Morgan Stanley has increased its earnings estimates for UBS, Deutsche Bank, Credit Suisse and Royal Bank of Scotland, while also raising its price target for Barclays, driven by better-than-expected revenue growth, higher returns on equity and improved margins.

The US investment bank said it expects the improvement in earnings seen in the first quarter of this year not to prove a one-off, with some banks benefiting from a steeper interest rate yield curve.

The bank recommends investors to switch out of Société Générale – moving from taking an overweight to even-weight stance – and into Deutsche Bank (underweight to overweight), and also switching into Credit Suisse from UBS.

“Q2 and beyond is likely to be stronger than the market currently anticipates – due, in our view, to higher margins being more sustainable than the market fears, steep [yield] curves, decent activity levels, plausible healing trade in markets and decent cost control,” the firm said in a note.

“What’s more, we believe the big outflows in hedge fund assets are largely behind us, as are mutual fund outflows, and so investors are more prepared to re-risk to benefit from the better backdrop,” the note continued.

It added that while there is “massive overcapacity” in many economic sectors, this does not apply to the banking sector.