Earnings call transcript: RBC Q1 2025 earnings beat expectations despite stock drop

Published 27/02/2025, 16:04
 Earnings call transcript: RBC Q1 2025 earnings beat expectations despite stock drop

Royal Bank of Canada (RBC), a prominent player in the banking industry with a 53-year track record of consistent dividend payments, reported robust earnings for the first quarter of 2025, surpassing market expectations with an adjusted diluted earnings per share (EPS) of $3.62 compared to the forecasted $3.23. The bank achieved a record net income of $5.1 billion, marking a 29% increase year-over-year. Despite these strong financial results and six analysts revising their earnings estimates upward, RBC’s stock price fell by 4.23% in pre-market trading, closing at $114.43, down from the previous close of $119.48.

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Key Takeaways

  • RBC exceeded EPS expectations by 12.1%.
  • Record Q1 earnings of $5.1 billion, up 29% year-over-year.
  • Stock price dropped 4.23% in pre-market trading.
  • Strong revenue growth across all segments.
  • Increased guidance for net interest income growth.

Company Performance

RBC demonstrated significant financial strength in Q1 2025, with a 27% increase in adjusted diluted EPS and a 26% rise in net interest income year-over-year. The bank’s return on equity stood at 16.8%, reflecting robust profitability. According to InvestingPro Fair Value analysis, RBC currently appears undervalued despite its strong performance and 14 consecutive years of dividend increases. This performance underscores RBC’s competitive position, with market share gains across various banking segments and strong client engagement.

Financial Highlights

  • Revenue: $16.74 billion, exceeding the forecast of $15.43 billion.
  • Earnings per share: $3.62, up 27% year-over-year.
  • Common Equity Tier One (CET1) ratio: 13.2%.
  • Operating leverage: 13% (8% adjusted).

Earnings vs. Forecast

RBC’s Q1 2025 earnings significantly outpaced market expectations. The actual EPS of $3.62 exceeded the forecast by 12.1%, while revenue surpassed projections by $1.31 billion. This positive earnings surprise reflects the bank’s strong operational performance and effective cost management.

Market Reaction

Despite the earnings beat, RBC’s stock declined by 4.23% in pre-market trading, suggesting investor concerns over broader market conditions or potential future challenges. The stock remains within its 52-week range of $95.84 to $128.05, indicating room for recovery. InvestingPro data shows RBC maintains relatively low price volatility with a beta of 0.83, while its overall financial health score stands at "FAIR" based on comprehensive analysis of growth, profitability, and momentum metrics.

Outlook & Guidance

RBC has revised its net interest income growth guidance to high single to low double digits, reflecting confidence in its ability to capitalize on favorable market conditions. The bank also anticipates full-year expense growth at the upper end of the mid-single-digit range and maintains its impaired provisions guidance for 2025.

Executive Commentary

CEO Dave MacKay emphasized RBC’s commitment to client growth and stability amid market uncertainties, stating, "We face that uncertainty knowing that we have plans, we have stability." He also noted that "volatility does help the business," highlighting the bank’s resilience in navigating challenging market conditions.

Risks and Challenges

  • Potential tariff uncertainties could impact market volatility.
  • Economic indicators suggest moderating growth in Canada.
  • Interest rate cuts by the Bank of Canada may affect net interest income.
  • Integration challenges with City National operations.
  • Maintaining cost synergies from the HSBC Canada acquisition.

Q&A

During the earnings call, analysts inquired about the potential impacts of tariffs and economic scenarios, credit provisions, and margin expansion drivers in Canadian Banking. RBC provided insights into its risk management strategies and ongoing operational improvements at City National.

Full transcript - Royal Bank of Canada (RY) Q1 2025:

Conference Operator: Good morning, ladies and gentlemen. Welcome to the RBC’s twenty twenty five First Quarter Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Senior Vice President, Investor Relations. Please go ahead, sir.

Asim Imran, Senior Vice President, Investor Relations, RBC: Thank you, and good morning, everyone. Speaking today will be Dave MacKay, President and Chief Executive Officer Catherine Gibson, Chief Financial Officer and Graham Hepworth, Chief Risk Officer. Also joining us today for your questions, Erica Nielsen, Group Head, Personal Banking Sean Amada Gautje, Group Head, Commercial Banking Neil McLaughlin, Group Head, Wealth Management Derek Nelner, Group Head, Capital Markets and Jennifer Publicover, Group Head, Insurance. As noted on Slide one, our comments may contain forward looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially.

I would also remind listeners that the bank assesses its performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions and then re queue. With that, I’ll turn it over to Dave.

Dave MacKay, President and Chief Executive Officer, RBC: Thanks, Asim. Good morning, everyone, and thank you for joining us. Before we begin, I want to mention our thoughts are with the families that have been impacted by the devastating fires in Southern California. RBC, together with City National Bank, has donated $3,000,000 to support victims in the impacted areas. Today, we reported first quarter earnings of $5,100,000,000 a record result that reflects RBC’s financial and strategic strength amidst an evolving operating environment to start the fiscal year.

Adjusted earnings of $5,300,000,000 were up 29% year over year were up 23% excluding adjusted earnings of $267,000,000 from the acquisition of HSBC Canada. We reported a return on equity of 16.8% on the foundation of a strong common equity Tier one ratio of 13.2%. Our premium ROE continues to create value for shareholders with gross internal capital generation of 76 basis points underpinning robust book value growth of 13% year over year. Strong revenue growth was driven by a well diversified base comprised of a balanced mix of net interest income and fee based revenue. Net interest income was up 26% this quarter, results benefited from strong deposit growth in personal banking, strong loan growth in commercial banking and higher spreads.

We also saw robust fee based revenue growth with strong results across wealth management, global markets and investment banking as we benefited from constructive markets and strong client activity. This quarter, we generated operating leverage of 13% or 8% on adjusted basis as we saw the benefits of our scale and the realization of cost synergies related to the acquisition of HSBC Canada. We remain well positioned to achieve the full cost synergies of $740,000,000 by early twenty twenty six, having achieved an annualized run rate savings of over $500,000,000 or approximately 70% of our stated target. We expect to drive further efficiencies as our clients benefit from the investments we continue to make in our digital capabilities. Earlier this year, we made the mortgage renewal process easier and faster for clients through our streamlined option in the RBC mobile app, which has nearly 8,000,000 active users.

Clients who choose to renew through this option will be able to secure mortgage terms and virtual signed documents in a matter of minutes. RBC Direct Investing is now the only bank owned brokerage in Canada to offer self directed investors online international trading through leading global exchanges. While our PCL and impaired loans increased this quarter, they were largely within expectations given the point of the economic cycle. Going forward, we are maintaining our PCL guidance for the year, which Graham will speak to shortly. Turning to the macro environment.

We started the year offering a VISTA backdrop of constructive markets and affirming of Canadian economic data, including moderating headline inflation levels and improving employment trends. Furthermore, we expect the Bank of Canada to continue to take a more dovish stance, which should help consumer sentiment and growth. The widening gap between U. S. And Canadian interest rates has resulted in a weaker Canadian dollar, which could partly buffer any tariff shock for American users of Canadian goods and services.

As Canada’s largest financial institution, we have an important role to play in delivering advice, insights and value to our clients amidst the uncertainty, while also supporting our communities. Many of our clients continue to come to us for deeper advice in navigating the evolving environment, which has contributed to strong deposit flows and increased transactional activity in our market related businesses. Having said that, rising uncertainty around trade policy and geopolitics combined with immigration restrictions may already be moderating client activity in certain parts of the Canadian economy. We are seeing signs of lower business confidence with some of our commercial banking clients opting to delay certain investment decisions. Furthermore, Canadian housing activity remains modest despite tailwinds from lower interest rates and changing mortgage rules.

Moving forward, while we hope this uncertainty is short term in nature, we are focused on the preparedness as opposed to the predictions. We have run several scenarios with respect to the depth, breadth and duration of potential tariffs. We believe we are in a strong position to navigate the uncertainty given the strength of our capital, our diversified funding, our brand and our diversified business and geographic model. Similarly, Canada also has a strong foundation. We have the natural and human resources that the world is looking for.

We have the capability to improve our access to major markets. The existing CUSMA trade agreement is a solid foundation. While it can always be improved, we are encouraged by the ongoing dialogue and believe there is a path forward that can drive prosperity for all across these economies. Importantly, this is a chance for Canada to make structural improvements to the country’s economic productivity and competitiveness, including removing interprovincial trade barriers and approving high impact energy and infrastructure products. This can drive future growth opportunities with significant benefits to Canadians.

Amidst this uncertainty, ensuring we continue to operate with sufficient buffers takes on increased importance. Our stress testing suggests that even under a more severe scenario of lower revenue and higher credit losses, our capital levels would remain above regulatory minimums. We are deeply committed to supporting our clients’ growing financial needs through our award winning advice and value propositions. We have also been repurchasing our stock this quarter and continue to see buybacks as a tactical lever to generate shareholder value. With this context, I will now speak to our key growth drivers starting with our acquisition of HSBC Canada.

Since the close and convert acquisition almost a year ago, we have generated cumulative adjusted pre provision pretax earnings of over $950,000,000 on a standalone basis, excluding the benefits of the cost synergies highlighting the earnings generating power of this acquisition. Moving to personal banking, where we continue to leverage our client value proposition and foundational distribution advantage across our physical and digital channels. This quarter, we saw outsized growth in our core banking accounts, which underpinned 18% deposit growth or 8% excluding the acquisition of HSBC. The acquisition of core deposits remains As client needs shift amidst an uncertain environment, we expect flows to As client needs shift amidst an uncertain environment, we expect flows to shift between RBC savings and investment offerings. Mortgage growth remained modest as we maintained our pricing discipline with respect to originations, while remaining focused on retaining client relationships as mortgages renew over the coming quarters.

In contrast, credit card balances grew due to the increased purchase volumes and seasonally higher revolve rates following the holidays. Turning to our commercial banking franchise, where we have leading market positions across small business and commercial clients. Loans and acceptances were up 35% year over year or up 10% excluding HSBC Canada. The majority of our growth has been with clients where we have strong relationships. Deposit growth also remains strong, up 19% year over year or 8% excluding HSBC Canada.

In the near term, commercial banking loan growth may moderate as clients hold back plans and investments amidst the tariff driven uncertainty. However, absent more severe and sustained tariffs, we expect loan growth in the high single digit range through this year, including the benefits from our expanded client and specialist coverage related to HSBC Canada’s acquisition. Turning to capital markets, which reported very strong results this quarter, generating record pre provisioned pre tax earnings of $1,700,000,000 Global Markets reported over $2,000,000,000 in revenue this quarter driven by strong performance in both equities and foreign exchange trading revenue, benefiting from increased client activity amidst an uncertain macroeconomic environment. Corporate investment banking was up 24% from last year with our investment banking business benefiting from constructive market conditions and expanded scale across client and product verticals and supported by solid growth in corporate banking. Going forward, the uncertainty around trade policy could impact deal activity in the near term.

However, the resulting levels of volatility could be beneficial to our sales and trading businesses. Furthermore, we have robust client dialogue and a strong client engagement and remain well positioned to support our clients and take advantage of market opportunities as policy uncertainty moderates. Moving to our Wealth Management segment, where we look to leverage our growing advisor base, holistic advisory and banking solutions and technology investments to serve client needs and enhance advisor productivity. Wealth management revenue surpassed $5,500,000,000 for the first time, while generating nearly $1,000,000,000 in net income for the quarter. Assets under administration in U.

S. Wealth management, including City National, increased to nearly US700 billion dollars U. S. Net new assets represented an annualized 3% of opening AUA, excluding the reinvestment of interest and dividend income. In addition to the uptick in client assets, we saw an increase in sweep deposits and securities based lending as we look to enhance our offerings for U.

S. Clients. In Canadian Wealth Management, we have sector leading advisor productivity, assets under administration increased 22% from last year benefiting from higher markets and net new assets. And RBC Global Asset Management’s assets under management increased 23% from last year surpassing $700,000,000,000 for the first time. RBC GAM generated net sales of $11,000,000,000 this quarter, including nearly $4,000,000,000 of Canadian retail net sales as our clients continue to choose us as their trusted advisor amidst a volatile environment.

To close, we’ve had a strong start to fiscal twenty twenty five amidst an evolving operating environment. While change is constant, so is our commitment to our clients and communities. Our strategies also continue to deliver leading risk adjusted returns and long term value to our shareholders. We look forward to our upcoming Investor Day on March 27, where we will discuss key strategic initiatives designed to accelerate our ambitions across our businesses and core geographies. With that, Catherine, over to you.

Catherine Gibson, Chief Financial Officer, RBC: Thanks Dave and good morning everyone. Starting on Slide eight, we reported record results this quarter with diluted earnings per share coming in at $3.54 Adjusted diluted earnings per share was $3.62 up 27% from last year benefiting in part from the acquisition of HSBC Canada and FX translation impacts. Our record results were underpinned by double digit revenue and earnings growth across each of our segments and reflected robust adjusted all bank offering leverage of 7.7%. Turning to capital on Slide nine. Our CET1 ratio remains strong at 13.2%, stable to last quarter.

The solid growth in internal capital generation, net of dividends was mostly deployed into organic businesses, particularly in capital markets and personal banking, and easily allowed the bank to earn through the net credit migration in the quarter. As part of our capital deployment strategy, we also repurchased approximately 1,900,000.0 shares this quarter for $338,000,000 Despite the macro uncertainty, our strategy of prioritizing capital allocation towards client driven organic growth and increasing dividends in line with earnings remains unchanged. We will also continue to be opportunistic in our use of buybacks while operating with a strong CET1 ratio above 12.5%. Should downside scenarios associated with rising trade tensions materialize, our experience during the pandemic serves as a good reminder of the benefit of our strong recurring and diversified earnings streams, which will continue to act as a primary absorber of any deterioration. Furthermore, our capital buffer, which sits well above the regulatory minimum, provides a strong second line of defense.

Moving to Slide 10. Allbank net interest income was up 26% year over year or up 27% excluding trading revenue. These results benefited from the addition of HSBC Canada, solid volume growth in both personal banking and commercial banking as well as higher spreads in personal banking and the impact of foreign exchange translation. All bank net interest margin, excluding trading revenue, was down one basis point from last quarter as the impact of higher securities balances in capital markets was mostly offset by favorable product mix in personal banking and Commercial Banking. Canadian Banking NIM was up seven basis points from last quarter, mainly driven by strong growth in non maturity deposits, which were up approximately 3% quarter over quarter.

Underpinning this strong growth has been positive flows from GICs and external sources into non maturity deposits. NIM also continued to benefit from our tractor deposit strategy. These benefits were partly offset by ongoing competition for term deposits, which we expect to persist throughout the year. Looking forward, we are increasing our 2025 all bank net interest income growth guidance. We expect high single digit to low double digit net interest income ex trading revenue growth in 2025, up from the mid to high single digit range guidance provided last quarter.

The increase in our guidance reflects stronger than expected growth in non maturity deposits this quarter as well as better than expected spreads on both mortgages and GICs. While our guidance has increased, the wide range reflects the evolving operating environment. Moving to Slide 11, reported non interest expenses were up 11% from last year. Core expense growth as guided to last quarter was elevated, coming in at 13 year over year, impacted in part by the contribution of run rate expenses associated with the acquisition of HSBC Canada. The main driver of growth, however, was higher variable compensation, which was commensurate with strong results in wealth management and capital markets.

Other staff related costs associated with increased FTE and severance also contributed to the increase. Looking ahead, we will remain diligent in managing our cost base. We expect all Bancorp expense growth, which is off of base of reported 2024 expenses, to be at the upper end of our mid single digit guidance range for 2025. We continue to expect positive operating leverage for the year. The move to the upper end of our core expense growth guidance reflects higher than expected variable compensation in the quarter.

As indicated last quarter, we expect a faster pace of core expense growth in the first half of the year, reflecting the inclusion of HSBC Canada results and to a lesser extent investments for our next phase of growth. As a reminder, core expense growth includes run rate costs associated with the HSBC Canada acquisition, but excludes the impact of FX and share based compensation. Turning to taxes. The adjusted non teb effective tax rate was 20.4% this quarter, up from 19.5% last quarter. The increase reflects the impact of Pillar two tax legislation, which was embedded in our guidance provided last quarter as well as changes in earnings mix.

Turning to our Q1 segment results that begin on Slide 12. Personal Banking reported earnings of $1,700,000,000 Focusing on Personal Banking Canada, net income was up 26% year over year. Excluding $91,000,000 of NIA from HSBC Canada, Personal Banking Canada net income rose a strong 19% year over year benefiting from close to 4% operating leverage. Organic net interest income was up 15% from last year, reflecting higher spreads and a robust 8% growth in deposits. Organic non interest income was up 7% year over year, underpinned by higher mutual fund distribution fees, mainly from capital appreciation and the benefit of branch net sales.

Turning to Slide 13. Commercial banking NIAT of $777,000,000 rose 20% from a year ago, including $73,000,000 from HSBC Canada. Net income growth was impacted in part by higher credit provisions across a few sectors, which Graham will touch on shortly. On a pre provision pretax basis, earnings were up 32% or 9% year over year excluding HSBC Canada, driven by solid volume growth and higher service charges. Loan and deposit growth were solid at 108% year over year, respectively.

Importantly, the loan book we acquired through the acquisition of HSBC Canada is starting to show momentum and is up over recent months in line with the growth of the Commercial Banking back book. Commercial Banking’s efficiency ratio improved to 33%, reflecting positive operating leverage of 1%. Turning to Wealth Management on Slide 14. NIAID of $980,000,000 rose 48% from a year ago, reflecting strong growth in fee based client assets across our businesses. We added over $20,000,000,000 in net new assets across our North American Wealth Advisory and Global Asset Management businesses as momentum builds in long term retail mutual fund net sales.

Higher revenue was partly offset by higher variable compensation. City National generated USD 60,000,000 in adjusted earnings this quarter, impacted in part by USD 31,000,000 taken on performing loans related to the California wildfires. We are seeing good momentum in enhancing City National’s profitability, and we remain committed to these efforts. Turning to Capital Markets results on Slide 15. Record net income of $1,400,000,000 increased 24 from last year, benefiting from broad based revenue growth and FX translation impacts.

Pretax pre provision earnings surpassed $1,700,000,000 in the quarter, up 31% from last year. Corporate and investment banking revenue was up 24% from last year. Excluding the impact of loan underwriting markdowns in the prior year, revenue was up 18%, reflecting higher loan syndication revenue in North America, the impact of increased lending balances and spreads as well as higher debt origination, primarily in The U. S. Global Markets revenue was up 24% as robust client engagement and a constructive market backdrop drove higher equity trading across most regions and increased FX trading in Canada.

Q1 is capital markets seasonally strong this quarter. And while we expect business momentum to remain strong, we anticipate typical seasonal declines in pretax pre provision earnings through the remainder of the year. Turning to Slide 16. Insurance net income of $272,000,000 was up 24% from last year, mainly due to higher insurance service results, driven by the $65,000,000 impact of reinsurance contract recaptures and improved claims experienced across the majority of our products. This was partially offset by lower insurance investment results, primarily reflecting higher favorable investment related experience in the prior period on the transition to IFRS 17.

To conclude, we are very pleased with the strong momentum across our core businesses to start the year, which underpinned a robust adjusted ROE of 17.2% on a strong CE1 base of 13.2%. Looking ahead, our financial and strategic strength, including our diversified businesses and revenue streams, positions us well to navigate uncertainty in the macroeconomic environment. With that, I will turn it over to Graham.

Graham Hepworth, Chief Risk Officer, RBC: Thank you, Catherine, and good morning, everyone. I’ll now discuss our allowances in the context of the current macroeconomic environment and the path ahead as we navigate uncertainty from the evolving geopolitical risks that Dave noted earlier. Underlying performance of The U. S. And Canadian economies have been largely positive over the quarter, although the Canadian economy is still underperforming.

We expect the Bank of Canada to continue gradually cutting rates into the middle of twenty twenty five, providing further relief for borrowers, while the U. S. Federal Reserve is now expected to hold rates steady throughout 2025. Notwithstanding these factors, it remains highly uncertain how the prospect of tariffs will impact the broader economy. The impact will vary based on the extent and duration of tariffs, retaliatory measures, progress in removing barriers to domestic trade and the availability of fiscal support measures.

To provide some context on how the tariff uncertainty is reflected in our provisions, recall that under IFRS nine, our performing allowances reflect not only our baseline expectations, but the potential for weaker economic conditions reflected through a series of pessimistic scenarios. These scenarios have been highlighted on Slide 36. While broad and sustained tariffs could create a recessionary conditions, the range of outcomes are well within the pessimistic scenarios we currently consider. Despite the positive U. S.

And Canadian economic signs noted earlier, we kept our downside risk weights at an elevated level this quarter to account for this new uncertainty. Going forward, as the tariff situation evolves, we will continue to reflect known outcomes through our baseline scenario and any ongoing uncertainty through potentially new or amended downside scenarios. Turning to Slide 18, we took a total of $68,000,000 of provisions on performing loans this quarter, mainly reflecting unfavorable changes in portfolio composition, including a $45,000,000 provision related to the California wildfires. This was partially offset by a favorable impact from our macroeconomic forecasts and the migration of one large capital markets account in the other services sector from conforming to impaired. I’ll expand upon this in a moment.

Excluding the impacts of the wildfires and the transfer of this one capital markets account, provisions on performing loans is similar with recent history. Many of our C and B clients were directly impacted by the California wildfires. RBC’s related credit exposure consists primarily of residential mortgages and loans in the fire zone that amount to just under $1,000,000,000 The affluent nature of the client base, low loan to value ratios and effective insurance coverage substantially mitigate the credit risk of this tragic event. Additionally, we have established a prudent allowance that provides coverage for residual uncertainty, reflecting the potential for lengthy recovery efforts and the possible depreciation in land values. This marks the eleventh consecutive quarter where we added reserves on performing loans resulting in a total ACL of $6,900,000,000 We remain confident these allowances provide strong coverage relative to current and anticipated PCL on impaired loans.

Moving to Slide 19. Gross impaired loans of $7,900,000,000 were up $2,000,000,000 or 19 basis points this quarter, primarily driven by capital markets and commercial banking. As a reminder, last quarter we highlighted that our strong credit performance in our capital market portfolio over the last two quarters was unlikely to continue. Outcomes this quarter are reflective of the ongoing challenges in the current credit environment and the uneven timing of losses that can occur within our wholesale portfolio. In capital markets, a 1,500,000,000 new formation relates to the impairment of the previously mentioned accounts in the other services sector.

This former investment grade utility borrower was originated with a strong capital structure and has operated in a heavily regulated environment. Most recently, the borrower has been impacted by changes to regulatory and environmental expectations that require significant investment to address. We have been provisioning for this outcome and relative to the size of this exposure, losses are expected to be manageable. In Commercial Banking, new formations remain elevated driven by a few large impairments in the real estate related, consumer discretionary and agricultural sectors. However, several of the largest new formations in the real estate and related sector have recently returned to performing status.

Turning to Slide 20, PCL on impaired loans of 39 basis points was up 13 basis points quarter over quarter or $345,000,000 with provisions higher across all segments. In personal banking, provisions were up $66,000,000 with our unsecured portfolios continuing to be the main drivers of losses. In our mortgage portfolio, impairments and provisions are increasing in line with our expectations. Clients are showing resilience as they face higher refinancing costs supported by stable home prices and lower rates. In our commercial banking portfolio, provisions came in higher this quarter.

These outcomes are not unexpected given where we are in the economic cycle. Most notably this quarter, we took additional provisions on previously impaired loans in the forest products and automotive sectors and new provisions in the consumer discretionary and industrial products sectors. With respect to the performance of the commercial banking portfolio acquired from HSBC Canada, it is driving a disproportionate share of commercial banking PCL on a payroll loan, predominantly driven by a few larger accounts in economically sensitive sectors, an area where HSBC was more concentrated. Given HSBC portfolio also indexes to larger client sizes, provisions can be uneven. Since legal day one, two HSBC names accounted for 54% of the cumulative HSBC PCL on impaired loan.

Given the mix of the HSBC portfolio, we do expect PCL for this portfolio to remain elevated for the next few quarters, though not at the levels we experienced in Q1. With nearly a full year of experience with the HSBC portfolio, we have conducted our standard credit reviews for the majority of HSBC borrowers. And on that basis, we remain confident in the overall credit quality of the loans we acquired and believe the combined portfolio will continue to benefit from greater diversification that will support strong through the cycle performance. In capital markets, provisions were up $191,000,000 mainly due to the large account noted earlier in the other services sector. To conclude, despite being impacted by several unique factors and areas of weakness this quarter, we are seeing offsetting strength in other segments of the portfolio.

All of this reflects the breadth, scale and diversification of our combined franchise. We still expect full year 2025 provisions on impaired loans to remain within the guidance previously provided. We remain prudent in building reserves on performing loans as we navigate uncertainties across multiple fronts. Moving forward, while we remain confident in our Stage three PCL guidance for 2025, the uncertainty in the policy environment, specifically related to tariffs, could impact the likelihood and timing of allowance for leases and peak PCL. Credit outcomes will continue to be dependent on the magnitude of change in unemployment rates, the direction of magnitude of changes in interest rates and commercial and residential real estate prices.

As always, we continue to co actively manage risk through the cycle, and we remain well capitalized to withstand plausible yet worse severe macroeconomic and geopolitical outcomes. With that, operator, let’s open the lines for Q and A.

Conference Operator: Thank you. We will now take questions from the telephone line. We have the first question from John Akins from Jefferies. Please go ahead. Your line is open.

Analyst: Good morning. I was hoping that

John Akins, Analyst, Jefferies: you could expand upon the performance of City National in the quarter. If we take into account the incremental provisions that you indicated for the California wildfires, performance seems to be quite solid. Can you talk to where you stand in terms of the ongoing operational improvement and profitability increases that you should be looking for and what we may be able to expect through the rest of the year?

Dave MacKay, President and Chief Executive Officer, RBC: Yes. Thanks, John. It’s Dave for that question. We continue to your point to make very good progress in our City National franchise. I was actually out there last week with the team and remain really encouraged about the client franchise, the momentum that we’re starting to build across a number of fronts.

It’s still a heavy lift on the overall replatforming from a number of fronts, but we’ll get a lot of that work done this year. So I think from that perspective, we continue to work through it on the schedule that we’ve told you. When you look at volume growth, we continue to run off single service clients in the commercial space to bringing on multi product clients. I had a chance to meet with a number of clients last week. And the ability to cross sell, I think, more importantly is critical.

The group, as we’ll show you in the Investor Day, continues to build out platforms to sell into the wealth management space and we’re launching that as we speak. So we feel good. Commercial loan growth, as you probably noticed, is a little muted given the runoff, run on, but the pipelines are building really nicely. And as the runoff starts to slow as we demark it, you’ll start to see better growth there. And again, we have to finish the job on the replatforming and the regulatory remediation and we’re doing well on that front also.

So net net, we feel good about the franchise and you’ll hear more about it in a few weeks.

John Akins, Analyst, Jefferies: Great. Thanks for the color, Dave. I appreciate it.

Conference Operator: Thank you. The next question is from Mario Mendonca, TD Securities. Please go ahead.

John Akins, Analyst, Jefferies: Good morning. So at first blush that big increase in formation seems maybe it’s disconcerting, but on closer review like Page 22, something I could see that the majority of that like a meaningful amount of it relates to that one credit and other services. So maybe help me understand what’s going on there. What happened in the quarter that would because you knew something was up with this credit because you built up a meaningful performing. Something happened in the quarter that caused you to be impaired.

If you could just speak to what that was? And then how do you get confidence that the collateral is good that you don’t need to build more provisions against this?

Graham Hepworth, Chief Risk Officer, RBC: Yes. Hi, Mario, it’s Graham. Thanks for that question. You obviously noted right that this quarter our significant tick up in gross impaired loans was hugely driven by this one account in utilities sector. That accounted for about $1,500,000,000 of the new formations.

And if you set that aside, I would say new formations have kind of largely been in line with where we’ve been traveling for the last few quarters. This account, we’ve seen it facing some headwinds and then some struggles for the past year and we’ve been downgrading that along the way. That’s why those downgrades and some of the kind of management overlays we take on top of that have been the drivers for why we built up the Stage two loan losses or reserves against that in prior quarters. But as many of these accounts go, it progressed to a more kind of formal situation in its restructuring and that kind of triggered us moving it into impaired status this quarter. And with the information that we gleaned through that restructuring process is then how we firm up our reserves to where we are.

There still is a degree of uncertainty around this account, but I think the range of scenarios we’ve considered in that workout process, our teams are very close to the restructuring that’s going on there. I think we feel pretty good about that we’re pretty meaningful in the range of where we think this lands in the coming quarters.

John Akins, Analyst, Jefferies: And Graeme, is it common for Royal

Dave MacKay, President and Chief Executive Officer, RBC: to have like $1,500,000,000

John Akins, Analyst, Jefferies: hold on a single credit? Is that to my impression, that seems high to me. Perhaps that’s normal. Maybe Royal is really that big and can absorb that.

Graham Hepworth, Chief Risk Officer, RBC: That? I think that’s also a very good question, Mario. I’ll maybe just start with a couple of comments, but maybe I’ll turn to Derek on that too to give you a bit of context for the client situation here. But you are right. Like that this is an investment grade utility, so naturally we will have higher hold for those type of situations.

But this is certainly beyond what I would say is a natural hold size for us on the larger end. And when we get into larger hold, it’s typically associated with kind of a transactional situation where it might be more temporal in nature. Unfortunately, things here deteriorated during that period. So maybe Derek can provide a little bit more context on the background here.

Derek Nelner, Group Head, Capital Markets, RBC: Sure. Thanks for the questions, Mario. Building on what Graham said, I think he’s bang on that traditionally if you look at an investment grade name, we would have meaningful holds, but this would certainly be a larger exposure than what we would have across the rest of the book. This specific client has been a very long standing client of the firm, going back multiple decades. We would typically support them through a revolver hold that would be meaningful size, but much smaller than the exposure we had here.

As Graham said, at various points in time over that historical relationship, we’ve had different transactions or just moments in time where the client needed a shorter term or more temporal increase. That was the situation here where we had some bilateral exposure for a period of time. And unfortunately, given the way the situation deteriorated following our origination of that, we ended up with an outsized exposure, obviously, at a time when it went into a more difficult scenario in restructuring.

John Akins, Analyst, Jefferies: One quick thing on U. S. Margin. I was a little surprised to see that come down considering what we’ve seen from The U. S.

Regionals in their Q4, all the chatter about better deposit dynamics, rates higher for longer. The U. S. Regionals are talking about margins in a big way. We didn’t see it at Royal.

Can you speak to that?

Catherine Gibson, Chief Financial Officer, RBC: Yes, Mario, it’s Catherine. I’ll take your question. So City National, as we’ve talked about before, is asset sensitive. And so what you’re seeing as you flow through the book is basically the straight impact of the reduction in the Fed rate. And so that’s what you would have seen on the deposit side as well as the loan side.

We’ve got hedging in place. We have secured to that downside environment in the rate. And so as we go forward, we actually expect to see stability in that margin slightly increase as we go forward.

Dave MacKay, President and Chief Executive Officer, RBC: I would just add, Dave, we have a slightly higher beta clients, obviously, with affluent high net worth clients interest bearing accounts. So whereas the regionals would have, like we do in Canada, a greater share in non interest bearing accounts.

John Akins, Analyst, Jefferies: Makes sense. Thank you.

Conference Operator: Thank you. The next question is from Ebrahim Poonawala, Bank of America. Please go ahead.

Ebrahim Poonawala, Analyst, Bank of America: Good morning. I guess maybe just sticking with the margin, Catherine, if I heard you right, you talked about when you gave your NII guidance that mortgage and GIC spreads were better. Just talk to us in terms of is that margin expansion in Canada driven by just balance sheet dynamics, hedging, etcetera? Or is that also a reflection that competitive environment is well behaved at the moment?

Catherine Gibson, Chief Financial Officer, RBC: Thank you for the question, Ebrahim. So speaking to the margins that you would have seen play out this quarter for Canadian Banking, you’re bang on basically the dynamics that we saw at play with increasing spreads in mortgages. And on the GIC front, it came in better than what we expected and that’s why it’s a

Erica Nielsen, Group Head, Personal Banking, RBC: driver in increasing our guidance.

Catherine Gibson, Chief Financial Officer, RBC: For the product mix shift, product mix shift, again, you would have heard me in my comments, we’re seeing a positive shift with GICs basically being largely flat quarter over quarter, but the non maturity deposits being up 3% quarter over quarter. And with that shift, it’s definitely accretive to our margins. On the competitive front, I think that is still something that’s definitely at play. And as again, I noted in my comments, we’re seeing the competitive pressure, but not to the same degree as what we had forecasted.

Asim Imran, Senior Vice President, Investor Relations, RBC0: Yes. Maybe just a couple of, it’s Erica. Just a couple of sentiments on the competitive dynamic. I would say that, in both of those markets, we it remains very competitive. I would say that, we think about how we’re going to ensure that we serve the needs of the Canadian or the RBC customer and how we win.

And so what you’re seeing in the dynamics in this last quarter is our ability, to really do a good job of managing that price to the end state consumer while winning the volume that we want in the marketplace. And we expect that intensity and the competitive nature of that. I mean, in the mortgage business, we’re heading into the spring market. We always see the dynamics of the spring market play out differently than other times in the year. And so we’re ready and prepared for the intensity to continue.

Ebrahim Poonawala, Analyst, Bank of America: Got it. David, a quick one for you. How do you manage the business right now? Is the marching orders to the troops play offense, play defense? Or are there different orders depending on the market?

Just give us a sense given even during the call there were new headlines on tariffs. I’m just wondering how you’re going about putting or running the bank right now in terms of growth versus managing for sort of a downside scenarios? Thanks.

Dave MacKay, President and Chief Executive Officer, RBC: It’s a great question. I think we come off constructive markets. We have these possible scenarios going forward, but we remain hopeful that we find outcomes here that don’t do damage to both economies. So we are still helping our clients grow. Not every client is pulling back.

Some clients are pulling back. But there are many clients that are still moving forward with confidence as they have business models that aren’t affected by the overall scenario. You’ve got to believe that when if that much damage is done on both sides with cross the board tires that hopefully we find a better solution than that and we can move these issues forward without doing severe damage to both economies, particularly The U. S. Economy.

So I think we’re in a somewhat our clients are being more cautious obviously and we will take their cue. But you’re going to see, I think, pretty strong opportunities across a number of areas as well. So we are balanced in our approach. And if things deteriorate, we’ll review that. But right now, we have a lot of momentum and we’re going to continue to serve our clients as they need.

Ebrahim Poonawala, Analyst, Bank of America: Okay. Thank you.

Conference Operator: Thank you. Next (LON:NXT) question is from Manik Raman from Scotiabank (TSX:BNS). Please go ahead.

Analyst: Hi, good morning. David, as we think through the worst case scenario for tariffs, I’m just curious your perspective in terms of what’s a bigger challenge, tariffs or COVID both from the overall economic perspective and RBC specifically?

Dave MacKay, President and Chief Executive Officer, RBC: I think it depends on the COVID was really difficult at the beginning as this could be and that there was enormous uncertainty and managing uncertainty is where the challenge lies. So when we entered COVID in March and we started shutting the economy down and we didn’t understand the nature of support programs and how people would get through that, it was incredibly uncertain and stressful. If there are across the board tariffs, then we’ll have a similar kind of trajectory that we’ll have to figure out what’s the impact, what nature of support programs coming out, what’s the duration. All of that was uncertain in the pandemic. And hopefully, we can clarify that uncertainty.

So managing this uncertainty is what we do. We plan for scenarios. So I can’t say one’s harder than the other. They both have a lot of similarities in that the impacts will range, as Graham said, and time the tariffs are in, the nature of the tariffs, whether they’re broad based or not or more specific, which is a more likely scenario. You’ll go through a period of uncertainty.

Well, you’ll work through it. The world’s not going to collapse overnight. Today, so it’s very different. So this should be more manageable at the end of the day. We’re not shutting the whole economy down like we had to during COVID.

So I would expect whatever the scenario is, this should be more manageable.

Analyst: Got it. So you’re saying like a longer it will take longer to play out this tariff scenario. Yes. Thank you.

Conference Operator: Thank you. The next question is from Gabriel De Schien, National Bank Financial. Please go ahead.

Asim Imran, Senior Vice President, Investor Relations, RBC1: Hey, good morning. Just a couple on the performing provision. So the actual performing piece that was low, but that’s because you released some stage two to book into Stage three for that one loan. Can you give me the number of Stage two releases associated with that account? And then the you gave some Slide 36, I think it is, where you’re kind of you’re giving us some sense of the economic scenarios underperforming ACL.

And if I look at that pessimistic one with 7% GDP contraction, 10% unemployment, that does line up to the worst case scenarios if we get the more severe tariff situation. Are you able to tell me if you were to if that becomes your base case, what’s the uptick in performing ACL because it’s not your base case now?

Graham Hepworth, Chief Risk Officer, RBC: Yes, Gabe, thanks. It’s Graham. Just a couple of questions there. So on your first question, the utility account we’ve been talking about, so we had built up about $110,000,000 of double ounces on that name over prior quarters, most of that coming in Q4. So

Ebrahim Poonawala, Analyst, Bank of America: that

Graham Hepworth, Chief Risk Officer, RBC: would have been released out of performing and then we added $165,000,000 in Stage three. So net perspective, that’s $55,000,000 but from a P and L perspective that reduced performing $110,000,000 So I thought we indicated absent that we would have been building in roughly the same range where we have for the last few quarters. In terms of the scenarios, it’s a good question. Going back to my comments in my speech, we’ve looked at a whole range of scenarios here ranging from kind of very severe across the board tariffs, global impact through to we looked at the different Bank of Canada scenarios that they’ve been articulating through to more targeted scenarios and kind of the impacts of things like the steel and aluminum. And so the range of outcomes there is very, very broad.

We provide this slide just to highlight to you that none of those scenarios we’ve looked at are outside what we already include in our IFRS nine provisioning, right. And so for context, I don’t think we’ve ever provided this data point before. We already attribute about 35% weighting to those three pessimistic scenarios in our IFRS nine construct, right? So we already attribute a fairly significant weighting to these pessimistic outcomes and in tariffs we might just have what could be the driver of them. I guess the other question and just to give you context, we take the pessimistic, the general pessimistic of those three scenarios, the one we attach the most weight to and it’s kind of in the middle of the pack of the three scenarios, but would be in line with kind of the higher end of the tariff considerations we’re worried about.

If we shifted 100% to that, you’d be looking at an ACL performing ACL increase of about 30%. And so that kind of gives you a marker on the high end of what possibly could play out. Just add on to the question earlier about comparing it to COVID, like again, I don’t see any of this having the same day one impact as COVID did. As Dave said, that was a complete shutdown of the economy. This is much more targeted, and that’s assuming it plays out kind of in that worst case scenario, let alone kind of government actions, etcetera, coming into play on it.

So hopefully that gives you a bit of context, Gabe, and a marker there that helps a little bit.

Asim Imran, Senior Vice President, Investor Relations, RBC1: No, no, that’s great. Very, very clear. I’m going to have to reread the Ram Hepworth section of the transcript again, but very helpful. Thanks.

Conference Operator: Thank you. Next question is from Paul Holdan from CIBC (TSX:CM). Please go ahead.

Asim Imran, Senior Vice President, Investor Relations, RBC2: Thank you. Good morning. And just to be very clear sorry, just to follow-up on that topic, Graham. Just to be very clear, you didn’t increase performing PCLs for potential tariff risk because you believe your pessimistic scenarios plus the way you’ve put towards those pessimistic scenarios already adequate enough?

Graham Hepworth, Chief Risk Officer, RBC: Well, from where we’re at, yes. I would say, I mean, again, other factors came into play this quarter. If we set tariffs aside and we looked at kind of everything else that’s playing, as Dave commented, we’ve seen some better than expected strength in Canada this past quarter. The inflation situation seems to be now contained. And so all of that probably would have led us to a spot that we would have reduced our weights on the pessimistic this quarter.

Because of the tariffs, we did not do that. And so in that sense, we didn’t build for it, but we certainly kind of held back on some releases. I think likewise, as we looked at it, our baseline expectations are certainly on the more conservative end of the spectrum of what you see in the market. And so all those are kind of the factors that we consider this quarter. But I think the key going forward, we’ll continue to monitor this.

And as we learn more, we’ll impound that in our base case. We’ll continue to reflect on the uncertainty and whether we think we need to build more for that or again likewise push off potential releases. But we’ll continue to evaluate that as we learn more through the quarter.

Asim Imran, Senior Vice President, Investor Relations, RBC2: Okay. That’s helpful. And that kind of leads to my second question. So no change in the impaired PCL guidance for the year despite obviously a high start to the year. You’ve highlighted why.

Your previous guidance, I think, incorporated an expectation that impaired PCLs would peak second half of the year. So maybe let’s attribute that to sort of Canadian retail. Is that still your expectation or maybe that has improved or changed just because of the point you highlighted, Canadian economy ex tariffs was actually starting to do better than previously expected?

Graham Hepworth, Chief Risk Officer, RBC: Right. That’s a good question. And maybe just to kind of break down the guidance there a little bit. In terms of where we’re going to peak for the year, well, given what was transpired in Q1, primarily driven by that one account, we don’t expect the rest of the year to be above that. But if we normalize for kind of the utility account that added about seven basis points to Stage three this quarter, we still feel good about the trajectory for the rest of the year.

And that’s why we’re holding the overall forecast that we guided to in Q4 are the same. The component parts there, I would say retail is still consistent with where we were in Q4. We continue to expect both unsecured and secured products to accrete up throughout the year. And so we anticipate will peak out towards the end of the year. Wholesale, again harder to trend quarter to quarter, but we continue to expect wholesale to be at elevated levels.

It differs business by business. C and D is probably seeing more balanced scorecard. Capital markets the same. Commercial being impacted more by the conditions in Canada. And so that’s probably more overall neutral throughout the rest of the year.

But when we put all that together, I think we still feel good about the range we’re in. And it’s somewhat supported by the strength of the economy to date. How the tariffs play into all that? I wouldn’t expect the tariffs to have a huge impact on Stage three in 2025. I think the impact of that really will play its way through into 2026.

I think 2025 will be more what we do with our Stage one and two in terms of tariffs.

Asim Imran, Senior Vice President, Investor Relations, RBC2: That’s great. I’ll leave it there for interest of time. Thank you.

Conference Operator: Thank you. The last question is from Lamar Persson, Cormark Securities. Please go ahead.

Derek Nelner, Group Head, Capital Markets, RBC: Yes, thanks. Maybe for Catherine, just wondering if you could just double click on what gives you the confidence to take the NII guidance higher. I guess just given the uncertain outlook of the impact of these tariffs on volume growth, increased macroeconomic uncertainty and the potential implications on competition that could impact like mortgage spreads, is there some element of revenue synergies on HSBC incorporated in there or maybe FX benefits that you didn’t mention? Or is it really or is it just down to the benefits of these non maturity deposits and spreads in mortgages and GICs just that rate? Thanks.

Catherine Gibson, Chief Financial Officer, RBC: Hi, Lamar. Thank you for the question. You basically hit all the key parts for driving our guidance up for the quarter. The one item that I would add is FX that did was a positive tailwind for us. So just going back to the key drivers, it was the positive results we saw in Q1 from the spreads as well as the product mix, the FX.

And to your question, HSVSP has always been included in our guidance. And so no change on our assumption there going forward.

Derek Nelner, Group Head, Capital Markets, RBC: But you’re not adding in like revenue synergies expectations on HSBC that you haven’t quantified yet. Is that part of it? Is that a piece of it or no?

Catherine Gibson, Chief Financial Officer, RBC: No, that’s not part of why we changed. Back to the reasons that I articulated, it is what we’re seeing in our results for Q1. And we felt it was appropriate to take up our guidance given the strong results.

Derek Nelner, Group Head, Capital Markets, RBC: Okay, great. Thank you.

Conference Operator: Thank you. There are no further questions at this time. I would now like to turn the meeting over to Dave Mackay.

Dave MacKay, President and Chief Executive Officer, RBC: I want to thank everybody for their questions. Great questions. Obviously, we understand the focus on the credit side. But I do want to bring in the messaging back to just Canadian economy performed through most of the quarter better than we thought. The client activity was strong across all our businesses and I think you saw the benefit of that, whether it was capital markets, wealth management, Zumrba Bank had an outstanding quarter, Commercial Bank, lots of client activity.

Our compete level was very high and we gained market share. That drove really strong revenue performance across the board with some margin expansion. Margin expansion was really benefited from our strategic focus on deposits. You’ve heard us talk for deposits for a decade, but consumer deposits, commercial deposits continue to build out RBC Clear, as you’ll hear more about at the March. And therefore, that provides us with a nice tailwind coming out of Q1 into the rest of the year.

There is uncertainty. Obviously, a lot of your questions are around the uncertainty. We face that uncertainty knowing that we have plans, we have stability, we’re working with our clients. We’re hoping for the best preparing for the worst. And we’re really in a great position to help our clients.

Volatility does help the business, a number of the businesses as well, and we’ve capitalized that on the capital market side. So feeling very good about how we started the year. You heard from Graham great questions around where we came on the credit side, a few lumpy issues there, but overall we feel good about our book and how it’s going to perform and continue to build the business and drive really strong shareholder returns. So thank you for your questions and look forward to seeing you next quarter.

Conference Operator: Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

Erica Nielsen, Group Head, Personal Banking, RBC: This conference is no longer being recorded.

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