Toronto-Dominion Bank (TSX:TD) and EQB Inc (TSX:EQB) are two popular Canadian bank stocks. The former is Canada's second-biggest bank by market cap; the latter is a smaller online bank often called "Canada's challenger bank." While differing in size, the two stocks have much in common. Both are lenders that are active in mortgages, savings and loans, and insurance. Also, both of them are considerably cheaper (going by valuation multiples) than the average Big Six bank. In this article, I will explore TD and EQB side by side so you can decide which is the better fit for your portfolio.

The case for TD Bank

The case for buying TD Bank instead of EQB comes down to two things: diversification and liquidity. TD Bank is a much more diversified business than EQB, and it has far more liquid assets as a percentage of total assets.

TD Bank is a highly diversified business with a variety of subsidiaries:

• A Canadian retail bank
• Canadian insurance and wealth management businesses
• A U.S. retail bank
• A U.S. investment bank/brokerage
• And more

By contrast, EQB is not nearly as diversified; it's mainly a Canadian retail bank.

TD Bank also has the edge over EQB in liquidity. TD has about 50% of its deposits covered by liquid assets; the same ratio for EQB is less than 20%. True, EQB's deposits are overwhelmingly GICs, which means that it has a respectable liquidity coverage ratio. Still, the low ratio of liquid assets to deposits would cause problems if the deposit mix were to shift to more demand deposits.

The case for EQB

The case for going with EQB over TD Bank rests on growth and valuation. In the trailing 12-month period, its revenue, earnings and dividends grew at the following rates:

• Revenue: 22.5%
• Earnings: 5.74%
• Dividends: 58%

The same rates for TD were as follows:

• Revenue: -8.2%
• Earnings: -9.8%
• Dividends: Roughly unchanged

As you can see, EQB grew revenue, earnings and dividends much faster than TD over the last 12 months. Despite this, it also trades at lower multiples. At today's prices, EQB trades at the following:

• 9.8 times earnings
• 3.3 times sales
• 1.2 times book value

Although TD has a lower price/sales ratio than EQB, its earnings and book value multiples are higher. So, TD would appear to be the pricier of the two stocks.

Another thing that EQB has going for it is the fact that it is not currently involved in any controversies. This year, TD took a $3 billion fine and a $430 billion asset cap because of money laundering at some of its U.S. branches. The bank looks poised to recover next year, but its growth in the U.S. will be impeded. EQB does not currently face any such impediments.

Final verdict

After comparing TD and EQB side by side, I find the comparison is roughly a tie. TD is basically "safer," with more liquid assets than EQB, but the latter does better in terms of growth and valuation. If there are no systemic issues in the economy, then EQB should fare better than TD — but you never know when systemic issues will arise.