A growing economy and favourable regulation may give U.S. banks an easier path to strong returns.Andrew Kelly/Reuters
Canadian bank stocks have soared over the past year, but now some investment managers see better bets south of the border.
U.S. banks, particularly regionals, are attractive because they trade at lower valuation multiples and can benefit from deregulation and merger-and-acquisition (M&A) activity, they say.
“U.S. bank stocks have an easier path to higher loan growth given that the U.S. economy is growing twice as fast as Canada’s,” says Rob Lauzon, chief investment officer at Middlefield Ltd. in Toronto.
New proposed rules to reduce the cash buffers that U.S. banks must set aside to absorb losses will free up capital for banks to grow their businesses, Mr. Lauzon says.
U.S. bank deregulation also favours mergers, he adds, and there will likely be another wave of them after the mid-term elections.
Mr. Lauzon, who holds four U.S. regional banks in his Middlefield Income Plus Class Fund, says this sector trades attractively, at 11 times forward earnings versus 12 to 13 times historically.
However, Canadian banks trade at 15 times forward earnings versus 10 to 12 times historically. Over the past year, the S&P/TSX Composite Banks Index is up more than 50 per cent, including dividends.
Mr. Lauzon’s fund’s core U.S. regional bank plays are First Horizon Corp. FHN-N, whose proposed merger with Toronto-Dominion Bank TD-T collapsed in 2023, and Wintrust Financial Corp. WTFC-Q.
These banks could be takeover targets before the 2028 U.S. presidential election because the Democrats are “not as friendly on M&A” should they win, Mr. Lauzon says.
The Middlefield fund also holds Valley National Bancorp VLY-Q, which has a deal to acquire Providence Financial Corp. and “is just good value,” he says, while Old Second Bancorp. Inc. OSBC-Q is a possible target for a bank consolidator in the Chicago area.
Maggie Meng, a senior investment analyst at Toronto-based Brompton Funds Ltd., is more focused on the fundamentals and growth prospects of U.S. regional banks than on takeover potential.
“Commercial and industrial loans are a huge driver for them,” says Ms. Meng, co-portfolio manager on Brompton North American Financials Dividend ETF BFIN-T.
This ETF’s regional banks include M&T Bank Corp. MTB-N, Citizens Financial Group Inc. CFG-N and Valley National Bancorp. “They’ve been improving their businesses and cutting costs,” she says.
The fund also holds U.S. large-cap bank stocks, including JP Morgan Chase & Co. JPM-N, Bank of America Corp. BAC-N and Citigroup Inc. C-N.
Furthermore, the fund holds investment banks, such as Goldman Sachs Group Inc. GS-N and Morgan Stanley MS-N.
Large-cap U.S. banks, unlike their Canadian peers, are more focused on investment banking and are “higher beta,” she notes.
They’re more exposed to the AI investment supercycle from loans to AI-driven companies and as intermediaries for IPOs, she adds.
The big U.S. banks will also benefit from proposals to lower capital requirements because they can use the excess funds for organic growth, M&A, or buybacks and dividends, Ms. Meng says.
The Brompton ETF also owns Canadian banks. Although their multiples are at the high end, they’re still “reasonably valued” up to 15 times forward earnings, she argues, noting their business is less cyclical now because they get substantial revenue from wealth management and capital markets versus mostly loan growth in the past.
Mr. Lauzon, who also holds Canadian banks in other funds, says they’ve benefited from foreign investors seeking exposure to the Canadian economy because of Prime Minister Mark Carney’s infrastructure buildout.
“Banks are the ones doing loans and bond deals,” he says. “We’re not bearish on Canadian banks, but they trade near all-times highs.”
Paul Harris, portfolio manager with Toronto-based Harris Douglas Asset Management Inc., holds Canadian bank stocks in his dividend portfolio, but wouldn’t suggest buying a lot more at current prices.
“They may move sideways over the next several months or a year,” he says. “If you own them, you should keep them. Over the long term they tend to do very well, and you get a strong dividend.”
But U.S. large-cap bank stocks are cheaper and have better growth prospects with their global asset management, investment banking and wealth management arms, as well as their massive credit-card businesses, he says.
U.S. capital markets revenue – from trading, underwriting and advisory services – will be strong given the upcoming IPOs by AI giants Anthropic and OpenAI, he adds, and debt issuance from the hyperscalers building AI infrastructure should help drive banks’ earnings growth.
Mr. Harris holds JPMorgan Chase, which trades at 14 times forward earnings or 2.5 times book value, and Bank of America, which trades at 12 times forward earnings or 1.4 times book value, in his U.S. equity portfolio. In contrast, Royal Bank of Canada RY-T trades at 15.2 times forward earnings or 2.9 times book value.
Mr. Harris says he doesn’t own U.S. regional banks because he sticks to fewer stocks to know them well.
But he says the valuation on super regionals, such as PNC Financial Services Group Inc. PNC-N, has risen on prospects of further acquisitions. It acquired FirstBank Holding Co. in January. Within banking, “it’s a huge technology scale business as we move into AI so it’s really important for them to get bigger,” he says.
Super regional banks could also be takeover targets for large banks, such as Citigroup and Wells Fargo & Co. WFC-N, which want to bulk up their retail businesses,” he adds.
The risk for U.S. banks is a sharp economic slowdown, but they have more capital than in the past and have passed stress tests to see if they can weather a severe downturn, he says.
Still, bank stocks would fall and multiples would compress in such a scenario. The silver lining, Mr. Harris says, is that it would make “a great buying opportunity.”