NEW YORK - The Canadian banking hoax continues with Canadian banks receiving outsized valuations compared to their U.S. Counterparts. Bank of America is valued at roughly the size of Canada's largest lender Royal Bank of Canada despite being 4 times the size.
Investors are clearly mis-pricing risk at this point. Canadian banks now entail much more risk than their U.S. counterparts. Before 2008 Canadian and U.S. Banks had similar capital ratios but U.S. Banks held much worse assets causing calamity. Now U.S. Banks still hold a little worse loan assets but have twice the capital as before.
Lets examine PNC Financial vs. CIBC to show how there is a joke being played in the financial system.
PNC Financial has a tier 1 ratio of 10.5%. Lets examine their assets and calculate how the ratio is derived. First off the ratio takes tangible common shareholders equity divided by risk weighted assets. Right now PNC has tangible equity of $23 billion and risk weighted assets of $220 billion which gets that ratio.
Both banks actually hold very similar assets with CIBC actually holding more loans of $180 billion compared to PNC of $150 billion. CIBC also holds more trading assets which is inherently more risky.
The rest of the assets are similar. CIBC has $362 billion of assets and $14.2 billion of tangible equity. PNC has $263 billion of assets and has $23 billion of tangible equity.
CIBC has leverage of 25 to 1, PNC has leverage of 11 to 1.
Both banks hold similar assets with PNC having much more provision for loan losses because of more trouble in the U.S. Market.
However it makes little sense that CIBC masquerades around saying they have a 14% tier 1 ratio and PNC says they have one of 10.5%. This is because of how the banking rules are set up in their respective countries in defining risk weighted assets. CIBC has much more leverage and is inherently much more dangerous. Despite its excess leverage the company earned $750 million in the latest quarter compared to $888 million by PNC. Despite the dangers of CIBC and its shortfall in earnings the company gets a $6 billion premium in terms of valuation to PNC.
Canadian banks have maintained dividends through the crisis, and increased dividends this year. Meanwhile yield on American banks is non-existant and Bank of America is frantically scrambling to raise capital. The market is smarter in its pricing than your analysis is.
ReplyDeletePnc took on the worst can of worms when they did the shotgun national city transaction which they were able to use their tarp money to buy it ! National city has worms and issues that even the smartest accounts and bankers couldn't even cone close to getting its true losses going forward remember national city was also huge in commercial loans and with that being the next wave to so called hit I would advise you to read between the lines and don't take a balance sheet at face value ! These losses are so much worse !
ReplyDeleteIt is the size that's part of the problem. When you have too much garbage on the asset side of the balance sheet, people have a hard time understanding the intrinsic value of an institution like BAC. So you come up with the worst-case scenario, what if it's only worth 30-40% of what is on the book???
ReplyDeleteYou are making a false comparison. Canadian Banks are profitable, with respectable PE ratios. Why would the market punish their valuation just because of what is happening with the US banks. You are making broad assumptions about the risk in their assets. I'll take 50:1 leverage on fairly priced assets over 4:1 leverage on Countrywide (BAC) assets.
ReplyDeleteThe US has a damaged reputation due to the melt down and lack of serious oversight. Canada has not had these same issues and is viewed as a much safer place to invest so I'm not surprised by this.
ReplyDeleteWhat tells you the BAC assets are not currently fairly priced? or the PNC ones are not.
ReplyDeleteU.S. Banks assets declined substantially in value but the banks went through a lot to get to their current position. At the current time U.S. Banks the good ones at least are safer than their Canadian counterparts. PNC, WFC, USB are clearly in a better position and have far less leverage than RY, CIBC, TD. And these banks hold mostly loans on their books and have simple businesses.
Despite this and their safety they trade at huge discounts.
WFC is earning more than 100% more than RY and has a far better financial condition and is in a worse U.S. Market and has far less leverage but it is only 78% more.
PNC trades at 60% of BMO (When you update BMO's C/S to 640 shares after MI transaction) despite making 18% more revenue and much more profit. I don't actually dislike the Canadian banks my point is your mispricing risk. Its a terrible investment to be buying Canadian Banks now.
A word on Basel. Canadian banks have much more leverage than their U.S. Counterparts that if Basel is adopted they will need to raise much more capital than banks like WFC, USB, PNC (Who are already well above the minimums) and to a lesser extent JPM and BAC but still more.
Canadian Banks have their own regulatory standards to measure risk weighted assets. The U.S Standard is much stricter so you also entail that risk.
I think BMO, RY would be good investments if the U.S. Banks were trading at twice their current values.