Better Bank Stock After Earnings News: TD or Royal Bank Stock?

RBC (TSX:RBC) stock and TD (TSX:TD) stock are the biggest Canadian banks, but which is the best after earnings were reported this week?

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Canadian banks came out with earnings this week, but all eyes were set squarely on Toronto-Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY). The pair holds the top spot in terms of assets under management (AUM), with Royal Bank stock still holding number one in terms of market cap.

But after earnings, which could be the better buy for investors? Let’s look at those earnings and consider the future of these bank stocks.

Into earnings

When it came to net income, RBC stock certainly came ahead during its first-quarter performance this week. Net income was up 14% year over year, with adjusted net income down just 5%. Meanwhile, TD stock reported net income up 79% year over year, yet adjusted was down 12%.

While RBC stock reported net income growth seems lower, adjusted shows that it had quite a small decline compared to TD stock. This indicates that there is the potential for more consistent growth. Revenue growth was also more diversified for RBC stock, with TD stock still focused on its United States personal banking growth.

While both banks experienced higher expenses, TD stock did see far larger expenses. Even so, both remained prepared for potential credit losses, and this remains important given they both will be monitoring loan performance in the coming quarters.

Expansion

Both of these bank stocks have been focusing on expansion as well during this recent quarter. For RBC stock, this was through the recent acquisition of HSBC Canada. There are both opportunities and risks here for investors to consider. Of course, RBC stock will be the undisputed leader in Canadian banking. This should also lead to increased profitability as well as synergies once combined. It also provides access to more international markets, as well as higher-income newcomers to Canada.

Of course, there are risks with TD as well. Integration could create challenges as well as unexpected costs. Plus, there will be the need to retain customers and, indeed, grow them to keep investors interested. So, what about TD stock?

TD stock invested in Charles Schwab, receiving dividends from its ownership stake. This has created a steady stream of income for the company. There is also the potential for capital appreciation if Schwab’s stock price increases. Furthermore, this provides TD stock with even more U.S. exposure, which the company continues to focus on.

However, the U.S. market continues to go through fluctuations, including Schwab. There is also limited control given that TD stock is a minority investor. And with so much banking competition, it certainly doesn’t hold the sway as TD stock does in Canada.

Future outlook

When it comes to long-term growth, both of these banks provide it. TD stock and RBC stock have a long history of strong stock performance. What’s more, they’ve been dividend payers and return providers for decades now.

For the immediate future, however, one might be better than the other. RBC stock, for one, posts a strong balance sheet with high capital adequacy ratios. It offers diversified revenue streams as well as the potential for growth. This would come from HSBC but also through its wealth management and capital market investments.

TD stock, meanwhile, will continue to have a strong presence in the U.S., offering more growth potential as well. Its focus on technology and innovation, closing banks to provide online support, should also improve efficiencies for the customer. What’s more, it’s growing its wealth management and insurance businesses.

Bottom line

The downsides here are more macro for RBC stock and more micro for TD stock. RBC stock will face headwinds from an economic slowdown, as well as increased competition on the domestic and international side. And the HSBC integration may not go as smoothly as hoped. But these are “ifs.”

TD stock meanwhile has higher expenses compared to RBC stock, and an ongoing investigation and potential fine for money laundering. Plus, the future of the U.S. economic environment looks uncertain.

So, if it’s down to one, I would consider RBC stock the better immediate player among bank stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Royal Bank Of Canada and Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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