Analysts See Opportunity in I-Banks

NEW YORK (TheStreet) -- Investors are making a mistake in assigning low valuations to big banks with large investment banking divisions, according to a pair of well-known bank analysts.

"In general, for people looking to put money to work now I'm a bigger fan of the money center banks and probably some of the brokers, than the regional banks or the smaller-cap banks," says Jeff Harte, analyst at Sandler O'Neill.

From a valuation perspective, Harte is especially keen on Citigroup (C Quote) and Bank of America (BAC Quote), though he also believes JPMorgan Chase (JPM Quote), and brokers like Goldman Sachs (GS Quote) and Morgan Stanley (MS Quote) are good bets because they get a larger portion of their revenues from investment banking and investment management than many regional banks. Also, they are less weighed down by areas such as commercial real estate. (See valuation chart below)

Dick Bove, analyst with Rochdale Securities, says investors in regional banks are counting on an improving economy helping those institutions repair their loan portfolios, which will translate to improved earnings.

But Bove himself believes consumer protection laws will hurt earnings in lots of areas that are central to the smaller banks' businesses. While the largest, most diversified ones will be impacted, they will have other areas, like investment banking, to pick up some of the slack. Banks with a big international focus, like Citigroup, will have additional flexibility, Bove says.

"Everyone's going to see their loan losses go down, but when that's over with, the regionals just don't have the firepower that the universals have," Bove says.

Of course investment banks will also face lots of new rules so they won't be immune. But names like Bank of America and Citi, in particular, have some pretty high profile boosters, like hedge fund genius of the moment John Paulson. Then again, Paulson just sold his shares in Goldman, suggesting he may be acting on an altogether different theory.

-- Written by Dan Freed in New York.