Bank Stocks Could Crash Again -- Just Not the Ones You Think
In the wake of the financial crisis, after hundreds of new regulations and capital requirements were thrust upon the U.S. banks, there's no way that we'll see bank stocks take another nosedive in the near future, right?
Wrong. There may not be an American-centric banking crash anytime soon, but that doesn't mean investors in international banks are immune to pain. After the U.S. financial sector outperformed the S&P 500 in 2012 and shares of a few banks such as Bank of America more than doubled in value, many investors are beginning to worry that the rally for U.S. banks is nearing its end. First-quarter results highlighted tepid loan demand and discouraging revenue numbers.
However, with popular valuation-metrics, like price-to-tangible book value, still pointing to the undervalued nature of the sector, I believe U.S. banks seem to have more upside than downside in the long term. But if we look at some international bank stocks, the story looks surprisingly different.
After avoiding many of the pitfalls that plagued American banks, Canadian and Australian banks have remained strong. Banks in these countries have delivered generous returns on equity to shareholders over the past several years largely because of higher leverage. But has this perceived strength led to a run-up in the valuation of these banks that may not ultimately be able to meet investors' lofty expectations?
Let's take a look at each country's four largest banks by looking at the following metrics:
- Total assets (USD, in billions)
- Average return-on-assets over the past two years
- Current share price-to-tangible book value
|National Australia Bank||791||0.64%||2.2|
|Australia & New Zealand Banking Group||697||0.93%|
|Royal Bank of Canada||832||0.93%||2.9|
|Bank of Nova Scotia||713||0.99%||2.6|
|Bank of Montreal||538||0.75%||1.9|
|Bank of America||2,175||0.13%||0.9|
First reaction: "Wow, U.S. banks really are enormous." But that's a whole other story that fellow Fool John Maxfield detailed here. Second reaction: "Boy, Australian and Canadian bank investors sure are optimistic!" -- at least compared with U.S. bank investors.
The most noteworthy takeaway from this quick snapshot may be how seemingly underappreciated Wells Fargo is. The bank boasts the strongest return on assets but is fourth cheapest on a price-to-tangible book value basis.
Sign of strength or weakness?
So often, investors take too narrow of a view when determining relative value. If one solely looks at large U.S. banks, it's reasonable to assume that Wells Fargo is "expensive." But why should Wells Fargo be lumped into the same category as bank stocks that move primarily on news of recent legal settlements and cost-cutting initiatives, instead of being compared with other banks with a strong track-record of operational success?
The vast discrepancy in valuation between Wells Fargo and the largest Australian and Canadian banks may signal Wells Fargo's tremendous upside or the foreign bank stocks' significant downside. The answer is not clear or absolute. But it would stand to reason that those investing on the side of Wells Fargo may be able to rest easier at night than those invested internationally in an industry that has shown the ability to deteriorate quickly when expectations get out of whack and panic rears its ugly head.
Time to buy?
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The article Bank Stocks Could Crash Again -- Just Not the Ones You Think originally appeared on Fool.com.David Hanson has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo and owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.