Two years after the collapse of Lehman Brothers Holdings Inc., investors still are unwilling to pay more than liquidation value for banks in developed nations.

The KBW Bank Index trades at 95% of book value, a level never seen before 2008, while stocks of lenders in Europe and Japan are also lower than their assets minus liabilities. Financial firms in the Standard & Poor's 500 Index have risen 6% this quarter before Monday, the smallest gain for any industry and about half the return for the gauge of American equity.

Bears say the combination of slowing economic growth, the weak U.S. housing market and increasing regulation mean bank profits will be limited and bad loans may increase. To DuPont Capital Management Corp. and Security Global Investors, low valuations, the fastest projected profit growth of any industry in the S&P 500 and the first decline in loss reserves since 2006 show that banks are too enticing to ignore.

"I don't know that trading results will be great, and I don't know that lending results will be great, but it's not going to matter because credit is improving fast enough that banks are going to look good and their book value's going to grow," said Mark Bronzo, an Irvington, N.Y., fund manager at Security Global Investors, which oversees $21 billion. "The sector's going to do well."

Declines averaging more than 50% since 2007 have left bank indexes below book value, data compiled by Bloomberg shows. The KBW gauge closed last week with a multiple of 0.95, less than half its average of 1.95 since 1993.

"Investors are still scared right now, scared that if you go into a double-dip or deflation then maybe the credit quality will worsen and that won't be good for banks," said Rafi Zaman, who helps oversee about $22.5 billion as the managing director of global equities at DuPont Capital Management in Wilmington, Del. "But if we're going to a slow-growth recovery, which is what our view is, then these banks should be a decent place to be invested."

Financial companies are trading at a discount to historic valuations even as credit markets recover from the crisis that helped to spur $1.8 trillion of global bank losses. Defaults on corporate bonds and loans in August decreased to a 20-month low of 5.1% in the United States, according to Moody's Investors Service.

At the same time credit markets are improving, banks are not lending. They pared commercial and industrial loans to $1.24 trillion in the week ended Sept. 8, 11.3% lower than a year earlier, Federal Reserve data shows.

Provisions for loan losses at American lenders fell 40.5%, to $40.3 billion, in the second quarter from a year earlier, marking the first reduction in four years. Foreclosures as a percentage of total loans fell last quarter after four years of advances, according to data released by the Mortgage Bankers Association on Aug. 26.

Most investors are avoiding banks. Money managers overseeing a combined $579 billion listed them as the biggest "underweight" among 11 industries in a Bank of America Corp. survey last week. Financials were the only group deemed both "undervalued" and rated "underweight" in the poll.

Fifth Third Bancorp, Ohio's largest lender by deposits, posted its first profit in a year last quarter, and analysts estimate earnings will more than double this year, and then triple in 2011. Fifth Third trades for 97% of book value, data compiled by Bloomberg shows.

"As we see continued improvement even at the margin, that should help rebuild confidence and ultimately close the gap between the price and the value," said Mary Chris Gay, a fund manager at Legg Mason Inc. in Baltimore, which oversees $645 billion. "Groups that do lead the market are historically very cheap at the low point of the cycle."

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