NEW YORK ( TheStreet) -- Wells Fargo Securities analyst Matt Burnell upgraded Citigroup ( C - Get Report) to a buy on Wednesday and raised the price target on the stock to $35 to $37, implying about a 20% upside from Tuesday's closing price at the higher end of the range.

Shares were rising 3.3% to $31.75 in morning trading.

Burnell expects increased capital returns in 2012 to drive outperformance even if capital market remains weak. Given the "depressed level of shares" and "inherent flexibility of share repurchases", the analyst expects the bank to favor buybacks over dividends. Citigroup may increase its quarterly dividend to 10 cents per share and seek approval to repurchase 100 million shares in 2012, the analyst predicts.

Moreover, he expects the pace of buybacks to accelerate in 2013. The capital return story has been driving investor interest in Citi, with shares up 20% in January.

Burnell expects Citi to also deliver higher EPS growth despite "modest expectations for investment banking" as it achieves positive operating leverage in regional consumer banking, succeeds in meeting its target expense reduction of $2.5 billion to $3 billion in 2012, increases share repurchases and continues to wind down Citi Holdings.

The analyst raised his 2012-13 EPS estimate to $$4.00/4.75 from $3.85/4.50.

"Citi trades at the second lowest P/TBV price-to-tangible book value multiple in our coverage universe (behind BAC) despite superior growth prospects and a better return profile," the analyst wrote. "Given's Citi's elevated volatility profile (roughly 23% above the peer average over the past year), we believe a volatility discount is appropriate in the near term, but we believe increased capital returns in 2012 will reduce the volatility in the shares relative to peers."

Separately, the analyst also upgraded First Horizon ( FHN - Get Report) to outperform. Story. "FHN's robust capital base should allow substantially higher share buybacks in 2012/2013, materially improving capital returns. Aggressive cost reductions (aided by a shrinking non-strategic portfolio) should generate materially stronger PPNR expansion than peers. Still, FHN trades at a 40% P/TBV discount to peers," the analyst argued, raising the price target on the stock to $9.50 to $10.50.

Overall, the analyst recommends a "barbell approach" to investing in bank stocks. He advocates buying defensives such as PNC Financial Services ( PNC - Get Report) and JPMorgan Chase ( JPM - Get Report) as well as "high-beta" names like Citigroup and First Horizon.

--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: tips@thestreet.com.

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