NEW YORK ( TheStreet) -- The Dubai debacle has prompted investors, once again, to consider the state of the credit crisis and global banks.

Dubai's state-controlled holding company last week sought a standstill agreement with creditors and an extension of loan maturities until at least May 30, the latest credit bubble to burst more than a year after Lehman Brothers died and AIG ( AIG) was put on life support.

Still, three of the four biggest U.S. banks -- Bank of America ( BAC), JPMorgan Chase ( JPM), Citigroup ( C) and Wells Fargo ( WFC) -- are excellent choices for long-term investors. The following is a breakdown of each of the four banks, and their prospects as investments.

Bank of America

Not only is Bank of America going through a humiliating search for a replacement for Chief Executive Officer Ken Lewis, one of the candidates, internal senior executive Brian Moynihan, laid an egg during the Congressional Oversight Committee hearing on Nov. 17.

Saying he didn't know for sure why former general counsel Timothy Mayopoulos was fired last December, Moynihan put forth that he believed it was part of the company's "downsizing." Members of the committee later said the testimony was hard to believe, since the dismissal came after Mayopoulos said Bank of America couldn't justify backing out of its deal to acquire Merrill Lynch, and Moynihan was the initial replacement as general counsel and reported directly to Lewis.

The CEO search, along with the heightened scrutiny that goes along with a $45 billion government stake in the company, has put a drag on Bank of America's shares, which have fallen about 17% since mid-October. But there are bright spots for investors willing to hold the stock for several years. For one, the price-to-tangible-book ratio is 1.4, down from 2.8 at the end of 2007 and 3.5 in both 2006 and 2005, according to SNL Financial.

During periods of "normal" economic growth, the four largest banks have tended to trade for at least two times tangible book value, but often much higher. Over the next several years, the Merrill Lynch acquisition should pay off, with the unit boosting revenue in Bank of America's Global Banking, Markets and Wealth & Investment Management segments.

Headwinds include the possibility that Bank of America may need to raise capital to pay back the government. Then again, dividends on preferred shares issued to the government amount to $563 million per quarter. In a report reiterating his company's "buy" rating on Bank of America, Sandler O'Neill analyst Jeff Harte said "the opportunity to reduce preferred dividends is likely to outweigh the dilutive impact of an increased share count."

Another event that could lead to capital increases among large domestic banks is the January implementation of statements 166 and 167 from the Financial Accounting Standards Board, which cover sales accounting for off-balance sheet assets. The big four securitized significant portions of their mortgage and credit-card portfolios in recent years, selling assets to off-balance sheet conduits. The new rules will force companies to move most of those assets back to the balance sheet. In a recent regulatory filing, Bank of America estimated a "net incremental impact on total assets" of about $121 billion.

With coming changes in management and accounting rules, and the government monkey on its back, the road will be rocky over the short term. However, boasting the biggest domestic deposit franchise, along with Merrill Lynch, Bank of America is an excellent recovery play. The company's stock has risen 10% this year.

JPMorgan Chase

JPMorgan Chase is the high flyer among the big four, having repaid the government early in the game. The acquisition of the failed Washington Mutual fed a 30% increase in domestic deposits, and earnings have been improving for the past four quarters, despite an increase in nonperforming loans.

The company's $3.6 billion in third-quarter net income translated into a return on average assets (ROA) of 0.71%, better than 2008's 0.21%, but behind the 1.06% return in 2007 and 1.04% in 2006.

Loan losses have been increasing, as JPMorgan's annualized ratio of net charge-offs to average loans for the third quarter was 3.75%, up from 3.38% in the previous quarter and 1.77% a year earlier. JPMorgan's reserve build has kept pace, with loan-loss reserves covering 4.59% of total loans as of Sept. 30.

Regarding the implementation of FAS 166 and 167, Barclays Capital analyst Jason Goldberg estimated that JPMorgan will bring about $100 billion in assets to its balance sheet, which wouldn't come close to forcing the company to raise additional capital.

JPMorgan's shares trade at 1.6 times tangible book and 12.6 times earnings. The stock sold for 2 times tangible book at the end of 2007, 2.5 times in 2006 and 2.4 times in 2005. The year-end price-to-earnings ratios were 12.7 in 2007, 9.6 in 2006 and 13.1 in 2005. As such, JPMorgan's shares are inexpensive, even though they've risen 31% this year.

Wells Fargo

Following Wells Fargo's announcement of $3.2 billion in third-quarter net income, Rochdale Research analyst Richard Bove said he would "avoid the stock," as it didn't appear the company would be able to sustain such a performance. Bove cited the $1.1 billion increase in mortgage servicing fee revenue, tied to hedging activity on Wells Fargo's servicing portfolio that the company didn't sufficiently explain.

Other analysts have a more positive outlook for Wells Fargo's shares, including Oppenheimer's Chris Kotowski, who supported an "outperform" rating for the company, with a price target of $36 based on discounts applied to an estimate of "normalized earnings" of $4.71 in 2012, and a price-to-earnings ratio of 12.

The shares are trading at about 12.1 times earnings and 1.4 times book value. SNL Financial couldn't provide a price-to-tangible book value estimate for Wells Fargo based on the company's September financial report. The stock was selling at 2.9 times tangible book at the end of 2007 and 3.5 times in 2006.

In a recent regulatory filing, the company estimated the implementation of FAS 166 and 167 would bring $48 billion in assets on to its balance sheet.

More importantly, Wells Fargo has yet to repay the $25 billion in government bailout money. After government stress tests on the largest 19 domestic holding companies were completed in May, Wells Fargo raised $8.6 billion in a public offering, exceeding by $6 billion the target set by regulators.

Wells Fargo had the highest regulatory tier 1 leverage ratio among the big four -- 9.03% as of Sept. 30 -- but also the highest level of nonperforming assets, comprising 4.43% of total assets. Nonperforming loans shot up after the company acquired Wachovia in last year's fourth quarter but have risen more sharply over the past two quarters. The ratio of net charge-offs to average loans was 2.39% for the third quarter, and the company kept ahead of the loan-loss pace, with reserves covering 2.86% of total loans as of Sept. 30.

Wells Fargo's acquisition of Wachovia doubled the company's size, diversified its revenue base and put it in second place for domestic deposits after Bank of America. While the company's nonperforming loans are cresting, and it will take some time for the company to repay the government, Wells Fargo has posted decent earnings for three quarters and is rebuilding its capital ratios. Wells Fargo's stock has fallen 7.9% this year.


A look at Citigroup's capital structure in the third-quarter financial filing highlights an ugly scenario: Not only does the government now control 34% of the company's common shares, it holds $27 billion in trust-preferred securities, with an 8% coupon. The Treasury's total investment is $49 billion, and the dividend payments on the trust-preferred shares total $540 million a quarter.

Citigroup's shares are trading at 0.9 times tangible book value, making it the cheapest among the big four. Then again, the $4.47 tangible book value estimate provided by SNL Financial includes the 34% government stake.

Citigroup had the highest rate of credit-card losses among the largest domestic card lenders during the third quarter, and its overall charge-off ratio of 4.78% was the highest of the big four. Citigroup has kept ahead of the pace of loan losses, with reserves covering 5.6% of total loans as of Sept. 30.

With a return to profitability, a stronger capital base and a diversified international business, Citigroup should eventually move beyond the crisis and wring a tighter, more focused franchise out of the mess inherited by CEO Vikram Pandit. Many analysts have a "neutral" rating on the shares, but with so much uncertainty tied to the massive (and expensive) government stake, investors considering a new position ought to stay clear for now. After all, the stock has performed more poorly than its big rivals, dropping 39% this year.

-- Reported by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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