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) -- Citigroup upgraded regional banks


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Fifth Third Bancorp

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on Tuesday, citing a combination of valuation and optimistic earnings expectations.

Analyst Keith Horowitz lifted his assessment of both BB&T and Fifth Third to a buy rating from hold, while reiterating a buy rating on


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, and affirming

Bank of America

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as the firm's top pick among the large-cap banks. The call was part of a valuation analysis of the banking sector.

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"Given the number of variables in flux in the middle of a credit cycle, it is challenging to determine where relative value lies in the group," the note says. "We believe the starting point is always the relationship between expected long-term returns and price-to-book, but mid-credit cycle investors must also consider: the duration one must wait to reach 'normal' earnings and likelihood of additional dilution to book value due to insufficient capital."

Based on estimates of how long it will take for banks to return to so-called normalized earnings and the analysts' estimates of total cumulative losses, the firm determined BB&T, Bank of America, Fifth Third and SunTrust offer the best value in the group. It listed


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Regions Financial

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, and

Zions Bancorp

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as its "most extended stocks" in the group with Zions designated as the firm's top sell idea.

Fifth Third's stock is stock is "inexpensive" relative to its long-term earnings power, remaining credit losses, and strong capital position and reserve levels, Horowitz writes in a separate note specific to the Cincinnati company. He raised his 12-month stock price target on Fifth Third shares by $2 to $13.

Fifth Third is "well positioned at roughly 67% of the way through the credit cycle vs. 55% for peers," he writes. "Current reserves of nearly $4 billion (5% loan loss ratio) are among the best in the industry. We expect Fifth Third's Tier 1 Common ratio to bottom at a still strong 6.6% in mid- 2010 (vs. 7% in the third quarter), leaving Fifth Third very unlikely, in our view, to further dilute shareholders."

BB&T is "attractively valued" given pretax pre-provision earnings potential vs. remaining losses embedded in its loan portfolio, fueled by slightly higher construction and commercial real estate exposure relative to BB&T's tangible common equity, Horowitz writes.

"We estimate BBT will emerge from the credit cycle with nearly $3 billion of excess capital that can be deployed through M&A and share repurchases," he writes. Horowitz raised his 12-month stock price target on BB&T by $2 to $34.

Citigroup's Horowitz estimates that banks are roughly 55% through the credit cycle with

First Horizon

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Marshall & Ilsley



Wells Fargo

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, Fifth Third and


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further along than most.

He added that banks with heavy exposure to commercial and industrial loans and commercial real estate such as BB&T,


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, and

M&T Bank

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likely have the most losses ahead.

It's interesting to note that not all Wall Street firms are so bullish on the regional banks. On the contrary,

Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. (GS) Report

let it be known it favors the large consumer-oriented banks such as

JPMorgan Chase

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, Bank of America and

Capital One

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, in an industry research note on Monday.

In its note, Goldman said it estimates banks have already recorded two-thirds of expected cumulative losses from the credit crisis so far.

Shares of Fifth Third were up 1.7% to $10.25, while BB&T's stock rose 2.3% to $25.46. Bank of America shares were climbing less than 1% to $15.95, while shares of SunTrust were flat.

--Written by Laurie Kulikowski in New York.