TD vs BAC : Is one of them a better buy than the other?

If you're trying to acquire a bank during an industry sell-off, you should generally choose safety.
WAN CHAI, Hong Kong - March 1, 2023 - PRLog -- Banks face a mixed picture today, as increasing interest rates allow these critical financial institutions to charge more for the loans they provide. Rising rates, however, bring about the likelihood of a recession, which would likely increase defaults and lower credit demand. Shares of Bank of America Corporation (BAC) and The Toronto-Dominion Bank (TD) are down around 20% and 16%, respectively, in 2022. Is one of them a better buy than the other? Yes.

Banks have significantly repaired their finances during the Great Recession, which was an economic crisis caused by excesses in the banking industry that lasted from 2007 to 2009. Nonetheless, it is worthwhile to look back in time to observe what happened to bank investors during that very tough period. History does not repeat itself, but it frequently rhymes.

BAC, one of the major banks in the United States, reduced its quarterly dividend from $0.32 per share to a penny at the start of 2009. This is a token payment intended to encourage institutional investors with dividend mandates to continue investing in the company. The dividend was not raised until the latter half of 2014.

The conservative Canadian banking authorities compelled TD Bank, and its counterparts not to boost dividends. For ten quarters, the bank's quarterly dividend remained constant at CA$0.30 per share. When authorities enabled TD Bank to increase its dividend again, it did so in early 2011. Since then, the dividend has been raised on a regular basis.

You can observe this by looking at the Tier 1 capital ratio, which attempts to measure how effectively a bank can endure hardship. Higher numbers are preferable. At the conclusion of the third quarter, BAC's Tier 1 ratio was 11%, up 49 basis points year on year. While this is a step in the right direction, it pales in contrast to TD Bank's 14.9%.

Even more intriguing, TD Bank's Tier 1 ratio is the second highest in North America. In other words, just one bank is better equipped to face misfortune. Meanwhile, TD Bank is increasing its presence in BAC's home market. BAC on the other hand, is limited in its ability to aggressively grow into Canada due to the country's banking restrictions. Once again, TD Bank appears to have the upper hand.

No corporation is flawless, and TD Bank has flaws, including the fact that the Canadian property market looks to be more inflated than the U.S. market this time around.

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