10 Most Profitable Banks Trading Below Book Value

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NEW YORK ( TheStreet) -- Even after a bank-stock rally, there are still hundreds of smaller companies whose shares are trading below book value.

Among the largest, only a few were below tangible book at the end of January. Guggenheim Securities analyst Marty Mosby says that when a bank trades below tangible book value, "it's about risk management."

"As you get to tangible book value, a bank has to produce profitability in excess of its cost of equity, in order to justify a meaningful premium to tangible book value," he says.

The KBW Bank Index (I:BKX) rose 30% during 2012 and went up another 5% in January, as investors digested another earnings season underscoring the industry's credit recovery and revenue challenges.

Using data provided by Thomson Reuters Bank Insight, TheStreet has compiled a list of actively traded bank stocks that traded below tangible book value at the end of January. It's limited to banks for which year-end data were available and to stocks with average daily trading volume of at least 50,000 shares. The list is also limited to the 10 banks with the highest operating returns on average assets (ROA) during 2012.

Of course, the price-to-book ratio is only one of many things to consider when picking bank stocks. Investors must also consider the timeline for greater profitability to support higher values.

One of the most familiar names still trading below book value is Bank of America (BAC) , which didn't make the cut for our list because the company's 2012 ROA was only 0.19%. The company's shares closed at $11.32 Thursday, trading for 85% of their reported Dec. 31 tangible book value of $13.36.

Mosby rates Bank of America "buy," with a $14 price target, which he says "represents what tangible book value would be as we move into 2014."

Despite another year of mediocre earnings performance and plenty of lousy headlines, Bank of America's stock was the 2012 bank champion. No bank has more at stake in the unfolding U.S. housing recovery, mainly because of former CEO Ken Lewis's unfathomable decision for the company to take on Countrywide Financial's mortgage disaster in July 2008. Investors' unresolved mortgage repurchase claims against the company totaled $28.3 billion as of Dec. 31, increasing from $25.5 billion the previous quarter, and $12.6 billion a year earlier.

Bank of America on Jan. 17 reported a fourth-quarter profit of $700 million, or 3 cents a share, after the company pre-announced a large mortgage putback settlement with Fannie Mae (FNMA) . The company also made a major contribution to the $8.5 billion foreclosure settlement between federal regulators and the nation's largest loan servicers.

The Fannie settlement was a pivotal event, because the company's earnings presentation implied that its mortgage repurchase claims would decline by roughly $12.2 billion, bringing repurchase claims down to about $14.5 billion. Of course, that figure doesn't include new repurchase claims that may crop up during the first quarter, but it shows major progress.