Royal Bank of Canada Q4 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ebrahim Poonawala - Bofa Merrill Lynch Asset Holdings Inc - Analyst : I guess, Dave, thanks for running through all of that. I guess a question around ROE and as we think about just capital deployment, Royal earned what, 17.2% ROE with a 13.5% CET1 this quarter. As we look forward and you look segment by segment, do you consider that the bank is over earning on ROE in any part of the business? Because I guess the follow-up to that is, is the ROE potential even with a 13% plus CET1 exceeding 18%, not 17%. And I ask this in the context of whether or not your scale, your diversity is actually creating a competitive advantage versus your peers in terms of the ROE differential. So would love any color on that. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. DECEMBER 03, 2025 / 1:00PM, RY.TO - Q4 2025 Royal Bank of Canada Earnings Call

Question: Ebrahim Poonawala - Bofa Merrill Lynch Asset Holdings Inc - Analyst : Got it. That's clear. And just following up on that, Dave, I'm having a hard time understanding whether the economy is getting better or worse as we look into the first half of '26 and how significant or important is some clarity on CUSMA or the US trade negotiations to really get business investment going, CapEx going? Or are actions that the governments announced enough to actually start seeing a pickup in activity based on what you're saying?

Question: Gabriel Dechaine - National Bank Financial Research - Analyst : Sort of related to that question, and I guess, Graeme touched upon a little bit in his comment. I'm just kind of trying to get a sense for your credit outlook there. You said the downside scenarios are reflected in your reserves. So if the USMCA or CUSMA is not extended than you've already reflected that. What's the -- what happens if that scenario plays out?

Question: Gabriel Dechaine - National Bank Financial Research - Analyst : Yeah. Okay. So yes, that does provide some clarity of uncertainty. And Dave, there's been this trend across the sector of pulling forward ROE targets and stuff like that. Your bank obviously is doing that. Something that you included in your 2027 ROE target, the upside scenario was 17% plus at the time and that -- maybe about half of that included some AI benefits. I'm wondering if there's a potential scenario, it sounds like it based on your commentary that we're also going to be pulling forward and maybe upsizing those payoffs from the investments in your various AI strategies. And yeah, let's go with that.

Question: Gabriel Dechaine - National Bank Financial Research - Analyst : Got it. So we're still 2025 investment year, 2026 investment year pay off, you start to accelerate in 2027? Or is that --

Question: Mario Mendonca - Cowen and Company LLC - Analyst : I observed this morning that the growth in C&IB, the loan growth clearly has improved. So that bank has turned the corner. But one thing I want to follow up on this I've noticed the difference between Royal's growth in commercial in the US and frankly, all the Canadian banks relative to the US banks and those banks that are located in the US, solely in the US. And my question is, is there a difference in how capital -- or the capital requirements for the US banks when they lend commercially and the Canadian banks. And I'm making this observation because OSFI has implemented the final rules on Basel III. It appears that in the US, a lot of that is on pause. So the first question is, is Royal at some kind of disadvantage in lending in the commercial space in the US relative to the US peers?

Question: Mario Mendonca - Cowen and Company LLC - Analyst : But has Royal received any like exemptions from OSFI on how those loans are treated in the US?

Question: Mario Mendonca - Cowen and Company LLC - Analyst : My second question relates to capital markets. And I'm not so much talking about earnings now. I'm just talking about the revenue actually like trading, underwriting revenue, securities and brokerage commissions. Those are those big three items that make up your capital markets

Question: Sohrab Movahedi - Bank of Montreal - Analyst : Dave, not to take anything away from the excellent detail that you kind of shared with us. Is the ROE improvement simply reducing the targeted CET1, which at Investor Day was 14%, now down to around 13%? Therefore, 16% plus goes up to 17% plus? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. DECEMBER 03, 2025 / 1:00PM, RY.TO - Q4 2025 Royal Bank of Canada Earnings Call

Question: Sohrab Movahedi - Bank of Montreal - Analyst : No, no, that's -- I just wanted to -- I just kind of wanted to understand how much of it was the numerator, how much of it was the denominator, if you will. But -- but you mentioned it just right now, Dave, and I think you answered -- you mentioned in an answer to another question that if I want -- if we -- if the bank wanted to solve for something higher there's a bit of a toggle basically with the growth end of the spectrum. But like you're not adjusting your risk appetite here in any way. Are you -- like are you saying that within my risk appetite I can have accelerated growth that can drive 17% ROE, but within my risk appetite, I can still slow down my growth and get 18% ROE. I'm just trying to understand how I should be thinking about your risk appetite and the comment around the growth and the 17%, 18% type ROEs you're talking about?

Question: Sohrab Movahedi - Bank of Montreal - Analyst : And is that toggle mostly in Eric's business then?

Question: Paul Holden - CIBC World Markets Corp - Analyst : I thought dropping the extra 30 page slide deck on the day of earnings. It was a test to see how we're using AI, but Dave, your summary is more useful for me. So I guess, I just want to drive like a little bit of a finer point on the ROE versus growth target. So obviously, you increased the ROE target. I would argue, if you're generating a higher ROE and as you also highlighted, are generating a lot of organic capital generation, like, why not increase the EPS growth target? Or is that something you kind of leave in your back pocket for when you find the right opportunities to deploy that excess capital?

Question: Paul Holden - CIBC World Markets Corp - Analyst : Okay. So maybe the way I'm going to look at it, I think it was 7% probably organically and then maybe the pluses from capital deployment. Second question then -- and I guess, to Graeme. So as I think about the outlook you laid out for '26, I think you mentioned sort of expectation for improving GDP and unemployment rate through the year. Does that suggest then based on your 2026 PCL guidance that maybe we can expect the first half of the year to start higher and then moderate through the back half of the year. I think that's probably how it lines up, and maybe you can talk us through that.

Question: Jill Shea - UBS AG - Analyst : I just wanted to touch on efficiency. You've made really good progress on the adjusted efficiency ratio of 54% relative to the medium-term target of the 53%. So just wanted you to maybe touch on that efficiency level. Could we get to a point where it's even lower than that 53% just given the scale of your business? Or is there like a philosophical, like reasoning behind like the 53% that you want to reinvest in the business? So maybe just help us think through that efficiency level over time.

Question: Mike Rizvanovic - Scotiabank GBM - Analyst : A quick one for Katherine. I wanted to just ask about your deposit mix in Canada. So you had a nice uptick quarter-quarter on the noninterest-bearing. And when I look at the split between noninterest-bearing to total, it's still hovering in that sort of 14%, 15% range. I think you peaked out at about 20% a few years ago. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. DECEMBER 03, 2025 / 1:00PM, RY.TO - Q4 2025 Royal Bank of Canada Earnings Call And I'm wondering in the rate environment that we're in, where we maybe get a bit of down drift in rates going forward. Can you see that number reflate, like is there a margin benefit to that? Is there anything to be said on maybe the NIM pickup that you might get in the Canadian lending business, if you do get a greater portion in noninterest-bearing going forward?

Question: Mike Rizvanovic - Scotiabank GBM - Analyst : Okay. Got it. And just a quick one for Dave. Just in terms of M&A appetite, and I apologize if I missed this in your earlier remarks, but this whole CUSMA dynamic not being resolved just quite yet, it sounds like it might make you a little bit hesitant to sort of pull the trigger on M&A in the US. If you do intend to build out the City National franchise. Is that a fair way of looking at your appetite right now? It's a little bit hindered by the fact that there's still some uncertainty and you might -- it might preclude you from doing a deal in the near term. Is that fair?

Question: Doug Young - Desjardins Securities Inc - Analyst : And I'll try to keep this maybe high level, Dave. I mean lots of information. Thanks for that. Maybe if I can ask you to distill the message down to like what are three items that you're particularly excited by and that you think could surprise investors that maybe isn't well known or thought of in your story?

Question: Doug Young - Desjardins Securities Inc - Analyst : That's helpful. And then just secondly, on capital markets. I think the guidance was pretax pre-provision earnings around $1.1 billion per quarter. Clearly, you've kind of moved past that. It sounds like the pipeline is fairly full. And potentially maybe the earnings power of this business is higher than when you put that out there. So is there a new number that you would kind of point to you for that capital market franchise?

Question: Mario Mendonca - Cowen and Company LLC - Analyst : Your early comments, I think you referred -- someone referred to the second half of the year 2026 that fee income could be affected by the changes in the budget. Now I'm familiar with what was said in the budget, but I'm not really clear on what fees you'd be referring to here? Is it card fees, deposit fees, FX fees? Could you help me think through what you're referring to there?

Question: Mario Mendonca - Cowen and Company LLC - Analyst : Just for clarity, the line item I would focus on there would be the deposit and payment services fees, but not the other, not cards or others. Is that right?

Question: Mario Mendonca - Cowen and Company LLC - Analyst : Okay. One other quick question on expenses. I think anybody who's been around the banks would acknowledge that this was an unusual year. It is not normal for any bank to have operating leverage of over 5%, nearly 6% in a given year and especially not a quarter like this month over 8%. So what I'm trying to get at is why? What was so different about 2025? Was it the mix of business? I mean, is AI starting to have an effect on expense growth? Why was this such an unusual year from an operating leverage perspective? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. DECEMBER 03, 2025 / 1:00PM, RY.TO - Q4 2025 Royal Bank of Canada Earnings Call

Question: Mario Mendonca - Cowen and Company LLC - Analyst : But is the paradigm still 1% to 2% is normal for a bank -- is that still an appropriate benchmark I should use going forward?

Question: Sohrab Movahedi - Bank of Montreal - Analyst : Really appreciate you squeezing me one more time. Katherine, lots of good outlook commentary. Can I get a sense of what you think would be a reasonable RWA growth for the bank in totality next year?

Question: Sohrab Movahedi - Bank of Montreal - Analyst : So no reason why RWA growth may be higher than loan growth?