Royal Bank of Canada (NYSE:RY) Q4 2025 Earnings Call Transcript

Royal Bank of Canada (NYSE:RY) Q4 2025 Earnings Call Transcript December 3, 2025

Royal Bank of Canada beats earnings expectations. Reported EPS is $2.76, expectations were $2.51.

Operator: Good morning, ladies and gentlemen. Welcome to RBC’s 2025 Fourth Quarter Results Conference Call. Please be advised that this call is being recorded. [Operator Instructions] I would now like to turn the meeting over to Asim Imran. Please go ahead.

Asim Imran: 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 questions, 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 of the quarterly slides and the strategic update, 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. And with that, I’ll turn it over to Dave.

David McKay: Thanks, Asim. Good morning, everyone, and thank you for joining us. Today, we reported record fourth quarter earnings of $5.4 billion and adjusted earnings of over $5.5 billion, closing out a record year in which we meaningfully drove our strategy forward. Our results speak to the strength of our diversified business model. This includes benefits from our leading deposit franchises in Personal Banking and Commercial Banking, Capital Markets reported record fourth quarter results. Our Wealth Management segment also reported record revenue, reflecting strong markets and client flows. These outstanding results underpinned a strong return on equity of 16.8% for the quarter supported by a CET1 ratio of 13.5%. This morning, we also increased our dividend by $0.10 or 6%.

We further returned capital to shareholders through $1 billion of share buybacks of nearly 5 million common shares this quarter. Through an annual review of our medium-term objectives, we are increasing our return on equity, NCO from 16% plus to 17% plus. I will speak more to this after Graeme’s remarks by providing an update on our Investor Day financial targets while sharing a strategic update on how we are driving long-term shareholder value. Before passing to Katherine for her views on the quarter and the outlook for fiscal 2026, I want to briefly address the operating environment in light of the heightened geopolitical and economic uncertainty. Fiscal and monetary policy has limited the impact of persistent sectoral and regional trade tensions, while other parts of the economy remain resilient.

As Canada’s effective tariff rate remains low and as Canadian exports to the U.S. remains solid, down 2% to 3% using the latest available data, the Canadian economy should maintain its demonstrated resilience as Canada negotiates a longer-term renewal of CUSMA. Furthermore, the ongoing shift towards a service-oriented economy should also offset some of the trade-related headwinds. North American consumers remain resilient, and we are confident in the overall resilience of our own retail portfolios. However, the impact of the K-shaped economy is increasingly polarizing with more affluent consumers investing disposable income in growing markets, while less affluent consumers struggle with affordability. Over the medium term, the federal government’s infrastructure and defense spend should stimulate growth in jobs in Canada and attract foreign investment.

Challenge is the country’s ability to get these projects approved by all stakeholders in a timely and efficient way. While the operating environment remains fluid and complex, and there is a lot of hard work yet to be done by governments and the private sector, I am cautiously optimistic on the outlook for Canada. As Canada’s largest financial services company by market capitalization, we recognize the important role we will continue to play in driving economic growth for Canada. In the U.S., our businesses are engaged in constructive dialogue with clients on lower — as lower U.S. interest rates and pro-growth deregulation are providing more confidence in corporate boardrooms, leading to increasing market activity across sectors from banking and technology to manufacturing.

With that, Katherine, over to you.

Katherine Gibson: Thanks, Dave, and good morning, everyone. Starting with Slide 7. This quarter, we reported record results with diluted earnings per share of $3.76. Adjusted diluted earnings per share of $3.85 was up 25% from last year, reflecting continued momentum across most of our businesses and strong adjusted all bank operating leverage of 8.5%. Pre-provision pretax earnings were up $1.8 billion year-over-year, more than offsetting the increase in provisions for credit losses, which Graeme will speak to shortly. Turning to capital on Slide 8. CET1 ratio of 13.5% was up 30 basis points from last quarter, largely reflecting strong internal capital generation net of dividends. This is partly offset by higher risk-weighted assets as we continue to deploy capital to drive organic growth, and partly offset by a reclassification of certain RWA due to a methodology change.

Returning capital to our shareholders through share buybacks and dividends remains a key part of our strategy. This quarter, we repurchased 4.8 million shares for approximately $1 billion, resulting in a total payout ratio of 59% for the quarter. Moving to Slide 9. All bank net interest income was up 13% from last year, or up 11% excluding trading revenue. Net interest income growth, excluding trading was up 17% for the year. All bank net interest margin, excluding trading revenue was up 3 basis points from last quarter, mainly reflecting higher margins in Personal Banking and Commercial Banking. Canadian Banking NIM was up 5 basis points from last quarter, largely benefiting from a favorable shift in product mix and the continued benefits of long-term interest rates.

Moving to Slide 10. Reported noninterest expense was up 4% and core noninterest expense was up 5% from last year. Core expense growth was driven by higher variable compensation commensurate with higher revenues. Higher volume-driven costs and investments in technology also contributed to the growth. This was partly offset by continued expense discipline and cost synergies related to the acquisition of HSBC Bank Canada. On taxes, the adjusted non-TEB effective tax rate was 20.4% this quarter, down approximately 1 percentage point relative to last quarter, largely reflecting a favorable tax adjustment in the U.S. Turning to our Q4 segment results beginning on Slide 11. Personal Banking reported earnings of $1.9 billion this quarter. Focusing on Personal Banking Canada, net income was up 20% from last year.

Strong operating leverage of 9% underpinned an improvement in efficiency ratio to 38.4%. This was partly offset by higher provisions for credit losses. Net interest income was up 13% from last year. Loans grew 3% year-over-year, reflecting growth in mortgages and cards. Deposits grew 1% from last year, driven by demand deposit growth of 8%, partly offset by a 4% decline in GIC. Noninterest income was up 7% from last year, largely reflecting the strength of our leading money in franchise with approximately $5 billion in mutual fund sales, half of which was in the fourth quarter. Turning to Slide 12. Commercial Banking net income of $810 million was up 5% from last year. Pre-provision pretax earnings were up 9% from last year, reflecting record revenue and well-managed expenses.

Loans were up 5% and deposits were up 3% last year. Loan growth benefited from our diversified portfolio led by resilient sectors, including agriculture, health care and public sector, partly offset by slower growth in tariff-impacted sectors, including manufacturing and logistics. Commercial real estate continues to face cyclical headwinds. Turning to Wealth Management on Slide 13. Net income of $1.3 billion rose 33% from last year underpinned by record revenue. Noninterest income was up 14% from last year. Assets under management in RBC Global Asset Management increased by 17% to $794 billion year-over-year, reflecting market appreciation and net sales in long-term Canadian retail and institutional money market mandates. We continue to see momentum in Canadian retail mutual fund net sales as our clients move back into market across fixed income, balance and equity mandates.

Assets under administration were up 17% in Canadian Wealth Management and 14% in U.S. Wealth Management versus last year. Our net interest income was up 13% from last year, including higher results in Canadian Wealth Management, driven by average volume growth in deposits and higher spreads. Higher revenue this quarter was partly offset by higher variable compensation in line with increased compensable revenues. City National Bank generated USD 163 million in adjusted earnings, including a release in performing provisions, up 79% from last year and 17% from last quarter. Turning to our Capital Markets results on Slide 14. Net income of $1.4 billion increased 45% from last year, underpinned by a record fourth quarter revenue of $3.6 billion.

On a pre-provision pretax basis, results were up 62% from last year to $1.6 billion. Global Markets revenue was up 30% from last year, reflecting higher fixed income trading across all regions, particularly in rates, municipal bonds and higher volumes and spreads in repo products. Higher equity derivatives trading also contributed to the increase. Corporate and Investment Banking revenue was up 18% from last year. Investment banking revenue was up 26% year-over-year reflecting higher M&A activity. Lending and transaction banking revenue was up 12%, driven by higher volumes. These factors were partly offset by higher compensation on increased results and continued investments in technology. Lastly, turning to Slide 15. Insurance net income of $98 million was down 40% from last year, primarily reflecting the impact of unfavorable annual actuarial assumption updates, an adjustment related to a previously recognized reinsurance recapture gain.

Effective Q1 2026, we are revising our methodology for allocating capital to insurance to more closely align with legal entity capital requirements. This increases attributed capital for insurance impacting the ROE effective fiscal 2026. This change though in the segment allocation has no impact at the all bank level. I’m now going to spend a few minutes on our outlook for 2026. We expect positive all-bank operating leverage for the year, including 1% to 2% positive operating leverage for Canadian Banking. We expect annual all bank net interest income growth, excluding trading to be in the mid-single-digit range. I’ll spend some time unpacking the drivers given there are a few moving parts. As a reminder, in the past, we have highlighted that there are many variables that impact NIM, including changes in client and competitive behavior and the forward curve, which are difficult to predict in the current dynamic environment.

Our guidance reflects improving product mix, including higher growth in demand deposits relative to GICs and benefits from our structural hedging tractor strategy. Furthermore, lower spread mortgages rolling into higher spread mortgages in the second half of 2026 are also expected to be a benefit, contingent on the competitive environment. Solid volume growth across our businesses is also expected to contribute. We expect mortgage growth in the low to mid-single-digit range, reflecting continued stabilization in the Canadian housing market. Commercial loan growth is expected to trend in the mid- to high single digit range, contingent on improving macro conditions and client sentiment. The $117 million in benefit this quarter related to the purchase price accounting accretion of fair value adjustments from the HSBC Canada acquisition will decrease to approximately $80 million next quarter, and largely run off by Q2 2026.

This is expected to impact all bank net interest income growth by approximately 1%. Also, as a reminder, the second quarter has fewer days than the other quarters, which generally results in a decrease in net interest income. Turning to noninterest income. Noninterest income is expected to benefit from a continued shift in client flows towards investments, partly offset by reduced fees in the second half of the year, in line with regulations set out in last year’s federal budget. In Capital Markets, we continue to maintain a high-level engagement with our clients in what we deem a constructive environment as deal pipelines continue to remain robust. We expect all bank expense growth to be in the mid-single-digit range, reflecting higher variable compensation.

For Q1 2026, we expect to incur seasonally higher costs related to pension and eligible to retire benefits. We will continue upholding a disciplined approach to cost management, while investing in our strategic growth initiatives, as well as continued investments in our broader safety and soundness framework. As noted at our Investor Day, we expect the adjusted non-TEB effective tax rate to be in the 21% to 23% range, reflecting changes in earnings mix. As we look to 2026, we’ll continue to prioritize client-driven organic growth, dividend increases and be more active in our use of buybacks, while maintaining strong capital levels. Dave will speak to this further in the strategic update. To conclude, we generated record results this quarter, underpinning an adjusted ROE of 17.2%.

Our results highlight our efficient use of resources, including our robust capital, diversified sources of funding and liquidity and prudent cost management. And with that, I will turn it over to Graeme.

Graeme Hepworth: Thank you, Katherine, and good morning, everyone. I’ll now discuss our allowances in the context of the current macroeconomic environment and ongoing trade uncertainty. Despite persistent economic headwinds, the Canadian economy has demonstrated resilience over the past year with household spending remaining strong. As we head into 2026, we expect to see continued stabilization in the Canadian economy, supported by recent rate cuts, government fiscal support and federal budget actions. However, U.S. and Canada trade issues remain largely unresolved. Consequently, we have maintained a prudent approach with our allowances, retaining elevated weightings to our downside scenarios consistent with the last 2 quarters.

Turning to Slide 17. We took a total of $14 million or 1 basis point of provisions on performing loans this quarter. This mainly reflects changes in credit quality and portfolio growth, partially offset by favorable changes in our macroeconomic forecast. As a result, we observed a small increase in allowances on our performing loans in Personal Banking and Commercial Banking, offset by releases in Wealth Management from the City National portfolio. It’s important to note that economic impacts have not been felt uniformly across our portfolio. Rising unemployment in Ontario and the Greater Toronto area, coupled with higher payments at mortgage renewal have contributed to rising consumer impairments in these regions. Additionally, softness in these regions and uncertainty from U.S. sectoral tariffs have had a greater relative impact on economically sensitive sectors in the commercial banking portfolio.

In response, we have continued to build reserves against our Canadian portfolios. Overall, we continue to maintain strong reserves, and we will continue to prudently manage our allowances given the backdrop of ongoing uncertainty as we move into 2026. Moving to Slide 18. Gross impaired loans of $8.7 billion were down by $69 million or 2 basis points from last quarter, primarily driven by accounts returning to performing status and higher write-offs as total new formations were flat quarter-over-quarter. Our overall gross impaired loans remain elevated, we are seeing a more stable trend in the pace of new wholesale formations and watch list exposures since the beginning of the year. In Capital Markets, new formations increased by $160 million over Q3.

This was offset by an increase in borrowers returning to performing status and higher write-offs. Impairments this quarter were mainly driven by accounts in the consumer discretionary, real estate related and financial services sectors. In Commercial Banking, new formations decreased $215 million quarter-over-quarter. New formations were driven — primarily driven by accounts in the real estate and related, consumer discretionary and transportation sectors. Turning to Slide 19. PCL on impaired loans of 38 basis points was up 2 basis points or $71 million quarter-over-quarter, in line with our expectations, with higher provisions across most segments. For the full year, PCL on impaired loans of 37 basis points was consistent with our full year guidance despite the impairment from one large Capital Markets borrower in the other services sector.

This reflects the diversification and scale benefits of our loan portfolio and overall business model. Losses in the retail portfolios were $74 million higher this quarter, in line with our expectations. Our unsecured portfolios continue to be the main driver of losses for the quarter. Mortgage provisions are increasing as expected due to the regional factors previously highlighted. We expect retail losses to remain elevated in 2026, as we work through the lag effect of higher unemployment, consumer insolvencies and ongoing payment shocks for mortgage renewals in Canada. We continue to monitor the performance of the condo segments. However, the condo portfolio continues to perform better than the overall mortgage portfolio, pointing to our strong underwriting standards and portfolio quality.

In the commercial portfolio, provisions were up $50 million this quarter. We took additional provisions on a previously impaired commercial real estate exposure tied to the insolvency of a large Canadian retailer and a new provision in the consumer discretionary sector. Further, our annual update of our coverage ratio has resulted in a small additional provision for the quarter. The cyclical supply chain and consumer discretionary sectors accounted for a majority of our commercial losses over the last 12 months, given softer economic conditions and the impact from the higher rate environment earlier in the year. In Capital Markets, provisions were down $73 million quarter-over-quarter as provisions were taken on two large accounts in the previous quarter.

To conclude, we remain confident in the overall quality, diversification and resilience of our portfolios. We are pleased with our performance through a year marked with prolonged and heightened uncertainty. This year, we added a total of $622 million in provisions on performing loans, positioning us favorably to navigate the risk landscape, whether it be uncertain outcomes from U.S. trade policy, geopolitical risk or surprises to our economic forecasts. Looking ahead to 2026 with early signs of stabilization in sector-specific export and employment numbers, we expect Canadian GDP to gradually strengthen and unemployment rates to gradually fall from an earlier peak of 7.1%. However, economic growth will remain relatively modest and lagged impacts from fiscal stimulus could leave certain sectors and regions under pressure.

Based on this backdrop, we are forecasting PCL and impaired loans in 2026 to continue in a similar range as what we have experienced in 2025. While the timing and outcome of CUSMA negotiations creates ongoing uncertainty, we feel the potential downside risk has been appropriately captured in our allowances, supporting our financial resilience through the cycle. Credit outcomes will continue to depend on the extent and duration of tariffs, the effectiveness of announced fiscal support and stimulus measures and the performance of labor markets, interest rates and real estate prices. And 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.

And now back to Dave.

David McKay: Thank you, Graeme. Before speaking to the progress made against the strategies we articulated at our Investor Day in March, I will share some highlights of our annual performance, starting with Slide 3 of the strategic update deck. In fiscal 2025, we delivered an ROE of 16.3%, underpinned by over $66 billion in revenue and $20.4 billion in net income with record results in Wealth Management, Personal Banking, Capital Markets and Commercial Banking. Revenues were driven by strong volume growth, constructive markets and margin expansion across key products. Our earnings supported the increased return of capital to shareholders and a $58 billion increase in risk-weighted assets from last year, as we continue to support our clients’ financial needs and growth aspirations.

At the same time, we prudently built our allowance for credit loss ratio to 71 basis points and saw common equity Tier 1 growth of $9.8 billion with our CET1 ratio increasing to a robust 13.5%. Our funding strength is further underpinned by 127% LCR, 100% loan-to-deposit ratio across Canadian Banking growing U.S. deposits across City National and Transaction Banking and relatively narrow wholesale funding spreads. We grew book value per share by 9% this year, in line with our historical 10-year average, while returning over $11 billion of capital to our common shareholders through dividends and share buybacks. Slides 4 through 6 are a good reminder of the foundational strength of our business model, which is underpinned by being the leading financial service provider in Canada across most businesses and client categories.

In addition, we have a strong presence in the United States and Europe and attractive client verticals in some of the world’s largest fee pools. The success of our diversified business model is further strengthened by how our segments are working together as One RBC to deepen client relationships and bring them the full strength of our bank. We’re delivering more comprehensive FX, payments and transaction banking solutions to our wholesale clients across platforms and geographies, while looking to leverage the North South connectivity of RBC Clear and RBC Edge. We’re also providing complex solutions for our high-net-worth and ultra-high-net-worth clients, leveraging the collective expertise of our Capital Markets and Wealth Management businesses, as we look to capitalize on our combined origination and distribution strengths.

In short, our clients are at the center of everything we do. Turning to the ambitions we setout at Investor Day, we are already seeing outcomes unfolding from the significant growth opportunities we articulated in March. Starting with the integration of HSBC Bank Canada on Slide 7, we expect to exceed our initial target of $740 million in annualized cost synergies. With $115 million of cross-sold revenue in 2025, we are well on our way to achieving the $300 million annual revenue synergies target by 2027. Going forward, we expect to drive further synergies with both our commercial and retail client franchises, including cross-selling Personal Banking and Wealth Management products, as well as higher payment volumes and fees from enhanced treasury management solutions, international trading capabilities, along with strength with internationally connected clients.

Moving to our ambition of leveraging our market-leading artificial intelligence capabilities, where we continue to see the benefits of our long-term organic investments in data platforms and foundational models. In the past, you have heard us speak about Aiden, NOME, PVC.AI and our leading ability to build and implement machine and reinforcement learning models. We believe these capabilities have accelerated our ability to build and deploy generative AI models. We are partnering with leading firms like NVIDIA to accelerate our Agentic AI strategy, enhancing our Aiden platforms across Capital Markets. We’re also implementing key initiatives across our businesses, including reimagining mortgages and workflow for our commercial, corporate and investment banking teams.

We’re also leveraging AI to build the technology platform of the future, showing early results in enhanced security to protect the bank, and clients’ technology operations and AI-enabled developer productivity. This includes the development of over 5 million lines of code over 55,000 code reviews and over 3,000 test suites. RBC Assist, our internal AI tool has been launched to over 30,000 employees across front office and functional roles, enabling employees to be more productive in their day-to-day work. We are on track to meet our target of $700 million to $1 billion of enterprise value from artificial intelligence. Importantly, our target is net of investments, including building on investments already made in data storage, GPU clusters, proprietary LLMs, risk governance and in people.

We are also performing well against our enterprise-wide targets as seen on Slide 8. As Katherine noted earlier, we reported strong growth in net interest income this year, as we leverage the strength of our Canadian deposit franchises. In addition, strong fee-based growth in Wealth Management and Capital Markets revenue streams, combined with an uptick in transaction banking revenue increased our revenue productivity with a revenue to RWA ratio up over 40 basis points this year. At the same time, we are driving our efficiency ratio towards our 53% target while continuing to invest for future growth. Moving to Slide 9. Our goal continues to be to drive long-term shareholder value, which is reflected in our 4 medium-term objectives. As I noted earlier, we are increasing our through-the-cycle medium-term ROE objective to 17% plus due to the improved cost efficiencies and increased revenue productivity, including strong client flows and funding synergies from deposit growth.

We are constantly evaluating growth opportunities to drive shareholder value with the goal of optimizing growth, returns and capital efficiency. We believe a 17% plus target allows us to do it all through a market cycle. We are always focused on achieving better outcomes for our shareholders than simply meeting our objectives and targets. Our premium ROE, robust capital generation and current CET1 ratio give us significant strategic optionality. Even after deploying capital to grow our franchises and pay dividends, we expect to build significant excess capital over the coming years. Net income, net of dividends and core of RWA growth is estimated to add approximately 80 basis points to our CET1 ratio annually. We’ll continue to consider all dimensions of capital allocation, focusing on client-driven organic growth within our risk appetite and maintaining higher capital buffers during more volatile times.

You’ve heard me say before that there is no half-life to capital. Returning capital to shareholders is an important part of our plan. This year, we bought back 15 million or 1% of our common shares outstanding. Our total payout ratio was 57% this year. Unless we see changes in the domestic stability buffer, we continue to view that we have surplus capital in excess of 12.5%. At this point, our strategy is to operate within a 12.5% to 13.5% range in the current environment. If there is a sustainable — if there is sustainable excess capital above 13.5% CET1 ratio, Beyond what is needed to support longer-term organic growth opportunities within our risk appetite, we would look to deploy it towards accelerated buybacks above our recent cadence.

We will also continue to strive to consistently grow our dividends, which have increased at a 7% CAGR over the last 10 years. Given the strength of our performance, our fiscal 2025 dividend payout ratio was at the lower end of our 40% to 50% medium-term objective. Going forward, we will look to sustainably operate at the midpoint of this range. Today’s outsized dividend increase reflects this intention. I will provide an update on how we’re progressing on some of the key segment-specific strategies we highlighted at our Investor Day. On Slides 10 and 11, Capital Markets generated record revenue of $14.4 billion and earnings of $5.4 billion this year, as our major businesses, we’re well positioned to take advantage of constructive markets. Importantly, we are on track to meet our Investor Day targets of pretax pre-provision earnings growth and increased revenue profitability from our financial resources.

We are — we successfully grew our client franchises this year, leveraging the full breadth of our capabilities through our holistic global coverage model. Business growth was enabled by continued investments in talent with accelerated hiring of senior coverage and relationship managers in global markets and investment banking across the United States and Europe. Additionally, the cross-platform investments we made in artificial intelligence and technology are amplifying the execution of our strategic priorities. In Global Markets, we delivered broad-based market share gains with notable growth in focus areas, including equity derivatives and financing, commodities and G10 FX, where we’re capturing benefits from enhanced One RBC approach. With the increased scale of this business, we believe we can sustainably deliver strong results over the cycle, and we are focused on increasing market share guided by our prudent risk appetite.

In Global Investment Banking, we are seeing the results of our strategic shift towards winning larger mandates, resulting in increased revenue and productivity of senior bankers. Given the strength of our technology, data center, energy, power, utility and infrastructure teams across both investment banking and corporate banking, we are well positioned to benefit from the structural growth in artificial intelligence infrastructure and energy systems globally. And lastly, we are pleased with the progress of RBC Clear, our U.S. transaction banking platform. We’ve onboarded over 180 clients and USD 23 billion in deposits this year and are well on our way to reaching our USD 50 billion medium-term target. The funding benefits from this strategy will not only reduce our reliance on wholesale funding, it will also enable our growth strategies.

Moving to Wealth Management on Slides 12 and 13. We improved the pretax margin to 24.5%, as we drove — as we drive towards our Investor Day target of 29% by 2027. We are well positioned to benefit from secular trends across our key client segments, with annual net new assets increasing $33 billion or 4.9% in Canadian Wealth Management, excluding direct investing. U.S. Wealth Management net new assets increased by USD 28 billion or 4.3%, excluding CNB. And our total AUA across our Wealth Management advisory businesses has now reached $2.3 trillion. We are looking to further extend our industry-leading position in our Canadian full-service private wealth businesses by enhancing product capabilities that are becoming increasingly important to our client base.

We’ve doubled sales of private alts while having a record year for insurance sales to our Canadian clients. We are also increasing our investments in RBC Direct Investing, the second-largest self-directed platform in Canada, to enhance the client value proposition for the next leg of growth. We introduced commission-free ETF trading to create more value and win with early-stage investors. We launched our role distinction program that provides dedicated support and exclusive benefits to high-net-worth clients as they transition into full-service relationships. This year, we attracted over 90 experienced financial advisers to U.S. Wealth Management, with approximately 80% of these hires delivering over $2 million of historical revenue production.

We will continue hiring over the medium term to meet our Investor Day commitments. An important part of our U.S. strategy is to expand our product shelf with proprietary banking offerings to our U.S. Wealth Management and private banking clients. By the end of fiscal 2026, we will be launching enhanced credit card and mortgage capabilities, as we continue to grow security-based and tailored lending. We continue to believe in the secular opportunity in U.K. Wealth Management, given the country’s structural retirement funding challenges. While foundational technology integration efforts related to the Brewin Dolphin acquisition are taking longer than anticipated, we believe this will be largely complete by the end of 2026. We remain steadfast in achieving our profitability targets over the medium term.

RBC Global Asset Management maintained its leadership position in Canada, as we leveraged our leading affiliated retail distribution network, while enhancing our global distribution capabilities. We are expanding our investment capabilities with production innovation, adding to our growing expertise across traditional active mandates. This is in addition to a growing platform of alternative asset classes. These factors contributed to strong net sales of over $38 billion or 5.6% at RBC GAM and growing AUM to $794 billion. Turning to Slides 14 and 15, and looking at the U.S. as a region, we have made solid progress in enhancing profitability across our U.S. businesses. Net income was up 28% from last year, driven by more active clients, strong markets and improved operational efficiency.

City National’s net income increased to USD 350 million or USD 450 million on an adjusted basis as it continues to execute well at the client level, while growing deposits. The U.S. regions ROE increased by 1.4% to 10.7%, with the efficiency ratio improving by 4% to 79%. This success has been underpinned by several factors, including leveraging enterprise-wide capabilities, centralizing shared services and eliminating duplicative processes, operations and functions. We’ve seen improvement in both capital and funding efficiency through various financial resource optimization programs. Moving to Slides 16 and 17. This was a great year for Personal Banking. In addition to record revenue, we are on track to meet our Investor Day target of a sub-40% efficiency ratio by 2027.

We’re proud that RBC was ranked highest in customer satisfaction among the big five retail banks in the J.D. Power Canada Retail Banking Satisfaction Study for the second consecutive year. We added 400,000 net new clients to our premium client base this year. In addition, 40% of new clients acquired in year are now multiproduct clients. We remain focused on capturing the shifting money in motion, benefiting from the combination of our award-winning client value proposition, interconnected distribution channels and leading deposit and investments franchises. Reciprocity is also a core part of our client value proposition. We added strategic relationships with iconic Canadian partners such as Canadian Tire and the Pattison Food Group. This helped us grow our Avion member base by 700,000 in 2025.

Looking forward, we are excited about our partnership with Visa for the 2026 FIFA World Cup. With respect to channel optimization, our strategy to automate low complexity work, leverage artificial intelligence and increase the number of specialists in our sales force is helping meet our clients’ evolving needs while also driving higher adviser productivity and workload digitization. Turning to Slides 18 and 19. Commercial Banking expanded on our largest business deposit and lending franchise in Canada. We exceeded our growth goals in 2025 with double-digit volume growth on both sides of the balance sheet, driving record revenue. Ultimately, we did not meet our profitability expectations. Our ROE declined from fiscal 2024 largely due to higher PCL amidst an uncertain macro backdrop.

Despite unfavorable business sentiment and heightened competition, average commercial banking deposits and loans were up 10% and 16%, respectively. Our diversification and leading product shelf, including our market-leading transaction banking solutions helped offset the impact from the more challenged sectors while consolidating business with existing clients and attracting new clients. Increased investments in dedicated service and integrated distribution teams, along with realigned coverage positions us well to unlock further growth as business sentiment recovers. We are seeing strong momentum with transaction banking revenue up approximately $80 million from last year, as we saw increased client activity in both flows and account management activities.

In addition, we are increasing our collaboration with Capital Markets and City National to support the North South banking needs of our clients. Our investments are increasing scale, and increasing scale give us confidence in our ability to continue driving down the efficiency ratio towards 32% target while supporting our medium-term growth ambitions. Moving to Slide 20. RBC Insurance is an integral part of the One RBC model, working with both our Canadian Wealth Management and Personal Banking businesses to provide both wealth and insurance solutions while growing our leading creditor insurance business. As Katherine noted earlier, effective Q1 2026, we are revising our methodology for allocating capital to insurance. Going forward, the ROE target for insurance will now be in the mid- to high 20s, underpinned by mid-single-digit earnings growth and execution against key strategies.

We’ll continue enhancing our product suite to gain market share in key areas of focus, including in our group businesses. You’ll hear more about this over the coming quarters. We are leveraging the power of AI to improve our underwriting, claims management and adviser effectiveness. Investment management will also play a part, as we increase our allocation towards higher-yielding alternative assets, including infrastructure. So to close, we are well positioned to succeed across economic cycles given our unwavering commitment to our clients and diversified revenue streams at scale leading franchises and a strong balance sheet underpinned by robust capital ratios, broad sources of funding and a prudent risk appetite. We remain focused on delivering a premium through the cycle ROE and strong EPS growth underpinned by client-driven market share gains, increasing revenue productivity and improving cost efficiencies.

Finally, we are committed to using our strong internal capital generation to return capital to shareholders through increasing dividends and the strategic cadence of buybacks. With that, operator, let’s open the lines for Q&A.

Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala: I guess, Dave, thanks for running through all of that. I guess a question around ROE, and as we think about the 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 overearning 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 asked 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.

David McKay: Well, I think, first, I’d say our ROE has already differentiated itself significantly from our peers, given that many aspire to get to 15% versus us being already at 17% in the last 2 quarters, as you mentioned. So I think it is already differentiated quite significantly. And we’re very clear about the plus, right? So we’re trying to balance a number of things. One, we do want to see accelerated growth, and we want to outperform on growth as well. And therefore, as we look at the opportunities. Now we could easily run this bank at 18-plus percent, but we would trade off a bit of growth for that. So we think targeting 17-plus percent for now, and that’s a target that we review within the year and then annually at a minimum.

So it’s not a static target. It can be a dynamic target for us, and we will continue to review that. We believe that we can achieve accelerated loan growth, return capital to shareholders and drive a premium ROE of 17%. Like we’re — as you said there in the last 2 quarters, other aspires — aspire to it. And that’s, for us, plus doesn’t mean we can’t do both. I would think you can also detect a little bit of conservatism from us in that we still haven’t resolved CUSMA. We still haven’t seen the economy normalize yet. We are running fairly elevated markets right now. And, therefore, I think it’s just a prudent approach given there are some significant uncertainties that could affect the economy going forward that we just want to see play out a little bit longer.

And, therefore, I think, as we sit here, we thought that 70% kind of clears the board for us. As I said in my comments that we can provide accelerated growth, a very strong ROE at 17-plus when we fully develop our AI, and we start to see the benefits that we might see as 30,000 employees are using generative AI right now in their jobs, as we start to see those benefits roll in. And I’m hopeful that we’ll be able to look at that again and increase that in the near term. But for now, I think it is differentiated. It’s a growth story. It’s a capital return story through dividends and buybacks. And it’s a really, really strong performance and consistent performance within our risk appetite.

Ebrahim Poonawala: 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 U.S. trade negotiations to really get business investment going, CapEx going? Or are actions that the government has announced enough to actually start seeing a pickup in activity based on what you’re seeing?

David McKay: No, I still think there’s significant uncertainty exists. So you saw a lot through 2025, and you heard the commentary from both Derek and Sean that investors and businesses have held back on CapEx. You’re starting to see a little bit of growth there because some businesses just need to replace machinery that’s wearing out or at a necessity, they have to move forward. But there still is a hesitancy, as we have not resolved the issues around CUSMA. You’re seeing pretty severe sectoral impacts that are leading to job losses and Ontario is most acutely impacted by that. So you’re seeing challenges there. So I would say we have not resolved CUSMA. And, therefore, a lot of the elements of the budget were more medium-term oriented and not short-term oriented.

So just for that reason, you just heard Graeme’s commentary on largely flattish outlook for credit quality, and we’re just being a little more conservative in our outlook for the next year, not a deterioration, but we’re struggling to see a significant acceleration yet in either mortgages or commercial activity.

Operator: Your next question comes from the line of Gabriel Dechaine with National Bank.

Gabriel Dechaine: 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?

Graeme Hepworth: It’s Graeme. I mean, always, I’m a bit reluctant to project what we’re going to do on performing allowances, but I think you’re focused on the right point that could really kind of be a toggle for us one way or another in 2026. As you recall, we built up fairly significant provisions in Q2 last year kind of following operation date. And while that’s abated, I think we haven’t really released any of those allowances, just reflecting the CUSMA uncertainty. And so as that plays out this year, I mean, you could certainly see, I’d say, three different paths there. If CUSMA concludes satisfactorily or favorably, then that certainly would leave us in a spot that we’ve got some reserves that could be released. I think if it plays out unsatisfactorily, then I would say we have prefunded in part what could be an increase in Stage 3 losses going forward.

And quite frankly, if the uncertainty doesn’t sort itself out in ’26 and drags on, I would say we’d probably continue with those reserves in place. So right now, we don’t know how that’s going to play out, and that’s the uncertainty that Dave is referencing. And I think we’d like to get deeper into that and understand that before we kind of provide direction on which way performing allowances would go.

Gabriel Dechaine: Yes. 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 yes, let’s go with that.

David McKay: Well, I think you heard in my comments, certainly, as we work through the year since Investor Day and building the models and testing the models and deploying a new model, greater confidence in our ability to execute within that range. We are confident, obviously, in making those commitments at Investor Day, but we progressed and had a very strong year. We’ve rolled it out to 30,000 employees, and we haven’t seen the benefit of that yet. So we are quite excited about the impact of generative AI. It was kind of one of the factors that’s featured into our 17-plus percent target for ROE. And I think it would be the #1 driver that would factor into us outperforming against that 17-plus percent target.

Gabriel Dechaine: Got it. So we’re still 2025 investment year, 2026 investment year payoff, you start to accelerate in 2027? Or is that..

David McKay: Yes, that’s exactly it. Exactly. We’re excited about it. We’re doing well with it. As I said, we have all these strategic capabilities that have allowed us to accelerate the deployment.

Operator: Your next question comes from the line of Mario Mendonca with TD Securities.

Mario Mendonca: I observed this morning that the growth in CNB, 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 U.S. and frankly, all the Canadian banks relative to the U.S. banks, and those banks that are located in the U.S., solely in the U.S. And my question is, is there a difference in how capital — or the capital requirements for the U.S. 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 U.S., 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 U.S. relative to the U.S. peers?

Graeme Hepworth: Mario, it’s Graeme. I might start with that and if others want to add in. For CNB, in our capital allocation rule, it is — it starts with the OSFI rules ultimately. And for CNB, we are still on a standardized approach with that bank AIRB is something we’re working towards and would hopefully expect to get there, but it really is OSFI’s rules that we adhere to in our capital allocation methodology there. I mean, the U.S. rules would be kind of a combination of standardized approach as well as their CCAR methodology that falls into that. And what we have to hold capital at our subsidiary level based on those rules, ultimately, from a parent level, we really would focus on the OSFI capital rules, first and foremost.

Mario Mendonca: But has Royal received any like exemptions from OSFI on how those loans are treated in the U.S.?

Graeme Hepworth: No.

David McKay: So I would just add some color, Mario, that I think, I’ve mentioned on previous calls, we’ve been rolling off lower ROE single-product relationship loans on the balance sheet and putting on kind of multiproduct relationship assets. And I think that is probably a bigger driver towards an improved ROE story and accelerated growth. It took us a while. So there’s a lot of roll-on, roll-off. And now we’re starting to see, kind of more roll-on, both on — not only on the lending side, but also on the deposit side. And that’s just good evidence of the strategy execution I talked about. That’s going to have a much bigger ramp-up, I think, on ROEs going forward, and we’re pretty excited about the progress at City National.

Mario Mendonca: 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 revenue. I mean, obviously, an enormous year up 21% year-over-year with trading something like 33, can you put a finer point on your outlook for Capital Markets related revenue, the big three, like trading, underwriting and then securities and brokerage commissions, what you would expect in ’26?

Derek Neldner: Sure. I mean just a couple of high-level questions to frame that before I touch on ’26. I would just emphasize — the strategy we’re taking in Capital Markets is really building sort of long-term franchises, long-term relationships with our clients. And we’ve obviously benefited from the very robust activity we’ve seen this year, but we’re not sort of just pursuing where the trading revenue might be in the next quarter or two, like it is really about building long-term client franchises. A key part of that is the diversification of the business, which has, I think, really been a key to our ability to successfully deliver lower volatility results than our global peers. And so when you look at the diversification across all our businesses, obviously, corporate banking, investment banking, the various sectors and products within that.

And then within Global Markets, a very balanced asset class portfolio across both FICC and equities, that diversification, while you may get volatility in certain areas has really allowed us to deliver greater stability over a cycle. So if you take those two foundational elements to the strategy, and you then look at 2026, we’re very constructive on the outlook overall. As Dave highlighted, there are some uncertainties and risks, and we can see cyclicality in the fee pools. But right now, we continue to see very high levels of activity across all three of our major businesses. So across trading, we’re seeing a healthy level of volatility. Obviously, there’s uncertainty around the economy, the direction of rates, inflation, tariffs, et cetera, that is driving a fair bit of trading activity, and we expect that will continue.

Within investment banking, there is a lot of secular trends. Dave alluded to a few of those that are driving strategic activity among our clients. That strategic activity combined with a strong market backdrop is driving good underwriting activity, both across debt and equity. Our pipelines remain very strong there. So we expect that, that will continue. And then we are seeing a lot of clients, particularly outside of Canada, making strategic investments in their business, which is driving very good opportunities in our loan book. So right across all three businesses, we continue to have a very constructive outlook. Even if we were to see a slowdown or a correction in fee pools, as you saw through our Investor Day strategy, we do believe — we’ve got a number of key initiatives and investments underway that will allow us to continue to gain share that will offset any slowdown in fee activity, but at this point, our outlook is positive, we don’t anticipate a slowdown.

Operator: Your next question comes from the line of Sohrab Movahedi with BMO.

Sohrab Movahedi: 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?

David McKay: I don’t think that math is sufficient to get us there alone, right? It’s also an improvement on return on assets. I don’t know, Katherine, do you want to jump in?

Katherine Gibson: Yes. Why don’t I jump in? So that change in the MTO is not dependent at all on us changing our CET1 outlook. At Investor Day, we gave you a path to 16% plus without having to pull down our CET1. And then we also showed you a path to 17% plus. And so what you’re seeing today with us announcing that change in MTO is basically just confidence, ongoing confidence in our progress going forward, and that underpins it. As you would have seen in our remarks, we have guided to operating in a range going forward of 12.5% to 13.5% and that provides prudence, gives us opportunity on a variety of fronts and with the unknown environment ahead of us, it also gives us a bit of a buffer there. But as we go forward, if we see the right opportunities, the right actions to move lower in that range, that will result in a higher ROE, but we’re not driving down to equate to a higher ROE.

David McKay: I mean, at the end of the day — just at the end of the day, we’re trying to drive shareholder value here, right, and total shareholder return. And therefore, it’s not just optimizing the ROE, but it’s driving growth and EPS growth at the same time. And we’ve obviously simulated all of the outcomes running the organization at 18-plus percent, which we can do, and we find a 17-plus percent at this point in time, allows us to drive more shareholder value through all the elements of having dividend growth and returning capital to shareholders and being the most efficient capital user. So I think when you get all of that together, it creates more shareholder value at this point in time with the variables that we’re working with. If things change, we can certainly revisit it.

Sohrab Movahedi: 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 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?

David McKay: We’re absolutely not changing our risk appetite target. It’s return on risk. That focus us and then causes us to make marginal decisions on whether we do a deal or don’t do a deal. So no, we’re not changing our risk appetite because what’s an important part of our medium-term objective is that the volatility of our earnings, right? So it’s a big part of how we overall think about the organization and our investor base. So consistent risk appetite and risk strategy is critical through the cycle. It doesn’t change, but as you look at the trade-offs between doing above cost of equity deals, but below hurdle and what balance of that to — you’re above, you look at how you’re growing and where the opportunities are, and you’re trying to balance towards one of those targets and optimize all of your variables that I talked about. So it’s more of the return on risk, the balance of that than it is anything around the quantum of risk.

Sohrab Movahedi: And is that toggle mostly in Derek’s business then?

David McKay: Yes, absolutely, that’s one of the Derek’s, but also within Commercial Banking within the United States, so it’s in every business where we take risk, we’re looking at the return on that risk. And how it’s being priced and how we balance that to an overall 17% plus target with the premium growth objectives that we set.

Operator: Your next question comes from the line of Paul Holden with CIBC.

Paul Holden: 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?

Katherine Gibson: Paul, it’s Katherine. So to your question, why not changing the earnings per share target, it kind of goes back to when you looked at the variables and how they come together. We felt confident about moving at this time the ROE to 17%. We felt though the EPS keeping it at 7% plus is the right complement as we think about maximizing that shareholder value return. And I would also emphasize that they’re not capped. There’s pluses on both of those, and so we will continue to drive forward and drive those results that hit those medium-term objectives and deliver against those.

Paul Holden: 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.

Graeme Hepworth: Yes, Paul, it’s a good question. I mean I think right now, as we look at it, I think I would focus, first and foremost, on the guidance we laid out for the year. We’re kind of at these levels now, we would expect these kind of — this kind of 35 to 39 basis point range to persist through next year. Well, yes, the macro, we do expect that it will trend positively through the year. I would say a lot of that though then won’t really manifest itself — in kind of credit outcomes until probably 2027. I would say it’s hard to really predict a trend broadly, wholesale will be more volatile quarter-to-quarter I would say retail, there’s probably some — a bit more mix in the trends, I would say, as we progress through the year.

The unsecured products could improve. They will react quicker to some of the macroeconomic indicators, but on something like mortgages where 2026 is the kind of big year of refinancing and the payment impacts, that will probably see a bit more pressure the other way, not maybe significantly from where we are, but we will see some upward pressure through the year, right? So there’s different portfolios that are going to react differently through the year. And that’s kind of why we’re looking at it. It’s probably a bit of a plateau through the year before we start to see improvements going into 2027.

Operator: Your next question comes from the line of Jill Shea with UBS Financial.

Jill Glaser Shea: 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 I 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.

Katherine Gibson: Jill, it’s Katherine. Thank you for the question. It’s a great question. So as we think about the efficiency, we’re obviously always striving to improve. And as you’ve noted, we’ve had significant improvement over — when you compare where we are now to the last couple of years, a couple like significant improvement. And even throughout this year, we continue to improve. To your question about do we see a cap? No, I would say that we continue to see opportunity as we go forward. Our first target, though, is what we’ve put out there for Investor Day is to hit the 53% for 2027. But as we think about our business, as we think about the opportunities going forward, there are the mechanisms. We’ve talked about artificial intelligence.

We’ve got use cases underway. We’ve put a benefit target out there against that. And so that’s all going to play into it as we continue to progress, but back to kind of that 53% is our target as we sit now, but we’re always looking for opportunity to go further.

Operator: Your next question comes from the line of Mike Rizvanovic with Scotiabank.

Mehmed Rizvanovic: 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. 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?

Erica Nielsen: Thanks, Mike, for the question. It’s actually Erica. So when we look at our deposit business in the Canadian bank, A couple of things are happening. We are seeing rotations out of some of those interest-bearings on the GIC portfolio. We are aligned as this movement occurs to the needs of the client. So as we build that portfolio, if you go — sort of end of the pandemic through the last number of years and the attractiveness of the interest rates in the GIC portfolio at that time. We saw a lot of consumer deposits flowing into that category. Now as we see the markets pick up, we see more of a long-term home for some of those deposits into the markets business. So you see a lot of demand, Katherine alluded to in her speech, the pickup that we’ve had in mutual fund sales in direct investing into our DS businesses as clients sort of seek access to market space.

At the same time, we’ve built strength in our demand deposits in our account, checking and savings accounts built on the back of the strong client acquisition that we have on the back of the depth of relationship that we have. So I continue to see strength in those deposits, while I think we will see some — we’ll see continued movement from our GIC portfolio into the markets businesses.

Katherine Gibson: Mike, I was just going to build on it because you had a comment there also around NIM. And I’m going to say too to what Erica has just outlined, as we continue to see the shift, our expectations as we go into 2026 is that we will have that as a positive momentum into NIM as we go forward. Just given the differences in the margin between term deposits and on term.

Mehmed Rizvanovic: 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 U.S. 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?

David McKay: No, I don’t think CUSMA would impact given the strategy to grow Wealth Management and secondarily commercial activity in the U.S. in a very strong economy, I don’t think CUSMA would be the main driver. I honestly think that for the partners who we would execute that strategy with targets they may come to market at any time. And therefore, you have to be ready and understand your playbook and understand your synergy levels and where you can play from a price point, given there’s so much capital attracting quality so much capital and free capital available in the U.S. to go after some of these high-performing businesses, you expect a lot of competition. Therefore, I think it’s honestly — it’s more the timing than it is — you might have to react to someone who goes into play or you get a bilateral opportunity to do something in a relationship you’ve cultivated over years.

That’s probably the bigger consideration. And that’s why having the strategic optionality of all the capital and our organic capital, and I talked a lot about organic deployment of capital, but we didn’t — I didn’t actually talk about inorganic deployment. So you didn’t miss it. That obviously remains an option, but buying back shares right now and returning capital to shareholders and accelerating organic growth remains a priority. So I hope that helps. It’s really, I think, timing.

Operator: Your next question comes from the line of Doug Young with Desjardins.

Doug Young: 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?

David McKay: I came — I mentioned this last quarter. I think when you have the management team focused on operating the business the way we are today, and you’re seeing the results of that and all our businesses are performing well. All our businesses are outperforming from capital markets, investment banking and global markets right through to consumer banking, commercial banking, wealth management. I think you’re seeing the results of a very focused management team focused on organic execution with the client at the center. And we’ve got so much we’ve shown you that we’re investing in new products and the success of RBC Clear being one of them. So we’re bringing new services and capabilities to market even without the artificial intelligence input.

So I’m very excited about the focus of the business, the performance of all our businesses outperforming. You saw that in the results in the last 2 quarters. And we’re very excited about ’26 in the future. So I would say that’s kind of one. Two, I’m really excited about artificial intelligence. So as you look at the impact and the journey that we’re on and how it’s going to make us more productive, more effective, it’s going to allow us to serve more clients with the same or lower cost base to create new products I think I’m very excited about the artificial intelligence journey. I’m also excited about the improvement in our U.S. operations and in our European operations. So notwithstanding that we’re doing well and we’re leading in most of the things we do, we still have areas where we’re not doing well.

And we can continue to improve those that make a meaningful difference to the shareholder and the investment in particularly City National, our aspirations around RBC Clear and mid-corporate cash management and transaction banking and just as we deploy a full transaction banking solution into our treasury management solutions in the United States next year then connect kind of north, south from there and then globally, very excited about building out a global business that can compete. I’m excited about deploying capital into new markets like potentially in the Middle East. As we go through a plan there and the accelerated growth in the Middle East and our ability to open up in new markets and use our strengths and wealth management and in capital markets to compete in new areas.

The improvement in Asia has been incredibly significant for us, and we’re excited there. So as I go through focus on the business, organic growth, AI deployment is transformational and improving underperforming businesses, all of it gives us very significant momentum forward. And one of the reasons we increased our MTOs and we certainly — I certainly appreciate the ambition you have for us and pushing that ambition, I think that’s great. We also have that ambition for ourselves.

Doug Young: 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?

Derek Neldner: Yes. Thanks, Doug, for the question. Obviously, the $1.1 billion guidance on PPPT that we provided was a number of years ago. And I think as you’ve seen, we’ve continued to invest in and grow the franchise. We really sought to refresh that in our Investor Day target where we signaled it from 2024, which is a reminder. In 2024, we delivered full year PPPT of $5 billion. So call that $1.25 billion a quarter. From there, we signaled medium-term target of high single-digit annual growth in that PPPT number starting from that 2024 base. Obviously, given the activity in the market this year and the success executing on our strategy, we significantly exceeded that. We’re not changing that at this point, but we continue to be very comfortable on how we can continue to deliver against that high single-digit target. And if fee pools remain constructive, we certainly believe we can outperform that.

Operator: Your next question comes from the line of Matthew Lee with Canaccord Genuity.

Matthew Lee: Maybe just one for Erica on the mortgage front. Most borrowers seem to be entering renewals in pretty healthy equity positions. Rates are stabilizing a bit. So is that changing how clients are shopping for products more towards fixed rate stability or variable rate optionality? And then how does that inform your product mix outlook for NIM and strategy for mortgage retention over the next couple of years?

Erica Nielsen: Yes. Thanks for the question. Certainly, as the business goes onto the books, we see different dynamics in the fixed and variable rate businesses. So if you look at — if you look at the acquisition pool, we see more variable rate acquisition than fixed rate acquisition at this moment in time. But if you wind the clock back a few months that was — that actually had shifted and was the inverse of that. I think it has more to do on clients’ expectations of where rates are going to be and where Bank of Canada is relative to the value of the variable rate mortgage at this time. And so I think Canadians now, if you are looking, you’re thinking the Bank of Canada has been suggesting that it’s in a hold guidance at this point in time.

And so variable rates in that time can become more attractive to a client than they were when we were in the up cycle of interest rates. And so as we look towards this next year, I don’t think that it’s necessarily — we don’t really think about it as factoring into how we impacting the revenue generation of that business or the potential because the oscillation gets guided by the client and their expectations for what either fixed or variable rates are going to do over the year. So I think we remain confident that the products are priced properly to hit the demand of the client over the next year and so that’s the expectation as we think about the guidance for mortgages in the next year.

Operator: Your next question comes from the line of Mario Mendonca with TD Securities.

Mario Mendonca: In 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?

Erica Nielsen: Yes. Certainly — it’s Erica. Just following up on a question on the bank fees. So certainly, as we go through the back half of this year, we do have the NSF fee reduction that occurs at late in the second quarter of the year that will come to full run rate as we go through the back half of the year and then into 2027. As we commented before, that’s largely immaterial. As you think about the guidance, the ability for us to earn through that is there. I will say that bank fees were also a key item related to the most recent budget that came out from the government, and we are working with the government to better understand their expectation on some of the fees that they specifically called out in that budget, but we don’t have yet enough guidance on those — their expectation for changes in those fees to be able to give you any sense of when we would expect that to go into play and whether that you should consider that material.

Most of the fee reductions that we’ve had in the portfolio over the last number of years as a bank we’ve been able to earn through and so we would look to do the same as we consider some of those new potential fee changes.

Mario Mendonca: 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?

Erica Nielsen: That’s correct.

Mario Mendonca: 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?

Katherine Gibson: Hi, Mario, it’s a great question. A couple of things that have really underpinned that high operating leverage. As you’ve called out, it has been quite a year where every business has performed very well. We’ve seen the market appreciation we’ve seen constructive markets for capital markets. And so part of it is that mix that’s coming through. Another part of it is the HSBC synergies that’s coming through, and we’re seeing that predominantly in Commercial and Personal Banking, but also in capital markets, as well as in wealth management as well. And then the other — I guess, maybe another element to the mix, just to call out, is what we’ve seen on the NIM front. So from a deposit perspective, we’ve been seeing throughout that year, shift of GICs into non-term. So that’s also been definitely positive to our top line and then positive to operating leverage as well.

Mario Mendonca: But is the paradigm still 1% to 2% is normal for a bank. Is that still an appropriate benchmark I should use going forward?

Katherine Gibson: I was just going to say that, that is our guidance for next year. It’s a positive uplift for the organization going forward. And then for — in particular, commercial and personal banking, guiding to still remain in that 1% to 2% going forward.

Operator: Your next question comes from the line of Sohrab Movahedi with BMO.

Sohrab Movahedi: 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?

Katherine Gibson: I would guide you for RWA to be in line with the guidance that I had noted on loans. And so just quickly going back over that, like mortgages was low to mid. On the commercial side, it was mix high volume growth. And then capital markets or wholesale say moderate growth going forward. So you can look to that guidance to underpin what you can expense — expect us for RWA growth going forward.

Sohrab Movahedi: So no reason why RWA growth may be higher than loan growth?

Katherine Gibson: No.

David McKay: Okay. I think that’s the end of our questions in the queue. This is Dave, so I’ll just quickly close here and really appreciate all the time you spent with us and the questions this morning. I take the lack of questions on the quarter to mean that as we feel it was an outstanding quarter, and we performed well across our businesses. We provided a lot of guidance going forward more than we normally provide. I think we appreciate all the questions around trying to see where the ambition for that guidance was you have a team that has outperformed and wants to continue to outperform. And I think you can face that in the philosophy that we set targets that we want to beat and want to outperform on. And we have confidence in the future that this is a growth story.

This is a capital efficiency story. This is an outstanding franchise with great client segments that will continue to perform. So I really appreciate your time, your extended time this morning. Thank you for your questions. Have a great holiday season, and we’ll see you in the New Year. Thank you.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.