Like many investors, I’ve been in almost complete disbelief over the extraordinary sell off in global bank stocks recently.

In the last week, banks on both sides of the pond have sold off. U.S. banks such as Bank of America are down 27% this year, while Goldman Sachs is off 18%. And European banks have fared worse, with the Euro STOXX bank index plummeting 24%, despite a big rebound during the middle of the week, according to an Economist report.

The reason for these drops given by financial news channel pundits and even some bankers make little sense. If half of them are true, we’re in deep trouble, because they point to an imminent global economic meltdown.

Fortunately, when you cut through the hysteria, no evidence yet suggests the world’s banking system is about to collapse.

The World Bank and the IMF have repeatedly stressed that although global growth is slowing, there is growth. And if we learned one thing from the 2008 global financial crisis, it’s that governments’ central banks will do whatever is needed to protect the global banking system.

And though central banks have less dry power to fight a crisis given what has been spent, they do still have significant arsenal at their disposal (the power to create money from thin air!) to fight another financial collapse if need be.

The whole point of the trillions upon trillions of stimulus dollars that have been spent since 2008 was mainly to recapitalize the world’s banking system and make it safer; while at the same time there have been significant regulatory efforts around the world to force banks to keep a larger cushion of capital reserves in the event of a crisis.

Since 2008 a yearly ritual for bank analysts has been to review the so-called “stress tests” by the Federal Reserve and the European Central Bank that are trotted out annually to alert investors to the conditions of the banking system and its ability to withstand a crisis.

Finally, it strains credibility that any nation on this planet would allow its banks to collapse, as it would be tantamount to thermonuclear blast wiping out its economy. It is with this perspective that I have found it difficult to understand what has been driving the selloff in bank stocks, arguments such as;        

• Banks sold off because of bad loans to the oil and gas industry. Bank analysts have already established that the big banks have at best between 1% to 6% exposure to the oil and gas industry. As an FBR investment bank analyst said, “That’s not going to kill them. This is not like 2006 or 2007.”

• Banks sold off because of the prospect of negative interest rates. Given central banks focus on bank’s financial health, it’s debatable if negative rates would be allowed to severely impede bank profitability. And negative rates are a short-term stimulus measure designed to improve the economy, so it would not affect the long-term value of bank stocks.       

• Banks are not profitable enough. By the standards of before the 2008 financial crisis, banks are less profitable, true. But these days banks are also larger, less risky and better capitalized, generally speaking.Today there is less return, but there is also less risk.  

• The European Banks have not reformed as much as their American counterparts. It’s true that European banks are behind the curve in bank reforms, but they have been reforming. There is also a valid concern that negative rates in Europe could hurt profits. But again, with Europe’s “whatever it takes” stimulus program, it’s hard to envision a region-wide collapse.

But there is one argument that I do agree with.

• Central banks around the world haven’t done enough. I have argued for more than three years that central banks stimulus, if ineffective, could lead to global deflation. There is a valid concern that the collapse of asset markets around the world could eventually impede banks. But the bank selloff would only be valid if one believed the central banks around the world would not do everything in their power to support the global banking system, or could not. That’s a prospect which sends chills down my spine, as it would mean a global depression. But to date, there is not a bit of evidence supporting this argument.     

So there hasn’t been any indication of an imminent meltdown in the global banking system, which raises questions about the validity of the bank selloff.  I don’t believe the reasons for the bank selloff have truly come to light, and it’s possible that when the dust clears we’ll find no substantial reason beyond unwarranted fears.

In any case, we will continue to watch the sector closely and give advice as reliable information comes to light.   

Last week I did put the global banks in our Aggressive Portfolio on Hold as a precaution.

In the subscriber section, we stress-tested the strength and wherewithal of our bank holdings’ balance sheets and fundamentals in the event of further market declines and financial turmoil.

Portfolio Update

Please find the results of our analysis of our bank holdings using a proprietary Dupont Hybrid model, known as the Early Warning System, which evaluates the growth drivers that support return on equity (ROE) or value creation. The model alerts us to potential opportunities, as well as threats to our investment holdings. Two quarters of negative ROE in our model open the company to a potential SELL rating.  

Alliance Bernstein (NYSE: AB) is a U.S.-based, global asset management firm. Most of the assets it manages come from the U.S., but more than a third come from various countries around the world. It will profit most in the future from selling its mutual funds and delivering financial advice to growing populations of middle class consumers in emerging markets.

In our analysis, we found that AB has not had a negative quarter of return on equity (ROE) looking 10 years back. In the last four quarters, the company has delivered an ROE of between 2.8% and 3.5% on strong net profit margins, according to our model. While the company does not report a Current Ratio, the firm’s dividend coverage ratio is nearly 1 times earnings.

We continue to believe that AB is one of the best asset managers in the world and its prospects will stabilize when growth improves in Europe and around the world. AB is a Hold.

Banco Bradesco (NYSE: BBD) is Brazil’s second-largest private bank, with over 40 million customers and more than 4,000 branches. The lender controls around 15% of the market in term of assets. Banco Bradesco also boasts sizeable leasing, insurance, private pension funds, and asset management business lines. The firm’s fundamentals continue to be intact, though weakened by the Brazilian economy’s slowdown.  

In our analysis, BBD has delivered a steady ROE)of between 4.87% and 5.06% over the last four quarters on net profit margins in the 26% to 30% range, according to our model. BBD is indeed a conservative bank, having a high dividend coverage ratio of 3.5 times earnings, which is exhibited by its low payout ratio of 28%.

Looking at traditional bank measures, BBD has seen year-on-year earnings declines, whereas net income interest margins have fallen from 31.52% to 28.10%. Loan loss provisions as a percentage of net interest income were 48.88% this period as compared to 32.85% a year ago. The firm’s decline in net interest margins was influenced by both the relative drops on the levels of net loan assets and the level of total deposits as a percentage of equity.

One of the best managed banks in the region, we continue to believe BBD’s prospects will improve once the Brazilian economy plows through its current economic downturn and returns to growth. BBD is a Hold 

Banco Santander (NYSE: SAN) is a Spanish banking group centered on Banco Santander, S.A. and is the largest bank in the eurozone by market value. It is one of the largest banks in the world in terms of market capitalization.

In our analysis, SAN has one of the largest dividend coverage ratios we’ve seen, or 4.5 times earnings. Looking at the last 3 quarters, the firm has been delivering a tepid return on equity of between 1.4% and 2.5% on net profit margins of between 17.5% and 26%.

Given the weak ROE numbers we took a close look at its recent earnings report, and was pleasantly surprised, as in late January SAN reported its full 2015 results.   

On the earnings call, according to the CEO, for 2015 SAN improved all its financial metrics and delivered on its plan. The highlights were that net interest income and fee income grew by 8%, underlying profit was up by close to 13%, “and last but not least, we have increased cash and earnings per share (EPS),” the CEO exclaimed. SAN is a Hold

HSBC Holdings (NYSE: HSBC) is a British multinational banking and financial services company headquartered in London. It is the world’s third largest bank by total assets of $2.67 trillion.

According to our ROE analysis, the firm has not has a negative quarter of ROE since the 2008 crises. In the last 3 quarters, ROE has averaged 2.4%. The bank also in the last two quarters lowered its debt while net profit margins increased from 26% to 36% in the last quarter. The company has a dividend cover ratio of 1.89 times earnings.     

The bank has not reported earnings since November 2015 and with the turmoil in China, where HSBC has significant exposure, we are waiting to see how severe the impact has been given renewed weakness in China and throughout Asia could affect HSBC’s earnings due to increased losses on loans in the region.

Notwithstanding, the bank has weathered the storm so far, in the last quarter posting quarterly profits before tax 32% higher than the third quarter of 2014. It should be emphasized this is even as Asia was hurt by falling stock markets and slowing economic growth last year.

HSBC is one of the largest and most diversified banks in the world and we believe as Asia recovers and global growth returns, the bank will outperform. HSBC is a HOLD.

Swiss bank UBS (NYSE: UBS) is one of the two largest banks in Switzerland and one of the largest “private” banks in the world. It also has a large Swiss retail and corporate banking operation, as well as an investment banking business.

According to our proprietary Return on Equity (ROE) analysis, UBS’s ROE in the last 3 quarters has averaged 2.54%, falling to 1.66% in the latest quarter as a result of global weakness.

Nevertheless, UBS in the last quarter reported a 10% rise in profits, beating Wall Street consensus estimates, but has nonetheless seen its shares plunge. It has a dividend coverage ratio of 3.3 times earnings.

According to news reports, the bank cited pronounced risk aversion” among clients as it reported 3.4 billion Swiss francs ($3.3 billion) flowed out of its wealth management arm serving clients outside the U.S. Outflows in emerging markets and Europe outweighed inflows in the Asia Pacific region and Switzerland, the report noted.

We do believe this is a temporary blip as UBS was one of the first European banks to restructure, has plenty of reserves, and when markets stabilize in Europe and around the world, will likely be the most sought out wealth adviser. UBS is a Hold

Westpac (NYSE: WBK) is an Australian bank and financial-services provider headquartered in Sydney.

The bank is well capitalized already with its tier-1 ratio at 9.5. A common measure of bank strength based on its equity capital and reserves, it is well above the Australian regulators required minimum.

According to our proprietary Return on Equity (ROE) analysis, WBK has exhibited strong ROEs over the last 4 quarters, ranging between 3.59% and 4% on net profit margins of nearly 40%. Its dividend coverage ratio is 1.8 times earnings.

In November, Westpac Banking Corp confirmed a full-year cash profit of $7.82 billion, up 3 per cent for the year driven by loan growth, where the CEO told the Sydney Morning Herald that while the economy is progressing from growth driven by resources to services, banks are stuck in a “lower-for-longer” economy referring to the slowdown in Asia. WBK is a Hold.