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In this photograph taken July 19, 2010, the Wells Fargo logo is displayed on a sign outside one of the company's office buildings in Springfield, Ill.

Seth Perlman/AP

What are good strategies for picking U.S. bank stocks?

If you say "stay away," well enough – this item is not for you. Instead, if you're hardy enough to try to find winners among the still-depressed U.S. financial sector, Gerard Cassidy of RBC Dominion securities' southern arm has some tips for you.

Mr. Cassidy has identified several strategies for selecting outperformers in the sector in his second-quarter earnings preview. The results kicked off early Friday morning with JPMorgan Chase & Co. and Wells Fargo & Co.; both were up in Friday's trading.

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Monday, Citigroup Inc. announces, with Bank of America and many smaller regional players later in the week.

Mr. Cassidy says to look for:

Credit recovery: "We want to continue to own the credit-challenged banks that at the depths of the recession were mired in credit problems and still trade at a discount to book value," he says. As their assets perform better, they'll be able to set aside less money to cover problem loans, Mr. Cassidy says – and Wall Street consensus may underestimate these banks' abilities to surprise with earnings.

At the top of this list, Mr. Casidy says, are Citigroup, SunTrust Banks Inc. and Regions Financial Corp., all of which he gives "outperform" ratings with an assessment of "above-average risk."

Return of capital: "The industry is generating excess amounts of capital that cannot be redeployed quickly enough, which should eventually lead smart banks to give excess back to shareholders," he says. Regulators are becoming more comfortable with dividend and buyback plans, he says.

Banks that fit the category of being committed to the return of capital include State Street Corp. and KeyCorp., both of which he gives "outperform" ratings with an assessment of "average risk."

Revenue generators: "Bank stocks that are able to grow loan balances and revenues more efficiently than their competitors will likely become dominant franchises," Mr. Cassidy says. They'll also benefit from improved credit costs and economies of scale.

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Examples: JPMorgan, PNC Financial Services Group Inc., BB&T Corp. and State Street. He gives all "outperform" ratings, with PNC meriting a "top pick" designation. All he classifies as "average risk."

Thrifts with excess capital: A number of savings and loans and savings banks, known colloquially as "thrifts," are "well positioned to grow through well-underwritten loan portfolio growth and diversification," Mr. Cassidy says.

Northwest Bancshares Inc. and Provident Financial Services Inc. "still offer potential upside with solid dividend yields, in our view," he says. Both are "outperforms" with "average risk" in Mr. Cassidy's book.

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