The top 14 large global capital market banks have posted impressive performances in improving capital, reducing leverage and strengthening funding, according to Moody’s Investor Services.

moody's banks

However, Moody’s Corporation (NYSE:MCO) is concerned about the government support of bank holding companies, given the Orderly Liquidation Authority plans for ‘systemically important financial institutions.’ The agency feels this would reduce the likelihood of government support of banks.

Capital market banks get outperform rating

In a recent report published by Brad Hintz of Bernstein Research after discussion with Moody’s Corporation (NYSE:MCO), Bernstein has assigned an Outperform rating to Morgan Stanley (NYSE:MS), CME Group Inc (NASDAQ:CME) and Goldman Sachs Group, Inc. (NYSE:GS).

Bernstein feels Wall Street banks posted reasonable performance in the second quarter of 2013, despite facing several challenges such as rising U.S. interest rates, volatile credit spreads and a rising U.S. dollar.

Price-to-tangible book is a key indicator

Brad Hintz of Bernstein Research feels tangible book value of a securities firm is a ‘hard number’ reflecting the industry’s mark-to-market accounting discipline and the rapid turnover of brokerage firms’ balance sheets.

The following graph highlights the price to book Versus ROE for the first half of 2013 of top banks:

Moody's PBV ROE

Rationale for ‘outperform’ rating

Bernstein Research feels a rising U.S. interest rate cycle represents a handoff, first to capital market activities followed by wealth management. The analyst feels when unemployment declines in the U.S., retail investors’ risk appetite would ideally return. Considering Morgan Stanley (NYSE:MS) is the second largest U.S. wealth manager, and with Morgan’s three retail channels nearing completion, the analyst feels Morgan would derive more operating leverage in a retail rebound.

Brad Hintz notes bank liquidity / funding ratios have improved among the top fourteen banks. However, Morgan Stanley (NYSE:MS) and Goldman secure the top two positions based on Moody’s Corporation (NYSE:MCO) stable funding metric. Moody’s analysis further reveals during the first half of 2013, Goldman Sachs Group, Inc. (NYSE:GS) had generated equity returns over the cost of equity capital.

Justifying its rationale for assigning an outperformance rating on CME Group Inc (NASDAQ:CME), Bernstein Research notes CME controls 98 percent of the U.S. interest rate futures market. With the Federal Reserve enhancing interest rates gaining currency, the action would accentuate hedging activity in fixed income. Brad Hintz feels CME would be one of the early beneficiaries among the interest sensitive stocks, with rate hedging volumes expected to accelerate in anticipation of rising rates and a steepening yield curve.

By using forward 12-month EPS estimates, Bernstein pegged the 12-month price target for CME Group Inc (NASDAQ:CME), at $85.