Royal Bank of Canada (RY)

Total return at 5 years: 3.7%/year = 0.6% appreciation + 3.1% dividend. The target price ($198) is ex-dividend; the $30 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($193) and the other below.

Today — expensive, no margin of safety: at $193 trades ~3.8% above its value discounted to today (~$186); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($198) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$119.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($193) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-5.5%/year) than we project (6.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~CAD 16.7 bn of owner earnings in year 5 (vs ~CAD 29.7 bn of our base case). It recalculates if the DCF assumptions are edited.

A bank is valued on equity (P/E × common earnings + price/tangible book), not EV: deposits and debt are funding. It returns capital via dividend + buyback —the buyback reduces the share count, so earnings per share grow faster than aggregate earnings—. Total return adds the dividend collected along the way. In edit mode, the metric, shares, dividend, and exit multiple can be adjusted.

The entire model runs in Canadian dollars, the reporting currency; the price anchor is in the quotation currency and the conversion happens once, at the close of the cascade, at the live exchange rate. Year 0 is the twelve-month window ended Jul-31-2026: common earnings of CAD 22.19 billion over 1,384.6 million period-end shares, i.e., earnings per share of CAD 16.03. That window was built by levels from the third-quarter report —full fiscal 2025 plus the nine months to July 2026 minus the nine months to July 2025— because the SEC's structured data had not yet incorporated that quarter or the prior one, even though the bank filed them in May and August; the three components are published figures and the base fiscal year reconciles against the structured data. The base case decelerates from the nine months' +16.0% to +7.5% in year 1 and from there to ~5% by year 5, because year 0 still incorporates fiscal 2025's Capital Markets result (revenue CAD 14,426 million, +20%; net income CAD 5,393 million, +18%, the highest of the comparative periods presented) and the last stretch of the HSBC Bank Canada integration, components that are not extrapolated, and because the market appreciation that boosted Wealth Management in the quarter is not projected either. The company maintains a medium-term target of 7%+ diluted earnings-per-share growth and a return-on-common-equity target of 17%+ for fiscal 2026; the nine-month return was 17.5% and the quarter's 17.9%. The share path is a single one for all three scenarios and declines 1.0% per year, below the 1.5% annual rate revealed by the period-end series: the buyback offer launched in June 2025 expired on June 11, 2026 with 20.4 million shares cancelled for roughly CAD 4,473 million and was replaced by another for up to 45 million shares, but at a bank the surplus that funds it is limited by regulatory capital rather than cash flow, and issuance from the dividend reinvestment plan and share-based compensation offsets part of it, so the revealed pace is not extrapolated in full.

Today's multiple compresses on its own going forward as the metric per share grows (accelerated by the buyback, which reduces the share count). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—. Total return adds the dividend collected; the required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $198 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $193, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $198 in 5 years plus $30 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $186. Against the current market price ($193), the margin of safety is -3.8% (trades above the maximum → a premium is paid) and the total return at that price would be 3.7% annually.

• Entry multiple. Trades at 18× times trailing-twelve-month earnings, above a bank's 10-to-15-times range.
• Estimated total return. +4% annualized over five years, of which +3% corresponds to the dividend and +1% to appreciation.
• Dividend yield. 2.6% on the declared dividend of CAD 1.76 per quarter, with a history of annual increases.
• Multiple sensitivity. Nearly the entire valuation result depends on the exit multiple: the adverse scenario takes it to the floor of the band.

• Return on capital. Return on tangible common equity of 21.0%, comfortably above the 10% bar.
• Earnings predictability. The two traditional banking lines are stable, but capital markets contributes 23% of revenue with high variability.
• Reinvestment runway. Balance-sheet growth in a mature market runs at a mid-single digit: reinvestment pays off, but the runway is not long.
• Accounting quality. Earnings depend on the expected credit loss provisioning standard, which contributed by reversal over the nine months.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

A bank's drivers are those of the intermediation business: deposit volume, which is the funding; loan volume, which is where it is deployed; and the net interest margin, which is the price of the spread between the two. Added to that are assets under management, which generate fees without consuming capital, and Common Equity Tier 1, which sets how much the balance sheet can grow and how much capital is left over for dividends and buybacks. The loan book is read through the impaired-loan ratio and the provision coverage of that book.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Revenue growth. 16.1% in fiscal 2025 and 11.9% over the trailing twelve months, with a contribution from the acquisition and from currency translation.
• Organic growth. Deposits up 9.3% and loans up 7.0% year over year: the volume engine grows at a high single digit without acquisitions.
• Quality of growth. Nearly half of the quarter's growth comes from capital markets, the line that is not extrapolated.
• Terminal growth. The path reaches a mid-single digit by year 5, the reasonable ceiling for a bank in a mature domestic market.

• Ten-year relevance. Deposit and credit intermediation in a concentrated, regulated system does not get discontinued.
• Differentiated product. Credit is substitutable among large banks; the differentiation lies in the relationship and the wealth brand.
• Pricing power. The net interest margin is set more by the curve than by the bank: it fell from 1.64% to 1.58% year over year.
• Market share. Canada's largest bank by market value, with deposits growing 9.3% year over year.
• Behavior in a recession. A leveraged bank does not simply slow in a recession: the credit provision cuts earnings sharply.

• ✓Capital adequacy (CET1)CET1 13.5% (+2.4pp above the minimum)
• ✕Reserve coverage (allowance / loan book)0.70% of the loan book
• ✓Credit quality (net charge-off rate)0.37% annually
• ✓Value creation (ROTCE − 10% bar)+11pp
• ✓Funding (deposit base)Deposits $1,644.6 bn

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

ⓘ Has a loan book: credit health (delinquency, coverage, normalized CECL, RoA/RoE) is evaluated separately, not with corporate solvency.

• Capital. CET1 ratio of 13.5% against an 11.1% requirement including all regulatory surcharges.
• Liquidity. Liquidity coverage ratio of 125% and net stable funding ratio of 112%, against a 100% regulatory minimum.
• Loan-book quality. Impaired loans at 0.91% of the portfolio, up from 0.83% at the close of fiscal 2025.
• Provision coverage. Accumulated allowances of CAD 7,788 million, 77% of gross impaired loans.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

A bank is a business funded by its own earnings: deposits and issued debt are operating funding, not shareholder capital, so the cascade's only source is common earnings. From there come the dividend, which absorbs somewhat less than half, the buyback, and the retained capital that sustains balance-sheet growth and the Common Equity Tier 1 ratio.

• Capital return. Dividend raised 7% and a new buyback offer for up to 3% of the share count, with ample capital to fund them.
• Acquisitions. HSBC Bank Canada contributed CAD 453 million of earnings already in the year of closing, with no permanent return dilution.
• Insider ownership. Not available: the foreign issuer does not file a proxy statement with the Securities and Exchange Commission and the gap is declared.
• Reporting candor. The report publishes provisions by segment, impaired loans, and capital with full detail and comparatives.

• The market is paying for verified quality: return on tangible common equity near 20%, Common Equity Tier 1 nearly two points above the requirement, and a dominant position in a concentrated system, attributes that are scarce and sustained in a bank.
• The recent result is exceptional and the price extrapolates it: net income for the quarter ended July 31, 2026 grew 11.3% year-over-year and the nine-month figure 16.0%, with a reversal in provisions on performing loans that took that component from 0.08% to 0.01% of average portfolio.
• Capital return is visible and growing: quarterly dividend raised 7% to CAD 1.76 per share and a new buyback offer for up to 3% of the share count, both announced May 28, 2026, after the close of the twelve-month window being valued here.
• There is no identifiable source of discount: neither missing buyers nor motivated sellers appear, and that absence is exactly the signal that there is no analytical edge in today's price.
• Rating agencies confirmed and upgraded the credit after the close of the twelve-month window being valued here: Fitch raised the issuer rating to AA+ from AA on May 12, 2026 after updating its bank criteria, and Moody's (May 6) and DBRS (May 8) affirmed the rating with a stable outlook.

The entry multiple is well above the 10-to-15-times range a bank is valued at. The honest conclusion is that the market is not wrong about the business: it is paying up front for several years of the growth the base path projects.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -4%/year (-18% total): the margin of safety protects the downside. The bull (+8%/year, +45% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Credit cycle. The reversal of provisions on performing loans, from 0.13% to 0.01%, is not repeatable.
• Housing market. Canadian household indebtedness concentrates exposure in a single geography.
• Cybersecurity. The filing itself catalogs it among the principal risks, including dependence on third-party suppliers.
• Geopolitics and tariffs. Trade tensions hit the Canadian economy given its dependence on two trading partners.
• Exchange rate. Earnings are generated in Canadian dollars and the stock is paid for in U.S. dollars.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROTCE 21% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a PEG of 2.9 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Not applicable — the Magic Formula excludes financials and regulated businesses (EBIT/EV does not capture the operating leverage).

• Howard Marks Perception vs reality + cycle

  The price discounts -6% vs our 6%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -8%/yr, bull-scenario ceiling +5%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: efficient scale, switching costs, intangibles, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -6%, within what we project (6%) — the story squares with the numbers.