Investing in Canadian banks has long been considered a prudent strategy for those seeking stable, long-term growth. The nation's banking sector is renowned for its conservative lending practices, robust regulatory framework, and consistent profitability, making it a cornerstone of many investment portfolios.

The Royal Bank of Canada (TSX:RY) and the Bank of Montreal (TSX:BMO) are two of the country's most prominent financial institutions, each with a rich history and a strong market presence. RBC, established in 1864, has grown to become Canada's largest bank by market capitalization, offering a comprehensive range of financial services domestically and internationally. BMO, founded in 1817, holds the distinction of being Canada's oldest bank and has a significant footprint in North America, particularly in the United States. So, which is the better buy?

Into earnings

In the third quarter of 2024, RBC reported impressive financial results, with net income reaching $4.5 billion, a 16% increase from the previous year. This growth was driven by strong performances in personal and commercial banking, capital markets, and wealth management. In particular, the acquisition of HSBC Bank Canada contributed $239 million to RBC's net income, highlighting the bank's strategic expansion efforts.

BMO's third-quarter performance in 2024 was more subdued. The bank stock reported net income of $1.9 billion, falling short of analyst expectations. This shortfall was attributed to higher provisions for credit losses, which nearly doubled to $906 million compared to the previous year, plus weaker performance in its U.S. personal and commercial banking segment. Despite these challenges, BMO's Canadian operations and capital markets division showed resilience, with adjusted earnings rising by 7% and 23%, respectively.

Future growth

When evaluating these two bank stocks as potential investments, several factors come into play. RBC's larger market capitalization and diversified global operations provide a buffer against regional economic fluctuations. The bank's recent acquisition of HSBC Bank Canada is expected to enhance its market share and revenue streams. Plus, RBC's capital markets unit experienced a 23% increase in net income, reaching $1.2 billion, driven by a resurgence in deal-making activities.

On the other hand, BMO's strategic focus on the U.S. market, particularly through its acquisition of Bank of the West, offers significant growth potential. However, the competitive nature of the U.S. banking sector and recent underperformance in this segment pose challenges. BMO's higher provisions for credit losses indicate a cautious approach to potential loan defaults. This can impact short-term profitability.

Looking at value

In terms of valuation, RBC's stock has shown robust performance, with a 52-week range between $115.57 and $175.56, thereby reflecting investor confidence. BMO's stock has also demonstrated resilience, trading between $107.16 and $133.95 over the same period. Both banks offer attractive dividend yields, with RBC's forward annual dividend rate at $5.68 and BMO's at $6.20, thus appealing to income-focused investors.

Looking ahead, RBC's diversified operations and strategic acquisitions position it well for sustained growth. The bank stock's strong capital markets performance and expansion into new markets provide multiple revenue streams. BMO's focus on the U.S. market offers growth opportunities, but the bank will need to navigate competitive pressures and manage credit risks effectively to realize its potential.

Bottom line

Both RBC and BMO present compelling investment opportunities within the Canadian banking sector. RBC's larger scale, diversified operations, and recent acquisitions provide a solid foundation for long-term growth. BMO's strategic focus on the U.S. market offers significant upside potential, albeit with associated risks. Investors should consider their risk tolerance, investment horizon, and income needs when choosing between these two banking giants.