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) --


(C) - Get Citigroup Inc. Report


Fifth Third Bancorp

(FITB) - Get Fifth Third Bancorp Report



(KEY) - Get KeyCorp Report

are the top three bank picks from Deutsche Bank analyst Matt O'Connor as banks prepare to report second quarter earnings next month.

"Bank stocks could rally into earnings before stalling the rest of the summer given concerns over the macro picture and net interest margin pressure," O'Connor writes in a report published Friday. However, he believes bank stocks will finish above current prices by year-end, due to "hopefully improving capital markets, more political certainty, and hopefully less of an impact from Europe." Here are more details on his top three picks for the quarter.

3. Citigroup

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O'Connor argues Citigroup shares will face a "good test" when the bank reports second quarter earnings, "as the macro environment was sluggish, but not nearly as bad as in

the third and fourth quarters of last year when most credit spreads widened materially and inventory levels were much higher."

In what must be seen as a less-than-ringing endorsement, especially considering he views Citigroup as a top pick, O'Connor acknowledges that his below-consensus estimate of $0.78 could be too low as "assumptions for capital markets revenue, mortgage repurchase, and net interest income are all a bit conservative."

2. Fifth Third

While shares have risen just 1% year to date versus a 15% for the sector, Fifth Third now trades at eight times 2012 estimates compared to 10 times for comparable stocks. O'Connor sees the bank benefitting from an improvement mortgage banking environment, and adds that "there could be a positive capital deployment story later this year."

1. KeyCorp

KeyCorp shares have also lagged the broader index--by some 17% year to date. O'Connor cites "concerns that earnings power will be sluggish and capital deployment will take a while to play out," for the underperformance."

Still, the Deutsche Bank analyst sees an "upward bias" in the bank's net interest margins and a growing loan book, among other positives. He also believes the bank will unveil a new cost-cutting initiative on its second quarter earnings call.


Written by Dan Freed in New York


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