RBC lifts its return target, downplays interest in US M&A

• Key insight: Royal Bank of Canada adjusted its return on equity target upward, showcasing confidence in its ability to improve its earnings and make more money for shareholders.
  

• Supporting data: RBC is now projecting a return on equity of at least 17% by 2027.
  

• Forward look: Another upward revision is possible, depending on factors such as AI deployment, the CEO said.

Royal Bank of Canada increased a key financial performance target Wednesday after releasing a strong quarterly earnings report that was fueled partly by improved U.S. results.

The Toronto-based bank now expects to achieve a return on equity of 17% or more by 2027, up from the 16% or more it had been projecting, and higher than the 16.3% it reported for the fiscal year that ended on Oct. 31. Executives said the lift reflects higher revenues and prudent cost management.

CEO Dave McKay didn’t rule out another upward revision, saying that the latest guidance is “not a static target,” especially as the bank deploys more artificial intelligence tools that could lead to lower costs. About 13,000 RBC employees are using generative AI as part of their jobs, he said.

“As we start to see those benefits roll in, I’m hopeful that we’ll be able to look at that again and increase in the near term,” McKay told analysts during the bank’s fourth-quarter earnings call. “But for now … it’s a growth story. It’s a capital return story through dividends and buybacks. And it’s really, really strong performance and consistent performance within our risk appetite.”

On an adjusted basis, RBC has already been achieving a return on equity above 17%. During the bank’s fourth quarter, which ran from August through October, the metric was 17.2%. It was 17.3% on an adjusted basis during the bank’s second quarter, which went from May through July.

“Our key takeaway from [RBC’s] earnings call was management’s confidence in its operations, despite the ongoing uncertainty in the economic outlook,” John Aiken, an analyst at Jefferies, wrote Wednesday in a research note. “Raising the [return on equity] target underscores its belief and is coupled with a very high capital ratio that, when returned, can accelerate growth.”

RBC laid out its growth plans in March when it hosted its first investor day in seven years. Executives discussed a revamped U.S. strategy, which includes cross-selling more products to clients, expanding in the mortgage business and continuing to concentrate on certain longstanding niches.