Want to Invest in the Global Banking Sector? Think Canada

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.)

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What makes Toronto DominionRoyal 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:

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