If Canadian banks are so keen on U.S. acquisitions, should investors skip the middleman and invest in U.S. banks themselves?
The question alone is enough to turn many people queasy. The 24-member KBW Bank Index, which consists of household names like Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. along with some lesser-known banks, tumbled 85 per cent during the last financial crisis.
The rough times are back: This year, the index has stumbled 31 per cent amid concerns that U.S. economic growth is slowing to a halt and another financial crisis is in the works, this time spreading from Europe.
Clearly, this isn’t a group of stocks coasting on upbeat sentiment – but that can be good news for investors who like to move against the crowd.
U.S. bank stocks have other good things going for them beside investor distaste. For one, they’re a lot cheaper than their Canadian counterparts, which is partly what has been attracting takeover offers from north of the border.
While Canadian banks trade at about 12-times trailing earnings after the recent correction, U.S. banks are in single-digit territory.
Price-to-book ratios – another valuation measure, which tells you what investors are willing to pay for a company if it were to be liquidated – are also far lower for U.S. banks. Canadian banks tend to have rich price-to-book ratios of around two, while many U.S. banks have ratios below one, meaning that they are worth more dead than alive.
Of course, none of these measures mean much if the U.S. financial system is headed for the shredder. To be sure, there is a lot of uncertainty here: The mortgage-related debacle of the past decade continues to haunt U.S. banks, in the form of lawsuits and writedowns. As a result, earnings far less predictable.
However, fearing a repeat of the 2008 financial crisis that devoured so much of Wall Street seems a stretch, given that banks today are playing things far more conservatively. According to Goldman Sachs, major banks now have bigger reserves, better balance sheets and less leveraged exposure to losses, all of which should support them in the case of another economic downturn.
Not convinced? You’re not alone. But keep in mind that Canadian banks are the bedrock of most conservative investment portfolios, and these same banks are now bulking up on U.S. assets.
In other words, conservative investors are about to gain exposure to U.S. banks through their Canadian holdings. If they can do it, so can you.
