NEW YORK (CNN/Money) - Citigroup and J.P. Morgan Chase were able to shrug off worries earlier this year about how Enron's bankruptcy would impact their earnings. But that issue has been replaced with a more serious question: Did Citigroup and J.P. Morgan Chase help Enron commit fraud?

A congressional investigator testified on Tuesday that the two banks helped Enron hide debt. These allegations were just the latest bit of bad news for the beleaguered banking sector. Banks, a beacon of hope in the first half of the year thanks to continued signs of an improving economy, have been decimated in July due to overall market fears and concerns about another high profile bankruptcy: Worldcom. The Philadelphia Bank Index has plunged nearly 20 percent this month.

However, bank stocks surged on Wednesday after J.P. Morgan Chase executives told investors that the bank did nothing wrong and that they were buying shares on Wednesday. The group may have also benefited from an upgrade of Citigroup, curiously by J.P. Morgan Chase (kind of makes you want to hum "With a Little Help from My Friends," now doesn't it?)

Regardless of what happens to these two big banks though, it's hard to come up with good reasons to validate a sector-wide dumping. Second quarter earnings for regional banks were, for the most part, solid. Most banks did not have any major credit-related problems. And one positive side effect of the market's woes was a healthy level of deposit growth. (For more about second quarter earnings, click here.)

Steve Rayner, co-manager of the ING Financial Services fund, says the market's prolonged slide will probably lead to robust deposit growth in the third quarter as well. "What are people doing with all the money they're getting from selling stocks?" he asks.

Bank bargains Several banks are trading near, and in some cases below, their growth rates. Company  P/E*  Long-Term EPS Gr. Rate  Astoria Financial  8.6  10%  Charter One Financial  10.5  12%  Hibernia  10.4  9%  National City  10.1  8%  New York Community Bancorp  10.4  15%  Zions Bancorp  10.9  13%   * As of July 24 and based on 2003 EPS estimates  Sources: FirstCall, CNN/Money

David Ellison, manager of the FBR Financial Services and FBR Small Cap Financial funds, says that the big wild card for bank stocks now is the consumer. As long as the market's slump doesn't cause a big slowdown in consumer spending, fundamentals for banks probably won't deteriorate, even if there are more corporate loan problems. "Financials generally are consumer stocks," Ellison says.

And concerns about possible wrongdoing regarding Enron and other big corporate clients affect only a handful of large banks. "Most of the problems people have with the larger diversified financials don't apply to the regional banks and smaller banks," says Rayner, adding that bank stocks are probably the least likely to have major accounting problems because they are more closely scrutinized by government agencies such as the Federal Reserve and Office of the Comptroller of the Currency. "There shouldn't be any litigation-type risk for regional banks. The sell-off is way overdone," he says.

With all this in mind, managers say the recent sell-off has actually created some compelling bargains in the banking sector.

In fact, a group of nineteen large-cap regional banks tracked by Zacks Investment Research now trade at an average multiple of less than 10 times 2003 earnings estimates even though earnings are expected to increase at a rate of 10.5 percent annually over the next three to five years.

Of course, selectivity is still key in this market. Ellison says even though stocks like Citigroup and J.P. Morgan Chase appear to be cheap, he favors smaller banks with less moving parts. "I tend to avoid companies with eight or ten businesses and balance sheets that have sixty lines to it. It's too complicated," he says. Some examples of stocks he owns that he finds to be safer than the big banks include savings and loans Astoria Financial and Charter One as well as regional banks Hibernia and National City. He does not own Citigroup or J.P. Morgan Chase.

Chris Perry, manager of the Turner Future Financial Services fund, says that two banks that look attractive now are New York Community Bancorp and Zions Bancorp. Both banks trade at about 10 times 2003 earnings estimates.

Perry also thinks that two larger banks trading at higher valuations -- Fifth Third and Wells Fargo -- have been oversold lately. Despite strong earnings growth for both companies, Fifth Third's stock has fallen 12 percent in July and shares of Wells Fargo are down 15 percent.

Although the stocks are pricier than the average bank -- Wells trades at 12 times 2003 earnings estimates and Fifth Third at a multiple of 19 -- they both have better-than-average growth prospects as well. Analysts expect earnings to increase at a 12 percent clip for Wells Fargo over the next three to five years and at a 14 percent rate for Fifth Third. And neither company has much credit exposure to large corporate clients. Perry also does not own J.P. Morgan or Chase.