NEW YORK ( TheStreet) -- Wells Fargo (WFC - Get Report), US Bancorp (USB - Get Report) and PNC Financial Services (PNC - Get Report) are among the banks that offer investors a potentially high reward for relatively low risk, according to analysts at FBR Capital Markets.
All three banks are also well positioned heading into the third-quarter results. Each has major mortgage banking operations that could see a boost from refinance activity, big unrealized gains on securities and relatively less exposure to European sovereign debt, a team of analysts led by Paul Miller wrote in a research note on Monday.
That makes the stocks top picks at FBR, even as they lowered their earnings estimates for the third quarter and 2012 for the sector by 3% and 8% respectively. "In general, we continue to favor larger banks due to cheaper valuations, better efficiency, and access to cheaper capital, which should make earnings relatively more resilient," FBR wrote.
Bank stocks remain undervalued by as much as 40% even after the reduced estimates, according to FBR. Still, the analysts acknowledged the headwinds for banks. "Earnings power continues to deteriorate due to anemic loan demand, declining NIMs from low interest rates, and lower fee revenue from regulation," the report said. "Considering that banks' balance sheets are probably the strongest they have been in several years, we believe that the majority of dire economic scenarios are close to being priced in and banks present a compelling investment opportunity for the long-term investor willing to take major swings in the market," the analysts added later in the report.In the absence of near-term catalysts, investors should stay on the sidelines or if they need to own financials, to stick with the above large-cap stocks. The analysts also noted company-specific opportunities in Webster Financial (WBS - Get Report), Susquehanna Bancshares (SUSQ - Get Report) and Fifth Third Bancorp (FITB - Get Report). >>To see these stocks in action, visit the 3 Low-Risk, High-Reward Bank Stocks portfolio on Stockpickr. --Written by Shanthi Bharatwaj in New York
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