Royal Bank of Canada Earnings - Q2 2025 Analysis
Positives
- Pre-provision pre-tax earnings were strong in Q2, at nearly CAD 7 billion.
- Global markets had a strong quarter, driven by increased client activity amidst market volatility, which largely benefited equities and broader macro trading businesses.
- Canadian banking NIM was up 5 bps from Q1, benefiting from a favorable product mix, higher mortgage spreads, and continued benefits related to an attractive strategy, which provides protection in a declining rate environment.
- The company delivered strong results in Q2 despite market and macroeconomic uncertainty.
- The company's performance reflects the resilience of its diversified earnings stream and financial strength, positioning it to navigate the quarters ahead.
Q&A Highlights - Q2 2025
Analyst asked about the discretion used to classify loans as impaired.
Graeme Hepworth, the company's management, explained that they have well-defined processes and rules in place to determine when a loan is impaired, and that it is not solely based on whether a company stops paying or not. They also clarified that the $1 billion increase in GIL was due to administrative concerns, which have since been resolved.
Analyst asked about the direction of impaired loans next quarter.
Graeme Hepworth explained that the company is in the process of integrating HSBC into their processes, and some loans that were up for renewal did not get renewed on time, causing them to be tripped into impairment. However, these loans have since been renewed and resolved, and they will go the other direction next quarter.
Analyst asked about the drivers of NII growth, specifically if balance sheet growth or loan growth is needed to reach the low-double-digit range.
Katherine Gibson explained that the company's guidance for NII excluding trading is based on several assumptions, including volume growth, which they are holding to their guidance of low-single-digit growth for mortgages and high-single-digit growth for Commercial. They are also seeing moderate growth in Corporate Banking, but cautiousness from some clients could impact volume growth in the second half of the year. NIM is also expected to be positive due to strong growth in deposits and a positive mix shift, but competitive pressures and seasonal movements could impact NIM as well.
Analyst asked about the difference in net interest margin (NIM) between Commercial Banking and Personal Banking, and why the NIM is going lower in Commercial Banking despite strong loan growth.
The NIM is going lower in Commercial Banking due to the shift between NIM and other income, primarily driven by the migrations. The impact of this shift will lessen on a year-over-year basis as the migration completes in the next quarter. The continued execution of the multiyear strategy to invest in coverage and underwriting expertise has driven growth in the larger segments of the portfolio, which is returning off of a base of underperformance in the early part of this decade. The growth rate is close to the industry average at about 1% greater on a five-year basis. Sequential growth slope has been seen through all the uncertainty, with an average quarterly sequential growth of about 2.5%. The outlook is in the mid-single digits to low end of high-single digits on a full-year H2 basis this year, which would imply about a 1% to 1.5% sequential growth on a quarter-over-quarter basis for the next two quarters.
Analyst asked about the target of 18% and how long it will take to achieve it.
The target of 18% is a three-year target, and the projections are to rebuild to 18% in three years. The reserve build this quarter, the allocation of a capital methodology into the businesses, and the goodwill allocation from the HSBC acquisition have driven the target lower.
Analyst asked about the possibility of meeting the target for 2025.
The company acknowledges that it will be difficult to meet the target for 2025.
Analyst asked about the contribution of the mortgage business to the segment revenue.
Erica Nielsen replied that it's difficult to provide a specific number, but 10% is a reasonable estimate. She suggested taking the discussion offline.
