3 Reasons to Buy National Bank of Canada Instead of Royal Bank of Canada

National Bank of Canada (TSX:NA) may not be as well known as Royal Bank of Canada (TSX:RY)(NYSE:RY), but it may make a better investment.

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National Bank of Canada (TSX: NA) could be called Canada’s most forgotten bank. After all, it is the sixth-largest bank in a country that often refers to its Big 5. But investors shouldn’t overlook the company too quickly.

There are plenty of things to like about National, and below are three reasons why you should own the company instead of Canada’s largest bank, Royal Bank of Canada.

1. Improving fundamentals in Quebec

National is particularly unpopular among investors because of its concentration in the province of Quebec. To illustrate, last year 63% of National’s revenue came from Quebec. And the rest came almost entirely from Canada’s other provinces. So many investors are worried about National’s lack of diversification.

But there is good news. Quebec is doing a lot better than it has previously. Government balances are in better shape, with tax revenue growing more quickly than spending. And lower taxes may be on the horizon in the province. This would be welcome relief, since Quebec has some of the highest tax rates in North America, and there’s a strong argument that investment is suffering as a result.

2. Better growth prospects

A common worry among the Big 5 banks is a lack of growth prospects. And this is a fair concern. These banks have very little room to grow in Canada, while international markets are more competitive and come with lower returns.

For example, RBC’s personal and commercial banking business grew just 1% year over year in the most recent quarter. The bulk of growth came from riskier lines of business.

Meanwhile, National has a much smaller banking operation and thus has more room to take share. In the most recent quarter, personal and commercial banking revenues grew by 6% year over year.

3. Cheaper price

RBC shares have performed quite well so far this year, up 13%. As a result, the shares now trade at a healthy 13.4 times earnings, which is above average for the Big 5.

In the meantime, National shares have performed even better, up 17%. But they are still cheaper than RBC shares, trading at just 11.8 times earnings. This seems strange at first. Why is the faster-growing company trading at a lower multiple?

Perceptions might be one cause — RBC has a better brand and stronger reputation than National. So investors understandably would prefer to own RBC, even if it means paying a little more. Secondly, investors are worried about a lack of diversification with National. But if you hold the shares within a well-diversified portfolio, then you’re not overly exposed.

This discussion leaves out the other Big 5 banks, but the free report below covers them in more detail.

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.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

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