Royal Bank of Canada - Earnings Call - Q3 2025

Transcript

Operator (participant)

Good morning ladies and gentlemen. Welcome to RBC's 2025 third quarter results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Senior Vice President, Investor Relations. Please go ahead sir.

Asim Imran (SVP and Head of Investor Relations)

Thank you and good morning everyone. Speaking today will be Dave McKay, President and Chief Executive Officer, Katherine Gibson, Chief Financial Officer, and Graeme Hepworth, Chief Risk Officer. Also joining us today for your question, Erica Nielsen, Group Head Personal Banking, Sean Amato-Gauci, Group Head Commercial Banking, Neil McLaughlin, Group Head Wealth Management, Derek Neldner, Group Head Capital Markets, and Jennifer Publicover, Group Head Insurance. As noted on slide 2, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your question and then requeue. With that I'll turn it over to Dave.

Dave McKay (President and CEO)

Thank you, Asim. Good morning, everyone, and thank you for joining us today. We reported record third quarter earnings of $5.4 billion, up 21% or over $900 million from last year. These outstanding results underpinned a strong return on equity of over 17% for the quarter or over 16% year to date, supported by a robust capital ratio of 13.2%. We are gaining momentum towards meeting our medium-term investor day targets and are confident in continuing to achieve an ROE of at least 16% in fiscal 2026 and beyond. This quarter's strong earnings added 77 basis points of gross capital generation, truly showcasing the underlying earnings power of the bank, including realizing our targeted annualized cost synergies related to the acquisition of HSBC Bank Canada.

Our diversified business model is built to drive strong risk-adjusted returns, which in turn supports both our clients and the return of capital to shareholders, including increased share buybacks this quarter. Strong client-driven and risk-weighted asset growth supported revenue of $17 billion this quarter, including record revenue in capital markets and double-digit growth in personal banking and wealth management. We achieved our results in an environment of record equity markets and cyclically low investment grade credit spreads while seeing an increased flow of client deposits and market-related client activity. However, the constructive environment for market-related revenue continues to be tempered by geopolitical risks and the uncertainty around trade policy, particularly China's levy against Canada's canola exports and the potential review of or renegotiation of CUZMA.

We continue to monitor the negotiations, and we encourage policymakers on all sides to build on the foundational strengths of current trade agreements, which have provided significant benefits to all parties. Should current CUZMA-compliant goods largely maintain their qualified exemption to tariffs, Canada's effective tariff rate should remain low and the economy should remain resilient. However, as trade tensions extend, there may be persistent impacts, including declining consumer confidence, lower corporate profit margins, rising inflation, and softening labor markets across both the U.S. and Canada, with uncertain implications to monetary. Policy and capital flows.

Amidst the shifting landscape, we are operating from a position of strength. Our robust capital levels are reinforced by a strong allowance for credit losses of 74 basis points of loans, including elevated weightings toward downside scenarios. We believe our well underwritten portfolio is prudently provisioned. The diversification of assets and revenue streams across client sectors, geographies, products, and businesses further mitigates the impact of heightened uncertainty and volatility. As the country's largest financial institution by market capitalization, we have an important role to play in helping support our clients build an even better Canada while executing against the strategic priorities we highlighted at our Investor Day. Both within and outside of Canada, we are accelerating our investments in strategic initiatives by seeding growth across our segments and geographies, including new product and cross-border capabilities.

We are also improving and expanding our talent pool by hiring senior coverage and relationship talent in Capital Markets and client-facing account managers in Commercial Banking. In addition, we continue to attract experienced financial advisors in Wealth Management, especially in the United States where we expect higher recurring revenue from this recruitment. Our ongoing investments in technology build upon our leading competitive advantage in artificial intelligence, including our proprietary ADAM foundation model and Lumina data platform. These investments underpin the enterprise value we expect to generate from AI over the medium term. Furthermore, our expansion into transaction banking continues to be on track with RBC Clear receiving two awards at the recent Digital Bankers Global Transaction Banking Innovation Awards. With this context, I will now speak to key trends we are seeing across our businesses, starting with Personal Banking.

In our Canadian business, average deposits were up 2% from last year, including 7% growth in banking and savings accounts. We continue to focus on client acquisition while also capturing the shifting money in motion. Given the evolving interest rate and market outlook, these core deposits provide a structural funding cost advantage. Average residential mortgages were up 3% year-over-year as we added $4 billion of average balances this quarter. While we have maintained discipline on both credit quality and pricing, we are benefiting from higher switch-in volumes and an increase in mortgage retention rates. We see a pickup in housing starts, with signs of price stabilization and buyer confidence returning as affordability improves. We continue to expect Canadian housing resale activity to be dampened by underperformance in Ontario, particularly in the Greater Toronto Area.

In contrast, credit card growth was solid at 7% this quarter, driven by account acquisition, higher revolve rates, and increased client engagement. Our proprietary RBC Consumer Spending Tracker highlights that Canadian cardholder spending remained resilient, particularly in the retail and everyday categories. This quarter, we expanded our partnership with the Patterson Food Group into Western Canada and launched the WestJet RBC World Elite MasterCard credit card for business clients. Turning to Commercial Banking, average loan growth moderated to 6% year-over-year within the updated guidance we provided last quarter. Growth has been slower in more tariff-sensitive sectors, including manufacturing, transportation, and logistics, along with cyclical headwinds in commercial real estate. While our pipelines are building in a competitive market, clients continue to hold back their capital and inventory spend. We are well positioned to support our clients when they are ready.

Moving to Wealth Management, we reported double-digit growth in assets under administration in both Canadian and U.S. wealth management to $935 billion and $718 billion, respectively. Our global Wealth Management franchises benefited from market appreciation while continuing to drive net new client assets along with increased volumes on our U.S. Lending solutions. We also launched RBC Premium Savings in the U.S. this year, a new non-sweep high-yield deposit product which is seeing positive traction. Direct investing trading volumes were supported by strong market activity. Assets under management in RBC Global Asset Management increased by 12% to a record $741 billion, reflecting net sales into both long-term institutional and retail mandates. Like our Wealth Management businesses, we are seeing momentum in Canadian retail mutual fund net sales as our clients move back into markets across our broad set of strategies across fixed income, balanced, and equity mandates.

Now to Capital Markets, which reported record revenue of $3.8 billion, pre-provision pre-tax earnings of $1.7 billion, and net income of $1.3 billion this quarter. On a year-to-date basis, Capital Markets generated close to $11 billion in revenue and approximately $4 billion in net income. These are truly exceptional results across our diversified franchise. Global Markets reported revenue of over $1.9 billion, with strong results in our FICC businesses reflecting strength in spread and rates products, which are areas of traditional strength. We also reported a strong performance in both cash equities and equity derivatives as we supported heightened client activity, benefiting from increasing investments in the franchise. Corporate Investment Banking generated revenue of over $1.7 billion, benefiting from an increased number of larger M&A advisory mandates along with higher lending revenue in the U.S. and Europe, reflecting the strength of our global franchise.

Looking forward, we continue to maintain a high level of engagement with our clients in what we deem a constructive environment for capital markets. While the second half of the year is seasonally lower or slower than the first, we are encouraged by the increased optimism and confidence amongst our corporate and sponsor clients, and we expect higher levels of transactions and deal closures over the next 12 months. We also expect our Global Markets franchise to remain resilient as we deepen our expertise across products. Finally, I will comment on our broader U.S. region, which reported $635 million of net income this quarter. City National Bank reported earnings of $114 million or adjusted earnings of $139 million. Geographic efficiency ratio improved 6.6% year-over-year to 81.5%.

While there's still work to be done, we are seeing early signs of success as we continue to build a more cohesive U.S. operating model. To close, despite the uncertain environment, we are confident in our ability to generate a strong return on equity while continuing to deepen client relationships, grow market share, drive operating leverage, and return capital to shareholders. The strategic vision we articulated at our Investor Day remains clear, and we are already seeing the outcomes unfolding. We strive to further extend our leadership across Canada while scaling growth and unlocking new revenue streams in key markets and geographies, including the United States. Finally, in the spirit of continued transparency and accountability, we will look to provide an update on how we are performing against our Investor Day financial targets when we report our fourth quarter results later this year. With that, Katherine, over to you.

Katherine Gibson (CFO)

Thanks Dave and good morning everyone. Starting with Slide 8, this quarter we reported earnings per share of $3.75. Adjusted diluted earnings per share of $3.80 was up 18% from last year, driven by strong revenue momentum across our businesses and solid operating leverage, including the realization of the $740 million in annualized cost synergies from the acquisition of HSBC Bank Canada. Turning to capital on Slide 9, we continue to demonstrate strong capital generation. Our CET1 ratio came in at 13.2%, in line with last quarter. Strong internal capital generation net of dividends was partly offset by the impact of an increase in risk-weighted assets in our U.S. agency and sovereign exposures, driven by a downgrade of U.S. sovereign debt rating. Furthermore, changes to our credit risk parameters, which I called out last quarter, also had a modest negative impact to capital.

We continue to deploy capital to drive organic growth, particularly in corporate lending and residential mortgages, as well as increased loan underwriting commitment in capital markets. Returning capital to our shareholders through share buybacks and dividends remains a key part of our deployment strategy. This quarter we repurchased 5.4 million shares for $955 million, in line with the level purchased in aggregate over the last three quarters. Our total payout ratio was 56% year to date. We will continue to be tactical with the level of share repurchases based on prevailing market conditions. Moving to Slide 10, all bank net interest income was up 14% year-over-year, or up 12% excluding trading revenue. All bank net interest margin excluding trading revenue was down 5 basis points from last quarter, mainly due to lower interest income on certain transactions in capital markets, which was offset in other non-interest income.

We believe net interest margin is more of a relevant factor for our retail and commercial banking segment. Canadian Banking NIM was up two basis points from last quarter, benefiting from a favorable product mix, including a shift towards demand deposits in personal banking, which were up 1.5% from last quarter, offsetting a 1% sequential decline in GICs. We continue to benefit from tailwinds related to our structural hedging tractor strategy as five-year swap rates remain elevated relative to historical levels. The combination of the above two factors more than offset competitive pricing pressures in residential mortgages. As a reminder, benefits to net interest income from the purchase price accounting accretion from the HSBC Bank Canada acquisition of $118 million this quarter are expected to be largely run off by Q2 2026.

Looking forward, we now expect our 2025 all bank net interest income growth to be in the mid teens range including benefits from a more favorable deposit mix. Before moving on to expenses, one item I would like to point out is that the increase in other non interest income includes impacts from hedges of our U.S. share based compensation plan, which is largely offset in non interest expense as well as in net interest income, as I noted above in my discussion on all bank NIM. Moving to slide 11, reported non interest expense was up 7% and core non interest expense was up 8% from last year. Core expense growth this quarter reflects higher staff related costs largely driven by variable compensation to measure it with strong revenue growth in both Wealth Management and Capital Markets, as well as increased salaries and pensions and benefits.

Higher expenses also reflect investments in technology and operations as well as hiring in priority growth areas. Concurrently, we will continue operating with a disciplined expense management framework to prudently manage our cost base. Going forward, we expect all bank core expense growth, which is based on reported 2024 expenses, to now be in the mid to high single digit range, largely reflecting higher variable compensation. That said, we expect strong all bank operating leverage for the year, which is a key management priority. On taxes, the adjusted non TEB effective tax rate was 21.2% this quarter, relatively in line with the first half of 2025. Looking forward, we continue to expect the adjusted non TEB effective tax rate to be in the 20%-22% range. Turning to our Q3 segment results beginning on slide 12, Personal Banking reported results of over $1.9 billion.

Focusing on Personal Banking Canada, net income was up 23% from last year as a strong operating leverage of 12.5% was partly offset by higher provisions for credit losses. Personal Banking efficiency ratio improved to 38% this quarter, underpinned by strong revenue and relatively flat expense growth, partly reflecting the benefits from realized cost synergies related to the acquisition of HSBC Bank Canada. Higher revenues this quarter benefited from a 14% increase in net interest income and a 10% increase in non-interest income, largely driven by higher mutual fund revenue. Turning to slide 13, Commercial Banking net income of $836 million rose 2% from a year ago. Pre-provision pre-tax earnings were up 8% from last year, driven by a strong operating leverage of 4.8%, reflecting solid average volume growth and well-managed expenses, including the benefits of realized cost synergies related to the acquisition of HSBC Bank Canada.

This was offset partly by lower credit fees reflecting the succession of BA-based lending, which was offset in net interest income. Turning to Wealth Management on slide 14, net income of approximately $1.1 billion rose 15% from a year ago. Non-interest income was up 13% from last year, reflecting strong growth in fee-based client assets across our Wealth and Asset Management businesses, benefiting from market appreciation and net new assets. Net interest income was up 6% from last year, including higher results in Canadian Wealth Management reflecting average volume growth in deposits and higher spreads. This was partly offset by headwinds in U.S. Wealth Management. Higher revenue this quarter was partly offset by higher variable compensation commensurate with increased compensable revenue and investments, including technology and the recruitment of financial advisors. City National Bank generated $139 million U.S.

in adjusted earnings, up 81% from last year and 58% from last quarter. Last year's results included an impairment loss on our interest in an associated company and the sale of a non-core investment. Turning to our Capital Markets results on slide 15, net income of $1.3 billion increased 13% from last year, reflecting record revenues of $3.8 billion on a pre-provision pre-tax basis. Results were up 36% year-over-year to $1.7 billion. Global Markets revenue was up 37% year-over-year, reflecting higher fixed income trading, benefiting in part due to narrowing spreads. Results also benefited from our robust equity and FX trading performance. Corporate Investment Banking revenue was up 11% from last year. Investment Banking revenue was up 11% from last year, reflecting higher debt and equity origination and M&A activity across most regions.

Lending and Transaction Banking revenue was also up 11%, reflecting higher lending revenue in the U.S. and Europe. This was partly offset by lower municipal banking activity compared to a strong Q3 last year. Higher revenue was partly offset by higher variable compensation. Investments in technology also contributed to higher expenses. Turning to Slide 16, Insurance net income of $247 million was up 45% from last year, driven by higher insurance service result from improved life insurance claims experience and higher insurance investment results reflecting lower capital funding costs. Looking ahead, we expect Q4 results to be negatively impacted, primarily as a result of our annual actuarial assumption updates. Lastly, results for Corporate Support in the quarter benefited from the elevated net impact of favorable markets in our U.S. share-based compensation plan.

As we look forward to the fourth quarter, we expect Corporate Support to generate a net loss at the lower end of our $100 million-$150 million range. To conclude, despite the market and macroeconomic uncertainty, we generated record results this quarter underpinning an ROE of 17.3% with a CET1 ratio of 13.2%. Our Q3 performance showcases the strength of our diversified business model and its ability to drive premium returns as highlighted at our Investor Day, and positions us well in the quarters ahead as we execute on those strategies. With that, I'll turn it over to Graeme. Great.

Graeme Hepworth (CRO)

Thank you, Katherine, and good morning, everyone. I'll now discuss our allowances in the context of the current macroeconomic environment and the ongoing trade uncertainty. Overall, the Canadian economy has shown greater resilience than initially expected, and both business and consumer confidence have rebounded from earlier lows. We began the quarter with signs of reduced trade tensions, but this was followed by renewed tariff threats and the escalation of sector and country-specific tariffs as the heightened uncertainty around trade policy stretches over an extended time frame. This also increases the risk of shrinking appetite for business investment in Canada. Against this backdrop, recall that last quarter we increased our reserves to reflect the heightened uncertainty. We'd implemented a new trade-related scenario reflecting the potential for a severe North American recession driven by an escalating global trade war and rising geopolitical risks.

Given the ongoing uncertainty this quarter, we have maintained our prudent posture and retained the elevated weightings to our downside scenarios in line with last quarter. Turning to slide 18, we released a total of $28 million, or 1 basis point, of provisions on performing loans this quarter, mainly reflecting favorable changes to our macroeconomic forecast, partially offset by portfolio growth and unfavorable changes in portfolio composition. We saw quarter-over-quarter improvements to our base case unemployment and GDP forecasts, with rising Canadian fiscal stimulus contributing to the lifting of our outlook. This translated to a minor release of allowances on our performing loans in Wealth Management and Capital Markets, offset by a small increase in provisions in Personal Banking. City National Bank drove the bulk of the release of allowances due to favorable credit quality and improvements in the U.S. macroeconomic forecast.

Retail clients have shown resilience amidst this uncertain economic environment and have largely managed through the impact of increasing mortgage payments, and overall we are well reserved after building up allowances over the past three years. We will continue to prudently manage our allowances given the backdrop of ongoing uncertainty. Moving to slide 19, gross impaired loans of $8.8 billion were down $0.2 billion, or 3 basis points, from last quarter, primarily driven by our wholesale portfolios, which saw lower new formations. The decrease in GIL reflects several accounts moving back to performing status and the resolution of the administrative issues outlined in the prior quarter. While GIL remains elevated, we are seeing a moderation in the pace of exposures moving onto our watch list, and our wholesale portfolios are showing more balance with moderating formations in Capital Markets.

Positive trends in City National and a soft Canadian economy are contributing to elevated impairments in the commercial portfolio. In Capital Markets, new formations decreased $453 million quarter-over-quarter. Impairments this quarter were mainly driven by two accounts, one in each of the financing products and telecom and media sectors. We also saw a couple of clients in the real estate and related and industrial products sectors return to performing status, resulting in a net reduction to GIL. In Commercial Banking, new formations decreased $399 million quarter over quarter. The largest new formations in the quarter relate to borrowers in the real estate related and agriculture sectors. While new formations in the wholesale portfolio are playing out as we anticipated, they are expected to remain at elevated levels through the first half of 2026.

Expect to see more moderate outcomes as we work through the watch list and special loans pipelines as the economy gains momentum through 2026. As a reminder, impairments and recognized losses in our wholesale portfolios are inherently more difficult to predict quarter over quarter and can be volatile. Turning to slide 20, PCL on unimpaired loans of 36 basis points was up 1 basis point or $61 million quarter-over-quarter, in line with our expectations. In Capital Markets, provisions were up $83 million, driven by additional provisions taken on a previously impaired account. In the other services sector, which is undergoing a challenging and complex workout process, there was also a new impairment in the financing product sector. In our Commercial Banking portfolio, provisions of $296 million were up $10 million, led by provisions in the real estate related, consumer discretion, and transportation sectors.

Overall, the commercial portfolio continues to be impacted by softer economic conditions and consumer spending in Canada. Elevated impaired provisions over the last 12 months primarily reflect exposure to cyclical supply chain related sectors like automotive, transportation, and industrial products, as well as consumer discretionary and real estate related sectors, which have all been impacted by the high rate environment and post-pandemic trends. We continue to expect commercial PCL to remain elevated in the coming quarters, reflecting the weaker Canadian economic backdrop and ongoing trade uncertainty. In the retail portfolio, we saw higher losses this quarter in line with expectations, largely in the unsecured portfolios. While delinquencies across retail products remain elevated above historical levels, we are beginning to see stabilizing trends in early delinquencies.

To conclude, despite persistent uncertainty in the macroeconomic and policy environment, we remain confident in the overall quality, the diversification, and the resilience of our portfolios. Our robust provisioning framework, our prudent allowances, and additional monitoring allow us to assess a wide range of potential outcomes and impacts to our portfolio. We continue to expect PCL and impaired loans to remain elevated for the next few quarters in a similar overall range to what we've experienced over the first three quarters of the year, potentially offset by releases and performing allowances as credit outcomes improve. The length, the timing, and direction of allowances in PCL will continue to be dependent on the extent and duration of the tariffs, potential fiscal support and stimulus measures, along with the performance of labor markets, interest rates, and real estate prices.

As always, we continue to proactively manage risk through the cycle, and we remain well capitalized to withstand a broad range of macroeconomic and geopolitical outcomes. With that, operator, let's open the lines for Q and A.

Operator (participant)

Thank you. We will now take questions from the telephone lines. If you have a question, please press Star one. You may cancel your question at any time by pressing Star two. Please press Star one at this time. If you have a question, there will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala (Managing Director)

Hey, good morning. I guess maybe a question for you, Dave. There's a lot of conversation, just investor focus, around where some of these ROEs are heading. When we look at Royal's performance today, you can look at the 17.7% ROE for this quarter, 16.5% year to date. I think you said in your prepared remarks at least 16%. Would love to hear if that at least 16% in reality is more like at least 17%. Two questions there. One, do you think the bank is over earning anywhere within the P&L or do you think they have upside? Second, give us a sense of your appetite to build capital from here versus just keeping it at least relatively neutral from a CET1 perspective, which obviously is helpful to the ROE. Thank you.

Dave McKay (President and CEO)

Thank you for that mindful set of questions. I'll try to work my way through them because they're all really important questions. Maybe I'll start with the earnings strength because that kind of feeds into the narrative of our ROE expectations and the potential of the organization. I would say no, I think we captured a disproportionate share of client flow this quarter across all our businesses, whether it was in consumer banking, commercial banking, certainly Capital Markets. Our clients are active trading, Wealth Management, positive inflows. You look at where we did exceptionally well, it was on the revenue line. Therefore, you look at the sustainable factors to that revenue line. Our deposit base is a huge strength, but it's well tracked or that's stable. We're looking at client flows in our advisory businesses that are also stable as well.

We do have strong expectations, as I said in my speech, to continue to serve clients. On the advisory side, it remains to be seen where tariffs go as it affects confidence in the overall ability to invest in certain sectors. Some activity I think is still muted in the economy, particularly in Commercial Banking, because the tariff uncertainty affects the ability to raise capital. I would overall say our results are based on really strong client activity and our ability to capture a disproportionate share of client activity. We're seeing a very resilient economy. Therefore, we remain confident in our ability to continue to serve and use our scale to disproportionately drive the bottom line for investors.

We're feeling very good about the sustainability of what we're doing, notwithstanding some of the questions around Insurance being a little volatile, and we expect to earn through some of those in other areas. That led us to a very strong ROE this quarter, a 17.7% as you mentioned. We kind of reaffirmed our guidance around at least 16%+ this year and into next year. I think the only thing that's holding us back from sitting down and kind of reaffirming and updating guidance is our uncertainty around the tariff scenario right now and the impact on investments, the impact on our clients. We do want to kind of watch a little bit as we go through Q4 to see how negotiations unfold and we better understand the sectoral impacts and the overall impact to the Canadian economy and our ability to diversify.

As we do that, as Katherine Gibson mentioned, we're going to sit down and review our overall expectations for 2026 and we'll communicate that to you. At the next call in Q4.

Give us a little bit of time to read the environment. We feel very good about our results. We feel good about resilience. You heard Graeme talk about credit kind of plateauing, and that's the resilience of our customers again. We feel really good going into Q4 and into 2026. That reflects in the overall confidence around meeting our investor targets and accelerating towards those investor targets, as you pointed out. I think hopefully that answers your question as far as the significant capital build of 77 basis points this quarter and how do we deploy that. I think we would let, because we're able to earn 17.7% return on a 13.2% CET1 ratio. We have the ability to earn through that as some of the strongest banks in the world do, like us. Therefore, I'm okay letting it creep up.

We will continue to return capital to shareholders through share buybacks. We have that strong capital generation and dividends and dividend increases. We will manage that overall scenario with the ability to continue to invest in organic growth over time and potentially inorganic growth if it makes sense for the shareholder and for the strategic franchise. You'll see a bit of creep, I think, over time. We will continue to manage towards accelerating towards those overall ROE targets of 17%+. I think we have the financial power to do that with our capital return and our growth expectations for the business. I hope that helps. I hope it gives you a context of how we feel about the underlying strength and therefore how we're going to manage capital and how we're going to manage ROEs.

Ebrahim Poonawala (Managing Director)

No, helpful. Thank you very much for the detailed response.

Operator (participant)

Thank you. Our following question is from John Aiken from Jefferies. Please go ahead.

John Aiken (Director of Research)

Good morning. I was hoping that you'd be able to give us a little bit of information detail on City National. Can you update us in terms of the progress where we sit now. Also, what levers are still yet to be pulled in terms of future profitability expansion?

Dave McKay (President and CEO)

Yeah, thanks for that. We're extremely happy with the progress we're making at City National Bank. As we signaled over the last year in our investor day, we continue to progress well in our remediation of the platform and our building of the platform. We've allocated very significant financial resources to do that, which is embedded in the P&L. Earning $149 million while carrying that is really, really impressive. Part of what City National Bank is doing is now on its kind of front foot and recruiting commercial bankers, recruiting private bankers, adding clients. We feel very, very good about some of the potential to build the pipelines there and to see good overall loan growth and deposit growth in the franchise going forward.

We have work to do on our re-platforming through 2026, but we do expect to be able to bring expenses down as we progress through 2026 because certainly, I think in 2025 they're at their peak as far as building out our platform and then the strength of our second and third lines of defense. Overall, we feel good about our ability to continue to earn through, and that was a very strong quarter given some of the one-offs. We don't think it's going to back off too much from that, and we'll be able to replicate growth story from 2025 into 2026 for City National Bank.

John Aiken (Director of Research)

Thanks, Dave. Just a point of clarification, when you talk about expenses coming down in 2026. Is that on an absolute basis? Is that just incremental operating leverage?

Katherine Gibson (CFO)

Why don't I jump in? For City National Bank, we're doing that on an absolute basis. You've heard us talk before about the costs related to remediation being fully loaded, and what we're seeing is that those costs are already starting to come down. We're expecting to see that continue as we progress into 2026.

John Aiken (Director of Research)

Fantastic. Thanks for the responses.

Operator (participant)

Thank you. A following question is from Gabriel Dechaine from National Bank Financial, please go ahead.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Hey, good morning. A quick one on the trading result, which was quite strong this quarter. I know client driven is often the factor here. I'm just wondering if any of the shift in market dynamics between Q2 and Q3 played a role in an accounting sense. I know the high yield business or the leveraged finance business was weak in Q2, and the marks must have been much more favorable in Q3.

Sure. Thanks for the question, Gabe. I wouldn't say there was anything particularly abnormal in terms of marks or anything. If you step back and you look at the results, we had very strong results in FICC that was up about 35%. Part of FICC is obviously the credit trading business where we did see spreads tighten from the end of April through the end of July that might have been a 5% or 10% positive benefit, but not overly material. A lot of it was client driven within FICC as well. We obviously have our repo business, our foreign exchange business that performed very well, and our core rates business plus commodities. We did see very good strength right across the broad array of products. It wasn't just driven by credit. Credit obviously did help us relative to Q2, but I would say it was modest overall.

On the equity side where we've been strategically focused on making a lot of investments, we feel we're making very good headway there. We had over a 40% revenue uplift year-over-year. Obviously a constructive environment. We do feel that a number of the investments and strategic pivots we've made in that business are bearing fruit and driving outperformance in terms of market share capture.

Great. A question on the credit outlook. I know Graeme, you gave a lot to chew on there and I'll definitely go over the transcript, but I just want to look at a couple things here. One, you released some performing provision and I see there's a favorable change to your macro for outlook which reflects some of the support programs that you're anticipating, ones that have been announced as well. Maybe some signs that there is deterioration in the health of the Canadian consumer. We're seeing rising 90-day delinquency rates in certain categories, unemployment's going up, especially in our major urban centers.

I don't know if this is. Related, but some of your fastest growing categories in the Canadian business are HELOCs and credit cards. I'm wondering if that's a sign of stress as well. Balance all these factors. Are you still anticipating peak loan losses sometime in 2026 or are you getting more or less optimistic? How would you describe it?

Graeme Hepworth (CRO)

Thanks, Gabe. Maybe just to kind of work through some of your elements of the quiddit question. I mean, generally characterize, obviously we're still at a very kind of elevated level or part of the credit cycle. A little bit as I think we're moving into a period, we're seeing a little bit more stability as we look forward. I think that's true both on retail and wholesale. I think for some time on the retail portfolio we've been pointing to the fact that the unsecured products have been the ones that would continue to drive our PCL upwards and that has been very much playing out through 2025. As we start to look at some of the trends on early delinquencies there, that would start to point to that we're kind of getting closer to that range of being at peak levels, if you will.

The mortgage side, I would say in 2025 and going into 2026 there's still some headwinds there as we're very much at the heart of that refinancing period that will put pressure on the mortgage portfolio. So far that's playing out very much as we expected. I think again the portfolio is very resilient there in terms of both the quality of the client base as well as the very strong government writing standards that have been in place. On that point, I would point to our write offs as just a good indicator of kind of the recovery strength we've had so far in that space. Wholesale, we've seen elevated levels in wholesale in 2025. With the ongoing uncertainty, we would expect that to continue to persist into 2026, particularly around our commercial portfolio and the softness in Canada and the impact of that uncertainty in Canada.

It is a bit more balanced, as I noted, City National Bank and the U.S. side of the portfolio showing a little more strength right now. Capital Markets I think has had some more specific issues that I don't expect would repeat as we look forward. Overall, I think wholesale again will continue to be elevated, but I don't necessarily see anything playing at increasing trends there. We put it all together. I think it's just a bit more of a balanced story than the increasing levels we'd seen through 2025. We'll get a bit more, I guess, specific in our look in Q4 on 2026, just trying to provide a bit of sense for that trajectory. That, again, a difficult part of the credit cycle we're in. I think kind of that acceleration is slowing down at this point.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

is no major shift up or down from what you were seeing in Q2. I know there's a lot more going on in Q2, but sounds sort of. Sort of stable

Graeme Hepworth (CRO)

Q2 to Q3 again. Q2, we were coming off, that was really kind of the actions we took with our performing reserves and allowances. That was really reflecting coming off the back of Liberation Day and really that kind of acute increase in that political and policy uncertainty that we really felt we needed to up our reserves against that possibility. That was really that new scenario we put in. We really weighted more against that uncertainty. As this plays out and as Dave called out, as we get more clarity on kind of what's happening on kind of Kuzma trade negotiations, that will either give us the opportunity to release some of that back if that negotiation comes out favorably, or we're operating from a position of strength that we've got good reserves in place if that proves to be more negative, if you will.

That was really what we were reacting to in Q2, as opposed to something we were seeing specifically at that point in time in our own portfolio.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Okay, great. Thanks.

Operator (participant)

Thank you. Our following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi (Managing Director)

Okay, thank you, Dave. I just thought I'd maybe go to you. I mean, obviously you feel good about the quarter. I think the commentary you suggested you make made us believe anyway that you feel good about meeting the targets. I think you actually inadvertently slipped up and called it a 17%+ ROE as opposed to the 16%. I think you're feeling really good about that. Graeme is talking about certainly the uncertainties for sure, but probably a little bit less so quarter over quarter. I guess what I'm trying to figure out here is the uncertainty enough to outweigh the feel good if an inorganic opportunity presented itself, or are you feeling good enough about the fundamentals of the franchise that notwithstanding some of the uncertainties that we're all kind of talking about, you would be willing to be opportunistic in an inorganic situation?

Dave McKay (President and CEO)

Thank you for that question. I hope you did pick up from my tone. I'm feeling very good about our results and the strength of those results and the sustainability of the results because they're based on client activity and our ability to take a disproportionate share of what our clients are doing. Anything going forward obviously requires our clients to be healthy and active and we're seeing that resilience. We always do put out that caution that things can change and there's still that big uncertainty around trade tensions and tariff negotiations that kind of, I think, hold investors and hold commercial clients from investing capital and therefore make us a little bit cautious about nailing down certain commitments about the future right now. We're going to take a quarter to look at that.

That 17.7% was for this quarter, but we have really strong flows to support that 16%+ as we talked about and we'll see how quickly we grow and accelerate through our investor day targets over the coming quarters. Just stay with us on that and we'll get to that over the next two or three months as we continue to build the franchise. I think that's certainly how, when it comes to how do you continue to grow? We got a lot of great organic or inorganic growth opportunities that you saw in my investments. Whether it's RBC Clear and the global transaction banking business, we continue to hire in every part of our client-facing business from private banking to wealth management to capital markets, U.S., Canada, Europe in particular.

Therefore, we are on our front foot as far as continuing to grow the franchise organically with new product and expanded capacity and expanded geographic capacity with City National Bank as well, expanding into the Southeast very successfully already. With that though, however, we continue to think about what inorganic opportunities would look like, as any company should do. We have basically the same kind of objectives as I've articulated over the last five years of where we want to grow. We want to grow our wealth franchise, particularly in the United States, but also potentially in Europe, as we did with Brewin Dolphin. We'll continue to look at opportunities, but we have a very high bar on dilution and accretion to the shareholder because of organic capabilities.

I think what you're seeing, Sohrab, and the real strength of our results this year in this quarter is you know, how distracting and how complicated it is to do M&A. It takes the entire management team to land an HSBC and it takes you away from kind of full focus and attention on your current business. Now you're seeing the RBC management team fully focused on the franchise in front of us and growing the franchise, and these are the results. When you look at any acquisition and the time it takes from your management team to integrate that, you've got to put it against results this team can put together when it forklifts organically. I always look at that trade-off to say does this justify taking attention away from the great momentum we have in building out our inorganic capabilities?

Having said that, there are opportunities that could present themselves that I think are very accretive to you as an investor and to our strategic franchise, particularly in the wealth area, but only if it comes at a price and a set of terms that allows us to do both. That's what we loved about our HSBC acquisition. We didn't lose the momentum in our core business while we made this very complex significant integration. We would look to make sure that that was a set of conditions as well in any other organic. We have the capital, we have some strategic needs to grow wealth and commercial bank in the United States and in Europe. We'll continue to think about it and to be prepared to act if it makes sense.

Sohrab Movahedi (Managing Director)

Very helpful. Thank you.

Operator (participant)

Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca (Managing Director and Senior Research Analyst)

Good morning, Dave. Let me stick with you. $3.84 this quarter. If you annualize that, you're getting to a number well above what the street's forecasting for 2026. I don't think you would want us to annualize this number. What I'm asking is if you could do my job for me this morning and tell me what you think Royal over earned this quarter. Is there some way you can help us think? I don't suspect you want us to annualize this quarter. You don't want to set yourself up that way. Help me think through how much you over earn.

Dave McKay (President and CEO)

I'm going to let Katherine start on that and then I'll jump in at the end. Katherine, why don't you take a swing at that and then I'll follow up.

Katherine Gibson (CFO)

Good morning, Mario. I like the question. The way I would come at it, I would actually anchor you back to the guidance that we've provided to give you that, I guess, trend line as we go into the last quarter of the year. I take you back to the key components of what drives our results. If I start with our net interest income, the full year guidance I increased this quarter, and we are targeting a mid-teen growth for that. That is continuing with the volume, the resilience that Dave was talking to on the volume. No change to the guidance that we provided for mortgage volume. We're seeing moderate growth. On the commercial side, we're seeing mid to high for the second half of the year for Capital Markets, we're continuing down the path of the mid growth on that front.

On other income, we don't give specific guidance, but I would take you back to Dave's comments where we do see seasonality in the fourth quarter for markets, but we are also seeing optimism from our sponsors, from our corporate clients. On the Insurance front, really strong quarter, but Q4 we do, I'll call it, seasonality as we do update our annual actuarial assumptions there. If I take us to NIE, updated our guidance there to say mid to high, and really we're at that high end because of the variable comp where the expected continued growth on our commensurate on our commissionable revenue. Taxes, no change, still in the range of 20%-22%.

You've heard Graeme with his comments on the overall PCL, and the last item that is not a significant item but it can move is their corporate support, and we're looking for that in Q4 to be towards the lower end of the range. Putting that all together, we're expecting still positive, strong OPLEV going into the fourth quarter. I hope you take away from that. I guess I'm giving you still a little bit of work on that front, Mario, but I hope you can step away from that and, you know, arrive at a view for the fourth quarter.

Mario Mendonca (Managing Director and Senior Research Analyst)

I'll do my best on this assumption review and Insurance. Can you give us an order of magnitude, like is this something meaningful? You've mentioned it a couple of times, so I suspect it matters.

Jennifer Publicover (Group Head)

Hi, it's Jennifer. As far as just, I guess. Broader context on Insurance for a second, as you heard in Investor Day, we are looking to, you know, mid single digits in terms of overall earning capacity year-over-year. We're still guiding to that for the year. We have had some lumpiness in Q1. We had a significant recapture, client driven. That is not something that we would expect to sustain on the actuarial assumptions. We're still working through them.

We do have a book of business. We're continuing to run off and we actually recaptured a couple of those treaties in Q2 to reduce that volatility. It's going to be in line with what we've had in previous years on this book of business. It's not a significant adjustment, but we will expect Q4 to be lower.

Mario Mendonca (Managing Director and Senior Research Analyst)

All right. If I could, let me just finish up with Graeme. On these calls, we often listen to what you say and we try to parse your words, and you sound, as others have suggested, more comfortable today than you did in Q2. Your peers, however, several of them are sounding less comfortable. I'm referring specifically now to the retail book. When you think about your write-offs in retail, I think it's something worth looking at. I believe it's page, maybe it's page 25 or something of your supplement. The write-offs in retail continue to move higher, but you're suggesting that that's starting to stabilize. Your peers, several of them, referred to some, they use the pig in the python analogy in describing how things would continue to deteriorate right until 2026.

I'm trying to figure out if there's a difference between Royal's book of personal loans, cards, lines of credit, auto, that sort of thing, if it's different from some of the other peers that are giving us the pig in the python analogy. Does it matter that Royal's business mix and exposure is to the more affluent versus, say, the mass affluent, some of the other banks? Does that matter? Have you ever seen periods where that difference has appeared in Royal's results?

Graeme Hepworth (CRO)

Thanks, Mario. I'm not sure how to respond to the pig in the Python comment credit terminology we use here. I wouldn't say a lot changed quarter over quarter. I think we've just progressed closer to kind of that end state and maybe pick on a word Dave used earlier. I know everyone's always interested in when we're going to see kind of that peak point of the credit cycle. I think what we were trying to guide to a little bit is we're kind of in that range now and we would expect to persist in that range now. It's not going to be some singular magical quarter where we hit that peak and then instantly it comes down quick off of that. We are in a difficult part of the credit cycle and that's going to persist into 2026. We're probably in that range right now.

When we look at our retail franchise, we absolutely do have a very strong client base there. That has always produced, I think, very strong results for us from a credit perspective. I would look at and point out products like our cards business, for example, and the nature of that product set, the nature of who we attract as a bank means that product has always been a very, very strong performer for us from a PCL perspective, both on an absolute and a relative basis. We glean a lot from that, from data and insights as well, and how that feeds our overall risk programs. That is often a good leading indicator for us. It is the one that drives the PCL as we go up. We certainly are looking at trends around products like that as we go forward.

As I said, we're seeing more stability there, and that helps point and guide us as we think about what may play out in 2026. I would say likewise, as we've been going through this cycle, we've been taking action to help manage the front book. As flows come in, we've been taking actions to get to clients earlier and ensure we create the best outcomes possible. Again, likewise, in many of these products, we're straight and we'll start to see some of the benefits of those to offset the ongoing headwinds of weakness in the Canadian economy. You put all that together, the quality of that client base, the good underwriting standards, the very high discipline we have around our credit processes in retail, that's all what points to how we're thinking about the book now and how that might play out in 2026.

Mario Mendonca (Managing Director and Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. The following question is from Mike Rizvanovic.

Mike Rizvanovic (Managing Director)

Good morning. I have a couple quick questions. I wanted to start with Erica on slide 6. What caught my eye is the chart on the top left quadrant. It is that recent outperformance in discretionary and travel spend on the cards. Just trying to get my head wrapped around it, just in light of tariff risk and the unemployment market not looking. As robust as it has been. It had been prior to the tariffs dynamic coming into play. What's driving that? Is this just largely unit gains, as in gaining market share? I'm not sure what I'm missing here. Is it inflation? What do you think is driving that?

Erica Nielsen (Group Head)

Yeah, thanks for the question, Mike. A couple things I would say, you know, the cards portfolio for us has been doing well from a growth perspective in terms of balance formations and the spend that we're seeing on cards with clients, as Graeme just alluded to, that we feel very comfortable with. When we dissect what you're seeing on the top left of that chart, that is the core RBC client who has been performing well from a loss perspective, demonstrating increased confidence as a consumer in their willingness to spend. We've seen those green shoots across the portfolio from the Canadian consumer over this quarter. That's what we see on that trend. The other side I would say is that we have taken a lot of action.

We talked about some of the work that we've done from an AI and modeling perspective and Dave alluded to it in his remarks related to the ADAM model. What we're seeing, we are seeing our ability to deeper penetrate into our client base for those clients, demonstrate results for us in our cards portfolio. You're seeing that in the aggregate balance growth we're seeing and we're seeing that in the purchase volumes that we're seeing on our cards. I think it's just reflective of the strength of the portfolio as well as the consumer becoming more confident.

Dave McKay (President and CEO)

Okay, thank you. I think we'll move to the next question.

Operator (participant)

Thank you. Sorry, our next question is from Paul Holden from CIBC. Please go ahead.

Paul Holden (Director)

Thank you.Thanks for taking my question. It's for Sean. Trying to really figure out the. Outlook for commercial lending, and let me frame it quickly if I can. I think Dave made some comments around commercial customers a little bit more cautious. I think Graeme has suggested something similar. In terms of the sort of credit outlook for Commercial Banking, at the same time for, I think, the corporate clients, a more positive outlook. When I look at your actual loan growth, it's pretty good. Including in small business.

Just trying to figure out what is kind of the right outlook here. Robust growth, sort of lukewarm growth. Where is the potential for something to get better, particularly if we get a final trade negotiation with the U.S. done?

Sean Amato-Gauci (Group Head)

Yeah, thanks for the question, Paul. Maybe add some context of Q3 and I'll give some guidance on Q4. To your point, our sequential growth in Q3 was 1.2%, so in line with the guidance from last quarter of 1%-1.5%. Just for context. That's quite a bit lower than. Sort of on a rolling four-quarter.

Basis we were averaging about 1.7% to 2% growth. At this point we're maintaining our guidance into Q4 of about 1%-1.5% with potential to be at the upper end of that range. As you mentioned, the Q1, Q2 levels of uncertainty and I'd say historically low business sentiment definitely drove a significant reduction in the conversion onto the balance sheet from our pipelines. I'd say relative to four to six months ago, uncertainty has definitely improved. The business sentiment has definitely improved. Those pipeline conversions haven't really activated yet to previous levels. That's partially why we're maintaining our guidance into the back half of the year. We're also encouraged by the narrative around fiscal stimulus, but as you know, action hasn't really driven the activity yet in the marketplace.

The other factors maybe I'd guide you to with respect to our portfolio and why we continue to support our confidence in our investor day targets. Obviously we benefit from having the largest, most diversified portfolio as you mentioned, from small business to large corporates across every segment, sector and geography. We are looking to extend our leadership position in all of those sectors. We will see the increased contribution from the HSBC Bank Canada portfolio as well. Those pipelines remain quite robust, but similar to the broader Royal Bank of Canada portfolio and similar to the broader commercial industry, that uncertainty is what's driven the pause in some of the investment activity.

That's it. Those are how I would think about it. You know, we, slower than recent, growth outlook remains consistent with Q3 with some sort of green shoots that could drive that to higher growth levels in the midterm.

Paul Holden (Director)

That's helpful. Thanks Sean. I'll leave it there in the interest of time. Thanks.

Dave McKay (President and CEO)

We have one final question.

Operator (participant)

Thank you. Last question is from Matthew Lee from Canaccord Genuity. Please go ahead.

Matthew Lee (Director and Equity Research)

Hey, thanks so much for squeezing me in. Midmen, the Canadian business, both Personal and Commercial, you delivered really substantial improvements, improvements in efficiency.I know you follow HSBC synergies, but are there any other items you can talk about that contribute to that cost depression?

Erica Nielsen (Group Head)

Yeah. Maybe on the personal bank as it relates to the efficiency ratio, I think the team has done a very good job of just general expense management control. You saw that reflected in the results that we have there. In addition to the HSBC synergies, we're seeing good cost discipline as we think about balancing both the growth that's necessary in the platform and driving that growth and the spend that we need.

To drive that growth. We are making sure that we are disciplined in our costs. Obviously, at the revenue line perspective, we've seen strong revenue growth in the franchise, and as Dave alluded to, that's really on the back of how we're supporting our clients. Both strong acquisition and client growth from that side, as well as the consolidation of their business at RBC, which is playing off on both sides of the balance sheet, both in our deposit franchise and our lending franchise.

Sean Amato-Gauci (Group Head)

Quickly on the commercial side. Consistent. With the enterprise and to Katherine's comments, we did achieve 100% of the HSBC cost synergies this quarter. We also have some tailwind from the PPA, which will start to roll off into next year. Given the size of the platform we have, similar to Erica's points, there is very strong cost discipline within the business while continuing to invest in products, platform, and coverage to drive growth going forward both on the volume side and the revenue side. We are pretty confident in maintaining this level of efficiency ratio based on those factors.

Matthew Lee (Director and Equity Research)

All right, thanks guys.

Dave McKay (President and CEO)

Yeah, this is Dave. Let me try to bring this home and I appreciate all your comments and trying to understand how to project these outstanding results going forward and I'm sensitive to that. We are very proud of what we achieved. I think you've gotten a lot of good feedback on where we think results are very sustainable across Wealth Management, Capital Markets, Commercial Banking, Personal Banking, where they might be a little bit spiky like Insurance and some of the changes that might come in Q4. Therefore, let me try to help you kind of forecast this.

I would say given the significant difference between what we achieved at $5.5 billion versus where consensus was, I would expect as we look at all these factors going forward, and again all conditional on clients continuing to transact and no material fall off in our clients' sentiment and ability to continue to do business, I would expect we can produce results in the next quarter that are closer to what we achieved than where consensus was. If you look at the difference between the two, I think we're slightly better than the halfway point and use that as kind of a rough guide on where we think we can come out. It all depends on where clients and where tariffs go and how the world evolves. I think we're closer to being able to continue to achieve what we did than where you thought we were.

I hope that helps. I think it shows the enormous strength of the franchise and ability to earn $5.5 billion at a 17.7% ROE and the strength of all our businesses and investments we've made. We're going to continue to build on this going forward as we've got a couple of businesses that can do better, as you pointed out, and therefore our investments that we continue to make will see further growth and we'll keep moving forward. Thank you for your questions, thank you for your time. Look forward to seeing you at year end with a further update.

Operator (participant)

Thank you. That's all the time we have for questions. I would now like to turn the meeting back over to Mr. McKay.

Dave McKay (President and CEO)

That'd be it from our end. Thank you.

Operator (participant)

Perfect. Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.