- Key insight: Royal Bank of Canada adjusted its return on equity target upward, showcasing confidence in its ability to improve its earnings and make more money for shareholders.
- Supporting data: RBC is now projecting a return on equity of at least 17% by 2027.
- Forward look: Another upward revision is possible, depending on factors such as AI deployment, the CEO said.
Royal Bank of Canada increased a key financial performance target Wednesday after releasing a strong quarterly earnings report that was fueled partly by improved U.S. results.
The Toronto-based bank now expects to achieve a return on equity of 17% or more by 2027, up from the 16% or more it had been projecting, and higher than the 16.3% it reported for the fiscal year that ended on Oct. 31. Executives said the lift reflects higher revenues and prudent cost management.
CEO Dave McKay didn't rule out another upward revision, saying that the latest guidance is "not a static target," especially as the bank deploys more artificial intelligence tools that could lead to lower costs. About 30,000 RBC employees are using generative AI as part of their jobs, he said.
"As we start to see those benefits roll in, I'm hopeful that we'll be able to look at that again and increase in the near term," McKay told analysts during the bank's fourth-quarter earnings call. "But for now … it's a growth story. It's a capital return story through dividends and buybacks. And it's really, really strong performance and consistent performance within our risk appetite."
On an adjusted basis, RBC has already been achieving a return on equity above 17%. During the bank's fourth quarter, which ran from August through October, the metric was 17.2%. It was 17.3% on an adjusted basis during the bank's second quarter, which went from May through July.
"Our key takeaway from [RBC's] earnings call was management's confidence in its operations, despite the ongoing uncertainty in the economic outlook," John Aiken, an analyst at Jefferies, wrote Wednesday in a research note. "Raising the [return on equity] target underscores its belief and is coupled with a very high capital ratio that, when returned, can accelerate growth."
RBC laid out its growth plans in March when it hosted its first investor day in seven years. Executives discussed a
City National Bank in Los Angeles, which has been an RBC subsidiary since 2015, is an important part of the bank's stateside business. The bank, which is
It appears that City National is turning a corner. It reported net income of $138 million during the bank's fourth quarter, which ran from August through October. That was up 109% year over year, reflecting an increase in loans and deposits, the bank said in its fourth-quarter slidedeck.
Overall, RBC's U.S. operations, which also include wealth and capital markets, generated $884 million in net income during the quarter, up 54% year over year. Average loans were up 14% compared with the year-ago quarter, while average deposits rose 18%.
Given the surge in bank mergers and acquisitions in the United States this year, analysts were curious about RBC's appetite for a deal that would expand its existing City National operations.
McKay didn't rule out the possibility, but he also didn't describe acquiring a U.S.-based bank as a key goal.
"That obviously remains an option, but buying back shares right now and returning capital to shareholders and accelerating organic growth remains a priority," he said.
His comments echoed those made the day before by L. Scott Thomson, the CEO of the Bank of Nova Scotia. Thomson told analysts during Scotiabank's fourth-quarter earnings call that the Canadian bank is largely focused on organic growth opportunities in the U.S., though it would be open to considering "relatively small tuck-ins," possibly related to the wealth business.
For full-year 2025, RBC returned Canadian $11.3 billion to shareholders through common dividends and share buybacks. On Wednesday, the bank raised its dividend by CAD $0.10 to CAD $1.64 per share, payable starting on or around Feb. 24, 2026.
For the fourth quarter, the bank reported record net income of CAD $5.4 billion, up 29% year over year. Earnings per share were CAD $3.76, topping analysts' expectations by CAD $0.28.
