In an industry European research report published on Tuesday, Morgan Stanley downgraded Credit Suisse to equal-weight from overweight and said it recommends investors avoid most of the European wholesale banks “until at least after reporting season”.

"We still feel that dilution concerns remain uppermost for investors, even if much is already priced in, given the very high leverage ratios of European wholesale banks on total balance sheet, weakening credit conditions and little visibility on wholesale earnings for 2009," the report said.

Morgan Stanley sees a risk of further impairments at Credit Suisse from the forced shrinkage of its balance sheet and the winding down of businesses. Morgan Stanley recommended investors seeking to reduce their investment banking exposure switch out of Credit Suisse into Julius Baer. The latter  holds preferred European banking stocks, according to the report, because it is at a more advanced stage of cutting risk and scaling back its investment bank.

Morgan Stanley also resumed coverage of UBS with an equal-weight rating. “UBS now has the lowest legacy assets of the banks, highlighting the advanced de-risking, although earnings power is a constraint,” the report warns.

The broker is underweight on Deutsche Bank, saying “it remains the most levered of European banks and we model a very high risk of dilution.”

On the other hand, it is overweight on Royal Bank of Scotland but only from a UK-relative perspective.

“While [RBS]offers deep value, there is no catalyst until 2009 at the earliest, in our view. We remove it from our 'best ideas' portfolio after the recent rally,” the bank said.

Morgan Stanley is equal-weight on Barclays, explaining that while the bank has not taken UK government money, this has come at a cost.