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Updated to reflect Warren Buffett's comments on Bank of America, TheStreet's poll results.



) -- Bank stocks have outperformed in 2012 in a "risk on" rally that has bid up many of the previous year's underperformers including

Bank of America

(BAC) - Get Bank of America Corp Report



(C) - Get Citigroup Inc. Report


Hopes that the European crisis might not have a significant impact on the U.S. economy and expectations that there will be greater clarity on the regulatory front have helped turn the tide for bank stocks.

Other catalysts include banks' plans to return more capital to shareholders, policies addressing the housing market and of course an improving domestic economy.

Still, the industry's worst is not behind it with banks continuing to be slapped with lawsuits and the sentiment in Washington towards Wall Street still largely hostile.


shortlisted the five banks that have rallied the most in 2012, focusing on banks that have an average trading volume of more than 500,000 and a market price greater than $1, to eliminate the more questionable names.

The banks that have rallied in the last two months have largely been the weaker names, some of which are yet to repay government bailout money. However, their earnings upside could be significant if the economy strengthens.

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TheStreet Recommends

Here are

the biggest winners in 2012

, ranked in ascending order of year-to-date returns.

5. Popular

Shares of Puerto Rico-based


(BPOP) - Get Popular, Inc. Report

have gained 33% in 2012 so far, but is still down 43% over a one-year period.

Popular's shares fell 56% in 2011.

The stock was featured at the top of


list of the "10 Bank Stocks Trading Below Book with

Up to 85% Upside."

Popular still owes $935 million in TARP money, after having converted the government's preferred shares to trust-preferred shares in August 2009, while paying a $13 million exchange fee for the privilege.

Sandler O' Neill analyst Michael Sarcone expects the bank to hold off repaying bailout funds till atleast 2013, with the company reiterating that it will not repay TARP until it makes sense for shareholders. "We think this is a positive and shareholders will view it as such because it lowers the likelihood of a book value dilutive capital raise," Sarcone wrote in a report following fourth-quarter results.

The management has guided toward a 2012 net income range of $185 to $200 million, which is 15% to 20% higher than 2011 net income of $161 million and equates to an EPS range of 18 to 20 cents.

The shares currently trade for 0.6 times their Dec. 30 tangible book value of $3.08 and about 8 times its 2012 earnings per share consensus estimate of 23 cents.

The stock isn't very actively covered. Out of the five analysts covering the stock, three rate it an outperform or buy while two maintain a hold rating.

4. Regions Financial

Shares of

Regions Financial

(RF) - Get Regions Financial Corporation Report

are up more than 35% in the first two months of 2012, after declining nearly 40% in 2011.

Regions is yet to repay $3.5 billion in government bailout money and is considered among the weaker names among the big banks.

The company recently sold its brokerage subsidiary Morgan Keegan to

Raymond James Financial

(RJF) - Get Raymond James Financial, Inc. Report

for a total consideration of $1.18 billion.

According to Barclays Capital analyst Jason Goldberg the sale of the unit improves Regions' liquidity position, but it just slightly aids its capital position. The analyst expects the bank to raise both debt and equity in the near future to be able to repay TARP and achieve its required capital levels.

The management has said that improved profitability and sustainability in its operations would need to be achieved first before it repays TARP.

Still, FBR Capital Markets analyst Paul Miller expects the bank to raise money once shares approach closer to tangible book value.

At the current market price, Regions Financial trades at 12.7 times its expected 2012 earnings per share based on Reuters consensus estimates and at 0.66 times its tangible book value.

Six analysts out of 6 rate it a buy or outperform. 18 analysts maintain a neutral rating while two analysts rate the stock a sell or underperform.

3. Bank of America

Shares of embattled

Bank of America

(BAC) - Get Bank of America Corp Report

have jumped 46% in 2012 after falling 58% in 2011.

Concerns surrounding the bank's capital adequacy have abated somewhat after the bank has successfully disposed assets to build its balance sheet. But analysts now doubt whether the bank has enough earnings power as it has now adopted a strategy that is focused on shrinking its size.

At least three analysts have downgraded the bank in recent weeks to a neutral rating following the run up in stock price. But no one is ready to scream sell yet, as the stock still trades at a discount to its book value.

On a price-to-earnings basis, the stock is trading at about 8 times its 2012 consensus earnings per share.

Bank of America's problems are far from behind it, although bulls expect more clarity on the litigation front in 2012. The bank recently scored a small victory after a U.S. appeals court ruled that a proposed $8.5 billion mortgage-backed securities settlement should be reviewed in a New York court and not a federal court, increasing the chances that it will be approved.

The bank also took a more aggressive stance against

Fannie Mae


which has been increasing its repurchase claims, by deciding to no longer sell mortgages to the housing finance giant.

Meanwhile, there is also the Buffett factor. Billionaire investor Warren Buffett talked up his $5 billion investment in the stock in his annual letter to shareholders issued last week.

"Some huge mistakes were made by prior management," wrote Buffett. "Brian Moynihan has made excellent progress cleaning these up, though the completion of that process will take a number of years. Concurrently, he is nurturing a huge and attractive underlying business that will endure long after today's problems are forgotten. Our warrants to buy 700 million Bank of America shares will likely be of great value before they expire."

In a poll run by TheStreet, more than 60% of the voters said they believe the rally in Bank of America has just begun.

Sentiment seems to be largely positive on the stock, with 14 analysts rating it a buy or outperform, 17 analysts rating it a sell and only one analyst rating it an underperform.

2. Synovus Financial

Shares of

Synovus Financial

(SNV) - Get Synovus Financial Corp. Report

have also gained 46% in 2012.

The company still owes $967.9 million in TARP money. Synovus has reported operating profits for two consecutive quarters, with fourth-quarter earnings of $12.8 million, or 14 cents a share, following third-quarter earnings of $15.7 million, or 17 cents a share.

The biggest argument going for Synovus is the possibility that it will achieve a sustainable level of profitability in 2012 that will allow it to recapture its deferred tax assets, a move that allows companies to set off losses incurred during the crisis against future taxes.

The stock trades at about 20 times its consensus earnings estimate of 10 cents per share and 0.85 times its tangible book value per share.

Six analysts rate the stock a buy, while 20 analysts rate it a hold. Two analysts have an underperform rating on the stock.

1. Doral Financial

Shares of

Doral Financial


, yet another Puerto Rico-based bank holding company, have gained 55% in 2012 and is actually up 12% over a one-year period as well.

Doral had $1.9 billion in total assets as of Dec. 30 and reported fourth-quarter net income attributable to common shareholders of $9.2 million, or seven cents a share, compared to a loss of $38.5 million, or 30 cents a share, in the fourth quarter of 2010. The fourth-quarter profit reflected an $8.6 million income tax benefit.

B. Riley analyst Joe Gladue said in a

recent interview that there is still room for consolidation in the Puerto Rico market and that a logical combination would be

First Bancorp

(FBP) - Get First Bancorp Report

with Doral, since First Bancorp has completed a recapitalization, but "one thing they don't have is a big mortgage origination platform, which Doral has."

"Doral has said they would be interested in the consolidation as either a buyer or a seller," according to Gladue, who also says that a combined First Bancorp and Doral "could probably see $100 million in cost savings from a combination, which would improve the earnings of the combined company significantly."

The shares trade for six times the consensus 2012 EPS estimate of 26 cents. The consensus 2013 EPS estimate is 49 cents.

>>To see these stocks in action, visit the

5 Best-Performing Bank Stocks in 2012

portfolio on Stockpickr.

--Written by Shanthi Bharatwaj in New York

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Shanthi Bharatwaj


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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.