5 Buy-Rated Banks With Increased Upside: FBR (Update 1)

Updated with Bank of America's late afternoon stock price and more recent information on the company's efforts to trim assets.

NEW YORK (TheStreet) -- After a dismal 2011, when most bank stocks saw significant price pullbacks, we're in the midst of a bank rally that may accelerate if the major industry players pass Federal Reserve stress tests with flying colors.

FBR analyst Paul Miller said on Monday that he expected the rally to continue, "given that valuations are still at a discount to what the underlying fundamentals indicate, and we should receive more clarity on the regulatory and political fronts through the year." The analyst added that during the fourth quarter, "banks were able to show decent loan growth in select asset classes."

The KBW Bank Index (I:BKX) was up 10% year-to-date through Friday's market close, after seeing a 16% decline last year, with all 24 index components seeing positive year-to-date returns, led by Bank of America (BAC), with a 27% year-to-date return, following a fourth-quarter earnings report that lacked major mortgage-related surprises, while showing a solid increase in capital ratios.

Most analysts covering Bank of America are still on the fence, with significant mortgage putback risk from the company's purchase of Countrywide Financial in 2008. With this year's stress tests being based on particularly severe set of economic assumptions and with the prolonged foreclosure and servicing settlement between the major mortgage servicers, the federal regulators and states' attorneys general likely to be settled soon, 2012 could be the year that investors finally see a clear way forward for Bank of America.

FBR analyst Paul Miller continues to rate Bank of America "Market Perform," with an $8 price target, saying on Friday that "the company reported a weak core operating result, with most major non-interest income drivers down and expenses still at elevated levels," with the sale of assets -- which significantly boosted the company's capital ratios during the fourth quarter -- "likely to have a significant impact on BAC's earnings power over the long term, and set investors up for disappointment when the focus turns from capital adequacy to earnings potential."

Shares of Bank of America were up 3% in later afternoon trading on Monday, to $7.28, after the Daily Telegraph on Saturday reported that Virgin Money Holdings (UK) was "highly likely" to purchase B of A's MBNA Europe subsidiary. The report cited unnamed sources.

Of course, with Bank of America's shares trading at just over half its reported Dec. 31 tangible book value of $12.95, investors could be looking at an opportunity for a quick profit from here, despite the strong return over the past three weeks.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

The following are five bank holding companies that FBR still rates "Outperform," coming out of earnings season, with analysts raising price targets. We have ordered the group by ascending upside potential, based on FBR's 12 month targets:

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