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A Closer Look at the 2 Cheapest Banks on the TSX: Which Is the Better Buy?

Laurentian Bank (TSX:LB) and Canadian Western Bank (TSX:CWB) are two popular regional banks that Canadian investors navigate towards when they’re looking for a unique flavour of Canadian bank that goes beyond the Big Six.

The Big Six banks are more than enough to meet the needs of most investors, as they’re incredibly well managed, sufficiently capitalized, and more geographically diversified with high yields and promising growth prospects. But for those looking to play a specific region of the Canadian economy, Laurentian and Canadian Western Bank are the go-to plays. The former plays the Quebec market and the latter, as you’ve probably guessed from the bank’s name, is a play on the Western Canadian provinces of British Columbia and Alberta.

Let’s have a closer look at the two big regional Canadian banks to see which is more capable of delivering returns greater than the Big Six and if the associated risks are worth the potential additional reward.

Laurentian Bank

Laurentian stock is best known for its massive dividend yield (currently at 6.3%), which broke the 7% mark in the depths of the December sell-off. If you’re a shareholder of this bank, you’re either in it for the huge yield, which is typically the largest of all Canadian banks, or you’re looking for more exposure to the Quebec banking scene.

The Quebec economy has been quite robust relative to other provinces, but Laurentian’s management team has made a tonne of mistakes that resulted in a “mini-mortgage crisis” that was unique to Laurentian. The crisis caused Laurentian stock to lose nearly 40% of its value from peak to trough, and with expenses growing out of control, I’d encourage bargain hunters to steer clear of the name, despite the large dividend, which appears safe.

Laurentian’s management team is sub-par and is warranting of a significant discount. I suspect the stock will struggle to regain its footing as the bank looks to improve its cost controls. For now, Laurentian is dead money, so I’d steer clear of this roughed-up regional bank.

Canadian Western Bank

For those playing a rebound to the British Columbian and Albertan economies, the latter of which has been ailing due to low Western Canadian Crude (WCS) prices, Canadian Western Bank is the perfect stock to go with.

Although I’m not a huge fan of the outlook of the western provinces (Alberta in particular), with Canadian Western Bank, the hope is that the stock will soar and post substantial multiple compression should the Albertan economy regain its footing.

As you’d imagine, with the deteriorating Albertan economy, Canadian Western Bank has a loan book that’s full of Albertan borrowers that have been under a considerable amount of financial stress. If you’re betting on Canadian Western Bank, you’re playing a rebounding in WCS prices from the completion of pipelines that aim to relieve Alberta of its heavy oil glut. With no near-term relief in sight, however, Canadian Western Bank will likely continue to post sub-par results as we move back into rate-cutting mode.

Canadian Western Bank is ridiculously cheap, and with all the excess baggage likely priced into the stock at this juncture, the risk/reward proposition may make sense for those who are bullish on the rebounding of the Albertan economy. The stock trades at book value and nine times forward earnings. That’s pretty cheap, but it could get cheaper, especially if we have another oil rout like in 2014.

Foolish takeaway

I favour the Big Six banks over the two regional players mentioned in this piece. They’ve got a better risk/reward trade-off at this juncture, but if you’re keen on picking up one of the regionals, I’d go with Canadian Western Bank, as it has big upside potential in the event of an Albertan rebound.

Investors should expect to be waiting for years though, as there are no visible catalysts that could spark such a rebound over the near future. Fortunately, there’s the 3.6% dividend yield to collect for those willing to wait.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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