BofA Merrill Lynch expects subdued client activity and geo-political risks to weigh on the first-quarter earnings of large U.S. banks and downgraded shares of Citigroup Inc and Goldman Sachs Group Inc to neutral from buy.

Results (are) unlikely to be dismal, and should show improvement over fourth quarter, but we don't expect seasonal improvement as strong as often seen in the past, BofA Merrill analysts wrote in a note to clients.

Return of capital through dividends and distributions will be on the minds of investors and they are likely to play financials like BlackStone Group LP , Lazard Ltd and KKR & Co LP , which see little or no pains from restrictions being placed on banks, they said.

BofA Merrill cut its price target on Citigroup stock to $4.95 from $5.60, and that on Goldman stock by $8 to $174.

On JPMorgan Chase & Co , the brokerage maintained its buy rating and said the diversity of the lender's business , its ability to gain share and excess capital position puts it in a better position than most peers for improvements in earnings power and early capital distribution.

The brokerage cut its price target on Morgan Stanley to $29 from $31 and said though the company has had a strong run in 2010,recent capital markets trends suggest that its earnings may be limited in 2011.

It, however, maintained its neutral rating on the stock.

Goldman shares fell 1.2 percent to $162.53, while those of Citigroup fell 1.3 percent to $4.62 in early trade on Friday on the New York Stock Exchange. Morgan Stanley stock was down 1.6 percent at $28.88.

(Reporting by Rachel Chitra, Sweta Singh in Bangalore; Editing by Gopakumar Warrier)