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ROB Insight has gone to great lengths to show that European financial upheaval has a larger effect on Canadian banks stocks than most investors suppose. But in the case of the Cyprus bank bailout, the aftermath is more likely to create an attractive buying opportunity than reason to reduce bank holdings.
The proposed haircut for Cypriot bank depositors increases the risk of bank runs for the far larger financial institutions of Italy and Spain, as savers look to avoid an added tax. However, EU leadership is well aware that while a bank run in Cyprus may be inconvenient for the country's citizens and a number of dodgy Russian oligarchs, the economic effects on the euro zone would be minimal. A bank run in Italy, on the other hand, would be disastrous and threaten the viability of the entire currency union. Any signs of depositor skittishness in Italy will likely be met with another "whatever it takes" pledge by ECB president Mario Draghi.
Canadian bank investors will have to stomach some stock price volatility in the short term as the ham-handed eurocrats look to assuage market fear. Another financial crisis on the scale of 2008, however, remains unlikely – at least for now.
Investors, particularly those with underweight positions in the domestic banks, should look for an opportunity to pounce in the weeks ahead. With solvency risk for the domestic banks at roughly zero per cent and the ECB standing by to protect Italian and Spanish banks, a sharp sell-off in Canadian bank stocks is likely to create a profitable entry point.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow