NEW YORK ( TheStreet) -- Bank of America ( BAC - Get Report) is set for strong earnings growth over the next two years in comparison to other large-cap banks, according to Stifel Nicolaus analyst Christopher Mutascio.

The analyst on Monday upgraded Bank of America to a "Buy" rating, with an $11 price target, which represents 21% upside over the stock's closing price of $9.12 on Friday.

Bank of America's shares trade for a low 0.7 times their reported Sept. 30 tangible book value of $13.48, and for nine times the consensus 2013 earnings estimate of 97 cents a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.27.

After already seeing the shares rise 65% year-to-date, following a 58% plunge in 2011, Nicolaus upgraded Bank of America because the company's earnings "trajectory will be better than the rest of our large cap bank universe over the next two years as a decline in operating expenses more than offsets sluggish revenue growth stemming from the continuation of a low interest rate and tepid loan growth environment."

Mutascio estimates that Bank of America will earn 92 cents a share in 2013, with EPS of $1.20 a share in 2014. "Our estimates project a 30% EPS growth rate in 2014 for BAC versus a median increase of less than 5% for the rest of our universe," he said.

Large banks are facing painful times on the earnings front, unless they can cut their operating and extraordinary expenses significantly. The narrowing of the net interest margin -- the difference between the average rate earned on loans and investments and the average cost for deposits and borrowings -- continues to be the main industry headwind, with the Federal Reserve keeping its short-term federal funds rate in a target range of between zero and 0.25% since late 2008. Meanwhile, the central bank is doing everything it can to hold long-term rates at historically low levels. Most banks have already enjoyed most of the benefit of cheaper funding, and are now feeling the squeeze as their assets reprice at lower rates.

The industry is enjoying the boon of the mortgage refinancing wave, but for most, that it not likely to outweigh the margin pressure, the slowing commercial loan demand, and slowing of the loan loss reserve releases that have padded earnings for so many large banks during the credit recovery. But even if reserves are not being releases, many of the large banks will still see a benefit to earnings from lower credit costs.

While none of the large banks are expected to see a very significant improvement in net interest income over the next two years, Stifel Nicolaus expects Bank of America to reduce its annual expenses by $7.1 billion, or 10%, from an estimated $70.5 billion in 2012 to $63.4 billion in 2014. Granted, Bank of America's expenses have been very high because of the legacy mortgage mess springing mainly from the company's ill-timed and ill-considered acquisition of Countrywide Financial in 2008, however, none of the other large-cap banks covered by the firm are expected to see anywhere near BAC's expense reduction or 30% EPS growth from 2013 to 2014:
  • After Bank of America, the bank that Stifel Nicolaus expects will have the strongest earnings growth from 2013 to 2014 is SunTrust (STI - Get Report) of Atlanta. Mutascio estimates EPS to increase by 11% from $2.70 in 2013 to $3.00 in 2014. The analyst estimates that SunTrust will lower its expenses only slightly from $6.2 billion in 2012 to $6.1 billion in 2014, but also estimates that the annual provision for loan losses -- the among added to reserves, which lowers earnings -- will decline by 26%, from $1.2 billion in 2012 to $861 million in 2014.
  • Stifel estimates that Wells Fargo (WFC - Get Report) will see its EPS grow from $3.53 in 2013 and $3.76 in 2014, for earnings growth of 7%. Mutascio estimates the company will see a 2% reduction in expenses, from $49.7 billion in 2012, to $48.6 billion in 2014. Meanwhile, the analyst sees Wells Fargo lowering its provision for loan losses by 17%, from $7.0 billion in 2012 to $5.8 billion in 2014.
  • For JPMorgan Chase (JPM - Get Report), Stifel Nicolaus estimates earnings to increase from $5.35 a share in 2013 to $5.60 in 2014. That's 5% EPS growth. Mutascio estimates the company will cut its expenses from $61.7 billion in 2012 to $61.1 billion in 2014, which is a reduction of just 1%. He also expects JPMorgan Chase's provision for loan losses to increase by 28%, from $3.8 billion in 2012 to $4.8 billion in 2014.

SunTrust, Wells Fargo, and JPMorgan Chase all have "Hold" ratings from Stifel Nicolaus.

Mutascio said that Bank of America is "better positioned for the current environment than many banks that have already bled the loan loss reserves dry, have little exposure to mortgage origination and debt underwriting in the low interest rate environment, and have no material expense reductions on the horizon."

The analyst added that "with the company achieving a 3Q12 Basel III Tier 1 common capital ratio of approximately 9%," which exceeds the full 8.5% requirement including the 1.5% capital buffer required as a Global Systemically Important Financial Institution, "it has rebuilt its capital ratios much faster than we had expected."

Meeting the full Basel III requirement "should allow for the company to ask for and receive approval for a dividend increase during the upcoming 2012 Federal Reserve stress test process, which could improve overall investor sentiment on a name that we believe is under-owned relative to other large cap banks," Mutascio said.

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


-- 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 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.