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Two Large-Cap Banks Will Spike Through 2010: Top Analyst

Financials have worked about halfway through their balance sheet issues, but their earnings likely won't normalize until 2012, said Morgan Stanley's bank analyst Betsy Graseck.

Still, margin expansion, a shift in market share, and improving credit quality have allowed large-cap banks to continue offering opportunities for investors, she said.

"If I think about the overall banks in total, there might not be too much growth on the topline," Graseck said.

"But when you think about the lead players taking share from weaker institutions, weaker rivals that have less product diversity, I do think you'll see...the large-cap banks take share and grow topline," she said.

Graseck's top two recommendations in the sector are Bank of America and JPMorgan , which she would put new money into even before they report earnings next week, she said.

She's placed a $30 price target on BofA over the next 12 months, and a $60 target on JPMorgan — the bank she said is likely to be the first to reinstate its dividend.

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While many investors fear that commercial real estate will deliver the next big hit to the recovering sector, Graseck said it isn't as much of an issue with large-cap banks.

Although commercial real estate makes up 26 percent of total bank assets, it only accounts for 13 percent at bigger banks. At BofA and JPMorgan, it's only 5 and 3 percent, respectively.

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"I would underweight names that are heavy into commercial real estate because its a longer-tailed asset class, it's bigger loan exposures, it's lumpier [and] it's harder to predict," she said.

Graseck said she predicts loan losses to hit their peak over the next four to five quarters.

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Other Financial Stocks:

Bank of New York Mellon

Morgan Stanley

Citigroup

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Disclosures:

Graseck does not own any shares of the stocks mentioned above.

Disclaimer