It is always interesting when banks and investment banks offer investment coverage of their peers. In fact, some investors may believe that this is a signal into what is going inside of the bank that made the research call. In this case, Bank of America Merrill Lynch is making a positive case for Citigroup Inc. (NYSE: C) and Regions Financial Corp. (NYSE: RF).

The team pointed out that bank stocks have outperformed the broader markets in the fourth quarter. After all, the yield curve has steepened by 40 basis points. Another driving force has been modest earnings revisions higher after third-quarter results, reassuring bank bulls that the earnings are defensible even with a challenged revenue growth backdrop.

Almost two-thirds of the 34 banks under coverage have seen an increase in fourth-quarter consensus estimates. Some of the higher updates were based on better spread income outlooks, some were on lower credit provisioning expenses and some were based on lower expense and higher fee income estimates.

Merrill Lynch’s bank analyst team said:

With consensus estimates stable and the yield curve steepening, we think bank stocks could come out of the gate strongly in 2014. Given the multiple expansion that has occurred in the sector, feedback from the investor community suggests that fresh new ideas are tougher to come by. That said, we continue to favor banks where multiple expansion has lagged (mega caps top the list), and see the recent humdrum performance in the following as a particularly compelling buying opportunity in Citigroup and in Regions.

Citigroup Inc. (NYSE: C) was given a three-factor valuation framework to come to its $61 price target. This implies nearly 17% expected upside to the $52.26 closing price. The first issue we saw was that the team assigned a 10-times multiple on 2015 earnings and that its current market multiple is overly discounted. Citigroup was given a multiple of only 1.0 times tangible book value, which compares to about 1.3 times for its coverage universe of banks. Still, the team does believe that money center banks most likely will continue to trade at a discount to regional banking stocks.

Regions Financial Corp. (NYSE: RF) was also given a three-factor valuation framework. The firm’s $12 price target implies 22% upside to the $9.83 close from last Friday. This is based on a multiple of 1.3 times tangible book value and based on 12.5 times 2014 earnings per share. Regions Financial shares have traded in a range of $6.88 to $10.52 over the past 52-weeks.

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