Credit Suisse's Large Cap Bank Picks

In a recent report, Credit Suisse analysts initiated coverage of large cap banks and gave their take on the outlook for the sector. The report identifies an industry in transition that will eventually provide value for shareholders.
Positive and negative changes
Analysts believe that the balance sheets of the big banks are much stronger now than they were prior to the financial crisis and that much of the excess risk has been eliminated. However, the banking environment has drastically changed due to increased regulation and extremely low interest rates. These environmental changes have depressed the big banks’ return on equities (ROE).
Improving ROE
Analysts believe that rising interest rates will drive big bank earnings per share (EPS) and ROE growth in upcoming years. They forecast further upside for bank stocks from a rise in capital payouts.
Valuation/return discount gap
While ROEs will likely to continue to stay depressed below historical averages for the foreseeable future, analysts expect the depression to narrow by 2016. Considering that the big bank stocks are currently trading at only 63 percent of their historical average valuation (based on price to book value), analysts believe that the banks are undervalued even in the new reduced-ROE environment.
Long-term outlook
Analysts believe the opportunity for banks to return to historical valuation levels is coming if banks can obtain more stable and predictable earnings. “If the new regulatory framework has its intended consequences, banks ought to produce meaningfully less volatile earnings.”
Stock picks
Credit Suisse rates the stocks of Bank of America Corp BAC, Goldman Sachs Group Inc GS, JPMorgan Chase and Co JPM and Wells Fargo & Co WFC at Outperform. Citigroup Inc C, Morgan Stanley MS, PNC Financial Services Group PNC, and U.S. Bancorp USB are rated Neutral. SunTrust Banks Inc STI is rated Underperform.
Disclosure: the author owns shares of Bank of America and Wells Fargo.