The Motley Fool

TD Bank (TSX:TD) vs. RBC (TSX:RY): Which Is the Better Banking Stock?

It’s a tough time for Canadian banks.

Between a sluggish housing market, deteriorating credit quality and short attacks from major hedge funds, Canada’s financial institutions are taking a lot of heat. After years of steady, if not impressive growth, banks like The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Royal Bank of Canada (TSX:RY)(NYSE:RY) have begun to show signs of weakness, namely increasing provisions for credit losses and slower earnings growth. However, the two aforementioned banks delivered surprise earnings beats in Q2, with both of them posting better than expected results.

If you think the bad press against Canadian banks is overblown, you could always buy a finance-oriented ETF to get a piece of the whole sector. If you’re a more enterprising investor, however, you may want to bet big on the best of the bunch.

Many investors consider TD Bank and RBC to be the best Canadian banking stocks. The following are three things to consider when deciding which of them you should invest in.

Revenue and earnings growth

In terms of growth, RBC and TD Bank are pretty close, historically speaking. However, in the most recent quarter, TD bank won out, increasing revenue by 2.3% and earnings by 9% year over year. By contrast, RBC posted 14% revenue growth and 6% earnings growth–that gives RBC the win on revenue, but diluted EPS is ultimately more important, as it’s a measure of profit rather than sales alone. Both TD and RBC’s bottom lines were affected by provisions for credit losses (PCL), which increased significantly in their most recent quarters.

Valuation

RBC stock is fairly cheap at the moment, with a price-to-book ratio of about two and a forward P/E ratio of 11. However, TD Bank is just slightly cheaper, with a price-to-book ratio of 1.73 and a forward P/E ratio of 10.2. Going with trailing P/E ratios, TD is also slightly cheaper, at 12.15 to RBC’s 12.36.

Geographic scope

The biggest differences between TD and RBC come in the form of their geographic scope. Whereas RBC is focused almost entirely on the Canadian market (including services for Canadians in the U.S.), TD has a major focus on U.S. retail banking oriented toward American customers.

Foreign countries are huge potential growth areas for Canadian banks, which are heavily regulated and lack room to grow at home. TD’s international expansion efforts have mainly focused on the less regulated U.S. market, where it’s growing at 29% year over year. The company also has a major investment in TD Ameritrade, a U.S.-based brokerage that’s growing earnings at 93% year over year.

RBC’s U.S. operations, by contrast, are limited to offering cross-border banking services to Canadians travelling in the states, a relatively small niche and one in which RBC has limited room to grow.

It comes as no surprise, then, that TD achieved higher earnings growth than RBC in its most recent quarter. On the flip side, RBC did have higher revenue growth, thanks mainly to a huge increase in interest and dividend income. However, between the two of them, TD seems like a better growth bet.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share. Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune. Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Andrew Button owns shares of TORONTO-DOMINION BANK.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.