RBC's Earnings Surprise Masks Underlying Strength: Why RY Remains a Long-Term Buy

Royal Bank of Canada (RY) delivered a mixed but ultimately compelling Q2 2025 earnings report, with adjusted earnings of $2.20 per share missing analyst expectations, while the $2.15 per share (GAAP basis) beat forecasts. This apparent contradiction highlights the critical role of recurring vs. non-recurring costs in shaping investor perception. Beneath the noise lies a story of strategic execution, sector resilience, and a path to sustained profitability—reasons why RY deserves a place in long-term portfolios.

The Earnings Discrepancy: GAAP vs. Non-GAAP

The confusion stems from how RBC accounts for non-recurring costs. The $2.20 adjusted EPS figure excludes one-time expenses like restructuring and HSBC Canada integration costs. Meanwhile, the $2.15 GAAP EPS includes these items, reflecting a true "bottom-line" beat. This distinction is vital: RBC's core operations are thriving, as evidenced by a 14.4% year-over-year revenue surge to $10.84 billion, driven by net interest income growth and record wealth management revenue of $5.5 billion.

Recurring Costs: The Foundation of Stability

RBC's success hinges on recurring revenue streams:
1. Net Interest Income: Up 26% YoY, fueled by deposit growth and loan expansion.
2. Wealth Management: A key growth engine, benefiting from the HSBC Canada acquisition.
3. Cost Discipline: 70% of $740 million in annual synergies from the HSBC deal are already realized, with the remainder on track by early 2026.

These recurring strengths offset non-recurring headwinds like credit loss provisions and macroeconomic uncertainties. For example, while RBC's Q1 2025 PCL rose 26% YoY, the bank has stabilized impaired loans, reducing drag on future earnings.

Non-Recurring Costs: A Temporary Cloud

The adjusted EPS miss was largely due to non-recurring items:
- HSBC Integration Costs: $95 million in cumulative pre-tax expenses since March 2024, now largely behind RBC.
- Restructuring: Minimal ($0.5 million in Q2) but excluded from non-GAAP metrics.

These one-time hits obscure the $3.16 EPS growth (7.8% YoY) analysts project for the full year, assuming synergies materialize.

Why RY Outperforms Peers

While rivals like Scotiabank (BNS) struggled with a $1.52 EPS miss (vs. $1.57 estimates) due to credit provisions and slower deposit growth, RBC's diversified revenue streams and disciplined cost management shine. RBC's Estimate Revisions Score of 78 (Positive) reflects analyst confidence, contrasting with BNS's downward revisions.

Valuation: A Premium Warranted

RBC's trailing P/E of 13.9 vs. the industry median of 12.1 may seem steep, but it's justified by:
1. Strong Balance Sheet: Capital ratios exceed regulatory requirements, shielding against economic shocks.
2. HSBC Synergies: Final $240 million in savings by 2026 will further boost margins.
3. Global Growth: Wealth management and U.S. operations (now strengthened by HSBC) offer scalability.

Call to Action: Buy the Dip

The Q2 adjusted EPS miss is a temporary blip. Investors should focus on:
- Recurring Revenue Growth: Net interest and wealth management are engines of profit.
- De-Risked Balance Sheet: Credit metrics are stabilizing.
- Valuation Multiplier: A P/E premium is reasonable for a bank outperforming peers in a tough environment.

Final Take

RBC's Q2 results underscore its ability to navigate macro challenges while executing strategically. The GAAP beat and non-recurring cost clarity signal that profitability is on track. For long-term investors, RY offers a rare blend of stability and growth—now is the time to buy before consensus catches up.

Disclosures: This analysis is for informational purposes. Investors should conduct their own research before making decisions.