A recent change by Canada’s banking regulator has sent the Big Six Banks for a loop in the last week. The Office of the Superintendent of Financial Institutions (OSFI) raised the capital cushion that the banks must hold. Banks must have a capital reserve of 3.5%, up from 3% of a bank’s weighted assets. While it will add protection as debt levels rise, it wasn’t good news for investors with money in these banks.
Yet perhaps the two most watched may have been Royal Bank of Canada (TSX:RY) and Toronto Dominion Bank (TSX:TD). These two are tied for first as the largest banks in Canada based on assets. So let’s see which is the better buy these days, with this latest move taken into consideration.
Royal Bank stock
Royal Bank stock has remained relatively high in share price compared to its peers. Most probably boosted by stable income from its wealth and commercial management sector, as well as from capital markets. Yet, this recent push for reserves could certainly be a hit as the company looks to continue the acquisition of HSBC.
Shares of Royal Bank stock have been sliding slightly as the company reported disappointing earnings, coupled with the recent news from the OSFI. Shares are still up 3.3% in the last year, though down 12% since February.
Investors should be better off in the second half of the year, analysts say, as the bank rebounds from profit that fell 14% year-over-year during the last quarter. Company performance should stabilize, with less pressure on the stock by the end of the year.
The issue investors may look to are costs. Costs climbed as the company went through an acquisition, which also added to revenues. Yet the largest was compensation costs up 16% this year. Salary increases and “aggressive hiring” have led to higher costs, and Royal Bank stock may need to make cuts to adjust.
Based on historic price-to-earnings ratios, Royal Bank stock currently looks fairly if perhaps slightly undervalued. It currently offers a 4.41% dividend yield as of writing.
TD stock
Then we have the other heavy hitter. TD stock hasn’t enjoyed higher share prices compared to Royal Bank, and this is in large part due to the exposure to the United States. Yet that exposure could see the company turn around quickly when the American markets recover, which tends to be quick.
Even so, the losses in the U.S. could impact the company’s reserves. And that could drive shares lower as TD stock looks to make up for these losses. Especially as the company failed to capture First Horizons in the U.S. earlier this year.
Yet the markets may have overreacted, even with earnings coming in lower or close to estimates. There was a lot of volatility surrounding the stock, and yet now analysts believe there could be a larger upside in the near future. Especially as investors triggered a sell-off after results and the First Horizon deal fell through.
So while profitability will recover, the question is when. And that’s what investors will remain focused on. For now, it remains undervalued compared to its price-to-earnings ratio average of the last few years. TD stock currently trades at 10 times earnings, with the average at around 11 times earnings. Shares are down 8% in the last year, and 11% year to date. It offers a dividend yield at 4.92% as of writing.
Bottom line
When it comes to picking which of these banks to bet on, either is honestly fine. Undoubtedly, there’s going to be a volatile time ahead. Both Royal Bank stock and TD stock are going to continue to see ups and downs until the market recovers. But right now, you can get a great share price near value territory, with dividend yields higher than normal. What’s more, both offer long-term share growth that has been on display for decades.
Yet if it comes to one or the other, these days I would go with Royal Bank stock. We’re still waiting on the HSBC deal, but TD stock’s deal has already fallen through. Should Royal Bank stock see this deal come down the line, it could see a rise in share price and increased earnings to help offset any future cuts the company may need to make.
