(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.

 

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!

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.

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.

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%.

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.

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.

 

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.

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.

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.

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%.

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.

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.

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?”

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

 

Prices are as of May 18, 2011.

Citigroup moved up to no. 3 in market cap. from no.4. TD Bank moved up to #6 from #7, ahead of GS. National Bank moved up to #15 from #16.

Canadian banks’ aggregate market cap is US$310B, 40% of the 11 US banks ($773B) sampled here. That ratio was 36% in mid-February and 32% in March 2010. In effect, the 6 Canadian banks have seen their market cap grow from US$258B in March 2010 to US$310B currently, a 20% gain. Meanwhile, the 11 US banks’ market cap has declined 3%.

The 6 Canadian banks are trading at an average P/BV of 2.2x (2.1x in March 2010) vs 1.0x (1.1x) for the US banks. Seven of the 11 US banks listed here trade at or below book.

The Canadian banks are selling at 2.8x tangible BV (2.7x in March 2010) while the US banks are selling at 1.4x TBV (1.6x). In effect, the TBV of Canadian banks represents 79% 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 are over 2x TBV! In fact, 5 of the 6 Canadian banks are at more than 2.5x TBV.

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 10.8%, up considerably from 4.9% in March 2010.

The price of growth:

The Canadian banks are selling at 2.2x BV for a ROE of 18.2%. Investors are thus paying 0.12 units of BV for each 1% of ROE. For the US stocks, 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 14 months.

Among US stocks, KEY and BBT are selling at “Canadian prices” while earning “US ROEs”. Also interesting is the fact that investors are valuing GS’ and BAC’s ROEs similarly and at the very bottom of the range.

Note: Canadian banks will be reporting their Q2 ended Apr. 30 within 3 weeks. I will update the charts right after.

 

Bloomberg’s ranking includes banks with at least $100 billion in assets. It weighs and combines five criteria, including Tier 1 capital compared with risk-weighted assets; nonperforming assets compared with total assets; and efficiency, a comparison of costs against revenues.

All six Canadian banks but Scotiabank (?) are among the top 20. Only 3 US banks.