Flee to Canada to Dodge U.S. Bank Stock Risk

Tickers in this article: BAC BMO BNS C CM JPM RY TD WFC

New York (TheStreet) -- The strong fiscal fourth-quarter earnings performance of Royal Bank of Canada underscores the value investors see in the "Big Five" Canadian banks.

While some of the "Big Four" U.S. banks have achieved higher returns on average assets (ROA) during recent quarters, these earnings have been padded by large releases of loan loss reserves, which hasn't been the case for the largest Canadian banks.

Looking at year-to-date stock market performance, the contrast is striking. Through Thursday's market close, year-to-date declines for the big four U.S. banks ranged from 16% for Wells Fargo to a very painful 58% for Bank of America , beleaguered with mortgage putback claims and uncertainty over its capital strength, although CEO Brian Moynihan is making steady progress in his plan to boost capital ratios through the sale of noncore assets.

For the largest five Canadian banks, year-to-date stock performance has ranged from a decline of 10% for Bank of Nova Scotia to a positive return of 8% for Bank of Montreal . Meanwhile, the "Big Five" feature dividend yields ranging from 3.78% for Toronto-Dominion Bank to 5.00% for Canadian Imperial Bank of Commerce .

Looking at five-year returns, you would have at least made some money with any of the big five Canadian banks, while taking significant losses on any of the big four U.S. banks.

Here's a quick look at the largest five Canadian banks, with data provided by SNL Financial:
  • Royal Bank of Canada is pulling out of the U.S., expecting to close on a deal to sell its U.S. subsidiary, RBC Bank (USA) to PNC Financial Services Group , in the first quarter of 2012, for $3.45 billion, which SNL said in June was a $112 million discount to the U.S. subsidiary's book value. Royal Bank's shares closed at $47.03 Thursday, declining 7% year-to-date. Based on a quarterly payout of 54 cents, the shares have a dividend yield of 4.59%. The shares trade for 2.2 times book value and 10 times the consensus fiscal 2012 earnings estimate of $4.55 a share, among analysts polled by FactSet. For the most recent five quarters of data available from SNL, Royal Bank of Canada's ROA has ranged from 0.70% to 1.04%. The consensus 12-month price target for the shares among analysts polled by FactSet is $55.20 and two out of seven analysts rate the shares a buy. The other five analysts all have neutral ratings.
  • Toronto-Dominion Bank on Thursday completed its acquisition of MBNA's Canadian credit card portfolio from Bank of America. The company also has continued expanding in the U.S., building on its acquisition of Commerce Bank of Cherry Hill, N.J., in 2007, through several subsequent acquisitions, including the purchase of three failed banks from the Federal Deposit Insurance Corp. last year. The shares closed at $71.90 Thursday and were flat year-to-date, with a dividend yield of 3.78%, based on a quarterly payout of 68 cents. ROA has ranged between 0.64% and 1.00% over the past five quarters. The shares trade for 10 times the consensus fiscal 2012 EPS estimate of $7.11 and 2.4 times tangible book value. All seven analysts covering Toronto-Dominion rate the shares a buy, and the consensus price target is $88.34.
  • Shares of Bank of Nova Scotia closed at $50.24 Thursday, declining 10% year-to-date. Based on a quarterly payout of 52 cents, the shares have a dividend yield of 4.14%. ROA has ranged from 0.80% to 1.09% over the past five quarters. The shares trade for nearly 11 times the consensus 2012 EPS estimate of $4.79 and 2.8 times tangible book value. The six analysts covering Bank of Nova Scotia are evenly split between buy and hold ratings, and the consensus price target is $61.12.
  • Bank of Montreal closed at $59.09 Thursday, returning 8% year to date. Based on a quarterly payout of 70 cents, the shares have a dividend yield of 4.74%. The bank's ROA has ranged from 0.67% to 0.78% over the past four quarters. The shares trade for 10 times the consensus 2012 EPS estimate of $5.74, and just under twice their tangible book value. Bank of Montreal has had the weakest earnings among the big five Canadian banks over the past five quarters, and also has the weakest sentiment among analysts. Out of nine analysts covering Bank of Montreal, four rate the shares a buy, three have neutral ratings, and two analysts recommend selling the shares. The consensus price target is $65.03.
  • Shares of Canadian Imperial Bank of Commerce closed at $72 Thursday, declining 5% year-to-date. Based on a quarterly payout of 90 cents, the shares have a dividend yield of 5.00%. ROA has ranged from 0.56% to 0.90% over the past five quarters, according to SNL. Five out of nine analysts covering the company rate the shares a buy, while the remaining analysts all have neutral ratings. The consensus price target is $84.82.

In contrast, the big four U.S. banks have seen lumpier earnings -- padded greatly by the release of loan loss reserves -- and much weaker stock performance. With three out of four trading below tangible book value and all four trading at low multiples to forward earnings, analysts see bargains. Then again, at the end of last year they saw bargains, with the picks backfiring for investors.
  • Shares of JPMorgan Chase closed at $30.46 Thursday, declining 27% year-to-date. The company is unique among the big four, with a 3.28% dividend yield, based on a quarterly payout of 25 cents. JPMorgan's ROA has ranged between 0.76% and 0.87% over the past year. The company is also unique among the big four U.S. banks in releasing "just" $170 million in loan loss reserves during the third quarter, providing relatively little padding to its $4.3 billion in third-quarter earnings. The shares trade for six times the consensus 2012 EPS estimate of $4.88 and for just under tangible book value. Out of 25 analysts covering JPMorgan, 23 rate the shares a buy, while the remaining two analysts have neutral ratings. The consensus price target is $45.91.
  • Bank of America closed at $5.53 Thursday, with the overhang from mortgage losses, continued mortgage putback demands and concern over capital pushing the shares down 58% year-to-date. The shares trade for 5.5 times the consensus 2012 EPS estimate of 99 cents, and for just 0.4 times tangible book value. Because of the low valuation, there are still 10 analysts rating the shares a buy, while 13 analysts have neutral ratings and one analyst recommends selling the shares. The consensus price target for BAC is $9.53.
  • Citigroup closed at $26.99 Thursday, down 43% year-to-date. The shares trade for six times the consensus 2012 EPS estimate of $4.37 and for just over half their tangible book value. Out of 21 analysts covering Citi, 15 rate the shares a buy, four have neutral ratings, and two recommend selling the shares. The consensus price target is $42.39.
  • Wells Fargo has performed best this year among the big four, with shares down only 16% to close Thursday at $25.64. Based on a quarterly payout of 12 cents, the shares have a dividend yield of 1.87%. The shares trade for eight times the consensus 2012 EPS estimate of $3.20 and for 1.5 times tangible book value. Out of 23 analysts covering the shares, 20 rate Wells Fargo a buy, while two analysts have neutral ratings and one recommends selling the shares. The consensus price target is $32.57.

The analysts love the big four U.S. banks, based on the low multiples to forward earnings estimates and to tangible book value. But the market doesn't love them, and as we have seen, the analysts have been "early" on their predictions for recovery in the shares of the largest U.S banks.

Years early.

So if you think that the worst is over for the big four U.S. banks, and that the regulatory and mortgage putback pressure will subside in 2012, you're looking at some amazing bargains

If you would like to take a more conservative approach amid continuing uncertainty, while collecting a decent dividend yield, head north.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Tickers in this article: BAC BMO BNS C CM JPM RY TD WFC