Bank stocks and fintech stocks often seem like two peas in a pod. Both help people process payments. Both help people with their investments. In many cases, both take deposits, as some fintechs are transforming into bona-fide banks themselves. Between the two, fintechs have more hype surrounding them than banks do. However, with the massive crashes observed in Paypal and Block recently, banks collectively have better returns in the trailing two-year period. In this article, I will explore banks and fintech stocks side by side, comparing how they stack up on three factors: valuation, profitability, and growth.
Banks have fintechs beaten on valuation, generally speaking. It’s quite common to find Canadian banks trading at 8–10 times earnings these days. Meanwhile, Paypal is at 17 times earnings and Block isn’t even profitable. Banks are generally both profitable and modestly valued.
Consider Bank of Nova Scotia (TSX:BNS), for example. At today’s prices, it is truly dirt cheap. It trades at 9.3 times earnings, 0.95 times book value, and 2.5 times sales. When a company has a price/book ratio lower than one, that means that it is selling for less than the value of what it owns, after you subtract debt! The Bank of Nova Scotia is not exactly what you’d call a raging hot growth stock. Over the last five years, the company’s revenue has grown by only 2.3% per year, while its earnings have declined 3.3% per year. The company will need to change how it does things to become one of Canada’s truly excellent banks, but it definitely is cheap.
Profitability is another area where banks have the edge over fintechs. Bank of Nova Scotia is one of Canada’s worst-performing bank stocks, nevertheless it has a 25% net margin. In this high interest rate environment, it’s quite easy for banks to turn dollars into more dollars.
Growth is the one area where fintechs take the crown over banks. Fintechs are generally younger and more innovative companies than banks are, so naturally they grow faster.
Consider Nuvei (TSX:NVEI), for example. In the most recent quarter, it grew its revenue by 55% and its volumes by 72%. EBITDA grew by a more modest 36%. Such growth rates are not at all uncommon in the fintech scene. These companies are mostly relatively young tech startups after all, with large markets to feed. In their early days, companies often grow rapidly. So, investors shouldn’t be surprised that NVEI is growing revenue and earnings at a steady clip. Growth is the virtue of the younger company.
Bank stocks and fintech stocks: The final verdict
Taking all relevant factors into account, I prefer bank stocks to fintech stocks. First of all, banks win on two out of the three factors I looked at here, giving them the edge in most categories. Second, my point about how banks have less growth than fintechs applies mainly to the Big Six. There are high-growth banks a plenty, a very good Canadian example is EQB Inc, which grew its revenue 88.5% and its earnings 122% last quarter.