BB&T You Can Bank On — Bank of America and Citigroup, However …

The U.S. government has invested hundreds of billions of dollars — including the $750 billion Troubled Asset Recovery Program — to keep the world’s biggest banks (including some based in the U.S.) from failing. But if you’re going to put your own money into bank stock, skip the ones that got bailed out — like Bank of America (NYSE:BAC) and Citigroup (NYSE:C) — and consider a stake in a profitable regional bank like BB&T (NYSE:BBT).

Banking used to be such an easy business. Bankers would roll into the office at 10 a.m., take a few meetings and be out on the golf course by 2 p.m. In between, they’d make a business or home loan and feel blissfully confident that they would get a nice solid paycheck every two weeks — and attend a delightful Christmas party at the end of the year.

But starting in the mid-1970s, that cozy world crumbled, leading to a raft of changes that made banking a terrible business for everyone associated with it — except for a handful of traders. Here are the�three most significant ruptures in the banking industry structure:

• Deregulation. Starting in 1975, a raft of deregulation boosted the risk in banking. Stock trading commissions were open to competition, S&Ls could invest in risky assets, and commercial banks could get into investment banking.� These changes opened up merger mania — and Citigroup was the worst of the lot — making the mistake in thinking bank customers wanted a one-stop-shop. What they got was an incomprehensible pile of risk that the U.S. government had to rescue in 2008 with a $300 billion bailout.
• Securitization. The 1980s featured the emergence of securitization — selling financial assets like mortgages into a trust and issuing securities based on the cash�flows the assets generated.�Securitization turned�lenders into factories that mass-produced loans because the investment banks that engaged in securitization�had an insatiable appetite for ever-bigger portfolios to boost their�revenues and banker bonuses. As the volume of loans rose, the quality plummeted. But since ratings agencies competed�to AAA-rate those dodgy loan bundles, investor around the world were eager to buy them.
• Technology. The ATM and Internet have made it far cheaper to deliver banking services. But traditional banks still are operators of hundreds of retail stores that cost a huge amount of money to operate. Banks merge just to get economies of scale to support them.

All these changes led banks to take bigger risks as they struggled not to lose market share and the resulting bonuses to their more aggressive peers. And about once a decade, those risks led to a financial crisis:

• LDC loans. In the 1970s, there were big losses due to loans to so-called Lesser Developed Countries.
• Oil patch lending. In the early 1980s, there was another collapse because of too much lending for oil and gas exploration and oil-patch real estate.
• LBOs. The 1980s ended with a collapse in loans for leveraged buyouts.
• Sub-prime securitization. We still are suffering the aftereffects of the 2008 financial collapse that resulted from institutional investors who bought bundles of subprime-mortgage backed securities on margin.

Among the biggest perpetrators of the latest financial crisis remain two “zombie banks” — BofA and Citigroup. I call them zombie banks because if they were to adjust the value of their bad loans to their true current value, those banks would end up with a negative net worth.

BofA has $222 billion in shareholders’ equity and nearly $2 trillion in so-called Level 2 and Level 3 assets — for which there is no way to value them in the market. That $2 trillion includes $1.4 trillion in�so-called derivatives that Warren Buffett called financial weapons�of mass destruction.

Since�BofA’s financial statements do not reflect the real-time value of�those Level 2 and Level 3 assets, it is possible to think about scenarios�of�what they’re really worth. And in one such scenario, a mere�11% drop in their value — $222 billion divided by $2 trillion — would�wipe out�BofA’s net worth.

Surprisingly, not all banks are walking dead. BB&T, a North Carolina commercial bank with offices in 13 states and the District of Columbia, is doing well and it’s stock is cheap.

The $15 billion market capitalization BB&T had $6.9 billion in sales and earned a nice 11.3% net profit margin. And it is screamingly cheap — trading at a price/earnings-to-growth ratio of 0.43 (1.0 is considered fairly valued) on a P/E of 16.3 and earnings forecast to grow 38% to $2.42 in 2012 (after 51% EPS growth expected for 2011).

Citigroup has $176 billion in net worth, but it has mysteriously avoided�reporting for those Level 2 and Level 3 assets. To be fair, Citigroup is not as bad off as it used to be. It reported $3.3 billion in net income, up 24% from the year before. But the bad news is that its revenues are down 7% thanks to slower growth in many of its businesses. And it still has a $53 billion so-called Special Asset Pool that contains much of Citigroup�s toxic financial waste.

BB&T stuck to the traditional banking business and does it well. Most investors are too gloomy to notice this booming bank whose stock is selling at a discount.

Peter Cohan owns Citigroup shares and has no financial interest in the other securities mentioned.