RY's Q1 Earnings Are a Bull Run on Rails—But Watch This Red Flag!

Investors, this is a bank that’s not just surviving—it’s thriving. Royal Bank of Canada (RY) just delivered a record $5.3 billion in adjusted earnings for Q1 2025, a 29% jump from last year. The numbers are screaming “buy now”—but hold on. There’s a storm cloud on the horizon. Let’s break it down.

The Good News: A Financial Powerhouse

RY isn’t playing small ball. Its 16.8% Return on Equity (ROE) and 13.2% CET1 capital ratio are textbook examples of banking resilience. The acquisition of HSBC Canada? A masterstroke. That deal alone has generated over $950 million in pre-tax earnings since closing, proving RY’s M&A playbook works.

The Wealth Management division is on fire, pulling in $5.5 billion in revenue for the first time ever. With $700 billion in U.S. Assets Under Administration, this division is a cash machine. And let’s not forget the Canadian Banking net interest margin (NIM), which expanded by 7 basis points—a sign that RY is pricing loans smartly.

The Bad News: Credit Clouds on the Horizon

Here’s where the red flag flies. RY’s provisions for credit losses (PCL) spiked to 39 basis points, up 13 basis points from last quarter. A single utility-sector loan default pushed impaired loans to $7.9 billion—a $2 billion jump in just three months.

CEO Dave McKay warned that macroeconomic uncertainty—think tariff delays, geopolitical tensions, and soft housing markets—could crimp Commercial Banking loan growth. The HSBC portfolio’s exposure to economically sensitive sectors isn’t helping either.

Q&A Insights: Management’s Playbook

When pressed, management stood firm. CFO Katherine Gibson said the bank’s 13% operating leverage (despite 11% cost growth) proves cost discipline. She also highlighted that RY is balancing pricing and volume to keep margins strong—a key win in a hyper-competitive Canadian banking sector.

The City National division’s margin dip? Blame the Fed’s rate cuts. But here’s the kicker: affluent clients are sticking around, and interest-bearing deposits are rising. That means City National’s affluent client base is a moat against volatility.

The Bottom Line: Buy With Eyes Wide Open

RY’s Q1 is a buy signal for two reasons:
1. Strategic wins: The HSBC integration is paying off, and Wealth Management is a cash generator.
2. Resilient capital: That 13.2% CET1 ratio gives RY a cushion to weather credit storms.

But here’s the catch: If credit losses keep rising, this could eat into profits faster than you can say “tariff delay.” Investors, watch PCL trends closely.

Final Verdict: A Bank to Love—If You Can Stomach the Risks

RY’s Q1 is a 29% earnings surge on a foundation of strong capital and smart acquisitions. The Wealth division’s $5.5 billion revenue and the HSBC deal’s $950 million contribution are undeniable wins.

But that $7.9 billion in impaired loans? That’s a yellow flag. If credit issues worsen, RY’s growth could stall. For now, though, this is a buy—provided you set a strict watch on PCL metrics.

In conclusion, RY is a top-tier Canadian bank with the scale and strategy to dominate. Just don’t blink when the credit clouds roll in. This is a hold for the long term, but keep a close eye on those red flags.