Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q4 2025
Operator, Operator
Good morning, everyone. Welcome to RBC's conference call for the fourth quarter results of 2025. This call is being recorded. I will now hand it over to Asim Imran. Please proceed.
Asim Imran, Speaker
Thank you, and good morning, everyone. Speaking today will be Dave McKay, President and Chief Executive Officer; Katherine Gibson, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Erica Nielsen, Group Head, Personal Banking; Sean Amato-Gauci, Group Head Commercial Banking; Neil McLaughlin, Group Head Wealth Management; Derek Neldner, Group Head Capital Markets and Jennifer Publicover, Group Head Insurance. As noted on Slide 2 of the quarterly slides and the strategic update, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis, and considers both to be useful in assessing underlying business performance. And with that, I'll turn it over to Dave.
David McKay, CEO
Thanks, Asim. Good morning, everyone, and thank you for joining us. Today, we reported record fourth quarter earnings of $5.4 billion and adjusted earnings of over $5.5 billion, closing out a record year in which we meaningfully drove our strategy forward. Our results speak to the strength of our diversified business model. This includes benefits from our leading deposit franchises in Personal Banking and Commercial Banking, Capital Markets reported record fourth quarter results. Our Wealth Management segment also reported record revenue, reflecting strong markets and client flows. These outstanding results underpinned a strong return on equity of 16.8% for the quarter supported by a CET1 ratio of 13.5%. This morning, we also increased our dividend by $0.10 or 6%. We further returned capital to shareholders through $1 billion of share buybacks of nearly 5 million common shares this quarter. Through an annual review of our medium-term objectives, we are increasing our return on equity, NCO from 16% plus to 17% plus. I will speak more to this after Graeme's remarks by providing an update on our Investor Day financial targets while sharing a strategic update on how we are driving long-term shareholder value. Before passing to Katherine for her views on the quarter and the outlook for fiscal 2026, I want to briefly address the operating environment in light of the heightened geopolitical and economic uncertainty. Fiscal and monetary policy has limited the impact of persistent sectoral and regional trade tensions, while other parts of the economy remain resilient. As Canada's effective tariff rate remains low and as Canadian exports to the U.S. remains solid, down 2% to 3% using the latest available data, the Canadian economy should maintain its demonstrated resilience as Canada negotiates a longer-term renewal of CUSMA. Furthermore, the ongoing shift towards a service-oriented economy should also offset some of the trade-related headwinds. North American consumers remain resilient, and we are confident in the overall resilience of our own retail portfolios. However, the impact of the K-shaped economy is increasingly polarizing with more affluent consumers investing disposable income in growing markets, while less affluent consumers struggle with affordability. Over the medium term, the federal government's infrastructure and defense spending should stimulate growth in jobs in Canada and attract foreign investment. The challenge is the country's ability to get these projects approved by all stakeholders in a timely and efficient way. While the operating environment remains fluid and complex, and there is a lot of hard work yet to be done by governments and the private sector, I am cautiously optimistic on the outlook for Canada. As Canada's largest financial services company by market capitalization, we recognize the important role we will continue to play in driving economic growth for Canada. In the U.S., our businesses are engaged in constructive dialogue with clients on lower U.S. interest rates and pro-growth deregulation, providing more confidence in corporate boardrooms, leading to increasing market activity across sectors from banking and technology to manufacturing. With that, Katherine, over to you.
Katherine Gibson, CFO
Thanks, Dave, and good morning, everyone. Starting with Slide 7. This quarter, we reported record results with diluted earnings per share of $3.76. Adjusted diluted earnings per share of $3.85 was up 25% from last year, reflecting continued momentum across most of our businesses and strong adjusted all bank operating leverage of 8.5%. Pre-provision pretax earnings were up $1.8 billion year-over-year, more than offsetting the increase in provisions for credit losses, which Graeme will speak to shortly. Turning to capital on Slide 8. CET1 ratio of 13.5% was up 30 basis points from last quarter, largely reflecting strong internal capital generation net of dividends. This is partly offset by higher risk-weighted assets as we continue to deploy capital to drive organic growth, and partly offset by a reclassification of certain RWA due to a methodology change. Returning capital to our shareholders through share buybacks and dividends remains a key part of our strategy. This quarter, we repurchased 4.8 million shares for approximately $1 billion, resulting in a total payout ratio of 59% for the quarter. Moving to Slide 9. All bank net interest income was up 13% from last year, or up 11% excluding trading revenue. Net interest income growth, excluding trading was up 17% for the year. All bank net interest margin, excluding trading revenue was up 3 basis points from last quarter, mainly reflecting higher margins in Personal Banking and Commercial Banking. Canadian Banking NIM was up 5 basis points from last quarter, largely benefiting from a favorable shift in product mix and the continued benefits of long-term interest rates. Moving to Slide 10. Reported noninterest expense was up 4% and core noninterest expense was up 5% from last year. Core expense growth was driven by higher variable compensation commensurate with higher revenues. Higher volume-driven costs and investments in technology also contributed to the growth. This was partly offset by continued expense discipline and cost synergies related to the acquisition of HSBC Bank Canada. On taxes, the adjusted non-TEB effective tax rate was 20.4% this quarter, down approximately 1 percentage point relative to last quarter, largely reflecting a favorable tax adjustment in the U.S. Turning to our Q4 segment results beginning on Slide 11. Personal Banking reported earnings of $1.9 billion this quarter. Focusing on Personal Banking Canada, net income was up 20% from last year. Strong operating leverage of 9% underpinned an improvement in efficiency ratio to 38.4%. This was partly offset by higher provisions for credit losses. Net interest income was up 13% from last year. Loans grew 3% year-over-year, reflecting growth in mortgages and cards. Deposits grew 1% from last year, driven by demand deposit growth of 8%, partly offset by a 4% decline in GIC. Noninterest income was up 7% from last year, largely reflecting the strength of our leading money in franchise with approximately $5 billion in mutual fund sales, half of which was in the fourth quarter. Turning to Slide 12. Commercial Banking net income of $810 million was up 5% from last year. Pre-provision pretax earnings were up 9% from last year, reflecting record revenue and well-managed expenses. Loans were up 5% and deposits were up 3% last year. Loan growth benefited from our diversified portfolio led by resilient sectors, including agriculture, health care and public sector, partly offset by slower growth in tariff-impacted sectors, including manufacturing and logistics. Commercial real estate continues to face cyclical headwinds. Turning to Wealth Management on Slide 13. Net income of $1.3 billion rose 33% from last year, underpinned by record revenue. Noninterest income was up 14% from last year. Assets under management in RBC Global Asset Management increased by 17% to $794 billion year-over-year, reflecting market appreciation and net sales in long-term Canadian retail and institutional money market mandates. We continue to see momentum in Canadian retail mutual fund net sales as our clients move back into market across fixed income, balance and equity mandates. Assets under administration were up 17% in Canadian Wealth Management and 14% in U.S. Wealth Management versus last year. Our net interest income was up 13% from last year, including higher results in Canadian Wealth Management, driven by average volume growth in deposits and higher spreads. Higher revenue this quarter was partly offset by higher variable compensation in line with increased compensable revenues. City National Bank generated USD 163 million in adjusted earnings, including a release in performing provisions, up 79% from last year and 17% from last quarter. Turning to our Capital Markets results on Slide 14. Net income of $1.4 billion increased 45% from last year, underpinned by a record fourth quarter revenue of $3.6 billion. On a pre-provision pretax basis, results were up 62% from last year to $1.6 billion. Global Markets revenue was up 30% from last year, reflecting higher fixed income trading across all regions, particularly in rates, municipal bonds and higher volumes and spreads in repo products. Higher equity derivatives trading also contributed to the increase. Corporate and Investment Banking revenue was up 18% from last year. Investment banking revenue was up 26% year-over-year reflecting higher M&A activity. Lending and transaction banking revenue was up 12%, driven by higher volumes. These factors were partly offset by higher compensation on increased results and continued investments in technology. Lastly, turning to Slide 15. Insurance net income of $98 million was down 40% from last year, primarily reflecting the impact of unfavorable annual actuarial assumption updates, an adjustment related to a previously recognized reinsurance recapture gain. Effective Q1 2026, we are revising our methodology for allocating capital to insurance to more closely align with legal entity capital requirements. This increases attributed capital for insurance impacting the ROE effective fiscal 2026. This change though in the segment allocation has no impact at the all bank level. I'm now going to spend a few minutes on our outlook for 2026. We expect positive all-bank operating leverage for the year, including 1% to 2% positive operating leverage for Canadian Banking. We expect annual all bank net interest income growth, excluding trading to be in the mid-single-digit range. I'll spend some time unpacking the drivers given there are a few moving parts. As a reminder, in the past, we have highlighted that there are many variables that impact NIM, including changes in client and competitive behavior and the forward curve, which are difficult to predict in the current dynamic environment. Our guidance reflects improving product mix, including higher growth in demand deposits relative to GICs and benefits from our structural hedging strategy. Furthermore, lower spread mortgages rolling into higher spread mortgages in the second half of 2026 are also expected to be a benefit, contingent on the competitive environment. Solid volume growth across our businesses is also expected to contribute. We expect mortgage growth in the low to mid-single-digit range, reflecting continued stabilization in the Canadian housing market. Commercial loan growth is expected to trend in the mid- to high single digit range, contingent on improving macro conditions and client sentiment. The $117 million in benefit this quarter related to the purchase price accounting accretion of fair value adjustments from the HSBC Canada acquisition will decrease to approximately $80 million next quarter, and largely run off by Q2 2026. This is expected to impact all bank net interest income growth by approximately 1%. Also, as a reminder, the second quarter has fewer days than the other quarters, which generally results in a decrease in net interest income. Turning to noninterest income. Noninterest income is expected to benefit from a continued shift in client flows towards investments, partly offset by reduced fees in the second half of the year, in line with regulations set out in last year's federal budget. In Capital Markets, we continue to maintain a high-level engagement with our clients in what we deem a constructive environment as deal pipelines continue to remain robust. We expect all bank expense growth to be in the mid-single-digit range, reflecting higher variable compensation. For Q1 2026, we expect to incur seasonally higher costs related to pension and eligible to retire benefits. We will continue upholding a disciplined approach to cost management, while investing in our strategic growth initiatives, as well as continued investments in our broader safety and soundness framework. As noted at our Investor Day, we expect the adjusted non-TEB effective tax rate to be in the 21% to 23% range, reflecting changes in earnings mix. As we look to 2026, we'll continue to prioritize client-driven organic growth, dividend increases and be more active in our use of buybacks, while maintaining strong capital levels. Dave will speak to this further in the strategic update. To conclude, we generated record results this quarter, underpinning an adjusted ROE of 17.2%. Our results highlight our efficient use of resources, including our robust capital, diversified sources of funding and liquidity and prudent cost management. And with that, I will turn it over to Graeme.
Graeme Hepworth, CRO
Thank you, Katherine, and good morning, everyone. I will now discuss our allowances in light of the current macroeconomic conditions and ongoing trade uncertainties. Despite facing consistent economic challenges, the Canadian economy has shown resilience over the past year, with strong household spending. As we approach 2026, we anticipate continued stabilization in the Canadian economy, bolstered by recent rate cuts, government fiscal support, and federal budget measures. However, trade issues between the U.S. and Canada remain largely unresolved. As a result, we have adopted a cautious approach with our allowances, maintaining a high focus on downside scenarios consistent with the previous two quarters. We recorded a total of $14 million or 1 basis point of provisions on performing loans this quarter. This is mainly due to changes in credit quality and portfolio growth, which were partially offset by positive changes in our macroeconomic forecast. Consequently, we saw a slight increase in allowances on performing loans in both Personal Banking and Commercial Banking, counterbalanced by releases in Wealth Management from the City National portfolio. It is important to highlight that economic impacts have not been experienced uniformly across our portfolio. Rising unemployment in Ontario and the Greater Toronto area, together with increased payments at mortgage renewal, have led to higher consumer impairments in these areas. Additionally, weakness in these regions and uncertainty from U.S. sector-based tariffs have significantly affected economically sensitive sectors within the commercial banking portfolio. In response, we have continued to build reserves against our Canadian portfolios. Overall, we maintain strong reserves and will continue to manage our allowances carefully due to the ongoing uncertainty as we move into 2026. Gross impaired loans totaled $8.7 billion, a decrease of $69 million or 2 basis points from last quarter, primarily due to accounts returning to performing status and higher write-offs as total new formations remained flat quarter-over-quarter. While our overall gross impaired loans remain elevated, we are observing a more stable trend in the pace of new wholesale formations and watch list exposures since the start of the year. In Capital Markets, new formations increased by $160 million compared to Q3. This increase was offset by more borrowers returning to performing status and higher write-offs. Impairments this quarter mostly resulted from accounts in the consumer discretionary, real estate-related, and financial services sectors. In Commercial Banking, new formations declined by $215 million quarter-over-quarter, primarily driven by accounts in the real estate and related sectors, as well as consumer discretionary and transportation sectors. The provision for credit losses on impaired loans increased by 38 basis points, up 2 basis points or $71 million from the previous quarter, aligning with our expectations of higher provisions across most segments. For the entire year, the provision for credit losses on impaired loans remained at 37 basis points, in line with our annual guidance, despite an impairment associated with one significant Capital Markets borrower in the other services sector. This illustrates the benefits of diversification and scale within our loan portfolio and overall business model. Losses in the retail portfolios were $74 million higher this quarter, consistent with our expectations. Our unsecured portfolios continue to be the primary source of losses for this quarter. Mortgage provisions are rising as anticipated due to regional factors previously mentioned. We expect retail losses to stay elevated in 2026 as we navigate the lagging effects of higher unemployment, consumer insolvencies, and ongoing payment shocks from mortgage renewals in Canada. We continue to assess the performance of the condo segments, which continue to perform better than the wider mortgage portfolio, reflecting our strong underwriting practices and portfolio quality. In the commercial portfolio, provisions increased by $50 million this quarter. We recorded additional provisions on a previously impaired commercial real estate exposure linked to the insolvency of a large Canadian retailer, along with a new provision in the consumer discretionary sector. Additionally, our annual update regarding our coverage ratio led to a minor additional provision for the quarter. The cyclical supply chain and consumer discretionary sectors accounted for most of our commercial losses over the past year due to weaker economic conditions and the impact of higher interest rates earlier this year. In Capital Markets, provisions decreased by $73 million quarter-over-quarter as we had accounted for provisions on two large borrowers in the prior quarter. In conclusion, we remain confident in the quality, diversification, and resilience of our portfolios. We are pleased with our performance during a year marked by prolonged uncertainty. This year, we added a total of $622 million in provisions on performing loans, positioning us to effectively navigate risks, whether from uncertain outcomes related to U.S. trade policy, geopolitical risks, or surprises to our economic forecasts. Looking forward to 2026, with early signs of stabilization in specific sectors and employment figures, we expect Canadian GDP to strengthen gradually while unemployment rates decrease from an earlier peak of 7.1%. However, economic growth is anticipated to remain relatively modest, and the impacts of fiscal stimulus may continue to exert pressure on certain sectors and regions. Given this environment, we forecast the provision for credit losses and impaired loans in 2026 to remain within a similar range as seen in 2025. While the timing and outcomes of CUSMA negotiations present ongoing uncertainties, we believe that the potential downside risk has been adequately addressed in our allowances, which reinforces our financial resilience throughout these cycles. Credit outcomes will continue to be influenced by the extent and duration of tariffs, the effectiveness of announced fiscal support and stimulus measures, and the performance of labor markets, interest rates, and real estate prices. As always, we will proactively manage risk throughout the cycle while ensuring we remain well-capitalized to handle a broad range of macroeconomic and geopolitical events. Now I will turn it back to Dave.
David McKay, CEO
Thank you, Graeme. Before speaking to the progress made against the strategies we articulated at our Investor Day in March, I will share some highlights of our annual performance, starting with Slide 3 of the strategic update deck. In fiscal 2025, we delivered an ROE of 16.3%, underpinned by over $66 billion in revenue and $20.4 billion in net income with record results in Wealth Management, Personal Banking, Capital Markets and Commercial Banking. Revenues were driven by strong volume growth, constructive markets and margin expansion across key products. Our earnings supported the increased return of capital to shareholders and a $58 billion increase in risk-weighted assets from last year, as we continue to support our clients' financial needs and growth aspirations. At the same time, we prudently built our allowance for credit loss ratio to 71 basis points and saw common equity Tier 1 growth of $9.8 billion with our CET1 ratio increasing to a robust 13.5%. Our funding strength is further underpinned by 127% LCR, a 100% loan-to-deposit ratio across Canadian Banking, growing U.S. deposits across City National and Transaction Banking and relatively narrow wholesale funding spreads. We grew book value per share by 9% this year, in line with our historical 10-year average, while returning over $11 billion of capital to our common shareholders through dividends and share buybacks. Slides 4 through 6 are a good reminder of the foundational strength of our business model, which is underpinned by being the leading financial service provider in Canada across most businesses and client categories. In addition, we have a strong presence in the United States and Europe and attractive client verticals in some of the world's largest fee pools. The success of our diversified business model is further strengthened by how our segments are working together as one RBC to deepen client relationships and bring them the full strength of our bank. We're delivering more comprehensive FX, payments and transaction banking solutions to our wholesale clients across platforms and geographies, while looking to leverage the North South connectivity of RBC Clear and RBC Edge. We're also providing complex solutions for our high-net-worth and ultra-high-net-worth clients, leveraging the collective expertise of our Capital Markets and Wealth Management businesses, as we look to capitalize on our combined origination and distribution strengths. In short, our clients are at the center of everything we do. Turning to the ambitions we set out at Investor Day, we are already seeing outcomes unfolding from the significant growth opportunities we articulated in March. Starting with the integration of HSBC Bank Canada on Slide 7, we expect to exceed our initial target of $740 million in annualized cost synergies. With $115 million of cross-sold revenue in 2025, we are well on our way to achieving the $300 million annual revenue synergies target by 2027. Going forward, we expect to drive further synergies with both our commercial and retail client franchises, including cross-selling Personal Banking and Wealth Management products, as well as higher payment volumes and fees from enhanced treasury management solutions, international trading capabilities, along with strength with internationally connected clients. Moving to our ambition of leveraging our market-leading artificial intelligence capabilities, where we continue to see the benefits of our long-term organic investments in data platforms and foundational models. In the past, you have heard us speak about Aiden, NOME, PVC.AI and our leading ability to build and implement machine and reinforcement learning models. We believe these capabilities have accelerated our ability to build and deploy generative AI models. We are partnering with leading firms like NVIDIA to accelerate our Agentic AI strategy, enhancing our Aiden platforms across Capital Markets. We're also implementing key initiatives across our businesses, including reimagining mortgages and workflow for our commercial, corporate and investment banking teams. We're also leveraging AI to build the technology platform of the future, showing early results in enhanced security to protect the bank and clients' technology operations and AI-enabled developer productivity. This includes the development of over 5 million lines of code over 55,000 code reviews and over 3,000 test suites. RBC Assist, our internal AI tool has been launched to over 30,000 employees across front office and functional roles, enabling employees to be more productive in their day-to-day work. We are on track to meet our target of $700 million to $1 billion of enterprise value from artificial intelligence. Importantly, our target is net of investments, including building on investments already made in data storage, GPU clusters, proprietary LLMs, risk governance and in people. We are also performing well against our enterprise-wide targets as seen on Slide 8. As Katherine noted earlier, we reported strong growth in net interest income this year, as we leverage the strength of our Canadian deposit franchises. In addition, strong fee-based growth in Wealth Management and Capital Markets revenue streams, combined with an uptick in transaction banking revenue increased our revenue productivity with a revenue to RWA ratio up over 40 basis points this year. At the same time, we are driving our efficiency ratio towards our 53% target while continuing to invest for future growth. Moving to Slide 9. Our goal continues to be to drive long-term shareholder value, which is reflected in our four medium-term objectives. As I noted earlier, we are increasing our through-the-cycle medium-term ROE objective to 17% plus due to the improved cost efficiencies and increased revenue productivity, including strong client flows and funding synergies from deposit growth. We are constantly evaluating growth opportunities to drive shareholder value with the goal of optimizing growth, returns and capital efficiency. We believe a 17% plus target allows us to do it all through a market cycle. We are always focused on achieving better outcomes for our shareholders than simply meeting our objectives and targets. Our premium ROE, robust capital generation and current CET1 ratio give us significant strategic optionality. Even after deploying capital to grow our franchises and pay dividends, we expect to build significant excess capital over the coming years. Net income, net of dividends and core of RWA growth is estimated to add approximately 80 basis points to our CET1 ratio annually. We'll continue to consider all dimensions of capital allocation, focusing on client-driven organic growth within our risk appetite and maintaining higher capital buffers during more volatile times. You've heard me say before that there is no half-life to capital. Returning capital to shareholders is an important part of our plan. This year, we bought back 15 million or 1% of our common shares outstanding. Our total payout ratio was 57% this year. Unless we see changes in the domestic stability buffer, we continue to view that we have surplus capital in excess of 12.5%. At this point, our strategy is to operate within a 12.5% to 13.5% range in the current environment. If there is sustainable excess capital above 13.5% CET1 ratio, beyond what is needed to support longer-term organic growth opportunities within our risk appetite, we would look to deploy it towards accelerated buybacks above our recent cadence. We will also continue to strive to consistently grow our dividends, which have increased at a 7% CAGR over the last 10 years. Given the strength of our performance, our fiscal 2025 dividend payout ratio was at the lower end of our 40% to 50% medium-term objective. Going forward, we will look to sustainably operate at the midpoint of this range. Today's outsized dividend increase reflects this intention. I will provide an update on how we're progressing on some of the key segment-specific strategies we highlighted at our Investor Day. On Slides 10 and 11, Capital Markets generated record revenue of $14.4 billion and earnings of $5.4 billion this year, as our major businesses were well positioned to take advantage of constructive markets. Importantly, we are on track to meet our Investor Day targets of pretax pre-provision earnings growth and increased revenue profitability from our financial resources. We successfully grew our client franchises this year, leveraging the full breadth of our capabilities through our holistic global coverage model. Business growth was enabled by continued investments in talent with accelerated hiring of senior coverage and relationship managers in global markets and investment banking across the United States and Europe. Additionally, the cross-platform investments we made in artificial intelligence and technology are amplifying the execution of our strategic priorities. In Global Markets, we delivered broad-based market share gains with notable growth in focus areas, including equity derivatives and financing, commodities and G10 FX, where we're capturing benefits from enhanced one RBC approach. With the increased scale of this business, we believe we can sustainably deliver strong results over the cycle, and we are focused on increasing market share guided by our prudent risk appetite. In Global Investment Banking, we are seeing the results of our strategic shift towards winning larger mandates, resulting in increased revenue and productivity of senior bankers. Given the strength of our technology, data center, energy, power, utility and infrastructure teams across both investment banking and corporate banking, we are well positioned to benefit from the structural growth in artificial intelligence infrastructure and energy systems globally. And lastly, we are pleased with the progress of RBC Clear, our U.S. transaction banking platform. We've onboarded over 180 clients and USD 23 billion in deposits this year and are well on our way to reaching our USD 50 billion medium-term target. The funding benefits from this strategy will not only reduce our reliance on wholesale funding, it will also enable our growth strategies. Moving to Wealth Management on Slides 12 and 13. We improved the pretax margin to 24.5%, as we drive towards our Investor Day target of 29% by 2027. We are well positioned to benefit from secular trends across our key client segments, with annual net new assets increasing $33 billion or 4.9% in Canadian Wealth Management, excluding direct investing. U.S. Wealth Management net new assets increased by USD 28 billion or 4.3%, excluding CNB. And our total AUA across our Wealth Management advisory businesses has now reached $2.3 trillion. We are looking to further extend our industry-leading position in our Canadian full-service private wealth businesses by enhancing product capabilities that are becoming increasingly important to our client base. We've doubled sales of private alternatives while having a record year for insurance sales to our Canadian clients. We are also increasing our investments in RBC Direct Investing, the second-largest self-directed platform in Canada, to enhance the client value proposition for the next leg of growth. We introduced commission-free ETF trading to create more value and win with early-stage investors. We launched our role distinction program that provides dedicated support and exclusive benefits to high-net-worth clients as they transition into full-service relationships. This year, we attracted over 90 experienced financial advisers to U.S. Wealth Management, with approximately 80% of these hires delivering over $2 million of historical revenue production. We will continue hiring over the medium term to meet our Investor Day commitments. An important part of our U.S. strategy is to expand our product shelf with proprietary banking offerings to our U.S. Wealth Management and private banking clients. By the end of fiscal 2026, we will be launching enhanced credit card and mortgage capabilities, as we continue to grow security-based and tailored lending. We continue to believe in the secular opportunity in U.K. Wealth Management, given the country's structural retirement funding challenges. While foundational technology integration efforts related to the Brewin Dolphin acquisition are taking longer than anticipated, we believe this will be largely complete by the end of 2026. We remain steadfast in achieving our profitability targets over the medium term. RBC Global Asset Management maintained its leadership position in Canada, as we leveraged our leading affiliated retail distribution network, while enhancing our global distribution capabilities. We are expanding our investment capabilities with production innovation, adding to our growing expertise across traditional active mandates. This is in addition to a growing platform of alternative asset classes. These factors contributed to strong net sales of over $38 billion or 5.6% at RBC GAM and growing AUM to $794 billion. Turning to Slides 14 and 15, and looking at the U.S. as a region, we have made solid progress in enhancing profitability across our U.S. businesses. Net income was up 28% from last year, driven by more active clients, strong markets and improved operational efficiency. City National's net income increased to USD 350 million or USD 450 million on an adjusted basis as it continues to execute well at the client level, while growing deposits. The U.S. regions ROE increased by 1.4% to 10.7%, with the efficiency ratio improving by 4% to 79%. This success has been underpinned by several factors, including leveraging enterprise-wide capabilities, centralizing shared services and eliminating duplicative processes, operations and functions. We've seen improvement in both capital and funding efficiency through various financial resource optimization programs. Moving to Slides 16 and 17. This was a great year for Personal Banking. In addition to record revenue, we are on track to meet our Investor Day target of a sub-40% efficiency ratio by 2027. We're proud that RBC was ranked highest in customer satisfaction among the big five retail banks in the J.D. Power Canada Retail Banking Satisfaction Study for the second consecutive year. We added 400,000 net new clients to our premium client base this year. In addition, 40% of new clients acquired in the year are now multiproduct clients. We remain focused on capturing the shifting money in motion, benefiting from the combination of our award-winning client value proposition, interconnected distribution channels and leading deposit and investments franchises. Reciprocity is also a core part of our client value proposition. We added strategic relationships with iconic Canadian partners such as Canadian Tire and the Pattison Food Group. This helped us grow our Avion member base by 700,000 in 2025. Looking forward, we are excited about our partnership with Visa for the 2026 FIFA World Cup. With respect to channel optimization, our strategy to automate low complexity work, leverage artificial intelligence and increase the number of specialists in our sales force is helping meet our clients' evolving needs while also driving higher adviser productivity and workload digitization. Turning to Slides 18 and 19. Commercial Banking expanded on our largest business deposit and lending franchise in Canada. We exceeded our growth goals in 2025 with double-digit volume growth on both sides of the balance sheet, driving record revenue. Ultimately, we did not meet our profitability expectations. Our ROE declined from fiscal 2024 largely due to higher provisions amidst an uncertain macro backdrop. Despite unfavorable business sentiment and heightened competition, average commercial banking deposits and loans were up 10% and 16%, respectively. Our diversification and leading product shelf, including our market-leading transaction banking solutions helped offset the impact from the more challenged sectors while consolidating business with existing clients and attracting new clients. Increased investments in dedicated service and integrated distribution teams, along with realigned coverage positions us well to unlock further growth as business sentiment recovers. We are seeing strong momentum with transaction banking revenue up approximately $80 million from last year, as we saw increased client activity in both flows and account management activities. In addition, we are increasing our collaboration with Capital Markets and City National to support the North South banking needs of our clients. Our investments are increasing scale, and increasing scale gives us confidence in our ability to continue driving down the efficiency ratio towards a 32% target while supporting our medium-term growth ambitions. Moving to Slide 20. RBC Insurance is an integral part of the One RBC model, working with both our Canadian Wealth Management and Personal Banking businesses to provide both wealth and insurance solutions while growing our leading creditor insurance business. As Katherine noted earlier, effective Q1 2026, we are revising our methodology for allocating capital to insurance. Going forward, the ROE target for insurance will now be in the mid- to high 20s, underpinned by mid-single-digit earnings growth and execution against key strategies. We'll continue enhancing our product suite to gain market share in key areas of focus, including in our group businesses. You'll hear more about this over the coming quarters. We are leveraging the power of AI to improve our underwriting, claims management and adviser effectiveness. Investment management will also play a part, as we increase our allocation towards higher-yielding alternative assets, including infrastructure. So to close, we are well positioned to succeed across economic cycles given our unwavering commitment to our clients and diversified revenue streams at scale leading franchises and a strong balance sheet underpinned by robust capital ratios, broad sources of funding and a prudent risk appetite. We remain focused on delivering a premium through-the-cycle ROE and strong EPS growth underpinned by client-driven market share gains, increasing revenue productivity and improving cost efficiencies. Finally, we are committed to using our strong internal capital generation to return capital to shareholders through increasing dividends and the strategic cadence of buybacks. With that, operator, let's open the lines for Q&A.
Operator, Operator
And your first question comes from Ebrahim Poonawala with Bank of America.
Ebrahim Poonawala, Analyst
I guess, Dave, thanks for running through all of that. I guess a question around ROE, and as we think about the capital deployment, Royal earned what, 17.2% ROE with a 13.5% CET1 this quarter. As we look forward and you look segment by segment, do you consider that the bank is overearning on ROE in any part of the business? Because I guess the follow-up to that is, is the ROE potential even with a 13% plus CET1 exceeding 18%, not 17%. And I asked this in the context of whether or not your scale, your diversity is actually creating a competitive advantage versus your peers in terms of the ROE differential. So would love any color on that.
David McKay, CEO
Our return on equity has clearly set itself apart from our peers, especially since many aim for 15% while we have reached 17% over the last two quarters. This already marks a significant differentiation. We're striving for a balance in various areas; we want to see accelerated growth and excel in that aspect as well. While it's feasible for us to operate at 18% or more, that would require sacrificing some growth. For the time being, we are targeting 17% or higher, but this is a target we will evaluate throughout the year and at least once a year. It’s not fixed, and we intend to adapt it as needed. We believe we can achieve strong loan growth, return capital to shareholders, and maintain a premium return on equity of 17%. As noted, others aspire to reach this level, which is a positive indicator for us. However, there’s a hint of conservatism in our approach, as we have yet to resolve the CUSMA situation, and the economy has not fully stabilized. Given the current elevated market conditions, a cautious strategy is sensible considering the uncertainties that could impact the economy moving forward. For now, targeting 70% feels appropriate. We can provide accelerated growth and a strong 17% return on equity when we fully harness AI's potential, especially as 30,000 employees are currently integrating generative AI into their roles. I am optimistic that we will revisit this and potentially increase our goals soon. But for now, we are differentiated. It’s a growth and capital return narrative through dividends and buybacks, showcasing robust and consistent performance within our risk parameters.
Ebrahim Poonawala, Analyst
Got it. That's clear. And just following up on that, Dave, I'm having a hard time understanding whether the economy is getting better or worse as we look into the first half of '26 and how significant or important is some clarity on CUSMA or the U.S. trade negotiations to really get business investment going, CapEx going? Or are actions that the government has announced enough to actually start seeing a pickup in activity based on what you're seeing?
David McKay, CEO
No, I still think there's significant uncertainty exists. So you saw a lot through 2025, and you heard the commentary from both Derek and Sean that investors and businesses have held back on CapEx. You're starting to see a little bit of growth there because some businesses just need to replace machinery that's wearing out or at a necessity, they have to move forward. But there still is a hesitancy, as we have not resolved the issues around CUSMA. You're seeing pretty severe sectoral impacts that are leading to job losses and Ontario is most acutely impacted by that. So you're seeing challenges there. So I would say we have not resolved CUSMA. And, therefore, a lot of the elements of the budget were more medium-term oriented and not short-term oriented. So just for that reason, you just heard Graeme's commentary on largely flattish outlook for credit quality, and we're just being a little more conservative in our outlook for the next year, not a deterioration, but we're struggling to see a significant acceleration yet in either mortgages or commercial activity.
Operator, Operator
Your next question comes from the line of Gabriel Dechaine with National Bank.
Gabriel Dechaine, Analyst
Related to that question, Graeme mentioned this briefly in his comment. I'm trying to understand your credit outlook. You mentioned that your reserves account for downside scenarios. If the USMCA or CUSMA is not extended, you've already accounted for that. What would happen if that scenario occurs?
Graeme Hepworth, CRO
It's Graeme. I mean, always, I'm a bit reluctant to project what we're going to do on performing allowances, but I think you're focused on the right point that could really kind of be a toggle for us one way or another in 2026. As you recall, we built up fairly significant provisions in Q2 last year kind of following operation date. And while that's abated, I think we haven't really released any of those allowances, just reflecting the CUSMA uncertainty. And so as that plays out this year, I mean, you could certainly see, I'd say, three different paths there. If CUSMA concludes satisfactorily or favorably, then that certainly would leave us in a spot that we've got some reserves that could be released. I think if it plays out unsatisfactorily, then I would say we have prefunded in part what could be an increase in Stage 3 losses going forward. And quite frankly, if the uncertainty doesn't sort itself out in '26 and drags on, I would say we'd probably continue with those reserves in place. So right now, we don't know how that's going to play out, and that's the uncertainty that Dave is referencing. And I think we'd like to get deeper into that and understand that before we kind of provide direction on which way performing allowances would go.
Gabriel Dechaine, Analyst
Yes, that does provide some clarity on the uncertainty. Dave, there has been a trend in the sector of advancing ROE targets, and your bank is clearly doing that. In your 2027 ROE target, the optimistic scenario was over 17%, with about half of that potentially coming from AI benefits. I'm curious if it seems likely, based on your comments, that we will also be bringing forward and possibly increasing the returns from your various AI investments. Let's proceed with that.
David McKay, CEO
Well, I think you heard in my comments, certainly, as we work through the year since Investor Day and building the models and testing the models and deploying a new model, greater confidence in our ability to execute within that range. We are confident, obviously, in making those commitments at Investor Day, but we progressed and had a very strong year. We've rolled it out to 30,000 employees, and we haven't seen the benefit of that yet. So we are quite excited about the impact of generative AI. It was kind of one of the factors that's featured into our 17-plus percent target for ROE. And I think it would be the number one driver that would factor into us outperforming against that 17-plus percent target.
Gabriel Dechaine, Analyst
Got it. So we're still 2025 investment year, 2026 investment year payoff, you start to accelerate in 2027? Or is that..
David McKay, CEO
Yes, that's exactly it. Exactly. We're excited about it. We're doing well with it. As I said, we have all these strategic capabilities that have allowed us to accelerate the deployment.
Operator, Operator
Your next question comes from the line of Mario Mendonca with TD Securities.
Mario Mendonca, Analyst
I noticed this morning that loan growth at CNB has clearly improved. It seems that bank has turned a corner. However, I want to address the difference between Royal's commercial growth in the U.S. and that of all the Canadian banks compared to the U.S. banks. My question is whether there is a difference in capital requirements for lending commercially between U.S. banks and Canadian banks. This observation comes from the fact that OSFI has implemented the final rules on Basel III, while it seems that many U.S. banks are on pause regarding this. So, the first question is whether Royal is at a disadvantage in the commercial lending space in the U.S. compared to its U.S. peers.
Graeme Hepworth, CRO
Mario, it's Graeme. I might start with that and if others want to add in. For CNB, our capital allocation approach begins with the OSFI rules. Currently, we are using a standardized approach with that bank, and we are working towards the AIRB framework with the expectation of achieving it in the future. However, we primarily follow OSFI's rules in our capital allocation method. In the U.S., the rules incorporate a blend of the standardized approach and their CCAR methodology, which dictates the capital we must maintain at our subsidiary level. Overall, from a parent level, our main focus remains on the OSFI capital rules.
Mario Mendonca, Analyst
But has Royal received any exemptions from OSFI on how those loans are treated in the U.S.?
Graeme Hepworth, CRO
No.
David McKay, CEO
I want to add that we've been reducing lower ROE single-product loans on our balance sheet and transitioning to multiproduct relationship assets. This shift is likely a significant factor in improving our ROE and fostering growth. It has taken some time, but we are starting to see more activity, both in lending and deposits. This demonstrates the execution of our strategy, which should lead to a substantial increase in ROEs going forward. We are quite pleased with the progress at City National.
Mario Mendonca, Analyst
My second question relates to Capital Markets. And I'm not so much talking about earnings now. I'm just talking about the revenue actually like trading, underwriting revenue, securities and brokerage commissions. Those are those big three items that make up your Capital Markets revenue. I mean, obviously, an enormous year up 21% year-over-year with trading something like 33, can you put a finer point on your outlook for Capital Markets related revenue, the big three, like trading, underwriting and then securities and brokerage commissions, what you would expect in '26?
Derek Neldner, Speaker
Sure. I have a couple of high-level questions to set the stage before discussing 2026. I want to emphasize that our strategy in Capital Markets is focused on building long-term franchises and relationships with our clients. We've benefited from strong activity this year, but our approach isn't just about short-term trading revenue. It's about developing long-term client relationships. A crucial aspect is diversifying the business, which has enabled us to achieve lower volatility results compared to our global peers. The diversification spans corporate banking, investment banking, and various sectors and products, along with a balanced asset class portfolio in Global Markets across FICC and equities. Although certain areas may experience volatility, this diversity has helped us maintain stability over time. Considering these foundational elements of our strategy and looking toward 2026, we maintain a positive outlook overall. As Dave mentioned, while there are uncertainties and risks, we see cyclicality in the fee pools. Currently, we observe high levels of activity in our major businesses. In trading, there is healthy volatility influenced by factors such as economic uncertainty, the direction of rates, inflation, and tariffs. We expect this trend to persist. In investment banking, various secular trends are driving strategic activities among our clients, creating a favorable market environment for underwriting activities in both debt and equity. Our pipelines remain strong. Additionally, many clients, especially outside of Canada, are making strategic investments in their businesses, generating significant opportunities in our loan book. Across all three segments, we maintain a constructive outlook. Even if there were to be a slowdown in fee pools, as outlined during our Investor Day strategy, we have several key initiatives and investments that will help us continue gaining market share and offset any decline in fee activity. At this point, our outlook is positive, and we do not anticipate a slowdown.
Operator, Operator
Your next question comes from the line of Sohrab Movahedi with BMO.
Sohrab Movahedi, Analyst
Dave, not to take anything away from the excellent detail that you kind of shared with us. Is the ROE improvement simply reducing the targeted CET1, which at Investor Day was 14%, now down to around 13%? Therefore, 16% plus goes up to 17% plus?
David McKay, CEO
I don't think that math is sufficient to get us there alone, right? It's also an improvement on return on assets. I don't know, Katherine, do you want to jump in?
Katherine Gibson, CFO
Yes. Why don't I jump in? So that change in the MTO is not dependent at all on us changing our CET1 outlook. At Investor Day, we gave you a path to 16% plus without having to pull down our CET1. And then we also showed you a path to 17% plus. And so what you're seeing today with us announcing that change in MTO is basically just confidence, ongoing confidence in our progress going forward, and that underpins it. As you would have seen in our remarks, we have guided to operating in a range going forward of 12.5% to 13.5% and that provides prudence, gives us opportunity on a variety of fronts and with the unknown environment ahead of us, it also gives us a bit of a buffer there. But as we go forward, if we see the right opportunities, the right actions to move lower in that range, that will result in a higher ROE, but we're not driving down to equate to a higher ROE.
David McKay, CEO
At the end of the day, our goal is to drive shareholder value and total shareholder return. This involves not only optimizing our return on equity but also focusing on growth and earnings per share growth simultaneously. We have analyzed various scenarios and found that maintaining a return on equity above 17 percent enables us to enhance shareholder value by supporting dividend growth, returning capital to shareholders, and being an efficient user of capital. When we consider all these factors together, we believe we can create more shareholder value given our current circumstances. If the situation changes, we can reassess our approach.
Sohrab Movahedi, Analyst
I just wanted to clarify the components of the equation you're discussing. You mentioned earlier that if the bank aims for higher performance, there is some flexibility at the growth end of the spectrum. You're not changing your risk appetite, right? Are you suggesting that within my risk appetite, I can pursue accelerated growth for a 17% return on equity, but I can also opt for slower growth to achieve an 18% return on equity? I'm trying to understand your perspective on risk appetite in relation to the growth and the 17% and 18% return on equity you're referring to.
David McKay, CEO
We're definitely not altering our risk appetite target. It's all about the return on risk. This framework guides us in making decisions about pursuing deals. Therefore, our risk appetite remains unchanged because maintaining stable earnings volatility is crucial to our medium-term goals. This consistency in risk appetite and strategy is vital throughout various market cycles. While we may evaluate the trade-offs between deals that exceed our cost of equity but fall below our hurdle rate, we also focus on growth potential and available opportunities. Ultimately, we're trying to optimize our variables based on the return on risk rather than just the amount of risk we're willing to take.
Sohrab Movahedi, Analyst
And is that toggle mostly in Derek's business then?
David McKay, CEO
Yes, absolutely, that's one of Derek's, but also within Commercial Banking within the United States, so it's in every business where we take risk, we're looking at the return on that risk. And how it's being priced and how we balance that to an overall 17% plus target with the premium growth objectives that we set.
Operator, Operator
Your next question comes from the line of Paul Holden with CIBC.
Paul Holden, Analyst
I thought dropping the extra 30-page slide deck on the day of earnings, it was a test to see how we're using AI, but Dave, your summary is more useful for me. So I guess, I just want to drive like a little bit of a finer point on the ROE versus growth target. So obviously, you increased the ROE target. I would argue, if you're generating a higher ROE and as you also highlighted, are generating a lot of organic capital generation, like, why not increase the EPS growth target? Or is that something you kind of leave in your back pocket for when you find the right opportunities to deploy that excess capital?
Katherine Gibson, CFO
Paul, it's Katherine. So to your question, why not changing the earnings per share target, it kind of goes back to when you looked at the variables and how they come together. We felt confident about moving at this time the ROE to 17%. We felt though the EPS keeping it at 7% plus is the right complement as we think about maximizing that shareholder value return. And I would also emphasize that they're not capped. There's pluses on both of those, and so we will continue to drive forward and drive those results that hit those medium-term objectives and deliver against those.
Operator, Operator
Your next question comes from the line of Graeme Hepworth with National Bank.
Graeme Hepworth, CRO
Yes, I would guide you for RWA to be in line with the guidance that I had noted on loans. And so just quickly going back over that, like mortgages were low to mid. On the commercial side, it was mix high volume growth. And then capital markets or wholesale say moderate growth going forward. So you can look to that guidance to underpin what you can expect from RWA growth going forward.
David McKay, CEO
Okay. I think that's the end of our questions in the queue. This is Dave, so I'll just quickly close here and really appreciate all the time you spent with us and the questions this morning. I take the lack of questions on the quarter to mean that as we feel it was an outstanding quarter, and we performed well across our businesses. We provided a lot of guidance going forward more than we normally provide. I think we appreciate all the questions around trying to see where the ambition for that guidance was you have a team that has outperformed and wants to continue to outperform. And I think you can face that in the philosophy that we set targets that we want to beat and want to outperform on. And we have confidence in the future that this is a growth story. This is a capital efficiency story. This is an outstanding franchise with great client segments that will continue to perform. So I really appreciate your time, your extended time this morning. Thank you for your questions. Have a great holiday season, and we'll see you in the New Year. Thank you.
Operator, Operator
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.