Number Cruncher Extra

5 U.S. banks with solid balance sheets

What are we looking for?

The Canadian banking sector is widely considered to be one of the best and safest banking systems in the world, which explains why Canadians are heavily invested in the six major banks. However, the financial sector, represents 32 per cent of the S&P/TSX Composite Index. To diversify their portfolios, investors might want to consider investing in the U.S. banking sector. In the aftermath of the financial crisis, U.S. banks have become better capitalized, with an increased focus toward a more sustainable business model. Today, we will be looking at five dividend-paying U.S.-based banks with solid balance sheets.

The screen

Our screen of the banks’ subsector of the U.S. financials sector is based on the following criteria:

Market cap of at least US$10-billion;

-A positive EVA figure. Economic value-added (EVA) is a measure of true economic profit created by a company. EVA is calculated by subtracting the Capital charges from the NOPAT (Net Operating Profit After Taxes). The higher the economic value-added is, the more value a company is generating for its investors;

-An EPI figure of at least one. The economic performance index (EPI) is the main indicator to identify how much wealth is redistributed to the shareholders. The higher the figure, the better, and a negative EPI means that the company is not covering its costs of capital;

-Dividend yield of at least 3 per cent. We are looking for banks that consistently share their profits with the shareholders;

Positive earnings per share. We are looking for profitable companies only;

-A price-to-intrinsic value of between 0.5 and two. Price/IV is the price of the stock divided by the intrinsic value of the stock. We are avoiding overvalued and value trap stocks.

-Long term debt-to-equity ratio below two: We are looking for banks with solid bank sheet and low long term debt;

-Current SP score of at least 55: The SP Score is a proprietary scoring system based on StockPointer’s model. It’s a 12 factors algorithm with a focus on quality and value. This metric represents the overall performance of a company by considering multiple risk and performance factors. A high score indicates a high quality stock trading at a reasonable price. (The score range between zero and 100)

For informational purposes, we have also included recent stock price and one-year return. Please note that some ratios may have been reported at the end of the previous quarter.

What we found

TICKER COMAPNY RECENT PRICE ($) EVA ($MIL.) MKT CAP ($MIL.) EPI LT DEBT DIV. YIELD (%) Price / IV EPS CURRENT SP SCORE 1YR PRICE RTN.(%) LT DEBT / EQUITY
JPM-N Jpmorgan Chase & Co. 93.25 1029.82 284090.00 1.00 299344.0 3.89 1.08 8.88 65 -17.48 1.05
USB-N U.s. Bancorp 34.94 1214.38 53215.13 1.15 52298.0 4.73 0.93 3.93 65 -31.55 0.98
NTRS-Q Northern Trust Corporation 75.47 227.54 15700.09 1.16 4142.2 3.58 1.18 6.73 64 -19.68 0.26
DFS-N Discover Financial Services 41.37 806.58 12672.10 1.41 26098.0 4.82 0.67 6.74 68 -47.27 2.06
SYF-N Synchrony Financial 18.51 1178.58 10798.20 1.45 16063.0 5.41 0.54 4.46 58 -42.92 1.49

Five names made today’s list, ranked by market cap, JPMorgan Chase & Co., which shows the highest EPS, has been growing its revenues constantly since 2015. Although the bank’s performance spread (ROC – COC) was negative from 2016 to 2018, it has been positive for the past two years, which is a good indication for shareholders.

U.S. Bancorp is also a big player in the banking sector with a market cap of US$51-billion. The bank has beaten or matched EPS estimates for the past five years. The bank missed its last earnings estimate because of loan defaults related to COVID-19. With a current operating value of US$55.8-billion, the bank is trading at an 8 per cent discount compared with its current market value. At a current price of $35 per share, it’s worth considering adding it to your portfolio.

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For readers with an Inovestor for Advisors account, Here is the screener we used