(Recasts, adds details) Sept 25 (Reuters) - The proposed U.S. Treasury's bailout plan will do little to solve credit problems facing mid-sized banks, said analysts at Morgan Stanley, who downgraded two banks and recommended investors to sell mid-cap banks in the current market rally.
"We do not view the Treasury's plan to improve liquidity as a meaningful positive for the midcap banks. The problems facing the midcaps relate more to credit than liquidity," analysts led by Ken Zerbe wrote in a note to clients.
The better-capitalized banks may benefit from the plan by selling certain troubled parts of their loan portfolios, but many of the weaker-capitalized midcap banks may not be able to use it given the potential hit to their already strained capital positions, he said.
The analyst upgraded East West Bancorp (EWBC.O) and Sovereign Bancorp SOV.N to "overweight" from "equal weight" saying they have taken appropriate steps to remove risks from problem assets.
Zerbe said he expects midcap banks to trade lower in the next few months as the ban on short selling expires and the market realizes that the Treasury's proposal will not benefit the fundamentals of midcap bank balance sheets.
However, he said the midcap banks could benefit indirectly as the plan stabilizes the housing market and, potentially, mitigates the decline in home prices from current levels. (Reporting by Amiteshwar Singh in Bangalore, Editing by Dinesh Nair)