Texas is on RBC's map to grow its City National Bank unit

• Key insight: Royal Bank of Canada continues to see lots of organic growth potential for City National Bank, its U.S. banking franchise. Still, that doesn't mean M&A isn't a possibility.
  
• What's at stake: RBC's growth plan for City National includes expanding its presence in the Southeast, executives said Thursday. The right M&A deal would have to create "meaningful shareholder value," CEO Dave McKay said.
  
• Forward look: RBC executives said they're looking to add City National bankers in Texas.

Royal Bank of Canada is keeping its options open when it comes to growing its U.S. banking franchise, saying Thursday that high-caliber acquisitions are on the table.

To be sure, executives still think there are plenty of organic opportunities to grow City National Bank, the U.S. subsidiary that weathered a tough stretch in 2023. The Los Angeles-based business has a solid product set and sufficient lending capabilities, and it's adding bankers in high-growth markets in the Southeast, the executives said. It's also looking to add bankers in Texas, they added.

If an opportunity came along to boost City National's scale by making an acquisition, the Canadian parent company would consider it, RBC CEO Dave McKay said during the bank's quarterly earnings call. Still, the bar for mergers and acquisitions is high.

"We have an ability, because of RBC's scale, to allow City National to grow. We don't need to do something to be competitive," McKay told analysts. "We're only going to do something if it creates meaningful shareholder value because management's time is best placed in growing this franchise client by client, and we have a huge opportunity to do that."

The latest comments were largely in line with what McKay had previously said about RBC's interest in M&A in the U.S., though they were more bullish than the message in December. At that time, McKay said RBC's capital-deployment priorities were organic growth and share repurchases, which he reiterated Thursday. The Canadian parent's third-quarter 2026 Common Equity Tier 1 ratio was 13.5%, and it repurchased $1.6 billion Canadian dollars of outstanding shares during the quarter, which ended on July 31.

RBC acquired City National in 2015. Today it's a key component of the parent company''s stateside business, which is led by Greg Carmichael, the former CEO of Ohio-based Fifth Third Bancorp.

Known as the "bank to the stars" because of its extensive Hollywood connections, City National had substantial losses in 2023 stemming from rising deposit costs. It also reported higher provisions for credit losses and higher expenses.

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The subsidiary's performance has improved. During the quarter that ended on July 31, its net income rose 61% year over year to $184 million, RBC said Thursday. Average deposits rose 5% from the year-ago quarter, while average wholesale loans rose 7%, and average retail loans rose 9%, RBC said.

Total net income for all of RBC's U.S. operations rose 30% year over year. The segment's return on equity was 12.1% for the third quarter, up from 9.8% a year earlier.

Like numerous other banks, City National has set its sights on growing its presence in the Southeast U.S. It opened an office in Charlotte, North Carolina, in December, several months after opening an office in Greenville, South Carolina. The offices meant that the 120-plus City National bankers located in those two states would no longer have to work remotely.

The possibility of adding teams in Texas would put City National in the company of several other out-of-state banks that have expanded into that state in recent years. The two most prominent recent examples are Fifth Third, which acquired Dallas-based Comerica earlier this year, and Huntington Bancshares in Columbus, Ohio, which bought Dallas-based Veritex Holdings in 2025 and followed up with the purchase of Houston-based Cadence Bank in February. 

"The U.S. is an enormous opportunity for us," McKay said Thursday. "And we think there's more exciting growth coming as we continue to reduce costs … and we continue to grow our footprint."

For the most recent quarter, RBC reported company-wide net income of CAD $6 billion, up 11% year over year. Earnings per share were CAD $4.23, beating the average estimate of $4.03 that analysts had predicted, according to S&P Capital IQ.

Firmwide return on equity came in at 17.9%, easily eclipsing RBC's stated goal to achieve a 17% return on equity by 2027. 

On Thursday's call, RBC executives briefly addressed the trade war between Canada and the U.S., assuring investors that the bank is well-positioned to navigate the economic uncertainties.

"Economic impact mostly depends on how long the new tariffs remain in place, any potential retaliatory tariffs and potential government support measures provided to affected workers and businesses," RBC Chief Risk Officer Graeme Hepworth told analysts. "Against this backdrop, we continue to lean on our robust credit underwriting and provisioning processes."