Seeking Alpha: Still Waiting For A Little More Value At Canadian Western Bank

The last six months have gone more or less as I expected at Canadian Western Bank (OTCPK:CBWBF). I thought the valuation was a little steep last time around, and while the shares haven't done horribly (up about 4% before dividends), they've lagged other Canadian banks and significantly lagged the broader Canadian market. Unfortunately the story remains the same - I say "unfortunately" because I think Canadian Western is a really good bank and a great way to play ongoing growth in Western Canada, but I just don't see much undervaluation right now.

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Still Waiting For A Little More Value At Canadian Western Bank

Seeking Alpha: For One Of The Best Banks, Go North

It does interest me how sell-side analysts and investors will often overestimate the improvements to be had from inferior banks and simultaneously underrate the ability of banks who've established their excellence to keep the good numbers rolling. Such as that may be, it can work to investors' interests when it comes to Canada's 7th-largest bank, Canadian Western (OTCPK:CBWBF) (CWB.TO).

I'm certainly not going to argue that Canadian Western is obviously cheap - the stock trades at over 2x book value and about 30% above its traditional forward P/E. That said, those ratios don't always incorporate the superior record of profitability and returns at CWB, and I believe the shares are as of yet still somewhat undervalued. What's more, CWB is a good play both on the ongoing development of energy resources in Western Canada and a higher rate environment. I'd be tempted to wait in the hope of a pullback, but I've gone down that road before to my own detriment.

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For One Of The Best Banks, Go North

Investopedia: Scotiabank's Balanced Model Continues To Deliver

Each of the Canadian Big Five banks has its own strategy to diversify its growth outside of the Canadian banking market. In the case of Bank Of Nova Scotia (“Scotiabank”) (NYSE:BNS), that strategy revolves around building its high-growth Latin American banking business and it's less appreciated (but still lucrative) wealth management operations. Although investors should not underestimate the risk of a banking slowdown in Canada nor the inherent risks of emerging market banking, Scotiabank looks as though it may be a relative bargain in the banking sector.

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Investopedia: Beneath The Surface, Bank Of Montreal Not So Strong

Bank earnings are admittedly foggy at the best of times, and it only gets worse when the size of the bank in question increases. That said, Bank Of Montreal (NYSE:BMO) increasingly looks under pressure when it comes to core growth. With Canada potentially facing a housing crunch of its own and BMO's assets in the United States still underperforming, shareholders ought to ask themselves if the discount in BMO's price really compensates them for the risks.

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Investopedia: Commerce Bancshares Looks Like A Slow-And-Steady Pick

This arguably isn't the sort of market that really favors a stock like Commerce Bancshares (Nasdaq:CBSH). While the Midwest wasn't hit as hard in the housing crunch, it isn't a sexy market like the Southeast or Texas. What's more, with the generally conservative habits of Commerce Bancshares leadership, this stock is more likely to accrete value slowly (but dependably) rather than make flashy moves.

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Investopedia: Bank of Montreal Looking Stuck For Now

There are a lot of things to like about Bank of Montreal (NYSE:BMO), including its relatively solid credit quality, its strong dividend and its willingness to look outside of Canadian retail and commercial banking for future growth. What's not to like, though, is the relatively stagnant near-term performance, the weakening credit metrics and the weakening margins in both the American and Canadian operations. Although Bank of Montreal looks undervalued on the basis of its likely future returns on equity, investors considering these shares ought to appreciate the relatively bearish sentiment out there and be ready to wait to see value.

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Investopedia: Citizens Republic On The Road Back

When you realize that Citizens Republic Bancorp (Nasdaq:CRBC) is heavily exposed to Michigan, heavily exposed to non-mortgage consumer and commercial lending, and holds relatively low interest-free deposits, it's not so surprising that the company was in dire shape not so long ago. As the Michigan economy recovers and this bank transitions from survival to growth, though, this bank may have yet more to offer.

Strong in a Tough Neighborhood 

Citizens Republic is a fairly typical regional bank, with a large business in its home market (Michigan) and a smaller presence in neighboring states like Wisconsin and Ohio. About 10% of Citizens Republic's offices/branches are in Ohio, and the bank holds a 0.4% deposit share in the state. Wisconsin is home to about 20% of the branches and the market share is 0.9% - good enough for number 12 in the state.

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Investopedia: Is The U.S. Going To Goose BMO's Growth?

Sometimes one person's disaster is another's opportunity. Bank of Montreal (NYSE:BMO), one of Canada's "Big Six", had best hope that proves true in regards to its U.S. expansion efforts. While the CEOs of major U.S. banks like U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) hunker down and talk about a sluggish multi-year recovery, several Canadian banks are looking at expansion into the U.S. as a cornerstone of their growth strategies.

A Solid Third Quarter  
Whenever there are worries about macro-level growth, bank investors get nervous. Bank of Montreal's fiscal third quarter results may add a little calm to the sector, though, as they were a bit better than analysts expected.

 

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Investopedia: PNC Acquires Another Fixer-Up Bank Chain

For a well-run bank, PNC (NYSE:PNC) is not shy about taking on other banks' troubles in the name of market expansion. Having expanded into the Midwest and Florida with the acquisition of National City in 2008, PNC is moving into the Southeast region of the U.S. with the acquisition of Royal Bank of Canada's (NYSE:RY) U.S. banking operations. While a curious deal in some respects, it could represent a toe-hold for a firm quickly become a super-regional player. 

Terms of the Deal  
PNC will be paying $3.45 billion to Royal Bank of Canada for its U.S. operations, a regional bank with $25 billion in assets and 424 branches in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. PNC will have the option of paying up to $1 billion of the deal price in its own stock, a move that would prospectively represent about 3% of the bank's stock. To raise the cash for the deal, PNC will likely need to issue instruments like debt and trust preferred securities (a form of preferred stock).

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Investopedia: U.S. Bancorp Could Bring Investors Back To Banks

Many banks, but particularly the large banks like Citigroup (NYSE:C), have found the quality of their recent earnings reports challenged by those who do not approve of the large loan loss reserve releases that have buoyed the reported numbers. Does that change now, though, since conservatively-run U.S. Bancorp (NYSE:USB) has joined the list of banks recognizing reserve releases? While USB's reserve release was quite modest and the company's credit quality stands out as quite good, it may ultimately be a sign that conditions really are getting better for the banks. 

The Quarter That Was
It is easy to get bogged down in the details of bank earnings releases, so here are some of the most significant take-away points.

USB saw revenue increase 1% on a sequential basis and 3% on an annual basis for the fourth quarter. Net interest income was up 1% and 6%, respectively for those time periods, while non-interest income was up 5% and 10%. Non-interest income has long been a very significant part of U.S. Bancorp's business (and a reason that the company fared better during the recession), but investors should realize that the numbers this quarter were inflated by some "other" items that may not be repeatable. Netting out all of the "other," this item would have been down 3% sequentially and up 9% annually.

USB saw its net interest margin fall slightly, but 3.83% is still a very good result. Average earning assets were up 3%, and the company increased its loan book by 2% (or 1% net of acquisitions). Although a higher net interest margin would be much better, this is what bank investors should want to see - loan growth, net interest income growth, and so on.

Credit quality continued to improve in the fourth quarter. The company recognized a small reserve release ($25 million, or about one cent of EPS), and non-performing asset and charge-off ratios all improved (and are at good levels on a relative basis). Investors should also note that U.S. Bancorp has reserves well in excess of current non-performing loans (162%) - that is very conservative relative to other banks like Comerica (NYSE:CMA) or the also extremely well-run M&T Bank (NYSE:MTB).

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Investopedia: Comerica Gets Bigger, But "Better" Has To Wait

Comerica (NYSE:CMA) might be something of a microcosm and preview for regional banks this year. This Dallas-based bank not only reported better credit numbers for its fourth quarter, but stabilization in its loan activity and an acquisition of a smaller bank in a key target market. 

The Quarter That Was
Comerica's earnings were messy, but fairly typical for banks right now. Reported revenue did climb 5% and net interest income was stable, but core PTPP (pre-tax, pre-provision) earnings were down about 2% on a sequential basis. What's more, average earning assets were down 2% on a sequential basis. Consequently, while the company did report an impressive beat on the earnings line - reporting earnings of 53 cents versus a consensus estimate of 31 cents - virtually all of that upside was outside of its core earnings potential.

As that last sentence suggests, credit and provisioning was a major driver this quarter (as it is for virtually every U.S. bank right now). The company's fourth quarter provisions for loan losses were less than half of those in the third quarter and less than a quarter of what they were a year ago. As a result, the company's ratio of non-performing assets to total assets fell on a sequential basis. Said differently, the company charged off about $113 in bad loans this quarter, but only provisioned for $57 million of that, and that boosted the reported earnings (a "release" of loan loss reserves).

Getting Even Bigger in Texas
While Comerica's history is in Michigan, the company clearly sees Texas as its future. To that end, the company announced the acquisition of Sterling Bancshares (Nasdaq:SBIB). Comerica is offering up about 0.24 of its shares for each share of SBIB, giving the company a 29% premium (even after the stock had been moving up on merger chatter).


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BMO Buying Marshall & Ilsley

There was a widely held view that Bank of Montreal (NYSE:BMO) was going to expand its U.S. business, and the company did exactly this today - announcing that it was acquiring Wisconsin's Marshall & Ilsley (NYSE:MI) in an all-stock deal. Provided the deal closes as expected, this deal will make BMO the 15th-largest bank in the United States (it is already No.3 or No.4 in Canada, depending on the metric used to measure this), and the No.1 bank in Wisconsin (with 20% deposit share), as well as a leading bank in Arizona and several Midwestern states like Illinois.

The Terms of the Deal 

To acquire Marshall & Ilsley, BMO will exchange 0.1257 of its own shares for each share of MI - a deal that gives an implied value of $7.75 per share to MI. That's a 34% premium to where MI closed Thursday afternoon, although movement in BMO shares will change that imputed valuation and premium. All in all, it is a $4.1 billion deal for BMO, though the company will also be launching a nearly $800 capital raise as part of the deal and will be repaying MI's $1.7 billion TARP obligations.

A Weak Bank = No Premium 

Like the earlier deal between M&T Bank (NYSE:MTB) and Wilmington Trust, BMO is paying a fairly minimal premium to do this deal. In fact, BMO is taking out Marshall & Ilsley at a price that is roughly equal to its tangible book value. (For related reading, see Willmington Trust Sold For Tangible Book Value.)

So why is MI selling for so little? Well, BMO's comments about the deal suggest that MI was still in rough shape. In fact, BMO will be writing off about 12% of MI's loan book right off the top - a charge that will cost about $4.7 billion and means that cumulative losses for MI will be around 21% (if things get no worse from here). That is a pretty staggering amount of bad debt and a sharp indictment of management's decision to expand from the "boring" Midwest into hot real estate markets like Arizona and Florida. (For more, see Banking Merger Mania.)

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