Big Banks Could Go Higher as UBS Upgrades Citigroup to Buy (C, BAC, WFC, STI, KEY, RF)

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The financial sector took a beating during the mortgage and housing market meltdown that threw the nation into recession in 2008. After five years of bailouts and rebuilding, the banking sector has come back to help lead the charge to new highs for the stock market. In a report issued today UBS A.G. (NYSE: UBS) thinks there is plenty of upside from here for investors looking to own big money center banks.

Following a rigorous round of stress tests, all but one U.S. bank passed with reasonably good numbers. The analysts at UBS believe that the overall situation at Citigroup Inc (NYSE: C) may be the most favorable of all the large banks. They anticipate upside from Citigroup will be driven by the following four legs, with the story playing out over the next several years:

  1. The earnings headwind from Citi Holdings should start to fade this year.
  2. The reduction in risk weighted assets (RWAs) in Citi Holdings could free up more than $10 billion in trapped capital in just the next two years.
  3. Management’s new efficiency ratio adds about $0.75 per share in earnings versus UBS estimates.
  4. The deferred tax assets (DTA) will release tremendous amounts of capital over time, and the team at UBS found that none of that accretion is priced in to the stock.

„In addition they see Citigroup as a lagging play on the housing recovery. Citigroup has more capital trapped on its balance sheet than any other universal bank, and the analysts firmly believe a healing housing market and moderately improving economic outlook in the U.S. provides a much needed tailwind for Citigroup to release it.

Shares closed Friday at $46.49, and UBS raised its price target from $43 to $63. The Wall St. consensus price target is $50.

We recently reported that banking analyst Richard Bove took a similar view of the upside possible for Bank of America Corp. (NYSE: BAC). Bove, who is a well-known banking analyst at Rafferty Capital, was very positive on Wells Fargo & Co. (NYSE: WFC), but his preferred bank stock pick is Bank of America.

As far as the formal Bank of America call was concerned, Dick Bove said he thinks that the bank, the best DJIA performer of 2012, is his hands-down choice and that its stock is heading back up to $30 per share. The caveat was that it may take two or three years to get there. Bove also was positive on SunTrust Banks Inc. (NYSE: STI) for understating its assets, and he said that KeyCorp (NYSE: KEY) was a good bank stock to buy as well.

Regions Financial Corp. (NYSE: RF) also was mentioned positively among some of the regional banks. The firm believes that regional banks will see more positive news on the dividend front, rather than from the share buyback front, after the Federal Reserve approves the return of capital plan.

The bottom line for investors is that quality bank stocks have raised their capital levels well above what they used to hold as a precaution against another economic meltdown. With an improving economy and housing market, the time may be ripe to see the cream of the crop go even higher.

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