UPDATE: Large Bks Seen Outperforming Regionals

Goldman Sachs raised its rating on large banks to attractive Monday morning, drawing favorable comparisons with regional banks and saying stock prices still don't reflect the large banks' earnings power.

Improved earnings, stronger balance sheets and bigger assets following a year's worth of acquisitions at several large banks have leavened some analysts' views of the sector. In particular, Goldman's own price targets and earnings estimates have been hiked by analysts at several other firms in recent weeks.

Bank of America Corp. (BAC), which faces questions over who will succeed Ken Lewis as chief executive, is also drawing more favorable opinion after beating earnings estimates for two quarters.

Goldman singled out Wells Fargo & Co. (WFC) and Capital One Financial (COF) for upgrades Monday, calling Wells Fargo "the big winner" in tangible assets and predicting Capital One will benefit from stronger consumer spending once unemployment growth slows.

Shares in some financial stocks rose Monday morning after the upgrades. Wells Fargo rose 3.73% in recent premarket trade to $27.26, while Capital One rose 4.04% to $34.53.

Thanks to acquisitions like Wells Fargo's of Wachovia Corp., tangible assets per share have risen 29% at large banks since the second quarter of 2007, compared to a 29% drop at regionals, Goldman said.

Wells Fargo's tangible assets were 70% higher in the second quarter of 2009 compared to 2007, the firm noted, predicting those assets will fuel earnings.

Normalized earnings are now set to increase thanks in part to those deals, Goldman said, while the same measure for regionals banks has fallen on average.

"We believe the gap between sustainable earnings per share and current share prices is too wide," analysts led by Richard Ramsden wrote.

Goldman already had conviction buy ratings on J.P. Morgan Chase (JPM) and Bank of America (BAC).

-By Brendan Conway, Dow Jones Newswires; [phone]; [e-mail]