Morgan Stanley has added Crédit Agricole, the French bank, and Henderson, the UK-listed investment firm which recently bought rival firm Gartmore, to its “best ideas” list for European financial firms while sticking with UBS, Société Générale, Barclays and DnB Nor as its top picks.

In an update on its investment outlook as banking groups continued to report full-year results for 2010, the Wall Street firm said its “least preferred” list of firms comprised Lloyds Banking Group, Nordea, Natixis, Banca Populare di Milano and Akbank.

Morgan Stanley said that bank performance of the past year has been largely driven by sovereign risk and issues surrounding funding costs as much as any other factor.

A key risk for the European banking sector remains funding, Morgan Stanley said. “We have often argued that the approximately €1.7 trillion of bank debt to refinance cost-effectively remains a key risk and our base case for many banks is more deleveraging with risks to earnings,” it continued.

This deleveraging over the medium term will be part of a credit-less recovery for some European countries’ growth and therefore prompt the European Central Bank into providing support via monetary policy, Morgan Stanley said.

Separately, Mediobanca analysts said they had raised their 2011 estimate of earnings per share on Barclays by 5 per cent to £0.39, mainly on the back of stronger than expected revenues at Barclays Capital, as reported in the firm's results for 2010. Estimates for 2012 were unchanged, the Italian bank said. The price target on Barclays was hiked by 2 per cent to £3.74 per share, it added.