R
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y
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f
C
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Royal Bank of Canada
2007 Annual Report
Finding
better ways
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 more than 70,000 full- and part-
time employees who serve more than 15 million personal,
business, public sector and institutional clients through
offices in Canada, the U.S. and 36 other countries.
181 Glossary
183 Directors and executive
officers
184 Principal subsidiaries
185 Shareholder information
IFC Corporate profile
2
4
6
8
10
Better for our clients
Better for our shareholders
Better for our employees
Better for our communities
Chief Executive Officer’s
message
Performance compared to
objectives
Business discussion
Chairman’s message
Corporate governance
Corporate responsibility
15
16
21
22
24
33 Management’s Discussion
110 Consolidated Financial
and Analysis
Statements
34 Overview
39
Accounting and control
matters
Financial performance
43
50 Quarterly financial
information
Business segment results
52
Financial condition
71
80
Risk management
102 Additional risks that may
affect future results
104 Additional financial
information
111 Management’s responsibility
for financial reporting
111 Report of Independent
Registered Chartered
Accountants
112 Management’s report on
internal control over financial
reporting
112 Report of Independent
Registered Chartered
Accountants
113 Consolidated Balance Sheets
114 Consolidated Statements of
Income
115 Consolidated Statements of
Comprehensive Income and
Changes in Shareholders’
Equity
116 Consolidated Statements of
Cash Flows
117 Notes to the Consolidated
Financial Statements
This is a carbon neutral publication. Net carbon dioxide equivalent emissions
associated with the production and distribution of this report have been neutralized
through Zerofootprint using ISO 14064-2 reforestation carbon offsets.
Form #XXXXX (12/2007)
This report 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.
V ision
Values
Strategic goals
• Always earning the right to
be our clients’ first choice
• Excellent service to clients
• To be the undisputed leader
and each other
• Working together to succeed
• Personal responsibility for
high performance
• Diversity for growth and
innovation
• Trust through integrity in
everything we do
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
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 33.
R
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y
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Royal Bank of Canada
2007 Annual Report
Finding
better ways
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 more than 70,000 full- and part-
time employees who serve more than 15 million personal,
business, public sector and institutional clients through
offices in Canada, the U.S. and 36 other countries.
Fold Financial highlights
Better for our clients
2
Better for our shareholders
4
Better for our employees
6
Better for our communities
8
Chief Executive Officer’s
10
message
Performance compared to
objectives
Business discussion
Chairman’s message
Corporate governance
Corporate responsibility
16
21
22
24
15
33 Management’s Discussion
110 Consolidated Financial
and Analysis
Statements
177 Supplementary
information
34 Overview
38
43
51
Accounting and control
matters
Financial performance
Quarterly financial
information
Business segment results
53
Financial condition
71
80
Risk management
102 Additional risks that may
affect future results
104 Additional financial
information
111 Management’s responsibility
for financial reporting
181 Glossary
183 Directors and executive
officers
184 Principal subsidiaries
185 Shareholder information
111 Report of Independent
Registered Chartered
Accountants
112 Management’s report on
internal control over financial
reporting
112 Report of Independent
Registered Chartered
Accountants
113 Consolidated Balance Sheets
114 Consolidated Statements of
Income
115 Consolidated Statements of
Comprehensive Income
115 Consolidated Statements of
Changes in Shareholders’
Equity
116 Consolidated Statements of
Cash Flows
117 Notes to the Consolidated
Financial Statements
This is a carbon neutral publication. Net carbon dioxide equivalent emissions
associated with the production and distribution of this report have been neutralized
through Zerofootprint using ISO 14064-2 reforestation carbon offsets.
Form #81104 (12/2007)
This report 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.
V ision
Values
Strategic goals
• Always earning the right to
be our clients’ first choice
• Excellent service to clients
• To be the undisputed leader
and each other
• Working together to succeed
• Personal responsibility for
high performance
• Diversity for growth and
innovation
• Trust through integrity in
everything we do
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
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 33.
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)
Earnings per share (EPS) – diluted
2007
2006
2005
2007 vs. 2006
increase (decrease)
$ 22,462
791
12,473
5,492
24.6%
4.19
$
$ 20,637
429
11,495
4,728
23.5%
3.59
$
$ 19,184
455
11,357
3,387
18.0%
2.57
$
$
$
9%
1,825
84%
362
9%
978
16%
764
n.m. 110 bps
17%
.60
Capital
Tier 1 capital ratio
Total capital ratio
Risk-adjusted assets
9.4%
11.5%
$ 247,635
9.6%
11.9%
$ 223,709
9.6%
13.1%
$ 197,004
n.m.
n.m.
$ 23,926
(20)bps
(40)bps
11%
Key drivers
Total loans (before allowance for
loan losses)
Total deposits
Total assets
Assets under management
Assets under administration – RBC
Common share information
Share price (RY on the TSX)
High
Low
Close
Dividends per share
Book value per share
Market capitalization (C$ millions)
n.m. not meaningful
$ 239,429
365,205
600,346
161,500
548,200
$ 209,939
343,523
536,780
143,100
525,800
$ 191,914
306,860
469,521
118,800
417,100
$ 29,490
21,682
63,566
18,400
22,400
14%
6%
12%
13%
4%
$
61.08
49.50
56.04
1.82
17.58
71,522
$
51.49
41.29
49.80
1.44
16.52
63,788
$
43.34
30.45
41.67
1.18
14.89
53,894
$
9.59
8.21
6.24
.38
1.06
7,734
19%
20%
13%
26%
6%
12%
Note: All data in Canadian dollars unless otherwise stated.
(1)
(2)
TSR – Total shareholder return is price appreciation plus dividends reinvested, annualized.
Five-year compound annual growth rate (CAGR).
2007 vs. 2006 5-year CAGR (2)
16%
19%
2007 vs. 2006 5-year CAGR (2)
17%
14%
Shareholder information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario, Canada
M5J 2J5
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
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.)
Computershare Trust
Company, N.A.
350 Indiana Street
Suite 800
Golden, Colorado
U.S.A. 80401
Tel: 1-800-962-4284
Co-Transfer Agent
(United Kingdom)
Computershare Investor
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 divi dend 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 Avenue, 9th Floor
Toronto, Ontario, Canada M5J 2Y1
Tel: (514) 982-7555 or
1-866-586-7635
For other shareholder inquiries,
contact: Shareholder Relations
Royal Bank of Canada
200 Bay Street, 9th Floor
South Tower
Toronto, Ontario
Canada M5J 2J5
Tel: (416) 955-7806
Fax: (416) 974-3535
For financial information
inquiries, contact:
Investor Relations
Royal Bank of Canada
200 Bay Street
14th Floor, South Tower
Toronto, Ontario
Canada M5J 2J5
Tel: (416) 955-7802
Fax: (416) 955-7800 or
visit our website at
rbc.com/investorrelations
dividends.” Unless stated other-
wise, all dividends (and deemed
dividends) paid by us hereafter
are designated as “eligible
dividends” for the purposes of
such rules.
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,
2007, we may repurchase up to
20 million common 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, without charge,
by contacting RBC’s Secretary at
our Toronto mailing address.
2008 Annual Meeting
Our Annual Meeting of Common
Shareholders will be held at
9:00 a.m. (Eastern Standard Time)
on Friday, February 29, 2008, at
the Metro Toronto Convention
Centre, North Building,
255 Front Street West, Toronto,
Ontario, Canada.
2008 Quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
February 29
May 29
August 28
December 5
Direct deposit service
Shareholders in Canada and
the U.S. may have their divi-
dends deposited by electronic
funds transfer. To arrange for
this service, please contact our
Transfer Agent and Registrar,
Computershare Trust Company
of Canada.
Dividend Reinvestment Plan
Our Dividend Reinvest ment Plan
provides our registered common
shareholders residing in Canada
and the United States with the
means to purchase additional
RBC 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, Canada 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
Eligible Dividend Designation
For purposes of the enhanced
dividend tax credit rules contained
in the Income Tax Act (Canada)
and any corresponding provincial
and territorial tax legislation, all
dividends (and deemed dividends)
paid by us to Canadian residents
on our common and preferred
shares after December 31, 2005,
are designated as “eligible
Dividend dates for 2008
Subject to approval by the Board of Directors
Common and preferred
shares series N, W, AA, AB, AC,
AD, AE, AF and AG
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2007
Bibliothèque nationale du Québec
Record dates
Payment dates
January 24
April 24
July 24
October 27
February 22
May 23
August 22
November 24
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 report to shareholders does not form a part of this report. All references in this report to shareholders to
websites are inactive textual references and are for your information only.
EQuAl EMPloyMEnT oPPoRTuniTy: As required by our Code of Conduct, which applies to all RBC companies and applies equally to employees, we are committed to providing equal opportunity in all
dealings with employees, clients, suppliers and others. In the U.S., our subsidiaries are committed to providing Equal Employment Opportunity in compliance with relevant U.S. federal legislation and
regulations (EEO rules) to all employees and applicants for employment. Consistent with this commitment, all employment decisions of our U.S. subsidiaries are based upon skill and performance with-
out regard to race, colour, national origin or ancestry, religion, age, disability, gender, sexual orientation, status as a veteran or any other factors or characteristics protected by law. Our U.S. subsidiaries
are Equal Opportunity Employers and comply with U.S. federal, state and municipal employment laws, including regulations applicable to federal contractors. Disclosure in our 2007 Annual Report to
Shareholders about our U.S. subsidiaries’ Equal Employment Opportunity practices is required pursuant to EEO rules.
Trademarks used in this annual report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, ROYAL BANK, RBC, RBC ROYAL BANK OF CANADA, RBC BLUEPRINT FOR DOING BETTER, RBC
BLUE WATER PROJECT, RBC CAPITAL MARKETS, RBC CAPITAL TRUST, RBC CARLIN, RBC CENTURA, RBC COMMUNITY BLUEPRINT, RBC DAIN RAUSCHER, RBC DANIELS, RBC DOMINION SECURITIES,
RBC ENVIRONMENTAL BLUEPRINT, RBC FOUNDATION, RBC HEDGE 250 INDEX, RBC HOMELINE, RBC INSURANCE, RBC MORTGAGE, RBC NEXT GREAT INNOVATOR CHALLENGE, RBC REWARDS, RBC
SUBORDINATED NOTES TRUST, RBC TSNs and RBC TruCs which are trademarks of Royal Bank of Canada used by Royal Bank of Canada and/or by 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
n
a
r
b
r
e
t
n
I
16.7%15.6%18.0%23.5%24.6%$2.20$2.11$2.57$3.59$4.1920032004200520062007200320042005200620072003200420052006200720032004200520062007$2,968$2,803$3,387$4,728$5,492$120$124$168$207$240Return on equity (ROE)Diluted earnings per share (EPS)Net income Total shareholder return (TSR) (on a $100 investment on November 1, 2002) (1)
Financial
highlights
(C$ 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)
Earnings per share (EPS) – diluted
2007
2006
2005
2007 vs. 2006
increase (decrease)
$ 22,462
791
12,473
5,492
24.6%
4.19
$
$ 20,637
429
11,495
4,728
23.5%
3.59
$
$ 19,184
455
11,357
3,387
18.0%
2.57
$
$
$
9%
1,825
84%
362
9%
978
16%
764
n.m. 110 bps
17%
.60
Capital
Tier 1 capital ratio
Total capital ratio
Risk-adjusted assets
9.4%
11.5%
247.6
$
9.6%
11.9%
223.7
$
9.6%
13.1%
197.0
$
n.m.
n.m.
23.9
(20)bps
(40)bps
11%
$
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 (RY on the TSX)
High
Low
Close
Dividends per share
Book value per share
Market capitalization (C$ millions)
$ 239,429
365,205
600,346
161,500
548,200
$ 209,939
343,523
536,780
143,100
525,800
$ 191,914
306,860
469,521
118,800
417,100
$ 29,490
21,682
63,566
18,400
22,400
14%
6%
12%
13%
4%
$
61.08
49.50
56.04
1.82
17.58
71,522
$
51.49
41.29
49.80
1.44
16.52
63,788
$
43.34
30.45
41.67
1.18
14.89
53,894
$
9.59
8.21
6.24
.38
1.06
7,734
19%
20%
13%
26%
6%
12%
Excluding Institutional & Investor Services (IIS) assets that were contributed to the joint venture, RBC Dexia Investor Services.
(1)
n.m. not meaningful
Note: All data in Canadian dollars unless otherwise stated.
(1)
(2)
TSR – Total shareholder return is price appreciation plus dividends reinvested, annualized.
Five-year compound annual growth rate (CAGR).
2007 vs. 2006 5-year CAGR (2)
16%
19%
2007 vs. 2006 5-year CAGR (2)
17%
14%
Shareholder information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario, Canada
M5J 2J5
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
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.)
Computershare Trust
Company, N.A.
350 Indiana Street
Suite 800
Golden, Colorado
U.S.A. 80401
Tel: 1-800-962-4284
Co-Transfer Agent
(United Kingdom)
Computershare Investor
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 divi dend 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 Avenue, 9th Floor
Toronto, Ontario, Canada M5J 2Y1
Tel: (514) 982-7555 or
1-866-586-7635
For other shareholder inquiries,
contact: Shareholder Relations
Royal Bank of Canada
200 Bay Street, 9th Floor
South Tower
Toronto, Ontario
Canada M5J 2J5
Tel: (416) 955-7806
Fax: (416) 974-3535
For financial information
inquiries, contact:
Investor Relations
Royal Bank of Canada
200 Bay Street
14th Floor, South Tower
Toronto, Ontario
Canada M5J 2J5
Tel: (416) 955-7802
Fax: (416) 955-7800 or
visit our website at
rbc.com/investorrelations
dividends.” Unless stated other-
wise, all dividends (and deemed
dividends) paid by us hereafter
are designated as “eligible divi-
dends” for the purposes of such
rules.
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,
2007, we may repurchase up to
20 million common 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, without charge,
by contacting RBC’s Secretary at
our Toronto mailing address.
2008 Annual Meeting
Our Annual Meeting of Common
Shareholders will be held at
9:00 a.m. (Eastern Standard Time)
on Friday, February 29, 2008, at
the Metro Toronto Convention
Centre, North Building,
255 Front Street West, Toronto,
Ontario, Canada.
2008 Quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
February 29
May 29
August 28
December 5
Direct deposit service
Shareholders in Canada and
the U.S. may have their divi-
dends deposited by electronic
funds transfer. To arrange for
this service, please contact our
Transfer Agent and Registrar,
Computershare Trust Company
of Canada.
Dividend Reinvestment Plan
Our Dividend Reinvest ment Plan
provides our registered common
shareholders residing in Canada
and the United States with the
means to purchase additional
RBC 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, Canada 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
Eligible Dividend Designation
For purposes of the enhanced
dividend tax credit rules contained
in the Income Tax Act (Canada)
and any corresponding provincial
and territorial tax legislation, all
dividends (and deemed dividends)
paid by us to Canadian residents
on our common and preferred
shares after December 31, 2005,
are designated as “eligible
Dividend dates for 2008
Subject to approval by the Board of Directors
Common and preferred
shares series N, W, AA, AB, AC,
AD, AE, AF and AG
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2006
Bibliothèque nationale du Québec
Record dates
Payment dates
January 24
April 24
July 24
October 27
February 22
May 23
August 22
November 24
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 report to shareholders does not form a part of this report. All references in this report to shareholders to
websites are inactive textual references and are for your information only.
EQuAl EMPloyMEnT oPPoRTuniTy: As required by our Code of Conduct, which applies to all RBC companies and applies equally to employees, we are committed to providing equal opportunity in all
dealings with employees, clients, suppliers and others. In the U.S., our subsidiaries are committed to providing Equal Employment Opportunity in compliance with relevant U.S. federal legislation and
regulations (EEO rules) to all employees and applicants for employment. Consistent with this commitment, all employment decisions of our U.S. subsidiaries are based upon skill and performance with-
out regard to race, colour, national origin or ancestry, religion, age, disability, gender, sexual orientation, status as a veteran or any other factors or characteristics protected by law. Our U.S. subsidiaries
are Equal Opportunity Employers and comply with U.S. federal, state and municipal employment laws, including regulations applicable to federal contractors. Disclosure in our 2007 Annual Report to
Shareholders about our U.S. subsidiaries’ Equal Employment Opportunity practices is required pursuant to EEO rules.
Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC CENTURA, RBC MORTGAGE, CANADIAN BANKING, WEALTH MANAGEMENT, U.S. & INTERNATIONAL
BANKING, CAPITAL MARKETS, RBC ASSET MANAGEMENT, RBC CARLIN, RBC DANIELS, RBC DOMINION SECURITIES and RBC TRUST SUBORDINATED NOTES 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 RBC Dexia IS companies are licensed users of the RBC trademark.
d
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Royal Bank of Canada: Annual Report 2007
Shareholder information
185
16.7%15.6%18.0%23.5%24.6%$2.20$2.11$2.57$3.59$4.1920032004200520062007200320042005200620072003200420052006200720032004200520062007$2,968$2,803$3,387$4,728$5,492$120$124$168$207$240Return on equity (ROE)Diluted earnings per share (EPS)Net income Total shareholder return (TSR) (on a $100 investment on November 1, 2002) (1)
We are continually striving to do
better for our shareholders by
delivering value to our clients,
providing opportunities to our
employees and making a positive
impact within our communities.
Royal Bank of Canada: Annual Report 2007
1
Clients
Better
means
deeper
relationships.
Whether it is a family seeking their first mortgage,
a small business owner looking to expand
or a multinational corporation exporting to new
markets, we continually seek ways to better
understand our clients’ aspirations and goals.
We understand that our clients take different
paths to success but know that we can play a vital
role in guiding their journey. Our relentless focus
on communicating and building relationships
based on trust and insight ensures we deliver
value and remain relevant to the people we serve.
2
Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
Our Client First philosophy demands that all
aspects of our operations ultimately benefit
our clients. Hiring more talented and qualified
people, developing simpler processes, and
creating innovative products and services are a
few ways we make it easier for our clients to do
business with us.
Our clients do not stand still and neither can we.
While we take heart in our current success,
we know we must always do better.
3
Shareholders
Better
means
increased
confidence.
We recognize people and institutions have a
choice of where they invest their money.
The competition for capital is global and their
investment decisions reflect whether they
have confidence in our ability to deliver returns
that are superior to others.
While our owners range from multi-billion
dollar mutual funds and pension funds to the
individual long-term investor, they all demand we
demonstrate sound strategy and risk discipline,
strong management, as well as excellent and
ethical execution. We know there is little tolerance
for missteps and we are proud of our long track
record of enviable financial performance.
4
Of all our assets, our integrity is one of our most
valued. As a complex, global financial services
company, we recognize that our shareholders
define return on investment in terms broader
than dollars and cents. They expect us to act
responsibly and make a positive contribution
to the issues confronting society. We remain
accountable to all our shareholders by providing
them with transparent financial and non-financial
reporting and comprehensive disclosure.
Our reputation for leading corporate governance
practices is cited among the world’s best.
We are committed to always working hard to
ensure we reward our investors’ confidence with
superior returns and more reasons to trust their
capital with us.
5
Employees
Better
means
greater
opportunities.
We believe our people ultimately determine
our success.
We believe in enabling performance rather
than simply managing it, and we continually
work to create engaging environments where our
people can perform their best. Active coaching
and feedback are essential to building productive
partnerships between our managers and
employees. Knowledge sharing is encouraged,
and listening to and learning from each other
is simply made easier with tools such as blogs,
online newsletters, surveys and polls.
6
Providing comprehensive total rewards,
which includes competitive pay and benefits,
training, career opportunities, and flexible work
options, helps enable us to attract and retain
talented people.
Creating a positive environment means
recognizing and unleashing the power of diversity.
At RBC, we know our strength comes from the
sum of the things we have in common – our shared
values and purpose – and the things that make
each of us different and unique.
7
Communities
Better
means
broader
impact.
We share in the common responsibility to
make our communities better. We contribute to
their economic prosperity as an employer, as a
purchaser of goods and services, as a lender to
small and local businesses, and as a supporter
of community economic development initiatives
and local entrepreneurship.
We help our communities by working with
organizations and people who inspire others.
The RBC Olympians Program is one example:
Athletes, including four-time Canadian Paralympic
champion Andrea Holmes (shown), act as
community ambassadors and share their past
experiences and current Olympic dreams with
kids, community groups, clients and employees.
They also work to create awareness and support
8
for amateur sport in Canada and inspire the
next generation to be physically fit and participate
in sports at any level.
Through the RBC Foundation, our donations
help create social and economic opportunities that
strengthen the communities where we operate.
We are committed to making a lasting social
impact through inspired, responsible giving and
by building strong partnerships with the
charitable sector.
We are privileged to be operating in
communities around the world that are full of
opportunity and potential. We are proud that we
can contribute to their success by supporting the
people, programs and agencies that make our
communities richer places for all.
9
Chief Executive Officer’s message
Finding
better ways
At RBC, we spend significant time and energy advancing
our vision of “Always earning the right to be our clients’
first choice.” Over several years, we have made dramatic
changes to all aspects of our operations to make it easier for
clients to do business with us. We have worked together to
make our processes simpler and geared toward helping our
clients. We set stringent financial goals and embedded a
high-performance culture to drive top quartile performance
for our shareholders. Our efforts have been met with tremen-
dous success on all fronts, but like many great organizations,
we know that it is not enough. Ours is a fiercely competitive
business and we recognize that as a leader, the contest
for clients, capital and talent never weakens and we must
always pursue higher standards of growth and achievement.
Indeed, we are always finding better ways to exceed the
expectations of our shareholders, our clients and ourselves.
In 2007, our shareholders benefited from solid financial
results that reflected our leadership position in core busi-
nesses in Canada and our expansion and growth in the
U.S. and internationally. Across RBC, we have succeeded in
numerous growth initiatives, and have taken advantage of
opportunities in the Canadian and international markets.
During 2007, we continued to return capital to our share-
holders through dividend increases and share buybacks,
delivering a total shareholder return of 16 per cent.
Our management depth and operational discipline have
helped us weather the turbulent market conditions that
surfaced in the middle of 2007. As issues in the U.S. subprime
market spilled into other sectors, including high-quality
debt markets, they prompted increased volatility, wider
credit spreads and reduced liquidity in the capital markets.
10
Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
We have not been immune to these general market condi-
tions since we are active in the debt and equity markets,
largely through our capital markets businesses, and our
U.S. banking operations have some exposure to the U.S.
real estate market.
Overall, I am pleased with how we have managed our
businesses throughout 2007. The diversity of our busi-
nesses across multiple products, markets and geographies
is a significant competitive advantage and it enabled RBC
to deliver solid results in the face of this market disruption.
Throughout this period, our strong risk management
practices and our solid capital position not only allowed
us to maintain our high credit ratings, but served to assure
investors and bolster their confidence in us. Underpinned by
the continued strength of our balance sheet, I am proud
that we have again been recognized as the safest Canadian
bank and the third-safest bank in North America (Global
Finance magazine).
I have confidence in the capabilities of our organization, our
management team and our people to continue to respond
and react in the interests of our shareholders and clients.
As a result of our efforts and investments made during the
past several years, we are looking to the future from a posi-
tion of strength. Our financial performance is strong, we are
continuing to make investments necessary for future growth,
and we are trusted and respected as a financial services
provider, an employer and a corporate citizen.
I believe that our ability today to serve the needs of
our clients in every market is as strong as ever and I am
committed to ensuring that our people and our businesses
have the resources to maintain this standard. Our foundation
Janice R. Fukakusa, Chief Financial Officer; Charles M. Winograd, Group Head,
Capital Markets; Barbara Stymiest, Chief Operating Officer; Martin J. Lippert,
Group Head, Global Technology and Operations; Gordon M. Nixon, President
and Chief Executive Officer; W. James Westlake, Group Head, Canadian Banking;
Peter Armenio, Group Head, U.S. and International Banking; M. George Lewis,
Group Head, Wealth Management.
11
Our efforts have been met with tremendous success on all fronts,
but like many great organizations, we know that it is not enough.
We must always pursue higher standards of growth and achievement.
for future growth is made stronger by a backbone of central-
ized technology, operations and corporate functions teams
that allows us to gain economies of scale and foster innova-
tion. Our brand, which was again recognized as the most
valuable in Canada (Brand Finance, BrandZ), is an asset that
we know will be vital to our growth plans. We will be building
our brand further through targeted advertising and sponsor-
ships in the U.S. and U.K., and through several global initia-
tives, including the RBC Environmental Blueprint™ discussed
on page 30 of this report. In addition, we are taking steps
to develop a robust global talent pool as we are mindful
that more of our growth will increasingly come from interna-
tional markets.
2007 Strategic goals
In 2007, our people remained focused on our strategic goals:
• 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.
In the pages of this report, you will read the highlights of our
progress toward 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 work hard to be a leader in a fiercely competi-
tive marketplace. Spurred by our Client First philosophy and
favourable economic conditions for much of the first half
of 2007, all our retail Canadian businesses benefited from
significant volume growth. Our Canadian retail businesses –
banking, insurance and wealth management – demonstrated
leadership throughout the year, setting an excellent founda-
tion for future growth. In Canadian Banking, we grew lending
volumes by 11 per cent and deposit balances by 6 per cent.
Canadian Wealth Management continued its strong perfor-
mance, improving revenue by 13 per cent. And as the
Canadian industry leader in net sales of long-term mutual
funds for 16 consecutive calendar quarters, Global Asset
Management revenues grew 17 per cent from last year.
We have the broadest national retail presence in Canada –
with more branches and automated teller machines (ATMs)
than any other competitor across the country – and we have
12
Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
worked hard to attain top three market shares in all products
and regions. Despite our leadership position and reflective
of our competitive environment, we continue to make invest-
ments that will pay dividends in the years ahead. I believe
it is important that we not rest on past success, but use our
resources to further improve service by renewing our branch
network and re-energizing our people. Our clients are not the
only ones who see the difference: In 2007, Synovate recog-
nized us as the best among our largest domestic competitors
for the service we provide clients in our branches and the
value we give them.
Our diverse and broad-based capital markets businesses
continued to lead in most elements of the Canadian market,
and we were again named Dealmaker of the Year by the
Financial Post for providing services to Canada’s leading
corporate, government and institutional clients. We
continued to differentiate our capital markets business from
our Canadian peers by leveraging our expertise globally in
fixed income distribution, energy, mining and metals, the
Canadian dollar, and cross-border mergers and acquisitions.
Our second and third strategic goals describe our ambitions
outside our home market. Over time we expect to continue to
grow our international business to account for approximately
half of our overall earnings and we continue to invest to help
make this possible. Our commitment to growing our interna-
tional business lines is underscored by the fact that we have
completed or announced a total of nine international acquisi-
tions worth more than US$4.5 billion since October 2006.
Our progress in the U.S. continues. One source of our
strength in the U.S. is our ability to differentiate ourselves in
the banking and wealth management markets by providing
our clients with the benefit of RBC’s global resources, but
also stressing the autonomy and decision-making power of
local management.
While our U.S. banking business must manage the effects of
the recent downturn in the U.S. real estate market, we are
committed to our long-term strategy of building a strong
retail banking operation in the U.S. Southeast focused on
serving businesses, business owners and professionals. The
substantial investments that we have made in our operational
infrastructure over the past couple of years will enable
further expansion in the region and result in scale and oper-
ating efficiencies over time. In 2007, we made great strides
toward building a targeted banking client base of businesses,
business owners and professionals. Loans and deposits were
higher in our U.S. banking operations in 2007, and I am encour-
aged by the work done to build the foundation for future
growth especially in the face of today’s demanding conditions.
We have 350 branches in high-growth markets in the
U.S. Southeast, with 103 branches to be added following
the expected close of our acquisition of Alabama National
BanCorporation (ANB) that was announced in September. In
total, we have used acquisitions and de novo branch openings
to expand our current number of branches in the U.S.
by 24 per cent over 2006 with more than 900 additional
employees dedicated to serving our U.S. banking clients.
We are continuing to pursue investments that will grow our
retail banking business in high-growth markets in the
U.S. Southeast.
In the U.S. wealth management market, we are the seventh
largest full service brokerage, as measured by number of
financial consultants (FCs). We continued to build scale by
enabling our clients to grow their assets by attracting high-
producing FCs, and acquiring J.B. Hanauer & Co. Finally, in
our U.S. capital markets businesses, we have leveraged our
bulge bracket position in Canada to provide expertise and
product breadth to U.S. mid-market companies. We have
used acquisitions to expand our capabilities and expertise,
remaining a leader in municipal finance, and gaining strength
in both U.S. mid-market issues and the K–12 education
finance sector.
The most notable development outside Canada in 2007
was the announcement of our agreement to acquire RBTT
Financial Group (RBTT), which will create one of the most
expansive banking networks in the Caribbean with a
presence in 18 countries and territories across the region.
This will be a truly transformational acquisition for us in the
region and will extend our reach into many important new
markets, notably Trinidad and Tobago, Jamaica, and the
Dutch Caribbean. Unquestionably, pending a successful
close, acquiring RBTT significantly advances us towards our
objective to grow outside Canada.
Our core strength in international trust services is helping
to drive our success as a top 20 global private bank, and
we continued to expand our presence by opening several
new offices during the year. Through our 50 per cent owner-
ship in RBC Dexia Investor Services (RBC Dexia IS), we now
operate in 15 countries and have been ranked as the top
global custodian by Global Investor magazine and R&M
Consultants for four and three consecutive years, respec-
tively. Finally, in Capital Markets, we are a leading player
in select niche businesses. For example, we are a leader in
alternative currencies and are a top-tier player in infrastruc-
ture finance. In addition, we are leveraging our domestic
expertise to expand our global mining and energy practices.
2007 Financial results
Long-term shareholders will not be surprised that we must
leverage our ongoing financial success to cultivate new long-
term growth opportunities for our businesses. For several
years, we have made it a management priority to ensure
current success was reinvested to fund future growth. This
approach allowed us to deliver relatively solid shareholder
returns in 2007 while returning capital through increased
dividends and share buybacks. We raised dividends twice in
2007 for a total increase of 26 per cent, and we repurchased
11.8 million common shares. Our capital position is strong
with a Tier 1 capital ratio of 9.4 per cent, comfortably above
our target of greater than 8 per cent.
Our diluted EPS growth of 17 per cent, ROE of 24.6 per cent
and dividend payout ratio of 43 per cent compared favour-
ably to our annual objectives, largely reflecting strong
performance across most of our businesses. Our defined
operating leverage of 2.6 per cent (as shown on page 15)
was below our annual objective of greater than 3 per cent
reflecting higher costs in support of our growing business
and investments in future growth initiatives, including
acquisitions.
Our total shareholder return was 16 per cent for the year
ended October 31, and our three-, five- and 10-year total
shareholder returns were 25 per cent, 19 per cent and
15 per cent, respectively. Relative to our peer group, we deliv-
ered top quartile shareholder returns over the past three and
10 years, and second quartile returns over the past five years.
Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
13
Our success means finding better ways
While the past year has proved relatively successful by many,
if not all, measures, RBC’s advantage is our unwillingness to
be satisfied with the status quo. Especially in difficult
environments, strong players like RBC have the opportunity
to build on their position of strength to gain clients, increase
market share and grow quality assets by truly differentiating
themselves. Our long-term investors will see clearly that we
have changed significantly over the past several years in
order to better serve our clients.
Our past record of strong performance is the result of our
constantly asking how we can improve: I fully expect that
our future performance will reflect our reaction to the same
question. All our people at RBC are engaged in the response
to this challenge, and I am proud that they are always finding
better ways to gain our clients’ business and their trust.
Their continued work leads us to achieve our aggressive
goals and, in turn, should provide our shareholders with
confidence and superior returns.
I sincerely thank all our clients for their continued business
and our more than 70,000 employees for their relentless
focus on delivering value for our shareholders and clients
around the world.
Gordon M. Nixon
President and Chief Executive Officer
How we will measure ourselves in 2008
We look ahead with some caution, understanding that
current market volatility and uncertainty will impact financial
performance. Nevertheless, we remain committed to
generating top quartile total shareholder return in relation to
our Canadian and U.S. peer group over the medium term.
On page 15, we show our 2008 financial objectives,
which are based on our three strategic goals and economic
outlook and are intended to generate strong returns for our
shareholders.
Objectives for our defined operating leverage, ROE, Tier 1
capital ratio and dividend payout ratio remain unchanged,
reflecting our continued commitment to strong revenue
growth, cost containment, as well as sound and effective
management of capital resources. Our 2008 objective for
diluted EPS growth is 7 to 10 per cent. Our objectives factor
in the effect of our pending acquisitions of ANB and RBTT –
which will be funded partly through issuance of our common
shares – and related integration costs. The ANB acquisition
is expected to close in early 2008 and the RBTT acquisition
is expected to close in the middle of the year. We expect
our provision for credit loss ratio to trend upward toward
historical averages, in line with our view of the overall credit
environment.
While Canada’s economy expanded in the first half of
2007, our outlook is based on slower economic growth
going forward as a result of weakening credit markets and
the sharp rise in the Canadian dollar. We expect the U.S.
economy to grow in 2008 at the same pace as 2007 as a
result of rising business investment, strong export growth
boosted by the depreciation of the U.S. dollar and continued
consumer spending. We anticipate that financial market
volatility will persist into early 2008 as lenders and inves-
tors remain cautious. In other global economies, we expect
growth to ease moderately in 2008 with China and emerging
Asian countries leading the way.
14
Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
2007 Performance review
The table below shows our 2007 performance compared to our objectives for the year.
2007 Objectives
2007 Performance
1. Diluted earnings per share (EPS) growth
2. Defined operating leverage (1)
3. Return on common equity (ROE)
4. Tier 1 capital ratio (2)
5. Dividend payout ratio
10%+
>3%
20%+
8%+
40–50%
17%
2.6%
24.6%
9.4%
43%
(1)
(2)
Our defined operating leverage refers to 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 variable interest entities (VIEs), accounting adjustments related to the new financial instruments accounting standards and Global
Insurance revenue. Non-interest expense excludes Global Insurance expense. This is a non-GAAP measure. For further information, including reconciliation, refer to the Key performance
and non-GAAP measures section.
Calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
2008 Objectives
1. Diluted earnings per share (EPS) growth
2. Defined operating leverage (1)
3. Return on common equity (ROE)
4. Tier 1 capital ratio (2)
5. Dividend payout ratio
Objectives
7–10%
>3%
20%+
8%+
40–50%
(1)
(2)
See note (1) above.
Calculated using guidelines issued by the OSFI under the new Basel II framework, which changes the methodology for the determination of Risk-Adjusted Assets (RAA) and
regulatory capital.
Medium-term objective
Objective
3-year TSR
5-year TSR
2007 Performance
1. Total shareholder return (TSR) (1)
Top quartile
Top quartile
Second quartile
(1)
Calculated for period ended October 31, 2007, based on share price appreciation plus reinvested dividend income versus the TSR of seven Canadian financial institutions (Manulife
Financial Corporation, Bank of Nova Scotia, Toronto-Dominion Bank, Bank of Montreal, Sun Life Financial Inc., Canadian Imperial Bank of Commerce and National Bank of Canada)
and TSR (in U.S. dollars) of 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 Mellon, 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 2007
Royal Bank of Canada: Annual Report 2007
Performance compared to objectives
Chief Executive Officer’s message
15
(C$ millions, except
percentage amounts)
2007
2006
2005 Increase (decrease)
2007 vs. 2006
Total revenue
Net income
Average loans and acceptances
Average deposits
2,987
$ 12,521 $ 11,696 $ 10,998 $
2,426
200,000 179,700
147,100 139,200
2,007
160,700
132,500
825
561
20,300
7,900
7%
23%
11%
6%
Key highlights
• We continued to extend our leading market shares during the year across multiple
product categories including personal loans, residential mortgages, personal
investments, business deposits and loans, and creditor, disability and travel insurance.
This growth was achieved while exercising disciplined pricing and prudent risk
management.
• We grew our deposit base through the introduction of a new personal banking suite
that included several client-centric features, such as multi-product rebates, and a new
high-interest online savings account.
• We continued to expand our distribution strength by adding new bank branches,
insurance offices and ATMs, particularly in high-growth markets, and we renovated and
redesigned many of our existing bank branches to continue to better serve the needs
of our clients.
• We deepened our client relationships as reflected by the increasing number of clients
who have multiple products with RBC.
Achievements in 2007
• We were ranked first among Canada’s major banks for “Branch Service” and “Value for
Money” by Synovate for our efforts in improving the client experience.
• We gave new clients even more reasons to bank with us as we launched new and
innovative products such as a high-interest online savings account, improved packages
for students and seniors as well as our RBC Rewards® card loyalty program.
• We introduced incentives, including charitable environmental donations, rebates
and discounts, to encourage clients to conduct home energy audits, switch to online
eStatements, and purchase renewable energy and hybrid vehicles.
• We introduced more convenient and efficient credit and account opening processes for
the business banking market segment while also launching a new flat-fee account and
an account selector tool.
• We won the Bank Insurance Securities Association Award of Excellence for innovation
and leadership in providing our clients with insurance advice, choice and solutions.
2008 and beyond
• We will focus on delivering a superior client experience and helping clients achieve
financial success, allowing us to retain and grow their business.
• We will focus on continuing to improve our processes and revise our business models
to make it easier for our clients and employees to do business at RBC.
• We will focus on delivering relevant advice and solutions to attract new clients to RBC.
Canadian
Banking
Canadian Banking provides personal and
business financial services in Canada
and insurance products and services
internationally. With our leading national
distribution network and the most
valuable brand in Canada, we serve
approximately 14 million clients through
the country’s most extensive branch
and ATM network, our proprietary and
specialized sales forces, online channels
and call centres.
2007 Revenue contribution
Personal Financial Services
Business Financial Services
Cards and Payment Solutions
Global Insurance
41%
18%
16%
25%
16
Royal Bank of Canada: Annual Report 2007
Canadian Banking
Wealth
Management
(C$ millions, except
percentage amounts)
Total revenue
Net income
Assets under administration
Assets under management
2007
2006
2005 Increase (decrease)
2007 vs. 2006
$
3,992 $
762
488,500
161,200
3,487 $
604
476,500
142,800
3,151 $
502
380,700
118,500
505
158
12,000
18,400
14%
26%
3%
13%
Wealth Management comprises businesses
that directly serve the growing wealth
management needs of affluent and high
net worth clients in Canada, the U.S. and
outside North America, and businesses
that provide asset management and
trust products through RBC and external
partners. We are a market leader in
Canadian wealth and asset management,
and have strong and growing businesses
in the U.S. and internationally. Our
3,300 financial consultants, advisors,
private bankers and trust officers provide
investment advisory and discretionary
services, banking, credit and estate and
trust services to affluent and high net worth
clients. We have a network of 300 offices in
20 countries around the world.
2007 Revenue contribution
Canadian Wealth Management
U.S. & International
Wealth Management
Global Asset Management
36%
50%
14%
Key highlights
• We realigned our businesses in February 2007 to create a separate Wealth Management
segment to focus on extending our leadership position in Canada and aggressively
growing in the U.S. and international markets.
• In 2007 we continued to increase our proportion of fee-based revenue, to 53 per cent
of all Wealth Management revenue from 50 per cent in 2006.
• The fastest growing segment in our Canadian wealth management business continues
to be high net worth clients (households with more than $1 million in investable assets).
• We continued to lead the Canadian mutual fund industry in both sales and performance,
outpacing the industry in net sales of long-term funds for the last 16 consecutive
calendar quarters. By continuing to leverage our broad retail distribution network in
Canada and by expanding our third-party distribution, our mutual fund assets under
management increased by $13.1 billion, or 19 per cent, over the prior year.
• We continued to build scale in the U.S. and internationally for future growth through
organic expansion and acquisitions. We offered client solutions from across our
businesses including extending more than US$1 billion in credit provided by international
wealth management to high net worth clients of our U.S. wealth management business.
• We continued to lead the Canadian asset management industry in the development
of innovative products. We were the first major Canadian bank to launch a socially
responsible mutual fund family through our partnership with Jantzi Research Inc.
and the first Canadian financial institution to introduce mutual funds with reduced
management fees for self-directed investors.
Achievements in 2007
• We were the first in the Canadian full service brokerage industry to surpass $150 billion
in client assets under administration through our Canadian full service broker.
• We continued to lead the Canadian mutual fund industry in net sales, more than
75 per cent ahead of the second-place fund company.
• We received the Lipper Award for the “Best Overall Fund Group” in Canada in
recognition of our strong investment performance.
• We acquired J.B. Hanauer & Co., a financial services firm specializing in retail fixed
income and wealth management services, expanding our presence in strategic and
desirable New Jersey, Florida and Pennsylvania markets.
• We continued to expand our international wealth management business focused on
high net worth clients, opening offices in several cities, including Mexico City, Beijing
and Santiago.
2008 and beyond
• We will continue extending our lead in the Canadian wealth and asset management
markets.
• We will pursue strong organic and acquisitive growth in our existing U.S. wealth
management businesses that serve individual clients and advisors.
• We will focus on expanding our high net worth international wealth management
business in select markets as well as through “bolt-on” acquisitions to complement our
existing operations.
• We plan to expand our asset management business globally, initially through
acquisitions with a focus on U.S. opportunities.
• We will work to continue attracting and retaining experienced advisors, private bankers
and other client facing professionals across all our businesses.
Royal Bank of Canada: Annual Report 2007
Wealth Management
17
U.S. &
International
Banking
(C$ millions, except
percentage amounts)
2007
2006
2005 Increase (decrease)
2007 vs. 2006
Total revenue
Net income
Average loans and acceptances
Average deposits
Assets under administration –
RBC Dexia IS (1)
$
1,915 $
242
22,300
34,200
1,628 $
261
18,500
28,700
1,577 $
256
17,200
21,200
287
(19)
3,800
5,500
18%
(7)%
21%
19%
2,713,100 2,421,100
–
292,000
12%
(1)
RBC Dexia IS represents the total assets under administration as at September 30, 2007, of the joint venture
established January 2, 2006, of which we have a 50% ownership interest.
Key highlights
• We continued to expand our banking footprint in key growth areas in the U.S. Southeast
through targeted acquisitions and de novo branch openings such as:
– We announced our intention to acquire ANB, which would better position us to serve
the banking needs of businesses, business owners and professionals in the key
markets of Alabama, Florida and Georgia in the U.S. Southeast
– We acquired 39 branches in Alabama that were owned by AmSouth Bancorporation
– We added 17 branches in Georgia when we acquired Flag Financial Corporation.
• We took steps to dramatically grow our banking operation in the Caribbean by
announcing our intention in October to acquire RBTT. This transformational acquisition
extends our reach into many important regional markets, notably Trinidad and Tobago,
Jamaica, and the Dutch Caribbean, and provides the platform for additional growth both
within and outside the region. The acquisition would create one of the most expansive
banking networks in the Caribbean in 18 countries and territories across the region.
• We realized 12 per cent growth in assets under administration with RBC Dexia IS
underpinned by both new and existing client growth. RBC Dexia IS surpassed
$2.7 trillion in assets under administration.
• Loans and deposits in our U.S. banking operations rose 14 per cent and 8 per cent
(18 per cent and 12 per cent in U.S. dollars), respectively, as a result of acquisitions and
organic growth.
• Loans and deposits in our Caribbean banking operations rose 10 per cent and
4 per cent (14 per cent and 8 per cent in U.S. dollars), respectively, as a result of
growth initiatives and favourable business conditions in the region.
Achievements in 2007
• We made significant investments in our U.S. & International Banking operations,
successfully pursuing strategically important acquisitions in the U.S. Southeast and
Caribbean that complement our strategy.
• We added a real estate lending team to our Caribbean operations, giving us the
expertise to better serve clients across the region. In addition, we formed a Small
Business Unit to serve this growing client segment.
• RBC Dexia IS continues to be ranked the world’s number one global custodian in
two leading industry surveys (Global Investor, R&M Consultants) and we achieved
significant new business wins and retentions, including Claymore Investments,
First State Investments (UK) Limited, Guardian Capital Group, HSBC Bank Canada,
Manulife Financial, Swiss Reinsurance Company (Swiss Re) and Université du Québec.
2008 and beyond
• We will continue to implement our long-term strategy to become the pre-eminent bank
for business, business owners and professionals in the U.S. Southeast.
• We will focus on efficiently integrating, pending successful close, the ANB acquisition
while retaining and growing our client base.
• We will focus on successfully integrating, pending successful close, RBTT and our
Caribbean retail banking operations to create the leading bank in the region.
• We will focus on pursuing growth strategies with RBC Dexia IS that include
strengthening our global client franchise, building new value-added products and
expanding our presence in high-potential markets.
We provide personal and business banking
solutions to individuals, businesses,
business owners and professionals through
350 banking centres in the U.S. Southeast.
The announced acquisition of Alabama
National BanCorporation (ANB), expected to
close in early 2008 pending shareholder and
regulatory approvals, will add 103 branches
focused in high-growth U.S. Southeast
markets.
Our Caribbean operations provide banking
solutions to individuals and businesses
throughout our network of 44 branches in
eight Caribbean countries and territories.
The announced acquisition of RBTT, which
is expected to close in mid-2008 pending
shareholder and regulatory approvals, will
add more than 84 branches to our network
throughout the Caribbean.
We have a 50 per cent ownership in RBC
Dexia IS, which offers a complete range of
investor services, such as custody and fund
administration, to institutions worldwide.
2007 Revenue contribution
Banking
RBC Dexia IS
60%
40%
18
Royal Bank of Canada: Annual Report 2007
U.S. & International Banking
Capital
Markets
(C$ millions, except
percentage amounts)
Total revenue (1)
Net income
Trading revenue (1)
Average assets
(1)
Taxable equivalent basis.
2007
2006
2005 Increase (decrease)
2007 vs. 2006
$
4,389 $
1,292
2,021
4,136 $
1,355
2,143
260,600
3,562 $
686
1,684
229,100
253
(63)
(122)
50,600
6%
(5)%
(6)%
19%
311,200
Our diverse capital markets businesses
provide corporate and institutional
clients with advice, capital, access to the
world’s financial markets and innovative
products to help them achieve their growth
objectives. By leveraging our leadership
position in Canada, we have built a strong
and growing U.S. mid-market capital
markets franchise. Outside North America,
we have established ourselves as a leading
provider of global financial services.
Notable areas of strength include global
fixed income distribution capabilities,
structuring and trading, foreign exchange,
and infrastructure finance, as well as
broad capabilities in global mining
and energy.
2007 Revenue contribution
Global Markets
Global Investment Banking
and Equity Markets
Other
56%
38%
6%
Key highlights
• We completed three acquisitions to expand our client base and enhance our capabilities:
– Carlin Financial Group, which provides our clients with a best-in-class North American
electronic trade execution platform
– Daniels & Associates, L.P., a U.S. merger and acquisition advisory firm specializing in
the communications, media and entertainment, and technology sectors
– Seasongood & Mayer, LLC, strengthening our franchise as one of the leading
municipal finance platforms in the U.S.
• We expanded our global infrastructure finance platform and completed significant
transactions in North America, Europe and Australia to be regarded as a top-tier player
in the global infrastructure finance business.
• We expanded our base metals capabilities, enabling new and innovative transactions,
such as a copper derivative with a notional value of US$1 billion.
• We continued to extend our business in selected markets around the world, including
asset-based lending in Canada, fixed income and structured product distribution in
Asia, and investment banking in the U.S.
Achievements in 2007
• We remain the leading Canadian investment bank. We were named:
– Dealmaker of the Year in Canada for four of the last five years (Financial Post)
– Best Investment Bank in Canada (Global Finance magazine)
– Best Canadian Debt House (Euromoney Magazine, 2007)
– Number One Foreign Exchange Dealer in Canadian dollars (Euromoney
Magazine, 2007).
• We continued to hold the leading market share in the Canadian fixed income market and
remain a global leader. We led an $8.1 billion global bond issue, one of the largest to date.
• We extended our leadership position in Australian and New Zealand dollar denomination
bond issuances and retained our premier position in the Alternative Dollar market.
• We launched the RBC Hedge 250 Index® on the London Stock Exchange as a joint
venture with New Star Asset Management.
2008 and beyond
• We will strive to remain the Canadian wholesale client’s first choice for all financial
products and services.
• We will leverage our success and continue to diversify into new and complementary
areas where we can show competitive strength such as:
– Exporting our infrastructure and project finance expertise from the U.K. to other markets
– Growing our investment banking and municipal finance business in the U.S.
– Investing in our alternative assets and structured products businesses and
expanding our distribution capabilities
– Extending our global energy and mining capabilities
– Leveraging the Carlin acquisition to build out our electronic trading capabilities.
Royal Bank of Canada: Annual Report 2007
Capital Markets
19
Corporate
Support
Global Technology and Operations
and Global Functions
More than 18,000 employees in Global
Technology and Operations (GTO)
provide the essential information
technology and operations capabilities
necessary to support our diverse
business activities. In partnership
with our businesses, GTO provides
processing and fulfillment support,
direct customer sales and service
through its contact centres and
technology that enables the delivery of a
secure, flexible, reliable and convenient
client experience.
Our Global Functions support business
growth by providing the mission critical
control management systems, training
and expertise necessary to meet our
regulatory, financial reporting, balance
sheet management and corporate
funding requirements. Global Functions
also provide leadership related to
critical enterprise assets, including
our people and our brand and contribute
to the development of the enterprise
strategy.
20
Royal Bank of Canada: Annual Report 2007
Corporate Support
Achievements in 2007
In partnership with our businesses:
• GTO delivered on more than 319 million ATM transactions, 132 million client calls,
105 million online banking transactions, 2.7 billion point-of-sale transactions and
100 million equity trades.
• GTO focused on enhancing the client experience through improved service levels
and Interactive Voice Recognition changes in our contact centres, redesigning key
processes using Lean Six Sigma techniques, eliminating top client irritants, and
creating an end-to-end client services commitments framework.
• Global Functions contributed to our financial performance by effectively managing
capital, employing innovative strategies to diversify funding sources, enhancing
the productivity and engagement of the workforce, developing successful cost
management initiatives, supporting the businesses in maintaining credit quality and
our risk profile, and effectively managing our tax position.
• Global Functions supported enterprise M&A activity by conducting comprehensive
due diligence and negotiations and managing stakeholder relations in all major
transactions, including six international acquisitions.
• In November 2007, Global Functions launched the first covered bond program by a
Canadian issuer, further enhancing our liquidity position and diversifying our access to
wholesale funding.
2008 and beyond
• GTO will enable business strategies by driving innovative process and technology
improvements that simultaneously deliver a differentiated client experience and
increased defined operating leverage.
• Global Functions will contribute to our financial performance by working to maintain
a solid balance sheet, sound credit quality and capital ratios, effectively manage our
tax position, and implement cost-saving initiatives while improving the alignment of
business strategies and risk exposures.
• By collaborating with our businesses:
– GTO will work to make it easier for clients to do business with us while enhancing
client services, executing against our risk and compliance objectives, and ensuring
the safety and soundness of our infrastructure
– Global Functions will support business growth by attracting, retaining and
motivating talented employees and maintaining a strong governance and compliance
regime, a relevant and customer-centric brand strategy, enterprise strategy
development, proactive enterprise compliance, and solid relationships with
investors, credit rating agencies, regulators and other stakeholders.
Chairman’s
message
Investor confidence is a key element of RBC’s success and your Board of Directors
works hard to earn it. We act as the stewards of the organization, exercising independent
judgment in supervising management and safeguarding the interests of shareholders.
In fulfilling our role, we foster a corporate environment built on integrity and provide
management with guidance in pursuit of our shared goal: maximizing long-term
shareholder value.
RBC’s enterprise is complex, spanning multiple businesses and geographies. Our board’s
diversity of thought and experience enhances our ability to oversee the strategic develop-
ment of a successful global enterprise, understanding and assessing RBC’s competitive
environment, and anticipating the business possibilities and challenges of tomorrow.
The board reviews aspects of RBC’s strategy at every meeting, taking into account the
opportunities and risks of the businesses. We contribute a forward-looking perspective
by participating actively with management in an annual session dedicated to strategic
planning. In reviewing the implementation and success of approved strategic
and operating plans, we regularly monitor RBC’s performance against strategic goals,
approving capital expenditures and major transactions that align with our plan.
We take seriously our responsibility to oversee policies and processes to identify the
principal risks to RBC’s businesses and the systems implemented to manage them.
The board reviews strategies for identifying, prioritizing and managing risk, and for
clearly defining roles and responsibilities. We seek to ensure that management’s plans
and activities are prudent and focused on generating shareholder value within an
appropriate and comprehensive policy framework.
All our efforts are marked by an emphasis on trust and integrity. Our goal is to nurture
the positive values that are already well entrenched in RBC’s corporate culture and to
reinforce the ethical principles on which its reputation and success are founded. In the
board’s view, these are critical to RBC’s long-term success.
RBC’s Board of Directors has long been proactive in adopting leading corporate
governance practices. We remain firmly committed to continuous improvement of
RBC’s strong and effective governance standards. Again this year our approach received
high marks, earning recognition from the Conference Board of Canada, IR Magazine and
The Globe and Mail’s corporate governance rankings.
My goal as non-executive Chairman is to provide independent leadership that will
empower the board to add value. This involves keeping the board focused on its
objectives, cultivating a team approach and encouraging effective participation to
draw the greatest advantage from each director’s individual strengths. One of my
key responsibilities is to ensure that the board is independent-minded and evaluates
matters through a shareholder’s lens. Another ongoing focus is overseeing board
assessment and peer review, as well as our board development program, which further
enhances the board’s understanding of the evolving complexity of financial services
and the financial literacy of all directors. Over the past year, the board participated in
sessions dealing with specialized and complex aspects of RBC’s business operations,
accounting and financial instruments standards, methodologies used in assessing and
controlling risk and the implications of the Basel II Capital Accord.
Your Board of Directors is proud to actively participate in the achievements of Royal Bank
of Canada. On behalf of the board I would like to thank management and all employees
for their strong contribution to RBC’s performance over the past year.
David P. O’Brien
Chairman of the Board
Royal Bank of Canada: Annual Report 2007
Chairman’s message
21
Corporate
governance
Beyond compliance
At RBC, sound corporate governance has
long been recognized as an essential
element in developing investor confidence.
Our approach looks beyond regulatory
compliance and builds on our strong
governance fundamentals by incorporating
best practices to support the Board of
Directors’ ability to supervise and advise
management with the goal of enhancing
long-term shareholder value.
Transparency is a key aspect of good
governance and the board takes
seriously RBC’s commitment to clear and
comprehensive disclosure. Our practices
and policies fully comply with guidelines
established by Canadian securities
regulators, as well as applicable provisions
of the U.S. Sarbanes-Oxley Act of 2002
and requirements of the New York Stock
Exchange and the U.S. Securities and
Exchange Commission applicable to foreign
private issuers.
22
Royal Bank of Canada: Annual Report 2007
Corporate governance
Building on our tradition of excellence
To maintain our high standards, we continuously review and assess our corporate
governance system. The Board of Directors’ dynamic approach to governance anticipates
best practices as they evolve. Over the past few years RBC has adopted many significant
leading governance practices:
• A policy requiring directors to tender their resignations following the Annual Meeting
if they fail to receive majority shareholder support
• Increased minimum share ownership guideline for directors to $500,000 from the
previous level of $300,000, to strengthen alignment of their interests with those
of shareholders
• Increased minimum share ownership requirements for executive officers to further
align management and shareholder interests. The President and Chief Executive Officer
(CEO) must have shareholdings worth at least eight times the last three years’ average
base salary. The standard for other members of Group Executive is six times the last
three years’ average base salary, except the Head of Capital Markets, who must hold
shares worth at least two times the last three years’ average salary plus bonus
• A Performance Deferred Share Program to strengthen the alignment of the interests
of management with shareholders by tying senior management’s rewards to
the performance of RBC relative to a North American peer group of competing
financial institutions
• Limited share dilution resulting from the reduction in the number of stock option grants
awarded to management by approximately 70 per cent since 2003.
In addition:
• Our comprehensive Director Independence Policy has continued to evolve in response
to best practices and regulatory refinements. Under this policy, 15 of the 16 currently
serving directors are independent
• Meetings of independent directors are held regularly
• All members of every committee of the Board of Directors are independent: the Audit
Committee, Human Resources Committee, Corporate Governance and Public Policy
Committee, and Conduct Review and Risk Policy Committee
• For the Audit Committee, more stringent independence criteria have been
implemented, four individuals have been designated as audit committee financial
experts, 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
• The Audit, Human Resources, and Corporate Governance and Public Policy committees
have sole authority to retain and approve the fees of independent, external advisors.
The Human Resources Committee retains an independent compensation consultant
• Board and director evaluation procedures have been enhanced, with written peer
reviews added to complement the established peer assessment 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
competencies and skills that the board as a whole requires.
“ Our approach looks beyond regulatory compliance and builds on our
strong governance fundamentals by incorporating best practices to
support the Board of Directors’ ability to supervise and advise
management with the goal of enhancing long-term shareholder value.”
David P. O’Brien, Chairman of the Board
2008 Annual Meeting
Shareholders are invited to attend our Annual
Meeting at 9 a.m. (Eastern Standard Time)
on Friday, February 29, 2008, at the Metro
Toronto Convention Centre, North Building,
255 Front Street West, Toronto.
Demonstrating leadership
These measures build on our previous governance initiatives, which include, among
many others:
• Ensuring independent leadership of the Board of Directors by being first among our peer
companies to separate the positions of Chairman and Chief Executive Officer in 2001
• Adopting a policy limiting interlocking directorships of board members in 2002
• Permanently 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 educational 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.
Enhancing our disclosure
In keeping with our goals of continuously improving governance 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 compensation paid to individual directors and their share ownership
• Greater clarity on senior officers’ compensation relative to fiscal year performance
• Three-year, easy-to-read overviews of named executive officers’ compensation
• Aggregate compensation of top executives as a percentage of market capitalization
and a percentage of net income after-tax
• Comprehensive description of how the President and CEO’s compensation is
determined, including performance metrics and weighting
• Details of comparator companies used for benchmarking of both corporate
performance and executive pay
• 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 CEO
• A summary of significant differences between the NYSE rules applicable to U.S.-listed
companies and our governance practices as a non-U.S. issuer
• Our Corporate Responsibility Report and Public Accountability Statement.
Royal Bank of Canada: Annual Report 2007
Corporate governance
23
Corporate
responsibility
At RBC, we believe our first duty is to
operate with integrity at all times so
that we can continue to ensure the
present and future well-being of our
stakeholders: clients, employees, investors,
suppliers, governments, communities
and non-governmental organizations.
Our strategic approach to corporate
responsibility and the suite of programs
and practices described here serve as the
RBC Blueprint for Doing Better™.
For more information, visit
rbc.com/responsibility/approach
24
Royal Bank of Canada: Annual Report 2007
Corporate responsibility
Corporate
Responsibility
Principles:
RBC Blueprint for
Doing Better™
Economic impact
Marketplace
• Provide strong returns to
shareholders
• Pay fair share of taxes
• Support small business
and community economic
development
• Foster innovation and
entrepreneurship
• Purchase goods and services
responsibly
• Develop and provide
products responsibly
• Provide access to basic
banking services
• Protect and educate
consumers
Workplace
Environment
Community
• Respect diversity
• Foster a culture of employee
engagement
• Provide competitive compen-
sation and total rewards
• Provide opportunities for
training and development
• Reduce intensity of
operational footprint
• Promote environmentally
resonsible business
activities
• Offer environmental
products and services
• Provide donations with
a lasting social impact
• Sponsor key community
initiatives
• Encourage employees
to contribute
Recognition
In 2007, RBC was honoured with a number of global awards and recognition for our
corporate responsibility efforts and performance.
Awards
• RBC scored first place in the 2007 Best 50 Corporate Citizens in Canada ranking,
according to Corporate Knights magazine.
• RBC was named one of the world’s top 100 sustainable companies, according to the
third annual “Global 100” ranking announced in BusinessWeek magazine. Companies
on the list were selected from a universe of 1,800 publicly traded companies.
Socially responsible investment indices
RBC is listed on a number of significant Canadian and international indices that help
guide the investment decisions of socially responsible investors, including Dow Jones
Sustainability World Index, the DJSI North America Index, the FTSE4Good Index and
the Jantzi Social Index. Companies on these indices meet stringent social, ethical and
environmental criteria.
Reporting
Increasingly, companies are expected to report on their environmental, social and
governance practices, in addition to their financial results. A range of stakeholders are
asking for this information, yet there are significant differences of opinion about what
companies should disclose, as well as the appropriate degree and manner of disclosure.
RBC has adopted a multi-pronged approach to sustainability reporting. While we follow
the guidelines suggested by the Global Reporting Initiative, we do not produce a single
printed report covering everything for all stakeholders. Instead, we provide reporting
geared to various stakeholder groups, with an appropriate level of detail for each.
Our external website (rbc.com) is our primary reporting mechanism, where our annual
Corporate Responsibility Report and Public Accountability Statement can be found.
Code of Conduct
All RBC employees worldwide are governed by our Code of Conduct, which was first established
more than 20 years ago. The Code is reviewed regularly and was updated in 2007, with clarification
of our process for approving and disclosing waivers, increased confidentiality protection
provisions, additional guidelines for conflicts of interest, and updated standards for maintaining
respectful workplaces. All employees are required to take a web-based learning program so that
they know and understand the Code’s principles and compliance elements. The program includes
an online course and a test, which all employees must complete within 30 days of joining RBC and
at least once every two years thereafter. The company’s most senior officers and select others
must complete the program annually.
Policies
RBC has enterprise-wide compliance policies and processes to support the assessment
and management of risks, including policies to address issues such as economic
sanctions, lending to political parties, money laundering, terrorism financing and
conflicts of interest. Policies and controls are reviewed regularly to ensure continued
effectiveness and alignment with relevant laws and regulations.
Anti-money laundering policy
RBC is strongly committed to preventing the use of our financial services for money
laundering or terrorist financing purposes. In 2007, every RBC employee worldwide,
regardless of their role in the organization, took an anti-money laundering/anti-terrorism
financing course and exam. The course was tailored for each business, function and
geography with material specific to the laws of 38 countries and jurisdictions in which
we operate. Our Global Anti-Money Laundering Compliance Group develops and
maintains policies, guidelines, training and risk assessment tools and models and
other controls to help our employees protect RBC and our clients, and to ensure we are
managing ever-evolving money laundering and terrorism financing risks. Our controls
in this area incorporate Know Your Client rules established by various regulators to
ensure we properly identify our clients and protect against the illegal use of our products
and services.
Crisis management
RBC utilizes a best-in-class Business Continuity Management program to ensure that our
businesses or units are adequately prepared to deal with any disruption of service to its
clients. Risk assessments of all areas are conducted annually and further supported with
contingency plans and periodic testing.
The RBC Enterprise Crisis Management team, consisting of senior executives from
across the organization, is responsible for ensuring continued service to our clients. It is
supported by a global network of regional, business-line and local incident management
teams. These teams are on call around the clock to address any situation that may pose
material risk to staff, corporate reputation or our ability to deliver service to clients.
Regular crisis simulations are conducted to test the readiness and timely response to all
emergency situations.
The RBC Business Emergency Information Line is our link to employees to provide
current updates in the event of a crisis or external situation affecting their ability to
access RBC offices or serve our clients.
Reporting suspected irregularities
RBC has long-established processes that enable employees around the world to report
suspected breaches of our Code of Conduct, other irregularities and dishonesty directly
to our Ombudsman. Employees can report anonymously, confidentially and without fear
of retaliation.
Specific to financial reporting practices, the RBC Reporting Hotline was established
so employees and third parties around the world can anonymously, confidentially and
without fear of retaliation, report suspected irregularities or wrongdoing relating to
accounting, auditing or internal accounting controls directly to the RBC Ombudsman.
Royal Bank of Canada: Annual Report 2007
Ethics
25
Ethics
A truly sustainable company must have
ethical business practices. At RBC, one
of our key values is to operate with trust
through integrity in everything we do.
Our blueprint for ethical behaviour
includes a strong foundation of principles,
codes and formal policies designed to
protect consumers, combat corruption,
ensure business continuity, and facilitate
reporting of breaches or concerns.
For more information, visit
rbc.com/responsibility/governance
2007 Highlights
• Incurred taxes of $2.09 billion worldwide
• Purchased goods and services totalling $4.4 billion from international, national, regional and local
suppliers of all sizes
• Served more than half a million small business clients in Canada, the United States and
the Caribbean
• Promoted innovation, a key driver of the economy, through investments in early-stage technology
companies and support for research-based initiatives
Economic development
RBC invests in sustainable economic development, and we are committed to contributing
to the success of people and businesses in the communities where we operate. We support:
• Economic growth in communities where we do business
• Initiatives that help build well-being, wealth and capacity in Aboriginal communities
• Resources to promote economic self-sufficiency
• Financial literacy programs
• Programs that address basic needs, such as food banks.
RBC also promotes economic growth through industry partnerships. 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. We are the market
leader in Canada, serving almost one in four small business owners. We have over half a
million small business clients in Canada, the U.S. and the Caribbean.
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 entrepreneurship, such as:
• The Medical and Related Sciences (MaRS) project, facilitating research and
development, and its commercialization in Ontario
• The Council for Entrepreneurial Development, promoting high-growth, high-impact
entrepreneurial companies in North Carolina’s Research Triangle region
• Georgia Tech’s Advanced Technology Development Center, a recognized science and
technology incubator that helps entrepreneurs from the U.S. state of Georgia launch
and build successful companies
• The RBC Next Great Innovator Challenge™, which rewards college and university
students from across Canada for innovative ideas related to financial services.
Since 1969, we have brought investment dollars as well as our knowledge and expertise
to budding software and technology companies serving the financial services and other
sectors. We currently have approximately $250 million dedicated to directly invest in
emerging technology companies.
Purchasing
Our procurement policies are inclusive and aim to promote sustainable business
practices and economic development where possible and appropriate. To maintain the
highest standards, we review our purchasing policies 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 CAMSC’s U.S.
affiliate, the National Minority Supplier Development Council, since 2002.
Economic impact
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. RBC aims to have a positive
economic impact by providing attractive
returns to shareholders, creating
employment, supporting small business
and economic development, fostering
innovation and entrepreneurship
and purchasing responsibly.
For more information, visit
rbc.com/responsibility/economic
26
Royal Bank of Canada: Annual Report 2007
Economic impact
2007 Highlights
• Provided employment to more than 70,000 people worldwide, with $7.9 billion in compensation
and benefits
• Invested $54 million in formal training and development initiatives
• The vast majority of employees are RBC shareholders
Building mutually rewarding relationships with employees
RBC provides a flexible and competitive Total Rewards program based on an
understanding of what employees value and need. This comprehensive approach
rewards people for their skills and contribution and includes compensation, benefits
and a positive work environment, along with career and learning opportunities.
As our business and workforce continue to grow and become more diverse, offering
choice and flexibility through Total Rewards is even more critical to our success.
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. This includes developing employees
to be leaders through the use of key job-related experiences.
The employee savings and share ownership plans that are part of our rewards program
help align employee, investor and company objectives. The vast majority of employees
are RBC shareholders through these programs.
Well-informed employees are more likely to align their actions with company goals.
Our 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 encouraged to provide feedback and comments in a variety of ways.
RBC has a long history of listening and responding to employee feedback, with
employee opinion surveys dating back to 1981. By understanding employees’ views,
RBC can take action to address their needs and the company’s priorities, which results
in high levels of employee engagement and a strong commitment to clients.
In 2007, we again gathered employee input on our progress in key areas including talent
management, performance enablement, employee engagement and workplace culture.
Diversity for growth and innovation
Diversity is one of our core values. We believe that 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.
RBC is a leader in promoting diversity. We regularly sponsor research studies, awards
and public discourse that promote understanding and draw attention to diversity issues.
Our annual Diversity Progress Report is available at rbc.com/uniquecareers/diversity/
progress_reports.html.
Royal Bank of Canada: Annual Report 2007
Workplace
27
Workplace
A talented and highly motivated
workforce is a key element in our blueprint
for building a sustainable and successful
future. Consistently ranked as one of
the top employers in Canada, RBC strives
to strengthen our reputation as a quality
employer in all countries in which we
do business.
RBC employment worldwide
Fiscal year (ended October 31, 2007)
Canada
54,960
48,837
United States
12,181
11,663
Other international
4,619
4,545
Total
71,760
65,045
Number of employees
Full-time equivalent positions (FTE)
For more information, visit
rbc.com/responsibility/workplace
Responding to feedback
Every year, RBC businesses track client satisfaction and use client feedback to make
improvements. For instance, in 2007, client research helped provide direction for these
new initiatives in our Canadian retail banking operations:
• Environmentally responsible product options
• A simplified line-up of savings and chequing accounts with enhanced customer benefits
• High-interest online savings account
• Business banking packages for small businesses
• Enhanced marketing and communication materials for greater relevance.
Product responsibility
Responsible development of products and services
RBC follows a defined, rigorous 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 client needs, our Code of Conduct, laws and regulations, and
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.
Low-carbon banking for consumers
One of our priorities is to provide products and services that help our clients mitigate
their environmental impact. This includes online banking, and electronic statements
and bill payment. In Canada, RBC introduced new financial options and incentives for
our environmentally conscious clients in 2007, including incentives to switch off paper
statements, have a home energy audit, buy a lower-emission car, and switch to green
power. We encourage our clients to use electronic solutions that replace the carbon-
intense activities involved in retail banking such as travel and paper.
Socially responsible investing (SRI)
Increasingly, investors are becoming interested in putting their money where their
values are. In 2007, RBC became the first major Canadian bank to offer investors
this option with the launch of the RBC Jantzi Funds, three funds that are screened for
environmental, social and governance factors. Clients in Canada and the U.S. also have
access to other SRI funds through our network of advisors.
Responsible lending
RBC provides credit and banking services to companies in many industries. Our policies
cover areas of concern, including environmental issues. For instance, RBC will not
support or finance transactions that are directly related to trade in or manufacturing of
material for nuclear, chemical, and biological warfare or landmines.
RBC has a number of anti-corruption policies which require us to apply appropriate
scrutiny and monitoring measures to high-risk clients whose business activities are
known to be susceptible to criminal activity or have been designated as high-risk for
money laundering.
Marketplace
It’s been said that corporate responsibility
isn’t so much about how a company
spends its money, but how a company
makes its money. At RBC, our blueprint
for building sustainable, long-term
relationships with our clients includes
responsible practices in the marketplace,
such as soliciting and acting on client
feedback, providing responsibly
developed financial products, maintaining
vigilant consumer protection measures
and ensuring access to financial services.
Responding to feedback
Clients surveyed (thousands)
492
415
2007
135
2006
97
2005
150
98
Canada
United States
28
Royal Bank of Canada: Annual Report 2007
Marketplace
2007 Highlights
• Introduced new, low-carbon banking options for consumers
• Launched the RBC Jantzi Funds, three funds that are screened for environmental, social and
governance factors
• Ranked among the most trusted companies for privacy in Canada by the Ponemon Institute’s
2007 survey
Consumer protection
Privacy and information security
RBC is 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 stakeholders.
We have had a formal Privacy Code since 1991, 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. In 2007, we developed a broader, more
holistic framework for managing privacy, information risk, security and records/content
management. RBC ranked among the most trusted companies for privacy in Canada in
the Ponemon Institute’s 2007 survey.
Fraud prevention
RBC has stringent security policies and practices, backed up by around-the-clock
resources to prevent, detect and investigate potential fraud. Online security is a priority,
and our security guarantees help protect online banking and self-directed brokerage
clients from unauthorized transactions. In 2007, we centralized our claims process for
unauthorized transactions, resulting in quicker reimbursement to clients. We upgraded
most of our retail and branch lobby ATMs with anti-skimming devices in 2007. These
devices deter would-be criminals from placing fraudulent skimming devices over the
ATM card slot. We have developed a number of fraud-education initiatives including
up-to-date tips and alerts, brochures and client presentations.
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.
Know Your Client rules
Know Your Client rules are key to investment and banking clients’ protection. Our
employees are required to make all necessary efforts to understand a client’s profile,
financial and personal objectives before making recommendations relevant to their
needs. Our due diligence also covers compliance with applicable securities, consumer
protection, anti-money laundering, anti-terrorism and economic sanctions legislation.
Client complaint process
Our formal process for handling client concerns is outlined on our website and in our
Straight Talk brochures. If clients believe an issue to be unresolved following receipt of
a response from the RBC representative dealing with their concern, they may appeal to
the 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 consideration and respect.
We also respect the dignity and privacy of all parties involved in the proceedings.
Certain disputes that remain unresolved after being reviewed by the Ombudsman may
be directed to a number of agencies and regulators listed on our website and in our
Straight Talk brochures.
Access to banking services
RBC is committed to providing banking access through customized products and
services to a host of groups who were traditionally underserved.
For more information, visit
rbc.com/responsibility/marketplace
Royal Bank of Canada: Annual Report 2007
Marketplace
29
2007 Highlights
RBC continued to make progress on how we manage environmental issues through our priority
activities. Highlights include:
• Release of the RBC Environmental Blueprint™, outlining our environmental policy, priorities and
commitments for the next several years
• Launch of our pilot EnergySmart Program designed to enlist employees in reducing energy
consumption in our owned and leased premises
Policy
The RBC Environmental Policy was first developed in 1991 and, since then, periodically
updated to reflect the changing environmental priorities of our company and our
stakeholders. In 2007, our policy was substantially revised. It now more comprehensively
addresses environmental matters pertaining to operations, business activities, products
and services, employees, compliance, reporting and transparency and partnership.
Priorities
To effectively carry out our environmental sustainability mandate, we prioritized our
key environmental issues and activities in 2007 as part of the RBC Environmental
Blueprint™. In selecting our priorities, we considered our potential exposure to, and
influence over, the issue or activity, as well as its importance to our complete array
of stakeholders.
Climate change, biodiversity (including issues related to forests and indigenous
peoples) and water were selected as our priority environmental issues.
Climate change
Climate change presents environmental, social and financial challenges to the global
economy, human health and to our own businesses and operations. The two causes of
climate change are natural systems and human activity, most notably greenhouse gas
emissions from the combustion of fossil fuels, and large-scale removal of forests and
vegetation. We believe that it is of vital importance that we all contribute to efforts to
reduce greenhouse gas emissions and effectively adapt to the unavoidable impacts of
climate change.
Biodiversity
Biodiversity, or “biological diversity,” refers to the variety of different species, the
genetic variability of each species and the variety of different ecosystems that they
form. Environmental degradation resulting from human activity and the forces of climate
change is disrupting the natural biodiversity of habitats and ecosystems. Critical natural
systems and the abundant biodiversity they support must be preserved in order to
maintain healthy communities, cultural values and shareholder value.
Forests help moderate the climate, provide diverse habitats for species and purify water.
We believe that we must play a part in protecting the integrity of the boreal forests of
Canada and rainforests around the world by supporting sustainable forestry practices.
RBC recognizes that the identity, cultural beliefs and economies of some indigenous
peoples are intrinsically tied to their region’s history, biodiversity and natural landscapes.
We believe that industries operating in these natural areas must consider the effects of their
operations on affected communities, and particularly communities of indigenous peoples.
Water
Water is the most important natural resource on earth, and without it, all life would
cease. Access to clean fresh water, the preservation and management of watersheds
and water conservation are becoming increasingly urgent environmental concerns, both
globally and in many of the regions in which we operate. Climate change, pollution and
inefficient water usage are factors contributing to a growing water crisis. In 2007, we
launched the RBC Blue Water Project, a 10-year, $50 million charitable grant program to
help find global solutions to this crisis and we are exploring opportunities to contribute
solutions through financial products and services as well.
Environment
RBC is committed to environmental
sustainability. We believe that this
commitment has enhanced our
capacity to conduct business and the
RBC Environmental Blueprint™ will
allow us to continue delivering short-
and long-term benefits for our clients,
employees and the communities in
which we live and conduct business.
30
Royal Bank of Canada: Annual Report 2007
Environment
2007 Highlights (continued)
• Launch of environmental banking options for clients, helping them make a contribution to the
environment through RBC Homeline®, eStatements, hybrid car financing and green power
• Recognition by Newsweek as the company most capable globally of addressing the risks and
opportunities of climate change
• Recognition by the Carbon Disclosure Project as a leader in understanding and managing
the financial risks and opportunities of climate change
We intend to direct our environmental efforts toward three priority activities that are
important to RBC and our stakeholders:
• Reducing the intensity of our environmental footprint
• Promoting environmentally responsible business activities
• Offering environmental products and services.
Reducing the intensity of our environmental footprint
RBC is committed to continuing to reduce the intensity of our energy use, paper
consumption, employee travel, water use and procurement activities on a per employee
or per square metre basis. In 2007, we improved operating efficiencies through
strategic management of our environmental footprint and realized positive financial
and environmental impact. For example, retrofit lighting in our branch network and the
provision of electronic statements for clients has reduced our consumption of energy,
paper, operational costs and our indirect greenhouse gas emissions.
Responsible business activities
At RBC, we work with our clients and the companies we invest in to mitigate environmental
risks and support environmentally responsible business models. Comprehensive
environmental risk management policies and procedures facilitate the environmental
review of transactions, and we regularly update these policies and procedures to address
regulatory changes, emerging and evolving issues and international best practices.
For example, our Policy on Social and Environmental Review in Project Finance, which
enables us to meet our commitment to the Equator Principles, was amended in 2007 to
reflect new requirements under the revised Principles.
In our lending activities, and as appropriate, environmental issues are assessed
at the following levels: industry, borrower and transaction. Policies require that,
where warranted, transactions are reviewed by internal or third-party environmental
specialists to ensure that environmental risks are appropriately identified and
addressed. Our internal team of environmental experts provides support and expertise
to business and operational units throughout the organization.
Financial products and services
RBC seeks to offer an expanding array of products and services that provide environmental
benefits, are clearly distinguishable from comparable non-environmentally focused
products, and empower clients to reduce their environmental footprint at little or no
additional cost.
We view environmental markets – including renewable energy, clean technology, and
emissions trading – as an emerging business area for RBC. We participate in and are
watching these markets closely for future opportunities. For example, in collaboration
with several U.S. and Canadian banks and the UN Environment Programme Finance
Initiative, RBC commissioned a report on global best practices in environmental
financial products and services. The report was published online in August 2007, and
in September, RBC hosted a workshop for North American banks to learn more about
opportunities in green financial products and services.
For more information, see the
Risk management section of the
MD&A or visit rbc.com/responsibility
and rbc.com/environment
Royal Bank of Canada: Annual Report 2007
Environment
31
Community
The RBC Community Blueprint™ contains
a broad suite of programs and initiatives
to help build stronger, more sustainable
and prosperous communities around the
world. Our employees and pensioners
also make enormous contributions
as volunteers, sharing their financial
and business knowledge, time and
enthusiasm with thousands of community
groups worldwide.
2007 Highlights
• RBC contributed more than $82.8 million to community causes worldwide through donations of
more than $47.7 million and an additional $35.1 million in the sponsorship of community events
and national organizations
• Employees and pensioners worldwide contributed countless hours in volunteer activities and
funds to not for profit groups through payroll deductions, direct giving and special events
• As part of the RBC Environmental Blueprint we announced the RBC Blue Water Project™, a
$50 million philanthropic commitment over 10 years to support programs to enhance access to
clean drinking water, watershed management and water conservation
Donations
Donations are a cornerstone of our community programs, with a tradition of philanthropy
dating back to our roots. In fact, we have donations on record as far back as 1891.
We are one of Canada’s largest corporate donors, and contribute to communities across
North America and around the world. We are committed to making a lasting social
impact through inspired, responsible giving and by building strong partnerships with the
charitable sector. Our priority areas for funding include:
• Helping keep kids in school
• Supporting community health care through children’s mental health programs
• Providing for emerging artist programs
• Encouraging employee volunteerism
• Helping find global solutions for the preservation and conservation of and access to
fresh water.
Employee contributions
Our Employee Volunteer Grants Program was launched in 1999 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 organization
in their honour. Since 1999, RBC has made over 12,488 grants and donated more than
$6.24 million to celebrate our employees’ volunteer efforts.
Sponsorships
RBC is committed to supporting opportunities that are important to our clients and
our communities. As part of this commitment, we sponsor numerous Canadian and
international programs as well as community and cultural events in the neighbourhoods
where we do business. By leveraging our strategic partnerships, we can truly
differentiate RBC as a leading company committed to enabling the success of our
clients and our communities.
Our sponsorships focus on two major platforms: amateur sports and visual arts.
We support the development of amateur athletes through sponsorship of grassroots
events in local communities and national sport associations. We are the longest
standing supporter of Canada’s Olympic Team, dating back to 1947, and a Premier
National Partner of the 2010 Olympic and Paralympic Winter Games in Vancouver.
We also believe that healthy, vibrant communities are a direct result of investing in
creative vision and artistic talent. We proudly support community events, art exhibitions
and theatre performances. Celebrating its ninth year, the RBC Canadian Painting
Competition recognizes the talent of emerging professional visual artists in Canada.
2007 Worldwide RBC donations
by geography
(C$ millions)
2007 RBC donations
in Canada by cause
For more information, visit
rbc.com/responsibility/community
32
Royal Bank of Canada: Annual Report 2007
Community
Canada
$ 40.7
International $ 7.0
$ 47.7
Total
Social services
Arts and culture
Civic
Health
Education
22.7%
8.8%
8.0%
28.4%
32.1%
Management’s
Discussion
and Analysis
Management’s discussion and analysis (MD&A) is provided to enable a reader to assess our results of operations and financial condition for the fiscal year ended
October 31, 2007, 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, 2007. 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). Effective October 31, 2006, RBC Mortgage Company disposed of substantially all of its remaining assets
and obligations and we no longer separately classify its results in our Consolidated Financial Statements. Results reported on a total consolidated basis are compa-
rable to results reported from continuing operations for the corresponding prior periods.
Additional information about us, including our 2007 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.
34 Overview
34 About Royal Bank of Canada
34 Vision and strategic goals
35 Selected financial and other highlights
36 Overview of 2007
38 Outlook and objectives for 2008
38 Accounting and control matters
38 Critical accounting policies and estimates
Future changes in accounting policies
42
4
43
4
2 Controls and procedures
Financial performance
43 Overview
45 Total revenue
46 Net interest income and margin
7 Change in net interest income
47 Non-interest expense
48 Provision for credit losses
48
Insurance policyholder benefits, claims
and acquisition expense
49 Taxes
50 Results by geographic segment
50 Related party transactions
1 Results and trend analysis
2
51 Quarterly financial information
5
5
53 Business segment results
5
4
Fourth quarter 2007 performance
How we measure and report our
business segments
Impact of foreign exchange rates
on our business segments
5
5 Key performance and non-GAAP
measures
57 Canadian Banking
61 Wealth Management
64 U.S. & International Banking
67 Capital Markets
70 Corporate Support
Financial condition
71 Balance sheet
71 Capital management
77 Off-balance sheet arrangements
5
5
71
80 Risk management
8
Liquidity and funding risk
0 Overview
83 Credit risk
92 Market risk
95 Operational risk
96
99 Reputation risk
99 Regulatory and legal risk
100 Environmental risk
101 Insurance risk
101 Strategic risk
102 Competitive risk
102 Systemic risk
102 Additional risks that may affect future results
104 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 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 may make forward-looking statements in this document, in other
filings with Canadian regulators or the United States Securities and
Exchange Commission, in reports to shareholders and in other com-
munications. Forward-looking statements include, but are not limited
to, statements relating to our medium-term and 2008 objectives, our
strategic goals and priorities and the economic and business outlook
for us, for each of our business segments and for the Canadian, United
States and international economies. Forward-looking statements are
typically identified by words such as “believe,” “expect,” “forecast,”
“anticipate,” “intend,” “estimate,” “plan” and “project” and similar
expressions of future or conditional verbs such as “will,” “may,”
“should,” “could,” or “would.”
By their very nature, forward-looking statements require us to
make assumptions and are subject to inherent risks and uncertain-
ties, which give rise to the possibility that our predictions, forecasts,
projections, expectations or conclusions will not prove to be accurate,
that our assumptions may not be correct and that our objectives,
strategic goals and priorities will not be achieved. We caution read-
ers 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, liquidity and funding
risks, and other risks discussed in our 2007 management’s discussion
and analysis; general business and economic conditions in Canada,
the United States and other countries in which we conduct business,
including the impact from the continuing volatility in the U.S. subprime
and related markets and lack of liquidity in various of the financial
markets; the impact of the movement of the Canadian dollar relative to
other currencies, particularly the U.S. dollar, British pound and Euro;
the effects of changes in government monetary and other policies; the
effects of competition in the markets in which we operate; the impact
of changes in laws and regulations; judicial or regulatory judgments
and legal proceedings; the accuracy and completeness of information
concerning our clients and counterparties; our ability to success-
fully execute our strategies and to complete and integrate strategic
acquisitions and joint ventures successfully; changes in accounting
standards, policies and estimates, including changes in our estimates
of provisions and allowances; and our ability to attract and retain key
employees and executives.
We caution that the foregoing list of important factors is not
exhaustive and other factors could also adversely affect our results.
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 uncertainties and potential events. Unless
required by law, 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 and other factors can be
found under the Risk management section that may affect future
results section and the Additional risks that may affect future results
section.
Information contained in or otherwise accessible through the websites
mentioned does not form 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 2007
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Management’s Discussion and Analysis
33
33
Overview
About Royal Bank of Canada
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. We employ more than 70,000 full- and part-
time employees who serve more than 15 million personal, business,
public sector and institutional clients through offices in Canada, the U.S.
and 36 other countries.
Effective February 7, 2007, our previous three business segments
(RBC Canadian Personal and Business, RBC U.S. and International
Personal and Business, and RBC Capital Markets) were reorganized
into four business segments:
Canadian Banking comprises our domestic personal and busi-
ness banking operations, certain retail investment businesses and our
global insurance operations.
Wealth Management comprises businesses that directly serve
the growing wealth management needs of affluent and high net worth
clients in Canada, the U.S. and outside North America, and businesses
that provide asset management and trust products through RBC and
external partners.
U.S. & International Banking comprises our banking businesses
outside Canada, including our banking operations in the U.S. and
Caribbean. In addition, this segment includes our 50% ownership in
RBC Dexia Investor Services (RBC Dexia IS).
Capital Markets comprises our global wholesale banking busi-
ness, which 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.
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
intended to maintain the safety and soundness of our operations,
while keeping our capabilities 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 communi-
cations. This team also manages the capital, and liquidity and funding
positions of the enterprise to ensure that we meet regulatory require-
ments, 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 strategic business decisions.
Royal Bank of Canada
Canadian Banking
Wealth Management
U.S. & International Banking
Capital Markets
• Personal Financial Services
• Business Financial Services
• Cards and Payment Solutions
• Global Insurance
• Canadian Wealth Management
• U.S. & International Wealth
Management
• Global Asset Management
• Banking
• RBC Dexia IS
• Global Markets
• Global Investment Banking and
Equity Markets
• Other
• Global Technology and Operations
• Global Functions
Corporate Support
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.” We believe
that this client-focused approach to our business is critical to achieving
our strategic as well as our financial performance goals. Our Client
First philosophy is exhibited in all of our activities, including how
we deal with our clients, develop our products and services, and
collaborate across businesses and functions. We maintain our focus
on enhancing client satisfaction and loyalty by continually striving
to understand and meet the evolving needs and expectations of our
clients. We believe that pursuing our vision will generate strong, stable
revenue and earnings growth that will result in top quartile total share-
holder return compared to our North American peer group.
The Canadian market continues to provide us with significant
avenues for growth in both the retail and wholesale sectors. Our
trusted brand, together with our broad expertise and leading posi-
tions in diverse financial products and services, provides us with the
foundation and resources to expand internationally. The U.S., with its
geographic proximity, cultural similarities and close trade relationships
with Canada, will continue to be a focus of future growth as we build on
our strong market positions in selected businesses. In addition, we will
continue to expand outside North America in markets where our experi-
ence and expertise provide us with the ability to compete effectively.
For 2008, our strategic goals are to remain focused on growing
our domestic franchise, while continuing to expand internationally
by leveraging our core capabilities and by building on our portfolio
of international businesses. We expect to achieve these goals by
34
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
maintaining our focus on meeting the needs of clients through
ongoing innovation and by collaborating effectively across our many
businesses and functions.
•
In Canada, our goal is to be the undisputed leader in financial
services. We are strengthening the RBC brand by delivering a
superior client experience with a comprehensive suite of quality
financial products and services for all our clients. In banking, we
continue to leverage our extensive distribution capabilities to
grow market share across products and markets, while expanding
and enhancing our distribution network to meet the needs of
our clients. We are also developing innovative solutions and
simplifying processes for our clients to make it easier for them
to do business with us. In wealth management, we continue to
extend our lead in wealth and asset management markets and to
attract and retain experienced advisors. In capital markets, we
continue to focus on maintaining our leadership position across
all businesses and remain our wholesale clients’ first choice for all
financial products and services.
In the United States, our goal is to build on our strengths in bank-
ing, wealth management and capital markets. In banking, we are
focused on meeting the needs of businesses, business owners
and professionals. We continue to expand our U.S. Southeast
footprint in key high-growth markets through targeted de novo
branch openings and strategic acquisitions. In wealth manage-
ment, we continue to expand our business through organic
growth and strategic acquisitions, and provide our advisors with
•
•
customized support for investment, advisory and wealth man-
agement practices by utilizing our global resources. In capital
markets, we continue to deepen the penetration of our existing
client base through diverse product offerings and leveraging the
strengths of recent acquisitions, and enhancing our origination
capabilities to expand our client base.
Outside North America, our goal is to be a premier provider of
selected financial services where our core capabilities and key
expertise provide us with competitive advantages. In banking, we
intend to continue to build on our strong position in the Caribbean
through strategic acquisitions and organic growth, supported
by ongoing operational improvements, strengthening of client
relationships and broadening of product offerings. In wealth
management, our strategy remains focused on increasing scale
through expansion in our chosen markets and recruiting relation-
ship managers. We will continue to make targeted acquisitions
and enhance the breadth of our products and services, as well as
improve our relationship management model to capitalize on the
growing demand for wealth management products and services. In
custody services, our joint venture, RBC Dexia IS, utilizes its global
scale and expanded product capability to grow the number of and
deepen our client relationships. In capital markets, we continue to
expand our global distribution and extend our capabilities in struc-
turing and trading businesses, infrastructure finance and fixed
income origination.
Guided by our Client First philosophy and strategic goals, our business
segments continue to tailor their strategies to meet client needs and
strengthen client relationships within their unique operating and
competitive environments. We believe that the successful execution
of our business strategies will enhance the quality and diversity of our
earnings. These efforts should 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 and other highlights
(C$ millions, except per share, number of and percentage amounts)
Total revenue
Non-interest expense
Provision for credit losses
Insurance policyholder benefits, claims and acquisition expense
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
Canadian Banking
Wealth Management
U.S. & International Banking
Capital Markets
Corporate Support
Net income
Selected information
Earnings per share (EPS) – basic
Earnings per share (EPS) – diluted
Return on common equity (ROE) (1)
Return on risk capital (RORC) (2)
Net interest margin (3)
Capital ratios (4)
Tier 1 capital ratio
Total capital ratio
Selected balance sheet and other information
Total assets
Securities
Retail loans
Wholesale loans
Deposits
Average common equity (1)
Average risk capital (2)
Risk-adjusted assets (4)
Assets under management
Assets under administration – RBC
Common share information
Shares outstanding (000s) – average basic
– RBC Dexia IS (5)
– average diluted
– end of period
Dividends declared per share
Dividend yield
Common share price (RY on TSX) – close, end of period
Market capitalization (TSX)
Business information (number of )
Employees (full-time equivalent)
Bank branches
Automated teller machines
Period average US$ equivalent of C$1.00 (6)
Period-end US$ equivalent of C$1.00
Table 1
2007 vs. 2006
Increase (decrease)
$
$
$
$
$
$
2007
2006
$ 22,462
12,473
791
2,173
$ 20,637
11,495
429
2,509
$
$
$
$
$
7,025
5,492
–
5,492
2,987
762
242
1,292
209
5,492
4.24
4.19
24.6%
37.4%
1.30%
9.4%
11.5%
$
$
$
$
$
6,204
4,757
(29)
4,728
2,426
604
261
1,355
111
4,757
3.65
3.59
23.5%
36.7%
1.35%
9.6%
11.9%
2005
19,184
11,357
455
2,625
4,702
3,437
(50)
3,387
2,007
502
256
686
(14)
3,437
$
$
$
$
2.61 $
2.57 $
18.0%
29.3%
1.53%
9.6%
13.1%
1,825
978
362
(336)
821
735
29
764
561
158
(19)
(63)
98
735
.59
.60
n.m.
n.m.
n.m.
n.m.
n.m.
$ 600,346
178,255
169,462
69,967
365,205
22,000
14,450
247,635
161,500
548,200
2,713,100
1,273,185
1,289,314
1,276,260
1.82
3.3%
56.04
71,522
$
$
$ 536,780 $
184,869
151,050
58,889
343,523
19,900
12,750
223,709
143,100
525,800
2,421,100
1,279,956
1,299,785
1,280,890
1.44
$
3.1%
49.80
63,788
$
469,521
160,495
140,239
51,675
306,860
18,600
11,450
197,004
118,800
1,778,200
–
1,283,433
1,304,680
1,293,502
1.18
$
3.2%
41.67
53,894
$
$ 63,566
6,614)
(
18,412
11,078
21,682
2,100
1,700
23,926
18,400
22,400
292,000
(6,771)
(10,471)
(4,630)
.38
n.m.
6.24
7,734
$
$
65,045
1,541
4,419
60,858
1,443
4,232
60,012
1,419
4,277
$
.915
1.059
$
.883
.890
$
.824
.847
$
4,187
98
187
.03
.17
8.8%
8.5%
84.4%
(13.4)%
13.2%
15.5%
n.m.
16.2%
23.1%
26.2%
(7.3)%
(4.6)%
n.m.
15.5%
16.2%
16.7%
110 bps
70 bps
n.m.
(20)bps
(40)bps
11.8%
(3.6)%
12.2%
18.8%
6.3%
10.6%
13.3%
10.7%
12.9%
4.3%
12.1%
(.5)%
(.8)%
(.4)%
26.4%
20 bps
12.5%
12.1%
6.9%
6.8%
4.4%
4%
19%
(1)
(2)
(3)
(4)
(5)
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. For further discussion on Average risk capital and Return on
risk capital, refer to the Key performance and non-GAAP measures 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 as at September 30, 2007. We have revised the 2006 amount to reflect
the amount reported by RBC Dexia IS, as we had previously disclosed only the assets under custody amount related to our joint venture.
Average amounts are calculated using month-end spot rates for the period.
(6)
n.m. not meaningful
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
35
Overview of 2007
We reported record net income of $5,492 million for the year ended
October 31, 2007, up $764 million, or 16%, from a year ago. Diluted
earnings per share (EPS) were $4.19, up 17% compared to a year ago.
ROE was 24.6%, compared to 23.5% a year ago. The Tier 1 capital ratio
of 9.4% was down 20 basis points (bps) from 9.6% a year ago, while our
Total capital ratio of 11.5% was down 40 bps from 11.9% a year ago.
Executing our initiatives
During the year, we continued to diversify our products and services,
markets, and geographical presence to generate strong and stable
earnings growth. We remained focused on strengthening our distribu-
tion capabilities and enhancing client satisfaction and loyalty, while
seeking to deliver top quartile total shareholder return versus our
North American peer group.
In Canada, we continued to strengthen our leadership position in
most major product categories by enhancing the quality and breadth
of our products and services, as well as expanding and upgrading
our distribution network to better serve our clients. We continued to
be the leader in the Canadian mutual fund industry in terms of net
long-term sales and in most of our capital market businesses. We also
strengthened our leadership positions in most product categories,
including mortgages, credit cards and business loans and deposits.
As part of our initiatives to meet client needs and build enduring
client relationships, we have expanded our distribution capabilities
by adding new bank branches, insurance offices and automated teller
machines, particularly in high-growth markets, and have upgraded
our branches. We launched new and innovative products, including a
high-interest online savings account and socially responsible mutual
funds. We have also continued to streamline sales, credit and back-
office processes to make it easier for our clients to do business with
us. Our trusted brand, together with our leadership position in most
major product categories in Canada, continued to provide us with the
foundation and resources to expand internationally.
In the U.S., we continued to build scale and capability in all our
major businesses through a combination of organic growth and stra-
tegic acquisitions. To expand our banking capabilities strategically in
high-growth markets in the U.S. Southeast, we completed the acquisi-
tion of Atlanta-based Flag Financial Corporation and 39 AmSouth Bank
branches in Alabama. These acquisitions, which complemented our
de novo branch openings, have significantly expanded our banking
presence in the U.S. Southeast. We also announced an agreement (1) to
acquire Alabama National BanCorporation, the parent of 10 subsidiary
banks and other affiliated businesses in Alabama, Florida and Georgia,
which will add another 103 branches and strengthen our retail dis-
tribution by growing our footprint to over 450 locations throughout
high-growth southeastern U.S. markets. We also expanded our invest-
ment banking and wealth management capabilities in the U.S.
We completed the acquisition of Carlin Financial Group, which provides
our clients with a best-in-class North American electronic trade execu-
tion platform. We completed the acquisition of Daniels & Associates,
L.P., a leading mergers and acquisitions advisory firm specializing
in the communications, media and entertainment, and technology
sectors. In addition, we completed the acquisition of Seasongood &
Mayer, LLC, strengthening our franchise as one of the leading munici-
pal finance platforms in the U.S. We also completed the acquisition
of J.B. Hanauer & Co., expanding our retail fixed income and wealth
management capabilities in New Jersey, Florida and Pennsylvania.
Internationally, we strategically expanded our distribution net-
work, products and services in fast-growing markets and regions.
During the year, we announced our intention to acquire RBTT Financial
Group (RBTT) to expand our banking footprint in the Caribbean.
The acquisition is expected to close by the middle of 2008 (1), and
will create one of the most extensive retail banking networks in the
Caribbean, with a presence in 18 countries and territories across the
region. We also announced our intention to acquire a 50% interest in
Fidelity Merchant Bank & Trust Limited, the Bahamas-based wholly
owned subsidiary of Fidelity Bank & Trust International Limited to
form a joint venture to be called Royal Fidelity Merchant Bank & Trust
Limited, which is expected to close in the first quarter of 2008 (1).
This pending acquisition is expected to extend our growing financial
services platform in the Caribbean and will enable us to have greater
access to the fast-growing merchant banking and corporate advisory
sector in the region.
Basel II
As of November 1, 2007, we implemented the International
Convergence of Capital Measurement and Capital Standards: A
Revised Framework – Comprehensive Version (June 2006), known as
Basel II. Basel II more closely aligns regulatory capital requirements
with a financial institution’s underlying risk profile and internal risk
management practices as compared to Basel I, and is intended to
ensure that our capital holdings adequately underpin those risks.
For details related to the implications of Basel II on our capital man-
agement framework and risk measurement approaches, refer to the
Capital management and Risk management sections.
2007 Economic and market review
In 2007, the Canadian economy grew at an estimated rate of 2.6%,
which was down slightly from the 2.7% projected a year ago, with
domestic demand remaining the key driver of economic growth.
Robust economic growth in the early part of the year, largely reflect-
ing strong consumer spending underpinned by strong labour market
conditions, solid business investment, favourable terms of trade and
solid housing market activities, weakened slightly in the latter part of
the year. This was mainly attributable to slowing U.S. demand and a
tightening of credit conditions as a result of the U.S. subprime mort-
gage market concerns. While growth of both consumer and business
lending largely remained solid, credit quality weakened moderately
during the year as conditions appeared to be reverting to historical
averages. The Bank of Canada raised the overnight rate by 25 bps in
July to 4.5%, and kept the rate unchanged in September and October
taking into account the tightening of credit conditions arising from the
U.S. subprime mortgage market concerns and the marked appreciation
of the Canadian dollar, which had a negative impact on net exports. To
address the liquidity concerns and to support the efficient functioning
of the Canadian financial system, the Bank of Canada injected liquidity
into the financial markets on a number of occasions over the latter part
of the year.
The U.S. economy grew at an estimated rate of 2% for the year,
down from the 2.6% projected in 2006. This downward revision to
growth was primarily attributable to the U.S. subprime mortgage
market concerns. Solid econ omic growth in the middle of the year, pri-
marily supported by continued non-residential investment, strong
export growth and still-solid consumer spending, slowed in the latter
part of the year. The weakened economic growth was largely a result
of slowing residential investment amid the ongoing housing market
correction, a tightening of credit conditions and increased funding
costs arising from the U.S. subprime mortgage market concerns, as
well as a general repricing of risk in numerous markets. Consumer and
business lending, excluding mortgages, accelerated over recent
months, although there remain concerns that the intensification of the
housing market correction would eventually dampen lending. Credit
quality weakened, particularly in high-risk credit products and resi-
dential real estate-related loans. To alleviate the mounting liquidity
(1)
36
These acquisitions are subject to customary closing conditions including regulatory and shareholder approvals.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
concerns and to ease the U.S. financial market volatility arising from
the U.S. subprime mortgage market difficulties, the U.S. Federal
Reserve injected a significant amount of liquidity into financial
markets beginning in August. It then lowered its federal funds rate by
50 bps and 25 bps in September and October, respectively, to 4.5%,
in an effort to promote economic growth, forestall a severe economic
downturn and alleviate liquidity concerns.
Growth in other global economies remained solid for the year.
Although central banks in the United Kingdom, the Eurozone and
Japan had indicated their intention to further increase interest rates
to contain inflationary pressures in the early part of the year, they had
put their tightening monetary policies on hold to avoid an economic
slowdown, taking into account the financial market volatility triggered
by U.S. subprime mortgage market concerns.
Compared to our favourable outlook in 2006, global capital mar-
ket conditions were mixed during the year, largely attributable to the
U.S. subprime mortgage market concerns. Most major equity markets
reached record highs in June and July, and then declined as did the
debt markets, except for government bonds, largely due to the spillover
effects of the U.S. subprime mortgage market difficulties. Debt and
equity origination activities, which were strong at the beginning of the
year, slowed due to less favourable pricing and a tightening of liquidity.
Merger and acquisitions (M&A) activity remained strong for most of
the year.
Our three-year average annual TSR (2) of 25% ranks us in the top
quartile compared to our peer group and compares favourably with
the three-year average annual TSR for our peer group of 8%. Our per-
formance reflects our strong financial results, including returns on our
investment in our businesses, and effective risk and capital manage-
ment, which has allowed us to successfully meet most of our annual
earnings and capital objectives over the last three years.
Our five-year average annual TSR (2) of 19% ranks us in the sec-
ond quartile against our peer group. This compares favourably with
the five-year average annual TSR for our peer group of 14%.
Dividends paid over the three-year period have increased at an
average annual compounded rate of 22%.
(1)
(2)
Versus the TSR of seven large Canadian financial institutions (Manulife Financial
Corporation, The Bank of Nova Scotia, Toronto-Dominion Bank, Bank of Montreal,
Sun Life Financial Inc., Canadian Imperial Bank of Commerce and National Bank of
Canada) and 13 U.S. financial institutions (Bank of America Corporation, JPMorgan
Chase & Co., Wells Fargo & Company, Wachovia Corporation, U.S. Bancorp, SunTrust
Banks, Inc., The Bank of New York Mellon Corporation, BB&T Corporation, Fifth Third
Bancorp, National City Corporation, The PNC Financial Services Group, Inc., KeyCorp
and Northern Trust Corporation).
The three-year average annual TSR is calculated based on share price appreciation
plus reinvested dividend income for the period October 31, 2004 to October 31, 2007.
The five-year average annual TSR is calculated based on the period October 31, 2002
to October 31, 2007.
Three-year average annual total shareholder return (home currency) (1)
30%
24%
18%
12%
6%
0%
RBC
Canadian peer group
Total peer group
U.S. peer group
Five-year average annual total shareholder return (home currency) (1)
30%
24%
18%
12%
6%
0%
RBC
Canadian peer group
Total peer group
U.S. peer group
(1)
For Canadian financial institutions, the Canadian dollar is used. For U.S. financial
institutions, the U.S. dollar is used.
2007 Performance vs. objectives
Table 2
2007
Objectives
2007
Performance
Diluted earnings per share (EPS) growth
Defined operating leverage (1)
Return on common equity (ROE)
Tier 1 capital ratio (2)
Dividend payout ratio
10%+
>3%
20%+
8%+
40% –50%
17%
2.6%
24.6%
9.4%
43%
(1)
(2)
Our defined operating leverage refers to 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 Variable interest
entities (VIEs), accounting adjustments related to the new financial instruments
accounting standards and Global Insurance revenue. Non-interest expense excludes
Global Insurance expense. This is a non-GAAP measure. For further information includ-
ing a reconciliation, refer to the Key performance and non-GAAP measures section.
Calculated using guidelines issued by the OSFI.
2007 Annual objectives
Our diluted EPS growth, ROE and dividend payout ratio compared
favourably to our annual objectives, largely reflecting strong perfor-
mance across most of our businesses. We also increased our dividend
by $.38, or 26%, in 2007. Our defined operating leverage ratio was
below our annual objective, reflecting higher costs in support of our
growing business as well as investment in future growth initiatives
including acquisitions. Our capital position remained strong, with a
Tier 1 capital ratio comfortably above our target.
Medium-term objective
Our medium-term objective is to achieve top quartile (1) total share-
holder return (TSR) 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.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
37
Outlook and objectives for 2008
Economic outlook
Economic growth in Canada is expected to weaken as a strong
Canadian dollar and sluggish U.S. growth weigh on export growth.
Nonetheless, continued favourable terms of trade should support
income growth, which in turn should help sustain business and con-
sumer spending. We expect the Bank of Canada to decrease interest
rates by 50 bps by early 2008, taking into account the intensifying
restraint from the trade sector before shifting to a rising interest rate
environment in late 2008 when financial market volatility is expected
to dissipate. We forecast that the Canadian dollar will remain elevated
against the U.S. dollar into early 2008, reflecting firm commodity
prices, solid global economic growth and broad-based U.S. dollar
weakness. Taking into account modest U.S. growth, a strong Canadian
dollar and a tightening of credit conditions, we expect the Canadian
economy to grow at 2.2% in 2008.
We anticipate that the U.S. financial market volatility will persist
into early 2008 as investors and lenders will remain cautious and
risk averse amid a slowdown in the housing market. U.S. economic
growth is expected to accelerate in the latter part of 2008, primarily
underpinned by rising business investment, strong export growth
boosted by the relatively weak U.S. dollar, as well as continued con-
sumer spending reflecting solid personal disposable income and
healthy household balance sheets against a backdrop of lower interest
rates, and the abatement of current financial market volatility and the
housing market correction. We project that the U.S. Federal Reserve
will decrease the federal funds rate a further 75 bps by early 2008 to
insure that the downside risks from the financial market turmoil are
contained, and will start to increase the rate in the latter part of 2008
when economic growth is expected to accelerate. We project that the
U.S. economy will grow at 2.2% in 2008, taking into account antici-
pated improving economic conditions in the latter part of the year.
Growth in other global economies is expected to ease moderately
in 2008, with the highest growth projected for China and other emerg-
ing Asian economies. Economic growth in Japan and the Eurozone
is anticipated to weaken slightly on moderately slowing investment
related to tighter credit conditions and modest U.S. growth, although it
should remain solidly supported by continued business and household
spending.
Business outlook
Although consumer lending growth is expected to moderate in 2008
on tighter credit conditions, growth should continue to be supported
by rising domestic demand amid expanding labour markets. The intro-
duction of new mortgage products in Canada due to the liberalization
Accounting and control matters
Critical accounting policies and estimates
of the mortgage insurance market should also continue to underpin
credit growth. We anticipate business lending to remain solid with
ongoing investment spending. While credit quality is projected to
weaken moderately, we expect consumer and business credit quality
to remain solid in a historical context, with an anticipated increase in
provision for credit losses primarily resulting from modestly higher
average delinquency rates, portfolio growth and lower recoveries.
Capital market conditions are anticipated to improve from the
challenging environment over the latter part of 2007 stemming from
the U.S. subprime mortgage market concerns. Liquidity concerns
should also abate as global financial markets stabilize and gradually
return to more normalized levels of activity. We expect a rebound in
underperforming businesses as strains in financial markets ease.
2008 Objectives
Our primary financial objective continues to focus on providing top
quartile TSR relative to our North American peers. This medium-term
objective requires our focus on both current performance as well
as prudent investment in higher return businesses that will provide
us with competitive advantages and stable earnings growth for
the future.
2008 Objectives
Diluted earnings per share (EPS) growth
Defined operating leverage (1)
Return on common equity (ROE)
Tier 1 capital ratio (2)
Dividend payout ratio
Table 3
7% –10%
>3%
20%+
8%+
40% –50%
(1)
(2)
Our defined operating leverage is a non-GAAP measure and refers to the difference
between our revenue growth rate (as adjusted) and non-interest expense growth rate
(as adjusted).
Calculated using guidelines issued by the OSFI under Basel II, which changes the
methodology for the determination of risk-adjusted assets (RAA) and regulatory capital.
For 2008, our financial objectives have been established taking into
consideration our three strategic goals and our economic and business
outlooks as outlined in this section. Objectives for our defined operat-
ing leverage, ROE, Tier 1 capital ratio and dividend payout ratio remain
unchanged, reflecting our continued commitment to strong revenue
growth and cost containment, as well as sound and effective manage-
ment of capital resources. Our 2008 diluted EPS growth objective is
7% to 10 %. Our objectives factor in the effect of our pending acquisi-
tions of ANB and RBTT, which will be funded partly through issuance of
our common shares, as well as the related integration costs.
Application of critical accounting policies and estimates
Our significant accounting policies and estimates are described in
Note 1 to our Consolidated Financial Statements. Certain of these
policies, as well as estimates made by management in applying such
policies, are recognized 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 esti-
mates relate to the allowance for credit losses, fair value of financial
instruments, other-than-temporary impairment of available-for-sale
and held-to-maturity securities, securitization, variable interest enti-
ties, pensions and other post-employment benefits and income taxes.
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. The allowance for credit losses comprises the specific
allowance and the general allowance. The specific allowance is
38
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
determined through management’s identification 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
information. Our lending portfolio 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 process inherently
requires the use of certain assumptions and judgments including:
(i) assessing the impaired status and risk ratings of loans; (ii) estimat-
ing 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 loss rate
given changes in credit strategies, processes and policies; (v) assess-
ing 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 posi-
tion in the economic and credit cycles. Changes in these assumptions
or using other reasonable judgments can materially affect the allow-
ance level and thereby our net income.
Specific allowances
Specific allowances are established to cover estimated losses on both
retail and wholesale impaired loans. Loan impairment is recognized
when, based on management’s judgment, there is no longer reason-
able assurance that all interest and principal payments will be made in
accordance with the loan agreement.
For wholesale portfolios including small business loans managed
individually, which are continuously 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 borrower, financially responsible
guarantors and the realization of collateral. The amounts expected
to be recovered are reduced by estimated collection costs and dis-
counted at the effective interest rate of the obligation.
For retail portfolios managed on a pooled basis, including resi-
dential 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 rates, adjusted to reflect management’s
judgment relating to recent credit quality trends, portfolio character-
istics 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 cover estimated credit losses
that are incurred in the lending portfolio that have not yet been specifi-
cally identified as impaired. This estimation is based on a number
of assumptions including: (i) the level of unidentified problem loans
given current economic and business conditions; (ii) the timing of
the realization of impairment; (iii) the gross exposure of a credit
facility at the time of default; 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 the credit granting
process including underwriting, limit setting and the workout process
in order to adjust historical experience to better reflect the current
environment. In addition, current credit information including portfolio
composition, credit quality trends and economic and business infor-
mation is assessed to determine the appropriate allowance level.
For heterogeneous loans (wholesale loans including small busi-
ness loans managed individually), the general allowance is based on
the application of estimated probability of default, gross exposure
at default and loss factors, which are determined by historical loss
experience and delineated by loan type and rating. These parameters
are based on historical loss rates (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 judg-
mental factors that influence the loss estimate for this portfolio is the
application of the internal risk rating framework, which relies on our
quantitative and qualitative assessments of a borrower’s financial con-
dition in order to assign 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 portfolios (retail loans) including residential
mortgages, credit cards, as well as personal and small business loans
that are managed on a pooled basis, the determination of the general
allowance is based on the application of historical loss rates. Historical
loss rates are 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 imprecision inherent in the
allowance methodologies.
Any fundamental change in methodology is subject to indepen-
dent vetting and review.
Total allowance for credit losses
Based on the procedures discussed above, management believes
that the total allowance for credit losses of $1,572 million is adequate
to absorb estimated credit losses incurred in the lending portfolio as
at October 31, 2007. This amount includes $79 million classified in
other liabilities, which relates to letters of credit and guarantees and
unfunded commitments. The year-over-year increase of $86 million
largely reflects the increase in impaired loans.
Fair value of financial instruments
With the adoption of the three new accounting standards related to
financial instruments on November 1, 2006, a greater portion of our
Consolidated Balance Sheet is now measured at fair value. Refer to
Note 1 to our Consolidated Financial Statements for a detailed discus-
sion. Under the new standards, all financial instruments are required
to be measured at fair value on initial recognition except for certain
related party transactions. Measurement in subsequent periods
depends on whether the financial instruments have been classified or
designated as held-for-trading, available-for-sale, held-to-maturity,
loans and receivables or other financial liabilities.
Financial assets and financial liabilities held-for-trading, including
derivative instruments, are measured at fair value with changes in the
fair values recognized in net income, except for derivatives designated
in effective cash flow hedges or hedges of foreign currency exposure
of a net investment in a self-sustaining foreign operation; the changes
in the fair values of those derivatives are recognized in Other com-
prehensive income (OCI). Available-for-sale financial assets are also
measured at fair value with unrealized gains and losses, including
changes in foreign exchange rates, being recognized in OCI except for
investments in equity instruments classified as available-for-sale that
do not have a quoted market price in an active market, which are mea-
sured at cost. Financial assets held-to-maturity, loans and receivables,
and other financial liabilities are measured at amortized cost using the
effective interest method.
At October 31, 2007, approximately $276 billion, or 46%, of our
financial assets and $205 billion, or 36%, of our financial liabilities
were carried at fair value ($184 billion, or 34%, of financial assets and
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
39
$80 billion, or 16%, of financial liabilities at October 31, 2006). Note 2
to our Consolidated Financial Statements provides disclosure of the
fair value of our financial instruments as at October 31, 2007.
Fair value is defined as the amount at which a financial instru-
ment 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 bid or ask price, as appropriate, in an
active market. Where bid and ask prices are unavailable, we use the
closing price of the most recent transaction of that instrument subject
to the liquidity adjustments referred to below. 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 profiles or internal or external valuation models using observable
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 judg-
ment 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 that the amount realized on sale may 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 adjustments
are calculated to reflect the cost of unwinding a larger than normal
market risk position.
The majority of our financial instruments classified as held-
for-trading other than derivatives and financial assets classified as
available-for-sale comprise or relate to actively traded debt and equity
securities, which are carried at fair value based on available quoted
prices. As few derivatives and financial instruments designated as
held-for-trading 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
instruments, 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, 2007 and October 31, 2006. We have applied the general
concepts contained in the accounting standards related to financial
instruments under Canadian GAAP to determine the classification of
assets and liabilities carried at fair value among the valuation method-
ology groupings below.
Instruments grouped within “quoted prices” include those where
prices are obtained from an exchange, dealer, broker, industry group,
pricing service or regulatory agency, or net asset values provided by
fund managers of mutual funds and hedge funds. Instruments priced
based on models are grouped based on whether the models include
significant observable or unobservable parameters. Where fair value is
not evidenced by observable market parameters, and day one
unrealized gains and losses are not permitted under Canadian GAAP,
the instrument is grouped as being based on “pricing models with
significant unobservable market parameters.”
In September 2006, the U.S. Financial Accounting Standards
Board (FASB) issued FAS 157, Fair Value Measurements, which
includes measurement guidance and requires that all financial instru-
ments measured at fair value be categorized in fair value hierarchy
levels. We have not adopted these measurement and disclosure
requirements for U.S. GAAP reconciliation disclosure purposes, and
the information contained in the table below is not intended to corre-
spond to those levels.
Assets and liabilities carried at fair value by valuation methodology
Table 4
2007
Based on
2006 (1)
Based on
(C$ millions,
except percentage amounts)
Financial assets
Required to be classified as held-for-trading
other than derivatives (2)
Derivatives (3)
Designated as held-for-trading (2)
Classified as available-for-sale
Financial liabilities
Required to be classified as held-for-trading
other than derivatives (2)
Derivatives (4)
Designated as held-for-trading (2)
Fair value
$ 129,408
65,568
52,580
28,811
$ 276,367
$ 46,328
71,422
87,433
$ 205,183
Pricing
Pricing
models with models with
significant
observable unobservable
Quoted
market
market
prices parameters parameters
significant
82%
–
36%
70%
18%
100%
64%
28%
89%
–
–
11%
99%
100%
–
–
–
2%
–
1%
–
Total
Fair value
100% $ 147,237
37,008
100%
n.a.
100%
n.a.
100%
$ 184,245
100% $ 38,252
41,728
100%
n.a.
100%
$ 79,980
Pricing
Pricing
models with models with
significant
observable unobservable
market
market
prices parameters parameters
significant
Quoted
87%
–
n.a.
n.a.
13% $
100%
n.a.
n.a.
–
–
n.a.
n.a.
Total
100%
100%
n.a.
n.a.
97%
–
n.a.
3% $
100%
n.a.
–
–
n.a.
100%
100%
n.a.
(1)
(2)
(3)
(4)
Prior to the adoption of the new accounting standards related to financial instruments on November 1, 2006, there were no financial assets or financial liabilities designated as held-for-
trading and there were no financial assets classified as available-for-sale. Consequently, prior period comparatives are not applicable (n.a.).
The categories of financial instruments are explained in Note 1 to our Consolidated Financial Statements.
The fair value excludes margin requirements of $1,017 million (2006 – $721 million).
The fair value excludes market and credit valuation adjustments of $588 million (2006 – $366 million).
40
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2007 vs. 2006
With the adoption of the new financial instruments accounting stan-
dards, there are new categories of financial instruments carried at
fair value such as financial assets and financial liabilities designated
as held-for-trading and financial assets classified as available-for-
sale which were carried at amortized cost prior to November 1, 2006.
Further, all derivatives are now carried at fair value whereas prior to
that date, only derivatives other than designated hedging instruments
were carried at fair value. Accordingly, the comparative amounts for
2006 in the above table do not include these financial instruments.
The decrease of $18 billion in financial assets classified as
held-for-trading and the increase of $8 billion in financial liabilities
classified as held-for-trading in 2007 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. The increase of $29 billion in
derivative assets and of $30 billion in derivative liabilities in 2007,
primarily in foreign exchange and interest rate contracts, are largely
due to increased volatility, strong shifts in exchange rates and inter-
est rates, and higher client and trading activity, partially offset by the
weakening of the U.S. dollar relative to the Canadian dollar. These
activities are consistent with our strategy for these businesses and the
increases in 2007 are within the approved risk limits.
The determination of fair value where quoted 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 estab-
lishing 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 appro-
priate. 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 inde-
pendent 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.
Other-than-temporary impairment of available-for-sale and
held-to-maturity securities
Available-for-sale and held-to-maturity securities are assessed for
impairment at each reporting date. When the fair value of any security
has declined below its amortized cost, management is required to
assess whether the decline is other-than-temporary. In making this
assessment, we consider such factors as the type of investment, the
length of time and extent to which the fair value has been below the
amortized cost, 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 decision to record a writedown, its amount
and the period in which it is recorded could change if management’s
assessment of one or more of those factors is different. If the decline
in value is considered to be other-than-temporary, the cumulative
changes in the fair values of available-for-sale securities previously
recognized in Accumulated other comprehensive income (AOCI) are
reclassified to net income during that period. For further details, refer
to Notes 1 and 3 to our Consolidated Financial Statements.
Securitization
We periodically securitize Canadian residential mortgages, credit card
receivables and commercial mortgage loans by selling them to special
purpose entities (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 for
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 give us comfort
that legal isolation of the transferred loans has been achieved. We
often retain interests in securitized 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 several 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 activities 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
Canadian Institute of Chartered Accountants (CICA) Accounting
Guideline 15, Consolidation of Variable Interest Entities (AcG-15), pro-
vides 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, if required, to analyze and calculate the expected losses and
the 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 judg-
ment 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 invest-
ment products and structured finance transactions. For further details
on our involvement with VIEs, refer to the Off-balance sheet arrange-
ments section 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
retirement. These plans include registered pension plans, supple-
mental pension plans and health, dental, disability and life insurance
plans. The pension plans provide benefits based on years of service,
contributions and average earnings at retirement.
Due to the long-term nature of these plans, the calculation of ben-
efit 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. The 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 actuar-
ies. 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
temporary difference based on the future tax rates that are expected
to be in effect and management’s assumptions regarding the expected
timing of the reversal of such temporary differences.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
41
Future changes in accounting policies
Future changes in accounting policies and disclosure
Canadian GAAP
Capital Disclosures and Financial Instruments – Disclosures
and Presentation
On December 1, 2006, CICA issued three new accounting standards:
Handbook Section 1535, Capital Disclosures (Section 1535), Handbook
Section 3862, Financial Instruments – Disclosures (Section 3862),
and Handbook Section 3863, Financial Instruments – Presentation
(Section 3863). These new standards became effective for us on
November 1, 2007.
Section 1535 requires the disclosure of (i) an entity’s objectives,
policies and processes for managing capital; (ii) quantitative data
about what the entity regards as capital; (iii) whether the entity has
complied with any capital requirements; and (iv) if it has not complied,
the consequences of such non-compliance.
Sections 3862 and 3863 replace Handbook Section 3861,
Financial Instruments – Disclosure and Presentation, revising and
enhancing its disclosure requirements, and carrying its presentation
requirements forward unchanged. These new sections place increased
emphasis on disclosures about the nature and extent of risks arising
from financial instruments and how the entity manages those risks.
U.S. GAAP
Guidance on accounting for income taxes
FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48),
on July 13, 2006, and its related Staff Position FIN 48-1, Definition of
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 designed to ensure that informa-
tion is accumulated and communicated to management, including the
President and Chief Executive Officer, and Chief Financial Officer, to
allow timely decisions regarding required disclosure.
Management evaluated, under the supervision of and with the
participation of the President and CEO, and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as defined
under Multilateral Instrument 52-109 and the U.S. Securities Exchange
Act of 1934 as of October 31, 2007. Based on that evaluation, the
President and Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective
as of October 31, 2007.
Settlement in FASB Interpretation No. 48 (FSP FIN 48-1), on May 2,
2007. FIN 48 and FSP FIN 48-1 provide additional guidance on how to
recognize, measure and disclose income tax benefits. FIN 48 became
effective for us on November 1, 2007, and we do not expect it will have
a material impact on our consolidated financial position and results
of operations.
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 U.S. GAAP and is applicable to other account-
ing 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 this standard on our
consolidated financial position and results of operations.
Fair value option for financial assets and liabilities
On February 15, 2007, FASB issued Statement No. 159, The Fair Value
Option for Financial Assets and Liabilities (FAS 159). FAS 159 provides
an entity the option to report selected financial assets and liabilities
at fair value and establishes new disclosure requirements for assets
and liabilities to which the fair value option is applied. FAS 159 will be
effective for us on November 1, 2008. We are currently assessing the
impact of adopting this standard on our consolidated financial position
and 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 of October 31, 2007, and based on that assess-
ment, concluded that our internal control over financial reporting was
effective. See page 112 for Management’s report on internal control
over financial reporting and the Report of Independent Registered
Chartered Accountants. No changes were made in our internal control
over financial reporting during the year ended October 31, 2007, that
have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
42
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Financial performance
Overview
2007 vs. 2006
We reported record net income of $5,492 million for the year ended
October 31, 2007, up $764 million, or 16%, from a year ago. Diluted
EPS were $4.19, up 17% compared to a year ago. ROE was 24.6%,
compared to 23.5% a year ago. Our strong results were largely attrib-
utable to profitable volume and balance growth in our banking and
wealth management businesses, strong Global Insurance results,
and increased equity and foreign exchange trading results and strong
equity origination activity in our capital markets businesses. These
results reflected the ongoing successful execution of our growth initia-
tives as well as generally favourable economic and market conditions
for most of the year. For additional discussion on the performance of
our business segments, refer to the Business segment results section
starting on page 57. A gain related to the Visa Inc. restructuring and the
exchange of our membership interest in Visa Canada Association for
shares of Visa Inc. also contributed to the increase. These factors were
partially offset by the writedowns on the valuation of U.S. subprime
residential mortgage-backed securities (RMBS) and collateralized
debt obligations of asset-backed securities (CDOs of ABS) reflecting
the deterioration in credit markets since July 2007, higher provisions
for credit losses reflecting portfolio growth and higher impaired loans
in our U.S. residential builder finance business, and higher credit card
customer loyalty reward program costs. Also partly offsetting the
favourable factors were higher costs in support of our business growth
and the negative impact of a stronger Canadian dollar on the translated
value of our U.S. dollar-denominated earnings. The Tier 1 capital ratio
of 9.4% was down 20 bps from 9.6% a year ago, while the Total capital
ratio of 11.5% was down 40 bps from 11.9% a year ago.
U.S. subprime
In October 2007, the credit markets deteriorated dramatically after
rating agencies downgraded a broad group of U.S. subprime RMBS and
CDOs of ABS. Following these events, we recognized a charge of
$357 million before-tax in Capital Markets, consisting of writedowns
on the fair value of our direct holdings of U.S. subprime RMBS and
CDOs of ABS and related credit default swaps.
Our Capital Markets holdings of RMBS and CDOs of ABS arose
primarily in relation to our role in structuring CDOs of ABS and are
classified as held-for-trading, with unrealized changes in fair value
reflected in Non-interest income. Our other holdings are RMBS and are
classified as available-for-sale and unrealized changes in fair value
are generally reflected in Other comprehensive income. These changes
are reflected in Non-interest income only if management determines
that it is appropriate that the value be written down (referred to as
“other-than-temporary impairment”).
As at October 31, 2007, Capital Markets had $216 million of net
exposure to U.S. subprime CDOs of ABS, after taking into consideration
protection provided by credit default swaps. We have credit default
swaps providing protection of $240 million, recorded at fair market
value of $104 million, with counterparties rated less than AAA by
Standard & Poor’s (S&P) and less than Aaa by Moody’s Investors
Service (Moody’s). Other credit default swaps provide an additional
$1,053 million of protection against our gross exposure and are either
collateralized or with counterparties rated AAA by S&P and Aaa
by Moody’s.
As at October 31, 2007, we had $388 million of exposure to
U.S. subprime RMBS recorded as available-for-sale, which we intend
to hold until maturity. As at October 31, 2007, Capital Markets had
no net exposure to U.S. subprime RMBS after taking into account
credit default swaps that provide $1,113 million of protection and are
either collateralized or with counterparties rated AAA by S&P and Aaa
by Moody’s.
Canadian non-bank-sponsored asset-backed commercial paper
As at October 31, 2007, we had $4 million of direct holdings of
Canadian non-bank-sponsored asset-backed commercial paper
conduits where liquidity is contingent on a general market disruption.
We are not a significant participant in this market as a distributor or a
liquidity provider.
Structured investment vehicles
We had $1 million of direct holdings, $140 million of committed liquid-
ity facilities and $88 million of normal course interest rate derivatives
with structured investment vehicles (SIVs) as at October 31, 2007.
Our liquidity facilities remained undrawn at October 31, 2007 and we
do not consider any of our positions to be impaired. We do not manage
any SIVs.
Impact of U.S. vs. Canadian dollar
The translated value of our consolidated results is impacted by
fluctuations in the respective exchange rates relative to the Canadian
dollar. The following table depicts the effect of translating current year
Canadian dollar/U.S. dollar consolidated results at the current
exchange rate in comparison to the historical period’s exchange rate.
We believe this provides the reader with the ability to assess the
underlying results on a more comparable basis, particularly given the
magnitude of the recent changes in the exchange rate and the resulting
impact on our results.
Certain of our business segment results are also impacted by
fluctuations in the U.S. dollar, Euro and British pound exchange rates.
For further details, refer to the Impact of foreign exchange rates on our
business segments section.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
43
Impact of U.S. dollar vs. Canadian dollar
Table 5
(C$ millions, except per share amounts)
Canadian/U.S. dollar exchange rate (average)
2007
2006
2005
Percentage change in average US$
equivalent of C$1.00 (1)
Reduced total revenue
Reduced non-interest expense
Reduced net income
Reduced basic EPS
Reduced diluted EPS
2007 vs.
2006
2006 vs.
2005
$
1.093 $
1.132
4%
230 $
139
47
.04 $
.04 $
$
$
$
1.132
1.214
7%
425
215
123
.10
.09
(1)
Average amounts are calculated using month-end spot rates for the period.
In 2007, the Canadian dollar appreciated 4% on average com-
pared to a year ago resulting in a $47 million decrease in the translated
value of our U.S. dollar-denominated net income and a decrease of
$.04 in our current year’s diluted EPS.
Impact of the new financial instruments accounting standards
On November 1, 2006, we adopted three new accounting standards
related to financial instruments that were issued by the CICA. The
standards require a greater portion of our Consolidated Balance Sheet
to be measured at fair value with changes in the fair values reported
in income in the period they occur, except for available-for-sale securi-
ties, derivatives designated as cash flow hedges, and hedges of net
investments in foreign operations, the changes in fair value of which
are recognized in OCI. The standards also provide new guidance on the
accounting for derivatives in hedging relationships.
The following table provides the main impacts on our
Consolidated Statements of Income arising from the application of the
new financial instruments accounting standards. For further details
about the financial instruments accounting standards, refer to Notes 1
and 2 to our Consolidated Financial Statements.
Impact of the new financial instruments accounting standards
Table 6
(C$ millions)
Net interest income
Non-interest income
Insurance premiums, investment and fee income
Trading revenue
Other
Other
Total revenue
Insurance policyholder benefits, claims and acquisition expense
Net income
Canadian Banking
For the year ended October 31, 2007, we recognized a $22 million
increase in net interest income related to the application of the effec-
tive interest method on our residential mortgage portfolio. In addition,
we recorded a loss of $160 million in Insurance premiums, investment
and fee income related to the changes in the fair values of the securi-
ties backing our life and health insurance businesses. These losses
were largely offset by a corresponding $154 million decrease in the
measurement of certain liabilities related to life and health insurance
policies, recorded in Insurance policyholder benefits, claims and
acquisition expense.
Capital Markets
For the year ended October 31, 2007, we recognized a gain of
$18 million in Trading revenue as a result of the net increase in fair
values in various trading portfolios previously measured at amortized
cost. This gain includes a $59 million gain on our deposit liabilities
designated as held-for-trading resulting from the widening of our own
credit spread during the year.
Wealth Management
For the year ended October 31, 2007, we recorded a $35 million foreign
currency translation gain in Non-interest income – Other related to
deposits used to fund certain Available-for-sale securities denomi-
nated in foreign currencies in order to minimize exposure to changes
in foreign exchange rates. The corresponding foreign currency transla-
tion loss on the related Available-for-sale securities was recorded
in AOCI.
2007
Significantly impacted segments
$
22
Canadian Banking
(160) Canadian Banking
18
Capital Markets
35 Wealth Management
Corporate Support
(77)
(154) Canadian Banking
55
8
$
Corporate Support
For the year ended October 31, 2007, we recognized a gain of
$8 million. This consisted of a $32 million gain in Non-interest income –
Other related to certain long-term funding notes and subordinated
debentures that were issued and designated as held-for-trading liabili-
ties, including a $29 million gain related to the widening of our own
credit spread during the year. These amounts were largely offset by
$24 million of mark-to-market losses mainly related to the recognition
of the ineffectiveness of hedged items and the related derivatives in
hedge accounting relationships.
Summary of 2006 and 2005
In 2006, we achieved net income of $4,728 million, up $1,341 million,
or 40%, from 2005. Our strong earnings reflected solid business
growth across all business segments and our successful execution of
growth initiatives, despite the negative impact of the strong Canadian
dollar on the translated value of our foreign currency-denominated
results. Our 2005 results reflected the Enron litigation-related provi-
sion. Our strong results in 2006 were also underpinned by generally
favourable economic and credit conditions in both domestic and inter-
national markets.
In 2006, the Canadian economy grew by 2.8%, primarily bol-
stered by robust domestic demand. These factors were partially offset
by a weakening in exports and manufacturing activities against a
backdrop of a strong Canadian dollar, high but falling energy prices,
slowing U.S. demand and competition from emerging markets. The
U.S. economy recorded a growth rate of 2.9%, reflecting solid con-
sumer 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.
44
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
During 2006, strong consumer lending was supported by favour-
In 2005, the Canadian economy grew by 3.1% (1), reflecting
able labour market conditions and a relatively low interest rate
environment. Business lending remained solid, albeit in part offset
by surpluses of internally generated funds available for capital and
inventory investment. The favourable credit environment, together
with healthy household and corporate balance sheets, continued to
support strong consumer and business credit quality. Capital market
conditions were generally favourable, characterized by buoyant M&A
activity in Canada and strong performance of natural resource-based
equities. Debt origination activity in the U.S. and Europe weakened in
2006 in part due to rising interest rates and the negative impact of the
strengthening of the Canadian dollar.
During 2006, a number of specified items were identified, which
had minimal impacts on our overall results as their effects largely
offset each other. We realized a favourable resolution of an income
tax audit related to prior years, resulting in a $70 million reduction in
income tax expense. We received $51 million related to the termina-
tion of an agreement. We reversed $50 million of general allowance
related to our corporate loan portfolio. We also recorded a net gain of
$40 million on the exchange of New York Stock Exchange (NYSE) seats
for shares in the NYSE Group (NYX). We incurred a net charge of
$16 million ($19 million after-tax, which included a write-off of
deferred taxes) related to the transfer of our Institutional & Investor
Services business to the joint venture RBC Dexia IS. We recorded a
$61 million (before-tax and after-tax) charge in our insurance business
for additional estimated net claims for damages predominantly related
to hurricane Wilma, which occurred in late 2005. In addition, we made
a $72 million adjustment to increase our credit card customer loyalty
reward program costs.
In 2005, net income was $3,387 million, up $584 million, or 21%,
from 2004. Our strong earnings were supported by our successful
execution of client-focused initiatives and favourable economic condi-
tions, despite the negative impact of an Enron Corp. litigation-related
provision and charges for net claims related to hurricanes Katrina, Rita
and Wilma.
strong consumer and business spending underpinned by low inter-
est rates, robust employment growth and rising house prices, albeit
partially offset by the adverse effects of a strong Canadian dollar and
higher energy prices. The U.S. economy recorded a growth rate of
3.1% (1), 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 favour-
able credit and business environment with a general reduction in
defaults and bankruptcies.
During 2005, we took action to mitigate the uncertainties regard-
ing Enron-related matters, including the settlement of our part of the
MegaClaims bankruptcy lawsuit brought by Enron against RBC and
a number of financial institutions for $31 million (US$25 million). In
addition, we settled an additional $29 million (US$24 million) for rec-
ognition 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.
We recorded a charge of $203 million (US$173 million) before- and
after-tax for estimated net claims for damages related to hurricanes
Katrina, Rita and Wilma. We completed the sale of Liberty Insurance
Services Corporation (LIS) to IBM Corporation (IBM), and entered into
a long-term agreement with IBM to perform key business processes
for RBC Insurance U.S. operations. We also completed the sale of cer-
tain assets of RBC Mortgage Company (RBC Mortgage) to Home123
Corporation.
(1)
Reflects revised data from Statistics Canada and the Bureau of Economic Analysis.
Total revenue
(C$ millions)
Interest income
Interest expense
Net interest income
Investments (1)
Insurance (2)
Trading
Banking (3)
Underwriting and other advisory
Other (4)
Non-interest income
Total revenue
Additional information
Total trading revenue (5)
Net interest income – related to trading activities
Non-interest income – trading revenue
Total
Total trading revenue by product (5)
Interest rate and credit
Equities
Foreign exchange and commodities
Total
2007
2006
Table 7
2005
$ 26,377
18,845
$ 22,204
15,408
$ 16,981
10,188
$
$
$
$
7,532
4,405
3,152
2,261
2,620
1,217
1,275
$
$
6,796
3,786
3,348
2,574
2,391
1,024
718
6,793
3,357
3,270
1,594
2,326
1,026
818
$ 14,930
$ 13,841
$ 12,391
$ 22,462
$ 20,637
$
19,184
$
$
$
(390) $
2,261
(539) $
2,574
21
1,594
1,871
$
2,035
$
1,615
$
693
823
355
$
1,174
561
300
1,025
355
235
$
1,871
$
2,035
$
1,615
(1)
(2)
(3)
(4)
(5)
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.
Total trading revenue comprises trading-related revenue recorded in Net interest income and Non-interest income. Total trading revenue includes cash and related derivatives.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
45
2007 vs. 2006
Total revenue increased $1,825 million, or 9%, from a year ago.
Excluding the impact of the new financial instruments accounting stan-
dards, revenue was up $1,902 million, or 9%. The increase was largely
due to continued strong balance and volume growth in our banking
and wealth management businesses and a gain related to the Visa Inc.
restructuring. Higher revenue from several capital markets businesses
also contributed to this increase. The strong growth largely reflected
the successful execution of our strategy including acquisitions, as well
as generally favourable market conditions for most of the year. These
factors were partially offset by writedowns on the valuation of U.S.
subprime RMBS and CDOs of ABS, the negative impact of a stronger
Canadian dollar on the translated value of our U.S. dollar-denominated
revenue and higher credit card customer loyalty reward program costs.
For a reconciliation of revenue excluding the impact of the new finan-
cial instruments accounting standards, refer to the Key performance
and non-GAAP measures section.
Net interest income increased $736 million, or 11%, largely
driven by strong loan and deposit growth. Net interest margin of
1.30% was down 5 bps compared to the prior year.
Investments-related revenue increased $619 million, or 16%,
primarily due to continued growth in fee-based client assets reflect-
ing strong net sales, capital appreciation and the recruitment and
retention of experienced advisors. Growth in custodian and securities
lending businesses reflecting strong market activities, and higher
transactional volumes in our brokerage businesses also contributed to
the increase.
Insurance-related revenue decreased $196 million, or 6%.
Excluding the impact of the new financial instruments accounting
standards, revenue decreased $36 million, or 1%, from the prior year,
largely reflecting lower U.S. annuity sales mainly due to relatively
lower long-term interest rates and lower revenue from our property
catastrophe reinsurance business, which we exited completely this
year. These factors were partially offset by growth in our European
life reinsurance and Canadian businesses. For a reconciliation of
Insurance-related revenue excluding the impact of the new financial
instruments accounting standards, refer to the Key performance and
non-GAAP measures section.
Banking revenue was up $229 million, or 10%, mainly due to
higher transaction volumes and client balances and increased loan
syndication activity. These factors were partially offset by higher
credit card customer loyalty reward program costs that were recorded
against revenue.
Trading revenue decreased by $313 million, or 12%. Total trading
revenue was $1,871 million, down $164 million, or 8%, from a year
ago largely due to writedowns totalling $357 million on the valuation
of U.S. subprime RMBS and CDOs of ABS in our Structured Credit
business.
Underwriting and other advisory revenue increased $193 million,
or 19%, on strong equity origination activity across all geographies
and improved M&A results, mainly in the U.S. These factors were
partially offset by lower U.S. debt origination activity in part due to
the tightening of credit markets in the latter part of 2007 as a result of
the U.S. subprime mortgage market concerns.
Other revenue increased $557 million, or 78%, largely due to
a $326 million gain related to the Visa Inc. restructuring and gains
on the fair valuing of credit derivatives used to economically hedge
our corporate loan portfolio. A favourable adjustment of $40 million
related to the reallocation of certain foreign investment capital from
our international insurance operations, which had supported our
property catastrophe reinsurance business, as we exited this busi-
ness completely this year, a $35 million foreign exchange translation
gain on certain deposits resulting from the implementation of the new
financial instruments accounting standards, and higher private equity
gains and distributions also contributed to the increase.
2006 vs. 2005
Total revenue increased $1,453 million, or 8%, from 2005, largely due
to record trading results on improved market conditions and solid
business growth in our wealth management and banking businesses
reflecting successful execution of our 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 the translated
value of our U.S. dollar-denominated revenue, lower debt and equity
origination activity and certain favourable items recorded in 2005.
Net interest income increased $3 million. Strong loan and deposit
growth and increased spreads on deposits and personal investment
products were mostly offset by funding costs related to certain equity
trading strategies and the impact of higher securitization balances.
Investments-related revenue increased $429 million, or 13%,
primarily due to growth in fee-based client assets reflecting strong net
sales and capital appreciation and the inclusion of Abacus Financial
Services Group Limited. Higher transactional volumes in our full
service and self-directed brokerage businesses also contributed to the
increases.
Insurance-related revenue increased $78 million, or 2%, primarily
reflecting growth in our Canadian life business and 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 of a stronger Canadian dollar on the translated value of our
U.S. dollar-denominated revenue and lower revenue from property
catastrophe reinsurance reflecting our strategic reduction in exposure,
as we ceased underwriting new business.
Banking revenue was up $65 million, or 3%, mainly due to higher
service fees, higher credit fees related to our investment banking
activity and increased foreign exchange revenue due to higher trans-
action volume. These factors were partially offset by higher customer
loyalty reward program costs that were recorded against revenue.
Trading revenue increased by $980 million, or 61%. Total trading
revenue 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 $100 million, or 12%, largely due to a
number of favourable items recorded in 2005 including the gain on the
sale of an Enron-related claim, a cumulative accounting adjustment
related to our ownership interest in an investment and the gain on the
sale of LIS. These factors were partially offset by the receipt of a fee
related to the termination of an agreement and the net gain on the
exchange of our NYSE seats for NYX shares, which were both recorded
in 2006.
Net interest income and margin
(C$ millions, except percentage amounts)
Net interest income
Average assets (1)
Net interest margin (2)
2007
2006
Table 8
2005
$
7,532
581,000
$
6,796
502,100
$
6,793
445,300
1.30%
1.35%
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.
46
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Change in net interest income (1)
Table 9
(C$ millions)
Assets
Deposits with other banks
Canada
United States
Other International
Securities
Trading
Available-for-sale (3)
Investments (3)
Asset purchased under reverse repurchase
agreements and securities borrowed
Loans
Canada
Retail
Wholesale
United States
Other International
2007 vs. 2006
Increase (decrease)
due to changes in
2006 vs. 2005
Increase (decrease)
due to changes in
Average
volume (2)
Average
rate (2)
Net
change
Average
volume (2)
Average
rate (2)
Net
change
$
11
71
31
1,142
(230)
–
$
(9) $
(50)
4
423
141
–
$
2
21
35
1,565
(89)
–
783
(160)
623
1,025
–
348
778
194
(217)
(218)
106
1,219
(217)
130
884
$
10
11
35
863
–
22
404
697
146
108
172
$
–
89
104
482
–
216
1,069
423
(144)
376
140
10
100
139
1,345
–
238
1,473
1,120
2
484
312
Total interest income
$
3,959
$
214
$
4,173
$
2,468
$
2,755
$
5,223
Liabilities
Deposits
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 expense
Net interest income
$
(1) $
264
1,344
386
542
(66)
89
$
$
646
281
528
(460)
(60)
(15)
(41)
645
545
1,872
(74)
482
(81)
48
$
122
238
754
197
341
(18)
(115)
$
1,178
733
737
493
421
(5)
144
1,300
971
1,491
690
762
(23)
29
$
$
2,558
1,401
$
$
879
$
3,437
(665) $
736
$
$
1,519
949
$
$
3,701
$
5,220
(946) $
3
(1)
(2)
(3)
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.
Available-for-sale securities are carried at fair value. Prior to November 1, 2006, Available-for-sale securities were classified as investment securities and were carried at amortized cost.
2007 vs. 2006
Net interest margin decreased 5 bps reflecting the impact of changes
in product mix, an increase in lower-yielding and non-interest-earning
assets, competitive pressures on our U.S. deposit business, and the
reversal of accrued interest on higher impaired loans in the U.S.
Net interest income increased $736 million, or 11%, largely
driven by strong loan and deposit growth in our banking businesses.
As noted in Table 9, we experienced higher growth in lower-
yielding and non-interest-earning assets, including trading securities
and assets purchased under reverse repurchase agreements and
securities borrowed largely in support of our trading and other busi-
ness activities, which generate non-interest income. For further
details, refer to Table 58 in the Additional financial information section.
2006 vs. 2005
Net interest margin decreased 18 bps compared to 2005, reflecting
lower net interest income due to higher funding costs in support of
growth in certain equity trading strategies. An increase in lower-
yielding and non-interest-earning assets, which generate non-interest
income, largely in support of our trading and other business activities
also contributed to the decrease. This decrease was partially offset by
stronger loan and deposit growth and increased spreads on deposits
and personal investment products.
Non-interest expense
(C$ millions)
Salaries
Variable compensation
Stock-based compensation
Benefits and retention compensation
Human resources
Equipment
Occupancy
Communications
Professional and other external services
Other expenses
Non-interest expense
$
$
2007
3,541
2,975
194
1,150
7,860
1,009
839
723
838
,204
$
$
1
2006
3,192
2,827
169
1,080
7,268
957
792
687
844
947
$
$
Table 10
2005
3,101
2,309
169
1,103
6,682
960
749
632
796
1,538
$ 12,473
$
11,495
$
11,357
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
47
2007 vs. 2006
Non-interest expense increased $978 million, or 9%, compared to the
prior year, primarily reflecting higher costs due to increased business
levels, which included additional sales and service personnel and higher
variable compensation on higher commission-based revenue in Wealth
Management. Increased sundry losses and higher processing and
system development costs also contributed to the increase. Additional
costs in support of our growth initiatives, including our recent acquisi-
tions, and de novo branch expansion and branch upgrade programs also
contributed to the increase. These factors were partially offset by the
favourable impact of a stronger Canadian dollar on the translated value
of the U.S. dollar-denominated expenses and lower variable compensa-
tion in Capital Markets commensurate with weaker results.
2006 vs. 2005
Non-interest expense increased $138 million, or 1%, compared to
2005, largely reflecting higher variable compensation primarily in our
Capital Markets and Wealth Management segments due to strong busi-
ness performance. Higher costs in support of our growth initiatives,
including a higher level of sales personnel and infrastructure in our
distribution network, increased costs related to systems application
development, higher marketing and advertising costs and a larger
number of branches also contributed to the increase. These factors
were partially offset by the reduction in the translated value of U.S.
dollar-denominated expenses due to the stronger Canadian dollar.
The Enron litigation-related provision and the settlement of the Enron
MegaClaims bankruptcy lawsuit were recorded in 2005.
Provision for credit losses
(C$ millions)
Residential mortgages
Personal
Credit cards
Small business (1)
Retail
Business (2)
Sovereign (3)
Bank
Wholesale
Specific provision
General provision
Provision for credit losses
2007
2006
2005
Table 11
$
$
–
$
$
$
13
364
223
34
634
148
–
148
782
9
791
$
$
$
$
$
$
$
6
306
163
29
504
(22)
–
–
(22) $
482
(53)
429
$
$
2
259
194
27
482
(93)
–
–
(93)
389
66
455
Specific PCL as a % of average net loans and acceptances
.33%
.23%
.21%
(1)
(2)
(3)
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
2007 vs. 2006
Total provision for credit losses (PCL) increased $362 million, or 84%,
compared to the prior year, which had been at a cyclically low level,
and has trended up towards the historical average. The increase
reflected higher provisions for both of our wholesale and retail loan
portfolios, primarily reflecting portfolio growth and higher impaired
loans in our U.S. residential builder finance business triggered by the
downturn in the U.S. housing market. Specific PCL as a percentage
of average net loans and acceptances increased from a year ago,
largely reflecting higher impaired loans in our U.S. residential builder
finance business.
Specific PCL for retail loans was up $130 million, or 26%, from
a year ago. The increase was primarily attributable to higher provi-
sions in our credit cards and personal unsecured credit line portfolios,
largely reflecting higher loss rates and portfolio growth.
Specific PCL for wholesale loans increased $170 million over the
prior year. The increase was largely attributable to our business port-
folio mainly due to higher impaired loans in our U.S. residential builder
finance business and higher write-offs in Canada. Lower recoveries in
our corporate loan portfolio this year also contributed to the increase
in provisions.
Insurance policyholder benefits, claims and acquisition expense
(C$ millions)
Insurance policyholder benefits and claims
Insurance policyholder acquisition expense
Insurance policyholder benefits, claims and acquisition expense
The general provision increased $62 million from a year ago, pri-
marily reflecting a $50 million reversal of the general allowance related
to our corporate loan portfolio in the prior year. Higher provisions in
our U.S. residential builder finance business loan portfolio, largely
reflecting a weakening in credit quality as a result of the downturn in
the U.S. housing market, also contributed to the increase.
2006 vs. 2005
Provision for credit losses decreased $26 million, or 6%, from 2005.
The decrease largely reflected a $50 million reversal of the general
allowance in 2006 related to our corporate loan portfolio in Capital
Markets in light of the continued favourable credit conditions and
the strengthening of the credit quality of our corporate portfolio, the
favourable impact of the higher level of securitized credit cards, and
the continued strong credit quality of our U.S. loan portfolio. In 2005,
we also recorded a provision related to 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 loan portfolios.
Table 12
2007
1,588
585
$
2006
1,939
570
$
2005
2,103
522
2,173
$
2,509
$
2,625
$
$
48
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2007 vs. 2006
Insurance policyholder benefits, claims and acquisition expense
(PBCAE) decreased $336 million, or 13%, from the prior year. Excluding
the impact of the new financial instruments accounting standards and
the prior year hurricane-related charges, PBCAE decreased $121 mil-
lion, or 5%, over last year. The decrease was largely attributable to
the impact of lower U.S. annuity sales and a higher level of favourable
net actuarial liability adjustments this year, which included cumulative
adjustments of $92 million related to prior periods. These factors were
partially offset by increased costs commensurate with growth in our
European life reinsurance and Canadian businesses. For a reconcilia-
tion of PBCAE excluding the impact of the new financial instruments
accounting standards, refer to the Key performance and non-GAAP
measures section.
2006 vs. 2005
PBCAE decreased $116 million, or 4%, compared to 2005. The
decrease primarily reflected a $142 million (before- and after-tax)
reduction in hurricane-related charges for net claims, as we recorded
$203 million in 2005 related to hurricanes Katrina, Rita and Wilma
and $61 million for additional claims in 2006 predominantly related
to hurricane Wilma. The favourable impact on the translated value of
U.S. dollar-denominated actuarial liabilities as a result of the stronger
Canadian dollar and lower U.S. annuity sales also contributed to the
decrease. These factors were partially offset by higher benefits and
claims costs associated with business growth and a reduced level of
net favourable actuarial liability adjustments in 2006.
Taxes
(C$ 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 income and other taxes
Net income before income taxes
Effective income tax rate (2)
Effective total tax rate (3)
$
$
$
$
Table 13
2007
2006
2005
1,392
$
1,403
$
1,278
208
227
117
97
41
8
698
2,090
7,025
19.8%
27.1%
$
$
$
218
217
107
92
39
7
680
2,083
6,204
22.6%
30.3%
$
$
$
218
220
164
93
39
9
743
2,021
4,702
27.2%
37.1%
(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.
2007 vs. 2006
Income tax expense decreased $11 million, or 1%, from a year ago,
despite higher earnings before income taxes. The effective tax rate of
19.8% compared favourably to 22.6% a year ago. The lower effective
tax rate was largely due to writedowns on the valuation of U.S. sub-
prime RMBS and CDOs of ABS reported by our subsidiaries operating
in jurisdictions with higher income tax rates, the gain related to the
Visa Inc. restructuring, which is taxed at the capital gains tax rate, and
a higher level of income from tax-advantaged sources (Canadian tax-
able corporate dividends).
In addition to the income and other taxes reported in our
Consolidated Statements of Income, we recorded income taxes of
$946 million in 2007 (2006 – $136 million) in Shareholders’ equity,
an increase of $810 million, primarily reflecting an increase in unreal-
ized foreign currency translation gains as shown in Note 24 to our
Consolidated Financial Statements.
2006 vs. 2005
Income taxes were up in 2006 compared to 2005, largely reflecting
higher earnings and the impact of the Enron litigation-related provision
recorded in 2005. The effective income tax rate for 2006 decreased
4.6% primarily due to higher earnings reported by our subsidiaries
operating in jurisdictions with lower income tax rates, 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 increased by $18 million from a year ago, largely due
Other taxes decreased $63 million, largely due to lower capital
to increased payroll taxes reflecting higher staffing levels and higher
capital taxes due to an increased Canadian capital tax base on which
capital taxes are levied. Increased property taxes reflecting a higher
number of branches also contributed to the increase. These factors
were partially offset by lower goods and services and sales taxes due
to a decrease in the goods and services tax (GST) rate.
taxes primarily related to recoveries of capital taxes paid in prior
periods and a lower Canadian capital base on which capital taxes
are levied.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
49
Results by geographic segment (1)
Table 14
2007
2006
2005
(C$ 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
$ 6,435
8,605
$
412
4,322
$ 6
85
2,003
$ 7,532
14,930
$ 6,045
7,518
$
108
4,397
$
643
1,926
$ 6,796
13,841
$ 5,628
6,878
$
608
3,955
$
557
1,558
$ 6,793
12,391
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
Net income from continuing
operations
Net income (loss) from
discontinued operations
Net income
15,040
4,734
2,688
22,462
13,563
4,505
2,569
20,637
12,506
4,563
2,115
19,184
696
90
5
791
456
(28)
1
429
433
23
(1)
455
1,230
7,409
–
474
3,405
–
469
1,659
–
2,173
12,473
–
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
1,788
(13)
(242)
1,533
1,495
13
(61)
1,447
1,299
(64)
30
1,265
$ 3,917
$
778
$
797
$ 5,492
$ 3,177
$
799
$
781
$ 4,757
$ 2,774
$
200
$
463
$ 3,437
$
–
$ 3,917
$
$
–
778
$
$
–
$
–
$
–
797
$ 5,492
$ 3,177
$
$
(29) $
–
$
(29) $
–
770
$
781
$ 4,728
$ 2,774
$
$
(50) $
–
$
(50)
150
$
463
$ 3,387
(1)
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. Transactions are recorded in the local currency and are subject to foreign exchange rate fluctuations with
respect to the movement of the Canadian dollar.
2007 vs. 2006
Net income in Canada was $3,917 million, up $740 million, or 23%,
compared to the prior year. This increase largely reflected strong
volume and balance growth in our domestic banking and wealth man-
agement businesses and a gain related to the Visa Inc. restructuring.
Higher trading results, improved equity origination activity and higher
loan syndication activity also contributed to the increase. These fac-
tors were partially offset by higher costs reflecting increased business
levels and in support of growth initiatives, higher provisions for credit
losses and higher credit card customer loyalty reward program costs
this year.
U.S. net income of $778 million was up $8 million, or 1%, from
the prior year. Solid revenue growth reflecting the inclusion of our
recent acquisitions and improved equity origination and M&A activ-
ity was mostly offset by the negative impact of the stronger Canadian
dollar on the translated value of our U.S. dollar-denominated earnings,
higher costs in support of business growth and higher provision for
credit losses, which primarily reflected higher impaired loans in our
U.S. residential builder finance business.
Other international net income of $797 million was up $16 million,
or 2%, from 2006, partly due to stronger insurance results reflecting
the absence of hurricane-related charges this year and a favourable
adjustment related to the reallocation of certain foreign investment
capital this year. Growth at RBC Dexia IS also contributed to the
increase. These factors were largely offset by lower trading results
in certain fixed income businesses as a result of writedowns on the
valuation of U.S. subprime RMBS and CDOs of ABS.
2006 vs. 2005
Net income in Canada was $3,177 million, up $403 million, or 15%,
compared to 2005. This increase largely reflected strong revenue
growth in our wealth management and banking businesses due to our
successful execution of growth initiatives, the continuing favourable
economic conditions and stronger M&A activity. 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 comprises 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 2005 largely reflecting the Enron
litigation-related provision and strong trading results in 2006. 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
compared to a net loss of $50 million in 2005. The 2006 net loss
reflected charges related to the wind down of operations of RBC
Mortgage Company. The 2005 net loss largely reflected charges
related to the sale and wind down of operations, including the costs of
closing RBC Mortgage Company’s Chicago office and certain branches,
employee incentive payments and the write down of certain assets.
Other international net income was up $318 million, or 69%,
from 2005, mainly reflecting the lower net estimated hurricane-related
charges and income tax amounts, which were largely related to enter-
prise-funding activities and solid business growth in our European
life reinsurance business. These factors were partially offset by lower
revenue from property catastrophe reinsurance reflecting our strategic
reduction in exposure.
Related party transactions
In the ordinary course of business, we provide normal banking
services, operational services and enter into other transactions with
associated and other related corporations, including our joint venture
entities, on terms similar to those offered to non-related parties.
We grant loans to directors, officers and other employees at rates
normally accorded to preferred clients. In addition, we offer deferred
share and other plans to non-employee directors, executives and
certain other key employees. For further information, refer to Notes 9
and 29 to our Consolidated Financial Statements.
50
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Quarterly financial information
Results and trend analysis
Our quarterly earnings, revenue and expenses are impacted by a
number of trends and recurring factors which include seasonality,
general economic conditions and competition. The following table
summarizes our results for the last eight quarters.
Quarterly results
Table 15
(C$ millions, except per share amounts)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2007
2006
Net interest income
Non-interest income
Total revenue
Non-interest expense
Provision for credit losses
Insurance policyholder benefits,
claims and acquisition expense
Net income before income taxes and
non-controlling interest in subsidiaries
Income taxes
Non-controlling interest in net income
of subsidiaries
$ 1,828
3,787
$ 5,615
3,093
263
$ 1,965
3,515
$ 5,480
3,165
178
$ 1,889
3,780
$ 5,669
3,148
188
$ 1,850
3,848
$ 5,698
3,067
162
$ 1,731
3,618
$ 5,349
2,955
159
$ 1,766
3,440
$ 5,206
2,861
99
$ 1,617
3,505
$ 5,122
2,928
124
$ 1,682
3,278
$ 4,960
2,751
47
637
343
677
516
611
627
619
652
$ 1,622
255
$ 1,794
349
$ 1,656
353
$ 1,953
435
$ 1,624
342
$ 1,619
381
$ 1,451
348
$ 1,510
332
43
50
24
24
19
44
(25)
6
Net income from continuing operations
Net income (loss) from discontinued operations
$ 1,324
–
$ 1,395
–
$ 1,279
–
$ 1,494
–
$ 1,263
(1)
$ 1,194
(17)
$ 1,128
(10)
$ 1,172
(1)
Net income
$ 1,324
$ 1,395
$ 1,279
$ 1,494
$ 1,262
$ 1,177
$ 1,118
$ 1,171
Earnings per share – basic
– diluted
Segment net income (loss)
Canadian Banking
Wealth Management
U.S. & International Banking
Capital Markets
Corporate Support
$ 1.02
$ 1.01
$
1.07
$ 1.06
$
899
180
21
186
38
$
699
177
87
360
72
$
$
$
.99
.98
618
194
67
350
50
$
$
$
1.16
1.14
771
211
67
396
49
.97
.96
675
164
79
300
$
$
$
45
$
$
$
.91
.90
660
136
82
303
13
$
$
$
$
$
$
.86
.85
511
159
62
414
(18)
.90
.89
580
145
38
338
71
Net income
$ 1,324
$ 1,395
$ 1,279
$ 1,494
$ 1,263
$ 1,194
$ 1,128
$ 1,172
Period average USD equivalent of C$1.00 (1)
Period-end USD equivalent of C$1.00
$ 1.001
1.059
$
.937
.937
$
.874
.901
$
.861
.850
$
.897
.890
$
.896
.884
$
.877
.894
$
.865
.878
(1)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Seasonality
Seasonal factors impact our results in most quarters. The second
quarter has fewer days than the other three quarters, resulting in a
decrease primarily in net interest income and certain 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, brokerage and investment management
businesses.
Impact of economic and market conditions
In general, economic conditions remained favourable over most of the
last eight quarters and positively impacted our businesses. Economic
conditions were negatively impacted in the latter part of 2007, mainly
attributable to the U.S. subprime mortgage market concerns. For a
further discussion, refer to the Overview of 2007 section.
The strengthening of the Canadian dollar over the period resulted
in lower translated value of our U.S. dollar-denominated earnings,
primarily in our wholesale banking business and U.S. retail operations.
Overview and consolidated results
Over the last eight quarters, our results were affected by a number
of favourable and unfavourable items or events. Our fourth quarter
2007 results were impacted by the writedowns on the valuation of
U.S. subprime RMBS and CDOs of ABS, the gain related to the Visa Inc.
restructuring, and higher credit card customer loyalty reward program
costs. In the first quarter of 2007 we recorded a favourable adjustment
related to the reallocation of foreign investment capital and our
insurance business results were negatively impacted by hurricane-
related charges of $61 million (before- and after-tax). During the same
quarter, we also recorded a $50 million reversal of the general allow-
ance in light of the strong credit quality of our corporate loan portfolio,
which partially reflected the favourable credit conditions. Our results
over the last eight quarters were also impacted by the acquisition of
certain businesses. For further discussion, refer to the Overview of
2007 section.
Our consolidated net income consistently exceeded $1 billion
over the last eight quarters. These strong results largely reflected a
general increase in revenue across all our business segments. This
positive trend was partially offset by the lower translated value of
foreign currency-denominated earnings as a result of the strengthen-
ing of the Canadian dollar against the U.S. dollar during most of the
period, with the effects being more pronounced in the most recent
quarter.
Non-interest expense generally increased over the last eight
quarters, largely reflecting increased variable compensation on strong
business performance and higher costs due to increased business activ-
ity volume, acquisitions and higher spending in support of our growth
initiatives.
Provision for credit losses was at a cyclically low level during
most of the period, primarily reflecting a generally benign credit envi-
ronment and favourable corporate recoveries. However, it increased
over the past year due to portfolio growth, as well as increasing loss
rates and higher impairments, both of which have trended up towards
historical averages. In the fourth quarter of 2007, the provision for
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
51
Business segment results
Canadian Banking net income generally increased over the last eight
quarters reflecting strong volume growth across most business lines.
Margins have decreased slightly over the latter part of 2007, primarily
due to strong market competition. Our results in the fourth quarter
of 2007 were favourably impacted by the gain related to the Visa Inc.
restructuring, which was partly offset by higher credit card customer
loyalty reward program costs. Also, the first quarter of 2007 was
positively impacted by a favourable adjustment related to the realloca-
tion of foreign investment capital while the first quarter of 2006 was
adversely impacted by hurricane-related charges.
Wealth Management net income has generally trended higher
over the last eight quarters, driven largely by strong growth in fee-
based client assets across all business lines reflecting new sales,
capital appreciation and the recruitment and retention of experienced
advisors. This has been partially offset by higher variable compensa-
tion commensurate with commission-based revenue and higher costs
in support of business growth, including recent acquisitions.
U.S. & International Banking results were generally stable dur-
ing the period except for the fourth quarter of 2007. The decrease in
earnings in the fourth quarter of 2007 was primarily attributable to the
higher provisions in our U.S. residential builder finance loan portfolio
reflecting higher impaired loans. In addition, net income was impacted
by higher costs in support of business growth, including recent acqui-
sitions and de novo branch openings.
Capital Markets recorded a general improvement in earnings over
the period, with the exception of the fourth quarter of 2007, which was
impacted by the writedowns on the valuation of U.S. subprime RMBS
and CDOs of ABS over concerns related to the U.S. subprime mortgage
market. Throughout 2006 and most of 2007, our diverse business
and product offerings, together with business expansions and grow-
ing global distribution capabilities, contributed to this positive trend.
However, these factors were partially offset by the lower translated
value of U.S. dollar- and British pound-denominated earnings resulting
from the stronger Canadian dollar.
Non-interest expense increased $138 million, or 5%, from a
year ago, largely reflecting higher costs in support of our business
initiatives, including higher staffing levels, our recent acquisitions and
de novo branch openings. These factors were partially offset by lower
variable compensation in Capital Markets due to weaker results.
Provision for credit losses increased $104 million from a year ago,
largely reflecting higher impaired loans in our U.S. residential builder
finance business portfolio, primarily driven by the downturn in the
U.S. housing market. Higher provisions commensurate with growth
in our credit card portfolio and higher impairment in our business
portfolio also contributed to the increase.
PBCAE increased $26 million, or 4%, over the prior year, primarily
due to the impact of the new financial instruments accounting stan-
dards, increased costs associated with growth in our European life
reinsurance business as well as less favourable claims experience
in the current period. These factors were partly offset by reduced
expenses associated with lower U.S. annuity sales, a higher level of
favourable net actuarial liability adjustments, and the favourable
impact of a stronger Canadian dollar on the translated value of U.S.
dollar-denominated expenses.
credit losses increased in our U.S. & International Banking segment
due to higher impaired loans, primarily driven by the downturn in the
U.S. housing market. The decrease in provisions in the first quarter of
2006 was primarily due to a $50 million reversal of the general allow-
ance in light of the strong credit quality of our corporate loan portfolio
at that time.
PBCAE fluctuated considerably over the period. Although under-
lying business growth has generally increased PBCAE, there can be
significant quarterly volatility resulting from claims experience, actu-
arial liability adjustments and capital market impacts on equities
backing universal life policyholder funds. The impact of the new
financial instruments accounting standards implemented in the first
quarter of 2007 introduced additional volatility to this line. Other than
claims experience and actuarial liability adjustments, these items are
predominantly offset in Insurance-related revenue. As well, the first
quarter of 2006 was impacted by hurricane-related charges.
Our effective income tax rate has generally trended downward
from 22.0% to 15.7% over the period, despite higher earnings before
income taxes. This largely reflected higher income from tax-advantaged
sources (Canadian taxable corporate dividends), favourable income
tax settlements in the first quarter of 2006 and the second and third
quarters of 2007. The fourth quarter of 2007 reflected writedowns on
the valuation of U.S. subprime RMBS and CDOs of ABS reported by our
subsidiaries operations in jurisdictions with higher income tax rates
and a lower tax rate on the gain related to the Visa Inc. restructuring.
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.
Fourth quarter 2007 performance
Fourth quarter net income of $1,324 million was up $62 million, or 5%,
from a year ago despite the $48 million unfavourable impact of the
stronger Canadian dollar on the translated value of U.S. dollar-
denominated earnings. Diluted EPS were $1.01, up 5%. ROE was
23.0% compared to 23.9% a year ago. The increase was primarily due
to a gain on the Visa Inc. restructuring, higher equity derivatives and
foreign exchange trading results and solid volume and balance growth
in our banking and wealth management businesses. These factors
were partly offset by writedowns on the valuation of U.S. subprime
RMBS and CDOs of ABS, and an adjustment to increase our credit card
customer loyalty reward program costs.
Total revenue increased $266 million, or 5%, from a year ago,
largely reflecting a gain on the Visa Inc. restructuring, higher equity
derivatives and foreign exchange trading revenue and continued solid
volume and balance growth in our banking and wealth management
businesses. The favourable impact of the new financial instruments
accounting standards, the inclusion of recent acquisitions and
improved M&A activity also contributed to the increase. These factors
were partly offset by lower trading revenue in our fixed income busi-
nesses reflecting the writedowns on the valuation of U.S. subprime
RMBS and CDOs of ABS and an adjustment to increase our credit card
customer loyalty reward program costs.
52
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Business segment results
Results by business segment
(C$ 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
Net income before income taxes and
non-controlling interest in net income
of subsidiaries
Net income
Return on equity (ROE) (2)
Return on risk capital (RORC) (2)
Average assets (3)
2007
Table 16
2006
2005
Canadian
Wealth
Banking Management
U.S. &
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Total
Total
$
6,353 $
427 $ 1,031 $
453 $
6,168
3,565
884
3,936
$ 12,521 $ 3,992 $ 1,915 $ 4,389 $
5,285
788
2,902
1
1,481
109
2,769
(22)
(732) $
377
7,532 $ 6,796 $ 6,793
12,391
13,841
14,930
(355) $ 22,462 $ 20,637 $ 19,184
11,357
455
11,495
429
12,473
791
36
(85)
2,173
–
–
–
–
–
–
–
–
–
2,173
–
2,509
–
2,625
45
$
$
4,275 $ 1,089 $
2,987 $
762 $
325 $ 1,642 $
242 $ 1,292 $
7,025 $ 6,204 $ 4,702
(306) $
209 $ 5,492 $ 4,757 $ 3,437
34.3%
45.5%
18.0%
29.3%
$ 220,000 $ 16,600 $ 39,700 $ 311,200 $ (6,500) $ 581,000 $ 502,300 $ 447,100
24.6%
37.4%
23.5%
36.7%
26.6%
32.5%
6.9%
11.7%
32.4%
65.1%
6.7%
n.m.
(1)
Net interest income, total revenue and net income before income taxes are presented in 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 measure and report our business segments section.
Average risk capital and the Return on risk capital are key performance measures. For further details, refer to Key performance and non-GAAP measures section.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(2)
(3)
n.m. not meaningful
Canadian Banking
Net income increased $561 million, or 23%, from a year ago. The
increase primarily reflected strong growth across all our business lines
as well as a gain related to the Visa Inc. restructuring, partially offset
by higher costs in support of business growth, increased provision for
credit losses and higher credit card customer loyalty reward program
costs this year. Our prior year results also included the hurricane-
related charges and the receipt of a fee related to the termination of
an agreement, whereas this year we included a favourable adjustment
related to the reallocation of certain foreign investment capital.
Wealth Management
Net income for the year of $762 million increased $158 million, or
26%, from a year ago. The increase was largely due to strong earnings
growth across all our business lines reflecting the ongoing success ful
execution of our growth initiatives and generally favourable market
conditions. We recorded a foreign exchange translation gain on certain
deposits in the current year related to the implementation of the new
financial instruments accounting standards.
U.S. & International Banking
Net income decreased $19 million, or 7%, from the prior year. The
decrease was largely attributable to increased provision for credit
losses, primarily reflecting higher impaired loans in our U.S. residential
builder finance business. This was partially offset by strong business
growth in RBC Dexia IS, as well as higher loan and deposit growth in
the U.S. reflecting the inclusion of our acquisitions of Flag and the
AmSouth branches, de novo branch openings and business
expansion. Our results also reflected higher costs in support of
business growth and a loss on the restructuring of our U.S. banking
investment portfolio this year.
Capital Markets
Net income decreased $63 million, or 5%, compared to a year ago
largely due to the writedowns on the valuation of U.S. subprime RMBS
and CDOs of ABS in our Structured Credit business. The negative
impact of the stronger Canadian dollar on the translated value of U.S.
dollar-denominated earnings also contributed to the decrease. These
factors were partially offset by broad-based revenue growth in many
other businesses.
Corporate Support
Net income of $209 million for the year included income tax amounts
largely related to enterprise funding activities that were not allocated
to the business segments and favourable income tax settlements
related to prior years. These factors were partially offset by the mark-
to-market losses on derivatives relating to certain economic hedges, a
cumulative adjustment for losses resulting from the fair valuing of cer-
tain derivatives that did not qualify for hedge accounting and higher
capital taxes that were not allocated to the business segments.
Revenue contribution from our business segments (C$ millions)
Net income contribution from our business segments (C$ millions)
25,000
20,000
15,000
10,000
5,000
0
U.S. & International Banking
Wealth Management
Capital Markets
Canadian Banking
6,000
4,800
3,600
2,400
1,200
0
2005
2006
2007
2005
2006
2007
U.S. & International Banking
Wealth Management
Capital Markets
Canadian Banking
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
53
How we measure and report our business segments
Our management reporting framework is intended to measure the
performance of each business segment as if it were a stand-alone
business and reflect the way that business segment is managed. This
approach is intended to ensure that our business segments’ results
reflect all relevant revenue and expenses associated with the conduct
of their business and it depicts how management views those results.
The following highlights the key aspects of how our business
segments are managed and reported:
•
Canadian Banking reported results include securitized Canadian
residential mortgage and credit card loans and related amounts
for income and provision for credit losses. The securitized resi-
dential mortgage and credit card loans included as at October 31,
2007 were $19 billion and $4 billion, respectively
• Wealth Management reported results include additional
•
•
•
disclosures in U.S. dollars for its U.S. & International Wealth
Management business line, as we review and manage the results
of this business line largely in U.S. dollars
U.S. & International Banking reported results include additional
disclosure in U.S. dollars for its Banking business line, as we
review and manage the results of this business line largely on a
U.S. dollar basis
Capital Markets results are reported on a taxable equivalent
basis (teb), which grosses up Net interest income from certain
tax-advantaged sources (Canadian taxable corporate dividends)
to their effective taxable equivalent value with a corresponding
offset recorded in the provision for income taxes. This increases
comparability between taxable and tax-advantaged sources
of revenue
Corporate Support results include all enterprise level activities
that are undertaken for the benefit of the organization that are
not allocated to our four business segments, such as enterprise
funding, securitizations and net charges associated with unat-
tributed capital. The reported results of the Corporate Support
segment also reflect consolidation adjustments, including the
elimination of the teb adjustments recorded in Capital Markets.
Key methodologies
The following outlines the key methodologies and assumptions used
in our management reporting framework. These assumptions and
methodologies are periodically reviewed by management to ensure
they remain valid.
Expense allocation
In order to ensure that our business segments’ results include
expenses associated with the conduct of their business, we allocate
costs incurred or services provided by GTO and Global Functions,
which are directly undertaken or provided on the business segments’
behalf. For other costs not directly attributable to our business seg-
ments, including overhead costs and other indirect expenses, we use
our management reporting framework for allocating these costs to each
business segment 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 is intended to consistently measure and
align economic costs with the underlying benefits and risks associated
with the activities of each business segment. The amount of capital
assigned to each business segment is referred to as attributed capital.
Unattributed capital and associated net charges, are reported in
Corporate Support.
The capital attribution methodologies, detailed in the Capital
management section, involve a number of assumptions and estimates
that involve judgment and are revised periodically. Any changes to these
factors directly impact other measures such as business segment return
on average common equity and return on average risk capital.
54
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Funds transfer pricing
Our funds transfer pricing methodology is used to allocate interest
income and expense to each business segment. This allocation consid-
ers the interest rate risk, liquidity risk and regulatory requirements
of our business segments. Our business segments may retain certain
interest rate exposures, subject to management approval, that would
be expected in the normal course of operations. Other activities con-
ducted 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 (Canadian taxable corporate dividends) on a
taxable equivalent basis. Under this approach, we gross up revenue
from certain tax-advantaged sources, which currently only includes
our Canadian taxable corporate dividends recorded in Net interest
income, to their effective taxable equivalent value with a correspond-
ing offset recorded in the provision for income taxes. We record teb
adjustments in Capital Markets and record elimination adjustments
in Corporate Support. We believe these adjustments are useful and
reflect how Capital Markets manages its business since it increases
the comparability of revenue and related ratios across taxable and our
principal tax-advantaged sources of revenue. The use of teb adjust-
ments and measures may not be comparable to similar GAAP measures
or similarly adjusted amounts at other financial institutions. The teb
adjustment for 2007 was $332 million (2006 – $213 million, 2005 –
$109 million).
Changes made in 2007
The following highlights the key changes we made to our management
reporting framework and business segments during the year. All seg-
ment results have been revised accordingly for 2006 and 2005. These
changes did not have an impact on our consolidated results or disclo-
sure, unless otherwise noted.
• We revised the assets under administration – RBC Dexia IS
amount for 2006 to reflect the total assets under administration
amount reported by our joint venture. We had previously disclosed
only the total assets under custody amount related to RBC Dexia IS.
• We revised our definitions of assets under administration and
assets under management to better align them with our business-
specific practices. This change did not impact the amounts
reported for 2006 and 2005.
• We reclassified certain amounts reported in Capital Markets from
Interest income to Interest expense. There was no impact to Net
interest income as a result of this reclassification.
• We reclassified certain amounts reported in Corporate Support
related to interest settlements on swaps in fair value hedge
relationships from Non-interest income to Net interest income.
This reclassification did not impact results for 2006 and 2005.
• We reclassified certain deposits reported in Capital Markets and
U.S. & International Banking related to RBC Dexia IS, in
accordance with the Q2 2007 business segment realignment.
• We reclassified expenses related to internally developed
software from Non-interest expense – Other to more specific
Non-interest expense lines. All related comparative amounts
were updated to reflect this reclassification, which impacted the
Corporate Support segment only and had no impact on total Non-
interest expense.
Certain amounts related to trustee services within Canadian
Banking were reclassified from Non-interest income – Investment
management and custodial fees to Net interest income to better
reflect their nature.
•
Impact of foreign exchange rates on our business segments
The translated value of our business segment results is impacted by
fluctuations in the respective exchange rates relative to the Canadian
dollar. Wealth Management, U.S. & International Banking and Capital
Markets each have significant U.S. dollar-denominated operations,
while U.S. & International Banking has material Euro-denominated
results related to RBC Dexia IS, and Capital Markets has significant
British pound-denominated operations.
In 2007, the Canadian dollar appreciated 4% on average rela-
tive to the U.S. dollar and depreciated 5% on average relative to both
the British pound and Euro compared to a year ago. As a result of
the impact of the changes in the respective exchange rates from last
year, Wealth Management net income was down $9 million, U.S. &
International Banking net income was up $4 million, while Capital
Markets net income was down $30 million. For further discussion,
refer to the applicable business segment results section.
Key performance and non-GAAP measures
Key performance measures
Return on equity and Return on risk capital
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). We use ROE and RORC as a mea-
sure of return on total capital invested in our businesses. RORC does
not have a standardized meaning under GAAP and may not be compa-
rable to similar measures used by other financial institutions.
Our consolidated ROE calculation is based on net income avail-
able to common shareholders divided by total average common equity
for the period. Business segment ROE calculations are based on annu-
alized segment net income available to common shareholders divided
by average attributed capital for the period. For each segment, aver-
age attributed capital is based on attributed risk capital and amounts
invested in goodwill and intangibles (1).
The attribution of capital involves the use of assumptions, judg-
ments and methodologies that are regularly reviewed and revised by
management as necessary. 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.
RORC is used 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 by management for supporting invest-
ment and resource allocation decisions because they adjust for certain
items that may affect comparability between business segments and
certain competitors. The following table provides a summary of the
ROE and RORC calculations.
(1)
For internal allocation and measurement purposes, total attributed capital is deemed
by management to comprise 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.
Calculation of Return on equity and Return on risk capital
2007
Table 17
2006
2005
(C$ millions, except for percentage amounts) (1), (2)
Canadian
Wealth
Banking Management
U.S. &
International
Banking
Capital
Markets
Corporate
Support
Total
Total
Total
Net income available to common shareholders $ 2,953
$
753
$
228
$ 1,272
$
198
$ 5,404
$ 4,668
$ 3,349
Average risk capital (2)
Add: Unattributed capital
Goodwill and intangible capital
Average equity (3)
Return on equity (ROE)
Return on risk capital (RORC)
$ 6,500
–
2,100
$ 8,600
34.3%
45.5%
$ 1,150
–
1,150
$ 2,300
$ 1,950
–
1,400
$ 3,350
$ 3,900
–
900
$ 4,800
$
950
2,000
–
$ 2,950
$ 14,450
2,000
5,550
$ 22,000
$ 12,750
2,500
4,650
$ 19,900
$ 11,450
2,300
4,850
$ 18,600
32.4%
65.1%
6.9%
11.7%
26.6%
32.5%
6.7%
n.m.
24.6%
37.4%
23.5%
36.7%
18.0%
29.3%
(1)
(2)
Average risk capital, Goodwill and intangible capital, and Average equity represent rounded figures. These amounts are calculated using methods intended to approximate the average
of the daily balances for the period. ROE and RORC measures are based on actual balances before rounding.
Average risk capital includes Credit, Market (trading and non-trading), Insurance, Operational and Business and fixed assets risk capital. For further details refer to the Capital
management section.
The amounts for the segments are also referred to as attributed capital.
(3)
n.m. not meaningful
Non-GAAP measures
Given the nature and purpose of our management reporting frame-
work, we use certain non-GAAP financial measures, which are not
defined nor do they have standardized meaning under GAAP. Hence
these reported amounts and related ratios are not necessarily compa-
rable with similar information reported by other financial institutions.
2007 Defined operating leverage
Our defined operating leverage refers to the difference between our
revenue growth rate (as adjusted) and non-interest expense growth
rate (as adjusted). Revenue is presented on a taxable equivalent
basis, while the impact of consolidated VIEs is excluded, as they have
no material impact on our earnings. Accounting adjustments related to
the new financial instruments accounting standards are also excluded
from revenue as they give rise to volatility, primarily relating to unre-
alized gains and losses arising from fair valuing of the instruments
and are not viewed as a measure of economic performance. Global
Insurance results are excluded, as certain changes in revenue can be
largely offset in Insurance policyholder benefits, claims and acquisi-
tion expense, which is not captured in our defined operating leverage
calculation.
The following table shows the defined operating leverage
ratio calculation.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
55
2007 Defined operating leverage
(C$ millions, except percentage amounts)
Total revenue
Add: teb adjustment
Less: Revenue related to VIEs
Less: Global Insurance revenue
Less: Impact of the new financial instruments accounting standards (1)
Total revenue (adjusted)
Non-interest expense
Less: Global Insurance-related non-interest expense
Non-interest expense (adjusted)
Defined operating leverage
(1)
Excludes the impact of the new financial instruments accounting standards related to Global Insurance.
2007
2006
Change
Table 18
$ 22,462
332
31
3,192
83
$ 19,488
$ 12,473
537
$ 20,637
213
(7)
3,348
–
$
$
17,509
11,495
517
$
11,936
$ 10,978
11.3%
8.7%
2.6%
Consolidated revenue and Insurance-related results excluding the
impact of the new financial instruments accounting standards and
hurricane-related charges
In 2007 and 2006, there were certain items that impacted Total
consolidated revenue, Global Insurance and Insurance-related results.
Management believes that identifying and adjusting for these items
enhances the comparability of our results, and enables a more mean-
ingful comparison of our financial performance with certain other
financial institutions that make similar adjustments.
The following table provides a reconciliation of consolidated
revenue, Global Insurance and Insurance-related results excluding
the impacts of the new financial instruments accounting standards and
the hurricane-related charges.
Consolidated revenue, Global Insurance and Insurance-related results excluding the noted items
Table 19
(C$ millions)
GAAP reported amounts
Exclude: Impact of the new financial
October 31, 2007
October 31, 2006
Consolidated
revenue (1)
Global
Insurance
revenue (2)
Insurance
Insurance
policyholder
premiums,
investment benefits, claims
and and acquisition
expense (1)
fee income (1)
Consolidated
revenue (1)
Global
Insurance
revenue (2)
Insurance
Insurance
premiums,
policyholder
investment benefits, claims
and and acquisition
expense (1)
fee income (1)
$ 22,462
$ 3,192
$ 3,152
$ 2,173 $ 20,637
$ 3,348
$ 3,348
$ 2,509
instruments accounting standards
Hurricane-related charges
77
–
160
–
160
–
154
–
–
–
–
–
–
–
–
(61)
Amounts excluding the noted items
$ 22,539
$ 3,352
$ 3,312
$ 2,327 $ 20,637
$ 3,348
$ 3,348
$ 2,448
(1)
(2)
For further details, refer to the Financial performance section.
For further details, refer to the Canadian Banking section.
56
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Canadian Banking
Canadian Banking comprises our domestic personal and business
banking operations, certain retail investment businesses and our
global insurance operations. This segment includes Personal Financial
Services, Business Financial Services, Cards and Payment Solutions,
and Global Insurance.
Canadian Banking provides a broad suite of financial products
and services to over 14 million individual and business clients through
our extensive branch, automated teller machine (ATM), online and
telephone banking networks, as well as through a large number of pro-
prietary sales professionals in addition to a wide-ranging third-party
network of independent insurance distributors.
We have top rankings in market share for most retail product
categories and are the largest Canadian bank-owned insurer.
Highlights
• We launched new and innovative products to better serve
our clients through the introduction of a new personal banking
suite that includes several client-centric features, such as multi-
product rebates, and a new high-interest online savings account.
• We strengthened our leading market position in personal lending,
driven by 12% growth in residential mortgages.
• We continued to expand and upgrade our distribution network.
We opened 30 bank branches and 12 insurance offices in Canada
during the year.
Economic and market review
In Canada, strong economic growth, in part reflecting solid consumer
and business spending in the early part of the year, weakened mod-
erately in the latter part of the year, primarily due to slowing U.S.
demand and a tightening of credit conditions as a result of the U.S.
subprime mortgage market concerns. Nonetheless, robust domestic
demand, largely underpinned by favourable labour market conditions,
solid business investment and continued strong Canadian housing
market activities, contributed to volume growth in all our businesses,
particularly in the home equity lending and retail investment busi-
nesses. Competition in the personal deposits market remained strong
from both traditional and niche financial institutions.
Canadian Banking financial highlights
(C$ millions, except number of and 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
Net income before income taxes and non-controlling interest in subsidiaries
Net income
Key ratios
Return on equity (1)
Return on risk capital (1)
Net interest margin (2)
Operating leverage (Banking-related operations) (3)
Selected average balance sheet information (4)
Total assets (5)
Total earning assets (5)
Loans and acceptances (5)
Deposits
Attributed capital (1)
Risk capital (1)
Other information
Assets under administration
Number of employees (full-time equivalent)
Credit information
Gross impaired loans as a percentage of average net loans and acceptances
Specific PCL as a percentage of average net loans and acceptances
Banking-related operations (6)
Total revenue
Provision for credit losses
Non-interest expense
Net income
Global insurance
Total revenue
Insurance policyholder benefits, claims and acquisition expense
Non-interest expense
Net income
2007
$
6,353
6,168
$ 12,521
5,285
788
2,173
4,275
2,987
$
$
34.3%
45.5%
3.17%
6.5%
$
$
$
$
2006
5,816
5,880
11,696
5,027
604
2,509
3,556
2,426
30.1%
39.9%
3.22%
4.4%
Table 20
2005
$
5,233
5,765
$ 10,998
4,830
542
2,625
2,994
2,007
$
$
26.3%
36.3%
3.21%
5.8%
$ 220,000
200,400
200,000
147,100
8,600
6,500
$ 199,200
180,500
179,700
139,200
8,000
6,050
$ 181,100
163,200
160,700
132,500
7,550
5,450
$ 53,300
25,813
$ 44,600
24,828
$ 33,900
23,794
$
$
.35%
.39%
9,329
788
4,748
2,545
3,192
2,173
537
442
$
$
.33%
.34%
8,348
604
4,510
2,124
3,348
2,509
517
302
$
$
.31%
.34%
7,687
542
4,329
1,852
3,311
2,625
501
155
(1)
(2)
(3)
(4)
(5)
(6)
Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
Net interest margin (NIM) is calculated as Net interest income divided by Average total earning assets. Average total earning assets are calculated using methods intended to approxi-
mate the average earning asset balances for the period.
Defined as the difference between revenue growth rate and non-interest expense growth rate for Banking-related operations.
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 $19 billion and $4 billion, respectively
(2006 – $15 billion and $4 billion; 2005 – $11 billion and $4 billion).
The banking-related operations of Canadian Banking comprise Personal Financial Services, Business Financial Services, and Cards and Payment Solutions.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
57
Revenue by business line (C$ millions)
15,000
12,000
9,000
6,000
3,000
0
2005
2006
2007
Cards and Payment Solutions
Business Financial Services
Global Insurance
Personal Financial Services
Financial performance
2007 vs. 2006
Net income increased $561 million, or 23%, from a year ago. The
increase primarily reflected strong growth across all our business
lines as well as a $326 million ($269 million after-tax) gain related to
the Visa Inc. restructuring, partially offset by higher costs in support
of business growth, increased provision for credit losses and higher
credit card customer loyalty reward program costs, reflecting a
$121 million ($79 million after-tax) liability adjustment this year as
compared to $72 million ($47 million after-tax) in the prior year.
Our prior year results also included the hurricane-related charges,
and the receipt of a fee related to the termination of an agreement,
whereas this year we included a favourable adjustment related to the
reallocation of certain foreign investment capital.
Average assets increased $21 billion, or 10%, over the prior
year. The increase was largely attributable to strong loan growth,
underpinned by our successful execution of growth initiatives, robust
domestic demand and continued solid Canadian housing market
activities. Average deposits were up $8 billion, or 6%, from a year ago,
mainly due to growth in business deposits reflecting high liquidity
within Canadian businesses.
Banking-related operations
Banking-related operations net income was up $421 million, or 20%,
compared to the prior year. The increase was primarily due to solid
growth across all business lines and a gain related to the Visa Inc.
restructuring. These factors were partially offset by higher costs in
support of business growth, increased provision for credit losses, the
receipt of a fee related to the termination of an agreement in the prior
year, and higher credit card customer loyalty reward program costs
this year.
Total revenue was up $981 million, or 12%, over the prior year.
The increase was largely attributable to strong volume growth across
all business lines and the gain related to the Visa Inc. restructuring.
These factors were partly offset by the receipt of a fee related to the
termination of an agreement in the prior year and higher credit card
customer loyalty reward program costs this year.
Net interest margin decreased 5 bps from a year ago, primarily
reflecting the impact of changes in our product mix.
Non-interest expense increased $238 million, or 5%, compared
to a year ago. The increase was largely attributable to higher costs
in support of business growth, including a 4% increase in sales and
service personnel, or approximately 900 staff, and de novo branch
expansion, as well as higher costs associated with system develop-
ment, professional fees and sundry losses.
Provision for credit losses increased $184 million, or 30%, from
last year, which had been at a cyclically low level, and has trended
up towards the historical average this year. The increase was mainly
attributable to higher provisions in our business, credit card and per-
sonal loan portfolios, reflecting higher loss rates and portfolio growth.
Global Insurance
Global Insurance net income increased $140 million, or 46%, com-
pared to the prior year. The increase was primarily related to the
property catastrophe reinsurance business, reflecting the hurricane-
related charges in the prior year, and a favourable adjustment related
•
•
58
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
to the reallocation of certain foreign investment capital this year,
which was partially offset by lower income from this business as we
exited this business completely this year. A higher level of favourable
net actuarial liability adjustments and solid growth in our European
life reinsurance business also contributed to the increase. For a
detailed discussion regarding Insurance policyholder benefits, claims
and acquisition expense, refer to the Global Insurance business line
discussion.
2006 vs. 2005
Net income increased $419 million, or 21%, from 2005. The increase
primarily reflected solid revenue growth in our banking businesses
and lower hurricane-related charges in 2006. These factors were
partially offset by increased costs in support of business growth and
higher provision for credit losses partly due to loan growth and lower
recoveries.
Banking-related operations
Banking-related operations net income increased $272 million,
or 15%, from 2005, largely reflecting solid revenue growth across
all business lines. The increase in net income was partly offset by
increased costs in support of business growth and higher provision for
credit losses.
Total revenue increased $661 million, or 9%, from 2005. The
increase was mainly due to strong volume growth across all business
lines, and improved deposit and investment spreads, underpinned
by our successful execution of growth initiatives and favourable eco-
nomic conditions.
Net interest margin increased 1 bp compared to 2005, primarily
reflecting improved spreads on deposits and investment products.
Non-interest expense increased $181 million, or 4%, primarily
due to higher levels of sales and service personnel and infrastructure
costs in our distribution network and increased marketing costs in
support of business growth.
Provision for credit losses increased $62 million, or 11%, largely
reflecting higher provisions in our personal loan portfolio and lower
recoveries in our agriculture loan portfolio in 2006. In 2005, we included
our 50% proportionate share of a provision recorded at Moneris.
Global Insurance
Global Insurance net income increased $147 million compared to 2005,
largely reflecting a $142 million reduction in hurricane-related charges
in 2006. In addition, business growth associated with Canadian life
business and European life reinsurance business, as well as improved
claims experience in our Canadian property and casualty business
contributed to the increase. These factors were partially offset by lower
revenue from property catastrophe reinsurance business reflecting our
strategic reduction in exposure. For a detailed discussion regarding
Insurance-related revenue and Insurance policyholder benefits, claims
and acquisition expense, refer to the Financial performance section.
2008 Outlook and priorities
Canadian economic growth is expected to weaken in 2008 due to
tighter credit conditions, though credit growth should continue to be
supported by rising domestic demand amid expanding labour markets
and solid business investment. We will remain focused on new client
acquisition and growth in high-value markets, simplifying processes
as well as augmenting our strengths in distribution capabilities,
product breadth and integration, and client analytics to provide
superior client service.
Key strategic priorities for 2008
•
Deliver a superior client experience to help clients achieve
financial success, allowing us to retain and grow their business.
Continue to improve our processes and revise our business
models to make it easier for our clients to do business with us.
Focus on delivering relevant advice and solutions to attract new
clients in specific markets, geographies and life stages.
Business line review
Personal Financial Services
Personal Financial Services focuses on meeting the needs of our
individual clients at every stage of their lives through a wide range
of lending and investment products and services, including home
equity financing, lines of credit, personal loans, savings and chequing
accounts, guaranteed investment certificates (GICs), mutual funds and
self-directed brokerage accounts. We have the largest retail banking
network in Canada with 1,146 branches and 3,946 ATMs. In addition,
we have more than 75 private bankers and 1,700 sales specialists. We
also rank first or second in market share for most personal banking
products.
Financial performance
Total revenue increased $461 million, or 10%, over the prior year.
The increase largely reflected strong volume growth in home equity
lending and retail investments, and improved spreads across most
products. Higher mutual fund distribution fees, reflecting a 18%
growth in mutual fund balances as a result of strong net sales and
capital appreciation also contributed to the increase.
Average residential mortgage balances and personal loans were
each up by 12% over the prior year, supported by relatively low inter-
est rates in a historical context, strong labour market conditions and
continued solid Canadian housing market activities. Average personal
deposit balances increased 6% from a year ago, notwithstanding an
increasingly competitive market, in part driven by the success of our
recently launched high-interest online savings account.
Business Financial Services
Business Financial Services offers a wide range of lending, leasing,
deposit, investment and transaction products and services to small
and medium-sized businesses, 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
approximately 100 business banking centres and 2,000 business
account managers, and our strong commitment to our clients has
resulted in leading market share in business loans and deposits.
Financial performance
Total revenue increased $160 million, or 7%, over the prior year. The
increase was largely attributable to solid growth in business loans
and deposits, partially offset by lower spreads on deposits.
Average business loans grew by 7% and average business
deposits increased 10%, primarily driven by continued solid business
spending and high liquidity within Canadian businesses.
Selected highlights
Table 21
(C$ millions)
2007
2006
2005
Total revenue
Other information
Residential mortgages (1)
Personal loans (1)
Personal deposits (1)
Personal GICs (1)
Branch mutual fund balances
AUA – Self-directed brokerage
New accounts opened
(thousands) (2)
Number of:
Branches
Automated teller machines
$
5,082 $
4,621 $
4,181
113,200
38,700
35,500
57,900
66,900
28,300
100,800
34,600
33,600
57,000
56,500
23,200
89,700
30,500
32,900
57,200
46,600
19,800
1,066
769
740
1,146
3,946
1,117
3,847
1,104
3,906
(1)
(2)
Average amounts are calculated using methods intended to approximate the average
of the daily balances for the period.
Deposit accounts only.
Average residential mortgages, personal loans and deposits
(C$ millions)
120,000
96,000
72,000
48,000
24,000
0
2005
2006 2007
2005 2006
2007
40,000
Residential mortgages
32,000
Personal loans
Personal deposits
24,000
16,000
8,000
0
Selected highlights
Table 22
(C$ millions)
2007
2006
2005
Total revenue
Other information (average) (1)
Business loans (2)
Business deposits (3)
$
2,301 $
2,141 $
2,011
36,900
53,700
34,400
48,600
31,700
42,400
(1)
(2)
(3)
Average amounts are calculated using methods intended to approximate the average
of the daily balances for the period.
Includes small business loans treated as retail and wholesale loans.
Includes GIC balances.
Average business loans and deposits (C$ millions)
40,000
32,000
24,000
16,000
8,000
0
2005
2006 2007
2005 2006 2007
60,000
Business loans
48,000
Business deposits
36,000
24,000
12,000
0
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
59
Cards and Payment Solutions
Cards and Payment Solutions provides a wide array of convenient and
customized credit cards and related payment products and solutions.
In addition, this business line includes our 50% interest in Moneris,
the merchant card processing joint venture with the Bank of Montreal.
We have over 5 million credit card accounts and have an approxi-
mately 20% market share of Canada’s credit card purchase volume.
Financial performance
Total revenue increased $360 million, or 23%, compared to the prior
year. The increase largely reflected a $326 million ($269 million after-
tax) gain related to the Visa Inc. restructuring. Continued solid growth
in credit card balances and transaction volumes also contributed to
the increase. These factors were partially offset by the receipt of a fee
related to the termination of an agreement in the prior year, as well as
higher credit card customer loyalty reward program costs this year.
Global Insurance
Global Insurance offers a wide range of life, creditor, health, travel, home
and auto insurance products and services to individual and business cli-
ents 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, career sales force, Internet and retail insurance offices.
We are the largest Canadian bank-owned insurer, with products
distributed through more than 17,000 independent brokers and more
than 650 career sales representatives in North America. Our Canadian
insurance business holds lead positions in creditor, travel and individ-
ual living benefits insurance products, and has a significant presence
in life, home and auto insurance. We are a preferred provider of protec-
tion, asset accumulation and retirement solutions in the U.S.
Financial performance
Global Insurance net income increased $140 million, or 46%, com-
pared to the prior year. The increase was primarily related to the
property catastrophe reinsurance business, reflecting the hurricane-
related charges in the prior year, and a favourable adjustment related
to the reallocation of certain foreign investment capital this year,
which was partially offset by lower income from this business as we
exited this business completely this year. A higher level of favourable
net actuarial liability adjustments and solid growth in our European
life reinsurance business also contributed to the increase.
Total revenue decreased $156 million, or 5%, from a year ago.
Excluding the impact of the new financial instruments accounting
standards, total revenue increased $4 million from the prior year.
The increase was largely attributable to growth in our European life
reinsurance and Canadian businesses, and a favourable adjustment
related to the reallocation of certain foreign investment capital this
year. These factors were largely offset by lower U.S. annuity sales
mainly due to lower long-term interest rates and lower revenue from
our property catastrophe reinsurance operations, which we exited
completely this year. For a reconciliation of Global Insurance revenue
excluding the impact of the new financial instruments accounting stan-
dards, refer to the Key performance and non-GAAP measures section.
Gross insurance premiums and deposits were up $54 million, or
2%, primarily reflecting new sales growth and stronger client reten-
tion, partially offset by a decline in U.S. annuity sales.
60
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Selected highlights
Table 23
(C$ millions)
2007
2006
2005
Total revenue
Other information
Average credit card balances (1) 11,200
Net purchase volumes
47,200
$
1,946 $
1,586 $
1,495
9,900
41,500
8,800
36,100
(1)
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)
12,500
10,000
7,500
5,000
2,500
0
2005
2006 2007
2005 2006 2007
Average credit
card balances
Net purchase
volumes
50,000
40,000
30,000
20,000
10,000
0
Non-interest expense was up $20 million, or 4%, from a year ago,
primarily reflecting higher project-related spending and other costs in
support of business growth.
Insurance policyholder benefits, claims and acquisition expense
(PBCAE) decreased $336 million, or 13%, from the prior year.
Excluding the impact of the new financial instruments accounting
standards and the prior year hurricane-related charges, PBCAE
decreased $121 million, or 5%, over last year. The decrease was
largely attributable to the impact of lower U.S. annuity sales and a
higher level of favourable net actuarial liability adjustments this year,
which included cumulative valuation adjustments of $92 million relat-
ing to prior periods. These factors were partially offset by increased
costs commensurate with growth in our European life reinsurance and
Canadian businesses. For a reconciliation of PBCAE excluding the
Selected highlights
(C$ millions)
$
Total revenue
Non-interest expense
Insurance policyholder benefits,
claims and acquisition expense
Net income
Other information
Gross insurance premiums
and deposits
Insurance claims and policy
benefit liabilities
2007
2006
3,192 $
537
3,348 $
517
2,173
442
2,509
302
Table 24
2005
3,311
501
2,625
155
3,460
3,406
3,288
7,283
7,337
7,117
Gross insurance premiums and deposits (C$ millions)
Gross insurance
premiums and deposits
4,000
3,200
2,400
1,600
800
0
2005
2006
2007
impact of the new financial instruments accounting standards, refer to
the Key performance and non-GAAP measures section.
Insurance claims and policy benefit liabilities decreased $54 mil-
lion, or 1%, over the prior year. The decrease primarily reflected the
impact of a stronger Canadian dollar on the translated value of our
U.S. dollar-denominated liabilities, lower property catastrophe
reinsurance liabilities, net payments of claims related to hurricanes,
and a net decrease in life and health insurance liabilities reflecting
changes to actuarial assumptions and model enhancements. These
factors were largely offset by increased costs commensurate with
business growth and the impact of the new financial instruments
accounting standards.
Wealth Management
Wealth Management comprises businesses that directly serve the
growing wealth management needs of affluent and high net worth
clients in Canada, the U.S. and outside North America, and busi-
nesses that provide asset management and trust products through
RBC and external partners. This segment comprises Canadian Wealth
Management, U.S. & International Wealth Management and Global
Asset Management.
•
Highlights
• Wealth Management was created in February 2007 to focus on
extending our leadership position in Canada and aggressively
growing in the U.S. and international markets.
The fastest growing segment in Canadian wealth management
continues to be high net worth clients (households with more
than $1 million in investable assets).
Our Canadian full-service brokerage business was the first in
the Canadian industry to surpass $150 billion in client assets
under administration.
•
• We led the Canadian mutual fund industry in net sales of long-
term funds for the 16th consecutive calendar quarter.
• We continued to grow our U.S. full-service brokerage business
through the acquisition of J.B. Hanauer & Co. (J.B. Hanauer).
• We established international wealth management offices in sev-
eral cities, including Mexico City, Beijing and Santiago.
Economic and market review
In 2007, economic growth was solid, underpinned by a relatively
favourable interest rate environment, strong employment levels and
higher wages, and a solid yet moderating housing market, which
contributed to increased demand for wealth management products.
The generally favourable capital market conditions during the year
continued to support the growth of our wealth management business.
Economic growth weakened moderately in the latter part of the year
mainly attributable to slowing U.S. demand, and a tightening of credit
conditions as a result of the U.S. subprime mortgage market concerns.
Wealth Management financial highlights
(C$ millions, except number of and percentage amounts)
Net interest income
Non-interest income
Fee-based revenue
Transactional and other revenue
Total revenue
Non-interest expense
Provision for credit losses (PCL)
Net income before income taxes and non-controlling interest in subsidiaries
Net income
Key ratios
Return on equity (1)
Return on risk capital
Pre-tax margin
Selected average balance sheet information (2)
Total assets
Loans and acceptances
Deposits
Attributed capital (1)
Risk capital (1)
Other information
Revenue per advisor (000s) (3)
Assets under administration
Assets under management
Number of employees (full-time equivalent)
Number of advisors (3)
2007
2006
$
427
$
397
$
$
$
$
2,109
1,456
3,992
2,902
1
1,089
762
32.4%
65.1%
27.3%
$
1
$
$
1,745
1,345
3,487
2,613
872
604
27.8%
59.3%
25.0%
$
$
$
Table 25
2005
374
1,458
1,319
3,151
2,440
2
708
502
24.5%
54.8%
22.5%
$ 16,600
4,600
24,900
2,300
1,150
$
15,100
4,400
22,100
2,150
1,050
$
784 $
488,500
161,200
10,382
3,118
694
476,500
142,800
9,667
3,001
$ 13,200
4,100
20,700
2,050
900
$
687
380,700
118,500
8,791
2,934
Impact of US$ translation on selected items
Reduced total revenue
Reduced non-interest expense
Reduced net income
Percentage change in average US$ equivalent of C$1.00 (4)
For the year ended
2007 vs. 2006
$
61
49
9
4%
(1)
(2)
(3)
(4)
Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Includes investment advisors and financial consultants of our Canadian and U.S. full-service brokerage businesses.
Average amounts are calculated using month-end spot rates for the year.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
61
Revenue by business line (C$ millions)
4,000
3,200
2,400
1,600
800
0
2005
2006
2007
Global Asset Management
Canadian Wealth Management
U.S. & International
Wealth Management
Financial performance
2007 vs. 2006
Net income for the year of $762 million increased $158 million, or
26%, from a year ago. The increase was largely due to strong earnings
growth across all our business lines reflecting the ongoing suc-
cessful execution of our growth initiatives and generally favourable
market conditions. We recorded a $35 million ($28 million after-tax)
foreign exchange translation gain on certain deposits in the current
year related to the implementation of the new financial instruments
accounting standards.
Total revenue increased $505 million, or 14%, over the prior year,
largely due to strong growth in fee-based client assets across all busi-
ness lines, reflecting new sales, capital appreciation and the recruitment
and retention of experienced advisors. A foreign exchange translation
gain on certain deposits, the inclusion of our J.B. Hanauer acquisition,
solid loan and deposit growth in our international wealth management
business, and higher transactional volumes in our brokerage businesses
reflecting generally favourable market conditions throughout the early
part of the year also contributed to the increase. These factors were
partially offset by the negative impact of the stronger Canadian dollar on
the translated value of U.S. dollar-denominated revenue.
Non-interest expense was up $289 million, or 11%, mainly as a result
of higher variable compensation commensurate with higher commission-
based revenue, higher staffing levels and other costs in support of
business growth, including our acquisition of J.B. Hanauer. These factors
were partially offset by the favourable impact of the stronger Canadian
dollar on the translated value of U.S. dollar-denominated expenses.
Business line review
Canadian Wealth Management
Canadian Wealth Management includes the market leader in
full-service brokerage in Canada, with over 1,300 investment advi-
sors, providing advisor-based comprehensive financial solutions.
Additionally, we provide discretionary investment management
and trust services to high net worth clients, offering a relationship
approach for clients in need of sophisticated financial solutions. In
these businesses, there are more than 28 investment counsellors
and 125 trust professionals in locations across the country.
Financial performance
Revenue increased $170 million, or 13%, over the prior year, mostly
due to strong growth in fee-based client assets reflecting higher
net sales, capital appreciation and the recruitment and retention of
experienced advisors. Higher transactional volumes in our brokerage
business reflecting generally favourable market conditions also
contributed to the increase.
62
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2006 vs. 2005
Net income increased $102 million, or 20%, compared to 2005. The
increase primarily reflected strong earnings growth across all our busi-
ness lines and generally favourable market conditions. This increase
was partially offset by higher variable compensation due to higher
commission-based revenue, higher staffing costs and increased costs
in support of business growth, including our acquisition of Abacus
Financial Services Group Limited.
Total revenue increased $336 million, or 11%, compared to 2005,
largely due to strong growth in fee-based client assets reflecting new
sales and capital appreciation, and the inclusion of our Abacus acqui-
sition. These factors were partially offset by lower client transaction
volumes in our brokerage businesses.
Non-interest expense increased $173 million, or 7%, compared to
2005. The increase was primarily due to higher variable compensation
commensurate with higher commission-based revenue, the inclusion
of our Abacus acquisition and higher staffing levels.
2008 Outlook and priorities
The Canadian economic and business environment is expected to
weaken slightly although business growth should continue to be sup-
ported by generally favourable capital market conditions. In the U.S.,
we anticipate that financial market volatility will persist into early
2008, but economic growth will reaccelerate in the latter part of 2008.
Growth in other global economies is expected to ease moderately in
2008. This economic environment and the successful execution of our
strategic priorities are anticipated to fuel our growth.
Key strategic priorities for 2008
•
•
•
Continue extending our lead in the Canadian wealth and asset
management markets.
Pursue strong organic and acquisition growth in our U.S. wealth
management businesses that serve individual clients and
advisors.
Continue expanding our high net worth international wealth
management business in select markets as well as through
bolt-on acquisitions to complement our existing operations.
Focus on expanding our asset management business globally,
initially through acquisitions with a focus on U.S. opportunities.
• Work to continue attracting and retaining experienced advisors,
private bankers and other client-facing professionals across all
our businesses.
•
Selected highlights
(C$ millions)
Total revenue
Other information
Assets under administration
Assets under management
Total assets under fee-based
programs
Table 26
2007
2006
2005
$
1,460 $
1,290 $
1,164
183,000
22,200
168,600
17,500
146,400
12,700
83,300
70,200
56,500
Average assets under administration and management (C$ millions)
200,000
160,000
120,000
80,000
40,000
0
2005
2006 2007
2005 2006 2007
Assets under
administration
Assets under
management
25,000
20,000
15,000
10,000
5,000
0
U.S. & International Wealth Management
U.S. & International Wealth Management consists of our retail broker-
age business, which is one of the largest full-service firms in the U.S.
with over 1,770 financial consultants. We also have a clearing and exe-
cution services business that serves small to mid-sized independent
broker-dealers and institutions. Internationally, we provide custom-
ized banking, credit, investment and trust solutions to high net worth
private clients through 2,300 employees across a network of 34 offices
located in 20 countries around the world.
Financial performance
Revenue increased $256 million, or 15%, over the prior year. In U.S.
dollars, revenue increased $293 million, or 19%, largely as a result of
solid growth in fee-based client assets, higher transaction volumes
in our U.S. brokerage business reflecting generally favourable mar-
ket conditions throughout the early part of the year, and a foreign
exchange translation gain on certain deposits. The inclusion of our J.B.
Hanauer acquisition and solid loan and deposit growth in our interna-
tional wealth management business also contributed to the increase.
Global Asset Management
Global Asset Management is responsible for our proprietary asset
management business in Canada and the U.S. In Canada, we provide
a broad range of investment management services through mutual
funds, pooled funds and separately managed portfolios. We distri-
bute our investment solutions through a broad network of our bank
branches, our discount and full-service brokers, independent advisors
and direct-to-consumer. We are the largest single fund company and
one of the largest money managers in Canada. In the U.S., we provide
investment services to both retail and institutional clients through
mutual funds, fee-based accounts and separately managed portfolios.
Financial performance
Revenue increased $79 million, or 17%, over the prior year, mainly
reflecting strong growth in Canadian assets under management due
to solid net long-term and money market mutual fund sales and
capital appreciation.
Selected highlights
Table 27
(C$ millions)
2007
2006
2005
Total revenue
Other information
Total loans, guarantees and
letters of credit (1), (2)
Total deposits (1), (2)
Assets under administration
Assets under management
Total assets under fee-based
programs (3)
Other information (US$ millions)
Total revenue
$
1,988 $
1,732 $
1,580
5,500
17,900
305,500
20,200
4,500
15,100
307,900
19,700
3,900
13,900
234,300
15,600
26,600
26,400
20,700
1,826
1,533
1,305
(1)
(2)
(3)
Represents amounts related to our international wealth management businesses.
Represents an average amount, which is calculated using methods intended to
approximate the average of the daily balances for the period.
Represents amounts related to our U.S. wealth management businesses.
Average assets under administration and management (C$ millions)
350,000
280,000
210,000
140,000
70,000
0
2005 2006 2007
2005 2006 2007
Assets under
administration
Assets under
management
25,000
20,000
15,000
10,000
5,000
0
Selected highlights
Table 28
(C$ millions)
2007
2006
2005
Total revenue
Other information
Canadian net long-term
mutual fund sales
Assets under management
$
544 $
465 $
407
6,200
118,800
5,400
105,600
5,600
90,200
Average assets under management (C$ millions)
Assets under
management
125,000
100,000
75,000
50,000
25,000
0
2005
2006
2007
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
63
U.S. & International Banking
U.S. & International Banking comprises our banking businesses
outside Canada, including our banking operations in the U.S. and
Caribbean. In addition, this segment includes our 50% ownership in
RBC Dexia IS.
All of our businesses leverage the global resources of RBC, while
drawing upon the knowledge and expertise of our local profession-
als 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.
Highlights
• We continued to expand our banking footprint in key growth
areas in the U.S. Southeast through targeted acquisitions and
de novo branch openings. We acquired 39 AmSouth Bank
branches (AmSouth branches) in Alabama and added 17 branches
in Georgia when we acquired Flag Financial Corporation (Flag).
• We realized a 12% (17% in Euros) growth in assets under
administration with RBC Dexia IS, underpinned by both new and
existing client growth.
• We added a real estate lending team to our Caribbean operations,
giving us the expertise to better serve clients across the region.
In addition, we formed a small business unit to serve this growing
client segment.
Economic and market review
The solid U.S. economic growth in the middle of the year, primarily
supported by continued non-residential investment, strong export
growth and consumer spending, slowed in the latter part of the year.
The weakening economic conditions largely reflected the ongoing
housing market correction, a tightening of credit conditions and
increased funding costs arising from the U.S. subprime mortgage mar-
ket concerns. This resulted in a general weakening in credit quality of
residential real estate-related loans. Internationally, economic condi-
tions in the Caribbean remained strong, although strong competition
in the deposits market also tempered business growth. Solid economic
conditions in Canada and the fast-growing asset management industry
in Europe continued to support our global custody business growth.
U.S. & International Banking financial highlights
(C$ millions, except percentage amounts)
Net interest income
Non-interest income
Total revenue
Non-interest expense
Provision for credit losses (PCL)
Net income before income taxes and non-controlling interest in subsidiaries
Net income
Key ratios
Return on equity (1)
Return on risk capital (1)
Selected average balance sheet and other information (2)
Total assets
Loans and acceptances
Deposits
Attributed capital (1)
Risk capital (1)
Other information
Assets under administration – RBC
Assets under administration – RBC Dexia IS (3)
Number of employees (full-time equivalent)
Credit information
Gross impaired loans as a percentage of average net loans and acceptances
PCL as a percentage of average net loans and acceptances
Impact of US$ and Euro translation on selected items
Reduced total revenue
Reduced non-interest expense
Increased net income
Percentage change in average US$ equivalent of C$1.00 (4)
Percentage change in average Euro equivalent of C$1.00 (4)
2007
1,031
884
1,915
1,481
109
325
242
$
$
$
$
$
$
$
$
Table 29
2005
923
654
1,577
1,136
49
395
256
2006
940
688
1,628
1,216
25
387
261
$
$
$
$
6.9%
11.7%
10.6%
16.1%
10.8%
16.4%
$ 39,700
22,300
34,200
3,350
1,950
$ 32,600
18,500
28,700
2,400
1,600
$ 25,900
17,200
21,200
2,350
1,550
–
2,713,100
6,001
–
2,421,100
5,034
1,361,100
–
6,880
1.91%
.49%
1.01%
.14%
.94%
.28%
For the year ended
2007 vs. 2006
$
8
6
4
4%
(5)%
(1)
(2)
(3)
(4)
Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
AUA – RBC Dexia IS represents the total AUA of the joint venture as at September 30, 2007. We have revised the 2006 amount to reflect the amount reported by RBC Dexia IS, as we had
previously disclosed only the assets under custody amount related to our joint venture.
Average amounts are calculated using month-end spot rates for the year.
64
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Revenue by business line (C$ millions)
2,000
1,600
1,200
800
400
0
2005
2006
2007
RBC Dexia Investor Services
Banking
Financial performance
2007 vs. 2006
Net income decreased $19 million, or 7%, from the prior year. The
decrease was largely attributable to increased provision for credit
losses, primarily reflecting higher impaired loans in our U.S. residential
builder finance business. This was partially offset by strong business
growth in RBC Dexia IS, as well as higher loan and deposit growth in
the U.S. reflecting the inclusion of our acquisitions of Flag and the
AmSouth branches, de novo branch openings and business expan-
sion. Our results also reflected higher costs in support of business
growth and a loss on the restructuring of our U.S. banking investment
portfolio this year.
Total revenue increased $287 million, or 18%, from the prior year.
The increase was primarily attributable to RBC Dexia IS, reflecting
strong market activity, an additional month of results and business
growth. Banking revenue was also up largely due to loan and deposit
growth, mainly reflecting the inclusion of Flag and the AmSouth
branches, despite the negative impact of a stronger Canadian dollar on
the translated value of U.S. dollar-denominated revenue. These factors
were partially offset by a loss on the restructuring of our U.S. banking
investment portfolio this year.
Non-interest expense was up $265 million, or 22%, over the prior
year, largely reflecting higher costs in support of business growth.
The increase primarily reflected higher processing and staff costs at
RBC Dexia IS commensurate with business growth, the inclusion of
our acquisitions of Flag and the AmSouth branches and the related
integration costs, and U.S. de novo branch openings. Higher costs
associated with an additional month of results relating to RBC Dexia IS,
as well as an increase in sales and service personnel in our banking
branch network also contributed to the increase.
Provision for credit losses was up $84 million, largely due to
higher impaired loans in our U.S. residential builder finance business,
reflecting the downturn in the U.S. housing market in the latter part of
the year. As at October 31, 2007, we had $2.8 billion in our U.S. resi-
dential builder finance loans outstanding.
2006 vs. 2005
Net income increased $5 million, or 2%, from 2005, largely reflecting
solid growth and improved credit quality in Banking, partially offset by
transaction expenses related to the transfer of Institutional & Investor
Services to RBC Dexia IS.
Total revenue increased $51 million, or 3%, from 2005, primar-
ily reflecting strong revenue growth in RBC Dexia IS due to increased
business volume. The increase was partially offset by lower Banking
revenue due to the negative impact of a stronger Canadian dollar on the
translated value of U.S. dollar-denominated revenue. In U.S. dollars,
Banking revenue increased $58 million, or 7%, reflecting solid loan and
deposit growth and higher fee-based activities.
Non-interest expense was up $80 million, or 7%, from 2005,
primarily reflecting transaction expenses related to the transfer of IIS
to RBC Dexia IS, as well as higher project-related spending and other
costs in support of business growth.
Provision for credit losses decreased $24 million, or 49%,
compared to 2005, primarily reflecting strong credit quality in our
U.S. banking loan portfolio in 2006.
2008 Outlook and priorities
We continue to see significant opportunities in the U.S. and Caribbean
to expand our Banking business, through a combination of organic
growth and strategic acquisitions. We anticipate that the current
financial market volatility in the U.S. will persist into early 2008, as
investors and lenders will remain cautious and risk averse amid the
continued correction in the U.S. housing market. The anticipated
improved U.S. economic conditions in the latter part of 2008, primarily
underpinned by rising business investment, strong export growth and
continued consumer spending against a backdrop of the abatement of
current financial market volatility and the housing market correction,
should support business and revenue growth. The projected solid
economic growth in Canada and the Eurozone, as well as the increas-
ing trend of outsourcing by fund managers in Canada, the Eurozone
and Asia should continue to support RBC Dexia IS business growth.
Key strategic priorities for 2008
•
•
•
•
Continue implementing our long-term strategy to become the
pre-eminent bank for businesses, business owners and profes-
sionals in the U.S. Southeast.
Efficiently integrate the pending acquisition of Alabama National
BanCorporation for our U.S. banking operations, while retaining
and growing our client base through continuous enhancement of
our products and services and distribution network.
Build on our strong position in the Caribbean to create the lead-
ing bank in the region through the efficient integration of RBTT
Financial Group, which we recently announced our intention to
acquire, subject to closing conditions.
Pursue growth strategies with RBC Dexia IS that focus on
strengthening the global client franchise, broadening its suite of
products through innovation and expanding its presence in high-
growth markets.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
65
Business line review
Banking
Banking consists of our banking operations in the U.S. and Caribbean.
These businesses offer a broad range of banking products and ser-
vices to personal and business clients in their respective markets,
including residential construction finance services. Our U.S. banking
business ranks 5th in deposit market share in North Carolina and
among the top 15 in its U.S. Southeast banking footprint. It has a
network of 350 branches and 395 ATMs. Caribbean banking ranks in
the top three in deposit market share in most of its markets and has
44 branches and 78 ATMs.
Financial performance
Total revenue increased $86 million, or 8%, compared to the prior
year, despite the negative impact of a stronger Canadian dollar on the
translated value of U.S. dollar-denominated revenue. In U.S. dollars,
Banking revenue increased $114 million, or 12%, primarily driven by
solid loan and deposit growth, reflecting the inclusion of Flag and the
AmSouth branches, the 10 U.S. de novo branch openings since last
year and business growth. These factors were partially offset by a
loss on the restructuring of our U.S. banking investment portfolio. Net
interest margin was down 16 bps, largely due to continued competitive
pressure on deposit business, the reversal of accrued interest related
to higher impaired loans this year, and a loss on the early redemption of
trust preferred notes due to the impact of changes in our portfolio mix.
In U.S. dollars, average loans and acceptances and deposits were
up $3 billion (18%) and $2 billion (11%), respectively, from the prior
year. The increase was primarily attributable to growth in loans and
acceptances, and deposits in our U.S. banking operations of 18% and
12%, respectively, reflecting our acquisitions of Flag and the AmSouth
branches, de novo branch openings and business growth. Growth in
loans and acceptances, and deposits in our Caribbean banking opera-
tions of 14% and 8%, respectively, reflecting our continued focus on
enhancing sales management and client satisfaction, also contributed
to the increase.
RBC Dexia Investor Services
Our joint venture, RBC Dexia IS, offers an integrated suite of institu-
tional investor products and services, including global custody, fund
and pension administration, securities lending, shareholder services,
analytics and other related services, to institutional investors world-
wide. RBC Dexia IS was created on January 2, 2006, when we combined
our Institutional & Investor Services (IIS) business with Luxembourg-
based Dexia Funds Services in return for a 50% joint venture interest
in RBC Dexia IS.
Financial performance
Total revenue was up $201 million, or 36%, compared to the prior year.
The increase primarily reflected growth in our custodian and securities
lending business on strong market activity, as well as organic growth
from existing clients and the acquisition of new clients. An additional
month of results reported in the year also contributed to the increase.
Assets under administration were up 12% from a year ago. The
increase was largely attributable to the acquisition of new clients,
largely driven by an increase in sales as a result of our broadened
product and service offerings, organic growth from existing customers
and market appreciation.
66
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Selected highlights
Table 30
$
$
Total revenue (C$ millions)
Other information (US$ millions)
Total revenue
Net interest margin (1)
Average loans and
acceptances (2), (3)
Average deposits (2), (3)
Number of:
Branches
Automated teller machines
2007
2006
2005
1,156 $
1,070 $
1,077
1,059 $
945 $
3.56%
3.73%
887
3.70%
$ 17,800 $ 15,100 $ 14,200
15,500
15,900
17,700
394
473
325
385
315
371
(1)
(2)
(3)
Net interest margin (NIM) is calculated as Net interest income divided by Average
total earning assets. Average total 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 2005 for
netting of a large Caribbean government account effective the fourth quarter of 2005,
which reduced loan and deposit balances by a similar amount.
Average loans and deposits (US$ millions)
20,000
16,000
12,000
8,000
4,000
0
2005 2006 2007
2005 2006 2007
20,000
Loans and acceptances
16,000
Deposits
12,000
8,000
4,000
0
Selected highlights
Table 31
(C$ millions)
2007
2006
2005
Total revenue (1)
Other information
Assets under administration
RBC (2)
RBC Dexia IS (3)
$
759 $
558 $
500
–
2,713,100 2,421,100
– 1,361,100
–
(1)
(2)
(3)
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 comparative purposes. Revenue presented for 2006 rep-
resents 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 twelve months ended
September 30, 2007, as RBC Dexia IS reports on a one month lag.
AUA – RBC represents total Assets under administration (AUA) of our IIS business.
IIS AUA of $1,400 billion was contributed to RBC Dexia IS in exchange for our 50%
ownership interest.
AUA – RBC Dexia IS represents the total AUA of the joint venture as at September 30,
2007. We have revised the 2006 amount to reflect the amount reported by RBC Dexia
IS, as we had previously disclosed only the assets under custody amount related to
our joint venture.
Capital Markets
Capital Markets comprises our global wholesale banking business,
which 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. 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 remain committed to our businesses and will 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.
Highlights
• We completed three acquisitions to access new clients and build
on our capabilities: Carlin Financial Group, a U.S. broker-dealer
known for its proprietary trade execution platform; Daniels &
Associates, L.P., a U.S. merger and acquisition advisory firm; and
Seasongood & Mayer, LLC, a U.S. public finance firm and munici-
pal debt underwriter.
In 2007, we led or jointly led many significant debt and equity new
issuance transactions totalling $184 billion.
•
• We were involved in the top five merger and acquisitions
transactions with Canadian involvement through the first three
calendar quarters of 2007.
• We were named Dealmaker of the Year in Canada for four of the
last five years (Financial Post) and the Best Investment Bank in
Canada (Financial Post and Global Finance magazine).
Capital Markets financial highlights
(C$ millions, except number of and percentage amounts)
Net interest income (1)
Non-interest income
Total revenue (1)
Non-interest expense
Provision for (recovery of) credit losses (PCL)
Net income before income taxes and non-controlling interest in subsidiaries (1)
Net income
Key ratios
Return on equity (2)
Return on risk capital (2)
Selected average balance sheet information (3)
Total assets
Trading securities
Loans and acceptances
Deposits
Attributed capital (2)
Risk capital (2)
Other information
Number of employees (full-time equivalent)
Credit information
Gross impaired loans as a percentage of average net loans and acceptances
Specific PCL as a percentage of average net loans and acceptances
Impact of US$ and British pound translation on selected items (1)
Reduced total revenue (1)
Reduced non-interest expense
Reduced net income
Percentage change in average US$ equivalent of C$1.00 (4)
Percentage change in average British pound equivalent of C$1.00 (4)
Table 32
2007
453
3,936
4,389
2,769
(22)
1,642
1,292
$
$
$
$
2006
131
4,005
4,136
2,603
(115)
1,649
1,355
$
$
$
$
2005
557
3,005
3,562
2,890
(91)
762
686
$
$
$
$
26.6%
32.5%
31.5%
38.7%
17.5%
22.4%
$ 311,200
152,900
29,000
125,700
4,800
3,900
$ 260,600
132,300
22,100
108,100
4,250
3,450
$ 229,100
109,600
17,600
96,500
3,850
3,050
3,364
2,936
.06%
(.08)%
.28%
(.52)%
2,762
.67%
(.52)%
For the year ended
2007 vs. 2006
$
70
15
30
4%
(5)%
(1)
(2)
(3)
(4)
Taxable equivalent basis. For further discussion, refer to the How we measure and report our business segments section.
Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Average amounts are calculated using month-end spot rates for the year.
Revenue (1) by business line (C$ millions)
Revenue (1) by geography (C$ millions)
5,000
4,000
3,000
2,000
1,000
0
Other
GIBEM
Global Markets
5,000
4,000
3,000
2,000
1,000
0
Other
Europe
U.S.
Canada
2005
2006
2007
2005
2006
2007
(1)
Taxable equivalent basis. For further discussion, refer to the How we measure and report our business segments section.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
67
Economic and market review
Capital markets were generally favourable for the first part of 2007;
however, a sudden and deep deterioration in the U.S. subprime resi-
dential mortgage-backed securities (RMBS) market in the latter part
of 2007 had negative effects on the broader credit markets. This was
characterized by significant credit spread widening, increased volatil-
ity in global equities, the credit rating agency downgrades of a broad
group of collateralized debt obligations of asset-backed securities
(CDOs of ABS) and U.S. RMBS instruments and a general lack of liquid-
ity across a broad range of products including securities with strong
credit ratings. The severe disruption in financial markets contributed
to substantial writedowns and negatively impacted the effective-
ness of hedging strategies for certain credit related products. Global
central banks continued to provide liquidity to financial markets in an
effort to minimize the impact of the market dislocation on the broader
economy, including a 75 bps aggressive reduction in its overnight bor-
rowing rate by the U.S. Federal Reserve during the fourth quarter of
2007. Lower levels of liquidity coupled with increased financial market
volatility contributed to lower levels of origination activity compared
to 2006. M&A activity remained strong for most of the year. The stron-
ger Canadian dollar negatively impacted the translated value of our
U.S. dollar-denominated earnings.
Financial performance
2007 vs. 2006
Net income decreased $63 million, or 5%, compared to a year ago
largely due to writedowns recorded in the current year totalling
$357 million on the valuation of U.S. subprime RMBS and CDOs of ABS
in our Structured Credit business. The writedowns reflected the dete-
rioration in the credit markets in the latter part of 2007 as a result of
concerns over the U.S. subprime market, a general lack of liquidity and
the recent credit rating agency downgrades of a broad group of CDOs
of ABS and U.S. RMBS instruments. The negative impact of the stron-
ger Canadian dollar on the translated value of U.S. dollar-denominated
earnings also contributed to the decrease. These factors were partially
offset by broad-based revenue growth in many other businesses. The
writedowns of $357 million were offset by a $119 million compensa-
tion adjustment and $78 million income tax adjustment for a net
impact of $160 million.
Total revenue increased $253 million, or 6%. The increase was pri-
marily due to increased equity derivatives and foreign exchange trading
revenue, strong equity origination activity across all geographies and
the inclusion of our recent acquisitions. Higher M&A activity, mainly in
the U.S. gains associated with credit derivative contracts used to
economically hedge our core lending portfolio reflecting the widening
of credit spreads, and higher distributions on private equity invest-
ments also contributed to the increase. These factors were partially
offset by lower trading revenue in our fixed income businesses reflect-
ing the writedowns on the valuation of U.S. subprime RMBS and CDOs
of ABS, the negative impact of the stronger Canadian dollar on the
translated value of U.S. dollar-denominated revenue and lower U.S.
debt origination results due in part to the tightening of credit markets in
the latter part of 2007.
Non-interest expense increased $166 million, or 6%, primarily
reflecting increased costs in support of business growth, including
higher staffing levels and the inclusion of our recent acquisitions.
These factors were partially offset by lower variable compensation
commensurate with weaker results and lower professional fees.
Recovery of credit losses of $22 million in the current year com-
pares to a recovery of credit losses of $115 million in the prior year,
which included a $50 million reversal of the general allowance.
Average assets were up $51 billion, or 19%, mainly due to
increased trading securities primarily resulting from growth in certain
equity trading strategies and in our fixed income trading businesses.
Loans and acceptances increased $7 billion, or 31%, mainly related to
strong investment banking activity and growth in our Infrastructure
Finance business. Deposits increased $18 billion, or 16%, primarily
due to increased funding requirements of our trading businesses.
Credit quality remained strong as gross impaired loans decreased
$43 million, or 72%, from a year ago.
2006 vs. 2005
Net income increased $669 million, or 98%, compared to 2005
primarily due to the prior year Enron litigation-related provision of
$591 million ($326 million after-tax). Also contributing to the increase
were 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 and the negative
impact of a stronger Canadian dollar on the translated value of our
U.S. dollar- and British pound-denominated earnings.
Total revenue increased $574 million, or 16%. The increase was
primarily due to record trading results on improved market conditions
and growth in certain equity trading strategies and stronger M&A activ-
ity. 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 sec-
tor. Debt origination fees were also down, mainly in the U.S., due to the
rising interest rate environment and further weakening of the U.S. dollar.
Non-interest expense decreased $287 million, or 10%, largely
reflecting the Enron litigation-related provision recorded in 2005 and
the favourable reduction in the translated value of U.S. dollar- and
British pound-denominated expenses due to the stronger Canadian
dollar. Higher variable compensation on stronger business perfor-
mance and higher spending in support of business growth initiatives
partly offset the decrease.
Recovery of credit losses of $115 million in 2006, including a
$50 million reversal of the general allowance, compared to a recovery
of credit losses of $91 million in 2005.
2008 Outlook and priorities
Credit market and liquidity concerns should abate as capital markets
stabilize globally and gradually return to more normal levels of activity.
The expected gradual improvement in market conditions should result
in the recovery of underperforming businesses. In Canada, we will con-
tinue to build on our leadership position, while in the U.S. we remain
focused on leveraging the strengths of recent acquisitions continuing
to build our mid-market franchise and expanding into new sectors.
Internationally, we will strategically expand our global capabilities,
including strengthening our Infrastructure Finance business and
expanding the distribution of structured and fixed income products into
Asian markets. Our deal pipeline should remain fairly healthy and is
expected to continue to grow; however, conversion remains a concern.
Key strategic priorities for 2008
• Maintain our leadership position in Canada and deepen our
•
•
•
•
penetration in the Canadian mid-market segment.
Continue to grow our Municipal Products business with the
recently acquired platform of Seasongood & Mayer, expand our
banking activities geographically and develop new product seg-
ments in the U.S.
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, an area of
strength for us.
68
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
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 opera-
tions, alternative asset and private equity businesses.
Financial performance
Global Markets revenue decreased $124 million, or 5%, from a year
ago. Trading-related revenue was down $94 million, or 4%, primarily
due to lower trading revenue in certain fixed income business as a
result of writedowns totalling $357 million on the valuation of U.S. sub-
prime RMBS and CDOs of ABS in our Structured Credit business. This
was partially offset by higher equity derivatives and foreign exchange
trading revenue due to business expansion and increased market vola-
tility. Other revenue was down $30 million from a year ago largely due
to lower private equity investment gains.
We led or jointly led 1,005 debt issues, up from 615 deals
a year ago, with a total value of approximately $164 billion, and in
Municipal Finance, we were involved in 779 issues with a total value
of US$81 billion through October 2007.
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.
Given the significant growth in our National Clients business, we
transferred this business from Other to Global Investment Banking
and Equity Markets in the second quarter of 2007.
Financial performance
Global Investment Banking and Equity Markets revenue increased
$293 million, or 21%, compared to the prior year. Gross underwriting
and advisory revenue was up $166 million, or 25%, largely reflecting
strong equity origination activity across all geographies and improved
M&A activity mainly in the U.S. Equity sales and trading revenue
increased $92 million, or 33%, mainly due to the inclusion of our
recent acquisitions, while Other revenue was up $35 million, or 8%,
primarily reflecting higher private equity distributions and increased
lending activity.
In 2007, we advised on 98 announced M&A deals with a total
value of $190 billion. In 2007, we led or co-led 142 equity and
equity-related new issues with a total market value of $20 billion,
up from 82 in the prior year.
Selected highlights
Table 33
(C$ millions)
Total revenue (1)
Other information
Trading-related
Other (2)
2007
2006
2005
$
2,455 $
2,579 $
2,256
2,060
395
2,154
425
1,706
550
(1)
Taxable equivalent basis. For further discussion, refer to the How we measure and
report our business segments section.
(2) Other includes debt origination, municipal products, gains/losses on private equity
instruments, derivatives non-trading and securitization revenue.
Trading-related and Other revenue (C$ millions)
Other
Trading-related
3,000
2,400
1,800
1,200
600
0
2005
2006
2007
Selected highlights
Table 34
(C$ millions)
2007
2006
2005
Total revenue (1)
Other information
Gross underwriting and
advisory fees
Equity sales and trading
Other (2)
$
1,675 $
1,382 $
1,098
831
375
469
665
283
434
598
252
248
(1)
(2)
Taxable equivalent basis. For further discussion, refer to the How we measure and
report our business segments section.
Other includes increases in private equity distributions, growth in revenue
associated with our core lending portfolio and syndicated finance and the gain on the
exchange of our NYSE seats for NYX shares.
Gross underwriting and advisory fees, equity sales and trading,
and Other revenue (C$ millions)
2,000
1,600
1,200
800
400
0
2005
2006
2007
Equity sales and trading
Other
Gross underwriting and
advisory fees
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
69
Other
Other consists of our remaining businesses including our Global Credit
business, which oversees the management of our core lending port-
folios and manages our non-strategic lending portfolio. Global Credit
also includes our Global Financial Institutions business which delivers
innovative and creative solutions to global financial institutions includ-
ing correspondent banking, treasury and cash management services.
Research offers economic and securities research products to institu-
tional clients in Canada and globally.
Financial performance
Revenue from Other was $259 million, an increase of $84 million, or
48%, over the prior year. The increase mainly reflected gains associ-
ated with credit derivative contracts used to economically hedge our
core lending portfolio reflecting the widening of credit spreads and
increased revenue in our Global Financial Institutions business due to
higher deposit balances.
Corporate Support
Corporate Support segment activities include our global technology
and operations group, corporate treasury, finance, human resources,
risk management, internal audit and other global functions, the costs
of which are largely allocated to the business segments.
The reported results for the Corporate Support segment mainly
reflect activities that are undertaken for the benefit of the organiza-
tion, and which are not allocated to the business segments such as
enterprise funding, securitization and the net charges associated
with unattributed capital. The results also include consolidation
adjustments including the elimination of the teb adjustments recorded
in Capital Markets related to the gross-up of income from Canadian
taxable corporate dividends to their taxable equivalent value. These
adjustments are recorded in net interest income and offset in the
provision for income taxes.
Due to the nature of activities and consolidated adjustments
reported in this segment, we believe that a year-over-year trend analy-
sis is not relevant. The following identifies the material items affecting
the reported results in each year.
Corporate Support financial highlights
(C$ millions)
Net interest income (1)
Non-interest income
Total revenue (1)
Non-interest expense
Recovery of credit losses
Business realignment charges
Net loss before income taxes and non-controlling interest in subsidiaries (1)
Net income (loss)
Selected average balance sheet and other information (2)
Total assets
Attributed capital (3)
Securitization
Total securitizations sold and outstanding (4)
New securitization activity in the year (5)
Other information
Number of employees (full-time equivalent)
Table 35
2007
2006
2005
(732) $
377
(355) $
36
(85)
–
(306) $
$
209
(488) $
178
(310) $
36
(86)
–
(260) $
$
111
(294)
190
(104)
61
(47)
39
(157)
(14)
(6,500) $
2,950
(5,400) $
3,100
(4,000)
2,800
17,889
4,264
$ 1 5,836
6,142
$
11,587
3,821
$
$
$
$
$
$
19,485
18,393
17,785
(1)
(2)
(3)
(4)
(5)
Taxable equivalent basis. For further discussion, refer to the How we manage and report our business segments section. These amounts included the elimination of the adjustment
related to the gross-up of income from Canadian corporate dividends of $332 million in 2007 recorded in Capital Markets (2006 – $213 million, 2005 – $109 million).
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
For further discussion, refer to the Key performance and non-GAAP measures section.
Total securitizations sold and outstanding comprises credit card loans and residential mortgages.
New securitization activity comprises residential mortgages and credit card loans securitized and sold in the year. For further details, refer to Note 5 to our Consolidated Financial
Statements.
2007
Net income of $209 million for the year included income tax amounts
largely related to enterprise funding activities that were not allocated
to the business segments and favourable income tax settlements
related to prior years. These factors were partially offset by the
mark-to-market losses mainly related to the recognition of the inef-
fectiveness of hedged items and the related derivatives in hedge
accounting relationships, a cumulative adjustment for losses result-
ing from the fair valuing of certain derivatives that did not qualify for
hedge accounting and higher capital taxes that were not allocated to
the business segments.
2006
Net income of $111 million for the year mainly reflected income tax
amounts which were largely related to enterprise funding activities
70
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
and the favourable resolution of income tax audits related to prior
years not allocated to the business segments. Mark-to-market gains
on derivatives related to certain economic hedges also contributed to
net income in the year. These factors were partially offset by the timing
of securitization activity and an amount accrued related to a leased
space which we will not occupy and expect to sublease at a rate lower
than our contracted rate.
2005
Net loss of $14 million largely reflected business realignment charges
of $39 million, and mark-to-market losses on derivatives relating to
certain economic hedges, which were partially offset by securitization
activity and interest refunds relating to the resolution of disputed tax
items for the 1993 to 1998 tax periods.
Financial condition
Balance sheet
(C$ millions)
Interest-bearing deposits with banks
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
Other assets
Total assets
Deposits
Other liabilities
Non-controlling interest in subsidiaries
Shareholders’ equity
Table 36
As at October 31
2007
2006
$ 11,881
178,255
64,313
239,429
103,735
600,346
365,205
201,284
1,483
24,439
$ 10,502
184,869
59,378
209,939
69,100
536,780
343,523
160,575
1,775
22,123
With the adoption of the new financial instruments accounting stan-
dards, certain financial instruments are now measured at fair value
that were previously reported at cost or amortized cost. As a result, a
greater portion of our Consolidated Balance Sheet is now measured at
fair value, including certain derivative instruments. For further details,
refer to the Critical accounting policies and estimates section as well
as Notes 1 and 2 to our Consolidated Financial Statements.
2007 vs. 2006
Total assets were up $64 billion, or 12%, from a year ago, driven by
growth across most asset categories. The increase was largely attrib-
utable to solid loan growth, including Canadian residential mortgages
and personal and business loans, amid generally favourable domes-
tic market conditions. Higher balances related to derivative-related
amounts, primarily reflecting changes in market conditions, also con-
tributed to the increase.
Interest-bearing deposits with banks increased $1 billion, or
13%, from the prior year, largely reflecting a shift in our portfolio mix
to higher-yielding assets.
Securities were down $7 billion, or 4%, from a year ago, primarily
due to a strategic reduction in our positions taking into account recent
financial market volatility, and the impact of a stronger Canadian dollar
on the translated value of U.S. dollar-denominated securities.
Assets purchased under reverse repurchase agreements and
securities borrowed increased $5 billion, or 8%, from a year ago. This
growth primarily reflected higher balances in support of our equity and
fixed income trading strategies.
Loans increased $29 billion, or 14%, from a year ago, reflecting
past 12 months) and personal loans, largely driven by demand for
home equity lending amid continued strong Canadian housing market
activities, relatively low interest rates in a historical context and strong
labour market conditions. Solid growth in our wholesale loans of
$11 billion, or 19%, mainly reflecting continued growth in corporate
lending also contributed to the increase.
Other assets were up $35 billion, or 50%. The growth was mainly
attributable to an increase in derivative-related amounts primarily
in foreign exchange and interest rate contracts, reflecting increased
volatility, strong shifts in exchange rates and interest rates, as well as
higher client and trading activity. These factors were partially offset by
the impact of a stronger Canadian dollar on the translated value of U.S.
dollar-denominated derivative-related assets.
Deposits increased $22 billion, or 6%, from a year ago. The
growth was largely due to increased business and government depos-
its mainly reflecting higher balances in support of business activities,
increased balances at RBC Dexia IS, and domestic business growth.
Higher personal deposits in part driven by the success of our recently
launched high-interest online savings account also contributed to the
increase. These factors were partially offset by a reduction in interest-
bearing deposits with banks in part reflecting our lower funding
requirements compared to a year ago.
Other liabilities rose $41 billion, or 25%, from last year. The
increase was mainly due to derivative-related amounts, primarily
reflecting the same factors noted above in derivative-related assets.
Increased securities sold short, mainly reflecting business growth and
higher balance in support of our fixed income trading strategies, also
contributed to the increase.
increases across all categories. The largest growth was attributable to
Canadian residential mortgages, which increased $13 billion, or 14%
(despite the offsetting effect of $13 billion of securitizations over the
Shareholders’ equity increased $2 billion, or 10%, over the prior
year. The growth largely reflected strong earnings growth, net of divi-
dends, and a $1 billion net issuance of preferred shares since last year.
Capital management
Capital management framework
We actively manage our capital to balance the desire to maintain
strong capital ratios and high ratings with the objective of providing
strong returns to our shareholders. In striving to achieve this balance,
we consider the requirements of regulators, rating agencies, deposi-
tors and shareholders, as well as our future business plans, peer
comparisons and our position relative to internal targets for capital
ratios. Additional considerations include the costs and terms of current
and potential capital issuances, and projected capital requirements.
Our capital management framework provides the policies and
processes for defining, measuring, raising and investing all forms of
capital in a co-ordinated and consistent manner. We manage and moni-
tor our capital from several perspectives, including:
(i) Regulatory capital: capital required for regulatory compliance
defined in accordance with the Office of the Superintendent of
Financial Institutions Canada (OSFI) criteria;
(ii) Economic Capital: an internal assessment of the amount of equity
capital required to underpin our risks; and
(iii) Subsidiary capital: the amount of regulatory capital invested
in subsidiaries.
This co-ordinated approach to capital management serves an impor-
tant business function. Our goal is to optimize our capital usage and
structure and provide efficient support for our business segments and
clients and better returns for 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, in conjunction with our operating plan.
The Audit Committee is responsible for the governance of capital man-
agement, which includes the approval of capital management policies,
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
71
the regular review of our capital position and liquidity, funding and
capital management processes, and the ongoing review of internal
control over financial reporting. In addition, the OSFI meets with
our Audit Committee and the Conduct Review and Risk Policy
Committee (CR&RPC) to discuss policies and procedures regarding
capital management.
The Asset & Liability Committee and the Group Executive share
management oversight responsibility for capital management and
receive regular reports detailing compliance with the established lim-
its and guidelines. Corporate Treasury and Group Risk Management
(GRM) are responsible for the design and implementation of policies
for regulatory, economic and subsidiary capital.
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 (6)
Commitments to extend credit
Liquidity facilities
Note issuances and revolving underwriting facilities
Risk-adjusted assets (RAA)
Under the current Basel I framework, the calculation of RAA is deter-
mined by the OSFI-prescribed rules relating to on-balance sheet and
off-balance sheet exposures and includes an amount for the market
risk exposure associated with our trading portfolios.
During the year, RAA increased by $23.9 billion, with strong
growth across most categories including loans, mortgages, and off-
balance sheet derivative instruments. However, growth in nominal
assets was partially offset by the impact of a stronger Canadian dollar
on the translated value of our foreign currency-denominated assets.
Balance
sheet amount
Weighted
average of
risk weights (2)
Table 37
Risk-adjusted balance
2007
2006
$
16,107
18%
$
2,852
$
2,322
16,858
161,591
27,994
81,713
32,577
171,422
92,100
$ 600,362
Credit
equivalent
amount (5)
$ 19,758
100
36,187
21,954
4,826
–
$ 82,825
–
6%
1%
40%
17%
69%
11%
52
9,495
3
55
32,885
5,651
118,723
10,487
42
7,811
363
27,921
3,848
107,336
10,609
$ 180,500
$ 160,252
60%
78%
3%
85%
98%
–
$ 11,807
78
962
18,752
4,746
–
$ 14,092
65
3,022
16,666
4,413
4
$ 36,345
$ 38,262
Derivatives (7)
57,973
25%
14,457
10,432
Total off-balance sheet financial instruments
$ 140,798
$ 50,802
$ 48,694
Total specific and general market risk
Total risk-adjusted assets
16,333
14,763
$ 247,635
$ 223,709
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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.
The amount of credit exposure attributable to an off-balance sheet financial instrument, derived from the notional value of the exposure.
In 2007, we implemented a new trading credit risk system in our London office that enables clearer identification of these balances, resulting in a lower risk-adjusted balance.
Excludes non-trading credit derivatives given guarantee treatment for credit risk capital purposes.
Regulatory capital and capital ratios
Capital levels for Canadian banks are regulated pursuant to guide-
lines issued by the OSFI, based on standards issued by the Bank for
International Settlements. Regulatory capital is allocated to two tiers:
Tier 1 and Tier 2. Tier 1 capital comprises the more permanent com-
ponents of capital and consists primarily of common shareholders’
equity, non-cumulative preferred shares, the majority of which do not
have conversion features into common shares, and the eligible amount
of innovative capital instruments. In addition, goodwill is deducted
from Tier 1 capital.
Tier 2 capital consists mainly of subordinated debentures, trust
subordinated notes, the eligible amount of innovative capital instru-
ments 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 pre-
scribed by the OSFI. For further details on the terms and conditions of
our non-cumulative preferred shares and innovative capital instruments,
refer to Notes 17 and 18 of our Consolidated Financial Statements.
Regulatory capital ratios are calculated by dividing Tier 1 and
Total capital by RAA. The OSFI formally establishes risk-based capital
targets for deposit-taking institutions in Canada. These targets are
currently 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 are
required to ensure that their assets-to-capital multiple, which is
calculated by dividing gross adjusted assets by Total capital, does not
exceed a maximum level prescribed by the OSFI.
The components of regulatory capital and our regulatory capital
ratios are shown in the following table.
72
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Regulatory capital and capital ratios (1)
(C$ millions, except percentage amounts)
Tier 1 capital
Common equity (2)
Non-cumulative preferred shares
Trust capital securities
Other non-controlling interest in subsidiaries
Goodwill
Tier 2 capital
Permanent subordinated debentures (3)
Non-permanent subordinated debentures (3)
General allowances
Trust capital securities (excess over 15% Tier 1)
Trust subordinated notes
Accumulated net unrealized gain on available-for-sale equity securities (4)
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 38
2007
2006
$ 22,272
2,344
3,494
25
(4,752)
$ 21,065
1,345
3,222
28
(4,182)
23,383
21,478
–
779
5,473
1,221
1,027
105
8,605
839
6,313
1,223
249
–
–
8,624
(2,912)
(505)
(2,795)
(643)
$ 28,571
$ 26,664
9.4%
11.5%
19.9X
9.6%
11.9%
19.7X
(1)
(2)
(3)
(4)
As defined in the guidelines issued by the OSFI.
This amount is Shareholders’ equity less preferred shares of $2,050 million and other items not included in regulatory capital of $117 million.
Subordinated debentures that are within five years of maturity are subject to straight-line amortization to zero during their remaining term and, accordingly, are included above at their
amortized value.
As prescribed by the OSFI, certain components of Accumulated other comprehensive income (AOCI) are included in the determination of regulatory capital. Accumulated net foreign cur-
rency translation adjustments are included in Tier 1 capital in common equity. Net unrealized fair value losses on available-for-sale (AFS) equities are deducted in the determination of
Tier 1 capital while net unrealized fair value gains on AFS equities are included in Tier 2 capital.
Tier 1 capital ratio
12%
9%
6%
3%
0%
9.7%
8.9%
9.6%
9.6%
9.4%
2003
2004
2005
2006
2007
Selected capital management activity
(C$ millions)
Dividends
Common
Preferred
Common shares issued (1)
Repurchase of common shares – normal course issuer bid (2)
Preferred shares issued
Preferred shares redeemed
Subordinated debentures issued
Repurchase and redemption of debentures (3)
Issuance of Trust subordinated notes (4)
(1)
(2)
(3)
(4)
Represents cash received for stock options exercised during the year.
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.
As at October 31, 2007, the Tier 1 capital ratio was 9.4% and the Total
capital ratio was 11.5%.
The Tier 1 capital ratio was down 20 bps from a year ago. The
decrease was largely due to business growth, including acquisitions,
which resulted in an increase in RAA and a higher goodwill deduction
from capital. The impact of our common share repurchases under our
normal course issuer bid also contributed to the decrease. These fac-
tors were partially offset by strong generation of capital from earnings
and the issuance of preferred shares.
The Total capital ratio was down 40 bps from a year ago due to
growth in RAA and the redemption of subordinated debentures. These
factors were partially offset by the issuance of trust subordinated notes.
As at October 31, 2007, our assets-to-capital multiple was
19.9 compared to 19.7 a year ago. Our assets-to-capital multiple
remains below the maximum of 23 that is allowed by the OSFI.
$
Table 39
2007
2006
$
2,321
88
152
(646)
1,150
(150)
87
(985)
1,000
1,847
60
115
(844)
600
(250)
–
(955)
–
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
73
In 2007, we undertook several initiatives to support the effective man-
agement of our capital.
Tier 1
In 2007, we repurchased 11.8 million common shares for $646 million
under our NCIB that expired on October 31, 2007. Effective November 1,
2007, we renewed our NCIB to repurchase up to 20 million common
shares, or 1.6%, of our outstanding common shares as at October 31,
2007. This NCIB will expire on October 31, 2008.
On April 26, 2007, we issued $250 million of Non-cumulative
First Preferred Shares Series AG at $25 per share.
On March 14, 2007, we issued $200 million of Non-cumulative
First Preferred Shares Series AF at $25 per share.
On January 19, 2007, we issued $250 million of Non-cumulative
First Preferred Shares Series AE at $25 per share.
On December 13, 2006, we issued $250 million of Non-
cumulative First Preferred Shares Series AD 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.
On November 1, 2006, we issued $200 million of Non-cumulative
First Preferred Shares Series AC at $25 per share.
Tier 2
During the year, we purchased US$24 million of our outstanding
US$300 million floating rate debentures maturing in 2085.
On June 26, 2007, we issued JP¥10 billion (C$87 million) Japanese
Yen-denominated subordinated debentures.
On June 4, 2007, we redeemed all of our outstanding $500 million
subordinated debentures due June 4, 2012, at par value plus accrued
interest.
On April 30, 2007, we issued $1 billion of subordinated deben-
tures through RBC Subordinated Notes Trust, a closed-end trust wholly
owned by us.
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 2007 was 40% to 50%. In 2007, the dividend
payout ratio was 43%, up from 40% in 2006. Common share dividends
paid during the year were $2.3 billion, up 26% from a year ago.
Share data and dividends
Table 40
(C$ 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
2007
2006
2005
First Preferred (1)
Non-cumulative Series N
Non-cumulative Series O
Non-cumulative Series S
Non-cumulative Series W
Non-cumulative Series AA
Non-cumulative Series AB
Non-cumulative Series AC
Non-cumulative Series AD
Non-cumulative Series AE
Non-cumulative Series AF
Non-cumulative Series AG
12,000
–
–
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
$
300
–
–
300
300
300
200
250
250
200
250
$
1.18
–
–
1.23
1.11
1.18
1.22
1.06
.95
.77
.65
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
–
–
–
–
–
–
–
Total First Preferred
$ 2,350
$ 1,350
$ 1,000
Common shares outstanding
Treasury shares – preferred
Treasury shares – common
Stock options
Outstanding
Exercisable
1,276,260
(249)
(2,444)
$ 7,300
(6)
(101)
$ 1.82 1,280,890
(94)
(5,486)
$ 7,196
(2)
(180)
$ 1.44 1,293,502
(91)
(7,053)
$ 7,170
(2)
(216)
26,623
21,924
32,243
26,918
36,481
28,863
$
1.18
1.38
1.53
.99
–
–
–
–
–
–
–
$
1.18
(1)
As at October 31, 2007, the aggregate number of common shares issuable on the conversion of the First Preferred Shares Series N was approximately 5,743,000. As at October 31, 2007,
the First Preferred Shares Series W was not yet convertible. The other preferred shares do not have conversion options.
As at November 23, 2007, the number of outstanding common shares
and stock options were 1,276,292,000 and 26,591,000, respectively.
As at November 23, 2007, the number of Treasury shares – preferred
and Treasury shares – common were 263,000 and 2,775,000,
respectively. For further information about our share capital, refer to
Notes 18 and 21 to our Consolidated Financial Statements.
74
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Hedging foreign currency-denominated operations
Increasing amounts of U.S. dollar-denominated assets and deduc-
tions from regulatory capital prompted our development of a policy
for hedging our foreign exchange exposure with respect to our foreign
operations. The objectives of our hedging policy are: (i) stabilization of
our consolidated regulatory capital ratios from currency fluctuations,
and (ii) mitigation of potential earnings volatility that might result
if we dispose of these investments in foreign operations. When the
Canadian dollar strengthens/weakens against other currencies, the
losses/gains on net foreign investments reduce/increase our capital,
as well as our RAA and goodwill of the foreign currency-denominated
operations. Selecting an appropriate level of hedging for our invest-
ment in foreign operations ensures that our regulatory capital ratios
are not materially impacted by currency fluctuations due to the offset-
ting impact of the proportionate movements in the assets and capital.
Hedging our operations denominated in foreign currencies
promotes orderly and efficient capital management. It facilitates com-
pliance with regulatory requirements on an ongoing basis and enables
us to maintain greater control over key capital ratios, thereby reducing
the need for capital transactions in response to currency fluctuations.
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 con-
ditions, given our desire to maintain a debt rating of at least AA.
Economic Capital is attributed to each business segment in proportion
to management’s assessment of the risks. It allows for comparable
performance measurements among our business segments through
Return on Equity (ROE) and Return on Risk Capital (RORC), which are
described in detail in the Key performance and non-GAAP measures
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, rec-
ognizing that factors outside the scope of Economic Capital must also
be taken into consideration.
Economic Capital is also used to assess the adequacy of our
capital base. Our policy is to maintain a level of common equity and
other instruments with equity-like permanence and loss absorption
features that exceed Economic Capital with a comfortable cushion.
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
Economic Capital
Unattributed capital
Common equity
Economic Capital is calculated and attributed on a wider array
of risks than is regulatory capital, which is primarily limited to credit,
market (trading) and, under Basel II, operational risk. Economic
Capital also includes goodwill and intangibles. The identified risks
(described below) for which we calculate Economic Capital are credit,
market (trading and non-trading), operational, business, fixed asset,
and insurance. Additionally, Economic Capital allows for diversification
benefits across risks and business segments.
•
Credit risk is the risk of loss associated with a counterparty’s
inability or unwillingness to fulfill its payment obligations.
•
• Market risk is the risk of loss that may arise from changes in
market factors such as interest rates, foreign exchange rates,
equity or commodity prices, or the volatility of these factors, in
both banking and trading books. Market risk can be exacerbated
by thinly traded or illiquid markets.
Operational risk is 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 assumptions
made in insurance product design and pricing activities differ
from actual experience.
•
•
•
For further discussion of credit, market, operational and insurance
risk, refer to the Risk management section.
The calculation and attribution of Economic Capital involves a
number of assumptions and judgments. The methodologies are con-
tinually monitored to ensure that the Economic Capital framework
is comprehensive and consistent. Economic Capital measurement
models and techniques are developed by GRM and are subject to inde-
pendent assessment for appropriateness and reliability. The models
are continually benchmarked to leading industry practices via partici-
pation in surveys, reviews of methodologies and ongoing interaction
with external risk-management industry professionals. The models
and input parameters are subject to independent vetting and valida-
tion, as per internal model risk policies.
$
2007
6,850
2,700
2,750
2,000
150
$
Table 41
2006
5,800
2,500
2,450
1,800
200
$ 14,450
5,550
$ 12,750
4,650
$ 20,000
2,000
$
17,400
2,500
$ 22,000
$ 19,900
Economic Capital increased $2.6 billion from a year ago largely due
to increases in Credit risk capital, Goodwill and intangibles and
Operational risk capital. The increases in Credit risk and Operational
risk capital were primarily due to business growth including the impact
of our acquisitions of Flag, the AmSouth branches and Carlin. Goodwill
and intangibles increased primarily as a result of these acquisitions,
which were partially offset by the favourable impact of a stronger
Canadian dollar on the translated value of foreign currency-
denominated assets.
We remain well capitalized with current levels of qualified equity
exceeding the Economic Capital required to underpin all of our risks.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
75
Subsidiary capital
Management of consolidated capital has become a strategic objec-
tive for us as the amount of capital deployed in subsidiaries to build
their businesses has grown in order to maximize profits and returns
to our 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.
At the same time, subsidiaries should be sufficiently capitalized on
a stand-alone basis and in compliance with local regulatory require-
ments at all times. In addition to minimum capital requirements, these
local regulations may include restrictions on the transfer of assets in
the form of cash, dividends, loans or advances. For further details,
refer to Note 18 to our Consolidated Financial Statements. To balance
these regulatory requirements and facilitate the co-ordinated genera-
tion and allocation of capital across the enterprise, we have put in
place a comprehensive subsidiary capital management framework.
This framework sets guidelines for defining capital investments in our
subsidiaries and establishes an overall limit for total investment in
those subsidiaries.
While each of our subsidiaries has individual responsibility for
calculating, monitoring and maintaining capital adequacy in compli-
ance with the laws and regulations of its local jurisdiction, Corporate
Treasury is mandated to provide centralized oversight and consoli-
dated capital base management across various entities.
Other considerations affecting capital
Transition to Basel II
Beginning in the first quarter of 2008, as a result of the OSFI’s adop-
tion of new guidelines based on “International Convergence of
Capital Measurement and Capital Standards: A Revised Framework –
Comprehensive Version (June 2006),” known as Basel II, Canadian
banks will be required to calculate and report their regulatory capital
ratios under new measurement standards. We intend to adopt the
Advanced Internal Ratings Based (AIRB) Approach for credit risk and,
initially, the Standardized Approach for operational risk. There will be
no changes in the treatment of market risk. For details on our Basel II
risk approaches, refer to the Risk management section.
As part of the Basel II process, Canadian banks must demonstrate
to the OSFI that they have met the AIRB requirements and that their
capital reporting is accurate and of high quality. The OSFI has been
engaged in extensive AIRB approval reviews throughout 2007. Our
final application package, for adoption of the AIRB Approach for most
material portfolios, was submitted to the OSFI on October 31, 2007
and the formal approval decision is expected by December 31, 2007.
Once we achieve full compliance with the AIRB requirements and the
OSFI has agreed, we may proceed to reflect capital below Basel I levels,
subject to a two-year transitional floor requirement where our capital
must reflect 90% and 80% of our Basel I capital charges. As required
by the OSFI since November 1, 2006, we have been calculating capital
requirements in parallel under both the Basel I and Basel II rules.
Also, the OSFI has made some allowances for staged implemen-
tation. In particular, the OSFI has approved a waiver for RBC Centura
Bank to use the Standardized Approach for credit risk until 2010.
We have also been granted an extension (applicable to non-North
American portfolios) for RBC Dexia IS, which plans to implement the
AIRB approach by June 2008. Additionally, the OSFI has approved an
exemption for our Caribbean banking operations to report under the
Standardized Approach as long as that portfolio remains non-material
(defined as 1% or less of total balance sheet and credit equivalent
amounts).
Notwithstanding that our risk and capital management processes
were already substantially consistent with the principles embodied in
Basel II, we have introduced new policies and enhanced practices, as
appropriate, to facilitate transition to Basel II. These include meeting
requisite standards for:
•
•
risk rating system design and operation
risk quantification, validation, and use of rating systems and
internal ratings
corporate governance and oversight
•
76
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
•
implementation of a robust internal capital adequacy assessment
process (ICAAP).
Our approach to capital adequacy is a co-ordinated effort involv-
ing functional units such as GRM, Corporate Treasury, and Finance.
Currently, GRM works in partnership with our businesses to identify,
measure, mitigate and monitor all forms of risk, as described in the
Risk management section. Capital adequacy is assessed and deter-
mined with consideration of the full range of risk controls and capital
management tools available to us. We view capital adequacy as a
dynamic process that considers multiple variables, including earnings,
asset growth and capital transactions, within regulatory and financial
market constraints in order to meet strategic goals.
Our initial ICAAP was presented to the Audit Committee in
October 2007. This ICAAP incorporates senior management oversight,
comprehensive risk-based stress testing of regulatory capital require-
ments and our own assessment of risk based on Economic Capital,
which is expected to play a greater role in capital adequacy assess-
ments under Basel II.
Our ICAAP demonstrates that we are well capitalized, having
enough capital to meet management’s assessment of required
capital under both normal market conditions and a range of severe but
plausible stress testing scenarios. It serves as an important tool in the
establishment of our internal capital ratios target within the broader
context of our capital management framework, and will be subject to
annual review and ongoing development.
In addition to our ICAAP, several of our subsidiaries are required to
submit entity level ICAAPs to local regulators. While these assessments
are the responsibility of the respective subsidiaries, Corporate Treasury
liaises with subsidiaries to ensure enterprise-wide consistency.
Our implementation of Basel II will produce capital requirements
that may differ from those calculated under the current Basel I frame-
work. For the most part, this reflects a shift in calculation methodology
from application of prescribed risk weights to processes that are
more closely aligned with our internal risk management practices.
Also, Basel II incorporates a specific charge for operational risk that
is not currently required under Basel I. As Basel II will be applied on a
prospective basis, comparability to historical data and capital ratios
reported under Basel I may be difficult.
Disclosure requirements under Basel II will begin with our first
quarter 2008 financial disclosure, and will continue to evolve over
2008, with all quantitative and qualitative requirements being met
with the release of our 2008 annual report.
Accounting considerations
In addition to the regulatory environment, we closely monitor changes
in accounting rules and their potential impact on our capitalization
levels. With the recent adoption of the new financial instruments
accounting standards under Canadian GAAP, differences exist between
the measurement of capital as disclosed in the financial statements
and that used for regulatory capital purposes. For example, under
Canadian GAAP, available-for-sale (AFS) debt securities are recognized
at fair value, with unrealized gains and losses reported in Accumulated
other comprehensive income (AOCI). In contrast, for regulatory capi-
tal purposes, these securities are measured at amortized cost, and
consequently, no unrealized gains or losses are reflected in regulatory
capital. Additionally, the unrealized gains and losses on derivatives
designated as cash flow hedges and reported in AOCI are excluded
from regulatory capital.
Capital treatment for equity investments in other entities is deter-
mined by a combination of accounting and legal guidelines based on
the size or nature of the investment. Three broad approaches apply
as follows:
•
Consolidation: entities in which we have a controlling interest
must be fully consolidated on our consolidated balance sheet.
Joint ventures are consolidated on a pro rata basis. Consolidated
holdings are capitalized directly by asset class and are not
treated as equity investments for regulatory capital calculation
purposes.
•
•
Deduction: certain holdings are deducted in full from our regu-
latory capital. These include all “substantial” investments (as
defined by the Bank Act), as well as all investments in insurance
subsidiaries.
Risk weighting: unconsolidated equity investments that are not
deducted from capital are risk weighted at a prescribed rate for
determination of capital charges.
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of finan-
cial transactions that, under GAAP, are not recorded on our balance
sheet. Off-balance sheet transactions are generally undertaken for
risk management, capital management and/or funding management
purposes for our benefit and the benefit of our clients. These transac-
tions include transactions with special purpose entities and issuance
of guarantees. These transactions give rise to, among other risks,
varying degrees of market, credit, liquidity and funding risk, which are
discussed in the Risk management section.
Derivatives
On November 1, 2006, we adopted three new accounting standards
that were issued by the CICA related to financial instruments. These
standards and the impact on our financial position and results of
operations are discussed in the Impact of the new financial instru-
ments accounting standards section and in Note 1 to our Consolidated
Financial Statements. With the adoption of these standards, all deriva-
tives including derivatives that qualified for hedge accounting are now
recognized on the Consolidated Balance Sheets at fair value. Prior to
November 1, 2006, derivatives that qualified for hedge accounting
were not carried at fair value on our Consolidated Balance Sheets.
Refer to Note 7 to our Consolidated Financial Statements for detailed
information on our derivatives products.
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 operating entities and usually have no employees. SPEs may
be variable interest entities (VIEs) as defined by 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 con-
solidated, or in which we have significant variable interests. Pursuant
to 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
mortgage loans primarily to diversify our funding sources and enhance
our liquidity position. We also securitize residential and commercial
mortgage loans for sales and trading activities. Gains and losses on
securitizations are included in Non-interest income. Refer to Note 1 to
our Consolidated Financial Statements for our accounting policy for
loan securitizations.
In addition to traditional securitizations where we sell our
loans and receivables, we also enter into synthetic securitizations to
While Basel II retains the same criteria for determination of capital
treatment of equities, the prescribed risk weightings are generally
higher than under Basel I.
transfer risks relating to selected elements of our financial assets
without actually transferring the assets through the use of certain
financial instruments.
Credit card receivables
We securitize a portion of our credit card receivables through a SPE
on a revolving basis. The SPE is funded through the issuance of senior
and subordinated notes collateralized by the underlying credit card
receivables. The issuances are rated by at least two of DBRS, Moody’s
Investors Service (Moody’s) or Standard & Poor’s Corporation
(S&P). This SPE meets the criteria for a QSPE and, accordingly, as the
transferor of the credit card receivables, we are precluded from con-
solidating this SPE.
We continue to service the credit card receivables sold to the
QSPE 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
obligation 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 our AFS 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 Canadian insured 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 underlying mortgages that we have securitized for funding and
liquidity purposes.
We did not securitize any residential mortgages synthetically in
2007. As at October 31, 2006, we had synthetically securitized
$20 billion in residential mortgage loans through financial guarantees.
Commercial mortgage loans
We securitize commercial mortgages by selling them in collateral pools,
which meet certain diversification, leverage and debt coverage criteria,
to SPEs, one of which is sponsored by us. The SPEs finance the pur-
chase of these pools by issuing certificates that carry varying degrees
of subordination. The certificates issued by the SPE which we sponsor
range from AAA to B- and are rated by any two of DBRS, Moody’s and
S&P. The most subordinated certificates are unrated. The certificates
represent undivided interests in the collateral pool, and the SPE which
we sponsor, having sold all undivided interests available in the pool,
retains none of the risk of the collateral pools. We do not retain any
beneficial interests in the loans sold unless we purchase some of the
securities issued by the SPEs for our own account. We are the primary
servicer under contract with a third-party master servicer for the loans
that are sold to the SPE that is sponsored by us.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
77
Our financial asset securitizations
Table 42
(C$ millions)
Outstanding securitized assets
Residential mortgages
Credit cards
Commercial mortgages
Total
2007
2006
$ 18,384 $ 14,131
3,650
1,914
3,650
3,727
$ 25,761 $ 19,695
Retained interests
Residential mortgages
Mortgage-backed securities retained (1) $
Retained rights to future excess interest
Credit cards
Asset-backed securities purchased (2)
Retained rights to future excess interest
Subordinated loan receivables
Commercial mortgages
A sset-backed securities purchased (2)
5,954 $
414
5,591
206
870
27
3
47
1,390
26
6
–
Total
$
7,315 $
7,219
(1)
(2)
All residential mortgages securitized are Canadian insured mortgages.
Securities purchased during the securitization process.
Securitization activities during 2007
During the year, we securitized $13.3 billion of residential mortgages,
of which $6.2 billion were sold, $3.7 billion were reinvested in revolv-
ing securitizations and the remaining $3.4 billion were retained. We
also securitized $1.9 billion of commercial mortgages and purchased
$48 million (principal value) related securities during the securitiza-
tion process. Refer to Note 5 to our Consolidated Financial Statements
for further details and the amounts of impaired and past due loans
that we manage and any losses recognized on securitization activities
during the year.
Capital trusts
We issue innovative capital instruments, RBC Trust Capital Securities
(TruCS) and RBC Trust Subordinated Notes (TSNs), through three
SPEs: (i) RBC Capital Trust (Trust), (ii) RBC Capital Trust II (Trust II) and
(iii) RBC Trust Subordinated Trust (Trust III). We consolidated Trust but
do not consolidate Trust II or Trust III because 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 these trusts. As at
October 31, 2007, we held the residual interest of $1 million and
$1 million (2006 – $1 million and nil) in Trust II and Trust III, respec-
tively. We had a loan receivable of $40 million (2006 – $42 million)
from Trust II and of $30 million from Trust III (2006 – nil), and reported
the senior deposit notes of $900 million and $999.8 million (2006 –
$900 million and nil) that we issued to Trust II and Trust III in our
deposit liabilities. Under certain circumstances, TruCS of Trust II will be
automatically exchanged for our preferred shares and TSNs exchanged
for our subordinated notes without prior consent of the holders. In
addition, TruCS holders of Trust II have the right to exchange for our
preferred shares as outlined in Note 17 to our Consolidated Financial
Statements.
Liquidity and credit enhancement facilities
(C$ millions)
Committed
Interest expenses on the senior deposit notes issued to Trust II
and Trust III amounted to $52 million and $23.6 million, respectively
(2006 – $52 million and nil, 2005 – $52 million and nil) during the year.
For further details on the capital trusts and the terms of the TruCS and
TSNs 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 seven multi-seller asset-backed
commercial paper conduit programs (multi-seller conduits) – four in
Canada and three in the United States. We are involved in the multi-
seller conduit markets because our clients value these transactions,
they offer us a growing source of revenue and they generate a favour-
able 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
securitization 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.
The multi-seller conduits also financed assets that were either in
the form of securities, including collateralized debt obligations (CDOs)
or instruments that closely resemble securities such as credit-linked
notes. The credit quality of these transactions is very high, often in the
highest available rating categories established by the rating agencies
that assign ratings to these types of securities or security-like instru-
ments. 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 struc-
turing 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. Our maximum exposure to loss under these facil-
ities is $42.9 billion for 2007 and $35.1 billion for 2006. The increase
in liquidity and credit facilities is due to the increase in the multi-seller
conduits’ activities during the year. 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
$72 million during the year (2006 – $60 million, 2005 – $58 million).
Total commitments and amounts outstanding under liquidity
and credit enhancement facilities for the multi-seller conduits as at
October 31, 2007 and 2006, which are also included in our discussion
in the Guarantees section, are shown below:
2007
Maximum
exposure
to loss
Outstanding
Committed
2006
Maximum
exposure
to loss
Table 43
Outstanding
Backstop liquidity facilities
Credit enhancement facilities
$ 42,567
4,185
$ 38,726
4,185
$
–
–
$ 34,880
3,404
$ 31,686
3,404
$
–
–
78
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
The following is a summary of our maximum exposure to loss cat-
egorized by securitized client asset type in the multi-seller conduits for
the years ended October 31, 2007 and 2006.
The assets in these SPEs amounted to $5.2 billion as at
October 31, 2007 (2006 – $3.8 billion), of which $.3 billion were con-
solidated as at October 31, 2007 (2006 – $.7 billion). The majority of
the increase in these assets is due to the creation of new SPEs in 2007.
Maximum exposure to loss by client asset type
Table 44
(C$ millions)
Outstanding securitized assets
Auto loans and leases
Asset-backed securities
Consumer loans
Credit cards
Dealer floor plan receivables
Electricity market receivables
Equipment receivables
Insurance premiums
Other loans
Residential mortgages
Securities
Student loans
Trade receivables
Truck loans and leases
Other
2007
2006
$ 12,157 $
6
3
1
64
1,769
1 1,125
496
06
2,279
10
288
3,793
1,669
2,654
5,133
468
–
–
–
7,073
195
2,659
8,856
–
306
2,132
664
4,358
1,497
2,928
3,537
885
Total
$ 42,911 $ 35,090
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 posi-
tion, 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 2007, these seven multi-seller
conduits have financial assets totalling $29.3 billion as at October 31,
2007 (2006 – $24.8 billion). The maximum assets that may have to be
purchased by the conduits under purchase commitments outstanding
as at October 31, 2007 were $41.8 billion (2006 – $34.3 billion).
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
occasionally act as market maker. We do not, however, provide any
SPE with guarantees or other similar support commitments; instead
we buy credit protection from these SPEs through credit derivatives.
The investors 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
trading derivatives, the derivatives with these SPEs are carried at fair
value in derivative-assets and liabilities.
Structured finance
We occasionally invest in off-balance sheet entities in the form of
loan substitute and equity investments 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 fund-
ing, 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 regulations. We consolidate structured finance VIEs
in which our interests expose us to a majority of the expected losses.
In 2007, we reduced our total investments in certain transactions.
The unconsolidated entities in which we have significant investments
or loans had total assets of $4.8 billion as at October 31, 2007
(2006 – $6.9 billion). As at October 31, 2007, our total investments
in and loans to these entities were $2.5 billion (2006 – $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 exposure 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 significant exposure and which we did not consolidate
were $1.6 billion as at October 31, 2007 (2006 – $3.6 billion). The
decrease is primarily due to a reduction of assets in one of the
investment funds. As at October 31, 2007, our total exposure was
$423 million (2006 – $319 million).
Trusts, mutual and pooled funds
Our joint venture RBC Dexia IS provides global custody, fund and
pension administration of client assets as well as the provision of
shareholders services, foreign exchange, securities lending and
other related services. With respect to trusteeship and/or custodian
services for personal and institutional trusts, RBC Dexia IS 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 and
we include 50% of these fees in our revenue, representing our share
of interest in the joint venture. Refer to Note 9 to our Consolidated
Financial Statements for more details.
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
products 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.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
79
Due to the adoption of the three new financial instrument account-
ing standards on November 1, 2006, financial guarantees are now
recognized at inception at the fair value of the obligation undertaken in
issuing the guarantee. Subsequent measurement of financial guaran-
tees at fair value is not required unless the financial guarantee qualifies
as a derivative. As the carrying value of these financial guarantees
does not reflect our maximum potential amount of future payments, we
continue to consider guarantees as off-balance sheet arrangements.
Prior to November 1, 2006, financial guarantees were required to be
disclosed only in the notes to our Consolidated Financial Statements.
Our maximum potential amount of future payments in relation
to our guarantee products as at October 31, 2007, amounted to
$152 billion (2006 – $125 billion). In addition, as at October 31, 2007,
RBC Dexia IS securities lending indemnifications totalled $63.5 billion
(2006 – $45.6 billion); we are exposed to 50% of this amount. The
maximum potential amount of future payments represents the
maximum risk of loss if there was a total default by the guaranteed
parties, without consideration of possible recoveries under recourse
provisions, insurance policies or collateral held or pledged.
As at October 31, 2007, we had $40.4 billion in backstop liquidity
facilities related to asset-backed commercial paper programs, of which
96% were committed to RBC-administered multi-seller conduits.
Note 27 to our Consolidated Financial Statements provides
detailed information regarding the nature and maximum potential
exposure for the above-mentioned types of guarantee products.
Commercial commitments
We also provide commercial commitments to our clients to help them
meet their financing needs. On behalf of our clients we undertake
written documentary and commercial letters of credit, authorizing a
third party to draw drafts on us up to a stipulated amount and typi-
cally having underlying shipments of goods as collateral. We make
commitments to extend credit, which represent unused portions of
authorizations to extend credit in the form of loans, bankers’ accep-
tances or letters of credit. We also have uncommitted amounts for
which we retain the option to extend credit to a borrower. These
guarantees and commitments exposed us to liquidity and funding
risks. The following is a summary of our off-balance sheet commercial
commitments.
Commercial commitments (1)
Table 45
(C$ 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)
$
477
40,015
47,110
$
24
30,053
–
$
–
22,596
–
$
–
8,924
–
$
501
101,588
47,110
$
87,602
$ 30,077
$ 22,596
$
8,924
$ 149,199
(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.
Risk management
Overview
Our business activities expose us to a wide variety of risks in virtually
all aspects of our operations. We manage these risks by seeking
to ensure that business activities and transactions provide an appro-
priate 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 effective enterprise risk management frameworks. The
cornerstone of these frameworks is a strong risk management culture,
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
within our risk appetite.
Risk Capacity
Risk Appetite
Self-Imposed
Constraints
& Drivers
Risk Limits
& Tolerances
Risk Profile
Risk appetite
Our risk appetite framework provides a structured approach to defining
the amount and type of risk we are able and willing to accept in the pur-
suit of our business objectives. The risk appetite framework includes:
•
Identification of regulatory constraints that restricts our ability to
accept risk and helps us to define our Risk Capacity, which
represents the maximum amount and type of risk we can accept
Establishment and regular confirmation of Self-Imposed
Constraints & Drivers where we have chosen to limit or otherwise
influence the amount of risk we undertake
Translation of Risk Appetite into Risk Limits and Tolerances that
guide our businesses in their risk taking activity
Periodic measurement and monitoring of our Risk Profile, which
compares actual exposure to our established Risk Limits and
Tolerances.
•
•
•
80
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Risk management principles
We apply the following six overarching principles in the identification,
monitoring and management of risk throughout the organization:
(i) Balancing risk and reward is achieved through (a) aligning risk
appetite with business strategy, (b) diversifying risk, (c) pricing
appropriately for risk, (d) mitigating risk through preventive
controls, and (e) transferring risk to third parties
(ii) Management of risk is shared at all levels of the organization.
Business management is accountable for all risks assumed in
their operations, with direction and oversight provided by Group
Risk Management (GRM), Global Technology and Operations
(GTO), and Global Functions
(iii) Effective decision-making is based on a strong understanding
of risk
(iv) All business activities are conducted with the view of not risking
our reputation
(v) Assuring that services we provide are suitable for and understood
by our clients
(vi) Applying appropriate judgment is required throughout the organi-
zation in order to manage risk.
Risk governance
Our overall risk governance structure is presented below. It illustrates
the roles and responsibilities of the various stakeholders.
•
Establishing risk controls and limits to ensure appropriate risk
diversification and optimization of risk and return on both a port-
folio and transactional basis
Board of
Directors
CR&RPC &
Audit Committee
C
u
l
t
u
r
e
wnership
Group Executive
Group Risk Committee
Supporting Risk Committees
–
F
r
a
m
e
w
o
r
k
–
D
Group Risk Management & Corporate Treasury
Business Segments
ht – Escalation – Monitoring – O
Oversig
e
l
e
g
a
t
i
o
n
–
A
c
c
o
u
n
t
a
b
i
l
i
t
y
Canadian
Banking
Wealth
Management
U.S. &
International
Banking
Capital
Markets
Global Technology & Operations
Global Functions
Board and its committees
The Board of Directors provides oversight and carries out its risk
management mandate through the Conduct Review and Risk Policy
Committee (CR&RPC) and the Audit Committee.
CR&RPC is designed to ensure that we have risk policies, pro-
cesses and controls in place to manage significant risks and ensure
compliance with the Bank Act (Canada) and other relevant laws and
regulations.
Audit Committee provides oversight over the integrity of the
financial statements and reviews the adequacy and effectiveness of
internal controls and the control environment, and ensures that poli-
cies related to liquidity, funding and capital management are in place.
Group Executive (GE) and Group Risk Committee (GRC)
GE is our senior management team and is led by our President and
Chief Executive Officer (CEO). GE has overall responsibility for our
strategy and its execution by establishing the “tone at the top.” Their
risk oversight role is executed primarily through the mandate of GRC
and the five supporting risk committees as follows:
•
The Asset and Liability Committee (ALCO) reviews, recommends,
and approves policy frameworks pertaining to capital manage-
ment, structural interest rate risk management, funds transfer
pricing, liquidity and funding and subsidiary governance
The Ethics and Compliance Committee directly supports our
management of regulatory, compliance and reputation risk
The Policy Review Committee acts as the senior risk approval
authority relating to policies, products and services
The Structured Transactions Oversight Committee reviews
structured transactions and complex credits
The USA Corporate Governance Committee is responsible for all
corporate governance matters of our U.S. operations.
•
•
•
•
GRM and Corporate Treasury
GRM works in full partnership with our businesses to identify, assess,
mitigate and monitor all forms of risk. Together with the CEO and other
members of GE, the Chief Risk Officer (CRO) and GRM are primarily
responsible for the promotion of our risk management culture. The
CRO and GRM responsibilities include:
•
Establishing comprehensive risk identification and approval
processes
Establishing appropriate methodologies for risk measurement
•
• Monitoring risk levels and reporting to senior management and
•
the Board of Directors on major risks we assume or face
Acting as the catalyst in defining and communicating our
risk appetite.
Corporate Treasury is responsible for the management, oversight
and reporting of our capital position, structural interest rate risk, and
liquidity and funding risks. Corporate Treasury recommends poli-
cies and authorities relating to the identification, measurement and
management of liquidity and funding risk through ALCO and GRC for
approval by the Audit Committee.
Business segments and corporate support groups
The business segments, GTO and Global Functions also have responsi-
bility for the management of risk. These responsibilities include
(i) accountability for their risks, (ii) alignment of business strategy
with risk appetite, and (iii) identification, control and management of
their risks.
Risk measurement
Our 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 only apply to a single
risk type. While quantitative risk measurement is important, we also
place reliance on qualitative factors. Our measurement models and
techniques are continually subject to independent assessment by GRM
for appropriateness and reliability. 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 that they are within our risk appetite.
Expected loss
Expected loss represents those losses that are statistically expected
to occur in the normal course of business in a given period of time.
With respect to credit risk, the key parameters used to measure
our expected loss are the probability of default (PD), loss given default
(LGD) and exposure at default (EAD). These parameters are deter-
mined based on historical experience, supplemented by benchmarking
and updated on a regular basis, and are defined as follows:
•
PD: An estimated percentage that represents the probability that
obligors within a specific rating grade or for a particular pool of
exposures will default within a one-year period
LGD: An estimated percentage of EAD that is expected to be lost
in the event of default of an obligor
EAD: An estimated dollar value of the expected gross exposure of
a facility upon default of the obligor before specific provisions or
partial write-offs.
•
•
With respect to trading market risk, we use a statistical technique
known as Value-at-Risk to measure expected loss. It is a generally
accepted risk management concept that uses statistical models to
estimate within a given level of confidence the maximum loss in mar-
ket value we would experience in our trading portfolio from an adverse
one-day movement in market rates and prices. For further details, refer
to the Market risk section.
Unexpected loss and Economic Capital
Unexpected loss is a statistical estimate of the amount by which
actual losses can exceed expected loss over a specified time horizon,
measured at a specified level of confidence. On an enterprise-wide
basis, we use Economic Capital to estimate the unexpected loss asso-
ciated with our business activities. We calculate Economic Capital
by estimating the level of capital that is necessary to cover risks con-
sistent with our desired solvency standard and desired debt rating.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
81
The use of Economic Capital as a risk measure enables us to assess
performance on a comparable risk-adjusted basis at the transaction
and portfolio levels. For further information, refer to the Capital man-
agement section.
Sensitivity analysis and stress testing
Sensitivity analysis and stress testing help us ensure that the risks we
take remain within our risk appetite and that our level of capital
remains adequate. Under sensitivity analysis, model inputs and
assumptions are varied to assess how significantly the risk measure
changes. Stress testing helps us determine the effects of potentially
extreme market volatility on our portfolios. Stress scenarios are con-
servatively based on unlikely but possible adverse market events and
economy-wide developments.
Model validation
To ensure robustness of our measurement techniques, model validation
is carried out by our risk professionals independent of those respon-
sible for the development and use of the models and assumptions.
Risk control
Our enterprise-wide risk management approach is supported by a
comprehensive set of risk controls. This includes the development and
communication 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 opti-
mization of risk and return on both a portfolio and a transactional basis.
Risk policy architecture
Our risk management frameworks and policies are structured into the
following four levels:
Level 1: Enterprise Risk Management Framework: This framework
serves as the foundation of our risk management frame-
works and policies, and sets the “tone at the top.”
Level 2: Risk-Specific Frameworks: These individual frameworks
elaborate on each risk type and explain the following areas:
• Mechanisms for identifying, measuring, monitoring and
•
•
reporting of risk
Key policies
Respective roles and responsibilities related to a
specific risk.
Level 3: Enterprise Risk Policies: These policies are considered our
minimum requirements for our business segments, GTO and
Global Functions with respect to various risk types.
Level 4: Business Segments and GTO Specific Policies and
Procedures: These policies and procedures are established
by the business segments and GTO to manage the risks that
are unique to their operations.
Risk review and approval processes
Our 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 originator. The approval responsibilities are governed by
delegated authorities based on the following four categories:
•
Projects and Initiatives: Documentation of risk assessment is
formalized through the requirement that each Project
Appropriation Request (PAR) be reviewed and approved by GRM
and Global Functions
New Products and Services: The policies and procedures for the
approval of new or amended products and services have been
•
developed to ensure that our products and services are subject
to a broad and robust review and approval process that fully
considers associated risks, while striving to facilitate business
opportunities
Transactions: We ensure that risk assessment processes are in
place for the review and approval of all types of transactions,
including credit transactions
Structured Transactions and Complex Credits: The Structured
Transactions Oversight Committee reviews new structured
products and transactions with significant reputation, legal,
accounting, regulatory or tax risks.
•
•
Authorities and limits
The Board of Directors, through the CR&RPC, delegates the setting
of credit, market and insurance risk limits to the CEO, Chief Operating
Officer (COO) and CRO. These delegated authorities allow these offi-
cers 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 invest-
ment banking activities. These delegated authorities are reviewed and
approved annually by the Board of Directors and the CR&RPC. 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.
CR&RPC must approve any transactions which exceed management’s
delegated authorities.
The Board of Directors through the Audit Committee approves
risk limits for controlling liquidity and funding risk. These limits form
part of our liquidity management framework and are a key risk control
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.
Reporting
Enterprise level risk monitoring and reporting is a critical component
of our enterprise risk management program and supports the ability of
senior management and the Board of Directors to effectively perform
their risk management and oversight responsibilities.
Internal reporting is provided in the Enterprise Risk Report on
a regular basis with the purpose of ensuring senior management and
the Board of Directors receive timely and actionable forward-looking
risk reporting on significant risk issues impacting our organization.
We also have individual risk-specific reporting, which aligns with
governance and relevant laws and regulations. Annually, the CRO
provides the Board of Directors with a comprehensive review of
emerging risks facing the organization as a whole as well as those
facing the business segments. External reporting is provided as
required by law and other relevant regulations. Regular reporting on
risks is provided to stakeholders including regulators, external ratings
agencies and analysts.
Basel II
As at November 1, 2007, we have implemented Basel II, which more
closely aligns regulatory capital requirements with our underlying risk
profile and internal risk management practices compared to Basel I.
Basel II represents a major change in bank regulations, in that it allows
banks to select from a menu of approaches to calculate the minimum
capital required to support the credit risk and operational risks they
undertake.
82
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Credit risk
The Office of the Superintendent of Financial Institutions Canada (OSFI)
expects each major bank in Canada to adopt the Advanced Internal
Ratings Based (AIRB) Approach for all of its material portfolios,
although some flexibility is permitted regarding the timing of adop-
tion. For further details, refer to the Capital management section. Once
our AIRB internal ratings systems have been approved by the OSFI, we
are permitted to assess the credit risk of our exposures using our inter-
nal rating systems, and to employ the risk measurements produced by
those ratings systems in the calculation of required regulatory capital.
Operational risk
The OSFI has been less prescriptive with respect to the calcula-
tion 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 Standardized Approach provides the benefits of sounder
operational risk management and governance, positioning us to
migrate to AMA once advances in measurement capabilities war-
rant 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.
Market risk
Basel II treatment of market risk is unchanged from the treatment
under Basel I.
Risk Pyramid
We use a pyramid to identify and categorize our risks. These risks are
organized vertically within the Risk Pyramid to reflect the degree of
controllability. The Risk Pyramid provides us with a common language
and discipline for the identification and assessment of risk in our
businesses, products, initiatives, acquisitions and alliances. The Risk
Pyramid is reviewed regularly to ensure that all key risks are reflected
and ranked appropriately.
The base of the pyramid – The risk categories along the base of the
Risk Pyramid are those over which we have the greatest level of control
and influence. These are credit, market, liquidity and funding, and
insurance risks. Operational risk, while still viewed as one of the
risks over which we have the most control and influence, is ranked
on a higher level than the other highly controllable risks. This ranking
acknowledges the level of controllability associated with people,
systems and external events.
The middle of the pyramid – Strategic and reputation risks, while more
controllable than the risks at the top of the pyramid, are considered
less controllable compared to the risks at the base of the pyramid.
Strategic risk arises in one of two situations: (i) we choose the wrong
strategy, or (ii) we choose the right strategy, but execute it poorly.
Reputation risk is placed in the middle of the pyramid to denote the fair
degree of control and influence we can use to manage this risk type,
which generally occurs in connection with other risks, primarily regula-
tory and legal, and operational risks.
The top of the pyramid – Systemic risk is placed at the top of the Risk
Pyramid, which is the least controllable and typically cannot be man-
aged through any type of direct mitigation efforts, such as risk limits
and/or portfolio diversification. Regulatory and legal and competi-
tive risks, which can be viewed as somewhat controllable, can be
influenced through our role as a corporate entity, and as an active par-
ticipant in the Canadian and global financial services industry.
Less control and influence
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
Credit
Market
Liquidity
and
Funding
Insurance
Credit risk
Credit risk is the risk of loss associated with a counterparty’s inability
or unwillingness to fulfill its payment obligations. Credit risk may be
direct (issuer, debtor, obligor or policyholder) or indirect to a
secondary obligor (guarantor or reinsurer).
credit products and services to clients, such as short-term
investments relating to liquidity management and insurance business
investment activities.
Our credit offerings are a significant driver of overall business
We offer a wide range of credit products and services to
individual and business clients within Canada, the United States and in
numerous countries. Core products offered include loans, residential
and commercial mortgages, credit cards, lines of credit and letters
of credit. Specialized credit services include asset-backed financing,
margin lending, securities lending and project finance. The majority of
our businesses offer credit products and services. Credit risk is also
incurred through other activities not directly linked to the provision of
performance. The failure to effectively manage credit risk across the
organization and all products, services and activities can have a direct,
immediate and material impact on our earnings and reputation.
Our credit risk management principles are guided by the six
overall risk management principles discussed in the Risk management
overview section. In particular, the following two principles are com-
plemented by the items below with respect to credit risk management.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
83
•
•
•
The effective balancing of risk and return is achieved through:
Ensuring that credit quality is not compromised for growth
Diversifying credit risks in transactions, relationships and
portfolios
Using our credit risk rating and scoring systems, policies
and tools
Pricing appropriately for the credit risk taken
Applying consistent credit risk exposure measurements
•
•
• Mitigating credit risk through preventive and detective controls
Transferring credit risk to third parties where appropriate
•
through approved credit risk mitigation techniques, including
hedging activities and insurance coverage.
Our business activities are conducted with the view of not risking
our reputation. Therefore, there are certain types of clients and trans-
actions that we avoid in order to maintain our reputation, such as:
•
Financing the manufacture of equipment or material for nuclear,
chemical or biological warfare and landmines
Financing of Internet gambling businesses
Granting credit to entities subject to economic sanctions
Credit transactions that facilitate illegal activity, or contribute to
misleading financial statements or regulatory reporting
Credit transactions involving undocumented agreements,
disbursements or funds transfers
Granting credit to a business or individual engaged in activities
inconsistent with generally accepted standards of ethical
behaviour in the community.
•
•
•
•
•
Responsibilities
We deem credit risk management to be an enterprise-wide activity. The following provides a high-level overview of the key committees involved in
the management of credit risk.
Board of Directors and Conduct Review & Risk Policy Committee
Shapes and influences credit risk culture; approves credit risk appetite.
Ensures that management has in place frameworks, policies, processes and procedures to manage credit risk (including approval authority
for Credit Risk Management Framework and key enterprise-wide credit risk policies), and evaluates our effectiveness in managing credit risk.
Approves credit risk limits, delegates approval authorities to the CEO, COO, CRO, and approves credit transactions in excess of management’s
authorities.
Reviews enterprise-wide credit reporting, significant exposures and exceptions to limits.
Group Risk Committee
Ensures credit risk profile is consistent with strategic objectives.
Ensures that there are ongoing, appropriate and effective risk management policies, processes and procedures to manage credit risk (including
recommending the Credit Risk Management Framework and key enterprise-wide credit risk policies to the Board of Directors for approval).
Approves credit policies and products with significant risk implications, as referred by the CRO.
Recommends credit transactions in excess of management’s authority to the Board of Directors for approval.
Reviews enterprise-wide credit reporting, significant exposures and processes, and ensures that appropriate and timely information is
provided to the Board of Directors on matters relating to credit risk and its management.
Policy Review Committee
Structured Transactions Oversight Committee
Reviews and recommends approval of the Credit Risk
Management Framework.
Approves enterprise-wide credit risk policies.
Approves new and amended business specific credit risk policies
and products with significant risk implications.
•
•
Provides risk oversight of structured transactions and complex
credits, including identification and mitigation of risks.
Reviews and approves products and transactions referred to it
in accordance with our policies.
•
•
•
•
•
•
•
•
•
•
•
•
Risk measurement
Given the potential for credit risk to significantly impact our earnings,
it is critical that we accurately quantify credit risk at both the individual
obligor and portfolio levels. This allows us to effectively estimate
expected credit losses and minimize unexpected losses in order to
manage and limit earnings volatility.
Our credit risk exposures are classified as wholesale and retail
portfolios, and we employ different risk measurement processes for
each portfolio. The wholesale portfolio comprises business, sovereign
and bank exposures, which include mid-size to large corporations
and certain small businesses that are managed on an individual client
basis. The retail portfolio is comprised of residential mortgages and
personal, credit card and small business loans, which are managed on
a pooled basis. This categorization of exposures is consistent with
Basel II guidelines, which require banks to disclose their exposures
based on how they manage their business and risks.
Credit risk rating systems are designed to assess and quantify
the risk inherent in credit activities in an accurate and consistent
manner. We use a two-dimensional rating system for both wholesale
and retail credit exposures.
Wholesale credit portfolio
The wholesale credit risk rating system is designed to measure and
identify the risk inherent in our credit activities in an accurate and
consistent manner along two dimensions.
In the first dimension, each obligor is assigned a borrower risk
rating (BRR), which reflects an assessment of the credit quality of the
obligor. Each BRR has a probability of default (PD) assigned to it. This
PD is an estimate of the probability that an obligor with a certain BRR
will default within a one-year time horizon. The BRR differentiates the
riskiness of obligors and represents our evaluation of the obligor’s
ability and willingness to meet its contractual obligations despite
84
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
adverse or stressed business conditions, troughs in the business
cycle, economic downturns or unexpected events that may occur. The
assignment of BRRs is based on the evaluation of obligors’ business
and financial performance against several risk factors. We use Risk
Criteria Papers, which present a structured process for the consistent
identification and analysis of material information needed to assess
obligors in various industry sectors. Generally, the key risk factors
assessed include industry, markets, firm competitiveness, company
strategy and management quality, financial performance and access
to funds. Risk Criteria Papers provide guidance on what to emphasize
in the analysis of companies within an industry sector, and provide
weightings, which may vary from industry to industry. Our internal risk
ratings are reviewed at least on an annual basis.
Our rating system is largely consistent with that of external rat-
ing agencies. The following table provides a mapping of our 22-grade
internal risk ratings compared to ratings by external rating agencies.
Internal ratings map
Table 46
Rating
1 to 4
5 to 7
Standard &Poor’s
Moody’s Investors
Service
Description
AAA to AA-
Aaa to Aa3
A+ to A-
A1 to A3
Investment Grade
8 to 10
BBB+ to BBB-
Baa1 to Baa3
11 to 13
BB+ to BB-
Ba1 to Ba3
14 to 16
B+ to B-
B1 to B3
Non-investment Grade
17 to 20
CCC+ to CC
Caa1 to Ca
21 to 22
C to D
C to Bankruptcy
Impaired/Default
In the second dimension, loss given default (LGD) represents the
portion of exposure at default (EAD) expected to be lost when an obli-
gor defaults. LGD rates are largely driven by factors such as seniority
of debt, collateral security, client type, and the industry in which the
obligor operates. EAD represents an estimate of the expected gross
exposure of a credit facility at the time of default of the obligor. At
default the obligor may have drawn the facility fully or have repaid
some of the principal. We estimate EAD based on the outstanding
por tion and an estimated amount of the undrawn portion that is
expected to be drawn at the time of default. The estimation of these
parameters represents a critical part of our credit rating system. It
is a process of quantifying the risk associated with obligors and the
related facilities by estimating and assigning values to the parameters.
Parameter estimations are based on historical internal experience, and
are benchmarked to external data where applicable. While PD is used
at the obligor level, LGD and EAD are estimated for the various credit
facilities under that obligor.
These ratings and risk measurements are used in the determina-
tion of our expected losses, unexpected losses as well as economic
and regulatory capital. They are also used in the setting of risk limits,
portfolio management and product pricing.
Retail credit portfolio
Credit scoring is the primary risk rating system for assessing obligor
and transaction risk for retail exposures. Credit scoring is employed in
the acquisition of new clients (acquisition scoring) and portfolio
management of existing clients (behavioural scoring).
Acquisition scoring models, which are used for underwriting
purposes, utilize established statistical methods of analyzing new
applicant characteristics and past performance to estimate future
credit performance. In model development, all accessible sources
of data are used and include information obtained from the client
(employment status), data from our own systems (loan information)
and information from external sources (credit bureaus).
Behavioural scoring is used in the ongoing management of retail
clients with whom we have an established relationship. It utilizes
statistical techniques that capture past performance to predict future
behaviour and incorporate information such as cash flow and bor-
rowing trends, as well as the extent of our relationship with the client.
The behavioural risk score is dynamic and is generally updated on a
monthly basis to continually re-evaluate the risk. Characteristics used
in behavioural scoring models are based on information from existing
accounts and lending products for each client, and from information
obtained from external sources, such as credit bureaus.
For overall portfolio management, retail exposures are assessed
on a pooled basis, with each pool consisting of exposures that possess
similar homogeneous characteristics. Pooling of exposures allows for
more precise and consistent estimates of default and loss character-
istics. Criteria used to pool exposures for risk quantification include
behavioural score product type (mortgage, credit cards, lines of
credit and installment loans), collateral type (chattel, liquid assets and
real estate) and the delinquency status (performing, delinquent and
default) of the exposure. Regular monitoring and periodic adjustments
and alignments are conducted to ensure that this process provides for a
meaningful differentiation of risk. It also allows the grouping of homo-
geneous exposures from a risk perspective and permits accurate and
consistent estimation of loss characteristics at the pool level. Migration
between the pools is considered when assessing credit quality.
The pools are assessed in two dimensions: PD and LGD. The
estimation of PD and EAD considers both borrower and transaction
characteristics, including behavioural credit score, product type and
delinquency status. The LGD is estimated based on transaction speci-
fied factors, including product and collateral types. Our risk ratings are
reviewed and updated on a regular basis.
The following table maps PD ranges to various risk levels:
Internal ratings map
Table 47
PD bands
0.0% –1.0%
1.1% –6.4%
6.5% –99.99%
100.00%
Description
Low Risk
Medium Risk
High Risk
Impaired/Default
Validation
We ensure that our credit risk rating systems and methodologies are
subject to independent validation on a regular basis. The validation
processes provide confirmation that our systems properly identify
factors that help discriminate risk, appropriately quantify risk, pro-
duce measures of risk that respond to changes in the macroeconomic
and credit environments, and are consistent with regulatory require-
ments and our ratings philosophy. Those responsible for performing
validation activities are functionally separate from the group whose
methodologies and processes are subject to validation.
We ensure that there is proper separation of responsibility
between (i) transaction origination and approval which takes place
within the business segments, and (ii) design, development and main-
tenance of the risk rating methodologies, which takes place within
GRM. GRM is also responsible for estimating the three risk param-
eters as described above. To ensure there is a proper segregation of
responsibilities, models developed within the business segments are
approved by GRM.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
85
The validation of risk parameter estimation for both wholesale
and retail portfolios addresses the estimation process and the rea-
sonableness of the estimates used for the calculation of regulatory
capital. The following items are examined and assessed:
•
Quantification methodologies and processes, as well as the
reasonableness of outputs
Relationship between historical experience and internally derived
parameter values that incorporate estimators’ expert judgment
and external benchmarking
Sufficiency of data observations, the appropriateness of data
sources and data segmentation
Statistical significance and predictive power of the estimated
values. Levels of tolerance are defined and mapped against
actual results, with deviations explicitly noted.
•
•
•
A combination of quantitative (statistical) and qualitative (non-
statistical) validation methods is employed to ensure that our credit
risk rating system is valid. At a minimum, we adopt the following tech-
niques intended to ensure that the validation process:
•
Examines relevant and material data available from internal
and external sources, to establish a context for assumptions,
calculations and outputs
Demonstrates that estimates are grounded in historical
experience
Provides reasonable predictors of future default and loss.
•
•
Detailed validation reports are produced for the assessment of risk
rating methodology and risk parameter estimation.
Economic Capital
Economic Capital is management’s estimate of the amount of equity
required to underpin our risks. It is used in risk-based pricing decisions
and profitability measurement to ensure an appropriate risk and return
balance. Within our wholesale credit portfolio, it is also used in setting
single-name and industry limits in order to manage concentration risk.
For further details, refer to the Capital management section.
Sensitivity and stress testing
Sensitivity and stress tests are used to determine the size of poten-
tial losses related to various scenarios for the wholesale and retail
credit port folios. While unexpected losses are, by nature difficult
to quantify, we use stress testing, scenario and sensitivity analysis
to better understand and mitigate unexpected credit losses. These
activities serve to alert management to unlikely but possible adverse
market events and economy-wide developments and implications on
overall capital adequacy. Scenarios for credit risk such as economic
or industry downturns, are chosen on the basis of being meaningful,
representative of realistic potential events or circumstances, and rea-
sonably conservative.
Risk control
Our enterprise-wide credit risk policies are developed, communi-
cated and maintained by GRM. These policies set out the minimum
requirements for the prudent management of credit risk in a variety of
transactional and portfolio management contexts.
Credit risk policies
Our credit risk policies have evolved over many years as the organiza-
tion has grown in geographic scope and product complexity, and have
been refined based on experience, regulatory influences and innova-
tions in risk management and are managed under six major categories
as follows:
•
Credit Risk Assessment includes policies related to credit risk
analysis, risk rating, risk scoring and trading credit
Credit Risk Mitigation includes credit structuring, collateral and
guarantees
•
86
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
•
•
•
•
Credit Risk Approval includes credit risk limits and exceptions
Credit Documentation focuses on documentation and
administration
Credit Review and Deterioration includes monitoring and review
Credit Portfolio Management includes portfolio management
and risk quantification.
Approval of credit products and services
Our products and services are subject to robust risk review and
approval processes. New or amended products and services must be
reviewed relative to all risk types, including credit risk, in our Risk
Pyramid, and as the level of risk increases, a more senior level of
approval is required.
Credit risk limits
Limits are used to ensure our portfolio is well diversified and within
our risk appetite as approved by the Board of Directors. Our credit
limits are established at the following levels to ensure adequate diver-
sification and to reduce concentration risk:
•
•
•
•
•
Single-name limits
Underwriting risk
Geographic (county and region) limits
Industry sector limits
Product and portfolio limits.
The Economic Capital limit is intended to work as a complement to
the notional limits and, as such, single names must satisfy both limits.
To ensure single-name credit risk exposure remains well under
regulatory thresholds, and concentration risk is prudently managed,
we have established (i) internal single-name credit risk exposure limits
as a percentage of total capital, which are lower than that required
by the OSFI, and (ii) a broader and more conservative definition of
single-name credit risk exposure than that used by the OSFI. These
controls provide a significant buffer between our exposure tolerances
and those of our regulators. Exceptions are monitored by GRM and
reported to the CRO, with requisite reporting to the CR&RPC in accor-
dance with its mandate.
Credit risk mitigation
We seek to mitigate our exposure to credit risk through a variety of
means, including structuring of transactions, collateral and credit
derivatives. The policies and processes that are in place regarding the
monitoring of the effectiveness of our credit risk mitigation are dis-
cussed below.
Structuring of transactions
Proper structuring of a credit facility is a key factor in mitigating risk at
the transaction level and often includes the use of guarantees, secu-
rity, seniority and covenants. We use credit policies and procedures
to set out requirements for structuring transactions. Product-specific
guidelines set out appropriate product structuring and client criteria.
Collateral
We generally require obligors to pledge collateral as security when
we advance credit. This provides some protection in case of default.
Real estate, liquid assets, cash, bonds and government securities are
examples of the collateral securities we accept. The extent of risk
mitigation provided by collateral depends on the amount type and
quality of the collateral taken. Specific requirements relating to col-
lateral valuation and management are documented in our credit risk
management policies. GRM manages collateral positions through
a system, which maintains information according to counterparty.
Valuations of collateral are based on various sources and are com-
pared to our collateral positions.
Credit derivatives
We also mitigate risk through credit derivatives that serve to transfer
the risk to a third party. These derivatives are also used as a tool to
mitigate industry sector concentration and single name exposure.
Procedures are in place to ensure these hedges are efficient and
effective.
All derivative transactions supported by collateral are docu-
mented using industry-standard master agreements. Internal policies
have been developed for each jurisdiction in order to ensure the
legal enforceability of the collateral arrangements. Cash and securi-
ties held as collateral are held by us or by our authorized custodian.
Concentration within the collateral taken is minimal.
Credit valuation adjustments are made for derivative transac-
tions which are exposed to changes in counterparty credit quality.
Credit valuation adjustments are calculated at least once a month
using internal models and GRM-approved methodology, which con-
sist of sophisticated mathematical algorithms. The reasonableness
of the level of valuation adjustments is independently verified on a
monthly basis.
Netting is a technique that can reduce credit exposure from
derivatives and is generally facilitated through the use of master net-
ting agreements. A master netting agreement provides for a single net
settlement for all financial instruments covered by the agreement in
the event of default on, or termination of, any one contract with the
counterparty. Our trading units provide GRM with all relevant details
of outstanding transactions, including itemized mark-to-market data.
This data is used to monitor the amount of netting benefit recognized.
For further details, refer to Note 7 to our Consolidated Financial
Statements.
Reporting
GRM provides a number of enterprise level credit risk reports to senior
management and the Board of Directors so as to ensure that shifts
in our credit risk exposure or negative trends in our credit profile are
highlighted and appropriate actions can be taken where necessary.
An Enterprise Risk Report is distributed to the Board of Directors,
Group Risk Committee and senior executives on a quarterly basis. The
report provides a dynamic overview of our risk profile, including trend-
ing information and significant risk issues. It also includes analysis of
significant shifts in exposures, expected loss, Economic Capital and
risk ratings. Large exposure subject to credit policy exceptions, as
well as significant counterparty exposure and downgrades are also
reported. Analysis is provided on a portfolio and industry basis and
includes the results of stress testing and sensitivity analysis.
Separate business specific reports are also provided to senior
management, who monitor the credit quality of their respective
portfolios and emerging industry or market trends.
Loans and acceptances by portfolio and industry
Table 48
(C$ millions)
Residential mortgages
Personal
Credit cards
Small business (1)
Retail
Business (2)
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other
Sovereign (3)
Bank
Wholesale
Total loans and acceptances
Total allowance for loan losses
2007
2006
2005
2004
2003
$ 109,745
48,743
8,322
2,652
$ 96,675
44,902
7,155
2,318
$ 91,043
41,045
6,200
1,951
$ 81,998
36,848
6,456
1,928
$ 75,790
32,186
4,816
1,335
$ 169,462
$ 151,050
$ 140,239
$ 127,230
$ 114,127
5,367
3,285
5,206
7,632
4,245
1,349
4,119
2,301
19,187
2,423
2,656
17,583
932
5,468
5,435
2,958
4,553
6,010
2,588
1,126
3,659
1,072
16,145
2,326
2,400
15,586
887
3,252
5,238
2,545
4,437
5,628
1,892
1,210
3,157
543
13,730
2,244
1,900
14,772
550
903
4,992
2,370
4,566
3,462
935
1,150
2,827
511
12,224
2,135
2,555
12,319
800
668
4,789
2,346
4,920
3,621
1,120
1,523
2,952
987
12,286
2,723
3,196
11,894
732
1,176
$
81,753
$
67,997
$ 58,749
$
51,514
$ 54,265
$ 251,215
$ 219,047
$ 198,988
$ 178,744
$ 168,392
$
(1,493) $
(1,409) $
(1,498) $
(1,644) $
(2,055)
Total loans and acceptances, net of allowance for loan losses
$ 249,722
$ 217,638
$ 197,490
$ 177,100
$ 166,337
(1)
(2)
(3)
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Credit portfolio analysis
2007 vs. 2006
During 2007, our credit portfolio remained well diversified and con-
tinued to show strong growth. Total loans and acceptances increased
$32 billion, or 15%, compared to the prior year, reflecting continued
growth in both our retail and wholesale loan portfolios.
Retail credit portfolio
Retail loans increased $18 billion, or 12%, from a year ago, largely due
to solid growth across all categories in our Canadian loan portfolio.
Residential mortgages were up $13 billion, or 14%, despite the
offsetting effect of $13 billion of securitization during the year. The
increase was supported by continued solid housing market activities
in Canada, relatively low interest rates in a historical context, and
strong labour market conditions.
Personal loans grew $4 billion, or 9%, primarily reflecting strong
growth in home equity lending in Canada, driven by continued solid
housing market activities and favourable labour market conditions.
Credit cards increased $1 billion, or 16%, reflecting successful
sales efforts and continued consumer spending.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
87
Wholesale credit portfolio
Wholesale loans and acceptances were up $14 billion, or 20%, primar-
ily reflecting strong growth across various sectors, with the largest
increase in the Real estate and related, Bank and Energy sectors. Our
Real estate and related exposure increased $3 billion, largely attribut-
able to continued strong property development activities in Canada.
Our exposure to the Bank sector was up $2 billion, with widespread
increases across Canada, the U.S. and Other International. Our expo-
sure to the Energy sector increased $2 billion, primarily reflecting
continued investments by companies related to electricity generation,
as well as oil and gas exploration and production in Canada.
Our portfolio remained well diversified and the overall mix did not
change significantly from the prior year. The portfolio remained well
balanced with residential mortgages comprising 44%, wholesale loans
33%, personal loans 19%, credit cards 3% and small business
managed on a pooled basis 1%.
The portfolio grew across all geographic regions. The largest
increase was in Canada, with broad-based growth across both our
retail and wholesale loan portfolios on generally favourable economic
conditions. Growth in business lending accounted for most of the
increase in the U.S. and Other International. For further details, refer to
Table 59 in the Additional financial information section.
Total loans and acceptances by credit portfolio (C$ billions)
250
200
150
100
50
0
Small business
treated as retail
Credit cards
Personal
Wholesale
Residential
mortgages
2003
2004
2005
2006
2007
Five-year trend
Over the last five years, total loans and acceptances continued to
grow. Compared to 2003, our portfolio increased $83 billion, or 49%,
driven by growth in both our retail and wholesale loan portfolios.
Retail loans grew $55 billion, or 48%, since 2003, largely
reflecting strong growth in Canada across all categories, particularly
residential mortgages and personal loans, notwithstanding mortgage
and credit card securitizations over the period. This growth reflected
our continued focus on expanding our retail portfolios, underpinned
by continued solid Canadian housing market activities, relatively low
interest rates and strong labour market conditions.
Our wholesale portfolio grew $27 billion, or 51%, since 2003. The
largest growth sectors were Real estate and related, Bank, Energy and
Non-bank financial services, primarily driven by strong loan demand
in Canada amid generally favourable economic conditions over the
period. The increase in Real estate and related exposure over the
period was largely due to relatively strong North American housing
markets combined with our U.S. acquisitions. While the U.S. housing
market had been relatively solid over the past few years, it slowed
down significantly in the latter part of 2007, which tempered loan
growth. Our exposure to the Energy sector increased $4 billion, largely
attributable to increased investments by companies related to oil and
gas exploration and production in Canada and the U.S.
Our portfolio in Canada continued to grow over the period,
underpinned by our extensive distribution capabilities and continued
product enhancement on the back of solid loan demand and gener-
ally favourable economic conditions. Our exposure in the U.S. and
Other International generally trended downward except for the last
three years, partly reflecting our strategic reduction in exposure to
risk sensitive sectors, a reduction in single-name concentrations and
our exit from non-core client relationships. With our successful stra-
tegic realignment in these areas, our exposure in the U.S. and Other
International increased since 2005, primarily reflecting our successful
market expansion initiatives, including acquisitions.
Credit derivatives position (notional amounts) (1)
Table 49
(C$ millions)
Portfolio management
Business
Automotive
Consumer goods
Energy
Non-bank financial services
Industrial products
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other
Sovereign (3)
Bank
Total portfolio management
2007
2006
Protection
purchased (2)
Protection
sold (2)
Protection
purchased (2)
Protection
sold (2)
$
$
379
–
957
1,161
–
591
413
10
335
472
220
731
$
–
67
–
–
–
–
–
–
–
119
–
–
$
272
–
273
441
–
95
–
6
177
520
–
22
5
92
7
–
35
–
–
11
–
142
–
–
$
5,269
$
186
$
1,806
$
292
Comprises credit default swaps, total return swaps and credit default baskets.
(1)
(2) Net of offsetting protection purchased and sold in the amount of $261 million (2006 – $312 million).
(3)
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
88
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2007 vs. 2006
Total credit derivatives protection purchased increased $3 billion from
the prior year. The credit protection bought was mainly related to the
Non-bank financial services, Bank, Energy, and Mining and metals
sectors, largely reflecting the acquisition of credit protection to mitigate
single-name concentration risks in our portfolio. Our credit protection
sold was down $106 million, or 36%, from a year ago. The decrease was
mainly related to Industrial products, Consumer goods, and Technology
and media sectors largely reflecting unfavourable U.S. financial market
conditions.
Gross impaired loans and Allowance for credit losses
Loans are generally classified as impaired when there is no longer rea-
sonable assurance of timely collection of the full amount of principal
or interest.
Gross impaired loans continuity
(C$ millions, except percentage amounts)
Gross impaired loans, beginning of year
Retail
Wholesale
New impaired loans
Retail
Wholesale
Repayment, return to performing status, sold and other
Retail
Wholesale
Net impaired loan formations
Retail
Wholesale
Write-offs
Retail
Wholesale
Gross impaired loans, end of year
Retail
Wholesale
Total gross impaired loans
Key ratios
Gross impaired loans as a % of loans and acceptances
Total net write-offs as a % of average net loans and acceptances
n.m. not meaningful
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
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 account-
ing policies and estimates section and Note 1 to our Consolidated
Financial Statements.
2007
2006
2007 vs. 2006
Increase (decrease)
Table 50
$
$
$
$
$
$
$
$
$
$
$
$
$
$
383
451
834
926
720
$
$
$
340
434
774
810
271
1,646
$
1,081
$
43
17
60
116
491
607
(132) $
(340)
(144) $
(164)
12
(218)
(472) $
(308) $
(206)
$
794
380
$
666
107
1,174
$
773
$
(759) $
(109)
(623) $
(90)
(868) $
(713) $
$
418
722
$
383
451
$
1,140
$
834
$
.45%
.30%
.38%
.25%
128
273
401
(136)
(19)
(155)
35
271
306
n.m.
n.m.
13%
4
8%
14%
181
56%
8%
(133)
(67)%
19%
255
52%
(22)%
(21)
(22)%
9%
60
37%
7 bps
5 bps
2007
2006
2007 vs. 2006
Increase (decrease)
Table 51
$
4
$
$
$
$
$
263
782
(868)
170
$
282
482
(713)
205
7
(19)
300
(155)
(35)
(3)
351
$
263
$
88
1,223
9
(11)
1,221
1,572
$
$
$
1,286
(53)
(10)
1,223
1,486
$
$
$
(63)
62
(1)
(2)
86
(7)%
62
(22)
(17)
(43)
33%
(5)%
117
(10)
–
6%
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
89
2007 vs. 2006
Total gross impaired loans (GIL) increased $306 million, or 37%, com-
pared to the prior year, primarily reflecting higher impaired loans in our
U.S. residential builder finance business triggered by the downturn in
the U.S. housing market.
Retail gross impaired loans increased $35 million, or 9%, from a
year ago. The increase mainly reflected higher impairment in both U.S.
and Canadian residential mortgages and small business loans com-
mensurate with portfolio growth in Canada, partially offset by lower
impaired Canadian personal loans.
Gross impaired loans and allowance for credit losses (C$ millions)
2,400
1,800
1,200
600
0
1.20%
.90%
Gross impaired
loans
ACL
.60%
GIL ratio*
.30%
.0%
Wholesale gross impaired loans increased $271 million, or 60%,
2003
2004
2005
2006
2007
compared to the prior year. The increase was largely attributable to
the Real estate and related sector, primarily reflecting higher impaired
loans in our U.S. residential builder finance business as a result of the
downturn in the U.S. housing market. This was partially offset by lower
impaired loans in the Technology and media sector mainly due to the
favourable resolution of a particular impaired loan.
Gross impaired loans as a percentage of loans and acceptances
were .45% compared to .38% in the prior year, primarily reflecting
higher impaired loans in our U.S. residential builder finance business.
For further details, refer to Table 60 in the Additional financial informa-
tion section.
Allowance for credit losses
Total allowance for credit losses increased $86 million, or 6%, from a
year ago, primarily reflecting increased specific allowance related to
a weakening in credit quality of our U.S. residential builder finance
loan portfolio.
The specific allowance increased $88 million, or 33%, from the
prior year. The increase was mainly driven by higher impaired loans in
our U.S. residential builder finance business, primarily reflecting the
downturn in the U.S. housing market.
The general allowance remained relatively stable compared to
the prior year, as an increase in allowance mainly related to our U.S.
residential builder finance loan portfolio was offset by the impact of
a stronger Canadian dollar on the translated value of our U.S. dollar-
denominated allowance.
* GIL ratio: GIL as a percentage of loans and acceptances.
Five-year trend
Gross impaired loans
Gross impaired loans trended downward from 2003 to 2006, and
decreased $911 million, or 52%, primarily reflecting lower impair-
ment in our wholesale loan portfolio. In 2007, gross impaired loans
increased $306 million, or 37%, from the prior year, largely due to
higher impaired loans in our U.S. residential builder finance business
as a result of the downturn in the U.S. housing market.
Retail gross impaired loans remained relatively stable over the
period. The increase in gross impaired loans in both U.S. and Canadian
residential mortgages, primarily due to portfolio growth, was largely
offset by a decrease in impairment in our Canadian personal loan port-
folio over the period.
Wholesale gross impaired loans generally trended downward
from 2003 to 2006, and decreased $613 million, or 46%. The decline
was across all geographic areas and most industry sectors, with the
largest decrease in the Energy, Forest products, Transportation and
environment, and Agriculture sectors due to generally favourable eco-
nomic conditions over the period. In 2007, wholesale gross impaired
loans increased significantly, largely reflecting higher impairment in
our U.S. residential builder finance business triggered by the downturn
in the U.S. housing market.
The ratio of gross impaired loans as a percentage of loans and
acceptances declined significantly from 1.04% in 2003 to .38% in
2006, and increased to .45% in 2007, reflecting the factors discussed
above. For further details, refer to Table 60 in the Additional financial
information section.
Allowance for credit losses
Over the last five years, total allowance for credit losses of
$1,572 million in 2007, decreased $592 million, or 27%, from 2003,
primarily reflecting a reduction in specific allowance.
The specific allowance of $351 million in 2007 was down
$406 million, or 54%, compared to 2003. For the period 2003 to 2006,
the wholesale loan portfolio recorded the largest reduction in specific
allowance, and was broad-based across portfolios, industry sectors
and geographic regions. In 2007, specific allowance increased largely
resulting from a weakening in credit quality of our U.S. residential
builder finance loan portfolio driven by the downturn in the U.S. hous-
ing market.
The general allowance of $1,221 million in 2007 decreased
$186 million, or 13%, compared to 2003. The decrease was largely
due to the reversal of general allowance of $175 million and $50 million
in 2004 and 2006, respectively, largely reflecting improved credit
quality and economic conditions in those years.
90
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Provision for credit losses
The provision for credit losses is charged to income by an amount nec-
essary to bring the allowance for credit losses to a level determined
appropriate by management, as discussed in the Critical account-
ing policies and estimates section and Note 1 to our Consolidated
Financial Statements.
Provision for (recovery of) credit losses
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Credit cards
Small business (1)
Retail
Business (2)
Sovereign (3)
Bank
Wholesale
Total specific provision for loan losses
Total general provision
Total provision for credit losses
Specific PCL as a % of average net loans and acceptances
2007
2006
$
$
$
–
–
$
$
$
$
$
$
$
$
$
$
$
13
364
223
34
634
148
148
782
9
791
.33%
$
6
306
163
29
504
$
(22) $
–
–
(22) $
482
$
(53) $
429
$
.23%
Table 52
2007 vs. 2006
Increase (decrease)
7
58
60
5
130
170
–
–
170
300
62
362
n.m.
–
–
117%
19
37
17
26%
n.m.
n.m.
62%
117%
84%
10 bps
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
(1)
(2)
(3)
n.m. not meaningful
2007 vs. 2006
Total provision for credit losses (PCL) increased $362 million, or 84%,
compared to the prior year, which had been at a cyclically low level,
and has trended up towards the historical average. The increase
reflected higher provisions for both our wholesale and retail loan
portfolios, primarily reflecting portfolio growth and higher impaired
loans in our U.S. residential builder finance business triggered by the
downturn in the U.S. housing market. Specific PCL as a percentage of
average net loans and acceptances increased from a year ago, largely
reflecting higher impaired loans in our U.S. residential builder finance
business.
Specific PCL for retail loans was up $130 million, or 26%, from
a year ago. The increase was primarily attributable to higher provi-
sions in our credit cards and personal unsecured credit line portfolios,
largely reflecting higher loss rates and portfolio growth.
Specific PCL for wholesale loans increased $170 million over the
prior year. The increase was largely attributable to our business port-
folio mainly due to higher impaired loans in our U.S. residential builder
finance business and higher write-offs in Canada. Lower recoveries in
our corporate loan portfolio this year also contributed to the increase
in provisions.
The general provision increased $62 million from a year ago, pri-
marily reflecting a $50 million reversal of the general allowance related
to our corporate loan portfolio in the prior year. Higher provisions in
our U.S. residential builder finance loan portfolio, largely reflecting
a weakening in credit quality as a result of the downturn in the U.S.
housing market, also contributed to the increase.
Specific provision for credit losses (C$ millions)
1,000
750
500
250
0
Specific
PCL
PCL ratio*
.60%
.45%
.30%
.15%
.0%
2003
2004
2005
2006
2007
* PCL ratio: Specific PCL as a percentage of average net loans and acceptances.
Five-year trend
During the period 2003 to 2005, specific provision for credit losses
generally trended downward, primarily reflecting a reduction in
provisions for our business loan portfolio. We recorded significant
recoveries particularly in corporate loans in 2005 and 2006. In 2007,
specific provisions has trended up towards the historical average,
mainly reflecting higher provisions for our business loan portfolio,
largely due to increased impaired loans in our U.S. residential builder
finance business, portfolio growth and higher write-offs in Canada.
Higher provisions in our personal loan and credit cards portfolios
due to higher loss rates and portfolio growth also contributed to the
increase. The specific provision as a percentage of average net loans
and acceptances broadly declined from 2003 to 2006, largely due to
a reduction in provisions for our business loan portfolio. The ratio
increased to .33% in 2007, primarily reflecting higher impaired loans in
our U.S. residential builder finance business. For further details, refer
to Table 61 in the Additional financial information section.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
91
Market risk
Market risk is the risk of loss that may arise from changes in market
factors such as interest rates, foreign exchange rates, equity or com-
modity 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
composed of: (i) directional risk – arising from parallel shifts in
the yield curve, (ii) yield curve risk – arising from non-uniform
rate changes across a spectrum of maturities, (iii) basis risk –
resulting from an imperfect hedge of one instrument type by
another instrument type whose changes in price are not perfectly
correlated, and (iv) option risk – from changes in the value of
embedded options due to changes in prices or 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 prod-
ucts, 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 spread risk is the general adverse impact on our earnings
and economic value due to changes in the credit spreads associ-
ated with our holdings of instruments subject to credit risk.
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.
•
•
•
•
•
We conduct trading activities over-the-counter and on exchanges in
the spot, forward, futures and options markets, and we offer struc-
tured 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, com-
modities, and credit markets. Our trading operations primarily acts as
a market maker, executing transactions that meet the financial require-
ments 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 benefit-
ing 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 & Risk Policy Committee (CR&RPC). Market risk limit
92
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
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 (GRM) –
Market and Trading Credit Risk, which includes major units in Toronto,
London, New York and Sydney. The Market and Trading Credit Risk
group establishes market risk policies and limits, develops quantita-
tive techniques and analytical tools, vets trading models and systems,
maintains the Value-at-Risk (VaR) and stress risk measurement sys-
tems, 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 their market risks, work-
ing in partnership with GRM to ensure the alignment between risk
appetite and business strategies.
GRM – Market and Trading Credit Risk is responsible for the
determination 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 statistical 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.
The majority of trading positions in foreign exchange, interest
rate, equity, commodity and credit trading have capital calculated
under an internal models approach while structured credit deriva-
tives are calculated under the Standardized Approach. Also calculated
under the Standardized Approach for migration and default (specific)
risk are a limited set of interest rate products. These products and
risks are not included in our global VaR.
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 interval, a portfolio with a VaR of $20 million held over one
day would have a one in one hundred chance of suffering a loss greater
than $20 million in that day. VaR is measured over a 10-day horizon for
the purpose of determining 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 commod-
ity 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. As a result, historical scenar-
ios may not reflect the next market cycle. Furthermore, the use
of a 10-day horizon VaR for risk measurement implies that positions
could be unwound or hedged within 10 days but this may not be a
realistic assumption if the market becomes largely or completely
illiquid. For example, this was observed for certain U.S. subprime-
related securities since August 2007. 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
compare 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 the movement of actual market rates over the
next day and over the next 10 days on the market value of the port-
folios. 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 periodically to
further ensure accuracy and reliability. In 2007, there were five occur-
rences of a back-test exceeding VaR. This occurred during the volatile
markets of July and August. VaR calculated using a historical window
can lead to back-testing breaches when the historical window used in
the calculation is less volatile than current markets. During this period,
we frequently updated our scenarios to keep pace with current
market events.
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.
While we endeavour to be conservative in our stress testing, there can
be no assurance that our stress testing assumptions will cover every
market scenario that may unfold.
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 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 commit-
tee of Capital Markets.
Internal reporting to senior management includes stand-alone
risk calculations for portfolios that have standardized regulatory capi-
tal which are then combined with models-based results to present an
aggregated enterprise risk profile.
The following table shows our global VaR for total trading
activities under our models based approach for capital by major risk
category and also shows the diversification effect, which is calculated
as the difference between the global VaR and the sum of the separate
risk factor VaRs.
Global VAR by major risk category
Table 53
2007
2006
As at
Oct. 31
$
8
4
2
20
3
(19)
$ 18
For the year ended October 31
High
Average
Low
$ 18
7
2
23
5
n.m.
$ 27
$
9
2
1
19
3
(13)
$ 21
$
4
1
–
14
2
n.m.
$ 16
As at
Oct. 31
$
7
2
1
13
3
(9)
$ 17
For the year ended October 31
High
Average
Low
$ 11
4
2
20
4
n.m.
$ 25
$
7
2
1
13
3
(8)
$ 18
$
5
1
–
9
2
n.m.
$ 13
(C$ millions)
Equity
Foreign exchange
Commodities
Interest rate
Credit specific
Diversification
Global VAR
n.m. not meaningful
Global VaR by major risk category (C$ millions)
0
-3
-6
-9
-12
-15
-18
-21
-24
November
2006
February
2007
May
2007
August
2007
October
2007
Daily interest rate VaR
Daily equity VaR
Daily commodities VaR
Daily credit specific risk VaR
Daily foreign exchange VaR
Global VaR
2007 vs. 2006
Average global VaR for the year of $21 million was up compared to
$18 million a year ago. This increase largely reflected an increase
in both Interest rate and Equity VaR due to a higher level of trading
activity and increased market volatility during the current year. These
increases were mostly offset by an improvement in the overall diversi-
fication effect, which rose to 38% compared to 31% a year ago.
Trading revenue
2007 vs. 2006
The volatility in daily trading revenue in the latter part of 2007 reflected
difficult trading conditions in both interest rates and credit-related
products arising from a very stressed market during that period. Equity
markets also experienced high volatility in July and August. Writedowns
related to the valuation of U.S. subprime RMBS and CDOs of ABS in our
Structured Credit business totalled $357 million. In addition to this
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
93
Histogram of daily net trading revenue (1), (2) (number of days)
Daily net trading revenue and global VaR (1), (2) (C$ millions)
Histogram of daily net trading revenue (1), (2) (number of days)
Daily net trading revenue and global VaR (1), (2) (C$ millions)
one-day trading loss, we experienced 25 days of net trading losses with
the largest one-day loss of $23 million.
24
16
8
0
6
4
2
0
-334 -30
-10
0
10
30
60
Daily net trading revenue (C$ millions)
Histogram of daily net trading revenue (1) (number of days)
-30
-15
0
15
30
45
Daily net trading revenue (C$ millions)
60
50
40
30
20
10
0
-10
-20
-30
-340
24
16
8
November
2006
February
2007
May
2007
August
2007
October
2007
Daily net trading revenue
Global VaR
0
-334 -30
-10
0
10
30
60
Daily net trading revenue (C$ millions)
60
50
40
30
20
10
0
-10
-20
-30
-340
November
2006
February
2007
May
2007
August
2007
October
2007
Daily net trading revenue
Global VaR
(1)
(2)
Trading revenue on a taxable equivalent basis excluding revenue related to consolidated VIEs.
The $357 million writedown on the valuation of U.S. subprime RMBS and CDOs of ABS was included on October 31, 2007.
Non-trading market risk (Asset/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.
For additional information regarding the use of derivatives in asset
and liability management, refer to the Off-Balance sheet section and
Note 7 to our Consolidated Financial Statements. We continually moni-
tor the effectiveness of our interest rate risk mitigation activity within
Corporate Treasury on a value and earnings basis.
For a discussion of the management of foreign exchange risk in
the non-trading balance sheet, refer to the Hedging foreign currency-
denominated operations discussion in the Capital management section.
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 com-
pliance with policies and operating standards. Our Asset and Liability
Committee (ALCO) provides oversight to Corporate Treasury and
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 tradi-
tional 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 rates charged to clients as well as funds transfer pricing rates. Key
rate analysis is utilized as a primary tool for risk management. It pro-
vides 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.
94
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
6
Histogram of daily net trading revenue (1) (number of days)
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.
4
We also focus on developing retail product valuation models that
2
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.
0
-30
-15
45
30
15
0
Daily net trading revenue (C$ millions)
Validation
We supplement our assessment by measuring interest rate risk for
a range of dynamic and static market scenarios. Dynamic scenarios
simulate 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 immediate and sustained
±100 basis point parallel shift of the yield curve. The limit for net
interest income risk is 3% of projected net interest income, and for
economic value of equity risk, the limit is 5% of projected common
equity. Interest rate risk policies and limits are reviewed and approved
annually by the Board of Directors.
Risk reporting
The individual subsidiaries and business segments report the interest
rate risk management activity on a monthly basis. They must also
immediately report any exceptions to the interest rate risk policies to
Corporate Treasury and seek approval of the corrective actions.
An Enterprise interest rate risk report is reviewed monthly by
the ALCO and quarterly by the Group Risk Committee and the Board
of Directors.
Market risk measures – Non-trading banking activities
Table 54
Economic value of equity risk
Net interest income risk
2007
2006
2005
(C$ millions)
Before-tax impact of:
100bp increase in rates
100bp decrease in rates
Before-tax impact of:
200bp increase in rates
200bp decrease in rates
Canadian
dollar
impact
U.S.
dollar
impact (1)
All
currencies
Canadian
dollar
impact
U.S.
dollar
impact (1)
Economic
Economic
All
value Net interest
currencies of equity risk
income risk of equity risk
value Net interest
income risk
$
(391) $
315
(49) $
(6)
(440) $
309
40 $
(97)
14 $
(14)
54 $
(111)
(496) $
375
87 $
(153)
(435) $
291
(819)
640
(111)
(87)
(930)
553
68
(202)
29
(29)
97
(231)
(1,044)
658
147
(319)
(920)
461
106
(181)
162
(365)
(1)
Represents the impact on the non-trading portfolios held in our U.S. banking operations.
2007 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
2007, 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 result in direct or indirect financial loss, reputa-
tional impact, regulatory censure, or failure in the management of
other risks such as credit or market risk.
Our operational risk management framework flows directly from
our enterprise risk management framework and sets out the principles
and practices that we use to manage operational risk by identifying,
measuring, controlling, and monitoring and reporting it. During 2007,
we strengthened our operational risk management framework by
expanding the common operational risk language that supports the
consistent identification, assessment and understanding of risks.
We also implemented our “converged” operational risk and control
assessment and monitoring program. This enterprise-wide program
integrated several stand-alone programs to identify and assess
operational risks.
Responsibilities
The Board of Directors is responsible for providing oversight and
ensuring that appropriate policies have been implemented to man-
age operational risk. The Chief Risk Officer (CRO) and Group Risk
Management (GRM) are responsible for implementing the operational
risk management framework on an enterprise-wide basis, as well as
for directing and approving significant area-specific operational
risk policies. A dedicated team within GRM designs and supports
operational risk policies, programs and initiatives, and monitors
implementation progress and ongoing execution. The businesses
and corporate support groups are responsible for the informed and
active management of the operational risks within their activities in
accordance with the operational risk management framework.
Where appropriate, execution of operational risk management
programs is conducted by GTO on behalf of the businesses and
corporate support groups.
Risk measurement
Operational risk is difficult to measure in a complete and precise man-
ner, given that exposure to operational risk is often implicit, bundled
with other risks, or otherwise not taken on intentionally. In the banking
industry, measurement tools and methodologies continue to evolve.
Nonetheless, we are able to gauge our operational risk exposure by
using several approaches concurrently.
Risk assessment
Operational risks are identified and their potential impact assessed
through our enterprise-wide integrated operational risk and control
assessment and monitoring program. Our operational risk management
framework is used to ensure consistent identification and assessment
of operational risks and the controls used to manage these.
Risk indicators
Our businesses and corporate support groups use a broad range
of risk indicators to manage their day-to-day activities. GRM uses
indicators to monitor operational risk at the enterprise level. These
indicators provide insight into the level and composition of our
operational risk exposure and potential changes in these.
Operational event data collection and analysis
Operational risk events are reported in a central enterprise database.
Comprehensive information about these events is then collected, and
includes information regarding amount, occurrence, discovery date,
business area and product involved, root causes and risk drivers.
Analysis of operational risk event data helps us to understand where
and how our risks are manifesting themselves, provides a historical
perspective of our operational risk experience, and establishes a basis
for measuring our operational risk exposure and the capital needed to
underpin this type of risk.
Industry loss analysis
We review and analyze information on operational losses that have
occurred at other financial institutions, using published information
and information we acquire through our membership in the
Operational Riskdata eXchange (ORX), a private data-sharing
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
95
consortium. Both provide insights into the size and nature of potential
exposures, which enables us to benchmark our loss experience
against those of our peers to determine if our experience puts us in an
outlier position. It also allows us to monitor emerging developments
and trends that affect the financial industry as a whole.
Risk control
Operational risk is managed through our infrastructure, controls,
systems and people, complemented by central enterprise-wide groups
focusing on management of specific operational risks such as fraud,
privacy, outsourcing, and business disruption, as well as people and
systems risks.
A number of our enterprise-wide groups ensure that all of these
controls and systems are effective under our operational risk manage-
ment framework. These include compliance, which ensures a complete
view of our regulatory obligations and provides a co-ordinated,
effective response to these, and the internal audit group, which pro-
vides independent assessment of risk management practices, internal
controls and corporate governance processes.
Risk mitigation
Any high-risk exposures that we identify are subject to remedial
measures, monitoring and control testing. This includes exposures
identified through our integrated risk and control assessment and
monitoring program, internal audits, compliance reviews, business
continuity readiness reviews, or operational risk event reporting.
Our corporate insurance program enables us to 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.
Reporting
GRM provides quarterly enterprise level risk reporting to senior
management and the Board of Directors. The operational risk reporting
includes an overview of our operational risk profile and the trend and
outlook for our exposure. Details are provided on areas of elevated
risk, individual operational risks where there is heightened awareness,
regulatory or compliance issues, and large operational risk events.
This reporting is supplemented with more detailed specific reporting
by groups such as compliance, audit, legal and human resources.
Liquidity and funding risk
Liquidity and funding risk is the risk that an institution is unable to
generate or obtain 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 adequate sources of reliable and cost-effective cash or its
equivalents are continually available to satisfy our current and prospec-
tive financial commitments 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,
including demonstrated capacities to monetize specific asset
classes
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
reinforce these risk mitigation strategies by assigning prudential limits
or targets to metrics associated with these activities and regularly
measuring and monitoring various sources of liquidity risk under both
normal and stressed market conditions. In managing this risk, we
aim to achieve a prudent balance between the level of risk we take
and the cost of its mitigation, recognizing that this balance may
need to be adjusted if our internal and/or external environments
change materially.
Responsibilities
The Board of Directors is responsible for oversight of our liquidity
and funding management framework, which is developed and imple-
mented by senior management.
•
The Audit Committee approves our liquidity and funding man-
agement framework, our pledging framework, and liquidity
contingency plan and establishes broad liquidity risk tolerance
levels, and the Board of Directors is informed on a periodic basis
about our current and prospective liquidity condition.
The Group Risk Committee and our Asset and Liability Committee
(ALCO) share management oversight responsibility for liquidity
and funding policies and receive regular reports detailing compli-
ance with key limits and guidelines.
Corporate Treasury has global responsibility for the develop-
ment of liquidity and funding management policies, strategies
•
•
96
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
and contingency plans and for recommending and monitoring
limits within the framework. In this role, Corporate Treasury is
assisted by Group Risk Management. Corporate Treasury actively
participates in national and international industry initiatives to
benchmark and enhance its liquidity management practices.
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’s con-
servative estimates, assumptions and judgments pertaining to current
and prospective firm-specific and market conditions and the related
behaviour of our clients and counterparties. We measure and manage
our liquidity position from three risk perspectives as follows:
Structural liquidity risk
Structural liquidity risk management addresses the risk due to
mismatches 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 both the cash capital and
survival horizon models to assist in the evaluation of balance sheet
liquidity and determination of the appropriate term structure of our
debt financing. These methodologies also allow us to measure and
monitor the relationship between illiquid assets and core funding,
including our exposure to a protracted loss of unsecured wholesale
deposits under stressed conditions.
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
that are subject to an enterprise-wide framework that assigns a risk-
adjusted limit to our aggregate pledging exposure and individual limits
by types of pledging activities. Pledged assets include a pool of
eligible assets that are reserved exclusively to support our participa-
tion in payment and settlement systems.
Contingent liquidity risk
Contingent liquidity risk management assesses the impact of and
our intended responses to sudden stressful events. The liquidity
contingency plan identifies comprehensive action plans that would be
implemented depending on the duration and severity of the various
liquidity crises identified in our stress testing program. Corporate
Treasury maintains and administers the liquidity contingency plan.
The Liquidity Crisis Team, consisting of senior representatives of all
key business and functional units, meets regularly to engage in stress
testing and to review our liquidity contingency preparedness.
Our stress testing exercises are based on models that measure
our potential exposure to global, country-specific or RBC-specific
events (or a combination thereof) and consider both historical and
hypothetical events. Different levels of severity are considered for
each type of crisis including ratings downgrades of two and four
notches and to non-investment grade for RBC-specific events. These
comprehensive tests include elements of scenario and sensitivity
stress testing techniques. In all cases, the crisis impact is measured
over a nine-week horizon, which is also used in our key measure of tac-
tical liquidity risk and is what we consider to be the most crucial time
span for a liquidity event. Liquidity Crisis Team members contribute
to assumptions about the expected behaviour of balance sheet asset
and liability categories and off-balance sheet exposures based on
their specialized client, product and market perspectives. Some tests
are run monthly, others are only run annually. Frequency is determined
by considering a combination of their likelihood and impact. After
reviewing test results, the liquidity contingency plan and other related
liquidity and funding risk management practices may be modified
in light of lessons learned. Failure to meet predetermined minimum
targets in some of these tests, as well as in aforementioned risk mea-
sures, would result in discussion with senior management and, as
necessary, the Board of Directors, and possibly lead to revised limits
and targets.
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 (such as
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
port folios are subject to minimum asset levels and strict eligibility
guidelines to ensure ready access to cash in emergencies.
Risk control
We monitor and manage our liquidity position on a consolidated
basis and consider legal, regulatory, tax, operational and any other
applicable restrictions when analyzing our ability to lend or borrow
funds between branches, branches and subsidiaries, and subsidiaries.
Policies
Our principal liquidity and funding policies are reviewed and approved
annually by senior management committees and the Board of
Directors. These broad policies establish risk tolerance parameters
and authorize senior management committees or Corporate Treasury
to approve more detailed policies and limits related to specific mea-
sures, businesses and products. These policies and procedures govern
management, measurement and reporting requirements and define
approved liquidity and funding limits.
reviewed periodically to determine if they remain valid or changes to
assumptions and limits are required in light of internal and/or external
developments. Global market volatility in the latter part of 2007 has
prompted us to modify the liquidity treatment of certain asset classes
to reflect our expectations that market liquidity for these products
will be sporadic for some time. Some limits are in the process of being
reviewed and possibly revised to take into consideration the results of
updated stress tests that reflect lessons learned during this period of
market volatility.
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, branches, subsidiaries
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. To that effect, we completed the
first Canadian covered bond issuance in November 2007. 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, 2007 (1)
Moody’s Investors Service
Standard & Poor’s
Fitch Ratings
DBRS
Short-term
debt
Senior long-
term debt
P-1
A-1+
F1+
R-1(high)
Aaa
AA–
AA
AA
Table 55
Outlook
stable
positive
stable
stable
(1)
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.
Authorities and limits
Targets for our structural liquidity position, based on both a “cash cap-
ital” 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 treat-
ment of cash flow assets and liabilities under varying conditions are
During the year, there were two positive developments with respect to
our ratings. In the second quarter of 2007, Moody’s Investors Service
upgraded our senior long-term debt rating to Aaa from Aa2 as a result
of refinements made to their joint default analysis, and in the third
quarter of 2007, Standard & Poor’s revised our rating outlook to posi-
tive from stable, citing among other points, a sound liquidity profile and
a very robust liquidity management infrastructure. Our Fitch and DBRS
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
97
ratings and outlooks remain unchanged from October 31, 2006. Our
collective ratings continue to be the highest categories assigned by the
respective agencies to a Canadian bank and these strong credit ratings
support our ability to competitively access unsecured funding markets.
financial structure influence our long-term funding activities. We oper-
ate debt issuance programs in Canada, the U.S., Europe, Australia and
Japan. Diversification into new markets and untapped investor seg-
ments is also constantly evaluated against relative issuance costs.
Deposit profile
The composition of our global deposit liabilities is summarized in
Note 13 to our Consolidated Financial Statements. In 2007, personal
deposits remained the key 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 conceivable 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. Core deposits, consisting of
our own statistically derived estimates of the highly stable portions
of all of our relational personal, commercial and institutional balances
(demand, notice and fixed-term) together with wholesale funds matur-
ing beyond one year, increased during the year by about 2% to 56%
of our total deposits. 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 mar-
kets, which allows us to constantly monitor market developments and
trends in order to identify opportunities and risks and to take appropri-
ate and timely actions.
Term funding sources
Table 56
(C$ millions)
2007
2006
2005
Long-term funding outstanding $ 51,540 $ 33,361 $ 24,004
Total mortgage-backed
securities sold
Commercial mortgage-backed
securities sold
Credit card receivables financed
through notes issued by a
securitization special
purpose entity
14,239
12,186
2,405
2,250
1,914
2,759
8,487
2,500
1,237
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 objec-
tives, market conditions, interest rates, credit spreads and desired
Contractual obligations
During 2007, we continued to expand our long-term funding base
by issuing, either directly or through our subsidiaries, $30.7 billion
of senior deposit notes in various currencies and markets. Total long-
term funding outstanding increased $18.2 billion. Outstanding senior
debt containing ratings triggers, which would accelerate repayment,
constitutes 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 $2.1 billion. Our credit
card receivables, which are financed through notes issued by a
securitization special purposes entity, increased year over year
by $509 million. For further details, refer to the Off-balance sheet
arrangements section and Note 5 to our Consolidated Financial
Statements.
Impact of global market turmoil to our term funding capacity
Despite recent global market events, including a reduction in liquidity
in term funding markets, our liquidity and funding position remains
sound and adequate to execute our strategy. There are no known
trends, demands, commitments or events that are presently expected
to materially change this position.
By leveraging our new and existing domestic and global funding
programs, we continued to raise wholesale term funding in size
during the latter half of 2007. Most of the funding was raised through
large benchmark-sized transactions, but a significant amount was
also raised in a variety of lower-cost funding transactions. In 2007, we
raised wholesale term funding in 12 different currencies, including
six currencies in the fourth quarter. The market turmoil did not prevent
us from launching the first Canadian covered bond program, where
we sold €2 billion of notes in the inaugural transaction, which settled
on November 5, 2007. Our ability to raise wholesale term funding
continued to significantly exceed our funding needs during the latter
half of 2007.
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.
Over 5 years
Total
Total
2006
Table 57
2005
Total
$ 4,670
6,117
1,224
$ 51,540
6,235
3,161
$ 33,361
7,103
2,486
$ 24,004
8,167
2,508
2007
Over
3 to 5 years
$ 13,628
–
608
(C$ millions) (1)
Within 1 year
1 to 3 years
Unsecured long-term funding
Subordinated debentures
Obligations under leases (2)
$ 16,892
–
494
$ 16,350
118
835
(1)
(2)
Amounts represent principal only and exclude accrued interest.
Substantially all of our lease commitments are operating.
$ 17,386
$ 17,303
$ 14,236
$ 12,011
$ 60,936
$ 42,950
$ 34,679
98
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Reputation risk
Reputation risk is the risk that an activity undertaken by an organiza-
tion 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 primar-
ily 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 us.
In addition to the six risk management principles discussed
earlier in the Risk management overview section, the following prin-
ciples also 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 employ-
ees, including senior management, and extends to all members of
the Board of Directors.
Code of Conduct
Our corporate values and Code of Conduct underpin the management
of risk to our reputation and drive our ethical culture. Our Code of
Conduct is the foundation of employee and director awareness of
the kinds of conduct that protect our reputation, and those that put
our reputation at risk.
Responsibilities
The management of reputation risk is overseen by the Board of
Directors. The key senior management committees involved with
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 comply with or a failure to adapt to current and
changing regulations, law, industry codes or rules, regulatory expecta-
tions or ethical standards.
Global Compliance, which is a part of Group Risk Management
(GRM) has developed a comprehensive enterprise compliance man-
agement (ECM) framework that is consistent with regulatory guidance
from the OSFI and other regulators. The framework is designed to
promote the proactive, risk-based management of regulatory risk.
It applies to all of our businesses and operations, legal entities and
employees globally and confirms the shared accountability of all
employees across the organization for ensuring we maintain robust
and effective regulatory risk and compliance controls. The framework
covers the following eight elements of compliance management:
liaison with regulators, risk identification and assessment, control
design and evaluation, learning and awareness, compliance execution,
monitoring and oversight, issue management and reporting, and new
initiative management.
Responsibilities
Global Compliance sets out the enterprise-wide requirements for the
identification, assessment, control, monitoring and reporting of regu-
latory and compliance risk (and associated operational and
reputation risk), as well as remediation of any issues identified.
Oversight is provided by the Board of Directors through the CR&RPC
and the Audit Committee. The Ethics and Compliance Committee
supports our management of regulatory risk. It approves compliance
programs and compliance-related policies and informs and advises
the Group Risk Committee (GRC), CR&RPC and the Audit Committee on
significant regulatory issues and remedial measures.
The Chief Compliance Officer (CCO) and Global Compliance work
closely with business partners to ensure the overall effectiveness
monitoring and reporting on reputation risk at an enterprise level
are: Ethics and Compliance Committee, Policy Review Committee,
Structured Transactions Oversight Committee and the Group Risk
Committee.
Risk control
Policies
Policies and procedures support the management of reputation risk
across the organization. Business segments have specific policies in
place to manage the risks within their businesses, including reputa-
tion risk. A comprehensive set of policy requirements applies to the
identification and assessment of reputation risk, 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 require-
ments for managing conflicts of interest.
Reporting
The responsibility for monitoring and reporting on reputation risk
issues is primarily within GRM. Regular comprehensive reporting is
provided to the Group Risk Committee and the Board of Directors and
its committees. This includes annual reporting on fraud issues, litiga-
tion issues and quarterly reporting on regulatory, compliance and
operational risk issues. Reputation risk issues are also raised in inter-
nal audit reports provided to senior management, summaries of which
are provided to the Audit Committee.
of compliance and regulatory risk management controls across the
enterprise through the ECM framework, which includes 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 of Directors and timely execution of
appropriate action plans.
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 prod-
ucts and services, and the acquisition or development of new lines
of business. It is also measured through the testing of the effective-
ness of the controls 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 are working
to develop such metrics. Meanwhile, we use what measures are
available to identify issues and trends.
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 must reconfirm their under-
standing of and commitment to comply with the Code of Conduct at
least every two years, and employees in certain key roles, such as
Group Executive and others in financial oversight roles as identified in
our Auditor Independence Policy, must do so annually.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
99
CR&RPC. In addition, the CCO provides an annual report on overall
compliance, and on specific topics, such as related party transactions,
conflicts of interest, and compliance with Canadian consumer protec-
tion requirements, and the Global Chief Anti-Money Laundering Officer
reports at least annually on anti-money laundering and anti-terrorist
financing compliance. Similarly, senior compliance officers of our oper-
ating subsidiaries provide relevant annual and quarterly reports to
their respective senior management and Boards of Directors.
•
Train employees to identify and manage environmental risks
• Maintain an open dialogue with stakeholders, both internal and
external to the organization
• Measure our performance and compare it to our objectives,
which enables us to identify enhancement opportunities
Periodically verify that our environmental risk management
policies and processes are operating as intended.
•
Policies
Our Environmental Blueprint, launched in October 2007, updates our
corporate environmental policy. It details environmental issues that
are important to our stakeholders and us and outlines our commit-
ment to reducing our environmental footprint, responsible lending and
investment, and business growth and development of environmental
products and services.
Our suite of environmental credit risk management policies
enables us to proactively identify and manage environmental risks in
our lending activities. These policies are regularly reviewed to ensure
compliance with legal and operational requirements, and to take into
account evolving business activities.
In addition to general policies for commercial and corporate
lending, we have sector-specific and business-segment-specific poli-
cies and guidelines. For example, we have a separate Policy on Social
and Environmental Review in our Project Finance business, which
reflects our commitment to the Equator Principles (EPs). The EPs,
which were revised in 2007, are voluntary guidelines that help financial
institutions address the environmental and social risks associated
with project finance.
Management and mitigation
In addition to adherence to policies, standards, procedures and
guidelines, environmental risk is mitigated through transaction
structuring and the use of insurance as well as other mechanisms.
The CEA supports lenders, risk managers and clients in the manage-
ment and mitigation of environmental risks in transactions, by
recommending strategies to treat, eliminate or transfer (via insurance)
environmental risk.
Reporting
The Board of Directors and senior management committees are
periodically provided with reports and analysis on risks associated
with environmental issues (for example, climate change and the
Kyoto Accord, and the EPs), as appropriate. Loan losses resulting from
environmental issues are tracked and reported to senior management.
We report on our implementation of the EPs annually in our
Corporate Responsibility Report and Public Accountability Statement
(CRR & PAS) and on rbc.com. The CRR & PAS also provides information
about our environmental policies, lending, emerging issues, stake-
holder engagement, and environmental performance and initiatives.
We provide online and face-to-face training for all our employees
in the area of anti-money laundering compliance and training in other
compliance and regulatory risk related matters for relevant employees
through other online tools and other job aids, as part of employees’
regular job training, in new employee orientation materials, and peri-
odically through targeted face-to-face or webcast training.
Reporting
On a quarterly basis, the CCO reports compliance matters to senior
management, management committees, the Audit Committee and
Environmental risk
Environmental risk is the risk of loss to financial, operational or
reputation value resulting from the impact of environmental issues.
Environmental risk arises from our business activities and our opera-
tions. For example, the environmental issues associated with our
clients’ purchase and sale of contaminated property or development of
large-scale projects may give rise to credit and reputation risk for us.
Operational and legal risks may arise when we are faced with environ-
mental issues at our branches, offices or data processing centres.
We undertake independent and collaborative research to identify
and better understand the material environmental risks we face.
Some current and emerging issues include climate change, biodiver-
sity, water and the rights of indigenous peoples, among others.
Responsibilities
Environmental risk management activities are managed by the
Corporate Environmental Affairs Group (CEA) with support from
our business segments and Corporate Support groups. The CEA is
responsible for developing and implementing the environmental risk
management system, including identifying environmental risks in the
organization, designing and supporting environmental risk policies,
programs and initiatives, monitoring implementation, and leading
communication and training. The CEA also provides advisory services
and support to business and functional units on the management of
specific environmental risks.
Risk measurement
Some environmental risks associated with our business and opera-
tional activities can be easily quantified while others are assessed on
a qualitative basis. For example, in our lending activities, we quantify
the potential cost of cleaning up environmental contamination of
properties used as security for loans, and the cost to an obligor of
making operational changes that may be required to meet environ-
mental regulatory requirements or satisfy other obligations. In our
own operations, we quantify our cost to maintain compliance with
environmental regulations or applicable standards. Other environ-
mental risks are assessed on a qualitative basis, for example, the
exposure of a particular industry to the effects of climate change and
climate change regulations. As environmental risk measurement meth-
odologies mature, particularly with respect to climate change, we will
incorporate more quantitative risk measures into our processes.
Risk control
We manage environmental risk by maintaining an environmental
management system, including policy requirements, management and
mitigation strategies, and reporting. Specifically, to manage environ-
mental risk, we:
•
Develop and maintain environmental policies, standards,
procedures and guidelines
• Monitor relevant laws and regulations, as well as other
requirements to which the bank adheres
• Maintain environmental programs and initiatives
•
Establish roles and responsibilities for environmental
management in the organization
100
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
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 arises from our life and health,
creditor, home and auto, and travel insurance, and reinsurance busi-
nesses. 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 misestimation 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 admin-
istering policies, or of processing claims, exceeds the costs
assumed in pricing calculations.
•
•
Responsibilities
Insurance risk approval authorities are established by the Board of
Directors upon recommendation of its committees and delegated to
senior management.
The respective boards of directors of the insurance subsidiar-
ies are responsible for the stewardship of the insurance companies.
These boards of directors oversee and monitor the management of the
insurance subsidiaries and ensure that the subsidiaries are properly
managed and functioning within our overall strategies and policies.
Group Risk Management (GRM) is responsible for providing risk
management direction and oversight to the insurance businesses
and for providing comprehensive reporting of insurance risks facing
the organization. The Appointed Actuaries of our Canadian insur-
ance subsidiaries are appointed by the boards of directors and have
statutory requirements to provide opinions on adequacy of liabilities,
sufficiency of capital, the insurance company’s future financial condi-
tion and fairness of treatment for policyholders. External actuarial
reviewers, in accordance with the OSFI guidelines and Canadian
Institute of Actuaries standards, provide oversight on the work of the
Appointed Actuaries. Our international insurance subsidiaries receive
similar actuarial oversight. Global Functions and Global Technology
and Operations (GTO) also provide direction and oversight to manage
risk within their areas of expertise.
Insurance business units are responsible for the active manage-
ment of insurance risk in partnership with GRM, other Global Functions
groups and GTO.
Risk measurement
We measure insurance risks at regular intervals to ensure that our risk
profile is appropriately monitored, reported, and aligned with business
assumptions. These risk measurements are used for Economic Capital
quantification, valuation of actuarial liabilities, and to meet statutory
reporting requirements. This process is managed by GRM through the
use of models.
Models used for risk measurement are subject to a robust and
systematic process of review and reporting in accordance with our
Model Risk Policy. Key elements of the policy include maintaining
appropriate model documentation, an approval process to ensure
Strategic risk
Strategic risk is the risk that an enterprise or a particular business area
makes inappropriate strategic choices, or is unable to successfully
implement selected strategies or related plans and decisions.
We apply the following principles to manage strategic risk:
•
•
Significant decisions are aligned with our enterprise strategy
Business segment strategy is aligned with our enterprise strategy
appropriate segregation of duties, independent and periodic model
reviews, and clear accountability and oversight.
Risk control
Policies
Insurance risk policies articulate our strategies to identify, prioritize
and manage insurance risk. GRM is responsible for insurance risk
policies which establish the expectations and parameters within which
the insurance businesses may operate, communicate our risk tolerance,
and ensure accountability through clear roles and responsibilities.
Authorities and limits
Risk approval authorities and limits are established by the Board of
Directors and delegated to management within the business units in
order to guide insurance business activities. These delegated authori-
ties and limits ensure our insurance portfolio is well diversified and
within the risk appetite as approved by the Board of Directors.
Risk oversight and approval
GRM provides independent oversight over our insurance business
activities including product development, product pricing, under-
writing and claims management. GRM also approves authority for
activities, which exceed business unit authorities and limits, and
certain business activities, which are deemed to be of significant risk.
Risk mitigation
Our key elements for identifying, assessing and managing insurance
risk include a risk-based approach for product development and
pricing, effective guidelines and practices for underwriting and claims
management. In addition, transferring insurance risk to independent
insurance companies or reinsurance is used to diversify our portfolio
of insurance risks, limit loss exposure to large risks, and provide
additional capacity for future growth.
Actuarial liabilities
Actuarial liabilities are estimates of the amounts required to meet obli-
gations resulting from insurance contracts. Liabilities for estimated
future policy benefits and expenses are established in accordance with
the standards of practice of the Canadian Institute of Actuaries and the
requirements of the OSFI and other relevant professional and regula-
tory bodies. Actuarial liabilities under Canadian GAAP are calculated
using the Canadian Asset Liability Method. These estimates and actu-
arial assumptions include explicit provisions for adverse deviations
to ensure adequacy of liabilities and are validated through extensive
internal and independent external reviews and audits.
Reporting
GRM regularly provides independent evaluation and reporting on our
insurance risk exposures to management at the business segment
level and at the enterprise level. The reports analyze and communicate
insurance risk information and contribute to the overall understanding
of insurance risk. Reporting includes an assessment of risks facing the
insurance business units, trends related to all claims and adequacy of
actuarial liabilities. The reports also provide an assessment of the risk-
return profile of insurance products and a view of future potential risks.
•
All business strategies are supported by market and competitive
analysis and financial projection of their expected impact.
The effective identification and assessment of this risk is critical
for us and involves the Group Executive and the Board of Directors
when identifying and assessing various strategic opportunities for
the organization.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
101
Responsibilities
Responsibility for successfully implementing strategies is mandated to
the individual heads of the businesses. The Strategy and Development
team within Global Functions is responsible for the articulation of our
enterprise strategy. This team also provides support for the develop-
ment of strategies of the business segments and lines of business. The
identification and analysis of strategic issues, opportunities and risks
we face is an ongoing component of their overall responsibilities.
Risk control
The project appropriation request (PAR) process is used to manage
strategic risk. Our strategic initiatives group provides an initial review
and co-ordinates circulating each PAR to GRM, Law and Corporate
Treasury for review, comments and approval. The Board of Directors
and/or Group Risk Committee may approve the finalized version if
their approval is warranted. PARs are a critical part of our corporate
governance framework and are available for review by regulators or
our external auditors as required.
Competitive risk
Competitive risk is the risk associated with the inability to build
or maintain sustainable competitive advantage in a given market
or markets. This risk can arise within or outside the financial
sector, from traditional or non-traditional competitors, domestically
or globally.
We manage competitive risk through appropriate identification
and assessment as part of our overall risk management process.
This includes risk assessment of new or enhanced products and ser-
vices, alliances and acquisitions. Our ability to adapt to a changing
competitive environment will impact our overall financial performance.
Systemic risk
Systemic risk is the risk that the financial system as a whole may not
withstand the effects of a crisis resulting from extraordinary economic,
political, social or financial circumstances. This could result in finan-
cial, reputation or other losses.
Systemic risk is considered to be the least controllable risk we
face. Our ability to mitigate this risk when undertaking business
activities is very limited, other than through collaborative mechanisms
between industry participants, and, as appropriate, the public sector,
to reduce the frequency and impact of these risks.
Additional risks that may affect future results
By their very nature, forward-looking statements, including those
made in this document, require us to make assumptions and are sub-
ject to inherent risks and uncertainties which may cause our actual
results to differ materially from our expectations expressed in such
forward-looking statements. Factors that might cause our actual finan-
cial performance to vary from that described in our forward-looking
statements include credit, market, operational, liquidity and funding
risks, and other risks discussed in detail in the Risk management
section. In addition, the following discussion sets forth other factors
we believe could cause our actual results to differ materially from
expected results.
Industry factors
General business and economic conditions in Canada, the
United States and other countries in which we conduct business
Interest rates, foreign exchange rates, the stability of various financial
markets, including the impact from the continuing volatility in the
U.S. subprime and related markets and lack of liquidity in various
other financial markets, consumer spending, business investment,
government spending, the level of activity and volatility of the capital
markets, inflation and terrorism each impact the business and eco-
nomic environments in which we operate and, ultimately, the level of
business activity we conduct and earnings we generate in a specific
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
market could cause a reduction in new issue and investor trading
activity or assets under management and assets under administration,
resulting in lower fee, commission and other revenue. Also, defaults
by a large financial institution in Canada, the United States or interna-
tionally could adversely affect the financial markets generally and us
specifically.
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 signifi-
cant exposure is to the U.S. dollar due to 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 four
years has had a significant effect on our results. We are also exposed
to the British pound and the Euro due to our activities conducted inter-
nationally in these currencies. Further appreciation of the Canadian
dollar relative to the U.S. dollar, British pound and Euro reduced the
translated value of U.S. dollar-, British pound- and Euro-denominated
revenue, expenses and earnings.
Government monetary and other policies
Our businesses and earnings are affected by the monetary policies
that are adopted by the Bank of Canada and 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 oper-
ate. 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 United States and
internationally, which may increase the risk of default by such clients
and counterparties. Our businesses and earnings are also affected by
fiscal or other policies that are adopted by various regulatory authori-
ties in Canada, the United States and international agencies.
102
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
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, includ-
ing 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 competition could also reduce fee revenue
and adversely affect our earnings.
Changes in laws and regulations
Laws and regulations are in place to protect the financial and other
interests of our clients, investors and the public interest. Changes to
laws, including tax laws, regulations or regulatory policies, including
changes to our capital management framework, as well as 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 compli-
ance. 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
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
influence 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 business, there is
no assurance that we will receive required regulatory or shareholder
approvals or 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 ven-
tures. Our performance is contingent on retaining the clients and key
employees of acquired companies and joint ventures, and there is no
assurance that we will always succeed in doing so.
Changes in accounting standards, 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 dif-
ficult 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.
The accounting policies and methods we utilize determine
how we report our financial condition and results of operations, and
they require management to make estimates or rely on assumptions
about matters that are inherently uncertain. Such estimates and
assumptions may require revisions, and changes to them may materi-
ally adversely affect our results of operations and financial condition.
Significant accounting policies are described in Note 1 to our
Consolidated Financial Statements.
As detailed in the Critical accounting policies and estimates
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 inher-
ently uncertain; and (ii) carry the likelihood that materially different
amounts could be reported under different conditions or using differ-
ent 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.
Changes to our credit ratings
There can be no assurance that our credit ratings and rating outlooks
from rating agencies such as Moody’s Investors Service, Standard &
Poor’s, Fitch Ratings or DBRS will not be lowered or that these ratings
agencies will not issue adverse commentaries about us, potentially
resulting in higher financing costs and reduced access to capital mar-
kets. A lowering of our credit ratings may also affect our ability, and the
cost, to enter into normal course derivative or hedging transactions.
Development and integration of our distribution networks
Although we regularly explore opportunities to expand our distribu-
tion networks, either through acquisitions or organically by adding,
for example, new bank branches, insurance offices, online savings
accounts and ATMs in high-growth markets in Canada, the United
States and internationally, if we are not able to develop or integrate
these distribution networks effectively, our results of operations and
financial condition may be negatively affected.
Other factors
Other factors that may affect actual results include changes in gov-
ernment trade policy, the timely and successful development of new
products and services, technological changes and our reliance on
third parties to provide components of our business infrastructure,
fraud by internal or external parties, 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, com-
munication, 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.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
103
We caution that the foregoing discussion of risk factors is not
exhaustive and other factors could also adversely affect our results.
When relying on our forward-looking statements to make decisions
with respect to us, investors and others should carefully consider
the foregoing factors, other uncertainties 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.
Unless required by law, 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 financial information
Net interest income on average assets and liabilities from continuing operations (1)
Table 58
(C$ millions, except percentage amounts)
2007
2006
2005
2007
Average balances (2)
Interest (3)
2006
2005
2007
Average rate
2006
Assets
Deposits with other banks
Canada
United States
Other International
Securities
Trading
Available-for-sale (4)
Investments (4)
Asset purchased under reverse repurchase
agreements and securities borrowed
Loans (5)
Canada
Retail
Wholesale
United States
Other International
$
1,570 $
2,904
5,436
1,218 $
1,856
4,913
9,910
7,987
915 $
1,587
4,068
6,570
43 $
176
319
538
41 $
155
284
480
31
55
145
231
2.74%
6.06
5.87
5.43
162,828
31,516
–
134,166
–
38,792
110,356
–
37,876
–
6,621
1,044
194,344
172,958
148,232
7,665
5,056
–
1,133
6,189
3,711
–
895
4,606
–
4.07
3.31
3.94
3.37%
8.35
5.78
6.01
3.77
–
2.92
3.58
71,759
55,615
44,420
3,450
2,827
1,354
4.81
5.08
3.05
152,588
31,541
135,852
31,539
124,001
28,087
184,129
25,718
13,388
167,391
21,871
8,286
152,088
20,572
6,993
9,376
1,047
10,423
2,240
2,061
8,157
1,264
9,421
2,110
1,177
7,037
1,262
8,299
1,626
865
6.14
3.32
5.66
8.71
15.39
Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets
499,248
2,137
10,270
69,345
434,108
2,806
8,748
56,438
378,875
2,567
6,411
57,447
–
–
–
26,377
22,204
–
–
–
16,981
–
–
–
–
–
–
223,235
197,548
179,653
14,724
12,708
10,790
6.60
5.28
Total assets
$ 581,000 $ 502,100 $ 445,300 $ 26,377 $ 22,204 $ 16,981
4.54%
4.42%
3.81%
2005
3.39%
3.47
3.56
3.52
3.36
–
2.36
3.11
6.00
4.01
5.63
9.65
14.20
6.43
5.11
–
–
–
5.67
4.49
5.46
7.90
12.37
6.01
4.48
–
–
–
Liabilities and shareholders’ equity
Deposits (6)
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
$ 166,983 $ 167,015 $ 161,866 $
47,913
91,334
53,817
121,924
40,004
70,168
5,669 $
2,563
5,538
5,024 $
2,018
3,666
342,724
306,262
272,038
13,770
10,708
46,654
38,630
34,169
1,997
2,071
42,503
6,704
3,569
32,786
8,013
2,759
25,912
8,359
4,041
442,154
25,752
10,270
79,087
388,450
17,037
8,882
66,755
344,519
16,159
6,414
58,757
–
–
–
2,364
338
376
18,845
1,882
419
328
15,408
–
–
–
3,724
1,047
2,175
6,946
1,381
1,120
442
299
10,188
–
–
–
–
–
–
4
3.39%
.76
4.54
3.01%
4.21
4.01
2.30%
2.62
3.10
4.02
4.28
5.56
5.04
10.54
4.26
3.50
5.36
5.74
5.23
11.89
3.97
–
–
–
2.55
4.04
4.32
5.29
7.40
2.96
–
–
–
$ 557,263 $ 481,124 $
425,849 $ 18,845 $ 15,408 $
10,188
3.38%
3.20%
2.39%
$
1,553 $
1,022 $
22,184
19,954
811 $
–
18,640
– $
– $
–
–
–
–
–
%
Total liabilities and shareholders’ equity
$ 581,000 $ 502,100 $ 445,300 $ 18,845 $ 15,408 $
10,188
Net interest income and margin
$ 581,000 $ 502,100 $ 445,300 $
7,532 $
6,796 $
6,793
Net interest income and margin
(average earning assets)(7)
Canada
United States
Other International
$ 280,385 $ 257,319 $ 229,184 $
90,684
86,105
74,842
74,849
106,044
112,819
6,435 $
412
685
6,045 $
108
643
5,628
608
557
Total
$ 499,248 $ 434,108 $ 378,875 $
7,532 $
6,796 $
6,793
3.24%
1.30%
2.30%
.39
.61
1.51%
–%
–
3.07%
1.35%
2.35%
.12
.75
1.57%
–%
–
2.29%
1.53%
2.46%
.81
.74
1.79%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Calculated using methods intended to approximate the average of the daily balances for the period.
Interest income includes loan fees of $331 million (2006 – $348 million; 2005 – $343 million).
Available-for-sale securities are carried at fair value. Prior to November 1, 2006, Available-for-sale securities were classified as investment securities and were carried at amortized cost.
Average balances include impaired loans.
Deposits include savings deposits with average balances of $46 billion (2006 – $46 billion; 2005 – $46 billion), interest expense of $.4 billion (2006 – $.4 billion; 2005 – $.3 billion) and
average rates of .9% (2006 – .8%; 2005 – .6%). Deposits also include term deposits with average balances of $240 billion (2006 – $206 billion; 2005 – $181 billion), interest expense of
$10.7 billion (2006 – $8.3 billion; 2005 – $5.3 billion) and average rates of 4.43% (2006 – 4.02%; 2005 – 2.95%).
During the year, we reviewed the geographic information that was used to prepare the Net interest income and margin for the prior periods and determined that some information was
incorrectly classified; accordingly, the Net interest income and margins presented for the comparative periods have been revised.
104
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Loans and acceptances by geography (1)
Table 59
(C$ millions)
Canada
Residential mortgages
Personal
Credit cards
Small business (2)
Retail
Business (3)
Sovereign (4)
Bank
Wholesale
United States
Retail
Wholesale
Other International
Retail
Wholesale
Total loans and acceptances
Total allowance for loan losses
2007
2006
As at October 31
2005
2004
2003
$ 107,453
42,506
8,142
2,652
$ 94,272
37,946
6,966
2,318
$ 88,808
33,986
6,024
1,951
$ 80,168
30,415
6,298
1,928
$ 73,978
26,445
4,663
1,335
160,753
141,502
130,769
118,809
106,421
51,237
585
3,235
44,353
553
2,031
42,383
521
74
35,214
535
106
55,057
46,937
42,978
35,855
34,551
572
118
35,241
$ 215,810
$ 188,439
$ 173,747
$ 154,664
$ 141,662
6,804
18,548
7,652
13,847
7,741
12,317
7,010
11,698
6,189
13,213
25,352
21,499
20,058
18,708
19,402
1,905
8,148
10,053
1,896
7,213
9,109
1,729
3,454
5,183
1,411
3,961
5,372
1,517
5,811
7,328
$ 251,215
$ 219,047
$ 198,988
$ 178,744
$ 168,392
(1,493)
(1,409)
(1,498)
(1,644)
(2,055)
Total loans and acceptances, net of allowance for loan losses
$ 249,722
$ 217,638
$ 197,490
$ 177,100
$ 166,337
(1)
(2)
(3)
(4)
Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
105
Impaired loans by portfolio and geography (1)
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Small business (2)
Retail
Business (3)
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other
Sovereign (4)
Bank
Wholesale
Total impaired loans (5), (6)
Canada
Residential mortgages
Personal
Small business (2)
Retail
Business (3)
Sovereign (4)
Bank
Wholesale
United States
Retail
Wholesale
Other International
Retail
Wholesale
Total impaired loans
Specific allowance for loan losses
Net impaired loans
Gross impaired loans as a % of loans and acceptances:
Residential mortgages
Personal
Small business (2)
Retail
Wholesale
Total
$
$
$
$
$
$
2007
210
189
19
$
2006
165
205
13
As at October 31
2005
$
$
146
183
11
2004
156
204
8
$
418
$
383
$
340
$
368
$
$
$
$
$
65
5
83
3
14
29
29
4
345
10
19
116
–
–
722
1,140
149
152
19
$
$
$
$
45
8
85
6
15
12
17
5
82
49
19
108
–
–
451
834
127
183
13
48
4
73
47
15
16
12
4
74
52
14
75
–
–
434
774
106
161
11
$
89 $
8
59
162
14
163
60
10
102
89
19
116
–
–
$
$
$
891 $
1,335
1,259
$
1,745
$
96
178
8
$
320
$
323
$
278
$
282
$
377
–
377
697
57
314
–
–
$
$
$
266
225
501
–
–
$
$
$
266
589
15
151
–
–
$
$
$
225
503
16
173
–
–
$
$
$
501
783
44
332
371
$
166
$
189
$
376
$
$
$
$
41
31
72
1,140
(351)
$
$
$
45
34
79
834
(263)
$
$
$
46
36
82
774
(282)
$
$
$
42
58
100
1,259
(487)
789
$
571
$
492
$
772
$
–
$
$
$
$
$
$
$
$
.19%
.39%
.72%
.25%
.88%
.45%
.17%
.46%
.56%
.25%
.66%
.38%
.16%
.45%
.56%
.24%
.74%
.39%
.19%
.55%
.41%
.29%
1.73%
.70%
Table 60
2003
138
255
17
410
146
12
75
240
45
181
44
57
113
129
143
150
–
–
110
213
17
340
724
724
1,064
29
332
361
41
279
320
1,745
(757)
988
.18%
.79%
1.27%
.36%
2.46%
1.04%
Specific allowance for loan losses as a % of gross impaired loans
30.79%
31.53%
36.43%
38.68%
43.38%
(1)
(2)
(3)
(4)
(5)
(6)
Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Includes foreclosed assets of $36 million in 2007 (2006 – $9 million; 2005 – $17 million; 2004 – $27 million; 2003 – $34 million).
Past due loans greater than 90 days not included in impaired loans were $353 million in 2007 (2006 – $305 million; 2005 – $304 million; 2004 – $219 million; 2003 – $222 million).
106
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Provision for (recovery of) credit losses by portfolio and geography (1)
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Credit cards
Small business (2)
Retail
Business (3)
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other
Sovereign (4)
Bank
Wholesale
Total specific provision
Canada
Residential mortgages
Personal
Credit cards
Small business (2)
Retail
Business (3)
Sovereign (4)
Bank
Wholesale
United States
Retail
Wholesale
Other International
Retail
Wholesale
Total specific provision
Total general provision
Total provision for credit losses
Specific provision as a % of average net loans and acceptances
$
$
2007
13
364
223
34
For the year ended October 31
2005
2004
2006
$
6
306
163
29
$
2
259
194
27
$
7
222
167
27
$
634
$
504
$
482
$
423
$
Table 61
2003
8
254
155
39
456
(1) $
4
7
(53)
4
2
4
–
1
(5)
1
14
–
–
(12) $
–
24
(20)
10
(52)
(7)
(1)
(11)
(6)
8
(26)
–
–
$
$
$
(22) $
(93) $
482
$
389
$
$
6
296
161
29
$
1
247
192
27
$
$
$
$
7
2
(11)
50
–
7
13
(3)
(1)
2
(32)
64
–
–
98
521
6
211
166
27
$
593
$
492
$
467
$
410
$
15
(32)
3
–
–
$
$
$
15
507
12
(38)
–
–
–
–
(32) $
3 $
435
$
413 $
$
15
(60)
$
13
106
(26) $
(45) $
119
$
–
1
1
482
$
$
$
(53) $
429
$
$
–
(1)
$
–
(11)
(1) $
(11) $
389
66
455
$
$
$
521
$
721
(175) $
346
$
–
721
.43%
.23%
.21%
.30%
$
2
–
$
$
$
2
$
27
(7)
10
10
1
70
(2)
7
28
–
–
148
782
5
334
220
34
–
$
$
$
$
$
$
$
$
$
102
–
102
695
34
50
84
7
(4)
3
782
9
791
.33%
–
–
$
$
$
$
$
$
$
$
$
–
–
17
78
(1)
16
5
5
(8)
32
79
42
–
–
265
721
4
230
152
39
425
102
102
527
30
78
108
1
85
86
(1)
(2)
(3)
(4)
Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
107
Allowance for credit losses by 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 cards
Small business (2)
Retail
Business (3)
Sovereign (4)
Bank
Wholesale
Less developed countries exposures
Total write-offs by portfolio
Recoveries by portfolio
Residential mortgages
Personal
Credit cards
Small business (2)
Retail
Business (3)
Sovereign (4)
Bank
Wholesale
Total recoveries by portfolio
Net write-offs
Adjustments (5)
Total allowance for credit losses at end of year
Canada
Residential mortgages
Personal
Small business (2)
Retail
Business (3)
Sovereign (4)
Bank
Wholesale
United States
Retail
Wholesale
Other International
Retail
Wholesale
Total specific allowance for loan losses
General allowance
Total allowance for credit losses
Key ratios
Allowance for credit losses as a % of loans and acceptances
Net write-offs as a % of average net loans and acceptances
$
$
$
–
$
$
$
$
4
$
$
–
–
$
$
$
$
$
$
$
–
$
$
$
$
$
$
$
$
$
$
$
2007
1,486
791
(5)
(444)
(268)
(42)
2006
1,568
429
(5)
(379)
(204)
(36)
$
2005
1,714
455
(5)
(353)
(237)
(34)
2004
2,164
346
(7)
(332)
(207)
(44)
(759) $
(624) $
(629) $
(590) $
(109) $
–
–
(89) $
–
(141) $
–
(411) $
–
–
–
–
Table 62
2003
2,314
721
$
(10)
(379)
(192)
(53)
(634)
(348)
–
(109) $
(89) $
(141) $
(411) $
(348)
–
$
–
$
–
$
–
$
–
(868) $
(713) $
(770) $
(1,001) $
(982)
1
74
6
7
128
42
42
170
$
$
$
$
$
–
64
41
7
112
93
–
–
93
205
$
$
$
$
$
–
69
43
9
121
53
–
–
53
174
$
$
$
$
$
–
68
39
11
118
98
–
–
98
216
$
$
$
$
$
(698) $
(7)
(508) $
(3)
(596) $
(5)
(785) $
(11)
–
68
37
12
117
53
–
–
53
170
(812)
(59)
1,572
$
1,486
$
1,568
$
1,714
$
2,164
$
13
79
9
$
11
88
9
$
9
101
8
$
11
108
6
101
$
108
$
118
$
125
$
153
–
$
–
$
$
$
$
$
$
$
$
$
153
254
14
54
68
13
16
29
351
1,221
1,572
.63%
.30%
112
–
112
220
3
12
15
12
16
28
263
1,223
1,486
.68%
.25%
$
–
$
$
$
$
$
$
$
$
$
112
–
112
230
3
18
21
12
19
31
282
1,286
1,568
.79%
.32%
$
–
$
$
$
$
$
$
$
$
$
$
–
$
$
$
202
–
202
327
5
118
123
$
$
$
$
$
$
14
23
37
487
1,227
1,714
.97%
.46%
12
129
13
154
284
–
284
438
11
131
142
15
162
177
757
1,407
2,164
1.30%
.49%
(1)
(2)
(3)
(4)
(5)
Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Other adjustments include primarily foreign exchange translations on non-Canadian dollar denominated allowance for credit losses and acquisition adjustments for Flag Bank,
$21 million in 2007; Provident Financial Group Inc., $6 million in 2004; Admiralty Bancorp, Inc., $8 million in 2003.
108
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Credit quality information by Canadian province (1)
Table 63
(C$ millions)
Loans and acceptances
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
2007
2006
2005
2004
2003
$
11,556
35,168
92,956
40,956
35,174
$ 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
Total loans and acceptances in Canada
$ 215,810
$ 188,439
$ 173,747
$ 154,664
$ 141,662
Gross impaired loans
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
Total gross impaired loans in Canada
Specific provision
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
$
$
$
$
53
118
322
112
92
$
53
68
286
107
75
$
47
44
269
78
65
$
60
131
254
93
245
81
155
348
140
340
697
$
589
$
503
$
783
$
1,064
$
40
66
490
51
48
$
33
47
344
38
45
$
30
7
368
44
(14)
$
34
(1)
318
31
31
46
77
309
55
40
527
Total specific provision for credit losses in Canada
$
695
$
507
$
435
$
413
$
(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 in Canada by sector (1)
(C$ millions)
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other
Total small business loans
(1)
Includes small business exposure managed on a pooled and individual client basis.
$
2007
271
650
2,350
370
88
351
1,543
98
2,822
314
901
4,488
$
2
2006
248
601
2,043
284
73
366
1,377
88
,565
300
774
4,098
$
As at October 31
2005
$
715
490
1,728
182
78
311
1,057
57
1,982
243
549
3,365
2004
519
463
1,764
150
51
276
999
62
1,821
232
502
3,298
$
Table 64
2003
70
462
1,777
137
97
298
952
65
1,777
242
503
3,325
$ 14,246
$ 12,817
$
10,757
$
10,137
$
9,705
Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
109
Consolidated
Financial Statements
Reports
Notes to the Consolidated Financial Statements
148 Note 20 Pensions and other
post-employment benefits
150 Note 21 Stock-based compensation
153 Note 22 Trading revenue
153 Note 23 Business realignment charges
154 Note 24 Income taxes
155 Note 25 Earnings per share
156 Note 26 Concentrations of credit risk
156 Note 27 Guarantees, commitments
159
and contingencies
Note 28 Contractual repricing and
maturity schedule
160 Note 29 Related party transactions
161
Note 30 Results by business and
geographic segment
Note 31 Reconciliation of the application
of Canadian and United States generally
accepted accounting principles
175 Note 32 Parent company information
163
117
Note 1 Significant accounting policies
and estimates
124 Note 2 Fair value of financial instruments
127 Note 3 Securities
129 Note 4 Loans
130 Note 5 Securitizations
132 Note 6 Variable interest entities (VIEs)
133 Note 7 Derivative financial instruments
and hedging activities
Note 9 RBC Dexia Investor Services
oint venture
137 Note 8 Premises and equipment
137
j
138 Note 10 Goodwill and other intangibles
139 Note 11 Significant acquisitions and
dispositions
140 Note 12 Other assets
141 Note 13 Deposits
142 Note 14 Insurance
142 Note 15 Other liabilities
143 Note 16 Subordinated debentures
144 Note 17 Trust capital securities
145
Note 18 Preferred share liabilities and
share capital
Note 19 Non-controlling interest in
subsidiaries
147
111
111
Management’s responsibility for
financial reporting
Report of Independent Registered
Chartered Accountants
112 Management’s report on internal control
over financial reporting
112 Report of Independent Registered
Chartered Accountants
Consolidated Financial Statements
113 Consolidated Balance Sheets
114 Consolidated Statements of Income
Consolidated Statements of
115
Comprehensive Income
Consolidated Statements of Changes in
Shareholders’ Equity
115
116 Consolidated Statements of Cash Flows
110
110
Royal Bank of Canada: Annual Report 2007
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Consolidated Financial Statements
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
compliance 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 Shareholders of Royal Bank of Canada
We have audited the consolidated balance sheets of Royal Bank of
Canada (the “Bank”) as at October 31, 2007 and 2006 and the con-
solidated statements of income, comprehensive income, changes
in shareholders’ equity and cash flows for each of the three years in
the period ended October 31, 2007. These 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 years ended October 31, 2007 and 2006, we conducted our
audits in accordance with Canadian generally accepted auditing stan-
dards and the standards of the Public Company Accounting Oversight
Board (United States). With respect to the consolidated financial state-
ments as at and for the year ended October 31, 2005, we conducted
our audit in accordance with Canadian generally accepted auditing
standards. These standards require that we plan and perform an audit
to obtain reasonable 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, 2007
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Bank
as at October 31, 2007 and 2006 and the results of its operations and
its cash flows for each of the three years in the period ended
October 31, 2007 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
Bank’s internal control over financial reporting as of October 31,
2007 based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated November 29, 2007
expressed an unqualified opinion on the Bank’s internal control over
financial reporting.
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
November 29, 2007
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
111
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, man-
agement 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:
•
pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, the transactions related to and
dispositions of RBC’s assets
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
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, pro-
jections of any evaluation of the effectiveness of internal control over
financial 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.
Report of Independent Registered Chartered Accountants
To the Shareholders of Royal Bank of Canada
We have audited the internal control over financial reporting of Royal
Bank of Canada (the “Bank”) as of October 31, 2007 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, included
in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on 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,
assessing the risk that a material weakness exists, testing and evalu-
ating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
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
112
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Management assessed the effectiveness of RBC’s internal control
over financial reporting as of October 31, 2007, based on the criteria
set forth in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that, as of
October 31, 2007, 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 of
October 31, 2007.
RBC’s internal control over financial reporting as of October 31,
2007 has been audited by Deloitte & Touche LLP, Independent
Registered Chartered Accountants, who also audited RBC’s Consoli-
dated Financial Statements for the year ended October 31, 2007, as
stated in the Report of Independent Registered Chartered Accountants,
which report expressed 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, 2007
necessary to permit preparation of financial statements in accordance
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, the Bank maintained, in all material respects,
effective internal control over financial reporting as of October 31,
2007 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, 2007 of the Bank
and our report dated November 29, 2007 expressed an unqualified
opinion on those consolidated financial statements.
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
November 29, 2007
Consolidated Balance Sheets
As at October 31 (C$ millions)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities (Note 3)
Trading
Available-for-sale
Investments
Assets purchased under reverse repurchase agreements and securities borrowed
Loans (Notes 4 and 5)
Retail
Wholesale
Allowance for loan losses
Other
Customers’ liability under acceptances
Derivatives (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
Derivatives (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 (shares issued – 1,276,260,033 and 1,280,889,745)
Contributed surplus
Treasury shares – preferred (shares held – 248,800 and 93,700)
– common (shares held – 2,444,320 and 5,486,072)
Retained earnings
Accumulated other comprehensive income (loss)
Gordon M. Nixon
President and Chief Executive Officer
Robert B. Peterson
Director
2007
2006
$
4,226
$
4,401
1 1,881
10,502
148,246
30,009
–
147,237
–
37,632
178,255
184,869
64,313
59,378
169,462
69,967
151,050
58,889
239,429
(1,493)
209,939
(1,409)
237,936
208,530
11,786
66,585
2,131
4,752
628
–
17,853
103,735
9,108
37,729
1,818
4,304
642
82
15,417
69,100
$ 600,346
$ 536,780
$ 116,557
219,886
28,762
$ 114,040
189,140
40,343
365,205
343,523
11,786
44,689
37,033
72,010
7,283
–
28,483
9,108
38,252
41,103
42,094
7,337
32
22,649
201,284
160,575
6,235
1,400
300
1,483
2,050
7,300
235
(6)
(101)
18,167
(3,206)
7,103
1,383
298
1,775
1,050
7,196
292
(2)
(180)
15,771
(2,004)
24,439
22,123
$ 600,346
$ 536,780
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
113
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
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Securitization revenue (Note 5)
Net gain on sale of available-for-sale securities (Note 3)
Net gain on sale of investment securities
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 (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 (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)
Dividends per share (in dollars)
114
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
2007
2006
2005
$ 14,724
7,665
3,450
538
$ 12,708
6,189
2,827
480
$ 10,790
4,606
1,354
231
26,377
22,204
16,981
13,770
4,737
338
10,708
4,281
419
18,845
15,408
7,532
6,796
3,152
2,261
1,579
1,473
1,353
1,303
1,217
533
491
293
261
63
–
951
3,348
2,574
1,301
1,242
1,243
1,216
1,024
438
496
241
257
–
88
373
6,946
2,800
442
10,188
6,793
3,270
1,594
1,232
962
1,163
1,153
1,026
407
579
187
285
–
85
448
14,930
13,841
12,391
22,462
20,637
19,184
791
2,173
7,860
1,009
839
723
530
308
96
1,108
429
2,509
7,268
957
792
687
546
298
76
871
455
2,625
6,682
960
749
632
500
296
50
1,488
12,473
11,495
11,357
–
7,025
1,392
5,633
141
5,492
–
–
6,204
1,403
4,801
44
4,757
(29)
45
4,702
1,278
3,424
(13)
3,437
(50)
$
5,492
$
4,728
$
3,387
(88)
–
(60)
–
(42)
4
$
5,404
$
4,668
$
3,349
1,273,185
4.24
4.24
–
$
$
$
1,283,433
1,279,956
2.61
$
3.65
$
2.65
3.67
$
$
(.04)
(.02) $
$
1,289,314
4.19
4.19
–
$
$
$
1,304,680
1,299,785
2.57
$
3.59
$
2.61
3.61
$
$
(.04)
(.02) $
$
$
1.82
$
1.44
$
1.18
Consolidated Statements of Comprehensive Income
For the year ended October 31 (C$ millions)
Net income
Other comprehensive income, net of taxes
Net unrealized gains (losses) on available-for-sale securities
Reclassification of (gains) losses on available-for-sale securities to income
Unrealized foreign currency translation gains (losses)
Reclassification of (gains) losses on foreign currency translation to income
Net foreign currency translation gains (losses) from hedging activities
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification to income of (gains) losses on derivatives designated as cash flow hedges
Other comprehensive income (loss)
Total comprehensive income
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
Initial adoption of AcG-15, Consolidation of Variable Interest Entities
Other
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
Initial adoption of AcG-15, Consolidation of Variable Interest Entities
Balance at end of year
Retained earnings
Balance at beginning of year
Transition adjustment – Financial instruments (1)
Net income
Preferred share dividends (Note 18)
Common share dividends (Note 18)
Premium paid on common shares purchased for cancellation
Issuance costs and other
Balance at end of year
Accumulated other comprehensive income (loss)
Transition adjustment – Financial instruments (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
Balance at end of year
Retained earnings and Accumulated other comprehensive income
Shareholders’ equity at end of year
(1)
The transition adjustment relates to the implementation of the new financial instruments accounting standards. Refer to Note 1.
2007
2006
2005
$
5,492
$
4,728
$
3,387
(93)
28
(65)
(2,965)
(42)
1,804
(1,203)
80
31
111
–
–
–
(501)
2
269
(230)
–
–
–
–
–
–
(624)
5
401
(218)
–
–
–
(1,157)
(230)
(218)
$
4,335 $
4,498
$
3,169
2007
2006
2005
$
$
$
–
1,050
1,150
(150)
2,050
7,196
170
(66)
7,300
292
(6)
(46)
–
(5)
235
(2)
33
(37)
(6)
(180)
175
(96)
–
(101)
700
600
(250)
1,050
7,170
127
(101)
7,196
265
(2)
(18)
–
–
47
292
(2)
51
(51)
(2)
(216)
193
(157)
–
(180)
532
300
(132)
700
6,988
214
(32)
7,170
169
(6)
26
7
54
15
265
–
–
(2)
(2)
(294)
179
(47)
(54)
(216)
15,771
(86)
5,492
(88)
(2,321)
(580)
(21)
13,704
–
12,065
–
4,728
(60)
(1,847)
(743)
(11)
3,387
(42)
(1,512)
(194)
–
18,167
15,771
13,704
(45)
(65)
(3,207)
111
(3,206)
–
–
–
(2004)
–
–
(1,774)
–
(2,004)
(1,774)
14,961
13,767
11,930
$ 24,439
$
22,123
$ 19,847
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
115
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 payments
Future income taxes
Amortization of other intangibles
(Gain) loss on sale of premises and equipment
(Gain) loss on loan securitizations
(Gain) loss on sale of available-for-sale securities
(Gain) loss on sale of investment 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 assets
Derivative liabilities
Trading 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
Net cash from (used in) operating activities
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 available-for-sale securities
Proceeds from sale of investment securities
Proceeds from maturity of available-for-sale securities
Proceeds from maturity of investment securities
Purchases of available-for-sale securities
Purchases of investment 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
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
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
116
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
2007
2006
2005
$
5,492
$
4,757
$
3,437
791
434
(38)
(147)
96
(16)
(41)
(63)
–
429
405
(74)
144
76
(16)
(16)
–
(88)
455
414
(94)
(482)
50
(21)
(101)
–
(85)
(54)
(28)
1,034
(28,856)
29,916
9,623
(317)
1,647
19,473
–
220
217
(203)
1,105
(498)
(21,477)
(1,017)
1,036
629
(5)
(9)
63
391
(36,438)
1,334
840
(15,000)
4
(29,622)
95
19,473
(14,996)
(29,527)
1,030
(27,670)
5,607
–
25,628
–
18,431
–
(36,373)
(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)
(1,379)
( 39,569)
8,020
7,565
–
18,784
–
(24,097)
–
(706)
(4,935)
(373)
(5,265)
(33,534)
8,139
–
14,709
–
28,222
–
(38,474)
(511)
(16,405)
(256)
(36,690)
–
(43,375)
140
(36,690)
(43,235)
36,663
–
–
(953)
600
(250)
(6)
116
(844)
244
(208)
(1,807)
(47)
17,722
5,861
620
17,831
–
87
(989)
1,150
(150)
(23)
155
(646)
208
(133)
(2,278)
(59)
(4,070)
6,436
(145)
17,374
17,374
(332)
(175)
4,401
57,711
38,666
57,711
38,666
(80)
(600)
5,001
(122)
1,290
3,711
$
4,226
$
4,401
$
5,001
$ 18,494
1,352
$
$ 14,678
1,682
$
$
$
10,109
1,987
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),
our Consolidated Financial Statements are to be prepared in accor-
dance 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
Our 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
partnerships in which we have significant influence. These invest-
ments are reported in Other assets. Our share of earnings, gains and
losses realized on dispositions and writedowns to reflect other-than-
temporary impairment 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.
Significant accounting changes
Financial Instruments
On November 1, 2006, we adopted three new financial instruments
accounting standards that were issued by the Canadian Institute of
Chartered Accountants (CICA): Handbook Section 1530, Compre
hen sive Income (Section 1530), Handbook Section 3855, Financial
Instruments – Recognition and Measurement (Section 3855), and
Handbook Section 3865, Hedges (Section 3865). Comparative
amounts for prior periods have not been restated.
Comprehensive Income
Section 1530 introduces Comprehensive Income, which consists of
Net income and Other comprehensive income (OCI). OCI represents
changes in Shareholders’ equity during a period arising from trans-
actions and other events with non-owner sources and includes
unrealized gains and losses on financial assets classified as available-
for-sale, unrealized foreign currency translation gains or losses arising
from self-sustaining foreign operations, net of hedging activities,
and changes in the fair value of the effective portion of cash flow
hedging instruments. We have included in our Consolidated Financial
Statements a Consolidated Statement of Comprehensive Income for
the changes in these items, net of taxes, since November 1, 2006,
while the cumulative changes in OCI are included in Accumulated other
comprehensive income (loss) (AOCI), which is presented as a new cat-
egory of Shareholders’ equity on our 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 our Consolidated Balance Sheets when we
become a party to the contractual provisions of a financial instrument
or non-financial derivative contract. Under this standard, all financial
instruments are required to be measured at fair value on initial recog-
nition 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 financial liabilities. Transaction costs
are expensed as incurred for financial instruments classified or desig-
nated as held-for-trading. For other financial instruments, transaction
costs are capitalized on initial recognition.
Financial assets and financial liabilities held-for-trading are
measured at fair value with changes in those fair values recognized
in Non-interest income. Financial assets held-to-maturity, loans and
receivables, and other financial liabilities are measured at amortized
cost using the effective interest method. Available-for-sale financial
assets, which include loan substitute securities, are measured at fair
value with unrealized gains and losses, including changes in foreign
exchange rates, being recognized in OCI. Investments in equity instru-
ments classified as available-for-sale that do not have a quoted market
price in an active market are measured at cost.
Derivative instruments are recorded on our Consolidated Balance
Sheets at fair value, including those derivatives that are embedded in
financial or non-financial contracts that are not closely related to the
host contracts. Changes in the fair values of derivative instruments are
recognized in Net income except for derivatives designated as effec-
tive cash flow hedges or hedges of foreign currency exposure of a net
investment in a self-sustaining foreign operation, the changes in fair
value of which are recognized in OCI.
Section 3855 also provides an entity the option to designate
a financial instrument as held-for-trading (the fair value option) on
its initial recognition or upon adoption of the standard, even if the
financial instrument was not acquired or incurred principally for the
purpose of selling or repurchasing it in the near term. An instrument
that is classified as held-for-trading by way of this fair value option
must have a reliable fair value and satisfy one of the following criteria
established by the OSFI: (i) when doing so eliminates or significantly
reduces a measurement or recognition inconsistency that would other-
wise arise from measuring assets or liabilities, or recognizing gains
and losses on them on a different basis; (ii) it belongs to a group of
financial assets or financial liabilities or both that are managed and
evaluated on a fair value basis in accordance with our risk manage-
ment or investment strategy, and are reported to senior management,
on that basis; or (iii) it is an embedded derivative in a financial or non-
financial host contract and the derivative is not closely related to the
host contract.
The principal categories of our financial assets that we
designated as held-for-trading using the fair value option include
(i) investments supporting the policy benefit liabilities on life and
health insurance contracts issued by our insurance operations;
(ii) investments used to offset exposures under derivative contracts
in relation to our sales and trading activities; (iii) certain loans to cus-
tomers whose related hedging derivatives are measured at fair value;
and (iv) assets purchased under reverse repurchase agreements that
form part of our trading portfolio which is managed and evaluated on
a fair value basis. Financial liabilities designated as held-for-trading
include (i) deposits and structured notes with embedded derivatives
that are not closely related to the host contracts; (ii) assets sold under
repurchase agreements that form part of our trading portfolio which is
managed and evaluated on a fair value basis; and (iii) certain deposits
to offset the impact of related hedging derivatives measured at fair
value. Fair value designation for these financial assets and financial
liabilities significantly reduces the measurement inconsistencies.
Other significant accounting implications arising upon the adop-
tion of Section 3855 include the use of the effective interest method
for any transaction costs or fees, premiums or discounts earned on
financial instruments measured at amortized cost, and the recogni-
tion of the inception fair value of the obligation undertaken in issuing
a guarantee that meets the definition of a guarantee pursuant to
CICA Accounting Guideline 14, Disclosure of Guarantees (AcG-14).
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
117
Note 1 Significant accounting policies and estimates (continued)
Subsequent remeasurement at fair value is not required unless the
financial guarantee also meets the definition of a derivative. These
guarantees are remeasured at fair value at each balance sheet date
and reported as a derivative in Other assets or Other liabilities,
as appropriate.
Hedges
Section 3865 specifies the criteria that must be satisfied in order for
hedge accounting to be applied and the accounting for each of the
permitted hedging strategies. We use derivatives and non-derivative
financial instruments in our hedging strategies to manage our
exposures to interest, currency, credit and other market risks. 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 hedging relationship is designated
as a fair value hedge, a cash flow hedge or a hedge of foreign currency
exposure of a net investment in a self-sustaining foreign operation.
For our detailed accounting policy on hedge accounting refer to the
Derivatives section below in Note 1.
Impact upon adoption of Sections 1530, 3855 and 3865
The transition adjustments attributable to the remeasurement of
financial assets and financial liabilities at fair value, other than financial
assets classified as available-for-sale and hedging instruments desig-
nated as cash flow hedges or hedges of foreign currency exposure of
net investment in self-sustaining foreign operations, were recognized
in opening Retained earnings as at November 1, 2006. Adjustments
arising from remeasuring financial assets classified as available-for-
sale at fair value were recognized in opening AOCI as at that date.
For hedging relationships existing prior to adopting Section 3865
that continue to qualify for hedge accounting under the new standard,
the transition accounting is as follows: (i) Fair value hedges – any gain
or loss on the hedging instrument was recognized in opening Retained
earnings and the carrying amount of the hedged item was adjusted
by the cumulative change in fair value attributable to the designated
hedged risk and was also included in opening Retained earnings;
(ii) Cash flow hedges and hedges of net investments in self-sustaining
foreign operations – the effective portion of any gain or loss on the
hedging instrument was recognized in AOCI and the cumulative inef-
fective portion was included in opening Retained earnings.
We recorded the following transition adjustments in our
Consolidated Financial Statements: (i) a reduction of $86 million,
net of taxes, to our opening Retained earnings, representing changes
made to the value of certain financial instruments and the ineffective
portion of qualifying hedges, in compliance with the measurement
basis under the new standards including those related to the use of
fair value option; and (ii) recognition in AOCI of $45 million, net of
taxes, related to the net losses for available-for-sale financial assets
and cumulative losses on the effective portion of our cash flow hedges
that are now required to be recognized under Sections 3855 and 3865.
In addition, we have reclassified to AOCI $2,004 million of net unreal-
ized foreign currency losses on net investments in self-sustaining
foreign operations that were previously presented as a separate item
in Shareholders’ equity.
Variable Interest Entities
On February 1, 2007, we adopted CICA Emerging Issues Committee
Abstract No. 163, Determining the Variability to be Considered in
Applying AcG15 (EIC-163). EIC-163 provides additional clarification
on how to analyze and consolidate VIEs. The implementation of
EIC-163 resulted in the deconsolidation of certain investment funds;
however, the impact was not material to our consolidated financial
position or results of operations.
118
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Convertible and Other Debt Instruments with Embedded Derivatives
On August 1, 2007, we adopted CICA Emerging Issues Committee
Abstract No. 164, Convertible and Other Debt Instruments with
Embedded Derivatives (EIC-164). EIC-164 provides clarification regard-
ing the accounting treatment for certain types of convertible debt
instruments, their classification as liabilities or equity, and the implica-
tions on earnings per share. It also provides guidance on whether these
instruments contain any embedded derivatives that are required to be
accounted for separately. The adoption of EIC-164 was not material to
our consolidated financial position or results of operations.
Accounting Policy Choice for Transaction Costs
On June 1, 2007, CICA Emerging Issues Committee issued Abstract
No. 166, Accounting Policy Choice for Transaction Costs (EIC-166).
This EIC addresses the accounting policy choice of expensing or add-
ing transaction costs related to the acquisition of financial assets and
financial liabilities that are classified as other than held-for-trading.
Specifically, it requires the same accounting policy choice be applied
to all similar financial instruments classified as other than held-for-
trading, but permits a different policy choice for financial instruments
that are not similar. EIC-166 became effective for us on September 30,
2007 and requires retroactive application to all transaction costs
accounted for in accordance with Section 3855. Our current recogni-
tion policy for transaction costs, which was adopted on November 1,
2006, is consistent with this guidance.
The accounting policies described below have been updated to reflect
the requirements under the new financial instruments accounting
standards, and where applicable, include a discussion on the policies
used in the prior periods for comparative purposes.
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 denomi-
nated in foreign currencies are translated at average rates of exchange
for the year.
Assets and liabilities of our self-sustaining operations with func-
tional currencies 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 along with the effective portion
of related hedges are reported as a component of OCI on an after-tax
basis. Prior to November 1, 2006, these amounts were included in
Shareholders’ equity. Upon disposal or dilution of our interest in such
investments, an appropriate portion of the accumulated net transla-
tion gains or losses is included in Non-interest income.
Other foreign currency translation gains and losses are included
in Non-interest income.
Securities
Securities are classified, based on management’s intentions, as
held-for-trading, available-for-sale or held-to-maturity.
Held-for-trading securities include securities purchased for sale
in the near term and securities designated as held-for-trading under
the fair value option are reported at fair value. Obligations to deliver
Trading 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 securities is
recorded in Interest income. Interest and dividends accrued on interest-
bearing and equity securities sold short are recorded in Interest expense.
Available-for-sale securities include (i) securities which 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; and (ii) loan sub-
stitute securities which 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. Available-for-sale
securities are measured at fair value with unrealized gains and losses,
including changes in foreign exchange rates, recognized in OCI net of
tax. Purchase premiums or discounts on available-for-sale securities
are amortized over the life of the security using the effective interest
method and are recognized in Net interest income. Investments in
equity instruments classified as Available-for-sale that do not have a
quoted market price in an active market are measured at cost.
Held-to-maturity securities are debt securities where we have
the intention and ability to hold the investment until its maturity date.
These securities are carried at amortized cost using the effective inter-
est method. Dividends, interest income and amortization of premiums
and discounts on debt securities are recorded in Net interest income.
We hold a nominal amount of held-to-maturity securities in our normal
course of business. All held-to-maturity securities have been included
with Available-for-sale securities on our Consolidated Balance Sheets.
Gains and losses realized on disposal of available-for-sale securi-
ties are included in Gain on sale of securities in Non-interest income.
Both available-for-sale and held-to-maturity securities are subject to
periodic impairment review.
Prior to November 1, 2006, all investment securities, other than
Trading securities, were recorded on our Consolidated Balance Sheets
as Investment securities at amortized cost, and loan substitute securi-
ties were accorded the accounting treatment applicable to loans and,
where required, reduced by an allowance for credit losses.
We account for all our securities using settlement date accounting
except that changes in fair value between the trade date and settle-
ment date are reflected in income for securities classified or designated
as held-for-trading while changes in the fair value of available-for-sale
securities between the trade and settlement dates are recorded in OCI.
Assets purchased under reverse repurchase agreements and sold
under repurchase agreements
We purchase securities under agreements to resell (reverse repur-
chase agreements) and take possession of these securities. Reverse
repurchase agreements are treated as collateralized lending transac-
tions 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. We also sell securities under agreements to repurchase
(repurchase agreements), which are treated as collateralized
borrowing transactions.
Reverse repurchase agreements and repurchase agreements
are carried on our Consolidated Balance Sheets at the amounts at
which the securities were initially acquired or sold plus accrued inter-
est, respectively, except when they are designated using the fair value
option as held-for-trading and are recorded at fair value. Interest earned
on reverse repurchase agreements is included in Interest income in our
Consolidated Statements of Income, and interest incurred on repur-
chase agreements is included in Interest expenses in our Consolidated
Statements of Income. Changes in fair value for reverse repurchase
agreements and repurchase agreements carried at fair value under the
fair value option are included in Trading revenue in Non-interest income.
Prior to November 1, 2006, all reverse repurchase agreements
and repurchase agreements were carried on our Consolidated Balance
Sheets at the amounts at which the securities were initially acquired or
sold, respectively, plus accrued interest on interest-bearing securities.
Interest earned on reverse repurchase agreements was included in
Interest income, and interest incurred on repurchase agreements was
included in Interest expense, in our Consolidated Statements of Income.
Loans
Loans are recorded at amortized cost unless they have been desig-
nated as held-for-trading using the fair value option. Loans recorded
at amortized cost are net of an Allowance for loan losses and unearned
income which comprises unearned interest and unamortized loan fees.
Loans designated as held-for-trading are carried at fair value. Prior to
November 1, 2006, all loans were presented at amortized cost net of
an Allowance for loan losses and unearned income.
Loans stated at amortized cost are subject to periodic impairment
review and 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 pay-
ment 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 inter-
est 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 dis-
counting 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 Allowance for credit losses on our Consolidated
Balance Sheets. 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 collectibility 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 using the effective interest method.
Where there is reasonable expectation that a loan will result, commit-
ment and standby fees are also recognized as Interest income over the
expected term of the resulting loan using the effective interest method.
Otherwise, such fees are recorded as Other liabilities and amortized to
Non-interest income over the commitment or standby period.
Allowance for credit losses
The Allowance for credit losses is maintained at levels that manage-
ment considers appropriate to cover estimated 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 allowance
relates 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 allowance is increased by a charge to the Provision for credit
losses and decreased by the amount of write-offs, net of recoveries.
The Allowance for credit losses for on-balance sheet items is included
as a reduction to assets, and the allowance relating to off-balance
sheet items is included in Other liabilities.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
119
Note 1 Significant accounting policies and estimates (continued)
The allowance is determined based on management’s identifica-
tion and evaluation of problem accounts on estimated losses that exist
on the remaining portfolio, and on other factors including the com-
position and credit quality of the portfolio, and changes in economic
and business conditions. The Allowance for credit losses consists of
Specific allowances and the General allowance.
Specific allowances
Specific allowances are recorded to recognize estimated losses on
both retail and wholesale loans that have become impaired. The losses
relating to wholesale borrowers including small business loans individ-
ually managed 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 retail portfolios,
including residential mortgages, and personal and small business
loans managed on a pooled basis are based on net write-off experi-
ence. 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
A general allowance is established to cover estimated credit losses
incurred in the lending portfolio that have not yet been specifically
identified as impaired. For heterogeneous loans (wholesale loans
including small business loans individually managed), the determina-
tion of the general allowance is based on the application of estimated
probability of default, gross exposure at default and loss factors,
which are determined by historical loss experience and delineated by
loan type and rating. For homogeneous portfolios (retail loans) includ-
ing residential mortgages, credit cards, as well as personal and small
business loans that are managed on a pooled basis, the determination
of the general allowance is based on the application of historical loss
rates. 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 acceptances is reported in Liabilities – Other on our 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.
When derivatives are used in sales and trading activities, the real-
ized and unrealized gains and losses on derivatives are recognized in
Non-interest income – Trading revenue. Derivatives with a positive
fair value are reported as Derivative assets and derivatives with a neg-
ative fair value are reported as Derivative liabilities. 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. Margin
requirements and premiums paid are also included in Derivative
assets, while premiums received are shown in Derivative liabilities.
When derivatives are used to manage our own exposures, we
determine for each derivative whether hedge accounting can be
applied, as discussed below.
Hedge accounting
We use derivatives and non-derivatives in our hedging strategies to
manage our exposure to interest, currency, credit and other market
risks. Where hedge accounting can be applied, a hedge relationship is
designated and documented at inception to detail the particular risk
management objective and the strategy for undertaking the hedge
transaction. The documentation identifies the specific asset, liability
or anticipated cash flows being hedged, the risk that is being hedged,
the type of hedging instrument used and how effectiveness will be
assessed. The hedging instrument must be highly effective in accom-
plishing the objective of offsetting either changes in the fair value or
anticipated cash flows attributable to the risk being hedged both at
inception and throughout the life of the hedge. Hedge accounting is
discontinued prospectively when it is determined that the hedging
instrument is no longer effective as a hedge, the hedging instrument is
terminated or sold, or upon the sale or early termination of the
hedged item. Refer to Note 2 for the fair value of the derivatives and
non-derivative financial instruments categorized by their hedging
relationships, as well as derivatives that are not designated in hedging
relationships.
Fair value hedges
In a fair value hedging relationship, the carrying value of the hedged
item is adjusted for changes in fair value attributable to the hedged
risk and recognized in Non-interest income. Changes in the fair value
of the hedged item, to the extent that the hedging relationship is
effective, are offset by changes in the fair value of the hedging deriva-
tive, which are also recognized in Non-interest income. When hedge
accounting is discontinued, the carrying value of the hedged item is no
longer adjusted and the cumulative fair value adjustments to the car-
rying value of the hedged items are amortized to Net income over the
remaining term of the original hedging relationship.
We predominantly use interest rate swaps to hedge our exposure
to the changes in a fixed interest rate instrument’s fair value caused
by changes in interest rates. We also use, in limited circumstances,
certain cash instruments to hedge our exposure to the changes in fair
value of monetary assets attributable to changes in foreign currency
exchange rates.
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, interest rate options, foreign exchange
forward contracts, currency swaps, foreign currency futures, foreign
currency options and credit derivatives. All derivative instruments are
recorded on our Consolidated Balance Sheets at fair value, including
those derivatives that are embedded in financial or non-financial
contracts that are not closely related to the host contracts.
Cash flow hedges
In a cash flow hedging relationship, the effective portion of the change
in the fair value of the hedging derivative, net of taxes, is recognized
in OCI while the ineffective portion is recognized in Non-interest
income. When hedge accounting is discontinued, the amounts previ-
ously recognized in AOCI are reclassified to Net interest income during
the periods when the variability in the cash flows of the hedged item
affects Net interest income. Gains and losses on derivatives are reclas-
sified immediately to Net income when the hedged item is sold or
terminated early. We predominantly use interest rate swaps to hedge
the variability in cash flows related to a variable rate asset or liability.
120
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Prior to November 1, 2006, when a derivative was designated and
qualified as an effective hedging instrument in a fair value or cash flow
hedge, the income or expense of that derivative was recognized as an
adjustment to Interest income or Interest expense of the hedged item
in the same period. When hedge accounting was discontinued pro-
spectively, the fair value of the derivative was recognized in Derivative
assets or liabilities at that time and the gain or loss was deferred and
recognized in Net interest income in the periods in which the hedged
item affects income. When hedge accounting was discontinued due to
the sale or early termination of the hedged item, the fair value of the
derivative was recognized in Derivative assets or liabilities at that time
and the unrealized gain or loss is recognized in Non-interest income.
Net investment hedges
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, net of applicable
taxes, is recognized in OCI and the ineffective portion is recognized
in Non-interest income. The amounts previously recognized in AOCI
are recognized in Net income when there is a reduction in the hedged
net investment as a result of a dilution or sale of the net investment,
or reduction in equity of the foreign operation as a result of dividend
distributions.
We use foreign exchange contracts and foreign currency-
denominated liabilities to manage our foreign currency exposures
to net investments in self-sustaining foreign operations having a
functional currency other than the Canadian dollar.
Prior to November 1, 2006, foreign exchange gains and losses
on these hedging instruments, net of tax, were recorded in Net foreign
currency translation adjustments in our Consolidated Statements of
Changes in Shareholders’ Equity.
Premises and equipment
Premises and equipment are stated at cost less accumulated deprecia-
tion. Depreciation is recorded principally on a 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, and 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 business acquired 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, and
is defined by GAAP as the level of reporting at which goodwill is tested
for impairment and 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.
which may indicate that the estimated future net cash flows from the
asset will be insufficient to recover its carrying amount.
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
our 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
established to reduce future income tax assets to the amount more
likely than not to be realized. In addition, our 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 (as described in Note 20). These plans
include registered defined benefit pension plans, supplemental pen-
sion plans, defined contribution 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 three years on
a straight-line basis. For the majority of the non-principal and supple-
mental 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 prin-
cipal defined benefit plans, actuarial gains or losses are determined
each year and amortized over the expected average 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 beginning 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
recognized 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.
Other intangibles with a finite life are amortized on a straight-line
Our defined contribution plan expense is included in Non-interest
basis over their estimated useful lives, generally not exceeding
20 years, and are also tested for impairment when conditions exist
expense – Human resources for services rendered by employees
during the period.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
121
Note 1 Significant accounting policies and estimates (continued)
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 contributions 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
during 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 (the
Plans). The deferred share plans are settled in our common shares
or cash, and the deferred share unit plans are settled in cash. The
obligations for the Plans are accrued over their vesting period. For
share-settled awards, our accrued obligations 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 the Plans, 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 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 and 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 loans or packaged loans in
the form of mortgage-backed securities (MBS) to independent special
purpose entities (SPEs) or trusts that issue securities to investors.
These transactions are accounted for as sales and the transferred
assets are removed from our Consolidated Balance Sheets when we
are deemed to have surrendered control over such assets and have
received consideration other than beneficial interests in these trans-
ferred loans. For control to be surrendered, all of the following must
122
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
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 transferred loans or, if the purchaser
is a Qualifying Special Purpose Entity (QSPE) as described in the CICA
Accounting Guideline 12, Transfers of Receivables (AcG-12), its inves-
tors 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 one of these conditions is not
met, the transfer is considered to be a secured borrowing, the loans
remain on our Consolidated Balance Sheets, and the proceeds are
recognized as a liability.
When MBS are created, we reclassify the loans at their carrying
costs into MBS and retained interests on our Consolidated Balance
Sheets. The retained interest represents the excess spread of loan
interest over the MBS rate of return. The initial carrying value of the
MBS and the related retained interests are determined based on their
relative fair value on the date of securitization. MBS are classified as
trading account securities or available-for-sale securities, based on
management’s intent. Retained interests are classified as available-
for-sale. Both MBS and the retained interests are subject to periodic
impairment review.
Prior to November 1, 2006, retained interests in securitizations
that could be contractually prepaid or otherwise settled in such a way
that we would not recover substantially all of our recorded investment
were classified as Investment account securities at amortized cost.
Gains on the sale of loans or MBS are recognized in Non-interest
income and are dependent on the previous carrying amount of the
loans or MBS involved in the 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 aver-
age 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 classified as available-for-sale or loans and receivables,
except for investments supporting the policy benefit liabilities on
life and health insurance contracts which are designated as held-for-
trading under the fair value option with changes in fair value reported in
Insurance premiums, investment and fee income.
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 divi-
dends, 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 life and property and casualty insurance are included in Insurance
claims and policy benefit liabilities.
Acquisition costs for new insurance business consist of commis-
sions, premium taxes, certain underwriting costs and other costs
that vary with 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 con-
tract where the benefit amount is directly linked to the market value of
the investments held in the underlying fund. The contractual arrange-
ment 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
maturity value guarantees on segregated funds. The liability associ-
ated with these minimum guarantees is recorded in Insurance claims
and policy benefit liabilities. Segregated funds are not included in our
Consolidated Financial Statements. We derive only fee income from
segregated funds, which is reflected in Insurance premiums, invest-
ment and fee income. Fee income includes management fees, mortality,
policy, administration and surrender charges.
Prior to November 1, 2006, investments made by our insurance
operations were included in Investment account securities. Realized
gains and losses on disposal of fixed income investments that support
life insurance liabilities were deferred and amortized to Insurance premi-
ums, 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 were held to support non-universal life insurance products, the
realized gains and losses were 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 value and adjusted carrying cost of these equities were reduced
quarterly by 5%. Equities held to support universal life insurance prod-
ucts were carried at market value. Realized and unrealized gains or
losses on these equities were included in Insurance premiums, invest-
ment and fee income. Specific investments were written down to market
value or the net realizable value if it was determined that any impair-
ment in value was other-than-temporary. The write down was recorded
against Insurance premiums, investment and fee income in the period
the impairment is recognized.
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 com-
mon shareholders by the weighted average number of common shares
outstanding for the period, net of Treasury shares. Net income avail-
able to common shareholders is determined after deducting dividend
entitlements of preferred shareholders and any gain (loss) on redemp-
tion of preferred shares net of related income taxes. Diluted earnings
per share reflects the potential dilution that could occur if additional
common shares are assumed to be issued under securities or contracts
that entitle their holders to obtain common shares in the future, to the
extent such entitlement is not subject to unresolved contingencies. 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 provisions, variable interest entities,
insurance claims and policy benefit liabilities, pensions and other
post-employment benefits, the carrying value of goodwill, credit card
customer loyalty reward program liability 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.
Change in accounting estimate
During the year, we adjusted the liability associated with our credit
card customer loyalty reward program by $121 million in order to
reflect higher program costs. This change in estimate is reflected as
an increase in Other – Other liabilities on our Consolidated Balance
Sheets and as a decrease in Non-interest income – Card service
revenue in our Consolidated Statements of Income.
Change in financial statement presentation
On November 1, 2007, we implemented the International Convergence
of Capital Measurement and Capital Standards: A Revised Framework,
known as Basel II. In preparation for this implementation, we
reclassified our loans and credit quality information as either Retail or
Wholesale. During the year, we revisited our presentation of certain
assets, liabilities, revenues and expenses for previous periods to bet-
ter reflect the nature of these items. Accordingly, certain comparative
amounts have been reclassified to conform with the current year’s
presentation. These reclassifications did not materially impact our
consolidated financial position or results of operations.
Future accounting changes
Capital Disclosures and Financial Instruments – Disclosures
and Presentation
On December 1, 2006, the CICA issued three new accounting standards:
Handbook Section 1535, Capital Disclosures (Section 1535), Handbook
Section 3862, Financial Instruments – Disclosures (Section 3862),
and Handbook Section 3863, Financial Instruments – Presentation
(Section 3863). These new standards became effective for us on
November 1, 2007.
Section 1535 specifies the disclosure of (i) an entity’s objectives,
policies and processes for managing capital; (ii) quantitative data about
what the entity regards as capital; (iii) whether the entity has complied
with any capital requirements; and (iv) if it has not complied, the conse-
quences of such non-compliance.
Sections 3862 and 3863 replace Handbook Section 3861, Financial
Instruments – Disclosure and Presentation, revising and enhancing its
disclosure requirements, and carrying forward unchanged its presenta-
tion requirements. These new sections place increased emphasis on
disclosures about the nature and extent of risks arising from financial
instruments and how the entity manages those risks.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
123
Note 2 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 transac-
tion between knowledgeable and willing parties under no compulsion
to act. Fair values are determined by reference to quoted bid or ask
prices, as appropriate, in the most advantageous active market for
that instrument to which we have immediate access. Where bid and
ask prices are unavailable, we use the closing price of the most recent
transaction of that instrument subject to the liquidation adjustments
referred to below. In the absence of an active market, we determine
fair values based on prevailing market rates (bid and ask prices, as
appropriate) for instruments with similar characteristics and risk pro-
files or internal or external valuation models, such as option pricing
models and discounted cash flow analysis, using observable market-
based inputs.
Liquidity adjustments are 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. Liquidity adjustments are also cal-
culated to reflect the cost of unwinding a larger than normal market
size risk position.
All of our derivatives transactions are accounted for on a fair
value basis. We record valuation adjustments that represent the fair
value of the credit risk of our derivative portfolios. These adjustments
take into account the creditworthiness of our counterparties, the cur-
rent and potential future mark-to-market of the transactions, and the
effects of credit mitigants such as master netting agreements and
collateral agreements. Credit valuation adjustments are recalculated
regularly for all of our derivative portfolios. Changes to credit valua-
tion adjustments are recorded in current period income.
Fair values determined using valuation models require the use of
We have documented internal policies that detail our processes
assumptions concerning the amount and timing of estimated future
cash flows and discount rates. In determining those assumptions, 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. In limited circumstances, we use
input parameters that are not based on observable market data with
an adjustment to reflect the uncertainty and to ensure that financial
instruments are reported at fair values. Based on our assessment
we believe that using possible alternative assumptions to fair value
such financial instruments will not result in significantly different
fair values.
for determining fair value, including the methodologies used in
establishing our valuation adjustments. These methodologies are
consistently applied and periodically reviewed by our Risk
Management group.
Carrying value and fair value of selected financial instruments
As a result of adopting the new financial instruments accounting
standards, certain financial instruments are now measured at fair
value which were previously reported at cost or amortized cost. This
is primarily due to the reclassification of certain securities as Trading
securities, which includes securities designated as held-for-trading
using the fair value option. The following table provides a comparison
of carrying and fair values as at October 31, 2007 and October 31,
2006, for selected financial instruments:
Carrying value and fair value of
October 31, 2007
Carrying
value
Fair value
October 31,
2006
Financial
instruments
required to
Financial
instruments
be classified designated
as held-
as held-
for-trading
Available-
for-sale
instruments
Loans and
receivables
and
Loans and
receivables
and
measured non-trading non-trading
liabilities
liabilities
Available-
for-sale
instruments
measured
at cost
Total
carrying
amount
Total
fair
value
Total
fair
value
for-trading at fair value
Financial assets
Securities
Trading
Available-for-sale (1)
Total securities
$ 129,408 $ 18,838 $
– $
–
–
28,811
$ 129,408 $ 18,838 $ 28,811 $
– $
–
– $
– $
–
– $ 148,246 $ 148,246
30,009
30,009
1,198
– $
1,198 $ 178,255 $ 178,255 $ 185,239
Assets purchased under reverse repurchase agreements
and securities borrowed
$
– $ 25,522 $
– $ 38,791 $ 38,791 $
– $ 64,313 $ 64,313 $ 59,378
Loans
Retail
Wholesale
Total loans
Other
Derivatives
Other assets
Financial liabilities
Deposits
Personal
Business and government
Bank
Total deposits
$
– $
–
– $
3,235
– $ 168,782 $ 168,375 $
–
65,910
65,919
– $ 168,782 $ 168,375
69,145
–
69,154
$
– $
3,235 $
– $ 234,701 $ 234,285 $
– $ 237,936 $ 237,520 $ 208,638
$ 66,585 $
–
– $
164
$
– $
851 $
1,639
–
56,751
5,668
– $
–
– $
– $
24,653
24,653
– $ 66,585 $ 66,585 $ 37,682
22,660
–
24,817
24,817
– $ 115,706 $ 115,609 $
–
–
161,496
23,094
161,217
23,095
– $ 116,557 $ 116,460
219,607
–
28,763
–
219,886
28,762
$
1,639 $ 63,270 $
– $ 300,296 $ 299,921 $
– $ 365,205 $ 364,830 $ 343,312
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Derivatives
Other liabilities
Subordinated debentures
Trust capital securities
Preferred share liabilities
$ 44,689 $
– $
– $
– $
– $
– $ 44,689 $ 44,689 $ 38,252
–
72,010
–
–
–
–
24,086
–
–
77
–
–
–
–
–
–
–
–
12,947
–
36,232
6,158
1,400
300
12,947
–
3 6,262
6,427
1,476
300
–
–
–
–
–
–
37,033
72,010
36,232
6,235
1,400
300
37,033
72,010
36,262
6,504
1,476
300
41,103
42,108
28,736
7,384
1,532
304
(1)
Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost. Prior to November 1, 2006, both available-
for-sale and held-to-maturity securities were classified as Investment securities and were carried at amortized cost. The prior period comparative amounts have not been restated.
124
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
The purpose of the table below is to present the carrying value of those financial instruments that were classified upon adoption as held-for-trading
or available-for-sale or designated as held-for-trading using the fair value option.
October 31, 2006
Carrying value
Required
to be
classified Designated
as held-for- as held-for-
trading
trading
Classified
as
available-
for-sale
Financial assets
Securities
Trading
Investments (1)
Total securities
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
Other
Derivatives
Other assets
Financial liabilities
Deposits
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivatives
(1)
Includes the value of loan substitutes, which is nominal.
During the year, the fair value of our net financial assets classified as
held-for-trading increased by $2,115 million. The fair value of our net
financial assets designated as held-for-trading increased by $80 mil-
lion; substantially all of this increase was economically hedged. The
fair value of financial liabilities that we designated as held-for-trading
decreased by $88 million due to changes in our own credit risk.
Derivatives and non-derivative financial instruments
Financial assets
Derivative financial instruments (1)
Financial liabilities
Derivative financial instruments (1)
Non-derivative financial instruments (2)
All derivative instruments are carried at fair value.
(1)
(2) Non-derivative financial instruments are carried at amortized cost.
n.a. not applicable
$ 139,491 $ 18,412 $
–
–
–
26,966
$ 139,491 $ 18,412 $ 26,966
$
– $ 40,535 $
–
2,686
37,733
–
–
527
$
1,651 $ 60,859 $
38,252
–
42,340
–
27,494
–
–
–
–
–
–
–
–
–
The following table presents the carrying values of the deriva-
tive and non-derivative financial instruments designated as hedging
instruments categorized by their hedging relationships, as well as
derivatives that are not designated in hedging relationships.
As at October 31, 2007
Designated as hedging instruments
in hedging relationships
Cash flow
hedges
Fair value
hedges
Net investment
hedges
Not designated
in a hedging
relationship
390
$
268
$
856
$ 65,071
$
206
–
$
166
472
5
4,307
$ 71,633
n.a.
$
$
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
125
Note 2 Fair value of financial instruments (continued)
The following table presents the changes in fair value of the financial liabilities designated as held-for-trading using the fair value option as well as
their contractual maturity and carrying amounts.
Liabilities designated as held-for-trading
Term deposits
Personal
Business and government
Bank
Total term deposits
Obligations related to assets sold under repurchase agreements and
securities loaned
Subordinated debentures
October 31, 2007
Contractual
maturity
amount
Carrying
amount
Change in fair
Difference
between
value since
carrying November 1, 2006
attributable
to changes
in RBC’s
credit spread
amount and
contractual
maturity
amount
$
890
56,741
5,668
$
851
56,751
5,668
$
(39) $
10
–
$ 63,299
$ 63,270
$
(29) $
$ 24,087
82
$ 24,086
77
$
(1) $
(5)
(6)
(74)
(1)
(81)
–
(7)
Total
$ 87,468
$
87,433
$
(35) $
(88)
The following table presents information on loans and receivables designated as held-for-trading using the fair value option, the maximum
exposure to credit risk, the extent to which the risk is mitigated by credit derivatives and similar instruments, and changes in the fair value of these
assets as at October 31, 2007:
Carrying
amount of
loans and
receivables
designated
as held-
for-trading
Maximum
exposure to
credit risk
Change
in fair
value since
November 1,
2006
Cumulative
change in
fair value
since initial
recognition
attributable attributable to
changes in
credit risk
to changes in
credit risk
Cumulative
Change in
change in fair
fair value value of credit
derivatives
of credit
or similar
derivatives
instruments
or similar
since
instruments
designation
since
of asset
November 1,
at fair value
2006
Extent to
which credit
derivatives
or similar
instruments
mitigate
credit risk
$ 4,821
$ 4,821
$
–
$
–
$
–
$
–
$
25,522
3,235
25,522
3,164
–
(42)
–
(21)
–
1,106
–
–
–
–
–
18
18
$
Loans and receivables designated as held-for-trading
Interest-bearing deposits with banks
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans
Total
$ 33,578
$ 33,507
$
(42) $
(21) $ 1,106
$
126
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Note 3 Securities (1)
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
2007
Total
2006
Total
2005
Total
Term to maturity (2)
Trading account
Canadian government debt $ 1,683
U.S. government debt
384
Other OECD government debt (3)
–
Mortgage-backed securities
110
Asset-backed securities
231
Corporate debt and other debt
Bankers’ acceptances
Certificates of deposit
Other
Equities
373
704
5,189
–
$ 3,046
1,066
1,429
59
47
$ 5,106
2,084
2,699
1,200
6,612
$ 1,383
377
26
1,176
53
$ 2,853
5,106
82
3,099
691
$
–
–
–
–
–
$ 14,071 $ 13,900 $ 11,814
7,281
7,793
6,476
4,658
2,281
3,841
8,781
9,064
9,017
4,236
5,644
7,634
1
3,525
4,011
–
–
344
24,468
–
–
125
2,220
–
–
14
4,986
–
–
–
1,564
60,120
374
4,712
42,438
60,120
766
5,245
44,139
57,831
998
8,705
33,714
45,710
8,674
13,184
42,513
5,360
16,831
61,684
148,246
147,237
125,760
195
195
3.5%
Available-for-sale securities (1)
Canadian government debt
Federal
Amortized cost
Fair value
Yield (4)
Provincial and municipal
Amortized cost
Fair value
Yield (4)
U.S. government debt
Federal
Amortized cost
Fair value
Yield (4)
State, municipal and agencies
Amortized cost
Fair value
Yield (4)
Other OECD government debt (3)
Amortized cost
Fair value
Yield (4)
Mortgage-backed securities
Amortized cost
Fair value
Yield (4)
Asset-backed securities
Amortized cost
Fair value
Yield (4)
Corporate debt and other debt
Amortized cost
Fair value
Yield (4)
Equities (5)
Cost
Fair value
Loan substitute
Cost
Fair value
Yield (4)
–
–
–
–
–
–
–
–
–
–
–
307
307
5.3%
1
1
3.6%
80
80
5.2%
399
399
6.0%
2,563
2,554
4.8%
57
57
4.7%
–
–
–
–
–
–
517
518
5.1%
622
622
.5%
90
90
4.7%
5
5
4.2%
2,779
2,850
5.2%
–
–
–
–
–
2,031
2,040
4.4%
201
201
4.0%
–
–
–
1,194
1,155
5.0%
107
107
4.2%
4,854
4,872
4.6%
245
239
4.7%
3,229
3,135
4.5%
–
–
–
–
–
382
384
4.5%
78
77
4.5%
–
–
–
21
21
5.6%
84
83
4.6%
405
408
5.2%
357
357
5.2%
774
760
5.2%
–
–
–
–
–
Amortized cost
Fair value
3,545
3,536
4,070
4,142
11,861
11,749
2,101
2,090
–
–
–
–
–
–
–
–
–
–
–
–
5
5
4.9%
3,573
3,522
5.0%
998
939
5.3%
505
495
4.4%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,665
2,676
4.4%
279
278
4.2%
–
–
–
2,039
2,001
5.1%
819
818
1.4%
9,002
8,972
4.8%
2,004
1,939
5.4%
9,850
9,794
4.8%
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%
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%
–
–
2,715
2,874
2,715
2,874
2,537
2,592
1,012
974
400
400
4.6%
5,481
5,361
256
252
5.3%
2,971
3,126
656
652
4.9%
30,029
30,004
656
658
4.8%
37,632
38,002
675
683
3.7%
34,735
34,924
Held-to-maturity securities (1)
Amortized cost
Fair value
Total carrying value
of securities (1)
–
–
3
3
–
–
–
–
2
2
–
–
5
5
–
–
–
–
$ 12,210
$ 17,329
$ 54,262
$ 7,450
$ 22,194
$ 64,810
$ 178,255 $184,869 $ 160,495
(1)
(2)
(3)
(4)
(5)
Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost. Prior to November 1, 2006, both available-
for-sale and held-to-maturity securities were classified as Investment securities and were carried at amortized cost. The prior period comparative amounts have not been restated.
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.
Includes the value of the shares received upon the restructuring of Visa Inc. Refer to Note 30.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
127
Note 3 Securities (continued)
Unrealized gains and losses on Available-for-sale securities (1), (2)
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
Loan substitute securities
2007
2006
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$ 2,665
279
$
–
2,039
819
9,002
2,004
9,855
2,715
656
12
–
–
10
1
30
2
45
191
–
$
(1) $ 2,676
278
(1)
$ 3,649
1,687
$
–
(48)
(2)
(60)
(67)
(101)
(32)
(4)
–
2,001
818
8,972
1,939
9,799
2,874
652
536
1,678
758
11,805
3,164
11,162
2,537
656
29
248
–
5
4
17
11
238
110
2
$
(1) $ 3,677
1,935
–
(28)
(35)
(1)
(130)
(4)
(40)
(55)
–
508
1,648
761
11,692
3,171
11,360
2,592
658
$ 30,034
$
291
$
(316) $ 30,009
$ 37,632
$
664
$
(294) $ 38,002
Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost. Prior to November 1, 2006, both available-
for-sale and held-to-maturity securities were classified as Investment securities and were carried at amortized cost. The prior period comparative amounts have not been restated.
Includes $5 million held-to-maturity securities.
(1)
(2)
.
Realized gains and losses on sale of Available-for-sale securities (1)
Realized gains
Realized losses and writedowns
Net gain on sale of Available-for-sale securities
2007
187
(124)
63
$
$
2006
2005
177
(89)
88
$
$
141
(56)
85
$
$
(1)
Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost. Prior to November 1, 2006, both available-
for-sale and held-to-maturity securities were classified as Investment securities and were carried at amortized cost. The prior period comparative amounts have not been restated.
Fair value and unrealized losses position for Available-for-sale securities as at October 31, 2007
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
$
$
1,231
210
–
–
47
941
853
2,162
432
1
1
–
–
2
14
5
57
30
$
$
–
–
–
265
–
994
501
434
3
$
$
–
–
–
48
–
46
62
48
2
1,231
210
–
265
47
1,935
1,354
2,596
435
Total temporarily impaired securities
$
5,876
$
110
$
2,197
$
206
$
8,073
$
1
1
–
48
2
60
67
105
32
316
The unrealized losses for Canadian government debt and U.S. govern-
ment debt were caused by increases in interest rates and appreciation
of the Canadian dollar against the U.S. dollar. The contractual terms of
some of these investments either do not permit the issuer to settle the
securities at a price less than the amortized cost of the investment, or
permit prepayment of contractual amounts owing only with prepay-
ment 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. Further, a substantial amount of the U.S.
dollar-denominated debt is hedged against the foreign currency risk
and, accordingly, the unrealized losses are not considered to be other-
than-temporarily impaired as at October 31, 2007.
Unrealized losses for mortgage-backed securities, asset-backed
securities, corporate debt and other debt were due to interest rate
changes and widening credit spreads caused by the recent disruption
in the financial markets, the weakening of the U.S. housing market,
credit rating downgrades of certain securities in the marketplace, and
appreciation of the Canadian dollar against the U.S. dollar. However,
given that a substantial portion of these securities are investment-
grade securities and 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 the
principal amount of these securities 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, 2007.
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, 2007, as we have the ability and intent
to hold them for a reasonable period of time until they recover their
fair value.
128
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
The following table presents interest and dividends on Available-for-sale and Held-to-maturity securities:
Interest and dividends on Available-for-sale and Held-to-maturity securities (1)
Taxable interest income
Non-taxable interest income
Dividends
$
2007
968
2
74
$
2006
1,087
2
44
$
$
1,044
$
1,133
$
2005
862
2
31
895
(1)
Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost. Prior to November 1, 2006, both available-
for-sale and held-to-maturity securities were classified as Investment securities and were carried at amortized cost. The prior period comparative amounts have not been restated.
Note 4 Loans
Retail (1)
Residential mortgages
Personal
Credit cards
Small business (2)
Wholesale (1)
Business (3), (4)
Bank
Sovereign (5)
2007
2006
Canada United States
Other
International
Total
Canada United States
Other
International
Total
$ 107,453 $
42,506
8,142
2,652
1,402 $
5,283
119
–
890 $ 109,745 $ 94,272 $
954
61
–
37,946
6,966
2,318
48,743
8,322
2,652
1,518 $
6,011
123
–
885 $ 96,675
44,902
945
7,155
66
2,318
–
160,753
6,804
1,905
169,462
141,502
7,652
1,896
151,050
39,877
3,114
416
17,741
686
–
6,239
1,547
347
63,857
5,347
763
35,245
2,031
553
13,611
236
–
5,894
985
334
54,750
3,252
887
43,407
18,427
8,133
69,967
37,829
13,847
7,213
58,889
Total loans (6)
Allowance for loan losses
204,160
(1,101)
25,231
(321)
10,038
(71)
239,429
(1,493)
179,331
(1,086)
21,499
(266)
9,109
(57)
209,939
(1,409)
Total loans net of allowance for loan losses $ 203,059 $ 24,910 $
9,967 $ 237,936 $ 178,245 $ 21,233 $
9,052 $ 208,530
(1)
(2)
(3)
(4)
(5)
(6)
Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Included under Canada for 2007 are loans totalling $1,202 million to a variable interest entity administered by us.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Loans are net of unearned income of $113 million (2006 – $62 million).
Loan maturities and rate sensitivity
As at October 31, 2007
Retail
Wholesale
Maturity term (1)
Rate sensitivity
Under
1 year
1 to 5
years
Over 5
years (2)
Total
Floating
Fixed
rate
Non-rate-
sensitive
Total
$ 63,737 $ 92,337 $ 13,388 $ 169,462 $ 66,256 $ 101,496 $
39,908
22,269
7,790
69,967
48,625
21,342
1,710 $ 169,462
69,967
–
Total loans
Allowance for loan losses
$ 103,645 $ 114,606 $ 21,178 $ 239,429 $ 114,881 $ 122,838 $
–
–
–
(1,493)
–
–
1,710 $ 239,429
(1,493)
–
Total loans net of allowance for loan losses $ 103,645 $ 114,606 $ 21,178 $ 237,936 $ 114,881 $ 122,838 $
1,710 $ 237,936
(1)
(2)
Based on the earlier of contractual repricing or maturity date.
Included in Wholesale are loans totalling $1,202 million to a variable interest entity administered by us, with maturity terms exceeding five years.
Impaired loans (1), (2)
Retail
Residential mortgages
Personal
Small business (3)
Wholesale
Business (4)
Bank
Sovereign (5)
Total
Gross
210
189
19
418
722
–
–
722
1,140
$
$
$
$
$
$
$
$
$
$
2007
Specific
allowances
(23) $
(96)
(9)
(128) $
(223) $
–
–
(223) $
(351) $
2006
Net
152
104
4
260
311
–
–
311
571
Net
187
93
10
290
499
–
–
499
789
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
There are $353 million (2006 – $305 million) of loans that are contractually 90 days past due but are not considered impaired.
Average balance of gross impaired loans was $959 million (2006 – $805 million).
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
129
Note 4 Loans (continued)
Allowance for loan losses
Retail
Residential mortgages
Personal
Credit cards
Small business (2)
Wholesale
Business (3)
Bank
Sovereign (4)
Specific allowances
General allowance (5)
Total allowance for credit losses
Allowance for off-balance sheet and other items (6)
Total allowance for loan losses
2007
Write-offs
Recoveries
Provision
for credit
Other
losses adjustments (1)
Balance
at end
of year
2006
Balance
at end
of year
Balance at
beginning
of year
$
13
101
–
9
1
23
$
(5) $
(444)
(268)
(42)
(759)
$
140
–
–
$
263
1,223
$ 1,486
(77)
$
$
$
(109) $
–
–
(868) $
–
(868) $
–
$ 1,409
$
(868) $
1
74
46
7
128
42
–
–
170
–
170
–
170
$
$
$
$
$
$
$
$
13
364
223
34
634
148
–
–
782
9
791
(2)
$
$
1
1
(1)
1
2
2
–
–
$
23
96
–
9
13
101
–
9
128
$
123
223
–
–
$
140
–
–
4
(11)
$
351
1,221
$
263
1,223
(7) $ 1,572
(79)
–
$ 1,486
–
$
789
$
(7) $ 1,493
$ 1,486
(1)
(2)
(3)
(4)
(5)
(6)
Primarily represent the translation impact of foreign currency-denominated allowance for loan losses.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Includes $79 million (2006 – $77 million) related to off-balance sheet and other items.
The allowance for off-balance sheet and other items is reported separately under Other liabilities.
During the year ended October 31, 2007, assets acquired in respect of problem loans amounted to $36 million (2006 – $9 million).
Net interest income after provision for credit losses
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
2007
7,532
791
$
2006
6,796
429
$
2005
6,793
455
6,741
$
6,367
$
6,338
$
$
Note 5 Securitizations
The following table summarizes our securitization activities for 2007, 2006 and 2005:
Securitized and sold
Net cash proceeds received
Asset-backed securities purchased
Retained rights to future excess interest
Pre-tax gain (loss) on sale
2007 (1)
Canadian
residential
mortgage
loans (2), (3)
$ 6,188
6,097
–
146
55
Commercial
mortgage
loans (4)
$ 1,937
1,876
47
–
(14)
Credit
card
loans (5)
$ 1,200
400
794
9
3
2006
Canadian
residential
mortgage
loans (2), (3)
$ 6,329
6,210
–
121
2
Commercial
mortgage
loans
Credit
card
loans (5)
$
718
729
–
–
11
$ 1,200
600
596
8
4
2005
Canadian
residential
mortgage
loans (2), (3)
$ 3,752
3,739
–
100
87
Commercial
mortgage
loans
$
655
667
–
–
12
(1) We did not securitize any credit card loans during the year.
(2)
(3)
All Canadian residential mortgage loans securitized are insured.
Canadian insured residential mortgage loans securitized during the year through the creation of mortgage-backed securities and retained as at October 31, 2007 were $3,110 million
(2006 – $4,869 million, 2005 – $1,050 million). These securities are carried at fair value; prior to November 1, 2006, these securities were carried at amortized cost.
The net cash proceeds received represent gross proceeds of $1,923 million less funds used to purchase notes of $47 million (principal value of $48 million). We did not purchase any
notes as part of our securitization activities in 2006 or 2005.
The net cash proceeds received represent gross proceeds of $1,200 million in 2006 (2005 – $1,200 million) less funds used to purchase notes issued by Golden Credit Card Trust with a
principal value of $800 million in 2006 (2005 – $600 million).
(4)
(5)
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. None were sold in 2007.
130
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Cash flows from securitizations (1)
2007
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
2006
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
2005
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
Proceeds reinvested in revolving
securitizations
Cash flows from excess spread (2)
$ 15,684
256
$ 1,043
66
$ 3,559
168
$ 17,107
263
$
466
11
$ 2,251
134
$ 12,076
242
$
419
3
$ 1,520
100
(1)
(2)
This analysis is not applicable for commercial mortgage loans securitizations as we have not retained rights to future excess spread in these transactions.
Includes servicing fees received.
The key assumptions used to value the retained interests at the date of the securitization activities are as follows:
Key assumptions (1), (2)
2007 (3)
Canadian residential
mortgage loans
Variable rate
Fixed rate
2006
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
2005
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
Expected weighted average life of
prepayable receivables (in years)
Payment rate
Excess spread, net of credit losses
Expected credit losses
Discount rate
2.63
29.20%
.88
–
4.71%
3.69
14.38%
.83
–
4.80%
.16
40.02%
5.13
2.15
10.00
2.61
30.00%
1.18
–
4.32
3.60
15.39%
.99
–
4.36
.15
40.06%
6.88
1.75
10.00
3.48
13.52%
.20
–
3.64
3.59
13.36%
1.06
–
3.59
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 not retained rights to future excess spread in these transactions.
(1)
(2)
(3) We did not securitize any credit card loans during the year.
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, 2007 was .52%. Static credit pool losses are not applicable
to residential mortgages as substantially all the mortgages are govern-
ment 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, 2007
and 2006:
Loans managed
Retail
Wholesale
Total loans managed (2)
Less: Loans securitized and managed
Credit card loans
Canadian residential mortgage-backed securities
created and sold
Canadian residential mortgage-backed securities
created and retained
2007
2006
Loan principal
Past due (1)
Net write-offs
Loan principal
Past due (1)
Net write-offs
$ 192,633
69,967
$
$
754
739
262,600
1,493
3,650
14,239
5,282
–
–
–
718
66
784
86
–
–
$ 172,118
58,889
$
231,007
3,650
12,186
5,232
$
654
485
1,139
–
–
–
597
(4)
593
85
–
–
Total loans reported on the Consolidated Balance Sheets $ 239,429
$
1,493
$
698
$ 209,939
$
1,139
$
508
(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.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
131
Note 5 Securitizations (continued)
Sensitivity of key assumptions
Key assumptions are used to determine the fair value of our retained
interests. The following table is a summary of the key assumptions
used as at October 31, 2007 and the sensitivity of the current fair value
of our retained interests to immediate 10% and 20% adverse changes
in these key assumptions.
Increase (decrease) in fair value of retained interests due to adverse changes in key assumptions (1), (2)
2007
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
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
$
$
27.5
.25
37.39%
(1.6)
(3.2)
$
27.9
2.63–3.27
29.20–40.00%
(.8)
(1.5)
$
$
386.7
3.05–3.97
9.25–18.00%
$
(9.4)
(18.6)
$
$
5.72%
(5.0)
(10.0)
2.18%
(1.2)
(2.3)
$
.68–.88%
(14.0)
(28.0)
$
.84–.89%
(37.1)
74.3
$
–%
–
–
$
–%
–
–
$
10.00%
–
(.1)
4.71–6.81%
(.2)
$
(.3)
4.69–4.71%
$
(2.3)
(4.5)
(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 not retained rights to future excess spread in these transactions.
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
assumptions to the change in fair value may not be linear. The effect of
a variation in a particular assumption on the fair value of the retained
interests is calculated without changing any other assumptions.
Generally, the changes in one factor may result in changes in another,
which may magnify or counteract the sensitivity.
Note 6 Variable interest entities (VIEs)
The following table provides information about VIEs as at October 31,
2007 and 2006, in which we have significant variable interests,
and those we consolidate under CICA Accounting Guideline 15,
Consolidation of Variable Interest Entities (AcG-15), because we are
the Primary Beneficiary.
Maximum exposure
to loss as at Total assets as at
Total assets as at
October 31, 2007 October 31, 2007 October 31, 2006
Maximum exposure
to loss as at
October 31, 2006
Unconsolidated VIEs in which we have significant variable interests (1):
Multi-seller conduits (2)
Third-party conduits
Credit investment product VIEs
Investment funds
Structured finance VIEs
Other
Consolidated VIEs (3), (4):
Investment funds (5)
Structured finance VIEs
Credit investment product VIEs
Compensation vehicles
Other
$ 41,785
4,264
2,676
1,517
407
60
$ 42,912
1,625
1,733
324
407
80
$ 34,258
2,697
–
$ 35,031
1,018
–
3,390
2,592
128
303
1,465
84
$ 50,709
$
47,081
$ 43,065
$
37,901
$
995
560
276
83
144
$
1,851
409
689
355
151
$
2,058
$
3,455
(1)
(2)
(3)
(4)
(5)
132
The maximum exposure to loss resulting from our significant variable interests in these VIEs consists mostly of investments, loans, liquidity facilities and fair value of derivatives.
We have recognized $2,165 million (2006 – $2,130 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, 2007. Actual assets held by these
conduits as at October 31, 2007, were $29,290 million (2006 – $24,811 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
$75 million (2006 – $120 million), Trading securities of $1,185 million (2006 – $2,483 million), Available-for-sale securities of $315 million (2006 – $409 million) and Other assets of
$401 million (2006 – $287 million). The compensation vehicles hold $83 million (2006 – $156 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
liquidity facilities or credit enhancement facilities to, or enter into derivative transactions with, the VIEs.
The implementation of EIC-163 (refer to Note 1) resulted in the deconsolidation of certain investment funds during 2007. As at October 31, 2006, the total assets and maximum exposure
to loss of these deconsolidated funds were $363 million and $36 million, respectively.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Multi-seller and third-party conduits
We administer seven 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.
The multi-seller conduits also finance assets that are either in the
form of securities including collateralized debt obligations or instru-
ments that closely resemble securities such as credit-linked notes. In
these situations, the multi-seller conduit is often one of many inves-
tors 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 com-
mensurate with its risk position. The expected loss investor absorbs
a majority of each multi-seller conduit’s expected losses, when com-
pared to us; therefore, we are not the Primary Beneficiary and do not
consolidate these conduits under AcG-15. However, we continue to
hold a significant variable interest in these multi-seller conduits result-
ing from our provision of backstop liquidity facilities, partial credit
enhancement and 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 do not 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 invest-
ment 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
Note 7 Derivative financial instruments and hedging activities
risks, obtaining indirect exposure to financial assets, supporting an
enhanced yield, funding specific assets and meeting client require-
ments. We consolidate structured finance VIEs in which our interests
expose us to a majority of the expected losses.
Creation of credit investment products
We use VIEs to generally transform credit derivatives into cash
instruments, to distribute credit risk and to create customized credit
products to meet investors’ specific requirements. We enter into
derivative contracts 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 but the transfer of assets does 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.
Compensation vehicles
We use compensation trusts, which primarily hold our own common
shares, to economically hedge our obligation to certain employees
under some of our stock-based compensation programs. We consoli-
date the trusts in which we are the Primary Beneficiary.
Capital trusts
RBC Subordinated Notes Trust (Trust III) was created in 2007 to issue
$1 billion of innovative subordinated debentures and RBC Capital
Trust II (Trust II) was created in 2003 to issue $900 million of innova-
tive capital instruments. We issued senior deposit notes of the same
amounts to Trust II, and a senior deposit note of $999.8 million to
Trust III. Although we own the common equity and voting control
of these trusts, 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 these trusts. For details on our innovative capital
instruments, refer to Note 17.
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 QSPE under
AcG-12, which is specifically exempt from consolidation under AcG-15,
and our level of participation in each of the remaining 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.
Derivative financial instruments are financial contracts whose value is
derived from an underlying interest rate, foreign exchange rate, equity
or commodity instrument or index.
Equity forwards and futures are contractual obligations to buy or
sell at a fixed value (the contracted price) of an equity index, a basket
of stocks or a single stock at a predetermined future date.
Types of derivatives
Forwards and futures
Forward contracts are effectively tailor-made agreements that are
transacted between counterparties in the over-the-counter market,
whereas futures are standardized contracts with respect to amounts
and settlement dates, and are traded on regular future 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 predetermined 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 settle-
ment at a predetermined 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.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
133
Note 7 Derivative financial instruments and hedging activities (continued)
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 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
referenced 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 issued for trading purposes
Most of our derivative transactions relate to sales and trading activities.
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 iden-
tifying and profiting from price differentials between markets
and products.
Hedge activities
Fair value hedges
Ineffective portion
Cash flow hedges
Ineffective portion
Effective portion
Reclassified to income during the year (1)
Net investment hedges
Foreign currency losses
Gains from hedges
An after-tax equivalent amount of $31 million was reclassified from AOCI.
(1)
n.a. not applicable
134
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Derivatives issued for other than trading purposes
We also use derivatives for purposes other than trading, primarily for
hedging, in conjunction with the management of interest rate, credit
and foreign exchange risk related to our own asset/liability manage-
ment, funding 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, including funding and invest-
ment activities. 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 and cash instruments are specifically desig-
nated 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 either cause assets and liabilities to appreci-
ate or depreciate in market value or cause variability in anticipated
cash flows. When a hedging instrument functions effectively, gains,
losses, revenue and expenses of the hedging instrument will offset
the gains, losses, revenue and expenses of the hedged item. When
derivatives are designated as the hedging instrument, all components
of each derivative’s change in fair value are included in the assessment
and measurement of hedge effectiveness. When cash instruments are
designated for hedges of currency risks, only changes in their value
due to currency risk are included in the assessment and measurement
of hedge effectiveness.
We did not apply hedge accounting to any anticipated transac-
tions or firm commitments during the year. As at October 31, 2007,
after-tax net unrealized gains of $24 million were recognized in AOCI,
representing the cumulative effective portions of our cash flow
hedges. The net amount of gains and losses reported in AOCI that is
expected to be reclassified to Net interest income within the next
12 months is not estimated to be material.
From time to time, we also enter into derivative transactions to
economically hedge certain business strategies that do not otherwise
qualify for hedge accounting, or where hedge accounting is not con-
sidered economically feasible to implement. In such circumstances,
changes in fair value are reflected in Non-interest income.
2007
Net gains (losses)
included in
Net gains (losses)
included in
Non-interest income Net interest income
After-tax
unrealized
gains (losses)
included in OCI
$
(14)
$
n.a.
$
(9)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
(47)
n.a.
n.a.
n.a.
n.a.
80
n.a.
(2,965)
1,804
Notional amount of derivatives by term to maturity
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
2007
2006
Within
1 year
1 to
5 years
Over 5
years (1)
Total
Trading
Other than
trading
Trading
Other than
trading
$ 197,733
896,816
22,986
38,403
$
4,120
907,875
35,405
39,854
$
–
449,855
32,197
71,485
$ 201,853
2,254,546
90,588
149,742
$ 201,853
2,096,153
89,585
149,169
$
–
158,393
1,003
573
$ 315,378
1,874,206
99,172
73,566
$
–
140,232
86
–
706,342
2,648
53,818
28,961
30,500
18,548
22,614
68,553
112,912
14,945
4,656
100
9,521
252,784
21,149
7,978
141,584
7,472
7,559
183,650
20,129
14,285
7,521
82,936
330
296
197,026
31,203
741,776
18,147
278,338
36,763
38,355
399,224
73,946
710,961
17,748
242,319
36,756
38,355
393,247
73,804
30,815
399
36,019
7
–
5,977
142
8,806
19,278
19
–
227
168
1,396
5
2
–
–
–
–
26
77,364
132,192
14,964
4,656
77,086
132,008
14,964
4,656
327
9,689
254,206
327
9,689
254,206
278
184
–
–
–
–
–
626,484
18,553
228,090
65,572
68,337
219,054
86,548
146,886
211,131
71,926
119,194
6,070
26,088
257,154
33,033
1,072
20,707
71
51
2,722
573
524
901
–
–
–
–
–
$ 2,482,840
$ 1,406,669
$ 887,167
$ 4,776,676
$ 4,542,886
$ 233,790
$ 4,513,409
$ 199,972
(1)
(2)
(3)
Includes contracts maturing in over 10 years with a notional value of $205,976 million (2006 – $135,951 million). The related gross positive replacement cost is $10,910 million
(2006 – $3,857 million).
Comprises credit default swaps, total return swaps and credit default baskets, including credit derivatives given guarantee treatment for the OSFI regulatory reporting purposes.
Credit derivatives with a notional value of $5,530 million (2006 – $2,116 million) are economic hedges.
Comprises precious metal, commodity and equity-linked derivative contracts other than embedded equity-linked contracts.
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
2007
2006
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
$
44
13,938
621
–
$
49
14,241
–
786
$
72
14,250
488
–
$
25
14,446
–
625
$
52
12,150
795
–
$
50
12,003
–
888
$
44
12,258
602
–
$
60
11,969
–
698
14,603
15,076
14,810
15,096
12,997
12,941
12,904
12,727
8,342
2,231
8,987
1,044
–
8,508
1,522
9,419
–
1,028
14,503
3,066
13,634
1,221
–
14,410
2,141
14,250
–
1,302
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
20,604
20,477
32,424
32,103
17,362
18,348
15,402
16,593
Credit derivatives (2)
Other contracts (3)
3,964
6,096
3,508
9,537
10,416
4,925
9,375
10,317
1,139
5,623
975
8,803
1,795
5,798
1,580
9,221
$ 45,267
$ 48,598
$ 62,575
$ 66,891
$ 37,121
$ 41,067
$ 35,899
$ 40,121
Held or issued for other than trading purposes
Interest rate contracts
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)
Total gross fair values before netting (4)
Impact of master netting agreements
With intent to settle net or simultaneously (5)
Without intent to settle net or simultaneously (6)
Total
$
1,110
6
–
1,116
921
2
1,371
–
–
2,294
36
20
$
760
–
25
785
503
9
3,635
–
–
4,147
30
42
3,466
5,004
66,041
71,895
(473)
(38,256)
(473)
(38,256)
$ 27,312
$ 33,166
$
$
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
(1)
(2)
(3)
(4)
(5)
(6)
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 guarantee treatment for the 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.
The positive year-end fair value excludes margin requirements of $1,017 million (2006 – $721 million) and the negative year-end fair value excludes market and credit valuation
adjustments of $588 million (2006 – $366 million).
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.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
135
Note 7 Derivative financial instruments and hedging activities (continued)
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 evaluat-
ing the creditworthiness of counterparties, and managing the size,
diversification 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 net-
ting agreements. The master netting agreement provides for a single
net settlement of all financial instruments covered by the agreement
in the event of default. However, credit risk is reduced only to the
extent that our financial obligations to the same counterparty can be
set off against obligations of the counterparty to us. 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 the use of master
netting agreements to reduce derivative-related credit exposure. Our
overall exposure to credit risk that is reduced through master netting
agreements may change substantially following the reporting date as
the exposure is affected by each transaction subject to the agreement
as well as by changes in underlying market rates. Measurement of our
credit exposure arising out of derivative transactions is reduced to
reflect the effects of netting in cases where the enforceability of that
netting is supported by appropriate legal analysis as documented in
our trading credit risk policies.
The use of collateral is another significant credit mitigation
technique for managing derivative-related counterparty credit risk.
Marked-to-market provisions in our agreements with some counter-
parties, typically in the form of a Credit Support Annex, provide RBC
with the right to request that the counter party pay down or collateral-
ize the current market value of its derivatives positions when the value
passes a specified threshold amount.
During 2007, 2006 and 2005, neither our actual credit losses aris-
ing from derivative transactions nor the level of impaired derivative
contracts were significant. The tables below show replacement cost,
credit equivalent and risk-adjusted amounts of our derivatives both
before and after the impact of netting.
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
$955 million (2006 – $734 million) relating to exchange-traded instru-
ments as they are subject to daily margining and are deemed to have
no credit risk.
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 the 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)
2007
2006
Replacement Credit equivalent
amount
cost
Risk-adjusted
balance
Replacement Credit equivalent
amount
cost
Risk-adjusted
balance
$
72
15,360
364
$
92
23,484
1,032
$
22
5,213
248
$
44 $
13,358
591
109
21,031
1,164
15,796
24,608
5,483
13,993
22,304
15,424
18,073
1,221
22,222
32,901
1,832
5,674
6,138
466
34,718
56,955
12,278
10,416
4,120
35,026
6,723
8,465
2,251
5,595
9,466
1,056
16,117
1,795
5,160
12,413
22,697
2,244
37,354
6,975
8,696
$
22
4,452
260
4,734
3,310
4,305
502
8,117
2,009
2,760
Derivatives before master netting agreements
Impact of master netting agreements
$ 65,050
(38,729)
$ 123,312
(65,339)
$ 28,477
(14,020)
$
37,065
(19,089)
$ 75,329
(31,831)
$
17,620
(7,188)
Total derivatives after master netting agreement (3)
$ 26,321
$
57,973
$ 14,457
$
17,976
$ 43,498
$ 10,432
(1)
(2)
(3)
Comprises credit default swaps, total return swaps and credit default baskets. The above excludes credit derivatives issued for other than trading purposes related to bought and sold
protection with a replacement cost of $36 million (2006 – $20 million). Credit derivatives issued for other than trading purposes related to sold protection with a replacement cost of
$.4 million (2006 – $20 million) had a credit equivalent amount of $447 million (2006 – $283 million) and risk-adjusted asset amount of $447 million (2006 – $283 million) which were
given guarantee treatment per the OSFI guidance.
Comprises precious metal, commodity and equity-linked derivative contracts.
The total credit equivalent amount after netting includes collateral applied of $2,228 million (2006 – $1,310 million).
136
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Replacement cost of derivative financial instruments by risk rating and by counterparty type
Risk rating (1)
Counterparty type (2)
As at October 31, 2007
AAA, AA
A
BBB
BB or
lower
Total
OECD
Banks governments
Other
Total
Gross positive replacement cost
Impact of master netting agreements
$
42,142 $ 14,731 $
(28,042)
(8,047)
6,149 $
(2,367)
2,064 $
(273)
65,086 $
(38,729)
38,250 $
(31,193)
8,188 $
–
18,648 $
(7,536)
65,086
(38,729)
Replacement cost (after netting agreements) (3)
$
14,100 $
6,684 $
3,782 $
1,791 $
26,357 $
7,057 $
8,188 $
11,112 $
26,357
Replacement cost (after netting agreements) – 2006 (3) $
8,573 $
5,393 $
2,270 $
1,760 $
17,996 $
5,678 $
5,891 $
6,427 $
17,996
(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 issued for other than trading purposes with a total replacement cost of $36 million (2006 – $20 million).
Note 8 Premises and equipment
Land
Buildings
Computer equipment
Furniture, fixtures and other equipment
Leasehold improvements
2007
Accumulated
depreciation
$
$
–
333
1,986
764
727
$
Cost
133
553
3,049
1,059
1,147
Net book
value
133
220
1,063
295
420
$
Cost
134
511
2,462
1,012
1,127
2006
Accumulated
depreciation
$
$
–
321
1,698
736
673
Net book
value
134
190
764
276
454
$
5,941
$
3,810
$
2,131
$
5,246
$
3,428
$
1,818
The depreciation expense for premises and equipment for 2007 was $434 million (2006 – $405 million; 2005 – $414 million).
Note 9 RBC Dexia Investor Services joint venture
RBC Dexia Investor Services
We operate our institutional and investor services business (IIS)
through our joint venture, RBC Dexia Investor Services (RBC Dexia
IS). During the year, RBC Dexia IS finalized the net assets contribution
requirement outlined in the joint venture agreement. As a result, it was
determined that we had contributed €27 million ($41 million) of net
assets in excess of the amount required. This excess was settled by
RBC Dexia IS in cash and recognized by us as a reduction in our invest-
ment in the joint venture.
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:
For the
year ended
October 31,
2007
For the nine
months ended
October 31,
2006 (1)
Consolidated Statements of Income
Net interest income
Non-interest income
Non-interest expense
Net income
Consolidated Statements of Cash Flows
Cash flows from (used in) operating
activities
Cash flows from (used in) investing
activities
Cash flows from (used in) financing
activities
$
$
116
600
529
125
$
(546)
$
(2,299)
2,856
75
363
315
73
(71)
(97)
165
As at
(1)
October 31,
2007
October 31,
2006
For the year ended October 31, 2006, we did not report our proportionate share of
RBC Dexia IS results for our quarter ended January 31, 2006 as the joint venture was
formed on January 2, 2006, and we report its results on a one-month lag basis.
Consolidated Balance Sheets
Assets (1)
Liabilities
$ 15,544 $ 12,354
11,396
14,533
(1)
Includes $69 million (2006 – $69 million) of goodwill and $179 million (2006 –
$208 million) of intangible assets.
We provide certain services to RBC Dexia IS, which include administra-
tive and technology support, human resources, and credit and banking
facilities to support its operations. RBC Dexia IS also provides certain
services to 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 amount of income earned and expenses incurred by
RBC Dexia IS related to transactions with RBC are as follows:
Net interest income
Non-interest income
Non-interest expense
For the
year ended
October 31,
2007
For the nine
months ended
October 31,
2006 (1)
$
$
157
26
34
99
16
28
(1)
For the year ended October 31, 2006, we did not report the amounts of income earned
and expenses incurred by RBC Dexia IS related to transactions with RBC for our quar-
ter ended January 31, 2006 as the joint venture was formed on January 2, 2006, and
we report its results on a one-month lag basis.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
137
Note 10 Goodwill and other intangibles
Effective February 7, 2007, as discussed in Note 30, our previous three
business segments were reorganized into four business segments.
This reorganization resulted in the realignment of certain reporting
units. Accordingly, we have reallocated our goodwill to the new
reporting units using the relative fair value approach. The following
table discloses the changes in goodwill during 2006 and 2007, includ-
ing the reallocation of goodwill to the new reporting units:
Goodwill
Balance at October 31, 2005
Goodwill acquired during the year
Other adjustments (1), (2)
Balance at October 31, 2006
RBC
Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
RBC
Capital
Markets
$
$
2,419
–
72
$
831
86
(17)
$
953
–
(40)
Total
4,203
86
15
$
2,491
$
900
$
913
$
4,304
Goodwill acquired between November 1, 2006 and January 31, 2007
Other adjustments (3)
–
9
406
58
121
34
527
101
Balance at January 31, 2007
$
2,500
$
1,364
$
1,068
$
4,932
(1)
(2)
(3)
Other adjustments in 2006 primarily include the impact of foreign exchange translations on foreign currency-denominated goodwill, changes in goodwill related to our IIS business with
RBC Dexia IS (refer to Note 9), and the transfer of $6 million of 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 foreign currency-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 adjustments on our Consolidated Statements of Changes in Shareholders’ Equity.
Other adjustments in the first quarter of 2007 primarily include the impact of foreign exchange translations on foreign currency-denominated goodwill.
As a result of the application of the relative fair value approach for the business reorganization, goodwill as at January 31, 2007 has been
reallocated as follows:
Reallocation of goodwill
Goodwill
balance before
business
reorganization
Canadian
Banking
Wealth
Management
U.S. &
International
Banking
RBC Canadian Personal and Business
RBC U.S. and International Personal and Business
RBC Capital Markets
$
$
2,500
1,364
1,068
$
2,069
–
–
$
431
583
–
$
–
781
109
Goodwill
balance after
business
reorganization
$
2,500
1,364
1,068
Capital
Markets
–
–
959
Balance at January 31, 2007
$
4,932
$
2,069
$
1,014
$
890
$
959
$
4,932
Goodwill acquired between February 1 and
October 31, 2007
Other adjustments (1)
372
(552)
–
(19)
31
(163)
323
(217)
18
(153)
372
(552)
Balance at October 31, 2007
$
4,752
$
2,050
$
882
$
996
$
824
$
4,752
(1)
Other adjustments in the last three quarters of 2007 primarily include the impact of foreign exchange translations on foreign currency-denominated goodwill.
We have also completed the annual assessment for goodwill impairment in all reporting units and have determined that there was no goodwill impair-
ment for the year ended October 31, 2007 (2006 – nil; 2005 – nil).
Other intangibles
Core deposit intangibles
Customer lists and relationships
Mortgage servicing rights
2007
2006
Gross carrying
amount
Accumulated
amortization (1)
Net carrying
amount
Gross carrying
amount
Accumulated
amortization (1)
Net carrying
amount
$
$
376
605
47
(170) $
(200)
(30)
$
206
405
17
$
324
625
44
(163) $
(156)
(32)
$
1,028
$
(400) $
628
$
993
$
(351) $
161
469
12
642
(1)
Total amortization expense for 2007 was $96 million (2006 – $76 million; 2005 – $50 million).
The projected amortization of Other intangibles for each of the years ending October 31, 2008 to October 31, 2012 is approximately $86 million.
There were no writedowns of intangible assets due to impairment for the year ended October 31, 2007 (2006 – nil; 2005 – nil).
138
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Note 11 Significant acquisitions and dispositions
2007
In December 2006, we completed the acquisition of Atlanta, Georgia-
based Flag Financial Corporation (Flag) and its subsidiary, Flag Bank,
and in March 2007, we completed the acquisition of 39 branches of
AmSouth Bank in Alabama (AmSouth branches). Details of these
acquisitions are as follows:
Acquisition date
Business segment
Percentage of shares acquired
Flag
AmSouth branches (1)
December 8, 2006
March 9, 2007
U.S. & International Banking U.S. & International Banking
100%
n.a.
Purchase consideration in the currency of the transaction
Cash payment of US$435
Cash payment of US$343
Purchase consideration in Canadian dollar equivalent
Fair value of tangible assets acquired
Fair value of liabilities assumed
Fair value of identifiable net assets acquired (net liabilities assumed)
Core deposit intangibles and other intangibles (2), (3)
Goodwill
Total purchase consideration
$
$
$
498
1,912
(1,870)
42
50
406
498
$
$
$
405
2,368
(2,369)
(1)
83
323
405
(1)
(2)
(3)
The purchase price allocation for the AmSouth branches is preliminary; it will be finalized once the valuations of certain assets and liabilities are completed.
Core deposit intangibles are amortized on a straight-line basis over an estimated average useful life of seven years.
Included in the acquisition of Flag was $7 million of Other intangibles ($nil for AmSouth branches) which relates to non-compete agreements and are amortized over the term of the
agreements for a maximum of three years.
n.a. n ot applicable
Other acquisitions
Capital Markets
During 2007, we completed three acquisitions for a total cost of
US$150 million (C$170 million), which were paid in cash: (i) Ohio-
based Seasongood & Mayer, LLC, a public finance firm and leading
underwriter of municipal debt, and its wholly owned subsidiary,
Seasongood Asset Management, an investment advisor to public
funds clients, (ii) the broker-dealer business and certain other assets
of the Carlin Financial Group, a New York-based broker-dealer, and
(iii) Colorado-based Daniels & Associates, L.P., an M&A advisory firm
specializing in the communications, media and entertainment, and
technology sectors. These acquisitions are not material to Capital
Markets and resulted in goodwill of $160 million.
Wealth Management
On May 18, 2007, we completed the acquisition of New Jersey-based
J.B. Hanauer & Co., a privately held financial services firm which
specializes in retail fixed income and wealth management services, for
US$42 million (C$45 million) in cash. The acquisition is not material to
Wealth Management and resulted in goodwill of $18 million.
Pending acquisitions
U.S. & International Banking
On April 17, 2007, we announced our intention to acquire a 50% inter-
est in Fidelity Merchant Bank & Trust Limited, the Bahamas-based
wholly owned subsidiary of Fidelity Bank & Trust International Limited
to form a joint venture to be called Royal Fidelity Merchant Bank &
Trust Limited which will provide certain corporate finance and advi-
sory, investment management, stock brokerage, share registrar and
transfer agency, pension and mutual fund administration services.
This transaction is expected to close in the first quarter of 2008.
On September 6, 2007, RBC Centura Banks, Inc. announced
the signing of a definitive merger agreement pursuant to which RBC
Centura Banks, Inc. agreed to acquire Birmingham-based Alabama
National BanCorporation (ANB), parent of 10 subsidiary banks and
other affiliated businesses in Alabama, Florida and Georgia. Under the
agreement, shareholders of ANB will receive US$80 per share payable
in cash, RBC common shares or a combination of each, valuing the
deal at approximately US$1.6 billion (C$1.5 billion as at October 31,
2007), with the total transaction consideration consisting of one-half
cash and one-half RBC common shares. The acquisition is subject to
customary closing conditions, including approval by U.S. and Canadian
regulators and by ANB shareholders. The transaction is expected to
close in early calendar year 2008.
On October 2, 2007, we and the RBTT Financial Group (RBTT)
announced an agreement to combine our Caribbean retail banking
operations with RBTT’s through the acquisition of RBTT for a total
purchase price of TT$13.8 billion (C$2 billion as at October 31, 2007).
RBTT is a Caribbean-owned banking and financial services group
which offers a complete range of banking and financial intermed iate
services to customers in Trinidad and Tobago and the Caribbean.
Under the agreement, RBTT shareholders will receive per share con-
sideration of TT$40 payable 60% in cash and 40% in RBC common
shares. The number of RBC common shares to be received by RBTT
shareholders is subject to a plus/minus 10% “collar” based on our
share price of US$54.42. The acquisition is subject to customary clos-
ing conditions, including approval by the Trinidad and Tobago and
Canadian and other regulators and RBTT shareholders. This transac-
tion is expected to close by the middle of calendar year 2008.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
139
Note 11 Significant acquisitions and dispositions (continued)
2006
Acquisitions
Wealth Management
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.
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:
Acquisition date
Business segment
Percentage of shares acquired
Abacus
AG&T
November 30, 2005
October 3, 2006
Wealth Management (1)
Wealth Management (1)
100%
100%
Purchase consideration in the currency of the transaction
Cash payment of £$105 (2)
Cash payment of US$12.5
Purchase consideration in Canadian dollar equivalent
Fair value of tangible assets acquired
Fair value of liabilities assumed
Fair value of identifiable net tangible assets acquired
Customer lists and relationships (3)
Goodwill
Total purchase consideration
$
$
213
43
(23)
20
116
77
$
$
14
3
–
3
2
9
$
213
$
14
(1)
(2)
(3)
These acquisitions, which were previously included in the operations of RBC U.S. and International Personal and Business segment, are included in the Wealth Management business
segment effective February 2, 2007 upon reorganization of our business segments. Refer to Note 30.
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.
Dispositions
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 disposed of
substantially all of its remaining assets and obligations by the end of
2006 and the residual balances of RBC Mortgage in 2007 are immate-
rial. These residual balances are no longer recorded separately in
our Consolidated Financial Statements for 2007 and changes in
the amounts are now reported in Corporate Support. Prior to 2007,
the results of RBC Mortgage are presented separately as discontinued
operations.
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
$
$
2007
4,048
2,608
1,420
827
1,251
590
–
7,109
2006
3,172
2,229
1,614
702
1,104
761
489
5,346
$
17,853
$
15,417
(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.
140
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Note 13 Deposits
The following table details our deposit liabilities:
Personal
Business and government (4), (5)
Bank
Non-interest-bearing
Canada
United States
Other International
Interest-bearing
Canada (4), (5)
United States
Other International
Demand (1)
Notice (2)
Term (3)
Total
2007
2006
Total
$ 14,022
64,934
4,135
$ 36,537
16,930
221
$ 65,998
138,022
24,406
$ 116,557
219,886
28,762
$ 114,040
189,140
40,343
$ 83,091
$ 53,688
$ 228,426
$ 365,205
$ 343,523
$ 28,254
2,285
1,693
$ 19,088
2,293
1,241
155,190
41,514
136,269
174,170
50,123
96,608
$ 365,205
$ 343,523
(1)
(2)
(3)
(4)
(5)
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, 2007, the bal-
ance of term deposits also includes senior deposit notes we have issued to provide long-term funding of $51.5 billion (2006 – $33.4 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 holder exchange right. Refer to Note 17 for more information on RBC TruCS 2013.
Business and government deposits also include a senior deposit note of $999.8 million issued to RBC Subordinated Notes Trust (Trust III) (refer to Note 17). This senior deposit note
bears interest at an annual rate of 4.72% and will mature on April 30, 2017. Subject to the OSFI’s approval, the note is redeemable at our option, in whole or in part, on or after April 30,
2012, at the Redemption Price and may also be redeemed earlier at our option at the Early Redemption Price. The Redemption Price is an amount equal to $1,000 plus the unpaid distri-
butions to the redemption date. The Early Redemption Price is 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 Government of Canada bonds from the redemption date to April 30, 2012, plus 11 basis points.
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
2007
$ 171,929
17,484
15,290
9,501
8,552
5,670
$ 228,426
(1)
The aggregate amount of term deposits in denominations of $100,000 or more as at October 31, 2007 was $186 billion.
The following table presents the average deposit balances and average rates of interest paid during 2007 and 2006:
Average deposit balances and rates
Canada
United States
Other International
Average balances
2007
2006
$ 190,754
54,812
122,910
$ 183,085
48,272
91,942
$ 368,476
$ 323,299
Average rates
2007
2.97%
4.68
4.50
3.74%
2006
2.74%
4.18
3.99
3.31%
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
141
Note 14 Insurance
Insurance claims and policy benefit liabilities
Life and health
Property and casualty
Reinsurance
Total
Future policy benefit liabilities
Claims liabilities
Total
2007
6,664
417
202
7,283
6,610
673
$
$
$
2006
6,655
386
296
7,337
6,605
732
7,283
$
7,337
$
$
$
$
The net decrease in Insurance claims and policy benefit liabilities over
the prior year comprised: (i) the favourable impact of the stronger
Canadian dollar on U.S. dollar-denominated liabilities, (ii) a net
decrease in reinsurance liabilities reflecting claim payments related
to hurricanes Katrina, Rita and Wilma, and (iii) the net increase in
life and health and property and casualty liabilities attributable to
business growth and market movements on assets backing life and
health liabilities.
Furthermore, the review of various actuarial assumptions and com-
pletion of certain actuarial experience studies resulted in a net decrease
of $57 million life and $32 million health insurance liabilities. This was
predominantly driven by the impact of ongoing experience studies,
refinements to cash flow models and methods, investment portfolio
changes and updated interest rate assumptions, and includes a cumula-
tive valuation adjustment of $92 million relating to prior periods.
The changes in the insurance claims and policy benefit liabilities
are included in the Insurance policyholder benefits, claims and acquisi-
tion expense in our Consolidated Statement 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 provide
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 (ceded premiums) 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
Payroll and related compensation
Trade payables and related accounts
Taxes payable
Other
2007
3,445
(852)
$
2006
3,405
(810)
$
2005
3,329
(765)
2,593
$
2,595
$
2,564
$
$
$
$
2007
3,784
3,941
2,908
1,266
408
661
3,960
1,854
1,078
8,623
2006
3,929
3,382
2,556
1,250
491
526
3,551
709
78
6,177
$ 28,483
$ 22,649
(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.
142
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Note 16 Subordinated debentures
The debentures are unsecured obligations and are subordinated in
right of payment to the claims of depositors and certain other credi-
tors. All redemptions, cancellations and exchanges of subordinated
debentures are subject to the consent and approval of the OSFI. All
subordinated debentures are redeemable at our option. As a result of
adopting the new financial instruments accounting standards effective
November 1, 2006, Subordinated debentures are now presented on
our Consolidated Balance Sheets net of deferred financing costs. Prior
to November 1, 2006, deferred financing costs were recognized in
Other assets. The prior period comparative amounts have not been
restated. The amounts presented below are net of our holdings in these
securities which have not been cancelled and are still outstanding.
Maturity
March 15, 2009
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
June 26, 2037
October 1, 2083
June 6, 2085
June 18, 2103
Deferred financing costs
Earliest par value redemption date
November 8, 2006
(1)
June 4, 2007
(1)
January 22, 2008 (2)
January 27, 2009 (4)
June 1, 2009 (5)
January 25, 2010 (6)
June 24, 2010 (4)
April 12, 2011 (7)
November 4, 2013 (8)
June 26, 2017 (9)
(11)
(11)
June 18, 2009 (14)
Interest
rate
6.50%
6.75%
6.10% (3)
3.96% (3)
4.18% (3)
10.00%
7.10% (3)
3.70% (3)
6.30% (3)
5.45% (3)
9.30%
2.86% (10)
(12)
(13)
5.95% (15)
Denominated in
foreign currency
US$125
US$400
$
JPY 10,000
US$189
$
2007
118
–
–
483
495
976
257
515
775
389
1,021
110
77
224
179
622
2006
140
449
483
497
493
997
200
495
791
400
985
110
–
224
239
600
$
$
6,241
(6)
$
–
7,103
6,235
$
7,103
The terms and conditions of the debentures are as follows:
(1) Redeemed on the earliest par value redemption date at par value.
(2) 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.
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.
(3)
(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 14 basis
points and (ii) par value, and thereafter at any time at par value.
(9) Redeemable on or after June 26, 2017, at par value.
(10) Fixed interest rate at 2.86% per annum, payable semi-annually.
(11) Redeemable on any interest payment date at par value.
(12) Interest at a rate of 40 basis points above the 30-day Bankers’
(4) Redeemable at any time prior to the earliest par value redemption
Acceptance rate.
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.
(5) 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.
(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 12.5 basis
points and (ii) par value, and thereafter at any time at par value.
(13) 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 deben-
tures 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.
(14) 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
and the yield on a non-callable Government of Canada bond plus
21 basis points if redeemed prior to June 18, 2014, or 43 basis points
if redeemed at any time after June 18, 2014.
(7) Redeemable at any time prior to the earliest par value redemption
(15) Interest at a rate of 5.95% until earliest par value redemption date
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.
and every 5 years thereafter at the 5-year Government of Canada
yield plus 172 basis points.
Maturity schedule
The aggregate maturities of subordinated debentures, based on the
maturity dates under the terms of issue, are as follows:
At October 31, 2007
Within 1 year
1 to 5 years
5 to 10 years
Thereafter
Total
$
–
118
3,890
2,233
$
6,241
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
143
Note 17 Trust capital securities
We issue innovative capital instruments, RBC Trust Capital Securities
(TruCS) and RBC Trust Subordinated Notes (TSNs), through three
SPEs: RBC Capital Trust (Trust), RBC Capital Trust II (Trust II) and
RBC Subordinated Notes Trust (Trust III).
On April 30, 2007, we issued $1 billion innovative subordinated
debentures, TSNs – Series A, through Trust III. Trust III is a closed-end
trust established under the laws of the Province of Ontario. The issue
was priced at $99.982 with a yield to April 30, 2012 of 4.584%. The
proceeds were used to purchase a senior deposit note from us. Trust III
is a VIE under AcG-15. We do not consolidate Trust III as we are not its
Primary Beneficiary (refer to Note 6); therefore, the TSNs – Series A
issued by Trust III are not reported on our Consolidated Balance Sheet
but the senior deposit note issued by us to Trust III is reported as a
Business and government deposit liability (refer to Note 13).
In prior years, we issued non-voting RBC Trust Capital Securities
Series 2010, 2011 and 2015 (RBC TruCS 2010, 2011 and 2015) through
our consolidated subsidiary RBC Capital Trust, a closed-end trust
established under the laws of the Province of Ontario. RBC TruCS 2010
and 2011 are classified 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.
Unlike the RBC TruCS 2010 and 2011, the holders of RBC TruCS
2015 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; there-
fore, 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 the significant terms and conditions of
TruCS and TSNs as at October 31, 2007 and 2006:
Issuer
Issuance date
Distribution dates
Redemption date
Conversion date
Annual
yield
At the option of
the issuer
At the option
of the holder
2007
Principal
amount
2006
Principal
amount
RBC Capital Trust (1), (2), (3), (4), (5), (6), (7)
Included in Trust capital securities
650,000 Trust Capital Securities – Series 2010
July 24, 2000
750,000 Trust Capital Securities – Series 2011 December 6, 2000
June 30, December 31
June 30, December 31
7.288%
7.183%
December 31, 2005 December 31, 2010
December 31, 2005 December 31, 2011
$
$
650
750
$
$
650
750
Included in Non-controlling interest in subsidiaries
1,200,000 Trust Capital Securities –
Series 2015
October 28, 2005
June 30, December 31 4.87% (8)
December 31, 2010 Holder does not have
conversion option
$ 1,400
$ 1,400
$ 1,200
$ 1,200
$ 2,600
$ 2,600
RBC Capital Trust II (2), (3), (4), (6), (7), (9)
900,000 Trust Capital Securities – Series 2013
July 23, 2003
June 30, December 31
5.812%
December 31, 2008
Any time
$
900
RBC Subordinated Notes Trust (3), (4), (6), (7), (10), (11)
$1 billion 4.58% Trust Subordinated Notes –
April 30, 2007
April 30, October 30
4.584%
Series A
Any time Holder does not have
conversion option
$ 1,000
$
$
900
–
The significant terms and conditions of the TruCS and TSNs 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
(3)
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.
Issuer Redemption Price: 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 redemption
occurs on or after December 31, 2013 and 2015, respectively. The TSNs –
Series A may be redeemed, in whole or in part, subject to the approval
of the OSFI, for cash equivalent to (i) the Early Redemption Price if the
notes are redeemed prior to April 30, 2012, or (ii) the Redemption Price
if the notes are redeemed on or after April 30, 2012. 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 pro-
vide 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; and a maturity date of April 30, 2012, plus 11 basis points for
TSNs – Series A.
(4) Automatic Exchange Event: Without the consent of the holders, each RBC
TruCS 2010, 2011, 2013 and 2015 will be exchanged automatically for 40
of our non-cumulative redeemable First Preferred Shares Series Q, R, T
and Z, respectively, and each TSN – Series A will be exchanged automati-
cally for an equal principal amount of Bank Series 10 Subordinated Notes
upon occurrence of any one of the following events: (i) proceedings are
commenced for our winding-up; (ii) the OSFI takes control of us; (iii) we
have Tier 1 capital ratio of less than 5% or Total capital ratio of less than
8%; or (iv) the OSFI has directed us to increase our capital or provide
additional liquidity and we elect such automatic exchange or we fail 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.
From time to time, we purchase some of the innovative capital instru-
ments and hold them on a temporary basis. As at October 31, 2007,
we held $nil of RBC TruCS 2011 (2006 – $17 million) and $6 million of
RBC TruCS 2015 (2006 – $12 million) as treasury holdings which were
deducted from regulatory capital.
(5)
(6) Regulatory capital: According to the OSFI guidelines, innovative capital
instruments can comprise up to 15% of net Tier 1 capital with an
additional 5% eligible for Tier 2B capital. Any amount in excess of the
20% limitation is not recognized for regulatory capital purposes. TSN –
Series A qualifies as Tier 2B capital. As at October 31, 2007, $3,494 million
(2006 – $3,222 million) represents Tier 1 capital, $1,027 million (2006 –
$249 million) represents Tier 2B capital and $6 million (2006 – $29 million)
of our treasury holdings of innovative capital is deducted for regulatory
capital purposes. As at October 31, 2007, none of our innovative capital
instruments exceeds the OSFI’s limit of 20% (2006 – nil ).
144
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
(7) Holder Exchange Right: Holders of RBC TruCS 2010 and 2011 may
(9) Subject to the approval of the OSFI, Trust II may, in whole or in part, on
exchange, on any Distribution date on or after the conversion date speci-
fied 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
and TSNs – Series A 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 180-day Bankers’ Acceptance rate plus 1.5%, thereafter.
the Redemption date specified above, and on any Distribution date there-
after, redeem any outstanding RBC TruCS 2013, without the consent of
the holders.
(10) The cash distribution on the TSNs – Series A will be 4.58% paid semi-
annually until April 30, 2012, and at 90-day Bankers’ Acceptance rate
plus 1% thereafter paid quarterly until their maturity on April 30, 2017.
(11) We will guarantee the payment of principal, interest, the redemption
price, if any, and any other amounts of the TSNs – Series A when they
become due and payable, whether at stated maturity, call for redemp-
tion, Automatic Exchange or otherwise according to the terms of the Bank
Subordinated Guarantee and the Trust Indenture.
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
Common – An unlimited number of shares without nominal or par value
may be issued.
Preferred share liabilities
First preferred
Non-cumulative Series N
Treasury shares – sales
Treasury shares – purchases
Number
of shares
(000s)
2007
Amount
Dividends
declared
per share
Number
of shares
(000s)
2006
Amount
Dividends
declared
per share
Number
of shares
(000s)
2005
Amount
Dividends
declared
per share
11,916 $
152
(68)
298 $
4
(2)
1.18
12,000 $
–
(84)
300 $
–
(2)
1.18
12,000 $
–
–
1.18
300 $
–
–
Preferred share liabilities, net of treasury holdings
12,000 $
300
11,916 $
298
12,000 $
300
Preferred shares
First preferred
Non-cumulative Series O (1)
Non-cumulative Series S (2)
Non-cumulative Series W (3)
Non-cumulative Series AA (4)
Non-cumulative Series AB (5)
Non-cumulative Series AC (6)
Non-cumulative Series AD (7)
Non-cumulative Series AE (8)
Non-cumulative Series AF (9)
Non-cumulative Series AG (10)
– $
–
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
– $
–
300
300
300
200
250
250
200
250
–
–
1.23
1.11
1.18
1.22
1.06
.95
.77
.65
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
1.53
.99
–
–
–
–
–
–
–
$
2,050
$
1,050
$
700
Common shares
Balance at beginning of year
Issued under the stock option plan (11)
Purchased for cancellation
1,280,890 $
7,215
(11,845)
7,196
170
(66)
1,293,502 $
5,617
(18,229)
7,170
127
(101)
1,289,496 $
9,917
(5,911)
6,988
214
(32)
Balance at end of year
1,276,260 $
7,300 $
1.82
1,280,890 $
7,196 $
1.44
1,293,502 $
7,170 $
1.18
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
(94) $
1,345
(1,500)
(249) $
(5,486) $
4,756
(1,714)
–
(2)
33
(37)
(6)
(180)
175
(96)
–
(91) $
2,082
(2,085)
(94) $
(7,053) $
5,097
(3,530)
–
(2)
51
(51)
(2)
(216)
193
(157)
–
Balance at end of year
(2,444) $
(101)
(5,486) $
(180)
– $
–
(91)
(91) $
–
–
(2)
(2)
(9,726) $
5,904
(1,326)
(1,905)
(294)
179
(47)
(54)
(7,053) $
(216)
(1)
(2)
On November 24, 2006, we redeemed Non-cumulative First Preferred Shares Series O. The excess of the redemption price over carrying value of $3 million was charged to retained
earnings in preferred share dividends.
On October 6, 2006, we redeemed Non-cumulative First Preferred Shares Series S. The excess of the redemption price over 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.
(3)
On April 4, 2006, we issued 12 million Non-cumulative First Preferred Shares Series AA at $25 per share.
(4)
On July 20, 2006, we issued 12 million Non-cumulative First Preferred Shares Series AB at $25 per share.
(5)
On November 1, 2006, we issued 8 million Non-cumulative First Preferred Shares Series AC at $25 per share.
(6)
On December 13, 2006, we issued 10 million Non-cumulative First Preferred Shares Series AD at $25 per share.
(7)
On January 19, 2007, we issued 10 million Non-cumulative First Preferred Shares Series AE at $25 per share.
(8)
(9)
On March 14, 2007, we issued 8 million Non-cumulative First Preferred Shares Series AF at $25 per share.
(10) On April 26, 2007, we issued 10 million Non-cumulative First Preferred Shares Series AG at $25 per share.
(11)
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 $10 million
(2006 – $8 million), and from renounced tandem SARs, net of related income taxes, of $6 million (2006 – $2 million).
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
145
Note 18 Preferred share liabilities and share capital (continued)
Terms of preferred share liabilities and preferred shares
Preferred share liabilities
First preferred
Non-cumulative Series N
Preferred shares
First preferred
Non-cumulative Series W
Non-cumulative Series AA
Non-cumulative Series AB
Non-cumulative Series AC
Non-cumulative Series AD
Non-cumulative Series AE
Non-cumulative Series AF
Non-cumulative Series AG
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
$
.306250
.278125
.293750
.287500
.281250
.281250
.278125
.281250
February 24, 2010
May 24, 2011
August 24, 2011
November 24, 2011
February 24, 2012
February 24, 2012
May 24, 2012
May 24, 2012
25.00
August 24, 2003
August 24, 2008
26.00
26.00
26.00
26.00
26.00
26.00
26.00
26.00
February 24, 2010
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
Not convertible
(1) Non-cumulative preferential dividends on Series N, W, AA, AB, AC,
AD, AE, AF and AG 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, 2007 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 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 May 24, 2015; and in the case of Series AB, at a
price per share of $26, if redeemed during the 12 months commenc-
ing 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; and in the case of Series AC, at a price per share of
$26, if redeemed during the 12 months commencing November 24,
2011, and decreasing by $.25 each 12-month period thereafter to a
price per share of $25 if redeemed on or after November 24, 2015;
and in the case of Series AD, at a price per share of $26, if redeemed
during the 12 months commencing February 24, 2012, and decreasing
by $.25 each 12-month period thereafter to a price per share of $25 if
redeemed on or after February 24, 2016; and in the case of Series AE,
at a price per share of $26, if redeemed during the 12 months
commencing February 24, 2012, and decreasing by $.25 each
12-month period thereafter to a price per share of $25 if redeemed
on or after February 24, 2016; and in the case of Series AF, at a price
per share of $26, if redeemed during the 12 months commencing
May 24, 2012, and decreasing by $.25 each 12-month period thereaf-
ter to a price per share of $25 if redeemed on or after May 24, 2016;
and in the case of Series AG, at a price per share of $26, if redeemed
during the 12 months commencing May 24, 2012, and decreasing by
$.25 each 12-month period thereafter to a price per share of $25 if
redeemed on or after May 24, 2016.
(3) Subject to the consent of the OSFI and the requirements of the Act,
we may purchase the First Preferred Shares Series N, W, AA, AB,
AC, AD, AE, AF and AG for cancellation 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 and W into our common shares. First Preferred Shares may
be converted 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 con-
verted, 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 quarter, (i) we report a cumulative consolidated net loss for the
immediately preceding four quarters; and (ii) during the immediately
preceding quarter we fail to declare any cash dividends on all of
our outstanding preferred and common shares, we may defer pay-
ments of interest on the Series 2014-1 Reset Subordinated Notes
(matures 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 divi-
dend) 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, based
on standards issued by the Bank for International Settlements, are
risk-adjusted capital ratios 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
146
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
7% and a Total capital ratio of 10%. At October 31, 2007, our Tier 1 and
Total capital ratios were 9.4% and 11.5%, respectively (2006 – 9.6%
and 11.9%, respectively).
As at October 31, 2007, our assets-to-capital multiple was 19.9
(2006 – 19.7), which remains below the maximum ratio of 23 permitted
by the OSFI.
Dividend reinvestment plan
Our dividend reinvestment plan (plan), which was announced on
August 27, 2004, provides registered common shareholders with a
means to automatically reinvest the cash dividends paid on their com-
mon shares in the purchase of additional common shares. The plan
is only open to registered 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 issuances
As at October 31, 2007, 36.6 million common shares are available for
future issue relating to our plan and potential exercise of stock options
outstanding.
Normal Course Issuer Bid
Details of common shares repurchased under Normal Course Issuer
Bids (NCIB) during 2007, 2006 and 2005 are given below.
2007
Number of
shares eligible
for repurchase
(000s)
Number of
shares
repurchased
(000s)
Average
cost
per share
Amount
40,000
11,845
$
54.59
$
646
2006
Pre-stock dividend
Post-stock dividend
Total
Number of
shares eligible
for repurchase
(000s)
Number of
shares
repurchased
(000s)
Average
cost
per share
7,000
10,000
–
4,387
$
–
90.48
4,387
$
90.48
Amount
$
$
–
397
397
Number of
shares
repurchased
(000s)
Average
cost
per share
Amount
6,595
2,859
$
47.12
47.52
9,454
$
47.24
$
$
311
136
447
$
$
311
533
844
NCIB period
November 1, 2006 – October 31, 2007
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
(1)
The 2005 number of shares and average cost per share are pre-stock dividend.
Note 19 Non-controlling interest in subsidiaries
RBC Trust Capital Securities (TruCS) Series 2015
Consolidated VIEs
Others
2005 (1)
Number of
shares eligible
for repurchase
(000s)
Number of
shares
repurchased
(000s)
Average
cost
per share
10,000
25,000
1,950
1,005
$
83.50
63.24
2,955
$
76.61
Amount
$
$
163
63
226
$
2007
1,214
188
81
$
2006
1,207
506
62
$
1,483
$
1,775
We consolidate VIEs in which we are the Primary Beneficiary. These
VIEs include structured finance VIEs, investment funds, credit invest-
ment 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 as discussed
in Note 17. As at October 31, 2007, $20 million (2006 – $19 million) of
accrued interest net of $6 million (2006 – $12 million) of treasury hold-
ings was included in RBC Trust Capital Securities Series 2015.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
147
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,
disability and life insurance coverage.
During 2006, we changed our post-retirement benefit
program in Canada. The changes reduced our benefit obligations by
$505 million.
We fund our registered defined benefit pension plans in
accordance with actuarially determined amounts required to satisfy
employee benefit obligations under current pension regulations. For
our principal pension plans, the most recent actuarial valuation per-
formed for funding purposes was completed on January 1, 2007. The
Plan assets, benefit obligation and funded status
next actuarial valuation for funding purposes will be completed on
January 1, 2008.
For 2007, total contributions to our pension and other post-
employment benefit plans were $208 million and $57 million (2006 –
$594 million and $58 million), respectively. For 2008, total contribu-
tions to defined benefit pension plans and other post-employment
benefit plans are expected to be approximately $128 million and
$55 million, respectively.
For financial reporting purposes, we measure our benefit obliga-
tions and pension plan assets as at September 30 each year.
The following tables present financial information related to all
of our material pension and other post-employment plans worldwide,
including executive retirement arrangements:
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 (gain) 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 our 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 (3)
Pension plans (1)
2007
2006
Other post-employment plans (2)
2006
2007
$
$
$
$
$
$
$
$
6,407
638
146
25
(333)
–
(34)
(65)
6,784
6,838
178
362
25
(115)
(333)
(9)
5
(27)
(78)
6,846
(62)
488
(10)
95
2
513
590
(77)
513
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
5.60%
3.30%
5.25%
3.30%
$
$
$
$
$
$
$
$
41
4
56
5
(54)
–
–
–
52
1,468
19
75
5
3
(54)
–
–
–
(12)
1,504
(1,452)
564
1
(307)
5
(1,189)
–
(1,189)
(1,189)
5.62%
3.30%
29
3
59
6
(56)
–
–
–
41
1,891
26
77
6
38
(56)
(515)
5
–
(4)
1,468
(1,427)
598
1
(330)
4
(1,154)
–
(1,154)
(1,154)
5.26%
3.30%
(1)
(2)
(3)
For pension plans with funding deficits, the benefit obligations and fair values of plan assets totalled $5,850 million (2006 – $6,156 million) and $5,687 million (2006 – $5,665 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 7.2% for medical decreasing to an ultimate rate of 5.0% in 2016 and 4.5% for dental.
The actual assumption for rate of increase in future compensation is an age-related scale. Although the underlying assumption has not been changed, we have revised our presentation
of the disclosed equivalent single rate to be more consistent with the methodology used by other Canadian financial institutions.
The following table presents our estimates of the benefit payments for defined benefit pension and other post-employment plans:
Benefits payment projection
2008
2009
2010
2011
2012
2013–2017
148
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Other
post-employment
plans
Pension plans
$
$
318
349
357
365
373
2,086
61
69
74
77
81
458
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
1.5 million (2006 – 1.9 million) of our common shares having a fair
value of $84 million (2006 – $94 million). Dividends amounting to
$2.6 million (2006 – $2.5 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
2007
60%
40%
100%
2006
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 large 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 (gain)
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 (gain)
Amortization of prior service cost
Curtailment gain
Other post-employment benefit expense
$
$
$
$
2007
2006
2005
178
362
(411)
(2)
29
129
7
292
74
366
$
$
$
173
345
(364)
(2)
32
138
3
325
65
390
$
$
$
138
344
(328)
(2)
32
90
3
277
63
340
5.25%
7.00%
3.30%
5.25%
7.00%
3.30%
6.25%
7.00%
3.30%
2007
2006
2005
$
19
75
(3)
–
36
(23)
–
$
26
77
(2)
3
31
(20)
(8)
$
104
$
107
$
49
101
(2)
17
30
1
(1)
195
Weighted average assumptions to calculate other post-employment benefit expense
Discount rate
Rate of increase in future compensation (1)
5.26%
3.30%
5.41%
3.30%
6.35%
3.30%
(1)
The actual assumption for rate of increase in future compensation is an age-related scale. Although the underlying assumption has not changed, we have revised our presentation of the
disclosed equivalent single rate to be more consistent with the methodology used by other Canadian financial institutions.
Significant assumptions
Our methodologies to determine significant assumptions used in
calculating 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 2008 (7% for 2004 to 2007).
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.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
149
Note 20 Pensions and other post-employment benefits (continued)
Sensitivity analysis
The following table presents the sensitivity analysis of certain key assumptions on defined benefit pension and post-employment obligation and expense:
2007 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
$
229
23
–
$
29
6
15
Change in obligation
Change in expense
$
55
–
157
(129)
$
10
–
9
(7)
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 dis-
count rate determined in accordance with the methodology described
in significant assumptions, and is based on management’s best esti-
mate 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 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
2007
2006
2005
$
$
292
(227)
(246)
(38)
2
$
325
(81)
(100)
(2)
2
$
(217)
$
144
$
277
(423)
708
(31)
2
533
2007
2006
2005
$
$
104
(1)
(33)
23
–
$
107
(1)
7
(485)
(3)
$
93
$
(375)
$
195
(2)
150
(1)
(17)
325
We offer stock-based compensation to certain key employees and to
our non-employee directors. We use derivatives and compensation
trusts to manage our economic exposure to volatility in the price of our
common shares under many of these plans. The stock-based compen-
sation 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 stock option plan, options are
periodically granted to purchase common shares. The exercise price
for each grant is determined as the higher of the volume-weighted
average of the trading prices per board lot (100 shares) of our common
shares on the Toronto Stock Exchange (i) on the day preceding the day
of grant; and (ii) the five consecutive trading days immediately preced-
ing the day of grant. Stock options are normally granted at the end of
the year, with the exercise price determined at least five business days
after the release of the year-end financial results. The options vest
over a four-year period for employees and are exercisable for a period
not exceeding 10 years from the grant date.
For options issued prior to November 1, 2002, that were not
accompanied by tandem stock appreciation rights (SARs), no compen-
sation 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
150
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
2002 and first quarter of 2003, certain executive participants volun-
tarily renounced their SARs while retaining the corresponding options.
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. The compensation expense for these grants, which are
accompanied by tandem SARs, was $19 million for the year ended
October 31, 2007 (2006 – $27 million; 2005 – $42 million).
A summary of our stock option activity and related information
Outstanding at beginning of year
Granted
Exercised – Common shares (1), (2)
– SARs
Cancelled
Outstanding at end of year
Exercisable at end of year
Available for grant
2007
2006
2005
Number
of options
(000s)
Weighted
average
exercise price
Number
of options
(000s)
Weighted
average
exercise price
Number
of options
(000s)
Weighted
average
exercise price
32,243
1,835
(7,215)
(204)
(36)
26,623
21,924
21,527
$
$
$
24.66
55.06
21.10
21.50
36.42
27.71
24.17
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
(1)
(2)
Cash received for options exercised during the year was $152 million (2006 – $115 million; 2005 – $197 million).
New shares were issued for all options exercised in 2007, 2006 and 2005. Refer to Note 18.
Options outstanding and options exercisable as at October 31, 2007 by range of exercise price
$8.47 – $8.91 (1)
$15.00 – $19.82
$21.79 – $25.00
$26.10 – $31.70
$44.13 – $57.90
Total
Options outstanding
Options exercisable
Number
outstanding
(000s)
Weighted
average
exercise price
Weighted
average
remaining
contractual life
$
393
6,071
9,533
7,062
3,564
8.76
17.75
24.58
30.42
49.75
26,623
$
27.71
2.0
1.5
3.4
5.6
8.6
4.2
Number
exercisable
(000s)
Weighted
average
exercise price
$
393
6,071
9,533
5,501
426
8.76
17.75
24.58
30.09
44.13
21,924
$
24.17
(1)
The weighted average exercise prices have been revised to reflect the conversion of foreign currency-denominated options at the exchange rate as at our Consolidated Balance
Sheet date.
Fair value method
CICA 3870 requires 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, 2007, in respect of these plans was $13
million (2006 – $13 million; 2005 – $14 million). The compensation
expenses related to non-vested awards were $14 million at October 31,
2007 (2006 – $13 million; 2005 – $16 million), to be recognized over
the weighted average period of 2.2 years (2006 – 2.0 years; 2005 –
1.7 years).
CICA 3870 permits the use of other recognition methods, includ-
ing 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 loss from discontinued operations (3)
Net income
Basic earnings (loss) per share
From continuing operations
From discontinued operations
Total
Diluted earnings (loss) per share
From continuing operations
From discontinued operations
Total
2007
5,492
–
As reported
2006
$
4,757
(29)
$
2005
3,437
(50)
Pro forma (1), (2)
2005
$
3,424
(50)
5,492
$
4,728
$
3,387
$
3,374
4.24
–
$
3.67
(.02)
$
2.65
(.04)
$
4.24
$
3.65
$
2.61
$
4.19
–
$
3.61
(.02)
$
2.61
(.04)
$
4.19
$
3.59
$
2.57
$
2.64
(.04)
2.60
2.60
(.04)
2.56
$
$
$
$
$
$
(1)
(2)
(3)
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, 2007 and 2006.
Refer to Note 11.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
151
Note 21 Stock-based compensation (continued)
The weighted average fair value of options granted during
2007 was estimated at $7.84 (2006 – $6.80; 2005 – $4.66) using an
option pricing model on the date of grant. The following assumptions
were used:
For the year ended October 31
2007
2006
2005
Weighted average assumptions
Risk-free interest rate
Expected dividend yield
Expected share price volatility
Expected life of option
3.82%
3.06%
16%
6 years
3.98%
3.16%
17%
6 years
3.75%
3.25%
17%
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 our common shares. For the RBC Dominion Securities Savings Plan
our maximum annual contribution is $4,500 per employee. For the
RBC U.K. Share Incentive Plan our maximum annual contribution is
£1,500 per employee. In 2007, we contributed $64 million (2006 –
$60 million; 2005 – $56 million), under the terms of these plans,
towards the purchase of our common shares. As at October 31,
2007, an aggregate of 34.4 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 to certain key employees. Under these plans, the execu-
tives or directors may choose to receive all or a percentage of their
annual variable short-term 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 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, 2007, was $285 million
(2006 – $232 million; 2005 – $172 million). The share price fluctua-
tions and dividend equivalents compensation expense recorded
for the year ended October 31, 2007, in respect of these plans was
$37 million (2006 – $45 million; 2005 – $42 million).
We have a deferred bonus plan for certain key employees within
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, 2007, was $490 million (2006 – $401 million; 2005 –
$320 million). The share price fluctuations and dividend equivalents
compensation expense for the year ended October 31, 2007, in respect
of this plan was $62 million (2006 – $51 million; 2005 – $57 million).
We offer performance deferred share 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%, depend-
ing 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 our common shares held in trust as at October 31,
2007, was 2.3 million (2006 – 5.3 million; 2005 – 7.3 million). The value
of the DSUs liability as at October 31, 2007 was $250 million (2006 –
$153 million; 2005 – $38 million). The compensation expense
recorded for the year ended October 31, 2007, in respect of these
plans was $168 million (2006 – $148 million; 2005 – $109 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 employ-
ees 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 allo-
cated to the RBC share unit fund. Our liability for the RBC share units
held under the plan as at October 31, 2007, was $285 million (2006 –
$289 million; 2005 – $236 million). The compensation expense
recorded for the year ended October 31, 2007, was $157 million (2006 –
$110 million; 2005 – $90 million).
For other stock-based plans, compensation expense of $9 million
was recognized for the year ended October 31, 2007 (2006 – $10 million;
2005 – $8 million). The liability for the share units held under these
plans as at October 31, 2007, was $21 million (2006 – $4 million;
2005 – $19 million). The number of our common shares held under
these plans was .3 million (2006 – .3 million; 2005 – .3 million).
152
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Note 22 Trading revenue
Total 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
arising on their acquisition or issuance. Non-interest income includes
realized and unrealized gains and losses on trading securities and
trading derivative financial instruments.
Trading revenue
Net interest income
Non-interest income
Total
By product line
Interest rate and credit
Equities
Foreign exchange and commodities (1)
Total
(1)
Includes precious metals.
Note 23 Business realignment charges
$
$
$
2007
2006
(390) $
2,261
(539) $
2,574
2005
21
1,594
1,871
$
2,035
$
1,615
$
693
823
355
$
1,174
561
300
1,025
355
235
$
1,871
$
2,035
$
1,615
The following table sets out the changes in our business realignment
charges since November 1, 2004. These charges are recorded in
Other liabilities and include the income-protection payments for the
2,015 employees who have been terminated as of October 31, 2007.
Although the majority of the initiatives were substantially completed
during 2006, the associated income-protection payments to
severed employees and certain lease obligations continue. Prior
to 2007, the charges pertaining to RBC Mortgage were recorded in
Liabilities of operations held for sale. These charges include the
remaining lease obligations in connection with its former Chicago
headquarters and 40 of its branches which we vacated but remain
the lessee.
Business realignment charges
Continuing operations
Balance at beginning of year
Employee-related charges
Premises-related charges
Other adjustments including foreign exchange
Cash payments
Balance at end of year
Discontinued operations
Balance at beginning of year
Employee-related charges
Premises-related charges
Cash payments
Balance at end of year
Employee-related
Premises-related
Total
2007
2006
2005
$
$
$
$
$
$
$
43
–
–
–
(35)
$
118
(3)
3
(1)
(74)
8
$
43
$
$
$
13
–
6
(5)
$
14
$
14
–
(4)
(3)
7
7
8
15
177
40
–
(5)
(94)
118
15
1
12
(15)
13
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
153
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 Comprehensive Income and
Changes in Shareholders’ Equity
Continuing operations
Other comprehensive income (1)
Net unrealized gains (losses) on available-for-sale securities
Reclassification of (gains) losses on available-for-sale securities to income
Net foreign currency translation gains (losses), net of hedging activities
Net unrealized gains (losses) on derivatives designated as cash flow hedges
Reclassification to income of (gains) losses on derivatives designated as cash flow hedges
Issuance costs
Stock appreciation rights
Wealth accumulation plan gains
Other
Subtotal
Total income taxes
2007
2006
2005
$
$
696
416
322
$
506
331
435
739
431
478
1,434
1,272
1,648
14
3
(59)
(42)
104
31
(4)
131
(206)
(96)
(68)
(370)
1,392
1,403
1,278
–
–
(20)
2
(35)
3
1,392
1,385
1,246
(26)
15
911
43
16
(12)
5
–
(6)
946
n.a.
n.a.
130
n.a.
n.a.
(4)
4
–
6
136
n.a.
n.a.
204
n.a.
n.a.
2
5
7
2
220
$
2,338
$
1,521
$
1,466
(1)
Other comprehensive income was introduced under GAAP upon the adoption of Section 1530 on November 1, 2006 (refer to Note 1). Accordingly, there are no comparative figures for
prior periods, other than the figures related to foreign currency translation gains (losses), which are now included as part of OCI.
n.a. not applicable
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 (1)
Valuation allowance
Future income tax liability
Premises and equipment
Deferred expense
Other (1)
Net future income tax asset
$
2007
2006
$
460
642
188
10
91
115
204
460
2,170
(10)
2,160
(245)
(138)
(526)
(909)
439
616
101
27
68
151
253
335
1,990
(10)
1,980
(214)
(225)
(437)
(876)
$
1,251
$
1,104
(1)
Includes deferred taxes from the transition adjustment and other comprehensive income as a result of the adoption of the new financial instruments accounting standards on
November 1, 2006.
154
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Net future income tax assets are included in Other assets (refer
We believe that, based on all available evidence, it is more likely
to Note 12) and result from temporary differences between the tax
basis of assets and liabilities and their carrying amounts on our
Consolidated Balance Sheets. Included in the tax loss carryforwards
amount is $91 million of future income tax assets related to losses
in our Canadian, U.K. and U.S. operations (2006 – $31 million) which
expire starting in 2008. There is no tax asset related to capital losses
in 2007 (2006 – $27 million).
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.
Reconciliation to statutory tax rate
Income taxes at Canadian statutory tax rate
(Decrease) increase 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
2007
2006
2005
$
2,431
34.6%
$
2,152
34.7%
$
1,632
34.7%
(734)
(272)
30
(63)
(10.4)
(3.9)
.4
(.9)
(599)
(184)
13
21
(9.6)
(3.0)
.2
.3
(251)
(85)
–
(18)
(5.3)
(1.8)
–
(.4)
$
1,392
19.8%
$
1,403
22.6%
$
1,278
27.2%
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 $843 million as at October 31, 2007
(2006 – $822 million; 2005 – $745 million).
Note 25 Earnings per share
Basic earnings per share
Net income from continuing operations
Net loss from discontinued operations (1)
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 (2)
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
2007
2006
2005
$
$
$
5,492
–
5,492
(88)
–
4,757
(29)
4,728
(60)
–
3,437
(50)
3,387
(42)
4
$
5,404
$
4,668
$
3,349
1,273,185
1,279,956
1,283,433
$
$
$
4.24
–
$
3.67
(.02)
4.24
$
3.65
$
2.65
(.04)
2.61
$
5,404
$
4,668
$
3,349
1,273,185
13,254
2,875
1,279,956
14,573
5,256
1,283,433
13,686
7,561
1,289,314
1,299,785
1,304,680
$
$
$
4.19
–
$
3.61
(.02)
4.19
$
3.59
$
2.61
(.04)
2.57
(1)
(2)
Refer to Note 11.
The dilutive effect of stock options was calculated using the treasury stock method. For 2007, we excluded from the calculation of diluted earnings per share 16,224 average options out-
standing with an exercise price of $57.90 as the exercise price of these options was greater than the average market price of our common shares. During 2006 and 2005, no option
was outstanding with an exercise price exceeding the average market price of our common shares.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
155
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 contractual 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 particular 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:
2007
2006
Canada
%
United
States %
Europe
Other
Inter-
% national
%
Total
Canada
%
United
States
%
Europe
Other
Inter-
% national
%
Total
On-balance sheet assets
other than derivatives (1) $ 227,206 72% $ 41,518 13% $ 40,658 13% $ 6,146 2% $ 315,528 $ 204,488 73% $ 41,467 15% $ 27,358 10% $ 5,112 2% $ 278,425
Derivatives before
maste r netting
agreement (2), (3)
9,855 27
15,891 42
9,171 25
2,148 6
14,690 23
29,501 45
15,096 23
65,050
37,065
5,763
9
$241,896 64% $ 56,614 15% $ 70,159 18% $ 11,909 3% $ 380,578 $ 214,343 68% $ 50,368 16% $ 43,249 14% $ 7,260 2% $ 315,490
Off-balance sheet
credit instruments (4)
Committed and
uncommitted (5)
Other
$ 81,251 55% $ 52,393 35% $ 12,725 9% $ 2,329 1% $ 148,698 $ 78,851 55% $ 51,224 35% $ 12,997 9% $ 1,802 1% $ 144,874
60,640
19,776 33
11,563 19
28,563 47
14,226 24
31,194 53
13,418 23
58,925
738 1
87
–
$ 112,445 54% $ 65,811 32% $ 26,951 13% $ 2,416 1% $ 207,623 $ 107,414 52% $ 62,787 31% $ 32,773 16% $ 2,540 1% $ 205,514
(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 51% (2006 – 52%), the Prairies at 16% (2006 – 14%), British Columbia at 15% (2006 – 14%) and Quebec at 14% (2006 – 15%). No industry accounts for more than 10% of total
on-balance sheet credit instruments.
The largest concentration of credit exposure by counterparty type is banks at 60% (2006 – 59%).
Excludes credit derivatives classified as other than trading with a replacement cost of $36 million (2006 – $20 million).
Represents financial instruments with contractual amounts representing credit risk.
Of the commitments to extend credit, the largest industry concentration relates to financial services of 40% (2006 – 38%), mining and energy of 12% (2006 – 13%), commercial real
estate of 7% (2006 – 6%), government of 4% (2006 – 5%), wholesale of 4% (2006 – 5%), manufacturing of 4% (2006 – 4%) and transportation of 3% (2006 – 3%).
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 AcG-14. AcG-14 defines a guarantee to be a contract
(including an indemnity) that contingently requires us to make pay-
ments (in cash, 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. Effective November 1, 2006, a liability is now
recognized on our Consolidated Balance Sheets at the inception of a
guarantee for the fair value of the obligation undertaken in issuing the
guarantee. No subsequent remeasurement at fair value is required
Credit derivatives and written put options (2), (3)
Backstop liquidity facilities
Stable value products (3)
Financial standby letters of credit and performance guarantees (4)
Credit enhancements
Mortgage loans sold with recourse
unless the financial guarantee qualifies as a derivative. If the financial
guarantee meets the definition of a derivative, it is remeasured at fair
value at each balance sheet date and reported as a derivative in Other
assets or Other liabilities as appropriate.
As the carrying value of these financial guarantees is not
indicative of the maximum potential amount of future payments, we
continue to consider financial guarantees as off-balance sheet credit
instruments. The maximum potential amount of future payments
represents the maximum risk of loss if there was 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:
2007
2006
Maximum
potential amount
of future
payments
$
$ 70,242
43,066
17,369
16,661
4,814
230
Maximum
potential amount
of future
payments
Carrying
amount
2,657
41
–
57
30
–
$ 54,723
34,342
16,098
15,902
4,155
204
$
Carrying
amount (1)
352
–
–
17
–
–
(1)
(2)
(3)
(4)
For credit derivatives and written put options, the prior period comparatives represent the fair values of the derivatives; for financial standby letters of credit and performance
guarantees, they represent unamortized premiums received.
The carrying amount is included in Other – Derivatives on our Consolidated Balance Sheets.
The notional amount of these contracts approximates the maximum potential amount of future payments.
The carrying amount is included in Other – Other liabilities on our Consolidated Balance Sheets.
156
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
In addition to the above guarantees, we transact substantially
all of our securities lending activities in which we act as an agent for
the owners of securities through our joint venture, RBC Dexia IS. As
at October 31, 2007, RBC Dexia IS securities lending indemnifications
totalled $63,462 million (2006 – $45,614 million); 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 pay-
ments 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 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 guarantees include foreign exchange contracts, equity-based
contracts and certain commodity-based contracts. The term of these
options varies 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.
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 lim-
ited circumstances, when predetermined performance measures of
the financial assets owned by these programs are not met. We gener-
ally provide liquidity facilities for a term of one year.
Backstop liquidity facilities are also provided to non-asset-backed
programs such as variable rate demand notes issued by third parties.
These standby facilities provide liquidity support to the issuer to buy
the notes if the issuer is unable to remarket the notes, as long as the
instrument and/or the issuer maintains the investment grade rating.
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 and
457 plans. 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 partici-
pants 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
administered by us to protect commercial paper investors in the event
that the collection on the underlying assets, the transaction specific
credit enhancement or the liquidity proves to be insufficient to pay
for maturing 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 resi-
dential properties.
Securities lending indemnifications
We generally transact securities lending transactions through our
joint venture, RBC Dexia IS. In these transactions, RBC Dexia IS
acts 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 collateralize the security loaned at
all times. As part of this custodial business, an indemnification may
be provided to securities 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. Collateral held for our securities lending
transactions typically includes cash or securities that are issued or
guaranteed by the Canadian government, U.S. government or other
OECD countries.
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 indemnifi-
cation 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 indem-
nification agreements prevents us from making a reasonable estimate
of the maximum potential amount we could be required to pay to
counterparties. Historically, we have not made any significant pay-
ments under such indemnifications.
Other off-balance sheet credit instruments
In addition to financial guarantees, we utilize other off-balance sheet
credit instruments to meet the financing needs of our clients. The con-
tractual 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
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
157
Note 27 Guarantees, commitments and contingencies (continued)
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’ accep-
tances 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
contract. 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.
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 revolv-
ing underwriting facility represents a renewable note issuance facility
that can be accessed for a specified period of time.
The following table summarizes the contractual amounts of our other off-balance sheet credit instruments:
Other 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 (2)
Documentary and commercial letters of credit
Note issuances and revolving underwriting facilities
2007
2006
$ 55,281
46,307
36,187
47,110
501
–
$
57,154
42,222
38,185
45,498
713
8
$ 185,386
$ 183,780
(1)
(2)
Includes liquidity facilities.
Includes uncommitted liquidity loan facilities of $42.2 billion (2006 – $34.6 billion) provided to RBC-administered multi-seller conduits. As at October 31, 2007, $758 million (2006 – $nil)
was drawn upon on these facilities and is included in Loans.
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
2007
2006
$
305
3,443
1,733
51,695
40,698
1,132
$
100
1,936
187
56,580
36,788
941
$ 99,006
$ 96,532
2007
2006
$
1,981
1,772
$
1,794
2,309
34,881
48,479
8,502
3,391
38,118
44,651
6,547
3,113
$ 99,006
$ 96,532
158
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Collateral
As at October 31, 2007, the approximate market value of collateral
accepted that may be sold or repledged by us was $122.4 billion
(2006 – $109.1 billion). This collateral was received in connection with
reverse repurchase agreements, securities borrowings and loans,
and derivative transactions. Of this amount, $56.5 billion (2006 –
$48.0 billion) has been sold or repledged, generally as collateral under
repurchase agreements or to cover short sales.
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)
2008
2009
2010
2011
2012
Thereafter
$
494
453
382
329
279
1,224
$
3,161
(1)
Substantially all of our lease commitments are related to operating leases.
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 defen-
dants in an action entitled Regents of the University of California v.
Royal Bank of Canada in the United States District Court, Southern
Note 28 Contractual repricing and maturity schedule
District of Texas (Houston Division). 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 purchasers 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 a manner as
we believe to be in our best interests. As with any litigation, there
are significant 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 current difficult litigation environment. Although it is not pos-
sible 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 litigation 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 operating results for the particular period in
which the resolution occurs, notwithstanding the provision established
in the fourth quarter of 2005. We will continue to vigorously defend our-
selves in these cases.
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.
The following table details our exposure to interest rate risk as
defined and prescribed by CICA Handbook Section 3861, Financial
Instruments – Disclosure and Presentation. On- and off-balance sheet
financial instruments are reported based on the earlier of their con-
tractual repricing 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 following table does not incorporate
management’s expectation of future events where expected repricing
or maturity dates differ significantly from the contractual dates.
We incorporate these assumptions in the management of interest rate
risk exposure. These assumptions include expected repricing of trad-
ing instruments and certain loans and deposits. Taking into account
these assumptions on the consolidated contractual repricing and
maturity schedule at October 31, 2007, would result in a change in
the under-one-year gap from $(74.4) billion to $(53.3) billion (2006 –
$(79.8) billion to $(40.2) billion).
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
159
Note 28 Contractual repricing and maturity schedule (continued)
Carrying amount by earlier of contractual repricing or maturity date
Immediately
interest
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
Effective interest rate
Available-for-sale
Effective interest rate
Assets purchased under reverse repurchase
agreements and securities borrowed
Effective interest rate
Loans (net of allowance for loan losses) (1)
Effective interest rate
Derivatives
Effective interest rate
Other assets
$
– $ 14,317
4.71%
–
$
$
–
–
– $
–
$
–
–
– $ 1,790 $ 16,107
–
–
–
–
–
–
–
–
101,692
–
28,591
–
–
27,559
4.66%
8,263
4.68%
62,393
4.81%
25,664
5.46%
2,480
4.79%
–
4,856
4.74%
1,958
4.84%
1,920
4.67%
8,079
5.54%
–
–
–
5,208
4.63%
2,096
4.77%
–
–
14,071
5.31%
–
–
–
22,790
4.71%
12,240
4.78%
–
–
80,795
5.38%
6
4.62%
–
26,149
4.97%
2,326
4.92%
–
–
7,418
6.04%
–
–
–
61,684
–
3,126
–
–
–
217
–
35,508
–
37,150
148,246
30,009
64,313
237,936
66,585
37,150
$$ 130,283 $ 140,676
$ 16,813
$ 21,375 $ 115,831
$ 35,893 $ 139,475 $ 600,346
Liabilities
Deposits
Effective interest rate
Obligations related to assets sold under
repurchase agreements and securities
loaned
Effective interest rate
Obligations related to securities sold short
Effective interest rate
Derivatives
Effective interest rate
Other liabilities
Effective interest rate
Subordinated debentures
Effective interest rate
Trust capital securities
Effective interest rate
Preferred share liabilities
Effective interest rate
Non-controlling interest in subsidiaries
Effective interest rate
Shareholders’ equity
Effective interest rate
$$ 148,072 $ 112,388
4.45%
–
$ 23,461
4.42%
$ 24,779 $ 49,219
4.18%
4.36%
$ 5,915 $ 1,371 $ 365,205
4.81%
–
–
–
–
–
29,346
–
–
–
–
–
–
–
–
–
–
–
–
–
34,748
4.77%
1,402
4.72%
4,404
4.80%
250
4.82%
886
5.64%
–
–
–
–
–
–
–
–
1,838
4.76%
316
4.71%
–
–
106
4.85%
–
–
–
–
–
–
–
–
–
–
396
4.79%
596
4.59%
–
–
273
4.64%
–
–
–
–
300
4.72%
–
–
–
–
–
–
10,892
4.54%
4
4.60%
649
4.65%
3,892
5.01%
1,400
7.23%
–
–
1,200
4.87%
–
–
–
–
11,097
4.87%
13
4.96%
214
5.10%
1,465
6.40%
–
–
–
–
–
–
2,050
4.14%
51
–
20,386
–
38,243
–
46,060
–
(8)
–
–
–
–
–
283
–
22,389
–
37,033
44,689
72,010
47,552
6,235
1,400
300
1,483
24,439
$ 20,754 $ 128,775 $ 600,346
Total gap based on contractual repricing
Canadian dollar
Foreign currency
Total gap
Canadian dollar – 2006
Foreign currency – 2006
Total gap – 2006
$$ 177,418 $ 154,078 $ 25,721
$$ (47,135) $ (13,402) $ (8,908) $ (4,969) $ 48,575
22,680
25,895
$ 26,344 $ 67,256
9,417
(22,819)
11,450
(20,358)
(23,067)
(24,068)
(6,183)
1,214
$$ (47,135) $ (13,402) $ (8,908) $ (4,969) $ 48,575
$ (1,764) $ 52,937
14,282
$ (26,367) $ (24,559) $ 5,204
(19,898)
8,856
(18,902)
(2,372)
$ 15,139 $ 10,700 $
(6,296)
21,435
(8,000)
18,700
$ 15,139 $ 10,700 $
$ 11,628 $ (17,083) $
21,917
(3,879)
$$ (45,269) $ (15,703) $ (14,694) $ (4,136) $ 67,219
$ 33,545 $ (20,962) $
–
1
(1)
–
(4)
4
–
(1)
Includes loans totalling $1,202 million to a variable interest entity administered by us, with maturity terms exceeding five years.
Note 29 Related party transactions
In the ordinary course of business, we provide normal banking services
and operational services, and enter into other transactions with associ-
ated and other related corporations, including our joint venture entities,
on terms similar to those offered to non-related parties. Refer to Note 9
for more information regarding our joint venture, RBC Dexia IS.
We grant loans to directors, officers and other employees at rates
normally accorded to preferred clients. As at October 31, 2007, the
aggregate indebtedness, excluding routine indebtedness, to RBC
or its subsidiaries of current directors and executive officers was
approximately $3.2 million. Routine indebtedness includes (i) loans
made on terms no more favourable than loans to employees generally,
but not exceeding $50,000 to any director or executive officer;
(ii) loans to employees, fully secured against their residence and not
exceeding their annual salary; (iii) loans, other than to employees,
on substantially the same terms available to other customers with
comparable credit ratings and involving no more than the usual risk of
collectibility; and (iv) loans for purchases on usual trade terms, or for
ordinary travel or expense advances, with usual commercial repayment
arrangements. We also offer deferred share and other plans to non-
employee directors, executives and certain other key employees.
Refer to Note 21.
160
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Note 30 Results by business and geographic segment
2007
Net interest income
Non-interest income
Total revenue
Provision for (recovery of) credit losses
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Net income (loss) before income taxes
Income taxes
Non-controlling interest
Net income
Less: Preferred dividends
Net income (loss) available to
common shareholders
Average assets (2)
Total average assets
Canadian
Wealth
Banking Management
U.S. &
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Canada United States
Other
International
$
$
6,353
6,168
12,521
788
2,173
5,285
4,275
1,288
–
2,987
34
$
$
427
3,565
3,992
1
–
2,902
1,089
327
–
762
9
$
$
1,031
884
1,915
109
–
1,481
325
74
9
242
14
$
$
453
3,936
4,389
(22)
–
2,769
1,642
278
72
1,292
20
$
2,953
$
753
$
228
$
1,272
$ 220,000
$ 16,600
$ 39,700
$ 311,200
$ 220,000
$ 16,600
$ 39,700
$ 311,200
$
$
$
$
$
(732)
377
(355)
(85)
–
36
(306)
(575)
60
209
11
$
$
7,532
14,930
22,462
791
2,173
12,473
7,025
1,392
141
5,492
88
$
$
6,435
8,605
15,040
696
1,230
7,409
5,705
1,705
83
3,917
56
$
$
412
4,322
4,734
90
474
3,405
765
(62)
49
778
24
$
$
685
2,003
2,688
5
469
1,659
555
(251)
9
797
8
198
$
5,404
$
3,861
$
754
$
789
(6,500)
$ 581,000
$ 317,900
$ 135,100
$ 128,000
(6,500)
$ 581,000
$ 317,900
$ 135,100
$ 128,000
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
Net income (loss) from continuing operations $
Net loss from discontinued operations
Net income
Less: Preferred dividends
Net income (loss) available to
common shareholders
Average assets from continuing
operations (2)
Average assets from discontinued
operations (2)
Canadian
Wealth
Banking Management
U.S. &
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Canada United States
Other
International
$
5,816
5,880
11,696
604
2,509
5,027
–
3,556
1,130
–
2,426
–
2,426
24
$
$
397
3,090
3,487
1
–
2,613
1
872
268
–
604
–
604
6
$
$
$
$
940
688
1,628
25
–
1,216
–
387
117
9
261
(29)
232
7
131
4,005
4,136
(115)
–
2,603
(1)
1,649
317
(23)
1,355
–
1,355
13
$
$
(488)
178
(310)
(86)
–
36
–
(260)
(429)
58
111
–
111
10
$
$
6,796
13,841
20,637
429
2,509
11,495
–
6,204
1,403
44
4,757
(29)
4,728
60
$
6,045
7,518
13,563
456
1,379
7,056
–
4,672
1,458
37
3,177
–
3,177
40
$
$
$
$
$
108
4,397
4,505
(28)
683
3,038
–
812
14
(1)
799
(29)
770
15
643
1.926
2,569
1
447
1,401
–
720
(69)
8
781
–
781
5
$
2,402
$
598
$
225
$
1,342
$
101
$
4,668
$
3,137
$
755
$
776
$ 199,200
$
15,100
$ 32,600
$ 260,600
$
(5,400)
$ 502,100
$ 287,200
$ 113,300
$ 101,600
–
–
200
–
–
200
–
200
–
Total average assets
$ 199,200
$
15,100
$ 32,800
$ 260,600
$
(5,400)
$ 502,300
$ 287,200
$ 113,500
$ 101,600
2005
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
Net income (loss) from continuing operations
Net loss from discontinued operations
Net income (loss)
Less: Preferred dividends
Net income (loss) available to
common shareholders
Average assets from continuing
operations (2)
Average assets from discontinued
operations (2)
Canadian
Wealth
Banking Management
U.S. &
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Canada United States
Other
International
$
5,233
5,765
$
10,998
542
2,625
4,830
7
2,994
987
–
2,007
–
2,007
15
$
$
374
2,777
3,151
2
–
2,440
1
708
206
–
502
–
502
4
$
923
654
$
1,577
49
–
1,136
(3)
395
133
6
256
(50)
206
5
$
$
557
3,005
3,562
(91)
–
2,890
1
762
95
(19)
686
–
686
8
$
(294) $
190
6,793
12,391
$
(104)
(47)
–
61
39
(157)
(143)
–
(14)
–
19,184
455
2,625
11,357
45
4,702
1,278
(13)
3,437
(50)
$
(14) $
6
3,387
38
$
$
5,628
6,878
12,506
433
1,270
6,685
45
4,073
1,329
(30)
2,774
–
2,774
25
$
608
3,955
4,563
23
809
3,595
–
136
(76)
12
200
(50)
150
10
$
$
557
1,558
2,115
(1)
546
1,077
–
493
25
5
463
–
463
3
$
1,992
$
498
$
201
$
678
$
(20)
$
3,349
$
2,749
$
140
$
460
$ 181,100
$ 13,200
$
25,900
$ 229,100
$
(4,000) $ 445,300
$ 263,200
$ 92,400
$ 89,700
–
–
1,800
–
–
1,800
–
1,800
–
Total average assets
$ 181,100
$ 13,200
$ 27,700
$ 229,100
$
(4,000) $ 447,100
$ 263,200
$ 94,200
$ 89,700
(1)
(2)
Taxable equivalent basis.
Calculated using methods intended to approximate the average of the daily balances for the period.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
161
Note 30 Results by business and geographic segment (continued)
Revenue by business line
Banking (1)
Wealth management
Global insurance
Global markets (2)
Global investment banking and equity markets (2), (3)
RBC Dexia IS (4)
Other (5)
Total
$
2007
$ 10,485
3,992
3,192
2,455
1,675
759
(96)
$
2006
9,418
3,487
3,348
2,579
1,382
558
(135)
2005
8,761
3,151
3,311
2,256
1,098
500
104
$ 22,462
$ 20,637
$
19,184
(1)
(2)
(3)
(4)
(5)
Includes cards and payment solutions.
Taxable equivalent basis.
Includes our National Clients business, which was transferred from our Other line of business in the second quarter of 2007.
The amount for 2006 includes two months of revenue from IIS 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 only represent revenue from IIS.
Consists of Global Credit and Research business, and includes the tax equivalent basis adjustment which is discussed below.
Changes in 2007
Composition of business segments
Effective February 7, 2007, our previous three business segments
(RBC Canadian Personal and Business, RBC U.S. and International
Personal and Business, and RBC Capital Markets) were reorganized into
the following four business segments:
Canadian Banking comprises our domestic, personal and busi-
ness banking operations, certain retail investment businesses and our
global insurance operations.
Wealth Management comprises businesses that directly serve
the growing wealth management needs of affluent and high net worth
clients in Canada, the U.S. and outside North America, and businesses
that provide asset management and trust products through RBC and
external partners.
U.S. & International Banking comprises our banking businesses
outside Canada, including our banking operations in the U.S. and the
Caribbean. In addition, this segment includes our 50% ownership in
RBC Dexia IS.
Capital Markets comprises our global wholesale banking business
segment, which provides a wide range of corporate and investment
banking, sales and trading, research and related products and services
to corporate, public sector and institutional clients in North America,
and specialized products and services in select global markets.
The comparative results have been revised to conform to our new
basis of segment presentation.
All other enterprise level activities that are not allocated to these
four business segments, such as enterprise funding securitization, net
funding associated with unattributed capital, and consolidation adjust-
ments, including the elimination of the taxable equivalent basis (teb)
gross-up amounts, are included in Corporate Support. Teb adjustments
gross up Net interest income from certain tax-advantaged sources
(Canadian taxable corporate dividends) to their effective tax equiva-
lent value with the corresponding offset recorded in the provision for
income taxes. Management believes that these adjustments are neces-
sary for Capital Markets to reflect how it is managed. The use of the teb
adjustments 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 for 2007
was $332 million (2006 – $213 million, 2005 – $109 million).
During 2007, we also reclassified the following balances in report-
ing our business segments: (i) certain amounts reported in Capital
Markets from Interest income to Interest expense with no impact on Net
interest income; (ii) certain amounts related to interest settlements on
swaps in fair value hedge relationships from Non-interest income to Net
interest income which had no impact on the prior years’ results;
(iii) certain deposits in Capital Markets and U.S. & International Banking
related to RBC Dexia IS in accordance with the business realignment
that occurred in the second quarter of 2007; (iv) expenses related to
internally developed software from Non-interest expense – Other to the
more specific Non-interest expense lines. Only Corporate Support was
impacted by this reclassification and there was no impact on total
162
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Non-interest expense; and (v) certain amounts related to trustee
services within Canadian Banking have been reclassified from Non-
interest income – Investment management and custodial fees to Net
interest income to reflect their nature. All comparative amounts have
been revised to reflect these reclassifications.
Visa restructuring
In connection with the restructuring of Visa Inc., which was completed
on October 3, 2007, RBC’s membership interest in Visa Canada
Association was exchanged for shares of Visa Inc., resulting in a gain
of $326 million ($269 million net of taxes). The gain, which is based
on an independent valuation of RBC’s shares in Visa Inc., is included in
Canadian Banking’s Total revenue and recorded in Non-interest income –
Other in our Consolidated Statement of Income. The shares of Visa Inc.
are classified as Available-for-sale securities. Refer to Note 3.
Management reporting framework
Our management reporting framework is intended to measure the per-
formance 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 four 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.
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
currency and are subject to foreign exchange rate fluctuations with
respect to the movement in the Canadian dollar.
Note 31 Reconciliation of the application of Canadian and United States generally accepted accounting principles
Our 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, our 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.
We adopted SEC Staff Accounting Bulletin No. 108 on November 1,
2006. Refer to the discussion under the Significant accounting changes
section later in this note.
Condensed Consolidated Balance Sheets
Assets
Cash and due from banks
$
4,226
$
(78) $
4,148
$
4,401
$
(101) $
4,300
Interest-bearing deposits with banks
11,881
(4,436)
7,445
10,502
(4,223)
6,279
2007
2006
Canadian GAAP
Differences
U.S. GAAP
Canadian GAAP
Differences
U.S. GAAP
Securities
Trading
Available-for-sale
Investments
148,246
30,009
–
178,255
(5,348)
6,326
–
142,898
36,335
–
147,237
–
37,632
–
(282)
(97)
146,955
–
37,535
978
179,233
184,869
(379)
184,490
Assets purchased under reverse repurchase agreements
and securities borrowed
64,313
(2,263)
62,050
59,378
(2,148)
57,230
Loans (net of allowance for loan losses)
237,936
(2,188)
235,748
208,530
(111)
208,419
Other
Customers’ liability under acceptances
Derivatives
Premises and equipment, net
Goodwill
Other intangibles
Reinsurance recoverables
Separate account assets
Assets of operations held for sale
Other assets
Liabilities and shareholders’ equity
Deposits
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Derivatives
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)
11,786
66,585
2,131
4,752
628
–
–
–
17,853
–
(295)
(102)
(61)
(180)
1,140
114
–
30,590
11,786
66,290
2,029
4,691
448
1,140
114
–
48,443
9,108
37,729
1,818
4,304
642
–
–
82
15,417
–
717
(86)
(61)
(211)
1,182
111
–
24,893
9,108
38,446
1,732
4,243
431
1,182
111
82
40,310
103,735
31,206
134,941
69,100
26,545
95,645
$ 600,346
$ 23,219
$ 623,565
$ 536,780
$ 19,583
$ 556,363
$ 365,205
$
(12,276) $ 352,929
$ 343,523
$
(9,466) $ 334,057
11,786
44,689
37,033
72,010
7,283
–
–
28,483
–
829
11,786
45,518
9,108
38,252
(1,290)
(312)
2,530
114
–
33,712
35,743
71,698
9,813
114
–
62,195
41,103
42,094
7,337
–
32
22,649
–
(1,188)
(1,141)
312
2,686
111
–
27,877
9,108
37,064
39,962
42,406
10,023
111
32
50,526
201,284
35,583
236,867
160,575
28,657
189,232
6,235
1,400
300
1,483
24,439
6
(1,400)
(300)
1,405
201
6,241
–
–
2,888
24,640
7,103
1,383
298
1,775
22,123
300
(1,383)
(298)
1,083
690
7,403
–
–
2,858
22,813
$ 600,346
$ 23,219
$ 623,565
$ 536,780
$ 19,583
$ 556,363
(1)
Included in our consolidated earnings as at October 31, 2007 was $407 million (2006 – $293 million) of undistributed earnings of our joint ventures and investments accounted for using
the equity method under U.S. GAAP.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
163
Note 31 Reconciliation of the application 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
Joint ventures
Liabilities and equity
Non-interest income
Insurance accounting
Derivative instruments and hedging activities
Reclassification of financial instruments (1)
Variable interest entities
Limited partnerships
Joint ventures
Reclassification of foreign currency translation
Other
Provision for (recovery of) credit losses
Joint ventures
Other
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 difference 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 (2)
Difference – Other
Net loss from discontinued operations, U.S. GAAP (2)
Net income, U.S. GAAP
Basic earnings per share (3)
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 (2)
Canadian GAAP
U.S. GAAP
Diluted earnings per share (3)
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 (2)
Canadian GAAP
U.S. GAAP
2007
2006
2005
$
5,492
$
4,757
$
3,437
(17)
(115)
115
(202)
56
9
4
60
(650)
(41)
(31)
4
(8)
–
(22)
(75)
115
(544)
(31)
14
(10)
(3)
(458)
(4)
(29)
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)
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,750
$
3,539
(29) $
–
(29) $
(50)
5
(45)
4,721
$
3,494
3.65
3.62
3.67
3.64
$
$
$
$
2.61
2.67
2.65
2.71
(.02) $
(.02) $
(.04)
(.04)
3.59
3.57
3.61
3.59
$
$
$
$
2.57
2.63
2.61
2.67
(.02) $
(.02) $
(.04)
(.04)
137
11
69
653
2
31
66
(6)
3
(101)
5,541
–
–
–
5,541
4.24
4.26
4.24
4.26
–
–
4.19
4.21
4.19
4.21
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1)
(2)
(3)
Reclassification of financial instruments reflects differences in classification arising from the use of the fair value option and reclassification of securities. Prior to the adoption of the
new financial instruments accounting standards on November 1, 2006, this item reflected the reclassification of securities only. Please refer to material differences between Canadian
and U.S. GAAP for details of this reclassification of securities.
Refer to Note 11.
The impact of calculating earnings per share using the two-class method reduced U.S. GAAP basic and diluted earnings per share for all periods presented by less than one cent. Please
refer to material differences between Canadian and U.S. GAAP for details of this two-class method.
164
Royal Bank of Canada: Annual Report 2007
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 credit losses
Depreciation
Future income taxes
Amortization of other intangibles
Net gain on sale of investment 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 assets
Derivative liabilities
Trading 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 securities
Proceeds from maturity of investment securities
Purchases of investment securities
Proceeds from sale of available-for-sale securities
Proceeds from maturity of available-for-sale securities
Purchases of available-for-sale securities
Net acquisitions of premises and equipment
Change in assets purchased under reverse repurchase agreements and securities borrowed
Net cash from (used in) investing activities, U.S. GAAP
Cash flows from financing activities, Canadian GAAP
Change in deposits
Change in deposits – Canada
Change in deposits – International
Issue of RBC Trust Capital Securities
Issue of preferred shares
Redemption of preferred shares for cancellation
Issuance costs
Issue of common shares
Sales of treasury shares
Purchase of treasury shares
Dividends paid
Change in obligations related to assets sold under repurchase agreements and securities loaned
Dividends/distributions paid by subsidiaries to non-controlling interests
Change in obligations related to securities sold short
Change in short-term borrowings of subsidiaries
$
2007
19,473
49
4
(24)
(416)
(26)
–
(156)
293
64
1,012
(624)
(5,546)
(42)
344
(437)
2006
2005
$ (14,996) $
(8)
(2)
(20)
271
(20)
–
43
(120)
–
440
(267)
(695)
(8)
3,872
2,446
(29,527)
102
(18)
(4)
(135)
–
3
(438)
(1)
–
41
(90)
(710)
(511)
(2,504)
2,099
13,968
(9,064)
(31,693)
(36,690)
213
2,084
(7,565)
(18,784)
24,097
7,565
18,784
(19,964)
40
115
(43,235)
4,191
1,050
(14,709)
(28,203)
38,474
14,727
28,185
(38,383)
73
2,148
(
7,727)
48
28
(25,628)
(18,405)
3 6,373
25,651
18,379
(36,130)
12
–
30,105
(35,682)
(7,399)
17,374
(17,831)
(2,792)
17,813
–
(16)
5
11
(1)
3
(1)
(15)
(149)
(101)
2,017
–
57,711
(36,663)
(299)
27,468
–
(7)
–
7
1
–
(2)
(13)
(1,141)
(102)
(2,835)
–
38,666
(35,001)
15,522
19,791
(1,200)
–
–
3
(1)
–
7
(14)
–
(102)
2,837
(4)
$
$
$
$
16,317
$ 44,125
$ 40,504
(332) $
(80) $
(122)
(152)
4,300
4,148
$
$
(701)
5,001
4,300
$
$
1,290
3,711
5,001
Net cash from financing activities, U.S. GAAP
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, U.S. GAAP
(1) We did not have any discontinued operations during 2007.
Accumulated other comprehensive (loss), net of taxes (1)
Transition adjustment
Unrealized (losses) gains on available-for-sale securities
Unrealized foreign currency translation gains (losses),
net of hedging activities
Gains (losses) on derivatives designated as cash flow hedges
Additional pension obligation
2007
Canadian GAAP
Differences
U.S. GAAP
2006 (1)
2005 (1)
$
(45) $
(65)
$
45
133
$
–
68
$
–
191
–
83
(3,207)
111
–
(4)
(91)
(541)
(3,211)
20
(541)
(2,000)
(52)
(62)
(1,768)
(165)
(313)
Accumulated other comprehensive income (loss), net of income taxes $
(3,206) $
(458) $
(3,664) $
(1,923) $
(2,163)
(1)
The concept of AOCI was introduced under Canadian GAAP upon the adoption of Section 1530 on November 1, 2006 (refer to Note 1). Accordingly, there is no reconciliation for the prior
periods presented.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
165
Note 31 Reconciliation of the application of Canadian and United States generally accepted accounting principles (continued)
Consolidated Statements of Comprehensive Income
Net income
Other comprehensive income, net of taxes
Net unrealized (losses) gains on available-for-sale securities,
net of reclassification adjustments
Unrealized foreign currency translation gains (losses)
Reclassification of (gains) losses on foreign currency translation
to income
Net foreign currency translation gains (losses) from hedging activities
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification to income of (gains) losses on derivatives
designated as cash flow hedges
Additional pension obligation
Total comprehensive income
Income taxes (recovery) deducted from the above items:
Net unrealized gains (losses) on available-for-sale securities
Net foreign currency translation gains (losses), net of hedging activities
Net unrealized gains (losses) on derivatives designated as
cash flow hedges
Reclassification to income of (gains) losses on derivatives
designated as cash flow hedges
Additional pension obligation
$
$
2007
Canadian GAAP
Differences
U.S. GAAP
2006 (1)
2005 (1)
$
5,492
$
49
$
5,541
$
4,721
$
3,494
(65)
(2,965)
(42)
1,804
80
31
–
(58)
(49)
41
–
1
(5)
50
(123)
(3,014)
(1)
1,804
81
26
50
108
(507)
6
269
(35)
148
251
(95)
(623)
5
401
(97)
124
(246)
4,335
$
29
$
4,364
$
4,961
$
2,963
(11) $
911
43
16
–
(37) $
–
–
(3)
27
(48) $
911
$
57
130
43
13
27
(15)
75
134
(55)
204
(51)
66
(132)
32
Total income taxes (recovery)
$
959
$
(13) $
946
$
381
$
(1)
A new Consolidated Statement of Comprehensive Income was introduced under Canadian GAAP upon adoption of Section 1530 on November 1, 2006 (refer to Note 1). Accordingly, there
is no reconciliation for the prior periods presented.
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:
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o
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a
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t
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l
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(
s
m
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t
i
r
o
n
m
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e
h
t
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a
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l
,
s
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a
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a
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d
n
a
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m
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$
$
$
$
$
$
$
$
$
$
$
$
$
–
–
–
–
–
(2)
(8)
2
–
–
–
–
4
–
–
–
–
–
–
(78)
(4,436)
(375)
(2,262)
(2,931)
(4,818)
– (12,277)
(2,594)
–
–
–
–
–
–
–
(29)
–
–
–
–
–
–
–
–
–
(875)
–
(195)
–
–
2,967
–
2,728
–
–
–
–
239
(1)
(18)
873
13
(14)
6
–
–
–
(26)
–
–
220
–
–
–
–
–
–
25
–
–
–
–
–
(23)
–
(60)
–
–
–
–
37
–
–
–
–
–
–
–
–
–
–
–
2,422
–
–
–
–
–
–
–
(202) 13,995 18,106
–
–
–
(34)
–
(1,400)
(300)
1,434
300
–
339
–
–
–
–
(541)
–
–
16,417 18,106
–
–
–
–
–
–
–
–
–
–
–
–
–
–
717
–
–
717
–
–
–
–
–
l
a
t
o
T
– $
(78)
– $ (4,436)
978
1 $
– $ (2,263)
44 $ (2,188)
90 $ 31,206
(4) $ (12,276)
(24) $ 35,583
– $
6
– $ (1,400)
– $
(300)
– $ 1,405
201
163 $
As at October 31, 2007
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
(1)
(2)
Reclassification of financial instruments reflects differences in classification arising from the use of the fair value option and reclassification of securities. Prior to the adoption of the
new financial instruments accounting standards on November 1, 2006, this column reflected the reclassification of securities only. Refer to the material differences between Canadian
and U.S. GAAP for details of this reclassification of securities.
Other minor differences include cumulative translation adjustment of $41 million (2006 – $4 million) and $8 million ($nil for 2006) related to loans held for sale which are recorded at
the lower of cost or market under U.S. GAAP and recorded at amortized cost under Canadian GAAP.
166
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
As at October 31, 2006
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
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$
$
$
–
–
(101)
(33)
–
–
(342)
(4,190)
(288)
–
–
–
–
–
–
369
–
(179)
–
$
$
41
$ 321
52
$
$
(77)
$ 300
–
$
–
$
–
$
54
$
–
–
(2)
(2,148)
(1,004)
(3,723)
–
(39)
–
–
–
(305)
–
(9,518)
(1,907)
–
–
–
(29)
–
–
–
2,890
–
2,777
–
–
–
–
113
–
–
(128)
–
–
164
–
–
–
–
–
–
241
–
–
–
–
–
–
(15)
–
–
–
–
–
(22)
–
(58)
–
–
–
–
36
–
–
–
–
–
–
–
–
–
–
–
60
–
–
–
–
–
–
–
–
–
(25) 10,401 16,558
–
(34)
–
(1,383)
(298)
1,417
298
–
–
–
37 10,461 16,558
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(62)
–
–
–
–
852
–
–
852
–
–
–
–
–
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 $
(1)
Reclassification of financial instruments reflects differences in classification arising from the use of the fair value option and reclassification of securities. Prior to the adoption of the
new financial instruments accounting standards on November 1, 2006, this column reflected the reclassification of securities only. Refer to the material differences between Canadian
and U.S. GAAP for details of this reclassification of securities.
Material differences between Canadian and U.S. GAAP
No.
Item
U.S. GAAP
Canadian GAAP
The accounting for VIEs is consistent in all material
aspects with U.S. GAAP. In the second quarter of 2007,
we adopted EIC-163 which is substantially the same as
FSP FIN 46(R)-6. Refer to Note 1.
1
Variable interest
entities
We 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
requirements. Upon adoption of this guidance, we deconsoli-
dated certain investment funds.
2
Liabilities and
equity
Shares issued with conversion or conditional redemption
features are classified as equity. Shares that are mandatorily
redeemable because there is an unconditional obligation
requiring the issuer to redeem the instrument by transferring
its assets upon a specified date or upon an event that is
certain to occur are classified as liabilities.
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.
3
Derivative
instruments and
hedging activities
All derivatives are recorded on our 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 AOCI
within Shareholders’ equity, and will be subsequently rec-
ognized in Net interest income in the same period when the
cash flow of the hedged item affects earnings. The ineffec-
tive portion of the hedge is reported in Non-interest income.
Prior to November 1, 2006, derivatives embedded
within hybrid instruments generally were not separately
accounted for except for those related to equity-linked
deposit contracts. For derivatives that did not qualify
for hedge accounting, changes in their fair value were
recorded in Non-interest income. Non-trading derivatives
where hedge accounting had not been applied upon adop-
tion of Accounting Guideline 13, Hedging Relationships,
were recorded at fair value with transition gains or losses
being recognized in income as the original hedged item
affects Net interest income. Where derivatives had been
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
167
Note 31 Reconciliation of the application 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
3
Derivative
instruments and
hedging activities
(continued)
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.
designated and qualified as effective hedges, they were
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 was not required to be
recognized.
Upon the adoption of Section 3855 and Section 3865
on November 1, 2006, Canadian GAAP is substantially har-
monized with U.S. GAAP. Refer to Note 1.
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 propor-
tionately consolidated.
Prior to November 1, 2006, fixed income and equity invest-
ments were classified as Investment account securities.
Fixed income investments were carried at amortized cost,
and equity investments at cost except for those that sup-
port life insurance liabilities whose carrying values were
adjusted quarterly by 5% of the difference between market
value and previously adjusted carrying cost. Realized gains
and losses on disposal of fixed income investments that
support life insurance liabilities were deferred and amor-
tized to Non-interest income over the remaining term to
maturity of the investments sold to a maximum period of
20 years. Realized gains and losses on disposal of equity
investments were deferred and recognized as Non-interest
income at the quarterly rate of 5% of unamortized deferred
gains and losses.
Upon adoption of Section 3855 on November 1, 2006,
fixed income and equity securities are classified as
available-for-sale securities except for those supporting
the policy benefit liabilities of life and health insurance
contracts which are designated as held-for-trading using
the fair value option, as described in Note 1.
Insurance claims and policy benefit liabilities: Liabilities
for life insurance contracts are determined using the
Canadian Asset Liability Method, which incorporates
assumptions for mortality, morbidity, policy lapses,
surrenders, investment yields, policy dividends and main-
tenance 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. Property and casualty claim liabili-
ties represent the estimated amounts required to settle all
unpaid claims, and are recorded on a discounted basis.
5
Insurance
accounting
Fixed income and equity 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 AOCI within Shareholders’ equity. Realized gains
and losses are included in Non-interest income when realized.
Insurance claims and policy benefit liabilities: Liabilities for
life 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 divi-
dends 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 accumu-
lation 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. Property and casualty claim liabilities rep-
resent the estimated amounts required to settle all unpaid
claims, and are recorded on an undiscounted basis.
168
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Material differences between Canadian and U.S. GAAP (continued)
No.
Item
U.S. GAAP
Canadian GAAP
5
Insurance
accounting
(continued)
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 are limited to amounts
assessed against policyholders’ account balances for mor-
tality, policy administration and surrender charges, and are
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 our Consolidated Balance Sheets.
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 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 our
Consolidated Balance Sheets.
Separate accounts: Assets and liabilities of separate
accounts (known as segregated funds in Canada) are not
recognized on our Consolidated Balance Sheets.
6
Reclassification
of securities
and the
application of
the fair value
option
Securities are classified as Trading account or Available-for-
sale, and are carried on our 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 AOCI 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 impairment in
the value of Available-for-sale securities are included in Non-
interest income.
Prior to November 1, 2006, securities were classified as
Trading account (carried at estimated fair value), Investment
account (carried at amortized cost) or Loan substitute.
Writedowns to reflect other-than-temporary impairments
in the value of Investment account securities were included
in Non-interest income. Loan substitute securities were
accorded the accounting treatment applicable to loans and,
if required, were reduced by an allowance.
On November 1, 2006, we adopted Financial Accounting
Standards Board (FASB) Statement No. 155, Accounting for
Certain Hybrid Financial Instruments – an amendment of
FASB Statements No. 133 and 140 (FAS 155). FAS 155 allows
an entity to measure any hybrid financial instrument that con-
tains an embedded derivative that requires bifurcation at its
fair value, with changes in fair value recognized in earnings.
On November 1, 2006, we also adopted 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 measure its servicing
rights at fair value and can elect to subsequently amortize
its initial fair value over the term of the servicing rights, or
remeasure them at fair value with changes recognized in
With the adoption of Section 3855 on November 1, 2006,
Canadian GAAP is substantially harmonized with U.S. GAAP.
The significant difference subsequent to the adoption of this
new Canadian standard primarily relates to the use of the fair
value option. As described in Note 1, Section 3855 allows the
designation of any financial instrument as held-for-trading on
its initial recognition or upon adoption of the new standard.
The fair value option can be applied to any financial instru-
ment under Canadian GAAP (except for certain restrictions
imposed by the OSFI) whereas U.S. GAAP only allows the use
of the fair value option for servicing rights and certain hybrid
financial instruments. The principal categories of financial
instruments where we have applied the fair value option
under Canadian GAAP are described in Note 1.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
169
Note 31 Reconciliation of the application 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
6
Reclassification
of securities
and the
application of
the fair value
option
(continued)
Net income. The ability to remeasure servicing rights at fair
value through Net income eliminates the accounting mismatch
between the servicing rights and the related derivatives that
would otherwise result in the absence of hedge accounting.
Upon adoption of FAS 155 and FAS 156, certain hybrid
financial instruments and servicing rights are measured at fair
value. The adoption of these standards did not materially impact
our consolidated financial position or results of operations.
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)
9
Pension and
other post-
employment
obligations
Between November 29, 1999, and June 5, 2001, grants of
options under the employee stock option plan were accompa-
nied with tandem SARs, whereby participants could choose
to exercise a SAR instead of the corresponding option. In such
cases, the participants would receive a cash payment equal to
the difference between the closing price of our common shares
on the day immediately 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 participants 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 participants 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.
On October 31, 2007, we adopted the recognition requirements
of FASB Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Post-retirement Plans – an amend-
ment of FASB Statements No. 87, 88, 106 and 132(R) (FAS 158),
which require an entity to: (i) recognize the funded status of a
benefit plan on the balance sheet; and (ii) recognize in OCI the
existing unrecognized net actuarial gains and losses, prior ser-
vice costs and credits, and net transitional assets or obligations.
The measurement requirement of FAS 158, which requires an
entity to measure defined benefit plan assets and obligations as
at the year-end date, will be effective for us prospectively at the
end of 2009. The impact of adopting FAS 158 is disclosed
in the Pensions and other post-employment benefits section of
this note.
Prior to 2007, for defined benefit pension plans, an
unfunded accumulated benefit obligation was recorded as an
170
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
We use the equity method to account for investments in
limited partnerships that are non-VIEs or unconsolidated
VIEs, if we have the ability to exercise significant influ-
ence, generally indicated by an ownership interest of
20% or more.
For such a plan, a liability is recorded for the potential
cash payments to participants and compensation
expense is measured assuming that all participants will
exercise SARs.
Canadian GAAP does not have the same requirements as
FAS 158.
For a defined benefit plan, the plan assets and the
benefit obligations may be measured as of a date not
more than three months prior to the year-end. We mea-
sure our benefit obligations and pension plan assets as
at September 30 each year.
Material differences between Canadian and U.S. GAAP (continued)
No.
Item
U.S. GAAP
Canadian GAAP
9
Pension and
other post-
employment
obligations
(continued)
additional minimum pension liability, an intangible asset
was recorded up to the amount of unrecognized prior service
cost, and the excess of unfunded accumulated benefit obliga-
tion over unrecognized prior service cost was recorded as a
reduction in Other comprehensive income.
10 Trade date
accounting
For securities transactions, trade date basis of accounting
is used for both our Consolidated Balance Sheets and our
Consolidated Statements of Income.
For securities transactions, settlement date basis of account-
ing is used for our Consolidated Balance Sheets whereas
trade date basis of accounting is used for our Consolidated
Statements of Income.
11 Non-cash
collateral
Non-cash collateral received in securities lending transac-
tions is recorded on our 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 our Consolidated Balance
Sheets.
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.
Prior to November 1, 2006, Canadian GAAP only provides for
disclosure requirements.
Upon the adoption of Section 3855 on November 1, 2006,
Canadian GAAP is 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.
Upon adoption of Section 3855, loan commitments that can
be settled net or when there is a past practice of selling the
assets resulting from the loan commitments shortly after
origination can be treated as derivatives and such treatment
applies to all loan commitments in the same class.
In addition, loan commitments can be designated as
held-for-trading on their initial recognition or upon adoption
of the new standard using the fair value option (refer to Item
No. 6 above).
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.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
171
Note 31 Reconciliation of the application of Canadian and United States generally accepted accounting principles (continued)
Restricted net assets
Certain of our subsidiaries and joint ventures are subject to regulatory
requirements of the jurisdictions in which they operate. When these sub-
sidiaries and joint ventures are subject to such requirements, they may
be restricted from transferring to us our share of their assets in the form
of cash dividends, loans or advances. At October 31, 2007, restricted net
assets of these subsidiaries were $10.3 billion (2006 – $7.1 billion).
Pensions and other post-employment benefits
The following information on our defined benefit plans is in addition to
that disclosed in Note 20.
On October 31, 2007, we adopted the recognition and disclo-
sure provisions of FAS 158 which require the recognition of a plan’s
over-funded or under-funded status as an asset or liability with an
offsetting adjustment to AOCI net of tax. The adjustments to AOCI at
adoption represent the net actuarial gains and losses, prior service
costs or credits, and transitional assets or obligations that were
previously unrecognized. These amounts will be subsequently rec-
ognized as pension expense as they are amortized over the expected
average remaining service life of employee groups covered by the
plans. Further, actuarial gains and losses that arise in subsequent peri-
ods and are not recognized as pension expense in the same periods
will be recognized as a component of OCI. These amounts will be sub-
sequently recognized as a component of pension expense on the same
basis as the amounts recognized in AOCI on adoption of FAS 158.
The incremental effects of adopting the provisions of FAS 158
on our Consolidated Balance Sheet at October 31, 2007 are pre-
sented in the following table, including the effect of recognizing the
additional minimum liability of $30 million prior to adopting FAS 158.
The incremental effects of adopting the provision of FAS 158 on our
Consolidated Balance Sheet at October 31, 2007 had no effect on our
Consolidated Statement of Income for the year ended October 31,
2007, or for any year presented.
Other assets
Prepaid pension benefit cost (1)
Other liabilities
Accrued pension and other post-employment benefit expense (2)
Accumulated other comprehensive loss (3)
2007
Before application
of FAS 158
Adjustments
After application
of FAS 158
$
578
$
(479) $
99
1,262
330
1,592
$
18
$
809
$
827
(1)
(2)
(3)
Includes the reversal of $12 million unrecognized prior service costs reported as intangible asset.
Includes the reversal of the additional minimum liability adjustment of $30 million.
Includes employee benefit plan adjustments of $549 million, net of tax, and the reversal of the additional minimum liability adjustment of $20 million, net of tax.
The under-funded status of the pension plans and other post-
employment plans of $52 million and $1,441 million, respectively, are
recognized on our Consolidated Balance Sheet in Other liabilities. The
accumulated benefit obligations for the pension plans is $6,299 mil-
lion at October 31, 2007 (2006 – $6,277 million).
The pre-tax amounts included in AOCI at October 31, 2007 are as
follows:
Net actuarial loss
Prior service cost (benefit)
Transitional (asset) obligation
2007
Other post-
Pension plans employment plans
$
$
484
95
(10)
$
564
(307)
1
Total
1,048
(212)
(9)
Pre-tax amount recognized in Accumulated other comprehensive loss (1)
$
569
$
258
$
827
(1)
Amount recognized in AOCI, net of tax is $541 million.
172
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
The estimated net actuarial loss and prior service cost for the
pension plans that will be amortized from AOCI, on a pre-tax basis,
into pension expense during 2008 are $94 million and $22 million,
respectively, and pension expense will be reduced by $2 million
relating to the amortization of transitional assets. The estimated
net actuarial loss and transitional obligation for the Other post-
employment plans that will be amortized from AOCI, on a pre-tax
basis, into pension expense during 2008 are $37 million and $nil,
respectively, and pension expense will be reduced by $23 million
relating to the amortization of prior service benefit.
Hedging activities
Upon adoption of Section 3855 and Section 3865 on November 1,
2006, Canadian GAAP is substantially harmonized with U.S. GAAP.
The criteria in applying hedge accounting and the accounting for each
of the permitted hedging strategies are described in Note 1.
Prior to November 1, 2006, there were material differences
between Canadian and U.S. GAAP and such differences are quantified
as follows:
Fair value hedge
For the year ended October 31, 2006, the ineffective portion recog-
nized 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 effectiveness. 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 OCI for the effec-
tive portion of changes in fair value of derivatives designated as cash
flow hedges. The amounts recognized in OCI 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 loss) was reclassified to Net income
during the year. A net loss of $26 million (2005 – $111 million loss)
deferred in AOCI 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 loss) 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 $507 million (2005 – $623 million) related to our net invest-
ments in foreign operations, which were offset by gains of $269 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 OCI.
Average assets, U.S. GAAP
Canada
United States
Other International
2007
2006
2005
Average
assets
% of total
average assets
Average
assets
% of total
average assets
Average
assets
% of total
average assets
$ 338,545
139,569
125,743
56%
23%
21%
$ 297,740
119,614
104,533
57%
23%
20%
$ 277,442
97,002
101,961
58%
20%
22%
$ 603,857
100%
$ 521,887
100%
$ 476,405
100%
Significant accounting changes
Guidance for quantifying financial statement misstatements
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). It
provides guidance on how to evaluate prior period financial statement
misstatements for the purpose of assessing their materiality in the
current period. SAB 108 requires registrants to evaluate the material-
ity of identified adjusted errors using both of the follow methods: the
“rollover” approach, which quantifies errors based on the amount of
the errors originating in the current-year income statement without
considering the effects of correcting the portion of the current-year
balance sheet for misstatements that originated in prior years, and
the “iron curtain” approach, which quantifies an error based on the
effects of correcting the misstatement existing in the balance sheet
at the end of the current year, irrespective of when it arose. SAB 108
permits companies to adjust for the cumulative effect of errors that
the company previously determined to be immaterial by adjusting the
carrying amount of assets and liabilities as of the beginning of the
current year, with an offsetting adjustment to the opening balance of
retained earnings.
We adopted SAB 108 on November 1, 2006, and reduced our
opening retained earnings and AOCI by $42 million and $35 million,
respectively, and increased other liabilities by $77 million. These
adjustments pertain to errors that arose between 2001 and 2006
when certain criteria were not met in order for hedge accounting to be
achieved. We previously deemed these errors to be immaterial to our
Consolidated Financial Statements using the rollover method.
Future accounting changes
Guidance on accounting for income taxes
FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109
(FIN 48), on July 13, 2006, and its related Staff Position FIN 48-1,
Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1),
on May 2, 2007. FIN 48 and FSP FIN 48-1 provide additional guidance
on how to recognize, measure and disclose income tax benefits. The
cumulative effect of applying the provisions of FIN 48 will be reported
as an adjustment to the opening balance of retained earnings. FIN 48
became effective for us on November 1, 2007, and is not expected
to materially impact our consolidated financial position and results
of operations.
Accounting for deferred acquisition costs for insurance operations
On September 19, 2005, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 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 modi-
fication 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 cov-
erage within a contract. A replacement contract that is substantially
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
173
Note 31 Reconciliation of the application of Canadian and United States generally accepted accounting principles (continued)
changed from the replaced contract is accounted for as an extinguish-
ment of the replaced contract, resulting in the unamortized deferred
acquisition costs, unearned revenue liabilities, and deferred sales
inducement assets from extinguished contracts being expensed. This
SOP became effective for us on November 1, 2007 on a prospective
basis, and is not expected to materially impact our consolidated finan-
cial position and results of operations.
Guidance for written loan commitments recorded at fair value
through earnings
On November 5, 2007, the SEC issued Staff Accounting Bulletin
No. 109, Written Loan Commitments Recorded at Fair Value Through
Earnings (SAB 109). It requires that the expected net future cash flows
related to the associated servicing of the loan should be included in
the measurement of all written loan commitments that are accounted
for at fair value through earnings. In addition, internally developed
intangible assets should not be recorded as part of the fair value of a
derivative loan commitment. SAB 109 is effective for us on February 1,
2008. We are currently assessing the impact that this SAB will have on
our consolidated financial position and results of operations.
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 U.S. GAAP, and is applicable to other account-
ing 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 this standard on our
consolidated financial position and results of operations.
Fair value option for financial assets and liabilities
On February 15, 2007, FASB issued Statement No. 159, The Fair Value
Option for Financial Assets and Liabilities (FAS 159). FAS 159 provides
an entity the option to report selected financial assets and liabilities
at fair value and establishes new disclosure requirements for assets
and liabilities to which the fair value option is applied. FAS 159 will be
effective for us on November 1, 2008. We are currently assessing the
impact of adopting this standard on our consolidated financial position
and results of operations.
Offsetting of amounts related to certain contracts
On April 30, 2007, FASB issued a Staff Position FIN 39-1, Amendment
of FASB Interpretation No. 39 (FSP FIN 39-1), which amends certain
aspects of FIN 39, Offsetting of Amounts Related to Certain Contracts,
to permit a reporting entity to offset fair value amounts recognized
for the right to reclaim cash collateral (a receivable) or the obligation
to return cash collateral (a payable) against fair value amounts recog-
nized for derivative instruments executed with the same counterparty
under the same master netting agreement. FSP FIN 39-1 will be
effective for us on November 1, 2008. We are currently assessing the
impact of adopting this standard on our consolidated financial position
and results of operations.
Income tax benefits of dividends on share-based payment awards
At the June 27, 2007 meeting, the FASB ratified the consensus reached
by the Emerging Issues Task Force (EITF) on Issue 06-11, Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards
(EITF 06-11), on realized tax benefits on dividend payments related
to certain share-based payment arrangements which can be treated
as deductible compensation expense for income tax purposes. Under
EITF 06-11, a realized tax benefit from dividends or dividend equiva-
lents that are charged to retained earnings and paid to employees for
equity-classified non-vested equity shares, non-vested equity share
units, and outstanding share options should be recognized as an
increase to additional paid-in capital (APIC). Those tax benefits are
considered excess tax benefits (“windfall”) under FAS 123(R). The
EITF also reached a final consensus that if an entity’s estimate of for-
feitures increases (resulting in compensation expense), the amount of
associated tax benefits that are reclassified from APIC to the income
statement should be limited to the entity’s pool of excess tax benefits.
This EITF will be effective for us on November 1, 2008. We are currently
assessing the impact of adopting this standard on our consolidated
financial position and results of operations.
174
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Note 32 Parent company information
The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an equity
accounted basis:
Condensed Balance Sheets
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Investments in bank subsidiaries and associated corporations
Investments in other subsidiaries and associated corporations
Assets purchased under reverse repurchase agreements
Loans, net of allowances
Net balances due from bank subsidiaries
Net balances due from other subsidiaries
Other assets
Liabilities and shareholders’ equity
Deposits
Other liabilities
Subordinated debentures
Preferred share liabilities
Shareholders’ equity
Condensed Statements of Income
Interest income (1)
Interest expense
Net interest income
Non-interest income (2)
Total revenue
Provision for credit losses
Non-interest expense
Business realignment charges
Income from continuing operations before income taxes
Income taxes
Net income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries (3)
2007
2006
$
2,992
5,154
94,603
12,151
22,347
10,609
196,414
18,194
9,078
86,502
$
2,924
2,920
90,076
10,345
21,830
9,221
166,528
24,750
10,845
54,545
$ 458,044
$ 393,984
$ 306,123
121,065
$ 285,898
78,699
$ 427,188
$ 364,597
$
6,117
300
24,439
$
6,966
298
22,123
$ 458,044
$ 393,984
2007
2006
$
17,563
12,940
$ 14,007
10,351
$
4,623
4,408
9,031
702
5,905
–
2,424
454
1,970
3,522
3,656
3,935
7,591
410
5,720
2
1,459
424
1,035
3,693
2005
11,616
6,867
4,749
3,412
8,161
392
6,001
44
1,724
528
1,196
2,191
Net income
$
5,492
$
4,728
$
3,387
(1)
(2)
(3)
Includes dividend income from investments in subsidiaries and associated corporations of $420 million, $17 million and $20 million for 2007, 2006 and 2005, respectively.
Includes income from associated corporations of $4 million, $8 million and $49 million for 2007, 2006 and 2005, respectively.
Includes net loss from discontinued operations related to RBC Mortgage of $29 million and $50 million for 2006 and 2005, respectively. Refer to Note 11.
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
175
Note 32 Parent company information (continued)
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income
Adjustments to determine net cash from (used in) operating activities:
Change in undistributed earnings of subsidiaries
Other operating activities, net
Net cash from (used in) operating activities
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 available-for-sale securities
Proceeds from sale of investment securities
Proceeds from maturity of available-for-sale securities
Proceeds from maturity of investment securities
Purchase of available-for-sale securities
Purchase of investment securities
Net acquisitions of premises and equipment
Change in assets purchased under reverse repurchase agreements and securities borrowed
Net cash from (used in) investments in subsidiaries
Change in net funding provided to subsidiaries
Net cash used in investing activities
Cash flows from financing activities
Change in deposits
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
Sale of treasury shares
Purchase of treasury shares
Dividends paid
Change in obligations related to assets sold under repurchase agreements and securities loaned
Change in obligations related to securities sold short
Net cash from financing activities
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 (recovered) paid in year
2007
2006
2005
$
5,492
$
4,728
$
3,387
(3,522)
11,100
(3,693)
(7,397)
(2,191)
(17,184)
13,070
(6,362)
(15,988)
(2,234)
(38,896)
6,113
2,376
–
4,891
–
(10,365)
–
(481)
(1,388)
(2,101)
8,062
(1,192)
(23,417)
5,963
–
11,233
–
18,195
–
(25,445)
(401)
(388)
(946)
(8,734)
1,878
(23,439)
3,213
–
17,149
–
7,434
–
(16,374)
(310)
516
(326)
(13,639)
(34,023)
(25,132)
(23,898)
20,225
87
(989)
1,150
(150)
(23)
155
(646)
208
(133)
(2,278)
(553)
3,968
28,989
–
(953)
600
(250)
(6)
116
(844)
244
(208)
(1,807)
3,955
1,059
36,542
800
(786)
300
(132)
(3)
198
(226)
179
(49)
(1,469)
1,137
3,658
21,021
30,895
40,149
68
2,924
(599)
3,523
263
3,260
$
2,992
$
2,924
$
3,523
$ 13,061 $
$
(165) $
8,971
656
$ 6
$
,540
1,106
176
Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Supplementary information
Consolidated Balance Sheets
As at October 31 (C$ millions)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Assets
Cash and deposits with banks (1)
Securities (1)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans (2)
Retail
Wholesale
$ 16,107 $ 14,903 $ 10,238 $
9,978 $
6,013 $
6,659 $
6,244 $
178,255
184,869
160,495
128,946
128,931
108,464
91,798
7,149 $ 16,591 $ 13,389 $ 18,390
36,039
57,010
44,405
69,467
64,313
59,378
42,973
46,949
41,182
38,929
40,177
20,749
23,091
23,008
20,107
169,462
69,967
151,050
58,889
140,239
51,675
127,230
45,330
114,127
48,322
108,342
59,431
103,120
65,261
94,737
60,350
86,958
56,623
81,774
63,732
76,557
61,813
Allowance for loan losses
239,429
(1,493)
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)
237,936
208,530
190,416
170,916
160,394
165,570
166,103
153,216
141,697
143,480
136,601
Other
Customers’ liability under
acceptances
Derivatives
Premises and equipment, net
Goodwill
Other intangibles
Assets of operations
held for sale (3)
Other assets
Liabilities and shareholders’ equity
Deposits
Personal
Business and government
Bank
Other
Acceptances
Obligations related to
securities sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivatives
Insurance claims and
policy benefit liabilities
Liabilities of operations
held for sale (3)
Other liabilities
Subordinated debentures
Trust capital securities
Preferred share liabilities
Non-controlling interest
in subsidiaries
Shareholders’ equity
Preferred shares
Common shares
Contributed surplus
Treasury shares – preferred
– common
Retained earnings
Accumulated other
comprehensive income (loss)
11,786
66,585
2,131
4,752
628
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
–
–
17,853
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
103,735
69,100
65,399
69,433
63,327
55,852
54,617
39,159
32,261
50,117
33,637
$ 600,346 $ 536,780 $ 469,521 $ 426,222 $ 399,847 $ 375,474 $ 358,939 $ 289,740 $ 270,650 $ 274,399 $ 244,774
$ 116,557 $ 114,040 $ 111,618 $ 111,256 $ 106,709 $ 101,892 $ 101,381 $ 89,632 $ 87,359 $ 85,910 $ 86,106
64,368
119,581
22,755
22,003
93,618
19,646
76,107
17,988
160,593
34,649
129,860
22,576
86,223
14,315
107,141
24,925
189,140
40,343
133,823
25,880
219,886
28,762
365,205
343,523
306,860
270,959
259,145
243,476
233,447
202,896
187,897
180,005
173,229
11,786
9,108
7,074
6,184
5,943
8,051
9,923
11,628
9,257
10,620
10,561
44,689
38,252
32,391
25,005
22,855
19,110
16,443
13,419
17,885
14,404
11,152
37,033
72,010
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
7,283
7,337
7,117
6,488
4,775
2,407
2,268
144
113
427
107
–
28,483
32
22,649
40
18,408
62
20,172
50
17,850
–
19,405
–
19,417
–
13,128
–
11,872
–
9,339
–
10,176
201,284
160,575
131,003
126,585
113,744
105,166
99,369
66,788
65,439
77,916
56,397
6,235
1,400
300
7,103
1,383
298
8,167
8,116
6,243
6,614
6,513
5,825
4,596
4,087
4,227
1,400
2,300
2,300
1,400
1,400
650
–
–
–
300
300
300
989
1,315
1,585
1,562
1,844
1,484
1,483
1,775
1,944
58
40
35
45
40
103
499
531
2,050
7,300
235
(6)
(101)
18,167
1,050
7,196
292
(2)
(180)
15,771
700
7,170
265
(2)
(216)
13,704
532
6,988
169
–
(294)
12,065
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
(3,206)
(2,004)
(1,774)
(1,556)
(893)
(54)
(38)
(36)
(38)
(34)
(29)
24,439
22,123
19,847
17,904
18,075
17,794
16,850
11,956
11,053
10,048
8,906
$ 600,346 $ 536,780 $ 469,521 $ 426,222 $ 399,847 $ 375,474 $ 358,939 $ 289,740 $ 270,650 $ 274,399 $ 244,774
(1)
(2)
(3)
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.
As the information is not reasonably determinable, amounts for years prior to 2003 have not been fully reclassified as either Retail or Wholesale.
Relates to assets and liabilities of RBC Mortgage Company. As at October 31, 2006, we substantially disposed of the assets and obligations related to RBC Mortgage Company that were
not transferred to Home123 Corporation. 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 2007
Supplementary information
177
9,354
2,163
568
971
452
606
397
354
756
690
416
211
332
169
–
–
35
222
4,640
9,513
380
Consolidated Statements of Income
For the year ended October 31
(C$ millions, except per share amounts)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Interest income
Loans
Securities
Assets purchased under
reverse repurchase agreements
and securities borrowed
Deposits with banks
$ 14,724 $ 12,708 $ 10,790 $
6,189
4,606
7,665
9,535 $
3,593
9,900 $ 10,394 $ 12,001 $ 11,538 $ 10,394 $ 10,474 $
3,045
2,845
1,960
2,364
3,189
3,521
3,450
538
2,827
480
1,354
231
656
103
873
101
725
156
1,258
337
1,078
577
893
513
1,169
673
26,377
22,204
16,981
13,887
13,919
14,464
17,117
16,038
14,164
14,276
13,056
Interest expense
Deposits
Other liabilities
Subordinated debentures
13,770
4,737
338
10,708
4,281
419
6,946
2,800
442
5,142
1,897
429
Net interest income
7,532
6,796
6,793
18,845
15,408
10,188
7,468
6,419
Non-interest income
Insurance premiums,
investment and fee income
Trading revenue
Investment management
and custodial fees
Mutual fund revenue
Securities brokerage
commissions
Service charges
Underwriting and other
advisory fees
Foreign exchange revenue,
other than trading
Card service revenue
Credit fees
Securitization revenue
Net gain (loss) on sale of
available-for-sale securities
Net gain (loss) on sale of
investment securities
Other
3,152
2,261
1,579
1,473
1,353
1,303
1,217
533
491
293
261
63
–
951
3,348
2,574
1,301
1,242
1,243
1,216
1,024
438
496
241
257
–
88
373
3,270
1,594
2,870
1,563
1,232
962
1,105
850
1,163
1,153
1,166
1,089
1,026
407
579
187
285
–
85
448
918
331
555
198
200
–
20
518
5,452
1,735
376
7,563
6,356
2,356
1,908
1,078
673
1,031
1,122
813
279
518
227
165
–
31
431
5,709
1,562
406
8,712
1,868
410
9,057
1,551
344
7,677
10,990
10,952
6,787
6,127
5,086
7,636
1,291
286
9,213
4,951
7,732
1,296
339
9,367
6,548
1,251
384
8,183
4,909
4,873
2,043
1,689
1,139
723
1,187
1,088
755
276
496
223
174
–
(111)
623
1,824
1,770
1,058
692
1,000
920
573
303
458
237
123
–
(130)
921
973
1,594
737
1,106
822
624
841
778
643
299
420
212
115
–
(16)
185
621
556
625
708
403
243
362
189
222
–
27
250
578
748
597
537
549
664
369
218
305
183
218
–
342
146
Non-interest income
14,930
13,841
12,391
11,383
10,632
10,305
9,749
7,490
6,049
5,454
Total revenue
22,462
20,637
19,184
17,802
16,988
17,092
15,876
12,576
11,000
10,363
Provision for credit losses
791
429
455
346
721
1,065
1,119
691
760
575
2,173
2,509
2,625
2,124
1,696
1,535
1,344
687
530
438
346
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
7,860
1,009
839
723
530
308
–
96
1,108
7,268
957
792
687
546
298
–
76
871
6,682
960
749
632
500
296
–
50
1,488
6,638
906
765
672
465
294
–
69
1,024
6,234
882
721
707
431
292
–
71
827
6,264
893
759
768
404
306
–
72
954
12,473
11,495
11,357
10,833
10,165
10,420
5,667
807
704
673
398
303
210
36
919
9,717
–
38
4,597
679
556
695
267
–
76
11
700
4,013
677
564
699
298
–
66
–
743
3,594
585
508
665
262
–
62
–
723
3,365
605
559
587
228
–
59
–
650
7,581
7,060
6,399
6,053
–
–
–
–
–
–
–
–
Business realignment charges
Goodwill impairment
–
–
–
–
45
–
177
–
–
–
–
–
Income from continuing operations
before income taxes
Income taxes
Net income before
non-controlling interest
Non-controlling interest in net
income of subsidiaries
Net income from continuing
operations
Net income (loss) from
discontinued operations
7,025
1,392
6,204
1,403
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
5,633
4,801
3,424
3,035
2,967
2,707
2,318
2,172
1,635
1,776
1,644
141
44
(13)
12
12
5
11
7
8
76
77
5,492
4,757
3,437
3,023
2,955
2,702
2,307
2,165
1,627
1,700
1,567
–
(29)
(50)
(220)
13
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Net income
$
5,492 $
4,728 $
3,387 $
2,803 $
2,968 $
2,702 $
2,307 $
2,165 $
1,627 $
1,700 $
1,567
Preferred dividends
Net gain on redemption of
preferred shares
Net income available to
common shareholders
(88)
–
(60)
–
(42)
4
(31)
–
(31)
–
(38)
–
(31)
–
(25)
–
(27)
–
(21)
–
(19)
–
$
5,404 $
4,668 $
3,349 $
2,772 $
2,937 $
2,664 $
2,276 $
2,140 $
1,600 $
1,679 $
1,548
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) $
1,273,185
1,279,956 1,283,433 1,293,465
1,324,159 1,345,143 1,283,031 1,212,777
4.24 $
3.65 $
2.61 $
2.14 $
2.22 $
1.98 $
1.77 $
1.77 $
1,252,316 1,234,648 1,235,624
1.25
1.36 $
1.28 $
4.24 $
3.67 $
2.65 $
2.31 $
2.21 $
1.98 $
1.77 $
1.77 $
1.28 $
1.36 $
1.25
– $
(.02) $
(.04) $
(.17) $
.01
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1,289,314
1,299,785 1,304,680 1,311,016
4.19 $
3.59 $
2.57 $
2.11 $
1,338,032 1,356,241 1,294,432 1,219,730 1,264,610 1,267,253 1,264,103
1.23
1.96 $
1.34 $
2.20 $
1.27 $
1.76 $
1.76 $
4.19 $
3.61 $
2.61 $
2.28 $
2.19 $
1.96 $
1.76 $
1.76 $
1.27 $
1.34 $
1.23
– $
(.02) $
(.04) $
(.17) $
.01
n.a.
n.a.
n.a.
n.a.
n.a.
Dividends per share (in dollars) (1) $
1.82 $
1.44 $
1.18 $
1.01 $
.86 $
.76 $
.69 $
.57 $
.47 $
.44 $
(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 retroac-
tively for the stock dividend paid on April 6, 2006. Refer to Note 25.
n.a. not available
178
Royal Bank of Canada: Annual Report 2007
Supplementary information
n.a.
.38
Consolidated Statements of Comprehensive Income
For the year ended October 31
(C$ millions)
Net income
Other comprehensive income,
net of taxes
Net unrealized gains (losses) on
available-for-sale securities
Reclassification of (gains)
losses on available-for-sale
securities to income
$
Unrealized foreign currency
translation gains (losses)
Reclassification of (gains)
losses on foreign currency
translation to income
Net foreign currency
translation gains (losses)
from hedging activities
Net gains (losses) on
derivatives designated as
cash flow hedges
Reclassification to income of
(gains) losses on derivatives
designated as cash flow
hedges
Other comprehensive income
(loss)
Total comprehensive income
$
2007
5,492
$
2006
4,728 $
2005
3,387 $
2004
2,803
$
2003
2,968 $
2002
2,702 $
2001
2,307 $
2000
2,165 $
1999
1,627 $
1998
1,700 $
1997
1,567
(93)
28
(65)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,965)
(501)
(624)
(1,341)
(2,991)
(59)
463
(2)
(205)
164
129
(42)
2
5
–
3
–
10
1,804
(1,203)
269
(230)
401
(218)
678
(663)
2,149
(839)
43
(16)
(475)
(2)
80
31
111
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4
2
–
–
–
–
–
–
201
(4)
(169)
(5)
(135)
(6)
–
–
–
–
–
–
–
–
–
(1,157)
4,335
$
(230)
4,498 $
(218)
3,169 $
(663)
2,140
$
(839)
2,129 $
(16)
2,686 $
(2)
2,305 $
2
2,167 $
(4)
1,623 $
(5)
1,695 $
(6)
1,561
Consolidated Statements of Changes in Shareholders’ Equity
(
–
$
–
–
–
–
–
–
–
–
–
–
–
–
7
6)
26
78
–
–
–
–
(2)
(6)
14
85
31
33
33
56
–
–
–
–
–
–
–
–
–
–
–
–
265
292
7
–
(18)
169
(46)
–
–
–
–
–
–
–
34
2007
2002
2001
2003
2005
2006
1998
1999
–
–
–
–
2000
2004
–
–
85
–
–
33
–
–
78
–
47
292
–
–
(2)
(2)
54
15
265
–
(6)
169
–
(5)
235
(2)
51
(51)
(2)
(2)
33
(37)
(6)
7,170
127
(101)
7,196
7,196
170
(66)
7,300
3,065
109
(98)
3,076
6,979
193
(154)
7,018
6,940
191
(152)
6,979
3,076
3,976
(112)
6,940
6,988
214
(32)
7,170
7,018
127
(157)
6,988
300 $
–
–
–
300
556 $
–
–
(24)
532
447 $
–
–
5
452
452 $
250
–
7
709
532 $
–
–
–
532
2,907
18
–
2,925
2,925
192
(52)
3,065
532 $
300
(132)
–
700
709 $
–
(150)
(3)
556
300 $
296
(150)
1
447
700 $
600
(250)
–
1,050
1,050 $
1,150
(150)
–
2,050
For the year ended October 31
(C$ millions)
Preferred shares
Balance at beginning of year
Issued
Redeemed for cancellation
Translation adjustment
Balance at end of year
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
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
Retained earnings
Balance at beginning of year
Transition adjustment –
Financial instruments
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
Balance at end of year
Accumulated other comprehensive
income (loss)
Transition adjustment –
Financial instruments
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
Balance at end of year
Retained earnings and Accumulated
other comprehensive income (loss)
Shareholders’ equity at end of year $ 24,439 $ 22,123 $ 19,847 $ 17,904 $ 18,075 $ 17,794 $ 16,850 $ 11,956 $ 11,053 $ 10,048 $
–
1,700
(21)
(543)
(86)
5,492
(88)
(2,321)
–
4,728
(60)
(1,847)
–
2,803
(31)
(1,303)
–
2,702
(38)
(1,022)
–
2,968
(31)
(1,137)
–
3,387
(42)
(1,512)
–
2,307
(31)
(897)
–
1,627
(27)
(588)
–
2,165
(25)
(689)
–
248
(238)
(304)
(294)
179
(47)
–
–
(2,004)
(2)
12,065
–
13,704
–
11,333
–
8,464
–
10,235
(180)
175
(96)
–
(216)
193
(157)
–
–
15,771
–
18,167
111
(3,206)
–
(1,774)
–
(1,556)
–
9,206
–
6,857
–
(893)
–
7,579
–
(294)
–
(180)
(54)
(216)
–
(101)
(580)
(21)
(698)
(4)
(194)
–
(562)
(4)
(735)
–
(397)
(19)
(281)
(9)
(612)
(1)
(743)
(11)
–
(38)
–
(38)
–
(54)
–
(34)
–
(36)
12,065
6,823
10,440
10,181
8,464
13,767
13,704
10,235
15,771
11,333
14,961
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10,509
(2,004)
11,930
(3,207)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,556)
(1,774)
8,428
9,168
–
–
–
5,728
6,857
(893)
–
(7)
7,541
9,206
7,579
(221)
(38)
(36)
–
–
–
–
–
–
–
–
–
–
–
–
(65)
(45)
(38)
(54)
(34)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1997
300
–
–
–
300
2,876
69
(38)
2,907
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,809
–
1,567
(19)
(469)
(160)
–
–
–
5,728
–
–
(29)
–
(29)
5,699
8,906
Royal Bank of Canada: Annual Report 2007
Supplementary information
179
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
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
24.6%
.95
23.5%
.94
.93
1.30
.93
1.35
.76
.75
1.53
.67
.66
1.53
18.0%
15.6%
16.7%
15.8%
16.4%
19.8%
.76
.74
.71
.77
15.6%
.60
.75
1.64
.73
1.86
.70
1.90
.76
1.80
.59
1.83
18.4%
19.3%
.65
.64
1.88
.65
.65
2.03
66.5%
67.1%
64.6%
63.9%
62.6%
60.3%
61.4%
59.6%
55.0%
52.6%
48.8%
$ 581,000 $ 502,300 $ 447,100 $ 421,400 $ 390,700 $ 364,000 $ 322,900 $ 281,900 $ 269,900 $ 261,300 $ 239,500
$ 581,000 $ 502,100 $ 445,300 $ 418,200 $ 387,700 $ 364,000 $ 322,900 $ 281,900 $ 269,900 $ 261,300 $ 239,500
305,265
368,476
21,985
23,737
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
RBC
548,200
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
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 teller machines
Bank branches (9)
Canada
U.S. and Other international
2,713,100
161,500
2,421,100
143,100
–
118,800
–
102,900
–
94,400
–
93,300
–
100,000
–
92,300
–
81,600
–
73,400
–
67,700
21,478 $
$ 23,383 $
28,571
247,635
9.4%
11.5
26,664
223,709
9.6%
11.9
18,901 $ 16,272 $
25,813
197,004
9.6%
13.1
22,733
183,409
8.9%
12.4
16,259 $
21,374
166,911
9.7%
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
11,593 $
12,026 $
16,698
149,078
8.1%
16,480
157,064
7.4%
11.2
10.5
10,073
14,705
147,672
6.8%
10.0
1,276,260 1,280,890 1,293,502 1,289,496 1,312,043 1,330,514 1,348,042 1,204,796 1,235,535
1,324,159
1,273,185
1,289,314
1,235,162 1,233,342
1,279,956 1,283,433 1,293,465
1,345,143 1,283,031 1,212,777 1,252,316 1,234,648 1,235,624
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 1,264,103
.38
6.98
1.44 $
16.52
1.82 $
17.58
.44 $
7.89
1.01 $
1.18 $
.47 $
14.89
12.96
.86 $
13.57
.69 $
.76 $
13.37
11.97
.57 $
8.58
9.55
$
61.08
49.50
56.04
13.4
3.3%
43
51.49
41.29
49.80
13.9
3.1%
40
43.34
30.45
41.67
16.2
3.2%
45
32.95
29.02
31.70
15.0
3.3%
47
32.50
26.63
31.74
14.4
2.9%
39
29.45
22.53
27.21
13.9
2.9%
38
26.63
20.80
23.40
13.3
2.9%
39
24.44
13.63
24.15
13.7
3.0%
32
21.06
14.83
15.86
12.5
2.6%
37
23.05
14.38
17.78
13.3
2.4%
32
19.11
11.00
18.84
15.3
2.5%
30
65,045
4,419
60,858
4,232
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
1,146
395
1,117
326
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
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) Based on methods intended to approximate the average of the daily balances for the period.
(3)
(4)
(5)
(6) Dividends per common share divided by the average of high and low share price.
(7)
Common dividends as a percentage of net income after preferred dividends.
(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.
180
Royal Bank of Canada: Annual Report 2007
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.
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, as defined by the OSFI, divided by total
regulatory capital.
Assets under administration (AUA)
Assets administered by us which are benefi-
cially owned by clients. Services provided in
respect of assets under administration are
of an administrative nature, including safe-
keeping, collecting investment income,
settling purchase and sale transactions, and
record keeping.
Assets under management (AUM)
Assets managed by us which are benefi-
cially owned by clients. Services provided in
respect of assets under management include
the selection of investments and the provi-
sion of investment advice. We have assets
under management that are also adminis-
tered by us and included in assets under
administration.
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 assets that
give rise to our reported net interest income
including deposits with banks, securities,
assets purchased under reverse repurchase
agreements and securities borrowed, and
loans based on daily balances for the period
ending October 31 in each financial year.
Basis point (bp)
One one-hundredth of a percentage point (.01%).
Canadian GAAP
Canadian generally accepted accounting
principles.
Capital adequacy
The level of capital that is sufficient to
underpin risk and accommodate potential
unexpected increases in risk within specified
regulatory targets while maintaining our busi-
ness plans. This includes risks for which mini-
mum regulatory capital requirements may not
be specified.
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.
Cash capital position
Quantifies the extent to which illiquid assets
are funded by non-core liabilities and rep-
resents a formula-based measure of both
comparative and directional structural liquid-
ity risk.
Collateral
Assets pledged as security for a loan or other
obligation. Collateral can take many forms,
such as cash, highly rated securities, prop-
erty, inventory, equipment and receivables.
Collateralized debt obligation (CDO)
An investment grade security that is backed
by a pool of bonds, loans and/or any other
type of debt instrument.
Covered bonds
Full recourse on-balance sheet obligations
issued by banks and credit institutions that
are also fully collateralized by assets over
which investors enjoy a priority claim in the
event of an issuer’s insolvency.
Commitments to extend credit
Unutilized amount of credit facilities available
to clients either in the form of loans, bank-
ers’ acceptances and other on-balance sheet
financing, or through off-balance sheet prod-
ucts such as guarantees and letters of credit.
Derivative
A contract between two parties which
requires little or no initial investment and
where payments between the parties are
dependent upon the movements in price of
an underlying instrument, index or finan-
cial 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 (typically 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
Calculated as net income less preferred share
dividends divided by the average number of
shares outstanding.
Earnings per share (EPS), diluted
Calculated as net income less preferred share
dividends divided by the average number of
shares outstanding 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 neces-
sary to support our various businesses, given
their risks, consistent with our desired sol-
vency 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 obliga-
tions to third parties. Certain other guaran-
tees, such as bid and performance bonds,
represent non-financial undertakings.
Hedge
A risk management technique used to insu-
late financial results from market, interest
rate or foreign currency exchange risk (expo-
sure) 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 liabili-
ties in the same currencies or through the
use of foreign exchange hedging instruments
such as futures, options or foreign exchange
contracts.
Hedge funds
A type of fund, usually used by wealthy indi-
viduals and institutions, which is allowed to
use aggressive strategies that are unavailable
to mutual funds, including selling short, lever-
age, program trading, swaps, arbitrage and
derivatives.
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
Capital instruments issued by special
purpose entities (SPEs), whose primary
purpose is to raise capital. We issue inno-
vative capital instruments, RBC Trust
Capital Securities (TruCS) and RBC Trust
Subordinated Notes (TSNs), through three
SPEs: RBC Capital Trust, RBC Capital Trust II
and RBC Subordinated Notes Trust. As per the
OSFI guidelines, innovative capital can com-
prise up to 15% of net Tier 1 capital with an
additional 5% eligible for Tier 2 capital.
Managed basis
We report our segments on a managed basis,
which is intended to measure the perfor-
mance of each business segment as if it were
a stand-alone business and reflect the way
each segment is managed.
Royal Bank of Canada: Annual Report 2007
Glossary
181
Mark-to-market
Valuation of financial instruments using pre-
vailing market prices or fair value as of the
balance sheet date.
Return on common equity (ROE)
Net income, less preferred share dividends,
expressed as a percentage of average com-
mon equity.
Master netting agreement
An agreement between us and a counterparty
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 sub-
ordinated 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.
Non-bank sponsored asset-backed
commercial paper
A short-term promissory note issued primar-
ily by corporations, which is securitized with
loans or other receivables.
Normal course issuer bid (NCIB)
A program for the repurchase of our own com-
mon shares, for cancellation through a stock
exchange, that is subject to the various rules
of the relevant stock exchange and securities
commission.
Notional amount
The contract amount used as a reference
point to calculate payments for derivatives.
Off-balance sheet financial instruments
A variety of credit-related arrangements
offered to clients, which generally provides
liquidity protection.
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 mis-
sion 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 contrib-
uted 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.
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.
Residential mortgage-backed securities
Securities created through the securitization
of residential mortgage loans.
182
Royal Bank of Canada: Annual Report 2007
Glossary
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,
operational risk, liquidity and funding risk,
reputation risk, regulatory and legal risk,
environmental risk, insurance risk, strategic
risk, competitive risk and systemic risk.
Risk-adjusted assets
As prescribed by the OSFI guidelines and used
in the calculation of risk-based capital ratios.
The face value of on-balance sheet assets is
discounted using specified risk-weighting fac-
tors that reflect the relative risk of the asset.
The risk inherent in off-balance sheet instru-
ments is also recognized, first by determining
a credit equivalent amount, and then by apply-
ing appropriate risk-weighting factors.
Securities lending
Transactions in which the owner of a security
agrees to lend it under the terms of a prear-
ranged contract to a borrower for a fee. The
borrower must collateralize the security loan
at all times. An intermediary such as a bank
often acts as agent for the owner of the secu-
rity. There are two types of securities lending
arrangements: lending with and without
credit or market risk indemnification. In secu-
rities lending without indemnification, the
bank bears no risk of loss. For transactions in
which the bank provides an indemnification,
it bears risk of loss if the borrower defaults
and the value of the collateral declines
concurrently.
Securities sold short
A transaction in which the seller sells securi-
ties and then borrows the securities in order
to deliver them to the purchaser upon settle-
ment. At a later date, the seller buys identical
securities in the market to replace the bor-
rowed 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)
Entities that are typically organized for a sin-
gle discrete purpose, have a limited life and
serve to legally isolate the financial assets
held by the SPE from the selling organization.
SPEs are principally used to securitize finan-
cial and other assets in order to obtain access
to funding, to mitigate credit risk and to man-
age capital.
Structured investment vehicle
Managed investment vehicle that holds
mainly highly rated asset-backed securities
and funds itself using the short-term commer-
cial paper market as well as the medium-term
note (MTN) market.
Subprime loans
Subprime lending is the practice of making
loans to borrowers who do not qualify for the
best market interest rates because of their
deficient credit history. Subprime lending
carries more risk for both lenders and borrow-
ers due to the combination of higher interest
rates, poorer credit histories, and adverse
financial situations usually associated with
subprime applicants.
Survival horizon
Measures the length of time over which we
would have sufficient funds to repay our
maturing liabilities and finance off-balance
sheet commitments if access to wholesale
unsecured funding became suddenly unavail-
able and liquid assets, but no portion of mort-
gages and loans, were monetized.
Synthetic securitization
The transfer of risks relating to selected ele-
ments of our financial assets to unaffiliated
third parties through the use of certain finan-
cial instruments such as credit default swaps
and guarantees.
Taxable equivalent basis (teb)
Income from certain specified tax-advantaged
sources is increased to a level that would
make it comparable to income from taxable
sources. There is an offsetting adjustment
in the tax provision, thereby generating the
same after-tax net income.
Tier 1 capital and Tier 1 capital ratio
Tier 1 capital is considered to be the most
permanent in nature without creating a fixed
charge against income. As defined by the
OSFI, it includes common equity, retained
earnings, non-cumulative preferred shares,
and innovative capital instruments. The Tier 1
capital ratio is calculated by dividing Tier 1
capital by risk-adjusted assets.
Total capital ratio
The percentage of risk-adjusted assets sup-
ported by capital using the guidelines of the
OSFI based on standards issued by the Bank
for International Settlements and Canadian
GAAP financial information.
Trust Capital Securities (TruCS)
Transferable trust units issued by special pur-
pose entities, RBC Capital Trust or RBC Capital
Trust II, for the purpose of raising innovative
Tier 1 capital.
Trust Subordinated Notes (TSNs)
Transferable trust units issued by RBC
Subordinated Notes Trust for the purpose of
raising innovative Tier 2 capital.
U.S. GAAP
U.S. generally accepted accounting principles.
Value-at-Risk (VaR)
A generally accepted risk-measurement con-
cept that uses statistical models based on
historical information to estimate within a
given level of confidence the maximum loss
in market value we would experience in our
trading portfolio from an adverse one-day
movement in market rates and prices.
Variable interest entity (VIE)
An entity which either does not have suf-
ficient equity at risk to finance its activities
without additional subordinated 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.
Princeton Ventures Ltd.
Group executive
The Hon. Paule Gauthier,
P.C., O.C., O.Q., Q.C. (1991)
Quebec, Quebec
Senior Partner
Stein Monast L.L.P.
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
President
Reinhard & Associates
Kathleen P. Taylor (2001)
Toronto, Ontario
President and
Chief Operating Officer
Four Seasons Holdings 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.
Peter Armenio
Group Head
U.S. & International Banking
M. George Lewis
Group Head
Wealth Management
Gordon M. Nixon
President and Chief Executive
Officer
W. James Westlake
Group Head
Canadian Banking
Janice R. Fukakusa
Chief Financial Officer
Martin J. Lippert
Group Head, Global Technology
and Operations
Barbara G. Stymiest
Chief Operating Officer
Charles M. Winograd
Group Head
Capital Markets
Royal Bank of Canada: Annual Report 2007
Directors and executive officers
183
Principal subsidiaries
Principal subsidiaries (1)
Royal Bank Mortgage Corporation (4)
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 Mutual Funds Inc.
Royal Trust Corporation of Canada
The Royal Trust Company
RBC Insurance Holding Inc.
RBC General Insurance Company
RBC Insurance Company of Canada
RBC Life 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
Royal Bank of Canada Trust Company (Cayman) Limited
RBC Alternative Asset Management Inc.
RBC Holdings (USA) Inc. (2)
RBC USA Holdco Corporation (2)
RBC Dain Rauscher Corp. (2)
J.B. Hanauer & Co.
RBC Dain Rauscher Inc.
RBC Capital Markets Corporation
RBC Daniels L.P.
Prism Financial Corporation
RBC Trust Company (Delaware) Limited
RBC Insurance Holdings (USA) Inc.
Liberty Life Insurance Company
RBC Capital Markets Arbitrage SA
Royal Bank of Canada (Asia) Limited
RBC Centura Banks, Inc. (5)
RBC Centura Bank
RBCF L.P.
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
Royal Bank of Canada (Channel Islands) Limited
RBC Treasury Services (C.I.) Limited
RBC Offshore Fund Managers Limited
RBC Fund Services (Jersey) Limited
Royal Bank of Canada Investment Management (Guernsey) Limited
Abacus Investment Services Limited
RBC Regent Fund Managers Limited
RBC Trust Company (International) Limited
Regent Capital Trust Corporation Limited
RBC Trust Company (Jersey) Limited
RBC Trustees (Guernsey) Limited
RBC Regent Tax Consultants
RBC Wealth Planning International Limited
RBC cees Limited
RBC cees International Limited
RBC cees Fund Managers (Jersey) Limited
Royal Bank of Canada Trust Company (Asia) 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)
Carrying value of voting shares
owned by the bank (3)
Montreal, Quebec, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Hong Kong, China
Sydney, Australia
Toronto, Ontario, Canada
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
George Town, Grand Cayman
Wilmington, Delaware, U.S.
New York, New York, U.S.
New York, New York, U.S.
Minneapolis, Minnesota, U.S.
Parsippany, New Jersey, U.S.
Minneapolis, Minnesota, U.S.
New York, New York, U.S.
Denver, Colorado, U.S.
Dover, Delaware, U.S.
Wilmington, Delaware, U.S.
Wilmington, Delaware, U.S.
Greenville, South Carolina, U.S.
Steinsel, Luxembourg
Singapore, Singapore
Rocky Mount, North Carolina, U.S.
Rocky Mount, North Carolina, U.S.
Wilmington, Delaware, U.S.
St. Michael, Barbados
Amsterdam, Netherlands
London, England
London, England
London, England
London, England
London, England
Guernsey, Channel Islands
Guernsey, Channel Islands
Jersey, Channel Islands
Guernsey, Channel Islands
Jersey, Channel Islands
Guernsey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Guernsey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Jersey, Channel Islands
Hong Kong, China
Dublin, Ireland
Geneva, Switzerland
Geneva, Switzerland
Hong Kong, China
St. Michael, Barbados
$
1,002
1,051
2,896
20,659
3,933
205
3
2,319
10
18
(1)
(2)
(3)
(4)
(5)
184
The bank directly or indirectly owns 100% of the voting shares of each subsidiary except Finance Corporation of Bahamas Limited (75%).
Each subsidiary is incorporated or organized 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., and RBCF L.P., which is organized under the laws of the State of Nevada.
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 USA Holdco Corporation owns 4.78% and Prism Financial Corporation owns 5.17% of RBC Centura Banks, Inc.
Royal Bank of Canada: Annual Report 2007
Principal subsidiaries
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)
Earnings per share (EPS) – diluted
2007
2006
2005
2007 vs. 2006
increase (decrease)
$ 22,462
791
12,473
5,492
24.6%
4.19
$
$ 20,637
429
11,495
4,728
23.5%
3.59
$
$ 19,184
455
11,357
3,387
18.0%
2.57
$
$
$
9%
1,825
84%
362
9%
978
16%
764
n.m. 110 bps
17%
.60
Capital
Tier 1 capital ratio
Total capital ratio
Risk-adjusted assets
9.4%
11.5%
$ 247,635
9.6%
11.9%
$ 223,709
9.6%
13.1%
$ 197,004
n.m.
n.m.
$ 23,926
(20)bps
(40)bps
11%
Key drivers
Total loans (before allowance for
loan losses)
Total deposits
Total assets
Assets under management
Assets under administration – RBC
Common share information
Share price (RY on the TSX)
High
Low
Close
Dividends per share
Book value per share
Market capitalization (C$ millions)
n.m. not meaningful
$ 239,429
365,205
600,346
161,500
548,200
$ 209,939
343,523
536,780
143,100
525,800
$ 191,914
306,860
469,521
118,800
417,100
$ 29,490
21,682
63,566
18,400
22,400
14%
6%
12%
13%
4%
$
61.08
49.50
56.04
1.82
17.58
71,522
$
51.49
41.29
49.80
1.44
16.52
63,788
$
43.34
30.45
41.67
1.18
14.89
53,894
$
9.59
8.21
6.24
.38
1.06
7,734
19%
20%
13%
26%
6%
12%
Note: All data in Canadian dollars unless otherwise stated.
(1)
(2)
TSR – Total shareholder return is price appreciation plus dividends reinvested, annualized.
Five-year compound annual growth rate (CAGR).
2007 vs. 2006 5-year CAGR (2)
16%
19%
2007 vs. 2006 5-year CAGR (2)
17%
14%
Shareholder information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario, Canada
M5J 2J5
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
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.)
Computershare Trust
Company, N.A.
350 Indiana Street
Suite 800
Golden, Colorado
U.S.A. 80401
Tel: 1-800-962-4284
Co-Transfer Agent
(United Kingdom)
Computershare Investor
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 divi dend 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 Avenue, 9th Floor
Toronto, Ontario, Canada M5J 2Y1
Tel: (514) 982-7555 or
1-866-586-7635
For other shareholder inquiries,
contact: Shareholder Relations
Royal Bank of Canada
200 Bay Street, 9th Floor
South Tower
Toronto, Ontario
Canada M5J 2J5
Tel: (416) 955-7806
Fax: (416) 974-3535
For financial information
inquiries, contact:
Investor Relations
Royal Bank of Canada
200 Bay Street
14th Floor, South Tower
Toronto, Ontario
Canada M5J 2J5
Tel: (416) 955-7802
Fax: (416) 955-7800 or
visit our website at
rbc.com/investorrelations
dividends.” Unless stated other-
wise, all dividends (and deemed
dividends) paid by us hereafter
are designated as “eligible
dividends” for the purposes of
such rules.
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,
2007, we may repurchase up to
20 million common 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, without charge,
by contacting RBC’s Secretary at
our Toronto mailing address.
2008 Annual Meeting
Our Annual Meeting of Common
Shareholders will be held at
9:00 a.m. (Eastern Standard Time)
on Friday, February 29, 2008, at
the Metro Toronto Convention
Centre, North Building,
255 Front Street West, Toronto,
Ontario, Canada.
2008 Quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
February 29
May 29
August 28
December 5
Direct deposit service
Shareholders in Canada and
the U.S. may have their divi-
dends deposited by electronic
funds transfer. To arrange for
this service, please contact our
Transfer Agent and Registrar,
Computershare Trust Company
of Canada.
Dividend Reinvestment Plan
Our Dividend Reinvest ment Plan
provides our registered common
shareholders residing in Canada
and the United States with the
means to purchase additional
RBC 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, Canada 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
Eligible Dividend Designation
For purposes of the enhanced
dividend tax credit rules contained
in the Income Tax Act (Canada)
and any corresponding provincial
and territorial tax legislation, all
dividends (and deemed dividends)
paid by us to Canadian residents
on our common and preferred
shares after December 31, 2005,
are designated as “eligible
Dividend dates for 2008
Subject to approval by the Board of Directors
Common and preferred
shares series N, W, AA, AB, AC,
AD, AE, AF and AG
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2007
Bibliothèque nationale du Québec
Record dates
Payment dates
January 24
April 24
July 24
October 27
February 22
May 23
August 22
November 24
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 report to shareholders does not form a part of this report. All references in this report to shareholders to
websites are inactive textual references and are for your information only.
EQuAl EMPloyMEnT oPPoRTuniTy: As required by our Code of Conduct, which applies to all RBC companies and applies equally to employees, we are committed to providing equal opportunity in all
dealings with employees, clients, suppliers and others. In the U.S., our subsidiaries are committed to providing Equal Employment Opportunity in compliance with relevant U.S. federal legislation and
regulations (EEO rules) to all employees and applicants for employment. Consistent with this commitment, all employment decisions of our U.S. subsidiaries are based upon skill and performance with-
out regard to race, colour, national origin or ancestry, religion, age, disability, gender, sexual orientation, status as a veteran or any other factors or characteristics protected by law. Our U.S. subsidiaries
are Equal Opportunity Employers and comply with U.S. federal, state and municipal employment laws, including regulations applicable to federal contractors. Disclosure in our 2007 Annual Report to
Shareholders about our U.S. subsidiaries’ Equal Employment Opportunity practices is required pursuant to EEO rules.
Trademarks used in this annual report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, ROYAL BANK, RBC, RBC ROYAL BANK OF CANADA, RBC BLUEPRINT FOR DOING BETTER, RBC
BLUE WATER PROJECT, RBC CAPITAL MARKETS, RBC CAPITAL TRUST, RBC CARLIN, RBC CENTURA, RBC COMMUNITY BLUEPRINT, RBC DAIN RAUSCHER, RBC DANIELS, RBC DOMINION SECURITIES,
RBC ENVIRONMENTAL BLUEPRINT, RBC FOUNDATION, RBC HEDGE 250 INDEX, RBC HOMELINE, RBC INSURANCE, RBC MORTGAGE, RBC NEXT GREAT INNOVATOR CHALLENGE, RBC REWARDS, RBC
SUBORDINATED NOTES TRUST, RBC TSNs and RBC TruCs which are trademarks of Royal Bank of Canada used by Royal Bank of Canada and/or by 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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16.7%15.6%18.0%23.5%24.6%$2.20$2.11$2.57$3.59$4.1920032004200520062007200320042005200620072003200420052006200720032004200520062007$2,968$2,803$3,387$4,728$5,492$120$124$168$207$240Return on equity (ROE)Diluted earnings per share (EPS)Net income Total shareholder return (TSR) (on a $100 investment on November 1, 2002) (1)
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Royal Bank of Canada
2007 Annual Report
Finding
better ways
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 more than 70,000 full- and part-
time employees who serve more than 15 million personal,
business, public sector and institutional clients through
offices in Canada, the U.S. and 36 other countries.
Fold Financial highlights
Better for our clients
2
Better for our shareholders
4
Better for our employees
6
Better for our communities
8
Chief Executive Officer’s
10
message
Performance compared to
objectives
Business discussion
Chairman’s message
Corporate governance
Corporate responsibility
16
21
22
24
15
33 Management’s Discussion
110 Consolidated Financial
and Analysis
Statements
177 Supplementary
information
34 Overview
38
43
51
Accounting and control
matters
Financial performance
Quarterly financial
information
Business segment results
53
Financial condition
71
80
Risk management
102 Additional risks that may
affect future results
104 Additional financial
information
111 Management’s responsibility
for financial reporting
181 Glossary
183 Directors and executive
officers
184 Principal subsidiaries
185 Shareholder information
111 Report of Independent
Registered Chartered
Accountants
112 Management’s report on
internal control over financial
reporting
112 Report of Independent
Registered Chartered
Accountants
113 Consolidated Balance Sheets
114 Consolidated Statements of
Income
115 Consolidated Statements of
Comprehensive Income
115 Consolidated Statements of
Changes in Shareholders’
Equity
116 Consolidated Statements of
Cash Flows
117 Notes to the Consolidated
Financial Statements
This is a carbon neutral publication. Net carbon dioxide equivalent emissions
associated with the production and distribution of this report have been neutralized
through Zerofootprint using ISO 14064-2 reforestation carbon offsets.
Form #81104 (12/2007)
This report 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.
V ision
Values
Strategic goals
• Always earning the right to
be our clients’ first choice
• Excellent service to clients
• To be the undisputed leader
and each other
• Working together to succeed
• Personal responsibility for
high performance
• Diversity for growth and
innovation
• Trust through integrity in
everything we do
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
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 33.