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10 Banks With Turnaround Potential

 July 20, 2011 12:17 PM

by George Putnam, editor The Turnaround Letter

Bank stocks have been one of the worst performing groups during the first half of 2011, but we believe that many of them now represent very good long-term values.  

Below we identify the stocks of ten large banking companies that we believe have very attractive long-term appreciation potential.

While there is still the risk that more negative headlines will keep them under pressure for the short-term, the stocks have been beaten down to levels where they look very cheap.  

The big banks have cut back on risky practices (either voluntarily or by regulatory decree) and re-focused on their core businesses.  

Basic business banking may be less sexy than re-packaging subprime mortgages, but in the long run it is less volatile and more profitable.

Many of the large U.S. banks are now trading well below their book value. Historically, when times are good, bank stocks have traded at two or more times book value.   

It could take a couple of years for bank valuations to get back to those levels, but if they do, the appreciation in the stocks will be dramatic.  

Moreover, in the meantime, shareholders could be rewarded with increasing dividends and stock buybacks.

Coming out  of 2008, the regulators severely restricted  dividend payments and stock repurchases by the banks, but the government is gradually loosening these restrictions.

Bank of America (BAC) has powerful franchises in retail and commercial banking, credit cards, mortgage lending and investment banking.  

Each of these areas – and particularly the latter two – have caused the bank significant headaches since 2008, but it is beginning to put the problems behind it.  

The recent mortgage settlement is another step in the right direction. Eventually, the bank's massive scale should generate huge profits.

Citigroup (C) has a similarly broad reach, but on a global scale. The company's colossal ambitions almost brought it down in 2008-09.

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