Keefe, Bruyette & Woods Inc. is advising investors to steer clear of most big banks' stocks in 2012 and invest instead in life insurers, credit card companies and smaller-cap regional banks.

In its 2012 outlook for financial services, KBW said that the eight bank holding companies deemed by regulators to be "systemically important" have too much capital and too few options for deploying it to generate meaningful returns for shareholders.

While excess capital is an issue for financial firms of all sizes these days, smaller banks and nonbank financial firms will be more able to put that capital to use through increased dividends, share repurchases and acquisitions, the report said. Exposure to Europe and complex business models are also strikes against large institutions, according to the KBW report, which was authored by analysts Frederick Cannon, Brian Kleinhanzl and Matthew Dinneen and released Thursday.

The eight companies are Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley, Bank of New York Mellon Corp., State Street Corp. and Wells Fargo & Co. Of that group, the analysts are only recommending three of them — State Street, JPMorgan Chase and Goldman Sachs, to investors.

"Despite the banking industry reaching a 70-year high in capital ratios in 2011, government regulators, through their systemic risk definitions and stress tests, appear to want to significantly curtail capital deployment at the largest institutions," they wrote.

The analysts also predicted that the newly created Consumer Financial Protection Bureau will have minimal impact on banks in 2012 as implementation of Dodd-Frank Act shifts from issues around consumer banking to those pertaining to capital markets activities.

The CFPB "will be a benign force in 2012 as we do not believe a director will be appointed in an election year and because most of the practices that it was set up to curtail have been stopped," they wrote.

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