Royal Bank of Canada

IThe business

A bank takes deposits, lends them out, and keeps the difference. Royal Bank of Canada, called RBC here, does that for more than 19 million clients, and then does four other things with the same balance sheet: it manages money for the wealthy, trades and advises for large companies, insures, and lends in the United States through City National. At 31 July 2026 it had C$2.50T of assets, C$1.64T of deposits, C$1.11T of loans and 101,269 full-time staff.⁴ Shareholders own C$145.1B of equity, of which C$133.9B belongs to common holders and C$107.1B is tangible, meaning what is left after C$19.5B of goodwill and C$7.3B of other intangibles C (calculated).⁴

The bank reports five operating businesses and a corner called Corporate Support. Here is what each earned in the first nine months of fiscal 2026, which ended 31 July, and what it earned on the equity the bank assigns to it.⁴

Three facts in that table matter more than the rest. First, no one business is more than a third of profit, but the two most market-sensitive, Wealth Management and Capital Markets, are 49% of it C (calculated). Second, the Canadian consumer bank earns 25.4% on its equity, and that one return, on a mortgage-heavy book, is what the rest of the bank sits on.⁴ Third, Capital Markets uses a very large part of the capital, with C$288.7B of risk-weighted assets, 37% of the bank’s C$778.0B, and earns 14.6% on it C (calculated).⁴ That is a decent return and the lowest of the five.

What it sells

Net interest income, the difference between what the bank earns on loans and securities and what it pays for deposits and debt, was C$25.8B in the nine months, 48% of revenue C (calculated). Everything else was fees and trading, C$28.1B.⁴ The mix is the reason I cannot treat RBC as a plain lender. In the nine months, fees for investment management and custody were C$9.0B, up 14%, mutual fund revenue C$4.3B, up 17%, underwriting and advisory fees C$2.6B, up 24%, and total trading revenue C$4.3B.⁴ Those lines rise when stock and bond prices rise and when companies issue and merge, and they fall when markets fall. I take that up in the valuation, because my starting point keeps them at today’s level.

Revenue after insurance claims grew 7.3% a year from FY2016 to FY2025, from C$35.4B to C$66.6B C (calculated), but a large part of the latest jump is a purchase, not organic growth.¹²³ In March 2024 RBC bought HSBC Bank Canada for a total of C$15.5B in cash, of which C$13.5B was for the common shares.³ I take that up below. Revenue grew a further 9% in the first nine months of fiscal 2026 and net income 16%, to C$17.3B.⁴

The five parts of the story

Canadian banking concentration. Of C$1,116B of loans and acceptances at 31 July 2026, C$812B, or 73%, were to borrowers in Canada, C$224B (20%) in the United States and C$80B (7%) elsewhere C (calculated).⁴ In Canada, residential mortgages alone were C$473B, 42% of all loans C (calculated). RBC says it is first in market share among the Big Five banks in personal, commercial, wealth and capital markets business.³ That position is the strength and the exposure in one: the bank wins in a market dominated by the Big Five, and the whole bank is therefore tied to Canadian housing, household debt and the Canadian economy. Canadian Banking’s own return on equity was 23.2% in the third quarter, on an efficiency ratio of 36.7%.⁴

Mortgages and housing. Of the C$514B of residential mortgages worldwide, 82% are uninsured, which means the bank, not a government insurer, carries the loss if a borrower defaults.⁵ In Canada the share is 81%; in Ontario and British Columbia, which together hold C$332B of the Canadian book, it is 87%.⁵ The cushion is the loan-to-value ratio: the Canadian portfolio stands at 62% of current home value on average, and new uninsured loans were written at 70%.⁵ Thirty per cent of mortgages, 27% in Canada, still have more than 25 years left to run on the customer’s current payment, meaning the loan would take more than 25 years to repay at today’s payment.⁵ Mortgages in default are rising from a small base: gross impaired mortgages were C$2,188M in July, 0.43% of the book, up from C$1,554M a year before C (calculated).⁴ Write-offs are tiny so far: net write-offs on Canadian residential mortgages were C$12M in all of FY2025.⁴ I come back to the renewals in Risks.

Wealth management. This is the business that moved the profit most this year. Wealth net income was C$3.9B in nine months, up 30%, as assets under administration reached C$6.19T and assets under management C$1.71T, up 19% and 16% in a year.⁴ Management said the gain came from market appreciation and net sales.⁷ Management named both market appreciation and net sales; I cannot split them from outside, and I treat the markets part as something that can reverse.

Capital markets. Revenue was C$12.2B in nine months, up 13%, with Corporate and Investment Banking at C$5.6B and Global Markets at C$6.4B.⁴ The segment earned 14.6% on its equity, lent C$198B on average in the third quarter, up 21% in a year, and booked C$261M of provisions on impaired loans in the quarter, more than double the C$112M of the quarter before.⁴ Management said the rise came from a previously impaired account in other services and from impaired loans in consumer staples and industrial products.⁷

City National and the United States. RBC’s US operations, which include City National Bank, earned US$2.27B in the nine months, up 24%, but only 11.3% on their equity, with an efficiency ratio of 74.7%, against 52.8% for the whole bank.⁴ They hold C$223.7B of loans, 20% of the bank’s total, and C$2,138M of impaired loans, 21% of the bank’s total C (calculated).⁴ The US gives RBC growth and diversification, and it earns a return about 6 points below the bank’s average. Its own annual report calls City National a critical part of its US ambitions.³

HSBC Canada. The deal closed on 28 March 2024. The all-cash price for the common shares was C$13.5B, and the bank paid C$2.1B more for preferred shares and subordinated debt, for C$15.5B in all after other adjustments; it recorded C$6.5B of goodwill, which it said reflected expected expense synergies and growth.³ The integration costs were C$960M before tax in FY2024, and the bank stopped treating them as a special item in the third quarter of 2025 because the work was largely done.⁴ One effect is still in the numbers: in the third quarter Personal Banking net interest income was held back by lower accretion of the fair-value adjustments on the acquired loans, a boost that fades, and the segment’s net income fell 1% from a year before.⁷ Another is a charge of C$103M a quarter, before tax, for amortizing the intangibles bought in the deal and others.⁴ The bank’s 2026 proxy circular says it has exceeded its initial target of C$740M a year in cost synergies and is on its way to C$300M a year in revenue synergies by 2027.¹¹ Those are management’s figures, and I found no published figure for what the deal has earned, so I cannot say whether C$15.5B was well spent. What I can say is that the bank’s return on equity rose from 14.4% in FY2024 to 16.3% in FY2025 and 17.5% in nine months of FY2026 while absorbing it.³⁴

The credit line

The cost of being wrong is in that chart. In the pandemic year, FY2020, the provision was C$4.4B. In FY2021 the bank released C$0.8B of reserves back into profit. In FY2025 it provisioned C$4.4B, which was 0.42% of year-end loans, the highest ratio since FY2020, and in nine months of FY2026 C$3.0B, or 0.38% of average loans C (calculated).¹⁴³⁴ Over ten years the provision averaged C$2.0B a year, 0.27% of year-end loans C (calculated), and I use more than that going forward, because FY2021 was a release and FY2020 a spike.^121314153 At 31 July 2026 the allowance for credit losses on loans was C$7.8B, 0.70% of loans and 77% of the C$10.1B of gross impaired loans C (calculated).⁴

The balance sheet

This is where a bank differs from every other company on this site. Loans were 67% of deposits, and the bank holds C$646B of securities, 26% of assets, and C$314B of securities bought under agreements to resell C (calculated).⁴ Its liquidity coverage ratio was 125%, a surplus of about C$98B over the minimum.⁷ The leverage is the point: C$145B of equity supports C$2.50T of assets, 17 times C (calculated). That is what makes a bank’s earnings so sensitive to a small change in credit losses, and why a free-cash-flow model does not work here: loans, deposits and trading assets move the cash flow statement far more than anything an owner can take home. Section VI explains the method I use instead.

IIThe moat

A durable advantage is a cost or a habit that a rival with money and talent cannot copy in a reasonable time. A bank’s edge is often narrower than it looks, because loans and trades are commodities and the customer can usually go elsewhere. RBC’s is easier to test than most, because the Canadian market has five large players reporting on the same dates in the same format, so each claim can be put beside the others.

The test of an advantage is whether it has widened. Here is the evidence both ways.

Evidence it is widening

• Return on equity went from 16.3% in FY2016 to 16.3% in FY2025 and 17.5% in nine months of FY2026, and the bank raised its own target from 16% or more to 17% or more for fiscal 2026.¹²³⁴
• The efficiency ratio, expenses over revenue, was 52.8% in the third quarter, from 58.8% in the third quarter of 2024.⁴
• Revenue, net of claims, grew from C$35.4B to C$66.6B in nine years and earnings per share compounded at 8.4% a year, above the bank’s own 7% objective.¹²³
• Customers: the bank counts 19+ million clients, and its active mobile users rose from 7.6 million to 8.7 million in two years.³⁴

Evidence it is narrowing

• Net interest margin was 1.49% in the third quarter, down from 1.61% a year before. Most of the fall is mix, since the bank holds more low-margin trading assets: excluding trading and insurance assets the margin was 2.07% against 2.09%.⁴ Lower accretion on the HSBC loans also held back Personal Banking.⁷
• Expenses are growing slower than revenue, which is good, but the bank says higher staff costs, technology and variable pay all push them up, and staff rose from 96,628 to 101,269 in nine months.⁷⁴
• The shareholder return lagged peers. To October 2025 RBC’s three- and five-year total shareholder returns were 22% a year, against 26% and 25% for the peer average, which put it in the bottom half of its peer group both times.³ That is the record before this year’s jump. I note it because the market has since paid more for the franchise, not because the franchise got better by that much.
• The Canadian market is not growing as fast as it was. The bank expects Canada to grow more slowly in calendar 2026 than in 2025, partly because the population is declining.⁵

On balance I think the advantage is wide and stable in funding and distribution, and flat in return, since the biggest drivers of this year’s jump, market levels and deal activity, are cyclical. The advantage is real. The question for the valuation is how much of the 22% return it will keep.

IIIThe competitive advantage

The moat is about why a rival cannot copy the bank. The advantage is what the bank earns because of it. For a bank, the figure that matters most is the profit made on the equity it holds, and the cleanest test is to put it beside the four other Canadian banks, which file on the same dates, in the same currency, under the same regulator.

RBC earns more than every one of its peers, by 2.1 points over the next best on reported figures and by 1.3 points over the next best on adjusted figures C (calculated), and the market pays it more: 3.03 times book against 1.9 to 2.55 for the three that report a multiple.⁴⁶⁹⁸ That premium has been earned. It is also the reason that the stock has less room for error than the others. On this site, the nearest comparison is JPMorgan Chase, which earns a similar 20% on tangible equity and which I priced at 2.99 times tangible book on its page, with a price 15% above my base value; RBC at 3.7 times tangible book is more expensive on the same measure, for a bank whose home market is much smaller.

On my calculation of the return on tangible equity, RBC earned between 16.8% and 22.3% in each of the ten years to FY2025, and 20.1% on average C (calculated). The bank’s own measure, which takes out goodwill and intangibles net of tax, was 20.4% for FY2025 and 21.7% in the third quarter.⁴ I use my gross measure for the history so every year is on one footing; the two differ by less than a point. The average is what I would call a good, long record. The recent figure is the top of it.

The advantage is genuine and shows in the cost line as well as the return. The efficiency ratio of 52.8% in the third quarter, with Canadian Banking at 36.7%, reflects scale that a smaller bank does not have.⁴ Whether it deserves 3.7 times tangible book is a different question, and the valuation is where I deal with it.

IVManagement

Dave McKay is the President and Chief Executive Officer who signs the annual report’s management letter in every report I opened, from the 2017 report to the one for fiscal 2025.¹²¹³³ The rest of the Group Executive, the senior team that reports to him, changed more. Rod Bolger was chief financial officer in 2017 and 2019, and Katherine Gibson signs the 2025 statements.¹²¹³³ In the 2025 report the board chair said the year’s strong results followed a number of changes at the Group Executive level, and that the board oversaw succession planning.³

Pay, and what it pays them to do

The 2026 proxy circular sets out the chief executive’s pay. The board awarded Dave McKay C$22.09M of total direct compensation for FY2025, 30% above his C$17.0M target and 8% more than in 2024, leaving out a one-time special equity award in the earlier year.¹¹ That was C$2.0M of salary, a C$7.44M short-term incentive and C$12.65M of mid- and long-term awards, 80% of them performance deferred share units and 20% options.¹¹ So 91% of the package is variable and 57% is equity that pays out over three to four years C (calculated).

Follow the incentive through. The short-term incentive is set against net income: the plan target was C$18.6B and the result C$20.4B, which put the payout 86% above his C$4.0M target; it is capped at two times target.¹¹ The share units pay on the share price, plus, for grants made since December 2025, a modifier of up to 25% either way for total shareholder return against a peer group that now includes JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley, Goldman Sachs, Barclays and UBS; they are capped at 1.25 times target. The size of each grant is set against the bank’s medium-term objectives for earnings growth, return on equity and capital.¹¹ Two things follow. A bonus paid on net income rewards earning more, and an acquisition such as HSBC Canada adds earnings whether or not it earns a good return on the money spent, so I weigh the HSBC results above with that in mind. And the share units tie him to the price, which is now high, so he is paid for the stock holding its level as well as for the business.

Across the whole Group Executive and the directors, key management compensation was C$109M for FY2025, up from C$101M, of which C$70M was share-based, 64% C (calculated).³ Say on pay won 93.8% of votes in 2025.¹¹ I would note one change with a plain reading. The bank was in the bottom half of its peer group on shareholder return over three and five years, and has dropped top-half return as a medium-term objective for FY2026, saying the financial objectives are a better measure of execution; relative return stays in the pay programs.³ That is a defensible argument and also a convenient one, made after a stretch in which the shares lagged. Since then the shares have risen from C$205.47 on 31 October 2025 to C$293.41 on 31 July 2026, up 43%.³⁴

Their own money

The requirement for the chief executive is eight times average salary, kept for 24 months after retirement. At 31 October 2025, at C$205.47, Mr. McKay’s holdings counted toward it were C$61.75M, or 34.2 times his average salary: C$10.8M in shares, C$4.7M in deferred share units and C$46.3M in share units not yet vested.¹¹ On 6 February 2026 the circular lists 53,012 shares and 280,316 shares and units in all, worth C$65.2M at the C$232.72 close that day.¹¹ At today’s price the units are worth about C$80M and the shares alone C$15.2M C (calculated).¹ Most of the stake is therefore unvested pay that follows the share price, not savings from after-tax pay; the shares he owns outright are about five times his salary C (calculated). It is a stake that moves with the stock, and it is large against what he earns.

Mr. McKay was appointed chief executive in 2014 after leading personal and commercial banking, and he joined the bank in 1988.¹¹ He has signed the annual report as chief executive in every report I opened, from 2017 to 2025.¹²¹³³ I have not checked insider-trading filings for his sales, so I say nothing about whether he has sold.

What they did with capital over a full cycle

Over the ten fiscal years the bank earned C$142B, paid C$64B in common dividends and bought back C$15B of shares, 56% of earnings C (calculated).^121314153 Dividends per share rose from C$3.24 to C$6.04, 7% a year, and the third-quarter dividend was C$1.76, up 14% from a year before.³⁴ The bank spent C$15.5B, the equivalent of 11% of the ten-year profit, on HSBC Canada in a single year, and it bought no shares in FY2023, the year before the deal closed, and only C$0.1B in FY2024.³¹⁵ It also bought a UK wealth manager, Brewin Dolphin, in the period; I give no price for it.¹⁵ In the first nine months of FY2026, with the integration done, it bought back C$4.2B of shares and paid C$7.0B of dividends, together 67% of the C$16.9B earned for common holders C (calculated).⁵⁴ A new buyback for up to 45 million shares, 3.3% of the shares, runs to 11 June 2027.⁵

The record is of a conservative allocator: it paid out a little over half of ten-year earnings, kept the rest to build capital, and made one very large purchase, paid for in cash.³ I cannot grade the HSBC deal yet. What the return on equity has done since, 14.4% to 17.5%, argues that it has not diluted the bank.³⁴

VFinancials

This section is the ten years in numbers, and then the three things that matter most for the valuation: what a normal year looks like, what the owner can really take out, and how much capital is spare. The fiscal year ends on 31 October. Figures for FY2026 are the nine months to 31 July from the third-quarter supplement plus my estimate of the fourth quarter, which the bank will report on 3 December.⁴³

Three things in that table. First, earnings per share rose 8.4% a year while the share count fell only 6% over nine years, so almost all of the growth came from profit, not from buybacks. Second, tangible book per share rose from C$32.65 to C$71.86 in nine years and to C$77.35 at 31 July 2026, which is 9.2% a year C (calculated). Third, the efficiency ratio improved from 58% to 55% while staff rose by a quarter, which is what operating leverage looks like.

A normal year

The starting point matters more than any single input. The first nine months of FY2026 contain no special items, since the bank stopped treating HSBC costs as one in 2025, and the only adjusting item is the amortization of acquisition intangibles, C$306M before tax.⁴ So I do not remove one-off gains. The noise is of another kind: it is the level of markets. Wealth fees and trading are at a high, and I leave them there.

Two things in that table are judgement calls. I leave in a very strong year for the wealth and trading businesses: the third quarter alone had revenue of C$18.5B, up 9%, and Wealth Management earned C$1.44B, up 32%.⁷ And I leave in credit costs that are low: the provision was 0.38% of average loans in nine months, against 0.43% for FY2025 and a ten-year average close to 0.27% of year-end loans.⁴³ A return of 22% on that base is what the bank earns in a good year, not the average one.

Capital, and the capital the owner can reach

The CET1 ratio was 13.5% at 31 July 2026 against a requirement of 11.1% as of the same date.⁴⁵ The gap of 2.4 points is about C$19B of capital over the requirement C (calculated). The requirement has four parts: a 4.5% minimum, a 2.6% capital buffer, a 1.0% surcharge for being a domestic and global systemically important bank, and the domestic stability buffer, set by the regulator and cut from 3.5% to 3.0% of risk-weighted assets on 19 June 2026.⁵ I take the 0.5 point cut as a loosening that the regulator can reverse. At C$778B of risk-weighted assets, half a point is C$3.9B C (calculated).

Not all of the surplus is spare. A bank wants a cushion above the minimum for a bad year, and RBC’s own medium-term objective is a strong capital ratio, not the lowest permitted. Over five years it has averaged 13.5% and over three years 13.8%.³ If it ran at 12.5% instead, which is 1.4 points over the requirement, the surplus above that would be about C$8B C (calculated). I put the capital to work in my base case by letting the tangible equity to risk-weighted assets ratio drift from 13.8% to 12.8% over four years.

Reported earnings and owner cash

Reported earnings are not what the owner can take out. A bank has to keep its capital ratio as its balance sheet grows, so some of every year’s profit is spoken for before it is free. I call what is left owner cash. Stock pay is already inside net income as an expense, so I deduct it and do not add it back: share-based compensation was C$1.0B in FY2025.³ The capital to stand still is the equity the bank must add so that its ratio does not slip when the balance sheet grows only with inflation, which I take as 3% a year.

So the owner can take out about 86% of adjusted earnings if the bank grows only with inflation, which is 5.0% of the market value. If it keeps growing risk-weighted assets as it did in the last year, the cash falls to about two thirds of earnings, or 3.7% of the market value C (calculated). The cash I put in the valuation is the cash after growth, not this standstill figure. Either way, it is a low yield for a business whose growth is mostly the growth of the country it lends in.

VIValuation

Start with what would go wrong

Before any numbers, I ask what would most likely make this a bad investment from here, and work back from that. The business is excellent. These are the three ways it goes badly wrong, in the order I think most likely.

1. The multiple falls back to where it usually is. The market pays 3.70 times tangible book. At the ten fiscal year-ends to October 2025 it paid between 1.7 and 2.9 times, and 2.4 on average C (calculated).^1213141531 If RBC does what I expect and the market pays 2.0 times tangible book in 2036, the return from C$286.21 is about 4.2% a year, with the cash paid out on the way, which is 0.5 points above the 3.78% Government of Canada ten-year yield E (estimate).¹⁶ Nothing in the business has to break for that to happen.
2. A housing and jobs downturn arrives in Canada while the loan book is full. Mortgages are 42% of the loans, 82% of them uninsured, and the loan book is C$1.1T against C$134B of common equity.⁴⁵ My bear case is a recession year: revenue down 4.5% in FY2028, credit costs at 0.95% of loans, higher than the 0.66% of FY2020, and a return of 12% E (estimate). After that it never gets back above 17%. Under those terms the value is C$149.
3. The fee income that lifted the last two years reverses, and the regulator lifts the capital bar at the same time. Wealth Management and Capital Markets were 49% of nine-month profit and 57% of revenue C (calculated).⁴ They are tied to share prices and deal volumes, and the buffer cut from 3.5% to 3.0% in June can be undone.⁵ This is not a separate case in my model; it is inside the bear, and it is the one I can least size.

I can show what the first does, and I do below. The second is my bear case. The third I flag and move on.

What the price implies

Over the ten years the price rose 3.47 times, from C$82.58 on 2 November 2016, a 13.2% annual return before dividends, while tangible book per share rose 2.37 times from the end of FY2016 to July 2026 C (calculated).¹¹²⁴ The multiple supplied the rest, about 1.44 times of it. That part of the record cannot repeat without the multiple going to 5 times book.

How I value a bank

For most businesses on this site I discount free cash flow. A bank cannot be valued that way. Loans and deposits are its raw material, so the cash flow statement moves with the size of the balance sheet, not with what an owner can take out. The right question is how much a shareholder can take out and still leave the bank as strong. So I work on tangible equity.

The idea is simple. A dollar of tangible equity that earns exactly the cost of equity is worth a dollar. One that earns more is worth more than a dollar, and the more it earns above the cost, and the longer it can, the more it is worth. So the value of the shares is tangible book plus the present value of the profit above what equity costs. That gives the same number as discounting the cash the owner can take out each year, after keeping the capital ratio at a target. I do both, and they agree to the cent, which is a check on my arithmetic.

The last row is the one that surprises people. About 57% of the value sits beyond FY2036. That is not unusual for a business expected to last. But it means that the value is sensitive to what I assume the bank earns in ten years, and I show that sensitivity next.

Reverse the question: what return does the price need?

I take my base growth and my base capital ratios and ask a different question. What return on tangible equity, held for ten years and for ever after, makes the shares worth C$286.21? I solve it.

The answer is a return on tangible equity of 22.0% every year C (calculated). With the faster growth of my bull case it is 20.8%, and with the slower growth of my bear case, 24.2% C (calculated). There is a shorter route. If the bank holds a return R for ever and grows at g, the multiple of tangible book is (R minus g) over (cost of equity minus g). At today’s 3.70 times, R has to be 22.5% if growth is 4%, 25.2% if it is 3% and 19.8% if it is 5% C (calculated). Either way the price needs the bank to keep earning what it earned this year, for a decade or more, not what it earned on average.

I find it useful to put this beside the history. A flat 22% for ten years is above every five-year stretch in the record, and the highest single years were 22.3%, 22.1% and 22.1%. The price is therefore not crazy, since this year’s return is there. It prices the best year as the norm. I cannot say it won’t be, and that is what I mean by the honest range being wide.

The discount rate

I discount at 9.0%. The capital asset pricing model with the 3.78% Government of Canada ten-year yield and Damodaran’s 4.41% implied equity risk premium gives 7.8% on RBC’s beta against the TSX Composite over 36 months of 0.92, 7.8% over 60 months at 0.92 and 7.5% over 119 months at 0.85 C (calculated).¹⁶¹⁷¹⁸ I take 9.0%, about 1.2 points above the highest of the three, because a bank’s equity is the thin top layer of a very leveraged balance sheet, its beta tends to read low in calm years, and the equity risk premium I used is a US figure. The betas use price returns, without dividends.¹⁸

At 8.0%, below any rate I use, the base is C$275 E (estimate), still under the price. It takes the lower rate and a terminal return of 19.0% together to get past it. I use 9.0% because a bank’s earnings depend on credit in ways I cannot see from outside.

Three cases

My base case is the bank keeping most of what it has but giving some back. Revenue grows 5.5% in FY2027 and eases to 4% by FY2033, about 4.5% a year on average, a good deal under the 7.3% of the last decade, which includes HSBC Canada and two strong market years E (estimate).¹²³ The efficiency ratio drifts up from 53.3% to 56.5% as technology, pay and the cost of keeping 100,000 people take more of each dollar. Credit costs run at 0.42% of loans, above the 0.38% of the first nine months of FY2026, the 0.27% ten-year average of provision over year-end loans, and the 0.33% to 0.42% of FY2024 and FY2025 C (calculated).³⁴ The result is a return on tangible equity of 21.1% in FY2027, 20.0% in FY2031 and 18.7% in FY2036, an average of 19.9%, close to the ten-year average of 20.1%, and then 17.0% for ever. It is a good bank for ten years and an ordinary one afterwards.

The bull case has the bank repeat the last year for a decade: revenue growth of 6.5% easing to 5%, an efficiency ratio flat at 53.5%, credit costs at 0.36% and the capital ratio drifting down to 12.2% of risk-weighted assets E (estimate). That gives an average return of 22.7%, above any five-year stretch on record. The bear case has revenue down 4.5% in FY2028 as markets fall and rates drop, credit costs at 0.95% of loans, a higher capital target of 14.0% and, afterwards, an efficiency ratio stuck near 57.5% and a return that fades to 12.5% for ever E (estimate). Even the bear is a profitable bank. It earns more than the cost of equity every year, and is worth less than its price because the price pays for a lot more.

What I can’t judge

Some inputs I can’t know, and I would rather say so than pretend. I cannot see the quality of the loan book beyond what the bank reports. I do not know when Canadian mortgages signed in 2021 at a policy rate of 0.25% renew, because the documents I opened give no maturity table; I know the overnight rate rose to 5.00% by July 2023, stands at 2.50% after a rise on 29 October 2026, and that five-year terms are common, so I expect a renewal group to come due between now and 2027, with higher payments for some.¹⁹ I cannot know whether the 78% rise in impaired loans over nine quarters is a plateau or the early part of a cycle. I do not know whether trading and wealth fees will stay at today’s pace. I cannot know what the regulator will do with the stability buffer. And I do not know how AI will change costs. The range between my bear and bull is wide because these are wide questions.

Multiply it out

The price needs several things together. A return on tangible equity averaging 22% or more for ten years: I would give that 20%, since the bank has reached it in only three of ten years. Capital rules no tougher than today’s: 70%. Credit losses staying inside a normal cycle, without a housing bust: 70%. Multiplied, that is about 10% E (estimate). They overlap, since a good return supports the multiple and the capital, so the true figure is higher, perhaps one in six. And missing one does not ruin the case. The point is that the price is not a simple bet. It needs a lot to go right at once.

Quality and price are two questions

How good is the business? Among the best banks I have studied: a first-ranked domestic franchise, a return on equity above every Canadian rival, a profit in every year of the decade, including FY2020, and a balance sheet the regulator tests. How good is the price? Full. It is 26% above my base value, below my bull value, and it pays for this year’s return to continue. A great business can be a poor purchase at the wrong price. This looks closer to a great business at a full price than to a poor purchase, and I say so without calling it a bargain or a trap.

It helps to compare it with the next best use of the same dollar. A ten-year Government of Canada bond pays 3.78% with no risk to the dollars promised.¹⁶ RBC returns about 4.2% a year on my base if the market pays 2.0 times tangible book at the end, and 7.5% if it still pays 3.0, which is 3.7 points more than the bond, with all the risk of a bank share. On this site, JPMorgan Chase is priced 15% above its base value on its page, at 2.99 times tangible book and a 20% return, and Couche-Tard, a Canadian company in a very different business, 11% above its base. Among the other Canadian banks, TD trades at 2.4 times book on a 15.8% return, CIBC at 2.55 on 15.2% and Scotiabank at 1.9 on 14.1%.⁶⁸⁹ I have not valued them, and the multiple tracks the return in each, so by that measure RBC is not the cheap one, but it is not the strange one either.

The margin of safety

My margin-of-safety price is C$148, 35% below my base value. At C$148 my bear case returns about 9.1% a year, close to the 9.0% I require, and the base returns about 12.1% C (calculated). I use a wide cushion because I cannot see a bank’s credit. The price is 93% above it. The stock last closed below that level in August 2024.¹

Where this could be in 5 and 10 years

These are my estimates of what a share is worth at later dates, from the model above. The value at a date is the present value, at that date, of the owner cash that comes after it, on today’s 1,384.6M shares and in that year’s dollars. It includes the value of the bank beyond FY2036 and leaves out cash paid before the date, which the fourth column adds up from now to the end of FY2036, including the fourth quarter of FY2026. The last column is the yearly return from C$286.21 if the bank is worth that much at the end of FY2036.

For the base to stand at five years, revenue has to grow about 5% a year to FY2031, the efficiency ratio has to drift from 53.3% to 56.0%, and credit costs have to run at 0.42% of loans. That keeps the return on tangible equity near 20% in FY2031 and pays out about C$74 a share by then E (estimate). For it to stand at ten, the return has to settle near 17%, which is worth about 2.5 times tangible book. C$306 is that multiple on C$125 of tangible book per share E (estimate).

The bear and the bull differ mostly in the return on tangible equity. In the bear a FY2028 recession cuts revenue 4.5% and the return settles near 16%, then 12.5% for ever. In the bull it stays at 22 to 23% throughout. The discount rate is 9.0% in all three.

The most likely way the base is wrong is the fade. If the return stayed at 22% for ten years and after, instead of easing to 17%, a share would be worth about C$419 at the end of FY2036 and C$287 today, close to the price E (estimate).

These are estimates of value, not forecasts of the share price. The market price can sit above or below value for years.

VIIThe case for the price

What most people miss

First, the losses on Canadian mortgages have been almost nil for a long time. The bank’s own back-test shows an average actual loss rate on residential mortgages of 0.02% a year from fiscal 2003 to date, and net write-offs on Canadian mortgages were C$12M in all of FY2025 on a C$454B book C (calculated).⁴ Second, the weakest part of the bank is getting better: the US operations, which include City National, earned 8.9% on equity in the third quarter of 2024 and 12.1% in the third quarter of 2026, with their efficiency ratio improving from 88.1% to 74.2%.⁴ Third, the capital cushion is real money. The CET1 ratio is 2.4 points over the requirement, about C$19B, or 4.7% of the market value C (calculated), and the regulator has just lowered the bar by half a point.⁴⁵

The bull case

RBC is the best-run bank in a market with five large players, it earns a premium return every quarter, and it still has room to grow in wealth and in the United States. The clearest version is the bank’s own. In the third-quarter release of 27 August 2026 Dave McKay said the bank was delivering “a premium ROE quarter after quarter, consistently returning capital to our shareholders”.⁷ The 2025 annual report letter says the bank is progressing on what it promised at its Investor Day, delivering premium returns, and that it is scaling new revenue in the United States, the United Kingdom and Europe.³ The bank has raised its return on equity objective to 17% or more, and it earned 17.5% in nine months.³⁴ I checked the latest 13F filings of Berkshire Hathaway, Pershing Square, Viking Global, Giverny Capital, ARK and Baupost: none listed a position in Royal Bank of Canada.²⁰ I found no published view on RBC from Gerstner, Baker, Wood, Gurley, Palihapitiya, Sacks, Ackman or Buffett, so I attribute none. A 13F would show a position, not an argument, and I did not read sell-side targets.

Against reality

Much of the bull case is true today. The return is there, at 21.7% on tangible equity and 17.9% on equity, and the franchise, the credit record and the capital back it.⁴⁷ My bull case gives it all of that for a decade, an average return of 22.7% on tangible equity, and is worth C$296 E (estimate). If RBC does that and hits its targets, C$286.21 is a fair price, about 3% below that value. The price needs about 22% held for ten years, against a target of 17% or more on equity, which is about 21% on tangible equity, and a ten-year average of 20.1% C (calculated). So today’s return is already there. The distance is in the other indicators. Impaired loans rose 78% in two years while total loans rose 14%, the net interest margin fell from 1.61% to 1.49% in a year, and the multiple of tangible book is 3.7, against a ten-year average of 2.4.⁴

What a 10x would take. Ten times C$286.21 is C$2,862 a share, about C$4.0T of market value C (calculated). At 15 times earnings that needs about C$264B of net income to common, 11.5 times my FY2026 estimate of C$22.9B. At today’s 3.7 times tangible book it needs about C$1.07T of tangible equity, ten times the C$107B the bank has, which at a 22% return with nothing paid out takes more than ten years of compounding. The stock rose 3.5 times in the last ten years, and 1.4 times of that rise was a higher multiple, which cannot repeat at these levels C (calculated).¹ At about C$396B, RBC was the 11th largest bank in the world by market value at the end of October 2025, by the bank’s own count, when it was worth about C$288B.³ A tenfold move would make it worth about three times JPMorgan Chase, which I put at about US$0.9T, or C$1.25T, on its page C (calculated).² For a bank of this size that is close to impossible, and I would not build a case on it.

Where I come down

The capital cushion and the mortgage loss record moved me: they make my bear case a return of about 12% in a recession year, not a loss. The price did not move me, since it is 26% above my base and needs this year’s return to last ten. What would raise my values is a return of 22% or more on tangible equity with credit costs near 0.40% and a stable multiple; what would lower them is impaired loans rising faster than loans for another year, or a markets fall that takes the fee income back.

VIIIRisks, and what would change my view

The three ways this goes badly wrong are at the start of Valuation. These are the rest.

• Mortgage renewals and housing. The policy rate was 0.25% until March 2022, reached 5.00% in July 2023, and was 2.25% from 30 October 2025 until it rose to 2.50% on 29 October 2026.¹⁹ A borrower who took a five-year fixed mortgage in late 2021 renews now at a higher rate, and the bank has C$473B of Canadian mortgages, 81% uninsured, mostly in Ontario and British Columbia.⁵ The documents I opened do not show how many renew each year, so I cannot size the payment increase. The cushion is the 62% average loan-to-value and a 0.02% long-run loss rate. The warning is that gross impaired mortgages rose from C$1,554M to C$2,188M in a year.⁴⁵
• Credit outside housing. Real estate and related wholesale loans were C$115.0B, 10% of loans, with C$2.2B impaired, 2.0% of that portfolio, and about 40% of the impairments sit in the United States C (calculated).⁴ Credit cards were C$28.3B with provisions of C$725M in nine months, about 3.5% of the balance at an annual rate C (calculated).⁴ Wholesale write-offs in the third quarter were C$503M, more than the C$187M of a year before.⁴ Management said the rise in Capital Markets came from a previously impaired account and from impaired loans in a few sectors.⁷
• Rates and the margin. The bank estimates a 100 basis point rise in rates adds C$373M to annual net interest income before tax and a 100 point fall takes off C$558M; the economic value of equity falls C$2.5B in a rise.⁴ A fall in rates would hurt more than a rise would help.
• Markets-linked income. Wealth and Capital Markets together were 49% of nine-month profit. Trading revenue was C$4.3B in nine months and underwriting and advisory fees C$2.6B.⁴ A fall in markets takes part of these away within a quarter, while pay and technology costs stay.
• Regulation and capital. The domestic stability buffer was cut from 3.5% to 3.0% in June 2026 and the regulator has also lowered the upper range to 3.0%.⁵ A buffer that can be lowered can be raised. The bank is a global systemically important bank and a domestic one, with a 1% surcharge.⁵ The Basel rules and the OSFI treatment of mortgages are the live questions.
• The United States and trade. US operations earn 11.3% on equity and hold 20% of loans, 21% of impaired loans. New US tariffs on about 5% of imports from Canada began in August 2026, and the United States has said it will not extend the trade agreement beyond its 2036 expiry; the bank’s base case assumes no major change.⁴⁵
• HSBC Canada and fading accretion. The boost from fair-value accretion on the acquired loans is falling, and the C$103M a quarter of intangible amortization continues.⁷⁴ The deal is no longer a special item, so its returns will now hide in the segment numbers.
• Competition and technology. Staff rose to 101,269, up 4.8% in nine months, as the bank invested in technology and AI.⁴ The bank cites AI foundation models and over 25,000 staff on its own AI assistant.³ Whether that lowers costs or only holds them is unproven.
• Disposals. The sale of the Moneris payments business to Francisco Partners, half owned by RBC, is expected to bring a gain of about C$475M after tax by early 2027, which I do not include.⁵

What would raise my base value: the fourth-quarter results on 3 December showing a return of 22% or more on tangible equity, an efficiency ratio at or under 54%, credit costs under 40 basis points and buybacks continuing. What would lower it: impaired loans rising faster than loans for another year, an efficiency ratio rising faster than a point a year, or the regulator moving the capital bar up while the excess sits idle.⁴⁵