Canadian Banks
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This trade is based off of a relative valuation using P/B (50% weight), P/E, P/S, EV/EBITDA (all 16.67% weight) and here are my findings, all prices in CAD:
Overvalued:
RY with a target of $94.30 (-4.00%)
TD with a target of $70.95 (-3.10%)
RY and TD also have the largest amount of Home Equity Lines of Credit on their balance sheets and these will perform poorly in the next 8-24 months as interest rates in Canada increase and regional housing bubbles are popping. This could pose a serious threat to the two banks and into the latter half of 2018 and 2019. Consumers only need to pay interest on the loans, when the house values go down and the equity in the home decreases in value, they are still stuck with whatever is left on the HELOC but are more likely to refinance in bad conditions at higher interest rates.
(theglobeandmail.com/business/article-the-rise-of-helocs/)
Undervalued:
BNS with a target of $109.50 (+40.85%)
BMO with a target of $96.60 (+20.75%)
CM with a target of $118.90 (+6.06%)
Cheers, hope you find this useful.
Overvalued:
RY with a target of $94.30 (-4.00%)
TD with a target of $70.95 (-3.10%)
RY and TD also have the largest amount of Home Equity Lines of Credit on their balance sheets and these will perform poorly in the next 8-24 months as interest rates in Canada increase and regional housing bubbles are popping. This could pose a serious threat to the two banks and into the latter half of 2018 and 2019. Consumers only need to pay interest on the loans, when the house values go down and the equity in the home decreases in value, they are still stuck with whatever is left on the HELOC but are more likely to refinance in bad conditions at higher interest rates.
(theglobeandmail.com/business/article-the-rise-of-helocs/)
Undervalued:
BNS with a target of $109.50 (+40.85%)
BMO with a target of $96.60 (+20.75%)
CM with a target of $118.90 (+6.06%)
Cheers, hope you find this useful.
Nota
Apr 10 prices: May 9 Prices:RY 98.05 RY 98.88
TD 70.84 TD 73.53
BNS 77.6 BNS 79.55
BMO 96.27 BMO 99.42
CM 111.95 CM 113.72
Since shorting:
TD -3.6%
RY: -.85 %
Since buying:
BNS +2.5%
BMO +3.3%
CM +1.58%
Total: +2.93%
Staying with trade. I am comfortable with the long short and feel as though this is a strongly hedged bet. I think that in the next 6 months TD & RY (esp. TD) will correct to the rest of the industry's multiples. Cheers.
Penafian
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