Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Royal Bank of Canada RY reported slightly disappointing second-quarter results, with provisioning costs increasing 36% from a quarter ago. Adjusted earnings per share of C$ 3.12 fell 14% sequentially. This was due in large part to increased tariff-induced uncertainty in the Canadian and US economies.
Why it matters: Royal Bank of Canada’s commercial banking segment reported strong loan growth of 22%, but net income only increased 3% from the year-ago period, dragged down by a provisioning increase of 86%. Total bank provisioning increased by 55% year over year, worse than that of most Canadian peers.
· The bank maintained its 2025 impaired provisioning guidance of mid-30 basis points of total loans but cautioned that a prolonged impact from higher tariffs would affect its 2026 impaired loan provisioning.
· Net interest income excluding trading was up 20% year over year, driven by strong volume growth and net interest margin expansion. Management maintained its 2025 guidance for NII growth in the high single to low double digits when trading is excluded.
The bottom line: We are maintaining our C$ 157/USD 110 fair value estimate for wide-moat-rated Royal Bank of Canada after incorporating the latest results. We view the shares as fairly valued even with the 3% decline in price following the release of second-quarter earnings.
· Valuations for the Canadian banking sector have largely recovered from their April lows after some de-escalation in tariff rates. However, we still think that the Canadian and US economies have elevated levels of uncertainty in the near term, and we maintain our Medium Uncertainty Rating for RBC.
Key stats: Net formation of gross impaired loans in commercial banking increased by C$ 512 million sequentially to C$ 1.2 billion, mostly driven by a large retailer, which RBC expects to be resolved next quarter. Total bank gross impaired loans increased 13% from the year-ago quarter to 0.88% of total loans.
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