the partnership that
drives our business
a leader in
our category
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Working hard
to help clients
CReAte
my own business
a mining
powerhouse
This is a carbon neutral publication. Net carbon dioxide
equivalent emissions associated with the production and
distribution of this report have been neutralized through
the purchase and retirement of certified emission reductions
(CERs). CERs are subjected to a rigorous validation,
certification, registration and issuance process designed to
ensure real, measurable and verifiable emission reductions
that are recognized under the Kyoto Protocol.
a learning
experience
an education for
our children
All paper used in the production of this report is FSC (Forest
Stewardship Council) certified, acid free and elemental
chlorine free. Fibre used in the manufacture of the paper
comes from well-managed forests independently certified
by SmartWood Program of the Rainforest Alliance, according
to Forest Stewardship Council rules. Paper used for the cover
of the report contains 10% post-consumer waste.
Form #81104 (12/2008)
Royal Bank of Canada
2008 Annual Report
a retirement plan we
can look forward to
a banking experience
right for us
Vision
• Always earning the right to
be our clients’ first choice
Values
• Excellent service to clients
and each other
• Working together to succeed
• Personal responsibility for
high performance
• Diversity for growth and
innovation
• Trust through integrity in
everything we do
Strategic goals
• In Canada, to be the undisputed
leader in financial services
• In the U.S., to be a leading
provider of banking, wealth
management and capital
markets services by building
on and leveraging RBC’s
considerable capabilities
• Internationally, to be a premier
provider of select banking,
wealth management and capital
markets services in markets
of choice
royal BanK oF CanaD a (RY on TSX and NYSE) and its subsidiaries operate under the master brand name RBC. We are Canada’s
largest bank as measured by assets and market capitalization, one of North America’s leading diversified financial services
companies and among the largest banks in the world, as measured by market capitalization. We provide personal and commercial
banking, wealth management services, insurance, corporate and investment banking and transaction processing services on
a global basis. We employ more than 80,000 full- and part-time employees who serve more than 17 million personal, business,
public sector and institutional clients through offices in Canada, the U.S. and 48 other countries. For more information, please
visit rbc.com.
Contents
1 Financial highlights
4 Chief Executive Officer’s
message
9 Performance review
10 Business discussion
16 Chairman’s message
17 Corporate governance
19 Corporate responsibility
28 Management’s Discussion
and Analysis
29 Overview
35 Accounting and control matters
39 Financial performance
51 Quarterly financial information
53 Business segment results
75 Financial condition
83 Risk, capital and liquidity
management
112 Overview of other risks
116 Additional factors that may
affect future results
119 Additional financial
information
125 Consolidated Financial
Statements
126 Management’s responsibility
for financial reporting
126 Report of Independent
Registered Chartered
Accountants
127 Management’s Report on
Internal Control over Financial
Reporting
127 Report of Independent
Registered Chartered
Accountants
128 Consolidated Balance Sheets
129 Consolidated Statements
of Income
130 Consolidated Statements of
Comprehensive Income and
Changes in Shareholders’
Equity
131 Consolidated Statements of
Cash Flows
132 Notes to the Consolidated
Financial Statements
201 Supplementary information
205 Glossary
207 Directors and executive
officers
208 Principal subsidiaries
209 Shareholder information
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 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 29.
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: 1-866-586-7635
(Canada and the United States) or
(514) 982-7555 (International)
Fax: (514) 982-7580
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 contacts
For dividend information, change
in share registration or address,
lost stock certificates, tax forms,
estate transfers or dividend
reinvestment, please contact:
Computershare Trust Company
of Canada
100 University Avenue, 9th Floor
Toronto, Ontario, Canada M5J 2Y1
Tel: 1-866-586-7635
(Canada and the United States) or
(514) 982-7555 (International)
Fax: 1-888-453-0330
(Canada and the United States) or
(416) 263-9394 (International)
e-mail:
service@computershare.com
For other shareholder inquiries,
please 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, please 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
Direct deposit service
Shareholders in Canada and the
United States may have their
RBC common share dividends
deposited directly to their bank
account by electronic funds trans-
fer. To arrange for this service,
please contact our Transfer Agent
and Registrar, Computershare
Trust Company of Canada.
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
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 (NCIB) through
the facilities of the Toronto Stock
Exchange. During the one-year
period commencing November 1,
2008, 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 under the
NCIB, subject to prior consultation
with OSFI.
A copy of our Notice of Intention
to file a NCIB may be obtained,
without charge, by contacting our
Secretary at our Toronto mailing
address.
2009 Annual Meeting
The Annual Meeting of
Shareholders will be held on
Thursday, February 26, 2009 at
9:00 a.m. (Pacific Standard Time)
at the Vancouver Convention
& Exhibition Centre, Parkview
Terrace, 999 Canada Place,
Vancouver, British Columbia,
Canada.
2009 Quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
February 26
May 29
August 27
December 4
Dividend dates for 2009
Subject to approval by the Board of Directors
Common and preferred
shares series W, AA, AB, AC,
AD, AE, AF, AG, AH, AJ and AL
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2008
Bibliothèque nationale du Québec
Record dates
Payment dates
January 26
April 23
July 27
October 26
February 24
May 22
August 24
November 24
Printed in Canada
This annual report is printed on acid-free
paper and the entire book is recyclable.
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 without 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
2008 Annual Report to Shareholders about our U.S. subsidiaries’ Equal Employment Opportunity practices is required pursuant to EEO rules.
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.
d
n
a
r
b
r
e
t
n
I
Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC BANK, RBC BLUEPRINT FOR DOING BETTER, RBC BLUE WATER PROJECT, RBC CAPITAL
TRUST, RBC COMMUNITY BLUEPRINT, RBC DIRECT INVESTING, RBC ENVIRONMENTAL BLUEPRINT, RBC INSURANCE, RBC SUBORDINATED NOTES TRUST, RBC TSNs, RBC TruCS and RBC WEALTH
MANAGEMENT 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.
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
Capital (1)
Tier 1 capital ratio
Total capital ratio
Risk-adjusted assets
2008
2007
2006
2008 vs. 2007
Increase (decrease)
$ 21,582
1,595
12,351
4,555
18.0%
3.38
$
$ 22,462
791
12,473
5,492
24.6%
4.19
$
$ 20,637
429
11,495
4,728
23.5%
3.59
$
$
$
(880)
804
(122)
(937)
n.m.
(.81)
(4)%
102%
(1)%
(17)%
(660)bps
(19)%
9.0%
11.1%
$ 278,579
9.4%
11.5%
$ 247,635
9.6%
11.9%
$ 223,709
n.m.
n.m.
$ 30,944
(40)bps
(40)bps
12%
Key drivers
Total loans (before allowance for
loan losses)
Deposits
Total assets
Assets under management (AUM)
Assets under administration (AUA) – RBC (2)
$ 291,755
438,575
723,859
226,900
623,300
$ 239,429
365,205
600,346
161,500
615,100
$ 209,939
343,523
536,780
143,100
582,300
$ 52,326
73,370
123,513
65,400
8,200
22%
20%
21%
40%
1%
Common share information
Share price (RY on the TSX)
High
Low
Close
Dividends declared per share
Book value per share
Market capitalization (C$ millions)
$
55.84
39.05
46.84
2.00
20.99
62,825
$
61.08
49.50
56.04
1.82
17.58
71,522
$
51.49
41.29
49.80
1.44
16.52
63,788
$
(5.24)
(10.45)
(9.20)
.18
3.41
(8,697)
(9)%
(21)%
(16)%
10%
19%
(12)%
(1)
2008 capital ratios and risk-adjusted assets are calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) under the new Basel II
framework. Comparative capital ratios and risk-adjusted assets are calculated using guidelines issued by OSFI under the Basel I framework. Basel I and Basel II are not directly
comparable.
Assets under administration – RBC: Revised to include mutual funds sold through our Canadian branch network. Comparative amounts have been revised to reflect this change.
(2)
n.m. not meaningful
Net income
EPS – diluted
ROE
2
9
4
5
$
,
8
2
7
4
$
,
5
5
5
4
$
,
7
8
3
3
$
,
3
0
8
2
$
,
.
9
1
4
$
.
9
5
3
$
.
8
3
3
$
.
7
5
2
$
.
1
1
2
$
%
6
4
2
.
%
5
3
2
.
%
0
8
1
.
%
6
5
1
.
%
0
8
1
.
2004 2005 2006 2007 2008
2004 2005 2006 2007 2008
2004 2005 2006 2007 2008
Financial highlights
Royal Bank of Canada: Annual Report 2008
1
Return on equity
(ROE)
%
6
.
4
2
%
6
.
4
2
%
5
.
3
2
%
0
.
8
1
%
6
.
5
1
2004 2005 2006 2007 2008
Total shareholder returns (TSR)
(on a $100 investment on Nov. 1, 2001)
0
4
2
$
0
4
2
$
7
0
2
$
8
6
1
$
4
2
1
$
2004 2005 2006 2007 2008
a visionary leader
in biotech
our dream vacation
my future, the way
I design it
an improved
water system
the next generation
of mobile commerce
a software revolution
a detailed plan to
act upon
new ways to power
the planet
an oil and gas pioneer
my first new car
a global opportunity
an addition to
our family home
Working hard to
help clients create
“If we have learned one thing from the events
of the past year, it is that in difficult times clients
most need and value honest and expert advice
from professionals who can deliver solutions.
At RBC, we are working hard to help clients
create confidence in their future.”
– Gordon M. Nixon
CHIEF EXECUTIVE OFFICER’s MEssAGE
Uncertain times bring into sharp relief the importance
of fundamentals. This year, as market and economic
conditions were at their most challenging, RBC emerged, not
unscathed, but strong and stable largely due to our commit-
ment to the essential elements of sound management: business
diversification, comprehensive risk management, a clear
strategy, and a strong balance sheet.
If we have learned one thing from the events of the past year,
it is that in difficult times clients need and value honest and
expert advice from professionals who can deliver solutions.
At RBC, we are working hard to put our clients first by giving
them advice, products and services that help them create
confidence in their future. We have encouraged a more
collaborative and accountable culture where employees are
empowered to create a superior client experience. This culture
is reflected in our client-centric vision, in the work of more
than 80,000 professionals leveraging their experience and
expertise, and in RBC’s depth and breadth of resources for the
benefit of all our clients.
The current financial crisis has shown its ability to substan-
tially alter the environment for many individuals, companies,
financial institutions, and our shareholders. While we have not
been able to escape the year without some losses, in 2008,
RBC generated more than $4.5 billion of earnings and a return
on equity of 18.0%. These results prove that, as the rules for
our sector and our domestic and global economies are being
rewritten, RBC’s strategy of actively managing a diversified
portfolio of businesses and excelling at the execution of our
revenue and cost-efficiency initiatives has enabled us to
withstand the past year’s market shocks and pressures and
continue to generate value for our clients and shareholders.
RBC’s diversified business portfolio remains the foundation of
both our stability and our success, particularly through trying
times. While several of our businesses have been significantly
impacted by current economic events, the diversification of
our portfolio of businesses across industries, geographies
and client segments has reduced the overall volatility of our
4
Royal Bank of Canada: Annual Report 2008
Chief Executive Officer’s message
revenues and earnings. This provides us with the flexibility
and stability necessary to make investments in pursuit of our
long-term strategy and goals. Given the overall strength of our
portfolio of businesses, we find ourselves in a position to take
advantage of opportunities that many of our competitors can
no longer consider.
Our ongoing commitment to strong risk and performance
management has allowed us to stay on course better than
many of our domestic and international competitors. We diver-
sify our risk in numerous ways while continuing to prudently
use our balance sheet to produce high-quality earnings. We
recognize that maintaining and continually enhancing our risk
management capabilities will be critical as we navigate the
challenging territory ahead of us. In addition, the strength of
our asset quality and our liquidity position should provide a
solid base for future growth.
In summary, our continued strong earnings performance
relative to peers and top quartile performance of our share
price over the medium- and long-term periods of three, five
and 10 years reflect our sound risk management approach,
our franchise’s strong financial foundation, the benefits of our
diversified business model and, most importantly, the hard
work of our dedicated employees.
2008 Strategic goals
Throughout this year, our people and businesses have been
committed to pursuing our three long-term strategic goals:
• In Canada, to be the undisputed leader in financial services
• In the U.S., to be a leading provider of banking, wealth
management and capital markets services, building on and
leveraging RBC’s considerable capabilities
• Internationally, to be a premier provider of select banking,
wealth management and capital markets services in markets
of choice.
In Canada, our retail banking, wealth management, insurance
and capital markets businesses made significant strides
Gordon M. Nixon
President and Chief Executive Officer
Janice R. Fukakusa
Chief Financial Officer
during the year, enhancing our market leadership positions
while making it easier for clients to do business with us.
In the fiercely competitive Canadian banking marketplace, we
must continue to earn our clients’ business by ensuring our
advice and services are accessible and available across a variety
of channels. We have made it more convenient for clients to do
business with us by growing our mobile and specialized sales
forces, adding new bank branches and automated teller
machines (ATMs), and increasing the number of bank branches
that are open extended hours, including Saturdays, particularly
in high-growth areas. Our clients can now do business with our
contact centre agents in over 150 languages, and our small
business and commercial business clients in all major interna-
tional trading regions can now fulfill all their business needs
through a single relationship. Furthermore, we have deepened
client relationships and rewarded clients for their loyalty
through innovative offerings. These and many other efforts
have not gone unnoticed, with many notable third parties
recognizing us for our client services capabilities including
Synovate, Euromoney, and Maritz Canada Inc.
As the largest Canadian provider of wealth management
services, we continued to offer our clients a full range of
investment advice and planning services, supported by a team
of experts in financial and retirement planning, tax, law, and
trusts and estates. Our clients have access to an extensive
family of equity and fixed income investment products from
our asset management division, which broadened its capabilities
by acquiring Phillips, Hager & North Investment Management
Ltd. (PH&N) on May 1, 2008. The acquisition makes us the
largest mutual fund company in Canada with a 16% market
share and the largest private asset manager. The strength of
this business is further reflected by $8.8 billion in total mutual
fund net sales in fiscal 2008.
RBC is the only bank in Canada to offer a suite of insurance
solutions for both personal and business clients, and we are
the Canadian market leader in creditor and travel insurance
and the second largest provider of living benefits products.
Our product and distribution capabilities are also unique.
RBC Insurance offers a broad range of life and health, and
property and casualty products through proprietary channels
(adjacent insurance branches and career sales forces) as well
as through a variety of third-party channels (travel agents and
life insurance brokers), allowing our clients the opportunity to
create peace of mind by addressing all of their insurance needs.
As a leader in most aspects of the Canadian wholesale
marketplace, we are the country’s largest investment
bank, and number one or two in many domestic rankings,
including domestic debt capital markets and equity research.
Importantly, a strong balance sheet and a respected brand
name have enabled us to successfully export key competitive
strengths into new markets.
Outside Canada, we have devoted significant management
and financial resources to building our capabilities, our client
base, and our brand.
Since 2001, we have thoughtfully grown our banking business
in the southeastern U.S. market. Through measured organic
growth and expansion through strategic acquisitions, we have
created a network of nearly 440 branches in North Carolina,
South Carolina, Virginia, Georgia, Alabama, and Florida.
Our U.S. banking business has been significantly affected
by the ongoing stress in the U.S. housing market and the
weakening U.S. economy. We have taken steps to address
these issues, consistent with our commitment to prudent
risk management practices. We exited our residential builder
finance business outside our footprint and are actively
managing the assets in that portfolio to reduce the impact of
impaired loans over the long term. While we are aggressively
monitoring and managing our retail and commercial loan port-
folios, we are selectively growing our asset base by acquiring
high-quality personal and business clients who are attracted
to the quality of the RBC franchise. In addition, we are focused
on leveraging the well-developed business and commercial
Chief Executive Officer’s message
Royal Bank of Canada: Annual Report 2008
5
David I. McKay
Group Head, Canadian Banking
W. James Westlake
Group Head, International Banking
and Insurance
strategy in our U.S. banking business to develop an equally
robust retail strategy to provide clients with an integrated
experience and a full product suite to serve their business and
retail needs.
We are keenly aware that improving our U.S. bank’s earnings will
be a long-term process, as we need to work through the residual
weakness in the U.S. economy. We have done a great deal of
work to create momentum for the next few years and, while
there is no doubt that we face structural, credit and economic
headwinds in the U.S. banking environment, we believe that we
will be well-positioned when the environment improves.
Over the past year, we extended the reach of our wealth
management services in the U.S. Our acquisition of Ferris,
Baker Watts, Incorporated (FBW), significantly expanded our
presence in key regions and added more than 300 financial
consultants to our business. In addition, over the past year,
we have attracted experienced financial consultants from our
competitors to our U.S. wealth management business, a testa-
ment to both the quality of our business and to our growing
reputation in the U.S. RBC now has more than 2,000 financial
consultants serving clients in 41 states from 204 retail offices,
making us the seventh-largest national investment advisory
firm in the U.S. We also completed the conversion of our U.S.
wealth management business to a single broker-dealer plat-
form, along with our capital markets operations. As a result,
our clients will have increased access to the global capabilities
of RBC as well as to the broad product development capabili-
ties of our capital markets business.
While economic events over the past year had a negative
impact on some of our capital markets businesses in the U.S.,
many others were able to capitalize on opportunities created
by the market environment, adding talent and resources that
were drawn to the strength and stability of the RBC brand
name. And while many of our competitors have been forced to
downsize or significantly change their fundamental business
models, the soundness of our U.S. capital markets business
has enabled us to aggressively reposition and redirect
resources to take advantage of a broad range of opportunities
that the evolving market has created. For example, busi-
nesses hurt by the market’s recent instability, such as our
structured products and securitization businesses, have been
rationalized, while those that had new opportunities created
by the turmoil, such as investment banking, fixed income and
securities, have significantly upgraded their capabilities by
recruiting experienced talent from competitor organizations.
We have not, however, changed our fundamental risk
appetite or profile. Consistent with our emphasis on prudent
risk management and maintaining our strong balance sheet,
our capital markets business is focused on deploying capital
in a manner that enhances and expands key client relation-
ships, particularly at a time when we know clients are placing a
premium on strong and stable banking relationships.
Closing our acquisition of RBTT Financial Group (RBTT) was
the most significant development outside North America in
2008. Combined with our existing Caribbean banking busi-
ness, the acquisition made RBC the second-largest banking
group in the English-speaking Caribbean, with approximately
7,000 employees serving clients in 17 countries through
127 branches and business centres. The RBTT footprint was
an excellent complement to our business and has provided us
with immediately strong market positions in two new markets –
Trinidad and Tobago, one of the strongest economies in the
Caribbean, and Jamaica.
Our wealth management operations continued to expand
outside North America by opening a new office in Chile and,
with our capital markets operations, in India. Overall, the
business continues to grow by recruiting experienced private
banking professionals, aided by our reputation within the
industry as a premier provider of wealth management services
to clients around the world.
Our joint venture, RBC Dexia Investor Services (RBC Dexia IS),
differentiates itself as a provider of international trust services
6
Royal Bank of Canada: Annual Report 2008
Chief Executive Officer’s message
M. George Lewis
Group Head, Wealth Management
Barbara G. stymiest
Chief Operating Officer
by providing superior customer service and global reach. In
2008, we were named number one overall global custodian by
Global Investor for the fifth consecutive year. However, the
real proof of success is that in current conditions, RBC Dexia IS
has attracted new clients and gained more business from
existing customers.
As Canada’s only global investment bank, we continued to
grow, generating approximately 50% of our revenue outside
Canada as we executed a deliberate and disciplined inter-
national growth strategy. During the past year, we added a
leveraged finance team in London to support our European
investment banking business, and we expanded the U.K.-
based infrastructure financing business into Continental
Europe and Australia as well as the U.S. Finally, we continued
to extend our global capabilities related to the energy and
mining sectors, becoming a preferred provider of services in a
very dynamic market.
2008 Performance against objectives
We established our 2008 objectives in November 2007 based
on our economic and business outlooks for 2008 at that time.
While we acknowledged that early 2008 would be challenging,
with continued market volatility and slower economic growth,
we did not anticipate these conditions to persist for the dura-
tion of the year nor for the impact to be as significant. During
the year, we acknowledged that our progress towards certain
objectives was impeded largely by market volatility and uncer-
tainty – reflected in writedowns, higher provisions for credit
losses in our U.S. banking business, and declining interest
margins. As a result, except for our Tier 1 capital ratio, we did
not meet the annual objectives we set at the beginning of this
fiscal year. Our capital position remained strong throughout
2008 with our Tier 1 capital ratio above our target.
During the turbulent environment of the past year, the
importance of our sound business approach and the benefits
of our diversified business model helped sustain our share
performance relative to our peers. We delivered top quartile
share performance of 8% and 12% in the medium-term
periods of three and five years, respectively, while increasing
dividends paid over the three-year period at an average annual
compounded rate of 19%.
How we will measure ourselves in the future
We expect our operating environment in 2009 will continue
to pose challenges that will demand our continued diligence
in the management and allocation of our resources. Volatile
financial market conditions will continue into 2009 as credit
and liquidity concerns persist and global economies slow
down. We believe that recent government measures such
as interest rate cuts, financial market rescue packages and
enhanced intra-bank lending guarantees will eventually work
to improve market stability.
The Canadian economy likely slipped into a recession in the
final quarter of 2008 and we forecast it will grow by only .3%
in 2009 due to weaker domestic demand. While consumer
spending is expected to slow, reflecting modest weakening
in the labour and housing markets, the economic slowdown
is expected to result in calmer inflationary pressures and
more stable commodity prices. Meanwhile, we project the
U.S. economy will have negative growth of 1% in 2009. We
anticipate that deteriorating economic conditions and financial
market volatility will continue to dampen both consumer and
business spending and will likely cause the U.S. recession
to deepen as negative economic growth persists over the
remainder of 2008 and in early 2009. Growth in other global
economies, particularly those in the Eurozone, will likely
weaken further in 2009, as overseas economies continue to
contract due to weaker domestic demand, financial market
volatility and reduced demand for exports from major trading
partners. Emerging economies, led by China, are expected
to grow at a very moderate pace in 2009 given uncertainty in
global financial markets and recessionary conditions in some
industrialized countries.
Chief Executive Officer’s message
Royal Bank of Canada: Annual Report 2008
7
A. Douglas McGregor
Chairman and Co-CEO, Capital Markets
Mark A. standish
President and Co-CEO, Capital Markets
We anticipate that the medium term will see more cyclical and
structural changes for the financial services industry, including
higher funding costs, higher capital levels, the impact of the
deleveraging of balance sheets and a move to above-average
loan-loss levels from recent historic lows.
cautious and conservative about conditions over the near
term, we are proud of our consistent financial strength, sound
risk management policies and diversified business mix that
have enabled us to provide confidence to our millions of clients
and shareholders.
Because market and economic conditions introduce a high
degree of uncertainty into the short-term planning horizon,
we have created a set of medium-term performance objec-
tives (shown on page 9) that we think better reflect realistic
goals against the backdrop of near-term market turbulence. By
concentrating on these medium-term objectives, our manage-
ment team will focus on both current performance as well as
on prudent investment in higher-return businesses that will
provide us with competitive advantages and sustained and
stable earnings growth for the future.
Our medium-term objective is to generate earnings per share
growth of 7% or more. Our focus on cost management relative
to revenue growth is underlined by a medium-term operating
leverage objective of above 3% while striving for a return on
equity target of 18% or more. We will keep a keen eye on our
capital base, with our objective of maintaining a Tier 1 capital
ratio of 8.5% or higher, well ahead of regulatory requirements
and above our 2008 objective of 8%. Finally, our objective is
to maintain a dividend payout ratio over the medium term of
between 40% and 50%, the same as in 2008.
Helping our clients create a more confident future
During troubled times, strong, diversified and well-managed
companies like RBC have an advantage over many others.
Our momentum has been positive, but more importantly, we
have been able to deliver solid earnings in a very difficult
environment. We are encouraged by having our home market
heralded by the World Economic Forum as the base of the
soundest banking system world wide. And while we are
Outside Canada, we’re working through the challenges and
finding ways to invest capital, to hire top talent, to make
acquisitions, and to continue to build on the strategies that
we have pursued over the past several years. Across RBC, we
have renewed our attention to cost management because we
understand that our ability to control costs is critical to giving
us the flexibility to overcome current challenges and support
our future growth.
2008 was a difficult year, but I’m pleased to say our employees
rose to its challenges. I am proud of all our professionals
and our management team who have demonstrated they are
unshaken by the uncertain conditions we have encountered
and are undeterred by those that might lie ahead. More than
ever, we understand that our clients need and value sound
advice, and we will redouble our efforts to reach out to them to
help them create a more confident future.
I sincerely want to thank all of our clients for their continued
trust. And I want to thank our more than 80,000 professionals,
whose hard work, integrity and dedication are responsible for
our ongoing results.
Gordon M. Nixon
President and Chief Executive Officer
8
Royal Bank of Canada: Annual Report 2008
Chief Executive Officer’s message
2008
Performance
review
The table below shows our 2008 performance compared to our objectives for the year.
Diluted EPS growth
Defined operating leverage (1)
ROE
Tier 1 capital ratio (2)
Dividend payout ratio
2008 Objectives
2008 Performance
7% –10%
>3%
20%+
8%+
40%–50%
(19)%
1.0%
18.0%
9.0%
59.0%
3-year TSR
5-year TSR
Total shareholder return (TSR) (3)
Top quartile
Top quartile
Top quartile
(1)
(2)
(3)
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). For further information, 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) under the new Basel II framework.
Calculated for period ended October 31, 2008, based on share price appreciation plus reinvested dividend income versus the TSR of seven Canadian financial
institutions (Manulife Financial Corporation, Bank of Nova Scotia, The 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, Key Corp and Northern Trust Corporation).
The table below shows our medium-term objectives.
Diluted EPS growth
Defined operating leverage (1)
ROE
Tier 1 capital ratio (2)
Dividend payout ratio
(1)
(2)
See note (1) above.
See note (2) above.
Objectives
7%+
>3%
18%+
8.5%+
40%–50%
Canadian
Banking
(C$ millions, except
percentage amounts)
Total revenue
Net income
Average loans and acceptances (1)
Average deposits
Operating leverage
2008
2007
2006
$
9,586 $
2,662
225,000
155,000
9,329 $
2,545
199,200
8,348 $
2,124
179,000
147,100 139,200
4.4%
6.5%
2.6%
2008 vs. 2007
Increase (decrease)
257
117
25,800
7,900
n.m.
3%
5%
13%
5%
(390)bp
(1)
Total assets, Total earning assets, and Loans and acceptances include average securitized residential mortgage and
credit card loans for the year of $22 billion and $4 billion, respectively.
C A N A D I A N B A N K IN G provides personal and business financial services
in Canada. Through our leading national distribution network and the most
valuable brand in Canada, we reach approximately 10 million clients through our
extensive branch and ATM network, proprietary and specialized sales forces,
online channels and contact centres.
2008 Revenue contribution
Personal Financial Services
Business Financial Services
Cards and Payment Solutions
55%
26%
19%
2008 Key performance highlights
• Net income was up $117 million, or 5%, over last year, reflecting
revenue growth and effective cost management efforts. Prior
year results included a $326 million ($269 million after-tax)
gain related to the Visa Inc. restructuring, partially offset by an
increase to our credit card customer loyalty reward program
liability of $121 million ($79 million after-tax).
• Total revenue increased $257 million, or 3%, over the prior year,
reflecting continued solid volume growth across all businesses,
partially offset by margin compression. The growth was achieved
well within our risk-reward parameters. The prior year included
the gain related to the Visa Inc. restructuring and the points
liability cost as noted above.
• Our loan book increased by 13% as a result of strong growth in the
home equity business and the launch of new credit card offerings.
• We grew our deposit base by 5% through the introduction of
new personal and business products that included U.S. dollar
eSavings accounts and two new high-yield investment solutions
for business clients.
Business achievements in 2008
• We expanded our reach to clients by growing our mobile and
specialized sales forces, adding new bank branches and ATMs and
increasing the number of bank branches that are open extended
hours, including Saturdays, particularly in high-growth markets.
• Clients have greater access to more customized and enhanced
financial planning and advice tools with Your Future by Design®,
a unique approach to client advice. We also continued to develop
and provide clients with interactive online planning resources,
such as Credit Solutions Selector, Mortgage Calculator, Business
Solutions Selector, and Cash Flow tools.
• With the launch of our Language Line interpreter service, our
clients can now do business with our contact centre agents in
over 150 languages.
• With the acquisition of ABN AMRO N.V.’s Canadian commercial
leasing division, we extended our leadership position as the
largest bank-owned commercial leasing business in Canada, as
measured by assets.
• We made it easier for our business clients when we launched the
Global Banking for Business program to provide a single point
of contact for small and commercial business clients in all major
international trading regions.
• We continued to be recognized for our efforts to improve our
client service. In 2008 we were named:
– A leader among the Big Five Banks in Branch Service and
Financial Advice (Synovate Best Banking Awards: The Synovate
Customer Service Index (CSI) 2008 – Personal Banking)
– The number one domestic Private Bank in Canada
(Euromoney 2008 Private Banking Survey)
– Best in overall service: RBC Direct Investing (Dalbar 2007
Direct Brokerage Service Award)
– The number one bank chosen by most commercial clients*
in Canada, with almost three in 10 Canadian commercial
businesses dealing with RBC, and strong year over year gains
in client loyalty (Maritz Industry Survey, 2008)
*
Businesses with sales revenue of $1 million or above.
2009 and beyond
• We will focus on continuing to make it easier for clients to do
business with RBC through great products, services, improved
processes and increased accessibility.
• We have deepened client relationships and rewarded clients
• We will continue to focus on delivering a superior client
for their loyalty with further developments to our multi-product
rebates and new, innovative products including a line-up of
Canadian and U.S. dollar high-interest savings accounts; the new
Visa Infinite card, providing exclusive benefits and privileges to
cardholders; security-enhanced, chip-enabled credit cards;
and eStatements and preferred commission pricing for our Direct
Investing clients.
experience.
• We will strive to deliver insightful, relevant financial advice and
solutions to retain and attract clients to RBC in specific markets,
geographies and life stages.
• We will focus on aligning our infrastructure, products and
services, sales and retail capabilities to drive future growth,
efficiencies and client value.
10
Royal Bank of Canada: Annual Report 2008
Canadian Banking
(C$ millions, except
percentage amounts)
Total revenue
Net income
Assets under administration
Assets under management
2008
2007
2006
$
3,987 $
665
495,100
222,600
3,992 $
762
488,500
161,200
3,487 $
604
476,500
142,800
2008 vs. 2007
Increase (decrease)
(5)
(97)
6,600
61,400
0%
(13)%
1%
38%
Wealth
Management
W E A LT H M A N AG E M EN T businesses serve affluent and high net worth clients
around the world and provide asset management and estate and trust services
directly to clients and through internal partners and third-party distributors. This
segment comprises Canadian Wealth Management, U.s. & International Wealth
Management and Global Asset Management. We are a market leader in Canadian
wealth and asset management, and we have strong and growing businesses
in the U.s. and internationally. With more than 4,000 financial consultants,
advisors, private bankers and trust officers in 24 countries, we help clients grow,
protect and transfer their wealth.
2008 Revenue contribution
Canadian Wealth Management
U.S. & International
Wealth Management
Global Asset Management
37%
47%
16%
2008 Key performance highlights
• Net income decreased $97 million, or 13%, from last year
primarily due to lower transaction activity amid continued
uncertainty in global financial markets and the combined impact
of the items related to the Reserve Primary Fund and auction
rate securities (described in the Wealth Management section of
the MD&A).
• Total revenue was relatively flat to last year. Lower transaction
volumes, a decline in the fair value of certain securities held to
economically hedge our stock-based compensation plan, and the
unfavourable impact of the stronger Canadian dollar were mostly
offset by recent acquisitions and solid growth in fee-based client
assets for most of the year.
• Assets under management increased $61 billion, or 38%, from
last year, reflecting the acquisition of PH&N and strong net
mutual fund sales for most of the year.
• Assets under administration increased $7 billion, or 1%, from
last year, reflecting the favourable impact of the stronger U.S.
dollar on the translation of our U.S. dollar-denominated assets
under administration, as at October 31, 2008. Assets under
administration also increased, reflecting the acquisition of FBW,
partially offset by lower client assets due to uncertainty in global
financial markets.
Business achievements in 2008
• RBC’s strength and stability, combined with the attractiveness
of our Wealth Management platform and the acquisitions made
by our businesses, have enabled us to grow to more than 4,000
client-facing advisors.
• In acquiring PH&N, we established ourselves as the leading
provider of retail, high net worth, and institutional asset
management services, and became one of the top pension plan
managers in Canada, as measured by assets under management.
• We are now the largest fund company in Canada with 16%
market share, leading the industry with $8.8 billion in total
mutual fund net sales in fiscal 2008.
• Adding the PH&N private client team to our existing capability
also made us one of the largest private investment counselling
firms in Canada, with market strengths coast to coast.
• We continued to offer our clients a full range of investment
advice and planning services, supported by a team of experts
in financial and retirement planning, tax, law, and trusts and
estates. Access to this specialized wealth management services
team in Canada is one reason our investment advisors gave us
top marks in a satisfaction survey of bank-owned, regional and
national independent investment dealers (Investment Executive
2008 Brokerage Report Card).
• U.S. clients gained access to the global capabilities of RBC when
we converted to a single U.S. broker-dealer platform with Capital
Markets. Acquiring FBW significantly expanded our presence in
key U.S. regions and added more than 300 financial consultants.
We now operate 204 retail branches in 41 states.
• We opened a new office with Capital Markets in Mumbai, India,
while our new office in Santiago, Chile, broadened our presence
in Latin America.
• We were named the top provider of trust services in the U.K., and
the highest-ranked Canadian firm in Latin America (Euromoney).
• Our asset management business continued to deliver strong
investment performance, while keeping management expense
ratios below the median and offering pricing options that provide
clients with transparency and choice in seeking advice.
• We were named Best Overall Fund Group in Canada and, as a
result of the PH&N acquisition, Best Bond Fund Family in Canada,
both for the second consecutive year (Lipper Inc.).
2009 and beyond
• We will continue working to extend our lead in the Canadian
wealth and asset management markets, with client-focused
products, services and strategies.
• We plan to improve operating performance and to expand
U.S. Wealth Management through organic growth and bolt-on
acquisitions.
• We plan to expand our high net worth International Wealth
Management business through organic growth and bolt-on
acquisitions.
• We plan to expand asset management globally by leveraging
our capabilities in the institutional market and in the individual
market through sub-advisory and alliance opportunities.
• We will work hard to continue attracting and retaining
experienced advisors, private bankers and other professionals
across all our businesses.
Wealth Management
Royal Bank of Canada: Annual Report 2008
11
Insurance
(C$ millions, except
percentage amounts)
Total revenue
Net income
Premiums and deposits (1)
2008
2007
2006
2008 vs. 2007
Increase (decrease)
$
2,610 $
389
3,861
3,192 $
442
3,460
3,348 $
302
3,406
(582)
(53)
401
(18)%
(12)%
12%
(1)
Premiums and deposits include premiums on risk-based insurance and annuity products, and deposits on individual
and group segregated fund deposits, consistent with insurance industry practices.
We provide Canadians with improved access to IN sU R A N C E choices through a
wide range of insurance solutions including life, health, travel, home, auto, and
creditor insurance services to individual and business clients. These products
are distributed through third-party channels including independent life
insurance advisors and travel agents as well as through our growing proprietary
channels such as retail insurance branches, bank branches, call centres,
online, and our career sales force. In the U.s., we offer life insurance, annuity
products and travel insurance. Outside North America, we operate a specialty
reinsurance business.
2008 Revenue contribution
Reinsurance & Other
Canadian Life and Health
Property & Casualty
U.S. Life and Health
41%
30%
24%
5%
2008 Key performance highlights
• Net income was down 12%, or $53 million, over last year, mainly
due to $110 million ($80 million after taxes) of investment losses
on disposals and impairments, as well as impacts from equity
market movements. This was partially offset by favourable
actuarial adjustments and solid growth in our reinsurance and
Canadian businesses. Our prior year included a $40 million
(before- and after-tax) gain related to the reallocation of certain
foreign investment capital which had supported our property
catastrophe reinsurance business, exited in 2007. This decline
was partially offset by higher net actuarial adjustments reflecting
management actions and assumption changes and solid growth
in our reinsurance and Canadian businesses.
• Revenue decreased 18%, or $582 million, over last year mainly
due to the change in fair value of investments backing our life
and health policyholder liabilities, largely offset in policyholder
benefits, claims and acquisition expense. The decrease, which
also reflects lower U.S. annuity sales as well as investment
losses on disposals and impairments, as well as impacts from
equity market movements was partially offset by growth in our
reinsurance and Canadian businesses.
• Premiums and deposits grew $401 million, or 12%, from a
year ago, largely reflecting new sales growth, a U.K. annuity
reinsurance arrangement and continued strong client retention.
Business achievements in 2008
• We expanded our retail insurance network in Canada to
35 branches in 2008, from 21 branches in 2007, giving our
clients more convenient access to insurance services and advice.
Advisor’s Edge, a trade publication, recognized the impact of
our retail insurance presence, naming the development of our
insurance branch network as one of the most significant events
in financial services over the last 10 years.
• We expanded our insurance offering in a number of ways to
support large and small Canadian businesses, including reaching
an agreement with Aon Reed Stenhouse Inc. (Aon) to provide
commercial property and casualty and trade credit insurance
solutions to business owners. This agreement with Aon, combined
with our existing products and services, will enable us to provide
large and small Canadian businesses with innovative advice and
effective solutions tailored to meet their insurance needs.
12
Royal Bank of Canada: Annual Report 2008
Insurance
• We continued to make it easier for Canadian clients to do
business with us by offering a simplified life insurance product
for the mass market and improving our online travel insurance
offerings.
• RBC was recognized for our Wireless Road Advisor project at
the 21st annual CIO 100 Awards program as an innovative
organization that uses IT to create business value. This system
enables mobile claims adjusters to use their laptops to access
claims information over a wireless network to help clients with
the claims process.
• We were the first Canadian-owned travel insurance provider
to sign on with InRoomMD, a healthcare concierge program
providing in-room hotel visits 24 hours a day, seven days a week,
whenever possible, saving travellers the inconvenience of having
to search for medical assistance while visiting the U.S.
• Through our Canadian Banking operations, we also became the
first major Canadian bank to launch a disability insurance option
under our Business Loan Insurance Plan which assists business
owners by covering insured business loan and mortgage payments.
2009 and beyond
• We will focus on providing superior insurance solutions for our
clients through new and existing distribution channels.
• We will enhance the client experience by providing customers
with a comprehensive suite of RBC products and services based
on their needs.
• The Lean Six Sigma methodology will be applied to process
reviews of various groups – including health claims management,
new product development, and new application processing –
with a focus on immediate enhancements but also effecting a
cycle of continuous improvement.
• We will focus on growing internationally through our reinsurance
operations by executing on transactions that fit within RBC’s
overall risk framework.
• We will work to leverage our expanded retail banking presence in
the U.S. and Caribbean to grow non-Canadian insurance revenue,
providing clients with an integrated experience and RBC product
suite to serve their business needs.
(C$ millions, except
percentage amounts)
Total revenue
Net income
Average loans and acceptances
Average deposits
Assets under administration – RBC (1)
– RBC Dexia IS (2)
Assets under management – RBC (3)
(1)
(2)
$
2008
2,101 $
(153)
27,000
42,500
11,200
2,585,000
3,900
2007
1,915 $
242
22,300
34,200
2006
1,628 $
261
18,500
28,700
2,713,100
2,421,100
2008 vs. 2007
Increase (decrease)
186
(395)
4,700
8,300
11,200
(128,100)
3,900
10%
(163)%
21%
24%
n.m.
(5)%
n.m.
International
Banking
AUA – RBC represents the AUA for RBTT as at September 30.
RBC Dexia Investor Services represents the total assets under administration as at September 30 of the joint venture
established January 2, 2006, of which we have a 50% ownership interest.
AUM – RBC represents the AUM for RBTT as at September 30.
(3)
IN T ERN AT I O N A L B A NK IN G includes RBC’s banking businesses in the U.s.
and Caribbean, as well as global custody and investor services.
2008 Revenue contribution
Banking
RBC Dexia IS
59%
41%
Our U.S. banking operations offer a wide range of financial
services and advice, including a complete line of banking services
to individuals, businesses and public institutions throughout the
southeastern U.S. Our network includes 439 full-service banking
centres, an extensive ATM network, and telephone and online
banking. We are now among the top five deposit holders in
North Carolina and rank seventh overall as measured by deposits
in our six-state southeastern banking footprint (North Carolina,
South Carolina, Virginia, Georgia, Alabama and Florida).
In the Caribbean, we have one of the most extensive banking
networks, with operations in 17 countries and territories.
We provide banking solutions to individuals and businesses
throughout our network of 127 branches.
Our U.S. and Caribbean banking business includes our cards
operations, which provide a wide range of solutions for personal,
business and merchant clients in more than 18 countries.
We have a 50% ownership in RBC Dexia IS, which offers a
complete range of investor services, such as custody and fund
administration, to institutions worldwide.
2008 Key performance highlights
• Net loss of $153 million compares to net income of $242 million
a year ago. This was mainly attributable to a higher provision
for credit losses, and writedowns and losses on our investment
portfolios.
• Total revenue increased $186 million, or 10%, from last year, due
primarily to loan and deposit growth from our Alabama National
BanCorporation (ANB) and RBTT acquisitions.
• Average loans and acceptances and deposits grew 21% and
24%, respectively, due largely to our ANB and RBTT acquisitions.
• Assets under administration through RBC Dexia IS decreased to
$2.585 trillion, or a 5% decrease from 2007 as a result of the capital
depreciation on client assets.
Business achievements in 2008
• Following the integration of our acquisition of RBTT, our
clients have access to one of the most extensive banking
networks in the Caribbean. Our Caribbean operations as of
October 31, 2008, have more than US$22 billion in assets,
127 branches, with approximately 7,000 employees serving
more than 1.6 million clients.
• In the U.S., we successfully integrated our acquisition of ANB
by retaining client-facing employees and leveraging their local
market expertise with technology and management resources to
improve the client experience. The acquisition added more than
100 banking locations to our branch network. Our U.S. banking
operations, which were ranked 40th largest in the U.S. by assets
(as of June 30, 2008), serve approximately one million clients in
six southeastern states.
• In 2008, RBC Dexia IS was distinguished in several important
industry rankings: number one global custodian for a record
fifth consecutive year (Global Investor, 2004–2008), number one
provider of global custody services in Canada, Europe and U.K.
(R&M Consultants, 2008), transfer agent of the year (ICFA, 2008)
and global custody client relationship manager of the year
(ICFA, 2008).
2009 and beyond
• In the U.S., we will refine our operating model to improve
efficiencies and enhance our competitiveness in our
southeastern footprint while remaining consistent with our risk
management discipline.
• We will focus on building our U.S. banking business and
commercial strategy to develop a robust retail strategy that
provides our clients with an integrated experience and a full
product suite to serve their needs.
• We will focus on integrating RBTT’s infrastructure, technology,
products and services to provide a common platform for growth
and expansion in the Caribbean.
• We will focus on leveraging the strength of RBC and RBTT’s
combined operations and infrastructure to pursue opportunities
in high-growth markets such as the Spanish Caribbean and
Central and South America.
• 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 will work to leverage our size, scale and expertise in Canada
to significantly grow our international credit card business.
International Banking
Royal Bank of Canada: Annual Report 2008
13
Capital
Markets
(C$ millions, except
percentage amounts)
Total revenue (1)
Net income
Trading revenue (1)
Average assets
(1)
Taxable equivalent basis.
2008
2007
2006
$
3,935 $
1,170
967
340,300
4,389 $
1,292
2,929
311,200
4,136 $
1,355
2,143
260,600
2008 vs. 2007
Increase (decrease)
(454)
(122)
(1,962)
29,100
(10)%
(9)%
(67)%
9%
Our diverse C A P I TA L M A RK E T s businesses provide corporate, government,
and institutional advice, capital, and 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 and
are recognized as a top 15 global investment bank. Notable areas of strength
include global fixed income distribution capabilities, structuring and trading,
and foreign exchange. In addition, we continue to build our global capabilities in
energy, mining and infrastructure finance.
2008 Revenue contribution
Global Markets
Global Investment Banking and
Equity Markets
Other
48%
39%
13%
• We strengthened our market share in our U.S./global equity
capital markets businesses, ranking 12th and 19th according to
Dealogic (U.S.) and Bloomberg (global), respectively.
• We launched global capabilities for greenhouse gas emission
trading, acting as a market-making provider, taking principal risk,
providing pricing liquidity and facilitating hedging for clients on
exchanges in Canada, the U.S. and Europe.
2009 and beyond
• We will strive to remain the Canadian wholesale client’s first
choice for financial products and services.
• In the U.S., we will build on the solid performance of our
investment banking and equity sales and trading businesses to
strengthen relationships with our clients and expand our market
share.
• Further extend our U.K. infrastructure finance and project
advisory capabilities in the European, U.S. and Canadian
markets. We will further enhance our municipal banking business
and expand our leveraged finance capabilities to grow our
European client base.
• We will continue to build out our capabilities and infrastructure
to support our global energy and mining businesses, expand
our commodities franchise and enhance our electronic trading
platforms. In addition, we will focus on expanding our leveraged
finance capabilities to grow our European client base.
• We will focus on making further investments in our debt capital
markets businesses within our Asian and New York-based
emerging markets distribution platforms to deliver fixed income
and structured products to high net worth and institutional
clients.
2008 Key performance highlights
• 2008 financial performance in Capital Markets was significantly
impacted by writedowns resulting from the challenging
market environment. These writedowns reduced revenue by
$2,091 million compared to $393 million last year and reduced
net income by $920 million after-tax and related compensation
adjustments as compared to $173 million last year.
• Many of our Capital Markets businesses continued to perform
well, despite the challenging environment, including certain fixed
income and foreign exchange trading businesses along with our
U.S. cash equities and lending businesses.
• Notwithstanding the market environment, our diversified
platform and strong risk management allowed us to generate ROE
of 20.5%, down from 26.6% last year.
• Average assets were up $29 billion, or 9%, primarily due to
an increase in derivative assets, largely reflecting increased
market volatility and an increase in loan assets due to growth in
corporate lending activities.
Business achievements in 2008
• We continued to be Canada’s leading global investment bank, as
reflected by the following noteworthy recognitions:
– Dealmaker of the Year in Canada for five of the past six years
(Financial Post)
– Global ranking of 12th in the Bloomberg 20 (2007)
– Number one ranking in Canadian M&A, equity underwriting
and corporate debt financing (Bloomberg, 2007)
– Global Bond Arranger of the Year (Project Finance magazine,
2007), recognizing our strength in infrastructure finance and
our global bond platform
– Best Investment Bank in Canada (Euromoney)
– Our research team was recognized for its ability to provide
investment research on a North American and, increasingly, on
a global level
– Global ranking of 12th in the World’s Best Stock Pickers
awards (Bloomberg)
– Number one (tied) in the StarMine Analyst Awards
(Financial Post)
14
Royal Bank of Canada: Annual Report 2008
Capital Markets
Corporate
Support
CO RP O R AT E sU P P O R T comprises Global Technology and Operations (GTO) and Global Functions.
Together, these teams contribute to achieving enterprise and business objectives by enabling the strategies
of each business platform, and by driving innovative process and technology improvements, enhancing client
service, executing against RBC’s risk and compliance objectives, and ensuring the safety and soundness of
our organization.
For financial highlights related to Corporate support, please see page 74 of the MD&A.
GTO provides the processes and technology for a secure, flexible,
reliable and convenient client experience. We develop and
manage the essential information technology and operations
foundation, the processing and fulfillment support, as well as the
contact centre-delivered customer sales and service that support
our diverse business activities.
Global Functions provides value-added services and advice to
support business growth as well as the critical controls, systems
and expertise necessary to meet regulatory and financial
reporting, balance sheet management and corporate funding
requirements. Global Functions also provides leadership related
to the management of critical enterprise assets, including our
people, corporate reputation, capital base, debt ratings, and
enterprise strategy.
Business achievements in 2008
• In a year of extreme turbulence in the world’s financial markets,
RBC continued to be a source of stability and strength for our
clients. Our enterprise risk management framework underpins our
strength and stability and is at the core of our continued success
under extremely adverse business conditions. We are disciplined
and proactive in managing our risk profile within our risk appetite.
• Our treasury management team has skillfully and successfully
maintained our liquidity position and accessed funding at
relatively attractive rates from sources around the world in an
environment where other financial institutions have struggled to
access debt and capital.
• We safely and securely completed more than 300 million ATM
transactions, 118 million client calls, 140 million online banking
transactions, 600 million point-of-sale transactions and
230 million equity transactions on behalf of our clients.
• We were the Private Sector Winner of the Conference Board of
Canada/Spencer Stuart 2008 National Awards in Governance
in recognition of innovation in performance management for
creating a framework that facilitates the more accurate and
timely assessment of the implementation of strategic initiatives.
• The Canadian Institute of Chartered Accountants presented RBC
for the second consecutive year with the Award of Excellence for
Corporate Reporting in Financial Services, giving us the highest
average ranking among Canadian financial industry competitors
for our financial reporting, corporate governance disclosure,
electronic disclosure and sustainable development reporting.
• We achieved Best Overall Score in the Forrester Research, Inc.
2008 Canadian Bank Secure Web Site Rankings.
• IR Magazine presented RBC with the 2008 Best Retail Investor
Communications Award.
• RBC was once again included in two Dow Jones Sustainability
indices for 2009 (the World Index and the North American Index).
• RBC was declared one of Canada’s 10 Most Admired Corporate
Cultures of 2008 (Waterstone Human Capital).
The following rankings recognized the strength of the RBC brand
in 2008:
• Canada’s Top 50 Brands published in Canadian Business
magazine gave the RBC brand top place with an A+ rating
• BrandZ Top 100 Most Powerful Brands made RBC the first
Canadian company to be named to its global list.
2009 and beyond
• Our Corporate Support teams will continue to strive to effectively
and efficiently deliver value-added services and advice
necessary to support the achievement of our strategic and
performance goals.
• GTO will work in alignment with the strategic priorities of our
businesses to make it easier for clients to do business with us,
while enhancing client services, contributing to our risk and
compliance objectives, and ensuring the safety and soundness of
our infrastructure.
• Global Functions will contribute to RBC’s financial performance
by working to maintain a strong balance sheet, sound credit
quality and capital ratios; effectively managing our tax position;
and implementing cost-saving initiatives, while improving the
alignment of business strategies and risk exposures.
• Global Functions will support business growth by executing
strategies to attract, retain and motivate talented employees;
by maintaining strong risk, governance and compliance regimes;
and by promoting a relevant and customer-centric brand strategy,
a clear and compelling enterprise strategy, and solid relationships
with investors, credit rating agencies, regulators and other
stakeholders.
Corporate support
Royal Bank of Canada: Annual Report 2008
15
Chairman’s
message
“ The Board of Directors has been actively engaged
in reviewing RBC’s risk profile, while overseeing
management’s progress throughout the year in
implementing business strategies in the face of a
rapidly changing marketplace.”
– David P. O’Brien
In the difficult market conditions of 2008, the board’s role in
overseeing management of the principal risks of RBC’s businesses
took on added significance. The Board of Directors has been
actively engaged in reviewing RBC’s risk profile, while overseeing
management’s progress throughout the year in implementing
business strategies in the face of a rapidly changing marketplace.
In doing so, we have brought our collective business experience to
bear in assessing whether management’s plans and activities are
prudent and focused on generating shareholder value and achieving
success in the short, medium and long term within an effective risk
control environment. During 2008, we regularly measured corporate
performance against objectives, approving significant capital
expenditures and major transactions that were in alignment with
the strategic plan approved by the board. Balanced by our careful
oversight of policies, processes and systems that are designed to
support prudent management of risks, we provided forward-looking
advice to management concerning several strategic initiatives,
including the significant expansion of RBC’s presence in Canada and
internationally. In particular, the board played an important role
in advising management on major acquisitions that further built
RBC’s business in Canada (PH&N), the U.S. (ANB and FBW) and the
Caribbean (RBTT).
To maximize our contribution, the Board of Directors is committed
to adapting best practices in governance to the needs of the
organization. This year we are the private sector winner of
the National Award in Governance, conferred by The Conference
Board of Canada and Spencer Stuart. While our governance
practices, policies and processes have received recognition in
the past, this latest award is especially meaningful. It recognizes
the creation of a performance management framework aimed at
enhancing the flow and quality of information to management and
the Board of Directors. The availability of more timely, accurate
and actionable information facilitates insightful analysis by
directors and promotes constructive debate, both within the
board and between the board and management.
This innovation reflects RBC’s continuous improvement of its
progressive governance processes. This approach to corporate
governance supports us in our role as stewards of the
organization, safeguarding the interests of shareholders by
exercising independent supervision, while acting as key advisors
to management in pursuit of a shared goal: enhancing long-term
shareholder value.
16
Royal Bank of Canada: Annual Report 2008
Chairman’s message
Harnessing the energies and talents of strong individuals into a
dynamic team is among my duties as non-executive Chairman.
My goal is to provide leadership to enable the Board of Directors
to continue to add value to RBC’s performance. This involves
instilling a common vision, maintaining high standards of board
independence and overseeing processes of board assessment
and peer review to optimize the board’s effectiveness in fulfilling
its mandate. Another priority is our continuing education program
which equips directors to provide current and knowledgeable
guidance to management in a rapidly evolving regulatory and
business environment. Over the past year, the board received
presentations dealing with such matters as methodologies used
in assessing and controlling risk, the implications of the Basel II
Capital Accord, financial institution disclosure practices, and
implementation of International Financial Reporting Standards.
The ability of board members to contribute from a diversity of
thought and business experience enhances the value we bring
to the organization. Acting through our Corporate Governance
and Public Policy Committee, the board places considerable
importance on the process of selecting director candidates,
weighing the existing strengths of the board against the
evolving needs of the organization. We seek highly capable and
independent individuals with a grasp of strategic management,
who have been actively engaged in business leadership and have
demonstrated high personal standards of behaviour and values.
In 2008 we were pleased to welcome our newest director,
Edward Sonshine, Q.C., president and chief executive officer of
RioCan Real Estate Investment Trust, whose experience adds an
important dimension to the board.
In a challenging year for the financial services industry, Royal Bank
of Canada maintained its momentum and continued to build on past
successes. Your Board of Directors is proud to be actively engaged
in the organization’s achievements. On behalf of the board, I would
like to extend appreciation to management and employees around
the world for their contributions to the success of the organization.
While continuing to operate in a challenging environment, the
Board of Directors, management and employees remain focused on
serving RBC’s clients and creating value for shareholders.
David P. O’Brien
Chairman of the Board
Beyond compliance
RBC’s Board of Directors has long been proactive in adopting progressive
governance practices and policies. Our dynamic 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.
Corporate
governance
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 comply with regulations and
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 such as RBC.
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 endeavours to anticipate
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
• Our comprehensive Director Independence Policy has continued
to evolve in response to best practices and regulatory
refinements. Fourteen of the 15 directors currently serving
are independent
• Meetings of independent directors are held following each
regularly scheduled board meeting
• A minimum share ownership requirement of $500,000 for
directors, ensuring strong 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 CEO must have shareholdings worth at least
eight times the last three years’ average base salary. This
requirement extends for two years into retirement. The standard
for other members of the 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. These requirements
extend for one year into retirement
• 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
• Reduced the number of stock option grants awarded to
management by approximately 70% since 2003.
In addition:
• 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
apply to members, four individuals have been designated
as Audit Committee financial experts, and a policy limiting
the service of our Audit Committee members on the audit
committees of other companies was adopted in 2004
• 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.
Corporate governance
Royal Bank of Canada: Annual Report 2008
17
Corporate
governance
2008 Annual Meeting
Shareholders are invited to attend our Annual Meeting at
9 a.m. (Pacific time) on Thursday, February 26, 2009, at the
Vancouver Convention & Exhibition Centre, Parkview Terrace,
999 Canada Place, Vancouver, B.C.
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 CEO in 2001
• Establishing board and director evaluation procedures, with
written peer reviews to complement the peer assessment
practice of one-on-one interviews with the Chairman. In addition,
each board committee assesses its own effectiveness annually
• 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 a continuous education program for 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
• Easy-to-read, three-year 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
• Description of how the President and CEO’s compensation aligns
with corporate performance
• Details of comparator companies used for benchmarking of both
corporate performance and executive pay
• Increased disclosure regarding executive pensions and the 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
• 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 foreign private issuer
• Our Corporate Responsibility Report and Public Accountability
Statement.
18
Royal Bank of Canada: Annual Report 2008
Corporate governance
At RBC, we believe our duty is to operate our business with ethics and
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.
Corporate
responsibility
CORPORATE KNIGHTS • 2008
Corporate
responsibility
priorities
Economic impact
Marketplace
• Provide strong returns to shareholders
• Develop and provide products
• Pay fair share of taxes
• Support small business and community
economic development
• Foster innovation and entrepreneurship
• Purchase goods and services responsibly
• Create employment
responsibly
• Protect and educate consumers
• Provide access to basic banking services
Workplace
Environment
Community
• Foster a culture of employee engagement
• Reduce intensity of our operational footprint
• Provide donations with a lasting
• Provide competitive compensation and
• Lend responsibly
total rewards
• Enable growth through training and
development opportunities
• Respect diversity and promote inclusion
• Leverage green business opportunities
social impact
• Sponsor key community initiatives
• Enable employees to contribute
Vision
RBC is committed to doing better for our clients, our investors, our
employees and our communities through a focused approach to
corporate responsibility, the RBC Blueprint for Doing Better™. Our
goals are to demonstrate integrity in our business practices and
provide leadership in the workplace and the marketplace. Two
of our key focus areas are diversity and the environment, which
weave through all of our businesses. We are committed to being a
strong supporter of the communities in which we do business and to
transparency in sustainability reporting practices.
Structure
At RBC, our whole company, every employee, is responsible for
behaving responsibly, as outlined in our Code of Conduct, which reads:
“It is our duty as a corporate citizen to add value to society while
earning a profit for our shareholders. RBC companies take
responsibility for the effects of their actions, both social and
economic.”
Reporting
RBC has adopted a multi-pronged approach to reporting our
corporate responsibility practices, sometimes called non-financial
or sustainability reporting. We follow the guidelines suggested by
the Global Reporting Initiative and undertake a range of reporting
activities geared to various stakeholder groups, with our website
being our primary reporting medium. Our annual Corporate
Responsibility Report and Public Accountability Statement is
provided online at rbc.com.
Recognition
In 2008, RBC was privileged to receive a number of global awards
and honours for our corporate responsibility efforts and performance:
• For the ninth consecutive year, RBC was named to the Dow Jones
Sustainability World Index, an annual review that recognizes the
world’s financial, social and environmental corporate leaders.
• RBC is included on the Jantzi Social Index and for the last seven
consecutive years, has been included on the FTSE4Good Index.
In 2008, in order to respond to increased expectations for integrated
programs and reporting, RBC created a new Corporate Citizenship
group, encompassing Corporate Responsibility, Corporate
Environmental Affairs and Donations.
• For the fourth consecutive year, RBC was named one of the
world’s top 100 sustainable companies, according to the Global
100 ranking unveiled at the World Economic Forum in Davos,
Switzerland.
• RBC was included on the 2008 Best 50 Corporate Citizens in
Canada ranking, according to Corporate Knights magazine.
For more information, visit rbc.com/responsibility/approach
Corporate responsibility
Royal Bank of Canada: Annual Report 2008
19
Ethics and
business
integrity
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.
Crisis management
RBC uses a best-in-class Business Continuity Management
program to ensure that our businesses are adequately prepared
to deal with any disruption of service to 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 for,
and timeliness of responses to emergency situations.
The RBC Business Emergency Information Line is our link to
employees, providing 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 employees around the world have the duty to report
suspected breaches of our Code of Conduct, other irregularities
and dishonesty. We have long-established processes that enable
employees to do so, and our Code of Conduct protects employees
from retaliation for any report made in good faith.
Specific to financial reporting practices, the RBC Reporting Hotline
was established so employees and third parties around the world
can report suspected irregularities or wrongdoing relating to
accounting, auditing or internal accounting controls directly to the
RBC Ombudsman, anonymously, confidentially and without fear of
retaliation.
For more information, visit rbc.com/responsibility/governance
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, conflicts
of interest and gifts and entertainment. Policies and controls
are reviewed regularly to ensure continued effectiveness and
alignment with relevant laws and regulations.
Anti-money laundering
RBC is strongly committed to preventing the use of our financial
services for money laundering or terrorist financing purposes.
Annually, every RBC employee worldwide, regardless of his or
her role in the organization, takes an anti-money laundering/anti-
terrorism financing course and exam. The course is tailored for
each business, function and geography with material specific to
the laws of 48 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.
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 2008 to
clarify provisions regarding use of company-provided Internet
access, sharing of information with third parties and contacts
for reporting irregularities. All employees are required to take
a web-based learning program and test or follow an alternative
process approved by our Human Resources Group, so that they
know and understand the code’s principles and compliance
elements. Employees must review the code and acknowledge
adherence to it when they join RBC and at least once every two
years thereafter. The company’s most senior officers and select
others must complete the program annually.
20
Royal Bank of Canada: Annual Report 2008
Ethics and business integrity
Economic
impact
Priorities
• 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
2008 Highlights
• Delivered top-quartile share performance of 8% and 12% over three-
and five-year periods, respectively, while increasing dividends paid over
the three-year period at an average annual compound rate of 19%
• Incurred taxes of $2.08 billion worldwide
• Served more than half a million small business clients in Canada,
the U.S. and the Caribbean
responsibly
• Create employment
• Purchased goods and services totalling $4.7 billion from international,
national, regional and local suppliers of all sizes
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.
Economic development
RBC invests in sustainable economic development, and we
are committed to contributing to the success of people and
businesses in the communities in which we operate. We support:
• Economic growth in communities in which we do business
• Initiatives that help build well-being, wealth and capacity in
Aboriginal communities
• Initiatives that help newcomers succeed in their adopted country
• Resources to promote economic self-sufficiency
• Financial literacy programs
• Programs that address basic needs, such as food banks.
Promoting self-sufficiency and growth
We help stimulate economic growth by investing in programs
that enable economic development with a social purpose.
For instance, in Canada, we support:
• The Neil Squire Society’s Employ Ability Program which assists
physically disabled adults in Canada seeking employable skills,
education and confidence
• The Winnipeg Salvation Army’s Work Readiness Program
which helps income assistance recipients find a job and become
self-sufficient
• Miziwe Biik, which is committed to improving the socio-economic
status of the Greater Toronto Area Aboriginal population
through access to training, employment opportunities, business
development services, and employment counselling
• Youth Employment Services, a leading Canadian youth
organization that provides innovative programs empowering
disadvantaged and vulnerable youth to become self-sufficient,
contributing members of society.
In the U.S., RBC Bank provides millions of dollars in financing for
community development projects, benefiting low- and moderate-
income populations. Projects include low-income rental and
ownership housing developments, as well as affordable housing
for the elderly and people with disabilities.
Partnerships
RBC also promotes economic growth through industry
partnerships. For example, we support the Greater Halifax
Partnership which brings together over 150 private sector
companies, three levels of government and skilled business
professionals dedicated to engaging the community in the growth
of Greater Halifax’s economy.
Innovation
RBC takes a leadership role in supporting innovation and the
commercialization of research. In May 2008, we joined Research
in Motion Limited and Thomson Reuters to launch BlackBerry
Partners Fund, a US$150 million venture capital fund, to invest in
mobile applications and services for the BlackBerry platform and
other mobile platforms.
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.
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.
For more information, visit rbc.com/responsibility/economic
Economic impact
Royal Bank of Canada: Annual Report 2008
21
Workplace
Priorities
• Foster a culture of employee
engagement
• Provide competitive
compensation and total rewards
• Enable growth through training
and development opportunities
• Respect diversity and promote
inclusion
2008 Highlights
• Provided employment to more than 80,000 people worldwide
• Paid $7.8 billion in compensation and benefits
• Invested $149 million in formal training and development
initiatives to complement extensive on-the-job learning
The talented and highly motivated people who make up our workforce are key to 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.
A culture of employee engagement
As our business and workforce grow and become more diverse,
it’s important that we continue fostering a strong sense of how
we succeed together. We do this by making it easy for employees
to understand the roles they play in fulfilling RBC’s strategies,
helping employees grow personally and professionally, and being
committed to employee engagement.
We recognize that well-informed employees are more likely
to align their actions with company goals. Employees have
many opportunities to learn and ask questions about company
goals, strategies and progress through meetings with senior
management, regular formal communications and our extensive
intranet.
We have a long history of listening and responding to our
employees, and we regularly seek feedback and comments.
We have been conducting employee opinion surveys since 1981.
In 2008, we gathered employee input on our progress in key
areas including career development, performance enablement,
employee engagement and workplace culture. By understanding
employees’ views, RBC can take action to address their needs and
the company’s priorities. This results in high levels of employee
engagement and a strong commitment to clients.
Diversity and inclusion
RBC is a leader in valuing diversity. Our strength comes from
a combination of what we have in common, like shared values
and purpose, and what makes us different, like experiences
and perspectives. By bringing together those similarities and
differences, we are able to break new ground and better serve our
clients and communities.
We believe in creating an inclusive environment for our employees,
where they can feel valued, respected and supported – a place
where employees can develop their own unique abilities and
realize their aspirations. We also lead by stimulating public
discussion on diversity issues through sponsoring research
studies and awards that draw attention to diversity issues.
Our annual Diversity Progress Report is available at
rbc.com/careers/diversity.
Competitive compensation and total rewards
At the heart of an engaged workforce is a flexible, competitive
and meaningful Total Rewards program. Our program is based
on an understanding of what employees value. It recognizes
that flexibility and choice are the best response to meeting our
employees’ diverse needs. Our comprehensive approach rewards
people for their skills and contributions by offering employees
competitive compensation, benefits and a positive work
environment.
Employee savings and share ownership programs are also a part
of our Total Rewards program. In Canada, over 70% of employees
are shareholders through these programs, which help align
employee, investor and company objectives.
Growth through training and development
Employees expect ongoing career and learning opportunities to
be a part of their Total Rewards program and our commitment
to continuous employee growth and development helps ensure
we meet the current and future needs of both our people and our
clients. Experience is often the best teacher, and experience-
based learning in the form of work assignments, projects and
one-on-one coaching is central to growth at RBC. Employees
also have access to the training resources they need to learn and
grow through our many online learning and classroom training
opportunities.
For more information, visit rbc.com/responsibility/workplace
22
Royal Bank of Canada: Annual Report 2008
Workplace
Marketplace
Priorities
• Protect, educate and listen to
2008 Highlights
• Added more green banking options and socially responsible
consumers
investment products
• Provide access to basic banking
• Expanded line-up of banking products and services designed for
services
newcomers to Canada
• Develop and provide products
• Enhanced customer and employee awareness of privacy and
responsibly
information security
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.
Product responsibility
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 2008, we continued to offer options for our environmentally
conscious clients including incentives to switch off paper
statements, have a home energy audit, buy a lower-emission car,
and switch to green power.
Socially responsible investing (SRI)
As investors continue to express an interest in SRI, RBC has
reinforced its commitment to offering products that incorporate
environmental, social and governance criteria in the investment
process. In 2008, we expanded our SRI options through the
acquisition of PH&N, which manages the PH&N Community
Values Funds. Through Voyageur Asset Management Inc., we
also acquired certain assets of Boston-based Access Capital
Strategies, LLC (Access Capital). Access Capital invests in debt
securities that support community development serving low- and
moderate-income individuals and communities across the U.S.
Responsible lending
RBC provides credit and banking services to companies in many
industries. Our policies cover environmental implications and
other areas of concern. For instance, our Credit Risk Management
Framework, released in October 2008, states certain types of
clients and transactions must in all cases be avoided, including
the direct financing of companies manufacturing equipment or
materiel for nuclear, chemical or biological warfare landmines and
cluster bombs. RBC is a signatory to the Equator Principles, a set
of voluntary guidelines addressing environmental and social risks
associated with project finance.
RBC has a number of anti-corruption controls 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 or financing terrorism.
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 rigorous security safeguards
and internal controls to ensure the privacy and security of
information entrusted to us. In 2008, we continued to build
upon our robust framework for managing privacy, information
security, and records and content management by focusing on
important areas such as client and employee awareness. This
includes the development of a Phishing Resource Centre to help
educate our clients on how to recognize fake websites and e-mail
scams, as well as an internal focus on employee education and
development. We also revised our public website to make it easier
for consumers to obtain important information about privacy,
information security, and fraud prevention.
Fraud prevention
RBC has stringent security policies and practices, supported by
around-the-clock resources to prevent, detect and investigate
potential fraud. Our guarantees for online banking and self-
directed brokerage clients offer 100% reimbursement for
funds lost through unauthorized transactions in their accounts.
We continue to focus on operations by introducing simpler
processes, with positive results as evident in the significant
decrease in the turnaround time for fraud claims, resulting in
quicker reimbursement to our clients. We continue to develop
fraud-education initiatives including up-to-date tips and alerts,
brochures and client presentations.
Marketplace
Royal Bank of Canada: Annual Report 2008
23
Marketplace
Treating customers fairly
At RBC, we put our clients first, and that means it is of central
importance to us that we treat our clients fairly. We abide by a
number of market conduct rules and regulations designed to
protect financial services clients, such as the Canadian cost of
borrowing and other disclosure requirements, U.S. fair lending
requirements and U.K. Treating Customers Fairly regime.
In addition, the Canadian banking industry has developed a
number of voluntary codes to protect consumers, to which our
Canadian businesses have committed. These are listed at
rbc.com/voluntary-codes-public-commitments.
Know Your Client rules
Know Your Client rules are key to the protection of all our clients.
Our employees are required to make all necessary efforts
to understand a client’s profile, and financial and personal
objectives before making recommendations relevant to the
client’s 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 is 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.
Responding to feedback
Every year, RBC businesses track client satisfaction through a
range of feedback mechanisms such as telephone, paper and
online surveys in order to improve our products and services.
For instance, in 2008, we asked 492,000 clients within our
Canadian retail banking operation for their feedback, which
helped provide direction for the following initiatives:
• More green banking options such as paperless statements
• Banking products and services tailored for newcomers to Canada
• New banking channels and functionalities
• Product features that reward customers for their loyalty
• New Family Financial Kit to help parents of young children
organize their family’s financial future
• Enhanced customer advice to meet all banking and financial
needs
• More relevant marketing and communication materials.
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. A full description of these can be
found in our annual Corporate Responsibility Report and Public
Accountability Statement at rcb.com/pas.
For more information, visit rbc.com/responsibility/marketplace
24
Royal Bank of Canada: Annual Report 2008
Marketplace
Environment
Priorities
• Reduce the intensity of our
environmental footprint
• Promote environmentally
responsible business activities
• Offer environmental products
and services
2008 Highlights
• Converted all office paper purchased in Canada and the United States
to Forest Stewardship Council (FSC) certified sources and converted
all office paper in the British Isles to either FSC, Program for the
Endorsement of Forest Certification or 100% recycled content
• Launched our greenhouse gas (GHG) emissions trading desk with
capabilities to transact on exchanges in Canada, the U.S. and the
European Union
RBC is committed to environmental sustainability, as outlined in the RBC Environmental Blueprint™.
We continue to develop and implement the necessary programs, procedures and guidelines to support this
commitment. We believe that fulfilling our environmental goals will lead to short- and long-term benefits for
clients, shareholders, employees and the communities in which we live and conduct business.
Among other highlights in 2008, we:
• Analyzed the exposure of borrowers in our loan and investment
portfolio to climate change risks and regulations
• Conducted research on water issues, including an analysis of
water scarcity and the impacts on certain industrial sectors and
geographical regions in the U.S. and Canada
• Updated RBC policies regarding environmental risk management
for business and commercial markets.
Offer environmental products and services
RBC seeks to offer an expanding array of products and services
that provide environmental benefits and empower clients to
reduce their environmental footprint at little or no additional cost.
Among other highlights in 2008:
• Since January 2006, over 3.2 million RBC accounts have been
switched from paper statements to electronic statements. The
resulting paper savings amount to approximately 112.5 million
sheets or 511 metric tonnes of paper. Using the Environmental
Defense Fund Paper Calculator, these paper savings are
equivalent to approximately 13,500 trees.
• Launched the RBC Energy Saver Mortgage in Canada which
offers a $300 rebate on a home energy audit. A home energy
audit is a report generated by a licensed professional who
is specially trained to examine electrical, mechanical and
architectural aspects of residential homes. The audit provides
recommendations to help improve a home’s energy efficiency
and lower energy costs.
• Commissioned a report to review sustainability indices
and disclosure initiatives in North America and Europe in
collaboration with several U.S. and Canadian banks and the
UN Environment Programme Finance Initiative.
Policy
The RBC Environmental Policy was developed in 1991 and
substantially revised in 2004 and 2007 to reflect the changing
environmental priorities of our company and our stakeholders.
The policy addresses environmental matters pertaining
to operations, business activities, products and services,
employees, compliance, reporting transparency and partnerships.
Progress on our priorities
Reduce the intensity of our environmental footprint
RBC is committed to reducing our energy use, GHG emissions,
paper consumption and water use. We are also committed to
reducing the negative environmental impacts associated with the
waste we generate and our procurement activities. We know that
improving our operational efficiency, reducing our consumption
of energy and natural resources, and decreasing GHG emissions
associated with our business activities can lead to positive
environmental and economic results. Among other highlights in
2008, we:
• Developed a global Responsible Procurement Policy that
will increase the acquisition of environmentally and socially
preferable products and services and reduce the negative
impacts associated with our supply chain
• Updated the electrical, mechanical and architectural standards
for our Canadian branch network to eliminate excess capacity and
to improve energy efficiency
• Opened 36 new green-powered branches in Canada. At the end
of October 2008, we had 76 Canadian branches powered by
certified “green” emission-free power.
Promote environmentally responsible business activities
At RBC, we work with our clients and the companies in which we
invest in to identify and 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 issues and international best practices. In our lending
activities, policies require that certain transactions be reviewed by
internal or third-party environmental specialists to ensure that we
are appropriately identifying and addressing environmental risks.
Environment
Royal Bank of Canada: Annual Report 2008
25
Environment
2008 Highlights (continued)
• Performed detailed environmental credit risk assessments on 650 transactions in Canada and the
United States
• Convened a panel of experts to advise RBC on the RBC Blue Water Project™, and committed almost
$11.8 million in grants to 39 organizations globally to support watershed protection and access to clean
drinking water
• Named to the Carbon Disclosure Leadership Index 2008 under the Carbon Disclosure Project. Among
financial institutions, RBC was ranked number one in Canada, and tied for second place globally
• Trained RBC Capital Markets and Risk Management staff on climate change and carbon markets
Key environmental issues
When developing the RBC Environmental Blueprint, we prioritized
our key environmental issues by assessing our potential exposure
to, and influence over, the issue, as well as its importance to our
complete array of stakeholders. Our key environmental issues are
climate change, biodiversity and water.
Climate change
Climate change presents environmental, social and financial
challenges to the global economy, human health and our
own businesses and operations. 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
Biological diversity, or biodiversity, 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. RBC also recognizes that the identity,
cultural beliefs and economies of some indigenous peoples
are intrinsically tied to their region’s history, biodiversity and
natural landscapes. Critical natural systems and the abundant
biodiversity they support must be preserved in order to maintain
healthy communities, cultural values and shareholder value.
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.
Sustaining the RBC Environmental Blueprint
Keeping the RBC Environmental Blueprint on course requires an
open and proactive dialogue with our stakeholders and peers,
independent and co-operative research to identify and better
understand emerging environmental issues and transparent
and relevant reporting of our initiatives and progress. We also
recognize the importance of philanthropy to help communities
meet their environmental objectives. We refer to these activities
as “Sustaining the RBC Environmental Blueprint.” Among other
highlights in 2008, we:
• Proactively collaborated with non-governmental organizations
including Rainforest Action Network, Forest Ethics, Nature
Conservancy of Canada, the Canadian Boreal Initiative,
Zerofootprint, Flick Off, and the Durrell Wildlife Preservation
Trust
• Responded to inquiries from sustainability indices, socially
responsible investment companies and analysts including the
Ethical Funds Company, Jantzi Research, the Carbon Disclosure
Project, Dow Jones Sustainability Index and Innovest Strategic
Value Advisors
• Researched and authored a number of reports on water-related
issues including opportunities to support safe drinking water in
First Nations communities; water supply issues in the Caribbean;
impact of water scarcity on industrial sectors and geographic
regions in the U.S. and Canada; and the impact golf courses have
on the environment.
For more information, visit rbc.com/environment
26
Royal Bank of Canada: Annual Report 2008
Environment
Community
Priorities
• Provide donations with a
lasting social impact
• Sponsor key community
initiatives
2008 Highlights
• Contributed more than $99 million to community causes worldwide
through donations of more than $51.5 million and an additional
$47.5 million to the sponsorship of community events and national
organizations
• Enable employees to
• Launched leadership and community action grants as part of the
contribute
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
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 financially and as volunteers, sharing their financial and business knowledge, time
and enthusiasm with thousands of community groups worldwide.
Donations
Donations are a cornerstone of our community programs, which
have 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. We 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:
• Supporting freshwater initiatives
• Helping keep children in school
• Supporting community healthcare through children’s mental
health programs
• Providing for emerging artist programs.
Community sponsorships
Sponsorships are an important component of a company’s
promotional and marketing activities, and RBC sponsors
events and initiatives that are important to our clients and our
communities. Through strategic partnerships at the Canadian
and international level, as well as locally in regions where we do
business, we intend to differentiate RBC as a leading company
committed to enabling the success of our clients and our
communities.
For example, 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. RBC is also co-sponsoring the
Olympic Torch Relay, which will touch communities all across
Canada.
We believe that investments in creative vision and artistic
talent will result in healthy, vibrant communities. We support
community events, art exhibitions and theatre performances. For
example, RBC is the official bank and major sponsor of the Toronto
International Film Festival. As part of our sponsorship, we will
lend further assistance to the cultural growth of Canada through
the RBC Emerging Artist Bursary Program. Celebrating its 10th
anniversary this year, the RBC Canadian Painting Competition
recognizes the talent of emerging professional visual artists
in Canada.
Employee contributions
Volunteerism
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 14,500 grants
and donated more than $7.2 million to celebrate our employees’
volunteer efforts. In 2008, we expanded the program to RBC
employees globally, celebrating the community work of dedicated
RBC employee volunteers around the world.
Employee giving
Not only is RBC one of the largest private sector contributors
to the United Way in Canada, we also have one of the largest
private sector employee giving campaigns in Canada. In North
America, our employees donated more than $12.6 million in 2008,
facilitated through payroll deduction, in addition to direct giving
and employee-driven fundraising events.
For more information, visit rbc.com/community
2008 Worldwide RBC donations
by geography
(C$ millions)
2008 RBC donations
in Canada by cause
Canada
$44.1
International $ 7.4
$51.5
Total
Social services
Arts and culture
Civic
Health
Education
Environment
17.3%
8.9%
9.4%
29.3%
30%
5.1%
Community
Royal Bank of Canada: Annual Report 2008
27
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, 2008, compared with corresponding periods. This MD&A should
be read in conjunction with our Consolidated Financial Statements and related notes and is dated December 4, 2008. 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).
Additional information about us, including our 2008 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.
76 Off-balance sheet arrangements
80
Financial Stability Forum disclosures
83 Risk, capital and liquidity management
83 Overview
86 Credit risk
97 Market risk
100 Operational risk
101 Capital management
109 Liquidity and funding risk
112 Overview of other risks
112 Reputation risk
113 Regulatory and legal risk
113 Insurance risk
115 Environmental risk
116 Additional factors that may affect
future results
119 Additional financial information
See our Glossary for definitions of
terms used throughout this document.
29 Overview
29 About Royal Bank of Canada
30 Vision and strategic goals
31 Selected financial and other highlights
32 Overview of 2008
33 O utlook and medium-term objectives
35 Accounting and control matters
35
Critical accounting policies and
estimates
39
Impact of the market environment
38 Changes in accounting policies
39 Controls and procedures
Financial performance
39 Overview
40
46 Total revenue
47 Net interest income and margin
48 Provision for credit losses
49
Insurance policyholder benefits,
claims and acquisition expense
51 Quarterly financial information
51 Results and trend analysis
53
Fourth quarter 2008 performance
53 Business segment results
54
How we measure and report our
business segments
Impact of foreign exchange rates
on our business segments
55 Key performance and non-GAAP
55
measures
Insurance
International Banking
57 Canadian Banking
60 Wealth Management
64
68
71 Capital Markets
74 Corporate Support
Financial condition
75 Condensed balance sheet
75
49 Non-interest expense
49 Taxes
50 Pension obligations
50 Related party transactions
50 Results by geographic segment
28
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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 SEC, in reports to shareholders
and in other communications. Forward-looking statements include, but
are not limited to, statements relating to our medium-term objectives,
our strategic goals and priorities, and the economic and business out-
look for us, for each of our business segments and for the Canadian,
United States and international economies. The forward-looking
information contained in this document is presented for the purpose
of assisting our securityholders and financial analysts in understand-
ing our financial position and results of operations as at and for the
periods ended on the dates presented and our strategic priorities and
objectives, and may not be appropriate for other purposes. Forward-
looking statements are typically identified by words such as “believe,”
“expect,” “forecast,” “anticipate,” “intend,” “estimate,” “goal,” “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 uncertainties,
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 readers
not to place undue reliance on these statements as a number of
important factors could cause our actual results to differ materially
from the expectations expressed in such forward-looking statements.
These factors include credit, market, operational, liquidity and funding
risks, and other risks discussed in our 2008 Management’s Discussion
and Analysis; the impact of the market environment, including the
impact of the continuing volatility in the financial markets and lack
Overview
About Royal Bank of Canada
Royal Bank of Canada (RY on TSX and NYSE) and its subsidiaries
operate under the master brand name 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
(and among the largest banks in the world as measured by market
capitalization). We provide personal and commercial banking, wealth
and asset management services, insurance, corporate and invest-
ment banking and transaction processing services on a global basis.
We employ more than 80,000 full- and part-time employees who
serve more than 17 million personal, business, public sector and
institutional clients through offices in Canada, the U.S. and 48 other
countries.
Effective May 1, 2008, we created our Insurance business
segment, formerly a business under Canadian Banking. Concurrent
with the realignment, we renamed our U.S. & International Banking
segment International Banking. Our five business segments are
outlined below.
Canadian Banking comprises our domestic personal and
business banking operations and certain retail investment businesses.
Wealth Management businesses serve affluent and high net
worth clients around the world, and provide asset management and
estate and trust services directly to clients and through our internal
partners and third-party distributors.
Insurance offers a wide range of life, health, travel, home and
auto insurance products and creditor insurance services to individual
and business clients in Canada and the U.S. We also offer reinsurance
for clients around the world.
of liquidity in credit markets, and our ability to effectively manage
our liquidity and our capital ratios and implement effective risk
management procedures; general business and economic conditions
in Canada, the United States and other countries in which we conduct
business; changes in accounting standards, policies and estimates,
including changes in our estimates of provisions, allowances and
valuations; 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 fiscal, monetary and other
policies; the effects of competition in the markets in which we
operate; the impact of changes in laws and regulations, including
tax laws; judicial or regulatory judgments and legal proceedings; the
accuracy and completeness of information concerning our clients and
counterparties; our ability to successfully execute our strategies and
to complete and integrate strategic acquisitions and joint ventures suc-
cessfully; changes to our credit ratings; and development and
integration of our distribution networks.
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. Except
as 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 in the Risk, capital and liquidity management, Overview of other
risks and Additional factors that may affect future results sections.
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.
International Banking comprises our banking businesses in the
U.S. and Caribbean, and global custody and investor services, which
we provide through our 50% ownership in RBC Dexia Investor Services
(RBC Dexia IS).
Capital Markets comprises our global wholesale banking
business, which provides a wide range of corporate and investment
banking, sales and trading, and research and related products and ser-
vices to corporate, public sector, institutional and retail 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 improve-
ments designed to ensure we remain ahead of our competition, while
maintaining the safety and soundness of our operations. 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 our capital and liquidity and funding
positions with the goal of meeting regulatory requirements, while
maintaining effective funding management and allocation of capital.
In addition, the Global Functions team co-ordinates relationships with
external stakeholders, including investors, credit rating agencies and
regulators, and supports strategic business decisions.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
29
Royal Bank of Canada
Canadian Banking
Wealth Management
Insurance
International Banking
Capital Markets
• Personal Financial Services
• Business Financial Services
• Cards and Payment
Solutions
• Canadian Wealth
Management
• U.S. & International Wealth
Management
• Global Asset Management
• Reinsurance & Other
• Canadian Life and Health
• Property & Casualty
• U.S. Life
• 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 our client-focused approach 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,
how we develop our products and services, and how we 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.
Our strategic goals are to remain focused on growing our
Canadian franchise while continuing to expand internationally by lever-
aging our resources and expertise to build our portfolio of international
businesses. Although we face ongoing challenging economic and
market conditions in Canada, the U.S. and internationally in the near
term, we expect to achieve these goals by maintaining our focus on
meeting the needs of clients through ongoing innovation and by effec-
tively collaborating across our many businesses and functions.
•
In Canada, our goal is to be the undisputed leader in financial
services. We continue to look to the Canadian market to provide
us with opportunities for growth in both the retail and wholesale
sectors. We are strengthening our brand by delivering a supe-
rior client experience, providing insightful advice and relevant
solutions, and offering a comprehensive suite of quality finan-
cial products and services to help our clients achieve financial
success. In banking, we continue to leverage our extensive dis-
tribution 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 innova-
tive solutions, simplifying processes and enhancing systems for
our clients to make it easier for them to do business with us. In
Wealth Management, we intend to continue to extend our lead
in wealth and asset management markets and to attract and
retain experienced advisors. In Insurance, we intend to continue
to pursue growth opportunities by leveraging our existing client
relationships, distribution network and the strength of our brand.
In Capital Markets, we continue to focus on maintaining our leader-
ship position across most businesses and remain our wholesale
clients’ first choice for all financial products and services.
In the U.S., our goal is to be a leading provider of banking,
wealth management and capital markets services by building on
and leveraging our considerable capabilities. The U.S., with its
geographic proximity, cultural similarities and close trade relation-
ships with Canada, will continue to be a focus of future growth as
we build on our market positions in selected businesses. In bank-
ing, we continue to focus on meeting the broad needs of personal
and business clients by offering a wide range of financial prod-
ucts and services that leverage our resources and expertise. We
are focused on strengthening our position in key markets in the
•
•
southeastern U.S. by integrating our recent acquisitions and grow-
ing market share by expanding our product offerings and client
base. In Wealth Management, we continue to expand our business
through organic growth and strategic acquisitions, while attract-
ing and retaining experienced advisors and providing them with
customized support for investment, advisory and wealth manage-
ment practices by utilizing our global resources. We also intend to
leverage our investment management capabilities in the institu-
tional market, and in the individual market through sub-advisory
and alliance opportunities. In Capital Markets, we intend to
maintain our position as a top-tier leader in the U.S. mid-market
and will remain committed to our businesses, such as fixed
income, foreign exchange, infrastructure finance and structured
products, while building our origination capabilities through
strong, skilled teams.
Outside North America, our goal is to be a premier provider of
selected banking, wealth management and capital markets
services where our strong foundation, key expertise and broad
distribution network provide us with competitive advantages.
In banking, we intend to continue to build on our position in the
English Caribbean by leveraging our history in the region, focusing
on the integration of our RBTT Financial Group (RBTT) acquisition
and pursuing select growth opportunities in the Spanish Caribbean
and Central and South America. In Wealth Management, we remain
focused on expanding our high net worth client-focused business
through organic growth and strategic acquisitions. In Insurance,
we will focus on building our reinsurance business and leveraging
our RBTT acquisition to grow our bank insurance activities in the
Caribbean. In custody and investor services, our joint venture,
RBC Dexia IS, is focused on attracting new clients and deepening
existing relationships by leveraging its global scale and integrated
suite of products. In Capital Markets, we will continue to build
our global investment banking capabilities in energy and mining,
while expanding our presence in London, England, and Sydney,
Australia. We will also focus on extending our distribution capa-
bilities in Asia and leveraging our global distribution network to
increase product and service penetration and deepen relation-
ships with our investing clients.
Guided by our Client First philosophy and strategic goals, our business
segments continue to tailor their strategies to help clients create new
possibilities and achieve financial success, while strengthening client
relationships within their unique operating and competitive environ-
ments. We believe that the successful execution of our business
strategies will enhance the quality and diversity of our earnings. These
efforts should result in continued solid performance in our Canadian
businesses as well as improved results in our U.S. and other interna-
tional businesses.
30
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Selected financial and other highlights
(C$ millions, except per share, number of and percentage amounts)
Total revenue
Provision for credit losses (PCL)
Insurance policyholder benefits, claims and acquisition expense
Non-interest 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 (loss)
Canadian Banking
Wealth Management
Insurance
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 (NIM) (3)
Specific PCL to average net loans and acceptances
Gross impaired loans (GIL) as a % of loans and acceptances
Capital ratios and multiples (4)
Tier 1 capital ratio
Total capital ratio
Assets-to-capital multiple
Selected balance sheet and other information
Total assets
Securities
Retail loans (5)
Wholesale loans (5)
Deposits
Average common equity (1)
Average risk capital (2)
Risk-adjusted assets (4)
Assets under management (AUM)
Assets under administration (AUA) – RBC (6)
– RBC Dexia IS (7)
Common share information
Shares outstanding (000s) – average basic
– 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) (8)
Bank branches
Automated teller machines (ATM)
Period average US$ equivalent of C$1.00 (9)
Period-end US$ equivalent of C$1.00
$
$
$
$
$
$
2008
2007
2006
$ 21,582
1,595
1,631
12,351
$ 22,462
791
2,173
12,473
$ 20,637
429
2,509
11,495
$
$
$
$
$
$
$
$
$
$
6,005
4,555
–
4,555
2,662
665
389
(153)
1,170
(178)
4,555
3.41
3.38
18.0%
29.6%
1.44%
.53%
.96%
9.0%
11.1%
20.1X
7,025
5,492
–
5,492
2,545
762
442
242
1,292
209
5,492
4.24
4.19
24.6%
37.4%
1.33%
.33%
.45%
9.4%
11.5%
19.9X
$
$
$
$
$
6,204
4,757
(29)
4,728
2,124
604
302
261
1,355
111
4,757
3.65
3.59
23.5%
36.7%
1.35%
.23%
.38%
9.6%
11.9%
19.7X
Table 1
2008 vs. 2007
Increase (decrease)
(880)
804
(542)
(122)
(3.9)%
101.6%
(24.9)%
(1.0)%
(1,020)
(937)
–
(937)
(14.5)%
(17.1)%
n.m.
(17.1)%
117
(97)
(53)
(395)
(122)
(387)
(937)
(.83)
(.81)
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
.2X
4.6%
(12.7)%
(12.0)%
(163.2)%
(9.4)%
n.m.
(17.1)%
(19.6)%
(19.3)%
(660)bps
(780)bps
n.m.
20 bps
51 bps
(40)bps
(40)bps
n.m.
$ 723,859
171,134
195,455
96,300
438,575
24,750
15,050
278,579
226,900
623,300
2,585,000
$ 600,346
178,255
169,462
69,967
365,205
22,000
14,450
247,635
161,500
615,100
2,713,100
$ 536,780
184,869
151,050
58,889
343,523
19,900
12,750
223,709
143,100
582,300
2,421,100
$ 123,513
(7,121)
25,993
26,333
73,370
2,750
600
30,944
65,400
8,200
(128,100)
1,305,706
1,319,744
1,341,260
2.00
4.2%
46.84
62,825
$
$
1,273,185
1,289,314
1,276,260
1.82
3.3%
56.04
71,522
$
$
1,279,956
1,299,785
1,280,890
1.44
3.1%
49.80
63,788
$
$
32,521
30,430
65,000
.18
n.m.
(9.20)
(8,697)
$
$
73,323
1,741
4,964
64,815
1,541
4,419
60,539
1,443
4,232
$
$
.969
.830
.915
1.059
$
$
.883
.890
8,508
200
545
.054
(.23)
20.6%
(4.0)%
15.3%
37.6%
20.1%
12.5%
4.2%
12.5%
40.5%
1.3%
(4.7)%
2.6%
2.4%
5.1%
9.9%
90 bps
(16.4)%
(12.2)%
13.1%
13.0%
12.3%
5.9%
(21.6)%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Average common equity and ROE 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 RORC, refer
to the Key performance and non-GAAP measures section.
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.
2008 capital ratios and risk-adjusted assets are calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI) under the new Basel II
framework. Comparative capital ratios and risk-adjusted assets are calculated using guidelines issued by OSFI under the Basel I framework. Basel I and Basell II are not directly compa-
rable. For further discussion about Basel II, refer to the Capital management section.
Retail and wholesale loans above do not include allowance for loan losses.
AUA – RBC has been revised to include mutual funds sold through our Canadian branch network. Comparative amounts have been revised to reflect this change.
AUA – RBC Dexia IS represents the total AUA of the joint venture as at September 30, of which we have a 50% ownership interest.
Effective 2008, we have excluded statutory holiday pay for part-time employees from our full-time equivalent (FTE) calculation consistent with our management reporting framework.
All comparative amounts reflect the change to the FTE calculation.
Average amounts are calculated using month-end spot rates for the period.
(9)
n.m. not meaningful
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
31
Overview of 2008
We reported net income of $4,555 million for the year ended October 31,
2008, down $937 million, or 17%, from a year ago. Diluted earnings
per share (EPS) were $3.38, down 19% compared to a year ago. Return
on common equity (ROE) was 18.0%, compared to 24.6% a year ago.
The Tier 1 capital ratio of 9.0% was down 40 basis points (bps) from
9.4% a year ago, while our Total capital ratio of 11.1% was down
40 bps from 11.5% a year ago.
Executing our initiatives
Despite challenging market conditions during the year, we continued
to diversify our products and services, markets and geographical
presence through organic growth and strategic acquisitions, making it
easier for our clients to do business with us and positioning ourselves
for future earnings growth.
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, balancing organic growth with strategic
acquisitions, and expanding and upgrading our distribution network to
better serve our clients.
• We completed our acquisition of Phillips, Hager & North Investment
Management Ltd. (PH&N) in our Wealth Management business.
With our existing asset management business, this created the
largest fund company, as measured by assets under management,
and one of the largest private sector asset managers in Canada, as
measured by assets under management, with a significant pres-
ence in the institutional market for defined benefit and defined
contribution pension plans, endowments and foundations. For
2008, our results include six months of PH&N results.
• We launched various new products, such as the U.S. dollar
high-interest savings account, Visa Infinite Avion card and the
Business Investment account, to help clients meet their expand-
ing financial needs.
• We added 28 bank branches and 14 insurance branches, installed
240 ATMs and renovated 147 existing branches to make it easier
for our clients to do business with us.
In the U.S., we continued to build our presence in banking, wealth
management and capital markets through organic growth and a num-
ber of key acquisitions, while increasing the linkages between these
businesses. We also moved to better establish our brand position in
the country, as RBC Centura Bank and our retail brokerage, RBC Dain
Rauscher, became known as RBC Bank and RBC Wealth Management,
respectively.
• We completed our acquisition of Alabama National BanCorporation
(ANB), expanding our bank branch network to 439 full-service
banking centres and strengthening our position in several
markets in the southeastern U.S., including Alabama, Florida,
and Georgia. For 2008, our results include eight months of
ANB results.
• We strengthened our wealth management capabilities in the
eastern, midwestern and mid-Atlantic regions of the U.S. with
the acquisition of Ferris, Baker Watts, Incorporated (FBW) in
our wealth management business. This has added more than
300 experienced financial consultants, 42 branch offices and
approximately US$19 billion in assets under administration to
our network of more than 2,000 financial consultants operating
in 204 retail branches across 42 states. For 2008, our results
include four months of FBW results.
• We completed our acquisition of Richardson Barr & Co.
(Richardson Barr), a leading Houston-based energy advisory firm
specializing in acquisitions and divestitures in the exploration
and production sector, in our capital markets business. For 2008,
our results include three months of Richardson Barr results.
Outside North America, we continued to pursue growth opportunities
in select markets, expanding our distribution network and making it
easier for our clients to do business with us.
• We completed our acquisition of RBTT, creating one of the most
extensive banking networks in the Caribbean, with a presence in
17 countries across the region. For 2008, our results include RBTT
results from June 16 to September 30, as RBTT reports on a one-
month lag.
• We opened a new representative wealth management office in
Latin America to better serve our global client base. We also
opened a representative office in India to provide wealth man-
agement services to high net worth individuals, correspondent
banking and trade finance services to financial institutions in
India and capital markets products and services to governments
and corporations.
• We extended our platform of integrated global financial services,
giving Canada-based small and commercial businesses and their
foreign subsidiaries access to a full range of global treasury
management solutions for day-to-day banking in Europe and
Asia-Pacific region.
2008 Economic and market review (1)
The Canadian economy grew at an estimated rate of .6% to date in
2008, which was down from the 2.2% projected in November 2007.
Although the pace of growth slowed through the year, the Canadian
economy was generally supported by solid domestic demand, largely
reflecting favourable terms of trade and relatively solid consumer
fundamentals, including low unemployment. The economy contracted
modestly in the final calendar quarter mainly due to deterioration in
net exports given weaker U.S. and global growth, tightening credit
conditions and the decline in commodity prices. The sharp drop in
commodity prices late in the fiscal year contributed to the dramatic
decline in the Canadian dollar relative to the U.S. dollar. Throughout
the year, the Bank of Canada reduced the overnight rate by a total of
200 bps to 2.25%, taking into consideration the global economic slow-
down, weaker market conditions and declining commodity prices.
The U.S. economy grew at an estimated rate of 1.3%, which was
down from the 2.2% projected at the start of the year. While economic
growth improved slightly in the early part of the year, largely as a result
of the Economic Stimulus Act of 2008, the U.S. economy deteriorated in
the second half of the year, largely due to tightening credit conditions,
the persistent decline in the housing market, weak consumer and busi-
ness spending and the rise in the unemployment rate. Credit quality
also weakened, particularly in residential and commercial real estate-
related loans. In an effort to lessen the extent of economic decline,
restore stability and alleviate liquidity concerns, the Federal Reserve
lowered the federal funds rate on a number of occasions throughout
the year by 325 bps to 1%.
Global economies moderated in the early part of the year and
deteriorated thereafter, particularly in the U.K. and the Eurozone.
Emerging economies, led by China, recorded solid growth in the early
part of the year, but weakened in the latter part of the year due to the
deterioration in global financial markets.
The deterioration in the U.S. mortgage-backed securities markets
that began in mid-2007 continued into 2008 and had significant unfa-
vourable effects on broader credit markets. Generally, there has been
widening of credit spreads, increased volatility in global equities and
a general lack of liquidity across a wide range of products. In addition,
challenging capital market conditions intensified in the last quarter
of the year with the collapse of some global financial institutions,
declining corporate profits and general fear of a global recession.
32
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Over the course of October, governments around the globe
stepped in to stabilize the markets and restore public confidence in
financial institutions by injecting billions of dollars into the financial
system globally. They announced measures that included coordi-
nated interest rate reductions, funding programs, capital injections
into financial institutions, guarantees and nationalization of financial
institutions. In line with global governments, the Bank of Canada cut
interest rates, injected liquidity into the Canadian market, introduced
insurance on wholesale funding and extended its Canada Mortgage
and Housing Corporation securitization program.
(1)
Data as at December 4, 2008.
2008 Performance vs. objectives
Table 2
Diluted earnings per share (EPS) growth
Defined operating leverage (1)
Return on common equity (ROE)
Tier 1 capital ratio (2)
Dividend payout ratio
2008
Objectives
Performance
7%–10%
>3%
20%+
8%+
40%–50%
(19)%
1.0%
18.0%
9.0%
59%
(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). For further information, refer to the Key performance and non-GAAP
measures section.
Calculated using guidelines issued by OSFI under the new Basel II framework.
2008 Annual objectives
We established our 2008 objectives in November 2007 based on our
economic and business outlooks for 2008 at that time. In 2008, mar-
ket and economic conditions were significantly impacted, as credit
markets deteriorated and financial markets experienced widespread
illiquidity and elevated levels of volatility especially in the latter part
of the year. While we acknowledged that early 2008 would be chal-
lenging, with continued market and accounting volatility and slower
economic growth, we did not anticipate these conditions to persist for
the duration of the year nor the impact to be as significant.
We acknowledged during the year that progress towards certain
objectives had been affected largely by writedowns, higher provision
for credit losses in our U.S. banking business and spread compression.
As a result, except for our Tier 1 capital ratio, we did not meet our other
annual objectives. Our capital position remained strong throughout
2008, with our Tier 1 capital ratio above our objective.
Our medium-term objective was to achieve top quartile total
shareholder return (TSR) compared to our North American peers. (1)
TSR is a concept used to compare the performance of our shares over
a period of time, reflecting share price appreciation and dividends paid
to shareholders. The absolute size of the TSR will vary depending on
market conditions, but the relative position reflects the market’s per-
ception of a company’s overall performance relative to its peers over a
period of time.
Our three-year and five-year average annual TSR of 8% (2) and
12% (2), respectively, ranked us in the first quartile within our peer
group for both periods. The three-year and five-year average annual
TSR for our peer group was (9)% and (2)%, respectively (2).
Our dividends paid over the three-year period have increased at
an average annual compounded rate of 19%.
Our TSR objectives are measured relative to our North American
peers and, as a result of the mergers and acquisitions that our peers
were involved in during 2008, we are in the process of re-evaluating
our peer group. We will disclose any revisions to our peer group once
determined, and will continue to monitor and re-evaluate our peer
group over the medium term based on events as they unfold.
(1)
(2)
Our North American peers consist of seven large Canadian financial institutions
(Manulife Financial Corporation, The Bank of Nova Scotia, The 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, JP Morgan Chase & Co., Wells Fargo & Company, Wachovia Corporation,
US Bancorp, Sun Trust Banks, Inc., The Bank of New York Mellon Corporation, BB&T
Corporation, Fifth Third Bancorp, National City Corporation, The PNC Financial
Services Group, 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, 2005 to October 31, 2008.
The five-year average annual TSR is calculated based on the period October 31, 2003
to October 31, 2008 and is based on information as disclosed by Bloomberg.
Total shareholder return
For the year ended October 31
Common share price (RY on TSX) – close, end of period
Dividends paid per share
Increase (decrease) in share price
Total shareholder return (2)
2008
$
46.84
2.00
(16.4)%
(12.8)%
$
2007
56.04
1.72
12.5%
16.2%
$
2006
49.80
1.32
19.5%
23.2%
$
2005
41.67
1.13
31.4%
35.4%
Table 3
2004 Five-year CAGR (1)
$
31.70
.98
(.1)%
3.2%
8.1%
19.2%
(1)
(2)
Compound annual growth rate (CAGR).
Total shareholder return assumes reinvestment of dividends and therefore does not equal the sum of dividends paid per share and share price increase (decrease) in the table.
Outlook and medium-term objectives
Economic and market outlook (1)
The Canadian economy likely slipped into a recession in the final
quarter of 2008 and is expected to grow by only .3% in 2009 due to
weaker domestic demand. Consumer spending is expected to slow,
reflecting modest weakening in both the labour and housing markets.
Inflation pressures are likely to dissipate as commodity prices stabilize
at lower levels and economic growth remains slow. We forecast the
Canadian dollar on average to be weaker relative to the U.S. dollar
given lower commodity prices. We expect the Bank of Canada to
decrease interest rates to 1.75% in late 2008 to mitigate some down-
ward pressure on the economy and hold rates constant through most
of 2009.
We project the U.S. economy will have negative growth of 1%
in 2009. We anticipate that deteriorating economic conditions and
financial market volatility will continue to dampen both consumer and
business spending and will likely cause the U.S. recession to deepen
as negative economic growth persists over the remainder of 2008 and
(1)
Data as of December 4, 2008
in early 2009. We anticipate that the Federal Reserve will cut the fed-
eral funds rate to .5% in late December and hold it there through 2009.
Global economies, particularly those in the Eurozone, will likely
weaken further in 2009, as overseas economies continue to contract
due to weaker domestic demand, financial market volatility and
reduced demand for exports from major trading partners. Emerging
economies, led by China, are expected to grow at a very moderate
pace in 2009 given uncertainty in global financial markets and reces-
sionary conditions in some industrialized countries.
Financial markets continue to deal with the fallout of a crisis
in credit markets and a deteriorating outlook for global economies.
Volatile financial market conditions are likely to continue into 2009
as credit and liquidity concerns persist and global economies slow
down. We anticipate that recent government and central bank
measures such as interest rate cuts, financial market rescue packages
and enhanced interbank lending guarantees will eventually work to
improve market stability.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
33
Business outlook and priorities
A weak global economic outlook, continued financial market volatility
and general uncertainty on the timing of a recovery is expected to
create a challenging operating environment in the midterm.
In Canadian Banking, consumer lending is expected to slow in
the coming year, largely driven by lower housing sales and prices and
reduced consumer spending levels. Business spending is expected to
moderate and is likely to cause slower growth in business lending. Our
business lending clients remain healthy, with generally solid balance
sheets and historically low levels of debt; however, business lending
remains susceptible to the health of the overall economy.
Retail net interest margins will likely remain under pressure as
the low interest rate environment persists and our portfolio contin-
ues to shift towards lower-spread secured home equity products.
Competitive pricing will also remain a factor.
Credit quality during 2009 in Canada is expected to weaken
moderately assuming a slower economic environment and a higher
unemployment rate, and will likely impact consumer, business and
corporate credit portfolios. We anticipate an increase in our provision
for credit losses, primarily resulting from portfolio growth and modestly
higher average delinquency rates. We will continue to remain focused
on managing operating expenses in our domestic banking business.
In Wealth Management, we expect modest growth in fee-based
client assets from currently depressed levels as financial markets
stabilize in the medium term. We intend to continue to add experi-
enced advisors across all our businesses and leverage the depth and
breadth of our resources to serve our clients, which should support
growth in fee-based client assets. Further, we anticipate modest
growth in transaction revenue as a result of the expected financial
market stability in the near term and steady growth in the medium
term. We expect growth will be supported by stability in financial
markets and an increased investor appetite for transparent wealth
management products.
In Insurance, we expect investment returns to be impacted by
market conditions in the near term and we believe our diversified
product portfolio, coupled with the contribution of our infrastructure
investments and retail branch expansion, should mitigate the impact
to our results.
In International Banking, we expect that our U.S. banking
operations will continue to be impacted by a weak U.S. economy and
the decline in the U.S. housing market. U.S. consumer and business
lending growth will also remain weak. We anticipate provision for
credit losses to reflect higher impaired loans, primarily due to deterio-
ration in residential builder finance, as well as in our commercial, retail
and business banking portfolios. We will remain focused on systemati-
cally balancing growth and risk in our U.S. loan portfolio as we refine
our U.S. banking operating model, improve efficiencies and reduce
expenses. We continue to see opportunities for our Caribbean banking
business in the current market environment as we continue with the
ongoing integration of our RBTT acquisition.
We hold trading and certain other investment assets at fair value,
with the value determined using market prices or valuation models
that depend on assumptions regarding market conditions. As a result,
the fair value of these assets and their impact on our financial results
will depend on future market developments. Volatile financial market
conditions, reflecting liquidity and pricing pressures, are expected to
continue in the near term. Over time, we anticipate that recent govern-
ment measures will improve stability in the financial markets.
In Capital Markets, we expect certain of our businesses will
continue to be affected by the market uncertainty, including potential
writedowns in certain fixed income businesses, although we expect
there will be a slight improvement when global markets begin to
stabilize. We will remain vigilant about managing our cost structure,
efficiently using our balance sheet and focusing on risk management,
while positioning our businesses to capitalize on market opportunities.
Medium-term objectives
We anticipate that the medium term will see more cyclical and struc-
tural changes for the financial services industry, including higher
funding costs, higher capital levels, the impact of the de-leveraging
of balance sheets and a move to above-average loan loss levels from
recent historic lows. We have established medium-term (3 to 5 years)
financial objectives in place of annual objectives. These objectives
are aligned with our three strategic goals and we believe they better
reflect the new realities of the business and economic environment as
outlined in this section.
Medium-term 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 4
7%+
>3%
18%+
8.5%+
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). For further information, refer to the Key performance and non-GAAP
measures section.
Calculated using guidelines issued by OSFI under the new Basel II framework.
Our objectives for diluted EPS growth, defined operating leverage,
ROE, and dividend payout ratio over the medium term are summa-
rized in the table above and continue to reflect our commitment to
strong earnings growth, cost containment and return on investment
in our businesses, as well as sound and effective risk and capital
management. Maintaining a strong capital position is integral to our
medium-term strategy, and we intend to keep our Tier 1 capital ratio
above our 8.5%+ objective.
We intend to measure our financial performance using medium-
term objectives for the foreseeable future until market and accounting
volatility and economic uncertainty subside. We will continue to
assess our progress on a quarterly and annual basis as we measure
ourselves against these medium-term objectives. We will continue to
benchmark our TSR with our North American peers and maintain our
focus on maximizing shareholder value. As mentioned above, we are
in the process of re-evaluating our North American peer group and will
disclose any revisions once determined.
By focusing on the execution of medium-term objectives in our
decision-making, we believe we will be positioned to provide sustain-
able earnings growth and returns to our shareholders.
34
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies and estimates
Our significant accounting policies are described in Note 1 to the
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 dif-
ferent assumptions. Our critical accounting policies and estimates
relate to the fair value of financial instruments, other-than-temporary
impairment of available-for-sale (AFS) and held-to-maturity (HTM)
securities, allowance for credit losses, variable interest entities, good-
will and other intangible assets, securitization, 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.
Fair value of financial instruments
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
(HFT), available-for-sale, held-to-maturity, loans and receivables or
other financial liabilities. A financial instrument can be designated
as held-for-trading (the fair value option (FVO)) on its initial recogni-
tion, provided it meets certain criteria, even if it was not acquired or
incurred principally for the purpose of selling or repurchasing in the
near term.
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.
As at October 31, 2008, approximately $340 billion, or 47%, of
our financial assets and $252 billion, or 36%, of our financial liabilities
were carried at fair value ($276 billion, or 46%, of financial assets and
$205 billion, or 36%, of financial liabilities as at October 31, 2007).
Note 2 to our Consolidated Financial Statements provides disclosure of
the fair value of our financial instruments as at October 31, 2008.
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. Where
quoted prices are not available for a particular financial instrument,
we use the quoted price of a financial instrument with similar charac-
teristics and risk profile 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 judgment is
required, however, when the observable market prices and parameters
do not exist. In addition, management exercises judgment when
establishing market valuation adjustments that would be required to
determine the fair values. These include valuation adjustments for
liquidity for financial instruments that are not quoted in an active mar-
ket, 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. They also include valuation adjustments calculated when mar-
ket prices are not observable due to insufficient trading volume or a
lack of recent trades in a less active or inactive market.
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 using the FVO are actively quoted, we rely primarily on
internally developed pricing models and established industry standard
pricing models, such as Black-Schöles, to determine their 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 significant input parameters are not based on market observ-
able 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.
To determine the fair value adjustments on RBC debt designated
as held-for-trading, as discussed in the Financial overview section, we
calculate the present value of the instruments based on the contractual
cash flows over the term of the arrangement by using the RBC effective
funding rates at the beginning and end of the period, with the unreal-
ized change in the present value recorded in net income.
The following table summarizes our significant financial assets
and liabilities carried at fair value, by valuation methodology as at
October 31, 2008 and October 31, 2007. 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 unreal-
ized gains and losses are not permitted under GAAP, the instrument is
grouped as being based on “pricing models with significant unobserv-
able market parameters.”
Financial Accounting Standards Board (FASB) Statement No. 157,
Fair Value Measurements (FAS 157), includes measurement guidance
and requires that all financial instruments measured at fair value be
categorized in fair value hierarchy levels. We have not adopted these
measurement and disclosure requirements as at October 31, 2008, for
U.S. GAAP reconciliation disclosure purposes, and the information con-
tained in the table below is not intended to correspond to those levels.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
35
Assets and liabilities carried at fair value by valuation methodology
Table 5
2008
Based on
2007
Based on
(C$ millions,
except percentage amounts)
Financial assets
Required to be classified as held-for-trading
other than derivatives
Derivatives (1)
Designated as held-for-trading (FVO)
Classified as available-for-sale
Financial liabilities
Required to be classified as held-for-trading
other than derivatives
Derivatives (1)
Designated as held-for-trading (FVO)
Fair value
$ 104,414
136,227
52,185
47,039
$ 339,865
$ 27,507
128,705
95,359
$ 251,571
Pricing
Pricing
models with models with
significant
significant
observable unobservable
market
parameters
Quoted
market
prices parameters
72%
–
31%
59%
17%
97%
66%
28%
96%
–
–
4%
99%
100%
11%
3%
3%
13%
–
1%
–
Total
Fair value
100% $ 129,408
65,568
100%
52,580
100%
28,811
100%
$ 276,367
100% $ 46,328
71,422
100%
87,433
100%
$ 205,183
Pricing
Pricing
models with models with
significant
significant
observable unobservable
market
parameters
Quoted
market
prices parameters
82%
–
36%
70%
18%
100%
64%
28%
89%
–
–
11%
99%
100%
–
–
–
2%
–
1%
–
Total
100%
100%
100%
100%
100%
100%
100%
(1) Market and credit valuation adjustments that are determined on an instrument-specific basis are included. For the remaining instruments, these adjustments are determined on a pooled
basis and thus, have been excluded. Derivative assets exclude market and credit valuation adjustments of $(1,117) million (2007 – $nil) and margin requirements of $1,024 million
(2007 – $1,017 million).
2008 vs. 2007
The market environment weakened significantly through 2008. As
a result, there was a high degree of uncertainty and volatility which
lead to reduced volume of trading activity in the financial markets.
Many of the debt securities in our portfolio that were actively traded
experienced limited trading volumes. As a result, market quotes were
unavailable and indicative prices were not being provided by alternate
sources such as brokers, dealers and pricing agencies. At year-end, we
had to adopt alternate valuation methodologies to value many of our
financial instruments.
As a result of the changes in our valuation methodologies, there
were significant movements into the pricing models with significant
unobservable market parameters category. The increase of 11% in
financial assets classified as held-for-trading was primarily on account
of certain short-term debt securities which did not have sufficient
trading volumes in the market and indicative prices were also not
available. The increase of 3% in derivative-related assets was due to
higher fair values in our structured credit business and the migration
of assets valued using pricing models with significant observable
market parameters into this category. The increase of 3% in financial
assets designated as held-for-trading was related to loans in our
commercial mortgage business where there were limited observable
market transactions on which to base our valuations. The increase
of 11% in the available-for-sale category was related to the auction
rate securities and securities in our Municipal GIC business that were
reclassified from held-for-trading to the available-for-sale category
and due to insufficient trading volumes in the market and no indicative
prices being available.
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. Group Risk Management is responsible for establishing
our valuation methodologies and policies, which address the use
and calculation of valuation adjustments. These methodologies are
reviewed on an ongoing basis to ensure that they remain appropri-
ate. Group 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. Refer to the Risk management section for further
details 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 with unrealized
losses are assessed for impairment at each reporting date and more
frequently when conditions warrant. When the fair value of any secu-
rity 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 severity of the impairment, the financial and credit
aspects of the issuer, and our intent and ability to hold the investment
for a period of time sufficient to allow for any anticipated recovery
in fair value. The decision to record a writedown, its amount and the
period in which it is recorded could change based on management’s
judgment. If the decline in value based on management’s judgment
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.
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
including 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
determined through management’s identification and determination of
losses related to impaired loans. The general allowance is established
on a quarterly basis through management’s assessment of probable
losses in the remaining portfolio.
The process for determining the allowances involves quantita-
tive 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 data given
changes in credit strategies, processes and policies; (v) assessing the
current credit quality of the portfolio based on credit quality trends in
relation to impairments, write-offs and recoveries, portfolio character-
istics and composition; and (vi) determining the current position in the
economic and credit cycles. Changes in these assumptions or using
other reasonable judgments can materially affect the allowance level
and thereby our net income.
36
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Specific allowance
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.
Historical loss rates are applied to current outstanding loans to deter-
mine 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 eco-
nomic conditions, the impact of policy and process changes, and other
supporting factors.
For wholesale portfolios managed individually, which are continu-
Any fundamental change in methodology is subject to indepen-
ously monitored, an account is classified as impaired based on our
evaluation of the borrower’s overall financial condition, its available
resources and its propensity to pay amounts as they come due. A
specific allowance is then established on individual accounts that are
classified as impaired, using management’s judgment relating to the
timing of future cash flow amounts that can be reasonably expected
from the borrower, financially responsible guarantors and the realiza-
tion of collateral. The amounts expected to be recovered are reduced
by estimated collection costs and discounted 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 manage-
ment’s judgment relating to recent credit quality trends, portfolio
characteristics and composition, and economic and business condi-
tions. 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 but have not yet been spe-
cifically 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 managed individually),
the general allowance is based on the application of estimated prob-
ability 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), supple-
mented by industry studies, and are updated on a regular basis.
This approach allows us to generate a range of potential losses over
an economic cycle. One of the key judgmental factors that influence
the loss estimate for this portfolio is the application of the internal
risk rating framework, which relies on our quantitative and qualitative
assessments of a borrower’s financial condition in order to assign an
internal credit risk rating similar to those used by external rating agen-
cies. Any material change in the above parameters or assumptions
would affect the range of probable credit losses and consequently
could affect the general allowance level.
For homogeneous portfolios (retail loans), including residential
mortgages and 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.
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 $2,299 million is adequate to
absorb estimated credit losses incurred in the lending portfolio as
at October 31, 2008. This amount includes $84 million classified in
other liabilities, which relates to letters of credit and guarantees and
unfunded commitments.
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 cash flows among the identi-
fied parties holding variable interests to determine who is the Primary
Beneficiary. In addition, there is a significant amount of judgment exer-
cised 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.
Goodwill and other intangible assets
Under GAAP, goodwill is not amortized and is generally allocated to
reporting units which are one level below our operating segments.
Goodwill is tested for impairment on an annual basis or more frequently
if an event occurs or circumstances change such that the fair value of a
reporting unit may be reduced to less than its book value.
Testing goodwill begins with determining the fair value of each
reporting unit and comparing it to its carrying amount, including
goodwill. If the carrying value of a reporting unit exceeds its fair value,
the fair value of the reporting unit’s goodwill must be determined
and compared to its carrying value. The fair value of the goodwill is
imputed by determining the fair value of the assets and liabilities of
the reporting unit. Goodwill is deemed to be impaired if its carrying
value exceeds the fair value. That excess is the quantum of the impair-
ment which must be charged to income in the period it is identified.
Subsequent reversals of impairment are prohibited.
Management applies significant judgment in estimating the fair
value of our reporting units which is accomplished primarily using an
earnings-based approach which incorporates each reporting unit’s
internal forecasts of revenues and expenses. The use of this model
and, more generally, our impairment assessment process require the
use of estimates and assumptions, including discount rates, growth
rates, and terminal growth rates. Changes in one or more of the
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
37
estimates or assumptions could have an impact on the determina-
tion of the fair value of our reporting units and thus, the results of the
impairment test. In addition to the earnings-based approach, where
possible, we use a market-based approach to assess what the appro-
priate fair value of each reporting unit may be in the current market
based on actual market events and comparable companies.
Other intangibles with a finite life are amortized on a straight-line
basis over their estimated useful lives, generally not exceeding
20 years. These are also tested for impairment when an event occurs
or a condition arises that indicates that the estimated future net
cash flows from the asset may be insufficient to recover its carrying
amount. The identification of such events or conditions may be subject
to management’s judgment. Estimating the fair value of a finite-life
intangible for purposes of determining whether it is impaired also
requires management to make estimates and assumptions, changes
in which could have an impact on the determination of the fair value of
the intangible and thus, the results of the impairment test. We do not
have any intangibles with indefinite lives.
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.
Pensions and other post-employment benefits
We sponsor a number of defined benefit and defined contribution
plans that provide 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.
For further details, refer to Notes 1 and 10 to our Consolidated
Due to the long-term nature of these plans, the calculation of ben-
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
efit expenses and obligations depends on various assumptions such
as discount rates, expected rates of return on assets, healthcare cost
trend rates, projected salary increases, retirement age, and mortality
and termination rates. Discount rate assumption is determined using a
yield curve of AA corporate debt securities. All other assumptions are
determined by management and are reviewed annually by the actuaries.
Actual experience that differs from the actuarial assumptions will
affect the amounts of benefit obligation and expense. The weighted
average assumptions used and the sensitivity of key assumptions are
presented in Note 20 to our Consolidated Financial Statements.
Income taxes
Management exercises judgment in estimating the provision for
income taxes. We are subject to income tax laws in various jurisdic-
tions 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 manage-
ment’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 deter-
mined 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.
Changes in accounting policies
Significant changes in accounting policies and disclosures
during 2008
Canadian GAAP
Financial Instruments – Presentation and Disclosures
On November 1, 2007, we adopted three new presentation and
disclosure standards that were issued by the CICA: Handbook Section
1535, Capital Disclosures (Section 1535), Handbook Section 3862,
Financial Instruments – Disclosures (Section 3862), and Handbook
Section 3863, Financial Instruments – Presentation (Section 3863).
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 consequences of such non-compliance.
Sections 3862 and 3863 substantially replaced Handbook
Section 3861, Financial Instruments – Disclosure and Presentation
(Section 3861), revised and enhanced its disclosure requirements and
continued its presentation 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.
Reclassification of financial Instruments
In October 2008, the CICA issued amendments to Handbook
Section 3855, Financial Instruments – Recognition and Measurement,
Section 3861, and Section 3862, permitting, under certain circum-
stances, financial assets to be reclassified from held-for-trading to
available-for-sale or from available-for-sale to loans and receivables.
Financial assets that were classified as held-for-trading using the fair
value option cannot be reclassified. These amendments were effective
for us on August 1, 2008 and are referred to as the “CICA reclassifica-
tion amendments” throughout this document.
Future changes in accounting policies and disclosure
Canadian GAAP
Goodwill and Intangible Assets
The CICA issued a new accounting standard, Handbook Section 3064,
Goodwill and Intangible Assets, which clarifies that costs can be
deferred only when they relate to an item that meets the definition
of an asset, and as a result, start-up costs must be expensed as
incurred. The new and amended standard is effective for us begin-
ning November 1, 2008. The implementation of these standards is not
expected to have a material impact on our consolidated financial
position and results of operations.
38
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Transition to International Financial Reporting Standards
The CICA has announced that Canadian GAAP for publicly accountable
enterprises companies will be replaced with International Financial
Reporting Standards (IFRS) over a transition period expected to end in
2011. We will begin reporting our financial statements in accordance
with IFRS on November 1, 2011. We have begun planning our transi-
tion to IFRS but the impact on our consolidated financial position and
results of operations has not yet been determined.
U.S. GAAP
Framework on fair value measurement
The FASB issued the following pronouncements regarding fair value
measurement: (i) FAS 157 on September 15, 2006; (ii) Staff Position
FAS 157-1, Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement
under Statement 13, on February 14, 2008; (iii) Staff Position FAS 157-2,
Effective Date of FASB Statement No. 157, on February 12, 2008; and
(iv) Staff Position FAS 157-3, Determining the fair value of a financial
asset when the market for that asset is not active, on October 10, 2008.
FAS 157 establishes a framework for measuring fair value under U.S.
Controls and procedures
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide rea-
sonable assurance that information required to be disclosed by us in
reports filed or submitted under Canadian and U.S. securities laws
is recorded, processed, summarized and reported within the time
periods specified under those laws and include controls and proce-
dures that are designed to ensure that information is accumulated
and communicated to management, including the President and Chief
Executive Officer, and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
As of October 31, 2008, management evaluated, under the
supervision of and with the participation of the President and Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as defined under rules adopted by
the Canadian securities regulatory authorities and the United States
Securities and Exchange Commission. 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, 2008.
Financial performance
Overview
GAAP and is applicable to other accounting pronouncements where fair
value is considered to be the relevant measurement attribute. FAS 157
also expands disclosures about fair value measurements. FAS 157
will be effective for us on November 1, 2008, except for certain non-
financial assets and non-financial liabilities which will be effective on
November 1, 2009. The transition adjustment will be recognized in
the opening balance of retained earnings reported under U.S. GAAP
as at November 1, 2008 and is not material to our consolidated
financial position.
Fair value option for financial assets and liabilities
On February 15, 2007, the 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. The transition adjust-
ment will be recognized in the opening balance of retained earnings
reported under U.S. GAAP as at November 1, 2008 and is not material
to our consolidated financial position.
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.
As of October 31, 2008, management assessed the effectiveness of
our internal control over financial reporting and, based on that assess-
ment, concluded that our internal control over financial reporting was
effective and that there were no material weaknesses in our internal
control over financial reporting. See Management’s report on inter-
nal 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, 2008, that have materially
affected, or are reasonably likely to materially affect, our internal con-
trol over financial reporting.
2008 vs. 2007
We reported net income of $4,555 million for the year ended
October 31, 2008, down 17% from $5,492 million a year ago. Diluted
EPS were $3.38, down 19% compared to a year ago. ROE was 18%,
compared to 24.6% a year ago. Our results were primarily impacted by
significantly higher writedowns of $2,091 million in Capital Markets
compared to $393 million last year, additional market environment
related writedowns of $397 million in Corporate Support and
$297 million in International Banking. The impact of these writedowns
was partially offset by gains of $533 million on the change in the fair
value of deposit liabilities and subordinated debentures designated
as held-for-trading, largely as a result of the widening of our credit
spreads (fair value adjustments on RBC debt designated as held-for-
trading), as well as a related $608 million reduction of income taxes
and $499 million of compensation adjustments. For further details,
refer to the Impact of the market environment section.
Higher provision for credit losses, primarily in our U.S. banking
business, weaker equity origination activity and higher costs in sup-
port of business growth also contributed to the decrease. Our prior
year results were also favourably impacted by a gain related to the Visa
Inc. restructuring. These factors were partly offset by the reduction of
the Enron Corp.-related litigation provision, solid volume growth in our
banking-related and wealth management businesses partly reflecting
our acquisitions, the impact of which was partially offset by spread
compression in our banking-related businesses. Higher trading rev-
enue in certain of our fixed income and foreign exchange businesses
also partially offset the decrease in net income. Our Tier 1 capital ratio
of 9.0% was down 40 bps from 9.4% a year ago.
There were several important developments during 2008 which
we believe, individually and in aggregate, affect the analysis of our
potential Enron-related litigation provision. As a result of our continu-
ous evaluation of these developments as they occurred, our latest
assessment of them has led us to reduce our litigation provision from
$591 million (US$500 million), which we established in 2005, to
$60 million (US$50 million) or $33 million after-tax (US$27 million).
Refer to Note 25 to our Consolidated Financial Statements for more
information.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
39
Impact of the market environment
The weak market environment continued throughout 2008, resulting
in writedowns of $2,785 million ($1,418 million after-tax and related
compensation adjustments). The writedowns included losses within
certain HFT portfolios and losses on our AFS securities. Of this,
$2,091 million ($920 million after-tax and related compensation adjust-
ments) related to Capital Markets, $397 million ($297 million after-tax)
related to Corporate Support, which includes treasury activities, and
$297 million ($201 mil lion after-tax) related to International Banking.
The impact of the writedowns was partially offset by $533 million
($273 million after-tax and compensation adjustments) on the gain
related to fair value adjustments on RBC debt designated as held-for-
trading. Of this, $343 million ($144 million after-tax and compensation
adjustments) related to Capital Markets and $190 million ($129 million
after-tax) related to Corporate Support.
It is expected that most gains resulting from the widening of our
credit spreads in the current period will reverse in future periods as
the fair value of these liabilities increase through the combination of
the passage of time to maturity, or our effective funding rates decline.
The writedowns within Capital Markets related primarily to U.S.
subprime and collateralized debt obligations (CDOs) of asset-backed
securities (ABS), residential mortgage-backed securities (RMBS) and
other, losses on auction rate securities (ARS), the investment portfolio
of our municipal GIC business, U.S. commercial mortgage-backed
securities (CMBS) and on bank-owned life insurance (BOLI) contracts
in our U.S. Insurance and Pension solutions business.
The writedowns and losses in Corporate Support and
International Banking were primarily related to U.S. MBS and other
securities in our HFT and AFS portfolios, which are held in support of
treasury related activities and investment objectives. The writedowns
were on securities deemed to be other-than-temporarily impaired
and losses on the sale of other securities. The deterioration of the fair
value of these securities reflected various factors including increased
market spreads resulting from higher credit risk and liquidity premi-
ums and in some cases the weakening of underlying collateral.
Reclassification of Held-for-trading to Available-for-sale
Upon acquiring securities, we classify them either as HFT or AFS. For
HFT securities, we reflect changes in fair value in Non-interest income –
Trading Revenue. For AFS securities, we reflect unrealized changes in
fair value for the current period in OCI. If realized or considered to be
other- than-temporarily impaired in value, we reflect changes in fair
value in non-interest income – net (loss) gain on available-for-sale secu-
rities. Refer to the Unrealized gains and losses on AFS securities section
for more details on our AFS portfolio and valuation assessments.
Effective August 1, 2008, we adopted the CICA reclassification
amendments. We reclassified $6,868 million (1) from the HFT category
to the AFS category during the quarter ended October 31, 2008 and
recognized $478 million ($270 million after-tax) in OCI that otherwise
would have been recognized as a loss in our income statement. We
have transferred certain student loan auction rate securities and cer-
tain securities within U.S. municipal GICs and other trading portfolios
out of the HFT category to the AFS category during the quarter ended
October 31, 2008. The unrealized losses on these securities largely
reflected liquidity concerns in the current market. Management has
determined that the unrealized losses on these securities are tem-
porary in nature and intends to hold the remaining securities until
maturity or their value recovers.
For further information, refer to Note 3 to our Consolidated
Financial Statements for more information.
(1)
Represents the fair value as at October 31, 2008.
Summary of market environment impact – gains (losses)
(C$ millions)
Writedowns
Capital Markets – Held-for-trading
U.S. subprime
Hedged with MBIA
CDOs of ABS, RMBS, and other
U.S. auction rate securities (ARS)
U.S. Municipal guaranteed investment contracts (GIC) and other U.S. MBS
U.S. Insurance and Pension solutions
U.S. commercial mortgage-backed securities (CMBS)
Corporate Support
Held-for-trading – U.S. RMBS
AFS – U.S. MBS and other securities
International Banking
AFS – U.S. MBS and other securities
Total pre-tax and related compensation adjustments
Compensation adjustments
Income tax recoveries
Total (writedowns) after-tax and compensation adjustments
Fair value adjustments on RBC debt held-for-trading
Capital Markets
Corporate Support
Total pre-tax and related compensation adjustments
Compensation adjustments
Income tax recoveries
Total gains after-tax and compensation adjustments
Total net income impact
40
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
2008
Table 6
2007
$
(704) $
(597)
(243)
(268)
(162)
(117)
(2,091)
(129)
(268)
(397)
(297)
$
(2,785) $
613
754
$
(1,418) $
$
343
190
533
(114)
(146)
273
$
$
$
$
(5)
(352)
–
–
–
(36)
(393)
–
–
–
–
(393)
131
89
(173)
59
29
88
(20)
(25)
43
(1,145) $
(130)
Capital Markets
U.S. subprime – hedged with MBIA
Table 7
(C$ millions)
As at October 31, 2008
Writedowns
Underlying exposure
Credit protection through CDS
Principal/
notional
Fair
value
Cash
collateralized
MBIA
insured (1)
Fair value of
MBIA protection
after
writedowns (2)
2008
2007
Subprime RMBS
Subprime CDOs of ABS
Non-subprime (CDOs of corporate names)
$
1,303
1,221
3,253
$
473
15
2,357
Total
$
5,777
$
2,845
$
689
$
5,217
$
1,519
$
704
$
5
(1)
(2)
The counterparty is a subsidiary of MBIA Inc., a monoline insurance provider with a financial strength rating of Baa1 by Moody’s Investors Service (Moody’s) as at November 7, 2008 and
AA (Negative Outlook) by Standard & Poor’s (S&P) as at August 14, 2008.
The fair value is included in Other – Derivatives.
Capital Markets writedowns of $704 million during the year resulted
from declines in fair value of credit default swaps (CDS) with mono-
line insurer MBIA Inc. that represent credit protection purchased to
hedge our credit risk exposure to super-senior tranches of structured
credit transactions, taking into account market credit default spreads,
expected recovery rates on the underlying exposures and other
parameter inputs. As noted in Table 7, the credit protection with MBIA
covers both subprime- and non-subprime-related assets. For infor-
mation on monoline insurance for non-subprime assets, refer to the
Financial Stability Forum disclosures section.
U.S. subprime – CDOs of ABS, RMBS, and other
Table 8
(C$ millions)
CDOs of ABS
Other subprime RMBS, and other
Total
(1)
Net on-balance sheet amount of trading-related securities.
As at October 31, 2008
Writedowns
Principal/
notional
Fair
value (1)
$
$
$
862
(57)
$
93
46
805
$
139
$
2008
421
176
597
$
$
2007
264
88
352
Capital Markets writedowns of $597 million during the year related
to declines in fair value of subprime CDOs of ABS, RMBS and CDO
positions. These holdings include $540 million notional value of
predominantly senior tranches of RBC-sponsored CDOs previously
hedged by monoline insurer ACA Capital Holdings Inc. (ACA) and other
unhedged positions. The Other subprime RMBS principal/notional
amount represents a net short exposure (liability).
U.S. ARS
(C$ millions)
Student loan ARS
Closed-end funds and municipal ARS
Total
Other (net change due to consolidation of VIEs and realized losses)
Total
Table 9
As at October 31, 2008
Writedowns
Principal
Fair value (1)
2008
2007
$
$
$
4,177
154
4,331
–
$
$
3,651
153
3,804
–
$
$
202
1
203
40
$
–
$
–
4,331
$
3,804
$
243
$
–
–
–
(1)
The fair value is included in Securities – Available-for-sale except for Closed-end funds and municipal ARS that continue to be included in Securities – Held-for-trading.
Capital Markets writedowns of $203 million during the year resulted
from declines in fair value of our trading positions of ARS, based
on market prices and a models-based approach to valuations that
includes the impact of liquidity.
U.S. ARS are issued through variable interest entity (VIE) trusts
in the U.S. financial markets. The VIEs hold long-term assets and fund
them with long-term debt that trades at short-term debt prices, with an
interest rate reset every week to 35 days. These securities are issued
by municipalities, student loan authorities and other sponsors through
bank-managed auctions. We participate as a remarketing agent in the
ARS market.
As at October 31, 2008, the fair value of the auction rate securi-
ties we hold on our balance sheet is $3.8 billion, of which $3.7 billion is
backed by student loan collateral. The average yield on our holdings is
above our funding costs. Approximately 89% of our inventory is rated
AAA. In terms of student loan auction rate securities that we hold,
approximately 97% of the supporting student loan collateral is guaran-
teed under the U.S. government Federal Family Education Loan Program.
In addition to amounts shown in the table above, during the
second and third quarters of 2008, we sold $1.5 billion of the ARS in
our trading inventory into off-balance sheet special purpose entities
to which we provide liquidity facilities. Of this amount, $465 million
was sold during the third quarter and the purchase of the ARS by the
SPE was financed by a loan from us and the loan is secured by various
assets of the SPE. These transactions are reflected at fair value and
are not included in the amounts shown in the table above. For further
details on VIEs, refer to the Structured finance VIEs in the Off-balance
sheet arrangements section and Note 6 to our Consolidated Financial
Statements.
We have reclassified U.S. ARS of $3,651 million (fair value as at
October 31, 2008) out of the HFT category to the AFS category during
the quarter ended October 31, 2008.
In addition to ARS described above, as disclosed in our press
release on October 8, 2008, as part of a settlement with the SEC
New York Attorney General’s office, and the North American
Administrators Association we will offer to purchase, at par, ARS held
by our U.S. retail brokerage clients, as well as charities with accounts
at RBC of US$25 million or less and small institutions and businesses
with accounts at RBC of US$10 million or less. The repurchase offer
represents approximately US$850 million as at October 31, 2008. For
further details, refer to the Fourth quarter 2008 performance section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
41
U.S. Municipal GICs and other U.S. MBS
Table 10
(C$ millions)
U.S. Municipal GIC business
Agency MBS (2)
Agency discount notes and bonds
Non-Agency MBS (AAA or Alt-A)
Federal, municipal and corporate bonds
GIC liability and hedge gains and losses
Other U.S. non-Agency MBS
As at October 31, 2008
Writedowns
Principal
Fair value (1)
2008
2007
$
$
$
$
2,486
941
9
402
3,838
–
3,838
935
$
$
$
2,299
941
5
338
3,583
–
3,583
594
$
$
$
4,773
$
4,177
$
$
–
–
–
$
$
103
(1)
60
31
193
80
273
(5)
268
–
–
–
–
–
–
(1)
(2)
The fair value is included in Securities – Held-for-trading or Available-for-sale.
Includes Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae).
In our U.S. Municipal GIC business, we issue GICs for cash received
from municipalities, generally in situations where a municipality has
issued debt and does not have immediate needs for the proceeds.
The GIC liabilities are of various durations averaging approximately
18 months and the payments are swapped to floating rate. We then
invest the cash received from the municipalities primarily in MBS, both
agency and non-Agency (refer to table above).
Capital Markets writedowns of $273 million during the year
resulted from declines in fair value of our investment portfolio
supporting our U.S.Municipal GIC business along with losses related
to our GIC liabilities and related hedge positions.
We have reclassified securities of $3,217 million (fair value as at
October 31, 2008) within the U.S. Municipal GICs and other trading
portfolios from HFT to AFS during the quarter ended October 31, 2008.
U.S. Insurance and Pension solutions
Table 11
(C$ millions)
BOLI stable value contracts
As at October 31, 2008
Writedowns
Notional (1)
Fair value (1)
2008
$
9,451
$
7,392
$
162
$
2007
–
(1)
Notional value represents the total amount of investment value protected under stable value contracts and is reported under stable value products in Note 25 of our Consolidated
Financial Statements. Fair value represents the current estimate of fair value of the investments referenced under the stable value contracts.
Our U.S. Insurance and Pension solutions business in Capital Markets
provides stable value contracts on BOLI policies purchased by banks
on groups of eligible employees. The BOLI purchaser pays premiums
to the insurance company, and the premiums are then invested in a
portfolio of eligible assets. While the insurance is in place, the
purchaser receives tax-exempt earnings linked to the performance of
the underlying assets and also receives death benefits as they arise.
The stable value wraps provided by our U.S. Insurance and
Pension solutions business reduce the volatility of the tax-free
earnings stream received by purchasers of BOLI on the assets in their
policy. If a purchaser were to surrender (terminate early) its BOLI
policy, the terms of the stable value contract generally require us to
make up the difference between the notional and fair value of the
assets inside the policy. The purchaser would receive a payment for
this difference in value, but also would be taxed on the surrender
value, forfeit the tax-exempt income stream, and may be exposed to
unhedged long-term tax-deferred liabilities.
As at October 31, 2008, the difference between the notional value
and fair value of our BOLI contracts was $2,059 million ($433 million
as at October 31, 2007). This represents the loss that would be recog-
nized if all insurance contracts were surrendered on that date. Capital
Markets recognized writedowns of $162 million during the year, reflect-
ing both the value of the assets underlying the investment portfolios of
the policies and our estimated probability of the policyholders surren-
dering their policies.
U.S. CMBS
(C$ millions)
Corporate loans and CMBS
Table 12
As at October 31, 2008
Writedowns
Principal
Fair value (1)
2008
$
923
$
796
$
117
$
2007
36
(1)
Includes held-for-trading loans and CMBS principal amount of $747 million with a fair value of $605 million recorded in Loans – Wholesale and whole loans with a principal amount of
$176 million recorded in Loans – Wholesale.
In our U.S. CMBS business, we previously originated commercial
mortgages in the U.S. market and warehoused them until such time as
there was an opportunity to securitize them for a fee through issuance
of CMBS or to sell them in the whole loan market. Loans previously
originated to be securitized are classified as HFT while those to be sold
in the whole loan market are classified as loans and receivables and
carried at amortized cost. We have discontinued new business and we
will continue to wind down this business in an orderly fashion.
Capital Markets recognized a loss of $117 million during the year
due to credit deterioration, reduced liquidity in the CMBS issuance
market and the impact of derivative hedges of interest-rate risk within
the portfolio. As at October 31, 2008, the fair value of our inventory
was $796 million.
42
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Corporate Support
Operations included in the Corporate Support segment hold various
securities in HFT and AFS portfolios in support of their respective
treasury-related activities and investment objectives. The majority of
their holdings are Canadian government and Agency-related securities
that have experienced gains during the year, primarily due to the
decrease in interest rates. However, investments in MBS and certain
ABS and Corporate debt securities held in Corporate Support have
been adversely impacted by the market environment, lack of liquidity
and, in some cases, deterioration in the underlying collateral.
The portfolios that have been impacted by these events and their
related writedowns and losses are detailed below. Refer to the
Unrealized gains and losses on AFS securities section and Note 3
to our Consolidated Financial Statements for further details on the
assessment of impairment on AFS securities and total writedowns due
to other-than-temporary impairment.
U.S. MBS and other securities
Table 13
(C$ millions)
Held-for-trading
Mortgage-backed securities (MBS)
Available-for-sale
Mortgage-backed securities (MBS)
Asset-backed securities (ABS)
Corporate debt and other debt
Total
Corporate Support recognized $397 million of writedowns and realized
losses in 2008 related to the market environment. The writedowns
included a loss of $129 million related to a held-for-trading portfolio of
U.S. MBS and $268 million of writedowns on AFS securities that were
determined to be other-than-temporarily impaired.
Held-for-trading
The HFT portfolio consists of high-quality super-senior tranches of
U.S. Alt-A and other Non-Agency MBS. The deterioration of the market
value of these securities mainly reflected increased market spreads
resulting from higher market risk and liquidity premiums. These pre-
miums are significantly higher than historically experienced, resulting
in little differentiation in the market between higher and lower quality
tranches of MBS securities. These factors gave rise to the
deterioration in prices resulting in a recognized loss in the trading
portfolio of $129 million for the year.
As at October 31, 2008
Writedowns and realized losses
Amortized
cost
Fair value
Net unrealized
losses
2008
2007
$
387
$
387
$
–
$
129
$
1,355
613
753
1,083
477
642
272
136
111
215
23
30
$
3,108
$
2,589
$
519
$
397
$
–
–
–
–
–
Available-for-sale
MBS in AFS are similar to those in the HFT portfolio, but also includes
fair value of $143 million fair value of subprime securities largely
comprised of super-senior tranches. These securities experienced sig-
nificant declines in fair value due to the ongoing widening of spreads
and, to varying degrees, the weakening of underlying collateral. In
2008, the assessment of these securities for other-than-temporary
impairment resulted in writedowns of $215 million, mainly related to
Alt-A and subprime MBS.
ABS in the AFS portfolio included collateralized loan obligations
(CLO) and U.S. uninsured student loans. The majority of these
instruments are rated AAA with significant credit support. Based on
management’s assessment of these securities, certain lower quality
CLOs were determined to be other-than-temporarily impaired and writ-
ten down by $23 million to their fair value.
Corporate and other debt mainly includes various securities
with exposure to European financial institutions. The $30 million loss
largely reflects writedowns on securities we intend to sell in order to
manage our exposure to certain names.
International Banking
Operations in International Banking hold various AFS securities in
support of their respective treasury-related activities and investment
objectives. The majority of the securities they hold are U.S. govern-
ment and Agency-related securities that have experienced fair value
declines primarily due to liquidity concerns. Investments in MBS
and certain ABS and corporate debt securities held in this segment
have been adversely impacted by the dislocation in the market, lack
of liquidity, and in some cases, deterioration in the underlying col-
lateral. The portfolios that have been impacted by these events and
their related writedowns and losses are detailed below. Refer to the
Unrealized gains and losses on AFS securities section and Note 3
to our Consolidated Financial Statements for further details on the
assessment of impairment on AFS securities and total writedowns due
to other-than-temporary impairment.
U.S. MBS and other securities
Table 14
(C$ millions)
Available-for-sale
Mortgage-backed securities (MBS)
Asset-backed securities (ABS)
Corporate debt and other debt
Agency preferred stock
Total
As at October 31, 2008
Writedowns and realized losses
Amortized
cost
Fair value
Net unrealized
losses
2008
2007
$
$
$
2,249
366
1,866
–
1,869
341
1,689
–
$
380
25
177
–
$
–
–
136
–
91
70
$
4,481
$
3,899
$
582
$
297
$
–
–
–
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
43
International Banking recognized $297 million of writedowns and
realized losses in 2008 related to the market environment. The write-
downs included $184 million on AFS securities that were determined
to be other-than-temporarily impaired and $113 million of realized
losses related to the sale of Agency preferred stock and certain AFS
debt securities.
MBS in AFS are largely comprised of super-senior tranches of
non-Agency and Alt-A MBS. Also included is $63 million fair value of
subprime MBS. These securities have experienced significant declines
in fair value due to the ongoing widening of spreads and, to varying
degrees, the weakening of underlying collateral. In 2008, the assess-
ment of these securities for other-than-temporary impairment resulted
in writedowns of $136 million, mainly related to Alt-A and other non-
Agency MBS.
ABS in the AFS portfolio included structured notes and auction
credit support and have experienced moderate price declines over the
year, primarily related to liquidity. Based on management’s assess-
ment of these securities for other-than-temporary impairment, no
securities were deemed by management to be other-than-temporarily
impaired.
Corporate and other debt mainly includes various securities
with exposure to non-Organization for Economic Co-operation and
Development (OECD) governments, predominately Caribbean coun-
tries where we operate, and U.S. and European financial institutions.
The $91 million loss largely reflected realized losses on the sale of
certain securities and writedowns on securities we intended to sell
in order to effectively manage our exposures to certain names and
reposition a number of portfolios. $33 million of the loss related to
securities that were deemed to be other-than-temporarily impaired.
During the year, we realized a $70 million loss on the sale of our
rate securities. The majority of these instruments have significant
U.S. Agency preferred stock.
Unrealized gains and losses on AFS securities
As at October 31, 2008, all AFS securities that had unrealized losses
were assessed for other-than-temporary impairment. This included
the change in fair value including, where applicable, foreign exchange.
For those securities that, based on management’s judgment, it was
not probable that all principal and interest would be recovered, the
securities were deemed to be other-than-temporarily impaired and
were written down to their fair value. In addition, securities for which
management could not attest to holding until maturity or where in
management’s opinion the value of the security would not recover
prior to its disposition were also deemed to be other-than-temporarily
impaired and were written down to their fair value. Management has
determined that the unrealized losses on the remaining securities
were temporary in nature and intends to hold the remaining securities
until their value recovers.
Total RBC available-for-sale portfolio
Reclassification of Held-for-trading to Available-for-sale
During the quarter ending October 31, 2008, we reclassified certain
financial assets from the HFT category to the AFS category in accor-
dance with the CICA reclassification amendments. Refer to Note 3 to
our Consolidated Financial Statements for further details on the reclas-
sification and additional details regarding AFS securities. Refer to our
Consolidated Financial Statements of Comprehensive Income and to
our Consolidated Financial Statements of Changes in Shareholders’
Equity for details regarding the impact on OCI and AOCI, respectively.
(C$ millions)
Government and agency
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Loan substitute securities
2008
Amortized
cost
Fair value
$ 24,294 $ 24,382
3,548
4,796
12,785
2,683
227
4,278
5,192
13,102
3,057
256
Fair value
as a %
of total
50%
7%
10%
27%
6%
–%
Gross
unrealized
gains
Gross
unrealized Net unrealized
losses gains (losses)
Net gains
(losses)
recognized
in income
$
447
4
11
136
4
–
$
$
(359) $
(734)
(407)
(453)
(378)
(29)
88
(730)
(396)
(317)
(374)
(29)
7
(363)
(25)
(162)
(88)
(1)
Total (1)
$ 50,179
$ 48,421
100%
$
602
$ (2,360) $ (1,758)
$
(632)
(1)
Excludes held-to-maturity of $205 million that is grouped with AFS on the balance sheet.
Table 15
2007
Net gains
(losses)
recognized
in income
(55)
–
(6)
(20)
161
–
80
Government and agency
Government and agency securities constitute 50% of the AFS securi-
ties we hold and are largely comprised of Canadian federally issued
instruments and mortgages insured by Canadian agencies, as well as
$4,069 million of U.S. Agency MBS and $1,734 million of ARS.
The net unrealized gains of $88 million include unrealized gains
of $447 million largely attributable to Canada-based instruments
resulting from the recent decrease in interest rates and unrealized losses
of $359 million mainly related to U.S. Agency MBS and U.S. ARS. The
unrealized losses on these securities largely reflected liquidity con-
cerns in the current market.
Mortgage-backed securities
Mortgage-backed securities represent 7% of the total AFS portfolio.
The portfolio largely consists of high-quality super-senior tranches
of U.S. Alt-A and other U.S. non-Agency MBS as well as $189 million
of U.S. subprime. The net unrealized loss of $730 million reflects the
impact of increased market spreads related to higher risk and liquidity
premiums, with little differentiation in the market between higher and
lower quality tranches.
As at October 31, 2008, all U.S. MBS were assessed for other-
than-temporary impairment using a cash flow projection model and
management consideration of other market and security-specific fac-
tors. The cash flow model incorporated actual cash flows on the MBS
through the current period and then projected the remaining cash
flows on the underlying mortgages, using a number of assumptions
and inputs that were based on the security-specific collateral. The
44
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
assumptions included default, prepayment and recovery rates, the lat-
ter being largely dependent upon forecasted house prices. The model
then distributed those cash flows to each tranche of the security based
on the transaction structure, subordination and credit enhancements.
The inputs and assumptions used were based on updated market data
for defaults, prepayment and house price appreciation at the municipal
level provided by a third-party vendor. Management made adjustments
for historical data and model limitations and specific adjustments to
slow prepayments to reflect the expected impact of the current market
environment on obligor behaviour. If the model predicted that it was
probable that a security will not recover all principal and interest due,
a further review of the security was undertaken to determine if, in
management’s judgment, a loss would ultimately be realized. Where
management concluded based on this analysis that the loss was other-
than-temporary, the security was written down to its fair value. Almost
all of the $363 million in losses recognized in 2008 were as a result of
writedowns due to other-than-temporary impairment. In most cases,
the securities’ fair value is lower than the amount we ultimately expect
to recover.
Asset-backed securities
Asset-backed securities constitute 10% of the total AFS portfolio and
mainly comprise insured student loans, including U.S. ARS that were
transferred to AFS on August 1, 2008. CLOs, U.S. uninsured student
loans and commercial mortgage-backed securities are also included.
The majority of these instruments are highly rated with significant
credit support and have experienced moderate price declines over
the year resulting in $396 million in net unrealized losses or 8% of the
portfolio value.
As at October 31, 2008, all securities were assessed for other-
than-temporary impairment. Impairment testing methods included the
use of cash flow projection models and management’s consideration
of other market and security-specific factors. Based on this assess-
ment, certain lower quality CLOs were deemed other-than-temporarily
impaired and written down by $23 million to their fair value.
Corporate and other debt
Corporate and other debt mainly includes corporate bonds, non-OECD
government bonds and structured notes securities. The Corporate
bonds are well diversified across a number of names and sectors,
with U.S. and Global financial institutions being the largest concentra-
tion. The non-OECD government securities are primarily related to
Caribbean countries where we have ongoing operations. The struc-
tured notes are predominately supported by Canadian credit cards.
The net unrealized losses mainly reflected widening spreads on certain
U.S. and Global financial institutional securities.
Each security was assessed for other-than-temporary impairment
based on management’s consideration of internal and external ratings,
subordination and other market and security-specific factors. Complex
instruments were also assessed using a cash flow projection model.
The $162 million loss recognized in income largely reflected realized
losses on the sale of certain securities and writedowns on securities
we intend to sell in order to effectively manage our exposures to cer-
tain names and reposition certain portfolios. $33 million of the loss
related to securities that were deemed to be impaired.
Equity
Equity holdings represent 6% of the portfolio. These investments are
largely comprised of publicly traded equity and preferred shares of
Canadian financial institutions. To a lesser extent, we also hold invest-
ments in other public, private and venture companies.
A substantial portion of the unrealized losses related to publicly
traded Canadian bank shares we hold to economically hedge certain
stock-based compensation programs. While their share prices are
under pressure due to current market conditions, these banks are
well capitalized, continue to generate strong earnings and continue
to pay dividends, and we do not consider these securities to be other-
than-temporarily impaired. Other equity holdings that we viewed as
other-than-temporarily impaired were written down to their fair value.
The net losses largely reflected a realized loss of $70 million on the
sale of U.S. Agency preferred shares of Fannie Mae and Freddie Mac
and write downs due to impairments identified in our private equity
portfolio.
Summary of 2007 and 2006
In 2007, we achieved net income of $5,492 million, up $764 million, or
16%, from 2006. Our strong results were largely attributable to profit-
able volume and balance growth in our banking and wealth management
businesses, strong 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 success-
ful execution of our growth initiatives as well as generally favourable
economic and market conditions for most of the year. A $326 million
($269 million after-tax) 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.
In 2007, the Canadian economy grew at an estimated rate of
2.6%, with domestic demand remaining the key driver of economic
growth. Robust economic growth in the early part of the year, largely
reflecting strong consumer spending, solid business investment,
favourable terms of trade and solid housing market activities, weak-
ened slightly in the latter part of the year. This was mainly attributable
to slowing U.S. demand and tightening credit conditions as a result
of the U.S. mortgage market concerns. The U.S. economy grew at an
estimated rate of 2%. Solid 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 weaker economic growth was largely a result of slowing
residential investment amid the ongoing housing market correction,
tightening credit conditions and increased funding costs arising from
the U.S. mortgage market concerns, as well as a general repricing of
risk in numerous markets.
During 2007, we had a charge of $393 million before tax and com-
pensation adjustments in Capital Markets, consisting of the writedowns
on the valuation of U.S. RMBS and CDOs of ABS, reflecting the deteri-
oration in credit markets since July 2007, higher provision for credit
losses, reflecting portfolio growth, higher impaired loans in our U.S.
residential builder finance business, and higher credit card customer
loyalty reward program costs. We also had higher costs in support of
business growth and the negative impact of a stronger Canadian dollar
on the translation of our U.S. dollar-denominated earnings.
In 2006, net income was $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-related litigation provision. Our
strong results in 2006 were also underpinned by generally favourable
economic and credit conditions in both domestic and international
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 consumer
and business spending supported by strong balance sheets as well as
strength in the labour market, though partly restrained by the lagged
effects of increases in interest rates and high but falling energy prices.
During 2006, strong consumer lending was supported by favour-
able labour market conditions and a relatively low interest rate
environment. Business lending remained solid, albeit in part offset by
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
45
surpluses of internally generated funds available for capital and inven-
tory investment. Capital market conditions were generally favourable,
characterized by buoyant mergers and acquisitions (M&A) activity in
Canada and strong performance of natural resource-based equities.
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
$40 million on the exchange of New York Stock Exchange (NYSE) seats
for shares in the NYSE Group (NYX).
Impact of U.S. vs. Canadian dollar
The translated value of our consolidated results is impacted by fluctua-
tions in the respective exchange rates relative to the Canadian dollar.
The following table depicts the effect of translating current year U.S.
dollar/Canadian dollar consolidated results at the current year weighted
average exchange rate in comparison to the historical period’s weighted
average exchange rate. Revenue, expenses and income denominated in
foreign currencies are translated at average rates of exchange during the
year in our consolidated results. We believe this provides the reader with
the ability to assess the underlying results on a more comparable basis,
particularly given the magnitude of the recent changes in the exchange
rate and the resulting impact on our results.
Certain of our business segment results are also impacted by
fluctuations in the U.S. dollar, Euro and British pound exchange rates
relative to the Canadian dollar. For further details, refer to the Impact
of foreign exchange rates on our business segments section.
Impact of U.S. dollar vs. Canadian dollar
(C$ millions, except per share amounts)
Canadian/U.S. dollar exchange rate (average)
2008
2007
2006
Percentage change in average US$
equivalent of C$1.00 (1)
Increased (decreased) total revenue
Increased (decreased) non-interest expense
Increased (decreased) net income
Increased (decreased) basic EPS
Increased (decreased) diluted EPS
Table 16
2007 vs.
2006
2008 vs.
2007
$
$
$
$
.969
.915 $
6%
(340) $
(210)
(90)
(.07) $
(.07) $
.915
.883
4%
(230)
(139)
(47)
(.04)
(.04)
(1)
Average amounts are calculated using month-end spot rates for the period.
In 2008, the Canadian dollar appreciated 6% on average relative to
the U.S. dollar from a year ago, resulting in a $90 million decrease in
the translated value of our U.S. dollar-denominated net income and a
decrease of $.07 in our current year’s diluted EPS.
Monetary assets and liabilities denominated in foreign currencies
are translated into Canadian dollars at rates prevailing at the balance
sheet date. Non-monetary assets and liabilities are translated into
Canadian dollars at historical rates. Assets and liabilities of our self-
sustaining operations with functional currencies other than Canadian
dollars are translated into Canadian dollars at rates prevailing at the
balance sheet date.
For further information on the impact of foreign currency transla-
tion on our balance sheet, refer to the Financial condition section.
Total revenue
(C$ 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
Table 17
2008
2007
2006
$ 25,344
15,984
$ 26,547
18,845
$ 22,204
15,408
$
$
$
$
$
$
9,360
4,697
2,609
(408)
3,076
875
1,373
7,702
4,405
3,152
1,999
2,620
1,217
1,367
6,796
3,786
3,348
2,574
2,391
1,024
718
$ 12,222
$ 14,760
$ 13,841
$ 21,582
$ 22,462
$ 20,637
$
$
$
$
998
(408)
(220) $
1,999
(539)
2,574
590
$
1,779
$
2,035
(259) $
265
584
$
640
784
355
1,174
561
300
$
590
$
1,779
$
2,035
(1)
(2)
(3)
(4)
(5)
Includes securities brokerage commissions, investment management and custodial fees, and mutual funds.
Includes premiums, investment and fee income. Investment income includes the change in fair value of investments backing policyholder liabilities and is largely offset in insurance
policyholder benefits, claims and acquisition expense.
Includes service charges, foreign exchange revenue other than trading, card service revenue and credit fees.
Includes other non-interest income, net gain (loss) on AFS securities (other-than-temporary impairment and realized gain/loss), fair value adjustments on RBC debt designated as
held-for-trading, the change in fair value of certain derivatives related to economic hedges and securitization revenue.
Total trading revenue comprises trading-related revenue recorded in Net interest income and Non-interest income. Total trading revenue includes revenue from cash and related
derivatives.
46
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
2008 vs. 2007
Total revenue decreased $880 million, or 4%, from a year ago. The
decrease was largely due to writedowns resulting from the impact of
the current market environment. Lower insurance-related revenue,
largely related to the change in fair value of investments backing our
life and health policyholder liabilities and largely offset in policy-
holder benefits and claims, weaker equity origination activity and
the negative impact of the strong appreciation of the Canadian dollar
throughout most of the year on the translation of our U.S. dollar-
denominated revenue also contributed to the decrease. These factors
were partially offset by solid volume growth in our banking-related and
wealth management businesses, which was driven by the successful
execution of our growth initiatives and continued expansion activities,
including acquisitions, higher trading results in certain capital mar-
kets businesses and the gain on fair value adjustments on RBC debt
designated as held-for-trading. Our prior year revenue was favourably
impacted by a gain related to the Visa Inc. restructuring.
Net interest income increased $1,658 million, or 22%, largely
driven by lower funding costs and solid growth on certain trading posi-
tions, and solid loan and deposit growth in Canada, partially offset by
retail spread compression. Net interest margin of 1.44% was up
11 bps compared to the prior year.
Investments-related revenue increased $292 million, or 7%, pri-
marily due to increased fee-based and transaction revenue as a result
of our acquisitions. Also contributing to the increase was solid growth
in fee-based client assets, reflecting higher net sales and the addition
of more experienced advisors. Higher U.S. cash equities revenue and
higher custody fees and securities lending revenue also contributed to
the increase. These factors were partially offset by lower transaction
volumes in our full-service brokerages, amid the uncertainty in global
financial markets.
Insurance-related revenue decreased $543 million, or 17%,
mainly reflecting the change in fair value of investments backing our
life and health policyholder liabilities, largely offset in policyholder
benefits and claims. Investment losses on disposals and impairments,
as well as impacts from equity market movements and lower U.S.
annuity sales also contributed to the decrease. These factors were
partially offset by solid growth in our reinsurance and Canadian busi-
nesses during the year.
Trading revenue decreased by $2,407 million. Total trading rev-
enue was $590 million, down $1,189 million, or 67%, from a year ago
largely due to writedowns resulting from the current market environ-
ment. The decrease was partly offset by stronger trading results in
certain fixed income and foreign exchange businesses. For a detailed
discussion regarding our writedowns, refer to the Impact of the market
environment in the Financial performance section.
Banking revenue was up $456 million, or 17%, mainly due to a
credit card customer loyalty reward program liability charge in the
prior year and improved results in our syndicated finance business,
higher foreign exchange revenue due to increased transaction volumes
and increased service fees in the current year.
Other revenue was flat compared to the prior year. The gain on
fair value adjustments on RBC debt designated as held-for-trading,
as well as higher gains on credit derivative contracts recorded at fair
value used to economically hedge our corporate lending portfolio and
higher gains on the change in fair value of certain derivatives related
to economic hedges contributed to an increase in revenue. These fac-
tors were offset by write downs in Corporate Support and International
Banking, the change in fair value of certain securities held to economi-
cally hedge the stock-based compensation plan in our U.S. brokerage
business (which was partially offset by lower stock-based compensa-
tion expenses in non-interest expense) and lower equity distributions.
Also offsetting the increase in Other revenue were certain favourable
items recorded in prior year including a gain related to the Visa Inc.
restructuring and a favourable adjustment related to the reallocation
of certain foreign investment capital from our international insurance
operations.
2007 vs. 2006
Total revenue increased $1,825 million, or 9%, from 2006. 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. The strong growth largely
reflected the successful execution of our strategy, including acquisi-
tions, as well as generally favourable market conditions for most of
2007. These factors were partially offset by writedowns related to U.S.
subprime RMBS and CDOs of ABS, the negative impact of a stronger
Canadian dollar on the translation of our U.S. dollar-denominated rev-
enue and higher credit card customer loyalty reward program costs.
Net interest income increased $906 million, or 13%, largely
driven by strong loan and deposit growth. Net interest margin of
1.33% was down 2 bps compared to 2006.
Investments-related revenue increased $619 million, or 16%,
primarily due to continued growth in fee-based client assets, capital
appreciation and the recruitment and retention of more experienced
advisors.
Insurance-related revenue decreased $196 million, or 6%, largely
reflecting the change in fair value of investments backing our life and
health policyholder liabilities, which was largely offset in policyholder
benefits and claims, lower U.S. annuity sales and lower revenue from
our property catastrophe reinsurance business, which we exited
completely in 2007.
Trading revenue decreased $575 million, or 22%, with Total trad-
ing revenue of $1,779 million down $256 million, or 13%, from 2006
on writedowns related to U.S. subprime RMBS and CDOs of ABS.
Banking revenue was up $229 million, or 10%, mainly due to
higher transaction volumes and client balances, as well as increased
loan syndication activity.
Underwriting and other advisory revenue increased $193 million,
or 19%, due to strong equity origination activity and improved M&A
results, mainly in the U.S.
Other revenue increased $649 million, or 90%, largely due to the
Underwriting and other advisory revenue decreased $342 million,
Visa Inc. restructuring gain.
or 28%, from a year ago, mainly due to weak equity origination and
lower M&A activities.
Net interest income and margin
(C$ millions, except percentage amounts)
Net interest income
Average assets (1)
Net interest margin (2)
Table 18
2008
2007
2006
$
9,360
650,300
$
7,702
581,000
$
6,796
502,100
1.44%
1.33%
1.35%
(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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
47
Change in net interest income (1)
Table 19
(C$ millions)
Assets
Deposits with other banks
Canada
United States
Other International
Securities
Trading
Available-for-sale
Asset purchased under reverse repurchase
agreements and securities borrowed
Loans
Canada
Retail
Wholesale
United States
Other International
2008 vs. 2007
Increase (decrease)
due to changes in
2007 vs. 2006
Increase (decrease)
due to changes in
Average
volume (2)
Average
rate (2)
Net
change
Average
volume (2)
Average
rate (2)
Net
change
$
7
60
114
(534)
289
(165)
1,017
207
684
375
$
(5) $
(99)
(117)
(568)
122
(566)
(1,504)
(260)
(763)
503
$
2
(39)
(3)
11
71
31
(1,102)
411
1,142
(230)
(731)
815
(487)
(53)
(79)
878
1,025
–
348
778
$
(9) $
(50)
4
423
141
(22)
194
(217)
(218)
106
2
21
35
1,565
(89)
793
1,219
(217)
130
884
Total interest income
$
2,054
$
(3,257) $
(1,203) $
3,991
$
352
$
4,343
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
$
244
115
1,654
(54)
(303)
24
37
$
(1,490) $
(920)
(1,215)
(418)
(1,246) $
(805)
439
(472)
(448)
(8)
(79)
(751)
16
(42)
(1) $
264
1,344
386
542
(66)
89
$
646
281
528
(460)
(60)
(15)
(41)
645
545
1,872
(74)
482
(81)
48
$
$
1,717
337
$
$
(4,578) $
(2,861) $
2,558
1,321
$
1,658
$
1,433
$
$
879
$
3,437
(527) $
906
(1)
(2)
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Volume/rate variance is allocated on the percentage relationship of changes in balances and changes in rates to the total net change in net interest income.
2008 vs. 2007
Net interest margin increased 11 bps, largely reflecting lower funding
costs and solid growth on certain trading positions, and solid volume
growth on our Canadian-related banking businesses, muted by spread
compression. These factors were offset by higher growth in lower-
yielding and non-interest-earning assets, largely reflecting an increase
in derivative assets as a result of increased market volatility, which
generated non-interest income. For further details, refer to Table 82 in
the Additional financial information section.
Provision for credit losses
(C$ millions)
Provision for credit losses
2008 vs. 2007
Total provision for credit losses (PCL) of $1,595 million compares to
$791 million in the prior year. The increase was largely attributable
to higher impaired loans in our U.S. banking business, mainly in our
residential builder finance, commercial and business banking loan
portfolios, reflecting the continued housing downturn and deteriorat-
ing economic conditions, and an increase in the general provision,
commensurate with volume growth and weaker credit quality in the
Canadian retail portfolio and weakness in U.S. banking portfolios. For
a detailed discussion regarding our PCL, refer to the Credit risk section.
2007 vs. 2006
Net interest margin decreased 2 bps, reflecting the impact of changes
in product mix, an increase in lower-yielding and non-interest-earning
assets and competitive pressures on our U.S. deposit business.
2008
2007
$
1,595
$
791
$
Table 20
2006
429
2007 vs. 2006
Total PCL increased $362 million, compared to 2006, which had been
at a cyclically low level. The increase reflected higher provisions for
our wholesale and retail loan portfolios, primarily reflecting portfolio
growth and higher impaired loans in our U.S. residential builder finance
business triggered by the downturn in the U.S. housing market.
48
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Insurance policyholder benefits, claims and acquisition expense
(C$ millions)
Insurance policyholder benefits and claims
Insurance policyholder acquisition expense
Insurance policyholder benefits, claims and acquisition expense
2008 vs. 2007
Insurance policyholder benefits, claims and acquisition expense
(PBCAE) decreased $542 million, or 25%, from last year, which pri-
marily reflected the change in fair value of investments backing our
life and health policyholder liabilities, largely offset in revenue. For a
detailed discussion regarding our current and prior year PBCAE, refer
to the Insurance segment section.
Table 21
2008
1,029
602
$
2007
1,588
585
$
2006
1,939
570
1,631
$
2,173
$
2,509
$
$
2007 vs. 2006
Insurance PBCAE decreased $336 million, or 13%, from 2006. The
decrease primarily reflected the change in fair value of investments
backing our life and health policyholder liabilities, which was largely
offset in revenue.
Non-interest expense
(C$ millions)
Salaries
Variable compensation
Benefits and retention compensation
Stock-based compensation
Human resources
Equipment
Occupancy
Communications
Professional and other external services
Other expenses
Non-interest expense
$
$
2008
3,845
2,689
1,168
77
7,779
1,155
926
749
903
839
2007
3,541
2,975
1,150
194
7,860
1,009
839
723
838
,204
$
$
1
$
$
Table 22
2006
3,192
2,827
1,080
169
7,268
957
792
687
844
947
$ 12,351
$ 12,473
$ 11,495
2008 vs. 2007
Non-interest expense decreased $122 million, or 1%, compared to
the prior year, largely reflecting the reduction of the Enron-related
litigation provision. The decrease was also due to lower variable
compensation commensurate with weaker results, primarily impacted
by writedowns, the favourable impact of a stronger Canadian dollar
on the translation of our U.S. dollar-denominated expenses and lower
stock-based compensation expense in our U.S. brokerage businesses
due to the decline in fair value of our earned compensation liability.
These factors were partially offset by additional costs in support of our
growth initiatives, including our acquisitions, infrastructure invest-
ments and increased sales and services expenses in our banking
branch network.
2007 vs. 2006
Non-interest expense increased $978 million, or 9%, compared to
2006, primarily reflecting higher costs due to increased business
levels, including additional sales and service personnel and higher vari-
able compensation in Wealth Management. Increased sundry losses,
higher processing and system development costs, and additional costs
in support of our growth initiatives, including our acquisitions,
de novo branch expansion and branch upgrade programs, also con-
tributed to the increase. These factors were partially offset by the
favourable impact of a stronger Canadian dollar on the translation of
our U.S. dollar-denominated expenses and lower variable compensa-
tion in Capital Markets commensurate with weaker results.
Taxes
(C$ 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 23
2008
2007
2006
1,369
$
1,392
$
1,403
204
242
104
103
42
16
711
2,080
6,005
22.8%
31.0%
$
$
$
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%
(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.
2008 vs. 2007
Income tax expense decreased $23 million, or 2%, from a year ago due
to lower earnings before income taxes in 2008. The effective tax rate
of 22.8% increased 3% from 19.8% a year ago. The higher effective
tax rate was largely due to lower earnings reported by our subsidiaries
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
49
operating in jurisdictions with lower income tax rates and a higher
tax rate on the reduction of the Enron-related litigation provision.
These factors were partially offset by a lower statutory Canadian
corporate income tax rate in 2008 and a higher level of income from tax-
advantaged sources (Canadian taxable corporate dividends) in 2008.
Other taxes increased by $13 million from 2007, largely due to
higher payroll, business and property taxes, reflecting higher staffing
levels and a greater number of branches, respectively. These factors
were partially offset by lower capital taxes due to a lower Canadian
capital tax base and lower goods and services taxes (GST) due to a
decrease in the GST rate.
In addition to the income and other taxes reported in our
Consolidated Statements of Income, we recorded a recovery of income
taxes of $2,225 million in 2008 (2007 – $946 million income tax
expense) in shareholders’ equity, a decrease of $3,171 million,
primarily reflecting decreased unrealized foreign currency translation
gains, net of hedging, and unrealized losses in our AFS portfolio and
derivatives designated as cash flow hedges.
2007 vs. 2006
Income tax expense decreased $11 million, or 1%, from 2006, despite
higher earnings before income taxes. The lower effective tax rate in
2007 was largely due to writedowns in our subsidiaries operating in
jurisdictions with higher income tax rates, the gain related to the Visa
Inc. restructuring, and a higher level of income from tax-advantaged
sources (Canadian taxable corporate dividends).
Other taxes increased by $18 million from 2006, largely due to
increased payroll taxes, reflecting higher staffing levels, and higher
capital taxes due to an increased Canadian capital tax base and
increased property taxes, reflecting a greater number of branches.
These factors were partially offset by lower GST due to a decrease in
the GST rate.
In addition to the income and other taxes reported in our
Consolidated Statements of Income, we recorded income taxes of
$946 million in 2007 in shareholders’ equity, an increase of $810 mil-
lion over 2006, primarily reflecting an increase in unrealized foreign
currency translation gains.
Pension obligations
A number of defined benefit and defined contribution plans are offered
to our employees, which provide pension and post-employment ben-
efits 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 benefits include health,
dental, disability and life insurance coverage.
We fund our registered defined benefit pension plans in accor-
dance with actuarially determined amounts required to satisfy
employee benefit obligations under current pension regulations. We
continue to fund our pension plans in accordance with federal and
provincial regulations. The performance of our pension plan assets
was negatively impacted by the current economic environment and
we expect to contribute higher amounts to our pension plans during
2009 to manage our funded status as described in Note 20 to our
Consolidated Financial Statements.
Related party transactions
We measured our benefit obligations and pension plan assets
as at September 30, 2008. Bond yields have increased in response to
the uncertainty and volatility in the global financial markets thereby
impacting the selection of the discount rate used to measure our
benefit obligations and pension plan assets. This has resulted in an
actuarial gain of $932 million in our benefit obligation, which offset
our pension plan asset losses of $877 million and reduced our overall
pension liability. Gains and losses on our pension plan assets are
amortized over the estimated average remaining service life of the
plan, which decreases the volatility to our expenses recognized every
year. The weakening of the Canadian dollar at year-end also resulted in
an increase of our pension liability for our U.S. and international plans.
In the ordinary course of business, we provide normal banking ser-
vices, operational services, and enter into other transactions with
associated and other related corporations, including our joint venture
entities, on terms similar to those offered to non-related parties.
We grant loans to directors, officers and other employees at rates
normally accorded to preferred clients. In addition, we offer deferred
share and other plans to non-employee directors, executives and cer-
tain other key employees. For further information, refer to Notes 9 and
27 to our Consolidated Financial Statements.
Results by geographic segment (1)
Table 24
(C$ millions)
Net interest income
Non-interest income
Total revenue
Provision for (recovery of)
credit losses
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Income taxes and
non-controlling interest
Net income from continuing
operations
Net loss from discontinued
operations
2008
2007
2006
Canada
United
Other
States International
Total
Canada
United
Other
States International
Total
Canada
United
Other
States International
Total
$ 6,929
8,220
$ 1,132
2,521
$ 1,299
1,481
$ 9,360
12,222
$ 6,402
8,638
$
412
4,322
$
888
1,800
$ 7,702
14,760
$ 6,045
7,518
$
108
4,397
$
643
1,926
$ 6,796
13,841
15,149
3,653
2,780
21,582
15,040
4,734
2,688
22,462
13,563
4,505
2,569
20,637
924
643
28
1,595
696
90
5
791
456
(28)
1
429
922
7,490
30
2,991
679
1,870
1,631
12,351
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
1,826
(163)
(213)
1,450
1,788
(13)
(242)
1,533
1,495
13
(61)
1,447
$ 3,987
$
152
$
416
$ 4,555
$ 3,917
$
778
$
797
$ 5,492
$ 3,177
$
799
$
781
$ 4,757
–
–
–
–
–
–
–
–
–
(29)
–
(29)
Net income
$ 3,987
$
152
$
416
$ 4,555
$ 3,917
$
778
$
797
$ 5,492
$ 3,177
$
770
$
781
$ 4,728
(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 to 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.
50
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
2008 vs. 2007
Net income in Canada was $3,987 million, up $70 million, or 2%,
compared to the prior year. This increase was primarily due to higher
gains on credit derivative contracts recorded at fair value used to
economically hedge our corporate lending portfolio in our capital mar-
kets businesses, solid volume growth and effective cost management
efforts in our banking business and higher trading results in certain of
our fixed income and foreign exchange businesses. These factors were
partially offset by the prior year gain related to the Visa Inc. restruc-
turing, weak equity origination activity, and lower M&A and debt
origination activities.
U.S. net income of $152 million was down $626 million, or 80%,
compared to the prior year, largely reflecting significantly higher
write downs and provision for credit losses and lower equity and debt
origination activities. The unfavourable impact of the stronger Canadian
dollar on the translation of our U.S. dollar-denominated earnings also
contributed to the decrease. These factors were partially offset by the
reduction of the Enron-related litigation provision, lower variable compen-
sation commensurate with weaker results and higher trading revenue in
certain of our fixed income and foreign exchange businesses and the gain
on fair value adjustments on RBC debt designated as held-for-trading.
Other International net income was $416 million, down $381 mil-
lion from the prior year, mainly reflecting writedowns in our capital
markets businesses. These were partially offset by higher trading
revenue in certain of our fixed income and foreign exchange busi-
nesses, the gain on fair value adjustments on RBC debt designated as
held-for-trading, increased earnings from our RBTT acquisition reflect-
ing loan and deposit growth, and business growth at RBC Dexia IS.
2007 vs. 2006
Net income in Canada was $3,917 million, up $740 million, or 23%,
compared to 2006, largely reflecting strong volume and balance
growth in our domestic banking and wealth management businesses
and a gain related to the Visa Inc. restructuring. The increase was
partially offset by higher costs due to increased business levels and
growth initiatives, as well as higher provision for credit losses and
higher credit card customer loyalty reward program costs.
U.S. net income of $778 million was up $8 million, or 1%, from
2006, primarily reflecting solid revenue growth from our acquisitions
and improved equity origination and M&A activities. This was offset
mostly by the negative impact of a stronger Canadian dollar on the
translation of our U.S. dollar-denominated earnings, increased costs in
support of business growth and higher provision for credit losses.
Other International net income of $797 million was up $16 million,
or 2%, from 2006, partly due to stronger Insurance results and growth at
RBC Dexia IS, largely offset by lower trading results due to writedowns.
Quarterly financial information
Results and trend analysis
Our quarterly earnings, revenue and expenses are impacted by a
number of trends and recurring factors, which include seasonality,
general economic conditions and competition. The following table
summarizes our results for the last eight quarters.
Quarterly results
Table 25
(C$ millions, except per share amounts)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2008
2007
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Net income before income taxes and
non-controlling interest in subsidiaries
Income taxes
Non-controlling interest in net income
of subsidiaries
$ 2,709
2,360
$ 5,069
619
$ 2,301
3,611
$ 5,912
334
$ 2,209
2,745
$ 4,954
349
$ 2,141
3,506
$ 5,647
293
$ 1,998
3,617
$ 5,615
263
$ 1,965
3,515
$ 5,480
178
$ 1,889
3,780
$ 5,669
188
$ 1,850
3,848
$ 5,698
162
(86)
2,989
553
3,272
548
2,970
616
3,120
637
3,093
343
3,165
677
3,148
516
3,067
$ 1,547
428
$ 1,753
442
$ 1,087
156
$ 1,618
343
$ 1,622
255
$ 1,794
349
$ 1,656
353
$ 1,953
435
(1)
49
3
30
43
50
24
24
Net income
$ 1,120
$ 1,262
Earnings per share – basic
– diluted
Segment net income (loss)
Canadian Banking
Wealth Management
Insurance
International Banking
Capital Markets
Corporate Support
Net income
$
$
$
$
$
$
.82
.81
676
116
59
(206)
584
(109)
.93
.92
709
186
137
(16)
269
(23)
$ 1,120
$ 1,262
Period average US$ equivalent of C$1.00 (1)
Period-end US$ equivalent of C$1.00
$
.901
.830
$
.988
.977
$
$
$
$
$
$
928
$ 1,245
$ 1,324
$ 1,395
$ 1,279
$ 1,494
$
$
$
$
$
$
.70
.70
604
182
104
38
13
(13)
.96
.95
673
181
89
31
304
(33)
1.02
1.01
797
180
102
21
186
38
$
$
$
1.07
1.06
596
177
103
87
360
72
$
$
$
.99
.98
1.16
$
$ 1.14
$
566
194
52
67
350
50
586
211
185
67
396
49
928
$ 1,245
$ 1,324
$ 1,395
$ 1,279
$ 1,494
.994
.993
$ 1.002
.996
$ 1.001
1.059
$
.937
.937
$
.874
.901
$
.861
.850
(1)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
51
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, as economic conditions have deteriorated since the fourth
quarter of 2007, our businesses have been unfavourably impacted.
The decline in economic conditions is primarily attributable to volatility
and uncertainty in global financial markets. For a further discussion,
refer to the Overview of 2008 section.
The Canadian dollar generally strengthened over the last
eight quarters, resulting in a lower translated value of our U.S. dollar-
denominated earnings, primarily in our wholesale banking business
and U.S. retail operations. This was partially offset by a sharp depre-
ciation of the Canadian dollar since the second quarter of 2008.
Overview and consolidated results
Over the last eight quarters, our results were affected by a number of
favourable and unfavourable items or events.
•
Our last five quarters were adversely impacted by writedowns of
$3,178 million due to the market environment, partly offset by the
$672 million reduction to income taxes, $610 million in
compensation adjustments and the gain on fair value adjust-
ments on RBC debt designated as held-for-trading.
In the fourth quarter of 2008, we recorded a reduction of the
$542 million Enron-related litigation provision and an increase to
the general allowance of $145 million.
Our fourth quarter of 2007 results included a positive gain related
to the Visa Inc. restructuring ($326 million) and a charge
related to our credit card customer loyalty reward program
($121 million).
The first quarter of 2007 included a favourable adjustment
related to the reallocation of foreign investment capital.
Our results over the last eight quarters were impacted by the
acquisition of certain businesses.
•
•
•
•
Our consolidated net income generally exceeded $1 billion over the
last eight quarters, reflecting sustained performance across most
of our businesses, despite the impact of writedowns in the past five
quarters and the lower translated value of our U.S. dollar-denominated
earnings.
Provision for credit losses trended higher over the past eight
quarters from the cyclically low level in early 2007, which primarily
reflected a generally benign credit environment. Portfolio growth and
higher impairments, due primarily to the U.S. housing market and
corporate loan portfolios, have driven the upward trend. The signifi-
cant increase in the fourth quarter of 2008 included an increase in the
specific provision, primarily reflecting deterioration in U.S. portfolios
and the foreign exchange impact of the depreciation of the Canadian
dollar compared to the U.S. dollar. An increase in the general allow-
ance in the fourth quarter of 2008, reflecting portfolio volume growth
and weaker credit quality, also contributed to the increase.
Non-interest expense generally increased over the period, pri-
marily reflecting recent acquisitions and higher spending in support
of our growth initiatives. The decrease in the fourth quarter of 2008
was largely due to the reduction of the Enron-related litigation provi-
sion. The second quarter of 2008 and fourth quarter of 2007 decreases
were primarily due to lower variable compensation, in line with lower
earnings resulting from writedowns. The increase over the period
was partially offset by a reduction in the translation of our U.S. dollar-
denominated expenses during most of the period.
PBCAE fluctuated considerably over the period. Although under-
lying business growth has generally increased PBCAE, there can be
significant quarterly volatility resulting from the change in fair value of
investments backing our life and health policyholder liabilities, claims
experience and actuarial liability adjustments. The impact of the
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.
Our effective income tax rate generally trended downward over
the period, other than the third and fourth quarters of 2008, which
reflected a higher tax rate on the reduction of the Enron-related litiga-
tion provision in the fourth quarter and a lower portion of income in
jurisdictions with lower income tax rates. The decrease in our effective
tax rate was largely due to a higher level of income from tax-advantaged
sources (Canadian taxable corporate dividends) and a reduction in the
statutory Canadian corporate income tax rate in 2008 versus 2007.
The last five quarters were also impacted by writedowns, which were
recorded in jurisdictions with higher income tax rates. The Visa Inc.
restructuring gain in the fourth quarter of 2007 which was taxed at the
capital gains tax rate also contributed to the decrease in rates in 2007.
Non-controlling interest in net income of subsidiaries fluctuated
over the period, which depends on the net income attributed to third-
party investors in entities in which we do not have 100% ownership,
but are required to consolidate.
Business segment results
Canadian Banking net income generally trended higher over the last
eight quarters, reflecting solid volume growth across most businesses
and effective cost management efforts, partially offset by spread com-
pression. Our results in the second quarter of 2008 were unfavourably
impacted by the loss on the redemption of our shares in connection
with the Visa Inc. initial public offering (IPO) of $35 million. The fourth
quarter of 2007 included the Visa Inc. restructuring gain and the credit
card customer loyalty reward program charge.
Wealth Management net income generally remained stable over
the last eight quarters driven largely by growth in fee-based client
assets and increased fee-based revenue from our PH&N acquisition.
The decrease in the fourth quarter of 2008 was largely due to lower
transaction volumes in our full-service brokerage business and lower
fees amid the uncertainty in global financial markets.
Insurance results fluctuated over the last eight quarters. The
decrease in earnings in the fourth quarter of 2008 was mainly due to
investment losses on disposals and impairments as well as impacts
from equity market movements. The decrease in earnings in the
second quarter of 2007 was primarily due to higher disability claims
experience. The first quarter of 2007 was favourably impacted by an
adjustment related to the reallocation of foreign investment capital
and net actuarial liability adjustments.
International Banking net income fluctuated over the period.
The past several quarters were impacted by reported writedowns
and losses and higher provision for credit losses, primarily in our U.S.
banking business. The fourth quarter of 2008 was most significantly
impacted by these factors.
Capital Markets results fluctuated over the period, impacted by
the writedowns due to ongoing weakness in the market environment
since the fourth quarter of 2007. However, given the diversification of
our business, certain of our trading products benefited from the mar-
ket volatility and lower interest rate environment. The fourth quarter
of 2008 was positively impacted by the reduction of the Enron-related
litigation provision.
52
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Fourth quarter 2008 performance
Fourth quarter net income of $1,120 million was down $204 million,
or 15%, from a year ago. Our results were primarily impacted by
higher writedowns of $1,003 million as compared to $393 million in
the prior year, which reduced net income by $532 million after tax and
related compensation adjustments, compared to $173 million a year
ago, resulting from continued deterioration in the financial markets,
weaker results in our equity trading businesses and higher provision
for credit losses. These factors were partly offset by the reduction of
the Enron-related litigation provision, revenue growth in certain of our
fixed income and foreign exchange businesses, the gain on fair value
adjustments on RBC debt designated as held-for-trading, and volume
growth in our banking-related and wealth management businesses.
Our prior year results were also impacted by a gain related to the Visa
Inc. restructuring.
Total revenue decreased $546 million, or 10%, from a year ago,
primarily due to lower insurance-related revenue, higher writedowns
of $1,003 million compared to $393 million a year ago, and weaker
results in our equity trading businesses. Our prior year results were
also impacted by a gain related to the Visa Inc. restructuring. These
factors were partially offset by revenue growth in certain of our fixed
income and foreign exchange businesses, loan and deposit growth,
partly reflecting our acquisitions and the gain on fair value adjust-
ments on RBC debt designated as held-for-trading.
Provision for credit losses was $619 million as compared to a pro-
vision of $263 million a year ago. The provision includes an increase
to the general allowance of $145 million ($98 million after-tax) com-
mensurate with volume growth in the Canadian retail portfolio and
continued weakness in the U.S. retail and commercial portfolios, and
higher impaired loans related to our U.S. residential builder finance and
commercial and retail portfolios. Higher provisions and lower recover-
ies in our corporate lending portfolio also contributed to the increase.
Business segment results
Results by business segment
Insurance policyholder benefits, claims and acquisition expense
decreased $723 million, or 114%, from the prior year, due to the
change in fair value of investments backing our life and health policy-
holder liabilities, largely offset in revenue. Additionally, there was
a higher level of favourable net actuarial adjustments related to
management actions and assumption changes in the current quarter.
These factors were partially offset by costs commensurate with busi-
ness growth.
Non-interest expense decreased $104 million, or 3%, compared
to the prior year, primarily reflecting the reduction of the Enron-related
litigation provision and lower stock-based compensation expense
in our U.S. brokerage businesses in Wealth Management due to the
favourable decline in fair value of our earned compensation liability.
These factors were partially offset by additional costs in support of our
growth initiatives, including our acquisitions of RBTT, ANB, FBW, PH&N
and J.B. Hanauer, and the unfavourable impact of the weaker Canadian
dollar on the translation of our U.S. dollar-denominated expenses.
In addition, we incurred a total charge of $42 million ($30 million
after-tax) related to our auction rate securities settlement with U.S.
regulators, of which $25 million ($19 million after-tax) was recorded in
Wealth Management, with the remainder charged to Capital Markets,
which is comprised of the estimated difference between par value and
current valuations, and a penalty. The actual financial impact of the
repurchase offer will depend on the number of clients who accept the
repurchase offer, and market conditions at the time of acceptance.
Further, a provision for $37 million ($22 million after-tax) to support
clients of FBW invested in the Reserve Primary Fund (a U.S. money
market fund) that was managed by a third-party provider and write-
downs related to the cancellation of the Canadian industry-wide
payments initiatives also offset the decrease in non-interest expense.
2008
Table 26
2007
2006
(C$ millions)
Wealth
Canadian
Banking Management
Insurance
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Total
Total
Net interest income
Non-interest income
$
6,718 $
2,868
468 $
– $ 1,330 $ 1,839 $
3,519
2,610
771
2,096
(995) $ 9,360 $ 7,702 $ 6,796
13,841
358
14,760
12,222
Total revenue
Provision for (recovery of)
credit losses
Insurance policyholder
benefits, claims and
acquisition expense
Non-interest expense
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)
$
9,586 $
3,987 $ 2,610 $ 2,101 $ 3,935 $
(637) $ 21,582 $ 22,462 $ 20,637
867
1
–
497
183
47
1,595
791
429
–
4,758
–
3,038
1,631
576
–
1,876
–
2,121
–
(18)
1,631
12,351
2,173
12,473
2,509
11,495
$
$
3,961 $
2,662 $
948 $
665 $
403 $
389 $
(272) $ 1,631 $
(153) $ 1,170 $
(666) $ 6,005 $ 7,025 $ 6,204
(178) $ 4,555 $ 5,492 $ 4,757
38.1%
52.2%
32.8%
37.1%
$ 232,300 $ 16,900 $ 12,600 $ 51,300 $ 340,300 $
23.3%
64.9%
20.5%
24.5%
(3.4)%
(8.1)%
(6.2)%
n.m.
23.5%
36.7%
(3,100) $ 650,300 $ 581,000 $ 502,300
24.6%
37.4%
18.0%
29.6%
(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 elimi-
nated 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
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 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 average securi-
tized residential mortgage and credit card loans included as at
October 31, 2008 were $22 billion and $4 billion, respectively.
• Wealth Management reported results include additional
•
•
•
•
disclosures in U.S. dollars for its U.S. & International Wealth
Management business, as we review and manage the results of
this business largely in U.S. dollars.
Insurance reported results include the change in fair value of the
investments backing our policyholder liabilities recorded as rev-
enue. This impact is largely offset in policyholder benefits, claims
and acquisition expense.
International Banking reported results include additional disclo-
sure in U.S. dollars for its banking business, as we review and
manage the results of this business largely in U.S. dollars.
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 five business segments, such as enterprise fund-
ing, securitizations and net charges associated with unattributed
capital. The reported results of the Corporate Support segment
also reflect consolidation adjustments, including the elimination
of the teb adjustments recorded in Capital Markets. We record
teb adjustments in Capital Markets and record elimination adjust-
ments 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 source of revenue. The
use of teb adjustments and measures may not be comparable to
similar GAAP measures or similarly adjusted amounts disclosed
by other financial institutions. The teb adjustment for 2008 was
$410 million (2007 – $332 million, 2006 – $213 million).
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.
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 five busi-
ness 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.
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 were 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 capi-
tal. 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.
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.
54
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Changes made in 2008
The following highlights the key changes we made to our management
reporting framework and business segments during the year. Unless
specifically stated, comparative amounts have been revised and did
not have an impact on our consolidated results. We have summarized
changes made in 2008 below.
•
In the fourth quarter of 2008, our segment results for Corporate
Support included changes in the Allowance for credit losses –
General allowance. Group Risk Management effectively controls
the general allowance through its monitoring and oversight of
various portfolios of loans throughout the enterprise and reviews
the general allowance by product type on a quarterly basis. Prior
to the fourth quarter of 2008, changes in the Allowance for credit
losses – General Allowance were included in Canadian Banking,
International Banking and Capital Markets. We have reflected
this management change prospectively as of the fourth quarter of
2008. Comparative segment results were not restated to reflect
this management change given the insignificance of its impact on
comparative periods. This change does not impact our previously
reported consolidated financial information. For further informa-
tion regarding the changes to the general allowance during 2008,
refer to our Corporate Support segment discussion.
• We created our Insurance segment, formerly a business under
Canadian Banking, and renamed our U.S. & International Banking
segment International Banking. The historical comparative
segment financial information was restated to reflect the realign-
ment of our business segments. The restated historical segment
financial information for Canadian Banking and Insurance did not
impact our previously reported consolidated financial information.
• We revised our gross insurance premiums and deposits balances
in Insurance to include our segregated funds deposits, consistent
with insurance industry practices.
• We transferred management oversight of our Wealth
Management U.S. subprime and CDO AFS portfolio to Corporate
Support, where we have greater expertise in managing these
types of investments, particularly during current market condi-
tions. Comparative segment results were not revised to reflect
this management change given the insignificance of its impact on
comparative periods.
• We revised the calculation for assets under administration for
Canadian Banking to reflect the inclusion of mutual funds sold
through our Canadian branch network.
• We enhanced our Economic Capital methodologies and parame-
ters, which mainly resulted in a decrease of capital for non-trading
market risk allocated to our business segments and to an increase
of capital for credit risk allocated to Capital Markets.
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, International Banking and Capital
Markets each have significant U.S. dollar-denominated operations,
while International Banking also has significant Euro-denominated
results related to RBC Dexia IS, and Capital Markets also has significant
British pound-denominated operations.
In 2008, the Canadian dollar exchange rate appreciated 6% and
10% on average relative to the U.S. dollar and British pound, respec-
tively, and depreciated 4% on average relative to the Euro compared
to a year ago. Our revenue was unfavourably impacted by the lower
translated value of foreign currency-denominated revenue as a result
of the strong appreciation of the Canadian dollar during most of
the period, with the effects being more pronounced in the first half
of 2008. As a result of the impact of the changes in the respective
exchange rates from last year, Wealth Management net income was
down $24 million, International Banking net loss increased $40 mil-
lion, while Capital Markets net income was up $12 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 equity (ROE) and return on risk capital
(RORC). We use ROE and RORC, at both the consolidated and segment
levels, as measures of return on total capital invested in our busi-
nesses. The business segment ROE and RORC measures are viewed as
useful measures for supporting investment and resource allocation
decisions because they adjust for certain items that may affect com-
parability between business segments and certain competitors. RORC
does not have standardized meaning under GAAP and may not be com-
parable to similar measures disclosed 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 net income available to common shareholders divided by average
attributed capital for the period. For each segment, average attributed
capital, or Economic Capital, includes attributed risk capital required
to underpin various risks as described in the Capital Management sec-
tion and amounts invested in goodwill and intangibles (1).
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 attribution of capital and risk capital involves the use of
assumptions, judgments and methodologies that are regularly
reviewed and revised by management as necessary. Changes to
such assumptions, judgments and methodologies can have a mate-
rial 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.
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). The difference between total average common equity and average
attributed capital is classified as Unattributed capital, which is reported in Corporate
Support for segment reporting purposes.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
55
Calculation of Return on equity and Return on risk capital
2008
Table 27
2007
2006
(C$ millions,
except for percentage amounts) (1), (2)
Canadian
Wealth
Banking Management
Insurance
International
Banking
Capital
Markets
Corporate
Support
Total
Total
Total
Net income available to
common shareholders
Average risk capital (2)
Add: Unattributed capital
Goodwill and intangible
capital
Average equity (3)
$ 2,634
$
653
$
385
$
(174) $ 1,147
$
(191) $ 4,454
$ 5,404
$ 4,668
$ 5,050
–
$ 1,000
–
$ 1,050
$ 2,150
–
$ 4,700
–
$ 1,100
2,000
$ 15,050
2,000
$ 14,450
2,000
$ 12,750
2,550
1,850
$ 6,900
1,800
$ 2,800
100
$ 1,150
3,050
$ 5,200
900
$ 5,600
–
$ 3,100
7,700
$ 24,750
5,550
$ 22,000
4,600
$ 19,900
Return on equity (ROE)
Return on risk capital (RORC)
38.1%
52.2%
23.3%
64.9%
32.8%
37.1%
(3.4)%
(8.1)%
20.5%
24.5%
(6.2)%
n.m.
18.0%
29.6%
24.6%
37.4%
23.5%
36.7%
(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 manage-
ment section.
The amounts for the segments are referred to as attributed capital or Economic Capital.
(3)
n.m. not meaningful
Non-GAAP measures
2008 Defined operating leverage
We use and report defined operating leverage consistent with our
management framework. Defined operating leverage does not have a
standardized meaning under GAAP and is not necessarily comparable
with similar information reported by other financial institutions.
Our defined operating leverage refers to the difference between
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. Insurance results
are excluded as certain changes in revenue can be largely offset in
Insurance policyholder benefits, claims and acquisition expense,
which is not captured in our defined operating leverage calculation.
The following table shows the defined operating leverage ratio
our revenue growth rate (as adjusted) and non-interest expense
calculation.
2008 Defined operating leverage
(C$ millions, except percentage amounts)
Total revenue
Add: teb adjustment
Less: Revenue related to VIEs
Less: Insurance revenue
Less: Impact of the financial instruments accounting standards
Total revenue (adjusted)
Non-interest expense
Less: Insurance-related non-interest expense
Non-interest expense (adjusted)
Defined operating leverage
(1)
Our revenue in 2007 excluded accounting adjustments related to the financial instruments accounting standards.
2008
2007 (1)
Change
Table 28
$ 21,582
410
(48)
2,610
–
$ 22,462
332
31
3,192
83
$ 19,430
$ 19,488
(.3)%
$ 12,351
576
$ 12,473
537
$ 11,775
$ 11,936
(1.3)%
1.0%
56
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Canadian Banking
Canadian Banking comprises our domestic personal and business
banking operations and certain retail investment businesses. This
segment comprises Personal Financial Services, Business Financial
Services, and Cards and Payment Solutions.
Canadian Banking provides a broad suite of financial products
and services to over 10 million individual and business clients through
our extensive branch, ATM, online and telephone banking networks, as
well as through a large number of proprietary sales professionals. We
have top rankings in market share for most retail product categories.
Highlights
• We expanded our network by opening 28 new branches and
adding 214 ATMs. Our various sales forces were provided with
specific training to enhance their capabilities to deliver insightful,
relevant financial advice and tailored banking solutions to
our clients.
• We enhanced our online capabilities by providing options for
eStatements, a secure message centre and various self-serve
tools such as Creditor Selector, making it easier for our clients to
do business with us.
•
Various new products, such as the U.S. dollar high-interest savings
account, Visa Infinite Avion card and the Business Investment
Account were launched to help clients meet their expanding finan-
cial needs.
• We completed the acquisition of ABN AMRO N.V.’s Canadian com-
mercial leasing division which enhances our ability to provide
clients with a comprehensive range of financial services and spe-
cialized products through a broader sales distribution network.
Economic and market review
As discussed in the 2008 Economic and market review in the Overview
of 2008 section, the reduction in the overnight rate from 4.25% to
2.25% helped maintain solid, but moderating demand for our mort-
gage and consumer credit. However, this reduction has also reduced
spreads on personal deposits and business loans. Employment levels
remained relatively high in Canada during 2008, which helped main-
tain solid consumer spending and sales in our deposit and investment
products. Competition for guaranteed investment certificates (GIC)
and other deposit products intensified, with tighter credit conditions
and increased consumer demand for fixed income investments given
the sharp declines in equity investments, capital markets and volatility
in financial and equity markets.
Canadian Banking financial highlights
(C$ millions, except number of and percentage amounts)
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest 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 (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 (6)
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
$
$
$
$
2008
6,718
2,868
9,586
867
4,758
3,961
2,662
38.1%
52.2%
2.98%
2.6%
$
$
$
$
2007
6,353
2,976
9,329
788
4,748
3,793
2,545
34.9%
48.1%
3.17%
6.5%
$
$
$
$
Table 29
2006
5,816
2,532
8,348
604
4,510
3,234
2,124
32.2%
44.6%
3.22%
4.4%
$ 232,300
225,200
225,000
155,000
6,900
5,050
$ 207,500
200,400
199,200
147,100
7,200
5,250
$ 187,600
180,500
179,000
139,200
6,500
4,700
$ 109,500
24,222
$ 120,200
23,930
$ 101,100
23,001
.36%
.39%
.35%
.39%
.33%
.34%
(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.
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 earning
asset balances for the period.
Defined as the difference between revenue growth rate and non-interest expense growth rate.
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 $22 billion and $4 billion, respectively
(2007 – $19 billion and $4 billion; 2006 – $15 billion and $4 billion).
In 2008, AUA was revised to include mutual funds sold through our Canadian branch network. Comparative amounts have been revised to reflect this change.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
57
Revenue by business line (C$ millions)
10,000
8,000
6,000
4,000
2,000
0
2006
2007
2008
Cards and Payment Solutions
Business Financial Services
Personal Financial Services
Financial performance
2008 vs. 2007
Net income increased $117 million, or 5%, compared to the prior year,
reflecting solid volume growth across all businesses and effective cost
management efforts, which were partially offset by spread compres-
sion and increased provisions for credit losses. Our prior year results
reflected the $326 million ($269 million after-tax) gain related to the
Visa Inc. restructuring, partially offset by a charge related to our credit
card customer loyalty reward program of $121 million ($79 million
after-tax).
Total revenue increased $257 million, or 3%, over the prior year.
This increase reflected continued solid volume growth across all
businesses and higher foreign exchange revenue, service fees and
mutual fund distribution fees, which were partially offset by spread
compression. Our prior year results included the gain related to the
Visa Inc. restructuring, partially offset by the points liability cost, as
noted above.
Net interest margin decreased 19 bps from a year ago, largely
reflecting the impact of changes in our retail product mix attribut-
able to growth in our home equity lending and high-interest savings
account products, the lower interest rate environment and continued
competitive pressures.
Provision for credit losses increased $79 million, or 10%, reflect-
ing portfolio growth and higher loss rates in our credit cards and
personal loan portfolios.
Non-interest expense of $4,758 million was essentially flat, as
higher sales and service expenses in our banking branch network in
support of business growth and project spending were largely offset
by lower operational support and infrastructure costs.
Average assets increased $25 billion, or 12%. The increase was
largely due to solid loan growth, mainly in our home equity products,
underpinned by our successful execution of growth initiatives and
a solid housing market. Average deposits were up $8 billion, or 5%,
from a year ago, largely due to volume growth in business and per-
sonal deposits, including our high-interest savings account products.
2007 vs. 2006
Net income was up $421 million, or 20%, compared to 2006, primarily
due to solid growth across all businesses and a gain related to the Visa
Inc. restructuring. This was 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 2006 and higher
credit card customer loyalty reward program costs in 2007.
Total revenue was up $981 million, or 12%, over 2006. The
increase was largely attributable to strong volume growth across all
businesses and the gain related to the Visa Inc. restructuring. These
factors were partly offset by the receipt of a fee related to the termina-
tion of an agreement in 2006 and higher credit card customer loyalty
reward program costs.
Net interest margin decreased 5 bps from 2006, primarily reflect-
ing the impact of changes in our product mix.
Provision for credit losses increased $184 million, or 30%, from
2006, which had been at a cyclically low level. 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.
Non-interest expense increased $238 million, or 5%, compared to
2006. The increase was largely attributable to higher costs in support
of business growth, including a 4% increase in sales and service per-
sonnel, as well as higher costs from system development, professional
fees and, sundry losses.
Outlook and priorities
As discussed in the Outlook and medium-term objectives section,
early signs of moderating housing and labour demand have tempered
the outlook for growth and may have an unfavourable impact on our
loan and deposit business. The lack of liquidity in credit markets will
likely continue into next year and keep the cost of funding at elevated
levels, resulting in continued spread compression. Expanding our
distribution network and introducing new products and services will
augment steady growth in our different businesses. We anticipate
some deterioration in the quality of our credit portfolio and expect
loss rates to be manageable, given the diversification and quality of
our portfolios. We expect that various government interventions,
supported by the lagged effects of monetary policy actions, should
improve the credit markets in the near term. While still sensitive to the
macro environment, we expect our business to grow at a moderate pace.
Key strategic priorities for 2009
•
Continue to make it easier for clients to do business with us
through innovative products and services, improved processes
and increased accessibility.
Continue to deliver a superior client experience.
Deliver insightful, relevant financial advice and solutions to
retain and attract clients in specific markets, geographies and life
stages.
Align our infrastructure, products and services, sales and retail
capabilities to drive future growth, efficiencies and client value.
•
•
•
58
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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 financing and investment products and services, including home
equity financing, personal lending, deposit accounts, mutual funds
and self-directed brokerage accounts, GICs and Canadian private bank-
ing. We rank first or second in market share for most personal banking
products and our retail banking network is the largest in Canada with
1,174 branches and 4,149 ATMs.
Financial performance
Total revenue increased $233 million, or 5%, over the prior year,
largely due to solid volume growth in residential mortgages, personal
loans and deposits, offset partially by some spread compression. Fee-
based revenue grew on higher foreign exchange volumes and certain
pricing changes. Mutual fund distribution fees also increased this
year due to higher average mutual fund balances, despite a significant
decline in balances in the fourth quarter of 2008.
Average residential mortgage balances and personal loans
were up by 15% and 13%, respectively, over last year, supported by
relatively low interest rates, a solid housing market and growth in our
market share for mortgages. Average personal deposit balances grew
16% from a year ago, driven by the success of our key savings
products, including our high-interest savings account products.
Business Financial Services
Business Financial Services offers a wide range of lending, leasing,
deposit, investment, foreign exchange, cash management and trade
products and services to small and medium-sized businesses and
commercial, agriculture and agribusiness clients across Canada. Our
extensive business banking network includes over 100 business bank-
ing centres and over 2,000 business account managers. Our strong
commitment to our clients has resulted in leading market share in
business loans and deposits.
Financial performance
Total revenue increased $140 million, or 6%, over the prior year,
largely attributable to solid volume growth in business loans and
deposits, partially offset by lower spreads on deposits due to an over-
all decline in interest rates.
Average business loans and deposits increased 8%, primarily
driven by continued solid business spending and on the successful
introduction of new deposit accounts.
Selected highlights
Table 30
(C$ millions)
2008
2007
2006
5,315 $
5,082 $
4,621
$
Total revenue
Other information
Residential mortgages (1)
129,800
Personal loans (1)
43,700
Personal deposits (1)
41,200
Personal GICs (1)
55,600
Branch mutual fund balances (2)
58,000
AUA – Self-directed brokerage (2) 26,500
New deposit accounts
opened (thousands) (3)
Number of:
Branches
Automated teller machines
1,174
4,149
1,129
113,200
38,700
35,500
57,900
66,900
28,300
100,800
34,600
33,600
57,000
56,500
23,200
1,066
769
1,146
3,946
1,117
3,847
(1)
(2)
(3)
Average amounts are calculated using methods intended to approximate the average
of the daily balances for the period.
Represents year-end spot balances.
Deposit accounts only.
Average residential mortgages, personal loans and deposits
(C$ millions)
150,000
120,000
90,000
60,000
30,000
0
2006
2007 2008
2006
2007
2008
50,000
Residential mortgages
40,000
Personal loans
Personal deposits
30,000
20,000
10,000
0
Selected highlights
Table 31
(C$ millions)
2008
2007
2006
Total revenue
Other information (average) (1)
Business loans (2)
Business deposits (3)
$
2,441 $
2,301 $
2,141
39,900
58,000
36,900
53,700
34,400
48,600
(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
2006
2007 2008
2006 2007 2008
60,000
Business loans
48,000
Business deposits
36,000
24,000
12,000
0
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
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 Solutions, Inc., our merchant card processing joint venture
with the Bank of Montreal. We have over 5 million credit card accounts
and have an approximately 20% market share of Canada’s credit card
purchase volume.
Financial performance
Total revenue decreased $116 million, or 6%, from 2007, largely due
to the Visa Inc. restructuring gain in the prior year and the loss on the
mandatory redemption of our Visa Inc. shares in connection with Visa’s
IPO in 2008. Spread compression in the current year also contributed
to the decrease. Partially offsetting the decrease in revenue was
strong growth in credit card loan balances and transaction volume
growth of 11% and 11%, respectively, and the points liability cost in
the prior year.
Selected highlights
Table 32
(C$ millions)
2008
2007
2006
Total revenue
Other information
Average credit card balances (1)
Net purchase volumes
$
1,830 $
1,946 $
1,586
12,400
52,600
11,200
47,200
9,900
41,500
(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)
15,000
12,000
9,000
6,000
3,000
0
2006
2007 2008
2006 2007 2008
Average credit
card balances
Net purchase
volumes
60,000
48,000
36,000
24,000
12,000
0
Wealth Management
Wealth Management businesses serve affluent and high net worth
clients around the world, and provide asset management and estate
and trust services directly to clients and through our internal partners
and third-party distributors. This segment comprises Canadian Wealth
Management, U.S. & International Wealth Management and Global
Asset Management.
Highlights
• We grew to more than 4,000 client-facing advisors through acqui-
•
sitions, competitive hiring and recruiting programs.
In acquiring PH&N, we supported both Canadian Wealth
Management and Global Asset Management by adding almost
$68 billion of assets under management and an experienced
team of wealth management professionals.
• We extended the reach of U.S. & International Wealth
Management by acquiring FBW, a full-service U.S. broker-dealer
with 42 branch offices, approximately US$19 billion in assets
under administration and more than 300 experienced financial
consultants. We also opened a new office in Latin America, and,
in co-operation with Capital Markets, in India.
Global Asset Management continued its sales leadership in
Canada, with $8.8 billion in total mutual fund net sales in
fiscal 2008.
•
Economic and market review
As discussed in the 2008 Economic and market review in the Overview
of 2008 section, the challenging capital market and economic condi-
tions persisted throughout the year and significantly impacted the
results of our business. This led to a decline in the value of
cli ent assets, as well as lower transaction volumes in our brokerage
businesses in Canada and in the U.S., and contributed to a modest
decline in the value of client assets internationally. In addition, the
stronger Canadian dollar negatively impacted the translation of our
U.S. dollar-denominated earnings.
Our U.S. brokerage business maintains a stock-based compensa-
tion plan that allows eligible employees to allocate deferred earnings
to purchase our common shares or various mutual funds which we
economically hedge. The impact of accounting volatility as a result of
the current market environment has unfavourably affected our earn-
ings during the current year due to a decline in the fair value of certain
securities used to economically hedge the compensation plan, which
was partially offset by gains from the decline in the fair value of the
earned compensation liability.
60
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Wealth Management financial highlights
(C$ millions, except number of and percentage amounts)
Net interest income
Non-interest income
Fee-based revenue
Transactional and other revenue
Total revenue
Provision for credit losses
Non-interest expense
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 (2)
Selected average balance sheet information (3)
Total assets
Loans and acceptances
Deposits
Attributed capital (1)
Risk capital (1)
Other information
Revenue per advisor (000s) (4)
Assets under administration
Assets under management
Number of employees (full-time equivalent)
Number of advisors (4)
Impact of US$ translation on selected items
Increased (decreased) total revenue
Increased (decreased) non-interest expense
Increased (decreased) net income
Percentage change in average US$ equivalent of C$1.00 (5)
Table 33
2008
2007
$
468
$
427
$
$
$
$
2,276
1,243
3,987
1
3,038
948
665
23.3%
64.9%
23.8%
$
$
$
2,109
1,456
3,992
1
2,902
1,089
762
32.4%
65.1%
27.3%
$
1
$
$
2006
397
1,745
1,345
3,487
2,613
872
604
27.8%
59.3%
25.0%
$ 16,900
5,200
26,900
2,800
1,000
$
731
495,100
222,600
10,954
3,578
$ 16,600
4,600
24,900
2,300
1,150
$ 15,100
4,400
22,100
2,150
1,050
$
787 $
488,500
161,200
9,621
3,118
702
476,500
142,800
9,666
3,001
2008 vs. 2007
$
(91)
(60)
(24)
6%
(1)
(2)
(3)
(4)
(5)
Segment Return on equity, Return on risk capital and 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.
Pre-tax margin is defined as net income before income taxes and non-controlling interest in subsidiaries dividend by total revenue.
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.
Revenue by business line (C$ millions)
5,000
4,000
3,000
2,000
1,000
0
2006
2007
2008
Global Asset Management
Canadian Wealth Management
U.S. & International
Wealth Management
Financial performance
2008 vs. 2007
Net income for the year of $665 million decreased $97 million, or
13%, from a year ago, mainly due to lower transaction activity amid
continued uncertainty in global capital markets, the unfavourable
impact of the stock-based compensation plan, the stronger Canadian
dollar on the translation of our U.S. dollar-denominated earnings and
items related to the Reserve Primary Fund and auction rate securi-
ties as noted below. The favourable impact of the foreign exchange
translation gain on certain deposits related to the implementation of
the financial instruments accounting standards in the prior year also
reduced net income. These factors were partially offset by increased
earnings and fee-based revenue from our PH&N acquisition and solid
growth in fee-based client assets throughout most of the year.
Total revenue was flat compared to the prior year and included
increased fee-based revenue driven by higher fee-based client assets,
reflecting higher net sales and the addition of more experienced
advisors, and the contribution of PH&N’s private counsel and asset
management businesses. Increased fee-based client assets were
impacted by significant capital depreciation in the latter part of the
year due to the general decline in asset valuations amid continued
uncertainty in global capital markets. Increased transaction revenue
resulting from our J.B. Hanauer and FBW acquisitions, higher spreads
and solid volume growth from deposit and loan balances in our inter-
national wealth management business also contributed to revenue.
The increase in revenue was offset by lower transaction revenue due
to lower transaction volumes in our full-service brokerage business,
the decline in fair value of securities held in our stock-based compen-
sation plan, and the unfavourable impact of the stronger Canadian
dollar on the translation of our U.S. dollar-denominated revenue.
Non-interest expense was up $136 million, or 5%, mainly as a
result of increased costs in support of business growth, including
our acquisition-related staff and occupancy costs. This increase also
reflected the provision related to our support agreement for clients
of FBW invested in the Reserve Primary Fund (a U.S. money market
fund managed by a third-party provider) of $37 million ($22 million
after-tax) and Wealth Management’s share of the settlement with U.S.
regulators for $25 million ($19 million after-tax) relating to auction
rate securities. These factors were partially offset by the favourable
impact of the stronger Canadian dollar on our U.S. dollar-denominated
expenses, lower expenses due to the favourable decline in fair value
of our earned compensation liability related to our stock-based
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
61
compensation plan and lower variable compensation commensurate
with lower commission-based revenue.
Return on equity was down 910 bps from the prior year, reflecting
increased goodwill and intangibles related to the acquisitions of PH&N
and FBW, which contributed to average equity, as well as lower earn-
ings in the current year.
Assets under administration increased by $7 billion, or 1%, from
last year, reflecting the favourable impact of the stronger U.S. dollar
on the translation of our U.S. dollar-denominated assets under admin-
istration as at October 31, 2008. Assets under administration also
increased, reflecting the acquisition of FBW, partially offset by lower
client assets due to uncertainty in global financial markets.
Assets under management increased $61 billion, or 38%, from
last year, reflecting the acquisition of PH&N and strong mutual fund
sales for most of the year.
2007 vs. 2006
Net income for 2007 of $762 million increased $158 million, or 26%,
from 2006. The increase was largely due to strong earnings growth
across all our business lines reflecting the ongoing successful execu-
tion of our growth initiatives and generally favourable capital market
conditions. We recorded a $35 million ($28 million after-tax) foreign
exchange translation gain on certain deposits in 2007 related to the
implementation of the new financial instruments accounting standards.
Total revenue increased $505 million, or 14%, over 2006, largely
due to strong growth in fee-based client assets across all business
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 transaction volumes in our brokerage businesses,
reflecting generally favourable capital market conditions throughout
most 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
Business line review
Canadian Wealth Management
Canadian Wealth Management includes our full-service retail broker-
age in Canada, which is the market leader as measured by assets
under administration, with more than 1,400 investment advisors
providing advice-based, wide-ranging comprehensive financial solu-
tions to affluent and high net worth clients. Additionally, we provide
discretionary investment management and estate and trust services to
our domestic clients through more than 60 investment counsellors and
more than 125 trust professionals in locations across the country.
Financial performance
Revenue increased $14 million, or 1%, over the prior year, mostly due
to the growth in fee-based revenue driven by the increase in fee-based
client assets, reflecting higher net sales and the addition of more
experienced advisors, and the contribution of PH&N’s private counsel
business. This increase was partially offset by lower fee-based client
assets resulting from significant capital depreciation in the last quarter
of the year and lower transaction revenue due to lower transaction
volumes in our full-service brokerage business, driven by depressed
asset valuations amid the uncertainty in global capital markets.
Assets under administration decreased 12% from a year ago,
mainly due to capital depreciation amid the uncertainty in global
capital markets.
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.
Outlook and priorities
As discussed in the Outlook and medium-term objectives section,
we expect global capital markets will remain significantly volatile
in the short-term, and as asset valuations are expected to remain
depressed this will continue to affect our results in the near term. We
expect modest growth in fee-based client assets as financial markets
stabilize in the medium term. Adding experienced advisors across all
our businesses and providing client solutions, products and advice
that leverage the depth and breadth of our resources should also sup-
port steady growth in fee-based client assets over the medium term.
Further, we anticipate modest growth in transaction revenue as a
result of the potential for a modest recovery and steady growth in the
medium term. We expect growth will be supported by stability in finan-
cial markets and an increased investor appetite for transparent wealth
management products.
Key strategic priorities for 2009
•
Continue extending our lead in the Canadian wealth and asset
management markets with client-focused products, services and
strategies.
Improve operating performance, and expand our U.S. Wealth
Management business through organic growth.
Expand our high net worth International Wealth Management
business through organic growth and bolt-on acquisitions.
Expand asset management globally by leveraging our manage-
ment capabilities in the institutional market and in the individual
market through sub-advisory and alliance opportunities.
Continue attracting and retaining experienced advisors and other
professionals across all our businesses, and provide them with
best-in-class support in serving their clients’ needs.
•
•
•
•
Selected highlights
Table 34
(C$ millions)
2008
2007
2006
Total revenue
Other information
Assets under administration
Assets under management
Total assets under fee-based
programs
$
1,474 $
1,460 $
1,290
160,700
23,000
183,000
22,200
168,600
17,500
78,800
83,300
70,200
Average assets under administration and management (C$ millions)
200,000
160,000
120,000
80,000
40,000
0
2006
2007 2008
2006 2007 2008
AUA
AUM
25,000
20,000
15,000
10,000
5,000
0
62
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
U.S. & International Wealth Management
U.S. & International Wealth Management includes one of the largest
full-service retail brokerage firms in the U.S., with more than 2,000
financial consultants. We also operate a clearing and execution
services business that serves small to mid-sized independent broker-
dealers and institutions. Internationally, we provide customized
banking, credit, investment and trust solutions to high net worth
private clients through 2,500 employees across a network of 35 offices
located in 22 countries around the world.
Financial performance
Revenue decreased $119 million, or 6%, from the prior year. In U.S.
dollars, revenue decreased $14 million, or 1%, largely due to the
decline in fair value of securities held in our stock-based compensation
plan and lower transaction revenue due to lower transaction volumes
in our full-service brokerage business due to the uncertainty in global
capital markets. We also recorded a US$31 million foreign exchange
translation gain on certain deposits in 2007 related to the implemen-
tation of the financial instruments accounting standards which also
contributed to the decrease. These factors were partially offset by
additional transaction revenue from our J.B. Hanauer and FBW acquisi-
tions, and solid volume growth and higher spreads in our international
wealth management business.
Assets under administration decreased 14% from a year ago,
mainly due to capital depreciation amid the uncertainty in global
capital markets.
Global Asset Management
Global Asset Management is responsible for our proprietary asset
management business. In Canada, we provide a broad range of invest-
ment management services in all client segments through mutual
funds, pooled funds and separately managed portfolios. We distribute
our investment solutions to individuals through a broad network of
our bank branches, our discount and full-service brokerage business,
independent advisors and directly to consumers. We also provide
investment solutions directly to institutional clients, including defined
benefit and defined contribution pension plans, as well as endow-
ments and foundations. We are the largest fund company and one of
the largest money managers in Canada. In the U.S., we provide invest-
ment services to both retail and institutional clients through mutual
funds, fee-based accounts and separately managed portfolios.
Financial performance
Revenue increased $100 million, or 18%, over the prior year, mainly
reflecting growth in fee-based revenue driven by growth in assets
under management due to the contribution of PH&N’s asset manage-
ment business and strong net mutual fund sales for most of the year.
This growth was negatively impacted by net mutual fund redemptions
and significant capital depreciation in the last quarter of the year amid
the uncertainty in global capital markets.
Assets under management increased 52% from a year ago,
mainly due to the contribution of PH&N’s asset management business,
and net mutual fund sales, which were partially offset by net mutual
fund redemptions and capital depreciation in the last quarter of 2008,
amid the uncertainty in global capital markets.
Selected highlights
Table 35
Total revenue (C$ millions)
Other information (US$ millions)
Total revenue
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)
2008
2007
2006
$
1,869 $
1,988 $
1,732
1,812
1,826
1,533
5,200
18,500
277,600
16,200
5,100
16,500
323,300
21,400
4,000
13,300
274,200
17,600
21,300
28,100
23,500
(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 (US$ millions)
350,000
280,000
210,000
140,000
70,000
0
2006 2007 2008
2006 2007 2008
Assets under
administration
Assets under
management
25,000
20,000
15,000
10,000
5,000
0
Selected highlights
Table 36
(C$ millions)
2008
2007
2006
Total revenue
Other information
Canadian net long-term
mutual fund sales
Canadian net money market
mutual fund sales
Assets under management
$
644 $
544 $
465
600
6,200
5,400
8,200
180,100
1,300
118,800
400
105,600
Average assets under management (C$ millions)
Assets under
management
200,000
160,000
120,000
80,000
40,000
0
2006
2007
2008
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
63
Insurance
Insurance offers a wide range of life, health, travel, home and auto
insurance products and creditor insurance services to individual and
business clients in Canada and the U.S. We also offer reinsurance for
clients around the world. These products and services are offered
through a wide variety of distribution channels, including telephone,
independent life insurance advisors, travel agents, career sales forces,
Internet and retail insurance branches.
We are the largest Canadian bank-owned group of insurers, with
products distributed through more than 17,000 independent brokers
and almost 600 career sales advisors in North America. Our Canadian
insurance business holds a lead position in travel insurance products
and has a significant presence in individual living benefits, life, home
and auto insurance. In the U.S. we are a provider of protection, asset
accumulation, retirement solutions and travel insurance.
Highlights
• We completed a major technology transformation within our
Canadian Life and Health insurance business this year, which
resulted in an integrated business and technology platform that
will provide a solid foundation to support the future growth of our
life and health business.
• We expanded and diversified our international footprint during
the year through strong business growth and our entry into the
U.K. annuity reinsurance market.
• We expanded our Canadian retail insurance network to 35
branches in 2008, from 21 branches in 2007, giving our clients
more convenient access to insurance services and advice.
•
Through new sales, strong client retention and international
market expansion, our premiums and deposits reached $1 billion
per quarter during the year.
Economic and market review
As discussed in the 2008 Economic and market review in the Overview
of 2008 section, Canadian economic growth remained moderate
in 2008, which coupled with infrastructure investment, supported
business initiatives and our retail branch expansion, contributing
to increased business growth, particularly in our reinsurance and
Canadian businesses. Our insurance businesses were impacted by
weakness in the global equity and credit markets, particularly in the
fourth quarter, where we incurred investment losses on disposals and
impairments, as well as impacts from equity market movements.
Since the adoption of accounting standards related to financial
instruments in 2007, financial assets backing our life and health
policy holder liabilities are largely designated as held-for-trading and
the changes in fair value are recorded in net investment income. The
impact of the current market environment has resulted in significant
volatility in revenue. This volatility has been largely offset in policy-
holder benefits and claims, so that the overall impact on net income is
largely minimal.
Insurance financial highlights
(C$ millions, except number of and percentage amounts)
Non-interest income
Net earned premiums
Investment income
Fee income
Total revenue
Insurance policyholder benefits, claims and acquisition expense
Non-interest 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)
Selected average balance sheet information (2)
Total assets
Attributed capital (1)
Risk capital (1)
Other information
Premiums and deposits (3)
Insurance claims and policy benefit liabilities
Fair value changes on investments backing policyholder liabilities (4)
Assets under management
Number of employees (full-time equivalent)
2008
2007
2006
Table 37
$
2
$
$
$
2,864
(458)
04
2,610
1,631
576
403
389
$
$
$
$
2,593
402
197
3,192
2,173
537
482
442
$
$
$
$
2,595
535
218
3,348
2,509
517
322
302
32.8%
37.1%
31.2%
34.7%
20.5%
22.8%
$ 12,600
1,150
1,050
$ 12,500
1,400
1,250
$ 11,600
1,450
1,350
$
$
$
3,861
7,385
(870)
400
1,722
3,460
7,283
(108)
300
1,575
3,406
7,337
61
300
1,568
(1)
(2)
(3)
(4)
Segment Return on equity, Return on risk capital and 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.
Premiums and deposits include premiums on risk-based insurance and annuity products, and deposits on individual and group segregated fund deposits, consistent with insurance
industry practices.
Includes revenue impact of the change in fair value of investments backing policyholder liabilities is reflected in Investment income and largely offset in insurance policyholder benefits
claims and acquisition expense.
64
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Revenue by business line (C$ millions)
Premiums and deposits by business line (C$ millions)
4,000
3,200
2,400
1,600
800
0
U.S. Life
Property & Casualty
Canadian Life and Health
Reinsurance & Other
4,000
3,200
2,400
1,600
800
0
2006
2007
2008
2006
2007
2008
U.S. Life
Property & Casualty
Canadian Life and Health
Reinsurance & Other
Financial performance
2008 vs. 2007
Net income decreased by $53 million, or 12%, over last year, mainly
due to $110 million ($80 million after-taxes) of investment losses on
disposals and impairments, as well as impacts from equity market
movements. Our prior year included a $40 million (before- and after-
tax) gain related to the reallocation of certain foreign investment
capital which had supported our property catastrophe reinsurance
business, exited in 2007. These factors were partially offset by a
higher level of favourable net actuarial adjustments, reflecting the
impact of management actions and assumption changes, and solid
business growth in our reinsurance and Canadian businesses.
Total revenue decreased $582 million, or 18%, over last year. This
decrease was mainly due to the change in fair value of investments
backing our life and health policyholder liabilities, largely offset in
policyholder benefits, claims and acquisition expense. Investment
losses on disposals and impairments, as well as impacts from equity
market movements, lower U.S. annuity sales and the appreciation of
the Canadian dollar on the translation of our U.S. dollar-denominated
revenue also contributed to this decrease. These factors were partially
offset by solid growth in our reinsurance and Canadian businesses
during the year.
Insurance PBCAE decreased $542 million, or 25%, over last year,
primarily reflecting the change in fair value of investments, as noted
above, largely offset in revenue and a higher level of favourable net
actuarial adjustments this year, reflecting management actions and
assumption changes. The appreciation of the Canadian dollar on the
translation of our U.S. dollar-denominated liabilities and the impact
of lower U.S. annuity sales also contributed to this decrease. These
factors were partially offset by higher costs commensurate with the
growth in our reinsurance and Canadian businesses.
Non-interest expense was up $39 million, or 7%, from a year ago,
primarily reflecting increased infrastructure costs, costs in support of
business growth and continued strategic investments to support busi-
ness initiatives including our retail branch expansion.
Premiums and deposits were up $401 million, or 12%, from a
year ago, reflecting new sales growth, a new U.K. annuity reinsurance
agreement and continued strong client retention. These factors were
partially offset by the impact of the appreciation of the Canadian dol-
lar on the translation of our U.S. dollar-denominated premiums and
deposits and lower U.S. annuity deposits.
2007 vs. 2006
Insurance net income increased $140 million, or 46%, compared to
2006. The increase was primarily related to our property catastrophe
reinsurance business, reflecting the hurricane-related charges in 2006
and a favourable adjustment related to the reallocation of certain
foreign investment capital in 2007. These factors were partially offset
by lower income from our property catastrophe reinsurance business,
which we exited completely in 2007. 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 was down $156 million, or 5%, from 2006. The
decrease reflected the change in fair value of investments backing our
life and health policyholder liabilities, which is largely offset in policy-
holder benefits and claims. These factors were partially offset by the
growth in our European life reinsurance and Canadian businesses, and
a favourable adjustment related to the reallocation of certain foreign
investment capital in 2007. Lower annuity sales and lower revenue
from our property catastrophe reinsurance business also contributed
to the decrease.
Insurance PBCAE decreased $336 million, or 13%, from 2006. The
decrease primarily reflected the change in fair value of investments, as
noted above, which was largely offset in revenue. The impact of lower
U.S. annuity sales and management actions and assumption changes
that resulted in a higher level of favourable net actuarial liability adjust-
ments in 2007 also contributed to the decrease. These factors were
partially offset by increased costs commensurate with growth in our
European life reinsurance and Canadian businesses.
Non-interest expense was up $20 million, or 4%, from 2006,
primarily reflecting higher infrastructure investments and costs in sup-
port of business growth.
Premiums and deposits were up $54 million, or 2%, from 2006,
primarily reflecting new sales growth and stronger client retention,
partially offset by a decline in U.S. annuity sales.
Outlook and priorities
As discussed in the Outlook and medium-term objectives section,
the deterioration in financial markets is expected to adversely affect
the global economy, with a general uncertainty on the timing of the
recovery. In the current economic and market conditions, the insurance
industry outlook is potentially more turbulent and volatile than it has
been in the past few years. Continued weakness in the global equity
and credit markets may impact investment returns. However, the overall
quality of our investment portfolio remains very good. As a result of
our diversified product portfolio, coupled with the contribution of our
infrastructure investments and retail branch expansion, we anticipate
the slowing economic growth should not have a significant impact on
our business growth.
Key strategic priorities for 2009
•
Strengthen distribution economics by increasing sales through
low-cost distribution channels and by strengthening our position
in profitable third-party distribution channels.
Deepen client relationships by enhancing the client experience by
providing customers with a comprehensive suite of products and
services based on their needs.
Simplify the way we do business by enhancing and streamlining
all business processes to ensure that clients find it easy and
simple to do business with us.
Pursue selected international niche opportunities with the aim
to grow our reinsurance business by executing on a higher
volume of profitable transactions that fit within our overall risk
framework.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
65
Business line review
Reinsurance & Other
Reinsurance insures risks of other insurance and reinsurance compa-
nies. We offer life and accident and sickness products. In 2008, we
expanded into the life annuity reinsurance market, which increases
the scale of our reinsurance operations and provides the benefits of
increased geographic and product diversification.
Financial performance
Total revenue increased $205 million, or 24%, over the prior year,
primarily due to growth in our European life and other life retrocession
businesses, as well as from the impact of our new U.K. annuity reinsur-
ance business. This increase more than offset a favourable adjustment
related to the reallocation of foreign capital investment due to exiting
our property catastrophe reinsurance business in the prior year.
Premiums and deposits of $1,551 million increased 24% due to
business growth in European life and other life retrocession business
as well as entry into the U.K. annuity reinsurance market.
Canadian Life and Health
Canadian Life and Health offers life and health insurance, as well as
wealth accumulation solutions, to individual and group clients across
Canada. We offer term and universal life, critical illness, disability,
long-term care insurance and segregated funds, as well as group
benefits.
Financial performance
Total revenue decreased $357 million, or 31%, from the prior year,
mainly due to declines in the fair value of investments backing our
policyholder liabilities, largely offset in policyholder benefits and
claims. Losses attributable to the impact from equity market move-
ments, also contributed to the decrease. The decrease was partially
offset by increases in universal life deposits and new sales.
Premiums and deposits increased $126 million, or 11%, from the
prior year, largely due to growth in universal life products.
Selected highlights
Table 38
(C$ millions)
2008
2007
2006
Total revenue
Other information
Premiums and deposits (1)
$
1,064 $
859 $
744
1,551
1,251
1,132
(1)
Premiums and deposits include premiums on risk-based insurance and annuity
products, and deposits on individual and group segregated fund deposits, consistent
with insurance industry practices.
Premiums and deposits (C$ millions)
2,000
1,600
1,200
800
400
0
2006
2007
2008
Premiums and deposits
Selected highlights
Table 39
(C$ millions)
2008
2007
2006
Total revenue
Other information
Premiums and deposits (1)
Fair value changes on
investments backing
policyholder liabilities (2)
$
779 $
1,136 $
1,227
1,272
1,146
1,069
(522)
(93)
48
(1)
(2)
Premiums and deposits include premiums on risk-based insurance and annuity
products, and deposits on individual and group segregated fund deposits, consistent
with insurance industry practices.
Includes revenue impact of the change in fair value of investments backing our
policyholder liabilities, which was largely offset in PBCAE.
Premiums and deposits (C$ millions)
1,500
1,200
900
600
300
0
2006
2007
2008
Premiums and deposits
66
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Property & Casualty
Property & Casualty is comprised of personal home and auto
insurance and travel insurance. Our group insurance program provides
employers and affinity groups the ability to offer insurance benefits
to their employees and members. We also offer commercial insur-
ance through our partnership with Aon Reed Stenhouse Inc. We are
the leading provider of travel insurance, providing a wide range of
products and services, including trip cancellation and interruption
coverage.
Financial performance
Total revenue increased $26 million, or 4%, compared to the prior
year. The increase reflected home and auto sales growth as well as
strong retention on home and auto policy renewals. Travel insurance
revenue remained stable despite a slowdown in the overall travel
industry. These factors were partially offset by investment losses on
disposals and impairments.
Premiums and deposits increased $43 million, or 7%, over the
prior year, reflecting a 13% growth in the number of home and auto
policies inforce. Travel coverages decreased, but changes in the busi-
ness mix and products kept premiums relatively stable for the year.
U.S. Life
U.S. Life is strategically positioned to deliver value-added products
and services to consumers in the middle-income and mass-affluent
markets in the U.S. Our products include protection (term, traditional
and indexed universal life, whole life, critical illness and accidental
death) and asset accumulation (fixed annuities, fixed-indexed annui-
ties, variable insurance products) vehicles, with a focus on targeted
solutions for specific market segments.
Financial performance
Total revenue decreased $456 million, or 77%, compared to the prior
year due to the change in fair value of investments backing our policy-
holder liabilities, largely offset in policyholder benefits and claims.
Investment losses on disposals and impairments, the appreciation of
the Canadian dollar on the translation of our U.S. dollar-denominated
revenue and lower annuity deposits also contributed to this decrease.
Premiums and deposits decreased $68 million, or 15%, over the
prior year due to the appreciation of the Canadian dollar on the transla-
tion of our U.S. dollar-denominated premiums and deposits, and lower
annuity deposits.
Selected highlights
Table 40
(C$ millions)
2008
2007
2006
Total revenue
Other information
Premiums and deposits (1)
Home and auto policies
inforce (thousands)
Travel insurance coverages
(thousands)
$
627 $
601 $
647
335
604
297
576
573
254
2,689
2,888
2,843
(1)
Premiums and deposits include premiums on risk-based insurance and annuity
products, and deposits on individual and group segregated fund deposits, consistent
with insurance industry practices.
Premiums and deposits (C$ millions)
750
600
450
300
150
0
2006
2007
2008
Premiums and deposits
Selected highlights
Table 41
Total revenue (C$ millions)
Fair value changes on
investments backing
policyholder liabilities
Other information (US$ millions)
Total revenue
Premiums and deposits (1)
Fair value changes on
investments backing
policyholder liabilities (2)
2008
2007
2006
$
140 $
596 $
801
(346)
(18)
159
378
548
418
13
707
558
(313)
(13)
11
(1)
(2)
Premiums and deposits include premiums on risk-based insurance and annuity
products, and deposits on individual and group segregated fund deposits, consistent
with insurance industry practices.
Includes the revenue impact of the change in fair value of investments backing our
policyholder liabilities, which was largely offset in PBCAE.
Premiums and deposits (C$ millions)
750
600
450
300
150
0
2006
2007
2008
Premiums and deposits
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
67
International Banking
International Banking comprises our banking businesses in the U.S.
and Caribbean, and global custody and investor services, which we
provide through 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’ needs and building strong relationships
by consistently delivering high-quality service.
Highlights
• We completed our acquisition of RBTT, creating one of the most
extensive banking networks in the Caribbean, with 127 branches
and business centres and a presence in 17 countries across the
region. RBTT also added approximately $4 billion in loans and
$6 billion in deposits at acquisition.
• We completed our acquisition of ANB, which expanded our net-
work to 439 full-service banking centres in the southeastern
U.S. and added approximately $6 billion in loans and $6 billion
in deposits at acquisition. ANB has also strengthened our pres-
ence in Alabama, opened important new markets in Florida and
increased our presence in Georgia.
Economic and market review
As discussed in the 2008 Economic and market review in the Overview
of 2008 section, the continued downturn in the U.S. housing market,
volatile financial markets and weak consumer and business spending
in the U.S. led to higher provision for credit losses in our U.S. residen-
tial builder finance business and in our U.S. commercial and retail loan
portfolios.
In the Caribbean, the economy remained stable, with loans and
deposits increasing primarily due to our RBTT acquisition.
In the Eurozone, slowing economic growth and volatile financial
markets resulted in lower assets under administration and lower trans-
action volumes at RBC Dexia IS.
International Banking financial highlights
(C$ millions, except number of and percentage amounts)
2008
Net interest income
Non-interest income
Total revenue
Provision for credit losses
Non-interest expense
Net (loss) income before income taxes and non-controlling interest in subsidiaries
Net (loss) income
$
$
$
$
$
$
1,330
771
2,101
497
1,876
(272) $
(153) $
1
Table 42
2006
940
688
1,628
25
1,216
387
261
2007
1,031
884
1,915
109
,481
325
242
$
$
$
$
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 (3)
– RBC Dexia IS (4)
Assets under management – RBC (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
(3.4)%
(8.1)%
6.9%
11.7%
10.6%
16.1%
$ 51,300
27,000
42,500
5,200
2,150
$ 39,700
22,300
34,200
3,350
1,950
$ 32,600
18,500
28,700
2,400
1,600
$ 11,200
2,585,000
3,900
12,335
$
–
2,713,100
–
6,001
$
–
2,421,100
–
5,034
5.97%
1.84%
1.91%
.49%
1.01%
.14%
Impact of US$ and Euro translation on selected items
Increased (decreased) total revenue
Increased (decreased) non-interest expense
Increased (decreased) net income
Percentage change in average US$ equivalent of C$1.00 (5)
Percentage change in average Euro equivalent of C$1.00 (5)
2008 vs. 2007
$
(72)
(19)
(40)
6%
(4)%
(1)
(2)
(3)
(4)
(5)
Segment Return on equity, 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 and AUM – RBC represent the AUA and AUM, respectively, of RBTT as at September 30. RBTT results are reported on a one-month lag.
AUA – RBC Dexia IS represents the total AUA of the joint venture as at September 30, of which we have a 50% ownership interest. RBC Dexia IS results are reported on a one-month lag.
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.
68
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Revenue by business line (C$ millions)
2,500
2,000
1,500
1,000
500
0
2006
2007
2008
RBC Dexia Investor Services
Banking
Financial performance
2008 vs. 2007
Net loss was $153 million compared to net income of $242 million a
year ago. The decrease in earnings, predominantly in our U.S. banking
business, was mainly attributable to higher provision for credit losses
and writedowns and losses of $297 million ($201 million after-tax) on
our investment portfolios. These factors were partially offset by our
RBTT and ANB acquisitions, reflecting loan and deposit growth, and
business growth at RBC Dexia IS. For a detailed discussion regarding
our writedowns, refer to the Impact of the market environment in the
Financial performance section.
Total revenue increased $186 million, or 10%, over the prior year.
The increase was primarily due to our ANB and RBTT acquisitions,
reflecting loan and deposit growth. Business growth at RBC Dexia IS
and the favourable impact of the appreciation of the Euro against the
Canadian dollar also contributed to the increase. These factors were
partially offset by the writedowns and losses on our investment port-
folios and the unfavourable impact of a stronger Canadian dollar on
our U.S. dollar-denominated revenue.
Provision for credit losses of $497 million increased $388 million
from a year ago, primarily in U.S. banking, reflecting higher impaired
loans in our U.S. residential builder finance business and in our
U.S. commercial and retail loan portfolios due to the continued hous-
ing market downturn and deteriorating economic conditions in the
U.S. For further details on our provision for credit losses, refer to the
Credit risk section.
Non-interest expense increased $395 million, or 27%, from a year
ago, mainly due to higher costs in support of business growth, largely
reflecting the inclusion of our ANB and RBTT acquisitions and related
integration costs, and increased business volume at RBC Dexia IS.
These factors were partially offset by the favourable impact of a stron-
ger Canadian dollar on the translation of our U.S. dollar-denominated
expenses.
2007 vs. 2006
Net income decreased $19 million, or 7%, from 2006, largely due
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 at RBC Dexia IS, higher
loan and deposit growth in the U.S., reflecting acquisitions noted
below, de novo branch openings and business expansion.
Total revenue increased $287 million, or 18%, from 2006, primar-
ily attributable to RBC Dexia IS, reflecting strong market activity, an
additional month of results and business growth. Banking revenue
also increased, largely due to loan and deposit growth from our
acquisitions of Flag Financial Corporation (Flag) and the AmSouth
branches, despite the negative impact of a stronger Canadian dollar on
the translation of our U.S. dollar-denominated revenue. These factors
were partially offset by a loss on the restructuring of our U.S. banking
investment portfolio in 2007.
Provision for credit losses was up $84 million from 2006, 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 2007.
Non-interest expense was up $265 million, or 22%, over 2006,
largely reflecting higher costs in support of business growth related to
RBC Dexia IS, our acquisitions and integration of Flag and the AmSouth
branches, and de novo branch openings in the U.S.
Outlook and priorities
As discussed in the Outlook and medium-term objectives section,
global economies are expected to weaken further in the near term.
Consequently, we anticipate that interest rates may continue to
decline, accompanied by fluctuations in foreign exchange rates and
continued volatility in financial markets. These factors may impact
our spreads, as well as the translation of our foreign currency-
denominated earnings. In the U.S., we anticipate that the current
financial market volatility and housing market downturn will persist
into next year, along with reduced consumer and business spending
and negative economic growth. We expect these conditions to have an
unfavourable impact on our loan and deposit business in U.S. bank-
ing, as well as increase our provision for credit losses. The Caribbean
economy is also expected to be affected by the global economic slow-
down, with reduced exports, tourism and foreign direct investment.
Despite this, we continue to see opportunities for our Caribbean bank-
ing business with the ongoing integration of our RBTT acquisition and
continued strength in our loan and deposit portfolios. In the Eurozone,
financial market volatility will likely continue as many economies face
recession, which may impact business volumes at RBC Dexia IS.
Key strategic priorities for 2009
•
Refine our operating model to improve efficiencies and enhance
our competitiveness in our southeastern U.S. footprint, while
developing a robust retail strategy to provide our clients with an
integrated experience and a full product suite to serve their needs.
Continue to build on our strong position in the Caribbean through
the efficient integration of RBTT and by leveraging the strength of
our combined operations, providing the base for further expan-
sion in potential high-growth markets, including the Spanish
Caribbean and Central and South America.
Strive to significantly grow our international credit card business
by leveraging our size, scale and expertise in Canada.
Pursue growth strategies with RBC Dexia IS that include strength-
ening our global client franchise, building new value-added
products and expanding our presence in high-potential markets.
•
•
•
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
69
Business line review
Banking
Banking consists of our banking operations in the U.S. and Caribbean.
Our banking businesses offer a broad range of products and ser-
vices and financial advice to individuals, business clients and public
institutions in their respective markets. Our U.S. banking business
is now among the top five deposit holders in North Carolina and
ranks seventh overall as measured by deposits in our southeastern
U.S. footprint (1), where we have a network of 439 full-service bank-
ing centres and over 500 ATMs. As a result of our RBTT acquisition,
our Caribbean banking business is now the second largest bank, by
assets, in the English Caribbean, and our presence has increased to
127 branches in 17 countries across the region.
Financial performance
Total revenue increased $90 million, or 8%, compared to the prior
year. In U.S. dollars, Banking revenue increased $162 million, or 15%,
primarily driven by our ANB and RBTT acquisitions, reflecting loan and
deposit growth. These factors were partially offset by the writedowns
and losses on our investment portfolios, predominantly in our U.S.
banking business. Net interest margin was up 6 bps, mainly due to our
ANB and RBTT acquisitions.
In U.S. dollars, average loans and acceptances, and average depos-
its increased $6 billion and $6 billion, or 35% and 36%, respectively,
from the prior year. The increase was primarily attributable to growth in
loans and acceptances of 32%, and deposits of 32% in our U.S. banking
business, largely reflecting our ANB acquisition. In our Caribbean bank-
ing business, growth in loans and acceptances, and deposits of 54% and
52%, respectively, largely reflected our RBTT acquisition.
(1)
Our southeastern U.S. banking footprint comprises North Carolina, South
Carolina, Virginia, Alabama, Florida and Georgia.
Average loans and deposits (US$ millions)
Loans and acceptances
Deposits
25,000
20,000
15,000
10,000
5,000
0
2006 2007 2008
2006 2007 2008
RBC Dexia IS
Our joint venture, RBC Dexia IS, offers a complete range of investor
services to institutions worldwide, including global custody, fund and
pension administration, shareholder services, distribution support,
securities lending and borrowing, reconciliation services, compliance
monitoring and reporting, investment analytics and treasury services.
Financial performance
Total revenue increased $96 million, or 13%, compared to the prior
year, primarily due to business growth reflecting higher custody fees
and increased foreign exchange and securities lending revenue. The
positive impact of the appreciation of the Euro against the Canadian
dollar also contributed to the increase.
Assets under administration decreased 5% from a year ago,
mainly due to capital depreciation as a result of volatility in global
financial markets.
Selected highlights
Table 43
2008
2007
2006
1,246 $
1,156 $
1,070
$
$
Total revenue (C$ millions)
Other information (US$ millions)
Total revenue
Net interest margin (1)
Average loans and
acceptances (2)
Average deposits (2)
Assets under administration (3)
Assets under management (3)
Number of:
Branches
Automated teller machines
1,221 $
1,059 $
3.62%
3.56%
945
3.73%
$ 24,100 $ 17,800 $ 15,100
15,900
17,700
–
–
–
–
24,100
9,300
3,300
566
815
394
473
325
385
(1)
(2)
(3)
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.
AUA and AUM represent the total AUA and AUM, respectively, of RBTT as at
September 30. RBTT results are reported on a one-month lag.
Number of branches in U.S. and Caribbean
Caribbean
U.S.
600
480
360
240
120
0
2006
2007
2008
On September 30, 2008, the Dexia Group, our joint venture part-
ner in RBC Dexia IS, was recapitalized and the governments of France,
Belgium, and Luxembourg guaranteed new interbank and institutional
deposits and new bond issuances until October 31, 2009. We have
assessed our exposure and, as at December 4, 2008, have determined
these developments have not impacted the operations of
RBC Dexia IS.
Selected highlights
Table 44
(C$ millions)
2008
2007
2006
Total revenue
Other information
Asset under administration –
RBC Dexia IS (1)
$
855 $
759 $
558
2,585,000
2,713,100
2,421,100
(1)
AUA – RBC Dexia IS represents the total AUA of the joint venture as at September 30.
RBC Dexia IS results are reported on a one-month lag. We have revised the 2006
amount to reflect the amount reported by RBC Dexia IS, as we had previously dis-
closed only the assets under custody amount.
70
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Capital Markets
Capital Markets comprises our global wholesale banking business,
which provides a wide range of corporate and investment banking,
sales and trading, and research and related products and services
to corporate, public sector, institutional and retail clients in North
America and specialized products and services in select global mar-
kets. This segment consists of two main businesses: Global Markets
and Global Investment Banking and Equity Markets. All other busi-
nesses 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 capa-
bilities 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 structure and trader, and a leading
global fixed income bank.
Highlights
• We continue to be Canada’s leading global investment bank
and were named Dealmaker of the Year in Canada for five of the
last six years (Financial Post); Best Investment Bank in Canada
(Euromoney); number one in Canadian M&A, equity underwriting
and corporate debt financing (Bloomberg, 2007) and Global Bond
Arranger of the Year (Project Finance magazine, 2007).
•
• We continued to attract top talent and build teams in our U.S. and
European operations to further expand and strengthen key
businesses.
RBC Capital Markets Corp. and RBC Dain Rauscher Inc., our two
principal U.S. broker-dealers, merged into one legal entity, with
a common technology platform. The consolidation of the back
offices is designed to provide the foundation for efficiency and
future growth. RBC Dain Rauscher’s broker-dealer was renamed
RBC Capital Markets Corporation.
• We completed the acquisition of Richardson Barr, a leading
Houston-based energy advisory firm specializing in acquisitions
and divestitures in the exploration and production sector.
Economic and market review
As discussed in the 2008 Economic and market review in the Overview
of 2008 section, the severe disruption in financial markets resulted in
substantial writedowns in MBS assets and related derivatives by U.S.
and most major banks globally. Concerns of a global recession, com-
bined with the negative effects on broader credit markets, resulted
in significant writedowns in certain of our credit-related businesses.
These challenging markets and uncertain economic conditions also
impacted traditional investment banking activities, as a number
of deals were postponed. However, given the diversification of our
business, certain of our trading products benefited from the market
volatility and lower interest rate environment.
Capital Markets financial highlights
(C$ millions, except number of and percentage amounts)
Net interest income (1)
Non-interest income
Total revenue (1)
Provision for (recovery of) credit losses
Non-interest expense
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
Table 45
2008
1,839
2,096
3,935
183
2,121
1,631
1,170
$
$
$
$
2007
623
3,766
4,389
(22)
2,769
1,642
1,292
$
$
$
$
2006
131
4,005
4,136
(115)
2,603
1,649
1,355
$
$
$
$
20.5%
24.5%
26.6%
32.5%
31.5%
38.7%
$ 340,300
140,200
38,300
132,600
5,600
4,700
$ 311,200
152,900
29,000
125,700
4,800
3,900
$ 260,600
132,300
22,100
108,100
4,250
3,450
3,296
3,339
2,922
1.30%
.48%
.06%
(.08)%
.28%
(.52)%
Impact of US$ and British pound translation on selected items (1)
2008 vs. 2007
Increased (decreased) total revenue
Increased (decreased) non-interest expense
Increased (decreased) 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)
$
(111)
(137)
12
6%
10%
(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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
71
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
2006
2007
2008
2006
2007
2008
(1)
Taxable equivalent basis. For further discussion, refer to the How we measure and report our business segments section.
Other
Europe
U.S.
Canada
Financial performance
2008 vs. 2007
Net income decreased $122 million, or 9%, compared to a year ago,
largely due to significantly higher writedowns of $2,091 million
compared to $393 million last year, resulting from continued deteriora-
tion in the U.S. credit markets throughout 2008. These writedowns
reduced net income by $920 million after tax and related compensa-
tion adjustments as compared to $173 million last year. Weak equity
and debt origination activities and the increase in provision for credit
losses also contributed to the decrease. The decrease in net income
was partially offset by higher trading results in certain businesses
and lower non-interest expense primarily due to the reduction of the
Enron-related litigation provision, higher gains on credit derivative
contracts recorded at fair value used to economically hedge our cor-
porate lending portfolio and the gain on fair value adjustments on RBC
debt designated as held-for-trading. For a detailed discussion regard-
ing our writedowns, refer to the Impact of the market environment in
the Financial performance section.
Total revenue decreased $454 million, or 10%, compared to the
prior year. The decrease was primarily due to significantly higher
writedowns noted above, weak equity and debt origination activities
and weaker results in our equity trading businesses. The negative
impact of the strong appreciation of the Canadian dollar on the transla-
tion of our U.S. dollar-denominated and British pound-denominated
revenue also contributed to the decrease. These items were partially
offset by higher trading results in certain of our fixed income and
foreign exchange businesses, higher gains on credit derivative con-
tracts recorded at fair value used to economically hedge our corporate
lending portfolio and the gain on fair value adjustments on RBC debt
designated as held-for-trading, as noted above. Improved results in
our U.S. cash equities, lending and loan syndication finance busi-
nesses also partially offset the decrease in revenue.
Provision for credit losses of $183 million in the current year com-
pares to a recovery of $22 million in the prior year. This included a
$61 million provision related to loans extended under liquidity
facilities drawn on by RBC-administered multi-seller asset-backed
commercial paper conduit programs, and also included provisions
related to some specific corporate loans.
Non-interest expense decreased $648 million, or 23%, from a
year ago, mainly due to the reduction of the Enron-related litigation
provision, lower variable compensation mostly attributable to the
write downs and the favourable impact of a stronger Canadian dollar
on the translation of our U.S. dollar- and British pound-denominated
expenses. These factors were partially offset by higher infrastructure
investments in certain businesses, including acquisitions, sundry
losses and Capital Markets’ share of the settlement with U.S. regula-
tors related to auction rate securities.
Average assets were up $29 billion, or 9%, primarily due to an
increase in derivative assets, largely reflecting increased market volatility
and an increase in loan assets due to growth in corporate lending activi-
ties. These factors were partially offset by lower fixed income and equity
trading securities resulting from strategically reducing such assets.
2007 vs. 2006
Net income decreased $63 million, or 5%, compared to 2006, largely
due to writedowns recorded in 2007 totalling $393 million related to
the deterioration in the U.S. credit markets. These write downs reduced
net income by $173 million after tax and related compensation adjust-
ments. 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.
Total revenue increased $253 million, or 6%, from 2006. The
increase was primarily 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 and
higher distributions on private equity investments also contributed
to the increase. These factors were partially offset by lower trad-
ing revenue in our fixed income businesses, reflecting the valuation
writedowns related to certain securities, the negative impact of the
stronger Canadian dollar on the translated value of U.S. dollar-denomi-
nated revenue and lower U.S. debt origination results.
Recovery of credit losses of $22 million in 2007 compares to a
recovery of credit losses of $115 million in 2006, which included a
$50 million reversal of the general allowance.
Non-interest expense increased $166 million, or 6%, from
2006, 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 performance and lower
professional fees.
Outlook and priorities
As discussed in the Outlook and medium-term objectives section,
market uncertainty will likely continue into 2009. Certain of our busi-
nesses will be affected in the near term but we expect there will be a
slight improvement when global markets begin to stabilize. We antici-
pate that our fixed income businesses will encounter some writedowns
due to continuing market volatility. However, we believe these write-
downs should not be as significant as in 2008 as we are continuing to
proactively reduce the risk and size of certain of our non-strategic busi-
nesses. We also expect some improvement in our equity and debt new
issuance activities compared to 2008. Global central banks continue to
provide liquidity to financial markets in an effort to minimize the impact
of the market environment on the broader economy. Certain measures,
such as significant interest rate reductions, financial-market rescue
packages and intra-bank lending guarantees, are expected to improve
market stability over time, and we anticipate that certain of our
businesses are well positioned to capitalize on these opportunities.
Key strategic priorities for 2009
• Maintain our leadership position in Canada and deepen our pen-
•
•
etration of the mid-market segment in energy and mining sectors.
Leverage our investment banking expertise in energy and mining
to expand our commodities business. This will include building
our natural gas and energy trading and marketing platforms and
developing U.S. power and global emissions capabilities.
In our U.S. investment banking business, continue to improve our
market share in key product areas, namely M&A, equity under-
writing and leveraged loans.
72
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
•
•
Continue to invest and grow our electronic trading and cash
equities platforms to deliver multi-asset products and services to
our clients.
Intend to further extend our U.K. infrastructure finance and our
project advisory capabilities in the European, U.S. and Canadian
markets. We intend to further enhance our municipal banking
•
business and expand our leveraged finance capabilities to grow
our European client base.
Enhance our Asian- and New York-based emerging markets distri-
bution platforms to deliver fixed income and structured products
to our institutional clients.
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 $502 million, or 21%, from a year
ago. Trading-related revenue was down $903 million, or 47%,
primarily due to significantly higher writedowns and weaker results in
our equity trading businesses, partially offset by stronger results in
certain of our fixed income and foreign exchange businesses. Other
revenue of $867 million was up $413 million from a year ago, largely
due to the gain on fair value adjustments on RBC debt designated as
held-for-trading, partially offset by weaker debt origination revenue.
We led or jointly led 607 non-structured mid-term notes debt
issues, up from 603 deals a year ago, with a total value of approxi-
mately $71 billion (2007 – $81 billion), and in municipal finance,
we were involved in 732 issues, down from 1,092 a year ago, with a
total value of approximately $74 billion (2007 – $115 billion) through
October 2008.
Global Investment Banking and Equity Markets
Global Investment Banking and Equity Markets brings together our
investment banking and equity sales and trading capabilities to pro-
vide a complete suite of advisory and equity-related services to clients
from origination, structuring and advising to distribution, sales and
trading, and global prime brokerage.
During the year, we closed our acquisition of Richardson Barr, a
leading Houston-based energy advisory firm specializing in acquisi-
tions and divestitures in the exploration and production sector, and
also acquired teams in our leveraged finance and product businesses
in the U.K., as well as in our options trading and program trading
businesses in the U.S.
Financial performance
Global Investment Banking and Equity Markets revenue decreased
$197 million, or 11%, compared to the prior year. Gross underwriting
and advisory revenue was down $292 million, or 35%, due to weaker
equity origination and lower M&A activities, reflecting challenging
market conditions in 2008, as compared to strong results in 2007.
Equity sales and trading revenue increased $117 million, or 31%,
mainly due to improved results in our U.S. cash equities business,
while Other revenue was up $43 million, or 9%, primarily reflecting
strong lending and loan syndication activity.
In 2008, we advised on 117 announced M&A deals, up from 98
announced deals a year ago, with a total value of US$41 billion (2007 –
$190 billion). In 2008, we led or co-led 71 equity and equity-related
new issues, down from 142 in the prior year, with a total market value
of $30 billion (2007 – $20 billion).
Selected highlights
Table 46
(C$ millions)
Total revenue (1)
Other information
Trading-related
Other (2)
2008
2007
2006
$
1,902 $
2,404 $
2,553
1,028
867
1,931
454
2,154
425
(1)
(2)
Taxable equivalent basis. For further discussion, refer to the How we measure and
report our business segments section.
Other includes debt origination, municipal products, gains/losses on private equity
investments, 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
2006
2007
2008
Selected highlights
Table 47
(C$ millions)
2008
2007
2006
Total revenue (1)
Other information
Gross underwriting and
advisory fees
Equity sales and trading
Other (2)
$
1,536 $
1,733 $
1,417
539
492
512
831
375
469
665
283
434
(1)
(2)
Taxable equivalent basis. For further discussion, refer to the How we measure and
report our business segments section.
Other includes private equity distributions, 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
2006
2007
2008
Equity sales and trading
Other
Gross underwriting and
advisory fees
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
73
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 and retail clients globally.
Financial performance
Revenue from Other was $497 million, an increase of $245 million over
the prior year, mainly reflecting higher gains on credit derivative
contracts recorded at fair value used to economically hedge our corpo-
rate lending portfolio, as counterparty credit spreads widened during
the period.
Net income was positively impacted by the decrease in
non-interest expense, which largely reflected the reduction of the
Enron-related litigation provision.
Corporate Support
The Corporate Support segment includes our global technology and
operations group, corporate treasury, finance, human resources,
risk management, internal audit and other global functions. The costs
related to these activities are largely allocated to the business segments,
although certain activities related to monitoring and oversight of the
enterprise reside within this segment.
The reported results for the Corporate Support segment mainly
reflect activities that are undertaken for the enterprise, and which are
not allocated to the business segments, such as enterprise funding
activities, and include fair value adjustments of RBC debt designated
as held-for-trading, changes in the general allowance for credit losses,
as well as the change in the fair value of certain derivatives used
to economically hedge related risks. Also included are certain tax
amounts, securitization and securities mainly held for treasury-related
activities and the net charges associated with unattributed capital. In
addition, the results reflect 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)
Provision for (recovery of) credit losses
Non-interest expense
Net loss before income taxes and non-controlling interest in subsidiaries (1)
Net income (loss)
Securitization
Total securitizations sold and outstanding (2)
New securitization activity in the year (3)
Other information
Number of employees (full-time equivalent)
Table 48
2008
2007
2006
$
$
$
$
(995) $
358
(637) $
47
(18)
(732) $
377
(355) $
(85)
36
(666) $
(178) $
(306) $
$
209
(488)
178
(310)
(86)
36
(260)
111
$ 19,316
6,482
$ 17,889
4,264
$ 15,836
6,142
20,794
20,349
18,348
(1)
(2)
(3)
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 $410 million in 2008 recorded in Capital Markets (2007 – $332 million, 2006 – $213 million).
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.
2008
Net loss of $178 million for the year included writedowns of
$397 million ($297 million after-tax) on our exposure to U.S. MBS and
other securities of which $268 million related to AFS and $129 million
related to HFT. For a detailed discussion regarding our writedowns,
refer to the Impact of the market environment in the Financial perfor-
mance section
The net loss also reflected an increase in the general allowance
of $145 million ($98 million after-tax) related to volume growth in our
Canadian retail portfolio, weakness in our U.S. banking portfolios and a
foreign currency translation adjustment related to our U.S. dollar-
denominated deposits used to fund certain U.S. dollar-denominated AFS
securities. These factors were partially offset by income tax amounts
largely related to enterprise funding activities that were not allocated to
the segments, the gain on the fair value adjustments on RBC debt desig-
nated as held-for-trading of $190 million ($129 million after-tax), gains
related to the change in fair value of derivatives related to certain eco-
nomic hedges on our funding and gains related to securitization activity.
Prior to the fourth quarter of 2008, changes in the general allow-
ance were recorded in our Canadian Banking, International Banking
and Capital Markets segments. For further information regarding the
allocation of the general allowance, refer to the How we measure and
report our business segments section.
2007
Net income of $209 million for 2007 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 decline
in fair value related to the recognition of the ineffectiveness of hedged
items and the related derivatives in hedge accounting relationships, a
cumulative adjustment for losses resulting from the fair value of cer-
tain derivatives that did not qualify for hedge accounting and higher
capital taxes that were not allocated to the business segments.
2006
Net income of $111 million for 2006 mainly reflected income tax
amounts, which were largely related to enterprise funding activities
and the favourable resolution of income tax audits related to prior
years not allocated to the business segments. Gains on the change in
fair value of derivatives related to certain economic hedges also con-
tributed to net income in 2006. These factors were partially offset by
the timing of securitization activity and an amount accrued related to a
leased space, which we will not occupy.
74
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Financial condition
Condensed balance sheet (1)
As at October 31 (C$ millions)
Assets
Cash and due from banks (2)
Interest-bearing deposits with banks
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Loans (net of allowance for loan losses)
Other (3)
Total assets
Liabilities and shareholders’ equity
Deposits
Other (4)
Subordinated debentures
Trust capital securities
Preferred share liabilities
Non-controlling interest in subsidiaries
Shareholders’ equity
Total liabilities and shareholders’ equity
Table 49
2008
2007
$ 11,086
20,041
171,134
44,818
289,540
187,240
$
4,226
11,881
178,255
64,313
237,936
103,735
$ 723,859
$ 600,346
$ 438,575
242,624
8,131
1,400
–
2,371
30,758
$ 365,205
201,284
6,235
1,400
300
1,483
24,439
$ 723,859
$ 600,346
(1)
(2)
(3)
(4)
The table above represents our condensed balance sheet, which is largely measured at fair value. 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. Assets and liabilities of our
self-sustaining operations with functional currencies other than Canadian dollars are translated into Canadian dollars at rates prevailing at the balance sheet date. For further details,
refer to the Critical accounting policies and estimates section as well as Notes 1 and 2 to our Consolidated Financial Statements.
Cash and due from banks of $11 billion is comprised mainly of operating balances with other banks, bank notes and operating balances with the Bank of Canada. As Cash and due from
banks is related to operating activities in the near term, year-over-year trend analysis is not relevant.
Other assets includes derivative-related amounts (2008 – $136,134 million, 2007 – $66,585 million), customer’s liability under acceptances (2008 – $11,285, 2007 – $11,786) and
Goodwill (2008 – $9,977, 2007 – $4,752). For further information, refer to our Consolidated Balance Sheets.
For further information, refer to our Consolidated Balance Sheets.
2008 vs. 2007
Total assets were up $124 billion, or 21%, from a year ago, largely
attributable to the impact of the weaker Canadian dollar on the transla-
tion of mainly U.S. dollar-denominated assets (approximately half the
impact) and growth across most asset categories. The increase also
reflected the impact of changes in market conditions on the fair value
of derivatives, and solid loan growth, particularly in wholesale loans,
Canadian residential mortgages and personal loans, partially offset by
a reduction in our securities positions and a reduction in the fair value
of these positions, reverse repos and securities borrowed.
Interest-bearing deposits with banks increased $8 billion from
the prior year, largely reflecting higher balances required for pledging
assets related to trading activities due to reduced liquidity in global
financial markets in the latter part of the year. The increase also
reflected a shift in our portfolio mix to higher-yielding assets and the
impact of the weaker Canadian dollar on the translation of foreign
currency-denominated interest-bearing deposits.
Securities were down $7 billion, or 4%, from a year ago, primarily
due to reduced positions as a result of the continued financial market
volatility and the reduction in fair values from weak market condi-
tions. These factors were partially offset by the impact of the weaker
Canadian dollar on the translation of mainly U.S. dollar-denominated
securities and increased positions for government-guaranteed debt
instruments amid the uncertainty in global financial markets.
Assets purchased under reverse repurchase agreements (reverse
repos) and securities borrowed decreased $19 billion, or 30%, from
a year ago, reflecting reduced counterparty activity as a result of
financial market volatility and lower stock borrowing activity. This was
partially offset by the impact of the weaker Canadian dollar on the
translation of mainly U.S. dollar-denominated reverse repos and secu-
rities borrowed.
Loans increased $52 billion, or 22%, from a year ago, partially
due to growth in our Canadian retail loan portfolio. This growth was
led by Canadian residential mortgages, which increased $10 billion,
or 10%, and an increase in personal loans, mainly driven by demand
for home equity lending due to the strong housing market during the
beginning of the year and continued relatively low interest rates and
low unemployment in Canada throughout the year. Solid growth in
our wholesale loans of $26 billion, or 38%, mainly reflected continued
growth in corporate lending, our acquisitions of ANB and RBTT, and
higher balances required for pledging assets related to trading
activities due to reduced liquidity in global financial markets in the
latter part of the year. The increase in total loans also reflected the
impact of the weaker Canadian dollar on the translation of U.S. dollar-
denominated loans.
Other assets were up $84 billion from the prior year, mainly
attributable to higher fair value of derivative-related assets. This
growth was primarily a result of the impact of the strengthening of
the U.S. dollar, both on U.S. dollar-denominated asset balances and
on foreign exchange contract positions where we were long on the
U.S. dollar. The impact of the downward shift in yields on our received
fixed positions, increased market volatility and the widening of credit
spreads on credit protection bought also contributed to the increase.
In addition, the increase reflected higher broker-dealer receivables
due to higher activity resulting from increased capital market volatility
and goodwill from our acquisitions of RBTT, ANB and PH&N.
Total liabilities were up $117 billion, or 20%, from a year ago,
largely as a result of the impact of the weaker Canadian dollar on for-
eign currency-denominated liabilities. The increase was also driven
by growth in deposits and increased fair value of derivative-related
amounts due to market conditions that were partially offset by reduced
activity from borrowed securities and repurchase agreements.
Deposits increased $73 billion, or 20%, from a year ago. The
growth was largely due to higher business and government deposits
that were driven by the weaker Canadian dollar on the translation
of mainly U.S. currency-denominated deposits and our issuances of
notes and covered bonds, which are classified in deposits, to support
business growth. Higher personal deposits also contributed to the
increase, largely based on the strong demand for our Canadian dollar-
and U.S. dollar-denominated high-interest savings accounts and
strong growth in personal fixed-term deposits amid the uncertainty in
global financial markets. Our ANB and RBTT acquisitions also contrib-
uted to deposit growth.
Other liabilities increased $41 billion, or 21%, mainly attributable
to higher fair value of derivative-related liabilities. This increase was
primarily due to the impact of the stronger U.S. dollar on both our U.S.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
75
dollar-denominated liabilities and foreign exchange contract positions
where we were short on the U.S. dollar. The impact of the downward
shift in yields on our pay fixed positions, increased market volatility,
the widening of credit spreads on credit protection sold and higher
broker-dealer payables, reflecting higher activity due to increased
capital market volatility, also contributed to the increase. These
factors were partially offset by reduced counterparty activity in bor-
rowed securities and repurchase agreements, as a result of continued
financial markets volatility, and a decrease in securities lending and
short selling activities, partially reduced by the impact of the weaker
Canadian dollar on mainly U.S. dollar-denominated borrowed securi-
ties and repurchase agreements.
Preferred share liabilities related to Non-cumulative First
Preferred Shares Series N were redeemed during the year and was
financed out of general corporate funds.
Non-controlling interest in subsidiaries increased $.9 billion from
last year, mainly due to $500 million of RBC Trust Capital Securities
which were issued in the current year. For further information, refer to
Note 17 to our Consolidated Financial Statements.
Subordinated debentures increased $2 billion, or 30%, from the
prior year, largely reflecting the issuances net of redemptions of subor-
dinated debentures used to support business growth.
Shareholders’ equity increased $6 billion, or 26%, from the prior
year, largely reflecting the issuance of common shares mainly for con-
sideration paid for our acquisitions of RBTT, ANB, PH&N and FBW, our
current year net income and a decline in unrealized foreign currency
losses in our self-sustaining foreign subsidiaries, net of our hedging
activities. These factors were partially offset by dividends declared on
our common shares, increased unrealized losses on our AFS portfolio
and dividends declared on preferred shares during the year.
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of financial
transactions that, under GAAP, are not recorded on our balance sheet.
Off-balance sheet transactions are generally undertaken for risk
management, capital management and/or funding management pur-
poses for our benefit and the benefit of our clients. These transactions
include transactions with SPEs and issuance of guarantees. These
transactions give rise to, among other risks, varying degrees of mar-
ket, credit, liquidity and funding risk, which are discussed in the Risk
management section.
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 VIEs as defined by CICA
AcG-15, Consolidation of Variable Interest Entities. Refer to the Critical
accounting policies and estimates section and Notes 1 and 6 to our
Consolidated Financial Statements for our consolidation policy and
information about the VIEs that we have consolidated or in which
we have significant variable interests. Pursuant to CICA Accounting
Guideline 12, Transfers of Receivables (AcG-12), Qualifying SPEs
(QSPEs) 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
management 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 trans-
fer 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 Dominion Bond
Rating Service (DBRS), Moody’s Investors Service (Moody’s) and
Standard & Poor’s (S&P). This SPE meets the criteria for a QSPE and,
accordingly, as the transferor of the credit card receivables, we are
precluded from consolidating this SPE.
We continue to service the credit card receivables sold to the
QSPE and perform an administrative role for the QSPE. We also pro-
vide 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 government-guaranteed Canadian residential mortgage
loans through the creation of MBS and sell a portion of these MBS as
part of government auctions as well as to an independent SPE on a
revolving basis. We retain interests in the excess spread on the sold
MBS and service the underlying mortgages we have securitized for
funding and liquidity purposes ourselves or through an independent
servicer.
We did not securitize any residential mortgages synthetically in
2007 and 2008. As at October 31, 2008, the notional balance of our
purchased credit protection totalled $399.4 million on residential
mortgages with an outstanding unamortized balance of $9.9 billion.
Commercial mortgage loans
We securitize commercial mortgages by selling them in collateral pools,
which meet certain diversification, leverage and debt coverage criteria,
to SPEs, one of which is sponsored by us. The SPEs finance the pur-
chase of these pools by issuing certificates that carry varying degrees
of subordination. The certificates issued by the SPE which we sponsor
range from AAA to B- and are rated by any two of DBRS, Moody’s and
S&P. The most subordinated certificates are unrated. The certificates
represent undivided interests in the collateral pool, and the SPE which
we sponsor, having sold all undivided interests available in the pool,
retains none of the risk of the collateral pools. We do not retain any
beneficial interests in the loans sold unless we purchase some of the
securities issued by the SPEs for our own account. We are the primary
servicer under contract with a third-party master servicer for the loans
that are sold to our sponsored SPE.
76
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Our financial asset securitizations
Table 50
As at October 31 (C$ millions)
Outstanding securitized assets
Residential mortgages
Credit cards
Commercial mortgages
Total
2008
2007
$ 21,520 $ 18,384
3,650
3,727
4,120
2,325
$ 27,965 $ 25,761
Retained interests
Residential mortgages
Mortgage-backed securities retained (1) $ 12,342 $
Retained rights to future excess interest
Credit cards
Asset-backed securities purchased (2)
Retained rights to future excess interest
Subordinated loan receivables
Commercial mortgages
Asset-backed securities purchased (2)
954
26
8
699
7
5,954
414
870
27
3
12
Total
$ 14,036 $
7,280
(1)
(2)
All residential mortgages securitized are Canadian mortgages and are government
guaranteed.
Securities purchased during the securitization process.
Securitization activities during 2008
During the year, we securitized $18.4 billion of residential mort-
gages, of which $7.5 billion were sold and the remaining $10.9 billion
(notional value) were retained. We securitized and sold $1.5 billion
of credit card loans and purchased $65 million of related securities
during the securitization process. We also securitized $.2 billion of
commercial mortgages and purchased $9 million (notional value) of
the related securities during the securitization process. Refer to Note 5
to our Consolidated Financial Statements for further details including
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
(RBC TruCS) and RBC Trust Subordinated Notes (RBC TSNs), through
three SPEs: (i) RBC Capital Trust (Trust), (ii) RBC Capital Trust II (Trust II)
and (iii) RBC Subordinated Notes Trust (Trust III). We consolidate 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, 2008, we held residual interest of $1 million and $1 million
(2007 – $1 million and $1 million) in Trust II and Trust III, respectively.
We had loan receivables of $3 million (2007 – $40 million) and $30 mil-
lion (2007 – $30 million) from Trust II and Trust III, respectively, and
reported the senior deposit notes of $900 million and $999.8 million
(2007 – $900 million and $999.8 million) that we issued to Trust II and
Trust III, respectively, in our deposit liabilities. Under certain circum-
stances, RBC TruCS of Trust II will be automatically exchanged for our
preferred shares and RBC TSNs exchanged for our subordinated notes
without prior consent of the holders. In addition, RBC TruCS holders of
Trust II have the right to exchange for our preferred shares as outlined
in Note 17 to our Consolidated Financial Statements.
Interest expenses on the senior deposit notes issued to Trust II
and Trust III amounted to $52 million and $47.2 million, respectively
(2007 – $52 million and $23.6 million), during the year. For further
details on the capital trusts and the terms of the RBC TruCS and RBC
TSNs issued and outstanding, refer to the Capital management section
and Note 17 to our Consolidated Financial Statements.
Securitization of client financial assets
Within Securitization Finance, our principal relationship with SPEs
comes in the form of administering six multi-seller asset-backed
commercial paper conduit programs (multi-seller conduits or conduits) –
three in Canada and three in the U.S. We are involved in these conduit
markets because our clients value these transactions, they offer us a
source of revenue and they generate a favourable risk-adjusted return
for us. Our clients primarily utilize multi-seller conduits to diversify
their financing sources and to reduce funding costs by leveraging the
value of high-quality collateral.
The multi-seller conduits purchase various financial assets and
finance the purchases by issuing highly rated asset-backed commer-
cial paper. The main types of asset classes financed by the multi-seller
conduits are credit cards, auto loans and leases, trade receivables,
student loans, asset-backed securities, equipment receivables, and
consumer loans. As at October 31, 2008, these asset classes com-
prised 95% of our maximum exposure to loss by client asset type. Less
than 1% of outstanding securitized assets comprised U.S. Alt-A or sub-
prime mortgages and the securitized assets do not contain commercial
mortgage loans.
We do not maintain any ownership or retained interests in
these multi-seller conduits and have no rights to, or control of, their
assets. We provide services such as transaction structuring and
administration as specified by the multi-seller conduit program docu-
ments for which we receive market based fees. In addition, we provide
backstop liquidity facilities and partial credit enhancements to the
multi-seller conduits, as shown in Table 51. Fee revenue for all such
services, which is reported in Non-interest income, amounted to
$160 million during the year (2007 – $72 million). Commitments under
the backstop liquidity and credit enhancement facilities are factored
into our risk adjusted asset calculation, and therefore impact our regu-
latory capital requirements.
Our total commitment to the conduits in the form of backstop
liquidity facilities and credit enhancement facilities is shown in
Table 51.
Liquidity and credit enhancement facilities
As at October 31 (C$ millions)
Backstop liquidity facilities
Credit enhancement facilities
2008
2007
Notional of
committed
amounts
Allocable
notional
amounts (2)
Outstanding
loans
Total
maximum
exposure
to loss
Notional of
committed
amounts
Allocable
notional
amounts (2)
Outstanding
loans
Table 51
Total
maximum
exposure
to loss
$ 43,452
4,486
$ 37,080
4,486
$ 1,947
–
$ 39,027
4,486
$ 42,567
4,185
$ 38,726
4,185
$
$
–
–
–
$ 38,726
4,185
$ 42,911
Total (1)
$ 47,938
$ 41,566
$ 1,947
$ 43,513
$ 46,752
$ 42,911
(1)
(2)
Represents multi-seller conduits administered by us.
Based on total committed financing limit.
The total committed amount of the backstop liquidity facilities and the
program-wide credit enhancement facilities exceeds the amount of
the total financing limit established by the conduits under the receiv-
able purchase agreements. The maximum exposure to loss cannot
exceed the amount of the financing limit, and therefore the maximum
exposure to loss attributable to our backstop liquidity and credit
enhancement facilities is less than the total committed amount of
these facilities.
Our maximum exposure to loss as shown in Table 51 is calculated
based on the total amount we are exposed to under backstop liquidity
facilities and partial credit enhancements we provide to the multi-seller
conduits, and is limited to a maximum 102% of the total amount of
assets purchased or committed to be purchased by the conduits
plus any outstanding loans. Our maximum exposure to loss was
$43.5 billion as at October 31, 2008 (2007 – $42.9 billion). The maxi-
mum assets that may have to be purchased by the conduits under
purchase commitments outstanding as at October 31, 2008 were
$42.7 billion (2007 – $41.8 billion). Outstanding loans as at October 31,
2008 were $1.9 billion (2007 – $nil). Of the total purchase commitments
outstanding, the multi-seller conduits have purchased financial assets
totalling $33.6 billion as at October 31, 2008 (2007 – $29.3 billion).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
77
Maximum exposure to loss by client asset type
Table 52
As at October 31 ($ millions)
Outstanding securitized assets
Credit cards
Auto loans and leases
Trade receivables
Student loans
Asset-backed securities
Equipment receivables
Consumer loans
Dealer floor plan receivables
Insurance premiums
Other loans
Electricity market receivables
Truck loans and leases
Residential mortgages
Corporate loans receivables
Total
Canadian equivalent (1)
2008
2007
(US$)
(C$)
Total (C$)
(US$)
(C$)
Total (C$)
$
$
$ 12,281
3,426
2,280
3,670
2,360
365
1,122
327
213
276
–
235
–
–
1,494
5,390
2,302
–
–
1,535
–
187
203
–
306
–
110
–
$ 16,286
9,517
5,048
4,420
2,843
1,975
1,351
581
460
333
306
283
110
–
$ 10,736
4,915
3,042
2,808
1,941
522
1,822
326
306
–
–
495
3,822
304
984
7,514
2,259
–
–
1,785
49
187
321
–
306
–
183
–
$ 11,126
12,157
5,133
2,653
1,834
2,278
1,770
495
610
–
306
468
3,794
287
$ 26,555
$ 11,527
$ 43,513 $ 31,039
$ 13,588
$ 42,911
$ 31,986
$ 11,527
$ 43,513
$ 29,323
$ 13,588
$ 42,911
(1)
US$ amounts converted at an exchange rate of 1.2045 (2007 – .9447)
During the credit market dislocations of 2008, we continued to originate
new business. At the same time, we reduced our exposure to U.S. dollar
assets by U.S. $4.5 billion and to Canadian dollar assets by $2.1 billion,
reduced exposure to specific asset classes, specifically U.S. residential
mortgages and U.S. auto loans and leases, increased the amount of
credit enhancement provided by the seller for new transactions, and
increased the fees that we charge. As 74% of the assets of the multi-
seller conduits are U.S. denominated assets, the total outstanding
securitized assets reported in Table 52 is impacted by changes to the
Canadian and U.S. exchange rate. Applying the exchange rate used in
2007, the outstanding assets would have decreased by approximately
14.7% to $36.6 billion from October 31, 2007 to October 31, 2008,
rather than the 1.4% increase highlighted above.
The multi-seller conduits typically purchase the financial assets
as part of a securitization transaction by our clients. In these situa-
tions, the sellers of the financial assets generally continue to service
the respective assets and generally provide some amount of first-loss
credit protection on the assets in the form of transaction-specific
credit enhancements, which reduces our overall risk exposure. This
credit protection could be in the form of additional assets, cash or
subordination of rights to cash flows. In many cases, the amount of
first-loss credit protection is the greater of a fixed amount or a multiple
of recent performance measures such that if an asset’s performance
deteriorates, then the amount of first-loss credit protection increases.
As of September 30, 2008, the weighted averaged first loss credit
protection was 35.7% of total assets, providing a coverage multiple of
approximately 10 times weighted average annual expected loss rate
on the client asset portfolio of 3.5%.
Multiple independent debt rating agencies review all of the trans-
actions in the multi-seller conduits. Transactions financed in our U.S.
multi-seller conduits are reviewed by at least three ratings agencies
including Moody’s, S&P and Fitch. Transactions in our Canadian multi-
seller conduits are reviewed by the following four rating agencies:
Moody’s, S&P, Fitch and DBRS. Each applicable rating agency also
reviews ongoing transaction performance on a monthly basis and may
publish reports detailing portfolio and program information related to
the conduits.
The commercial paper issued by each multi-seller conduit is in
the conduit’s own name with recourse to the financial assets owned by
each multi-seller conduit, and is non-recourse to us except through our
participation in liquidity and/or credit enhancement facilities. Of total
commercial paper issued by the conduits of $33.6 billion (2007 –
$42.9 billion), 74% (2007 – 78%) is generally rated within the top
ratings category of each rating agency and the remaining amount is
rated in the second highest ratings category of each rating agency. We
sometimes purchase the commercial paper issued by the conduits in
our capacity as a placement agent in order to facilitate overall program
liquidity. As at October 31, 2008, the fair value of our inventory was
$598 million, classified as Securities – Trading.
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 before
us and the multi-seller conduit’s debt holders (multi-seller conduit
first-loss position). In return for assuming this multi-seller conduit
first-loss position, the expected loss investor is paid by the multi-seller
conduit a return commensurate with its risk position. Moreover, each
multi-seller conduit has granted to the expected loss investor material
voting rights, including the right to approve any transaction prior to
the multi-seller conduit purchasing and financing a transaction. We do
not consolidate any of the multi-seller conduits.
Our fee structure also reduces our risk exposure on the portfolio.
For over 90% of the securitized assets as at October 31, 2008, funding
is provided on a cost of funds plus basis, such that the cost to our
clients is the sum of the conduit cost of funds plus a fee that includes
the cost of allocable credit facilities and ancillary costs provided by us
and other third parties. As a result, we are not exposed to the funding
or spread risk on these assets that would arise in volatile markets.
In 2008, certain multi-seller conduits drew down some of our
backstop liquidity facilities. The outstanding loans are included in
Loans – Wholesale, representing the gross loan amount before pro-
visions, of $1.9 billion, representing less than 5% of outstanding
securitized assets. As at October 31, 2008, allowance for loan losses
on these loans totalled $65 million (2007 – $nil).
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, including credit derivatives to purchase protection from
these SPEs (credit protection), 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 of derivative counterparty to the
SPE, we also assume the associated counterparty credit risk of the SPE.
These SPEs issue funded notes. In some instances, we invest in
these notes. The funded notes may be rated by external rating agen-
cies, as well as listed on a stock exchange, and are generally 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 occasion-
ally act as market maker. Some of the SPEs also issue unfunded notes
in the form of senior credit derivatives or funding commitment and
we may be an investor in these unfunded notes. The investors in the
funded and unfunded notes ultimately bear the cost of any payments
made by the SPE as a result of the credit protection provided to us. 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
78
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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
derivatives, the derivatives with these SPEs are carried at fair value in
derivative-related assets and liabilities.
The assets in these SPEs amounted to $5.3 billion as at
October 31, 2008 (2007 – $5.2 billion), of which $.2 billion were con-
solidated as at October 31, 2008 (2007 – $.3 billion). As at October 31,
2008, our investments in the funded notes, the derivative-related
receivables and the notional amounts of the unfunded notes related to
the unconsolidated SPEs were $34 million (2007 – $290 million),
$599 million (2007 – $829 million) and $648 million (2007 –
$614 million), respectively.
Structured finance
In 2008, we purchased U.S. ARS from entities which funded their
long-term investments in student loans by issuing short-term senior
and subordinated notes. Principal and accrued interest on the student
loans are largely guaranteed by U.S. government agencies. In our role
as auction remarketing agent to these entities, we are under no legal
obligation to purchase the notes issued by these entities in the auction
process. We consolidate the entities in which our ARS investments
expose us to a majority of the expected losses. As at October 31,
2008, the total assets of the unconsolidated ARS entities and the fair
value of our significant investments in these unconsolidated entities
were $9.2 billion (2007 – $.2 billion) and $3.4 billion (2007 –
$.2 billion), respectively. As at October 31, 2008, approximately 88%
of these investments were AAA rated. Interest income from the ARS
investments, which is reported in Net-interest income, amounted to
$93 million during the year (2007 – $2 million, 2006 – $nil).
On October 8, 2008, we announced that, as part of an agreement
in principle to settle with certain U.S. regulators, we will offer to pur-
chase, at par, for a six-month period beginning no later than December
15, 2008, ARS held by U.S. retail brokerage clients that are qualified
for the repurchase offer. Qualifying clients who sold eligible ARS below
par between February 11, 2008 and October 8, 2008 will be paid the
difference between par and the price of the sale.
During the year, we sold some of our ARS investments into Tender
Option Bond (TOB) programs, where each TOB program consists of
a credit enhancement (CE) trust and a TOB trust. Each ARS sold to
the TOB program is supported by a letter of credit issued by us and
is financed by the issuance of floating-rate certificates to short-term
investors and a residual certificate to a single third-party investor.
We are the remarketing agent for the floating-rate certificates and we
provide liquidity facilities to each of the TOB programs to purchase any
floating-rate certificates that have been tendered but not remarketed.
We do not, however, consolidate these trusts because the residual
certificate holder is exposed to a majority of the variability in these
trusts. The liquidity facilities and letters of credit are included in our
disclosure on guarantees in Note 25 to our Consolidated Financial
Statements. As at October 31, 2008, the total assets of the TOB
programs related to the ARS were $1.4 billion (2007 – $nil) and the
floating-rate certificates that we hold as market maker were $nil
(2007 – $nil). Fee revenue for the remarketing services and the
provision for the letters of credit and liquidity facilities, which is
reported in Non-interest income, amounted to $3 million during the
year (2007 – $nil, 2006 – $nil).
In 2008, we also sold $465 million of our ARS to an unaffiliated
and unconsolidated entity at fair market value. The purchase of the
ARS by this entity was financed by a loan from us, and the loan is
secured by various assets of the entity. We are the remarketing agent
for the ARS. We provide to the entity a credit facility, certain adminis-
trative services and guarantees, which are secured by cash collateral.
This entity also enters into interest rate derivatives with other counter-
parties who are exposed to the majority of its variability; as a result,
we do not consolidate this entity. As at October 31, 2008, total assets
of this entity and our maximum exposure to loss were $4.7 billion
and $500 million, respectively. Fee revenue from this entity, which is
reported in Non-interest income, amounted to $4.0 million during the
year (2007 – $.3 million, 2006 – $nil). The interest income from the
loan and the credit facility, which is reported in Net interest income,
totalled $6.7 million for the year (2007 – $1.1 million, 2006 – $nil).
We occasionally invest in 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. We consolidate the entities in
which our interests expose us to a majority of the expected losses. The
total assets of the unconsolidated entities in which we have significant
investments or loans were $3.5 billion as at October 31, 2008 (2007 –
$4.8 billion). As at October 31, 2008, our total investments in and
loans to these entities were $1.7 billion (2007 – $2.5 billion), which are
reflected on our Consolidated Balance Sheets.
Investment funds
We enter into equity derivative transactions with third parties includ-
ing 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 we are exposed to a majority
of the expected losses of the funds. The total assets held in the uncon-
solidated funds where we have significant exposure were $1.2 billion
as at October 31, 2008 (2007 – $1.6 billion). As at October 31, 2008,
our total exposure was primarily related to the investments in the
funds and was $349 million (2007 – $423 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
shareholder services, foreign exchange, securities lending and other
related services. With respect to trusteeship or custodial services for
personal and institutional trusts, RBC Dexia IS has a fiduciary respon-
sibility 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
which are recorded in Non-interest income. Significant types of guaran-
tee 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 guar-
antees, stable value products, credit enhancements, mortgage loans
sold with recourse and certain indemnification agreements.
In accordance with CICA Handbook Section 3855, Financial
Instruments – Recognition and Measurement, financial guarantees
are recognized at inception at the fair value of the obligation under-
taken in issuing the guarantee. Subsequent measurement of financial
guarantees at fair value is not required unless the financial guaran-
tee 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.
Our maximum potential amount of future payments in relation
to our guarantee products as at October 31, 2008, amounted to
$137 billion (2007 – $152 billion). In addition, as at October 31, 2008,
RBC Dexia IS securities lending indemnifications totalled $45.7 billion
(2007 – $63.5 billion); we are exposed to 50% of this amount. The
maximum potential amount of future payments represents the maxi-
mum risk of loss if there was a total default by the guaranteed parties,
without consideration of possible recoveries under recourse provi-
sions, insurance policies or collateral held or pledged.
As at October 31, 2008, we had $37.9 billion (2007 – $40.4 billion)
in backstop liquidity facilities related to asset-backed commercial
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
79
paper programs, of which 98% (2007 – 96%) was committed to
RBC-administered multi-seller conduits.
Note 25 to our Consolidated Financial Statements provides
detailed information regarding the nature and maximum potential
exposure for the above-mentioned types of guarantee products.
Retail and commercial commitments
We also provide commitments to our clients to help them meet their
financing needs. On behalf of our clients, we undertake written
documentary and commercial letters of credit, authorizing a third party
to draw drafts on us up to a stipulated amount and typically having
underlying shipments of goods as collateral. We make commitments
to extend credit, which represent unused portions of authorizations
to extend credit in the form of loans, bankers’ acceptances or letters
of credit. We also have uncommitted amounts for which we retain the
option to extend credit to a borrower. These guarantees and commit-
ments exposed us to liquidity and funding risks. The following is a
summary of our off-balance sheet commitments.
Retail and commercial commitments (1)
Table 53
(C$ 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)
$
558
11,570
–
$
–
66,520
170,780
$
–
21,314
–
$
–
5,303
–
$
558
104,707
170,780
$ 12,128
$ 237,300
$ 21,314
$
5,303
$ 276,045
(1)
(2)
Based on remaining term to maturity.
Uncommitted amounts represent amounts for which we retain the option to extend credit to a borrower.
Financial Stability Forum disclosures
The Financial Stability Forum (FSF) is comprised of senior representa-
tives from international financial authorities, including central banks
and supervisory authorities and international financial institutions.
On April 7, 2008, the FSF released its report to the G7 Ministers on
recent conditions in the credit market. Key recommendations include
increased disclosure around risk exposures and valuation methods,
including writedowns. Our disclosures substantially comply with the
FSF recommendations where they relate to areas that are significant
to us.
We provide specialized disclosures in the following sections of
our Annual Report:
•
•
•
Financial performance – Impact of the market environment
Risk management – Credit risk and Market risk
Off-balance sheet arrangements
•
Fair valuation methods and policies, in Notes 1 and 2 to our
Consolidated Financial Statements
U.S. subprime and Alt-A exposures
Certain activities and transactions we enter into expose us to the
risk of default of U.S. subprime and Alt-A residential mortgages. Our
on-balance sheet exposures to these risks are comprised mainly of
holdings of RMBS, CDOs of RMBS and mortgages (whole loans), which
are loans rather than securities. RMBS and CDOs of RMBS may be
classified on our balance sheets as either HFT or AFS. The mortgages
are carried at amortized cost. The fair value of these holdings, net of
applicable hedges, is presented in the table below. Our net exposures
to U.S. subprime and Alt-A comprise less than .5% of our total assets
as at October 31, 2008.
Net exposure to U.S. subprime and Alt-A through RMBS, CDOs and mortgages
Table 54
2008
Subprime
RMBS
CDOs that may
contain subprime
or Alt-A
Alt-A RMBS
Total
735
$
1,749
$
107
$
2,591
As at October 31 (C$ millions)
Fair value of securities before hedging
Fair value of securities net of hedging by rating
AAA
AA
A
BBB
Below BBB-
Total
Fair value of securities net of hedging by vintage
2003 (or before)
2004
2005
2006
2007
Total
Amortized cost of subprime/Alt-A mortgages (whole loans)
Total subprime and Alt-A exposures, net of hedging
Sensitivities of fair value of securities, net of hedging, to changes in assumptions
100 bp increase in credit spread (spread over the benchmark swap curve)
100 bp increase in interest rates (parallel shift upwards in the swap curve)
20% increase in default rates (default rate on the underlying mortgages
held as collateral)
25% decrease in pre-payment rates (early repayment of principal on the
underlying mortgages held as collateral)
80
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
$
$
$
$
125
64
63
6
4
1,426
196
21
88
18
$
262
$
1,749
$
$
$
$
$
$
33
45
168
16
–
262
293
555
$
$
$
$
30
102
795
553
269
1,749
952
2,701
$
$
$
$
(4) $
2
(40) $
(2)
(2)
(17)
(18)
(58)
$
2,104
$
$
$
2,104
1,245
3,349
–
–
–
–
93
93
–
–
34
32
27
93
–
93
(2)
–
(2)
–
CDOs by collateral type net of hedging
(C$ millions)
CDOs fair value net of hedging by collateral type
CDOs that may contain U.S. subprime or
Alt-A mortgages
Corporate
Total CDOs net of hedging
Table 55
Fair value
as at
October 31,
2008
$
$
93
493
586
As shown in Table 54, changes in assumptions have relatively
minor impacts on the net exposures of our U.S. subprime and Alt-A
securities. The greatest impact comes from a 25% decrease in pre-
payment rates, which results in a decline of 4% or less in the fair
values of our U.S. subprime and Alt-A securities, net of hedging. Rising
interest rates increase the cash flow available to our senior tranche
of mostly floating-rate securities. Further, increases in credit spread
or default rates reduce the net fair value by approximately 2% or less
as most of our holdings are AAA rated or have a senior ranking in the
capital structure.
Of our total holdings of RMBS, holdings with a fair value of $262 mil-
lion, net of hedging, may be exposed to U.S. subprime risk. Of this
potential exposure, over 96% of our related holdings are rated A and
above, and 48% of our related holdings were rated AAA, on a net basis
as at October 31, 2008. None of these RMBS were issued within the
past two years.
Of our total holdings of RMBS, holdings with a fair value of
$1,749 million, net of hedging, may be exposed to U.S. Alt-A risk. Of
this potential exposure, over 81% of our related holdings were rated
AAA as at October 31, 2008. Less than 47% of these RMBS were
issued within 2006 and 2007.
Of our total holdings of CDOs, holdings of $93 million, net of
hedging, may be exposed to U.S. subprime or Alt-A risk. This repre-
sents less than 16% of our total net unhedged positions in CDOs in
which we had direct holdings, which totalled $586 million.
Special purpose entities
In the normal course of business, we engage in a variety of financial
transactions with SPEs that are typically set up for a single, discrete
purpose, often have a limited life and serve to legally isolate the finan-
cial assets held by the SPE from the selling organization, which may be
our customers or us. They are not operating entities and usually have
no employees. Under GAAP, SPEs may or may not be recorded on our
balance sheets. For a complete discussion of our off-balance sheet
SPEs, refer to the Off-balance sheet arrangements section.
Refer to the Critical accounting policies and estimates section
and Note 6 to our Consolidated Financial Statements, for information
about the VIEs that we have consolidated (on-balance sheet), or in
which we have significant variable interests, but have not consolidated
(off-balance sheet). Additional information about these VIEs as at
October 31, 2008 is provided in the following table.
Variable interest entities
As at October 31 (C$ millions)
Total assets (1)
Maximum
exposure (2)
Unconsolidated VIEs in which we have significant variable interests:
2008
Total assets by credit ratings
AAA and AA
A
BBB BB and below
Not rated
Table 56
Multi-seller conduits (3)
Structured finance VIEs
Credit investment product VIEs
Investment funds
Third-party conduits
Other
Consolidated VIEs
Structured finance VIEs
Investment funds
Credit investment product VIEs
Compensation vehicles
Other
(C$ millions)
Unconsolidated VIEs in which we
have significant variable interests:
Multi-seller conduits (3)
Structured finance VIEs
Credit investment product VIEs
Investment funds
Third-party conduits
Other
Consolidated VIEs
Structured finance VIEs
Investment funds
Credit investment product VIEs
Compensation vehicles
Other
$ 42,698
15,245
2,649
1,182
734
155
$ 43,513
5,319
1,281
349
386
63
$ 22,377
9,762
981
–
431
–
$ 18,982
1,293
68
–
244
–
$
1,136
–
255
–
59
–
$ 62,663
$ 50,911
$ 33,551
$ 20,587
$
1,450
$
1,688
1,268
196
76
113
$
3,341
$
$
536
–
196
–
–
732
$
$
1,152
–
–
–
–
$
1,152
$
–
–
–
–
–
–
$
$
$
$
203
–
691
–
–
–
$
–
4,190
654
1,182
–
155
894
$
6,181
–
–
–
–
–
–
$ –
1,268
–
76
113
$
1,457
Total assets (1)
Maximum
exposure (2)
Under 1
year
1–5
years
Over 5
years
Not
applicable
Canada
Other
international
U.S.
2008
Total assets by average maturities
Total assets by geographic
location of borrowers
$ 42,698
15,245
2,649
1,182
734
155
$ 43,513
5,319
1,281
349
386
63
$ 17,274
27
–
–
719
–
$ 23,036
126
–
15
15
–
$
2,388
10,402
2,649
–
–
–
$
–
4,690
–
1,167
–
155
$ 11,301
–
–
325
734
44
$ 29,201
15,245
2,649
459
–
111
$
2,196
–
–
398
–
–
$ 62,663
$ 50,911
$ 18,020
$ 23,192
$ 15,439
$
6,012
$ 12,404
$ 47,665
$
2,594
$
1
1,688
1,268
196
76
13
$
3,341
$
$
–
–
196
–
–
196
$
$
–
–
–
–
–
–
$
$
1,688
–
–
–
113
$
–
1,268
–
76
–
$ 1,801
$
1,344
$
–
–
–
76
14
90
$ –
$
1,688
600
–
–
35
$
2,323
$
668
196
–
64
928
(1)
(2)
(3)
Total assets and maximum exposure to loss correspond to disclosures provided in Note 6 to our Consolidated Financial Statements. Refer to Note 6 for further information on these
amounts.
The maximum exposure to loss resulting from significant variable interests in these VIEs consists mostly of investments, loans, liquidity facilities and fair value of derivatives. The maxi-
mum exposure to loss may exceed the total assets in the multi-seller conduits, as our liquidity facilities may sometimes be extended for up to 102% of the total value of the assets in the
conduits.
Represents multi-seller conduits administered by us.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
81
The risk rating distribution of assets within the VIEs in the table
above is indicative of the credit quality of the collateral underlying those
assets while for certain VIEs, assets or underlying collateral are not
rated in the categories disclosed above. Examples of assets that have
not been rated include derivatives, mutual fund or hedge fund units and
personal or private loans.
Over 86% of assets in unconsolidated VIEs in which we have sig-
nificant variable interests were rated A or above. Over 56% of assets in
our consolidated VIEs were rated A or above. Both are primarily origi-
nated in the U.S. with varying maturities.
backstop liquidity facilities. In addition, we provide a program-wide
credit enhancement facility sized at a minimum of 10% of the face
amount of commercial paper outstanding. The total committed
amount of the backstop liquidity facilities and the program-wide credit
enhancement facility exceeds the amount of the total financing limit
established by the conduits under the receivable purchase agreements.
The maximum potential amount of payments or loss cannot exceed the
amount of the financing limit, and therefore the maximum exposure
to loss attributable to our backstop liquidity and credit enhancement
facilities is less than the total committed amount of these facilities.
Multi-seller conduits
Multi-seller conduits that we administer comprise over 68% of the
total assets of unconsolidated VIEs as at October 31, 2008, and are
used primarily for the securitization of client financial assets. Our con-
duit programs are administered in North America.
We purchase commercial paper issued by our multi-seller conduits
in our capacity as placement agent in order to facilitate the overall
program liquidity. As at October 31, 2008, the fair value of our holdings
was $598 million which are classified as HFT. Our variable interests in
the multi-seller conduits are monitored to ensure that we are not at risk
of being required to consolidate the multi-seller conduits under GAAP.
We also provide backstop liquidity facilities and partial credit
enhancements to the multi-seller conduits. Refer to the Off-balance sheet
arrangements section for the total commitments and amounts outstand-
ing under liquidity and credit enhancement facilities for the multi-seller
conduits as at October 31, 2008 and 2007, and for a breakdown of the
October 31, 2008 maximum exposure to loss by client asset type.
For committed facilities, our multi-seller conduits purchase high
credit quality financial assets primarily from our clients and finance
these purchases primarily through the issuance of highly rated com-
mercial paper offered on a discounted basis. For assets purchased,
there are supporting backstop liquidity facilities generally equal to
102% of the financing limits established by the conduits under the
receivable purchase agreements. The primary purpose of the backstop
liquidity facilities is to provide an alternative source of financing in the
event that our multi-seller conduits are unable to access the commer-
cial paper market. We are the provider of the transaction-specific
Maximum exposure to loss by client asset type
As at October 31 (C$ millions)
Leveraged finance by geography
Canada
United States
Europe
Leveraged finance by type
Private equity ownership of infrastructure or essential services
Private equity ownership of other entities
As at October 31 (C$ millions)
Exposure by industry
Communications, media and telecommunications
Consumer and industrial products
Energy
Non-bank financial services
Healthcare
Infrastructure
Utilities
Real estate
Total
Canadian non-bank-sponsored ABCP
Liquidity facilities totalling $185 million, included above in the third-
party conduit amounts of maximum exposure to loss, were in place
to support Canadian non-bank administered conduits and remain
undrawn. As at October 31, 2008, we held $2.6 million of third-party
non-bank-sponsored commercial paper that is subject to the Montreal
Accord (par value, or the face amount, is $10.5 million) where liquidity
is contingent on a general market disruption and in which we were not
a significant participant as a distributor or liquidity provider. The mar-
ket for our remaining holdings remains liquid and active. For additional
details on our involvement in the restructuring of non-bank-sponsored
ABCP, refer to Note 25 to our Consolidated Financial Statements.
Structured investment vehicles
We held $108 million of normal course interest rate derivatives with
structured investment vehicles (SIVs) as at October 31, 2008. We do
not hold any commercial paper issued by SIVs. We do not manage
any SIVs.
Leveraged finance
Leveraged finance comprises infrastructure finance, essential services
and other types of finance. It excludes investment-grade financing and
non-investment-grade financing where there is no private equity spon-
sor involvement. Our total commitments, both funded and unfunded,
are summarized in the following table by geography and industry, and
comprise less than .6% of our total assets.
Unfunded
commitments
2008
Funded
exposure
Table 57
Total
exposure
$
$
$
$
$
226
434
370
709
893
1,360
$
935
1,327
1,730
1,030
$
2,962
$
3,992
$
265
765
1,075
1,887
$
1,340
2,652
1,030
$
2,962
$
3,992
$
2008
567
993
70
234
348
1,341
387
52
$
3,992
82
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Monoline insurance on non-subprime assets
In addition to the monoline insurance described under the Impact of the market environment section, we have direct and indirect monoline insur-
ance on non-subprime assets, as described in the table and text below.
Direct and indirect monoline insurance
(C$ millions)
Financial Security Assurance Holdings Ltd. (FSA)
Syncora Holdings Ltd. (Formerly XL Capital Ltd.)
AMBAC Financial Group (AMBAC)
Total
Table 58
As at October 31, 2008
Principal/
notional
Fair value
$
$
375
288
235
45
42
57
$
898
$
144
As shown in the table above, as at October 31, 2008, we held mono-
line insurance protection of $898 million against default of the issuer
or counterparty on non-subprime trading assets comprising CDOs or
CLOs of corporate names and interest rate swaps. The recorded fair
value as at October 31, 2008 on these monoline insurance contracts
was $144 million.
We also have indirect monoline insurance exposure through
assets that we hold and liquidity facilities that we provide. Monoline
insurers provide bond insurance for third-party originated assets that
we hold, such as U.S. municipal bonds, ARS and GICs, interest rate
swaps, public infrastructure bonds and collateralized GICs. In these
cases, we obtain a benefit from the insurance protection. The principal/
notional value of these assets as at October 31, 2008 was $2,124 mil-
lion. The majority of these assets are held in our trading book, with
changes in fair value reflected in Non-interest income – Trading revenue,
and the implied value of the insurance is reflected in the fair value of
the asset (1). In addition, we provide liquidity facilities of $968 million
to certain of our customers in respect of their bond issuance programs
where monoline insurance was purchased as part of that program, of
which $30.5 million was drawn as of October 3, 2008.
(1)
Effective August 1, 2008, we adopted the CICA Handbook reclassification amend-
ments and reclassified certain financial assets out of the HFT category to the AFS
category during the quarter ended October 31, 2008. By reclassifying the securities,
gains or losses will no longer be recorded in net income and are recorded in OCI, and
will be subject to an impairment assessment at each reporting date to determine
whether any unrealized losses are an other-than-temporary impairment. For further
information, refer to Note 3 to our Consolidated Financial Statements.
Additional FSF disclosures
The fair value of our total direct holdings of CMBS was $391 million as
at October 31, 2008.
Risk, capital and liquidity management
Overview
Risk environment
Our business activities expose us to a wide variety of risks in virtu-
ally all aspects of our operations. During 2008, market and economic
conditions were severely impacted as credit markets deteriorated and
financial markets experienced widespread illiquidity and elevated
levels of volatility. Our risk profile has increased as a result of the
deteriorating economic environment, negative credit quality trends
and volatile markets.
The shortage of liquidity in the financial markets represents a
significant risk facing the global banking industry as it experiences
funding shortages and an inability to value and dispose of assets. This
shortage of liquidity is resulting in a change in the landscape of the
global financial services industry.
The slowing of economic growth and credit tightening has
resulted in increasing bankruptcy rates, and deterioration in personal
and business credit quality as evidenced through increased delin-
quency and impaired loans. The extent of this deterioration in 2009
is still very uncertain. Stock market volatility has and will continue to
result in increased market risk and losses within certain capital mar-
kets businesses and investment portfolios.
We manage these risks by seeking to ensure that business activi-
ties and transactions provide an appropriate balance of return for the
risk assumed and remain within our Risk Appetite.
Our management of risk is supported by sound risk manage-
ment practices and effective enterprise risk management frameworks
including capital management and liquidity management. The cor-
nerstone 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 Appetite
Our Risk Appetite framework provides a structured approach to defin-
ing the amount and type of risk we are able and willing to accept in
the pursuit of our business objectives. The Risk Appetite framework
includes:
•
Identification of regulatory constraints that restrict our ability to
accept risk and helps us to define our Risk Capacity, which repre-
sents the maximum amount and type of risk we can accept
Establishment and regular confirmation of Self-Imposed
Constraints and Drivers where we have chosen to limit or other-
wise influence the amount of risk we undertake is defined as our
Risk Appetite
Translation of Risk Appetite into Risk Limits and Tolerances that
guide our businesses in their risk taking activity
•
•
• Measurement and monitoring of our Risk Profile against Risk
Limits and Tolerances.
Risk Capacity
Regulatory
Constraints
Risk Appetite
Self-Imposed
Constraints and Drivers
Risk Limits
and Tolerances
Risk Profile
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
83
On a quarterly basis an assessment of our Risk Profile against our
Risk Appetite is reviewed by senior management. This analysis focuses
on areas where our current Risk Profile may be approaching our self-
imposed constraints.
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.
Our board-approved self-imposed constraints can be categorized
The CR&RPC shapes and influences our risk culture and ensures
as follows:
•
Target AA senior debt rating, which is assessed against bench-
marks established by rating agencies for similarly rated banks
Strong capital ratios
Limited appetite for earnings volatility including the impact of
provision for credit losses and writedowns
Limit the potential impact of an interest rate shock within estab-
lished thresholds
•
•
•
• Maintain sound and prudent management of liquidity and funding
risk
Low exposure to “tail events” (i.e., low probability, high adverse
impact)
Ensure compliance with legislative and regulatory requirements
•
•
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 aligning risk appe-
tite with business strategy, diversifying risk, pricing appropriately
for risk, mitigating risk through preventive controls and transfer-
ring 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), GTO, and Global Functions.
(iii) Effective decision-making is based on a strong understanding of
risk.
(iv) Avoiding all business activities that are not consistent with our
values, Code of Conduct or policies.
(v) Assuring that services we provide are suitable for and understood
by our clients.
(vi) Appropriate judgment is required throughout the organization 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.
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
ht – Escalation – Monitoring – O
Oversig
Business Segments
Canadian
Banking
Wealth
Management
Insurance
International
Banking
Capital
Markets
Global Technology and Operations
Global Functions
e
l
e
g
a
t
i
o
n
–
A
c
c
o
u
n
t
a
b
i
l
i
t
y
management have risk policies, processes and controls in place to
manage significant risks and ensure compliance with the Bank Act
(Canada) and other relevant laws and regulations.
The 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 and Group Risk Committee
Group Executive (GE) is our senior management team and is led by
our President and CEO. GE has overall responsibility for our strategy
and its execution by establishing the “tone at the top.” Their risk over-
sight role is executed primarily through the mandate of Group Risk
Committee (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 man-
agement of regulatory, compliance and reputation risk.
The Policy Review Committee (PRC) acts as the senior risk
approval authority relating to policies, products and services.
The Structured Transactions Oversight Committee (STOC)
reviews structured transactions and complex credits.
The USA Corporate Governance Committee is responsible for all
corporate governance matters of our U.S. operations.
•
•
•
•
The GRC approves credit policies and products with significant risk
implications and recommends credit transactions in excess of senior
management’s authority to the Board of Directors for approval. It also
reviews enterprise-wide credit reporting, significant exposures and
processes, and ensures that appropriate and timely information is pro-
vided to the Board of Directors on matters relating to credit risk and its
management.
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 President and
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.
Establishing risk controls and limits to ensure appropriate risk
diversification and optimization of risk and return on both a
portfolio and transactional basis
•
•
• 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.
84
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Business segments and corporate support groups
The business segments, GTO and Global Functions, also have respon-
sibility 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 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 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
those 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 (VaR) to measure expected loss. It is a gener-
ally accepted risk management concept that uses statistical models
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. For further
details, refer to the Market risk section. For trading credit risk, we use
a statistical model to derive a credit risk exposure profile by modeling
the potential value of the portfolio of trades with each counterparty
over its life, based on simulated market rates and prices, to estimate
expected credit risk exposure and expected loss. The model takes into
account wrong-way risk where our exposure to a particular counter-
party increases as creditworthiness deteriorates, in which case we use
the worst case exposure value.
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
associated 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.
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
management section.
Sensitivity analysis and stress testing
Sensitivity analysis and stress testing are risk measurement tech-
niques which help us ensure that the risks we take remain within our
risk appetite and our level of capital remains adequate. Sensitivity
analysis involves varying the model inputs and assumptions to assess
the impact on various risk measures. Stress testing helps us determine
the potential impact of extreme market volatility and severe economic
conditions on the organization.
Our enterprise-wide stress testing program utilizes stress
scenarios which are conservatively based on unlikely but possible
adverse market and economic events. We evaluate sets of common
stress scenarios with relevant input that is integrated to develop an
enterprise-wide view of the impacts on our financial results and capital
requirements. This program uses macroeconomic projections that are
then transformed into stress impacts on various types of risk across
the organization.
Scenarios include shallow recession, severe recession, real estate
weakness, financial sector crisis, stagflation and energy price volatility.
The current economic environment is comparable to the assumptions
under our shallow recession scenario.
Model validation
We use models to measure and manage different types of risk. We
employ a holistic process whereby a model, its inputs and outputs are
reviewed. This includes the data used, the logic and theoretical under-
pinnings of the model, the processing component, the interpretation of
the output and the strategic use of the model results. Our model valida-
tion process is designed to ensure that all underlying model risk factors
are identified and successfully mitigated. To ensure robustness of our
measurement techniques, model validation is carried out by our risk
professionals independent of those responsible for the development
and use of the models and assumptions. In cases where independent
validation is not internally possible (e.g., exceptionally specialized
models) outside experts are hired to validate the model.
Risk control
Our enterprise-wide risk management approach is supported by a
comprehensive set of risk controls. The controls are anchored by our
Enterprise risk management framework, Risk-specific frameworks,
Capital management framework and Liquidity management frame-
work. These frameworks lay the foundation for 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
optimization of risk and return on both a portfolio and a transactional
basis.
Our Enterprise risk management framework provides an overview
of our enterprise-wide program for identifying, measuring, controlling
and reporting on the significant risks we face.
Our risk management frameworks and policies are structured into
the following four levels:
Risk policy architecture
Level 1: Enterprise Risk Management Framework: This framework
serves as the foundation of our risk-specific frameworks 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 spe-
cific 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
85
Level 1
Enterprise risk
management framework
Level 2
Credit risk
framework
Market risk
framework
Operational risk
framework
Capital management
framework
Liquidity management
framework
Reputation risk
framework
Compliance management
framework
Insurance risk
framework
Level 3
Level 4
Enterprise-wide
policies
e.g., Credit risk
mitigation
Enterprise-wide
policies
e.g., VaR, structural
interest rate risk
Enterprise-wide
policies
e.g., Loss event data
collection
Enterprise-wide
policies
e.g., Dividend policy
Enterprise-wide
policies
e.g., Cash flow limits
Enterprise-wide
policies
e.g., Code of Conduct
Enterprise-wide
policies
e.g., Privacy, AML
Enterprise-wide
policies
e.g., Morbidity risk
Canadian Banking
Wealth Management
Insurance
International Banking
Capital Markets
Global Technology and Operations
Global Functions
Area specific risk policy and procedures
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 del-
egated authorities based on the following four categories:
•
Transactions: We strive to ensure that risk assessment processes
are in place for the review and approval of all types of transac-
tions, including credit transactions.
Structured Transactions and Complex Credits: The STOC reviews
new structured products and transactions with significant reputa-
tion, legal, accounting, regulatory or tax risks.
Projects and Initiatives: Documentation of risk assessment is for-
malized through the requirement that each Project Appropriation
Request (PAR) be reviewed and approved by GRM and Global
Functions.
New Products and Services: Policies and procedures for the
approval of new or amended products and services are designed
to ensure that our products and services are subject to a broad
and robust review and approval process that fully considers asso-
ciated risks, while striving to facilitate business opportunities.
•
•
•
Authorities and limits
The Board of Directors, through the CR&RPC, delegates the setting
of credit, market and insurance risk limits to the President and CEO,
COO and CRO. These delegated authorities allow these officers to set
risk tolerances, approve geographic (country and region) and indus-
try sector exposure limits within defined parameters, and establish
underwriting and inventory limits for trading and investment banking
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 arise
directly from claims against a debtor or obligor, an issuer of securities
or a policyholder through outstanding premiums, or indirectly from
claims against a guarantor of credit obligations or a reinsurer, resulting
from ceded insurance risk.
We offer a wide range of credit products and services to indi-
vidual and business clients within Canada, the U.S. and in numerous
other 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
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
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.
The deteriorating economy, rising unemployment and tighter
credit conditions negatively impacted household and business credit
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
the capital plan and 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 via the Enterprise Risk Report on a
quarterly 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.
This reporting focuses on assessing the status of our current and pro-
jected Risk Profile in relation to our risk appetite. 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.
quality during 2008. These conditions have resulted in increased
levels of impaired loans, allowance for credit losses and provision for
credit losses. Within the U.S., housing value declines, a slowdown in
consumer spending and turmoil in the global financial markets have
negatively impacted our builder finance portfolio.
Our credit risk management principles are guided by the six over-
•
•
•
arching risk management principles discussed in the Risk management
principles section. In particular, the following two principles are com-
plemented by the items below with respect to credit risk management.
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.
86
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
All business activities that are not consistent with our values,
Code of Conduct or policies must be avoided. Such business activities
include:
•
Direct financing of companies manufacturing equipment or
material for nuclear, chemical or biological warfare, landmines or
cluster bombs
Financing 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
The PRC and the STOC support the GRC in meeting its credit man-
date. The PRC approves enterprise-wide credit risk policies, new and
amended business-specific credit risk policies and products with sig-
nificant risk implications. STOC provides risk oversight of structured
transactions and complex credits, including identification and mitiga-
tion of risks, and 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 individ-
ual obligor and portfolio levels. This allows us to effectively estimate
expected credit losses and minimize unexpected losses in order to
limit earnings volatility.
We employ different risk measurement processes for our whole-
sale and retail portfolios. 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, which require banks to disclose their expo-
sures based on how they manage their business and risks.
In measuring credit risk under Basel II, two principal approaches
are available: Advanced Internal Ratings Based (AIRB) and
Standardized. Most of our credit risk exposure is measured under the
AIRB Approach.
Under the AIRB Approach, we use our own estimates of the three
key parameters (PD, LGD, EAD) based on historical experience from
internal credit risk rating systems in the derivation of risk-weighted
assets in accordance with supervisory standards. Credit risk rating
systems are designed to assess and quantify the risk inherent in credit
activities in an accurate and consistent manner.
Under the Standardized Approach, used primarily for RBC Dexia
IS, RBC Bank (USA) and our Caribbean banking operations, risk
weights prescribed by OSFI are used to calculate risk-weighted assets
for credit risk exposures. Credit assessments by OSFI-recognized
external credit rating agencies of S&P, Moody’s, Fitch Ratings (Fitch)
and DBRS are used to risk-weight our sovereign and bank expo-
sures based on the standards and guidelines issued by OSFI. For our
business and retail exposures, we use the standard risk weights pre-
scribed by OSFI.
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 con-
sistent 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 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 adverse or stressed busi-
ness 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 risk and financial risk based on
fundamental credit analysis supplemented by quantitative models.
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 59
Ratings
1 to 4
5 to 7
Standard & Moody’s Investor
Poor’s (S&P) Service (Moody’s)
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, LGD represents the portion of EAD expected
to be lost when an obligor defaults. LGD rates are largely driven by fac-
tors 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 portion 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 determination of our
expected losses, unexpected losses as well as economic and regula-
tory capital. They are also used in the setting of risk limits, portfolio
management and product pricing. Our wholesale credit risk rating sys-
tem is reviewed and updated on a regular basis to ensure its accuracy
and consistency.
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 man-
agement 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 such as
employment status, data from our internal systems such as loan infor-
mation and information from external sources such as 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
87
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 pos-
sess similar homogeneous characteristics. Pooling of exposures
allows for more precise and consistent estimates of default and loss
characteristics. 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), the time that the account has been on book, and the
delinquency status (performing, delinquent and default) of the expo-
sure. 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 homogeneous
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 also assessed based on the following parameters:
PD, LGD and EAD. The estimation of these parameters takes into
account borrower and transaction characteristics, including behav-
ioural credit score, product type and delinquency status. The LGD is
estimated based on transaction-specific factors, including product and
collateral types. Our risk ratings are reviewed and updated on a regular
basis.
The following table maps PD bands to various risk levels:
Internal ratings map
Table 60
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
Our credit risk rating systems and methodologies are subject to
independent validation on a regular basis. The validation processes
provide support for assuring confirmation that our systems properly
identify factors that help differentiate risk, appropriately quantify risk,
produce measures of risk that respond to changes in the macroeco-
nomic and credit environments, and are consistent with regulatory
requirements and our ratings philosophy. Those responsible for per-
forming validation activities are functionally separate from the groups
whose methodologies and processes are subject to validation.
We ensure that there is proper separation of responsibility
between groups responsible for performing validation activities and
groups whose methodologies and process are subject to validation.
Validation results and conclusions are also reviewed by Internal Audit
Services on a regular basis.
The validation of the risk parameter estimation process for both
wholesale and retail portfolios includes the examination and assess-
ment of the following:
•
Quantification methodologies and processes, as well as the rea-
sonableness 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 val-
ues. 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 are 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:
•
Examine relevant and material data available from internal and
external sources to establish a context for assumptions, calcula-
tions and outputs
Demonstrate that estimates are grounded in historical
experience
Provide 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 which serves as management’s estimate of the
amount of equity required to underpin our risks is used in risk-based
pricing decisions and profitability measurement to ensure an appro-
priate 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 testing and stress scenario analysis are used to estimate
the capital impacts and financial losses we might expect to occur
under stress situations. While unexpected losses are, by nature,
difficult to quantify, we use stress testing to better understand and
mitigate the potential for unexpected credit losses. These activities
serve to alert management to implications for overall capital ade-
quacy. Scenarios such as economic or industry downturns are chosen
on the basis of being meaningful, representative of plausible events or
circumstances, and calibrated to feature a range of severities. Stress
testing is one component of our internal capital adequacy assessment
process (ICAAP) analysis. Refer to the Capital management section for
further details on ICAAP.
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. They
have been refined based on experience, regulatory influences and
innovations in risk management, and they 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
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. Proposals for new and amended credit products
and services are comprehensively reviewed and approved under a risk
assessment framework. A risk assessment is used to articulate the
risk level of the proposal to determine the level of risk approval
required. For proposals with significant risk implications, approval by
the PRC is required.
88
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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 (country and region) limits
Industry sector limits
Product and portfolio limits
To ensure that single-name credit risk exposure remains well under
regulatory threshold, 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 OSFI, and (ii) a broader and more conservative definition
of single-name credit risk exposure than that used by 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 as well as client and
guarantor criteria. The third-party guarantors that we deal with are
primarily sovereign-sponsored agencies.
Collateral
For most of our credit products and services, 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 collat-
eral depends on the amount, type and quality of the collateral taken.
Specific requirements relating to collateral valuation and management
are documented in our credit risk management policies.
Credit derivatives
Credit derivatives are used as a tool to mitigate industry sector con-
centration and single-name exposure. Procedures are in place to
ensure these economic hedges are efficient and effective. The counter-
parties that we transact with are typically investment-grade banks and
non-bank financial institutions.
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 under a GRM-approved methodology, which
consist 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 relevant details of
outstanding transactions, including itemized fair value data. This data
is used to monitor the amount of netting benefit recognized. For fur-
ther 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 an overview of our risk profile, including trending
information and significant risk issues. It also includes analysis of sig-
nificant shifts in exposures, expected loss, Economic Capital and risk
ratings. Large exposures 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 portfo-
lios and emerging industry or market trends.
Gross credit risk exposure
Gross credit risk exposure is categorized into lending-related and
other, and trading-related.
Lending-related and other credit risk exposure comprises out-
standing loans and acceptances, undrawn commitments as well as
other exposure, including contingent liabilities such as letters of credit
and guarantees, and AFS debt securities. For undrawn commitments
and contingent liabilities, gross exposure represents an estimated por-
tion of the contractual amount that is expected to be drawn at the time
of default of an obligor. For further details on the valuation of loans
and acceptances and contingent liabilities, refer to Notes 1, 2 and 25 to
our Consolidated Financial Statements.
Trading-related credit risk exposure consists of repo-style
transactions, which include repurchase and reverse repurchase
agreements and securities lending and borrowing transactions, as
well as over-the-counter derivatives. For repurchase and reverse
repurchase agreements, gross exposure represents the amount at
which securities were initially sold or acquired. For securities lending
and borrowing transactions, gross exposure is the amount at which
securities were initially loaned or borrowed. For over-the-counter
derivatives, the gross exposure amount represents the credit equiva-
lent amount, which is defined by OSFI as the replacement cost plus an
add-on amount for potential future credit exposure.
For more information on repurchase and reverse repurchase
agreements and derivative-related credit risk, refer to Notes 1, 7 and
29 to our Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
89
Credit risk exposure by portfolio and sector
Table 61
Lending-related and other
Trading-related
2008
As at October 31 (C$ millions)
Residential mortgages (5)
Personal
Credit cards
Small business (6)
Retail
Business (7)
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 (8)
Sovereign (9)
Bank (10)
Wholesale
Total exposure
Loans and acceptances
Outstanding
$ 122,991
60,727
8,933
2,804
Undrawn
commitments
$
2
42,462
19,933
2,265
Other (1)
Repo-style
transactions (2)
Over-the-
counter
derivatives (3) Total exposure (4)
$
$
–
67
–
49
–
–
–
–
–
$
$
–
–
–
–
–
$ 122,993
103,256
28,866
5,118
$ 260,233
$ 195,455
$ 64,662
$
116
$
$
$
5,305
3,999
7,389
8,146
8,788
1,152
5,033
3,947
22,978
3,206
4,239
25,623
2,496
5,284
409
1,856
2,085
8,371
5,212
523
2,177
1,206
3,406
3,026
2,026
6,357
2,548
4,308
$
18
137
396
2,443
4,589
101
323
542
1,428
296
569
10,100
10,749
57,793
$
–
20
–
1
49,463
7
–
69
7
–
–
1,661
2,784
61,675
$
54
507
502
1,801
18,241
122
306
962
397
490
865
10,710
17,824
34,171
$
5,786
6,519
10,372
20,762
86,293
1,905
7,839
6,726
28,216
7,018
7,699
54,451
36,401
163,231
$ 107,585
$ 43,510
$ 89,484
$ 115,687
$ 86,952
$ 443,218
$ 303,040
$ 108,172
$ 89,600
$ 115,687
$ 86,952
$ 703,451
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Includes contingent liabilities such as letters of credit and guarantees, and AFS debt securities.
Includes repurchase and reverse repurchase agreements and securities borrowing and lending transactions.
Credit equivalent amount after factoring in master netting agreements.
Total exposure represents exposure at default, which is the expected gross exposure upon the default of an obligor. This amount is before any specific allowances and does not reflect
the impact of credit risk mitigation. Exposure under Basel II asset classes of qualifying revolving retail and other retail are largely included within Personal and Credit cards, while home
equity lines of credit are included in Personal.
Includes certain synthetic mortgage securitizations.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
The Lending-related and other credit risk exposure of our Other business sector within the Wholesale portfolio comprises: (i) for Outstanding loans and acceptances: other services
$10.9 billion, financing products $4.9 billion, holding and investments $4.6 billion, health $2.5 billion and other $2.7 billion; (ii) for Undrawn loans and acceptances commitments:
other services $3.7 billion, health $.9 billion, holding and investments $.7 billion, financing products $.6 billion and other $.4 billion; and (iii) for Other lending-related: other services
$2.2 billion, financing products $.7 billion, holding and investments $.6 billion and other $6.5 billion. The Trading-related credit risk exposure of our Other business sector within the
Wholesale portfolio comprises: (i) for Repo-style transactions: other services $.4 billion, holding and investments $.3 billion, financing products $.1 billion and other $.8 billion; and (ii)
Over-the-counter derivatives: financing products $5.4 billion, other services $1.7 billion and other $3.5 billion.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
(9)
(10) Bank refers primarily to regulated deposit-taking institutions and securities firms.
2008
As at October 31, 2008, our gross credit risk exposure was
$703 billion, with most of our exposure related to loans and accep-
tances and repo-style transactions. Retail credit risk exposure was
$260 billion, or 37%, of our total exposure. Our largest retail exposure
was in residential mortgages and personal loans. Wholesale credit risk
exposure was $443 billion, or 63%, of our total exposure. Our largest
wholesale exposure was in the bank portfolio and the Non-bank
financial services sector, with which we transact the majority of our
repo-style transactions and over-the-counter derivative trades.
Our credit portfolio remained well diversified across all geo-
graphic regions. The majority of our exposure was in Canada, followed
by Other international and the U.S.
90
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Loans and acceptances by portfolio and sector
Table 62
2008
2007
2008 vs. 2007
Increase (decrease)
(C$ millions)
Residential mortgages (1)
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 (4)
Sovereign (5)
Bank (6)
Wholesale
Total loans and acceptances (7)
Total allowance for loan losses
$ 122,991
60,727
8,933
2,804
$ 109,745
48,743
8,322
2,652
$ 13,246
11,984
611
152
$ 195,455
$ 169,462
$ 25,993
$
$
5,305
3,999
7,389
8,146
8,788
1,152
5,033
3,947
22,978
3,206
4,239
25,623
2,496
5,284
$
5,367
3,285
5,206
7,632
6,959
1,349
4,119
2,301
19,187
2,423
2,656
17,583
932
2,754
(62)
714
2,183
514
1,829
(197)
914
1,646
3,791
783
1,583
8,040
1,564
2,530
$ 107,585
$ 81,753
$ 25,832
$ 303,040
$ 251,215
$ 51,825
$
(2,215) $
(1,493) $
(722)
12%
25%
7%
6%
15%
(1)%
22%
42%
7%
26%
(15)%
22%
72%
20%
32%
60%
46%
168%
92%
32%
21%
(48)%
20%
Total loans and acceptances, net of allowance for loan losses
$ 300,825
$ 249,722
$ 51,103
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes certain synthetic mortgage securitizations.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Other in 2008 related to other services $10.9 billion, financing products $4.9 billion, holding and investments $4.6 billion, health $2.5 billion, and other $2.7 billion.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Total loans and acceptances does not reflect the impact of credit risk mitigation. Basel II asset classes of qualifying revolving retail and other retail are largely included within Personal
and Credit cards, while home equity lines of credit are included in Personal.
Loans and acceptances outstanding portfolio analysis
2008 vs. 2007
During 2008, our portfolio remained diversified and continued to
show solid growth. Total loans and acceptances increased $52 bil-
lion, or 21%, compared to the prior year, reflecting growth in both
our retail and wholesale loan portfolios. The favourable impact of the
weaker Canadian dollar on the translation of U.S. dollar-denominated
loans and acceptances into Canadian dollars also contributed to the
increase.
Retail credit portfolio
Retail loans increased $26 billion, or 15%, from a year ago, largely due
to portfolio growth in residential mortgages and personal loans. Our
acquisitions of RBTT and ANB accounted for $4 billion of this growth.
Residential mortgages were up $13 billion, or 12%, primarily in
Canada, as housing market activity remained strong throughout most
of the year. Acquisitions of RBTT and ANB accounted for $2 billion of
the increase.
Personal loans increased $12 billion, or 25%, largely attribut-
able to growth in home equity lending in Canada. Acquisitions of RBTT
and ANB accounted for $2 billion of this increase. Credit card loans
increased $.6 billion, or 7%.
Wholesale credit portfolio
Wholesale loans and acceptances were up $26 billion, or 32%, from
the prior year, primarily reflecting portfolio growth. Our RBTT and ANB
acquisitions also contributed $8 billion to the increase.
Other increased by $8 billion, or 46%, spread across several sub
sectors. Our Real estate and related exposure increased $3.8 billion,
or 20%, largely attributable to our ANB acquisition and the impact
of the weaker Canadian dollar on the translation of our U.S. dollar-
denominated loans. The rest of the increase was spread across other
areas such as Bank, Consumer goods and Non-bank financial services.
The overall mix of our portfolio did not change significantly from
the prior year although retail loans decreased 3% while wholesale
loans and acceptances increased by the same amount. The portfolio
remained well balanced among residential mortgages comprising
40%, wholesale loans of 36%, personal loans of 20%, credit cards of
3% and small business of 1%.
The portfolio grew across all geographic regions. The largest
increase was in Canada, with growth predominately in the Retail
portfolio. Growth in the Business portfolio accounted for most of the
increase in the U.S. and Other international. For further details, refer to
Table 83 in the Additional financial information section.
Total loans and acceptances by credit portfolio (C$ billions)
300
240
180
120
60
0
2004
2005
2006
2007
2008
Wholesale
Small business
treated as retail
Credit cards
Personal
Residential
mortgages
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
91
Five-year trend
Over the last five years, total loans and acceptances have largely
trended upward. Compared to 2004, our portfolio increased
$124 billion, or 70%.
Retail loans have increased $68 billion, or 54%, since 2004,
largely reflecting strong growth in Canada across all categories, par-
ticularly residential mortgages and personal loans, notwithstanding
mortgage and credit card securitizations over the period. This growth
reflected our continued focus on strengthening our leadership posi-
tion in most major product categories, underpinned by a fairly benign
market environment through most of this period, although the economy
weakened in the latter part of 2008. Growth in the U.S. and Other inter-
national was primarily driven by our acquisitions of RBTT and ANB.
Our Wholesale portfolio has increased $56 billion, or 109%, since
2004. While there was broad-based growth in all sectors, the largest
growth sectors were in Real estate and related, Other, Non-bank
financial services and Energy. The increase in Real estate and related
exposure over the period was largely due to relatively strong North
American housing markets through to the early part of 2007 in the
U.S. and the latter part of 2008 in Canada. Our exposure to Other
services increased largely due to growth in the Business services,
Entertainment/Recreation/Restaurants and Non-profit organizations
subsectors. The increase in exposure to the Energy sector was largely
attributable to increased investments in oil and gas exploration and
production as well as oil refining, marketing and distribution activities
in Canada and the U.S. Our exposure to Non-bank financial services
increased over the period, primarily driven by growth in Funds and
trusts, as a result of RBC Dexia IS, and the Consumer and commercial
finance subsectors, primarily in the U.S. and Other international.
Compared to 2004, our portfolio mix has shifted, reflecting the
growth in our Wholesale portfolio. Retail loans decreased from 71% of
total loans and acceptances in 2004 to 64% in 2008, while Wholesale
loans increased correspondently over the period. For further details,
refer to Tables 83 and 84 in the Additional financial information section.
Our portfolio in Canada continued to grow over the period, under-
pinned by our Client First philosophy and by enhancing the quality
and breadth of our products and services as well as expanding and
upgrading of our distribution network to better serve our clients. Our
exposure in the U.S. and Other international has trended upward, par-
ticularly in recent years, reflecting our expansion activities as well as
organic growth.
Credit derivatives
Credit derivatives are over-the-counter contracts that transfer credit
risk related to an underlying financial instrument from one counter-
party to another. We purchase and sell credit protection for both
trading and other than trading purposes. We are exposed to counter-
party credit risk when we purchase credit protection or the derivative
has a positive fair value. As with other derivatives, we use collateral
and master netting agreements for managing counterparty credit
risk and these contracts are subject to the same credit approval, limit
and monitoring standards used for managing other credit risk. For a
more detailed description of the types of credit derivatives we enter
into and how we manage the related credit risk, refer to Note 7 to our
Consolidated Financial Statements.
Trading credit derivatives
The majority of our credit derivative-related positions are entered into
for trading purposes. These trading positions are generally equally
split between purchased and sold protection. Our trading activities are
conducted in association with market-making, positioning and manag-
ing certain trading-related credit risk. Over 98% of our net exposures
are with investment-grade counterparties.
For a summary of significant market developments during the
year affecting certain trading credit derivative positions purchased
from monoline insurers, refer to the Impact of the market environment
in the Financial performance section.
Trading credit derivatives (1)
Table 63
As at October 31
(C$ millions)
Notional amount
Protection
purchased
Protection sold
Fair value (2)
Positive
Negative
Replacement cost (3)
2008
2007
2008 vs. 2007
Increase (decrease)
$ 140,010 $ 202,733 $ (62,723)
190,514
(57,999)
132,515
(31)%
(30)%
16,456
15,344
5,607
10,416
9,375
3,340
6,040
5,969
2,267
58%
64%
68%
(1)
(2)
(3)
Comprises credit default swaps.
Gross fair value before netting.
Replacement cost is after netting but before collateral.
2008 vs. 2007
The total notional value of trading credit derivatives was down
$121 billion, or 31%, from a year ago. The decrease largely reflected
the strategic reduction in positions supporting structured transactions
during 2008.
Total gross Positive and Negative fair value were each up
$6 billion from last year, while the Replacement cost increased
$2 billion from a year ago. These amounts increased despite a reduc-
tion in positions, largely due to the continued widening of credit
spreads during the year and the depreciation of the Canadian dollar
compared to the U.S. dollar in the latter part of 2008.
Other than trading credit derivatives
We also purchase and sell credit derivatives for other than trading
purposes in order to manage our overall credit portfolio. To mitigate
industry sector concentrations and single-name exposures related to
our credit portfolio, we purchase credit derivatives to transfer credit
risk to third parties. We also sell credit protection in order to diversify
our portfolio. Our credit protection sold does not constitute a material
portion of our overall credit exposure. The notional amount of other
than trading credit derivatives represents the contract amount used
as a reference point to calculate payments. Notional amounts are
generally not exchanged by the counterparties, and do not reflect
our exposure at default. None of these contracts are with monoline
insurers nor related to U.S. subprime-related assets.
92
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Other than trading credit derivatives position (notional amount and fair value) (1)
Table 64
(C$ millions)
Notional amount
Business
Automotive
Energy
Non-bank financial services
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other (2)
Sovereign (3)
Bank (4)
Net protection purchased
Offsetting protection sold related to the same reference entity
Gross protection purchased
Net protection sold (5)
Offsetting protection purchased related to the same reference entity
Gross protection sold
Gross protection purchased and sold (notional amount)
Fair value (6)
Positive
Negative
2008
2007
2008 vs. 2007
Increase (decrease)
$
$
$
$
$
$
$
473
363
379
590
136
10
224
439
294
259
3,167
–
3,167
147
–
147
3,314
400
15
$
$
$
$
$
$
$
379
957
1,161
591
413
10
335
472
220
731
5,269
261
5,530
186
261
447
5,977
36
30
$
$
$
$
$
$
$
94
(594)
(782)
(1)
(277)
–
(111)
(33)
74
(472)
(2,102)
(261)
(2,363)
(39)
(261)
(300)
(2,663)
25%
(62)%
(67)%
–
(67)%
–
(33)%
(7)%
34%
(65)%
(40)%
(100)%
(43)%
(21)%
(100)%
(67)%
(45)%
364
(15)
n.m.
(50)%
Comprises credit default swaps.
Other in 2008 related to consumer goods $39 million, health $12 million and other $388 million.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Protection sold as at October 31, 2008 related to consumer goods $81 million and other $66 million (2007 – consumer goods $67 million and other $119 million).
Gross fair value before netting.
(1)
(2)
(3)
(4)
(5)
(6)
n.m. not meaningful
2008 vs. 2007
The gross notional value of other than trading credit derivatives was
down $2.7 billion, or 45%, from a year ago, primarily reflecting the
strategic reduction of positions and the maturing of contracts. Total
protection purchased was down $2.4 billion, or 43%, from the prior
year. The decrease was mainly due to the strategic reduction of posi-
tions related to Non-bank financial services, Energy, Bank, and Real
estate and related, and Transportation and environment. This reduc-
tion was partially offset by an increase in exposure to Sovereign and
Automobile.
Total protection sold was down $300 million, or 67%, from the
prior year, mainly related to a strategic reduction in positions.
Total gross Positive fair value increased $364 million from the
prior year, largely related to the continued widening of credit spreads
and the depreciation of the Canadian dollar compared to the U.S. dol-
lar in the latter part of 2008. Total gross Negative fair value was down
$15 million, or 50%, from a year ago, largely related to the maturing
of contracts.
Gross impaired loans and Allowance for credit losses
Loans are generally classified as impaired when there is no longer rea-
sonable assurance of timely collection of the full amount of principal
or interest.
The allowance for credit losses is maintained at a level that
management believes is sufficient to absorb probable losses in both
the on- and off-balance sheet portfolios. The allowance is evaluated
on a quarterly basis based on our assessment of problem accounts,
recent loss experience and changes in other factors, including the
composition and quality of the portfolio and economic conditions.
The allowance is increased by the provision for credit losses (which is
charged to income) and decreased by the amount of write-offs net of
recoveries. For further information, refer to the Critical accounting poli-
cies and estimates section and Note 1 to our Consolidated Financial
Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
93
Gross impaired loans continuity
(C$ 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
n.m. not meaningful
2008
2007
2008 vs. 2007
Increase (decrease)
Table 65
$
388
730
1,118
$
1,263
2,138
$
$
$
$
383
443
826
896
721
5
287
292
367
1,417
3,401
$
1,617
$
1,784
(47) $
(238)
(132) $
(325)
85
87
(285) $
(457) $
172
1,216
1,900
$
$
764
396
452
1,504
3,116
$
1,160
$
1,956
(876) $
(435)
(759) $
(109)
(1,311) $
(868) $
(117)
(326)
(443)
728
2,195
$
$
388
730
340
1,465
2,923
$
1,118
$
1,805
1%
65
35%
41%
197
110%
64%
27
38%
59%
380
169%
(15)%
(299)
(51)%
88%
201
161%
.96%
.42%
.45%
.30%
n.m.
n.m.
51 bps
12 bps
2008
2007
2008 vs. 2007
Increase (decrease)
Table 66
$
351
1,430
(1,311)
162
135
$
263
782
(868)
170
4
88
648
(443)
(8)
131
33%
83
(51)
(5)
n.m.
767
$
351
$
416
119%
1,221
165
146
1,532
2,299
$
$
$
1,223
9
(11)
1,221
1,572
$
$
$
(2)
156
157
311
727
–%
n.m.
n.m.
25%
46%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2008 vs. 2007
Gross impaired loans
Total gross impaired loans (GIL) increased $1,805 million. This pri-
marily reflected higher impaired loans in both wholesale and retail
portfolios.
Retail gross impaired loans increased $340 million from a year
ago. This increase reflected higher impairment in our Canadian
residential mortgage portfolio due to portfolio growth and in our
U.S. residential mortgage and personal loans portfolio, reflecting
deteriorating economic conditions. Higher impaired loans in Other
international, primarily due to the acquisition of RBTT, also contributed
to the increase.
Wholesale gross impaired loans increased $1,465 million from
a year ago. The increase was largely attributable to our U.S. banking
business, mainly in our residential builder finance and commercial
and business banking loan portfolios due to the continued housing
downturn and deteriorating economic conditions. The increase also
reflected higher impaired loans related to some specific accounts in
our corporate lending portfolios, primarily in the U.S. and to a lesser
extent in Canada including $203 million related to loans extended
under liquidity facilities drawn on by RBC-administered multi-seller
ABCP conduit programs secured by the AAA tranche of a CDO of ABS in
the U.S.
The increase in Gross impaired loans resulted in the ratio of Gross
impaired loans as a percentage of loans and acceptances increasing to
.96% compared to .45% last year.
For further details, refer to Table 85 in the Additional financial
information section.
94
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Allowance for credit losses
Total allowance for credit losses increased $727 million, or 46%, from
a year ago directly related to the increase in impaired loans.
Specific allowance for retail loans increased $88 million, primar-
ily due to increased allowance in the personal loan portfolio related to
Other international, primarily due to the acquisition of RBTT. Higher
allowance in our U.S. retail loan and residential mortgage portfolio in
Canada also contributed to the increase.
Specific allowance for wholesale loans increased $328 million
from a year ago. The increase was largely attributable to higher
impaired loans as noted above.
The general allowance increased $311 million, or 25%, from a
year ago, commensurate with volume growth and weakening credit
quality in the Canadian retail portfolio, weakness in the U.S. banking
portfolios, the acquisitions of ANB and RBTT, and foreign currency
impact of depreciating Canadian dollar.
Gross impaired loans and allowance for credit losses (C$ millions)
3,000
2,250
1,500
750
0
2004
2005
2006
2007
2008
* GIL ratio: GIL as a percentage of loans and acceptances.
1.20%
.90%
Gross impaired
loans
ACL
.60%
GIL ratio*
.30%
.0%
Five-year trend
Gross impaired loans
Gross impaired loans decreased in 2005, and remained relatively sta-
ble from 2005 to 2006. The increase in 2007 reflected the beginning
of the downturn in the U.S. housing market, primarily affecting our
U.S. residential builder finance business. The increase in 2008 largely
reflects the impact of the continued housing downturn and deteriorat-
ing economic conditions in the U.S. The increase also reflected higher
impaired loans in our corporate lending portfolio.
For further details, refer to Table 85 in the Additional financial
information section.
Allowance for credit losses
Total allowance for credit losses decreased slightly, but remained
relatively stable from 2004 to 2006. In 2007, the specific allowance
increased largely due to higher gross impaired loans in our U.S. resi-
dential builder finance business as noted above. In 2008, specific
allowance for credit losses continued to increase as the downturn
in the U.S. housing market and slowing economic conditions further
impacted our builder finance portfolio. Higher impaired loans in our
corporate lending portfolio also contributed to the increase.
The general allowance remained relatively stable between 2004
and 2007. The increase in general allowance in 2008 reflected volume
growth and weakness in our U.S. retail and commercial portfolios.
For further details, refer Table 87 in the Additional financial infor-
mation section.
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 accounting
policies and estimates section and Note 1 to our Consolidated
Financial Statements.
Provision for (recovery of) credit losses
Table 67
(C$ millions, except percentage amounts)
Residential mortgages
Personal
Credit cards
Small business (1)
Retail
Business (2)
Sovereign (3)
Bank (4)
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
2008
2007
2008 vs. 2007
Increase (decrease)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
16
445
270
46
777
653
–
–
653
1,430
165
1,595
.53%
$
$
$
–
$
$
$
$
5
364
223
34
626
156
–
–
156
782
9
791
.33%
11
81
47
12
151
497
–
497
648
156
804
n.m.
220%
22
21
35
24%
319%
–
319%
83%
n.m.
102%
20 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.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
(1)
(2)
(3)
(4)
n.m. not meaningful
2008 vs. 2007
Provision for credit losses
Total PCL increased $804 million, compared to the prior year. The
increase reflected higher specific and general provisions in both our
wholesale and retail portfolios.
Specific PCL for retail loans was up $151 million, or 24%, from a
year ago. The increase was primarily attributable to higher provisions
in Canadian credit cards, reflecting higher loss rates and portfolio
growth. Higher provisions in our U.S. retail portfolio also contributed
to the increase.
Specific PCL for wholesale loans increased $497 million from
a year ago. The increase was largely attributable to higher impaired
loans in our U.S. banking business, mainly in our residential builder
finance, commercial and business banking loan portfolios as noted
earlier. The increase also reflected higher provisions, largely related to
some specific accounts in our corporate lending portfolios, primarily
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
95
in the U.S. and to a lesser extent in Canada, including a $61 million
provision related to loans extended under liquidity facilities drawn on
by an RBC-administered multi-seller ABCP conduit programs in the U.S.
The general provision increased $156 million from a year ago,
commensurate with volume growth and weakening credit quality in the
Canadian retail portfolio and weakness in the U.S. banking portfolios.
The increase in specific PCL resulted in the ratio of Specific PCL as
a percentage of loans and acceptances increasing to .53% compared to
.33% last year.
As at October 31, 2008, U.S. banking operations loans totalled
$27.3 billion, consisting of $18.4 billion in wholesale loans and
$8.8 billion in retail loans. U.S. residential builder finance loans consist
of $2.1 billion in our ongoing builder finance business and $1.2 billion
in RBC Real Estate Finance Inc. (REFI), a wholly-owned subsidiary set
up to manage the wind down of builder finance loans from the out-of-
footprint states, primarily in California, Washington, Arizona, Utah,
Illinois and Colorado, as well as certain other impaired U.S. residential
builder finance loans from the in-footprint portfolio.
For further details, refer Table 86 in the Additional financial infor-
Approximately 80% of the $578 million in total specific PCL in the
mation section.
Specific provision for credit losses (C$ millions)
1,500
1,125
750
375
0
Specific
PCL
PCL ratio*
.60%
.45%
.30%
.15%
.0%
2004
2005
2006
2007
2008
* PCL ratio: Specific PCL as a percentage of average net loans and acceptances.
Five-year trend
Provision for credit losses
During the period 2004 to 2005, specific provision for credit losses
trended downward, primarily reflecting a reduction in provisions for
our business portfolio. We recorded significant recoveries, particularly
in our corporate loans in 2005 and 2006.
In 2007, specific provisions increased primarily due to our U.S.
residential builder finance portfolio, reflecting the beginning of the
downturn in the U.S. housing market. The increase in 2008 largely
reflected the impact of continued deterioration in the U.S. housing
market and slowing economic conditions as discussed above.
U.S. banking operations
As at October 31 (C$ millions)
Retail
Residential mortgages
Home equity
Lot loans
Credit cards
Other
Wholesale
Commercial and business banking loans
Residential builder finance loans
RBC Real Estate Finance Inc. (REFI)
Other
Total U.S. banking operations loans
$
Table 68
2008
2,922
4,269
1,142
187
320
$
8,840
$ 14,588
2,116
1,153
585
$ 18,442
$ 27,282
U.S. this year relates to our U.S. banking operations. Of this amount,
approximately 60% relates to our U.S. residential builder finance busi-
ness, including REFI portfolio. The balance relates to commercial and
business banking loans and home equity and lot loans.
Of the $436 million increase in the wholesale PCL in the U.S.
this year, approximately 70% relates to our U.S. banking operations.
Approximately 80% of this amount is attributable to impaired loans in
our U.S. residential builder finance business including our REFI port-
folio. The balance relates to commercial and business banking loans.
Banking book equities
Banking book equities consist of positions in financial instruments
held for investment purposes and are not part of our trading book.
They include both direct and indirect ownership interests, whether vot-
ing or non-voting, in the assets and income of an entity that are neither
consolidated nor deducted for regulatory capital purposes. Banking
book equities consist of publicly traded and private equities, partner-
ship units, venture capital and holdings of derivative instruments tied
to equity interests.
Basel II defines banking book equity exposures based on the
economic substance of the transaction rather than the legal form or
accounting treatment associated with the instrument. As such, differ-
ences exist in the identification of equity securities held in the banking
book and those reported in Notes 1 to 3 to our Consolidated Financial
Statements.
With reference to banking book equities reported on our
Consolidated Balance Sheets, the majority are classified as AFS, with
the remainder classified as investments in associated corporations
under other assets and non-equity (debt) securities.
Equities held in the banking book are subject to credit risk capital
requirements as prescribed by OSFI under Basel II.
The following table summarizes our banking book equity
exposure and net unrealized losses on the portfolio.
Banking book equity exposure
As at October 31 (C$ millions)
Public
Private
Table 69
2008
1,461
1,630
$
Total banking book equity exposure (1)
$
3,091
Accumulated net unrealized losses for
regulatory capital purposes (2)
$
(380)
(1)
(2)
Total exposure represents exposure at default, which is the expected gross exposure
upon the default of an obligor.
This amount represents unrealized losses net of income taxes.
96
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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 mar-
ket conditions, expectations of future price and yield movements and
the composition of our trading portfolio.
In the last quarter of 2008, all markets, both cash and derivatives
across all asset classes, including credit, experienced unprecedented
volatility in prices, as major market participants underwent radical and
rapid de-leveraging of balance sheets and forced-selling. This activity,
coupled with the fear of a global recession, dragged prices down
across all markets. We supplemented existing market risk measures by
frequent updates to the historical scenario window used in VaR as well
as the refinement of the risk factors used in the calculations to accu-
rately reflect the current market conditions.
•
•
Trading market risk
Trading market risk encompasses various risks associated with cash
and related derivative products that are traded in interest rate, foreign
exchange, equity, credit and commodity markets. Trading market risk is
comprised of the following components:
•
Interest rate risk is the potential adverse impact on our earnings
and economic value due to changes in interest rates. It is com-
posed of: (i) 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 – arising
from an imperfect hedge of one instrument type by another
instrument type in which changes in price are not perfectly cor-
related, and (iv) option risk – arising 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 pre-
cious metals price movements and volatilities. In our proprietary
positions, 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, heat-
ing oil, natural gas and power. 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 earn-
ings 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. Severe dis-
location of money market and bond markets from the synthetic
credit markets, as well as fundamentals-based market valuations,
impacts trading ability, profitability and risk measurements.
• Market illiquidity risk is the inability to liquidate our positions or
•
•
•
acquire hedges to neutralize our trading positions. In times of
severe stress, illiquidity is experienced in even the most highly
rated and previously highly liquid instruments.
derivative transactions. Market risks associated with trading activities
are a result of market-making, positioning, and sales and arbitrage
activities in the interest rate, foreign exchange, equity, commodities,
and credit markets. Our trading operations primarily act as a market
maker, executing transactions that meet the financial requirements of
our clients and transferring the market risks to the broad financial mar-
ket. We also act as principal and take proprietary market risk positions
within the authorized limits determined by the Board of Directors.
The trading book consists of cash and derivative positions that are
held for short-term resale, taken on with the intent of benefiting in the
short term from actual or expected differences between their buying
and selling prices or to lock in arbitrage profits.
Responsibilities
Market risk limit approval authorities are established by the Board
of Directors, upon recommendation of the CR&RPC, and delegated to
senior management.
The independent oversight of trading market risk management
activities is the responsibility of GRM – Market and Trading Credit Risk,
which includes major units in Toronto, London, New York, Tokyo and
Sydney. GRM – Market and Trading Credit Risk establishes market risk
policies and limits, develops quantitative techniques and analytical
tools, vets trading models and systems, maintains the VaR and stress
risk measurement systems, and provides enterprise risk reporting on
trading activities. This group also provides
independent oversight on trading activities, including the establish-
ment and administration of trading operational limits, market risk and
counter party 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 func-
tioning 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 (VaR based), while structured
credit derivatives and mortgage-backed securities are calculated under
the Standardized Approach as approved by OSFI. 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, as discussed below.
Value-at-Risk
VaR is a statistical technique that measures the worst-case loss
expected over a one-day 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.
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.
We conduct trading activities over-the-counter and on exchanges in the
spot, forwards, futures and options markets, and we offer structured
As with any modeled risk measure, there are certain limitations
that arise from the assumptions used in VaR. Historical VaR assumes
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
97
that the future will behave like the past. As a result, historical
scenarios may not reflect the next market cycle. Furthermore, the use
of a one-day horizon VaR for risk measurement implies that positions
could be unwound or hedged within a day but this may not be a real-
istic assumption if the market becomes largely or completely illiquid.
VaR is calculated based on end-of-day positions.
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 hypo-
thetical 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.
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 periodi-
cally to further ensure accuracy and reliability. In 2008, there were
18 occurrences of a back-test exceeding VaR, of which 9 occurred in
the latter part of 2008. The breaches occurred during the very volatile
markets in March, September and October. VaR calculated using a his-
torical 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 underly-
ing risk.
VaR is a risk measure that is only meaningful in normal market
conditions. 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 sev-
eral types of stress testing, including historical stress events such as
the 1987 stock market crash, as well as hypothetical “what-if” stress
Risk control
Policies
A comprehensive market risk 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 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 committee 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 70
2008
2007
As at
Oct. 31
$
8
8
1
34
8
(19)
For the year ended October 31
Average
High
Low
$ 13 $ 28
9
6
44
11
(38)
3
2
26
7
(23)
$
6
1
–
17
4
(13)
As at
Oct. 31
$
8
4
2
20
3
(19)
For the year ended October 31
Average
High
Low
$
9
2
1
19
3
(13)
$ 18
7
2
23
5
(22)
$
4
1
–
14
2
(8)
$ 40
$ 28
$ 50
$ 18
$ 18
$ 21
$ 27
$ 16
(C$ millions)
Equity
Foreign exchange
Commodities
Interest rate
Credit specific
Diversification
Global VaR
.
Global VaR by major risk category (C$ millions)
0
-5
-10
-15
-20
-25
-30
-35
-40
-45
November
2007
February
2008
May
2008
August
2008
October
2008
Daily interest rate VaR
Daily equity VaR
Daily commodities VaR
Daily credit-specific risk VaR
Daily foreign exchange VaR
98
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
60
40
20
0
6
4
2
0
Global VaR
2008 vs. 2007
Average global VaR for the year of $28 million was up compared to
$21 million a year ago. This increase largely reflected an increase in
both interest rate, including credit specific, and equity risk due to
increased market volatility. These increases were mostly offset by an
increase in the diversification effect, up from 38% to 45% for 2008.
Trading revenue
2008 vs. 2007
During the year, we experienced 44 days of net trading losses compared
to 25 days in 2007. The volatility in daily trading revenue in the last
part of 2008 reflected the unprecedented volatility in the market. The
largest daily loss, including writedowns, of $342 million was related
to unprecedented volatility in equity and credit markets and exceeded
the global VaR estimate for that day. Writedowns and valuation adjust-
ments are discussed further in the impact of market environment in
the Financial performance section. The breadth of our trading activities
is designed to diversify market risk to any particular strategy, and to
reduce trading revenue volatility.
Trading revenues for the year ended October 31, 2008 (teb)
(number of days)
Trading revenues and global VaR (1) (C$ millions)
Trading revenues for the year ended October 31, 2008 (teb)
(number of days)
Trading revenues and global VaR (1) (C$ millions)
100
80
20
0
-20
-50
-100
-150
-200
-275
-350
^
-100
-80
-60
-40
-20
0
20
40
60
80
100
Daily net trading revenue (C$ millions), excluding VIEs
60
40
20
0
November
2007
February
2008
May
2008
August
2008
October
2008
Daily net trading revenue
Global VaR
^
-100
-80
-60
-40
-20
0
20
40
60
80
100
Daily net trading revenue (C$ millions), excluding VIEs
100
80
20
0
-20
-50
-100
-150
-200
-275
-350
November
2007
February
2008
May
2008
August
2008
October
2008
Daily net trading revenue
Global VaR
-334
(1)
Trading revenue on a taxable equivalent basis excluding revenue related to consolidated VIEs.
-334
Histogram of daily net trading revenue (1) (number of days)
-30
-15
0
15
30
45
Daily net trading revenue (C$ millions)
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 bal-
ance sheet to a target level. We modify the risk profile of the balance
sheet through proactive hedging to achieve our target level. For addi-
tional 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 monitor the effec-
tiveness 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
compliance with policies and operating standards. ALCO provides
oversight to Corporate Treasury and reviews and approves the policies
developed by Corporate Treasury.
Histogram of daily net trading revenue (1) (number of days)
6
Risk measurement
We endeavour to keep pace with best practices in instrument valu-
ation, 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.
4
2
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
provides us with an assessment of the sensitivity of the exposure of
our economic value of equity to instantaneous changes in individual
points on the yield curve.
0
The economic value of equity is equal to the net present value of
45
-30
30
our assets, liabilities and off-balance sheet instruments.
Daily net trading revenue (C$ millions)
-15
15
0
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.
We also focus on developing retail product valuation models that
incorporate the impact of consumer behaviour. These valuation models
are typically derived through econometric estimation of consumer
exercise of options embedded in retail products. The most significant
embedded options are mortgage rate commitments and prepayment
options. In addition, we model the sensitivity of the value of deposits
with an indefinite maturity to interest rate changes.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
99
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 policy and interest rate limit document 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 bp 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 limits are reviewed and approved annually by
the Board of Directors.
Risk reporting
The individual subsidiaries and business segments report the inter-
est 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 for corrective actions.
An enterprise interest rate risk report is reviewed monthly by ALCO
and quarterly by the GRC and the Board of Directors.
Market risk measures – Non-trading banking activities
Table 71
(C$ millions)
Before-tax impact of:
100 bp increase in rates
100 bp decrease in rates
Before-tax impact of:
200 bp increase in rates
200 bp decrease in rates
2008
2007
2006
Economic value of equity risk
Net interest income risk
Canadian
dollar
impact
U.S.
dollar
impact (1)
Canadian
dollar
impact
U.S.
dollar
impact (1)
Total
Economic
Economic
Total
value of Net interest
income risk
equity risk
value of Net interest
income risk
equity risk
$
(470) $
404
(38) $
44
(508) $
448
23 $
(62)
22 $
(28)
45 $
(90)
(440) $
309
54 $
(111)
(496) $
375
(982)
774
(68)
64
(1,050)
838
8
(236)
54
(43)
62
(279)
(930)
553
97
(231)
(1,044)
658
87
(153)
147
(319)
(1)
Represents the impact on the non-trading portfolios held in our U.S. banking operations.
2008 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 hedg-
ing 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 2008, our interest rate
risk exposure was well within our target level.
Operational risk
Operational risk is the risk of loss or harm 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. During 2008, we broadened
how we define operational risk to include harm as well as loss. This
better reflects how we perceive operational risk and will help us
ensure it is effectively managed.
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, monitoring and reporting it.
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 them.
Responsibilities
A dedicated team within GRM designs and supports operational risk
policies, programs and initiatives, and monitors implementation prog-
ress 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 opera-
tional risk management framework. Where appropriate, execution of
operational risk management programs is conducted by GTO on behalf
of the businesses and corporate support groups.
Key risk indicators
Our business segments, Global Technology and Operations, and
Global Functions 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, as well as potential changes in, our operational
risk exposure.
100
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Operational event data collection and analysis
Operational risk events are reported in a central enterprise database.
Comprehensive information about these events is 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 histori-
cal perspective of our operational risk experience and establishes a
basis for measuring our operational risk exposure. In keeping with
our broadened definition of operational risk, during 2008 we began
to include data on events with non-monetary impacts and near-miss
events in our collection and analysis activities.
Industry loss analysis
We review and analyze information on operational losses that have
occurred at other financial institutions, using published informa-
tion and information we acquire through our membership in ORX
(Operational Riskdata eXchange Association), a private data-sharing
consortium. Both provide insights into the size and nature of poten-
tial 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.
Capital management
Strong capital and liquidity positions facilitate opportunistic business
expansion and help maintain safety and soundness in times of stress.
Our stress absorption capability is comprised of both capital adequacy
and our liquidity position which together aim to provide the market
with confidence in the organization’s ability to remain safe and sound.
A detailed overview of our capital management and liquidity and fund-
ing management practices are discussed in this section and the next
section, respectively.
Risks, including credit, market and operational, as discussed
earlier, influence overall capital management, and liquidity and fund-
ing management. The linkage between risks and our stress absorption
capability to ensure the safety and soundness of the organization are
illustrated below.
Credit risk
Market risk
• Trading market risk
• Non-trading market risk
Operational risk
Other risks
Market perception
Capital position
Liquidity position
Safety and soundness
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 capital ratio targets.
Additional considerations include the costs and terms of current and
potential capital issuances and projected capital requirements.
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-coordinated,
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 this insurance are determined on a central,
enterprise-wide basis.
Reporting
GRM provides quarterly enterprise-wide risk reports to senior man-
agement 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, regu-
latory or compliance issues, and large operational risk events. These
reports are supplemented with more detailed specific contributions
from groups such as compliance, audit, legal and human resources.
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:
•
Regulatory capital: capital required for regulatory compliance
defined in accordance with OSFI
Economic capital: an internal assessment of the amount of capital
required to underpin our risks
Subsidiary capital: the amount of regulatory capital invested in
subsidiaries.
•
•
Additionally, within our capital management framework, we have in
place an ICAAP for the purpose of setting internal capital targets and
strategies for achieving those targets consistent with our business
plans, risk profile, risk appetite and operating environment.
As part of this process, we have implemented a program of
enterprise-wide stress testing to evaluate the income and capital (eco-
nomic and regulatory) impacts of several potential stress events. This
exercise involves various teams, including GRM, Corporate Treasury,
Finance and Economics. Results from this testing are a key input into
our capital planning process and are used in settling appropriate
stress factors we use to test the robustness of our capital position on a
quarterly basis.
Our co-ordinated approach to capital management serves an
important 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
depositors and senior creditors.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
101
Governance
The Board of Directors is responsible for ultimate oversight of capital
management, including the annual review and approval of our Capital
Plan, and our ICAAP. The Audit Committee is responsible for the gover-
nance of capital management, which includes:
•
•
The approval of capital management policies
The regular review of our capital position and liquidity, funding
and capital management processes
The approval of the ICAAP
The ongoing review of internal control over financial reporting.
•
•
In addition, OSFI meets with our Audit Committee and the 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 established limits
and guidelines. Corporate Treasury and GRM are responsible for the
design and implementation of policies relative to regulatory, economic
and subsidiary capital, and for developing and implementing the ICAAP.
Basel II
With OSFI’s adoption of new capital guidelines based on “International
Convergence of Capital Measurement and Capital Standards: A
Revised Framework – Comprehensive Version (June 2006),” known
as Basel II, effective November 1, 2007, major Canadian banks are
required to calculate and report their regulatory capital ratios under
new measurement standards.
The top corporate entity to which Basel II applies at the con-
solidated level is Royal Bank of Canada. Basel II represents a major
change to bank regulation in that it allows banks to select from a
limited menu of risk-based approaches of increasing sophistication,
Regulatory capital and capital ratios
As at October 31 (C$ millions, except percentage amounts)
Capital
Tier 1 capital
Total capital
Risk-adjusted assets
Credit risk
Market risk
Operational risk
Total risk-adjusted assets
Capital ratios
Tier 1 capital
Total capital
Assets-to-capital multiple
used to calculate the minimum regulatory (Pillar 1) capital, in particu-
lar with respect to credit and operational risk.
For credit risk, OSFI expects each major bank to adopt the AIRB
Approach for its material portfolios, although some flexibility is
permitted for the timing of the adoption. Accordingly, as part of our
transition to Basel II, OSFI has allowed for staged implementation of
the AIRB Approach for credit risk, including:
•
A waiver for RBC Bank (USA), formerly RBC Centura Bank, to use
the Standardized Approach for credit risk through fiscal 2010
An extension whereby we are permitted to defer use of the AIRB
Approach for our proportionate interest in the exposures of RBC
Dexia IS, until November 1, 2010, at the latest
Exemptions for exposures for which credit risk is reported under
the Basel II Standardized Approach (i.e., our Caribbean banking
operations) on the basis that such portfolios and entities in appli-
cable jurisdictions are non-material.
•
•
For operational risk, the two options available to us are the Advanced
Measurement Approach (AMA) and the Standardized Approach. Initially,
we have adopted the Standardized Approach for operational risk.
For market risk capital, we use both Internal Models and
Standardized Approaches.
Basel II has resulted in capital requirements that differ from those
calculated under Basel I. For the most part, this reflects a shift in
calculation methodology for risk-adjusted assets (RAA) from pre-
scribed risk weights to using parameters that are more closely aligned
with our internal assessment and measurement of risk. As Basel II is
applied on a prospective basis, Basel I and Basel II calculations are not
directly comparable.
Basel II (1)
2008
Table 72
Basel I (1)
2007
$ 25,173
30,830
$ 23,383
28,571
$ 229,537
17,220
31,822
$ 231,302
16,333
–
$ 278,579
$ 247,635
9.0%
11.1%
20.1X
9.4%
11.5%
19.9X
(1)
As defined in the guidelines issued by OSFI. Basel I and II calculations are not directly comparable.
Regulatory capital and capital ratios
Capital levels for Canadian banks are regulated pursuant to guide-
lines issued by OSFI, based on standards issued by the Bank for
International Settlements, Basel Committee of Banking Supervisors
(BCBS). Regulatory capital is allocated to two tiers: Tier 1 and Tier 2.
Tier 1 capital comprises the more permanent components 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 and other items
prescribed by OSFI are deducted from Tier 1 capital.
Tier 2 capital consists mainly of subordinated debentures,
trust subordinated notes, the eligible amount of innovative capital
instruments that could not be included in Tier 1 capital and an eligible
portion of the total general allowance for credit losses, less OSFI-
prescribed deductions. Total capital is defined as the sum of Tier 1 and
Tier 2 capital. For further details on the terms and conditions of non-
cumulative preferred shares and innovative capital instruments, refer
to the Share data and dividends section and Notes 17 and 18 to our
Consolidated Financial Statements.
Regulatory capital ratios are calculated by dividing Tier 1 and
Total capital by RAA. 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 cal-
culated by dividing gross adjusted assets by Total capital, does not
exceed a maximum level prescribed by OSFI.
The adoption of Basel II introduced changes in the components of
eligible regulatory capital. Significant changes include:
•
General allowances for credit losses on portfolios subject to the
Standardized Approach can be included in Tier 2 capital up to a
102
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
limit of 1.25% of the RAA of those portfolios. For portfolios sub-
ject to the AIRB Approach, the treatment depends on whether
allowances are more or less than expected losses. In the former
case, the difference is included in Tier 2 capital up to a limit of
.6% of the AIRB portfolio’s credit RAA. In the latter case, the dif-
ference is deducted 50% from Tier 1 capital and 50% from Tier 2
capital. Under Basel I, general allowances were included in Tier 2
capital up to a maximum of .875% of total RAA.
•
Securitization-related increases in equity, for example, gains
on sale, are deducted from Tier 1 capital. Other securitization-
related deductions are made 50% from Tier 1 capital and 50%
from Tier 2 capital. Previously, these deductions were made from
Total capital.
The components of regulatory capital are shown in the following table.
Capital
As at October 31 (C$ millions, except percentage amounts)
Tier 1 regulatory capital (1)
Common equity (2)
Non-cumulative preferred shares
Innovative capital instruments
Other non-controlling interests in subsidiaries
Goodwill (3)
Substantial investments (4)
Securitization-related deductions (5)
Expected loss in excess of allowances – AIRB Approach
Other
Total Tier 1 capital
Tier 2 regulatory capital (1)
Permanent subordinated debentures
Non-permanent subordinated debentures (6)
Innovative capital instruments (excess over 15% of Tier 1)
Excess of non-cumulative preferred shares
Trust subordinated notes
General allowance
Accumulated net unrealized gain on available-for-sale equity securities (7)
Substantial investments (4)
Investment in insurance subsidiaries
Securitization-related deductions (8)
Expected loss in excess of allowances – AIRB Approach
Other
Total Tier 2 capital
Total regulatory capital
Total Tier 1 and Tier 2 capital
Substantial investments
Investment in insurance subsidiaries
First-loss facility
Total regulatory capital (1)
Table 73
Basel I
2007
Basel II
2008
$ 22,272
2,344
3,494
25
(4,752)
$ 28,946
2,657
3,879
357
(9,977)
(37)
(329)
(315)
(8)
$ 25,173
$ 23,383
$
–
–
779
5,473
1,027
1,221
105
$
900
7,223
120
–
1,027
488
–
(277)
(3,198)
(305)
(315)
(6)
$
5,657
$
8,605
$ 30,830
–
–
–
$ 31,988
(309)
(2,912)
(196)
$ 30,830
$ 28,571
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
As defined in the guidelines issued by OSFI, Basel I and Basel II calculations are not directly comparable.
This amount is shareholders’ equity less preferred shares of $2,663 million plus other items not included in regulatory capital of $851 million.
Basel II goodwill deduction reflects total consolidated goodwill. Basel I goodwill deduction reflects consolidated goodwill net of insurance goodwill.
Under Basel II, substantial investment deductions are made 50% from each of Tier I and Tier 2 capital. Currently, there is a transitional provision until October 31, 2008, to deduct
substantial investments held prior to December 31, 2006 in full from Tier 2 capital. Under Basel I, these investments were deducted from Total capital.
Securitization deduction from Tier 1 capital consists of (i) seller’s interest in residential mortgages of $80 million and credit cards of $29 million; (ii) securitizations rated below BB- of
$102 million; and (iii) unrated positions of $118 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 at their
amortized value.
As prescribed by OSFI, certain components of accumulated other comprehensive income are included in the determination of regulatory capital. Accumulated net foreign currency
translation adjustments are included in Tier 1 capital. Net unrealized fair value losses on 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.
Securitization deduction from Tier 2 capital consists of (i) seller’s interest in residential mortgages of $80 million and credit cards of $5 million; (ii) securitizations rated below BB- of
$101 million; and (iii) unrated positions of $119 million.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
103
Tier 1 capital ratio
8.9%
9.6%
9.6%
9.4%
9.0%
12%
9%
6%
3%
0%
2004
2005
Basel I
2006
2007
2008
Basel II
As at October 31, 2008, our Tier 1 capital ratio was 9.0% and our Total
capital ratio was 11.1%.
The Tier 1 capital ratio was down 40 bps from a year ago. The
decrease was largely due to higher RAA, and a higher goodwill capital
deduction reflecting the impact of a weaker Canadian dollar on foreign
currency denominated assets and additional goodwill from the acqui-
sitions of ANB, PH&N, RBTT and FBW. These factors were partially
offset by higher shareholders’ equity from retained earnings, capital
issuances and the positive impact of a weaker Canadian dollar on net
unrealized foreign currency translation gains and losses.
The Total capital ratio was down 40 bps from a year ago largely
due to factors noted above for Tier 1 capital and a decrease in the
amount of general allowance included in regulatory capital under
Basel II, partially offset by net issuance of subordinated debentures.
As at October 31, 2008, our assets-to-capital multiple was
20.1 compared to 19.9 a year ago. Our assets-to-capital multiple
remains below the maximum prescribed by OSFI.
Risk-adjusted assets
Under the current Basel II framework, OSFI requires banks to meet
minimum risk-based capital requirements for exposures to credit risk,
operational risk, and, where they have significant trading activity,
market risk. RAA is calculated for each of these risk types and added
together to determine total RAA.
Further, Basel II has introduced a transitional capital floor adjust-
ment. Once a bank achieves full compliance with AIRB implementation
and data requirements, contingent on OSFI approval, a 90% Basel I
capital floor will apply for at least four quarters, after which the banks
may qualify for an 80% Basel I capital floor, which will also apply for at
least four quarters.
Our RAA as calculated under Basel II is not directly comparable
During the year, RAA increased by $31 billion, primarily due
to RAA calculated previously under Basel I due to several factors,
including:
•
Under the Basel II AIRB Approach for credit risk, banks rely on
their own internal estimates for risk components in determining
their capital requirements and equivalent RAA for a given expo-
sure which is in contrast to the use of industry-wide prescribed
rates under Basel I
A capital charge for operational risk was not required under
Basel I
The asset class definitions have changed significantly and are
more differentiated under Basel II.
•
•
to business growth, including our acquisition of ANB and RBTT, the
inclusion of RAA for operational risk under Basel II and the impact of a
weaker Canadian dollar at October 31, 2008 on the translated value of
our foreign currency-denominated assets. These factors were partially
offset by the impact of the adoption of the AIRB Approach for credit
risk under Basel II.
104
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Risk-adjusted assets – Basel II (1)
Table 74
As at October 31 (C$ millions)
Exposure (2)
Average
of risk
weights (3)
Standardized
Approach
Advanced
Approach
Other (4)
Total (5)
2008
Risk-adjusted assets
Credit risk
Lending-related and other
Residential mortgages
Other retail (Personal, Credit cards and
Small business treated as retail)
Business (Corporate, Commercial, Medium-sized
enterprises and Non-bank financial institutions)
Sovereign (Government)
Bank
Total lending-related and other
Trading-related
Repo-style transactions
Over-the-counter derivatives
Total trading-related
Total lending-related and other and trading-related
Bank book equities (6)
Securitization exposures
Regulatory scaling factor (7)
Other risk-adjusted assets (4)
Total credit risk (4)
Market risk (8)
Interest rate
Equity
Foreign exchange
Commodities
Specific risk
Total market risk
Operational risk (9)
$ 93,445
8%
$
1,418
$
6,024
$
7,442
142,221
161,331
15,793
67,385
22%
60%
12%
13%
7,974
23,954
40,566
560
6,733
56,760
1,266
2,267
31,928
97,326
1,826
9,000
$ 480,175
31%
$ 57,251
$ 90,271
$
–
$ 147,522
$ 115,687
86,952
$ 202,639
$ 682,814
3,091
83,190
n.a.
186,623
$ 955,718
$
3%
30%
643
3,139
$
2,472
22,757
$
3,115
25,896
14%
$
3,782
$ 25,229
$
–
$ 29,011
26%
91%
9%
n.a.
19%
$ 61,033
–
767
n.a.
n.a.
$ 115,500
2,826
6,527
7,491
n.a.
$ 35,393
$ 176,533
2,826
7,294
7,491
35,393
24%
$ 61,800
$ 132,344
$ 35,393
$ 229,537
$
$
2,719
1,206
326
345
6,150
2,110
1,367
22
2
2,973
$
2
3
4,829
,573
48
347
9,123
$ 10,746
$
6,474
$ 17,220
$ 31,822
n.a.
n.a.
$ 31,822
Total risk-adjusted assets
$ 955,718
$ 104,368
$ 138,818
$ 35,393
$ 278,579
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Calculated using guidelines issued by OSFI under the new Basel II framework.
Total exposure represents exposure at default which is the expected gross exposure upon the default of an obligor. This amount is before any specific allowances or partial write-offs
and does not reflect the impact of credit risk mitigation and collateral held.
Represents the average of counterparty risk weights within a particular category.
For credit risk, a majority of our portfolios use the AIRB Approach, which represents 58% of RAA. Portfolios using the Standardized Approach represent 27% of RAA. The remaining 15%
represents balance sheet assets not included in the Standardized or AIRB Approaches.
The minimum capital requirements for each category can be calculated by multiplying the total RAA by 8%.
The amount of banking book equity exposures that were “grandfathered” under Basel II, and thus subject to a 100% risk-weighting until the end of 2017, was $1,095 million as at
October 31, 2008.
The scaling factor represents a calibration adjustment of 6% as prescribed by OSFI under the Basel II framework and is applied to RAA amounts for credit risk assessed under the AIRB
Approach.
For market risk RAA measurement, we use an Internal Models Approach where we have obtained regulatory approval and a Standardized Approach for products yet to be approved.
For operational risk, we use the Standardized Approach.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
105
In 2008, we undertook several initiatives to support the effective management of our capital, as outlined in Table 75 below.
Selected capital management activity
Table 75
(C$ millions)
Tier 1
Common shares issued
Stock options exercised (1)
Acquisition of ANB
Acquisition of PH&N (2)
Acquisition of RBTT
Acquisition of FBW
Repurchase of common shares –
normal course issuer bid (3), (4)
First preferred shares issued
Non-cumulative Series AC
Non-cumulative Series AD
Non-cumulative Series AE
Non-cumulative Series AF
Non-cumulative Series AG
Non-cumulative Series AH
Non-cumulative Series AJ (5)
First preferred shares redeemed
Non-cumulative Series O
Non-cumulative Series N
Trust Capital Securities issued (6)
Tier 2
Subordinated debentures issued (7)
March 11, 2018
June 6, 2018
June 26, 2037 (JPY10 billion)
Repurchase and redemption of
subordinated debentures (7)
November 8, 2011
June 4, 2012
January 22, 2013
Trust subordinated notes issued (8)
October 31, 2008
October 31, 2007
For the year ended
Issuance or
redemption
date
Number
of shares
(000s)
Dollars
per share
Amount
Issuance or
redemption
date
Number
of shares
(000s)
Dollars
per share
Amount
February 22, 2008
May 1, 2008
June 16, 2008
June 27, 2008
$
6,445
16,370 $
20,250
18,246
4,809
50.69
48.00
49.27
49.07
1,120
49.50
153
830
972
899
236
55
7,215
$
170
11,845 $
54.59
November 1, 2006
December 13, 2006
January 19, 2007
March 14, 2007
April 26, 2007
8,000
10,000
10,000
8,000
10,000
25.00
25.00
25.00
25.00
25.00
646
200
250
250
200
250
April 29, 2008
September 16, 2008
8,500
16,000
25.00
25.00
213
400
August 22, 2008
April 28, 2008
12,000
25.00
March 11, 2008
June 6, 2008
January 22, 2008
November 24, 2006
.
300
500
1,000
1,000
June 26, 2007
November 8, 2006
June 4, 2007
April 30, 2007
500
6,000
25.00
150
87
US$400
500
1,000
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Amounts include cash received for stock options exercised during the year, fair value adjustment to stock options, and the exercise of stock options from tandem stock appreciation
rights (SARs) awards and from renounced tandem SARs.
In addition, we issued 6.75 million shares in RBC PH&N Holdings Inc. for $324 million which, after three years, are exchangeable into our common shares as part of the consideration
paid for the acquisition of PH&N.
For further details, refer to Note 18 to our Consolidated Financial Statements.
Effective November 1, 2008, we renewed our normal course issuer bid (NCIB) for one year to purchase, for cancellation, up to 20 million common shares.
Dividend rate will reset every five years.
$379 million is included in Tier 1 capital, $121 million is included in Tier 2 capital. For further details, refer to Note 17 to our Consolidated Financial Statements.
For further details, refer to Note 16 to our Consolidated Financial Statements.
Amount in par value. For further details, refer to Note 17 to our Consolidated Financial Statements.
Subsequent to October 31, 2008, the following capital transaction
occurred:
On November 3, 2008, we issued 12 million Non-cumulative First
Preferred Shares Series AL at $25 per share, for total proceeds of
$300 million.
On November 24, 2008, we announced our intention to issue
9 million Non-cumulative 5-year rate reset First Preferred Shares
Series AN at $25 per share, for total proceeds of $225 million. The
underwriters have the option to purchase an additional $100 million
preferred shares at the same offering price. The issuance is expected
to be completed on December 8, 2008.
Dividends
Our common share dividend policy reflects our earnings outlook,
desired payout ratio and the need to maintain adequate levels of capi-
tal to fund business opportunities. The targeted range of our common
share dividend payout ratio for 2008 was 40 to 50%. In 2008, the divi-
dend payout ratio was 59%, up from 43% in 2007, as 2008 earnings
declined largely due to writedowns, higher provision for credit losses
in U.S. banking and spread compression. Common share dividends
paid during the year were $2.6 billion, up 13% from a year ago.
106
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Share data and dividends
2008
(C$ millions, except number of shares
and per share amounts)
Number of
shares (000s)
Amount
Dividends
declared
per share
Number of
shares (000s)
2007
Amount
Table 76
2006
Dividends
declared
per share
Number of
shares (000s)
Dividends
declared
per share
Amount
First Preferred (1)
Non-cumulative Series N
Non-cumulative Series O
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
Non-cumulative Series AH
Non-cumulative Series AJ (2)
$
$
$
–
–
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
8,500
16,000
–
–
300
300
300
200
250
250
200
250
213
400
$
.88
–
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
.81
–
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
1.23
.71
.41
–
–
–
–
–
–
–
Total First Preferred
$ 2,663
$ 2,350
$ 1,350
Common shares outstanding
Treasury shares – preferred
Treasury shares – common
Exchangeable shares of
RBC PH&N Holdings Inc.
Stock options
Outstanding
Exercisable
Dividends
Common
Preferred
1,341,260
(260)
(2,258)
$ 10,384
(5)
(104)
$
2.00 1,276,260
(249)
(2,444)
$ 7,300
(6)
(101)
$
1.82 1,280,890
(94)
(5,486)
$ 7,196
(2)
(180)
$ 1.44
6,750
324
–
–
–
–
–
–
–
21,773
17,247
26,623
21,924
32,243
26,918
2,624
101
2,321
88
1,847
60
(1)
(2)
Only the First Preferred Shares Series W has a conversion option which, as at October 31, 2008, was not yet convertible.
Dividend rate will reset every five years.
As at December 1, 2008, the number of outstanding common shares
and stock options were 1,341,342,000 and 21,627,000, respectively.
As at December 1, 2008, the number of Treasury shares – preferred
and Treasury shares – common were 191,200 and 2,202,000,
respectively. For further information about our share capital, refer to
Notes 18 and 21 to our Consolidated Financial Statements.
Economic Capital
Economic Capital is our internal 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
conditions, 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
ROE and 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, recognizing 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 exceeds Economic Capital with a comfortable cushion.
Economic Capital is calculated and attributed on a wider array
of risks than is Basel II Pillar I regulatory capital, which is calibrated
predominantly to target credit, market (trading) and operational risk
measures. The identified risks (described below) for which we calcu-
late Economic Capital are credit, market (trading and non-trading),
operational, business, fixed asset, and insurance. Additionally,
Economic Capital includes goodwill and intangibles, and reflects diver-
sification 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, and credit spreads, 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 or harm due to variances in vol-
umes, prices and costs caused by competitive forces, regulatory
changes, reputation and strategic risks.
Fixed asset risk is defined as the risk that the value of fixed assets
will be less than their book value at a future date.
Insurance risk is the risk of loss that may occur when actuarial
assumptions made in insurance product design and pricing activi-
ties 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
continually monitored with a view to ensuring that the Economic
Capital framework is comprehensive and consistent. Economic Capital
measurement models and techniques are developed by GRM and are
subject to an internal independent assessment for appropriateness
and reliability. The models are continually benchmarked to leading
industry practices via participation in surveys, reviews of methodolo-
gies and ongoing interaction with external risk management industry
professionals. The models and input parameters are subject to inde-
pendent vetting and validation, as per internal model risk policies.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
107
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 increased $2.8 billion from a year ago largely due
to increases in Goodwill and intangibles capital and Credit risk capi-
tal, partly offset by a decrease in Market risk (non-trading) capital.
Goodwill and intangibles capital increased primarily as a result of our
acquisitions of ANB, RBTT, PH&N and FBW, as well as the impact of a
weaker Canadian dollar on goodwill denominated in foreign curren-
cies. The increase in Credit risk capital was largely due to business
growth, including acquisitions during the current year, and the impact
of a weaker Canadian dollar on the translated value of foreign currency-
denominated assets. The decrease in Market risk (non-trading)
capital was mostly attributable to methodology changes related to
diversification benefits in certain portfolios and improved measure-
ment of interest rate risk inherent in our Canadian retail and wholesale
operations.
We remain well capitalized with current levels of qualified capital
exceeding the Economic Capital required to underpin all of our risks.
Subsidiary capital
Management of our subsidiary capital is an important part of our
overall capital management framework. We allocate capital across
the enterprise to maximize returns to our shareholders and meet local
regulators’ capital adequacy requirements. Additionally, we focus on
ensuring that we can access capital recognized in our consolidated
regulatory capital measurements. To achieve this objective, we set
guidelines for defining capital investments in our subsidiaries and
manage the relationship between capital invested in subsidiaries and
our consolidated capital base.
Each of our subsidiaries has individual responsibility for main-
taining the subsidiary’s compliance with local regulatory capital
adequacy requirements, which may include restrictions on the
transfer of assets in the form of cash, dividends, loans or advances.
Concurrently, Corporate Treasury provides centralized oversight and
consolidated capital base management across the various entities.
The following table provides the Tier 1 and Total capital ratios of
our significant banking subsidiary RBC Bank (USA).
Capital ratios of our significant banking subsidiary
Table 78
As at October 31
RBC Bank (USA) (1), (2)
Tier 1 capital ratio
Total capital ratio
2008
2007
9.2%
12.5%
10.7%
13.0%
(1)
(2)
Calculated using guidelines issued by the U.S. Federal Reserve Board under Basel I,
as the U.S. will adopt Basel II no earlier than 2010.
As RBC Bank (USA)’s fiscal year runs from January 1 to December 31, the ratios shown
are as at September 30, 2008 and September 30, 2007, respectively.
Other considerations affecting capital
In addition to the regulatory environment, we closely monitor changes
in GAAP and their potential impact on our capitalization levels.
$
2008
8,100
1,750
2,850
2,200
150
$
Table 77
2007
6,850
2,700
2,750
2,000
150
$ 15,050
7,700
$ 14,450
5,550
$ 22,750
2,000
$ 20,000
2,000
$ 24,750
$ 22,000
The Accounting Standards Board (AcSB) of the CICA has
announced the adoption of IFRS in place of existing Canadian GAAP.
For fiscal years beginning on or after January 1, 2011, publicly account-
able enterprises are required to adopt IFRS for financial reporting
and disclosure purposes. Moreover, OSFI has confirmed that all
federally regulated financial institutions must adopt IFRS as required
in the AcSB plan. The adoption of IFRS may impact the capital and
capital ratios of banks due to significant recognition and measure-
ment differences between IFRS and current Canadian GAAP. We will
begin reporting our financial statements in accordance with IFRS on
November 1, 2011. We are currently reviewing the IFRS requirements
to assess their impact on our capital and disclosure requirements.
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 Sheets.
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 unconsolidated “substantial
investments,” as defined by the Bank Act (Canada), 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.
•
•
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.
Impact of the financial market turmoil on capital
Our capital position continues to be strong despite the global market
turmoil. We maintain a capital cushion to support our business plans
and accommodate unexpected increases in risk. While our cost of
capital has increased from recent historical lows along with the mar-
ket, our access to capital funding remains sound, as reflected in our
continuing ability to raise over $6 billion of regulatory capital in 2008
and early fiscal 2009, both as consideration for our acquisitions and
for general business purposes. We have reflected our higher costs of
capital in internal models and performance measures to ensure the
prudent use of capital. To reflect a renewed focus on managing capital
at an appropriate level through the business cycle, we have increased
our medium-term Tier 1 capital ratio objective from greater than 8.0% to
greater than 8.5%. Additionally, we continue to focus on cost-effective
initiatives to strengthen our capital position globally.
108
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Our forward-looking capital plan provides the flexibility to
accommodate the changing environment. We continue to monitor
developments in both the domestic and international markets to
assess their potential impact on our capital and adjust our capital
plans accordingly.
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
prospective 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 pro-
vide assured access to cash in a crisis.
•
Our liquidity and funding management practices and processes rein-
force these risk mitigation strategies by assigning prudential limits
or targets to metrics associated with these activities and regularly
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 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 and the Conduct Review and Risk Policy
Committee approve our liquidity and funding management
framework. The Audit Committee approves our liquidity risk
policy, 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 the ALCO share management
oversight responsibility for liquidity and funding policies and
receive regular reports detailing compliance with key limits and
guidelines.
Corporate Treasury has global responsibility for the develop-
ment of liquidity and funding management policies, strategies
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
•
•
Hedging foreign currency-denominated operations
We are exposed to foreign currency risk arising from our investments
in foreign operations. For unhedged equity investments, when the
Canadian dollar weakens against other currencies, the unrealized
translation gains on net foreign investments increase our capital levels
through AOCI and increase the translated value of the risk-adjusted
assets of the foreign currency-denominated operations. The reverse
is true when the Canadian dollar appreciates against other currencies.
As such, fluctuations in foreign currency exchange rates can result in
volatility in our capital and capital ratios. Consequently, we consider
these impacts in selecting an appropriate level of our investments in
foreign operations to be hedged.
•
•
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 regula-
tory requirements.
In managing liquidity risk, we favour a centralized management
approach so that funding and operational efficiencies can be maxi-
mized. We also believe that this approach results in more coordinated
and effective measurement and oversight. However, market, regula-
tory, tax and organizational considerations influence the extent to
which we can be fully centralized.
Risk measurement
The assessment of our liquidity position reflects management’s
conservative 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 mis-
matches in effective maturities between all 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 financ-
ing. 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 (overnight to nine weeks), 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 are not considered a source of available liquidity and include
a pool of eligible assets that are reserved exclusively to support our
participation in payment and settlement systems.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
109
Contingent liquidity risk
Contingent liquidity risk management assesses the impact of and our
intended responses to sudden stressful events. The liquidity con-
tingency plan identifies comprehensive action plans that would be
considered in response to various types of crisis of different duration
and severity and in light of prevailing internal and external market
conditions. Corporate Treasury maintains and administers the liquidity
contingency plan. The Liquidity Crisis Team, consisting of senior rep-
resentatives 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
tactical liquidity risk and is what we consider to be the most crucial
time span for a liquidity event. The risk of more prolonged crises is
addressed through the frequency with which our key tests are updated
as well as through our measures of structural liquidity that assume a
stressed environment. 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 could lead to more conservative
practices and limits being prescribed.
Our liquid assets are primarily a diversified pool of highly rated
and liquid 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 portfolios are subject to minimum asset levels and strict eligibil-
ity guidelines to ensure ready access to cash in emergencies, including
their eligibility for central bank advances.
Risk control
We monitor and manage our liquidity position on a consolidated basis
and consider legal, regulatory, tax, operational and any other appli-
cable 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 the Asset and Liability Committee, Group Risk Committee
and the Board of Directors. These broad policies establish risk toler-
ance parameters and authorize senior management committees
or Corporate Treasury to approve more detailed policies and limits
related to specific measures, businesses and products. These policies
and procedures govern management, measurement and reporting
requirements and define approved liquidity and funding limits.
Authorities and limits
Targets for our structural liquidity position, based on both a “cash cap-
ital” metric and a “survivability horizon” measurement, are approved
at least annually and monitored quarterly.
With respect to net short-term funding requirements, limits
are monitored daily or weekly, depending on the materiality of each
RBC reporting entity, to ensure compliance. The prescribed treat-
ment of cash flow assets and liabilities under varying conditions are
reviewed periodically by Corporate Treasury in concert with Group
Risk Management and the business segments to determine if they
remain valid or changes to assumptions and limits are required in light
of internal or external developments. Through this type of process,
we ensure that a close link is maintained between the management of
liquidity and funding risk and market liquidity risk. Global market vola-
tility since mid-2007 has prompted us to modify the liquidity treatment
of certain asset classes, including auction rate securities and asset-
backed securities, to reflect our expectations that market liquidity for
these products will be sporadic for some time. Some limits have been
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.
Various other liquidity metrics related to internal and external
risk conditions are also monitored and reported regularly to senior
management.
Funding
Funding strategy
Diversification of funding sources from retail, commercial, corpo-
rate and institutional investors is a crucial component of our overall
liquidity management strategy. We encourage wholesale funding
diversity and regularly review sources of short- and long-term funds
to ensure that they are well diversified by provider, product, market,
currency, structure, maturity and geographic origin. We maintain
an ongoing presence in different funding markets, which allows us
to constantly monitor market developments and trends in order to
identify opportunities and risks and to take appropriate and timely
actions. Diversification expands our wholesale funding flexibility
while minimizing funding concentration and dependency and gener-
ally reducing financing costs. To that effect, since September 2007,
we have completed our first two covered bond issuances, as well as
our first Samurai bond and U.S. dollar-denominated asset-backed
security underpinned by credit card receivables from Canadian clients.
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 depos-
its, 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
110
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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 December 4, 2008 (1)
Moody’s
S&P
Fitch
DBRS
Short-term
debt
Senior long-
term debt
P-1
A-1+
F1+
R-1(high)
Aaa
AA-
AA
AA
Table 79
Outlook
negative
stable
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.
The above table presents our major credit ratings as at December 4,
2008. On May 1, 2008, S&P revised our rating outlook from positive
to stable, citing the pressure on our earnings of our U.S. retail bank-
ing operations due to the downturn in the U.S. housing market. On
November 24, 2008, Moody’s revised our rating outlook from stable
to negative, citing the potential for further writedowns related to our
structured credit exposures and our off-balance sheet exposure to
multi-seller and third-party conduits. Our Fitch and DBRS ratings and
outlooks remain unchanged from October 31, 2007. Our collective rat-
ings 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.
Deposit profile
In 2008, personal and commercial 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 institutional clients and foreign commer-
cial and central banks. The composition of our global deposit liabilities
is summarized in Note 13 to our Consolidated Financial Statements.
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 1% to 57% of
our total deposits.
Term funding sources
Table 80
(C$ millions)
2008
2007
2006
Long-term funding outstanding $ 70,906 $ 51,540 $ 33,361
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
15,196
12,186
2,405
2,759
3,163
2,159
1,914
2,250
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, desired debt
maturity profile and desired financial structure influence our long-term
funding activities. We operate debt issuance programs in Canada, the
U.S., Europe, Australia and Japan. Diversification into new markets and
untapped investor segments is also constantly evaluated against rela-
tive issuance costs.
During 2008, we continued to expand our long-term funding base
by issuing, either directly or through our subsidiaries, $31.7 billion
of senior deposit notes in various currencies and markets. Total long-
term funding outstanding increased $19.4 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 $957 million. Our credit
card receivables, which are financed through notes issued by a
securitization special purposes entity, increased year over year by
$404 million. For further details, refer to the Off-balance sheet arrange-
ments section and Note 5 to our Consolidated Financial Statements.
Impact of global market turmoil on liquidity management
Despite recent global market events, including a material reduction in
liquidity in term funding markets, we believe our liquidity and funding
position remains adequate to execute our strategy. By leveraging our
new and existing domestic and global funding programs, we continued
to raise wholesale term funding in size throughout the year as oppor-
tunities presented themselves. 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. The $25 billion
MBS auctions announced by the Government of Canada in October and
subsequently increased to $75 billion in November have helped us
further strengthen our liquidity position. We are also in the process of
evaluating various newly announced public sector funding programs
in different jurisdictions to determine our eligibility and, as applicable,
our interest.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
111
As the macroeconomic environment and the health of the finan-
cial industry in general has deteriorated, we have taken incremental
steps to further conserve funding and manage the composition of our
balance sheet. This includes selectively reducing trading inventories
and enhancing the liquidity of our balance sheet by securitizing more
of our loans to create more eligible collateral to access existing and
new central bank lending programs. We will continue to undertake
similar initiatives as opportunities arise and circumstances warrant.
We expect that various government interventions and central bank
initiatives globally will improve the credit markets over the next few
months. Except for uncertainty about the timing of the recovery of
liquidity in term markets, there are no other known trends, demands,
commitments or events that are presently expected to materially
change this position.
Contractual obligations
In the normal course of business, we enter into contracts that give rise
to commitments of future minimum payments that affect our liquidity.
Depending on the nature of these commitments, the obligation may
be recorded on- or off-balance sheet. The table below provides a sum-
mary of our future contractual funding commitments.
Contractual obligations
As at October 31 (C$ millions) (1)
Within 1 year
1 to 3 years
3 to 5 years
Over 5 years
Total
2008
Table 81
2006
Total
2007
Total
Unsecured long-term funding
Covered bonds
Subordinated debentures
Obligations under leases (2)
$ 11,906
205
278
550
$ 26,676
–
–
884
$ 14,237
3,103
–
633
$ 5,796
1,940
7,980
1,129
$ 58,615
5,248
8,258
3,196
$ 49,131
–
6,343
3,161
$ 33,361
–
7,103
2,486
$ 12,939
$ 27,560
$ 17,973
$ 16,845
$ 75,317
$ 58,635
$ 42,950
(1)
(2)
The amounts presented above exclude accrued interest except for the category “Within 1 year.”
Substantially all of our lease commitments are operating.
Overview of other risks
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 ear-
lier in the Risk management principles section, the following principles
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
monitoring and reporting on reputation risk at an enterprise level
are the Ethics and Compliance Committee, PRC, STOC, Group Risk
Committee and Capital Markets 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.
112
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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 GRM, has developed a
comprehensive enterprise compliance management (ECM) framework
that is consistent with regulatory guidance from OSFI and other regula-
tors. The framework is designed to promote the proactive, risk-based
management of compliance and regulatory risk. It applies to all of our
businesses and operations, legal entities and employees globally and
confirms the shared accountability of all our employees for ensuring
we maintain robust and effective regulatory risk and compliance
controls. The framework covers the following eight elements of com-
pliance 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
regulatory and compliance risk (and associated operational and repu-
tation 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 GRC, CR&RPC
and the Audit Committee on significant regulatory issues and remedial
measures.
The CCO and Global Compliance work closely with business
partners to ensure the overall effectiveness of compliance and regula-
tory risk management controls across the enterprise through the ECM
framework, which includes policies for consistent and effective compli-
ance, independent oversight of compliance 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
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 all our Insurance
businesses, which include life and health, creditor, home and auto,
and travel insurance, and reinsurance businesses. 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. Components
of claims risk include mortality risk, morbidity risk, home and
auto risk and travel risk.
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 mea-
sure compliance-related matters is relatively new and there are few
proven methods for detecting leading indicators, we are working on
developing new qualitative and quantitative measures. 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, must do so
annually.
We provide online and face-to-face training for all our employees
on the Code of Conduct and in the area of anti-money laundering and
anti-terrorist financing compliance. Relevant employees also receive
additional training in other compliance and regulatory risk matters.
This is done through online tools and job aids (as part of employees’
regular job training), new employee orientation materials, and periodi-
cally through targeted online, face-to-face or webcast training.
Reporting
On a quarterly basis, the CCO reports compliance matters to senior
management, the Audit Committee and CR&RPC. The CCO also pro-
vides an annual report on overall compliance, and on specific topics,
such as related party transactions, conflicts of interest, outsourcing
arrangements and compliance with Canadian consumer protection
requirements. In addition, the Global Chief Anti-Money Laundering
Officer reports at least annually on anti-money laundering and anti-
terrorist financing compliance. Similarly, senior compliance officers
supporting our operating subsidiaries and lines of business provide
relevant annual and quarterly reports to their respective senior man-
agement teams and boards of directors.
•
•
Policyholder behaviour risk: The risk that the behaviour of
policyholders relating to premium payments, policy withdrawals
or loans, policy lapses, surrenders and other voluntary termina-
tions differs from the behaviour assumed in pricing calculations.
Expense risk: The risk that the expense of acquiring or
administering policies, or of processing claims, exceeds the costs
assumed in pricing calculations.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
113
Responsibilities
Insurance risk approval authorities are established by the Board of
Directors upon recommendation of its committees and delegated to
senior management.
The boards of directors of the insurance subsidiaries are respon-
sible for the stewardship of the insurance companies. The 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.
GRM – Insurance is responsible for providing risk manage-
ment direction and oversight to the insurance businesses and for
providing comprehensive reporting of insurance risks that we face.
The Appointed Actuaries of our Canadian insurance companies are
appointed by the boards of directors and have statutory require-
ments to provide opinions on adequacy of liabilities, sufficiency of
capital, the insurance company’s future financial condition and fair-
ness of treatment for policyholders. External actuarial reviewers, in
accordance with OSFI guidelines and Canadian Institute of Actuaries
standards, provide oversight on the work of the Appointed Actuaries.
Our international insurance subsidiaries receive similar actuarial over-
sight. Global Functions and 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 – Insurance
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
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 poli-
cies, which establish the expectations and parameters within which
the insurance businesses 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 – Insurance provides independent oversight over our insurance
business activities, including product development, product pricing,
underwriting and claims management. GRM – Insurance also approves
authority for activities that 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 pric-
ing, effective guidelines and practices for underwriting, and claims
management. Reinsurance, which involves transactions that transfer
insurance risk to independent insurance companies, is also 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 OSFI and other relevant professional and regulatory
bodies. Actuarial liabilities for life insurance contracts 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 – Insurance regularly provides independent evaluation and report-
ing 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.
114
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
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 from environmental 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, biodiversity,
water and the rights of indigenous peoples, among others.
Responsibilities
Environmental risk management activities are overseen by the
Corporate Environmental Affairs (CEA) Group with support from our
business segments and Corporate Support groups. The CEA Group 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 Group also provides advisory
services and support to business and functional units on the manage-
ment of specific environmental risks in business transactions.
Risk measurement
The magnitude of environmental risk associated with business activi-
ties is a function of several factors including the industry sector, the
type and size of the transaction, the ability of the borrower to man-
age environmental matters, and whether real property is taken as
collateral. Some environmental risks 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
environmental regulatory requirements or satisfy other obligations.
We are also progressively able to quantify the potential cost of new
environmental regulations, such as climate change regulation, to a
particular sector or client. Other environmental risks are assessed on a
qualitative basis; for example, the exposure of a particular industry to
the physical effects of climate change or water scarcity.
In our operations, we quantify our cost of compliance with
environmental regulations or applicable standards.
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 polices, standards, proce-
dures and guidelines
• Monitor relevant laws and regulations, as well as other require-
ments to which RBC adheres
• Maintain environmental programs and initiatives
•
Establish roles and responsibilities for environmental manage-
ment in the organization
•
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
We published our first environmental policy in 1991. The RBC
Environmental Blueprint™, published in 2007, includes a revised
corporate environmental policy, as well as details on environmental
issues that are important to our stakeholders and us, and outlines
our commitment to reducing our environmental footprint, responsible
lending and investment, and the development of environmental prod-
ucts 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 lend-
ing, we have sector-specific and business-segment-specific policies
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 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 Group supports lenders, risk managers and clients in the
management 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, 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 and PAS) and on rbc.com. The CRR and PAS also provides infor-
mation about our environmental policies, lending, emerging issues,
stakeholder engagement, and environmental performance and
initiatives.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
115
Additional factors 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.
Impact of the market environment
The impact from the continuing volatility in the financial markets and
lack of liquidity in credit markets has led to unprecedented levels of
market volatility. This market environment has led to the failure or
significant weakening of a number of substantial financial institutions
globally, causing widespread liquidation of assets and further con-
straining of credits markets. These asset sales, along with asset sales
by other leveraged investors, including some hedge funds, have rap-
idly driven down prices and valuations across a wide variety of traded
asset classes. Asset price deterioration has a negative effect on the
valuation of many of the asset categories represented on our balance
sheet, and reduces our ability to sell assets at prices we consider to be
fair value.
Our ability to effectively manage our liquidity, our positions
within global financial markets, our capital ratios, and our ability to
implement effective risk management processes could have a material
impact on our business, financial condition, earnings and share price.
Writedowns on the value of our held-for-trading securities, or our
available-for-sale securities following a determination that they are
other-than-temporarily impaired, could further impact our earnings.
As well, a protracted market decline could further reduce liquidity in
the markets, making it more difficult to value financial instruments,
as the most recent transaction price may not be indicative of fair
value and we may have to rely on other valuation techniques based
on market parameters if the market is deemed to be inactive; access
the capital markets and sell assets; increased competition for funding
could increase our funding costs; changes in market rates and prices
may adversely affect the value of financial products; and our deriva-
tive and other transactions may expose us to unexpected risks and
potential losses, any or all of which could impact our financial condi-
tion and earnings.
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, consumer saving and spending habits as well as consumer
borrowing and repayment patterns, business investment, government
spending, the level of activity and volatility of the capital markets,
inflation and terrorism each impact the business and economic envi-
ronments in which we operate and, ultimately, the level of business
activity we conduct and earnings we generate in a specific geographic
region. For example, as a result of the market environment many coun-
tries are currently experiencing an economic downturn or recession.
Either occurrence would result in high unemployment and lower fam-
ily incomes, corporate earnings, business investment and consumer
spending, any or all of which would adversely affect the demand for
our loan and other products and services. In addition, our provision
for credit losses would likely increase due to higher expected credit
losses, the amount of which could be significant, resulting in lower
earnings. Similarly, a further downturn in a particular equity or debt
market could cause additional reductions in new issue and investor
trading activity or assets under management and assets under
administration, resulting in lower fee, commission and other revenue.
Also, additional defaults by one or more large financial institutions in
Canada, the United States or internationally could further adversely
affect the financial markets generally and us specifically.
Changes in accounting standards and accounting policies
and estimates
From time to time, the AcSB changes the financial accounting and
reporting standards that govern the preparation of our financial state-
ments. These changes can be difficult to anticipate and can materially
impact how we record and report our financial condition and results
of operations. In some instances, we may be required to retroactively
apply a new or revised standard that results in our restating prior
period financial statements.
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, including estimates of
provisions, allowances and valuations of financial instruments, or rely
on assumptions about matters that are inherently uncertain. Such esti-
mates and assumptions may require revisions, and changes to them
may materially 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 sec-
tion, we have identified eight accounting policies as being “critical” to
the presentation of our financial condition and results of operations
as: (i) they require management to make particularly subjective and/
or complex judgments about matters that are inherently uncertain;
and (ii) it is likely that materially different amounts could be reported
using different assumptions and estimates.
In 2006, the AcSB announced its decision that all reporting
issuers should adopt IFRS. We are required to adopt IFRS commencing
November 1, 2011. The adoption of IFRS could impact (i) our current
accounting policies, and (ii) our capital and capital ratios due to sig-
nificant recognition and measurement differences between IFRS and
current Canadian GAAP which could in turn materially impact our finan-
cial condition and results of operations
Currency rates
Our revenue, expenses and income denominated in currencies other
than the Canadian dollar are subject to fluctuations in the movement
of the average Canadian dollar relative to the average of those curren-
cies. Such fluctuations may affect our overall business and financial
results. Our most significant 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. A strengthening or weakening of the average Canadian dollar
compared to the average U.S. dollar could have a significant effect on
our results of operations. For example, in the fourth quarter of 2008,
the average Canadian dollar exchange rate depreciated consider-
ably against the U.S. dollar, resulting in an increase in the translated
value of our U.S. dollar net loss. A strengthening or weakening of the
Canadian dollar spot rate compared to the U.S. dollar spot rate could
also have a significant effect on our financial condition. For example,
as at October 31, 2008, the Canadian dollar spot rate depreciated
sharply against the U.S. dollar, resulting in an increase in the trans-
lated value of our U.S. dollar-denominated assets and liabilities, and
a decrease in our Tier 1 capital ratio as a result of higher risk-adjusted
assets and a higher goodwill capital deduction. We are also exposed
to the British pound and the Euro due to our activities conducted
internationally in these currencies. Appreciation or depreciation of the
Canadian dollar relative to the British pound or Euro could reduce or
increase, as applicable, the translated value of our British pound- or
Euro-denominated revenue, expenses and earnings, and could also
impact our financial condition.
116
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Government fiscal monetary and other policies
Our businesses and earnings are affected by the fiscal, monetary or
other policies that are adopted by the Bank of Canada and various
other Canadian regulatory authorities, the Board of Governors of the
Federal Reserve System in the United States and other U.S. govern-
ment authorities, as well as those adopted by international regulatory
authorities and agencies, in jurisdictions in which we operate. For
example, the Bank of Canada reduced the overnight rate from 4.25%
to 2.25% taking into consideration the global economic slowdown,
weaker market conditions and declining commodity prices which
reduced spreads on many of our products and in turn impacted 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.
Level of competition
The competition for clients among financial services companies in
the consumer and business markets in which we operate is intense.
Client loyalty and retention can be influenced by a number of factors,
including relative service levels, the prices and attributes of our prod-
ucts or services, our reputation and actions taken by our competitors.
Benefits received by our U.S. and international competitors under laws
and regulations enacted by their governments in response to the credit
environment may also impact our ability to compete. For example, the
benefits received by U.S. financial institutions under the Emergency
Economic Stabilization Act, the Troubled Asset Relief Program (which
has involved injections of capital into U.S. financial institutions) and
the Temporary Liquidity Guarantee Program (which includes the tem-
porary raising of the U.S. Federal Deposit Insurance Corporation’s
deposit insurance from US$100,000 to US$250,000) could result in
our potential or existing customers deciding to deposit their money
in a U.S. deposit-taking financial institution instead of with us. Other
financial services companies, such as insurance companies and non-
financial companies, are increasingly offering services traditionally
provided by banks. Such competition could also reduce net interest
income, 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 the changes
in how they are interpreted, implemented or enforced, particularly due
to the market environment, 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 or injunctions or loss of licences or registrations 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. We operate in an increasingly regulated and litigious
environment, potentially exposing us to liability and other costs, the
amounts of which may be difficult to estimate. 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.
Execution of our strategy
Our ability to execute on our objectives and strategic goals will influ-
ence our financial performance. If we are unable to successfully
implement selected strategies or related plans and decisions, if we
make inappropriate strategic choices or if we make a change to 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
ventures. Our performance is contingent on successful integration of
acquisitions and joint ventures, and 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 to our credit ratings
There can be no assurance that our credit ratings and rating outlooks
from rating agencies such as Moody’s, S&P, 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 markets. A lowering of our credit ratings
may also affect our ability, and the cost, to enter into normal course
derivative or hedging transactions and may require us to post addi-
tional collateral under certain contracts.
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, receptive markets in Canada, the
United States and internationally, if we are not able to develop or inte-
grate these distribution networks effectively, our results of operations
and financial condition may be negatively affected.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
117
Other factors
Other factors that may affect actual results include the possibility that
the financial system as a whole may not withstand the effects of a
crisis resulting from extraordinary economic, political, social or financial
circumstances, changes in government trade policy, the timely and
successful development of new products and services, our ability to
cross-sell more products to customers, technological changes and our
reliance on third parties to provide components of our business infra-
structure, the failure of third parties to comply with their obligations
to us and our affiliates as such obligations relate to the handling of
personal information, fraud by internal or external parties, the
possible impact on our business from disease or illness that affects
local, national or global economies, disruptions to public infrastruc-
ture, including transportation, communication, power and water,
international conflicts and other political developments including
those relating to the war on terrorism, and our success in anticipating
and managing the associated risks.
We caution that the foregoing discussion of risk factors 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.
118
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Additional financial information
Net interest income on average assets and liabilities from continuing operations (1)
(C$ millions, except percentage amounts)
2008
2007
2006
2008
Average balances (2)
Interest (3)
2007
2006
2008
Table 82
Average rate
2007
2006
Assets
Deposits with other banks
Canada
United States
Other International
Securities
Trading
Available-for-sale (4)
Investments (4)
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans (5)
Canada
Retail
Wholesale
United States
Other International
$
1,837 $
4,168
7,802
1,570 $
2,904
5,436
1,218 $
1,856
4,913
13,807
9,910
7,987
137
316
498
45 $
43 $
149,098
39,626
–
162,828
31,516
–
134,166
–
38,792
188,724
194,344
172,958
5,519
1,455
,974
–
6
176
319
538
6,621
1,044
–
7,665
41
155
284
480
5,056
–
1,133
6,189
2.45%
3.29
4.05
3.61
3.70
3.67
–
3.70
2.74%
6.06
5.87
5.43
4.07
3.31
–
3.94
3.37%
8.35
5.78
6.01
3.77
–
2.92
3.58
68,356
71,759
55,615
2,889
3,620
2,827
4.23
5.04
5.08
170,300
38,558
152,588
31,541
135,852
31,539
208,858
35,096
15,623
184,129
25,718
13,388
167,391
21,871
8,286
2
8,889
994
9,883
2,161
,939
9,376
1,047
10,423
2,240
2,061
8,157
1,264
9,421
2,110
1,177
5.22
2.58
4.73
6.16
18.81
Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets
530,464
3,702
11,274
104,860
499,248
2,137
10,270
69,345
434,108
2,806
8,748
56,438
–
–
25,344
–
26,547
–
–
–
22,204
–
–
–
259,577
223,235
197,548
14,983
14,724
12,708
5.77
4.78
–
–
–
Total assets
$ 650,300 $ 581,000 $ 502,100 $
25,344 $
26,547 $
22,204
3.90%
4.57%
4.42%
6.14
3.32
5.66
8.71
15.39
6.60
5.32
–
–
–
6.00
4.01
5.63
9.65
14.20
6.43
5.11
–
–
–
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
$ 174,441 $ 166,983 $ 167,015 $
53,817
121,924
56,329
163,487
47,913
91,334
4,423 $
1,758
5,977
5,669 $
2,563
5,538
5,024
2,018
3,666
2.54%
3.12
3.66
4
3.39%
.76
4.54
394,257
342,724
306,262
12,158
13,770
10,708
45,367
46,654
38,630
1,525
1,997
2,071
36,558
7,183
3,962
42,503
6,704
3,569
32,786
8,013
2,759
487,327
16,784
11,274
108,116
442,154
25,752
10,270
79,087
388,450
17,037
8,882
66,755
–
–
1,613
354
334
15,984
–
2,364
338
376
18,845
–
–
–
1,882
419
328
15,408
–
–
–
–
3.08
3.36
4.41
4.93
8.43
3.28
–
–
4.02
4.28
5.56
5.04
10.54
4.26
–
–
–
3.01%
4.21
4.01
3.50
5.36
5.74
5.23
11.89
3.97
–
–
–
$ 623,501 $ 557,263 $ 481,124 $
15,984 $
18,845 $
15,408
2.56%
3.38%
3.20%
1,795
25,004
1,553
22,184
1,022
19,954
–
–
–
–
–
–
Total liabilities and shareholders’ equity
$ 650,300 $ 581,000 $ 502,100 $
15,984 $
18,845 $
15,408
Net interest income and margin
$ 650,300 $ 581,000 $ 502,100 $
9,360 $
7,702 $
6,796
Net interest income and margin
(average earning assets)
Canada
United States
Other International
$ 308,574 $ 280,385 $ 257,319 $
106,044
112,819
108,733
113,157
90,684
86,105
6,929 $
1,132
1,299
6,402 $
412
888
6,045
108
643
Total
$ 530,464 $ 499,248 $ 434,108 $
9,360 $
7,702 $
6,796
–
–
2.46%
1.44%
2.25%
1.04
1.15
1.76%
–
–
3.24%
1.33%
2.28%
.39
.79
1.54%
–
–
3.07%
1.35%
2.35%
.12
.75
1.57%
(1)
(2)
(3)
(4)
(5)
(6)
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 $339 million (2007 – $331 million; 2006 – $348 million).
AFS securities are carried at fair value. Prior to November 1, 2006, AFS 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 $48 billion (2007 – $46 billion; 2006 – $46 billion), interest expense of $.5 billion (2007 – $.4 billion; 2006 – $.4 billion) and
average rates of 1.0% (2007 – .9%; 2006 – .8%). Deposits also include term deposits with average balances of $227 billion (2007 – $240 billion; 2006 – $206 billion), interest expense
of $8.0 billion (2007 – $10.7 billion; 2006 – $8.3 billion) and average rates of 3.50% (2007 – 4.43%; 2006 – 4.02%).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
119
Loans and acceptances by geography (1)
Table 83
As at October 31 (C$ millions)
Canada
Residential mortgages (2)
Personal
Credit cards
Small business (3)
Retail
Business (4)
Sovereign (5)
Bank (6)
Wholesale
United States
Retail
Wholesale
Other International
Retail
Wholesale
Total loans and acceptances
Total allowance for loan losses
2008
2007
2006
2005
2004
$ 117,690
48,780
8,538
2,804
$ 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
177,812
160,753
141,502
130,769
118,809
53,775
1,544
978
51,237
585
521
44,353
553
160
42,383
521
74
35,214
535
106
56,297
52,343
45,066
42,978
35,855
234,109
213,096
186,568
173,747
154,664
12,931
30,943
6,804
18,548
7,652
13,847
7,741
12,317
7,010
11,698
43,874
25,352
21,499
20,058
18,708
4,712
20,345
1,905
10,862
1,896
9,084
25,057
12,767
10,980
1,729
3,454
5,183
1,411
3,961
5,372
$ 303,040
$ 251,215
$ 219,047
$ 198,988
$ 178,744
$
(2,215) $
(1,493) $
(1,409) $
(1,498) $
(1,644)
Total loans and acceptances, net of allowance for loan losses
$ 300,825
$ 249,722
$ 217,638
$ 197,490
$ 177,100
(1)
(2)
(3)
(4)
(5)
(6)
Geographic information is based on residence of borrower.
Includes certain synthetic mortgage securitizations in 2005, 2006, 2007 and 2008.
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.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Loans and acceptances by portfolio and sector
Table 84
As at October 31 (C$ millions)
Residential mortgages (1)
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 (4)
Sovereign (5)
Bank (6)
Wholesale
Total loans and acceptances (7)
Total allowance for loan losses
2008
2007
2006
2005
2004
$ 122,991
60,727
8,933
2,804
$ 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
$ 195,455
$ 169,462
$ 151,050
$ 140,239
$ 127,230
5,305
3,999
7,389
8,146
8,788
1,152
5,033
3,947
22,978
3,206
4,239
25,623
2,496
5,284
5,367
3,285
5,206
7,632
6,959
1,349
4,119
2,301
19,187
2,423
2,656
17,583
932
2,754
5,435
2,958
4,553
6,010
4,459
1,126
3,659
1,072
16,145
2,326
2,400
15,586
887
1,381
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
$ 107,585
$ 81,753
$ 67,997
$ 58,749 $
51,514
$ 303,040
$ 251,215
$ 219,047
$ 198,988
$ 178,744
$
(2,215) $
(1,493) $
(1,409) $
(1,498) $
(1,644)
Total loans and acceptances, net of allowance for loan losses
$ 300,825
$ 249,722
$ 217,638
$ 197,490
$ 177,100
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes certain synthetic mortgage securitizations in 2005, 2006, 2007 and 2008.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Other in 2008 related to other services, $10.9 billion; financing products, $4.9 billion, holding and investments, $4.6 billion, health $2.5 billion and other $2.7 billion.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Total loans and acceptances does not reflect the impact of credit risk mitigation. Basel II asset classes of qualifying revolving retail and other retail are largely included within Personal
and Credit cards, while home equity lines of credit are included in Personal.
120
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Impaired loans by portfolio and geography (1)
Table 85
As at October 31 (C$ millions, except percentage amounts)
2008
2007
2006
2005
2004
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 (4)
Sovereign (5)
Bank (6)
Wholesale
Total impaired loans (7)
Canada
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 (5)
Bank (6)
Wholesale
United States
Residential mortgages
Personal
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 (5)
Bank (6)
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
340
348
40
728
95
20
57
80
25
25
194
7
1,137
45
10
500
–
–
2,195
2,923
238
150
40
428
95
17
43
5
3
22
174
6
50
10
10
94
–
–
529
52
81
133
–
3
14
73
8
3
20
1
1,087
35
–
282
–
–
1,526
1,659
167
140
307
2,923
(767)
$
$
$
$
$
$
$
$
–
–
$
$
$
$
–
–
$
$
$
$
$
180
189
19
388
65
5
83
3
14
29
29
4
353
10
19
116
–
–
730
1,118
149
152
19
320
64
4
81
1
3
28
28
4
53
10
19
82
–
–
377
6
–
27
1
1
2
–
–
1
1
–
300
–
–
16
–
–
322
349
41
31
72
1,118
(351)
$
$
$
$
$
$
$
$
–
$
$
$
$
–
–
$
$
$
$
$
165
205
13
383
45
8
85
6
15
12
17
5
74
49
19
108
–
–
443
826
127
183
13
323
45
5
73
4
2
11
14
5
26
9
6
66
266
8
–
15
–
3
12
–
–
1
3
–
48
40
13
23
143
158
45
34
79
826
(263)
$
$
$
$
$
$
$
$
–
–
$
$
$
$ –
–
–
$
$
$
$
$
146
183
11
340
48
4
73
47
15
16
12
4
58
52
14
75
–
–
418
758
106
161
11
278
44
2
69
1
2
16
11
4
33
6
7
30
–
225
8
–
16
4
2
4
43
–
–
1
–
25
46
7
25
157
173
46
36
82
758
(282)
2,156
$
767
$
563
$
476
$
.28%
.57%
1.43%
.37%
2.04%
.96%
.
.16%
.39%
.72%
.23%
.89%
45%
.17%
.46%
.56%
.25%
.65%
.38%
.16%
.45%
.56%
.24%
.71%
.38%
156
204
8
368
89
8
59
162
14
163
60
10
76
89
19
116
–
–
865
1,233
96
178
8
282
75
4
48
1
–
163
56
8
37
16
16
77
501
33
11
44
4
11
141
–
–
4
–
39
73
3
31
306
350
42
58
100
1,233
(487)
746
.19%
.55%
.41%
.29%
1.73%
.70%
Specific allowance for loan losses as a % of gross impaired loans
26.24%
31.40%
31.84%
37.20%
38.68%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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.
Other in 2008 is related to other, $135 million; financing products, $203 million; other services, $124 million; holding and investments, $22 million; and health, $16 million.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Past due loans greater than 90 days not included in impaired loans were $479 million in 2008 (2007 – $280 million; 2006 – $305 million; 2005 – $304 million; 2004 – $219 million).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
121
Provision for (recovery of) credit losses by portfolio and geography (1)
Table 86
(C$ millions, except percentage amounts)
2008
2007
2006
2005
2004
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 (4)
Sovereign (5)
Bank (6)
Wholesale
Total specific provision
Canada
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 (5)
Bank (6)
Wholesale
United States
Residential mortgages
Personal
Credit cards
Small business (2)
Retail
Business (3)
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 (5)
Bank (6)
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ 9
$
16
445
270
46
777
5
10
19
21
–
2
95
2
345
21
3
130
–
–
653
1,430
8
352
266
46
672
5
10
13
(3)
–
2
78
1
12
4
3
27
–
–
152
824
6
74
4
–
84
–
6
24
–
–
17
1
333
17
–
96
–
–
494
578
21
7
28
1,430
165
1,595
.53%
$
$
$
$
$
$
$
$
–
–
$
$
$
$
$
–
–
$
$
$
$
$
$
$
5
364
223
34
626
2
2
27
(7)
–
10
10
1
78
(2)
7
28
–
–
156
782
5
334
220
34
593
2
2
26
(4)
–
10
10
1
15
4
8
28
–
–
102
695
1
22
3
–
26
–
1
(3)
–
–
–
–
63
(6)
–
3
–
–
58
84
7
(4)
3
782
791
.33%
$
$
$
$
$
$
$
$
–
–
$
$
$
$
$
–
–
$
$
$
$
$
$
$
6
306
163
29
504
(1)
4
7
(53)
4
2
4
–
1
(5)
1
14
–
–
(22)
482
6
296
161
29
492
(1)
4
6
(10)
–
1
4
–
2
1
2
6
15
507
–
10
2
–
12
–
1
(43)
4
1
–
–
–
(6)
(1)
6
(38)
(26)
–
1
1
482
(53)
429
.23%
$
$
$
$
$
$
$
$
–
–
$
$
$
$
$ 1
–
–
$
$
$
$
$
$
$
2
259
194
27
482
(12)
–
24
(20)
10
(52)
(7)
(1)
(11)
(6)
8
(26)
–
–
(93)
389
1
247
192
27
467
(12)
–
25
1
10
(52)
(5)
–
(1)
(3)
10
(5)
(32)
435
1
12
2
–
15
–
(1)
(20)
–
–
(2)
–
(10)
(3)
(2)
(22)
(60)
(45)
–
(1)
(1)
389
66
455
.21%
7
222
167
27
423
7
2
(11)
50
–
7
13
(3)
(1)
2
(32)
64
–
–
98
521
6
212
165
27
410
6
1
(12)
–
–
7
12
1
(4)
7
(30)
15
3
413
1
9
3
–
13
1
63
–
–
1
–
3
(9)
(1)
47
106
119
–
(11)
(11)
521
(175)
346
.30%
(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.
Other in 2008 is related to financing products, $61 million; other services, $39 million; health, $9 million; holdings and investments, $8 million; and other, $13 million.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
122
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Allowance for credit losses by portfolio and geography (1)
Table 87
(C$ 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 (5)
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 (5)
Wholesale
Total recoveries by portfolio
Net write-offs
Adjustments (6)
Total allowance for credit losses at end of year
Specific allowance for loan losses
Canada
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 (5)
Wholesale
United States
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 (5)
Wholesale
Other International
Retail
Wholesale
Total specific allowance for loan losses
General allowance
Residential mortgages
Personal
Credit cards
Small business (2)
Retail
Wholesale
General allowance for off-balance sheet items and other items
Total 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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2008
1,572
1,595
(9)
(504)
(319)
(44)
(876)
(435)
–
–
(435)
–
(1,311)
1
76
49
7
133
29
–
–
29
162
(1,149)
281
2,299
23
79
17
119
13
5
12
2
9
4
49
1
9
6
5
23
–
–
138
257
5
16
–
21
–
–
6
27
–
–
8
1
241
13
–
79
–
–
375
396
68
46
114
767
20
461
270
47
798
650
84
1,532
2,299
.76%
.42%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2007
1,486
791
(5)
(446)
(268)
(42)
(761)
(107)
–
–
(107)
–
(868)
1
75
46
7
129
41
–
–
41
170
(698)
(7)
1,572
13
79
9
101
9
2
45
–
9
10
9
1
18
5
7
38
–
–
153
254
1
5
–
6
–
–
–
–
–
–
–
–
56
–
–
6
–
–
62
68
13
16
29
351
16
349
193
37
595
370
256
1,221
1,572
.63%
.30%
$
$
$
–
$
$
$
$
$
$
$
$
$
$
$
9
$
$
–
–
$
$
$
2
–
$
$
–
–
$
$
$
$
$
$
1
$
$
$
$
$
2006
1,568
429
(5)
(379)
(204)
(36)
(624)
(89)
–
(89)
–
(713)
–
64
41
7
112
93
–
–
93
205
(508)
(3)
1,486
11
88
108
8
3
32
2
10
2
8
1
10
5
7
24
112
220
1
3
1
2
3
–
1
–
–
–
1
–
–
4
12
15
12
16
28
263
19
365
95
37
616
349
258
1,223
1,486
.68%
.25%
$
$
$
–
$
$
$
$
$
$
$
$
$
$
$
8
$
$
–
–
$
$
$
2
–
$
$
–
–
$
$
$
$
$
$
$
$
$
$
$
2005
1,714
455
(5)
(353)
(237)
(34)
(629)
(141)
–
(141)
–
(770)
–
69
43
9
121
53
–
–
53
174
(596)
(5)
1,568
9
101
118
14
1
31
5
10
6
7
–
15
3
4
16
112
230
1
3
1
2
3
1
–
–
–
–
1
5
1
4
18
21
12
19
31
282
19
343
195
37
594
425
267
1,286
1,568
.79%
.32%
$
$
$
–
$
$
$
$
$
$
$
$
$
$
$
6
$
$
–
–
$
$
$
3
–
$
$
–
–
$
$
$
$
$
$
$
$
$
$
$
2004
2,164
346
(7)
(332)
(207)
(44)
(590)
(411)
–
(411)
–
(1,001)
–
68
39
11
118
98
–
–
98
216
(785)
(11)
1,714
11
108
125
27
2
14
–
–
63
24
3
14
6
13
36
202
327
2
5
–
2
4
48
–
–
3
–
14
8
2
37
118
123
14
23
37
487
14
334
191
37
576
374
277
1,227
1,714
.97%
.46%
(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.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Other adjustments include primarily foreign exchange translations on non-Canadian dollar-denominated allowance for credit losses and acquisition adjustments for RBTT $25 million in
2008; ANB $50 million in 2008; Flag Bank $21 million in 2007; and Provident Financial Group Inc. $6 million in 2004.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2008
123
Credit quality information by Canadian province (1)
Table 88
(C$ millions)
Loans and acceptances
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
2008
2007
2006
2005
2004
$ 11,446
32,908
105,410
43,884
40,461
$ 11,556
35,168
90,242
40,956
35,174
$ 10,256
32,723
81,968
32,598
29,023
$ 10,255
26,646
78,283
31,190
27,373
$
9,598
23,670
70,896
26,701
23,799
Total loans and acceptances in Canada
$ 234,109
$ 213,096
$ 186,568
$ 173,747
$ 154,664
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)
$
$
$
$
66
122
504
158
107
$
53
118
322
112
92
$
53
68
286
107
75
$
47
44
269
78
65
957
$
697
$
589
$
503
$
$
43
63
610
60
48
$
40
66
490
51
48
$
33
47
344
38
45
$
30
7
368
44
(14)
Total specific provision for credit losses in Canada
$
824
$
695
$
507
$
435
$
(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.
60
131
254
93
245
783
34
(1)
318
31
31
413
Small business loans and acceptances in Canada by sector (1)
As at October 31 (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 (2)
Total small business loans
$
$
2008
261
636
2,234
384
84
346
1,672
100
3,052
316
940
4,687
$
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
$
Table 89
2004
519
463
1,764
150
51
276
999
62
1,821
232
502
3,298
2005
715
490
1,728
182
78
311
1,057
57
1,982
243
549
3,365
$ 14,712
$ 14,246
$ 12,817
$ 10,757
$ 10,137
(1)
(2)
Includes small business exposure managed on a pooled and individual client basis.
Other sector in 2008 related primarily to other services – $2,977 million, health – $1,108 million, holding and investment – $473 million and financing products – $79 million.
124
Royal Bank of Canada: Annual Report 2008
Management’s Discussion and Analysis
Consolidated
Financial
Statements
Reports
Notes to the Consolidated Financial Statements
132 Note 1 Significant accounting policies
164 Note 19 Non-controlling interest in
and estimates
subsidiaries
137
Note 2 Fair value of financial instruments
164 Note 20 Pensions and other
126
Management’s responsibility for
financial reporting
126
Report of Independent Registered
Chartered Accountants
126
Comments by Independent Registered
Chartered Accountants on Canada-United
States of America Reporting Difference
127 Management’s Report on Internal Control
over Financial Reporting
127 Report of Independent Registered
Chartered Accountants
Consolidated Financial Statements
128 Consolidated Balance Sheets
129 Consolidated Statements of Income
130 Consolidated Statements of
Comprehensive Income
141 Note 3 Securities
144 Note 4 Loans
146 Note 5 Securitizations
148 Note 6 Variable interest entities
149 Note 7 Derivative instruments
and hedging activities
153 Note 8 Premises and equipment
154 Note 9 RBC Dexia Investor Services
joint venture
154 Note 10 Goodwill and other intangibles
156 Note 11 Significant acquisitions
157 Note 12 Other assets
158 Note 13 Deposits
130 Consolidated Statements of Changes in
159 Note 14 Insurance
Shareholders’ Equity
159 Note 15 Other liabilities
131 Consolidated Statements of Cash Flows
160 Note 16 Subordinated debentures
161 Note 17 Trust capital securities
162
Note 18 Preferred share liabilities and
share capital
post-employment benefits
167 Note 21 Stock-based compensation
169 Note 22 Revenue from trading and
selected non-trading financial instruments
170 Note 23 Income taxes
171 Note 24 Earnings per share
172 Note 25 Guarantees, commitments
and contingencies
176
Note 26 Contractual repricing and
maturity schedule
176 Note 27 Related party transactions
177 Note 28 Results by business and
geographic segment
179 Note 29 Nature and extent of risks
arising from financial instruments
186 Note 30 Capital management
187 Note 31 Reconciliation of the application
of Canadian and United States generally
accepted accounting principles
199 Note 32 Parent company information
200 Note 33 Subsequent event
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
125
Management’s responsibility for financial reporting
The accompanying Consolidated Financial Statements of Royal Bank
of Canada (RBC) were prepared by management, which is responsible
for the integrity and fairness of the information presented, including
the many amounts that must of necessity be based on estimates and
judgments. These Consolidated Financial Statements were prepared
in accordance with Canadian generally accepted accounting principles
(GAAP) pursuant to Subsection 308 of the Bank Act (Canada), which
states that, except as otherwise specified by the Superintendent
of Financial Institutions Canada, the financial statements are to be
prepared in accordance with Canadian GAAP. Financial information
appearing throughout our Management’s Discussion and Analysis is
consistent with these Consolidated Financial Statements.
In discharging our responsibility for the integrity and fairness of
the Consolidated Financial Statements and for the accounting systems
from which they are derived, we maintain the necessary system of
internal controls designed to ensure that transactions are authorized,
assets are safeguarded and proper records are maintained. These
controls include quality standards in hiring and training of employees,
policies and procedures manuals, a corporate code of conduct and
accountability for performance within appropriate and well-defined
areas of responsibility.
The system of internal controls is further supported by a compli-
ance function, which is designed to ensure that we and our employees
comply with securities legislation and conflict of interest rules, and by
an internal audit staff, which conducts periodic audits of all aspects of
our operations.
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 condi-
tion. 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
The Board of Directors oversees management’s responsibilities
Toronto, December 4, 2008
for financial reporting through an Audit Committee, which is
composed entirely of independent directors. This Committee reviews
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, 2008 and 2007 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, 2008. 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.
We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States). 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 esti-
mates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reason-
able basis for our opinion.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Bank as at
October 31, 2008 and 2007 and the results of its operations and its
cash flows for each of the three years in the period ended October 31,
2008 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, 2008
based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated December 4, 2008
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
December 4, 2008
Comments by Independent Registered Chartered Accountants on Canada-United States of America Reporting Difference
The standards of the Public Company Accounting Oversight Board
(United States) require the addition of an explanatory paragraph
(following the opinion paragraph) when there is a change in accounting
principles that has a material effect on the comparability of the Bank’s
financial statements, such as the changes described in Notes 1, 2, 3,
7, and 31 to the consolidated financial statements. Our report to the
shareholders dated December 4, 2008, is expressed in accordance
with Canadian reporting standards which do not require a reference to
such a change in accounting principles in the auditors’ report when
126
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
the change is properly accounted for and adequately disclosed in the
financial statements.
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
December 4, 2008
Management’s Report on Internal Control over Financial Reporting
Management of Royal Bank of Canada (RBC) is responsible for
establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process
designed by, or under the supervision of, the President and Chief
Executive Officer and the Chief Financial Officer and effected by the
Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. It includes
those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect 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
detection 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, 2008 based on the
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 assess-
ment 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
Management assessed the effectiveness of RBC’s internal control
over financial reporting as of October 31, 2008, based on the criteria
set forth in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on that assessment, management concluded that, as of
October 31, 2008, RBC’s internal control over financial reporting is
effective based on the criteria established in the Internal Control –
Integrated Framework. Also, management determined that there were
no material weaknesses in RBC’s internal control over financial report-
ing as of October 31, 2008.
RBC’s internal control over financial reporting as of October 31,
2008 has been audited by Deloitte & Touche LLP, Independent
Registered Chartered Accountants, who also audited RBC’s
Consolidated Financial Statements for the year ended October 31,
2008, 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, December 4, 2008
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
management override of controls, material misstatements due to error
or fraud may not be prevented or detected on a timely basis. Also, pro-
jections of any evaluation of the effectiveness of the internal control
over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in condi-
tions, 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,
2008 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, 2008 of the Bank
and our report dated December 4, 2008 expressed an unqualified
opinion on those consolidated financial statements.
Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants
Toronto, Canada
December 4, 2008
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
127
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
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)
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)
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 – 1,341,260,229 and 1,276,260,033)
Contributed surplus
Treasury shares – preferred (shares held – 259,700 and 248,800)
– common (shares held – 2,258,047 and 2,444,320)
Retained earnings
Accumulated other comprehensive income (loss)
Gordon M. Nixon
President and Chief Executive Officer
Victor L. Young
Director
128
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
2008
2007
$ 11,086
$
4,226
20,041
11,881
122,508
48,626
147,485
30,770
171,134
178,255
44,818
64,313
195,455
96,300
169,462
69,967
291,755
(2,215)
239,429
(1,493)
289,540
237,936
11,285
136,134
3,260
9,977
1,253
25,331
11,786
66,585
2,131
4,752
628
17,853
187,240
103,735
$ 723,859
$ 600,346
$ 139,036
269,994
29,545
$ 116,557
219,886
28,762
438,575
365,205
11,285
27,507
32,053
128,705
7,385
35,689
11,786
44,689
37,033
72,010
7,283
28,483
242,624
201,284
8,131
1,400
–
2,371
6,235
1,400
300
1,483
2,663
10,384
242
(5)
(104)
19,936
(2,358)
2,050
7,300
235
(6)
(101)
18,167
(3,206)
30,758
24,439
$ 723,859
$ 600,346
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 (loss) gain on available-for-sale securities (Note 3)
Net gain on 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
Income from continuing operations before income taxes
Income taxes (Note 23)
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 income available to common shareholders
Average number of common shares (in thousands) (Note 24)
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 24)
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)
2008
2007
2006
$ 14,983
6,974
2,889
498
$ 14,724
7,665
3,620
538
$ 12,708
6,189
2,827
480
25,344
26,547
22,204
12,158
3,472
354
13,770
4,737
338
10,708
4,281
419
15,984
18,845
15,408
9,360
7,702
6,796
2,609
(408)
1,759
1,561
1,377
1,367
875
646
648
415
461
(617)
–
1,529
3,152
1,999
1,579
1,473
1,353
1,303
1,217
533
491
293
261
63
–
1,043
3,348
2,574
1,301
1,242
1,243
1,216
1,024
438
496
241
257
–
88
373
12,222
14,760
13,841
21,582
22,462
20,637
1,595
1,631
7,779
1,155
926
749
562
341
135
704
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
12,351
12,473
11,495
6,005
1,369
4,636
81
4,555
–
7,025
1,392
5,633
141
5,492
–
6,204
1,403
4,801
44
4,757
(29)
$
4,555
$
5,492
$
4,728
(101)
(88)
(60)
$
4,454
$
5,404
$
4,668
1,305,706
3.41
3.41
–
$
$
$
1,273,185
4.24
4.24
–
$
$
$
1,279,956
3.65
3.67
(.02)
$
$
$
1,319,744
3.38
3.38
–
$
$
$
1,289,314
4.19
$
4.19
$
–
$
1,299,785
3.59
3.61
(.02)
$
$
$
$
2.00
$
1.82
$
1.44
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
129
Consolidated Statements of Comprehensive Income
For the year ended October 31 (C$ millions)
Comprehensive income
Net income
Other comprehensive income, net of taxes
Net change in unrealized (losses) gains on available-for-sale securities
Net unrealized losses on available-for-sale securities
Reclassification of losses on available-for-sale securities to income
Foreign currency translation adjustments
Unrealized foreign currency translation gains (losses)
Reclassification of (gains) losses on foreign currency translation to income
Net foreign currency translation (losses) gains from hedging activities
Net change in cash flow hedges
Net (losses) gains on derivatives designated as cash flow hedges
Reclassification of losses on derivatives designated as cash flow hedges to income
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
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
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 financial instruments accounting standards. Refer to Note 1.
130
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
2008
2007
2006
$
4,555
$
5,492
$
4,728
(1,376)
373
(1,003)
5,080
(3)
(2,672)
2,405
(603)
49
(554)
848
(93)
28
(65)
(2,965)
(42)
1,804
(1,203)
80
31
111
–
–
–
(501)
2
269
(230)
–
–
–
(1,157)
(230)
$
5,403
$
4,335 $
4,498
2008
2007
2006
$
$
2,050
613
–
2,663
7,300
3,090
(6)
10,384
235
(5)
14
(2)
242
(6)
23
(22)
(5)
(101)
51
(54)
(104)
$
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)
18,167
–
4,555
(101)
(2,624)
(49)
(12)
15,771
(86)
5,492
(88)
(2,321)
(580)
(21)
13,704
–
4,728
(60)
(1,847)
(743)
(11)
19,936
18,167
15,771
(45)
(1,068)
(802)
(443)
(2,358)
(45)
(65)
(3,207)
111
(3,206)
–
–
(2,004)
–
(2,004)
17,578
14,961
13,767
$ 30,758
$ 24,439
$ 22,123
Consolidated Statements of Cash Flows
For the year ended October 31 (C$ millions)
Cash flows from operating activities
Net income
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 on sale of premises and equipment
Gain on loan securitizations
Loss (gain) on sale of available-for-sale securities
Writedown of available-for-sale securities
Gain on sale of investment securities
Writedown 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 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 used in acquisitions
Net cash (used in) investing activities from continuing operations
Net cash from investing activities from discontinued operations
Net cash used in investing activities
Cash flows from financing activities
Change in deposits
Issue of RBC Trust Capital Securities
Issue of RBC Trust Subordinated Notes
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 financing activities from continuing operations
Net cash from 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
2008
2007
2006
$
4,555
$
5,492
$
4,757
1,595
539
(11)
(455)
135
(17)
(203)
1
631
–
–
791
434
(38)
(147)
96
(16)
(41)
(146)
66
–
–
102
164
(2,705)
(69,527)
56,685
25,013
(552)
(4,518)
(54)
(28)
1,034
(28,856)
29,916
10,976
(317)
3,341
11,432
–
22,503
–
11,432
22,503
(8,160)
(62,209)
9,480
8,885
–
14,804
–
(24,864)
–
(1,265)
19,650
(974)
(1,379)
(41,802)
8,020
8,117
–
15,350
–
(22,012)
–
(706)
(4,935)
(373)
429
405
(74)
144
76
(16)
(16)
–
–
(228)
25
220
217
(203)
1,105
(498)
(21,341)
(1,017)
1,713
(14,302)
4
(14,298)
(5,265)
(33,534)
8,139
–
8,547
–
27,188
–
(31,976)
(511)
(16,405)
(256)
(44,653)
–
(39,720)
–
(44,073)
140
(44,653)
(39,720)
(43,933)
61,271
500
–
2,000
(500)
613
(300)
(11)
149
(55)
74
(76)
(2,688)
(33)
(6,172)
(17,192)
1,618
16,831
–
1,000
87
(989)
1,150
(150)
(23)
155
(646)
208
(133)
(2,278)
(59)
(4,070)
6,436
(145)
36,663
–
–
–
(953)
600
(250)
(6)
116
(844)
244
(208)
(1,807)
(47)
17,722
5,861
620
39,198
17,374
57,711
39,198
17,374
57,711
883
6,860
4,226
(332)
(175)
4,401
(80)
(600)
5,001
$ 11,086
$
4,226
$
4,401
$ 15,967
2,025
$
$ 18,494
1,352
$
$ 14,678
1,682
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
131
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 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
Capital Disclosures and Financial Instruments –
Disclosures and Presentation
On November 1, 2007, we adopted three new presentation and
disclosure standards that were issued by the Canadian Institute
of Chartered Accountants (CICA): Handbook Section 1535, Capital
Disclosures (Section 1535), Handbook Section 3862, Financial
Instruments – Disclosures (Section 3862), and Handbook Section
3863, Financial Instruments – Presentation (Section 3863).
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 consequences of such non-compliance.
Sections 3862 and 3863 substantially replaced Handbook
Section 3861, Financial Instruments – Disclosure and Presentation,
revised and enhanced its disclosure requirements and continued
its presentation 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.
In October 2008, the CICA issued amendments to Handbook
Section 3855, Financial Instruments – Recognition and Measurement,
Section 3861, Financial Instruments – Disclosure and Presentation and
Section 3862, Financial Instruments – Disclosure, permitting, under
certain circumstances, financial assets to be reclassified from held-
for-trading to available-for-sale or from available-for-sale to loans and
receivables. Financial assets that were classified as held-for-trading
using the fair value option cannot be reclassified. These amendments
were effective for us on August 1, 2008, and details of the securities
reclassified are presented in Note 3.
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at rates prevailing at the balance sheet
date. Non-monetary assets and liabilities are translated into Canadian
dollars at historical rates. Income and expenses denominated in foreign
currencies are translated at average rates of exchange for the year.
132
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Assets and liabilities of our self-sustaining operations with
functional 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 Other comprehensive
income (OCI) on an after-tax basis. Upon disposal or dilution of our
interest in such investments, an appropriate portion of the accumulated
net translation gains or losses is included in Non-interest income.
Other foreign currency translation gains and losses are included
in Non-interest income.
Securities
Securities 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 and 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
substitute 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 the differ-
ence between the fair value and its amortized cost, including changes
in foreign exchange rates, recognized in OCI, net of tax. Purchase
premiums or discounts on available-for-sale debt 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
interest method. 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.
At each reporting date, and more frequently when conditions war-
rant, we evaluate our available-for-sale and held-to-maturity securities
with unrealized losses to determine whether those unrealized losses are
other-than-temporary. This determination is based on consideration of
several factors including: (i) the length of time and extent to which the fair
value has been less than its amortized cost; (ii) the severity of the impair-
ment; (iii) the cause of the impairment and the financial condition and
near-term prospects of the issuer; and (iv) our intent and ability to hold
the investment for a period of time sufficient to allow for any anticipated
recovery of fair value. If our assessment indicates that the impairment in
value is other-than-temporary, or we do not have the intent or ability to
hold the security until its fair value recovers, the security is written down
to its current fair value, and a loss is recognized in net income.
Gains and losses realized on disposal of available-for-sale securi-
ties and losses related to other-than-temporary impairment in value of
available-for-sale securities are included in Non-interest income as Net
gain or losses on available-for-sale securities.
We account for all of our securities using settlement date
accounting except that changes in fair value between the trade date
and settlement 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.
Fair value option
A financial instrument can be designated as held-for-trading (the fair
value option) on its initial recognition, 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 reliably
measurable fair value and satisfy one of the following criteria established
by OSFI: (i) it eliminates or significantly reduces a measurement or
recognition inconsistency that would otherwise 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 management 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.
Financial instruments designated as held-for-trading using the fair
value option are recorded at fair value and any gain or loss arising due to
changes in fair value are included in net income. These instruments can-
not be reclassified out of held-for-trading category while they are held
or issued.
Transaction costs
Transaction costs are expensed as incurred for financial instruments
classified or designated as held-for-trading. For other financial
instruments, transaction costs are capitalized on initial recognition.
Assets purchased under reverse repurchase agreements and sold
under repurchase agreements
We purchase securities under agreements to resell (reverse repurchase
agreements) and take possession of these securities. Reverse repur-
chase agreements are treated as collateralized lending transactions
whereby we monitor the market value of the securities purchased
and additional collateral is obtained when appropriate. We also have
the right to liquidate the collateral held in the event of counterparty
default. 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
interest, 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 repurchase agreements is included in Interest expense 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.
Loans
Loans are recorded at amortized cost unless they have been designated
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.
Loans stated at amortized costs 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 payment is
180 days in arrears. Loans guaranteed by a Canadian government
are classified as impaired when the loan is contractually 365 days in
arrears. When a loan is identified as impaired, the accrual of interest
is discontinued and any previously accrued but unpaid interest on the
loan is charged to the Provision for credit losses. Interest received on
impaired loans is credited to the Provision for credit losses. Impaired
loans are returned to performing status when all past due amounts,
including interest, have been collected, loan impairment charges have
been reversed, and the credit quality has improved such that timely
collection of principal and interest is reasonably assured.
When an impaired loan is identified, the carrying amount of the
loan is reduced to its estimated realizable amount, measured by
discounting the expected future cash flows at the effective interest
rate inherent in the loan. In subsequent periods, recoveries of amounts
previously written off and any increase in the carrying value of the
loan are credited to the 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 collectability 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,
commitment 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 management
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.
The allowance is determined based on management’s identification
and evaluation of problem accounts for estimated losses that exist on
the remaining portfolio, and on other factors including the composition
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
133
Note 1 Significant accounting policies and estimates (continued)
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
individually 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 experience.
For credit cards, no specific allowance is maintained as balances are
written off when a payment is 180 days in arrears. Personal loans are
generally written off at 150 days past due. Write-offs for other loans are
generally recorded when there is no realistic prospect of full recovery.
General allowance
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 determination
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)
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. 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.
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.
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, equity
swaps 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. An embedded
derivative is a component of a hybrid instrument that includes a
non-derivative host contract, with the effect that some of the cash
flows of the hybrid instrument vary in a way similar to a stand-alone
derivative. When an embedded derivative is separated, the host
contract is accounted for based on GAAP applicable to contract of that
type without the embedded derivative. All embedded derivatives are
presented on a combined basis with the host contracts although they
are separated for measurement purposes.
When derivatives are used in sales and trading activities, the
realized and unrealized gains and losses on derivatives are recognized
134
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
in Non-interest income – Trading revenue. Derivatives with a positive
fair value are reported as Derivative assets and derivatives with a
negative 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.
Market and credit valuation adjustments, 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.
To determine the fair value adjustments on RBC debt designated
as held-for-trading, we calculate the present value of the instruments
based on the contractual cash flows over the term of the arrangement
by using RBC’s effective funding rate at the beginning and end of the
period with the unrealized change in present value recorded in Net
income.
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
accomplishing 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 7 for the fair value of the derivatives
and non-derivative 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 derivative, which are
also recognized in Non-interest income. When hedge accounting is dis-
continued, the carrying value of the hedged item is no longer adjusted
and the cumulative fair value adjustments to the carrying 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.
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 Accumulated other comprehensive income (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 reclassified 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.
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 reduc-
tion 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.
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 rea-
sonably 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.
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
pension 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 cal-
culated using a market-related value approach. Under this approach,
assets are valued at an adjusted market value, whereby realized and
unrealized capital gains and losses are amortized over 3 years on a
straight-line basis. For the majority of the non-principal and 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 pen-
sion 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 expense – 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 obliga-
tions. For some of our defined benefit plans, including the principal
defined benefit plans, actuarial gains or losses are determined each
year and amortized over the expected average remaining service life
of employee groups covered by the plans. 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
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
expense – Human resources for services rendered by employees
during the period.
The cumulative excess of pension fund contributions over the
amounts recorded as expenses is reported as a Prepaid pension
benefit cost in Other assets. The cumulative excess of expense over
fund 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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
135
Note 1 Significant accounting policies and estimates (continued)
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 common 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 obliga-
tions 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
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
136
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
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
held-for-trading securities or available-for-sale securities, based on
management’s intent. Retained interests are classified as available-
for-sale or as held-for-trading using the fair value option. Both MBS
and the retained interests are subject to periodic impairment review.
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 servic-
ing 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 and a portion of property and casualty
contracts. These 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 mortal-
ity, morbidity, policy lapses and surrenders, investment yields, policy
dividends, operating and policy maintenance expenses, and provisions
for adverse deviation. These assumptions are reviewed at least
annually and updated in response to actual experience and market
conditions. Liabilities for property and casualty insurance represent
estimated provisions for reported and unreported claims. Liabilities
for 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 pol-
icy 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
associated 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,
investment and fee income. Fee income includes management fees,
mortality, policy, administration and surrender charges.
Liabilities and equity
Financial instruments that will be settled by a variable number of
our common shares upon their conversion by the holders as well
as the related accrued distributions are classified as liabilities on our
Consolidated Balance Sheets. Dividends and yield distributions
on these instruments are classified as Interest expense in our
Consolidated Statements of Income.
Earnings per share
Earnings per share is computed by dividing Net income available to
common shareholders by the weighted average number of common
shares outstanding for the period, net of treasury shares. Net income
available to common shareholders is determined after deducting divi-
dend entitlements of preferred shareholders and any gain (loss) on
redemption of preferred shares net of related income taxes. Diluted
earnings per share reflects the potential dilution that could occur if
additional common shares 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,
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 transaction
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. 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 profiles or internal or external valuation models, such as option
pricing models and discounted cash flow analysis, using observable
market-based inputs.
Fair values determined using valuation models require the use
of assumptions concerning the amount and timing of estimated future
cash flows and discount rates. 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
insurance claims and policy benefit liabilities, pensions and other
post-employment benefits, the carrying value of goodwill and finite
lived intangible assets, credit card customer loyalty reward program
liability and income taxes, require management to make subjec-
tive or complex judgments. Accordingly, actual results could differ
from these and other estimates thereby impacting our Consolidated
Financial Statements.
Changes in financial statement presentation
Effective November 1, 2007, OSFI adopted new guidelines based
on “International Convergence of Capital Measurement and Capital
Standards: A Revised Framework – Comprehensive Version (June
2006),” known as Basel II, which introduced several changes from
the predecessor framework, commonly referred to as Basel I. These
changes have impacted the basis of preparation and presentation of
certain tables in these notes.
During the year, we revisited our presentation of certain assets,
liabilities, revenues and expenses for previous periods to better 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 financial position
or results of operations.
Future accounting changes
Goodwill and Intangible Assets
The CICA issued a new accounting standard, Section 3064, Goodwill
and Intangible Assets, which clarifies that costs can be deferred only
when they relate to an item that meets the definition of an asset and,
as a result, start-up costs must be expensed as incurred. This stan-
dard, which is effective for us beginning November 1, 2008, is not
expected to materially impact our consolidated financial position or
results of operations.
International Financial Reporting Standards
The CICA has announced that Canadian GAAP for publicly accountable
enterprises companies will be replaced with International Financial
Reporting Standards (IFRS) over a transition period expected to end in
2011. We will begin reporting our financial statements in accordance
with IFRS on November 1, 2011. We have begun planning our transi-
tion to IFRS but the impact on our consolidated financial position and
results of operations has not yet been determined.
an adjustment to reflect the uncertainty and to ensure that financial
instruments are reported at fair values. This includes valuation adjust-
ments for liquidity for financial instruments that are not quoted in
an active market when we believe that the amount realized on sale
may be less than the estimated fair value due to insufficient liquidity
in the market over a short period of time. It also includes valuation
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.
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 in order to
ascertain their fair values. These adjustments take into account the
creditworthiness of our counterparties, the current and potential
future mark-to-market of the transactions, and the effects of credit
mitigants such as master netting agreements and collateral agree-
ments. Credit valuation adjustments are revised as appropriate.
Changes to credit valuation adjustments are recorded in current
period income.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
137
Note 2 Fair value of financial instruments (continued)
A net gain of $12 million, representing the change in fair values
estimated based on valuation techniques using input parameters that
are not supported by observable market data, was recognized in Net
income for the year ended October 31, 2008 (2007 – $8 million).
The unrealized gain or loss at inception for financial instruments
is recognized in Net income only if the fair value of the instrument is
(i) evidenced by a quoted market price in an active market or observ-
able current market transactions that are substantially the same,
(ii) based on a valuation technique that uses observable market
inputs, or (iii) the risks associated with the derivative contract are fully
offset by another contract(s) with a third party(ies). Unrealized gain
or loss at inception is the difference between the transaction price
and its fair value on the trade date. For financial instruments where
the fair value is not evidenced by the above-mentioned criteria or the
risks associated with the original contract are not fully transferred
to a third party, the unrealized gain or loss at inception is deferred.
The deferred gain or loss is recognized when (i) unobservable market
inputs become observable to support the fair value of the transaction,
(ii) the risks associated with the original contract are substantially off-
set by another contract(s) with a third party(ies), (iii) the gain or loss
is realized through receipt or payment of cash, or (iv) the transaction is
terminated early or on maturity.
We have documented our internal policies that detail our
processes for determining fair value, including the methodologies
used in establishing our valuation adjustments. These methodologies
are consistently applied and periodically reviewed by Group Risk
Management.
The following table summarizes changes in the aggregate amount of deferred unrealized gains at inception for financial instruments.
Deferred unrealized gains not yet recognized in net income, as at the beginning of the year
Add: Deferred unrealized gains arising during the year
Less: Deferred gains reclassified to net income during the year
Deferred unrealized gains, as at the end of the year
2008
2007
$
$
186
24
12
$
198
$
119
75
8
186
The deferred unrealized gains at inception primarily arise in equity structured notes, structured credit and interest rate derivatives, and bank-
owned life insurance policies stable value contracts.
Carrying value and fair value of selected financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instruments:
Carrying value and fair value of
2008
Carrying
value
Fair value
Financial
instruments
required to
be classified
as held-
for-trading
Financial
instruments
designated
as held-
for-trading
Available-
for-sale
instruments
measured
at fair value
Loans and
receivables
and
non-trading
liabilities
Loans and
receivables
and
non-trading
liabilities
Available-
for-sale
instruments
measured
at cost (1)
Total
carrying
amount
Total
fair
value
$ 104,414
–
$ 18,094
–
$
–
47,039
$ 104,414
$ 18,094
$ 47,039
$
$
–
–
–
$
$
–
–
–
$
–
1,587
$ 122,508
48,626
$ 122,508
48,626
$
1,587
$ 171,134
$ 171,134
$
$
$
$
$
$
$
$
$
$
–
–
–
–
$ 15,607
$
–
7,137
$
7,137
$ 136,134
–
$
–
136
$
$
–
–
–
–
$
2,678
67,462
7,268
$ 77,408
$ 27,507
$
–
–
128,705
–
–
–
–
17,870
–
–
81
–
–
$
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 29,211
$ 29,211
$ 194,448
87,955
$ 198,127
88,615
$ 282,403
$ 286,742
$
–
30,903
$
–
30,903
$ 136,358
202,532
22,277
$ 137,181
202,564
22,277
$ 361,167
$ 362,022
$
–
$
–
14,183
–
42,271
8,050
1,400
–
14,183
–
42,458
7,605
1,448
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 44,818
$ 44,818
$ 194,448
95,092
$ 198,127
95,752
$ 289,540
$ 293,879
$ 136,134
31,039
$ 136,134
31,039
$ 139,036
269,994
29,545
$ 139,859
270,026
29,545
$ 438,575
$ 439,430
$ 27,507
$ 27,507
32,053
128,705
42,271
8,131
1,400
–
32,053
128,705
42,458
7,686
1,448
–
Financial assets
Securities
Trading
Available-for-sale (2)
Total securities
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans
Retail
Wholesale
Total loans
Other
Derivatives (3)
Other assets
Financial liabilities
Deposits
Personal
Business and government (4)
Bank (5)
Total deposits
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
(1)
(2)
(3)
(4)
(5)
Includes the nominal value of our held-to-maturity investments which are carried at amortized cost.
Loan substitutes are classified as available-for-sale securities. Also includes the securities reclassified from trading to available-for-sale on August 1, 2008. Refer to Note 3.
Includes $2 million of bank-owned life insurance policies stable value contracts.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.
138
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Carrying value and fair value of selected financial instruments (continued)
Carrying value and fair value of
2007
Carrying
value
Fair value
Financial
instruments
required to
be classified
as held-
for-trading
Financial
instruments
designated
as held-
for-trading
Available-
for-sale
instruments
measured
at fair value
Loans and
receivables
and
non-trading
liabilities
Loans and
receivables
and
non-trading
liabilities
Available-
for-sale
instruments
measured
at cost (1)
Total
carrying
amount
Total
fair
value
$ 128,647
–
$ 18,838
–
$
–
29,572
$ 128,647
$ 18,838
$ 29,572
$
$
–
–
–
$
$
–
–
–
$
–
1,198
$ 147,485
30,770
$ 147,485
30,770
$
1,198
$ 178,255
$ 178,255
$
$
$
$
$
$
$
$
$
$
–
–
–
–
$ 25,522
$
–
3,235
$
3,235
$ 66,585
–
$
–
164
$
–
1,639
–
$
851
56,751
5,668
$
1,639
$ 63,270
$ 44,689
$
–
–
72,010
–
–
–
–
24,086
–
–
77
–
–
$
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 38,791
$ 38,791
$ 168,782
65,919
$ 168,375
65,910
$ 234,701
$ 234,285
$
–
24,653
$
–
24,653
$ 115,706
161,496
23,094
$ 115,609
161,217
23,095
$ 300,296
$ 299,921
$
–
$
–
12,947
–
36,232
6,158
1,400
300
12,947
–
36,262
6,427
1,476
300
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 64,313
$ 64,313
$ 168,782
69,154
$ 168,375
69,145
$ 237,936
$ 237,520
$ 66,585
24,817
$ 66,585
24,817
$ 116,557
219,886
28,762
$ 116,460
219,607
28,763
$ 365,205
$ 364,830
$ 44,689
$ 44,689
37,033
72,010
36,232
6,235
1,400
300
37,033
72,010
36,262
6,504
1,476
300
Financial assets
Securities
Trading
Available-for-sale (2)
Total securities
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans
Retail
Wholesale
Total loans
Other
Derivatives (3)
Other assets
Financial liabilities
Deposits
Personal
Business and government (4)
Bank (5)
Total deposits
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
(1)
(2)
(3)
(4)
(5)
Includes the nominal value of our held-to-maturity investments which are carried at amortized cost.
Loan substitutes are classified as available-for-sale securities.
Includes $71 million of bank-owned life insurance policies stable value contracts.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.
The following table presents information on loans and receivables
designated as held-for-trading using the fair value option, the maxi-
mum 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. We measure the change in the fair value of loans
and receivables designated as held-for-trading due to changes in
credit risk as the difference between the total change in the fair value
of the instrument during the period and the change in fair value calcu-
lated using the appropriate risk-free yield curves.
2008
Loans and receivables designated as held-for-trading
Interest-bearing deposits with banks
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans – Wholesale
Total
$ 33,955
$ 33,955
$
(241)
$
(288)
$
(1)
The cumulative change is measured from the later of November 1, 2006, or the initial recognition of the credit derivative or similar instruments.
Carrying
amount of
loans and
receivables
designated
as held-
for-trading
Maximum
exposure to
credit risk
Change
in fair
value since
November 1,
2007
Cumulative
change in
fair value
since initial
recognition
attributable attributable to
changes in
credit risk
to changes in
credit risk
Extent to
which credit
derivatives
or similar
instruments
mitigate
credit risk
Change in
fair value
of credit
derivatives
or similar
instruments
since
November 1,
Cumulative
change in
fair value
of credit
derivatives
or similar
2007 instruments (1)
$ 11,211
$ 11,211
$
–
$
–
$
–
$
–
$
15,607
7,137
15,607
7,137
–
(241)
–
(288)
–
817
817
$
–
38
38
$
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
to changes in
credit risk
credit risk
Extent to
which credit
derivatives
or similar
instruments
mitigate
credit risk
Change in
fair value
of credit
derivatives
or similar
instruments
since
November 1,
Cumulative
change in
fair value
of credit
derivatives
or similar
2006 instruments (1)
$
4,821
$
4,821
$
–
$
–
$
–
$
–
$
25,522
3,235
25,522
3,164
–
(42)
–
(21)
–
1,106
–
18
18
$
–
–
47
47
–
–
–
–
Loans and receivables designated as held-for-trading
Interest-bearing deposits with banks
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans – Wholesale
Total
$ 33,578
$ 33,507
$
(42)
$
(21)
$
1,106
$
(1)
The cumulative change is measured from the later of November 1, 2006, or the initial recognition of the credit derivative or similar instruments.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
139
Note 2 Fair value of financial instruments (continued)
The following table presents the changes in the fair value of our finan-
cial liabilities designated as held-for-trading using the fair value option
as well as their contractual maturity and carrying amounts. In order
to determine the change during a year in the fair value of a financial
liability that we have designated as held-for-trading, we calculate the
present value of the instrument’s contractual cash flows using rates as
at the beginning of the year: first, using an observed discount rate that
reflects our credit spread and, again, using a rate that excludes our
credit spread. We then compare the difference between those values
to the difference between the same calculations using rates at the end
of the year.
Liabilities designated as held-for-trading
Term deposits
Personal
Business and government (2)
Bank (3)
Total term deposits
2008
Contractual
maturity
amount
Carrying
amount
Change in fair
Difference
between
value since
carrying November 1, 2007
attributable
to changes
in RBC
credit spread
amount and
contractual
maturity
amount
Cumulative
change in
fair value (1)
$
2,724
67,541
7,265
$
2,678
67,462
7,268
$
(46) $
(79)
3
(40) $
(449)
(3)
(46)
(524)
(4)
$ 77,530
$ 77,408
$
(122) $
(492) $
(574)
Obligations related to assets sold under repurchase agreements
and securities loaned
Subordinated debentures
Total
$ 17,877
122
$ 17,870
81
$
(7) $
(41)
$
–
(41)
–
(48)
$ 95,529
$ 95,359
$
(170) $
(533) $
(622)
(1)
(2)
(3)
The cumulative change attributable to changes in our credit spread is measured from the later of November 1, 2006, or the initial recognition of the liabilities designated as
held-for-trading.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.
Liabilities designated as held-for-trading
Term deposits
Personal
Business and government (1)
Bank (2)
Total term deposits
Obligations related to assets sold under repurchase agreements
and securities loaned
Subordinated debentures
2007
Contractual
maturity
amount
Carrying
amount
Change in fair
Difference
between
value since
carrying November 1, 2006
attributable
to changes
in RBC
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)
(1)
(2)
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.
140
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Note 3 Securities (1)
$
Trading account
Canadian government debt
U.S. government debt
Other OECD government debt (3)
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Bankers’ acceptances
Certificates of deposit
Other
Equities
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. state, municipal and
agencies debt (5)
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 (6)
Cost
Fair value
Loan substitute
Cost
Fair value
Yield (4)
12
269
4,760
–
7,191
1,720
1,723
3.9%
160
160
4.5%
422
422
3.8%
417
417
1.0%
–
–
–
306
279
5.1%
2,019
2,028
5.5%
–
–
–
–
–
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
2008
Total
2007
Total
2006
Total
Term to maturity (2)
894
624
29
3
600
$ 3,492
1,252
458
27
383
$ 11,067
1,159
840
208
1,239
$ 1,833
957
839
323
1,458
$ 3,625
4,736
322
1,915
871
$
–
–
–
–
–
$ 20,911 $ 15,207 $ 13,937
10,523
6,603
6,494
4,236
1,518
4,408
6,784
9,387
8,728
2,488
2,476
4,551
1
1,771
8,629
–
–
134
14,843
–
–
–
5,737
–
–
–
4,405
–
–
–
689
42,104
13
2,174
39,063
42,104
374
4,712
42,438
60,120
766
5,245
44,139
57,831
16,013
29,490
11,147
15,874
42,793
122,508
147,485
147,237
137
138
3.2%
44
44
4.2%
976
974
2.6%
662
662
.9%
–
–
–
147
144
8.5%
4,632
4,656
5.3%
–
–
–
–
–
11,128
11,543
3.5%
402
407
4.9%
1,455
1,443
4.1%
86
88
3.9%
69
60
6.2%
427
417
5.8%
3,393
3,419
5.1%
–
–
–
–
–
125
128
4.3%
68
67
4.6%
305
298
4.1%
87
88
5.1%
31
30
5.4%
1,855
1,780
4.1%
1,479
1,364
7.4%
–
–
–
–
–
13
12
4.9%
–
–
–
6,072
5,753
4.0%
15
15
5.3%
4,178
3,458
5.6%
2,457
2,176
4.3%
1,449
1,188
5.2%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
130
130
–
13,123
13,544
3.6%
674
678
4.8%
9,230
8,890
3.8%
1,267
1,270
1.5%
4,278
3,548
5.6%
5,192
4,796
4.5%
13,102
12,785
5.5%
7,742
7,769
4.5%
279
278
4.2%
4,407
4,370
4.2%
819
818
1.4%
3,143
3,096
6.3%
1,179
1,114
5.9%
9,850
9,794
4.8%
9,496
9,458
4.0%
1,687
1,935
5.4%
4,491
4,415
4.4%
758
761
2.8%
4,277
4,248
5.4%
1,058
1,067
5.6%
12,672
12,868
4.7%
3,057
2,683
3,057
2,683
2,715
2,874
2,537
2,592
256
227
5.6%
3,443
3,040
256
227
5.6%
50,179
48,421
656
652
5.1%
30,790
30,765
656
658
4.8%
37,632
38,002
Amortized cost
Fair value
5,044
5,029
6,598
6,618
16,960
17,377
3,950
3,755
14,184
12,602
Held-to-maturity securities (1)
Amortized cost
Fair value
Total carrying value
of securities (1)
–
–
4
4
–
–
200
200
1
1
–
–
205
205
5
5
–
–
$ 12,220
$ 22,635
$ 46,867
$ 15,102
$ 28,477
$ 45,833
$ 171,134 $178,255 $184,869
(1)
(2)
(3)
(4)
(5)
(6)
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 derived using the contractual interest rate and the carrying value at the end of the year for the respective securities.
The 2006 balances include U.S. federal government debt with amortized cost and fair value of $536 million and $508 million, respectively.
Includes the value of the shares received upon the Visa Inc. restructuring which are carried at cost. Refer to Note 28.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
141
Note 3 Securities (continued)
The latter months of 2008, particularly September and October,
were marked by a high degree of uncertainty and volatility in the
global financial markets. As a result of significant concern regarding
the liquidity of financial institutions, certain governments have taken
significant steps to stabilize the markets and restore public confidence
in financial institutions including reducing interest rates, providing
funding programs and guarantees, injecting capital into financial insti-
tutions; some financial institutions have also been nationalized. As a
result of these rare circumstances, we have reclassified, as of August 1,
2008, the securities identified in the following table, from the held-
for-trading category to available-for-sale in accordance with the CICA’s
amendments to Sections 3855, 3861 and 3862 as discussed in Note 1.
Reclassification of securities from held-for-trading securities to available-for-sale
Financial assets
U.S. state, municipal and agency debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Fair value
as at
August 1,
2008
$ 3,996
513
1,234
567
Unrealized gains and losses on available-for-sale securities (1), (2)
$ 6,310
$
(379) $
Changes in
fair value
recognized in
net income
during the
period from
November 1,
2007 to
July 31, 2008
Changes in
fair value
recognized in
net income
during
2007
$
(144) $
(94)
(80)
(61)
(11)
–
–
–
(11)
Effective
interest rate
as at
August 1,
2008
3.6%
7.9%
3.7%
3.9%
Estimated
cash flows
expected to
be recovered
as at
August 1,
2008
$ 4,116
808
1,322
629
Total
carrying value
and fair value
as at
October 31,
2008
$ 4,358
593
1,324
593
Changes in
fair value
during the
period from
August 1,
2008 to
October 31,
2008
Changes in
fair value
recognized in
net income
during the
period from
August 1,
2008 to
October 31,
2008
$
(211) $
(76)
(121)
(70)
–
5
(5)
–
–
$ 6,875
$ 6,868
$
(478) $
Canadian government debt
Federal
Provincial and municipal
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Loan substitute securities
2008
2007
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value (2)
$
$
$ 13,123
674
9,230
1,271
4,280
5,192
13,301
3,057
256
422
5
16
4
4
11
136
4
–
$
(1) $ 13,544
678
(1)
8,890
(356)
1,274
(1)
3,550
(734)
4,796
(407)
12,984
(453)
2,683
(378)
227
(29)
$ 7,732
279
3,582
819
3,345
1,812
9,855
2,715
656
34
–
14
1
4
2
45
191
–
$
(6) $ 7,760
278
(1)
3,544
(52)
818
(2)
3,260
(89)
1,785
(29)
9,799
(101)
2,874
(32)
652
(4)
$ 50,384
$
602
$ (2,360) $ 48,626
$ 30,795
$
291
$
(316) $ 30,770
(1)
(2)
Includes $205 million (2007 – $5 million) held-to-maturity securities.
The comparative fair values have been revised from those previously presented; these revisions have no impact on our Consolidated Balance Sheets.
Realized gains and losses on available-for-sale securities (1), (2)
Realized gains
Realized losses and writedowns
Net (losses) gain on available-for-sale securities
2008
99
(731)
$
2007
204
(124)
$
(632) $
80
$
2006
293
(90)
203
$
$
(1)
(2)
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.
The following related to our insurance operations are included in the Insurance premiums, investment and fee income line on the Consolidated Statements of Income: Realized gains –
2008 – $1 million, 2007 – $17 million, and 2006 – $116 million; Realized losses and writedowns – 2008 – $16 million, 2007 – $nil, and 2006 – $1 million.
Fair value and unrealized losses position for available-for-sale securities
Canadian government debt
Federal
Provincial and municipal
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Loan substitute securities
Less than 12 months
12 months or more
Total
Fair value Unrealized losses
Fair value Unrealized losses
Fair value Unrealized losses
2008
$
$
126
236
6,546
99
2,128
4,073
3,360
970
–
$
1
1
321
1
348
314
294
217
–
$
–
–
270
–
996
361
633
347
191
$
$
–
–
35
–
386
93
159
161
29
126
236
6,816
99
3,124
4,434
3,993
1,317
191
1
1
356
1
734
407
453
378
29
Total temporarily impaired securities
$ 17,538
$
1,497
$
2,798
$
863
$ 20,336
$
2,360
142
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Less than 12 months
12 months or more
Total
Fair value Unrealized losses
Fair value Unrealized losses
Fair value Unrealized losses
2007
Canadian government debt
Federal
Provincial and municipal
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Loan substitute securities
$
$
1,310
210
212
47
862
853
1,955
432
216
$
2
1
–
2
13
5
53
30
4
$
951
–
887
–
1,954
347
686
68
–
$
$
4
–
52
–
76
24
48
2
–
2,261
210
1,099
47
2,816
1,200
2,641
500
216
Total temporarily impaired securities
$
6,097
$
110
$
4,893
$
206
$ 10,990
$
6
1
52
2
89
29
101
32
4
316
Available-for-sale and held-to-maturity securities are assessed for
impairment at each reporting date and more frequently when
conditions warrant. Our impairment review is primarily based on the
factors described in Note 1. Depending on the nature of the securities
under review we apply specific methodology to assess whether it is
probable that the amortized cost of the security would be recovered.
These include cash flow projection models which incorporate actual
and projected cash flows using a number of assumptions and inputs
that are based on security-specific collateral. The inputs and assump-
tions used such as default, prepayment and recovery rates, are based
on updated market data provided by a third-party vendor. We also
consider internal and external ratings, subordination and other market
and security-specific factors. We do a further review of the security,
if the model predicts that it is probable that we will not be able to
recover the entire principal and interest amount in order to assess
whether a loss would ultimately be realized. We used this approach
to assess our MBS and ABS portfolio and some of our complex instru-
ments included in our corporate and other debt. As at October 31,
2008, our unrealized losses on available-for-sale and held-to-maturity
securities were $2,360 million.
With respect to securities where, based on management’s judg-
ment, it was not probable that the amortized cost would be recovered,
the securities were deemed to be other-than-temporarily impaired
and were written down to their fair value. In addition, securities which
management was not certain we would hold until maturity or that the
value of the security would recover prior to its disposition were also
deemed to be other-than-temporarily impaired and were written down
to their fair value.
The majority of the $356 million unrealized loss on U.S. state,
municipal and agencies debt securities related to U.S. agency MBS
and U.S. ARS, including certain securities that were reclassified from
held-for-trading. The issuing agencies are supported by the U.S. gov-
ernment and the unrealized losses on these securities largely reflect the
liquidity concerns in the current market.
The MBS largely consist of U.S. Alt-A, U.S. non-agency MBS and
$206 million of U.S. subprime securities. The U.S. Alt-A and the
non-agency MBS are high quality super-senior tranches with credit
support through subordination, overcollateralization, and excess
spread. The unrealized losses of $734 million largely reflect the impact
of increased market spreads related to higher risk and liquidity premi-
ums, with little differentiation in the market between higher and lower
quality tranches. As at October 31, 2008, all U.S. MBS were assessed
for other-than-temporary impairment using a cash flow projection
model and management consideration of other market and security-
specific factors. The cash flow model incorporated actual cash
flows on the MBS through the current period and then projected the
remaining cash flows on the underlying mortgages, using a number of
assumptions and inputs that were based on the security-specific col-
lateral. The assumptions included default, prepayment and recovery
rates, the latter being largely dependent upon forecasted house prices
which were assessed at the municipal level. Where management
concluded based on our assessment that the loss was other-than-
temporary, the security was written down to its fair value.
ABS mainly comprised insured student loans including U.S. ARS
that were reclassified to available-for-sale on August 1, 2008, CLOs,
U.S. uninsured student loans and commercial MBS. The majority of
these instruments are highly rated with significant credit support and
experienced moderate price declines over the year resulting in
$407 million of unrealized losses or 8% of the portfolio value.
Corporate and other debt mainly includes corporate bonds, non-OECD
government bonds and structured notes securities. The corporate
bonds are well diversified across a number of names and sectors,
with U.S. and global financial institutions being the largest concentra-
tion. The non-OECD government securities are primarily related to
Caribbean countries where we have ongoing operations. The struc-
tured notes are predominately supported by high quality Canadian
credit card loans. The net unrealized losses mainly reflected widening
spreads on certain U.S. and global financial institutional securities.
The unrealized losses on the ABS and corporate and other debt are
primarily attributable to interest rate changes and widening credit
spreads caused by the ongoing disruption in the financial markets, and
the continual weakening of the U.S. housing market. However, based
on the underlying credit of the issuers or the fact that some of these
securities are overcollateralized, have excess spread to support the
credit of the bonds, or are at least A-rated, we believe that the future
cash flows will be sufficient to enable us to recover the amortized
costs of these securities by their maturity dates.
Equity holdings are largely comprised of publicly traded equity
and preferred shares of Canadian financial institutions. To a lesser
extent, we also hold investments in other public, private and venture
companies. A substantial portion of the $378 million unrealized losses
related to publicly traded Canadian bank shares we hold to economi-
cally hedge certain stock based compensation programs. While their
share prices are under pressure due to current market conditions,
these banks are well capitalized, continue to generate strong earnings
and continue to pay dividends.
Management believes that the unrealized losses on the above-
mentioned securities as at October 31, 2008, are temporary in nature
and intends to hold them until recovery of their fair value which may be
on maturity of the debt securities.
Impairment losses recognized
When we determine that a security is other-than-temporarily impaired,
the amortized cost of the security is written down to fair value and
the previously unrealized loss is reclassified from AOCI to net income.
During 2008, $631 million of net losses were recognized in net income
(2007 – $66 million) on available-for-sale securities. The majority of
these losses were attributable to MBS and certain ABS and corporate
debt securities that were deemed impaired. The losses also included
writedowns of securities we intend to sell. Included in this amount is
$10 million of writedown for our available-for-sale securities relating
to our insurance operations which has been reflected in the Insurance
premiums, investment and fee income line on our Consolidated
Statements of Income (2007 – $nil).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
143
Note 3 Securities (continued)
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), (2)
Taxable interest income
Non-taxable interest income
Dividends
$
2008
2,089
99
110
$
2007
1,373
31
85
$
2006
1,401
44
52
$
2,298
$
1,489
$
1,497
(1)
(2)
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.
The following related to our insurance operations are included in the Insurance premiums, investment and fee income line on the Consolidated Statements of Income: Taxable interest
income – 2008 – $452 million, 2007 – $405 million, and 2006 – $314 million; Non-taxable interest income – 2008 – $29 million, 2007 – $29 million, and 2006 – $43 million; Dividends –
2008 – $17 million, 2007 – $11 million, and 2006– $7 million.
Note 4 Loans
Retail (1)
Residential mortgages
Personal
Credit cards
Small business (2)
Wholesale (1)
Business (3), (4)
Bank (5)
Sovereign (6)
2008
2007
Canada United States
Other
International
Total
Canada United States
Other
International
Total
$ 117,690 $
48,780
8,538
2,804
2,948 $
9,796
187
–
2,353 $ 122,991 $ 107,453 $
2,151
208
–
60,727
8,933
2,804
42,506
8,142
2,652
1,402 $
5,283
119
–
890 $ 109,745
48,743
954
8,322
61
2,652
–
177,812
12,931
4,712
195,455
160,753
6,804
1,905
169,462
43,497
831
815
30,424
445
–
15,475
3,861
952
89,396
5,137
1,767
37,163
3,114
416
17,741
686
–
8,953
1,547
347
63,857
5,347
763
45,143
30,869
20,288
96,300
40,693
18,427
10,847
69,967
Total loans (7)
Allowance for loan losses
222,955
(1,199)
43,800
(834)
25,000
(182)
291,755
(2,215)
201,446
(1,101)
25,231
(321)
12,752
(71)
239,429
(1,493)
Total loans net of allowance for loan losses $ 221,756 $ 42,966 $ 24,818 $ 289,540 $ 200,345 $ 24,910 $ 12,681 $ 237,936
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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 and U.S. for 2008 are loans totalling $1,200 million (2007 – $1,202 million) and $2,447 million (2007 –$ nil), respectively, to VIEs administered by us.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
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 $160 million (2007 – $113 million).
Loan maturities and rate sensitivity
Maturity term (1)
Rate sensitivity
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
rate
Non-rate-
sensitive
Total
2008
Retail
Wholesale
$ 67,310 $ 110,776 $ 17,369 $ 195,455 $ 98,752 $ 93,861 $
51,627
32,294
12,379
96,300
65,095
31,201
2,842 $ 195,455
96,300
4
Total loans
Allowance for loan losses
$ 118,937 $ 143,070 $ 29,748 $ 291,755 $ 163,847 $ 125,062 $
–
–
–
(2,215)
–
–
2,846 $ 291,755
(2,215)
–
Total loans net of allowance for loan losses $ 118,937 $ 143,070 $ 29,748 $ 289,540 $ 163,847 $ 125,062 $
2,846 $ 289,540
Maturity term (1)
Rate sensitivity
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
rate
Non-rate-
sensitive
Total
2007
Retail
Wholesale
$ 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 $3,647 million (2007 – $1,202 million) to variable interest entities administered by us. All of the loans reprice monthly or quarterly.
144
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Impaired loans (1)
Retail
Residential mortgages (2)
Personal
Small business (3)
Wholesale
Business (2), (4), (5)
Sovereign (6)
Bank (7)
Total
Gross
340
348
40
728
2,195
–
–
2,195
2,923
$
$
$
$
$
$
$
$
$
$
2008
Specific
allowances
(30) $
(161)
(17)
(208) $
Net
310
187
23
520
(559) $
–
–
1,636
–
–
(559) $
1,636
(767) $
2,156
$
$
$
$
$
2007
Net
165
93
10
268
499
–
–
499
767
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Average balance of gross impaired loans for the year was $1,906 million (2007 – $921 million).
The October 31, 2007, comparative numbers reflect a reclassification of $22 million from our U.S. retail residential mortgage portfolio to our U.S. wholesale real estate and related
portfolio (gross impaired loans of $30 million, net of specific allowances of $8 million).
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis. Includes gross and net impaired loans of $203 million (2007 – $nil) and $138 million (2007 – $nil), respectively,
related to loans extended under liquidity facilities drawn on by RBC-administered multi-seller asset-backed commercial paper conduit programs.
The comparative number that we had reported previously included certain U.S. foreclosed assets of $22 million that had already been reported as acquired assets in respect of problem
loans below. Accordingly, the comparative number was decreased by $22 million.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
The principal collateral and other credit enhancements we hold as
security for retail loans include: (i) mortgage insurance, mortgages
over residential real estate and properties, (ii) recourse to the personal
assets being financed such as automobiles, as well as personal guar-
antees, term deposits and securities; for wholesale loans they include:
(i) recourse to business assets such as real estate, equipment,
inventory, accounts receivable and intangible assets, and (ii) recourse
to the commercial real estate properties being financed.
During the year ended October 31, 2008, we acquired $215 million
of assets in respect of problem loans (2007 – $36 million). The related
reduction in the Allowance for credit losses was $87 million (2007 – $nil).
Allowance for loan losses
Retail
Residential mortgages (2)
Personal
Credit cards
Small business (3)
Wholesale
Business (2), (4)
Sovereign (5)
Bank (6)
Specific allowances
Retail
Residential mortgages
Personal
Credit cards
Small business (3)
Wholesale
Business (4)
Sovereign (5)
Bank (6)
Allowance for off-balance sheet and other items (7)
General allowance (7)
Total allowance for credit losses
Allowance for off-balance sheet and other items (8)
2008
Balance at
beginning
of year
Write-offs
Recoveries
Provision
for credit
losses
Other
adjust-
ments (1)
Balance
at end
of year
16
445
270
46
777
653
–
–
653
$
$
$
$
$
$
$
$
$
$
15
96
–
9
$
(9) $
(504)
(319)
(44)
$
1
77
49
6
120
$
(876) $
133
$
231
–
–
231
351
16
349
193
37
595
370
–
–
370
256
$
(435) $
–
–
$
(435) $
29
–
–
29
$
$
$ (1,311) $
162
$ 1,430
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$ (1,311) $
–
–
–
–
–
–
–
–
–
–
–
–
162
–
162
(7) $
58
50
10
111
$
$
$
$
$
$
$
49
–
–
49
5
165
$ 1,595
$ 1,221
$ 1,572
(79)
7
47
–
–
54
81
–
–
81
135
11
54
27
–
92
231
–
–
231
$
$
$
$
$
$
$
$
$
(177) $
30
161
–
17
208
559
–
–
559
767
20
461
270
47
798
650
–
–
650
84
$
$
$
$
$
$
$
$
$
$
2007
Balance
at end
of year
15
96
–
9
120
231
–
–
231
351
16
349
193
37
595
370
–
–
370
256
$
$
$
$
$
$
$
$
$
$
146
$ 1,532
$ 1,221
281
(5)
$ 2,299
(84)
$ 1,572
(79)
Total allowance for loan losses
$ 1,493
$ (1,311) $
$ 1,595
$
276
$ 2,215
$ 1,493
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Primarily represents the translation impact of foreign currency-denominated allowance for loan losses. Included in the Specific and General allowance adjustments are $57 million and
$25 million, respectively, related to the loans acquired in connection with the acquisition of RBTT Financial Group. The General allowance adjustment also includes $50 million related to
the acquisition of Alabama National BanCorporation. Refer to Note 11.
The October 31, 2007 comparative numbers reflect a reclassification of $8 million in each of the allowance for credit losses and the provision for credit losses from our U.S. retail
residential mortgage portfolio to our U.S. wholesale real estate and related portfolio.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis. Includes $65 million (2007 – $nil) of provisions related to loans extended under liquidity facilities drawn on by
RBC-administered multi-seller asset-backed commercial paper conduit programs.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Includes $84 million related to off-balance sheet and other items (2007 – $79 million).
The allowance for off-balance sheet is reported separately under Other liabilities.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
145
Note 4 Loans (continued)
A loan is considered past due when a counterparty has not made a
payment by the contractual due date. The following table presents
the carrying value of loans that are past due but not classified as
impaired because they are either (i) less than 90 days past due, or
(ii) fully secured and collection efforts are reasonably expected to
result in repayment. Credit card balances are written off when a
payment is 180 days in arrears.
Loans past due but not impaired
Retail
Wholesale
Total
2008
2007
1–29 days
30–89 days
90 days
and greater
Total
1–29 days
30–89 days
90 days
and greater
3,337 $
1,830
1,401 $
649
365 $
114
5,103 $
2,593
2,365 $
620
960 $
207
254 $
26
Total
3,579
853
5,167 $
2,050 $
479 $
7,696 $
2,985 $
1,167 $
280 $
4,432
$
$
Net interest income after provision for credit losses
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
2008
9,360
1,595
$
2007
7,702
791
$
2006
6,796
429
7,765
$
6,911
$
6,367
$
$
Note 5 Securitizations
The following table summarizes our securitization activities for 2008, 2007 and 2006 (1).
Securitized and sold
Net cash proceeds received
Asset-backed securities purchased
Retained rights to future excess interest
Pre-tax gain (loss) on sale
2008
Canadian
residential
mortgage
loans (3), (4)
$ 7,892
7,846
–
242
196
Credit
card
loans (2)
$ 1,470
1,404
65
9
8
2007 (2)
Commercial
mortgage
loans (5)
Canadian
residential
mortgage
loans (3), (4)
$
166
156
9
–
(1)
$ 6,188
6,097
–
146
55
Commercial
mortgage
loans (5)
$ 1,937
1,876
47
–
(14)
Credit
card
loans (2)
$ 1,200
400
794
9
3
2006
Canadian
residential
mortgage
loans (3), (4)
$ 6,329
6,210
–
121
2
Commercial
mortgage
loans (5)
$
718
729
–
–
11
(3)
(1) We did not recognize an asset or a liability for our servicing rights with respect to the securitized loans as we received adequate compensation for our services.
(2) With respect to the securitization of credit card loans, the net cash proceeds received represent gross cash proceeds of $1,469 million for the year ended October 31, 2008 (2007 – $nil;
2006 – $1,194 million) less funds used to purchase notes of $65 million (2007 – $nil; 2006 – $794 million) issued by Golden Credit Card Trust. The principal value of the notes was
$65 million for the year ended October 31, 2008 (2007 – $nil; 2006 – $800 million).
Canadian insured residential mortgage loans securitized during the year through the creation of mortgage-backed securities and retained as at October 31, 2008 were $9,464 million
(2007 – $3,110 million; 2006 – $4,869 million). These securities are carried at fair value.
All Canadian residential mortgage loans securitized are insured.
During the year ended October 31, 2008, the net cash proceeds received represent gross proceeds of $165 million (2007 – $1,923 million) less funds used to purchase notes of $9 million
(2007 – $47 million). The principal value of the notes was $10 million (2007 – $48 million). During the year ended October 31, 2006, the net cash proceeds received represent gross
proceeds of $729 million.
(4)
(5)
In addition to the above securitization transactions, we sold
US$67 million (C$70 million) of whole loans in commercial real estate
mortgages to third-party investors at their principal amounts during
the year ended October 31, 2008. The gains on these sales were
$1.3 million during the year 2008. None were sold during 2007 or 2006.
Cash flows from securitizations (1)
During 2006, we sold $815 million of residential mortgage loans,
resulting in a pre-tax loss of $3 million. None were sold during 2007
or 2008.
2008
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
2007
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
2006
Canadian residential
mortgage loans
Variable rate
Fixed rate
Credit
card
loans
Proceeds reinvested in revolving
securitizations
Cash flows from excess spread (2)
$ 17,934
254
$
641
28
$ 3,679
151
$ 15,684
256
$ 1,043
66
$ 3,559
168
$ 17,107
263
$
466
11
$ 2,251
134
(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.
146
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
The key assumptions used to value the retained interests at the date of the securitization activities are as follows:
Key assumptions (1), (2)
Expected weighted average life of
prepayable receivables (in years)
Payment rate
Excess spread, net of credit losses
Expected credit losses
Discount rate
2008
2007 (3)
2006
Credit
card
loans
Canadian residential
mortgage loans
Canadian residential
mortgage loans
Variable rate
Fixed rate
Variable rate
Fixed rate
Credit
card
loans
Canadian residential
mortgage loans
Variable rate
Fixed rate
.25
37.02%
3.86
2.49
10.00%
4.00
33.36%
.84
–
2.22–4.07%
3.67
15.11%
1.51
–
2.22–4.77%
2.63
29.20%
.88
–
4.15–5.05%
3.69
14.38%
.83
–
4.15–5.05%
.16
40.02%
5.13
2.15
3.60
15.39%
.99
–
10.00% 4.24–4.93% 3.70–4.93%
2.61
30.00%
1.18
–
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 2007.
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, 2008 was .54% (2007 – .52%). Static credit pool losses are
not applicable to residential mortgages as substantially all the mort-
gages are government guaranteed.
The following table summarizes the loan principal, past due and
net write-offs for total loans reported on our Consolidated Balance
Sheets and securitized loans that we manage as at October 31, 2008
and 2007.
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
321,767
4,120
15,196
10,696
2008
2007
Loan principal
Past due (1)
Net write-offs
Loan principal
Past due (1)
Net write-offs
$ 225,467
96,300
$
1,141
2,309
3,450
48
–
–
$
842
406
$ 192,633
69,967
$
$
680
756
1,248
262,600
1,436
99
–
–
3,650
14,239
5,282
38
–
–
718
66
784
86
–
–
Total loans reported on the Consolidated Balance Sheets $ 291,755
$
3,402
$
1,149
$ 239,429
$
1,398
$
698
(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.
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, 2008 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)
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
2008
Canadian residential
mortgage loans
Variable rate
Fixed rate
$
42.1
4.51–5.89
28.00–40.00%
(3.7)
$
(6.2)
$
382.9
2.58–4.32
9.00–18.00%
(10.1)
$
(19.0)
$
$
.80%
(11.4)
(21.9)
–%
–
–
$
$
.94–1.03%
(46.4)
(91.3)
–%
–
–
Credit
card
loans
26.0
.25
38.20%
(1.6)
(3.2)
4.37%
(5.4)
(10.7)
2.53%
(2.0)
(3.0)
10.00%
–
(.1)
$
2.94–4.00%
(.2)
(.4)
$
2.15–2.94%
(1.0)
(2.1)
$
$
$
$
$
$
$
$
$
$
2007
Canadian residential
mortgage loans
Variable rate
Fixed rate
$
27.9
2.63–3.27
29.20–40.00%
(.8)
$
(1.5)
$
$
.68–.88%
(14.0)
(28.0)
–%
–
–
$
386.7
3.05–3.97
9.25–18.00%
$
(9.4)
(18.6)
$
$
.84–.89%
(37.1)
74.3
–%
–
–
Credit
card
loans
27.5
.25
37.39%
(1.6)
(3.2)
5.72%
(5.0)
(10.0)
2.18%
(1.2)
(2.3)
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
147
Note 6 Variable interest entities (VIEs)
The following table provides information about VIEs as at October 31,
2008 and 2007, 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.
Unconsolidated VIEs in which we have significant variable interests (1)
Multi-seller conduits (2)
Structured finance VIEs (3), (4)
Credit investment product VIEs
Investment funds
Third-party conduits (4)
Other
Consolidated VIEs (5), (6)
Structured finance VIEs (7)
Investment funds
Credit investment product VIEs
Compensation vehicles
Other
2008
2007
Total assets
Maximum
exposure
to loss
Total assets
Maximum
exposure
to loss
$ 42,698
15,245
2,649
1,182
734
155
$ 43,513
5,319
1,281
349
386
63
$ 41,785
2,841
2,676
1,517
1,830
60
$ 42,912
407
1,733
325
825
79
$ 62,663
$ 50,911
$ 50,709
$ 46,281
$
1,688
1,268
196
76
113
$
560
995
276
83
144
$
3,341
$
2,058
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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 $7,207 million (2007 – $2,165 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, 2008. Actual assets held by these
conduits as at October 31, 2008, were $33,591 million (2007 – $29,290 million).
Includes total assets and maximum exposure to loss of $10,555 million (2007 – $200 million) and $4,820 million (2007 – $200 million), respectively, relating to unconsolidated auction
rate securities entities as well as Tender Option Bond programs to which we have sold auction rate securities.
A VIE was reclassified from Third-party conduits to Structured finance VIEs. Total assets of this VIE as at October 31, 2007 were $2,434 million. We have also reassessed the maximum
exposure to loss of this VIE as at October 31, 2007 to be $nil.
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
$114 million (2007 – $75 million), Trading securities of $1,409 million (2007 – $1,185 million), Available-for-sale securities of $nil (2007 – $315 million), Loans of $1,543 million
(2007 – $nil) and Other assets of $199 million (2007 – $401 million). The compensation vehicles hold $76 million (2007 – $83 million) of our common shares, which are reported as
Treasury shares. The obligation to provide our 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.
Includes total assets of consolidated ARS entities of $1,688 million (2007 – $nil).
Multi-seller and third-party conduits
We administer six multi-seller asset-backed commercial paper conduit
programs (multi-seller conduits). These conduits primarily purchase
financial assets from clients and finance those purchases by issuing
asset-backed commercial paper. Our clients primarily utilize multi-seller
conduits to diversify their financing sources and to reduce funding costs.
The primary focus of the multi-seller conduits is to provide financ-
ing for asset classes originated by our clients, such as credit cards,
auto loans and leases, trade receivables, student loans, asset-backed
securities, equipment receivables and consumer loans. As at October 31,
2008, these asset classes comprised 95% of our maximum exposure
to loss by client asset type. Less than 1% of outstanding securitized
assets comprised U.S. Alt-A or subprime mortgages and the securi-
tized assets do not contain commercial mortgage loans.
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
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 25.
Structured finance VIEs
In 2008, we purchased U.S. auction rate securities (ARS) from entities
which funded their long-term investments in student loans by issuing
short-term senior and subordinated notes. Certain of these entities are
VIEs. Principal and accrued interest on the student loans are largely
guaranteed by U.S. government agencies. In our role as auction remar-
keting agent to these entities, we are under no legal obligation to
purchase the notes issued by these entities in the auction process.
We hold significant variable interests in certain unconsolidated entities.
We consolidate the entities where our investments expose us to a
majority of the expected losses.
We also sell ARS into Tender Option Bond (TOB) programs, where
each TOB program consists of a credit enhancement (CE) trust and a
TOB trust. Each ARS sold to the TOB program is supported by a letter
of credit issued by us and is financed by the issuance of floating-rate
certificates to short-term investors and a residual certificate to a single
third-party investor. We are the remarketing agent for the floating-
rate certificates and we provide liquidity facilities to each of the TOB
programs to purchase any floating-rate certificates that have been ten-
dered but not remarketed. Both the CE and the TOB trusts are VIEs. We
have significant variable interests in these trusts through our liquidity
facilities and letters of credit. However, the residual certificate holder
is exposed to a majority of the expected losses in these trusts. As a
result, we do not consolidate these trusts under AcG-15. The liquidity
facilities and letters of credit are included in our disclosure on guaran-
tees in Note 25.
In 2008, we sold ARS to an unaffiliated and unconsolidated entity
at fair market value. The purchase of the ARS by this entity was financed
by a loan from us, and the loan is secured by various assets of the entity.
We are the remarketing agent for the ARS. The entity is a VIE. We have
significant variable interests in this VIE as a result of providing the ARS
loan, a credit facility and guarantees, which are secured by cash collat-
eral, to the VIE. This VIE also enters into interest rate derivatives with other
148
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
counterparties who are exposed to the majority of its variability; as a
result, we do not consolidate this entity.
We finance VIEs that are part of transactions structured to
hedge our exposure from these derivatives by investing in other funds.
We consolidate the investment funds when we are exposed to a major-
ity of the expected losses of the funds.
achieve a desired outcome such as limiting exposure to specific assets
or risks, obtaining indirect exposure to financial assets, supporting
an enhanced yield, funding specific assets and meeting client 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, including credit derivatives, to purchase protec-
tion from these VIEs (credit protection) 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.
These VIEs issue funded notes. In certain instances, we invest
in the funded notes issued by these VIEs. Some of the VIEs also issue
unfunded notes in the form of senior credit derivatives or funding
commitment and we may be an investor of these unfunded notes. The
investors in the funded and unfunded notes ultimately bear the cost of
any payments made by the VIEs as a result of the credit protection
provided to us. We consolidate the VIEs in which our investments in
the notes expose us to a majority of the expected losses.
Investment funds
We enter into equity derivative transactions with third parties includ-
ing mutual funds, unit investment trusts and other investment funds
for fees to provide their investors with the desired exposure, and we
Note 7 Derivative instruments and hedging activities
Derivative instruments are categorized as either financial or non-
financial derivatives. Financial derivatives are financial contracts whose
value is derived from an underlying interest rate, foreign exchange rate,
equity or equity index. Non-financial derivatives are contracts whose
value is derived from a commodity instrument or index.
Financial 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 futures 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 finan-
cial instrument on a predetermined future date at a specified price.
Foreign exchange forwards and futures are contractual obliga-
tions to exchange one currency for another at a specified price for
settlement at a predetermined future date.
Equity forwards and futures are contractual obligations to buy or
sell at a fixed value (the contracted price) of an equity index, a basket
of stocks or a single stock 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.
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 VIEs 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 VIEs relative to others
does not expose us to a majority of the expected losses. We also do
not have significant interests in these VIEs. For details on our securiti-
zation activities, refer to Note 5.
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.
Commodity swaps are contracts in which one counterparty
agrees to pay or receive from the other cash flows based on changes in
the value of a commodity index.
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 pur-
chaser for this right. The various option agreements that we enter into
include interest rate options, foreign currency options, equity options
and index 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
149
Note 7 Derivative instruments and hedging activities (continued)
Other derivative products
Certain warrants and loan commitments that meet the definition of
derivative are also included as derivative instruments.
Non-financial derivatives
We also transact in non-financial derivative products including
precious metal and commodity derivative contracts in both the over-
the-counter and exchange markets.
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 identifying and
profiting from price differentials between markets and products.
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.
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. We assess
and measure the effectiveness of a derivative that is designated as a
hedging instrument based on the change in its fair value. When cash
instruments are designated as 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, 2008,
after-tax net unrealized losses of $579 million (2007 – after-tax net
unrealized gains of $24 million) were recognized in AOCI, representing
the cumulative effective portions of our cash flow hedges.
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.
Interest rate swaps are used to adjust exposure to interest rate
After-tax unrealized losses of $61 million (before-tax unrealized
risk by modifying the repricing or maturity characteristics of exist-
ing and/or anticipated assets and liabilities, including funding and
investment 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
losses of $91 million) included in AOCI as at October 31, 2008 are
expected to be reclassified to Net interest income within the next
12 months.
The following table presents the fair values of the derivative and
non-derivative instruments categorized by their hedging relationships,
as well as derivatives that are not designated in hedging relationships.
Derivatives and non-derivative instruments
2008
2007
Designated as hedging instruments
in hedging relationships
Designated as hedging instruments
in hedging relationships
Cash flow
hedges
Fair value
hedges
N
Net
investment
ot
designated
in a hedging
hedges relationship (1)
Cash flow
hedges
Fair value
hedges
Net
investment
Not
designated
in a hedging
hedges relationship (1)
Assets
Derivative instruments (2)
Liabilities
Derivative instruments (2)
Non-derivative instruments (3)
$
$
879 $
1,397 $
355 $ 133,503 $
390 $
268 $
856 $ 65,071
1,597 $
–
61 $
449
1,229 $ 125,818 $
5,886
n.a.
206 $
–
166 $
472
5 $ 71,633
n.a.
4,307
Includes $2 million of bank-owned life insurance policies stable value contracts (2007 – $71 million).
All derivative instruments are carried at fair value.
Non-derivative instruments are carried at amortized cost.
(1)
(2)
(3)
n.a. not applicable
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 gains (losses)
(Losses) gains from hedges
2008
2007
Net gains
(losses)
included in Non-
interest income
Net gains
(losses)
included in Net
interest income
After-tax
unrealized
gains (losses)
included in OCI
Net gains
(losses)
included in Non-
interest income
Net gains
(losses)
included in Net
interest income
After-tax
unrealized
gains (losses)
included in OCI
$
(6) $
n.a.
$
n.a.
$
(14) $
n.a.
$
(8)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
(72)
n.a.
n.a.
n.a.
(603)
n.a.
5,080
(2,672)
(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
$
(14) $
(72) $
1,805
$
(23) $
(47) $
(1,081)
After-tax losses of $49 million were reclassified from AOCI to income for the year ended October 31, 2008 (2007 – losses of $31 million).
(1)
n.a. not applicable
150
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
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)
2008
Term to maturity
2007
Within
1 year
1 to
5 years
Over 5
years (1)
Total
Trading
Other than
trading
Trading
Other than
trading
$ 245,673
962,719
21,001
28,024
$
19,369
1,201,252
28,492
36,559
$
–
594,231
43,114
100,482
$ 265,042
2,758,202
92,607
165,065
$ 265,042
2,534,700
91,826
164,847
$
–
223,502
781
218
$ 201,853
2,096,153
89,585
149,169
$
–
158,393
1,003
573
870,019
6,121
69,174
34,436
34,659
33,199
45,156
51,882
84,046
10,200
10,669
222
394
179,996
30,589
8,811
184,000
10,990
11,151
156,092
28,543
20,295
12,826
4,493
896
–
–
10,281
1,115
11,097
91,984
971
481
86,548
31,297
901,723
26,029
345,158
46,397
46,291
275,839
104,996
856,124
25,484
291,688
46,334
46,234
272,525
104,037
45,599
545
53,470
63
57
3,314
959
11
–
–
–
72,188
96,872
14,693
11,565
72,024
96,872
14,693
11,565
–
–
6,373
222
394
196,650
222
394
196,650
164
–
–
–
–
–
–
710,961
17,748
242,319
36,756
38,355
393,247
73,804
77,086
132,008
14,964
4,656
327
9,689
254,206
30,815
399
36,019
7
–
5,977
142
278
184
–
–
–
–
–
$ 2,687,590
$ 1,764,639
$ 967,704
$ 5,419,933
$ 5,091,261
$ 328,672
$ 4,542,886
$ 233,790
(1)
(2)
(3)
Includes contracts maturing in over 10 years with a notional value of $255,281 million (2007 – $205,976 million). The related gross positive replacement cost is $9,840 million
(2007 – $10,910 million).
Comprises credit default swaps, total return swaps and credit default baskets, including credit derivatives given guarantee treatment for OSFI regulatory reporting purposes.
Credit derivatives with a notional value of $3,167 million (2007 – $5,530 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 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
2008
2007
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
$
191
21,632
797
–
$
143
21,559
–
1,216
$
329
32,596
1,569
–
$
220
30,448
–
1,714
$
44
13,938
621
–
$
49
14,241
–
786
$
72
14,250
488
–
$
25
14,446
–
625
22,620
22,918
34,494
32,382
14,603
15,076
14,810
15,096
12,831
2,396
12,628
1,214
–
12,793
1,777
11,806
–
1,160
37,096
1,597
18,654
1,850
–
36,682
1,574
18,628
–
1,830
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
29,069
27,536
59,197
58,714
20,604
20,477
32,424
32,103
Credit derivatives (2)
Other contracts (3)
13,131
8,617
11,868
11,486
16,456
18,914
15,344
17,322
3,964
6,096
3,508
9,537
10,416
4,925
9,375
10,317
$ 73,437
$ 73,808
$ 129,061
$ 123,762
$ 45,267
$ 48,598
$ 62,575
$ 66,891
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
$
3,687
19
–
3,706
1,404
10
3,377
10
–
4,801
400
15
8,922
$
2,774
–
31
2,805
1,299
24
2,544
–
6
3,873
15
6
6,699
137,983
130,461
(1,756)
(76,179)
(1,756)
(76,179)
$ 60,048
$ 52,526
$
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
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 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.
(1)
(2)
(3)
(4) Market and credit valuation adjustments that are determined on an instrument-specific basis are included. For the remaining instruments, these adjustments are determined on a pooled
basis and thus, have been excluded. Positive year-end fair values exclude market and credit valuation adjustments of $(1,117) million (2007 – $nil) and margin requirements of
$1,024 million (2007 – $1,017 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.
(5)
(6)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
151
Note 7 Derivative instruments and hedging activities (continued)
Fair value of derivative instruments by term to maturity
Derivative assets (1), (2)
Derivative liabilities
Less than 1 year
1 to 5 years
Over 5 years
Total
2008
2007
Total
$ 60,800
56,269
$ 43,760
42,797
$ 31,667
29,639
$ 136,227
128,705
$ 65,568
71,422
Includes $2 million of bank-owned life insurance policies stable value contracts (2007 – $71 million).
(1)
(2) Market and credit valuation adjustments that are determined on an instrument-specific basis are included. For the remaining instruments, these adjustments are determined on a pooled
basis and thus, have been excluded. Derivative assets exclude market and credit valuation adjustments of $(1,117) million (2007 – $nil) and margin requirements of $1,024 million
(2007 – $1,017 million).
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. A 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 a 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 a 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.
Mark-to-market provisions in our agreements with some counterpar-
ties, typically in the form of a Credit Support Annex, provide us with
the right to request that the counterparty pay down or collateralize
the current market value of its derivatives positions when the value
passes a specified threshold amount.
The replacement cost for 2008 represents the total fair value
of all outstanding contracts in a gain position after factoring in the
master netting agreements. The replacement cost for 2007 represents
the total fair value of all outstanding contracts in a gain position
before and after factoring in the master netting agreements. The
amounts in the table below exclude fair value of $5,999 million
(2007 – $955 million) relating to exchange-traded instruments 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 OSFI.
The risk-adjusted amount is determined by applying the standard
OSFI-defined measures of counterparty risk to the credit equivalent
amount.
152
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Derivative-related credit risk
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Foreign exchange contracts
Forward contracts
Swaps
Options purchased
Credit derivatives (3)
Other contracts (4)
2008 (1)
2007
Replacement Credit equivalent
amount
cost
Risk-adjusted
balance(2)
Replacement Credit equivalent
amount
cost
Risk-adjusted
balance(2)
$
$
329
7,743
353
8,425
$
430
12,938
729
14,097
16,438
9,692
508
19,797
19,212
1,101
26,638
40,110
5,607
12,979
10,344
17,680
244
4,106
230
4,580
3,938
3,806
274
8,018
8,130
5,168
$
72
15,360
364
$
92
23,484
1,032
$
15,796
24,608
15,424
18,073
1,221
22,222
32,901
1,832
22
5,213
248
5,483
5,674
6,138
466
34,718
56,955
12,278
10,416
4,120
35,026
6,723
8,465
2,251
Derivatives before master netting agreements
Impact of master netting agreements
$
$
n.a.
n.a.
$
n.a.
n.a.
n.a.
n.a.
$ 65,050
(38,729)
$ 123,312
(65,339)
$ 28,477
(14,020)
Total derivatives after master netting agreements (5)
$ 53,649
$ 82,231
$ 25,896
$ 26,321
$ 57,973
$ 14,457
(1)
(2)
(3)
(4)
(5)
The amounts presented for 2008 are net of master netting agreements in accordance with Basel II.
The 2008 risk-adjusted balance was calculated in accordance with Basel II. The 2007 risk-adjusted balance was calculated in accordance with Basel I.
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 $400 million (2007 – $36 million). Credit derivatives issued for other-than-trading purposes related to sold protection with a replacement cost of
$3 million (2007 – $.4 million), credit equivalent amount of $147 million (2007 – $447 million) and risk-adjusted asset amount of $35 million (2007 – $447 million) which were given
guarantee treatment per OSFI guidance.
Comprises precious metal, commodity and equity-linked derivative contracts.
The total credit equivalent amount after netting includes collateral applied of $4,721 million (2007 – $2,228 million).
Replacement cost of derivative instruments by risk rating and by counterparty type
Risk rating (1)
Counterparty type (2)
AAA, AA
A
BBB
BB or
lower
Total
OECD
Banks governments
Other
Total
2008
Gross positive replacement cost
Impact of master netting agreements
$
68,657 $ 40,630 $
41,916
24,587
15,388 $
8,487
7,308 $ 131,983 $
2,944
77,934
82,512 $
65,073
6,593 $
–
42,878 $ 131,983
77,934
12,861
Replacement cost (after netting agreements) (3)
$
26,741 $ 16,043 $
6,901 $
4,364 $
54,049 $
17,439 $
6,593 $
30,017 $
54,049
Replacement cost (after netting agreements) – 2007 (3) $
14,100 $
6,684 $
3,782 $
1,791 $
26,357 $
7,057 $
8,188 $
11,112 $
26,357
(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 OSFI.
Includes credit derivatives issued for other-than-trading purposes with a total replacement cost of $400 million (2007 – $36 million).
Note 8 Premises and equipment
Land
Buildings
Computer equipment
Furniture, fixtures and other equipment
Leasehold improvements
2008
Accumulated
depreciation
$
$
–
427
2,437
981
857
Net book
value
216
418
1,445
414
767
$
Cost
216
845
3,882
1,395
1,624
2007
Accumulated
depreciation
$
$
–
333
1,986
764
727
Net book
value
133
220
1,063
295
420
$
Cost
133
553
3,049
1,059
1,147
$
7,962
$
4,702
$
3,260
$
5,941
$
3,810
$
2,131
The depreciation expense for premises and equipment for 2008 was $539 million (2007 – $434 million; 2006 – $405 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
153
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 ).
Assets and liabilities representing our interest in RBC Dexia IS
and our proportionate share of its financial results before adjusting for
related party transactions are presented in the following tables:
Consolidated Balance Sheets
Assets (1)
Liabilities
As at
October 31,
2008
October 31,
2007
$ 19,136 $ 15,544
14,533
18,114
We provide certain services to RBC Dexia IS, which include admin-
istrative 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:
For the
year ended
October 31,
2008
For the
For the nine
year ended months ended
October 31,
October 31,
2006 (1)
2007
$
145 $
28
38
157 $
26
34
99
16
28
(1)
Includes $72 million (2007 – $69 million) of goodwill and $158 million (2007 –
$179 million) of intangible assets.
Net interest income
Non-interest income
Non-interest expense
For the
year ended
October 31,
2008
For the
For the nine
year ended months ended
October 31,
October 31,
2006 (1)
2007
(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
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 Statements
of Income
Net interest income
Non-interest income
Non-interest expense
Net income
Consolidated Statements of
Cash Flows
Cash flows used in
operating activities
Cash flows used in
investing activities
Cash flows from (used in)
financing activities
$
162 $
647
602
135
116 $
600
529
125
75
363
315
73
$
(1,433) $
(546) $
(71)
(2,158)
(2,299)
(97)
3,713
2,856
165
(1)
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.
Note 10 Goodwill and other intangibles
Effective February 7, 2007, as discussed in Note 28, 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.
Effective May 1, 2008, as discussed in Note 28, we created our
Insurance segment, formerly a business under Canadian Banking.
This reorganization resulted in the realignment of certain reporting
units. Accordingly, we have reallocated our goodwill to the reporting
units using the relative fair value approach. The reorganization also
resulted in the U.S. & International Banking segment being renamed
International Banking.
The following tables disclose the changes in goodwill during
2007 and 2008, including the reallocation of goodwill to the new
reporting units.
Goodwill
Balance at October 31, 2006
Goodwill acquired between November 1, 2006 and January 31, 2007
Other adjustments (1)
Balance at January 31, 2007
RBC
Canadian
Personal and
Business
RBC U.S. and
International
Personal and
Business
$
$
2,491
–
9
$
900
406
58
RBC
Capital
Markets
913
121
34
$
Total
4,304
527
101
$
2,500
$
1,364
$
1,068
$
4,932
(1)
Other adjustments in the first quarter of 2007 primarily include the impact of foreign exchange translations on foreign currency-denominated goodwill.
154
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
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.
Goodwill
Balance at October 31, 2007
Goodwill acquired between November 1, 2007 and April 30, 2008
Other adjustments (1)
$
$
2,050
–
–
$
882
–
70
996
1,270
11
$
Canadian
Banking
Wealth
Management
U.S. &
International
Banking
Capital
Markets
824
–
62
$
Total
4,752
1,270
143
Balance at April 30, 2008
$
2,050
$
952
$
2,277
$
886
$
6,165
(1)
Other adjustments in the first two quarters of 2008 primarily include the impact of foreign exchange translations on foreign currency-denominated goodwill.
Reallocation of goodwill
Canadian Banking
Wealth Management
U.S. & International Banking
Capital Markets
Balance at April 30, 2008
Goodwill acquired between May 1 and
October 31, 2008
Other adjustments (1)
Goodwill
balance before
business
reorganization
Canadian
Wealth
Banking Management
Insurance
International
Banking
Goodwill
balance after
business
Markets reorganization
Capital
$ 2,050
952
2,277
886
$ 1,919
–
–
–
$
$ 6,165
$ 1,919
$
–
952
–
–
952
$ 2,775
1,037
$
–
–
$ 1,147
147
$
$
$
131
–
–
–
131
$
$
–
–
2,277
–
$ 2,277
$
–
–
–
886
886
$ 2,050
952
2,277
886
$ 6,165
–
22
$ 1,607
722
$
21
146
$ 2,775
1,037
Balance at October 31, 2008
$ 9,977
$ 1,919
$ 2,246
$
153
$ 4,606
$ 1,053
$ 9,977
(1)
Other adjustments in the last two quarters of 2008 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
impairment for the year ended October 31, 2008 (2007 – $nil; 2006 – $nil).
Other intangibles
Core deposit intangibles
Customer lists and relationships
Mortgage servicing rights
2008
2007
Gross carrying
amount
Accumulated
amortization (1)
Net carrying
amount
Gross carrying
amount
Accumulated
amortization (1)
Net carrying
amount
$
$
725
1,073
70
(273) $
(287)
(54)
$
452
786
16
$
376
605
47
(170) $
(200)
(30)
$
1,868
$
(614) $
1,254
$
1,028
$
(400) $
206
405
17
628
(1)
Total amortization expense for 2008 was $135 million (2007 – $96 million).
The projected amortization of Other intangibles for each of the years ending October 31, 2009 to October 31, 2013 is approximately $126 million.
There were no writedowns of intangible assets due to impairment for the year ended October 31, 2008 (2007 – $nil).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
155
Note 11 Significant acquisitions
2008
International Banking
In February 2008, RBC Bancorporation (USA), formerly RBC Centura
Banks, Inc., completed the acquisition of Birmingham-based Alabama
National BanCorporation (ANB), parent of 10 subsidiary banks and
other affiliated businesses in Alabama, Florida and Georgia.
In June 2008, we completed the acquisition of RBTT Financial
Group (RBTT) for a total purchase price of TT$13.7 billion (C$2.3 bil-
lion). RBTT is a Caribbean-based banking and financial services group
which offers a complete range of banking and financial intermediation
services to customers in Trinidad and Tobago and other Caribbean
countries. We have not recognized revenues or expenses for the
month of October 2008 as we report the results of RBTT on a one-
month lag basis.
The purchase price allocations of these acquisitions are
preliminary and may be revised when estimates and assumptions are
finalized and the valuation of assets and liabilities is completed.
We do not anticipate that any revisions will be significant to our
financial statements. Details of the purchase price and the preliminary
allocation are as follows:
Acquisition date
Percentage of shares acquired
Purchase consideration in the currency of the transaction
Purchase consideration in Canadian dollar equivalent
Fair value of tangible assets acquired (1)
Fair value of liabilities assumed (2)
Fair value of identifiable net assets acquired
Core deposit intangibles (3)
Goodwill
Total purchase consideration
ANB
February 22, 2008
100%
RBTT
June 16, 2008
100%
Total cash payment of US$939 million
and 16.4 million RBC common shares
valued at US$49.9067 each
Total cash payment of TT$8.3 billion
and 18.2 million RBC common shares
valued at US$48.2540 each
$
$
1,779
7,459
(7,079)
380
91
1,307
$
$
2,278
8,787
(8,200)
587
121
1,570
$
1,778
$
2,278
(1)
(2)
(3)
Included in the fair value of tangible assets acquired from ANB are loans of approximately $140 million that have been identified for sale.
Includes future income tax liabilities of $32 million and $31 million related to the intangible assets acquired for ANB and RBTT, respectively.
Core deposit intangibles are amortized on a straight-line basis over an estimated average useful life of seven years.
Wealth Management
In May 2008, we completed the acquisition of Vancouver-based
Phillips, Hager & North Investment Management Ltd. (PH&N), an
investment management firm with approximately $68 billion of assets
under management.
In June 2008, we completed the acquisition of Washington
D.C.-based Ferris, Baker Watts, Incorporated (FBW), a full-service
broker-dealer with 42 branch offices in eight states and the District of
Columbia.
The purchase price allocations of these acquisitions are
preliminary and have not been finalized because the valuation of
certain assets and liabilities has not been completed. Details of the
preliminary purchase price allocations are as follows:
Acquisition date
Percentage of shares acquired
Purchase consideration in the currency of the transaction (1)
Purchase consideration in Canadian dollar equivalent
Fair value of tangible assets acquired
Fair value of liabilities assumed (2)
Fair value of identifiable net assets acquired
Customer relationships (3)
Goodwill
Total purchase consideration
PH&N
May 1, 2008
100%
FBW
June 20, 2008
100%
20.2 million RBC common shares and
6.75 million exchangeable shares of a
wholly owned subsidiary of RBC
valued at $48.0025 each
Total cash payment of
US$27 million and 4.8 million
RBC common shares
valued at US$48.2485 each
$
$
1,297
57
(178)
(121)
423
995
$
1,297
$
$
$
265
421
(301)
120
7
138
265
(1)
(2)
(3)
The exchangeable shares issued for the acquisition of PH&N will be exchanged on a one-for-one basis for RBC common shares three years after closing in accordance with the purchase
agreement.
Includes future income tax liabilities of $125 million and $3 million related to the intangible assets acquired for PH&N and FBW, respectively.
Customer relationships are amortized on a straight-line basis over an estimated average useful life of 11 years and seven years for PH&N and FBW, respectively.
156
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Other acquisitions
During the year ended October 31, 2008, we also completed the fol-
lowing acquisitions: (i) on December 4, 2007, International Banking
completed the acquisition of 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
called Royal Fidelity Merchant Bank & Trust Limited; (ii) on August 4,
2008, Capital Markets completed the acquisition of Richardson Barr &
Co., a Houston-based energy advisory firm specializing in acquisitions
and divestitures in the exploration and production sector; and (iii) on
October 1, 2008, Canadian Banking acquired ABN AMRO’s Canadian
commercial leasing division. The combined preliminary purchase price
of these acquisitions, which were not material to the respective seg-
ments, was $389 million and resulted in goodwill of $26 million.
2007
International Banking
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
Percentage of shares acquired
Flag
AmSouth branches
December 8, 2006
March 9, 2007
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 (1)
Fair value of identifiable net tangible 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)
Includes future income tax liabilities of $12 million and $10 million related to the intangible assets acquired for Flag and AmSouth Branches, respectively.
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. Not 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 were not material to Capital
Markets and resulted in goodwill of $160 million.
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 23)
Prepaid pension benefit cost (2) (refer to Note 20)
Other
Wealth Management
In May 2007, we completed the acquisition of New Jersey-based
J.B. Hanauer & Co., a privately held financial services firm which spe-
cializes in retail fixed income and wealth management services for
cash. Total purchase price was US$65 million (C$71 million), of which
US$42 million (C$45 million) was paid at close and the final adjust-
ment was paid subsequent to October 31, 2008 under the purchase
agreement. The acquisition was not material to Wealth Management
and resulted in goodwill of $43 million.
$
2008
$ 10,269
2,461
1,156
1,062
1,706
551
8,126
2007
4,048
2,608
1,420
827
1,251
590
7,109
$ 25,331
$ 17,853
(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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
157
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), (4)
Total
2008
2007
Total
$
$ 59,946
100,011
6,699
4,580
3,245
12
$ 74,510
166,738
22,834
$ 139,036
269,994
29,545
$ 116,557
219,886
28,762
$ 166,656
$
7,837
$ 264,082
$ 438,575
$ 365,205
$ 34,463
4,682
4,579
$ 28,254
2,285
1,693
168,246
68,450
158,155
155,190
41,514
136,269
$ 438,575
$ 365,205
(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 include both savings and 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, 2008, the
balance of term deposits also includes senior deposit notes we have issued to provide long-term funding of $63.2 billion (2007 – $51.5 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 OSFI. It may
be redeemed earlier, at our option in certain specified circumstances, subject to the approval of 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 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
distributions 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 following table presents the contractual maturities of our demand, notice and term deposit liabilities. Included in “within 1 year” are deposits
payable on demand and deposits payable after notice.
Deposits (1)
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
2008
2007
$ 357,112
30,768
19,912
10,871
11,319
8,593
$ 308,708
17,484
15,290
9,501
8,552
5,670
$ 438,575
$ 365,205
(1)
The aggregate amount of term deposits in denominations of $100,000 or more as at October 31, 2008 was $221 billion (2007 – $186 billion).
The following table presents the average deposit balances and average rates of interest paid during 2008 and 2007.
Average deposit balances and rates
Canada
United States
Other International
Average balances
Average rates
2008
2007
$ 187,182
58,997
164,862
$ 190,754
54,812
122,910
$ 411,041
$ 368,476
2008
2.36%
2.98
3.63
2.96%
2007
2.97%
4.68
4.50
3.74%
158
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Note 14 Insurance
Insurance claims and policy benefit liabilities
Life and Health
Property and Casualty
Reinsurance
Total
Future policy benefit liabilities
Claims liabilities
Total
2008
6,676
459
250
7,385
6,660
725
$
$
$
2007
6,664
417
202
7,283
6,610
673
7,385
$
7,283
$
$
$
$
The net increase in Insurance claims and policy benefit liabilities
over the prior year comprised (i) the unfavourable impact of the depre-
ciation of the Canadian dollar on U.S. dollar-denominated liabilities,
(ii) the net increase in life and health, reinsurance and property and
casualty liabilities attributable to business growth, (iii) the decrease
due to market movements on assets backing life and health liabilities
and (iv) decreased reinsurance liabilities reflecting claim payments
related to hurricanes Katrina, Rita and Wilma.
Furthermore, the review of various actuarial assumptions
and completion of certain actuarial experience studies resulted in
a net decrease of $33 million in life insurance liabilities (2007 –
$57 million) and a net decrease of $111 million in health insurance
liabilities (2007 – $32 million). 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.
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 Statements of Income in the period in
which the estimates changed.
Reinsurance
In the ordinary course of business, our insurance operations rein-
sure 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 reinsur-
ance 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 mini-
mize 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 our 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
Cheques and other items in transit
Other
2008
3,760
(896)
$
2007
3,445
(852)
$
2006
3,405
(810)
2,864
$
2,593
$
2,595
$
$
$
2008
5,402
9,610
2,925
$
1,383
428
701
3,855
2,329
139
1,193
7,724
2007
3,784
3,941
2,908
1,266
408
661
3,960
1,854
1,078
281
8,342
$ 35,689
$ 28,483
(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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
159
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 OSFI.
All subordinated debentures are redeemable at our option. 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
January 22, 2013
January 27, 2014
June 1, 2014
November 14, 2014
January 25, 2015
June 24, 2015
April 12, 2016
March 11, 2018
June 6, 2018
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
Interest
rate
Denominated in
foreign currency
January 22, 2008
January 27, 2009
June 1, 2009
(1)
(2)
(4)
January 25, 2010
(5)
June 24, 2010
(2)
April 12, 2011 (6)
March 11, 2013
(7)
June 6, 2013
(9)
November 4, 2013 (11)
June 26, 2017 (12)
(14)
(14)
June 18, 2009 (17)
(3)
(3)
6.50%
6.10%
3.96%
4.18%
10.00%
(3)
7.10%
(3)
3.70%
(3)
6.30%
4.84%
(8)
5.00% (10)
5.45%
(3)
9.30%
2.86% (13)
(15)
(16)
5.95% (18)
US$125
$
JPY 10,000
US$189
$
2008
151
–
500
1,001
271
528
816
407
1,039
1,012
1,102
110
81
224
228
672
2007
118
483
495
976
257
515
775
389
–
–
1,021
110
77
224
179
622
$
$
8,142
(11)
$
6,241
(6)
8,131
$
6,235
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 8 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)
(4) Redeemable at any time prior to the earliest par value redemption
date at the greater of (i) the fair value of the subordinated debentures
based on the yield on Government of Canada bonds plus 9 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 12.5 basis
points and (ii) par value, and thereafter at any time at par value.
(9) Redeemable at any time prior to the earliest par value redemption
date at the greater of (i) the fair value of the subordinated debentures
based on the yield on Government of Canada bonds plus 44 basis
points and (ii) par value, and thereafter at any time at par value.
(10) Interest at stated interest rate until earliest par value redemption
date, and thereafter at a rate of 2.15% above the 90-day Bankers’
Acceptance rate.
(11) Redeemable at any time prior to the earliest par value redemption
date at the greater of (i) the fair value of the subordinated debentures
based on the yield on Government of Canada bonds plus 14 basis
points and (ii) par value, and thereafter at any time at par value.
(12) Redeemable on or after June 26, 2017 at par value.
(13) Fixed interest rate at 2.86% per annum, payable semi-annually.
(14) Redeemable on any interest payment date at par value.
(15) Interest at a rate of 40 basis points above the 30-day Bankers’
Acceptance rate.
(6) Redeemable at any time prior to the earliest par value redemption
(16) Interest at a rate of 25 basis points above the U.S. dollar 3-month
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.
(7) Redeemable at any time prior to the earliest par value redemption
date at the greater of (i) the fair value of the subordinated debentures
based on the yield on Government of Canada bonds plus 42.5 basis
points and (ii) par value, and thereafter at any time at par value.
Interest at stated interest rate until earliest par value redemption
date, and thereafter at a rate of 2.00% above the 90-day Bankers’
Acceptance rate.
(8)
LIMEAN. In the event of a reduction of the annual dividend we declare
on our common shares, the interest payable on the debentures is
reduced pro rata to the dividend reduction and the interest reduction
is payable with the proceeds from the sale of newly issued common
shares.
(17) 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.
(18) Interest at a rate of 5.95% until earliest par value redemption date
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:
Within 1 year
1 to 5 years
5 to 10 years
Thereafter
160
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
$
2008
151
–
5,574
2,417
$
8,142
Note 17 Trust capital securities
We issue innovative capital instruments, RBC Trust Capital Securities
(RBC TruCS) and RBC Trust Subordinated Notes (RBC TSNs), through
three SPEs: RBC Capital Trust (Trust), RBC Capital Trust II (Trust II) and
RBC Subordinated Notes Trust (Trust III).
On April 28, 2008, we issued $500 million of RBC Trust Capital
Securities Series 2008-1 (RBC TruCS 2008-1) through our consolidated
subsidiary RBC Capital Trust (Trust), a closed-end trust established
under the laws of the Province of Ontario. The issue was priced at
$1,000 per RBC TruCS 2008-1, and the proceeds were used to fund the
Trust’s acquisition of trust assets. The holders of RBC TruCS 2008-1
do not have any conversion rights or any other redemption rights. As a
result, upon consolidation of the Trust, RBC TruCS 2008-1 are
classified as Non-controlling interest in subsidiaries (refer to Note 19).
In prior years, we also issued non-voting RBC Trust Capital
Securities Series 2010, 2011 and 2015 (RBC TruCS 2010, 2011 and
2015) through the Trust. 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; therefore, the
RBC TruCS 2013 issued by Trust II are not reported on our Consolidated
Balance Sheets, but the senior deposit note is reported in Business
and government deposit liabilities (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 RBC 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.
In 2007, we issued $1 billion innovative subordinated debentures,
RBC TSNs – Series A, through Trust III. Trust III is a closed-end trust
established under the laws of the Province of Ontario. 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 RBC TSNs – Series A issued
by Trust III are not reported on our Consolidated Balance Sheets but
the senior deposit note issued by us to Trust III is reported in Business
and government deposit liabilities (refer to Note 13).
The table below presents the significant terms and conditions of
RBC TruCS and RBC TSNs as at October 31, 2008 and 2007.
Issuer
RBC Capital Trust (1), (2), (3), (4), (5), (6), (7)
Included in Trust capital securities
650,000 Trust Capital Securities – Series 2010
750,000 Trust Capital Securities – Series 2011
Included in Non-controlling interest in subsidiaries
1,200,000 Trust Capital Securities –
Series 2015
500,000 Trust Capital Securities –
Series 2008–1
RBC Capital Trust II (2), (3), (4), (6), (7), (9)
Issuance date
Distribution dates
Annual
yield
At the option of
the issuer
At the option
of the holder
Redemption date
Conversion date
July 24, 2000
December 6, 2000
June 30, December 31
June 30, December 31
7.288%
7.183%
December 31, 2005
December 31, 2005
December 31, 2010
December 31, 2011
October 28, 2005
June 30, December 31 4.87% (8)
April 28, 2008
June 30, December 31 6.821% (8)
December 31, 2010 Holder does not have
conversion option
June 30, 2013 Holder does not have
conversion option
2008
Principal
amount
2007
Principal
amount
$
650
750
$ 1,400
$
650
750
$ 1,400
1,200
1,200
500
–
$ 3,100
$ 2,600
900,000 Trust Capital Securities – Series 2013
July 23, 2003
June 30, December 31
5.812%
December 31, 2008
Any time
$
900
$
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
$ 1,000
The significant terms and conditions of the RBC TruCS and RBC TSNs are as follows:
(1) Subject to the approval of 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 2008-1, 2010, 2011 and 2015, without
the consent of the holders.
(3)
(2) Subject to the approval of OSFI, upon occurrence of a special event as
defined, prior to the Redemption date specified above, the trusts may
redeem all, but not part of, RBC TruCS 2008-1, 2010, 2011, 2013 or 2015
without the consent of the holders.
Issuer Redemption Price: The RBC TruCS 2008-1 may be redeemed for
cash equivalent to (i) the Early Redemption Price if the redemption occurs
prior to June 30, 2018 or (ii) the Redemption Price if the redemption occurs
on or after June 30, 2018. The RBC TruCS 2010 and 2011 may be redeemed
for cash equivalent to (i) the Early Redemption Price if the redemption
occurs earlier than six months prior to the conversion date specified above
or (ii) the Redemption Price if the redemption occurs on or after the date
that is six months prior to the conversion date as indicated above. The
RBC TruCS 2013 and 2015 may be redeemed for cash equivalent to (i) the
Early Redemption Price if the redemption occurs prior to December 31,
2013 and 2015, respectively, or (ii) the Redemption Price if the redemp-
tion occurs on or after December 31, 2013 and 2015, respectively. The
RBC TSNs – Series A may be redeemed, in whole or in part, subject to the
approval of 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, 2018, plus
77 basis points, for RBC TruCS 2008-1, 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 RBC TSNs – Series A.
(4) Automatic Exchange Event: Without the consent of the holders, each RBC
TruCS 2008-1 will be exchanged automatically for 40 of our non-cumulative
redeemable Bank Preferred Shares Series AI, 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 RBC TSN – Series A will be exchanged automatically 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) 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) 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 Bank
Preferred Shares Series AI and 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 and
2008, we held none of RBC TruCS 2008-1, RBC TruCS 2010, RBC TruCS
2011 and RBC TSNs – Series A, except for $6 million of RBC TruCS 2015 in
2007 as treasury holdings which were deducted from regulatory capital.
(5)
(6) Regulatory capital: According to OSFI guidelines, innovative capital
instruments can comprise up to 15% of net Tier 1 capital with an addi-
tional 5% eligible for Tier 2B capital. RBC TSN – Series A qualifies as Tier
2B capital. As at October 31, 2008, $3,879 million (2007 – $3,494 million)
represents Tier 1 capital, $1,147 million (2007 – $1,027 million)
represents Tier 2B capital and $nil (2007 – $6 million) of our treasury
holdings of innovative capital is deducted for regulatory capital purposes.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
161
Note 17 Trust capital securities (continued)
(7) Holder Exchange Right: Holders of RBC TruCS 2010 and 2011 may
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 2008-1, RBC
TruCS 2015 and RBC 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
non-cumulative cash distribution on the RBC TruCS 2008-1 will be 6.821%,
paid semi-annually in an amount of $34.105 on June 30 and December 31
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
of each year until June 30, 2018, and floating distributions thereafter at
the six-month Bankers’ Acceptance rate plus 350 basis points.
(9) Subject to the approval of OSFI, Trust II may, in whole or in part, on
the Redemption date specified above, and on any distribution date
thereafter, redeem any outstanding RBC TruCS 2013, without the consent
of the holders.
(10) The cash distribution on the RBC 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 RBC 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.
Common – An unlimited number of shares without nominal or par value
may be issued.
Preferred share liabilities
First preferred
Non-cumulative Series N (1)
Treasury shares – sales
Treasury shares – purchases
Preferred share liabilities, net of treasury holdings
Preferred shares
First preferred
Non-cumulative Series O (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)
Non-cumulative Series AH (11)
Non-cumulative Series AJ (12)
Common shares
Balance at beginning of year
Issued on new acquisitions
Issued under the stock option plan (13)
Purchased for cancellation
Balance at end of year
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
Balance at end of year
Number
of shares
(000s)
2008
Amount
Dividends
declared
per share
Number
of shares
(000s)
2007
Amount
Dividends
declared
per share
Number
of shares
(000s)
2006
Amount
Dividends
declared
per share
– $
–
–
– $
– $
–
–
–
– $
– $
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
8,500
16,000
300
300
300
200
250
250
200
250
213
400
.88
–
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
.81
–
11,916 $
152
(68)
298 $
4
(2)
12,000 $
300
– $
– $
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
–
–
300
300
300
200
250
250
200
250
–
–
1.18
–
1.23
1.11
1.18
1.22
1.06
.95
.77
.65
–
–
12,000 $
–
(84)
300 $
–
(2)
11,916 $
298
6,000 $
12,000
12,000
12,000
–
–
–
–
–
–
–
150 $
300
300
300
–
–
–
–
–
–
–
1.18
1.38
1.23
.71
.41
–
–
–
–
–
–
–
$
2,663
$
2,050
$
1,050
1,276,260 $
59,675
6,445
(1,120)
7,300
2,937
153
(6)
1,280,890 $
–
7,215
(11,845)
7,196
–
170
(66)
1,293,502 $
–
5,617
(18,229)
7,170
–
127
(101)
1,341,260 $ 10,384 $
2.00
1,276,260 $
7,300 $
1.82
1,280,890 $
7,196 $
1.44
(249) $
1,060
(1,071)
(260) $
(2,444) $
1,269
(1,083)
(2,258) $
(6)
23
(22)
(5)
(101)
51
(54)
(104)
(94) $
1,345
(1,500)
(249) $
(5,486) $
4,756
(1,714)
(2,444) $
(2)
33
(37)
(6)
(180)
175
(96)
(101)
(91) $
2,082
(2,085)
(94) $
(7,053) $
5,097
(3,530)
(5,486) $
(2)
51
(51)
(2)
(216)
193
(157)
(180)
(1)
(2)
On August 22, 2008, we redeemed Non-cumulative First Preferred Shares Series N at a redemption price equal to the carrying value.
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 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) On April 29, 2008, we issued 8.5 million Non-cumulative First Preferred Shares Series AH at $25 per share.
(12) On September 16, 2008, we issued 16 million Non-cumulative 5-Year Rate Reset First Preferred Shares Series AJ at $25 per share.
(13)
Includes fair value adjustments to stock options of $5 million (2007 – $2 million), 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 $4 million (2007 – $10 million), and from renounced tandem SARs, net of related income taxes, of $4 million
(2007 – $6 million).
(14) The 6.75 million exchangeable shares of a wholly owned subsidiary of RBC issued for the acquisition of PH&N are not included in this table. Refer to Note 11.
162
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Terms of preferred share liabilities and preferred shares
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
Non-cumulative Series AH
Non-cumulative Series AJ
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
Conversion date (5)
$
.306250
.278125
.293750
.287500
.281250
.281250
.278125
.281250
.353125
.312500
February 24, 2010
May 24, 2011
August 24, 2011
November 24, 2011
February 24, 2012
February 24, 2012
May 24, 2012
May 24, 2012
May 24, 2013
February 24, 2014
$
26.00
26.00
26.00
26.00
26.00
26.00
26.00
26.00
26.00
25.00
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
Not convertible
Not convertible
Not convertible
Not convertible
(1) Non-cumulative preferential dividends on Series W, AA, AB, AC, AD,
AE, AF, AG, AH and AJ 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, 2008 or
the contractual redemption price, whichever is applicable. Subject
to the consent of 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 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 dur-
ing the 12 months commencing August 24, 2011, and decreasing by
$.25 each 12-month period thereafter to a price per share of $25 if
redeemed on or after August 24, 2015; and in the case of Series AC,
at a price per share of $26, if redeemed during the 12 months com-
mencing 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 thereafter 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; and in
the case of Series AH, at a price per share of $26, if redeemed dur-
ing the 12 months commencing May 24, 2013, and decreasing by
$.25 each 12-month period thereafter to a price per share of $25 if
redeemed on or after May 24, 2017; and in the case of Series AJ, at a
price per share of $25, if redeemed on February 24, 2014 and on each
February 24 every fifth year thereafter.
(3) Subject to the consent of OSFI and the requirements of the Act, we
may purchase the First Preferred Shares Series W, AA, AB, AC, AD,
AE, AF, AG, AH and AJ 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 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) The conversion date refers to the date of conversion to common
shares.
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.
We have agreed that if Trust or 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 divi-
dends on our preferred or common shares.
(i) interest will accrue on these notes but will not compound; (ii) we
may not declare or pay dividends (except by way of stock dividend) on,
or redeem or repurchase, any of our preferred or common shares; and
(iii) we may not make any payment of interest, principal or premium
on any debt securities or indebtedness for borrowed money issued or
incurred by us that rank subordinate to these notes.
Dividend reinvestment plan
Our dividend reinvestment plan (plan) provides registered common
shareholders with a means to automatically reinvest the cash divi-
dends paid on their common shares in 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
We have also agreed that if, on any day we report financial results
market share purchases or treasury issuances.
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 payments of
interest on the Series 2014-1 Reset Subordinated Notes (matures on
June 18, 2103). During any period while interest is being deferred,
Shares available for future issuances
As at October 31, 2008, 26.8 million common shares are available for
future issue relating to our dividend investment plan and potential
exercise of stock options outstanding.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
163
Note 18 Preferred share liabilities and share capital (continued)
Others
We announced on October 23, 2008, our intention to issue 8 million
Non-cumulative 5-Year Rate Reset First Preferred Shares Series AL
at $25 per share, for total proceeds of $200 million. This issuance
was completed on November 3, 2008 for a total of 12 million shares
and proceeds of $300 million, including underwriters’ options that
were exercised.
We also announced on October 30, 2008, that the Toronto Stock
Exchange has approved RBC to repurchase up to 20 million common
shares. Subject to consultation with OSFI, purchases under the Normal
Course Issuer Bid (NCIB) may commence on November 1, 2008 and will
terminate on October 31, 2009.
Normal Course Issuer Bid
Details of common shares repurchased under NCIBs during 2008, 2007
and 2006 are given below.
NCIB period
2008
2007
Number of
shares eligible
for repurchase
(000s)
Number of
shares
repurchased
(000s)
Average
cost
per share
Number of
shares eligible
for repurchase
(000s)
Amount
Number of
shares
repurchased
(000s)
Average
cost
per share
Amount
November 1, 2007 – October 31, 2008
November 1, 2006 – October 31, 2007
20,000
–
1,120
–
$
49.50
–
$
55
–
–
40,000
–
11,845
–
54.59
$
$
–
646
NCIB period
June 26, 2006 – October 31, 2006
June 24, 2005 – June 23, 2006
Pre-stock dividend
Post-stock dividend
Total
2006
Number of
shares eligible
for repurchase
(000s)
Number of
shares
repurchased
(000s)
Average
cost
per share
Number of
shares
repurchased
(000s)
Average
cost
per share
Amount
Amount
7,000
10,000
–
4,387
$
–
90.48
4,387
$
90.48
$
$
–
397
397
6,595
2,859
$
47.12
47.52
9,454
$
47.24
$
$
311
136
447
$
$
311
533
844
Note 19 Non-controlling interest in subsidiaries
RBC Trust Capital Securities (RBC TruCS) – Series 2015
– Series 2008-1
Consolidated VIEs
Others
$
$
2008
1,220
511
205
435
2007
1,214
–
188
81
$
2,371
$
1,483
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 Series 2015 in 2005 and Series 2008-1 in
2008 which are reported as Non-controlling interest in subsidiaries
upon consolidation as discussed in Note 17. As at October 31, 2008,
$20 million (2007 – $20 million) of accrued interest was included in
RBC TruCS Series 2015. The 2007 amount is net of $6 million of treasury
holdings. Series 2008-1 includes $11 million of accrued interest.
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.
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
performed for funding purposes was completed on January 1, 2008.
The next actuarial valuation for funding purposes will be completed on
January 1, 2009.
For 2008, total contributions to our pension and other post-
employment benefit plans were $285 million and $43 million
(2007 – $208 million and $57 million), respectively. For 2009, total
contributions to pension plans and other post-employment benefit
plans are expected to be approximately $475 million and
$44 million, respectively.
For financial reporting purposes, we measure our benefit
obligations and pension plan assets as at September 30 each year.
164
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
The following tables present financial information related to all of our material pension and other post-employment plans worldwide, including
executive retirement arrangements.
Plan assets, benefit obligation and funded status
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
$
$
$
$
$
$
$
$
Pension plans (1)
2008
2007
Other post-employment plans (2)
2007
2008
6,784
(877)
191
29
(343)
7
–
35
5,826
6,846
174
389
29
(932)
(343)
(12)
12
–
51
6,214
(388)
769
(8)
62
14
449
551
(102)
449
$
–
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
6.70%
3.30%
5.60%
3.30%
$
4
5
–
–
–
$
$
7
5
3
–
–
–
$
$
1
5
$
$
$
52
(4)
45
6
(58)
–
–
–
41
1,504
16
83
6
(264)
(58)
–
11
–
17
1,315
(1,274)
272
1
(283)
3
(1,281)
–
(1,281)
(1,281)
6.72%
3.30%
41
56
(54)
52
1,468
19
5
(54)
(12)
1,504
(1,452)
564
(307)
(1,189)
–
(1,189)
(1,189)
5.62%
3.30%
(1)
(2)
For pension plans with funding deficits, the benefit obligations and fair values of plan assets totalled $5,359 million (2007 – $5,850 million) and $4,917 million (2007 – $5,687 million),
respectively.
For our other post-employment plans, the assumed healthcare 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 6.2% for medical decreasing to an ultimate rate of 4.1% in 2017 and 4.5% for dental.
The following table presents our estimates of the benefit payments for defined benefit pension and other post-employment plans.
Benefits payment projection
2009
2010
2011
2012
2013
2014–2018
Other
post-employment
plans
Pension plans
$
$
370
371
378
387
399
2,247
66
70
74
78
82
472
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
0.4 million (2007 – 1.5 million) of our common shares having a fair
value of $20 million (2007 – $84 million). Dividends amounting to
$1.8 million (2007 – $2.6 million) were received on our common shares
held in the plan assets during the year.
The following table presents the allocation of the plan assets by
securities category.
Asset category
Equity securities
Debt securities
Other
Total
Actual
2008
51%
45%
4%
100%
2007
60%
40%
–
100%
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
165
Note 20 Pensions and other post-employment benefits (continued)
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
Weighted average assumptions to calculate other post-employment benefit expense
Discount rate
Rate of increase in future compensation
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 7.25% for 2009 (7.00% for 2005
to 2008).
$
$
$
$
2008
2007
2006
174
389
(438)
(2)
22
103
–
248
82
330
$
$
$
178
362
(411)
(2)
29
129
7
292
74
366
$
$
$
173
345
(364)
(2)
32
138
3
325
65
390
5.60%
7.00%
3.30%
5.25%
7.00%
3.30%
5.25%
7.00%
3.30%
2008
2007
2006
$
16
83
(3)
–
29
(23)
–
$
19
75
(3)
–
36
(23)
–
26
77
(2)
3
31
(20)
(8)
$
102
$
104
$
107
5.62%
3.30%
5.26%
3.30%
5.41%
3.30%
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.
166
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Sensitivity analysis
The following table presents the sensitivity analysis of certain key assumptions on defined benefit pension and post-employment obligation and expense.
2008 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 healthcare cost trend rates
Impact of 1.00% decrease in healthcare cost trend rates
Change in obligation
Change in expense
$
197
18
–
$
25
3
16
Change in obligation
Change in expense
$
42
–
120
(100)
$
9
–
10
(8)
Reconciliation of defined benefit expense recognized with defined
benefit expense incurred
The cost of pension and other post-employment benefits earned
by employees is actuarially determined using the projected benefit
method pro-rated on services. The cost is computed using the
discount rate determined in accordance with the methodology
described in significant assumptions, and is based on management’s
best estimate of expected plan investment performance, salary
escalation, retirement ages of employees and costs of health, dental,
disability and life insurance.
Actuarial gains or losses arise over time due to differences in
actual experience compared to actuarial assumptions. Prior service
costs arise as a result of plan amendments. Adoption of CICA
Handbook Section 3461, Employee Future Benefits, resulted in recog-
nition 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
$
$
2008
248
1,315
(1,035)
(34)
2
Defined benefit pension expense incurred
$
496
$
(217)
$
2007
2006
$
292
(227)
(246)
(38)
2
325
(81)
(100)
(2)
2
144
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
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.
2008
2007
2006
$
$
102
8
(293)
24
–
$
104
(1)
(33)
23
–
$
(159)
$
93
$
107
(1)
7
(485)
(3)
(375)
For options issued prior to November 1, 2002, that were not
accompanied by tandem SARs, no compensation expense was
recognized as the option’s exercise price was not less than the market
price of the underlying stock on the day of grant. When the options are
exercised, the proceeds received are credited to common shares.
Between November 29, 1999 and June 5, 2001, grants of options
under the employee stock option plan were accompanied by tandem
SARs. With tandem SARs, participants could choose to exercise a SAR
instead of the corresponding option. In such cases, the participants
received a cash payment equal to the difference between the closing
price of common shares on the day immediately preceding the day of
exercise and the exercise price of the option. During the last quarter
of 2002 and first quarter of 2003, certain executive participants 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. These grants, which are accompanied by tandem SARs, resulted
in a compensation gain of $21 million for the year ended October 31,
2008 (2007 – $19 million expense; 2006 – $27 million expense).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
167
Note 21 Stock-based compensation (continued)
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
2008
2007
2006
Number
of options
(000s)
Weighted
average
exercise price
Number
of options
(000s)
Weighted
average
exercise price
Number
of options
(000s)
Weighted
average
exercise price
26,623
2,020
(6,445)
(148)
(277)
21,773
17,247
19,925
$
$
$
27.71
52.87
21.72
19.30
48.36
31.66
26.92
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
(1)
(2)
Cash received for options exercised during the year was $140 million (2007 – $152 million; 2006 – $115 million).
New shares were issued for all options exercised in 2008, 2007 and 2006. Refer to Note 18.
Options outstanding and options exercisable as at October 31, 2008 by range of exercise price
$10.80 – $11.35 (1)
$15.00 – $19.51
$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
$
219
2,398
7,709
6,144
5,303
11.24
16.71
24.58
30.50
50.88
21,773
$
31.66
1.1
1.0
2.5
4.8
8.1
4.3
Number
exercisable
(000s)
Weighted
average
exercise price
$
219
2,398
7,709
5,669
1,252
11.24
16.71
24.58
30.40
47.92
17,247
$
26.92
(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, 2008, in respect of these plans was
$12 million (2007 – $13 million; 2006 – $13 million). The compensation
expenses related to non-vested awards were $11 million at October 31,
2008 (2007 – $14 million; 2006 – $13 million), to be recognized over
the weighted average period of 2.0 years (2007 – 2.2 years; 2006 –
2.0 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. 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, 2008, 2007 and 2006.
The weighted average fair value of options granted during 2008
was estimated at $6.57 (2007 – $7.84; 2006 – $6.80) using an option
pricing model on the date of grant. The following assumptions were
used:
For the year ended October 31
2008
2007
2006
Weighted average assumptions
Risk-free interest rate
Expected dividend yield
Expected share price volatility
Expected life of option
3.93%
3.27%
14%
6 years
3.82%
3.06%
16%
6 years
3.98%
3.16%
17%
6 years
Employee savings and share ownership plans
We offer many employees an opportunity to own our common 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 2008, we contributed
$68 million (2007 – $64 million; 2006 – $60 million), under the terms
of these plans, towards the purchase of our common shares. As at
October 31, 2008, an aggregate of 34.1 million common shares were
held under these plans.
Deferred share and other plans
We offer deferred share unit plans to executives, non-employee direc-
tors and to certain key employees. Under these plans, the executives
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, 2008, was $200
million (2007 – $285 million; 2006 – $232 million). The share price
fluctuations and dividend equivalents compensation gain recorded for
the year ended October 31, 2008, in respect of these plans was
$37 million (2007 – $37 million expense; 2006 – $45 million expense).
168
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
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, 2008, was $473 million (2007 – $490 million; 2006 –
$401 million). The share price fluctuations and dividend equivalents
compensation gain for the year ended October 31, 2008, in respect of
this plan was $75 million (2007 – $62 million expense; 2006 –
$51 million expense).
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%,
depending on our total shareholder return compared to a defined peer
group of North American financial institutions. The value of the award
paid will be equivalent to the original award adjusted for dividends
and changes in the market value of common shares at the time the
award vests. The number of our common shares held in trust as at
October 31, 2008, was 2.0 million (2007 –2.3 million; 2006 –
5.3 million). The value of the DSUs liability as at October 31, 2008 was
$164 million (2007 – $250 million; 2006 – $153 million). The com-
pensation expense recorded for the year ended October 31, 2008, in
respect of these plans was $96 million (2007 – $168 million; 2006 –
$148 million).
We maintain a non-qualified deferred compensation plan for key
employees in the United States under an arrangement called the
RBC U.S. Wealth Accumulation Plan. This plan allows eligible employees
to make deferrals of a portion of their annual income and allocate
the deferrals among various fund choices, which include a share unit
fund that tracks the value of our common shares. Certain deferrals
may also be eligible for matching contributions, all of which are
allocated to the RBC share unit fund. Our liability for the RBC share units
held under the plan as at October 31, 2008, was $244 million (2007 –
$285 million; 2006 – $289 million). The compensation gain recorded
for the year ended October 31, 2008, was $123 million (2007 –
$157 million expense; 2006 – $110 million expense).
For other stock-based plans, compensation expense of $5 million
was recognized for the year ended October 31, 2008 (2007 –
$9 million; 2006 – $10 million). The liability for the share units held
under these plans as at October 31, 2008, was $35 million (2007 –
$21 million; 2006 – $4 million). The number of our common shares held
under these plans was .2 million (2007 – .3 million; 2006 – .3 million).
Note 22 Revenue from trading and selected non-trading financial instruments
Held-for-trading financial instruments
Total Trading revenue includes both trading-related net interest income
and trading revenue reported in Non-interest income. Net interest
income arises from interest income and dividends recognized on trading
assets and liabilities. Non-interest income includes a $210 million
decrease in the fair values of our net financial assets classified as
held-for-trading for the year ended October 31, 2008 (2007 – increased
by $1,912 million).
Net interest income (expense)
Non-interest (expense) income
Total
By product line
Interest rate and credit
Equities
Foreign exchange and commodities (1)
Total
(1)
Include precious metals.
Financial instruments designated as held-for-trading
During the year, net gains or losses representing net changes in the
fair value of financial assets and financial liabilities designated as
held-for-trading decreased by $341 million (2007 – increased by
$80 million).
$
$
$
2008
998
(408)
2007
$
(220) $
1,999
2006
(539)
2,574
590
$
1,779
$
2,035
(259) $
265
584
$
640
784
355
1,174
561
300
$
590
$
1,779
$
2,035
Financial instruments measured at amortized cost
The following were recognized in Non-interest income during the year
ended October 31, 2008:
•
Net fee income of $3,183 million, which does not form an integral
part of the effective interest rate of financial assets and liabilities
other than held-for-trading (2007 – $2,617 million).
Net fee income of $5,405 million arising from trust and other
fiduciary activities (2007 – $5,779 million).
Net gains and losses of $nil arising from financial instruments
measured at amortized cost (2007 – $nil).
•
•
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
169
Note 23 Income taxes
Income taxes (recoveries) 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 losses on available-for-sale securities
Reclassification of losses on available-for-sale securities to income
Net foreign currency translation (losses) gains, net of hedging activities
Net unrealized (losses) gains on derivatives designated as cash flow hedges
Reclassification to income of losses on derivatives designated as cash flow hedges
Issuance costs
Stock appreciation rights
Other
Subtotal
Total income (recoveries) taxes
2008
2007
2006
$
1,350
664
85
2,099
(533)
(211)
14
(730)
$
$
696
416
322
506
331
435
1,434
1,272
14
3
(59)
(42)
104
31
(4)
131
1,369
1,392
1,403
–
–
–
–
(20)
2
1,369
1,392
1,385
(778)
201
(1,361)
(304)
23
(6)
2
(2)
(2,225)
(26)
15
911
43
16
(12)
5
(6)
946
n.a.
n.a.
130
n.a.
n.a.
(4)
4
6
136
$
(856) $
2,338
$
1,521
(1)
OCI was introduced upon the adoption of Section 1530 on November 1, 2006; accordingly, there are no comparative figures for 2006, 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-related litigation provision
Other comprehensvie income
Other
Valuation allowance
Future income tax liability
Premises and equipment
Deferred expense
Intangibles
Other
Net future income tax asset
170
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
$
2008
2007
$
719
721
189
6
106
31
27
234
708
2,741
(78)
2,663
(240)
(64)
(185)
(468)
(957)
460
642
188
10
91
50
204
47
369
2,061
(10)
2,051
(245)
(138)
(25)
(392)
(800)
$
1,706
$
1,251
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 $106 million of future income tax assets related to losses in
our Canadian, Japanese and U.S. operations (2007 – $91 million) which
will expire starting in 2009.
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
2008
2007
2006
$
1,952
32.5%
$
2,431
34.6%
$
2,152
34.7%
(450)
(326)
51
142
(7.5)
(5.4)
.8
2.4
(734)
(272)
30
(63)
(10.4)
(3.9)
.4
(.9)
(599)
(184)
13
21
(9.6)
(3.0)
.2
.3
$
1,369
22.8%
$
1,392
19.8%
$
1,403
22.6%
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 $920 million as at October 31, 2008
(2007 – $843 million; 2006 – $822 million).
Note 24 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
Exchangeable shares (3)
Average number of diluted common shares (in thousands)
Diluted earnings (loss) per share
Continuing operations
Discontinued operations
Total
2008
2007
2006
$
$
$
4,555
–
4,555
(101)
–
5,492
–
5,492
(88)
–
4,757
(29)
4,728
(60)
–
$
4,454
$
5,404
$
4,668
1,305,706
1,273,185
1,279,956
$
$
$
$
3.41
–
$
4.24
–
3.67
(0.02)
3.41
$
4.24
$
3.65
4,454
$
5,404
$
4,668
1,305,706
8,497
2,148
3,393
1,273,185
13,254
2,875
–
1,279,956
14,573
5,256
–
1,319,744
1,289,314
1,299,785
$
$
$
3.38
–
$
4.19
–
3.61
(0.02)
3.38
$
4.19
$
3.59
(1)
(2)
(3)
The net loss for 2006 is related to RBC Mortgage Company which was disposed of in 2005.
The dilutive effect of stock options was calculated using the treasury stock method. For 2008, we excluded from the calculation of diluted earnings per share 3,541,989 average options
outstanding with an exercise price of $53.99 as the exercise price of these options was greater than the average market price of our common shares. For 2007, we excluded from the
calculation of diluted earnings per share 16,224 average options outstanding 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, no options were outstanding with an exercise price exceeding the average market price of our common shares.
Exchangeable shares were issued for the acquisition of PH&N. Refer to Note 11.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
171
Note 25 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, Disclosure of Guarantees. AcG-14 defines a
guarantee to be a contract (including an indemnity) that contingently
requires us to make payments (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 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 indica-
tive of the maximum potential amount of future payments, we continue
to consider financial guarantees as off-balance sheet credit instru-
ments. 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.
Credit derivatives and written put options (1)
Backstop liquidity facilities (2)
Stable value products (3)
Financial standby letters of credit and performance guarantees (4)
Credit enhancements
Mortgage loans sold with recourse
2008
2007
Maximum
potential amount
of future
payments
$
$ 43,700
40,892
24,876
22,185
4,873
210
Maximum
potential amount
of future
payments
Carrying
amount
5,742
59
–
75
22
–
$ 70,242
43,066
17,369
16,661
4,814
230
$
Carrying
amount
2,657
41
–
57
30
–
(1)
(2)
(3)
(4)
The carrying amount is included in Other – Derivatives on our Consolidated Balance Sheets. The notional amount of the contract approximates the maximum potential amount of future
payments.
Certain RBC-administered multi-seller asset-backed commercial paper conduit programs drew down certain of our backstop liquidity facilities. As at October 31, 2008, these loans
totalled US$1,617 million (C$1,947 million) before the allowance for loan losses of US$54 million (C$65 million) and are included in Wholesale Loans – Business on our Consolidated
Balance Sheets.
The notional amount of the contract approximates the maximum potential amount of future payments. The maximum potential amount of future payments comprise $9.4 billion
(October 31, 2007 – $7.0 billion) for bank-owned life insurance policies and $15.4 billion (October 31, 2007 – $10.4 billion) for U.S. Employee Retirement Income Security Act of 1974
(ERISA)-governed pension plans such as 401(k) plans. During the year, we recorded a provision of approximately $149 million in connection with the bank-owned life insurance policies
stable value contracts. The provision reflects both the value of the assets in the underlying investment portfolios of the policies and our estimate of the probability of the policyholders
surrendering their policies.
The carrying amount is included in Other – Other liabilities on our Consolidated Balance Sheets. Includes $1.4 billion maximum potential amount of future payments related to the ARS
TOB programs and represents the higher of the notional amounts of the letters of credit and the liquidity facilities.
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, 2008, RBC Dexia IS securities lending indemnifications
totalled $45,723 million (2007 – $63,462 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 disclosed only 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 41 years.
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
six 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
limited circumstances, when predetermined performance measures
of the financial assets owned by these programs are not met. We
generally provide liquidity facilities for a term of one to three years.
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.
We enter into written put options that are contractual agreements
The terms of the backstop liquidity facilities do not require us
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
to advance money to these programs in the event of bankruptcy or to
purchase non-performing or defaulted assets.
172
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Stable value products
We sell stable value products that offer book value protection primar-
ily to plan sponsors of United States Employee Retirement Income
Security Act of 1974 (ERISA)-governed pension plans such as 401(k)
plans and 457 plans as well as bank-owned life insurance policies. The
book value protection is provided on portfolios of intermediate/short-
term fixed income securities and is intended to cover any shortfall in
the event that plan participants withdraw funds or policyholders
surrender their life insurance policies 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
represent irrevocable assurances that we will make payments in the
event that a client cannot meet its obligations to third parties. For
certain guarantees, the guaranteed party can request payment from
us even though the client has not defaulted on its obligations. 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 approximately three years.
Mortgage loans sold with recourse
Through our various agreements with investors, we may be required to
repurchase U.S. originated mortgage loans sold to an investor
if the loans are uninsured for greater than one year, or refund any
premium received where mortgage loans are prepaid or in default
within 120 days. The mortgage loans are fully collateralized by
residential properties.
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 ter-
minate 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 indemnifica-
tion agreements may require us to compensate the counterparties for
costs incurred as a result of changes in laws and regulations (including
tax legislation) or as a result of litigation claims or statutory sanctions
that may be suffered by the counterparty as a consequence of the
transaction. The terms of these indemnification agreements will vary
based on the contract. The nature of the indemnification agreements
prevents us from making a reasonable estimate of the maximum poten-
tial amount we could be required to pay to counterparties. Historically,
we have not made any significant payments under such indemnifications.
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
are generally the same as for loans. Many of these instruments expire
without being drawn upon. As a result, the contractual amounts may
not necessarily represent our actual future credit risk exposure or cash
flow requirements.
Commitments to extend credit represent unused portions of
authorizations to extend credit in the form of loans, bankers’
acceptances or letters of credit.
In securities lending transactions, we lend our own or our clients’
securities to a borrower for a fee under the terms of a pre-arranged
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 (2)
Original term to maturity of 1 year or less
Original term to maturity of more than 1 year
Securities lending
Uncommitted amounts (3)
Documentary and commercial letters of credit
2008
2007 (1)
$ 44,135
60,572
27,547
170,780
558
$ 42,236
54,733
36,187
185,297
501
$ 303,592
$ 318,954
(1)
(2)
(3)
The 2007 comparative information has been revised as a result of implementing Basel II.
Includes liquidity facilities.
The comparative numbers have been revised to include retail commitments in addition to commercial commitments. Uncommitted amounts include uncommitted liquidity loan facilities of
$41.4 billion (2007 – $42.2 billion) provided to RBC-administered multi-seller conduits. As at October 31, 2008, $nil (2007 – $758 million) was drawn upon on these facilities and is included
in Loans.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
173
Note 25 Guarantees, commitments and contingencies (continued)
Restructuring of non-bank-sponsored asset-backed commercial
paper (ABCP) conduits
In August 2007, certain non-bank-sponsored ABCP conduits in Canada
faced various liquidity issues which ultimately led them to an agreed
upon standstill process and discussions toward a longer-term solu-
tion. As a result of negotiations amongst various parties, a proposed
restructuring of the ABCP conduits under the Companies Creditors
Arrangement Act was reviewed by the Ontario Superior Court (Court).
One aspect of the restructuring involves a margin funding facility from
a group of derivative counterparties, banks and others. We have been
actively engaged in discussions related to the restructuring and have
indicated our support for this margin funding facility, subject to the
approval of the restructuring by the Court and the completion of
certain other conditions. Upon the approval of the restructuring and
the completion of these conditions, we anticipate that we will account
for the margin funding facility as a loan commitment.
On June 5, 2008, the Court approved the proposed restructuring
of the non-bank-sponsored ABCP conduits but the Court’s decision
was appealed to the Ontario Court of Appeal. On August 18, 2008, the
Ontario Court of Appeal unanimously upheld the decision of the Court.
Certain investors of the non-bank-sponsored ABCP conduits requested
the Supreme Court of Canada to hear their arguments on the appeal,
but on September 19, 2008, the Supreme Court of Canada turned
down their request.
While we have been working toward closing the transaction, on
November 25, 2008, the Pan-Canadian Investors Committee for the
non-bank-sponsored ABCP conduits announced that they will not be in
a position to close the transaction by the end of November. We under-
stand that the Court has now extended the plan implementation date
to December 19, 2008.
Pledged assets
In the ordinary course of business, we pledge assets with terms and
conditions that are usual and customary to our regular lending,
borrowing and trading activities recorded on our Consolidated Balance
Sheets. The following are examples of our general terms and
conditions on pledged assets:
•
The risks and rewards of the pledged assets reside with
the pledgor.
The pledged asset is returned to the pledgor when the necessary
conditions have been satisfied.
The right of the pledgee to sell or repledge the asset is dependent
on the specific agreement under which the collateral is pledged.
If there is no default, the pledgee must return the comparable
asset to the pledgor upon satisfaction of the obligation
•
•
•
We are also required to provide intraday pledges to the Bank of Canada
when we use the Large Value Transfer System (LVTS), which is a
real-time electronic wire transfer system that continuously processes
all Canadian dollar large-value or time-critical payments throughout the
day. The pledged assets earmarked for LVTS activities are normally
released back to us at the end of the settlement cycle each day.
Therefore, the pledged securities amount is not included in the table
below. For the year ended October 31, 2008, we had on average
$3.2 billion (2007 – $3.6 billion) of securities pledged intraday to the
Bank of Canada on a daily basis. There are infrequent occasions where
we are required to take an overnight advance from the Bank of Canada
to cover a settlement requirement, in which case an equivalent value of
the pledged assets would be used to secure the advance. There were no
overnight advances taken on October 31, 2008 and October 31, 2007.
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
Covered bonds
Other
2008
2007
$
2,443
9,960
9,821
45,920
23,362
989
$
305
3,443
1,733
51,695
39,670
1,052
$ 92,495
$ 97,898
2008
2007
$
5,706
2,226
$
1,981
1,772
25,613
30,919
17,664
5,142
5,225
34,801
48,479
7,474
–
3,391
$ 92,495
$ 97,898
Collateral
In the ordinary course of business, we enter into collateral agreements
with terms and conditions that are usual and customary to our regular
lending and borrowing activities recorded on our Consolidated Balance
Sheets. The following are examples of our general terms and
conditions on collateral assets that we may sell, pledge or repledge:
The risks and rewards of the pledged assets reside with
•
the pledgor.
•
•
•
The pledged asset is returned to the pledgor when the necessary
conditions have been satisfied.
The right of the pledgee to sell or repledge the asset is dependent
on the specific agreement under which the collateral is pledged.
If there is no default, the pledgee must return the comparable
asset to the pledgor upon satisfaction of the obligation.
174
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
As at October 31, 2008, the approximate market value of collat-
eral accepted that may be sold or repledged by us was $83.0 billion
(2007 – $122.4 billion). This collateral was received in connection with
reverse repurchase agreements, securities borrowings and loans,
and derivative transactions. Of this amount, $32.6 billion (2007 –
$56.5 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), (2)
2009
2010
2011
2012
2013
Thereafter
$
550
478
406
344
289
1,129
$
3,196
(1)
(2)
Substantially all of our lease commitments are related to operating leases.
The minimum lease payments include an imputed interest of capital leases of
$7 million.
Repurchase offer of ARS
On October 8, 2008, we announced that, as part of an agreement in
principle to settle with the U.S. regulators, we will offer to purchase,
at par, for a six-month period beginning no later than December 15,
2008, ARS held by U.S. retail brokerage clients that are qualified for
the repurchase offer. Qualifying clients who sold eligible ARS below
par between February 11, 2008 and October 8, 2008 will be paid the
difference between par and the price of the sale.
The repurchase offer represents notional amounts of approxi-
mately US$850 million (C$1,024 million) as at October 31, 2008.
The impact on our 2008 results is US$34.5 million (C$41.6 million)
pre-tax which comprised the estimated difference between par value
and current valuations and a penalty of US$9.8 million (C$11.8 mil-
lion). RBC has agreed to pay to the New York Attorney General’s office
and the state securities commissioners associated with the North
American Securities Administrators Association. The final financial
impact of the repurchase offer will depend on the number of clients
who accept the repurchase offer and market conditions at the time
they accept.
In addition, we will also continue to work with issuers and other
interested parties to provide liquidity solutions for institutional inves-
tors not covered by the repurchase offer.
Litigation
Enron Corp. (Enron) litigation
A purported class of purchasers of Enron publicly traded equity and
debt securities between January 9, 1999 and November 27, 2001,
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
District of Texas (Houston Division). The Regent’s case was consoli-
dated with the lead action entitled Newby v. Enron Corp., which is the
main consolidated purported Enron shareholder class action wherein
similar claims have been made against numerous other financial
institutions, law firms, accountants and certain current former officers
and directors of Enron. RBC has also been named as a defendant by
several individual investors in respect of the losses suffered by those
investors as purchasers of Enron publicly traded equity and
debt securities.
During the fourth quarter of 2005, RBC established a litigation
provision of $591 million (US$500 million) or $326 million after-tax
(US$276 million) in regard to its Enron-related litigation exposure.
Management reviews this provision regularly and at least on a quar-
terly basis. There were several important developments during 2008
which we believe affect the analysis of RBC’s potential Enron-related
litigation exposure, including Supreme Court and other court decisions
in the United States, the restatement by the plaintiffs in the Newby
case of the basis for certification of the class in regard to their claim
and the defendants’ replies to that restatement. As a result of our
continuous evaluation of these developments as they occurred,
individually and in aggregate, our latest assessment of them has led
us to conclude that a litigation provision of $60 million (US$50 million)
or $33 million after-tax (US$27 million) is reasonable. The $542 million
(US$450 million) difference has been recorded in Non-interest
expense – Other on our income statement. We will continue to vigor-
ously defend ourselves in all remaining Enron-related cases and will
exercise our judgment in resolving these claims.
Other
Various other legal proceedings are pending that challenge certain of
our practices or actions. We consider that the aggregate liability
resulting from these other proceedings will not be material to our
financial position or results of operations.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
175
Note 26 Contractual repricing and maturity schedule
The following table details our exposure to interest rate risk as
defined and prescribed by CICA Handbook Section 3862, Financial
Instruments – Disclosures. On- and off-balance sheet financial instru-
ments are reported based on the earlier of their contractual 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
Carrying amount by earlier of contractual repricing or maturity date
future events where expected repricing or maturity dates differ signifi-
cantly from the contractual dates. We incorporate these assumptions
in the management of interest rate risk exposure. These assumptions
include expected repricing of trading instruments and certain loans
and deposits. Taking into account these assumptions on the consoli-
dated contractual repricing and maturity schedule at October 31, 2008,
would result in a change in the under-one-year gap from $(63.0) billion
to $(48.7) billion (2007 – $(74.4) billion to $(53.3) billion).
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
$
– $ 29,247
2.68%
–
$
$
–
–
– $
–
$
–
–
– $ 1,880 $ 31,127
–
–
–
–
–
–
–
–
–
140,102
–
53,156
–
–
16,908
2.80%
10,925
2.41%
44,818
2.79%
30,363
4.04%
7,064
2.97%
–
7,409
3.12%
2,794
3.25%
–
–
8,802
5.03%
2
3.03%
–
8,855
3.05%
3,390
2.96%
–
–
21,162
5.01%
–
–
–
20,264
3.23%
19,354
4.48%
–
–
80,781
5.50%
17
3.18%
–
26,279
4.06%
9,123
4.45%
–
–
7,699
5.70%
–
–
–
42,793
122,508
3,040
–
48,626
–
–
–
631
–
75,895
–
51,106
44,818
–
289,540
–
136,134
–
51,106
$$ 193,258 $ 139,325
$ 19,007
$ 33,407 $ 120,416
$ 43,101 $ 175,345 $ 723,859
Liabilities
Deposits
Effective interest rate
Obligations related to assets sold under
repurchase agreements and securities
loaned
Effective interest rate
Obligations related to securities sold short
Effective interest rate
Derivatives
Effective interest rate
Other liabilities
Effective interest rate
Subordinated debentures
Effective interest rate
Trust capital securities
Effective interest rate
Preferred share liabilities
Effective interest rate
Non-controlling interest in subsidiaries
Effective interest rate
Shareholders’ equity
Effective interest rate
Total gap based on contractual repricing
Canadian dollar
Foreign currency
Total gap
Canadian dollar – 2007
Foreign currency – 2007
Total gap – 2007
$$ 171,501 $ 139,513
2.36%
–
$ 14,883
3.34%
$ 30,384 $ 74,015
3.98%
3.43%
$ 7,389 $
4.67%
890 $ 438,575
–
–
–
–
–
–
51,012
–
–
–
–
–
–
–
–
–
–
–
–
–
29,232
2.79%
706
3.15%
5,318
2.85%
168
2.35%
951
3.51%
–
–
–
–
–
–
–
–
525
3.11%
199
3.09%
–
–
12
2.44%
151
6.50%
–
–
–
–
–
–
–
–
$$ 222,513 $ 175,888 $ 15,770
$$ (29,255) $ (36,563) $ 3,237
3,174
63
(36,638)
75
(29,221)
(34)
1,473
2.38%
331
2.85%
–
–
8
2.62%
1,671
5.93%
–
–
–
–
–
–
–
–
633
2.62%
6,415
2.85%
3
3.20%
1,734
4.08%
3,796
5.20%
1,400
7.23%
1,200
4.87%
–
–
–
–
190
3.91%
5,964
3.97%
28
3.16%
524
5.63%
1,562
6.73%
–
–
500
6.82%
2,663
4.58%
–
–
–
–
13,892
–
72,344
–
51,913
–
–
–
–
–
671
–
28,095
–
–
–
32,053
–
27,507
–
128,705
–
54,359
–
8,131
–
1,400
–
2,371
–
30,758
–
–
–
$ 33,867 $ 89,196
$ 18,820 $ 167,805 $ 723,859
$
(460) $ 31,220
$ 24,281 $ 7,540 $
(513)
53
31,164
56
24,247
34
7,788
(248)
$ (29,255) $ (36,563) $ 3,237
$
(460) $ 31,220
$ 24,281 $ 7,540 $
$ (23,067) $ 9,417 $ 11,450
(20,358)
(22,819)
(24,068)
$ (6,183) $ 22,680
25,895
1,214
$ (6,296) $ (8,000) $
21,435
18,700
$ (47,135) $ (13,402) $ (8,908) $ (4,969) $ 48,575
$ 15,139 $ 10,700 $
–
1
(1)
–
1
(1)
–
(1)
Includes loans totalling $3,647 million to variable interest entities administered by us, with maturity terms exceeding five years.
Note 27 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, 2008,
the aggregate indebtedness, excluding routine indebtedness, to RBC
or its subsidiaries of current directors and executive officers was
approximately $0.6 million (2007 – $3.2 million). Routine indebtedness
176
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
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 collectability; 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.
Note 28 Results by business and geographic segment
6,718
2,868
9,586
867
–
4,758
3,961
1,299
–
2,662
28
2,634
6,353
2,976
9,329
788
–
4,748
3,793
1,248
–
2,545
29
2,516
Canadian
Wealth
Banking Management
Insurance
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Canada United States
Other
International
$
$
$
$
$
468
3,519
3,987
1
–
3,038
948
283
–
665
12
653
16,900
16,900
$
$
$
$
$
–
2,610
2,610
–
1,631
576
403
14
–
389
4
$
$
$
1,330
771
2,101
497
–
1,876
(272)
(128)
9
(153)
21
$
1,839
2,096
3,935
183
–
2,121
1,631
465
(4)
1,170
23
385
$
(174)
$
1,147
12,600
$ 51,300
$ 340,300
12,600
$ 51,300
$ 340,300
$
$
$
$
$
(995)
358
(637)
47
–
(18)
(666)
(564)
76
(178)
13
$
$
9,360
12,222
21,582
1,595
1,631
12,351
6,005
1,369
81
4,555
101
$
6,929
8,220
15,149
924
922
7,490
5,813
1,750
76
3,987
60
$
$
$
1,132
2,521
3,653
643
30
2,991
(11)
(159)
(4)
152
30
$
$
1,299
1,481
2,780
28
679
1,870
203
(222)
9
416
11
(191)
$
4,454
$
3,927
$
122
$
405
(3,100)
$ 650,300
$ 354,700
$ 143,500
$ 152,100
(3,100)
$ 650,300
$ 354,700
$ 143,500
$ 152,100
Canadian
Wealth
Banking Management
Insurance
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Canada United States
Other
International
$
$
$
$
$
427
3,565
3,992
1
–
2,902
1,089
327
–
762
9
753
16,600
16,600
$
$
$
$
$
–
3,192
3,192
–
2,173
537
482
40
–
442
5
$
$
1,031
884
1,915
109
–
1,481
325
74
9
242
14
$
$
623
3,766
4,389
(22)
–
2,769
1,642
278
72
1,292
20
437
$
228
$
1,272
12,500
$ 39,700
$ 311,200
12,500
$ 39,700
$ 311,200
$
$
$
$
$
(732)
377
(355)
(85)
–
36
(306)
(575)
60
209
11
$
$
7,702
14,760
22,462
791
2,173
12,473
7,025
1,392
141
5,492
88
$
6,402
8,638
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
$
$
888
1,800
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
Canadian
Wealth
Banking Management
Insurance
International
Banking
Capital
Markets (1)
Corporate
Support (1)
Total
Canada United States
Other
International
$
$
5,816
2,532
8,348
604
–
4,510
–
3,234
1,110
–
$
397
3,090
3,487
1
–
2,613
1
872
268
–
$
–
3,348
3,348
–
2,509
517
–
322
20
–
$
940
688
1,628
25
–
1,216
–
387
117
9
131
4,005
4,136
(115)
–
2,603
(1)
1,649
317
(23)
(488)
178
(310)
(86)
–
36
–
(260)
(429)
58
$
6,796
13,841
20,637
429
2,509
11,495
–
6,204
1,403
44
$
$
6,045
7,518
13,563
456
1,379
7,056
–
4,672
1,458
37
$
108
4,397
4,505
(28)
683
3,038
–
812
14
(1)
Average assets (2)
$ 232,300
Total average assets
$ 232,300
2008
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 $
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 $
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 from
continuing operations
Net loss from
discontinued operations
Average assets (2)
$ 207,500
Total average assets
$ 207,500
$
2,124
$
604
$
302
$
261
$
1,355
$
111
$
4,757
$
3,177
$
799
$
Net income
Less: Preferred dividends
2,124
20
–
–
604
6
–
302
4
(29)
232
7
–
1,355
13
–
111
10
(29)
4,728
60
–
3,177
40
(29)
770
15
Net income available
to common shareholders $
2,104
$
598
$
298
$
225
$
1,342
Average assets from
continuing operations (2) $ 187,600
Average assets from
discontinued operations (2) $
–
Total average assets
$ 187,600
$
$
$
15,100
–
15,100
$
$
$
11,600
$ 32,600
$ 260,600
–
$
200
$
–
11,600
$ 32,800
$ 260,600
(1)
(2)
Taxable equivalent basis.
Calculated using methods intended to approximate the average of the daily balances for the period.
$
$
$
$
101
$
4,668
$
3,137
$
755
$
776
(5,400)
$ 502,100
$ 287,200
$ 113,300
$ 101,600
–
$
200
$
–
$
200
$
–
(5,400)
$ 502,300
$ 287,200
$ 113,500
$ 101,600
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
177
643
1,926
2,569
1
447
1,401
–
720
(69)
8
781
–
781
5
Note 28 Results by business and geographic segment (continued)
Revenue by business line
Banking (1)
Wealth management
Insurance
Global markets (2)
Global investment banking and equity markets (2), (3)
RBC Dexia IS (4)
Other (5)
Total
$
2008
2007
$ 10,832
3,987
2,610
1,902
1,536
855
(140)
$ 10,485
3,992
3,192
2,404
1,733
759
(103)
2006
9,418
3,487
3,348
2,553
1,417
558
(144)
$ 21,582
$ 22,462
$ 20,637
(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.
Consists of Global Credit and Research business, and includes the tax equivalent basis adjustment which is discussed below.
Changes in 2008
Composition of business segments
Effective May 1, 2008, we created our Insurance business segment,
formerly a business under Canadian Banking. Concurrent with the
realignment, we renamed our U.S. & International Banking segment
International Banking. Our five business segments are outlined below.
Canadian Banking comprises our domestic personal and business
banking operations and certain retail investment businesses.
Wealth Management businesses serve affluent and high net
worth clients around the world, and provide asset management and
estate and trust services directly to clients and through our internal
partners and third-party distributors.
Insurance offers a wide range of life, health, travel, home and
auto insurance products and creditor insurance services to individual
and business clients in Canada and the U.S. We also offer reinsurance
for clients around the world.
International Banking comprises our banking businesses in the
U.S. and Caribbean, and global custody and investor services, which
we provide through our 50% ownership in RBC Dexia IS.
Capital Markets comprises our global wholesale banking business,
which provides a wide range of corporate and investment banking, sales
and trading, and research and related products and services to corpo-
rate, public sector, institutional and retail clients in North America and
specialized products and services in select global markets.
The comparative results have been restated to conform to our
new basis of segment presentation.
All other enterprise level activities that are not allocated to these
five business segments, such as enterprise funding, securitizations,
net charges associated with unattributed capital, and consolidation
adjustments, 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
equivalent value with the corresponding offset recorded in the provi-
sion for income taxes. Management believes that these adjustments
are necessary 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. Our 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 2008 was $410 million (2007 – $332 million; 2006 –
$213 million).
During 2008, we also reclassified the following balances in
reporting our business segments: (i) certain Allowance for credit
losses – General allowance from Canadian Banking, International
Banking and Capital Markets were transferred to Corporate Support
without a revision to comparative segment results given the insig-
nificance of the transfer on comparative periods; (ii) certain Trading
revenue reported in the fourth quarter of 2007, and the first and
second quarters of 2008 in Capital Markets from Net interest income –
Interest income to Non-interest income – Other with no impact to
Total revenue; (iii) segregated fund deposits were included in our
gross insurance premiums and deposits balances in Insurance to
ensure consistent application with insurance industry practices;
(iv) management oversight and the results of our Wealth Management
U.S. subprime and collateralized debt obligations available-for-sale
securities (CDO AFS) portfolio were transferred to Corporate Support
without a revision to comparative segment results given the insignifi-
cance of its impact on comparative periods; (v) certain U.S. municipal
debt held in our Tender Option Bond (TOB) programs from Securities –
Trading to Securities – Available for Sale resulting in a non-significant
charge to Net income and AOCI; (vi) certain loans in our Wholesale –
Bank – Canada to Wholesale – Non-banking financial services – Other
International without impacting total Loans and acceptances or Net
income; and (vii) certain Trading revenue reported in the fourth
quarter of 2007 in Capital Markets from Non-interest income – Trading
revenue to Net interest income to better reflect its nature with no
impact to Total trading revenue. All comparative amounts have
been revised to reflect these reclassifications, unless otherwise
specifically stated.
Visa Inc. initial public offering (Visa IPO)
We incurred a net loss of $20 million ($17 million after-tax) in respect of
our shares of Visa Inc., including those that were subject to mandatory
redemption in connection with the Visa IPO. The net loss includes a
$35 million loss recognized by Canadian Banking on their shares that
were subject to mandatory redemption, representing the difference
between the price at which we recorded the shares when they were
received on October 3, 2007, upon the reorganization of Visa Canada
and the Visa IPO price. International Banking recognized a gain of
$15 million on its shares at the time of the Visa IPO. The shares of
Visa Inc. are classified as available-for-sale securities and carried at
cost. Refer to Note 3.
Management reporting framework
Our management reporting framework is intended to measure the
performance of each business segment as if it was a stand-alone
business and reflect the way that business segment is managed. This
approach ensures our business segments’ results reflect all relevant
revenue and expenses associated with the conduct of their business
and depicts how management views those results. These items do not
impact our consolidated results.
178
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
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
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 in the Canadian dollar.
Note 29 Nature and extent of risks arising from financial instruments
We are exposed to the following risks as a result of holding financial instruments: credit risk, market risk, liquidity and funding risk. The following
is a description of those risks and how we manage our exposure to them.
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 arise
directly from claims against a debtor or obligor, an issuer of securities
or a policy holder through outstanding premiums, or indirectly from
claims against a guarantor of credit obligations or a reinsurer, resulting
from ceded insurance risk.
Risk measurement
We employ different risk measurement processes for our wholesale
and retail portfolios.
In measuring credit risk under Basel II, two principal approaches
are available: Advanced Internal Ratings Based (AIRB) and
Standardized. Most of our credit risk exposure is under the AIRB
Approach.
Under the AIRB Approach, we use our own estimates of the three
key parameters, Probability of Default (PD), Loss Given Default (LGD)
and Exposure at Default (EAD), based on historical experience from
internal credit risk rating systems in the derivation of risk-weighted
assets in accordance with supervisory standards. The three key
parameters are defined as follows:
•
PD is an estimated percentage that represents the probability
those obligors within a specific rating grade or for a particular
pool of exposures will default within a one-year period.
LGD is an estimated percentage of EAD that is expected to be lost
in the event of default of an obligor.
EAD is an estimated dollar value of the expected gross exposure
of a facility upon default of the obligor before specific provisions
or partial write-offs.
•
•
Credit risk rating systems are designed to assess and quantify the risk
inherent in credit activities in an accurate and consistent manner.
Under the Standardized Approach, used primarily for RBC Dexia
IS, RBC Bank (USA) and our Caribbean banking operations, risk
weights prescribed by OSFI are used to calculate risk-weighted assets
for credit risk exposures. Credit assessments by OSFI-recognized
external credit rating agencies of Standard & Poor’s (S&P), Moody’s
Investor Services (Moody’s), Fitch Ratings (Fitch) and Dominion Bond
Rating Services (DBRS) are used to risk-weight our sovereign and bank
exposures based on the standards and guidelines issued by OSFI. For
our business and retail exposures, we use the standard risk weights
prescribed by OSFI.
The wholesale credit risk rating system is designed to measure and
identify the risk inherent in our credit activities in an accurate and con-
sistent manner along two dimensions: borrower risk rating (BRR), which
reflects an assessment of the credit quality of the obligor, and LGD.
Credit scoring is the primary risk rating system for assessing
obligor and transaction risk for retail exposures. Retail exposures are
assessed on a pooled basis, with each pool consisting of exposures
that possess similar homogeneous characteristics. The pools are
assessed based on the following parameters: PD, LGD and EAD.
The estimation of these parameters takes into account borrower and
transaction characteristics, including behavioural credit score,
product type and delinquency status. The LGD is estimated based on
transaction-specific factors, including product and collateral types.
Our risk ratings are reviewed and updated on a regular basis.
Our gross credit risk exposure is categorized into lending-related
and other, and trading-related. Lending-related and other credit risk
exposure comprises outstanding loans and acceptances, undrawn
commitments as well as other exposure, including contingent liabilities
such as letters of credit and guarantees, and available-for-sale debt
securities. For undrawn commitments and contingent liabilities, gross
exposure represents an estimated portion of the contractual amount
that is expected to be drawn upon at the time of default of an obligor.
Trading-related credit risk exposure consists of repo-style
transactions, which includes repurchase and reverse repurchase
agreements and securities lending and borrowing transactions, as
well as over-the-counter derivatives. For repurchase and reverse
repurchase agreements, gross exposure represents the amount at
which securities were initially sold or acquired. For securities lending
and borrowing transactions, gross exposure is the amount at which
securities were initially loaned or borrowed. For over-the-counter
derivatives, the gross exposure amount represents the credit equiva-
lent amount, which is defined by OSFI as the replacement cost plus an
add-on amount for potential future credit exposure.
Credit quality performance
Refer to Note 4 for additional information on the credit quality perfor-
mance of our loans.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
179
Note 29 Nature and extent of risks arising from financial instruments (continued)
Credit risk exposure by portfolio and sector
Lending-related and other
Trading-related
2008
Residential mortgages (5)
Personal
Credit cards
Small business (6)
Retail
Business (7)
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 (8)
Sovereign (9)
Bank (10)
Wholesale
Total exposure
Loans and acceptances
Outstanding
$ 122,991
60,727
8,933
2,804
Undrawn
commitments
2
$
42,462
19,933
2,265
$
Other (1)
Repo-style
transactions (2)
Over-the-
counter
derivatives (3)
$
–
67
–
49
–
–
–
–
–
$
$
–
–
–
–
–
$ 195,455
$ 64,662
$
116
$
$
5,305
3,999
7,389
8,146
8,788
1,152
5,033
3,947
22,978
3,206
4,239
25,623
2,496
5,284
$
409
1,856
2,085
8,371
5,212
523
2,177
1,206
3,406
3,026
2,026
6,357
2,548
4,308
$
18
137
396
2,443
4,589
101
323
542
1,428
296
569
10,100
10,749
57,793
$
–
20
–
1
49,463
7
–
69
7
–
–
1,661
2,784
61,675
$
54
507
502
1,801
18,241
122
306
962
397
490
865
10,710
17,824
34,171
Total
exposure (4)
$ 122,993
103,256
28,866
5,118
$ 260,233
$
5,786
6,519
10,372
20,762
86,293
1,905
7,839
6,726
28,216
7,018
7,699
54,451
36,401
163,231
$ 107,585
$ 43,510
$ 89,484
$ 115,687
$ 86,952
$ 443,218
$ 303,040
$ 108,172
$ 89,600
$ 115,687
$ 86,952
$ 703,451
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Includes contingent liabilities such as letters of credit and guarantees, and available-for-sale debt securities.
Includes repurchase and reverse repurchase agreements and securities borrowing and lending transactions.
Credit equivalent amount after factoring in master netting agreements.
Total exposure represents exposure at default, which is the expected gross exposure upon the default of an obligor. This amount is before any specific allowances and does not reflect
the impact of credit risk mitigation. Exposure under Basel II asset classes of qualifying revolving retail and other retail are largely included within Personal and Credit cards, while home
equity lines of credit are included in Personal.
Includes certain synthetic mortgage securitizations.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
The Lending-related and other credit risk exposure of our Other Business sector within the Wholesale portfolio comprises: (i) for Outstanding loans and acceptances: other services
$10.9 billion, financing products $4.9 billion, holding and investments $4.6 billion, health $2.5 billion and other $2.7 billion; (ii) for Undrawn loans and acceptances commitments:
other services $3.7 billion, health $.9 billion, holding and investments $.7 billion, financing products $.6 billion and other $.4 billion; and (iii) for Other lending-related: other services
$2.2 billion, financing products $.7 billion, holdings and investments $.6 billion and other $6.5 billion. The Trading-related credit risk exposure of our Other Business sector within the
Wholesale portfolio comprises: (i) for Repo-style transactions: other services $.4 billion, holdings and investments $.3 billion, financing products $.1 billion and other $.8 billion; and
(ii) Over-the-counter derivatives: financing products $5.4 billion, other services $1.7 billion and other $3.5 billion.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
(9)
(10) Bank refers primarily to regulated deposit-taking institutions and securities firms.
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.
Concentration of credit risk
2008
2007 (1)
Canada
%
United
States %
Europe
Other
Inter-
% national
%
Total
Canada
%
United
States
%
Europe
Other
Inter-
% national
%
Total
On-balance sheet assets
other than derivatives (2) $ 240,620 69% $ 56,382 16% $ 40,519 12% $ 10,337 3% $ 347,858 $ 227,206 72% $ 41,518 13% $ 40,658 13% $ 6,146 2% $ 315,528
Derivatives before
master netting
agreement (3), (4)
14,690 23
29,501 45
15,096 23
5,763 9
69,728 53
10,716 8
24,033 18
27,106 21
131,583
65,050
$ 264,653 55% $ 83,488 18% $ 110,247 23% $ 21,053 4% $ 479,441 $ 241,896 64% $ 56,614 15% $ 70,159 18% $ 11,909 3% $ 380,578
Off-balance sheet
credit instruments (5)
Committed and
uncommitted (6)
Other
$ 177,317 64% $ 62,932 23% $ 17,388 6% $ 17,850 7% $ 275,487 $ 163,897 58% $ 69,326 25% $ 22,893
24,820 51
11,047 23
10,615 22
1,998 4
48,480
31,194 53
13,418 23
14,226 24
8% $ 26,150 9% $ 282,266
58,925
87
–
$ 202,137 63% $ 73,979 23% $ 28,003 9% $ 19,848 6% $ 323,967 $ 195,091 57% $ 82,744 24% $ 37,119 11% $ 26,237 8% $ 341,191
(1)
(2)
(3)
(4)
(5)
(6)
The 2007 comparative information has been revised as a result of implementing Basel II.
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% (2007 – 51%), the Prairies at 16% (2007 – 16%), British Columbia and the territories at 16% (2007 – 15%) and Quebec at 12% (2007 – 14%). No industry accounts for
more than 19% (2007 – 30%) of total on-balance sheet credit instruments.
The largest concentration of credit exposure by counterparty type is banks at 62% (2007 – 60%).
Excludes credit derivatives classified as other than trading with a replacement cost of $400 million (2007 – $36 million).
Represents financial instruments with contractual amounts representing credit risk.
Comparative amounts have been revised to include retail commitments in addition to commercial commitments. Retail and wholesale commitments comprise 32% (2007 – 30%) and
68% (2007 – 70%), respectively, of our total commitments. The largest sector concentration in the wholesale portfolio relates to Non-bank financial services at 34% (2007 – 38%),
Bank at 11% (2007 – 16%), Energy at 9% (2007 – 7%), Real estate and related at 7% (2007 – 7%) and Sovereign at 6% (2007 – 3%).
180
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Credit derivatives
Credit derivatives are over-the-counter contracts that transfer credit
risk related to an underlying financial instrument from one counter-
party to another. We are exposed to counterparty credit risk when we
purchase credit protection or the derivative has a positive fair value.
As with other derivatives, we use collateral and master netting agree-
ments for managing counterparty credit risk. These contracts are
subject to the same credit approval, limits and monitoring standards
used for managing other credit risk.
We purchase and sell credit protection for both trading and
other-than-trading purposes. Our trading activities are conducted in
association with market-making, positioning and managing certain
trading-related credit risk.
Trading credit derivatives (1)
Notional amount
Protection purchased
Protection sold
Fair value (2)
Positive
Negative
Replacement cost (3)
(1)
(2)
(3)
Comprises credit default swaps.
Gross fair value before netting.
Replacement cost is after netting but before collateral.
2008
2007
$ 140,010
132,515
$ 202,733
190,514
16,456
15,344
5,607
10,416
9,375
3,340
We also purchase and sell credit derivatives for other-than-trading
purposes in order to manage our overall credit portfolio. To mitigate
industry sector concentrations and single-name exposures related to
our credit portfolio, we purchase credit derivatives to transfer credit
risk to third parties. We also sell credit protection in order to diversify
our portfolio. The notional amount of other-than-trading credit
derivatives represents the contract amount used as a reference point
to calculate payments. Notional amounts are generally not exchanged
by the counterparties, and do not reflect our exposure at default.
None of these contracts are with monoline insurers nor related to U.S.
subprime-related assets.
Other-than-trading credit derivatives position (notional amount and fair value) (1)
Notional amount
Business
Automotive
Energy
Non-bank financial services
Mining and metals
Real estate and related
Technology and media
Transportation and environment
Other
Sovereign (2)
Bank (3)
Net protection purchased
Offsetting protection sold related to the same reference entity
Gross protection purchased
Net protection sold (4)
Offsetting protection purchased related to the same reference entity
Gross protection sold
Gross protection purchased and sold (notional amount)
Fair value (5)
Positive
Negative
2008
2007
$
473
363
379
590
136
10
224
439
294
259
3,167 $
–
3,167 $
147 $
–
147 $
379
957
1,161
591
413
10
335
472
220
731
5,269
261
5,530
186
261
447
3,314
$
5,977
400 $
15
36
30
$
$
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
Comprises credit default swaps.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Protection sold as at October 31, 2008 related to consumer goods $81 million and other $66 million (October 31, 2007 – consumer goods $67 million and other $119 million).
Gross fair value before netting.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
181
Note 29 Nature and extent of risks arising from financial instruments (continued)
Objectives, policies and methodologies
Our credit risk management principles are guided by our overarching
risk management principles. In particular, the following two principles
are complemented by the items below with respect to credit risk
management:
(i) 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.
•
(ii) All business activities that are not consistent with our values, code
of conduct or policies must be avoided.
The following committees are involved in the management of
credit risks: Board of Directors and Conduct Review and Risk Policy
Committee (CR&RPC), Group Risk Committee (GRC), Policy Review
Committee and Structured Transactions Oversight Committee.
Working in combination, these committees approve credit risk limits,
ensure that management has in place frameworks, policies, processes
and procedures to manage credit risk and that the overall credit risk
policies are complied with at the business and transaction levels.
Our enterprise-wide credit risk policies set out the minimum
requirements for the management of credit risk in a variety of trans-
actional and portfolio management contexts. Our credit risk policies
comprise the following six categories:
•
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
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.
•
•
•
•
•
Our products and services are subject to risk review and approval pro-
cesses. Proposals for new and amended credit products and services
are comprehensively reviewed and approved under a risk assessment
framework. The risk assessment is used to assess the risk level of the
proposal to determine the level of risk approval required. For propos-
als with significant risk implications, approval by the Policy Review
Committee is required. We seek to mitigate our exposure to credit risk
through a variety of means, including structuring of transactions, col-
lateral and credit derivatives.
Limits are used to ensure our portfolio is well diversified and
within our risk limit 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 (country and region) limits
Industry sector limits
Product and portfolio limits
Group Risk Management (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,
GRC and senior executives on a quarterly basis. The report provides an
overview of our risk profile, including trending information, significant
risk issues and analysis of significant shifts in exposures, expected
loss and risk ratings. Large exposures subject to credit policy excep-
tions, 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 portfo-
lios and emerging industry or market trends.
Our credit risk objectives, policies and methodologies have not
changed materially from 2007.
Market risk
Market risk is the risk of loss on the value of a financial instrument that
may arise from changes in market factors such as interest rates, for-
eign exchange rates, equity or commodity prices, and credit spreads.
We are exposed to market risk in our trading activities and our asset/
liability management activities. The level of market risk to which we
are exposed varies depending on market conditions, in particular,
the volatility and liquidity in the markets where the instruments are
traded, expectations of future price and yield movements and the
composition of our trading portfolio.
Trading market risk
We conduct trading activities over-the-counter and on exchanges in
the spot, forwards, 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,
commodities and credit markets. Our trading operations primarily
act as a market maker, executing transactions that meet the financial
requirements of our clients and transferring the market risks to the
broad financial market. We also act as principal and take proprietary
market risk positions within the authorized limits determined by the
Board of Directors. The trading book, as defined by OSFI, consists
of cash and derivative positions that are held for short-term resale,
taken on with the intent of benefiting in the short term from actual or
expected differences between their buying and selling prices or to lock
in arbitrage profits.
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 and comprise:
Interest rate risk, which is the potential adverse impact on the
•
value of a financial instrument 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 –
182
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
•
•
•
•
•
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 – arising 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, which is the potential adverse impact
on the value of a financial instrument due to currency rate and
precious metals price movements and volatilities. In our
proprietary positions, we are exposed to the spot, forwards and
derivative markets.
Equity risk, which is the potential adverse impact on the value
of a financial instrument 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 equi-
ties and indices as principal in conjunction with our investment
banking activities and from our trading activities, which include
tailored equity derivative products, arbitrage trading and relative
value trading.
Commodities risk, which is the potential adverse impact on
the value of a financial instrument due to commodities price
movements and volatilities. Principal commodities traded
include crude oil, heating oil, natural gas and power. In our
proprietary positions, we are exposed to the spot, forwards and
derivative markets.
Credit spread risk, which is the general adverse impact on the
value of a financial instrument due to changes in the credit
spreads associated with our holdings of instruments subject to
credit risk.
Credit specific risk, which is the potential adverse impact on the
value of a financial instrument due to changes in the creditworthi-
ness and default of issuers on our holdings in bonds and money
market instruments, and those underlying credit derivatives.
Severe dislocation of money market and bond markets from
the synthetic credit markets, as well as fundamentals-based
market valuations, impacts trading ability, profitability and risk
measurements.
• Market illiquidity risk, which is the inability to liquidate our
positions or acquire hedges to neutralize our trading positions. In
times of severe stress, illiquidity is experienced in even the most
highly rated and previously highly liquid instruments.
Risk measurement
We use risk measurement tools such as Value-at-Risk (VaR), sensitivity
analysis and stress testing in assessing global risk-return trends.
The majority of trading positions in foreign exchange, interest rate,
equity, commodity and credit trading have capital calculated under
a VaR based Internal Models Approach, while structured credit
derivatives and mortgage-backed securities are calculated under the
Standardized Approach as approved by OSFI. 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. The breadth of our trading activity
is designed to diversify market risk to any particular strategy, and to
reduce trading revenue volatility.
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. We measure VaR by major risk category
on a discrete basis. We also measure and monitor the effects of cor-
relation in the movements of interest rates, credit spreads, exchange
rates, equity and commodity prices and highlight the benefit of diversi-
fication within our trading portfolio.
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
scenarios may not reflect the next market cycle. Furthermore, the use
of a one-day horizon VaR for risk measurement implies that positions
could be unwound or hedged within a day but this may not be a
realistic assumption if the market becomes largely or completely illiquid.
VaR is calculated on end-of-day positions.
To ensure VaR effectively captures our market risk, we continu-
ously 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 iso-
lating 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 portfolios.
Intraday 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.
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
conditions. 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. Our stress
scenarios are reviewed and updated as required to reflect relevant
events and hypothetical situations. In light of the current market envi-
ronment, we supplemented existing market risk measures by frequent
updates to the historical scenario window used in VaR and risk factors
were refined to accurately reflect the current market conditions in the
calculations. While we endeavour to be conservative in our stress test-
ing, there can be no assurance that our stress testing assumptions will
cover every market scenario that may unfold.
The following table shows our global VaR for total trading
activities by major risk category and the diversification effect, which
is calculated as the difference between the global VaR and the sum of
the separate risk factor VaRs.
Global VaR
Equity
Foreign exchange
Commodities
Interest rate
Credit specific
Diversification
Global VaR
2008
2007
As at
October 31
For the year ended October 31
Average
High
Low
As at
October 31
For the year ended October 31
Average
High
Low
$
8
8
1
34
8
(19)
$ 13
3
2
26
7
(23)
$ 28
9
6
44
11
(38)
$
6
1
0
17
4
(13)
$
8
4
2
20
3
(19)
$
9
2
1
19
3
(13)
$ 18
7
2
23
5
(22)
$
4
1
–
14
2
(8)
$ 40
$ 28
$ 50
$ 18
$ 18
$ 21
$ 27
$ 16
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
183
Note 29 Nature and extent of risks arising from financial instruments (continued)
Objectives, policies and methodologies
Our market risk management framework is designed to ensure that our
risks are appropriately diversified on a global basis. Market risk limit
approval authorities are established by the Board of Directors, upon
recommendation of the CR&RPC, and delegated to senior management.
The independent oversight of trading market risk management
activities is the responsibility of GRM – Marketing and Trading Credit
Risk. GRM – Market and Trading Credit Risk establishes market risk
policies and limits, develops quantitative techniques and analytical
tools, vets trading models and systems, maintains the VaR and stress
risk measurement systems, and provides enterprise risk reporting on
trading activities. This group also provides independent oversight on
trading activities, including the establishment and administration
of trading operational limits, market risk and counterparty credit
limit compliance, risk analytics, and the review and oversight of non-
traditional or complex transactions. GRM uses risk measurement tools
such as VaR, sensitivity analysis and stress testing in assessing global
risk-return trends and to alert senior management to adverse trends or
positions. 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 committee of Capital Markets.
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 hedging to achieve our target level. We
continually monitor the effectiveness of our interest rate risk mitiga-
tion activity within Corporate Treasury on a value and earnings basis.
For additional information regarding the use of the derivatives in asset
and liability management, refer to Note 7.
Risk measurement
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 as it provides
us with an assessment of the sensitivity of the exposure of our eco-
nomic value of equity to instantaneous changes in individual points on
the yield curve. The economic value of equity is equal to the net pres-
ent value of our assets, liabilities and off-balance sheet instruments.
The following table provides the potential before-tax impact of
an immediate 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.
Market risk measures – Non-trading banking activities
2008
2007
2006
Economic value of equity risk
Net interest income risk
Canadian
dollar
impact
U.S.
dollar
impact (1)
Canadian
dollar
impact
U.S.
dollar
impact (1)
Total
Economic
Economic
Total
value of Net interest
income risk
equity risk
value of Net interest
income risk
equity risk
Before-tax impact of:
100bp increase in rates
100bp decrease in rates
Before-tax impact of:
200bp increase in rates
200bp decrease in rates
$
$
(470) $
404
(982) $
774
(38) $
44
(508) $
448
23 $
(62)
(68) $
64
(1,050) $
838
8 $
(236)
22 $
(28)
54 $
(43)
45 $
(90)
(440) $
309
54 $
(111)
(496) $
375
62 $
(279)
(930) $
553
97 $
(231)
(1,044) $
658
87
(153)
147
(319)
(1)
Represents the impact on the non-trading portfolios held in our U.S. banking operations.
Objectives, policies and methodologies
Corporate Treasury is responsible for managing our enterprise-wide
interest rate risk, monitoring approved limits and compliance with
policies and operating standards. Our Asset and Liability Committee
(ALCO) provides oversight to Corporate Treasury and reviews and
approves the policies developed by Corporate Treasury. An enterprise
interest rate risk report is reviewed monthly by ALCO and quarterly by
GRC and the Board of Directors.
risks to net interest income over a 12-month horizon, and the eco-
nomic value of equity, are to be contained. These ranges are based on
an immediate and sustained 100 basis point increase or decrease par-
allel 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 limits are
reviewed and approved annually by the Board of Directors.
Our interest rate risk policy and interest rate limit document
define the management standards and acceptable limits within which
Our overall market risk objectives and methodologies have not
changed materially from 2007.
Liquidity and funding risk
Liquidity and funding risk is the risk that we may be unable to generate
or obtain sufficient cash or its equivalent in a timely and cost-effective
manner to meet our commitments as they come due.
Risk measurement
The assessment of our liquidity position reflects management’s
estimates, assumptions and judgments pertaining to current and pro-
spective firm-specific and market conditions and the related behaviour
•
184
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
of our clients and counterparties. We measure and manage our liquid-
ity position from three risk perspectives:
•
Structural liquidity risk, which addresses the risk due to mis-
matches in effective maturities between assets and liabilities,
more specifically the risk of over-reliance on short-term liabilities
to fund longer-term illiquid assets;
Tactical liquidity risk, which addresses our normal day-to-day
funding requirements that are managed by imposing prudential
limits on net fund outflows in Canadian dollar and foreign
currencies for key short-term time horizons (overnight to nine
weeks), 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; and
Contingent liquidity risk, which assesses the impact of and our
intended responses to sudden stressful events.
•
Objectives, policies and processes
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
prospective financial commitments under normal and contemplated
stress conditions. To achieve this objective, 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; and
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. We monitor and man-
age 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. In response to deteriorat-
ing macroeconomic and financial market conditions, we have taken
steps to further conserve funding and manage the composition of our
balance sheet. This includes selectively reducing trading inventories,
enhancing the liquidity of our balance sheet and evaluating various
newly announced public sector funding programs in different jurisdic-
tions to determine our eligibility and, as applicable, our interest.
The Board of Directors is responsible for oversight of our liquidity
and funding management framework, which is developed and
implemented by senior management.
•
The Audit Committee and the CR&RPC approve our liquidity and
funding management framework. The Audit Committee approves
our liquidity risk policy, pledging framework, and liquidity contin-
gency 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.
GRC and ALCO share management oversight responsi bility for
liquidity and funding policies and receive regular reports detail-
ing compliance with key limits and guidelines.
Corporate Treasury has global responsibility for the development
of liquidity and funding management policies, strategies and
contingency plans and for recommending and monitoring limits
within the framework.
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.
In managing liquidity risk, we favour a centralized management
approach so that funding and operational efficiencies can be maxi-
mized. We also believe that this approach results in more co-ordinated
and effective measurement and oversight. However, market, regula-
tory, tax and organizational considerations influence the extent to
which we can be fully centralized.
Our principal liquidity and funding policies are reviewed and
approved annually by ALCO, GRC 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 measures,
businesses and products. These policies and procedures govern
management, measurement and reporting requirements and define
approved liquidity and funding limits.
Targets for our structural liquidity position are approved at least
annually and monitored quarterly. With respect to net short-term
funding requirements, limits are monitored daily or weekly, depending
on the materiality of each RBC reporting entity to ensure compliance.
The prescribed treatment of cash flow assets and liabilities under
varying conditions is reviewed periodically by Corporate Treasury with
GRM and the business to determine if they remain valid or changes
to assumptions and limits are required in light of internal or external
developments. Through this type of process, we ensure that a close
link is maintained between the management of liquidity and funding
risk and market liquidity risk. As a result of global market volatility
during the last year, we have modified the liquidity treatment of cer-
tain asset classes, including auction rate securities and asset-backed
securities, based on our expectations of market liquidity for these
products. Some limits have been revised to take into consideration the
results of updated stress tests during this period of market volatility.
Our liquidity and funding risk objectives, policies and methodologies
have not changed materially from 2007. However, certain limits and
strategies have been revised as a result of the market conditions.
Credit ratings
The following table presents our major credit ratings as at December 4,
2008.
As at December 4, 2008 (1)
Moody’s (2)
S&P (3)
Fitch
DBRS
Short-term
debt
Senior long-
term debt
P-1
A-1+
F1+
R-1(high)
Aaa
AA-
AA
AA
Outlook
negative
stable
stable
stable
(1)
(2)
(3)
Credit ratings are not recommendations to purchase, sell or hold our securities 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.
In November 2008, Moody’s revised our rating outlook from stable to negative.
In May 2008, S&P revised our rating outlook from positive to stable.
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
obligations may be recorded on- and off-balance sheet. The following
table provides a summary of our primary future contractual
funding commitments.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
185
Note 29 Nature and extent of risks arising from financial instruments (continued)
Unsecured long-term funding
Covered bonds
Subordinated debentures
Obligations under leases (2)
Within 1 year
1 to 3 years
3 to 5 years
Over 5 years
Total
2008 (1)
2007 (1)
Total
$ 11,906
205
278
550
$ 26,676
–
–
884
$ 14,237
3,103
–
633
$
5,796
1,940
7,980
1,129
$ 58,615
5,248
8,258
3,196
$ 49,131
–
6,343
3,161
$ 12,939
$ 27,560
$ 17,973
$ 16,845
$ 75,317
$ 58,635
(1)
(2)
The amounts presented exclude accrued interest except for the category “Within 1 year.”
Substantially all of our lease commitments are operating.
Note 30 Capital management
Regulatory capital and capital ratios
Capital levels for Canadian banks are regulated pursuant to guide-
lines issued by OSFI, based on standards issued by the Bank for
International Settlements, Basel Committee of Banking Supervisors.
Regulatory capital is allocated to two tiers: Tier 1 and Tier 2. Tier 1 cap-
ital comprises the more permanent components 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 instru-
ments. In addition, goodwill and other items prescribed by OSFI are
deducted from Tier 1 capital. Tier 2 capital consists mainly of subor-
dinated debentures, trust subordinated notes, the eligible amount
of innovative capital instruments that could not be included in Tier 1
capital, and an eligible portion of the total general allowance for credit
losses, less OSFI-prescribed deductions. Total capital is defined as the
sum of Tier 1 and Tier 2 capital.
Regulatory capital ratios are calculated by dividing Tier 1 and
Total capital by risk-adjusted assets (RAA). OSFI requires banks to
Regulatory capital and capital ratios
Capital
Tier 1 capital
Total capital
Risk-adjusted assets
Credit risk
Market risk
Operational risk
Total risk-adjusted assets
Capital ratios
Tier 1 capital
Total capital
Assets-to-capital multiple
meet minimum risk-based capital requirements for exposures to credit
risk, operational risk, and where they have significant trading activity,
market risk. RAA is calculated for each of these risk types and added
together to determine total RAA .
In addition, 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 OSFI. Our assets-to-capital multiple
remains below the maximum prescribed by OSFI.
Our regulatory capital ratios for 2008 have been calculated using
Basel II, which is required to be applied only on a prospective basis.
The differences between Basel I and Basel II make it difficult to mean-
ingfully compare the ratios to those as at October 31, 2007.
Basel II Basel I
2007
2008
$ 25,173
30,830
$ 23,383
28,571
$ 229,537
17,220
31,822
$ 231,302
16,333
–
$ 278,579
$ 247,635
9.0%
11.1%
20.1X
9.4%
11.5%
19.9X
186
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
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 Act , which states that except as otherwise speci-
fied by 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.
Condensed Consolidated Balance Sheets
Assets
2008
2007
Canadian GAAP
Differences
U.S. GAAP
Canadian GAAP
Differences
U.S. GAAP
Cash and due from banks
$ 11,086
$
(133) $ 10,953
$
4,226
$
(78) $
4,148
Interest-bearing deposits with banks
20,041
(5,017)
15,024
11,881
(4,436)
7,445
Securities (1)
Trading
Available-for-sale
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans (net of allowance for loan losses)
Other
Customers’ liability under acceptances
Derivatives
Premises and equipment, net
Goodwill
Other intangibles
Reinsurance recoverables
Separate account assets
Other assets
Liabilities and shareholders’ equity
122,508
48,626
171,134
44,818
289,540
11,285
136,134
3,260
9,977
1,253
–
–
25,331
(2,388)
6,176
120,120
54,802
147,485
30,770
(4,490)
5,468
142,995
36,238
3,788
174,922
178,255
978
179,233
(3,086)
41,732
64,313
(2,263)
62,050
(2,638)
286,902
237,936
(2,188)
235,748
–
(345)
(141)
(65)
(161)
1,260
81
25,684
11,285
135,789
3,119
9,912
1,092
1,260
81
51,015
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
187,240
26,313
213,553
103,735
31,206
134,941
$ 723,859
$ 19,227
$ 743,086
$ 600,346
$ 23,219
$ 623,565
Deposits
$ 438,575
$
(16,040) $ 422,535
$ 365,205
$
(12,276) $ 352,929
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
Other liabilities
11,285
27,507
32,053
128,705
7,385
–
35,689
–
1,787
11,285
29,294
11,786
44,689
–
829
11,786
45,518
(1,135)
(346)
3,720
81
31,739
30,918
128,359
11,105
81
67,428
37,033
72,010
7,283
–
28,483
(1,290)
(312)
2,530
114
33,712
35,743
71,698
9,813
114
62,195
242,624
35,846
278,470
201,284
35,583
236,867
Subordinated debentures
Trust capital securities
Preferred share liabilities
8,131
1,400
–
41
8,172
(1,400)
–
–
–
Non-controlling interest in subsidiaries
2,371
1,396
3,767
6,235
1,400
300
1,483
6
6,241
(1,400)
(300)
1,405
–
–
2,888
Shareholders’ equity (2)
30,758
(616)
30,142
24,439
201
24,640
(1)
(2)
On October 1, 2008, we reclassified $3,476 million of securities from Trading to Available-for-sale. Refer to the Reclassification of securities section later in this note.
Included in our consolidated earnings as at October 31, 2008 was $538 million (2007 – $407 million) of undistributed earnings of our joint ventures and investments accounted for using
the equity method under U.S. GAAP.
$ 723,859
$ 19,227
$ 743,086
$ 600,346
$ 23,219
$ 623,565
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
187
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
Other
Non-interest income
Insurance accounting
Derivative instruments and hedging activities
Reclassification of securities
Application of the fair value option
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 (1)
Difference – Other
Net loss from discontinued operations, U.S. GAAP (1)
Net income, U.S. GAAP
Basic earnings per share (2)
Canadian GAAP
U.S. GAAP
Basic earnings per share from continuing operations
Canadian GAAP
U.S. GAAP
Basic earnings (loss) per share from discontinued operations (1)
Canadian GAAP
U.S. GAAP
Diluted earnings per share (2)
Canadian GAAP
U.S. GAAP
Diluted earnings per share from continuing operations
Canadian GAAP
U.S. GAAP
Diluted earnings (loss) per share from discontinued operations (1)
Canadian GAAP
U.S. GAAP
2008
2007
2006
$
4,555
$
5,492
$
4,757
(10)
(165)
112
(12)
289
(107)
(379)
(127)
–
(17)
(681)
(3)
(17)
3
(44)
(368)
(13)
72
724
–
17
342
–
5
(101)
4,075
–
–
–
4,075
3.41
3.03
3.41
3.03
–
–
3.38
3.00
3.38
3.00
–
–
(17)
(115)
115
–
–
(202)
56
8
1
4
60
(650)
(41)
(31)
4
(8)
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
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(22)
(75)
115
(544)
(31)
14
–
(10)
(3)
(458)
(4)
(29)
2
–
471
16
75
440
2
29
95
8
3
(101)
4,750
(29)
–
(29)
4,721
3.65
3.62
3.67
3.64
(.02)
(.02)
3.59
3.57
3.61
3.59
(.02)
(.02)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1)
(2)
Discontinued operations relate to the sale of RBC Mortgage Company in 2005.
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.
188
Royal Bank of Canada: Annual Report 2008
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
Gain on sale of available-for-sale securities
Writedown of available-for-sale 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 used in investing activities, Canadian GAAP
Change in interest-bearing deposits with banks
Change in loans, net of 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 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 preferred shares
Redemption of preferred shares for cancellation
Issuance costs
Issue of common shares
Purchase of treasury shares
Sales 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
2008
2007
2006
$ 11,432
(480)
$ 22,503
49
$
(14,298)
(8)
41
(26)
(43)
(27)
(9)
15
1,190
–
(219)
50
(34)
(6,087)
(120)
3,050
342
4
(24)
(416)
(26)
(14)
–
(156)
293
64
1,012
(624)
(2,102)
42
344
184
(2)
(20)
271
(20)
–
–
43
(120)
–
440
(267)
(695)
8
3,872
2,430
9,075
21,133
(8,366)
(44,653)
581
443
4,057
–
678
–
(1,586)
–
65
823
(39,720)
213
2,084
4,773
–
1,185
–
(5,960)
40
115
–
(43,933)
4,191
1,050
14,727
(14,709)
28,185
(28,203)
(38,383)
38,474
73
2,148
(39,592)
(37,270)
(36,380)
39,198
(61,271)
6,562
50,945
(5)
7
5
1
–
–
(14)
155
(102)
958
17,374
(17,831)
(2,792)
17,813
(16)
5
11
(1)
(1)
3
(15)
(149)
(101)
2,017
57,711
(36,663)
(299)
27,468
(7)
–
7
1
(2)
–
(13)
(1,141)
(102)
(2,835)
Net cash from financing activities, U.S. GAAP
$ 36,439
$ 16,317
$ 44,125
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 2008 and 2007.
Accumulated other comprehensive (loss), net of taxes (1)
$
$
883
$
(332) $
(80)
6,805
4,148
$ 10,953
(152)
4,300
4,148
$
$
(701)
5,001
4,300
$
$
2008
2007
2006 (1)
Canadian
GAAP
Differences
U.S. GAAP
Canadian
GAAP
Differences
U.S. GAAP
U.S. GAAP
Transition adjustment
Unrealized gains and losses on available-for-sale securities
Unrealized foreign currency translation gains and losses,
net of hedging activities
Gains and losses on derivatives designated as
cash flow hedges
Additional pension obligation
$
(45) $
(1,068)
(802)
(443)
–
45
57
45
$
–
(1,011)
$
(45) $
(65)
45
133
$
–
68
$
–
191
(757)
(3,207)
(4)
(3,211)
(2,000)
(86)
(523)
(529)
(523)
111
–
(91)
(541)
20
(541)
(52)
(62)
Accumulated other comprehensive (loss),
net of income taxes
$ (2,358) $
(462) $ (2,820) $ (3,206) $
(458) $ (3,664) $ (1,923)
(1)
The concept of AOCI was introduced under Canadian GAAP upon the adoption of Section 1530 on November 1, 2006 . Accordingly, there is no reconciliation for the prior periods presented.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
189
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 (losses) gains from
hedging activities
Net (losses) gains on derivatives designated as
cash flow hedges
Reclassification of losses on derivatives designated
as cash flow hedges to income
Additional pension obligation
2008
2007
2006 (1)
Canadian
GAAP
Differences
U.S. GAAP
Canadian
GAAP
Differences
U.S. GAAP
U.S. GAAP
$ 4,555
$
(480) $ 4,075
$ 5,492
$
49
$ 5,541
$ 4,721
(1,003)
5,080
(76)
46
(1,079)
5,126
(65)
(2,965)
(3)
(2,672)
(603)
49
–
3
–
–
5
18
–
(42)
(2,672)
1,804
(603)
54
18
80
31
–
(58)
(49)
41
–
1
(5)
50
(123)
(3,014)
108
(507)
(1)
6
1,804
81
26
50
269
(35)
148
251
Total comprehensive income
$ 5,403
$
(484) $ 4,919
$ 4,335
$
29
$ 4,364
$ 4,961
Income taxes (recovery) deducted from the above items:
Net unrealized (losses) gains on available-for-sale
securities
Net foreign currency translation (losses) gains
from hedging activities
Net (losses) gains on derivatives designated
as cash flow hedges
Reclassification of losses on derivatives designated as
cash flow hedges to income
Additional pension obligation
$
(577) $
64
$
(513) $
(11) $
(37) $
(48) $
57
(1,361)
(304)
23
–
–
–
3
9
(1,361)
911
(304)
26
9
43
16
–
–
–
(3)
27
911
43
13
27
130
(15)
75
134
Total income taxes (recovery)
$ (2,219) $
76
$ (2,143) $
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. 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.
2008
s
e
r
u
t
n
e
v
t
n
i
o
J
$
$
$
(133)
(5,017)
(1,460)
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
$ (16,124)
Other liabilities
(2,061)
$
Subordinated debentures
–
$
Trust capital securities
–
$
Preferred share liabilities
–
$
Non-controlling interest in subsidiaries $
(38)
Shareholders’ equity
–
$
(3,085)
(2,635)
(5,893)
$
$
$
g
n
i
t
n
u
o
c
c
a
e
c
n
a
r
u
s
n
I
–
–
–
f
o
n
o
i
t
a
c
fi
i
s
s
a
l
c
e
R
s
e
i
t
i
r
u
c
e
s
–
–
(940)
–
–
3,538
–
3,801
–
–
–
–
(263)
–
–
1,023
–
–
–
–
–
–
83
r
i
a
f
e
h
t
f
o
n
o
i
t
a
c
i
l
p
p
A
n
o
i
t
p
o
e
u
l
a
v
–
–
–
(1)
(3)
51
91
1
41
–
–
–
(86)
s
p
i
h
s
r
e
n
t
r
a
p
d
e
t
i
m
i
L
–
–
(240)
–
–
280
–
–
–
–
–
–
40
n
o
i
t
a
i
c
e
r
p
p
a
k
c
o
t
S
s
t
h
g
i
r
–
–
–
–
–
(19)
–
(46)
–
–
–
–
27
-
t
s
o
p
r
e
h
t
o
d
n
a
n
o
i
s
n
e
P
s
t
fi
e
n
e
b
t
n
e
m
y
o
l
p
m
e
g
n
i
t
n
u
o
c
c
a
e
t
a
d
e
d
a
r
T
–
–
–
–
–
6,427
l
a
r
e
t
a
l
l
o
c
h
s
a
c
-
n
o
N
–
–
–
–
–
–
–
(256) 14,108
–
–
13,360
y
t
i
u
q
e
d
n
a
s
e
i
t
i
l
i
b
a
i
L
–
–
–
–
–
–
–
(34)
–
(1,400)
–
1,434
–
–
267
–
–
–
–
(523)
–
20,535
–
–
–
–
–
–
13,360
–
–
–
–
–
d
n
a
s
t
n
e
m
u
r
t
s
n
i
e
v
i
t
a
v
i
r
e
D
t
e
s
f
f
o
f
o
t
h
g
R
i
–
–
–
–
–
–
–
–
–
–
–
–
–
r
o
f
d
l
e
h
s
n
a
o
l
,
t
n
e
m
t
s
u
j
d
a
s
m
e
t
i
r
o
n
m
i
r
e
h
t
o
d
n
a
e
l
a
s
n
o
i
t
a
l
s
n
a
r
t
e
v
i
t
a
l
u
m
u
C
l
a
t
o
T
– $
(133)
– $ (5,017)
1 $ 3,788
– $ (3,086)
– $ (2,638)
122 $ 26,313
(4) $ (16,040)
23 $ 35,846
– $
41
– $ (1,400)
– $
–
– $ 1,396
(616)
104 $
s
e
i
t
i
v
i
t
c
a
g
n
i
g
d
e
h
–
–
–
–
–
(1)
(3)
–
–
–
–
–
2
190
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
2007
s
e
r
u
t
n
e
v
t
n
i
o
J
$
$
$
(78)
(4,436)
(375)
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
$ (12,277)
Deposits
(2,594)
$
Other liabilities
–
$
Subordinated debentures
–
$
Trust capital securities
–
Preferred share liabilities
$
(29)
Non-controlling interest in subsidiaries $
–
$
Shareholders’ equity
(2,262)
(2,931)
(4,818)
$
$
$
g
n
i
t
n
u
o
c
c
a
e
c
n
a
r
u
s
n
I
–
–
–
–
–
2,967
–
2,728
–
–
–
–
239
f
o
n
o
i
t
a
c
fi
i
s
s
a
l
c
e
R
s
e
i
t
i
r
u
c
e
s
–
–
(875)
–
–
870
–
–
–
–
–
–
(5)
r
i
a
f
e
h
t
f
o
n
o
i
t
a
c
i
l
p
p
A
n
o
i
t
p
o
e
u
a
v
l
–
–
–
(1)
(18)
3
13
(14)
6
–
–
–
(21)
s
p
i
h
s
r
e
n
t
r
a
p
d
e
t
i
m
i
L
–
–
(195)
–
–
220
–
–
–
–
–
–
25
n
o
i
t
a
i
c
e
r
p
p
a
k
c
o
t
S
s
t
h
g
i
r
–
–
–
–
–
(23)
–
(60)
–
–
–
–
37
-
t
s
o
p
r
e
h
t
o
d
n
a
n
o
i
s
n
e
P
s
t
fi
e
n
e
b
t
n
e
m
y
o
l
p
m
e
g
n
i
t
n
u
o
c
c
a
e
t
a
d
e
d
a
r
T
–
–
–
–
–
2,422
l
a
r
e
t
a
l
l
o
c
h
s
a
c
-
n
o
N
–
–
–
–
–
–
–
(202) 13,995
–
–
18,106
y
t
i
u
q
e
d
n
a
s
e
i
t
i
l
i
b
a
i
L
–
–
–
–
–
–
–
(34)
–
(1,400)
(300)
1,434
300
–
339
–
–
–
–
(541)
–
16,417
–
–
–
–
–
–
18,106
–
–
–
–
–
d
n
a
s
t
n
e
m
u
r
t
s
n
i
e
v
i
t
a
v
i
r
e
D
t
e
s
f
f
o
f
o
t
h
g
R
i
–
–
–
–
717
–
–
717
–
–
–
–
–
r
o
f
d
l
e
h
s
n
a
o
l
,
t
n
e
m
t
s
u
d
a
j
s
m
e
t
i
r
o
n
m
i
r
e
h
t
o
d
n
a
e
l
a
s
n
o
i
t
a
l
s
n
a
r
t
e
v
i
t
a
l
u
m
u
C
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 $
s
e
i
t
i
v
i
t
c
a
g
n
i
g
d
e
h
–
–
–
–
–
(2)
(8)
2
–
–
–
–
4
Material differences between Canadian and U.S. GAAP
No.
Item
U.S. GAAP
Canadian GAAP
1
Joint ventures
Investments in joint ventures other than VIEs are accounted
for using the equity method.
Investments in joint ventures other than VIEs are proportion-
ately consolidated.
2
Insurance
accounting
Classification of securities: Fixed income and equity invest-
ments 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 dividends
and direct operating expenses. These assumptions are
not revised unless it is determined that existing deferred
acquisition costs cannot be recovered. For universal life and
investment-type contracts, liabilities represent policyholder
account balances and include a net level premium reserve for
some contracts. The account balances represent an 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
represent the estimated amounts required to settle all unpaid
claims, and are recorded on an undiscounted basis.
Insurance revenue: Amounts received for universal life and
other investment-type contracts are not included as revenue,
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 mortality, 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.
Classification of securities: Fixed income and equity invest-
ments are classified as available-for-sale securities except
for those supporting the policy benefit liabilities of life
and health insurance contracts and a portion of property
and casualty contracts which are designated as held-
for-trading using the fair value option. Available-for-sale
and held-for-trading securities are carried at fair value,
however, the unrealized gains and losses for available-for-
sale securities are reported in AOCI, net of taxes, whereas
held-for-trading investments, which are designated using
the fair value option, are reported in net income. (Refer to
Item No. 4 below.)
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.
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 estab-
lished as a charge to Insurance policyholder benefits,
claims and acquisition expense.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
191
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
2
Insurance
accounting
(continued)
3
Reclassification
of securities
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 invest-
ment-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 reflects premiums or profit margins after the
date of acquisition only.
Reinsurance: Reinsurance recoverables are recorded as an
asset on our Consolidated Balance Sheets.
Policy acquisition costs: The costs of acquiring new life
insurance 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.
Differences relating to pre-November 1, 2006 period:
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.
Differences relating to pre-November 1, 2006 period:
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.
Differences in presentation on the balance sheet: Certain
investments in private equities measured at cost are included
in Other assets.
Differences in presentation on the balance sheet:
Investments are measured at cost and presented under
Securities.
Differences in classification of securities: Certain MBS, where
management intends to sell them in the near term, are classi-
fied as Available-for-sale.
Differences in classification of securities: These are
classified as held-for-trading.
Differences in securities reclassified as a result of the current
economic environment: For purposes of our U.S. GAAP results,
we reclassified certain securities from held-for-trading to
available-for-sale effective October 1, 2008. In addition, the
U.S. Municipal guaranteed investment contracts and U.S. mort-
gage-backed securities reclassified under Canadian GAAP were
not reclassified under U.S. GAAP because the entities which
hold those securities are prohibited from classifying securities
as available-for-sale. The fair value of the securities reclassified
on October 1, 2008 was $3,476 million.
Differences in securities reclassified as a result of the
current economic environment: As discussed in Note 3,
in accordance with Canadian GAAP, we reclassified
certain securities from trading to available-for-sale as of
August 1, 2008.
4
Application of the
fair value option
Effective November 1, 2006, U.S. GAAP allowed the follow-
ing financial instruments to be measured at fair value with
changes in fair value to be recognized in net income: (i) any
hybrid financial instrument that contains an embedded deriva-
tive that requires bifurcation at its fair value; and (ii) servicing
rights. The ability to measure the entire hybrid financial
As described in Note 1, effective November 1, 2006, any
financial instrument can be designated as held-for-trading
on its initial recognition (fair value option) (subject to cer-
tain restrictions imposed by OSFI), provided the fair value
of the instrument is reliably measurable, whereas under
U.S. GAAP, the use of the fair value option is available only
192
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Material differences between Canadian and U.S. GAAP (continued)
No.
Item
U.S. GAAP
Canadian GAAP
4
Application of
the fair value
option
(continued)
instrument at fair value eliminates the requirement to
bifurcate the embedded derivative, whereas the remeasure-
ment of 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.
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
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 activi-
ties; (iii) certain loans to customers whose related hedging
derivatives are measured at fair value; (iv) assets sold or pur-
chased under repurchase or reverse repurchase agreements
that form part of our trading portfolio which is managed and
evaluated on a fair value basis; (v) deposits and structured
notes with embedded derivatives that are not closely related
to the host contracts; and (vi) certain deposits to offset the
impact of related hedging derivatives measured at fair value.
Financial instruments designated as held-for-trading using the
fair value option are recorded at fair value and any gain or loss
arising due to changes in fair value are included in net income.
5
Limited
partnerships
The equity method is used to account for investments in lim-
ited partnerships that are non-VIEs or unconsolidated
VIEs, if we own at least 3% of the total ownership interest.
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 influence,
generally indicated by an ownership interest of 20% or more.
For stock options granted with SARs, a liability is recorded
for the potential cash payments to participants and compen-
sation expense is measured assuming that all participants
will exercise SARs.
6
Stock
appreciation
rights (SARs)
Between November 29, 1999, and June 5, 2001, options
granted under the employee stock option plan were accom-
panied by 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. Compensation expense would be
measured using estimates based on past experience of partici-
pants exercising SARs rather than the corresponding options.
On November 1, 2005, we adopted FASB Statement
No. 123 (revised 2004) Share-Based Payment (FAS 123(R)),
and its related FASB Staff Positions (FSPs) prospectively for
new awards and the unvested portion of existing awards.
FAS 123(R) requires that the compensation expense asso-
ciated with these awards should be measured assuming
that all participants will exercise SARs. Under the transition
guidelines of the new standard, the requirements of the
FAS 123(R) are applicable to awards granted after the adop-
tion of the new standard. Since these SARs were awarded
prior to adoption of the FAS 123(R), they continue to be
accounted for under the previous accounting standard.
7
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 RBC TruCS are
classified as liabilities. Dividends and yield distributions on
these instruments are included in Interest expense in our
Consolidated Statements of Income.
8
Pension and
other post-
employment
benefits
On October 31, 2007, we adopted the recognition require-
ments of FASB Statement No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Post-retirement Plans –
an amendment of FASB Statements No. 87, 88, 106 and
132(R) (FAS 158), 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 service costs and credits, and net
transitional assets or obligations. FAS 158 requires an entity
to measure defined benefit plan assets and obligations as
at the year-end date; this measurement requirement will be
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 measure our
benefit obligations and pension plan assets as at
September 30 each year.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
193
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
8
Pension and
other post-
employment
benefits
(continued)
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 presented later in this note.
Prior to 2007, for defined benefit pension plans, an
unfunded accumulated benefit obligation was recorded as an
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 obligation over
unrecognized prior service cost was recorded as a reduction in
Other comprehensive income.
9
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
accounting is used for our Consolidated Balance Sheets
whereas trade date basis of accounting is used for our
Consolidated Statements of Income.
10 Non-cash
collateral
Non-cash collateral received in securities lending transactions 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.
11 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.
12 Derivative
instruments
and hedging
activities
Non-derivative hedging instrument: Certain foreign currency-
denominated available-for-sale assets have been hedged
against foreign currency-denominated deposits. In order to
qualify for hedge accounting under U.S. GAAP, the hedging
instrument should be a derivative, unless it is a hedge of
a foreign exchange exposure of a net investment in a self-
sustaining foreign operation or it relates to unrecognized firm
commitments. Accordingly, the change in fair value of the avail-
able-for-sale assets including the foreign exchange gain or loss
is recognized in AOCI, whereas the change in translation gain or
loss on the foreign currency-denominated deposits is recorded
in net income resulting in a mismatch.
Differences relating to pre-November 1, 2006 period: All deriva-
tives 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 recognized in Net interest
income in the same period when the cash flow of the hedged
item affects earnings. The ineffective portion of the hedge is
reported in Non-interest income. For derivatives that are desig-
nated 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.
Non-derivative hedging instrument: Under Canadian
GAAP, a non-derivative hedging instrument can be used
to hedge any foreign currency risk exposure.
Differences relating to pre-November 1, 2006 period:
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 deriva-
tives where hedge accounting had not been applied
upon adoption of Accounting Guideline 13, Hedging
Relationships, were recorded at fair value with transition
gains or losses being recognized in income when the
original hedged item affected Net interest income. Where
derivatives had been designated and qualified as effec-
tive 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 substan-
tially harmonized with U.S. GAAP.
194
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Material differences between Canadian and U.S. GAAP (continued)
No.
Item
U.S. GAAP
Canadian GAAP
13 Two-class
method of
calculating
earnings per
share
When calculating earnings per share, we are required to give
effect to securities or other instruments or contracts that
entitle their holders to participate in undistributed earnings
when such entitlement is nondiscretionary and objectively
determinable.
Canadian GAAP does not have such a requirement.
14
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.
15 Cumulative
translation
adjustment
Foreign currency translation gains and losses relating to our
self-sustaining foreign operations that have been accumu-
lated in AOCI can be recognized in net income only when the
foreign operation has been substantially or fully liquidated.
Foreign currency translation gains and losses can be rec-
ognized in net income when there is a reduction in the net
investment of our foreign operations which may be even due
to dividend distribution.
16 Loans held-for-
sale
Loans held-for-sale are recorded at the lower of cost or
market value.
These are measured at amortized cost.
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, 2008, restricted
net assets of these subsidiaries were $16.3 billion (2007 – $10.3 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 disclosure
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 on
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. Actuarial gains and losses that arise in subsequent periods
and are not recognized as pension expense in the same periods will
be recognized as a component of OCI. These amounts will be subse-
quently recognized as a component of pension expense on the same
basis as the amounts recognized in AOCI on adoption of FAS 158.
The effects of adopting the provisions of FAS 158 on our
Consolidated Balance Sheets at October 31, 2007 are presented in the
following table, including the effect of recognizing the additional
minimum liability of $30 million prior to adopting FAS 158. Adopting
FAS 158 had no impact on our Consolidated Statements of Income 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 $355 million and $1,272 million (2007 –
$52 million and $1,441 million), respectively, is recognized on our
Consolidated Balance Sheets in Other liabilities. The accumulated
benefit obligations for the pension plans were $5,757 million at
October 31, 2008 (2007 – $6,299 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
195
Note 31 Reconciliation of the application of Canadian and United States generally accepted accounting principles (continued)
The pre-tax amounts included in AOCI are as follows:
Net actuarial loss
Prior service cost (benefit)
Transitional (asset) obligation
Pre-tax amount recognized in Accumulated other
comprehensive loss (1)
2008
2007
Other post-
Pension plans employment plans
$
$
761
62
(8)
$
267
(283)
1
Total
1,028
(221)
(7)
Other post-
Pension plans employment plans
$
$
484
95
(10)
$
564
(307)
1
Total
1,048
(212)
(9)
$
815
$
(15) $
800
$
569
$
258
$
827
(1)
Amount recognized in AOCI, net of tax, is $523 million (2007 – $541 million).
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 2009 are $51 million and $20 million, respec-
tively, and pension expense will be reduced by $2 million relating to
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 2009 are $21 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. All components of each derivative’s change in fair value
have been included in the assessment of fair value hedge effective-
ness. 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 was recorded in OCI for the effective portion of changes in
Fair value and unrealized losses position for available-for-sale securities
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 was reclassified to Net
income during the year. A net loss of $26 million deferred in AOCI as
at October 31, 2006, was 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 was recognized in Non-interest income for the ineffec-
tive 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 cur-
rency losses of $507 million related to our net investments in foreign
operations, which were offset by gains of $269 million related to
derivative and non-derivative instruments designated as hedges
for such foreign currency exposures. The net foreign currency gains
(losses) are recorded as a component of OCI.
Securities
The following table represents the duration of the unrealized losses
on our available-for-sale securities. Refer to Note 3 for the reasons
why these securities are considered to be not other-than-temporarily
impaired as at October 31, 2008. The gross unrealized losses of the
available-for-sale securities under U.S. GAAP are higher than those
under Canadian GAAP as disclosed in Note 3 primarily because certain
of these securities were designated as held-for-trading under Canadian
GAAP using the fair value option.
Canadian government debt
Federal
Provincial and municipal
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Loan substitute securities
Less than 12 months
12 months or more
Total
Fair value Unrealized losses
Fair value Unrealized losses
Fair value Unrealized losses
2008
$
$
958
883
7,180
132
2,329
4,179
5,355
1,080
–
$
$
11
72
354
3
373
345
569
230
–
–
26
360
21
1,270
401
1,369
347
191
$
–
5
41
4
443
108
382
161
29
$
958
909
7,540
153
3,599
4,580
6,724
1,427
191
11
77
395
7
816
453
951
391
29
Total temporarily impaired securities
$ 22,096
$
1,957
$
3,985
$
1,173
$ 26,081
$
3,130
196
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Less than 12 months
12 months or more
Total
Fair value Unrealized losses
Fair value Unrealized losses
Fair value Unrealized losses
2007
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
$
$
1,734
390
–
388
133
1,019
877
3,322
432
216
8
5
–
2
5
16
6
85
30
4
$
$
966
27
11
1,249
–
2,218
382
1,329
71
–
$
4
1
–
65
–
88
25
72
2
–
$
2,700
417
11
1,637
133
3,237
1,259
4,651
503
216
Total temporarily impaired securities
$
8,511
$
161
$
6,253
$
257
$ 14,764
$
12
6
–
67
5
104
31
157
32
4
418
Average assets, U.S. GAAP
Canada
United States
Other International
2008
2007
2006
Average
assets
% of total
average assets
Average
assets
% of total
average assets
Average
assets
% of total
average assets
$ 374,121
147,835
147,049
56%
22%
22%
$ 338,545
139,569
125,743
56%
23%
21%
$ 297,740
119,614
104,533
$ 669,005
100%
$ 603,857
100%
$ 521,887
57%
23%
20%
100%
Significant accounting changes
Guidance on accounting for income taxes
On November 1, 2007, we adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 provides specific guidance on the recognition, de-recognition,
measurement and disclosure of income tax positions in financial
statements, including the accrual of related interest and penalties.
Under FIN 48, income tax benefits are recognized and measured
based on a two-step model: (i) a tax position must be more-likely-
than-not of being sustained where “more-likely-than-not” means a
likelihood of more than 50%, and (ii) the benefit is measured as the
dollar amount of the position that is more-likely-than-not of being
realized upon ultimate settlement with a taxing authority. The differ-
ence between the tax benefit recognized in accordance with the FIN 48
model and the tax benefit claimed on a tax return is referred to as an
unrecognized tax benefit (UTB).
A reconciliation of the change in the UTB balance (excluding any
related accrual for interest) from November 1, 2007 to October 31,
2008 is as follows:
Reconcilation of the change in unrecognized tax benefits
Balance, November 1, 2007
Add: Increases related to positions taken during prior years
Add: Increases related to positions taken during current year
Add: Positions acquired or assumed in business combinations
Add: Foreign exchange and other
Less: Decreases related to positions taken during prior years
Less: Settlements
Balance, October 31, 2008
As at October 31, 2008 and November 1, 2007, the balances of our
UTBs, excluding any related accrual for interest, were $858 million and
$635 million, respectively, of which $827 million and $627 million,
respectively, if recognized, would affect our effective tax rate. It is
difficult to project how unrecognized tax benefits will change over the
next 12 months.
Under FIN 48, we continue our policy of accruing income-tax-
related interest and penalties within income tax expense. As at
October 31, 2008 and November 1, 2007, our accrual for interest and
penalties that relate to income taxes, net of payments on deposit to
taxing authorities, were $23 million and $27 million, respectively.
There was a net decrease of $4 million in the accrual for interest and
penalties during the 12 months ended October 31, 2008. The adoption
of FIN 48 had no material impact on our retained earnings or goodwill
as at November 1, 2007.
RBC and its subsidiaries are subject to Canadian federal and pro-
vincial income tax, U.S. federal, state and local income tax, and income
tax in other foreign jurisdictions. The following are the major tax juris-
dictions in which RBC and its subsidiaries operate and the earliest tax
year subject to examination:
$
$
635
23
191
32
27
(39)
(11)
858
Tax year
2004
1998
2006
Jurisdiction
Canada
United States
United Kingdom
Accounting for deferred acquisition costs for insurance operations
On November 1, 2007, we adopted 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. SOP 05-1 defines an internal replacement as a modification
in product benefits, features, rights or coverages that occurs by the
exchange of a contract for a new contract, by amendment or endorse-
ment, rider to a contract, or by the election of a feature or coverage
within a contract. A replacement contract that is substantially changed
from the replaced contract is accounted for as an extinguishment of the
replaced contract, resulting in the unamortized deferred acquisition
costs, unearned revenue liabilities, and deferred sales inducement
assets from extinguished contracts being expensed. The adoption of
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
197
Note 31 Reconciliation of the application of Canadian and United States generally accepted accounting principles (continued)
this standard did not materially impact our consolidated financial
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 was effective for us on
February 1, 2008. The impact of adopting this SAB was not material to
our consolidated financial position and results of operations.
Accounting for a change or projected change in the timing of cash flows
relating to income taxes generated by a leveraged lease transaction
On November 1, 2007, we adopted FASB Staff Position FAS 13-2,
Accounting for a Change or Projected Change in the Timing of Cash
Flows Relating to Income Taxes Generated by a Leveraged Lease
Transaction (FSP FAS 13-2), which addresses the accounting for a
change or projected change in the timing of cash flows relating to
income taxes generated by leveraged lease transactions. The principal
provision of FSP FAS 13-2 is the requirement that a lessor recalculate
the recognition of lease income when there is a change in the esti-
mated timing of the cash flows relating to income taxes generated by
such leveraged leases even if the total amount of income tax cash flow
is not affected. The adoption of FSP FAS 13-2 resulted in a decrease
to the opening balance of retained earnings as of November 1, 2007,
by $21 million, net of tax, which represents a cumulative effect of a
change in accounting principle, with a corresponding offset decreas-
ing the net investment in leveraged leases. The charge to retained
earnings will be recognized as a component of net income over the
remaining lives of the respective leases.
If new information becomes available in the future causing a
change in assumptions relating to the amount and timing of income
tax cash flows, we will then be required to perform another recalcula-
tion. The effect will be reported in the results of our operations, and
could, depending on the assumption that changed, result in either an
increase or decrease to the net investment in the leases.
Future accounting changes
Framework on fair value measurement
The FASB issued the following pronouncements regarding fair value
measurement: (i) FASB Statement No. 157, Fair Value Measurements
(FAS 157) on September 15, 2006; (ii) Staff Position FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement
under Statement 13 on February 14, 2008; (iii) Staff Position FAS 157-2,
Effective Date of FASB Statement No. 157 on February 12, 2008; and
(iv) Staff Position FAS 157-3, Determining the fair value of a financial
asset when the market for that asset is not active on October 10, 2008.
FAS 157 establishes a framework for measuring fair value in U.S. GAAP,
and is applicable to other accounting pronouncements where fair value
is considered to be the relevant measurement attribute. FAS 157 also
expands disclosures about fair value measurements. FAS 157 became
effective for us on November 1, 2008 except for certain non-financial
assets and non-financial liabilities which will be effective on November 1,
2009. The transition adjustment will be recognized in the opening bal-
ance of retained earnings reported under U.S. GAAP as at November 1,
2008 and is not material to our consolidated financial position.
Fair value option for financial assets and liabilities
On February 15, 2007, the 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
became effective for us on November 1, 2008. The transition adjust-
ment will be recognized in the opening balance of retained earnings
reported under U.S. GAAP as at November 1, 2008 and is not material
to our consolidated financial position.
Offsetting of amounts related to certain contracts
On April 30, 2007, the 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 recognized for
derivative instruments executed with the same counterparty under the
same master netting agreement. FSP FIN 39-1 became effective for us on
November 1, 2008, and the impact of adopting it is not material to 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 shared-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 became effective for us on November 1, 2008, and the impact
of adopting it is not material to our consolidated financial position and
results of operations.
Business combinations
In December 2007, the FASB issued Statement No. 141 (revised 2007),
Business Combinations (FAS 141(R)), which replaces Statement
No. 141, Business Combinations (FAS 141). FAS 141(R), which will be
effective for us on November 1, 2009, improves the relevance, repre-
sentational faithfulness, and comparability of the information that an
entity provides in its financial reports about a business combination
and its effects. FAS 141(R) retains the fundamental requirements
in FAS 141, being the requirement to use the acquisition method of
accounting for all business combinations and the identification of an
acquirer for each business combination. Significant changes in
FAS 141(R) are as follows:
• More assets acquired and liabilities assumed to be measured at
•
•
•
fair value as of the acquisition date;
Liabilities related to contingent consideration to be remeasured
at fair value and each subsequent reporting period;
An acquirer to expense acquisition-related costs;
Non-controlling interest in subsidiaries initially to be measured at
fair value and classified as a separate component of equity.
We are currently assessing the impact of adopting this standard on our
consolidated financial position and results of operations.
Non-controlling interest
In December 2007, the FASB issued Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statements – an amendment
of ARB No. 51 (FAS 160). FAS 160, which will be effective for us on
November 1, 2009, improves the relevance, representational faithful-
ness, and comparability of the information that an entity provides in
its financial reports related to an entity’s non-controlling interests.
Significant requirements of FAS 160 include:
198
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
•
•
•
•
Ownership interests in subsidiaries held by parties other than the
parent to be presented clearly in equity, but separately from the
parent’s equity;
The amount of consolidated net income attributable to the parent
and to the non-controlling interest be clearly identified and pre-
sented on the consolidated statement of income;
After control is obtained, a change in ownership interests that
does not result in a loss of control should be accounted for as an
equity transaction; and
A change in ownership of a consolidated subsidiary that results in
a loss of control and deconsolidation will trigger recognition of a
gain or loss and any retained non-controlling equity investment in
the former subsidiary will be initially measured at fair value.
We are currently assessing the impact of adopting this standard on our
consolidated financial position and results of operations.
Derivatives and hedging activities
In March 2008, the FASB issued Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133 (FAS 161). FAS 161 enhances disclosures for
derivative instruments and hedging activities and their effects on
an entity’s financial position, financial performance and cash flows.
Under FAS 161, an entity is required to disclose the objectives for using
derivative instruments in terms of underlying risk and accounting
designation; the fair values, gains and losses of derivatives; as well as
credit-risk-related contingent features in derivative agreements.
FAS 161 will be effective for us on February 1, 2009. We are currently
assessing the impact of adopting this standard on our consolidated
financial position and results of operations.
Convertible debt instruments
In May 2008, the FASB issued Staff Position APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement) (FSP APB 14-1).
FSB APB 14-1 clarifies that issuers of convertible debt instruments
should separately account for the liability and equity components
in order to properly reflect the entity’s borrowing rate that would be
applied to a nonconvertible debt instrument. FSP APB 141-1 will be
effective for us on November 1, 2009. We are currently assessing the
impact of adopting this standard on our consolidated financial position
and results of operations.
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
As at October 31
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 for loan losses
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
For the year ended October 31
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)
2008
2007
$
3,649
11,497
93,981
27,676
21,786
5,619
218,449
16,778
1,232
156,701
$
2,992
5,154
94,603
12,151
22,347
10,609
196,414
18,194
9,078
86,502
$ 557,368
$ 458,044
$ 351,286
167,343
$ 306,123
121,065
$ 518,629
$ 427,188
7,981
–
30,758
6,117
300
24,439
$ 557,368
$ 458,044
2008
2007
2006
$ 18,615
11,302
$ 17,563
12,940
$ 14,007
10,351
7,313
3,882
11,195
1,116
5,372
–
4,707
1,257
3,450
1,105
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
Net income
$
4,555
$
5,492
$
4,728
(1)
(2)
(3)
Includes dividend income from investments in subsidiaries and associated corporations of $415 million, $420 million and $17 million for 2008, 2007 and 2006, respectively.
Includes loss from associated corporations of $4 million for 2008 and income of $4 million and $8 million for 2007 and 2006, respectively.
Included in the net loss for 2006 was $29 million related to RBC Mortgage Company which was disposed of in 2005.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2008
199
Note 32 Parent company information (continued)
Condensed Statements of Cash Flows
For the year ended October 31
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 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 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
Note 33 Subsequent event
2008
2007
2006
$
4,555
$
5,492
$
4,728
(1,105)
(7,853)
(3,522)
10,058
(4,403)
12,028
(3,693)
(7,368)
(6,333)
(6,343)
(38,136)
6,559
4,866
–
6,060
–
(12,136)
–
(616)
4,990
(6,055)
9,436
–
–
(2,234)
(41,648)
6,113
2,438
4,891
(6,633)
–
(481)
(1,388)
(2,101)
8,062
(1,192)
(23,417)
5,963
–
6,330
–
18,195
–
(20,571)
(401)
(388)
(946)
(8,734)
(31,375)
(32,981)
(25,161)
45,163
2,000
(500)
613
(300)
(11)
149
(55)
74
(76)
(2,688)
3,541
(11,475)
20,225
87
(989)
1,150
(150)
(23)
155
(646)
208
(133)
(2,278)
(553)
3,968
36,435
21,021
28,989
–
(953)
600
(250)
(6)
116
(844)
244
(208)
(1,807)
3,955
1,059
30,895
657
2,992
68
2,924
(599)
3,523
$
3,649
$
2,992
$
2,924
$ 11,524
1,052
$
$ 13,061
$
$
(165) $
8,971
656
On November 24, 2008, we announced our intention to issue 9 million
Non-cumulative 5-Year Rate Reset First Preferred Shares Series AN
at $25 per share, for total proceeds of $225 million. We granted the
underwriters an option, exercisable in whole or in part, to purchase up
to an additional 4.0 million preferred shares at the same offering price.
The issuance is expected to be completed on December 8, 2008.
200
Royal Bank of Canada: Annual Report 2008
Consolidated Financial Statements
Supplementary information
Consolidated Balance Sheets
As at October 31 (C$ millions)
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Assets
Cash and deposits with banks (1)
Securities (1)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans
Retail
Wholesale
$ 31,127 $ 16,107 $ 14,903 $ 10,238 $
9,978 $
6,013 $
6,659 $
6,244 $
171,134
178,255
184,869
160,495
128,946
128,931
108,464
91,798
7,149 $ 16,591 $ 13,389
44,405
57,010
69,467
44,818
64,313
59,378
42,973
46,949
41,182
38,929
40,177
20,749
23,091
23,008
195,455
96,300
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
Allowance for loan losses
291,755
(2,215)
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)
289,540
237,936
208,530
190,416
170,916
160,394
165,570
166,103
153,216
141,697
143,480
Other
Customers’ liability under
acceptances
Derivatives
Premises and equipment, net
Goodwill
Other intangibles
Assets of operations
held for sale (2)
Other assets
Liabilities and shareholders’ equity
Deposits
Personal
Business and government
Bank
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 (2)
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)
11,285
136,134
3,260
9,977
1,253
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
–
–
25,331
–
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
187,240
103,735
69,100
65,399
69,433
63,327
55,852
54,617
39,159
32,261
50,117
$ 723,859 $ 600,346 $ 536,780 $ 469,521 $ 426,222 $ 399,847 $ 375,474 $ 358,939 $ 289,740 $ 270,650 $ 274,399
$ 139,036 $ 116,557 $ 114,040 $ 111,618 $ 111,256 $ 106,709 $ 101,892 $ 101,381 $ 89,632 $ 87,359 $ 85,910
76,107
129,860
17,988
22,576
93,618
19,646
119,581
22,003
86,223
14,315
160,593
34,649
133,823
25,880
189,140
40,343
107,141
24,925
219,886
28,762
269,994
29,545
438,575
365,205
343,523
306,860
270,959
259,145
243,476
233,447
202,896
187,897
180,005
11,285
11,786
9,108
7,074
6,184
5,943
8,051
9,923
11,628
9,257
10,620
27,507
44,689
38,252
32,391
25,005
22,855
19,110
16,443
13,419
17,885
14,404
32,053
128,705
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
7,385
7,283
7,337
7,117
6,488
4,775
2,407
2,268
144
113
427
–
35,689
–
28,483
32
22,649
40
18,408
62
20,172
50
17,850
–
19,405
–
19,417
–
13,128
–
11,872
–
9,339
242,624
201,284
160,575
131,003
126,585
113,744
105,166
99,369
66,788
65,439
77,916
8,131
1,400
–
6,235
1,400
300
7,103
1,383
298
8,167
1,400
300
8,116
2,300
300
6,243
2,300
300
6,614
1,400
6,513
5,825
4,596
4,087
1,400
650
–
–
989
1,315
1,585
1,562
1,844
2,371
1,483
1,775
1,944
58
40
35
45
40
103
499
2,663
10,384
242
(5)
(104)
19,936
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
(2,358)
(3,206)
(2,004)
(1,774)
(1,556)
(893)
(54)
(38)
(36)
(38)
(34)
30,758
24,439
22,123
19,847
17,904
18,075
17,794
16,850
11,956
11,053
10,048
$ 723,859 $ 600,346 $ 536,780 $ 469,521 $ 426,222 $ 399,847 $ 375,474 $ 358,939 $ 289,740 $ 270,650 $ 274,399
(1)
(2)
As the information is not reasonably determinable, amounts for years prior to 2001 have not been fully restated to reflect the reclassification of certificates of deposits.
Relates to assets and liabilities of 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.
Supplementary information
Royal Bank of Canada: Annual Report 2008
201
Consolidated Statements of Income
For the year ended October 31
(C$ millions, except per share amounts)
Interest income
Loans
Securities
Assets purchased under
reverse repurchase agreements
and securities borrowed
Deposits with banks
Interest expense
Deposits
Other liabilities
Subordinated debentures
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
$ 14,983 $ 14,724 $ 12,708 $ 10,790 $
6,974
7,665
6,189
4,606
9,535 $
3,593
9,900 $ 10,394 $ 12,001 $ 11,538 $ 10,394 $ 10,474
1,960
3,045
2,845
2,364
3,189
3,521
2,889
498
3,620
538
2,827
480
1,354
231
656
103
873
101
725
156
1,258
337
1,078
577
893
513
1,169
673
25,344
26,547
22,204
16,981
13,887
13,919
14,464
17,117
16,038
14,164
14,276
12,158
3,472
354
13,770
4,737
338
10,708
4,281
419
6,946
2,800
442
15,984
18,845
15,408
10,188
Net interest income
9,360
7,702
6,796
6,793
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 (loss) gain on sale of
available-for-sale securities
Net gain (loss) on
investment securities
Other
2,609
(408)
1,759
1,561
1,377
1,367
875
646
648
415
461
(617)
–
1,529
3,152
1,999
1,579
1,473
1,353
1,303
1,217
533
491
293
261
63
–
1,043
3,348
2,574
1,301
1,242
1,243
1,216
1,024
438
496
241
257
–
88
373
3,270
1,594
1,232
962
1,163
1,153
1,026
407
579
187
285
–
85
448
5,142
1,897
429
7,468
6,419
2,870
1,563
1,105
850
1,166
1,089
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
4,909
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
12,222
14,760
13,841
12,391
11,383
10,632
10,305
9,749
7,490
6,049
5,454
Total revenue
21,582
22,462
20,637
19,184
17,802
16,988
17,092
15,876
12,576
11,000
10,363
Provision for credit losses
1,595
791
429
455
346
721
1,065
1,119
691
760
Insurance policyholder benefits,
claims and acquisition expense
Non-interest expense
Human resources
Equipment
Occupancy
Communications
Professional fees
Outsourced item processing
Amortization of goodwill
Amortization of other intangibles
Other
Business realignment charges
Goodwill impairment
Income from continuing operations
before income taxes
Income taxes
Net income before
non-controlling interest
Non-controlling interest in net
income of subsidiaries
Net income from continuing
operations
Net (loss) income from
discontinued operations
1,631
2,173
2,509
2,625
2,124
1,696
1,535
1,344
687
530
7,779
1,155
926
749
562
341
–
135
704
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
12,351
12,473
11,495
11,357
10,833
10,165
10,420
–
–
–
–
–
–
45
–
177
–
–
–
–
–
5,667
807
704
673
398
303
210
36
919
9,717
–
38
4,597
679
556
695
267
–
76
11
700
7,581
–
–
4,013
677
564
699
298
–
66
–
743
7,060
–
–
575
438
3,594
585
508
665
262
–
62
–
723
6,399
–
–
6,005
1,369
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
4,636
5,633
4,801
3,424
3,035
2,967
2,707
2,318
2,172
1,635
1,776
81
141
44
(13)
12
12
5
11
7
8
76
4,555
5,492
4,757
3,437
3,023
2,955
2,702
2,307
2,165
1,627
1,700
–
–
(29)
(50)
(220)
13
n.a.
n.a.
n.a.
n.a.
n.a.
Net income
$
4,555 $
5,492 $
4,728 $
3,387 $
2,803 $
2,968 $
2,702 $
2,307 $
2,165 $
1,627 $
1,700
Preferred dividends
Net gain on redemption of
preferred shares
Net income available to
common shareholders
(101)
–
(88)
–
(60)
–
(42)
4
(31)
–
(31)
–
(38)
–
(31)
–
(25)
–
(27)
–
(21)
–
$
4,454 $
5,404 $
4,668 $
3,349 $
2,772 $
2,937 $
2,664 $
2,276 $
2,140 $
1,600 $
1,679
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)
$
$
$
1,305,706
1,273,185
1,279,956
1,283,433
1,293,465
1,324,159 1,345,143 1,283,031
1,212,777
3.41 $
4.24 $
3.65 $
2.61 $
2.14 $
2.22 $
1.98 $
1.77 $
1.77 $
1,252,316 1,234,648
1.36
1.28 $
3.41 $
4.24 $
3.67 $
2.65 $
2.31 $
2.21 $
1.98 $
1.77 $
1.77 $
1.28 $
1.36
– $
– $
(.02) $
(.04) $
(.17) $
.01
n.a.
n.a.
n.a.
n.a.
n.a.
1,319,744
1,289,314
1,299,785
1,304,680 1,311,016
1,338,032
3.38 $
4.19 $
3.59 $
2.57 $
2.11 $
2.20 $
1,356,241 1,294,432 1,219,730 1,264,610 1,267,253
1.34
1.96 $
1.76 $
1.27 $
1.76 $
3.38 $
4.19 $
3.61 $
2.61 $
2.28 $
2.19 $
1.96 $
1.76 $
1.76 $
1.27 $
1.34
– $
– $
(.02) $
(.04) $
(.17) $
.01
n.a.
n.a.
n.a.
n.a.
Dividends per share (in dollars)
$
2.00 $
1.82 $
1.44 $
1.18 $
1.01 $
.86 $
.76 $
.69 $
.57 $
.47 $
(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 retro-
actively for the stock dividend paid on April 6, 2006. Refer to Note 24.
n.a. not available
202
Royal Bank of Canada: Annual Report 2008
Supplementary information
n.a.
.44
Consolidated Statements of Comprehensive Income
For the year ended October 31
(C$ millions)
Net income
Other comprehensive income,
net of taxes
Net unrealized losses on
available-for-sale securities
Reclassification of 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
(losses) gains
from hedging activities
Net (losses) gains on
derivatives designated as
cash flow hedges
Reclassification of
losses on derivatives
designated as cash flow
hedges to income
Other comprehensive income
(loss)
Total comprehensive income
$
2008
4,555 $
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
$
(1,376)
373
(1,003)
(93)
28
(65)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,080
(2,965)
(501)
(624)
(1,341)
(2,991)
(59)
463
(2)
(205)
164
(3)
(42)
2
5
–
3
–
10
(2,672)
2,405
1,804
(1,203)
269
(230)
401
(218)
678
(663)
2,149
(839)
43
(16)
(475)
(2)
(603)
80
49
(554)
31
111
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4
2
–
–
–
–
–
201
(4)
(169)
(5)
–
–
–
–
–
–
848
5,403 $
(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
Consolidated Statements of Changes in Shareholders’ Equity
–
–
–
–
–
300
–
–
–
300
2,907
18
–
2,925
–
$
–
–
–
–
–
–
–
–
–
7
78
14
26
–
–
–
–
–
–
(6)
(2)
(6)
(5)
33
56
31
33
85
14
–
–
–
–
–
–
–
–
–
–
265
235
292
7
–
(18)
(46)
169
–
34
–
–
–
1998
2007
2002
2003
2001
2005
2008
2006
1999
2000
2004
–
–
85
–
–
33
–
–
78
–
–
(2)
(2)
–
47
292
54
15
265
–
(5)
235
–
(6)
169
–
(2)
242
(2)
51
(51)
(2)
(2)
33
(37)
(6)
(6)
23
(22)
(5)
7,018
127
(157)
6,988
6,988
214
(32)
7,170
6,979
193
(154)
7,018
2,925
192
(52)
3,065
3,065
109
(98)
3,076
6,940
191
(152)
6,979
7,196
170
(66)
7,300
7,170
127
(101)
7,196
3,076
3,976
(112)
6,940
452 $
250
–
7
709
556 $
–
–
(24)
532
532 $
–
–
–
532
447 $
–
–
5
452
7,300
3,090
(6)
10,384
300 $
296
(150)
1
447
709 $
–
(150)
(3)
556
532 $
300
(132)
–
700
700 $
600
(250)
–
1,050
1,050 $
1,150
(150)
–
2,050
2,050 $
613
–
–
2,663
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
6,823
other comprehensive income (loss)
Shareholders’ equity at end of year $ 30,758 $ 24,439 $ 22,123 $ 19,847 $ 17,904 $ 18,075 $ 17,794 $ 16,850 $ 11,956 $ 11,053 $ 10,048
–
4,555
(101)
(2,624)
(86)
5,492
(88)
(2,321)
–
4,728
(60)
(1,847)
–
3,387
(42)
(1,512)
–
2,803
(31)
(1,303)
–
2,968
(31)
(1,137)
–
2,702
(38)
(1,022)
–
2,165
(25)
(689)
–
1,627
(27)
(588)
–
2,307
(31)
(897)
–
248
(238)
(304)
(294)
179
(47)
–
(2)
12,065
–
10,235
–
11,333
–
13,704
–
18,167
(101)
51
(54)
–
–
15,771
(180)
175
(96)
–
(216)
193
(157)
–
–
19,936
–
(1,774)
111
(3,206)
(443)
(2,358)
–
(2,004)
–
(1,556)
–
8,464
–
7,579
–
9,206
–
(893)
–
6,857
–
(104)
–
(294)
(54)
(216)
–
(101)
–
(180)
(194)
–
(580)
(21)
(743)
(11)
(735)
–
(698)
(4)
(612)
(1)
(397)
(19)
(562)
(4)
(281)
(9)
13,767
10,440
10,181
12,065
–
(54)
–
(38)
–
(36)
–
(38)
14,961
13,704
15,771
11,333
10,235
18,167
17,578
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(49)
(12)
11,930
10,509
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2,004)
(1,068)
(1,774)
(3,207)
(1,556)
8,428
9,168
–
–
–
–
–
–
–
8,464
7,541
6,857
(802)
–
–
–
–
(893)
9,206
7,579
(221)
(38)
(36)
–
–
–
–
–
–
–
–
–
–
(45)
(45)
(54)
(65)
(38)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(34)
–
1,700
(21)
(543)
–
(34)
–
–
–
5,728
–
(7)
Supplementary information
Royal Bank of Canada: Annual Report 2008
203
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
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
18.0%
.70
.68
1.44
24.6%
.95
.93
1.33
23.5%
.94
18.0%
.76
.93
1.35
.75
1.53
15.6%
.67
.66
1.53
16.7%
.76
.75
1.64
15.8%
.74
16.4%
.71
.73
1.86
.70
1.90
19.8%
.77
.76
1.80
15.6%
.60
18.4%
.65
.59
1.83
.64
1.88
56.6%
65.7%
67.1%
64.6%
63.9%
62.6%
60.3%
61.4%
59.6%
55.0%
52.6%
$ 650,300 $ 581,000 $ 502,300 $ 447,100 $ 421,400 $ 390,700 $ 364,000 $ 322,900 $ 281,900 $ 269,900 $ 261,300
$ 650,300 $ 581,000 $ 502,100 $ 445,300 $ 418,200 $ 387,700 $ 364,000 $ 322,900 $ 281,900 $ 269,900 $ 261,300
339,300
438,575
28,100
26,800
305,300
365,205
22,395
23,800
261,800
343,523
21,075
20,700
230,500
306,860
19,149
19,500
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
RBC
623,300
615,100
582,300
1,824,800
1,593,900
1,483,800 1,365,900
1,342,500
1,175,200
967,800
829,200
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
2,585,000
226,900
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
$
25,173 $
30,830
278,579
9.0%
23,383 $
28,571
247,635
9.4%
21,478 $
26,664
223,709
9.6%
18,901 $
25,813
197,004
9.6%
11.1
11.5
11.9
13.1
16,272 $
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
12,026 $
16,698
149,078
8.1%
11.2
11,593
16,480
157,064
7.4%
10.5
1,341,260
1,305,706
1,319,744
1,276,260
1,273,185
1,289,314
1,280,890
1,279,956
1,299,785
$
2.00 $
1.82 $
1.44 $
20.99
17.58
16.52
1,235,162
1,293,502 1,289,496 1,312,043 1,330,514
1,283,433 1,293,465
1,234,648
1,345,143
1,304,680 1,311,016 1,338,032 1,356,241 1,294,432 1,219,730 1,264,610 1,267,253
.44
7.89
1,348,042 1,204,796 1,235,535
1,283,031 1,212,777 1,252,316
1,324,159
1.18 $
1.01 $
.57 $
14.89
.47 $
12.96
13.57
.86 $
.76 $
13.37
11.97
.69 $
8.58
9.55
55.84
39.05
46.84
13.9
4.2%
59
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
73,323
,964
4
64,815
4,419
60,539
4,232
59,647
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
1,174
567
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
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 prices 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 prices.
Common dividends as a percentage of net income after preferred dividends.
(7)
(8) On a full-time equivalent basis.
(9) Bank branches which provide full or limited banking services dealing directly with clients. Bank branches prior to 2001 are reported on the basis of service delivery units.
204
Royal Bank of Canada: Annual Report 2008
Supplementary information
Glossary
Acceptances
A bill of exchange or negotiable instrument drawn
by the borrower for payment at maturity 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 management
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.
Alt-A assets
A term used in the U.S. to describe assets
(mainly mortgages) with a borrower risk profile
between the prime and subprime categorizations.
Categorization of assets as Alt-A (as opposed
to prime) varies, such as limited verification or
documentation of borrowers’ income or a limited
credit history.
Asset-backed securities (ABS)
Securities created through the securitization of
a pool of assets, for example auto loans or credit
card loans.
Assets-to-capital multiple
Total assets plus specified off-balance sheet
items, as defined by OSFI, divided by total
regulatory capital.
Assets under administration (AUA)
Assets administered by us, which are beneficially
owned by clients, as at October 31, unless other-
wise noted. Services provided in respect of assets
under administration are of an administrative
nature, including safekeeping, collecting invest-
ment income, settling purchase and sale transac-
tions, and record keeping.
Assets under management (AUM)
Assets managed by us, which are beneficially
owned by clients, as at October 31, unless other-
wise noted. Services provided in respect of assets
under management include the selection of invest-
ments and the provision of investment advice.
We have assets under management that are also
administered by us and included in assets under
administration.
Auction rate securities (ARS)
Securities issued through variable interest entity
(VIE) trusts that hold long-term assets funded
with long-term debt, with an interest rate reset
every week to 35 days via auctions managed by
participating financial institutions. In the U.S.,
these securities are issued by sponsors such as
municipalities, student loan authorities or other
sponsors through bank-managed auctions.
Bank-owned life insurance contracts (BOLI)
Our U.S. Insurance and Pension solutions
business provides banks with BOLI stable value
agreements (“wraps”) which insure the life
insurance policy’s cash surrender value from
market fluctuations on the underlying invest-
ments, thereby guaranteeing a minimum tax-
exempt return to the counterparty. These wraps
allow us to account for the underlying assets on an
accrual basis instead of a mark-to-market basis.
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 business plans.
This includes risks for which minimum 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 (long term)
assets are funded by short-term liabilities and
represents a formula-based measure of both com-
parative and directional structural liquidity risk.
Collateral
Assets pledged as security for a loan or other obli-
gation. Collateral can take many forms, such as
cash, highly rated securities, property, inventory,
equipment, receivables.
Collateralized debt obligation (CDO)
Securities that may have multiple tranches issued
by special purpose vehicles sponsored by certain
organizations which hold collateral such as pools
of bonds, loans and any other type of debt instru-
ments which are generally non-mortgage assets
and investors bear the credit risk of these assets.
The sponsor usually sets the size of the senior
tranche to attain triple-A ratings, with more sub-
ordinate tranches receiving successively lower
ratings. If there are defaults on the assets held or
the collateralized assets underperform, sched-
uled payments are made first to the most senior
tranches, followed by successive payments to the
least subordinate tranches.
Collateralized loan obligation (CLO)
Securities which are backed by a pool of com-
mercial or personal loans, structured so that there
are several classes of bondholders with varying
maturities, called tranches.
Commercial mortgage-backed
securities (CMBS)
Securities created through the securitization of
commercial mortgages.
Commitments to extend credit
Unutilized amount of credit facilities available to
clients either in the form of loans, bankers’ accep-
tances and other on-balance sheet financing, or
through off-balance sheet products such as
guarantees and letters of credit.
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.
Credit default swaps (CDS)
A derivative contract that provides the purchaser
with a one-time payment should the referenced
entity/entities default (or a similar triggering
event occur).
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 financial rate. Examples of derivatives
include swaps, options, forward rate agreements
and futures. The notional amount of the derivative
is the contract amount used as a reference point to
calculate the payments to be exchanged between
the two parties, and the notional amount itself is
generally not exchanged by the parties.
Dividend payout ratio
Common dividends as a percentage of net income
after preferred share dividends.
Dividend yield
Dividends per common share divided by the
average of the high and low share prices in the
relevant period.
Documentary and commercial letters of credit
Written undertakings by a bank on behalf of its
client (typically an importer), authorizing a third
party (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 interna-
tional 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 divi-
dends 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 necessary to
support our various businesses, given their risks,
consistent with our desired solvency standard
and credit ratings. The identified risks (described
above) for which we calculate Economic Capital
are credit, market (trading and non-trading),
operational, business, fixed asset, and insurance.
Additionally, Economic capital includes goodwill
and intangibles, and allows for diversification ben-
efits across risks and business segments.
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.
Fair value adjustments on RBC debt
designated as held-for-trading
The change in fair value of deposit liabilities and
subordinated debentures designated as held-
for-trading, largely as a result of the widening of
our credit spreads, is defined as fair value adjust-
ments on RBC debt designated as held-for-trading.
Gross-adjusted assets (GAA)
GAA are used in the calculation of the Assets-to-
Capital multiple. They represent our total assets
including specified off-balance sheet items and net
of prescribed deductions. Off balance sheet items
for this calculation are direct credit substitutes,
including letters of credit and guarantees,
transaction-related contingencies, trade-related
contingencies and sale and repurchase agreements.
Guarantees and standby letters of credit
Primarily represent irrevocable assurances that
a bank will make payments in the event that its
client cannot meet its financial obligations to third
parties. Certain other guarantees, such as bid
and performance bonds, represent non-financial
undertakings.
Hedge
A risk management technique used to insulate
financial results from market, interest rate or
foreign currency exchange risk (exposure) arising
from normal banking operations. The elimination
or reduction of such exposure is accomplished by
establishing offsetting positions. For example,
assets denominated in foreign currencies can
be offset with liabilities in the same currencies
or through the use of foreign exchange hedging
instruments such as futures, options or foreign
exchange contracts.
Hedge funds
A type of investment fund, marketed to wealthy
individuals and institutions, that is subject to lim-
ited regulation and restrictions on its investments
compared to retail mutual funds, and that often
utilize aggressive strategies such as selling short,
leverage, 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 con-
tractual terms of the loan agreement. Credit card
balances are not classified as impaired as they are
directly written off after payments are 180 days
past due.
Innovative capital instruments
Innovative capital instruments are capital instru-
ments issued by Special Purpose Entities (SPEs),
whose primary purpose is to raise capital. We pre-
viously issued innovative capital instruments, RBC
Trust Capital Securities (RBC TruCS) and RBC Trust
Subordinated Notes (RBC TSNs), through three
SPEs: RBC Capital Trust, RBC Capital Trust II and
RBC Subordinated Notes Trust. As per OSFI guide-
lines, innovative capital can comprise up to 15% of
net Tier 1 capital with an additional 5% eligible for
Tier 2 capital.
Leveraged finance
Comprises infrastructure finance, essential ser-
vices and other types of finance. As both arrangers
and underwriters, we provide structuring and
distribution expertise in support of the financing
requirements of our clients, which include both
corporations and financial sponsors.
Glossary
Royal Bank of Canada: Annual Report 2008
205
Managed basis
We report our segments on a managed basis
which is intended to measure the performance of
each business segment as if it were a stand alone
business and reflect the way each segment is
managed.
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.
Monoline insurer
Insurance companies that specialize in financial
guaranty insurance products, predominantly
for the municipal bond market in the U.S. and
structured finance products, such as CDOs.
Net interest income
The difference between what is earned on assets
such as loans and securities and what is paid
on liabilities such as deposits and subordinated
debentures.
Net interest margin (average assets)
Net interest income as a percentage of total
average assets.
Net interest margin (average earning assets)
Net interest income as a percentage of total
average earning assets.
Non-bank sponsored asset-backed
commercial paper
A short-term promissory note issued primarily
by special purpose securitization vehicles that
hold loans or other assets and are not sponsored
by banks.
Normal course issuer bid (NCIB)
A program for the repurchase of our own 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 arrangements offered to clients, which
include credit derivatives, written put options,
backstop liquidity facilities, stable value products,
financial standby letters of credit, performance
guarantees, credit enhancements, mortgage loans
sold with recourse, commitments to extend credit,
securities lending, documentary and commercial
letters of credit, note issuances and revolving
underwriting facilities, securities lending indemnifi-
cations and indemnifications.
Office of the Superintendent of Financial
Institutions Canada (OSFI)
The primary regulator of federally chartered
financial institutions and federally administered
pension plans in Canada. OSFI’s mission is to safe-
guard policyholders, depositors and pension plan
members from undue loss.
Options
A contract or a provision of a contract that gives
one party (the option holder) the right, but not the
obligation, to perform a specified transaction with
another party (the option issuer or option writer)
according to specified terms.
Prepaid pension benefit cost
The cumulative excess of amounts contributed to
a pension fund over the amounts recorded as
pension expense.
Provision for credit losses
The amount charged to income necessary to bring
the allowance for credit losses to a level deter-
mined 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 (RMBS)
Securities created through the securitization of
residential mortgage loans.
Return on common equity (ROE)
Net income less preferred share dividends,
expressed as a percentage of average common
equity.
Reverse repurchase agreements
Involve the purchase of securities for cash at a
near value date and the simultaneous sale of the
securities for value at a later date.
Risk
Financial institutions face a number of different
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, insurance risk, strategic
risk, competitive risk and systemic risk.
Risk-adjusted assets (RAA) – Basel I
Used in the calculation of risk-based capital ratios
as defined by guidelines issued by OSFI. The face
value of assets is discounted using risk-weighting
factors in order to reflect a comparable risk per dol-
lar among all types of assets. The risk inherent in
off-balance sheet instruments is also recognized,
first by determining a credit equivalent amount,
and then by applying appropriate risk-weighting
factors. Specific and general market risk-adjusted
assets are added to the calculation of the Balance
Sheet and off-balance sheet risk-adjusted assets
to obtain the total risk-adjusted assets.
RAA – Basel II
Used in the calculation of risk-based capital ratios
as defined by guidelines issued by OSFI based on
Basel II, effective November 1, 2007. A majority of
our credit risk portfolios use the AIRB Approach
and the remainder use a Standardized Approach
for the calculation of RAA based on the total expo-
sure, i.e. exposure at default, and counterparty risk
weights. For measurement of market risk RAA, we
use internal models approach for products with
regulatory approval and a Standardized Approach
for products to be approved. For measurement
of operational risk, we use the Standardized
Approach. In addition, Basel II requires a transi-
tional capital floor adjustment. For more details,
refer to the Capital management section.
Securities lending
Transactions in which the owner of a security
agrees to lend it under the terms of a prearranged
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 security. There are two
types of securities lending arrangements: lending
with and without credit or market risk indemnifica-
tion. In securities 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 securities
and then borrows the securities in order to deliver
them to the purchaser upon settlement. At a later
date, the seller buys identical securities in the
market to replace the borrowed securities.
Securitization
The process by which various financial assets are
packaged into newly issued securities backed by
these assets.
Special purpose entities (SPEs)
Entities that are typically organized for a single
discrete purpose, have a limited life and serve to
legally isolate the financial assets held by the SPE
from the selling organization. SPEs are principally
used to securitize financial and other assets in
order to obtain access to funding, to mitigate
credit risk and to manage capital.
Standardized Approach
Risk weights prescribed by OSFI are used to
calculate risk-weighted assets for the credit
risk exposures. Credit assessments by OSFI-
recognized external credit rating agencies of S&P,
Moody’s, Fitch and DBRS are used to risk-weight
our Sovereign and Bank exposures based on the
standards and guidelines issued by OSFI. For our
Business and Retail exposures, we use the stan-
dard risk weights prescribed by OSFI.
Structured investment vehicles
Managed investment vehicle that holds mainly
highly rated asset-backed securities and funds
itself using the short-term commercial paper mar-
ket 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 mar-
ket interest rates because of their deficient credit
history. Subprime lending carries more risk for
lenders due to the combination of higher interest
rates for the borrowers, poorer credit histories,
and adverse financial situations usually associ-
ated with subprime applicants.
Super senior tranches of structured
credit transactions
Represents the most senior class of commercial
paper or notes that are issued in structured credit
transactions. These financial instruments benefit
from the subordination of all other securities,
issued by structured credit vehicles.
Survival horizon
Measures the length of time over which RBC would
have sufficient funds to repay its maturing liabili-
ties and finance off-balance sheet commitments
if access to wholesale unsecured funding became
suddenly unavailable and liquid assets, but no
portion of mortgages and loans, were monetized.
Synthetic securitization
The transfer of risks relating to selected elements
of our financial assets to unaffiliated third parties
through the use of certain financial 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 comprises the more permanent
components 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 and other items as prescribed
by OSFI are deducted from Tier 1 capital to deter-
mine adjusted net Tier 1 capital. The Tier 1 capital
ratio is calculated by dividing the adjusted net
Tier 1 capital by risk-adjusted assets.
Tier 2 capital and Tier 2 capital ratio
Tier 2 capital consists mainly of subordinated
debentures, trust subordinated notes, the eligible
amount of innovative capital instruments that
could not be included in Tier 1 capital, and an eligi-
ble portion of the total general allowance for credit
losses, less OSFI-prescribed deductions.
Total capital and total capital ratio
Total capital is defined as the total of net Tier 1 and
Tier 2 capital. The total capital ratio is calculated by
dividing total capital by risk-adjusted assets.
Tranche
A security class created by a process used in
structured finance whereby the risks and returns
associated with a pool of assets is packaged into
several classes of securities offering different risk
and return profiles from those of the underlying
asset pool. The aggregate risk of the tranches
created is the same as those of the underlying
asset pool from which it is derived, but the amount
of subordination attached to a specific tranche
for losses experienced in the underlying pool of
assets and entitlement to its returns differ. The
process typically results in the creation of at least
three tranches – senior, mezzanine, and equity –
with each having a progressively higher degree of
credit risk and potential returns. Tranches are typi-
cally rated by ratings agencies, and reflect both
the credit quality of underlying collateral as well
as the level of protection based on the tranches’
relative subordination.
Trust Capital Securities (RBC TruCS)
Transferable trust units issued by special purpose
entities RBC Capital Trust or RBC Capital Trust II for
the purpose of raising innovative Tier 1 capital.
Trust Subordinated Notes (RBC TSNs)
Transferable trust units issued by RBC
Subordinated Notes Trust for the purpose of rais-
ing innovative Tier 2 capital.
U.S. GAAP
U.S. generally accepted accounting principles.
Value-at-Risk (VaR)
A generally accepted risk-measurement concept
that uses statistical models based on historical
information to estimate within a given level of confi-
dence 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 sufficient
equity at risk to finance its activities without addi-
tional subordinated financial support, or where
the holders of the equity at risk lack the character-
istics of a controlling financial interest.
206
Royal Bank of Canada: Annual Report 2008
Glossary
Directors and executive officers
Directors
W. Geoffrey Beattie (2001)
Toronto, Ontario
President and
Chief Executive Officer
The Woodbridge
Company Limited
Deputy Chairman
Thomson Reuters Corporation
Thomson Reuters PLC
Douglas T. Elix, A.O. (2000)
Ridgefield, Connecticut
Corporate Director
John T. Ferguson, F.C.A. (1990)
Edmonton, Alberta
Chairman and
Chief Executive Officer
Princeton Developments Ltd.
Princeton Ventures Ltd.
The Hon. Paule Gauthier,
P.C., O.C., O.Q., Q.C. (1991)
Quebec, Quebec
Senior Partner
Stein Monast L.L.P.
Group Executive
Janice R. Fukakusa
Chief Financial Officer
M. George Lewis
Group Head
Wealth Management
Timothy J. Hearn (2006)
Calgary, Alberta
Corporate Director
Alice D. Laberge (2005)
Vancouver, British Columbia
Corporate 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
J. Pedro Reinhard (2000)
Key Biscayne, Florida
President
Reinhard & Associates
Edward Sonshine (2008)
Toronto, Ontario
President and
Chief Executive Officer
RioCan Real Estate
Investment Trust
Kathleen P. Taylor (2001)
Toronto, Ontario
President and
Chief Operating Officer
Four Seasons Hotels and Resorts
Victor L. Young, O.C. (1991)
St. John’s, Newfoundland
and Labrador
Corporate Director
The date appearing after the name of
each director indicates the year in which
the individual became a director.
A. Douglas McGregor
Co-Group Head
Capital Markets
David I. McKay
Group Head
Canadian Banking
Gordon M. Nixon
President and
Chief Executive Officer
Mark A. Standish
Co-Group Head
Capital Markets
Barbara G. Stymiest
Chief Operating Officer
W. James Westlake
Group Head
International Banking
and Insurance
Directors and executive officers
Royal Bank of Canada: Annual Report 2008
207
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 Securities 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. (2)
RBC Holdings (USA) Inc. (2)
RBC USA Holdco Corporation (2), (5)
RBC Capital Markets Holdings (USA) Inc. (2)
RBC Capital Markets Corporation (2)
Prism Financial Corporation (5)
RBC Trust Company (Delaware) Limited
RBC Insurance Holdings (USA) Inc.
Liberty Life Insurance Company
RBC Capital Markets Arbitrage S.A.
Royal Bank of Canada (Asia) Limited
Capital Funding Alberta Limited
RBC PH&N Holdings Inc. (6)
RBC Bancorpation (USA) (5)
RBC Bank (USA)
RBCF L.P. (2)
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
RBC Investment Solutions (CI) Limited
RBC 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 Limited
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) Ltd.
RBC Holdings (Barbados) Ltd.
RBC Financial (Caribbean) Limited
(1)
(2)
Carrying value of voting shares
owned by the bank (3)
925
1,102
3,121
$
Principal
office address (2)
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
New York, New York, U.S
New York, New York, U.S.
New York, New York, U.S.
Minneapolis, Minnesota, U.S.
New York, New York, U.S.
Wilmington, Delaware, U.S.
Wilmington, Delaware, U.S.
Wilmington, Delaware, U.S.
Greenville, South Carolina, U.S.
Luxembourg, Luxembourg
Singapore, Singapore
Calgary, Alberta, Canada
Toronto, Ontario, Canada
Raleigh, North Carolina, U.S.
Raleigh, 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
St. Michael, Barbados
Port of Spain, Trinidad and Tobago
26,769
5,664
269
4
3,057
14
46
2,703
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, RBC Capital Markets Holdings (USA) Inc. and RBC Alternative Asset Management Inc., which are incorporated under the laws of the State of Delaware, U.S., RBC Capital
Markets Corporation, which is incorporated under the laws of the State of Minnesota 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 6.68% and Prism Financial Corporation owns 3.25% of RBC Bancorporation (USA).
RBC PH&N Holdings Inc. has exchangeable shares outstanding that were issued as part of the consideration to acquire PH&N and which will be exchanged on a one-for-one basis for RBC
common shares three years after closing in accordance with the purchase agreement.
(3)
(4)
(5)
(6)
208
Royal Bank of Canada: Annual Report 2008
Principal subsidiaries
Vision
• Always earning the right to
be our clients’ first choice
Values
• Excellent service to clients
and each other
• Working together to succeed
• Personal responsibility for
high performance
• Diversity for growth and
innovation
• Trust through integrity in
everything we do
Strategic goals
• In Canada, to be the undisputed
leader in financial services
• In the U.S., to be a leading
provider of banking, wealth
management and capital
markets services by building
on and leveraging RBC’s
considerable capabilities
• Internationally, to be a premier
provider of select banking,
wealth management and capital
markets services in markets
of choice
royal BanK oF CanaD a (RY on TSX and NYSE) and its subsidiaries operate under the master brand name RBC. We are Canada’s
largest bank as measured by assets and market capitalization, one of North America’s leading diversified financial services
companies and among the largest banks in the world, as measured by market capitalization. We provide personal and commercial
banking, wealth management services, insurance, corporate and investment banking and transaction processing services on
a global basis. We employ more than 80,000 full- and part-time employees who serve more than 17 million personal, business,
public sector and institutional clients through offices in Canada, the U.S. and 48 other countries. For more information, please
visit rbc.com.
Contents
1 Financial highlights
4 Chief Executive Officer’s
message
9 Performance review
10 Business discussion
16 Chairman’s message
17 Corporate governance
19 Corporate responsibility
28 Management’s Discussion
and Analysis
29 Overview
35 Accounting and control matters
39 Financial performance
51 Quarterly financial information
53 Business segment results
75 Financial condition
83 Risk, capital and liquidity
management
112 Overview of other risks
116 Additional factors that may
affect future results
119 Additional financial
information
125 Consolidated Financial
Statements
126 Management’s responsibility
for financial reporting
126 Report of Independent
Registered Chartered
Accountants
127 Management’s Report on
Internal Control over Financial
Reporting
127 Report of Independent
Registered Chartered
Accountants
128 Consolidated Balance Sheets
129 Consolidated Statements
of Income
130 Consolidated Statements of
Comprehensive Income and
Changes in Shareholders’
Equity
131 Consolidated Statements of
Cash Flows
132 Notes to the Consolidated
Financial Statements
201 Supplementary information
205 Glossary
207 Directors and executive
officers
208 Principal subsidiaries
209 Shareholder information
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 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 29.
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: 1-866-586-7635
(Canada and the United States) or
(514) 982-7555 (International)
Fax: (514) 982-7580
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 contacts
For dividend information, change
in share registration or address,
lost stock certificates, tax forms,
estate transfers or dividend
reinvestment, please contact:
Computershare Trust Company
of Canada
100 University Avenue, 9th Floor
Toronto, Ontario, Canada M5J 2Y1
Tel: 1-866-586-7635
(Canada and the United States) or
(514) 982-7555 (International)
Fax: 1-888-453-0330
(Canada and the United States) or
(416) 263-9394 (International)
e-mail:
service@computershare.com
For other shareholder inquiries,
please 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, please 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
Direct deposit service
Shareholders in Canada and the
United States may have their
RBC common share dividends
deposited directly to their bank
account by electronic funds trans-
fer. To arrange for this service,
please contact our Transfer Agent
and Registrar, Computershare
Trust Company of Canada.
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
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 (NCIB) through
the facilities of the Toronto Stock
Exchange. During the one-year
period commencing November 1,
2008, 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 under the
NCIB, subject to prior consultation
with OSFI.
A copy of our Notice of Intention
to file a NCIB may be obtained,
without charge, by contacting our
Secretary at our Toronto mailing
address.
2009 Annual Meeting
The Annual Meeting of
Shareholders will be held on
Thursday, February 26, 2009 at
9:00 a.m. (Pacific Standard Time)
at the Vancouver Convention
& Exhibition Centre, Parkview
Terrace, 999 Canada Place,
Vancouver, British Columbia,
Canada.
2009 Quarterly earnings
release dates
First quarter
Second quarter
Third quarter
Fourth quarter
February 26
May 29
August 27
December 4
Dividend dates for 2009
Subject to approval by the Board of Directors
Common and preferred
shares series W, AA, AB, AC,
AD, AE, AF, AG, AH, AJ and AL
La Banque Royale publie aussi son
Rapport annuel en français.
Legal Deposit, fourth quarter, 2008
Bibliothèque nationale du Québec
Record dates
Payment dates
January 26
April 23
July 27
October 26
February 24
May 22
August 24
November 24
Printed in Canada
This annual report is printed on acid-free
paper and the entire book is recyclable.
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 without 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
2008 Annual Report to Shareholders about our U.S. subsidiaries’ Equal Employment Opportunity practices is required pursuant to EEO rules.
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.
d
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Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC BANK, RBC BLUEPRINT FOR DOING BETTER, RBC BLUE WATER PROJECT, RBC CAPITAL
TRUST, RBC COMMUNITY BLUEPRINT, RBC DIRECT INVESTING, RBC ENVIRONMENTAL BLUEPRINT, RBC INSURANCE, RBC SUBORDINATED NOTES TRUST, RBC TSNs, RBC TruCS and RBC WEALTH
MANAGEMENT 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.
the partnership that
drives our business
a leader in
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This is a carbon neutral publication. Net carbon dioxide
equivalent emissions associated with the production and
distribution of this report have been neutralized through
the purchase and retirement of certified emission reductions
(CERs). CERs are subjected to a rigorous validation,
certification, registration and issuance process designed to
ensure real, measurable and verifiable emission reductions
that are recognized under the Kyoto Protocol.
a learning
experience
an education for
our children
All paper used in the production of this report is FSC (Forest
Stewardship Council) certified, acid free and elemental
chlorine free. Fibre used in the manufacture of the paper
comes from well-managed forests independently certified
by SmartWood Program of the Rainforest Alliance, according
to Forest Stewardship Council rules. Paper used for the cover
of the report contains 10% post-consumer waste.
Form #81104 (12/2008)
Royal Bank of Canada
2008 Annual Report
a retirement plan we
can look forward to
a banking experience
right for us