The Federal Reserve will meet next week in one of the most anticipated meetings in years. On the table will be perhaps the first increase in interest rates in years, and Wall Street still has the odds at about 50/50 that Janet Yellen and the Fed governors will finally pull the trigger for the rate lift-off.

In a new report, Merrill Lynch is in line with Wall Street estimates and thinks the odds remain at about a 50% chance for a small measured increase, which almost all agree would be 25 basis points, or one-quarter of one percentage point. In the report, the Merrill Lynch team highlights financials that are good to own in a rising short rate environment, and we focused on the large cap banks that look like a good bet and all are rated Buy. We also recently focused on six big banks that are trading under book value.

Comerica

This is a smaller large cap bank, often off the Wall Street radar, but it may provide a very compelling investment idea. Comerica Inc. (NYSE: CMA) is a financial services company headquartered in Dallas, Texas, and strategically aligned in to three business segments: a business bank, a retail bank and wealth management. The company operates branches in Texas, California, Michigan, Arizona and Florida, as well as in Canada and Mexico. Comerica reported total assets of $69.9 billion at June 30, 2015.

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While some view the bank as expensive, with the recent pullback in bank stocks, especially regional banks, Comerica is now looking more attractive relative to fundamentals for the first time in a while. The Merrill Lynch team is putting a 16-times multiple on estimated 2016 earnings, which while not cheap certainly is achievable.

Comerica investors are paid a 2% dividend. The Merrill Lynch price target is an eye-opening $60. The Thomson/First Call consensus target is $49.07. The stock closed most recently at $42.43.
KeyCorp

This is another smaller large cap bank that makes good sense now. KeyCorp (NYSE: KEY) operates as the bank holding company for KeyBank National Association, which provides deposit, lending, cash management and investment services to individuals, small and medium-sized businesses. KeyCorp also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under KeyBanc Capital Markets.

While the second-quarter numbers were below the Merrill Lynch estimates, the miss was driven mostly by higher expenses. These numbers were partially offset by a record quarter for the investment banking and debt placement departments. While the analysts lowered forward estimates, they think the earnings per share will continue to grow for the balance of the year, and they project modest improvements in efficiency.

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Key investors are paid a nice $2.2% dividend. The Merrill Lynch price target is $17, and the consensus target is $16.24. The shares closed Thursday at $13.57.

JPMorgan

This stock trades at a very low 11.1 times estimated forward earnings. JPMorgan Chase & Co. (NYSE: JPM) is expected to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on 2015 estimated price to earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide an earnings headwind throughout this year.

Improvement in loan growth, terrific equity capital markets and a steady increase in deposits will be a solid plus. Trading at a discount to many of the large cap banks on 2015 earnings estimates helps upside potential as well. With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors.

JPMorgan investors are paid a 2.81% dividend. The Merrill Lynch price target is $75, and the consensus target is $74.68. Shares closed on Thursday at $62.66.

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Given the market uneasiness, now is the time to stick with the large cap leaders, especially when they are expected to fare well in the coming rising rate environment. The U.S. Treasury trade is very crowded, and when the Fed starts to raise even a little, you can bet the accounts that bought bonds on margin will start to sell, and that in itself could push rates higher and faster.

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