5 Large-Cap Bank Stock Buys From Guggenheim

NEW YORK ( TheStreet) -- With so many bank stocks showing very strong year-to-date returns, even aggressive bank stock investors may be tempted to pause and take some gains.

Guggenheim Securities analyst Marty Mosby covers large-cap banks, and shared his five top picks with TheStreet, including three "quality banks" and two "that are still in recovery mode," providing an opportunity for investors, because of discounted valuations to tangible book value and to forward earnings estimates.

Here are Mosby's five top picks, ordered by ascending upside potential, based on Monday's closing prices and the analyst's 12-month price targets:

5. Wells Fargo

Shares of Wells Fargo ( WFC) closed at $33.50 Monday, returning 23% year-to-date, following a 10% decline during 2011. Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.63%.

The shares trade for just over twice their tangible book value, accordion to Thomson Reuters Bank Insight, and for nine times the consensus 2013 earnings estimate of $3.68 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.28.

According to data supplied by Thomson Reuters Bank Insight, Wells Fargo's quarterly operating returns on average assets have ranged from 1.21% to 1.30% over the past five quarters, putting it near the top for consistent, strong earnings performance among the largest U.S. bank holding companies.

Mosby says that with the completion of Wells Fargo's integration process for Wachovia -- which Wells Fargo acquired at the end of 2008, thus doubling in size -- the company will "take advantage" of the development of their franchise, "as well as the integration expenses going away in the second quarter."

Mosby said in April that "WFC's plan to remove $1.5 billion in quarterly operating expenses throughout 2012 is expected to begin to impact earnings in the second quarter of this year, generating an acceleration in sequential earnings per share growth next quarter," adding that although "one of the biggest concerns about WFC, in our view, has been whether revenues would grow in 2012," the company during the second quarter "increased revenues sequentially by $1 billion, as fee income sources rebounded."

Please see TheStreet's earnings coverage for details on Wells Fargo's second-quarter results.

Mosby's price target for Wells Fargo is $43, and he estimates the company will earn $3.43 a share this year, followed by EPS of $3.84 during 2013. The analyst said that "Over time, if management can replicate the prior era of consistent earnings per share growth, we expect WFC to produce 13% to 18% in annualized total shareholder returns."

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

4. U.S. Bancorp

Shares of U.S Bancorp ( USB) of Minneapolis closed at $31.57 Monday, returning 18% year-to-date, following a 2% return during 2011. Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.47%.

The shares trade for just over three times tangible book value, and for 10.5 times the consensus 2013 EPS estimate of $3.01. The consensus 2012 EPS estimate is $2.7.

Mosby says that U.S. Bancorp -- along with Wells Fargo -- "has continued to exceed market expectations consistently over the past year and half, and we think that will continue through the end of this year."

The numbers bear this out, with operating returns on average assets over the past five quarters ranging from 1.36% to 1.61%, according to Thomson Reuters Bank insight.

Please see TheStreet's earnings coverage for details on USB's second-quarter results.

Mosby says that "U.S. Bancorp is one of the better positioned banks to take advantage of what is going well in the economy -- the low rates are encouraging some investments in productivity and processes to make commercial and corporate businesses more productive."

The analyst adds that "a lot of customers that had gone out to use the capital markets more in lieu of the traditional banker, are now transitioning their relationships to include a traditional bank. These corporate and commercial customers "like the relationship management, the loyalty and the safety and soundness of a bank's balance sheet, as opposed to finding incremental investors to keep funding their companies."

Mosby's price target for U.S. Bancorp is $42, and the analyst estimates the company will earn $2.90 a share this year, followed by 2013 EPS of $3.35.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

3. Regions Financial

Shares of Regions Financial ( RF) of Birmingham, Ala., closed at $6.70 Monday, returning 56% year-to-date, following a 38% decline during 2011.

The shares trade for 1.1 times their March 31 reported tangible book value of $6.42, and for nine times the consensus 2013 EPS estimate of 78 cents. The consensus 2012 EPS estimate is 59 cents.

Regions in early April repaid $3.5 billion in federal bailout funds received through the Troubled Assets Relief Program, or TARP. The company last Wednesday announced that it had completed its exit from TARP, by repurchasing a warrant from the U.S. Treasury for $45 million.

Please see TheStreet's earnings coverage for a detailed discussion of Regions Financial's second-quarter results.

Mosby says that as Regions "moved into the first quarter, you saw their operating earnings jump up to the 12 to 13 cent range on asset quality improvements, but in the first quarter you had about $40 million in seasonal employee compensation expenses, which delayed the full benefit of the asset quality improvement to the second quarterly."

The analyst also said that the repayment of TARP was during the second quarter, "will create one-time expenses which will deflate the reported earnings, but operating expenses will be lowered by approximately $50 million in preferred dividends per quarter."

Mosby's price target for Regions Financial is $9.00, and he estimates the company will earn 74 cents a share this year, followed by EPS of 96 cents in 2013.

Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.

2. Bank of America

Shares of Bank of America ( BAC) closed at $7.96 Monday, returning 43% year-to-date, following a 58% plunge last year.

The shares trade for 0.7 times tangible book value, and for eight times the consensus 2013 EPS estimate of $1.05. The consensus 2012 EPS estimate is 62 cents.

Mosby says that Bank of America "is the only large-cap bank we cover that trades at a significant discount to its tangible book value, and so given that the discount is related to the eventual loss content related to the mortgage overhang issues, we believe two things are helping BAC position itself such that it will not have to haircut its tangible book value."

The first of the factors that will hopefully lead to a recapture of the discount to tangible book value is "the improvement in their profitability -- if you exclude the debit valuation adjustment numbers they earned around 30 cents last quarter." Mosby adds that "as their earnings have rebounded and their capital ratios have improved, it becomes less and less likely that BAC will eventually experience a significant reduction in tangible book value."

Mosby's price target for Bank of America is $11, and he is way out in front of most other analysts in estimating the company will earn $1.01 a share this year. The analyst estimates that BAC will earn $1.10 a share during 2013.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

1. Bank of New York Mellon

Shares of Bank of New York Mellon ( BK) closed at $23.10 Monday, returning 17% year-to-date, following a 33% decline during 2011. Based on a 13-cent quarterly payout, the shares have a dividend yield of 2.25%.

The shares trade for 2.3 times tangible book value, and for nine times the consensus 2013 EPS estimate of $2.50. The consensus 2012 EPS estimate is $2.23.

Mosby describes the company as "the other kind of what I would call a recovery story, a recovery of earnings momentum," adding that "As the trust banks have been under pressure in their operating environment over the last three years, Bank of New York Mellon's consistent growth model has not been able to generate the earnings momentum that the trust consolidators have historically been able to create."

"As the operating environment has stabilized," says Mosby, "customer growth and efficiency initiatives should enable BNY Mellon to begin to grow earnings per share again," and "once the market realizes that that's going to happen, the shares should trade at a multiple of earnings more in line with past valuations," in a range of 12 to 14 times forward earnings.

Right now, the shares trade under Mosby's 2013 EPS estimate of $2.39.

Interested in more on Bank of New York Mellon? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 5 Large-Cap Bank Stocks Buys From Guggenheim portfolio on Stockpickr.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.