Beat the Rush to the Banks

At least the behemoth is already near its floor. Bove figures that Bank of America is conservatively worth at least 15% of its deposits. At a price of $32, the stock trades for 19% of the value of BofA's deposits. The price-earnings ratio, based on forecasted 2009 profits of $3.29 per share, is 10.

For the cleanest nose on the block, look no further than Wells Fargo ( WFC). On July 16, the day after financial stocks in Standard & Poor's 500-stock index dropped 3%, the company reported a second-quarter profit of 53 cents per share -- handily beating the average analyst estimate of 50 cents. The company then thumbed its nose at naysayers by raising its quarterly dividend by 3 cents, to 34 cents per share.

Wells Fargo has largely sidestepped the worst of the housing crisis by keeping its lending standards high. Less than 10% of the loans it services are those of subprime customers, and the company has no exposure to interest-only or choose-what-you-pay loans. Wells Fargo is also the only U.S. bank with a top, triple-A credit rating. At $31, the stock, which is up 3% this year, trades at 14 times estimated '09 profits of $2.31 a share.

Captive to housing

Moving to smaller fare doesn't do much to trim risk. "The smaller the bank, the more closely it's tied to real estate," says Robert Eisthen, an analyst with Bartlett & Co., a Cincinnati investment firm. But you can still find small banks that never let frothy home prices go to their head, as well as those that have been unduly tarred by Wall Street.

In the former category, Hudson City Bancorp ( HCBK) has been reaping the rewards of its firm lending standards. It operates mainly in New York, Connecticut and its home state of New Jersey. And rather than sell to investors the mortgages it originates, Hudson City holds them. It has no exposure to subprime mortgages or to loans with ultra-flexible payment options, and its customers have better-than-average equity in their homes.

The bank has reported record profits in each of the past five quarters and raised its dividend twice this year. The share price is up 22% year-to-date through early September, so this is no fire-sale stock. At $18, Hudson City sells for 16 times expected 2009 profits of $1.18 per share.

For shares with some bounce-back potential, consider Marshall & Ilsley ( MI). The Milwaukee-based company has almost 200 branches in Wisconsin and a few dozen more in Indiana, Arizona and Florida, so it's exposed to ground zero of the housing crisis. Marshall took a big hit in the second quarter, posting a loss of $1.52 per share after making an $886-million provision for loan and lease losses.

But after taking that medicine, Marshall & Ilsley appears to be steadying. Arricale, the T. Rowe Price manager, says that even though the company has not had to raise capital or cut its dividend, the stock, which is selling at close to half its bare-bones accounting value, is trading as though it has. Says Arricale: "If management is right and the company doesn't need to raise capital or cut the dividend, then the stock will be a home run in a short amount of time." At $17, the stock is down more than 60% over the past year. It sells for 11 times estimated '09 earnings of $1.50 per share.

Down but not out

The investment banks are the shakiest group. Still, the winners are easy to spot. Both Goldman Sachs ( GS) and Morgan Stanley ( MS) have "the necessary capital and funding to weather the storm," says Phil Davidson, the manager of several value funds at American Century. Goldman has churned out profits in each quarter since the credit crisis began in the summer of 2007, while Morgan Stanley suffered just one quarterly loss, in the period that ended November 2007, because of loan write-downs.

Morgan Stanley may be best positioned to weather the worst. Brad Hintz, an analyst with Sanford Bernstein, an investment firm that caters to wealthy clients, says the company has the most diversified revenue base and the lowest exposure to risky loans of the major investment banks. "If you're going to tiptoe through a minefield," he says, "you don't want to weigh 300 pounds. You want to be the little guy."

Goldman Sachs benefits from its already glowing reputation -- everyone wants to work with the best. "It has the number-one investment-banking franchise in the world, and it has come through this thing without any bullet holes," Hintz says. Some hedge funds may already be switching to Goldman from its ailing competitors. Revenues in the securities-services group, which serves prime brokerage customers such as hedge funds, increased 36% in Goldman's second quarter (which ended in May) over the first quarter.

Investors are rewarding the pair's steadier footing. At an early-September price of $163, Goldman Sachs was down 24% year-to-date; Morgan Stanley, at $41, was off 22%. Meanwhile, Merrill Lynch and Lehman Brothers were down 50% and 75%, respectively. Goldman trades at nine times estimated 2009 earnings of $18.11 per share, while Morgan Stanley sells at eight times estimated profits of $5.46 per share (both companies' fiscal years end in November).

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