UPDATE 3-US capital injection plan a game changer - Citigroup

(Adds Baird upgrades)

By Ratul Ray Chaudhuri

BANGALORE, Oct 14 (Reuters) - The U.S. government's plan to inject capital into beleaguered banks is "a game changer" and banks with thinnest capital will be the biggest beneficiaries, Citigroup said, upgrading 12 banks to "buy."

"This is the most significant development to date in the sense that in one action the Treasury has moved to address the greater issues of the day facing banks - capital, liquidity in the form of depositor protection, and the ability to issue debt," analyst Keith Horowitz wrote in a note to clients.

Citigroup views Bank of America (BAC.N) as the greatest gainer among large banks and sees BB&T (BBT.N) as the best positioned among mid-sized regional banks. [nWNAS4848]

Separately, Citigroup analyst Prashant Bhatia raised his rating on Goldman Sachs (GS.N) and Morgan Stanley (MS.N) ratings to "buy" from "hold," saying the government actions are unique as they benefit both the existing debt and equity holders.

Robert W. Baird & Co upgraded Wells Fargo & Co (WFC.N), Fifth Third Bancorp (FITB.O) and SunTrust Banks Inc (STI.N) to "outperform" from "neutral," saying the ability to raise cheap capital will enable investors to benefit from the "normalized" earnings power in the long term.

The U.S. Treasury Department on Tuesday unveiled a plan to inject $250 billion into U.S. banks to beat back a credit crisis that threatens to swamp the economy. [nN14511679]

Citigroup's Horowitz said this plan seems focused on encouraging private capital to start flowing back into the system.

The rating upgrades should be viewed as a trading call as the rules have changed and the banks will benefit from increased availability of attractively priced capital, Horowitz said.

"Nothing in the plan changes our fundamental view of the group."

"Credit costs continue to increase, revenue growth is challenged, and mark-to-market risk continues, but our call is that this is more than discounted in the stocks already," the analyst said.

He expects the plan to be less of an incremental positive for the "safe haven" stocks like JPMorgan Chase (JPM.N), New York Community Bancorp (NYB.N), PNC Financial Services Group (PNC.N) and US Bancorp (USB.N). He rates these stocks "hold".

"(The) only piece missing is improved liquidity through interbank lending market," he said. The Federal Reserve can help the interbank borrowing by backing this channel, Horowitz said.

CONFIDENCE UP AT A COST

Analysts at Morgan Keegan said the government's plan significantly reduces solvency and liquidity concerns surrounding U.S. banks and "should improve the overall environment for private capital to once again flow into quality franchises."

"The big what-if is that we do not know how the remaining funds (after injecting 50 percent, or $125 billion, in the top nine U.S. banks) will be distributed, but our sense is that size matters," the analysts wrote in a note.

Fox-Pitt Kelton analysts said the bailout plan should improve confidence, but at a cost.

The analysts see lower long-term returns as they expect the government to take aggressive steps to impose tougher restrictions on risk and increase capital reserves.

Fox-Pitt kept its "underweight" rating on U.S. banks and "marketweight" rating on U.S. investment banks/brokers and trust banks.

"We expect bank/broker stocks to stall out, as the reality of global and domestic economic weakness sets in. Earnings should be weighed down by the preferred dividends, rising credit costs, losses associated with problem assets, and lower revenue," the brokerage said. (Additional reporting by Anurag Kotoky, Editing by Vinu Pilakkott)