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%. <\/p>\n
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. <\/p>\n
"Canadian banks trade at 9.2x \u201cnormalized\u201d F12e EPS compared to global
\nbanks at 7.5x 2012e EPS," he said in a note to clients. <\/p>\n
"However, valuations are largely in line given
\nhigher returns, and are cheaper than similar Australian banks. Also,
\nCanadian banks are lower risk and have much higher capital than their
\npeers."<\/p>\n
Based on fiscal 2010 estimates, PEs for the banks are 12.1x, representing the high end of their average range of 10 to 12x. <\/p>\n
Mr. Rozenberg said that is not unreasonable assuming a 16% increase in EPS growth in fiscal 2011 from 2% this fiscal year. <\/p>\n
Applying a 12x PE to fiscal 2011 EPS estimates, he projected a 14% return for Canada' bank group, plus a 4% yield. <\/p>\n
He prefers Royal Bank of Canada<\/a>, Bank of Nova Scotia<\/a> and CIBC<\/a> due to above average returns.<\/p>\n