5 Bank Stock Picks for 2012 by Goldman Sachs

NEW YORK ( TheStreet) -- Banks are preparing themselves for a slow recovery in 2012, but bank stocks could move higher on the strength of dividend and buyback moves and opportunities from the deleveraging expected in Europe, according to analysts from Goldman Sachs.

The team of analysts led by Richard Ramsden lowered the fourth quarter 2011 estimates by 4% to factor in weaker-than-expected capital markets activity for the big banks.

But despite negative headlines out of Europe and several spikes in volatility, the environment is still stable, the analysts wrote.

Following last week's Goldman Sachs Financial Services Conference, the analysts remain convinced that all banks in their coverage will pass the Fed's 2012 stress test. They also expect the transparency from the Fed in the form of published results to "create further differentiation among the group", helping those with capital strength to return capital in 2012.

"We expect 2012 to be the year which banks attempt to build capital to reach their new Basel III capital targets," they wrote. "That said, given the amount of capital that is currently being generated, combined with capital levels already at all-time highs, we believe most will be in a position to increase capital returns in 2012."

Goldman expects most of the capital returns to be in the form of buybacks, as the Fed is likely to support only conservative payout ratios.

The sovereign debt crisis in Europe has caused turmoil in the financial markets but it also has several positives for U.S. banks in the form of "1) a re-intermediation of the high yield credit market which has driven increased C&I loan growth and (2) European banks have begun to de-lever in order to shore up capital bases/funding, which has allowed U.S. banks to acquire Euro-zone dollar based assets and businesses at attractive yields."

Citigroup ( C), JPMorgan Chase ( JPM) and State Street ( STT) are best positioned to capitalize on taking share in some international business, while Wells Fargo ( WFC) and PNC Financial Services ( PNC) are best placed to pick up assets at attractive returns, according to the analysts.

Here are five top picks from Goldman Sachs in the financial services sector.

5. American Express

Goldman expects American Express ( AXP) to earn $4.10 per share in 2012 and $4.40 per share in 2013. It has a one-year price target of $56, which represents a 15% upside from current levels. The stock trades at about 12 times 2012 EPS.

4. Huntington Bancshares

Huntington Bancshares ( HBAN) is Goldman's top picks among the regionals. Goldman has previously highlighted the stock because the bank has been able to grow its core franchise better than its peers.

Goldman expects the bank to maintain its dividend payout and buyback $105 million worth of shares, taking its overall effective yield to 5.5%.br />

3. JPMorgan Chase

JPMorgan Chase is best positioned to both build capital and continue dividends and share purchases. Goldman expects to earn $4.75 per share in 2012 and $5.40 in 2013. The stock has a price target of $43, a 30% upside from current levels.

2. State Street

Goldman expects State Street's ( STT) "solid organic growth momentum, significant cost cutting initiatives and leading capital position" to drive near-term growth prospects.

The trust bank has a one-year price target of $48, which implies a potential 17% return from current levels.

1. Wells Fargo

Wells Fargo is expected to benefit from acquisitions of businesses from Europe that complements its current businesses, including insurance distribution and wealth/brokerage/retirement.

Wells Fargo has a price target of $31, a 15% upside from current levels.

>>To see these stocks in action, visit the 5 Bank Stock Picks for 2012 by Goldman Sachs portfolio on Stockpickr.

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--Written by Shanthi Bharatwaj in New York

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

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