NEW YORK ( TheStreet) -- Bank stocks continue to dig a deeper hole with every negative headline, but analysts feel investors may have hit bedrock. The 12-month consensus price targets for shares of the nation's 50 largest banks by assets are well ahead of current market prices, according to data from FactSet, showing that analysts feel the market is undervaluing the stocks. Several banks including behemoths like Bank of America ( BAC) and Citigroup ( C) are trading at a discount to their book values. It may be that the market still does not trust the value of the assets on banks' balance sheets. Others say that as banks continue to shrink, valuations also need to be on the lower end of the historical range. Still, analysts argue that the selloff in banks has been overdone. The second quarter results that have been reported so far has also been encouraging with a large number of earnings beats. Loan growth was still tepid, but an improvement from earlier quarters, while banks continue to see vast improvements in credit quality. Analysts at Goldman Sachs believe that bank stocks are still largely a macro trade. "Despite the better underlying drivers and the minimal revisions to next year's estimates, bank stocks have continued to underperform the market," the analysts wrote in a note. "Additionally, the "one-day" outperformance seen in stocks that have reported has then reversed within a day or two, suggesting the market continues to view the sector as a highly correlated "beta" trade." Barclays Capital analyst Jason Goldberg believes that at least some of the macro concerns that are weighing on bank stocks are beginning to ease. "We group investor concerns into four buckets, namely, fundamental, economic, regulatory and sovereign (at the start of the year we were using three, but added 'sovereign'). To the extent there is progress on these fronts in the back half of the year, given where valuations are and how under-owned the group feels, it could give the stocks a meaningful lift," Goldberg said in a note. Here are five bank stocks that have the most upside, based on consensus target estimates and current price levels.
5. Huntington Bancshares
Median Price Target: $7.84 Market Price on Jul 27: $6 Implied Upside: 31% Huntington Bancshares ( HBAN) beat second-quarter profit expectations with a net income of $145.9 million, or 16 cents a share, compared to $126.4 million, or 14 cents a share in the first quarter and $48.8 million, or three cents a share, in the second quarter of 2010. Total loans were $38.5 billion as of June 30, increasing 4% from June 2010. Key growth areas were commercial and industrial loans, which totaled $13.4 billion and increased 8% year-over-year, and automobile loans, which were up 28% to $6 billion. >> 5 Banks Making Cheaper Business Loans The Ohio-based bank also raised its quarterly dividend to four cents a share from one cent. Analysts were disappointed with its relatively cautious outlook and the higher-than-expected pressure on margins. "Management's outlook changed somewhat in that they see the economy basically stable but with limited potential for improvement as borrower confidence remains low, Terry McEvoy of Oppenheimer noted in his post earnings review. "Before, they felt there was potential for improvement. Despite the change in tone, modest loan growth is still forecast with credit costs continuing their downward trajectory," he said. The analyst maintains a buy rating on the stock. FBR analyst Paul Miller was less positive, lowering his recommendation to "market perform" from "outperform," arguing "the company is having trouble growing revenues with the economy still sluggish and low interest rates weighing on its ability to grow the balance sheet at attractive risk-adjusted spreads." Miller dropped his price target to $7 from $8. Still, of the 25 analysts covering the stock, 13 analysts have a buy rating. 10 analysts maintain a hold rating, while 2 analysts rate it a sell.
4. JPMorgan Chase
Median Price Target: $54.76 Market Price on Jul 27: $40.67 Implied Upside: 35% As a consistently strong performer through the crisis, shares of JPMorgan Chase ( JPM) have been a relative winner in the banking sector. Analysts expect the outperformance to continue, given its well-diversified banking business model and strong capital levels. The banking giant earned net income of $5.4 billion, or $1.27 a share for the second quarter, compared with the $4.8 billion, or $1.09 a share it earned in the same quarter a year-ago. Revenue came in at $27.4 billion, up from $25.13 billion during the second quarter of 2010. CEO Jamie Dimon also signaled that
investors should expect more dividends and share buybacks. We are going to have a lot of extra capital," Dimon said during the analyst conference call, adding that the bank will apply to the regulator to allow it to increase dividend "when appropriate". FBR Capital analyst Paul Miller said the second quarter's performance was a prime example of why "investors should own JPM even though it may be considered a crowded long." "JPM continues to beat the competition throughout its different business lines, while returning considerable amounts of excess capital back to shareholders," the analyst wrote in a note. Out of the 37 analysts covering the stock, an overwhelming 31 rate it a buy. There are no sells on the stock.
Median Price Target: $53.96 Market Price on Jul 27: $38.27 Implied Upside: 41% Citigroup ( C) has been gaining favor with analysts as the one bank among the big four that is capable of generating loan growth. Out of the 30 analysts covering the stock, 20 rate it a buy, 7 a hold and 3 a sell. Citi's chief advantage is its strong presence in emerging markets, with over 60% of its core business revenues coming from foreign markets. It also has a relatively low exposure to the mortgage problems compared to Bank of America ( BAC) and JPMorgan. In the second quarter,
the bank reported a net income of $3.3 billion, or $1.09 a share compared to $3 billion, or a dollar a share (adjusted for the May 6 one-for-ten reverse split) in the first quarter and $2.7 billion, or 90 cents a share, in the second quarter of 2010. Some of the gains came from reserve releases and the bank's sale of securities from its non-core Holdings business, which it continues to wind down, although at a moderate pace. Citi also said expenses will likely rise to beyond its earlier guidance due to uncertainty associated with forex and legal costs. That caused analysts to cut their price targets on the stock , although most remained largely positive on the stock. Oppenheimer's Chris Kotowski called Citigroup his favorite stock, calling it "extraordinarily cheap, on a tangible book value that is rising and not falling." "Peeling through the current Citigroup's results shows an underlying core business that is growing, RBC Capital's Gerard Cassidy wrote in a note. "Recognizing that the global macro economic is fragile and volatile, we believe the Future Citigroup's foundation is strong and should capture the faster global growth better than any other U.S.-based bank."
2. Bank of America
Median Price Target: $14.13 Market Price on Jul.27: $9.68 Implied Upside: 46% Bank of America continues to be weighed down by its mortgage-related problems, but analysts clearly find the valuation of the stock too tempting to pas s up. Out of the 38 analysts covering the stock, 20 rate it a buy. Another 18 choose to sit on the fence with a hold rating. No one has a sell on the stock. Analysts continue to see upside even as
they take down their earnings estimates to reflect the nearly $20 billion in mortgage-related charges the bank reported in the second quarter, which resulted in a loss of 90 cents per share. Analysts were expecting the loss since Bank of America had pre-announced the charges and given additional earnings guidance June 29. However, weaker-than-expected spreads and continued challenges in loan growth also weighed on the earnings outlook. At least 15 analysts lowered their price targets on the stock after the nation's largest bank declared its second quarter results. Still, with the stock trading at less than half its book value of $20.29, no one wants to scream "sell." Sandler O'Neill analyst Jeff Harte, one of the many who reduced the price target and earnings estimate on the stock said the current valuations at 76% of tangible book value implies an unrealistically large dilution looms. "We continue to view a capital raise as unlikely and the recent selloff as having gone too far," the analyst wrote in his second quarter review note. "While we concede that BAC's Basel III capital levels lag those of its peers, we do not expect BAC to have trouble meeting currently proposed Basel III deadlines and do not expect management to be pressured into complying on an accelerated schedule."
1. Banco Popular
Median Price Target: $4.33 Market Pric on Jul 27: $2.31 Implied Upside: 87% San Juan, Puerto Rico-based Banco Popular ( BPOP) swung to profit in the second quarter earning a net income of $109.8 million, or 11 cents a share, compared with a loss of $236.2 million, or 28 cents a share, a year ago. Pre-provision net revenue rose 22% to $216.99 million over the year ago period. Like most banks, Popular saw a dramatic improvement in credit quality, leading it to set aside a lower provision for loan losses. Net charge offs fell 44 percent to $134 million. Provisions for loan losses fell 29 percent to $144.3 million. Morgan Stanley listed Popular as one of its top mid-cap banking picks on expectations of credit improvement, loan growth and capital deployment as the economy improves. Shares are down 5% year-to-date. At the current market price, the stock trades at less than 7 times its estimated 2012 EPS of 36 cents per share. It is also at a 38% discount to its book value of $3.82 per share. Out of the seven analysts covering the stock, five rate it a buy. One analyst has a hold rating on the stock and one has a sell. >>To see these stocks in action, visit the 5 Bank Stocks Ready to Rocket portfolio on Stockpickr. --Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj. >To follow the writer on Twitter, go to http://twitter.com/shavenk. >To submit a news tip, send an email to: firstname.lastname@example.org.