Toronto-Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY) are two of Canada’s most widely owned bank stocks. The former is Canada’s biggest bank by assets; the latter is the biggest by market capitalization (a term that means value of all shares combined). They both certainly have the “big” factor down pat. The question is, which banking stock is better?
That may not be the easiest question to answer. TD and Royal Bank are very different. They both do a lot of retail banking in Canada, but their foreign operations differ significantly. Royal Bank’s foreign operations mostly consist of investment banking and wealth management, TD’s mostly consist of U.S. retail banking. There are big differences, but there are similarities as well.
In this article, I will explore the similarities and differences between TD and Royal Bank stocks so you can decide which one is right for you.
The case for TD Bank
The case for TD Bank over Royal Bank largely comes down to growth potential. I think that TD Bank has better growth potential than Royal Bank for three reasons:
- Its historical growth is stronger. For example, over the last five years, TD has grown its revenue by 7.06% per year, while RY has only grown its revenue by 4.3% per year.
- TD has an obvious growth catalyst: acquisitions. It just bought the investment bank Cowen and is in the process of buying the U.S. Bank First Horizon: a bank that earns about $1 billion a year in profit.
- First Horizon is located in the U.S. southeast, which has one of the fastest population growth rates in the United States.
All of the facts above point to TD Bank having significant growth potential. Of course, they come with certain risks: closing the First Horizon deal will reduce TD’s capital position significantly, for example. But the growth potential is very real.
The case for Royal Bank
The case for Royal Bank over TD Bank comes down to discipline. Royal Bank has generally been more prudent over the years in growing its business than TD has. TD is currently dealing with a big headache in the U.S. over accusations that it pushed customers into opening accounts they didn’t even want. This is a widely criticized business practice; when Wells Fargo was caught doing it, it eventually had to pay out $3 billion in fines.
Royal Bank has never faced as much controversy as TD over issues like this, because it’s very disciplined in how it runs its business. So, you could say that RY perhaps has less operational risk than TD does. Interestingly enough Royal Bank is actually riskier than TD in terms of its capital position: it has a 12.7% common equity tier-one (CET1) ratio, vs. TD’s 16.2%. However, TD’s CET1 ratio will come down after the First Horizon deal closes, so I won’t count that as a point in TD’s favour.
Having considered pros and cons of both stocks, I consider the comparison between TD and Royal Bank to be a tie. TD Bank has better growth; Royal Bank may be somewhat safer. Personally, I hold TD Bank stock but not Royal Bank: I like its more aggressive growth strategy. But those who prefer stability above all else may prefer RY.