One day, Wall Street worries that a Greek debt default will drag the global economy off a cliff. The next, another European Union bailout will save the day.

What are we to make of this dizzying European tennis game? Frankly, I think it might be wise to take your eye off the bouncing ball for a while and focus on what’s happening here at home.

In early March 2009, Citigroup (NYSE: C) came out with a “less bad” earnings bulletin than Wall Street expected, triggering one of the most sweeping and powerful short-covering rallies in stock market history.

A smaller version could take hold this summer as the European Union stitches together yet another bailout for Greece. Just days ago, all it took was a hint of a resolution to the Greek debt crisis — and the short sellers ran for cover.

This time, again, American banks are set to lead the way. According to the BIS, U.S. banks have only about $32.7 billion of exposure to Greek debt. Moreover, analyst Glenn Schorr of Nomura thinks the total might even be a lot lower, after hedges are taken into account. Just wait till that news gets around!

Finding Banks You Can Trust

Yes, bankers are wearing a lot of egg on their faces. First came the housing bust, which ravaged bank profits and drove some of America’s largest financial institutions to the brink of insolvency. Massive dividend cuts followed, together with steep share-price declines.

The worst of the storm passed in March 2009. For a time, bank stocks rallied sharply, giving investors a renewed sense of hope. Since last April, however, bank shares have lagged the market indexes. As we speak, the KBW bank index is languishing at about 20% below its 2010 peak.

What’s ailing bank stocks? The worries are manifold. Here’s a sampling:

• The U.S. economic recovery is proceeding slowly and haltingly, keeping the industry’s loan losses unusually high.
• New government regulations associated with the Dodd-Frank financial “reform” will cost banks dearly, perhaps $20 billion per year or more.
• Some of the industry’s big players have even managed to shoot themselves in the foot again by ramming foreclosures through the legal system without adequate paperwork.

If all this muck has you throwing up your hands in disgust, I understand. I certainly hold no brief for crooked or incompetent bankers. On the other hand, nearly four decades of investment experience has taught me that when an entire industry is as disliked as banking is now, there are bargains to be had.

Indeed, the beauty of a wipeout like the one we’ve seen in banking is that now you can buy the best-quality franchises for much less than it would have cost you to snag mediocre merchandise three or four years ago. But you’ve got to be selective.

To be honest, about 98% of the bank stocks out there don’t interest me at all. But let me tell you about a handful that do.

3 Best Banks to Buy Now

The first is a regional gem headquartered in Buffalo, N.Y. While other banks were plunging into subprime mortgages a few years back, First Niagara Financial Group (NASDAQ: FNFG) stuck to its credit standards. As an added precaution, CEO John Koelmel maintained huge amounts of excess capital on the bank’s balance sheet — a stance that paid off handsomely when the global financial crisis struck in 2008.

FNFG was in a perfect position to take advantage of the turmoil by gobbling up assets other banks were forced to sell. In 2009, First Niagara acquired Harleysville National, a Pennsylvania bank, as well as 57 western Pennsylvania branches of Cleveland’s National City Corp. Both transactions immediately boosted FNFG’s earnings per share.

More recently, in April, FNFG closed on a deal to take over NewAlliance Bancshares, a healthy Connecticut banking chain.

Result: FNFG has grown from $8 billion in assets to $30 billion in a little over three years while paying one-third to one-half the price (in terms of book value) managements gleefully paid during the heyday for bank takeovers in the late 1990s. First Niagara hasn’t compromised its strong credit quality, either. Nonperforming loans at March 31 equaled only 0.75% of the total loan portfolio versus 4.85% for all banks nationally.

Unlike many banks, too, FNFG has continued to pay its dividend at the full pre-crisis rate. Current yield: 4.7%. At 13 times estimated 2011 earnings, I figure the stock has room to generate a total return of 20% or more in the next 12 months.

For a contrarian play, I recommend buying one of the safest U.S. banks, J.P. Morgan Chase (NYSE: JPM). Analyst estimates for JPM’s 2011 and 2012 earnings have moved up nicely during the past 90 days, making the stock an excellent rebound candidate when the overall market turns. Thanks to the 20 cent-per-share dividend increase in March, JPM is now paying five times what it did last year for a respectable yield of 2.5%. Pay up to $47 for JPM. From here, I’m projecting a total return of 30% to 40% in the year ahead.

Bank of New York Mellon (NYSE: BK) is another of my favorites. In 2011, for the second year in a row, it was named safest bank in America by Global Finance Baxter International. The 44% dividend increase announced in March testifies its earnings recovery is now well-entrenched. Bank of New York is dishing out 52 cents per share annually (down from 96 cents before the cut in April 2009; up from 36 cents in 2010). That’s not as generous as I had hoped, but a second dividend hike is possible in late 2011 as the profit rebound continues. Assuming a roughly 30% payout ratio on this year’s estimated earnings, I reckon BK could lift its dividend to an annual rate of 70 cents.

Judging by the cautious note he sounded on the bank’s litigation exposure in BK’s first-quarter earnings call, I think CEO Bob Kelly is deliberately tamping down investor enthusiasm so he can deliver more than the consensus expects over the balance of the year. Certainly, there was nothing to suggest any deterioration in BK’s stellar fundamentals. Quite the contrary: BK is accumulating excess capital so fast that the bank plans to satisfy the upcoming Basel III capital standards a year early.

First Niagara is my pick for conservative investors who want a hearty dividend up front. If you’re more focused on capital gains, though, JPM or BK might serve you a rich banquet during the next six to 12 months. Either way, you’ll earn a good deal more than on a money market fund — and if the market interprets the dividend news the way I foresee, you’ll pocket some nifty appreciation, as well.

Richard Band is the editor of the Profitable Investing newsletter.