Where Should You Park Your Investment Capital?

Written by Amy Legate-Wolfe at The Motley Fool Canada

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When it comes to choosing between two strong banks, Canadian Imperial Bank of Commerce (TSX:CM) and Royal Bank of Canada (TSX:RY) are two strong options. The decision hinges on a combination of recent performance, strategic outlook, and overall financial stability. Both banks are among Canada’s largest financial institutions, making them strong contenders for any long-term portfolio. But which comes out first?

RBC stock recently reported its fourth-quarter 2024 earnings, showcasing a net income of $4.22 billion, up from $3.94 billion a year earlier. This marked an impressive improvement of around 7%, driven largely by strength in its personal and commercial banking divisions as well as gains in wealth management. RBC stock’s acquisition of HSBC Canada was a significant contributor to this growth, adding nearly 780,000 new clients to its platform and reinforcing its market dominance. The wealth management division alone saw net income rise to $969 million. Thanks to higher fees and improved market conditions.

CIBC also delivered a strong fourth quarter, with adjusted net income reaching $1.9 billion, representing an impressive 24% year-over-year increase. Adjusted earnings per share (EPS) climbed 22% to $1.91, helped by reduced provisions for credit losses. This dropped by 22.5% to $419 million. This reduction suggests improved economic stability and a healthier loan portfolio. While CIBC’s performance is commendable, it lacks the transformational strategic moves that have characterized RBC stock’s recent success. Instead, CIBC remains focused on steady organic growth, improving operational efficiency, and managing credit risk. These are positive signs of stability. Yet, that may not translate into the same level of growth potential that RBC stock is currently demonstrating.

Valuation metrics provide additional context. CIBC’s trailing price-to-earnings (P/E) ratio is 12.95, compared to RBC stock’s slightly higher 15.77. This difference suggests that RBC stock commands a premium. This can be interpreted as investors paying more for its earnings potential and growth opportunities. While a lower P/E ratio might indicate that CIBC is undervalued, RBC stock’s premium reflects the bank’s stronger long-term strategic positioning. RBC also maintains a higher price-to-book (P/B) ratio at 2.13 compared to CIBC’s 1.65. Further reinforcing the market’s confidence in RBC’s superior earning power and broader market reach.

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Dividends are an essential consideration for long-term investors, and both banks offer generous payouts. CIBC provides a forward annual dividend rate of $3.60 per share, yielding 4.02% at writing. This makes it particularly attractive for income-focused investors. RBC stock’s quarterly dividend recently increased to $1.48 per share, or $5.68 annually, resulting in a yield of 3.23% at writing. While RBC’s yield is lower, the bank has a history of steady dividend growth and a lower payout ratio of 48.98% compared to CIBC’s 51.66%. A lower payout ratio indicates that RBC retains more of its earnings to reinvest in growth, which supports its long-term expansion strategy.

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