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Is Royal Bank of Canada or Toronto-Dominion Bank a Better Bet Right Now?

Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) have been under pressure for the past six months, and investors are wondering if the recent pop in the stocks is the start of a new upward trend.

Let’s take a look at the two titans to see if one is a better pick right now.

Royal Bank of Canada

Royal recently impressed the markets with better-than-expected Q1 2015 earnings.

The company is benefiting from a stronger focus on capital markets, wealth management, and insurance because it looks for non-retail opportunities to generate income. The shift has been a successful one and the bank continues to expand its reach.

Royal signed a US$5.4 billion deal in January to purchase City National Corp., a U.S.-based wealth manager. The acquisition positions Royal for an aggressive expansion into private and commercial banking operations in the U.S., and marks an important return to the American market.

Royal’s previous big foray into the U.S. ended badly. The company spent 11 years trying to build a profitable U.S.-based retail franchise, but finally gave up in 2013 and sold the assets for $3.62 billion, taking a $1.57 billion charge in the process.

This time it looks like Royal might have the right assets in the right market.

In Canada, the bank continues to do well, despite concerns about consumer debt levels. Weakness in the oil sector is making some shareholders nervous, but management recently assured investors that the company is comfortable with its lending exposure to energy-related clients. Royal backed up the statement by increasing its dividend. The annualized payout of $3.08 now yields about 4%.

Toronto-Dominion Bank

Toronto-Dominion also posted strong numbers for the first quarter of 2015. The company delivered adjusted earnings of $2.1 billion, representing a 5% increase over the same period last year.

The solid results were driven by continued strength in Canadian retail operations and an impressive 15% jump in earnings from the U.S. division.

Toronto-Dominion currently owns more than 1,300 U.S. branches that are located all along the East Coast from Maine right down to Florida. The company has spent about $17 billion to build the U.S. operation and now has more branches south of the border than it does in Canada. It is quite a growth story considering the company was essentially a non-player in the U.S. retail market a decade ago.

The Canadian operations are still more profitable, but lending growth in the U.S. and a strong U.S. dollar are providing a nice boost to results.

TD’s new CEO, Bharat Masrani, has consistently warned investors in recent months that the banking industry is facing some earnings headwinds. The conservative rhetoric might be warranted, but Toronto-Dominion can’t be too worried about earnings because the company just increased its dividend by 9%. The current payout of $2.04 yields about 3.75%.

Which should you buy?

Both Royal Bank and Toronto-Dominion are solid long-term bets. The two companies currently trade at almost identical valuations of 11.3 times forward earnings and 1.7 times book, which are reasonable compared to historical patterns.

Royal Bank’s earnings are more reliant on capital markets activities and this area of the business tends to be more volatile. For that reason, it might be safer to go with Toronto-Dominion at this point, given some of the economic concerns here in Canada.

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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 Andrew Walker has no position in any stocks mentioned.

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