3 Big Bank Winners for 2012: KBW (Update 1)

Updated with information in the Goldman Sachs section, on federal regulators' extension in Friday of the public comment period for the proposed regulations to implement the Volcker Rule.

NEW YORK (TheStreet) -- KBW analyst Frederick Cannon on Friday urged investors to be "very selective" with bank stocks, while also recommending JPMorgan Chase (JPM), Goldman Sachs (GS), and State Street (STT), as winning stock picks for 2012.

All three of KBW's recommendations were previously included among TheStreet's 10 New York Bank Stocks With Most Upside for 2012, based on consensus price targets among analysts polled by FactSet.

Cannon described a banking industry primed and ready for growth, with record levels of capital and excess liquidity in an environment of continued as indicated by the Federal Reserve, but stifled by regulatory overhang including -- somewhat ironically -- the Federal Reserve's continued clampdown on "capital deployment at the largest institutions."

Alexopoulos reiterated his "Overweight" rating on First Horizon's shares, while raising his "December 2012 price target" to $10 from $8.50, after a meeting with CEO Bryan Jordan left the analyst "feeling better" about the company's "mortgage putback risk, capital return opportunities, and long-term profitability goals." The analyst raised his 2012 EPS estimate to 58 cents from 40 cents.

According to KBW, the consolidated U.S. banking industry's tangible common equity ratio stood at a record 8.5% as of Sept. 30, "well above the 6.9% average TCE ratio since 1934."

Cannon expects "economic growth to be in the 2% range in 2012 in the U.S., not great, but considerably stronger than recessionary conditions in Europe and considerably less volatile than growth in China and the emerging markets," and that the resilience of the U.S. economy will "become even more evident in 2012." With the Fed appearing "intent on maintaining extremely high levels of liquidity in the U.S. banking system," the analyst said that "investors will increase their appetite for risk assets," making "financial firms that can invest in risk assets, or benefit from selling them, are an attractive opportunity."

The analyst said that "trapped capital will continue to be a theme at the largest financial institutions that received the dubious distinction of being labeled globally systemic this year," which along with KBW's three picks include Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Morgan Stanley (MS) and Bank of New York Mellon (BK), which are all rated "Market Perform" by KBW.

While most of the above banks -- with the exception of Bank of America, which is facing the largest hit from mortgage putback demands and the coming settlement with federal regulators and states' attorneys general over "robo-signing" and other mortgage foreclosure and loan servicing problems -- can make a strong case for dividend increases and/or share buybacks, Cannon sees the Federal Reserve's third round of bank stress tests as "a glaring example of the capital deployment problem which many large financial institutions must bear."

Here's how all eight major bank holding companies listed in the KBW report stack up:

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