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Stingy Investor Tip Sheet

Banks by the book

Canadian bank stocks have been battered and bruised by the downturn. The median bank is now down 51% from its 52-week highs.

Company                Price  Loss   52WkLow 52WkHigh
====================== ====== ====== ======= ========
Cdn Western Bank (CWB)  $9.73 -66.8%   $9.73  $29.29	
Bank of Montreal (BMO) $24.66 -55.2%  $24.66  $55.08	
TD Bank (TD)           $33.25 -53.9%  $33.25  $72.11	
Scotiabank (BNS)       $24.83 -52.7%  $24.83  $52.51	
CIBC (CM)              $39.92 -49.1%  $39.52  $78.48	
Royal Bank (RY)        $27.07 -47.4%  $26.80  $51.50	
Laurentian Bank (LB)   $25.25 -43.7%  $24.30  $44.85	
National Bank (NA)     $32.21 -41.8%  $24.25  $55.39	
Source: February 20, 2009,  
Loss colum shows decline from the 52 week high.

But this week marked an unusual event. Most of the Canadian banks are now trading for less than book value. In recent years the banks have often traded for more than two times book value. As a result, the banks appear to be better values today than they have been for many years.

The table below highlights the current price-to-book-value ratios (P/B) and price-to-tangible-book-value ratios (P/TB) for the banks.

Company                 Price   P/B   P/TB
======================  ====== ===== ======
Laurentian Bank (LB)    $25.25  0.56  0.59
Bank of Montreal (BMO)  $24.66  0.64  0.71
TD Bank (TD)            $33.25  0.85  1.96
Cdn Western Bank (CWB)   $9.73  0.91  0.92
National Bank (NA)      $32.21  0.93  1.12
CIBC (CM)               $39.92  1.10  1.34
Scotiabank (BNS)        $24.83  1.14  1.29
Royal Bank (RY)         $27.07  1.18  1.85
Source: February 20, 2009

Laurentian Bank, as the only unionized bank in the bunch, typically trades at a low P/B ratio. Indeed, it rarely sold for more than book value during the last decade and it currently has the lowest ratio of the bunch. The next two characters, BMO and TD, have regularly traded at ratios in excess of 1.5. Royal, often seen as the safest bank, has traded around three times book value on occasion.

Should the banks survive, without overly diluting their shareholders, then investors could dream that the banks will return to their average P/B ratios. Longer-term bulls might even speculate of a return to the old high P/B ratios. In such scenarios, what would the gains look like assuming that the book values themselves remain unchanged?

Company	               P/B  AvgPB ToAvg  HighPB ToHigh
====================== ==== ===== ====== ====== ======
Bank of Montreal (BMO) 0.64  1.70 164.2%   2.09 224.8%	
TD Bank (TD)           0.85  2.05 141.4%   2.54 199.1%	
Cdn Western Bank (CWB) 0.91  1.82 100.1%   3.25 257.4%	
Royal Bank (RY)        1.18  2.24  90.4%   2.92 148.2%	
Scotiabank (BNS)       1.14  2.12  86.3%   2.80 146.1%	
National Bank (NA)     0.93  1.58  69.5%   2.13 128.5%	
CIBC (CM)              1.10  1.77  61.3%   2.53 130.6%	
Laurentian Bank (LB)   0.56  0.79  42.1%   1.04  87.1%	    
Source: February 20, 2009, Average and High 
P/B ratios based on annual figures.  ToAvg and ToHigh
shows the gains needed to move P/B ratios back to
average and high levels.

Of course, book values aren't fixed. They fluctuate. It seems likely that the banks will suffer from either reduced earnings or losses over the next few quarters. Losses and writedowns could put a dent in current book values.

But earnings have held up so far with the exception of CIBC. The table below shows current price-to-earnings ratios but the banks will issue new quarterly earnings reports over the next couple of weeks.

Company                Price   P/E  Yield  Payout
====================== ====== ===== ====== ======
Bank of Montreal (BMO) $24.66  6.95 11.35%   79%
CIBC (CM)              $39.92 -6.34  8.74%  -55%
Scotiabank (BNS)       $24.83  8.11  7.89%   64%
National Bank (NA)     $32.21  6.88  7.70%   53%
Royal Bank (RY)        $27.07  9.05  7.39%   67%
TD Bank (TD)           $33.25  6.81  7.34%   50%
Laurentian Bank (LB)   $25.25  6.64  5.15%   34%
Cdn Western Bank (CWB)  $9.73  6.12  4.32%   26%
Source: February 20, 2009

The low share prices have also produced high dividend yields. The median bank yield is surprisingly high at 7.5%. All 6 of the big banks yield more than 7%. That's a darn sight better than a savings account even if dividends aren't nearly as secure.

Of the bunch, BMO is generally seen to be the most at risk of a dividend cut. The bank's payout ratio (dividends divided by earnings) has been high for some time and it currently sits at 79%. The bank also recently issued a raft of new shares to bolster its balance sheet. Unfortunately, BMO's low share price makes additional share issuances expensive. Hopefully, it has enough money to make it through the current downturn without a dividend cut.

Given the current yields and economic conditions, any of the banks could suffer from a dividend cut. Even worse, once one cuts then the others might follow. However, I'd guess that at most one or two will cut barring a repeat of the 1930s. As a result, a diversified selection of banks should do reasonably well from current levels for the long-term investor.

02/22/2009   10:30 PM EST   Permlink   save & shareP/B

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