Denis Ouellet's  Instablog

 I picked the 26 largest publicly traded banks in North America and Europe and did some ratios on them. I excluded Goldman Sachs and Morgan Stanley because their bank status is so recent. All data is translated in US$ based on May 14 exchange rates. To facilitate reading the charts, US banks are in blue, Canadian banks in red and European banks in yellow. The charts can be seen at http://www.news-to-use...

MARKET CAPITALIZATIONS

• Only 3 US banks ranks in the top 10 banks on market capitalization. Five are in the bottom 10, creating two far apart classes of institutions: the huge and the tiny.  The top 3 have an average market cap of $120B while the smaller 5 average $11B.
• Five European banks are in the top 10 on market cap, 2 Canadian banks.
• The 9 US banks have a total market cap of $445B, 23% above that of the 9 European banks.
• If we only consider the top 20 market caps, only 6 US banks make the list with a total of $429B in market cap (avg of $72B), while 8 European banks make the list with $290B in market cap (avg of $36B). ALL SIX CANADIAN BANKS are in the top 20 with a combined market cap of $202B (avg $34B).

 RETURNS ON EQUITY

• Canadian banks clearly dominate in terms of profitability, followed by European banks. US banks are forecast to show very poor ROEs in 2009 with 4 of the 9 US banks forecast to show negative ROEs.
• Canadian banks clearly stand out as their 2009 ROEs are expected to average 15.1%, compared to 0.4% for US banks. European banks’ ROEs are forecast to average 6.5% in 2009.

PRICE TO BOOK VALUES

• All Canadian banks stocks trade above book values with 3 banks at or above 2.0x BV.
• Five of the 9 US banks currently sell below BV. Same for European banks. Most of these 10 banks sell significantly below BV.

PRICE TO TANGIBLE BOOK VALUES

• 8 banks sell below tangible book value and 8 sell above 2x TBV.

THE PRICE OF GROWTH

Price to book value ratios are not very meaningful valuation tools unless considered along with returns on BV, or ROEs. How much are investors paying for growth?

• Generally, the higher the ROE the higher the multiple of book one should be willing to pay.
• Dispersion around the regression line is significant suggesting that many banks are overvalued or undervalued in a relative sense, based on ROE alone.
• European banks are particularly dispersed, on each side of the line but mainly on the undervalued side. Either they are relatively undervalued or the market is not comfortable with ROE estimates (Read European Banks: A Stress Unconfessed).
• There is a particularly wide dispersion of PB around the 5% to 8% ROE range.
• It is also interesting to see that TD Bank, a Canadian bank with an increasing US presence, is selling at only a slight premium to JPM and BBT while boasting a ROE twice as high.

Stock prices are as of May 11.

Disclosure: long CM,TD