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.
Our top pick to play this is BOK Financial (BOKF); its shares have risen a bit since worries peaked in January but are still trading at a 6% discount to our fair value estimate. We also like Fifth Third (FITB), which is trading at a larger 10% discount.
Finally, for investors more willing to roll the dice, we think that worries about Barclays' (BCS) exposure to energy are significantly overdone, and the firm is trading at a 20% discount. But we see Barclays as materially riskier than the other two, as it has deep regulatory problems and is undergoing a large shift in its business model.