Choosing between any two of the top five banks in Canada can be a task that's more difficult than it may seem. For one, these large lenders are highly correlated, meaning that it doesn't really matter which bank stock one picks; they're most likely going to move in the same direction. From a dividend and growth perspective, it's also true that yields and growth rates are likely to be about roughly the same. So, why not simply buy a sector-weighted exchange-traded fund (ETF) and call it a day?

There are some differences between Canada's largest banks that are worth pointing out. These differences could lead to relative outperformance over a medium-term time frame.

Here's a breakdown of two of Canada's largest banks and which is the stock I'd call the likely prospective winner over the next five years or so.

Toronto-Dominion Bank

Toronto-Dominion Bank (TSX:TD) offers retail and corporate banking services, wealth management and related financial solutions. The services list includes accounts, cards, certificates of deposits, life and non-life insurance, mortgage and borrowings, international banking, merchant solutions, investment, cash management, and wealth advisory services.

Toronto-Dominion Bank can produce a good level of financial performance despite a challenging macroeconomic environment. In the third quarter of its fiscal year 2024, which ended in July, TD posted a 3% year-over-year increase in its adjusted earnings to $2.05 per share.

It also managed to post a solid 8.9% year-over-year rise in its revenue to $14.2 billion, thanks to continued strength in its core banking operations, particularly in the Canadian market. In fact, despite the AML investigation and the not-so-easy macroeconomic environment, Toronto-Dominion Bank has shown it can still grow revenue and protect its earnings.

Its Canadian personal and commercial banking operations touched record during the July 2024 quarter. Its revenue segment rose about 9% year over year to about $5 billion. Apart from this, the segment's net profit also rose by about 13%, reflecting the strength of its customer base and leading market position.

Royal Bank of Canada

Royal Bank of Canada (TSX:RY) offers personal, institutional, and business banking products and wealth and asset management services. It operates through a network of branch offices, ATMs, and online portals and serves individual, business, SMEs, institutional, and high and ultra-high net worth individual clients.

Royal Bank of Canada is supporting its steady dividend with a reliable history over the last 10 years, supported by a low payout ratio of just 49%, which is sustainable. However, its yield at 3.42% is a little below the average of the major Canadian dividend players but sits at a discount to the estimated fair value.

Recent fixed-income offerings are said to be strategic financial maneuvers to bring support to growth and stability. The company might better position itself for greater financial oversight and strategic direction in pursuing efforts at constant growth by appointing its new chief financial officer.

The bank has sound financial health with high earnings, good quality of credits, and excellent customer satisfaction, which comes well for the bank. However, the rise of noninterest expenses, gross impaired loans, and a high price-to-earnings ratio compared to peers indicate various issues.

The growth opportunities include achieving expense synergies and enhancement of trade finance offerings. However, it will balance these factors against the economic uncertainty and additional regulatory hurdles surrounding the bank.

The verdict

Overall, taking into account valuation, dividend potential, and growth potential, Toronto-Dominion Bank is better than Royal Bank. It has more upside if it can beat the money-laundering allegations or even if it just pays out a moderate amount of fines and settlements. Royal Bank is pretty well-valued by banking standards, and at 13 times earnings with little growth, it is not cheap. However, it is a pretty conservative bank, so you are unlikely to lose your shirt on it.