(Adds comments from Fox-Pitt note)
May 29 (Reuters) - Keefe, Bruyette & Woods upgraded Morgan Stanley (MS.N) to "outperform" from "market perform" and raised its price target on the stock, saying the bank was poised to benefit from recent improvements in its operating environment.
The pending merger of Morgan Stanley's wealth management business with Smith Barney in a joint venture has the potential to enhance long-term profitability, said analyst Robert Lee who assumed coverage of the stock.
The Smith Barney deal calls for Morgan Stanley to pay Citigroup Inc (C.N) $2.7 billion in cash for a majority control of the venture.
Fox-Pitt Kelton analyst David Trone, who raised his estimates and price target on Morgan Stanley, said he expected the firm's equity underwriting revenue to triple, as it has been a big underwriter of large bank capital raises during the second quarter.
Trone said he expects $200 million in real estate equity losses at Morgan Stanley for the second quarter, but forecast net credit write-downs to be close to zero.
KBW analyst Lee, however, said returns on capital at Morgan Stanley were likely to remain muted in the near-term, placing a limit on its valuation.
Separately, Lee also assumed coverage of Goldman Sachs Group Inc (GS.N) with a "market perform" rating and said the firm had weathered the financial crisis better than most peers.
For alerts on price targets and estimate changes on Morgan Stanley and Goldman, please double click on [ID:nWNAB4470], [ID:nWNAB4471], [ID:nWNAB4587].
Shares of Morgan Stanley were trading up more than 2 percent at $30.05 in pre-market trade, after closing at $29.43 Thursday on the New York Stock Exchange. Shares of Goldman Sachs were up almost 1 percent at $145.80 before the bell after closing at $144.65 on Thursday. (Reporting by Ramya Dilip in Bangalore; Editing by Anil D'Silva)