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The Globe and Mail

Canada bank stock premium to U.S. shrinks to narrowest since 2007

Bank towers are shown from Bay Street in Toronto's financial district.

Adrien Veczan/THE CANADIAN PRESS

Canadian bank stocks have gotten a whole lot cheaper relative to their U.S. counterparts.

The shares, which have fetched a premium over U.S. lenders for a dozen years, are now trading at their narrowest margin in almost a decade, according to data compiled by Bloomberg. It's a significant shift from eight years ago, when Canadian bank stocks were almost three times pricier based on tangible book value.

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"It's a buying opportunity," said David Baskin, who helps oversee about $1.1-billion at Baskin Wealth Management in Toronto including shares of Toronto-Dominion Bank, Bank of Nova Scotia and National Bank of Canada. "If you look at the Canadian banks' price-to-earnings ratio and dividend yields, they certainly look very inexpensive."

Financial stability, attractive dividends and healthy growth profiles have helped fuel the premium over the years, but those advantages are now under pressure as prospects for Canadian lenders have diminished while picking up for their U.S. peers, said Craig Fehr, Canadian investment strategist at Edward Jones & Co.

Other made-in-Canada factors also may be pressuring prices, including concerns about exposure to overheated housing markets in two of the country's biggest cities -- Toronto and Vancouver -- as well as credit rating downgrades by Moody's Investors Service in May.

Greater Value

The spread between Canada's eight-company S&P/TSX Commercial Banks Index and the KBW Bank Index of 24 U.S. lenders reached its narrowest this week since Oct. 9, 2007, based on price to tangible book value. The ratio measures what investors are willing to pay for a company's equity after removing intangible items, such as goodwill and brand names that would have little value if the firm went out of business.

By that measure, Canadian banks are now 52 per cent pricier than U.S. banks, trading at about 2.29 times tangible book versus 1.76 times for the U.S. group. In July 2009, they were almost three times more expensive, at about 2.97 times versus 1.12 for U.S. banks. Over the past decade, they've traded on average at more than twice the valuation of U.S. lenders.

The Canadian banks index has fallen 7 per cent since touching a record high on March 6, and year-to-date performance is up 0.1 per cent, trailing the 2.2-per-cent gain of the KBW Bank Index.

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The dissipating premium for Canadian banks comes even as those lenders produce superior profitability and higher dividend yields while operating in a country poised to outperform the U.S. economy this year for the first time since 2014, according to economists' estimates compiled by Bloomberg.

"I would view the Canadian banks as inherently more valuable than the American banks, simply because of the structure of the industry in Canada," Mr. Baskin said. "It's such an oligopoly, the returns on invested capital are so terrific and so consistent over time that I think they deserve a premium."

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