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Standard & Poors, BMO Nesbitt Burns, banks

The case for Canadian banks Add to ...

Canadian banks are feeling the love.

On the back of a Standard & Poor's report Thursday that shows the big banks pass any stress test with flying colours, one of the sector's top analysts took the boots to one of the sector's enduring myths: That Canadian banks are somehow inferior to U.S. peers.

S&P's latest report is an extension of the extra scrutiny given to American banks in the wake of the economic meltdown. After working over balance sheets, the credit rating agency concluded: "Canadian financial institutions perform better under our stress tests than do those we rate in the U.S. under similar tests."

Score one for the locals.

In the same vein, BMO Nesbitt Burns analyst Ian de Verteuil published a report that compared Canadian banks with U.S. peers, with a eye to proving, or knocking down, a widely-held view that domestic banks are "expensive" compared with foreign rivals.

This view has an enormous influence on asset allocation decisions at institutional investors. If money managers see little upside to Canadian banks stocks compared with peers, then they will steer clear, and the sector will go sideways.

Mr. de Verteuil's key point is that while Canadian bank stocks trade at a premium to the average U.S. bank, that valuation is more than justified. To boil down a larger thesis, he showed that Canadian banks have shown they can continue to grow their book value, while the bulk of U.S. banks are shrinking.

A brief digression: To the enduring frustration of Canadian bank CEOs and their investor relations staff, global investors always seem to find a reason to steer clear of domestic banks, in favour of their American peers. Mr. de Verteuil ran through the litany of past rationalization in his report: The big six "already control too much of their core market to grow, they haven't deployed excess capital well, they don't offer consolidation possibilities, etc."

"Today, the argument is that they are too expensive relative to the "average" U.S. bank," said Mr. de Verteuil. He then observed: "Whatever the argument, the facts speak for themselves: Canadian banks as a group have outperformed U.S. banks over the last year, two years, five years, 10 years and 20 years, and with a relatively high degree of regularity."

"Given events of the past two years, we see little reason why this would change in the medium term," said the BMO Nesbitt Burns analyst.

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