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Full Speed Ahead for Banks: Guggenheim

Mosby expects Bank of America (BAC - Get Report) to achieve a 2013 ROTCE of 8.1%, while its cost of equity will be 12.9%. For Citigroup (C - Get Report), he expects a 2013 ROTCE of 8.8%, with a cost of equity of 13.2%. These expected "negative excess returns" mean that over the short haul, these companies remain recovery plays for investors.

Bank of America and Citigroup are the only large-cap banks covered by Guggenheim still trading below tangible book value. Mosby has "buy" ratings on both companies and expects both to trade above tangible book by the end of the year. The analyst on Tuesday raised his price target for Bank of America to $15 from $14, and raised his target for Citi to $57.00 from $55.00.

Mosby said that for "investors with a preconceived viewpoint that the economy is picking up steam and should turn the corner in 2013 despite running off a fiscal cliff or two," the volatile Bank of America and Citigroup "represent more than 30% upside potential."

With both banks greatly boosting their capital, a major catalyst for the shares could be significant dividend increases after the Federal Reserve completes its annual bank stress tests in March. Both companies are currently paying nominal quarterly dividends of 1 cent a share. Guggenheim estimates that Bank of America's annual payout will rise 20 cents a share, while Citigroup's annual dividend will increase to $1.00.

Mosby said that his firm's dividend estimates "are based on the assumption that we believe it is in management's best interest to use all of their excess capital to increase their dividends instead of repurchasing shares." Of course, the banks' management could decide otherwise.

Oppenheimer analyst Chris Kotowski cautioned investors on Monday "to have guarded expectations" for dividend increases following the stress tests. He estimates that Bank of America's annual dividend for 2013 will be just 12 cents a share, while Citigroup's will be 40 cents, with neither of the companies buying back any shares. While both companies "have high and rising capital ratios, the industry's recent history suggests that the banks get let out of the penalty box only very slowly," he said.

Upgrading BB&T

Mosby on Tuesday upgraded BB&T (BBT - Get Report) of Winston-Salem, N.C., to a "buy" rating from a "neutral" rating, while increasing his price target for the shares to $38.00 from $34.00. The analyst also raised his 2013 EPS estimate for the shares to $3.10 from $3.09, while lowering his 2013 estimate to $3.50 from $3.56.
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