Bank of America: Downgrade Threat Loser (Update 3)

Based on Morgan Stanley's liquidity stress tests, the company faces additional collateral requirements of $6.8 billion, based on its March 31 trading positions.

Investors expecting a three-notch downgrade for Morgan Stanley reacted by sending the shares up more than 3% in aftermarket trading, to $14.42.

Morgan Stanley released a statement saying that "While Moody's revised ratings are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years."

The firm also said that the acknowledgement by Moody's of Morgan Stanley's "long-term partnership withMitsubishi UFJ Financial Group as well as our industry-leading capital and liquidity highlight some of the transformative steps we have taken," adding that "with our de-risked balance sheet, stable sources of funding, diverse business mix and strong leadership team, we are well positioned to deliver for clients and shareholders."

UBS Analyst Brennan Hawken said earlier on Thursday that Morgan Stanley expected that a Moody's downgrade would "not have an outsized impact on the firm," and that "the primary revenue impact" from a downgrade would be "in its long-dated, uncollateralized interest rate derivatives, which MS has already de-emphasized."

Hawken rates Morgan Stanley a "Buy," with a $19 price target, saying the shares "are cheap, even when we assume very negative outcomes from some of the exogenous issues facing the firm."

The KBW Bank Index (I:BKX) was down over 2% to close at 44.49, with all 24 index components showing declines.