Update with afternoon close information.

NEW YORK (

TheStreet

) -- Atlantic Equities analyst Richard Staite on Friday said that

Wells Fargo

(WFC) - Get Report

and

PNC Financial Services Group

(PNC) - Get Report

were "key picks" for a U.S. banking sector showing a "wide disparity in profitability."

Shares of Wells Fargo rose 2% to close at $29.60, while PNC was up slightly, to close at $59.08.

Staite also upgraded

U.S. Bancorp

(USB) - Get Report

to a neutral rating from "Underweight," saying he hadn't shifted to an "Overweight" rating, "given the high valuation" of the shares, and downgraded

Morgan Stanley

(MS) - Get Report

to an "Underweight" rating, saying that "Given recent share price moves we now see Morgan Stanley as being the least attractive in the sector."

USB was up slightly in afternoon trading, to close at $27.86.

The analyst said that "profitability for US banks remains sharply divided between the best and the worst performers," with regional U.S. Bancorp "at the top end," with an impressive 23% return on tangible equity over the past year, followed by WFC at 15% and PNC at 13%," while

JPMorgan Chase

(JPM) - Get Report

"generated 14% and

Citigroup

(C) - Get Report

7%."

In his industry comments, Staite said that "net interest income increased by nearly 2%

quarter-over-quarter across the sector," driven by a 5 basis point expansion of the net interest margin, "which marked the first improvement for at least six quarters," as the banks "benefited from 1.7% QoQ average loan growth and over 2% QoQ deposit growth."

On the negative side, Staite said that "the largest area of weakness was in both

fixed income, currency and commodities and Equity trading revenues, which declined by 8% and 18% QoQ respectively on average," which was worse than the banks had indicated in early December. Staite added that the large banks' "management still has little clarity on whether the weakness in H2 2011 was cyclical or secular or what impact future regulation may have on their businesses."

The analyst also sharply lowered his 2012 and 2013 earnings estimates for

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

, saying that both banks are "in the process of restructuring their operations with the result that revenues in the run off business are falling faster than the associated costs putting pressure on underlying pre provision profitability."

For Bank of America, State lowered his 2012 earnings estimate to 53 cents a share from 80 cents and his 2013 estimate to 80 cents from $1.20, which are both well below consensus estimates. The analyst was impressed that the company "improved its Basel I

Tier 1 common equity ratio to 9.9% from 8.7% during the quarter," which was mainly the result of asset sales and an offering of common shares, but said "the flip side is lower EPS forecasts. Asset sales have reduced future revenues and earnings whilst at the same time the share count has increased."

Staite has a neutral rating on Bank of America, with a $7.50 price target.

Bank of America's shares were down a penny to close at $7.30.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

Staite lowered his 2012 EPS estimate for Citigroup to $4.07 from $4.73, and his 2013 estimate to $5.07 from $5.49, saying that like Bank of America, the company had "suffered from weak trading revenues and we believe this may extend into 2012."

The analyst said that Citi's "disappointing performance in its Securities and Banking unit

had offset more positive progress in its Consumer bank, and that although "costs disappointed in 2011 but we expect greater control in 2012."

State reiterated his "Overweight" rating for Citigroup, but lowered his price target for the shares to $44 from $52.00.

Citigroup's shares rose 2% to close at $30.87.

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.

Staite raised his price target for Wells Fargo to $38 from $32, saying that the company "should see a significant boost to earnings in 2012 and 2013 with costs set to decline by at least 12%," and that WFC "is gaining market share and returning capital to shareholders.

Based on a quarterly payout of 12 cents, the shares have a dividend yield of 1.64%.

Wells Fargo has been the strongest earner among the "big four" U.S. bank holding companies over the past year, with a return on average assets (ROA) ranging between 1.11% and 1.27% over the past five quarters, according to HighlineFI.

Staite estimates that Wells Fargo will earn $3.22 a share in 2012, followed by EPS of $4.02 in 2013, having "factored in the full impact of the cost cutting plan that will bring Q4 2012 costs down to $11bn from $12.5bn currently which might account for our higher numbers relative to consensus."

Wells Fargo's shares trade for 1.7 times tangible book value, according to HighlineFI, and nine times the consensus 2012 earnings estimate of $3.19 a share, among analysts polled by Thomson Reuters.

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

Staite raised his price target for PNC's shares to $75 from $70, saying that the Pittsburgh lender "is gaining market share in commercial banking and should see a further EPS boost from the upcoming acquisition" of RBC Bank (USA) from

Royal Bank of Canada

(RY) - Get Report

, which is expected to be completed in March, and will expand PNC's market presence with 400 additional branches in southern states. PNC does not plan to issue additional common shares to help fund the $3.45 billion purchase.

Staite estimates that PNC will earn $6.58 a share in 2012, followed by 2013 EPS of $7.37, with is higher-than-consensus estimate "driven by a more positive view of net interest income given continued strong loan growth plus we also factor in a beneficial impact of the RBC (USA) acquisition."

PNC trades for 1.3 times tangible book value, according to HighlineFI, and 9.5 times the consensus 2012 EPS estimate of $6.20.

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

U.S. Bancorp has consistently out-earned other large regional bank holding companies, with ROA ranging between 1.36% and 1.61% over the past five quarters, according to HighlineFI, and the company's relatively high price multiple to book value, reflects its steady performance.

In support of his neutral rating on the shares, Staite said that the company was "unlikely to see any further improvement in ROTE given it is already highly efficient whereas WFC and PNC both have room to cut costs."

The analyst raised his 2012 EPS estimate for U.S. Bancorp to $2.69 from $2.53 and his 2013 estimate to $2.92 from $2.86. Staite's price target for the shares is $30.00.

USB trades for 2.6 times tangible book value, according to HighlineFI, and 10 times the consensus 2012 EPS estimate of $2.68.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

Staite downgraded Morgan Stanley to "Underweight," with a price target of $18, because of the company's

continued weakness in trading revenue

. The analyst also said that "given it has higher funding cost and a relatively fixed

expense base, we forecast

return on tangible equity at only 6% in 2012.

State lowered his 2012 EPS estimate to $1.77 from $1.81 and his 2012 estimate to $2.24 from $2.26.

"Looking forward we see limited improvement with revenues suffering from macro uncertainty and new regulations," he said.

Morgan Stanley's shares trade for just 0.6 times the company's reported Dec. 31 tangible book value of $31.42, and 10 times the consensus 2012 EPS estimate of 91 cents.

Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.

--

Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here:

Philip van Doorn

.

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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 TheStreet.com 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.