Toronto-Dominion Bank vs. Royal Bank of Canada: Which is the Safest Investment?

Toronto-Dominion Bank (TSX: TD)(NYSE: TD) and Royal Bank of Canada (TSX: RY)(NYSE: RY) are Canada’s biggest banks. Both companies have enjoyed fantastic gains since the Great Recession, and investors are wondering which one is the better choice given the growing debt risks in the Canadian retail market.

Let’s take a look at both Royal and TD to see which one might be the safest bet right now.

Toronto-Dominion Bank

Toronto-Dominion has a very strong Canadian retail operation. The company regularly wins awards for superior customer service and does an excellent job of getting its happy customers to sign up for as many services and products as possible.

In the company’s Q3 2014 earnings statement, TD’s Canadian retail operation produced earnings of $1.4 billion, a 54% increase over the same period in 2013. All areas of the business performed well, including the insurance division, which had struggled in previous quarters.

TD is betting heavily on the U.S. to drive future growth. The company has 1,300 branches in the U.S. making it one of the country’s top 10 banks. The U.S. division earned US$518 million in the last quarter, a 4% year-over-year increase.

The U.S. market is very competitive. In a recent statement, TD’s next leader, Bharat Masrani, said the company now has the scale it needs in the U.S. and will focus on driving organic growth rather than pursuing expansion through further acquisitions.

TD’s Canadian residential mortgage portfolio was $231 billion at the end of July. Insured mortgages represented 63% of the portfolio. The loan-to-value (LTV) ratio on the uninsured mortgages was 61%.

Toronto-Dominion is well capitalized. The company reported a Q3 Basel III Common Equity Tier 1 (CET1) ratio of 9.3% for the quarter-ended July 31. The ratio is a measure of the bank’s financial stability.

TD currently trades at 14 times earnings. The annualized dividend of $1.88 per share yields about 3.3%.

Royal Bank of Canada

Canada’s largest bank has been a star performer in the past couple of years. In the last earnings statement, Royal Bank reported record profits driven by strong gains in the capital markets and wealth management operations. Earnings from the capital markets group jumped 65% year-over-year, and the wealth management division enjoyed a 22% gain compared to the same period in 2013.

In a statement regarding the strong results, Royal Bank’s CEO, David McKay, said the performance in the capital markets division was exceptional and might not be repeated to the same degree in the next quarter.

Royal Bank held $189 billion in Canadian retail mortgages at the end of its Q3 reporting period. The insured mortgages accounted for 39% of the holdings. The LTV ratio on the uninsured component was 55%.

Royal Bank also has a strong balance sheet. The company’s CET1 ratio as of July 31, was 9.5%.

Royal currently trades at 14.2 times earnings and the $3.00 per share dividend provides a yield of about 3.6%.

Which bank should you buy?

Toronto-Dominion probably carries less risk for investors at this point. The company’s earnings are well diversified between Canada and the U.S. and a higher percentage of its mortgages are insured. The decision to pursue organic growth in the U.S. should make more capital available for buybacks and dividend increases.

Royal’s earnings are more susceptible to fluctuations because capital markets and wealth management revenues can be volatile. Regarding the mortgage exposure, Royal would likely take a bigger hit than TD in the event of a serious slump in the Canadian housing market.

The Canadian banks have traditionally been core investments in most Canadian portfolios. Take a look at the free report mentioned below to get a full analysis on Canada’s top banks.

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Canadian banks are considered must-have investments. After all, they're very stable, well capitalized, and face limited competition. That said, there are concerns for the banks and their investors. In this FREE report, we cover everything you need to know about Canada's Big 5 -- whether you're already an investor or are considering buying shares.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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