Month after month, JPMorgan Chase endures negative headlines — this week came the announcement that the bank is paying $2.6 billion to settle allegations related to Bernard Madoff's Ponzi scheme — yet investment analysts remain bullish on its stock.

Yes, its share price fell a bit after word got out in October that it had agreed to pay $13 billion to settle mortgage-related claims, but it rebounded quickly and is now up roughly 35% over the last year. And in the view of Keefe, Bruyette & Woods analyst Christopher Mutascio, the shares are likely to keep rising.

Mutascio, who has given JPMorgan Chase an "outperform" rating, argues that the company's stock is underpriced in comparison to other large banks. And he says that the nation's largest, and most embattled, bank is beginning to shed the worst of its legal woes.

"We all know the legal issues and the legal costs that are facing JPMorgan," Mutascio said during a conference call Thursday in which KBW analysts discussed their outlook for the upcoming year. "But that is really masking what we think are solid fundamentals."

JPMorgan, which is scheduled to report quarterly earnings on Tuesday, has around $7 billion in remaining legal reserves, Mutascio estimates. The bank still faces probes related to manipulation of the London interbank offered rate, energy trading, certain mortgage securities and its hiring practices in China.

"The risks are not over. We don't want to imply that they are," Mutascio said. "But we do think that they are getting to a light at the end of the tunnel."

Looking more broadly at the banking sector, KBW analysts predicted that earnings per share growth will be strongest in 2014 at the large universal banks, followed by the small institutions. They expect regional banks to have lower earnings per share growth than the other two groups.

"Overall we believe this is a relatively good environment for financial stocks. On the other hand, we also see continued regulatory constraints," said Fred Cannon, KBW's global director of research.

The largest of the smaller banks, those within $5 billion and $10 billion in assets, are in a sweet spot, KBW analyst Jefferson Harralson argued. Although certain new regulations are adding to their costs, they're exempt from price caps on debit swipe fees, and they are not required to hold as much capital as some of their larger competitors.

"So what you have is a nice little pocket where banks can have enough scale to be profitable and not have too much scale to attract the notice of the regulators," Harralson says. "They can buy banks, they can sell. They can grow."

Often banks with $5 billion to $10 billion of assets look to acquire institutions with less than $1 billion of assets. But in part because of higher regulatory costs, banks in the $1 billion to $2 billion asset range are now facing increasing pressure to sell, Harralson says.

"The environment's ripe" for mergers and acquisitions, he says. "Especially in that $1 billion to $2 billion range, you're going to see a lot of it."

In contrast, KBW analysts do not expect to see many acquisitions involving large banks in 2014. Because of their size, Bank of America (BAC), Wells Fargo (WFC) and JPMorgan are not in a position to get regulatory approval of bank acquisitions, Mutascio says.

He notes that regional banks such as U.S. Bancorp (USB), PNC Financial Services Group (PNC) and BB&T (BBT) might be able to complete some acquisitions — particularly small ones akin to U.S. Bank's recent announcement that it is buying 94 Chicago-area branches from Royal Bank of Scotland's RBS Citizens.

But he adds that regional banks are also under intense scrutiny when it comes to acquisitions, pointing to M&T Bank's (MTB) long wait for regulatory approval of its deal for Hudson City (HCBK) Bancorp. That deal, first announced in August 2012, was held up after the Federal Reserve identified problems in M&T's compliance with anti-money laundering and Bank Secrecy Act. In December, the companies said that the deal may not close until the end of 2014.

Among small banks, KBW has an "outperform" rating on Columbia, S.C.-based First Financial Holdings (SCBT), despite a 58% climb in the company's share price over the last year. The $8 billion-asset company has grown through acquisitions in recent years, and KBW analysts expect its momentum to continue.

Because of the First Financial Holdings' track record of successful integrations, small banks in the Carolinas that are looking to sell will see the company as an attractive partner, Harralson predicts.

"You will see them being successful in deals," he says. "We like stocks that can grow. We like stocks that are accepting credit risk."

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.