Morgan Stanley (NYSE:MS), in its most recent report on the valuations of large and mid cap banks released last week, analyzes the sector using several different metrics. Those metrics are used in an attempt to discover the banks which are most undervalued by the market.

The analysis finds that mid cap banks outperformed larger banks last week, mid cap movers brought an aggregate 1.9% return, while the more valuable institutions lost 0.1% of their value as a whole last week. The S&P 500 lost 0.2% in trading ending last Friday.

The move in mid caps seems mostly due to the recent merger between Hudson City Bancorp Inc. (NASDAQ:HCBK), and M&T Banking Corporation (NYSE:MTB). That deal was announced last Monday and precipitated a jump of 12.4% in the stock of Hudson City Bancorp Inc. (NASDAQ:HCBK).

Despite the waves caused by that merger, the analysts at Morgan Stanley (NYSE:MS) do not see it as a turning point in the current lull in the Mergers and Acquisitions cycle. The deal was the largest so far in 2012, but, according to the analysts, does little to add to the value of the stock in the near term.

The risk factors most prevalent in the industry are growing borrower caution, which might lead to less borrowing in the market and compress margins. A second slowdown is expected from manoeuvres associated with implementing the capital restrictions that will come into play with the Basel III asset weightings. Those rules will force banks to sit on capital rather than deploying it.

Among the large cap banks BB&T Corporation, (NYSE:BBT) outperformed during the week with a bump of 1.9%. BB&T Corporation, (NYSE:BBT) gained from apprehension about the conclusion of the Federal Reserve’s Jackson Hole conference, which closed on Saturday. With comparably steady earnings and low Net Interest Margin compression, that firm formed an ideal holding spot for some investor’s capital.

On the opposite side of the field, Bank of America Corp. (NYSE:BAC) performed poorly last week, losing 2.9%. This was brought on by a 5 point drop in the consumer confidence index. Despite the drop Morgan Stanley is still equal weight on the stock. Bank of America Corp. (NYSE:BAC) appears, at least to the analysts, to be a good longer term investment.

Using a ratio of Price over Q2 2012 Tangible Book Value to the Return on Total Assets expected in 2013, Bank of America Corp. (NYSE:BAC)appears to be one of the most undervalued financial institutions at the moment, along with Citigroup Inc. (NYSE:C).

By the same measure the cheapest mid cap banks are Popular Inc. (NASDA:BPOP), KeyCorp (NYSE:KEY), and Washington Federal Inc. (NASDAQ:WAFD).

Using a second measure, that of Price over second quarter tangible book value to 2013 Return on Equity less Cost of Equity, Citigroup and Bank of America pop up again as the least expensive. This time however, they are joined by JPMorgan Chase & Co. (NYSE:JPM).

Using that measure the cheapest stocks in the mid cap range are Popular,  M&T Banking Corporation (NYSE:MTB), and Hancock Holding Company (NASDA:HBHC).

One of the most interesting measures of bank value revealed in the report, as always, is Morgan Stanley’s proprietary “What’s in the Price” measure. According to this framework JPMorgan Chase & Co. (NYSE:JPM) is one of the most valuable banks to hold in the longer term.

The measure also suggests that after 2014, 48% of Morgan Stanley’s North American coverage is pricing in negative earning. That measure, though a long term forecast, should be followed through these reports as an indication of where banks are going in the longer term.

The biggest take away from this report is the low valuation placed on some of America’s largest banks. JPMorgan Chase & Co. (NYSE:JPM) still doesn’t seem to have recovered from its London Whale slump, and Bank of America does not seem to have yet recovered from 2011.

Whether these valuations suggest a continuing lack of confidence in the American banking system, a belief that things are changing in some significant way in the future, or represent an aberration, it is clear that some kind of apprehension about the future is plaguing the banking system.