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?
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.
