NEW YORK (TheStreet) -- Recent financial strength ratings are in for midyear for the top 40 largest publicly traded worldwide banks with a U.S. presence that I rate. ("Largest" is by asset size.) It's no surprise that the best well-managed banks are found in the U.S. and Canada, given all of the uncertain economic and geopolitical risks overseas -- with none of the eurozone banks making the list.
The table below shows the top rated financial institutions.
What makes these financial institutions superior to the rest? They had above-average capital, strong profitability, liquidity and stability, with well-managed loan portfolios.
My previous article, "Want to Invest in the Global Banking Sector? Think Canada," focused primarily on the strength of the two Canadian banks to make the list: Toronto-Dominion (TD) and Royal Bank of Canada (RY) . Both of these banks showed potential stock price returns of 10% to 30% over the next 12 to 18 months. Though both are at or near 52-week high and all-time highs, earnings growth is expected to be at 8% or 9% for 2014 to 2015. That would justify the high 2 times to 2 1/2 times book value compared to the other banks on this list. These banks show continued reliability in delivering earnings by beating estimates over 75% of the time in the last three years.
Let's look at the remaining U.S. institutions to make the list. Those rated as "superior" or "excellent" are U.S. Bancorp (USB - Get Report) , Charles Schwab (SCHW - Get Report) and Northern Trust (NTRS - Get Report) . None of these institutions had significant exposure to European or overseas risks, and thus avoided the pitfalls that troubled many international banks.
Honorable mention goes out to banks rated as "very good," but which did not make the list: Wells Fargo (WFC - Get Report) , Bank of New York Mellon (BK - Get Report) , State Street (STT - Get Report) , HSBC Holdings (HSBC) , Mitsubishi UFJ Financial (MTU) and non-traditional bank and credit card issuer American Express (AXP - Get Report) . Look for a subsequent article for stock analysis of these well run banks.
Financial strength ratings and how well the banks are managed are only one aspect, though. Stock price analysis will point out if this is a good entry point to trade the bank.
Up next: analysis on when to buy and sell these stocks.
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.
While all the banks in this list had excellent or superior financial strength ratings, U.S. Bank -- with a current stock price of $42.32 as of Monday at 11:15 a.m. -- has more room for potential upside than either Charles Schwab or Northern Trust. Stock price appreciation is projected at 11% to 35% over next 12 to 18 months, based on historical and current industry average price-to-earnings ratios. A modest price-to-book ratio of 2.1, an 8% earnings growth estimate for 2015 and earnings beats of 92% over the last three years make this a solid pick, in line with the returns of the two Canadian banks noted above.
Clearly Charles Schwab appears to be overvalued at any P/E multiplier and by its current price-to-book of 3.6 which is considerably higher than the other banks analyzed. I would stay clear of this until earnings catch up to price or there is a pullback in the stock.
Northern Trust fares a little better based on forward P/E and 2015 earnings of $3.84 per share. However, the bank has a tendency to miss quarterly earnings estimates over the last three years, beating estimates only 25% of the time, which can set the bank up for investor disappointment.
See my prior article in the Trading Bank Earning series on global banks for further historical analysis of the group.
At the time of publication, the author was long BAC, C, SAN and WFC.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates U S BANCORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate U S BANCORP (USB) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, expanding profit margins, increase in net income, growth in earnings per share and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
- You can view the full analysis from the report here: USB Ratings Report