Royal Bank of Canada's Q3 2025: Contradictions Surface in Credit Cycle, Tariff Uncertainty, and Capital Allocation Strategies

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 27, 2025

Financials Results

• Revenue: $17.0B; YOY change not disclosed (record Capital Markets revenue; double-digit growth in Personal Banking and Wealth Management)
• EPS: $3.75 reported EPS; adjusted diluted EPS $3.80, up 18% YOY

Guidance:

• 2025 all-bank net interest income now expected to grow mid-teens.
• All-bank expense growth (vs. reported 2024) now mid- to high-single digits, driven by higher variable comp.
• Expect strong all-bank operating leverage for the year.
• Adjusted non-TEB effective tax rate expected at 20%–22%.
• Q4 Capital Markets seasonally softer but client optimism supports activity.
• Insurance: Q4 to be negatively impacted by annual actuarial assumption updates.
• Corporate Support: Expect Q4 net loss at the lower end of the $100–$150M range.
• Canadian Commercial lending: Q4 sequential loan growth guidance maintained at ~1.0%–1.5%, potentially upper end.
• CNB remediation spend peaks in 2025; expenses expected to decline absolutely into 2026.

Business Commentary:

• Record Earnings and ROE:
• Royal Bank of Canada (RY) reported record third quarter earnings of $5.4 billion, up 21% from last year, resulting in a strong return on equity of over 17%.

• The growth was supported by robust capital generation, with a CET1 ratio of 13.2%, and revenue from record Capital Markets and double-digit growth in Personal Banking and Wealth Management.

• Capital Markets Performance:

• Capital Markets reported record revenue of $3.8 billion, pre-provision pretax earnings of $1.7 billion, and net income of $1.3 billion.

• Growth was driven by strong performance in FICC businesses, where revenue exceeded $1.9 billion, and Corporate Investment Banking, with over $1.7 billion in revenue.

• Personal and Commercial Banking Trends:

• Average deposits in Personal Banking increased by 2% year-over-year, with a 7% growth in banking and savings accounts. Commercial Banking average loan growth moderated to 6% year-over-year.

• The growth in Personal Banking was supported by increased mortgage balances and credit card acquisitions, while Commercial Banking saw slower growth in sectors affected by tariffs and economic uncertainty.

• Wealth Management Expansion:

• Wealth Management reported double-digit growth in assets under administration in both Canadian and U.S. markets, reaching USD 718 billion in the U.S.
• The expansion was driven by market appreciation, net new client assets, and increased volumes in U.S. lending solutions, contributing to the strong performance in assets under management.

Sentiment Analysis:

• Management reported record Q3 earnings of $5.4B (up 21%) and ROE of ~17.7% with CET1 of 13.2%. Capital Markets posted record revenue of $3.8B. They reaffirm confidence in achieving at least 16% ROE into 2026 while acknowledging tariff/trade uncertainty. Guidance raised for 2025 NII growth (mid-teens) and strong operating leverage expected.

Q&A:

• Question from Ebrahim Huseini Poonawala (BofA Securities): Is ROE sustainably above 16% and how will you manage capital—build CET1 or keep it flat to support ROE?
  Response: Earnings strength is client-activity driven and sustainable; maintaining ‘at least 16%’ ROE pending tariff clarity, aiming toward 17%+ over time; CET1 can creep up while continuing buybacks/dividends and funding organic (and selective inorganic) growth.

• Question from John Aiken (Jefferies): Update on City National—progress and remaining levers for profitability expansion?
  Response: CNB is progressing: remediation fully funded, active banker recruitment, and pipeline growth; expenses expected to decline on an absolute basis into 2026 as remediation spend rolls off, enabling sustained earnings improvement.

• Question from Gabriel Dechaine (National Bank Financial): Were trading gains driven by favorable marks, and how does the credit outlook trend—peaking in 2026?
  Response: Trading was broad-based and client-driven; credit spreads tightening helped modestly. Credit trends are stabilizing: unsecured retail near peak, mortgages face refi headwinds, wholesale elevated but balanced; outlook broadly stable vs. Q2.

• Question from Sohrab Movahedi (BMO Capital Markets): With strong momentum but uncertainty, will you pursue inorganic opportunities?
  Response: Organic growth remains priority; M&A considered selectively (notably in US/European wealth) with a high bar for accretion and execution risk, given distractions of large integrations; capital is available if terms are compelling.

• Question from Mario Mendonca (TD Cowen): Did you over-earn this quarter, and how should we model Q4, including insurance assumptions?
  Response: Don’t annualize Q3; use guidance: mid-teens 2025 NII growth, mid- to high-single-digit expense growth, 20%–22% tax; Capital Markets seasonally softer in Q4; insurance to be lower in Q4 due to actuarial updates; Corporate Support loss at low end of $100–$150M.

• Question from Mehmed (Mike) Rizvanovic (Scotiabank GBM): What’s driving recent outperformance in discretionary/travel card spend?
  Response: Stronger spend from core, higher-quality clients and market-share gains; AI-driven targeting deepened penetration; portfolio balance growth reflects improved consumer confidence.

• Question from Paul David Holden (CIBC Capital Markets): Outlook for commercial lending growth given mixed signals?
  Response: Q3 sequential growth was 1.2%; Q4 guidance maintained at ~1%–1.5% (potentially upper end). Sentiment improving but pipeline conversions lag; HSBC portfolios supportive; near-term growth slower with medium-term upside.

• Question from Matthew James Lee (Canaccord Genuity): Beyond HSBC synergies, what drove efficiency gains in Canadian Personal & Commercial?
  Response: Tight expense discipline alongside strong revenue growth; for Commercial, 100% of HSBC cost synergies achieved and some PPA tailwind (to roll off), while continuing to invest in product/platform and coverage.