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How North America’s biggest banks stack up

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Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. michael@wickhaminvestments.com

What are we looking for?

North America's biggest, most efficient banks.

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The screen

My colleague Rob Belanger and I started with North American banks over $5-billion in market capitalization.

Tier 1 capital is the measure of a bank's financial strength based on the sum of its equity capital and disclosed reserves. A firm's risk-weighted assets include all assets that a firm holds that are systematically weighted for credit risk. Generally, a firm must have a ratio of Tier 1 capital to its risk weighted assets of more than 6 per cent to be considered well capitalized. We are looking for a large ratio.

The efficiency ratio shows the percentage of a dollar needed to produce $1 of revenue. We have sorted the banks based on the efficiency ratio, from best to worst.

We are looking for a low number when examining the percentage of non-performing assets in comparison to total assets. In simple terms, if a borrower fails to make a loan payment for 90 days it is considered to be a non-performing asset.

U.S. hedge funds see Canada's housing market as a bubble set to burst and they want to take advantage of that by shorting the banks that hold the mortgages. The short interest ratio is a sentiment indicator derived by dividing the amount of stock that is sold short by the average daily volume of a stock. It determines how long it will take short sellers, in days, to cover their entire position if the price of a stock begins to rise.

What did we find?

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Excluding the yield, one of the best banks on our list is First Republic. A relative newcomer on the scene, the company was formed in 1985 and operates predominantly on the U.S. West Coast. M&T Bank claims the highest short interest ratio at 11.06 days. The firm was started in 1856 and sports the best efficiency ratio but scores relatively poorly in the Tier 1 capital and non-performing asset categories.

While CIBC and the Bank of Nova Scotia are very close in most categories, we'll give the edge to CIBC with its higher yield and better Tier 1 capital ratio.

While Bank of America only scores well in the Tier 1 capital ratio, the stock has doubled in the past 12 months.

Conclusion

Evident on our screen, bashing and shorting Canadian assets has been a popular chant this year. Pacific Investment Management Co. LLC (Pimco), the world's largest bond fund, says the bearishness has gone too far. Playing the short side could be a dangerous gamble. As always, do your own research or contact an investment professional before buying.

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About the Author
Portfolio Manager

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high net worth clients. Mr. Bowman has 30 years experience as an investment adviser and financial planner serving both individual and corporate accounts. More

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