Where our
vision leads us
R
o
y
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l
B
a
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k
o
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C
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Royal Bank of Canada
2006 Annual Report
Where we are
RBC corporate profile
Royal Bank of Canada (RY on TSX and NYSE) and its
subsidiaries operate under the master brand name of
RBC and may be referred to in this text as RBC. We are
Canada’s largest bank as measured by assets and
market capitalization and one of North America’s leading
diversified financial services companies. We provide
personal and commercial banking, wealth management
services, insurance, corporate and investment banking
and transaction processing services on a global basis. Our
Global Technology and Operations and Global Functions
teams enable business growth with expert professional
advice and state-of-the-art processes and technology.
We employ approximately 70,000 full- and part-time
employees who serve more than 14 million personal,
business, public sector and institutional clients through
offices in North America and 34 countries around the world.
In Canada, we have strong market positions in all of our
businesses. In personal and business banking, we rank first
or second in most retail products. In wealth management,
we have the leading (1) full-service brokerage operation,
the top mutual fund provider among Canadian banks
(1) Based on assets under administration.
and the second-largest (1) self-directed broker. We are
the largest Canadian bank-owned insurer, one of the top
10 Canadian life insurance producers, and a leader in
creditor products, travel insurance and individual disability
insurance. In corporate and investment banking, we
continue to be the top-ranked securities underwriter
and the leading mergers and acquisitions (M&A) advisor.
Our domestic delivery network is one of the most extensive
of all Canadian financial services companies.
In the United States, we provide personal and commercial
banking, insurance, full-service brokerage and corporate
and investment banking services to approximately
two million clients .
Outside North America, we have a banking network in the
Caribbean and a significant presence in select markets. We
offer investment banking, trading, correspondent banking
and reinsurance to corporate, institutional, public sector
and business clients. We also offer private banking and
wealth management services for high net worth individuals
and corporate and institutional clients.
1
2
5
6
8
10
12
13
14
17
Financial highlights
Chief Executive Officer’s
message
Performance compared to
objectives
To be the undisputed leader in
financial services in Canada
To build on our strengths in
banking, wealth management
and capital markets in the
United States
To be a premier provider of
selected global financial services
Global Technology and Operations
and Global Functions
Chairman’s message
Corporate governance
Corporate responsibility
25 Management’s Discussion
99
26
33
38
and Analysis
Executive summary
Accounting and control matters
Consolidated results from
continuing operations
43 Quarterly financial information
Business segment results from
45
continuing operations
Financial condition
Risk management
Additional risks that may affect
future results
Additional financial information
63
72
90
92
Consolidated Financial
Statements
161 Glossary
163 Directors and executive
100 Management’s responsibility for
officers
164 Principal subsidiaries
165 Shareholder information
financial reporting
100 Report of Independent Registered
Chartered Accountants
101 Management’s report on internal
control over financial reporting
101 Report of Independent Registered
Chartered Accountants
102 Consolidated Balance Sheets
103 Consolidated Statements of
Income
104 Consolidated Statements of
Changes in Shareholders’ Equity
105 Consolidated Statements of
Cash Flows
106 Notes to the Consolidated
Financial Statements
This annual report contains forward-looking statements within the meaning of certain securities laws, including the
“safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian
securities legislation. We caution readers not to place undue reliance on these statements as a number of important factors
could cause our actual results to differ materially from the expectations expressed in such forward-looking statements.
Additional information about these factors can be found under “Caution regarding forward-looking statements” on page 25.
The carbon dioxide emissions associated with the production and distribution of
this report have been mitigated by Zerofootprint according to the highest standards
in carbon offsetting.
Form #81104 (12/2006)
This report has been printed on paper stock that contains 10% post-consumer fibre
and is FSC (Forest Stewardship Council) certified. FSC fibre used in the manufacture
of the paper stock comes from well-managed forests independently certified by
SmartWood according to Forest Stewardship Council rules.
Where our
vision leads us
R
o
y
a
l
B
a
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C
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Royal Bank of Canada
2006 Annual Report
Where we are
RBC corporate profile
Royal Bank of Canada (RY on TSX and NYSE) and its
subsidiaries operate under the master brand name of
RBC and may be referred to in this text as RBC. We are
Canada’s largest bank as measured by assets and
market capitalization and one of North America’s leading
diversified financial services companies. We provide
personal and commercial banking, wealth management
services, insurance, corporate and investment banking
and transaction processing services on a global basis. Our
Global Technology and Operations and Global Functions
teams enable business growth with expert professional
advice and state-of-the-art processes and technology.
We employ approximately 70,000 full- and part-time
employees who serve more than 14 million personal,
business, public sector and institutional clients through
offices in North America and 34 countries around the world.
In Canada, we have strong market positions in all of our
businesses. In personal and business banking, we rank first
or second in most retail products. In wealth management,
we have the leading (1) full-service brokerage operation,
the top mutual fund provider among Canadian banks
(1) Based on assets under administration.
and the second-largest (1) self-directed broker. We are the
largest Canadian bank-owned insurer, one of the top 10
Canadian life insurance producers, and a leader in
creditor products, travel insurance and individual disability
insurance. In corporate and investment banking, we
continue to be the top-ranked securities underwriter
and the leading mergers and acquisitions (M&A) advisor.
Our domestic delivery network is one of the most extensive
of all Canadian financial services companies.
In the United States, we provide personal and commercial
banking, insurance, full-service brokerage and corporate
and investment banking services to approximately
two million clients.
Outside North America, we have a banking network in the
Caribbean and a significant presence in select markets. We
offer investment banking, trading, correspondent banking
and reinsurance to corporate, institutional, public sector
and business clients. We also offer private banking and
wealth management services for high net worth individuals
and corporate and institutional clients.
1
2
5
6
8
10
12
13
14
17
Financial highlights
Chief Executive Officer’s
message
Performance compared to
objectives
To be the undisputed leader in
financial services in Canada
To build on our strengths in
banking, wealth management
and capital markets in the
United States
To be a premier provider of
selected global financial services
Global Technology and Operations
and Global Functions
Chairman’s message
Corporate governance
Corporate responsibility
25 Management’s Discussion
99
26
33
38
and Analysis
Executive summary
Accounting and control matters
Consolidated results from
continuing operations
43 Quarterly financial information
Business segment results from
45
continuing operations
Financial condition
Risk management
Additional risks that may affect
future results
Additional financial information
63
72
90
92
Consolidated Financial
Statements
161 Glossary
163 Directors and executive
100 Management’s responsibility for
officers
164 Principal subsidiaries
165 Shareholder information
financial reporting
100 Report of Independent Registered
Chartered Accountants
101 Management’s report on internal
control over financial reporting
101 Report of Independent Registered
Chartered Accountants
102 Consolidated Balance Sheets
103 Consolidated Statements of
Income
104 Consolidated Statements of
Changes in Shareholders’ Equity
105 Consolidated Statements of
Cash Flows
106 Notes to the Consolidated
Financial Statements
This annual report contains forward-looking statements within the meaning of certain securities laws, including the
“safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian
securities legislation. We caution readers not to place undue reliance on these statements as a number of important factors
could cause our actual results to differ materially from the expectations expressed in such forward-looking statements.
Additional information about these factors can be found under “Caution regarding forward-looking statements” on page 25.
The carbon dioxide emissions associated with the production and distribution of
this report have been mitigated by Zerofootprint according to the highest standards
in carbon offsetting.
Form #81104 (12/2006)
This report has been printed on paper stock that contains 10 per cent post-consumer
fibre and is FSC (Forest Stewardship Council) certified. FSC fibre used in the
manufacture of the paper stock comes from well-managed forests independently
certified by SmartWood according to Forest Stewardship Council rules.
Vision
Values
Strategic goals
• Always earning the right to be
• Excellent service to clients
our clients’ first choice
and each other
• Working together to
succeed
• Personal responsibility for
high performance
• To be the undisputed leader in
financial services in Canada
• To build on our strengths in
banking, wealth management
and capital markets in the
United States
• Diversity for growth and
• To be a premier provider
innovation
• Trust through integrity in
everything we do
of selected global financial
services
Financial highlights
(C$ millions, except per share
and percentage amounts)
Operating performance
Total revenue
Provision for credit losses
Non-interest expense
Net income
Return on common equity (ROE)
Diluted earnings per share
2006
2005
2004
$ 20,637
429
11,495
4,728
23.5%
3.59
$
$ 19,184
455
11,357
3,387
18.0%
2.57
$
$ 17,802
346
10,833
2,803
15.6%
2.11
$
2006 vs. 2005
Increase (decrease)
$
$
1,453 8%
(26) (6)%
138 1%
1,341 40%
550 bps n.m.
1.02 40%
RBC Canadian Personal and Business
(C$ millions, except
percentage amounts)
Total revenue
Net income
Return on equity (ROE)
Average loans and acceptances
Average deposits
Assets under administration
Assets under management
2006
2005
2004
$ 13,381 $ 12,499 $ 11,213
2,043
24.7%
145,300
133,700
157,300
58,700
2,794
31.5%
180,500
145,700
213,200
89,700
2,304
27.1%
161,500
138,800
180,300
72,100
The businesses in RBC Canadian
Personal and Business
continued to strengthen our
leadership position in most
major product categories by
expanding our distribution
network, enhancing our products
and services, better meeting our
client needs and deepening our
client relationships.
2006 vs. 2005
Increase (decrease)
$
882
7%
490 21%
440 bps n.m.
19,000 12%
6,900 5%
32,900 18%
17,600 24%
9.6%
11.9%
$ 223,709
9.6%
13.1%
$ 197,004
8.9%
12.4%
$ 183,409
– bps n.m.
(120)bps n.m.
$ 26,705 14%
RBC U.S. and International Personal and Business
Capital
Tier 1 capital ratio
Total capital ratio
Risk-adjusted assets
Key drivers
Total loans (before allowance for
loan losses)
Total deposits
Total assets
Assets under management
Assets under administration (1)
Common share information
Share price
High
Low
Close
Dividends declared per share
Book value per share
Market capitalization ($ millions)
$ 209,939
343,523
536,780
143,100
525,800
$ 191,914
306,860
469,521
118,800
417,100
$ 172,560
270,959
426,222
102,900
391,000
$ 18,025 9%
36,663 12%
67,259 14%
24,300 21%
108,700 26%
$
51.49
41.29
49.80
1.44
16.52
63,788
$
43.34
30.45
41.67
1.18
14.89
53,894
$
32.95
29.02
31.70
1.01
13.57
40,877
$
8.15 19%
10.84 36%
8.13 20%
.26 22%
1.63 11%
9,894 18%
Excluding Institutional & Investor Services (IIS) assets that were contributed to the joint venture RBC Dexia Investor Services on January 2, 2006.
(1)
n.m. not meaningful
(C$ millions, except
percentage amounts)
Total revenue
Net income
Return on equity (ROE)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
$
2,872 $
444
13.6%
2,728 $
387
11.8%
2,702 $
214
5.4%
144 5%
57 15%
180 bps n.m.
(US$ millions, except
percentage amounts)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
Total revenue
Net income
Average loans and acceptances
Average deposits
Assets under administration
Assets under management
$
2,537 $
393
18,300
29,700
274,200
47,500
2,248 $
320
16,900
27,400
198,400
39,500
2,057
162
14,400
25,200
191,800
36,300
$
289 13%
73 23%
1,400 8%
2,300 8%
75,800 38%
8,000 20%
The wealth management and
banking businesses in RBC U.S.
and International Personal and
Business continued to build scale
and capabilities through a
combination of organic growth
initiatives and acquisitions.
In 2006, we expanded our distri-
bution network and products
and services, and focused our
expansion in fast-growing markets
and regions.
RBC Capital Markets
(C$ millions, except
percentage amounts)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
Total revenue (teb) (1)
Net income
Return on equity (ROE)
Average loans and acceptances
Average deposits
$
4,693 $
1,407
29.3%
23,500
118,800
4,062
760
18.1%
17,600
98,900
$
3,933 $
827
19.5%
18,600
88,400
631 16%
647 85%
1,120 bps n.m.
5,900 34%
19,900 20%
(1)
Taxable equivalent basis (teb).
By successfully executing growth
plans, the businesses in
RBC Capital Markets maintained
our position as the undisputed
leader in the Canadian market,
and expanded our activities
in the U.S. mid market and our
global infrastructure finance
platform.
Shareholder information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario, Canada
Tel: (416) 974-5151
Fax: (416) 955-7800
Mailing address:
P.O. Box 1
Royal Bank Plaza
Toronto, Ontario
Canada M5J 2J5
website:
rbc.com
Transfer Agent
and Registrar
Main Agent
Computershare Trust
Company of Canada
Street address:
1500 University Street
Suite 700
Montreal, Quebec
Canada H3A 3S8
Tel: (514) 982-7555, or
1-866-586-7635
Fax: (514) 982-7635
website:
computershare.com
Co-Transfer Agent (U.S.)
The Bank of New York
101 Barclay Street
New York, New York
U.S. 10286
Co-Transfer Agent
(United Kingdom)
Computershare Services PLC
Securities Services – Registrars
P.O. Box No. 82, The Pavilions,
Bridgwater Road, Bristol
BS99 7NH England
Stock exchange listings
(Symbol: RY)
Common shares are listed on:
Canada
Toronto Stock Exchange (TSX)
U.S.
New York Stock Exchange (NYSE)
Switzerland
Swiss Exchange (SWX)
All preferred shares are listed
on the Toronto Stock Exchange.
Valuation Day price
For capital gains purposes, the
Valuation Day (December 22,
1971) cost base for our common
shares is $7.38 per share. This
amount has been adjusted to
reflect the two-for-one share split
of March 1981 and the two-for-one
share split of February 1990. The
one-for-one share dividend paid
in October 2000 and April 2006
did not affect the Valuation Day
value for our common shares.
Shareholder contact
For information about stock
transfers, address changes,
dividends, lost stock certificates,
tax forms, estate transfers,
contact: Computershare Trust
Company of Canada
100 University Ave., 9th Floor
Toronto, Ontario M5J 2Y1
Tel: (514) 982-7555 or
1-866-586-7635
For other shareholder inquiries,
contact: Shareholder Services
Royal Bank of Canada
123 Front Street West
6th Floor
Toronto, Ontario
Canada M5J 2M2
Tel: (416) 955-7806
or visit our website at
rbc.com/investorrelations
2007 quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
March 2
May 25
August 24
November 30
Direct deposit service
Shareholders in Canada and the
U.S. may have their dividends
deposited by electronic funds
transfer. To arrange for this
service, please contact
Computershare Trust Company of
Canada at their mailing address.
Dividend Reinvestment Plan
Our Dividend Reinvestment Plan
provides our registered common
shareholders residing in Canada
and the United States with the
means to purchase additional
common shares through the
automatic reinvestment of their
cash dividends.
For more information on
participation in the Dividend
Reinvestment Plan, please
contact our Plan Agent:
Computershare Trust Company
of Canada
Attn: Dividend Reinvestment Dept.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Tel: 1-866-586-7635 (Canada
and U.S.) or (514) 982-7555
Fax: (416) 263-9394 or
1-888-453-0330
e-mail:
service@computershare.com
Institutional investors, brokers
and security analysts
For financial information inquiries,
contact:
Investor Relations
Royal Bank of Canada
123 Front Street West
6th Floor
Toronto, Ontario
Canada M5J 2M2
Tel: (416) 955-7803
Fax: (416) 955-7800
Common share repurchases
We are engaged in a normal
course issuer bid through the
facilities of the Toronto Stock
Exchange. During the one-year
period commencing November 1,
2006, we may repurchase up to
40 million shares in the open
market at market prices. We
determine the amount and timing
of the purchases.
A copy of our Notice of Intention
to file a normal course issuer
bid may be obtained, with-
out charge, by contacting the
Secretary of the bank at our
Toronto mailing address.
2007 Annual Meeting
The Annual Meeting of Common
Shareholders will be held at
9:00 a.m. (EST) on Friday, March 2,
2007 at the Metro Toronto
Convention Centre, North Building,
255 Front Street West, Toronto
Ontario, Canada
Dividend dates for 2007
Subject to approval by the Board of Directors
Common and preferred
shares series N, W, AA, AB and
AC
Record dates
Payment dates
January 25
April 25
July 26
October 25
February 23
May 24
August 24
November 23
Credit ratings
(as at November 29, 2006)
Short-term debt
Senior long-term debt
Moody’s Investors Service
Standard & Poor’s
Fitch Ratings
Dominion Bond Rating Service
P-1
A-1+
F1+
R-1(high)
Aa2
AA
AA
AA
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2006
Bibliothèque nationale du Québec
Printed in Canada
This annual report is printed on acid-free
paper and the entire book is recyclable.
Information contained in or otherwise accessible through the websites mentioned in this annual report does not form a part of this annual report. All references in this annual report to websites are
inactive textual references and are for your information only.
Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC CANADIAN PERSONAL AND BUSINESS, RBC U.S. AND INTERNATIONAL PERSONAL AND BUSINESS,
RBC CAPITAL MARKETS, RBC ASSET MANAGEMENT, RBC CAPITAL TRUST, RBC CENTURA, RBC DAIN RAUSCHER, RBC DIRECT INVESTING, RBC DOMINION SECURITIES, RBC INSURANCE, RBC MORTGAGE,
RBC CASH FLOW PORTFOLIOS, RBC HEDGE 250 INDEX, RBC HOMELINE PLAN, RBC MANAGED PORTFOLIOS, RBC NO LIMIT ACCOUNT, RBC REWARDS and RBC TruCS, which are trademarks of Royal
Bank of Canada used by Royal Bank of Canada and/or its subsidiaries under license. All other trademarks mentioned in this report, which are not the property of Royal Bank of Canada, are owned by
their respective holders. RBC Dexia IS and affiliated Dexia companies are licensed users of the RBC trademark.
d
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r
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I
Royal Bank of Canada Annual Report 2006
Shareholder information 165
Vision
Values
Strategic goals
• Always earning the right to be
• Excellent service to clients
our clients’ first choice
and each other
• Working together to
succeed
• Personal responsibility for
high performance
• To be the undisputed leader in
financial services in Canada
• To build on our strengths in
banking, wealth management
and capital markets in the
United States
• Diversity for growth and
• To be a premier provider
innovation
• Trust through integrity in
everything we do
of selected global financial
services
Financial highlights
(C$ millions, except per share
and percentage amounts)
Operating performance
Total revenue
Provision for credit losses
Non-interest expense
Net income
Return on common equity (ROE)
Diluted earnings per share
2006
2005
2004
$ 20,637
429
11,495
4,728
23.5%
3.59
$
$ 19,184
455
11,357
3,387
18.0%
2.57
$
$ 17,802
346
10,833
2,803
15.6%
2.11
$
2006 vs. 2005
Increase (decrease)
$
$
1,453 8%
(26) (6)%
138 1%
1,341 40%
550 bps n.m.
1.02 40%
RBC Canadian Personal and Business
(C$ millions, except
percentage amounts)
Total revenue
Net income
Return on equity (ROE)
Average loans and acceptances
Average deposits
Assets under administration
Assets under management
2006
2005
2004
$ 13,381 $ 12,499 $ 11,213
2,043
24.7%
145,300
133,700
157,300
58,700
2,794
31.5%
180,500
145,700
213,200
89,700
2,304
27.1%
161,500
138,800
180,300
72,100
The businesses in RBC Canadian
Personal and Business
continued to strengthen our
leadership position in most
major product categories by
expanding our distribution
network, enhancing our products
and services, better meeting our
client needs and deepening our
client relationships.
2006 vs. 2005
Increase (decrease)
$
882
7%
490 21%
440 bps n.m.
19,000 12%
6,900 5%
32,900 18%
17,600 24%
9.6%
11.9%
$ 223,709
9.6%
13.1%
$ 197,004
8.9%
12.4%
$ 183,409
– bps n.m.
(120)bps n.m.
$ 26,705 14%
RBC U.S. and International Personal and Business
Capital
Tier 1 capital ratio
Total capital ratio
Risk-adjusted assets
Key drivers
Total loans (before allowance for
loan losses)
Total deposits
Total assets
Assets under management
Assets under administration (1)
Common share information
Share price
High
Low
Close
Dividends declared per share
Book value per share
Market capitalization ($ millions)
$ 209,939
343,523
536,780
143,100
525,800
$ 191,914
306,860
469,521
118,800
417,100
$ 172,560
270,959
426,222
102,900
391,000
$ 18,025 9%
36,663 12%
67,259 14%
24,300 21%
108,700 26%
$
51.49
41.29
49.80
1.44
16.52
63,788
$
43.34
30.45
41.67
1.18
14.89
53,894
$
32.95
29.02
31.70
1.01
13.57
40,877
$
8.15 19%
10.84 36%
8.13 20%
.26 22%
1.63 11%
9,894 18%
Excluding Institutional & Investor Services (IIS) assets that were contributed to the joint venture RBC Dexia Investor Services on January 2, 2006.
(1)
n.m. not meaningful
(C$ millions, except
percentage amounts)
Total revenue
Net income
Return on equity (ROE)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
$
2,872 $
444
13.6%
2,728 $
387
11.8%
2,702 $
214
5.4%
144 5%
57 15%
180 bps n.m.
(US$ millions, except
percentage amounts)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
Total revenue
Net income
Average loans and acceptances
Average deposits
Assets under administration
Assets under management
$
2,537 $
393
18,300
29,700
274,200
47,500
2,248 $
320
16,900
27,400
198,400
39,500
2,057
162
14,400
25,200
191,800
36,300
$
289 13%
73 23%
1,400 8%
2,300 8%
75,800 38%
8,000 20%
The wealth management and
banking businesses in RBC U.S.
and International Personal and
Business continued to build scale
and capabilities through a
combination of organic growth
initiatives and acquisitions.
In 2006, we expanded our distri-
bution network and products
and services, and focused our
expansion in fast-growing markets
and regions.
RBC Capital Markets
(C$ millions, except
percentage amounts)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
Total revenue (teb) (1)
Net income
Return on equity (ROE)
Average loans and acceptances
Average deposits
$
4,693 $
1,407
29.3%
23,500
118,800
4,062
760
18.1%
17,600
98,900
$
3,933 $
827
19.5%
18,600
88,400
631 16%
647 85%
1,120 bps n.m.
5,900 34%
19,900 20%
(1)
Taxable equivalent basis (teb).
By successfully executing growth
plans, the businesses in
RBC Capital Markets maintained
our position as the undisputed
leader in the Canadian market,
and expanded our activities
in the U.S. mid market and our
global infrastructure finance
platform.
Shareholder information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario, Canada
Tel: (416) 974-5151
Fax: (416) 955-7800
Mailing address:
P.O. Box 1
Royal Bank Plaza
Toronto, Ontario
Canada M5J 2J5
website:
rbc.com
Transfer Agent
and Registrar
Main Agent
Computershare Trust
Company of Canada
Street address:
1500 University Street
Suite 700
Montreal, Quebec
Canada H3A 3S8
Tel: (514) 982-7555, or
1-866-586-7635
Fax: (514) 982-7635
website:
computershare.com
Co-Transfer Agent (U.S.)
The Bank of New York
101 Barclay Street
New York, New York
U.S. 10286
Co-Transfer Agent
(United Kingdom)
Computershare Services PLC
Securities Services – Registrars
P.O. Box No. 82, The Pavilions,
Bridgwater Road, Bristol
BS99 7NH England
Stock exchange listings
(Symbol: RY)
Common shares are listed on:
Canada
Toronto Stock Exchange (TSX)
U.S.
New York Stock Exchange (NYSE)
Switzerland
Swiss Exchange (SWX)
All preferred shares are listed
on the Toronto Stock Exchange.
Valuation Day price
For capital gains purposes, the
Valuation Day (December 22,
1971) cost base for our common
shares is $7.38 per share. This
amount has been adjusted to
reflect the two-for-one share split
of March 1981 and the two-for-one
share split of February 1990. The
one-for-one share dividend paid
in October 2000 and April 2006
did not affect the Valuation Day
value for our common shares.
Shareholder contact
For information about stock
transfers, address changes,
dividends, lost stock certificates,
tax forms, estate transfers,
contact: Computershare Trust
Company of Canada
100 University Ave., 9th Floor
Toronto, Ontario M5J 2Y1
Tel: (514) 982-7555 or
1-866-586-7635
For other shareholder inquiries,
contact: Shareholder Services
Royal Bank of Canada
123 Front Street West
6th Floor
Toronto, Ontario
Canada M5J 2M2
Tel: (416) 955-7806
or visit our website at
rbc.com/investorrelations
2007 quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
March 2
May 25
August 24
November 30
Direct deposit service
Shareholders in Canada and the
U.S. may have their dividends
deposited by electronic funds
transfer. To arrange for this
service, please contact
Computershare Trust Company of
Canada at their mailing address.
Dividend Reinvestment Plan
Our Dividend Reinvestment Plan
provides our registered common
shareholders residing in Canada
and the United States with the
means to purchase additional
common shares through the
automatic reinvestment of their
cash dividends.
For more information on
participation in the Dividend
Reinvestment Plan, please
contact our Plan Agent:
Computershare Trust Company
of Canada
Attn: Dividend Reinvestment Dept.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Tel: 1-866-586-7635 (Canada
and U.S.) or (514) 982-7555
Fax: (416) 263-9394 or
1-888-453-0330
e-mail:
service@computershare.com
Institutional investors, brokers
and security analysts
For financial information inquiries,
contact:
Investor Relations
Royal Bank of Canada
123 Front Street West
6th Floor
Toronto, Ontario
Canada M5J 2M2
Tel: (416) 955-7803
Fax: (416) 955-7800
Common share repurchases
We are engaged in a normal
course issuer bid through the
facilities of the Toronto Stock
Exchange. During the one-year
period commencing November 1,
2006, we may repurchase up to
40 million shares in the open
market at market prices. We
determine the amount and timing
of the purchases.
A copy of our Notice of Intention
to file a normal course issuer
bid may be obtained, with-
out charge, by contacting the
Secretary of the bank at our
Toronto mailing address.
2007 Annual Meeting
The Annual Meeting of Common
Shareholders will be held at
9:00 a.m. (EST) on Friday, March 2,
2007 at the Metro Toronto
Convention Centre, North Building,
255 Front Street West, Toronto
Ontario, Canada
Dividend dates for 2007
Subject to approval by the Board of Directors
Common and preferred
shares series N, W, AA, AB and
AC
Record dates
Payment dates
January 25
April 25
July 26
October 25
February 23
May 24
August 24
November 23
Credit ratings
(as at November 29, 2006)
Short-term debt
Senior long-term debt
Moody’s Investors Service
Standard & Poor’s
Fitch Ratings
Dominion Bond Rating Service
P-1
A-1+
F1+
R-1(high)
Aa2
AA
AA
AA
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2006
Bibliothèque nationale du Québec
Printed in Canada
This annual report is printed on acid-free
paper and the entire book is recyclable.
Information contained in or otherwise accessible through the websites mentioned in this annual report does not form a part of this annual report. All references in this annual report to websites are
inactive textual references and are for your information only.
Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC CANADIAN PERSONAL AND BUSINESS, RBC U.S. AND INTERNATIONAL PERSONAL AND BUSINESS,
RBC CAPITAL MARKETS, RBC ASSET MANAGEMENT, RBC CAPITAL TRUST, RBC CENTURA, RBC DAIN RAUSCHER, RBC DIRECT INVESTING, RBC DOMINION SECURITIES, RBC INSURANCE, RBC MORTGAGE,
RBC CASH FLOW PORTFOLIOS, RBC HEDGE 250 INDEX, RBC HOMELINE PLAN, RBC MANAGED PORTFOLIOS, RBC NO LIMIT ACCOUNT, RBC REWARDS and RBC TruCS, which are trademarks of Royal
Bank of Canada used by Royal Bank of Canada and/or its subsidiaries under license. All other trademarks mentioned in this report, which are not the property of Royal Bank of Canada, are owned by
their respective holders. RBC Dexia IS and affiliated Dexia companies are licensed users of the RBC trademark.
d
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Royal Bank of Canada Annual Report 2006
Shareholder information 165
Total shareholder returns (TSR) (1)
(on a $100 investment on November 1, 2001)
Market capitalization
(millions)
C$
US$
3
7
1
$
4
4
1
$
3
9
1
$
8
4
1
$
0
2
1
$
2
2
1
$
0
5
3
$
7
4
2
$
9
6
2
$
1
0
2
$
,
8
8
7
3
6
$
,
4
9
8
3
5
$
,
4
4
6
1
4
$
,
7
7
8
0
4
$
,
7
9
1
6
3
$
2002
2003
2004
2005
2006
2002
2003
2004
2005
2006
Shareholder performance
TSR ()
C$
2006 vs. 2005
23%
30%
Market capitalization
• Largest Canadian bank
• Largest Canadian company
• 7th largest North American bank
US$
5-year CAGR (2)
20%
28%
Diluted earnings per share
Return on common equity
Financial performance
.
9
5
3
$
.
7
5
2
$
.
6
9
1
$
.
0
2
2
$
.
1
1
2
$
%
8
5
1
.
%
7
6
1
.
%
6
5
1
.
%
0
8
1
.
%
5
3
2
.
Diluted
EPS
2006 vs. 2005
40%
5-year CAGR (2)
5%
2002
2003
2004
2005
2006
2002
2003
2004
2005
2006
Net income
(millions)
Total revenue
(millions)
2
0
7
2
$
,
8
6
9
2
$
,
3
0
8
2
$
,
7
8
3
3
$
,
8
2
7
4
$
,
,
2
9
0
7
1
$
,
8
8
9
6
1
$
,
2
0
8
7
1
$
,
4
8
1
9
1
$
,
7
3
6
0
2
$
2002
2003
2004
2005
2006
2002
2003
2004
2005
2006
Total loans
(millions)
,
3
7
7
7
6
1
$
,
9
4
4
2
6
1
$
,
0
6
5
2
7
1
$
,
9
3
9
9
0
2
$
,
4
1
9
1
9
1
$
Total deposits
(millions)
,
6
7
4
3
4
2
$
,
5
4
1
9
5
2
$
,
9
5
9
0
7
2
$
,
3
2
5
3
4
3
$
,
0
6
8
6
0
3
$
2002
2003
2004
2005
2006
2002
2003
2004
2005
2006
Note: All data in Canadian dollars unless otherwise stated.
()
(2)
TSR – Total shareholder return is price appreciation plus dividends reinvested, annualized.
Five-year compound annual growth rate (CAGR).
Financial performance
Net
income
2006 vs. 2005
40%
5-year CAGR (2)
5%
Total
revenue
8%
5%
Key business drivers
Total
loans
2006 vs. 2005
9%
5-year CAGR (2)
5%
Total
deposits
2%
8%
Royal Bank of Canada Annual Report 2006
Financial highlights
Where our vision leads us
Chief Executive
Officer’s message
Royal Bank of Canada Annual Report 2006
2 Chief Executive Officer’s message
Royal Bank of Canada Group Executive (L to R): Elisabetta Bigsby, Group Head, Human Resources and Transformation;
Martin J. Lippert, Group Head, Global Technology and Operations; Barbara G. Stymiest, Chief Operating Officer;
Gordon M. Nixon, President and Chief Executive Officer; W. James Westlake, Group Head, RBC Canadian Personal and
Business; Peter Armenio, Group Head, RBC U.S. and International Personal and Business; Charles M. Winograd, Group
Head, RBC Capital Markets.
Since 2004, “Always earning the right to be our clients’ first
choice” has been our vision and guiding philosophy. We strongly
believe we can continually do more for our clients, which drives
us to keep improving the way we work with them and each other.
Our vision has led us to find the best solutions for our clients.
Our ongoing success has enabled us to keep delivering superior
returns to our shareholders while funding new opportunities
in our businesses. In 2006, we delivered record financial results
and reached the significant milestone of earning more than
$ billion each quarter. These results reflect the strong growth of
all our businesses, our successful execution of growth initiatives,
and favourable conditions in our domestic and international
markets. During the year, we continued to return capital to
our shareholders through dividend increases and share
buybacks, delivering a total shareholder return of 23 per cent
(30 per cent in U.S. dollars), for the year ended October 3.
We paid a stock dividend, which had the same effect as a
two-for-one split of our common shares, and made our shares
accessible to more investors.
Our strategic goals drive our success
When we first articulated our Client First approach, all of us at RBC
made a commitment to exceed client expectations at every oppor-
tunity and through every service channel. We believe more clients
will give us more of their business if we can consistently deliver
on this promise. To do this, we focus on three strategic goals:
. To be the undisputed leader in financial services in Canada.
2. To build on our strengths in banking, wealth management and
capital markets in the United States.
3. To be a premier provider of selected global financial services.
We have made progress on each of these goals through a variety
of initiatives, each with the common objective of serving our
clients to the best of our abilities.
In Canada, we extended our leadership in most major product
categories serving retail and wholesale clients. We are the top
provider of major consumer lending products as a result of our
strong market shares in personal loans, credit cards and residential
mortgages. Strong product offerings combined with the scale,
diversity and reach of our distribution network allowed RBC to
become the fastest growing mutual fund company in the country.
Our capital markets leadership in Canada has been recognized
by many national and international sources.
The size and diversity of our Canadian operations have also bene-
fited our enterprise as a whole, contributing to a foundation for
sustainable growth. The strength of our balance sheet supports
solid credit ratings, and we were named the safest Canadian
bank and fourth safest bank in North America (Global Finance
magazine). Centralized operations and technology continue to
enable economies of scale and foster the innovation required to
strengthen and leverage our leadership position globally. And our
brand was again recognized as the most valuable in Canada, an
asset that we continually look to build upon globally.
In reviewing progress towards our second goal, I am pleased with
the growth across all our businesses in the U.S.
This year, our U.S. banking operations delivered improved results,
based on a clear strategy of serving businesses, business owners
and professionals while investing in infrastructure that will
support future growth. This year, we announced an agreement to
complete two acquisitions that are excellent strategic, economic
and cultural fits with our operations in the Southeast U.S. The
acquisition of Flag Financial Corporation, which operates the
largest community bank headquartered in Atlanta, will increase
our client reach in a key growth market. Also, our November 2006
announcement to acquire 39 branches in Alabama owned
by AmSouth Bancorporation will immediately make us the
seventh largest financial institution in that state, as measured
by deposits. Both acquisitions, expected to close in early 2007,
complement our de novo branch openings in high-growth areas.
Close linkages across our businesses allow us to use our capital
markets capabilities to better serve U.S. retail investors by
pro viding them access to global debt origination and structured
product capabilities. We continued this year to build scale and
capability to serve these clients, opening 0 new wealth manage-
ment offices in high-growth cities and recruiting productive and
successful financial consultants from our competition. And, as a
result of our acquisition of Delaware-based American Guaranty &
Trust Company, we are able to more effectively provide U.S. trust
solutions to high net worth clients.
Our U.S. investment banking and fixed income capabilities are
expanding due to a combination of organic growth and acquisi-
tions that have brought us closer to our goal of being a top-tier
provider to U.S. middle-market companies. We were ranked
among the top investment banks targeting the U.S. middle
market, and through the first three calendar quarters of 2006,
we ranked first for number of issues as senior manager in the
Royal Bank of Canada Annual Report 2006
Chief Executive Officer’s message 3
municipal finance market (Thomson Financial). Late in the fiscal
year, we announced an agreement to acquire the broker-dealer
business and certain assets of Carlin Financial Group of New York,
which will provide our clients with a best-in-class North American
electronic execution platform. Finally, in November 2006, we
announced an agreement to acquire Daniels & Associates L.P.,
the most active mergers and acquisitions advisor in the U.S. to
the cable, telecom and broadcast industries. Both the Carlin and
Daniels transactions are expected to close in early 2007.
To achieve our third goal we invested in several global businesses
where we can leverage our competitive strengths to enable
us to meet our clients’ increasing needs. For example, we
expanded our infrastructure finance capabilities and now have a
successful global infrastructure finance platform with offices in
North America, Europe and Australia. We strengthened our ability
to serve wealth management clients when we acquired Abacus
Financial Services Group, a transaction that made RBC the top
provider of international trust services in the U.K. (Euromoney
magazine).
In 2006, we also recognized the growing importance of China
to our global business and made a number of investments to
help us unlock opportunities available in this important growth
market. As we have done successfully in other parts of the world,
we are making targeted investments in areas where we have
global competitive advantages. Building on our historical pres-
ence in China, we upgraded our representative banking office in
Beijing to branch status, enabling us to provide a greater range of
services to institutional and individual clients. Our global capital
markets depth is evident through our role as a co-lead manager of
the institutional tranche for the Industrial and Commercial Bank
of China’s initial public offering.
A more detailed discussion of what we have achieved on these
three goals and what we plan to do in 2007 and beyond is
provided on pages 6 to 2.
Our record results
I am pleased that we have met our medium-term objective of
delivering top quartile total shareholder returns. While we deliv-
ered a total shareholder return of 23 per cent (30 per cent in U.S.
dollars), for the year ended October 3, our 5- and 0-year total
shareholder returns of 20 per cent (28 per cent in U.S. dollars) and
20 per cent (22 per cent in U.S. dollars), respectively, rank among
the highest of all global banks.
Our net income reached $4.7 billion, up 40 per cent from 2005,
and our return on equity was 23.5 per cent, which are impressive
results for any financial institution. We met or exceeded all but
one of our financial objectives for 2006. Our diluted EPS growth,
ROE, revenue growth and dividend payout ratio all met the
targets we set for the year, and we exceeded our portfolio quality
objective, which was supported by a favourable credit environ-
ment. Our solid capital position was maintained comfortably
above our objective. We raised our dividends twice in 2006 by a
total of $.26 per share, or 22 per cent. (Excluding the impact of the
Enron Corp. litigation-related provision in 2005, net income and
diluted EPS both increased 27 per cent.)
Royal Bank of Canada Annual Report 2006
4 Chief Executive Officer’s message
While we performed well against these measures, we did not
meet our target for operating leverage as it was impacted by our
business mix and certain factors which contributed to our earnings
growth but were not appropriately captured in this measure. As
noted below, and in more detail on page 32, we have adjusted
our 2007 operating leverage calculation to take those factors into
account to more accurately reflect the underlying performance of
our businesses going forward.
How we will measure ourselves in 2007
Looking ahead, we remain committed to generating top quartile
total shareholder returns in relation to our Canadian and
U.S. peer group over the medium term.
On page 5, we show our 2007 financial objectives to meet this
medium-term objective. These objectives are based on our
expectation of a robust Canadian economy with continuing strong
consumer spending and solid business investment. In the U.S.,
we expect a moderately slower economy, largely attributable
to slightly weaker growth in consumer spending and a cooling
housing market. We expect to continue to benefit from relatively
favourable equity markets, a stable interest rate environment,
and strong fiscal conditions.
Our 2007 objectives are focused on measures that we believe
are required to generate strong returns for our shareholders.
Our ROE, Tier capital and dividend ratios remain unchanged.
For 2007, our objective of growing our diluted EPS by at least
0 per cent is lower than the 2006 objective as our 2005 earnings
included the impact of the provisions related to the Enron
litigation and estimated net claims related to hurricanes Katrina,
Rita and Wilma. Our operating leverage objective remains
greater than three per cent, however, we have adjusted our
operating leverage calculation to more appropriately reflect the
performance of our businesses. Our revenue growth target is
incorporated in our earnings per share and adjusted operating
leverage objectives. In addition, we believe our portfolio quality is
adequately captured in our profitability and other objectives.
Our success depends on our employees putting clients first
This has been an exciting year of growth for RBC. Our record
performance in 2006 reflects the talent and commitment of all our
employees. Their hard work has resulted in our clients rewarding
us with more of their business and, most importantly, their trust.
We remain committed to developing new and innovative ways to
meet our clients’ needs while achieving our strategic goals and
continuing to provide superior returns for our shareholders.
I would like to sincerely thank our clients for their continued busi-
ness and our employees around the world for their dedication to
finding new ways to earn the right to be our clients’ first choice.
Gordon M. Nixon
President and Chief Executive Officer
2006 performance review
The table below shows our 2006 performance compared to our objectives for the year.
. Diluted earnings per share (EPS) growth
2. Return on common equity (ROE)
3. Revenue growth
4. Operating leverage
5. Portfolio quality (4)
6. Capital management: Tier capital ratio (5)
7. Dividend payout ratio
2006 Objectives ()
2006 Performance
20%+ (2)
20%+
6–8%
>3% (3)
.40–.50%
8%+
40–50%
40% (6)
23.5%
8%
% (7)
.23%
9.6%
40%
()
(2)
(3)
Our 2006 financial objectives were established late in fiscal 2005 and reflected our economic and business outlooks for 2006. We established aggressive objectives for 2006 to position
us as a top quartile performer with respect to total return to shareholders relative to our Canadian and U.S. peers. At the time these objectives were established, we expected an average
Canadian dollar value of US$.87 in 2006; however, the actual dollar value was US$.883.
Based on 2005 total reported diluted EPS of $5.3, which has been retroactively adjusted to $2.57 to reflect a stock dividend of one common share on each of our issued and outstanding
common shares, paid on April 6, 2006.
Operating leverage is the difference between revenue growth rate and non-interest expense growth rate. Our 2006 objective is based on 2005 non-interest expenses excluding the Enron
litigation provision of $59 million recorded in Q4 2005.
Ratio of specific provisions for credit losses to average loans and acceptances.
Calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
Excluding the impact of the Enron Corp. litigation-related provision in 2005, diluted EPS increased 27%.
(4)
(5)
(6)
(7) We have adjusted our 2007 operating leverage calculation to incorporate certain factors in order to more appropriately reflect the performance of our businesses going forward. If this new
approach was applied to our 2006 results, our adjusted operating leverage would have been 2.5%. Adjusted operating leverage is a non-GAAP financial measure. For a further discussion
and reconciliation, refer to the Key financial measures (non-GAAP) section in the Management’s Discussion and Analysis (MD&A).
2007 objectives
. Diluted earnings per share (EPS) growth
2. Adjusted operating leverage ()
3. Return on common equity (ROE)
4. Tier capital ratio (2)
5. Dividend payout ratio
Objectives
0%+
>3%
20%+
8%+
40–50%
()
(2)
Adjusted operating leverage is the difference between revenue growth rate (as adjusted) and non-interest expense growth rate (as adjusted). Revenue is based on a taxable equivalent basis,
excluding consolidated variable interest entities (VIEs), accounting adjustments related to the new Financial Instruments Standard and insurance-related revenue, while non-interest expense
excludes insurance-related expense. For further details, see Key financial measures (non-GAAP) section in the MD&A.
Calculated using guidelines issued by the OSFI.
Medium-term objective
. Total shareholder return ()
Top quartile (2)
Top quartile (2)
Objective
2006 Performance
()
(2)
Total shareholder return is calculated based on share price appreciation plus reinvested dividend income.
Versus seven large Canadian financial institutions (Manulife Financial Corporation, Bank of Nova Scotia, TD Bank Financial Group, BMO Financial Group, Sun Life Financial Inc.,
Canadian Imperial Bank of Commerce and National Bank of Canada) and 3 U.S. financial institutions (Bank of America, JP Morgan Chase & Co., Wells Fargo & Company, Wachovia
Corporation, US Bancorp, Sun Trust Banks, Inc., The Bank of New York, BB&T Corporation, Fifth Third Bancorp, National City Corporation, The PNC Financial Services Group, KeyCorp and
Northern Trust Corporation).
Royal Bank of Canada Annual Report 2006
Performance compared to objectives 5
Where more Canadian clients
put their trust for all their
financial solutions
STRATEGIC GOAL
Operations in Canada
Strengths and capabilities
WHERE WE ARE
To be the undisputed
leader in financial
services in Canada
We provide personal, commer-
cial, corporate and investment
banking, wealth manage ment
and insurance to over 3 mil -
lion personal, business and
public sector clients across
Canada. We are the premier
marketer and distributor
of financial products and
services. We offer private
banking services and expertise
to individuals, corporations,
institutions and internationally
based high net worth clients
who have family or business
interests in Canada. We lead
in the Canadian wholesale
banking market, supporting
corporate, public and insti-
tutional clients with strategic
advice and financing solu-
tions, including investment
banking, research, sales
and trading.
Canadians seek financial
advice and solutions from
RBC to achieve their individual
goals. Our scale and diverse
businesses provide the
opportunity to offer competi-
tive, flexible and innovative
products and services to new
and existing clients. We have
one of the most recognized
and most valuable brands
in the country. In most parts
of Canada, we hold strong
market positions in all our
businesses, including top
rankings in personal and busi-
ness banking, wealth manage-
ment, wholesale banking and
creditor and travel insurance.
Our clients benefit from the
insight, dedication and exper-
tise of our more than 40,000
employees, our broad suite
of integrated products and
services and our approach to
developing strong relation-
ships. Clients can access our
financial offerings through our
leading distribution capability,
which includes a network of
,7 branches, the country’s
largest number of automated
banking machines (ABMs),
online and telephone banking,
Canada’s largest mortgage
specialist sales force, as well
as through a large number
of investment advisors and a
large force of third-party inde-
pendent insurance distributors.
We are the only Canadian
wholesale bank with a global
fixed income distribution
capability for issuing clients.
Our clients have access to
key global markets through
our full suite of debt, equity,
advisory and alternative asset
capabilities. We continue to
enhance our geographic reach
and product capabilities to
meet the expanding needs of
our clients.
Royal Bank of Canada Annual Report 2006
6 To be the undisputed leader in financial services in Canada
KEY HIGHLIGHTS
• Most valuable brand in Canada
with a value of $3.99 billion in the
first annual Best Brands in Canada
ranking (Interbrand).
• Largest bank-owned sales force,
branch network, ABM network,
full service brokerage, bank-
owned insurer and stand-alone
mutual fund company (by assets
under management) in Canada.
• The leading wholesale bank in
Canada in most of our lines of
business (Thomson Financial,
Bloomberg and Financial Post).
Achievements in 2006
WHERE WE ARE GOING
2007 and beyond
Banking
Wealth management
Capital markets
• Continue to attract new
• Expanded and refurbished our
branch network and restruc-
tured our retail sales organiza-
tion to improve distribution
capabilities, client delivery and
enhance client experiences.
• Redesigned our secured home
equity product, RBC Homeline
Plan, to better meet client
needs by enhancing flexibility
while improving delivery.
• Introduced the RBC No Limit
Account, a high-volume
transaction account providing
significant savings for clients
who rely upon the convenience
of debit cards for everyday
transactions.
• Launched our Welcome to
Canada online program to
attract, grow and retain clients
who are new immigrants
and/or part of Canada’s high
growth South Asian and
Chinese communities.
• Launched a charitable gift
pro gram to provide a
tax-efficient and convenient
way for individuals to create
a lasting legacy.
• Introduced a new commission
rate structure for self-directed
investors, including lower fees
for active traders as part of an
aggressive strategy to provide
self-directed investors with
more compelling value and
convenience.
• Introduced specialized products
to support the retiring boomer
market in Canada, including
RBC Cash Flow Portfolios and
RBC Managed Portfolios.
• Named Dealmaker of the Year
(Financial Post), remained
the market leader in M&A and
fixed income and held the
leading market share of the
fast-growing Maple market,
where foreign institutions
issue Canadian dollar bonds
(Thomson Financial and
Bloomberg).
• Played key roles in Canada’s
largest transactions, including
the initial public offering of
Tim Hortons, the acquisitions
of Inco Limited by Companhia
Vale do Rio Doce and Dofasco
Inc. by Arcelor S.A.
Insurance
• Continued to provide clients
with easier access to and
more choice of products and
services by launching the first
nationwide online quote and
purchase capability for home
and auto insurance in Canada.
• Named Favourite Travel
Insurance Provider by
Canadian travel agents for
fourth consecutive year
(Canadian Travel Press).
personal and business clients
and deepen existing
relationships.
• Emphasize profitable growth
in high value retail markets.
• Focus on delivering advice
and service excellence to our
personal and business clients,
enhance our productivity and
local market competitiveness.
• Build upon our traditional
strengths in distribution,
product breadth, client
relationship management,
integration and risk manage-
ment to enable the success
of our personal and business
clients.
• Create new and stronger
relationships with Canada’s
middle-market companies.
• Continue to be a leader in
providing corporate and
institutional clients with the
full breadth of RBC Capital
Markets’ global capabilities.
Royal Bank of Canada Annual Report 2006
To be the undisputed leader in financial services in Canada 7
Where a growing number of U.S.
clients succeed using our focused and
increasingly integrated strengths
STRATEGIC GOAL
Operations in the U.S.
WHERE WE ARE
To build on our
strengths in banking,
wealth management
and capital markets
in the United States
We are focused on serving
an increasing number of
individual and commercial
clients in banking and wealth
management and on becoming
a significant wholesale bank to
the U.S. mid market.
We provide personal and
business banking solutions to
individuals, businesses, busi-
ness owners and professionals
through our regional banking
network in the Southeast.
Our ,680 financial consul-
tants offer full-service wealth
management expertise and
customized financial services
to 30,000 households in
40 states. We provide clearing
and execution services to
independent broker-dealers
and institutions and also offer
insurance protection and
asset accumulation solutions
nationwide.
of capital markets services
across seven industry sectors
in major cities through out the
U.S. Corporate, public and
institutional clients of all sizes
have access to our global debt
origination and distribution
capabilities as well as public
and infrastructure finance.
Strengths and capabilities
All our U.S. clients benefit
from the global resources of
RBC, while drawing upon the
knowledge and expertise of
our employees who are dedi-
cated to consistently deliver
quality financial solutions
and services. Importantly,
strong and complementary
linkages between our U.S.
capital markets businesses
and our retail operations allow
us to leverage our extensive
retail network to effectively
distribute fixed income and
structured products.
We offer emerging and middle-
market companies a full suite
Our individual and busi-
ness clients benefit from our
Royal Bank of Canada Annual Report 2006
8 To build on our strengths in banking, wealth management and capital markets in the United States
targeted approach. Our U.S.
bank focuses on serving busi-
nesses, business owners and
professionals. We take the time
to know our clients and differ-
entiate ourselves, in a highly
competitive marketplace, by
tailoring financial products and
services to meet their specific
needs. Individual investors and
businesses are well-served
by our ability to tailor wealth
management solutions devel-
oped through long-lasting
relationships with experienced
financial consultants.
Our U.S. middle-market
corporate and institutional
clients have access to a full suite
of products and services focused
on supporting their growth and
financing strategies. We have
established strength in municipal
finance, and our global
capabilities in securitization,
infrastructure finance and public
finance are helping to build our
presence in this key market.
KEY HIGHLIGHTS
• Ranked eighth largest full-service
• Ranked among top investment
• Ranked number one for Senior
securities firm in the U.S. as
measured by number of financial
consultants.
• Opened 0 de novo banking
branches to expand our presence
and client reach in fast-growing
southeastern markets.
banks targeting the middle-market –
6th in initial public offerings and
4th in the equity league tables
(Dealogic).
Manager: Small Issues in the first
three quarters of calendar 2006
for municipal finance (Thomson
Financial).
Achievements in 2006
Banking
• Announced agreements to
acquire Atlanta-based Flag
Financial Corporation (Flag)
along with its 7 branches
and, in November 2006,
39 branches in Alabama
owned by AmSouth Bank,
providing us with a total of
338 branches in the Southeast
once the transactions close.
The transactions are subject
to regulatory approvals and
other customary conditions
and are expected to close in
the first quarter and second
quarter of 2007, respectively.
• Increased new personal
accounts by 37 per cent and
new business accounts by
20 per cent following the
launch, in the first quarter of
2006, of a new streamlined
suite of personal and business
chequing accounts with unique
features to better meet our
clients’ needs.
Wealth management
• Achieved a record
US$32 billion in assets under
administration, up 4 per cent
over 2005, by recruiting
experienced financial
consultants and executing
our strategy to become the
primary advisor to more of our
retail investor clients by better
understanding and meeting
their needs.
Capital markets
• Selected to advise on one of
the first Florida public/private
partnerships.
• Tripled distribution of
structured notes through our
wealth management network.
• Announced agreement to
acquire the broker-dealer busi-
ness and certain other assets
of Carlin Financial Group,
based in New York, providing
a best-in-class North American
electronic execution platform.
In addition, in November
2006, we announced an
agreement to acquire Daniels
& Associates L.P., the most
active M&A advisor in
the U.S. to cable, telecom and
broadcast industries. Both
transactions are subject to
regulatory approvals and
other customary conditions
and are expected to close in
the first quarter of 2007.
• Achieved strong growth in our
clearing and execution services
business with 60 correspon-
dent firms generating total
assets under administration of
US$34 billion, up 27 per cent
from 2005.
• Acquired American Guaranty &
Trust Company, a Delaware-
based trust business, enabling
us to provide U.S. trust solu-
tions to high net worth clients.
Insurance
• Achieved record sales in U.S.
term life insurance business:
63 per cent year-over-year
growth.
• Expanded proprietary sales
distribution in Florida to
increase sales capability
within our retail banking
footprint.
WHERE WE ARE GOING
2007 and beyond
• Continue to focus on becoming
the bank for businesses, busi-
ness owners and professionals
in the Southeast by expanding
our products and services to
meet the needs of this growing
business segment.
• Become the wealth manage-
ment advisor of first choice to
more clients by demonstrating
overall strength in credit and
lending, trust services and
delivery of structured products
and alternative investments.
• Continue to expand our U.S.
insurance capabilities through
enhanced products and
services.
• Increase our investment
banking client base by
leveraging our broad product
platform, advisory capabilities
and global debt distribution.
• Continue to expand relation-
ships in the municipal
finance market and establish
ourselves as a key player in
infrastructure finance.
Royal Bank of Canada Annual Report 2006
To build on our strengths in banking, wealth management and capital markets in the United States 9
Where clients around the world
obtain specialized products and
trusted services
STRATEGIC GOAL
Operations around the world
Strengths and capabilities
WHERE WE ARE
To be a premier
provider of selected
global financial
services
We provide investment
banking, advisory and trading
services, trade finance and
reinsurance to corporate and
institutional clients through
offices worldwide. Our global
debt business provides
issuers with origination,
securitization, structured
products, infrastructure and
project finance capabilities
globally. Our wealth manage-
ment offering is focused on
providing expertise to high net
worth individuals, and corpo-
rate and institutional clients
in 33 offices in 2 countries.
We also provide banking
solutions to individuals and
businesses in the Caribbean.
Our joint venture, RBC Dexia
Investor Services (IS), offers
a complete range of investor
services, such as custody and
fund administration, to institu-
tions worldwide.
Clients around the world
seek sophisticated financial
solutions and advice from us
in selected global financial
services markets. We leverage
our regional and corporate
strengths globally to keep
pace with the expanding needs
of our corporate and institu-
tional clients and to support
our strategic goals. We are
recognized as a world leader in
Canadian dollar trading
and in Canadian dollar debt
issuance and investor services.
We provide global debt distri-
bution and global capabilities
in the mining and energy
sectors, structured products,
syndicated and infrastructure
finance, and foreign exchange.
Our global private bank ranks
in the top 20 private banks
worldwide based on market
leadership by region and
areas of service. Our financial
professionals consistently
deliver high quality wealth
management solutions and
advice to our clients.
We have deep historical and
community roots as a leading
provider of a broad range of
banking products and services
in the Caribbean for more than
00 years.
One of the world’s top 0
global custodians, RBC Dexia IS
offers institutional investors
worldwide an integrated suite
of products, including global
custody, fund and pension
administration, securities
lending, shareholder services,
investment analytics and other
related services.
Royal Bank of Canada Annual Report 2006
0 To be a premier provider of selected global financial services
KEY HIGHLIGHTS
• Ranked as the top foreign exchange
bank globally in Canadian dollar
trading (Euromoney magazine).
• Recognized as one of the top
20 private banks in the world
(Euromoney magazine).
• Added more than 0 client
• Ranked in the top three in deposit
facing employees around the world
in wealth management.
market share in most of our
Caribbean banking markets.
• Completed the creation of
RBC Dexia IS, resulting in a top-tier
global custodian with approxi-
mately $.9 trillion in client assets
under administration.
Achievements in 2006
Capital markets
Banking
• Awarded Nomad status on
the Alternative Investment
Market, enabling us to bring
junior mining and energy
companies to the international
market.
• Enhanced sales management
practices, improved client
satisfaction and opened two
new offices in The Bahamas,
contributing to strong revenue
growth across the Caribbean.
Investments in China
• Built on our historical
presence in China when we
upgraded our representative
banking office to branch status
and made targeted invest-
ments in businesses where
we have global competitive
advantages including fund
management, global debt
markets, global financial insti-
tutions and private banking.
• Co-lead managed the
institutional tranche for the
Industrial and Commercial
Bank of China’s initial public
offering.
• Established a global infrastruc-
ture finance platform, with
offices in Canada, U.S., Europe
and Australia with marquee
transactions, including lead
advisor on a €.2 billion new
rail project in France.
Wealth management
• Acquired Abacus Financial
Services Group, adding
49 client facing professionals,
expanding our client base and
wealth management services
in the U.K. and Channel
Islands, and increasing assets
under administration by
US$4 bil lion.
• Expanded lending solutions to
meet the needs of our high net
worth clients, increasing credit
by 25 per cent. Also, launched
a Canadian real estate invest-
ment fund to allow interna-
tional investors to participate
in the Canadian commercial
real estate sector.
WHERE WE ARE GOING
2007 and beyond
• Enhance our global capabilities
in U.S. dollars and euros to
complement our leading
positions in Canadian
dollars, British pounds, and
New Zealand and Australian
dollar origination.
• Leverage our global distribu-
tion platform to sell structured
products in key Asian markets.
• Expand our infrastructure
finance expertise further
into the U.S., Europe and
Australia.
• Expand market share among
high net worth individuals by
strengthening and building
relationships with centres of
influence who understand
our value proposition and
appreciate our commitment
to delivering high-quality,
customized solutions.
• Build on our current strong
position in Caribbean banking
through organic growth and
operational improvements.
• Continue to expand oppor-
tunistically in China where we
have demonstrated global
competitive advantages.
Royal Bank of Canada Annual Report 2006
To be a premier provider of selected global financial services
Where we support business growth,
client focus and strong corporate
governance
Global Technology
and Operations and
Global Functions
Team profile
More than 8,000 employees
in Global Technology and
Operations (GTO) and Global
Functions apply leading prac-
tices to sup port RBC’s delivery
of innovative ways to meet the
changing needs and expecta-
tions of our clients, employees
and other stakeholders. In
addition, GTO and Global
Functions help RBC realize cost
savings, allocate resources
and strengthen governance.
GTO provides the operational
and technological foundation
required for effective delivery
of products and services to our
clients. In partnership with the
businesses and through its
processing and call centres,
GTO provides contact manage-
ment, product fulfillment,
sales, service, technology
and operational support
solutions that provide value
to our clients.
strong credit quality and lower ing
our effective income tax rate.
Global Functions is a team of
specialized professionals that
provides sound governance,
thought leadership and an
enterprise perspective on
strategic issues, challenges
and opportunities facing RBC
and its businesses. It supports
business growth by providing
insight and governance in
the areas of risk and controls,
compliance, law, finance, tax,
communications and brand. As
well, it prudently manages the
capital, liquidity and funding
positions of the enterprise to
ensure RBC meets regulatory
requirements while ensuring
effective cost management
and capital allocation.
Achievements in 2006
• Global Functions contributed
to RBC’s financial performance
and achievement of a number
of objectives by effectively
man aging capital, supporting
the businesses in maintaining
• Global Functions supported
enter prise M&A activity by
conducting comprehensive
due diligence, negotiations
and stakeholder relations in all
major transactions, including
the formation of RBC Dexia IS,
the acquisitions of Abacus
Financial Services Group Ltd.,
American Guaranty & Trust
Company and the announced
agreements to acquire Flag
and the AmSouth branches.
• GTO worked with its business
partners to handle more than
00 million client calls,
330 million ABM transactions,
05 million online banking
transactions, 2.3 billion point-
of-sale transactions, and
00 million equity transactions.
• RBC was named among the
best companies globally for
technology and organizational
excellence for the seventh
time in the past 0 years (CIO
magazine).
Royal Bank of Canada Annual Report 2006
2 Global Technology and Operations and Global Functions
2007 and beyond
• GTO will focus on driving inno-
vative process and technology
improvements that simultane-
ously deliver a differentiated
client experience and increased
operating leverage.
• Global Functions will focus on
contributing to our financial
performance by continuing to
maintain a solid balance sheet,
strong credit quality and capital
ratios, and effectively managing
RBC’s tax position.
• Global Functions will focus on
contributing to business growth
through maintaining a strong
governance regime, an effec-
tive brand strategy, strategic
enterprise planning, proactive
enterprise compliance, and solid
relationships with investors,
credit rating agencies, regulators
and other stakeholders.
• Global Functions and GTO will
continue to partner with our
businesses to improve and
simplify processes that impact
clients and employees.
Where a foundation of
good governance guides us
Chairman’s message
As stewards of the organiza-
tion, we believe the foremost
purpose of the Board of
Directors is to create an
environment for management
that demands integrity while
promoting long-term share-
holder value. Good governance,
which enables the creation and
enhancement of shareholder
value, is as important to the
success of RBC as the
operational achievements
of the company.
We are committed to the
continuous improvement of our
leading corporate governance
practices. My goal as Chairman
is to provide leadership to the
board so it can continue to
provide management with
sound and independent advice.
In 2006, our approach to
corporate governance continued
to receive recognition from our
peers. In an annual ranking
by chief executive officers
of Canada’s major compa-
nies, RBC was again named
Most Respected Canadian
Corporation, placing first in
the category of Corporate
Governance for the fourth
consecutive year.
We are key advisors to manage-
ment in the development of
strategy. Every board meeting
over the past year included
presentations on aspects of
RBC’s strategy, taking into
account the opportunities
and risks of the businesses.
We participated with manage-
ment in an annual session
dedicated to strategic planning
and approved the enterprise
strategy. In supervising
management’s implementation
of strategy, we approved major
transactions and capital
expenditures that were aligned
with the strategic plan and
regularly reviewed corporate
performance against objectives.
Our ability to contribute from a
diversity of thought and back-
grounds enhances the value we
provide to RBC management
and shareholders. The
Corporate Governance and
Public Policy Committee
regularly reviews and assesses
the board’s existing strengths
and the evolving needs of the
organization. We are pleased
to welcome our newest
directors whose experience will
add an important dimension
to the board. Timothy Hearn,
Alice Laberge and Michael
McCain are all well-recognized
in their respective fields, and
we are already benefiting
from the contributions they
are making to our discussions
based on their experience in
the Canadian and international
business markets.
To fulfill our responsibilities
to you, our shareholders, we
must have the expertise to
make knowledgeable decisions
concerning RBC’s global
businesses in a rapidly evolving
regulatory and business envi-
ronment. As part of our ongoing
director education program, we
participated over the past year
in sessions on specialized and
complex aspects of RBC’s
business operations, the implica-
tions of the Basel II Capital Accord
for RBC’s capital management
framework, methodologies used
in assessing risk, and the impact
of new standards on financial
statements and disclosure
controls and certifications.
I am pleased that the board has
been able to contribute to the
success of RBC in 2006. Further
details of the governance prin-
ciples and practices of the Board
of Directors and RBC are available
in the following pages and on our
website at rbc.com/governance.
On behalf of the Board of
Directors, I extend appreciation
to management and all 69,480
employees around the world for
their contribution to RBC’s strong
performance over the past year
and their commitment to meeting
our clients’ highest expectations.
David P. O’Brien
Chairman of the Board
Royal Bank of Canada Annual Report 2006
Chairman’s message 3
“ Good governance, which enables the creation and enhancement
of shareholder value, is as important to the success of RBC as the
operational achievements of the company.”
David P. O’Brien, Chairman of the Board
Corporate governance
Beyond compliance
Our practices and policies fully
comply with guidelines estab-
lished by Canadian securities
regulators as well as appli-
cable provisions of the U.S.
Sarbanes-Oxley Act of 2002
and requirements adopted by
the New York Stock Exchange
and the U.S. Securities and
Exchange Commission.
Strategically, our governance
approach is to look beyond
regulatory compliance with a
view to building on our strong
governance fundamentals by
implementing best practices
in support of the goals of the
organization.
In these pages we summarize
some of the steps taken
in recent years to achieve
leading standards of corporate
governance. A more complete
description of RBC’s corporate
governance practices may
be found in our Management
Proxy Circular and on our
web site at rbc.com/governance.
Building on our tradition
of excellence
Over the past few years, RBC
has adopted many significant
leading governance practices,
including:
• New rules requiring directors
to tender their resignations
following the Annual Meeting
if they fail to receive majority
shareholder support
• Increased minimum share
ownership guideline for direc-
tors to $500,000 from the
previous level of $300,000, to
strengthen alignment of their
interests with those of share-
holders
• Increased minimum share
ownership requirements for
top executives, with the CEO’s
minimum threshold rising
from six times to seven times
average base salary, to further
align management and share-
holder interests
• A requirement for senior
executives to retain for at least
one year Royal Bank common
shares with a value equal to
the after-tax gain realized on
the exercise of options, so as
to increase the alignment of
their interests with those of
shareholders
• A Performance Deferred
Share Program to strengthen
the alignment of the interests
of management with share-
holders by tying senior
management’s rewards to the
performance of RBC relative
to a peer group of competing
North American financial
institutions
• Diminished share dilution
resulting from the reduction
of the number of stock option
grants awarded to manage-
ment by approximately
70 per cent since 2003.
Royal Bank of Canada Annual Report 2006
4 Corporate governance
• The Audit, Human Resources
and Corporate Governance
and Public Policy committees
have sole authority to retain
and approve the fees of inde-
pendent, external advisors.
The Human Resources
Committee retains an indepen-
dent compensation consultant
• Board and director evaluation
procedures have been
enhanced, with written peer
reviews added to complement
the established peer assess-
ment practice of one-on-one
interviews with the Chairman
• The process of selecting
individuals for nomination as
directors has been formalized
to ensure that the strengths
of potential candidates are
weighed against the compe-
tencies and skills that the
board as a whole should
possess.
In addition:
• Our comprehensive Director
Independence Policy has
continued to evolve in
response to best practices
and regulatory refinements.
Under this policy, 4 of the 7
currently serving directors are
independent
• Meetings of independent
directors are held regularly
• All members of the board’s
Audit Committee, Human
Resources Committee, and
Corporate Governance and
Public Policy Committee are
independent, and a majority
of members of the Conduct
Review and Risk Policy
Committee are independent
• For the Audit Committee,
more stringent independence
criteria have been imple-
mented, a financial expert has
been designated, financial
literacy requirements have
been defined and a policy
limiting the service of our
Audit Committee members on
the audit committees of other
companies has been approved
Demonstrating leadership
These measures build on our
previous governance initia-
tives, which include, among
many others:
• Ensuring independent leader-
ship of the Board of Directors
by being first among our peer
companies to separate the
positions of Chairman and
Chief Executive Officer in 200
• Adopting a policy limiting
interlocking directorships of
board members
• Discontinuing grants under
the Director Stock Option Plan
in 2002
• Being among the first major
Canadian companies to
expense stock options in
financial statements, which
we have done since 2003
• Providing continuous educa-
tional material, presentations
and programs to directors
so they remain knowledgeable
and informed about the
ever-changing business and
regulatory environment and
the specialized and complex
aspects of finance and our
business operations.
Royal Bank of Canada Annual Report 2006
Corporate governance 5
2007 Annual Meeting
Shareholders are invited to
attend our Annual Meeting at
9 a.m. (Eastern Standard Time)
on Friday, March 2, 2007, at
the Metro Toronto Convention
Centre, North Building,
255 Front Street West,
Toronto, or to listen to
a webcast of the event.
Further details will be made
available on our investor
relations website at rbc.com/
investorrelations/conference.
Enhancing our disclosure
In keeping with our goals of
continuously improving gover-
nance and providing greater
transparency and simplicity in
our communications, in recent
years we have enhanced
disclosure in our Management
Proxy Circular, including:
• More detail on the compensa-
tion paid to individual directors
and their share ownership
• Greater clarity on senior offi-
cers’ compensation relative to
fiscal year performance
• Three-year, easy-to-read
overviews of senior officers’
compensation
• Total aggregate compensation
of the top management team
as a percentage of market
capitalization and a percent-
age of net income after tax
• Increased disclosure regarding
executive pensions, including
the impact of changes in
interest rates, annual service
cost, accrued obligation and
value of retirement plans for
top executives.
Important information about
our governance practices
The following additional
information on our governance
practices is available at
rbc.com/governance:
• Our Statement of Corporate
Governance Practices and
Guidelines
• Our Code of Conduct
• The charters of our Board
of Directors and each of its
committees
• Our Director Independence
Policy
• Position descriptions for the
Chairman of the Board,
the chairs of committees of the
board, and the President and
Chief Executive Officer
• A summary of significant
differences between the NYSE
rules and our governance
practices
• Our Corporate Responsibility
Report.
Royal Bank of Canada Annual Report 2006
6 Corporate governance
Where we make
an impact
Corporate
responsibility
At RBC, we define corporate
responsibility as operating
with integrity at all times and
sustaining our long-term
viability while contributing to
the present and future well-
being of our stakeholders.
This means that we strive
to take active responsibility
for the daily choices that we
face, especially in regard to
ethical business practices, our
economic impact, as well as
our practices in the workplace,
the environment and the
community.
Sustainability reporting
Increasingly, companies are
being asked to report on their
social, environmental and
ethical performance, which
is sometimes called sustain-
ability reporting. While there
are many stakeholders asking
for such information, there
is little agreement about what
and how much companies
should disclose, as well
as the appropriate manner
of disclosure.
RBC has adopted a multi-
pronged approach to sustain-
ability reporting. We provide
tailored reporting geared to
various stakeholders, with an
appropriate level of detail in
each. Additional information
can be found on our website at
rbc.com/responsibility.
Royal Bank of Canada Annual Report 2006
Corporate responsibility 7
Corporate
responsibility
principles
Business practices
Economic impact
• Comply with laws and
• Provide strong returns to
regulations
• Manage under strong
governance
• Operate with ethical business
practices
• Provide products and access to
banking services responsibly
• Protect and educate consumers
shareholders
• Pay fair share of taxes
• Support small business and
community economic
development
• Foster innovation and
entrepreneurship
• Purchase goods and services
responsibly
Workplace and employment
Environment
Community
• Respect diversity
• Foster a culture of employee
• Lend responsibly
• Leverage “green” business
engagement
• Provide competitive
compensation and total
rewards
• Provide opportunities for
training and development
opportunities
• Reduce operational
footprint
• Provide donations with a
lasting social impact
• Sponsor key community
initiatives
• Enable employees to
contribute
At RBC, one of our key values
is to operate with trust
through integrity in everything
we do. We have enterprise-
wide compliance policies
and processes to support the
assessment and management
of risks, and have formal poli-
cies to address issues such as:
• Economic sanctions
• Lending to political parties
• Financing military materiel
• Money laundering
• Terrorist financing
• Conflicts of interest including
outside activities and external
directorships of employees
Code of Conduct
All RBC employees worldwide
are governed by our Code
of Conduct, which was estab-
lished more than 20 years ago
and is updated regularly. Our
Code of Conduct e-learning
program ensures all our
employees (from the CEO
down) know and understand
the Code’s principles and
compliance elements. This
e-learning program includes
both an online course and
a test. All employees must
complete the program and test
within three months of joining
RBC and at least once every
two years thereafter.
• Insider trading, information
barriers and employee trading
Client due diligence (Know
Your Client and Suitability)
• Environmental risk
• Outsourcing risk
• Structured transactions and
complex credits
• Auditor independence.
Policies and controls are
reviewed regularly to ensure
continued effectiveness.
RBC must perform due
diligence on new and existing
clients both to comply with
applicable anti-money
laundering, anti-terrorism
and economic sanctions
legislation and also so we can
understand our clients’ needs
in offering suitable products
and services. To address the
various anti-money laundering
and anti-terrorism rules, RBC
has implemented appropriate
scrutiny and monitoring
measures in line with regula-
tory requirements. This client
due diligence helps us to
monitor trade suitability within
our securities businesses,
and more broadly, helps us
to ensure we are providing
clients with an appropriate
range of products and
services.
Anti-money laundering policy
RBC is committed to preventing
the use of its financial services
for money laundering or
terrorist financing purposes.
Our Global Anti-Money
Laundering Compliance Group
is dedicated to the continuous
development and mainte-
nance of policies, guidelines,
training and risk assessment
tools and models to help our
employees deal with ever-
evolving money laundering
and terrorism financing risks.
Anti-terrorism policy
RBC and our directors, officers
and employees will not know-
ingly enter into transactions
with, or provide or assist in
providing, directly or indirectly,
financial services to, or for the
benefit of, states, entities,
organizations and individuals
targeted by applicable anti-
terrorism measures. To
effectively meet these require-
ments, automated systems
scan client names against
various terrorist and control
lists daily, including scan-
ning of payments against the
Ethical business
practices
For more information on
RBC’s business integrity, visit
rbc.com/responsibility/business
Royal Bank of Canada Annual Report 2006
8 Corporate responsibility
RBC’s business continuity planning
encompasses our response to a
wide variety of disruption and crisis
scenarios affecting the well-being
of our employees, clients, business
operations and our communities.
The RBC Business Emergency
Information Line is set up to advise
our employees in the event of an
RBC-wide crisis or external situation
affecting our ability to access RBC
offices or serve our clients.
The RBC Reporting Hotline enables
employees and third parties around
the world to confidentially report
questionable internal accounting or
auditing matters directly to RBC’s
Ombudsman. For more information,
visit rbc.com/governance.
Office of the Superintendent
of Financial Institutions,
the Office of Foreign Assets
Control and other control lists,
as per terrorist financing
regulations.
Economic sanctions policy
RBC businesses, directors,
officers and employees will not
knowingly conduct business
with states, entities, organiza-
tions and individuals targeted
by the economic sanctions of
the jurisdictions where they
are located or where they
operate, or those jurisdictions
otherwise applicable to them.
Privacy and information
security
The Internet and other
information technologies
have revolutionized the way
we do business, enabling us
to interact and do business
with clients, employees, and
other third parties from the
con venience of the home or
office. At the same time, it also
brings legitimate concerns
about privacy and security.
At RBC, we are dedicated to
safeguarding the privacy and
confidentiality of personal,
business, financial, and other
information. In fact, it is one
of our highest priorities and
remains a cornerstone of our
commitment to our clients,
employees, and other third
parties. We have had a formal
Privacy Code since 99,
overseen by our Chief Privacy
Officer, and we use vigorous
security safeguards and
internal controls to ensure
the privacy and security of
information entrusted to us.
Fraud prevention
RBC places a high priority on
protecting clients against
potential losses from financial
fraud. We work closely with
other financial institutions,
industry associations and law
enforcement authorities
globally to combat financial
crime. We also have a website
on fraud, credit and debit card
safety for clients globally,
and a publication, Straight
Talk, about financial fraud,
available through our branch
network and online.
Voluntary codes of conduct
The Canadian banking industry
has developed a number of
voluntary commitments and
codes to protect consumers
to which RBC has committed.
These are listed at rbc.com/
voluntary-codes-public-
commitments, including:
• Canadian Code of Practice for
Consumer Debit Card Services
• Canadian Bankers Association
Code of Conduct for authorized
insurance activities
• Model Code of Conduct for
Bank Relations with Small-
and Medium-Sized Businesses
• Principles of Consumer
Protection for Electronic
Commerce: A Canadian
Framework
• Visa Zero Liability Policy
• Visa E-Promise.
Crisis management
RBC’s Crisis Management
teams, made up of senior exec-
utives across the organization,
are responsible for the overall
identification, isolation and
management of major crises,
and are activated when crises
emerge that are both within
and outside RBC’s control.
We have enterprise-wide
business continuity manage-
ment processes and undergo
periodic simulations and
exercises to help prepare for
possible crises, while testing
our contingent strategies and
tactics and the capabilities of
crisis response teams.
Royal Bank of Canada Annual Report 2006
Corporate responsibility 9
Socially responsible investing
Investors who wish to express their
values through ethical investments
are increasingly turning to research
firms for solid, third-party analysis
of which companies have a positive
or negative effect on society and the
environment. RBC is included on a
number of significant indices that
recognize financial, social and
environmental leaders.
Client care
RBC’s vision is “Always
earning the right to be our
clients’ first choice.” The entire
company is focused on that
vision, from soliciting and
acting on client feedback
to maintaining vigilant
consumer protection
measures to ensuring access
to financial services.
Responding to feedback
Clients surveyed (thousands)
5
1
4
7
8
1
0
5
1
0
0
1
8
9
7
9
2004
2005
2006
Canada
United States
Every year, RBC businesses
track client satisfaction
and use feedback to make
improve ments. For instance,
in 2006, in Canada, we:
• Enhanced our online investing
site to help investors make
more informed decisions
• Improved our Interactive Voice
Response (IVR) for easier
navigation, information and
representative access
• Significantly reduced our
personal account opening
process time
• Launched a new unlimited
transactions account for only
$.95 per month.
In 2006, in the U.S., we:
• Introduced online cheque
imaging
• Decreased loan turnaround
time for small business clients.
Fraud prevention
RBC has stringent security
policies and practices, backed
up by around-the-clock
resources to prevent and
detect potential fraud. In 2006,
we introduced guarantees
for online banking and self-
directed brokerage clients,
offering 00 per cent
reimburse ment for funds lost
through unauthorized transac-
tions in their accounts.
We have developed a number
of fraud-education initiatives
including up-to-date tips
and alerts, brochures and
client presentations. In 2006,
we published a new Guide
to Security and Privacy and
undertook a client education
campaign on fraud prevention
and identity protection.
A resolve to make it right
Our formal process for
handling client concerns is
outlined on our website and in
our Straight Talk brochures.
Customers whose issues are
unresolved following this
process may appeal to RBC’s
Office of the Ombudsman,
which examines decisions
made by RBC companies and
reviews their compliance with
proper business procedures.
The Office ensures customers
get a fair and impartial hearing
and are treated with consid-
eration and respect. We also
respect the dignity and privacy
of all parties involved in the
proceedings.
Responsible development of
products and services
RBC follows a defined,
rigorous review process before
launching any new product
or significantly changing an
existing one. We evaluate
products for a range of risks
and ensure they align with our
Code of Conduct, with legisla-
tion, and with any voluntary
consumer protection codes
that we have signed. Approval
levels within RBC correspond
to the level of risk identified for
a particular product or service.
A cornerstone of investor
and client protection is the
Know Your Client rule. Our
employees are required to
make all necessary efforts to
understand their clients’ situa-
tion and financial and personal
objectives before making
recommendations.
RBC is also committed to
providing banking access to a
host of previously underserved
groups through customized
products and services. For
information, see our Corporate
Responsibility Report
and Public Accountability
Statement at rbc.com.
Royal Bank of Canada Annual Report 2006
20 Corporate responsibility
Economic impact
($ millions)
Employee compensation and benefits ()
Dividend payments to common and preferred shareholders
Income and other taxes (all jurisdictions) ()
Goods and services purchased from suppliers of all sizes
Community investments including donations, sponsorships
()
Based on continuing operations.
2006
2005
2004
$ 7,340 $
,907
2,083
3,900
83
6,736 $ 6,70
,334
,554
,989
2,02
3,700
3,700
59
65
Economic impact
Economic development
Companies both large and
small can help shape the
economies of the communities
and countries in which they
do business, simply through
their day-to-day business
decisions and actions. At RBC,
we have an economic impact
as an employer and taxpayer
through our activities as a
financial services company
and as a purchaser of goods
and services.
For more information on RBC’s
economic impact, visit
rbc.com/responsibility/economic
RBC invests in sustainable
economic development, and
we are committed to contrib-
uting to the success of people
and businesses in the commu-
nities where we operate.
We support:
• Programs that address basic
needs, such as food banks
and shelters
• Economic growth in communi-
ties where we do business
• Initiatives that help build
wealth and capacity in
Aboriginal communities
• Resources to promote
economic self-sufficiency
• Financial literacy programs.
RBC also promotes economic
growth through industry part-
nerships. For example, we are
a member of the Canadian
American Business Council,
raising awareness of the value
of the Canada-U.S. trade
relationship and enhancing
the overall competitiveness of
North American economies.
Small business
Small business is an important
engine driving economic
growth. RBC is the marketplace
leader in Canada with almost
600,000 small- and medium-
sized enterprise clients, while
RBC Centura serves almost
60,000 small business clients
in the Southeast U.S.
Financing is essential for many
small businesses to start,
operate or grow, and RBC
offers a host of credit solutions
tailored to meet the needs
of diverse businesses at
various stages. We also strive
to provide the best possible
products, advice and expertise
to help this sector prosper.
Innovation
RBC takes a leadership role in
supporting innovation and the
commercialization of research,
and we support projects and
organizations that promote
learning, innovation and entre-
preneurship, such as:
• The Medical and Related
Sciences (MaRS) project,
facilitating research and
development, and its
commercialization
• The Canadian Institute for
Advanced Research, helping
fuel Canada’s knowledge base
by bringing together the most
distinguished thinkers from
across Canada and around
the world.
We have made direct invest-
ments in a number of promising
early-stage ventures across
North America through RBC
Technology Ventures and its
partner funds. Our Strategic
Technology Fund has brought
investment dollars and our vast
knowledge and expertise to
budding technology companies
in the financial services sector.
Purchasing
In 2006, we spent $3.9 billion
on goods and services from
international, national,
regional and local suppliers of
all sizes.
Our procurement group is
responsible for sourcing
products and services. Our
procurement policies are
inclusive and aim to promote
sustainable business prac-
tices and economic develop-
ment where possible and
appropriate. In maintaining
the highest standards, our
purchasing policies are
reviewed annually.
We promote fair purchasing
practices and strive to
support, whenever possible,
the communities in which
we operate. We are a founding
member of the Canadian
Aboriginal and Minority
Supplier Council (CAMSC).
RBC has been a member of
the CAMSC’s U.S. affiliate,
the National Minority Supplier
Development Council,
since 2002.
Royal Bank of Canada Annual Report 2006
Corporate responsibility 2
Outside the workplace,
RBC employees around the world
participate in numerous community
activities like the 2006 Juvenile
Diabetes Research Foundation (JDRF)
Ride for Diabetes Research.
Attracting and retaining a
talented and highly moti-
vated workforce is a crucial
part of our ongoing success.
Consistently ranked as one of
the top employers in Canada,
we strive to strengthen our
reputation as an employer
in all countries in which we
do business.
Understanding what
employees value and need
enables us to leverage a
flexible and competitive
Total Rewards program to
support the mutual success
of employees and RBC. This
comprehensive approach
includes compensation,
benefits and a positive work
environment, along with
career and learning oppor-
tunities that reward people
for skills and contribution.
Flexibility within the work
environment includes the
opportunity for flexible
working hours, modified work
schedules and telework.
Employee savings and share
ownership plans are part
of the RBC Rewards program
and promote a sense of
ownership that helps align
employee, investor and
company objectives. The vast
majority of employees are
RBC shareholders through
these programs.
Continuous employee growth
and development helps
ensure we meet current and
future client needs. Employees
have access to the training
resources and opportunities
they need to learn and grow as
professionals, including global
access to RBC Campus, our
web-based learning platform,
and Career Advisor, a compre-
hensive career management
resource. Hiring practices
focus on identifying and
selecting talented people who
share our passion for putting
clients first.
Diversity is one of RBC’s core
values and we have become a
recognized leader in Canada
for promoting diversity.
Leveraging diversity for growth
and innovation is both a sound
business imperative and
the right thing to do for our
employees, clients and the
communities we serve.
Keeping employees informed
helps ensure alignment with
company goals. RBC’s senior
management team regularly
meets with employees to
discuss the company’s goals,
strategies and progress.
Employees have access to
company information via
intranet sites, electronic news
magazines, e-mail bulletins,
and other communication
channels, and are encour-
aged to provide feedback and
comments in a variety of ways.
Listening and responding to
employee feedback is part of
the RBC culture and we have
conducted employee opinion
surveys since 98. High
levels of employee engage-
ment and a strong commit-
ment to putting clients first
are achieved through under-
standing employee views
and taking action consistent
with employee needs and
RBC priorities.
Workplace
Employment worldwide
(as at October 31, 2006)
0
8
4
9
6
,
8
5
8
0
6
,
l
a
t
o
T
2
4
7
4
5
,
1
6
6
6
4
,
a
d
a
n
a
C
0
8
5
0
1
,
6
5
0
0
1
,
s
e
t
a
t
S
d
e
t
i
n
U
8
5
1
4
,
1
4
1
4
,
r
e
h
t
O
l
a
n
o
i
t
a
n
r
e
t
n
i
Number of employees
Full-time equivalent positions
For more information on
RBC’s workplace, visit
rbc.com/responsibility/workplace
Royal Bank of Canada Annual Report 2006
22 Corporate responsibility
RBC is actively working to minimize
our risks and pursue opportunities
presented by environmental issues.
Environment
For more information on
RBC’s business integrity, visit
rbc.com/responsibility/
environment
Performance and initiatives
We are actively working to
minimize our risks and pursue
opportunities presented by
environmental issues. For
example, RBC Technology
Ventures is a lead investor in
the GEF Clean Technology
Fund, and we are committed
to this through 2007. We are
seeking opportunities to
further expand our under-
writing, arranging and advisory
services for alternative
energy financing.
We are also focusing on
finding more ways to reduce
our operational impacts
through our SOFT (sourcing,
operations, facilities and
travel) Footprint program.
We commit to reporting our
ongoing progress on our
Environment website on
rbc.com in 2007.
For more information, see the
Risk management section of
the Management’s Discussion
and Analysis and our 2006
Corporate Responsibility
Report.
RBC recognizes that our
long-term economic success
is dependent on a sound
environment and healthy
communities. That is why we
strive to conduct our business
and operational activities
in a manner that minimizes
environmental risk and recog-
nizes environmental market
opportunities for the benefit of
our shareholders, clients and
employees.
Environmental policy
RBC’s Corporate Environ-
mental Policy was originally
developed in 99 and
supplements the environ-
mental section of our Code of
Conduct. The Policy’s objec-
tive is to guide RBC’s business
and operational activities in a
manner that respects the prin-
ciples of sustainable develop-
ment. The Policy is currently
under review and a revised
version, addressing emerging
environmental issues, will be
released in 2007.
Responsible lending
RBC considers potential
environmental and social
consequences of our lending
using our Credit and Project
Finance Environmental Risk
Management Policy suite.
This collection of policies
provides the basis upon which
we review transactions for
environmental issues. These
policies require that, where
warranted, transactions are
reviewed by environmental
specialists to proactively
identify and manage our envi-
ronmental risks.
In 2006, RBC recommitted to
the revised Equator Principles,
a set of voluntary guidelines
developed in 2003 to address
environmental and social
risks associated with project
finance. Since our original
adoption of the Equator
Principles in 2003, we have
reviewed 4 projects which
qualified for review under our
Equator Principles policy.
Issues and stakeholder
engagement
In 2006, we worked with
external stakeholders to help
identify issues relevant to
our business activities and
operations, including climate
change, forestry, biodiversity
and the rights of indigenous
peoples. We believe that by
engaging stakeholders, we
deepen our understanding of
these issues and are better
able to achieve a sustainable
balance between environ-
mental stewardship and
economic prosperity.
Royal Bank of Canada Annual Report 2006
Corporate responsibility 23
In 2006, RBC provided more than
$2 million in funding so that
community-based organizations
could offer after-school programs
across Canada, such as this program
held at the Braeburn Junior School
in Toronto.
Community
Donations
Employee contributions
In 2006, RBC contributed more
than $83 million to community
causes worldwide through
donations of more than
$42 million and an additional
$4 million in the sponsor-
ship of community events and
national organizations.
RBC believes in building
prosperity by supporting a
broad range of community
causes. Our employees and
pensioners also make an enor-
mous contribution as volun-
teers, sharing their financial
and business knowledge, time
and enthusiasm with thou-
sands of community groups
worldwide.
Donations are a cornerstone
of our community programs,
with a tradition of philan-
thropy dating back to our
roots. In fact, we have dona-
tions on record as far back as
89. We are one of Canada’s
largest corporate donors,
and contribute to communi-
ties across North America
and around the world. We
are committed to making a
lasting social impact through
inspired, responsible giving
and by building strong part-
nerships with the charitable
sector. Our priority areas for
funding include programs that:
• Help keep kids in school
• Support emerging artists
• Encourage employee
involvement
• Help seniors lead healthy and
independent lives.
2006 Worldwide RBC donations
by geography
(C$)
2006 RBC donations
in Canada by cause
RBC’s Employee Volunteer
Grants Program was
launched in 999 to support
and encourage community
involvement. Employees and
pensioners who volunteer a
minimum of 40 hours a year to
a registered charity are eligible
for a $500 grant to the organi-
zation in their honour.
Since 999, RBC has made
over 0,700 grants and
donated more than
$5.35 million to celebrate our
employees’ volunteer efforts.
Sponsorships
Sponsorships are an integral
part of RBC’s marketing and
promotional activities, and
are selected to promote our
brand, image and reputation.
Sponsorships often include an
assortment of benefits such as
consumer promotions, on-site
and media brand and product
exposure, as well as client
hosting and staff volunteer
opportunities.
Our community sponsorships
are focused on:
Canada
$ 35,471,617
International $ 6,928,653
Total
$ 42,400,270
Royal Bank of Canada Annual Report 2006
24 Corporate responsibility
Social services
20.3%
Arts and culture
10%
Civic
Health
Education
8.3%
29.9%
31.5%
• Amateur sport: We support
the development of amateur
athletes by sponsoring
grassroots events in local
communities to national sport
associations. We are the
longest-standing supporter
of Canada’s Olympic team,
dating back to 947, a
premier national partner of
the Vancouver 200 Olympic
and Paralympic Winter
Games and a proud sponsor
of the Canadian Olympic and
Paralympic Teams through
202. RBC also sponsors
hockey, snowboarding, free-
style skiing, athletics and
Special Olympics.
• Arts: We believe that healthy
vibrant communities are a
direct result of investing in
creative vision and artistic
talent. Our portfolio of interests
in this area includes the
RBC Canadian Painting
Competition, celebrating
Canadian visual artists early in
their career. We also support
community events such as art
exhibitions, as well as theatre
and orchestra performances.
For more information on
RBC’s business integrity, visit
rbc.com/responsibility/community
Management’s Discussion and Analysis
Management’s Discussion and Analysis (MD&A) is provided to enable a reader to assess our results of operations, financial condition and future prospects for the fiscal
year ended October 31, 2006, compared to the preceding two years. This MD&A should be read in conjunction with our Consolidated Financial Statements and related
notes and is dated November 29, 2006. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements prepared in accordance
with Canadian generally accepted accounting principles (GAAP). We have reclassified certain prior year information to conform to our current year’s presentation, including
reclassifications arising from enhancements to our transfer pricing methodologies and the transfer of a specific business between our segments. For further details, refer
to the How we manage our business segments section of this Annual Report.
Additional information about us, including our 2006 Annual Information Form is available free of charge, on our website at rbc.com/investorrelations, on the Canadian
Securities Administrators’ website at sedar.com and on the EDGAR section of the United States Securities and Exchange Commission’s (SEC) website at sec.gov.
26 Executive summary
43 Quarterly financial information
72 Risk management
26 Vision and strategic goals
27 Selected financial highlights
28 Overview
30
Financial performance 2006
32 Outlook and objectives for 2007
33 Accounting and control matters
33 Critical accounting policies and estimates
36
Future changes in accounting policies
37 Controls and procedures
38 Consolidated results from continuing operations
38 Total revenue
39 Net interest income and margin
39 Non-interest expense
40 Provision for credit losses
40
Insurance policyholder benefits, claims and
acquisition expense
63
41 Taxes
41 Business realignment charges
42 Results by geographic segment
42 Related party transactions
43 Results and trend analysis
45
Fourth quarter 2006 performance
45 Business segment results from continuing
operations
46 How we manage our business segments
47 Key financial measures (non-GAAP)
50 RBC Canadian Personal and Business
55 RBC U.S. and International Personal
Liquidity and funding risk
75 Credit risk
81 Market risk
84 Operational risk
85
87 Reputation risk
88 Regulatory and legal risk
89 Environmental risk
Insurance risk
89
and Business
58 RBC Capital Markets
62 Corporate Support
Financial condition
63 Balance sheet data and analysis
64 Capital management
69 Off-balance sheet arrangements
90 Additional risks that may affect future results
92 Additional financial information
See our Glossary for definitions of terms used throughout this document.
Caution regarding forward-looking statements
From time to time, we make written or oral forward-looking state-
ments within the meaning of certain securities laws, including the “safe
harbour” provisions of the United States Private Securities Litigation
Reform Act of 1995 and any applicable Canadian securities legislation.
We may make such statements in this document, in other filings
with Canadian regulators or the United States Securities and Exchange
Commission (SEC), in reports to shareholders or in other communi-
cations. These forward-looking statements include, among others,
statements with respect to our medium-term and 2007 objectives, and
strategies to achieve our objectives, as well as statements with respect
to our beliefs, outlooks, plans, objectives, expectations, anticipations,
estimates and intentions. The words “may,” “could,” “should,” “would,”
“suspect,” “outlook,” “believe,” “plan,” “anticipate,” “estimate,”
“expect,” “intend,” “forecast,” “objective” and words and expressions
of similar import are intended to identify forward-looking statements.
laws and regulations including tax laws; judicial or regulatory judgments
and legal proceedings; the accuracy and completeness of information
concerning our clients and counterparties; successful execution of our
strategy; our ability to complete and integrate strategic acquisitions
and joint ventures successfully; changes in accounting standards, poli-
cies and estimates; and our ability to attract and retain key employees
and executives. Other factors that may affect future results include:
the timely and successful development of new products and services;
technological changes; unexpected changes in consumer spending
and saving habits; the possible impact on our business from disease or
illness that affects local, national or global economies; disruptions to
public infrastructure, including transportation, communication, power
and water; the possible impact on our businesses of international
conflicts and other political developments including those relating to
the war on terrorism; and our success in anticipating and managing the
associated risks.
By their very nature, forward-looking statements involve numerous
We caution that the foregoing list of important factors that may affect
factors and assumptions, and are subject to inherent risks and uncer-
tainties, both general and specific, which give rise to the possibility that
predictions, forecasts, projections and other forward-looking statements
will not be achieved. We caution readers not to place undue reliance
on these statements as a number of important factors could cause our
actual results to differ materially from the expectations expressed in
such forward-looking statements. These factors include credit, market,
operational and other risks identified and discussed under the Risk man-
agement section; general business and economic conditions in Canada,
the United States and other countries in which we conduct business;
the impact of the movement of the Canadian dollar relative to other
currencies, particularly the U.S. dollar and British pound; the effects of
changes in government monetary and other policies; the effects of com-
petition in the markets in which we operate; the impact of changes in
future results is not exhaustive. When relying on our forward-looking
statements to make decisions with respect to us, investors and
others should carefully consider the foregoing factors and other uncer-
tainties and potential events. We do not undertake to update any
forward-looking statement, whether written or oral, that may be made
from time to time by us or on our behalf.
Additional information about these factors can be found under the
Risk management section and the Additional risks that may affect future
results section.
Information contained in or otherwise accessible through the websites
mentioned does not form a part of this document. All references in this
document to websites are inactive textual references and are for your
information only.
Royal Bank of Canada Annual Report 2006
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 25
Management’s Discussion and Analysis 25
Executive summary
Royal Bank of Canada (RY on TSX and NYSE) and its subsidiaries oper-
ate under the master brand name of RBC. We are Canada’s largest bank
as measured by assets and market capitalization and one of North
America’s leading diversified financial services companies. We provide
personal and commercial banking, wealth management services, insur-
ance, corporate and investment banking and transaction processing
services on a global basis. Our corporate support team enables business
growth with expert professional advice and state-of-the-art processes
and technology. We employ approximately 70,000 full- and part-time
employees who serve more than 14 million personal, business, public
sector and institutional clients through offices in North America and
34 countries around the world.
•
•
We have three client- and geographic-oriented business segments.
RBC Canadian Personal and Business consists of our personal and
business banking and wealth management businesses in Canada
and our global insurance business.
RBC U.S. and International Personal and Business consists of our
personal and business banking and retail brokerage businesses
in the U.S., banking in the Caribbean and private banking
internationally.
•
RBC Capital Markets provides a wide range of corporate and invest-
ment banking, sales and trading, research and related products
and services to corporations, public sector and institutional clients
in North America and specialized products and services in select
global markets.
Our business segments are supported by our corporate support team,
which consists of Global Technology and Operations (GTO) and Global
Functions. GTO provides the operational and technological foundation
required to effectively deliver products and services to our clients. It
also leads innovative process and technology improvements that maintain
the safety and soundness of our operations, while keeping our capabili-
ties ahead of the competition. Our Global Functions team of professionals
provides sound governance and advice in the areas of risk, compliance,
law, finance, tax and communications. This team also prudently manages
the capital and liquidity and funding positions of the enterprise to ensure
that we meet regulatory requirements, while ensuring effective funding
management and allocation of capital. In addition, the Global Functions
team provides support to our people and manages relationships with
external stakeholders including investors, credit rating agencies and
regulators, as well as supports our strategic business decisions.
Royal Bank of Canada
RBC Canadian Personal and Business
RBC U.S. and International Personal and Business
RBC Capital Markets
• Personal Banking
• Business Financial Services
• Cards and Payment Solutions
• Wealth Management
• Global Insurance
• Wealth Management
• Banking
• Global Markets
• Global Investment Banking and
Equity Markets
• RBC Dexia Investor Services (1)
• Other
Global Technology and Operations
Global Functions
(1)
On January 2, 2006, we combined our Institutional & Investor Services (IIS) business with Dexia Funds Services in return for a 50% joint venture interest in RBC Dexia Investor Services (RBC Dexia IS).
Vision and strategic goals
Our business strategies and actions are guided by our vision of “Always
earning the right to be our clients’ first choice,” which drives our
Client First approach, and is exhibited in the conduct of all our activities,
including how we deal with our clients, develop our products and
services and collaborate across businesses and functions. Our Client
First approach focuses on enhancing client satisfaction and loyalty in a
cost-efficient manner, even as the needs and expectations of our clients
continue to develop. We believe that applying this client focused
approach to how we conduct business is critical to achieving our stra-
tegic goals. As well, this approach will help us generate strong stable
revenue and earnings growth, and lead to continuous improvements in
productivity, and ultimately, top quartile financial performance versus
our North American peer group.
Our domestic market continues to offer significant avenues for
growth in both the retail and wholesale sectors. This potential growth,
together with the strength of our brand and leading positions in most
product categories, provides us with the financial strength to expand
internationally. The U.S. is the primary location for such growth, with its
geographic proximity, cultural similarity, close trade relationships with
Canada and our strength in select markets. In addition, we do business
in many other markets where our expertise allows us to compete and
strengthen our presence globally.
For 2007, our strategic goals remain focused on driving business
growth both domestically and internationally by leveraging and building
on our strengths. We expect to achieve these goals through ongoing
innovation and collaboration among businesses together with our focus
on meeting the needs of clients.
Royal Bank of Canada Annual Report 2006
26 Management’s Discussion and Analysis
•
•
•
In Canada, our goal is to be the undisputed leader in financial
services. We continue to leverage our extensive distribution capa-
bilities across business lines to maximize distribution effectiveness
for personal and business markets. We are also developing innova-
tive solutions for retail and wholesale clients, and expanding and
improving our distribution network while strengthening the RBC
brand by delivering a superior client experience.
In the United States, our goal is to build on our strengths in banking,
wealth management and capital markets. At RBC Capital Markets,
we continue to integrate our mid-market origination and distribu-
tion capabilities and develop our product and sector strengths.
We are focusing on our primary advisor strategy and on delivering
a broader suite of wealth management products at RBC Dain
Rauscher. To enhance efficiency, we are combining our capital
markets and wealth management operational activities to create
an integrated investment bank. We remain focused on enhancing
RBC Centura’s operating performance and have taken steps to
accelerate our expansion through both de novo branch openings
and acquisitions. In addition, we continue to grow our insurance
business.
Outside North America, our goal is to be a premier provider of
selected financial services. RBC Capital Markets continues to
enhance distribution by growing niche product and origination
capabilities. Global Private Banking is increasing scale through
targeted acquisitions, and building additional distribution capa-
bilities, expanding the breadth of its products and services, and
enhancing its relationship management model. We are reinforcing
our position in the Caribbean through organic growth and opera-
tional improvements, while continuing to explore opportunities
to selectively expand our footprint in fast-growing regions.
Our Institutional & Investor Services joint venture, RBC Dexia IS,
utilizes its global scale and expanded product capability to grow
the number and depth of its client relationships.
Guided by our vision and strategic goals, our business segments
tailor their strategies to meet client needs as well as strengthening client
relationships within their unique operating and competitive environ-
ments. The successful execution of our strategies across all retail and
wholesale businesses will continue to contribute to the significant
enhancement in the quality and diversity of our earnings. Our efforts
should also result in the continued strong market leadership of our
Canadian businesses as well as improved results and solid growth in
our U.S. and international businesses.
Selected financial highlights (1)
(C$ millions, except per share, number of and percentage amounts)
2006
2005
2004
Table 1
2006 vs. 2005
Increase (decrease)
Continuing operations
Total revenue
Non-interest expense
Provision for credit losses
Insurance policyholder benefits, claims and acquisition expense
Business realignment charges
Net income before income taxes and non-controlling interest
in subsidiaries
Net income from continuing operations
Net loss from discontinued operations
Net income
Segments – net income from continuing operations
RBC Canadian Personal and Business
RBC U.S. and International Personal and Business
RBC Capital Markets
Corporate Support
Net income from continuing operations
Selected information
Earnings per share (EPS) – diluted (2)
Return on common equity (ROE) (3)
Return on risk capital (RORC) (3)
Selected information from continuing operations
Earnings per share (EPS) – diluted (2)
Return on common equity (ROE) (3)
Return on risk capital (RORC) (4)
Net interest margin (5)
Capital ratios (6)
Tier 1 capital ratio
Total capital ratio
Selected balance sheet and other information
Total assets
Securities
Consumer loans
Business and government loans
Deposits
Average common equity (3)
Average risk capital (4)
Risk-adjusted assets (6)
Assets under management
Assets under administration – RBC
Common share information (2)
Shares outstanding (000s) – average basic
– RBC Dexia IS (7)
– average diluted
– end of period
Dividends declared per share
Dividend yield
Common share price (RY on TSX) – close, end of period
Market capitalization
Business information for continuing operations (number of)
Employees (full-time equivalent)
Bank branches
Automated banking machines (ABM)
Period average US$ equivalent of C$1.00 (8)
Period-end US$ equivalent of C$1.00
(1)
$ 20,637
11,495
429
2,509
–
$ 19,184
11,357
455
2,625
45
$ 17,802
10,833
346
2,124
177
$
$
$
$
$
$
$
$
$
$
6,204
4,757
(29)
4,728
2,794
444
1,407
112
4,757
3.59
23.5%
36.7%
3.61
23.3%
37.0%
1.35%
9.6%
11.9%
4,702
3,437
(50)
3,387
2,304
387
760
(14)
3,437
2.57
18.0%
29.3%
2.61
18.1%
29.7%
1.52%
9.6%
13.1%
$
$
$
$
$
4,322
3,023
(220)
2,803
2,043
214
827
(61)
3,023
2.11 $
15.6%
24.6%
2.28 $
16.8%
26.5%
1.53%
8.9%
12.4%
$ 536,780
184,869
148,732
61,207
343,523
19,900
12,750
223,709
143,100
525,800
1,893,000
$ 469,521
160,495
138,288
53,626
306,860
18,600
11,450
197,004
118,800
1,778,200
–
$ 426,222
128,946
125,302
47,258
270,959
17,800
11,300
183,409
102,900
1,593,900
–
1,279,956
1,299,785
1,280,890
1.44
3.1%
49.80
63,788
$
$
1,283,433
1,304,680
1,293,502
1.18
3.2%
41.67
53,894
$
$
1,293,465
1,311,016
1,289,496
1.01
3.3%
31.70
40,877
$
$
$
$
$
$
1,453
138
(26)
(116)
(45)
1,502
1,320
21
1,341
490
57
647
126
1,320
1.02
550 bps
740 bps
1.00
520 bps
730 bps
n.m.
– bps
(120)bps
$ 67,259
24,374
10,444
7,581
36,663
1,300
1,300
26,705
24,300
n.m.
n.m.
(3,477)
(4,895)
(12,612)
.26
(10)bps
8.13
9,894
$
$
60,858
1,443
4,232
.883
.890
$
60,012
1,419
4,277
.824
.847
$
61,003
1,415
4,432
$
.762
.821
$
846
24
(45)
.06
.04
7.6%
1.2%
(5.7)%
(4.4)%
n.m.
31.9%
38.4%
n.m.
39.6%
21.3%
14.7%
85.1%
n.m.
38.4%
39.7%
n.m.
n.m.
38.3%
n.m.
n.m.
n.m.
n.m.
n.m.
14.3%
15.2%
7.6%
14.1%
11.9%
7.0%
11.4%
13.6%
20.5%
n.m.
n.m.
(.3)%
(.4)%
(1.0)%
22.0%
n.m.
19.5%
18.4%
1.4%
1.7%
(1.1)%
7.2%
5.1%
(2)
(3)
(4)
(5)
(6)
(7)
Certain consolidated and segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the
year. For further discussion, refer to the How we manage our business segments section.
On April 6, 2006, we paid a stock dividend of one common share on each of our issued and outstanding common shares. The effect is the same as a two-for-one split of our common shares.
All common share and per share information has been retroactively adjusted to reflect the stock dividend.
Average common equity and Return on common equity are calculated using month-end balances for the period.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. Average risk capital and the Return on risk capital are non-GAAP
financial measures. For further discussion and reconciliation, refer to the Key financial measures (non-GAAP) section.
Net interest margin (NIM) is calculated as Net interest income divided by Average assets. Average assets are calculated using methods intended to approximate the average of the daily
balances for the period.
Calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
Assets under administration – RBC Dexia IS represents the total assets under administration (AUA) of the joint venture, of which we have a 50% ownership interest. RBC Dexia IS was created
on January 2, 2006, and we contributed AUA of $1,400 billion to the joint venture at that time. As RBC Dexia IS reports on a one-month lag, Assets under administration – RBC Dexia IS are as at
September 30, 2006.
Average amounts are calculated using month-end spot rates for the period.
(8)
n.m. not meaningful
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 27
Overview
Overview of 2006
We achieved record earnings performance this year, reflecting strong
business growth across all business segments and our successful
execution of growth initiatives, despite the negative impact of the strong
Canadian dollar on our foreign currency translated results. Our strong
results were also underpinned by continuing favourable economic condi-
tions in both domestic and international markets.
Executing our initiatives
In Canada, we continued to strengthen our leadership position in most
major product categories by enhancing our products and services and
expanding our distribution network to better meet our client needs
and deepen client relationships. We are the fastest growing mutual
fund company in the country, based on net sales, and the leader in most
of our capital markets lines of business. We have leveraged our leading
position in capital markets to grow our mid-market businesses
and have become a major player in the Maple bond market, helping
global companies to issue Canadian dollar debt. The strength of our
brand, together with our leadership position in most major product
categories in Canada, provides us the financial strength to expand our
business globally.
In the U.S., we continued to build scale and capability in all our
major businesses through a combination of organic growth and acquisi-
tions. We announced two agreements (1) that will expand our banking
capabilities in the Southeast U.S. The acquisition of Atlanta-based Flag
Financial Corporation will significantly increase our banking presence in
key Georgia markets. In addition, we also recently announced an agree-
ment (1) to acquire 39 bank branches in Alabama owned by AmSouth
Bank, which will make us the seventh largest financial institution in
that state, as measured by deposits. These two acquisitions, which
are expected to close in early 2007, complement our de novo branch
openings in high-growth areas. We acquired Delaware-based American
Guaranty & Trust Company, enabling us to provide U.S. trust solutions
to high net worth clients. We also expanded our U.S. investment bank-
ing and fixed income capabilities. We announced an agreement (1) to
acquire the broker-dealer business and certain assets of Carlin Financial
Group of New York, which will provide our clients with a best-in-class
North American electronic execution platform. In November 2006, we
announced an agreement (1) to acquire Daniels & Associates, L.P., the
most active M&A advisor based on transactions to the cable, telecom
and broadcast industries in the U.S., enabling us to better serve our
investment banking clients. These two acquisitions are expected to
close in the first quarter of 2007.
Internationally, we expanded our distribution network, products
and services, and focused our expansion in fast-growing markets and
regions. During the year, we acquired Abacus Financial Services Group,
which expanded our client base and significantly strengthened our
wealth management services in the U.K. and Channel Islands. We also
recognized the growing importance of the Chinese market and have
made a number of strategic investments in China during the year. We
upgraded our representative banking office in Beijing to branch status,
enabling us to provide a wide range of services to retail and wholesale
clients. We were a co-lead manager of the institutional tranche for the
Industrial and Commercial Bank of China’s initial public offering (IPO).
We strategically reduced our exposure to property catastrophe reinsur-
ance during the year, as we ceased underwriting new business and
focused on managing the remaining claim liabilities related to previous
commitments.
In all our operations, we sought out opportunities for strong and
diversified earnings growth, while enhancing client satisfaction and
loyalty in a cost-efficient manner.
To ensure sound corporate governance, we continued to commit
ourselves to establishing and maintaining adequate disclosure controls
and procedures, as well as internal control over financial reporting in
order to provide reasonable assurance regarding the reliability of our
financial disclosure, and ultimately, maintaining our clients’ trust and
investors’ confidence. We have also dedicated significant resources and
management attention to the implementation of Basel II (International
Convergence of Capital Measurement and Capital Standards: A Revised
Framework), and have made significant progress towards compliance.
For further information, refer to the Accounting and control matters and
Risk management sections.
2006 Economic and market review
In 2006, North American economic conditions were generally favour-
able, benefiting from low but rising interest rates, solid yet slowing
housing markets, strong employment levels and higher wages, and
healthy growth in business investment. The Bank of Canada has
maintained the overnight rate at 4.25% since May after 7 consecutive
25 basis point (bps) increases, which served to help slow economic
activity and contain inflationary pressures. The Canadian economy
remained robust with an estimated growth rate of 2.8%, primarily
underpinned by strong domestic demand. These factors were partially
offset by a weakening in exports and manufacturing activities against
the backdrop of a strong Canadian dollar, high but falling energy prices,
slowing U.S. demand and competition from emerging markets. The U.S.
Federal Reserve has held the federal funds rate unchanged at 5.25%
since June after 17 consecutive rate increases taking into account slow-
ing economic growth and more contained inflationary pressures. Real
GDP in the U.S. grew by an estimated 3.4%, reflecting solid consumer
and business spending supported by strong balance sheets as well as
strength in the labour market, though partly restrained by the lagged
effects of increases in interest rates and high but falling energy prices.
Strong consumer lending was supported by high employment
levels, continued wage growth, and a relatively low interest rate envi-
ronment. Canadian households continued to redeploy their liquidity
into wealth management products, resulting in a shift from chequing
and savings accounts towards mutual funds and fixed-term deposits to
take advantage of higher returns. The favourable credit environment,
together with the solid debt-servicing capacity of households, continued
to support strong consumer credit quality.
Business lending remained solid, albeit in part offset by surpluses
of internally generated funds available for capital and inventory
investment. Strong business credit quality continued to reflect solid
corporate earnings and healthy balance sheets as well as a benign credit
environment.
Capital market conditions were generally favourable, character-
ized by high equity market volatility and strong performance of natural
resource-based equities. M&A activity in Canada rivaled the record
high set in 2000. Equity origination activity weakened in the year in part
reflecting slower equity market activity outside the resource sector,
while debt origination activity in the U.S. and Europe was also down
in part due to rising interest rates and the negative impact of the
strengthening of the Canadian dollar.
Specified items
A number of specific items were identified during 2006, including a
favourable resolution of an income tax audit related to prior years, an
adjustment to increase our credit card customer loyalty reward program
liability, and additional hurricane-related charges. These items had
minimal impacts on our overall results as their effects largely offset
each other.
(1)
These agreements are subject to customary closing conditions including regulatory approval.
Royal Bank of Canada Annual Report 2006
28 Management’s Discussion and Analysis
Specified items
(C$ millions)
Income tax reduction
Agreement termination fee
General allowance reversal
Net gain on the exchange of NYSE seats
for NYX shares
Amounts related to the transfer of IIS to
RBC Dexia IS
Credit card customer loyalty reward
program liability adjustment
Hurricane-related charges
Enron litigation provision
Business realignment charges (1)
Goodwill impairment (2)
Rabobank settlement costs
2006
2005
2004
Before-tax
After-tax
Before-tax
After-tax
Before-tax
After-tax
Segments
Table 2
$
–
–
175
$
–
–
113
$
n.a.
51
50
40
(16)
(72)
(61)
–
–
–
–
$
70
33
33
23
(19)
(47)
(61)
–
–
–
–
$
–
–
–
–
–
–
(203)
(591)
(58)
–
–
$
–
–
–
–
–
–
(203)
(326)
(37)
–
–
–
–
–
–
–
(192)
(130)
n.a.
Corporate Support
RBC Canadian Personal and Business
RBC Capital Markets and RBC Canadian
Personal and Business
RBC Capital Markets and RBC U.S. and
International Personal and Business
RBC Capital Markets
RBC Canadian Personal and Business
–
–
–
–
–
(125)
(130)
(74)
RBC Canadian Personal and Business
RBC Capital Markets
All segments
Discontinued operations
RBC Capital Markets
(1)
(2)
n.a.
For the year ended October 31, 2005, $29 million after-tax related to continuing operations and $8 million after-tax related to discontinued operations. For October 31, 2004, $116 million
after-tax related to continuing operations and $9 million after-tax related to discontinued operations.
Relates to RBC Mortgage Company which has been classified as discontinued operations.
not applicable
Income tax reduction
We realized a favourable resolution of an income tax audit related to
prior years, resulting in a $70 million reduction in income tax expense.
Agreement termination fee
We received $51 million related to the termination of an agreement.
General allowance reversal
We reversed $50 million of the general allowance related to our cor-
porate loan portfolio in RBC Capital Markets, in light of the continued
favourable credit conditions and the strengthening of the credit quality
of our corporate loan portfolio.
Net gain on the exchange of NYSE seats for NYX shares
The broker-dealer subsidiaries of RBC Capital Markets and RBC U.S. and
International Personal and Business received shares in NYSE Group
(NYX) in exchange for their respective New York Stock Exchange (NYSE)
seats. This exchange resulted in a net gain of $32 million being recog-
nized in RBC Capital Markets and a net gain of $8 million in RBC U.S.
and International Personal and Business.
Amounts related to the transfer of IIS to RBC Dexia IS
On January 2, 2006, we combined our Institutional & Investor Services
(IIS) business, previously part of RBC Capital Markets, with the Dexia
Fund Services business of Dexia Banque Internationale à Luxembourg
(Dexia) in return for a 50% joint venture interest in the new company,
RBC Dexia Investor Services (RBC Dexia IS). Net charges incurred
associated with the transfer of our IIS business to RBC Dexia IS were
$16 million before-tax ($19 million after-tax which included a write-off
of deferred taxes).
Credit card customer loyalty reward program liability adjustment
We made a $72 million adjustment to increase our credit card customer
loyalty reward program liability largely as a result of refinements
to our model assumptions to reflect higher customer utilization of
RBC Rewards points.
Hurricane-related charges
We recorded a $61 million (before- and after-tax) charge in our
insurance business for additional estimated net claims for damages
predominantly related to Hurricane Wilma which occurred in late
October 2005.
Overview of 2005
In 2005, our strong earnings were supported by our successful execu-
tion of client-focused initiatives and favourable economic conditions,
despite the negative impact of the Enron Corp. litigation-related
provision and charges for estimated net claims related to hurricanes
Katrina, Rita and Wilma.
In conjunction with our objective of improving revenue growth, we
realigned our organization into four segments, three business segments
and Corporate Support, to create a more efficient organization, which
better meets our client needs and enhances shareholder value. This
realignment also provided the opportunity to introduce new leadership
at the business segment levels, to eliminate redundant positions, to
streamline processes as well as to implement cost-containment initia-
tives. We also divested non-strategic operations and assets, expanded
our distribution network and product offerings, and sought out new
revenue growth opportunities while enhancing our service to clients in a
cost-efficient manner.
In 2005, the Canadian economy grew by 2.9%, reflecting strong
consumer and business spending underpinned by low interest rates,
robust employment growth and rising house prices, albeit partially
offset by the adverse effects of a stronger Canadian dollar and higher
energy prices. The U.S. economy recorded a growth rate of 3.2%, fuelled
by strong consumer spending amid solid job growth and surging house
prices, despite increases in interest rates and energy prices, and the
dampening impacts of hurricanes Katrina, Rita and Wilma. Business
investment in the U.S. was buoyed by both capital and inventory
investment. Strong consumer credit quality was supported by resilient
debt-servicing capacity and high household liquidity, while business
credit quality continued to reflect a favourable credit and business
environment with a general reduction in defaults and bankruptcies.
During 2005, we took actions to mitigate the uncertainties regard-
ing Enron-related matters, including the settlement of our part of the
MegaClaims bankruptcy lawsuit brought by Enron against us and a num-
ber of financial institutions for $31 million (US$25 million). In addition,
we settled an additional $29 million (US$24 million) for recognition of
claims against the Enron bankruptcy. We also established a provision of
$591 million (US$500 million) or $326 million after-tax (US$276 million
after-tax) for Enron litigation-related matters (Enron provision), including
a securities class action lawsuit brought on behalf of Enron securities
holders in a federal court in Texas.
In the fourth quarter of 2005, we recorded a charge of $203 million
(US$173 million) before- and after-tax for estimated net claims for
damages related to hurricanes Katrina, Rita and Wilma.
We completed the sale of Liberty Insurance Services Corporation
(LIS) to IBM Corporation (IBM), and entered into a long-term agreement
with IBM to perform key business processes for RBC Insurance U.S.
operations. This divestiture enabled us to focus on our core life insur-
ance business in the U.S.
We completed the sale of certain assets of RBC Mortgage Company
(RBC Mortgage) to Home123 Corporation, as RBC Mortgage was no
longer a core business to our U.S. operations.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 29
Overview of 2004
In 2004, we delivered solid earnings growth in most of our businesses,
improved credit quality and grew market shares in key products in
Canada. We launched our Client First approach to realign our opera-
tions, to grow revenue and to create long-term value for shareholders
and clients.
In 2004, the Canadian economy grew by 3.3% on declining interest
rates and strengthening consumer demand. The U.S. economy also
expanded rapidly at a growth rate of 3.9% against a low interest rate
environment and an improved labour market. The favourable credit
environment supported demand for consumer loans and investment
products, while business lending started to pick up with increased
investment in capital equipment and inventories.
During 2004, there were several important corporate develop-
ments and transactions. We incurred a $192 million business
realignment charge. We had a $130 million write-off of goodwill related
to RBC Mortgage Company. We also announced a $74 million after-tax
settlement net of a related reduction in compensation and tax
expense related to a dispute with Cooperatieve Centrale Raiffeisen-
Boerenleenbank, B.A. (Rabobank settlement costs). Our insurance
business acquired the Canadian operations of Provident Life and
Accident Insurance Company (UnumProvident), a wholly owned subsid-
iary of UnumProvident Corporation. We also acquired William R. Hough
& Co. Inc., a full-service investment firm specializing in fixed income
sales, trading and underwriting primarily in the Southeast U.S., which
provides synergies to our U.S. debt business in RBC Capital Markets. In
addition, we acquired the Provident Financial Group’s Florida banking
operations providing us with continued expansion opportunities in this
fast-growing market.
Financial performance 2006
Record net income of $4,728 million for the year ended October 31,
2006, was up $1,341 million, or 40%, from a year ago. Diluted EPS
were $3.59, up 40%, over the prior year. Return on common equity was
23.5%. Excluding the prior year Enron provision, net income increased
$1,015 million, or 27%, and diluted EPS were up $.77, or 27%, over the
prior year. Results excluding the prior year Enron provision are a non-
GAAP measure. For a reconciliation and further discussion, refer to the
Key financial measures (non-GAAP) section.
Continuing operations
Net income from continuing operations for 2006 was $4,757 million,
up $1,320 million, or 38%, from a year ago. Diluted EPS were $3.61,
up $1.00, or 38%, over the prior year. ROE was 23.3%. Excluding the
prior year Enron provision, net income increased $944 million, or 26%
and diluted EPS were up $.75, or 26%, over the prior year. The increase
largely reflected strong earnings momentum and solid growth across all
our business segments. The reduction in our effective income tax rate
and lower hurricane-related charges in the current year, also contributed
to the improvement in our results. These factors were partially offset by
higher variable compensation reflecting stronger business performance
and higher costs related to our growth initiatives. This growth was
achieved despite the $125 million reduction in the translated value of our
U.S. dollar-denominated earnings due to the stronger Canadian dollar.
Total revenue increased $1,453 million, or 8%, from a year ago,
largely due to record trading results on improved market conditions
and solid business growth in our wealth management and banking
businesses reflecting our successful execution of growth initiatives and
favourable market conditions. Strong M&A activity and the net gain
on the exchange of our NYSE seats for NYX shares also contributed
to the increase. These factors were partially offset by a reduction of
$425 million due to the negative impact of the stronger Canadian dollar
on translated U.S. dollar-denominated revenue, lower debt and equity
origination activity and certain favourable items recorded in the prior
year. These items included the gain on the sale of an Enron-related
claim, a cumulative accounting adjustment related to our ownership
interest in an investment and the gain on sale of LIS.
Non-interest expense increased $138 million, or 1%, compared to
the prior year largely reflecting the prior year Enron provision. Excluding
the Enron provision, non-interest expense increased $729 million, or
7%. The increase largely reflected higher variable compensation pri-
marily in RBC Capital Markets and our wealth management businesses
reflecting strong business performance. Higher costs in support of our
business growth initiatives also contributed to the increase. These
costs included a higher level of personnel in our distribution network,
increased costs related to technology development, higher marketing
and advertising costs and a higher number of branches. The increase
in non-interest expense was partially offset by the $215 million reduc-
tion in the translated value of U.S. dollar-denominated expenses due to
the stronger Canadian dollar and the prior year settlement of the Enron
MegaClaims bankruptcy lawsuit.
Royal Bank of Canada Annual Report 2006
30 Management’s Discussion and Analysis
Total provision for credit losses decreased $26 million, or 6%, from
a year ago. The decrease largely reflected a $50 million reversal of the
general allowance this year, the favourable impact of the higher level of
securitized credit cards, and the continued strong credit quality of our
U.S. loan portfolio. The prior year also included our 50% proportionate
share of a provision booked at Moneris Solutions, Inc. (Moneris). These
factors were partially offset by higher provisions for our Canadian
personal loan and small business portfolios, as well as lower recoveries
in our corporate and agriculture portfolios.
Insurance policyholder benefits, claims and acquisition expense
decreased $116 million, or 4%, compared to the prior year. The
decrease primarily reflected a $142 million (before- and after-tax)
reduction in hurricane-related charges for estimated net claims, as we
recorded $203 million in 2005 related to hurricanes Katrina, Rita and
Wilma and $61 million for additional claims in 2006 predominantly
related to Hurricane Wilma. The favourable impact on the translated
value of U.S. dollar-denominated actuarial liabilities as a result of the
stronger Canadian dollar and lower U.S. annuity sales also contributed
to the decrease. These factors were partially offset by higher benefits
and claims costs associated with business growth and a reduced level
of net favourable actuarial liability adjustments this year.
Discontinued operations
The net loss for discontinued operations for 2006 was $29 million com-
pared to a net loss of $50 million for 2005. The current period net loss
mainly reflected charges related to the wind-down of RBC Mortgage. The
prior year net loss reflected operating losses prior to the sale of certain
assets of RBC Mortgage to Home123 Corporation on September 2, 2005,
as well as subsequent charges related to the sale and wind-down of
operations, including the costs of closing RBC Mortgage’s Chicago office
and certain branches, employee incentive payments and the writedown
of certain assets. As at October 31, 2006, we have substantially
disposed of the assets and obligations related to RBC Mortgage that
were not transferred to Home123 Corporation.
Capital ratios
The Tier 1 capital ratio of 9.6% was unchanged from a year ago as
strong internal capital generation, the reclassification of innovative capi-
tal from Tier 2, and the net issuance of preferred shares were offset by
share repurchases and robust balance sheet growth. The Total capital
ratio of 11.9% was down 120 bps from the previous year largely reflect-
ing our redemption of subordinated debentures in 2006.
Impact of U.S. vs. Canadian dollar
The translated value of our U.S. dollar-denominated results is impacted
by fluctuations in the U.S./Canadian dollar exchange rate. Table 3
depicts the effect of translating current year results at the current
exchange rate in comparison to the historical period’s exchange rate.
We believe this provides the reader with the ability to assess the
underlying results on a more comparable basis, particularly given the
magnitude of the recent changes in the exchange rate and the resulting
impact on our results.
Impact of U.S. dollar vs. Canadian dollar
Table 3
(C$ millions, except per share amounts)
Reduced total revenue
Reduced non-interest expense
Reduced net income from
continuing operations
Reduced net income
2006 vs.
2005
2005 vs.
2004
$
425 $
215
125
123
420
260
65
61
.05
.05
8%
Reduced diluted EPS – continuing operations $
Reduced diluted EPS
$
.10 $
.09 $
Percentage change in average US$
equivalent of C$1.00 (1)
7%
(1)
Average amounts are calculated using month-end spot rates for the period.
In 2006, the Canadian dollar appreciated 7% on average relative to
the U.S. dollar from the prior year, resulting in a $123 million decrease
in the translated value of our U.S. dollar-denominated net income
and a reduction of $.09 on our current year’s diluted EPS. U.S. dollar-
denominated net income from continuing operations was reduced by
$125 million and diluted EPS by $.10 compared to the prior year.
2006 Performance vs. objectives
Table 4
(C$ millions, except per share amounts)
Diluted earnings per share (EPS) growth (2)
Return on common equity (ROE)
Revenue growth
Operating leverage (3)
Portfolio quality (4)
Capital management: Tier 1 capital ratio (5)
Dividend payout ratio
2006
Objectives (1)
2006
Performance
20%+
20%+
6–8%
>3%
.40–.50%
8%+
40–50%
40%
23.5%
8%
1%
.23%
9.6%
40%
(1)
(2)
(3)
(4)
(5)
Our 2006 financial objectives were established late in fiscal 2005 and reflected our
economic and business outlook for 2006. We established objectives for 2006 to position
us as a top quartile performer with respect to total return to shareholders relative to our
Canadian and U.S. peers. At the time these objectives were established, we expected an
average Canadian dollar value of US$.817 in 2006; however, the actual dollar value was
US$.883.
Based on 2005 total reported diluted EPS of $5.13, which has been retroactively adjusted
to $2.57 to reflect our stock dividend paid on April 2, 2006.
Operating leverage is the difference between our revenue growth rate and the non-interest
expense growth rate. Our 2006 objective for operating leverage was based on 2005
non-interest expense excluding the Enron provision of $591 million.
Ratio of specific provision for credit losses to average loans and acceptances.
Calculated using guidelines issued by the OSFI.
2006 Annual objectives
In 2006, we met all but one of our objectives with the exception of our
operating leverage objective. Diluted EPS growth was 40% (27% exclud-
ing the Enron provision) and ROE was 23.5%, exceeding their targets of
diluted EPS growth of 20% plus and ROE of 20% plus, largely reflecting
strong earnings growth. Revenue growth of 8% was at the top end of our
range of 6% to 8%, despite the negative impact of a stronger Canadian
dollar on our U.S. dollar- and GBP-denominated revenue, primarily due
to strong trading revenue and growth in our banking and wealth man-
agement businesses. Favourable credit conditions in 2006 continued to
support our strong credit quality ratio of .23%, which was significantly
better than our objective of .40% to .50%. We also maintained our solid
capital position with a Tier 1 capital ratio of 9.6%, which was signifi-
cantly above our target of 8% plus, due to strong earnings generation
and net capital issuances. Our dividend payout ratio of 40% met our
target payout ratio of 40% to 50% due in large part to the 22% increase
in dividends during the year. However, we missed our operating lever-
age target for the year as it was impacted by our business mix and
certain factors which contribute to our earnings growth but were not
appropriately captured in this measure. These factors included the
impact of tax-advantaged sources, consolidated VIEs and insurance-
related revenue and expense. Accordingly, we have adjusted our 2007
operating leverage calculation to incorporate these factors in order to
more appropriately reflect the performance of our businesses going for-
ward. If this new approach was applied to our 2006 results, our adjusted
operating leverage would have been 2.5% (1).
Medium-term objective
Commencing in 2006, our medium-term objective is to consistently
achieve top quartile (2) total shareholder return (TSR) (3) compared to
our Canadian and U.S. peers. This medium-term objective increases our
focus on our priority to maximize shareholder value and requires us to
consider both our current performance and our investment in higher
return businesses that will provide sustainable competitive advantage
and stable earnings growth.
Our 5-year (4) average annual TSR of 20% (28% in U.S. dollars)
ranks us in the top quartile against our peer group and compares
favourably with the 5-year average annual TSR for our peer group of
8% (16% in U.S. dollars). Our performance reflects our strong financial
results, including returns on our investment in our businesses, and
management of our risks which has allowed us to successfully meet
most of our annual earnings, capital and credit quality objectives over
the last two years.
Dividends paid over the five-year period have increased at an
average annual compounded rate of 16%.
(1)
(2)
(3)
(4)
Adjusted operating leverage is a non-GAAP financial measure. For a further discussion
and reconciliation, refer to the Key financial measures (non-GAAP) section.
Versus seven large Canadian financial institutions (Manulife Financial Corporation,
Bank of Nova Scotia, TD Bank Financial Group, BMO Financial Group, Sun Life Financial
Inc., Canadian Imperial Bank of Commerce and National Bank of Canada) and 13 U.S.
financial institutions (Bank of America, JP Morgan Chase & Co., Wells Fargo & Company,
Wachovia Corporation, US Bancorp, Sun Trust Banks, Inc., The Bank of New York, BB&T
Corporation, Fifth Third Bancorp, National City Corporation, The PNC Financial Services
Group, KeyCorp and Northern Trust Corporation).
Total shareholder return is calculated based on share price appreciation from October 31,
2001 to October 31, 2006 plus reinvested dividend income over this period.
This refers to the period October 31, 2001 to October 31, 2006.
Five-year average annual total shareholder return (C$)
30%
24%
18%
12%
6%
0%
RBC
Canadian peer group
Total peer group
U.S. peer group
Five-year average annual total shareholder return (US$)
30%
24%
18%
12%
6%
0%
RBC
Canadian peer group
Total peer group
U.S. peer group
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 31
Outlook and objectives for 2007
Economic outlook
The Canadian economy is expected to remain strong, with real GDP
growth of 2.7% in 2007, compared to an estimated 2.8% in 2006.
Domestic demand is likely to remain the key driver of economic growth.
Consumer spending should continue to benefit from a solid labour mar-
ket, good household balance sheet conditions, relatively stable interest
rates and tax relief, while solid business investment in capital goods
underpinned by a firm currency and strong corporate balance sheets
is anticipated. We expect the Bank of Canada to ease interest rates in
the latter part of 2007 taking into account an anticipated slowing of
economic growth in part reflecting the waning U.S. demand for Canadian
exports and the expectation that inflation will fall in line with the Bank of
Canada’s target.
Real GDP growth in the U.S. is expected to slow to 2.6% in 2007
from an estimated 3.4% for 2006, largely attributable to slower growth
in consumer spending and a cooling housing market. Growth in con-
sumer spending is projected to slow in response to the lagged effects of
higher interest rates and lower gains in household wealth amid a soften-
ing housing market. However, a major slowdown in consumer spending
is unlikely as strong household liquidity and tight labour market condi-
tions should continue to support growth. Business investment should
remain solid, aided by healthy corporate balance sheets. The U.S. trade
deficit is likely to recover moderately, reflecting increasing demand
from foreign nations given firm global growth, the delayed impact of the
weakening U.S. dollar on exports, and declining import growth as the
economy gears down. We anticipate the U.S. Federal Reserve to lower
interest rates in the second half of 2007 in response to slower economic
growth and more contained inflationary pressures.
Business outlook
Consumer lending growth is expected to moderate in 2007, largely
driven by lower construction and resale activity in housing markets and
somewhat slower growth in consumer spending. We expect business
lending to remain solid with ongoing business investment in inventories,
machinery and equipment, albeit in part constrained by continued high
corporate liquidity.
While a gradual deterioration in credit quality is anticipated, we
expect consumer and business credit quality to remain solid in a histori-
cal context, with an anticipated increase in provision for credit losses
primarily resulting from higher loan volume and lower recoveries.
The outlook for capital markets globally is expected to remain
relatively favourable with stable interest rates and improving equity
markets. We expect a modest rebound in origination activity, which will
be partially offset by a weakening in M&A activity from a near historical
high in 2006. Equity origination activity is expected to increase from a
relatively slow 2006 as markets other than the resource and income
trust sectors should improve, while debt origination is expected to
benefit from municipal banking activity in new sectors and growth in
U.S. dollar distribution. In addition, core lending activities are expected
to increase as spread compression is showing signs of abating, while
term is extending.
2007 Objectives
Diluted earnings per share (EPS) growth
Adjusted operating leverage (1)
Return on common equity (ROE)
Tier 1 capital ratio (2)
Dividend payout ratio
Table 5
10%+
>3%
20%+
8%+
40–50%
(1)
(2)
Adjusted operating leverage is the difference between our revenue growth rate (as
adjusted) and non-interest expense growth rate (as adjusted). Revenue is based on a
taxable equivalent basis and excludes consolidated VIEs, accounting adjustments related
to the new Financial Instruments Standard and Insurance-related revenue. Non-interest
expense excludes Insurance-related expense. This is a non-GAAP measure. For a further
discussion and reconciliation, refer to the Key financial measures (non-GAAP) section.
Calculated using guidelines issued by the OSFI.
Our primary objective continues to focus on providing top quartile total
shareholder return (TSR) (1) relative to our North American peers (2). This
medium-term objective requires our focus on both current performance
as well as prudent investment in higher return businesses that will
provide sustainable competitive advantage and stable earnings growth.
For 2007, our objectives have been established based on our
economic and business outlooks, including a robust Canadian economy
with continuing strong consumer spending and solid business invest-
ment. In the U.S., we expect a moderately slower economy, largely
attributable to slightly weaker growth in consumer spending and a
cooling housing market. We expect to continue to benefit from relatively
favourable equity markets, a relatively stable interest rate environment,
and strong domestic fiscal conditions.
Our 2007 diluted EPS growth objective of 10% plus is lower than
our 2006 objective, as our 2005 earnings included the impact of the
Enron provision and charges for estimated net claims related to hur-
ricanes Katrina, Rita and Wilma. Our commitment to strong revenue
growth and prudent cost containment continues to be encapsulated in
our adjusted operating leverage objective, which remains greater than
3%. However, we have adjusted our operating leverage calculation for
2007 to more appropriately reflect the performance of our businesses,
and to address the factors that were not appropriately captured in the
ratio previously. The adjusted operating leverage ratio now includes the
gross up adjustment for certain tax-advantaged income (Canadian tax-
able corporate dividends), and excludes our insurance-related revenue
and expense, amounts related to the consolidation of variable interest
entities (VIEs), and accounting adjustments related to the new Financial
Instruments Standard. Our objective for ROE remains unchanged at 20%
plus. We also retained our Tier 1 capital and dividend payout ratio tar-
gets, which reflect sound and effective management of capital resources.
Our Tier 1 capital ratio target remains greater than 8%, which compares
favourably to the target of 7% set by our primary regulator (OSFI). Our
dividend payout ratio also remains unchanged at 40% to 50%. Our rev-
enue growth target is reflected in our earnings per share and adjusted
operating leverage objectives, and we believe our portfolio quality is ade-
quately captured in our profitability and other objectives. Accordingly,
we do not have 2007 objectives for revenue and credit quality.
(1)
(2)
Total shareholder return is calculated based on share price appreciation plus dividend
income.
Includes seven large Canadian financial institutions (Manulife Financial Corporation,
Bank of Nova Scotia, TD Bank Financial Group, BMO Financial Group, Sun Life Financial
Inc., Canadian Imperial Bank of Commerce and National Bank of Canada) and 13 U.S.
financial institutions (Bank of America, JP Morgan Chase & Co., Wells Fargo & Company,
Wachovia Corporation, US Bancorp, Sun Trust Banks, Inc., The Bank of New York, BB&T
Corporation, Fifth Third Bancorp, National City Corporation, The PNC Financial Services
Group, KeyCorp and Northern Trust Corporation).
Royal Bank of Canada Annual Report 2006
32 Management’s Discussion and Analysis
Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies and estimates
Our significant accounting policies are contained in Note 1 to the
Consolidated Financial Statements. Certain of these policies, as well as
estimates made by management in applying such policies, are recog-
nized as critical because they require us to make particularly subjective
or complex judgments about matters that are inherently uncertain and
because of the likelihood that significantly different amounts could be
reported under different conditions or using different assumptions. Our
critical accounting policies and estimates relate to the allowance for credit
losses, fair value of financial instruments, securitization, variable interest
entities, pensions and other post-employment benefits, income taxes, and
other-than-temporary impairment of investment securities. Our critical
accounting policies and estimates have been reviewed and approved by
our Audit Committee, in consultation with management, as part of their
review and approval of our significant accounting policies and estimates.
Allowance for credit losses
The allowance for credit losses represents management’s estimate of
identified credit-related losses in the portfolio, as well as losses that
have been incurred but are not yet identifiable at the balance sheet
date. The allowance is established to cover the lending portfolio includ-
ing loans, acceptances, letters of credit and guarantees, and unfunded
commitments, as at the balance sheet date. The allowance for credit
losses is comprised of the specific allowance and the general allowance.
The specific allowance is determined through management’s identifica-
tion and determination of losses related to impaired loans. The general
allowance is determined on a quarterly basis through management’s
assessment of probable losses in the remaining portfolio.
The process for determining the allowances involves quantitative
and qualitative assessments using current and historical credit informa-
tion. Our lending portfolio, excluding credit card balances as they are
directly written off after payments are 180 days past due, is reviewed on
an ongoing basis to assess whether any borrowers should be classified
as impaired and whether an allowance or write-off is required. The pro-
cess inherently requires the use of certain assumptions and judgments
including: (i) assessing the impaired status and risk ratings of loans;
(ii) estimating cash flows and collateral values; (iii) developing default
and loss rates based on historical and industry data; (iv) adjusting loss
rates and risk parameters based on the relevance of historical experi-
ence given changes in credit strategies, processes and policies;
(v) assessing the current credit quality of the portfolio based on credit
quality trends in relation to impairments, write-offs and recoveries,
portfolio characteristics and composition; and (vi) determining the
current position in the economic and credit cycles. Changes in these
assumptions or using other reasonable judgments can materially affect
the allowance level and thereby our net income.
Specific allowances
Specific allowances are established to absorb probable losses on
impaired loans. Loan impairment is recognized when, based on man-
agement’s judgment, there is no longer reasonable assurance that all
interest and principal payments will be made in accordance with the
loan agreement.
For large business and government portfolios, which are continu-
ously monitored, an account is classified as impaired based on our
evaluation of the borrower’s overall financial condition, its available
resources and its propensity to pay amounts as they come due. A specific
allowance is then established on individual accounts that are classified
as impaired, using management’s judgment relating to the timing of
future cash flow amounts that can be reasonably expected from the bor-
rower, financially responsible guarantors and the realization of collateral.
The amounts expected to be recovered are reduced by estimated collec-
tion costs and discounted at the effective interest rate of the obligation.
For homogeneous portfolios, including residential mortgages and
personal and small business loans, accounts are classified as impaired
based on contractual delinquency status, generally 90 days past due.
The estimation of specific allowance on these accounts is based on
formulas that apply product-specific net write-off ratios to the related
impaired amounts. The net write-off ratios are based on historical loss
experience, adjusted to reflect management’s judgment relating to
recent credit quality trends, portfolio characteristics and composition,
and economic and business conditions. Credit card balances are directly
written off after payments are 180 days past due. Personal loans are
generally written off at 150 days past due.
General allowance
The general allowance is established to absorb probable losses on
accounts in the lending portfolio that have not yet been specifically
classified as impaired. This estimation is based on a number of assump-
tions including: (i) the level of unidentified problem loans given current
economic and business conditions; (ii) the timing of the realization of
impairment; (iii) the committed amount that will be drawn when the
account is classified as impaired; and (iv) the ultimate severity of loss.
In determining the appropriate level of general allowance, management
first employs statistical models using historical loss rates and risk
parameters to estimate a range of probable losses over an economic
cycle. Management then considers changes in credit process including
underwriting, limit setting and the workout process in order to adjust
historical experience to better reflect the current environment. In addi-
tion, current credit information including portfolio composition, credit
quality trends and economic and business information are assessed to
determine the appropriate allowance level.
For large business and government loans, the general allowance
level is estimated based on management’s judgment of business and
economic conditions, historical loss experience, the impact of policy
changes and other relevant factors. The range of loss is derived through
the application of a number of risk parameters related to committed
obligations. The key parameters used are probability of default (PD),
loss given default (LGD) and usage given default (UGD). PDs are
delineated by borrower type and risk rating; LGDs are largely based
on seniority of debt, collateral security and client type, and UGDs are
applied based on risk rating. These parameters are based on long-term
historical loss experience (default migration, loss severity and exposure
at default), supplemented by industry studies and are updated on a
regular basis. This approach allows us to generate a range of potential
losses over an economic cycle. One of the key judgmental factors that
influence the loss estimate for this portfolio is the application of the
internal risk rating framework, which relies on our quantitative and qual-
itative assessments of a borrower’s financial condition in order to assign
it an internal credit risk rating similar to those used by external rating
agencies. Any material change in the above parameters or assumptions
would affect the range of probable credit losses and consequently may
affect the general allowance level.
For homogeneous loans, including residential mortgages, credit
cards, and personal and small business loans, probable losses are
estimated on a portfolio basis. Long-term historical loss experience is
applied to current outstanding loans to determine a range of probable
losses over an economic cycle. In determining the general allowance
level, management also considers the current portfolio credit quality
trends, business and economic conditions, the impact of policy and
process changes, and other supporting factors. In addition, the general
allowance includes a component for the model limitations and impreci-
sion inherent in the allowance methodologies.
Any fundamental change in methodology is subject to independent
vetting and review.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 33
Total allowance for credit losses
Based on the procedures discussed above, management is of the
opinion that the total allowance for credit losses of $1,486 million is
adequate to absorb estimated credit losses incurred in the lending port-
folio as at October 31, 2006. This amount includes $77 million classified
in Other liabilities, which relates to letters of credit and guarantees and
unfunded commitments.
Fair value of financial instruments
In accordance with GAAP, certain financial instruments are carried on
our balance sheet at their fair value. These financial instruments com-
prise securities held in our trading portfolio, obligations related to
securities sold short and derivative financial instruments (excluding
non-trading derivatives qualifying for hedge accounting). At October 31,
2006, approximately $184 billion, or 35%, of our financial assets and
$80 billion, or 19%, of our financial liabilities were carried at fair value
($164 billion, or 36%, of financial assets and $75 billion, or 19%, of
financial liabilities at October 31, 2005). Note 2 to our Consolidated
Financial Statements provides disclosure of the estimated fair value of
all our financial instruments at October 31, 2006.
Fair value is defined as the amount at which a financial instrument
could be bought or sold in a current transaction, other than in a forced
or liquidation sale, between knowledgeable and willing parties in an
arm’s length transaction under no compulsion to act. The best evidence
of fair value is quoted prices in an active market. Where quoted prices
are not available for a particular financial instrument, we use the quoted
price of a financial instrument with similar characteristics and risk profile
or internal or external valuation models using market-based inputs to
estimate the fair value.
The determination of fair value for actively traded financial instru-
ments that have quoted market prices or readily observable model-input
parameters requires minimal subjectivity. Management’s judgment is
required, however, when the observable market prices and parameters
do not exist. In addition, management exercises judgment when
establishing market valuation adjustments for liquidity when we believe
the potential exists that the amount realized on sale will be less than
the estimated fair value due to insufficient liquidity over a short period
of time. This includes adjustments calculated when market prices are
not observable due to insufficient trading volume or a lack of recent
trades in a less active or inactive market. In addition, liquidity adjust-
ments are calculated to reflect the cost of unwinding a larger than
normal market risk.
The majority of our trading securities portfolio and obligations
related to securities sold short comprise or relate to actively traded debt
and equity securities, which are carried at fair value based on avail-
able quoted prices. As few derivative financial instruments are actively
quoted, we rely primarily on internally developed pricing models and
established industry-standard pricing models, such as Black-Schöles, to
determine fair value. In determining the assumptions to be used in our
pricing models, we look primarily to external readily observable market
inputs including factors such as interest rate yield curves, currency rates
and price and rate volatilities as applicable. However, certain derivative
financial instruments are valued using significant unobservable market
inputs such as default correlations, among others. These inputs are
subject to significantly more quantitative analysis and management
judgment. Where input parameters are not based on market observable
data, we defer the initial trading profit until the amounts deferred
become realized through the receipt and/or payment of cash or once the
input parameters are observable in the market. We also record fair value
adjustments to account for measurement uncertainty due to model risk
and parameter uncertainty when valuing complex or less actively traded
financial instruments. For further information on our derivative instru-
ments, refer to Note 7 to our Consolidated Financial Statements.
The following table summarizes our significant financial assets and
liabilities carried at fair value by valuation methodology at October 31,
2006, and October 31, 2005.
Assets and liabilities carried at fair value by valuation methodology
Table 6
(C$ millions, except percentage amounts)
Fair value
Based on
Quoted market prices
Pricing models with significant observable
market parameters
Pricing models with significant unobservable
market parameters
2006
2005
Financial assets
Financial liabilities
Financial assets
Financial liabilities
Trading
securities
Derivatives
Obligations
related to
securities
sold short
Derivatives
Trading
securities
Derivatives
Obligations
related to
securities
sold short
Derivatives
$ 147,237
$ 37,008
$ 38,252
$ 41,728 $ 125,760
$ 38,341
$ 32,391
$ 42,404
87%
–
97%
–
85%
–
93%
13
–
100
–
3
–
100
15
–
–
99
1
7
–
–
100
–
100%
100%
100%
100%
100%
100%
100%
100%
2006 vs. 2005
The increases of $21.5 billion in Trading securities and $5.9 billion in
Obligations related to securities sold short in 2006 are primarily due
to our equity and bond securities held related to our proprietary equity
arbitrage and fixed income trading businesses, where we offset the risks
from our securities holdings by short selling other securities that are
of similar risks to those in our portfolios. These activities are consistent
with our strategy for these businesses and the increases in 2006 are
within the approved risk limits.
The determination of fair value where quoted market prices are not
available and the identification of appropriate valuation adjustments
require management judgment and are based on quantitative research
and analysis. Our risk management group is responsible for establishing
our valuation methodologies and policies, which address the use and
calculation of valuation adjustments. These methodologies are reviewed
on an ongoing basis to ensure that they remain appropriate. Risk
management’s oversight in the valuation process also includes ensuring
all significant financial valuation models are strictly controlled and
regularly recalibrated and vetted to provide an independent perspective.
During the year, there was no significant change to our methodologies
for determining fair value, including those for establishing any valuation
adjustments. Refer to the Risk management section for further detail on
the sensitivity of financial instruments used in trading and non-trading
activities.
As outlined in Note 1 to our Consolidated Financial Statements,
changes in the fair value of Trading securities and Obligations related
to securities sold short are recognized as Trading revenue in
Non-interest income and changes in the fair value of our trading and
non-trading derivatives that do not qualify for hedge accounting are
recognized in Non-interest income.
Royal Bank of Canada Annual Report 2006
34 Management’s Discussion and Analysis
Securitization
We periodically securitize residential mortgages, credit card receivables
and commercial mortgage loans by selling them to special purpose enti-
ties (SPEs) or trusts that issue securities to investors. Some of the key
accounting determinations in a securitization of our loans are whether
the transfer of the loans meets the criteria required to be treated as a
sale and, if so, the valuation of our retained interests in the securitized
loans. Refer to Note 1 to our Consolidated Financial Statements for a
detailed description of the accounting policy on loan securitization.
When we securitize loans and retain an interest in the securitized
loans, it is a matter of judgment whether the loans have been legally
isolated. We obtain legal opinions where required to establish legal
isolation of the transferred loans. We often retain interests in securi-
tized loans such as interest-only strips, servicing rights or cash reserve
accounts. Where quoted market prices are not available, the valuation
of retained interests in sold assets is based on our best estimate of sev-
eral key assumptions such as the payment rate of the transferred loans,
weighted average life of the prepayable receivables, excess spread,
expected credit losses and discount rate. The fair value of such retained
interests calculated using these assumptions affects the gain or loss
that is recognized from the sale of the loans. Refer to Note 5 to our
Consolidated Financial Statements for the volume of securitization activ-
ities of our loans, the gain or loss recognized on sale and a sensitivity
analysis of the key assumptions used in valuing our retained interests.
Another key accounting determination is whether the SPE that
is used to securitize and sell our loans is required to be consolidated.
As described in Note 6 to our Consolidated Financial Statements, we
concluded that none of the SPEs used to securitize our financial assets
should be consolidated.
Variable interest entities
We adopted the Canadian Institute of Chartered Accountants (CICA)
Accounting Guideline 15, Consolidation of Variable Interest Entities
(AcG-15) on November 1, 2004, which provides guidance on applying
the principles of consolidation to certain entities defined as variable
interest entities (VIEs). Where an entity is considered a VIE, the Primary
Beneficiary is required to consolidate the assets, liabilities and results
of operations of the VIE. The Primary Beneficiary is the entity that is
exposed, through variable interests, to a majority of the VIE’s expected
losses (as defined in AcG-15) or is entitled to a majority of the VIE’s
expected residual returns (as defined in AcG-15), or both.
We use a variety of complex estimation processes involving both
qualitative and quantitative factors to determine whether an entity is a
VIE, and to analyze and calculate its expected losses and its expected
residual returns. These processes involve estimating the future cash
flows and performance of the VIE, analyzing the variability in those cash
flows, and allocating the losses and returns among the identified parties
holding variable interests to determine who is the Primary Beneficiary.
In addition, there is a significant amount of judgment exercised in
interpreting the provisions of AcG-15 and applying them to our specific
transactions.
AcG-15 applies to a variety of our businesses, including our
involvement with multi-seller conduits we administer, credit investment
products and structured finance transactions. For further details on our
involvement with VIEs, refer to the Off-balance sheet arrangements sec-
tion and Note 6 to our Consolidated Financial Statements.
Pensions and other post-employment benefits
We sponsor a number of defined benefit and defined contribution plans
providing pension and other benefits to eligible employees after retire-
ment. These plans include registered pension plans, supplemental
pension plans and health, dental, disability and life insurance plans.
The pension plans provide benefits based on years of service, contribu-
tions and average earnings at retirement.
Due to the long-term nature of these plans, the calculation of
benefit expenses and obligations depends on various assumptions
such as discount rates, expected rates of return on assets, health care
cost trend rates, projected salary increases, retirement age, mortality
and termination rates. Discount rate assumption is determined using a
yield curve of AA corporate debt securities. All other assumptions are
determined by management and are reviewed annually by the actuaries.
Actual experience that differs from the actuarial assumptions will affect
the amounts of benefit obligation and expense. The weighted average
assumptions used and the sensitivity of key assumptions are presented
in Note 20 to our Consolidated Financial Statements.
Income taxes
Management exercises judgment in estimating the provision for income
taxes. We are subject to income tax laws in various jurisdictions where
we operate. These complex tax laws are potentially subject to different
interpretations by the taxpayer and the relevant tax authority. The
provision for income taxes represents management’s interpretation of
the relevant tax laws and its estimate of current and future income tax
implications of the transactions and events during the period. A future
income tax asset or liability is determined for each timing difference
based on the future tax rates that are expected to be in effect and man-
agement’s assumptions regarding the expected timing of the reversal of
such temporary differences.
Other-than-temporary impairment of investment securities
Investments in equity and debt securities which are purchased for
longer term purposes are classified as Investment account securities.
These securities may be sold in response to or in anticipation of changes
in interest rates and resulting prepayment risk, changes in foreign
currency risk, changes in funding sources or terms, or to meet liquidity
needs. Investment account equity securities, including non-public and
venture capital equity securities for which representative market quotes
are not readily available, are carried at cost. Investment account debt
securities are carried at amortized cost.
Debt and publicly traded equity investment securities are reviewed
at each quarter-end to determine whether the fair value is below its car-
rying value. Investments in private companies’ securities with carrying
value greater than $5 million are reviewed semi-annually to determine
whether the fair value is below its carrying value. All other strategic
investments in equity securities are reviewed, at a minimum, on an annual
basis to determine whether the fair value is below its carrying value.
When the fair value of any of our Investment account securities has
declined below its carrying value, management is required to assess
whether the decline is other than temporary. In making this assessment,
we consider factors such as the type of investment, the length of time
and extent to which the fair value has been below the carrying value, the
financial and credit aspects of the issuer, and our intent and ability to
hold the investment long enough to allow for any anticipated recovery.
The decisions to record a writedown, its amount and the period in
which it is recorded could change if management’s assessment of those
factors is different. As at October 31, 2006, total unrealized losses on
Investment account securities for which the carrying value exceeded
fair value were $294 million. Of this amount, $219 million was related to
securities for which the carrying value had exceeded fair value
for 12 months or more. During 2006, we recorded $24 million in
Non-interest income on the Consolidated Statement of Income for
the recognition of other-than-temporary impairment of Investment
account securities.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 35
Hedges
Section 3865 specifies the criteria under which hedge accounting can
be applied and how hedge accounting should be executed for each of
the permitted hedging strategies: fair value hedges, cash flow hedges
and hedges of a foreign currency exposure of a net investment in a
self-sustaining foreign operation. In a fair value hedging relationship,
the carrying value of the hedged item will be adjusted by gains or
losses attributable to the hedged risk and recognized in Net income.
The change in the fair value of the hedged item, to the extent that the
hedging relationship is effective, will be offset by changes in the fair
value of the hedging derivative. In a cash flow hedging relationship, the
effective portion of the change in the fair value of the hedging deriva-
tive will be recognized in OCI. The ineffective portion will be recognized
in Net income. The amounts recognized in AOCI will be reclassified to
Net income in the periods in which Net income is affected by the vari-
ability in the cash flows of the hedged item. In hedging a foreign currency
exposure of a net investment in a self-sustaining foreign operation, the
effective portion of foreign exchange gains and losses on the hedging
instruments will be recognized in OCI and the ineffective portion is rec-
ognized in Net income.
For hedging relationships existing prior to adopting Section 3865
that are continued and qualify for hedge accounting under the
new standard, the transaction accounting is as follows: (i) Fair value
hedges – any gain or loss on the hedging instrument is recognized in
the opening balance of retained earnings on transition and the carrying
amount of the hedged item is adjusted by the cumulative change in fair
value that reflects the designated hedged risk and the adjustment is
included in the opening balance of retained earnings on transition;
(ii) Cash flow hedges and hedges of a net investment in a self-sustaining
foreign operation – any gain or loss on the hedging instrument that is
determined to be the effective portion is recognized in AOCI and the
ineffectiveness in the past periods is included in the opening balance
of retained earnings on transition.
Deferred gains or losses on the hedging instrument with respect
to hedging relationships that were discontinued prior to the transition
date but qualify for hedge accounting under the new standards will be
recognized in the carrying amount of the hedged item and amortized
to Net income over the remaining term of the hedged item for fair value
hedges, and for cash flow hedges it will be recognized in AOCI and
reclassified to Net income in the same period during which the hedged
item affects Net income. However, for discontinued hedging relation-
ships that do not qualify for hedge accounting under the new standards,
the deferred gains and losses are recognized in the opening balance of
retained earnings on transition.
In October 2006, the CICA’s Accounting Standards Board issued
a Board Notice, Hedges, Section 3865, in order to provide clarifying
guidance with respect to the transition provisions for deferred gains
or losses on continuing and discontinued hedging relationships. The
amended version of Section 3865 incorporating the clarifying guidance
is expected to be issued in December 2006, with early adoption permit-
ted. We have adopted the proposed amendments on November 1, 2006.
Future changes in accounting policies
Financial Instruments
In 2005, the CICA issued three new accounting standards: Handbook
Section 1530, Comprehensive Income (Section 1530), Handbook
Section 3855, Financial Instruments – Recognition and Measurement
(Section 3855), and Handbook Section 3865, Hedges (Section 3865).
These new standards became effective for us on November 1, 2006.
Comprehensive Income
Section 1530 introduces Comprehensive income which is comprised of
Net income and Other comprehensive income and represents changes in
Shareholders’ equity during a period arising from transactions and other
events with non-owner sources. Other comprehensive income (OCI)
includes unrealized gains and losses on financial assets classified as
available-for-sale, unrealized foreign currency translation amounts, net
of hedging, arising from self-sustaining foreign operations, and changes
in the fair value of the effective portion of cash flow hedging instruments.
Our Consolidated Financial Statements will include a Consolidated
Statement of Comprehensive Income while the cumulative amount,
Accumulated other comprehensive income (AOCI), will be presented as a
new category of Shareholders’ equity in the Consolidated Balance Sheets.
Financial Instruments – Recognition and Measurement
Section 3855 establishes standards for recognizing and measuring
financial assets, financial liabilities and non-financial derivatives. It
requires that financial assets and financial liabilities including deriva-
tives be recognized on the balance sheet when we become a party to
the contractual provisions of the financial instrument or a non-financial
derivative contract. All financial instruments should be measured at fair
value on initial recognition except for certain related party transactions.
Measurement in subsequent periods depends on whether the financial
instrument has been classified as held-for-trading, available-for-sale,
held-to-maturity, loans and receivables, or other liabilities.
Financial assets and financial liabilities held-for-trading will be
measured at fair value with gains and losses recognized in Net income.
Financial assets held-to-maturity, loans and receivables and financial
liabilities other than those held-for-trading, will be measured at
amortized cost using the effective interest method of amortization.
Available-for-sale financial assets will be measured at fair value with
unrealized gains and losses including changes in foreign exchange rates
being recognized in OCI. Investments in equity instruments classified as
available-for-sale that do not have a quoted market price in an active
market will be measured at cost.
Derivative instruments must be recorded on the balance sheet at
fair value including those derivatives that are embedded in financial
instrument or other contracts but are not closely related to the host
financial instrument or contract, respectively. Changes in the fair values
of derivative instruments will be recognized in Net income, except for
derivatives that are designated as a cash flow hedge, the fair value
change for which will be recognized in OCI.
Section 3855 permits an entity to designate any financial
instrument as held-for-trading on initial recognition or adoption of the
standard, even if that instrument would not otherwise satisfy the
definition of held-for-trading set out in Section 3855. Instruments that
are classified as held-for-trading by way of this “fair value option” must
have reliable fair values and are subject to additional conditions and
disclosure requirements set out by the OSFI.
Other significant accounting implications arising on adoption of
Section 3855 include the initial recognition of certain financial guar-
antees at fair value on the balance sheet and the use of the effective
interest method of amortization for any transaction costs or fees,
premiums or discounts earned or incurred for financial instruments
measured at amortized cost.
Royal Bank of Canada Annual Report 2006
36 Management’s Discussion and Analysis
Impact of adopting sections 1530, 3855 and 3865
The transition adjustment attributable to the following will be recog-
nized in the opening balance of retained earnings as at November 1,
2006: (i) financial instruments that we will classify as held-for-trading
and that were not previously recorded at fair value, (ii) the difference in
the carrying amount of loans and deposits prior to November 1, 2006,
and the carrying amount calculated using the effective interest rate from
inception of the loan, (iii) the ineffective portion of cash flow hedges,
(iv) deferred gains and losses on discontinued hedging relationships
that do not qualify for hedge accounting under the new standards,
(v) unamortized deferred net realized gains or losses on investments
that support life insurance liabilities, and (vi) consequential effects on
insurance claims and policy benefit liabilities due to remeasuring the
financial assets supporting these liabilities.
Adjustments arising due to remeasuring financial assets classified
as available-for-sale and hedging instruments designated as cash flow
hedges will be recognized in the opening balance of Accumulated other
comprehensive income.
Controls and procedures
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed by us is
recorded, processed, summarized and reported within the time periods
specified under Canadian and U.S. securities laws, and include controls
and procedures that are designated to ensure that information is accu-
mulated and communicated to management, including the President
and Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
As of October 31, 2006, an evaluation was carried out, under the
supervision of and with the participation of management, including
the President and Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures as
defined in Rule 13a-15(e) under the U.S. Securities Exchange Act of
1934 and under Multilateral Instrument 52-109. Based on that evalua-
tion, the President and Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of our disclosure controls and
procedures were effective as at October 31, 2006.
Neither of the transition amounts that will be recorded in the open-
ing retained earnings or in the opening AOCI balance on November 1,
2006 is expected to be material to our consolidated financial position.
The tax consequences, if any, of the new standards on the transi-
tion or subsequent accounting is unknown. The tax authorities are
currently reviewing the standards to determine any such implications.
Variability in Variable Interest Entities
On September 15, 2006, the EIC issued Abstract No. 163, Determining
the Variability to be Considered in Applying AcG-15 (EIC-163). This EIC
provides additional clarification on how to analyze and consolidate VIEs.
EIC-163 will be effective for us on February 1, 2007 and its implemen-
tation will result in the deconsolidation of certain investment funds.
However, the impact is not expected to be material to our consolidated
financial position or results of operations.
Internal control over financial reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assur-
ance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP.
Management assessed the effectiveness of our internal control over
financial reporting as at October 31, 2006, and based on that assess-
ment determined that our internal control over financial reporting was
effective. See page 101 for Management’s report on internal control
over financial reporting and the Report of Independent Registered
Chartered Accountants with respect to management’s assessment of
internal control over financial reporting.
No changes were made in our internal control over financial
reporting during the year ended October 31, 2006, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 37
Consolidated results from continuing operations
•
•
•
Net income of $4,757 million, up $1,320 million, or 38%. Excluding the prior year Enron litigation-related provision (1) of $326 million
after-tax, net income increased $994 million, or 26%, largely due to strong earnings momentum across all business segments and lower
hurricane-related charges.
Revenue up $1,453 million, or 8%, from 2005 due to record trading results on improved market conditions and solid business growth in
our wealth management and banking businesses.
Non-interest expense up $138 million, or 1%. Excluding the prior year Enron litigation-related provision of $591 million, non-interest
expense increased $729 million, or 7%, primarily due to higher variable compensation on stronger business performance.
The following provides a discussion of our reported results from
continuing operations for the year ended October 31, 2006. Factors
that primarily relate to a specific segment are discussed in detail in the
respective segment results section. For a discussion of our discontinued
operations, refer to the Executive summary section.
In addition to providing an analysis comparing the current year to
the prior year, we have included an analysis of our 2005 results com-
pared to those for 2004.
Total revenue
(C$ millions)
Interest income
Interest expense
Net interest income
Investments (1)
Insurance (2)
Trading
Banking (3)
Underwriting and other advisory
Other (4), (5)
Non-interest income
Total revenue
Additional information
Total trading revenue (6)
Net interest income – related to trading activities
Non-interest income – trading revenue
Total
Total trading revenue by product (6)
Fixed income and money markets
Equity
Foreign exchange contracts
Total
2006
2005
Table 7
2004
$ 22,170
15,408
$ 16,958
10,188
$ 13,866
7,468
$
$
$
$
6,762
3,820
3,348
2,574
2,391
1,024
718
$
$
6,770
3,380
3,270
1,594
2,326
1,026
818
6,398
3,142
2,870
1,563
2,173
918
738
$ 13,875
$ 12,414
$ 11,404
$ 20,637
$ 19,184
$ 17,802
$
$
$
(539) $
2,574
21
1,594
$
286
1,563
2,035
$
1,615
$
1,849
$
1,174
561
300
$
1,025
355
235
1,044
527
278
$
2,035
$
1,615
$
1,849
Includes brokerage, investment management and mutual funds.
Includes premiums, investment and fee income.
Includes service charges, foreign exchange other than trading, card services and credit fees.
Includes other non-interest income, gain/loss on securities sales and securitization.
(1)
(2)
(3)
(4)
(5) During the year, we reclassified the changes in the fair value of certain derivative instruments designated as economic hedges of our stock-based compensation plan at RBC Dain Rauscher from
Non-interest income – Other to Non-interest expense – Stock-based compensation, in order to more appropriately reflect the purpose of these instruments and our management of our compen-
sation plan. All amounts have been restated to reflect this reclassification. For further details, refer to Note 1 to the Consolidated Financial Statements.
Total trading revenue is comprised of trading-related revenue recorded in Net interest income and Non-interest income. Total trading revenue includes revenue from cash and related derivative
securities.
(6)
2006 vs. 2005
Total revenue increased $1,453 million, or 8%, from a year ago, largely
due to record trading results on improved market conditions and solid
business growth in our wealth management and banking businesses
reflecting our successful execution of growth initiatives and favourable
market conditions. Strong M&A activity and the net gain on the
exchange of our NYSE seats for NYX shares also contributed to the
increase. These factors were partially offset by a reduction of
$425 million due to the negative impact of the stronger Canadian dollar
on translated U.S. dollar-denominated revenue, lower debt and equity
origination activity and certain favourable items recorded in the prior
year. These items included the gain on the sale of an Enron-related
claim, a cumulative accounting adjustment related to our ownership
interest in an investment and the gain on sale of LIS.
Net interest income decreased $8 million, largely driven by
increased funding costs related to certain equity trading strategies and
the impact of higher securitization balances. This decrease was largely
offset by strong loan and deposit growth and increased spreads on
deposits and personal investment products.
Investments-related revenue increased $440 million, or 13%,
primarily due to strong net sales and capital appreciation in our mutual
fund businesses, growth in fee-based accounts and client balances,
the inclusion of Abacus and higher volumes in our full-service and self-
directed brokerage businesses.
Insurance-related revenue increased $78 million, or 2%, primarily
reflecting growth in our Canadian life business as well as our European
life reinsurance business. This was partially offset by lower revenue in our
U.S. life business largely due to lower annuity sales, the negative impact
on the translated value of U.S. dollar-denominated revenue resulting
from the stronger Canadian dollar and policy lapses on discontinued and
mature product lines. Lower revenue from property catastrophe
reinsurance reflecting our strategic reduction in exposure as we have
ceased underwriting new business also contributed to the decrease.
Banking revenue was up $65 million, or 3%, mainly due to higher
service fees, higher credit fees related to our investment banking activ-
ity and increased foreign exchange revenue due to higher transaction
volume. These factors were partially offset by our higher credit card cus-
tomer loyalty reward program costs that were recorded against revenue.
(1)
Results excluding the Enron litigation-related provision are non-GAAP financial measures. For a further discussion and reconciliation, refer to the Key financial measures (non-GAAP) section.
Royal Bank of Canada Annual Report 2006
38 Management’s Discussion and Analysis
Trading revenue increased by $980 million, or 61%. Total trading
Net interest income increased $372 million, or 6%, largely driven
revenue (including Net interest income and Non-interest income related
to trading) was $2,035 million, up $420 million, or 26%, from a year ago
largely due to record trading results on improved market conditions and
growth in certain equity trading strategies. This was partly offset by higher
funding costs in support of growth in certain equity trading strategies.
Underwriting and other advisory revenue decreased $2 million
on lower equity origination in Canada mainly reflecting slower activity
outside the resource sector and lower debt origination largely in the U.S.
due to the rising interest rate environment. These factors were largely
offset by stronger M&A activity.
Other revenue decreased $100 million, or 12%, largely due to a
number of favourable items recorded in the prior year including the gain
on the sale of an Enron-related claim, a cumulative accounting adjust-
ment related to our ownership interest in an investment and the gain
on the sale of LIS. These factors were partially offset by the receipt of a
fee related to the termination of an agreement and the net gain on the
exchange of our NYSE seats for NYX shares both recorded in 2006.
2005 vs. 2004
Total revenue in 2005 increased $1,382 million, or 8%, compared to
2004, reflecting revenue growth across all lines of business in part due
to our growth initiatives and favourable North American business
conditions. These factors resulted in increased revenue from our lend-
ing, deposit, insurance and wealth management businesses. The
increase was partially offset by a reduction of $420 million due to the
negative impact of the stronger Canadian dollar on translated U.S. dollar-
denominated revenue.
by increased loan and deposit volumes in both Canada and the U.S.,
partially offset by increased funding costs as a result of higher volumes
and rates on funding positions related to equity trading.
Investments-related revenue increased $238 million, or 8%,
primarily due to higher transaction volumes and growth in client assets
in our full-service brokerage business and strong mutual fund sales and
capital appreciation.
Insurance-related revenue increased $400 million, or 14%, reflect-
ing growth in our disability insurance business, which has included
UnumProvident since May 1, 2004, as well as strong growth in our prop-
erty and casualty, life and reinsurance businesses. This was partially
offset by the effect of the sale of LIS in 2005.
Banking revenue increased $153 million, or 7%, mainly due to
increased foreign exchange revenue and higher service fees.
Trading revenue improved $31 million, or 2%. Total trading rev-
enue (including Net interest income and Non-interest income related to
trading) was $1,615 million, down $234 million, or 13%, from a year ago
across all product categories but primarily in our equity trading business
largely due to challenging market conditions for most of 2005.
Underwriting and other advisory revenue increased $108 million,
or 12%, on higher debt originations due to a historically low interest
rate environment and higher equity originations arising from strength in
income trust and structured products.
Other revenue increased $80 million, or 11%, largely due to the
gain on the sale of an Enron-related claim, higher securitization revenue
and higher private equity gains, which were partially offset by the gain
on the sale of real estate in 2004.
Net interest income and margin
(C$ millions, except percentage amounts)
Net interest income
Average assets (1)
Net interest margin (2)
2006
2005
Table 8
2004
$
6,762
502,100
$
6,770
445,300
$
6,398
418,200
1.35%
1.52%
1.53%
(1)
(2)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Net interest income as a percentage of average assets.
2006 vs. 2005
Net interest margin decreased 17 bps reflecting both lower net interest
income and an increase in lower yielding and non-interest earning assets.
The decrease in net interest income compared to the prior year
primarily reflected higher funding costs in support of growth in certain
equity trading strategies which was partially offset by stronger loan and
deposit growth and increased spreads on deposits and personal invest-
ment products.
We experienced higher growth and activity in lower yielding and
non-interest earning assets including trading securities and assets
purchased under reverse repurchase agreements and securities
borrowed largely in support of our trading and other business activities
which generate non-interest income. For further details, refer to
Tables 56 and 57 in the Additional financial information section.
2005 vs. 2004
Net interest margin decreased 1 bp, largely reflecting higher funding
costs in RBC Capital Markets in support of their trading activities. This
decrease was partially offset by net interest margin improvement in
RBC U.S. and International Personal and Business largely due to strong
loan growth relative to other assets, which earn lower returns.
Non-interest expense
(C$ millions)
Salaries
Variable compensation
Stock-based compensation (1)
Benefits and retention compensation
Human resources
Equipment
Occupancy
Communications
Professional and other external services
Other expenses
Non-interest expense
$
$
2006
3,264
2,827
169
1,080
7,340
957
792
687
926
793
$
$
2005
3,155
2,309
169
1,103
$
6,736 $
960
749
632
825
1,455
Table 9
2004
3,199
2,283
124
1,095
6,701
906
765
672
768
1,021
$ 11,495
$ 11,357 $ 10,833
(1)
During the year, we reclassified the changes in the fair value of certain derivative instruments designated as economic hedges of our stock-based compensation plan at RBC Dain Rauscher from
Non-interest income – Other to Non-interest expense – Stock-based compensation, in order to more appropriately reflect the purpose of these instruments and our management of our compen-
sation plan. All amounts have been restated to reflect this reclassification. For further details, refer to Note 1 to the Consolidated Financial Statements.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 39
2006 vs. 2005
Non-interest expense increased $138 million, or 1%, compared to
the prior year. Excluding the Enron provision, non-interest expense
increased $729 million, or 7%, which largely reflected higher variable
compensation primarily in RBC Capital Markets and our wealth manage-
ment businesses reflecting strong business performance. Higher costs
in support of our growth initiatives also contributed to the increase.
These costs reflected a higher level of sales personnel and infrastructure
in our distribution network, increased costs related to systems applica-
tion development, higher marketing and advertising costs, and a larger
number of branches. The increase in non-interest expense was partially
offset by the $215 million reduction in the translated value of U.S. dollar-
denominated expenses due to the stronger Canadian dollar and the
prior year settlement of the Enron MegaClaims bankruptcy lawsuit.
Non-interest expense excluding the prior year Enron provision is a
non-GAAP measure. For a reconciliation and further discussion, refer to
the Key financial measures (non-GAAP) section.
2005 vs. 2004
Non-interest expense increased $524 million, or 5%, from 2004, largely
reflecting the prior year Enron provision of $591 million. Stock-based
compensation was also higher in light of the significant appreciation in
our common share price in 2005. Increased costs related to the higher
level of sales and service personnel in our Canadian branch network
also contributed to the increase. These factors were partially offset by a
$260 million decline in expenses due to the positive impact of the
stronger Canadian dollar on the translation of U.S. dollar-denominated
expenses and improved productivity reflecting cost-reduction efforts
attributable to streamlining head office and support operations,
procurement initiatives and lower occupancy costs as a result of
optimizing our office space. The prior year also included the Rabobank
settlement costs.
Provision for credit losses
(C$ millions)
Residential mortgages
Personal
Credit cards
Consumer
Business and government
Specific provision
General provision
Provision for credit losses
Table 10
2006
2005
2004
$
$
$
6
306
163
475
7
482
(53)
$
$
$
2
259
194
455
(66)
389
66
7
222
167
396
125
521
(175)
429
$
455
$
346
$
$
$
$
2006 vs. 2005
Total provision for credit losses decreased $26 million, or 6%, from a
year ago. The decrease largely reflected a $50 million reversal of the
general allowance this year, the favourable impact of the higher level
of securitized credit cards, and the continued strong credit quality of our
U.S. loan portfolio. The prior year also included our 50% proportionate
share of a provision booked at Moneris. These factors were partially
offset by higher provisions for our Canadian personal loan and small
business portfolios, as well as lower recoveries in our corporate and
agriculture portfolios.
Specific provision for credit losses for consumer loans was up
$20 million, or 4%, compared to the previous year. The increase was
largely due to higher provisions in Canadian personal loans in part
reflecting portfolio growth, which was partly offset by the favourable
impact of the higher level of securitized credit cards.
Business and government provision for credit losses increased
$73 million over the prior year. The increase primarily reflected the
transfer of $52 million from the specific allowance to the general allow-
ance in the prior year as a result of the alignment of our enterprise-wide
accounting treatment of credit losses, lower recoveries in our corporate
and agriculture portfolios, and higher provisions in small business
loans in the current year. These factors were partially offset by a lower
provision in our U.S. business portfolio reflecting continued strong
credit quality. The prior year included our 50% proportionate share of a
provision booked at Moneris.
The general provision decreased $119 million from a year ago.
The decrease was largely due to a $50 million reversal of the general
allowance this year in light of the strengthening of our corporate loan
portfolio reflecting continuing favourable credit conditions, and the
transfer of $52 million from the specific allowance to the general allow-
ance in the prior year.
2005 vs. 2004
Total provision for credit losses increased $109 million, or 32%, from
2004. The increase was mainly due to the $175 million reversal of the
general allowance in 2004 and higher specific provisions in personal
credit lines and credit cards mainly due to portfolio growth in 2005. The
increase was partially offset by higher corporate recoveries and lower
student loan losses in 2005.
Insurance policyholder benefits, claims and acquisition expense
(C$ millions)
Insurance policyholder benefits, claims and acquisition expense
Table 11
2006
2005
2004
$
2,509
$
2,625
$
2,124
2006 vs. 2005
Insurance policyholder benefits, claims and acquisition expense
decreased $116 million, or 4%, compared to the prior year. The
decrease primarily reflected a $142 million (before- and after-tax)
reduction in hurricane-related charges for estimated net claims, as we
recorded $203 million in 2005 related to hurricanes Katrina, Rita and
Wilma and $61 million for additional claims in 2006 predominantly
related to Hurricane Wilma. The favourable impact on the translated
value of U.S. dollar-denominated actuarial liabilities as a result of the
stronger Canadian dollar and lower U.S. annuity sales also contributed
to the decrease. These factors were partially offset by higher benefits
and claims costs associated with business growth and a reduced level of
net favourable actuarial liability adjustments this year.
Royal Bank of Canada Annual Report 2006
40 Management’s Discussion and Analysis
2005 vs. 2004
Insurance policyholder benefits, claims and acquisition expense
increased $501 million, or 24%, over 2004 largely reflecting higher busi-
ness volumes in the disability insurance business, which has included
UnumProvident since May 1, 2004, and charges for estimated net
claims for damages related to hurricanes Katrina, Rita and Wilma. Net
increases in life insurance liabilities reflecting decreases in long-term
interest rates, a change in the tax treatment of certain invested assets,
and higher policy maintenance costs also contributed to the increase.
These items were partially offset by a net decrease in health insurance
reserves due to improved disability claims and termination experience.
Taxes
(C$ millions, except percentage amounts)
Income taxes
Other taxes
Goods and services and sales taxes
Payroll taxes
Capital taxes
Property taxes (1)
Insurance premium taxes
Business taxes
Total
Effective income tax rate (2)
Effective total tax rate (3)
$
$
Table 12
2006
2005
2004
1,403
$
1,278
$
1,287
$
218
217
107
92
39
7
680
$
218
220
164
93
39
9
743
225
207
140
84
33
13
702
$
2,083
$
2,021
$
1,989
22.6%
30.3%
27.2%
37.1%
29.8%
39.6%
(1)
(2)
(3)
Includes amounts netted against non-interest income regarding investment properties.
Income taxes as a percentage of net income before income taxes.
Total income and other taxes as a percentage of net income before income and other taxes.
Our operations are subject to a variety of taxes, including taxes on
income and capital assessed by Canadian federal and provincial
governments and taxes on income assessed by the governments of
international jurisdictions where we operate. Taxes are also assessed on
expenditures and supplies consumed in support of our operations.
$136 million in 2006 (2005 – $220 million) in Shareholders’ equity,
a reduction of $84 million, reflecting a decrease in unrealized foreign
currency translation gains as shown in Note 24 to our Consolidated
Financial Statements.
2006 vs. 2005
As shown in Table 12 above, income taxes are up from last year, largely
reflecting higher earnings and the impact of the $591 million ($326 mil-
lion after-tax) Enron litigation-related provision recorded in the prior
year. The effective income tax rate for the year decreased 4.6% primarily
due to higher income reported by our international subsidiaries that
operate in lower income tax jurisdictions, a higher level of income from
tax-advantaged sources (Canadian taxable corporate dividends), and
the favourable resolution of income tax audits in 2006 related to prior
years.
Other taxes decreased by $63 million, largely due to lower capital
taxes primarily related to recoveries of capital taxes paid in prior periods
and a lower Canadian capital base on which capital taxes are levied.
In addition to the income and other taxes reported in the
Consolidated Statements of Income, we recorded income taxes of
2005 vs. 2004
Income taxes were relatively unchanged compared to 2004, despite
higher income before income taxes from continuing operations. Higher
income reported by our international subsidiaries that operated in
lower income tax jurisdictions, additional income from tax-advantaged
sources, and a tax recovery resulting from the Enron litigation provision
had the effect of lowering our effective tax rate by 2.6% to 27.2% com-
pared to 2004.
Other taxes increased by $41 million, largely due to an increase
in capital and payroll taxes as a result of higher capital levels and busi-
ness growth. In addition to the income and other taxes reported in the
Consolidated Statements of Income, we recorded income taxes of
$220 million in 2005 ($330 million in 2004) in Shareholders’ equity, a
reduction of $110 million, reflecting a decrease in unrealized foreign
currency translation gains as shown in Note 24 to our Consolidated
Financial Statements.
Business realignment charges
Table 13
(C$ millions)
Employee-related
Other
Total business realignment charges from
continuing operations
$
$
Expense for the year ended October 31
2006
2005
$
–
–
$
45
–
Liability balance as at October 31
2004
164
13
2006
$
$
41
2
2005
118
–
$
2004
164
13
–
$
45
$
177
$
43
$
118
$
177
In 2006, we continued to implement the additional cost-reduction activi-
ties identified during 2005. However, we did not record any additional
business realignment charges for continuing operations. The charges
incurred in the prior year primarily related to the net additional positions
identified for elimination.
The business realignment liability from continuing operations
decreased by a net of $75 million from the prior year largely reflecting
employee-related payments for income-protection and professional fees.
Although the majority of our realignment initiatives were completed by
the end of 2006, certain payments related to income-protection and
certain lease obligations will continue. For additional details, refer to
Note 23 to our Consolidated Financial Statements.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 41
Results by geographic segment (1), (2)
Table 14
2006
2005
2004
(C$ millions)
Canada
United
Other
States International
Total
Canada
United
Other
States International
Total
Canada
United
Other
States International
Total
Net interest income
Non-interest income
$ 6,011
7,552
$
108
4,397
$
643
1,926
$ 6,762
13,875
$ 5,605
6,901
$
608
3,955
$
557
1,558
$ 6,770
12,414
$ 5,011
6,121
$
934
3,743
$
453
1,540
$ 6,398
11,404
Total revenue
Provision for (recovery of)
credit losses
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Business realignment charges
Income taxes and
non-controlling interest
13,563
4,505
2,569
20,637
12,506
4,563
2,115
19,184
11,132
4,677
1,993
17,802
456
(28)
1
429
433
23
(1)
455
343
61
(58)
346
1,379
7,056
–
683
3,038
447
1,401
2,509
11,495
1,270
6,685
45
809
3,595
–
546
1,077
–
2,625
11,357
45
909
6,395
142
872
3,457
29
343
981
6
2,124
10,833
177
1,495
13
(61)
1,447
1,299
(64)
30
1,265
1,172
46
81
1,299
Net income from continuing
operations
Net income (loss) from
discontinued operations
Net income
$ 3,177
$
799
$
781
$ 4,757
$ 2,774
$
200
$
463
$ 3,437
$ 2,171
$
212
$
640
$ 3,023
$
–
$ 3,177
$
$
(29) $
–
$
(29) $
–
770
$
781
$ 4,728
$ 2,774
$
$
(50) $
–
$
(50) $
–
150
$
463
$ 3,387
$ 2,171
$
$
(220) $
–
$
(220)
(8) $
640
$ 2,803
(1)
(2)
For geographic reporting, our segments are grouped into Canada, United States and Other International. Transactions are primarily recorded in the location that best reflects the risk due to
negative changes in economic conditions and prospects for growth due to positive economic changes. This location frequently corresponds with the location of the legal entity through which
the business is conducted and the location of our clients.
Certain consolidated and segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the
year. For further discussion, refer to the How we manage our business segments section.
2005 vs. 2004
Net income in Canada was $2,774 million, up $603 million, or 28%,
from 2004. This increase reflected growth in our banking and wealth
management businesses, and volume growth in our disability insurance
business as a result of the acquisition of UnumProvident. These factors
were partly offset by higher non-interest expense, largely reflecting
higher levels of sales and service personnel in our Canadian distribution
network, higher benefit costs and higher advertising and new program
costs in support of business growth. The provision for credit losses
increased $90 million, which largely reflected the reversal of the general
allowance in 2004.
U.S. net income of $150 million in 2005 compared to a net loss
of $8 million in 2004. U.S. net income from continuing operations of
$200 million in 2005 compared to net income of $212 million in 2004.
Net income from continuing operations in 2005 largely reflected the
Enron litigation provision recorded and the negative impact of the stron-
ger Canadian dollar on the translated value of U.S. dollar-denominated
earnings. These factors were partially offset by reductions in non-interest
expense related to Client First and lower provision for credit losses
reflecting improved credit conditions. Also, 2004 included the Rabobank
settlement costs. Net loss from discontinued operations of $50 million
in 2005 compared to a net loss of $220 million in 2004. The net loss in
2005 reflected charges related to the sale and wind-down of operations,
including the costs of closing RBC Mortgage’s Chicago office and
certain branches, employee incentive payments and the writedown of
certain assets. The net loss in 2004 of $220 million largely reflected the
$130 million goodwill impairment charge related to RBC Mortgage.
Other international net income was down $177 million, or 28%,
from 2004, mainly reflecting the $203 million charges for estimated net
claims from hurricanes Katrina, Rita and Wilma.
2006 vs. 2005
Net income in Canada was $3,177 million, up $403 million, or 15%,
compared to the prior year. This increase largely reflected strong
revenue growth in our wealth management and banking businesses
due to our successful execution of growth initiatives and the continuing
favourable economic conditions. Stronger M&A activity also contrib-
uted to the increase. These factors were partly offset by higher variable
compensation on stronger business performance and increased costs in
support of business growth.
U.S. net income of $770 million was up $620 million, or 413%,
from 2005 and is comprised of net income from continuing operations
of $799 million and a net loss from discontinued operations of
$29 million. U.S. net income from continuing operations was up
$599 million, or 300%, compared to the prior year largely reflecting
the prior year Enron provision and strong trading results in the current
period. These factors were partially offset by lower debt originations,
lower U.S. annuity sales, the negative impact of the stronger Canadian
dollar on the translated value of U.S. dollar-denominated income and
the gain recorded in the prior year on the sale of LIS in 2005.
Net loss from discontinued operations of $29 million in 2006 com-
pared to a net loss of $50 million in the prior year. The current period
net loss reflected charges related to the wind-down of operations of
RBC Mortgage. The prior year net loss largely reflected charges related
to the sale of certain assets and wind-down of operations, including the
costs of closing RBC Mortgage’s Chicago office and certain branches,
employee incentive payments and the writedown of certain assets.
Other international net income was up $318 million, or 69%, from
2005, mainly reflecting the $142 million reduction in net estimated
hurricane-related charges, as we recorded $203 million in the prior
year related to hurricanes Katrina, Rita and Wilma and $61 million for
additional claims in the current period predominantly related
to Hurricane Wilma, income tax amounts which were largely related to
enterprise-funding activities and solid business growth in our European
life reinsurance business. These factors were partially offset by lower
revenue from property catastrophe reinsurance reflecting our strategic
reduction in exposure.
Related party transactions
In the ordinary course of business, we provide normal banking services,
operational services and enter into other transactions with associated
and other related corporations, including our joint venture entities, on
terms similar to those offered to non-related parties. We grant loans to
directors, officers and other employees at rates normally accorded to
preferred clients. In addition, we offer deferred share and other plans to
non-employee directors, executives and certain other key employees.
For further information, refer to Notes 9 and 21 to our Consolidated
Financial Statements.
Royal Bank of Canada Annual Report 2006
42 Management’s Discussion and Analysis
Quarterly financial information
Results and trend analysis
Our quarterly earnings, revenue and expense are impacted by a number
of trends and recurring factors which include seasonality, general
economic conditions and competition.
Seasonality
Seasonal factors impact our results in most quarters. The second quarter
has fewer days than the other three quarters, resulting in a decrease
in individual revenue and expense items. The third and fourth quarters
include the summer months, during which market activity frequently
slows, negatively impacting the results of our capital markets, broker-
age and investment management businesses.
Impact of economic and market conditions
In general, economic conditions remained favourable over the past
eight quarters and positively impacted our businesses. A relatively solid
housing market, a low but rising interest rate environment, strong labour
markets conditions, as well as solid consumer and business spending
supported loan and deposit growth and strong demand for our wealth
management products over the period. These favourable factors, along
with our continued risk management efforts, contributed to a general
improvement in our portfolio credit quality. In general, capital market
conditions were more favourable in 2006 compared to the prior year,
characterized by higher equity market volatility, near record high M&A
activity and solid cash equities business which benefited from healthy
foreign demand for Canadian natural resource-based equities.
Partly offsetting these favourable factors was the strengthening of
the Canadian dollar over the period, which resulted in a lower translated
value of our U.S. dollar- and GBP-denominated earnings, primarily in our
wholesale and U.S. retail operations. In addition, heightened market
competition in both Canadian and U.S. lending products resulted in
spread compression. There was also increased competition in wholesale
banking, as U.S.-based investment banks expanded their presence in
Canada after the elimination of foreign content restrictions on Canadian
registered retirement products.
The following table summarizes our results for the last eight
quarters.
Quarterly results (1)
Table 15
(C$ millions, except per share amounts)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2006
2005
Net income from continuing operations
Net income (loss) from discontinued operations
1,263
(1)
1,194
(17)
1,128
(10)
1,172
(1)
19
44
(25)
6
Net interest income
Non-interest income
Total revenue
Non-interest expense
Provision for credit losses
Insurance policyholder benefits,
claims and acquisition expense
Business realignment charges
Net income before income taxes and
non-controlling interest in subsidiaries
Income taxes
Non-controlling interest in net income
of subsidiaries
Net income
Earnings per share (2) – basic
– diluted
Earnings per share (2) from
continuing operations – basic
– diluted
Segment net income (loss) from
continuing operations
RBC Canadian Personal and Business
RBC U.S. and International Personal
and Business
RBC Capital Markets
Corporate Support
$ 1,721
3,628
$ 5,349
2,955
159
$ 1,757
3,449
$ 5,206
2,861
99
$ 1,609
3,513
$ 5,122
2,928
124
$ 1,675
3,285
$ 4,960
2,751
47
$ 1,757
3,039
$ 4,796
3,310
103
$ 1,657
3,272
$ 4,929
2,732
128
$ 1,662
3,024
$ 4,686
2,661
116
$ 1,694
3,079
$ 4,773
2,654
108
611
–
627
–
619
–
652
–
740
40
681
1
622
2
582
2
$ 1,624
342
$ 1,619
381
$ 1,451
348
$ 1,510
332
$
603
90
$ 1,387
392
$ 1,285
353
$ 1,427
443
$ 1,262
$ 1,177
$ 1,118
$ 1,171
$
$
$
$
.97
.96
.97
.96
$
$
$
$
.91
.90
.92
.91
$
$
$
$
.86
.85
.87
.86
$
$
$
$
.90
.89
.90
.89
$
$
$
$
$
(30)
543
(21)
522
.40
.39
.42
.41
(6)
1,001
(22)
$
$
$
$
$
979
.75
.74
.77
.76
$
$
$
$
$
16
916
(9)
907
.70
.69
.71
.70
$
$
$
$
$
7
977
2
979
.76
.75
.76
.75
$
775
$
742
$
608
$
669
$
504
$
679
$
524
$
597
126
315
47
111
329
12
106
433
(19)
101
330
72
132
(57)
(36)
80
255
(13)
Net income from continuing operations
$ 1,263
$ 1,194
$ 1,128
$ 1,172
Period average USD equivalent of C$1.00 (3)
Period-end USD equivalent of C$1.00
$
.897
.890
$
.896
.884
$
.877
.894
$
.865
.878
$
$
543
$ 1,001
.850
.847
$
.810
.817
$
$
(1)
(2)
(3)
Certain consolidated and segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the
year. For further discussion, refer to the How we manage our business segments section.
On April 6, 2006, we paid a stock dividend of one common share on each of our issued and outstanding common shares. The effect is the same as a two-for-one split of our common shares.
All earnings per share calculations have been retroactively adjusted to reflect the stock dividend.
Average amounts are calculated using month-end spot rates for the period.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 43
82
294
16
916
.811
.795
93
268
19
977
.827
.806
$
$
Trend analysis
Overview
Over the last eight quarters, our results were affected by a number of
favourable and unfavourable specified items. In the first quarter of 2006
and the fourth quarter of 2005, our results were impacted by
$61 million (before- and after-tax) and $203 million (before- and
after-tax), respectively, of hurricane-related charges in our insurance
business. In the fourth quarter of 2005, we recorded a $591 million
($326 million after-tax) provision for Enron litigation-related matters. A
$50 million reversal of the general allowance was recorded in the first
quarter of 2006 in light of the strengthening of our corporate loan port-
folio reflecting continuing favourable credit conditions. Our results were
also impacted by the acquisition and disposition of certain businesses.
We recorded an additional $40 million business realignment charge for
continuing operations in the fourth quarter of 2005. In addition,
RBC Mortgage was classified as discontinued operations in the second
quarter of 2005 and certain assets of RBC Mortgage were sold in the
fourth quarter of 2005.
Consolidated results
Our consolidated net income from continuing operations throughout
2006 was consistently higher than the prior year. This largely reflected a
general increase in revenue across all our business segments. This posi-
tive trend was partially offset by the lower translated value of foreign
currency-denominated revenue and earnings as a result of the strength-
ening of the Canadian dollar over the period.
Non-interest expense increased over the period, largely reflecting
increased variable compensation on strong business performance and
higher costs in support of our growth initiatives, except for the fourth
quarter of 2005, when we recorded a provision for Enron. The increase
was partially offset by a reduction in the translated value of U.S. dollar-
denominated expenses due to the strengthening of the Canadian dollar
over the period.
Provision for credit losses fluctuated slightly over the period.
The decrease in provisions in the first quarter of 2006 was primarily
due to a $50 million reversal of the general allowance discussed earlier.
The fourth quarter of 2006 was impacted by higher provisions for
personal and small business loans along with lower corporate recoveries.
Corporate and commercial recoveries had positively impacted our
business results over the period.
Income taxes generally trended downward over the period, despite
higher earnings before income taxes from continuing operations. This
largely reflected higher earnings reported by our foreign subsidiaries
operating in lower income tax jurisdictions, higher income from tax-
advantaged sources (Canadian taxable corporate dividends) and the
favourable resolution of an income tax audit in the first quarter of 2006.
These factors contributed to a reduction in our effective income tax rate
over the last eight quarters from 31.0% to 21.1%.
Non-controlling interest in net income of subsidiaries fluctuated
over the period, which depends on the net income attributed to third-
party investors in entities in which we do not have 100% ownership, but
are required to consolidate.
Business segment results
RBC Canadian Personal and Business net income generally increased
over the last eight quarters. This reflected strong volume growth across
most business lines and generally improved margins, despite strong
market competition and a shift in client preferences towards lower
spread products.
RBC U.S. and International Personal and Business results largely
trended upward over the period. This was primarily driven by solid
revenue growth, albeit partly restrained by the negative impact on the
translated value of U.S. dollar-denominated earnings due to the stronger
Canadian dollar.
RBC Capital Markets recorded a general improvement in earnings
over the period, with the exception of the fourth quarter of 2005, which
included the $591 million ($326 million after-tax) provision for Enron
litigation-related matters. Our diverse business and product offerings,
together with business expansions and growing global distribution
capabilities, contributed to this positive trend. In addition, income taxes
trended downward, despite increased earnings before tax, largely due
to higher earnings reported by our international subsidiaries operating
in lower tax jurisdictions. However, these factors were partially offset by
the lower translated value of U.S. dollar- and GBP-denominated earnings
resulting from the stronger Canadian dollar.
Royal Bank of Canada Annual Report 2006
44 Management’s Discussion and Analysis
Fourth quarter 2006 performance
Fourth quarter net income of $1,262 million was up $740 million, or
142%, from a year ago. Diluted EPS were $.96, up 146%. ROE was
23.9%. The increase largely reflected the impact of the prior year provi-
sion of $591 million ($326 million after-tax) related to Enron litigation
matters. Excluding the prior year Enron provision, net income increased
$414 million, or 49%.
Continuing operations
Net income from continuing operations of $1,263 million increased
$720 million, or 133%, compared to the prior year and diluted EPS
were up $.55, or 134%. ROE was 23.6%. Excluding the prior year Enron
provision, net income increased $394 million, or 45%, and diluted
EPS were up $.30, or 45%. The increase was primarily due to stronger
revenue growth in our wealth management and banking businesses
reflecting our successful execution of growth initiatives, and stronger
trading results in our capital markets businesses. The reduction in our
effective income tax rate in the current year and the prior year charge
related to estimated net claims for damages related to hurricanes also
contributed to the improvement in our results. These factors were
partially offset by higher variable compensation reflecting stronger busi-
ness performance, higher costs related to our ongoing initiatives and
investments to support growth and higher provision for credit losses.
Total revenue increased $553 million, or 12%, from a year ago,
reflecting solid revenue growth in our wealth management and banking
businesses and stronger trading results. Higher M&A activity and
solid business growth in our European life reinsurance businesses also
contributed to the increase. These factors were partly offset by the
prior year gain on the sale of an Enron-related claim and lower debt and
equity origination activity in the current period.
Business segment results from continuing operations
Non-interest expense decreased $355 million, or 11%, from
a year ago, largely reflecting the prior year Enron provision. Excluding
the Enron provision, non-interest expense was up $236 million, or 9%,
largely reflecting higher variable compensation on stronger business
performance. Higher staffing levels in our distribution network, as well
as increased marketing and advertising costs in support of our business
growth also contributed to the increase.
Provision for credit losses increased $56 million from a year ago,
largely reflecting lower recoveries in our corporate and agriculture port-
folios in the current quarter and increased provisions in our personal
loan and small business portfolios.
Insurance policyholder benefits, claims and acquisition expense
decreased $129 million, or 17%, over the prior year. The decrease
largely reflected a charge of $203 million (before- and after-tax) related
to estimated net claims for damages related to hurricanes Katrina, Rita
and Wilma, which was partially offset by a net reduction in actuarial
liabilities of $74 million, both of which were recorded in the prior period.
Discontinued operations
The net loss of $1 million in the fourth quarter of 2006 compared to a
net loss of $21 million a year ago, which reflected an operating loss prior
to the sale of certain assets of RBC Mortgage to Home123 Corporation
on September 2, 2005, as well as charges related to the sale and wind-
down of operations. As at October 31, 2006, we have substantially
disposed of the assets and obligations related to RBC Mortgage that
were not transferred to Home123 Corporation.
Results by business segment (1)
(C$ millions)
Net interest income
Non-interest income
Total revenue
Non-interest expense
Provision for (recovery of) credit losses
Insurance policyholder benefits,
claims and acquisition expense
Business realignment charges
RBC Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
2006
RBC
Capital
Markets (2)
Table 16
2005
2004
Corporate
Support (2)
Total
Total
Total
$ 5,941 $ 1,109 $
201 $
7,440
1,763
4,492
$ 13,381 $ 2,872 $ 4,693 $
2,260
26
3,058
(115)
6,140
604
(489) $ 6,762 $ 6,770 $ 6,398
11,404
180
12,414
13,875
(309) $ 20,637 $ 19,184 $ 17,802
10,833
346
11,357
455
11,495
429
37
(86)
2,509
–
–
1
–
(1)
–
–
2,509
–
2,625
45
2,124
177
Net income before income taxes and non-controlling
interest in net income of subsidiaries
Net income from continuing operations
$ 4,128 $
$ 2,794 $
585 $ 1,751 $
444 $ 1,407 $
(260) $ 6,204 $ 4,702 $ 4,322
112 $ 4,757 $ 3,437 $ 3,023
Return on equity (ROE) (3)
Return on risk capital (RORC) (3)
Average assets (4)
31.5%
43.1%
13.6%
22.4%
$ 200,700 $ 39,000 $ 267,800 $
29.3%
37.7%
3.0%
n.m.
16.8%
26.5%
(5,400) $ 502,100 $ 445,300 $ 418,200
23.3%
37.0%
18.1%
29.7%
(1)
(2)
Certain consolidated and segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the
year. Reported amounts include securitized residential mortgage and credit card loans. For further discussion, refer to the How we manage our business segments section.
Net interest income, total revenue and net income before income taxes are presented in RBC Capital Markets on a taxable equivalent basis. The taxable equivalent basis adjustment is
eliminated in the Corporate Support segment. For a further discussion, refer to the How we manage our business segments section.
Average risk capital and the Return on risk capital are non-GAAP financial measures. For further discussion and reconciliation, refer to the Key financial measures (non-GAAP) section.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(3)
(4)
n.m. not meaningful
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 45
RBC Canadian Personal and Business
Net income of $2,794 million increased $490 million, or 21%, from a
year ago. The increase largely reflected strong revenue growth in our
banking and wealth management businesses and lower hurricane-
related charges this year. The increase was partly offset by higher
variable compensation on stronger business performance, increased
costs in support of business growth and higher provision for credit
losses partly due to loan growth and lower recoveries.
RBC U.S. and International Personal and Business
Net income of $444 million was up $57 million, or 15%, from the
prior year, despite a $28 million reduction due to the negative
impact of a stronger Canadian dollar on the translated value of
U.S. dollar-denominated earnings. In U.S. dollars, net income was up
US$73 million, or 23%, driven by strong revenue growth in Wealth
Management and solid business growth and improved credit quality
in Banking.
RBC Capital Markets
Net income was $1,407 million, up $647 million, or 85%, compared
to a year ago, mostly reflecting the prior year Enron provision and record
trading results in the current period. Excluding the prior year Enron pro-
vision, net income increased $321 million, or 30%, compared to a year
ago largely reflecting record trading results, a lower effective income
tax rate and near record M&A fees. These factors were partly offset by
higher variable compensation on improved business performance,
lower debt and equity origination activity and the negative impact of
a stronger Canadian dollar on the translated value of our U.S. dollar-
and GBP-denominated earnings.
Corporate Support
Net income of $112 million for the year mainly reflected income tax
amounts which were largely related to enterprise funding activities and
the favourable resolution of income tax audits related to prior years not
allocated to the business segments. Mark-to-market gains on deriva-
tives related to certain economic hedges also contributed to net income
in the year. These factors were partially offset by the timing of securitiza-
tion activity and an amount accrued for lease obligations.
Revenue contribution from our business segments (C$ millions)
Net income contribution from our business segments (C$ millions)
25,000
20,000
15,000
10,000
5,000
0
RBC Capital Markets
RBC U.S. and International
Personal and Business
RBC Canadian Personal
and Business
5,000
4,000
3,000
2,000
1,000
0
2004
2005
2006
2004
2005
2006
RBC Capital Markets
RBC U.S. and International
Personal and Business
RBC Canadian Personal
and Business
How we manage our business segments
Our management reporting framework is intended to measure the
performance of each business segment as if it was a stand-alone
business and reflect the way the business segments are managed.
This approach is intended to ensure that our business segment results
reflect all relevant revenue and expenses associated with the conduct of
their business and depicts how management views their results.
We use and report certain non-GAAP financial measures, consistent
with our management framework. These measures do not have
standardized meanings under GAAP and are not necessarily comparable
with similar information reported by other financial institutions.
The following highlights how our segments are managed and
reported:
•
RBC Canadian Personal and Business reported results include
securitized residential mortgage and credit card loans and related
amounts for income and provision for credit losses. The securitized
residential mortgage and credit card loans included as at
October 31, 2006 were $17.8 billion and $3.7 billion, respectively.
RBC U.S. and International Personal and Business reported results
include additional disclosure in U.S. dollars as we largely review
and manage the results of this segment on a U.S. dollar basis.
RBC Capital Markets results are reported on a teb basis, which
grosses up net interest income from certain tax-advantaged
sources (Canadian taxable corporate dividends) to their effective
tax equivalent value with a corresponding offset recorded in the
provision for income taxes. This enhances the comparability of
revenue and related ratios across our taxable and tax-advantaged
sources of revenue.
Corporate Support results include all enterprise level activities that
are undertaken for the benefit of the organization which are not
•
•
•
Royal Bank of Canada Annual Report 2006
46 Management’s Discussion and Analysis
allocated to our three business segments, such as enterprise fund-
ing, securitizations and net charges associated with unattributed
capital. The reported results of the Corporate Support segment
also reflect consolidation adjustments, including the elimination of
the teb adjustments recorded in RBC Capital Markets.
Key methodologies
The following outlines the key methodologies and assumptions used in
our management reporting framework. These assumptions and meth-
odologies are periodically reviewed by management to ensure that they
remain valid.
Expense allocation
In order to ensure that our segments’ results include expenses associ-
ated with the conduct of their business, we allocate costs incurred or
services provided by our Global Technology and Operations and Global
Functions groups, which were directly undertaken or provided on behalf
of the segments. For other costs not directly attributable to our business
segments, including overhead costs and other indirect expenses, we use
our management reporting framework for allocating these costs to each
business in a manner that reflects the underlying benefits.
Capital attribution
Our framework also assists in the attribution of capital to our business
segments in a manner that consistently measures and aligns economic
costs with the underlying benefits and risks associated with the activi-
ties of each business segment. The amount of capital assigned to each
segment is referred to as Attributed equity. Unattributed equity and
associated net charges are reported in Corporate Support.
The capital attribution methodologies, detailed in the Capital man-
agement section of this Annual Report, involve a number of assumptions
and estimates that are revised periodically. Any changes to these factors
directly impact other measures such as our business segments’ return on
average equity and return on average risk capital.
Funds transfer pricing
Our funds transfer pricing methodology is used to allocate interest
income and expense to each business. This allocation considers the
interest rate risk, liquidity risk and regulatory requirements of our
business segments. Our segments may retain certain interest rate
exposures subject to management approval that would be expected in
the normal course of operations. Other activities conducted between our
business segments are generally conducted at market rates.
Taxable equivalent basis (teb)
Similar to many other institutions, we analyze income from certain tax-
advantaged sources (in our case, Canadian taxable corporate dividends)
on a taxable equivalent basis (teb). Under this approach, we gross up
revenue from tax-advantaged sources, which currently includes only our
Canadian taxable corporate dividends recorded in Net interest income,
to their tax equivalent value with a corresponding offset recorded in the
provision for income taxes. We record teb adjustments in RBC Capital
Markets and record elimination adjustments in Corporate Support.
We believe these adjustments are useful and reflect how RBC Capital
Markets manages its business since it enhances the comparability
of revenue and related ratios across our taxable and tax-advantaged
sources of revenue. The use of teb adjustments and measures may not
be comparable to similar GAAP measures or similarly adjusted amounts
at other financial institutions. The teb adjustments for 2006 were
$213 million (2005 – $109 million; 2004 – $55 million).
Changes made in 2006
The following highlights the key changes we made to our management
reporting framework and business segments during the year. All seg-
ment historical comparatives have been restated for 2005 and 2004.
These changes did not have an impact on our consolidated results or
disclosure, unless otherwise noted.
• We enhanced our transfer pricing methodologies.
• We recorded the teb adjustments, which gross up tax-advantaged
income, currently Canadian taxable corporate dividends, to their
Key financial measures (non-GAAP)
tax equivalent value, in RBC Capital Markets, and eliminated the
teb adjustments in Corporate Support.
• We reported segment net interest margin (NIM) based on earning
assets only. Previously, we reported segment NIM based on Total
average assets. This change was made as NIM based on earning
assets is viewed by management as a more meaningful measure,
as it only includes those assets that give rise to our reported
net interest income including deposits with other banks, certain
securities and loans. In conjunction with this change, we added
residential mortgages securitized balances and reclassified certain
income amounts in RBC Canadian Personal and Business. The
securitization of residential mortgage and credit card loans and
related results are offset in our Corporate Support segment.
• We reclassified the mark-to-market changes in the fair value
of derivative instruments designated as economic hedges for
our stock-based compensation plan at RBC Dain Rauscher. This
resulted in amounts being reclassified from Non-interest income
to Non-interest expense – Stock-based compensation in order to
more appropriately reflect the purpose of these instruments and
our management of this compensation plan. The reclassification
did not apply to other securities used to economically hedge
RBC Dain Rauscher’s stock-based compensation plan.
Consolidated results have been restated to reflect this change.
• We transferred our housing tax credit syndication business
•
(1)
(2)
from RBC U.S. and International Personal and Business to
RBC Capital Markets.
Certain client-owned assets reported as assets under administra-
tion (1) and as assets under management (2) were determined to
be either incorrectly classified or qualified for classification under
both terms. We reclassified certain portfolios to conform to our
definitions. The segment and consolidated historic comparatives
have been restated to reflect these changes.
Assets under administration (AUA): Assets administered by us, which are beneficially
owned by clients and are therefore not reported on the Consolidated Balance Sheets.
Services provided in respect of assets under administration are of an administrative
nature, including safekeeping, collecting investment income, settling purchase and
sale transactions, and record keeping.
Assets under management (AUM): Assets managed by us, which are beneficially
owned by clients and are therefore not reported on the Consolidated Balance Sheets.
Services provided in respect of assets under management include the selection of
investments and the provision of investment advice. Assets under management may
also be administered by us.
Performance and non-GAAP measures
We measure and evaluate the performance of our consolidated opera-
tions and each business segment using a number of financial metrics
such as net income, return on average common equity (ROE) and return
on average risk capital (RORC). While net income is in accordance with
GAAP, the others are considered non-GAAP financial measures. The
measures reported that are not defined by GAAP do not have standard-
ized meanings and may not be comparable to similar measures used by
other companies.
Return on equity and Return on risk capital
We use ROE and RORC, at both the consolidated and segment levels, as
a measure of return on total capital invested in our businesses. Our con-
solidated ROE calculation is based on net income available to common
shareholders divided by total average common equity for the period.
Business segment ROE calculations are based on net income available
to common shareholders divided by average attributed capital for the
period. For each segment, average attributed capital is based on attrib-
uted risk capital and amounts invested in goodwill and intangibles (1).
In the second quarter of 2005, goodwill was reallocated, in accordance
with GAAP. For segment reporting purposes the unattributed capital is
reported in Corporate Support.
GAAP does not prescribe a methodology for attributing capital
or risk capital to business segments or for computing segment ROE or
RORC, and there is no generally accepted methodology for doing so.
Such attributions involve the use of assumptions, judgments and
methodologies that are regularly reviewed and revised as deemed nec-
essary. The attribution of risk capital is based on certain assumptions,
judgments and models that quantify economic risks as described in the
Economic capital section. Changes to such assumptions, judgments and
methodologies can have a material effect on the segment ROE and RORC
information that we report. Other companies that disclose information
on similar attributions and related return measures may use different
assumptions, judgments and methodologies.
(1)
For internal allocation and measurement purposes, total attributed capital is deemed by
management to be comprised of amounts necessary to support the risks inherent in the
businesses (risk capital) and amounts related to historical investments (goodwill and
intangibles). Total risk capital and goodwill and intangibles are referred to as Attributed
capital as well as Economic capital. The difference between total average common
equity and average attributed capital is classified as Unattributed capital and reported in
Corporate Support, for segment reporting purposes.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 47
RORC is used at both the consolidated and business segment
levels to measure returns on capital required to support the risks related
to ongoing operations. Our RORC calculations are based on net income
available to common shareholders divided by attributed risk capital
(which excludes goodwill and intangibles and unattributed capital).
The business segment ROE and RORC measures are viewed as useful
measures for supporting investment and resource allocation decisions
because they adjust for certain items that may affect comparability
between business segments and certain competitors. Table 17 provides
a reconciliation of the RORC calculations.
Return on equity and Return on risk capital reconciliation
(C$ millions, except for percentage amounts) (1), (2)
Net income from continuing operations
Net loss from discontinued operations
Net income
less: Preferred dividends (3)
RBC Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
2006
RBC
Capital
Markets
Table 17
2005
2004
Corporate
Support
Total
Total
Total
$ 2,794
–
$ 2,794
(22)
$
$
444
–
$ 1,407
–
444
(8)
$ 1,407
(12)
$
$
112
–
$ 4,757
(29)
$ 3,437
(50)
$ 3,023
(220)
112
(18)
$ 4,728
(60)
$ 3,387
(38)
$ 2,803
(31)
Net income available to common shareholders
$ 2,772
$
436
$ 1,395
$
94
$ 4,668
$ 3,349
$ 2,772
Average equity
less: Unattributed capital
less: Goodwill and intangible capital
Average risk capital (4)
Return on equity (ROE)
Return on risk capital (RORC)
$ 8,800
–
2,350
$ 6,450
$ 3,200
–
1,250
$ 1,950
$ 4,750
–
1,050
$ 3,700
$ 3,150
2,500
–
650
$
31.5%
43.1%
13.6%
22.4%
29.3%
37.7%
3.0%
n.m.
Return on equity (ROE) from continuing operations
Return on risk capital (RORC) from continuing operations
$ 19,900
2,500
4,650
$ 12,750
23.5%
36.7%
23.3%
37.0%
$ 18,600
2,300
4,850
$ 11,450
$ 17,800
1,100
5,400
$ 11,300
18.0%
29.3%
15.6%
24.6%
18.1%
29.7%
16.8%
26.5%
(1)
The average risk capital, goodwill and intangible capital, average attributed capital and average equity figures shown above and throughout this document represent rounded figures. These
amounts are calculated using methods intended to approximate the average of the daily balances for the period. The ROE and RORC measures shown above and throughout this document are
based on actual balances before rounding.
Business segment ROE and RORC are calculated on a continuing operations basis only. Total (consolidated) return on common equity and RORC include continuing and discontinued operations.
Preferred dividends include a net gain on redemption of preferred shares.
Average risk capital includes credit, market (trading and non-trading), insurance, operational, business and fixed assets risk capital. For further details, refer to the Capital management section.
(2)
(3)
(4)
n.m. not meaningful
RBC Capital Markets total revenue (teb) excluding revenue related to
Consolidated Variable Interest Entities (VIEs)
We consolidate certain entities in accordance with CICA AcG-15,
Consolidation of Variable Interest Entities (VIEs). Consolidation of a VIE
is based on our exposure to variability in the VIE’s assets and not on
whether we have voting control. Revenue and expenses from certain of
these VIEs have been included in RBC Capital Markets results. However,
the amounts that have been consolidated, which are attributable to
other equity investors in these VIEs are offset in Non-controlling interest
in net income of subsidiaries and have no impact on our reported net
income. As the amounts attributable to other equity investors do not
have an impact on our reported net income, management believes that
adjusting for these items enhances the comparability of RBC Capital
Markets results and related ratios and enables a more meaningful com-
parison of our financial performance with other financial institutions.
As the expenses are not viewed as material, we have only adjusted for
the revenue attributed to other equity investors.
The following table provides a reconciliation of total revenue (teb)
excluding VIEs for RBC Capital Markets.
RBC Capital Markets total revenue (teb) excluding VIEs
(C$ millions)
Total revenue (teb) (1)
Revenue related to VIEs offset in Non-controlling interest (2)
Total revenue (teb) excluding VIEs
Table 18
2006
4,693
(7)
$
2005
4,062
(24)
$
2004
3,933
–
4,700
$
4,086
$
3,933
$
$
(1)
(2)
Taxable equivalent basis. For further discussion, refer to the How we manage our business segments section.
Represents revenue attributed to other equity investors of consolidated VIEs which is offset in Non-controlling interest in net income of subsidiaries.
Royal Bank of Canada Annual Report 2006
48 Management’s Discussion and Analysis
Results excluding Enron provision
In the fourth quarter of 2005, we recorded a litigation charge of
$591 million ($326 million after-tax) for Enron-related matters, including
a securities class action lawsuit brought on behalf of Enron securities
holders in a federal court in Texas. Table 19 provides a reconciliation
of our RBC Capital Markets and consolidated GAAP results for 2005 to
exclude the Enron provision. Management believes that adjusting
this amount provides a meaningful measure for comparison to other
periods.
2005 Results excluding Enron provision
(C$ millions, except per share amounts)
Reported (2)
RBC Capital Markets (1)
RBC Consolidated
Enron
litigation
provision
Excluding
Enron
litigation
provision
Reported (2)
Enron
litigation
provision
Table 19
Excluding
Enron
litigation
provision
Continuing operations
Non-interest expense
Income taxes
Net income from continuing operations
Net income
Earnings per share from continuing operations – diluted
Earnings per share – diluted
$
$
3,274
137
$
$
591
265
2,683
402
$ 11,357
1,278
760
$
326
$
1,086
$
$
$
$
3,437
3,387
2.61
2.57
$
$
$
$
$
591
265
326
326
.25
.25
$ 10,766
1,543
$
$
$
$
3,763
3,713
2.86
2.82
(1)
(2)
Certain segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the year. For further
discussion, refer to the How we manage our business segments section.
Income taxes for RBC Capital Markets are reported on a taxable equivalent basis. For further discussion, refer to the How we manage our business segments section.
2006 Adjusted operating leverage
Operating leverage is the difference between our revenue growth rate
and the non-interest expense growth rate. Our 2006 operating leverage
objective of greater than 3% excluded the 2005 Enron provision of
$591 million from non-interest expense. While we performed well
against our earnings measures, our operating leverage for 2006 of 1%
did not meet our target. This was largely attributed to the impact of our
business mix and certain factors, which contributed to earnings growth,
but were not appropriately captured in this measure. These factors
included the impact of tax-advantaged sources, consolidated VIEs and
insurance-related revenue and expense.
During the year, we experienced higher than expected earnings
growth from our wealth management and capital markets businesses,
which included higher earnings from certain tax-advantaged sources
(Canadian taxable corporate dividends), which are not appropriately
reflected in our revenue growth, while the related expense was fully
captured in expense growth. We also realized lower than expected
insurance-related revenue, which in turn largely resulted in lower policy-
holder benefits, claims and acquisition expense. While the reduction in
insurance-related revenue reduced the ratio, the related reduction in
policyholder benefits claims and acquisition expense was not captured
in our operating leverage calculation, as it was not reflected in expense
2006 Adjusted operating leverage
(C$ millions, except percentage amounts)
Total revenue
add: teb adjustment
less: Revenue related to VIEs
less: Gross insurance revenue
Total revenue (adjusted)
Non-interest expense
less: 2005 Enron provision
Non-interest expense excluding the Enron provision
less: Insurance non-interest expense
Non-interest expense (adjusted)
Operating leverage
Adjusted operating leverage
growth. In addition, consolidated VIEs impacted our revenue, and
consequently our operating leverage. However, as their earnings are
attributed to other equity investors and offset in Non-controlling
interest in income of subsidiaries, they have no impact on our reported
net income.
We concluded that revenue growth should be based on a tax-
able equivalent basis, while the impact of consolidated VIEs should be
excluded as they have no material impact on our earnings. We also con-
cluded insurance-related revenue and expenses should not be included
in the determination of the operating leverage ratio, as their impact
cannot be appropriately recognized in the ratio. We have adjusted our
2007 operating leverage calculation to incorporate these factors in
order to more appropriately reflect the performance of our businesses
going forward. If this new approach was applied to our 2006 results,
our adjusted operating leverage would have been 2.5%, which although
still below our target, is a more meaningful measure and indicator of our
performance.
The following table shows our 2006 operating leverage ratio based
on our reported GAAP revenue and expense and the adjustments to our
2006 operating leverage to conform to our 2007 adjusted operating
leverage ratio calculation.
2006 vs. 2005
Increase (decrease)
2006
$ 20,637
213
(7)
3,348
$ 17,509
$ 11,495
–
$ 11,495
517
$ 10,978
$
$
$
$
$
2005
19,184
109
(24)
3,311
16,006
11,357
591
10,766
501
10,265
$
$
$
$
$
1,453
104
17
37
1,503
138
(591)
729
16
713
Operating
leverage
7.6%
6.8%
0.8%
Table 20
Adjusted
operating
leverage
9.4%
6.9%
2.5%
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 49
RBC Canadian Personal and Business
•
•
•
Net income increased $490 million, or 21%, reflecting a broad-based increase across business lines.
Strong revenue growth in wealth management and banking businesses of $845 million, or 9%.
Solid volume growth in most of our business lines reflecting our successful execution of growth initiatives and continuing favourable
economic conditions.
RBC Canadian Personal and Business segment consists of our personal
and business banking and wealth management businesses in Canada
as well as our global insurance business. This segment is comprised
of Personal Banking, Business Financial Services, Cards and Payment
Solutions, Wealth Management and Global Insurance.
RBC Canadian Personal and Business provides a broad suite of
financial products and services to over 13 million individual and busi-
ness clients through our extensive branch, automated banking machine,
online and telephone banking networks, as well as through a large
number of proprietary sales professionals and investment advisors in
addition to a wide-ranging third-party network of independent insur-
ance distributors. We have 3.5 million online and 2.9 million telephone
clients.
We have top rankings in most retail businesses and the leading
full-service brokerage operation. We are also the top mutual fund
provider among Canadian banks as well as the largest Canadian bank-
owned insurer.
Business highlights
•
RBC Asset Management led the Canadian mutual fund industry in
long-term net sales for the third consecutive year, with net sales of
•
•
•
$5.4 billion. It has over $68 billion in assets under management or an
11% market share, representing Canada’s largest single fund family.
During 2006, total personal loans grew 13%, and RBC moved to
the number one Canadian market share position at 15%.
RBC Homeline Plan portfolio grew 117% over last year, with the total
balance outstanding in excess of $27 billion as of October 2006.
2006 was a year of continued and accelerated focus on our
network distribution capability. In Canada, we opened fourteen
banking branches and seven insurance branches.
Economic and market review
In 2006, Canadian economic growth was strong, underpinned by a rela-
tively favourable interest rate environment, strong employment levels
and higher wages, and a solid yet moderating housing market, which
contributed to increased demand for consumer and business loans, as
well as other financial products. Competition in the personal deposits
business continued to increase from both traditional and niche financial
institutions which offer high-interest savings products. The generally
favourable capital market conditions during the year continued to sup-
port the growth of our wealth management business.
RBC Canadian Personal and Business financial highlights (1)
(C$ millions, except percentage amounts)
Net interest income
Non-interest income
Total revenue
Non-interest expense
Provision for credit losses (PCL)
Insurance policyholder benefits, claims and acquisition expense
Business realignment charges
Net income before income taxes and non-controlling interest in subsidiaries
Net income
Key ratios
Return on equity (2)
Return on risk capital (2)
Net interest margin (3)
Operating leverage (excluding Global Insurance) (4)
Selected average balance sheet and other information (5)
Total assets (6)
Total earning assets (6)
Loans and acceptances (6)
Deposits
Attributed capital (2)
Risk capital (2)
Assets under administration
Assets under management
Credit information
Gross impaired loans as a % of average loans and acceptances
Specific PCL as a % of average loans and acceptances
Other information
Number of employees (full-time equivalent)
2006
2005
2004
Table 21
$
5,941
7,440
$ 13,381
6,140
604
2,509
–
4,128
2,794
$
$
$
5,348
7,151
$ 12,499
5,872
542
2,625
7
3,453
2,304
$
$
$
4,876
6,337
$ 11,213
5,630
410
2,124
63
2,986
2,043
$
$
31.5%
43.1%
3.27%
4.5%
27.1%
39.1%
3.26%
5.5%
24.7%
37.6%
3.31%
(.5)%
$ 200,700
181,500
180,500
145,700
8,800
6,450
213,200
89,700
$ 182,400
163,900
161,500
138,800
8,450
5,850
180,300
72,100
$ 164,100
147,200
145,300
133,700
8,200
5,400
157,300
58,700
.33%
.33%
.31%
.34%
.44%
.33%
28,271
27,045
27,366
(1)
(2)
(3)
(4)
(5)
(6)
Certain segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the year. Reported
amounts include securitized residential mortgage and credit card loans. For further discussion, refer to the How we manage our business segments section.
Average attributed capital and Return on equity are calculated using methods intended to approximate the average of the daily balances for the period. Segment Return on equity, Average risk
capital and Return on risk capital are non-GAAP financial measures. For further discussion and reconciliation, refer to the Key financial measures (non-GAAP) section.
Net interest margin (NIM) is calculated as Net interest income divided by Average earning assets. Average earning assets are calculated using methods intended to approximate the average
earnings asset balances for the period.
Defined as the difference between revenue growth rate and non-interest expense growth rate for the segment, excluding Global Insurance due to the nature of its business.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Total assets, total earning assets, and loans and acceptances include average securitized residential mortgage and credit card loans for the year of $14.9 billion and $3.7 billion, respectively.
Royal Bank of Canada Annual Report 2006
50 Management’s Discussion and Analysis
Revenue by business line (C$ millions)
15,000
12,000
9,000
6,000
3,000
0
2004
2005
2006
Personal Banking
Business Financial Services
Cards and Payment Solutions
Wealth Management
Global Insurance
Financial performance
2006 vs. 2005
Net income for the year of $2,794 million increased $490 million, or
21%, from a year ago. The increase largely reflected strong revenue
growth in our wealth management and banking businesses, and lower
hurricane-related charges this year. The increase was partly offset
by higher variable compensation on stronger business performance,
increased costs in support of business growth and higher provision for
credit losses partly due to loan growth and lower recoveries.
Total revenue increased $882 million, or 7%, over the prior year,
largely reflecting strong volume growth and improved deposit and
investment spreads in our banking and wealth management businesses,
which combined for an increase in revenue of $845 million, or 9%. These
results continued to reflect our successful execution of growth initiatives
and the continuing favourable economic conditions.
Net interest margin increased 1 bp over last year to 3.27%, primar-
ily reflecting improved spreads on deposits and investment products.
Non-interest expense was up $268 million, or 5%, mainly as a
result of higher variable compensation on stronger business perfor-
mance, higher levels of sales personnel and infrastructure costs in our
distribution network, and higher advertising and marketing costs in sup-
port of business growth.
Provision for credit losses increased $62 million, or 11%, largely
reflecting higher provisions in our personal loan and small business
portfolios and lower recoveries in our agriculture portfolio this year. The
prior year included our 50% proportionate share of a provision booked
at Moneris.
Insurance policyholder benefits, claims and acquisition expense
decreased $116 million, or 4%, compared to the prior year. The
decrease primarily reflected a $142 million (before- and after-tax)
reduction in charges for estimated net claims for damages related to
hurricanes, as we recorded $203 million in 2005 related to hurricanes
Katrina, Rita and Wilma and $61 million for additional claims in 2006
predominantly related to Hurricane Wilma. The favourable impact on
the translated value of U.S. dollar-denominated actuarial liabilities as
a result of the stronger Canadian dollar and lower U.S. annuity sales
also contributed to the decrease. These factors were partially offset by
higher benefits and claims costs associated with business growth and a
reduced level of net favourable actuarial liability adjustments this year.
Average assets increased $18 billion, or 10%, over the prior year,
largely due to strong loan growth, underpinned by our successful execu-
tion of growth initiatives, solid business and household balance sheets,
and strong labour market conditions. Deposits were up $7 billion, or 5%,
from a year ago mainly due to growth in business deposits.
2005 vs. 2004
Net income increased $261 million, or 13%, from a year ago. The
increase primarily reflected strong revenue growth across all business
lines, which was partially offset by charges for hurricane-related
estimated net claims, higher costs associated with increased sales and
service personnel in our Canadian branch network, and higher provision
for credit losses largely reflecting a $78 million reversal of the general
allowance recorded in 2004.
Total revenue increased $1,286 million, or 11%, over the prior
year, largely due to strong growth in our disability insurance business,
which included UnumProvident since May 1, 2004, and higher volumes
in lending and deposits. The increase also resulted from robust mutual
fund sales, and increased brokerage and investment management
fees related to higher client assets, transaction volumes and higher
service fees.
Non-interest expense increased $242 million, or 4%, primarily due
to increased sales and service personnel in our distribution network,
higher variable compensation associated with strong business perfor-
mance and higher benefit costs. Higher advertising and new program
costs in support of our business growth also contributed to the increase.
Provision for credit losses increased $132 million, largely reflecting
a $78 million reversal of the general allowance in 2004, as well as higher
provisions commensurate with loan growth.
Insurance policyholder benefits, claims and acquisition expense
increased $501 million, or 24%, over the prior year. The increase was
largely due to higher business volumes in the disability insurance busi-
ness, which included UnumProvident since May 1, 2004, and the impact
of charges for estimated net claims related to hurricanes Katrina, Rita
and Wilma.
2007 Outlook and priorities
The Canadian economic and business environment is expected to
remain favourable for business growth. We expect continued strong
performance from our wealth management, banking and insurance
businesses, supported by generally favourable economic, labour and
capital market conditions, and our successful implementation of growth
initiatives. We will remain focused on new client acquisition and growth
in high-value markets, augmenting our strengths in client insights and
analytics, distribution capabilities and risk management, as well as
product breadth and integration, with increased emphasis on our local
competitiveness, and providing superior client service.
Key strategic priorities for 2007
•
•
•
Enhance client service, improve problem resolution and offer
high-quality products and services to achieve industry leading
client loyalty, increase client retention and generate superior results.
Expand and enhance our extensive distribution networks
through increased contact points and improved integration to
truly differentiate ourselves from the competition and extend our
leadership position.
Continue to streamline our processes and structures to make
it easier for our clients to do business with us and to improve
the ability of our employees to deliver cost-effective and efficient
solutions.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 51
Business line review
Personal Banking
Personal Banking focuses on meeting the needs of our individual
clients at every stage of their lives through a wide range of products and
services, including home equity financing, lines of credit, core deposits,
personal loans and automotive financing.
We have the largest retail banking network in Canada with over
1,100 branches and 3,800 automated banking machines. We also rank
first or second in market share for most personal banking products,
including 16% market share of residential mortgages and 14% of
personal loans.
Financial performance
Revenue increased $226 million, or 7%, over the prior year, primarily
reflecting strong loan growth particularly in home equity lending and
improved spreads on deposits. Average personal loans increased 12%
and average residential mortgage balances were up 12% over the prior
year, underpinned by relatively low interest rates, a continued solid
housing market and a firm labour market. Average personal deposit
balances increased 2% from a year ago notwithstanding an increasingly
competitive market.
Business Financial Services
Business Financial Services offers a wide range of lending, leasing,
deposit and transaction products and services to small and medium-
sized businesses, and commercial, farming and agriculture clients
across Canada. We also provide trade-related products and services to
Canadian and international clients to assist them in the conduct of their
import and export operations domestically and around the globe.
Our extensive business banking network includes 96 business
banking centres, and our strong commitment to our clients has resulted
in top market share in business loans and deposits.
Financial performance
Revenue increased $130 million, or 6%, over the prior year largely as a
result of strong growth in business loans and deposits. Average busi-
ness loans grew by 10% on favourable economic conditions, while
average business deposits increased 15% driven by high liquidity within
Canadian businesses.
Royal Bank of Canada Annual Report 2006
52 Management’s Discussion and Analysis
Selected highlights (1)
Table 22
(C$ millions)
$
Total revenue
Other information (average) (2)
Residential mortgages
Personal loans
Personal deposits
New accounts opened (thousands)
2006
2005
2004
3,614 $
3,388 $
3,094
100,800
34,400
32,600
769
89,700
30,600
31,900
740
79,900
27,000
30,800
715
(1)
(2)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
Reported amounts include securitized residential mortgages. For further discussion, refer
to the How we manage our business segments section.
Average amounts are calculated using methods intended to approximate the average of
the daily balances for the period.
Average residential mortgages, personal loans
and deposits (C$ millions)
120,000
96,000
72,000
48,000
24,000
0
2004
2005 2006
2004 2005
2006
35,000
Residential mortgages
28,000
Personal loans
Personal deposits
21,000
14,000
7,000
0
Selected highlights (1), (2)
Table 23
(C$ millions)
2006
2005
2004
Total revenue
Other information (average) (2)
Business loans
Business deposits
$
2,141 $
2,011 $
1,888
35,800
48,600
32,400
42,400
30,100
39,200
(1)
(2)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Average amounts are calculated using methods intended to approximate the average of
the daily balances for the period.
Average business loans and deposits (C$ millions)
40,000
32,000
24,000
16,000
8,000
0
2004
2005 2006
2004 2005 2006
50,000
Business loans
40,000
Business deposits
30,000
20,000
10,000
0
Cards and Payment Solutions
Cards and Payment Solutions provides a wide array of convenient and
customized credit cards and related payment products and solutions.
We have over 5 million credit card accounts and have approxi-
mately 20% market share of Canada’s credit card purchase volume.
Financial performance
Revenue increased $91 million, or 6%, over the prior year, largely
reflecting strong growth in new clients supported by ongoing marketing
initiatives, higher client spending and balances and the receipt of a fee
related to the termination of an agreement. These factors were partially
offset by higher costs related to our customer loyalty reward program.
Average card balances increased 13% and net purchase volume grew
by 15%, reflecting strong labour market conditions and continued
consumer confidence.
Selected highlights (1)
Table 24
(C$ millions)
2006
2005
2004
Total revenue
Other information
Average card balances (2)
Net purchase volumes
$
1,586 $
1,495 $
1,341
9,900
41,500
8,800
36,100
7,900
30,600
(1)
(2)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
Reported amounts include securitized credit card loans. For further discussion, refer to
the How we manage our business segments section.
Average amounts are calculated using methods intended to approximate the average of
the daily balances for the period.
Average credit card balances and net purchase volumes (C$ millions)
Wealth Management
Wealth Management provides investment and trust products and ser-
vices through our branch network of licensed mutual fund salespeople,
as well as through full-service and self-directed brokerage, asset
management, trust services, investment counselling and private bank-
ing. Wealth Management includes RBC Dominion Securities, RBC Direct
Investing and RBC Asset Management.
RBC Dominion Securities continues to be the market leader in full-
service brokerage in Canada, with over 1,300 investment advisors and
$145 billion of assets under administration. RBC Direct Investing is the
second largest Canadian self-directed brokerage as measured by assets
under administration. In 2006, RBC Direct Investing introduced market-
leading pricing for active investors, and has significantly enhanced its
online capabilities.
RBC Asset Management provides a broad range of investment ser-
vices and products including mutual funds, pooled funds and separately
managed portfolios marketed and distributed by our branch network of
9,700 licensed mutual fund salespeople, full-service and self-directed
brokerage, as well as independent financial planners.
Financial performance
Revenue was up $398 million, or 17%, over the prior year. The increase
reflected higher spreads on personal investment products and client
balances, strong net sales and capital appreciation in mutual funds and
continued growth in fee-based accounts. The strong investment perfor-
mance of the RBC family of funds also contributed to a 25% increase
in assets under management. The GIC portfolio remained relatively
stable over the past three years, despite a higher portion of investment
purchases being directed towards long-term mutual funds.
10,000
8,000
6,000
4,000
2,000
0
2004
2005 2006
2004 2005 2006
Average card
balances
Net purchase
volumes
50,000
40,000
30,000
20,000
10,000
0
Selected highlights (1)
Table 25
(C$ millions)
2006
2005
2004
Total revenue
Other information
Long-term mutual fund
net sales
Assets under administration
Assets under management
GICs (2)
$
2,692 $
2,294 $
2,015
5,450
191,800
89,500
57,000
5,982
166,200
71,800
57,200
3,883
147,600
58,200
56,700
(1)
(2)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Average amounts are calculated using methods intended to approximate the average of
the daily balances for the period.
Assets under administration and management (C$ millions)
200,000
160,000
120,000
80,000
40,000
0
2004
2005 2006
2004 2005 2006
Assets under
administration
Assets under
management
100,000
80,000
60,000
40,000
20,000
0
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 53
Insurance claims and policy benefit liabilities increased $220 million,
or 3%, over the prior year, primarily reflecting business growth in our
Canadian life business and European life reinsurance business. The
increase was partially offset by our lower property catastrophe reinsur-
ance liabilities, net payment of claims related to hurricanes, and a net
decrease of $15 million of life and health insurance liabilities reflecting
changes to various actuarial assumptions.
Selected highlights (1)
(C$ millions)
Total revenue
Non-interest expense
Insurance policyholder benefits,
claims and acquisition expense
Net income before income taxes
Insurance claims and policy
benefit liabilities
Other selected information
(in thousands)
Canadian life and health
policies in force and
certificates (2)
U.S. life policies in force
Home and auto – personal lines
policies in force
Travel coverages
2006
2005
$
3,348 $
517
3,311 $
501
2,509
322
2,625
186
Table 26
2004
2,875
501
2,124
242
7,337
7,117
6,488
2,295
1,374
254
2,843
2,245
1,860
233
2,323
2,203
1,976
193
2,121
(1)
(2)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Excludes accidental death and dismemberment which is no longer marketed.
Global Insurance revenue and insurance policyholder benefits,
claims and acquisition expense (C$ millions)
3,500
2,800
2,100
1,400
700
0
2004
2005 2006
2004 2005 2006
Global Insurance
revenue
Insurance policyholder
benefits, claims and
acquisition expense
3,000
2,400
1,800
1,200
600
0
Global Insurance
Global Insurance offers a wide range of life, creditor, health, travel,
home and auto insurance products and services to individual and
business clients in Canada and the U.S. as well as reinsurance for clients
around the world. These products and services are offered through a
wide variety of distribution channels, including telephone, independent
brokers, travel agents, a proprietary sales force, Internet and retail
insurance offices.
Our insurance products are distributed through more than 17,000
independent brokers in Canada and more than 650 career sales repre-
sentatives in North America. Our Canadian insurance business holds
lead positions in creditor, travel and individual health insurance prod-
ucts, and has a significant presence in life, home and auto insurance.
During 2006, we strategically reduced our exposure in property
catastrophe reinsurance, as we have ceased underwriting new business
and focused on managing the remaining claim liabilities related to
previous commitments.
Financial performance
Net income before income taxes increased $136 million, or 73%,
primarily reflecting the reduction in charges of $142 million (before-
and after-tax) for the estimated net claims for damages related to
hurricanes, as we recorded $203 million in 2005 related to hurricanes
Katrina, Rita and Wilma and $61 million for additional net claims in 2006
predominantly related to Hurricane Wilma. In addition, business growth
associated with Canadian life business and European life reinsurance
business, as well as improved claims experience in our Canadian prop-
erty and casualty business also contributed to the increase. These
factors were partially offset by lower revenue from property catastrophe
reinsurance reflecting our strategic reduction in exposure.
Total revenue increased $37 million, or 1%, over the prior year,
primarily reflecting growth in our Canadian life business and European
life reinsurance business. These factors were mainly offset by lower
revenue in our U.S. life business largely due to lower annuity sales, the
negative impact on the translated value of U.S. dollar-denominated
revenue resulting from the stronger Canadian dollar, and policy lapses
on discontinued and mature product lines. Lower revenue from property
catastrophe reinsurance reflecting our strategic reduction in exposure
and the gain on sale of Liberty Insurance Services in 2005 also offset the
increase in revenue.
Non-interest expense was up $16 million, or 3%, compared to the
previous year. This primarily reflected growth in our Canadian life
business and increased marketing and system development costs,
which were partially offset by the lower translated value of U.S. dollar-
denominated expense.
Insurance policyholder benefits, claims and acquisition expense
decreased $116 million, or 4%, compared to the prior year. The
decrease primarily reflected a $142 million (before- and after-tax)
reduction in hurricane-related charges for estimated net claims, the
favourable impact on the translated value of U.S. dollar-denominated
actuarial liabilities as a result of the stronger Canadian dollar and lower
U.S. annuity sales. These factors were partially offset by higher benefit
and claim costs associated with business growth and a reduced level of
net favourable actuarial liability adjustments this year.
Royal Bank of Canada Annual Report 2006
54 Management’s Discussion and Analysis
RBC U.S. and International Personal and Business
•
Net income of $444 million increased 15% over the prior year. In U.S. dollars, net income was up 23%, driven by a strong improvement
across all businesses.
• Wealth Management revenue rose 9%, or 17% in U.S. dollars, and assets under administration increased 38%, in U.S. dollars, resulting
from our successful execution of growth initiatives, including the acquisition of Abacus.
Banking revenue was down 1%, but increased 7% in U.S. dollars, with loans and deposits up 10% and 5%, respectively, in U.S. dollars.
•
RBC U.S. and International Personal and Business consists of our
personal and business banking and retail brokerage businesses in
the U.S., banking in the Caribbean, and private banking internationally.
This segment is comprised of Wealth Management, which includes
Global Private Banking and certain activities of RBC Dain Rauscher,
and Banking, which includes our RBC Centura and Caribbean banking
operations.
All of our businesses leverage the global resources of RBC, while
drawing upon the knowledge and expertise of our local professionals to
deliver customized solutions to our clients. We differentiate ourselves
in each of our highly competitive marketplaces by tailoring solutions to
meet our clients’ specific needs and building strong, long-lasting
relationships by consistently delivering high-quality service.
Business highlights
•
RBC Dain Rauscher grew its assets under administration to a record
level of US$132 billion, an increase of 14% over 2005, driven by
solid equity market performance, recruiting experienced financial
consultants and executing on its primary advisor strategy.
RBC Centura increased its new personal account openings by 37%
and new business account openings by 20% following the launch
in the first quarter of 2006 of a new suite of personal and business
chequing accounts with unique features to better meet client needs.
•
•
•
•
Caribbean banking grew its loans and deposits by 17% and 8%,
respectively, in U.S. dollars, by focusing on enhanced sales
management and client satisfaction.
Global Private Banking completed the acquisition of Abacus
on November 30, 2005, expanding its presence in the U.K. and
Channel Islands and increasing assets under administration by
US$41 billion.
Global Private Banking added a U.S. trust capability, with its acqui-
sition of American Guaranty & Trust, which administers more than
1,000 personal trusts and holds more than US$1.3 billion in trust
and investment accounts for its clients.
Economic and market review
The U.S. economy experienced solid growth throughout most of 2006,
which continued to support business growth and the credit quality of
our loan portfolio. However, rising interest rates and slowing housing
markets in the U.S. did start to moderate the demand for loans. The
U.S. and most international equity market indices increased over the
year, which positively impacted revenue in our brokerage operations.
Internationally, solid economic growth in many regions, including the
Caribbean, supported business and revenue growth.
RBC U.S. and International Personal and Business financial highlights (1)
(C$ millions, except number of and percentage amounts)
Net interest income
Non-interest income
Total revenue
Non-interest expense
Provision for credit losses (PCL)
Business realignment charges
Net income before income taxes and non-controlling interest in subsidiaries
Net income
Key ratios
Return on equity (ROE) (2)
Return on risk capital (RORC) (2)
Selected average balance sheet and other information (3)
Total assets
Loans and acceptances
Deposits
Attributed capital (2)
Risk capital (2)
Assets under administration
Assets under management
Credit information
Gross impaired loans as a % of average loans and acceptances
Other information
Number of employees (full-time equivalent)
(US$ millions)
Net interest income
Non-interest income
Total revenue
Non-interest expense
Provision for credit losses (PCL)
Business realignment charges
Net income before income taxes and non-controlling interest in subsidiaries
Net income
2006
1,109
1,763
2,872
2,260
26
1
585
444
$
$
$
$
2005
1,108
1,620
2,728
2,150
51
(2)
529
387
$
$
$
$
$
$
$
$
13.6%
22.4%
11.8%
19.6%
Table 27
2004
989
1,713
2,702
2,330
80
23
269
214
5.4%
9.1%
$ 39,000
20,700
33,600
3,200
1,950
307,900
53,400
$ 37,700
20,500
33,300
3,250
1,950
234,300
46,700
$ 37,100
18,800
33,100
3,800
2,250
233,700
44,200
.90%
.79%
1.17%
11,238
10,512
10,644
2006
980
1,557
2,537
1,997
22
1
517
393
$
$
$
$
2005
912
1,336
2,248
1,771
41
(2)
438
320
$
$
$
$
2004
753
1,304
2,057
1,774
61
19
203
162
$
$
$
$
(1)
(2)
(3)
Certain segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the year. For further
discussion, refer to the How we manage our business segments section.
Average attributed capital and Return on equity are calculated using methods intended to approximate the average of the daily balances for the period. Segment Return on equity, Average risk
capital and the Return on risk capital are non-GAAP financial measures. For a further discussion and reconciliation, refer to the Key financial measures (non-GAAP) section.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 55
Revenue by business line (C$ millions)
Revenue by business line (US$ millions)
3,000
2,400
1,800
1,200
600
0
Banking
Wealth Management
3,000
2,400
1,800
1,200
600
0
2004
2005
2006
2004
2005
2006
Banking
Wealth Management
Impact of U.S. vs. Canadian dollar
The translated value of this segment’s U.S. dollar-denominated results
is impacted by fluctuations in the U.S./Canadian dollar exchange rate.
The table below depicts the impact of translating the specified year’s
U.S. dollar-denominated results at the average exchange rate in effect
during that period in comparison to the prior year’s average exchange
rate. We believe this provides the reader with the ability to assess
the underlying results on a more comparable basis, particularly given the
magnitude of the change in the exchange rate over the comparable
periods and the resulting impact on our results.
The Canadian dollar appreciated 7% on average relative to the
U.S. dollar compared to a year ago. As well, in 2005, the Canadian dollar
appreciated 8% on average relative to the U.S. dollar, compared to 2004.
Impact of USD translation on selected items (1)
Table 28
(C$ millions, except for percentage amounts)
Reduced total revenue
Reduced non-interest expense
Reduced net income
Percentage change in the average
US$ equivalent of C$1.00 (2)
$
2006 vs.
2005
2005 vs.
2004
161 $
123
28
7%
187
141
33
8%
(1)
(2)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Average amounts are calculated using month-end spot rates for the period.
Financial performance
2006 vs. 2005
Net income increased $57 million, or 15%, from the prior year, despite a
$28 million reduction due to the negative impact of a stronger Canadian
dollar on the translated value of U.S. dollar-denominated earnings. In
U.S. dollars, net income was up US$73 million, or 23%, driven by strong
revenue growth in Wealth Management and solid business growth and
improved credit quality in Banking.
Revenue increased $144 million, or 5%, over the prior year. In U.S.
dollars, revenue was up US$289 million, or 13%.
Wealth Management revenue improved $151 million, or 9%. In
U.S. dollars, Wealth Management revenue was up US$231 million, or
17%, mainly due to the inclusion of Abacus, higher securities brokerage
commissions in Global Private Banking and growth in fee-based client
assets at RBC Dain Rauscher.
Banking revenue decreased $7 million, or 1%, compared to the
prior year. In U.S. dollars, Banking revenue increased US$58 million, or
7%, reflecting solid loan and deposit growth and higher fee-based
activities.
Non-interest expense was up $110 million, or 5%, over the prior
year. In U.S. dollars, non-interest expense increased US$226 million, or
13%, largely reflecting the inclusion of Abacus and increased variable
compensation, primarily in Wealth Management on stronger revenue.
The increase also reflected higher project-related spending and other
costs in support of business growth.
Provision for credit losses was down $25 million, or 49%. In U.S.
dollars, the decrease was US$19 million, reflecting continued strong
credit quality in our loan portfolio at RBC Centura.
Royal Bank of Canada Annual Report 2006
56 Management’s Discussion and Analysis
2005 vs. 2004
Net income increased $173 million, or 81%, from 2004, despite a
$33 million reduction due to the negative impact of a stronger Canadian
dollar on the translated value of U.S. dollar-denominated earnings. In
U.S. dollars, net income improved US$158 million, or 98%, reflecting
strong improvement in all businesses. 2004 also included $23 million
($14 million after-tax) of business realignment charges.
Revenue increased $26 million, or 1%. In U.S. dollars, revenue
increased US$191 million, or 9%, over the prior year. This increase
largely reflected solid loan and deposit growth in our Banking opera-
tions, higher fee-based client assets at RBC Dain Rauscher and higher
net interest income and fee-based activity at Global Private Banking.
These factors were partly offset by a gain from the sale of our merchant
acquiring card portfolio to Moneris recorded in the prior year.
Non-interest expense declined $180 million, or 8%. In U.S. dollars,
non-interest expense was down US$3 million, reflecting the valuation
allowance recorded in 2004 relating to certain mortgage loans
believed to have been fraudulently originated in 2001 and 2002. Cost-
containment efforts also contributed to the decrease. These factors were
largely offset by higher variable compensation on better performance of
our businesses.
Provision for credit losses decreased $29 million, or 36%. In U.S.
dollars, provision for credit losses was down US$20 million, reflecting
improved credit quality of our loan portfolio.
2007 Outlook and priorities
We continue to see significant opportunity in the U.S. and globally to
expand our Banking and Wealth Management businesses, both through
organic growth and strategic acquisitions. We expect the U.S. economy
to moderate in 2007 given the slowdown in the housing market and the
softening of consumer spending and corporate profitability due to the
lagged effect of previous interest rate increases. Competitive pricing is
expected to continue to put pressure on our margins. In 2007, we expect
the U.S. dollar to appreciate moderately relative to the Canadian dollar
in response to weaker energy prices, negative interest rate spreads
versus the U.S. market and the stabilization of the U.S. fiscal and
trade deficits.
Key strategic priorities for 2007
•
Continue to grow RBC Dain Rauscher through its primary advisor
strategy and by partnering with RBC Centura, Global Private
Banking and RBC Capital Markets to build on our credit and lending
capabilities, trust services, and delivery of structured products
and alternative investments.
Expand Global Private Banking’s market share among high net
worth individuals by strengthening and building relationships with
centres of influence, adding distribution and expanding product
offerings.
Continue to grow RBC Centura by focusing on meeting the needs
of businesses, business owners and professionals, and expanding
our network in key high-growth markets.
Build on our current strong position in the Caribbean through
organic growth and operational improvements.
•
•
•
Business line review
Wealth Management
Wealth Management is comprised of RBC Dain Rauscher and our Global
Private Banking operations. RBC Dain Rauscher offers investment,
advisory and asset management services to individuals, and clearing and
execution services to small and mid-sized independent broker-dealers
and institutions in the U.S. RBC Dain Rauscher ranks as the 8th largest
full-service securities firm in the U.S. with its network of 1,680 financial
consultants across the country. Global Private Banking provides high
net worth individuals, corporate and institutional clients internationally
with private banking and credit, trust services, discretionary investment
management, full-service brokerage and global custody and fund
administration. Global Private Banking has an international network of
33 offices in 21 countries and is recognized as one of the top 20 private
banks in the world (Euromoney magazine).
Financial performance
Revenue in 2006 was $1,802 million, up $151 million, or 9%, compared
to the prior year. In U.S. dollars, revenue increased US$231 million, or
17%, with assets under administration and assets under management
up 38% and 20%, respectively.
These results reflected the successful execution of our growth
initiatives and solid U.S. and international equity market performance
during the year. Global Private Banking generated strong revenue
growth, largely driven by the inclusion of Abacus and higher securities
brokerage commissions from new sales and business expansion.
RBC Dain Rauscher had solid growth on higher fee-based client assets,
reflecting recruiting of experienced financial consultants and progress
on its primary advisor strategy.
Banking
Banking consists of our RBC Centura and Caribbean banking operations.
These businesses offer a broad range of banking products and
services to personal and business clients in their respective markets.
RBC Centura ranks 6th in deposit market share in North Carolina and
among the top 15 in its Southeast U.S. banking footprint. It has a
network of 282 branches and 314 ABMs. Caribbean banking ranks in
the top three in deposit market share in most of its markets and has
43 branches and 71 ABMs.
Financial performance
Banking revenue in 2006 was $1,070 million, a decrease of $7 million,
or 1%, compared to the prior year, reflecting the negative impact
of a stronger Canadian dollar on the translated value of U.S. dollar-
denominated revenue. In U.S. dollars, revenue improved US$58 million,
or 7%, driven by solid loan and deposit growth of 10% and 5%,
respectively, and higher fee-based activities, both at RBC Centura and
Caribbean banking. Business growth benefited from favourable eco-
nomic conditions. However, rising interest rates and slowing housing
markets in the U.S. did start to moderate demand for loans at
RBC Centura. Banking’s net interest margin at 3.73% in 2006 declined
5 bps from the prior year, reflecting changes to asset mix, the flatter U.S.
yield curve and competitive pricing.
Selected highlights (1)
Table 29
Total revenue (C$ millions)
Other information (US$ millions)
Total revenue
Assets under administration
Assets under management
2006
2005
2004
$
1,802 $
1,651 $
1,658
1,592
274,200
47,500
1,361
198,400
39,500
1,263
191,800
36,300
(1)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Assets under administration and management (US$ millions)
275,000
220,000
165,000
110,000
55,000
0
2004 2005 2006
2004 2005 2006
Assets under
administration
Assets under
management
50,000
40,000
30,000
20,000
10,000
0
Selected highlights (1)
Table 30
Total revenue (C$ millions)
Other information (US$ millions)
Total revenue
Net interest margin (2)
Average loans and
acceptances (3), (4)
Average deposits (3), (4)
Number of:
Branches
Automated banking machines
2006
2005
2004
$
1,070 $
1,077 $
1,044
945
3.73%
887
3.78%
794
3.59%
$ 15,100 $ 13,700 $ 11,900
13,900
15,100
15,900
325
385
315
371
317
372
(1)
(2)
(3)
(4)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Net interest margin (NIM) is calculated as Net interest income divided by Average earning
assets. Average earning assets are calculated using methods intended to approximate
the average of the daily balances for the period.
Average amounts are calculated using methods intended to approximate the average of
the daily balances for the period.
Average loans and acceptances and Average deposits have been adjusted for 2004 and
2005 for netting of a large Caribbean government account effective fourth quarter 2005,
which reduced loan and deposit balances by a similar amount.
Average loans and acceptances and average deposits (US$ millions)
20,000
16,000
12,000
8,000
4,000
0
2004 2005 2006
2004 2005 2006
20,000
Loans and acceptances
16,000
Deposits
12,000
8,000
4,000
0
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 57
RBC Capital Markets
Record net income of $1,407 million.
•
• Revenue (teb) up $631 million, or 16%, largely reflecting record trading results and very strong M&A activity.
•
Continued to expand our municipal finance activities in the U.S. mid-market and our global infrastructure finance platform.
RBC Capital Markets provides a wide range of corporate and investment
banking, sales and trading, research and related products and services
to corporations, public sector and institutional clients in North America
and specialized products and services in select global markets. This
segment consists of two main businesses, Global Markets and Global
Investment Banking and Equity Markets, and our 50% ownership in
RBC Dexia IS. All other businesses are grouped under Other.
We have an established reputation as a premier Canadian invest-
ment bank with top-tier market share in virtually all lines of wholesale
business in Canada. We offer a full suite of products and service
capabilities and have long-standing and deep relationships with our
clients. We have a select but diversified set of global capabilities which
includes fixed income, equity, foreign exchange, structured products,
global infrastructure finance, and energy and mining.
We have an unwavering commitment to our businesses and
rigorously maintain our focus on being the undisputed leader in Canada,
a top-tier leader in the U.S. mid-market, a global structurer and trader,
and a leading global fixed income bank.
Business highlights
•
Record trading performance as we continue to expand our product
offering and trading strategies.
Advised on many of the largest announced M&A deals in Canada,
including the acquisitions of Inco Limited and Dofasco Inc.
•
•
•
•
Top-ranked debt new issue dealer for Canadian government and
corporate bonds as well as Maple bonds; and top-ranked Senior
Manager for U.S. Municipal bonds by the number of issues for the
first three calendar quarters of 2006 (Thompson Financial).
Leveraged our U.K. infrastructure and project finance capabilities
into other international and U.S. client relationships, such as
advising one of the first Florida public/private partnerships, the
Tampa Hillsborough County Expressway Authority and an advisory
role on a €1.2 billion new rail bypass project in France.
Continued to build on our strengths in Alternative Assets,
launching the RBC Hedge 250 Index, which was designed to be an
investable benchmark index of hedge fund performance.
Economic and market review
During the year, capital markets conditions were generally favourable,
characterized by strong trading conditions, including higher equity mar-
ket volatility and a low but rising interest rate environment, near record
high M&A activity and solid cash equities business which benefited from
healthy foreign demand for Canadian natural resource-based equities.
Equity origination activity started the year slowly and remained below
expectations mainly reflecting uncertainty in equity markets outside the
resource sector. Debt origination activity was also lower in the U.S. and
Europe, largely due to the rising interest rate environment. The stronger
Canadian dollar negatively impacted the translated value of our
U.S. dollar- and GBP-denominated earnings.
RBC Capital Markets financial highlights (1)
(C$ millions, except percentage amounts)
Net interest income (teb) (2)
Non-interest income
Total revenue (teb) (2)
Non-interest expense
Provision for (recovery of) credit losses (PCL)
Business realignment charges
Net income before income taxes (teb) and non-controlling interest in subsidiaries (2)
Net income
Key ratios
Return on equity (ROE) (3)
Return on risk capital (RORC) (3)
Selected average balance sheet and other information (4)
Total assets
Trading securities
Loans and acceptances
Deposits
Attributed capital (2)
Risk capital (2)
Assets under administration – RBC
Assets under administration – RBC Dexia (5)
Credit information
Gross impaired loans as a % of average loans and acceptances
Specific PCL as a % of average loans and acceptances
Other selected balances
Number of employees (full-time equivalent)
2006
201
4,492
4,693
3,058
(115)
(1)
1,751
1,407
$
$
$
$
$
$
$
$
Table 31
2005
607
3,455
4,062
3,274
(91)
1
878
760
$
$
$
$
2004
847
3,086
3,933
2,845
(108)
27
1,169
827
29.3%
37.7%
18.1%
23.8%
19.5%
26.3%
$ 267,800
132,300
23,500
118,800
4,750
3,700
4,700
1,893,000
$ 229,300
109,600
17,600
98,900
4,100
3,150
1,363,600
–
$ 219,300
91,100
18,600
88,400
4,200
3,150
1,202,900
–
.26%
(.28)%
.67%
(.52)%
2.18%
(.05)%
2,938
4,670
4,640
(1)
(2)
(3)
(4)
(5)
Certain segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the year. For further
discussion, refer to the How we manage our business segments section.
Taxable equivalent basis. For further discussion, refer to the How we manage our business segments section.
Average attributed capital and Return on equity are calculated using methods intended to approximate the average of the daily balances for the period. Segment return on equity, Average risk
capital and the Return on risk capital are non-GAAP financial measures. For a further discussion and reconciliation, refer to the Key financial measures (non-GAAP) section.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Assets under administration – RBC Dexia IS represents the total AUA of RBC Dexia IS, of which we have a 50% ownership interest. As RBC Dexia IS reports on a one-month lag, AUA –
RBC Dexia IS is as at September 30, 2006.
Royal Bank of Canada Annual Report 2006
58 Management’s Discussion and Analysis
Revenue (teb) by geography (C$ millions)
Revenue (teb) by business line (C$ millions)
5,000
4,000
3,000
2,000
1,000
0
Other
Europe
U.S.
Canada
5,000
4,000
3,000
2,000
1,000
0
2004
2005
2006
2004
2005
2006
Other
RBC Dexia IS/IIS (1)
GIBEM
Global Markets
Impact of US$ and British pound (GBP) vs. Canadian dollar
The translated value of this segment’s U.S. dollar- and GBP-denominated
results are impacted by fluctuations in the respective exchange rates
to the Canadian dollar. The table below depicts the effect of translating
the specified year’s U.S. dollar- and GBP-denominated results at the
average exchange rates in effect during that period in comparison to the
prior year’s average exchange rates. We believe this provides the reader
with the ability to assess underlying results on a more comparable
basis, particularly given the magnitude of the change in the exchange
rates over the comparable periods and the resulting impact on our
results.
The Canadian dollar appreciated 7% on average and 9% on average
relative to the U.S. dollar and GBP, respectively, compared to a year ago.
Also, the Canadian dollar appreciated 8% on average relative to the U.S.
dollar and 6% on average relative to the GBP in 2005 compared to 2004.
Impact of US$ and GBP translation on selected items (1) Table 32
(C$ millions, except for percentage amounts)
Reduced total revenue (teb) (2)
Reduced non-interest expense
Reduced net income
Percentage change in average
US$ equivalent of C$1.00 (3)
Percentage change in average
GBP equivalent of C$1.00 (3)
2006 vs.
2005
2005 vs.
2004
$
218 $
120
67
7%
9%
172
118
31
8%
6%
(1)
(2)
(3)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Taxable equivalent basis. For further discussion, refer to the How we manage our busi-
ness segments section.
Average amounts are calculated using month-end spot rates for the period.
Financial performance
2006 vs. 2005
Net income increased $647 million, or 85%, compared to a year ago.
Excluding the prior year Enron litigation-related provision of $591 million
($326 million after-tax), net income increased $321 million, or 30%,
compared to a year ago largely reflecting record trading results, a lower
effective income tax rate and near record M&A fees. These factors were
partly offset by higher variable compensation on improved business
performance, lower debt and equity origination activity and the negative
impact of a stronger Canadian dollar on the translated value of our
U.S. dollar- and GBP-denominated earnings. Results excluding the Enron
provision are a non-GAAP measure. For a reconciliation and further
discussion, refer to the Key financial measures (non-GAAP) section.
Total revenue (teb) increased $631 million, or 16%. The increase
was primarily due to record trading results on improved market condi-
tions and growth in certain equity trading strategies and stronger M&A
activity. Higher distributions and gains from private equity investments,
increased brokerage commissions and increased credit fees related
to investment banking activity also contributed to the increase. These
factors were partially offset by a decline in equity origination in Canada
mainly reflecting uncertainty in equity markets outside the resource
sector. Debt origination fees were also down, mainly in the U.S., due to
(1)
Revenue presented for 2006 represents two months of revenue from our IIS business
earned between November 1, 2005, and the creation of RBC Dexia IS on January 2,
2006. Also included is our proportionate share of RBC Dexia IS revenue for the nine
months ended September 30, 2006, due to the one-month reporting lag. Revenue pre-
sented for 2005 and 2004 represents revenue from our IIS business only.
the rising interest rate environment and further weakening of the
U.S. dollar. Net interest income (teb) declined $406 million, or 67%,
primarily due to higher funding costs in support of growth in certain
equity trading strategies. Non-interest income increased $1,037 million,
or 30%, mainly due to higher equity trading revenue, higher M&A fees
mainly in Canada, increased distributions from private equity invest-
ments and higher credit fees. These factors were partially offset by lower
debt and equity origination activity. Total revenue (teb) excluding VIEs
was $4,700 million, up $614 million, or 15%, from a year ago. For
further discussion and reconciliation of total revenue (teb) excluding
VIEs, refer to the Key financial measures (non-GAAP) section.
Non-interest expense decreased $216 million, or 7%. Excluding the
prior year Enron provision, non-interest expense increased $375 million,
or 14%, compared to the prior year primarily reflecting higher variable
compensation on stronger business performance. Higher professional
fees primarily related to business integration, and certain accounting
adjustments to expenses, which increased both reported revenue and
expenses, related to our 50 per cent ownership of RBC Dexia IS and
higher spending in support of business growth initiatives also contrib-
uted to the increase. These factors were partially offset by the
$120 million reduction in the translated value of U.S. dollar- and GBP-
denominated expenses due to the stronger Canadian dollar and the
prior year settlement of the Enron MegaClaims bankruptcy lawsuit.
Recovery of credit losses of $115 million was comprised of
$65 million of recoveries of previously impaired corporate loans and
the $50 million reversal of the general allowance. This compared to the
$91 million recovery of credit losses realized in the prior year related to
previously impaired corporate accounts.
Income taxes increased $227 million from a year ago. Excluding
the negative impact of the prior year Enron provision, income taxes
decreased $38 million mainly due to higher earnings from international
subsidiaries operating in lower income tax jurisdictions.
Average assets continued to grow, up $39 billion, or 17%, primarily
due to increased trading securities primarily resulting from growth in
certain trading strategies. Loans and acceptances increased $6 billion,
or 34%, primarily related to stronger investment banking activity and
lending activity of RBC Dexia IS. Deposits increased $20 billion, or
20%, primarily due to increased funding requirements of our trading
businesses. Credit quality remained strong, as gross impaired loans
decreased $57 million, or 48%, from last year.
2005 vs. 2004
Net income decreased $67 million, or 8%, over the same period a
year ago, primarily due to the Enron provision. This decrease was
partly offset by moderate revenue growth, a lower effective tax rate,
lower compensation costs and the Rabobank settlement charges
incurred in 2004.
Total revenue (teb) increased $129 million, or 3%. The increase was
primarily due to higher origination activity in Canada and gains from the
sale of an Enron-related claim. Partially offsetting the increase was lower
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 59
in new sectors and growth in U.S. dollar distribution. Also, core lending
results are expected to increase as spread compression abates, while
term extends. We also expect further growth in our infrastructure and
project finance business as we continue to expand our capabilities from
the U.K. to other international and U.S. markets, and growth from the
expansion of structured and fixed income products into Asian markets.
The Canadian dollar is expected to depreciate moderately relative to
the U.S. and other foreign currencies as commodity and energy prices
begin to ease. Our deal pipeline should remain healthy and is expected
to continue to grow. Credit market conditions are expected to remain
relatively favourable though the level of loan loss recovery opportunities
is expected to continue to decline, commensurate with a lower level of
problem loans.
•
Key strategic priorities for 2007
• Maintain our leadership position in Canada and deepen our
penetration in the Canadian mid-market client segment.
Continue to grow our Municipal Products business, expand
our banking activities geographically and develop new product
segments in the U.S.
Successfully integrate new acquisitions and new businesses.
Continue to expand the distribution of structured and fixed income
products into Asian markets.
Continue to expand our infrastructure and project finance product
offering from U.K. to other international and U.S. markets.
Continue to build our global energy capabilities.
•
•
•
•
Selected highlights (1)
Table 33
(C$ millions)
Total revenue (teb) (2)
Other information
Trading-related
Other
2006
2005
2004
$
2,579 $
2,256 $
2,268
2,154
425
1,706
550
1,853
415
(1)
(2)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Taxable equivalent basis. For further discussion, refer to the How we manage our
business segments section.
Trading-related and Other revenue (C$ millions)
Other
Trading-related
3,000
2,400
1,800
1,200
600
0
2004
2005
2006
trading revenue across all product categories due to challenging market
conditions in 2005. Net interest income (teb) declined compared to 2004
primarily due to higher funding costs related to certain equity trading
strategies and spread compression and reduced volumes in our lending
portfolios. Non-interest income increased compared to 2004 primarily
due to increased origination activity and gains on the sale of an Enron-
related claim. Total revenue (teb) excluding VIEs was $4,086 million, up
$153 million, or 4%, compared to 2004.
Non-interest expense increased $429 million, or 15%, largely
reflecting the Enron provision and the Enron MegaClaims bankruptcy
settlement costs, partly offset by lower compensation costs, and the
Rabobank settlement charges and business realignment charges
incurred in 2004.
Recovery of credit losses of $91 million in 2005, related to
previously impaired corporate accounts, compared to recoveries of
$108 million in 2004, which were largely comprised of a $99 million
reversal of the general allowance.
2007 Outlook and priorities
The outlook for capital markets globally is expected to remain relatively
favourable with stable interest rates and improving equity markets.
We expect to continue to expand our trading strategies and expect a
modest rebound in origination activity, which will be partially offset by
a weakening in M&A activity from a near historical high in 2006. Equity
origination activity is expected to increase from a relatively slow 2006 as
markets outside the resource and income trust sectors improve, while
debt origination is expected to benefit from Municipal banking activity
Business line review
Global Markets
Global Markets is our centre for origination, trading and distribution of
predominantly investment grade fixed income, foreign exchange and
derivative products. It also conducts our proprietary trading operations,
alternative asset and private equity businesses.
Financial performance
Revenue (teb) increased $323 million, or 14%, from a year ago. The
increase was primarily due to stronger trading results across all product
categories. Higher private equity investment gains were mostly offset by
lower debt origination fees, mainly in the U.S.
Trading-related revenue was up 26% on improved market condi-
tions and growth in several trading strategies. Other revenue was down
23% mainly due to lower debt origination fees, lower results from our
housing tax credit syndication business and further weakening of the
U.S. dollar during the year. During 2006, we led or jointly led 615 debt
issues, up from 543 deals a year ago, with a total value of approximately
$130 billion, and in Municipal Finance, we were involved in 642 issues
with a total value of US$45 billion through the first three calendar
quarters of 2006.
Royal Bank of Canada Annual Report 2006
60 Management’s Discussion and Analysis
Global Investment Banking and Equity Markets
Global Investment Banking and Equity Markets brings together our
investment banking and equity sales and trading capabilities to provide a
complete suite of advisory and equity-related services to clients from
origination, structuring and advising to distribution, sales and trading.
Financial performance
Global Investment Banking and Equity Markets revenue increased
$271 million, or 28%, compared to the prior year. This increase largely
reflected higher M&A activity, increased credit fees related to our invest-
ment banking activity, higher private equity distributions and the net
gain realized on the exchange of our NYSE seats for NYX shares. These
factors were partially offset by lower equity origination activity due to
market uncertainty outside the resource and income trust sectors.
Gross underwriting and advisory revenue was up 11%, in large part
due to near historical highs for M&A fees reflecting stronger activity in
the Canadian resource sector. This was partially offset by lower equity
originations reflecting less robust income trust activity and softer
market conditions outside the resource sector. In 2006, we advised on
86 M&A deals with a total value of US$67 billion. This was up from 66
deals in the prior year. The increase largely reflected a robust Canadian
M&A environment and solid growth in the U.S. market. In 2006, we led
or co-led 82 equity and equity-related new issues with a total market
value of $13 billion, up from 75 in the prior year. Increased volumes
from the prior year was more than offset by reduced deal values, reflect-
ing uncertainty in the markets outside the resource sector and a drop in
income trust origination.
RBC Dexia Investor Services
RBC Dexia IS was created on January 2, 2006 when we combined our
Institutional & Investor Services (IIS) business with Dexia Funds Services
in return for a 50% joint venture interest in RBC Dexia IS. RBC Dexia IS
offers an integrated suite of institutional investor products and services,
including global custody, fund and pension administration, securities
lending, shareholder services, analytics and other related services, to
institutional investors worldwide.
Given the similarities between the IIS and RBC Dexia IS businesses,
we have disclosed the revenue from our prior IIS business and our 50%
proportionate ownership of RBC Dexia IS on the same line for compara-
tive purposes. Revenue presented for 2006 represents two months of
revenue from our IIS business earned between November 1, 2005
and the creation of RBC Dexia IS on January 2, 2006. The current period
revenue also includes our proportionate share of RBC Dexia IS for the
nine months ended September 30, 2006, as RBC Dexia IS reports on a
one-month lag.
Financial performance
Revenue was $558 million in 2006, primarily reflecting high deposit
volumes and strong foreign exchange revenue resulting from strong
market activity.
Since its creation on January 2, 2006, assets under administration
have increased 9% reflecting strong market activity.
Other
Other consists of our other businesses including National Clients, which
manages our client relationships with mid-market clients in Canada. It
also includes our Global Credit business, which oversees the manage-
ment of our core lending portfolios and manages our non-strategic
lending portfolio. Global Credit also manages our Global Financial
Institutions business which delivers innovative and creative solutions to
global financial institutions including correspondent banking, treasury
and cash management services. Research offers economic and securi-
ties research products to institutional clients in Canada and globally.
Selected highlights (1)
(C$ millions)
Total revenue (teb) (2)
Other information
Gross underwriting and
advisory fees
Equity sales and trading
Other (3)
2006
2005
$
1,250 $
979 $
665
283
302
598
252
129
Table 34
2004
941
546
247
148
(1)
(2)
(3)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Taxable equivalent basis. For further discussion, refer to the How we manage our
business segments section.
Other includes the gain on our NYSE shares, increases in private equity distributions and
growth in revenue associated with our core lending book and syndicated finance.
Gross underwriting and advisory fees, equity sales and trading,
and Other revenue (C$ millions)
1,500
1,200
900
600
300
0
2004
2005
2006
Other
Equity sales and trading
Gross underwriting and
advisory fees
Selected highlights (1)
Table 35
(C$ millions)
$
Total revenue (teb) (2), (3)
Other information
Assets under administration –
RBC (4)
RBC Dexia IS (5)
2006
2005
2004
558 $
500 $
455
1,893,000
– 1,361,100 1,202,900
–
–
(1)
(2)
(3)
(4)
(5)
Certain segment-related amounts have been restated to conform to our current manage-
ment reporting framework and changes made to our business segments during the year.
For further discussion, refer to the How we manage our business segments section.
Taxable equivalent basis. For further discussion, refer to the How we manage our
business segments section.
Comparative amounts for 2005 and 2004 only represent revenue for IIS.
Assets under administration – RBC represents total AUA of our IIS business. RBC IIS AUA
of $1,400 billion was contributed to RBC Dexia IS in exchange for our 50% ownership
interest.
Assets under administration – RBC Dexia IS represents the total AUA of RBC Dexia IS.
As RBC Dexia IS reports on a one-month lag basis, AUA – RBC Dexia IS is reported as at
September 30, 2006.
Financial performance
Revenue from Other was $306 million, a decline of $21 million, or 6%,
over the prior year. The decrease mainly reflected the gain recorded
in the prior year related to the sale of an Enron-related claim. This
factor was partially offset by increased revenue in our Global Financial
Institutions business due to higher deposit balances.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 61
Corporate Support
Corporate Support segment activities include our Global Technology
and Operations Group, Corporate Treasury, Finance, Human Resources,
Risk Management, Internal Audit and other Global Functions, the costs
of which are largely allocated to the business segments.
The reported results for the Corporate Support segment mainly
reflect activities that are undertaken for the benefit of the organization
which are not allocated to the business segments such as enterprise
funding, securitization and the net charges associated with unattributed
capital. The results also include consolidation adjustments such as the
elimination of the teb adjustments recorded in RBC Capital Markets
related to the gross-up of income from Canadian taxable corporate
dividends to their tax equivalent value. These adjustments are recorded
in net interest income and offset in the provision for income taxes.
Due to the nature of activities and consolidated adjustments
reported in this segment, we believe that a period over period trend
analysis is not relevant. The following identifies the material items
affecting the reported results in each period.
Corporate Support financial highlights (1)
(C$ millions)
Net interest income (teb) (2)
Non-interest income
Total revenue (teb) (2)
Non-interest expense
Recovery of credit losses
Business realignment charges
Net income before income taxes and non-controlling interest in subsidiaries (teb) (2)
Net income (loss)
Selected average balance sheet and other information (3)
Total assets
Attributed capital (4)
Securitization
Total securitizations sold and outstanding (5)
New securitizations activity in the period (6)
Table 36
2006
2005
2004
(489) $
180
(309) $
37
(86)
–
(260) $
$
112
(293) $
188
(105) $
61
(47)
39
(158) $
(14) $
(314)
268
(46)
28
(36)
64
(102)
(61)
(5,400) $
3,150
(4,100) $
2,800
(2,300)
1,600
$
$
$
$
$
17,781
7,529
12,661
4,952
7,883
3,074
(1)
(2)
(3)
(4)
(5)
(6)
Certain segment-related amounts have been restated to conform to our current management reporting framework and changes made to our business segments during the year. For further
discussion, refer to the How we manage our business segments section.
Taxable equivalent basis. For further discussion, refer to the How we manage our business segments section. These amounts included the elimination of the adjustment related to the gross-up
of income from Canadian corporate dividends of $213 million in 2006 recorded in RBC Capital Markets (2005 – $109 million; 2004 – $55 million).
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Average attributed capital is a non-GAAP financial measure. For further discussion, refer to the Key financial measures (non-GAAP) section.
Total securitizations sold and outstanding are comprised of Credit card loans and Residential mortgages.
New securitization activity is comprised of Residential mortgages and Credit card loans securitized and sold in the year. For further details, refer to Note 5 to our Consolidated Financial
Statements.
2004
Net loss of $61 million primarily reflected the $64 million in business
realignment charges, a $42 million charge for losses on equity invest-
ments, a $68 million charge for consolidation adjustments to eliminate
inter-company items such as underwriting fees, the $26 million writedown
of an investment in AOL Canada and $19 million of costs relating to
a processing disruption. These factors were partially offset by mark-to-
market gains on derivatives related to certain economic hedges.
2006
Net income of $112 million for the year mainly reflected income tax
amounts which were largely related to enterprise funding activities and
the favourable resolution of income tax audits related to prior years not
allocated to the business segments. Mark-to-market gains on deriva-
tives related to certain economic hedges also contributed to net income
in the year. These factors were partially offset by the timing of securitiza-
tion activity and an amount accrued related to a leased space which
we will not occupy and expect to sub-lease at a rate lower than our
contracted rate.
2005
Net loss of $14 million largely reflected business realignment charges of
$39 million and mark-to-market losses on derivatives relating to certain
economic hedges, which were partially offset by securitization activity
and interest refunds relating to the resolution of disputed tax items for
the 1993 to 1998 tax periods.
Royal Bank of Canada Annual Report 2006
62 Management’s Discussion and Analysis
Financial condition
Balance sheet data and analysis
(C$ millions)
Interest-bearing deposits with banks
Securities
Trading account
Investment account and loan substitutes
Total securities
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
Residential mortgages
Personal loans
Credit cards
Business and government loans
Total loans
Other assets
Total assets
Deposits
Other liabilities
Non-controlling interest in subsidiaries
Shareholders’ equity
Table 37
As at October 31
2006
2005
$ 10,502
$
5,237
$ 147,237
37,632
$ 184,869
$ 59,378
$ 125,760
34,735
$ 160,495
$ 42,973
$ 96,675
44,902
7,155
61,207
$ 209,939
$ 69,100
$ 536,780
$ 343,523
$ 160,575
1,775
$
$ 22,123
$ 91,043
41,045
6,200
53,626
$ 191,914
$ 65,399
$ 469,521
$ 306,860
$ 131,003
1,944
$
$ 19,847
2006 vs. 2005
Total assets increased $67 billion, or 14%, from a year ago. The increase
was largely attributable to higher Total securities and Assets purchased
under reverse repurchase agreements and securities borrowed in
support of our increased level of trading activities, and growth in Total
loans reflecting strong loan demand driven by favourable economic
conditions.
Interest-bearing deposits with banks increased $5 billion from
a year ago, mainly due to the consolidation of our 50% proportionate
share in RBC Dexia IS.
Credit cards increased $1 billion, or 15%, despite the offsetting
effect of $550 million of net securitization during the year. The increase
largely reflected successful sales efforts and strong growth in client
spending and balances. The net securitization of $550 million was com-
prised of $1.2 billion securitized in 2006 and $650 million of previously
securitized amounts which matured in 2006, resulting in the loans being
recorded back on our Consolidated Balance Sheets.
Business and government loans were up $7 billion, or 13%,
reflecting solid business loan demand and the consolidation of our 50%
proportionate share in RBC Dexia IS.
Total securities increased $24 billion, or 15%, from a year ago,
mainly reflecting a higher level of trading securities in support of growth
in our trading businesses.
Other assets increased $4 billion, or 6%, from the prior year,
primarily due to increased business activity in customers’ liability under
acceptances and receivables from brokers and dealers.
Assets purchased under reverse repurchase agreements and
securities borrowed increased $16 billion, or 38%, from a year ago
generally in support of equity and debt trading strategies and business
expansion.
Deposits increased $37 billion, or 12%, from a year ago, largely
driven by growth in business and government deposits in support of
increased business activities as well as increased funding requirements
of our trading businesses.
Total loans increased $18 billion, or 9%, from a year ago as a result
Other liabilities increased $30 billion, or 23%, compared to the
of increases across all categories, reflecting strong loan demand driven
by favourable economic conditions.
prior year, mainly due to increased business activities related to repur-
chase agreements, securities lending and securities sold short.
Residential mortgages increased $6 billion, or 6%, despite the
offsetting effect of $13.6 billion of net securitization during the year.
The increase continued to be driven by a relatively solid housing market,
relatively low interest rates, strong labour market conditions, as well
as continued consumer confidence. Our sales efforts also contributed to
the increase.
Personal loans increased $4 billion, or 9%, reflecting continued
growth in both secured and unsecured credit lines, supported by strong
consumer demand and favourable credit conditions.
Shareholders’ equity was up $2 billion, or 11%, over the prior year
on strong earnings growth, net of dividends. Details on our common
and preferred share balances in our Shareholders’ equity and Preferred
share liabilities are provided in Table 38. For further discussion, refer to
Note 18 to our Consolidated Financial Statements.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 63
Share data and dividends
Table 38
(C$ millions, except number of shares
and per share amounts)
Number of
shares (000s)
Amount
Dividends
per share
Number of
shares (000s)
Amount
Dividends
per share
Number of
shares (000s)
Amount
Dividends
per share
2006
2005
2004
First Preferred
Non-cumulative Series N (1)
Non-cumulative Series O (1)
US$ Non-cumulative Series P
Non-cumulative Series S
Non-cumulative Series W (1)
Non-cumulative Series AA (2)
Non-cumulative Series AB (3)
$
$
12,000
6,000
–
–
12,000
12,000
12,000
300
150
–
–
300
300
300
$
1.18
1.38
–
1.33
1.23
.71
.41
12,000
6,000
–
10,000
12,000
–
–
$
300
150
–
250
300
–
–
$
1.18
1.38
US 1.26
1.53
.99
–
–
12,000
6,000
4,000
10,000
–
–
–
300
150
132
250
–
–
–
Total First Preferred
$ 1,350
$ 1,000
$
832
Common shares outstanding (4) 1,280,890
(94)
Treasury shares – preferred
Treasury shares – common (4)
(5,486)
Stock options (4)
Outstanding
Exercisable
32,243
26,918
$ 7,196
(2)
(180)
$ 1.44 1,293,502
(91)
(7,053)
$ 7,170
(2)
(216)
$
1.18 1,289,496
–
(9,726)
$ 6,988
–
(294)
36,481
28,863
44,744
32,801
$
1.18
1.38
US 1.44
1.53
–
–
–
$
1.01
(1)
As at October 31, 2006, the aggregate number of common shares issuable on the conversion of the First Preferred Shares Series N and O was approximately 6,463,000 and 3,264,000, respec-
tively. As at October 31, 2006, the First Preferred Shares Series W was not yet convertible. On November 24, 2006, we redeemed all the issued and outstanding Non-cumulative First Preferred
Shares Series O.
(2)
On April 4, 2006, we issued 12 million First Preferred Shares Series AA. These preferred shares do not have a conversion option.
(3) On July 20, 2006, we issued 12 million First Preferred Shares Series AB. These preferred shares do not have a conversion option.
(4)
On April 6, 2006, we paid a stock dividend of one common share on each of our issued and outstanding common shares. The effect is the same as a two-for-one split of our common shares.
All common shares, treasury shares and stock option numbers have been retroactively adjusted to reflect the stock dividend.
As at November 24, 2006, the number of outstanding common shares
and stock options were 1,279,524,000 and 31,754,000 respectively. The
number of other securities disclosed in the table above are unchanged.
For further information, refer to Notes 18 and 21 to our Consolidated
Financial Statements.
On November 1, 2006, we issued 8 million First Preferred Shares
Series AC. The net proceeds of this transaction will be used for general
business purposes. Subject to regulatory approval, we may redeem
these preferred shares in whole or in part at a declining premium on
or after November 24, 2011.
Capital management
Capital management framework
We actively manage our capital to balance the desire to maintain strong
capital ratios and high ratings with the desire to provide strong returns
to our shareholders. In striving to achieve this balance, we consider
the requirements of regulators, rating agencies, depositors and share-
holders, as well as our future business plans, peer comparisons and
our position relative to internal targets for capital ratios. Additional con-
siderations include the costs and terms of current and potential capital
issuances and projected capital requirements.
Our capital management framework serves to define, measure,
raise and invest all forms of capital in a co-ordinated and consistent
manner. We manage and monitor our capital from three perspectives:
(i) regulatory capital, (ii) economic capital and (iii) subsidiary capital.
This co-ordinated approach to capital management serves an important
business function, optimizing our capital usage and structure. It pro-
vides more efficient support for our business segments and clients and
better returns to our shareholders while protecting our depositors and
senior creditors.
Governance
The Board of Directors is responsible for the annual review and approval
of our capital plan, including all capital transactions, in conjunction with
our operating plan. The Audit Committee is responsible for the gover-
nance of capital management, which includes the review and ongoing
monitoring of internal controls and the control environment as well as
establishing and approving policies for their compliance with regulatory
standards and internal objectives.
The Asset and Liability Committee and the Group Executive share
management oversight responsibility for capital management and
receive regular reports detailing compliance with the established limits
and guidelines. In addition, the OSFI meets with our Audit Committee
and the Conduct Review and Risk Policy Committee to discuss our
policies and procedures regarding capital management.
Capital Management is responsible for the design and imple-
mentation of policies for regulatory, economic and subsidiary capital
management. Other key responsibilities include the monitoring and
reporting of our capital position along with recommending and
co-ordinating the execution of capital transactions.
Royal Bank of Canada Annual Report 2006
64 Management’s Discussion and Analysis
Risk-adjusted assets
Risk-adjusted assets are determined by applying the OSFI prescribed
rules to on-balance sheet and off-balance sheet exposures. They also
include an amount for the market risk exposure associated with our
trading portfolios.
Over the last year, risk-adjusted assets increased by $27 billion to
$224 billion, largely due to strong growth in loans, investment securities
and residential mortgages. Strong growth in off-balance sheet credit
instruments as well as the impact of RBC Dexia IS also contributed to
the increase. Risk-adjusted assets for market risk declined from the
previous year.
Risk-adjusted assets (1)
(C$ millions, except percentage amounts)
Balance sheet assets
Cash and deposits with banks
Securities
Issued or guaranteed by Canadian or other OECD (3) governments
Other
Residential mortgages (4)
Insured
Conventional
Other loans and acceptances (4)
Issued or guaranteed by Canadian or other OECD (3) governments
Other
Other assets
Off-balance sheet financial instruments
Credit instruments
Guarantees and standby letters of credit
Documentary and commercial letters of credit
Securities lending
Commitments to extend credit
Liquidity facilities
Note issuance/revolving underwriting facilities
Derivatives (5)
Total off-balance sheet financial instruments
Total specific and general risk
Total risk-adjusted assets
(1)
(2)
(3)
(4)
(5)
Calculated using guidelines issued by the OSFI.
Represents the weighted average of counterparty risk weights within a particular category.
OECD stands for Organisation for Economic Co-operation and Development.
Amounts are shown net of allowance for loan losses.
Includes non-trading credit derivatives given guarantee treatment for credit risk capital purposes.
Balance
sheet amount
Weighted
average of
risk weights (2)
Table 39
Risk-adjusted balance
2006
2005
$ 15,392
15%
$
2,322
$
1,830
25,120
159,749
29,666
66,996
20,501
159,730
59,623
$ 536,777
Credit
equivalent
amount
$ 19,428
143
38,185
19,666
4,413
4
$ 81,839
43,498
$ 125,337
–
5%
1%
42%
19%
67%
18%
42
7,811
48
5,278
363
27,921
385
25,592
3,848
107,336
10,609
2,991
95,639
7,014
$ 160,252
$ 138,777
73%
45%
8%
85%
100%
100%
$ 14,092
65
3,022
16,666
4,413
4
$ 12,154
56
2,299
14,968
3,513
3
$ 38,262
$ 32,993
24%
10,432
9,696
$ 48,694
$ 42,689
14,763
15,538
$ 223,709
$ 197,004
Regulatory capital and capital ratios
Capital levels for Canadian banks are regulated pursuant to guidelines
issued by the OSFI, based on standards issued by the Bank of
International Settlements. Regulatory capital is allocated into two tiers,
with Tier 1 capital comprising the more permanent components of
capital. Tier 1 capital consists primarily of common shareholders’ equity,
non-cumulative preferred shares, and the eligible amount of innovative
capital instruments less a deduction for goodwill. Tier 2 capital consists
mainly of subordinated debentures, the eligible amount of innovative
capital instruments that could not be included in Tier 1 capital, and an
eligible portion of the total general allowance for credit losses. Total
capital is defined as the total of Tier 1 and Tier 2 capital less deductions
as prescribed by the OSFI.
Regulatory capital ratios are calculated by dividing Tier 1 and Total
capital by risk-adjusted assets based on GAAP financial information.
In 1999, the OSFI formally established risk-based capital targets for
deposit-taking institutions in Canada. These targets are a Tier 1 capital
ratio of 7% and a Total capital ratio of 10%. In addition to the Tier 1 and
Total capital ratios, Canadian banks need to operate within a leverage
constraint and ensure that their assets-to-capital multiple, which is
calculated by dividing gross adjusted assets by Total capital, does not
exceed the level prescribed by regulators.
The components of regulatory capital and our regulatory capital
ratios are shown in Table 40.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 65
Regulatory capital and capital ratios (1)
(C$ millions, except percentage amounts)
Tier 1 capital
Common equity (2)
Non-cumulative preferred shares
Innovative capital instruments
Other non-controlling interest in subsidiaries
Goodwill
Tier 2 capital
Permanent subordinated debentures (3)
Non-permanent subordinated debentures (3)
Innovative capital instruments
General allowances
Other deductions from capital
Investment in insurance subsidiaries
Other
Total capital
Capital ratios
Tier 1 capital to risk-adjusted assets
Total capital to risk-adjusted assets
Assets-to-capital multiple
Table 40
2006
2005
$ 21,065
1,345
3,222
28
(4,182)
$ 19,115
997
2,835
28
(4,074)
21,478
18,901
839
6,313
249
1,223
8,624
874
7,234
567
1,286
9,961
(2,795)
(643)
(2,642)
(407)
$ 26,664
$ 25,813
9.6%
11.9%
19.7X
9.6%
13.1%
17.6 X
(1)
(2)
(3)
As defined in the guidelines issued by the OSFI.
This amount is shareholders’ equity less preferred shares of $1,050 million and other items of $8 million.
Subordinated debentures that are within five years of maturity are subject to straight-line amortization to zero during their remaining term and, accordingly, are included above at their
amortized value.
Tier 1 capital ratio
9.3%
9.7%
8.9%
9.6%
9.6%
12%
9%
6%
3%
0%
2002
2003
2004
2005
2006
Tier 1 capital rose to $21.5 billion, an increase of $2.6 billion over last
year. The increase was primarily due to strong internal capital genera-
tion, the reclassification of innovative capital from Tier 2 and the net
issuance of preferred shares as outlined in the capital management
activity section below. These increases were partially offset by common
share repurchases and cumulative unrealized foreign currency transla-
tion losses as a result of a stronger Canadian dollar.
Tier 2 capital decreased $1.3 billion in 2006. The decrease was
mainly a result of redemptions of subordinated debentures as outlined
in the capital management activity section below and the reclassification
of innovative capital to Tier 1.
Total capital increased $.9 billion as the net increase in Tier 1
and Tier 2 capital was partially reduced by an increase in regulatory
deductions.
As at October 31, 2006, the Tier 1 capital ratio of 9.6% was
unchanged from a year ago as strong internal capital generation, the
reclassification of innovative capital from Tier 2 and the net issuance of
preferred shares were offset by share repurchases and strong balance
sheet growth. The Total capital ratio of 11.9% was down 120 bps from
the previous year largely reflecting our redemption of subordinated
debentures in 2006. Throughout fiscal 2006, we maintained a Tier 1 cap-
ital ratio that exceeded our 2006 annual objective of greater than 8%.
As at October 31, 2006, our assets-to-capital multiple was
19.7 times, which remained below the maximum permitted by the OSFI,
compared to 17.6 times as at October 31, 2005.
Royal Bank of Canada Annual Report 2006
66 Management’s Discussion and Analysis
Selected capital management activity
(C$ millions)
Dividends
Common
Preferred
Preferred shares issued
Preferred shares redeemed
Treasury shares net sales – common
Repurchase of common shares – normal course issuer bid (1)
Repurchase and redemption of debentures (2)
Issuance of Trust Capital Securities (3)
(1)
(2)
(3)
For further details, refer to Note 18 to our Consolidated Financial Statements.
For further details, refer to Note 16 to our Consolidated Financial Statements.
For further details, refer to Note 17 to our Consolidated Financial Statements.
$
Table 41
2006
2005
$
1,847
60
600
(250)
36
(844)
(955)
–
1,512
42
300
(132)
132
(226)
(786)
1,200
In 2006, we undertook several initiatives to effectively manage our capital.
On April 26, 2006, we redeemed all of our $100 million of outstand-
Tier 1
In 2006, we repurchased 13.8 million common shares for $844 million,
of which 6.6 million shares were repurchased for $311 million under our
normal course issuer bid (NCIB) that expired on October 31, 2006; and
7.2 million shares were repurchased for $533 million under our NCIB
that expired on June 23, 2006. Effective November 1, 2006, we renewed
our NCIB to repurchase up to 40 million common shares, or 3%, of our
outstanding common shares. This NCIB will expire on October 31, 2007.
On October 6, 2006, we redeemed all of the issued and outstand-
ing $250 Non-cumulative First Preferred Shares Series S.
On July 20, 2006, we issued $300 million of Non-cumulative First
Preferred Shares Series AB at $25 per share.
On April 6, 2006, we paid a stock dividend of one common share
for each issued and outstanding common share, which has the same
effect as a two-for-one split of our common shares.
On April 4, 2006, we issued $300 million of Non-cumulative First
Preferred Shares Series AA at $25 per share.
Subsequent to October 31, 2006, we completed the following capital-
related activities:
On November 1, 2006, we issued $200 million of Non-cumulative
First Preferred Shares Series AC at $25 per share.
On November 24, 2006, we redeemed all of the issued and out-
standing $150 million Non-cumulative First Preferred Shares Series O.
Tier 2
During the year, we purchased $22 million of the outstanding
$250 million floating-rate debentures maturing in 2083 and
US$19 million of the outstanding US$300 million floating-rate deben-
tures maturing in 2085.
On October 24, 2006, we redeemed all of our US$300 million of
outstanding 6.75% subordinated debentures due October 24, 2011, for
100% of their principal amount plus accrued interest.
On September 12, 2006, we redeemed all of our $350 million of
outstanding 6.50% subordinated debentures due September 12, 2011,
for 100% of their principal amount plus accrued interest.
Starting in the third quarter of 2006, we included in our Tier 2B
capital US$120 million junior subordinated debentures issued by
RBC Centura prior to acquisition in 2001 based on the OSFI’s approval.
The ongoing inclusion of these instruments in our Tier 2B capital and
any redemption or repurchase is subject to certain regulatory conditions.
ing 8.20% subordinated debentures due April 26, 2011, for 100% of
their principal amount plus accrued interest.
On February 13, 2006, we redeemed all of our $125 million of
outstanding 5.50% subordinated debentures due February 13, 2011,
for 100% of their principal amount plus accrued interest.
Subsequent to October 31, 2006, we completed the following capital-
related activity:
On November 8, 2006, we redeemed all of our outstanding
US$400 million floating rate subordinated debentures due November 8,
2011, for 100% of their principal amount plus accrued interest
to the redemption date.
Dividends
Our common share dividend policy reflects our earnings outlook,
desired payout ratio and the need to maintain adequate levels of
capital to fund business opportunities. The targeted common share
dividend payout ratio for 2006 was 40–50%. In 2006, the dividend pay-
out ratio was 40%, down from 45% in 2005. Common share dividends
during the year were $1.8 billion, up 22% from a year ago.
Hedging foreign currency-denominated operations
Rising U.S. dollar-denominated assets and deductions from regulatory
capital have prompted the development of a policy regarding hedging
our foreign exchange exposure with respect to our foreign operations.
The objectives of our hedging policy are: (i) immunization of our
consolidated regulatory capital ratios from currency fluctuations and
(ii) mitigation of potential earnings volatility that might result at
disposition of these investments. When the Canadian dollar strength-
ens/weakens against other currencies, the losses/gains on net foreign
investments reduce/increase our capital, as well as the risk-adjusted
assets and goodwill of the foreign currency-denominated operations.
By selecting an appropriate level of hedging of our investment in foreign
operations, our regulatory capital ratios are not materially impacted by
currency fluctuations due to the offsetting impact of the proportionate
movement in the assets and capital.
The outcome of hedging operations denominated in foreign
currencies is to promote orderly and efficient capital management.
It enables us to comply with regulatory requirements on an ongoing
basis and to maintain greater control over key capital ratios
thereby reducing the need for capital transactions in response
to currency fluctuations.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 67
Economic capital
Economic capital is our own quantification of risks associated with
business activities. Economic capital is defined as the capital required
to remain solvent and in business even under extreme market condi-
tions, given our desire to maintain an AA debt rating. Economic capital is
attributed to each business segment in proportion to the risks inherent
in their respective business and drives the optimization of returns in
terms of risk and reward. It allows for direct comparable performance
measurements through Return on equity (ROE) and Return on risk
capital (RORC) which are described in detail in the Key financial
measures (non-GAAP) section. Accordingly, Economic capital aids senior
management in resource allocation and serves as a reference point for
the assessment of our aggregate risk appetite in relation to our financial
position, recognizing that factors outside the scope of Economic capital
must also be taken into consideration.
The identified risks for which we calculate Economic capital are
credit, market (trading and non-trading), operational, business, fixed
asset and insurance risk.
•
Credit risk is the risk of loss associated with a counterparty’s
inability to fulfill its payment obligations.
• Market risk is the risk of loss that results from changes in interest
and foreign exchange rates, equity and commodity prices and
credit spreads.
•
•
•
•
Operational risk is defined as the risk of loss resulting from
inadequate or failed internal processes, people and systems or
from external events.
Business risk is the risk of loss due to variances in volumes,
prices and costs caused by competitive forces, regulatory changes,
reputation and strategic risks.
Fixed asset risk is defined as the risk that the value of fixed assets
will be less than their book value at a future date.
Insurance risk is the risk of loss that may occur when actuarial
assumptions made in insurance product design and pricing
activities differ from actual experience.
In addition, goodwill and intangibles are underpinned by Economic
capital. For further discussion of credit, market, operational and insur-
ance risk, refer to the Risk management section.
Economic capital is a non-GAAP measure and its calculation and
attribution involves a number of assumptions and judgments. The
methodologies are continually monitored to ensure that the Economic
capital framework is comprehensive and consistent.
Economic capital
(C$ millions average balances)
Credit risk
Market risk (trading and non-trading)
Operational risk
Business and fixed asset risk
Insurance risk
Risk capital
Goodwill and intangibles
Attributed capital (Economic capital)
Unattributed capital
Common equity
$
2006
5,800
2,500
2,450
1,800
200
$
Table 42
2005
5,100
2,200
2,350
1,600
200
$ 12,750
4,650
$ 11,450
4,850
$ 17,400
2,500
$ 16,300
2,300
$ 19,900
$ 18,600
Attributed Economic capital increased $1.1 billion from the same period
a year ago largely due to increases in Credit risk and Market risk capital
partially offset by a decrease in Goodwill and intangibles. The increase
in Credit risk capital was primarily due to business growth along with
the impact of RBC Dexia IS, which was established on January 2, 2006.
Market risk capital increased largely in our non-trading portfolios.
Goodwill and intangibles decreased as a result of the impact of a stron-
ger Canadian dollar on the translated value of U.S. dollar-denominated
assets and was partially offset by the impact of RBC Dexia IS and Abacus.
We remain well capitalized with current levels of qualified equity
exceeding the Economic capital required to underpin all of our risks.
Subsidiary capital
Structured management of consolidated capital has become a key stra-
tegic objective as the amount of capital deployed in subsidiaries to build
their businesses has grown in order to maximize profits and returns to
shareholders. Accordingly, regulatory bodies have focused on ensuring
that for all internationally active banks, capital recognized in regulatory
capital measurements is accessible by the parent entity. To meet these
new regulatory requirements and facilitate the co-ordinated generation
and allocation of capital across the organization, we have put in place
a comprehensive subsidiary capital framework. This framework sets
guidelines for defining capital investments in our subsidiaries and
establishes minimum targets in relation to our total investment in those
subsidiaries.
While each of our subsidiaries has individual responsibility for
calculating, monitoring and maintaining capital adequacy in compliance
with the laws and regulations of its local jurisdiction, the Capital
Management Group is mandated to provide centralized oversight and
consolidated capital base management across various entities.
Future developments
We closely monitor changes in the accounting framework and their
potential impact on our capitalization levels through ongoing dialogue
with our external auditors, other financial institutions, the Canadian
Bankers Association and the OSFI. Several changes in accounting
principles have either been introduced or are being proposed in the
areas of financial instruments (as described in the Critical accounting
policies and estimates section and Note 1 to the Consolidated Financial
Statements), and requirements for contracts that can be settled in cash
or shares to be settled in shares for the calculation of diluted EPS. These
changes could affect our capital requirements and activities.
Basel II
The implementation of the capital adequacy requirements for Basel II will
begin with a parallel run in fiscal 2007 with full compliance expected
at the beginning of fiscal 2008. We are actively preparing for the imple-
mentation of the Basel II framework as detailed in the Risk management
section.
Royal Bank of Canada Annual Report 2006
68 Management’s Discussion and Analysis
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of financial
transactions that, under GAAP, are not recorded on our balance sheet.
Off-balance sheet transactions are generally undertaken for risk man-
agement, capital management and/or funding management purposes
for our benefit and the benefit of our clients. These transactions include
derivative financial instruments, transactions with special purpose
entities and issuance of guarantees. These transactions give rise to,
among other risks, varying degrees of market, credit and liquidity risk,
which are discussed in the Risk management section.
Derivative financial instruments
Derivative financial instruments are primarily used in sales and trading
activities to enable our clients to transfer, modify or reduce current or
expected risks. These trading derivatives are fully recognized at their fair
values on our Consolidated Balance Sheets.
We also use derivatives to manage our exposures to interest,
currency, credit and other market risks. We may choose to enter into
derivative transactions to economically hedge certain business strategies
that do not otherwise qualify for hedge accounting or where hedge
accounting is not considered economically feasible to implement
(economic hedges). These economic hedges are also carried at fair value
on our Consolidated Balance Sheets.
interests. Pursuant to the CICA Accounting Guideline 12, Transfers of
Receivables (AcG-12), qualifying SPEs (QSPE) are legal entities that are
demonstrably distinct from the transferor, have limited and specified
permitted activities, have defined asset holdings and may only sell or
dispose of selected assets in automatic response to specified conditions.
We manage and monitor our involvement with SPEs through our
Structured Transactions Oversight Committee. Refer to the Risk man-
agement section for further details.
Securitization of our financial assets
We periodically securitize our credit card receivables and residential and
commercial mortgage loans primarily to diversify our funding sources
and enhance our liquidity position. Gains and losses on securitizations
are included in Non-interest income.
Credit card receivables
We securitize a portion of our credit card receivables through an SPE
on a revolving basis. The SPE is funded through the issuance of senior
and subordinated notes collateralized by the underlying credit card
receivables. This SPE meets the criteria for a QSPE and, accordingly,
as the transferor of the credit card receivables, we are precluded from
consolidating this SPE.
Certain derivatives that are used to manage our risks are specifi-
We continue to service the credit card receivables sold to the QSPE
cally designated and qualify for hedge accounting (accounting hedges).
We apply hedge accounting to minimize significant unplanned fluctua-
tions in earnings caused by changes in interest rates or exchange rates.
These hedging derivatives represent off-balance sheet items, as they are
not carried at fair value.
Notes 1 and 7 to our Consolidated Financial Statements provide
more detail on our accounting for, and types of, derivatives. The follow-
ing are the net fair values of the derivatives by category:
Derivatives
(C$ millions)
On-balance sheet
Trading derivatives
Economic hedges
Off-balance sheet
Accounting hedges
Total net fair value
Table 43
2006
2005
$
(4,222) $
(498)
(3,628)
(452)
294
386
$
(4,426) $
(3,694)
Special purpose entities
Special purpose entities (SPEs) are typically set up for a single, discrete
purpose, have a limited life and serve to legally isolate the financial
assets held by the SPE from the selling organization. They are not oper-
ating entities and usually have no employees. SPEs may be variable
interest entities (VIEs) as defined by the Canadian Institute of Chartered
Accountants (CICA) Accounting Guideline 15, Consolidation of Variable
Interest Entities (AcG-15). Refer to the Critical accounting policies and
estimates section and Notes 1 and 6 to our Consolidated Financial
Statements, for our consolidation policy and information about the
VIEs that we have consolidated, or in which we have significant variable
and perform an administrative role for the QSPE. We also provide first-
loss protection to the QSPE in two forms. We have an interest in the
excess spread from the QSPE which is subordinate to the QSPE’s obliga-
tion to the holders of its asset-backed securities. Excess spread is the
residual net interest income after all trust expenses have been paid. Our
excess spread serves to absorb losses with respect to the credit card
receivables before payments to the QSPE’s noteholders are affected.
The present value of this excess spread is reported as a retained interest
within Investment account securities on our Consolidated Balance
Sheets. In addition, we provide loans to the QSPE to pay upfront
expenses. These loans rank subordinate to all notes issued by the QSPE.
Residential mortgage loans
We securitize residential mortgage loans through the creation of
mortgage-backed securities (MBS) and sell a portion of these MBS to
an independent SPE on a revolving basis. We retain interests in the
excess spread on the sold MBS and continue to service the mortgages
underlying these MBS. The retained portion of these MBS is recorded in
Investment account securities on our Consolidated Balance Sheets.
Commercial mortgage loans
We securitize commercial mortgages by selling them in collateral pools,
which meet certain diversification, leverage and debt coverage criteria,
to an SPE. The SPE finances the purchase of these pools by issuing
certificates that carry varying degrees of subordination. These certifi-
cates range from AAA to B- when rated, and the most subordinated are
unrated. The certificates represent undivided interests in the collateral
pool, and the SPE, having sold all undivided interests available in the
pool, retains none of the risk of the collateral pools. As part of the SPE
pooling and servicing agreement, we continue to be the primary servicer
of the loans under contract with a master servicer for the SPE.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 69
Our financial asset securitizations
(C$ millions)
Outstanding securitized assets
Residential mortgages
Credit cards
Commercial mortgages
Total
Retained interests
Residential mortgages
Mortgage-backed securities retained
Retained rights to future excess interest
Credit cards
Asset-backed securities purchased
Retained rights to future excess interest
Subordinated loan receivables
Total
Table 44
2006
2005
$
$ 14,131
3,650
1,914
9,561
3,100
1,237
$ 19,695
$ 13,898
$
5,591
206
1,390
26
6
$
2,654
172
596
21
6
$
7,219
$
3,449
2006 vs. 2005
During the year, we securitized $13.6 billion of residential mortgages,
of which $6.3 billion were sold and the remaining $7.3 billion were
retained as Investment account securities. We also securitized
$.7 billion of commercial mortgages and $1.2 billion in credit card
loans. During the year, $650 million of previously securitized credit card
loans matured which resulted in the loans being recorded back on our
Consolidated Balance Sheets. For further details, refer to Note 5 to our
Consolidated Financial Statements.
Capital trusts
We issue innovative capital instruments, RBC Trust Capital Securities
(TruCS), through two SPEs: RBC Capital Trust (Trust) and RBC Capital
Trust II (Trust II). We consolidated Trust but did not consolidate Trust II.
As at October 31, 2006, we held the residual interest of $1 million
(2005 – $1 million) in Trust II, had a loan receivable from Trust II of
$42 million (2005 – $44 million), and reported the senior deposit note
of $900 million (2005 – $900 million) we issued to Trust II in our deposit
liabilities. Under certain circumstances, TruCS of Trust II will be auto-
matically exchanged for our preferred shares. In addition, TruCS holders
of Trust II have the right to exchange for our preferred shares as outlined
in Note 17 to our Consolidated Financial Statements.
Interest expenses on the senior deposit note issued to Trust II
amounted to $52 million (2005 – $52 million; 2004 – $52 million) during
the year. For further details on the capital trusts and the terms of the
TruCS issued and outstanding, refer to the Capital management section
and Note 17 to our Consolidated Financial Statements.
Securitization of client financial assets
Within our Global Securitization Group, our principal relationship with
SPEs comes in the form of administering six multi-seller asset-backed
commercial paper conduit programs (multi-seller conduits) – 3 in
Canada and 3 in the United States. We are involved in the multi-seller
conduit markets because our clients value these transactions, they
offer a growing source of revenue and they generate a favourable risk-
adjusted return for us. Our clients primarily utilize multi-seller conduits
to diversify their financing sources and to reduce funding costs by
leveraging the value of high-quality collateral. The multi-seller conduits
purchase various financial assets from clients and finance the purchases
by issuing highly rated asset-backed commercial paper. The multi-seller
conduits typically purchase the financial assets as part of a securitiza-
tion transaction by our clients. In these situations, the sellers of the
financial assets continue to service the respective assets and generally
provide some amount of first-loss protection on the assets.
During 2006, the multi-seller conduits also financed assets that
were in the form of either securities or instruments that closely resemble
securities such as credit-linked notes. The credit quality of these
transactions was very high – often in the highest available rating cat-
egories established by the rating agencies that assign ratings to these
types of securities or security-like instruments. In these situations, the
multi-seller conduit is often one of many investors in the securities or
security-like instruments.
The commercial paper issued by each multi-seller conduit is in the
multi-seller conduit’s own name with recourse to the financial assets
owned by the multi-seller conduit. The multi-seller conduit commercial
paper is non-recourse to us except through our participation in liquid-
ity and/or credit enhancement facilities, and non-recourse to the other
multi-seller conduits that we administer.
We do not maintain any ownership or retained interests in these
multi-seller conduits. We provide services such as transaction structur-
ing and administration as specified by the multi-seller conduit program
documents, for which we receive fees. In addition, we provide backstop
liquidity facilities and partial credit enhancements to the multi-seller
conduits. We have no rights to, or control of, the assets owned by the
multi-seller conduits. Fee revenue for all such services, which is reported
as Non-interest income, amounted to $60 million during the year
(2005 – $58 million; 2004 – $70 million).
At fiscal years ended October 31, total commitments and amounts
outstanding under liquidity and credit enhancement facilities for the
multi-seller conduits, which are also included in our discussion in the
Guarantees section, are shown below:
Liquidity and credit facilities
Table 45
2006
2005
(C$ millions)
Committed (1)
Outstanding Committed (1)
Outstanding
Liquidity facilities $ 34,880 $
Credit facilities
3,404
– $ 29,442 $
–
2,832
–
–
(1)
Our maximum exposure to loss under these facilities is $35.1 billion for 2006 and
$29.4 billion for 2005. The increase in liquidity facilities is due to the increase in the
multi-seller conduits’ activities during the year.
All the multi-seller conduits were restructured in 2004. As part of the
restructurings, an unrelated third party (expected loss investor) agreed
to absorb credit losses up to a maximum contractual amount that may
occur in the future on the assets in the multi-seller conduits (multi-seller
conduit first-loss position) before us and the multi-seller conduit’s
debt holders. In return for assuming this multi-seller conduit first-loss
position, the expected loss investor is paid by the multi-seller conduit
a return commensurate with its risk position. Moreover, each multi-
seller conduit has granted to the expected loss investor material voting
rights, including the right to approve any transaction prior to the multi-
seller conduit purchasing and financing a transaction. As a result of the
restructurings, we do not consolidate any of the multi-seller conduits.
As a result of increased activities during the year, these six multi-seller
conduits have financial assets totalling $24.8 billion as at October 31,
2006 (2005 – $20.2 billion). The maximum assets that may have to be
purchased by the conduits under purchase commitments outstanding as
at October 31, 2006 were $34.3 billion (2005 – $29.3 billion).
Royal Bank of Canada Annual Report 2006
70 Management’s Discussion and Analysis
Creation of credit investment products
We use SPEs to generally transform credit derivatives into cash instru-
ments, to distribute credit risk and to create customized credit products
to meet the needs of investors with specific requirements. As part of
this process, we may transfer our assets to the SPEs with an obligation
to buy these assets back in the future and may enter into derivative
contracts with these SPEs in order to convert various risk factors such as
yield, currency or credit risk of underlying assets to meet the needs of
the investors. In this role as derivative counterparty to the SPE, we also
assume the associated counterparty credit risk of the SPE.
These SPEs often issue notes. The notes may be rated by external
rating agencies, as well as listed on a stock exchange, and are gener-
ally traded via recognized bond clearing systems. While the majority of
the notes are expected to be sold on a “buy and hold” basis, we may on
occasion act as market maker. We do not, however, provide any SPE with
any guarantees or other similar support commitments; rather, we buy
credit protection from these SPEs through credit derivatives. The inves-
tors in the notes ultimately bear the cost of any payments made by the
SPE under these credit derivatives. We consolidate the SPEs in which our
investments in the notes expose us to a majority of the expected losses.
There are many functions required to create such a product.
We fulfill some of these functions and independent third parties or
specialist service providers fulfill the remainder. Currently we act as
sole arranger and swap provider for SPEs where we are involved and, in
most cases, act as paying and issuing agent as well. As with all our trad-
ing derivatives, the derivatives with these SPEs are carried at fair value
in derivative-related assets and liabilities. The assets in these SPEs
amounted to $3.8 billion as at October 31, 2006 (2005 – $3.3 billion), of
which $.7 billion were consolidated as at October 31, 2006 (2005 –
$.7 billion).
Asset management
Collateralized Debt Obligation (CDO) SPEs raise capital by issuing debt
and equity securities and invest their capital proceeds in portfolios of
debt securities. Any net income or loss is shared by the CDO’s equity
and debt investors. In 2005, we sold our CDO management business to
a third party, and in 2006, we sold our investments in the CDO’s first-
loss tranche. The interest income from investments in the CDO’s first-loss
tranche totalled nil in 2006 (2005 – $9 million; 2004 – $10 million).
Structured finance
We occasionally make loan substitute and equity investments in
off-balance sheet entities that are part of transactions structured to
achieve a desired outcome, such as limiting exposure to specific assets
or risks, obtaining indirect (and usually risk mitigated) exposure to
financial assets, funding specific assets, supporting an enhanced yield
and meeting client requirements. These transactions usually yield a
higher return or provide lower cost funding on an after-tax basis than
financing non-SPE counterparties, holding an interest in financial assets
directly, or receiving on-balance sheet funding. These transactions are
structured to mitigate risks associated with directly investing in the
underlying financial assets, or directly receiving funding and may be
structured so that our ultimate credit risk is that of a non-SPE, which in
most cases is another financial institution. Exit mechanisms are built
into these transactions to curtail exposure from changes in law or regu-
lations. We consolidate structured finance VIEs in which our interests
expose us to a majority of the expected losses. The unconsolidated
entities in which we have significant investments or loans had total
assets of $6.9 billion as at October 31, 2006 (2005 – $6.5 billion). As at
October 31, 2006, our total investments in and loans to these entities
were $2.9 billion (2005 – $2.9 billion), which are reflected on our
Consolidated Balance Sheets.
Investment funds
We enter into derivative transactions with third parties including mutual
funds, unit investment trusts and other investment funds for fees to
provide their investors with the desired exposure and hedge our expo-
sure from these derivatives by investing in other funds. We consolidate
the investment funds when our participation in the derivative or our
investment in other funds exposes us to a majority of the respective
expected losses. The total assets held in the funds where we have sig-
nificant exposure and which we did not consolidate were $3.6 billion
(2005 – $6.7 billion) as at October 31, 2006. As at October 31, 2006, our
total exposure to these funds was $319 million (2005 – $908 million).
The total assets held in the funds where we have significant exposure
declined as we have sold some of our investments in these funds.
Trusts, mutual and pooled funds
Our joint venture RBC Dexia IS provides trusteeship and/or custodian
services for a number of personal and institutional trusts and has a fidu-
ciary responsibility to act in the best interests of the beneficiaries of the
trusts. RBC Dexia IS earns fees for providing these services. We include
50% of these fees in our revenue, representing our share of interest in
RBC Dexia IS.
We manage assets in mutual and pooled funds and earn fees at
market rates from these funds, but do not guarantee either principal or
returns to investors in any of these funds.
Guarantees
We issue guarantee products, as defined by the CICA Accounting
Guideline 14, Disclosure of Guarantees (AcG-14), in return for fees
recorded in Non-interest income. Significant types of guarantee prod-
ucts we have provided to third parties include credit derivatives, written
put options, securities lending indemnifications, backstop liquidity
facilities, financial standby letters of credit, performance guarantees,
stable value products, credit enhancements, mortgage loans sold with
recourse and certain indemnification agreements.
Our maximum potential amount of future payments in relation to
our guarantee products as at October 31, 2006, amounted to $125 billion
(2005 – $121 billion). In addition, as of October 31, 2006, RBC Dexia IS
securities lending indemnifications totalled $45.6 billion (2005 – nil);
we are exposed to 50% of this amount. The maximum potential amount
of future payments represents the maximum risk of loss if there were a
total default by the guaranteed parties, without consideration of possible
recoveries under recourse provisions, insurance policies or from collat-
eral held or pledged.
Note 27 to our Consolidated Financial Statements provides
detailed information regarding the nature and maximum potential expo-
sure for the above-mentioned types of guarantee products.
In addition to guarantees, we provide commercial commitments
to our clients to help them meet their financing needs. On behalf of our
clients we undertake written documentary and commercial letters of
credit, authorizing a third party to draw drafts on us up to a stipulated
amount and typically having underlying shipments of goods as collat-
eral. We make commitments to extend credit, which represent unused
portions of authorizations to extend credit in the form of loans, bankers’
acceptances or letters of credit. We also have uncommitted amounts for
which we retain the option to extend credit to a borrower. The following
is a summary of our off-balance sheet commercial commitments.
Commercial commitments (1)
Table 46
(C$ millions)
Within 1 year
1 to 3 years
Over 3 to 5 years
Over 5 years
Total
Documentary and commercial letters of credit
Commitments to extend credit and liquidity facilities
Uncommitted amounts (2)
$
693
45,171
45,498
$
20
29,736
–
$
–
20,279
–
$
–
4,190
–
$
713
99,376
45,498
$ 91,362
$ 29,756
$ 20,279
$
4,190
$ 145,587
(1)
(2)
Based on remaining term to maturity.
Uncommitted amounts represent an amount for which we retain the option to extend credit to a borrower.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 71
Credit risk is the risk of loss associated with a counterparty’s
inability to fulfill its payment obligations.
Market risk is the risk of loss that results from changes in interest
and foreign exchange rates, equity and commodity prices, and credit
spreads.
Liquidity and funding risk is the risk that an institution is unable to
generate sufficient cash or its equivalent in a timely and cost-effective
manner to meet its commitments as they come due.
Insurance risk is the risk of loss that may occur when actuarial
assumptions made in insurance product design and pricing activities
differ from actual experience.
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems or from external events.
Reputation risk is the risk that an activity undertaken by an orga-
nization or its representatives will impair its image in the community
or lower public confidence in it, resulting in the loss of business, legal
action or increased regulatory oversight.
Strategic risk is the risk that the enterprise or a particular business
area will make inappropriate strategic choices, or is unable to success-
fully implement selected strategies or related plans and decisions.
Regulatory and legal risk is the risk of negative impact to business
activities, earnings or capital, regulatory relationships or reputation as
a result of failure to adhere to or comply with regulations, law, industry
codes or rules, regulatory expectations or ethical standards.
Competitive risk is the risk associated with the inability to build
or maintain sustainable competitive advantage in a given market
or markets.
Systemic risk is the risk that the financial system as a whole may
not withstand the effects of a crisis resulting from extraordinary eco-
nomic, political, social or financial circumstances. This could result in
financial, reputation or other losses.
Environmental risk is the risk of loss to financial, operational or
reputation value resulting from the impact of environmental issues.
Environmental risk is often embedded within other risks such as credit
and operational risk.
Risk management
Our business activities expose us to a wide variety of risks, which are
inherent in virtually all aspects of our operations. Our goal in managing
these risks is to protect the enterprise from an unacceptable level of
earnings volatility while supporting and enabling business oppor-
tunities. We do this by ensuring that the risks arising from business
activities and transactions provide an appropriate balance of return for
the risk assumed and remain within our risk appetite.
Our management of risk is supported by sound risk management
practices and an effective risk management framework. The cornerstone
of our risk management framework is a strong risk management cul-
ture, supported by a robust enterprise-wide set of policies, procedures
and limits, which involve our risk management professionals, business
segments and other functional teams. This partnership is designed to
ensure the ongoing alignment of business strategies and activities with
our risk appetite.
Risk management principles
We apply the following overarching principles in the identification,
monitoring and management of risk throughout the organization:
•
Business management is accountable for all risks assumed in their
operations.
Independent oversight is necessary to provide an objective
assessment of our exposure to risk.
The optimum balance of risk and return is achieved through the
alignment of business strategy and risk appetite on an enterprise-
wide basis.
Extreme positions are avoided to mitigate the likelihood of
unacceptable earnings volatility.
•
•
•
Risk types
We have the greatest level of direct control and influence over credit,
market, liquidity and funding, insurance and operational risks. Effective
management of these risks reduces our exposure to other risks that we
have less control and influence over.
Risk types
Systemic
Regulatory
and Legal Competitive
Strategic
Reputation
Operational
M
o
r
e
c
o
n
t
r
o
l
a
n
d
i
n
f
l
u
e
n
c
e
Less control and influence
Credit
Market
Liquidity
and
Funding
Insurance
Royal Bank of Canada Annual Report 2006
72 Management’s Discussion and Analysis
Governance
The following graphic illustrates our overall risk governance structure.
Board and its committees
Board of Directors
Conduct Review and Risk Policy Committee
Audit Committee
Key risk committees
Group Risk Committee
USA Corporate
Governance Committee
Structured Transactions
Oversight Committee
Policy Review
Committee
Ethics and Compliance
Committee
Asset and Liability
Committee
Key risk management groups
Group Risk Management and Corporate Treasury
Business segments and corporate support groups
Business Segments
Global Technology and Operations
Global Functions
The responsibilities of the various stakeholders of risk management are
as follows:
Board and its committees
Board of Directors
The Board of Directors provides oversight and carries out its mandate
with respect to risk management through the Conduct Review and Risk
Policy Committee (CR&RPC) and the Audit Committee.
Conduct Review and Risk Policy Committee (CR&RPC)
This committee is designed to ensure that we have risk policies, pro-
cesses and controls in place to manage the significant risks to which we
are exposed and that we comply with the Bank Act (Canada) and other
relevant laws and regulations. Key responsibilities are to (i) shape and
influence our risk culture, (ii) identify risks, (iii) determine the appropri-
ate organizational structure for Group Risk Management (GRM),
(iv) review and approve significant policies and limits for controlling risk,
(v) review and monitor the major risks we assume or face and provide
direction as required, and (vi) ensure we have sufficient and appropriate
risk management resources.
Audit Committee
The committee mandate includes (i) providing oversight over the integrity
of the financial statements, (ii) ensuring policies related to liquidity
and funding management and capital management are in place, and
(iii) obtaining reasonable assurance that applicable policies are being
adhered to. The committee reviews the adequacy and effectiveness of
internal controls and regularly reviews regulatory and legal risks, and
litigation matters that could significantly affect the financial statements.
The committee, along with the CR&RPC, regularly reviews significant
risks facing the organization and regulatory compliance matters.
Key risk committees
Group Risk Committee (GRC)
The GRC executes management’s oversight role regarding risk man-
agement. This committee is designed to ensure that the appropriate
authorities, resources, responsibilities and reporting are in place to
support an effective risk management program. The GRC is chaired
by the President and Chief Executive Officer, and includes the other
members of the Group Executive, the Chief Risk Officer and the Chief
Financial Officer. The GRC is responsible for ensuring that (i) our overall
risk profile is consistent with strategic objectives, and (ii) there are
ongoing, appropriate and effective risk management processes to iden-
tify, measure and manage risks on an aggregate basis. GRC recommends
risk limits and controls including aggregate exposure limits for credit,
market and insurance risks to CR&RPC for approval. In addition, it
recommends the liquidity and funding management framework, liquidity
contingency plan, and liquidity and funding risk limits to the Audit
Committee for approval.
We also have five primary management risk committees, which
report to the GRC and ensure appropriate governance and compliance
is maintained. The risk committee structure and mandates are reviewed
regularly to ensure ongoing alignment with organizational roles and
responsibilities and regulatory developments as necessary. The commit-
tees are as follows:
USA Corporate Governance Committee is responsible for oversight,
monitoring and reporting on all corporate governance matters including
all material risks, affecting our U.S. operations.
Structured Transactions Oversight Committee provides risk over-
sight of structured transactions and complex credits to ensure that all
potentially significant reputation, regulatory and legal, accounting or tax
risks are adequately identified and effectively managed or mitigated.
Policy Review Committee is responsible for the approval of (i) our
risk management and policy framework, (ii) enterprise-wide risk policies
relating to risk identification and approval, measurement, controls,
limits and reporting, (iii) new or changed products, services and
initiatives with significant risk implications, and (iv) risk measurement
approaches and methodologies.
Ethics and Compliance Committee directly supports our manage-
ment of regulatory, compliance and reputation risk through approval of
our ethics and compliance program, which includes our Code of Conduct
and Enterprise Compliance Management Framework, as well as specific
policies and procedures in areas such as anti-money laundering and
anti-terrorist financing, privacy and information protection, conflicts
of interest, and insider trading. It serves as the senior management focal
point in initiating response to and action on new and changing regula-
tory and compliance risks. It informs and advises GRC and the Board
of Directors on significant compliance and regulatory issues and appro-
priate remedial measures.
Asset and Liability Committee (ALCO) based on its delegated
authority reviews, recommends or approves broad policy frameworks
pertaining to economic and regulatory capital management, interest
rate risk related to traditional non-trading banking activities, funds
transfer pricing, liquidity and funding, as well as subsidiary governance.
The committee also provides regular oversight and strategic direction in
light of expected returns and the impact of competitive and regulatory
environments.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 73
Key risk management groups
Group Risk Management (GRM)
GRM works in full partnership with our businesses to identify, assess,
mitigate and monitor all forms of risk. The CRO has overall responsibil-
ity for all aspects of the group risk management function. The CRO and
GRM have been delegated responsibility by the Board of Directors for
developing and maintaining (i) a comprehensive risk identification and
approval process, (ii) appropriate methodologies for risk measurement,
(iii) risk controls and limits to ensure appropriate risk diversification and
optimization of risk/return on both a portfolio and transactional basis,
and (iv) comprehensive and timely reporting to senior management and
the Board on major risks being assumed by or facing the organization.
Corporate Treasury
The Corporate Treasury function has responsibility for the management,
oversight and reporting of our capital position, structural interest rate
risk, and liquidity and funding risks. Their responsibilities also include
the management and reporting of regulatory, economic and subsidiary
capital, while ensuring compliance with regulatory and internal con-
straints. One of their goals is to optimize returns to shareholders by
minimizing the cost of capital, within the above constraints. Corporate
Treasury also recommends related policies and authorities to ALCO and
GRC, who recommend to the Audit Committee for approval.
Business segments and corporate support groups
The business segments, Global Technology and Operations (GTO) and
Global Functions also have responsibility for the management of risk.
These responsibilities include (i) accountability of their risks, (ii) align-
ment of business strategy with corporate risk culture and risk appetite,
and (iii) identification, control and management of their risks.
Risk measurement
The ability to measure risks is a key component of our enterprise-wide
risk management process. Certain measurement methodologies are
common to a number of risk types, while others may only apply to a
single risk type. While quantitative risk measurement is important, we
also place reliance on qualitative factors. For each risk, where appropri-
ate, controls are in place to ensure both quantifiable and unquantifiable
risks are identified, assessed and reported.
In most cases we are able to develop a quantifiable measure of
expected loss and unexpected loss, as well as to conduct stress scenar-
ios. These measurement models and techniques are continually subject
to independent assessment for appropriateness and reliability. The
implementation of Basel II will enhance our ability to measure risks. For
those risk types that are hard to quantify, we place greater emphasis on
qualitative risk factors and assessment of activities to gauge the overall
level of risk in order to ensure they are within our risk tolerance.
Expected loss
Expected loss represents those losses that are statistically expected to
occur as a result of conducting business. They largely arise in the form
of credit and fraud losses due to lending activities.
Unexpected loss
Unexpected loss is a statistical estimate of the amount by which actual
losses can exceed expected loss over a specified time horizon, mea-
sured to a specified level of confidence. On an enterprise-wide basis,
we use economic capital to quantify the unexpected loss associated
with our business activities. Economic capital is computed and assigned
by the various risk categories to the business activities. This enables
the application of a common and consistent quantifiable metric to
ensure that returns throughout the organization are commensurate with
the associated risks. This represents best practice as it measures risk in
terms of economic realities rather than regulatory or accounting rules.
The use of economic capital as a risk metric enables us to assess per-
formance on a more comparable risk-adjusted basis at the transaction
and portfolio level. Economic capital is embedded in the management
culture of the organization through risk-adjusted performance measures
such as Return on equity and Return on risk capital.
Royal Bank of Canada Annual Report 2006
74 Management’s Discussion and Analysis
Stress scenario loss
Stress testing helps determine the effects of potentially extreme market
movements. Stress scenarios are conservatively based on unlikely but
possible adverse market events and economy-wide developments.
Through stress testing, we can assess the level of our potential risk
exposure under extreme conditions. This type of testing is intended to
alert senior management to our exposure to potential economic, politi-
cal or other disruptive events in order to assess overall capital adequacy
and the necessary action required.
Model validation
To ensure robustness of our measurement techniques, validation is
carried out by risk professionals independent of those responsible for
the development and usage of the models and assumptions.
Risk control
A comprehensive set of risk controls supports our enterprise-wide risk
management approach. This includes the development and commu-
nication of policies, establishment of formal risk review and approval
processes, and the establishment of delegated authorities and limits.
The implementation of robust risk controls enables the optimization of
risk and return on both a portfolio and transactional basis.
Policies
Our Risk Policy Management Framework outlines the roles and responsi-
bilities of GRM, the business segments and corporate support groups
in the effective creation, approval, maintenance and communication
of both enterprise-wide risk policies as well as business-specific risk
policies. This risk policy management framework is supplemented with
the policy approval authorities matrix which sets out who can approve
policies, procedures, standards and guidelines.
Risk policies that cover risk identification, measurement, man-
agement and reporting are set by GRM and are considered minimum
requirements for the businesses, GTO and other Global Functions. These
policies communicate our risk appetite, limits and parameters within
which business groups and employees can operate. Businesses also
have specific policies and procedures in place to manage the risks within
their business. All risk policies are subject to a rigorous approval process,
which depending on the type and significance of the policy can involve
the Policy Review Committee, Ethics and Compliance Committee, Group
Risk Committee or the Conduct Review and Risk Policy Committee.
Risk review and approval
Risk review and approval processes are established by GRM based on
the nature, size and complexity of the risk involved. In general the risk
review and approval process involves a formal review and approval by
an individual, group or committee that is independent from the origina-
tor. The approval responsibilities are governed by delegated authorities.
Requirements for the review and monitoring of risks are set out in
a number of enterprise level policies and procedures. This includes but
is not limited to the following: Credit Principles, Rules and Guidelines,
Market Risk Principles and Rules, Operational Risk Policies as part of the
Operational Risk Management Framework and compliance policies as
part of the Enterprise Compliance Management Program Framework.
The risk review and approval of new products and services is a key
responsibility of GRM, with enterprise-wide requirements set out in the
Policy and Procedures for the Approval of New or Amended Products
and Services. This policy has been developed to ensure that our prod-
ucts and services are subject to a broad and robust review and approval
process that fully considers associated risks, while striving to facilitate
business opportunities.
Authorities and limits
The Board of Directors, through the CR&RPC, delegates credit, market
and insurance risk exposures to the President and Chief Executive
Officer (CEO), Chief Operating Officer (COO) and Chief Risk Officer (CRO).
The delegated authorities allow these officers to set risk tolerances,
approve geographic (country and region) and industry sector exposure
limits within defined parameters, and establish underwriting and
inventory limits for trading and investment banking activities. These
authorities are reviewed and approved annually by the Board.
•
•
GRM is responsible for establishing:
the criteria whereby these authorities may be further delegated
the minimum requirements for documenting, communicating and
monitoring the use of these delegated authorities.
The establishment and maintenance of a sound risk limits system is fun-
damental to the overall management of risks inherent in our business
activities. The size of our limits reflects our risk appetite given market
and credit conditions and our business strategies.
Our policy on risk limits primarily covers and prevents the concen-
tration of risk in the following areas:
•
•
•
•
• Market risk.
Single name risk (credit and transactional)
Geographic and industry sector risk
Product and portfolio risk
Underwriting risk
These identified limits apply consistently across all businesses, port-
folios, transactions and products. Activities must be conducted within
these limits. Those activities that exceed the specified limits are
required to abide by the exception process as outlined within the policy.
CR&RPC must approve any transactions which exceed management’s
delegated authorities.
Credit risk
The OSFI expects each major bank in Canada to adopt the Advanced
Internal Ratings Based Approach (AIRB) for all of its material portfolios,
although some flexibility is permitted regarding the timing of adoption.
AIRB, which is the most sophisticated of the three approaches, involves
an extensive and rigorous supervisory approval process to ensure
that the bank complies with a comprehensive set of minimum standards.
Once approved, the bank is permitted to assess the credit risk of its
exposures using its internal rating systems, and to employ the risk
measurements produced by those ratings systems in the calculation
of required regulatory capital. Both wholesale and retail portfolios will
employ estimates for probability of default (PD), loss given default (LGD)
and exposure at default (EAD) based on internal data.
We are diligently working toward adoption of the AIRB approach
for all material portfolios, and have submitted to the OSFI a phased AIRB
adoption plan that will satisfy that objective.
Operational risk
The OSFI has been less prescriptive with respect to the calculation of
capital for operational risk. The two options available to us under
Basel II are the Standardized Approach and the Advanced Measurement
Approach (AMA). We have elected to implement the more sophisticated
risk management and governance practices that are required under
AMA, but will initially use the Standardized Approach for the calculation
of operational risk capital.
The Board of Directors through the Audit Committee approves risk
On an industry basis, we believe current model-based measure-
limits for controlling funding and liquidity risk. These limits form part
of our liquidity management framework as set out by Corporate
Treasury. Liquidity risk limits are designed to ensure that reliable
and cost-effective sources of cash are available to satisfy our current
and prospective commitments, both on- and off-balance sheet. Any
liquidity risk exposures exceeding policy limits must be approved by the
Executive Vice-President Corporate Treasury or his delegate, with notice
provided to the COO.
Reporting
GRM provides timely and comprehensive risk reporting to senior man-
agement and the Board of Directors on major risks being assumed by
or facing the organization, enabling appropriate management and over-
sight. This reporting includes, but is not limited to (i) all large exposure
exceptions to credit policy, (ii) large counterparty exposures, (iii) signifi-
cant counterparty downgrades and (iv) information on capital adequacy.
Basel II
Basel II is a new international capital adequacy framework that will more
closely align regulatory capital requirements with the underlying eco-
nomic risks. The official implementation date in Canada is November 1,
2007, following a one-year parallel run with current capital requirements.
Basel II represents a major change in bank regulation, in that
it allows management to select from a menu of approaches for the
calculation of the minimum capital required to support the credit and
operational risk undertaken by banks.
Credit risk
ment methodologies remain unproven as a credible and robust means
of calculating capital for the purposes of underpinning operational risk.
RBC’s approach brings the benefits of sounder operational risk manage-
ment and governance, positioning it to migrate to AMA once advances
in measurement capabilities warrant the adoption of a model-based
calculation approach. The OSFI fully endorses this strategy of focusing
on sound management of operational risk while working towards more
advanced measurement capabilities. We continue to work closely with
the OSFI and key host supervisors to ensure that our approach to opera-
tional risk management and Basel II compliance is clearly understood
and consistent with regulatory expectations.
Basel program integration office
We established a Basel program integration office in 2004 to direct and
manage the enterprise-wide implementation effort, which has the full
and active support of senior management. The Basel Program is
co-sponsored by the COO and the Chief Information Officer and is
governed by a steering committee comprised of senior executives of
the functional areas that will be most impacted by the implementation
including Group Risk Management, Corporate Treasury and Global
Technology and Operations. We have dedicated significant resources
and management attention to the Basel II implementation effort,
and senior management is satisfied with the bank’s progress towards
compliance.
Credit risk is the risk of loss associated with a counterparty’s inability
to fulfill its payment obligations. We incur credit risk in our business
segments through the extension of credit and other transactions with
various counterparties, including on- and off-balance sheet items such
as loans, acceptances, letters of credit and guarantees.
Responsibilities
Oversight of credit risk is provided by the Board of Directors through
the Conduct Review and Risk Policy Committee (CR&RPC). Credit risk
approval authorities are established by the Board of Directors upon
recommendation of the CR&RPC, and delegated to senior management.
Any transactions exceeding management’s authorities must be
approved by the CR&RPC.
Group Risk Management (GRM) sets out the enterprise-wide
requirements for the identification, assessment, monitoring and report-
ing of credit risk. Business segments are accountable for the credit risks
within their businesses, working in partnership with GRM on the proper
alignment between risk appetite and business strategies.
Risk measurement
Credit risk is measured on an ongoing basis at the borrower and portfolio
levels in order to ensure management is aware of changes in our risk
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 75
profile. Our portfolio is segmented into wholesale, and consumer and
small business, and each employs its own risk measurement and assess-
ment processes.
Wholesale portfolio
The key parameters used in measuring and monitoring our exposure to
expected loss and calculating credit risk economic capital are the
probability of default (PD), loss given default (LGD) and exposure at
default (EAD). Using these risk parameters, we can measure and monitor
our credit risk to ensure it remains within established limits and our risk
tolerance levels.
These risk parameters are determined based on historical experi-
ence, supplemented by benchmarking and are updated on a regular
basis. The estimation of PD, LGD and EAD rates are either established or
approved by GRM ensuring independence and consistency.
Validation procedures related to these parameters are currently in
place and continue to be enhanced in order to meet the requirements
of the Basel II Accord. The aim of the validation procedures is to ensure
we (i) identify factors that differentiate risk, (ii) produce measures
that appropriately quantify risk and (iii) produce measures of risk that
respond to changes in the macroeconomic and credit environments.
Economic capital
Credit risk is the largest contributor to overall economic capital. In addi-
tion to the quantification of unexpected loss, Economic capital is used
in setting Single Name and Industry limits in order to manage concen-
tration in the wholesale portfolio. In the consumer and small business
portfolio, Economic capital is used in the risk-based pricing decisions and
profitability measurement to ensure an appropriate risk/return balance.
Sensitivity and stress testing
Sensitivity and stress tests are used to determine the size of potential
losses related to various scenarios for the wholesale, and consumer and
small business portfolios. To this end, sensitivity tests are run using
different assumptions to examine the impact on key portfolio metrics. In
addition to sensitivity testing, stress tests are used to assess client and
portfolio vulnerability to the impacts of unlikely but possible extreme
events such as a significant market disruption or a significant downturn
in a particular industry.
Risk control
We manage our credit risk in the organization through policy requirements,
established authorities and limits, mitigation activities and reporting.
Probability of default
Probability of default (PD) measures the probability that a given
borrower will default within a 1-year time horizon. In order to determine
the PD of any given borrower, the borrower is assigned a Borrower Risk
Rating (BRR) using a 22-point scale. The BRR, which is largely consis-
tent with external rating agencies, is underpinned by methodologies
developed by industry specific experts in GRM. The assessment used
to assign a BRR is based on a detailed review of industry sector trends,
market competitiveness, overall company strategy, financial strength,
access to funds and the financial management of the borrower.
Each BRR differentiates the riskiness of the borrower from a default
perspective and corresponds to the statistical probability of default by
a borrower within the next year.
Loss given default
Loss given default (LGD) represents the amount expected to be lost
when a counterparty or borrower defaults. The level of LGD depends on
the type of collateral, the seniority of debt, and the industry in which
the counterparty operates. The LGD is based on historical experience,
supplemented by benchmarking and is updated on a regular basis.
Exposure at default
Exposure at default (EAD) represents the expected level of usage of the
credit facility when default occurs. At default the borrower may have
drawn the loan fully or have repaid some of the principal. The estimate
is also based on historical experience, supplemented by benchmarking
and is updated on a regular basis.
Policies
Risk review and approval processes are established by GRM based
on the nature, size and complexity of the risk involved. Requirements
for the review and monitoring of credit risks are set out in a number of
enterprise level policies including:
•
•
•
•
Delegated risk approval authorities by the Board of Directors
Policy on risk limits
Enterprise-wide credit risk policies
Credit principles, rules and guidelines.
Authorities and limits
Limits are used to ensure our portfolio is well diversified and within our
risk appetite as approved by the Board of Directors. We have notional
and economic capital limits for single name and sector exposures.
Country exposure is managed by a set of notional limits. Finally, product
limits ensure we are not overexposed to any one structure.
Credit risk mitigation
In addition to limits, credit risk is mitigated through credit structuring,
credit derivatives and loan sales. Proper structuring of a credit facility is
key in mitigating risk at the transaction level. This includes guarantees,
collateral and covenants. We also mitigate risk through credit deriva-
tives that serve to transfer the risk to a third party. Procedures are in
place to ensure that these hedges are efficient and effective. Decisions
on loan sales are made based on an assessment of the market price,
our view of the underlying borrower risk as well as the impact on our
overall portfolio.
Consumer and small business portfolio
For Consumer and small business credit portfolios, customized credit
scoring models are used for risk measurement.
Application scoring models, which are used for underwriting pur-
poses, utilize established statistical methods of analyzing new applicant
characteristics and past performance to estimate future credit perfor-
mance. In model development, all sources of data that are accessible
are used and include internal data and external information from credit
bureaus.
Behavioural scoring is used in the ongoing management of con-
sumer and small business accounts. It utilizes statistical techniques that
capture past performance to predict future behaviour and incorporate
information such as cash flow and borrowing trends, as well as the
extent of our relationship with the client. Combined with risk indicators
from external sources, this tool has proven to be a leading indicator of
risk for our existing accounts, and has identified significant opportuni-
ties for improving the risk/return tradeoffs.
Reporting
Enterprise level credit risk reports are provided by GRM to senior man-
agement and the Board of Directors on a quarterly basis to ensure any
shifts or negative trends in credit profile are highlighted.
For the wholesale portfolio, an analysis is provided to management
for monitoring purposes which includes reporting on significant shifts in
exposures, expected loss, economic capital, risk ratings and loan clas-
sifications. In addition, large exposure credit policy exceptions, large
counterparty exposures, and significant counterparty downgrades are
reported. Analysis is provided on a portfolio basis and an industry sector
basis and includes the results of stress testing and sensitivity analysis.
A monthly report for consumer and small business loan portfolios
is used to assess and monitor shifts in portfolio quality. Each portfolio
is assigned one of the following portfolio quality trend indicators –
declining, stable or improving – based on specific performance indica-
tors. Other key information in the report includes items such as loss
rates and delinquency formations.
Royal Bank of Canada Annual Report 2006
76 Management’s Discussion and Analysis
Credit portfolio analysis
2006 vs. 2005
During 2006, our credit portfolio remained well diversified and continued
to show strong growth. Total loans and acceptances increased $20 billion,
or 10%, compared to the prior year. The increase reflected strong growth
in both our consumer and our business and government portfolios, driven
by strong loan demand against the backdrop of generally favourable
North American economic conditions.
Our overall credit quality remained solid. Consumer credit quality
remained well supported by continuing favourable credit conditions and
solid debt-servicing capacity of households. As well, strong corporate
earnings and healthy balance sheets continued to support our business
credit quality.
Loans and acceptances outstanding by credit portfolio and geography (1)
Table 47
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Credit cards
Consumer
Business and government
Total loans and acceptances
Canada
United States
Other International
Total loans and acceptances
Total allowance for loan losses
2006
2005
2006 vs. 2005
Increase (decrease)
$ 96,675
44,902
7,155
$ 91,043
41,045
6,200
$
5,632
3,857
955
$ 148,732
70,315
$ 138,288
60,700
$ 10,444
9,615
$ 219,047
$ 198,988
$ 20,059
$ 188,439
21,499
9,109
$ 173,747
20,058
5,183
$ 14,692
1,441
3,926
$ 219,047
$ 198,988
$ 20,059
(1,409)
(1,498)
89
6%
9
15
8%
16
10%
8%
7
76
10%
6
10%
Total loans and acceptances, net of allowance for loan losses
$ 217,638
$ 197,490
$ 20,148
(1)
Geographic information is based on residence of borrower.
Consumer loans increased $10 billion, or 8%, from a year ago largely
due to domestic growth across all categories.
Residential mortgages were up $6 billion, or 6%, despite the
offsetting effect of $13.6 billion of net securitization during the year.
This growth was supported by a strong housing market, low but rising
interest rates, strong labour market conditions, as well as continued
consumer confidence. Our sales efforts also contributed to the increase.
Personal loans grew $4 billion, or 9%, reflecting continued growth
in credit lines in Canada driven by strong consumer spending in a
relatively low interest rate environment.
Credit cards increased $1 billion, or 15%, despite the offsetting
effect of $550 million of net securitization during the year. The increase
reflected successful sales efforts and continued consumer spending.
Business and government loans and acceptances rose $10 billion,
or 16%, largely reflecting solid loan demand due to business spending
on inventories, machinery and equipment and the consolidation of our
50% proportionate share in RBC Dexia IS. The increase occurred across
all sectors, with the largest increase realized in financial services and
real estate-related sectors. Financial services increased $3 billion largely
reflecting lending activity related to RBC Dexia IS and higher lending to
U.S. financial institutions. Real estate-related exposure was up $2 billion,
largely due to lending to Canadian real estate developers reflecting
a relatively strong housing market. For further details, refer to Table 58
of the Additional financial information section.
Our portfolio remained well diversified and the overall mix did
not change significantly from the prior year, with residential mortgages
comprising 44%, business and government of 32%, personal loans of
21% and credit cards of 3%.
The portfolio grew across all geographic regions, supported by
solid global economic conditions. The largest increase was in Canada,
with broad-based growth across both our consumer and business and
government portfolios. Growth in business lending accounted for most
of the increase in the United States and Other International. For further
details, refer to Table 59 of the Additional financial information section.
Total loans and acceptances by credit portfolio (C$ billions)
250
200
150
100
50
0
Business and
government
Credit card
Personal
Residential
mortgages
2002
2003
2004
2005
2006
Five-year trend
Over the last five years, total loans and acceptances largely trended
upward. Compared to 2002, our portfolio increased $43 billion, or 25%,
primarily reflecting the increase in our consumer portfolio.
Consumer loans grew $40 billion, or 37%, since 2002, largely
due to strong growth in Canada across all categories, notwithstanding
mortgage and credit card securitizations. This growth was driven by
generally favourable economic conditions and increased focus on
growing our consumer portfolio.
Our business and government portfolio grew $3 billion, or 4%,
since 2002. The largest growth sectors were real estate-related,
government and automotive. Real estate-related exposure increased
$5 billion due to broad-based growth in the United States and Canada,
driven by generally favourable economic conditions and relatively solid
housing markets in North America over the last three years. Government
exposure increased $1 billion due to additional lending to provincial
governments in Canada, and municipal governments in the United States
driven by the expansion of our U.S. operations. The increase in the
automotive sector of $1 billion is mainly due to domestic exposure to
dealers, and rental and leasing companies. Our efforts, which largely
took place in 2002, to reduce credit exposure to risk-sensitive sectors
resulted in decreases in the technology and media, and transportation
and environment sectors.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 77
Compared to 2002, our portfolio mix shifted, reflecting our efforts
to move towards a lower-risk profile. Consumer loans increased from
62% of total loans and acceptances in 2002 to 68% in 2006, while
business and government loans decreased correspondingly over the
period. For further details, refer to Tables 58 and 59 of the Additional
financial information section.
Our portfolio continued to grow in Canada since 2002, reflecting
strong loan demand and favourable economic conditions. Our exposure
in the U.S. and Other International trended downward except for recent
years, partly reflecting our strategic reduction in exposure to risk-
sensitive sectors, a reduction in single-name concentrations and our exit
of non-core client relationships. With our successful strategic adjust-
ment in these areas, our exposure in the U.S. and Other International
increased in 2005 and 2006, respectively, largely reflecting organic
growth as well as our expansion initiatives.
Gross impaired loans and Allowance for credit losses
Loans are generally classified as impaired when there is no longer
reasonable assurance of timely collection of the full amount of principal
or interest.
The allowance for credit losses is maintained at a level that
management believes is sufficient to absorb probable losses in both
the on- and off-balance sheet portfolios. The allowance is evaluated on
a quarterly basis based on our assessment of problem accounts, recent
loss experience and changes in other factors, including the composition
and quality of the portfolio and economic conditions. The allowance is
increased by the provision for credit losses (which is charged to income)
and decreased by the amount of write-offs net of recoveries. For further
information, refer to the Critical accounting policies and estimates
section and Note 1 to our Consolidated Financial Statements.
Gross impaired loans continuity
(C$ millions, except percentage amounts)
Gross impaired loans, beginning of year
Consumer
Business and government
New impaired loans
Consumer
Business and government
Repayment, return to performing status, sold and other
Consumer
Business and government
Net impaired loan formations
Consumer
Business and government
Write-offs
Consumer
Business and government
Gross impaired loans, end of year
Consumer
Business and government
Total gross impaired loans
Key ratios
Gross impaired loans as a % of gross loans and acceptances
Total net write-offs as a % of average loans and acceptances
Allowance for credit losses continuity
(C$ millions, except percentage amounts)
Specific allowance
Balance, beginning of year
Provision for credit losses
Write-offs
Recoveries
Adjustments
Specific allowance for credit losses, end of year
General allowance
Balance, beginning of year
Provision for credit losses
Adjustments
General allowance for credit losses, end of year
Allowance for credit losses
Allowance for credit losses as a % of gross impaired loans
n.m. not meaningful
Royal Bank of Canada Annual Report 2006
78 Management’s Discussion and Analysis
2006
2005
2006 vs. 2005
Increase (decrease)
Table 48
$
$
$
305
469
774
746
335
335
924
1,259
912
291
$
$
$
1,081
$
1,203
$
(124) $
(184)
(352) $
(566)
(308) $
(918) $
622
151
773
$
$
560
(275)
$
285
$
(583) $
(130)
(590) $
(180)
(713) $
(770) $
344
490
834
$
$
305
469
774
$
$
(30)
(455)
(485)
(166)
44
(122)
228
382
610
62
426
488
7
50
57
39
21
60
(9)%
(49)
(39)%
(18)%
15
(10)%
65%
67
66%
11%
155
171%
1%
28
7%
13%
4
8%
.38%
.25%
.39%
.32%
(1)bps
(7)bps
n.m.
n.m.
2006
2005
2006 vs. 2005
Increase (decrease)
Table 49
$
282
482
(713)
205
7
$
487
389
(770)
174
2
263
$
282
$
$
$
$
1,286
(53)
(10)
1,223
1,486
178%
$
$
$
1,227
66
(7)
1,286
1,568
203%
(205)
93
57
31
5
(19)
59
(119)
(3)
(63)
(82)
n.m.
(42)%
24
7
18
250
(7)%
5%
(180)
(43)
(5)%
(5)%
n.m.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2006 vs. 2005
Gross impaired loans
Gross impaired loans increased $60 million, or 8%, compared to the
prior year, largely reflecting loan growth. Both our consumer and busi-
ness and government portfolios recorded higher impairment this year.
Consumer gross impaired loans increased $39 million, or 13%,
from a year ago, with increases in both residential mortgages and
personal loans. Gross impaired residential mortgages increased
$18 million, or 13%, which was primarily due to portfolio growth and
higher impairment in domestic residential mortgages. The increase
in impairment in personal loans was largely related to domestic credit
line products in part reflecting the overall portfolio growth.
Business and government gross impaired loans increased
$21 million, or 4%, compared to the prior year. While the increase was
across a number of sectors, the small business and government sectors
recorded the largest increases in impairment. The increase was partially
offset by a reduction in impairment in the energy sector primarily
resulting from the favourable resolution of a previously impaired
U.S. borrower.
Gross impaired loans as a percentage of loans and acceptances
remained relatively stable at .38%, compared to .39% in the prior year,
as the increase in gross impaired loans was commensurate with the
growth in the overall portfolio. For further details, refer to Table 60 of
the Additional financial information section.
Allowance for credit losses
Total allowance for credit losses decreased $82 million, or 5%, from a
year ago. The decrease was largely due to a $50 million reversal of the
general allowance in 2006 reflecting the strengthening credit quality of
our corporate loan portfolio, and a reduction in the specific allowance
for both our consumer and business and government portfolios.
The specific allowance decreased $19 million, or 7%, from the prior
year. The reduction was mainly in our domestic personal loan and U.S.
corporate portfolios.
The general allowance decreased $63 million, or 5%, compared
to the prior year, largely reflecting a $50 million reversal of general
allowance in light of the strengthening credit quality of the corporate
loan portfolio reflecting continuing favourable credit conditions.
Total allowance for credit losses as a percentage of gross impaired
loans decreased to 178% compared to 203% a year ago, primarily
reflecting the reduction in the general allowance. For further details,
refer to Table 62 of the Additional financial information section.
Gross impaired loans (GIL) and allowance for credit losses (ACL)
(C$ millions)
2,400
1,800
1,200
600
0
1.20%
.90%
Gross impaired
loans
ACL
.60%
GIL ratio*
.30%
.0%
2002
2003
2004
2005
2006
* GIL ratio: GIL as a percentage of total gross loans and acceptances.
Five-year trend
Gross impaired loans
Over the past five years, gross impaired loans largely trended down-
ward, decreasing $1,454 million, or 64%, from 2002, primarily due
to lower impairment in our corporate loan portfolio. The reduction was
largely attributable to the favourable resolution of a number of previ-
ously impaired corporate loans that arose in 2001 and 2002.
In 2006, consumer gross impaired loans decreased $93 million,
or 21%, compared to 2002, largely due to lower impairment in personal
loans in Canada and the U.S.
In 2006, business and government gross impaired loans declined
$1,361 million, or 74%, compared to 2002. The decline was across all
geographic regions and most industry sectors, with the largest decrease
in the energy, forest products, transportation and environment, and
technology and media sectors. The decrease reflected our proactive
management of problem accounts and improvement in credit conditions
over the period.
The ratio of gross impaired loans as a percentage of loans and
acceptances declined significantly to .38% in 2006, compared to 1.30%
in 2002, reflecting the factors above.
Allowance for credit losses
Over the past five years, total allowance for credit losses of
$1,486 million in 2006, decreased $828 million, or 36%, from 2002. The
decrease was largely due to a reduction in specific allowance, reflecting
lower corporate impairment due to improved credit conditions.
The specific allowance of $263 million in 2006 was down
$631 million, or 71%, compared to 2002. The decrease was broad-
based across all portfolios, industry sectors and geographic regions.
The business and government portfolio recorded the largest reduction
in specific allowance, in line with the significant decline of impairment
over the period.
The general allowance of $1,223 million in 2006, decreased
$197 million, or 14%, compared to 2002. The decrease was due
to a $175 million reversal of the general allowance in 2004, and a
$50 million reversal of the general allowance in 2006, largely reflecting
improved credit quality and economic conditions.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 79
Provision for credit losses
The provision for credit losses is charged to income by an amount
necessary to bring the allowance for credit losses to a level determined
appropriate by management, as discussed in the Critical accounting
policies and estimates section and Note 1 to our Consolidated
Financial Statements.
Provision for credit losses by credit portfolio and geography (1)
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Credit cards
Consumer
Business and government
Total specific provision for loan losses
Canada
United States
Other International
Total specific provision for loan losses
Total general provision
Total provision for credit losses
Specific provision as a % of average loans and acceptances
Geographic information is based on residence of borrower.
(1)
n.m. not meaningful
2006 vs. 2005
Total provision for credit losses decreased $26 million, or 6%, from a
year ago largely reflecting the continued strong credit quality of our
portfolio and favourable credit conditions. The specific provision as a
percentage of average loans and acceptances in 2006 was .23%
compared to .21% in 2005, largely reflecting an increase in specific
provisions over the prior year.
Specific provision for credit losses for consumer loans was up
$20 million, or 4%, compared to the prior year. The increase was largely
due to higher provisions in Canadian personal loans in part reflecting
portfolio growth, which was partly offset by the favourable impact of the
higher level of securitized credit cards.
Table 50
2006 vs. 2005
Increase (decrease)
$
$
$
$
$
$
$
2006
2005
$
$
$
$
6
306
163
475
7
482
507
(26)
1
2 $
259
194
455
(66)
$
389 $
$
435
(45)
(1)
482
$
389 $
4
47
(31)
20
73
93
72
19
2
93
(53) $
429
$
.23%
$
$
66
455
.21%
(119)
(26)
2 bps
200%
18
(16)
4%
111
24%
17%
42
200
24%
(180)%
(6)%
n.m.
Specific provision for credit losses (C$ millions)
1,200
900
600
300
0
2002
2003
2004
2005
2006
Specific
PCL
PCL ratio*
.60%
.45%
.30%
.15%
.0%
Business and government provision for credit losses increased
* PCL ratio: Specific PCL as a percentage of average loans and acceptances.
$73 million over the prior year. The increase primarily reflected the
transfer of $52 million from the specific allowance to the general
allowance in the prior year as a result of the alignment of our enterprise-
wide accounting treatment of credit losses, lower recoveries in our
corporate and agriculture portfolios, and higher provisions in small
business loans. These factors were partially offset by a lower provision
in our U.S. business portfolio reflecting continued strong credit quality.
The prior year included a provision related to our 50% proportionate
share of a provision booked at Moneris.
The general provision decreased $119 million from a year ago.
The decrease was largely due to a $50 million reversal of the general
allowance this year in light of the strengthening of our corporate loan
portfolio reflecting continuing favourable credit conditions and the
transfer of $52 million from the specific allowance to the general
allowance in the prior year.
Five-year trend
Over the last five years, specific provision for credit losses decreased
significantly, despite a 25% increase in total loans and acceptances. The
decrease was largely due to a reduction in provisions for our corporate
loan portfolio, which recorded a high level of provision in 2002 and
significant recoveries in 2005 and 2006. These factors were partially
offset by an increase in consumer specific provisions in the last couple
of years, primarily driven by significant portfolio growth of credit card
and personal loans. The specific provision as a percentage of average
loans and acceptances declined to .23% in 2006, compared to .62% in
2002, largely reflecting the significant reduction in provisions related to
corporate loans over the period. For further details, refer to Table 61 of
the Additional financial information section.
Royal Bank of Canada Annual Report 2006
80 Management’s Discussion and Analysis
Market risk
Market risk is the risk of loss that results from changes in interest and
foreign exchange rates, equity and commodity prices, and credit spreads.
We are exposed to market risk in our trading activity and our asset
liability management activities. The level of market risk to which we are
exposed varies depending on market conditions, expectations of future
price and yield movements and the composition of our trading portfolio.
Trading market risk
Trading market risk encompasses various risks associated with cash
and related derivative products that are traded in interest rate, foreign
exchange, equity, credit and commodity markets. Trading market risk is
comprised of the following components:
•
Interest rate risk is the potential adverse impact on our earnings
and economic value due to changes in interest rates. It is com-
posed of (i) repricing risk – arising from differences in the maturity
of timing of repricing of the assets, liabilities and off-balance sheet
instruments, (ii) directional risk – arising from parallel shifts in the
yield curve, (iii) yield curve risk – arising from non-uniform rate
changes across a spectrum of maturities, (iv) basis risk – resulting
from an imperfect hedge of one instrument type by another instru-
ment type whose changes in price are not perfectly correlated, and
(v) option risks – arising from changes in the value of embedded
options due to changes in interest rates and their volatility. Most
financial instruments have exposure to interest rate risk.
Foreign exchange rate risk is the potential adverse impact on our
earnings and economic value due to currency rate and precious
metals price movements and volatilities. In our proprietary posi-
tions, we are exposed to the spot, forward and derivative markets.
Equity risk is the potential adverse impact on our earnings due to
movements in individual equity prices or general movements in
the level of the stock market. We are exposed to equity risk from
the buying and selling of equities and indices as principal in
conjunction with our investment banking activities and from our
trading activities, which include tailored equity derivative products,
arbitrage trading and relative value trading.
Commodities risk is the potential adverse impact on our earnings
and economic value due to commodities price movements and
volatilities. Principal commodities traded include crude oil, heating
oil and natural gas. In our proprietary positions, we are exposed to
the spot, forwards and derivative markets.
Credit specific risk is the potential adverse impact on our earnings
and economic value due to changes in the creditworthiness and
default of issuers on our holdings in bonds and money market
instruments, and those underlying credit derivatives.
Credit spread risk is the potential adverse impact on our earnings
and economic value due to changes in the credit spreads associ-
ated with our holdings of credit-risky instruments.
•
•
•
•
•
We conduct trading activities over the counter and on exchanges in the
spot, forward, futures and options markets, and we offer structured
derivative transactions. Market risks associated with trading activities
are a result of market-making, positioning, and sales and arbitrage
activities in the interest rate, foreign exchange, equity, commodities, and
credit markets. Our trading operations primarily acts as a market maker,
executing transactions that meet the financial requirements of our clients
and transferring the market risks to the broad financial market. We also
act as principal and take proprietary market risk positions within the
authorized limits granted by the Board of Directors. The trading book
consists of cash and derivative positions that are held for short-term
resale, taken on with the intent of benefiting in the short term from
actual or expected differences between their buying and selling prices
or to lock in arbitrage profits.
Responsibilities
Oversight of market risk is provided by the Board of Directors through the
Conduct Review and Risk Policy Committee (CR&RPC). Market risk limit-
approval authorities are established by the Board of Directors upon
recommendation of the CR&RPC and delegated to senior management.
The independent oversight of trading market risk management
activities is the responsibility of Group Risk Management – Market and
Trading Credit Risk, which includes major units in Toronto, London,
New York and Sydney. The Market and Trading Credit Risk group estab-
lishes market risk policies and limits, develops quantitative techniques
and analytical tools, vets trading models and systems, maintains the
Value-at-Risk (VAR) and stress risk measurement systems, and provides
enterprise risk reporting on trading activities. This group also provides
independent oversight on trading activities, including the establishment
and administration of trading operational limits, market risk and
counterparty credit limit compliance, risk analytics, and the review and
oversight of non-traditional or complex transactions.
Business segments are accountable for the market risks within
their businesses, working in partnership with GRM to ensure the
alignment between risk appetite and business strategies.
GRM – Market and Trading Credit Risk is responsible for the deter-
mination and reporting of regulatory and economic capital requirements
for market risk, and provides assurance to regulators in regular filings,
on reporting accuracy, timeliness and the proper functioning of statisti-
cal models within the approved confidence level.
Risk measurement
We employ risk measurement tools such as VAR, sensitivity analysis and
stress testing. GRM uses these measures in assessing global risk-return
trends and to alert senior management to adverse trends or positions.
Value-At-Risk (VAR)
VAR is a statistical technique that measures the worst-case loss expected
over the period within a 99% confidence level. Larger losses are possible,
but with low probability. For example, based on a 99% confidence inter-
val, a portfolio with a VAR of $15 million held over one day would have a
one in one hundred chance of suffering a loss greater than $15 million in
that day. VAR is measured over a 10-day horizon for the purpose of deter-
mining regulatory capital requirements.
We measure VAR by major risk category on a discrete basis. We
also measure and monitor the effects of correlation in the movements
of interest rates, credit spreads, exchange rates, equity and commodity
prices and highlight the benefit of diversification within our trading
portfolio. This is then quantified in the diversification effect shown in our
global VAR table on the following page.
As with any modeled risk measure, there are certain limitations that
arise from the assumptions used in VAR. Historical VAR assumes that
the future will behave like the past. Furthermore, the use of a 10-day VAR
for risk measurement implies that positions could be unwound or
hedged within 10 days. VAR is calculated based on end-of-day positions.
Validation
To ensure VAR effectively captures our market risk, we continuously
monitor and enhance our methodology. Daily back-testing serves to com-
pare hypothetical profit or loss against the VAR to monitor the statistical
validity of 99% confidence level of the daily VAR measure. Back-testing
is calculated by holding position levels constant and isolating the effect
of actual market rates movements over the next day on the market value
of the portfolios. Intra-day position changes account for most of the
difference between theoretical back-testing and actual profit and loss.
VAR models and market risk factors are independently reviewed on a
periodic basis to further ensure accuracy and reliability. In 2006, there
were no occurrences of a back-test exceeding VAR.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 81
Sensitivity analysis and stress testing
Sensitivity analysis is used to measure the impact of small changes in
individual risk factors such as interest rates and foreign exchange rates
and is designed to isolate and quantify exposure to the underlying risk.
VAR is a risk measure that is only meaningful in normal market con-
ditions. To address more extreme market events, stress testing is used
to measure and alert senior management to our exposure to potential
political, economic or other disruptive events. We run several types
of stress testing, including historical stress events such as the 1987
stock market crash, as well as hypothetical “what-if” stress events that
represent potential future events that are plausible but have a very low
probability of occurring. Our stress scenarios are reviewed and updated
as required to reflect relevant events and hypothetical situations.
Risk control
Policies
A comprehensive risk policy framework governs trading-related risks
and activities and provides guidance to trading management, middle
office compliance functions and operations. We employ an extensive set
of principles, rules, controls and limits, which conform to industry best
practice. Our market risk management framework is designed to ensure
that our risks are appropriately diversified on a global basis. Limits on
measures such as notional size, term and overall risk are monitored at
the desk, and at the portfolio and business levels.
Reporting
Reports on trading risks are provided by GRM – Market and Trading
Credit Risk to the Chief Risk Officer (CRO) and the operating committee
of RBC Capital Markets on a weekly basis and to senior management on
a daily basis. Enterprise-wide reporting is used to monitor compliance
against VAR and stress limits approved by the Board of Directors and
the operating limits derived from these board limits. In addition to this
monitoring, GRM – Market and Trading Credit Risk pre-approves excesses
and reports any breach to the CRO and the operating committee of
RBC Capital Markets.
The following table shows our global VAR for total trading activities
by major risk category and the diversification effect. During the year, we
included our credit default swap business in the interest rate and credit
specific VAR using the models approach to VAR measurement.
Global VAR by major risk category
Table 51
(C$ millions)
Equity
Foreign exchange
Commodities (1)
Interest rate
Credit specific
Diversification
Global VAR
2006
2005
As at Oct. 31
year-end
For the year ended October 31
High
Average
Low
As at Oct. 31
year-end
For the year ended October 31
High
Average
Low
$
7
2
1
13
3
(9)
$ 17
$ 11
4
2
20
4
n.m.
$ 25
$
7
2
1
13
3
(8)
$ 18
$
5
1
–
9
2
n.m.
$ 13
$
7
1
1
12
2
(8)
$ 15
$ 10
5
2
16
3
n.m.
$ 17
$
6
2
1
10
2
(9)
$ 12
$
4
1
–
6
1
n.m.
8
$
(1)
Commodities reflect market risk for energy-related trading activities such as crude, heating oil and natural gas. Effective May 2005, these activities have been included in our models and
reported alongside other Market risk trading activities. Prior to May 2006 these activities had been subject to the standardized approach for capital allocation.
n.m. not meaningful
Global VAR by major risk category (C$ millions)
0
-3
-6
-9
-12
-15
-18
-21
November
2004
May
2005
November
2005
May
2006
October
2006
Daily interest rate VAR
Daily equity VAR
Daily commodities VAR
Daily credit specific risk VAR
Daily foreign exchange VAR
Global VAR
2006 vs. 2005
Average global VAR for the year of $18 million was up compared to
$12 million a year ago largely due to an increase in interest rate global
VAR. This increase in VAR for interest rates is due to increased trading
activity and an increase in correlation between the interest rate busi-
nesses in the current year. Overall diversification benefit, which is
calculated as the difference between the global VAR and the sum of the
separate risk factor VARs, was reduced to 31% compared to 43% a
year ago.
Trading revenue
2006 vs. 2005
During the year, we experienced six days of net trading losses. The largest
loss of $4.87 million did not exceed the Global VAR estimates for that day.
The breadth of our trading activities is designed to diversify market risk to
any particular strategy, and to reduce trading revenue volatility.
The low volatility and the consistent growth of our trading revenue
is a reflection of our broad product and geographic diversity.
Royal Bank of Canada Annual Report 2006
82 Management’s Discussion and Analysis
Histogram of daily net trading revenue (1) (number of days)
Daily net trading revenue and global VAR (1) (C$ millions)
Histogram of daily net trading revenue (1) (number of days)
Daily net trading revenue and global VAR (1) (C$ millions)
18
12
6
0
60
50
40
30
20
10
0
-10
-20
-30
18
12
6
0
60
50
40
30
20
10
0
-10
-20
-30
-5
0
10
20
30
40
50
60
Daily net trading revenue (C$ millions)
November
2005
February
2006
May
2006
August
2006
October
2006
-5
0
10
20
30
40
50
60
Daily net trading revenue (C$ millions)
November
2005
February
2006
May
2006
August
2006
October
2006
Daily net trading revenue
Global VAR
Daily net trading revenue
Global VAR
(1)
Trading revenue on a taxable equivalent basis excluding revenue related to consolidated VIEs.
Non-trading market risk (asset and liability management)
Traditional non-trading banking activities, such as deposit taking and
lending, expose us to market risk, of which interest rate risk is the
largest component.
Our goal is to manage the interest rate risk of the non-trading
balance sheet to a target level. We modify the risk profile of the balance
sheet through proactive hedging to achieve our target level. We
continually monitor the effectiveness of our interest rate risk mitigation
activity within Corporate Treasury on a value and earnings basis.
Responsibilities
While our individual subsidiaries and business segments manage
the daily activities, Corporate Treasury is responsible for managing
our enterprise-wide interest rate risk, monitoring approved limits and
compliance with policies and operating standards. Our Asset Liability
Committee (ALCO) provides oversight to Corporate Treasury. ALCO
reviews the policy developed by Corporate Treasury and provides
recommendations to CR&RPC for approval.
Risk measurement
We endeavour to keep pace with best practices in instrument valuation,
econometric modeling and new hedging techniques on an ongoing
basis. Our investigations range from the evaluation of traditional asset/
liability management processes to pro forma application of recent
developments in quantitative methods.
Our risk position is measured daily, weekly or monthly based on
the size and complexity of the portfolio. Measurement of risk is based
on client rates as well as funds transfer pricing rates. Key rate analysis
is utilized as a primary tool for risk management. It provides us with an
assessment of the sensitivity of the exposure of our economic value of
equity to instantaneous changes in individual points on the yield curve.
The economic value of equity is equal to the net present value of
our assets, liabilities and off-balance sheet instruments.
We also focus on developing retail product valuation models
that incorporate the impact of consumer behaviour. These valuation
models are typically derived through econometric estimation of
consumer exercise of options embedded in retail products. The most
significant embedded options are mortgage rate commitments and
prepayment options. In addition, we model the sensitivity of the value
of deposits with an indefinite maturity to interest rate changes.
Validation
We supplement our assessment by measuring interest rate risk for a
range of dynamic and static market scenarios. Dynamic scenarios simu-
late our interest income in response to various combinations of business
and market factors. Business factors include assumptions about future
pricing strategies and volume and mix of new business, whereas market
factors include assumed changes in interest rate levels and changes
in the shape of the yield curve. Static scenarios supplement dynamic
scenarios and are employed for assessing the risks to the value of
equity and net interest income.
As part of our monitoring of the effectiveness of our interest rate
risk mitigation activity within Corporate Treasury which is done on a
value and earnings basis, model assumptions are validated against
actual client behaviour.
Risk control
Policies and limits
The interest rate risk policies define the management standards and
acceptable limits within which risks to net interest income over a
12-month horizon, and the economic value of equity, are to be
contained. These ranges are based on an immediate and sustained
± 200 basis point parallel shift of the yield curve. The limit for net interest
income risk is 6% of projected net interest income and the limit for
economic value of equity risk is 12% of projected common equity.
Interest rate risk policies and limits are reviewed annually.
Funds transfer pricing
We use a funds transfer pricing mechanism at the transaction level
to transfer interest rate risk to Corporate Treasury and identify the
profitability of various products. The funds transfer pricing rates are
market-based and are aligned with interest rate risk management prin-
ciples. They are supported by empirical research into client behaviour
and are an integral input to the retail business pricing decisions.
Risk reporting
The individual subsidiaries and business segments report the interest
rate risk management activity on a monthly basis. They must also imme-
diately report any exceptions to the established policy to Corporate
Treasury and seek approval of the corrective actions.
An enterprise interest rate risk report is reviewed monthly by ALCO
and quarterly by the Group Risk Committee and by the Board of Directors.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 83
Market risk measures – Non-trading banking activities
Table 52
(C$ millions)
2006
2005
2004
Economic value
of equity risk
Net interest
income risk
Economic value
of equity risk
Net interest
income risk
Economic value
of equity risk
Net interest
income risk
Before-tax impact of: 100bp increase in rates
100bp decrease in rates
Before-tax impact of: 200bp increase in rates
200bp decrease in rates
$
(496) $
375
(1,044)
658
$
87
(153)
147
(319)
(435) $
291
(920)
461
$
106
(181)
162
(365)
(412) $
215
(882)
405
70
(150)
107
(314)
2006 Analysis
The above table provides the potential before-tax impact of an imme-
diate and sustained 100 basis point and 200 basis point increase or
decrease in interest rates on net interest income and economic value of
equity of our non-trading portfolio, assuming that no further hedging
is undertaken. These measures are based upon assumptions made by
senior management and validated by empirical research. All interest rate
risk measures are based upon interest rate exposures at a specific time
and continuously change as a result of business activities and our risk
management initiatives. Over the course of 2006, our interest rate risk
exposure was well within our target level.
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events.
Operational risk is embedded in all our activities, including the practices
and controls used to manage other risks. Failure to manage operational
risk can lead to failure in the management of other risks such as credit
risk, market risk or regulatory risk.
Our operational risk management framework sets out a common
language for operational risk and the principles and practices by which
we manage operational risk, including risk identification, measurement,
mitigation and monitoring.
Under this framework, we consider operational risk from three
perspectives: causes, events and impacts. Detailed categories and
definitions for each of these are included in the framework to support
the consistent identification and assessment of risks.
Responsibilities
As with all significant risks, the Board of Directors is responsible for
providing management oversight and ensuring that appropriate
policies have been implemented to manage operational risk. The Chief
Risk Officer and Group Risk Management are responsible for develop-
ing and implementing the operational risk management framework
on an enterprise-wide basis, as well as for directing and approving
significant business-specific operational risk policies. Within Group
Risk Management, a dedicated team has been established to design
and support operational risk policies, programs and initiatives and
to monitor implementation progress and ongoing execution. The
Business Segments are responsible for managing operational risk
within their operations in accordance with the operational risk manage-
ment framework. Where appropriate, execution of certain operational
risk management programs is conducted by Global Technology and
Operations on behalf of the businesses.
Risk measurement
Since exposure to operational risk is often implicit or not taken on
intentionally, complete and precise measurement is difficult. Current
measurement methodologies and tools continue to evolve in the indus-
try. Nonetheless, we use several approaches concurrently to gauge our
operational risk exposure.
Risk assessment
During 2006, assessments of operational risks were carried out through
enterprise-wide programs that evaluated individual key risks such
as financial reporting risk (Sarbanes-Oxley Act of 2002), privacy, out-
sourcing, fraud and money laundering.
To improve efficiency and effectiveness, several of these programs
were brought together into a single, integrated operational risk and con-
trol assessment program launched November 1, 2006. The integrated
Royal Bank of Canada Annual Report 2006
84 Management’s Discussion and Analysis
program provides consistent identification and assessment of opera-
tional risks and the controls used to manage these risks.
Risk indicators
A broad range of risk indicators are used by the Business Segments to
manage their day-to-day operations and by Group Risk Management
to monitor operational risk at the enterprise level. These indicators pro-
vide insight into potential changes in our operational risk exposure and
assist with proactive management of this risk.
Loss event data collection and analysis
We have established comprehensive standards requiring that opera-
tional risk events be identified and reported in the enterprise Loss Event
Database when they occur. Required information includes the amount
of the loss, any recoveries, relevant dates, root causes and risk drivers
affecting the loss. Collection of internal operational loss data helps us
to understand where and how our risks are manifesting themselves,
provides a historical perspective of our operational loss experience, and
establishes a basis for measuring our operational risk exposure and the
capital needed to underpin this.
Industry loss analysis
We review and analyze published information on operational losses that
have occurred at other financial institutions. This provides insight into
the size and nature of potential exposures, and allows us to monitor
emerging developments or trends that affect the financial industry
as a whole.
Risk control
Complementing our infrastructure, controls, systems and people are
our activities under the operational risk management framework and
those of several central enterprise-wide groups which focus on aspects
such as control effectiveness, management of specific operational
risks, and transfer of risk. These groups include (i) fraud management,
which focuses on prevention, detection and intervention regarding both
internal and external fraud; (ii) the compliance group, which ensures a
complete view of our regulatory demands and provides a co-ordinated,
effective response to these; (iii) the business continuity management
group, which co-ordinates planning, preparation and response for
business disruption and crisis situations which may affect our ability
to provide quality and timely services to our clients; (iv) the corporate
insurance group, through which we transfer some of our operational risk
exposure by purchasing insurance coverage, the nature and amounts
of which are determined on a central, enterprise-wide basis; and
(v) the internal audit group, which provides independent assessment
of risk management practices, internal controls and corporate
governance processes.
Risk mitigation
Our corporate insurance program quantifies our appetite for particular
segments of operational risk and works with businesses and functional
partners to strategically manage the related risks.
Liquidity and funding risk
Liquidity and funding risk is the risk that an institution is unable to
generate sufficient cash or its equivalent in a timely and cost-effective
manner to meet its commitments as they come due.
Our liquidity and funding management framework is designed to
ensure that reliable and cost-effective sources of cash or its equivalents
are available to satisfy our current and prospective financial commit-
ments under normal and contemplated stress conditions. To achieve
this goal, we are dedicated to the preservation of the following key
liquidity and funding risk mitigation strategies:
A large base of core client deposits
•
Continual access to diversified sources of wholesale funding
•
A comprehensive and enterprise-wide liquidity contingency plan
•
supported by an earmarked pool of unencumbered marketable
securities (referred to as “contingency liquidity assets”) that
provide assured access to cash in a crisis.
Our liquidity and funding management practices and processes rein-
force these risk mitigation strategies by assigning prudential limits or
targets to metrics associated with these activities and regularly measur-
ing and monitoring various sources of liquidity risk under both normal
and stressed market conditions.
Responsibilities
The Board of Directors is responsible for oversight of our liquidity and
funding management framework, which is developed and implemented
by senior management.
•
The Audit Committee approves our liquidity and funding manage-
ment framework, pledging framework and liquidity contingency
plan, and the Board of Directors is informed on a periodic basis
about our current and prospective liquidity condition.
The GRC and the Asset and Liability Committee share management
oversight responsibility for liquidity and funding policies and
receive regular reports detailing compliance with key limits and
guidelines.
Corporate Treasury has global responsibility for the development
of liquidity and funding management policies, strategies and con-
tingency plans and for recommending and monitoring limits within
the framework. In this role, Corporate Treasury is assisted by GRM.
Treasury departments of business segments and key subsidiaries
execute transactions in line with liquidity management policies and
strategies.
Subsidiaries are responsible for managing their own liquidity in
compliance with policies and practices established under advice
and counsel by Corporate Treasury and within governing regulatory
requirements.
•
•
•
•
Risk measurement
The assessment of our liquidity position reflects management estimates
and judgments pertaining to current and prospective firm-specific and
market conditions and the related behaviour of our clients and counter-
parties. We measure and manage our liquidity position from three risk
perspectives as follows:
Reporting
Group Risk Management provides quarterly enterprise level reporting
to senior management and the Board of Directors which includes an
overview of our operational risk profile. Details are provided on large
operational events, areas of heightened risk, insurance coverage,
potential emerging risks, fraud management activities, status of busi-
ness continuity preparedness, and regulatory or compliance issues.
This reporting is supplemented with more detailed specific reporting by
groups such as compliance, audit and legal.
Structural liquidity risk
Structural liquidity risk management addresses the risk due to mis-
matches in effective maturities between assets and liabilities, more
specifically the risk of over-reliance on short-term liabilities to fund
longer-term illiquid assets. We use the cash capital methodology to
assist in the evaluation of balance sheet liquidity and determination of
the appropriate term structure of our debt financing. It also allows us
to measure and monitor the relationship between illiquid assets and
core funding, including our exposure to a protracted loss of unsecured
wholesale deposits.
Tactical liquidity risk
Tactical liquidity risk management addresses our normal day-to-day
funding requirements, which are managed by imposing prudential limits
on net fund outflows in Canadian dollar and foreign currencies for key
short-term time horizons, as well as on our pledging activities, which
are subject to an enterprise-wide framework that assigns risk-adjusted
limits to all transaction types. Pledged assets include a pool of eligible
assets that are reserved exclusively to support our participation in
Canadian payment and settlement systems.
Contingent liquidity risk
Contingent liquidity risk management addresses the risk of and our
intended responses to general market disruptions, adverse political/
economic developments and a series of progressively more severe
RBC credit rating downgrades. The liquidity contingency plan identifies
comprehensive action plans that would be implemented depending on
the duration and severity of the variety of stressful events listed above.
Corporate Treasury maintains and administers the liquidity contingency
plan. The Liquidity Crisis Team meets regularly to engage in stress and
scenario test exercises and to modify the liquidity contingency plan in
light of lessons learned.
Our liquid assets are primarily a diversified pool of highly rated
marketable securities and include segregated portfolios (in both
Canadian and U.S. dollars) of contingency liquidity assets to address
potential on- and off-balance sheet liquidity exposures (e.g., deposit
erosion, loan drawdowns and higher collateral demands) that have
been estimated through models we have developed or by the scenario
analyses and stress tests that we conduct periodically. These portfolios
are subject to minimum asset levels and strict eligibility guidelines to
ensure ready access to cash in emergencies.
Risk control
We manage our liquidity position on a consolidated basis and consider
legal, regulatory, tax, operational and any other restrictions when
analyzing our ability to lend or borrow funds between our legal entities.
Policies
Our principal liquidity and funding policies are reviewed and approved
annually by the senior management committees and the Board of
Directors. These broad policies authorize senior management commit-
tees or Corporate Treasury to approve more detailed policies and limits
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 85
related to specific measures, businesses and products. These policies
and procedures govern management, measurement and reporting
requirements and define approved liquidity and funding limits.
Authorities and limits
Targets for our structural liquidity position, based on both a “cash
capital” metric and a “survivability horizon” measurement, are approved
at least annually and monitored regularly.
With respect to net short-term funding requirements, all limits are
monitored regularly to ensure compliance. The prescribed treatment of
cash flow assets and liabilities under varying conditions are reviewed
periodically to determine if they remain valid or changes to assumptions
and limits are required in light of internal and/or external developments.
Reporting
Detailed reports on our principal short-term asset/liability mismatches
are monitored on a daily basis to ensure compliance with the limits for
overall group exposure and by major currency and geographic locations.
As set out in our liquidity and funding management framework, any
potential exceptions to established limits on net fund outflows or other
rules, whether monitored on a daily, weekly, monthly or quarterly basis,
are reported immediately to Corporate Treasury which provides or
arranges for approval after reviewing a remedial action plan.
Funding
Funding strategy
Diversification of funding sources is a crucial component of our overall
liquidity management strategy. Diversification expands our funding
flexibility while minimizing funding concentration and dependency and
generally reducing financing costs. Maintaining competitive credit
ratings is also critical to cost-effective funding. Core funding, comprising
capital, longer-term liabilities and a diversified pool of personal and,
to a lesser extent, commercial deposits, is the foundation of our strong
structural liquidity position.
Credit ratings
Our ability to access unsecured funding markets and to engage in
certain collateralized business activities on a cost-effective basis is
primarily dependent upon maintaining competitive credit ratings. Our
credit ratings are largely determined by the quality of our earnings, the
adequacy of our capital and the effectiveness of our risk management
programs. We estimate, based on periodic reviews of ratings triggers
embedded in our existing businesses and of our funding capacity
sensitivity, that a minor downgrade would not materially influence our
liability composition, funding access, collateral usage and associated
costs. However, a series of downgrades could have adverse conse-
quences for our funding capacity, collateral requirements and on the
results of our operations.
Credit ratings
As at November 29, 2006
Short-term
Senior
debt long-term debt
Moody’s Investor Services
Standard & Poor’s
Fitch Ratings
Dominion Bond Rating Service
P-1
A-1+
F1+
R-1(high)
Aa2
AA-
AA
AA
Table 53
Outlook
stable
stable
stable
stable
Our strong credit ratings support our ability to competitively access
unsecured funding markets. At the end of 2006, all our ratings have
returned to stable outlook upon the resolution of Standard & Poor’s
negative outlook earlier this year with no rating implications. Near the
end of the year, Dominion Bond Rating Service implemented a meth-
odology change applicable to banks which led to a one-notch increase
of our ratings and those of our peers. As a result, our short-term debt
rating was increased to R-1(high) from R-1(middle) and our senior long-
term debt rating was increased from AA(low) to AA.
Royal Bank of Canada Annual Report 2006
86 Management’s Discussion and Analysis
All of our ratings are amongst the highest categories assigned by
the respective agencies to a Canadian bank (our current ratings are at
par with, or at a one-notch premium to, our major Canadian banking
peers). In 2006, we were once again named as the safest Canadian bank
and the 4th safest North American bank by Global Finance magazine.
Credit ratings are not recommendations to purchase, sell or hold a
financial obligation inasmuch as they do not comment on market price
or suitability for a particular investor. Ratings are subject to revision or
withdrawal at any time by the rating organization.
Deposit profile
The composition of our global deposit liabilities is summarized in
Note 13 to our Consolidated Financial Statements. In 2006, personal
deposits remained the prime source of funding for our Canadian dollar
balance sheet while most foreign currency deposits originated from
unsecured, wholesale sources, including large corporate and institu-
tional clients and foreign commercial and central banks.
Our personal deposit franchise constitutes the principal source
of constant funding while certain commercial and institutional client
groups also maintain relational balances with low volatility profiles.
Taken together, these clients represent a highly stable supply of core
deposits in most prospective environments as they typically are less
responsive to market developments than transactional lenders and
investors due to the impact of deposit insurance and extensive and, at
times, exclusive relationships with us. As at October 31, 2006, our core
deposits, which include our statistical estimates of the stable portions
of our personal and commercial/institutional transactional balances,
expected renewal rates for personal fixed term deposits under one
year and personal and wholesale funds maturing beyond one year,
represented about 54% of our total deposits. Year-over-year, this ratio
declined about 1% due to growth in short-term, unsecured deposits
used to fund liquid assets. We encourage wholesale funding diversity
and regularly review sources of short-term funds to ensure that they are
well-diversified by provider, product, market and geographic origin. In
addition, we maintain an ongoing presence in different funding markets,
which allows us to constantly monitor market developments and trends
in order to identify opportunities and risks and to take appropriate and
timely actions.
Term funding sources
Table 54
(C$ millions)
2006
2005
2004
Long-term funding outstanding $ 33,361 $ 24,004 $ 18,831
Total mortgage-backed
securities sold
Commercial mortgage-backed
securities sold
Credit card receivables financed
through notes issued by a
securitization special purpose
entity
12,186
8,487
1,914
2,500
1,237
2,250
1,900
5,983
603
Our long-term funding sources are managed to minimize cost by limiting
concentration by geographic location, investor segment, instrument,
currency and maturity profile. In addition, liquidity objectives, market
conditions, interest rates, credit spreads and desired financial structure,
influence our long-term funding activities. We operate debt issuance
programs in Canada, the U.S. and Europe. Diversification into new
markets and untapped investor segments is also constantly evaluated
against relative issuance costs.
During 2006, we continued to expand our long-term funding base
by issuing, either directly or through our subsidiaries, $18.5 billion of
senior deposit notes in various currencies and markets. Total long-term
funding outstanding increased $9.4 billion. Outstanding senior debt
containing ratings triggers, which would accelerate repayment, consti-
tutes a very small proportion of our overall outstanding debt.
Other liquidity and funding sources
We use commercial mortgage, residential mortgage and credit card
receivable-backed securitization programs as alternative sources of
funding and for liquidity and asset/liability management purposes.
We hold retained interests in our residential mortgage and credit
card securitization programs. Our total outstanding mortgage-backed
securities sold increased year over year by $3.7 billion. Our credit card
receivables, which are financed through notes issued by a securitization
special purposes entity, decreased year over year by $250 million.
For further details, refer to the Off-balance sheet section and Note 5
to our Consolidated Financial Statements.
Our liquidity and funding position remains sound and adequate
to execute our strategy. There are no known trends, demands, com-
mitments, events or uncertainties that are presently viewed as likely to
materially change this position.
Contractual obligations
In the normal course of business, we enter into contracts that give rise
to commitments of future minimum payments that affect our liquidity.
Depending on the nature of these commitments, the obligation may be
recorded on- or off-balance sheet. The table below provides a summary
of our future contractual funding commitments.
Contractual obligations
(C$ millions) (1)
Within 1 year
1 to 3 years
3 to 5 years
Over 5 years
Total
2006
Table 55
2005
Total
2004
Total
Unsecured long-term funding
Subordinated debentures
Obligations under leases (2)
(1)
(2)
Amounts represent principal only and exclude accrued interest.
Substantially all of our lease commitments are operating.
Reputation risk
$ 9,545
–
419
$ 11,177
140
704
$ 9,471
–
495
$ 3,168
6,963
868
$ 33,361
7,103
2,486
$ 24,004
8,167
2,508
$ 18,831
8,116
2,418
$ 9,964
$ 12,021
$ 9,966
$ 10,999
$ 42,950
$ 34,679
$ 29,365
Reputation risk is the risk that an activity undertaken by an organization
or its representatives will impair its image in the community or lower
public confidence in it, resulting in the loss of business, legal action or
increased regulatory oversight.
Reputation risk can arise from a number of events and primarily
occurs in connection with regulatory, legal and operational risks.
Operational failures and non-compliance with laws and regulations can
have a significant reputational impact on the organization. Failure to
effectively manage reputation risk can result in reduced market capital-
ization, loss of client loyalty and the inability to expand.
The following principles apply to our overall management of
reputation risk:
• We must operate with integrity at all times in order to sustain a
strong and positive reputation.
Protecting our reputation is the responsibility of all our employees,
including senior management and extends to all members of the
Board of Directors.
No transaction or action is worth jeopardizing our reputation.
•
•
Responsibilities
The management of reputation risk is overseen by the Board of
Directors. The key senior management committees involved with
monitoring and reporting on reputation risk at an enterprise level
are: Ethics and Compliance Committee, Policy Review Committee,
USA Corporate Governance Committee and Structured Transactions
Oversight Committee.
Risk control
Policies
Policies and procedures support the management of reputation risk
both directly and indirectly across the organization. Business segments
have specific policies in place to manage the risks within their business,
including reputation risk. This includes requirements to identify and
mitigate reputation risk when considering new business initiatives,
products and services. A comprehensive set of policy requirements
apply to the identification and assessment of reputation risks, including
Know Your Client due diligence controls and procedures, anti-money
laundering and anti-terrorist financing policy requirements, auditor
independence requirements, research standards, whistle blowing, and
the mandatory requirements for managing conflicts of interest.
Reporting
The responsibility for monitoring and reporting on reputation risk
issues is primarily within Group Risk Management. Regular comprehen-
sive reporting relevant to the management of reputation risk is
provided to the Group Risk Committee and the Board of Directors
and its committees. This includes annual reporting on fraud issues,
litigation issues and quarterly reporting on regulatory, compliance and
operational risk issues. Reputation risk issues are also raised in internal
audit reports provided to senior management, summaries of which
are provided to the Audit Committee.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 87
Regulatory and legal risk
Regulatory and legal risk is the risk of negative impact to business
activities, earnings or capital, regulatory relationships or reputation as
a result of failure to adhere to or comply with regulations, law, industry
codes or rules, regulatory expectations or ethical standards.
GRM Compliance has developed a comprehensive enterprise
compliance management (ECM) framework that is consistent with
regulatory guidance from the OSFI and other regulators. The framework
is risk-based and designed to promote the proactive management of
regulatory risk. It applies to all of our businesses and operations, legal
entities and employees globally and outlines our accountabilities in
order to ensure we maintain robust and effective programs for manag-
ing regulatory risk. The framework covers nine elements of compliance
management: liaison with regulators, risk assessment, control design
and oversight, training and education, compliance execution, monitor-
ing, issue tracking, reporting, and new initiative management.
Responsibilities
Group Risk Management (GRM) sets out the enterprise-wide require-
ments for the identification, assessment, control, monitoring and
reporting of regulatory and legal risk across RBC. Oversight is provided
by the Board of Directors through the Conduct Review and Risk Policy
Committee (CR&RPC). The Ethics and Compliance Committee supports
our management of regulatory risk. It informs and advises GRC and the
CR&RPC on significant regulatory issues and remedial measures.
GRM Compliance is directly responsible for supporting the man-
agement of regulatory and legal risk. It reports to management and the
Board of Directors on the overall status of compliance performance and
ensures appropriate action plans are executed on a timely basis. The
management of regulatory and legal risks is ultimately the responsibility
of senior management and the businesses.
The Chief Compliance Officer and GRM Compliance work closely
with business partners to ensure the overall effectiveness of compliance
across the enterprise through the enterprise compliance management
program (ECMP), which includes compliance strategy and policies for
consistent and effective compliance, independent oversight of compli-
ance controls, timely reporting of trends and escalation of issues to
senior management and the board.
Risk measurement
The identification and assessment of regulatory risk includes formal risk
assessment activities carried out across the organization, both at the
individual business and operational level, and at the enterprise level.
Risk is measured through the assessment of the impact of regulatory
and organizational changes, the introduction of new products and
services, and the acquisition or development of new lines of business.
It is also measured through the testing of the effectiveness of the con-
trols established to ensure compliance with regulatory requirements
and expectations. Although the use of metrics to measure compliance-
related matters is relatively new and there are few proven methods for
detecting leading indicators, we have begun to use such metrics to iden-
tify issues and trends and to track changes in regulatory risk between
businesses and over time.
Risk control
Policies
We have a strong ethical and compliance culture grounded in our Code
of Conduct. The Code of Conduct is regularly reviewed and updated
to ensure that it continues to meet the expectations of regulators
and other stakeholders. All our employees, from the CEO down, must
reconfirm their understanding of and commitment to comply with the
code at least every two years, and employees in high-risk roles must do
so annually. We administer enterprise-wide delivery of online Code of
Conduct training, testing and monitoring through our training technol-
ogy, eCampus.
We also provide training in compliance and regulatory risk related
matters for relevant employees through other online tools (for example,
in the area of anti-money laundering compliance), job aids, as part of
employees’ regular job training, in new employee orientation materials,
and periodically through targeted face-to-face or webcast training.
Reporting
On a quarterly basis, the Chief Compliance Officer and GRM Compliance
report compliance matters to senior management, management
committees and the Board of Directors and its operating subsidiaries.
In addition, the Chief Compliance Officer provides an annual report
on overall compliance, and on specific topics, such as related party
transactions, conflicts of interest, compliance with Canadian consumer
protection requirements and anti-money laundering compliance.
Similarly, senior compliance officers of our operating subsidiaries pro-
vide relevant annual and quarterly reports to their senior management
and Board of Directors.
Royal Bank of Canada Annual Report 2006
88 Management’s Discussion and Analysis
Environmental risk
Environmental risk is the risk of loss to financial, operational or reputa-
tion value resulting from the impact of environmental issues. These
impacts may be direct, such as financial loss sustained from credit pro-
vided to owners of contaminated properties, or indirect, such as damage
to our reputation resulting from the activities of our clients.
We undertake independent and collaborative research, engage
stakeholders, measure performance, and carry out benchmarking in
order to identify and address the material environmental issues we face.
Issues include climate change, sustainable forestry, biodiversity and
the rights of indigenous peoples.
In relation to climate change, for example, we undertook a high-
level carbon risk profile of our lending portfolio in order to assess
potential credit risk impacts. While the aggregated carbon risk exposure
of our portfolio was not considered significant, we continue to monitor
this risk as scientific and economic analysis, regulatory actions and our
own portfolios evolve.
Responsibilities
Our environmental risk activities are managed by the Environmental
Risk Management Group (ERMG) and its partners in the businesses
and corporate support groups. Oversight of all risks is provided by the
Chief Risk Officer and ultimately by the Conduct Review and Risk Policy
Committee of our Board of Directors.
Operational activities relating to the environment are managed
co-operatively by the ERMG, Corporate Real Estate, Strategic Sourcing
and Corporate Communications. These groups have expertise in credit,
emerging environmental issues, operations and reporting. Collectively,
they develop, integrate and manage environmental policy, programs
and practices.
Risk measurement
Some environmental risks associated with our business and operational
activities can be easily quantified. These include the costs of rectifying
environmental contamination of properties used as security for loans.
Other risks are newer, more complex and more difficult to quantify,
requiring expert judgment on an ongoing basis to identify environmental
issues and estimate impacts. As risk measurement methodologies
mature (relative to carbon risk), we will incorporate those considered
useful into our processes.
Risk control
Our Corporate Environmental Policy supplements the environment sec-
tion of our Code of Conduct. The policy’s primary focus is to guide our
lending practices and operational activities. It is currently under review,
and a revised and updated policy addressing emerging environmental
issues will be released in 2007.
Our environmental credit risk management policies provide a
means to proactively identify and manage environmental risks in our
lending activities. These policies are regularly reviewed to ensure com-
pliance with our legal and operational commitments, and to take into
account evolving business activities.
Our commitment to the Equator Principles is an integral part of our
environmental risk management approach. The Equator Principles are
a voluntary set of guidelines that help financial institutions address the
environmental and social risks associated with project finance. We have
developed an internal policy governing project finance activities in line
with these principles.
The ERMG continues to communicate with business segments to
ensure that existing and emerging environmental risks are appropriately
managed and controlled. Enhancements, including further policy
development and transaction screening tools, are under consideration.
Reporting
The Board of Directors and senior management committees are pro-
vided with reports and analysis on environmental issues (for example,
climate change and the Kyoto Accord, and the Equator Principles), as
appropriate. Our annual Corporate Responsibility Report (CRR) provides
information to our stakeholders about our areas of focus and progress,
including environmental policy, lending, emerging issues, stakeholder
engagement, and environmental performance and initiatives.
Insurance risk
Insurance risk is the risk of loss that may occur when actuarial assump-
tions made in insurance product design and pricing activities differ from
actual experience. Insurance risk can be categorized into the following
sub-risks:
•
Claims risk: The risk that the actual severity and/or frequency of
claims differ from the levels assumed in pricing calculations.
This risk can occur through (i) a mis-estimation of expected claims
activities as compared to actual claims activities, or (ii) the mis-
selection of a risk during the underwriting process.
Policyholder behaviour risk: The risk that the behaviour of policy-
holders relating to premium payments, policy withdrawals or loans,
policy lapses, surrenders and other voluntary terminations differs
from the behaviour assumed in pricing calculations.
Expense risk: The risk that the expense of acquiring or administer-
ing policies, or of processing claims, exceeds the costs assumed in
pricing calculations.
•
•
Insurance risk arises from our life and health, home and auto, travel
insurance and reinsurance businesses.
We have established an insurance risk management framework
which comprises five primary risk management activities: risk oversight
and monitoring, risk reviews and approvals, risk event escalation, risk
policies and risk reporting.
Responsibilities
Group Risk Management – Insurance monitors insurance risk via the
insurance risk management framework.
The collaborative process between risk management and business
segments facilitates the identification and prioritization of risks and
ensures the appropriate risk mitigants are implemented in order to align
with the organization’s risk appetite.
Group Risk Management participation in key business activities
and processes and in risk-based reviews enables the monitoring of
business activities and risks, and the establishment of limits such as
underwriting limits. Additional oversight is achieved through periodic
compliance assessments, internal audits and other review mechanisms.
Risk measurement
Insurance risks are measured using in-house models (developed by
our Corporate Actuarial Group) and industry models, each of which com-
plies with GRM Model Risk Policy. These risk measurements are used
for economic capital attribution, for valuation of liability reserves, and
for ensuring that our regulatory capital meets the OSFI guidelines for
insurance companies. The models are also used for asset-liability man-
agement (ALM) purposes.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 89
Our allocation of insurance risk is measured by economic capital.
We have a diversified portfolio of insurance risks with the largest single
category being less than 30% of our allocated economic capital.
Risk mitigation
Reinsurance (as a risk mitigation technique) is used for reducing
our exposure to insurance risks that may not fit within our desired risk
profile.
Risk control
Policies
Risk policies articulate our strategies for identifying, prioritizing and
managing risk. Policies communicate a consistent message about risk
tolerance and ensure accountability through clear roles and responsibili-
ties. Enterprise-wide policies on insurance risk are centrally managed
within Group Risk Management.
Risk review and approval
Product design and pricing risk arising from product initiatives is moni-
tored through a structured risk analysis and approval process. Initiatives
are reviewed and assigned a risk rating to identify the appropriate level
of approval authority within the organization.
Additional risks that may affect future results
By their very nature, forward-looking statements, including those
made in this document, involve numerous factors and assumptions,
and are subject to inherent risks and uncertainties, both general and
specific, which may cause our future results to differ materially from our
expectations expressed in our forward-looking statements. Factors that
might cause future financial performance to vary from that described in
those forward-looking statements include credit, market, operational
and other risks identified and discussed in detail in the Risk manage-
ment section. In addition, the following discussion sets forth other
factors we believe could cause future results to differ materially from
expected results.
Industry factors
General business and economic conditions in Canada, the U.S. and other
countries in which we conduct business
Interest rates, foreign exchange rates, consumer spending, business
investment, government spending, the level of activity and volatility of
the capital markets, inflation and terrorism, each impact the business
and economic environments in which we operate and, ultimately, the
level of business activity we conduct and earnings we generate in a spe-
cific geographic region. For example, an economic downturn in a country
may result in high unemployment and lower family income, corporate
earnings, business investment and consumer spending, and could
adversely affect the demand for our loan and other products. In addi-
tion, our provision for credit losses would likely increase, resulting in
lower earnings. Similarly, a downturn in a particular equity or debt mar-
ket could cause a reduction in new issue and investor trading activity,
assets under management and assets under administration, resulting in
lower fee, commission and other revenue.
Currency rates
Our revenue, expenses and income denominated in currencies other
than the Canadian dollar are subject to fluctuations in the movement of
the Canadian dollar relative to those currencies. Such fluctuations may
affect our overall business and financial results. Our most significant
exposure is to the U.S. dollar on account of our level of operations in the
U.S., and other activities conducted in U.S. dollars.
The strengthening of the Canadian dollar compared to the U.S.
dollar over the last three years has had a significant effect on our
results. We are also exposed to the British pound on account of our level
of operations in the U.K. and activity conducted internationally in this
currency. Further appreciation of the Canadian dollar relative to the U.S.
dollar or British pound would reduce the translated value of U.S. dollar-
and GBP-denominated revenue, expenses and earnings, respectively.
Royal Bank of Canada Annual Report 2006
90 Management’s Discussion and Analysis
Reporting
Group Risk Management – Insurance evaluates and reports on insurance
risk related items to management at the business unit level and at the
enterprise level on a regular basis. The reports facilitate the analysis
and communication of information and contribute to the overall
understanding of insurance risk. Reporting includes an assessment of
risks facing the various businesses and covers trends related to claims
and loss ratios. The reports also enable an assessment of the risk/return
profile of insurance products and impart a view of potential risks on
the horizon.
Government monetary and other policies
Our businesses and earnings are affected by the monetary policies
that are adopted by the Bank of Canada, the Board of Governors of the
Federal Reserve System in the United States as well as those adopted
by international agencies, in jurisdictions in which we operate. For
example, monetary policy decisions by the Bank of Canada have an
impact on the level of interest rates, fluctuations of which can have an
impact on our earnings. As well, such policies can adversely affect our
clients and counterparties in Canada, the U.S. and internationally, which
may increase the risk of default by such clients and counterparties. Our
businesses and earnings are also affected by the fiscal or other policies
that are adopted by various regulatory authorities in Canada, the U.S.
and international agencies.
Level of competition
The competition for clients among financial services companies in the
consumer and business markets in which we operate is intense. Client
loyalty and retention can be influenced by a number of factors, including
relative service levels, the prices and attributes of our products or
services, our reputation and actions taken by our competitors. Other
financial companies, such as insurance and mono-line companies, and
non-financial companies are increasingly offering services traditionally
provided by banks. Such disintermediation could also reduce fee
revenue and adversely affect our earnings.
Changes in laws and regulations
Regulations are in place to protect the financial and other interests of
our clients, investors and the public interest. Changes to laws, regula-
tions or regulatory policies (including tax laws) and changes in how they
are interpreted, implemented or enforced, could adversely affect us, for
example, by lowering barriers to entry in the businesses in which we
operate or increasing our costs of compliance. In addition, our failure
to comply with applicable laws, regulations or regulatory policies could
result in sanctions and financial penalties by regulatory agencies that
could adversely impact our reputation and earnings.
Judicial or regulatory judgments and legal proceedings
Although we take what we believe to be reasonable measures designed
to ensure compliance with laws, regulations and regulatory policies
in the jurisdictions in which we conduct business, there is no assurance
that we always will be or will be deemed to be in compliance.
Accordingly, it is possible that we could receive a judicial or regulatory
judgment or decision that results in fines, damages and other costs that
would damage our reputation and negatively impact on our earnings.
We are also subject to litigation arising in the ordinary course
The accounting policies we utilize determine how we report our
of our business. The adverse resolution of any litigation could have a
material adverse effect on our results or could give rise to significant
reputational damage, which could impact our future business prospects.
Accuracy and completeness of information on clients and counterparties
When deciding to extend credit or enter into other transactions with
clients and counterparties, we may rely on information provided by
or on behalf of clients and counterparties, including audited financial
statements and other financial information. We also may rely on rep-
resentations of clients and counterparties as to the completeness and
accuracy of that information. Our financial results could be adversely
impacted if the financial statements and other financial information
relating to clients and counterparties on which we rely do not comply
with GAAP or are materially misleading.
Bank-specific factors
Execution of our strategy
Our ability to execute on our objectives and strategic goals will influ-
ence our financial performance. If our strategic goals do not meet with
success or there is a change in our strategic goals, our financial results
could be adversely affected.
Acquisitions and joint ventures
Although we regularly explore opportunities for strategic acquisitions of,
or joint ventures with, companies in our lines of businesses, there is no
assurance that we will be able to complete acquisitions or joint ventures
on terms and conditions that satisfy our investment criteria. There is
also no assurance we will achieve our financial or strategic objectives or
anticipated cost savings following acquisitions or forming joint ventures.
Our performance is contingent on retaining the clients and key employ-
ees of acquired companies and joint ventures, and there is no assurance
that we will always succeed in doing so.
Changes in accounting standards and accounting policies and estimates
From time to time, the Accounting Standards Board of the CICA changes
the financial accounting and reporting standards that govern the
preparation of our financial statements. These changes can be difficult
to anticipate and can materially impact how we record and report our
financial condition and results of operations. In some instances, we may
be required to retroactively apply a new or revised standard that results
in our restating prior period financial statements.
financial condition and results of operations, and they require manage-
ment to make estimates or rely on assumptions about matters that are
inherently uncertain. Such estimates and assumptions may require
revision, and changes to them may materially adversely affect our
results of operations and financial condition. Significant accounting
policies and estimates are described in Note 1 to our Consolidated
Financial Statements.
As detailed in the Accounting and control matters section, we
have identified seven accounting policies as being “critical” to the
presentation of our financial condition and results of operations as
they (i) require management to make particularly subjective and/or
complex judgments about matters that are inherently uncertain and
(ii) carry the likelihood that materially different amounts could be
reported under different conditions or using different assumptions
and estimates.
Ability to attract employees and executives
Competition for qualified employees and executives is intense both
within the financial services industry and from non-financial industries
looking to recruit. If we are unable to retain and attract qualified
employees and executives, our results of operations and financial
condition, including our competitive position, may be materially
adversely affected.
Other factors
Other factors that may affect future results include changes in
government trade policy, the timely and successful development of new
products and services, technological changes, unexpected changes
in consumer spending and saving habits, the possible impact on our
business from disease or illness that affects local, national or global
economies, disruptions to public infrastructure, including transporta-
tion, communication, power and water, international conflicts and other
political developments including those relating to the war on terrorism,
and our success in anticipating and managing the associated risks.
We caution that the foregoing discussion of risk factors that may
affect future results is not exhaustive. When relying on our forward-
looking statements to make decisions with respect to us, investors and
others should carefully consider the foregoing factors, other uncertain-
ties and potential events, and other industry- and bank-specific factors
that may adversely affect our future results and the market valuation
placed on our common shares. We do not undertake to update any
forward-looking statement, whether written or oral, that may be made
from time to time by us, or on our behalf.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 91
Additional financial information
Net interest income on average assets and liabilities from continuing operations (1)
Table 56
(C$ millions, except percentage amounts)
2006
2005
2004
2006
Average balances (2)
Interest (3)
2005
2004
2006
Average rate
2005
Assets
Deposits with other banks
Canada
United States
Other International
Securities
Trading account
Investments
Loan substitute
915 $
629 $
41 $
$
1,218 $
1,856
4,913
7,987
1,587
4,068
6,570
134,166
38,127
665
110,356
37,198
678
1,093
3,897
5,619
94,178
43,146
358
172,958
148,232
137,682
155
284
480
5,056
1,068
31
6,155
31 $
55
145
8
7
88
3.37%
8.35
5.78
231
103
6.01
3,711
839
33
4,583
2,718
837
17
3,572
3.77
2.80
4.66
3.56
3.39%
3.47
3.56
3.52
3.36
2.26
4.87
3.09
2004
1.27%
.64
2.26
1.83
2.89
1.94
4.75
2.59
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans (4)
Canada
Residential mortgages
Personal
Credit cards
Business and government
United States
Other International
Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets
55,615
44,420
43,920
2,827
1,354
656
5.08
3.05
1.49
90,624
36,840
6,233
33,694
82,960
32,864
6,238
30,026
75,722
28,857
5,656
27,616
167,391
21,871
8,286
152,088
20,572
6,993
137,851
21,329
6,586
197,548
179,653
165,766
434,108
2,806
8,748
56,438
378,875
2,567
6,411
57,447
352,987
2,758
6,047
56,408
4,539
2,701
761
1,420
9,421
2,110
1,177
12,708
22,170
–
–
–
4,090
2,055
753
1,401
8,299
1,626
865
10,790
16,958
–
–
–
3,903
1,813
674
1,342
7,732
1,134
669
9,535
13,866
–
–
–
5.01
7.33
12.21
4.21
5.63
9.65
14.20
6.43
5.11
–
–
–
4.93
6.25
12.07
4.67
5.46
7.90
12.37
6.01
4.48
–
–
–
5.15
6.28
11.92
4.86
5.61
5.32
10.16
5.75
3.93
–
–
–
Total assets
$ 502,100 $ 445,300 $ 418,200 $
22,170 $
16,958 $
13,866
4.42%
3.81%
3.32%
Liabilities and shareholders’ equity
Deposits (5)
Canada
United States
Other International
Obligations related to securities sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned
Subordinated debentures
Other interest-bearing liabilities
Total interest-bearing liabilities
Non-interest-bearing deposits
Acceptances
Other liabilities
Total liabilities
Shareholders’ equity
Preferred
Common
$ 167,015 $ 161,866 $ 147,956 $
47,913
91,334
40,004
70,168
38,402
67,680
5,024 $
2,018
3,666
3,724 $
1,047
2,175
306,262
272,038
254,038
10,708
38,630
34,169
27,013
2,071
32,786
8,013
2,759
388,450
17,037
8,882
66,755
25,912
8,359
4,041
344,519
16,159
6,414
58,757
29,159
8,000
3,458
321,668
14,164
6,049
57,697
1,882
419
328
15,408
–
–
–
6,946
1,381
1,120
442
299
10,188
–
–
–
3,186
510
1,446
5,142
978
677
429
242
7,468
–
–
–
3.01%
4.21
4.01
3.50
5.36
5.74
5.23
11.89
3.97
–
–
–
2.30%
2.62
3.10
2.55
4.04
4.32
5.29
7.40
2.96
–
–
–
2.15%
1.33
2.14
2.02
3.62
2.32
5.36
7.00
2.32
–
–
–
$ 481,124 $ 425,849 $ 399,578 $
15,408 $
10,188 $
7,468
3.20%
2.39%
1.87%
$
1,022 $
811 $
19,954
18,640
832
17,790
–
–
–
–
–
–
Total liabilities and shareholders’ equity
$ 502,100 $ 445,300 $ 418,200 $
15,408 $
10,188 $
7,468
Net interest income and margin
$ 502,100 $ 445,300 $ 418,200 $
6,762 $
6,770 $
6,398
Net interest income and margin
Canada
United States
International
$ 257,319 $ 229,184 $ 212,562 $
90,684
86,105
74,842
74,849
61,716
78,709
6,068 $
136
558
5,379 $
774
617
4,870
922
606
Total
$ 434,108 $ 378,875 $ 352,987 $
6,762 $
6,770 $
6,398
–
–
3.07%
1.35%
2.36%
.15
.65
1.56%
–
–
2.29%
1.52%
2.35%
1.03
.82
1.79%
–
–
1.79%
1.53%
2.29%
1.49
.77
1.81%
(1)
(2)
(3)
(4)
(5)
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Interest income includes loan fees of $348 million (2005 – $343 million; 2004 – $336 million).
Average balances include impaired loans.
Deposits include savings deposits with average balances of $46 billion (2005 – $46 billion; 2004 – $45 billion), interest expense of $.4 billion (2005 – $.3 billion; 2004 – $.2 billion) and average
rates of .8% (2005 – .6%; 2004 – .5%). Deposits also include term deposits with average balances of $206 billion (2005 – $181 billion; 2004 – $169 billion), interest expense of $8.3 billion
(2005 – $5.3 billion; 2004 – $4.0 billion) and average rates of 4.02% (2005 – 2.95%; 2004 – 2.34%).
Royal Bank of Canada Annual Report 2006
92 Management’s Discussion and Analysis
Change in net interest income (1)
Table 57
(C$ millions)
Assets
Deposits with other banks
Canada
United States
Other International
Securities
Trading account
Investments
Loan substitute
Assets purchased under
reverse repurchase agreements
and securities borrowed
Loans
Canada
Residential mortgages
Personal
Credit cards
Business and government
United States
Other International
2006 vs. 2005
Increase (decrease)
due to changes in
2005 vs. 2004
Increase (decrease)
due to changes in
Average
volume (2)
Average
rate (2)
Net
change
Average
volume (2)
Average
rate (2)
Net
change
$
$
10
11
35
863
21
(1)
–
89
104
482
208
(1)
$
$
10
100
139
$
5
4
4
1,345
229
(2)
506
(125)
16
$
18
44
53
487
127
–
23
48
57
993
2
16
404
1.069
1,473
8
690
698
383
266
(1)
162
108
173
66
380
9
(143)
376
139
449
646
8
19
484
312
362
251
70
114
(42)
43
(175)
(9)
9
(55)
534
153
187
242
79
59
492
196
Total interest income
$
2,434
$
2,778
$
5,212
$
1,216
$
1,876
$
3,092
Liabilities
Deposits
Canada
United States
International
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Subordinated debentures
Other interest-bearing liabilities
Total interest expense
Net interest income
$
$
$
122
238
754
197
341
(18)
(115)
$
1,178
733
737
493
421
(5)
144
1,300
971
1,491
690
762
(23)
29
$
$
1,519
915
$
$
3,701
$
5,220
$
(923) $
(8) $
311
22
55
280
(83)
19
42
646
570
$
$
$
$
227
515
674
123
526
(6)
15
538
537
729
403
443
13
57
2,074
$
2,720
(198) $
372
(1)
(2)
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Volume/rate variance is allocated on the percentage relationship of changes in balances and changes in rates to the total net change in net interest income.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 93
Diversification by credit portfolio
Table 58
(C$ millions)
Residential mortgages
Personal
Credit card
Consumer
Agriculture
Automotive (1)
Consumer goods
Energy
Financial services
Forest products
Government
Industrial products
Mining and metals
Real estate and related
Technology and media
Transportation and environment (1)
Other
Business and government (2)
Total loans and acceptances
Total allowance for loan losses
2006
2005
2004
2003
2002
$ 96,675
44,902
7,155
$ 91,043
41,045
6,200
$ 81,998
36,848
6,456
$ 75,790
32,186
4,816
$ 72,840
30,588
4,914
$ 148,732
$ 138,288
$ 125,302
$ 112,792
$ 108,342
$
5,708
3,053
4,864
6,064
5,756
1,166
2,719
3,733
1,161
16,421
2,395
2,581
14,694
$
5,509
2,637
4,731
5,648
2,661
1,249
2,444
3,229
553
13,977
2,310
2,062
13,690
$
5,207
2,451
4,821
3,493
1,609
1,181
2,319
2,887
671
12,420
2,192
2,749
11,442
$
4,955
2,427
5,180
3,711
2,315
1,554
2,096
3,012
1,056
12,463
2,782
3,290
10,759
$
5,039
2,164
5,246
6,775
5,518
1,670
1,323
3,728
1,630
11,673
4,630
4,518
13,568
$ 70,315
$ 60,700
$ 53,442 $ 55,600
$ 67,482
$ 219,047
$ 198,988
$ 178,744
$ 168,392
$ 175,824
(1,409)
(1,498)
(1,644)
(2,055)
(2,203)
Total loans and acceptances, net of allowance for loan losses
$ 217,638
$ 197,490
$ 177,100
$ 166,337
$ 173,621
(1)
(2)
Commencing in 2002, certain amounts were reclassified from the transportation and environment sector grouping to the automotive group.
Includes small business loans of $12,817 million in 2006 (2005 – $10,757 million; 2004 – $10,137 million; 2003 – $9,705 million; 2002 – $9,470 million). For further details, see Table 64.
Diversification by geographical area (1)
Table 59
(C$ millions)
Canada
Residential mortgages
Personal
Credit cards
Business and government
United States
Residential mortgages
Personal
Credit cards
Business and government
Other International
Residential mortgages
Personal
Credit cards
Business and government
Total loans and acceptances
Total allowance for loan losses
2006
2005
2004
2003
2002
$ 94,272
37,946
6,966
49,255
$ 88,808
33,986
6,024
44,929
$ 80,168
30,415
6,298
37,783
$ 73,978
26,445
4,663
36,576
$ 67,700
24,550
4,740
41,585
$ 188,439
$ 173,747
$ 154,664
$ 141,662
$ 138,575
$
1,518
6,011
123
13,847
$
1,375
6,248
118
12,317
$
1,053
5,849
108
11,698
$
1,067
5,015
107
13,213
$
4,351
5,269
125
16,537
$ 21,499
$ 20,058
$ 18,708
$ 19,402
$ 26,282
$
$
885
945
66
7,213
$
860
811
58
3,454
$
777
584
50
3,961
$
745
726
46
5,811
789
769
49
9,360
$
9,109
$
5,183
$
5,372
$
7,328
$ 10,967
$ 219,047
$ 198,988
$ 178,744
$ 168,392
$ 175,824
(1,409)
(1,498)
(1,644)
(2,055)
(2,203)
Total loans and acceptances, net of allowance for loan losses
$ 217,638
$ 197,490
$ 177,100
$ 166,337
$ 173,621
(1)
Geographic information is based on residence of borrower.
Royal Bank of Canada Annual Report 2006
94 Management’s Discussion and Analysis
Impaired loans by credit portfolio and geography (1)
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Consumer
Agriculture
Automotive
Consumer goods
Energy
Financial services
Forest products
Government
Industrial products
Mining and metals
Real estate and related
Small business (2)
Technology and media
Transportation and environment
Other
Business and government
Total impaired loans (3), (4)
Canada
Residential mortgages
Personal
Business and government
United States
Consumer
Business and government
Other International
Consumer
Business and government
Total impaired loans
Specific allowance for credit losses
Net impaired loans
Gross impaired loans as a % of loans and acceptances
Residential mortgages
Personal
Credit cards
Consumer
Business and government
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
2006
2005
$
$
$
$
$
$
154
190
344
45
5
59
6
15
1
21
4
3
64
129
42
14
82
490
834
127
183
279
$
$
$
$
$
$
136
169
305
48
2
53
46
16
10
–
2
3
54
108
48
8
71
469
774
106
161
236
Table 60
2003
2002
2004
146
189
$
131 $
235
335 $
366 $
89 $
4
36
162
14
151
–
38
8
84
142
86
12
98
146 $
7
48
240
45
169
–
25
57
97
169
122
136
118
131
306
437
159
39
57
243
77
199
–
53
128
115
205
225
206
145
924 $
1,379 $
1,851
1,259
$
1,745
$
2,288
$
96
178
509
$
110
213
741
102
275
895
589
$
503
$
783
$
1,064
$
1,272
$
15
151
$
16
173
$
44
332
$
29
332
166
$
189
$
376
$
361
$
$
$
$
19
60
79
834
(263)
$
$
$
22
60
82
774
(282)
$
$
$
17
83
100
1,259
(487)
$
$
$
14
306
320
1,745
(757)
47
537
584
13
419
432
2,288
(894)
571
$
492
$
772
$
988
$
1,394
.16%
.42%
0%
.23%
.70%
.38%
.15%
.36%
0%
.22%
.77%
.39%
.18%
.51%
0%
.27%
1.73%
.70%
.17%
.73%
0%
.32%
2.48%
1.04%
.18%
1.00%
0%
.40%
2.74%
1.30%
Specific allowance for credit losses as a % of gross impaired loans
31.53%
36.43%
38.68%
43.38%
39.07%
(1)
(2)
(3)
(4)
Geographic information is based on residence of borrower.
Includes government guaranteed portions of impaired loans of $25 million in small business in 2006 (2005 – $18 million; 2004 – $24 million; 2003 – $39 million; 2002 – $64 million) and
$8 million in agriculture (2005 – $5 million; 2004 – $9 million; 2003 – $9 million; 2002 – $10 million).
Includes foreclosed assets of $9 million in 2006 (2005 – $17 million; 2004 – $27 million; 2003 – $34 million; 2002 – $32 million).
Past due loans greater than 90 days not included in impaired loans were $305 million in 2006 (2005 – $304 million; 2004 – $219 million; 2003 – $222 million; 2002 – $217 million).
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 95
Provision for credit losses by credit portfolio and geography (1)
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Credit card
Consumer
Agriculture
Automotive
Consumer goods
Energy
Financial services
Forest products
Industrial products
Mining and metals
Real estate and related
Small business
Technology and media
Transportation and environment
Other
Business and government
Total specific provision for loan losses
Canada
Residential mortgages
Personal
Credit cards
Business and government
United States
Consumer
Business and government
Other International
Consumer
Business and government
Total specific provision for loan losses
Total general provision
Total provision for credit losses
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2004
2003
2002
Table 61
2006
6
306
163
$
2005
2
259
194
$
475
$
455
$
(1) $
3
–
(53)
4
(2)
(1)
–
(4)
54
(6)
(2)
15
$
$
$
7
482
6
296
161
44
(12) $
–
21
(20)
10
(53)
(9)
(1)
(15)
44
(7)
7
(31)
(66) $
389
$
$
1
247
192
(5)
$
$
$
$
$
$
7
222
167
396
7
1
(19)
50
–
3
5
(4)
(7)
75
1
(35)
48
125
521
6
211
166
30
8 $
254
155
417
–
(1)
10
78
(1)
13
1
5
(12)
77
30
77
27
304
721
4
230
152
141
$
$
$
$
$
507
$
435
$
413
$
527
$
$
12
(38)
$
15
(60)
$
13
106
$
30
78
(26) $
(45) $
119
$
108
$
–
1
1
482
$
$
$
(53) $
429
$
$
–
(1)
$
–
(11)
(1) $
(11) $
1
85
86
389
66
455
$
$
$
521
$
721
(175) $
–
346
$
721
$
$
$
$
$
2
289
140
431
22
1
17
145
(6)
4
(2)
27
(16)
110
298
2
32
634
1,065
2
267
135
125
529
27
413
440
–
96
96
1,065
–
1,065
.62%
Specific provision as a % of average loans and acceptances
.23%
.21%
.30%
.43%
(1)
Geographic information is based on residence of borrower.
Royal Bank of Canada Annual Report 2006
96 Management’s Discussion and Analysis
Allowance for credit losses by credit portfolio and geography (1)
(C$ millions, except percentage amounts)
Allowance at beginning of year
Provision for credit losses
Write-offs by portfolio
Residential mortgages
Personal
Credit card
Consumer
Business and government
LDC exposures
Total write-offs by portfolio
Recoveries by portfolio
Personal
Credit card
Consumer
Business and government
Total recoveries by portfolio
Net write-offs
Adjustments (2)
Total allowance for credit losses at end of year
Canada
Residential mortgages
Personal
Business and government
United States
Consumer
Business and government
Other International
Consumer
Business and government
Total specific allowance for loan losses
General allowance
Total allowance for credit losses
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2006
1,568
429
(5)
(374)
(204)
2005
1,714
455
(5)
(347)
(237)
$
2004
2,164
346
(7)
(325)
(207)
2003
2,314
721
(10)
(373)
(192)
(583) $
(130)
–
(589) $
(181)
–
(539) $
(462)
–
(575) $
(407)
–
Table 62
2002
2,392
1,065
$
(12)
(398)
(178)
(588)
(836)
(33)
(713) $
(770) $
(1,001) $
(982) $
(1,457)
$
$
64
41
105
100
$
$
69
43
112
62
$
$
68
39
107
109
$
$
68
37
105
65
205
$
174
$
216
$
170
$
70
38
108
90
198
(508) $
(3)
(596) $
(5)
(785) $
(812) $
(11)
(59)
(1,259)
116
1,486
$
1,568
$
1,714
$
2,164
$
2,314
$
11
88
121
$
9
101
120
$
11
108
208
$
12
129
297
220
$
230
$
327
$
438
$
3
12
15
1
27
28
263
1,223
$
$
$
$
$
3
18
21
–
31
31
282
1,286
$
$
$
$
$
$
5
118
$
11
131
123
$
142
$
–
37
37
487
1,227
$
$
$
–
177
177
757
1,407
$
$
$
14
163
329
506
17
212
229
–
159
159
894
1,420
1,486
$
1,568
$
1,714
$
2,164
$
2,314
Key ratios
Allowance for credit losses as a % of loans and acceptances
Allowance for credit losses as a % of impaired loans (coverage ratio)
Net write-offs as a % of average loans and acceptances
.68%
178%
.25%
.79%
203%
.32%
.97%
136%
.46%
1.30%
124%
.49%
1.33%
101%
.74%
(1)
(2)
Geographic information is based on residence of borrower.
Other adjustments include primarily foreign exchange translations on non-Canadian dollar denominated allowance for credit losses and acquisition adjustments for Provident Financial Group Inc.
$6 million in the first quarter 2004; Admiralty Bancorp, Inc. $8 million.
Royal Bank of Canada Annual Report 2006
Management’s Discussion and Analysis 97
Credit quality information by province (1)
Table 63
(C$ millions)
Loans and acceptances
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
2006
2005
2004
2003
2002
$ 10,256
32,723
83,839
32,598
29,023
$ 10,255
26,646
78,283
31,190
27,373
$
9,598
23,670
70,896
26,701
23,799
$
9,191
22,564
64,351
24,084
21,472
$
8,828
21,695
63,233
24,215
20,604
Total loans and acceptances in Canada
$ 188,439
$ 173,747
$ 154,664
$ 141,662
$ 138,575
Impaired loans
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
Total impaired loans in Canada
Provision for credit losses
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
$
$
$
$
53
68
286
107
75
$
47
44
269
78
65
$
60
131
254
93
245
$
81
155
348
140
340
107
90
471
177
427
589
$
503
$
783
$
1,064
$
1,272
$
33
47
344
38
45
$
30
7
368
44
(14)
$
34
(1)
318
31
31
$
46
77
309
55
40
59
(5)
330
86
59
529
Total provision for credit losses in Canada
$
507
$
435
$
413
$
527
$
(1)
(2)
(3)
(4)
Based on residence of borrower.
Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
Comprises Manitoba, Saskatchewan and Alberta.
Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
Small business loans and acceptances by sector
(C$ millions)
Agriculture
Automotive
Consumer goods
Energy
Financial services
Forest products
Government
Industrial products
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other
Total small business loans
$
$
$
2006
248
601
2,043
284
73
366
177
1,377
88
2,565
300
774
3,921
2005
715
490
1,728
182
78
311
182
1,057
57
1,982
243
549
3,183
$
2004
519
463
1,764
150
51
276
156
999
62
1,821
232
502
3,142
$
Table 64
2002
67
377
1,583
125
93
278
187
887
69
1,737
204
552
3,311
2003
70
462
1,777
137
97
298
161
952
65
1,777
242
503
3,164
$ 12,817
$ 10,757
$ 10,137
$
9,705
$
9,470
Royal Bank of Canada Annual Report 2006
98 Management’s Discussion and Analysis
Consolidated Financial Statements
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
100 Management’s responsibility for financial
106 Note 1 Significant accounting policies and
132 Note 20 Pensions and other
reporting
estimates
100 Report of Independent Registered
Chartered Accountants
101 Management’s report on internal control
over financial reporting
101 Report of Independent Registered
Chartered Accountants
102 Consolidated Balance Sheets
103 Consolidated Statements of Income
104 Consolidated Statements of Changes in
112 Note 2 Estimated fair value of financial
instruments
113 Note 3 Securities
115 Note 4 Loans
116 Note 5 Securitizations
118 Note 6 Variable interest entities
119 Note 7 Derivative financial instruments
123 Note 8 Premises and equipment
123 Note 9 RBC Dexia Investor Services joint
post-employment benefits
134 Note 21 Stock-based compensation
137 Note 22 Trading revenue
137 Note 23 Business realignment charges
138 Note 24 Income taxes
139 Note 25 Earnings per share
140 Note 26 Concentrations of credit risk
140 Note 27 Guarantees, commitments and
contingencies
144 Note 28 Contractual repricing and maturity
Shareholders’ Equity
venture
schedule
105 Consolidated Statements of Cash Flows
124 Note 10 Goodwill and other intangibles
124 Note 11 Significant acquisitions and
144 Note 29 Related party transactions
145 Note 30 Results by business and geographic
dispositions
segment
147 Note 31 Reconciliation of Canadian and
United States generally accepted accounting
principles
156 Note 32 Subsequent events
125 Note 12 Other assets
126 Note 13 Deposits
127 Note 14 Insurance
127 Note 15 Other liabilities
128 Note 16 Subordinated debentures
129 Note 17 Trust capital securities
130 Note 18 Preferred share liabilities and
share capital
132 Note 19 Non-controlling interest in
subsidiaries
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 99
Management’s responsibility for financial reporting
The accompanying Consolidated Financial Statements of Royal Bank
of Canada (RBC) were prepared by management, which is responsible
for the integrity and fairness of the information presented, including
the many amounts that must of necessity be based on estimates and
judgments. These Consolidated Financial Statements were prepared
in accordance with Canadian generally accepted accounting principles
(GAAP) pursuant to Subsection 308 of the Bank Act (Canada), which
states that, except as otherwise specified by the Superintendent
of Financial Institutions Canada, the financial statements are to be
prepared in accordance with Canadian GAAP. Financial information
appearing throughout our management’s discussion and analysis is
consistent with these Consolidated Financial Statements.
In discharging our responsibility for the integrity and fairness of the
consolidated financial statements and for the accounting systems from
which they are derived, we maintain the necessary system of internal
controls designed to ensure that transactions are authorized, assets are
safeguarded and proper records are maintained. These controls include
quality standards in hiring and training of employees, policies and
procedures manuals, a corporate code of conduct and accountability for
performance within appropriate and well-defined areas of responsibility.
The system of internal controls is further supported by a compli-
ance function, which is designed to ensure that we and our employees
comply with securities legislation and conflict of interest rules, and by
an internal audit staff, which conducts periodic audits of all aspects of
our operations.
The Board of Directors oversees management’s responsibilities
for financial reporting through an Audit Committee, which is composed
entirely of directors who are neither officers nor employees of RBC.
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of Royal Bank of Canada
We have audited the consolidated balance sheets of Royal Bank of
Canada (the “Bank”) as at October 31, 2006 and 2005 and the consoli-
dated statements of income, changes in shareholders’ equity and cash
flows for each of the years in the three-year period ended October 31,
2006. These consolidated financial statements are the responsibility
of the Bank’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
With respect to the consolidated financial statements as at and for
the year ended October 31, 2006, we conducted our audit in accordance
with Canadian generally accepted auditing standards and the standards
of the Public Company Accounting Oversight Board (United States).
With respect to the consolidated financial statements as at and for the
years ended October 31, 2005 and 2004, we conducted our audits in
accordance with Canadian generally accepted auditing standards. These
standards require that we plan and perform an audit to obtain reason-
able assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
This Committee reviews our consolidated financial statements and
recommends them to the Board for approval. Other key responsibilities
of the Audit Committee include reviewing our existing internal control
procedures and planned revisions to those procedures, and advising
the directors on auditing matters and financial reporting issues. Our
Compliance Officer and Chief Internal Auditor have full and unrestricted
access to the Audit Committee.
The Office of the Superintendent of Financial Institutions, Canada
(OSFI) examines and inquires into the business and affairs of RBC as
deemed necessary to determine whether the provisions of the Bank Act
are being complied with, and that RBC is in sound financial condition. In
carrying out its mandate, OSFI strives to protect the rights and interests
of depositors and creditors of RBC.
Deloitte & Touche LLP, Independent Registered Chartered
Accountants appointed by the shareholders of RBC upon the recom-
mendation of the Audit Committee and Board, have performed an
independent audit of the Consolidated Financial Statements and their
report follows. The auditors have full and unrestricted access to the
Audit Committee to discuss their audit and related findings.
Gordon M. Nixon
President and Chief Executive Officer
Janice R. Fukakusa
Chief Financial Officer
Toronto, November 29, 2006
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Bank as
at October 31, 2006 and 2005 and the results of its operations and
its cash flows for each of the years in the three-year period ended
October 31, 2006 in accordance with Canadian generally accepted
accounting principles.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the effec-
tiveness of the Bank’s internal control over financial reporting as at
October 31, 2006, based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
November 29, 2006 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Bank’s internal control over
financial reporting and an unqualified opinion on the effectiveness of
the Bank’s internal control over financial reporting.
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Toronto, Canada
November 29, 2006
Royal Bank of Canada Annual Report 2006
100 Consolidated Financial Statements
Management’s report on internal control over financial reporting
Management of Royal Bank of Canada (RBC) is responsible for establish-
ing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process designed by, or
under the supervision of, the President and Chief Executive Officer and
the Chief Financial Officer and effected by the Board of Directors,
management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. It includes those policies and
procedures that:
(i) pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, the transactions related to and
dispositions of RBC’s assets
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
RBC receipts and expenditures are made only in accordance with
authorizations of management and RBC’s directors
(iii) provide reasonable assurance regarding prevention or timely detec-
tion of unauthorized acquisition, use, or disposition of RBC assets
that could have a material effect on RBC’s financial statements.
Due to its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements on a timely basis. Also,
projections of any evaluation of the effectiveness of internal control over
financial reporting to future periods are subject to the risk that the con-
trols may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of Royal Bank of Canada
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over Financial
Reporting, that Royal Bank of Canada (the “Bank”) maintained effec-
tive internal control over financial reporting as at October 31, 2006,
based on criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Bank’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment
and an opinion on the effectiveness of the Bank’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reason-
able assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circum-
stances. We believe that our audit provides a reasonable basis for
our opinions.
A company’s internal control over financial reporting is a process
designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar
functions, and effected by the company’s board of directors, manage-
ment, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
Management assessed the effectiveness of RBC’s internal control
over financial reporting as at October 31, 2006, based on the criteria
set forth in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management believes that, as at
October 31, 2006, RBC’s internal control over financial reporting is
effective. Also, management determined that there were no material
weaknesses in RBC’s internal control over financial reporting as
at October 31, 2006.
Management’s assessment of the effectiveness of RBC’s internal
control over financial reporting as at October 31, 2006, has been
audited by Deloitte & Touche LLP, Independent Registered Chartered
Accountants, who also audited RBC’s Consolidated Financial Statements
for the year ended October 31, 2006, as stated in the Report of
Independent Registered Chartered Accountants, which expressed an
unqualified opinion on management’s assessment of RBC’s internal
control over financial reporting and an unqualified opinion on the
effectiveness of RBC’s internal control over financial reporting.
Gordon M. Nixon
President and Chief Executive Officer
Janice R. Fukakusa
Chief Financial Officer
Toronto, November 29, 2006
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detec-
tion of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper manage-
ment override of controls, material misstatements due to error or fraud
may not be prevented or detected on a timely basis. Also, projections
of any evaluation of the effectiveness of the internal control over finan-
cial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Bank main-
tained effective internal control over financial reporting as at October 31,
2006, is fairly stated, in all material respects, based on the criteria
established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Also in our opinion, the Bank maintained, in all material respects,
effective internal control over financial reporting as at October 31, 2006,
based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as at and for the year ended October 31, 2006 of the Bank
and our report dated November 29, 2006 expressed an unqualified
opinion on those consolidated financial statements.
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Toronto, Canada
November 29, 2006
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 101
Consolidated Balance Sheets
As at October 31 (C$ millions)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities (Note 3)
Trading account
Investment account
Loan substitute
Assets purchased under reverse repurchase agreements and securities borrowed
Loans (Notes 4 and 5)
Residential mortgage
Personal
Credit cards
Business and government
Allowance for loan losses
Other
Customers’ liability under acceptances
Derivative-related amounts (Note 7)
Premises and equipment, net (Note 8)
Goodwill (Note 10)
Other intangibles (Note 10)
Assets of operations held for sale
Other assets (Note 12)
Liabilities and shareholders’ equity
Deposits (Note 13)
Personal
Business and government
Bank
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivative-related amounts (Note 7)
Insurance claims and policy benefit liabilities (Note 14)
Liabilities of operations held for sale
Other liabilities (Note 15)
Subordinated debentures (Note 16)
Trust capital securities (Note 17)
Preferred share liabilities (Note 18)
Non-controlling interest in subsidiaries (Note 19)
Shareholders’ equity (Note 18)
Preferred shares
Common shares (1) (shares issued – 1,280,889,745 and 1,293,501,544)
Contributed surplus
Retained earnings
Treasury shares – preferred (shares held – 93,700 and 90,600)
Net foreign currency translation adjustments
– common (1) (shares held – 5,486,072 and 7,052,552)
2006
2005
$
4,401
$
5,001
10,502
5,237
147,237
36,976
656
125,760
34,060
675
184,869
160,495
59,378
42,973
96,675
44,902
7,155
61,207
91,043
41,045
6,200
53,626
209,939
(1,409)
191,914
(1,498)
208,530
190,416
9,108
37,729
1,818
4,304
642
82
15,417
7,074
38,834
1,708
4,203
409
263
12,908
69,100
65,399
$ 536,780
$ 469,521
$ 114,040
189,140
40,343
$ 111,618
160,593
34,649
343,523
306,860
9,108
38,252
41,103
42,094
7,337
32
22,649
7,074
32,391
23,381
42,592
7,117
40
18,408
160,575
131,003
7,103
1,383
298
1,775
8,167
1,400
300
1,944
1,050
7,196
292
15,771
(2)
(180)
(2,004)
700
7,170
265
13,704
(2)
(216)
(1,774)
22,123
19,847
$ 536,780
$ 469,521
(1)
The number of common shares issued and the number of common shares held as treasury shares have been adjusted retroactively for the stock dividend paid on April 6, 2006. Refer to Note 18.
Gordon M. Nixon
President and Chief Executive Officer
Robert B. Peterson
Director
Royal Bank of Canada Annual Report 2006
102 Consolidated Financial Statements
Consolidated Statements of Income
For the year ended October 31 (C$ millions)
Interest income
Loans
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits with banks
Interest expense
Deposits
Other liabilities
Subordinated debentures
Net interest income
Non-interest income
Insurance premiums, investment and fee income
Trading revenue
Investment management and custodial fees
Securities brokerage commissions
Mutual fund revenue
Service charges
Underwriting and other advisory fees
Card service revenue
Foreign exchange revenue, other than trading
Securitization revenue (Note 5)
Credit fees
Gain on sale of investment account securities (Note 3)
Other
Non-interest income
Total revenue
Provision for credit losses (Note 4)
Insurance policyholder benefits, claims and acquisition expense
Non-interest expense
Human resources (Notes 20 and 21)
Equipment
Occupancy
Communications
Professional fees
Outsourced item processing
Amortization of other intangibles (Note 10)
Other
Business realignment charges (Note 23)
Income from continuing operations before income taxes
Income taxes (Note 24)
Net income before non-controlling interest
Non-controlling interest in net income of subsidiaries
Net income from continuing operations
Net loss from discontinued operations
Net income
Preferred dividends (Note 18)
Net gain on redemption of preferred shares
Net income available to common shareholders
Average number of common shares (1) (in thousands) (Note 25)
Basic earnings per share (in dollars)
Basic earnings per share from continuing operations (in dollars)
Basic earnings (loss) per share from discontinued operations (in dollars)
Average number of diluted common shares (1) (in thousands) (Note 25)
Diluted earnings per share (in dollars)
Diluted earnings per share from continuing operations (in dollars)
Diluted earnings (loss) per share from discontinued operations (in dollars)
2006
2005
2004
$ 12,708
6,155
2,827
480
$ 10,790
4,583
1,354
231
$
9,535
3,572
656
103
22,170
16,958
13,866
10,708
4,281
419
6,946
2,800
442
15,408
10,188
6,762
6,770
3,348
2,574
1,335
1,243
1,242
1,216
1,024
496
438
257
241
88
373
3,270
1,594
1,255
1,163
962
1,153
1,026
579
407
285
187
85
448
5,142
1,897
429
7,468
6,398
2,870
1,563
1,126
1,166
850
1,089
918
555
331
200
198
20
518
13,875
12,414
11,404
20,637
19,184
17,802
429
2,509
7,340
957
792
687
628
298
76
717
455
2,625
6,736
960
749
632
529
296
50
1,405
346
2,124
6,701
906
765
672
474
294
69
952
11,495
11,357
10,833
–
6,204
1,403
4,801
44
4,757
(29)
45
4,702
1,278
3,424
(13)
3,437
(50)
177
4,322
1,287
3,035
12
3,023
(220)
$
4,728
$
3,387
$
2,803
(60)
–
(42)
4
(31)
–
$
4,668
$
3,349
$
2,772
1,279,956
$
3.65
$
3.67
(.02) $
1,283,433
2.61
$
$
2.65
(.04) $
1,293,465
2.14
2.31
(.17)
$
$
$
1,299,785
$
3.59
$
3.61
(.02) $
1,304,680
2.57
$
$
2.61
(.04) $
1,311,016
2.11
2.28
(.17)
$
$
$
Dividends per share (1) (in dollars)
$
1.44
$
1.18
$
1.01
(1)
The average number of common shares, average number of diluted common shares, basic and diluted earnings per share, as well as dividends per share, have been adjusted retroactively for the
stock dividend paid on April 6, 2006. Refer to Note 25.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 103
$
2006
2005
2004
$
$
700
600
(250)
1,050
7,170
127
(101)
7,196
265
(2)
(18)
–
–
–
47
292
532
300
(132)
700
6,988
214
(32)
7,170
169
(6)
26
7
–
54
15
265
532
–
–
532
7,018
127
(157)
6,988
85
–
56
–
34
–
(6)
169
13,704
4,728
(60)
(1,847)
(743)
(11)
–
12,065
3,387
(42)
(1,512)
(194)
–
–
11,333
2,803
(31)
(1,303)
(735)
–
(2)
15,771
13,704
12,065
(2)
51
(51)
(2)
(216)
193
(157)
–
–
(180)
–
–
(2)
(2)
(294)
179
(47)
–
(54)
(216)
(1,774)
(499)
269
(2,004)
(1,556)
(619)
401
(1,774)
–
–
–
–
–
248
(238)
(304)
–
(294)
(893)
(1,341)
678
(1,556)
$ 22,123
$ 19,847
$ 17,904
Consolidated Statements of Changes in Shareholders’ Equity
For the year ended October 31 (C$ millions)
Preferred shares (Note 18)
Balance at beginning of year
Issued
Redeemed for cancellation
Balance at end of year
Common shares (Note 18)
Balance at beginning of year
Issued
Purchased for cancellation
Balance at end of year
Contributed surplus
Balance at beginning of year
Renounced stock appreciation rights
Stock-based compensation awards
Gain on redemption of preferred shares
Reclassified amounts
Initial adoption of AcG-15, Consolidation of Variable Interest Entities
Other
Balance at end of year
Retained earnings
Balance at beginning of year
Net income
Preferred share dividends (Note 18)
Common share dividends (Note 18)
Premium paid on common shares purchased for cancellation
Issuance costs and other
Cumulative effect of adopting AcG-17, Equity-Linked Deposit Contracts
Balance at end of year
Treasury shares – preferred (Note 18)
Balance at beginning of year
Sales
Purchases
Balance at end of year
Treasury shares – common (Note 18)
Balance at beginning of year
Sales
Purchases
Reclassified amounts
Initial adoption of AcG-15, Consolidation of Variable Interest Entities
Balance at end of year
Net foreign currency translation adjustments
Balance at beginning of year
Unrealized foreign currency translation gain (loss)
Foreign currency gain (loss) from hedging activities
Balance at end of year
Shareholders’ equity at end of year
Royal Bank of Canada Annual Report 2006
104 Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the year ended October 31 (C$ millions)
Cash flows from operating activities
Net income from continuing operations
Adjustments to determine net cash from (used in) operating activities
Provision for credit losses
Depreciation
Business realignment charges
Business realignment payments
Future income taxes
Amortization of other intangibles
Write-down of deferred issuance costs
(Gain) loss on sale of premises and equipment
(Gain) loss on loan securitizations
Loss on investment in associated corporations and limited partnerships
(Gain) loss on sale of investment account securities
Changes in operating assets and liabilities
Insurance claims and policy benefit liabilities
Net change in accrued interest receivable and payable
Current income taxes
Derivative-related assets
Derivative-related liabilities
Trading account securities
Net change in brokers and dealers receivable and payable
Other
Net cash from (used in) operating activities from continuing operations
Net cash from (used in) operating activities from discontinued operations
2006
2005
2004
$
4,757
$
3,437
$
3,023
429
405
–
(74)
144
76
–
(16)
(16)
–
(88)
220
217
(203)
1,105
(498)
(21,477)
(1,017)
1,036
(15,000)
4
455
414
36
(94)
(482)
50
–
(21)
(101)
–
(85)
629
(5)
(9)
63
391
(36,438)
1,334
804
(29,622)
95
Net cash from (used in) operating activities
(14,996)
(29,527)
Cash flows from investing activities
Change in interest-bearing deposits with banks
Change in loans, net of loan securitizations
Proceeds from loan securitizations
Proceeds from sale of investment account securities
Proceeds from maturity of investment account securities
Purchases of investment account securities
Change in loan substitute securities
Net acquisitions of premises and equipment
Change in assets purchased under reverse repurchase agreements and securities borrowed
Net cash from (used in) acquisitions
Net cash from (used in) investing activities from continuing operations
Net cash from (used in) investing activities from discontinued operations
Net cash from (used in) investing activities
Cash flows from financing activities
Change in deposits
Issue of RBC Trust Capital Securities (RBC TruCS)
Issue of subordinated debentures
Repayment of subordinated debentures
Issue of preferred shares
Redemption of preferred shares for cancellation
Issuance costs
Issue of common shares
Purchase of common shares for cancellation
Sales of treasury shares
Purchase of treasury shares
Dividends paid
Dividends/distributions paid by subsidiaries to non-controlling interests
Change in obligations related to assets sold under repurchase agreements and securities loaned
Change in obligations related to securities sold short
Change in short-term borrowings of subsidiaries
(5,265)
(33,534)
8,139
14,709
28,203
(38,474)
19
(511)
(16,405)
(256)
(43,375)
140
(43,235)
36,663
–
–
(953)
600
(250)
(6)
116
(844)
244
(208)
(1,807)
(47)
17,722
5,861
620
1,030
(27,670)
5,607
25,628
18,405
(36,373)
26
(383)
3,976
–
(9,754)
2,027
(7,727)
35,001
1,200
800
(786)
300
(132)
(3)
198
(226)
179
(49)
(1,469)
(13)
(3,092)
7,386
(628)
Net cash from (used in) financing activities from continuing operations
Net cash from (used in) financing activities
Effect of exchange rate changes on cash and due from banks
Net change in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Supplemental disclosure of cash flow information
Amount of interest paid in year
Amount of income taxes paid in year
57,711
38,666
14,675
57,711
38,666
14,675
(80)
(600)
5,001
(122)
1,290
3,711
(17)
824
2,887
$
4,401
$
5,001
$
3,711
$ 14,678
1,682
$
$ 10,109
1,987
$
$
$
7,408
2,612
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 105
346
387
177
–
(52)
69
25
(52)
(34)
9
(20)
118
(120)
(895)
(3,281)
4,426
(1,965)
(539)
6
1,628
303
1,931
(4,320)
(15,287)
3,532
18,427
38,088
(50,911)
(376)
(439)
(5,767)
438
(16,615)
850
(15,765)
11,814
–
3,100
(990)
–
–
–
119
(892)
248
(238)
(1,295)
(13)
1,977
2,150
(1,305)
Consolidated Financial Statements (all tabular amounts are in millions of Canadian dollars, except per share amounts)
Note 1 Significant accounting policies and estimates
The accompanying Consolidated Financial Statements have been
prepared in accordance with Subsection 308 of the Bank Act (Canada)
(the Act), which states that, except as otherwise specified by the Office
of the Superintendent of Financial Institutions Canada (OSFI), the
Consolidated Financial Statements are to be prepared in accordance
with Canadian generally accepted accounting principles (GAAP). The
significant accounting policies used in the preparation of these financial
statements, including the accounting requirements of the OSFI, are
summarized below. These accounting policies conform, in all material
respects, to Canadian GAAP.
Basis of consolidation
The Consolidated Financial Statements include the assets and liabilities
and results of operations of all subsidiaries and variable interest
entities (VIEs) where we are the Primary Beneficiary after elimination of
intercompany transactions and balances. The equity method is used to
account for investments in associated corporations and limited partner-
ships in which we have significant influence. These investments are
reported in Other assets. Our share of earnings, gains and losses realized
on dispositions and writedowns to reflect other-than-temporary impair-
ment in the value of these investments are included in Non-interest
income. The proportionate consolidation method is used to account
for investments in joint ventures in which we exercise joint control,
whereby our pro rata share of assets, liabilities, income and expenses is
consolidated.
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at rates prevailing at the balance sheet
date. Non-monetary assets and liabilities are translated into Canadian
dollars at historical rates. Income and expenses denominated in foreign
currencies are translated at average rates of exchange for the year.
Assets and liabilities of our self-sustaining operations with
functional currency other than the Canadian dollar are translated into
Canadian dollars at rates prevailing at the balance sheet date, and
income and expenses of these foreign operations are translated at
average rates of exchange for the year.
Unrealized gains or losses arising as a result of the translation
of our foreign self-sustaining operations are included in Shareholders’
equity along with related hedge and tax effects. On disposal or upon
dilution of our interest in such investments, an appropriate portion
of the accumulated net translation gains or losses is included in Non-
interest income.
Other foreign currency translation gains and losses are included in
Non-interest income.
Securities
Securities which are purchased for sale in the near term are classified
as Trading account securities and reported at their estimated fair value.
Obligations to deliver Trading account securities sold but not yet
purchased are recorded as liabilities and carried at fair value. Realized
and unrealized gains and losses on these securities are recorded as
Trading revenue in Non-interest income. Dividend and interest income
accruing on Trading account securities are recorded in Interest income.
Interest and dividends accrued on interest-bearing and equity securities
sold short are recorded in Interest expense.
Investments in equity and debt securities which are purchased for
longer term purposes are classified as Investment account securities.
These securities may be sold in response to or in anticipation of changes
in interest rates and resulting prepayment risk, changes in foreign
currency risk, changes in funding sources or terms, or to meet liquidity
Royal Bank of Canada Annual Report 2006
106 Consolidated Financial Statements
needs. Investment account equity securities, including non-public and
venture capital equity securities for which representative market quotes
are not readily available, are carried at cost. Investment account debt
securities are carried at amortized cost. Dividends, interest income and
amortization of premiums and discounts on debt securities are recorded
in Interest income. Gains and losses realized on disposal of Investment
account securities, which are calculated on an average cost basis,
and writedowns to reflect other-than-temporary impairment in value
are included in Gain on sale of investment account securities in
Non-interest income.
Loan substitute securities are client financings that have been
structured as after-tax investments rather than conventional loans in
order to provide the clients with a borrowing rate advantage. Such
securities are accorded the accounting treatment applicable to loans
and, if required, are reduced by an allowance for credit losses.
We account for all our securities using settlement date accounting
for the Consolidated Balance Sheets and trade date accounting for the
Consolidated Statements of Income.
Assets purchased under reverse repurchase agreements and sold
under repurchase agreements
We purchase securities under agreements to resell (reverse repurchase
agreements) and take possession of these securities. Reverse repur-
chase agreements are treated as collateralized lending transactions,
whereby we monitor the market value of the securities purchased and
additional collateral is obtained when appropriate. We also have the
right to liquidate the collateral held in the event of counterparty default.
These agreements are carried on the Consolidated Balance Sheets at
the amounts at which the securities were initially acquired plus accrued
interest. Interest earned on reverse repurchase agreements is included
in Interest income in our Consolidated Statements of Income.
We sell securities under agreements to repurchase (repurchase
agreements). Repurchase agreements are treated as collateralized bor-
rowing transactions and are carried on the Consolidated Balance Sheets
at the amounts at which the securities were initially sold plus accrued
interest on interest-bearing securities. Interest incurred on repurchase
agreements is included in Interest expense in our Consolidated
Statements of Income.
Loans
Loans are stated net of an Allowance for loan losses and unearned
income, which comprises unearned interest and unamortized loan fees.
Loans are classified as impaired when, in management’s opinion,
there is no longer reasonable assurance of the timely collection of the
full amount of principal or interest. Whenever a payment is 90 days past
due, loans other than credit card balances and loans guaranteed or
insured by a Canadian government (federal or provincial) or a Canadian
government agency (collectively “Canadian government”) are classified
as impaired unless they are fully secured and collection efforts are
reasonably expected to result in repayment of debt within 180 days
past due. Credit card balances are written off when a payment is 180 days
in arrears. Loans guaranteed by a Canadian government are classified
as impaired when the loan is contractually 365 days in arrears. When
a loan is identified as impaired, the accrual of interest is discontinued
and any previously accrued but unpaid interest on the loan is charged
to the Provision for credit losses. Interest received on impaired loans is
credited to the Provision for credit losses. Impaired loans are returned to
performing status when all past due amounts, including interest, have
been collected, loan impairment charges have been reversed, and the
credit quality has improved such that timely collection of principal and
interest is reasonably assured.
When an impaired loan is identified, the carrying amount of the
loan is reduced to its estimated realizable amount, measured by
discounting the expected future cash flows at the effective interest
rate inherent in the loan. In subsequent periods, recoveries of amounts
previously written off and any increase in the carrying value of the
loan are credited to the Provision for credit losses in the Consolidated
Statements of Income. Where a portion of a loan is written off and the
remaining balance is restructured, the new loan is carried on an accrual
basis when there is no longer any reasonable doubt regarding the col-
lectibility of principal or interest and payments are not 90 days past due.
Assets acquired in respect of problem loans are recorded at their
fair value less costs of disposition. Fair value is determined based on
either current market value where available or discounted cash flows.
Any excess of the carrying value of the loan over the recorded fair value
of the assets acquired is recognized by a charge to the Provision for
credit losses.
Fees that relate to activities such as originating, restructuring or
renegotiating loans are deferred and recognized as Interest income over
the expected term of such loans. Where there is reasonable expectation
that a loan will result, commitment and standby fees are also recognized
as Interest income over the expected term of the resulting loan.
Otherwise, such fees are recorded as Other liabilities and amortized to
Non-interest income over the commitment or standby period.
Allowances for credit losses
The Allowances for credit losses are maintained at levels that manage-
ment considers adequate to absorb identified credit-related losses
in the portfolio as well as losses that have been incurred, but are not
yet identifiable as at the balance sheet date. The allowances relate to
on-balance sheet exposures, such as loans and acceptances, and off-
balance sheet items such as letters of credit, guarantees and unfunded
commitments.
The allowances are increased by the Provision for credit losses,
which is charged to income, and decreased by the amount of write-offs,
net of recoveries. The Allowances for credit losses for on-balance sheet
items are included as a reduction to assets, and allowances relating to
off-balance sheet items are included in Other liabilities.
The allowances are determined based on management’s identifi-
cation and evaluation of problem accounts, estimated probable losses
that exist on the remaining portfolio, and other factors including the
composition and credit quality of the portfolio, and changes in economic
conditions. The Allowances for credit losses consist of Specific allow-
ances and the General allowance.
Specific allowances
Specific allowances are maintained to absorb losses on both specifically
identified borrowers and other homogeneous loans that have become
impaired. The losses relating to identified large business and govern-
ment borrowers are estimated using management’s judgment relating
to the timing of future cash flow amounts that can be reasonably
expected from the borrowers, financially responsible guarantors and
the realization of collateral. The amounts expected to be recovered are
reduced by estimated collection costs and discounted at the effective
interest rate of the obligation. The losses relating to homogeneous
portfolios, including residential mortgages, and personal and small
business loans are based on net write-off experience. For credit cards,
no specific allowance is maintained as balances are written off when a
payment is 180 days in arrears. Personal loans are generally written off
at 150 days past due. Write-offs for other loans are generally recorded
when there is no realistic prospect of full recovery.
General allowance
The general allowance represents the best estimate of probable losses
within the portion of the portfolio that has not yet been specifically
identified as impaired. For large business and government loans and
acceptances, the general allowance is based on the application of
expected default and loss factors, determined by historical loss
experience, delineated by loan type and rating. For homogeneous
portfolios, including residential mortgages, credit cards, and personal
and small business loans, the determination of the general allowance is
done on a portfolio basis. The losses are estimated by the application
of loss ratios determined through historical write-off experience. In
determining the general allowance level, management also considers the
current portfolio credit quality trends, business and economic conditions,
the impact of policy and process changes, and other supporting factors.
In addition, the general allowance includes a component for the model
limitations and imprecision inherent in the allowance methodologies.
Acceptances
Acceptances are short-term negotiable instruments issued by our clients
to third parties, which we guarantee. The potential liability under accep-
tances is reported in Liabilities – Other on the Consolidated Balance
Sheets. The recourse against our clients in the case of a call on these
commitments is reported as a corresponding asset of the same amount
in Assets – Other. Fees earned are reported in Non-interest income.
Derivatives
Derivatives are primarily used in sales and trading activities. Derivatives
are also used to manage our exposures to interest, currency, credit and
other market risks. The most frequently used derivative products are
interest rate swaps, interest rate futures, forward rate agreements, inter-
est rate options, foreign exchange forward contracts, currency swaps,
foreign currency futures, foreign currency options and credit derivatives.
Derivatives used in sales and trading activities are reported on
the Consolidated Balance Sheets at their fair value. Derivatives with a
positive fair value are reported as assets in Derivative-related amounts,
and derivatives with a negative fair value are reported as liabilities in
Derivative-related amounts. Where we have both the legal right and
intent to settle derivative assets and liabilities simultaneously with a
counterparty, the net fair value of the derivative positions is reported as
an asset or liability, as appropriate. Realized and unrealized gains and
losses on sales and trading derivatives are recognized in Non-interest
income – Trading revenue. Margin requirements and premiums paid are
also included in Derivative-related amounts in assets, while premiums
received are shown in Derivative-related amounts in Liabilities.
When derivatives are used to manage our own exposures, we
determine for each derivative whether hedge accounting can be applied.
Where hedge accounting can be applied, a hedge relationship is desig-
nated as a fair value hedge, a cash flow hedge, or a hedge of a foreign
currency exposure of a net investment in a self-sustaining foreign
operation. The hedge is documented at inception detailing the particular
risk management objective and the strategy for undertaking the hedge
transaction. The documentation identifies the specific asset, liability
or forecasted cash flows being hedged, the risk that is being hedged,
the type of derivative used and how effectiveness will be assessed. The
derivative must be highly effective in accomplishing the objective of
offsetting either changes in the fair value or forecasted cash flows
attributable to the risk being hedged both at inception and throughout
the life of the hedge.
Fair value hedge transactions predominantly use interest rate
swaps to hedge the changes in the fair value of an asset, liability or firm
commitment. Cash flow hedge transactions predominantly use interest
rate swaps to hedge the variability in forecasted cash flows. When a
derivative that is held or issued for other-than-trading purposes is desig-
nated and qualifies as an effective hedging instrument in a fair value or
cash flow hedge, the income or expense of the derivative is recognized
as an adjustment to Interest income or Interest expense of the hedged
item in the same period.
Foreign exchange forward contracts and foreign currency-
denominated liabilities are used to manage foreign currency exposures
from net investments in self-sustaining foreign operations having a
functional currency other than the Canadian dollar. Foreign exchange
gains and losses on these hedging instruments, net of applicable tax,
are recorded in Net foreign currency translation adjustments.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 107
Note 1 Significant accounting policies and estimates (continued)
Hedge accounting is discontinued prospectively when the
derivative no longer qualifies as an effective hedge or the derivative
is terminated or sold. The fair value of the derivative is recognized in
Derivative-related amounts in assets or liabilities at that time and the
gain or loss is deferred and recognized in Net interest income in the
periods in which the hedged item affects income. Hedge accounting is
also discontinued on the sale or early termination of the hedged item.
The fair value of the derivative is recognized in Derivative-related
amounts in assets or liabilities at that time and the unrealized gain or
loss is recognized in Non-interest income.
Other-than-trading derivatives, for which hedge accounting has
not been applied, including total return swaps, certain warrants, loan
commitments and derivatives embedded in equity-linked deposit
contracts, are carried at fair value on a gross basis as Derivative-related
amounts in assets and liabilities with changes in fair value recorded in
Non-interest income or Non-interest expense. These other-than-trading
derivatives are eligible for designation in future hedging relation-
ships. Upon designation of a new effective hedging relationship, any
previously recorded fair value on the Consolidated Balance Sheets is
amortized to Net interest income.
For derivatives that are carried at fair value and whose fair value
is not evidenced at inception by quoted market prices, other current
market transactions or observable market inputs, we defer the initial
trading profits. The deferred amounts are recognized when they become
realized through the receipt and/or payment of cash or once the fair
value is observable in the market.
Premises and equipment
Premises and equipment are stated at cost less accumulated depre-
ciation. Depreciation is recorded principally on the straight-line basis
over the estimated useful lives of the assets, which are 25 to 50 years
for buildings, 3 to 10 years for computer equipment, 7 to 10 years for
furniture, fixtures and other equipment. The amortization period for
leasehold improvements is the lesser of the useful life of the leasehold
improvements or the lease term plus the first renewal period, if
reasonably assured of renewal, up to a maximum of 10 years. Gains
and losses on disposal are recorded in Non-interest income.
Business combinations, goodwill and other intangibles
All business combinations are accounted for using the purchase
method. Identifiable intangible assets are recognized separately from
Goodwill and included in Other intangibles. Goodwill represents the
excess of the price paid for the acquisition of subsidiaries over the
fair value of the net identifiable assets acquired, and is assigned to
reporting units of a business segment. A reporting unit comprises
business operations with similar economic characteristics and
strategies. It is defined by GAAP as the reporting level at which goodwill
is tested for impairment, which is either a business segment or one
level below. Upon disposal of a portion of a reporting unit, goodwill
is allocated to the disposed portion based on the fair value of that
portion relative to the total reporting unit.
Goodwill is evaluated for impairment annually as at August 1 or
more often if events or circumstances indicate there may be an impair-
ment. If the carrying value of a reporting unit, including the allocated
goodwill, exceeds its fair value, goodwill impairment is measured as the
excess of the carrying amount of the reporting unit’s allocated goodwill
over the implied fair value of the goodwill, based on the fair value of the
assets and liabilities of the reporting unit. Any goodwill impairment is
charged to income in the period in which the impairment is identified.
Subsequent reversals of impairment are prohibited.
Other intangibles with a finite life are amortized on a straight-line
basis over their estimated useful lives, generally not exceeding 20 years,
and are also tested for impairment when conditions exist which may
indicate that the estimated future net cash flows from the asset will be
insufficient to recover its carrying amount.
Royal Bank of Canada Annual Report 2006
108 Consolidated Financial Statements
Income taxes
We use the asset and liability method whereby income taxes reflect
the expected future tax consequences of temporary differences between
the carrying amounts of assets or liabilities for accounting purposes
compared with tax purposes. A future income tax asset or liability is
determined for each temporary difference based on the tax rates that
are expected to be in effect when the underlying items of income and
expense are expected to be realized, except for earnings related to
our foreign operations where repatriation of such amounts is not
contemplated in the foreseeable future. Income taxes reported in the
Consolidated Statements of Income include the current and future
portions of the expense. Income taxes applicable to items charged or
credited to Shareholders’ equity are netted with such items. Changes in
future income taxes related to a change in tax rates are recognized
in the period when the tax rate change is substantively enacted.
Net future income taxes accumulated as a result of temporary
differences are included in Other assets. A valuation allowance is estab-
lished to reduce future income tax assets to the amount more likely than
not to be realized. In addition, the Consolidated Statements of Income
contain items that are non-taxable or non-deductible for income tax
purposes and, accordingly, cause the income tax provision to be
different from what it would be if based on statutory rates.
Pensions and other post-employment benefits
We offer a number of benefit plans, which provide pension and other
benefits to eligible employees. These plans include registered defined
benefit pension plans, supplemental pension plans, defined contribu-
tion plans and health, dental, disability and life insurance plans.
Investments held by the pension funds primarily comprise equity
and fixed income securities. Pension fund assets are valued at fair value.
For the principal defined benefit plans, the expected return on plan
assets, which is reflected in the pension benefit expense, is calculated
using a market-related value approach. Under this approach, assets are
valued at an adjusted market value, whereby realized and unrealized
capital gains and losses are amortized over 3 years on a straight-line
basis. For the majority of the non-principal and supplemental defined
benefit pension plans, the expected return on plan assets is calculated
based on fair value of assets.
Actuarial valuations for the defined benefit plans are performed
on a regular basis to determine the present value of the accrued pension
and other post-employment benefits, based on projections of employees’
compensation levels to the time of retirement and the costs of health,
dental, disability and life insurance.
Our defined benefit pension expense, which is included in Non-
interest expenses – Human resources, consists of the cost of employee
pension benefits for the current year’s service, interest cost on the liability,
expected investment return on the market-related value or market value of
plan assets and the amortization of prior service costs, net actuarial gains
or losses and transitional assets or obligations. For some of our defined
benefit plans, including the principal defined benefit plans, actuarial gains
or losses are determined each year and amortized over the expected aver-
age remaining service life of employee groups covered by the plan. For the
remaining defined benefit plans, net actuarial gains or losses in excess of
the greater of 10% of the plan assets or the benefit obligation at the begin-
ning of the year are amortized over the expected average remaining service
life of employee groups covered by the plan.
Gains and losses on settlements of defined benefit plans are recog-
nized in income when settlement occurs. Curtailment gains and losses
are recognized in the period when the curtailment becomes probable
and the impact can be reasonably estimated.
Our defined contribution plan expense is included in Non-interest
expense – Human resources for services rendered by employees during
the period.
The cumulative excess of pension fund contributions over the
amounts recorded as expenses is reported as a Prepaid pension benefit
cost in Other assets. The cumulative excess of expense over fund con-
tributions is reported as Accrued pension and other post-employment
benefit expense in Other liabilities.
Stock-based compensation
We offer stock-based compensation plans to certain key employees and
to our non-employee directors as described in Note 21.
We use the fair value method to account for stock options granted
to employees whereby compensation expense is recognized over the
applicable vesting period with a corresponding increase in Contributed
surplus. When the options are exercised, the exercise price proceeds
together with the amount initially recorded in Contributed surplus
are credited to Common shares. Stock options granted prior to
November 1, 2002, were accounted for using the intrinsic value method,
and accordingly no expense was recognized for these options since the
exercise price for such grants was equal to the closing price on the day
before the stock options were granted. These awards fully vested dur-
ing 2006. When these stock options are exercised, the proceeds will be
recorded as Common shares.
Options granted between November 29, 1999, and June 5, 2001,
were accompanied by tandem stock appreciation rights (SARs), which
gave participants the option to receive cash payments equal to the
excess of the current market price of our shares over the options’
exercise price. SARs obligations are now fully vested and give rise to
compensation expense as a result of changes in the market price of our
common shares. These expenses, net of related hedges, are recorded
as Non-interest expense – Human resources in our Consolidated
Statements of Income with a corresponding increase in Other liabilities
on our Consolidated Balance Sheets.
Our other compensation plans include performance deferred share
plans and deferred share unit plans for key employees. These plans are
settled in our common shares or cash and the obligations are accrued
over their vesting period. For share-settled awards, our accrued obliga-
tions are based on the market price of our common shares at the date of
grant. For cash-settled awards, our accrued obligations are periodically
adjusted for fluctuations in the market price of our common shares and
dividends accrued. Changes in our obligations under these plans, net
of related hedges, are recorded as Non-interest expense – Human
Resources in our Consolidated Statements of Income with a corre-
sponding increase in Other liabilities or Contributed surplus on our
Consolidated Balance Sheets.
The compensation cost attributable to options and awards granted
to employees who are eligible to retire or will become eligible to retire
during the vesting period is recognized immediately if the employee is
eligible to retire on the grant date or over the period between the grant
date to the date the employee becomes eligible to retire.
Our contributions to the employee savings and share ownership
plans are expensed as incurred.
Loan securitization
We periodically securitize loans by selling them to independent special
purpose entities (SPEs) or trusts that issue securities to investors. These
transactions are accounted for as sales and the loans are removed from
our Consolidated Balance Sheets when we are deemed to have surren-
dered control over such assets and have received consideration other
than beneficial interests in these transferred loans. For control to be sur-
rendered, all of the following must occur: (i) the transferred loans must
be isolated from the seller, even in bankruptcy or other receivership;
(ii) the purchaser must have the legal right to sell or pledge the trans-
ferred loans or, if the purchaser is a Qualifying Special Purpose Entity
as described in the Canadian Institute of Chartered Accountants (CICA)
Accounting Guideline 12, Transfers of Receivables (AcG-12), its investors
have the right to sell or pledge their ownership interest in the entity; and
(iii) the seller must not continue to control the transferred loans through
an agreement to repurchase them or have a right to cause the loans to
be returned. If any of these conditions is not met, the transfer is consid-
ered to be a secured borrowing, the loans remain on our Consolidated
Balance Sheets, and the proceeds are recognized as a liability.
We often retain interests in the securitized loans, such as interest-
only strips or servicing rights and, in some cases, cash reserve accounts.
Retained interests in securitizations that can be contractually prepaid or
otherwise settled in such a way that we would not recover substantially
all of our recorded investment are classified as Investment account
securities and subject to periodic impairment review.
Gains on a transaction accounted for as a sale are recognized
in Non-interest income and are dependent on the previous carrying
amount of the loans involved in the transfer, which is allocated between
the loans sold and the retained interests based on their relative fair
value at the date of transfer. To obtain fair values, quoted market prices
are used, if available. When quotes are not available for retained
interests, we generally determine fair value based on the present value
of expected future cash flows using management’s best estimates of
key assumptions such as payment rates, weighted average life of the
prepayable receivables, excess spread, expected credit losses and
discount rates commensurate with the risks involved.
For each securitization transaction where we have retained the
servicing rights, we assess whether the benefits of servicing represent
adequate compensation. When the benefits of servicing are more than
adequate, a servicing asset is recognized in Other assets. When the
benefits of servicing are not expected to be adequate, we recognize a
servicing liability in Other liabilities. Neither an asset nor a liability is
recognized when we have received adequate compensation. A servicing
asset or liability is amortized in proportion to and over the period of
estimated net servicing income.
Insurance
Premiums from long-duration contracts, primarily life insurance, are
recognized when due in Non-interest income – Insurance premiums,
investment and fee income. Premiums from short-duration contracts,
primarily property and casualty, and fees for administrative services
are recognized in Insurance premiums, investment and fee income over
the related contract period. Unearned premiums of the short-duration
contracts, representing the unexpired portion of premiums, are reported
in Other liabilities. Investments made by our insurance operations are
included in Investment account securities.
Insurance claims and policy benefit liabilities represent current
claims and estimates for future insurance policy benefits. Liabilities
for life insurance contracts are determined using the Canadian Asset
Liability Method (CALM), which incorporates assumptions for mortality,
morbidity, policy lapses and surrenders, investment yields, policy
dividends, operating and policy maintenance expenses, and provisions
for adverse deviation. These assumptions are reviewed at least annually
and updated in response to actual experience and market conditions.
Liabilities for property and casualty insurance represent estimated
provisions for reported and unreported claims. Liabilities for the life and
property and casualty insurance are included in Insurance claims and
policy benefit liabilities.
Realized gains and losses on disposal of fixed income investments
that support life insurance liabilities are deferred and amortized to
Insurance premiums, investment and fee income over the remaining
term to maturity of the investments sold, up to a maximum period of
20 years. For equities that are held to support non-universal life insur-
ance products, the realized gains and losses are deferred and amortized
into Insurance premiums, investment and fee income at the quarterly
rate of 5% of unamortized deferred gains and losses. The differences
between the market values and adjusted carrying costs of these equi-
ties are reduced quarterly by 5%. Equities held to support universal life
insurance products are carried at market value. Realized and unrealized
gains or losses on these equities are included in Insurance premiums,
investment and fee income. Specific investments are written down
to market value or the net realizable value if it is determined that any
impairment in value is other-than-temporary. The writedown is recorded
against Insurance premiums, investment and fee income in the period
the impairment is recognized.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 109
Note 1 Significant accounting policies and estimates (continued)
Acquisition costs for new insurance business consist of commis-
sions, premium taxes, certain underwriting costs and other costs that
vary with and are primarily related to the acquisition of new business.
Deferred acquisition costs for life insurance products are implicitly
recognized in Insurance claims and policy benefit liabilities by CALM.
For property and casualty insurance, these costs are classified as Other
assets and amortized over the policy term.
Segregated funds are lines of business in which we issue a contract
where the benefit amount is directly linked to the market value of the
investments held in the underlying fund. The contractual arrangement
is such that the underlying assets are registered in our name but the
segregated fund policyholders bear the risk and rewards of the fund’s
investment performance. We provide minimum death benefit and matu-
rity value guarantees on segregated funds. The liability associated with
these minimum guarantees is recorded in Insurance claims and policy
benefit liabilities. Segregated funds are not included in the Consolidated
Financial Statements. We derive only fee income from segregated funds,
which is reflected in Insurance premiums, investment and fee income.
Fee income includes management fees, mortality, policy, administration
and surrender charges.
Liabilities and equity
Financial instruments that will be settled by a variable number of our
common shares upon their conversion by the holders as well as the
related accrued distributions are classified as liabilities on our
Consolidated Balance Sheets. Dividends and yield distributions on
these instruments are classified as Interest expense in our Consolidated
Statements of Income.
Earnings per share
Earnings per share is computed by dividing Net income available to
common shareholders by the weighted average number of common
shares outstanding for the period, excluding Treasury shares. Net
income available to common shareholders is determined after deducting
dividend entitlements of preferred shareholders and any gain (loss) on
redemption of preferred shares net of related income taxes. Diluted
earnings per share reflects the potential dilution that could occur if
additional common shares were assumed to be issued under securities
or contracts that entitled their holders to obtain common shares in the
future, to the extent such entitlement is not subject to unresolved contin-
gencies. The number of additional shares for inclusion in diluted earnings
per share calculations is determined using the treasury stock method.
Under this method, stock options whose exercise price is less than the
average market price of our common shares are assumed to be exercised
and the proceeds are used to repurchase common shares at the average
market price for the period. The incremental number of common shares
issued under stock options and repurchased from proceeds is included in
the calculation of diluted earnings per share.
Use of estimates and assumptions
In preparing our Consolidated Financial Statements in conformity with
GAAP, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, net income and
related disclosures. Certain estimates, including the Allowance for
credit losses, the fair value of financial instruments, accounting for
securitizations, litigation, variable interest entities, pensions and other
post-employment benefits and income taxes, require management
to make subjective or complex judgments. Accordingly, actual results
could differ from these and other estimates, thereby impacting our
Consolidated Financial Statements.
Royal Bank of Canada Annual Report 2006
110 Consolidated Financial Statements
Significant accounting changes
Implicit variable interests
On November 1, 2005, we adopted CICA Emerging Issues Committee
Abstract No. 157, Implicit Variable Interests under AcG-15 (EIC-157). This
EIC clarifies that implicit variable interests are implied financial interests
in an entity that change with changes in the fair value of the entity’s
net assets exclusive of variable interests. An implicit variable interest is
similar to an explicit variable interest except that it involves absorbing
and/or receiving variability indirectly from the entity. The identification
of an implicit variable interest is a matter of judgment that depends on
the relevant facts and circumstances. The implementation of this EIC
did not have a material impact on our consolidated financial position or
results of operations.
Change in financial statement presentation
During the year, we reclassified on our Consolidated Statements of
Income changes in the fair value of certain derivative instruments desig-
nated as economic hedges of our stock-based compensation plans from
Non-interest income – Other to Non-interest expense – Human resources
in order to more appropriately reflect the purpose of these instruments
and our management of these compensation exposures. The impact of
the reclassification on prior periods resulted in corresponding decreases
in both Non-interest income – Other and Non-interest expense – Human
resources. For the years ended October 31, 2006, 2005 and 2004,
$36 million, $31 million and $nil were reclassified, respectively. Certain
other comparative amounts have also been reclassified to conform to
the current year’s presentation.
Future accounting changes
Financial instruments
In 2005, the CICA issued three new accounting standards: Handbook
Section 1530, Comprehensive Income (Section 1530), Handbook
Section 3855, Financial Instruments – Recognition and Measurement
(Section 3855), and Handbook Section 3865, Hedges (Section 3865).
These new standards became effective for us on November 1, 2006.
Comprehensive Income
Section 1530 introduces Comprehensive income which is comprised of
Net income and Other comprehensive income and represents changes
in Shareholders’ equity during a period arising from transactions and
other events with non-owner sources. Other comprehensive income
(OCI) includes unrealized gains and losses on financial assets classified
as available-for-sale, unrealized foreign currency translation amounts
net of hedging arising from self-sustaining foreign operations, and
changes in the fair value of the effective portion of cash flow hedging
instruments. Our Consolidated Financial Statements will include a
Consolidated Statement of Comprehensive Income while the cumula-
tive amount, Accumulated other comprehensive income (AOCI), will be
presented as a new category of Shareholders’ equity in the Consolidated
Balance Sheets.
Financial Instruments – Recognition and Measurement
Section 3855 establishes standards for recognizing and measuring
financial assets, financial liabilities and non-financial derivatives. It
requires that financial assets and financial liabilities including deriva-
tives be recognized on the balance sheet when we become a party to
the contractual provisions of the financial instrument or a non-financial
derivative contract. All financial instruments should be measured at fair
value on initial recognition except for certain related party transactions.
Measurement in subsequent periods depends on whether the financial
instrument has been classified as held-for-trading, available-for-sale,
held-to-maturity, loans and receivables, or other liabilities.
Financial assets and financial liabilities held-for-trading will be
measured at fair value with gains and losses recognized in Net income.
Financial assets held-to-maturity, loans and receivables and financial lia-
bilities other than those held-for-trading will be measured at amortized
cost using the effective interest method of amortization. Available-
for-sale financial assets will be measured at fair value with unrealized
gains and losses including changes in foreign exchange rates being
recognized in OCI. Investments in equity instruments classified as
available-for-sale that do not have a quoted market price in an active
market will be measured at cost.
Derivative instruments must be recorded on the balance sheet at
fair value including those derivatives that are embedded in financial
instrument or other contracts but are not closely related to the host
financial instrument or contract, respectively. Changes in the fair values
of derivative instruments will be recognized in Net income, except for
derivatives that are designated as a cash flow hedge, the fair value
change for which will be recognized in OCI.
Section 3855 permits an entity to designate any financial
instrument as held-for-trading on initial recognition or adoption of the
standard, even if that instrument would not otherwise satisfy the
definition of held-for-trading set out in Section 3855. Instruments that
are classified as held-for-trading by way of this “fair value option” must
have reliable fair values and are subject to additional conditions and
disclosure requirements set out by the OSFI.
Other significant accounting implications arising on adoption of
Section 3855 include the initial recognition of certain financial guar-
antees at fair value on the balance sheet and the use of the effective
interest method of amortization for any transaction costs or fees,
premiums or discounts earned or incurred for financial instruments
measured at amortized cost.
Hedges
Section 3865 specifies the criteria under which hedge accounting can
be applied and how hedge accounting should be executed for each of
the permitted hedging strategies: fair value hedges, cash flow hedges
and hedges of a foreign currency exposure of a net investment in a
self-sustaining foreign operation. In a fair value hedging relationship,
the carrying value of the hedged item will be adjusted by gains or
losses attributable to the hedged risk and recognized in Net income.
The changes in the fair value of the hedged item, to the extent that the
hedging relationship is effective, will be offset by changes in the fair
value of the hedging derivative. In a cash flow hedging relationship, the
effective portion of the change in the fair value of the hedging derivative
will be recognized in OCI. The ineffective portion will be recognized in
Net income. The amounts recognized in AOCI will be reclassified to Net
income in the periods in which net income is affected by the variability
in the cash flows of the hedged item. In hedging a foreign currency
exposure of a net investment in a self-sustaining foreign operation, the
effective portion of foreign exchange gains and losses on the hedging
instruments will be recognized in OCI and the ineffective portion is
recognized in Net income.
For hedging relationships existing prior to adopting Section 3865
that are continued and qualify for hedge accounting under the new
standard, the transition accounting is as follows: (1) Fair value hedges –
any gain or loss on the hedging instrument is recognized in the opening
balance of retained earnings on transition and the carrying amount of
the hedged item is adjusted by the cumulative change in fair value that
reflects the designated hedged risk and the adjustment is included in the
opening balance of retained earnings on transition; (2) Cash flow hedges
and hedge of a net investment in a self-sustaining foreign operation –
any gain or loss on the hedging instrument that is determined to be
the effective portion is recognized in AOCI and the ineffectiveness in
the past periods is included in the opening balance of retained earnings
on transition.
Deferred gains or losses on the hedging instrument with respect
to hedging relationships that were discontinued prior to the transition
date but qualify for hedge accounting under the new standards will be
recognized in the carrying amount of the hedged item and amortized
to Net income over the remaining term of the hedged item for fair value
hedges, and for cash flow hedges it will be recognized in AOCI and
reclassified to Net income in the same period during which the hedged
item affects Net income. However, for discontinued hedging relation-
ships that do not qualify for hedge accounting under the new standards,
the deferred gains and losses are recognized in the opening balance of
retained earnings on transition.
In October, 2006, the CICA’s Accounting Standards Board issued
a Board Notice, Hedges, Section 3865, in order to provide guidance
with respect to the transition provisions for deferred gains or losses
on continuing and discontinued hedging relationships. The amended
version of Section 3865 incorporating the clarifying guidance is
expected to be issued in December 2006, with early adoption permitted.
We adopted the proposed amendments on November 1, 2006.
Impact of adopting Sections 1530, 3855 and 3865
The transition adjustment attributable to the following will be recog-
nized in the opening balance of retained earnings as at November 1,
2006: (i) financial instruments that we will classify as held-for-trading
and that were not previously recorded at fair value, (ii) the difference in
the carrying amount of loans and deposits prior to November 1, 2006,
and the carrying amount calculated using the effective interest rate from
inception of the loan, (iii) the ineffective portion of cash flow hedges,
(iv) deferred gains and losses on discontinued hedging relationships
that do not qualify for hedge accounting under the new standards,
(v) unamortized deferred net realized gains or losses on investments
that support life insurance liabilities, and (vi) the consequential effect on
insurance claims and policy benefit liabilities due to remeasurement
of financial assets supporting these liabilities.
Adjustments arising due to remeasuring financial assets classified
as available-for-sale and hedging instruments designated as cash flow
hedges will be recognized in the opening balance of Accumulated other
comprehensive income.
Neither of the transition amounts that will be recorded in the open-
ing retained earnings or in the opening AOCI balance on November 1,
2006 is expected to be material to our consolidated financial position.
The tax consequences, if any, of the new standards on the transi-
tion or subsequent accounting are unknown. The tax authorities are
currently reviewing the standards to determine any such implications.
Stock-based compensation
On July 6, 2006, the Emerging Issues Committee (EIC) issued Abstract
No. 162, Stock-Based Compensation for Employees Eligible to Retire
Before the Vesting Date (EIC-162). This EIC clarifies that the compensa-
tion cost attributable to options and awards, granted to employees who
are eligible to retire or will become eligible to retire during the vesting
period, should be recognized immediately if the employee is eligible to
retire on the grant date or over the period between the grant date to the
date the employee becomes eligible to retire. This EIC became effective
for us on November 1, 2006, and requires retroactive application to all
stock-based compensation awards accounted for in accordance with the
CICA Handbook Section 3870, Stock-Based Compensation and Other
Stock-Based Payments (CICA 3870). Our current recognition policy for
stock-based compensation is consistent with this guidance.
Variability in variable interest entities
On September 15, 2006, the EIC issued Abstract No. 163, Determining
the Variability to be Considered in Applying AcG-15 (EIC-163). This EIC
provides additional clarification on how to analyze and consolidate VIEs.
EIC-163 will be effective for us on February 1, 2007 and its implemen-
tation will result in the deconsolidation of certain investment funds.
However, the impact is not expected to be material to our consolidated
financial position or results of operations.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 111
Note 2 Estimated fair value of financial instruments
The fair value of a financial instrument is the amount at which the
financial instrument could be exchanged in an arm’s length transaction
between knowledgeable and willing parties under no compulsion to act.
Fair value is based on quoted market prices when available. However,
when financial instruments lack an available trading market, fair value
is based on prevailing market rates for instruments with similar charac-
teristics and risk profile or internal or external valuation models using
observable market-based inputs. Fair values determined using valuation
models require the use of assumptions concerning the amount and
timing of estimated future cash flows and discount rates. These assump-
tions reflect the risks inherent in the financial instrument. Valuation
adjustments are required to adjust the quoted market prices or valua-
tion model outputs for additional market factors which are required to
ensure the financial instruments are recorded at fair value.
Adjustments for counterparty credit risk are calculated to include
the credit quality of the counterparty in determining the fair value of
derivative transactions. The market-based parameters used in the
derivative valuation models do not take into account the credit quality
of the counterparties to the transactions. As a result, we calculate a
valuation adjustment for each counterparty in arriving at the fair value of
the transactions reported.
We have documented internal policies that detail our processes for
determining fair value, including the methodologies used in establish-
ing our valuation adjustments. These methodologies are consistently
applied and periodically reviewed by Group Risk Management.
The aggregate fair value amounts represent point-in-time esti-
mates only and should not be interpreted as the amounts realizable in
an immediate settlement of the instruments.
Liquidity adjustments are calculated when market prices are not
The following table presents the carrying value and estimated fair
observable due to insufficient trading volume or a lack of recent trades
in a less active or inactive market. Liquidity adjustments are also
calculated to reflect the cost of unwinding a larger than normal market
size risk position.
value of our financial assets and liabilities; accordingly, it does not reflect
the value of assets and liabilities that are not considered financial instru-
ments, such as premises and equipment, goodwill and other intangibles.
2006
Estimated
fair value
Book value
Difference
Book value
2005
Estimated
fair value
Difference
Financial assets
Cash and deposits with banks
Securities
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans (net of allowance for loan losses)
Derivative-related amounts
Other assets
Financial liabilities
Deposits
Derivative-related amounts
Other liabilities
Subordinated debentures
Trust capital securities
Preferred share liabilities
$ 14,903
184,869
$ 14,903
185,239
$
–
370
$ 10,238
160,495
$ 10,238
160,684
$
59,378
208,530
37,733
22,660
59,378
208,638
37,682
22,660
$
$ 343,523
42,340
28,736
7,103
1,383
298
$ 343,312
42,108
28,736
7,384
1,532
304
–
108
(51)
–
211
232
–
(281)
(149)
(6)
42,973
190,416
39,008
18,194
42,973
190,506
39,123
18,194
$ 306,860
43,001
24,330
8,167
1,400
300
$ 308,047
42,817
24,330
8,503
1,582
310
$
(1,187)
184
–
(336)
(182)
(10)
–
189
–
90
115
–
Methodologies and assumptions used to estimate fair value of
financial instruments
Financial instruments valued at carrying value
Due to their short-term nature, the fair values of Cash and deposits with
banks and Assets purchased under reverse repurchase agreements and
securities borrowed are assumed to approximate their carrying values.
Securities
The fair values of securities are based on quoted market prices, when
available. If quoted market prices are not available, fair values are
estimated using quoted market prices of similar securities or other
third-party information. Liquidity adjustments, including adjustments for
resale restrictions greater than one year, are recorded as appropriate.
Loans
The fair values of the loans and deposits portfolios are based on an
assessment of interest rate risk and credit risk. Fair value is determined
under a discounted cash flow methodology using a discount rate based
on interest rates currently charged for new loans with similar terms and
remaining maturities, adjusted for a credit risk factor, which is reviewed
at least annually. For certain variable rate loans that reprice frequently
and for loans without a stated maturity, fair values are assumed to be
equal to carrying values.
Derivative financial instruments
The fair values of derivatives are equal to the book value, with the
exception of amounts relating to derivatives that have been
designated and have qualified for hedge accounting. The fair values
of exchange-traded derivatives are based on quoted market prices.
The fair values of over-the-counter derivatives are based on prevailing
market rates for instruments with similar characteristics and maturi-
ties, net present value analysis, or are determined by using pricing
models that incorporate current market and contractual prices of the
underlying instruments, time value of money, yield curve and volatility
factors. Counterparty credit risk and liquidity valuation adjustments are
recorded, as appropriate.
Other assets/liabilities
The fair values of Other assets and Other liabilities approximate their
carrying values.
Deposits
The fair values of fixed-rate deposits with a fixed maturity are determined
by discounting the expected future cash flows, using market interest
rates currently offered for deposits of similar terms and remaining
maturities (adjusted for early redemptions where appropriate). The fair
values of deposits with no stated maturity or deposits with floating rates
are assumed to be equal to their carrying values.
Subordinated debentures
The fair values of subordinated debentures are based on quoted market
prices for similar issues or current rates offered to us for debt of the
same remaining maturity.
Trust capital securities and preferred share liabilities
The fair values of Trust capital securities and preferred share liabilities
are based on quoted market prices.
Royal Bank of Canada Annual Report 2006
112 Consolidated Financial Statements
Note 3 Securities
Within 3
months
3 months to
1 year
1 to 5
years
Over 5 years
to 10 years
Over
10 years
With no
specific
maturity
2006
Total
2005
Total
2004
Total
Term to maturity (1)
$ 2,148
1,649
$ 4,646
1,379
$ 2,547
493
$ 1,518
3,331
$
$ 13,900 $ 11,814 $ 11,082
1,794
8,687
9,142
1,071
7
81
61
2,799
5,702
–
1,148
206
1,528
–
1,355
21,247
–
1,587
269
3,375
–
29
3,752
–
688
1,104
2,438
–
–
3,783
–
4,658
3,841
7,715
6,476
2,281
7,375
–
–
534
57,831
766
5,245
44,139
57,831
998
8,705
33,714
45,710
3,844
1,017
8,689
1,078
4,973
24,895
31,950
–
–
–
–
–
18,931
13,518
31,509
12,052
12,862
58,365
147,237
125,760
89,322
86
86
4.4%
55
55
4.5%
6
6
4.0%
368
364
2.4%
2
2
4.1%
490
488
4.0%
64
65
5.4%
1,419
1,428
5.2%
2,514
2,539
4.2%
245
247
4.5%
449
421
4.6%
982
953
3.6%
241
241
4.3%
5,544
5,474
3.9%
2,321
2,327
4.8%
3,726
3,766
4.6%
208
211
4.6%
363
373
4.7%
45
45
4.7%
286
289
5.5%
91
93
4.6%
1,242
1,231
5.4%
158
158
5.2%
1,266
1,277
4.6%
13
13
3.6%
1,023
1,259
5.9%
12
12
5.3%
–
–
–
48
49
–
4,514
4,484
5.2%
559
559
5.5%
2,148
2,279
5.5%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
362
362
–
2,537
2,592
2,899
2,954
3,649
3,677
4.2%
1,687
1,935
5.4%
536
508
4.5%
1,678
1,648
3.6%
758
761
2.6%
11,805
11,692
4.5%
3,164
3,171
5.0%
11,162
11,360
4.8%
2,537
2,592
36,976
37,344
6,214
6,205
3.6%
2,035
2,229
4.9%
633
628
2.2%
2,199
2,139
2.5%
1,595
1,599
1.9%
8,254
8,183
4.4%
1,442
1,445
4.2%
10,676
10,839
3.7%
1,012
974
34,060
34,241
6,898
6,939
3.4%
2,010
2,118
5.2%
475
466
4.1%
3,419
3,388
2.4%
1,725
1,739
1.2%
6,038
6,082
4.4%
1,392
1,395
3.0%
15,948
16,121
2.8%
1,018
1,022
38,923
39,270
–
–
–
–
–
–
–
–
–
–
3,589
3,596
2,490
2,494
16,022
15,968
3,659
3,677
8,317
8,655
Trading account
Canadian government debt $ 3,041
U.S. government debt
2,290
Other OECD government
debt (2)
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Bankers’ acceptances
Certificates of deposit
Other
Equities
705
1,062
9,121
–
164
2,255
293
Investment account
Canadian government debt
Federal
Amortized cost
Estimated fair value
Yield (3)
Provincial and municipal
Amortized cost
Estimated fair value
Yield (3)
U.S. government debt
Federal
Amortized cost
Estimated fair value
Yield (3)
State, municipal and agencies
Amortized cost
Estimated fair value
Yield (3)
Other OECD government debt (2)
Amortized cost
Estimated fair value
Yield (3)
Mortgage-backed securities
Amortized cost
Estimated fair value
Yield (3)
Asset-backed securities
Amortized cost
Estimated fair value
Yield (3)
Corporate debt and other debt
Amortized cost
Estimated fair value
Yield (3)
Equities
Cost
Estimated fair value
828
828
4.2%
1
1
6.1%
24
24
3.3%
42
42
2.5%
376
376
1.3%
15
15
5.7%
62
62
4.4%
2,241
2,248
5.1%
Amortized cost
Estimated fair value
Loan substitute
Cost
Estimated fair value
Total carrying value
of securities
Total estimated fair value
of securities
–
–
–
–
–
–
–
–
400
400
256
258
656
658
675
683
701
715
$ 22,520
$ 16,008
$ 47,531
$ 15,711
$ 21,579
$ 61,520
$ 184,869 $ 160,495 $ 128,946
$ 22,527
$ 16,012
$ 47,477
$ 15,729
$ 21,917
$ 61,577
$ 185,239 $ 160,684 $ 129,307
(1)
(2)
(3)
Actual maturities may differ from contractual maturities shown above, since borrowers may have the right to prepay obligations with or without prepayment penalties.
OECD stands for Organisation for Economic Co-operation and Development.
The weighted average yield is based on the carrying value at the end of the year for the respective securities.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 113
Note 3 Securities (continued)
Unrealized gains and losses on Investment account securities
Canadian government debt
Federal
Provincial and municipal
U.S. government debt
Federal
State, municipal and agencies
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
2006
2005
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair
value
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair
value
$ 3,649
1,687
$
536
1,678
758
11,805
3,164
11,162
2,537
$ 36,976
$
29
248
–
5
4
17
11
238
110
662
$
(1) $ 3,677
1,935
–
$ 6,214
2,035
$
(28)
(35)
(1)
(130)
(4)
(40)
(55)
508
1,648
761
11,692
3,171
11,360
2,592
633
2,199
1,595
8,254
1,442
10,676
1,012
$
(294) $ 37,344
$ 34,060
$
16
195
4
–
5
15
6
204
17
462
$
(25) $ 6,205
2,229
(1)
(9)
(60)
(1)
(86)
(3)
(41)
(55)
628
2,139
1,599
8,183
1,445
10,839
974
$
(281) $ 34,241
Realized gains and losses on sale of Investment account securities
Realized gains
Realized losses and writedowns
Gain on sale of Investment account securities
2006
2005
$
$
177
(89)
88
$
$
141
(56)
85
$
$
2004
136
(116)
20
Fair value and unrealized losses position for Investment account securities as at October 31, 2006
Less than 12 months
12 months or more
Total
Fair value Unrealized losses
Fair value Unrealized losses
Fair value Unrealized losses
Canadian government debt
Federal
Provincial and municipal
U.S. government debt
Federal
State, municipal and agencies
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
$
$
–
10
61
56
387
4,512
120
602
125
Total temporarily impaired securities
$
5,873
$
1
–
1
1
1
63
1
6
1
75
$
$
18
24
85
1,157
–
4,492
2,002
1,093
373
–
–
27
34
–
67
3
34
54
$
$
18
34
146
1,213
387
9,004
2,122
1,695
498
$
9,244
$
219
$ 15,117
$
1
–
28
35
1
130
4
40
55
294
The unrealized losses for Canadian government debt, U.S. government
debt, mortgage-backed securities and asset-backed securities were
caused by increases in interest rates. The contractual terms of these
investments either do not permit the issuer to settle the securities at a
price less than the amortized costs of the investment or permit prepay-
ment of contractual amounts owing only with prepayment penalties
assessed to recover interest foregone. As a result, it is not expected that
these investments would be settled at a price less than the amortized
cost. Unrealized losses for corporate debt and other debt were caused
by either increases in interest rates or, in some cases, credit rating
downgrades; however, given that we have the ability and intent to hold
these investments until there is a recovery of fair value, which may be
at maturity, we believe it is probable that we will be able to collect all
amounts due according to the contractual terms of the investments.
Accordingly, we do not consider these investments to be other-than-
temporarily impaired as at October 31, 2006.
Unrealized losses on equity securities are primarily due to the
timing of the market prices, foreign exchange movements, or the early
years in the business cycle of the investees for certain investments.
We do not consider these investments to be other-than-temporarily
impaired as at October 31, 2006, as we have the ability and intent to
hold them for a reasonable period of time until the recovery of fair value.
Royal Bank of Canada Annual Report 2006
114 Consolidated Financial Statements
Note 4 Loans (1)
Canada
Residential mortgage
Personal
Credit card
Business and government
United States
Residential mortgage
Personal
Credit card
Business and government
Other International
Residential mortgage
Personal
Credit card
Business and government
Total loans (2)
Allowance for loan losses
Total loans net of allowance for loan losses
(1)
(2)
Includes all loans booked by location, regardless of currency or residence of borrower.
Loans are net of unearned income of $62 million (2005 – $67 million).
Loan maturities and rate sensitivity
2006
2005
$ 94,272
37,946
6,966
37,053
$ 88,808
33,986
6,024
34,443
176,237
163,261
1,518
6,011
123
14,935
1,375
6,248
118
13,517
22,587
21,258
885
945
66
9,219
11,115
860
811
58
5,666
7,395
209,939
(1,409)
191,914
(1,498)
$ 208,530
$ 190,416
Maturity term (1)
Rate sensitivity
Under
1 year
1 to 5
years
Over 5
years
Total
Floating
Fixed
rate
Non-rate-
sensitive
Total
$ 20,678 $ 68,401 $
34,386
7,155
39,520
7,925
–
16,428
7,596 $ 96,675 $ 21,257 $ 75,391 $
2,591
–
5,259
44,902
7,155
61,207
34,338
189
40,097
10,555
5,542
21,018
$ 101,739 $ 92,754 $ 15,446 $ 209,939 $ 95,881 $ 112,506 $
(1,409)
$ 208,530
27 $ 96,675
44,902
7,155
61,207
9
1,424
92
1,552 $ 209,939
(1,409)
$ 208,530
As at October 31, 2006
Residential mortgage
Personal
Credit card
Business and government
Total loans
Allowance for loan losses
Total loans net of allowance for loan losses
(1)
Based on the earlier of contractual repricing or maturity date.
Impaired loans (1), (2)
Residential mortgage
Personal
Business and government
2006
Specific
allowance
$
(13) $
(90)
(160)
$
Gross
154
190
490
Net
141
100
330
$
$
834
$
(263) $
571
$
2005
Net
126
66
300
492
(1)
(2)
There are $305 million (2005 – $304 million) of loans that are contractually 90 days past due but are not considered impaired.
Average balance of gross impaired loans was $805 million (2005 – $903 million).
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 115
Note 4 Loans (continued)
Allowance for loan losses
Residential mortgage
Personal
Credit card
Business and government
Specific allowances
General allowance (2)
Total allowance for credit losses
Allowance for off-balance sheet and other items (3)
2006
Write-offs
Recoveries
Provision
for credit
losses Adjustments (1)
Balance at
beginning
of year
$
10
103
–
169
$
(5) $
(374)
(204)
(130)
$
282
1,286
$ 1,568
(70)
$
$
(713) $
–
(713) $
–
$
$
$
–
64
41
100
205
–
205
–
$
$
$
7
306
163
6
482
(53)
429
–
2005
Balance
at end
of year
10
103
–
169
$
Balance
at end
of year
13
90
–
160
$
1
(9)
–
15
7
(10)
$
263
1,223
$
282
1,286
(3) $ 1,486
(77)
(7)
$ 1,568
(70)
Total allowance for loan losses
$ 1,498
$
(713) $
205
$
429
$
(10) $ 1,409
$ 1,498
(1)
(2)
(3)
Primarily represent the translation impact of foreign currency-denominated Allowance for loan losses.
Includes $77 million (2005 – $70 million) related to off-balance sheet and other items.
The allowance for off-balance sheet and other items is reported separately under Other liabilities.
Net interest income after provision for credit losses
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
2006
6,762
429
$
2005
6,770
455
$
2004
6,398
346
6,333
$
6,315
$
6,052
$
$
Note 5 Securitizations
The following table summarizes our securitization activities for 2006, 2005 and 2004 (1):
Securitized and sold
Net cash proceeds received
Asset-backed securities purchased
Retained rights to future excess interest
Pre-tax gain on sale
Securities created and retained
as Investment account securities
Credit
card
loans
$ 1,200
400
794
9
3
2006
Residential
mortgage
loans (3)
$ 6,329
6,210
–
121
2
–
7,262
Commercial
mortgage
loans
Credit
card
loans
$ 1,200
600
596
8
4
$
718
729
–
–
11
–
2005
Residential
mortgage
loans (3)
$ 3,752
3,739
–
100
87
2004 (2)
Commercial
mortgage
loans
Residential
mortgage
loans (3)
Commercial
mortgage
loans
$
$
655
667
–
–
12
$ 3,074
3,035
–
75
36
486
497
–
–
11
–
–
2,706
–
1,903
(1) We did not recognize a servicing asset or servicing liability for our servicing rights with respect to the securitized loans as we received adequate compensation for our services.
(2)
(3)
There was no credit card loans securitization in 2004.
All residential mortgage loans securitized are government guaranteed.
In addition to the above securitization transactions, we sold $815 million of residential mortgage loans in 2006, resulting in a pre-tax loss of $3 million.
Cash flows from securitizations (1)
2006
Residential
mortgage
loans
Variable rate
Fixed rate
Credit
card
loans
2005
Residential
mortgage
loans
Variable rate
Fixed rate
Credit
card
loans
2004
Residential
mortgage
loans (2)
Fixed rate
Credit
card
loans
Proceeds reinvested in revolving
securitizations
Cash flows from retained interests
in securitizations
$ 17,107
$
466
$ 2,251
$ 12,076
$
419
$ 1,520
$ 10,028
$ 1,202
187
10
111
118
2
81
84
46
(1)
(2)
This analysis is not applicable for commercial mortgage loans securitizations as we have no retained interest in these transactions.
There was no variable rate residential mortgage loans securitization in 2004.
Royal Bank of Canada Annual Report 2006
116 Consolidated Financial Statements
The key assumptions used to value the retained interests at the date of the securitization activities are as follows:
Key assumptions (1), (2)
Expected weighted average life of prepayable receivables
(in years)
Payment rate
Excess spread, net of credit losses
Expected credit losses
Discount rate
2006
Residential
mortgage
loans
Variable rate
Fixed rate
2.61
30.00%
1.18
–
4.32
3.60
15.39%
.99
–
4.36
Credit
card
loans
.16
40.02%
5.13
2.15
10.00
2005
Residential
mortgage
loans
2004 (3)
Residential
mortgage
loans (4)
Variable rate
Fixed rate
Fixed rate
3.48
13.52%
.20
–
3.64
3.59
13.36%
1.06
–
3.59
3.88
12.00%
.74
–
3.83
Credit
card
loans
.15
40.06%
6.88
1.75
10.00
(1)
(2)
(3)
(4)
All rates are annualized except the payment rate for credit card loans which is monthly.
This analysis is not applicable for commercial mortgage loans securitizations as we have no retained interest in these transactions.
There was no credit card loans securitization in 2004.
There was no variable rate residential mortgage loans securitization in 2004.
Static pool credit losses include actual incurred and projected credit
losses divided by the original balance of the loans securitized. The
expected static pool credit loss ratio for securitized credit card loans at
October 31, 2006 was .46%. Static credit pool losses are not applicable
to residential mortgages as the mortgages are government guaranteed.
The following table summarizes the loan principal, past due and
net write-offs for total loans reported on our Consolidated Balance
Sheets and securitized loans that we manage as at October 31, 2006
and 2005:
Loans managed
Residential mortgage
Personal
Credit card
Business and government
Total loans managed (2)
Less: Loans securitized and managed
Credit card loans
Mortgage-backed securities created and sold
Mortgage-backed securities created and retained
2006
2005
Loan principal
Past due (1)
Net write-offs
Loan principal
Past due (1)
Net write-offs
$
$ 116,397
44,902
10,805
61,207
$
308
235
65
531
233,311
1,139
3,650
14,131
5,591
–
–
–
5
310
248
30
593
85
–
–
$
$ 103,258
41,045
9,300
53,626
$
302
216
61
499
207,229
1,078
3,100
9,561
2,654
–
–
–
5
279
240
118
642
46
–
–
Total loans reported on the Consolidated Balance Sheets $ 209,939
$
1,139
$
508
$ 191,914
$
1,078
$
596
(1)
(2)
Includes impaired loans as well as loans that are contractually 90 days past due but are not considered impaired.
Excludes any assets we have temporarily acquired with the intent at acquisition to sell to SPEs.
At October 31, 2006, key economic assumptions and the sensitivity of
the current fair value of our retained interests to immediate 10% and
20% adverse changes in key assumptions are shown in the table below.
These sensitivities are hypothetical and should be used with
caution. Changes in fair value based on a variation in assumptions
generally cannot be extrapolated because the relationship of the change
in assumption to the change in fair value may not be linear.
Sensitivity of key assumptions to adverse changes (1), (2)
Also, the effect of a variation in a particular assumption on the fair
value of the retained interests is calculated without changing any other
assumption; generally, changes in one factor may result in changes in
another, which may magnify or counteract the sensitivities.
Credit
card
loans
2006
Residential
mortgage loans
Variable rate
Fixed rate
Fair value of retained interests
Weighted average remaining service life (in years)
Payment rate
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Excess spread, net of credit losses
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Expected credit losses
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
Discount rate
Impact on fair value of 10% adverse change
Impact on fair value of 20% adverse change
$
$
17.9
.25
36.55%
(1.0)
(2.0)
$
$
5.71%
(1.8)
(3.5)
1.87%
(.6)
(1.2)
$
14.2
.48–3.02
30.00–40.00%
(.4)
(.8)
$
$
.80–.93%
(1.0)
(3.1)
$
211.0
3.06–3.85
10.00–18.00%
$
(5.1)
(10.2)
.83–1.88%
(21.2)
$
(42.5)
$
–%
–
–
$
–%
–
–
$
10.00%
–
–
4.24–6.00%
–
$
(.1)
4.24–4.33%
$
(2.3)
(4.6)
(1)
(2)
All rates are annualized except for the credit card loans payment rate which is monthly.
This analysis is not applicable for commercial mortgage loans securitizations as we have no retained interest in these transactions.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 117
Note 6 Variable interest entities
The following table provides information about VIEs as at October 31,
2006 and 2005, in which we have a significant variable interest and
those that we consolidate under Accounting Guideline 15, Consolidation
of Variable Interest Entities (AcG-15) because we are the Primary
Beneficiary.
Total assets as at
Total assets as at
October 31, 2006 October 31, 2006 October 31, 2005
Maximum exposure
to loss at
Maximum exposure
to loss at
October 31, 2005
Unconsolidated VIEs in which we have a significant variable interest (1)
Multi-seller conduits (2)
Third-party conduits
Structured finance VIEs
Investment funds
Other
Collateralized Debt Obligations
Consolidated VIEs (3), (4)
Investment funds
Credit investment product VIEs
Structured finance VIEs
Compensation vehicles
Other
$ 34,258
2,697
2,592
3,390
128
–
$ 35,031
1,018
1,465
303
84
–
$ 29,253
2,162
1,907
6,634
915
1,104
$ 29,442
672
1,410
899
57
16
$ 43,065
$ 37,901
$ 41,975
$ 32,496
$
1,851
689
409
355
151
$
1,140
660
471
311
140
$
3,455
$
2,722
(1)
(2)
(3)
(4)
The maximum exposure to loss resulting from our significant variable interest in these VIEs consists mostly of investments, loans, liquidity facilities and fair value of derivatives. We have
recognized $2,130 million (2005 – $2,628 million) of this exposure on our Consolidated Balance Sheets.
Total assets represent maximum assets that may have to be purchased by the conduits under purchase commitments outstanding as at October 31, 2006. Actual assets held by these conduits
as at October 31, 2006, were $24,811 million (2005 – $20,191 million).
The assets that support the obligations of the consolidated VIEs are reported on our Consolidated Balance Sheets primarily as follows: Interest-bearing deposits with banks of $120 million
(2005 – $152 million), Trading account securities of $2,483 million (2005 – $1,733 million), Investment account securities of $409 million (2005 – $406 million) and Other assets of $287 million
(2005 – $246 million). The compensation vehicles hold $156 million (2005 – $185 million) of our common shares, which are reported as Treasury shares. The obligation to provide common
shares to employees is recorded as an increase to Contributed surplus as the expense for the corresponding stock-based compensation plan is recognized.
Investors have recourse only to the assets of the related VIEs and do not have recourse to our general assets, unless we breach our contractual obligations relating to those VIEs, provide liquid-
ity facilities or credit enhancement facilities to, or enter into derivative transactions with, the VIEs.
Multi-seller and third-party conduits
We administer six multi-seller asset-backed commercial paper conduit
programs (multi-seller conduits). These conduits primarily purchase
financial assets from clients and finance those purchases by issuing
asset-backed commercial paper. Our clients primarily utilize multi-seller
conduits to diversify their financing sources and to reduce funding costs.
During 2006, the multi-seller conduits also financed assets in the
form of either securities or instruments that closely resemble securities
such as credit-linked notes. In these situations, the multi-seller conduit is
often one of many investors in the securities or security-like instruments.
An unrelated third party (expected loss investor) absorbs credit
losses, up to a maximum contractual amount, that may occur in the
future on the assets in the multi-seller conduits (multi-seller conduit
first-loss position) before the multi-seller conduits’ debt holders and us.
In return for assuming this multi-seller conduit first-loss position, each
multi-seller conduit pays the expected loss investor a return commensu-
rate with its risk position. The expected loss investor absorbs a majority
of each multi-seller conduit’s expected losses, when compared to us;
therefore, we are not the Primary Beneficiary and are not required to
consolidate these conduits under AcG-15. However, we continue to hold
a significant variable interest in these multi-seller conduits resulting
from our provision of backstop liquidity facilities, partial credit enhance-
ment and our entitlement to residual fees.
We hold significant variable interests in third-party asset-backed
security conduits primarily through providing liquidity support and credit
enhancement facilities. However, we are not the Primary Beneficiary
and are not required to consolidate these conduits under AcG-15.
The liquidity and credit enhancement facilities are included and
described in our disclosure on guarantees in Note 27.
Investment funds
We enter into derivatives with third parties including mutual funds, unit
investment trusts and other investment funds to provide their investors
with the desired exposure and hedge our exposure from these derivatives
by investing in other funds. We are the Primary Beneficiary when our
participation in the derivative or our investment in other funds exposes
us to a majority of the respective expected losses.
Structured finance VIEs
We finance VIEs that are part of transactions structured to achieve a
desired outcome such as limiting exposure to specific assets or risks,
obtaining indirect exposure to financial assets, supporting an enhanced
yield, funding specific assets and meeting client requirements. We con-
solidate structured finance VIEs in which our interests expose us to a
majority of the expected losses.
Collateralized Debt Obligations
Through our Collateral Debt Obligation (CDO) management business, we
acted as collateral manager for several CDO entities which invested in
leveraged bank-initiated term loans, high yield bonds and mezzanine cor-
porate loans. As part of our role, we were required to invest in a portion of
the CDOs’ first-loss tranche. Our total exposure to loss was through fees
we earned as a collateral manager and our share of the first-loss tranche.
This exposure comprised less than a majority of the total expected losses
of the CDOs and therefore, we were not the Primary Beneficiary. We sold
our CDO management business in 2005 to a third party, excluding the
first-loss tranche investments which were sold during 2006.
Creation of credit investment products
We use VIEs to generally transform credit derivatives into cash instru-
ments, to distribute credit risk and to create customized credit products
to meet investors’ specific requirements. We enter into derivative con-
tracts with these entities in order to convert various risk factors such
as yield, currency or credit risk of underlying assets to meet the needs
of the investors. We transfer assets to these VIEs as collateral for notes
issued which do not meet sale recognition criteria under AcG-12. In
certain instances, we invest in the notes issued by these VIEs, which
requires us to consolidate them when we are the Primary Beneficiary.
Royal Bank of Canada Annual Report 2006
118 Consolidated Financial Statements
Compensation vehicles
We use compensation trusts, which primarily hold our own common
shares, to economically hedge our obligation to certain employees
under our stock-based compensation programs. We consolidate the
trusts in which we are the Primary Beneficiary.
Capital trusts
RBC Capital Trust II (Trust II) was created in 2003 to issue $900 million
innovative capital instruments. We issued a senior deposit note of the
same amount to this trust. Although we own the common equity and
voting control of the trust, we are not the Primary Beneficiary since we
are not exposed to the majority of the expected losses, and we do not
have a significant interest in the trust. For details on our innovative
capital instruments, refer to Note 17.
Note 7 Derivative financial instruments
Derivative financial instruments are financial contracts whose value is
derived from an underlying interest rate, foreign exchange rate, equity
or commodity instrument or index.
Types of derivatives
Forwards and futures
Forward contracts are effectively tailor-made agreements that are trans-
acted between counterparties in the over-the-counter market, whereas
futures are standardized contracts with respect to amounts and settle-
ment dates, and are traded on regular exchanges. Examples of forwards
and futures are described below:
Interest rate forwards (forward rate agreements) and futures are
contractual obligations to buy or sell an interest-rate sensitive financial
instrument on a future date at a specified price.
Foreign exchange forwards and futures are contractual obligations
to exchange one currency for another at a specified price for settlement
at a predetermined future date.
Equity forwards and futures are contractual obligations to buy or
sell a fixed value (the contracted price) of an equity index, a basket of
stocks or a single stock at a specified future date.
Swaps
Swaps are over-the-counter contracts in which two counterparties
exchange a series of cash flows based on agreed upon rates to a
notional amount. The various swap agreements that we enter into are
as follows:
Interest rate swaps are agreements where two counterparties
exchange a series of payments based on different interest rates applied
to a notional amount in a single currency.
Cross currency swaps involve the exchange of fixed payments in
one currency for the receipt of fixed payments in another currency. Cross
currency interest rate swaps involve the exchange of both interest and
principal amounts in two different currencies.
Equity swaps are contracts in which one counterparty agrees to
pay or receive from the other cash flows based on changes in the value
of an equity index, a basket of stocks or a single stock.
Options
Options are contractual agreements under which the seller (writer)
grants the purchaser the right, but not the obligation, either to buy (call
option) or sell (put option), a security, exchange rate, interest rate, or
Securitization of our financial assets
We employ SPEs in the process of securitizing our assets, none of which
are consolidated under AcG-15. One entity is a qualifying SPE under
AcG-12, which is specifically exempt from consolidation under AcG-15,
and our level of participation in each of the remaining third-party SPEs
relative to others does not expose us to a majority of the expected
losses. We also do not have significant interests in these SPEs. For
details on our securitization activities, refer to Note 5.
other financial instrument or commodity at a predetermined price, at or
by a specified future date. The seller (writer) of an option can also settle
the contract by paying the cash settlement value of the purchaser’s
right. The seller (writer) receives a premium from the purchaser for this
right. The various option agreements that we enter into include interest
rate options, foreign currency options and equity options.
Credit derivatives
Credit derivatives are over-the-counter contracts that transfer credit risk
related to an underlying financial instrument (referenced asset) from
one counterparty to another. Examples of credit derivatives include
credit default swaps, credit default baskets and total return swaps.
Credit default swaps provide protection against the decline in
value of the referenced asset as a result of specified credit events such
as default or bankruptcy. It is similar in structure to an option whereby
the purchaser pays a premium to the seller of the credit default swap in
return for payment related to the deterioration in the value of the refer-
enced asset. Credit default baskets are similar to credit default swaps
except that the underlying referenced financial instrument is a group of
assets instead of a single asset.
Total return swaps are contracts where one counterparty agrees to
pay or receive from the other cash flows based on changes in the value
of the referenced asset.
Other derivative products
We also transact in other derivative products including precious metal
and commodity derivative contracts in both the over-the-counter and
exchange markets. Certain warrants and loan commitments that meet
the definition of derivative are also included as derivative instruments.
Derivatives held or issued for trading purposes
Most of our derivative transactions relate to sales and trading activi-
ties. Sales activities include the structuring and marketing of derivative
products to clients to enable them to transfer, modify or reduce current
or expected risks. Trading involves market-making, positioning and
arbitrage activities. Market-making involves quoting bid and offer prices
to other market participants with the intention of generating revenue
based on spread and volume. Positioning involves managing market risk
positions with the expectation of profiting from favourable movements
in prices, rates or indices. Arbitrage activities involve identifying and
profiting from price differentials between markets and products. We do
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 119
Note 7 Derivative financial instruments (continued)
not deal, to any significant extent, in leveraged derivative transactions.
These transactions contain a multiplier which, for any given change in
market prices, could cause the change in the transactions’ fair values to
be significantly different from the change in fair values that would occur
for similar derivatives without the multiplier.
Derivatives held or issued for other-than-trading purposes
We also use derivatives in connection with our own asset/liability
management activities, which include hedging and investment activities.
Interest rate swaps are used to adjust exposure to interest rate risk
by modifying the repricing or maturity characteristics of existing and/or
anticipated assets and liabilities. Purchased interest rate options are
used to hedge redeemable deposits and other options embedded in
consumer products. We manage our exposure to foreign currency risk
with cross currency swaps and foreign exchange forward contracts.
We use credit derivatives to manage our credit exposures and for risk
diversification in our lending portfolio.
Certain derivatives are specifically designated and qualify for
hedge accounting. We apply hedge accounting to minimize significant
unplanned fluctuations in earnings caused by changes in interest rates
or foreign exchange rates. Interest rate and currency fluctuations will
Notional amount of derivatives by term to maturity
either cause assets and liabilities to appreciate or depreciate in market
value or cause variability in forecasted cash flows. When a derivative
functions effectively as a hedge, gains, losses, revenue and expenses
on the derivative will offset the gains, losses, revenue and expenses on
the hedged item.
We may also choose to enter into derivative transactions to
economically hedge certain business strategies that do not otherwise
qualify for hedge accounting, or where hedge accounting is not
considered economically feasible to implement. In such circumstances,
changes in fair value are reflected in Non-interest income.
We did not apply hedge accounting to any anticipated transactions
for the year ended October 31, 2006.
Derivatives – Notional amounts
Notional amounts, which are off-balance sheet, serve as a point of refer-
ence for calculating payments and are a common measure of business
volume. The following table provides the notional amounts of our deriv-
ative transactions by term to maturity. Excluded from the table below
are notional amounts of $121 million (2005 – $198 million), relating to
certain warrants and loan commitments reported as derivatives.
Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (2)
Other contracts (3)
Exchange-traded contracts
Interest rate contracts
Futures – long positions
Futures – short positions
Options purchased
Options written
Foreign exchange contracts
Futures – long positions
Futures – short positions
Other contracts (3)
Term to maturity
2006
2005
Within
1 year
1 to
5 years
Over 5
years (1)
Total
Trading
Other than
trading
Trading
Other than
trading
$ 302,435
812,548
34,122
28,878
$
12,943
847,446
40,397
33,906
$
–
354,444
24,739
10,782
$ 315,378
2,014,438
99,258
73,566
$ 315,378
1,874,206
99,172
73,566
$
–
140,232
86
–
$ 124,504
1,014,868
58,571
53,420
$
–
138,117
53
–
626,968
2,678
48,497
52,395
54,874
16,096
38,916
140,939
177,930
66,647
119,034
5,149
26,088
250,199
31,484
9,586
133,383
13,203
13,498
114,419
21,516
1,065
7,361
66,917
45
16
91,261
26,689
659,517
19,625
248,797
65,643
68,388
221,776
87,121
626,484
18,553
228,090
65,572
68,337
219,054
86,548
33,033
1,072
20,707
71
51
2,722
573
6,465
32,413
5,279
160
921
–
6,955
6
1,689
–
–
147,410
212,032
71,926
119,194
146,886
211,131
71,926
119,194
–
–
–
6,070
26,088
257,154
6,070
26,088
257,154
524
901
–
–
–
–
–
518,109
15,565
175,417
100,710
111,322
169,412
77,993
74,440
110,874
83,926
38,028
9,785
2,230
76,894
33,128
407
10,389
23
16
3,843
216
644
1,208
–
–
–
–
–
$ 2,804,393
$ 1,323,974
$ 585,014
$ 4,713,381
$ 4,513,409
$ 199,972
$ 2,816,068
$ 188,044
(1)
(2)
(3)
Includes contracts maturing in over 10 years with a notional value of $135,951 million (2005 – $87,299 million). The related gross positive replacement cost is $3,857 million
(2005 – $2,556 million).
Comprises credit default swaps, total return swaps and credit default baskets, including credit derivatives given guarantee treatment for OSFI regulatory reporting purposes.
Comprises precious metal, commodity and equity-linked derivative contracts other than embedded equity-linked contracts.
Royal Bank of Canada Annual Report 2006
120 Consolidated Financial Statements
The following table provides the fair value of our derivative financial instruments:
Fair value of derivative instruments
Held or issued for trading purposes
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
2006
2005
Average fair value
for year ended (1)
Year-end
fair value
Average fair value
for year ended (1)
Year-end
fair value
Positive
Negative
Positive
Negative
Positive
Negative
Positive
Negative
$
52
12,150
795
–
$
50
12,003
–
888
$
44
12,258
602
–
$
60
11,969
–
698
$
26
15,898
713
–
$
11
15,655
–
749
$
21
13,298
989
–
$
19
12,954
–
1,079
12,997
12,941
12,904
12,727
16,637
16,415
14,308
14,052
6,740
2,041
7,010
1,571
–
6,969
1,522
8,275
–
1,582
5,493
2,151
6,703
1,055
–
5,758
1,522
8,319
–
994
8,064
1,503
6,191
2,088
–
8,467
1,316
6,630
–
1,841
6,696
1,788
6,163
2,149
–
7,059
1,388
7,397
–
2,049
17,362
18,348
15,402
16,593
17,846
18,254
16,796
17,893
Credit derivatives (2)
Other contracts (3)
1,139
5,623
975
8,803
1,795
5,798
1,580
9,221
992
2,888
873
6,732
914
5,605
908
8,398
$ 37,121
$ 41,067
$ 35,899
$ 40,121
$ 38,363
$ 42,274
$ 37,623
$ 41,251
Held or issued for other-than-trading purposes
Interest rate contracts
Swaps
Options purchased
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (2)
Other contracts (3)
Total gross fair values before netting
Impact of master netting agreements
With intent to settle net or simultaneously (4)
Without intent to settle net or simultaneously (5)
Total
$
$
1,100
–
1,100
102
5
607
1
–
715
20
85
940
–
940
236
5
631
–
1
873
30
281
1,920
2,124
37,819
42,245
(137)
(18,952)
(137)
(18,952)
$ 18,730
$ 23,156
$
$
982
1
983
173
–
423
–
–
596
20
45
937
–
937
221
56
365
–
–
642
20
111
1,644
1,710
39,267
42,961
(144)
(20,822)
(144)
(20,822)
$ 18,301
$ 21,995
(1)
(2)
(3)
(4)
(5)
Average fair value amounts are calculated based on monthly balances.
Comprises credit default swaps, total return swaps and credit default baskets, including credit derivatives given guaranteed treatment for OSFI regulatory reporting purposes.
Comprises precious metal, commodity and equity-linked derivative contracts. Certain warrants and loan commitments that meet the definition of derivatives are also included.
Impact of offsetting credit exposures on contracts where we have both a legally enforceable master netting agreement in place and we intend to settle the contracts on either a net basis or
simultaneously.
Additional impact of offsetting credit exposures on contracts where we have a legally enforceable master netting agreement in place but do not intend to settle the contracts on a net basis or
simultaneously.
Derivative-related credit risk
Credit risk from derivative transactions is generated by the potential
for the counterparty to default on its contractual obligations when one
or more transactions have a positive market value to us. Therefore,
derivative-related credit risk is represented by the positive fair value
of the instrument and is normally a small fraction of the contract’s
notional amount.
We subject our derivative-related credit risk to the same credit
approval, limit and monitoring standards that we use for managing
other transactions that create credit exposure. This includes evaluating
the creditworthiness of counterparties, and managing the size, diversi-
fication and maturity structure of the portfolio. Credit utilization for all
products is compared with established limits on a continual basis and
is subject to a standard exception reporting process. We utilize a
single internal rating system for all credit risk exposure. In most cases,
these internal ratings approximate the external risk ratings of public
rating agencies.
Netting is a technique that can reduce credit exposure from
derivatives and is generally facilitated through the use of master netting
agreements. A master netting agreement provides for a single net settle-
ment of all financial instruments covered by the agreement in the event
of default on, or termination of, any one contract. However, credit risk
is eliminated only to the extent that our financial obligations to the
same counterparty can be settled after we have realized contracts with
a favourable position. The two main categories of netting are close-out
netting and settlement netting. Under the close-out netting provision, if
the counterparty defaults, we have the right to terminate all transactions
covered by the master netting agreement at the then-prevailing market
values and to sum the resulting market values, offsetting negative
against positive values, to arrive at a single net amount owed by either
the counterparty or us. Under the settlement netting provision, all
payments and receipts in the same currency and due on the same day
between specified branches are netted, generating a single payment
in each currency, due either by us or the counterparty. We maximize
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 121
Note 7 Derivative financial instruments (continued)
the use of master netting agreements to reduce derivative-related
credit exposure. Our overall exposure to credit risk reduced through
master netting agreements may change substantially following the
reporting date as the exposure is affected by each transaction sub-
ject to the agreements as well as changes in underlying market rates.
However, measurement of our credit exposure arising out of derivative
transactions is not reduced to reflect the effects of netting unless the
enforceability of that netting is supported by appropriate legal analysis,
as documented in our policy.
To further manage derivative-related counterparty credit exposure,
we include mark-to-market provisions, typically in the form of a Credit
Support Annex, in our agreements with some counterparties. Under
such provisions, we have the right to request that the counterparty
pay down or collateralize the current market value of its derivatives
position with us when the position passes a specified threshold. The
use of collateral is another significant credit mitigation technique for
managing derivative-related counterparty credit risk with other banks
and broker-dealers.
The tables below show replacement cost, credit equivalent and
risk-adjusted amounts of our derivatives both before and after the
impact of netting. During 2006, 2005 and 2004, neither our actual credit
losses arising from derivative transactions nor the level of impaired
derivative contracts were significant.
Replacement cost represents the total fair value of all outstanding
contracts in a gain position, before factoring in the master netting
agreements. The amounts in the table below exclude fair value of
$734 million (2005 – $504 million) relating to exchange-traded instru-
ments as they are subject to daily margining and are deemed to have
no credit risk. Fair value of $nil (2005 – $1 million) relating to certain
warrants and loan commitments that meet the definition of derivatives
for financial reporting purposes is also excluded.
The credit equivalent amount is defined as the sum of the replace-
ment cost plus an add-on amount for potential future credit exposure as
defined by the OSFI.
The risk-adjusted amount is determined by applying standard OSFI
defined measures of counterparty risk to the credit equivalent amount.
Derivative-related credit risk
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Foreign exchange contracts
Forward contracts
Swaps
Options purchased
Credit derivatives (1)
Other contracts (2)
2006
2005
Replacement
cost
Credit equivalent
amount
Risk-adjusted
balance
Replacement
cost
Credit equivalent
amount
Risk-adjusted
balance
$
44 $
13,358
591
109
21,031
1,164
13,993
22,304
5,595
9,466
1,056
12,413
22,697
2,244
16,117
37,354
1,795
5,160
6,975
8,696
$
22
4,452
260
4,734
3,310
4,305
502
8,117
2,009
2,760
$
21
14,280
958
$
44
19,496
1,182
$
15,259
20,722
6,869
8,374
2,149
12,389
18,935
3,625
17,392
34,949
914
5,177
4,663
8,670
10
4,742
338
5,090
3,408
3,744
971
8,123
1,453
2,886
Derivatives before master netting agreements
Impact of master netting agreements
$ 37,065
(19,089)
$ 75,329
(31,831)
$ 17,620
(7,188)
$ 38,742
(20,966)
$ 69,004
(31,182)
$ 17,552
(7,856)
Total derivatives after master netting agreement
$ 17,976
$ 43,498
$ 10,432
$ 17,776
$ 37,822
$
9,696
(1)
(2)
Comprises credit default swaps, total return swaps and credit default baskets. Credit derivatives classified as “other-than-trading” with a replacement cost of $20 million (2005 – $20 million),
credit equivalent amount of $283 million (2005 – $390 million) and risk-adjusted asset amount of $283 million (2005 – $390 million), which are given guarantee treatment per the OSFI guidance,
are excluded from this table.
Comprises precious metal, commodity and equity-linked derivative contracts.
Replacement cost of derivative financial instruments by risk rating and by counterparty type
Risk rating (1)
Counterparty type (2)
As at October 31, 2006
AAA, AA
A
BBB
BB or
lower
Total
OECD
Banks governments
Other
Total
Gross positive replacement cost
Impact of master netting agreements
$
21,139 $
(12,566)
9,666 $
(4,273)
4,053 $
(1,783)
2,227 $
(467)
37,085 $
(19,089)
21,693 $
(16,015)
5,891 $
–
9,501 $
(3,074)
37,085
(19,089)
Replacement cost (after netting agreements) (3)
$
8,573 $
5,393 $
2,270 $
1,760 $
17,996 $
5,678 $
5,891 $
6,427 $
17,996
Replacement cost (after netting agreements) – 2005 (3) $
8,149 $
4,943 $
2,174 $
2,530 $
17,796 $
6,631 $
5,273 $
5,892 $
17,796
(1)
(2)
(3)
Our internal risk ratings for major counterparty types approximate those of public rating agencies. Ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower
represent non-investment grade ratings.
Counterparty type is defined in accordance with the capital adequacy requirements of the OSFI.
Includes credit derivatives classified as “other than trading” with a total replacement cost of $20 million (2005 – $20 million).
Royal Bank of Canada Annual Report 2006
122 Consolidated Financial Statements
Note 8 Premises and equipment
Land
Buildings
Computer equipment
Furniture, fixtures and other equipment
Leasehold improvements
2006
Accumulated
depreciation
$
$
–
321
1,698
736
673
$
Cost
134
511
2,462
1,012
1,127
$
Net book
value
134
190
764
276
454
Cost
143
591
2,184
996
956
2005
Accumulated
depreciation
$
$
–
312
1,502
720
628
Net book
value
143
279
682
276
328
$
5,246
$
3,428
$
1,818
$
4,870
$
3,162
$
1,708
The depreciation expense for premises and equipment for 2006 was $405 million (2005 – $414 million; 2004 – $387 million).
Note 9 RBC Dexia Investor Services joint venture
On January 2, 2006, we combined our Institutional & Investor Services
business (IIS), previously operated mainly through our wholly-owned
subsidiaries Royal Trust Corporation of Canada, The Royal Trust
Company, and RBC Global Services Australia Pty Limited, with the Dexia
Funds Services business of Dexia Banque Internationale à Luxembourg
(Dexia) in return for a 50% joint venture interest in a newly formed
company known as RBC Dexia Investor Services (RBC Dexia IS). Under
the agreement with Dexia, we contributed net assets with a carrying
value of approximately $895 million, of which $84 million was related to
IIS goodwill. We did not recognize a gain or loss on this transaction.
RBC Dexia IS, which provides an integrated suite of institutional
investor products and services, including global custody, fund and pen-
sion administration, securities lending, shareholder services, analytics
and other related services to institutional investors worldwide, is a hold-
ing company headquartered in London, United Kingdom. Operations of
RBC Dexia IS are conducted mainly through RBC Dexia Investor Services
Trust in Canada and RBC Dexia Investor Services Bank in Luxembourg
and their respective subsidiaries and branches around the world.
We report the results of RBC Dexia IS on a one-month lag basis.
For our year ended October 31, 2006, we have included our proportion-
ate share of RBC Dexia IS financial results for their nine months ended
September 30, 2006. Assets and liabilities representing our interest
in RBC Dexia IS and our proportionate share of its financial results
before adjusting for related party transactions are presented in the
following tables:
Consolidated Statements of Income
Net interest income
Non-interest income
Non-interest expense
Net income
Consolidated Statements of Cash Flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
For the nine months ended
October 31, 2006 (1)
$
$
75
363
315
73
(71)
(97)
165
(1)
Represents our proportionate share of RBC Dexia IS financial results for their nine months
ended September 30, 2006.
Along with Dexia, we provide certain operational services to
RBC Dexia IS, which include administrative and technology support,
human resources and others. In addition, both Dexia and we provide, on
an equal basis, credit and banking facilities to RBC Dexia IS to support
its operations. RBC Dexia IS provides certain services to Dexia and us,
including custody and trusteeship, fund and investment administration,
transfer agency and investor services. These services and facilities are
provided by the respective parties in the normal course of operations
on terms similar to those offered to non-related parties. The amounts of
interest income earned and expenses incurred by RBC Dexia IS related
to transactions with RBC are as follows:
Consolidated Balance Sheets
Assets (1)
Liabilities
As at October 31, 2006
$
12,354
11,396
(1)
Includes $69 million of goodwill and $208 million of intangible assets.
Net interest income
Non-interest income
Non-interest expense
For the nine months ended
October 31, 2006
$
99
16
28
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 123
Note 10 Goodwill and other intangibles
We have completed the annual test for goodwill impairment in all report-
ing units and have determined that goodwill is not impaired.
The following table discloses the changes in goodwill over 2006
and 2005:
Goodwill
Balance at October 31, 2004
Other adjustments (1)
Balance at October 31, 2005
Goodwill acquired during the year
Other adjustments (2), (3)
Balance at October 31, 2006
RBC Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
RBC Capital
Markets
$
$
$
$
2,502
(83)
2,419
–
72
$
$
792
39
831
86
(17)
$
$
986
(33)
953
–
(40)
Total
4,280
(77)
4,203
86
15
$
2,491
$
900
$
913
$
4,304
(1)
(2)
(3)
Other adjustments in 2005 primarily include changes to RBC Dain Rauscher’s goodwill due to resolutions of pre-acquisition tax positions, reclassification of certain trust businesses’ intangibles
to goodwill, and the impact of foreign exchange translations on non-Canadian dollar-denominated goodwill.
Other adjustments in 2006 primarily include the impact of foreign exchange translations on non-Canadian dollar-denominated goodwill, changes in goodwill related to our IIS business with
RBC Dexia IS (refer to Note 9), and the transfer of $6 million housing tax credit syndication business goodwill from RBC U.S. and International Personal and Business to RBC Capital Markets.
Refer to Note 30.
During 2006, we adjusted the foreign exchange translation of certain non-Canadian dollar-denominated goodwill of RBC Canadian Personal and Business to better align with the nature of the net
assets supporting the segment. This resulted in an increase of $182 million of goodwill for RBC Canadian Personal and Business. A corresponding increase was made to Unrealized foreign currency
translation gain (loss) on our Consolidated Statements of Changes in Shareholders’ Equity.
Other intangibles
Core deposit intangibles
Customer lists and relationships (2)
Mortgage servicing rights
2006
2005
Gross carrying
amount
Accumulated
amortization (1)
Net carrying
amount
Gross carrying
amount
Accumulated
amortization (1)
Net carrying
amount
$
$
324
625
44
993
$
(163) $
(156)
(32)
$
(351) $
161
469
12
642
$
$
346
275
68
689
$
(149) $
(105)
(26)
$
(280) $
197
170
42
409
(1)
(2)
Total amortization expense for 2006 was $76 million (2005 – $50 million; 2004 – $69 million).
Increase primarily relates to our joint venture investment in RBC Dexia IS and acquisitions made in 2006. Refer to Note 9 and Note 11, respectively.
During 2005, we revisited the goodwill and intangible assets identified
in connection with the acquisition of certain trust businesses in fiscal
1999 and 2000 and determined that approximately $57 million
(€28 million) initially allocated to customer lists and relationships
actually represented goodwill. The reallocation resulted in an increase
in the carrying amount of goodwill and a recovery of approximately
$15 million of amortization expense given that we ceased amortizing
goodwill and indefinite life intangibles beyond November 1, 2001, in
accordance with GAAP.
The projected amortization of Other intangibles for each of the
years ending October 31, 2007 to October 31, 2011 is approximately
$77 million. There were no writedowns of intangible assets due to impair-
ment for the year ended October 31, 2006 (2005 – nil; 2004 – nil).
Note 11 Significant acquisitions and dispositions
2006
Acquisitions
In November 2005, we completed the acquisition of operations of Abacus
Financial Services Group Limited (Abacus) in London, Jersey, Guernsey,
Edinburgh and Cheltenham. Abacus is based in Jersey, Channel Islands,
and provides wealth management and fiduciary services to private and
corporate clients primarily in the British Isles and Continental Europe.
Acquisition date
Business segment
Percentage of shares acquired
Purchase consideration
Fair value of tangible assets acquired
Fair value of liabilities assumed
Fair value of identifiable net tangible assets acquired
Customer lists and relationships (2)
Goodwill
Total purchase consideration
In October 2006, we completed the acquisition of American
Guaranty & Trust (AG&T) which is based in Wilmington, Delaware, and
offers complete personal trust and custody services through a unique
strategic partnership with professional advisors.
The details of these acquisitions are as follows:
Abacus
American Guaranty & Trust
November 30, 2005
October 3, 2006
RBC U.S. and International
Personal and Business
RBC U.S. and International
Personal and Business
100%
100%
Cash payment of £105(1)
Cash payment of US$12.5
$
$
43
(23)
20
116
77
213
$
3
–
3
2
9
$
14
(1)
(2)
Includes £20 million placed in an escrow account for future payments of claims as agreed to in the purchase agreement. Amounts remaining in the escrow account will be released to the
vendors over a three-year period after completion of the acquisition.
Customer lists and relationships are amortized on a straight-line basis over an estimated average useful life of 15 years.
Royal Bank of Canada Annual Report 2006
124 Consolidated Financial Statements
Pending acquisitions
On August 9, 2006, RBC Centura Banks, Inc. announced the signing of
a definitive merger agreement pursuant to which RBC Centura Banks, Inc.
will acquire Atlanta, Georgia-based Flag Financial Corporation (Flag)
and its subsidiary, Flag Bank. Under the agreement, shareholders of
Flag will receive US$25.50 per share for a total purchase price of approxi-
mately US$456 million. The acquisition is subject to customary closing
conditions, including approval by U.S. and Canadian regulators. This
transaction is expected to be completed by the end of calendar
year 2006.
On October 25, 2006, RBC Capital Markets announced that it has
agreed to acquire the broker-dealer business and certain other assets
of the Carlin Financial Group, a New York-based boutique broker-
dealer. This transaction is subject to regulatory approval and other
customary closing conditions and is expected to be completed in
the first quarter of 2007.
2005
Disposition
On December 31, 2004, we completed the sale of our subsidiary Liberty
Insurance Services Corporation to IBM Corporation for cash. The nominal
gain on the sale was reported in RBC Canadian Personal and Business.
Discontinued operations
On September 2, 2005, we completed the sale of RBC Mortgage
Company (RBC Mortgage) to New Century Mortgage Corporation
and Home123 Corporation (Home123), pursuant to which Home123
acquired certain assets of RBC Mortgage including its branches,
and hired substantially all of its employees.
RBC Mortgage has substantially disposed of its remaining assets
and obligations that were not transferred to Home123. These are
recorded separately on the Consolidated Balance Sheets as Assets
of operations held for sale and Liabilities of operations held for sale.
The operating results of RBC Mortgage are classified as discontinued
operations for all periods presented in the Consolidated Statements
of Income. RBC Mortgage’s business realignment charges (refer to
Note 23) have been reclassified to discontinued operations.
2004
Acquisitions
During 2004, we completed the acquisitions of Provident Financial Group
Inc.’s Florida banking operations (Provident), William R. Hough & Co.,
Inc. (William R. Hough) and the Canadian operations of Provident Life
and Accident Insurance Company (UnumProvident). The details of these
acquisitions are as follows:
Acquisition date
Business segment
Percentage of shares acquired
Purchase consideration
Fair value of tangible assets acquired
Fair value of liabilities assumed
Fair value of identifiable net tangible assets acquired
Core deposit intangibles (1)
Customer lists and relationships (1)
Goodwill
Total purchase consideration
Provident
William R. Hough
November 21, 2003
February 27, 2004
UnumProvident
May 1, 2004
RBC U.S. and International
Personal and Business
RBC Capital Markets
RBC Canadian Personal
and Business
n.a.
100%
Cash payment of US$81
Cash payment of US$112
$ 1,145
(1,180)
(35)
13
–
127
$
105
$
$
54
(21)
33
–
12
105
150
n.a.
n.a. (2)
$ 1,617
(1,617)
–
–
–
–
–
$
(1)
(2)
Core deposit intangibles and customer lists and relationships are amortized on a straight-line basis over an estimated average useful life of 8 and 15 years, respectively.
In connection with the acquisition of the Canadian operations of UnumProvident, we assumed UnumProvident’s policy liabilities and received assets with the equivalent fair value to support
future payments.
Note 12 Other assets
Receivable from brokers, dealers and clients
Accrued interest receivable
Investment in associated corporations and limited partnerships
Insurance-related assets (1)
Net future income tax asset (refer to Note 24)
Prepaid pension benefit cost (2) (refer to Note 20)
Cheques and other items in transit
Other
$
$
2006
3,172
2,229
1,614
702
1,104
761
489
5,346
2005
1,934
1,716
1,423
679
1,248
540
2,117
3,251
$ 15,417
$ 12,908
(1)
(2)
Insurance-related assets include policy loan balances, premiums outstanding, amounts due from other insurers in respect of reinsurance contracts and pooling arrangements, and deferred
acquisition costs.
Prepaid pension benefit cost represents the cumulative excess of pension fund contributions over pension benefit expense.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 125
Note 13 Deposits
The following table details our deposit liabilities as at October 31, 2006 and 2005.
Personal
Business and government (4)
Bank
Non-interest bearing
Canada
United States
Other International
Interest-bearing
Canada (4)
United States
Other International
Demand (1)
Notice (2)
Term (3)
Total
2006
2005
Total
$ 13,805
58,444
6,380
$ 32,969
15,158
128
$ 67,266
115,538
33,835
$ 114,040
189,140
40,343
$ 111,618
160,593
34,649
$ 78,629
$ 48,255
$ 216,639
$ 343,523
$ 306,860
$ 19,088
2,293
1,241
$ 17,729
3,799
908
174,170
50,123
96,608
167,243
41,399
75,782
$ 343,523
$ 306,860
(1)
(2)
(3)
(4)
Deposits payable on demand include all deposits for which we do not have the right to notice of withdrawal. These deposits are primarily chequing accounts.
Deposits payable after notice include all deposits for which we can legally require notice of withdrawal. These deposits are primarily savings accounts.
Term deposits include deposits payable on a fixed date. These deposits include term deposits, guaranteed investment certificates and similar instruments. At October 31, 2006, the balance
of term deposits also includes senior deposit notes we have issued to provide long-term funding of $33.4 billion (2005 – $24.0 billion) and other notes and similar instruments in bearer form of
$30.2 billion (2005 – $24.9 billion).
The senior deposit note of $900 million issued to Trust II (refer to Note 17) is included in Business and government deposits. This senior deposit note bears interest at an annual rate of 5.812%
and will mature on December 31, 2053. The note is redeemable at our option, in whole or in part, on and after December 31, 2008, subject to the approval of the OSFI. It may be redeemed earlier, at
our option in certain specified circumstances, subject to the approval of the OSFI. Each $1,000 of the note principal is convertible at any time into 40 of our Non-cumulative redeemable
First Preferred Shares Series U at the option of Trust II. Trust II will exercise this conversion right in circumstances in which holders of RBC Trust Capital Securities Series 2013 (RBC TruCS 2013)
exercise their exchange right. Refer to Note 17 for more information on RBC TruCS 2013.
The contractual maturities of the term deposits are as follows:
Term deposits (1)
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
2006
$ 167,252
21,907
7,716
6,170
9,145
4,449
$ 216,639
(1)
The aggregate amount of term deposits in denominations of $100,000 or more as at October 31, 2006 was $175 billion.
The following table presents the average deposit balances and average rate of interest paid during 2006 and 2005:
Average deposit balances and rates
Canada
United States
Other International
Average balances
2006
2005
$ 183,085
48,272
91,942
$ 176,665
40,497
71,035
$ 323,299
$ 288,197
Average rate
2006
2.74%
4.18
3.99
3.31%
2005
2.11%
2.59
3.06
2.41%
Royal Bank of Canada Annual Report 2006
126 Consolidated Financial Statements
Note 14 Insurance
Insurance claims and policy benefit liabilities
Life and health
Property and casualty
Reinsurance
Total
Future policy benefit liabilities
Claims liabilities
Total
2006
6,655
386
296
7,337
6,605
732
$
$
$
2005
6,414
316
387
7,117
6,360
757
7,337
$
7,117
$
$
$
$
The increase in Insurance claims and policy benefit liabilities over the
prior year is comprised of a net increase in life and health and property
and casualty reserves attributable to business growth, and a net
decrease in our reinsurance reserves reflecting claim payments related
to hurricanes Katrina, Rita and Wilma.
Furthermore, as a result of a review of various actuarial assump-
tions and the completion of certain actuarial experience studies, we
recorded a net decrease of $15 million of life and health insurance
reserves. All changes collectively resulted in a $75 million net decrease
in health reserve, largely offset by a net increase in life and annuity
reserves of $60 million. This was predominantly driven by the impact of
changes to interest rate assumptions which shifted the liability by line
of business, investment portfolio changes, decreases in long-term
interest rates, the introduction of the new actuarial standard of practice
for interest rates and other minor assumption changes.
The changes in the insurance claims and policy benefit liabilities
are included in Insurance policyholder benefits, claims and acquisition
expense in the Consolidated Statements of Income in the period in
which the estimates changed.
Reinsurance
In the ordinary course of business, our insurance operations reinsure
risks to other insurance and reinsurance companies in order to provide
greater diversification, limit loss exposure to large risks, and pro-
vide additional capacity for future growth. These ceding reinsurance
arrangements do not relieve our insurance subsidiaries from their direct
obligation to the insureds. We evaluate the financial condition of the
reinsurers and monitor our concentrations of credit risks to minimize our
exposure to losses from reinsurer insolvency.
Reinsurance recoverables related to property and casualty insur-
ance business, which are included in Other assets, include amounts
related to paid benefits and unpaid claims. Reinsurance recoverables
related to life insurance business are included in Insurance claims and
policy benefit liabilities to offset the related liabilities.
Reinsurance amounts included in Non-interest income for the years
ended October 31 are shown in the table below:
Net premiums
Gross premiums
Ceded premiums
Note 15 Other liabilities
Short-term borrowings of subsidiaries
Payable to brokers, dealers and clients
Accrued interest payable
Accrued pension and other post-employment benefit expense (1) (refer to Note 20)
Insurance-related liabilities
Dividends payable
Other
2006
3,405
(810)
$
2005
3,329
(765)
$
2004
2,956
(574)
2,595
$
2,564
$
2,382
$
$
$
2006
$
3,929
3,382
2,556
1,250
491
526
10,515
2005
3,309
3,161
1,827
1,195
485
424
8,007
$ 22,649
$ 18,408
(1)
Accrued pension and other post-employment benefit expense represents the cumulative excess of pension and other post-employment benefit expense over pension and other post-employment
fund contributions.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 127
Note 16 Subordinated debentures
The debentures are unsecured obligations and are subordinated in right
of payment to the claims of depositors and certain other creditors.
All redemptions, cancellations and exchanges of subordinated deben-
tures are subject to the consent and approval of the OSFI.
On August 25, 2006, we announced our intention to redeem
all of our outstanding US$400 million subordinated debentures due
November 8, 2011 at par value plus accrued interest. The redemption
was completed on November 8, 2006.
Maturity
March 15, 2009
February 13, 2011
April 26, 2011
September 12, 2011
October 24, 2011
November 8, 2011
June 4, 2012
January 22, 2013
January 27, 2014
June 1, 2014
November 14, 2014
January 25, 2015
June 24, 2015
April 12, 2016
November 4, 2018
June 8, 2023
October 1, 2083
June 6, 2085
June 18, 2103
Earliest par value redemption date
February 13, 2006
April 26, 2006
September 12, 2006
October 24, 2006
November 8, 2006
June 4, 2007
January 22, 2008
January 27, 2009
June 1, 2009
(1)
(1)
(1)
(1)
(2)
(4)
(6)
(7)
(8)
January 25, 2010
(9)
June 24, 2010
(7)
April 12, 2011 (10)
November 4, 2013 (11)
Interest
rate
6.50%
5.50%
8.20%
6.50%
6.75%
6.75%
6.10%
3.96%
4.18%
10.00%
7.10%
3.70%
6.30%
5.45%
9.30%
(3)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
Denominated in
foreign currency
2006
US$125
$
US$300
US$400
$
140
–
–
–
–
449
483
497
493
997
200
495
791
400
985
110
224
239
600
2005
148
124
99
350
345
473
500
500
498
1,000
200
500
800
400
1,000
110
246
274
600
(12)
(12)
June 18, 2009 (15)
(13)
(14)
5.95% (16)
US$213
$
7,103
$
8,167
(10) Redeemable at any time prior to the earliest par value redemption date
at the greater of (i) the fair value of the subordinated debentures based
on the yield on Government of Canada bonds plus 22 basis points and
(ii) par value, and thereafter at any time at par value.
(11) Redeemable at any time prior to the earliest par value redemption date
at the greater of (i) the fair value of the subordinated debentures based
on the yield on Government of Canada bonds plus 14 basis points and
(ii) par value, and thereafter at any time at par value.
(12) Redeemable on any interest payment date at par value.
(13) Interest at a rate of 40 basis points above the 30-day Bankers’
Acceptance rate.
(14) Interest at a rate of 25 basis points above the U.S. dollar 3-month
LIMEAN. In the event of a reduction of the annual dividend we
declare on our common shares, the interest payable on the debentures
is reduced pro rata to the dividend reduction and the interest
reduction is payable with the proceeds from the sale of newly issued
common shares.
(15) Redeemable on June 18, 2009, or every fifth anniversary of such date
at par value. Redeemable on any other date at the greater of par value
and the yield on a non-callable Government of Canada bond plus .21%
if redeemed prior to June 18, 2014, or .43% if redeemed at any time
after June 18, 2014.
(16) Interest at a rate of 5.95% until the earliest par value redemption date
and every 5 years thereafter at the 5-year Government of Canada bond
yield plus 1.72%.
The terms and conditions of the debentures are as follows:
(1) Redeemed on the earliest par value redemption date at par value.
(2) Redeemable on the earliest par value redemption date at par value.
(3)
Interest at a rate of 50 basis points above the U.S. dollar 3-month
LIBOR until earliest par value redemption date, and thereafter at a rate
of 1.50% above the U.S. dollar 3-month LIBOR.
(4) Redeemable at any time prior to the earliest par value redemption date
at the greater of (i) the fair value of the subordinated debentures based
on the yield on Government of Canada bonds plus 5 basis points and
(ii) par value, and thereafter at any time at par value.
Interest at stated interest rate until earliest par value redemption
date, and thereafter at a rate of 1.00% above the 90-day Bankers’
Acceptance rate.
(5)
(6) Redeemable at any time prior to the earliest par value redemption date
at the greater of (i) the fair value of the subordinated debentures based
on the yield on Government of Canada bonds plus 18 basis points and
(ii) par value, and thereafter at any time at par value.
(7) Redeemable at any time prior to the earliest par value redemption date
at the greater of (i) the fair value of the subordinated debentures based
on the yield on Government of Canada bonds plus 8 basis points and
(ii) par value, and thereafter at any time at par value.
(8) Redeemable at any time prior to the earliest par value redemption date
at the greater of (i) the fair value of the subordinated debentures based
on the yield on Government of Canada bonds plus 9 basis points and
(ii) par value, and thereafter at any time at par value.
(9) Redeemable at any time prior to the earliest par value redemption date
at the greater of (i) the fair value of the subordinated debentures based
on the yield on Government of Canada bonds plus 12.5 basis points
and (ii) par value, and thereafter at any time at par value.
Maturity schedule
The aggregate maturities of subordinated debentures, based on the
maturity dates under the terms of issue, are as follows:
At October 31, 2006
1 to 5 years
5 to 10 years
Thereafter
Royal Bank of Canada Annual Report 2006
128 Consolidated Financial Statements
Total
$
140
4,789
2,174
$ 7,103
Note 17 Trust capital securities
We issue innovative capital instruments, RBC Trust Capital Securities
(TruCS), through two SPEs: RBC Capital Trust (Trust) and RBC Capital
Trust II (Trust II).
In prior years, we issued non-voting RBC Trust Capital Securities
Series 2010 and 2011 (RBC TruCS 2010 and 2011) through our consoli-
dated subsidiary RBC Capital Trust, a closed-end trust established under
the laws of the Province of Ontario. RBC TruCS 2010 and 2011 are classi-
fied as Trust capital securities. The proceeds of the RBC TruCS 2010 and
2011 were used to fund the Trust’s acquisition of trust assets. Holders
of RBC TruCS 2010 and 2011 are eligible to receive semi-annual
non-cumulative fixed cash distributions.
In 2005, we issued another series of non-voting trust capital securi-
ties, RBC Trust Capital Securities Series 2015 (RBC TruCS 2015), through
the Trust. Unlike the RBC TruCS 2010 and 2011, the holders of these
instruments do not have any conversion rights or any other redemption
rights. As a result, upon consolidation of the Trust, RBC TruCS 2015 are
classified as Non-controlling interest in subsidiaries (refer to Note 19).
Holders of RBC TruCS 2015 are eligible to receive semi-annual non-
cumulative fixed cash distributions until December 31, 2015 and a
floating rate cash distribution thereafter.
Trust II, an open-end trust, has issued non-voting RBC TruCS 2013,
the proceeds of which were used to purchase a senior deposit note from
us. Trust II is a VIE under AcG-15 (refer to Note 6). We do not consolidate
Trust II as we are not the Primary Beneficiary; therefore, the RBC TruCS
2013 issued by Trust II are not reported on our Consolidated Balance
Sheets, but the senior deposit note is reported in Deposits (refer to
Note 13). Holders of RBC TruCS 2013 are eligible to receive semi-annual
non-cumulative fixed cash distributions.
No cash distributions will be payable by the trusts on TruCS if we
fail to declare regular dividends (i) on our preferred shares, or (ii) on
our common shares if no preferred shares are then outstanding. In this
case, the net distributable funds of the trusts will be distributed to us as
holders of residual interest in the trusts. Should the trusts fail to pay the
semi-annual distributions in full, we will not declare dividends of any kind
on any of our preferred or common shares for a specified period of time.
The table below presents our outstanding TruCS as at October 31,
2006 and 2005:
Issuer
Issuance date
Distribution dates
Redemption date
Conversion date
Annual
yield
At the option of
the issuer
At the option
of the holder
2006
Principal
amount
2005
Principal
amount
RBC Capital Trust (1), (2), (3), (4), (5), (6), (7)
Included in Trust capital securities
650,000 Trust Capital Securities –
Series 2010
750,000 Trust Capital Securities –
Series 2011
Included in Non-controlling interest
in subsidiaries
1,200,000 Trust Capital Securities –
Series 2015
RBC Capital Trust II (2), (3), (4), (5), (6), (7), (9)
900,000 Trust Capital Securities –
Series 2013
July 24, 2000
June 30, December 31
7.288%
December 31, 2005
December 31, 2010
December 6, 2000
June 30, December 31
7.183%
December 31, 2005
December 31, 2011
$
$
650
750
$
$
650
750
$ 1,400
$ 1,400
October 28, 2005
June 30, December 31
4.87% (8)
December 31, 2010
Holder does not
have conversion
option
$ 1,200
$ 1,200
$ 2,600
$ 2,600
July 23, 2003
June 30, December 31
5.812%
December 31, 2008
Any time
$
900
$
900
The significant terms and conditions of the TruCS are as follows:
(1) Subject to the approval of the OSFI, the Trust may, in whole (but not in
part), on the Redemption date specified above, and on any Distribution
date thereafter, redeem the RBC TruCS 2010, 2011 and 2015 without
the consent of the holders.
(2) Subject to the approval of the OSFI, upon occurrence of a special event
as defined, prior to the Redemption date specified above, the trusts
may redeem all, but not part of, RBC TruCS 2010, 2011, 2013 or 2015
without the consent of the holders.
(3) The RBC TruCS 2010 and 2011 may be redeemed for cash equivalent
to (i) the Early Redemption Price if the redemption occurs earlier than
six months prior to the conversion date specified above or (ii) the
Redemption Price if the redemption occurs on or after the date that is
six months prior to the conversion date as indicated above. The RBC
TruCS 2013 and 2015 may be redeemed for cash equivalent to (i) the
Early Redemption Price if the redemption occurs prior to December 31,
2013 and 2015, respectively, or (ii) the Redemption Price if the redemp-
tion occurs on or after December 31, 2013 and 2015, respectively.
Redemption Price refers to an amount equal to $1,000 plus the unpaid
distributions to the Redemption date. Early Redemption Price refers to
an amount equal to the greater of (i) the Redemption Price and
(ii) the price calculated to provide an annual yield, equal to the yield on
a Government of Canada bond issued on the Redemption date with a
maturity date of June 30, 2010 and 2011, plus 33 basis points and
40 basis points, for RBC TruCS 2010 and 2011, respectively, and a
maturity date of December 31, 2013 and 2015, plus 23 basis points
and 19.5 basis points, for RBC TruCS 2013 and 2015, respectively.
(4) Each RBC TruCS 2010, 2011, 2013 and 2015 will be exchanged automat-
ically without the consent of the holders for 40 of our non-cumulative
redeemable First Preferred Shares Series Q, R, T and Z, respectively,
upon occurrence of any one of the following events: (i) proceedings
are commenced for the winding-up of the bank; (ii) the OSFI takes
control of the bank; (iii) the bank has Tier 1 capital ratio of less than 5%
or Total capital ratio of less than 8%; or (iv) the OSFI has directed the
bank to increase its capital or provide additional liquidity and the bank
elects such automatic exchange or the bank fails to comply with such
direction. The First Preferred Shares Series T and Z pay semi-annual
non-cumulative cash dividends and Series T is convertible at the option
of the holder into a variable number of common shares.
(5) From time to time, we purchase some of the innovative capital instru-
ments and hold them on a temporary basis. As at October 31, 2006, we
held $17 million of RBC TruCS 2011 (2005 – $nil), $12 million of RBC
TruCS 2015 (2005 – $nil) and $nil of RBC TruCS 2013 (2005 – $2 million)
as treasury holdings which were deducted from regulatory capital.
(6) According to the OSFI guidelines, innovative capital instruments can
comprise up to 15% of net Tier 1 capital with an additional 3% eligible
for Tier 2B capital. Any amount in excess of the 18% limitation is not
recognized for regulatory capital purposes. As at October 31, 2006,
$3,222 million (2005 – $2,835 million) represents Tier 1 capital,
$249 million (2005 – $567 million) represents Tier 2B capital and
$29 million (2005 – $2 million) of our treasury holdings of innovative
capital is deducted for regulatory capital purposes. As at October 31,
2006, none of our innovative capital instruments exceeds the OSFI’s
limit of 18% (2005 – $96 million).
(7) Holders of RBC TruCS 2010 and 2011 may exchange, on any
Distribution date on or after the conversion date specified above,
RBC TruCS 2010 and 2011 for 40 non-cumulative redeemable bank
First Preferred Shares, Series Q and Series R, respectively. Holders of
RBC TruCS 2013 may, at any time, exchange all or part of their holdings
for 40 non-cumulative redeemable First Preferred Shares Series U,
for each RBC TruCS 2013 held. The First Preferred Shares Series Q, R
and U pay semi-annual non-cumulative cash dividends as and when
declared by our Board of Directors and are convertible at the option
of the holder into a variable number of common shares. Holders of
RBC TruCS 2015 do not have similar exchange rights.
(8) The non-cumulative cash distribution on the RBC TruCS 2015 will be
4.87% paid semi-annually until December 31, 2015, and at one-half of
the sum of the 180-day bankers’ acceptance rate plus 1.5% thereafter.
(9) Subject to the approval of the OSFI, Trust II may, in whole or in part,
on the Redemption date specified above, and on any Distribution
date thereafter, redeem any outstanding RBC TruCS 2013 without
the consent of the holders.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 129
Note 18 Preferred share liabilities and share capital
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second
Preferred Shares without nominal or par value, issuable in series; the
aggregate consideration for which all the First Preferred Shares and all
the Second Preferred Shares that may be issued may not exceed
$20 billion and $5 billion, respectively.
Issued and outstanding shares (1)
Common – An unlimited number of shares without nominal or par value
may be issued.
Number
of shares
(000s)
2006
Amount
Dividends
declared
per share
Number
of shares
(000s)
2005
Amount
Dividends
declared
per share
Number
of shares
(000s)
2004
Amount
Dividends
declared
per share
Preferred share liabilities
First preferred
Non-cumulative Series N
Treasury shares – purchases (2)
12,000 $
(84)
300 $
(2)
1.18
12,000 $
–
300 $
–
1.18
12,000 $
–
300 $
–
1.18
Preferred share liabilities, net of treasury holdings
11,916 $
298
12,000 $
300
12,000 $
300
Preferred shares
First preferred
Non-cumulative Series O
US$ Non-cumulative Series P (3)
Non-cumulative Series S (4)
Non-cumulative Series W (5)
Non-cumulative Series AA (6)
Non-cumulative Series AB (7)
Common shares
Balance at beginning of year
Issued under the stock option plan (8)
Purchased for cancellation
6,000 $
–
–
12,000
12,000
12,000
150 $
–
–
300
300
300
1.38
–
1.33
1.23
.71
.41
6,000 $
–
10,000
12,000
–
–
150 $
–
250
300
–
–
1.38
US 1.26
1.53
.99
–
–
6,000 $
4,000
10,000
–
–
–
150 $
132
250
–
–
–
1.38
US 1.44
1.53
–
–
–
$
1,050
$
700
$
532
1,293,502 $
5,617
(18,229)
7,170
127
(101)
1,289,496 $
9,917
(5,911)
6,988
214
(32)
1,312,042 $
6,657
(29,203)
7,018
127
(157)
Balance at end of year
1,280,890 $
7,196 $
1.44
1,293,502 $
7,170 $
1.18
1,289,496 $
6,988 $
1.01
Treasury shares – Preferred shares
Balance at beginning of year
Sales
Purchases
Balance at end of year
Treasury shares – Common shares
Balance at beginning of year
Sales
Purchases
Initial adoption of AcG-15
Reclassified amounts
Balance at end of year
(91) $
2,082
(2,085)
(94) $
(7,053) $
5,097
(3,530)
–
–
(5,486) $
(2)
51
(51)
(2)
(216)
193
(157)
–
–
(180)
– $
–
(91)
(91) $
(9,726) $
5,904
(1,326)
(1,905)
–
(7,053) $
–
–
(2)
(2)
(294)
179
(47)
(54)
–
(216)
– $
–
–
– $
– $
7,550
(7,376)
–
(9,900)
(9,726) $
–
–
–
–
–
248
(238)
–
(304)
(294)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
On April 6, 2006, we paid a stock dividend of one common share on each of our issued and outstanding common shares. The effect is the same as a two-for-one share split. We have retroactively
adjusted the number of common shares and dividends declared per share for the stock dividend.
There was no sale of Preferred share liabilities – First preferred treasury shares during 2006, 2005 and 2004.
On October 7, 2005, we redeemed Non-cumulative First Preferred Shares Series P.
On October 6, 2006, we redeemed Non-cumulative First Preferred Shares Series S. The excess of the redemption price over the carrying value of $10 million was charged to Retained earnings in
Preferred share dividends.
On January 31, 2005, we issued 12 million Non-cumulative First Preferred Shares Series W at $25 per share.
On April 4, 2006, we issued 12 million Non-cumulative First Preferred Shares Series AA at $25 per share.
On July 20, 2006, we issued 12 million Non-cumulative First Preferred Shares Series AB at $25 per share.
Includes the exercise of stock options from tandem stock appreciation rights (SARs) awards, resulting in a reversal of the accrued liability, net of related income taxes, of $8 million (2005 –
$10 million; 2004 – $5 million) and from renounced tandem SARs, net of related income taxes, of $2 million (2005 – $7 million; 2004 – $3 million).
Terms of preferred share liabilities and preferred shares
Preferred share liabilities
First preferred
Non-cumulative Series N
Preferred shares
First preferred
Non-cumulative Series O
Non-cumulative Series W
Non-cumulative Series AA
Non-cumulative Series AB
Dividend
per share (1)
Redemption
date (2)
Redemption
price (2), (3)
At the option of
the bank (2), (4)
At the option of
the holder (5)
Conversion date
$
$
.293750
August 24, 2003
.343750
.306250
.278125
.293750
August 24, 2004
February 24, 2010
May 24, 2011
August 24, 2011
$
$
25.25
August 24, 2003
August 24, 2008
25.50
26.00
26.00
26.00
August 24, 2004
February 24, 2010
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
(1) Non-cumulative preferential dividends on Series N, O, W, AA and AB
are payable quarterly, as and when declared by the Board of Directors,
on or about the 24th day of February, May, August and November.
(2) The redemption price represents the price as at October 31, 2006 or
the contractual redemption price, whichever is applicable. Subject to
the consent of the OSFI and the requirements of the Act, we may, on or
after the dates specified above, redeem First Preferred Shares. These
may be redeemed for cash, in the case of Series N at a price per share of
$26, if redeemed during the 12 months commencing August 24, 2003,
and decreasing by $.25 each 12-month period thereafter to a price per
share of $25 if redeemed on or after August 24, 2007; and in the case of
Series O, at a price per share of $26, if redeemed during the 12 months
commencing August 24, 2004, and decreasing by $.25 each 12-month
period thereafter to a price per share of $25 if redeemed on or after
August 24, 2008; and in the case of Series W, at a price per share of $26,
if redeemed during the 12 months commencing February 24, 2010, and
decreasing by $.25 each 12-month period thereafter to a price per share
of $25 if redeemed on or after February 24, 2014; and in the case of
Series AA, at a price per share of $26, if redeemed during the 12 months
commencing May 24, 2011, and decreasing by $.25 each 12-month
period thereafter to a price per share of $25 if redeemed on or after
Royal Bank of Canada Annual Report 2006
130 Consolidated Financial Statements
May 24, 2015; and in the case of Series AB, at a price per share of $26,
if redeemed during the 12 months commencing August 24, 2011, and
decreasing by $.25 each 12-month period thereafter to a price per share
of $25 if redeemed on or after August 24, 2015.
(3) Subject to the consent of the OSFI and the requirements of the Act, we
may purchase First Preferred Shares Series N, O, W, AA and AB for cancel-
lation at the lowest price or prices at which, in the opinion of the Board of
Directors, such shares are obtainable.
(4) Subject to the approval of the Toronto Stock Exchange, we may, on or
after the dates specified above, convert First Preferred Shares Series N,
O and W into our common shares. First Preferred Shares may be con-
verted into that number of common shares determined by dividing the
then-applicable redemption price by the greater of $2.50 and 95% of
the weighted average trading price of common shares at such time.
(5) Subject to our right to redeem or to find substitute purchasers, the
holder may, on or after the dates specified above, convert First Preferred
Shares into our common shares. Series N may be converted, quarterly,
into that number of common shares determined by dividing the then-
applicable redemption price by the greater of $2.50 and 95% of the
weighted average trading price of common shares at such time.
Restrictions on the payment of dividends
We are prohibited by the Act from declaring any dividends on our
preferred or common shares when we are, or would be placed as a
result of the declaration, in contravention of the capital adequacy and
liquidity regulations or any regulatory directives issued under the Act.
We may not pay dividends on our common shares at any time unless all
dividends to which preferred shareholders are then entitled have been
declared and paid or set apart for payment.
In addition, we may not declare or pay a dividend without the
approval of the OSFI if, on the day the dividend is declared, the total of
all dividends in that year would exceed the aggregate of our net income
up to that day and of our retained net income for the preceding two years.
We have agreed that if RBC Capital Trust or RBC Capital Trust II
fail to pay any required distribution on the trust capital securities in full,
we will not declare dividends of any kind on any of our preferred or
common shares. Refer to Note 17.
Currently, these limitations do not restrict the payment of
dividends on our preferred or common shares.
We have also agreed that if, on any day we report financial results
for a fiscal quarter, (i) we report a cumulative consolidated net loss for
the immediately preceding four quarters; and (ii) during the immediately
preceding fiscal quarter we fail to declare any cash dividends on all of
our outstanding preferred and common shares, we may defer payments
of interest on the Series 2014-1 Reset Subordinated Notes (mature
on June 18, 2103). During any period while interest is being deferred,
(i) interest will accrue on these notes but will not compound; (ii) we may
not declare or pay dividends (except by way of stock dividend) on, or
redeem or repurchase, any of our preferred or common shares; and
(iii) we may not make any payment of interest, principal or premium
on any debt securities or indebtedness for borrowed money issued or
incurred by us that rank subordinate to these notes.
Regulatory capital
We are subject to the regulatory capital requirements defined by the
OSFI. Two measures of capital strength established by the OSFI are
risk-adjusted capital ratios based on standards issued by the Bank for
International Settlements and the assets-to-capital multiple.
The OSFI requires Canadian banks to maintain a minimum Tier 1
and Total capital ratio of 4% and 8%, respectively. However, the OSFI has
also formally established risk-based capital targets for deposit-taking
institutions in Canada. These targets are a Tier 1 capital ratio of 7% and
a Total capital ratio of 10%. At October 31, 2006, our Tier 1 and Total
capital ratios were 9.6% and 11.9%, respectively (2005 – 9.6% and
13.1%, respectively).
At October 31, 2006, our assets-to-capital multiple was 19.7 times
(2005 – 17.6 times), which remains below the maximum permitted by
the OSFI.
Dividend reinvestment plan
Our dividend reinvestment plan, which was announced on August 27,
2004, provides registered common shareholders with a means to
automatically reinvest the cash dividends paid on their common shares
in the purchase of additional common shares. The plan is only open to
shareholders residing in Canada or the United States.
Management has the flexibility to fund the plan through open
market share purchases or treasury issuances.
Shares available for future issue
As at October 31, 2006, 42.2 million common shares are available for
future issue relating to our dividend reinvestment plan and potential
exercise of stock options outstanding.
Other
On October 19, 2006, we announced our intention to redeem all of our
issued and outstanding 6 million Non-cumulative First Preferred Shares
Series O at $25.50 per share including a $.50 redemption premium.
The redemption was completed on November 24, 2006.
We also announced on October 23, 2006, our intention to issue
8 million Non-cumulative First Preferred Shares Series AC at $25 per
share, for total proceeds of $200 million. This issuance was completed
on November 1, 2006.
Normal course issuer bid
Details of common shares repurchased under normal course issuer bids
(NCIB) during 2006, 2005 and 2004 are given below.
NCIB period
June 26, 2006 – October 31, 2006
June 24, 2005 – June 23, 2006
NCIB period
June 24, 2005 – June 23, 2006
June 24, 2004 – June 23, 2005
June 24, 2003 – June 23, 2004
Pre-stock dividend
Post-stock dividend
Total
2006
Number of
shares eligible
for repurchase
(000s)
Number of
shares
repurchased
(000s)
Average
cost
per share
Number of
shares
repurchased
(000s)
Average
cost
per share
Amount
Amount
7,000
10,000
–
4,387
$
–
90.48
4,387
$
90.48
$
$
–
397
397
6,595
2,859
$
47.12
47.52
9,454
$
47.24
$
$
311
136
447
$
$
311
533
844
Number of shares
eligible for
repurchase
(000s)
Number of
shares
repurchased
(000s)
2005 (1)
Average
cost
per share
10,000
25,000
25,000
1,950
1,005
–
$
83.50
63.24
–
Number of
shares
repurchased
(000s)
2004 (1)
Average
cost
per share
–
6,412
8,189
$
–
60.56
61.54
$
Amount
163
63
–
$
Amount
–
388
504
2,955
$
76.61
$
226
14,601
$
61.11
$
892
(1)
The 2005 and 2004 number of shares and average cost per share are pre-stock dividend.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 131
Note 19 Non-controlling interest in subsidiaries
RBC Trust Capital Securities Series 2015
Consolidated VIEs
Others
$
2006
1,207
506
62
$
2005
1,200
703
41
$
1,775
$
1,944
We consolidate VIEs in which we are the Primary Beneficiary. These VIEs
include structured finance VIEs, investment funds, credit investment
product VIEs and compensation vehicles as described in Note 6.
We issued RBC TruCS 2015 in 2005 which are reported as Non-
controlling interest in subsidiaries upon consolidation. Refer to Note 17.
As at October 31, 2006, $19 million (2005 – nil) of accrued interest net
of $12 million (2005 – nil) of treasury holdings was included in RBC Trust
Capital Securities Series 2015.
Note 20 Pensions and other post-employment benefits
We offer a number of defined benefit and defined contribution plans,
which provide pension and post-employment benefits to eligible
employees. Our defined benefit pension plans provide benefits based
on years of service, contributions and average earnings at retirement.
Our other post-employment benefit plans include health, dental, disabil-
ity and life insurance coverage.
During the year, we announced changes to our post-retirement
benefit program in Canada which will be effective for eligible employees
who retire on or after January 1, 2010. The new post-retirement program
provides for the allotment of a fixed annual credit to eligible retirees
which will be calculated based on the number of years of eligible service
provided. The credit can be used toward the purchase of health and
dental coverage after retirement. As a result of these changes, our ben-
efit obligations have been reduced by $505 million.
Plan assets, benefit obligation and funded status
We fund our registered defined benefit pension plans in accordance
with actuarially determined amounts required to satisfy employee ben-
efit entitlements under current pension regulations. For our principal
pension plans, the most recent actuarial valuation performed for funding
purposes was completed on January 1, 2006. The next actuarial valua-
tion for funding purposes will be completed on January 1, 2007.
For 2006, our total contributions to pension and other post-
employment benefit plans were $594 million and $58 million
(2005 – $248 million and $56 million), respectively. For 2007, total con-
tributions to defined benefit pension plans and other post-employment
benefit plans are expected to be approximately $160 million and
$60 million, respectively.
For financial reporting purposes, we measure our benefit
obligations and pension plan assets as at September 30 each year.
The following tables present financial information related to our
pension and other post-employment plans:
Change in fair value of plan assets
Opening fair value of plan assets
Actual return on plan assets
Company contributions
Plan participant contributions
Benefits paid
Business acquisitions
Other
Change in foreign currency exchange rate
Closing fair value of plan assets
Change in benefit obligation
Opening benefit obligation
Service cost
Interest cost
Plan participant contributions
Actuarial loss
Benefits paid
Plan amendments and curtailments
Business acquisitions
Other
Change in foreign currency exchange rate
Closing benefit obligation
Funded status
Excess of benefit obligation over plan assets
Unrecognized net actuarial loss
Unrecognized transitional (asset) obligation
Unrecognized prior service cost
Contributions between September 30 and October 31
Prepaid asset (accrued liability) as at October 31
Amounts recognized in the Consolidated Balance Sheets consist of:
Other assets
Other liabilities
Net amount recognized as at October 31
Weighted average assumptions to calculate benefit obligation
Discount rate
Rate of increase in future compensation
$
$
$
$
$
$
$
$
Pension plans (1)
2006
2005
Other post-employment plans (2)
2005
2006
5,719
445
518
24
(323)
21
2
1
6,407
6,524
173
345
24
38
(323)
24
31
5
(3)
6,838
(431)
963
(12)
131
14
665
761
(96)
665
$
$
$
$
$
$
$
$
5,067
751
179
24
(295)
–
18
(25)
5,719
5,503
138
344
24
798
(295)
1
–
49
(38)
6,524
(805)
1,127
(14)
136
3
447
540
(93)
447
$
$
$
$
$
$
$
$
5.25%
4.40%
5.25%
4.40%
$
$
$
$
$
$
$
$
29
3
59
6
(56)
–
–
–
41
1,891
26
77
6
38
(56)
(515)
5
–
(4)
1,468
(1,427)
598
(330)
1
4
(1,154)
–
(1,154)
(1,154)
5.26%
4.40%
31
4
55
3
(64)
–
–
–
29
1,620
49
101
3
180
(64)
(1)
–
6
(3)
1,891
(1,862)
604
140
11
5
(1,102)
–
(1,102)
(1,102)
5.41%
4.40%
(1)
(2)
For pension plans with funding deficits, the benefit obligations and fair values of plan assets totalled $6,156 million (2005 – $5,872 million) and $5,665 million (2005 – $5,026 million), respectively.
For our other post-employment plans, the assumed health care cost trend rates for the next year used to measure the expected cost of benefits covered by the post-employment health and life
plans were 7.8% for medical decreasing to an ultimate rate of 4.9% in 2015 and 4.5% for dental.
Royal Bank of Canada Annual Report 2006
132 Consolidated Financial Statements
Benefit payment projection
The following table presents our estimates of the benefit payments for defined benefit pension and other post-employment plans.
Benefits payment projection
2007
2008
2009
2010
2011
2012–2016
Other
post-employment
plans
Pension plans
$
$
327
324
351
363
369
2,017
63
66
74
79
83
475
Composition of defined benefit pension plan assets
The defined benefit pension plan assets are primarily composed of
equity and fixed income securities. The equity securities include
1.9 million (2005 – 1.7 million, adjusted for stock dividend) of our com-
mon shares having a fair value of $94 million (2005 – $70 million).
Dividends amounting to $2.5 million (2005 – $1.6 million) were received
on our common shares held in the plan assets during the year.
The following table presents the allocation of the plan assets by
securities category:
Asset category
Equity securities
Debt securities
Total
Actual
2006
60%
40%
100%
2005
60%
40%
100%
Investment policy and strategies
Pension plan assets are invested prudently over the long term in order
to meet pension obligations at a reasonable cost. The asset mix policy
takes into consideration a number of factors including the following:
(i)
Investment characteristics including expected returns, volatilities
and correlations between plan assets and plan liabilities;
(ii) The plan’s tolerance for risk, which dictates the trade-off between
increased short-term volatility and enhanced long-term expected
returns;
(iii) Diversification of plan assets to minimize the risk of losses;
(iv) The liquidity of the portfolio relative to the anticipated cash flow
requirements of the plan; and
(v) Actuarial factors such as membership demographics and future
salary growth rates.
Pension and other post-employment benefit expense
The following tables present the composition of our pension benefit and other post-employment benefit expense:
Pension benefit expense
Service cost
Interest cost
Expected return on plan assets
Amortization of transitional asset
Amortization of prior service cost
Amortization of actuarial loss
Other
Defined benefit pension expense
Defined contribution pension expense
Pension benefit expense
Weighted average assumptions to calculate pension benefit expense
Discount rate
Assumed long-term rate of return on plan assets
Rate of increase in future compensation
Other post-employment benefit expense
Service cost
Interest cost
Expected return on plan assets
Amortization of transitional obligation
Amortization of actuarial loss
Amortization of prior service cost
Curtailment gain
Other post-employment benefit expense
Weighted average assumptions to calculate other post-employment benefit expense
Discount rate
Rate of increase in future compensation
$
$
$
2006
2005
2004
173
345
(364)
(2)
32
138
3
325
65
390
$
$
138
344
(328)
(2)
32
90
3
277
63
340
$
$
136
330
(315)
(2)
32
84
–
265
64
329
5.25%
7.00%
4.40%
6.25%
7.00%
4.40%
6.25%
7.00%
4.40%
2006
2005
2004
$
26
77
(2)
3
31
(20)
(8)
$
49
101
(2)
17
30
1
(1)
72
99
(1)
17
26
1
–
$
107
$
195
$
214
5.41%
4.40%
6.35%
4.40%
6.34%
4.40%
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 133
Note 20 Pensions and other post-employment benefits (continued)
Significant assumptions
Our methodologies to determine significant assumptions used in calcu-
lating the defined benefit pension and other post-employment expense
are as follows:
Overall expected long-term rate of return on assets
The assumed expected rate of return on assets is determined by
considering long-term expected returns on government bonds and a
reasonable assumption for an equity risk premium. The expected long-
term return for each asset class is then weighted based on the target
asset allocation to develop the expected long-term rate of return on
assets assumption for the portfolio. This resulted in the selection of an
assumed expected rate of return of 7% for 2007 (7% for 2003 to 2006).
Discount rate
For the Canadian and U.S. pension and other post-employment plans,
all future expected benefit payment cash flows at each measurement
date are discounted at spot rates developed from a yield curve of AA
corporate debt securities. It is assumed that spot rates beyond 30 years
are equivalent to the 30-year spot rate. The discount rate is selected as
the equivalent level rate that would produce the same discounted value
as that determined by using the applicable spot rates. This methodology
does not rely on assumptions regarding reinvestment rates.
Sensitivity analysis
The following table presents the sensitivity analysis of certain key assumptions on defined benefit pension and post-employment obligation and expense:
2006 Sensitivity of key assumptions
Pension
Impact of .25% change in discount rate assumption
Impact of .25% change in rate of increase in future compensation assumption
Impact of .25% change in the long-term rate of return on plan assets assumption
Other post-employment
Impact of .25% change in discount rate assumption
Impact of .25% change in rate of increase in future compensation assumption
Impact of 1.00% increase in health care cost trend rates
Impact of 1.00% decrease in health care cost trend rates
Change in obligation
Change in expense
$
233
26
–
$
29
6
13
Change in obligation
Change in expense
$
52
–
143
(119)
$
8
–
19
(15)
Reconciliation of defined benefit expense recognized with defined
benefit expense incurred
The cost of pension and other post-employment benefits earned by
employees is actuarially determined using the projected benefit method
pro-rated on services. The cost is computed using the discount rate
determined in accordance with the methodology described in significant
assumptions, and is based on management’s best estimate of expected
plan investment performance, salary escalation, retirement ages of
employees and costs of health, dental, disability and life insurance.
Actuarial gains or losses arise over time due to differences in actual
experience compared to actuarial assumptions. Prior service costs arise
as a result of plan amendments. Adoption of the CICA Handbook Section
3461, Employee Future Benefits, resulted in recognition of a transitional
asset and obligation at the date of adoption.
The actuarial gains or losses, prior service costs and transitional
asset or obligation are amortized over the expected average remaining
service lifetime of active members expected to receive benefits under
the plan. The following tables show the impact on our annual benefit
expense if we had recognized all costs and expenses as they arose.
Defined benefit pension expense incurred
Defined benefit pension expense recognized
Difference between expected and actual return on plan assets
Difference between actuarial losses (gains) amortized and actuarial losses (gains) arising
Difference between prior service costs amortized and prior service costs arising
Amortization of transitional asset
Defined benefit pension expense incurred
Other post-employment benefit expense incurred
Other post-employment benefit expense recognized
Difference between expected and actual return on plan assets
Difference between actuarial losses (gains) amortized and actuarial losses (gains) arising
Difference between prior service costs amortized and prior service costs arising
Amortization of transitional obligation
Other post-employment benefit expense incurred
Note 21 Stock-based compensation
2006
2005
2004
$
$
325
(81)
(100)
(2)
2
$
277
(423)
708
(31)
2
$
144
$
533
$
265
(160)
(50)
(12)
2
45
2006
2005
2004
$
$
107
(1)
7
(485)
(3)
$
195
(2)
150
(1)
(17)
$
(375)
$
325
$
214
(2)
(91)
(1)
(17)
103
We offer stock-based compensation plans to certain key employees
and to our non-employee directors. We use derivatives and compensa-
tion trusts to manage our economic exposure to volatility in the price of
our common shares under many of these plans. The expense amounts
reported below for our stock-based compensation plans exclude the
impact of these derivative instruments. The stock-based compensation
amounts recorded in Non-interest expense – Human resources
in our Consolidated Statements of Income are net of the impact of
these derivatives.
Stock option plans
We have stock option plans for certain key employees and for non-
employee directors. On November 19, 2002, the Board of Directors
discontinued all further grants of options under the non-employee
directors plan. Under the employee plans, options are periodically
granted to purchase common shares at prices not less than the market
price of such shares on the day of grant. The options vest over a 4-year
period for employees and are exercisable for a period not exceeding
10 years from the grant date.
Royal Bank of Canada Annual Report 2006
134 Consolidated Financial Statements
For options issued prior to November 1, 2002, that were not
accompanied by tandem stock appreciation rights (SARs), no compensa-
tion expense was recognized as the option’s exercise price was not less
than the market price of the underlying stock on the day of grant.
When the options are exercised, the proceeds received are credited to
common shares.
Between November 29, 1999, and June 5, 2001, grants of options
under the employee stock option plan were accompanied by tandem
SARs. With tandem SARs, participants could choose to exercise a SAR
instead of the corresponding option. In such cases, the participants
received a cash payment equal to the difference between the closing
price of common shares on the day immediately preceding the day of
exercise and the exercise price of the option. During the last quarter
of 2002 and first quarter of 2003, certain executive participants
voluntarily renounced their SARs while retaining the corresponding
options. SARs obligations are now fully vested and give rise to com-
pensation expense as a result of changes in the market price of our
common shares. The compensation expense for these grants, which
are accompanied by tandem SARs, was $27 million for the year ended
October 31, 2006 (2005 – $42 million; 2004 – $3 million).
A summary of our stock option activity and related information
Outstanding at beginning of year
Granted
Exercised – Common shares (2), (3)
– SARs
Cancelled
Outstanding at end of year
Exercisable at end of year
Available for grant
2006
2005 (1)
2004 (1)
Number
of options
(000s)
Weighted
average
exercise price
Number
of options
(000s)
Weighted
average
exercise price
Number
of options
(000s)
Weighted
average
exercise price
36,481
1,756
(5,617)
(143)
(234)
32,243
26,918
23,121
$
$
$
23.15
44.13
20.40
21.60
24.36
24.66
22.57
44,744
2,054
(9,917)
(320)
(80)
36,481
28,863
24,500
$
$
$
22.02
31.70
19.85
21.01
30.44
23.15
21.56
49,606
2,378
(6,657)
(352)
(231)
44,744
32,801
26,430
$
$
$
21.03
31.32
17.97
20.68
23.93
22.02
20.21
(1)
(2)
(3)
The number of options and weighted average exercise price for 2005 and 2004 have been adjusted for the stock dividend paid on April 6, 2006. Refer to Note 18.
Cash received for options exercised during the year was $115 million (2005 – $197 million; 2004 – $119 million).
New common shares were issued for all options exercised in 2006, 2005 and 2004. Refer to Note 18.
Options outstanding and options exercisable as at October 31, 2006 by range of exercise price
$10.00 – $15.00 (2)
$15.45 – $19.82
$21.79 – $25.00
$26.09 – $29.68
$31.31 – $44.13
Total
Options outstanding (1)
Options exercisable (1)
Number
outstanding
(000s)
Weighted
average
exercise price
$
1,055
9,724
12,176
3,365
5,923
11.60
18.27
24.56
29.01
35.24
32,243
$
24.66
Weighted
average
remaining
contractual life
2.3
2.2
4.3
5.6
7.9
4.4
Number
exercisable
(000s)
Weighted
average
exercise price
$
1,055
9,724
12,176
2,451
1,512
11.60
18.27
24.56
29.00
31.44
26,918
$
22.57
(1)
(2)
The number of options outstanding and options exercisable have been adjusted for the stock dividend paid on April 6, 2006. Refer to Note 18.
The weighted average exercise prices have been revised to reflect the conversion of non-Canadian dollar-denominated options at the exchange rate as at the balance sheet date.
Fair value method
CICA 3870 recommends recognition of an expense for option awards
using the fair value method of accounting. Under this method, the fair
value of an award at the grant date is amortized over the applicable
vesting period and recognized as compensation expense. We adopted
the fair value method of accounting prospectively for new awards
granted after November 1, 2002. The fair value compensation expense
recorded for the year ended October 31, 2006, in respect of these plans
was $13 million (2005 – $14 million; 2004 – $9 million). The compensa-
tion expenses related to non-vested awards were $13 million at
October 31, 2006 (2005 – $16 million; 2004 – $18 million), to be recog-
nized over the weighted average period of 2.0 years (2005 – 1.7 years;
2004 – 2.4 years).
CICA 3870 permits the use of other recognition methods, including
the intrinsic value method, provided pro forma disclosures of net income
and earnings per share calculated in accordance with the fair value
method are presented. For awards granted before November 1, 2002,
pro forma net income and earnings per share are presented in the
following table:
Net income from continuing operations
Net income (loss) from discontinued operations (3)
Net income
Basic earnings (loss) per share (4)
From continuing operations
From discontinued operations
Total
Diluted earnings (loss) per share (4)
From continuing operations
From discontinued operations
Total
2006
4,757
(29)
As reported
2005
$
3,437
(50)
$
2004
3,023
(220)
Pro forma (1), (2)
2005
$
3,424
(50)
$
2004
2,991
(220)
4,728
$
3,387
$
2,803
$
3,374
$
2,771
3.67
(.02)
$
2.65
(.04)
$
2.31
(.17)
$
2.64
(.04)
$
3.65
$
2.61
$
2.14
$
2.60
$
3.61
(.02)
$
2.61
(.04)
$
2.28
(.17)
$
2.60
(.04)
$
3.59
$
2.57
$
2.11
$
2.56
$
2.29
(.17)
2.12
2.26
(.17)
2.09
$
$
$
$
$
$
(1)
(2)
(3)
(4)
Compensation expense under the fair value method is recognized over the vesting period of the related stock options. Accordingly, the pro forma results of applying this method may not be
indicative of future amounts.
During the first quarter of 2006, all awards granted prior to adopting the fair value method of accounting were fully vested and their fair values at the grant dates had been fully amortized;
therefore, there are no pro forma results to disclose for the year ended October 31, 2006.
Refer to Note 11.
The basic and diluted earnings per share have been adjusted retroactively for the stock dividend paid on April 6, 2006. Refer to Note 18.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 135
We offer performance deferred award plans to certain key
employees, all of which vest at the end of three years. Awards under
the plans are deferred in the form of common shares which are held in
trust until they fully vest, or in the form of DSUs. A portion of the award
under some plans can be increased or decreased up to 50%, depending
on our total shareholder return compared to a defined peer group of
North American financial institutions. The value of the award paid will
be equivalent to the original award adjusted for dividends and changes
in the market value of common shares at the time the award vests.
The number of common shares held in trust as at October 31, 2006,
was 5.3 million (2005 – 7.3 million; 2004 – 8.1 million). The value
of the DSUs liability as at October 31, 2006, was $153 million (2005 –
$38 million; 2004 – $1 million). The compensation expense recorded
for the year ended October 31, 2006, in respect of these plans was
$148 million (2005 – $109 million; 2004 – $80 million).
We maintain a non-qualified deferred compensation plan for key
employees in the United States under an arrangement called the
RBC U.S. Wealth Accumulation Plan. This plan allows eligible employees
to make deferrals of a portion of their annual income and allocate the
deferrals among various fund choices, which include a share unit fund
that tracks the value of our common shares. Certain deferrals may also
be eligible for matching contributions, all of which are allocated to the
RBC share unit fund. Our liability for the RBC share units held under the
plan as at October 31, 2006, was $289 million (2005 – $236 million;
2004 – $155 million). The compensation expense recorded for the year
ended October 31, 2006, was $110 million (2005 – $90 million; 2004 –
$56 million). On the acquisition of Dain Rauscher, certain key employees
of Dain Rauscher were offered retention unit awards totalling
$318 million to be paid out evenly over expected service periods of
between three and four years. During fiscal 2005, these retention unit
awards were fully paid out to participants based on the market value of
common shares on the vesting date. The liability under this plan as at
October 31, 2006, was nil (2005 – nil; 2004 – $36 million). The compen-
sation expense recorded for the year ended October 31, 2006, in respect
of this plan was nil (2005 – $1 million; 2004 – $16 million).
Our stock-based compensation plan included a mid-term compen-
sation plan for certain senior executive officers. The last award under
this plan was granted in 2001, which was paid out in 2004.
For other stock-based plans, compensation expense of $10 million
was recognized for the year ended October 31, 2006 (2005 – $8 million;
2004 – $5 million). The liability for the share units held under these
plans as at October 31, 2006, was $4 million (2005 – $19 million; 2004 –
$16 million). The number of common shares held under these plans was
.3 million (2005 – .3 million; 2004 – .4 million).
Note 21 Stock-based compensation (continued)
The fair value of options granted during 2006 was estimated at $6.80
(2005 – $4.66; 2004 – $5.47) using an option pricing model on the date
of grant. The following assumptions were used:
For the year ended October 31
2006
2005
2004
Weighted average assumptions
Risk-free interest rate
Expected dividend yield
Expected share price volatility
Expected life of option
3.98%
3.16%
17%
6 years
3.75%
3.25%
17%
6 years
4.22%
2.90%
18%
6 years
Employee savings and share ownership plans
We offer many employees an opportunity to own our shares through
savings and share ownership plans. Under these plans, the employees
can generally contribute between 1% and 10% of their annual salary
or benefit base for commissioned employees. For each contribution
between 1% and 6%, we will match 50% of the employee contributions
in common shares. For the RBC Dominion Securities Savings Plan, our
maximum annual contribution is $4,500 per employee. For the RBC UK
Share Incentive Plan, our maximum annual contribution is £1,500 per
employee. In 2006, we contributed $60 million (2005 – $56 million;
2004 – $54 million), under the terms of these plans, towards the
purchase of common shares. As at October 31, 2006, an aggregate
of 34.7 million common shares were held under these plans.
Deferred share and other plans
We offer deferred share unit plans to executives, non-employee directors
and previously to certain key employees. Under these plans, the
executives or directors may choose to receive all or a percentage of their
annual incentive bonus or directors’ fee in the form of deferred share
units (DSUs). The executives or directors must elect to participate in the
plan prior to the beginning of the fiscal year. DSUs earn dividend
equivalents in the form of additional DSUs at the same rate as dividends
on common shares. The participant is not allowed to convert the DSUs
until retirement, permanent disability or termination of employment/
directorship. The cash value of the DSUs is equivalent to the market
value of common shares when conversion takes place. The value of the
DSUs liability as at October 31, 2006, was $221 million (2005 –
$172 million; 2004 – $120 million). The share price fluctuations and
dividend equivalents compensation expense recorded for the year
ended October 31, 2006, in respect of these plans was $44 million
(2005 – $42 million; 2004 – $3 million).
We have a deferred bonus plan for certain key employees within
RBC Capital Markets. Under this plan, a percentage of each employee’s
annual incentive bonus is deferred and accumulates dividend equiva-
lents at the same rate as dividends on common shares. The employee
will receive the deferred bonus in equal amounts paid within 90 days
of the three following year-end dates. The value of the deferred bonus
paid will be equivalent to the original deferred bonus adjusted for
dividends and changes in the market value of common shares at the
time the bonus is paid. The value of the deferred bonus liability as at
October 31, 2006, was $401 million (2005 – $320 million; 2004 –
$241 million). The share price fluctuations and dividend equivalents
compensation expense for the year ended October 31, 2006, in respect
of this plan was $51 million (2005 – $57 million; 2004 – $4 million).
Royal Bank of Canada Annual Report 2006
136 Consolidated Financial Statements
Note 22 Trading revenue
Trading revenue includes both trading-related net interest income and
Trading revenue reported in Non-interest income. Net interest income
arises from interest and dividends related to trading assets and liabilities
and amortization of premiums and discounts on its acquisition or its
issuance. Non-interest income includes realized and unrealized gains
and losses from the purchase and sale of securities, and realized and
unrealized gains and losses on trading derivative financial instruments.
Trading revenue
Net interest income
Non-interest income
Total
Note 23 Business realignment charges
2006
(539) $
2,574
2005
21
1,594
2,035
$
1,615
$
$
2004
286
1,563
1,849
$
$
During the year, we continued to implement the additional cost-reduction
activities identified during 2005 (the additional initiatives). The objec-
tives of these additional initiatives are consistent with those approved
by the Board of Directors on September 9, 2004, in connection with our
business realignment. The objectives of the business realignment were
to reduce costs, accelerate revenue growth, and improve the efficiency
of our operations in order to better serve our clients.
The following table sets out the changes in our business
realignment charges since November 1, 2004. Although the majority of
the initiatives were substantially completed during fiscal 2006, the
associated income-protection payments to severed employees and
certain lease obligations will extend beyond that time. The $43 million
business realignment charges pertaining to continuing operations
to be paid in future periods are recorded in Other liabilities on the
Consolidated Balance Sheets while the $14 million pertaining to
RBC Mortgage, which is accounted for as discontinued operations
(refer to Note 11), is recorded in Liabilities of operations held for sale.
The charges recorded by each segment during the year are disclosed
in Note 30.
Business realignment charges
Balance as at October 31, 2004 for continuing operations
Initial initiatives
Reversal for positions not eliminated
Accrual for new positions identified
Additional initiatives
Other adjustments including foreign exchange
Cash payments
Balance as at October 31, 2005 for continuing operations
Initial initiatives
Reversal for positions not eliminated
Accrual for new positions identified
Adjustments for positions eliminated
Additional initiatives
Reversal for positions not eliminated
Adjustments for closure of operations centres
Other adjustments including foreign exchange
Cash payments
Balance as at October 31, 2006 for continuing operations
Balance as at October 31, 2004 for discontinued operations
Adjustments for closure of branches and headquarters
Cash payments
Balance as at October 31, 2005 for discontinued operations
Adjustments for closure of branches and headquarters
Cash payments
Balance as at October 31, 2006 for discontinued operations
Total balance as at October 31, 2006
Employee-related Premises-related
charges
charges
Other
$
13
$
$
164
$
(55)
52
43
(4)
(82)
$
118
$
(1)
3
6
(11)
–
(1)
(73)
41
2
1
(2)
1
–
(1)
–
41
$
$
$
$
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
3
–
(1)
2
13
12
(13)
12
6
(4)
14
16
–
–
–
(1)
(12)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
Total
177
(55)
52
43
(5)
(94)
$
118
(1)
3
6
(11)
3
(1)
(74)
43
15
13
(15)
13
6
(5)
14
57
$
$
$
$
$
Our business realignment charges include the income-protection pay-
ments for severed employees. For continuing operations, the number of
employee positions identified for termination decreased to 1,866 from
2,063 at October 31, 2005. The decrease in the accrual corresponds to
the net decrease of 197 positions which is comprised of the following:
for the original and additional initiatives, 19 and 215 positions were
reinstated, respectively, and 37 new positions were identified for elimi-
nation. As at October 31, 2006, 1,980 employees had been terminated,
164 of whom related to RBC Mortgage.
In 2006, we closed 3 operation centres related to the additional
initiatives. In 2005, we closed the Chicago headquarters of RBC
Mortgage and 40 of its branches. Although we have vacated these prem-
ises, we remain the lessee; accordingly, we have accrued the fair value of
the remaining future lease obligations. We expensed the lease cancella-
tion payments for those locations for which we have legally extinguished
our lease obligation. The carrying value of redundant assets in the closed
premises has been included in premises-related costs.
We also incurred approximately $4 million in 2005 in connection
with employee outplacement services. The other charges represent fees
charged by a professional services firm for strategic and organizational
advice provided to us with respect to the business realignment initiatives.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 137
Note 24 Income taxes
Income taxes in Consolidated Statements of Income
Continuing operations
Current
Canada – Federal
– Provincial
International
Future
Canada – Federal
– Provincial
International
Subtotal
Discontinued operations
Current
International
Future
International
Subtotal
Income taxes (recoveries) in Consolidated Statements of Changes in Shareholders’ Equity
Continuing operations
Unrealized foreign currency translation gain, net of hedging activities
Issuance costs
Stock appreciation rights
Wealth accumulation plan gains
Other
Subtotal
Total income taxes
Sources of future income taxes
Future income tax asset
Allowance for credit losses
Deferred compensation
Pension related
Business realignment charges
Tax loss carryforwards
Deferred income
Enron litigation provision
Other
Valuation allowance
Future income tax liability
Premises and equipment
Deferred expense
Other
Net future income tax asset
2006
2005
2004
$
$
506
331
435
$
739
431
478
659
338
217
1,272
1,648
1,214
104
31
(4)
131
(206)
(96)
(68)
(370)
12
12
49
73
1,403
1,278
1,287
(20)
2
(35)
3
(59)
4
1,385
1,246
1,232
130
(4)
4
–
6
136
204
2
5
7
2
220
328
–
3
–
(1)
330
$
1,521
$
1,466
$
1,562
$
2006
2005
$
439
616
101
27
68
151
253
335
1,990
(10)
1,980
(214)
(225)
(437)
(876)
464
545
168
38
25
160
265
331
1,996
(11)
1,985
(183)
(245)
(309)
(737)
$
1,104
$
1,248
Included in the tax loss carryforwards amount is $31 million of future
income tax assets related to losses in our Canadian and U.S. operations
(2005 – $3 million) which expire in 10 to 20 years from origination. Also
included in the tax loss carryforwards amount is a $27 million tax asset
related to capital losses (2005 – $11 million), which has no expiry date.
We believe that, based on all available evidence, it is more likely
than not that all of the future income tax assets, net of the valuation
allowance, will be realized through a combination of future reversals of
temporary differences and taxable income.
Royal Bank of Canada Annual Report 2006
138 Consolidated Financial Statements
Reconciliation to statutory tax rate
Income taxes at Canadian statutory tax rate
Increase (decrease) in income taxes resulting from
Lower average tax rate applicable to subsidiaries
Tax-exempt income from securities
Tax rate change
Other
Income taxes reported in Consolidated Statements
of Income before discontinued operations
and effective tax rate
2006
2005
2004
$
2,152
34.7%
$
1,632
34.7%
$
1,513
35.0%
(599)
(184)
13
21
(9.6)
(3.0)
.2
.3
(251)
(85)
–
(18)
(5.3)
(1.8)
–
(.4)
(164)
(54)
(10)
2
(3.8)
(1.3)
(.2)
.1
$
1,403
22.6%
$
1,278
27.2%
$
1,287
29.8%
International earnings of certain subsidiaries would be taxed only upon
their repatriation to Canada. We have not recognized a future income
tax liability for these undistributed earnings as we do not currently
expect them to be repatriated. Taxes that would be payable if all foreign
subsidiaries’ accumulated unremitted earnings were repatriated are
estimated at $822 million as at October 31, 2006 (2005 – $745 million;
2004 – $714 million).
Note 25 Earnings per share (1)
Basic earnings per share
Net income from continuing operations
Net income (loss) from discontinued operations (2)
Net income
Preferred share dividends
Net gain on redemption of preferred shares
Net income available to common shareholders
Average number of common shares (in thousands)
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Total
Diluted earnings per share
Net income available to common shareholders
Average number of common shares (in thousands)
Stock options (3)
Issuable under other stock-based compensation plans
Average number of diluted common shares (in thousands)
Diluted earnings (loss) per share
Continuing operations
Discontinued operations
Total
2006
2005
2004
$
$
$
4,757
(29)
4,728
(60)
–
3,437
(50)
3,387
(42)
4
3,023
(220)
2,803
(31)
–
$
4,668
$
3,349
$
2,772
1,279,956
1,283,433
1,293,465
$
$
$
3.67
(.02)
$
2.65
(.04)
$
3.65
$
2.61
$
2.31
(.17)
2.14
4,668
$
3,349
$
2,772
1,279,956
14,573
5,256
1,283,433
13,686
7,561
1,293,465
12,151
5,400
1,299,785
1,304,680
1,311,016
$
$
3.61
(.02)
$
2.61
(.04)
$
3.59
$
2.57
$
2.28
(.17)
2.11
(1)
(2)
(3)
The average number of common shares, average number of diluted common shares, and basic and diluted earnings per share have been adjusted retroactively for the stock dividend paid on
April 6, 2006. Refer to Note 18.
Refer to Note 11.
The dilutive effect of stock options was calculated using the treasury stock method. During 2006 and 2005, no option was outstanding with an exercise price exceeding the average market price
of our common shares. For 2004, we excluded from the calculation of diluted earnings per share 2,174,376 average options outstanding with an exercise price of $31.32 as the exercise price of
these options was greater than the average market price of our common shares.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 139
Note 26 Concentrations of credit risk
Concentrations of credit risk exist if a number of clients are engaged in
similar activities, or are located in the same geographic region or have
comparable economic characteristics such that their ability to meet con-
tractual obligations would be similarly affected by changes in economic,
political or other conditions. Concentrations of credit risk indicate the
relative sensitivity of our performance to developments affecting a par-
ticular industry or geographic location. The amounts of credit exposure
associated with our on- and off-balance sheet financial instruments are
summarized in the following table:
2006
2005
Canada
%
United
States %
Europe
Other
Inter-
% national
%
Total
Canada
%
United
States
%
Europe
Other
Inter-
% national
%
Total
$ 204,488 73% $ 41,467 15% $ 27,358 10% $ 5,112 2% $ 278,425 $ 186,663 77% $ 32,366 13% $ 18,813
8% $ 4,119 2% $ 241,961
$ 78,851 55% $ 51,224 35% $ 12,997 9% $ 1,802 1% $ 144,874 $ 68,391 53% $ 46,221 35% $ 13,014 10% $ 2,542 2% $ 130,168
68,228
33,608 49
22,609 33
11,835 18
19,776 33
28,563 47
11,563 19
60,640
738
176
1
–
9,855 27
9,171 25
15,891 42
2,148
6
37,065
10,276 27
9,682 25
16,638 42
2,146 6
38,742
$ 117,269 48% $ 71,958 30% $ 48,664 20% $ 4,688 2% $ 242,579 $ 112,275 47% $ 67,738 29% $ 52,261 22% $ 4,864 2% $ 237,138
On-balance
sheet assets (1)
Off-balance sheet
credit instruments (2)
Committed and
uncommitted (3)
Other
Derivatives before
master netting
agreement (4), (5)
(1)
(2)
(3)
(4)
(5)
Includes assets purchased under reverse repurchase agreements and securities borrowed, loans and customers’ liability under acceptances. The largest concentrations in Canada are Ontario
at 52% (2005 – 41%), Quebec at 15% (2005 – 10%), the Prairies at 14% (2005 – 12%), and British Columbia at 14% (2005 – 11%). No industry accounts for more than 10% of total on-balance
sheet credit instruments.
Represents financial instruments with contractual amounts representing credit risk.
Of the commitments to extend credit, the largest industry concentrations relate to financial services of 38% (2005 – 37%), government of 5% (2005 – 6%), commercial real estate of 6%
(2005 – 5%), transportation of 3% (2005 – 5%), wholesale of 5% (2005 – 5%), manufacturing of 4% (2005 – 4%), and mining and energy of 13% (2005 – 13%).
The largest concentration by counterparty type of this credit exposure is with banks at 59% (2005 – 60%).
Excludes credit derivatives classified as “other than trading” with a replacement cost of $20 million (2005 – $20 million) which are given guarantee treatment.
Note 27 Guarantees, commitments and contingencies
Guarantees
In the normal course of our business, we enter into numerous agree-
ments that may contain features that meet the definition of a guarantee
pursuant to CICA Accounting Guideline 14, Disclosure of Guarantees
(AcG-14). AcG-14 defines a guarantee to be a contract (including an
indemnity) that contingently requires us to make payments (either in
cash, financial instruments, other assets, our own shares or provision of
services) to a third party based on (i) changes in an underlying interest
rate, foreign exchange rate, equity or commodity instrument, index or
other variable that is related to an asset, a liability or an equity security
of the counterparty, (ii) failure of another party to perform under an
obligating agreement or (iii) failure of another third party to pay its
indebtedness when due. The maximum potential amount of future
payments represents the maximum risk of loss if there were a total
default by the guaranteed parties, without consideration of possible
recoveries under recourse provisions, insurance policies or from
collateral held or pledged.
The table below summarizes significant guarantees we have
provided to third parties:
Credit derivatives and written put options (1), (2)
Backstop liquidity facilities
Stable value products (2)
Financial standby letters of credit and performance guarantees (3)
Credit enhancements
Mortgage loans sold with recourse (4)
Securities lending indemnifications (5)
2006
2005
$
Maximum
potential amount
of future
payments
$ 54,723
34,342
16,098
15,902
4,155
204
–
Maximum
potential amount
of future
payments
Carrying
amount
352
–
–
17
–
–
–
$ 28,662
29,611
12,567
14,417
3,179
388
32,550
$
Carrying
amount
465
–
–
16
–
–
–
(1)
(2)
(3)
(4)
(5)
The carrying amount is included in Other – Derivative-related amounts on our Consolidated Balance Sheets.
The notional amount of these contracts appropriates the maximum potential amount of future payments.
The carrying amount is included in Other – Other liabilities on our Consolidated Balance Sheets.
As at October 31, 2006, the amount related to discontinued operations was nil (October 31, 2005 – $174 million). Refer to Note 11. The October 31, 2005 amount was revised to include the
$174 million.
Substantially all of our securities lending activities are now transacted through our new joint venture, RBC Dexia IS. As at October 31, 2006, RBC Dexia IS securities lending indemnifications
totalled $45,614 million (2005 – nil); we are exposed to 50% of this amount.
Credit derivatives and written put options
Our clients may enter into credit derivatives or written put options for
speculative or hedging purposes. AcG-14 defines a guarantee to include
derivative contracts that contingently require us to make payments to
a guaranteed party based on changes in an underlying that is related to
an asset, a liability or an equity security of a guaranteed party. We have
Royal Bank of Canada Annual Report 2006
140 Consolidated Financial Statements
only disclosed amounts for transactions where it would be probable,
based on the information available to us, that the client would use the
credit derivative or written put option to protect against changes in an
underlying that is related to an asset, a liability or an equity security
held by the client.
We enter into written credit derivatives that are over-the-counter
contractual agreements to compensate another party for its financial
loss following the occurrence of a credit event in relation to a specified
reference obligation, such as a bond or loan. The terms of these credit
derivatives vary based on the contract and can range up to 15 years.
We enter into written put options that are contractual agreements
under which we grant the purchaser the right, but not the obligation, to
sell, by or at a set date, a specified amount of a financial instrument at a
predetermined price. Written put options that typically qualify as guar-
antees include foreign exchange contracts, equity-based contracts and
certain commodity-based contracts. The terms of these options vary
based on the contract and can range up to five years.
Collateral we hold for credit derivatives and written put options is
managed on a portfolio basis and may include cash, government T-bills
and bonds.
Securities lending indemnifications
In securities lending transactions, we act as an agent for the owner of a
security, who agrees to lend the security to a borrower for a fee, under
the terms of a pre-arranged contract. The borrower must fully collateral-
ize the security loaned at all times. As part of this custodial business,
an indemnification may be provided to security lending customers to
ensure that the fair value of securities loaned will be returned in the
event that the borrower fails to return the borrowed securities and the
collateral held is insufficient to cover the fair value of those securities.
These indemnifications normally terminate without being drawn upon.
The term of these indemnifications varies, as the securities loaned are
recallable on demand. The majority of the collateral held for our securi-
ties lending transactions includes cash, equities, convertible bonds,
and securities that are issued or guaranteed by the Canadian govern-
ment, U.S. government or other OECD countries.
Backstop liquidity facilities
Backstop liquidity facilities are provided to asset-backed commercial
paper conduit programs (programs) administered by us and third parties,
as an alternative source of financing in the event that such programs are
unable to access commercial paper markets, or in limited circumstances,
when predetermined performance measures of the financial assets owned
by these programs are not met. The liquidity facilities’ terms can range up
to five years. The terms of the backstop liquidity facilities do not require
us to advance money to these programs in the event of bankruptcy or
to purchase non-performing or defaulted assets. None of the backstop
liquidity facilities that we have provided have been drawn upon.
Stable value products
We sell stable value products that offer book value protection primarily
to plan sponsors of Employee Retirement Income Security Act of 1974
(ERISA)-governed pension plans such as 401(k) plans, 457 plans, etc.
The book value protection is provided on portfolios of intermediate/
short-term investment-grade fixed income securities and is intended to
cover any shortfall in the event that plan participants withdraw funds
when market value is below book value. We retain the option to exit
the contract at any time. For stable value products, collateral we hold is
managed on a portfolio basis and may include cash, government T-bills
and bonds.
Financial standby letters of credit and performance guarantees
Financial standby letters of credit and performance guarantees repre-
sent irrevocable assurances that we will make payments in the event
that a client cannot meet its obligations to third parties. The term of
these guarantees can range up to eight years. Our policy for requiring
collateral security with respect to these instruments and the types
of collateral security held is generally the same as for loans. When
collateral security is taken, it is determined on an account-by-account
basis according to the risk of the borrower and the specifics of the
transaction. Collateral security may include cash, securities and other
assets pledged.
Credit enhancements
We provide partial credit enhancement to multi-seller programs admin-
istered by us to protect commercial paper investors in the event that
the collection of the underlying assets, the transaction-specific credit
enhancement or the liquidity proves to be insufficient to pay for matur-
ing commercial paper. Each of the asset pools is structured to achieve a
high investment-grade credit profile through credit enhancement related
to each transaction. The term of these credit facilities is between one
and four years.
Mortgage loans sold with recourse
Through our various agreements with investors, we may be required
to repurchase U.S. originated mortgage loans sold to an investor if the
loans are uninsured for greater than one year, or refund any premium
received where mortgage loans are prepaid or in default within 120 days.
The mortgage loans are fully collateralized by residential properties.
Indemnifications
In the normal course of our operations, we provide indemnifications
which are often standard contractual terms to counterparties in trans-
actions such as purchase and sale contracts, service agreements,
director/officer contracts and leasing transactions. These indemnifica-
tion agreements may require us to compensate the counterparties for
costs incurred as a result of changes in laws and regulations (including
tax legislation) or as a result of litigation claims or statutory sanctions
that may be suffered by the counterparty as a consequence of the
transaction. The terms of these indemnification agreements will vary
based on the contract. The nature of the indemnification agreements
prevents us from making a reasonable estimate of the maximum poten-
tial amount we could be required to pay to counterparties. Historically,
we have not made any significant payments under such indemnifications.
Off-balance sheet credit instruments
We utilize off-balance sheet credit instruments to meet the financing
needs of our clients. The contractual amounts of these credit instruments
represent the maximum possible credit risk without taking into account
the fair value of any collateral, in the event other parties fail to perform
their obligations under these instruments. Our credit review process, our
policy for requiring collateral security and the types of collateral security
held are generally the same as for loans. Many of these instruments
expire without being drawn upon. As a result, the contractual amounts
may not necessarily represent our actual future credit risk exposure or
cash flow requirements.
Commitments to extend credit represent unused portions of
authorizations to extend credit in the form of loans, bankers’ acceptances
or letters of credit.
In securities lending transactions, we lend our own or our clients’
securities to a borrower for a fee under the terms of a pre-arranged con-
tract. The borrower must fully collateralize the security loaned at all times.
Uncommitted amounts represent an amount for which we retain
the option to extend credit to a borrower.
Guarantees and standby letters of credit include credit enhance-
ment facilities, written put options, other-than-trading credit
derivatives, and standby and performance guarantees. These instru-
ments represent irrevocable assurances that we will make payments in
the event that a client cannot meet its obligations to third parties.
Documentary and commercial letters of credit, which are written
undertakings by us on behalf of a client authorizing a third party to
draw drafts on us up to a stipulated amount under specific terms and
conditions, are collateralized by the underlying shipment of goods to
which they relate.
A note issuance facility represents an underwriting agreement
that enables a borrower to issue short-term debt securities. A revolving
underwriting facility represents a renewable note issuance facility that
can be accessed for a specified period of time.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 141
Note 27 Guarantees, commitments and contingencies (continued)
The following table summarizes the contractual amounts of our off-balance sheet credit instruments:
2006
2005
$ 57,154
42,222
38,185
45,498
21,734
713
8
$ 50,843
34,410
48,750
44,915
18,786
685
7
$ 205,514
$ 198,396
2006
2005
$
100
1,936
187
56,580
36,788
941
$
64
1,488
624
31,915
36,878
626
$ 96,532
$ 71,595
2006
2005
$
1,794
2,309
$
1,370
1,510
38,118
44,651
6,547
3,113
27,532
32,266
5,506
3,411
$ 96,532
$ 71,595
Lease commitments
Minimum future rental commitments for premises and equipment under
long-term non-cancellable operating and capital leases for the next five
years and thereafter are as follows:
Lease commitments (1)
2007
2008
2009
2010
2011
Thereafter
$
419
378
326
268
227
868
$
2,486
(1)
Substantially all of our lease commitments are related to operating leases.
Off-balance sheet credit instruments
Commitments to extend credit (1)
Original term to maturity of 1 year or less
Original term to maturity of more than 1 year
Securities lending
Uncommitted amounts
Guarantees and standby letters of credit
Documentary and commercial letters of credit
Note issuance and revolving underwriting facilities
(1)
Includes liquidity facilities.
Pledged assets
In the ordinary course of business, we pledge assets recorded on
our Consolidated Balance Sheets. Details of assets pledged against
liabilities are shown in the following tables:
Pledged assets
Cash and due from banks
Interest-bearing deposits with banks
Loans
Securities
Assets purchased under reverse repurchase agreements
Other assets
Assets pledged to:
Foreign governments and central banks
Clearing systems, payment systems and depositories
Assets pledged in relation to:
Securities borrowing and lending
Obligations related to securities sold under repurchase agreements
Derivative transactions
Other
Collateral
As at October 31, 2006, the approximate market value of collateral
accepted that may be sold or repledged by us was $109.1 billion
(2005 – $82.2 billion). This collateral was received in connection with
reverse repurchase agreements, securities borrowings and loans,
and derivative transactions. Of this amount, $48.0 billion (2005 –
$47.8 billion) has been sold or repledged, generally as collateral
under repurchase agreements or to cover short sales.
Royal Bank of Canada Annual Report 2006
142 Consolidated Financial Statements
Litigation
Enron Corp. (Enron) litigation
A purported class of purchasers of Enron who publicly traded equity and
debt securities between January 9, 1999, and November 27, 2001, has
named Royal Bank of Canada and certain related entities as defendants
in an action entitled Regents of the University of California v. Royal Bank
of Canada in the United States District Court, Southern District of Texas
(Houston Division). This case has been consolidated with the lead action
entitled Newby v. Enron Corp., which is the main consolidated purported
Enron shareholder class action wherein similar claims have been made
against numerous other financial institutions, law firms, accountants,
and certain current and former officers and directors of Enron. In
addition, Royal Bank of Canada and certain related entities have been
named as defendants in several other Enron-related cases, which are
filed in various courts in the U.S., asserting similar claims filed by pur-
chasers of Enron securities. Royal Bank of Canada is also a third-party
defendant in cases in which Enron’s accountants, Arthur Andersen LLP,
filed third-party claims against a number of parties, seeking contribution
if Arthur Andersen LLP is found liable to plaintiffs in these actions.
We review the status of these matters on an ongoing basis and
will exercise our judgment in resolving them in such manner as we
believe to be in our best interests. As with any litigation, there are sig-
nificant uncertainties surrounding the timing and outcome. Uncertainty
is exacerbated as a result of the large number of cases, the multiple
defendants in many of them, the novel issues presented, and the cur-
rent difficult litigation environment. Although it is not possible to predict
the ultimate outcome of these lawsuits, the timing of their resolution or
our exposure, during the fourth quarter of 2005, we established a litiga-
tion provision of $591 million (US$500 million) or $326 million after tax
(US$276 million). We believe the ultimate resolution of these lawsuits
and other proceedings, while not likely to have a material adverse effect
on our consolidated financial position, may be material to our operat-
ing results for the particular period in which the resolution occurs,
notwithstanding the provision established in 2005. We will continue to
vigorously defend ourselves in these cases.
On July 27, 2005, Royal Bank of Canada reached an agreement to
settle its part of the MegaClaims lawsuit brought by Enron in the
United States Bankruptcy Court for the Southern District of New York
against Royal Bank of Canada and a number of other financial institu-
tions. Under the agreement, Royal Bank of Canada agreed to pay Enron,
and expensed in the third quarter of 2005, $31 million (US$25 million)
in cash to settle the claims that have been asserted by Enron against
the bank and certain related entities. Enron allowed $140 million
(US$114 million) in claims filed against the Enron bankruptcy estate
by the bank, including a $61 million (US$50 million) claim previously
transferred by the bank, that were the subject of a separate proceed-
ing in the bankruptcy court, in exchange for a cash payment to Enron of
$29 million (US$24 million) which was expensed in the fourth quarter
of 2005. The agreement was approved by U.S. federal bankruptcy court
on November 29, 2005, and resolved all claims between the bank and
Enron related to Enron’s bankruptcy case. Payment was made by us
in fiscal 2006 in accordance with the agreement and all actions by the
Enron estate against Royal Bank of Canada were dismissed.
Other
Various other legal proceedings are pending that challenge certain of
our practices or actions. We consider that the aggregate liability result-
ing from these other proceedings will not be material to our financial
position or results of operations.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 143
Note 28 Contractual repricing and maturity schedule
The table below details our exposure to interest rate risk as defined and
prescribed by the CICA Handbook Section 3860, Financial Instruments –
Disclosure and Presentation. On- and off-balance sheet financial
instruments are reported based on the earlier of their contractual repric-
ing date or maturity date. Effective interest rates have been disclosed
where applicable. The effective rates shown represent historical rates
for fixed-rate instruments carried at amortized cost and current market
rates for floating-rate instruments or instruments carried at fair value.
The table below does not incorporate management’s expectation of
Carrying amount by earlier of contractual repricing or maturity date
future events where expected repricing or maturity dates differ signifi-
cantly from the contractual dates. We incorporate these assumptions
in the management of interest rate risk exposure. These assumptions
include expected repricing of trading instruments and certain loans and
deposits. Taking into account these assumptions on the consolidated
contractual repricing and maturity schedule at October 31, 2006,
would result in a change in the under one-year gap from $(79.8) billion
to $(40.2) billion (2005 – $(79.5) billion to $(39.7) billion).
Immediately
rate-sensitive
Under 3
months
3 to 6
months
Over 6 to
12 months
Over 1 to
5 years
Over 5
years
Non-rate-
sensitive
Total
Assets
Cash and deposits with banks
Effective interest rate
Securities
Trading account
Effective interest rate
Investment account and loan substitute
Effective interest rate
Assets purchased under reverse repurchase
agreements
Effective interest rate
Loans (net of allowance for loan losses)
Effective interest rate
Other assets
$
– $ 11,104
4.33%
–
$
$
–
–
– $ 2,036
4.22%
–
$
– $ 1,763 $ 14,903
–
–
–
–
–
–
30,399
4.69%
10,163
4.90%
–
–
92,469
–
–
58,454
5.14%
21,230
5.93%
–
$$ 92,469 $ 131,350
5,706
4.69%
1,346
4.93%
924
4.33%
8,288
5.56%
–
$ 16,264
5,238
4.62%
1,781
4.94%
24,093
4.62%
14,378
4.58%
23,436
4.85%
6,809
4.80%
58,365
–
3,155
–
147,237
37,632
–
–
11,953
5.49%
–
–
–
68,574
5.28%
–
$ 18,972 $ 109,081
59,378
–
–
5,873
5.96%
–
–
–
143
–
69,100
69,100
$ 36,118 $ 132,526 $ 536,780
208,530
Liabilities
Deposits
Effective interest rate
Obligations related to assets sold under
repurchase agreements
Effective interest rate
Obligations related to securities sold short
Effective interest rate
Other liabilities
Effective interest rate
Subordinated debentures
Effective interest rate
Non-controlling interest in subsidiaries
Effective interest rate
Shareholders’ equity
Effective interest rate
On-balance sheet gap
Off-balance sheet financial instruments (1)
Derivatives used for asset/liability
management purposes
Pay side instruments
Effective interest rate
Receive side instruments
Effective interest rate
Derivatives used for trading purposes
Effective interest rate
Total off-balance sheet financial instruments $
Total gap
Canadian dollar
Foreign currency
Total gap
Canadian dollar – 2005
Foreign currency – 2005
Total gap – 2005
$$ 137,738 $ 103,805
4.44%
–
$ 18,085
4.31%
$ 31,312 $ 43,391
3.79%
3.92%
–
–
–
–
–
–
–
–
–
–
–
–
–
886
39,191
–
4.33%
4.74%
10,769
195
757
4.53%
4.49%
4.44%
650
–
–
7.29%
–
–
4,413
–
912
5.12%
–
5.51%
1,200
–
–
4.87%
–
–
–
–
150
–
–
5.50%
$$ 137,738 $ 144,815
$ 32,596 $ 60,423
$ 19,166
$$ (45,269) $ (13,465) $ (2,902) $ (13,624) $ 48,658
491
4.28%
310
4.54%
–
–
483
6.75%
–
–
–
–
$ 5,454 $ 3,738 $ 343,523
4.86%
–
–
10,442
4.59%
750
7.18%
1,295
6.48%
–
–
900
4.68%
–
535
–
15,779
–
81,501
–
–
–
575
–
21,073
–
41,103
38,252
82,901
7,103
1,775
22,123
$ 18,841 $ 123,201 $ 536,780
–
$ 17,277 $ 9,325 $
(961) $ (2,328) $ (27,368) $ (7,204) $
$
4.22%
4,932
4.68%
6,884
4.31%
4.35%
4,980
4.32%
(15,811)
4.33%
– $ (42,054) $
4.41%
4.34%
–
19,145
40,333
–
4.61%
4.34%
–
26,784
–
(517)
4.22%
4.33%
–
– $ (2,238) $ (11,792) $ 9,488 $ 18,561
$$ (45,269) $ (15,703) $ (14,694) $ (4,136) $ 67,219
52,937
14,282
$$ (45,269) $ (15,703) $ (14,694) $ (4,136) $ 67,219
$ (6,791) $ 48,941
18,045
$$ (29,385) $ (32,154) $ (16,773) $ (1,191) $ 66,986
$ (14,858) $ (34,024) $ 2,619
(19,392)
1,870
(24,559)
8,856
(26,367)
(18,902)
5,204
(19,898)
(1,764)
(2,372)
(14,527)
5,600
4.77%
10,525
4.99%
12,947
4.41%
– $ (79,915)
–
–
–
(30,287)
–
79,915
–
$ 16,268 $ (30,287) $
$ 33,545 $ (20,962) $
11,628
21,917
(17,083)
(3,879)
$ 33,545 $ (20,962) $
$ 11,125 $ (7,010) $
13,771
(5,369)
$ 24,896 $ (12,379) $
–
–
(4)
4
–
2
(2)
–
(1)
Represents net notional amounts.
Note 29 Related party transactions
In the ordinary course of business, we provide normal banking services,
operational services and enter into other transactions with associated
and other related corporations, including our joint venture entities, on
terms similar to those offered to non-related parties. Refer to Note 9.
We grant loans to directors, officers and other employees at rates
normally accorded to preferred clients. In addition, we offer deferred
share and other plans to non-employee directors, executives and certain
other key employees. Refer to Note 21.
Royal Bank of Canada Annual Report 2006
144 Consolidated Financial Statements
RBC
Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
RBC
Capital
Markets
Corporate
Support
Total
Canada United States
Other
International
$ 1,109 $
201
4,492
$
(489) $ 6,762 $ 6,011 $
180
13,875
7,552
4,397
108 $
643
1,926
Note 30 Results by business and geographic segment
2006
Net interest income
Non-interest income
Total revenue
Provision for (recovery of) credit losses
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Business realignment charges
Net income (loss) before income taxes
Income taxes
Non-controlling interest
$ 5,941
7,440
13,381
604
2,509
6,140
–
4,128
1,334
–
1,763
2,872
26
–
2,260
1
585
135
6
4,693
(115)
–
3,058
(1)
1,751
364
(20)
(309)
(86)
20,637
429
13,563
456
4,505
(28)
2,569
1
–
37
–
(260)
(430)
58
2,509
11,495
–
6,204
1,403
44
1,379
7,056
–
4,672
1,458
37
683
3,038
–
447
1,401
–
812
14
(1)
720
(69)
8
781
–
781
Net income (loss) from continuing operations $ 2,794
Net loss from discontinued operations
–
$
444 $ 1,407
–
(29)
$
112 $ 4,757 $ 3,177 $
–
(29)
–
799 $
(29)
Net income (loss)
$ 2,794
$
415 $ 1,407
$
112 $ 4,728 $ 3,177 $
770 $
Average assets from continuing operations (1) $ 200,700
Average assets from discontinued operations (1)
–
$ 39,000 $ 267,800
–
200
$ (5,400) $ 502,100 $ 287,200 $ 113,300 $ 101,600
–
200
200
–
–
Total average assets (1)
$ 200,700
$ 39,200 $ 267,800
$ (5,400) $ 502,300 $ 287,200 $ 113,500 $ 101,600
2005
Net interest income
Non-interest income
RBC
Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
RBC
Capital
Markets
Corporate
Support
Total
Canada
United States
Other
International
$ 5,348
7,151
$ 1,108 $
607 $
1,620
3,455
(293) $ 6,770 $ 5,605 $
188
12,414
6,901
Total revenue
Provision for (recovery of) credit losses
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Business realignment charges
Net income (loss) before income taxes
Income taxes
Non-controlling interest
12,499
542
2,728
51
2,625
5,872
7
–
2,150
(2)
3,453
1,149
–
529
135
7
Net income (loss) from continuing operations $ 2,304
–
Net loss from discontinued operations
$
387 $
(50)
4,062
(91)
–
3,274
1
878
137
(19)
760
–
(105)
(47)
19,184
455
12,506
433
–
61
39
2,625
11,357
45
(158)
(143)
(1)
4,702
1,278
(13)
1,270
6,685
45
4,073
1,329
(30)
$
(14) $
–
3,437 $
(50)
2,774 $
–
200 $
(50)
608 $
3,955
4,563
23
809
3,595
–
136
(76)
12
557
1,558
2,115
(1)
546
1,077
–
493
25
5
463
–
Net income (loss)
$ 2,304
$
337 $
760 $
(14) $ 3,387 $ 2,774 $
150 $
463
Average assets from continuing operations (1) $ 182,400
–
Average assets from discontinued operations (1)
$ 37,700 $ 229,300 $ (4,100) $ 445,300 $ 263,200 $ 92,400
1,800
1,800
1,800
–
–
–
$ 89,700
–
Total average assets (1)
$ 182,400
$ 39,500 $ 229,300 $ (4,100) $ 447,100 $ 263,200 $ 94,200 $ 89,700
2004
Net interest income
Non-interest income
Total revenue
Provision for (recovery of) credit losses
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Business realignment charges
Net income (loss) before income taxes
Income taxes
Non-controlling interest
RBC
Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
$ 4,876
6,337
11,213
410
2,124
5,630
63
2,986
943
–
$
989 $
1,713
2,702
80
–
2,330
23
269
52
3
RBC
Capital
Markets
847
3,086
3,933
(108)
–
2,845
27
1,169
334
8
Corporate
Support
Total
Canada
United States
$
(314) $ 6,398 $ 5,011 $
268
11,404
6,121
934
3,743
Other
International
$
453
1,540
(46)
(36)
17,802
346
11,132
343
4,677
61
1,993
(58)
–
28
64
(102)
(42)
1
2,124
10,833
177
4,322
1,287
12
909
6,395
142
3,343
1,166
6
872
3,457
29
258
45
1
343
981
6
721
76
5
640
–
Net income (loss) from continuing operations $
Net loss from discontinued operations
2,043
–
$
214 $
(220)
827 $
–
(61) $
–
3,023 $
(220)
2,171
–
$
212
(220)
$
Net income (loss)
$ 2,043
$
(6) $
827
$
(61) $ 2,803 $ 2,171
$
(8) $
640
Average assets from continuing operations (1) $ 164,100
–
Average assets from discontinued operations (1)
$ 37,100 $ 219,300 $ (2,300) $ 418,200 $ 238,000 $ 89,500
3,200
3,200
3,200
–
–
–
$ 90,700
–
Total average assets (1)
$ 164,100
$ 40,300 $ 219,300 $ (2,300) $ 421,400 $ 238,000 $ 92,700 $ 90,700
(1)
Calculated using methods intended to approximate the average of the daily balances for the period.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 145
Note 30 Results by business and geographic segment (continued)
Revenue by business lines
Banking (1)
Wealth management
Global insurance
Global markets
Global investment banking and equity markets
RBC Dexia IS (2)
Other (3)
Total
$
$
$
2006
8,411
4,494
3,348
2,579
1,250
558
(3)
2005
7,971
3,945
3,311
2,256
979
500
222
2004
7,367
3,673
2,875
2,268
941
455
223
$ 20,637
$ 19,184
$ 17,802
(1)
(2)
(3)
Includes cards and payment solutions.
The amount for 2006 includes two months of revenue from Institutional & Investor Services and our 50% proportionate share of nine months of revenue from RBC Dexia IS for the year ended
October 31, 2006. Comparative amounts for 2005 and 2004 only represent revenue from IIS.
Consists of National Clients, Research and Global Credit, and includes the teb adjustment which is discussed below.
Composition of business segments
For management reporting purposes, our operations and activities
are organized into three business segments: RBC Canadian Personal
and Business, RBC U.S. and International Personal and Business, and
RBC Capital Markets. RBC Canadian Personal and Business consists of
banking and wealth management businesses in Canada and our global
insurance business, and its results reflect how it is managed, inclusive
of securitized assets and related amounts for income and provision for
credit losses. RBC U.S. and International Personal and Business consists
of our banking and retail brokerage businesses in the U.S., banking in
the Caribbean and international private banking. RBC Capital Markets
provides a wide range of corporate and investment banking, sales and
trading, research and related products and other services. All other
enterprise level activities that are not allocated to these three business
segments, such as securitization and other items and net charges asso-
ciated with unattributed capital, are reported under Corporate Support.
Consolidation adjustments, including the elimination of the taxable
equivalent basis gross-up amounts reported in Net interest income and
provision for income taxes, are also included in Corporate Support.
Our management reporting framework is intended to measure
the performance of each business segment as if it was a stand-alone
business and reflect the way that business segment is managed. This
approach ensures our business segments’ results reflect all relevant
revenue and expenses associated with the conduct of their business
and depicts how management views those results. These items do not
impact our consolidated results.
The expenses in each business segment may include costs or
services directly incurred or provided on their behalf at the enterprise
level. For other costs not directly attributable to one of our business
segments, we use a management reporting framework that uses
assumptions, estimates and methodologies for allocating overhead
costs and indirect expenses to our business segments and that assists
in the attribution of capital and the transfer pricing of funds to our
business segments in a manner that fairly and consistently measures
and aligns the economic costs with the underlying benefits and risks
of that specific business segment. Activities and business conducted
between our business segments are generally at market rates. All other
enterprise level activities that are not allocated to our three business
segments are reported under Corporate Support.
Our assumptions and methodologies used in our management
reporting framework are periodically reviewed by management to
ensure they remain valid. The capital attribution methodologies involve
a number of assumptions and estimates that are revised periodically.
Changes during 2006
During 2006, we implemented the following changes in our business
segments:
We started to report Net interest income, Total revenue and Net
income before income taxes of our RBC Capital Markets segment on a
taxable equivalent basis (teb). Net interest income from tax-advantaged
sources, primarily related to Canadian taxable dividends, is grossed up
to its effective tax equivalent value with a corresponding offset recorded
in the provision for income taxes. Management believes these adjust-
ments are necessary to reflect how RBC Capital Markets is managed
since it enhances the comparability of revenue across our taxable
and tax-advantaged sources. The use of teb adjustments and measures
may not be comparable to similar GAAP measures or similarly adjusted
amounts at other financial institutions. The teb adjustment of
$213 million in RBC Capital Markets (2005 – $109 million; 2004 –
$55 million) is eliminated in Corporate Support.
We have also implemented certain revisions to our overhead and
transfer pricing methodologies, and transferred our housing tax credit
syndication business from RBC U.S. and International Personal and
Business to RBC Capital Markets. In addition, we reclassified changes
in fair value of certain derivative instruments designated as economic
hedges of our stock-based compensation plans from Non-interest
income to Non-interest expense (refer to Note 1). We also reclassified
certain amounts out of Non-interest income into Net interest income
in our RBC Canadian Personal and Business segment to correspond
with our management reporting, and the reclassification is eliminated
in Corporate Support. The comparative results have been updated to
reflect these changes.
We have included in the Total average assets of RBC Canadian
Personal and Business the residential mortgages that have been
securitized; the consolidation adjustment is included in Corporate
Support. The comparative amounts of Total average assets have been
revised to reflect this change.
Geographic segments
For geographic reporting, our segments are grouped into Canada,
United States and Other International. Transactions are primarily
recorded in the location that best reflects the risk due to negative
changes in economic conditions and prospects for growth due to posi-
tive economic changes. This location frequently corresponds with the
location of the legal entity through which the business is conducted and
the location of our clients. Transactions are recorded in the local cur-
rency and are subject to foreign exchange rate fluctuations with respect
to the movement in the Canadian dollar.
Royal Bank of Canada Annual Report 2006
146 Consolidated Financial Statements
Note 31 Reconciliation of Canadian and United States generally accepted accounting principles
The Consolidated Financial Statements are prepared in accordance with
Subsection 308 of the Bank Act (Canada), which states that except as
otherwise specified by the OSFI, the Consolidated Financial Statements
are to be prepared in accordance with Canadian GAAP. As required by the
U.S. Securities and Exchange Commission (SEC), material differences
between Canadian and U.S. GAAP are quantified and described below:
Condensed Consolidated Balance Sheets
Assets
Cash and due from banks
$
4,401
$
(101) $
4,300
$
5,001
$
–
$
5,001
Interest-bearing deposits with banks
10,502
(4,223)
6,279
5,237
(32)
5,205
2006
2005
Canadian GAAP
Differences
U.S. GAAP
Canadian GAAP
Differences
U.S. GAAP
Securities
Trading account
Investment account
Loan substitute
Available for sale
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans (net of allowance for loan losses)
Other
Customers’ liability under acceptances
Derivative-related amounts
Premises and equipment, net
Goodwill
Other intangibles
Reinsurance recoverables
Separate account assets
Assets of operations held for sale
Other assets
147,237
36,976
656
–
184,869
59,378
208,530
9,108
37,729
1,818
4,304
642
–
–
82
15,417
(282)
(36,976)
(656)
37,535
146,955
–
–
37,535
125,760
34,060
675
–
(977)
(34,060)
(675)
34,729
124,783
–
–
34,729
(379)
184,490
160,495
(983)
159,512
(2,148)
57,230
42,973
–
42,973
(111)
208,419
190,416
939
191,355
–
717
(86)
(61)
(211)
1,182
111
–
24,893
9,108
38,446
1,732
4,243
431
1,182
111
82
40,310
7,074
38,834
1,708
4,203
409
–
–
263
12,908
–
1,157
(33)
45
–
1,190
105
–
26,917
7,074
39,991
1,675
4,248
409
1,190
105
263
39,825
Liabilities and shareholders’ equity
Deposits
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Derivative-related amounts
Insurance claims and policy benefit liabilities
Separate account liabilities
Liabilities of operations held for sale
Other liabilities
Subordinated debentures
Trust capital securities
Preferred share liabilities
Non-controlling interest in subsidiaries
Shareholders’ equity (1)
69,100
26,545
95,645
65,399
29,381
94,780
$ 536,780
$ 19,583
$ 556,363
$ 469,521
$ 29,305
$ 498,826
$ 343,523
$
(9,466) $ 334,057
$ 306,860
$
28
$ 306,888
9,108
38,252
41,103
42,094
7,337
–
32
22,649
–
(1,188)
9,108
37,064
7,074
32,391
–
1,647
7,074
34,038
(1,141)
312
2,686
111
–
27,877
39,962
42,406
10,023
111
32
50,526
23,381
42,592
7,117
–
40
18,408
–
579
2,643
105
–
23,916
23,381
43,171
9,760
105
40
42,324
160,575
28,657
189,232
131,003
28,890
159,893
7,103
1,383
298
1,775
22,123
300
(1,383)
(298)
1,083
690
7,403
–
–
2,858
22,813
8,167
1,400
300
1,944
19,847
407
(1,400)
(300)
1,434
246
8,574
–
–
3,378
20,093
$ 536,780
$ 19,583
$ 556,363
$ 469,521
$ 29,305
$ 498,826
(1)
Included in our consolidated earnings as at October 31, 2006 was $293 million undistributed earnings of our joint ventures and investments accounted for using the equity method under
U.S. GAAP.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 147
Note 31 Reconciliation of Canadian and United States generally accepted accounting principles (continued)
Condensed Consolidated Statements of Income
Net income from continuing operations, Canadian GAAP
Differences:
Net interest income
Derivative instruments and hedging activities
Variable interest entities
Joint ventures
Liabilities and equity
Non-interest income
Insurance accounting
Derivative instruments and hedging activities
Reclassification of securities
Variable interest entities
Limited partnerships
Joint ventures
Other
Provision for (recovery of) credit losses
Reclassification of securities
Joint ventures
Insurance policyholder benefits, claims and acquisition expense
Insurance accounting
Non-interest expense
Stock appreciation rights
Insurance accounting
Joint ventures
Variable interest entities
Other
Income taxes and net differences in income taxes due to the above items
Non-controlling interest in net income of subsidiaries
Variable interest entities
Joint ventures
Liabilities and equity
Net income from continuing operations, U.S. GAAP
Net loss from discontinued operations, Canadian GAAP
Difference – Other
Net loss from discontinued operations, U.S. GAAP
Net income, U.S. GAAP
Basic earnings per share (1), (2)
Canadian GAAP
U.S. GAAP
Basic earnings per share from continuing operations
Canadian GAAP
U.S. GAAP
Basic earnings (loss) per share from discontinued operations
Canadian GAAP
U.S. GAAP
Diluted earnings per share (1), (2)
Canadian GAAP
U.S. GAAP
Diluted earnings per share from continuing operations
Canadian GAAP
U.S. GAAP
Diluted earnings (loss) per share from discontinued operations
Canadian GAAP
U.S. GAAP
2006
2005
2004
$
4,757
$
3,437
$
3,023
(22)
–
(75)
115
(544)
(31)
14
(10)
(3)
(458)
(33)
–
2
471
16
75
440
2
29
95
8
3
(101)
36
–
–
115
(606)
11
27
–
(9)
(171)
(4)
–
18
584
25
72
118
–
–
(13)
–
–
(101)
10
(19)
–
166
(603)
(1)
7
–
(11)
(146)
–
(1)
–
582
(3)
47
114
(35)
(1)
35
52
–
(152)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,750
$
3,539
$
3,064
(29) $
(50) $
–
5
(220)
(5)
(29) $
(45) $
(225)
4,721
$
3,494
$
2,839
3.65
3.62
3.67
3.64
$
$
$
$
2.61
2.67
2.65
2.71
$
$
$
$
2.14
2.16
2.31
2.33
(.02) $
(.02) $
(.04) $
(.04) $
(.17)
(.17)
3.59
3.57
3.61
3.59
$
$
$
$
2.57
2.63
2.61
2.67
$
$
$
$
2.11
2.13
2.28
2.30
(.02) $
(.02) $
(.04) $
(.04) $
(.17)
(.17)
(1)
(2)
Two-class method of calculating earnings per share: The impact of calculating earnings per share using the two-class method reduced U.S. GAAP basic and diluted earnings per share for the
years ended October 31, 2006, 2005 and 2004 by less than one cent. Please refer to material differences between Canadian and U.S. GAAP for details of this two-class method.
The basic and diluted earnings per share have been adjusted retroactively for the stock dividend paid on April 6, 2006. Refer to Note 18.
Royal Bank of Canada Annual Report 2006
148 Consolidated Financial Statements
Condensed Consolidated Statements of Cash Flows (1)
Cash flows from (used in) operating activities, Canadian GAAP
U.S. GAAP adjustment for net income
Adjustments to determine net cash from (used in) operating activities
Provision for (recovery of) credit losses
Depreciation
Future income taxes
Amortization of other intangibles
Loss on investment in associated corporations and limited partnerships
Net gain on sale of investment account securities
Changes in operating assets and liabilities
Insurance claims and policy benefit liabilities
Net change in accrued interest receivable and payable
Derivative-related assets
Derivative-related liabilities
Trading account securities
Reinsurance recoverable
Net change in brokers and dealers receivable and payable
Other
Net cash from (used in) operating activities, U.S. GAAP
Cash flows from (used in) investing activities, Canadian GAAP
Change in interest-bearing deposits with banks
Change in loans, net of loan securitizations
Proceeds from sale of investment account securities
Proceeds from maturity of investment account securities
Purchases of investment account securities
Proceeds from sale of available-for-sale securities
Proceeds from maturity of available-for-sale securities
Purchases of available-for-sale securities
Change in loan substitute securities
Net acquisitions of premises and equipment
Change in assets purchased under reverse repurchase agreements and securities borrowed
2006
2005
$
(14,996) $
(8)
(29,527) $
102
(2)
(20)
271
(20)
–
–
43
(120)
440
(267)
(695)
(8)
3,872
2,446
(18)
(4)
(135)
–
–
3
(438)
(1)
41
(90)
(710)
(511)
(2,504)
2,099
(9,064)
(31,693)
(43,235)
4,191
1,050
(14,709)
(28,203)
38,474
14,727
28,204
(38,383)
(19)
73
2,148
(7,727)
48
28
(25,628)
(18,405)
36,373
25,651
18,405
(36,130)
(26)
12
–
2004
1,931
41
1
(12)
256
–
15
(59)
(1,385)
(83)
(186)
12
314
1,620
(118)
(43)
2,304
(15,765)
551
1,027
(18,427)
(38,088)
50,911
18,453
38,093
(51,328)
376
22
–
Net cash from (used in) investing activities, U.S. GAAP
(35,682)
(7,399)
(14,175)
Cash flows from (used in) financing activities, Canadian GAAP
Change in deposits
Change in deposits – Canada
Change in deposits – International
Issue of RBC Trust Capital Securities (RBC TruCS)
Issue of preferred shares
Issuance costs
Issue of common shares
Purchases of treasury shares
Change in obligations related to assets sold under repurchase agreements and securities loaned
Dividends paid
Dividends/distributions paid by subsidiaries to non-controlling interests
Change in obligations related to securities sold short
Change in short-term borrowings of subsidiaries
57,711
(36,663)
(299)
27,468
–
(7)
7
1
(2)
(1,141)
(13)
(102)
(2,835)
–
38,666
(35,001)
15,522
19,791
(1,200)
–
3
(1)
7
–
(14)
(102)
2,837
(4)
14,675
(11,814)
14,927
(3,870)
–
–
–
–
(12)
–
(14)
(102)
(1,078)
–
Net cash from (used in) financing activities, U.S. GAAP
44,125
40,504
12,712
Effect of exchange rate changes on cash and due from banks
Net change in cash and due from banks
Cash and due from banks at beginning of year
(80)
(701)
5,001
(122)
1,290
3,711
(17)
824
2,887
Cash and due from banks at end of year, U.S. GAAP
$
4,300
$
5,001
$
3,711
(1)
Canadian and U.S. GAAP cash flow reconciling items relating to discontinued operations were not material.
Accumulated other comprehensive income (loss), net of taxes (1)
Unrealized gains and losses on available-for-sale securities
Unrealized foreign currency translation gains and losses, net of hedging activities
Gains and losses on derivatives designated as cash flow hedges
Additional pension obligation
Accumulated other comprehensive income (loss), net of income taxes
(1)
Accumulated other comprehensive income is a separate component of Shareholders’ equity under U.S. GAAP.
$
$
2006
191
(2,000)
(52)
(62)
2005
83
(1,768)
(165)
(313)
$
2004
178
(1,551)
(192)
(67)
$
(1,923) $
(2,163) $
(1,632)
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 149
Note 31 Reconciliation of Canadian and United States generally accepted accounting principles (continued)
Consolidated Statements of Comprehensive Income
Net income, U.S. GAAP
Other comprehensive income, net of taxes
Changes in unrealized gains and losses on available-for-sale securities
Changes in unrealized foreign currency translation gains and losses
Impact of hedging unrealized foreign currency translation gains and losses
Changes in gains and losses on derivatives designated as cash flow hedges
Reclassification to earnings of gains and losses on cash flow hedges
Additional pension obligation
Total comprehensive income
Income taxes (recovery) deducted from the above items:
Changes in unrealized gains and losses on available-for-sale securities
Impact of hedging unrealized foreign currency translation gains and losses
Changes in gains and losses on derivatives designated as cash flow hedges
Reclassification to earnings of gains and losses on cash flow hedges
Additional pension obligation
2006
2005
2004
$
4,721
$
3,494 $
2,839
108
(502)
270
(35)
148
251
(95)
(618)
401
(97)
124
(246)
65
(1,336)
678
(147)
59
423
4,961
$
2,963 $
2,581
$
57
130
(15)
75
134
(55) $
204
(51)
66
(132)
42
328
(79)
58
245
594
Total income taxes (recovery)
$
381
$
32
$
Material balance sheet reconciling items
The following tables present the increases or (decreases) in assets, liabilities and shareholders’ equity by material differences between Canadian and
U.S. GAAP:
s
e
i
t
i
v
i
t
c
a
g
n
g
d
e
h
i
d
n
a
s
t
n
e
m
u
r
t
s
n
i
e
v
i
t
a
v
i
r
e
D
t
s
e
r
e
t
n
i
e
l
b
a
i
r
a
V
s
e
i
t
i
t
n
e
s
e
r
u
t
n
e
v
t
n
o
J
i
As at October 31, 2006
n
o
i
t
a
c
fi
i
s
s
a
l
c
e
R
s
e
i
t
i
r
u
c
e
s
f
o
i
s
p
h
s
r
e
n
t
r
a
p
d
e
t
i
m
i
L
n
o
i
t
a
i
c
e
r
p
p
a
s
t
h
g
i
r
k
c
o
t
S
s
e
i
t
i
l
i
b
a
i
L
y
t
i
u
q
e
d
n
a
l
a
n
o
i
t
i
d
d
A
n
o
i
t
a
g
i
l
b
o
n
o
i
s
n
e
p
$
$
–
–
–
e
t
a
d
e
d
a
r
T
g
n
i
t
n
u
o
c
c
a
–
–
60
h
s
a
c
-
n
o
N
l
a
r
e
t
a
l
l
o
c
–
–
–
–
–
–
–
(25) 10,401
–
–
16,558
–
37
–
–
–
–
(62)
–
10,461
–
–
–
–
–
–
16,558
–
–
–
–
–
n
a
o
l
,
s
e
e
t
n
a
r
a
u
G
t
e
s
f
f
o
f
o
t
h
g
R
i
–
–
–
–
852
–
–
852
–
–
–
–
–
d
n
a
s
t
n
e
m
t
i
m
m
o
c
s
m
e
t
i
r
o
n
m
i
r
e
h
t
o
l
a
t
o
T
– $
(101)
– $ (4,223)
(379)
1 $
– $ (2,148)
(111)
– $
111 $ 26,545
– $ (9,466)
87 $ 28,657
– $
300
– $ (1,383)
– $
(298)
– $ 1,083
690
25 $
–
–
–
–
–
(22)
–
(58)
–
–
–
–
36
–
–
–
–
–
–
–
(34)
–
(1,383)
(298)
1,417
298
i
s
p
h
s
r
e
n
t
r
a
p
d
e
t
i
m
i
L
n
o
i
t
a
i
c
e
r
p
p
a
s
t
h
g
i
r
k
c
o
t
S
y
t
i
u
q
e
d
n
a
s
e
i
t
i
l
i
b
a
i
L
l
a
n
o
i
t
i
d
d
A
n
o
i
s
n
e
p
n
o
i
t
a
g
i
l
b
o
e
t
a
d
e
d
a
r
T
g
n
i
t
n
u
o
c
c
a
h
s
a
c
-
n
o
N
l
a
r
e
t
a
l
l
o
c
n
a
o
l
,
s
e
e
t
n
a
r
a
u
G
t
e
s
f
f
o
f
o
t
h
g
R
i
d
n
a
s
t
n
e
m
t
i
m
m
o
c
s
m
e
t
i
r
o
n
m
i
r
e
h
t
o
l
a
t
o
T
–
165
–
(61)
–
–
–
–
–
–
104
–
(140)
–
127
–
–
–
–
–
–
(13)
–
–
–
(17)
–
(45)
–
–
–
–
28
–
–
–
–
–
(34)
–
(1,400)
(300)
1,434
300
–
–
–
167
–
480
–
–
–
–
(313)
–
(977)
–
9,143
–
–
–
16,339
–
8,166
–
–
–
–
–
–
16,339
–
–
–
–
–
–
–
897
–
–
897
–
–
–
–
–
– $
(31) $
– $
(32)
(983)
939
125 $ 29,381
– $
28
84 $ 28,890
407
– $
– $ (1,400)
– $
(300)
– $ 1,434
246
10 $
–
–
–
369
–
(179)
–
–
(128)
–
–
164
–
–
–
–
–
–
(15)
–
–
–
–
–
–
241
n
o
i
t
a
c
fi
i
s
s
a
l
c
e
R
s
e
i
t
i
r
u
c
e
s
f
o
g
n
i
t
n
u
o
c
c
a
e
c
n
a
r
u
s
n
I
–
–
–
–
–
2,890
–
2,777
–
–
–
–
113
g
n
i
t
n
u
o
c
c
a
e
c
n
a
r
u
s
n
I
–
–
–
2,819
–
2,661
–
–
–
–
158
$
$
$
–
–
(101)
(33)
–
–
(342)
(4,190)
(288)
Assets
Cash and due from banks
Interest-bearing deposits
with banks
Securities
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans
Other assets
Liabilities and shareholders’ equity
Deposits
Other liabilities
Subordinated debentures
Trust capital securities
Preferred share liabilities
Non-controlling interest in subsidiaries
Shareholders’ equity
–
$
$
41
$ 321
$
52
(77)
$
$ 300
–
$
–
$
–
$
54
$
–
–
(2)
(2,148)
(1,004)
(3,723)
–
(39)
–
–
–
(305)
–
(9,518)
(1,907)
–
–
–
(29)
–
As at October 31, 2005
Assets
Interest-bearing deposits
with banks
Securities
Loans
Other assets
Liabilities and shareholders’ equity
Deposits
Other liabilities
Subordinated debentures
Trust capital securities
Preferred share liabilities
Non-controlling interest in subsidiaries
Shareholders’ equity
s
e
i
t
i
v
i
t
c
a
g
n
g
d
e
h
i
d
n
a
s
t
n
e
m
u
r
t
s
n
i
e
v
i
t
a
v
i
r
e
D
t
s
e
r
e
t
n
i
l
e
b
a
i
r
a
V
s
e
i
t
i
t
n
e
(32)
$
–
$
$
42
$ 813
$
28
$ 416
$ 407
–
$
–
$
–
$
(28)
$
–
–
–
–
–
–
–
–
–
–
–
s
e
r
u
t
n
e
v
t
n
o
J
i
–
–
–
(74)
–
(74)
–
–
–
–
–
Royal Bank of Canada Annual Report 2006
150 Consolidated Financial Statements
Material differences between Canadian and U.S. GAAP
No.
Item
U.S. GAAP
Canadian GAAP
1
Variable interest
entities
We began in 2004 to consolidate VIEs where we are the entity’s
Primary Beneficiary under Financial Accounting Standards Board
(FASB) Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46R). VIEs are entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support
from other parties. The Primary Beneficiary is the party that has
exposure to a majority of the expected losses and/or expected
residual returns of the VIE.
In the fourth quarter of 2006, we adopted FASB Staff
Position FIN 46(R)-6, Determining the Variability to be
Consolidated in Applying FASB Interpretation No. 46(R)
(FSP FIN 46(R)-6). This guidance provides additional clarification
on how to analyze VIEs and their consolidation requirement.
Upon adoption of this guidance, we deconsolidated certain
investment funds.
2
Liabilities and
equity
Shares issued with conversion or conditional redemption
features are classified as equity.
3
Derivative
instruments and
hedging activities
All derivatives are recorded on the Consolidated Balance
Sheets at fair value, including certain derivatives embedded
within hybrid instruments. For derivatives that do not qualify
for hedge accounting, changes in their fair value are recorded
in Non-interest income. For derivatives that are designated and
qualify as cash flow hedges, changes in fair value related to
the effective portion of the hedge are recorded in Accumulated
other comprehensive income within Shareholders’ equity, and
will be subsequently recognized in Net interest income in the
same period when the cash flow of the hedged item affects
earnings. The ineffective portion of the hedge is reported in Non-
interest income. For derivatives that are designated and qualify
as fair value hedges, the carrying amount of the hedged item is
adjusted by gains or losses attributable to the hedged risk and
recorded in Non-interest income. This change in fair value of
the hedged item is generally offset by changes in the fair value
of the derivative.
Prior to 2005, we consolidated an entity when we effec-
tively controlled the entity, usually through the ownership
of more than 50% of the voting shares.
In 2005, we adopted AcG-15, Variable Interest Entities
and the treatment of VIEs is consistent in all material
aspects with U.S. GAAP.
The new guidance EIC-163, which is substantially
the same as FSP FIN 46(R)-6, will be adopted by us in the
second quarter of 2007. Refer to Note 1.
Financial instruments that can be settled by a variable
number of our common shares upon their conversion by
the holder are classified as liabilities under Canadian GAAP.
As a result, certain of our preferred shares and TruCS are
classified as liabilities. Dividends and yield distributions on
these instruments are included in Interest expense in our
Consolidated Statements of Income.
Derivatives embedded within hybrid instruments are
generally not separately accounted for except for those
related to equity-linked deposit contracts. For derivatives
that do not qualify for hedge accounting, changes in
their fair value are recorded in Non-interest income.
Non-trading derivatives where hedge accounting has not
been applied upon adoption of Accounting Guideline 13,
Hedging Relationships, are recorded at fair value with
transition gains or losses being recognized in income
as the original hedged item affects Net interest income.
Where derivatives have been designated and qualified
as effective hedges, they are accounted for on an accrual
basis with gains or losses deferred and recognized over
the life of the hedged assets or liabilities as adjustments
to Net interest income. The ineffective portion of the
hedge is not required to be recognized.
Upon the adoption of Section 3855 and Section 3865
on November 1, 2006, Canadian GAAP will be substan-
tially harmonized with U.S. GAAP.
4
Joint ventures
Investments in joint ventures other than VIEs are accounted for
using the equity method.
Investments in joint ventures other than VIEs are proportion-
ately consolidated.
5
Insurance
accounting
Fixed income investments: Fixed income investments are
included in Available-for-sale securities and are carried at
estimated fair value. Unrealized gains and losses, net of income
taxes, are reported in Accumulated other comprehensive
income within Shareholders’ equity. Realized gains and losses
are included in Non-interest income when realized.
Fixed income investments: Fixed income investments are
classified as Investment account securities and carried at
amortized cost. Realized gains and losses on disposal of
fixed income investments that support life insurance liabili-
ties are deferred and amortized to Non-interest income
over the remaining term to maturity of the investments sold
to a maximum period of 20 years.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 151
Note 31 Reconciliation of Canadian and United States generally accepted accounting principles (continued)
Material differences between Canadian and U.S. GAAP (continued)
No.
Item
U.S. GAAP
Canadian GAAP
5
Insurance
accounting
(continued)
Equity investments: Equity securities are classified as
Available-for-sale securities and are carried at estimated
fair value. Unrealized gains and losses, net of income taxes,
are included in Accumulated other comprehensive income.
Realized gains and losses are included in Non-interest income
when realized.
Insurance claims and policy benefit liabilities: Liabilities for
insurance contracts, except universal life and investment-type
contracts, are determined using the net level premium method,
which includes assumptions for mortality, morbidity, policy
lapses, surrenders, investment yields, policy dividends and
direct operating expenses. These assumptions are not revised
unless it is determined that existing deferred acquisition costs
cannot be recovered. For universal life and investment-type
contracts, liabilities represent policyholder account balances
and include a net level premium reserve for some contracts. The
account balances represent an accumulation of gross deposits
received plus credited interest less withdrawals, expenses and
mortality charges. Underlying reserve assumptions of these
contracts are subject to review at least annually.
Insurance revenue: Amounts received for universal life and
other investment-type contracts are not included as rev-
enue, but are reported as deposits to policyholders’ account
balances in Insurance claims and policy benefit liabilities.
Revenue from these contracts is limited to amounts assessed
against policyholders’ account balances for mortality, policy
administration and surrender charges, and is included in
Non-interest income when earned. Payments upon maturity
or surrender are reflected as reductions in the Insurance
claims and policy benefit liabilities.
Policy acquisition costs: Acquisition costs are deferred in
Other assets. The amortization method of the acquisition costs
is dependent on the product to which the costs are related.
For long-duration contracts, they are amortized in proportion
to premium revenue. For universal life and investment-type
contracts, amortization is based on a constant percentage of
estimated gross profits.
Value of business acquired: The value of business acquired
(VOBA) is determined at the acquisition date and recorded as
an asset. The VOBA asset is amortized and charged to income
using the same methodologies used for policy acquisition cost
amortization but reflecting premiums or profit margins after
the date of acquisition only.
Reinsurance: Reinsurance recoverables are recorded as an
asset on the Consolidated Balance Sheets.
Equity investments: Equity securities included in the
Investment account securities are initially recorded at cost.
The carrying value of equity securities that support life insur-
ance liabilities is adjusted quarterly by 5% of the difference
between market value and the previously adjusted carrying
cost. Realized gains and losses are deferred and recognized as
Non-interest income at the quarterly rate of 5% of unamortized
deferred gains and losses.
Insurance claims and policy benefit liabilities: Liabilities for life
insurance contracts are determined using the Canadian Asset
Liability Method, which incorporates assumptions for mortal-
ity, morbidity, policy lapses, surrenders, investment yields,
policy dividends and maintenance expenses. To recognize the
uncertainty in the assumptions underlying the calculation of
the liabilities, a margin (provision for adverse deviations) is
added to each assumption. These assumptions are reviewed
at least annually and updated in response to actual experience
and market conditions.
Insurance revenue: Premiums for universal life and other
investment-type contracts are recorded as Non-interest
income, and a liability for future policy benefits is established
as a charge to Insurance policyholder benefits, claims and
acquisition expense.
Policy acquisition costs: The costs of acquiring new life insur-
ance and annuity business are implicitly recognized as a
reduction in Insurance claims and policy benefit liabilities.
Value of business acquired: The value of life insurance in-force
policies acquired in a business combination is implicitly
recognized as a reduction in Insurance claims and policy
benefit liabilities.
Reinsurance: Reinsurance recoverables of life insurance
business related to the risks ceded to other insurance or
reinsurance companies are recorded as an offset to Insurance
claims and policy benefit liabilities.
Separate accounts: Separate accounts are recognized on the
Consolidated Balance Sheets.
Separate accounts: Assets and liabilities of separate accounts
(known as segregated funds in Canada) are not recognized on
the Consolidated Balance Sheets.
Royal Bank of Canada Annual Report 2006
152 Consolidated Financial Statements
No.
Item
U.S. GAAP
Canadian GAAP
6
Reclassification
of securities
Securities are classified as Trading account or Available-for-sale,
and are carried on the Consolidated Balance Sheets at their
estimated fair value. The net unrealized gain (loss) on Available-
for-sale securities, net of related income taxes, is reported in
Accumulated other comprehensive income within Shareholders’
equity except where the Available-for-sale securities qualify as
hedged items in fair value hedges. These hedged unrealized gains
(losses) are recorded in Non-interest income, where they are
generally offset by the changes in fair value of the hedging
derivatives. Writedowns to reflect other-than-temporary impair-
ment in the value of Available-for-sale securities are included in
Non-interest income.
Securities are classified as Trading account (carried
at estimated fair value), Investment account (carried at
amortized cost) or Loan substitute. Writedowns to
reflect other-than-temporary impairment in the value
of Investment account securities are included in Non-
interest income. Loan substitute securities are accorded
the accounting treatment applicable to loans and,
if required, are reduced by an allowance.
Upon adoption of Section 3855 on November 1,
2006, Canadian GAAP will be substantially harmonized
with U.S. GAAP.
We use the equity method to account for investments
in limited partnerships that are non-VIEs or unconsoli-
dated VIEs, if we have the ability to exercise significant
influence, which is generally indicated by an ownership
interest of 20% or more.
For such a plan, a liability is recorded for the poten-
tial cash payments to participants and compensation
expense is measured assuming that all participants will
exercise SARs.
7
Limited
partnerships
The equity method is used to account for investments in limited
partnerships that are non-VIEs or unconsolidated VIEs, if we own
at least 3% of the total ownership interest.
8
Stock
appreciation
rights (SARs)
Between November 29, 1999, and June 5, 2001, grants of options
under the employee stock option plan were accompanied with
tandem SARs, whereby participants could choose to exercise a
SAR instead of the corresponding option. In such cases, the par-
ticipants would receive a cash payment equal to the difference
between the closing price of our common shares on the day imme-
diately preceding the day of exercise and the exercise price of
the option. For such a plan, compensation expense would be
measured using estimates based on past experience of partici-
pants exercising SARs rather than the corresponding options.
On November 1, 2005, we adopted FASB Statement No. 123
(revised 2004), Share-Based Payment (FAS 123(R)) and its related
FASB Staff Positions (FSPs) prospectively for new awards and the
unvested portion of existing awards. FAS 123(R) requires that the
compensation expense should be measured assuming that all par-
ticipants will exercise SARs. Under the transition guidelines of the
new standard, the requirements of the new accounting standard
are applicable to awards granted after the adoption of the new
standard. Since these SARs were awarded prior to adoption of the
new accounting standard, these will continue to be accounted for
under the previous accounting standard.
9
Additional
pension
obligation
For defined benefit pension plans, an unfunded accumulated
benefit obligation should be recorded as an additional minimum
pension liability, an intangible asset should be recorded up to
the amount of unrecognized prior service cost, and the excess of
unfunded accumulated benefit obligation over unrecognized
prior service cost should be recorded as a reduction in Other
comprehensive income.
There is no requirement to recognize additional pension
obligation.
10 Trade date
accounting
For securities transactions, trade date basis of accounting is used
for both the Consolidated Balance Sheets and the Consolidated
Statements of Income.
For securities transactions, settlement date basis of
accounting is used for the Consolidated Balance Sheets
whereas trade date basis of accounting is used for the
Consolidated Statements of Income.
11 Non-cash
collateral
Non-cash collateral received in securities lending transactions is
recorded on the Consolidated Balance Sheets as an asset and
a corresponding obligation to return it is recorded as a liability,
if we have the ability to sell or repledge it.
Non-cash collateral received in securities lending
transactions is not recognized on the Consolidated
Balance Sheets.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 153
Note 31 Reconciliation of Canadian and United States generally accepted accounting principles (continued)
Material differences between Canadian and U.S. GAAP (continued)
No.
Item
U.S. GAAP
Canadian GAAP
12 Right of offset
When financial assets and liabilities are subject to a legally
enforceable right of offset and we intend to settle these
assets and liabilities with the same party either on a net basis
or simultaneously, the financial assets and liabilities may be
presented on a net basis.
Net presentation of financial assets and liabilities is
required when the same criteria under U.S. GAAP are met.
In addition, the netting criteria may be applied to a tri-party
transaction.
13 Guarantees
For guarantees issued or modified after December 31, 2002,
a liability is recognized at the inception of a guarantee
for the fair value of the obligation undertaken in issuing
the guarantee.
Canadian GAAP only provides for disclosure requirements.
Upon the adoption of Section 3855 on November 1,
2006, Canadian GAAP will be substantially harmonized with
U.S. GAAP.
14 Loan
commitments
For loan commitments entered into after March 31, 2004
and issued for loans that will be held for sale when funded,
revenue associated with servicing assets embedded in
these commitments should be recognized only when the
servicing asset has been contractually separated from the
underlying loans.
15 Two-class method
of calculating
earnings per
share
When calculating earnings per share, we are required to give
effect to securities or other instruments or contracts that
entitle their holders to participate in undistributed earnings
when such entitlement is nondiscretionary and objectively
determinable.
Canadian GAAP does not have such a requirement.
Canadian GAAP does not have such a requirement.
16
Income taxes
In addition to the tax impact of the differences outlined
above, the effects of changes in tax rates on deferred income
taxes are recorded when the tax rate change has been
passed into law.
These effects are recorded when the tax rate change has
been substantively enacted.
Significant acquisitions
There was no Canadian and U.S. GAAP difference resulting from our
acquisitions completed in 2006, and we did not have a significant
acquisition in 2005.
The following table presents the differences in the allocation of pur-
chase considerations due to Canadian and U.S. GAAP differences as
explained in Item 5 Insurance accounting above for significant acquisi-
tions that occurred in 2004:
2004
Provident
William R. Hough
UnumProvident (1)
Canadian
GAAP
Difference
U.S. GAAP
Canadian
GAAP
Difference
U.S. GAAP
Canadian
GAAP
Difference
U.S. GAAP
VOBA
Fair value of liabilities assumed
$
– $
(1,180)
$
–
–
– $
(1,180)
– $
(21)
– $
–
– $
– $
(21)
(1,617)
661 $
(661)
661
(2,228)
(1)
In connection with the acquisition of the Canadian operations of UnumProvident, we assumed UnumProvident’s policy liabilities and received assets with the equivalent fair value to support
future payments.
Royal Bank of Canada Annual Report 2006
154 Consolidated Financial Statements
Pensions and other post-employment benefits
The following table provides information on our defined benefit plans in addition to those disclosed in Note 20.
Plan assets, benefit obligations and funded status
Amounts recognized on the Consolidated Balance Sheets consist of:
Prepaid pension benefit cost
Accrued pension benefit expense
Intangible asset
Accumulated other comprehensive income (before taxes)
Net amount recognized as at October 31
Accumulated benefit obligation (1)
Pension plans
Other post-employment plans
2006
2005
2006
2005
$
$
$
682
(133)
21
95
665
6,277
$
$
$
$
137
(300)
130
480
$
–
(1,154)
–
–
–
(1,102)
–
–
447
$
(1,154) $
(1,102)
5,944
n.a.
n.a.
(1)
For all plans where the accumulated benefit obligations exceeded the fair values of the plan assets, the accumulated benefit obligation and the fair value of the assets were $923 million
(2005 – $5,265 million) and $789 million (2005 – $4,987 million), respectively.
Hedging activities
Fair value hedge
For the year ended October 31, 2006, the ineffective portion recognized
in Non-interest income amounted to a net unrealized gain of $11 million
(2005 – $4 million). All components of each derivative’s change in fair
value have been included in the assessment of fair value hedge effec-
tiveness. We did not hedge any firm commitments for the year ended
October 31, 2006.
Cash flow hedge
For the year ended October 31, 2006, a net unrealized gain of $1 million
(2005 – $97 million loss) was recorded in Other comprehensive income
for the effective portion of changes in fair value of derivatives designated
as cash flow hedges. The amounts recognized in Other comprehensive
income are reclassified to Net interest income in the periods in which
Net interest income is affected by the variability in cash flows of the
hedged item. A net loss of $108 million (2005 – $124 million) was
reclassified to Net income during the year. A net loss of $26 million
(2005 – $111 million) deferred in Accumulated other comprehensive
income as at October 31, 2006, is expected to be reclassified to Net
income during the next 12 months.
For the year ended October 31, 2006, a net unrealized loss of
$23 million (2005 – $3 million) was recognized in Non-interest income
for the ineffective portion of cash flow hedges. All components of each
derivative’s change in fair value have been included in the assessment
of cash flow hedge effectiveness. We did not hedge any forecasted
transactions for the year ended October 31, 2006.
Hedges of net investments in foreign operations
For the year ended October 31, 2006, we experienced foreign currency
losses of $502 million (2005 – $618 million) related to our net invest-
ments in foreign operations, which were offset by gains of $270 million
(2005 – $401 million) related to derivative and non-derivative instru-
ments designated as hedges for such foreign currency exposures. The
net foreign currency gains (losses) are recorded as a component of
Other comprehensive income.
Average assets, U.S. GAAP
Domestic
United States
Other International
2006
2005
2004
Average
assets
% of total
average assets
Average
assets
% of total
average assets
Average
assets
% of total
average assets
$ 297,740
119,614
104,533
57%
23%
20%
$ 277,442
97,002
101,961
58%
20%
22%
$ 253,100
94,231
96,267
$ 521,887
100%
$ 476,405
100%
$ 443,598
57%
21%
22%
100%
Future accounting changes
Accounting for certain hybrid financial instruments
On February 16, 2006, FASB issued FASB Statement No. 155, Accounting
for Certain Hybrid Instruments – an amendment of FASB Statement
No. 133 and 140 (FAS 155), which allows an entity to elect to measure
certain hybrid financial instruments at fair value in their entirety, with
changes in fair value recognized in earnings. The fair value election will
eliminate the need to separately recognize certain derivatives embed-
ded in hybrid financial instruments under FASB Statement No. 133,
Accounting for Derivative Instruments & Hedging Activities. FAS 155 will
be effective for us on November 1, 2006.
Accounting for servicing financial assets
On March 17, 2006, FASB issued FASB Statement No. 156, Accounting
for Servicing of Financial Assets – an amendment of FASB Statement
No. 140 (FAS 156). Under FAS 156, an entity is required to initially mea-
sure its servicing rights at fair value and can choose to subsequently
amortize the initial fair value over the term of the servicing rights, or
remeasure them at fair value through income. The ability to remeasure
servicing rights at fair value through income will eliminate the account-
ing mismatch between the servicing rights and the related derivatives
that would otherwise result in the absence of hedge accounting.
FAS 156 will be effective for us on November 1, 2006.
The implementation of these two standards is not expected to
have a material impact on our consolidated financial position and
results of operations.
Guidance on accounting for income taxes
On July 13, 2006, FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement
No. 109 (FIN 48), which provides additional guidance on how to recog-
nize, measure, and disclose income tax benefits. FIN 48 will be effective
for us on November 1, 2007.
Royal Bank of Canada Annual Report 2006
Consolidated Financial Statements 155
Note 31 Reconciliation of Canadian and United States generally accepted accounting principles (continued)
Accounting for defined benefit pension and other post-retirement plans
On September 29, 2006, FASB issued Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Post-retirement
Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)
(FAS 158). FAS 158 requires an entity to (i) recognize the overfunded
or underfunded status of a benefit plan as an asset or liability in the
balance sheet; (ii) recognize the existing unrecognized net gains and
losses, unrecognized prior-service costs and credits, and unrecognized
net transition assets or obligations in Other comprehensive income; and
(iii) measure defined benefit plan assets and obligations as of the year-
end balance sheet date. This statement is effective prospectively for
us at the end of fiscal year 2007 in respect of recognition requirements
mentioned in (i) and (ii) above, and for the end of the fiscal year 2009 in
respect of measurement date changes mentioned in (iii) above.
Accounting for deferred acquisition costs for insurance operations
In September 2005, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued Statement
of Position 05-1, Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on
accounting for deferred acquisition costs on internal replacements
of insurance and investment contracts other than those specifically
described in FASB Statement No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments. SOP 05-1
defines an internal replacement as a modification in product benefits,
features, rights or coverages that occurs by the exchange of a
contract for a new contract, by amendment or endorsement, rider
to a contract, or by the election of a feature or coverage within a
contract. A replacement contract that is substantially changed from
the replaced contract is accounted for as an extinguishment of the
replaced contract, resulting in the release of deferred costs including
unamortized deferred acquisition costs. This SOP 05-1 will be effective
for us on November 1, 2007.
Guidance for quantifying financial statement misstatements
On September 13, 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (SAB 108). SEC staff issued SAB 108 to
address what they identified as diversity in practice whereby entities
were using either an income statement approach or a balance sheet
approach, but not both, when evaluating whether an error is material
to an entity’s financial statements. SAB 108 requires that in quantifying
and analyzing misstatements, both the income statement approach and
the balance sheet approach should be used to evaluate the materiality
of financial statement misstatements. SAB 108 will be effective for us on
November 1, 2007.
Framework on fair value measurement
On September 15, 2006, FASB issued FASB Statement No. 157, Fair
Value Measurements (FAS 157), which establishes a framework for
measuring fair value in GAAP, and is applicable to other accounting
pronouncements where fair value is considered to be the relevant
measurement attribute. FAS 157 also expands disclosures about fair
value measurements and will be effective for us on November 1, 2008.
We are currently assessing the impact of adopting the above standards
on our consolidated financial position and results of operations.
Note 32 Subsequent events
On November 1, 2006, RBC Centura Bank announced that it had signed
an agreement with AmSouth Bancorporation (AmSouth Bank) pursu-
ant to which RBC Centura Bank will acquire 39 branches in Alabama
owned by AmSouth Bank. On November 21, 2006, RBC Capital Markets
announced that it had signed an agreement to acquire Daniels &
Associates, L.P. (Daniels), a mergers and acquisitions advisor to the
cable, telecom and broadcast industries. Both acquisitions are subject
to regulatory approvals and other customary conditions. The acquisi-
tions of branches from AmSouth Bank and Daniels are expected to close
in the second and first quarter of 2007, respectively.
Royal Bank of Canada Annual Report 2006
156 Consolidated Financial Statements
Supplementary information
Consolidated Balance Sheets
As at October 31 (C$ millions)
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Assets
Cash and deposits with banks (1)
Securities (1)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans
Residential mortgage
Personal
Credit cards
Business and government
$ 14,903 $ 10,238 $
9,978 $
6,013 $
6,659 $
6,244 $
184,869
160,495
128,946
128,931
108,464
91,798
7,149 $ 16,591 $ 13,389 $ 18,390 $ 22,313
44,744
44,405
57,010
36,039
69,467
59,378
42,973
46,949
41,182
38,929
40,177
20,749
23,091
23,008
20,107
12,446
96,675
44,902
7,155
61,207
91,043
41,045
6,200
53,626
81,998
36,848
6,456
47,258
75,790
32,186
4,816
49,657
72,840
30,588
4,914
59,431
67,442
31,395
4,283
65,261
62,984
27,087
4,666
60,350
59,242
25,050
2,666
56,623
57,069
22,760
1,945
63,732
53,369
20,864
2,324
61,813
48,120
18,440
3,522
55,491
Allowance for loan losses
209,939
(1,409)
191,914
(1,498)
172,560
(1,644)
162,449
(2,055)
167,773
(2,203)
168,381
(2,278)
155,087
(1,871)
143,581
(1,884)
145,506
(2,026)
138,370
(1,769)
125,573
(1,875)
208,530
190,416
170,916
160,394
165,570
166,103
153,216
141,697
143,480
136,601
123,698
Other
Customers’ liability under
acceptances
Derivative-related amounts
Premises and equipment, net
Goodwill
Other intangibles
Assets of operations
held for sale (2)
Other assets
Liabilities and shareholders’ equity
Deposits
Personal
Business and government
Bank
9,108
37,729
1,818
4,304
642
7,074
38,834
1,708
4,203
409
6,184
38,897
1,738
4,280
521
5,943
35,616
1,648
4,356
566
8,051
30,258
1,653
5,004
665
9,923
27,240
1,602
4,919
619
11,628
19,155
1,249
648
208
9,257
15,151
1,320
611
–
10,620
30,413
1,872
551
–
10,561
14,776
1,696
607
–
7,423
12,994
1,785
335
–
82
15,417
263
12,908
2,457
15,356
3,688
11,510
–
10,221
–
10,314
–
6,271
–
5,922
–
6,661
–
5,997
–
5,760
69,100
65,399
69,433
63,327
55,852
54,617
39,159
32,261
50,117
33,637
28,297
$ 536,780 $ 469,521 $ 426,222 $ 399,847 $ 375,474 $ 358,939 $ 289,740 $ 270,650 $ 274,399 $ 244,774 $ 231,498
$ 114,040 $ 111,618 $ 111,256 $ 106,709 $ 101,892 $ 101,381 $ 89,632 $ 87,359 $ 85,910 $ 86,106 $ 90,774
47,799
107,141
23,244
24,925
76,107
17,988
119,581
22,003
64,368
22,755
160,593
34,649
93,618
19,646
86,223
14,315
129,860
22,576
133,823
25,880
189,140
40,343
Other
Acceptances
Obligations related to
securities sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivative-related amounts
Insurance claims and
policy benefit liabilities
Liabilities of operations
held for sale (2)
Other liabilities
Subordinated debentures
Trust capital securities
Preferred share liabilities
Non-controlling interest
in subsidiaries
Shareholders’ equity
Preferred shares
Common shares
Contributed surplus
Retained earnings
Treasury shares – preferred
– common
Net foreign currency translation
adjustments
343,523
306,860
270,959
259,145
243,476
233,447
202,896
187,897
180,005
173,229
161,817
9,108
7,074
6,184
5,943
8,051
9,923
11,628
9,257
10,620
10,561
7,423
38,252
32,391
25,005
22,855
19,110
16,443
13,419
17,885
14,404
11,152
8,331
41,103
42,094
23,381
42,592
26,473
42,201
24,496
37,775
24,056
32,137
22,672
28,646
9,895
18,574
11,093
15,219
13,756
29,370
9,669
14,732
16,835
13,449
7,337
7,117
6,488
4,775
2,407
2,268
144
113
427
–
91
32
22,649
40
18,408
62
20,172
50
17,850
–
19,405
–
19,417
–
13,128
–
11,872
–
9,339
–
10,176
–
10,428
160,575
131,003
126,585
113,744
105,166
99,369
66,788
65,439
77,916
56,290
56,557
7,103
1,383
298
8,167
1,400
300
8,116
2,300
300
6,243
2,300
300
6,614
1,400
6,513
5,825
4,596
4,087
4,227
3,602
1,400
650
–
–
–
–
989
1,315
1,585
1,562
1,844
1,484
1,452
1,775
1,944
58
40
35
45
40
103
499
531
108
1,050
7,196
292
15,771
(2)
(180)
700
7,170
265
13,704
(2)
(216)
532
6,988
169
12,065
–
(294)
532
7,018
85
11,333
–
–
556
6,979
78
10,235
–
–
709
6,940
33
9,206
–
–
452
3,076
–
8,464
–
–
447
3,065
–
7,579
–
–
300
2,925
–
6,857
–
–
300
2,907
–
5,728
–
–
300
2,876
–
4,809
–
–
(2,004)
(1,774)
(1,556)
(893)
(54)
(38)
(36)
(38)
(34)
(29)
(23)
22,123
19,847
17,904
18,075
17,794
16,850
11,956
11,053
10,048
8,906
7,962
$ 536,780 $ 469,521 $ 426,222 $ 399,847 $ 375,474 $ 358,939 $ 289,740 $ 270,650 $ 274,399 $ 244,667 $ 231,498
(1)
(2)
As the information is not reasonably determinable, amounts for years prior to 2001 have not been fully restated to reflect the reclassification of certificates of deposits.
Relates to assets and liabilities of discontinued operations (RBC Mortgage Company). As the information is not reasonably determinable, amounts for years prior to 2003 have not been restated
to reflect the presentation of assets and liabilities of operations held for sale.
Royal Bank of Canada Annual Report 2006
Supplementary information 157
Interest income
Loans
Securities
Assets purchased under
reverse repurchase agreements
and securities borrowed
Deposits with banks
Consolidated Statements of Income
For the year ended October 31
(C$ millions, except per share amounts)
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
$ 12,708 $ 10,790 $
6,155
4,583
9,535 $
3,572
9,900 $ 10,394 $ 12,001 $ 11,538 $ 10,394 $ 10,474 $
3,025
1,955
3,175
2,832
2,356
3,505
9,354 $
2,159
9,490
2,445
2,827
480
1,354
231
656
103
873
101
725
156
1,258
337
1,078
577
893
513
1,169
673
568
971
366
891
22,170
16,958
13,866
13,899
14,450
17,101
16,025
14,156
14,271
13,052
13,192
Interest expense
Deposits
Other liabilities
Subordinated debentures
10,708
4,281
419
6,946
2,800
442
15,408
10,188
Net interest income
6,762
6,770
Non-interest income
Insurance premiums, investment
and fee income
Trading revenue
Investment management
and custodial fees
Securities brokerage commissions
Mutual fund revenue
Service charges
Underwriting and other
advisory fees
Card service revenue
Foreign exchange revenue,
other than trading
Securitization revenue
Credit fees
Gain on sale of investment
account securities
Other
3,348
2,574
1,335
1,243
1,242
1,216
1,024
496
438
257
241
88
373
3,270
1,594
1,255
1,163
962
1,153
1,026
579
407
285
187
85
448
5,142
1,897
429
7,468
6,398
2,870
1,563
1,126
1,166
850
1,089
918
555
331
200
198
20
518
5,452
1,735
376
7,563
6,336
5,709
1,562
406
8,712
1,868
410
9,057
1,551
344
7,677
10,990
10,952
6,773
6,111
5,073
7,636
1,291
286
9,213
4,943
7,732
1,296
339
9,367
4,904
6,548
1,251
384
8,183
4,869
7,115
1,238
322
8,675
4,517
2,356
1,908
1,098
1,031
673
1,122
813
518
279
165
227
31
431
2,043
1,689
1,153
1,187
723
1,088
755
496
276
174
223
(111)
623
1,824
1,770
1,074
1,000
692
920
573
458
303
123
237
(130)
921
973
1,594
737
1,106
835
841
624
778
643
420
299
115
212
(16)
185
629
625
556
708
403
362
243
222
189
27
250
578
748
602
549
537
664
369
305
218
218
183
342
146
452
606
401
756
354
690
416
332
211
–
169
35
222
337
368
317
491
241
701
273
282
165
–
153
105
115
Non-interest income
13,875
12,414
11,404
10,652
10,319
9,765
7,503
6,057
5,459
Total revenue
20,637
19,184
17,802
16,988
17,092
15,876
12,576
11,000
10,363
Provision for credit losses
429
455
346
721
1,065
1,119
691
760
575
4,644
9,513
380
3,548
8,065
440
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Human resources
Equipment
Occupancy
Communications
Professional fees
Outsourced item processing
Amortization of goodwill
Amortization of other intangibles
Other
Business realignment charges
Goodwill impairment
Income from continuing operations
before income taxes
Income taxes
Net income before
non-controlling interest
Non-controlling interest in net
income of subsidiaries
–
–
6,204
1,403
4,801
44
2,509
2,625
2,124
1,696
1,535
1,344
687
530
438
346
266
7,340
957
792
687
628
298
–
76
717
6,736
960
749
632
529
296
–
50
1,405
6,701
906
765
672
474
294
–
69
952
6,297
882
721
707
444
292
–
71
751
6,315
893
759
768
416
306
–
72
891
11,495
11,357
10,833
10,165
10,420
45
–
177
–
–
–
–
–
5,723
807
704
673
409
303
210
36
852
9,717
–
38
4,651
679
556
695
267
–
76
11
646
7,581
–
–
4,013
677
564
699
298
–
66
–
743
7,060
–
–
3,594
585
508
665
262
–
62
–
723
6,399
–
–
3,365
605
559
587
228
–
59
–
650
6,053
–
–
2,851
492
507
523
165
–
38
–
536
5,112
–
–
4,702
1,278
4,322
1,287
4,406
1,439
4,072
1,365
3,658
1,340
3,617
1,445
2,650
1,015
2,951
1,175
2,734
1,090
2,247
880
3,424
3,035
2,967
2,707
2,318
2,172
1,635
1,776
1,644
1,367
(13)
12
12
5
11
7
8
76
77
49
Net income from continuing
operations
Net income (loss) from
discontinued operations
4,757
3,437
3,023
2,955
2,702
2,307
2,165
1,627
1,700
1,567
1,318
(29)
(50)
(220)
13
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Net income
$
4,728 $
3,387 $
2,803 $
2,968 $
2,702 $
2,307 $
2,165 $
1,627 $
1,700 $
1,567 $
1,318
Preferred dividends
Net gain on redemption of
preferred shares
Net income available to
common shareholders
(60)
–
(42)
4
(31)
–
(31)
–
(38)
–
(31)
–
(25)
–
(27)
–
(21)
–
(19)
–
(32)
–
$
4,668 $
3,349 $
2,772 $
2,937 $
2,664 $
2,276 $
2,140 $
1,600 $
1,679 $
1,548 $
1,286
Average number of common shares
(in thousands) (1)
Basic earnings per share (in dollars) $
Basic earnings per share from
continuing operations (in dollars) $
Basic earnings (loss) per share from
discontinued operations (in dollars) $
Average number of diluted common
shares (in thousands) (1)
Diluted earnings per share (in dollars) $
Diluted earnings per share from
continuing operations (in dollars) $
Diluted earnings (loss) per share from
discontinued operations (in dollars) $
1,279,956
1,283,433
1,293,465
1,324,159 1,345,143 1,283,031
1,212,777
3.65 $
2.61 $
2.14 $
2.22 $
1.98 $
1.77 $
1.77 $
1,252,316 1,234,648 1,235,624 1,256,484
1.02
1.36 $
1.25 $
1.28 $
3.67 $
2.65 $
2.31 $
2.21 $
1.98 $
1.77 $
1.77 $
1.28 $
1.36 $
1.25 $
1.02
(.02) $
(.04) $
(.17) $
.01
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1,299,785
1,304,680 1,311,016
1,338,032
1,356,241 1,294,432 1,219,730 1,264,610 1,267,253
3.59 $
2.57 $
2.11 $
2.20 $
1.96 $
1.76 $
1.76 $
1.27 $
1.34 $
1,264,103 1,257,247
1.02
1.23 $
3.61 $
2.61 $
2.28 $
2.19 $
1.96 $
1.76 $
1.76 $
1.27 $
1.34 $
1.23 $
1.02
(.02) $
(.04) $
(.17) $
.01
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Dividends per share (in dollars) (1) $
1.44 $
1.18 $
1.01 $
.86 $
.76 $
.69 $
.57 $
.47 $
.44 $
.38 $
(1)
n.a.
The average number of common shares, average number of diluted common shares, basic and diluted earnings per share, as well as dividends per share, have been adjusted retroactively for
the stock dividend paid on April 6, 2006. Refer to Note 25.
not available
Royal Bank of Canada Annual Report 2006
158 Supplementary information
n.a.
.34
Consolidated Statements of Changes in Shareholders’ Equity
For the year ended October 31
(C$ millions)
Preferred shares
Balance at beginning of year
Issued
Redeemed for cancellation
Translation adjustment
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997 1996 (1)
$
700 $
600
(250)
–
532 $
300
(132)
–
532 $
–
–
–
556 $
–
–
(24)
709 $
–
(150)
(3)
452 $
250
–
7
447 $
–
–
5
300 $
296
(150)
1
300 $
–
–
–
300 $
–
–
–
535
–
(237)
2
300
Balance at end of year
1,050
700
532
532
556
709
452
447
300
300
Common shares
Balance at beginning of year
Issued
Purchased for cancellation
Balance at end of year
Contributed surplus
Balance at beginning of year
Renounced stock appreciation
rights
Stock-based compensation
awards
Gain on redemption of preferred
shares
Reclassified amounts
Initial adoption of AcG-15,
Consolidation of Variable
Interest Entities
Other
Balance at end of year
Retained earnings
Balance at beginning of year
Net income
Preferred share dividends
Common share dividends
Premium paid on common shares
purchased for cancellation
Issuance costs and other
Cumulative effect of initial
adoption of Employee Future
Benefits
Cumulative effect of adopting
AcG-17, Equity-Linked Deposit
Contracts
7,170
127
(101)
7,196
6,988
214
(32)
7,018
127
(157)
6,979
193
(154)
6,940
191
(152)
3,076
3,976
(112)
3,065
109
(98)
7,170
6,988
7,018
6,979
6,940
3,076
2,925
192
(52)
3,065
2,907
18
–
2,925
2,876
69
(38)
2,910
–
(34)
2,907
2,876
265
169
(2)
(18)
–
–
–
47
292
(6)
26
7
–
54
15
265
85
–
56
–
34
–
(6)
169
78
–
7
–
–
–
–
33
31
14
–
–
–
–
–
–
33
–
–
–
–
85
78
33
13,704
4,728
(60)
(1,847)
12,065
3,387
(42)
(1,512)
11,333
2,803
(31)
(1,303)
10,235
2,968
(31)
(1,137)
(743)
(11)
(194)
–
(735)
–
(698)
(4)
–
–
–
–
–
(2)
–
–
9,206
2,702
(38)
(1,022)
(612)
(1)
–
–
8,464
2,307
(31)
(897)
(397)
(19)
(221)
–
–
–
–
–
–
–
–
–
7,579
2,165
(25)
(689)
(562)
(4)
–
–
–
–
–
–
–
–
–
–
6,857
1,627
(27)
(588)
(281)
(9)
–
–
–
–
–
–
–
–
–
–
5,728
1,700
(21)
(543)
–
(7)
–
–
–
–
–
–
–
–
–
–
4,809
1,567
(19)
(469)
(160)
–
–
–
–
–
–
–
–
–
–
–
4,077
1,318
(32)
(418)
(136)
–
–
–
Balance at end of year
15,771
13,704
12,065
11,333
10,235
9,206
8,464
7,579
6,857
5,728
4,809
Treasury shares – preferred
Balance at beginning of year
Sales
Purchases
Balance at end of year
Treasury shares – common
Balance at beginning of year
Sales
Purchases
Reclassified amounts
Initial adoption of AcG-15,
Consolidation of Variable
Interest Entities
Balance at end of year
Net foreign currency translation
adjustments
Balance at beginning of year
Unrealized foreign currency
translation gain (loss)
Foreign currency gain (loss) from
hedging activities
(2)
51
(51)
(2)
(216)
193
(157)
–
–
(180)
–
–
(2)
(2)
(294)
179
(47)
–
(54)
(216)
–
–
–
–
–
248
(238)
(304)
–
(294)
–
–
–
–
–
–
–
–
–
–
(1,774)
(1,556)
(893)
(54)
(499)
(619)
(1,341)
(2,988)
269
401
678
2,149
Balance at end of year
(2,004)
(1,774)
(1,556)
(893)
–
–
–
–
–
–
–
–
–
–
(38)
(59)
43
(54)
–
–
–
–
–
–
–
–
–
–
(36)
473
(475)
(38)
–
–
–
–
–
–
–
–
–
–
(38)
(2)
4
(36)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(34)
(29)
(205)
164
201
(38)
(169)
(34)
(23)
129
(135)
(29)
–
–
–
–
–
–
–
–
–
–
(20)
(12)
9
(23)
Shareholders’ equity at end of year $ 22,123 $ 19,847 $ 17,904 $ 18,075 $ 17,794 $ 16,850 $ 11,956 $ 11,053 $ 10,048 $
8,906 $
7,962
(1)
Retained earnings at the beginning of 1996 was reduced by $75 million as a result of the adoption of the Impaired Loans accounting standard.
Royal Bank of Canada Annual Report 2006
Supplementary information 159
Financial highlights
(C$ millions, except per share
and percentage amounts)
Performance ratios
Return on common equity
Return on assets
Return on assets after
preferred dividends
Net interest margin (1)
Non-interest income as a % of
total revenue
Average balances and year-end
off-balance sheet data
Averages (2)
Assets
Assets from continuing
operations
Loans, acceptances and
reverse repurchase
agreements
Deposits
Common equity
Total equity
Assets under administration –
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
23.5%
.94
.93
1.35
18.0%
.76
.75
1.52
15.6%
.67
.66
1.53
16.7%
.76
.75
1.63
15.8%
.74
.73
1.86
16.4%
.71
.70
1.89
19.8%
.77
.76
1.80
15.6%
.60
.59
1.83
18.4%
.65
.64
1.88
19.3%
.65
.65
2.03
17.6%
.64
.63
2.20
67.2%
64.7%
64.1%
62.7%
60.4%
61.5%
59.7%
55.1%
52.7%
48.8%
44.0%
$ 502,300 $ 447,100 $ 421,400 $ 390,700 $ 364,000 $ 322,900 $ 281,900 $ 269,900 $ 261,300 $ 239,500 $ 204,900
$ 502,100 $ 445,300 $ 418,200 $ 387,700 $ 364,000 $ 322,900 $ 281,900 $ 269,900 $ 261,300 $ 239,500 $ 204,900
261,911
323,299
19,898
20,709
230,484
288,197
18,592
19,451
215,733
268,202
17,790
18,622
209,161
250,777
17,551
18,761
208,184
240,397
16,809
18,522
196,861
218,425
13,843
15,916
181,240
193,762
10,814
12,789
177,052
184,796
10,264
12,475
178,822
178,688
9,107
11,078
154,809
166,249
8,003
9,744
130,656
147,391
7,320
9,265
RBC
525,800
1,778,200
1,593,900
1,483,800
1,365,900
1,342,500
1,175,200
967,800
829,200
783,300
522,100
Assets under administration –
RBC Dexia IS
Assets under management
Capital ratios (3)
Tier 1 capital
Total capital
Total risk-adjusted assets
Tier 1 capital ratio
Total capital ratio
Common share information
Shares outstanding (in thousands)
End of year
Average basic
Average diluted
Dividends per share
Book value per share
Common share price (RY on TSX) –
High (4)
Low (4)
Close
Price/earnings multiple (5)
Dividend yield (6)
Dividend payout ratio (7)
Number of
Employees (8)
Automated banking machines
Bank branches (9)
Canada
U.S. and International
1,893,000
143,100
–
118,800
–
102,900
–
94,400
–
93,300
–
100,000
–
92,300
–
81,600
–
73,400
–
67,700
–
51,200
$
21,478 $
26,664
223,709
9.6%
11.9
16,272 $
18,901 $
25,813
197,004
9.6%
22,733
183,409
8.9%
16,259 $
21,374
166,911
9.7%
13.1
12.4
12.8
15,380 $
21,012
165,559
9.3%
12.7
14,851 $
20,171
171,047
8.7%
11.8
13,567 $
19,044
158,364
8.6%
12.0
12,026 $
16,698
149,078
8.1%
11.2
11,593 $
16,480
157,064
7.4%
10.5
10,073 $
14,705
147,672
6.8%
10.0
9,037
12,069
128,163
7.0%
9.4
1,280,890
1,279,956
1,299,785
1,293,502 1,289,496 1,312,043 1,330,514
1,283,433 1,293,465
1,345,143
1,304,680 1,311,016 1,338,032 1,356,241
1,324,159
1,348,042 1,204,796 1,235,535
1,283,031 1,212,777 1,252,316 1,234,648
1,294,432 1,219,730 1,264,610 1,267,253
$
1.44 $
1.18 $
1.01 $
.86 $
.76 $
.69 $
16.52
14.89
13.57
13.37
12.96
11.97
.57 $
9.55
.47 $
8.58
1,235,162 1,233,342 1,242,118
1,235,624 1,256,484
1,264,103 1,257,247
.34
.38 $
6.17
.44 $
7.89
6.98
51.49
41.29
49.80
12.9
3.1%
40
60,858
4,232
1,117
326
43.34
30.45
41.67
14.4
3.2%
45
32.95
29.02
31.70
14.7
3.3%
47
32.50
26.63
31.74
13.4
2.9%
39
29.45
22.53
27.21
13.3
2.9%
38
26.63
20.80
23.40
13.5
2.9%
39
24.44
13.63
24.15
10.8
3.0%
32
21.06
14.83
15.86
14.2
2.6%
37
23.05
14.38
17.78
14.0
2.4%
32
19.11
11.00
18.84
12.2
2.5%
30
11.10
7.44
11.08
9.0
3.6%
33
60,012
4,277
61,003
4,432
60,812
4,469
59,549
4,572
57,568
4,697
49,232
4,517
51,891
4,585
51,776
4,317
48,816
4,248
46,205
4,215
1,104
315
1,098
317
1,104
282
1,117
278
1,125
283
1,333
306
1,410
99
1,422
106
1,453
105
1,493
103
Based on methods intended to approximate the average of the daily balances for the period.
Calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada.
Intra-day high and low share prices.
Average of high and low common share price divided by diluted earnings per share.
(1) Net interest income as a percentage of average assets from continuing operations.
(2)
(3)
(4)
(5)
(6) Dividends per common share divided by the average of high and low share price.
Common dividends as a percentage of net income after preferred dividends.
(7)
(8) On a full-time equivalent basis.
(9)
Bank branches which provide full or limited banking services dealing directly with clients. Bank branches prior to 2001 are reported on the basis of service delivery units.
Royal Bank of Canada Annual Report 2006
160 Supplementary information
Glossary
Acceptances
A bill of exchange or negotiable instrument
drawn by the borrower for payment at matu-
rity and accepted by a bank. The acceptance
constitutes a guarantee of payment by the
bank and can be traded in the money market.
The bank earns a “stamping fee” for providing
this guarantee.
Adjusted operating leverage
The difference between revenue growth
rate (as adjusted) and non-interest expense
growth rate (as adjusted). Revenue is based
on a taxable equivalent basis, excluding VIEs,
accounting adjustments related to the new
Financial Instruments Standard and Insurance-
related revenue, while Non-interest expense
excludes Insurance-related expense.
Allowance for credit losses
The amount deemed adequate by manage-
ment to absorb identified credit losses as well
as losses that have been incurred but are not
yet identifiable as at the balance sheet date.
This allowance is established to cover the
lending portfolio including loans, acceptances,
guarantees, letters of credit, and unfunded
commitments. The allowance is increased by
the provision for credit losses, which is charged
to income and decreased by the amount of
write-offs, net of recoveries in the period.
Assets-to-capital multiple
Total assets plus specified off-balance sheet
items, divided by total regulatory capital.
Assets under administration (AUA)
Assets administered by us which are benefi-
cially owned by clients and are therefore not
reported on the Consolidated Balance Sheets.
Services provided in respect of assets under
administration are of an administrative nature,
including safekeeping, collecting investment
income, settling purchase and sale transac-
tions, and record keeping.
Assets under management (AUM)
Assets managed by us which are beneficially
owned by clients and are therefore not
reported on the Consolidated Balance Sheets.
Services provided in respect of assets under
management include the selection of invest-
ments and the provision of investment advice.
Assets under management may also be
administered by the financial institution.
Average balances
Average balances are calculated using meth-
ods intended to approximate the average of
the daily balances of the period.
Average earning assets
The average carrying value of deposits with
banks, securities, assets purchased under
reverse repurchase agreements and certain
securities borrowed, and loans based on daily
balances for the period ending October 31 in
each fiscal year.
Basis point (bp)
One one-hundredth of a percentage point
(.01%).
Beta
The measure of a security’s volatility relative
to a market index.
Canadian GAAP
Canadian generally accepted accounting
principles.
Capital ratio
The percentage of risk-adjusted assets
supported by capital, using the guidelines
of the Office of the Superintendent of
Financial Institutions Canada based on stan-
dards issued by the Bank for International
Settlements and Canadian GAAP financial
information.
Cash capital position
Quantifies the extent to which illiquid assets
are funded by non-core liabilities and
represents a formula-based measure of
both comparative and directional structural
liquidity risk.
Collateral
Assets pledged as security for a loan or other
obligation. Collateral can take many forms:
cash, highly rated securities, property, inven-
tory, equipment, receivables, etc.
Collateralized Debt Obligation (CDO)
An investment-grade security backed by a
pool of bonds, loans and/or any other type of
debt instruments.
Commercial clients
Generally, private companies with revenue in
excess of $20 million and less than $1 billion.
Typically, clients with revenue of less than
$100 million are served in Canada by our
RBC Canadian Personal and Business segment
and in the U.S. by RBC Centura in our RBC U.S.
and International Personal and Business seg-
ment. Corporate and larger commercial clients
with frequent need to access capital markets
and more sophisticated financing require-
ments are served by our RBC Capital Markets
segment.
Commitments to extend credit
Credit facilities available to clients either in
the form of loans, bankers’ acceptances and
other on-balance sheet financing, or through
off-balance sheet products such as guarantees
and letters of credit.
Cost of capital
Management’s estimate of its weighted
average cost of equity and debt capital.
De novo
A newly opened bank branch, as opposed to a
bank branch acquired through an acquisition.
Derivative
A contract between two parties where pay-
ments between the parties are dependent
upon the movements in price of an underlying
asset, index or financial rate. Examples of
derivatives include swaps, options, forward
rate agreements and futures. The notional
amount of the derivative is the contract
amount used as a reference point to calculate
the payments to be exchanged between the
two parties, and the notional amount itself is
generally not exchanged by the parties.
Dividend payout ratio
Common dividends as a percentage of net
income after preferred share dividends.
Dividend yield
Dividends per common share divided by the
average of the high and low share prices in the
relevant period.
Documentary and commercial letters
of credit
Written undertakings by a bank on behalf of
its client (typically an importer), authorizing a
third party (for example, an exporter) to draw
drafts on the bank up to a stipulated amount
under specific terms and conditions. Such
undertakings are established for the purpose
of facilitating international trade.
Earnings per share (EPS), basic
Net income less preferred share dividends,
divided by the average number of shares
outstanding.
Earnings per share (EPS), diluted
Net income less preferred share dividends,
divided by the average number of shares out-
standing, adjusted for the dilutive effects of
stock options and other convertible securities.
Economic capital
An estimate of the amount of equity capital
required to underpin risks. It is calculated
by estimating the level of capital that is
necessary to support our various businesses,
given their risks, consistent with our desired
solvency standard and credit ratings.
Fair value
The amount of consideration that would be
agreed upon in an arm’s length transaction
between knowledgeable, willing parties who
are under no compulsion to act.
Guarantees and standby letters of credit
Primarily represent irrevocable assurances
that a bank will make payments in the event
that its client cannot meet its financial
obligations to third parties. Certain other
guarantees, such as bid and performance
bonds, represent non-financial undertakings.
Royal Bank of Canada Annual Report 2006
Glossary 161
Hedge
A risk management technique used to insulate
financial results from market, interest rate
or foreign currency exchange risk (exposure)
arising from normal banking operations.
The elimination or reduction of such exposure
is accomplished by establishing offsetting
positions. For example, assets denominated in
foreign currencies can be offset with liabilities
in the same currencies or through the use of
foreign exchange hedging instruments such as
futures, options or foreign exchange contracts.
Impaired loans
Loans are classified as impaired when there
has been a deterioration of credit quality to
the extent that management no longer has
reasonable assurance of timely collection of
the full amount of principal and interest in
accordance with the contractual terms of the
loan agreement. Credit card balances are not
classified as impaired as they are directly writ-
ten off after payments are 180 days past due.
Innovative capital instruments
Our innovative capital instruments are trans-
ferable trust units issued by the RBC Capital
Trust and RBC Capital Trust II special purpose
entities. Innovative capital can comprise up to
15% of net Tier 1 capital with an additional 3%
eligible for Tier 2B capital.
Mark-to-market
Valuation of financial instruments using
prevailing market prices or fair value as of the
balance sheet date.
Master netting agreement
An agreement designed to reduce the credit
risk of multiple derivative transactions
through the creation of a legal right of offset
of exposure in the event of a default.
Net interest income
The difference between what is earned on
assets such as loans and securities and
what is paid on liabilities such as deposits and
subordinated debentures.
Net interest margin (average assets)
Net interest income as a percentage of total
average assets.
Net interest margin (average earning assets)
Net interest income as a percentage of total
average earning assets.
Normal course issuer bid (NCIB)
A repurchase of our own shares for cancella-
tion through a stock exchange; it is subject to
the various rules of the relevant exchanges
and securities commissions.
Notional amount
The contract amount used as a reference point
to calculate payments for derivatives.
Off-balance sheet financial instruments
A variety of products offered to clients, which
fall into two broad categories: (i) credit related
arrangements, which generally provide clients
with liquidity protection, and (ii) derivatives,
which are defined on the previous page.
Royal Bank of Canada Annual Report 2006
162 Glossary
Office of the Superintendent of Financial
Institutions Canada (OSFI)
The primary regulator of federally chartered
financial institutions and federally adminis-
tered pension plans in Canada. The OSFI’s
mission is to safeguard policyholders,
depositors and pension plan members from
undue loss.
Options
A contract, or a provision of a contract, that
gives one party (the option holder) the right,
but not the obligation, to perform a specified
transaction with another party (the option
issuer or option writer) according to specified
terms.
Prepaid pension benefit cost
The cumulative excess of amounts contributed
to a pension fund over the amounts recorded
as pension expense.
Provision for credit losses
The amount charged to income necessary to
bring the allowance for credit losses to a level
determined appropriate by management. This
includes both specific and general provisions.
Qualifying special purposes entities (QSPE)
Legal entities that are demonstrably distinct
from the transferor, have limited and specified
permitted activities, have defined asset hold-
ings and may only sell or dispose of selected
assets in automatic response to specified
conditions.
Repurchase agreements
Involve the sale of securities for cash at a near
value date and the simultaneous repurchase
of the securities for value at a later date.
Return on common equity (ROE)
Net income, less preferred share dividends,
expressed as a percentage of average
common equity.
Reverse repurchase agreements
Involve the purchase of securities for cash
at a near value date and the simultaneous sale
of the securities for value at a later date.
Risk
Financial institutions face a number of differ-
ent risks that expose them to possible losses.
These risks include credit risk, market risk,
liquidity and funding risk, insurance risk,
operational risk, reputation risk, strategic risk,
regulatory and legal risk, and competitive,
systemic and environmental risk.
Risk-adjusted assets
Used in the calculation of risk-based capital
ratios. The face value of assets is discounted
using risk-weighting factors in order to reflect
a comparable risk per dollar among all types of
assets. The risk inherent in off-balance sheet
instruments is also recognized, first by deter-
mining a credit equivalent amount, and then
by applying appropriate risk-weighting factors.
Securities lending
Transactions in which the owner of a security
agrees to lend it under the terms of a pre-
arranged contract to a borrower for a fee. The
borrower must fully collateralize the security
loan at all times. An intermediary such as a
bank often acts as agent for the owner of the
security. There are two types of securities
lending arrangements, lending with and
without credit or market risk indemnification.
In securities lending without indemnification,
the intermediary bears no risk of loss. For
transactions in which the intermediary
provides an indemnification, risk of loss
occurs if the borrower defaults and the value
of the collateral declines concurrently.
Securities sold short
A transaction in which the seller sells
securities and then borrows the securities in
order to deliver them to the purchaser upon
settlement. At a later date, the seller buys
identical securities in the market to replace
the borrowed securities.
Securitization
The process by which high-quality financial
assets are packaged into newly issued securi-
ties backed by these assets.
Special purpose entities (SPEs)
SPEs are entities that are typically organized
for a single discrete purpose, have a limited
life and serve to legally isolate the financial
assets held by the SPE from the selling organi-
zation. SPEs are principally used to securitize
financial and other assets in order to obtain
access to funding, to mitigate credit risk and
to manage capital.
Taxable equivalent basis (teb)
A measure that increases Net interest income
from certain tax-advantaged sources (in our
case, Canadian taxable Corporate dividends)
to their tax equivalent value, making it
comparable to income from taxable sources.
There is an offsetting adjustment in the tax
provision, thereby generating the same
after-tax net income as reported under GAAP.
Trust capital securities (RBC TruCS)
Transferable trust units issued by RBC Capital
Trust or RBC Capital Trust II for the purpose
of raising innovative Tier 1 capital.
U.S. GAAP
U.S. generally accepted accounting principles.
Value-At-Risk (VAR)
A generally accepted risk-measurement
concept that uses statistical models to esti-
mate within a given level of confidence the
maximum loss in market value the bank would
experience in its trading portfolio from an
adverse one-day movement in market rates
and prices.
Variable interest entity (VIE)
A variable interest entity is an entity which
does not have sufficient equity at risk to
finance its activities without additional subor-
dinated financial support or where the holders
of the equity at risk lack the characteristics of
a controlling financial interest.
Directors and executive officers
Directors
W. Geoffrey Beattie (2001)
Toronto, Ontario
President and Chief Executive
Officer
The Woodbridge Company
Limited
Deputy Chairman
The Thomson Corporation
George A. Cohon,
O.C., O.Ont. (1988)
Toronto, Ontario
Founder
McDonald’s Restaurants
of Canada Limited
Douglas T. Elix, A.O. (2000)
Ridgefield, Connecticut
Senior Vice-President and
Group Executive
Sales & Distribution
IBM Corporation
John T. Ferguson, F.C.A. (1990)
Edmonton, Alberta
Chairman of the Board
Princeton Developments Ltd.
Group executive
Peter Armenio
Group Head, RBC U.S. and
International Personal and
Business
Elisabetta Bigsby
Group Head, Human Resources
and Transformation
The Hon. Paule Gauthier,
P.C., O.C., O.Q., Q.C. (1991)
Quebec, Quebec
Senior Partner
Desjardins Ducharme L.L.P.
ATTORNEYS
Timothy J. Hearn (2006)
Calgary, Alberta
Chairman, President and
Chief Executive Officer
Imperial Oil Limited
Alice D. Laberge (2005)
Vancouver, British Columbia
Company Director
Jacques Lamarre, O.C. (2003)
Outremont, Quebec
President and
Chief Executive Officer
SNC-Lavalin Group Inc.
Brandt C. Louie, F.C.A. (2001)
West Vancouver,
British Columbia
President and
Chief Executive Officer
H.Y. Louie Co. Limited
Chairman and
Chief Executive Officer
London Drugs Limited
Michael H. McCain (2005)
Toronto, Ontario
President and
Chief Executive Officer
Maple Leaf Foods Inc.
Gordon M. Nixon (2001)
Toronto, Ontario
President and
Chief Executive Officer
Royal Bank of Canada
David P. O’Brien (1996)
Calgary, Alberta
Chairman of the Board
Royal Bank of Canada
Chairman of the Board
EnCana Corporation
Robert B. Peterson (1992)
Toronto, Ontario
Company Director
J. Pedro Reinhard (2000)
Key Biscayne, Florida
Company Director
Cecil W. Sewell, Jr. (2001)
Stuart, Florida
Chairman
RBC Centura Banks, Inc.
Kathleen P. Taylor (2001)
Toronto, Ontario
President, Worldwide
Business Operations
Four Seasons Hotels Inc.
Victor L. Young, O.C. (1991)
St. John’s, Newfoundland and
Labrador
Company Director
The date appearing after the name of
each director indicates the year in which
the individual became a director.
Martin J. Lippert
Group Head, Global Technology
and Operations
Gordon M. Nixon
President and Chief Executive
Officer
Barbara G. Stymiest
Chief Operating Officer
Charles M. Winograd
Group Head, RBC Capital Markets
W. James Westlake
Group Head, RBC Canadian
Personal and Business
Royal Bank of Canada Annual Report 2006
Directors and executive officers 163
Principal subsidiaries
Principal subsidiaries (1)
Royal Bank Mortgage Corporation (4)
Royal Mutual Funds Inc.
RBC Capital Trust
RBC Dominion Securities Limited (4)
RBC Dominion Securities Inc.
RBC Investment Services (Asia) Limited
RBC Sec Australia Pty Limited
Royal Bank Holding Inc.
Royal Trust Corporation of Canada
The Royal Trust Company
RBC Insurance Holding Inc.
RBC General Insurance Company
RBC Life Insurance Company
RBC Travel Insurance Company
RBC Direct Investing Inc.
RBC Asset Management Inc.
RBC Private Counsel Inc.
R.B.C. Holdings (Bahamas) Limited
RBC Caribbean Investment Limited
Royal Bank of Canada Insurance Company Limited
Finance Corporation of Bahamas Limited
Royal Bank of Canada Trust Company (Bahamas) Limited
Investment Holdings (Cayman) Limited
RBC (Barbados) Funding Ltd.
Royal Bank of Canada (Caribbean) Corporation
RBC Capital Markets Arbitrage SA
RBC Holdings (USA) Inc. (2)
RBC USA Holdco Corporation (2)
RBC Dain Rauscher Corp. (2)
RBC Dain Rauscher Inc.
RBC Capital Markets Corporation
RBC Holdings (Delaware) Inc. (5)
Prism Financial Corporation (5)
RBC Trust Company (Delaware) Limited
RBC Insurance Holding (USA) Inc.
Liberty Life Insurance Company
Royal Bank of Canada (Asia) Limited
RBC Centura Banks, Inc. (5)
RBC Centura Bank
Royal Bank of Canada Financial Corporation
RBC Finance B.V.
Royal Bank of Canada Holdings (U.K.) Limited
Royal Bank of Canada Europe Limited
Royal Bank of Canada Investment Management (U.K.) Limited
Royal Bank of Canada Trust Corporation Limited
RBC Asset Management UK Limited
RBC Holdings (Channel Islands) Limited
RBC Trustees (Guernsey) Limited
Royal Bank of Canada (Channel Islands) Limited
Royal Bank of Canada Trustees (Jersey) Limited
Royal Bank of Canada Investment Management (Guernsey) Limited
Royal Bank of Canada Fund Services (Jersey) Limited
Royal Bank of Canada Offshore Fund Managers Limited
Royal Bank of Canada Trust Company (Asia) Limited
Royal Bank of Canada Trust Company (Cayman) Limited
Royal Bank of Canada Trust Company (International) Limited
Regent Capital Trust Corporation Limited
RBC Regent Fund Managers Limited
Royal Bank of Canada Trustees Limited
Royal Bank of Canada Trust Company (Jersey) Limited
Abacus Financial Services Group Limited
RBC Reinsurance (Ireland) Limited
Royal Bank of Canada (Suisse)
Roycan Trust Company S.A.
RBC Investment Management (Asia) Limited
RBC Capital Markets (Japan) Limited
Principal
office address (2)
Montreal, Quebec, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Hong Kong, China
Sydney, Australia
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Montreal, Quebec, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Nassau, Bahamas
George Town, Grand Cayman
St. Michael, Barbados
Nassau, Bahamas
Nassau, Bahamas
George Town, Grand Cayman
St. Michael, Barbados
St. Michael, Barbados
Luxembourg
New York, New York, U.S.
New York, New York, U.S.
Minneapolis, Minnesota, U.S.
Minneapolis, Minnesota, U.S.
New York, New York, U.S.
Wilmington, Delaware, U.S.
Dover, Delaware, U.S.
Wilmington, Delaware, U.S.
Wilmington, Delaware, U.S.
Greenvillle, South Carolina, U.S.
Singapore, Singapore
Rocky Mount, North Carolina, U.S.
Rocky Mount, North Carolina, U.S.
St. Michael, Barbados
Amsterdam, Netherlands
London, England
London, England
London, England
London, England
London, England
Guernsey, Channel Islands
Guernsey, Channel Islands
Guernsey, Channel Islands
Jersey, Channel Islands
Guernsey, Channel Islands
Jersey, Channel Islands
Guernsey, Channel Islands
Hong Kong, China
George Town, Grand Cayman
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Dublin, Ireland
Geneva, Switzerland
Geneva, Switzerland
Hong Kong, China
St. Michael, Barbados
Carrying value of
voting shares owned
by the bank (3)
$
1,104
8
1,052
2,114
16,414
3,805
3
2,541
9
13
(1)
(2)
(3)
(4)
(5)
The bank owns 100% of the voting shares of each subsidiary except Finance Corporation of Bahamas Limited (75%).
Each subsidiary is incorporated under the laws of the state or country in which the principal office is situated, except for RBC Holdings (USA) Inc., RBC USA Holdco Corporation and
RBC Dain Rauscher Corp. which are incorporated under the laws of the state of Delaware, U.S.
The carrying value (in millions of dollars) of voting shares is stated as the bank’s equity in such investments.
The subsidiaries have outstanding non-voting shares of which the bank, directly or indirectly, owns 100%.
RBC Holdings (Delaware) Inc. owns 3.70% and Prism Financial Corporation owns 6.25% of RBC Centura Banks, Inc.
Royal Bank of Canada Annual Report 2006
164 Principal subsidiaries
Vision
Values
Strategic goals
• Always earning the right to be
• Excellent service to clients
our clients’ first choice
and each other
• Working together to
succeed
• Personal responsibility for
high performance
• To be the undisputed leader in
financial services in Canada
• To build on our strengths in
banking, wealth management
and capital markets in the
United States
• Diversity for growth and
• To be a premier provider
innovation
• Trust through integrity in
everything we do
of selected global financial
services
Financial highlights
(C$ millions, except per share
and percentage amounts)
Operating performance
Total revenue
Provision for credit losses
Non-interest expense
Net income
Return on common equity (ROE)
Diluted earnings per share
2006
2005
2004
$ 20,637
429
11,495
4,728
23.5%
3.59
$
$ 19,184
455
11,357
3,387
18.0%
2.57
$
$ 17,802
346
10,833
2,803
15.6%
2.11
$
2006 vs. 2005
Increase (decrease)
$
$
1,453 8%
(26) (6)%
138 1%
1,341 40%
550 bps n.m.
1.02 40%
RBC Canadian Personal and Business
(C$ millions, except
percentage amounts)
Total revenue
Net income
Return on equity (ROE)
Average loans and acceptances
Average deposits
Assets under administration
Assets under management
2006
2005
2004
$ 13,381 $ 12,499 $ 11,213
2,043
24.7%
145,300
133,700
157,300
58,700
2,794
31.5%
180,500
145,700
213,200
89,700
2,304
27.1%
161,500
138,800
180,300
72,100
The businesses in RBC Canadian
Personal and Business
continued to strengthen our
leadership position in most
major product categories by
expanding our distribution
network, enhancing our products
and services, better meeting our
client needs and deepening our
client relationships.
2006 vs. 2005
Increase (decrease)
$
882
7%
490 21%
440 bps n.m.
19,000 12%
6,900 5%
32,900 18%
17,600 24%
9.6%
11.9%
$ 223,709
9.6%
13.1%
$ 197,004
8.9%
12.4%
$ 183,409
– bps n.m.
(120)bps n.m.
$ 26,705 14%
RBC U.S. and International Personal and Business
Capital
Tier 1 capital ratio
Total capital ratio
Risk-adjusted assets
Key drivers
Total loans (before allowance for
loan losses)
Total deposits
Total assets
Assets under management
Assets under administration (1)
Common share information
Share price
High
Low
Close
Dividends declared per share
Book value per share
Market capitalization ($ millions)
$ 209,939
343,523
536,780
143,100
525,800
$ 191,914
306,860
469,521
118,800
417,100
$ 172,560
270,959
426,222
102,900
391,000
$ 18,025 9%
36,663 12%
67,259 14%
24,300 21%
108,700 26%
$
51.49
41.29
49.80
1.44
16.52
63,788
$
43.34
30.45
41.67
1.18
14.89
53,894
$
32.95
29.02
31.70
1.01
13.57
40,877
$
8.15 19%
10.84 36%
8.13 20%
.26 22%
1.63 11%
9,894 18%
Excluding Institutional & Investor Services (IIS) assets that were contributed to the joint venture RBC Dexia Investor Services on January 2, 2006.
(1)
n.m. not meaningful
(C$ millions, except
percentage amounts)
Total revenue
Net income
Return on equity (ROE)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
$
2,872 $
444
13.6%
2,728 $
387
11.8%
2,702 $
214
5.4%
144 5%
57 15%
180 bps n.m.
(US$ millions, except
percentage amounts)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
Total revenue
Net income
Average loans and acceptances
Average deposits
Assets under administration
Assets under management
$
2,537 $
393
18,300
29,700
274,200
47,500
2,248 $
320
16,900
27,400
198,400
39,500
2,057
162
14,400
25,200
191,800
36,300
$
289 13%
73 23%
1,400 8%
2,300 8%
75,800 38%
8,000 20%
The wealth management and
banking businesses in RBC U.S.
and International Personal and
Business continued to build scale
and capabilities through a
combination of organic growth
initiatives and acquisitions.
In 2006, we expanded our distri-
bution network and products
and services, and focused our
expansion in fast-growing markets
and regions.
RBC Capital Markets
(C$ millions, except
percentage amounts)
2006
2005
2004
2006 vs. 2005
Increase (decrease)
Total revenue (teb) (1)
Net income
Return on equity (ROE)
Average loans and acceptances
Average deposits
$
4,693 $
1,407
29.3%
23,500
118,800
4,062
760
18.1%
17,600
98,900
$
3,933 $
827
19.5%
18,600
88,400
631 16%
647 85%
1,120 bps n.m.
5,900 34%
19,900 20%
(1)
Taxable equivalent basis (teb).
By successfully executing growth
plans, the businesses in
RBC Capital Markets maintained
our position as the undisputed
leader in the Canadian market,
and expanded our activities
in the U.S. mid market and our
global infrastructure finance
platform.
Shareholder information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario, Canada
Tel: (416) 974-5151
Fax: (416) 955-7800
Mailing address:
P.O. Box 1
Royal Bank Plaza
Toronto, Ontario
Canada M5J 2J5
website:
rbc.com
Transfer Agent
and Registrar
Main Agent
Computershare Trust
Company of Canada
Street address:
1500 University Street
Suite 700
Montreal, Quebec
Canada H3A 3S8
Tel: (514) 982-7555, or
1-866-586-7635
Fax: (514) 982-7635
website:
computershare.com
Co-Transfer Agent (U.S.)
The Bank of New York
101 Barclay Street
New York, New York
U.S. 10286
Co-Transfer Agent
(United Kingdom)
Computershare Services PLC
Securities Services – Registrars
P.O. Box No. 82, The Pavilions,
Bridgwater Road, Bristol
BS99 7NH England
Stock exchange listings
(Symbol: RY)
Common shares are listed on:
Canada
Toronto Stock Exchange (TSX)
U.S.
New York Stock Exchange (NYSE)
Switzerland
Swiss Exchange (SWX)
All preferred shares are listed
on the Toronto Stock Exchange.
Valuation Day price
For capital gains purposes, the
Valuation Day (December 22,
1971) cost base for our common
shares is $7.38 per share. This
amount has been adjusted to
reflect the two-for-one share split
of March 1981 and the two-for-one
share split of February 1990. The
one-for-one share dividend paid
in October 2000 and April 2006
did not affect the Valuation Day
value for our common shares.
Shareholder contact
For information about stock
transfers, address changes,
dividends, lost stock certificates,
tax forms, estate transfers,
contact: Computershare Trust
Company of Canada
100 University Ave., 9th Floor
Toronto, Ontario M5J 2Y1
Tel: (514) 982-7555 or
1-866-586-7635
For other shareholder inquiries,
contact: Shareholder Services
Royal Bank of Canada
123 Front Street West
6th Floor
Toronto, Ontario
Canada M5J 2M2
Tel: (416) 955-7806
or visit our website at
rbc.com/investorrelations
2007 quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
March 2
May 25
August 24
November 30
Direct deposit service
Shareholders in Canada and the
U.S. may have their dividends
deposited by electronic funds
transfer. To arrange for this
service, please contact
Computershare Trust Company of
Canada at their mailing address.
Dividend Reinvestment Plan
Our Dividend Reinvestment Plan
provides our registered common
shareholders residing in Canada
and the United States with the
means to purchase additional
common shares through the
automatic reinvestment of their
cash dividends.
For more information on
participation in the Dividend
Reinvestment Plan, please
contact our Plan Agent:
Computershare Trust Company
of Canada
Attn: Dividend Reinvestment Dept.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
Tel: 1-866-586-7635 (Canada
and U.S.) or (514) 982-7555
Fax: (416) 263-9394 or
1-888-453-0330
e-mail:
service@computershare.com
Institutional investors, brokers
and security analysts
For financial information inquiries,
contact:
Investor Relations
Royal Bank of Canada
123 Front Street West
6th Floor
Toronto, Ontario
Canada M5J 2M2
Tel: (416) 955-7803
Fax: (416) 955-7800
Common share repurchases
We are engaged in a normal
course issuer bid through the
facilities of the Toronto Stock
Exchange. During the one-year
period commencing November 1,
2006, we may repurchase up to
40 million shares in the open
market at market prices. We
determine the amount and timing
of the purchases.
A copy of our Notice of Intention
to file a normal course issuer
bid may be obtained, with-
out charge, by contacting the
Secretary of the bank at our
Toronto mailing address.
2007 Annual Meeting
The Annual Meeting of Common
Shareholders will be held at
9:00 a.m. (EST) on Friday, March 2,
2007 at the Metro Toronto
Convention Centre, North Building,
255 Front Street West, Toronto
Ontario, Canada
Dividend dates for 2007
Subject to approval by the Board of Directors
Common and preferred
shares series N, W, AA, AB and
AC
Record dates
Payment dates
January 25
April 25
July 26
October 25
February 23
May 24
August 24
November 23
Credit ratings
(as at November 29, 2006)
Short-term debt
Senior long-term debt
Moody’s Investors Service
Standard & Poor’s
Fitch Ratings
Dominion Bond Rating Service
P-1
A-1+
F1+
R-1(high)
Aa2
AA
AA
AA
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2006
Bibliothèque nationale du Québec
Printed in Canada
This annual report is printed on acid-free
paper and the entire book is recyclable.
Information contained in or otherwise accessible through the websites mentioned in this annual report does not form a part of this annual report. All references in this annual report to websites are
inactive textual references and are for your information only.
Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC CANADIAN PERSONAL AND BUSINESS, RBC U.S. AND INTERNATIONAL PERSONAL AND BUSINESS,
RBC CAPITAL MARKETS, RBC ASSET MANAGEMENT, RBC CAPITAL TRUST, RBC CENTURA, RBC DAIN RAUSCHER, RBC DIRECT INVESTING, RBC DOMINION SECURITIES, RBC INSURANCE, RBC MORTGAGE,
RBC CASH FLOW PORTFOLIOS, RBC HEDGE 250 INDEX, RBC HOMELINE PLAN, RBC MANAGED PORTFOLIOS, RBC NO LIMIT ACCOUNT, RBC REWARDS and RBC TruCS, which are trademarks of Royal
Bank of Canada used by Royal Bank of Canada and/or its subsidiaries under license. All other trademarks mentioned in this report, which are not the property of Royal Bank of Canada, are owned by
their respective holders. RBC Dexia IS and affiliated Dexia companies are licensed users of the RBC trademark.
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Royal Bank of Canada Annual Report 2006
Shareholder information 165
Where our
vision leads us
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Royal Bank of Canada
2006 Annual Report
Where we are
RBC corporate profile
Royal Bank of Canada (RY on TSX and NYSE) and its
subsidiaries operate under the master brand name of
RBC and may be referred to in this text as RBC. We are
Canada’s largest bank as measured by assets and
market capitalization and one of North America’s leading
diversified financial services companies. We provide
personal and commercial banking, wealth management
services, insurance, corporate and investment banking
and transaction processing services on a global basis. Our
Global Technology and Operations and Global Functions
teams enable business growth with expert professional
advice and state-of-the-art processes and technology.
We employ approximately 70,000 full- and part-time
employees who serve more than 14 million personal,
business, public sector and institutional clients through
offices in North America and 34 countries around the world.
In Canada, we have strong market positions in all of our
businesses. In personal and business banking, we rank first
or second in most retail products. In wealth management,
we have the leading (1) full-service brokerage operation,
the top mutual fund provider among Canadian banks
(1) Based on assets under administration.
and the second-largest (1) self-directed broker. We are the
largest Canadian bank-owned insurer, one of the top 10
Canadian life insurance producers, and a leader in
creditor products, travel insurance and individual disability
insurance. In corporate and investment banking, we
continue to be the top-ranked securities underwriter
and the leading mergers and acquisitions (M&A) advisor.
Our domestic delivery network is one of the most extensive
of all Canadian financial services companies.
In the United States, we provide personal and commercial
banking, insurance, full-service brokerage and corporate
and investment banking services to approximately
two million clients.
Outside North America, we have a banking network in the
Caribbean and a significant presence in select markets. We
offer investment banking, trading, correspondent banking
and reinsurance to corporate, institutional, public sector
and business clients. We also offer private banking and
wealth management services for high net worth individuals
and corporate and institutional clients.
1
2
5
6
8
10
12
13
14
17
Financial highlights
Chief Executive Officer’s
message
Performance compared to
objectives
To be the undisputed leader in
financial services in Canada
To build on our strengths in
banking, wealth management
and capital markets in the
United States
To be a premier provider of
selected global financial services
Global Technology and Operations
and Global Functions
Chairman’s message
Corporate governance
Corporate responsibility
25 Management’s Discussion
99
26
33
38
and Analysis
Executive summary
Accounting and control matters
Consolidated results from
continuing operations
43 Quarterly financial information
Business segment results from
45
continuing operations
Financial condition
Risk management
Additional risks that may affect
future results
Additional financial information
63
72
90
92
Consolidated Financial
Statements
161 Glossary
163 Directors and executive
100 Management’s responsibility for
officers
164 Principal subsidiaries
165 Shareholder information
financial reporting
100 Report of Independent Registered
Chartered Accountants
101 Management’s report on internal
control over financial reporting
101 Report of Independent Registered
Chartered Accountants
102 Consolidated Balance Sheets
103 Consolidated Statements of
Income
104 Consolidated Statements of
Changes in Shareholders’ Equity
105 Consolidated Statements of
Cash Flows
106 Notes to the Consolidated
Financial Statements
This annual report contains forward-looking statements within the meaning of certain securities laws, including the
“safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian
securities legislation. We caution readers not to place undue reliance on these statements as a number of important factors
could cause our actual results to differ materially from the expectations expressed in such forward-looking statements.
Additional information about these factors can be found under “Caution regarding forward-looking statements” on page 25.
The carbon dioxide emissions associated with the production and distribution of
this report have been mitigated by Zerofootprint according to the highest standards
in carbon offsetting.
Form #81104 (12/2006)
This report has been printed on paper stock that contains 10 per cent post-consumer
fibre and is FSC (Forest Stewardship Council) certified. FSC fibre used in the
manufacture of the paper stock comes from well-managed forests independently
certified by SmartWood according to Forest Stewardship Council rules.