Better Buy: RBC Stock or EQ Bank Stock?

Canadian bank stocks like Royal Bank of Canada (TSX:RY) are better positioned.

| More on:
Investor wonders if it's safe to buy stocks now

Source: Getty Images

A banking crisis has emerged across the southern border and the Atlantic. Regional banks in the U.S. and the third-largest bank in Switzerland have collapsed this month. Both governments have stepped in with rescue packages, but investors are worried it won’t be enough. That’s why all global banks, including Canadian ones, have lost market value this month.

The ongoing crisis is reminiscent of the 2008 financial crisis. However, Canadian banks were relatively insulated from that crisis and emerged stronger. They could be in a similar position this time. Some analysts believe the banking system in Canada is more diversified and better regulated which protects Canadians from the global crisis.  

In this environment, domestic investors could seek out opportunities. You could either bet on Canada’s largest bank RBC (TSX:RY) or a smaller challenger bank such as EQ Bank (TSX:EQB). If you’re in the market seeking bargains, here’s what you need to know. 

RBC

With $1.7 trillion in assets, Royal Bank of Canada is the nation’s largest lender. It’s also well diversified. Only 24% of its revenue is generated in the U.S., according to RBC’s latest quarterly report. Another 16% is generated in countries besides Canada and the U.S. 

Meanwhile, much of the bank’s mortgage loans are insured by the Canada Mortgage and Housing Corporation and client deposits are backed by the Canada Deposit Insurance Corporation. Put simply, the bank’s assets are safer than its global peers. 

However, the stock is down 7.4% over the past month, as investors retreat from the banking sector. That pushed RBC’s valuation down to just 1.76 times book value per share and 10 times forward earnings per share.

The bank’s dividend yield has also improved noticeably. RBC stock now offers a 4.16% passive return at current market price. Investors seeking a safe haven with reliable passive income should buy this blue-chip bank stock. 

EQ Bank

Investors with an appetite for risk and better growth could consider niche lenders like Equitable Bank. Shares of EQB have plunged 17.76% month over month as of close on March 23. 

Investors are far more skeptical about smaller financial institutions. That’s for good reason. Smaller Canadian banks and lenders focus on riskier segments of the market. Home Capital Group offered uninsured mortgages to subprime borrowers and experienced a partial bank run in 2017. Institutional investors rescued it with a $2 billion cash injection. 

Similarly, Equitable Bank offers uninsured mortgages, commercial loans, equipment leasing financing and business loans — all riskier businesses but with higher interest rates and better returns. The bank’s return on equity is 15.9% at the end of 2022. 

The bank has also raised its Allowance for Credit Losses (ACL) in recent quarters to mitigate risks. At the end of 2022, the bank’s ACL was 0.18% of total lending assets which seems adequate. Meanwhile, EQB’s stock is trading at 7.26 times earnings per share and a 12.5% discount to book value per share. 

Put simply, if you’re looking for a high-risk, high-reward bank stock, EQB should be on your radar.  

Bottom line

Canada’s bank stocks are sliding along with the rest of the world. However, our financial institutions may avoid the crisis. Dividend investors should target blue-chip bank stocks while growth investors could hunt for bargains in the mid-cap space.

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool recommends EQB. The Motley Fool has a disclosure policy.

More on Investing

nvidia headquarters with nvidia sign in front
Tech Stocks

Nvidia Just Delivered a Beat-and-Raise Quarter. There’s 1 Red Flag Investors Shouldn’t Ignore.

The chipmaker continued to benefit from robust demand for artificial intelligence (AI). But can it last?

Read more »

GettyImages-1473086836
Tech Stocks

Why Super Micro Computer Stock Is Soaring Today

The volatile stock is getting a boost from Nvidia.

Read more »

Snowflake logo in snowflake office on wall_snowflake-1
Tech Stocks

Here’s Why Snowflake Stock Skyrocketed Today

Shares of the data company are up 32% for the day.

Read more »

man touching magnifying glass button on floating search bar internet google search engine
Tech Stocks

Why Alphabet Stock Was Sliding Today

The parent company of Google is facing heat from U.S. regulators.

Read more »

chart reflected in eyeglass lenses
Tech Stocks

Top Canadian AI Stocks to Watch in 2025

Celestica (TSX:CLS) stock and another Canadian AI stock are worth watching closely this holiday season.

Read more »

woman looks out at horizon
Investing

Is Sun Life Financial Stock a Buy for its 4% Dividend Yield?

Let's dive into whether Sun Life Financial (TSX:SLF) stock is a buy for its dividend yield alone, or if this…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

1 Magnificent Energy Stock Down 17% to Buy and Hold Forever

Down over 17% from all-time highs, Headwater Exploration is a TSX energy stock that offers you a tasty dividend yield…

Read more »

Man data analyze
Investing

Want $1 Million in Retirement? 2 Simple Index Funds to Buy and Hold for Decades

Just invest in a S&P 500 index fund and do nothing.

Read more »