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RBC Capital Markets analyst Andre-Philippe Hardy has reduced his price targets for Canadian bank stocks, suggesting valuations face further downside risk if U.S. economic woes cause a slowdown in Canada.

The median price-to-book ratio today is roughly 2.0. That compares with 1.65 during the last market trough, in the fall of 2002. At that time loan losses were rising quickly and equity markets were facing challenges.

But times are getting tough again, he says, with the quality of credit facing further deterioration, the North American economy in limbo, and equity markets looking weaker than they have in five years. Then there is the potential for more write-offs from the banks. As a result, he is applying an average 1.8x PB multiple to derive new price targets for bank stocks.

Using this approach, his price target for Bank of Montreal (NYSE:BMO) falls to C$43 from C$49, Bank of Nova Scotia (NYSE:BNS) dips to C$48 from C$49, and CIBC (NYSE:CM) to C$65 from C$73. National Bank [NA/TSX] was cut to C$43 from C$51, while Toronto-Domininion Bank (NYSE:TD), the analyst’s favorite name in the sector, gets a reduction from C$76 to C$69.

These 12-month targets suggest median returns of 10%, including dividends. But if current book values are used, there is roughly 8% of potential downside in near-term share prices.