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4 Big Bank Plays from JPMorgan

NEW YORK (TheStreet) -- President Obama's expanded mortgage refinance program is feeding "another record quarter for mortgage origination revenues" according to JPMorgan Chase analyst Vivek Juneja.

The analyst on Monday raised his 2012 earnings estimates for nine of the nation's largest banks, not only because of the refinancing boom, but because investment banking revenue is holding up "better than feared," and because "10 year Treasury yields have recovered sharply recently from their lows in late July," which should lead to an eventual rise in mortgage loan rates, reducing pressure on net interest margins.

A key weakness for the big banks continues to be trading volume, which Juneja said is "tracking down sharply in 3Q from weak 2Q amid more pronounced summer slowdown in activity levels, particularly in equities and derivatives."

JPMorgan Chase still views the banking sector as "attractive and expect rising rates and better than feared fundamentals to help, especially when combined with the fact that the sector is underowned," although "there is still some uncertainty around Europe and global growth, as well as the looming presidential election and 'fiscal cliff', which provide some headwinds."

The "fiscal cliff" is the combination of the expiration of the "Bush tax cuts" that were extended in 2010, and also the federal spending cuts mandated by the Budget Control Act of 2011 -- a Faustian bargain signed into law by President Obama in August of last year, in order to have the U.S. debt ceiling raised.

Among large regional banks, Juneja said that "SunTrust (STI), Fifth Third (FITB) and Regions (RF) have all seen strong gains post earnings on improving credit," and that "in addition, for Fifth Third, a near-term catalyst is the pending likely approval of a share buyback and dividend increase from stress test resubmission."

The Federal Reserve in March only partially approved Fifth Third's annual capital plan, which included an increase in the dividend on common shares and repurchases of common shares. The Fed only approved the company's plan to repurchase $1.4 billion in trust preferred securities and repurchases of common shares in amounts equal to after-tax gains from the sale of shares in Vantiv (VNTV) Fifth Third's former payment processing subsidiary, which went public during the first quarter.

Juneja has a neutral rating on Fifth Third, with a price target of $17.50, saying that "FITB's stock valuation is in line with [the] peer average, trading at 1.2 times tangible book value and nine times JPMorgan's 2013 earnings estimate of $1.57 a share, at Friday's closing price of $14.40. The analyst's price target for Fifth Third is based on "a price to tangible book value multiple of 1.4x," and Juneja expects the company "to trade at a slight discount to the expected peer group multiple of 1.5x owing to a relatively weaker footprint and recent track record."

Citigroup (C) is the cheapest large-cap bank stock covered by JPMorgan Chase, trading for just 6.4 times JPM's 2013 EPS estimate of $4.52, at Friday's closing price of $29.03.

Despite the low forward P/E and price-to-tangible-book ratio of just 0.6, Juneja has a neutral rating on Citi, "as increased capital return in 2012 had been a key catalyst for the stock and the Fed's refusal to approve Citi's capital return plan and Citi's decision to not ask for return in the resubmission pushes this out to 2013."

Over the long term, JPMorgan sees many constructive factors for Citigroup's shares, including the low price multiples; "strong and growing capital levels;" international revenue growth opportunities, as the company's business outside the U.S. accounted for 40% of revenues during 2011; a "sizeable amount of loan loss reserves," and the "long run potential for return of excess capital to shareholders."

Here are the four large-cap banks that JPMorgan rates "Overweight," sorted by declining forward P/E:

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