UPDATE 1-Goldman raises large US banks to attractive

Oct 5 (Reuters) - Large U.S. banks' normalized earnings have surged 39 percent this cycle mostly on long-term accretive deals, but banks' share prices do not fully reflect their earnings power, Goldman Sachs said as it upgraded big banks to "attractive" from "neutral."

Analysts, including Richard Ramsden and Brian Foran, upgraded Wells Fargo & Co (WFC.N) to "buy," Comerica Inc (CMA.N) to "neutral" and added Capital One Financial Corp (COF.N) to their conviction buy list in place of Fifth Third Bancorp. [ID:nWNAB5939]

Shares of Wells Fargo and Capital One rose 5 percent to $27.42 and $34.80 respectively, in pre-market trade on Monday.

"The market has failed to recognize the dramatic improvement in earning power at the large banks versus the regionals," Goldman analysts said, as they kept their "cautious" view on regional banks citing permanent earnings dilution and later cycle credit issues.

Tangible assets per share have risen 29 percent for large banks compared with a 25 percent fall for regionals, while pre-provision earnings per asset has increased 7 percent for large banks versus a 14 percent fall for regionals, the analysts wrote in a note to clients.

Wells Fargo is the 'big winner' this cycle as its tangible assets per share have risen sharply by 70 percent in the second quarter of 2009 compared with the same quarter in 2007, Goldman analysts said.

While big banks normalized earnings are 39 percent higher than in 2007 -- mostly on account of long-term accretive deals such as Wells Fargo-Wachovia Corp and JPMorgan Chase & Co (JPM.N)-Washington Mutual Inc (WAMUQ.PK) -- regional banks' normalized earnings have fallen 36 percent, they said.

Last year, Wells Fargo completed its $12.5 billion takeover of Wachovia, while JPMorgan bought the banking units of failed thrift Washington Mutual. (Reporting by Tenzin Pema in Bangalore; Editing by Gopakumar Warrier)