What are we looking for?
Canadian banks offering compelling valuations.
The screen
We last looked at North American financials back in September; lingering concerns over oil and gas exposure, low interest rates and slowing growth in lending have continued to depress valuations of the Canadian banks. As of Jan. 7, the median price-to-book ratio for the six largest Canadian banks has dropped to 1.47. Over the past 20 years, we haven't seen lower levels since the median P/B was 1.43 in September, 1996, and 1.30 in February, 2009. Investors' concerns are valid and we could still see further declines, but current valuations may be very compelling.
To search for some potential ideas within the sector, my colleague Lawrence Ullman and I used Morningstar CPMS to rank Canada's Big Six based on their latest price-to-book ratio.
More about the Ullman Group
The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.
What we found
Looking back, the median 12-month return for the banks following the periods mentioned were 65 per cent (September, 1996, to September, 1997) and 73 per cent (February, 2009, to February, 2010).
We also used Bloomberg to perform a back-test starting Dec. 31, 1999, reselecting an equally weighted portfolio of the two Canadian banks with the lowest P/B ratios each year.
Over the full period, this strategy would have generated an annualized total return of 14.8 per cent compared with 5.2 per cent for the S&P/TSX composite total return index. Selecting the full group of six would have also been a successful approach as it would have posted an annualized total return of 12.6 per cent.
The opinions expressed in this report are the opinions of the author, and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto.
Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons Ltd. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Ltd.