Bank stocks and fintech stocks are like two peas in a pod. Both handle people’s money. Both are involved in payment processing. And both are increasingly involved in investment management. With the rise of services like Square, Paypal, and Stripe has come increasing pressure on banks, bringing competition where none previously existed.
However, the big banks are still a force to be reckoned with, particularly in Canada. In this country, the so-called ‘Big Six’ banks control 93% of the nation’s private wealth. That’s a much heavier concentration of wealth in a handful of institutions than is found elsewhere in the world. In this article, I will explore the relationship between bank stocks and fintech stocks, so you can decide which is right for you.
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The case for bank stocks
The case for bank stocks (compared to fintech) comes down to stability, valuation, and growth. Canada’s big banks are generally more stable than fintech startups, because they are well-regulated and have large amounts of liquidity. Canada’s banks are generally more stable than foreign banks for that matter, but that’s a topic for another day.
We can use one specific case study to illustrate the virtues that Canadian banks in general possess:
Royal Bank of Canada (TSX:RY). RY is Canada’s biggest bank by market cap. It has a 4.4% dividend yield and a 10.8 price-to earnings (“P/E”) ratio. The high dividend yield means you can collect a lot of income by holding RY – particularly if you hold it in a tax-free account like a TFSA – while the low P/E ratio means you probably aren’t overpaying when you buy it. Of course, this is simplifying matters somewhat. Sometimes stocks have low P/E ratios because their earnings are declining. Should this situation persist, then the low (trailing) P/E ratio will prove to have been misleading. However, Royal Bank’s business is not on the decline. Its revenue and earnings have grown over the last five years, and current interest rates are high enough for the bank to collect a lot of mortgage interest.
The case for fintech stocks
The case for fintech stocks (as opposed to bank stocks) is that they typically have better growth than banks do. Although these stocks are risky, they sometimes produce big profits for people who get in early.
Consider Nuvei (TSX:NVEI) for example. It’s a Canadian fintech stock that rose 226% during an epic run in 2020 and 2021. The stock made a lot of money for people who got in (and out) early. However, it later came crashing down in the 2022 tech stock bear market. It still hasn’t recovered.
Nevertheless, Nuvei isn’t down for the count just yet. Its most recent quarter showed strong growth, featuring metrics like:
- $307 million in revenue, up 45%.
- $110 million in adjusted EBITDA, up 19%.
- $50.7 billion in payments volume, up 68%.
Some of the metrics in the release were pretty good, but on the other hand, net income (both GAAP and adjusted) declined precipitously. It was a mixed showing, overall, but it does help to illustrate the strong revenue growth that fintech companies sometimes deliver.
