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 Bank of America (BAC) (-58%), Goldman Sachs (GS) (-49%), Citigroup (C) (-46%), Morgan Stanley (MS) (-39%) and Suntrust (STI) (-37%).
By contrast, the 6 Canadian banks covered lost only 7% collectively.
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.
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.
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.
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.
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.
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 KeyCorp (KEY) and C, and between BB&T (BBT) and GS and JP Morgan (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.