Royal Bank of Canada Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Earnings and ROE: Record third quarter earnings of $5.4 billion, up 21% from last year. ROE was over 17% for the quarter and over 16% year-to-date. Confident in achieving at least 16% ROE in fiscal 2026 and beyond.
• Cost Synergies: Realized $740 million in annualized cost synergies from the acquisition of HSBC Bank Canada.
• Capital and Dividends: CET1 ratio was 13.2%; repurchased 5.4 million shares for $955 million this quarter; total payout ratio was 56% year-to-date.
• Segment Details: Personal Banking saw average deposits and mortgage growth; Commercial Banking had moderated loan growth in tariff-sensitive sectors; Wealth Management had double-digit growth in assets under administration; Capital Markets had record revenues; Insurance had strong net income growth.
• Technology and Expansion: Invested in AI (ATOM Foundation model and Lumina data platform); expansion into transaction banking with RBC Clear receiving awards; hiring in various segments for talent.

Segment Performance

• Personal Banking: In Canada, net income was up 23% from last year. Average deposits were up 2%, including 7% growth in banking and savings accounts. Average residential mortgages were up 3% year-over-year. Credit card growth was solid at 7% this quarter. Efficiency ratio improved to 38.7%, with net interest income up 14% and noninterest income up 10% (largely from mutual fund revenue).
• Commercial Banking: Net income was $836 million, rising 2% from a year ago. Pre-provision pretax earnings were up 8% due to strong operating leverage and realized cost synergies from the HSBC Canada acquisition, offset by lower credit fees.
• Wealth Management: Net income was approximately $1.1 billion, up 15% from a year ago. Assets under administration in Canadian and U.S. Wealth Management were $935 billion and $718 billion respectively. Assets under management at RBC Global Asset Management increased by 12% to a record $741 billion.
• Capital Markets: Net income was $1.3 billion, up 13% from last year, with record revenues of $3.8 billion. Global Markets revenue was up 37%, and Corporate and Investment Banking revenue was up 11%.
• Insurance: Net income was $247 million, up 45% from last year, driven by improved life insurance claims experience and lower capital funding costs.

Guidance

• Expect to continue achieving an ROE of at least 16% in fiscal 2026 and beyond.
• 2025 all bank net interest income growth is expected in the mid-teens range.
• All bank operating leverage is expected to be strong for the year.
• Q4 results are expected to be negatively impacted primarily by annual actuarial assumption updates in insurance.
• Will provide an update on Investor Day financial targets when reporting fourth quarter results.

Risks

• Geopolitical risks and trade policy uncertainty, such as China's levy on Canada's canola exports and potential CUSMA review/renegotiation, which could impact consumer confidence, corporate profit margins, inflation, and labor markets.
• Ongoing uncertainty around tariffs and trade negotiations could lead to persistent impacts on the economy and bank operations.
• Credit risk management: Elevated impaired provisions in the commercial portfolio due to softer economic conditions and trade uncertainty; the retail portfolio saw higher losses in unsecured portfolios but beginning to see stabilizing trends in early delinquencies.

Question and Answer

• Q: Ebrahim Poonawala from Bank of America asked about ROE and capital management. A: Dave McKay responded on client activity, ROE expectations, and capital deployment, stating confidence in sustainable results and ability to manage capital.
• Q: John Aiken from Jefferies asked about City National progress. A: Dave McKay and Katherine Gibson discussed City National's progress, expense reduction plans, and ongoing platform remediation.
• Q: Gabriel Dechaine from National Bank Financial asked about trading results and credit outlook. A: Derek Neldner and Graeme Hepworth responded on trading market dynamics (client-driven with some spread tightening) and credit outlook (elevated provisions but stabilizing trends in retail).
• Q: Sohrab Movahedi from BMO Capital Markets asked about inorganic opportunities. A: Dave McKay discussed organic growth vs. inorganic opportunities, emphasizing high bar for dilution and accretion to shareholders.
• Q: Mario Mendonca from TD Securities asked about overearning and insurance assumption review. A: Katherine Gibson and Jennifer Publicover discussed earnings guidance and insurance actuarial assumptions, noting Q4 expected to be lower due to actuarial adjustments.
• Q: Mehmed Rizvanovic from [firm] asked about discretionary and travel spend on cards. A: Erica Nielsen responded on client confidence, portfolio strength, and AI-driven insights contributing to increased spend.
• Q: Paul Holden from CIBC asked about commercial lending outlook. A: Sean Amato-Gauci discussed commercial lending growth (moderated, with green shoots) and uncertainty from trade policy.
• Q: Matthew Lee from Canaccord Genuity asked about Canadian business efficiency. A: Erica Nielsen and Graeme Hepworth discussed efficiency improvements, cost discipline, and maintenance of efficiency ratio through cost synergies and revenue growth.