Royal Bank of Canada (TSX:RY) and TD Bank (TSX:TD) are Canada’s largest financial institutions. Bank stocks are off their highs for the year, and investors who missed the big rallies after the 2020 market crash are wondering if RY stock or TD stock are now oversold and good to buy for a retirement portfolio.
Royal Bank
Royal Bank is the largest firm on the TSX with a current market capitalization of $175 billion. The stock trades near $126 at the time of writing compared to nearly $140 in February.
Royal Bank avoided the temptation to chase a major U.S. acquisition in the past two years and has instead focused on doing deals in the United Kingdom and Canada. The company has already closed its $2.4 billion takeover of Brewin Dolphin, a large wealth management firm in the U.K. and Ireland. The deal makes Royal Bank a top-three player in the sector in those markets. At home, Royal Bank is working to close its $13.5 billion purchase of HSBC Canada. The deal will add roughly 130 branches and brings an affluent client portfolio.
Royal Bank generated solid fiscal second-quarter (Q2) 2023 results. Adjusted net income came in at $3.8 billion. That is down about 13% from the same period last year and largely due to a higher provision for credit losses (PCL). The bank booked a PCL of $600 million in the quarter compared to a $342 million PCL reversal in fiscal Q1 2022. This is important for investors to note, as the PCL number is simply an amount the bank sets aside for potential loan losses that might not actually occur.
Royal Bank finished fiscal Q2 2023 with a common equity tier-one (CET1) ratio of 13.7%, well above the 11.5% regulators will require in the coming months, but Royal Bank’s CET1 ratio will drop when the HSBC deal closes in early 2024.
At the current share price, Royal Bank stock trades for about 12.5 times trailing 12-month earnings and provides a 4.25% dividend yield.
TD Bank
TD is another banking giant with a current market capitalization near $149 billion. The stock trades close to $82 per share at the time of writing. That’s up from the 12-month low of around $76 but way off the $93 the stock fetched earlier this year and the $108 at the top of the rally in the first part of 2022.
TD built up a large capital cushion to pay for its planned US$13.4 billion all-cash takeover of First Horizon, a U.S. regional bank based in the southeastern states. The deal would have added more than 400 branches and was set to make TD a top-six retail bank in the American market. TD backed out of the intended acquisition, citing regulatory hurdles, and finished fiscal Q2 with a CET1 ratio of 15.3%.
The excess cash gives TD a significant safety net to ride out a potential economic downturn. However, the company’s adjusted earnings growth will not hit the previous guidance of 7-10% due to the cancelled deal.
TD didn’t raise the dividend when it announced the fiscal Q2 2023 results. Investors, however, could see a bump in the payout or even a special dividend as a reward for their patience during the painful drop in the stock price in the past 18 months. TD might also use part of the excess cash to buy back stock.
On the growth side, TD now intends to take a slower organic approach to building its presence in the U.S. southeast.
TD stock currently offers a 4.7% dividend yield and trades for close to 10.4 times trailing 12-month earnings.
Is one a better pick?
TD and Royal Bank are good companies with long track records of profit expansion and dividend growth. Buying these stocks on dips has historically proven to be a savvy move over the long run, and both deserve to be on your radar for a retirement portfolio.
If you only buy one, I would probably go with TD as the first choice today. It would be a contrarian pick, but the stock still appears oversold and could deliver better upside on a recovery in the medium term.
