Canadian bank stocks and fintech stocks might seem like they are worlds apart. On the one hand, you have cheap dividend stocks with high yields; on the other hand, you have expensive growth names that often trade at 30 times sales.
What could these two types of stocks possibly have in common?
As it turns out, they have more in common than you probably think!
Although bank stocks and fintech stocks are valued differently, they actually share operational similarities. Both tend to be involved in activities like sending money and managing investments. In fact, some fintechs have even acquired the necessary regulatory approvals and become banks themselves!
Nevertheless, there are important differences between Canadian bank stocks and fintech stocks. In this article, I will explore the differences between the two types of equities, so you can decide which is the best bet for you.
Banks: A proven business model
One thing that Canadian banks have going for them is a proven business model. Most of the “Big Six” banks have been around for over 100 years, and not one of them has failed in that time period.
Consider Royal Bank of Canada (TSX:RY), for example. It’s a bank that is more than 150 years old. In those 150 years, it has never suffered a single liquidity crisis of the sort that tanked several U.S. banks this past spring.
Is Royal Bank of Canada still a safe bank today? All signs point to yes. In its most recent quarter, RY grew its profit by 8% and earnings per share by 9%, and had a 14.1% CET1 ratio. The “CET1 ratio” means top quality capital divided by risk weighted assets. The higher this ratio, the better, and 14.1% is far better than what most banks can boast. So, RY is probably fairly safe.
Many banks have growth!
One of the reasons some people prefer fintechs to banks is because the former is assumed to have growth, while the latter is assumed to be a bunch of dinosaurs. That’s not the case. Consider EQB Inc (TSX:EQB), for example. In its most recent quarter, it did $300 million in revenue, up 88.5%, and $3.99 in earnings per share, up 103%. Incredible growth. And the quarter was no fluke either! Over the last five years, the company has compounded its revenue by 23% per year and earnings at 15.5% per year. So, the growth is a long-term trend.
In the fintech camp, you have names like Block Inc, which is down 80% from its all-time high, and losing money. The company has historically had better growth than EQB, but definitely did not do as well in the most recent quarter. Between it and EQB, I know which stock I’d invest my money in.
Foolish takeaway
Banks and fintechs. There’s a world of similarity, but a world of difference, too. Although the two categories of stocks have much in common, banks have delivered much better returns since 2020. Given the relatively risky nature of fintechs, I’d favour banks for 2023 and onward, as well.
