Investors have shied away from Canadian banks in recent months resulting in a 0.4% dip in share prices during the fiscal first quarter from November through January. By comparison, U.S. banks are up 9%.
One of the reasons for the underperformance to global peers might be valuation. But according to UBS analyst Peter A. Rozenberg, Canadian banks aren't that overpriced on closer inspection.
"Canadian banks trade at 9.2x “normalized” F12e EPS compared to global
banks at 7.5x 2012e EPS," he said in a note to clients.
"However, valuations are largely in line given
higher returns, and are cheaper than similar Australian banks. Also,
Canadian banks are lower risk and have much higher capital than their
peers."
Based on fiscal 2010 estimates, PEs for the banks are 12.1x, representing the high end of their average range of 10 to 12x.
Mr. Rozenberg said that is not unreasonable assuming a 16% increase in EPS growth in fiscal 2011 from 2% this fiscal year.
Applying a 12x PE to fiscal 2011 EPS estimates, he projected a 14% return for Canada' bank group, plus a 4% yield.
He prefers Royal Bank of Canada, Bank of Nova Scotia and CIBC due to above average returns.