Both the Royal Bank of Canada and the National Bank of Canada say they expect return on equity to climb, despite tariff uncertainty.Maria Collins/The Globe and Mail
Royal Bank of Canada RY-T and National Bank of Canada NA-T booked surges in fourth-quarter earnings as two of the country’s largest lenders target higher profitability in the years ahead.
In the quarter ended Oct. 31, RBC and National benefitted from an increase in equities trading and merger and acquisition activity amid volatility prompted by stock market swings and the U.S. trade war. Both banks said they expect return on equity to climb, despite the risk that tariff uncertainty could continue to strain the economy and the outlook remains clouded.
RBC raised its target on return on equity – an industry metric that measures profitability – to 17 per cent or more in the next few years. The change comes after RBC quickly surpassed the 16-per-cent goal it set at its investor day in March.
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RBC chief executive officer Dave McKay said he is confident in this target for a several reasons, including the continuing integration of its takeover of HSBC Bank Canada and improvements in its plan to implement artificial intelligence.
“Our ROE has already differentiated itself significantly from our peers, given that many aspire to get to 15 per cent,” Mr. McKay said on a conference call with analysts.
But the bank remains cautious as trade uncertainty lingers ahead of negotiations over the United States-Mexico-Canada Agreement (USMCA).
“We still haven’t resolved [USMCA], 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.”
National also said it’s targeting a return on equity of 17 per cent by 2027, a jump from its current level of 14.6 per cent.
In February, the bank closed its deal to take over Canadian Western Bank. The acquisition allowed National to significantly expand its footprint in Alberta and British Columbia.
National chief executive officer Laurent Ferreira said he expects to reach the goal of $270-million in cost savings from the merger by the end of 2026, one year ahead of schedule. The bank will also book revenue synergies – which include savings from streamlining similar products and services – of $200-million to $250-million by the end of 2028.
National Bank of Canada closed its deal to take over Canadian Western Bank in February.Paul Chiasson/The Canadian Press
On Tuesday, National said it will purchase Laurentian Bank of Canada’s retail and small and medium-sized enterprises banking, as well as its syndicated loan portfolio. Fairstone Bank of Canada will acquire all common shares of Laurentian at $40.50 a share, a premium of 20 per cent over the price of the stock’s close on Monday.
“It’s a natural fit, given our strong presence in Quebec, enabling us to serve even more local customers and communities,” Mr. Ferreira said during a conference call. Laurentian’s clients “will benefit from our leading digital capabilities, our broader branch network, products and services offering, and financial advisory and business banking teams.”
RBC and National were the second and third major Canadian banks to report earnings for the fiscal fourth quarter. On Tuesday, Bank of Nova Scotia posted higher profits that beat analysts’ estimates. Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce will wrap up earnings week on Thursday.
Profit at RBC, Canada’s largest lender, jumped 29 per cent year-over-year to $5.4-billion or $3.76 a share, in the three months ended Oct. 31. With adjustments to exclude certain items, the bank said it earned $3.85 a share, beating the $3.55 that analysts estimated, according to S&P Capital IQ.
National Bank’s profit rose 11 per cent to $1.1-billion or $2.57 a share. Adjusted to exclude certain items, including acquisition and integration charges related to the lender’s takeover of Canadian Western Bank, the bank said it earned $2.82 a share, beating the $2.62 analysts expected.
Both banks raised their quarterly dividends, with RBC boosting it by 10 cents to $1.64 a share and National increasing it by six cents to $1.24.
RBC’s capital markets profit climbed 45 per cent to $1.4-billion, driven by higher revenue in global markets and corporate and investment banking, with equities trading and merger and acquisition activity climbing across all regions. The U.S. division contributes more than half of the business’s revenue.
Earnings in National’s capital markets unit climbed 41 per cent to $432-million, driven by higher equities revenues as well as merger and acquisition activities.
While certain sectors weather the storm, others continue to struggle. RBC’s commercial banking profit rose 5 per cent as loan and deposit balances grew 5 per cent and 3 per cent, respectively. That growth is driven by “resilient sectors” including agriculture, health care and the public sector, even as tariffs stunted demand from manufacturing, logistics and real estate, according to RBC chief financial officer Katherine Gibson.
Over the past year, banks have ramped up their provisions for credit losses – the funds banks set aside to cover loans that may default – in anticipation of souring consumer and business sentiment.
In the quarter, RBC set aside $1-billion in provisions. That included $984-million against loans the bank believes may not be repaid, based on models that use economic forecasting to predict future losses. In the same quarter last year, RBC set aside $640-million in provisions.
National Bank set aside $244-million in provisions, including $211-million against loans the bank believes may not be repaid. In the same period last year, National Bank had set aside $162-million in provisions.
In the year ahead, the lender expects to book provisions at similar levels to 2025.
“The geopolitical and geoeconomic situation that has defined 2025 will continue to shape business confidence and investments in 2026. Trade tensions with the U.S. are affecting all provinces, causing job losses in certain sectors and a slowdown in the labour market,” Mr. Ferreira said.
“We are nonetheless encouraged by increased government focus on the economy, as reflected in the federal budget, which included tax cuts, investment in housing and infrastructure, and measures to stimulate business investment. This should support consumer consumption and resilience.”