Wells Fargo Booted Off Goldman's Favorites List

NEW YORK ( TheStreet) -- Regions Financial ( RF) has replaced Wells Fargo ( MS) on the "conviction" buy list at Goldman Sachs, according to a report from Goldman's banking sector analysts published Monday.

Both banks have had a strong run this year, with Wells shares gaining 25% so far in 2012 versus a 71% rise for Regions ahead of Monday's open. By contrast, the SPDR KBW Bank ETF has gained 19%.

However, Goldman analysts see a better opportunity for further gains at Regions as it closes redundant branches and possibly looks to spin off its Midwestern banks.

"While both of these will take time to complete, if we were to assume Regions could reposition 15% its branch network and divest its Midwest footprint at a 3% deposit premium, longer- term we see 2-2.5% of return on tangible common equity improvement and over 35% upside to shares over the next 18-24 months," Goldman's analysts write. They also see Regions benefitting from a continued housing recovery in the Southeastern U.S., where Regions has heavy exposure relative to other large-cap U.S. banks.

As for Wells, Goldman's analysts retained their "buy" rating, arguing the bank "remains uniquely positioned" to increase revenue through mortgage banking, cut expenses and return capital. However, they argue these strengths are "partially reflected in valuation" and they "believe there is better upside elsewhere." Wells trades at 9.3 times 2013 earnings estimates versus 8.3 times for "money center banks," according to Goldman's research.

-- Written by Dan Freed in New York.

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