Favorite Large Bank Picks For Jan-2012

Yesterday, major regional banks (fourteen in number) sported gains of almost 1.16 percent, collectively. Among these banks, Bank of America's share price gained the least ($0.18), while? M&T Bank Corp's share price gained the most ($3.8).

Share price gains were surprising given that the Federal Reserve proposed steps to strengthen regulation and supervision of large bank holding companies with consolidated assets equal to or greater than $50 billion or those designated to be systemically important. The proposals include risk-based capital and leverage requirements implemented in two phases that would include subjection to the Fed's capital plan rule that requires firms to develop annual capital plans, conduct stress tests, and maintain adequate capital ratios, as well as a proposal issued by the Fed to implement a risk-based capital surcharge based on the framework and methodology developed by the
Basel Committee on Banking Supervision. Firms would also be subjected to annual stress tests. Credit exposure of a covered financial firm would be limited to a single counterparty as a percentage of the firm's regulatory capital. The Fed noted that it is proposing that firms would need to comply with many of the enhanced standards a year after they are finalized. Requirements related to stress tests would take effect shortly after the rule is finalized.

Compliance with Fed's proposals would not only increase regulatory costs but would also limit strategic options for these banks. So Fed's announcement should have had a negative impact. Yesterday that didn't happen but would surely happen as the market digests the import of Fed's proposals. This should lead to adjustments, positive on some and negative on some other, in the share prices of these fourteen banks. Though I am not giving the workings of the detailed share price impacts, nevertheless I will pick my favorite stocks among these fourteen.

Fifth Third Bancorp? (NASDAQ:FITB)

Fifth Third! 's capit al position is already well in excess of established standards, likely standards, and most peers. Holding company cash is currently sufficient for more than 2 years of obligations. Minimal holding company or bank debt maturities until 2013, so need for new capital at above peer average cost of marginal capital is minimal. Fifth Third has completely exited all crisis-era government support programs and it is one of the few large banks that
have no TLGP-guaranteed debt to refinance in 2012. In addition, it has no direct European sovereign exposure; total exposure to European peripheral borrowers is less than $0.2 billion and gross exposure to European banks less than $0.3 billion.

I expect FITB share to test $15.5 and establish $15 in January 2012.

State Street Corporation? (NYSE:STT)

STT has two powerful platforms for growth namely State Street Global Services ($21.5 trillion in assets under custody and administration), and State Street Global Advisors (1.9 trillion in assets under management). Nearly 78 of its top 100 clients use both asset servicing and asset management and they account for about 35% of total management fee revenue (YTD 2011).

As of end September 2011, STT's tier 1 common ratio was 16 percent,which is significantly higher than 12.5 percent for The Bank of New York Mellon Corporation? (NYSE:BK), and 11.8 percent for Northern Trust Corporation? (NASDAQ:NTRS). Moreover, even under Basel III, STT's tier 1 common ratio was 11.7 percent, which is significantly higher than 6.5 percent for The Bank of New York Mellon Corporation (NYSE:BK), and 11.8 percent for Northern Trust Corporation (NASDAQ:NTRS).

I expect STT share to test $50 and establish $49 in January 2012.

Other stocks that I think could benefit include SunTrust Banks, Inc.(NYSE:STI), U.S. Bancorp (NYSE:USB), and JPMorgan Chase & Co. (NYSE:JPM).{$end}