Royal Bank of Canada’s SWOT analysis: credit card shift shapes stock outlook

Royal Bank of Canada (NYSE:RY), one of Canada’s "Big 6" banks and a $204 billion market cap institution, finds itself navigating a shifting financial landscape as consumer behaviors and economic conditions evolve. According to InvestingPro data, RY has demonstrated remarkable consistency with 15 consecutive years of dividend raises and maintains a solid 2.27% dividend yield. Recent analyses from BMO Capital Markets highlight significant trends that are shaping the bank’s prospects and challenges in the coming years.

Credit Card Ascendancy

A recent survey conducted by BMO Capital Markets reveals a notable shift in Canadian banking consumer behaviors. Credit cards are emerging as the new anchor product, supplanting traditional transactional products as the primary financial relationship between banks and their clients. This trend presents both opportunities and challenges for Royal Bank of Canada.

The survey indicates a consolidation in credit card usage, with 44% of respondents now holding only one credit card, up from 37% in 2019. This consolidation trend is particularly pronounced among customers over 40, while those under 40 are showing increased card penetration. Younger consumers are displaying a preference for low-interest-rate cards over rewards-based offerings, likely due to price sensitivity and rising living costs.

For Royal Bank of Canada, this shift towards credit cards as a primary financial product could lead to enhanced customer retention and cross-selling opportunities. The bank has already seen an increase in credit card prominence, which aligns well with this emerging trend. Credit cards offer frequent touchpoints with customers, allowing for personalized offers and the building of trust – key factors in attracting and retaining clients in the current market.

Mortgage Market Dynamics

While credit cards are gaining prominence, mortgages are experiencing a decline as anchor products. This shift is attributed to the commoditization of mortgage products and the increasing role of mortgage brokers in the Canadian market. Despite this trend, Royal Bank of Canada has demonstrated resilience in its mortgage portfolio.

The bank’s residential mortgage balances grew by approximately 11% year-over-year, adjusting to about 4% growth when excluding the acquisition of HSBC Canada. Analysts project an overall expectation of approximately 5% mortgage growth year-over-year in 2025 for the sector. However, there is potential downside risk to residential mortgage loan growth due to macroeconomic uncertainty, particularly stemming from U.S. trade policies.

Royal Bank’s robust underwriting process, which has stress-tested borrowers’ affordability, may serve as a mitigating factor against risks associated with mortgage renewals. This is particularly relevant given that approximately $596 billion in fixed-rate mortgages are due for renewal over the next two years, potentially affecting monthly payments for mortgage holders.

Financial Performance and Outlook

Royal Bank of Canada’s recent financial performance reflects both strengths and challenges. The bank experienced a dividend increase of around 4% on a semi-annual review basis, with InvestingPro reporting impressive revenue growth of 16.26% and a P/E ratio of 15.19. While the bank reported the highest quarterly build in Provisions for Credit Losses (PCLs) among its peers, with an addition of 23 basis points, its strong market position and consistent performance have contributed to a remarkable 24.54% total return over the past year. This increase in PCLs reflects anticipation of economic downsides due to trade disruptions.

The bank’s stock performance has been mixed, with a 1.7% decline over a recent week, making it the weakest performer among its peers during that period. Despite this short-term volatility, Royal Bank of Canada has shown a total return of 26.7% over the past year and is trading at a high valuation of 12.3x based on 2026 estimated earnings per share.

Analysts maintain an optimistic outlook on Royal Bank of Canada, with some continuing to rate it as "Outperform." The bank is also included in select top stock lists, reflecting confidence in its long-term prospects.

Industry Challenges and Economic Outlook

The Canadian banking sector, including Royal Bank of Canada, faces several challenges in the near term. Economic forecasts predict a potential "technical recession" in Canada, with negative GDP growth expected in Q4/25 and Q1/26. This economic slowdown could lead to a rise in unemployment rates, historically a precursor to credit quality issues and higher PCLs.

Despite these challenges, some factors provide a degree of relief. Declining oil prices and a lower Bank of Canada overnight interest rate may help offset some of the pressures on credit quality. Analysts suggest that banks with strong defensive positions, including Royal Bank of Canada, may be better positioned to navigate these economic headwinds.

The shift in consumer behavior towards decreased debt aversion could result in higher credit card usage and revolve rates, potentially benefiting loan growth and lending margins for banks. However, this trend also carries risks if not managed with effective lending strategies.

Bear Case

How might the potential Canadian recession impact RY’s loan portfolio quality?

The forecasted "technical recession" in Canada, with negative GDP growth expected in Q4/25 and Q1/26, poses significant risks to Royal Bank of Canada’s loan portfolio quality. Historical patterns suggest that economic downturns often lead to increased unemployment rates, which in turn can result in higher loan delinquencies and defaults.

The bank has already reported the highest quarterly build in Provisions for Credit Losses (PCLs) among its peers, adding 23 basis points in anticipation of economic challenges. This proactive approach may provide some buffer, but a prolonged recession could necessitate further increases in PCLs, potentially impacting the bank’s profitability.

Moreover, with approximately $596 billion in fixed-rate mortgages due for renewal over the next two years, there’s a risk that some borrowers may struggle with higher monthly payments if interest rates remain elevated during the recession. While Royal Bank’s robust underwriting process and stress testing of borrowers’ affordability offer some protection, a severe economic downturn could still lead to increased mortgage defaults.

Could the shift away from mortgages as anchor products harm RY’s long-term growth prospects?

The declining prominence of mortgages as anchor products in the Canadian banking sector presents a potential challenge to Royal Bank of Canada’s long-term growth strategy. Mortgages have traditionally been a key driver of customer relationships and a stable source of revenue for banks.

As mortgages become increasingly commoditized and mortgage brokers gain market share, Royal Bank may find it more difficult to differentiate its offerings and maintain its market position in this sector. This could lead to reduced cross-selling opportunities and potentially lower customer retention rates over time.

Furthermore, if the bank is unable to fully offset the reduced growth in mortgages with expansion in other product areas, such as credit cards or commercial lending, it may experience slower overall growth. This shift could also impact the bank’s risk profile, as mortgages typically represent lower-risk lending compared to some other forms of consumer credit.

Bull Case

How can RY leverage the trend towards credit cards to enhance customer relationships and profitability?

The emerging trend of credit cards becoming the new anchor product in Canadian banking presents a significant opportunity for Royal Bank of Canada to strengthen customer relationships and boost profitability. Credit cards offer more frequent touchpoints with customers compared to traditional banking products, allowing for greater personalization and engagement.

By leveraging data analytics and artificial intelligence, Royal Bank can offer hyper-personalized credit card products and services tailored to individual customer needs and preferences. This approach can lead to increased customer satisfaction, loyalty, and ultimately, higher retention rates.

Moreover, the shift towards credit cards as primary financial products opens up new avenues for cross-selling other banking services. Royal Bank can use credit card interactions as opportunities to introduce customers to complementary products such as savings accounts, investment services, or insurance offerings.

The potential increase in credit card revolve rates, as suggested by the decreased debt aversion among survey respondents, could also contribute to higher lending margins and improved profitability for the bank’s credit card portfolio.

What advantages does RY’s strong defensive position offer in the current economic climate?

Royal Bank of Canada’s strong defensive position provides several advantages in navigating the current uncertain economic climate. The bank’s robust underwriting process, which has stress-tested borrowers’ affordability, serves as a protective measure against potential increases in loan defaults, particularly in the mortgage sector.

The bank’s diverse business model, spanning various financial services, allows for risk diversification and the ability to offset weaknesses in one sector with strengths in another. This diversification can help maintain overall stability in the face of economic headwinds.

Royal Bank’s strong capital position, as evidenced by its ability to increase dividends and renew its Normal Course Issuer Bid (NCIB) for approximately 35 million shares, provides financial flexibility. This strength allows the bank to weather potential economic storms while still investing in growth opportunities and returning value to shareholders.

Furthermore, Royal Bank’s inclusion in top stock lists by analysts suggests confidence in its ability to outperform peers in challenging market conditions. Trading near its 52-week high of $147.64, the stock has caught the attention of analysts and investors alike. According to InvestingPro, which offers comprehensive analysis through its Pro Research Reports covering 1,400+ top stocks, RY shows promising potential with multiple positive indicators. The platform’s Fair Value analysis suggests the stock is currently undervalued, presenting an opportunity for investors seeking quality financial sector exposure. This positive sentiment can translate into better access to capital markets and potentially more favorable terms in financial transactions.

SWOT Analysis

Strengths:

• Strong market position as one of Canada’s "Big 6" banks
• Robust underwriting process and stress testing for mortgages
• Diverse business model across various financial services
• Strong capital position allowing for dividend growth and share buybacks
• Increasing prominence in the credit card market

Weaknesses:

• Exposure to potential slowdown in the Canadian mortgage market
• Highest quarterly build in Provisions for Credit Losses among peers
• Recent underperformance in stock price compared to peers

Opportunities:

• Leveraging the shift towards credit cards as primary financial products
• Potential for increased cross-selling and customer retention through personalized offerings
• Possible benefits from higher credit card usage and revolve rates
• Expansion of digital banking services to meet changing consumer preferences

Threats:

• Potential "technical recession" in Canada affecting loan portfolio quality
• Rising unemployment rates and their impact on credit quality
• Increased competition from fintech companies and non-traditional financial service providers
• Ongoing economic uncertainty due to global trade tensions and policy changes

Analysts Targets

BMO Capital Markets (August 22, 2025): No specific target or rating provided

BMO Capital Markets (August 18, 2025): Included in Top 15 List

BMO Capital Markets (June 2, 2025): Outperform rating (no price target given)

BMO Capital Markets (May 2, 2025): Listed as Top 15 List Member and Income Stock

BMO Capital Markets (March 24, 2025): No specific target or rating provided

This analysis is based on information available up to August 22, 2025. For the most current insights and comprehensive analysis of Royal Bank of Canada, including detailed financial metrics, Fair Value estimates, and expert recommendations, visit InvestingPro. The platform offers exclusive access to over 10 additional ProTips and advanced analytical tools to help you make more informed investment decisions.

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