North American Banks Ranking (Dec. 2013)

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.

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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.

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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.

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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.

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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.

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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:

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All previous rankings going back to May 2009 can be seen here.

 

North American Banks Ranking (Sept. 2013)

North American banks market caps rose 7.1% since my last ranking on March 2013, in line with the S&P 500 Index (+7.6%) during the same period. U.S. banks gained 10.3% while Canadian banks advanced only 1.4%. Over the last 12 months, U.S. banks are up 23.2% while Canadian banks edged up only 3.5%. Meanwhile, the S&P 500 Index rose 13.3%.

U.S. money center banks did particularly well since September 2012:  BAC (+55%), MS (+48%), C (+44%),  GS (+29%), and JPM (+26%) all gained more than 25%. Among regional banks, only KEY made money-center type gains with a 34% jump. Other regionals were mixed: WFC (+19%), FITB (+19%), STI (+13.5%) USB (+6%).

WFC regained its top rank on market cap which it had lost to JPM last March.

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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. Five of the 11 U.S. banks ranked here still trade below book value. BAC continues to trade at the lowest P/BV at 0.7x.

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Canadian banks also dominate on Price to Tangible BV. Only two U.S. banks still trade below TBV.

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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% (BMO at 14.8%) with an average of 17.9% (17.6% last March). The U.S. banks’ average expected ROE is 9.7% (9.4% last March). Excluding USB (15.7%) , the remaining 10 U.S. banks are expected to earn a ROE of 9.1% (8.8% last March), nearly half the return enjoyed by Canadian banks.

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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 0.7x, its low current ROE justifies its low valuation. Contrary to September 2012, BAC is not undervalued relative to its peers on the basis of expected 2013 ROEs.

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JPM has become the big outlier. Its stock rose only 3.3% since March while both BV (+2.5%) and expected ROE (10.4% to 11.2%) rose. FITB stock rose 15.5% since March but a 10% gain in BV and a rise in its expected ROE from 10.8% to 12.1% have made the stock pretty cheap relative to its peers. Here are the March 2013 and the September 2012 charts for comparison:

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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.

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Six American banks lead the pack, up from 3 in September 2012 and none in August 2011. BAC is now the most expensive bank on that score. It was the second least expensive bank on year ago. During that period, its stock price rose 55% while its expected ROE declined from 6.7% to 4.9% (a 27% deterioration) on an unchanged BV (its expected ROE for 2014 is 6.7%).

By comparison, C, which was the least expensive stock in September 2012 is now the 6th least expensive stock. Even though its stock rose 44%, its expected ROE only declined from 8.0% to 7.6% (5% deterioration).

The two cheapest stocks by this measure are now FITB and JPM. During the last year, FITB rose 19% but its BV gained 15% and its expected ROE advanced 23%. For its part, JPM stock rose 26% while its BV gained 8.5% and its ROE advanced 6%.

By country, investors are now paying 0.11 units of BV for each 1% of ROE for both Canadian and U.S. banks. For the U.S. banks, that ratio was 0.105 last March and 0.09 in September 2012. In March 2010, the ratios were 0.11 and 0.14 respectively, the U.S. banks then trading at a 27% premium

All previous rankings going back to May 2009 can be seen here.

FYI, I include excerpts from a recent Thomson/Reuters AlphaNow blog post which, using a different valuation method (unknown to me), also sees JPM as a relatively cheap bank stock.

(…) JPM appears inexpensive using the StarMine Intrinsic Valuation model, with the model valuing JPM at almost $89. JPM is also only trading at a P/E of only 8.3 versus 10.4 for its peer group, as seen in the chart below.

JPM Equity Valuation
Source: Thomson Reuters Eikon

Why the discount? Firstly, all the U.S. banking stocks are trading well below their fair value, with the industry median being 0.77 – so while the banks are cheap due to the structural reduction in their ROE and leverage, JPM appears to be attractive even against the other banks.

Secondly, JPM has specific regulatory and legal challenges with the London Whale, its pre-crisis MBS issuance and the investigation into the hiring of Chinese “princelings” in China and Hong Kong, to name but a few.

Markets hate nothing more than uncertainty and JPM is being priced at a modest discount until there’s greater clarity on whether the company’s litigation reserve balance is sufficient for the various fines that are currently under negotiation.

Credit markets don’t see the problem

One last market signal that’s worth considering is the credit default market. Note in the chart below that the market has barely raised an eyebrow at recent events – 2013 volatility has been notable for its absence, certainly nothing like the levels seen since 2008.

CDS and StarMine
Source: Thomson Reuters Eikon

With some justification, market participants often note the more alert nature of the fixed income market – bond yields have often inverted before the equity markets even finish serving the champagne. Here, the reverse is true. Perhaps the absence of concern should be the interesting signal for the equity investor.

Note: If you consider investing on the basis of the above, make sure you have read the disclaimer here.

 

NORTH AMERICAN BANKS RANKING (March 2013)

(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.

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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.

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Canadian banks also dominate on Price to Tangible BV. Four U.S. banks still trade below TBV.

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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.

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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.

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Here’s the September 2012 chart:

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And that of December 2011:

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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.

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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.

 

NORTH AMERICAN BANKS RANKING (Sept. 2012)

(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.

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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.

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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.

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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%.

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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.

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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.

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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.

 

NORTH AMERICAN BANKS RANKING (March 2012)

Prices are as of March 9, 2012.

North American banks market caps surged 18.5% since the beginning of 2012 with U.S. banks gaining a spectacular 24% while Canadian banks gained only 6.9%.

BAC’s 45% stock price advance combined with a 4.5% increase in shares o/s to give the bank a 51% jump in market cap in 9 weeks!

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Meanwhile, collective book values of U.S. banks rose only 3.3%. BAC’s book value per share declined 3.4% during the period. The 6 Canadian banks are trading at an average P/BV of 2.0x (1.8x last December) compared with 0.9x (0.8x) for the 11 U.S. banks. Four U.S. banks trade at less than 50% of their book value. Only BAC now trades below 0.5x BV.

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The Canadian banks are selling at 2.6x tangible BV (2.3x) while the U.S. banks are selling at 1.2x TBV (1.1x). In effect, the TBV of Canadian banks represents 77% of their BV compared with 72% for the U.S. banks.

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All 6 Canadian banks earn a ROE (2012e) of more than 15% with an average of 18.5%,up from (18.0% in December). The U.S. banks’ average ROE is 9.7%, up from 8.9%.

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The price of growth:

Canadian banks’ P/BV is 2.2x that of the U.S. banks but their average ROE is 1.9x that of the U.S. banks. Canadian banks’ valuation is thus not much out of line when ROE is considered. Alternatively, U.S. banks are not all that cheap when their profitability is considered.

Note the two big outliers STI and CM.

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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 2012 is for ROE averaging 9.7%, 52% that of Canadian banks.

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NORTH AMERICAN BANKS RANKING (January 2012)

Prices are as of Dec. 31, 2011.

The meltdown in U.S. bank stocks is incredible. My 11 stock universe of the largest banks has seen its collective market cap. melt from $856M to $580M, a drop of 33%. The big losers were BAC (-58%), GS (-49%), C (-46%), MS (-39%) and STI (-37%).

By contrast, the 6 Canadian banks covered lost only 7% collectively.

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The 6 Canadian banks are trading at an average P/BV of 1.8x (2.2x one year ago) compared with 0.8x (1.1x) for the 11 U.S. banks. Four U.S. banks trade at less than 50% of their book value.

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The Canadian banks are selling at 2.3x tangible BV (2.7x) while the U.S. banks are selling at 1.1x TBV (1.1x). In effect, the TBV of Canadian banks represents 78% of their BV compared with 72% for the U.S. banks.

All but four U.S. banks are selling below TBV (JPM = 1.02x), including C and BAC at 0.5x and 0.4x respectively, highlighting the low confidence level the market has on asset quality at these banks. All Canadian banks but BMO (1.7x) are well over 2x TBV. 

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All 6 Canadian banks earn a ROE (2012e) of more than 15% with an average of 18.0%, up from (17.5 one year ago). The U.S. banks’ average ROE is 8.9%, down from 10.3% last year. Only KEY is expected to earn a higher ROE in 2012 than the what was expected in early 2011.

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The price of growth:

Canadian banks’ P/BV is 2.3x that of the U.S. banks but their average ROE is 2.0x that of the U.S. banks. Canadian banks’ valuation is thus not out of line when ROE is considered. Alternatively, U.S. banks are not all that cheap when their profitability is considered.

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For Canadian banks, investors are paying 0.10 units of BV for each 1% of ROE. For the U.S. banks, that ratio is 0.08, a 16% discount (13% one year ago). 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 2012 is for ROE averaging 8.9%, half that of Canadian banks.

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Another way to look at this is that investors are willing to pay 25% more for Canadian banks’ profitability, a clear indication that stability has a higher value than recovery potential at this time.

Last August, I had identified a clear pricing anomaly between WFC and TD reflecting investors nervousness on WFC’s balance sheet quality. Even though WFC’s results were worst than expected in 2011, the valuation gap has been closed.

Current valuation anomalies are between KEY and C, and between BBT and GS and JPM. Investors are more positive on regional banks than large money center banks. They may well be right as we enter an election year when politicians will find it much more politically smart to hit banks than ordinary people.

 

NORTH AMERICAN BANKS RANKING (August 2011)

Prices are as of August 16, 2011. Combined US and Canadian market caps have declined 12.9% since my June 10 ranking. US banks collapsed 16.8% while the sounder Canadian banks lost only 3.5%. Among US banks, BAC, MS and C cratered 31%, 25% and 21% respectively while GS and JPM lost 14% and 12% respectively. WFC lost only 6.6%.

Since March 10, 2010, while the S&P 500 Index advanced 4.5%, the aggregate market cap of the 11 US banks sampled declined 24% compared with a 9.4% increase in the 6 Canadian banks. As a result, Canadian banks aggregate market caps now represent 47% of that of the 11 US banks, up from 32% only 16 months ago. During that period, BAC’s market cap has disintegrated 55% and GS’ 32%.

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The 6 Canadian banks are trading at an average P/BV of 2x (2.1x last June and 2.1x in March 2010) compared with 0.76x (0.9x and 1.1x) for the 11 US banks. All but 2 US banks trade below BV. 

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The Canadian banks are selling at 2.56x tangible BV (2.7x last June and in March 2010) while the US banks are selling at 1.1x TBV (1.6x). In effect, the TBV of Canadian banks represents 77% of their BV compared with 70% for the US banks.

All but four US banks are selling below TBV, including C and BAC at 0.6x. All Canadian banks but BMO (1.95x) are over 2x TBV! In fact, 4 of the 6 Canadian banks are at more than 2.5x TBV. Looked at another way, the 6 Canadian banks have aggregate tangible book values of $106B compared with $627B for the 11 US banks, almost 6 to 1 in favor of the US banks. Yet, the US market caps are only 2.1x that of the Canadian banks.

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All 6 Canadian banks earn a ROE (2011e) of more than 15% with an average of 17.9% (18.2% last June). The US banks’ average ROE is 10.5% (10.4% last June).

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The price of growth:

Canadian banks’ P/BV is 2.6x that of the US banks while their average ROE is 1.7x that of the US banks. Investors’ nervousness about banks’ balance sheets is best illustrated by the relative valuation of WFC, USB and TD: all three banks have very similar 2011 estimated ROEs of 15.4% but their P/BV varies from 1x to 2x.

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For Canadian banks, investors are paying 0.11 units of BV for each 1% of ROE. For the US banks, that ratio is 0.07, a 36% discount. In March 2010, the ratios were 0.11 and 0.14 respectively. US banks were at a 27% premium, only 15 months ago. During that period, US banks average estimated ROE rose from 4.9% for 2010 to 10.5% for 2011. Meanwhile, Canadian banks’ estimated average ROE rose from 17.1% to 17.9%.

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Note: Canadian banks will shortly be reporting their Q3. I will update the ranking afterwards.

All previous rankings going back to May 2009 can be seen here.

 

NORTH AMERICAN BANKS RANKING (June 2011)

Prices are as of June 10, 2011. Canadian banks have reported their Q2 results since my May 18 post. Combined US and Canadian market caps have since declined 6.1% with comparable aggregate declines both sides of the borders. The biggest losers were STI (-12.1%), RY (-9.3%), WFC (-8.8%), CM (8.7%) and BAC (-8.3%). BNS only lost -1.3% during the period.

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The 6 Canadian banks are trading at an average P/BV of 2.1x (2.1x in March 2010) vs 0.9x (1.1x) for the US banks. Seven of the 11 US banks listed here trade below book.

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The Canadian banks are selling at 2.7x tangible BV (2.7x in March 2010) while the US banks are selling at 1.3x TBV (1.6x). In effect, the TBV of Canadian banks represents 77% of their BV compared with 71% for the US banks. Three US banks are selling below TBV, including the huge C and BAC. All Canadian banks but BMO are over 2x TBV! In fact, 4 of the 6 Canadian banks are at more than 2.5x TBV.

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All 6 Canadian banks earn a ROE (2011e) of more than 15% with an average of 18.2% (17.1% for 2010e in March 2010). The US banks’ average ROE is 10.4%, up considerably from 4.9% in March 2010. The consensus earnings estimate on STI dropped considerably since May 18. Its estimated 2011 ROE is now the lowest of the group at 6.0%.

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The price of growth:

The Canadian banks are selling at 2.1x BV for a ROE of 18.2%. Investors are thus paying 0.12 units of BV for each 1% of ROE. For the US banks, that ratio is 0.09. In March 2010, the ratios were 0.11 and 0.14 respectively, indicating that the US bank stocks have become much cheaper than Canadian banks during the last 15 months.

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In general, US bank stocks remain negatively affected by poor profitability and an obvious lack of trust in either their true earnings (and thus book value) and/or their ability to return to their pre-crisis levels of ROEs in the foreseeable future. That does not apply to STI and KEY which are both trading at Canadian valuations while earning the worst US ROEs. Their risk/reward is clearly unappealing. In Canada, BNS appears relatively overvalued 0.127x PB/ROE. To its credit, its recent quarterly results were the best in the Canadian group.

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Concerns (fears) on the US banks come from the double dipping US housing market and exposure to PIGS debt.

According to the BIS, US banks are directly and indirectly exposed to nearly $200B of debt from Greece, Ireland and Portugal. Recall that the 11 US banks surveyed here have a combined market cap of $725B.

On the US housing overhang, here is what IRA’s Dennis Santiago wrote on May 26:

Looking at degraded real estate in particular that data shows that work to stem what was a tidal wave of 30-89 day delinquent loans seems to have gotten us back to the same levels of $76-78B today as it was in 2008 when the swan eggs hatched. This doesn’t mean the nest isn’t toxic. Over 90 day delinquent real estate presently stands at $105.5B. It was a mere $19B the day the music stopped. Similar large workout inventory remains in Non-Accrual loans that stand at $186B today and Other Real Estate Owned sits at $52B as of 1Q2011. So now you can answer the question, “How much is a glut?”

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The market is right to be concerned: US banks are not out of the woods just yet.