No sector has gotten as much bad press over the past three years than the banking industry.  Financial institutions have received billions in bailouts, contended with massive defaults in mortgages, cried about the new regulations and capital requirements from Congress.   Most recently their faults documentation created "Foreclosuregate" which has been the most recent cause for bank bashing.  An index that measures the performance of companies in the financial sector has a three-year annualized return of -17%.  Even with all of the bad news, it may be time to consider investing in the sector.

Reasons the financial sector may be attractive:

1.       Business is starting to rebound - banks are seeing some signs of loan growth and some financial companies are considering raising dividends.  Mortgage write-offs are stabilizing and the foreclosure process is starting to resume.  Bank executives have been quoted as saying they expect to increase the number of loans they make in 2011.

2.       Rising interest rates - over the past couple of weeks, long term interest rates have started to rise.  The Federal Reserve, who controls the short term rates, reiterated its intention to keep interest rates close to zero for the foreseeable future.  Low, short term rates and high, long term rates are good for banks because they can now borrow short-term at rock-bottom costs and lend longer-term at higher rates.

3.       Buy low, sell high - timing the market is a tough game to play, but financial stocks have been beaten up disproportionally over the past two years and in some valuations can make them look cheap.

What bank stocks to buy?  See below some recommendations:

Can't decide what bank to invest in?  One option is to purchase a financial sector exchange traded fund, which is a low-cost diversified way to gain exposure to the entire sector.

However, for those who prefer individual stocks, I would look into some of the big names.  Bank of America and Citigroup, as value plays, would fall into the "Buy Low" reason above.  Bank of America was trading for $20/share in April.  It now trades for $12/share.  One of the reasons for the drop is because they are rumored to be the subject of an upcoming WikiLeaks report. 

You could also look at some of the bellwethers like JP Morgan and Wells Fargo.  These are two banks that because of their strength were able to acquire assets on the cheap during the recent financial crisis.  The assets that they acquired should start paying dividends for investors as soon as the 1st quarter of 2011.

If you decide to venture into this area, please do so with caution.  There is risk associated with these stocks and there is always the chance that they can go even lower.