Wells Fargo, PNC are 'Key' Bank Stock Picks: Analyst (Update 3)

Update with afternoon close information.

NEW YORK (TheStreet) -- Atlantic Equities analyst Richard Staite on Friday said that Wells Fargo (WFC) and PNC Financial Services Group (PNC) were "key picks" for a U.S. banking sector showing a "wide disparity in profitability."

Shares of Wells Fargo rose 2% to close at $29.60, while PNC was up slightly, to close at $59.08.

Staite also upgraded U.S. Bancorp (USB) to a neutral rating from "Underweight," saying he hadn't shifted to an "Overweight" rating, "given the high valuation" of the shares, and downgraded Morgan Stanley (MS) to an "Underweight" rating, saying that "Given recent share price moves we now see Morgan Stanley as being the least attractive in the sector."

USB was up slightly in afternoon trading, to close at $27.86.

The analyst said that "profitability for US banks remains sharply divided between the best and the worst performers," with regional U.S. Bancorp "at the top end," with an impressive 23% return on tangible equity over the past year, followed by WFC at 15% and PNC at 13%," while JPMorgan Chase (JPM) "generated 14% and [Citigroup (C)] 7%."

In his industry comments, Staite said that "net interest income increased by nearly 2% [quarter-over-quarter] across the sector," driven by a 5 basis point expansion of the net interest margin, "which marked the first improvement for at least six quarters," as the banks "benefited from 1.7% QoQ average loan growth and over 2% QoQ deposit growth."

On the negative side, Staite said that "the largest area of weakness was in both [fixed income, currency and commodities] and Equity trading revenues, which declined by 8% and 18% QoQ respectively on average," which was worse than the banks had indicated in early December. Staite added that the large banks' "management still has little clarity on whether the weakness in H2 2011 was cyclical or secular or what impact future regulation may have on their businesses."

The analyst also sharply lowered his 2012 and 2013 earnings estimates for Bank of America (BAC) and Citigroup (C), saying that both banks are "in the process of restructuring their operations with the result that revenues in the run off business are falling faster than the associated costs putting pressure on underlying pre provision profitability."

For Bank of America, State lowered his 2012 earnings estimate to 53 cents a share from 80 cents and his 2013 estimate to 80 cents from $1.20, which are both well below consensus estimates. The analyst was impressed that the company "improved its Basel I [Tier 1 common equity] ratio to 9.9% from 8.7% during the quarter," which was mainly the result of asset sales and an offering of common shares, but said "the flip side is lower EPS forecasts. Asset sales have reduced future revenues and earnings whilst at the same time the share count has increased."

Staite has a neutral rating on Bank of America, with a $7.50 price target.

Bank of America's shares were down a penny to close at $7.30.

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

Staite lowered his 2012 EPS estimate for Citigroup to $4.07 from $4.73, and his 2013 estimate to $5.07 from $5.49, saying that like Bank of America, the company had "suffered from weak trading revenues and we believe this may extend into 2012."

The analyst said that Citi's "disappointing performance in its Securities and Banking unit [had] offset more positive progress in its Consumer bank, and that although "costs disappointed in 2011 but we expect greater control in 2012."

State reiterated his "Overweight" rating for Citigroup, but lowered his price target for the shares to $44 from $52.00.

Citigroup's shares rose 2% to close at $30.87.

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.