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Rare Discounts Among Bank Stocks

Investors have overreacted to the impact falling oil prices and turmoil in Russia will have on banks, says Morningstar's Erin Davis.

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Erin Davis: Investors have been concerned about the potential impacts of low oil prices and turmoil in Russia on banks, but we think their worries are overdone. We see the drop in share prices as an opportunity to buy shares in high-quality companies at rarely available discount prices.

We looked at the past for guidance as to how oil and Russia might affect banks and found the results reassuring. In particular, we looked at the oil glut of the 1980s and the lesser-developed country crisis of 1989, and we found that banks could face losses of about 5% on energy loans and 15% on Russian exposure if conditions don't improve. Even in this stressed scenario, the results weren't so bad for banks: Losses, on average, were just 1.7% of common equity.

Erin Davis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.