NEW YORK ( TheStreet) -- Deutsche Bank ( DB) analysts released their U.S. large cap bank picks for 2011, adding that some fourth quarter surprises will cause bank stocks to initally outperform the broader market. "In October, we became more positive on banks low economic expectations, stabilizing loan balances, potential capital deployment opportunities in
the first half of 2011 for some banks and attractive valuations," the note released by the analysts states. Investors should not expect dirt cheap bank stocks this year, the analysts argue, adding many are trading at 14 times 2011 estimates or 12 times 2010 estimates. The analysts believe a number of factors are pushing up bank stock valuations, including an active M&A environment. "The recent acquisition of MI ( MI) was done at a 35% premium--which can be viewed as a positive read-through for other regionals and we believe additional deals seem likely. Other potential sellers in a consolidating market are FHN ( FHN) , RF ( RF) and TCB ( TCB). Potential acquirers are likely to be BBT ( BBT) , FITB ( FITB), JPM ( JPM), PNC ( PNC) and USB ( USB)," the analysts wrote in their note. Of course not everything is rosy in 2011. The analysts suggest that regulatory reform will still weigh on the sector, especially uncertainty surrounding the impact on bank revenue and the future of the GSE mortgage industry. There could also be $1.5 trillion to $2 trillion in residential real estate losses next year. But with these factors in mind, here are Deutsche Bank's top three bank stock picks.
1. JPMorgan ChaseJPMorgan Chase ( JPM) shares are trading just below $45 and at eight times the normal EPS estimates, versus 10 times EPS for the group. Expect JPMorgan to beat fourth-quarter estimates when it announces earnings on January 14, Deutsche Bank analysts predict. They add the bank will report earnings of $1.05 a share versus consensus at 98 cents a share. In addition, if Basel III capital expectations are low enough investors could see a dividend boost in the first or second quarter. "Capital should continue to build in 4Q (we estimate Tier 1 common of 7.7% for banks by year end 2010 under Basel 3 (vs. 8.9% under Basel 1) and we expect some commentary on capital deployment," the analysts wrote in the research note. Looking forward, Deutsche expects that JPMorgan's operating leverage should improve in 2011, with most of its investment spend already reflected in the run-rate. Also, if credit improves in 2011 the security portfolio is also likely to bring in greater yields. In terms of regulation, JPMorgan has been open about the impact that Dodd-Frank will have on the institution. The bank has already disclosed that the CARD Act will cut $750 million from their bottom line and the Durbin Amendment will could cost about $2 billion in revenues annually if the interchange fee is reduced by about 50%. The big question for JPMorgan will be what the bank will do concerning mortgage buybacks now that Bank of America ( BAC) has announced they will be repurchasing $2.5 billion from Fannie Mae ( FNMA) and Freddie Mac ( FMCC). Investors and analysts will be watching to see how much in losses the bank could face from repurchase costs.
2. Wells FargoWells Fargo ( WFC) is also a buy with stock trading around $32 per share. The stock is trading at just under nine times the normal EPS estimate versus the group at 10 times EPS, according to the report. Fourth quarter earnings are expected to top analyst estimates at 63 cents a share compared to 61 cents a share, according to Deutsche Bank analysts. "WFC is well-positioned to gain market share--including mortgage, commercial lending (including CRE), and credit card given many of the revenue benefits from the Wachovia deal are still to come and as some large competitors remain internally focused," the analysts said in the note. The biggest challenge in 2011 for Wells Fargo will be the squeeze on its net interest margin in relationship to their higher-yielding securities book and runoff of higher yielding loans. However, analysts believe the bank's net interest margin will, "be more resilient than expected," due to core deposit growth, lower debt and CD run off. Basel III should not be a problem for Wells Fargo, and analysts predict that the bank will build 10 percent more capital by the end of 2012. Wells is also likely to face concerns over mortgage repurchase costs in 2011 and 2012, according to the report.
3. TCF Financial CorporationTCF Financial Corporation ( TCB) is Deutsche Bank's third top stock pick. The stock is currently trading around $15.60. The analysts believe the shares are underperforming primarily due to concerns about credit and debit card interchange, which will affect nine percent of the regional bank's revenue. The stock is trading at eight times normal EPS. Expectations for the bank in the fourth quarter are that it will not meet analyst estimates reporting 18 cents per share instead of the consensus of 23 cents per share. "We expect modest NIM pressure in the 4Q10 and in 1H11. While there's little flexibility to further reduce deposit rates over time, longer-term, there's significant opportunity to improve wholesale funding costs over time," the Deutsche analysts explained. --Written by Maria Woehr in New York. To contact the writer of this article, click here: Maria Woehr. To follow the writer on Twitter, go to http://twitter.com/newsgirlmw. To submit a news tip, send an email to: firstname.lastname@example.org.