Canadian Banks vs U.S. Banks: Where's the Better Value?

As we head into first quarter reporting season for U.S banks, Merill Lynch analyst Sumit Malhotra has an interesting take on the relative value of Canadian bank stocks versus shares in their U.S. counterparts.

Mr. Malhotra noted:

On a market-cap weighted basis the Canadian banks now trade at 9.6 times [analysts’ earnings estimates for 2009,] a modest 4% premium to the 9.3 times multiple accorded to the large-cap U.S. Banks.

This differential is well-below the one-year (15%) and three-year (14%) averages, suggesting to us that the possibility of mean reversion exists as U.S. bank estimates continue to be revised downwards.

U.S. banks are facing margin compression, slow balance sheet growth, weakening credit quality and liquidity concerns. Canada’s big banks, with their strong domestic retail franchises, also face margin pressure but are less concerned by the other factors likely to hit U.S. bank results this quarter.

The Merrill Lynch analyst says he is “not bullish” on Canadian banks in the near term. But with limited opportunities for profitable long trades in the banking sector, “a relative value trade” of Canadian banks over big U.S. banks “makes sense,” he says.

Comments

[Football Geek:]

Interesting that while there is talk of US banks cutting their dividends, the outlook for CAN banks is slower, but increasing dividend yields.
At the moment the Canadian economy is stronger than the US economy, due to it's resourse base exporting nature. TD bank is
very well positioned with no sub-prime issues, and is expanding into the US at the very time when US regional banks are at good value.
RBC is the biggest bank in Canada, and BNS is a global play. CIBC is a mess, and BMO is not far behind.

2008 Mar 31 08:48 AM

[Bingo 2:]

There are other major differences . Canada does not operate in a deficit based economy. They also have learned to keep out of world affairs which they can not control. Their govt does not have to spend 750 mil a month fighting a war to prop up the ego of their chief of state.

2008 Apr 01 03:14 PM

[crispos:]

Canadians have always been (big) net savers. That's the difference. The US personal savings rate was most recently at 0.3%. You buy the Canadian banks for the steady cash flow of their highly profitable personal, commercial banks and wealth management arms and discount the ephemeral earnings from the casino-type attitude of the "investment/world market" divisions that have added little net value over time.

2008 Apr 01 06:10 PM