(Prices are as of September 12, 2012.)
North American banks market caps surged 25.4% since the beginning of 2012, far outpacing the S&P 500 Index gain of 14.9%. U.S. banks gained a spectacular 33.5% while the more resilient and better managed Canadian banks advanced only 8.9%.
Since my last review in March 2012, U.S. banks are up 7.5% while Canadian banks edged up 1.9%.
BAC has heavily influenced the U.S. bank segment with a 78% jump in its market cap so far in 2012 thanks to a 63% jump in its share price to $9.09 from $5.56 at the end of 2011. As a result, BAC’s market cap has leapt from 6th to 3rd place among North American banks, just ahead of Citigroup. BAC had the top market cap among N.A. banks in June 2010. Its current market cap is 33% lower than 2 years ago in spite of its 13% additional shares outstanding.
Excluding BAC, the other 10 U.S. banks market cap rose 28.5% year-to-date.
Aggregate book values for U.S. banks rose 14.6% YtD on 5.2% more shares outstanding while Price/Book Value jumped from 0.78x to 0.95x.
Canadian banks’ aggregate book value rose 5.5% YtD on a 1.7% higher share count. Canadian banks continue to trade at a big P/BV premium to U.S. banks; their PB is 1.85x, up slightly from 1.80x on Dec. 31, 2011.
Four U.S. banks now trade above BV, up from 2 at the end of 2011. BAC continues to trail the group at 0.45x BV.
American bank stocks are selling at 1.26x tangible BV, up from 1.08x at the end of 2011. Canadian banks are valued at 2.4x TBV vs 2.3x on Dec. 31, 2011.
Price to Book valuation must always be analyzed against return on book. Five of the six Canadian banks earn a ROE (2013e) of more than 15% with an average of 17.3%,down from 18.0% expected for 2012 in December 2011. The U.S. banks’ average expected ROE is 9.9%, up from 8.9%.
One of the better ways to evaluate bank stocks is to confront ROE with P/BV. The chart below plots the 17 North American banks surveyed on that score. Even though BAC looks cheap on its P/BV, its low current ROE explains its low valuation. There are not many clear outliers to the regression line this time.
Interestingly, STI, a big “cheap” outlier last March, has moved to the “expensive” side this time as its stock jumped 27% while its BV gained only 2.2% and its expected ROE declined from 11.5% for 2012 to 7% for 2013.
Similarly, in Canada, NA was an “expensive outlier last March while RY was right on the fair value line. Today, NA looks cheap while RY is on the expensive side. Both banks are expected to earn similar ROEs in 2013 (18.0% and 18.3%) but NA is selling at 1.8x BV vs 2.1x for RY which thus sells at a 15% premium on that score. In truth, however, RY has generally always traded at a premium to NA.
The table below helps assess the P/BV vs ROE relationship. Dividing the expected ROE into the P/BV ratio, we get “the price of growth” in the form of the number of units of BV for each 1% of ROE.
For Canadian banks, investors are paying 0.11 units of BV for each 1% of ROE. For the U.S. banks, that ratio is 0.09, a 14% discount (16% last December). In March 2010, the ratios were 0.11 and 0.14 respectively, the U.S. banks then trading at a 27% premium. In March 2010, U.S. banks’ average estimated ROE was 4.9% for 2010 while Canadian banks’ estimated average ROE was 17.1%. U.S. banks outlook for 2013 is for ROE averaging 9.9%, 57% that of Canadian banks.