Are bank stocks ripe for the picking or rotting from the inside out? Amanda Morrall looks at a curious trend overseas and asks what Kiwi investors should do.

By Amanda Morrall

I know I hark on about Canada, but indulge me for a moment.

A story on the business pages of the Globe and Mail, one of the country's main national newspapers there, caught my attention last week.

The article, posted in the investing section, reported on the Canadian banks' (renowned for their conservatism) exuberant buying of cheap U.S. bank stocks. This cherry picking of shares is hardly newsworthy or exclusive to Canadian banks. It's happening around the world as  investors and fund managers look to take advantage of the fall in the markets to scoop up apparently undervalued stocks, expected to rise in price.

The article explored the prospects for do-it-yourself investors. The suggestion was: that if conservative banks are swooping in and buying up stocks, then why should not investors do the same, cutting out the middleman (fund managers) and buying for themselves. Of course there are plenty of reasons why not. The potential implosion of the U.S. economy being the least of them but it got me thinking along the same lines with respect to New Zealand banks, whose profit margins have been painted as the envy of 22 OECD nations.

The story took on a life of its own as a rogue blogger, who goes by the handle Zero Hedge, challenged the sacred notion that banks in Canada are in fact conservative and are any less vulnerable to collapse than those in the U.S. or Europe. The Emperor has no clothes. Who knew?  I thought it was just Zero Hedge who had no clothes. He trades on gossip and uses the alias Tyler Durden, a scrappy con-artist portrayed by a buffed up Brad Pitt in the movie Fight Club. (For more on Who is Tyler Durden, see this article from the Globe and Mail

That mainstream business journalists are starting to give nameless bloggers more credibility than the usual buttoned down suspects who feed us information says something about the new age of journalism. For Zero Hedge's original post that triggered the firestorm, click here.

A financial analyst from Canada's National Bank Financial, Peter Routlege, came to the defence of the impugned Canadian banking sector, dissecting Zero Hedge's attack, poking holes in his or their theories and reassuring readers who were following the story that banks in Canada, are indeed as safe as they are widely held to be. Read more on Routledge's deconstruction of why the Canadian banking system is not the next domino to fall as was suggested by the underdressed Zero Hedge here.

And in New Zealand ?

So, back in New Zealand, which if you believe the party line has a banking sector that is also stronger, less corruptible and more stable than many others in the world. No sub-prime exposure, reportedly good quality lending, good quality borrowing and economically on much stabler ground that the United States

The relative profit margins of the big four might be regarded as an indication of that. (See banking and finance editor Gareth Vaughan's story here).

Reserve Bank governor Alan Bollard acknowledges banks here are in a somewhat privileged position and said as much in a recent speech given to the New  Zealand Shareholders's Association. A full copy of the speech can be read on the Reserve Bank's website here.

So, can New Zealand investors looking to do better than meagre returns on bank deposits fare better in the long-term investing in the banks themselves, to claim a piece of those juicy profits for themselves? Or are New Zealand banks really no safer than many others at the mercy of increasingly uncertain lending arrangements, official cash rates and consumers' ability to borrow.

Yields are undoubtedly an invitation to invest but when and at what price you buy them is key.  

Hear what the experts have to in part two of this inquiry.