Investing in large-cap bank stocks is a proven strategy to generate outsized gains over time. While bank stocks are cyclical, they are key pillars of economic growth, making the largest players too big to fail. Despite the cyclicality associated with bank stocks, giants such as JPMorgan (NYSE:JPM) and Royal Bank of Canada (TSX:RY) have delivered steady returns in the last two decades.
Since April 2004, RBC stock has returned 330% while JPM stock is up over 400%. However, if we adjust for dividends, cumulative returns for RBC stock are much higher at 832%, outpacing the 764% returns delivered by JPM.
As past returns don’t matter much to future investors, let’s see which banking giant, RBC or JPMorgan, is a better buy right now.
The bull case for JPM stock
Valued at US$557 billion by market cap, JPMorgan reported revenue of US$42.6 billion and an operating profit of US$4.44 per share in the first quarter (Q1) of 2024. Comparatively, Wall Street forecast revenue at US$41.9 billion and operating profit at US$4.11 per share in the March quarter. In the year-ago period, these numbers stood at US$39.3 billion and US$4.10 per share, respectively.
While JPMorgan beat estimates, it reiterated its net interest income forecast of US$90 billion in 2024, while analysts expected the company to raise it by at least US$2 billion.
Despite a challenging macro environment in 2023, JPM increased investment banking fees by 18% year over year. Further, segments such as wealth management and lending-based fee income also grew at enviable rates, showcasing the robustness of JPM’s business model.
Armed with a rock-solid balance sheet, JPM ended Q1 of 2024 with a return on equity (ROE) of 17%, much higher than peers such as Wells Fargo and Citi, which reported an ROE of 10.5% and 6.6%, respectively.
JPMorgan increased its net revenue by 9% and net income by 6%, allowing the banking behemoth to raise quarterly dividends by almost 10% to US$1.15 per share, indicating a forward yield of 2.4%.
Priced at 12 times forward earnings, JPM stock is quite cheap, given earnings are forecast to rise by 8% year over year in 2024.
The bull case for RBC stock
Royal Bank of Canada is the largest company trading on the TSX, valued at $189 billion by market cap. Compared to banks south of the border, Canadian banks are much more conservative, which results in lower growth rates. However, as the Canadian banking sector is heavily regulated, it allows RBC and other major players to benefit from entrenched positions and a wide economic moat.
Despite its outsized gains, RY stock trades 10% below all-time highs, increasing its forward yield to more than 4%. Additionally, these payouts have more than tripled in the last 17 years, enhancing the effective yield significantly.
Priced at 12 times forward earnings, RY stock trades at a discount of 8% to consensus target estimates.
The Foolish takeaway
Both JPM and RBC are blue-chip banking giants positioned to deliver steady gains to long-term shareholders. Investors can consider gaining exposure to both these stocks which also provides portfolio diversification.
