Investing in banks is a tempting but scary consideration at the moment. On the one hand, measures taken by governments in the U.S. and Europe seem to encourage more lending, suggesting that the worst is over. On the other, there may be more ugly surprises in quarterly financial reports, which could erode what little investor confidence there is.

But, still, there are some analysts who have put “buy” or “overweight” ratings on four of the big U.S.-based global diversified banks: Charlotte, N.C.-based Bank of America Corp. ; and Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co., all of New York.

Bank of America, Goldman Sachs and JPMorgan are expected to come out of the crisis bigger and stronger than ever. Already, JPMorgan has acquired the banking operations of New York-based Bear Stearns Cos. Inc. and Seattle-based Washington Mutual Inc. (known as WaMu), while Bank of America has purchased Merrill Lynch & Co. Inc.

Citigroup will survive, the analysts say, but it will have to change its business model. As part of that, it has already earmarked $600 billion — almost a third of its $2 trillion in total assets under administration — in non-core business assets that it will sell over the next few years. (All figures are in U.S. dollars.)

These four banks are among the nine into which the U.S. Treasury Department will inject capital by purchasing specially issued preferred shares. Bank of America, Citigroup and JPMorgan will each receive a $25-billion cash injection, while Goldman Sachs will receive $10 billion. These funds, says Tim Johal, a portfolio manager with I.G. Investment Management Ltd. in Winnipeg, will raise Bank of America’s, Citigroup’s and JPMorgan’s Tier 1 capital ratios — a bank’s core equity capital as a percentage of its risk-weighted assets — to around 10%. Goldman Sachs’ ratio is already more than 11%.

Although this injection of capital is not necessary for these banks to survive, it will both bolster confidence in the U.S. banking system and encourage the banks to lend to each other and to consumer and business customers.

Johal finds the approach the U.S. government is taking — buying preferred shares — preferable to that taken by its European counterparts, which are buying newly issued common shares of distressed banks. The purchase of preferreds does not greatly dilute existing shareholders’ equity, while the common shares being issued in Europe do. Furthermore, there is every reason to believe the U.S. banks will buy back the preferreds. So, the government stake should be fairly short-lived. Bank of America CEO Kenneth Lewis has said that the bank expects to redeem the preferreds in three to five years and repay the money.

Since June 2007, Citigroup has reported the biggest losses — $68.1 billion — the result of writedowns and increased credit-loss provisions, according to data from New York-based Bloomberg LP.

Merrill Lynch has reported $58.1 billion in losses; WaMu, $45.6 billion; Bank of America, $27.4 billion; JPMorgan, $20.5 billion; and Goldman Sachs, $4.9 billion.

A closer look at the four banks:

> Bank Of America Corp. Johal likes this bank, saying its acquisition of Merrill Lynch provides diver-sification into capital market sales and trading and investment banking, areas in which Bank of America had not had a large presence. The acquisition also increases Bank of America’s global presence, as Merrill Lynch has more than 16,000 advisors worldwide with AUA of $1.5 trillion.

This diversification comes at an opportune time because Bank of America is close to the 10% market-share limit for U.S. retail deposits imposed by U.S. banking regulations. As such, the bank can grow retail deposits only organically.

Bank of America has managed the credit crisis well, Johal says, noting that management has a history of learning from previous experiences and being able to change; he points specifically to the bank’s decision in the early years of this decade to cease issuing subprime mortgages.

FLIGHT TO QUALITY

Bank of America is also among the top picks of Richard McGrath, senior investment analyst and portfolio advisor with AGF International Investors Inc. in Dublin.

Bank of America and JPMorgan, he says, have “more of a retail focus and were not involved to the same extent in the toxic U.S. subprime assets.” He also believes the two banks are managing themselves well through the downturn.

@page_break@An Oct. 7 report issued by New York-based J.P. Morgan Securities Inc. recommends “overweighting” Bank of America’s stock despite its very weak earnings, noting that the bank is benefiting from a “flight to quality,” which “should drive good long-term growth.” In the quarter ended Sept. 30, the report notes, deposits increased 4% from June 30.

An Oct. 14 report from Citigroup Global Markets Inc. in New York upgraded Bank of America to a “buy” based on the U.S. government’s capital infusion, with a 12-month price target of $31 a share. The shares closed at $20.53 on Oct. 27, up from a low of $18.99 on Oct. 10, but down 59.1% from a high of $50.20 in July 2007 and down 62.7% from their all-time high of $55.08 in November 2006.

New York-based UBS Securities LLC’s Oct. 7 report rates the stock “neutral” with a 12-month price target of $29 a share. UBS is not expecting a quick recovery from the credit crisis/global slowdown, but the report adds that if it were to occur, Bank of America’s stock could climb to $40-$50 a share.

An Oct. 8 report from Toronto-based RBC Capital Markets rates the stock a “sector perform,” lowering the price target for Bank of America stock to $23 a share from $29. The RBC report anticipates investor disenchantment following the upcoming reduction of Bank of America’s dividend — it will cut its quarterly dividend in half in December to an annualized $1.28 a share — and the 10%-11.5% dilution of shares from an offering of 455 million common shares in October.

The public offering — priced at $22 a share — raised $9.8 million in net proceeds and boosted the number of common shares outstanding to 4.6 billion. The underwriters have an option to purchase an additional 68.25 million shares. The shares are widely held,

The RBC report also voices concerns about integration risk with the Merrill Lynch acquisition.

In the nine months ended Sept. 30, Bank of America reported net income of $5.8 billion, a precipitous drop from $14.7 billion during the same period a year earlier. The main reason for its lower net income was a huge jump in loan-loss provisions, to $18.3 billion from $5.1 billion.

Revenue for the nine months was $57.1 billion vs $54 billion a year earlier. Balance sheet assets were $1.8 trillion as of Sept. 30 and the bank’s Tier 1 ratio was 7.6%.

> Citigroup Inc. Johal feels that Citigroup’s stock has been oversold, pointing out that it was recently trading at about 0.7 times book value. “Citigroup’s franchise has more potential,” he says, “than the stock price shows.”

It will take time for the bank to reinvent itself with more of a retail focus, Johal admits. Citigroup is very interested in acquiring a big U.S. deposit bank, as shown by its failed bid for Charlotte, N.C.-based Wachovia Corp., and Citigroup also wants to expand into emerging markets, including Asia, the Middle East and Africa.

McGrath owns the stock; the J.P. Morgan Securities report suggests “overweighting” it; and the UBS report rates it a “neutral.” UBS’s Oct. 16 report had a 12-month price target of $17 a share. That’s up from the $11.73 at which the shares closed on Oct. 27, but down 68% from July 2007’s high of $52.97 and down 70% from the all-time high of $57 in December 2006.

With such a big drop in the share price, Citigroup’s valuation is relatively attractive, given its “much better footprint for long-term growth,” says the Oct. 17 J.P. Morgan Securities report. Citigroup has received some benefits from the flight to quality, the report notes, but more from its global operations than its domestic retail operations.

The UBS report also notes the increase in global deposits and adds that $3 billion in net new money went into wealth management in the three months ended Sept. 30. That report also points out that management continues to manage expenses, which were down by 8% in the third quarter from a year earlier, and to sell non-core assets.

LARGEST NETWORK

UBS’s Oct. 3 report regrets that Citigroup wasn’t able to acquire Wachovia, noting that the acquisition would have been “positive strategically and financially, broadening Citigroup’s footprint, solidifying its funding base and accretive.” Although there will probably be other deals, they won’t be “as big or as good as this one.”

Citigroup has the world’s largest financial services network, spanning more than 100 countries and more than 200 million client accounts.

Citigroup reported a net loss of $10.4 billion in the nine months ended Sept. 30, after making a $22-billion provision for loan losses and benefits and claims, In the same period in 2007, it reported net income of $13.4 billion after provisions of $10.3 billion. Revenue was $47.2 billion vs $72.1 billion a year earlier. The Tier 1 capital ratio was 8.3% as of Sept. 30.

Citigroup has 5.4 million widely held common shares outstanding.

> Goldman Sachs Group Inc. received approval from the U.S. Federal Reserve Board on Sept. 21 to become a bank holding company, which allows it to borrow from the Fed, rather than continue on as an investment bank. This is a defensive move; Goldman Sachs has no plans to become a deposit-taking bank, Johal says.

Goldman Sachs has increased its liquidity by selling $5 billion in preferred shares to Warren Buffett’s Berkshire Hathaway Inc., making a $5-billion common share offering and getting the $10-billion injection from the U.S. Treasury.

However, none of this shored up Goldman Sachs’ share price, which had been sinking since September. Its 448 million shares outstanding hit a low of $74 a share on Oct. 10; and even though the shares closed at $92.88 on Oct. 27, that was still at less than 40% of its May 2007 high of $233.97.

Goldman Sachs has 3.8 billion widely held common shares outstanding.

Johal says the shares are oversold. In his view, the bank has an incredible franchise, with more than 50% of its earnings coming from outside the U.S.; earnings have held up well, with no quarterly losses; it didn’t take any subprime mortgage-related losses; and it has a clean balance sheet.

The J.P. Morgan Securities’ Sept. 23 report recommended “overweighting” Goldman Sachs’ stock, based on the firm’s “superior business and firm culture.”

But UBS’s Sept. 23 report rates the stock a “neutral,” with a 12-month price target of $145. The report states that given Buffett’s track record, his investment in Goldman Sachs “lends credibility to the firm’s business model, client franchise, risk management capabilities and balance sheet” but concerns around profitability, the economy, several parts of the debt market and Goldman Sachs’ business model remain.

Net income was $4.4 billion in the nine months ended Aug. 29 vs $8.4 billion in the same period a year earlier. Revenue was $23.8 billion vs $35.2 billion. Assets were $1.1 trillion at Aug. 29 and the Tier 1 capital ratio was 11.6%.

> JPMorgan Chase & Co. Johal has nothing but good things to say about this bank. It avoided most of the subprime mortgage mess and its chairman, president and CEO, James Dimon, is one of the most highly regarded bank CEOs. Johal notes Dimon stopped raising JPMorgan’s dividend when he became CEO in December 2006, resulting in a war chest that has been very useful during the credit crisis.

JPMorgan is in 50 countries and has 90 million customers — including many of the world’s largest multinationals.

Johal likes the Bear Stearns and WaMu deals, and he expects JPMorgan will continue to look for acquisition opportunities.

JPMorgan is also one of McGrath’s top picks, based on its retail focus, its avoidance of much of the subprime mortgage mess and its good management.

UBS’s Oct. 15 report rates the stock “neutral,” with a price target of $44 a share. The share price closed at $34 on Oct. 27, down 36.2% from its May 2007 high of $53.25.

The UBS report calls JPMorgan “a very solid company, and the market share gains, mortgage asset reductions and capital ratios are all impressive.” But, it adds, earnings will probably be muted for a while.

JPMorgan reported net income of $4.9 billion in the nine months ended Sept. 30, vs $12.4 billion in the same period a year earlier. Revenue was $50 billion vs $54 billion. Loan-loss provisions were $13.7 billion vs $4.3 billion. Assets were $2.3 trillion and the Tier 1 capital ratio was 8.9%. IE