Royal Bank of Canada (TSX:RY) and The Toronto-Dominion Bank (TSX:TD) are two of Canada’s biggest banks. Royal Bank is the biggest going by market cap and earnings, while TD Bank is the biggest going by total assets. Both banks have a lot going for them. Compared to other stocks, TD and RY are both cheap and have high dividend yields. However, they’re not the same stock – not by any stretch of the imagination. In this article, I will compare TD Bank and Royal Bank side by side so you can decide which is the best fit for your portfolio.
The case for Royal Bank
A case for Royal Bank can be built on the fact that it has a good reputation with regulators. It has received very few fines over the years (by bank standards anyway), and is a respected Canadian financial institution. Pierre Poilievre is calling for Royal Bank’s HSBC Canada deal to be blocked, but he’s not in power. I wouldn’t consider that a real risk unless the conservatives win a future election.
TD Bank does not have as good a reputation with regulators as Royal Bank does. Earlier this year, it was successfully sued for $1.2 billion in the U.S. for failing to stop a Ponzi scheme. Then, it got sued by a hedge fund manager who said it failed to make proper disclosures about an M&A deal it was involved in. Then, the U.S. department of Justice said it was investigating TD Bank for poor money laundering practices. This is quite the list of legal issues for a company to face in just one year! Royal Bank is not facing a massive list of legal issues, so it takes the crown over TD Bank when it comes to legal risk.
The case for TD Bank
To be completely honest, TD Bank looks more appealing to me than Royal Bank in basically every category except the one described in the paragraph above. Apart from Royal Bank’s edge in pleasing regulators, TD wins in every category: capital adequacy, profitability, valuation, and growth.
First, capital adequacy. TD Bank’s overall CET1 ratio was 15.2% in the second quarter; it was 17% in the U.S. segment. Royal Bank’s CET1 ratio in the same period was 14.1% – also amazing, but not as good as TD’s.
Then, we have profitability. Going by trailing 12-month figures, TD Bank has a 19% net margin and 13.8% return on equity. Both very strong. Royal Bank has an 18% net margin and a 14.6% return on equity. Each bank wins in one category but TD’s win on the net margin is larger, so I’m handing it the overall crown on profitability. Also, TD’s return on assets (0.77%) is slightly higher than Royal Bank’s (0.75%).
Then, we have valuation. TD Bank trades at 10.1 times earnings and 1.5 times book value. Royal Bank trades at 10.6 times earnings and 1.6 times book value. Using these metrics, TD is cheaper.
Finally, there’s growth. Over the last five years, TD has grown its revenue by 7.1% and earnings per share by a 5.6% CAGR. Royal Bank has only grown these figures by a 5.2% and 5.4% CAGR, respectively. TD also beats RY on growth in the trailing 12-month period, with revenue up 14.5% and earnings down 2.2%. RY’s revenue is only up 9.5% and its earnings are down 5.7%.
Basically, you’d need to be really terrified of U.S. lawsuits to choose Royal Bank over TD Bank. The latter beats the former on basically every conventional banking metric you can think of.
