9 Q1 Bank Stock Picks from Barclays

NEW YORK ( TheStreet) -- Barclays Capital published a massive first-quarter preview on bank stocks and the team of analysts led by Jason Goldberg has a positive view on large-cap banks and is neutral on mid-cap names.

The report notes that bank stocks have trailed the market going into earnings season this quarter -- in contrast to the last five quarters -- and despite generally positive results from the Federal Reserve Comprehensive Capital Analysis & Review, better known as the stress test, conducted on the largest 19 U.S. bank holding companies.

Many banks, including Wells Fargo ( WFC), JPMorgan Chase ( JPM), U.S. Bancorp ( USB) announced they had gotten the go-ahead for share buybacks and dividend hikes. Even crisis-battered Citigroup ( C) it would reinstate small shareholder payout of a penny a share.

"Unfortunately, the conversations with investors post that exam quickly shifted toward first quarter earnings expectations, which we view as lackluster, though not surprising," the Barclays report states.

Barclays had been relatively bullish on the banks going into each of the past four quarters, regularly expecting the majority of the names it covers to exceed Wall Street analyst consensus estimates. This time around, banks posting better than expected numbers may be in the minority, Barclays' analysts write.

Adding to the uncertainty quarter has been mixed economic data with positive signs in the employment outlook offset by a still-weak housing market, the report notes.

JPMorgan Chase will start the earnings season Wednesday, with Bank of America ( BAC) set to report on Friday, though the busiest days will come Tuesday and Thursday of next week.

Areas Barclays analysts will be watching closely include loan growth, which they expect to be even worse than usual in a seasonally weak first quarter. They expect fee income to show small declines at most banks, though investment banking should be improved over the fourth quarter, particularly for banks with meaningful trading operations like JPMorgan Chase, Bank of America and Citigroup.

Balance sheets should continue to improve, with tangible book value increasing an average of 2%, which Barclays analysts note would be the fifth straight quarter showing improvement in this area. They are also forecasting continued declines in the percentage of loans classified as "non-performing," though they believe commercial real estate will be a problem at many institutions.

Barclays analysts are above consensus on several names that are nonetheless not among their top recommendations. Examples of these include Northern Trust ( NTRS), Comerica ( CMA) and Fifth Third Bancorp ( FITB). Other names they favor are popular with other analysts as well. Here are Barclays' picks.

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9. Wells Fargo

Strong and steady wins the raceis presumably a mantra favored by Wells Fargo shareholders. Their bank prides itself on avoiding fads, and it weathered the financial crisis far better than many other giant institutions, while establishing a presence in the Eastern U.S. with its acquisition of Wachovia in 2008 for $12.7 billion, or less than $6 per share, roughly a tenth of Wachovia's share price in 2006, according to Reuters.

Though that acquisition has earned lots of praise, it also exposed Wells Fargo even further to the uncertainties of the still-struggling U.S. housing market. Many observers, including the analysts at Barclays, believe Wells Fargo's management is up to the task. Still, there are concerns that CEO and Chairman John Stumpf cannot fill the shoes of his predecessor, Dick Kovacevich. Barclays analysts also wrote that Wells Fargo's recent dividend increase was lower than they anticipated, though they added that the $6.4 billion share repurchase exceeded their expectations.

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8. U.S. Bancorp

U.S. Bancorp has warned about pressures on its net interest margins, but Barclays' analysts say they are "not especially concerned on this front."

More important, they say, has been U.S. Bancorp's recent statements about increasing its dividend by 150% to 50 cents per share and buying back some 50 million shares of common stock. Loan growth also looked "broad based" in the fourth quarter, and pre provision revenues also look set to increase this year, as earnings get a further boost from reserve releases and improving asset quality, Barclays' analysts argue.

The Minneapolis-based bank, one of the 10 largest in the U.S. also bought First Community Bank in January and the securitization trust administration businesses of Bank of America in December. Both deals will impact results, according to the Barclays' report.

Founded in 1863, U.S. Bancorp had 3,013 bank branches and 5,323 ATMs as of November 2010. Barclays has a price target of $31.

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7. The Bank of New York Mellon Corp. ( BK)

BNY Mellon operates in 34 countries and more than 100 markets. An asset manager of $977 billion, it also has $22.3 trillion in assets under custody.

"While encouraged by its return to modest operating leverage in 4Q10, we look for its recent margin pressure to continue amid the current low rate environment and dampen a portion of the earnings leverage that naturally arises from its recent new business wins," Barclays analysts write.

They have a $38 price target, compared to the $30.04 price at which shares were trading late Monday afternoon, and, despite their "overweight" recommendation, are expecting below-consensus earnings in the first quarter of 52 cents per share.

Barclays' analysts had been expecting a higher quarterly number of 57 cents, but lowered estimates due to a decline in equity prices, continued low interest rates, a slowdown in foreign exchange trading, and "seasonal pressure in its issuer services division's depository receipts business," the report states.

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6. TCF Financial ( TCB)

TCF has been attracting lots of attention lately due to its legal battle over the hugely unpopular Durbin amendment, which caps the fees banks with more than $10 billion in assets can charge in debit card transactions.

The bank is challenging the constitutionality of the law, in a case that is being closely watched in the banking industry for obvious reasons.

Durbin doesn't apply to banks with less than $10 billion in assets, but TCF, which has $18 billion, is right on the cusp.

"The big banks are in some cases 100 times larger than we are. They have lots of other ways they can make money. We don't," says TCF spokesman Jason Korstange.

Indeed, $110 million of TCF's $140 million in earnings in 2010 came from debit card fees. Korstange says the bank can survive without the fee income, despite the enormous hit to profitability.

Fortunately for the bank, it may not have to. The Federal Reserve has already missed one deadline for rulemaking on Durbin, and legislators from both parties have expressed reservations about the Durbin amendment, including Barney Frank (D., Mass.), co-author of the Dodd-Frank reform legislation that includes the Durbin amendment.

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5. State Street ( STT)

A popular holding with Warren Buffett successor-in-waiting Todd Combs, State Street is a giant in the boring but reliable business of asset servicing. At year-end, it had $21.5 trillion in assets under custody and administration--a pile of money so large that even the tiny fees it brings in on this business translate into meaningful profits.

State Street is also a giant money manager, and it added another $30 billion in assets with the Jan. 10 purchase of Bank of Ireland Asset Management.

Barclays' analysts argue State Street shares are cheap at about 12 times their 2011 estimates, compared to a 20 year average multiple of 16. Barclays excluded 2000-2001 from that 20-year average multiple, however.

Barclays expects State Street to continue growing its custodial and asset management businesses while also increasing the fees it charges. Offsetting those positive trends somewhat, Barclays argues, will be lower net interest income and higher expenses.

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4. First Interstate BancSystem ( FIBK)

Barclays analysts are looking for First Interstate to earn 18 cents per share in the first quarter, a penny shy of Wall Street analysts' consensus. The price target of $19 per share compares to Monday's closing price of $13.32 for the Billings, Mont.-based institution, which has about $7.5 billion in assets.

"While near-term loan demand will likely be tepid, we are hopeful for improvement looking out," say Barclays' analysts of First Interstate. "We believe the franchise remains poised to grow over the longer term, but expect results to be hampered by elevated credit costs and depressed loan demand for at least a few more quarters."

First Interstate has exposure to three resort and second home communities where it "remains somewhat captive to credit trends," according to the report.

Barclays expects an increase in non-performing assets and net charge-offs, offset somewhat by a decline in the amount of capital the bank sets aside for bad loans.

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3. City National ( CYN)

Barclays has an "overweight" rating and a $65 price target on Los Angeles-based City National, but it appears to be more of a long-term view.

" While the announced doubling of its dividend to a 25% payout ratio reflects its strong capital position, we believe more robust loan demand/higher short-term interest rates will be needed to drive the shares meaningfully higher near-term," the analysts wrote.

The bank isn't exposed to the most distressed housing markets in greater Los Angeles, such as the "Inland Empire," and recent comments from CEO Russell Goldsmith on CNBC suggest the executive believes a slow recovery is occurring, though he wouldn't go so far as to call it self-sustaining.

A press release accompanying City National's fourth quarter results said bank management expects profits to increase this year as asset quality improves and credit costs decline.

"However, it is likely that slow economic growth, limited loan demand, conditions in the commercial real estate market, and the continuing decline of covered assets will moderate overall average loan growth," the release stated, adding that low interest rates would continue to hurt net interest margin and hamper revenue growth.

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2.Citigroup

Citigroup was one of the hardest hit giant financial companies during the crisis, and while its reputation appears a long way from recovering, the Citigroup of today is indisputably a different institution in certain respects.

The most obvious difference between the Citigroup of today and that of 2008 can be seen in the strength of the balance sheet. Because the bank took more in bailout funds than almost any other institution, it was under U.S. government authority for longer, and its government overseers made sure it created a substantial capital cushion.

Citigroup bulls, including the analysts at Barclays, point to the bank's outsized presence in emergingmarkets--a presence that dwarfs that of any other retail bank. Citigroup bears, such as CLSA analyst Mike Mayo, question the bank's ability to manage its far-flung businesses effectively. Indeed, the bank was recently told to halt its sales of wealth management products in Indonesia after a manager there was arrested on suspicion of stealing $2 million from clients.received more bailout funds has gone from being

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1. JPMorgan Chase

Barclays has a $60 price target on JPMorgan Chase and is expecting first quarter earnings per share of $1.23 versus a consensus of $1.18. Despite pressures from regulatory changes, housing market weakness, mortgage servicing disputes, and pressure on net interest margins (NIM), Barclays analysts "expect a positive tone" when JPMorgan releases its first quarter numbers.

That's because the Barclays analysts believe JPMorgan's recent investor day presentation to investors was well received, and they are encouraged that the bank got the go ahead from the Federal Reserve to raise its dividend to 25 cents per quarter and to buy back $15 billion in common shares.

Asset management and Treasury and Securities Services are likely to post improving results for JPMorgan, Barclays analysts predict. The analysts are also looking for higher fee income and stable expenses from the JPMorgan, while credit improves as non-performing assets and net charge-offs decrease.

-- Written by Dan Freed in New York.

>>To see these stocks in action, visit the 9 Q1 Bank Stock Picks from Barclays portfolio on Stockpickr.

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

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