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Bank of America Corp (BAC), SunTrust Banks, Inc. (STI): Wall Street’s Favorite Will Surprise You

In recent weeks, Wall Street has gained an attraction for the regional banks in addition to popular money center banks such as Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C).

Two contributing factors have lead to a momentum shift for the regionals. First, we’ve seen pockets of economic strength across the United States. Increased consumer confidence has lead Americans to spend more of their paychecks, helping to fuel 2.5% GDP growth during the first quarter. Second, the housing market has exhibited a surprising recovery, driven by record-low interest rates enabling buyers to purchase homes.

Both of the factors above tie into regional banks, which have reported increased loan growth and lower charge-offs in recent months as a result of a healthier consumer and rising home prices. D.R. Horton, Inc. (NYSE:DHI), a homebuilder from which I coincidentally made a new home purchase, provided a tremendous earnings report on Friday, April 26 which gives further credence to the recovery in housing.

Bank of America Corp (NYSE:BAC)The purpose of the introduction above is to parlay into a compelling investment opportunity. Consider SunTrust Banks, Inc. (NYSE:STI), a regional bank which is attractively positioned in a Southeast growth market with strong demographic trends.

Image: Bank of America Corp (NYSE:BAC)

The Atlanta, GA headquartered lender has an envious footprint, with exposure to the resurgent housing boom in Florida. The Sunshine State has been one of the strongest in the economic recovery, with ample evidence of job growth and rising home prices.

SunTrust Banks, Inc. (NYSE:STI) recently reported first quarter earnings and held its annual shareholder meeting in April. Here are four reasons why the Atlanta based lender has significantly more upside:

On April 19, SunTrust reported better-than-expected Q1 results. Earnings per share rose to $0.63 for the first quarter, 37% higher than the net income earned during Q1 2012. Tier 1 capital increased to 11.20%, well above the Federal Reserve’s requirement.

Annualized net charge offs decreased to 0.76% of average loans, a decline from 1.30% and 1.38% during Q4 and Q1 2012, respectively. The lowest charge-off level in 5 years is being driven by home price appreciation and economic improvement across the Southeast, in particular Florida.

The board of directors approved a quarterly dividend increase to $0.10 per share, and a share repurchase plan of $200 million has been previously authorized. The Federal Reserve did not object to SunTrust’s capital plan for 2013 as announced with C-CAR in March.

Analysts at FBR Capital upgraded SunTrust Banks, Inc. (NYSE:STI) to “outperform” from “market perform” following Q1 results with a new $37 price target. Managing director Paul Miller believes that SunTrust’s credit quality is “getting much better, quicker than we thought” and will continue to improve even with signs of slowing economic growth.

Net interest margin (NIM) remains a challenge

While SunTrust made tremendous strides during the first quarter, challenges remain in the banking sector that are evident at both SunTrust Banks, Inc. (NYSE:STI) and its regional colleagues. In particular, the net interest margin remains a challenge at all banks across the United States, especially with the 10 year Treasury Note priced beneath 2.00%.

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