NEW YORK (

TheStreet

) --Investors scouting for attractive picks in the banking sector should focus on the small and mid-cap space, according to sector analysts at KBW.

Issuing their 2012 banking outlook on Thursday, the team of analysts said small and mid-cap banks -- or SMID Cap banks as they call it -- have significant capital and regulatory advantages over their large-cap counterparts.

SMID-cap banks will face less scrutiny in their capital deployment plans, falling safely outside the regulatory capital buffer trap- and are expected to have a higher dividend payout ratio than large banks. The impact of regulations such as the Durbin Amendment is limited as well, as it only applies to banks with assets greater than $10 billion.

The potential for mergers and acquisitions in this segment is also much higher, as smaller transaction sizes attract less scrutiny and have limited impact on local communities.

Large-cap banks, on the other hand, will still face limitations on their ability to return capital, with universal banks such as

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Citigroup

(C) - Get Report

facing headline risks from Europe and concerns over the Volcker rule 's impact on capital markets operations.

In the large-cap space, KBW recommends that investors stick to high-quality names such as JPMorgan,

Goldman Sachs

(GS) - Get Report

and

U.S. Bancorp

(USB) - Get Report

, according to KBW.

In a Q&A session following the presentation, analyst David Konrad acknowledged that the upside for the big banks particularly Citigroup and

Morgan Stanley

(MS) - Get Report

could be significant if there is a more credible plan out of Europe and if more clarity emerges on the impact of the Volcker rule. But he recommends focusing on "high- quality less volatile names," within the universal banks such as JPMorgan and Goldman for investors who wish to ride the upside from those two events.

Konrad also likes

Fifth Third Bancorp

(FITB) - Get Report

and

SunTrust

(STI) - Get Report

within the regional space.

KBW's

top 12 picks for 2012

are all small and mid-cap banks however.

Bank of Marin Bancorp

(BMRC) - Get Report

,

Bryn Mawr Bank Corporation

(BMTC) - Get Report

and

CVB Financial

(CVBF) - Get Report

are companies identified as highly profitable within this space.

Banks that are overcapitalized and most likely to deploy capital through dividends, buybacks and acquisitions include CVB Financial,

Columbia Banking System

(COLB) - Get Report

,

F.N.B. Corp

(FNB) - Get Report

and

People's United Financial

(PBCT) - Get Report

.

Hancock Holding

(HBHC)

,

Susquehanna Bancshares

(SUSQ)

and

BBCN Bancorp

(BBCN)

are likely to see more earnings upside as they take advantage of recent acquisitions.

Investors looking for turnaround candidates could buy

Flushing Financial Corporation

(FFIC) - Get Report

and

Private Bancorp

(PVTB)

.

Wintrust Financial

(WTFC) - Get Report

is a low-risk high-quality name in the mid-west that the analysts say is a good steward of capital.

>>To see these stocks in action, visit the

12 Bank Stock Picks for 2012 by KBW

portfolio on Stockpickr.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here:

Shanthi Bharatwaj

.

>To follow the writer on Twitter, go to

http://twitter.com/shavenk

.

>To submit a news tip, send an email to:

tips@thestreet.com

.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.