加拿大皇家银行

Royal Bank of Canada reported solid fiscal third-quarter results. Adjusted earnings per share of CAD 4.28 grew 11% from the prior-year quarter. The results translate into an adjusted return on equity of 17.9%, above the bank's medium-term target of 17.0%-plus.

Why it matters: While net interest income growth of 5% (7% excluding trading) year over year was in line with RBC's full-year guidance for mid-single-digit growth, it was slower than the peer average of 8% in the quarter. RBC's net interest margin declined 2 basis points from the prior-year quarter, worse than most of its peers. Management said the purchase accounting accretion from HSBC Canada rolling off has created a headwind of around 4 basis points per quarter, which the bank should lap in the second quarter of fiscal 2027. Loan growth of 8% year over year was impressive, though, given the bank's size, and it was ahead of most peers in the quarter.

The bottom line: As we incorporate wide-moat Royal Bank of Canada's latest results, we anticipate increasing our CAD 235/USD 169 fair value estimate by a high-single-digit percentage. We continue to assess the shares as overvalued. The increase in our valuation will be primarily driven by higher fee income growth from the bank's wealth management and capital markets businesses in the near term, which will be partially offset by lower 2026 net interest income and higher expense growth.

Coming up: Similar to peers that have reported this cycle, RBC did not indicate any meaningful changes to its fiscal 2026 credit guidance amid the latest tariff announcements between the US and Canada. Its last guidance was similar to the 2025 level, which was 37 basis points of provisioning for impaired loans.

A prolonged and severe tariff situation would lead to higher credit costs and lower balance-sheet growth for Royal Bank of Canada as well as the other Canadian banks. That said, government-supportive measures for the tariff-affected sectors and the labor force would help alleviate the negative impact on profitability and returns for the Canadian banks. RBC also has a strong capital position to weather potentially higher credit costs, ending the third quarter at a common equity Tier 1 ratio of 13.5%, 240 basis points above its current regulatory minimum of 11.1%.

RBC's capital markets segment earnings were up 4% sequentially during the quarter, lower than some of its peers but still impressive, given that the bank's trading business has less exposure to equities trading. Within the segment, corporate and investment banking revenue rose 10%, while global markets revenue increased 5% sequentially.

Our fair value estimate for RBC is USD 185 per share. We forecast the bank to grow its revenue at a CAGR of 4.9% from 2025 to 2030. Our valuation is 3.2 times the tangible book value as of July 2026. We use an exchange rate of CAD 1/USD 0.72 in our valuation.

We expect RBC to increase its fee income at a CAGR of 4.9% from 2025 to 2030. We acknowledge that predicting capital markets revenue is inherently challenging, and we still believe the capital markets business remains highly volatile. We caution investors that a reduction in the revenue base will lead to a much larger decline in profitability, given the business' high operating leverage.

We expect loan growth of 7.6% in 2026, with wholesale loan growth being the largest driver. This is a slowdown from the more than 15% growth in 2024 (mostly driven by the HSBC Canada acquisition) but better than the 6% growth in 2025. Overall, we expect RBC to increase its loan balances at a 4.7% CAGR over the next five years. In terms of net interest margin, we expect a relatively stable margin for RBC between 1.51% and 1.56% from 2026 to 2030. Taken together, we forecast net interest income growth of 4.8% in 2026 and a five-year CAGR of 4.8%.

We forecast 2026 provisioning costs at 0.36% of average loans, lower than 0.43% in 2025 and similar to 0.35% in 2024. RBC has greater exposure than some of its peers to the Canadian housing market, where elevated home prices and consumer leverage are concerns. However, Canadian mortgage debt held up surprisingly well despite higher mortgage rates, and there was never a severe increase in mortgage defaults. We view this as more of a future risk to growth than an immediate risk to capital.

Trading income grew by 34% in 2025. We now expect 2026 trading income to grow by 10% following the first three quarters' strong performance. Excluding trading income, we forecast noninterest income to increase by 11% in 2026. We project total noninterest income to increase at a 4.9% CAGR from 2025-30.

2024 core operating expenses grew 7.4% after adjusting for HSBC Canada-related expenses. 2025 core operating expenses accelerated to 11.8%, mostly driven by the strong performance in wealth management and capital markets segments, as both businesses carry a large variable compensation component. We project expense growth of 5.3% for 2026, mostly driven by compensation and technology investments.

We forecast the bank's long-term efficiency ratio at around 53.2%. Our forecasts indicate an average return on tangible common equity of 21.8% for the bank for the period 2026-30. We use an 8.2% cost of equity in our valuation.

We assign Royal Bank of Canada a Morningstar Economic Moat Rating of wide because it possesses durable cost advantages and switching costs that are consistent with our bank moat framework. In our view, RBC has a wide moat because it has superior market share in the advantageous Canadian banking environment, superior operating efficiency, and exposure to more-moaty nonbank businesses. We are confident that the bank will consistently earn returns well above our 8.2% cost of equity estimate.

Bank moats are derived primarily from cost advantages and switching costs, and we believe the Canadian banking environment offers systemic cost advantages and switching costs that lead to returns above the cost of capital, allowing the big banks operating under its jurisdiction to possess moats. In Canada, switching costs stem from a tightly regulated oligopolistic market structure (Big Six Canadian banks control more than 95% market share), which limits competition, stabilizes pricing, and reduces customer incentive to switch banks. Cost advantages stem from a low-cost deposit base, strong operating efficiency, and conservative underwriting, reinforced by a Canadian regulatory environment favorable to the big banks. This combination produces lower operating, credit, and regulatory costs, along with lower and better-diversified risk, supporting higher risk-adjusted returns for the big Canadian banks.

Canada's favorable banking environment stems from several factors. First, barriers to entry are very high. Nonresidents may not own more than 25% of a bank's shares without government approval, and foreign banks face operating restrictions. Domestic competition is also controlled, as exclusive federal chartering control has entrenched a few large banks. Second, a protective, efficient regulatory system also drives cost advantages through risk reduction. Regulators need only monitor the Big Six banks, far simpler than overseeing thousands of US banks, fostering collaboration and coordinated responses to strain.

Regulators also help control mortgage pricing, limiting pricing wars that erode underwriting standards. Rules curb bad credit issuance through mandatory insurance on riskier mortgages, the absence of a GSE-like subsidized securitization market, and requirements that banks hold more risk on the balance sheet. A higher-tax, stronger safety-net model has fostered a more stable middle class, supporting political stability and further reducing systemic risk. Combined with government subsidies on deposits and mortgage insurance, and the implicit too-big-to-fail subsidy (all Big Six banks are domestic systemically important banks at a minimum), these factors create an environment where excess bank returns are highly likely in Canada.

Scale further reinforces these cost advantages. Larger scale spreads fixed costs, improving efficiency, as the five largest Canadian banks are all bigger than the largest US regional bank. Nationwide branch networks lower customer acquisition costs. The banks span nearly every major financial product, generating economies of scope on top of economies of scale.

Within the Canadian banking system, RBC stands out among the Big Six, and it derived around 43% of its 2025 revenue from domestic banking. As the largest Canadian bank, RBC accounts for more than 20% of domestic deposits and loans and holds number-one or number-two market share across all banking products. The bank also has one of the best cross-selling capabilities and execution among all Big Six banks, enabling it to extract a larger share of its consumers' wealth. The strength of its Canadian banking franchise translates into superior Canadian banking efficiency ratios over its peers.

RBC is also one of the dominant investment banks in Canada and a top-15 player worldwide. We think that the bank has a moat in investment banking built on intangible assets, which increases its probability of sourcing larger deals and generating better revenue share and economics from a deal with a lead advisor position. It also has the largest amount of assets under management and assets under administration among Canadian banks, giving it the largest exposure to this higher-margin, asset-light business and a larger share of clients’ overall wealth.

Beyond Canadian banking, RBC derives around 34% of revenue from wealth and asset management, 21% from capital markets (investment banking and trading), and another 2% from insurance. We assess its asset management business and investment banking business as moaty, and the insurance as a no-moat business. The wealth management segment accounts for about 34% of RBC's 2025 revenue. The primary moat for wealth management and asset management businesses is switching costs, and we view the bank as moaty in both businesses. RBC is the largest Canadian wealth manager and the largest retail fund manager. Big Six banks and Big Three life insurers have taken shares from independent pure-play asset managers, a trend we expected to continue given their larger distribution networks and more fungible pricing across their broader product sets.

Royal Bank of Canada derives around 21% of its revenue from the capital markets business. We think RBC has brand recognition that provides a competitive advantage for garnering investment banking deals and recruiting top talent. It is one of the dominant investment banks in Canada and a top-15 player worldwide. Around half of its capital markets revenue is from its investment banking business, and half is from its trading business. While we don't view its trading business as moaty, it's deeply intertwined with its investment banking business and serves as a crucial part of the bank's value proposition to institutional clients. Lastly, we don’t view RBC's insurance business as moaty, at around 2% of its 2025 revenue. In general, insurers do not benefit from favorable competitive positions.

RBC's worldwide scope in capital markets and wealth management provides a powerful and diversified stream of revenue. This should lead to outsize fee income versus Canadian peers.

RBC's execution in deepening client relationships and cross-selling in the Canadian banking business can improve its return profile even higher.

The acquisition of HSBC Bank Canada has strengthened RBC's position in Canada, more revenue synergies from this acquisition could boost RBC's return profile.

The bank has one of the larger exposures to the Canadian housing market, and as the Canadian consumer's ability to borrow becomes constrained, RBC may struggle to achieve loan and revenue growth and incur additional credit risk.

If tariffs are implemented for a prolonged period, the Canadian economy could enter a recession and make the bank see lower growth and higher credit costs.

The bank's US commercial banking business, City National Bank, remains a drag on overall bank returns despite some improvement in the efficiency ratio.