I have been looking at investing in bank stocks in a country that may default. The prices seem very low right now, even considering the risks. What truly happens to bank stocks in a country that defaults on its debts? Do the stocks become worthless, almost like a company emerging from bankruptcy where the common stocks are wiped out and the company issues new shares? It seems as though almost a complete shutdown is priced in currently.
The prices seem very low even considering the risk? The prices are low because of the risk.
Nothing happens to the banks if the sovereign defaults. However, the sovereign debt holders - lose some or all the money they lent to that sovereign. Incidentally, many banks invest in the treasury bonds of various countries, especially those they're located in. They also invest in other companies that rely on the government, or the currency. If that dependency is too high - the bank may fail. If the dependency is not high, or non-existent - the bank will survive. If the bank fails - yes, your shares will be wiped out, that's what happens with bankrupt companies.
If you considering investing in banks in a country that you think may default - research them and see how much investments they have that will be affected by that default.
Most national banks are required by the regulations of their host countries to hold significant reserves in the form of government debt. A default would likely wipe out their capital and your common stock would become worthless. The common stock only has positive value today because of the option value based on the possibility the host country will evade a default.