Royal Bank (TSX:RY) is down about 6% in 2025. Investors who missed the big rally last year are wondering if RY stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Royal Bank stock price
Royal Bank trades near $162 per share at the time of writing. That’s down from $180 about four months ago but is still up 20% over the past year.
Royal Bank saw its stock price pull back in 2022 and 2023 as the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to get inflation under control. In normal conditions higher interest rates tend to be net positive for banks as they enable the banks to generate better net interest margins. The steep hike in rates over such a short period of time, however, also put pressure on borrowers with too much variable-rate debt. This forced the banks to set aside more money to cover potential loan losses.
As soon as the central banks signalled they were done raising interest rates, Royal Bank picked up a new tailwind that lasted through most of 2024, with a boost coming from rate cuts in Canada and the United States last year. Lower interest rates will help borrowers and should lead to declining provisions for credit losses (PCL).
Risks
A trade war with the United States could drive the Canadian and American economies into a recession. At the same time, tariffs could spark a new inflation surge that would worsen the economic conditions and could potentially force the central banks to raise interest rates again despite a weakening economy. If unemployment jumps, there could be a wave of loan defaults.
Roughly one million fixed-rate mortgages that were taken out at very low rates in 2020 are coming due this year at rates that are much higher. Banks are battling to secure the best of these customers by offering very competitive rates. This will squeeze margins. At the same time, households with too much debt might be forced to sell or default on their loans despite efforts to stretch amortizations.
Opportunity
Royal Bank is benefitting from its takeover of HSBC Canada and has the financial firepower to compete with the other big Canadian banks for the best customers in the current environment. If tariffs get trimmed or don’t last for long, the economy could pick up momentum. This would be good for Royal Bank and its peers.
Should you buy now?
Near-term volatility is expected until the impact of tariffs on the economy is clear. This will take some time, so I wouldn’t back up the truck just yet. That being said, Royal Bank is a solid company that can ride out the turbulence and should deliver decent long-term total returns for investors.
Additional weakness would be viewed as an opportunity to pick up the stock. Buying Royal Bank on material pullbacks has historically proven to be a savvy move for patient investors.
