NEW YORK (TheStreet) -- With most of the international banks having reported earnings through mid-year, where are the pockets of strength and weakness and how can you profit from banking globally?
Turns out your best bets outside the U.S. are Canada's Toronto-Dominion Bank (TD) and Royal Bank of Canada (RY) . TD, at close to $53, is up nearly 12% for the year to date while Royal Bank, at near $81, is up 13% for the same period. The S&P 500 is up 14% YTD.
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Looking at the 40 largest global banks (by asset size) from 10 different countries (including the U.S.) that trade on our stock market, two fundamental questions need to be asked:
What is the underlying financial strength of the bank, and
Whether, using stock price analysis, this is a good entry point to trade the bank. Just because a bank is a strong financial performer doesn't mean it's a good buy from a stock price point of view. Also, you can't rule out a stock trade from a more modest financial performer with one that has more reasonable underlying stock price fundamentals.
Of the 40 financial institutions I rate for financial strength a quarter were rated below average or poor with about half rated above average or higher. Globally, a majority of the weakness was found in Europe while Canada was a bright spot with two of the five globally high-rated banks i.e. excellent or superior. (The U.S. had the remaining top-rated banks.)
What makes Toronto Dominion, Royal Bank and the other top-rated financial institutions superior to the rest? They had above-average capital, strong profitability, liquidity and stability with well-managed loan portfolios. The table below summarizes the global banking sector and its financial performance:
Let's look specifically at Royal Bank of Canada, which just reported third-quarter earnings that beat analysts' estimates by 5%, or 8 Canadian cents a share. This was the company's third straight beat and ninth beat overall in the last three years (75%), with an average beat of 6 Canadian cents a share. Royal Bank is expected to earn C$6.04 for fiscal year 2104 and C$6.55 for fiscal year 2015.
The table below shows what you can expect to receive as a return if you invested in this bank today.
Although global banks are a bit harder to forecast because of currency fluctuations, information available and reliability of the analysts' estimates, Royal Bank's earnings estimated for fiscal year 20014 and 2015 have been revised up by 3% and 2%, respectively, over the last 90-day period.
While the bank is currently fully at 52-week and all-time highs based on the solid and predictable earnings growth forecast in the table above, the price targets over the next 12 to 18 months could yield another 10% to 30% return for your money.
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The continued premium on this global bank stock is warranted due to how well Canada as a country has been able to weather any significant economic downturn and the bank's ability to stay clear of doing business in those problematic regions -- namely Europe.
TheStreet Ratings team rates ROYAL BANK OF CANADA as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate ROYAL BANK OF CANADA (RY) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity and expanding profit margins. However, as a counter to these strengths, we find that the growth in the company's earnings per share has not been good."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 11.9%. Since the same quarter one year prior, revenues slightly increased by 6.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Commercial Banks industry and the overall market, ROYAL BANK OF CANADA's return on equity exceeds that of both the industry average and the S&P 500.
- ROYAL BANK OF CANADA has improved earnings per share by 17.6% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. During the past fiscal year, ROYAL BANK OF CANADA increased its bottom line by earning $5.51 versus $4.96 in the prior year.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Commercial Banks industry average. The net income increased by 15.4% when compared to the same quarter one year prior, going from $1,885.00 million to $2,175.00 million.
- You can view the full analysis from the report here: RY Ratings Report