Earnings Call Transcript
ROYAL BANK OF CANADA (RY)
Earnings Call Transcript - RY Q3 2025
Operator, Operator
Good morning, ladies and gentlemen. Welcome to the RBC 2025 Third 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
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 are 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, 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 requeue. With that, I'll turn it over to Dave.
David I. McKay, President and Chief Executive Officer
Thank you, Asim. Good morning, everyone, and thank you for joining us. Today, we reported record third quarter earnings of $5.4 billion, up 21% or over $900 million from last year. These outstanding results underpin a strong return on equity of over 17% for the quarter or over 16% year-to-date, supported by a robust capital ratio of 13.2%. We are gaining momentum towards meeting our medium-term Investor Day targets and are confident in continuing to achieve an ROE of at least 16% in fiscal 2026 and beyond. This quarter's strong earnings added 77 basis points of gross capital generation, truly showcasing the underlying earnings power of the bank, including realizing our targeted annualized cost synergies related to the acquisition of HSBC Bank Canada. Our diversified business model is built to drive strong risk-adjusted returns, which in turn supports both our clients and the return of capital to shareholders, including increased share buybacks this quarter. Strong client-driven and risk-weighted asset growth supported revenue of $17 billion this quarter, including record revenue in Capital Markets and double-digit growth in Personal Banking and Wealth Management. We achieved our results in an environment of record equity markets and cyclically low investment-grade credit spreads while seeing an increased flow of client deposits and market-related client activity. However, the constructive environment for market-related revenue continues to be tempered by geopolitical risks and the uncertainty around trade policy, particularly China's levy against Canada's canola exports and the potential review or renegotiation of CUSMA. We continue to monitor the negotiations, and we encourage policymakers on all sides to build on the foundational strengths of current trade agreements, which have provided significant benefits to all parties. Should current CUSMA compliant goods largely maintain their qualified exemption to tariffs, Canada's effective tariff rate should remain low and the economy should remain resilient. However, as trade tensions extend, there may be persistent impacts, including declining consumer confidence, lower corporate profit margins, rising inflation, and softening labor markets across both the U.S. and Canada, with uncertain implications for monetary policy and capital flows. Amidst the shifting landscape, we are operating from a position of strength. Our robust capital levels are reinforced by a strong allowance for credit loss of 74 basis points of loans, including elevated weightings to our downside scenarios. We believe our well-underwritten portfolio is prudently provisioned. The diversification of assets and revenue streams across client sectors, geographies, products, and businesses further mitigates the impact of heightened uncertainty and volatility. As the country's largest financial institution by market capitalization, we have an important role to play in helping support our clients build an even better Canada while executing against the strategic priorities we highlighted at our Investor Day, both within and outside of Canada. We are accelerating our investments in strategic initiatives by seeding growth across our segments and geographies, including new product and cross-border capabilities. We are also improving and expanding our talent pool by hiring senior coverage and relationship talent and capital markets and client-facing account managers in commercial banking. In addition, we continue to attract experienced financial advisers in wealth management, especially in the United States, where we expect higher recurring revenue from this recruitment. Our ongoing investments in technology, built upon our leading competitive advantage and artificial intelligence, including our proprietary ATOM Foundation model and Lumina data platform, underpin the enterprise value we expect to generate from AI over the medium term. Furthermore, our expansion into transaction banking continues to be on track, with RBC Clear receiving two awards at the recent Digital Bankers Global Transaction Banking Innovation Awards. With this context, I will now speak to key trends we are seeing across our businesses, starting with Personal Banking. In our Canadian business, average deposits were up 2% from last year, including 7% growth in banking and savings accounts. We continue to focus on client acquisition while also capturing the shifting money in motion, given the evolving interest rate and market outlook. These core deposits provide a structural funding cost advantage. Average residential mortgages were up 3% year-over-year as we added $4 billion of average balances this quarter. While we have maintained discipline on both credit quality and pricing, we are benefiting from higher switch-in volumes and an increase in mortgage retention rates. While we see a pickup in housing starts, the signs of price stabilization and buyer confidence returning as affordability improves, we continue to expect Canadian housing resale activity to be dampened by underperformance in Ontario, particularly in the Greater Toronto area. In contrast, credit card growth was solid at 7% this quarter, driven by account acquisition, higher revolve rates, and increased client engagement. Our proprietary RBC consumer spending tracker highlights that Canadian cardholder spending remained resilient, particularly in the retail and everyday categories. This quarter, we expanded our partnership with the Pattison Food Group into Western Canada and launched the WestJet RBC World Elite MasterCard credit card for business clients. Turning to Commercial Banking. Average loan growth moderated to 6% year-over-year within the updated guidance we provided last quarter. Growth has been slower in more tariff-sensitive sectors, including manufacturing, transportation, and logistics, along with cyclical headwinds in commercial real estate. While our pipelines are building in a competitive market, clients continue to hold back their capital and inventory spend. We are well positioned to support our clients when they are ready. Moving to Wealth Management. We reported double-digit growth in assets under administration in both Canadian and U.S. Wealth Management to $935 billion and USD 718 billion, respectively. Our global wealth management franchises benefited from market appreciation while continuing to drive net new client assets, along with increased volumes in our U.S. lending solutions. We also launched RBC premium savings in the U.S. this year, a new nonsweep high-yield deposit product, which is seeing positive traction. Direct Investing trading volumes were supported by strong market activity. Assets under management at RBC Global Asset Management increased by 12% to a record $741 billion, reflecting net sales into both long-term institutional and retail mandates. Like our wealth management businesses, we are seeing momentum in Canadian retail mutual fund net sales as our clients move back into markets across our broad set of strategies across fixed income, balanced, and equity mandates. Now to Capital Markets, which reported record revenue of $3.8 billion, pre-provision pretax earnings of $1.7 billion, and net income of $1.3 billion this quarter. On a year-to-date basis, Capital Markets generated close to $11 billion in revenue and approximately $4 billion in net income. These are truly exceptional results across our diversified franchise. Global Markets reported revenue of over $1.9 billion with strong results in our FICC businesses, reflecting strength in spread and rates products, which are areas of traditional strength. We also reported a strong performance in both cash equities and equity derivatives as we supported heightened client activity, benefiting from increasing investments in the franchise. Corporate Investment Banking generated revenue of over $1.7 billion, benefiting from an increased number of larger M&A advisory mandates along with higher lending revenue in the U.S. and Europe, reflecting the strength of our global franchise. Looking forward, we continue to maintain a high level of engagement with our clients in what we deem a constructive environment for capital markets. While the second half of the year is seasonally lower or slower than the first, we are encouraged by the increased optimism and confidence among our corporate and sponsor clients, and we expect higher levels of transactions and deal closures over the next 12 months. We also expect our global markets franchise to remain resilient as we deepen our expertise across products. Finally, I will comment on our broader U.S. region, which reported USD 635 million of net income this quarter. City National Bank reported earnings of USD 114 million or adjusted earnings of USD 139 million. The geographic efficiency ratio improved by 6.6 percentage points year-over-year to 81.5%. While there's still work to be done, we are seeing early signs of success as we continue to build a more cohesive U.S. operating model. To close, despite the uncertain environment, we are confident in our ability to generate a strong return on equity while continuing to deepen client relationships, grow market share, drive operating leverage, and return capital to shareholders. The strategic vision we articulated at our Investor Day remains clear, and we are already seeing the outcomes unfolding. We strive to further extend our leadership across Canada while scaling growth and unlocking new revenue streams in key markets and geographies, including the United States. Finally, in the spirit of continued transparency and accountability, we will look to provide an update on how we are performing against our Investor Day financial targets when we report our fourth quarter results later this year. And with that, Katherine, over to you.
Katherine Gibson, Chief Financial Officer
Thanks, Dave, and good morning, everyone. Starting with Slide 8. This quarter, we reported earnings per share of $3.75, adjusted diluted earnings per share of $3.80, which was up 18% from last year, driven by strong revenue momentum across our businesses and solid operating leverage, including the realization of the $740 million in annualized cost synergies from the acquisition of HSBC Bank Canada. Turning to capital on Slide 9. We continue to demonstrate strong capital generation. Our CET1 ratio came in at 13.2%, in line with last quarter. Strong internal capital generation net of dividends was partly offset by the impact of an increase in risk-weighted assets in our U.S. agency and sovereign exposures, driven by a downgrade of the U.S. sovereign debt rating. Furthermore, changes to our credit risk parameters, which I called out last quarter, also had a modest negative impact on capital. We continue to deploy capital to drive organic growth, particularly in corporate lending and residential mortgages, as well as increased loan underwriting commitments in capital markets. Returning capital to our shareholders through share buybacks and dividends remains a key part of our deployment strategy. This quarter, we repurchased 5.4 million shares for $955 million, in line with the level purchased in aggregate over the last 3 quarters. Our total payout ratio was 56% year-to-date. We will continue to be tactical with the level of share repurchases based on prevailing market conditions. Moving to Slide 10. All bank net interest income was up 14% year-over-year or up 12%, excluding trading revenue. All bank net interest margin, excluding trading revenue, was down 5 basis points from last quarter, mainly due to lower interest income on certain transactions in capital markets, which was offset in other noninterest income. We believe net interest margin is a more relevant factor for our retail and commercial banking segments. Canadian Banking NIM was up 2 basis points from last quarter, benefiting from a favorable product mix, including a shift towards demand deposits in personal banking, which were up 1.5% from last quarter, offsetting a 1% sequential decline in GICs. We continue to benefit from tailwinds related to our structural hedging tractor strategy, as 5-year swap rates remain elevated relative to historical levels. The combination of the above two factors more than offset competitive pricing pressures in residential mortgages. As a reminder, benefits to net interest income from the purchase price accounting accretion and from the HSBC Canada acquisition of $118 million this quarter are expected to be largely run off by Q2 2026. Looking forward, we now expect our 2025 all bank net interest income growth to be in the mid-teens range, including benefits from a more favorable deposit mix. Before moving on to expenses, one item I'd like to point out is that the increase in other noninterest income includes impacts from hedges of our U.S. share-based compensation plan, which is largely offset in noninterest expense as well as in net interest income, as I noted above in my discussion on all bank NIM. Moving to Slide 11. Reported noninterest expense was up 7%, and core noninterest expense was up 8% from last year. Core expense growth this quarter reflects higher staff-related costs, largely driven by variable compensation, commensurate with strong revenue growth in both wealth management and capital markets, as well as increased salaries, pensions, and benefits. Higher expenses also reflect investments in technology and operations, as well as hiring and priority growth areas. Concurrently, we will continue operating with a disciplined expense management framework to prudently manage our cost base. Going forward, we expect all Bancorp expense growth, which is based on reported 2024 expenses, to now be in the mid- to high single-digit range, largely reflecting higher variable compensation. That said, we expect strong all bank operating leverage for the year, which is a key management priority. On taxes, the adjusted non-TEB effective tax rate was 21.2% this quarter, relatively in line with the first half of 2025. Looking forward, we continue to expect the adjusted non-TEB effective tax rate to be in the 20% to 22% range. Turning to our Q3 segment results beginning on Slide 12. Personal Banking reported results of over $1.9 billion. Focusing on Personal Banking in Canada, net income was up 23% from last year as a strong operating leverage of 12.5% was partly offset by higher provisions for credit losses. Personal banking efficiency ratio improved to 38.7% this quarter, underpinned by strong revenue and relatively flat expense growth, partly reflecting the benefits from realized cost synergies related to the acquisition of HSBC Canada. Higher revenues this quarter benefited from a 14% increase in net interest income and a 10% increase in noninterest income, largely driven by higher mutual fund revenue. Turning to Slide 13. Commercial Banking net income of $836 million rose 2% from a year ago. Pre-provision pretax earnings were up 8% from last year, driven by a strong operating leverage of 4.8%, reflecting solid average volume growth and well-managed expenses, including the benefits of realized cost synergies related to the acquisition of HSBC Canada. This was offset partly by lower credit fees, reflecting the succession of VA-based lending, which was offset in net interest income. Turning to Wealth Management on Slide 14. Net income of approximately $1.1 billion rose 15% from a year ago. Noninterest income was up 13% from last year, reflecting strong growth in fee-based client assets across our wealth and asset management businesses, benefiting from market appreciation and net new assets. Net interest income was up 6% from last year, including higher results in Canadian Wealth Management, reflecting average volume growth in deposits and higher spreads. This was partly offset by headwinds in U.S. Wealth Management. Higher revenue this quarter was partly offset by higher variable compensation commensurate with increased compensable revenue and investments, including technology and the recruitment of financial advisers. City National generated USD 139 million in adjusted earnings, up 81% from last year and 58% from last quarter. Last year's results included an impairment loss on our interest in an associated company and the sale of a non-core investment. Turning to our Capital Markets results on Slide 15. Net income of $1.3 billion increased 13% from last year, reflecting record revenues of $3.8 billion. On a pre-provision pretax basis, results were up 36% year-over-year to $1.7 billion. Global Markets revenue was up 37% year-over-year, reflecting higher fixed income trading, benefiting in part due to narrowing spreads. Results also benefited from our robust equity and FX trading performance. Corporate and Investment Banking revenue was up 11% from last year. Investment Banking revenue was up 11% from last year, reflecting higher debt and equity origination and M&A activity across most regions. Lending and transaction banking revenue was also up 11%, reflecting higher lending revenue in the U.S. and Europe. This was partly offset by lower municipal banking activity compared to a strong Q3 last year. Higher revenue was partly offset by higher variable compensation; investments in technology also contributed to higher expenses. Turning to Slide 16. Insurance net income of $247 million was up 45% from last year, driven by higher insurance service results from improved life insurance claims experience and higher insurance investment results, reflecting lower capital funding costs. Looking ahead, we expect Q4 results to be negatively impacted primarily as a result of our annual actuarial assumption updates. Lastly, results for corporate support in the quarter benefited from the elevated net impact of favorable markets in our U.S. share-based compensation plan. As we look forward to the fourth quarter, we expect corporate support to generate a net loss at the lower end of our $100 million to $150 million range. To conclude, despite the market and macroeconomic uncertainty, we generated record results this quarter, underpinning an ROE of 17.3%, with a CET1 ratio of 13.2%. Our Q3 performance showcases the strength of our diversified business model and its ability to drive premium returns as highlighted at our Investor Day, positioning us well in the quarters ahead as we execute on those strategies. With that, I'll turn it over to Graeme.
Graeme Hepworth, Chief Risk Officer
Great. Thank you, Katherine, and good morning, everyone. I'll now discuss our allowances in the context of the current macroeconomic environment and the ongoing trade uncertainty. Overall, the Canadian economy has shown greater resilience than initially expected, and both business and consumer confidence have rebounded from earlier lows. We began the quarter with signs of reduced trade tensions, but this was followed by renewed tariff threats and the escalation of sector and country-specific tariffs. As the heightened uncertainty around trade policy stretches over an extended timeframe, this also increases the risk of shrinking appetite for business investment in Canada. Against this backdrop, recall that last quarter, we increased our reserves to reflect the heightened uncertainty. We implemented a new trade-related scenario, reflecting the potential for a severe North American recession driven by an escalating global trade war and rising geopolitical risks. Given the ongoing uncertainty this quarter, we have maintained our prudent posture and retained the elevated weightings to our downside scenarios in line with last quarter. Turning to Slide 18. We released a total of $28 million or 1 basis point of provisions on performing loans this quarter, mainly reflecting favorable changes to our macroeconomic forecast, partially offset by portfolio growth and unfavorable changes in portfolio composition. We saw quarter-over-quarter improvements to our base case unemployment and GDP forecast, with rising Canadian fiscal stimulus contributing to the lifting of our outlook. This translated to a minor release of allowances on our performing loans in wealth management and capital markets, offset by a small increase in provisions in Personal Banking. City National drove the bulk of the release of allowances due to favorable credit quality and improvements in the U.S. macroeconomic forecast. Retail clients have shown resilience in an uncertain economic environment and have largely managed through the impact of increasing mortgage payments. Overall, we are well reserved after building up allowances over the past 3 years. We will continue to prudently manage our allowances given the backdrop of ongoing uncertainty. Moving to Slide 19. Gross impaired loans of $8.8 billion were down $0.2 billion or 3 basis points from last quarter, primarily driven by our wholesale portfolios, which saw lower new formations. The decrease in GIL reflects several accounts moving back to performing status and the resolution of the administrative issues outlined in the prior quarter. While GIL remained elevated, we are seeing a moderation in the pace of exposures moving onto our watch list, and our wholesale portfolios are showing more balance with moderating formations in capital markets, positive trends in City National, and a soft Canadian economy contributing to elevated impairments in the commercial portfolio. In Capital Markets, new formations decreased $453 million quarter-over-quarter. Impairments this quarter were mainly driven by two accounts, one in each of the financing products and telecom and media sectors. We also saw a couple of clients in the real estate and related and industrial product sectors return to performing status, resulting in a net reduction to GIL. In Commercial Banking, new formations decreased $399 million quarter-over-quarter. The largest new formations in the quarter related to borrowers in the real estate-related and agriculture sectors. While the information in the wholesale portfolio is playing out as we anticipated, they are expected to remain at elevated levels through the first half of 2026. We expect to see more moderate outcomes as we work through the watch list and special loan pipelines as the economy gains momentum through 2026. As a reminder, impairments and recognized losses in our wholesale portfolios are inherently more difficult to predict quarter-over-quarter and can be volatile. Turning to Slide 20. PCL on impaired loans of 36 basis points was up 1 basis point or $61 million quarter-over-quarter, in line with our expectations. In Capital Markets, provisions were up $83 million, driven by additional provisions taken on a previously impaired account in the other services sector, which is undergoing a challenging and complex workout process. There is also a new impairment in the financing product sector. In our commercial banking portfolio, provisions of $296 million were up $10 million, led by provisions in the real estate related, consumer discretion, and transportation sectors. Overall, the commercial portfolio continues to be impacted by softer economic conditions and consumer spending in Canada. Elevated impaired provisions over the last 12 months primarily reflect exposure to cyclical supply chain-related sectors like automotive, transportation, and industrial products, as well as consumer discretionary and real estate-related sectors, which have all been impacted by the higher rate environment and post-pandemic trends. We continue to expect commercial PCLs to remain elevated in the coming quarters, reflecting the weaker Canadian economic backdrop and ongoing trade uncertainty. In the retail portfolio, we saw higher losses this quarter in line with expectations, largely in the unsecured portfolios. While delinquencies across retail products remain elevated above historical levels, we are beginning to see stabilizing trends in early delinquencies. To conclude, despite persistent uncertainty in the macroeconomic and policy environment, we remain confident in the overall quality, the diversification, and the resilience of our portfolios. A robust provisioning framework, our prudent allowances, and additional monitoring allow us to assess a wide range of potential outcomes and impacts to our portfolio. We continue to expect PCL impaired loans to remain elevated for the next few quarters, in a similar overall range to what we've experienced over the first 3 quarters of the year, potentially offset by releases and performing allowances as credit outcomes improve. The likelihood, timing, and direction of allowances in PCL will continue to be dependent on the extended duration of the tariffs, potential fiscal support and stimulus measures, along with the performance of labor markets, interest rates, and real estate prices. As always, we continue to proactively manage risk through the cycle, and we remain well capitalized to withstand a broad range of macroeconomic and geopolitical outcomes. And with that, operator, let's open the lines for Q&A.
Operator, Operator
Our first question is from Ebrahim Poonawala from Bank of America.
Ebrahim Huseini Poonawala, Analyst
I guess, maybe a question for you, Dave. There's a lot of conversation just investor focus around where some of these ROEs are heading? And when we look at Royal's performance today, if you look at the 17.7% ROE for this quarter, 16.5% year-to-date. And I think you said in your prepared remarks, at least 16%. I would love to hear that at least 16% in reality is more like at least 17%. Two questions there. One, do you think the bank is over earning anywhere within the P&L? Or do you think there is upside? And second, give us a sense of your appetite to build capital from here versus just keeping it at least relatively neutral from a CET1 perspective, which obviously is helpful to the ROE?
David I. McKay, President and Chief Executive Officer
Thank you for the numerous questions. I appreciate their importance and will address them. I'll begin with our earnings strength, as it ties into our return on equity expectations and the organization's potential. We successfully captured a significant share of client activity this quarter across all our divisions, including consumer banking, commercial banking, capital markets where clients are actively trading, and wealth management with positive inflows. Our revenue was exceptionally strong, supported by our stable deposit base. Additionally, client flows in our advisory businesses are also stable. We have strong expectations for continuing to serve clients in advisory roles. However, the uncertainty around tariffs may impact investment confidence in certain sectors, leading to some muted activity in the economy, especially in commercial banking due to these tariff uncertainties affecting capital raising. Overall, our results reflect robust client activity and our capability to capture significant client engagement, indicating a resilient economy. Thus, we remain confident in our ability to leverage our scale for the benefit of our investors. We are optimistic about the sustainability of our performance despite some volatility in insurance. This quarter, we achieved a strong return on equity of 17.7% and have reaffirmed our guidance for at least 16% this year and next. Our hesitation to update this guidance is due to uncertainties regarding the tariff situation and its potential effects on investments and clients. We plan to monitor the situation as we move into Q4 to assess how negotiations evolve and their impact on the Canadian economy and our diversification efforts. Following this, we will review our expectations for 2026 and share updates during the next call in Q4. We are confident in our results and the resilience of our clients, as highlighted by Graeme's comments on credit stabilization. We feel positive about entering Q4 and looking towards 2026, reinforcing our confidence in achieving our investor targets. Regarding the capital build of 77 basis points this quarter, we are in a strong position with a 17.7% return on a 13.2% CET1 ratio, allowing us to manage capital effectively. We intend to continue returning capital to shareholders through buybacks, supported by solid capital generation and increased dividends. We will maintain our growth strategy over time, both organically and potentially through acquisitions, ensuring we manage our return on equity targets of over 17%. I hope this clarifies our outlook on the underlying strength and how we intend to manage capital and ROEs.
Operator, Operator
Our following question is from John Aiken from Jefferies.
John Aiken, Analyst
I was hoping that you'd be able to give us a little bit of detail on City National. Can you update us in terms of the progress of where we sit now and also what levers are still yet to be pulled in terms of future profitability expansion?
David I. McKay, President and Chief Executive Officer
Yes. Thanks for that. We're extremely happy with the progress we're making at City National as we signaled over the last year in our Investor Day. We continue to progress well in the remediation of the platform, and we do. We've allocated very significant financial resources to do that, which is embedded in the P&L. So earning $149 million with carrying that is a really, really impressive part of what City National is doing. City National is now on its kind of front foot in recruiting commercial bankers, recruiting private bankers, adding clients. So we feel very, very good about some of the potential to build the pipelines there and to see good overall loan growth and deposit growth in the franchise going forward. We have work to do on our replatforming through 2026, but we do expect to be able to bring expenses down as we progress through 2026 because there's certainly, I think, in 2025, we're at their peak as far as building out our platform and then the strength of our second and third lines of defense. Overall, we feel good about our ability to continue to earn through. And that was a very strong quarter given some of the one-offs, but we don't think it's going to back off too much from that, and we'll be able to replicate the growth story from '25 into '26 for City National.
John Aiken, Analyst
Just a point of clarification. When you talk about expenses coming down in 2026 and further, is that on an absolute basis? Or is that just incremental operating leverage?
Katherine Gibson, Chief Financial Officer
Do you want me to jump in? For City National, we are looking at this from an absolute perspective. We have previously discussed the fully loaded costs related to remediation. What we are observing is that these costs are already beginning to decrease, and we anticipate this trend will continue as we move into 2026.
Operator, Operator
Our following question is from Gabriel Dechaine from National Bank Financial.
Gabriel Dechaine, Analyst
A quick one on the trading result, which was quite strong this quarter. I know client-driven is often the factor here. I'm just wondering if any of the shift in market dynamics between Q2 and Q3 played a role in accounting sense. I know the high-yield business or the leverage finance business was weak in Q2, and the marks must have been much more favorable in Q3.
Derek Neldner, Group Head, Capital Markets
Sure. Thanks for the question, Gabe. I wouldn't say there was anything particularly abnormal in terms of marks or anything. If you step back and you look at the results, we had very strong results in FICC that was up about 35%. Part of FICC is obviously the credit trading business, where we did see spreads tighten from the end of April through the end of July. That might have been a 5% or 10% positive benefit but not overly material. A lot of it was client-driven. Within FICC as well, we obviously have our repo business, our foreign exchange business that performed very well in our core rates business plus commodities. So we did see very good strength right across the broad array of products. It wasn't just driven by credit. Credit obviously did help us relative to Q2, but I would say it was modest overall. And then on the equity side, where we've been strategically focused on making a lot of investments, we feel we're making very good headway there. We had over a 40% revenue uplift year-over-year. Obviously, a constructive environment, but we do feel that a number of the investments and strategic pivots we've made in that business are bearing fruit in driving outperformance in terms of market share capture.
Gabriel Dechaine, Analyst
Okay, great. I have a question about the credit outlook. Graeme, you provided a lot of information, and I'll definitely review the transcript. I want to highlight a couple of points. First, you released some performing provisions, and I noticed a positive change in your macro outlook, reflecting some of the support programs you are anticipating, including those already announced. However, there are also indications of a decline in the financial health of Canadian consumers. We're observing increased 90-day delinquency rates in some categories, rising unemployment, particularly in major urban areas. I’m not sure if this is connected, but some of your fastest-growing categories in Canada are HELOCs and credit cards, which could indicate stress as well. Considering all these factors, do you still expect peak loan losses around 2026, or has your outlook improved or worsened? How would you describe it?
Graeme Hepworth, Chief Risk Officer
Thank you, Gabe. To address your points on the credit situation, we're currently experiencing an elevated phase in the credit cycle, but it seems we're gradually moving toward a more stable period. This observation holds true for both retail and wholesale sectors. In our retail portfolio, unsecured products have consistently driven our provision for credit losses higher, a trend that is expected to continue through 2025. However, early delinquency trends suggest we may be approaching peak levels. On the mortgage side, we anticipate some challenges in 2025 and into 2026 due to ongoing refinancing pressures, though this aligns with our expectations. The mortgage portfolio remains resilient, thanks to both the quality of the client base and our strong underwriting standards, as evidenced by our write-offs showcasing solid recoveries. In wholesale, we have observed elevated levels in 2025 due to continued uncertainties, which we expect to extend into 2026, especially in our commercial portfolio, amid weaker conditions in Canada. However, the situation is somewhat balanced, as City National in the U.S. is demonstrating more strength. Capital markets are facing specific issues that I do not foresee recurring in the future. Overall, while wholesale will likely remain elevated, I do not anticipate significant increasing trends. In summary, the narrative appears to be more balanced than the rising levels we've observed through 2025. We will provide more detailed insights in our Q4 outlook for 2026. The credit cycle we are navigating is challenging, but I believe the acceleration we have been experiencing is beginning to slow down.
Gabriel Dechaine, Analyst
So no major shift up or down from what you were seeing in Q2? I know there's a lot more going on in Q, but it sounds sort of stable.
Graeme Hepworth, Chief Risk Officer
In the transition from Q2 to Q3, we adjusted our performing reserves and allowances due to political and policy uncertainties following Liberation Day. We felt it was necessary to increase our reserves to prepare for any potential challenges. This new scenario we adopted involved placing greater weight on those uncertainties. As we gain more clarity on the CUSMA trade negotiations, we may have the chance to release some reserves if the negotiations go well, or we will be in a strong position with ample reserves if the outcome is less favorable. Our actions in Q2 were a reaction to this situation, rather than any specific issues in our portfolio at that time.
Operator, Operator
Our following question is from Sohrab Movahedi from BMO Capital Markets.
Sohrab Movahedi, Analyst
Dave, I just thought I'd maybe go to you. I mean, obviously, you feel good about the quarter. I think the commentary you suggested you made us believe anyway that you feel good about meeting the targets. I think you actually inadvertently slipped up and called it a 17% plus ROE as opposed to the 16%. So like I think you're feeling really good about that. And Graeme is talking about certainly the uncertainties for sure, but probably a little bit less so quarter-over-quarter. I guess what I'm trying to kind of figure out here is, is the uncertainty enough to outweigh the feel-good if an inorganic opportunity presented itself? Or are you feeling good enough about the fundamentals of the franchise that notwithstanding some of the uncertainties that we're all kind of talking about, you would be willing to be opportunistic in an inorganic situation?
David I. McKay, President and Chief Executive Officer
Thank you for your question. I want to convey that I am very optimistic about our current results and their sustainability, which are driven by client activity and our ability to capture a significant share of what our clients are doing. Moving forward, it is essential for our clients to remain healthy and active, and we are witnessing that resilience. However, we do remain cautious as changes can occur, especially regarding uncertainties surrounding CUSMA and tariff negotiations, which may deter investors and commercial clients from committing capital. We will take some time to assess the situation. The 17.7% growth is specific to this quarter, but we have strong flows to sustain growth above 16% as mentioned. We will see how quickly we can expand and achieve our Investor Day targets in the upcoming quarters. We appreciate your patience as we develop our franchise further. In terms of growth, we have numerous promising inorganic opportunities, as reflected in my investments, such as RBC Clear and our global transaction banking business. We are actively hiring across our client-facing sectors, including private banking, wealth management, and capital markets, particularly in the U.S., Canada, and Europe. This positions us well for continuing organic growth through new products and expanded capacity, including our successful expansion into the Southeast with City National. Nonetheless, we are also considering potential inorganic opportunities, aiming for the same growth objectives we've set over the past five years. We want to enhance our wealth franchise, especially in the U.S., and possibly in Europe, like we did with Brewin Dolphin. We maintain a high standard regarding dilution and the impact on shareholders due to our organic growth capabilities. What you are seeing in our results highlights the challenges and complexities of pursuing mergers and acquisitions, which require the full attention of our management team. Currently, the RBC management team is entirely focused on enhancing our existing franchise, which is reflected in our performance. The time commitment required for any acquisition must be weighed against the results we can achieve through organic focus. We need to ensure that any acquisition allows us to maintain our momentum in our core business, something we managed effectively with the HSBC integration. We have the capital and strategic intentions to grow our wealth and commercial banking sectors in the U.S. and Europe, and we will remain prepared to act if suitable opportunities arise.
Operator, Operator
A following question is from Mario Mendonca from TD Securities.
Mario Mendonca, Analyst
Dave, can we stay with you? This quarter's earnings were $3.84. If we annualize that, it exceeds what analysts are forecasting for 2026. I think you might not want us to annualize this figure. So, can you help clarify how much you believe Royal overearned this quarter? I don't think you want to set expectations based on this quarterly number, so please help me understand the overearnings.
David I. McKay, President and Chief Executive Officer
I'm going to let Katherine start, and then I'll jump in at the end. But Katherine, why don't you take a swing at that? And then I'll follow up.
Katherine Gibson, Chief Financial Officer
I like the question. The way I would come at it, I would actually anchor you back to the guidance that we've provided to give you that, I guess, trend line as we go into the last quarter of the year. So I take you back to the key components of what drives our results. If I start with our net interest income, the full-year guidance, I increased this quarter, and so we are targeting a mid-teen growth for that. That is continuing with the volume, the resilience that Dave was talking to on the volume. So no change to the guidance that we've provided for mortgage volume. We're seeing moderate growth on the commercial side; we're seeing mid- to high for the second half of the year for capital markets; we're continuing down the path of mid-growth on that front. On other income, we don't give specific guidance, but I would take you back to Dave's comments where we do see seasonality in the fourth quarter for capital markets, but we are also seeing optimism from our sponsors and our corporate clients. On the insurance front, a really strong quarter. But Q4, we do, I'll call it, seasonality as we do update our annual actuarial assumptions there. If I take us to NIE, I updated our guidance there to say mid to high. We're at that high end because of the variable comp where the expected continued growth on our commissionable revenue. Taxes, no change, still in the range of 20% to 22%. And then you've heard Graeme with his comments on the overall PCL. The last item that is significant but can move is their corporate support, and we're looking for that in Q4 to be towards the lower end of the range. Putting that all together, we're expecting still positive strong outlet going into the fourth quarter. So I hope you take away from that. I guess I'm giving you still a little bit of work on that front, Mario, but I hope you can step away from that and arrive at a view for the fourth quarter.
Mario Mendonca, Analyst
I will do my best. Regarding the assumption review in insurance, can you provide a rough estimate? Is this something significant, as you've mentioned it a few times, so it seems to matter.
Jennifer Publicover, Group Head, Insurance
It's Jennifer. Regarding the broader context on insurance, as mentioned during Investor Day, we are aiming for mid-single digits in terms of overall earning capacity year-over-year, and we are still maintaining that outlook for the year. There has been some variability; in Q1, we experienced a significant client-driven recapture that we do not anticipate will continue. We are still assessing the actuarial assumptions. We have a book of business that we are gradually running off, and we managed to recapture a few of those treaties in Q2 to help minimize volatility. However, this will align with what we have seen in previous years for this book of business. While it is a notable adjustment, we expect Q4 to show a decline.
Mario Mendonca, Analyst
All right. Let me finish up with Graeme. During these calls, we often listen to what you say and analyze your words. You seem more comfortable today than you did in Q2. However, some of your peers appear less confident. I'm specifically talking about the retail sector and your perspective on write-offs in retail. This seems worth examining, particularly on page 25 of your supplement. Retail write-offs are increasing, but you indicate that this may be stabilizing. Several of your peers refer to the "pig in the python" analogy to describe ongoing deterioration expected until 2026. I’m trying to understand if there’s a distinction between Royal's personal loans, credit cards, and lines of credit compared to others using this analogy. Does it matter that Royal’s business mix is oriented towards the more affluent compared to the mass affluent customers of some other banks? Has this distinction ever affected Royal's results in the past?
Graeme Hepworth, Chief Risk Officer
Thank you, Mario. I'm not sure how to address the pig in the python reference since it's not terminology we typically use. However, I wouldn't say there's been a significant change from quarter to quarter. We've just moved closer to the end state, and to touch on a term Dave used earlier, many are curious about when we'll reach the peak of the credit cycle. We believe we're currently in that range and expect to remain there. It's not going to be a specific quarter where we reach the peak and then see a quick decline. We're in a challenging phase of the credit cycle that will continue into 2026, but we are probably at that range now. Regarding our retail franchise, we have a robust client base that has consistently delivered strong outcomes from a credit standpoint. For instance, our cards business has always performed well for us in terms of provision for credit losses on both absolute and relative scales. We gain valuable insights from that data, which informs our overall risk management strategies. This serves as a key leading indicator for us, driving the provision for credit losses as it increases. We are monitoring trends in these products going forward. As I mentioned, we're experiencing more stability in this area, which aids our planning for 2026. Throughout the cycle, we've implemented measures to manage our new business and incoming flows effectively. We've focused on engaging with clients sooner to optimize outcomes. Moreover, in several of these products, we anticipate seeing benefits that may help offset the ongoing challenges posed by the Canadian economy. Overall, the quality of our client base, our sound underwriting standards, and the strict discipline surrounding our credit processes in retail are central to our strategy and considerations for how things may unfold in 2026.
Operator, Operator
Following question is from Mike Rizvanovic.
Mehmed Rizvanovic, Analyst
I have a couple of quick questions. I wanted to start with Erica. On Slide 6, the chart in the top left quadrant caught my attention. It's about the recent outperformance in discretionary and travel spending on the cards. I'm trying to understand this considering the tariff risk and the unemployment market not appearing as strong as it has been before the tariffs situation arose. What is driving this trend? Is it mainly due to unit gains and an increase in market share? Or am I missing something here? Is it inflation, and what do you think is behind this?
Erica Nielsen, Group Head, Personal Banking
Thank you for your question, Mike. I would like to highlight a few points. Our cards portfolio has shown pleasing growth in terms of balance formations and client spending, which we feel very positive about. Looking at the chart, it reflects the performance of our core RBC clients, who are exhibiting a strong performance in terms of losses and increased consumer confidence, leading to higher spending. We have also noticed encouraging trends among Canadian consumers this quarter. Furthermore, we've implemented significant actions, including advancements in AI and modeling, which Dave mentioned regarding the Adam model. This has allowed us to penetrate deeper into our client base, resulting in positive outcomes within our cards portfolio. We see this in the overall balance growth and the purchasing volumes on our cards, which indicates the portfolio's strength and increasing consumer confidence.
Operator, Operator
Our next question is from Paul Holden from CIBC.
Paul David Holden, Analyst
It's for Sean. So trying to really figure out the outlook for commercial lending, let me frame it quickly, if I can. Like I think Dave made comments around commercial customers a little bit more cautious. I think Graeme has suggested something similar in terms of the sort of credit outlook for commercial. But then at the same time, I think corporate clients, some more positive outlook? And then also when I look at your actual loan growth, it's pretty good, including a small business. So just trying to figure out what is kind of the right outlook here, robust growth, sort of lukewarm growth, or is the potential for something that get better, particularly if we get a final trade negotiation with the U.S. done?
Sean Amato-Gauci, Group Head, Commercial Banking
Thank you for the question, Paul. I’d like to provide some context regarding Q3 and offer guidance for Q4. Our sequential growth in Q3 was 1.2%, which aligns with our previous guidance of 1% to 1.5%. It's important to note that this figure is lower than our average growth of about 1.7% to 2% over the last four quarters. Currently, we are keeping our Q4 guidance in the range of 1% to 1.5%, with the possibility of reaching the higher end of that range. The uncertainty we experienced in Q1 and Q2, along with historically low business sentiment, has significantly impacted the conversion of our pipelines onto the balance sheet. While our pipelines remain strong, this uncertainty has caused a slowdown in investment activity, similar to trends seen in the broader RBC portfolio and the commercial industry overall. I believe this outlines the situation. Although the growth has been slower than in recent periods, our outlook remains consistent with Q3, and there are some promising signs that could lead to increased growth in the medium term.
David I. McKay, President and Chief Executive Officer
Last question is from Matthew Lee from Canaccord Genuity.
Matthew James Lee, Analyst
Maybe on the Canadian business, both personal and commercial, you delivered really substantial improvements in efficiency. I know you called out HSBC synergies, but are there any other items you can talk about that contributing to that cost depression?
Erica Nielsen, Group Head, Personal Banking
Yes. So maybe on the personal bank as it relates to the efficiency ratio, I think the team has done a very good job of just general expense management control. You saw that reflected in the results that we have there. So in addition to the HSBC synergies, we're seeing good cost discipline as we think about balancing both the growth that's necessary in the platform and driving that growth and the spend that we need to drive that growth, but as well as making sure that we are disciplined in our costs. Obviously, the revenue line perspective, we've seen strong revenue growth in the franchise. As Dave alluded to, that's really on the back of how we're supporting our clients, both strong acquisition and client growth from that side, as well as the consolidation of their business at RBC, which is playing off on both sides of the balance sheet, both in our deposit franchise and our lending franchise.
Graeme Hepworth, Chief Risk Officer
And quickly on the commercial side, consistent with the enterprise and to Katherine's comments, we did achieve 100% of the HSBC cost synergies this quarter. We also had some tailwind from the PPA, which will start to roll off into next year. But given the size of the platform, we have, similar to Erica's points, very strong cost discipline within the business while continuing to invest in product platform and coverage to drive growth going forward, both on the volume side and the revenue side. So we're pretty confident in maintaining this level of efficiency ratio based on those factors.
David I. McKay, President and Chief Executive Officer
This is Dave. I want to summarize our performance and thank you for your insights on projecting our impressive results in the future, which we take seriously. We are very proud of our achievements. You've received considerable feedback indicating that results in areas like wealth, capital markets, commercial banking, and consumer banking are likely sustainable, though there may be some volatility in insurance and potential changes in Q4. To help you with forecasting, I want to highlight that our results of $5.5 billion significantly exceeded consensus expectations. Looking ahead, assuming our clients continue to engage and there are no significant declines in their sentiment or ability to conduct business, I believe we can deliver results in the next quarter that are more in line with what we've achieved than what consensus predicts. If you compare the two figures, we are slightly above the midpoint, which can serve as a rough guide for our potential outcomes, dependent on client activity, tariffs, and how external factors unfold. This reflects the considerable strength of our franchise, with the ability to earn $5.5 billion and achieve a 17.7% return on equity, along with the robustness of all our business segments and our investments. We are committed to continuing to build on this momentum, and we have several businesses that can improve as mentioned. Our ongoing investments will lead to further growth, and we will keep pushing forward. Thank you for your questions and your time. We look forward to providing you with an update at year-end. Thank you.
Operator, Operator
Thank you. That's all the time we had for questions. I would now like to turn the meeting back over to Mr. McKay.
David I. McKay, President and Chief Executive Officer
That would be it from our end. Thank you.
Operator, Operator
Perfect. Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.