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) -- Bank stock investors are bracing themselves for another recession as deep as the 2008 financial crisis, an outlook that might be too bearish according to analysts at Stifel Nicolaus.

In a report released on Monday, the team of analysts led by Christopher Mutascio said banks were in no danger of a liquidity crisis, a view reiterated by many other analysts. And recession concerns, while legitimate, were already priced into stocks.

In their analysis of bank valuations, the Stifel analysts assumed the worst: that banks would incur the same kind of financial losses experienced during the financial crisis from 2008 through 2011. On that basis, stocks were trading at 1 times their adjusted book value per share- in essence pricing in the worst recession in decades.

That meant that there was room for upside if the recession is not as bad as feared. "We should note that it is quite possible that the next recession, should we enter one, could be more shallow in terms of its impact on the banks given that corporate America's balance sheets remain strong/liquid and the chances of an additional 35% decrease in home prices across the country from current levels seems low, in our view," the analysts said.

While they acknowledged the tough operating environment for banks, banks would be attractive if we get signs that the economy is not going into a recession, they said.

Wells Fargo

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is Stifel's top pick, given attractive valuations, strong earnings offsets from its cost saving initiative and mortgage origination business and unrealized investment gains.

The selloff in


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may also have been overdone, according to the analysts. "Neither bank needs to raise capital, in our view, and their shares are currently trading at just 75%-80% of adjusted tangible book value to include the losses incurred during the financial crisis." Stifel has a hold rating on both stocks, noting that the valuations are not as attractive relative to Wells Fargo.

Bank of America

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Regions Financial

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also trade below their recession-adjusted book value per share. However, the analysts prefer staying on the sidelines when it comes to Bank of America, "given our inability to determine the risk."

On Regions, the analysts expect the bank to raise capital to repay TARP, which would dilute shareholder returns.

--Written by Shanthi Bharatwaj in New York

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Shanthi Bharatwaj


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