As bank stocks continue to trade at record levels, investors and more than a few analysts have grown increasingly anxious about their future.

Bank stocks, argue some critics, have little upside and have grown too expensive. The Standard & Poor's bank index is ahead by an amazing 30% this year, and some of the industry's biggest proponents have quietly tempered their optimism about the stocks.

Others, however, continue to argue that banks - though pricey on a historical basis - remain bargains relative to other stocks.

There is no question that bank stocks are expensive, said veteran analyst Carole S. Berger at Salomon Brothers Inc.

In a recent report, she pointed out that bank "price-to-earning ratios are at the top end of their historic range, price-to-book values are at record levels, and our (statistical) regression model suggests that the group is well ahead of fundamentals."

"So there is no way bank stocks look cheap," said Ms. Berger. "However, I am not a seller."

One economic indicator working in favor of banks is high real liquidity growth, argued Ms. Berger.

Ms. Berger said real liquidity growth - or the increase in the money supply by the Federal Reserve - is the highest this decade.

"Every time this indicator turns negative, it is our signal to exit the banks," she said. "Negative liquidity growth is coincident with the onset of a credit cycle."

Anthony R. Davis, bank analyst at SBC Dillon Read & Co., argues that banks have many "levers that they can pull on" to determine their earnings and profitability.

In fact, there are five major long-term trends working in their favor: consolidation, demographics, deregulation, technology, and an accommodating macroeconomic environment, said the analyst.

Bank stocks are expensive when evaluating them from a traditional point of view, acknowledged Mr. Davis. "But this is not your father's banking industry. And I say that because of those five long-term trends."

Banks have also been more profitable than ever , pointed out Mr. Davis.

Equity to capital is at the highest level, efficiency ratios are at the lowest, and return on assets and equity are at record highs, he said. Fees as a percent of revenues and loan-loss reserves are also at record levels, he added.

"The banks of today are not the banks of yesterday," said Mr. Davis. "This is not your father's banking industry."

Bank analyst Anthony J. Polini of Advest Inc. said he would rather look at the industry as a "glass that is 85% full."

Nevertheless, the "not so positive side" of the banking industry is that net interest margins will likely come down and credit quality will probably continue to crumble, he said.

Mr. Polini also argued there are more than a few "bankers sitting on their hands while their stock price is being lifted by speculation" and favorable economic conditions.

And the analyst argued that bank stocks are not overpriced.

"On a relative basis, banks still continue to trade at a discount to the S&P 500," said Mr. Polini. "You just can't analyze their stock price in a void."

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