(Adds Bernstein comments, details, background)
June 3 (Reuters) - Keefe, Bruyette & Woods upgraded BB&T Corp (BBT.N) to "market perform" from "underperform", and said a capital raise and dividend cut at the bank have reduced the risk of a drop in share price.
The brokerage also raised its price targets on Bank of America Corp (BAC.N) and SunTrust Banks Inc (STI.N), after the lenders raised billions of dollars in a bid to break free from Washington's grasp. [ID:nN02502975]
Many banks have complained about the increased government scrutiny and pay restrictions that accompany TARP funds. To free themselves from the restrictions, banks still need to repurchase or get rid of government warrants to buy their shares.
Although the new capital raise would increase the number of Bank of America shares outstanding by about 2 billion, significant normalized earnings are still available for the company, KBW said in a note to clients.
Rochdale Securities analyst Richard Bove, however, said it is very unlikely at this point that Bank of America would ask to redeem its TARP preferred, as the capital raises have not been completed.
"This (capital raise) will lower results this year but increase results, I believe in 2011 when reserve builds will drop off meaningfully," Bove said in a note on Tuesday.
Separately, KBW analyst Robert Lee said although the elimination of preferred dividend at Morgan Stanley (MS.N) would add to earnings, this was largely offset by a higher share count and the impact of a recently completed wealth management joint venture.
CAPITAL ONE, BB&T MAY REPAY SOON
Bernstein Research's Kevin St. Pierre said Capital One Financial Corp (COF.N) and BB&T are likely to get approvals for redemption of the TARP preferred securities in the near term, while Fifth Third (FITB.O), KeyCorp (KEY.N), Regions Financial (RF.N) and SunTrust (STI.N) would take longer.
"We expect the approvals for redemption of the TARP preferred securities will look much like the stress test results for our banks," the analyst said in a note to clients.
Of the 19 banks to undergo stress tests that assessed their readiness for a deep recession, 10 were ordered to raise $74.6 billion. The others had enough capital.
The U.S. Federal Reserve said large banks hoping to repay TARP must show an ability to access public equity markets, sell long-term debt without government backing, lend sufficiently, meet their funding obligations and support their subsidiaries.
Among the stress-tested banks, St. Pierre said he favored Capital One and Fifth Third, both of which he rates "outperform."
The analyst also said that despite a difficult near-term environment, where net-charge-offs likely rise into the first half of 2010, many of the regional bank stocks look attractive.
"While the recent rally off the bottom may prove difficult to sustain in the near-term, we believe long-term investors can take a buy and hold barbell strategy," he said. (Reporting by Anurag Kotoky in Bangalore; Editing by Ratul Ray Chaudhuri, Himani Sarkar)