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4 Large Bank Stock Picks From Deutsche Bank

Shares of Fifth Third Bancorp (FITB - Get Report) of Cincinnati closed at $13.75 Wednesday, returning 9% year-to-date, following an 11% decline during 2011.

The shares trade for 1.2 times their reported June 30 tangible book value of $11.89, and for nine times the consensus 2013 earnings estimate of $1.52 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.58.

Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.33%.

Fifth Third last Thursday reported second-quarter earnings available to common shareholders of $376 million, or 40 cents a share, declining from $421 million, or 46 cents a share, during the first quarter, when the company saw after-tax benefits of roughly $82 million, or nine cents a share, from spinoff of its Vantiv (VNTV) payment processing subsidiary. Second-quarter earnings increased slightly from $328 million, or 35 cents a share, in the second quarter of 2011.

During the second quarter, Fifth Third realized after-tax gains of $36 million, or four cents a share, on the sale of Vantiv shares.

Fifth Third's second-quarter return on average assets (ROA) was 1.32%, declining from 1.49% in the first quarter, but increasing from 1.22% in the second quarter of 2011. The second-quarter return on average common equity (ROE) was 11.4%, declining from 13.1% the previous quarter, and increasing from 11.0% a year earlier.

Please see TheStreet's earnings coverage for more detail on Fifth Third's second-quarter results.

Back in March, the Federal Reserve only partially approved Fifth Third's annual capital plan, allowing the company to maintain its dividend on common shares and repurchase repurchase of trust preferred shares, but rejecting a planned dividend hike, while only approving common share buybacks in amounts equal to after-tax gains from the Vantiv sale. Fifth Third submitted a revised capital plan to the Federal Reserve in June, saying its plans to return capital to investors were "substantially similar" to the earlier plan. The company expects to hear back from the Fed in August.

Fifth Third is O'Connor's "top pick" among super regional banks, who attributes the stock's underperformance this year to "disappointment/uncertainty" over the company's plans to return capital to investors, although "there should be a resolution/more clarity coming soon."

While Fifth Third didn't report an increase in mortgage putback claims against the company -- which for Bank of America rose a whopping 41% during the second quarter -- the company said that Fannie Mae (FNMA) and Freddie Mac (FMCC) may begin requesting loan files for nonperforming loans by the end of the year, "likely leading to an increase in repurchase claims," according to O'Connor.

O'Connor's price target for Fifth Third is $17, and he estimates that Fifth Third will earn $1.56 a share for all of 2012, followed by EPS of $1.65 in 2013.

The analyst said that Fifth Third is attractive now on valuation, with the shares trading "at just 8.7x and 8.3x our 2012E and 2013E, respectively vs. 10.2x and 9.3x for peers," implying that concerns over capital return "should be in the stock." O'Connor added that "Near term, FITB should continue be one of the biggest beneficiaries of stronger mortgage," and once the company hears back from the Fed on its revised capital plan, "there could be a positive capital deployment story later this year."

FITB Chart FITB data by YCharts

Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.
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