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Company Tangible BV per share (3/31/11) Share Price (6/22/11) Discount to Tangible BV (%)
Bank of America (NYSE:BAC) 14.55 10.79 25.8%
Citigroup (NYSE:C) 47.05 39.51 16.0%
Morgan Stanley (NYSE:MS) 29.74 22.60 24.0%

Tangible book value is a company's net assets minus goodwill and intangibles. It is referred to by many as the company's liquidation value. Buying a stock below liquidation value can provide what famed value investor Benjamin Graham called a "margin of safety.

Some value investors have been picking up bank shares only to have them decline further and detract from their performance. In fact BAC, C and MS have underperformed the S&P 500 Index over the past 52 weeks with BAC leading the pack down a whopping 30.7% (see chart below). Of the three banks, BAC has the lowest Tier 1 common equity ratio of 8.60% for the year ended December 31, 2010. Tier 1 common equity ratio measures a bank's financial strength by comparing a bank's core equity capital with its total risk-weighted assets. Risk-weighted assets include all assets that the bank holds that are systematically weighted for credit risk. Central banks typically develop the weighting scale for different asset classes, such as cash and coins, which have zero risk, versus a letter or credit, which carries more risk. The risk-weighted assets essentially measure the firm's assets in terms of risk, typically in terms of 0%, 20%, 50% or 100%.

(Click to enlarge)

Investors with a less draconian outlook on housing, bank capital requirements and Greek debt default should consider these three banks while they trade below their respective tangible book values.

Conservative investors looking to avoid company-specific risks may want to consider the Financial Select Sector SPDR ETF (NYSEARCA:XLF) and/or the SPDR KBW Bank ETF (NYSEARCA:KBE). XLF's objective is to replicate the performance of the Financial Select Sector Index (index ticker: IXM) before expenses and KBE's objective is to replicate the performance of the KBW Bank Index before expenses.

ETF BAC Weighting C Weighting MS Weighting
XLF 6.13% 6.42% 1.96%
KBE 6.17% 6.76% 0.00%

The large discounts from tangible book values can be attributed to the double-dip in housing (see chart below), regulatory uncertainty requiring additional capital for systemically important financial institutions (SIFI) and contagion risks from a Greek sovereign debt default. It is estimated that home prices can fall another 10% - 25%, capital requirements for SIFI can increase as high as 14% and 27% of U.S. banks hold Greek debt!

Case-Shiller Home Prices
(Click to enlarge)

Disclosure: I am long XLF.