Samuel Oubadia is a senior analyst at Lorne Steinberg Wealth Management in Montreal.
What are we looking for?
Bargains in the global banking sector.
While some equity markets (as seen by their indexes) have recently reached all-time highs, one industry that has never completely recovered from the crisis of 2008, is the financial sector. Many of the problems facing the sector are related to the much stricter regulatory environment that banks now face as a result of the fallout from that crisis.
Banks, globally, have had to beef up their balance sheets by raising capital in some way, shape or form. But given that capital adequacy ratios are still a moving target, investors have been wary of a sector that is prone to negative surprises. As a result, the banking sector, as a group, tends to trade a seemingly attractive valuations.
At Lorne Steinberg Wealth Management, we are deep-value equity investors. While the banking sector appears to offer a lot to choose from that qualifies as “value,” we believe that looking at these stocks requires us to go beyond valuation metrics.
Using S&P Capital IQ, we created a screen to look at banks in developed markets, where the market capitalization was above $1-billion (U.S.). (We also included financial institutions where investment banking is the primary line of business.)
We checked for banks that had a price-to-tangible-book value of less than 1.4 times. However, in order to incorporate a measure of capital adequacy as well, we also screened for banks that had a core Tier 1 equity ratio greater than 10 per cent. To limit the results of the screen even further, we only included banks that have seen their share price increase less than 10 per cent over the past year.
What we found
The results of the screen can be seen in the accompanying table. Interestingly, several major U.S. banks appear on the list.
As always, we would note a few words of caution. The regulatory environment, globally, is still very much in transition. So although a bank may meet certain capital measures today, these requirements may be made more stringent in the near future. Also, our screen does not address issues such as earnings growth or asset quality. Investors should consider these risks before buying any of the banks listed here.