NEW YORK ( TheStreet) -- Third quarter earnings for large cap regionals are likely to surprise to the upside, according to a report published Friday by Citigroup analyst Keith Horowitz.

BB&T Corp. ( BBT - Get Report), Fifth Third Bancorp ( FITB - Get Report) and Wells Fargo ( WFC - Get Report) are likely to provide the biggest upside surprises versus analyst estimates, according to Horowitz, though his only "buy" rating in the group is U.S. Bancorp ( USB - Get Report). (Horowitz also has "buy" ratings on JPMorgan Chase ( JPM) Bank of America ( BAC - Get Report), Goldman Sachs ( GS) and Lazard ( LAZ), though none of these are regional banks.)

Fees from refinancing-fueled mortgage activity, plus wider gain on sale margins and continued credit improvement, will drive the earnings surprises, Horowitz writes. Despite his relatively bullish outlook, Horowitz trimmed estimates as a result of the lower interest rate environment which has the effect of squeezing profit margins on bank loans.

U.S. Bancorp is Horowitz's top pick among large cap regionals because it is "relatively better positioned to show positive core pre-tax pre-provision growth over the next several quarters given the expected payback from recent investments."

He also believes the bank is in a "sweet spot" where it is big enough to benefit from economies of scale, without being deemed systemically important by regulators, which would subject it to stronger capital requirements.

With regard to Fifth Third, Horowitz argues that despite entering the credit cycle "with a relatively high risk portfolio, management has been proactive in building reserves, writing down/selling problem assets and exiting higher risk channels (such as broker home equity and non-owner occupied commercial real estate)."

Though he sees the bank as having a strong capital position and solid normalized earnings power, Horowitz argues valuation is nothing to get overly excited about.

In the case of Wells Fargo, Horowitz writes that despite its "hold" rating, "the stock is looking more attractive to us on a relative basis than in the past." Still, valuations remain high relative to peers, and Horowitz is below consensus for 2012. Still, Wells Fargo, along with U.S. Bancorp and M&T Bancorp ( MTB - Get Report) offers the least potential downside to 2012 estimates, Horowitz writes.

As for BB&T, Horowitz sees a strong third quarter driven by improved mortgage banking revenue, though he sees lending profit margins pressured by low interest rates.

"While BBT has performed relatively well through the downturn and capital levels are already within the likely range of future targets (currently 8.3% Basel 3 Tier 1 common ratio vs. 8.5% target), we see the tough environment presenting challenges for capital deployment near-term, which increases the risk of an acquisition at an unattractive price," Horowitz writes.

Another important theme for banks is so-called "excess" capital over and above what regulators are likely to require. Horowitz argues First Horizon National Corp. ( FHN - Get Report) is the best example of this trend, where he sees $3 billion in value from excess capital alone.

-- Written by Dan Freed in New York.

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