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Updated with comments on JPMorgan Chase from KBW analyst Frederick Cannon and Stifel Nicolaus analyst Christopher Mutascio, and also to correct the date of Citigroup's earnings announcement. Citi will report its third-quarter results next Monday, Oct. 15.



) -- The apparent housing recovery may finally turn investor sentiment to undervalued money center banks and away from a couple of high-flying regional names.

While portfolio managers are "gravitating towards 'housing sensitive' stocks - benefitting regional banks," Bank of America Merrill Lynch analyst Erika Penala said on Tuesday that "money center bank stocks... will be bigger incremental beneficiaries to this theme."

Penala reinstated her firm's coverage of


(C) - Get Citigroup Inc. Report


JPMorgan Chase

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with "Buy" ratings, while downgrading

U.S. Bancorp

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Fifth Third Bancorp

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, which have both had much stronger recent earnings performance than Citi or JPM.

Among the 24 components of the

KBW Bank Index


, Citigroup and JPMorgan have the cheapest valuations to consensus 2013 earnings estimates, among analysts polled by Thomson Reuters, while some of the regional names are no longer bargains, but are trading "close to fair values," according to Penala.

The analyst said that "investors are incorrectly overlooking C and JPM on the housing theme, as both EPS power and market multiples are highly levered to a recovery. With consolidated loan loss reserves at 4.4% of loans for C and 3.3% for JPM versus 2% median of the large cap regional banks, the money centers have significantly more room to release reserves," which directly pads earnings results.

Penela also said that the Federal Reserve's next round of annual stress tests "should re-establish money centers as return of capital stories, and give investors confidence that these banks are on a smooth glidepath to Basel 3 compliance." According to BAC Merrill Lynch's analysis, Citigroup could increase its dividend payout from a penny a quarter, to a total annual payout of 60 cents during 2013, while JPMorgan Chase, whose "well-publicized synthetic credit loss had essentially invalidated its 2012

Federal Reserve capital return approval," could see its common share buybacks resume during the first quarter of next year.

Finally, the analyst expects capital markets revenue for both firms "could bottom in 2012," setting them up for a major earnings advantage over the regional banks beginning in 2013.

Here's a quick look at all four banks, with their stock and earnings performance, along with additional comment from Penala:


Citi's shares closed at $34.60 Tuesday, returning 32% year-to-date, following a 44% decline during 2011.

The shares trade for 0.7 times their reported June 30 tangible book value of $51.81, and for 7.6 times the consensus 2013 earnings estimate of $4.55. The consensus 2012 EPS estimate is $4.07.

For the 12-month period ended June 30, Citigroup's operating return on average assets (ROA) was 0.55%, while the company's return on average tangible common equity (ROE) was 7.22%, according to Thomson Reuters Bank Insight.

Citigroup will announce its third-quarter results next Monday. The consensus among analysts is for the company to report a profit of 96 cents, declining from a dollar a share in the second quarter (excluding credit and debit valuation adjustments), and $1.23 during the third quarter of 2011.

Penala's price target for Citigroup is $45, offering "the most potential upside" among the large-cap bank stocks she covers. The company is "one of the more misunderstood banks," she said, "in that investors view outsized risk in its international operations and overlook its EPS leverage to a US housing recovery."

Citigroup CEO Vikram Pandit's long-term "good bank/bad bank" strategy for Citigroup is to pursue growth in the company's international operations, while placing noncore assets -- including the company's 49% stake in the Morgan Stanley Smith Barney joint venture, which the company is selling to

Morgan Stanley

(MS) - Get Morgan Stanley Report

-- within the Citi Holdings subsidiary, and allowing them to run off.

Penala said that within Citi Holdings "is a $100bn residential first mortgage and home equity portfolio (15% of total loans), $6.9bn of nonperforming loans (NPLs), and 9.3% reserve/loans ratio," illustrating that the runoff subsidiary has much to gain from a housing recovery, and also has plenty of excess reserves, which can eventually be recaptured in earnings.

"Over time, we expect C to return 25% of market cap to shareholders," through dividends and share buybacks, the analyst said.

Penala also said that "a housing recovery could mean improving inflows of new defaults and better than expected realized values on the residential portfolio, accelerating credit leverage to EPS," and that "if housing continues to recover, we believe portfolio managers looking to increase weight in banks will invest in C incrementally given fair values at regionals and underweight positioning in C."

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JPMorgan Chase

JPMorgan closed at $41.38 Tuesday, returning 28% year-to-date, following a 20% decline during 2011.

The shares trade for 1.2 times tangible book value, and for 7.9 times the consensus 2013 EPS estimate of $5.22. The consensus 2012 EPS estimate is $4.76.

Based on a quarterly payout of 30 cents, the shares have a dividend yield of 2.90%.

For the 12-month period ended June 30, JPMorgan's ROA was 0.79% and its ROE was 11.32%.

JPMorgan Chase will kick off earnings season for large banks on Friday, with a consensus EPS estimate of $1.21, matching the company's second-quarter results, and increasing from $1.02 during the third quarter of 2011.

Penala's price target for JPMorgan Chase is $48.

The shares have recovered most of the value they lost following CEO James Dimon's announcement in late May that the company was facing large second-quarter losses from trading activities within its Chief Investment Office. JPMorgan announced soon after that it was suspending its share buyback program, but after the company achieved a $5 billion second-quarter profit, despite $4.4 billion in hedge trading losses, Dimon said that the company might be able to resume buybacks in the fourth quarter, subject to Federal Reserve approval.

Penala said that "the resumption of share buybacks in 1Q13 and '13 stress test approval should re-establish JPM as a capital return story." The analyst added that "over the next 2 years, we estimate JPM will return 20% of market cap to investors."

Penala also sees JPMorgan Chase benefiting from market rotation, as portfolio managers "incrementally invest in money centers like JPM given full valuations at regionals."

KBW analyst Frederick Cannon on Wednesday followed a similar theme of a bottoming for capital markets revenue, estimating that JPMorgan Chase will report "fairly solid results out of the investment bank," with fixed income trading revenue increasing to $3.525 billion from $3.490 billion in the second quarter, although the analyst also expects "a modest decline in equity trading to $930 million from $1,043 million in 2Q12."

Cannon also expects "investment Banking fees to improve modestly linked quarter at $1,275 million (up 23% year over year) driven by strong debt underwriting of $700 million ($639 million last quarter)."

"For JPM, we are forecasting two non-operating items in the quarter, a $900 million swap termination gain and $450 million DVA charge, so we expect reported EPS ($1.33), to be above operating EPS ($1.25)," Cannon said. He rates JPMorgan "Outperform," with a $49 price target.

Stifel Nicolaus analyst Christopher Mutascio expressed concerns on Wednesday over JPMorgan's net interest margin, which is the difference between the average yield on loans and investments and the average cost for deposits and borrowings. Mutascio said that despite the focus on JPMorgan's unwinding of the hedge positions that lead to its second-quarter trading losses, we are more focused on the company's net interest margin as net interest income still makes up roughly 50% of the company's total revenue base (versus roughly 10% for trading)."

"During 2Q12 the company's net interest margin compressed 14 basis points to 2.47%, resulting in a 4.2% ($496 million) sequential quarter decrease in net interest income," Mutascio said, and while "management has indicated the 2Q12 margin compression was not driven by the de-risking of the balance sheet in the aftermath of the London trading issues, we would have greater confidence in our 2013 EPS estimate if we were to see the margin stabilize in 3Q12. Without stabilization, we believe the risk to the consensus earnings expectations would be to the downside."

Stifel Nicolaus rates JPMorgan Chase a "Hold."

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U.S. Bancorp

U.S. Bancorp of Minneapolis has seen its shares return 31% year-to-date, through Tuesday's close at $34.68. During 2011, the shares returned 2%, which was a strong showing, during a year in which the KBW Bank Index declined 25%.

The shares trade for 2.9 times tangible book value, and for 11.4 times the consensus 2013 EPS estimate of $3.05. The consensus 2012 EPS estimate is $2.85.

With a quarterly payout of 20 cents, the shares have a dividend yield of 2.31%.

The company has earned Penala's label as "best in class," with an ROA of 1.59% for the 12-month period ended June 30, and an ROE of 22.01%, which was the strongest among the 24 components of the KBW Bank Index.

U.S. Bancorp will report its third-quarter results on Oct. 17, with a consensus EPS estimate of 73 cents, increasing from 71 cents in the second quarter, and 64 cents during the third quarter of 2011.

Penala downgraded U.S. Bancorp to a neutral rating from a "Buy" rating, while lowering her price target for the shares to $35 from $37, "as we believe that USB's above average valuations will come under pressure based on a declining

return on tangible equity that we forecast."

The analyst said that the stock is "trading close to their all-time high with USB at 2.4x YE13

estimated tangible book value, in line with our target TBV multiple and at 11.1x our 2013E EPS versus our target 11.5x P/E multiple, leaving limited upside potential in the absence of a significant upward revision to our EPS estimate.

Bank of America Merrill Lynch estimates that U.S. Bancorp will earn $3.10 a share during 2013.

Of course, Penala's rating and price target reflect expectations for the stock over the next year. For truly long-term investors, the company's quality speaks for itself. Penala said "we continue to view USB as a high-quality franchise given the demonstrated market share gains (loan growth has consistently beaten expectations), an established culture of expense control, better diversity from spread income, and the strongest

return on tangible equity outlook in our universe.

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Fifth Third Bancorp

Shares of Fifth Third Bancorp of Cincinnati closed at $15.86 Tuesday, returning 27% year-to-date, following an 11% decline during 2011.

The shares trade for 1.3 times tangible book value, and for 10 times the consensus 2013 EPS estimate of $1.58. The consensus 2012 EPS estimate is $1.61.

Fifth Third pays a quarterly dividend of 10 cents a share, for a yield of 2.52%.

For the 12-month period ended June 30, the company's ROA was 1.29%, while its ROE was 14.01%.

Fifth Third will announce its third-quarter results on Oct. 18, with a consensus EPS estimate of 38 cents, declining from 40 cents the previous quarter and also a year earlier.

Penala downgraded Fifth Third to a neutral rating from a "Buy" rating, with a price target of $16.50, saying "we see few near term catalysts and believe that valuations reflect the approx. $1bn in after-tax gains that FITB can potentially realize from the sale of its remaining stake in Vantiv and subsequently deploy this toward buying back shares."

Fifth Third's shares have risen 19% since the end of the second quarter, and the company's near-term capital return potential is quite visible. "By contrast, capital return expectations are far more muted for money center banks," Penala said, "and investors that prefer to continue to invest in this theme will find more upside in C and JPM, in our view, than at regional banks generally."

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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.