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2 Bank Stock Book Value Bargains

Bank of America Merrill Lynch analyst Erika Najarian rates Citigroup a "buy," with a $58 price target, implying 19% upside for the shares over the next 12 months. "We believe C is one of the more misunderstood banks in that investors view outsized risk in its international operations, but overlook the company's EPS leverage to a US housing recovery," she wrote in a client note on Thursday.

Citigroup is unique among the largest U.S. banks, in that 57% of the company's third-quarter revenue and 63% of its operating profits were derived from operations outside the United States.

Najarian thinks "emerging markets (EM) headline risk" is driving the current discount in Citi's shares. "As such, we think C stock could re-rate to TBV if the next several quarters contain no EM credit quality shocks - especially in light of strong capitalization levels," she wrote.

Goldman Sachs (GS) closed at $163.52 Thursday and traded for 1.1 times its reported Sept 30 book value of $143.86 a share. The stock trades for 10.6 times the consensus 2014 EPS estimate of $15.43.

Deutsche Bank analyst Matt O'Connor continues to prefer market sensitive banks over regional and asset-sensitive banks, and in a note to clients on Thursday wrote that "4Q capital markets revenues are off to a good start." The record closing for the Dow Jones Industrial Average (^DJI) on Wednesday and the excitement over the Twitter (TWTR) IPO underlines the case that there's plenty of eagerness among investors to jump into the market.

In addition to a rebound in capital markets revenue in the fourth quarter, the market sensitive banks' compensation "flexibility," and a "typical seasonal uplift in 1Q revenue" all bode well for the market sensitive banks, according to O'Connor. Meanwhile, the large regional banks are expected to continue seeing significant revenue declines as mortgage loan application volume continues to fall.

Among market sensitive banks, Goldman is O'Connor's "top pick," with the analyst's price target of $181 implying 11% upside for the shares. O'Connor cited the stock's low valuation to tangible book value, the company's 9% year-over-year growth of tangible book vaue and wrote that "3Q trading issues are unlikely to repeat in 4Q."
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