Royal Bank (TSX:RY) and TD Bank (TSX:TD) are TSX giants in the Canadian banking sector. The performances of the stocks have diverged in the past year with Royal Bank delivering better returns. Investors are wondering if RY stock will continue to outperform or if TD might be undervalued at this point and a better pick for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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Royal Bank
Royal Bank trades near $168 per share at the time of writing. This is down from the record high of $180 the stock reached in recent months but is still up 31% in the past year.
Royal Bank scored a big win with its $13.5 billion purchase of HSBC Canada last year. The deal added nearly 800,000 new customers and gave Royal Bank a boost in its ability to provide international wealth and banking services to its clients.
With a current market capitalization of nearly $238 billion, Royal Bank has the financial firepower to compete for attractive new acquisitions that might arise or grow existing businesses organically. In Canada, there is an opportunity to compete for the roughly two million fixed-rate mortgage renewals that are coming up in 2025 and 2026. Homeowners faced with higher rates will likely shop around to see which bank will give them the best deal.
On the acquisition front, Royal Bank’s last large purchase in the United States occurred in 2015 when it bought City National for US$5.4 billion. The chief executive officer (CEO) said in 2024 that the bank isn’t looking to buy other banks in the U.S. at the present time. City National has been more problematic than expected for Royal Bank, but the company still sees good long-term potential in the American market.
Royal Bank remains very profitable. Adjusted return on equity (ROE) was 15.5% in fiscal 2024. Adjusted net income rose 10% last year to $17.4 billion. The bank finished fiscal 2024 with a solid capital position, even after paying for the HSBC acquisition.
At the current share price, investors can get a dividend yield of 3.5% from RY stock.
TD Bank
TD has struggled over the past three years, largely due to troubles in its American operations. Regulators in the U.S. hit TD with more than US$3.1 billion in fines last year and placed an asset cap on TD’s American business. This is a big blow to TD’s growth program. The bank spent billions of dollars over the past 20 years acquiring U.S. regional banks down the east coast from Maine to Florida. TD was forced to abandon its planned US$13.4 billion takeover of First Horizon in 2023 due to regulatory hurdles.
TD’s new CEO took control of the bank this month and is already making big changes. TD just sold its remaining interest in Charles Schwab for net proceeds of about $20 billion. The bank says it will use about $8 billion to buy back TD stock and will use the rest of the funds to invest in organic growth, including opportunities in Canada.
TD is working on a comprehensive strategic review. Investors should get more details on the new growth strategy by the end of the year. In the meantime, investors can pick up a dividend yield of 4.9%. TD stock trades near $85 per share compared to $108 three years ago, so there is decent upside potential on a turnaround.
Is one a better pick?
Royal Bank and TD should both be solid holdings for a buy-and-hold portfolio. At the current levels, I would probably split a new investment between the two stocks.
