Royal Bank of Canada: A Compelling Long-Term Investment Amid Attractive Valuation Metrics

Royal Bank of Canada (RBC) has emerged as a standout performer in the Canadian banking sector in 2025, driven by robust earnings growth, disciplined capital management, and a resilient business model. For long-term investors, the question is whether RBC’s current valuation offers a compelling entry or accumulation opportunity. A deep dive into its financials, peer comparisons, and analyst forecasts reveals a stock that balances strong fundamentals with reasonable pricing.

Valuation Metrics: Undervalued Relative to Growth

RBC’s price-to-earnings (P/E) ratio of 15.09 as of August 2025 [5] appears elevated compared to its 5-year average of 11.87 [3], but it remains below the industry median of 14.2x [2]. More importantly, its PEG ratio of 0.84—calculated by dividing the P/E by its 18.03% earnings growth over the past 12 months [5]—suggests the stock is undervalued relative to its growth trajectory. This is significantly lower than the sector average of 1.34, indicating RBC is trading at a discount to its peers despite outperforming them in profitability.

For context, RBC’s return on equity (ROE) of 17.7% in Q3 2025 [2] and a 14.2% ROE in Q2 2025 [4] highlight its efficiency in generating returns for shareholders. These figures outpace the sector’s average ROE of 12.5% [1], further justifying its premium valuation. Meanwhile, its 3.75% 5-year average dividend yield [2] and a recent 4% dividend hike to $1.54 per share [2] make it an attractive income play.

Franchise Strength: Diversified Business Model and Market Leadership

RBC’s dominance in key segments underscores its long-term durability. In Q3 2025, its Personal Banking segment reported a 22% year-over-year net income increase, driven by higher net interest income and volume growth [2]. The Wealth Management division also saw a 15% rise in net income, fueled by market appreciation and fee-based assets [1]. These results reflect RBC’s ability to capitalize on both interest rate environments and client demand for wealth solutions.

The bank’s market share in Canadian retail banking is unrivaled, with Statista noting it as the most customer-satisfying bank in 2024 [3]. Its CET1 capital ratio of 13.2% [2] provides a buffer for continued growth and shareholder returns, including $2.6 billion in capital returns through dividends and buybacks in Q2 2025 [2]. This financial fortitude positions RBC to navigate macroeconomic risks, such as U.S.-Canada trade tensions, while maintaining its competitive edge.

Peer Comparison and Analyst Outlook

RBC’s valuation appears favorable against peers like Toronto-Dominion Bank (TD) and Bank of Montreal (BMO). While TD trades at a P/E of 9.8 and a 5.2% dividend yield [1], its lower growth potential makes it a more defensive play. BMO, with a P/E of 12.3 [1], balances growth and efficiency but lacks RBC’s scale. RBC’s P/E of 15.09 [5] is justified by its superior ROE and earnings growth, making it a better long-term bet for investors seeking both income and capital appreciation.

Analyst forecasts reinforce this view. For 2025 and 2026, RBC is projected to deliver average EPS of $13.68 and $14.45, respectively [5], with revenue expected to rise to $65.24 billion in 2025 and $66.58 billion in 2026 [5]. These estimates align with RBC’s strategic focus on net interest income expansion and cost discipline, as outlined in its Q3 earnings call [2].

Risks and Considerations

While RBC’s fundamentals are strong, investors should monitor credit risk and interest rate volatility. The bank increased credit loss provisions to $881 million in Q3 2025 [2], a 23% rise quarter-over-quarter, reflecting cautious risk management. However, its CET1 ratio remains well above regulatory requirements, mitigating concerns. Additionally, RBC’s exposure to the U.S. market—via its wealth management and commercial banking operations—could face headwinds from trade policy shifts.

Conclusion: A Buy for Long-Term Investors

Royal Bank of Canada’s combination of strong earnings growth, a robust capital position, and a diversified business model makes it a compelling long-term investment. Its PEG ratio of 0.84 [5] and ROE of 17.7% [2] suggest the market is not fully pricing in its growth potential, particularly in wealth management and international markets. For investors seeking a balance of income and growth, RBC’s 3.75% dividend yield [2] and disciplined buyback program further enhance its appeal. While risks exist, RBC’s franchise strength and strategic resilience position it to outperform in a challenging macroeconomic environment.

Source:
[1] Canadian Bank Earnings and Valuation Outlook for Q3 2025 [https://www.ainvest.com/news/canadian-bank-earnings-valuation-outlook-q3-2025-navigating-credit-risk-nim-expansion-capital-dynamics-2508/]
[2] ROYAL BANK OF CANADA REPORTS THIRD QUARTER 2025 RESULTS [https://finance.yahoo.com/news/royal-bank-canada-reports-third-100000645.html]
[3] Royal Bank of Canada - statistics & facts [https://www.statista.com/topics/3030/royal-bank-of-canada/]
[4] RY (Royal Bank of Canada) ROE % [https://www.gurufocus.com/term/roe/RY]
[5] Royal Bank of Canada (RY) PEG Ratio [https://www.financecharts.com/stocks/RY/value/peg-ratio]