CM Not As Cheap As You May ThinkHere are the year-end book values:
BMO - $28.29
CM - $33.31
Td - $29.23
Here is their current share prices:
BMO - $55.93
CM - $71.09
TD - $69.05
Here is a P/BV:
BMO - 1.97
CM - 2.13
TD - 2.36
BMO has some exposure to SIVs, but they are higher quality vehicles and they have restricted their participation at $2B. There is really no danger to BMO's capital levels or its dividend. Yielding 5%.
CM has total of $10B of exposure and there is a real danger of $5B writedown. The market value of its CDOs is 50 cents on the dollar, but CM doesn't write-down most because of "insurance". We already know ACA insurance is worthless and likely many others will be as well.
TD has no CDOs or subprime. But it does have a large U.S. retail banking presence. But its weak U.S. earnings already reflected and they don't have to worry about truly nasty surprises. also the economies in the NE, where TD's operations are concentrated, are better markets than those in California, Florida and Michigan.
So......
CM trading at higher P/BV than BMO despite needing huge writedowns.
CM will be taking at least a $2B writedown (and assuming income tax of 40%) that's $1.2B after-tax. Divided by 340 mm shares that's $3.50 per share.
So on a pro-forma basis its BV would be $29.81 and P/BV would be 2.38. That would be the same as TD!!
Compared to CM, TD has:
1) A stronger Canadian retail franchise
2) An established U.S. presence that will a source of growth long-term
3) Strong capital and low-risk so my hampered by capital concerns and the need to build capital in anticipation of writedowns.
4) TD Waterhouse on fire, especially with demise of ETRADE.
If Cm takes a $5B writedown, that would be $3B after-tax or $8.80. BV would be $24.51. Now I would expect CM would issue 35 mm shares at $60 to pay for writedown so pro-forma BV would be $27.80. The P/BV would be 2.55.
If the stock was between $60-$65 then the P/BV would be 2.15-2.34. that's a reasonable range given the large writedowns behind it and would be similar to TD.
Sure, its getting close to buy. I do not deny that. But in this market your first worry should not be "missing an up move". Your first worry is to minimize potential losses.
Given that Fitch has threatened to downgrade the best top insurers (AMBAC and MBIA) it seems plausible that CM throws in the towel and does the $5B writedown and $2B equity issue. I want to preserve capital and minimize my downside by looking to buy at $65/share.