NEW$ TO U(SE)

Follow-up on my May 14 initial post NORTH AMERICAN AND EUROPEAN BANK RANKINGS. I excluded Goldman Sachs and Morgan Stanley because their bank status is so recent. All data is translated in US$ based on May 14 exchange rates. To facilitate reading the charts, US banks are in blue, Canadian banks in red and European banks in yellow.

MARKET CAPITALIZATIONS

• Market caps have jumped 34.5% since May. European banks market caps jumped 43.4% (+4-8% from currencies), Canadian banks gained 32.7% (+9% currency) while US banks gained 28%.
• Market cap gains were not all market related. Many banks issued substantial equity since May, particularly US banks. In fact, only 3 US banks performed well since May11: FITB, C and BAC rose some 20%. All other US bank stocks rose less than 10%. WFC declined 5% and KEY lost 15%.
• The 9 US banks have a combined market cap of $569B, 10% above the 9 European banks. The gap has narrowed from 23% last May.

RETURNS ON EQUITY

I am now using consensus 2010 estimates to calculate ROEs.

• Canadian banks continue to dominate on profitability but European banks have improved.

PRICE TO BOOK VALUES

• PB now average 1.3x vs 1.14x last May.
• Canadian banks again show the highest valuations. US banks PB trail behind as a group.
• 8 banks sell below BV compared to 10 banks last May.

PRICE TO TANGIBLE BOOK VALUES

• Average PTBV are now 1.9x, up from 1.8x last May. Substantial equity issues by many US banks have boosted their TBV while diluting shareholders.
• 4 banks continue to sell below TBV vs 8 last May.

THE PRICE OF GROWTH

Price to book value ratios are not very meaningful valuation tools unless considered along with returns on BV, also known as ROEs. How much are investors paying for growth? The chart plots PB and ROE using 2010 estimates as of September 2009.

• 2010 ROEs are estimated at 8.5% while 2009 ROEs were forecast at 5.%% last May. Shareholder dilution has eroded a good part of the increased profits that would normally come from improving economic outlooks.
• Dispersion around the regression line is tighter than last May indicating that valuations are more in line with profitability on a relative basis (markets are more efficient).
• Canadian banks’ higher PB values are not outrageous given their ROEs. However, RY and BNS seem expensive relative to their ROE estimates. European banks generally trade below the regression line, likely reflecting investors’ concerns about their true financial condition.
• If you own US bank stocks or plan to buy any (even more so if you think C is undervalued looking at the chart above) you should read Q2 2009 Bank Stress Test Results: The Zombie Dance Party Rocks On and also JPMorganChase: How Much Capital Does a Bank Need?. Capital needs (voluntary or mandatory) will weigh heavily on US banks’ profitability through 2011 in my view. Beware of dilution!