While the chatter on Wall Street has continued to focus on downside earnings per share risk from banks next year, the sooner the estimate cuts are finally factored in, the sooner stock prices may start to move higher. In a new research report, Merrill Lynch cuts earnings estimates and price targets an average 4% across the firm’s 41 banks in their coverage universe.

The Merrill Lynch team now assumes there will be no Federal Reserve rate hikes this year, while many on Wall Street predict a December hike. Though the firm has dropped the estimates for the mega-cap banks 3% for the third quarter, any upside surprises could be met with some serious buying.

Merrill Lynch has three mega-cap bank stocks rated Buy.

Citigroup

This banking giant is actually starting to hit some Wall Street firms’ screens as a value play. Citigroup Inc. (NYSE: C) is very cheap, trading at just 9.15 times estimated 2015 earnings, and it is the nation’s fourth-largest bank by assets. Numerous Wall Street analysts cite the fact that Citigroup will be a leader in buyback payouts to shareholders. Combined with the bank’s strong domestic and international business, and a better overall economy, plus the headline risk over bank stress tests being removed, share purchases look wise here.

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Citigroup trades at 85% tangible book value (TBV), which is where the stock has often found support in the past. While they do lower their numbers, they think that is priced in and they see the TBV growing 14% by this time next year. With Citigroup scheduled to report earnings this week, aggressive accounts could buy stock in front of the release on Thursday.

Citigroup investors are paid a small 0.4% dividend. The Merrill Lynch price target for the stock is $65, and the Thomson/First Call consensus price target is $64.15. Shares closed Friday at $51.38.
JPMorgan

This stock trades at a very low 9.7 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.

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JPMorgan investors are paid a 2.84% dividend. The Merrill Lynch price target is $73, and the consensus target is $73.36. Shares closed on Friday at $61.93.

Wells Fargo

This large cap bank is another stock for value investors to look at now. Wells Fargo & Co. (NYSE: WFC) was hit hard in the sell-off as investors feel that the possibility of interest rate increases may get pushed out yet again. The Merrill Lynch analysts like the bank’s diverse business model, which protects against current low rates.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line. Which the analysts feel could aid a big return of capital to shareholders. The stock remains a top Warren Buffett holding.

Merrill Lynch likes the stability, yield and some asset sensitivity that the big bank offers, and investors looking to add financials to their portfolio could do well buying shares. The firm also likes knowing that the bank has little exposure outside of the United States.

Wells Fargo shareholders are paid a solid 2.9% dividend. The Merrill Lynch price target is $58, and the consensus is set at $59.02. Shares closed Friday at $52.14.

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While the recent rally in the markets has been nice for weary investors, the bottom line is volatility at higher levels may be here to stay for some time. Owning neglected financials makes sense for long-term growth portfolios.

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