It's hard to read the UBS note on Australian banks without thinking about Canada. Via FT Alphaville: "The Aussie banks are very good companies. They are profitable, resilient, well capitalized, well managed, shareholder focused and have a very strong industry and regulatory structure."
Sound familiar? That description fits perfectly with Canada's Big Banks, which have a well-deserved reputation for rewarding shareholders with handsome returns and rising dividends, after emerging from the financial crisis with barely a scratch.
Yet, UBS has concerns about Australian banks, and these concerns seem relevant to the situation in Canada: "Following the significant leveraging of the Australian & NZ households over the last 30 years they are now low growth and remain heavily exposed to housing, funding markets and unemployment risk."
Similar comments have been made about Canada's banking industry: Here, consumers have record-high debt levels and the housing market is showing signs of retreating from extremely high levels (when home prices are compared to incomes). And, like Australia, Canada's struggling mining stocks are pointing to trouble in the recource sector, if not the underlying economy.
As UBS argues, there is a bullish case for Australian banks, which also seems to fit well with Canadian banks: Dividend yields are attractive, and that looks especially nice when the world's central banks continue to hold down interest rates.
But attractive yields simply mean that timing a downturn is difficult. As UBS explains, "As with all asset bubbles, they can go higher and for longer than many expect." And: "All we can say is buyer beware."
That doesn't exactly boost confidence that banks are ideal long-term holdings at this point. This impression is supported by the more cautious tone on Canadian banks in Bloomberg Markets magazine (June issue), with the release of its annual ranking of the strongest global banks. Since the financial crisis, this list has become a source of national pride for Canadians.
The good news is that Canada is still well-represented in the top 10. Canadian Imperial Bank of Commerce is No. 3. Royal Bank of Canada is No. 4. Bank of Nova Scotia is No. 7 and Toronto-Dominion Bank is No. 8. The bad news? This year's rankings marked a decline. Some Canadian banks slipped in the rankings, Bloomberg explains, "as the industry was hit by ratings downgrades and hurt by a slowing economy and an increasingly risky housing sector."
At least there is one important difference between Australian and Canadian banks: Valuations. UBS says that Australian banks – which include Commonwealth Bank of Australia, Westpac Banking, National Australia Bank and Australia & New Zealand Banking Corp. – now trade at an average of 14.9-times earnings. That's equal to their highest earnings multiple, touched in October 2007, just before the start of the global financial crisis.
By comparison, Canadian banks look far more reasonable: The Big Five have an average price-to-earnings ratio of just 11.
Is that enough of a disctinction to make them attractive investments? The lower valuations might help cushion any decline in Canadian bank stocks. But their similarities to Australian banks is the bigger standout – and a bigger source of concern.
David Berman