Morgan Stanley removes Barclays from model portfolio

(Reuters) - Morgan Stanley said it removed short Barclays (BARC.L) from its model portfolio despite capital concerns, citing valuation and proposals from the Financial Services Authority aimed at protecting banks when raising capital.

"We are closing our underweight in Barclays after significant underperformance and the stock trading below our conservative price target," the investment bank said.

Morgan Stanley said it would look to turn more positive if a capital raising was confirmed.

Barclays on Monday said it plans to raise billions of pounds by selling stakes to outside investors and offering shares to existing shareholders to boost its balance sheet.

Morgan Stanley said Royal Bank of Scotland (RBS.L) is its top pick in the UK following the successful capital raising, prudent marks and potential disposals.

Morgan Stanley's stocks on the short side include London Stock Exchange (LSE.L), Banca Monte dei Paschi (BMPS.MI), Bradford & Bingley BB.L, Lloyds TSB (LLOY.L), Alliance & Leicester ALLL.L, Sabadell (SABE.MC) and Popular (POP.MC).

(Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by Vinu Pilakkott)