Royal Bank of Canada (TSX:RY), the country’s largest bank by market cap, captured investors’ attention by soaring nearly 12.5% last month — an intriguing return in such a short time for a conservative blue-chip stock. For a traditional bank that is perceived to move slowly and steadily, this kind of surge is nothing short of extraordinary.
In comparison, Bank of Nova Scotia (TSX:BNS) wasn’t far behind, climbing 12.1%, while Bank of Montreal (TSX:BMO) rose an impressive 8.7%.
So, what powered this rally? And more importantly, can it last?
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Earnings season ignited the bank stocks
The answer begins with strong quarterly results. The Canadian banks recently reported their fiscal third-quarter earnings, and they didn’t disappoint.
Scotiabank and BMO announced their results on August 26, while Royal Bank followed on August 27. Each has seen a meaningful rise in share price since then:
- Royal Bank rose another 5% after earnings.
- Scotiabank jumped roughly 10%.
- BMO also gained nearly 10%.
Clearly, investors liked what they saw — solid earnings and positive outlooks acted as catalysts. But the act of investing should never be based on short-term results. A look at long-term returns reveals that these stocks have been dependable wealth builders.
A decade of growth: RBC leads the pack
Let’s rewind 10 years and see how these banks have rewarded patient investors:
- Royal Bank turned a $1,000 investment into $4,178, representing an annualized return of 15.4%.
- BMO grew the same amount to $3,913, or 14.6% annually.
- Scotiabank, in turn, turned $1,000 into $2,525, for an annualized return of 9.7%.
From an earnings growth perspective, Royal Bank also shines. Over the past decade, its adjusted earnings per share (EPS) grew at a compound annual rate (CAGR) of 7.1%, and its price-to-earnings (P/E) ratio expanded from around 11 to roughly 14.7 today — a reflection of market confidence.
Meanwhile:
- Scotiabank grew EPS at just 1.8% annually, with its P/E ratio moving from 10.3 to 12.7.
- BMO grew EPS at 3.9% CAGR, and its P/E jumped from 9.9 to 15 — now higher than RBC’s.
The numbers tell a clear story: RBC not only delivers more reliable earnings growth, but it also tends to trade at a premium valuation because of it.
What’s next for Royal Bank stock?
This year’s earnings are reinforcing the bullish trend. Year to date (YTD), RBC’s adjusted EPS is up 17%, helping to justify the recent price surge. In contrast, Scotiabank is showing signs of a turnaround with 5% EPS growth YTD and hopes for double-digit gains next year. BMO is keeping pace with a 14% YTD EPS increase.
However, history offers a word of caution. Bank stocks — especially the Big Six — rarely post back-to-back years of market-beating gains unless Canada is in a strong economic recovery after a recession.
If Royal Bank can maintain its earnings momentum into next year, the stock could consolidate for a while before making its next leg up. But if earnings slow, expect P/E compression and potentially a pullback.
The Foolish investor takeaway
Last month’s 12.5% surge in RBC shares wasn’t a fluke — it was backed by strong fundamentals and improving sentiment. Whether the momentum continues will depend on what happens next with earnings and the broader economy.
