Royal Bank (TSX:RY) is down more than 10% in 2025. Investors who missed the big rally in 2024 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) portfolio focused on total returns.
Royal Bank share price
Royal Bank trades near $152 per share at the time of writing. The stock is down from $180 in December but is still up over the past 12 months.
Interest rate changes have played a large role in the movement of bank stocks in the past five years. Rate cuts that occurred during the pandemic fuelled a surge in home buying that drove prices and loan amounts higher. Low interest rates, along with generous government support, helped avoid a wave of defaults during the pandemic. This enabled Royal Bank to generate strong profits, even as net interest margins tightened.
RY stock soared from about $80 in the spring of 2020 to nearly $150 in early 2022. At that point, inflation started to get out of control, and markets began to anticipate the rate hikes that materialized through 2022 and 2023 as the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to slow down the economy to get inflation under control.
Royal Bank’s share price trended lower through most of 2022 and 2023, eventually sliding back below $110 per share. The next rally to the upside began as soon as the central banks indicated they were done raising interest rates. Bank stocks picked up a tailwind in the second half of 2024 as rate cuts occurred in Canada and the United States.
Tariff risks
Recently announced U.S. tariffs sparked the latest pullback in bank stocks. Investors are concerned that prices will rise as companies pass the jump in costs along to consumers. This could slow or halt the pace of rate cuts. At the same time, there is a risk of a recession and a jump in unemployment. A wave of job losses could put pressure on Royal Bank and its peers in the coming months as households that are already struggling with too much debt and higher living costs start to default on loans.
In a scenario where inflation soars and the economy slides into a recession, things could get ugly for the banks.
Opportunity
Royal Bank is very profitable, maintains a strong capital position, and has the financial firepower to take advantage of distress in the bank sector to make strategic acquisitions. It can also afford to compete aggressively with other Canadian banks to win the business of attractive customers that will renew mortgages this year and in 2026.
Time to buy Royal Bank stock?
Additional downside is certainly possible until there is more clarity on how high U.S. tariffs will actually be and how long they will remain in place. As such, I wouldn’t back up the truck today. That being said, contrarian investors with some cash to put to work should keep RY on their radar. Buying Royal Bank stock on big dips has historically proven to be a savvy move for patient investors.
