Royal Bank of Canada vs. Toronto-Dominion Bank: Which Is the Best Investment?

Is Royal Bank of Canada (TSX:RY)(NYSE:RY) or Toronto-Dominion Bank (TSX:TD)(NYSE:TD) a better pick right now?

| More on:

Royal Bank of Canada (TSX: RY)(NYSE: RY) and Toronto-Dominion Bank (TSX: TD)(NYSE: TD) are Canada’s largest banks. They are both enjoying solid growth and earnings, but are pursuing very different strategies to get there.

Let’s take a look at Royal Bank of Canada and Toronto-Dominion Bank to see which one might be a better option for new investors.

Royal Bank of Canada

Canada’s largest bank abandoned its U.S. ambitions in 2011, after a failed attempt to build a profitable business in the highly competitive market. Royal Bank has since focused on growing its wealth management and capital markets businesses. The shift in strategy has paid off.

Royal Bank reported record Q3 2014 earnings of nearly $2.4 billion, a 4% year-over-year increase. The company’s capital markets division stole the show with a 66% surge to $641 million, representing a hefty 27% of total earnings. Wealth management earnings jumped 22%, and Royal Bank’s insurance group also stood out, with a year-over-year gain of 34%.

Investors should be careful about getting too optimistic as the company acknowledged the record capital markets results might not be repeated.

Royal Bank finished the latest quarter with a Basel III Common Equity Tier 1 (CET1) ratio of 9.5%.

One concern for investors in all of the Canadian banks is the exposure to Canadian residential mortgages. Royal Bank had $189 billion of mortgages on the books at the end of Q3, with 39% being insured. The loan-to-value ratio (LTV) for the uninsured component was 55%.

Royal Bank trades at 13.7 times earnings. The dividend yield is about 3.8%.

Toronto-Dominion Bank

TD has the best Canadian retail operation among the Big 5 banks. The company consistently wins awards for customer service excellence and has a deposit franchise that is the envy of its peers.

Toronto-Dominion is also investing heavily in its U.S. operations. With more than 1,300 branches, TD is now the 10th largest bank in the U.S.

The bank reported net income of $2.1 billion in its Q3 2014 earnings statement. Canadian retail contributed $1.4 billion, a 54% increase over the second quarter in 2013. The entire Canadian retail operation is firing on all cylinders, including a rebound in TD’s insurance operations. South of the border, TD’s U.S. division enjoyed record net income of US$518 million, a 4% year-over-year gain.

Recent results have been great, but the company might run into some headwinds in the coming quarters. Management told analysts on the conference call that TD is forecasting higher credit losses and is facing heavy competition for assets in the U.S. Net interest margins are expected to shrink as a result.

TD is still well capitalized although its CET1 capital ratio of 9.3% is at the lower end compared to the other banks. About 63% of TD’s $231 billion mortgage portfolio was insured as of the end of Q3. On the uninsured portion, the LTV ratio was 61%.

Toronto-Dominion Bank trades at 13.6 times earnings. The dividend yield is about 3.6%.

The bottom line

Both banks are solid long-term holdings, but I would lean toward Toronto-Dominion right now. Royal Bank has a higher percentage of uninsured mortgages on its books, and the heavy reliance on capital markets revenues is also a bit concerning, given the potential earnings volatility in those activities.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Bank Stocks

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Bank Stocks

Is TD Bank Stock a Good Buy Now?

Here’s why TD Bank stock looks even more attractive to buy for the long term after its upbeat second-quarter earnings.

Read more »

consider the options
Bank Stocks

Is TD Bank Stock the Best Bank Stock for You?

TD Bank stock is reflecting a lot of the negative news. It remains a top bank stock trading at attractive…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Prediction: These 2 Canadian Bank Stocks Are Next in Line to Pop

National Bank of Canada (TSX:NA) and another bank stock look ready to roar higher in the second half of 2024.

Read more »

analyze data
Bank Stocks

Should You Load Up on TD Bank Stock?

TD Bank (TSX:TD) stock has bounced back a bit since its recent lows, but the best may be on the…

Read more »

Businessperson's Hand Putting Coin In Piggybank
Stocks for Beginners

3 Dividend Stocks Every Investor Should Own

Heading into earnings season, which bank stocks are best for dividend income?

Read more »

stock research, analyze data
Bank Stocks

Should Investors Buy the Correction in TD Stock?

TD stock is down more than 25% from the 2022 high. Is it finally time to buy?

Read more »

thinking
Bank Stocks

Could Royal Bank Stock Reach $200?

Growing rate cut hopes and improving analysts’ expectations from Royal Bank’s financial results could help its stock maintain strong upward…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Bank Stocks

1 of the Best Dividend-Paying Bank Stocks to Buy Now and Hold Forever

Here’s a very reliable, dividend-paying Canadian bank stock you can buy at a bargain right now and hold for the…

Read more »