Our obsession with awards in this country rivals ancient Rome's obsession with violent sports. In the interest of capitulating to this shallow obsession, rather than rising above it, I'm going to establish an award for the very worst bank stock. The nominees will be determined based on four undesirable categories: lingering losses, damage from losses, future earnings, and price.

Lingering losses
There has been much debate about whether we are through the worst of the credit crunch. Meredith Whitney, Oppenheimer analyst and revealer of all future truths, said last month that "the real harrowing days of the credit crisis are still in front of us." Morgan Stanley (NYSE: MS) analysts said a few months ago that we are in only the third inning of the crisis. Even among the more optimistic prognosticators, few believe that large write-offs for the major banks have ended.

Which banks will continue to write off large sums in the next several quarters? The most likely suspects are the banks that have already revealed the greatest subprime exposure. The leaders in this category are Citigroup (NYSE: C), UBS (NYSE: UBS), and Merrill Lynch (NYSE: MER). Recent writedowns for these banks were $34 billion, $37 billion, and $18 billion, respectively.

Ability to manage more losses
The banks least able to handle further losses are those that have already stretched their capital cushions using less painful methods of replenishing capital, such as stopping stock repurchases and borrowing money to be paid back in better times. These banks will be forced to raise capital by issuing common stock that will dilute shareholdings, cutting dividends, and hoarding cash that can no longer be used for revenue-generating activities.

Although this category has many worthy contenders, nobody can hold a candle to Citigroup. The bank has raised $40 billion in capital over the last few months, diluting shareholders in the process. Plus, it already cut its dividend 41%.

Future earnings
Many large banks that earned huge profits during the boom years did so with excessive leverage. As banks delever their balance sheets to shore up their capital positions, they cut back on revenue-generating activities. Also, large U.S. banks such as JPMorgan Chase (NYSE: JPM), Citigroup, and Bank of America (NYSE: BAC) had generated much of their earnings during the boom times through noninterest income -- income generated from fees rather than profits on loans. Much of the revenue associated with mortgage fees and the repackaging of loans won't return for several years.

Price
Large U.S. banks are cheap now to be sure. In fact, many are selling at or below book value. The large U.S. banks selling more than slightly above book value include Goldman Sachs (NYSE: GS), Morgan Stanley, UBS, and Merrill. Goldman deserves the higher valuation because it's still actually making good money, with a high return on equity. Merrill and Morgan Stanley are selling at higher valuations with little justification.However, they still sell at less than 1.5 times book. UBS, on the other hand, is selling at around three times book value, a high price for one of the most notorious subprime overindulgers. UBS wins!

And the winner is …
Given the criteria, I believe the top three finalists for "worst bank stock" are Merrill, UBS, and Citigroup. While Merrill is indeed overpriced and highly undesirable at this point, it does have deep pockets. It should be able to endure losses and come back strong. UBS, in this Fool's opinion, is way overpriced, with more writedown trouble and possible restructuring ahead. However, its tremendous international banking presence in a booming world economy will enable it to return to profitability before too long.

That leaves Citigroup as the overall winner -- or loser, depending how you look at it. Although Citigroup is selling at a relatively reasonable price, its outstanding performance in the first three categories, combined with its restructuring issues beyond the subprime crisis, puts it over the top. It should be a long, painful wait for this stock to come back. Congratulations, Citi!

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