(Prices are as of March 1, 2013.)
North American banks market caps rose 9.7% since my last ranking on September 13, 2012, outpacing the S&P 500 Index (+5.3%) during the same period. U.S. banks gained 11.7% while Canadian banks advanced only 4.9%. Over the last 12 months, U.S. banks are up 20% while Canadian banks edged up only 7%. Meanwhile, the S&P 500 Index rose 10.5%.
U.S. money center banks did particularly well since September 2012 as MS, GS, C, BAC and JPM all gained more than 20%. Regional banks, including WFC (+2.0%), barely rose during the same period. Among regionals, only KEY (+7.0%) beat the S&P 500 since last September.
As a result, WFC lost its top rank on market cap to JPM.
Canadian banks continue to dominate on Price to Book Values but U.S. money centers closed some of the huge gap during the last 6 months. Six of the 11 U.S. banks ranked here still trade below book value. BAC continues to trade at nearly half its BV (0.55x) which stayed essentially flat during the past year at just above $20.
Canadian banks also dominate on Price to Tangible BV. Four U.S. banks still trade below TBV.
Price to Book valuation must always be analyzed against return on book to have some meaning. Five of the six Canadian banks earn a ROE (2013e) of more than 15% with an average of 17.6% (17.3% last September). The U.S. banks’ average expected ROE is 9.4%, down from 9.9% last September. Excluding USB, the remaining 10 U.S. banks are expected to earn a ROE of 8.8%, down from 9.3% six months ago.
One of the better ways to evaluate bank stocks is to correlate ROE with P/BV. The chart below plots the 17 North American banks surveyed on that score. For example, even though BAC looks cheap on its P/BV, its low current ROE justifies its low valuation. Relative to its peers, BAC is not undervalued on the basis of expected 2013 ROEs.
In fact, investors are currently pretty efficient in their relative valuation of North American banks, particularly U.S. banks.
Here’s the September 2012 chart:
And that of December 2011:
The chart 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 0.111 units of BV for each 1% of ROE. For the U.S. banks, that ratio is now 0.105. This 5% discount has shrunk spectacularly from 14% in September 2012 and 16% in December 2011. In March 2010, U.S. banks were trading at a 27% premium.
Obviously, the recent re-pricing of U.S. money center banks reflects investors belief that the worst is over on the housing front. As mentioned, U.S. bank ROEs have really not improved much during the past year.
A major change, however, is that U.S. banks have started buying back their shares. Total shares outstanding rose 6% between December 2010 and September 2012. They declined 2.7% in the past 6 months. Share buybacks at substantial discount to BV can do wonders on ROEs.
With the housing market recovery and interest rates and the yield curve at their low points, U.S. bank earnings and ROEs could stage a pretty nice recovery during the next several years.
Given their apparent relative mis-pricing, their better management, balance sheet and ROEs, JPM and WFC seem to be the better safe buys at this time.
(Disclosure: I own JPM, TD, BMO and CM)
All previous rankings going back to May 2009 can be seen here.