Bank buildings tower over the corner of Bay Street and Adelaide streets in Toronto.Gloria Nieto/The Globe and Mail
Despite their wild run, shares of Canada's biggest banks still aren't astronomically expensive.
That's the conclusion from CIBC World Markets analyst Rob Sedran, who crunched a slew of numbers to compare current valuations to historical trends, as well as to other sectors.
Right now, the Big Six banks trade at an average of 12.2 times CIBC's fiscal 2014 earnings expectations. That means that if a bank generates $1 of earnings per share, its stock would trade for $12.20.
The current average compares to a 10-year pre-crisis average multiple of 11.7 times 12-month earnings estimates, according to CIBC.
So yes, the shares look a little pricey. But they aren't outrageously so, for a number of reasons.
Mr. Sedran notes that the 10-year average multiple, is just that – an average. That means there were periods when the multiple was higher, especially between late 2004 and 2006.
Maybe more importantly, the Canadian banking landscape is still rather supportive of strong earnings. "We feel a bearish stance is appropriate when business conditions are turning for the worse rather than simply when valuations are moving beyond historical averages," Mr. Sedran wrote in a note to clients.
And if you compare the Canadian bank shares' runs to that of the S&P/TSX Composite Index as well as the S&P 500 U.S. Regional Bank index, as Mr. Sedran did, the soaring values don't look so dramatic. Both of those indices are also on fire.
Still, Mr. Sedran knows this may all sound a little crazy.
"Over the last year, EPS growth has been better than forecast, but the stocks have outpaced that growth again, delivering a 27 per cent average simple return," he noted.
But based on history, "it would appear that while the Canadian banks have seen a run-up in share prices and valuations, these levels are far from out of the ordinary. We think investors should focus on operating conditions, which remain benign to favorable, and less on absolute valuations (though even those are not that problematic at this point)," he wrote.
And if you need any extra motivation, Mr. Sedran offered a little joke incentive, just for fun. "Trust us, we have a degree in mathematics."
Tim Kiladze