Why Toronto-Dominion Bank Stock Is Lower Risk Than Royal Bank of Canada

If you’re looking for safety, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a much better option than Royal Bank of Canada (TSX:RY)(NYSE:RY).

| More on:
The Motley Fool

Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are not only Canada’s two largest banks, they are the country’s largest companies. So it’s no surprise that so many Canadian investors hold both stocks.

And while they are both large Canadian banks, there are actually some big differences between the two. We take a closer look at three of these differences, and reveal why TD is the safer bank to hold.

1. A difference in geography

The table below shows the geographic breakdown of RBC’s and TD’s loans.

Prairie Loans 19% 12%
Ontario Loans 36% 40%
Rest of Canada 30% 17%
U.S.A 8% 31%
Rest of World 7% 0%
Total 100% 100%

As can be seen, TD is heavily concentrated in Ontario and the United States, while having relatively little exposure to the Prairie Provinces. And in today’s environment, this is important. Alberta’s economy is struggling mightily with low energy prices, and this could lead to significant loan defaults in the province.

Meanwhile, Ontario is benefiting from low oil prices and a cheap Canadian dollar, which is great news for TD. And down in the United States (especially where TD is concentrated), consumers and businesses aren’t spending so much money on gasoline. This puts extra money in their pockets, which should mean fewer loan defaults. So if you’re afraid of the low oil price and its effect on the banks, you can see there’s much less to worry about with TD.

2. A difference in business models

RBC has a very diversified business model, while TD is mainly a retail bank. To be more specific, over 20% of RBC’s income comes from capital markets, while this number is less than 10% for TD.

Again this makes a difference, because the capital markets are a cyclical, high-risk, opaque business. And retail is far steadier by comparison. So if the energy sector does wreak havoc on the Canadian economy, RBC is certainly more exposed.

3. A difference in approach

Ever since 2002, which was an awful year for TD, the bank has placed special emphasis on risk management. And this paid off in a big way during the financial crisis. TD also has strongly emphasized customer service. Clearly, the bank wants to make money the old-fashioned way.

RBC is no slouch when it comes to risk management and customer service. But it is no TD, and that may become a problem if Canada’s economy continues to suffer.

TD trades at 11 times earnings compared to only nine times for RBC, so TD’s lower-risk stock does come with a price. But given the precarious state of Canada’s economy, the premium is well worth it.

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.

More on Bank Stocks

A stock price graph showing declines
Bank Stocks

TD Stock Has Fallen to a Low of $73: Is it Done Dropping?

TD (TSX:TD) is often viewed as a great long-term investment. But given its volatility in recent months, has TD stock…

Read more »

grow money, wealth build
Bank Stocks

This 6.9% Yielding Dividend Stock Remains a Top Choice for Passive Income

High yield dividend stock First National Financial (TSX:FN) remains a good value.

Read more »

calculate and analyze stock
Bank Stocks

CRA: Are You Eligible for the $496 GST/HST Refund in 2024?

Here's how investors can consider reinvesting proceeds from tax credits such as the GST/HST to build long-term wealth.

Read more »

stock market
Bank Stocks

Big Bank Bull Run? 2 Canadian Bank Stocks Overdue for a Rally

Looking to invest in the best Canadian bank stocks? Here are two options that still trade at a discount and…

Read more »

A worker uses a double monitor computer screen in an office.
Bank Stocks

BMO vs. BNS: Which Bank Stock Is a Better Buy?

Let's explore whether Bank of Nova Scotia or Bank of Montreal is a better buy today seeing as they have…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Bank Stocks

Better Buy: TD Bank Stock vs. BMO

TD Bank (TSX:TD) and Bank of Montreal (TSX:BMO) are the kings of banking value this summer.

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Canadian Bank Stocks: Buy, Sell, or Hold?

Canadian bank stocks are rock-solid investments, but one is a no-brainer buy following the recent interest rate cut.

Read more »

hand using ATM
Bank Stocks

Better Stock to Buy Now: TD Bank or Scotiabank?

As far as the large Canadian banks are concerned, let's dive into two of the best and see which one…

Read more »