Markets are treating Canada’s two largest banks in very different ways. TD Bank (TSX:TD) trades close to where it did three years ago, while Royal Bank (TSX:RY) is bumping up against its all-time high. Investors are wondering if TD stock is now undervalued and good to buy or if RY is the safer long-term bet right now for a TSX bank pick.
TD Bank
TD just reported its first quarterly loss in more than 20 years. The surprising fiscal third-quarter (Q3) 2024 numbers are due to a US$2.6 billion provision for fines connected to the ongoing regulatory investigations into the American business. TD is under scrutiny in the United States for not having adequate systems in place to detect and prevent money laundering. The Q3 charge is much larger than the US$450 million TD already set aside earlier this year and pushes the total anticipated penalties into the upper range of what analysts had speculated could occur. The total US$3 billion charges will use up a large chunk of the excess capital TD has carried on the balance sheet over the past year. As a result, TD said it sold part of its stake in Charles Schwab to cover the US$2.6 billion hit.
The issues south of the border have hurt the stock. TD trades for close to $79.50 at the time of writing. This is above the 12-month low of around $74 but is way off the $108 the stock reached in early 2022.
The risk at this point is that American regulators could impose growth restrictions on TD in the American market in addition to the fines. TD has spent billions of dollars on acquisitions over the past two decades to build a large American retail banking business that runs from Maine down the East Coast to Florida and would like to get even bigger in the United States.
On the positive side, the roughly US$3 billion in charges appears to be where the penalties will top out. This gives investors a bit of clarity on the situation. On an adjusted basis, TD actually delivered solid fiscal Q3 results despite all the distractions. Adjusted net income came in at $3.65 billion, which is in line with fiscal Q3 2023.
Royal Bank
Royal Bank trades near $154 at the time of writing. That’s just shy of the $155 record high.
The banking giant now sports a market capitalization of about $218 billion. This not only makes Royal Bank the largest company in Canada based on this metric but also places it among the biggest banks in the world.
Royal Bank is benefitting from its $13.5 billion acquisition of HSBC Canada earlier this year. The deal added more than 100 branches in Canada with roughly 780,000 clients. It also looks like a savvy move in comparison to TD’s abandoned US$13.4 billion takeover attempt of First Horizon, a U.S. regional bank, last year. Bank of Montreal (TSX:BMO) is feeling some pain, as well, after it paid US$16.3 billion in 2023 to acquire California-based Bank of the West. BMO negotiated the deal in late 2021 at the height of the post-covid bank rally. The purchase has been a drag on Bank of Montreal’s share price over the past year amid larger provisions for credit losses caused by soaring interest rates in 2022 and 2023.
Royal Bank isn’t cheap at its current trailing 12-month price-to-earning multiple of 14.1, but you get a best-in-class pick and a decent 3.7% dividend yield.
Is one a better bet?
Conservative buy-and-hold investors should probably stick with Royal Bank. The long-term chart for the banking giant suggests that buying at high points still pays off in the long run.
Contrarian investors who are willing to take on some additional downside risk and are willing to ride out more turbulence might prefer to go with TD today. The 5% yield is attractive, and the stock should eventually recover once all the issues in the American business are put to bed.
