Banks Left Behind in Dow’s Record Rally

As the Dow rallies past its 2007 highs and hits its all-time record, there's one sector that's nowhere near its glory days: Financials.

Big U.S. banks were driven near extinction in the 2008 crisis, and the stocks remain badly bruised. Even the giant rallies financials stocks saw throughout 2012 did little to edge the sector close to where it peaked, some nine months before the benchmark indexes would reach all-time highs on Oct. 9, 2007.

Since then, the steep levels of capital on hand mandated by regulators has pinched banks' return on equity, and only one of the country's largest five banks has seen anything resemble a market recovery.

Scott Eelis | Bloomberg | Getty Images

The most battered of the big banks: Citigroup. Shares of the nation's third-largest bank by assets were so troubled that, in March 2011, the bank executed a 1-for-10 reverse stock split — a drastic measure to restore investor confidence. Even as Citigroup slashed costs, shed non-core assets, cleaned up its opaque balance sheet and replaced its chief executive, the stock is off roughly 91 percent from its 2007 highs.

(Read More: Bailout Alums, Five Years Later)

Then there's Bank of America. A spate of mortgage settlements throughout the last year started chipping away at crisis-era litigation risk, lifting a big, longstanding overhang on BAC's share price. The bank is halfway through its massive restructuring initiative, dubbed "New BAC," which is expected to increase the bank's profitability. Those two factors helped Bank of America's stock rally roughly 50 percent over the last year to $11.62 — still around 75 percent below its peak trading level in 2007.

(Read More: Making Sense of Bank of America Earnings...Good Luck!)

A dearth of merger and underwriting activity has kept investment banks Morgan Stanley and Goldman Sachs far from the 2007 highs as well. The two banks are down around 60 and 30 percent, respectively, from the last time the Dow crossed 14,000.

San Francisco-based Wells Fargo, the nation's largest mortgage provider and arguably one of the most conservative banks where risk-taking is concerned, is teetering near its break-even mark of $35.95.

(Read More: Economic Optimism Growing on Wall Street - CNBC Survey)

Only JPMorgan has managed to squeak by with any post-peak gains. The U.S.'s largest bank by assets got even bigger since the 2007 highs by coming to the rescue of two severely troubled competitors: In March 2008, it scooped up brokerage Bear Stearns for less than the price of Bear's New York City headquarters, and later that year, it bought Seattle-based lender Washington Mutual out of bankruptcy. Shares fell in mid-2012 amid the "London Whale" trading blunder, but have rallied roughly 50 percent since and is currently trading at multi-year highs.

One promising sign is the increasingly bullish stance that analysts and stock-pickers alike have taken on the financials sector going into the current rally. For the banks, it helps to have the world's third-richest man in your corner: Warren Buffett has famously stood by the banks, and currently holds warrants in Bank of America and Goldman Sachs, as well as a common equity stake in Wells Fargo that seems to keep growing.

(Read More: Economic Optimism Growing on Wall Street)

As Buffett wrote to shareholders at the beginning of 2012: "The banking industry is back on its feet."

Its stocks are just far from the high-flying, high-leverage days of yore.

(Read More: How We Got Here, Where We're Going)

By CNBC's Kayla Tausche; Follow her on Twitter: @KaylaTausche
—By CNBC's Jesse Bergman: Follow him on Twitter: @JBergmanCNBC