Wells Fargo Upgrades Fifth Third, SunTrust

NEW YORK ( TheStreet) -- Investors looking toward a summer of discontent for the largest banks should consider regional names levered to the U.S. housing recovery and commercial loan growth, according to Wells Fargo analyst Matthew Burnell.

Burnell on Thursday upgraded Fifth Third Bancorp ( FITB) and SunTrust ( STI) to "Outperform," from "Market Perform" ratings, preferring "leverage to stabilizing/improving U.S. residential real estate and manufacturing strength amid euro-zone volatility."

The analyst said that "U.S. mortgage loan activity remains healthy (thanks to even lower rates and a HARP 2.0 refinancing boom) and C&I loan growth has proven resilient. HARP is the Home Affordable Refinance Program, which was expanded by President Obama earlier this year, to allow borrowers with mortgages held by Fannie Mae ( FNMA) or Freddie Mac ( FMCC), to refinance their homes at today's historically low rates, even if the decline in property values over the past several years left their homes worth much less than the loan being refinanced.

Burnell said that U.S. regional banks' "profit performance - and less international exposure - justify premium valuations." A quick look at the valuations for the three largest U.S. banks highlights just how low the international exposure, regulatory pressure at home, and JPMorgan Chase's ( JPM) second-quarter hedge trading loss announced on May 10, have pushed down valuations.
  • Shares of Citigroup (C) closed at $26.00 Wednesday, down 1% year-to-date, following a 44% decline during 2011. The shares trade for just over half their tangible book value, according to Thomson Reuters Bank Insight, and for less than six times the consensus 2013 earnings estimate of $4.66, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.09.
  • Shares of Bank of America (BAC) closed at $7.20 Wednesday, returning 30% year-to-date, after falling 58% last year. The shares trade for 0.6 times tangible book value, and for seven times the consensus 2013 EPS estimate of $1.02. The consensus 2012 EPS estimate is 58 cents.
  • JPMorgan closed at $32.96 Wednesday, returning 0.5% year-to-date, following last year's 20% decline. The shares trade just above tangible book value, and for six times the consensus 2013 EPS estimate of $5.40. The 2012 consensus EPS estimate is $4.43. JPMorgan features an attractive dividend yield, which CEO James Dimon said the company was defending, when announcing a decision to suspend share buybacks. Based on a 30-cent quarterly payout, the dividend yield is 3.64%.

Among the three universal banks listed above, Burnell remains "partial" to JPMorgan and Citigroup -- rating both "Outperform -- although he is "cautious on the near-term (3-6 months) outlook in light of macroeconomic and regulatory uncertainty."

The regional banks upgraded by Burnell trade at higher multiples to forward earnings than the three universal banks:

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