People walk by the Bank of Nova Scotia in Toronto on Tuesday, August 28, 2012. Canadian banks are outperforming U.S. rivals even as plunging oil prices hamper economic growth.Michelle Siu/The Canadian Press
Canadian banks are trading near the cheapest levels relative to their U.S. peers in six years, offering higher profitability and dividends even as economic growth lags the United States.
The Big Six are more profitable than their 12 largest U.S. counterparts, including Wells Fargo & Co., JPMorgan Chase & Co. and U.S. Bancorp based on return on equity, according to data compiled by Bloomberg. The Canadian banks give almost half their earnings back to investors in payouts and boast an average dividend yield of almost 4 per cent, double that of U.S. competitors.
"I'm not sure a lot of U.S. investors buy Canadian banks because they always like their own, but their own haven't measured up," John Kinsey, fund manager at Caldwell Securities Ltd. in Toronto, whose firm manages about $1-billion.
Canadian banks, ranked the world's soundest for seven straight years by the Geneva-based World Economic Forum, are outperforming U.S. rivals even as plunging oil prices hamper economic growth.
Canadian lenders are benefiting from fewer regulatory restrictions and less competition than U.S. peers, according to analysts and investors such as Ian Nakamoto. Toronto-Dominion Bank, Bank of Montreal and others are also leveraging expansion in the United States, where economic growth will top Canada's for the next two years, according to economists' estimates compiled by Bloomberg.
The U.S. economy is forecast to expand 3.1 per cent this year and 2.8 per cent in 2016, outpacing Canada's predicted 2.05 per cent and 2.2 per cent.
"U.S. banks are under a heavy regulatory environment, so that makes a big difference," said Mr. Nakamoto, director of research at MacDougall, MacDougall & MacTier in Toronto, which manages about $5-billion. "We have an oligopoly, with five or six banks for 33 million people, while the U.S. has thousands of banks and credit unions for 330 million. There is competition in Canada, but it's not cutthroat."
"There's a feeling that the Canadian banks have performed better recently, but there might be a bit better opportunity in the U.S. over the next 12, 18, 24 months," said Jim Shanahan, an analyst at Edward Jones & Co., in a phone interview from St. Louis. U.S. banks may fare better "especially given some of the credit concerns in Canada and the slower loan and income and revenue growth that seems likely."
Canadian bank stocks have traded at a premium to those in the U.S. for more than eight years, based on price to tangible book value per share, according to Bloomberg data. By that measure, Canada's eight largest banks are about 56 per cent more expensive, trading at about 2.4 times book value versus 1.5 times for the U.S. group, the data show. That's down from the average for the past five years, which saw Canadian banks trade at twice the valuation of U.S. lenders.
"Canadian banks are more expensive, but they're actually allowed to do things with their money, so it's worth paying a premium," said Barry Schwartz, chief investment officer at Baskin Wealth Management in Toronto, which oversees $800 million.
"The regulatory restrictions aren't as onerous because we never suffered the same calamity as what happened in the U.S."