Banking has not exactly been a great investment — especially since September 2008, when Lehman Brothers kicked the bucket. In 2011, bank stocks have declined an average of 27%. As rumors of 100,000 Wall Street layoffs surface, Wells Fargo (NYSE:WFC) — it’s trying out a $3-per-month debit-card fee to boost revenue — and Citigroup (NYSE:C) reported earnings for the third quarter Monday.

Prior to their scheduled reporting time of 8 a.m. Monday, the two banks were expected to report double-digit earnings growth compared to the year before thanks largely to lower charges for bad loans. Analysts expected Wells Fargo to report an 18% rise in net income to $3.9 billion, while analysts saw Citigroup as poised to report a 15% rise to $2.5 billion, according to Bloomberg.

In fact, both banks reported better-than-expected numbers. Thanks to improvements in its lending and deposit division and its absence from the volatile investment banking business, Wells Fargo earned a $4.1 billion profit in the third quarter, beating expectations by $200 million. However, its earnings per share of 72 cents fell slightly below analysts’ estimates, according to DealBook.

Citigroup also beat expectations. Its 74% rise in net income, to $3.8 billion, was much better than expected. Moreover, its $1.23 EPS for the third quarter was 36% higher than analysts’ estimates of 81 cents per share, according to DealBook. But there might be less here than meets the eye. After all, about a third of Citigroup’s pre-tax operating profit came from a $2 billion paper gain that weirdly reflects “a sharp increase in the perceived riskiness of its debt.” And that gain helped offset weak trading results and big mortgage losses.

These numbers reflect the benefits to the banks of combining so-called commercial and investment banking. Commercial banking is the business of taking insured deposits and lending them to businesses and consumers. Investment banking uses overnight loans from other banks to finance corporate issuance of debt and equity and pay advisers who help companies with mergers.

In 2011, the investment banking business — Citigroup is a big player here — has been relatively quiet thanks to turbulence in the financial markets. By contrast, commercial banking has been growing, albeit slowly. For example, International Strategy & Investment Group reported that in the third quarter, loan growth inched up 1.2% among the top 25 U.S. banks because of an increase in commercial and residential loans, while the deposits to fuel those loans climbed 6.8%.

Does this mean that you should avoid Citigroup and invest in Wells Fargo stock instead?

• Wells Fargo: Shrinking, but still fairly profitable; very cheap stock. Revenues for Wells Fargo have dropped 6.2% in the past 12 months to $51 billion, while net income has jumped 46% to $13.7 billion — earning a solid 17.8% net profit margin. In addition, WFC’s price/earnings-to-growth ratio of 0.58 (where a PEG ratio of 1.0 is considered fairly priced) is very cheap on a P/E of 10.34 and earnings expected to grow 17.8% to $3.30 in 2012.
• Citigroup: Decent growth, profitable, and a cheap stock to boot. Citigroup’s revenues are up 3.8% in the past 12 months to $74.9 billion, while net income jumped 220% to $9.8 billion — yielding a net profit margin of 13%. Its PEG ratio is a very cheap 0.43 on a P/E of 8.79 and earnings expected to grow 20.4% to $4.61 in 2012.

Banking stocks are widely hated by investors. But if these earnings forecasts prove accurate, both stocks look like bargains. I’d favor Wells Fargo over Citigroup because I am not optimistic about a recovery in investment banking. But if you see such a recovery around the corner, both stocks look good.

Peter Cohan holds stock in WFC and C.