Picture a retiree in Calgary. Her five-year GIC (Guaranteed Income Certificate) recently matured, and the rate she is offered isn’t very attractive. So, she sits down with an advisor at the Royal Bank of Canada (TSX: RY) and moves the money into a balanced portfolio instead.
The retiree is still a bank customer while RBC continues to earn income by upselling its product portfolio.
These episodes play out thousands of times every day all across RBC branches. And it helps explain why I’d happily buy Royal Bank of Canada today and hold it for the next five years.
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What makes Royal Bank of Canada different from other Canadian banks?
The business model of banks is simple to understand. They take deposits and provide loans. The difference between the interest they earn on loans and what is paid on deposits translates into profits.
CEO David McKay said at Scotiabank’s Financials Summit on September 9 that RBC runs its Canadian consumer and commercial bank at a 35% efficiency ratio, below the peer average of 45%. In other words, RBC spends $0.35 to earn each dollar of revenue, while competitors spend $0.45.
Further, around 40% of RBC customers hold three or more products with the bank, CFO Katherine Gibson said at a Barclays conference on September 16.
Notably, capital flows into RBC’s wealth business rose 20% from a year earlier.
In fiscal Q3 2026 (ended in July), RBC posted a net income of $6 billion, up from $5.4 billion last year. Its earnings per share rose 13% to $4.23, while revenue rose more than 10% to $18.5 billion.
RBC added more than $80 billion in new loans in the quarter, larger than its next two peers combined.
Return on equity measures the profit earned on shareholder money. The ratio has improved from 15.5% in 2024 to 16.7% in 2025 and to more than 18% in Q3.
RBC’s AI plan could push profits even higher by 2027
RBC is targeting $700 million to $1 billion in annual benefits from AI, after paying for the investment. Gibson said the real scale-up arrives in 2027, as it used AI to accelerate commercial loan approvals and cut mortgage sales costs.
McKay said:
The opportunity in front of our organization is the transformation of the business using artificial intelligence. That is going to drive by far the greatest shareholder return and the focus of the management team.
RBC has already captured $760 million in cost savings from its HSBC Canada deal, ahead of schedule.
A good part of its $300 million revenue target from that deal is still to come. Meanwhile, its U.S. bank, City National, earned roughly $184 million in Q3 as its turnaround gains speed.
RBC aims to pay out 40% to 50% of earnings as dividends. That means the dividend should rise roughly in line with profits. The bank declared a quarterly dividend of $1.76 per share, or $7.04 a year. The annual dividend has risen from $2 per share in 2009.
RBC also holds a capital cushion of 13.5%, well above the 11% minimum regulators require. It’s also buying back about 2% of its shares a year because management believes the stock is undervalued.
However, investing in RBC stock carries certain risks. For instance, the trade war could slow loan demand in sectors such as automobiles, steel, and forestry, especially in Ontario.
Record profits from wealth management and capital markets could move lower if stock market sentiment turns bearish.
Mortgage growth is stuck in the low single digits as immigration slows.
Still, Gibson said reserves for retail loan losses now match a 20-year high.
The Foolish takeaway
Canada’s biggest bank just had a record quarter. I’m excited about the blue-chip TSX dividend stock because it can maintain payouts across market cycles while consistently expanding earnings per share.
