Royal Bank of Canada Earnings: 2025 Finished Strong and Medium-Term ROE Target Raised

Key Morningstar Metrics for Royal Bank of Canada

What We Thought of Royal Bank of Canada’s Earnings

Royal Bank of Canada RY reported strong fiscal fourth-quarter results. Adjusted earnings per share of $C3.85 grew 25% from the prior-year quarter. Fiscal 2025 results translate into an adjusted return on equity of 16.7%.

Why it matters: Net interest income excluding trading grew by 11% year over year. Fee income went up by 16%, with strong capital markets and wealth management fee income.

• Adjusted expenses grew by 5% from the prior-year quarter, mostly driven by variable compensation increases as capital markets and wealth management results were strong.
• The bank delivered an adjusted operating leverage of 850 basis points in the fiscal fourth quarter, which we view as much higher than a normalized level. The bank’s guidance for fiscal 2026 implies around 100 to 200 basis points positive operating leverage in its Canadian banking segments.

The bottom line: As we incorporate fourth-quarter results and updated outlook, we expect to increase our C$169 fair value estimate for wide-moat-rated Royal Bank of Canada by high single digits. We continue to assess shares as overvalued even after the contemplated increase in valuation.

• We agree with the market that Royal Bank of Canada’s franchise is one of the best in Canada. However, we caution investors not to over-extrapolate the volatile results of the capital market segment. In addition, stock market valuation was also very constructive in fiscal 2025, with S&P/TSX index up 23%.
• We still think that the Canadian economy has a heightened level of uncertainty, as a trade deal has yet to be achieved between Canada and the US. The bank guided fiscal 2026 impaired loan provisioning to be similar to fiscal 2025 levels (around 35 to 40 basis points of loans).

Coming up: Management’s new medium-term target for ROE is now 17%-plus, up 1% from the prior 16%-plus, with a target common equity Tier 1 ratio of 12.5% to 13.5%.