Royal Bank of Canada (TSX:RY) released third-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
Royal Bank of Canada reported record earnings of $6 billion, up 11% year over year, driven by revenue growth of 9% and improved cost efficiency.
The company achieved a premium return on equity of nearly 18% and maintained a robust CET1 ratio of 13.5%.
Strong performance in Personal Banking, Commercial Banking, Capital Markets, and Wealth Management segments contributed to the results.
Strategic initiatives included expanding the global transaction banking business and accelerating AI investments, aiming to significantly increase enterprise value by 2027.
Management highlighted favorable market conditions, strong client activity, and disciplined execution of strategies as key performance drivers.
Guidance included stable NIM expectations for the next quarter and a focus on sustaining organic growth, share buybacks, and dividend payments.
Notable operational highlights included record revenue in several segments, strategic acquisitions, and technological investments enhancing service offerings.
Full Transcript
OPERATOR
Good morning, ladies and gentlemen. Welcome to the Royal Bank of Canada's 2026 Third Quarter Results Conference Call. Please be advised that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.
Thank you. I would now like to turn the meeting over to Asam Imran. Please go ahead.
Asam Imran, Investor Relations
Thank you and good morning, everyone. Speaking today will be Dave Mackay, President and Chief Executive Officer, Kathryn Gibson, Chief Financial Officer, and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions: Erika Nielsen, Group Head, Personal Banking; Shanamatigouchi, Group Head, Commercial Banking; Neil McLaughlin, Group Head, Wealth Management and Insurance; and Derek Nellner, Group Head, Capital Markets. 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 questions 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 very strong results, including record earnings of $6 billion, up 11% year over year. Revenues grew by 9% year over year as we further increased our revenue productivity while also deploying our balance sheet for client-driven growth. Furthermore, our relatively equal weightings between non-interest revenue and net interest income provide us with an attractive business mix.
We also improved our cost efficiency, generating an adjusted operating leverage of 2.4% and an adjusted efficiency ratio of 52%. These results reflect three forces working together: a diversified business model, strong client activity, and a favorable market backdrop. This was enabled by disciplined execution of well-articulated strategies, investments in talent and technology, and deployment of our balance sheet. Our performance this quarter delivered a premium return on equity of nearly 18% and broad-based growth while maintaining a robust 13.5% Common Equity Tier 1 ratio.
This combination continues to generate sustainable, long-term shareholder value, and this was evidenced by the 10% year-over-year growth in book value per share and 80 basis points of internal capital generation this quarter, or 3 percentage points over the last 12 months. We deployed 85 basis points of capital in the quarter to grow our business, pay dividends, and buy back our stock. As always, we continue to prioritize the deployment of our balance sheet towards client-driven organic growth.
As we mentioned earlier this year, we're looking to continue building the bank of the future. That means growing market share and laying the foundation for new growth verticals and relationships to diversify the business and create future value. These create a flywheel multiplier effect for driving durable ancillary revenue streams. Our integrated platform, client trust, and market leadership helped us earn the recognition as both Canada's and North America's Best Bank in Euromoney's 2026 Awards for Excellence.
We also continued to return capital to our shareholders. Our total payout ratio increased to 69% this quarter as we grow our dividends towards the midpoint of our medium-term dividend payout ratio objective of 40% to 50%. We are also buying back our stock in a disciplined manner as we look to optimize ROE, EPS growth, and compound book value per share growth in a multi-tiered operating environment. Taking a step back to look at the global landscape, market conditions have remained largely constructive, with megatrends continuing to shape critical sectors including natural resources, power, infrastructure, strategic defense, healthcare, and the AI ecosystem. These trends support increased client activity for our Capital Markets and Wealth Management segments. Nonetheless, elevated bond yields across many large economies are creating fiscal challenges and refinancing risk for both governments and corporations. Now a few comments on the outlook for Canada. The Canadian economy and labour market have performed well, having already absorbed multiple shocks over the past 18 months. Our clients have also continued to spend and delinquencies remained well controlled.
Looking forward, the implementation of the recently announced Section 338 tariffs could impact approximately 40 basis points of Canadian GDP, with a larger impact on certain sectors and provinces. While Canada and the U.S. have yet to come to a longer-term solution, we note the average effective tariff rate remains low at approximately 6%, with over 80% of exports remaining duty free. Furthermore, the government has announced substantial support packages, leveraging Canada's significant financial flexibility.
The medium-term opportunity remains more meaningful. We look forward to working with all stakeholders on the development of major nation-building projects, and we're pleased to see advancements. The Port of Montreal expansion and shipbuilding contracts, increased foreign direct investment, and new trade relationships add to our optimism. We believe we are well positioned to navigate near-term uncertainty while supporting our clients' growth aspirations, given the strength of our balance sheet and diversified business model.
With this context, I will now speak to the drivers behind our strong segment results, with a focus on four key factors. First, our leading, award-winning franchises that are laser-focused on client needs. Second, our strategies that position us to benefit from our significant data scale, structural growth opportunities, and client activity. Third, the targeted connectivity of balance sheet scale, client acquisition, and deepening client relationships.
And fourth, operating scale that underpins our premium risk-adjusted profitability. Moving to Slide 5. Personal Banking in Canada reported record revenue this quarter and remains the preeminent franchise in the country, with leading market share in personal lending, total deposits, and investments. It's encouraging to see higher switch volumes and strong retention driving a significant uptick in sequential mortgage growth to 1.8%, the highest since our acquisition of HSBC Bank Canada.
Credit card balances increased 7% from last year in a quarter where Avion Rewards had a record number of new accounts acquired. We also launched new cashback products as well as our partnership with Hopper, which will bring a world-class travel booking platform and innovative travel offerings to the Canadian market. Also, the aggregate of average retail deposits and mutual fund AUA increased 8%, or $47 billion, year over year, with net money inflows positive for the quarter.
Ultimately, this repositioning, primarily out of term deposits to fee-based investments, benefits both the client and the bank. Commercial Banking has leading market share in both loans and deposits across client categories. This segment generated record net income this quarter, underpinning an ROE of 18.6%, in an environment of trade uncertainty and geopolitical risks weighing on business activity and client sentiment, particularly in real estate, supply chain, and consumer sectors within Ontario and British Columbia.
However, this quarter showed an uptick in sequential loan growth to 1.2%, partly due to growth pockets in agriculture, healthcare, and the public sector, as well as HST rebates. In the real estate sector, deposit growth was very strong at 9% year over year, benefiting from increased client coverage and improved sales productivity. There were also ancillary fee-based benefits to this volume growth, as client activity drove double-digit transaction banking revenue growth across FX and cash management fees.
RBC Capital Markets is the leading franchise in our home market, a top 10 global investment bank, and was recently named Canada's Best Investment Bank by Euromoney. This segment reported record revenue and net income this quarter while generating an ROE of 14.5%. Investment banking revenue increased 23% from last year, and our market share over the last 12 months grew to 2.1%, benefiting from higher origination and M&A activity across most regions.
Strong lending growth in Corporate Banking was largely driven by higher investment-grade loans and securitization finance in support of our clients' growth aspirations. This drove increased opportunities to cross-sell into advisory, origination, and sales and trading intermediation activities. Our average investment banking fee per client and average fee per senior banker continue to increase, demonstrating our monetization, expanded client connectivity, as well as continued talent investments and balance sheet productivity overall, driving stronger returns.
Global Markets revenue was up 11% from last year, underpinned by growing momentum in our equities franchise, where we reported strong market share gains in equity derivatives. As we noted at our investor day, growing our equity financing capabilities is a strategic imperative. We grew these volumes 40% compared to last year. We continue to leverage our strong balance sheet, credit rating, and brand to drive these strategies, which have robust returns on equity.
Looking ahead, our pipeline remains healthy in a constructive environment, and our ongoing growth initiatives support our client-focused strategies. Wealth Management also reported record revenue and net income this quarter, benefiting from its diversified revenue streams as clients came to us for trusted advice, service, and solutions in an evolving environment. Starting with our wealth advisory businesses, RBC Dominion Securities, which is the largest Canadian wealth management franchise, was recently recognized by its advisors as the highest-rated bank-owned investment dealer in Canada in Investment Executive's Brokerage Report Card for the 20th consecutive year. Our U.S. Wealth Advisory business, the sixth-largest U.S. wealth advisory firm, recently ranked fourth in J.D. Power's advisory satisfaction ranking. Canadian Wealth Management and U.S. Wealth Management increased 20% and 14%, respectively, benefiting from both market appreciation as well as net new assets this quarter. RBC Direct Investing, our self-directed platform, benefited from nearly a 40% year-over-year increase in trading volumes, partly due to the successful launch of GoSmart earlier this year.
Our wealth management platforms also benefited from higher deposits in our Canadian business and an 18% year-over-year growth in credit and lending balances in our U.S. Wealth Advisory franchise. Our new advisor hiring pipeline continues to be strong, positioning us well for future revenue growth. As the largest Canadian retail mutual funds franchise, RBC Global Asset Management increased assets under management by 13% year over year due to constructive markets and leading mutual fund net sales.
In addition, the RBC iShares Alliance led the industry with respect to long-term ETF net sales of $10 billion for calendar Q2 2026, while concurrently announcing the expansion of its lineup of fixed income solutions as we continue to expand into private markets. I'll now cover a few of the key initiatives that will underpin our next leg of profitable growth, with a more detailed update to come in Q4. We have an ambition to build a global transaction banking business with an end-to-end offering that allows us to service our wholesale clients as they operate seamlessly across borders in a world with evolving trade connections.
Secondly, our U.S. region efficiency ratio has improved to 75% year to date, moving us closer towards our target in the low 70s. As part of this success, City National Bank's net income increased $184 million this quarter, benefiting from 8% loan growth and 5% deposit growth as we continue to add teams and execute well for our clients. And third, we're also accelerating the execution around our AI ambitions as we build towards generating $700 million to $1 billion in enterprise value by the end of fiscal 2027.
We are leveraging our advantages in data scale, client relationships, execution capabilities, and nearly a decade of investments in our Borealis Research Institute. And with that, Kathryn, over to you.
Nadine Ahn, Chief Financial Officer
Thanks, Dave, and good morning, everyone. Starting with slide 7, we delivered record results this quarter with diluted earnings per share of $4.23. Adjusted diluted earnings per share of $4.28 was up 11% from last year, reflecting record revenues across most of our segments and all-bank operating leverage of 3%. Turning to capital on slide 8, our CET1 ratio remains flat at 13.5%. We generated ROE of 17.9%, underpinning strong capital generation of 80 basis points this quarter.
After dividends and strong client-driven growth primarily in corporate lending, credit cards, and residential mortgages, complemented by higher market-related exposures in Capital Markets, we generated 16 basis points of net capital. This was largely absorbed by the repurchase of 5.6 million shares for approximately $1.6 billion. Lastly, the previously announced sale of Moneris is expected to contribute approximately 10 basis points to CET1 in the first quarter of 2027, while the run-rate earnings impact is not expected to be significant.
Moving to slide 9, all-bank net interest income grew 5% from last year. Excluding trading net interest income, all-bank net interest income was up 7%. Further excluding the impact of certain transactions in Capital Markets that carry related offsets in other non-interest income, as well as excluding lower purchase price adjustments, or PPA, related to the acquisition of HSBC Canada, our all-bank net interest income was up 11%. This reflected solid volume growth across our largest segments, including Personal Banking, Commercial Banking, and Wealth Management.
We also continued to benefit from our deposit strategy. A sequential decline of 4 basis points in all-bank NIM excluding trading was largely due to Capital Markets, including the aforementioned transactions, as well as lower loan book spreads, including a shift towards investment-grade loans. Trading net interest income was down $178 million, or 27%, from last year, driven by higher financing volumes in Capital Markets. As Dave noted earlier, this was more than offset in trading non-interest income.
Total non-interest income was up 13%, driven largely by higher fee-based revenues in Wealth Management and Capital Markets. Moving to slide 10, reported non-interest expense was up 6% from last year and up 7% on an adjusted basis. Higher variable compensation consistent with higher revenues drove more than half of the growth. Higher salaries were the second-largest driver of the growth as we continued to invest in our talent, including in Capital Markets, Wealth Management, and Personal Banking.
The remainder of the increase reflected technology-related spend, including safety and soundness initiatives and digital tools, as well as higher marketing investments, including new brand partnerships. Moving to taxes, the adjusted non-TEB effective tax rate increased by 1 percentage point to 22.3%, reflecting changes in earnings mix. I'll now turn to our Q3 segment results, which begin on slide 11. Personal Banking generated $1.9 billion of earnings this quarter.
Personal Banking Canada net income was down 1% from last year. Revenue was a record, up 4% from last year. Net interest income was up 5% as we earned through the impact of lower HSBC Canada-related PPA. Excluding this, our net interest income was up 8% from last year, driven by 4% loan growth and higher margins. Non-interest income was up 3%, driven by growth in mutual fund distribution fees underpinned by higher fee-based assets. This was partly offset by lower service charges, largely reflecting the impact of regulatory changes that we guided to previously.
Expenses were up 9%, including higher staff-related costs and the timing of investments in technology and marketing. This included digital and AI initiatives, as well as client acquisition and engagement campaigns. Turning to slide 12, Commercial Banking net income was a record $936 million, up 12% from last year, underpinned by record pre-provision, pre-tax earnings of $1.5 billion. Revenue was up 5%, primarily reflecting higher net interest income growth driven by higher volumes and margins.
Commercial Banking loan-to-deposit ratio improved 3 percentage points from last year to 58% as deposits grew 9% from last year and 6% sequentially, reflecting growth in non-maturity deposits. Loans were up 4% from last year and 1% sequentially as growth accelerated among our larger clients and in certain sectors. I'll now make a few comments on our combined Canadian Banking segments. Net interest income was up 5% from last year, or up 7% excluding the impact of lower HSBC Canada-related PPA.
NIM was down 3 basis points from last quarter. This is primarily reflecting the seasonally higher lending spreads we noted in the prior quarter. Lastly, our combined Canadian Banking segments generated a leading efficiency ratio of 37%. This quarter's negative operating leverage of 3% largely reflected lower HSBC Canada-related PPA, the impact of regulatory changes, and the timing of investments in Personal Banking. Our year-to-date operating leverage remains strong at 2%.
Turning to Wealth Management on slide 13, net income of $1.4 billion was up 32% from last year, reflecting record revenue and a strong pre-tax margin of 29.3%, which was up 4 percentage points from last year. Non-interest income was up 16%, underpinned by market appreciation, positive net sales, and net new assets across most regions. Higher transactional revenue also contributed to the increase, with increased activity in Canadian Wealth Management, including our direct investing business.
Net interest income was up 16% from last year, benefiting from deposit growth in Canadian Wealth Management and higher spreads and loan volumes in U.S. Wealth Management, including City National Bank. Turning to Capital Markets on slide 14, record net income of $1.5 billion was up 16% from last year. Pre-provision, pre-tax earnings of $2 billion were also a record, driven by strong revenue momentum across all businesses and efficiency ratio improvement of 3 percentage points.
Global Markets performance remained strong, with revenue up 11% from last year, reflecting continued momentum in equities trading and strength in our non-trading and financing portfolios. This is partly offset by headwinds in rates trading amid muted client activity. Corporate and Investment Banking revenue was up 16% from last year, with investment banking revenue up 23% from last year, reflecting record levels of activity. Lending and transaction banking revenue was up 10%, driven partly by strong growth in loans and in deposits.
Turning to slide 15, Insurance net income of $197 million was down 20% from last year, largely due to lower insurance service results. This is primarily a result of favorable longevity reinsurance adjustments and recaptures in the prior year. Our premium deposits were up 9% from last year, reflecting higher segregated fund and group annuity sales. To conclude, we reiterate our full-year target while remaining mindful of the evolving macro environment.
All-bank net interest income excluding trading is up 7% year to date and on track to deliver against our mid-single-digit range guidance. Looking ahead to next quarter, we expect Canadian Banking margins to be relatively stable, with structural tailwinds offset by increased competition for mortgages and term deposits. Expense growth of 5% year to date remains consistent with our mid-single-digit range guidance. We continue to expect positive all-bank operating leverage for the full year, including 1% to 2% in Canadian Banking.
As a reminder, we continue to expect the non-TEB effective tax rate to move towards the higher end of our 21% to 23% guided range over the coming quarters. Lastly, following the recent change in the domestic stability buffer, we now expect the CET1 ratio to trend toward the midpoint of our 12.5% to 13.5% range over time as we look to drive organic growth, increase our dividends, and execute share buybacks at a similar cadence to the last couple of quarters.
With that, I'll now turn it over. Thanks, Graham. Thank you, Katherine, and good morning, everyone. I'll now discuss our allowances in the context of the current macroeconomic environment, continuing geopolitical tensions, and ongoing trade developments. As Dave noted earlier, the Canadian economy has proven to be resilient with the improvements in employment and GDP seen in Q2. We maintain a cautiously optimistic outlook that the economy will continue to expand. Likewise, the U.S. economy has demonstrated strong productivity growth and low unemployment rates, but geopolitical risks remain as significant sources of economic and credit uncertainty. This stems from two key areas: first, the impact of evolving and uncertain trade policy, and second, the inflationary pressures arising from the ongoing conflict in the Middle East. On the trade front, CUSMA moving to an annual review cycle has left tariff exemptions intact for goods and services covered under the pact.
Nevertheless, last week we saw the implementation of new Section 338 tariffs on key Canadian exports to the U.S. As these apply to a narrow base of Canadian products, these tariffs alone are not expected to meaningfully change our overall economic forecasts. The economic impact ultimately 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.
Against this backdrop, we continue to lean on our robust credit underwriting and provisioning processes for allowances. We have prudently retained elevated weighting to our downside scenarios, including our trade disruption scenario, which contemplates a North American recession driven by an escalating global trade war and rising geopolitical risks. Turning to Slide 17, we took a total of 21 million, or 1 basis point, of provisions on performing loans this quarter.
This is predominantly driven by portfolio growth in Personal Banking and Capital Markets, partially offset by favorable changes in our macroeconomic forecasts, largely in the U.S. region. Moving to Slide 18, gross impaired loans were up 353 million, or 1 basis point, from last quarter, primarily driven by Capital Markets and Wealth Management and offset by lower impaired loans in Commercial Banking. In Capital Markets, gross impaired loans increased by 466 million, largely due to impaired loans in the real estate and related sector.
These borrowers are part of a subset of our commercial real estate portfolio which we expect will face continued impact from ongoing secular headwinds in the near term. The facilities impacted are structured to minimize losses and therefore were not a key driver of PCL this quarter. In Wealth Management, impaired loans, predominantly at City National Bank, increased 114 million, primarily driven by the utilities sector. In Commercial Banking, impaired loans are down 241 million over the quarter, where we are seeing lower impairments in the real estate-related and consumer discretionary sectors.
As a reminder, impairments in our wholesale portfolios are inherently more difficult to predict and can be episodic. However, while risk continues to be elevated, we are seeing modest improvements in credit quality across the wholesale portfolio. Turning to Slide 19, PCL on impaired loans of 35 basis points was up 1 basis point, or 80 million, quarter over quarter and remains in line with our expectations. In Capital Markets, provisions were up 148 million quarter over quarter.
The largest driver of provisions this quarter relates to a former investment-grade borrower in the other services sector, more specifically in the utilities space, that we originally impaired in the first quarter of 2025. Recent changes in the political environment have significantly increased uncertainty around the path to resolution on this file. Accordingly, we are prudently taking an additional 120 million of provisions while recognizing that the ultimate outcome remains uncertain.
In the commercial portfolio, while PCL on impaired loans remains elevated compared to historical levels, we have seen improving loss trends over the last three quarters. Additionally, retail credit indicators are showing signs of stabilization. Delinquencies in unsecured products, particularly credit cards, remain elevated but have leveled off from last quarter. In our home equity finance portfolio, while we continue to manage near-term renewal risks, we are encouraged by recent improvements in impairment formations.
To conclude, despite various geopolitical and trade headwinds over the last few quarters, Canada's economy has shown signs of stabilization driven by resilient household spending, recovering business investment, and expanding net trade. Although sectors directly targeted by U.S. tariffs to date have faced headwinds, the impacts have remained contained and have not spread to the overall economy. Internally, as noted previously, credit indicators have generally been stable or improving.
We are pleased with the performance of our loan portfolios this quarter. We expect our overall full-year 2026 provisions on impaired loans to remain within the range we previously guided to. And now back to Dave.
Asam Imran, Investor Relations
Operator, we can take Q&A now.
OPERATOR
At this time, I would like to remind everyone, in order to ask a question press star then the number one on your telephone keypad. And your first question comes from the line of Ibrahim Punawala with Bank of America. Please go ahead.
Ibrahim Punawala, Analyst at Bank of America
Good morning. Two-part question, since you want to limit questions, but both with the angle of trying to understand where Royal Bank of Canada can outperform peers on growth. So maybe for Dave, Derek. One, talk to us in terms of what the AI CapEx cycle means for Royal Bank of Canada. Yes, you are on some of these IPOs, debt issuance, but is there something more lasting when we think about lending, deposits, wealth management that this AI cycle can create?
And we just heard Nvidia last night talk about growth into the next couple of years. So we're trying to understand if we should view Royal Bank of Canada on the revenue side as a beneficiary of what's going on with the CapEx build-out. And second, you made a big splash of the global transaction banking. Just summarize for us where you think Royal Bank of Canada has the right to win in an area that is intensely competitive. Thank you.
Derek Neldner, Group Head, RBC Capital Markets
Sure. Thanks, Ibrahim. It's Derek. I'll maybe take your first question on the AI CapEx cycle. I think certainly it's an area that's obviously driving tremendous growth, and we do think it will be a unique growth opportunity for us where we are positioned to drive differentiated performance. So if I step back from that or unpack that a little bit, obviously the AI build-out is impacting a variety of sectors from technology to data centers to power to energy to critical minerals.
Those are all areas where we feel we have strengths today, areas we've been investing over time, and areas where we're bringing together our collective expertise very well. In our view, when we then look at those areas of opportunity and how they connect to our businesses, obviously there's a lot of financing required for the build-out. Given our size and scale and AA balance sheet, it's an opportunity for us to support clients initially with lending.
And you've seen that come through in some very strong loan growth for us year over year. But importantly, then anchoring that lending and those relationships into other businesses. You mentioned GTB. Clearly, as we're growing our loan book, we are connecting the dots with our cash management business and growing deposits as part of that. We're obviously tying that to investment banking activity, where we had very good results this quarter both across DCM, ECM, project finance advisory, and then that obviously has ancillary benefits into our trading businesses and also into our wealth franchise.
So in totality there's a very big opportunity, and we think we're positioned well to capitalize on it, and we do think it will be sustainable.
Dave McKay, President and CEO
Ibrahim, this is Dave. Maybe I'll give some of the rationale behind creating this global transaction banking business and integrating it across platforms, and I'll hand it to Sean and Derek for more specific comments about the competitive rationale. But we do have aspirations to compete globally. We have invested heavily in technology platforms across Commercial Banking, obviously RBC Clear and Capital Markets that Derek just spoke to, and our City National franchise.
And we felt that we wanted to integrate that technology platform and bring it under one common leader to not only create efficiencies but enable a more focused go-to-market strategy with our clients globally as we segment. So this allows us to be more efficient and bring our technology to our customers, approach the market more efficiently, and our aspiration is to really serve a more globally connected customer from Royal Bank of Canada. And we see the world moving to create more global trade relationships and more global cross-border flow, also enabling the group to look at modernizing payments through tokenization and stablecoins.
So that's the strategy behind it. We are very optimistic about it. We think we have, and we believe we have, the right to win. We're a significant creditor to a very large corporate loan book and commercial loan book, and City National is growing their mid-corporate and commercial loan book, and therefore we're part of syndicates. We have relationships with these customers, and we feel we have, with modern technology, the right to ask for the cross-sell into the global transaction banking capabilities.
So with that, maybe Sean and then Derek, some comments about specific competition.
Sean Amato-Gauci, Group Head, Personal & Commercial Banking
Yeah, thanks, Dave. Sean speaking. So when we've assessed the opportunity here, we started by looking at where are we today, and ultimately we've got an exceptionally strong foundation across Canada and increasingly in the U.S., as Dave mentioned. You saw in our results approaching 340 billion in Canadian deposits across all segments of the business and wholesale landscape. We've invested heavily, as Dave has mentioned, to build leading cash management platforms here and in the U.S. with Edge and Clear. We now have the most comprehensive product suite across the cash management, treasury, and trade landscape. And then when we start thinking about our clients and client needs across all segments, clients are expecting more connected and integrated experiences. They also want less friction when they're dealing with us across borders. And clients of all sizes, across all sectors and segments, increasingly are operating internationally.
And this is about supporting client needs and accelerating, I'd say, our growth ambitions across the transaction banking landscape across regions. And ultimately this leads to some of our longstanding focuses as an organization: deposit strength, funding advantage, and growing fee-resilient businesses and ROE expansion for the enterprise.
Derek Neldner, Group Head, RBC Capital Markets
I would just briefly add, in terms of a competitive market but where we feel we have a right to win. Beyond building on Sean's comments on the very strong foundation we obviously enjoy in Canada, I think we've seen very good success in our build-out of RBC Clear, and we look forward to providing a more detailed update at Q4. But needless to say, we're tracking ahead of our plans. We're seeing very good results in terms of new client onboarding, the growth of deposits, and the profitability that's coming with that.
And so that track record now of two years entering a new market in the transaction banking business, and the success we're seeing to date, gives us confidence we can continue to build off that not just in North America but over time in other regions.
Ibrahim Punawala, Analyst at Bank of America
Extremely comprehensive. Thank you.
OPERATOR
Your next question comes from the line of John Akin with Jefferies. Please go ahead.
UNKNOWN Analyst
Good morning, wanted to talk about the wealth management pre-tax margins. Now I know the quarter benefited from the reserve release but basically what we've seen over the last two years, as Dave highlighted in his comments, very significant growth in AUM that's led to operating leverage benefiting the segment. Where I'm going with this is, you know, with this growth are we going to see a necessary step of investment in the segment to perpetuate this or are we at a level now where we're actually going to see the scale benefiting and potentially see that margin continue to increase?
UNKNOWN Executive
Yeah, thanks for the question. So listen, overall in terms of pre-tax margin, what you're seeing, you know, maybe just start with our Wealth Canada franchise. You heard in Dave's comments, this is the number one platform in Canada. We're actually larger than our number two and three competitors put together. So we do have a scale advantage there and that continues to grow in terms of just a fixed cost base. In terms of as we're competing and having these assets continue to grow, we're getting some real scale benefit in our Canadian business.
You also heard in some of the comments, very upbeat Direct Investing franchise, both in terms of adding new clients but also seeing much steeper client activity in terms of trades per day. So these are all very positive, I'd say, revenue and top-line benefits in terms of the pre-tax margin. In terms of do we expect to see a step up in investment, right now we have been investing fairly consistently across our wealth franchises. In terms of technology, we do not expect to have a required sort of step up in that investment.
And then even within that envelope, we are funding our AI use cases, probably first and foremost to improve productivity for those same advisors so they can go out and spend more time connecting with clients, continue to grow those individual portfolios, do better for the client and obviously better for the enterprise. And then also in our back office, being able to streamline our processes, think end to end, take costs down, increase our service levels, and then the last portion is our AI for alpha and making sure that our Global Asset Management business is getting the best signals they can and embedding that into the 30 plus customized investment processes to generate alpha. So within all of that, that's all within our existing funding envelope and we do not see any.
UNKNOWN Analyst
Great. Thanks for the color.
OPERATOR
Your next question comes from the line of Stephen Boland with Raymond James. Please go ahead.
Stephen Boland, Analyst at Raymond James
Good morning. I'm going to follow up on the GTB announcement. I think that was a good comprehensive answer. I'm just wondering about implementation timing of this and how do we measure success in this initiative. Is it just going to be kind of buried in the loan growth numbers, maybe the deposit numbers? What metrics are you looking for to show that this initiative is actually taking traction? I'm not sure who wants to take that. Derek.
Derek Neldner, Group Head, RBC Capital Markets
Sure. Steve, it's Derek. I'll start and Sean can add. Very good question. Thank you. In terms of implementation, we have well-established businesses today that individually are all doing very well and so we've got great momentum. We see an even bigger prize over time that we can get after. But we're very pleased at how all the businesses are doing right now. And we're going to try to ensure we don't disrupt that strong momentum in any way. So we'll be bringing the businesses together.
It will be some organizational changes around that. We'll be working through that over the next 60 to 90 days. And we think it will be a fairly seamless transition to take those existing businesses into a unified offering, importantly for our clients and as well for our teams. We've obviously done a lot of work looking at what we think the opportunity is in North America and beyond. As we bring this business together, we will be crystallizing those targets and over time we'll look to come out with different KPIs to address your exact point.
So I'd say stay tuned. But definitely while this will continue to be reported in the existing segments today, we will be coming out with KPIs to track how the broader GTB initiative is proceeding.
OPERATOR
Your next question comes from the line of Gabriel Deschain with National Bank Financial. Please go ahead.
Gabriel Deschain, Analyst at National Bank Financial
Good morning. 18% ROE is great, so it's a little bit odd to maybe poke holes into it. And what I mean by that is the capital markets has, unlike other banks, has not really been enhancing the ROE to the same degree. That's because of the capital intensity of that business. We've seen over the past year or two more corporate lending, balance sheet expansion. I understand the motivation behind that strategy. I'm just wondering when do you expect the inflection point, the balance sheet intensity to maybe calm down a little bit and then the lower capital-intensity revenue items moving higher and the ROE following that?
Derek Neldner, Group Head, RBC Capital Markets
Sure. Thanks, Gabe. It's Derek. I'll address that first. Just a couple of sort of comments I would make. One, as you're probably aware, different banks have different approaches to capital allocation to the businesses. So it's a little bit apples and oranges when you compare the capital markets ROEs across peers. I think to your point though, it's very important to look over time at how has that been progressing? If you look back, and again we've had our own changes to capital attribution in recent years, if you look back and you normalize that, we've seen very significant expansion of the capital markets ROE really going back to 2019, 2020.
As you'll recall at Investor Day, we put out a target of 14% by 2027. We're operating well ahead of that this year. So we feel very pleased about how we've been able to continue on that trajectory. And even year to date, we've obviously seen a good lift in ROE. But when we look at our revenue to RWA, again, very good progression in those metrics. The strategy obviously is to continue to improve that. We feel very confident in our ability to do it.
Part of that comes from the mix of non-lending versus lending. I would just highlight that, again, if you come back to the very strong balance sheet growth we've seen year to date. Some of that gets monetized in the very near term because there's a direct linkage between the capital you provide and ancillary business. But some of that is building for the long term and that's where we see very good opportunities, where some of the balance sheet deployment right now is really building our medium-term client franchises.
And we feel very confident that, as we've seen in the last number of years, we'll continue to see that monetization ratio come through and strengthen our franchises over time.
Gabriel Deschain, Analyst at National Bank Financial
Over time, I guess it's a different approach and you learned from the past a long time ago, admittedly, but we saw the corporate loan book growing by a lot and then there was some reversal of that eventually. So it's just not—it's different this time, I suppose. And my next question for Dave: M&A is an obvious area of discussion here given where bank stock valuations are. How do you define a tuck-in acquisition these days and what would it take for you to do something more than a tuck-in?
Dave McKay, President and CEO
I guess I would say first and foremost, Gabriel, we're focused on organic growth. You've seen the momentum quarter over quarter and year over year in our corporate loan book, in our commercial loan book and in City National. You look at the mega projects coming. We're expecting to see RWA growth and lending growth and revenue growth and NI growth from those sectors. So there's going to be significant opportunity and growing opportunity to deploy capital into organic growth and we're quite excited about it.
And you saw the very strong client activities across all our lending, including mortgages. So I think that's where we're going to put capital first and foremost. We've always said that and I'm very excited about the growth and opportunities around that super cycle generated from AI that was previously asked. So I think that's foremost. As we think about then, to your question second, we're going to buy back our shares and continue and buy back shares at the rate we've done in the last number of quarters and accelerate where possible.
So I think we've got significant capital, we generated a significant amount of capital from our profitability. So I think second, third as I think about then, it's always important to state those first two because that's our priority and that's how we're going to create significant shareholder value. We're always mindful of franchises that can create value for us, whether it's creating scale in commercial banking in the United States, creating scale in wealth management in the United States.
We has always been our focus. We have an ability because of Royal Bank of Canada scale to allow City National to grow. We don't need to do something to be competitive. We have cash management products, we have treasury management, we have commercial and consumer lending capability. We're cross-selling those effectively now. So it's not that we need it to close the capability gap. We'll do it if it can create shareholder value. And yes, while our stocks are strong, so are the potential targets.
And therefore it's all about creating a playbook that creates medium-term shareholder value. So nothing's changed. We're not keeping capital because we think we're going to do something imminently. We're keeping capital for growth and we're also keeping capital because there's a little bit of instability in the geopolitics around the world right now. But we're not keeping capital because we feel we have to do something. 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 huge opportunity to do that.
Gabriel Deschain, Analyst at National Bank Financial
All right, thanks Dave and Derek.
OPERATOR
Your next question comes from the line of Mario Mendonca with TD Securities. Please go ahead.
Mario Mendonca, Analyst at TD Securities
Good morning. I was looking at Royal's pre-tax pre-provision profit growth this quarter and, frankly, over the last couple of quarters it's in line with some but certainly weaker than others. And as I drill down and think about it, it's certainly not your fee income. Clearly that's very strong. And while there could be some lagging on the trading, I understand that because of Royal's focus on fixed income compared to some of your peers. But where it does stand out is on the NIM, essentially.
And I appreciate the bank's target is to grow NII, but your NII growth is lagging several of your peers. The reason I'm coming at it from this direction is I would not have expected that given Royal's deposit profile and you tout that profile and the funding advantages regularly, as you should. Why is that not driving better margin performance relative to your peers given the funding profile and the level of rates that we have in the market today?
Katherine Gibson
Good morning, Mario, thank you for the question. It's Katherine. As you noted, our all-bank NIM is impacted at the top of the house by some capital markets items. As you pull those out and you look at the overall underlying growth, one thing that I would take you to is on the net interest income side, we have been earning through our purchase price equation. So that is a headwind that we've been earning through. So if you take that aside, as I referenced in my remarks, we are growing our net interest income at 7% and that is underpinned by strong volume growth that we've seen in both our commercial as well as in our personal bank, both on the loan side as well as the deposits in the commercial banking. So overall we're feeling good about that trajectory going forward as we think about our NIM. And as I said in my comments, I feel like we've got a stable NIM as we enter into the fourth quarter.
UNKNOWN Analyst
Talk about what the effect of the wind-down of the PPA is. Is that taking out three points of growth, four points of growth? What would you put that at, and when would you expect the bank to lap that headwind?
Katherine Gibson
So the PPA is about a $100 million headwind per quarter, and that translates into about a 4 basis point headwind. And so we will lap that when we head to Q2 next year.
UNKNOWN Analyst
Okay, thank you, that's all I've got.
OPERATOR
Your next question comes from the line of Paul Holden with CIBC. Please go ahead.
Paul Holden, Analyst at CIBC
Thank you. Good morning. Sort of questioning along the same vein, specifically I guess for Sean, just looking at the NII growth, I guess loan growth specifically. We have seen some of the peers show accelerated commercial loan growth over the last couple quarters. Not seeing that as much for Royal Bank of Canada, but obviously it's still really good deposit growth. So just wondering if you can talk about that—what's going on in terms of the competitive dynamics there?
Sean Amato-Gauci, Group Head, Personal & Commercial Banking
Sure. Thanks, Paul. Thanks for the question. So our loan growth for the quarter was 1.2%. As Katherine highlighted, that was actually double the growth rate from our previous quarter with really strong exit momentum. July actually was our highest growth month that we've experienced in a year. And so looking ahead, we expect to track and to continue to build on that momentum. Our pipelines are really strong. We've obviously seen some variability across regions and sectors, especially those impacted by the tariffs.
But we're also seeing some really good green shoots that's driving that momentum, especially in those sectors that are less impacted by tariffs or some of the uncertainty, whether it's in agriculture, in healthcare and public sector, and some emerging green shoots also in real estate, especially in Ontario as developers have shifted to single family homes and purpose-built rental driven by the HST rebate. Our pipelines are really strong. As I mentioned, we continue to see quality improvements across the portfolio, whether it's declining watch list, impaired rates, and special loans volumes.
And as Dave mentioned, we've got some, you know, obviously optimism that the government and infrastructure programs will start to take effect. You know, we're pretty well balanced and steady through the cycle. Lenders bulk and have coming off of 12 of 13 consecutive quarters of outsized growth relative to the market. So we're happy with our growth, especially this part of the cycle, and we have a lot of focus on continuing the momentum we have recently and continuing to invest in the business on both sides of the balance sheet.
Paul Holden, Analyst at CIBC
Okay, that's helpful. So it sounds like building momentum. Just one quick follow-up—HSBC client retention, that's been strong, in line with or better than your expectations?
Sean Amato-Gauci, Group Head, Personal & Commercial Banking
Yeah, absolutely. I'll start. Maybe Arka can follow as well. On the client side, we are well below our targeted attrition rates that we would have modeled during the due diligence. We've had extremely strong retention and growing with the client bases now that we fully integrated, completed the TSA, and also are picking up strength in some of the areas that HSBC had outsized positions in, for example in hotels and seniors housing and the upper end of the market in our Corporate Client Group, where we really embedded a lot of the learnings from HSBC's model to drive growth in that segment.
So absolutely, we're really pleased with the retention and, importantly, the recent growth from that portfolio.
UNKNOWN Executive
And then on the retail side, I would say similar themes to what Sean just expressed at the aggregate client retention level. Feel very good about the performance of that, trending at or slightly ahead of where we would have expected it when we went into the deal. And then we continue to see the opportunity for depth of relationship across that client franchise take hold. And so month over month we are continuing to deepen those client relationships.
That HSBC client came to us with less depth than the RBC client, and so we see ourselves on track exactly as we would expect relative to that depth of relationship. So feeling good that those clients are being well served by us.
Paul Holden, Analyst at CIBC
Thanks for taking my questions.
Sean Amato-Gauci, Group Head, Personal & Commercial Banking
Appreciate it.
OPERATOR
Your next question comes from the line of Mike Rizvenovich with Scotiabank. Please go ahead.
Mike Rizvenovich, Analyst at Scotiabank
Hey, good morning. Had a question for Dave. Just on the capital ratio. Just wondering—it seems like there's a bit of a hesitation to fully incorporate the 100 basis point DSB range reduction into where you sort of want to be on the CET1 ratio. And I understand in the current environment perfectly why. But if you're thinking more longer term, let's say two to three years out, is there a possibility that maybe we go back to that previous historical dynamic where the banks—well, Royal Bank of Canada—would be somewhere in that 50 to 100 basis point buffer above the high end of where the DSB could land at?
Meaning that right now the max that OSFI could be at on the CET1 requirement would be 11. So can you get to sort of ballpark 12% flat on CET1 in, say, two to three years?
Dave McKay, President and CEO
Yeah, great question. So we are being careful and prudent given some of the uncertainty in the geopolitical environment, but we do, as Katherine mentioned, foresee bringing that 13.5 down towards initially the middle of a range, 12.5 to 13.5, because we're at the high end now, and then potentially even lower, to your point, because we have that ability to do so, whether it's organic growth or continuing share buybacks. So I would say yes, we would not have an adverse reaction to bringing it down consistently through the deployment of capital to somewhere near those ranges, given the recent DSB pullback by OSFI.
Mike Rizvenovich, Analyst at Scotiabank
Okay, that's helpful. And then a quick one for Neil. Just wanted to ask about CNB. Obviously the number this quarter looks really strong and you've had a pretty strong rebound here. When you think about CNB and the next leg of growth, is this something that is just going to largely be an organic story, or are you potentially looking to add to your capabilities with inorganic?
Dave McKay, President and CEO
Maybe I'll address that, as I work very closely with Greg Carmichael, head of CNB and our U.S. operations. So yes, first and foremost we have a very significant opportunity to grow organically. We are adding teams across different markets, now into the Southeast, looking potential to go into Texas. We're adding product capability to cross-sell into our wealth clients in Neil's business, whether it's mortgages, core banking product, credit card coming off the CNB platform.
We're moving into mid-corporate global transaction banking with new capabilities there. So there is a significant organic push that the team is very focused on. If there is an opportunity to add to commercial scale, we do talk about that and the synergies. We're increasingly building a capability to have a robust—as you said, as we've gone through all of this change and investment in our platforming, our risk platforms, our tech platforms— increasingly we're building a capability to roll another bank onto those platforms.
We have a number of very significant opportunities to integrate the U.S. already within RBC, whether it's our Georgia bank and others. So there's synergies there that we're focused on. So the U.S. has enormous opportunity for us. You saw very significant growth in CNB, and we think there's more exciting growth coming as we continue to reduce costs from our remediation efforts and we continue to grow organically our footprint. And yes, we're always thinking and talking about how can we add to that scale with a confident playbook like we had with HSBC, where we take out costs as the predominant driver of shareholder returns and then look to grow our footprint in the region. So it's both, honestly. It's a great question and we're very excited about the opportunities in the United States.
Mike Rizvenovich, Analyst at Scotiabank
Thanks for the color.
OPERATOR
This concludes the question and answer session. I'll now turn the call back over to Dave McKay for closing remarks.
Dave McKay, President and CEO
Thank you for your questions today. We're really happy with the results. I think there's some areas where certainly we're looking to improve our operations. But I think the underlying thematic that we tried to convey today is we're seeing very strong client activity. We're winning market share, not always at the margin we wanted, but we're winning market share across our corporate banking, investment banking activities, commercial banking, deposits in particular, consumer banking, mortgages.
Competing well. We're competing really well for AUA and AUM. So you're seeing a franchise that's really invested and continues to invest in building a sustainable foundation for growth on our balance sheet, off our balance sheet. I think that's the characteristic of our franchise. This is sustainable growth built through clients with great products, great systems, great capabilities. And we're going to continue to do that with a really healthy mix between NII and non-interest income.
So thank you very much for your questions. We look forward to our ongoing dialogue and to see you next quarter.
OPERATOR
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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