Banks gaining appeal with investors

Slowdown in housing boosts their allure

TORONTO — Canadian bank valuations have plunged in the past four years amid a slowdown in the housing market, making the country’s lenders, including TorontoDominion Bank and Bankof Nova Scotia more attractive to investors.

Bank stock values closely track resale home prices, which rose at the slowest pace in almost four years last month, a Bloomberg chart shows. As a result, Canadian lenders are trading at about 11 times earnings, down from almost 19 in September 2009.

“We think the banks are really cheap,” David Baskin, president of Baskin Financial Services, whose Torontobased firm oversees about $500 million including bank shares. “People will become more comfortable with the Canadian housing market again and they’ll recognize that these fears were overblown.”

Bank stock valuations have been a leading indicator to the changing pace of resale home prices since 2009, Bloomberg data show. The ratio of stock price to earnings for Canada’s eight-largest lenders soared in February 2009, about three months ahead of a surge in the growth of home prices, according to Bloomberg data. Bank stocks were most expensive at the end of September 2009, while home prices peaked in May 2010.

The chart is based on the year-over-year growth of the Teranet-National Bank Home Price Index and the price-toearnings ratio for the Standard & Poor’s/TSX Commercial Banks Index. The index is comprised of Royal Bank of Canada, Toronto-Dominion, Scotiabank, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Laurentian Bank and Canadian Western Bank.

The price-to-earnings ratio of the banks index has fallen to 11.1, from a high of 18.6 in September 2009. The annual growth of Canadian home prices has followed a similar trend, declining to 1.8 per cent last month from 12.7 per cent in May 2010, according to the Teranet-National Bank index. Bank shares are cheaper than three years ago amid a slowdown in home price gains and prospects of rising borrowing costs.

Banks shares are starting to rally. The eight-member banks index has risen in four of the past five weeks, gaining 3.3 per cent over that time.