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4 Banks to Buy Now from JPMorgan

Tickers in this article: BAC PNC STI USB WFC

NEW YORK ( TheStreet) -- It would be a tall order to repeat last year's performance for large-cap bank stocks, but some of the industry's best-known names are still trading at very attractive valuations to book value and earnings estimates.

JPMorgan Chase analyst Vivek Juneja said in a report on Wednesday that he expects "bank stocks to be choppy near term, but benefit over time as equity fund inflows continue and the economy recovers gradually."

The theme of equity inflows was underscored in a report by Jefferies analyst Daniel Fannon on Wednesday. After a "really bad" December, when investors pulled $20 billion from equity funds as the fiscal cliff debate continued in Washington, "total active equity inflows have equaled almost $15B," during the first several weeks of 2013.

In his review of fourth-quarter earnings for nine of the nation's largest bank holding companies, Juneja said that results were "mixed, with strong and higher than expected commercial and industrial loan growth and investment banking fees, and further improvement in credit metrics," which was offset by narrowing net interest margins (NIM) for regional banks, and by declining trading revenue.

Juneja also noted that money center banks saw expanding net interest margins, and that "mortgage banking revenues remained strong, but spreads are starting to compress somewhat."

Economic reports continue to underline the long-term recovery of housing prices in the United States, which is lowering banks' credit costs. Meanwhile, mortgage lenders had a very strong 2012, amid the boom in refinancing in a time of record-low rates. But the spread between mortgage loan rates and mortgage-backed securities yields is narrowing, meaning that banks will be receiving lower premiums on the sale of newly originated loans.

Looking ahead, Juneja expects "EPS growth to slow at regional banks in 2013 but increase at money center banks which are recovering." JPMorgan expects earnings growth to be "led on average by further decline in credit costs, controlled growth in expenses, and share repurchases."

Downgrading USB

Juneja on Wednesday lowered his rating for U.S. Bancorp (USB) to "neutral" from "overweight," while lowering his price target for the shares to $37.50 from $39.50.

The analyst said that U.S. Bancorp had benefitted from the credit crisis, "by growing additional businesses to drive revenue growth faster than peers over last couple of years - notably mortgage originations, which offset slowdown in payments processing fee growth." But Juneja lowered his rating for the shares because he expects "the gap in revenue growth for USB to narrow versus peers," as the company's newer businesses mature and mortgage revenue declines.

U.S. Bancorp has indeed stood out through the credit crisis, remaining profitable every quarter, while most of its large-cap banking peers did not. The company has continued to outperform during the credit recovery. Early this month, USB was featured by TheStreet among the eight actively traded banks that had managed to achieve returns on average tangible equity of at least 10% for every quarter since the end of 2009.

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