June 7, 2011 - There's a lot wrong with Bank of America and Citicorp. From bad loans to lawsuits to analysts' downgrades. Not hard to find reasons to stay away from these two behemoths. But if you look beyond their current travails, you have to be at least interested in them as investments.

Here are some interesting numbers for these banks:

	BAC	C
Total assets	$2.274 trillion (3/31/11)	$1.947 trillion (3/31/11)
Market Cap	$110.4 billion	$110.58 billion
Book Value  Per Share	$21.15	$58.46
Price to Book	.51	.65
Forward P/E Ratio	6.4	7
Dividend Yield	.4%	.1%
Profit Margin  (Last 12 months)	-4.08%	15%
Stock Price	$10.81 (6/7/11)	$37.75 (6/7/11)

The ones that really stand out are the Price to Book. At BAC, it's .51. That means an investor can buy $1 of equity for 51 cents at the current price. At C, an investor pays 65 cents for a $1 of equity. What that basically means is that for investors to lose money at BAC, the company has to lose more than 49 cents a share. Doesn't sound like a lot of cushion but consider this: there are 10.13 billion shares Outstanding. That means the bank needs to lose over $5 billion for an investor to lose. For C, there are 2.92 billion shares Outstanding. For an investor to lose money, the bank would need to lose 35 cents a share or a total loss at the bank of $1 billion.

In the last four quarters, BAC made 27 cents, 27 cents, 4 cents and 17 cents respectively. For C, earnings were 90 cents, 70 cents, 40 cents and $1.00 respectively. For this year, 27 analysts have a consensus estimate for earnings at BAC of $1.06 (with a range of 86 cents to $1.43). In 2012, 31 analysts have a consensus earnings estimate of $1.71 (with a range of $1.33 to $2.50). For C, 23 anlaysts have a consensus estimate of $4.20 (with a range of $3.80 to $4.80). In 2012, the consensus is for $5.37 (with a range of $3.90 to $6.40). No losses predicted for the next couple of years.

So investors can buy these stocks at bargain prices. But there are lots of risks attached, some of them unknown. One of them was already mentioned: the Dodd-Frank regulations for banks. This new law will require banks to have more equity to support their loan portfolios. Currently, it takes about 8% equity to carry a loan on the books. That means for every $1 of a loan, the bank has 8 cents to support it. On top of that is the loan loss reserve which is applied to bad loans before equity feels the pain. The new law may require as little ase 3% more equity and some are saying up to 7%. That means new equity levels would go to 11 cents to 15 cents to support loans.

Ultimately, that slows lending, because there isn't as much money to lend when more equity is required. That means banks need to raise more equity or sell loans to shrink to meet the new requirements. That will slow growth, at the bank level and the economy.

Furthermore, the housing market isn't out of the quicksand yet. The latest reports showed housing prices going lower, even with interest rates at extremely attractive rates (for those qualified to borrow). Nothing I can find suggests a quick fix for this important piston in the economic engine. Some experts think another 5 or 6 years before housing is healthy again.

Lastly, unemployment went the wrong way again in the last figures released. It's at 9%, with some regions well above that. Without jobs, there can be no recovery, no homes sold, no demand for loans either for mortgages or businesses. Banks can't prosper without those.

So where does that leave an investor considering these two giants? Perplexed, most likely. While there's a lot of positive in buying stocks that are relatively cheap, there is a reason they're so attractive. There's still a lot of risk with these (and other banks). Still if the worst is over or very nearly, then investors may wish they had moved out on the risk scale and bought some of these bastions of U.S. business at these levels. There's still plenty of downside potential (including bankruptcy if things get really bad....this time Americans won't want to hear "too big to fail"). But the upside from here looks to be much greater than the downside.

- Ted Allrich