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Bank Stocks Gets Cheaper, But Risks Remain

Stocks in this article: BAC WFC FAIRX

BOSTON ( TheStreet) -- The nation's two biggest banks, Bank of America (BAC) and Wells Fargo (WFC), will let investors know if they've overcome their problems with troubled assets this week when they report their second-quarter results.

More than two years have passed since bank stocks helped bring major benchmarks to a 12-year low. Bank of America and Wells Fargo shares have doubled since March 2009 as the companies shed bad mortgages and shored up their balance sheets with the help of government aid. Still, analysts are betting that the banks aren't out of the woods.

Bank of America stock is down 24% this year, making it the worst-performing bank in the KBW Bank Index, which tracks 24 U.S. banks. Wells Fargo shares have lost 12%, beating the 11% decline of the KBW index. The Standard & Poor's 500 Index has gained 5% this year.

The slowing U.S. economy and Europe's debt crisis are also adding to woes in the financial sector. A weak economy is dampening demand for loans as companies become more cautious. The debt crisis in Europe has the potential to shake bank stocks around the world, even if they don't hold sovereign bonds.

Bank of America is the largest U.S.-based financial holding company with global assets of $2.3 trillion. The Charlotte, N.C.-based bank acquired Merrill Lynch and Countrywide Financial in 2008, leading to some unexploded bombs in its loan portfolio. For fiscal year 2011, analysts estimate that Bank of America will lose 16 cents per share, including a 90-cent loss in the second quarter. But the bank is expected to turn its business around next year to earn $1.68 per share.

"Bank of America's recent bold actions to contain and reduce its potential liability from soured mortgages should go a long way toward clarifying its total exposure to the U.S. housing bust," Standard & Poor's wrote in a research note.

Analysts appear to be optimistic about Bank of America's prospects. Eight analysts rate the stock "buy," 10 rate it "buy/hold" and 14 say to "hold" the stock, according to Standard & Poor's.

Standard & Poor's analyst Eric Oja rates the company "strong buy" with a five-star rating, the firm's highest rating. S&P considers Bank of America shares "attractively priced."

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