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The Party Isn't Over Yet: Wall Street's Bank Picks


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The run in big bank stocks may not be over, say Wall Street analysts. And many are particularly positive on Bank of America and Citigroup this year.

"The group is putting up decent numbers, despite the fact you have more subdued economic growth and persistent low interest rates," said Barclays bank analyst Jason Goldberg of the financial sector. "If we ever get the U.S. economy back working again to more desirable GDP growth and a little bit higher interest rates, I think there's a fair amount of upside."

While some banks are poised to fare better, others offer a better value. And then there's one pick that noted banks analyst Meredith Whitney describes as a true growth company in financials.

Sector Upside, and Affordable

Goldman Sachs equity strategists agree with that view. The broker this week raised its recommended portfolio allocation for financials to "overweight" from "neutral," telling investors the group will benefit from "accelerating GDP growth, rising interest rates and supportive equity markets."

(Read more: Big US Banks Will Rise Further: Analyst)

Moreover, Goldman analysts estimate a 5 percent rise in home prices would increase bank 2013 earnings per share by 13 percent. "Strength in housing provides support to revenues until loan growth and net interest margins recover," Goldman U.S. equity strategist David Kostin wrote in a research note.

While the financials sector has run up 17 percent during the past six months, outpacing an 8 percent advance for the S&P 500, the sector remains cheap. Goldman notes financials still trade 50 percent below the 2007 peak.

They are also one of the few investment ideas that will benefit as interest rates begin to rise, said Chris Leavy, BlackRock's chief investment officer of US fundamental equity. "They're good ideas in their own right and bring a real benefit to a portfolio," he said.

Analyst Stock Ideas

But some big banks are poised to fare better than others from here.

Meredith Whitney prefers Bank of America coming out of the Federal Reserve stress tests. "What's amazing about this is very rarely do these big banks have value, catalyst and momentum," she told CNBC. "And Bank of America had all of that."

(Read more: 'You Have to Be Bullish,' on US Stocks: Whitney)

The Fed's decision to allow Bank of America to buyback $5 billion in stock may also be a positive read-through for Citigroup, UBS analyst Brennan Hawken said. "Next year Citi's going to be in very similar position to BofA and they'll be able to buyback a lot more than most people expect right now," he said.

With BofA shares are up sharply over the past three months, Whitney sees another 20 percent upside from here. "The stress test was a huge catalyst for this name," she said.

But Whitney stressed the call on BofA isn't about a return to loan growth. "It's all cost cutting," she said. "It's all operating leverage. I don't have a lot of revenue growth expectations for the big banks in general."

(Read More: The Safest Banks in Emerging Markets)

That's one reason Credit Suisse analyst Moshe Orenbuch prefers Citigroup to Bank of America. "I think just general economic growth and the ability to grow loans and net interest income is going to be a tougher challenge for BofA," he said. He also likes Citigroup for its emerging markets exposure.

And with a $12 price target, Orenbuch believes the good news is already priced into Bank of America shares. Plus, the stock trades at a premium to both Citi and JPMorgan on 2014 and 2015 earnings, he said.

But BlackRock's Leavy likes Bank of America saying the bank's earnings power will become more transparent as the servicing expenses tied to poor loans improves. Leavy is bullish on US Bancorp as well. He said the bank will continue to grow its loan book, and has a competitive advantage with its low expense ratio.

As for JPMorgan, Whitney said there may be less upside since it has less cost-cutting to do than some of their peers. She also said last week's congressional hearing into its trading losses was ugly. "It reminded me of how bad it was seeing Goldman Sachs in the same position," Whitney said. "It took a long time for Goldman to get over that. It will probably take a long time for JPMorgan to get over it."

A Growth Stock in Financials?

While Whitney sees 20 percent upside on Bank of America, Discover Financial could do even better.

"There's over 30 percent opportunity in Discover inside of this year," she said, calling it one of the true growth companies in financials with more than 20 percent return on equity.

"Discover has been an unbelievable name largely because it is taking market share from a lot of the banks, but it's also providing liquidity where the banks aren't providing liquidity," Whitney added.

Saying the company's $20 billion market cap could probably double in the next two years, Whitney told CNBC, "It's all guns blazing on this name."

— By CNBC's Justin Menza

Additional News: JPMorgan, Goldman Sachs Flagged in Fed's Review

Additional Views: 'Sweet Spot for Risk Assets': Economist

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Disclosures:

Goldberg and his family own shares of Citigroup and JPMorgan. Barclays or an affiliate received compensation for investment banking services from BAC, C, JPM in the past 12 months.

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