Bank of America Corp (BAC), Morgan Stanley (MS), UBS AG (UBS): Cheap, Or Is It?

Goldman Sachs Group, Inc. (NYSE:GS) has managed to knock earnings out of the park over the last four quarters, beating analysts’ estimates by at least 10% each quarter. However, the one downside for Goldman is its increased exposure in Europe. At the end of 2012, Goldman’s total credit exposure increased to $3.9 billion from $2.9 billion in the prior year, and market exposure increased to $1.3 billion from $585 million in Portugal, Italy, Ireland, Greece and Spain.

UBS AG (USA) (NYSE:UBS) witnessed a big loss related to rouge trading activities, but this hasn’t spooked investors with new money inflows still positive. However, the bank’s assets under management are still well off their 2007 second-quarter peak.

UBS AG (USA) (NYSE:UBS) plans to focus on downsizing and reducing fixed income risk-weighted assets to help improve the bank’s position and return on equity over the long term. If not for its high valuation, this investment bank might actually be worth taking a deeper look at; since 3Q 2011 it has managed to reduce its risk-weighted assets 35%.

Bank of America Corp (NYSE:BAC) has been one of the turnaround banks performing nicely of late, growing earnings robustly year over year for 1Q 2013, thanks in part to a slowdown in the provision for credit losses and reduced operating expenses. Bank of America has been relentlessly trying to realign its balance sheet in accordance with the regulatory changes post the meltdown to remain afloat.

In fact, since 2010, the company has completed the divestiture of more than 20 non-core assets to strengthen its capital position. Then in 2012, the bank divested its 49% stake in Mitsubishi UFJ Merrill Lynch PB Securities Co., its JV with Mitsubishi UFJ Financial Group, Inc.

Bank of America Corp (NYSE:BAC) also managed to grow deposits by 7% in 2012 despite a sluggish economy; however, I still like Citi as the best way to play the turnaround banking industry given its better returns and balance sheet.

Don’t be fooled

It appears that Citi is truly cheap, whereas Morgan Stanley could be a value trap. It also appears that Bank of America Corp (NYSE:BAC) is working on an effective turnaround, with better returns than Morgan and a P/B ratio that’s a 13% discount to Morgan Stanley’s. For investors already owning Morgan Stanley stock, it would be advisable to buy some protection with covered calls (an income-oriented strategy).

The article This Bank Is too Cheap to Ignore, or Is It? originally appeared on Fool.com and is written by Marshall Hargrave.

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