North American banks market caps rose 8.6% since my last ranking on September 3, 2013, underperforming the S&P 500 Index (+10.4%) during the same period. U.S. banks rose in line with the U.S. market with a 10.2% gain but Canadian banks advanced only 4.0% in U.S. dollars as the loonie lost 4.3%.
Gains were fairly uniform among banks. Morgan Stanley (+18.4%) and BB&T (+2.9%) were the only real outliers since September 3rd.
Canadian banks continue to dominate on Price to Book Values but U.S. money centers closed some of the huge gap during the last 12 months. Four of the 11 U.S. banks ranked here still trade below book value. BAC continues to trade at the lowest P/BV at 0.76x.
Canadian banks also dominate on Price to Tangible BV. Only one U.S. bank (C) still trade below TBV, a far cry from USB and most Canadian banks which sell around 3x 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 (2014e) of more than 15% (BMO at 14.4%) with an average of 17.0% (17.9% last September, 17.6% last March). The U.S. banks’ average expected ROE is 9.8% (9.7% last September, 9.4% last March). Excluding USB (15.2%), the remaining 10 U.S. banks are expected to earn a ROE of 9.3% (9.1% last September, 8.8% last March), still substantially less than the return enjoyed by Canadian banks even though the gap is slowly declining.
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 of 0.76x, its low expected ROE justifies its low valuation relative to its peers. Contrary to September 2012, BAC is not undervalued relative to its peers on the basis of expected 2013 ROEs.
JPM and USB remain the only big outliers on each side of the regression line. Here are the September 2013 and the March 2013 charts for comparison:
All previous rankings going back to May 2009 can be seen here.