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10 Big Banks Stocks to Watch In the 'Kitchen Sink' Quarter (Update 3)


Bank of America is the largest participant in the $8.5 billion foreclosure settlement between the nation's largest mortgage loan servicers, the Federal Reserve and the Office of the Comptroller of the Currency, which was also announced Monday. Wells Fargo (WFC) announced that its ""portion of the cash settlement will be $766 million, which is based on the proportionate share of Wells Fargo-serviced loans in the overall IFR population." The company also said it would "record a pre-tax charge of approximately $644 million in the fourth quarter of 2012 to fully reserve for its cash payment portion of the settlement and additional remediation-related costs." The effect of the charge will be a reduction in fourth-quarter earnings of roughly 12 cents a share, according to Stifel Nicolaus analyst Christopher Mutascio.

Credit Suisse analyst Moshe Orenbuch on Wednesday downgraded Bank of America to a neutral rating from an "Outperform" rating, saying the stock's "current valuation appears to be ahead of the company's near to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting." Despite the downgrade, the analyst raised his price target for the shares by a dollar to $12.00.

Bank of America's shares were down 5% on Wednesday to close at $11.43. The shares rose 110% during 2012, after dropping 58% during 2011.

Citigroup announced that it would "record a pre-tax charge of approximately $305 million in the fourth quarter of 2012 for its cash payment portion of the settlement," while U.S Bancorp (USB) said that its "share of the settlement will include a cash payment of $80 million (pretax), which is expected to reduce fourth-quarter 2012 earnings per share by approximately 3 cents. In addition, the settlement includes a commitment to provide approximately $128 million of other mortgage assistance, such as loan modifications, which is covered by existing loan loss reserves."

Mosby on Wednesday raised his price target for Citigroup's shares to $55, implying 30% upside from Tuesday's closing price of $42.46, saying "While we do not expect C to report its full earnings power in 4Q12, we believe that its valuation is based more on reduction of loss potential in Citi Holdings and approval to deploy excess capital in March. Thus, we have increased C's price target to ~95% of year-end 2013's tangible book value." Citi's shares now trade at 0.8 times its reported Sept. 30 tangible book value of $52.70.

Could the Margin Squeeze Be Ending?

A major theme for most large U.S. banks over the past few years has been the pressure on net interest margins (NIM), as the Federal Reserve has kept its short-term federal funds rate in a target range of zero to 0.25% since the end of 2008, while also doing everything it can to push long-term rates down and hold them at their current levels.