Bank stocks offer better value in U.S. than Canada

By Norm Rothery on December 10, 2017
Estimated reading time: 3 minutes

Canada's leveraged banks may not have learned the lessons of the last financial crisis

The most dramatic difference between the U.S. and Canadian bank stocks comes down to leverage. All of the U.S. banks have smaller leverage ratios, and usually much smaller ones, than the Canadian banks. On average, the U.S. banks have leverage ratios (assets/equity) of 9.0, whereas the average for the Canadian banks comes in at 19.1. While it could be argued that the Canadian banks have better franchises than the U.S. banks, the leverage that the Canadian banks employ appears to indicate that they’ve not learned enough from the collapse of the U.S. real estate market in 2008. First up, the following table provides stats on Canada’s bank sector.

Name	Market Cap (M)	Price	P/E	P/B	Yield	Leverage
Royal Bank (RY)	$147,709	$101.33	13.8	2.25	3.59%	18.29
TD Bank (TD)	$137,775	$74.51	14.1	2.05	3.22%	17.87
Bank of Nova Scotia (BNS)	$100,682	$84.00	13.1	1.89	3.76%	16.85
Bank of Montreal (BMO)	$64,444	$99.49	12.2	1.67	3.62%	18.01
CIBC (CM)	$50,435	$114.72	10.4	1.78	4.53%	20.67
National Bank (NA)	$21,596	$63.25	13.3	2.05	3.67%	23.07
Canadian Western Bank (CWB)	$3,201	$36.23	15.9	1.49	2.65%	11.64
Laurentian Bank (LB)	$2,301	$59.22	13.4	1.18	4.19%	26.61
Source: Bloomberg, November 22, 2017

Next up is a similar table for the U.S. big banks from the diversified and super-regional industry subgroups.

Name	Market Cap (M)	Price	P/E	P/B	Yield	Leverage
JPMorgan (JPM)	$337,500	$97.27	13.9	1.45	2.30%	9.92
Bank of America (BAC)	$273,699	$26.24	14.2	1.10	1.80%	8.38
Wells Fargo (WFC)	$266,107	$54.04	13.8	1.48	2.90%	9.36
Citigroup (C)	$189,125	$71.53	13.8	0.91	1.80%	8.26
Goldman Sachs (GS)	$93,289	$237.24	12.2	1.20	1.30%	10.71
Morgan Stanley (MS)	$87,466	$48.38	13.1	1.24	2.10%	10.66
US Bancorp (USB)	$86,011	$51.83	15.3	2.00	2.30%	9.31
PNC Financial (PNC)	$62,806	$132.00	15.9	1.48	2.30%	8.08
Capital One (COF)	$41,688	$86.00	12.0	0.91	1.90%	7.21
SunTrust Banks (STI)	$27,439	$57.64	14.6	1.22	2.80%	8.49
Fifth Third Bancorp (FITB)	$20,187	$28.61	10.6	1.34	2.20%	8.69
KeyCorp (KEY)	$19,626	$18.25	15.6	1.34	2.10%	8.97
Huntington (HBAN)	$14,712	$13.61	16.2	1.53	3.20%	9.53
Comerica (CMA)	$13,689	$78.71	17.5	1.71	1.50%	8.96
Source: Bloomberg, November 22, 2017

The U.S. banks pay a lower average dividend yield of 2.2%, whereas the Canadian banks pay an average yield of 3.7%. But the U.S. banks trade at lower book value multiples with a harmonic average of 1.29 versus 1.73 north of the border. Both offer roughly similar earnings multiples. Overall, the big U.S. banks look relatively attractive based on their lower book value multiples and lower leverage ratios. The institutional memory of the big crash is hopefully still very real in the U.S. and it should help curb excesses in the near term. It’s harder to make a similar claim in Canada. Update on the Safer Canadian Dogs strategy OK, let’s shift gears to another investing strategy. Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders. The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada. My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done. Here’s the updated Safer Dogs of the TSX, representing the top yielders as of June 8. The list is a good starting point for those who want to put some money to work. Just keep in mind, the idea is to hold the stocks for at least a year after purchase – barring some calamity.

Name	Price	P/B	P/E	Earnings Yield	Dividend Yield
Emera (EMA)	$48.42	1.77	18.13	5.51%	4.67%
BCE (BCE)	$61.56	3.62	19.06	5.25%	4.66%
CIBC (CM)	$114.72	1.78	10.42	9.61%	4.53%
Power (POW)	$32.82	1.14	9.86	10.14%	4.37%
Shaw (SJR.B)	$28.21	2.39	16.40	6.10%	4.20%
TELUS (T)	$48.40	3.40	22.72	4.40%	4.17%
Bank of Nova Scotia (BNS)	$84.00	1.89	13.08	7.70%	3.76%
National Bank (NA)	$63.25	2.05	13.26	7.64%	3.67%
Bank of Montreal (BMO)	$99.49	1.67	12.24	8.20%	3.62%
Royal Bank (RY)	$101.33	2.25	13.84	7.26%	3.59%
Source: Bloomberg, November 22, 2017

Notes — Price: Closing price per share; P/B: Price to Book Value Ratio; P/E: Price to Earnings Ratio; Earnings Yield: Earnings divided by Price, expressed as a percentage; Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage. As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (The author may own shares of some, or all, of the stocks mentioned.)