It's no secret that banks, specifically the big banks, are today's most disliked businesses in the public eye. People naturally want easy scapegoats and banks are being served up on a silver platter. While no one is suggesting banks are completely innocent, it takes two to tango; in this case, it was a whole party. Banks extended easy credit because the demand from consumers for loans was high, due to the seeming insatiable demand for housing and other assets.

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Panic Prices
The investment scenario for banks has never been this simple. If you believe that they will survive and can look ahead to 2013 and beyond, valuations are cheap. In what is a terrible environment for financial institutions, Citigroup (NYSE:C) is expected to earn around $3.81 a share at the end of 2011 and $4.70 in 2012. Shares today trade for $29. Of course, estimates can be wrong and for banks, estimates can be way off the mark.

No one is suggesting moving 20% of your assets into Citigroup, but a normal multiple of 11-12 times 2012 earnings suggests a $50 -$60 share price. Even a fair value of one times tangible book value for Citigroup, is equal to 50% upside today. Looking at the menu of financial company valuations, it's clear the valuations are pricing in panic. (For related reading, see How To Choose The Best Stock Valuation Method.)

The Basket Approach
For most investors, investing in individual financial names is an uncomfortable approach. Today's financial ETFs enable you to own a basket of all the major financials. The risk is still concentrated in the financial industry, but you get exposure to different institutions, some of which are deemed healthier than their cousins.

The SPDR KBW Bank ETF (NYSE:KBE) owns all the major players, including healthier names like Wells Fargo (NYSE:WFC) and less reputable ones like Bank of America (NYSE:BAC). Shares in KBE are down almost 27% year to date, significantly better than BAC's almost 53% decline, but still hurt by the overall sell-off in the industry.

Those with an aversion to owning the big banks can bet on regional banks, via the SPDR KBW Regional Banking ETF (NYSE:KRE). KRE is down almost 20% since January, an indication that regional banks are being spared the major sell-off that the mega banks are experiencing. KRE owns none of the major financials, but rather regional names like East West Bancorp (NYSE:EWBC) and Community Bank System (NYSE:CBU). (For further insight into risk in the financial sector, read How Do Banks Determine Risk?)

Bottom Line
Whether owning ETFs or individual stocks, betting on financials today is multi-year bet. Banks still have problems, some more significant than others. Those problems won't be fixed in a month or even a year, however, when the dust settles and investors begin to see the earnings power of these names, the share prices will be at much higher levels than they are today.

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Tickers in this Article: C, KBE, WFC, BAC, KRE, EWBC, CBU

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