NEW YORK (TheStreet) - The last installment in this Trading Bank Earning series breaks down earnings results and investment opportunities among the eight largest global banks I follow that either have a large U.S. presence or are prominent enough to be publicly traded on a major U.S. stock exchange.
Unlike the other banks covered in this series, the global banks have their headquarters outside the United States and primarily based in Canada or Europe, with one based in Japan. Assets for these institutions cover a wide range from $500 billion to $2.7 trillion (converted to U.S. dollars).
(To evaluate how global compare, view the other articles in this series: Trading Bank Earnings Part 1, Trading Earnings, Part 2 and 'Non-Traditional' Strong Results: Trading Earnings, Part 3.)
Of the global banks that have reported (three do not report until August), three of the five, or 60%, beat analysts' expectations. This is the second-worst rate among money center banks (50%), super regionals" (75%) and the non-traditional financial service companies (67%).
So, as an investor, how can you make money?
Revised stock price appreciation for the global bank group from April 10 to May 16 yielded an industry leading best increase of 0.9% compared to money centers that had declines in return by 2.5%, regionals with a decline of 1.8% and non-tradtitional banks with an increase in return of 0.4%. The trend, after earnings season, for the all U.S. banking sectors has been to sell off.
At the three-week mark after earnings, money centers actually were up by 0.4%, with the regional group up 0.5% and the financial service companies' stock price appreciation of 1.6% over three weeks ending May 2. The table below indicates key metrics and highlights which banks met or beat earnings and those that missed and by how much.
The global banks that beat first-quarter 2014 expectations were: Toronto Dominion (TD), beat by 2.9%; HSBC Financial (HSBC) by 0.7% and Bank of Montreal (BMO), beat by 4.5%. Two banks in the group missed recent estimates: Deutsche Bank (DB) missed by 23.4% and Royal Bank of Scotland (RBS) missed by 46.5%.
Three banks -- Mitsubishi UFJ Financial Group (MTU), Banco Santander (SAN) and Banco Bilbao Vizcaya Argentaria (BBVA) will report until August with no information available on prior quarter results. Both Deutsche Bank and Royal Bank of Scotland missed badly on their quarterly results due to lower bank wide revenues and a reduction in banking assets by 15% to 20% year over year for both banks.
Based on stock price appreciation, earnings performance and consistency in beating earnings over the last three years, the winners of this group were Toronto Dominion and Bank of Montreal, which both handily beat estimates and had significant stock price performance over the last five weeks just prior and after earnings ended May 16. Additionally both have beaten the last twelve quarters estimates better than 82%+ of the time.
Bank of Montreal gets the nod as the best value selection because of its relative better price to book value at 1.64 times compared to Toronto Dominion at almost 2 times book.
If you missed the short-term appreciation on global banks stocks, then how can you profit if you are a long-term investor with a buy-and-hold strategy? The table below shows the revised fiscal year earnings estimates for 2014 and 2015 along with price targets and potential returns.
Over the next 12 to 18 months, the best plays based on current valuations and stock price appreciation for FY2014 are Bank of Montreal, Toronto Dominion Bank and HSBC since all have expected stock returns greater than 30%+ based on a historical industry price-to-earnings ratio of 15. Current stock prices would give these stocks some of the lowest forward looking P/E ratios, at between 9 to 10 times.
Based on some key group metrics and headline news risk, U.S. banking stocks represent a superior investment opportunity because they are relatively undervalued compared to their global peers, with more reliable earning potential.
Some of the European banks (Deutsche Bank and Royal Bank of Scotland) missed earnings estimates by a wide margin. Outside of some mortgage litigation from Bank of America (BAC) and fraud issues on minor holdings at Citigroup (C), U.S. stocks have less headline risk than do global banks at this time.
The European Union's economy, generally regarded as weaker than the U.S., as well as lingering eurozone issues with countries such as Spain and Greece continue to weigh heavily on their stock markets. In addition, headline risk from Libor-fixing, primarily among European banks, and the most recent gold price fixing scandal involving primarily overseas banks will further hamper stock returns in the short term.
At the time of publication the author had positions in SAN, BAC and C.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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