Valued at a market cap of $321 billion, Royal Bank of Canada (TSX:RY) is the 11th largest bank in the world. After adjusting for dividend reinvestments, RBC stock has returned:
- 36% in the past year.
- 89% in the last 3 years.
- 161% in the last 5 years.
- 398% in the last 10 years.
- 1,000% in the last 20 years.
Despite these market-beating returns, the blue-chip bank stock also offers you a dividend yield of almost 3% today. Let’s see if Royal Bank of Canada stock is still a good buy in January 2026.
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RBC is focusing on long-term growth
Royal Bank of Canada is targeting a 17% return on equity (RoE) as CEO Dave McKay outlined an aggressive growth strategy built on three key pillars: net interest income expansion, fee-based revenue growth, and efficiency improvements driven by artificial intelligence.
RBC stock currently trades at a forward price-to-earnings multiple of 14.7 times, which is above its 10-year average of 11.9 times. The bank trades at a premium to peers in Canada and the U.S. An elevated valuation forces RBC to deliver exceptional results in the near term. Notably, McKay emphasized that the bank can achieve its targets without increasing risk appetite.
- RBC plans to operate with a common equity Tier 1 ratio between 12.5% and 13.5%.
- This ratio is a key banking metric that compares a bank’s highest-quality capital with its risk-weighted assets. It also indicates a bank’s ability to absorb losses and maintain stability amid a challenging environment.
- RBC confirmed that any excess capital above the 13.5% threshold will be returned to shareholders through buybacks.
The bank generates roughly 80 basis points of organic capital each quarter, net of dividends. This provides it with the flexibility to target acquisitions or deploy capital towards buybacks. McKay explained that the bank would only pursue transformational deals that could quickly return to the 17% RoE target.
The growth strategy relies heavily on improving return on assets from roughly 87 basis points last year to 100 basis points.
One-third of this improvement will come from net interest margin expansion as the struggling mortgage business recovers from the worst margin compression in 25 years. Another third will come from wealth management and capital markets fee income, while the final third stems from efficiency gains.
RBC’s U.S. operations represent a significant opportunity.
- City National Bank continues to work toward target returns, while the wealth and capital markets franchises are expanding rapidly.
- The bank launched RBC Clear, a senior markets platform that raised $23 billion in U.S. deposits from scratch in three years, with ambitions to reach $50 billion.
- This funding capability could transform RBC’s ability to pursue U.S. acquisitions by solving funding challenges that constrain regional banks.
McKay identified cyber risk and sectoral credit volatility as primary concerns, particularly as trade disputes around CUSMA (Canada-U.S.-Mexico Agreement) negotiations create uncertainty for certain industries.
However, the Canadian consumer remains resilient, and RBC sees unprecedented infrastructure investment opportunities in Canada totaling $175 billion in defence and infrastructure spending over the coming years.
Is RBC stock overvalued right now?
Analysts tracing RY stock forecast adjusted earnings to grow from $14.43 in fiscal 2025 (ended in October) to $17.22 in fiscal 2027.
If the bank stock trades at its historical earnings multiple of 11.9 times, it will be priced at $205 at the end of 2026. Currently, RBC stock trades at $229.60 per share.
Given consensus price targets, RBC stock trades at a 2% discount in January 2026. If we account for dividends, total returns will be around 5% over the next 12 months.
