BB&T, SunTrust Upgraded At Credit Suisse

NEW YORK ( TheStreet) -- Credit Suisse lifted its view on the regional bank industry on Wednesday to the equivalent of a buy, specifically upgrading BB&T ( BBT) to neutral and SunTrust Banks ( STI) to outperform.

The drivers for the call are the attractive Southeast U.S. markets both BB&T and SunTrust are located in, the likelihood that consumer loan losses in the region will recover faster than in other parts of the country, and the potential for M&A in the sector.

The upgrades follow other bullish calls on the banks this week, including an upgrade of BB&T by Citi Investment Research on Tuesday.

Credit Suisse analyst Craig Siegenthaler says in the research note that investors should buy the regional banks before the fourth-quarter reporting season begins. Year-end results at the banks tend to be messy and inclusive of many special items that are incrementally negative for earnings.

"As we believe nonperforming assets, net charge-offs and provisions will steadily improve throughout 2010, and that 13 of our 15 covered companies will not need additional capital (except with early TARP repayment), we are buyers before the fourth quarter kitchen sink results in mid-January," Siegenthaler writes in the note. "The quarterly results will bring improved EPS visibility following the peak in provisions."

Siegenthaler expects loan loss provisions to "peak" this quarter with banks lowering the amount of reserve building next year, specifically as nonperforming loans also peak in the first half of the year.

He expects bank stocks to return to "historical valuation levels" of 11-13 times forward earnings per share by mid-2012, giving the average stock a 75% potential upside over the next three years. According to Siegenthaler, fiscal 2013 will be the first year that banks are able to return to so-called normalized earnings.

Still commercial real estate will remain an issue through fiscal 2012, he notes. Additionally, the rate of improvement will vary by bank depending on loan geography, loan mix and "level of conservatism embedded in previous charge-off and reserve build assumptions," Siegenthaler writes.

SunTrust's strong footprint in the Southeast "supports stronger organic deposit/loan growth," Siegenthaler says in a separate note. "Additionally, we estimate the Southeast region (vs. mid-Atlantic and Midwest) and most consumer loan classes will recover earlier and faster. This is already occurring in SunTrust's nonperforming loan organic growth, which has declined three consecutive quarters and is now one of the lowest in our coverage."

He raised his 12-month target share price on SunTrust by $6 to $29 and added $3 to his target for BB&T, bringing it to $31.

The BB&T upgrade is supported by future M&A opportunities and net interest margin benefits from the recently acquired Colonial Bank assets, despite the expectation that BB&T's growth in nonperforming loans is likely to exceed peers over the next few quarters, he says in the BB&T-specific note.

"We do not expect BB&T's provisions to recover as fast as its peers, which is negatively impacted by aggressive refinancing activity," Siegenthaler says. "Specifically, the company's proactive refi strategy is keeping nonperforming loans, but it could be delaying loan losses into 2010 and 2011. Additionally, we believe BB&T's large and growing OREO other real estate owned balance could continue to negatively impact pretax pre-provision earnings over the next two years, which causes our expectation of stock price appreciation to be backend-loaded."

Of the 15 regional banks it covers, Credit Suisse favors Fifth Third ( FITB) and First Horizon ( FHN). Conversely, Synovus ( SYN) and Zions Bancorp ( ZION) are the only two banks covered that Credit Suisse still rates at underperform, the equivalent of a sell rating. BB&T was rated at underperform prior to the upgrade.

In midday action, shares of SunTrust were rising less than 1% to $23.52, BB&T shares added 1.9% to $26.09, Fifth Third's stock rose 2.4% to $10.42, and First Horizon shares gained 1.3% to $13.82.

--Written by Laurie Kulikowski in New York.

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