(Changes source; adds details, background)
Jan 23 (Reuters) - Bear Stearns upgraded the U.S. large-cap banks sector to "market overweight" from "market underweight" Wednesday, a day after the U.S. Federal Reserve slashed a key interest rate by the biggest amount in more than 23 years in a bid to head off a U.S. recession.
The Fed's decision to become more aggressive, combined with the capital recently added to major banks as a result of the massive valuation write-downs on subprime mortgage-related securities, has limited the amount of further downside risk, analyst David Hilder said in a note to clients.
Citigroup Inc (C.N) and Merrill Lynch MER.N have raised capital from investors in Asia, the Middle East and elsewhere as the subprime mortgage crisis forced large asset write-downs and devoured banks' capital.
However, Hilder said, "We fully expect non-performing assets, especially real estate-related loans, to continue to rise at least through mid-year, and perhaps through the end of 2008."
The banks with the highest levels of real estate loan exposure will generally underperform banks that have less real estate exposure and more leverage to capital markets volumes, Hilder added.
"Rounding out our top three ideas for 2008 would be JPMorgan Chase (JPM.N), which has greater trading and real estate loan exposure, but has done a better job than some competitors in managing risk," Hilder said. (Reporting by Nivedita Gupta in Bangalore; Editing by Pratish Narayanan)