No Need To Take A Flyer On Canadian Banks

USD based investors should be wary of Canadian banks.  Canadian banks have taken a beating in 2015 and the near-term trend doesn't look to be abating anytime soon. The average USD performance of a Canadian bank year-to-date is a "correction" worthy -13%. Meanwhile, the average performance for a US bank is only -4.5% and this is skewed by Bank of America which is down over 13%. The rest of the group is down 2.72% on average.

Canadian Bank Performance


US Bank Performance


Undoubtedly, one of the reasons for the underperformance of Canadian banks has been the recent knockdown of estimates. Over the past six months, FY1 sales estimates have fallen by 10% on average and FY1 EPS estimates have declined by 13.1%. FY1 sales growth is expected to be negative for five of the six canadian banks and FY1 earnings growth estimate is expected to be significantly negative for all six. FY1 earnings growth is expected to decline by nearly 6% on average.

Change In FY1 Sales Estimates


Change In FY1 EPS Estimates


Sales Growth Expectations


Earnings Growth Expectations


Unfortunately, the recent decline hasn't brought down prices enough to make a truly compelling valuation argument. All the Canadian banks are trading at double-digit P/E ratios and over 2x sales and at least 1.4x book value. Two of the US banks (Citigroup and Bank of America) trade below book value and the highest P/B ratio of any US bank is only 1.8x.

Current Valuations 


Lastly, the technical outlook isn't supportive currently. In general this is relative low volatile group and has tended to trade in line with the market. However, every single stock is breaking down and look to be squarely in a downtrend. Unfortunately, these stocks look to be in the early innings of what could be a multi-year trend of underperformance.