Morgan Stanley expects to continue upgrading its earnings forecasts for European banking groups, saying their battered investment banking divisions should be able to increase revenues by handling a predicted rise in the amount of equity issuance.

The US investment bank said in a note that it remains overweight of Credit Suisse, Barclays and Deutsche Bank, as it does of firms such as Bank of America and JP Morgan in the US. Meanwhile, the improved market environment should also be beneficial for firms such as Swiss private bank Julius Baer and the UK-listed asset manager, Henderson, Morgan Stanley said. It is overweight both of these financial institutions.

Equity issuance is currently running at 3.5 times the levels of the first quarter of 2009, Morgan Stanley said, while debt issuance is also up by 7 per cent on the 11 banks that Morgan Stanley tracks – helping to drive up the earnings banks make from handling such issuance.

Investment banking divisions of banking groups suffered in 2008 as the credit crunch forced banks to make massive write-downs, a process that also hit some of these groups’ wealth management divisions as clients grew uneasy about the impact such losses might have.

Morgan Stanley said it expects Credit Suisse’s earnings in the second quarter will be higher than the previous quarter, with a Q2 earnings-per-share forecast of SFr1.69, giving an EPS forecast for the whole year of SFr5.67. For UBS, its EPS forecast for 2009 is SFr0.11, and its forecast on Deutsche Bank for 2009 is €6.25, and £11.8 on Barclays.

Morgan Stanley currently has an “equal weight” portfolio weighting on UBS and Société Générale.