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.

Trouble overseas
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

Australian Banks

 Bank Assets  Average ROA  P/TBV 
National Australia Bank  791  0.64%  2.2
Commonwealth Bank  748  1.01%  3.6
Westpac  700  1.00%  3.3
Australia & New Zealand Banking Group  697  0.93%


Canadian Banks

 Bank Assets Average ROA P/TBV
Royal Bank of Canada 832 0.93% 2.9
Toronto-Dominion Bank  813 0.87% 2.5
Bank of Nova Scotia 713 0.99% 2.6
Bank of Montreal 538 0.75% 1.9

U.S. Banks

Bank Assets Average ROA P/TBV
JPMorgan Chase 2,389 0.90% 1.2
Bank of America 2,175 0.13% 0.9
Citigroup 1,882 0.51% 0.9
Wells Fargo  (NYSE: WFC  ) 1,437 1.34% 1.6

Data source: S&P Capital IQ

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?
To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

Read/Post Comments (3) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 07, 2013, at 10:37 PM, observerbob2013 wrote:

    The facts that are quietly ignored in this article are, firstly it may not have occured to the writer that there is a small difference in the population of Australia compared to the US. When this is taken into account the australian banks are many times the size of their American counter-parts.

    Secondly due to effective bank regulation in Australia bank failures have not occured for more than 80 years. A few banks have been reorganised by the industry itself but none have failed since the great depression. Compare this to the enormous number of failures in the US banking system in the same time.

    As a pre-crash holder of Citicorp I think that I will stick with the regulkated Australian banks in future rather than the unregulated high risk American ones.

  • Report this Comment On May 11, 2013, at 2:02 PM, crca99 wrote:

    Thanks for review of how to evaluate banks.

  • Report this Comment On May 11, 2013, at 4:18 PM, jelliff497 wrote:

    rating on BAC and C

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