BB&T Is a 'Top Pick' for Investors: Citi

NEW YORK ( TheStreet) -- In the midst of a very strong market rally for bank stocks and an improving interest rate outlook, most large regional names are "no longer cheap," but BB&T ( BBT) remains a solid pick, according to Citigroup analyst Keith Horowitz.

Friday's market euphoria following stronger-than-expected job growth numbers pushed the KBW Bank Index ( I:BKX) to a 52-week high of 63.94. The index has returned 25% this year, following a 30% return during 2012.

That's a remarkable run. At the end of 2011, it was fairly easy to look at large-cap U.S. bank stocks, with their remarkably low valuations, and say it was time to load up, but now things are getting more difficult.

On the positive side, long-term rates have increased sharply, with the rate on 10-year U.S. Treasury bonds increasing to 2.73% on Friday, from 1.70% at the end of April. This promises widening net interest margins for banks, but the large-cap banks will only see an "incremental benefit," according to Horowitz.

With "valuations that look full, very limited impact from higher rates on earnings in the near term and the forward curve already assuming 100 bp of rate hikes in 2015," Horowitz in a report on Sunday wrote that "we believe risk/reward is not favorable here and would not chase this rally."

Going With BB&T

There are three large-cap regional banks stocks that Horowitz considers "preferred plays heading into earnings," including BB&T, M&T Bank ( MTB) of Buffalo, N.Y., and Wells Fargo ( WFC). However, BB&T of Winston-Salem, N.C., is the only one the analyst rates a "buy."

BB&T's shares closed at $34.88 Friday, returning 22% this year, following a 19% return during 2012. Those, of course, are stellar numbers, but if you look at the one-year chart at the end of this article, you can see that the shares have significantly underperformed the KBW Bank Index and the S&P 500 ( SPX.X) over the 52-week period.

A major reason for the underperformance has been investors' discomfort following the Federal Reserve's rejection of BB&T's 2013 capital plan in March, on "qualitative" grounds. The bank submitted its revised plan on June 11, and the Fed will respond by Aug. 25. An approval of the revised plan could serve as a catalyst for the shares.

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