It’s going to be a tough year for Canada’s Big Six banks.

The sharp decline in the price of oil has already led to significant reductions in capital spending plans in the exploration and production space, and that will likely lead to a slowdown in western Canada.

It remains an open question to what degree—if at all—a corresponding decline in the value of the Canadian dollar versus the U.S. dollar will help stimulate the Great White North’s manufacturing export sector and mitigate the impact of crude’s collapse.

The energy headwind has already inspired a sharp sell-off in Big Six stocks over the past few months.

If you take a long view, it’s a good time to capitalize on the fear of a slowdown in earnings growth that’s likely to be short-lived by taking advantage of valuations that are compelling in a historical context.

Black January

January 2015 was the worst start to the year for Canadian bank stocks in 25 years, as the Standard & Poor’s/Toronto Stock Exchange Commercial Bank Index shed 9.1%. It’s the weakest January since 1990’s 12% slide.

It coincided with a further 9% deterioration in the benchmark crude oil futures contract, which is now off 55% since June 20, 2014.

Bank losses accelerated in the aftermath of a surprise interest rate cut by the Bank of Canada (BoC). 

Canadian banks are already coping with slowing consumer loan growth. The BoC’s move suggests key policymakers are more concerned about economic growth than they’d previously let on.

Indeed, the BoC ended its longest period of inaction on interest rates since the 1950s with a cut it described as “insurance” against a weakening energy patch, noting that the downside oil shock is “unambiguously negative” for the Canadian economy.

E&Ps have already cut jobs and postponed projects, and there are signs Alberta’s housing market is cooling, rapidly. The BoC is also focused on emerging risks such as weak inflation.

About a week after the BoC trimmed its benchmark by 25 basis points to 0.75% the Big Six cut their prime lending rates by 15 basis points to 2.85%.

Net interest margins—the difference between what banks pay to borrow and what they earn on loans—will compress a little bit further.

The major threat, however, is from slowing economic growth and consumer borrowing. According to BoC data, year-over-year mortgage growth in 2014 was about half the pace of eight years ago.

The Big Six are responding with moves to reduce costs.

In late January Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) announced it will cut approximately 500 jobs, or about 1% of its staff.

And CE Portfolio Conservative Holding Bank of Nova Scotia (TSX: BNS, NYSE: BNS), still our top pick among the Big Six, announced late last year that it would reduce its workforce by 1,500, the biggest move by any Canadian bank in 10 years.

The S&P/TSX Commercial Bank Index, which includes the components of the table “Big Six Beatdown” plus Canadian Western Bank (TSX: CWB, OTC: CBWBF) and Laurentian Bank of Canada (TSX: LB, OTC: LRCDF), tumbled 13% from its post-Great Financial Crisis high on Sept. 18, 2014, before rebounding along with a strong rally for crude in the first days of February.

From that 2014 peak Canada’s banks are now off 7%, reflecting the market’s concern about a rough year ahead.

Note too that short interest in the Big Six will likely ramp up as speculators place downside bets against Canada, as they did in early 2013 on the expectation that Canada’s housing market would suffer an implosion akin to the one in 2007–09 in the U.S.

That trade proved a big flop, No. 1 because Canadian housing has sustained its steady upward trend. And No. 2, such a disaster is unlikely due to major differences in the Canadian mortgage regime versus the U.S.

For instance, lending requirements have been and remain much tighter. Down payments in Canada average more than 20%, and there was and is no major “subprime” market.

That’s not to say home prices can’t come down. They can and probably will, or growth in same will at least slow.

But Canadians on average have much more equity in their homes than Americans. And a government backstop in the form of mortgage insurance provided by the Canada Mortgage and Housing Corp limits the scope of losses for Canada’s banks.

Value Trap vs. Long-Term Treat

The extent to which investors have soured on the Canadian banks in recent months is startling.

Since the fateful OPEC meeting on Nov. 27, 2014, during which the cartel elected to leave its production quota unchanged, the S&P/TSX Energy Index has actually climbed by 0.7%. But the S&P/TSX Commercial Bank Index has shed 7% of its value.

Although the banks’ exposure to the struggling oil and gas sector averages just 2% of total loans, the energy downturn will weigh on the economy in western Canada and put the brakes to revenue growth from capital markets activities.

At the same time, analysts expect earnings and revenue for the group will grow by 3% to 5% during fiscal 2015, supported by domestic retail and commercial lending businesses.

There are challenges on the consumer side, as personal debt has increased to keep pace with home price growth. And though a hard landing for consumer spending or the housing market is unlikely, bank earnings will likely be clipped a bit.

Commercial and industrial loan growth, meanwhile, is expected to remain relatively strong.

The Big Six boast solid capital ratios, and their balance sheet liquidity and funding remain strong.

Negative sentiment around this sector is overdone, and renewed fears about Canadian housing are misplaced. Although growth is likely to be slower for banks, the sector remains near peak operating efficiency and now offers compelling relative value.

Our preference for Scotiabank is based on the fact that it’s the “most international” of the Big Six, with the greatest share of revenue and earnings derived from overseas markets.

The Conservative Holding has significant exposure to the Caribbean, Latin America and Southeast Asia, which hasn’t necessarily been an advantage in recent months due to weakness afflicting emerging market economies.

Scotiabank’s domestic franchise is a solid foundation for its international ambitions, which we believe will be rewarded with outsized growth as middle class consumers in emerging markets continue to develop.

Bank of Nova Scotia is a buy under $69.

I’ve upgraded Royal Bank of Canada (TSX: RY, NYSE: RY) in the aftermath of its deal to buy Los Angeles-based City National Corp for $5.4 billion, the largest U.S. bank acquisition in more than three years.

Royal Bank is now a buy under $65.

Toronto-Dominon Bank (TSX: TD, NYSE: TD) now operates a bigger branch network in the U.S. than in Canada. It’s also leveraging its footprint in the U.S. Northeast to snag a bigger share of the wealth-management market.

TD Bank is a buy under $48.