Royal Bank of Canada Annual Report 2009

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FY2009 Annual Report · Royal Bank of Canada

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Royal Bank of Canada

2009 Annual Report

Vision

Values

Strategic goals

•

Always earning the right to be our
clients’ first choice

•

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

•

In Canada, our goal is to be the
undisputed leader in financial
services.

In the U.S., our goal is to be a leading
provider of capital markets, wealth
management and banking services by
building on and leveraging
our considerable capabilities.

Outside North America, our goal is to
be a premier provider of select capital
markets, wealth management and
banking services in markets of choice.

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 among the largest banks in the world, based on market
capitalization. We are one of North America’s leading diversified financial services companies, and provide personal and
commercial banking, wealth management services, insurance, corporate and investment banking and transaction processing
services on a global basis. We employ approximately 80,000 full- and part-time employees who serve more than 18 million
personal, business, public sector and institutional clients through offices in Canada, the U.S. and 53 other countries. For more
information, please visit rbc.com.

CONTENTS

Chief Executive Officer’s message

Chairman’s message

Management’s Discussion and Analysis

Overview

Financial performance

Quarterly financial information

Business segment results

Financial condition

Risk, capital and liquidity management

Overview of other risks

Additional risk factors that may affect future results

Additional financial information

Key performance and non-GAAP measures

Accounting and control matters

Related party transactions

Supplemental information

Report of Independent Registered Chartered Accountants

Comments by Independent Registered Chartered
Accountants on Canada-United States of America Reporting
Difference

Management’s Report on Internal Control over Financial
Reporting

Report of Independent Registered Chartered Accountants

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income and
Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

147 Glossary

150 Directors and executive officers

151

152

Principal subsidiaries

Shareholder information

75 Management’s Responsibility for Financial Reporting

See our Glossary for definitions of terms used throughout this
document.

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 risk factors could cause our actual results to differ materially from the expectations
expressed in such forward-looking statements. Additional information about our forward-looking statements and risk factors can be found under
the Caution regarding forward-looking statements on page 5.

CHIEF EXECUTIVE OFFICER’S MESSAGE

At the end of a very challenging year, RBC stands apart as a
globally significant, strong and stable financial institution. We
had top quartile shareholder returns for one-, three-, five- and
10-year time horizons versus our North American peer group
and today we are one of the largest banks in the world based
on market capitalization. We are one of only a handful of
banks globally with a Aaa-rating by Moody’s Investors Service,
and are among the most respected and well recognized banks
for our corporate citizenship.

In fiscal 2009, we generated net income of $3.858 billion,
which reflects a goodwill impairment charge of $1 billion on
both a pre-tax and after-tax basis that did not affect our
ongoing operations. Excluding the goodwill impairment
charge, adjusted net income of $4.9 billion1 was up 7 per cent
from a year ago, reflecting strong performances in Canadian
Banking, Capital Markets, Wealth Management, and
Insurance.

Our consistently strong performance is due to our diversified
business model, our strong balance sheet, a comprehensive
approach to risk management, a clear long-term strategy and
the efforts of employees who are proud to be part of RBC and
committed to always putting our clients first.

The financial crisis and resulting economic downturn posed
difficult conditions for our clients, but our people worked
diligently to help them achieve better outcomes by extending
credit and providing advice and service that leveraged our
global capabilities, expertise as well as our competitive and
financial strengths.

While the environment last year proved the strength of our
business model, it also spurred all our businesses to find new
ways to be more efficient and productive. In addition to a Tier 1
capital ratio of 13 per cent and low leverage relative to our
global peers, our sharper focus on cost management will
ensure that we are able to reinvest those savings in the solid
growth opportunities provided by improving investor
confidence, stronger credit and equity markets and recovering
asset values.

capital constraints, government ownership, new regulatory
hurdles or re-focused strategic priorities. In contrast, our
strength, stability and diversified business model, combined
with our risk management and financial performance have
given us an unprecedented range of strategic opportunities.
We are actively looking to invest in key business areas, as well
as to explore potential acquisitions that meet our strict
economic, strategic, and cultural criteria.

2009 Strategic goals
A large driver of our success has been our focus on our
long-term strategy, which will continue to guide our business
decisions. Specifically, our strategic goals are:
•

In Canada, to be the undisputed leader in financial
services.
In the U.S., to be a leading provider of capital markets
services, wealth management and banking by building on
and leveraging our considerable capabilities.
Outside North America, to be a premier provider of select
capital markets, wealth management and banking
services in markets of choice.

•

In Canada, RBC is an iconic brand and we are recognized as a
clear Canadian business leader. While 2009 was a very
difficult competitive environment, nearly all our businesses
continued to build on their leadership position in each market
and product category.

We continued to take steps to make it easier for clients of our
retail bank to do business with us by expanding our branch
and ATM networks, and by extending the hours of operation in
more than half our branches. Over the past five years, we
invested significantly in our business by adding client-facing
employees and we redesigned processes to make it easier for
our employees to serve our clients. We are beginning to see
the results of these changes: more business from both new
and existing clients, higher market shares in consumer
lending, business loans and business deposits, and
recognition by third-party organizations such as Synovate and
Forrester Research Inc.

We are a better company today than we were before the crisis
began. We are armed with the wherewithal to invest and
innovate so that we may further enhance our strengths and
take the necessary steps to address our challenges. Our
competitors are retreating from businesses in the face of

Our Canadian wealth management business is the largest in
the country and includes the country’s largest full service
brokerage and largest mutual fund company. Despite the
downturn, net sales of our mutual funds continued to
increase, demonstrating the power of our distribution

(1)

Adjusted net income is a non-GAAP measure. For more information, please see the Key performance and non-GAAP measures section of our Management’s Discussion and Analysis.

Chief Executive Officer’s message

Royal Bank of Canada: Annual Report 2009

CHIEF EXECUTIVE OFFICER’S MESSAGE

network, rising financial markets, clients’ increasing risk
appetite and confidence in our fund management expertise.
Private Banker International named RBC the “Outstanding
Private Bank – North America” for 2009, recognizing our
growth potential, strength, stability and leadership.

We are the largest bank-owned insurance company in Canada,
and we are building our client base by providing more value to
clients. We offer travel, life, and home and auto, and travel
products and services through growing proprietary channels,
including retail insurance branches, call centres, the Internet,
a career sales force as well as through independent insurance
advisors and travel agencies. Notably, we recently reorganized
our business to be more responsive to client needs and
expanded our Canadian retail insurance network to 49
branches in 2009, from 35 branches in 2008.

We continue to be Canada’s leading global investment bank,
and were again named Dealmaker of the Year in Canada
(Financial Post), Best Investment Bank in Canada (Euromoney)
and a leader in Canadian equity underwriting and corporate
debt financing (Bloomberg, Thomson Reuters). We acted as
global coordinator for the largest bought deal ever.

In the U.S., we are the sixth largest full-service retail brokerage
firm with almost 2,300 financial consultants – up over 100
from last year following successful competitive recruitment.
We successfully integrated our Ferris, Baker Watts Inc. and J.B.
Hanauer & Co. acquisitions and announced an agreement to
acquire J.P. Morgan’s Third Party Registered Investment
Advisory Servicing Business to expand the breadth and depth
of our custody and clearing services. That acquisition is
subject to regulatory approvals and other customary closing
conditions and is expected to close in the second quarter of
2010.

For our capital markets business, our recent designation as a
primary dealer in the U.S. by the Federal Reserve Bank of
New York allows us to participate in all U.S. treasury auctions,
giving us a broader product offering to better serve clients
around the world and demonstrating the health and stability
of our U.S. fixed income trading business.

The challenging economic conditions in the U.S. continue to
affect our U.S. retail banking operations, which we are
restructuring to improve client service and to achieve greater
operational efficiency. We have over 430 branches in the

Royal Bank of Canada: Annual Report 2009

Chief Executive Officer’s message

southeastern U.S. serving retail, small business and
commercial clients.

Outside North America, we are the only Canadian bank with a
global wealth management capability, capitalizing on the
sector’s long-term growth around the world. The current
market environment has presented significant growth
opportunities for this business and we will continue to
consider suitable acquisitions. In 2009, our U.K. wealth
management operations completed the acquisition of Jersey-
based Mourant Private Wealth, enhancing our ability to
provide integrated private wealth management services to
international clients.

Our global capital markets businesses also took advantage of
the market dislocation by recruiting hundreds of talented
professionals, acquiring new clients, and participating in
larger transactions. Our fixed income and energy and mining
businesses are now successful on a global basis.

In our Caribbean banking operation, we are integrating our
RBTT acquisition with the goal of establishing a common
operating platform to support our growth in the region. We
established our Caribbean headquarters in Port of Spain,
Trinidad and Tobago, to serve as the centre of our Caribbean
banking network, which is currently the second largest in the
English speaking Caribbean.

Our joint venture, RBC Dexia Investor Services, is a top 10
global custodian in terms of assets under administration,
providing unique offshore and onshore solutions to
institutions worldwide in 16 countries on four continents. It
continues to pursue select client and market initiatives, such
as the agreement to acquire the depositary bank business of
Unione di Banche Italiane Scpa. The acquisition enhances our
presence in key markets in Europe, broadens the scope of our
capabilities and strengthens our client base. This deal is
expected to close in the first half of 2010 and is subject to
customary regulatory approvals from the relevant authorities.

2009 Progress on medium-term objectives
In 2008, we anticipated challenging financial market
conditions – including more cyclical and structural changes in
the financial services industry – and established a set of
medium-term objectives (shown on page 3) that reflected our
focus on both current performance as well as on long-term
opportunities. We continue to make progress toward these
objectives.

CHIEF EXECUTIVE OFFICER’S MESSAGE

2009 Progress on medium-term objectives

Diluted EPS growth
Defined operating leverage (1)
ROE
Tier 1 capital ratio
Dividend payout ratio
(1)

Medium-term
objectives
7%+
> 3%
18%+
8.5%+
40% - 50%

2009
Progress
(24)%
3.5%
11.9%
13.0%
78%

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 of our Management’s Discussion and Analysis.

In line with these expectations, the recessionary environment,
challenging market conditions, and the need to strengthen
capital positions hurt our earnings per share (EPS) growth,
return on equity (ROE) and dividend payout ratio, though we
made positive progress toward our objectives for defined
operating leverage and Tier 1 capital.

Our defined operating leverage for 2009 was 3.5 per cent, very
strong in the current environment, reflecting strong revenue
growth and effective cost management. If we exclude the
reduction of the Enron Corp.-related litigation provision in
2008, as it does not reflect our normal course operating
expenses, our defined operating leverage is 8.2 per cent.

Common and preferred share issuances significantly
strengthened our Tier 1 capital ratio during the year but
contributed to a dilutive impact on our EPS and ROE growth:
Despite the fact that adjusted net income (excluding the
goodwill impairment charge) grew by 7 per cent, the share
dilution caused EPS and ROE to fall.

2010 Outlook
We remain committed to these medium term objectives for
2010. We expect our businesses to benefit modestly from
recoveries in Canadian and global economies but we also expect
credit concerns to persist through at least the middle of 2010.

The Canadian economy is currently forecast to grow by 2.6 per
cent in 2010, reflecting increased consumer spending,
improvements in the U.S. economy, continued low borrowing
costs and the impact of government stimulus projects. Credit
quality is expected to remain under pressure, although with
some improvement in 2010, as we anticipate the
unemployment rate in Canada to peak early in 2010. Our
forecast for the U.S. economy is for 2.5 per cent growth in the
next year as consumer spending and the housing market show
modest signs of improvement. Credit quality is expected to
remain under pressure in the U.S. but should begin to
stabilize through 2010 reflecting modest improvements in
consumer and business spending and continued
improvement in financial markets. Outside North America, we
expect a gradual recovery in global economies in 2010 with a
slower pace of growth in advanced economies, such as the
U.K. and Eurozone countries. We anticipate solid growth in
China will lead emerging economies, as a result of continued

fiscal stimulus, increased domestic demand, and modest
export growth. We project global capital markets will continue
to stabilize and credit spreads will tighten further as the
global economic recovery continues and access to credit
improves.

Positioned to seize opportunities for long-term growth
In the midst of the most difficult financial conditions in a
generation, RBC has proved equal to the challenge. As many
global competitors stumbled or fell, RBC operated with
integrity and continued to produce results of which we are
justifiably proud. Where we encountered difficult conditions,
we faced our challenges head on. Guided by our long-term
strategy, our efforts generated momentum across all our
businesses and give us greater confidence as we seek to
extend our performance into and through 2010.

Despite our success, we will not become complacent. Our
clients’ needs are changing and to remain relevant we will
continue to use our financial strength and expert capabilities to
provide them with sound advice and excellent service. Our
experience in 2009 has reinforced our appreciation for the need
to continue to improve and adapt the way we deliver products
and services as well as to continue investing in the infrastructure
necessary to support our businesses now and in the future. Our
cost discipline will enable us to reinvest in our growth and
capabilities at a time when many of our competitors cannot.

I believe RBC is now one of the better positioned financial
companies in the world because our employees have been
relentless about pursuing all aspects of our business with the
best interests of our clients in mind. At every chance, each of
our 80,000 employees has focused on helping our clients be
more confident about their future. I thank all of them sincerely
for their professionalism, and for their continued commitment
to our clients and to each other.

Finally, I want to thank all our clients for their trust through
these difficult times. We will continue to work hard so that we
earn the right to serve you every day.

Gordon M. Nixon
President and Chief Executive Officer

Chief Executive Officer’s message

Royal Bank of Canada: Annual Report 2009

CHAIRMAN’S MESSAGE

The hallmark of a high performing board is collective business
experience that can be brought to bear in changing
circumstances. Over the past two years, global market
uncertainty has presented the Board of Directors with both
opportunities and challenges, while confirming the relative
strength and stability of RBC. During this challenging time for
the financial services industry worldwide, RBC has continued
to demonstrate the resilience and prudent management that
shareholders count on. In RBC’s boardroom this period has
been marked by thoughtful analysis, active engagement with
management and shareholders, and openness to change.

Your board has responded with a sharp focus on the oversight
of key risks, while continuing to apply its sound and
progressive governance practices and policies.
Comprehensive discussion and analysis of exposures to
complex risks and reviews of the quality and adequacy of risk
controls throughout the year positioned directors to carefully
assess the ability of RBC to execute its business strategy in a
rapidly changing business and regulatory environment. We
actively engage in reviewing the organization’s risk profile
relative to its risk appetite and provide advice and support to
the senior management team in their effort to continuously
enhance the strength of RBC’s risk capabilities. This includes
overseeing a structured approach to defining the type and
amount of risk that is appropriate to accept and seeking to
ensure there is an appropriate balance of return for the risks
that are prudently assumed. The impact of our stewardship in
this area translates into a strong, enterprise-wide risk
management culture, supported by risk management
practices and frameworks that have proven to be effective and
robust.

This response has been enabled by the diverse and broad
business expertise represented on the Board of Directors
which has been augmented by our continuing director
education program. Over the past year, in addition to
presentations on the organization’s risk profile and appetite,
and methodologies used in assessing and controlling complex
risks, these education sessions have emphasized liquidity
and funding risk management, accounting standards, and
governance and compensation, further equipping directors to
provide current and knowledgeable advice to management.

Your Board of Directors has long been proactive in adopting
best practice compensation principles and processes, but the
past year has seen particular attention paid to the governance
and controls in place for executive compensation. RBC’s
approach to compensation governance aligns with the
Principles for Sound Compensation Practices issued this year
by the Financial Stability Board, the forum of international
regulators created by the G20 to promote financial stability.
While pay for performance remains a key principle
underpinning long term shareholder value creation, we remain
equally committed to ensuring our compensation program
design and governance practices align with sound risk
management principles.

Transparency is another fundamental aspect of good
governance. Your board takes seriously RBC’s commitment to
shareholder engagement and clear and comprehensive
disclosure. The coming year will mark shareholders’ first
opportunity to participate in a “say on pay” advisory vote on
the executive compensation report in our 2010 proxy circular.
The Board of Directors believes shareholders should have the
opportunity to review and fully understand the objectives,
philosophy and principles that the board has used to make
compensation decisions and is confident shareholders will
review the compensation disclosure thoughtfully. In addition
to the advisory vote, the board looks forward to direct and
constructive interaction with shareholders on this and other
important issues.

As Chairman, my goal is to instill a common vision and
provide leadership for your Board of Directors, advancing our
dynamic approach to corporate governance. The board is
proud to be actively engaged in the achievements of RBC and
extends 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 enhancing the stability and
strength of RBC and creating value for shareholders.

On behalf of the Board of Directors,

David P. O’Brien
Chairman of the Board

Royal Bank of Canada: Annual Report 2009

Chairman’s message

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, 2009, compared to the preceding two years. This MD&A should be read in conjunction with our
Consolidated Financial Statements and related notes and is dated December 3, 2009. 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), unless otherwise noted.

Additional information about us, including our 2009 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.

6 Overview

7
7
8

Selected financial and other
highlights
About Royal Bank of Canada
Vision and strategic goals
Overview and outlook

10 Financial performance

10
11

Overview
Results of operations

14 Quarterly financial information

Fourth quarter 2009
performance
Results and trend analysis

16 Business segment results

16
16

17
20
23
26

Results by business segment
How we measure and report
our business segments
Canadian Banking
Wealth Management
Insurance
International Banking

28
31

Capital Markets
Corporate Support

32 Results by geographic segment

33 Financial condition

33
33

Condensed balance sheets
Off-balance sheet arrange-
ments

37 Risk, capital and liquidity

management
37
40
43
45
47
48
52

Overview
Credit risk
Credit quality performance
Market risk
Operational risk
Capital management
Liquidity and funding
management

54 Overview of other risks
Reputation risk
Regulatory and legal risk

54
54

55
55
56

Insurance risk
Environmental risk
Additional risk factors that
may affect future results

57 Additional financial information

Total RBC available-for-sale
portfolio
CICA section 3855 –
reclassification of securities to
loans
Market environment impacts

61 Key performance and non-GAAP

measures

63 Accounting and control matters

67 Related party transactions

68 Supplemental information

See our Glossary for definitions of terms used
throughout this document.

Caution regarding forward-looking statements
From time to time, we make written or oral forward-looking statements
within the meaning of certain securities laws, including the “safe
harbour” provisions of the United States Private Securities Litigation
Reform Act of 1995 and any applicable Canadian securities legislation.
We may make forward-looking statements in this document, in other
filings with Canadian regulators or the SEC, in reports to shareholders
and in other communications. Forward-looking statements in this
document include, but are not limited to, statements relating to our
medium-term objectives, our vision and strategic goals, the 2010
economic and market outlook for the Canadian, U.S. and global
economies, the outlook and priorities for each of our business
segments, and liquidity and funding management. The forward-looking
information contained in this document is presented for the purpose of
assisting the holders of our securities and financial analysts in
understanding our financial position and results of operations as at
and for the periods ended on the dates presented and our vision and
strategic goals and medium-term objectives, and may not be appro-
priate for other purposes. Forward-looking statements are typically
identified by words such as “believe”, “expect”, “forsee”, “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
medium-term objectives, vision and strategic goals will not be
achieved. We caution readers not to place undue reliance on these
statements as a number of risk factors could cause our actual results
to differ materially from the expectations expressed in such forward-
looking statements. These factors – many of which are beyond our
control and the effects of which can be difficult to predict – include:
credit, market, operational and liquidity and funding risks, and other

risks discussed in the Risk, capital and liquidity management and
Overview of other risks sections; general business, economic and
financial market conditions, including the ongoing impact from the
market environment, the lack of liquidity in certain markets, the level
of activity and volatility of the capital markets and recessionary
conditions in Canada, the United States and certain 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 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 successfully; and
development and integration of our distribution networks.

We caution that the foregoing list 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 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 and Overview of
other risks 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 refer-
ences and are for your information only.

Management’s Discussion and Analysis

Royal Bank of Canada Annual Report 2009

Overview

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 (PBCAE)
Non-interest expense
Goodwill impairment charge
Net income before income taxes and non-controlling interest

in subsidiaries

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

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
Tangible common equity (Tier 1 common capital) ratio (5)

Selected balance sheet and other information

Total assets
Securities
Retail loans (6)
Wholesale loans (6)
Deposits
Average common equity (1)
Average risk capital (2)
Risk-adjusted assets (4)
Assets under management (AUM)
Assets under administration (AUA) – RBC

– RBC Dexia IS (7)

Common share information

Shares outstanding (000s) – average basic

– average diluted
– end of period

Dividends declared per share
Dividend yield (8)
Common share price (RY on TSX) – close, end of period
Market capitalization (TSX)
Business information (number of)
Employees (full-time equivalent)
Bank branches
Automated teller machines (ATM)
Period average US$ equivalent of C$1.00 (9)
Period-end US$ equivalent of C$1.00

$
$

Table 1

2007

2009 vs. 2008
Increase (decrease)

$
$

2009

29,106
3,413

4,609
14,558
1,000

5,526
3,858

2,663
583
496
(1,446)
1,768
(206)
3,858

2.59
2.57
11.9%
19.5%
1.65%
.97%
1.86%

13.0%
14.2%
16.3X
9.2%

2008

21,582
1,595

1,631
12,351
–

6,005
4,555

2,662
665
389
(153)
1,170
(178)
4,555

3.41
3.38
18.1%
29.6%
1.39%
.53%
.96%

9.0%
11.0%
20.1X
6.5%

22,462 $
791

2,173
12,473
–

7,524
1,818

2,978
2,207
1,000

$
$

7,025
5,492 $

(479)
(697)

2,545 $
762
442
242
1,292
209
5,492 $

4.24 $
4.19 $

24.7%
37.4%
1.33%
.33%
.45%

9.4%
11.5%
20.0X

1
(82)
107
(1,293)
598
(28)
(697)

(.82)
(.81)
n.m.
n.m.
n.m.
n.m.
n.m.

n.m.
n.m.
(3.8)X
n.m.

654,989
186,272
205,224
78,927
398,304
30,450
18,600
244,837
249,700
648,800
2,484,400

1,398,675
1,412,126
1,417,610
2.00
4.8%
54.80
77,685

71,186
1,761
5,030
.858
.924

$ 723,859
171,134
195,455
96,300
438,575
24,650
15,050
278,579
226,900
623,300
2,585,000

1,305,706
1,319,744
1,341,260
2.00
4.2%
46.84
62,825

73,323
1,741
4,964
.969
.830

$ 600,346 $
178,255
169,462
69,967
365,205
21,850
14,450
247,635
161,500
615,100
2,713,100

1,273,185
1,289,314
1,276,260

1.82 $
3.3%
56.04 $

71,522

64,815
1,541
4,419

.915 $

1.059

(68,870)
15,138
9,769
(17,373)
(40,271)
5,800
3,550
(33,742)
22,800
25,500
(100,600)

92,969
92,382
76,350
–
n.m.
7.96
14,860

(2,137)
20
66
(.111)
.09

34.9%
114.0%

182.6%
17.9%
n.m.

(8.0)%
(15.3)%

–
(12.3)%
27.5%
n.m.
51.1%
n.m.
(15.3)%

(24.0)%
(24.0)%
(620) bps
(1,010) bps
26 bps
44 bps
90 bps

400 bps
320 bps
n.m.
270 bps

(9.5)%
8.8%
5.0%
(18.0)%
(9.2)%
23.5%
23.6%
(12.1)%
10.0%
4.1%
(3.9)%

7.1%
7.0%
5.7%
n.m.
60 bps
17.0%
23.7%

(2.9)%
1.1%
1.3%
(11.5)%
11.3%

(1)
(2)

(3)
(4)

Average common equity and ROE 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. 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.
2009 and 2008 capital ratios and risk-adjusted assets were calculated using the Basel II framework, 2007 capital ratios and risk-adjusted assets were calculated using the Basel I framework,
Basel I and Basel II are not directly comparable. For further discussion about Basel II, refer to the Capital management section.
For further discussion, refer to the Key performance and non-GAAP measures section.
Retail and wholesale loans do not include allowance for loan losses.
Represents the total AUA of the joint venture, of which we have a 50% ownership interest, reported on a one-month lag.
Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
Average amounts are calculated using month-end spot rates for the period.

(5)
(6)
(7)
(8)
(9)
n.m. not meaningful

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

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 among
the largest banks in the world, based on market capitalization. We are
one of North America’s leading diversified financial services
companies, and provide personal and commercial banking, wealth
management services, insurance, corporate and investment banking

and transaction processing services on a global basis. We employ
approximately 80,000 full- and part-time employees who serve more
than 18 million personal, business, public sector and institutional
clients through offices in Canada, the U.S. and 53 other countries.
Our five business segments, listed below, are supported by Corporate
Support.

Canadian Banking

Wealth Management

Insurance

International Banking

Capital Markets

ROYAL BANK OF CANADA

•

Personal Financial
Services

Business Financial
Services

Cards and
Payment Solutions

•

Canadian Wealth
Management

U.S. & International
Wealth
Management

Global Asset
Management

•

Canadian Insurance

U.S. Insurance

International &
Other Insurance

•

Banking

RBC Dexia IS

•

Capital Markets
Sales and Trading

Corporate and
Investment Banking

•

Operations

Corporate Support

•

Technology

•

Functions

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.”

Our clear commitment to our vision and long-term strategy
reflects our diversified business model, our strong balance sheet, a
comprehensive approach to risk management, and an approach that
puts the client at the centre of all our business activities. As we

continually strive to be a top performing bank that delivers sustain-
able, profitable growth and top quartile results for our shareholders,
we are focused on our three strategic goals outlined below. We
continued to make progress on these goals, as highlighted in the
following table, despite the challenging economic and market
conditions that persisted in 2009.

Strategic goals

Progress made during 2009

In Canada, our goal is to be
the undisputed leader in
financial services.

In the U.S., our goal is to be a
leading provider of capital
markets, wealth management
and banking services by
building on and leveraging
our considerable capabilities.

•

Announced the WestJet RBC MasterCard, a new travel rewards card offering rewards to clients who
travel in North America and the Caribbean on WestJet. This will make us the first large Canadian
financial institution to offer both MasterCard and Visa.

Launched RBC International Remittance, a new remittance service that gives Canadian clients an
economical and secure means to transfer money in various currencies to family and friends abroad.

Introduced ‘Practice Accounts’ through RBC Direct Investing, allowing clients to experiment with
investment strategies without putting their own money at risk. This is the first integrated offering of its
kind by a Canadian self-directed brokerage.

Continued to be the largest mutual fund company in Canada with 16% market share, $2.1 billion in
long-term net sales (31% of industry), and were named by Lipper as best overall in Fixed Income in
2009.

Continued to be ranked #1 overall among Canadian bank-owned brokerage firms in Investment
Executive’s annual Brokerage Report Card. RBC Dominion Securities ranked first in 22 of the
31 categories, including overall satisfaction, products and support for high net worth clients, freedom
to make objective product choices, as well as the firm’s stability, strategic focus, corporate culture
and ethics.

Introduced a new universal life product in our insurance business, to be sold through our
independent insurance advisors in order to further strengthen our competitive positioning in the
brokerage market.

Expanded our retail insurance network to 49 branches with 14 locations opening in 2009, providing
our clients with more convenient access to insurance services.

Built a significant U.S. dollar fixed income and currencies presence, expanded our equity sales and
trading businesses, and were designated a U.S. primary dealer by the Federal Reserve Bank of
New York.

Announced an agreement to acquire J.P. Morgan’s Third Party Registered Investment Advisory (RIA)
Servicing Business to expand the breadth and depth of our custody and clearing services (1).
Recruited a record number of experienced financial consultants from the competition.

Began restructuring our U.S. banking business to improve effectiveness and efficiency, with a focus
on providing our clients with superior service and choice of products.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Strategic goals

Progress made during 2009

Outside North America, our
goal is to be a premier
provider of select capital
markets, wealth management
and banking services in
markets of choice.

•

Named Best Overall Credit House in Europe, Best Bank for Sterling Bonds, Best Bank for Non-Core
Currency Bonds and Best Bank for Electronic Trading in Credit magazine’s 2009 European Credit
Awards. We also ranked in the top 10 in six other categories.

Completed our acquisition of Mourant Private Wealth, an institutional private client trust business
with operations in Jersey, Dubai and Cayman. This aligns with our strategy of providing integrated
global wealth management services to international clients.

Continued to make progress with the integration of our RBTT Financial Group (RBTT) acquisition and
opened our new Caribbean headquarters in Trinidad.

Our joint venture, RBC Dexia Investor Services (RBC Dexia IS), announced an agreement with Unione
di Banche Italiane Scpa (UBI) to acquire UBI Banca’s depositary bank business, which will make RBC
Dexia IS the largest third party fund administrator and the fourth largest depositary bank in Italy (1).

(1)

These acquisitions are subject to regulatory approvals and other customary closing conditions.

Overview and outlook

2009 Economic and market review – data as at December 3, 2009
The Canadian economy contracted by an annualized 4.8% on average
over the first two calendar quarters of 2009, mainly reflecting
decreased consumer and business spending, rising levels of
unemployment which exerted additional pressure on household and
business credit quality throughout the year and weakness in housing
and auto production. Exports have fallen as a result of lower U.S.
demand, in part as a result of the restructuring of the North American
auto sector.

In response, the Bank of Canada reduced the overnight rate to

the historically low rate of .25% and the federal government
introduced a fiscal stimulus package in the form of accelerated
spending on infrastructure and tax cuts. Signs of recovery emerged in
the third calendar quarter evidenced by gross domestic product (GDP)
annualized growth of .4%, supported by improvements in consumer
spending, particularly in durable goods, reflecting a surge in auto
sales, and renewed consumer confidence. Financial markets stabi-
lized and the housing market retraced losses recorded in late 2008
and the early part of 2009. The Canadian dollar has appreciated
against most major currencies since early 2009 driven largely by
higher commodity prices and investor movement away from U.S.
dollar assets.

The U.S. economy remained in recession in 2009 by contracting
3.6% on average over the first calendar half of 2009, reflecting weak
consumer and business spending, high levels of unemployment,
deterioration in housing and financial markets and tightened credit
conditions. In response, the Federal Reserve lowered the funds rate by
75 basis points (bps) in December 2008, and has held it at a histor-
ically low range of 0% to .25% throughout 2009. The U.S. government
also approved additional fiscal stimulus. Signs of recovery emerged in
the third calendar quarter of 2009 with GDP rising at an annualized
rate of 2.8% from the previous quarter reflecting improvements in
consumer spending, and in the housing market. However, commercial
real estate remained weak throughout 2009.

Most global economies continued to deteriorate in early 2009 as
domestic demand and global trade declined. Early recovery emerged
in the second calendar quarter for most of the Eurozone, as France
and Germany posted positive growth. Although the pace of decline
slowed in the U.K., the economy was still under pressure during the
third calendar quarter. Emerging economies, particularly in China and
Asia, recovered strongly in 2009.

Global capital markets remained under pressure and exhibited
significant volatility during early 2009. However, in the latter part of
2009, global capital markets improved and volatility moderated as
compared to the prior year, reflecting the expectation of a sustained
global economic recovery. Credit spreads for us and many issuers
have narrowed, reflecting the general improvement in funding
markets as a result of government initiatives and improved investor
confidence. Senior debt markets and other funding sources have
improved in terms of pricing and capacity while government funding

programs were reduced. For further information, refer to the Liquidity
and funding management section.

Medium-term objectives
We established medium-term (3 to 5 years) objectives last year to
align with our three strategic goals and reflect our longer-term view of
financial performance taking into account the constantly changing
economic and market environment. By focusing on the execution of
our medium-term objectives in our decision-making we believe we
will be well positioned to provide sustainable earnings growth and
returns to shareholders.

2009 Progress on medium-term objectives
Our objectives over the medium term are summarized in the table
below and these objectives continue to reflect our commitment to
strong earnings growth, prudent cost management and return on
investment in our businesses, as well as sound and effective risk, and
capital management. Our progress towards these objectives is
discussed below.

2009 Progress on medium-term objectives

Table 2

Diluted EPS growth
Defined operating leverage (1)
ROE
Tier 1 capital ratio
Dividend payout ratio

Medium-term
objectives

2009
Progress

7% +
> 3%
18% +
8.5% +
40% - 50%

(24)%
3.5%
11.9%
13.0%
78%

(1)

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.

We compared unfavourably to our medium-term objectives for diluted
EPS growth, ROE and dividend payout ratio. Diluted EPS growth and ROE
objectives were largely impacted by a high level of credit losses
reflecting weak economic and market conditions, a goodwill impairment
charge, as well as the dilutive effect of the common and preferred share
issuances. These factors were partially offset by solid earnings driven by
stronger trading revenue in certain of our capital markets businesses
and volume growth in our banking-related businesses.

These factors also impacted our dividend payout ratio as our
level of dividends remained unchanged in 2009 although earnings
decreased.

Our defined operating leverage of 3.5% compared favourably in
2009 to our medium-term objective, mainly reflecting strong trading
revenue and our ongoing commitment to prudent cost management.
If we exclude the reduction of the Enron Corp.-related litigation
provision of $542 million in 2008 from non-interest expense, as this

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

is not reflective of our normal course operating expenses, our defined
operating leverage is 8.2%. Our capital position remained strong as
our Tier 1 capital ratio was comfortably above our objective, largely
due to the issuance of $4.8 billion of capital during the year.

In 2009, we continued to measure our Total Shareholder Return

(TSR) and other financial metrics against our North American peer
group (1) and maintained our focus on maximizing shareholder value.
TSR is a concept used to compare the performance of our common
shares over a period of time, reflecting share price appreciation and
dividends paid to common shareholders. The absolute size of the TSR
will vary depending on market conditions, but the relative position
reflects the market’s perception of a company’s overall performance
relative to its peers over a period of time. Our three- and five-year
average annual TSR of 8% (2) and 16% (2), respectively, ranked us in
the first quartile within our peer group for both periods. The three-
and five-year average annual TSR for our peer group was (13)% and
(4)%, respectively (2).

As a result of changes in the financial services industry over the

past several years, including mergers and acquisitions, and
considering our performance and evolving global strategy, we recently
completed a re-evaluation of our peer group with the goal of ensuring
that we include only those institutions in the financial services

Total shareholder return

industry globally, that we consider most relevant to us as
competitors. Our new peer group will be effective in 2010 (3).

(1)

(2)

(3)

Our North American peer group for 2009 consists of 19 financial institutions
(18 excluding us: seven large Canadian financial institutions (Bank of Montreal,
Canadian Imperial Bank of Commerce, Manulife Financial Corporation, National Bank of
Canada, The Bank of Nova Scotia, Sun Life Financial Inc., and the Toronto Dominion
Bank), and eleven U.S. financial institutions (BB&T Corporation, Bank of America
Corporation, The Bank of New York Mellon Corporation, Fifth Third Bancorp, J.P. Morgan
Chase & Co., KeyCorp, Northern Trust Corporation, The PNC Financial Services Group,
Sun Trust Banks Inc., U.S. Bancorp and Wells Fargo & Company),
The three-year average annual TSR is calculated based on our common share price
appreciation plus reinvested dividend income for the period October 31, 2006 to
October 31, 2009. The five-year average annual TSR is calculated based on the period
October 31, 2004 to October 31, 2009 and is based on information as disclosed by
Bloomberg L.P.
Our new global peer group will consist of 20 financial institutions (19 excluding us –
seven large Canadian financial institutions (Bank of Montreal, Canadian Imperial Bank
of Commerce, Manulife Financial Corporation, National Bank of Canada, Power Financial
Corporation, The Bank of Nova Scotia and The Toronto-Dominion Bank), five U.S.
financial institutions (Bank of America Corporation, JPMorgan Chase & Co., The Bank of
New York Mellon Corporation, U.S. Bancorp and Wells Fargo & Company), five European
financial institutions (Banco Bilbao Vizcaya Argentaria Group (BBVA), Barclays PLC, BNP
Paribas, Credit Suisse Group AG and Deutsche Bank Group) and two Australian financial
institutions (National Australia Bank and Westpac Banking Corporation).

Table 3

Five-year
CAGR (1)

11.6%
15.3%

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)

2009
$ 54.80 $
2.00
17.0%
22.7%

2008

2007

2006

46.84 $
2.00
(16.4)%
(12.8)%

56.04 $
1.72
12.5%
16.2%

49.80 $
1.32
19.5%
23.2%

2005

41.67
1.13
31.4%
35.4%

(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.

Impact of foreign exchange rates on our results
Our U.S. dollar-denominated results are impacted by fluctuations in
the Canadian/U.S. dollar exchange rate as shown in the table below.
Revenue, provision for credit losses (PCL), expenses and income
denominated in U.S. dollars are translated at the average rate of
exchange for the year.

While the Canadian dollar strengthened in the latter half of the
year, it depreciated 11% on average relative to the U.S. dollar from a
year ago, which had an unfavourable impact on our consolidated net
income in 2009. Our U.S. dollar-denominated revenue, which was
favourably impacted by the depreciation of the Canadian dollar, was
more than offset by the unfavourable impact on our U.S. dollar-
denominated PCL, Insurance policyholder benefits, claims and
acquisition expense (PBCAE) and non-interest expense.

Impact of the U.S. dollar on our consolidated results

Table 4

(C$ millions, except per share amounts)
Canadian/U.S. dollar exchange rate (average)
2009
2008
2007
Percentage change in average US$ equivalent of

C$1.00 (1)

Increased (decreased) total revenue
Increased (decreased) PCL
Increased (decreased) non-interest expense
Increased (decreased) net income
Increased (decreased) basic EPS
Increased (decreased) diluted EPS

2009 vs.
2008

2008 vs.
2007

$
$

.858
.969

(11)%
636
94
498
(84)
(.06)
(.06)

$
$

.969
.915

6 %
(340)
–
(210)
(90)
(.07)
(.07)

(1)

Average amounts are calculated using month-end spot rates for the period.

Certain of our business segment results are impacted by fluctuations
in the U.S. dollar, Euro and British pound 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 and Capital Markets also
have significant Euro- and British pound-denominated results,

respectively. The Canadian dollar depreciated 4% on average relative
to the Euro and appreciated 10% on average relative to the British
pound compared to a year ago. For further details on the impact to our
segments, refer to the Business segment results section.

2010 Economic and market outlook – data as at December 3, 2009
The Canadian economy is expected to grow at 2.6% in 2010, reflecting
increased consumer spending, improvements in the U.S. economy,
continued low borrowing costs and fiscal stimulus. Recovery in
consumer spending is expected to improve as households’ asset values
are projected to increase reflecting continued stabilization in financial
and housing markets. We anticipate credit quality to remain under
pressure with some improvement, as we anticipate the unemployment
rate to peak early in 2010. We expect business spending will lag the
initial recovery as excess capacity remains but will rebound in the latter
half 2010. We expect inflation pressures will be subdued during 2010 as
the recovery is expected to be gradual. A strong Canadian dollar relative
to the U.S. dollar is projected reflecting higher expected commodity
prices and continued investor movement away from U.S. dollar assets.
The Bank of Canada has made a conditional commitment to keep
interest rates at .25% until the end of the second calendar quarter of
2010. We expect 50-basis-point increases by the Bank of Canada in both
the third and fourth calendar quarters of 2010 as the expected recovery
becomes further entrenched.

The U.S. economy is projected to grow by 2.5% in 2010 reflecting

a modest increase in consumer spending and further stabilization in
the housing market. We anticipate the pace of consumer spending to
be slow as households repair balance sheets and will likely face tough
labour conditions throughout 2010. Credit quality is expected to
continue to be weak in the U.S. but should begin to stabilize through
2010 reflecting modest improvements in consumer and business
spending and continued improvement in financial markets. The
combination of government spending and improvements in business
investment are expected to stabilize labour markets. We anticipate
that the Federal Reserve will hold the federal funds rate at the current
range until late 2010 and that the U.S. dollar will continue to weaken
in 2010 against most major currencies, as a result of the expected
slow recovery and weak fiscal position.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

We expect a gradual recovery in global economies in 2010 with
significant divergence between the pace of growth in advanced and
emerging economies. A slower recovery is anticipated in the U.K. and
Eurozone reflecting modest export growth resulting from the
rebalancing of global demand, high unemployment and tightened
credit conditions as banks continue to deleverage their balance
sheets. We anticipate solid growth in China reflecting continued fiscal
stimulus, increased domestic demand, and modest export growth,
which will lead growth in emerging economies.

We project global capital markets will continue to stabilize and

credit spreads will tighten further as the global economic recovery
continues and access to credit improves.

Financial performance

Overview

As a result of the previous market disruption and related stress

on the global financial system, it is expected that global financial
institutions will be confronted by increased regulation, higher capital
requirements and new leverage requirements.

These predictions and forecasts are based on information and

assumptions from sources we consider reliable. If this information or
these assumptions are not accurate, actual economic outlooks may
differ materially from the outlook presented in this section.

2009 vs. 2008
We reported net income of $3,858 million for the year ended
October 31, 2009, compared to $4,555 million a year ago, a decrease
of 15%, mainly reflecting a goodwill impairment charge of $1 billion
(US$838 million) on both a pre-tax and after-tax basis. This was a
non-cash item and did not affect our ongoing operations or our
capital ratios. Diluted earnings per share (EPS) were $2.57 down 24%
from a year ago. Return on common equity (ROE) was 11.9%,
compared to 18.1% a year ago.

Excluding the goodwill impairment charge, adjusted net income
was $4,858 million. Adjusted diluted EPS were $3.28, down $.10, or
3%, and adjusted ROE was 14.9%, reflecting the dilutive effect of
common and preferred share issuances, mainly in the early part of the
year. The increase of $303 million, or 7%, in adjusted net income was
driven by stronger trading revenue, which included lower market
environment-related losses on held-for-trading (HFT) instruments,
partially offset by higher related variable compensation in certain of
our capital markets businesses. Higher net securitization gains, solid
growth in our banking-related businesses, partly reflecting our prior
year acquisitions, volume growth in our insurance businesses and
lower market environment-related losses on available-for-sale (AFS)
instruments also contributed to the increase. These factors were
partially offset by losses on fair value adjustments on certain RBC debt
designated as HFT and losses on credit default swaps used to
economically hedge the corporate lending portfolio as compared to
gains in the prior year, higher provision for credit losses, increased
costs in support of business growth, including from our acquisitions,
and a higher effective tax rate.

Last year, our results included the favourable impact of

$542 million ($252 million after-tax and related compensation
adjustments) related to the reduction of the Enron Corp-related
litigation provision. Our Tier 1 capital ratio of 13.0% was up 400 bps
from 9.0% a year ago. Adjusted measures are non-GAAP measures.
For a detailed discussion on adjusted measures, refer to the Key
performance and non-GAAP measures section.

Summary of 2008 and 2007
In 2008, net income was $4,555 million, down 17% from 2007. This
primarily reflected higher total market environment-related net
losses. Higher PCL, weaker equity origination activity and higher costs
in support of business growth also contributed to the decrease in net
income. Our results in 2007 also included a $326 million ($269
million after-tax) gain related to the Visa Inc. restructuring. These
factors were partly offset by the reduction of the Enron-related
litigation provision and solid volume growth in our banking-related
and wealth management businesses, partly reflecting our acquis-
itions, the impact of which was partially offset by spread
compression. Higher trading revenue also partly offset the decrease.

In 2007, net income was $5,492 million, up 16% from 2006. Our

strong results were largely attributable to volume growth in our
banking and wealth management businesses, strong insurance
results, increased equity and foreign exchange and commodities
trading results and strong equity origination activity, as well as the
gain related to the Visa Inc. restructuring. These factors were partly
offset by market environment-related losses in 2007 and higher PCL.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Results of operations

(C$ millions)

Interest income
Interest expense

Net interest income

Investments (2)
Insurance (3)
Trading
Banking (4)
Underwriting and other advisory
Other (5)

Non-interest income

Total revenue

PCL
Insurance PBCAE (3)
Non-interest expense
Goodwill impairment charge

Income before income taxes
Income taxes
Non-controlling interest in net income of subsidiaries

Net income

Additional information

Total trading revenue (6)

Net interest income – related to trading activities
Non-interest income – trading revenue

Total

Total trading revenue by product (6)

Interest rate and credit
Equities
Foreign exchange and commodities

Total

Average assets
Net interest margin (NIM)
Effective tax rate (7)

2009

20,543
9,037

11,506

4,270
5,718
2,671
3,456
1,050
435

17,600

29,106

3,413
4,609
14,558
1,000

5,526
1,568
100

3,858

2,294
2,671

4,965

3,304
1,008
653

4,965

695,300
1.65%
28.4%

2008 (1)

25,032
15,984

9,048

4,697
2,609
(96)
3,076
875
1,373

12,534

21,582

1,595
1,631
12,351
–

6,005
1,369
81

4,555

686
(96)

590

(259)
265
584

590

650,300
1.39%
22.8%

Table 5

2007

26,547
18,845

7,702

4,405
3,152
1,999
2,620
1,217
1,367

14,760

22,462

791
2,173
12,473
–

7,025
1,392
141

5,492

(220)
1,999

1,779

640
784
355

1,779

581,000
1.33%
19.8%

(1)

(2)
(3)
(4)
(5)

(6)
(7)

Certain trading revenue reported in Capital Markets was reclassified from Non-interest income – Trading revenue to Net interest income to better reflect its nature. There was no impact to
Total revenue as a result of this reclassification.
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 PBCAE.
Includes service charges, foreign exchange revenue other than trading, card service revenue and credit fees.
Includes other non-interest income, net gain (loss) on available-for-sale (AFS) securities (other-than-temporary impairment and realized gain/loss), fair value adjustments on certain RBC debt
designated as HFT, 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.
Income taxes as a percentage of net income before income taxes.

Total revenue
2009 vs. 2008
Total revenue increased $7,524 million, or 35%, from a year ago.

Net interest income increased $2,458 million, or 27%, largely

due to lower funding costs on certain trading positions. Loan and
deposit growth, largely due to solid volume growth in our Canadian
banking businesses, and a full year of revenue from our RBTT
acquisition, and to a lesser extent, our Alabama National
BanCorporation (ANB) acquisition, also contributed to the increase.
These factors were partially offset by spread compression in our
banking-related and wealth management businesses reflecting
historically lower interest rates and higher impaired loan balances,
largely in U.S. banking. Net interest margin of 1.65% was up 26 bps.

Investments-related revenue decreased $427 million, or 9%,
mainly due to lower fee-based client assets and lower mutual fund
distribution fees, partially offset by higher transaction volumes.

Insurance-related revenue increased $3,109 million, largely due
to the change in fair value of investments backing our life and health
policyholder liabilities and increased annuity volumes, both of which
were largely offset by higher related PBCAE. Volume growth across all
businesses also contributed to the increase. For further details, refer
to the Insurance segment section.

Trading revenue in Non-interest income increased $2,767
million. Total trading revenue, which comprises trading-related
revenue recorded in Net interest income and Non-interest income,
was $4,965 million, up $4,375 million. Stronger trading revenue,
which included lower market-environment related losses on HFT
instruments, benefitted from favourable market opportunities,
including a historically low interest rate environment and increased
client activity. Gains on credit valuation adjustments on certain
derivative contracts as compared to losses in the prior year also
contributed to the increase. For further details, refer to the Market
environment impacts section.

Banking revenue was up $380 million, or 12%, mainly due to

improved results in our client-based securitization activity and
lending businesses in Capital Markets, higher service fee revenue
across banking-related businesses, and a favourable adjustment
related to our credit card customer loyalty reward program liability.

Underwriting and other advisory revenue increased $175 million,

or 20%, mainly due to higher equity and debt origination activities,
partially offset by lower mergers and acquisitions (M&A) activity.

Other revenue was down $938 million, primarily due to losses on

the fair value adjustments on certain RBC debt designated as HFT as
compared to gains in the prior year in Capital Markets and Corporate
Support, reflecting the tightening of our credit spreads. Losses on
credit default swaps recorded at fair value used to economically

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

hedge certain corporate loan portfolios as compared to gains in the
prior year in Capital Markets also contributed to the decrease. Net
losses on AFS securities increased $8 million from the prior year,
which included a loss of $144 million on certain Canadian bank
common shares in the latter part of 2009 which more than offset the
decrease in market environment-related losses. These factors were
partially offset by higher securitization revenue of $708 million
predominantly attributable to Corporate Support reflecting a higher
than historical level of securitization activity from our participation in
government-sponsored funding programs. A gain, as compared to a
loss in the prior year, on our stock based compensation plan in our
U.S. brokerage business also contributed to the increase. For further
details about our loss on certain Canadian bank common shares,
refer to Note 3 to our Consolidated Financial Statements.

Our revenue for the year was favourably impacted by the weaker
Canadian dollar relative to the U.S. dollar. For further details, refer to
the Impact of foreign exchange rates on our results section.

2008 vs. 2007
Total revenue decreased $880 million, or 4%, from 2007.

Net interest income increased $1,346 million, or 17%, largely

driven by lower funding costs on certain trading positions, and solid
loan and deposit growth in Canadian Banking, partially offset by
spread compression.

Investments-related revenue increased $292 million, or 7%,
primarily due to increased fee-based and transaction revenue as a
result of our acquisitions, and solid growth in fee-based client assets.

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 PBCAE.
Investment losses and lower annuity volumes also contributed to the
decrease. These factors were partially offset by solid growth in our
reinsurance and Canadian businesses.

Trading revenue in Non-interest income decreased by $2,095
million. Total trading revenue was $590 million, down $1,189 million,
or 67%, largely due to market environment-related losses on HFT
securities.

Banking revenue was up $456 million, or 17%, mainly due to a
credit card customer loyalty reward program liability charge in 2007,
improved results in our syndicated finance business, and higher
foreign exchange revenue.

Underwriting and other advisory revenue decreased

$342 million, or 28%, mainly due to weak equity origination and
lower M&A activities.

Other revenue was flat compared to 2007. The gain on fair value
adjustments on RBC debt designated as HFT, as well as higher gains
on credit default swaps recorded at fair value used to economically
hedge our corporate lending portfolio favourably impacted revenue.
These factors were offset by market environment-related losses on
AFS securities, and the Visa Inc. restructuring gain recorded in 2007.
Our revenue was also unfavourably impacted by the stronger

Canadian dollar relative to the U.S. dollar.

Change in net interest income (1)

Table 6

(C$ millions)

Assets

Deposits with other banks

Canada
U.S.
Other international

Securities
Trading
Available-for-sale

Asset purchased under reverse repurchase agreements

and securities borrowed

Loans

Canada
Retail
Wholesale

U.S.
Other international
Total interest income

Liabilities

Deposits
Canada
U.S.
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

2009 vs. 2008
Increase (decrease)
due to changes in

2008 vs. 2007
Increase (decrease)
due to changes in

Average
volume (2)

Average
rate (2)

Net change

Average
volume (2)

Average
rate (2)

Net change

$
$

16
15
(127)

(378)
448

(801)

681
(204)
385
329
364

221
161
(540)
(265)

4
9
(1)
(411)
775

(24)
(141)
(75)

(443)
(343)

(8)
(126)
(202)

(821)
105

(1,157)

(1,958)

504
(1,060)
(769)
(1,345)
$ (4,853)

1,185
(1,264)
(384)
(1,016)
$ (4,489)

$ (1,698)
(1,141)
(2,399)
26

$ (1,477)
(980)
(2,939)
(239)

(1,208)
(13)
(103)
$ (6,536)
1,683
$

(1,204)
(4)
(104)
$ (6,947)
2,458
$

$
$

7
60
114

(525)
309

(165)

(5)
(99)
(117)

2
(39)
(3)

(1,234)
447

(1,759)
756

(566)

(731)

998
275
684
375
2,132

(2,934)
1,121
(763)
503
$ (3,647)

(1,936)
1,396
(79)
878
$ (1,515)

244
115
1,654
(54)

(303)
24
37
1,717
415

$ (1,490)
(920)
(1,215)
(418)

$ (1,246)
(805)
439
(472)

(448)
(8)
(79)
$ (4,578)
931
$

(751)
16
(42)
$ (2,861)
1,346
$

(1)
(2)

Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Volume/rate variance is allocated on the percentage relationship of changes in balances and changes in rates to the total net change in net interest income.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Net interest margin
2009 vs. 2008
Net interest margin was 1.65%, up 26 bps, largely reflecting lower
funding costs on certain trading positions in Capital Markets, partially
offset by spread compression in our banking-related and wealth
management businesses. This reflected the historically low interest
rate environment and the impact of changes in the Canadian retail
product mix, resulting from higher volume growth in lower margin
products. For further details, refer to Table 66 in the Supplemental
information section.

2008 vs. 2007
Net interest margin increased 6 bps, largely reflecting lower funding
costs on certain trading positions in Capital Markets, largely offset by
spread compression.

Provision for credit losses
Credit quality has deteriorated from the prior year consistent with the
global economic cycle. For further details on our PCL, refer to the Risk,
capital and liquidity management section.

2009 vs. 2008
Total PCL of $3.4 billion increased $1.8 billion from a year ago,
primarily attributable to increased specific provisions of $1.4 billion,
mainly in our corporate loan portfolio, and in our U.S. banking and
our Canadian unsecured retail and business lending portfolios. An
increase in the general provision of $424 million, predominantly
related to U.S. banking and to a lesser extent, our U.S. corporate
lending and Canadian retail and business lending portfolios, also
contributed to the increase.

2008 vs. 2007
Total PCL of $1.6 billion increased $804 million from 2007 reflecting
increased specific PCL of $648 million, largely attributable to higher
impaired loans in U.S. banking, mainly in our residential builder finance,
and commercial loan portfolios, reflecting deteriorated economic
conditions. An increase in the general provision of $156 million,
reflecting volume growth and weaker credit quality in our Canadian retail
and U.S. banking portfolios also contributed to the increase.

Insurance policyholder benefits, claims and acquisition expense
2009 vs. 2008
PBCAE increased $2,978 million from a year ago, largely reflecting the
change in fair value of investments backing our life and health
policyholder liabilities and higher costs commensurate with
increased annuity volumes, largely offset in revenue. For further
details, refer to the Insurance segment section.

2008 vs. 2007
PBCAE decreased $542 million, or 25%, from 2007, primarily
reflecting the change in fair value of investments backing our life and
health policyholder liabilities, largely offset in revenue.

Non-interest expense
2009 vs. 2008
Non-interest expense increased $2,207 million, or 18% from a year
ago, largely due to increased variable compensation driven by higher
trading results. Approximately 60% of our variable compensation was
earnings-based with the remainder sales commission-based.
Increased costs in support of business growth, which included
acquisition-related staff and occupancy costs, reflecting a full year of
expenses from our acquisitions of RBTT, Ferris, Baker Watts Inc.
(FBW), ANB and Philips, Hager & North Investment Management Ltd.
(PH&N), and the impact of the weaker Canadian dollar relative to the
U.S. dollar also contributed to the increase. These factors were
partially offset by our ongoing focus on cost management. Last year,
our non-interest expense included the favourable impact of $542
million related to the reduction of the Enron-related litigation
provision.

2008 vs. 2007
Non-interest expense decreased $122 million, or 1%, compared to
2007, largely reflecting the reduction of the Enron-related litigation
provision. Lower variable compensation reflecting higher market
environment-related losses on HFT instruments, the impact of
stronger Canadian dollar relative to the U.S. dollar and lower stock-
based compensation expense in our U.S. brokerage business, were
partially offset by increased costs in support of business growth,
including acquisition-related staff and occupancy costs.

Non-interest expense

Table 7

(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

2009
4,146
3,561

1,189
82
8,978
1,025
1,045
761

2008
$ 3,845
2,689

2007
$ 3,541
2,975

1,168
77
$ 7,779
934
926
749

1,150
194
$ 7,860
847
839
723

860
1,889
14,558

903
1,060
$ 12,351

838
1,366
$ 12,473

Goodwill impairment
In 2009, we recorded a goodwill impairment charge in our International
Banking reporting unit of $1 billion. The impairment reflected the
continuing impact of the deterioration in the overall U.S. economic
environment, including declines in the U.S. housing market and in the
market value of U.S. banks. For further details, refer to Note 10 to our
Consolidated Financial Statements.

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.

2009 vs. 2008
Income tax expense increased $199 million, or 15%, from a year ago
despite lower earnings before income taxes in 2009. The effective tax
rate of 28.4% increased 5.6% from 22.8% a year ago, largely due to
the goodwill impairment charge, which was not deductible for tax
purposes. Excluding the goodwill impairment charge, the adjusted
effective tax rate was 24.0%, an increase of 1.2%, mainly due to
lower earnings reported by our subsidiaries operating in jurisdictions
with lower income tax rates, partially offset by a reduction in the
statutory Canadian corporate income tax rate in 2009. For further
details on the adjusted effective income tax rate refer to the Key
performance and non-GAAP measures section.

Other taxes increased by $60 million from 2008, largely due to

higher capital taxes, reflecting higher capital levels and higher
property taxes, net of a release of amounts accrued due to favourable
resolution of a goods and services tax audit. In addition to the income
and other taxes reported in our Consolidated Statements of Income,
we recorded income taxes of $1,706 million in 2009 (2008 – $2,225
million income tax recovery) in shareholders’ equity, an increase of
$3,931 million, primarily reflecting increased unrealized foreign
currency translation gains, net of hedging, unrealized gains in both
our AFS portfolio and derivatives designated as cash flow hedges.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

2008 vs. 2007
Income tax expense decreased $23 million, or 2%, from 2007 due to
lower earnings before income taxes in 2008. The effective tax rate of
22.8% as compared to 19.8% was largely due to lower earnings
reported by our subsidiaries 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. Higher payroll, business

and property taxes were partially offset by lower capital taxes due to a
lower Canadian capital tax base and a reduction in the goods and
services taxes rate.

Quarterly financial information

Fourth quarter 2009 performance

Fourth quarter net income of $1,237 million was up $117 million, or
10%, from a year ago mainly due to higher trading revenue, including
lower market environment-related losses on HFT instruments, which
was partially offset by higher related variable compensation. Lower
net losses on AFS securities, improved equity origination activity and
volume growth in Canadian Banking and Insurance also contributed
to the increase. These factors were partially offset by higher PCL. Our
prior year results were favourably impacted by the reduction of the
Enron-related litigation provision.

Total revenue increased $2,390 million, due to higher insurance

related revenue, mainly resulting from the change in fair value of
investments and higher annuity volumes, largely offset in PBCAE and
higher trading revenue, including lower market environment-related
losses. Lower net losses on our AFS securities, improved equity
origination activity in Capital Markets, volume growth in Canadian
Banking and growth in transactional volumes in Wealth Management
also contributed to the increase. These factors were partially offset by
cumulative accounting adjustments related to prior periods and
losses on the change in fair value of certain derivatives used to
economically hedge our funding activities compared to gains last
year. A $52 million ($39 million after-tax) provision related to the
restructuring of certain Caribbean banking mutual funds also
unfavourably impacted revenue.

Total PCL was up $264 million or 43% from a year ago, mainly
reflecting higher specific provisions related to a number of specific

Results and trend analysis

Taxes

Table 8

(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
Effective total tax rate (2)
(1)
(2)

2007
2008
2009
1,568 $ 1,369 $ 1,392

204 $
242
104
103
42
16
711 $

180 $
249
161
115
46
20
771 $

208
227
117
97
41
8
698
2,339 $ 2,080 $ 2,090
5,526 $ 6,005 $ 7,025
19.8%
22.8%
28.4%
27.1%
31.0%
37.1%

Includes amounts netted against non-interest income regarding investment properties.
Total income and other taxes as a percentage of net income before income and other
taxes.

clients in our corporate lending portfolio. Increased loss rates in our
Canadian credit card and unsecured personal portfolios, and the
impact of $28 million related to our adoption of the amendments to
Canadian Institute of Chartered Accountants (CICA) section 3855,
Financial Instruments – Recognition and Measurement as certain
impaired AFS securities were reclassified to loans, mainly in U.S.
banking also contributed to the increase. These factors were partially
offset by lower specific PCL in U.S. banking reflecting stabilizing asset
quality, largely in our residential builder finance portfolio. The general
provision of $156 million increased $11 million from last year’s
general provision of $145 million, mainly reflecting credit deterio-
ration related to U.S. banking. For further information on the
reclassification, refer to the CICA section 3855 – reclassification of
securities to loans section.

PBCAE increased $1,408 million, largely due to the change in fair

value of investments and an increase in annuity volumes, both of
which were largely offset in revenue. Unfavourable actuarial
adjustments resulting from management actions and assumption
changes also contributed to the increase.

Non-interest expense increased $617 million, or 21%, largely

due to increased variable compensation driven by higher trading
results, partially offset by our ongoing commitment to cost
management. Last year non-interest expense was favourably
impacted by the reduction of the Enron-related litigation provision.

Our quarterly earnings, revenue and expenses are impacted by a
number of trends and recurring factors, which include seasonality,
general economic and market conditions, and fluctuations in foreign

exchange rates. The following table summarizes our results for the
last eight quarters.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Quarterly results

(C$ millions, except per share amounts)

Net interest income
Non-interest income

Total revenue

PCL
Insurance PBCAE
Non-interest expense
Goodwill impairment charge

Net income before income taxes and

non-controlling interest in subsidiaries
Income taxes
Non-controlling interest in net income of

subsidiaries
Net income (loss)
EPS – basic

– diluted

Segment net income (loss)

Canadian Banking
Wealth Management
Insurance
International Banking
Capital Markets
Corporate Support

Net income (loss)
Effective tax rate
Period average US$ equivalent of C$1.00

2009

2008

Q1
2,898 $ 2,832
3,863
4,231
6,761 $ 7,063
786
1,076
3,622
–

974
958
3,575
1,000

Q4
$ 2,629
2,440
$ 5,069
619
(86)
2,989
–

Q3
$ 2,221
3,691
$ 5,912
334
553
3,272
–

Q2
$ 2,131
2,823
$ 4,954
349
548
2,970
–

Table 9

Q1
$ 2,067
3,580
$ 5,647
293
616
3,120
–

254 $ 1,579
464
266

$ 1,547
428

$ 1,753
442

$ 1,087
156

$ 1,618
343

$ 2,876 $ 2,900 $

4,583

4,923

$ 7,459 $ 7,823 $

883
1,322
3,606
–

770
1,253
3,755
–

$ 1,648 $ 2,045 $

389

449

$ 1,237 $ 1,561 $
1.06 $
$
1.05 $
$

.83 $
.82 $

38
5
(50) $ 1,110
.78
(.07) $
.78
(.07) $

(1)
$ 1,120
.82
$
.81
$

49
$ 1,262
.93
$
.92
$

717 $
161
104
(125)
561
(181)

669 $
168
167
(95)
562
90

$ 1,237 $ 1,561 $

581 $
126
113
(1,126)
420
(164)

696
128
112
(100)
225
49
(50) $ 1,110

23.6%

22.0%

104.7%

.924 $

.900 $

.805 $

29.4%
.815

676
116
59
(206)
584
(109)
$ 1,120

27.7%
.901

709
186
137
(16)
269
(23)
$ 1,262

25.2%
.988

3
928
.70
.70

604
182
104
38
13
(13)
928

14.4%
.994

$
$
$

30
$ 1,245
.96
$
.95
$

673
181
89
31
304
(33)
$ 1,245

21.2%
$ 1.002

Seasonality
Seasonal factors impact our results in most quarters. The second
quarter has fewer days than the other quarters, generally resulting in
a decrease in net interest income and certain expense items. The
third and fourth quarters include the summer months during which
market activity generally tends to slow, negatively impacting the
results of our capital markets, brokerage and investment
management businesses.

Overview of consolidated results
As economic and market conditions deteriorated over most of the
period, our net income has been unfavourably impacted by PCL and
total market environment-related net losses. PCL has generally
increased, particularly over the last five quarters, while market
environment-related losses have moderated since the first quarter of
2009. A number of other items, noted below, have also affected our
results.
•

In the second quarter of 2009, we recorded a goodwill
impairment charge of $1 billion, resulting in a net loss of $50
million for the quarter and an effective tax rate of 104.7%.
Excluding this charge, adjusted net income for the quarter was
$950 million and the adjusted effective tax rate was 21.2%, as
the goodwill impairment charge was not deductible for tax
purposes.
In the fourth quarter of 2008, we recorded a reduction of the
Enron-related litigation provision of $542 million.
The Canadian dollar depreciated significantly, on average,
relative to the U.S. dollar from the first quarter of 2008 to the
second quarter of 2009, and has strengthened considerably
since the third quarter of 2009. These fluctuations in the
Canadian/U.S. dollar exchange rate have had an impact on our
consolidated net income over the period.

•

Trend analysis
Our quarterly results have generally increased over the corresponding
period in the prior year. However, for the first two quarters of 2009 our
results decreased from the comparative quarters in 2008. For the last
two quarters of 2009, our results have increased over the
comparative quarters in 2008 due to solid performances across most
of our businesses as a result of improved market conditions.

Revenue has generally fluctuated over the period. Increases in

revenue have mainly resulted from solid trading revenue in certain of
our capital markets businesses and changes in the fair value of our
investment portfolios backing our life and health policyholder
liabilities in Insurance due to market volatility, largely offset in PBCAE.
As well, higher banking-related revenue due to solid volume growth,
partly reflecting our acquisitions, and revenue growth in our wealth
management businesses, primarily driven by our acquisitions, also
contributed to revenue. Revenue has been unfavourably impacted by
total market environment-related losses, mainly in the latter part of
2008 and the early half of 2009, reduced fee-based client assets due
to capital depreciation, lower transaction volumes, and spread
compression in our banking-related and wealth management
businesses.

PCL has generally trended significantly higher over the period
due to weakness in the economic environment. We have also made
additions to our general provision, which were particularly elevated in
the last five quarters, largely reflecting credit deterioration mainly
related to the economic environment. For further details, refer to the
Credit quality performance section.

PBCAE has fluctuated considerably over the period. Although
underlying 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.

Non-interest expense has generally increased over the last eight
quarters, mainly due to higher variable compensation resulting from
higher trading revenue, increased costs in support of business growth,
including the impact of our acquisitions, and the impact of the
generally weaker Canadian dollar relative to the U.S. dollar. These
factors were partially offset by our ongoing focus on cost management.
Our effective tax rate has generally fluctuated over the last eight
quarters, reflecting a varying portion of income being reported by our
subsidiaries operating in jurisdictions with differing income tax rates
and a fluctuating level of income from tax-advantaged sources
(Canadian taxable corporate dividends). Market environment-related
losses and the reduction of the Enron-related litigation provision,
which were recorded at higher income tax rates, the goodwill
impairment charge, and a reduction in statutory Canadian corporate
income tax rates also impacted our effective tax rate over the period.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Business segment results

Results by business segment

(C$ millions, except for percentage
amounts)

Net interest income
Non-interest income

Total revenue

PCL
Insurance PBCAE
Goodwill impairment charge
Non-interest expense

2009

Table 10

2008

2007

Canadian
Banking
6,947 $
2,943

Wealth
Management

Insurance

397 $

– $

3,683

5,715

International
Banking
1,687 $
903

9,890 $
1,275
–
–
4,729

4,080 $
–
–
–
3,262

5,715 $
–
4,609
–
559

2,590 $
980
–
1,000
2,346

Capital
Markets (1)

Corporate
Support (1)

3,399 $
3,524

6,923 $
702
–
–
3,628

(924) $
832

(92) $
456
–
–
34

12,534

Total
9,048 $

Total
7,702
14,760

Total
11,506 $
17,600
29,106 $ 21,582 $ 22,462
791
1,595
2,173
1,631
–
–
12,473
12,351

3,413
4,609
1,000
14,558

Net income before income

taxes and non-controlling
interest in net income of
subsidiaries

Net income

Return on equity (ROE)
Return on risk capital (RORC)
Average assets

$
$

3,886 $
2,663 $

818 $
583 $

547 $ (1,736) $
496 $ (1,446) $

2,593 $
1,768 $

(582) $
(206) $

5,526 $
3,858 $

6,005 $
4,555 $

7,025
5,492

35.9%
48.4%

37.0%
42.9%
$ 258,900 $ 20,500 $ 13,100 $ 63,700 $ 347,900 $

(19.4)%
(49.1)%

14.2%
49.2%

21.0%
24.3%

(10.4)%
(26.0)%

24.7%
37.4%
(8,800) $ 695,300 $ 650,300 $ 581,000

18.1%
29.6%

11.9%
19.5%

(1)

Net interest income, total revenue and net income before income taxes are presented in Capital Markets on a taxable equivalent basis. The taxable equivalent basis adjustment is eliminated
in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments section.

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
include all applicable 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 specific provision for credit losses.

•

• Wealth Management, Insurance and International Banking reported
results include disclosure in U.S. dollars as we review and manage
the results of certain business lines largely in U.S. dollars.
Insurance reported results include the change in fair value of
investments backing our life and health policyholder liabilities
recorded as revenue, which is largely offset in PBCAE.
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. We record the
elimination of the teb adjustments in Corporate Support. We
believe these adjustments are useful and reflect how Capital
Markets manages its business, since it enhances the
comparability of revenue and related ratios across taxable
revenue 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.
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 volatility
related to treasury activities, securitizations and net charges
associated with unattributed capital.
Specific allowances are recorded to recognize estimated losses
on our lending portfolio on loans that have become impaired. The
specific provisions for credit losses are included in the results of
each business segment to fully reflect the appropriate expenses
related to the conduct of each business segment. A general
allowance is established to cover estimated credit losses incurred
in the lending portfolio that have not been specifically identified

•

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

as impaired. Changes in the general allowance are included in
Corporate Support, as Group Risk Management effectively
controls this through its monitoring and oversight of various
portfolios of loans throughout the enterprise.

Key methodologies
The following outlines the key methodologies and assumptions used
in our management reporting framework. These are periodically
reviewed by management to ensure they remain valid.

Expense allocation
To ensure that our business segments’ results include expenses
associated with the conduct of their business, we allocate costs
incurred or services provided by Operations, Technology and
Functions, which were directly undertaken or provided on the
business segments’ behalf. For other costs not directly attributable to
our business segments, including overhead costs and other indirect
expenses, we use our management reporting framework for allocating
these costs to each business segment in a manner that reflects the
underlying benefits.

Capital attribution
Our framework also determines the attribution of capital to our
business segments in a manner that is intended to consistently
measure and align economic costs with the underlying benefits and
risks associated with the activities of each business segment. The
amount of capital assigned to each business segment is referred to as
attributed capital. Unattributed capital and associated net charges
are reported in Corporate Support. For further information, refer to the
Capital management and Key performance and non-GAAP measures
sections.

Funds transfer pricing
A funds transfer pricing methodology is used to allocate interest
income and expense by product to each business segment. This
allocation considers the interest rate risk, liquidity and funding risk
and regulatory requirements of each of our business segments. We
base transfer pricing on external market costs and each business
segment fully absorbs the costs of running its business. Our business
segments may retain certain interest rate exposures subject to
management approval that would be expected in the normal course
of operations.

Changes made in 2009
The following highlights the key changes we made to our business
segments during the year to reflect how each business is appropri-
ately managed. Unless specifically stated, comparative amounts have
been revised and did not have an impact on our consolidated results.
• We realigned Capital Markets into two main businesses, Capital
Markets Sales and Trading, and Corporate and Investment
Banking.

Canadian Banking

Canadian Banking comprises our domestic personal and business
banking operations and certain retail investment businesses and is
operated through three business lines: 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, automated teller machines (ATMs), online and
telephone banking networks, as well as through a large number of
proprietary sales professionals. The competitive landscape of our
Banking-related operations in the Canadian financial services
industry consists of 22 Schedule I banks, 47 independent trust
companies, 26 foreign banks and a number of credit unions and
caisses populaires. In this competitive environment, we have top
rankings in market share for most retail financial product categories,
the largest branch network, the most ATMs and the largest mobile
sales network across Canada.

Year in review
•

Cost management was a focus throughout this year and we
launched several significant transformational initiatives that are
focused on enhancing sales and service productivity and
improving processes through streamlining and automation.

• We realigned Insurance into three main businesses, Canadian

Insurance, U.S. Insurance, and International & Other Insurance.

For further details, refer to the Capital Markets and Insurance segment
sections.

• We announced the new WestJet RBC Mastercard, a new travel

rewards card offering rewards to clients who travel in North America
and the Caribbean on WestJet. This will make us the first large
Canadian financial institution to offer both MasterCard and Visa.

• We expanded our highly successful RBC Reward credit card

points program to additional banking products and services,
rewarding our clients for their loyalty.

Economic and market review
Our results were impacted by the slowdown in the economy resulting
in higher credit losses across our loan portfolios. Historically low
interest rates contributed to strong growth in our home equity
business; however it also resulted in significant spread compression.
A reduction in businesses spending resulted in strong growth in
business deposits and investments and moderate growth in our
business lending portfolio. Clients shifted to lower risk investment
products such as our guaranteed investment certificates (GIC) and
deposit products and short term money market funds due to volatility
in the equity markets. Our market position increased, most notably in
the auto financing and leasing business, as foreign and niche
competitors withdrew or reduced their presence in the Canadian
marketplace. For further details on our general economic review, refer
to the 2009 Economic and market review section.

Canadian Banking financial highlights

(C$ millions, except number of and percentage amounts)

Net interest income
Non-interest income

Total revenue

PCL
Non-interest expense

Net income before income taxes and non-controlling interest in subsidiaries
Net income
Key ratios
ROE
RORC
NIM (1)
Operating leverage

Selected average balance sheet information

Total assets (2)
Total earning assets (2)
Loans and acceptances (2)
Deposits
Attributed capital
Risk capital
Other information

AUA
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

$
$

2009
6,947
2,943
9,890
1,275
4,729
3,886
2,663

35.9%
48.4%
2.76%
3.8%

2008
6,718
2,868
9,586
867
4,758
3,961
2,662

38.1%
52.2%
2.98%
2.6%

$
$

Table 11

2007
6,353
2,976
9,329
788
4,748
3,793
2,545

34.9%
48.1%
3.17%
6.5%

258,900
251,600
249,600
172,600
7,250
5,400

$ 232,300
225,600
225,000
155,000
6,900
5,050

$ 207,500
200,400
199,200
147,100
7,200
5,250

133,800
23,280

$ 109,500
24,222

$ 120,200
23,930

.50%
.51%

.36%
.39%

.35%
.39%

(1)
(2)

NIM is calculated as Net interest income divided by Average total earning assets.
Average total assets, Average total earning assets, and Average loans and acceptances include average securitized residential mortgage and credit card loans for the year of $37 billion and
$4 billion, respectively (2008 – $22 billion and $4 billion; 2007 – $19 billion and $4 billion).

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

2008 vs. 2007
Net Income increased $117 million, or 5%, from 2007, reflecting solid
volume growth and effective cost management, which were partially
offset by spread compression and higher PCL.

Total revenue increased $257 million, or 3%, reflecting solid

volume growth across all businesses, higher foreign exchange
revenue, service fees and mutual fund distribution fees, partially
offset by spread compression. Our results for 2007 included a gain
related to the Visa IPO shares upon the reorganization of Visa Inc.,
which was partially offset by an unfavorable adjustment related to our
credit card customer loyalty reward program liability.

Net Interest margin decreased 19 bps, largely reflecting the

impact of changes in our retail product mix, the lower interest rate
environment and competitive pressure.

PCL increased $79 million, or 10%, reflecting 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.

Outlook and priorities
The expected return to economic growth in 2010, increased consumer
spending and a continued low interest rate environment should
generate solid consumer lending growth, particularly in home equity
lending. Further improvements in the equity markets are expected to
renew consumer confidence and lead to stronger growth in our
mutual funds products. We expect business lending growth to lag the
economic recovery given the higher levels of liquidity and excess
capacity. With unemployment rates expected to peak in early 2010,
credit losses will likely remain elevated. For further details on our
general economic outlook, refer to the 2010 Economic and market
outlook section.

Key strategic priorities for 2010
•
•

Continue to deliver a superior client experience.
Continue to simplify the way we do business by eliminating
complexity and automating key processes.
Enable collaboration and convergence of people and channels to
increase employee engagement and productivity and strengthen
our distribution capabilities.

•

Financial performance
Total revenue was relatively flat compared to the prior year as the
impact of lower interest rates on deposit spreads and lower mutual
fund distribution fees, due to capital depreciation, offset strong
volume growth in home equity loans and deposits accounts, and
higher lending spreads.

Average residential mortgages were up 9% over last year,
supported by historically low interest rates and a solid housing
market. Average personal deposits grew by 19% from last year, driven
by the continued success of our key savings products and customer
preference for reduced risk.

Revenue by business line (C$ millions)

10,000

8,000

6,000

4,000

2,000

Cards and Payment Solutions

Business Financial Services

Personal Financial Services

2007

2008

2009

Financial performance
2009 vs. 2008
Net income was flat as strong volume growth in personal and
business products and effective cost management were fully offset by
significantly higher PCL and spread compression.

Total revenue increased $304 million, or 3%, from the previous

year largely reflecting strong volume growth in home equity loans and
personal and business deposits and a favourable adjustment to our
credit card customer loyalty reward program in the current year. These
factors were partly offset by lower spreads due to the historically low
interest rate environment and a decline in mutual fund distribution
fees reflecting capital depreciation.

Net interest margin decreased 22 bps from a year ago reflecting
sharply lower interest rates, higher term funding costs and the impact
of changes in product mix, reflecting higher volume growth in lower
margin products including personal deposits and home equity loans.
PCL increased $408 million, or 47%, mainly reflecting higher

loss rates in credit cards and unsecured personal portfolios and
higher impaired loans in our business lending portfolio primarily as a
result of recessionary conditions. For further details, refer to the
Credit quality performance section.

Non-interest expense decreased $29 million, or 1%, mainly due

to our ongoing focus on cost management, including lower staff levels
reflecting productivity initiatives and lower pension and benefit costs,
partly offset by higher operational costs in support of business
volume growth and branch network expansion.

Average assets increased $27 billion, or 11% largely due to

continued strong growth in home equity and personal lending
products. Average deposits were up $18 billion, or 11%, reflecting
strong growth in both personal and business deposits.

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
banking. We rank first or second in market share for most personal
banking products and our retail banking network is the largest in
Canada with 1,197 branches and 4,214 ATMs.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Table 12

Average residential mortgages, personal loans and deposits
(C$ millions)

2009
5,305 $ 5,315 $ 5,082

2008

2007

141,800 129,800 113,200
38,700
43,700
35,500
41,200
57,900
55,600
66,900
58,000
28,300
26,500

53,000
49,000
58,000
63,300
35,500

990

1,129

1,066

1,197
4,214

1,174
4,149

1,146
3,946

150,000

120,000

90,000

60,000

30,000

2007 2008 2009

2007

2008

2009

60,000

Residential mortgages

48,000

Personal loans

Personal deposits

36,000

24,000

12,000

Selected highlights

(C$ millions)

Total revenue
Other information (average)
Residential mortgages
Personal loans
Personal deposits
Personal GICs
Branch mutual fund balances (1)
AUA – Self-directed brokerage (1)
New deposit accounts
opened (thousands)

Number of:
Branches
Automated teller machines (ATMs)

(1)

Represents year-end spot balances.

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
banking 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 was relatively flat compared to the prior year as strong
volume growth in deposits and improved lending spreads, offset
lower spreads on deposits, due to the historically low interest rate
environment.

Over the course of the year, businesses have increased their
liquidity levels, leading to strong growth of 13% in business deposits;
however this reduced demand for credit, limiting our business loan
growth to 6%.

Selected highlights

Table 13

(C$ millions)

Total revenue
Other information (average)

Business loans (1)
Business deposits (2)

2009
2,457 $

2008

2007

2,441 $

2,301

42,400
65,400

39,900
58,000

36,900
53,700

(1)
(2)

Includes small business loans treated as retail and wholesale loans.
Includes GIC balances.

Average business loans and deposits (C$ millions)

45,000

36,000

27,000

18,000

9,000

2007

2008

2009

2007

2008

2009

Business loans

Business deposits

70,000

56,000

42,000

28,000

14,000

Cards and Payment Solutions

Cards and Payment Solutions provides a wide array of convenient and
customized credit cards and related payment products and solutions.
We have over 6 million credit card accounts and have an approx-
imately 20% market share of Canada’s credit card purchase volume.
In addition, this business line includes our 50% interest in
Moneris Solutions, Inc., our merchant card processing joint venture
with the Bank of Montreal.

Selected highlights

Table 14

(C$ millions)

Total revenue
Other information

2009
2,128 $

2008

2007

1,830 $

1,946

Average credit card balances
Net purchase volumes

12,500
53,200

12,400
52,600

11,200
47,200

Financial performance
Total revenue increased $298 million or 16%, compared to the past
year, primarily reflecting higher spreads from lower funding costs and
higher transactional volumes. The increase also reflected a
favourable adjustment of $52 million related to our credit card
customer loyalty rewards program liability reflecting favorable
assumption changes on the cost of the program. A gain of $18 million
on the sale of a portion of our remaining Visa IPO shares this year as
compared to a loss of $29 million on the redemption of our Visa IPO
shares in the prior year also increased revenue.

Balances remained relatively flat compared to last year reflecting

lower overall market growth as well as strategies implemented in
early 2009 to limit credit losses during the economic downturn, which
included a reduction in our marketing and direct mail programs.

Average credit card balances and net purchase volumes (C$ millions)

15,000

12,000

9,000

6,000

3,000

2007

2008

2009

2007

2008

2009

Average credit
card balances

Net purchase
volumes

60,000

48,000

36,000

24,000

12,000

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Wealth Management

Wealth Management comprises Canadian Wealth Management,
U.S. & International Wealth Management and Global Asset
Management. We serve affluent and high net worth clients in Canada,
the United States, Latin America, Europe and Asia with a full suite of
investment, trust and other wealth management solutions. We also
provide asset management products and services directly, through
other RBC distribution channels and through third-party distributors
to institutional and individual clients. Our competitive environment is
discussed below in each business.

Year in review
• We successfully leveraged the strength and stability of RBC to
attract client-facing professionals through proactive hiring
campaigns in each of our businesses. We added more than 158
financial consultants and client-facing professionals across our
Canadian, U.S. and international businesses.

• We completed the acquisition of Mourant Private Wealth and
successfully integrated our FBW and J.B. Hanauer & Co. (JBH)
acquisitions in U.S. & International Wealth Management. We
also announced an agreement to acquire J.P. Morgan’s Third
Party Registered Investment Advisory (RIA) Servicing Business to
expand the breadth and depth of our custody and clearing
services. (1)

• We made solid progress in integrating our Phillips, Hager & North

(PH&N) acquisition and realigning our Canadian and U.S. asset
management businesses focusing on the following three areas

of opportunities: (i) Canadian retail asset management where we
continued to demonstrate strong sales and performance with
$2.1 billion of net long-term fund sales in 2009; (ii) Canadian
institutional asset management where we are the third largest in
Canada by AUM; and (iii) in U.S. asset management where we
repositioned our Voyageur Asset Management business for
growth.

• We won the 2009 “Outstanding Private Bank – North America”
award by Private Banker International, recognizing our strength,
stability and leadership.

Economic and market review
Fee-based client asset values and transaction volumes were impacted
by continued weak market conditions in early 2009. However,
improvements during the latter half of the year partially offset this
impact through capital appreciation and higher investor confidence
driving higher transaction volumes and higher net sales. Also, as a
few competitors retrenched their operations as a result of market
disruption, we continued to grow our market share and attracted a
record number of experienced client-facing professionals, largely in
U.S. Wealth Management. For further details on our general economic
review, refer to the 2009 Economic and market review section.

(1)

The acquisition is subject to regulatory approvals and other customary closing
conditions and is expected to close in the second quarter of 2010.

Wealth Management financial highlights

(C$ millions, except number of and percentage amounts)

Net interest income
Non-interest income
Fee-based revenue
Transactional and other revenue

Total revenue

Non-interest expense

Net income before income taxes and non-controlling interest in subsidiaries
Net income

Key ratios
ROE
RORC
Pre-tax margin (1)

Selected average balance sheet information

Total assets
Loans and acceptances
Deposits
Attributed capital
Risk capital
Other information

Revenue per advisor (000s) (2)
AUA
AUM
Number of employees (full-time equivalent)
Number of advisors (3)

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

$
$

2,154
1,529
4,080
3,262
818
583

14.2%
49.2%
20.0%

20,500
5,800
31,500
3,900
1,100

670
502,300
245,700
10,818
4,504

2009 vs. 2008

197
163
33

(11)%

2009

2008

397

468

Table 15

2007

427

2,109
1,456
3,992
2,902
1,089
762

32.4%
65.1%
27.3%

$
$

2,276
1,243
3,987
3,038
948
665

23.3%
64.9%
23.8%

$ 16,900
5,200
26,900
2,800
1,000

731
495,100
222,600
10,954
4,346

$ 16,600
4,600
24,900
2,300
1,150

787
488,500
161,200
9,621
3,811

(1)
(2)
(3)

Pre-tax margin is defined as net income before income taxes and non-controlling interest in subsidiaries dividend by total revenue.
Includes investment advisors and financial consultants of our Canadian and U.S. full-service brokerage businesses.
Includes client-facing advisors across all our wealth management businesses.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Revenue by business line (C$ millions)

5,000

4,000

3,000

2,000

1,000

Global Asset Management

Canadian Wealth Management

U.S. & International
Wealth Management

2007

2008

2009

Financial performance
2009 vs. 2008
Net income for the year of $583 million decreased $82 million, or
12%, from a year ago, mainly reflecting lower average fee-based
client assets and spread compression. These factors were partially
offset by a gain, as compared to a loss in the prior year, on our stock-
based compensation plan, the prior year provisions related to the
Reserve Primary Fund and auction rate securities, the impact of the
weaker Canadian dollar relative to the U.S. dollar and the inclusion of
a full year of results from our PH&N acquisition.

Total revenue increased $93 million, or 2%, mainly due to the

impact of the weaker Canadian dollar relative to the U.S. dollar. A
gain, as compared to a loss in the prior year, on our stock-based
compensation plan in our U.S. brokerage business and higher
transaction volumes reflecting a full year of revenue from FBW also
contributed to the increase. These factors were largely offset by lower
fee-based revenue reflecting decreased average fee-based client
assets, resulting from capital depreciation, which was only partially
offset by the inclusion of a full year of revenue from PH&N, as well as
spread compression.

Non-interest expense was up $224 million, or 7%, mainly due to

the impact of the weaker Canadian dollar relative to the U.S. dollar.
Higher infrastructure and staff costs in support of business growth
largely reflecting a full year of expense from PH&N and FBW and the
recruitment of experienced client-facing advisors, and the increase in
the fair value of our earned compensation liability related to our
stock-based compensation plan also contributed to the increase.
These factors were partially offset by our focus on cost management,
the prior year provisions related to our support agreement for clients
of FBW invested in the Reserve Primary Fund and Wealth Manage-
ment’s share of the settlement with U.S. regulators relating to auction
rate securities.

2008 vs. 2007
Net income for the year of $665 million decreased $97 million, or
13%, from 2007, mainly due to lower transaction volumes, a loss on
our stock-based compensation plan, and the impact of the stronger
Canadian dollar relative to the U.S. dollar. These factors were partially

Business line review

Canadian Wealth Management

Canadian Wealth Management includes our full-service Canadian
retail brokerage, which is the market leader as measured by AUA, with
more than 1,430 investment advisors providing advice-based, wide-
ranging comprehensive financial solutions to affluent and high net
worth clients. Additionally, we provide discretionary investment
management and estate and trust services to our clients through
close to 70 investment counsellors and more than 120 trust
professionals in locations across Canada.

We compete with domestic banks and trust companies, global
private banks, investment counseling firms, bank-owned full service
brokerage and boutique brokerages, and mutual fund companies. In
Canada, bank-owned wealth managers continue to be the major
players.

offset by solid growth in fee-based client assets throughout most of
2008.

Total revenue was flat compared to 2007. Higher fee-based
revenue due to higher net sales, the recruitment of experienced
advisors, and the contribution of our PH&N acquisition was impacted
by significant capital depreciation in the latter part of the year due to
the general decline in asset valuations. Increased transaction revenue
from our JBH and FBW acquisitions was partially offset by lower
transaction volumes in our full-service brokerage business and a loss
on our stock-based compensation plan. Revenue was also
unfavourably impacted by the stronger Canadian dollar relative to the
U.S. dollar.

Non-interest expense was up $136 million, or 5%, mainly
reflecting higher infrastructure and staff costs in support of business
growth largely related to our acquisitions. This increase also reflected
the provisions related to the Reserve Primary Fund and auction rate
securities.

Outlook and priorities
We expect further market improvement and increased investor
confidence will generate higher asset valuations and transaction
volumes in the near term. We will continue to recruit and retain the
best client-facing professionals across all businesses, while
remaining focused on the development of innovative wealth
management products and services, which should collectively
support steady growth in fee-based client assets in the medium-term.
We anticipate loan and deposit growth will be partially offset by
spread compression resulting from the low interest environment. We
will remain committed to prudent cost management. For further
details on our general economic outlook, refer to the 2010 Economic
and market outlook section.

Key strategic priorities for 2010
•

Actively consider acquisition opportunities, presented by the
current market environment, for our Global Asset Management
business and continue to leverage its capabilities across our
network.
Continue to grow our high net-worth client base by retaining and
attracting the best advisors, pursuing new acquisitions for
International Wealth Management and delivering a broader
range of our wealth management products and services.
Translate recent acquisitions and record recruitment in our U.S.
Wealth Management business into enhanced profitability.
Continue our investments in our people, products, services and
infrastructure to enable global growth, improve operating
efficiency and maintain the highest standards of client
stewardship and regulatory compliance.
Consistent with our position as a top 20 global wealth manager,
continue to build brand awareness for RBC Wealth Management
with top talent, personal, corporate and institutional clients and
other stakeholders.

•

Financial performance
Revenue decreased $151 million, or 10%, compared to the prior year,
largely as a result of lower average fee-based client assets reflecting
capital depreciation and spread compression. These factors were
partially offset by a full year of revenue from PH&N’s private counsel
business.

Assets under administration increased 8% from a year ago,

mainly due to capital appreciation resulting from improved market
conditions in the latter half of the year and fee-based net sales.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Selected highlights

(C$ millions)

Total revenue
Other information

2009

2008

1,323 $

1,474 $

Table 16

2007

1,460

AUA (1)
AUM (1)
Total assets under fee-based

174,200
24,700

160,700
23,000

183,000
22,200

programs

88,000

78,800

83,300

(1)

Represents year-end spot balances.

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 close to 2,300
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 trust,
banking, credit, and investment solutions to high net worth private
clients with over 2,500 employees across a network of 31 offices
located in 21 countries around the world.

We operate in a fragmented and extremely competitive industry.
There are approximately 5,000 registered broker-dealers in the U.S.,
comprising independent, regional and global players. Competitors in
international wealth management comprise global wealth managers,
traditional offshore private banks, domestic wealth managers and
U.S. investment-led private client operations.

Financial performance
Revenue increased $263 million, or 14%. In U.S. dollars, revenue
increased $27 million, or 1%, largely due to higher transaction
volumes reflecting a full year of revenue from FBW, and a gain as
compared to a loss in the prior year on our stock-based compensation
plan. These factors were partially offset by lower average fee-based
client assets resulting from capital depreciation and spread
compression.

In U.S. dollars, assets under administration increased 9% from a
year ago, mainly due to capital appreciation resulting from improved
market conditions in the second half of the year.

Average assets under administration and management (1) (C$ millions)

200,000

160,000

120,000

80,000

40,000

2007 2008 2009

AUA

AUM

25,000

20,000

15,000

10,000

5,000

(1)

Represents average balances, which are more representative of the impact client
balances have upon our revenue.

Selected highlights

Table 17

(C$ millions)

Total revenue
Other information (US$ millions)

Total revenue
Total loans, guarantees and
letters of credit (1), (2)

Total deposits (1), (2)
AUA (3)
AUM (3)
Total assets under fee-based

2009
2,132 $

2008

2007

1,869 $

1,988

1,839

1,812

1,826

5,500
18,700
303,300
19,700

5,200
18,500
277,600
16,200

5,100
16,500
323,300
21,400

programs (4)

31,000

21,300

28,100

(1)
(2)

(3)
(4)

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 year end spot balances.
Represents amounts related to our U.S. wealth management businesses.

Average assets under administration and management (1) (US$ millions)

325,000

260,000

195,000

130,000

65,000

2007 2008 2009

AUA

AUM

25,000

20,000

15,000

10,000

5,000

(1)

Represents average balances, which are more representative of the impact client
balances have upon our revenue.

Global Asset Management

Global Asset Management is responsible for our proprietary asset
management business. We provide a broad range of investment
management services through mutual and pooled funds, fee-based
accounts and separately managed portfolios. We distribute our
investment solutions through a broad network of our bank branches,
our discount and full-service brokerage businesses, independent
advisors and directly to consumers. We also provide investment
solutions directly to institutional clients, including pension plans,
endowments and foundations. We are the largest fund company and
one of the largest money managers in Canada, with a 16% market
share as measured by AUM as recognized by the Investment Funds
Institute of Canada.

We face competition in Canada from major banks, insurance
companies, asset management organizations and boutique firms. The
Canadian fund management industry is large, and mature, but still a
relatively fragmented industry. Our U.S. asset manager competes with

independent asset management firms, as well as those that are part
of national and international banks, insurance companies and
boutique asset managers.

Financial performance
Revenue decreased $19 million, or 3%, mainly due to lower average
fee-based client assets resulting from capital depreciation, largely
offset by a full year of revenue from PH&N’s asset management
business.

Assets under management increased 11% from a year ago,
mainly due to capital appreciation from improved market conditions
in the latter half of the year, strong money market sales in our U.S.
asset management business and solid long-term fund net sales in
Canada, partially offset by a stronger Canadian dollar relative to the
U.S. dollar on our U.S. denominated assets and domestic money
market fund net redemptions.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Selected highlights

Table 18

Average assets under management

(1) (C$ millions)

(C$ millions)

Total revenue
Other information

Canadian net long-term mutual

fund sales

Canadian net money market

mutual fund sales

AUM (1)

(1)

Represents year end spot balances.

2009

2008

625 $

644 $

2007

544

2,100

300

6,200

(2,000)
199,700

8,400
180,100

1,300
118,800

200,000

160,000

120,000

80,000

40,000

2007

2008

2009

AUM

Insurance

Insurance comprises Canadian Insurance, U.S. Insurance, and
International & Other. In Canada, we offer our products and services
through our growing proprietary channels including retail insurance
branches, call centers, and our career sales force as well as through
independent insurance advisors and travel agencies. In the U.S., we
offer products through independent marketing organizations, call
centers, financial institutions, and our career sales force. Outside
North America, we operate in reinsurance markets globally. Our
competitive environment is discussed below in each business.

Year in review
• We realigned Insurance into three lines of business to be more
responsive to the evolving needs of our clients and to position
us to further strengthen our distribution economics, deepen
client relationships and simplify the way we do business.
• We expanded our Canadian retail insurance network to 49

branches in 2009, from 35 branches in 2008, giving our clients

(1)

Represents average balances, which are more representative of the impact client
balances have upon our revenue.

more convenient access to insurance services.

• We continued to expand and diversify our reinsurance

businesses during the year.

• We entered into an agreement with a large travel provider in the
U.S. to sell our travel insurance products through its distribution
networks.

Economic and market review
The insurance businesses experienced minimal impact from the
market environment. In the U.S., the market environment resulted in
market opportunities in fixed annuity products, reflecting the strength
of the RBC brand, and a growing market for income products. Revenue
growth, claims and investment performance in our Canadian and
International insurance businesses remained solid. For further details
on our general economic review, refer to the 2009 Economic and
market review section.

Insurance financial highlights

(C$ millions, except number of and percentage amounts)

Non-interest income

Net earned premiums
Investment income (1)
Fee income
Total revenue

Insurance policyholder benefits and claims (1)
Insurance policyholder acquisition expense
Non-interest expense

Net income before income taxes and non-controlling interest in subsidiaries
Net income

Key ratios
ROE
RORC

Selected average balance sheet information

Total assets
Attributed capital
Risk capital
Other information

Premiums and deposits (2)
Insurance claims and policy benefit liabilities
Fair value changes on investments backing policyholder liabilities (1)
Embedded value (3)
AUM
Number of employees (full-time equivalent)

$
$

Table 19

2009

2008

2007

3,889 $
1,579
247
5,715 $
3,975
634
559
547 $
496 $

2,864 $
(458)
204
2,610 $
1,029
602
576
403 $
389 $

2,593
402
197
3,192
1,588
585
537
482
442

37.0%
42.9%

32.8%
37.1%

31.2%
34.7%

13,100 $
1,300
1,150

12,600 $
1,150
1,050

12,500
1,400
1,250

4,970 $
8,922
917
5,915
200
1,653

3,861 $
7,385
(870)
4,919
400
1,722

3,460
7,283
(108)
n.a.
300
1,575

(1)

(2)
(3)

Investment income can experience volatility arising from fluctuation in the fair value of HFT assets. The investments which support actuarial liabilities are predominantly fixed income assets
designated as HFT, and consequently changes in fair values of these assets are recorded in investment income in the consolidated statements of income. Changes in the fair values of these
assets are largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in insurance policyholder benefits and claims.
Premiums and deposits include premiums on risk-based insurance and annuity products, and individual and group segregated fund deposits, consistent with insurance industry practices.
Embedded value is defined as the value of equity held in our Insurance segment and the value of in-force business (existing policies). For further details, refer to the Key performance and non
GAAP measures section.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Revenue by business line (C$ millions)

Premiums and deposits by business line (C$ millions)

5,800

4,640

3,480

2,320

1,160

U.S. Insurance

International & Other
Insurance

Canadian Insurance

5,000

4,000

3,000

2,000

1,000

2007

2008

2009

2007

2008

2009

U.S. Insurance

International & Other
Insurance

Canadian Insurance

Financial performance
2009 vs. 2008
Net income increased by $107 million, or 28%, compared to the prior
year, as the prior year included investment losses of $110 million
($80 million after-tax). Volume growth in all businesses, new U.K.
annuity reinsurance arrangements, lower allocated funding costs on
capital, and our ongoing focus on cost management also contributed
to the increase. These factors were partially offset by unfavourable
actuarial adjustments.

Total revenue increased $3,105 million, mainly due to the
change in fair value of investments and an increase in annuity
volumes in our U.S. and International & Other insurance businesses,
both of which were largely offset in policyholder benefits, claims and
acquisition expense (PBCAE). Volume growth in all businesses, the
impact of the weaker Canadian dollar relative to the U.S. dollar and
the prior year investment losses on disposals and impairments,
reflecting the impacts of equity market movements, also contributed
to the increase.

PBCAE increased $2,978 million, primarily reflecting the change

in fair value of investments backing our life and health policyholder
liabilities and higher costs commensurate with the increased annuity
volumes. Business growth, the unfavourable actuarial adjustments
reflecting management actions and assumption changes and the
impact of the weaker Canadian dollar relative to the U.S. dollar also
contributed to the increase.

Non-interest expense decreased $17 million, or 3%, reflecting
our ongoing focus on cost management, largely offset by the impact
of the weaker Canadian dollar relative to the U.S. dollar and higher
costs commensurate with business growth, including the addition of
new Canadian retail insurance branches.

Premiums and deposits were up $1,109 million, or 29%,
reflecting business growth, mostly in U.S. and reinsurance annuity
volumes, and the favourable impact of the weaker Canadian dollar
relative to the U.S. dollar.

Embedded value increased $996 million, or 20%, largely
reflecting growth from new sales, including the favourable impact of
product and pricing initiatives and new U.K. annuity reinsurance
arrangements. Also contributing to the growth was favourable
policyholder experience and a lower cost of capital related to changes
in capital requirements in our Canadian businesses. These factors
were partially offset by transfers of capital from our Insurance
businesses. For further details, refer to the Key performance and
non-GAAP measures section.

Business line review

Canadian Insurance

2008 vs. 2007
Net income decreased by $53 million, or 12%, over 2007, mainly due
to investment losses. Our 2007 results included a gain related to the
reallocation of certain foreign investment capital. These factors were
partially offset by a higher level of favourable net actuarial adjust-
ments and solid business growth.

Total revenue decreased $582 million, or 18%, mainly due to the

change in fair value of investments, largely offset in PBCAE.
Investment losses, lower U.S. annuity sales and the impact of the
stronger Canadian dollar relative to the U.S. dollar also contributed to
the decrease. These factors were partially offset by solid businesses
growth in our reinsurance and our Canadian insurance businesses.

Insurance PBCAE decreased $542 million, or 25%, primarily
reflecting the change in fair value of investments, largely offset in
revenue and a higher level of favourable net actuarial adjustments.
The impact of the stronger Canadian dollar relative to the U.S. dollar
and the impact of lower U.S. annuity sales also contributed to the
decrease. These factors were partially offset by higher costs
commensurate with business growth.

Non-interest expense was up $39 million, or 7%, primarily

reflecting higher costs commensurate with business growth.

Outlook and priorities
Improvement in global capital markets will likely continue to
favourably impact investment returns. Growth in travel insurance may
be negatively impacted in the near term as we anticipate a slow
recovery in travel activity largely reflecting continued weakness in
labour markets. Regulatory pricing reform related to auto insurance
rates in Canada may impact results in the near-term. For further
details on our general economic outlook, refer to the 2010 Economic
and market outlook section.

Key strategic priorities for 2010
•

Increase sales through proprietary distribution channels and
strengthen our position in third-party distribution channels.
Deepen client relationships by providing customers with a
unique 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 to do
business with us.
Pursue selected international niche opportunities with the aim to
grow our reinsurance business.

•

We offer life and health, home and auto and travel insurance products
as well as wealth accumulation solutions, to individual and group
clients across Canada. Our life and health portfolio includes universal
life, critical illness, disability, long-term care insurance, segregated
funds, and group benefits. We offer personal home and auto
insurance, and commercial insurance through our partnership with
Aon Reed Stenhouse Inc. Our travel products include out of province
medical coverage, trip cancellation and interruption insurance.

In Canada, we compete against approximately 250 other
insurance companies. We hold a leading market position in travel
insurance products, have a significant presence in life and health
products, and a growing presence in the home and auto markets.

Financial performance
Total revenue increased $ 1,254 million, compared to the prior year,
mainly due to the change in fair value of investments backing our
policyholder liabilities, largely offset in PBCAE. Investment gains as

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

compared to losses in the prior year, solid business growth in life and
home and auto products and lower allocated funding costs on capital
also contributed to the increase.

Premiums and deposits increased $49 million, or 3%, reflecting

sales growth in life, and home and auto products. In addition, we
continued to experience strong client and policy retention in these
businesses.

Selected highlights

Table 20

(C$ millions)

Total revenue
Other information

Premiums and deposits

Life and health
Property and casualty
Annuity and segregated

fund deposits
Fair value changes on

investments backing
policyholder liabilities

U.S. Insurance

2009

2008

2007

$ 2,654 $ 1,400 $ 1,733

1,210
708

1,188
643

1,141
600

452

(524)

(93)

We offer life insurance, annuities and travel insurance to clients
across the United States. Life and health products include term,
indexed universal life, whole life, accidental death and critical illness
protection. We also offer traditional fixed and fixed-indexed annuities.
Travel insurance products include trip cancellation, interruption
insurance and emergency medical coverage.

There are approximately 2,000 active life and health insurance
companies operating in the United States. We rank in the top 100 in
total life insurance policies in force and are a top 15 provider of fixed
indexed annuities.

Financial performance
Total revenue increased $1,516 million, compared to the prior year,
largely due to the change in fair value of investments backing our
policyholder liabilities and increased annuity volumes, both largely
offset in PBCAE. The impact of the weaker Canadian dollar relative to
the U.S. dollar also contributed to the increase. These factors were
partially offset by higher investment losses.

Premiums and deposits increased $708 million, reflecting strong

fixed annuity deposit growth and the impact of the weaker Canadian
dollar relative to the U.S. dollar.

Premiums and deposits (C$ millions)

2,000

1,500

1,000

500

2007

2008

2009

Premiums and deposits

Selected highlights

Table 21

(C$ millions)

Total revenue

Fair Value changes on investments
backing policyholder liabilities

Other information (US$ millions)

Total revenue
Premiums and deposits

Life and health
Property and casualty
Annuity

Fair value changes on investments
backing policyholder liabilities

2009
$ 1,662 $

2008

2007

146 $

601

458

(346)

(18)

1,448

247
11
704

400

166

263
4
115

553

260
3
159

(313)

(13)

Premiums and deposits (US$ millions)

Premiums and deposits

1,200

960

720

480

240

2007

2008

2009

International & Other Insurance

International & Other Insurance is primarily comprised of our
Reinsurance businesses which insure risks of other insurance and
reinsurance companies. We offer life & health, accident, and credit
and financial reinsurance products. We continued to expand into the
life annuity reinsurance market.

The global reinsurance market is dominated by a few large
players, with significant presence in the U.S., U.K. and Eurozone. The
reinsurance industry is competitive and barriers to entry remain high.

Financial performance
Total revenue increased $335 million, or 31%, over the prior year,
primarily due to growth in our European life and other life retrocession
businesses and the continued expansion of our U.K. annuity
reinsurance business.

Premiums and deposits increased $352 million, or 23%,

primarily for the reasons noted above.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Selected highlights

(C$ millions)
Total revenue
Other information

Premiums and deposits

Life and health
Property and casualty
Annuity

Table 22

Premiums and deposits (C$ millions)

2009
1,399 $

2008
1,064 $

2007
858

1,643
41
219

1,374
52
125

1,199
52
–

Premiums and deposits

2,000

1,600

1,200

800

400

2007

2008

2009

International Banking

International Banking comprises Banking and our joint venture, RBC
Dexia Investor Services (RBC Dexia IS). Banking includes our banking
businesses in the U.S. and Caribbean, which offer a broad range of
financial products and services to individuals, business clients and
public institutions in their respective markets. RBC Dexia IS offers an
integrated suite of products to institutional investors worldwide. Our
competitive environment is discussed below in each business.

Year in review
•

In light of our performance during the extremely challenging
economic and market conditions in the U.S. since mid-2008, we
began restructuring our U.S. banking business, which involves
realigning our distribution capabilities, governance structure and
risk management, reducing management layers, streamlining
end-to-end processes, and strengthening our senior management
team to improve effectiveness and efficiency in order to enhance
our competitive position in the southeastern U.S.
In the Caribbean, we continue to integrate RBTT as we move to
establish a common platform for growth and expansion in the
region. We also opened our new Caribbean headquarters in
Trinidad, which will serve as the centre of our Caribbean banking
network.

•

RBC Dexia IS announced an agreement to acquire UBI Banca’s
depositary bank business (1). The acquisition will enhance our
presence in key markets in Europe, broaden the scope of our
capabilities and strengthen our client base.

Economic and market review
Recessionary conditions and the challenging market environment
resulted in higher PCL and losses on our AFS portfolios in U.S.
banking. Our results were also impacted by continued spread
compression in both the U.S. and Caribbean due to historically low
interest rates and competitive pressures. In the Eurozone, the impact
of economic and market conditions on RBC Dexia IS resulted in lower
transaction volumes and reduced fee-based client assets. For further
details on our general economic review, refer to the 2009 Economic
and market review section.

In 2009, we recorded a goodwill impairment charge which
reflected the continuing impact of the deterioration in the overall U.S.
economic environment, including declines in the U.S. housing market
and in the market value of U.S. banks. For further details, refer to Note
10 to our Consolidated Financial Statements.

(1)

The acquisition is subject to regulatory and other customary closing conditions and is
expected to close in the first half of 2010.

International Banking financial highlights

(C$ millions, except number of and percentage amounts)

Net interest income
Non-interest income

Total revenue

PCL
Non-interest expense
Goodwill impairment charge

Net (loss) income before income taxes and non-controlling interest in subsidiaries
Net (loss) income
Key ratios
ROE
RORC

Selected average balance sheet information

Total assets
Loans and acceptances
Deposits
Attributed capital
Risk capital
Other information
AUA - RBC (1)

- RBC Dexia IS (2)

AUM - RBC (1)
Number of employees (full-time equivalent)

Credit information

Gross impaired loans as a percentage of average net loans and acceptances
Specific PCL as a percentage of average net loans and acceptances

Impact of US$ and Euro translation on selected items

Increased (decreased) total revenue
Increased (decreased) PCL
Increased (decreased) non-interest expense
Increased (decreased) net income
Percentage change in average US$ equivalent of C$1.00
Percentage change in average Euro equivalent of C$1.00

$
$

2008
1,330
771
2,101
497
1,876
–
(272)
(153)

(3.4)%
(8.1)%

51,300
27,000
42,500
5,200
2,150

11,200
2,585,000
3,900
12,335

5.97%
1.84%

$
$

Table 23

2007
1,031
884
1,915
109
1,481
–
325
242

6.9%
11.7%

39,700
22,300
34,200
3,350
1,950

–
2,713,100
–
6,001

1.81%
.49%

$
$

2009
1,687
903
2,590
980
2,346
1,000
(1,736)
(1,446)

(19.4)%
(49.1)%

63,700
35,800
51,600
7,750
3,050

7,700
2,484,400
3,800
11,462

8.80%
2.74%
2009 vs. 2008
134
94
142
(70)
(11)%
(4)%

(1)
(2)

These represent the AUA and AUM of RBTT, reported on a one-month lag.
Represents the total AUA of the joint venture, of which we have a 50% ownership interest, reported on a one-month lag.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Revenue by business line (C$ millions)

3,000

2,500

2,000

1,500

1,000

500

RBC Dexia IS

Banking

2007

2008

2009

Financial performance
2009 vs. 2008
Net loss of $1,446 million compares to a net loss of $153 million last
year, reflecting the goodwill impairment charge and higher PCL. These
factors were partially offset by the decrease in losses on our AFS
portfolios of $272 million ($184 million after-tax), and a full year of
results from RBTT.

Total revenue increased $489 million, or 23%. The increase was
mainly due to deposit and loan growth largely driven by a full year of
revenue from RBTT, and to a lesser extent, ANB. Lower losses on our
AFS portfolios, partially resulting from our adoption of the
amendments to CICA section 3855 as certain AFS securities were
reclassified to loans, and the impact of the weaker Canadian dollar
relative to the U.S. dollar also contributed to the increase. These
factors were partially offset by lower revenue at RBC Dexia IS and
spread compression, primarily in U.S. banking. For further details on
the reclassification, refer to the CICA section 3855 – reclassification
of securities to loans section.

PCL was up $483 million, mainly attributable to U.S. banking,
reflecting impaired loans in our commercial, residential builder finance,
lot loan, home equity and residential mortgage portfolios primarily as a
result of deteriorated economic and housing market conditions. The
impact of the weaker Canadian dollar on the translation of U.S. specific
PCL, higher provisions of $59 million resulting from the reclassification
noted above and a full year of results from RBTT also contributed to the
increase. For further details, refer to the Credit quality performance
section.

Non-interest expense increased $470 million, or 25%, primarily

reflecting higher staff and occupancy costs mainly related to a full
year of expenses from RBTT, and to a lesser extent, ANB. The impact
of the weaker Canadian dollar relative to the U.S. dollar and the
restructuring of our U.S. banking business also contributed to the
increase.

Business line review

Banking

2008 vs. 2007
Net loss of $153 million compared to net income of $242 million in
2007. The decrease in earnings, predominantly in U.S. banking, was
mainly attributable to higher PCL and market environment-related
losses of $297 million ($201 million after-tax) on our AFS portfolios.
These factors were partially offset by RBTT and ANB, reflecting loan
and deposit growth, and business growth at RBC Dexia IS.

Total revenue increased $186 million, or 10%, primarily due to

ANB and RBTT, business growth at RBC Dexia IS and the impact of the
stronger Euro relative to the Canadian dollar. These factors were
partially offset by the market environment-related losses and the
impact of the stronger Canadian dollar relative to the U.S. dollar.
PCL of $497 million increased $388 million, primarily in U.S.

banking, reflecting higher impaired loans in our U.S. residential
builder finance, commercial and retail portfolios.

Non-interest expense increased $395 million, or 27%, mainly
due to higher staff, occupancy and integration costs related to ANB
and RBTT, and increased business volume at RBC Dexia IS. These
factors were partially offset by the impact of the stronger Canadian
dollar relative to the U.S. dollar.

Outlook and priorities
In the U.S., economic recovery is expected to be slow, which will likely
have a continued unfavourable impact on our loan and deposit
growth. PCL in U.S. banking is expected to remain at elevated levels
in the near term and decline towards the end of 2010 as economic
conditions gradually improve. The Caribbean economy will likely
remain under pressure, which is expected to have an unfavourable
effect on our loan and deposit growth, although some signs of
recovery are likely by the end of 2010. In the Eurozone, the expected
improvement in capital markets and the return of investor confidence
should increase transaction volumes and fee-based client assets at
RBC Dexia IS. For further details on our general economic outlook,
refer to the 2010 Economic and market outlook section.

Key strategic priorities for 2010
•

Continue to transform our U.S. banking business by
implementing a strategic plan to strengthen our retail operating
model and improve performance by simplifying the way we do
business, improving risk management and distribution
capabilities and delivering an enhanced client experience.
Further strengthen our position in the Caribbean by completing
the rollout of our new Caribbean banking platform and
effectively integrating RBTT.
Focus on growth strategies at RBC Dexia IS by pursuing select
client and market initiatives that respond to emerging
opportunities.

•

Banking consists of our banking operations in the U.S. and
Caribbean. Our U.S. banking business provides a complete line of
banking products and services through 438 banking centres,
approximately 500 ATMs and online banking. Our Caribbean banking
business offers a comprehensive suite of banking products and
services, as well as international financing and trade promotion
services through an extensive branch and ATM network, and online
banking.

In the southeastern U.S., we compete against approximately
1,200 other banks, thrifts and credit unions. Deteriorating economic
and market conditions during the first half of 2009 resulted in
significant consolidation in the U.S. retail banking industry, with
numerous bank failures and some acquisitions. In this environment,
we are among the top five deposit holders in North Carolina and rank
seventh overall as measured by deposits in our southeastern U.S.
footprint (1).

In the Caribbean, we compete against banks, trust companies

and investment companies serving retail, corporate and institutional
customers. We are the second largest bank, by assets, in the English
Caribbean, with 125 branches in 17 countries.

Financial performance
Total revenue increased $634 million, or 51%, from the prior year. In
U.S. dollars, Banking revenue increased $391 million, or 32%,
primarily reflecting deposit and loan growth largely driven by a full
year of revenue from RBTT, and to a lesser extent, ANB. Lower market
environment-related losses, partially reflecting the reclassification
noted above, also contributed to the increase. These factors were
partially offset by spread compression due to historically low interest
rates and higher impaired loan balances, largely in U.S. banking.

(1)

Our southeastern U.S. banking footprint comprises North Carolina, South Carolina,
Virginia, Alabama, Florida, and Georgia.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Average loans and deposits (US$ millions)

35,000

28,000

21,000

14,000

7,000

2007

2008

2009

2007

2008

2009

Loans and acceptances

Deposits

In U.S. dollars, average deposits and average loans and

acceptances both increased $6 billion, or 26% and 24%, respectively.
The increase was mainly due to growth in loans and acceptances of
89%, and deposits of 72% in Caribbean banking, largely reflecting
RBTT. In U.S. banking, loans and acceptances, and deposits grew
12% and 10%, respectively, primarily attributable to ANB.

Selected highlights

Table 24

(C$ millions, except percentage amounts)

2009 (1)

2008 (1)

2007

Total revenue
Other information (US$ millions)

Total revenue
Net interest margin
Average loans and acceptances
Average deposits
AUA
AUM
Number of:
Branches
ATMs

1,880 $

1,246 $

1,156

1,612
3.57%

1,221
3.62%

1,059
3.56%
$ 30,000 $ 24,100 $ 17,800
17,700
–
–

24,100
9,300
3,300

30,300
7,100
3,500

563
816

566
815

394
473

(1)

RBTT reports on a one-month lag. For 2008, our results included RBTT results from
June 16 to September 30.

RBC Dexia IS

RBC Dexia IS, of which we have a 50% ownership interest, offers
global custody, fund and pension administration, securities lending,
shareholder services, analytics and other related services to institu-
tional investors.

client assets, reflecting capital depreciation. These factors were
partially offset by the impact of the weaker Canadian dollar relative to
the Euro.

Assets under administration decreased 4%, largely reflecting

RBC Dexia IS, with offices in 16 countries on four continents,

capital depreciation.

competes against the world’s largest global custodians and, in
certain markets, against select local financial institutions providing
investor services. Although competition continues to be intense, RBC
Dexia IS ranks among the top 10 global custodians and consistently
achieves top quartile standing in leading industry surveys.

Financial performance
Total revenue decreased $145 million, or 17%, compared to last year,
mainly due to lower transaction volumes and reduced fee-based

Selected highlights

Table 25

(C$ millions)
Total revenue
Other information

AUA (1)

2009

710 $

2008

855 $

2007
759

2,484,400

2,585,000

2,713,100

(1)

Represents the total AUA of the joint venture, of which we have a 50% ownership
interest, reported on a one-month lag.

Capital Markets

Capital Markets comprises our global wholesale banking businesses
providing corporate, public sector and institutional clients with a wide
range of products and services. In North America we offer a full suite
of products and service capabilities and have long-standing and deep
relationships with our clients. Internationally, we have a select but
diversified set of capabilities, which includes fixed income, equity,
foreign exchange, structured products, and investment banking. This
segment comprises Capital Markets Sales and Trading and Corporate
and Investment Banking. Our competitive environment is discussed
below in each business.

Year in review
• We acted as global coordinator in a US$4.0 billion equity

offering which was the largest bought deal ever globally, the
largest equity offering for a gold producer and the largest equity
offering ever completed by a Canadian company.

• We continued to take advantage of market opportunities by
attracting top talent and building teams in our U.S. and
European operations, further expanding key businesses and
establishing new client relationships. As a result of investments
in infrastructure and talent we have increased our market share
across several businesses in the U.S., including building a
significant U.S. dollar fixed income and currencies presence.
• We are the only Canadian bank currently designated as a primary
dealer in the U.S. which gives us increased access to clients,

greater information and market insight and
demonstrates our ongoing commitment to our U.S. fixed income
trading business.

• We continue to be Canada’s leading global investment bank,
and were again named Dealmaker of the Year in Canada
(Financial Post); Best Investment Bank in Canada winning all
three categories – debt, equity, and M&A (Euromoney); and a
leader in Canadian equity underwriting and corporate debt
financing (Bloomberg/Thomson Reuters). We were also
recognized as the Best Overall Credit House in Europe (Credit
Magazine’s 2009 European Credit Awards), recognizing the
success of our credit trading businesses.

Economic and market review
Improvements in global capital markets and easing of credit markets
during the latter half of 2009 resulted in lower total market
environment-related net losses for 2009 in Capital Markets. Many of
our trading businesses benefitted from favourable market
opportunities, wider bid/ask spreads, the lower interest rate
environment, increased client activity and narrowing credit spreads.
However, trading results moderated as market conditions stabilized in
the latter part of 2009. Traditional investment banking activities
increased in 2009 from the prior year mainly in the latter half of the
year and largely in Canada. For further details on our general economic
review, refer to the 2009 Economic and market review section.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

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
ROE
RORC

Selected average balance sheet information

Total assets
Trading securities
Loans and acceptances
Deposits
Attributed capital
Risk capital
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 26

2007

623
3,766
4,389
(22)
2,769
1,642
1,292

26.6%
32.5%

2008

1,527
2,408
3,935
183
2,121
1,631
1,170

20.5%
24.5%

$ 340,300
140,200
38,300
132,600
5,600
4,700

$ 311,200
152,900
29,000
125,700
4,800
3,900

3,296

3,339

1.30%
.48%

.06%
(.08)%

2009

3,399
3,524
6,923
702
3,628
2,593
1,768

$
$

21.0%
24.3%

347,900
121,100
39,500
108,100
8,100
7,000

3,097

2.32%
1.78%

Impact of US$ and British pound translation on selected items (1)

2009 vs. 2008

Increased (decreased) total revenue
Increased (decreased) non-interest expense
Increased (decreased) net income

Percentage change in average US$ equivalent of C$1.00
Percentage change in average British pound equivalent of C$1.00

166
130
19

(11)%
10%

(1)

Taxable equivalent basis. The teb adjustment for 2009 was $366 million (2008 – $410 million, 2007 – $332 million). For further discussion, refer to the How we measure and report our
business segments section.

Revenue by business line (C$ millions)

Revenue by geography (C$ millions)

7,000

5,600

4,200

2,800

1,400

Capital Markets
Sales and Trading

Corporate and
Investment Banking

7,000

5,600

4,200

2,800

1,400

2007

2008

2009

2007

2008

2009

Other
International

U.S.

Canada

Financial performance
2009 vs. 2008
Net Income increased $598 million or 51% from a year ago, primarily
due to stronger trading revenue. Improved results in certain of our
corporate and investment banking businesses, and decreased total
market environment-related net losses also contributed to the
increase. These factors were partially offset by higher variable
compensation and PCL, and the reduction of the Enron-related
litigation provision of $542 million ($252 million after-tax and related
compensation adjustments) in the prior year. A higher effective tax
rate also unfavourably impacted net income.

Total revenue increased $3 billion or 76%, mainly reflecting

stronger trading revenue, which included decreased market
environment-related losses on HFT instruments. These factors were
partially offset by losses on the fair value adjustment of certain RBC
debt designated as HFT and losses on credit default swaps used to
economically hedge the corporate lending portfolio as compared to
gains in the prior year. Refer to the Market environment impacts
section for further information.

PCL increased $519 million reflecting a number of impaired
loans in our corporate lending portfolio related to specific clients
specializing in non-bank financial services, financing products and
technology & media sectors. For further details refer to the Credit
quality performance section.

Non-interest expense increased $1.5 billion largely due to
increased variable compensation driven by higher trading results and
the impact of the weaker Canadian dollar relative to the U.S. dollar.
Last year, the reduction of the Enron-related litigation provision
favourably impacted non-interest expense.

2008 vs. 2007
Net income decreased $122 million, or 9%, compared to 2007 largely
due to significantly higher total market environment-related net
losses, weak equity and debt origination activities and higher PCL.
The decrease in net income was partially offset by higher trading
results in certain businesses and lower non-interest expenses.

Total revenue decreased $454 million, or 10%, primarily due to

significantly higher market environment-related losses on HFT
instruments and weak equity and debt origination activities. The
impact of the stronger Canadian dollar relative to the U.S. dollar and
British pound also contributed to the decrease. These items were
partially offset by higher trading results, higher gains on credit
derivative contracts recorded at fair value used to economically hedge
our corporate lending portfolio and gains on fair value adjustments on
certain RBC debt designated as HFT.

PCL of $183 million compared to a recovery of $22 million in

2007 due to a few impaired specific corporate loans.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Non-interest expense decreased $648 million, or 23%, mainly

due to the reduction of the Enron-related litigation provision and
lower variable compensation mostly attributable to market
environment-related losses on HFT instruments and the impact of a
stronger Canadian dollar relative to the U.S. dollar and British pound.
These factors were partially offset by higher infrastructure invest-
ments in certain businesses and sundry losses.

Outlook and priorities
Increases in equity and debt origination and M&A fees in the near-
term are likely as market and economic conditions are expected to
improve. We anticipate that most of our trading businesses will
perform at a more moderate level in 2010 due to expected lower
market volatility, narrower bid/ask and credit spreads, the potential
easing of government liquidity programs, increased competition and
rising interest rates. Our lending businesses will likely be impacted by
narrower credit spreads affecting revenue, while lower PCL is antici-
pated resulting from projected improved economic conditions in the
near-term. Our trading revenue may be impacted by changes to the
regulatory environment in which we operate due to higher capital
requirements and new leverage requirements. We expect significantly
lower total market environment-related net losses as markets are
expected to continue to stabilize in the near-term. For further details

Business line review

Capital Markets Sales and Trading

Capital Markets Sales and Trading comprises our trading and
distribution operations largely related to fixed income, foreign
exchange, equities and derivative products for institutional and
corporate clients and our proprietary trading operations.

Our Capital Markets Sales and Trading businesses compete with

global and regional investment banks. We have taken advantage of
market opportunities resulting from the market disruption as a
number of competitors have exited or have significantly reduced their
investments related to these areas.

Financial performance
Capital Markets Sales and Trading revenue increased $3.4 billion
from a year ago largely reflecting stronger trading revenue, which
included a decrease in market environment-related losses on HFT
instruments and gains on credit valuation adjustments on certain
derivative contracts as compared to losses in the prior year. Strong
performances in our U.S.-based equity and global fixed income and
money markets businesses contributed to the increase in trading
revenue. These factors were partially offset by losses on fair value
adjustments on certain RBC debt designated as HFT, resulting from
the narrowing of our credit spreads as compared to gains in the prior
year.

Corporate and Investment Banking

Corporate and Investment Banking comprises our investment
banking, debt and equity origination, advisory services, corporate
lending, private equity, and client securitization businesses. It also
includes our global credit business, which oversees the management
of our lending portfolios and global financial institutions business.
Our Research group offers economic and securities research to
institutional and retail clients globally.

Our Corporate and Investment Banking businesses primarily

compete with global investment banks, commercial banks and
boutique firms. We have an established reputation as a premier
Canadian investment bank with top-tier market share in virtually all
lines of wholesale business in Canada.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

on our general economic outlook, refer to the 2010 Economic and
market outlook section.

Key strategic priorities for 2010
•
• We intend to be a top-tier provider of both client and trading

To remain the undisputed leader in Canada.

•

focused products and services in the U.S., which includes
increases in origination activities and expansion of our client
base in our investment banking businesses and further
expansion of our fixed income trading businesses by leveraging
our designation as a primary dealer.
Continue to grow our businesses in Europe and Asia by
leveraging our strength in fixed income and other trading
products. Our investment banking businesses will remain
focused on expanding our share of energy and mining clients.
Further invest in our commodities businesses to establish a
leading energy trading and marketing platform in North America
and Europe by leveraging our existing expertise in this sector.
• We will continue to manage our balance sheet to position assets
for the highest return, maintain a diverse portfolio of businesses
and manage market and credit risk within established enterprise
constraints. We remain committed to prudent cost management
while making investments in our risk and control infrastructure.

•

Selected highlights

Table 27

(C$ millions)

Total revenue
Other information
Average assets
FTE

2009

5,247

2008

2007

1,824

2,453

315,700
1,493

309,700
1,595

282,900
1,655

Total revenue (C$ millions)

Total revenue

5,500

4,400

3,300

2,200

1,100

2007

2008

2009

Financial performance
Corporate and Investment Banking revenue decreased $435 million
as compared to the prior year.

Gross underwriting and advisory fees revenue increased $139

million primarily due to improved equity origination activity largely in
Canada and higher debt origination activities mainly in the U.S.
resulting from improved global equity markets and easing of credit
markets, during the latter half of 2009. These increases were partially
offset by lower M&A fees, largely reflecting a strong fourth quarter
performance in the prior year. However, M&A fees increased
throughout 2009, largely resulting from improved market conditions.
Other revenue decreased by $574 million largely reflecting losses

on credit default swaps recorded at fair value used to economically
hedge the corporate loan portfolio, compared to gains recognized in
the prior year. These factors were partially offset by higher revenue
from our client securitization and core lending businesses.

Selected highlights

(C$ millions)

Total revenue
Other information

Gross underwriting and

advisory fees
Other revenue (1)
Average assets
FTE

2009

2008

2007

$ 1,676

$ 2,111

$ 1,936

789
887
32,200
1,604

650
1,461
30,600
1,701

949
987
28,300
1,684

(1)

Other includes revenue associated with our core lending portfolio and syndicated
finance, private equity distributions and gains/losses on private equity investments.

Corporate Support

Table 28

Gross underwriting and advisory fees and Other revenue (C$ millions)

Other

Gross underwriting
and advisory fees

2,200

1,760

1,320

880

440

2007

2008

2009

Corporate Support comprises Operations, Technology and Functions.
Our Operations and Technology teams provide the operational and
technological foundation required to effectively deliver products and
services to our clients, while Functions includes our corporate
treasury, finance, human resources, risk management, internal audit
and other functional groups. The associated costs are largely
allocated to the business segments, although certain activities
related to monitoring and oversight of the enterprise reside within
this segment.

Reported results for Corporate Support mainly reflect activities

that are undertaken for the enterprise, and which are not allocated to
the business segments. For further details, refer to the How we
measure and report our business segments section.

Due to the nature of activities and consolidated adjustments
reported in this segment, we believe that a year-over-year analysis 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 (2)
Non-interest expense

Net loss before income taxes and non-controlling interest in subsidiaries (1)
Net (loss) income

Securitization

Total securitizations sold and outstanding (3)
New securitization activity in the year (4)

Other information

Number of employees (full-time equivalent)

$
$

Table 29

2008

(995)
358
(637)
47
(18)
(666)
(178)

$
$

2007

(732)
377
(355)
(85)
36
(306)
209

2009

(924)
832
(92)
456
34
(582)
(206)

$
$

32,685
18,689

$ 19,316
6,482

$ 17,889
4,264

20,876

20,794

20,349

(1)

(2)

(3)
(4)

Taxable equivalent basis. For further discussion, refer to the How we measure and report our business segments section. These amounts included the elimination of the adjustments related
to the gross-up of income from Canadian taxable corporate dividends recorded in Capital Markets of $366 million in 2009 (2008 – $410 million, 2007 – $332 million).
PCL in Corporate Support comprises the general provision and an adjustment related to PCL on securitized credit card loans managed by Canadian Banking. For further information, refer to
the How we measure and report our business segments section.
Total securitizations sold and outstanding comprises credit card loans and residential mortgages.
New securitization activity comprises Canadian residential mortgages and credit card loans securitized and sold in the year. For further details, refer to Note 5 to our Consolidated Financial
Statements. This amount does not include Canadian residential mortgage and commercial mortgage securitization activity of Capital Markets.

2009
Net loss of $206 million included a general provision for credit losses
of $589 million ($391 million after-tax), losses on certain AFS
securities of $419 million ($390 million of market environment-
related losses), including a loss of $144 million ($99 million after-tax)
in the latter part of the year on certain Canadian bank common
shares. Losses on fair value adjustments of $217 million ($151
million after-tax) on certain RBC debt designated as HFT, reflecting the
tightening of our credit spreads also contributed to the loss. These
factors were partially offset by securitization gains inclusive of new
and re-investment related activity, net of economic hedging activities,
totaling $918 million ($630 million after-tax), mainly due to a higher
than historical level of securitization activity from our participation in
government-sponsored funding programs. For further details on the
general provision, refer to the Credit quality performance section.

2008
Net loss of $178 million included market environment-related losses
of $268 million ($210 million after-tax) on certain AFS securities and
$129 million ($87 million after-tax) on certain HFT securities. The net
loss also reflected an increase in the general allowance of $145
million ($98 million after-tax) 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 fair value adjustments on certain RBC debt designated as
HFT of $190 million ($129 million after-tax), reflecting the widening of
our credit spreads, gains related to the change in fair value of certain
derivatives used to economically hedge our funding activities and
gains related to securitization activity.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

2007
Net income of $209 million 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
certain derivatives that did not qualify for hedge accounting and
higher capital taxes that were not allocated to the business
segments.

Results by geographic segment (1)

Table 30

(C$ millions)

Net interest income
Non-interest income

Total revenue
Provision for (recovery of)

credit losses
Insurance PBCAE
Non-interest expense
Goodwill impairment charge
Income taxes and non-
controlling interest

2009

2008

2007

Canada

U.S.

Other
International

Total

Canada

U.S.

Other
International

Total

Canada

U.S.

Other
International

$ 7,828 $ 2,134 $

9,464

5,565

1,544 $ 11,506 $ 6,929 $ 1,132 $
2,571

17,600

8,220

2,521

987 $ 9,048 $ 6,402 $

412 $

888 $

1,793

12,534

8,638

4,322

1,800

Total

7,702
14,760

$17,292 $ 7,699 $

4,115 $ 29,106 $ 15,149 $ 3,653 $

2,780 $ 21,582 $ 15,040 $ 4,734 $

2,688 $ 22,462

1,479
2,100
7,632
–

1,821
1,571
4,572
1,000

113
938
2,354
–

3,413
4,609
14,558
1,000

924
922
7,490

643
30
2,991

28
679
1,870

1,595
1,631
12,351

696
1,230
7,409

90
474
3,405

5
469
1,659

791
2,173
12,473

1,799

(133)

1,668

1,826

(163)

(213)

1,450

1,788

(13)

(242)

1,533

Net income

$ 4,282 $ (1,132) $

708 $ 3,858 $ 3,987 $

152 $

416 $ 4,555 $ 3,917 $

778 $

797 $

5,492

(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. For further details, refer to Note 28 to our Consolidated Financial Statements.

2009 vs. 2008
Net income in Canada was $4,282 million, up $295 million, or 7%,
compared to the prior year. The increase primarily reflected higher net
securitization gains, strong volume growth and cost management in
our banking-related businesses, and higher trading revenue, which
was partially offset by higher related variable compensation.
Improved equity origination activity also contributed to the increase.
These factors were partially offset by higher PCL and losses on fair
value adjustments on certain RBC debt designated as HFT, compared
to gains in the prior year. Spread compression in our banking-related
and certain wealth management businesses and higher losses on our
AFS securities also partly offset the increase in net income.

U.S. net loss of $1,132 million compares to net income of
$152 million last year, primarily reflecting the goodwill impairment
charge, higher PCL and the prior year reduction of the Enron-related
litigation provision. The impact of the weaker Canadian dollar relative
to the U.S. dollar, losses on credit default swaps and spread
compression also contributed to the decrease. These factors were
partly offset by higher trading revenue, which was partially offset by
higher related variable compensation, lower market environment-
related losses on our HFT and AFS instruments, higher transaction
volumes and improved debt origination activity.

Other International net income was $708 million, up

$292 million, or 70%, mainly reflecting lower market environment-
related losses on our HFT and AFS instruments, and higher trading
revenue, which was partially offset by higher related variable
compensation. A full year of results from RBTT, growth in our
European life and other life retrocession businesses, and the

continued expansion of our U.K. annuity reinsurance business also
contributed to the increase. These factors were partly offset by losses
on credit default swaps and losses on fair value adjustments on
certain RBC debt designated as HFT.

2008 vs. 2007
Net income in Canada was $3,987 million, up $70 million, or 2%,
from 2007. The increase primarily reflected higher gains on credit
valuation adjustments on certain derivative contracts, solid volume
growth and cost management in our banking business, and higher
trading revenue in certain businesses. These factors were partially
offset by the prior year Visa Inc. restructuring gain, 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%,

largely reflecting significantly higher market environment-related
losses and PCL, lower equity and debt origination activities, and the
impact of the stronger Canadian dollar relative to the U.S. dollar.
These factors were partially offset by the reduction of the Enron-
related litigation provision, lower variable compensation and higher
trading revenue in certain businesses, and gains on fair value
adjustments on certain RBC debt designated as HFT.

Other International net income of $416 million was down
$381 million, mainly reflecting market environment-related losses.
The decrease was partially offset by higher trading revenue in certain
businesses, gains on fair value adjustments on certain RBC debt
designated as HFT, the inclusion of our RBTT acquisition, and
business growth at RBC Dexia IS.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Financial condition

Condensed balance sheets (1), (2)

Table 31

As at October 31 (C$ millions)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Assets purchased under reverse
repurchase agreements and
securities borrowed

Loans (net of allowances for loan losses)
Other – Derivatives
– Other

2009

2008

8,353 $
8,923
186,272

11,086
20,041
171,134

41,580
280,963
92,173
36,725

44,818
289,540
136,134
51,106
654,989 $ 723,859

Total assets
Liabilities and shareholders’ equity
Deposits
Other – Derivatives
– Other

398,304 $ 438,575
128,705
114,039
8,131
1,400
2,371
693,221
30,638
654,989 $ 723,859
Foreign currency denominated assets and liabilities are translated to Canadian dollars.
Refer to Note 1 to our Consolidated Financial Statements.
Refer to Table 1 for period-end Canadian/U.S. dollar spot exchange rates.

Subordinated debentures
Trust capital securities
Non-controlling interest in subsidiaries
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity $
(1)

84,390
125,462
6,461
1,395
2,071
618,083
36,906

(2)

2009 vs. 2008
Total assets were down $69 billion, or 10%, from a year ago, with
approximately half of the decrease due to the impact of the stronger
Canadian dollar on the translation of mainly U.S. dollar-denominated
assets. The decrease in the fair value of derivatives also contributed
to the decrease.

Interest-bearing deposits with banks decreased $11 billion,

largely reflecting significantly lower levels of interbank lending as a
result of economic and market conditions.

Securities were up $15 billion, or 9%, resulting from increased

positions for government debt instruments, and our recent desig-
nation as a primary dealer in the U.S. These factors were partially
offset by the impact of the stronger Canadian dollar on the translation
of mainly U.S. dollar-denominated assets.

Loans decreased $9 billion, or 3%, from a year ago, mainly due

to the stronger Canadian dollar on the translation of mainly U.S.
dollar denominated assets. In addition, strong growth in Canadian

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,
capital and/or funding management purposes which benefit us and
our clients. These include transactions with special-purpose entities
(SPEs) and may include issuance of guarantees and give rise to,
among other risks, varying degrees of market, credit, liquidity and
funding risk, which are discussed in the Risk, capital and liquidity
management section.

SPEs are typically created for a single, discrete purpose, have a

limited life and serve to legally isolate the financial assets held by the
SPE from the selling organization. They are not operating entities and
usually have no employees. SPEs may be variable interest entities
(VIEs) as defined by CICA Accounting Guideline 15, Consolidation of
Variable Interest Entities (AcG-15). Refer to the Critical accounting
policies and estimates section and Notes 1, 6 and 31 to our 2009
Annual Consolidated Financial Statements for our consolidation
policy and 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). Pursuant to CICA
Accounting Guideline 12, Transfers of Receivables (AcG-12),

home equity loans was offset by increased securitization activity as
well as a decline in wholesale loans resulting from reduced utilization
of lending facilities by our clients.

Derivatives were down $44 billion, or 32%, from the prior year,

mainly attributable to the lower fair value of derivative-related assets.
This reduction was primarily a result of the impact of the weakening
U.S. dollar, both on U.S. dollar-denominated assets and on foreign
exchange contract positions where we were long on the U.S. dollar. A
strategic reduction in positions and the impact of the tightening of
credit spreads on credit protection bought also contributed to the
decrease.

Other assets were down $14 billion, or 28%, mainly due to the

reclassification in the current year of certain broker-dealer receivables
which are offset in wholesale loans, lower customers’ liability under
acceptances and the goodwill impairment charge in the year.

Total liabilities were down $75 billion, or 11%, from a year ago,
with approximately half of the decrease attributable to the impact of
the stronger Canadian dollar on the translation of mainly U.S. dollar-
denominated liabilities.

Deposits decreased $40 billion, or 9%, largely due to lower

business and government deposits as a result of lower funding
requirements, the stronger Canadian dollar and decreases in personal
term deposits resulting from the historically low interest rate
environment. These factors were partially offset by the increase in
personal demand deposits due to strong demand for our high yield
savings products.

Derivatives liabilities decreased $44 billion, or 34% from the
prior year, mainly attributable to lower fair value of derivative-related
liabilities. This reduction was primarily a result of the impact of the
weakening U.S. dollar, both on U.S. dollar-denominated liabilities
and on foreign exchange contract positions where we were short on
the U.S. dollar. A strategic reduction in positions and the impact of
the tightening of credit spreads on credit protection sold also
contributed to the decrease.

Other liabilities increased $11 billion or 10%, mainly resulting

from an increase in obligations related to securities sold short as well
as an increase in repurchase agreements due to increased volume
from our recent designation as a primary dealer in the U.S., offset by a
reduction in acceptances.

Shareholders’ equity increased $6 billion, or 20%, from the prior
year, largely reflecting the issuance of common and preferred shares,
a reduction in net unrealized losses on our AFS portfolio and
earnings, net of dividends.

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
Reputation Risk Oversight Committee; this committee is described in
the Risk, capital and liquidity management section.

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. In
addition, we also participate in bond securitization activities primarily
to diversify our funding sources. Gains and losses on securitizations
are included in Non-interest income. Refer to Note 1 to our 2009
Annual Consolidated Financial Statements for our accounting policy
for securitizations, and to Note 5 for a description of our securitization
activities by major product types.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Our financial asset securitizations

Table 32

As at October 31 (C$ millions)

2009

2008

Outstanding securitized assets

Credit cards
Commercial and residential mortgages
Bond participation certificates

Total

Retained interests

Residential mortgages

Mortgage-backed securities

retained (1)

Retained rights to future excess

interest
Credit cards

Asset-backed securities purchased (2)
Retained rights to future excess

interest

Subordinated loan receivables

Commercial mortgages

Asset-backed securities purchased (2)

Bond participation certificates retained

Total

3,870 $

39,796
1,105
44,771 $

4,120
24,386
1,243

29,749

8,920 $

12,342

1,497

981

33
5

55
11,493 $

699

954

26
8

14,123

(1)

(2)

All residential mortgages securitized are Canadian mortgages and are government
guaranteed.
Securities purchased during the securitization process.

Securitization activities during 2009
During the year, we securitized $26.7 billion of residential mortgages,
of which $16.6 billion were sold and the remaining $10.1 billion
(notional value) were retained. The increase in 2009 reflects that in
addition to our regular participation in the traditional Canada
Mortgage Bond Program, we sold Canadian government insured
residential mortgage backed securities (RMBS) into the Government
of Canada auction program, known as the Insured Mortgage Purchase
Program. We also securitized and sold $15 million of bond partic-

Variable interest entities

ipation certificates. Refer to Note 5 to our 2009 Annual 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: RBC Capital Trust (Trust), RBC Capital Trust II (Trust II) and
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, 2009 and October 31, 2008, we held residual interests of
$1 million in each of Trust II and Trust III. We had loan receivables of
$3 million (2008 – $3 million) and $30 million (2008 – $30 million)
from Trust II and Trust III, respectively, and reported the senior
deposit notes of $900 million and $999.8 million (2008 – $900
million and $999.8 million) that we issued to Trust II and Trust III,
respectively, in our deposit liabilities. Under certain circumstances,
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 2009 Annual Consolidated Financial Statements.

Interest expenses on the senior deposit notes issued to Trust II
and Trust III amounted to $52 million and $47 million, respectively
(2008 – $52 million and $47 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 2009 Annual Consolidated Financial
Statements.

Special purpose entities
The following table provides information on our VIEs in addition to the
disclosures and detailed description of VIEs provided in Notes 1, 6
and 31 to our 2009 Annual Consolidated Financial Statements.

Total assets by credit ratings (3)

Total assets by average maturities

Total assets by geographic
location of borrowers

2009

Table 33

2008

As at October 31
(C$ millions)
Unconsolidated VIEs in

which we have
significant variable
interests:
Multi-seller

conduits (5)
Structured finance

VIEs

Credit investment
product VIEs

Third-party conduits
Investment funds
Other

Consolidated VIEs:

Structured finance

VIEs

Investment funds
Compensation
vehicles

Credit investment
product VIEs

Other

Total
assets (1)

Maximum
exposure
(1), (2)

Investment
grade (4)

Non-
investment
grade (4)

Not
rated

Under 1
year

1-5
years

Over 5
years

Not
applicable

Canada

Other
International

U.S.

Total
assets (1)

Maximum
exposure
(1), (2)

$ 26,181 $ 26,550

$ 26,001 $

180 $

–

$ 13,515 $ 10,775 $

1,891 $

9,613

2,527

5,885

–

3,728

930
575
84
340

505
250
28
103
$ 37,723 $ 29,963

$ 2,620
588

–
3
$ 3,275

294
575
–
–

$ 32,755 $

2,561 $
–

–

–
–
2,561 $

471
–
–
–

165
–
84
340
651 $ 4,317

–
575
–
–

–

–
–
–
–

9,612

930
–
–
29

$ 14,091 $ 10,775 $ 12,462 $

59 $
–

–

–
–
59 $

–
588

–
3
655

– $
–

–

–
–
– $

– $
–

–

–
–
– $

2,620 $
–

–

–
3
2,623 $

–

–
–
84
311
395

–
588

–
–
652

$ 6,097 $ 18,426 $

1,658

$ 42,698 $ 43,448

–

9,613

–

10,904

3,927

–
575
–
32

930
–
2
272

$ 6,704 $ 29,243 $

–
–
82
36
1,776

2,649
734
816
155

1,281
386
184
63
$ 57,956 $ 49,289

– $

202

2,620 $
189

–

–
–
266 $

–
3
2,812 $

–
197

–

–
–
197

$ 2,491
1,268

196
113
$ 4,144

(1)
(2)

(3)

(4)

(5)

Total assets and maximum exposure to loss correspond to disclosures provided in Note 6 to our 2009 Annual Consolidated Financial Statements.
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 maximum
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.
The risk rating distribution of assets within the VIEs is indicative of the credit quality of the collateral underlying those assets. Certain assets, such as derivatives, mutual fund or hedge fund
units and personal loans, or underlying collateral are not rated in the categories disclosed in the table.
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.
Represents multi-seller conduits administered by us.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Over 84% of assets in unconsolidated VIEs in which we have
significant variable interests and over 77% of assets in consolidated
VIEs were rated A or above. These assets are primarily originated in
the U.S. with varying maturities. For multi-seller conduits and
unconsolidated structured finance VIEs, over 95% and 61%,
respectively, of assets were rated A or above.

Securitization of client financial assets
We administer 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. The conduits
offer us a favourable revenue, risk-adjusted return and cross-selling
opportunities. 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
commercial paper (ABCP) on an unleveraged basis. One percent
(2008 – less than 1%) of outstanding securitized assets comprised
U.S. Alt-A or subprime mortgages and the securitized assets do not
contain commercial mortgage loans.

We provide services such as transaction structuring, admin-
istration, backstop liquidity facilities and partial credit enhancements
to the multi-seller conduits. Fee revenue for all such services has
increased significantly since the prior year, $271 million during 2009
as compared to $160 million during 2008, due to increases in
transaction pricing which more than offset the volume reduction
during the year. These amounts are reported in Non-interest income.
Commitments under the backstop liquidity and credit enhancement
facilities are factored into our risk adjusted asset calculation and
therefore impact our regulatory capital requirements. We do not
maintain any ownership or retained interests in these multi-seller
conduits and have no rights to, or control of, their assets.

Our total commitment to the conduits in the form of backstop

liquidity and credit enhancement facilities is shown below. The total
committed amount of these facilities exceeds the total amount of the
maximum assets that may have to be purchased by the conduits
under the purchase agreements. As a result, 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 backstop liquidity and credit enhancement facilities are
explained in Notes 6 and 31 to our 2009 Annual Consolidated
Financial Statements.

Liquidity and credit enhancement facilities

Table 34

2009

2008

As at October 31 (C$ millions)
Backstop liquidity facilities
Credit enhancement facilities
Total

Notional of
committed
amounts (1)
$ 26,669
2,667
$ 29,336

Allocable
notional
amounts
$ 22,200
2,667
$ 24,867

Outstanding
loans (2)
$ 1,683
–
$ 1,683

(1)
(2)

Based on total committed financing limit.
Net of allowance for loan losses and write-offs.

Total maximum
exposure to
loss
23,883
2,667
26,550

Notional of
committed
amounts (1)
$ 43,452
4,486
$ 47,938

Allocable
notional
amounts
$ 37,080
4,486
$ 41,566

Outstanding
loans (2)
$ 1,882
–
$ 1,882

Total maximum
exposure
to loss
38,962
4,486
43,448

Maximum exposure to loss by client asset type

Table 35

As at October 31 ($ millions)
Outstanding securitized assets

Credit cards
Auto loans and leases
Student loans
Trade receivables
Asset-backed securities
Equipment receivables
Truck loans and leases
Electricity market receivables
Corporate loans receivables
Insurance premiums
Residential mortgages
Consumer loans
Dealer floor plan receivables

Total

Canadian equivalent

2009

2008

(US$)

(C$)

Total (C$)

(US$)

(C$)

Total (C$)

9,180 $ 1,494 $ 11,426 $ 12,281 $
2,611
2,358
1,464
2,087
596
290
–
206
–
–
–
–

1,494 $ 16,286
9,517
5,390
4,420
–
5,048
2,302
2,778
–
1,975
1,535
283
–
306
306
333
–
460
203
110
110
1,351
–
581
187
$ 18,792 $ 6,219 $ 26,550 $ 26,501 $ 11,527 $ 43,448
$ 20,331 $ 6,219 $ 26,550 $ 31,921 $ 11,527 $ 43,448

5,312
2,551
2,451
2,258
1,631
314
255
223
66
63
–
–

2,488
–
867
–
986
–
255
–
66
63
–
–

3,426
3,670
2,280
2,306
365
235
–
276
213
–
1,122
327

During the past year, we have continued to focus on selective
origination resulting in a reduction in our maximum exposure to loss
and concentrations while at the same time increasing pricing and first
loss protection. The maximum assets that may have to be purchased
by the conduits under purchase commitments outstanding as of
October 31, 2009 were $26.1 billion (2008 – $42.7 billion). The
changes from year to year are as follows: U.S. dollar assets decreased
by U.S. $7.5 billion from the prior year, mainly in the Credit cards,
Student loans and Consumer loans asset classes; Canadian dollar
assets decreased $5.2 billion from the prior year, mainly in the Auto
loans and leases, Trade receivables and Equipment receivables asset
classes. Of the total purchase commitments outstanding, the multi-
seller conduits have purchased financial assets totaling $18.9 billion
as at October 31, 2009 (2008 – $33.6 billion). As 76.7% of the assets
of the multi-seller conduits are U.S. denominated assets, our total
maximum exposure to loss reported in Table 35 is impacted by
changes to the Canadian and U.S. exchange rate. Applying the

exchange rate as at October 31, 2008, our maximum exposure to loss
would have decreased by approximately 33% to $29 billion from
October 31, 2008 to October 31, 2009, rather than the 39% decrease
highlighted above.

As of August 31, 2009, the weighted averaged first loss credit

protection provided by the sellers of the financial assets was 41% of
total assets, providing a coverage multiple of 8.3 times the weighted
average annual expected loss rate on the client asset portfolio of
4.9%. Our fee structure also reduces our risk exposure on the
portfolio. For 93% of the securitized assets as at October 31, 2009
(2008 – 90%), 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. Furthermore, an unrelated third party
(expected loss investor) agreed to absorb credit losses, up to a

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

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.

Multiple independent debt rating agencies review all of the
transactions in the multi-seller conduits. Transactions financed in our
U.S. multi-seller conduits are reviewed by three rating agencies
Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and
Fitch Ratings (Fitch). Transactions in our Canadian multi-seller
conduits are also reviewed by Dominion Bond Rating Services (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.

Of total ABCP issued by the multi-seller conduits of $18.9 billion

(2008 – $33.6 billion), 70% (2008 – 74%) is generally rated within
the top ratings category of those rating agencies that rate the ABCP;
the remaining amount is rated in the second highest ratings category
of those agencies. The weighted average maturities (U.S. conduits
45.3 and 37.9 days and Canadian conduits 31.3 and 29.4 days as at
October 31, 2009 and October 31, 2008, respectively) remain longer
than historical averages, providing well balanced maturity profiles
and assisting in mitigating funding risks associated with market
disruptions. We sometimes purchase the ABCP issued by the multi-
seller conduits in our capacity as a placement agent in order to
facilitate overall program liquidity. As at October 31, 2009, the fair
value of our inventory was $3.7 million (2008 – $598 million),
classified as Securities – Trading. Inventory continues to remain
below historical levels.

The U.S. multi-seller conduits include $2.4 billion of asset-

backed securities. There are no asset-backed securities in the
Canadian multi-seller conduits. In 2008 and 2009, certain U.S. multi-
seller conduits drew down some of our backstop liquidity facilities to
fund a portion of the asset-backed securities. These loans, net of
write-offs and allowances, amounted to $1.7 billion (2008 – $1.9
billion), and are included in Loans – Wholesale. Of the $1.7 billion,
$65 million (2008 – $203 million) and a related $2 million of
allowance for loan losses (2008 – $65 million), pertain to a single
asset-backed collateralized debt obligation which is classified as
impaired. In 2009, we wrote off $126 million (2008 – $nil) against the
allowance for loan losses. All other asset-backed securities remain
performing.

Creation of credit investment products
We use SPEs to generally transform credit derivatives into cash
instruments, to distribute credit risk and to create customized credit
products to meet the needs of investors with specific requirements.
These SPEs issue funded and unfunded notes. In some instances, we
invest in these notes. The funded notes may be rated by external
rating agencies, as well as listed on a stock exchange. While the
majority of the funded notes are expected to be sold on a “buy and
hold” basis, we may occasionally act as market maker. For
information on unfunded notes, refer to Notes 6 and 31 to our 2009
Annual Consolidated Financial Statements.

As with all our derivatives, the derivatives with these SPEs are
carried at fair value in derivative-related assets and liabilities. Our
exposure to these SPEs has decreased from the prior year due to
certain entities winding down. The assets in these SPEs amounted to
$2.9 billion as at October 31, 2009 (2008 – $5.3 billion), of which
$nil were consolidated as at October 31, 2009 (2008 – $.2 billion). As
at October 31, 2009, our investments in the funded notes, the
derivative-related receivables, and the notional amounts of the
unfunded notes related to the unconsolidated SPEs were $18 million
(2008 – $34 million), $317 million (2008 – $599 million) and $170
million (2008 – $648 million), respectively.

Structured finance
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. As at October 31, 2009,
the total assets of the unconsolidated ARS VIEs in which we have
significant investments and the fair value of these significant
investments were $4.7 billion (2008 – $4.9 billion) and $1.3 billion
(2008 – $2.0 billion), respectively. As at October 31, 2009,
approximately 89% of these investments were AAA rated. Interest
income from the ARS investments, which is reported in Net-interest
income, amounted to $77.5 million during the year (2008 – $93
million, 2007 – $2 million).

We also sell ARS into Tender Option Bond (ARS TOB) programs.
We are the remarketing agent for the floating-rate certificates issued
by the ARS TOB programs and we provide liquidity facilities and
letters of credit to each of the ARS TOB programs. The liquidity
facilities and letters of credit are included in our disclosure on
guarantees in Note 25 to our 2009 Annual Consolidated Financial
Statements. As at October 31, 2009, the total assets of
unconsolidated ARS TOB programs were $791 million (2008 – $1.4
billion). We did not hold any floating-rate certificates as market maker
for the ARS TOB programs as at October 31, 2009 or October 31,
2008. 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 (2008 –
$3 million, 2007 – $nil).

In 2008, we also 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. As at October 31, 2009, total assets of this entity and
our maximum exposure to loss were $4.2 billion (2008 – $4.7 billion)
and $449 million (2008 – $500 million), respectively. Fee revenue
from this entity, resulting from the credit facility, administrative
services and guarantees that we provide to the entity, as well as our
role as remarketing agent for the ARS held by the entity, amounted to
$3.7 million during the year (2008 – $4.0 million, 2007 – $.3 million).
This amount is reported in Non-interest income. The interest income
from the loan and the credit facility, which is reported in Net interest
income, totalled $7.2 million for the year (2008 – $6.7 million,
2007 – $1.1 million).

Investment funds
We enter into fee-based equity derivative transactions with
investment funds. These transactions provide their investors with the
desired exposure. We hedge our exposure from these derivatives by
investing in other funds. Due to higher redemptions during the year,
the total assets held in the unconsolidated funds where we have
significant exposure decreased by $732 million to $84 million as at
October 31, 2009. We have also chosen to reduce our interest to
certain funds during the year. As a result, our total exposure, which is
primarily related to the investments in the funds, decreased by $156
million to $28 million as at October 31, 2009.

Trusts, mutual and pooled funds
Our joint venture, RBC Dexia IS, offers global custody, fund and
pension administration, shareholder services, foreign exchange,
securities lending, analytics and other related services to institutional
investors. Where RBC Dexia IS acts as trustee, it has a fiduciary
responsibility to act in the best interests of the beneficiaries of the
trusts. 50% of the fees earned by RBC Dexia IS are included in our
revenue, representing our share of interest in the joint venture. Refer
to Note 9 to our 2009 Annual 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.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Guarantees, retail and commercial commitments
We issue guarantee products, as described in Note 25 to our 2009
Annual Consolidated Financial Statements, in return for fees which
are recorded in Non-interest income. Our maximum potential amount
of future payments in relation to our guarantee products as at
October 31, 2009, amounted to $89 billion (2008 – $137 billion). In
addition, as at October 31, 2009, RBC Dexia IS securities lending
indemnifications totalled $34.7 billion (2008 – $45.7 billion); we are
exposed to 50% of this amount. The maximum potential amount of
future payments represents the maximum risk of loss if there was a
total default by the guaranteed parties, without consideration of
possible recoveries under recourse provisions, insurance policies or
collateral held or pledged. As at October 31, 2009, we had $22.6
billion (2008 – $37.9 billion) in backstop liquidity facilities related to
ABCP programs, of which 98% (2008 – 98%) was committed to
RBC-administered multi-seller conduits.

We also provide commitments to our clients to help them meet
their financing needs. These guarantees and commitments exposed

us to liquidity and funding risks. The following is a summary of our
off-balance sheet commitments. Refer to Note 25 to our 2009 Annual
Consolidated Financial Statements for details regarding our
guarantees and commitments.

Retail and commercial commitments (1)

Table 36

(C$ millions)

Documentary and

commercial letters of
credit

Commitments to extend
credit and liquidity
facilities

Uncommitted amounts (2)

Within
1 year

1 to 3
years

Over 3 to 5
years

Over 5
years

Total

481 $

– $

481

10,531
–

61,528
181,172

$ 11,012 $ 242,700 $

5,217
–
5,217 $

4,188
–

81,464
181,172
4,188 $ 263,117

(1)
(2)

Based on remaining term to maturity.
Uncommitted amounts represent amounts for which we retain the option to extend
credit to a borrower.

Risk, capital and liquidity management

Overview

Risk environment
Our business activities expose us to a wide variety of risks in virtually
all aspects of our operations. Our ability to manage these risks is a
key competency within the organization, and is supported by a strong
risk culture and an effective risk management approach.

We manage our risks by seeking to ensure that business activ-

ities and transactions provide an appropriate balance of return for the
risk assumed and remain within our Risk Appetite, which is collec-
tively managed throughout the organization, through adherence to
our Enterprise Risk Management Framework.

The global economy remained in recession early in 2009.
However, during the latter part of 2009, the pace of economic decline
slowed largely reflecting stabilizing financial market and economic
conditions. Credit risk has increased while credit quality deteriorated
from the prior year consistent with the global economic cycle. The
extent of credit deterioration throughout 2010 will be driven by
economic conditions and will continue to impact our consolidated
results as credit losses generally come off the peak one year after the
trough of the economic cycle.

Global capital markets remained under pressure and exhibited

significant volatility during early 2009. The total market environment-
related net losses continued into 2009 at a similar pace to the end of
2008, though moderating in the latter part of the year, as global
capital markets improved and volatility moderated due to increasing
signs of stabilization in capital markets. However, there is still
significant risk as the sustainability of this trend remains uncertain.

We continued to take steps to mitigate the impact of the current

risk environment on our risk profile and enhanced our capital and
liquidity positions through additional capital issuances and
participating in certain securitization activities throughout 2009.
During the year, as a result of current economic and market
conditions, we evaluated potential stress events to ensure that we are
well positioned to manage through these conditions. Also as a result
of the previous market disruption global regulators have committed
to strengthening capital and liquidity requirements which may likely
lead to higher capital levels.

Risk Appetite

Our Risk Appetite is the amount and type of risk we are willing to
accept in the pursuit of our business objectives. Our Risk Appetite
Framework provides a structured approach to:

Risk Capacity

Regulatory
Constraints

Risk Appetite

Self-Imposed Constraints
and Drivers

Risk Limits and
Tolerances

Risk Profile

Define our Risk Capacity by
identifying regulatory constraints
that restrict our ability to accept risk.

Establish and regularly confirm our
Risk Appetite, defined by Self-
Imposed Constraints and Drivers
in which we have chosen to limit
or otherwise influence the amount
of risk undertaken. They include:

• maintaining an “AA” rating or

better
ensuring capital adequacy

•
• maintaining low exposure to

“stress events”

• maintaining stability of earnings
ensuring sound management of
•
liquidity and funding risk

• meeting regulatory requirements

and expectations, and

• maintaining a Risk Profile that is

no riskier than that of our average
peer.

Translate our Risk Appetite into
Risk Limits and Tolerances that
guide businesses in their risk
taking activities.

Regularly measure and evaluate
our Risk Profile against Risk Limits
and Tolerances ensuring
appropriate action is taken in
advance of Risk Profile surpassing
Risk Appetite.

Our Risk Appetite Framework is consistent with current industry best
practices and regulatory expectations. Going forward, it will be
adapted and applied at the business segment, line of business and
legal entity levels. It will evolve as regulators and markets continue to
focus on management’s review and discussion of Risk Appetite.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Risk management principles
The following principles guide our enterprise-wide management of risk:

Effective balancing of risk and reward by aligning risk appetite
with business strategy, diversifying risk, pricing appropriately
for risk, mitigating risk through preventive and detective
controls and transferring risk to third parties.

Shared responsibility for risk management as business
segments are responsible for active management of their risks,
with direction and oversight provided by Group Risk
Management and other corporate support groups.

Business decisions are based on an understanding of risk as
we perform rigorous assessment of risks in relationships,
products, transactions and other business activities.

Avoid activities that are not consistent with our Values, Code
of Conduct or Policies, which contributes to the protection of
our reputation.

Proper focus on clients reduces our risks by knowing our
clients and ensuring that the services we provide are suitable
for and understood by our clients.

Use of judgment and common sense in order to manage risk
throughout the organization.

Risk governance
Our overall risk governance structure shown below illustrates the
roles and responsibilities of the various stakeholders in our enter-
prise risk management program. Our risk governance structure is
reviewed regularly against best practices as set out in industry and
regulatory guidance. Over the past year, enhancements made to our
governance structure included a newly established oversight
committee for investment portfolios, confirmation of the role of the
Human Resources Committee of the Board of Directors in providing
oversight of our compensation systems, and the introduction of more
formalized mechanisms via which risk and governance issues can be
escalated by legal entity boards and committees to senior
management and the Board of Directors as necessary. A further
enhancement included the establishment of a new compensation risk
management oversight committee to formalize processes for
governance, oversight and management of compensation programs.

wnership – Monitoring – Escalation – Oversight

Canadian
Banking

Board of
Directors

CR&RPC & Audit
& HRC & CG&PPC

Group Executive

Group Risk Committee

–

Chief Risk Officer + Group Head Strategy,
Treasury and Corporate Services

GRM + Global Compliance + Corporate Treasury

–

t
i

Risk Committees

Business Segments

Insurance

International
Banking

Capital
Markets

Wealth
Management

Corporate Support

–

i
l
i
t

The components of our Risk Governance are as follows:

Board of Directors
•

Provides oversight and carries out its risk management
mandate primarily through its Committees, including Conduct
Review and Risk Policy Committee, Audit Committee, Corporate
Governance and Public Policy Committee and Human
Resources Committee.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

•

•
•

•

Conduct Review and Risk Policy Committee (CR&RPC)
•
•

Approves the risk appetite of the organization.
Approves risk management frameworks, principles and policies
recommended by Group Executive.
Reviews the effectiveness of our stress testing program.
Reviews comprehensive reporting on risk profile measured
against approved risk appetite.
Reviews significant exposures to single name credits.

•
•

•

Audit Committee
•

Reviews and approves our internal capital adequacy
assessment process (ICAAP).
Ensures policies related to liquidity, funding and capital
management, are in place, regularly reviewed and approved.

Reviews adequacy and effectiveness of internal controls.
Provides oversight over integrity of our financial statements.

Human Resources Committee (HRC)
•
•

Responsible jointly with the CR&RPC for our Code of Conduct.
Actively oversees the design and operation of our
compensation systems.

Corporate Governance and Public Policy Committee (CG&PPC)
•

Reviews policies and programs related to our image and
reputation.
Ensures appropriate processes are in place for communicating
to clients, employees, shareholders, the investment community
and the public.

•

Group Executive (GE)
•

Senior management team led by the President and Chief
Executive Officer (CEO).
Responsible for our strategy and its execution by establishing
the “tone at the top”.
GE’s risk oversight role is executed primarily through the
mandate of the Group Risk Committee and its supporting risk
committees.

Group Risk Committee (GRC)
•

Responsible for ensuring that our overall risk profile is
consistent with strategic objectives and that there is an
ongoing, appropriate and effective risk management process to
identify, measure and manage our risks on an aggregate basis.

Chief Risk Officer (CRO) and Group Risk Management (GRM)
•
•
•

Primarily responsible for the promotion of our risk culture.
Defines and communicates our risk appetite.
Maintains our enterprise-wide program for identifying,
measuring, controlling and reporting the significant risks that
face the organization.
Establishes risk controls and limits to ensure appropriate risk
diversification and optimizations of risk/return on both a
portfolio and transaction basis.
Monitors risk levels including our risk profile against our risk
appetite and reports to senior management and the Board of
Directors on major risks being assumed by or facing the
organization.

•

Chief Compliance Officer and Global Compliance
•

Responsible for providing active oversight of compliance
policies and processes designed to mitigate and manage
regulatory risk and compliance in all jurisdictions where we
conduct business.

Corporate Treasury
•

Manages and oversees our capital position, structural interest
rate risk, liquidity and funding risks.

Supporting risk committees
•

Asset and Liability Committee (ALCO) – reviews, recommends
and approves broad policy frameworks and regular compliance
reports related to capital management, liquidity and funding,
and structural interest rate risk management.

•

Capital Markets Risk Committee – oversees the management
of risks across Capital Markets and is the primary risk approval
authority for Capital Markets products and initiatives, policies,
and limits.
Investment Portfolio Committee – provides oversight of our
investment portfolios outside of Capital Markets, approves
investment policies and framework.
Policy Review Committee (PRC) – the senior risk approval
authority for policies, products and services.
Reputation Risk Oversight Committee – provides oversight
through the review of structured transactions, complex credits,
products, business activities or client relationships with
potentially significant reputational, legal, regulatory,
accounting or tax risks.
Compensation Risk Management Oversight Committee –
reviews and monitors compensation program design and
payouts of major incentive programs to ensure alignment with
the principles for sound compensation practices issued by the
Financial Stability Board. This committee is comprised of the
CRO, Chief Human Resources Officer, and the Chief Admin-
istrative Officer and Chief Financial Officer.
Ethics and Compliance Committee – directly supports our
management of regulatory, compliance and reputation risks.
Local/Legal Entity Governance and Oversight – ensures
controls are in place at legal entity boards to escalate risk and
governance issues to senior management. For example, U.S.
Corporate Governance Committee escalates risk and
governance issues affecting our U.S. operations to senior
management.

Business segments
•

Responsible for specific risks, alignment of business strategy
with risk appetite, and 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 difficult
to quantify, we place greater emphasis on qualitative risk factors and
assessment of activities to gauge the overall level of risk 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.

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. For further information, refer
to the Capital management section.

Sensitivity analysis and stress testing
Sensitivity analysis and stress testing are risk measurement
techniques that help us ensure that risks we take remain within our
risk appetite and our level of capital remains adequate.

Sensitivity analysis involves varying a single factor (e.g., a model

input or specific assumption) to assess the impact on various risk
measures.

Stress testing generally involves consideration of the simulta-
neous movements in a number of risk factors. It is used to measure
the level of potential unexpected losses for Credit, Market (both
trading and non-trading), Operational and Liquidity and Funding risks
under potential adverse conditions. Stress testing plays an important

role in supporting overall capital management and adequacy
assessment processes. Our enterprise-wide stress testing program
utilizes stress scenarios featuring a range of severities based on
unlikely but possible adverse market and economic events. These
common stress scenarios are evaluated across the organization, and
results are 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.
Macroeconomic scenarios evaluated this year include prolonged
recession, real estate weakness, persistent deflation and a crisis in
emerging markets. The current economic environment is favourable to
these projected scenarios.

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
underpinnings of the model, the processing component, the inter-
pretation of the output and the strategic use of the model results. Our
model validation 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 respon-
sible 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, Risk Specific, Capital, Liquidity and
Compliance Management Frameworks. 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 organized

into the following five levels:

Level 1: Enterprise Risk Management Framework is the foundation
for all matters related to risk management within the organization.

Level 2: Risk-Specific Frameworks elaborate on each specific risk
type and the mechanisms for identifying, measuring, monitoring and
reporting of risks, key policies and responsibilities.

Level 3: Enterprise Risk Policies articulate minimum requirements
within which businesses and employees must operate.

Level 4: “Multi-risk” Enterprise Risk Policies govern activities such
as product risk review and approval, stress testing, risk approval
authorities and model risk management.

Level 5: Business Segments Specific Policies & Procedures are
established to manage the risks that are unique to their operations.

Risk review and approval processes
Risk review and approval processes are established by GRM based on
the nature, size, and complexity of risk involved. In general, the risk
review and approval process involves a formal review and approval by
an individual, group or committee that is independent from the
originator. The approval responsibilities are governed by delegated
authorities based on the following categories: transactions, struc-
tured credit, projects and initiatives, and new products and services.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Authorities and limits
The CR&RPC delegates Credit, Market, and Insurance risk authorities
to the President and CEO and CRO. These delegated authorities allow
these officers to approve single name, geographic (country and
region) and industry sector exposures within defined parameters,
establish underwriting and inventory limits for trading and investment
banking activities and set market risk restrictions.

Reporting
Enterprise level risk monitoring and reporting are critical components
of our enterprise risk management program and support the ability of
senior management and the Board of Directors to effectively perform
their risk management and oversight responsibilities. On a quarterly
basis, the Enterprise Risk Report which includes a range of risks
facing the organization along with analysis of related issues and
trends is provided to senior management and the Board of Directors.
Annually, the CRO provides the Board of Directors with a review of the
risks facing the organization including a comprehensive review of our
current and projected risk profile relative to our risk appetite and the
identification of emerging risks. In addition to regular risk monitoring,
ad-hoc risk reporting is provided to senior management and the
Board of Directors as warranted for new or emerging risk issues or
significant changes in our level of risk.

Unique monitoring and reporting requirements are specified in

each risk-specific framework and include risk-specific limit usage
developed to align with governance best practices and relevant laws
and regulations.

The shaded text along with the tables specifically marked with an
asterisk(*) in the following sections of the MD&A represent our
disclosures on credit, market and liquidity and funding risks in
accordance with CICA Handbook Section 3862, Financial Instru-
ments – Disclosures, and includes discussion on how we measure
our risk and the objectives, policies and methodologies for
managing these risks. Therefore, these shaded text and tables
represent an integral part of our audited 2009 Annual Consolidated
Financial Statements for the years ended October 31, 2009 and
October 31, 2008.

Credit risk

Credit risk is the risk of loss associated with a counterparty’s
inability or unwillingness to fulfill its payment obligations and also
includes counterparty credit risk in our trading operations. Credit risk
may be direct (e.g. issuer, debtor, borrower or policyholder), or
indirect to a secondary obligor (e.g. guarantor, reinsurance),
off-balance sheet or contingent on the default of the primary party.

The majority of our businesses offer credit products and services

and these 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 reputa-
tion. All business activities that are not consistent with our Values,
Code of Conduct or policies are avoided.

•
•

•

We balance our risk and return by:
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.

Risk measurement
We quantify credit risk, at both the individual obligor and portfolio
levels to estimate expected credit losses and minimize unexpected
losses in order to limit earnings volatility.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

We employ different risk measurement processes for our
wholesale and retail credit 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. Credit
risk rating systems are designed to assess and quantify the risk
inherent in credit activities in an accurate and consistent manner.

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, the key parameters used to measure

•

our expected loss are the probability of default (PD), loss given default
(LGD) and exposure at default (EAD), which 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.
These parameters are determined based on historical
experience from internal credit risk rating systems in accordance
with supervisory standards, supplemented by benchmarking and
updated on a regular basis.

•

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 exposure. To determine the appropriate risk
weight, credit assessments by OSFI-recognized external credit rating
agencies of S&P, Moody’s, Fitch and DBRS are used. For rated
exposure primarily in sovereign and bank, we assign the
corresponding risk weight according to OSFI’s standard mapping.
For unrated exposure mainly in business and retail, we generally
apply OSFI prescribed risk weights in accordance with OSFI’s
standards and guidelines taking into consideration certain
exposure specific factors including counterparty type, exposure type
and credit risk mitigation technique employed.

Wholesale credit portfolio
The wholesale credit risk rating system is designed to measure and
identify the risk inherent in our lending credit activities along two
dimensions.

In the first dimension, each obligor is assigned a borrower risk

rating (BRR), reflecting an assessment of the credit quality of the
obligor. Each BRR has a PD assigned to it which 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 business conditions, troughs in the business cycle,
economic downturns or unexpected events that may occur. The
assignment of BRRs is based on the evaluation of obligors’ business
risk and financial risk based on fundamental credit analysis
supplemented by quantitative models.

Our rating system is largely consistent with that of external rating

agencies. The table below maps our 22-grade internal risk ratings
compared to ratings by external rating agencies.

Internal ratings map

Table 37

Ratings
1 to 4
5 to 7
8 to 10
11 to 13
14 to 16
17 to 20
21 to 22

Standard &
Poor’s (S&P)
AAA to AA-
A+ to A-
BBB+ to BBB-
BB+ to BB-
B+ to B-
CCC+ to CC
C to D

Moody’s Investor
Service (Moody’s)
Aaa to Aa3
A1 to A3
Baa1 to Baa3
Ba1 to Ba3
B1 to B3
Caa1 to Ca
C to Bankruptcy

Description

Investment Grade

Non-investment Grade

Impaired/Default

LGD rates are largely driven by factors such as seniority of debt,
collateral security, product 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.

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
and unexpected losses as well as economic and regulatory capital,
setting of risk limits, portfolio management and product pricing.

Retail credit portfolio
Credit scoring is the primary risk rating system for assessing obligor
and transaction risk for retail exposures. Credit scoring is employed
in the acquisition of new clients (acquisition scoring) and
management of existing clients (behavioural scoring).

Acquisition scoring models, which are used for underwriting
purposes, utilize established statistical methods of analyzing new
applicant characteristics and past performance to estimate future
credit performance. In model development, sources of data are used
and include information obtained from the client such as
employment status, data from our internal systems such as loan
information 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
borrowing trends, as well as the extent of our relationship with the
client. The behavioural risk score is dynamic and is generally updated
on a monthly basis to continually re-evaluate the risk. Characteristics
used in behavioural scoring models are based on information from
existing accounts and lending products for each client, and from
information obtained from external sources, such as credit bureaus.
For overall portfolio management, retail exposures are assessed

on a pooled basis, with each pool consisting of exposures with
similar homogeneous characteristics. We believe pooling allows for
more precise, accurate and consistent estimates of default and loss
characteristics at the pool level.

Criteria used to pool exposures for risk quantification include

behavioural score, product type (mortgage, credit cards, lines of
credit and instalment loans), collateral type (chattel, liquid assets
and real estate), the length of time that the account has been on our
books, and the delinquency status (performing, delinquent and
default) of the exposure. Regular monitoring and periodic adjust-
ments and alignments are conducted to ensure that this process
provides for a meaningful differentiation of risk. Migration between
the pools is considered when assessing credit quality.

The pools are also assessed based on PD, EAD and LGD which

considers borrower and transaction characteristics, including
behavioural credit score, product type and delinquency status. The
LGD is estimated based on transaction specific factors, including
product, loan to value 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 38

PD bands

0.0% - 1.0%

1.1% - 6.4%

6.5% - 99.99%

100.00%

Description

Low Risk

Medium Risk

High Risk

Impaired/Default

Validation
We ensure that our credit risk rating systems and methodologies are
subject to independent validation on a regular basis. This provides

support for assuring that our systems properly identify factors that
help differentiate risk, appropriately quantify risk, produce measures
of risk that respond to changes in the macroeconomic and credit
environments, and are consistent with regulatory requirements and
our ratings philosophy. Validation activities are performed
independently from the groups whose methodologies and processes
are subject to validation. Validation activities, results and
conclusions are also reviewed by Internal Audit Services on a regular
basis.

Risk control
The Board of Directors and the following committees are involved in
the management of credit risks: CR&RPC, GRC, PRC and Reputation
Risk Oversight Committee. Working in combination, these
committees approve credit risk limits and ensure that management
has in place frameworks, policies, processes and procedures to
manage credit risk. Reports are distributed to the Board of Directors,
GRC, and senior executives to keep them informed of our risk profile,
including trending information and significant credit risk issues and
shifts in exposures to ensure appropriate actions can be taken
where necessary. Our enterprise-wide credit risk policies, which are
developed, communicated and maintained by GRM, set out the
minimum requirements for the management of credit risk in a variety
of borrower, transactional and portfolio management contexts. Our
policies form an integral component of our Credit Risk Management
Framework.

These policies set out the minimum requirements for the

management of credit risk as follows:

Credit Risk Assessment
•
•
•

Mandatory use of credit risk rating and scoring systems.
Consistent credit risk assessment criteria.
Standard content requirements in credit application documents.

Credit Risk Mitigation
Structuring of transactions
•

Includes the use of guarantees, security, seniority and
covenants. 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
• We generally require obligors to pledge collateral as security

when we advance credit. Real estate, liquid assets, cash, bonds
and government securities are examples of the collateral
securities we accept. The extent of risk mitigation provided by
collateral depends on the amount, type and quality of the
collateral taken. Specific requirements related to collateral
valuation and management are documented in our credit risk
management policies.

Credit derivatives
•

Used as a tool to mitigate industry sector concentration and
single-name exposure. The counterparties that we transact with
are typically investment-grade banks and broker/dealers. 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 credit risk. For a more
detailed description of the types of credit derivatives we enter
into and how we manage related credit risk, refer to Note 7 to
our Consolidated Financial Statements.

Credit Risk Approval
•

Proposals for new and amended credit products and services
are comprehensively reviewed and approved under a risk
assessment framework and for those with significant risk
implications. Approval by the PRC is required.

Credit Portfolio Management
•

Limits are used to ensure: our portfolio is well diversified,
reduce concentration risk and remains within our risk appetite.
Our credit limits are established at the following levels: single-
name limits (notional and economic capital), underwriting risk

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

limits, geographic (country and region) limits, industry sector limits
(notional and economic capital), and product and portfolio limits.

Credit Risk Administration
Portfolio management
•
Collateral management
•
Management of delinquency and default
•
Credit risk data management
•

Gross credit risk exposure

Gross credit risk exposure is categorized into Lending-related and
other, and Trading-related. In the table below, Other exposure,
under Lending-related and other credit exposure, includes
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.

Repo-style transactions include repurchase and reverse
repurchase agreements and securities lending and borrowing
transactions. 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 (OTC),
the gross exposure amount represents the credit equivalent amount
after factoring in master netting agreements, which is defined by
OSFI as the replacement cost plus an add-on amount for potential
future credit exposure.

Our credit risk objectives, policies, and methodologies have not

changed materially from 2008.

Credit risk exposure by portfolio and sector*

Table 39

Lending-related and other

Trading-related

Lending-related and other

Trading-related

2009

2008

Loans and acceptances

Outstanding

Undrawn
commitments

Repo-style
transactions

Other

Over-the-
counter
derivatives (1)

Loans and acceptances

Total

exposure (2) Outstanding

Undrawn
commitments

Repo-style
transactions

Other

Over-the-
counter
derivatives (1)

Total
exposure (2)

As at October 31
(C$ millions)

Residential

mortgages (3) $ 122,130 $

11 $

– $

Personal
Credit cards
Small business (4)

71,542
8,701
2,851

51,132
20,113
2,382

47
–
48

Retail

$ 205,224 $

73,638 $

95 $

5,090 $
3,657
6,141
7,055

396 $

23 $

1,608
2,284
8,302

144
435
2,241

– $
–
–
–

– $

12
–
18

– $ 122,141 $ 122,991 $
–
–
–

122,721
28,814
5,281

60,727
8,933
2,804

2 $

– $

42,462
19,933
2,265

67
–
49

– $ 278,957 $ 195,455 $

64,662 $

116 $

8 $

248
234
1,411

5,517 $
5,669
9,094
19,027

5,305 $
3,999
7,389
8,146

409 $

18 $

1,856
2,085
8,371

137
396
2,443

– $
–
–
–

– $

20
–
1

– $ 122,993
103,256
–
28,866
–
5,118
–

– $ 260,233

54 $

507
502
1,801

5,786
6,519
10,372
20,762

3,541
830

6,738
453

6,569
89

49,837
–

7,771
15

74,456
1,387

8,788
1,152

5,212
523

4,589
101

49,463
7

18,241
122

86,293
1,905

3,972

2,307

1,774

1,275

340

543

21,049

2,853

1,259

2,562

2,730

293

–

198

335

6,817

5,033

2,177

323

3,929

3,947

1,206

542

320

25,481

22,978

3,406

1,428

768

6,353

3,206

3,026

296

–

306

962

7,839

6,726

397

28,216

490

7,018

4,413
22,572
2,779
2,516

1,791
4,962
2,145
763

419
6,884
20,937
37,316

–
9,835
2,830
63,514

459
6,686
8,178
27,678

7,082
50,939
36,869
131,787

4,239
25,623
2,496
5,284

2,026
569
6,357 10,100
2,548 10,749
4,308 57,793

–
1,661
2,784
61,675

865
10,710
17,824
34,171

7,699
54,451
36,401
163,231

87,951 $

38,607 $ 77,492 $ 126,048 $

54,309 $ 384,407 $ 107,585 $

43,510 $89,484 $ 115,687 $

86,952 $ 443,218

Total exposure

$ 293,175 $

112,245 $ 77,587 $ 126,048 $

54,309 $ 663,364 $ 303,040 $

108,172 $89,600 $ 115,687 $

86,952 $ 703,451

*
(1)
(2)
(3)
(4)

This table represents an integral part of our 2009 Annual Consolidated Financial Statements.
Credit equivalent amount after factoring in master netting agreements.
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.
Refer to Note 4 to our Consolidated Financial Statements for the definition of these terms.

2009 vs. 2008
Total gross credit risk exposure decreased $40 billion, or 6%, from
the prior year, largely reflecting decreases in our wholesale portfolio
generally across most exposure and sector types, which more than
offset the increase in the retail portfolio.

Retail exposure increased $19 billion, or 7%, mainly driven by
strong volume growth in our Canadian home equity loans partially
offset by increased securitization of Canadian residential mortgages.
The use of guarantees and collateral represents an integral part of our
credit risk mitigation in the retail portfolio as insured mortgages
account for approximately 24% of our residential mortgage portfolio
in 2009 as compared to 30% in 2008, largely related to the increased
securitization mentioned above. Secured personal lending represents
54% of personal loans outstanding in 2009 as compared to 50% in
2008, mainly due to the growth in Canadian home equity loans.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Wholesale exposure decreased $59 billion, or 13%, from the

prior year mainly reflecting general decreases across most exposure
and sector types. OTC derivatives exposure decreased $33 billion,
predominately in non-bank financial services, sovereign and bank
sectors. These decreases mainly reflected the impact of the
weakening of the U.S. dollar both on U.S. dollar-denominated
exposures and on foreign exchange contracts. A strategic reduction in
positions and the impact of the tightening of credit spreads on credit
protection bought also contributed to the decrease. Loans and
acceptances outstanding decreased $20 billion, mainly reflecting
reduced loan utilization rates across most sector groups, and to a
lesser extent, the impact of the stronger Canadian dollar relative to
the U.S. dollar, which drove broad-based decreases across most
sector groups.

The majority of our exposure was in Canada, followed by U.S.
and Other international. Our credit portfolio remained well diversified
across all geographic regions.

Business (4)
Agriculture
Automotive
Consumer goods
Energy
Non-bank

financial
services

Forest products
Industrial

products
Mining and
metals

Real estate and

Technology and

media

Transportation and
environment

Other

Sovereign (4)
Bank (4)

Wholesale

Loans and acceptances

Five-year trend
Total loans and acceptances have increased by $94 billion, or 47%,
across all geographic regions from 2005 to 2009.

Retail loans increased $65 billion, or 46%, largely reflecting
solid volume growth in Canada across all portfolios, partially offset by
securitization of Canadian residential mortgages and credit cards.
This growth reflected our continued focus on expanding our retail
portfolios in Canada and consumers capitalizing on the low interest
rate environment. U.S. and Other international retail portfolios have
increased since 2008, largely due to our acquisition of ANB and RBTT.
Wholesale loans and acceptances increased $29 billion, or 50%

since 2005. While there was growth generally across most sector
groups, the largest growth was in real estate and related, financing
products, other services, and transportation and environment. Our
exposures to real estate and related across all geographies and
financing products in the U.S. increased over the period, mainly
reflecting organic growth and acquisitions over the period.

The overall mix of the portfolio has not changed significantly

since 2005, as retail and wholesale loans comprised approximately
70% and 30% of total loans outstanding respectively, reflecting our
efforts to maintain a lower risk profile. The portfolio remained well
diversified with residential mortgages comprising 42%, wholesale
30%, personal 24%, credit cards 3% and small business 1% of total
loans outstanding.

Total loans and acceptances by credit portfolio (C$ billions)

350

280

210

140

2005 2006 2007

2008

2009

Wholesale

Credit cards

Small business
treated as retail

Personal

Residential
mortgages

2009 vs. 2008
Loans and acceptances decreased $10 billion, or 3%, from the prior
year, mainly reflecting decreases in our wholesale portfolio, partially
offset by solid retail growth in Canada.

Solid retail growth of $10 billion mainly reflected solid volume
growth in Canadian home equity loans, partially offset by increased
securitization of Canadian residential mortgages.

Wholesale loans and acceptances decreased by $20 billion,
mainly reflecting lower loan utilization and the stronger Canadian
dollar relative to the U.S. dollar. Overall wholesale loan utilization
decreased modestly to 40% from 43%. There were broad-based
decreases in most sector groups with the largest decreases in Non-
bank financial services, in the U.S. and Other international, largely in
the brokers and dealers and funds and trusts sectors. Our exposure to
bank, largely in Other International, decreased mainly reflecting lower
loan utilization as mentioned above. Mining and metals exposures in
Canada and Other international declined, mainly related to the base
metals and other mined commodities sectors. Our real estate and
related exposures decreased mainly in the U.S., as a result of the
general reduction in our residential builder finance portfolio.

Credit quality performance

Provision for credit losses

Five-year trend
The provision for credit losses is charged to income by an amount
necessary to bring the allowance for credit losses to a level
determined appropriate by management, as discussed in the Critical
accounting policies and estimates section and Note 1 to our
Consolidated Financial Statements. Beginning in 2006, specific
provisions began to increase and continued into 2009, largely
reflecting the impact of deterioration in the U.S. housing market and
related economic impacts and the impact of higher specific provi-
sions in our Canadian retail portfolio in 2008 and 2009, as compared
to the previously benign credit environment prior to 2007. The general
provision has increased since 2007, as a result of deterioration
across our credit portfolio due to the deteriorated global economic
conditions.

Loans and acceptances by portfolio and sector (1)

Table 40

Specific provision for credit losses (1) (C$ millions)

2,800

2,100

1,400

700

Specific PCL

PCL ratio (2)

1.20%

.90%

.60%

.30%

.00%

2005 2006 2007 2008 2009

(1)

(2)

For further information on reclassifications in 2009, refer to the CICA section 3855 –
reclassification of securities to loans section.
PCL ratio: Specific PCL as a percentage of average net loans and acceptances.

(C$ millions)

Residential mortgages
Personal
Credit cards
Small business

Retail

Business

Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation & environment
Other (2)
Sovereign
Bank
Wholesale
Total loans and acceptances
Total allowance for loan losses

Total loans and acceptances, net of

allowance for loan losses

$
$
$

2009

2008
122,130 $ 122,991
60,727
8,933
2,804
205,224 $ 195,455

71,542
8,701
2,851

5,090
3,657
6,141
7,055
3,541
830
3,972
1,774
21,049
2,562
4,413
22,572
2,779
2,516

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
87,951 $ 107,585
293,175 $ 303,040
(2,215)

(3,188) $

289,987 $ 300,825

(1)
(2)

Total loans and acceptances do not reflect the impact of credit risk mitigation.
2009 relates to Other services – $10 billion, Financing products – $5.7 billion, Holding
and investments – $3.9 billion, Health – $2.4 billion and Other – $.6 billion. Other in
2008 relates 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.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Provision for (recovery of) credit losses

(C$ millions, except percentage amounts )

Canadian Banking (1)
International Banking (1)
Capital Markets (1)
Corporate Support (1), (2)

Canada (3)

Residential mortgages
Personal
Credit cards
Small business

Retail
Wholesale

Specific PCL

United States (3)

Retail
Wholesale

Specific PCL

Other International (3)

Retail
Wholesale

Specific PCL

Total specific PCL

General provision (2)

Total PCL (3)

Table 41

2008

867
497
183
47

8
352
266
46

672
152

824

84
494

578

21
7

1,430

165

2009

1,275
980
702
456

18
467
393
55

933
436

1,369

267
1,096

1,363

31
61

2,824

589

3,413

1,595

(1)

(2)

(3)

Segments with significant total PCL have been presented in the table above. Effective
the fourth quarter of 2008, changes in Allowance for credit losses – general allowance
were included in Corporate Support results prospectively. For the nine months ended
July 31, 2008, the general provision was largely comprised of International Banking
($20 million).
PCL in Corporate Support is comprised of the general provision, an adjustment related
to PCL on securitized credit card loans managed by Canadian Banking and an amount
related to the reclassification of certain AFS securities to loans.
Geographic information is based on residence of borrower.

2009 vs. 2008
Total PCL of $3.4 billion increased $1.8 billion from a year ago, mainly
driven by increased specific PCL of $1.4 billion, as well as a higher
general provision.

Specific PCL in Canadian Banking increased $408 million or 47%,

mainly reflecting higher loss rates in credit cards and unsecured
personal portfolios and higher impaired loans in our business lending
portfolio primarily as a result of recessionary conditions.

Specific PCL in International Banking increased $503 million,
mainly attributable to U.S. banking reflecting impaired loans in our
commercial, residential builder finance, lot loan, home equity and
residential mortgage portfolios primarily as a result of deteriorated
economic and housing market conditions. In the latter half of the year,
asset quality started stabilizing, largely in our residential builder
finance portfolio, resulting from early signs of the U.S. economic
recovery and lower new impaired loans reflecting the general reduction
in this portfolio as compared to the first half of the year and the prior
year. The impact of the weaker Canadian dollar on the translation of
U.S. specific PCL, higher provisions of $59 million resulting from our
adoption of the amendments to CICA section 3855 as certain impaired
AFS securities were reclassified to loans, and the full year of results
from RBTT also contributed to the increase. For further details on the
reclassification, refer to the CICA section 3855 – reclassification of
securities to loans section.

Specific PCL in Capital Markets increased $519 million, due to a
number of impaired loans in our corporate lending portfolio related to
specific clients specializing in non-bank financial services, financing
products and technology & media sectors.

The general provision was up $424 million from the prior year

largely related to U.S. banking driven by deterioration in our
commercial portfolio and higher loss rates in our retail portfolio. To a
lesser extent, higher provisions related to our U.S. corporate lending
and Canadian unsecured retail and business lending portfolios, also
contributed to the increase. Refer to Table 70 for further details.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Gross impaired loans

Five-year trend
Since 2005, gross impaired loans have increased and continued
throughout 2009, largely reflecting the impact of deterioration in the
U.S. housing market and related global economic impact as
compared to the previously benign credit environment prior to 2007.
The increases in 2009 and 2008, as compared to prior years, mainly
reflects higher impaired loans in U.S. banking, and in our corporate
lending portfolio also contributed to the increase.

Gross impaired loans and allowance for credit losses (1) (C$ millions)

5,500

4,400

3,300

2,200

1,100

ACL

Gross impaired loans

GIL ratio (2)

2.00%

1.60%

1.20%

.80%

.40%

.00%

2005 2006 2007 2008 2009

(1)

(2)

For further information on reclassifications in 2009, refer to the CICA section 3855 –
reclassification of securities to loans section.
GIL ratio: GIL as a percentage of loans and acceptances.

Gross impaired loans

Table 42

(C$ millions, except percentage amounts)
Canadian Banking (1)
International Banking (1)
Capital Markets (1)
Corporate Support (1)
Canada
Retail
Wholesale
United States

Retail
Wholesale

Other International

Retail
Wholesale

Total GIL

2009
1,253
3,149
915
140

673
839

227
3,194

209
315
5,457

2008
811
1,612
499
–

428
529

133
1,526

167
140
2,923

(1)

Segments with significant GIL have been presented in the table above.

2009 vs. 2008
Total gross impaired loans (GIL) increased $2.5 billion from a year ago.

GIL in Canadian Banking increased $442 million or 55%, due to

higher impaired loans in our residential, business lending and
unsecured personal portfolios.

GIL in International Banking increased $1.5 billion, mainly
attributable to U.S. banking reflecting increased impaired loans of
$998 million resulting from our adoption of the amendments to CICA
section 3855, and our residential builder finance and commercial
portfolios. Higher GIL in our residential mortgage, home equity and lot
loan portfolios and Caribbean legacy and RBTT portfolios, also
contributed to the increase. These factors were partially offset by
write-offs and repayments in U.S. banking largely related to our
residential builder finance, retail and commercial portfolios.

GIL in Capital Markets increased $416 million, reflecting a number

of impaired loans in our corporate portfolio related to clients specializing
in non-bank financial services, real estate and related, other services
and bank sectors. These factors were partially offset by lower GIL in
financing products.

GIL in Corporate Support increased $140 million, reflecting our

adoption of the amendments to CICA section 3855.

Refer to Table 69 for further details.

Allowance for credit losses

Five-year trend
Specific and General allowances have increased since 2006 as a
result of the same conditions previously discussed.

Allowance for credit losses

Table 43

(C$ millions, except percentage amounts)

Canadian Banking
International Banking
Capital Markets
Corporate Support
Specific ACL
Canada
United States
Other International

Total specific ACL
General allowance

Retail
Wholesale

Total general allowance
Total ACL

2009
295
577
340
2,090

417
667
195
1,279

1,095
928
2,023
3,302

2008
207
375
186
1,531

257
396
114
767

798
734
1,532
2,299

2009 vs. 2008
Total allowance for credit losses (ACL) increased $1 billion, or 44%,
from a year ago, reflecting a $512 million increase in the specific
allowance reflecting the same factors as previously discussed, and
$491 million increase in the general allowance, mainly due to our
U.S. banking and, to a lesser extent, our U.S. corporate lending and
Canadian retail and business lending portfolios. Refer to Table 71 for
further details.

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
commodity prices, and credit spreads. We are exposed to market
risk in our trading activity and our asset/liability management
activities. The level to which we are exposed varies depending on
market conditions, expectations of future price and yield movements
and the composition of our trading portfolio.

Market risk increased as global capital markets volatility

increased from the prior year, particularly during the first half of
2009. However, this volatility dissipated throughout the remainder
of 2009. The higher volatility levels from the first half of 2009 were
fully incorporated into the historical data set used for the global
value-at-risk (VaR) scenario model during the year which resulted in
increased VaR levels from the previous year.

Trading market risk
Trading market risks associated with securities and related
derivatives trading activities are a result of market-making, propri-
etary, and sales and arbitrage activities in the interest rate, foreign
exchange, equity, commodities, and credit markets. GRM provides
independent oversight of trading market risk. Trading market risk
reflects the potential adverse impact on our earnings and economic
value and is comprised of the following components:
•

Interest rate risk arises from the changes in interest rates and is
composed of directional risk, yield curve risk, basis risk and
option risk. Interest rate risk also captures credit spread risk
arising from the changes in issuer spreads.
Foreign exchange rate risk arises from the change in currency
rates and precious metals price movements and volatilities. In
our proprietary positions, we are exposed to the spot, forward
and derivative markets.
Equity risk arises from the movements in individual equity
prices or movements in the level of stock market indices.
Commodities risk arises from commodities price movements
and volatilities.

•

Credit specific risk arises from the change in the
creditworthiness and default of issuers of our holdings in fixed
income products.
Market illiquidity risk arises from the inability to liquidate our
positions or acquire hedges to neutralize our trading positions.

We conduct trading activities over-the-counter and on exchanges in
the spot, forward, futures and options markets, and we offer
structured derivative transactions. 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. The breadth of our
trading activities is designed to diversify market risk to any particular
strategy, and to reduce trading revenue volatility.

Risk measurement
GRM employs risk measurement tools such as Value-at-Risk (VaR),
sensitivity analysis and stress testing to assess 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 requirements
calculated under an Internal Models Approach (VaR based), while
some structured credit derivatives, structured rate products,
mortgage-backed securities, and equity derivatives have capital
requirements calculated under the Standardized Approach prescribed
by OSFI. Also calculated under the Standardized Approach for credit
specific risk are a limited set of interest rate products. These products
and risks are not included in our 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 specific risk, exchange rates,
equity and commodity prices and highlight the benefit of
diversification within our trading portfolio. This is then quantified in
the diversification effect shown in our VaR table.

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. The historical scenarios used
to calculate VaR may not capture extreme market volatility. 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.

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
portfolios. Intra-day position changes account for most of the
difference between theoretical back-testing and actual profit and
loss. VaR models and market risk factors are independently reviewed
periodically to further ensure accuracy and reliability. In 2009, there
was 1 occurrence of a back-test loss exceeding total risk VaR. This

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

occurred during the period when markets were particularly volatile.
When the historical window used in the VaR calculation is less
volatile than current markets this can lead to back-testing breaches.
When these types of back-testing breaches occur, we frequently
update our scenarios to keep pace with market events.

Sensitivity analysis and stress testing
Sensitivity analysis is used to measure the impact of small changes in
individual risk factors such as interest rates and foreign exchange
rates and is designed to isolate and quantify exposure to the
underlying risk.

In order to address more extreme market events, stress testing is

used to measure and alert senior management to our exposure to
potential political, economic or other disruptive events. We run several
types of stress tests, including historical stress events such as the
1987 stock market crash, and the unprecedented market volatility in
2008 and early 2009, as well as hypothetical “what-if” stress events
that represent potential future events that are plausible but have a very
low probability of occurring. In light of the current market environment,
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. Our stress scenarios are reviewed and updated as
required to reflect relevant events and hypothetical situations. While
we endeavour to be conservative in our stress testing, there can be no
assurance that our stress testing assumptions will cover every market
scenario that may unfold.

Risk control
A comprehensive market risk framework governs trading-related risks
and activities and provides guidance to 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.
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. GRM – Market and Trading Credit Risk provides
independent oversight of trading market risk management activities
through establishing market risk policies and limits and developing,
vetting and maintaining our various quantitative techniques and
systems. Enterprise-wide reports are provided to the Chief Risk Officer
(CRO) and senior management to monitor compliance against VaR
and stress limits approved by the Board of Directors. Limits on
measures such as notional size, term and overall risk are monitored
at the trading desk and at the portfolio and business levels.

The following table shows our 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 VaR and the sum of the separate risk factor
VaRs.

VaR by major risk category*

Table 44

2009

For the year ended
October 31

2008
For the year ended
October 31

(C$ millions)

Oct. 31 Average

High

Low

Oct. 31 Average

High

Low

As at

Equity
Foreign exchange
Commodities
Interest rate
Credit specific
Diversification

9 $
4
2
48
16
(26)

10 $
4
1
49
11
(22)

21 $
13
4
69
17
(33)

53 $

70 $

6 $
2
–
20
7
(7)

26 $

8 $
8
1
34
8
(19)

13 $
3
2
26
7
(23)

28 $
9
6
44
11
(38)

6
1
–
17
4
(13)

40 $

28 $

50 $

This table represents an integral part of our 2009 Annual Consolidated Financial
Statements.

VaR

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

VaR by major risk category
Year ended October 31, 2009
(C$ millions)

-10

-20

-30

-40

-50

-60

-70

Nov-08

Feb-09

M ay-09

Aug-09

Oct-09

Daily interest rate VaR
Daily commodities VaR
Daily foreign exchange VaR

Daily equity VaR
Daily credit specific risk VaR

Trading revenue and VaR (1), (2) (C$ millions)

300

200

-20

-60

-100

-300

-500

-700

-730

N ov-2008

296

133

-121

-115

-359

Dec-2008

Jan-2009

Feb-2009

M ar-2009

Apr-2009

M ay-2009

Jun-2009

Jul-2009

Aug-2009

Sep-2009

Oct-2009

Daily Trading Revenue
Daily net trading revenue TEB, excluding VIEs and Accrual books

Trading VaR

(1)

(2)

Trading revenue on a taxable equivalent basis excluding revenue related to
consolidated VIEs.
Market losses below $2 million were not reflected on the above graph.

Trading revenue for the year ended October 31, 2009 (teb)

s
y
a
D

f
o
r
e
b
m
u
N
n

i
y
c
n
e
u
q
e
r
F

0
0
1
-

0
9
-

0
8
-

0
7
-

0
6
-

0
5
-

0
4
-

0
3
-

0
2
-

0 0
1
-

0
1

0
2

0
3

0
4

0
5

0
6

0
7

0
8

0
9

0
0
1
>

Daily net trading revenue (C$ millions), excluding VIEs

VaR
2009 vs. 2008
Average VaR for the year of $53 million was up compared to $28
million a year ago. This increase largely reflected the higher market
volatility in the interest rate and credit markets during 2009.

Trading revenue
2009 vs. 2008
During the year, we experienced 13 days of net trading losses
compared to 44 days in 2008. For the five net trading loss days in
early 2009, which exceeded VaR estimated for those respective days,
three of the largest net trading loss days were primarily due to market
environment-related losses. The remaining two net trading loss days
were largely attributable to the significant volatility in the equity and
credit 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 proactive hedging to achieve our target level.
The key sources of interest rate risk include exposures on the maturity
and re-pricing structures of certain bank loans, investments,
liabilities, derivatives, off-balance sheet items, products with

embedded options such as prepayment options and interest rate
caps or floors. For additional information regarding interest rate risk
and the use of derivatives in asset and liability management, refer to
the Off-balance sheet arrangements section and Notes 7 and 26 to
our Consolidated Financial Statements. We continually monitor the
effectiveness of our interest rate risk mitigation activity within
Corporate Treasury on a value and earnings basis.

Risk measurement
We continually seek opportunities to identify and adopt best practices
in instrument valuation, econometric modeling and hedging
techniques. Assessment of our practices range from the evaluation of
traditional asset/liability management processes to pro forma
application of recent developments in quantitative methods. Our risk
position is measured daily, weekly or monthly based on the size and
complexity of the portfolio. Measurement of risk is based on 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. The economic value of equity is equal to the net present
value of our assets, liabilities and off-balance sheet instruments.

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 process, the effectiveness of our
interest rate risk mitigation activity is assessed on a value and
earnings basis, and model assumptions are validated against actual
client behaviour.

Risk control

ALCO provides oversight over non-trading market risk limits, policies
developed by Corporate Treasury, and operating standards. Interest
rate risk reports are reviewed regularly by ALCO, GRC and the Board of
Directors. The structural interest rate risk policy defines the
management standards and acceptable limits within which risks to
net interest income over a 12-month horizon, and the economic value
of equity, are to be contained. These ranges are based on immediate
and sustained ±100 basis points (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.

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. Over the
course of 2009, our interest rate risk exposure was well within our
target level.

Market risk measures – Non-trading banking activities*

Table 45

(C$ millions)
Before-tax impact of:

100bp increase in rates
100bp decrease in rates

Before-tax impact of:

200bp increase in rates
200bp decrease in rates

2009

2008

2007

Economic value of equity risk

Net interest income risk

Canadian
dollar
impact

U.S.
dollar
impact (1)

Total

Canadian
dollar
impact

U.S.
dollar
impact (1)

Total

Economic
value of
equity risk

Net interest
income risk

Economic
value of
equity risk

Net interest
income risk

(256)
256

(513)
396

26
(42)

26
(73)

$(230)
214

336
(109)

3
(3)

$ 339
(112)

(508)
448

45
(90)

(440)
309

(487)
323

594
(149)

25
(20)

619
(169)

(1,050)
838

62
(279)

(930)
553

54
(111)

97
(231)

*
(1)

This table represents an integral part of our 2009 Annual Consolidated Financial Statements.
Represents the impact on the non-trading portfolios held in our U.S. banking operations.

Non-trading foreign exchange rate risk

Foreign exchange rate risk is the potential adverse impact on earnings
and economic value due to changes in foreign currency rates. Our
revenue, expenses and income denominated in currencies other than
the Canadian dollar are subject to fluctuations as a result of changes
in the value of the average Canadian dollar relative to the average
value of those currencies. 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. We are also exposed to the British pound
and the Euro due to our activities conducted internationally in these
currencies. A strengthening or weakening of the Canadian dollar
compared to the U.S. dollar, British Pound and the Euro could reduce
or increase, as applicable, the translated value of our foreign currency
denominated revenue, expenses and earnings and could have a
significant effect on our results of operations.

We are also exposed to foreign exchange rate risk arising from

our investments in foreign operations. For un-hedged equity
investments, when the Canadian dollar appreciates against other
currencies, the unrealized translation losses on net foreign invest-
ments decreases our shareholders’ equity through the cumulative
translation account and decreases the translated value of the risk-
adjusted assets of the foreign currency-denominated operations. The
reverse is true when the Canadian dollar depreciates against other
currencies. Consequently, we consider these impacts in selecting an

appropriate level of our investments in foreign operations to be
hedged.

Our overall market risk objectives, policies and methodologies

have not changed materially from 2008.

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.

Risk measurement
Operational risk is difficult to measure in a complete and precise
manner, 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. The two options available to us under Basel II are the Advanced
Measurement Approach (AMA) and the Standardized Approach. We
continued to adopt the Standardized Approach for operational risk.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

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.

Risk control
Operational risk is managed through our infrastructure, controls,
systems and people, complemented by central groups focusing on
enterprise-wide management of specific operational risks such as
fraud, privacy, outsourcing, and business disruption, as well as
people and systems risks.

Specific programs, policies, standards and methodologies have

been developed to support the management of Operational risk.
These programs are:

Risk and control assessment
Operational risks are identified and their potential impact assessed
through our integrated operational risk and control assessment and
monitoring program. Our operational risk framework is used to ensure
consistent identification and assessment of operational risks and the
controls used to manage them.

Operational event data collection and analysis
Operational risk events are reported in a central 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.
Events gathered and analyzed include losses, incidents with
non-monetary impacts and near-miss events. Analysis of operational
risk event data helps us to understand where and how our risks are
manifesting themselves, provides a historical perspective of our
operational risk experience and establishes a basis for measuring our
operational risk exposure.

Industry loss analysis
We review and analyze information on operational losses that have
occurred at other financial institutions, using published information and
information we acquire through our membership in the Operational
Riskdata eXchange Association, a private data-sharing consortium. Both
sources provide insights into the size and nature of potential exposures,
which enables us to benchmark our loss experience against those of our
peers to determine whether 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.

Key risk indicators
Business segments 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.

Capital management

Strong capital and liquidity positions facilitate opportunistic business
expansion and help maintain safety and soundness, particularly in
times of stress.

Risks, including credit, market and operational, influence overall

capital management, and liquidity and funding management. The
linkages between these risks and our stress absorption capability to
ensure safety and soundness of the organization are illustrated
below:

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Credit risk

Market risk
•Trading market risk
•Non-trading market risk

Operational risk

Other risks

Market perception

Capital management
Liquidity and funding management

Safety and soundness

Capital management framework
We actively manage our capital to maintain strong capital ratios and
high ratings while providing high returns to our shareholders. We
consider the requirements of regulators, rating agencies, depositors
and shareholders, our business plans, peer comparisons and our
internal capital ratio targets. Our goal is to optimize our capital usage
and structure, and provide support for our business segments and
clients and better returns for our shareholders, while protecting
depositors and senior creditors.

Our capital management framework provides the policies and
processes for defining, measuring, raising and investing all types of
capital in a co-ordinated and consistent manner. We manage and
monitor capital from several perspectives, including:
•

Regulatory capital: capital required for regulatory compliance
defined in accordance with OSFI criteria.
Economic capital: an internal assessment of the amount of
capital required to underpin our risks.
Subsidiary capital: the amount of capital invested in
subsidiaries.

•

Within our capital management framework, we have an internal
capital adequacy assessment process (ICAAP) that sets internal
capital targets and defines strategies for achieving those targets
consistent with our risk appetite, business plans and operating
environment.

As part of this process, we have implemented a program of
enterprise-wide stress testing to evaluate the income and capital
(economic and regulatory) impacts of several potential stress events.
This exercise involves various teams, including GRM, Corporate Treasury,
Finance and Economics. Results are a key input into our capital planning
process and are used in setting appropriate internal capital targets.

Basel II
With OSFI’s adoption of 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 in
accordance with prescribed measurement standards.

The top corporate entity to which Basel II applies at the

consolidated level is Royal Bank of Canada.

Under Basel II, banks select from among alternative approaches

to calculate their minimum regulatory capital required to underpin
credit, market and operational risks.

Effective November 1, 2007, we adopted the Basel II Advanced

Internal Ratings Based (AIRB) approach to calculate credit risk capital
for consolidated regulatory reporting purposes.

While the majority of our exposures are reported under the AIRB

Approach, certain portfolios considered non-material from a
consolidated perspective continue to use the Basel II Standardized
Approach for credit risk (for example, our Caribbean Banking
operations). In addition, the Standardized Approach will continue to
be used for specific portfolios until fiscal 2012 for RBC Bank (USA),
and RBC Dexia IS, of which we have a 50% ownership interest.

We continue to use the Standardized Approach for consolidated

regulatory reporting of capital for operational risk.

For consolidated regulatory reporting of market risk capital, we

use both Internal Model and Standardized Approaches.

Capital (1)

As at October 31 (C$ millions)

Tier 1 regulatory capital

Regulatory capital and capital ratios (1)

Table 46

As at October 31
(C$ millions; except percentage amounts)

2009

2008

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

31,774
34,881

25,031
30,710

$ 185,051
23,321
36,465

$ 229,537
17,220
31,822

$ 244,837

$ 278,579

13.0%
14.2%
16.3X

9.0%
11.0%
20.1X

(1)

Capital ratios for 2008 have been updated to reflect a restatement of retained earnings.
For more information, refer to the changes in accounting policies section.

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
capital comprises the highest quality capital and is a core measure of
a bank’s financial strength. Tier 1 capital consists of more permanent
components of capital, is free of mandatory fixed charges against
earnings and has a subordinate legal position to the rights of
depositors and other creditors of the financial institution. Tier 2
capital is composed of supplementary capital instruments that
contribute to the overall strength of a financial institution as a going
concern. Total capital is defined as the sum of Tier 1 and Tier 2
capital. The components of Tier 1 and Tier 2 capital are listed in
Table 47. For further details on the terms and conditions of the
various capital components, refer to the Selected share data section
and Notes 17 and 18 to our Consolidated Financial Statements.

Regulatory capital ratios are calculated by dividing Tier 1 and
Total capital by Risk-adjusted assets (RAA). OSFI formally establishes
risk-based capital targets for deposit-taking institutions in Canada.
These targets are currently a Tier 1 capital ratio greater than or equal to
7% and a Total capital ratio of greater than or equal to 10%. Canadian
banks are also 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.

Common shares
Contributed surplus
Retained earnings
Net after tax fair value losses arising from
changes in institutions’ own credit risk
Foreign currency translation adjustments
Net after tax unrealized holding loss on
available-for-sale equity securities

Non-cumulative preferred shares
Innovative capital instruments
Other non-controlling interests in subsidiaries
Goodwill
Substantial investments
Securitization-related deductions
Investment in insurance subsidiaries
Expected loss in excess of allowances – AIRB

Approach

Other

Total Tier 1 capital

Tier 2 regulatory capital

Table 47

2009

2008

$ 12,959
246
20,585

$ 10,266
242
19,816

(9)
(1,374)

(68)
4,811
3,991
353
(8,368)
(148)
(1,172)
(13)

(19)
–

(316)
(802)

(380)
2,657
3,857
357
(9,977)
(37)
(329)
–

(315)
(8)

$ 31,774

$ 25,031

Permanent subordinated debentures
Non-permanent subordinated debentures (2)
Innovative capital instruments (excess over 15%

878
5,583

900
7,223

of Tier 1)

Excess of non-cumulative preferred shares
Trust subordinated notes
General allowance
Substantial investments
Investment in insurance subsidiaries
Securitization-related deductions
Expected loss in excess of allowances – AIRB

Approach

Other

Total Tier 2 capital

Total regulatory capital

–
–
1,017
575
(147)
(3,628)
(1,150)

(20)
(1)

142
–
1,027
488
(277)
(3,198)
(305)

(315)
(6)

3,107

5,679

$ 34,881

$ 30,710

(1)

(2)

Opening retained earnings as at November 1, 2006 has been restated. Refer to Note 1 to
our Consolidated Financial Statements.
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.

Tier 1 capital ratio (1)

9.6%

9.4%

9.0%

13.0%

15%

12%

2005

2006

2007

2008

2009

Basel I

Basel II

(1)

Basel I and Basel II Tier 1 capital ratios are not directly comparable.

Our capital position strengthened in 2009 as we issued additional
regulatory capital for general business purposes and through internal
capital generation from earnings. The issuance proceeds supple-
mented our capital position and provided us flexibility to continue to
invest in our existing businesses. Our capital ratios remain well above
OSFI regulatory targets.

As at October 31, 2009, our Tier 1 capital ratio was 13.0% and

our Total capital ratio was 14.2%.

Our Tier 1 capital ratio was up 400 bps from a year ago, largely
due to the issuance of $4.8 billion of common and preferred shares,
lower RAA and internal capital generation, partially offset by higher
capital deductions.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Our Total capital ratio was up 320 bps, primarily due to the same

factors noted above, partially offset by the redemption and maturity
of certain subordinated debentures.

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.

As at October 31, 2009, our assets-to-capital multiple was 16.3

During the year, RAA decreased by $33.7 billion, primarily due to

times compared to 20.1 times a year ago. Our assets-to-capital
multiple remains below the maximum prescribed by OSFI.

Risk-adjusted assets (RAA)
Under Basel II, OSFI requires banks to meet minimum risk-based
capital requirements for exposures to credit risk, operational risk,

Risk-adjusted assets – Basel II

Average
of risk
weights
(2)

6%
20%
60%
9%
6%
27%

1%
32%
10%
22%
89%
17%
n.a.
61%
25%

Exposure (1)

$ 106,625
162,692
140,422
25,861
40,595
$ 476,195

$ 126,048
54,309
$ 180,357
$ 656,552
2,125
52,211
n.a.
35,686
$ 746,574

As at October 31 (C$ millions)

Credit risk

Lending-related and other
Residential mortgages
Other retail
Business
Sovereign
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
Securitization exposures
Regulatory scaling factor
Other assets

Total credit risk
Market risk

Interest rate
Equity
Foreign exchange
Commodities
Specific risk

Total market risk
Operational risk

Total risk-adjusted assets

$ 746,574

a decrease in wholesale credit exposures, refinements in our asset
risk classifications and the favourable impact of a stronger Canadian
dollar on the translation of our foreign currency denominated assets,
partially offset by corporate credit deterioration and higher capital
requirements for market and operational risks.

2009

Risk-adjusted assets

Table 48

2008

Standardized
approach

Advanced
approach

Other

Total

1,396
7,461
32,517
315
1,584
$ 43,273

289
1,941
$
2,230
$ 45,503
–
895
n.a.
n.a.
$ 46,398

4,194
381
449
427
6,813
$ 12,264
$ 36,465

$ 95,127

$ 4,954
25,360
51,567
1,957
791
$ 84,629

824
15,232
$ 16,056
$100,685
1,896
7,733
6,619
n.a.
$116,933

$ 3,942
1,037
21
3
6,054
$ 11,057
n.a.

$127,990

–

$21,720
$21,720

n.a.

$21,720

$ 6,350
32,821
84,084
2,272
2,375
$127,902

$ 1,113
17,173
$ 18,286
$146,188
1,896
8,628
6,619
21,720
$185,051

$ 8,136
1,418
470
430
12,867
$ 23,321
$ 36,465

$244,837

7,442
31,928
97,326
1,826
9,000
$ 147,522

3,115
25,896
$ 29,011
$ 176,533
2,826
7,294
7,491
35,393
$ 229,537

4,829
2,573
348
347
9,123
$ 17,220
$ 31,822

$ 278,579

(1)

(2)

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.

Selected capital management activity

Table 49

(C$ millions)

Tier 1
Common shares issued
General purpose
Dividend reinvestment plan (DRIP) (1)
Stock option exercised (2)

Preferred shares issued

Non-cumulative Series AX
Non-cumulative Series AV
Non-cumulative Series AT
Non-cumulative Series AR
Non-cumulative Series AP
Non-cumulative Series AN
Non-cumulative Series AL

Redemption of Innovative capital instruments
RBC Bank (USA)

Series A Capital Securities (US$94 million)
Triangle Capital Securities (US$20 million)

Tier 2
Redemption of subordinated debentures (3)

June 1, 2009
March 15, 2009 (US$125 million)
January 27, 2009

Issuance or
redemption
date

2009

Number of shares
(000s)

65,263
5,279
5,808

13,000
16,000
11,000
14,000
11,000
9,000
12,000

April 29, 2009
April 1, 2009
March 9, 2009
January 29, 2009
January 14, 2009
December 8, 2009
November 3, 2009

October 13, 2009
October 13, 2009

Amount

2,301
232
158

325
400
275
350
275
225
300

98
21

1,000
159
500

(1)

(2)

(3)

Effective May 1, 2009, with the first dividend payable on May 22, 2009, common shares were issued under the DRIP at a 3% discount from the average closing price of the five trading days
preceding the dividend payment date.
Amount included cash received for stock options exercised during the year, the fair value adjustment to stock options and the exercise of stock options from tandem stock appreciation rights
(SAR) awards and from renounced tandem SARS.
For further details, refer to Note 16 to our 2009 Annual Consolidated Financial Statements.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

During 2009, we did not repurchase any common shares under our
normal course issuer bid (NCIB), which expired on October 31, 2009.
Effective November 1, 2009, we renewed our NCIB to re-purchase up
to $20 million common shares and it will expire on October 31, 2010.
During 2009, we did not issue any shares from treasury under

our Umbrella Savings and Securities Plan, which includes our
employee savings and share ownership plans.

Dividends
Our common share dividend policy reflects our earnings outlook,
payout ratio objective and the need to maintain adequate levels of

capital to fund business opportunities. Our medium-term objective for
our common share dividend payout ratio is 40% to 50%. In 2009, the
dividend payout ratio was 78%, up from 59% in 2008 reflecting lower
earnings which were impacted by the goodwill impairment charge and
a higher level of credit losses and the Board of Directors declaring a
consistent level of dividends throughout the year. Common share
dividends paid during the year were $2.8 billion, up 7% from a year
ago.

Selected share data (1)

Table 50

2009

2008

2007

(C$ millions, except number of shares and per share amounts)
Common shares outstanding
First preferred shares outstanding

Non-cumulative Series N
Non-cumulative Series W (2)
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 (3)
Non-cumulative Series AL (3)
Non-cumulative Series AN (3)
Non-cumulative Series AP (3)
Non-cumulative Series AR (3)
Non-cumulative Series AT (3)
Non-cumulative Series AV (3)
Non-cumulative Series AX (3)

Treasury shares – preferred
Treasury shares – common
Exchangeable shares of RBC PH&N Holdings Inc.
Stock options
Outstanding
Exercisable

Dividends

Common
Preferred

Number
of shares
(000s)

Dividends
declared
per share
1,417,610 $13,075 $ 2.00 1,341,260 $ 10,384 $ 2.00 1,276,260 $ 7,300 $ 1.82

Dividends
declared
per share

Number
of shares
(000s)

Amount

–
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
1.41
1.49
1.48
1.50
1.34
1.27
1.11
1.01
.87

– $

300
300
300
200
250
250
200
250
213
400
300
225
275
350
275
400
325
(2)
(95)
324

12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
8,500
16,000
12,000
9,000
11,000
14,000
11,000
16,000
13,000
(65)
(2,127)
6,413

17,877
12,806

2,819
233

– $

12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
8,500
16,000

(260)
(2,258)
6,750

21,773
17,247

300
300
300
200
250
250
200
250
213
400

(5)
(104)
324

2,624
101

.88
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
.81
–

12,000 $ 300 $ 1.18
1.23
12,000
1.11
12,000
1.18
12,000
1.22
8,000
1.06
10,000
.95
10,000
.77
8,000
.65
10,000
–
–
–
–

300
300
300
200
250
250
200
250
–
–

(249)
(2,444)

(6)
(101)

26,623
21,924

2,321
88

(1)
(2)
(3)

For further details about our capital management activity, refer to Note 18 to our Consolidated Financial Statements.
The First Preferred Shares Series W has a conversion option which, as at October 31, 2009, was not yet convertible.
Dividend rate will reset every five years.

As at November 30, 2009, the number of outstanding common shares
and stock options were 1,420,680,000 and 17,611,000, respectively.
As at November 30, 2009, the number of Treasury shares – preferred
and Treasury shares – common were 13,000 and 2,697,000,
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 which is the capital required to remain
solvent under extreme market conditions, reflecting our objective 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 as described in
the Key performance and non-GAAP measures section and also aids
senior management in determining resource allocation in conjunction
with other factors.

Economic Capital is also used to assess the adequacy of our
capital base. Our policy is to maintain a level of available capital,
defined as common equity and other capital instruments with equity-
like permanence and loss absorption features such as preferred
shares and Innovative Tier 1 instruments, 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. Economic Capital is calculated based on credit, market
(trading and non-trading), operational, business and fixed asset, and
insurance risks and includes capital attribution for goodwill and other
intangibles.
•

Business risk is the risk of loss or harm due to variances in
volumes, prices and costs caused by competitive forces,
regulatory changes, reputation and strategic risks.
Fixed asset risk is defined as the risk that the value of fixed
assets will be less than their book value at a future date.

•

For further discussion on credit, market, operational and insurance
risks, refer to the relevant Risk, capital and liquidity management
sections.

The calculation and attribution of Economic Capital involves a number
of assumptions and judgments by management which are monitored
to ensure that the Economic Capital framework remains compre-
hensive and consistent. The models are benchmarked to leading
industry practices via participation in surveys, reviews of method-
ologies and ongoing interaction with external risk management
industry professionals.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Table 51

Liquidity and funding management

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
Under attribution of capital
Average common equity

2009
$ 10,100
2,450
3,550
2,350
150
$ 18,600
11,250
$ 29,850
600
$ 30,450

2008
$ 8,100
1,750
2,850
2,200
150
$ 15,050
7,700
$ 22,750
1,900
$ 24,650

Economic Capital increased $7.1 billion from a year ago, largely due
to increases in goodwill and intangibles. Credit risk, market risk and
operational risk also contributed to the increase. Goodwill and
intangibles increased primarily due to higher goodwill from the prior
year acquisitions, partially offset by the goodwill impairment charge
in our International Banking segment. Credit risk increased mainly
due to lower credit quality and business growth. Market risk
increased largely reflecting portfolio growth and market volatility,
while the increase in operational risk was attributable to higher
revenue.

We remain well capitalized with current levels of available
capital exceeding the Economic Capital required to underpin all of our
material risks.

Subsidiary capital
Our capital management framework includes the management of our
subsidiary capital. We invest capital across the enterprise to meet
local regulators’ capital adequacy requirements and maximize returns
to our shareholders. We invest in our subsidiaries as appropriate
during the year, including RBC Bank (USA) in light of regulatory
expectations and the continued extremely challenging economic and
market conditions in the U.S. We set guidelines for defining capital
investments in our subsidiaries and manage the relationship between
capital invested in subsidiaries and our consolidated capital base to
ensure that we can access capital recognized in our consolidated
regulatory capital measurements.

Each of our subsidiaries has responsibility for maintaining its

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 management
across all entities.

Other considerations affecting capital
Capital treatment for equity investments in other entities is
determined by a combination of accounting and regulatory 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
are fully consolidated on our Consolidated Balance Sheets, and
Joint ventures are consolidated on a pro rata basis.
Deduction: certain holdings are deducted in full from our
regulatory 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.

•

We monitor developments in both the domestic and international
regulatory environments to assess the impact on our current and
future capital position. In response to the recent financial market
disruption, global banking regulators and other bodies such as the
Basel Committee on Banking Supervision have committed to
strengthening the regulation, supervision and risk management of
financial institutions. Proposed areas of focus include, but are not
limited to, increased capital quantity, enhanced capital quality, the
introduction of an internationally harmonized leverage ratio and a
framework for the determination of countercyclical capital buffers. As
the details of the proposals remain undefined, the impact on capital
levels is not yet clear. In addition, changes to Basel II effective in
fiscal 2011, including revisions to the market risk framework, are
expected to lead to higher capital requirements. We will continue to
monitor the environment and revise our capital management strat-
egies and activities to reflect the changes.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Liquidity and funding risk (liquidity 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.

Our liquidity management framework is established to satisfy

•

our current and prospective commitments while also contributing, in
conjunction with our capital position, to our safety and soundness
in times of stress. To achieve these goals, we are dedicated to the
preservation of the following key liquidity risk mitigation strategies:
an appropriate balance between the level of risk we undertake
•
and the cost of its mitigation that takes into account the
potential impact of extreme but plausible events
broad funding access, including preserving and promoting a
reliable base of core client deposits, continual access to
diversified sources of wholesale funding and demonstrated
capacities to monetize specific asset classes
a comprehensive enterprise-wide liquidity contingency plan that
is supported by an earmarked pool of unencumbered
marketable securities that provide assured access to cash in a
crisis
appropriate and transparent liquidity transfer pricing and cost
allocation.

•

Our liquidity management policies, practices and processes reinforce
these risk mitigation strategies. In managing liquidity risk, we favour a
centralized management approach to maximize funding and opera-
tional efficiencies. However, market, regulatory, tax and organizational
considerations influence the extent to which we can be fully central-
ized.

Risk measurement
A variety of limit-based measures and metrics have been estab-
lished to monitor and control risk within appropriate tolerances
using normal course of business and stressed assumptions. Risk
methodologies and underlying assumptions are periodically
reviewed and validated to ensure alignment with our operating
environment, expected economic and market conditions, rating
agency preferences, regulatory requirements and accepted
practices. We measure and manage our liquidity position from three
risk perspectives as follows:

Structural (longer-term) liquidity risk
We use both the cash capital and survival horizon methodologies,
which focus on mismatches in effective maturity between all assets
and liabilities, to measure and control balance sheet risk and to
assist in the determination of our term funding strategy. Stressed
conditions are considered, including a protracted loss of unsecured
wholesale deposits that fund illiquid assets.

Tactical (shorter-term) liquidity risk
We apply net cash outflow limits in Canadian dollar and foreign
currencies for key short-term time horizons (overnight to nine
weeks) and assign a risk-adjusted limit to our aggregate pledging
exposure and individual limits by types of pledging activities to
measure our shorter-term liquidity exposures. Net cash flow
positions reflect known and anticipated cash flows for all material
unencumbered assets, liabilities and off-balance sheet activities.
Pledged assets are not considered a source of available liquidity.

Contingent liquidity risk
Contingent liquidity risk management assesses the impact of and our
intended responses to sudden stressful events. Our liquidity
contingency plan, maintained and administered by Corporate
Treasury, guides our actions and responses to liquidity crises. The
Liquidity Crisis Team, consisting of senior representatives with
relevant subject matter expertise from key business segments and
Corporate Support, contributes to the development of stress tests and
funding plans and meets regularly to conduct stress tests and review
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. 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 risk

that assume a stressed environment. Key tests are run monthly, while
others are only run quarterly. Frequency is determined by considering a
combination of likelihood and impact. After reviewing test results, the
liquidity contingency plan and other liquidity and funding risk
management practices and limits may be modified.

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
eligibility guidelines to ensure ready access to cash in emergencies,
including their eligibility for central bank advances.

Risk control
The Board of Directors is responsible for oversight of our liquidity and
funding management framework, which is developed and
implemented by senior management. We monitor and manage our
liquidity position on a consolidated basis and for key units and
consider legal, regulatory, tax, operational and any other applicable
restrictions. This includes analyzing our ability to lend or borrow funds
between branches, branches and subsidiaries, and subsidiaries, and
converting funds between currencies. GRC and ALCO share
management oversight responsibility for liquidity and funding policies
and receive regular reports detailing compliance with key limits and
guidelines. The Board of Directors is informed on a periodic basis
about our current and prospective liquidity condition.

Policies
Our principal liquidity and funding policies define risk tolerance
parameters. They authorize senior management committees or
Corporate Treasury to approve more detailed policies and limits
related to specific businesses and products that govern management,
measurement and reporting requirements.

Authorities and limits
Limits for our structural liquidity risk positions are approved at least
annually and measured and monitored weekly, monthly or quarterly.
Net cash flow limits are approved at least annually. Depending on the
materiality of each reporting entity, net cash flow limits are monitored
daily or weekly by major currency, branches, subsidiaries and
geographic locations. Any potential exceptions to established limits
are reported immediately to Corporate Treasury, which provides or
arranges for approval after reviewing a remedial action plan.

The prescribed treatments for cash flow assets and liabilities

under varying conditions are reviewed periodically by Corporate
Treasury in concert with GRM and the business segments to
determine if they remain valid or changes to assumptions and limits
are required. Through this process, we ensure that a close link is
maintained between the management of liquidity and funding risk,
market liquidity risk and credit risk, including GRM approval of credit
lines between entities. In response to our experience during the
volatile markets of the past two years, we have modified the liquidity
treatment of certain asset classes to reflect our expectations that
market liquidity for these products will remain impaired for some
time. Where required, limits have been reduced in consideration of
the results of updated stress tests.

Funding
Funding strategy
Core funding, comprising capital, longer-term liabilities and a
diversified pool of personal and, to a lesser extent, commercial and
institutional deposits, is the foundation of our structural liquidity
position. Our wholesale funding activities are well diversified by
geographic origin, investor segment, instrument, currency, structure
and maturity. We maintain an ongoing presence in different funding
markets, which allows us to constantly monitor market developments
and trends, identify opportunities and risks and take appropriate and
timely actions. We operate longer-term debt issuance programs in
Canada, the U.S., Europe, Australia and Japan. Expansion into new
markets and untapped investor segments is constantly evaluated
against relative issuance costs since diversification expands our
wholesale funding flexibility and minimizes funding concentration
and dependency, and generally reduces financing costs. Maintaining
competitive credit ratings is also critical to cost-effective funding.

Credit ratings
Our ability to access unsecured funding markets and to engage in
certain collateralized business activities on a cost-effective basis is
primarily dependent upon maintaining competitive credit ratings. Our
credit ratings are largely determined by the quality of our earnings,
the adequacy of our capital and the effectiveness of our risk
management programs. There can be no assurance that our credit
ratings and rating outlooks will not be lowered or that ratings
agencies will not issue adverse commentaries about us, potentially
resulting in adverse consequences for our funding capacity or 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 additional collateral under
certain contracts. However, 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.

The following table presents our major credit ratings as at
December 3, 2009. Our collective ratings continue to be the highest
categories assigned by the respective agencies to a Canadian bank,
and these strong credit ratings support our ability to competitively
access unsecured funding markets.

Credit ratings*

As at December 3, 2009 (1)

Short-
term debt

Senior long-
term debt

Moody’s Investors Service (Moody’s)
Standard & Poor’s (S&P)
Fitch Ratings (Fitch)
DBRS

P-1
A-1+
F1+
R-1(high)

Aaa
AA-
AA
AA

Table 52

Outlook

negative
stable
stable
stable

(1)

This table represents an integral part of our 2009 Annual Consolidated Financial
Statements.
Credit ratings are not recommendations to purchase, sell or hold a financial obligation
inasmuch as they do not comment on market price or suitability for a particular investor.
Ratings are subject to revision or withdrawal at any time by the rating organization.

Deposit profile
Our personal deposit franchise constitutes the principal source of
reliable 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
maturing beyond one year, increased during the year by about 6% to
63% of our total deposits.

Term funding sources*

Table 53

(C$ millions)

Long-term funding outstanding
Total mortgage-backed securities

sold

Commercial mortgage-backed

securities sold

Credit card receivables financed
through notes issued by a
securitization special purpose
entity

2009

2008

2007

$ 58,831 $ 70,906 $ 51,540

28,815

15,196

14,239

1,916

2,159

2,405

2,913

3,163

2,759

This table represents an integral part of our 2009 Annual Consolidated Financial
Statements.

During 2009, we continued to expand our long-term funding base by
selectively issuing, either directly or through our subsidiaries,
$5.5 billion of senior deposit notes in various currencies and markets.
However, total long-term funding outstanding decreased $12.1 billion
as we relied more heavily on securitizations. Outstanding senior debt
containing ratings triggers, which would accelerate repayment,
constitutes a very small proportion of our overall outstanding debt.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Other liquidity and funding sources
We use residential mortgage, commercial 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 MBS sold increased
year over year by $13,619 million. Our credit card receivables, which
are financed through notes issued by a securitization special
purposes entity, decreased year over year by $250 million. For further
details, refer to the Off-balance sheet arrangements section and Note
5 to our Consolidated Financial Statements.

We maintained a liquidity and funding position that we continue

to believe is appropriate to execute our strategy, and levels of
liquidity and funding risk remain well within our risk appetite. Except
for concerns about the sustainability of the economic recovery and
related implications for financial market resiliency, there are no other
known trends, demands, commitments or events that are presently
expected to materially change this position.

Our liquidity and funding risk objectives, policies and
methodologies have not changed materially from 2008. However,
certain limits and strategies have been revised as a result of the
market conditions.

Impact of global market developments on liquidity management
Despite challenging financial market conditions during much of the past
two years, we believe our liquidity and funding position remains
sufficient to execute our strategy. Public sector initiatives introduced
over this period have contributed to gradually improving global market
circumstances and a less vulnerable financial system. Although we
continued to experience comparatively favourable wholesale funding
access and pricing during the year, we selectively participated in some
of the government and central bank lending programs to supplement
our established financing resources. The MBS auctions introduced by
the Government of Canada in October 2008 helped us strengthen our
liquidity position in 2009 by providing an additional channel for
securitized residential mortgages during a period when the term funding
markets registered a material reduction in liquidity. We further bolstered
our liquidity position during the year by more aggressively gathering
core deposits, reducing collateral requirements and issuing capital.
More recently, the non-government guaranteed bank term funding
market has witnessed a broad-based revival with credit spreads
compressing meaningfully across the credit quality spectrum. Our new
issue spreads for senior term debt in Canada are now at their lowest
levels since late 2007 and provide us with renewed opportunities for
further strengthening our liquidity position going forward as circum-
stances warrant. We do not foresee any material impact from the
reduction or cancellation of public sector funding or liquidity programs.

Overview of other risks

Reputation risk

Reputation risk is the risk that an activity undertaken by an
organization or its representatives will impair its image in the
community or lower public confidence in it, resulting in the loss of
business, legal action or increased regulatory oversight.

Reputation risk can arise from a number of events and primarily

occurs in connection with regulatory, legal and operational risks.
Operational failures and non-compliance with laws and regulations
can have a significant reputational impact on us.
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
employees, 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.

Risk control
Policies and procedures support the management of reputation risk
across the organization. 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 requirements for managing conflicts of interest.

While our Code of Conduct and policies support the prevention

of reputation risk, we recognize that issues that could affect our
reputation may still occur. To mitigate potential risk to our reputation
stemming from such events, we have detailed and disciplined
escalation, reporting and resolution protocols.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Contractual obligations
In the normal course of business, we enter into contracts that give
rise to commitments of future minimum payments that affect our
liquidity. Depending on the nature of these commitments, the
obligation may be recorded on- or off-balance sheet. The table below
provides a summary of our future contractual funding commitments.

Contractual obligations*

2009

Table 54

2008

2007

As at October 31
(C$ millions) (1)

Within 1
year

1 to 3
years

3 to 5
years

Over 5
years

Total

Unsecured long-term

funding

Covered bonds
Subordinated
debentures
Obligations under

leases (2)

$ 33,684 $ 24,057 $ 9,595 $ 2,436 $ 69,772 $ 58,615 $ 49,131
–

5,248

3,407

2,129

5,740

204

–

103

–

6,461

6,564

8,258

6,343

566

3,161
$ 34,557 $ 24,983 $ 13,670 $12,228 $ 85,438 $ 75,317 $ 58,635

1,202

3,362

3,196

926

668

(1)

(2)

This table represents an integral part of our 2009 Annual Consolidated Financial
Statements.
The amounts presented above exclude accrued interest except for the category “Within
1 year.”
Substantially all of our lease commitments are operating.

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
expectations, or ethical standards.

Global Compliance has developed a comprehensive enterprise

compliance management (ECM) framework that is consistent with
regulatory guidance from OSFI and other regulators. 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. Within
the ECM framework there are five elements that drive the
management of regulatory risk. The first element sets the cycle in
motion by defining the nature of our business activities and
operations. The second element ensures compliance programs are
designed in a manner to most effectively meet regulatory require-
ments. The third and fourth elements relate to the design and
implementation of specific controls and the associated monitoring
and oversight of the effectiveness of those controls. This approach
allows us to take an enterprise-wide and holistic view of all
compliance programs. The fifth element ensures the timely escalation
and resolution of issues, and clear and transparent reporting. This is a
critical step in enabling senior management and the Board of
Directors to effectively perform their management and oversight
responsibilities.

Risk measurement
The identification and assessment of regulatory risk includes formal
risk assessment activities carried out across the organization, both at
the individual business and operational level, and at the enterprise
level. Risk is measured through the assessment of the impact of
regulatory and organizational changes, the introduction of new
products and services, and the acquisition or development of new lines
of business. It is also measured through the testing of the effectiveness
of the controls established to ensure compliance with regulatory

requirements and expectations. Although the use of metrics to measure
compliance-related matters is relatively new and there are few proven
methods for detecting leading indicators, we are refining and
developing new qualitative and quantitative measures. Meanwhile, we
use what measures are available to identify issues and trends.

Risk control
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 understanding 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, and training in other compliance and
regulatory risk related matters for relevant employees through other
online tools and job aids (as part of employees’ regular job training),
in new employee orientation materials, and periodically through
targeted online, face-to-face or webcast training.

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 is also the
approval authority for activities that exceed business unit authorities
and limits, as well as certain business activities which are deemed to
be of significant risk.

Risk mitigation
Key elements for identifying, assessing and managing insurance risk
include a risk review and approval process for product development and
pricing, effective guidelines and practices for underwriting and claims
management, and 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 provisions
Actuarial liabilities include explicit provisions for adverse deviations
to ensure their adequacy and are independently validated.

Insurance risk

Environmental risk

Insurance risk is the exposure to potential financial loss arising from
payments that are different than anticipated (e.g., number, amount,
and timing) under an insurance policy or reinsurance treaty. Insurance
risk is primarily associated with adverse experience with respect to
mortality, morbidity, longevity, claim frequency, claim severity,
policyholder behaviour and expense. Insurance risk arises from all
our Insurance businesses, which include life and health, creditor,
home and auto, travel insurance, and reinsurance. Insurance risk is
further categorized into the following sub-risks:
•

Claims risk: The risk that the actual severity, frequency or timing
of claims differs from the levels assumed in pricing calculations
or reserves. Claims risk may be realized in two ways: 1)
mis-estimation of expected claims activities to actual activities
or, 2) the criteria for underwriting the risk are not aligned with
the estimate for the amount, frequency, and/or timing of claims.
Types of claims risk include mortality risk, longevity risk,
morbidity risk, home and auto risk, and travel risk.
Policyholder behaviour risk: The risk that the actual behaviour of
policyholders relating to premium payments, policy withdrawals
or loans, policy lapses, surrenders, and the exercise of other
policy options differ from the behaviour assumed in pricing
calculations or reserves.
Expense risk: The risk that the expense of acquiring or adminis-
tering policies, or of processing claims, exceeds the costs
assumed in pricing calculations.

•

Risk measurement
Insurance risk is measured 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 and procedures support the management of insurance risk by
articulating our strategies to identify, prioritize, and manage
insurance risk. Insurance risk policies establish the expectations and
parameters within which the insurance businesses may operate,
communicate our risk tolerance, and ensure accountability through
clear roles and responsibilities.

Authorities and limits
Risk approval authorities and limits are established by the Board of
Directors and delegated to management within the business units in
order to guide insurance business activities. These delegated
authorities and limits ensure our insurance portfolio is well diversified
and within the risk appetite as approved by the Board of Directors.

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
operations. 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. Operational and legal risks may arise from environ-
mental issues at our branches, offices or data processing centres.

Corporate Environmental Affairs (CEA) sets enterprise-wide
policy requirements for the identification, assessment, control,
monitoring and reporting of environmental risk. Oversight is provided
by GE and by the CG&PPC. Business segments and Corporate Support
groups are responsible for incorporating environmental risk
management requirements and controls within their operations. The
CEA Group also provides advisory services and support to business
segments on the management of specific environmental risks in
business transactions.

Risk measurement
The magnitude of environmental risk associated with business
activities is a function of several factors including: the industry sector,
the type and size of the transaction, the ability of the borrower to
manage environmental matters, and whether real property is taken as
collateral. Some environmental risks, such as the potential cost of
cleaning up environmental contamination of properties used as
security for loans, can be easily quantified while others, including
exposure of a particular industry to the physical effects of climate
change or water scarcity, are assessed on a qualitative basis.

Risk control
We manage environmental risk by maintaining an environmental
management system, including policy requirements, management
and mitigation strategies, and reporting.

Our Corporate Environmental Policy articulates our overarching
environmental commitments. We maintain a suite of environmental
credit risk management policies including sector-specific and
business-segment-specific policies and guidelines. We have a
separate Policy on Social and Environmental Review in Project
Finance to reflect our commitment to the Equator Principles (EPs).

The key components of environmental risk management and
mitigation include:
•

Monitor relevant environmental laws and regulations, as well as
other requirements to which the bank adheres.
Track loan losses resulting from environment issues.
Train employees to identify and manage environmental risks.
Measure our performance and compare it to our objectives,
enabling us to identify enhancement opportunities.
Periodically verify that our environmental risk management
policies and processes are operating as intended.

•
•
•

•

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

On an annual basis, and more frequently as required, environmental
risk management activities, issues, and trends are reported to GE and
to the Corporate Governance and Public Policy Committee of the
Board of Directors.

CEA maintains ongoing communication on environmental risk

management issues with stakeholders, both internal and external to
the organization. We report on the full extent of environmental
management annually in the Corporate Responsibility Report and
Public Accountability Statement.

Additional risk factors that may affect future results

In addition to the risks described in the Risk, capital and liquidity
management, and Overview of other risks sections, there are numerous
other risk factors that could cause our results to differ significantly from
our plans, objectives and estimates. Forward-looking statements in this
document include, but are not limited to, statements relating to our
medium-term objectives, our vision and strategic goals, the 2010
economic and market outlook for the Canadian, U.S. and global
economies, the outlook and priorities for each of our business segments
and in our Liquidity and funding management section, and are presented
for the purpose of assisting the holders of our securities and financial
analysts in understanding our financial position and results of
operations as at and for the periods ended on the dates presented and
our vision and strategic goals and objectives, and may not be appro-
priate for other purposes. We caution readers not to place undue
reliance on these statements as a number of risk factors could cause
actual results to differ materially from the expectations expressed in
such forward-looking statements. These factors- many of which are
beyond our control and the effects of which can be difficult to predict-
include: credit, market, operational and liquidity and funding risks, and
other risks discussed earlier and those discussed below.

General business and economic conditions in Canada, the United
States and other countries in which we conduct business
The impact from the market environment, the lack of liquidity in
certain markets, the level of activity and volatility in capital markets
and the stability of various financial markets could materially impact
our financial condition and results of operations. Interest rates,
foreign exchange rates, and consumer saving and spending habits as
well as consumer borrowing and repayment patterns, business
investment, government spending, and inflation also impact the
business and economic environments in which we operate and,
ultimately, the level of business activity we conduct and earnings we
generate in a specific geographic region. For example, many countries
are currently experiencing a recession, resulting in high
unemployment and lower family incomes, corporate earnings,
business investment and consumer spending, any or all of which
could adversely affect the demand for our loan and other products
and services. These recessionary factors have resulted in significant
increases in provision for credit losses due to higher 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 admin-
istration, resulting in lower fee, commission and other revenue.

Changes in accounting standards and accounting policies
and estimates
From time to time, the Accounting Standards Board (AcSB) changes
the financial accounting and reporting standards that govern the
preparation of our financial statements. These changes can be difficult
to anticipate and can materially impact how we record and report our
financial condition and results of operations. In some instances, we
may be required to retroactively apply a new or revised standard that
results in our restating prior period financial statements.

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, or rely on assumptions about
matters that are inherently uncertain. Such estimates and assump-
tions 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.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

As detailed in the Critical accounting policies and estimates

section, 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.

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 significant recognition
and measurement differences between IFRS and current Canadian
GAAP which could in turn materially impact our financial condition
and results of operations.

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.
government authorities, as well as those adopted by international
regulatory authorities and agencies, in jurisdictions in which we
operate. 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
products 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 continue to impact our
ability to compete. 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, as well as
the changes in how they are interpreted, implemented or enforced,
could adversely affect us, for example by lowering barriers to entry in
the businesses in which we operate or increasing our costs of
compliance. In addition, our failure to comply with applicable laws,
regulations or regulatory policies could result in sanctions and
financial penalties by regulatory agencies that could adversely impact
our reputation and earnings.

Judicial or regulatory judgments and legal proceedings
Although we take what we believe to be reasonable measures
designed to ensure compliance with laws, regulations and regulatory
policies in the jurisdictions in which we conduct business, there is no
assurance that we always will be, or will be deemed to be, in
compliance. Accordingly, it is possible that we could receive a judicial
or regulatory judgment or decision that results in fines, damages, and
other costs 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
representations 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
influence 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.

Development and integration of our distribution networks
Although we regularly explore opportunities to expand our
distribution networks, either through acquisitions or organically by

Additional financial information

Total RBC available-for-sale portfolio

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 integrate these distribution networks effectively, our results
of operations and financial condition may be negatively affected.

Other factors
Other factors that may affect actual results include changes in
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 infrastructure, 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 infrastructure, including trans-
portation, 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.

As at October 31, 2009, all AFS securities that had unrealized losses
were assessed for other-than-temporary impairment. For those debt
instruments 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
written down to their fair value. For equity securities, where
management believes that the fair value will not recover prior to their
disposition or where there has been unrealized losses for a protracted

period of time, these securities were 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 will continue to
hold them until their value recovers, which may be at maturity. For
further details regarding the assessment of other-than-temporary
impairment, refer to Note 3 to our Consolidated Financial Statements.

Total RBC available-for-sale portfolio

Table 55

(C$ millions)
Government and agency
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Loan substitute

Total (1)

2009

2008

Amortized
cost

Fair
value

Net
unrealized
gains
(losses)

Net gains
(losses)
recognized
in income

Amortized
cost

Fair value

Net
unrealized
gains
(losses)

$ 22,166 $ 22,622 $

2,057
4,516
14,718
2,437
256

1,852
4,427
14,711
2,412
186

456 $
(205)
(89)
(7)
(25)
(70)

(17) $ 24,297 $ 24,386 $

(173)
(45)
(198)
(207)
–

4,280
5,193
13,301
3,057
256

3,550
4,796
12,984
2,683
227

89 $

(730)
(397)
(317)
(374)
(29)

Net gains
(losses)
recognized
in income
7
(363)
(25)
(162)
(88)
(1)

$ 46,150 $ 46,210 $

60 $

(640) $ 50,384 $ 48,626 $ (1,758) $

(632)

(1)

Includes held-to-maturity of $156 million (2008 – $205 million) that is grouped with AFS on the balance sheet.

The total amortized cost of the AFS portfolio was $46.1 billion as at
October 31, 2009, down $4.2 billion from the prior year. The
reduction largely reflected the impact of the stronger Canadian dollar
relative to the U.S. dollar, as well as the sale of certain U.S. agency
and Government of Canada securities, Canadian bank common
shares and Non agency U.S. mortgage-backed securities (MBS). The
reduction also reflected the reclassification of certain Non-agency
U.S. MBS securities to loans during the year in accordance with the
amendments to CICA section 3855. The decrease was partially offset
by the purchase of certificate of deposits issued by Global financial
institutions (FIs) and U.S. Treasury bills. For further details on the

reclassification, refer to the CICA section 3855 – reclassification of
securities to loans section.

We recognized $640 million of net losses in income this year, of

which $485 million ($320 million after-tax and compensation
adjustments) were market environment-related, see Table 59. These
losses were largely attributable to Canadian bank common shares,
Non-agency U.S. MBS and corporate debt and other debt. Net losses
of $207 million on equities primarily reflected the prolonged decline
in value of Canadian bank shares held to economically hedge stock-
based compensation programs. The net losses of $198 million on
corporate and other debt largely reflected losses on securities that

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

were deemed to be impaired and that we intend to sell in order to
effectively manage our exposures to certain names and reposition our
portfolios. The $173 million in losses on Non-agency U.S. MBS
related to losses on securities that we have sold or expect to sell in
order to reduce our exposure to certain vintages and asset classes.
The prior year losses of $632 million was largely attributable to $565
million of losses due to market environment related factors including
write downs on Non-agency U.S. MBS and losses on the sale of U.S.
Agency preferred shares of Federal National Mortgage Association
(Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie
Mac).

As at October 31, 2009, the portfolio had net unrealized gains of

$60 million compared to net unrealized losses of $1,758 million a
year ago. This largely reflected an improvement in the values of most
Non-agency and agency U.S. MBS, U.S. auction rate securities (ARS)

and debt related to Global FIs due to the tightening of credit spreads
and lower interest rates.

The net unrealized gains of $456 million on government and

agency securities were largely attributable to gains on Canadian
instruments which were partially offset by unrealized losses related to
U.S. ARS and U.S. Agency MBS. Net unrealized losses on MBS of $205
million were significantly lower than last year, reflecting price
improvements driven by improved U.S. housing and financial
markets. The MBS portfolio mainly consists of high quality super-
senior tranches of U.S. Alt-A and U.S. prime securities. The remaining
net unrealized losses were largely on asset-backed securities (ABS)
and loan substitute securities. The ABS securities are highly rated
with significant credit support and have experienced significant price
improvements during the year. The Loan substitute securities are
predominantly perpetual preferred shares of highly rated Canadian
entities.

CICA section 3855 – reclassification of securities to loans

During 2009, we reclassified certain AFS and HFT debt securities to
loans in accordance with the amendments to CICA section 3855,
which permit reclassification of debt securities that are not quoted in
active markets and which management does not intend to sell in the
foreseeable future. AFS debt securities held at October 31, 2009 that
are not quoted in active markets have an estimated fair value of $11
billion and include certain Auction rate securities, U.S. Non-Agency
MBS, and Government and Corporate Debt. The fair value of securities
selected for reclassification to loans, primarily U.S. Non-Agency MBS,
was $871 million as at October 31, 2009. These securities were
selected for reclassification as they are not quoted in active markets
and had previously incurred significant non credit related losses. The
net income impact after tax was $64 million net of the provision for
credit losses of $67 million for the year 2009 as per the table below
and Table 59. The remainder of the debt securities that are not
quoted in active markets remain in AFS debt securities, and fair value
exceeds book value or we intend to hold until their fair values recover
to book value.

Reclassification of securities to loans –
Net income impact

Table 56

(C$ millions)

Net interest income
Non-interest income

Total revenue
PCL

Net income before income taxes
Income taxes

Net income

2009
Increased (decreased)

International
Banking

Corporate
Support

(54)
180

126
59

67
19

(2)
27

25
8

17
1

Total

$ (56)
207

$151
67

$ 84
20

$ 64

The amendment to CICA section 3855 also requires loans and
receivables that are intended to be sold immediately or in the near
term be classified as held-for-trading debt. We also reclassified $179
million fair value of mortgages held-for-sale from loans to HFT debt
securities as we intend to sell these mortgages in the near term. The
reclassification had minimal impact on net income.

Refer to Note 1 to our Consolidated Financial Statements for
further details on the reclassification and transition adjustment made
on November 1, 2008.

Reclassification of securities to loans –
Balance sheet impact

(C$ millions)

Assets

Securities
Loans, net of allowance for loan losses
Other assets

Liabilities and Shareholders’ equity

Retained earnings
Accumulated other comprehensive income

Reclassification of securities to loans –
Credit quality impact

Table 57

2009
Increased
(decreased)

$(871)
1,132
(79)

$ 182

$ 130
52

$ 182

Table 58

(C$ millions)

Credit quality information

GIL
ACL

2009
Increased (decreased)

International

Banking Consolidated

998 $
121

1,138
189

2009

Impact of reclassification

Pre-
reclassification

Post-
reclassification

Increase
(decrease)

GIL (C$ millions)
ACL
GIL as a % of loans
and acceptances
Total coverage ratio (1)
Specific PCL as a % of
average net loans
and acceptances

(1)

Total ACL as a percentage of GIL.

4,319 $
3,113

5,457 $
3,302

1,138
189

148 bps
72%

186 bps
61%

38 bps
(11)%

95 bps

97 bps

2 bps

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Market environment impacts

The market environment-related losses continued into 2009, at a
similar pace to the end of 2008, though moderating primarily in the
latter half of the year as market conditions improved. Total market
environment-related net losses increased $99 million from the prior
year, largely reflecting losses on fair value adjustments on certain
RBC debt designated as HFT and losses on credit default swaps
economically hedging the corporate loan portfolio. These factors were
partially offset by lower market environment-related losses on HFT
and AFS portfolios and gains on credit valuation adjustments on
certain derivative contracts. These losses reduced revenue in 2009 by
$2.1 billion, largely during the first half of the year and were
comprised of losses of $1.4 billion of market environment-related
losses on HFT and AFS, and $.7 billion related to changes in credit
spreads as noted in Table 59. Net income was reduced in 2009 by
losses of $1.1 billion.

Capital Markets, Corporate Support and International Banking

revenue was negatively impacted by market environment- related
losses of $1,489 million, $607 million and $18 million, respectively,
in 2009. PCL increased $67 million as a result of our adoption of the
amendments of CICA section 3855. This increase was comprised of
$59 million in International Banking and $8 million in Corporate
Support. Capital Markets, Corporate Support and International
Banking segment net income was reduced by market environment-
related losses of $648 million, $431 million and $61 million in the
current year.

Summary of market environment impacts –
gains (losses)

Table 59

(C$ millions)

2009

2008

2007

Gains (losses) on impacted portfolios

Held-for-trading (HFT) (1)
Available-for-sale (AFS)(2)

Revenue impacts

Compensation adjustments
Income tax recoveries

(889) $ (2,220) $
(485)

(565)

$ (1,374) $ (2,785) $

317
343

613
754

(393)
–

(393)
131
89

Total after-tax and related compensation

adjustments

(714) $ (1,418) $

(173)

Gains (losses) related to credit spreads

Credit valuation adjustments on certain
derivatives other than monolines
Fair value adjustments on RBC debt

designated as HFT

Credit default swaps (CDS)

Revenue impacts

Compensation adjustments
Income tax recoveries

46 $

(118) $

(586)
(200)

533
393

(740) $
174
190

808 $
(204)
(227)

–

88
–

88
(20)
(25)

Total after-tax and related compensation

adjustments

(376) $

377 $

Credit losses related to AFS securities

reclassified to loans
PCL (2)
Income tax recoveries

(67)
17

–
–

Total after-tax

(50) $

– $

–
–

–

(2)

In accordance with the amendments to CICA section 3855 we reclassified certain
impaired AFS securities not quoted in an active market to loans. As a result the
impairment losses recognized in net income during 2008 on these securities of $229
million were reversed as a transitional adjustment on November 1, 2008 and an
allowance for credit losses of $139 million was established. For further information refer
to the CICA section 3855 – reclassification of securities to loans and Total RBC
available-for-sale portfolio sections.

Held-for-trading losses

We recognized losses of $889 million on HFT instruments during the
current year.

We recognized a loss of $420 million during the current year
resulting from an increase in the credit valuation adjustment resulting
from increases in fair value of credit default swaps (CDS) with
monoline insurer MBIA Inc. that represent credit protection purchased
to hedge our credit risk exposure to super-senior tranches of struc-
tured credit transactions, the fair value of the underlying assets and
other parameter inputs. The credit protection with MBIA covers both
subprime- and non-subprime-related assets.

We also incurred losses of $358 million primarily related to a
trading portfolio in Capital Markets containing CDOs of corporate
CDS. The business was discontinued and a series of risk reduction
trades and assignment of trades to a third party AA-rated financial
institution was executed.

Our U.S. Insurance and Pension solutions business in Capital
Markets provides stable value contracts on bank-owned life insurance
(BOLI) policies purchased by banks on groups of eligible employees.
We no longer originate BOLI policies. As of October 31, 2009, we
incurred losses of $111 million for the year, almost all of which were
related to one contract that is invested in both leveraged and
unleveraged strategies. This contract, with a Notional value of $2,024
million ($987 million of fair value) at October 31, 2009, was
restructured to remove the economic consequences of an early
surrender of the BOLI policy by establishing a fixed maturity date and
Notional value. The restructured contract also allows for a reduction
of investments in leveraged strategies. The fair value of our estimated
payment under the restructured contract at maturity is $250 million,
which has been recognized as a loss in 2008 and 2009. The
remainder of the BOLI contracts, with $6,276 million Notional value
($5,855 million of fair value) are invested in unleveraged strategies
that are mainly comprised of U.S. Agency MBS and government
securities. Notional value represents the total amount of investment
value protected under stable value contracts and is reported under
stable value products in Note 25 to our Consolidated Financial
Statements. Fair value represents the current estimate of the
investments referenced under the stable value contracts.

Capital Markets recognized a gain of $46 million in credit

valuation adjustments on certain derivative contracts other than
monolines, reflecting the change in the fair value of all derivatives that
are attributable to the credit quality of our derivative counterparts.
These credit valuation adjustments are calculated using internal
models, and our methodology considers the impact of both the
counterparty’s and our credit spreads on the present and potential
future asset and liability position of the derivative counterparty.
Counterparty credit spreads tightened and our net derivative-related
credit exposure to our counterparties decreased during the year.

Exposures to selected financial instruments

Total market environment net income

impact

$ (1,140) $ (1,041) $

(130)

(1)

U.S. subprime – CDOs of ABS, RMBS, and other gains of $23 million incurred for the
period of February 1, 2009 to October 31, 2009 were not included in the table above.
Losses of $358 million were incurred during the first quarter of 2009 and are included in
the table above. U.S. commercial mortgage-backed securities (CMBS) and U.S.
Municipal guaranteed investment contracts (GIC) and other U.S. MBS have not been
included in the above table. If included gains of $23 million would have been reported
for all of these portfolios for 2009. The gains are not included in the table above as
these gains are no longer considered a result of the market environment, since our
current exposure is not significant.

Exposure to U.S. subprime and Alt-A RMBS, CDOs and mortgages
Certain activities and transactions we enter into expose us to the risk
of default of U.S. subprime and Alt-A residential mortgages. Our net
exposures to U.S. subprime and Alt-A represent .4% of our total
assets as at October 31, 2009, compared to .5% the prior year.

Of our total holdings of RMBS, holdings with a fair value of $86
million, net of MBIA hedging of $249 million, may be exposed to U.S.
subprime risk. U.S. subprime RMBS exposures decreased $176
million from last year, primarily reflecting our adoption of the
amendments to CICA section 3855 as certain U.S. subprime securities

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Off-balance sheet arrangements
For our off-balance sheet arrangements including multi-seller
conduits, structured investment vehicles and other variable interest
entities as at October 31, 2009, refer to the Off-balance sheet
arrangements section.

Leveraged finance
Our exposure to leveraged finance as at October 31, 2009 was
nominal.

Direct and indirect monoline insurance
In addition to the monoline insurance previously described, we have
direct and indirect monoline insurance on non-subprime assets. The
table below shows our direct monoline insurance.

Direct monoline insurance

(C$ millions)

Table 61

As at October 31, 2009

Principal/
notional

Fair value

Financial Security Assurance Holdings Ltd. (FSA) $ 286 $
Syncora Holdings Ltd. (Formerly XL Capital Ltd)
AMBAC Financial Group (AMBAC)

259
108

Total

$ 653 $

26
15
6

As at October 31, 2009, we held monoline insurance protection of
$653 million against default of the issuer or counterparty on
non-subprime trading assets comprising CDOs and CLOs of corporate
names and interest rate swaps. The recorded fair value as at
October 31, 2009 on these monoline insurance contracts was $47
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, 2009 is
$1,458 million. 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. In addition, we provide liquidity facilities of
$336 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 $nil was drawn as of October 31, 2009.

Commercial mortgage-backed securities disclosure
The fair value of our total direct holdings of CMBS was $398 million
as at October 31, 2009.

were reclassified to loans and the stronger Canadian dollar relative to
the U.S. dollar. Of this potential exposure, over 66% of our related
holdings are rated A and above, compared to 96% in the prior year.
As at October 31, 2009, U.S. subprime RMBS holdings rated AAA, on
a net basis comprised 37% of total U.S. subprime RMBS holdings,
compared to 48% in 2008. Exposure to U.S. subprime loans was
$489 million as at October 31, 2009, representing .07% of total
assets, $196 million higher than last year largely resulting from the
reclassification noted above and the stronger Canadian dollar relative
to the U.S. dollar.

Of our total holdings of RMBS, holdings with a fair value of $988

million, net of hedging, may be exposed to U.S. Alt-A risk. U.S. Alt-A
exposures decreased $761 million from the prior year mainly
reflecting the reclassification of certain U.S. Alt-A securities to loans
and the stronger Canadian dollar relative to the U.S. dollar. Less than
50% of these RMBS were issued within 2006 and 2007. Our exposure
to U.S. Alt-A loans was $1,287 million as at October 31, 2009,
representing .20% of total assets and increased $335 million from
the prior year, primarily reflecting the reclassification discussed
above and the stronger Canadian dollar relative to the U.S. dollar.
Of our total holdings of CDOs, holdings of $22 million, net of
MBIA hedging of $4 million may be exposed to U.S. subprime or Alt-A
risk, decreased $71 million from 2008. This represents less than 8%
of our total net unhedged positions in CDOs in which we had direct
holdings, which totalled $300 million in 2009. The fair value of our
Corporate CDOs, net of hedging of $278 million as at October 31,
2009 and decreased $215 million from 2008 primarily reflecting the
sale and losses on certain positions and the stronger Canadian dollar
relative to the U.S. dollar.

Net exposure to U.S. subprime and Alt-A through
RMBS, CDOs and mortgages

Table 60

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- (1)

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)

Amortized cost of subprime/Alt-A
RMBS securities transferred to
loans under Section 3855

Total subprime and Alt-A

exposures, net of hedging

Sensitivities of fair value of

securities, net of hedging, to
changes in assumptions:
100bp increase in credit spread
100bp increase in interest rates
20% increase in default rates
25% decrease in pre-payment

rates

2009

CDOs that
may contain
subprime or
Alt-A

Total

Subprime
RMBS

Alt-A
RMBS

335 $ 988 $

26 $ 1,349

32 $ 116 $
24
1
–
29

86
44
55
687

–
–
–
–
22

86 $ 988 $

22 $ 1,096

19 $
8
54
2
3

49 $
97
351
323
168

–
–
17
5
–

86 $ 988 $

22 $ 1,096

228 $ 837 $

– $ 1,065

261 $ 450 $

– $

711

575 $2,275 $

22 $ 2,872

(4) $ (23) $
–
(2)

(7)
(32)

(2)

(50)

(1)
1
(1)

(1)

The subprime RMBS exposures rated below BBB- represents our net bought protection
position.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Key performance and non-GAAP measures

Performance measures

Tangible common equity (Tier 1 common capital) ratio
We use the Tangible common equity (Tier 1 common capital) ratio in
conjunction with regulatory capital ratios to evaluate our capital
adequacy specifically related to common equity. This ratio is calcu-
lated consistent with a stress testing measure used by the U.S.
Federal Reserve for U.S. banks in determining capital adequacy under
certain adverse scenarios except that our calculation of Tangible
common equity (Tier 1 common capital) is based on the Basel II
methodology as detailed in the Capital management section. We
believe that the Tangible common equity (Tier 1 common capital) ratio
is a useful supplemental measure of capital adequacy. The Tangible
common equity (Tier 1 common capital) ratio does not have a
standardized meaning under GAAP and may not be comparable to
similar measures disclosed by other financial institutions.

The following table provides a calculation of our Tangible

common equity (Tier 1 common capital) ratio.

Tangible common equity (Tier 1 common capital) ratio

Table 62

(C$ millions, except percentage amounts)

Tier 1 capital

Less: Qualifying other non-controlling

interest in subsidiaries

Innovative Tier 1 capital
instruments (1)

Non-cumulative First Preferred

shares (1)

Tier 1 common capital
Risk-adjusted assets

Tangible common equity (Tier 1 common

capital) ratio

(1)

Net of treasury shares.

2009

2008

$ 31,774 $ 25,031

353

357

3,991

3,857

4,811

2,657

$ 22,619 $ 18,160
$ 244,837 $ 278,579

9.2%

6.5%

Return on equity and Return on risk capital
We measure and evaluate the performance of our consolidated
operations and each business segment using a number of financial

Calculation of Return on equity and Return on risk capital

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
business segment levels, as measures of return on total capital
invested in our businesses. The business segment ROE and RORC
measures are viewed as useful measures for supporting investment
and resource allocation decisions because they adjust for certain
items that may affect comparability between business segments and
certain competitors. RORC does not have standardized meaning
under GAAP and may not be comparable to similar measures
disclosed by other financial institutions.

Our consolidated ROE calculation is based on net income
available to common shareholders divided by total average common
equity for the period. Business segment ROE calculations are based
on net income available to common shareholders divided by average
attributed capital for the period. For each segment, average attributed
capital, or Economic Capital, includes attributed risk capital required
to underpin various risks as described in the Capital Management
section 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 material
effect on the segment ROE and RORC information that we report.
Other companies that disclose information on similar attributions and
related return measures may use different assumptions, judgments
and methodologies.

The following table provides a summary of our 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.

2009

Table 63

2008

2007

(C$ millions, except percentage amounts) (1)

Net income (loss) available to

common shareholders

Canadian
Banking

Wealth
Management

Insurance

International
Banking

Capital
Markets

Corporate
Support

Total

$ 2,607 $

553 $

486 $ (1,504) $ 1,706 $ (223) $ 3,625 $ 4,454 $ 5,404

Average risk capital (2)

add: Under attribution of capital

Goodwill and intangible capital (3)

Average equity (4)

add: Impact of goodwill impairment charge

$ 5,400 $

1,100 $ 1,150 $

–
1,850

–
2,800

–
150

$ 7,250 $

3,900 $ 1,300 $

–

3,050 $ 7,000 $ 900 $ 18,600 $ 15,050 $ 14,450
1,850
5,550

600
11,250

–
1,100

–
4,700

1,900
7,700

600
650

7,750 $ 8,100 $ 2,150 $ 30,450 $ 24,650 $ 21,850
–

550

–

Adjusted average equity

$ 7,250 $

3,900 $ 1,300 $

8,300 $ 8,100 $ 2,150 $ 31,000 $ 24,650 $ 21,850

ROE

add: Impact of goodwill impairment charge

Adjusted ROE

RORC

35.9%
–

35.9%

14.2% 37.0% (19.4)% 21.0%
–

13.3%

–

14.2% 37.0%

(6.1)% 21.0%

48.4%

49.2% 42.9% (49.1)% 24.3%

n.m.
–

n.m.

11.9%
3.0%

14.9%

19.5%

18.1%
–

24.7%
–

18.1%

24.7%

29.6%

37.4%

(1)

(2)

(3)

Average risk capital, Goodwill and intangible capital, and Average equity represent rounded figures. ROE and RORC are based on actual balances before rounding. These are calculated using
methods intended to approximate the average of the daily balances for the period.
Average risk capital includes Credit, Market (trading and non-trading), Operational and Business and fixed assets, and Insurance risk capital. For further details, refer to the Capital
management section.
Corporate Support includes average software intangible assets as certain software was reclassified to intangible assets, with the adoption of CICA handbook Section 3064 effective 2009. For
further details, refer to the changes in accounting policies section.
The amounts for the segments are referred to as attributed capital or Economic Capital.

(4)
n.m. not meaningful

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Embedded value
Embedded value is a measure of shareholder value embedded in the
balance sheet of our Insurance segment, excluding any value
associated from future new sales. We use the change in embedded
value between reporting periods as a measure of the value created by
the insurance operations during the period.

We define embedded value as the value of equity held in our

Insurance segment and the value of in-force business (existing
policies). The value of in-force business is calculated as the present
value of future expected earnings on in-force business less the
present value of capital required to support in-force business. We use
discount rates that are consistent with other insurance companies.
Required capital uses the capital frameworks in the jurisdictions in
which we operate.

Non-GAAP measures

Key drivers affecting the change in embedded value from period

to period are new sales, investment performance, claims and
policyholder experience, change in actuarial assumptions, changes in
foreign exchange rates and changes in shareholder equity arising
from transfers in capital.

Embedded value does not have a standardized meaning under

GAAP and may not be directly comparable to similar measures
disclosed by other companies. Given this measure is specifically used
for our Insurance segment and involves the use of discount rates to
present value the future expected earnings and capital required for
the in-force business, reconciliation to financial statements
information is not applicable.

Adjusted measures
Adjusted measures are adjusted net income, adjusted EPS, adjusted
ROE and adjusted effective tax rate. We use and report adjusted
measures consistent with our management framework. We believe
that excluding the goodwill impairment charge which we recorded in
2009 from these measures is more reflective of ongoing operating
results and will provide readers with a better understanding of
management’s perspective on our performance. These adjusted

measures should also enhance the comparability of our financial
performance for 2009 to prior years. Adjusted measures are
non-GAAP measures which do not have standardized meanings under
GAAP and may not be comparable to similar measures disclosed by
other financial institutions.

The following table provides a calculation of our adjusted

measures.

Adjusted measures

(C$ millions, except percentage and per share amounts)

As reported

Income before income taxes
Income taxes

Net income before non-controlling interest
Non-controlling interest in net income of subsidiaries

Net income
Preferred dividends

Net income available to common shareholders

Average number of common shares (thousands)
Basic earnings per share (in dollars)

Average number of diluted common shares (thousands)
Diluted earnings per share (in dollars)

Average common equity
ROE (1)

Effective tax rate

(1)

Based on actual balances before rounding

5,526
1,568

3,958
100

3,858
(233)

3,625

1,398,675
2.59

1,412,126
2.57

30,450
11.9%

28.4%

2009

Goodwill
impairment
charge

1,000
–

1,000

.71

Table 64

2008

Adjusted

As reported

6,526 $
1,568

4,958 $
100

4,858 $
(233)

4,625 $

6,005
1,369

4,636
81

4,555
(101)

4,454

1,398,675

3.31 $

1,412,126

3.28 $

1,305,706
3.41

1,319,744
3.38

31,000 $
14.9%

24.0%

24,650
18.1%

22.8%

2009 Defined operating leverage
We use and report defined operating leverage consistent with our
management framework.

Our defined operating leverage refers to the difference between

our revenue growth rate (as adjusted) and non-interest expense
growth rate (as adjusted). Revenue is presented on a taxable
equivalent basis, while the impact of consolidated VIEs is excluded
as they have no material impact on our earnings. Insurance results
are excluded as certain changes in revenue can be largely offset in
Insurance policyholder benefits, claims and acquisition expense,
which expense is not captured in our defined operating leverage
calculation. Defined operating leverage does not have a standardized
meaning under GAAP and is not necessarily comparable with similar
information reported by other financial institutions.

The following table shows our defined operating leverage ratio

calculation.

2009 Defined operating leverage

Table 65

(C$ millions, except percentage amounts)

2009

2008

Change

Total revenue

Add: teb adjustment
Less: Revenue related to variable
interest entities (VIEs)
Insurance revenue

$ 29,106 $ 21,582
410

366

(22)
5,715

(48)
2,610

Total revenue (adjusted)

$ 23,779 $ 19,430

22.4%

Non-interest expense

Less: Insurance-related

$ 14,558 $ 12,351

non-interest expense

559

576

Non-interest expense (adjusted)

$ 13,999 $ 11,775

18.9%

Defined operating leverage

3.5%

Royal Bank of Canada: Annual Report 2009

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 our 2009
Annual Consolidated Financial Statements. Certain of these policies,
as well as estimates made by management in applying such policies,
are recognized as critical because they require us to make particularly
subjective or complex judgments about matters that are inherently
uncertain and because of the likelihood that significantly different
amounts could be reported under different conditions or using
different assumptions. Our critical accounting policies and estimates
relate to the fair value of financial instruments, other-than-temporary
impairment of available-for-sale (AFS) and held-to-maturity (HTM)
securities, securitization, allowance for credit losses, variable interest
entities, goodwill and other intangible assets, 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.

Financial instruments – recognition and measurement

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), AFS, HTM, loans and receivables or other
financial liabilities. A financial instrument can be designated as HFT
(the fair value option (FVO)) on its initial recognition, provided it
meets certain criteria, even if it was not acquired or incurred princi-
pally for the purpose of selling or repurchasing in the near term.

Financial assets and financial liabilities HFT, 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 compre-
hensive income (OCI). AFS 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 AFS that do not have a quoted market
price in an active market, which are measured at cost. Financial
assets HTM, loans and receivables, and other financial liabilities are
measured at amortized cost using the effective interest method.

As at October 31, 2009, approximately $302 billion, or 46%, of our
financial assets and $202 billion, or 33%, of our financial liabilities were
carried at fair value ($340 billion, or 47%, of financial assets and $252
billion, or 36%, of financial liabilities as at October 31, 2008).

CICA Section 3862, Financial Instruments – Disclosures, estab-
lishes a three-level hierarchy for disclosure of financial instruments
measured at fair value, which is essentially the same as the hierarchy
under U.S. GAAP. The classification of assets and liabilities within the
hierarchy is based on whether the inputs to the measurement
valuation methodology are observable or unobservable. Observable
inputs reflect market-derived or market-based information obtained
from independent sources, while unobservable inputs reflect our
estimates about market data. The following three-level fair value
hierarchy is based on the transparency of the inputs used to measure
the fair value of the financial instruments:
•

Level 1 – inputs are unadjusted quoted prices of identical
instruments in active markets.
Level 2 – inputs other than quoted prices included in Level 1 that
are observable for the asset or liability, either directly or
indirectly.
Level 3 – one or more significant inputs used in a valuation
technique are unobservable in determining fair values of the
instruments.

•

Note 2 to our 2009 Annual Consolidated Financial Statements discloses
the fair values of our financial instruments as at October 31, 2009.

Fair value is defined as the amount at which a financial
instrument could be bought or sold in a current transaction, other
than in a forced or liquidation sale, between knowledgeable and
willing parties in an arm’s-length transaction under no compulsion to
act. The best evidence of fair value is quoted 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 characteristics 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

instruments 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 market, 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 market 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 HFT, other

than derivatives and financial assets classified as AFS, 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 HFT 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 G7 interest-rate-
yield curves, currency rates and volatility of certain prices or rates.
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 observable data, we defer
the initial trading profit until the amounts deferred become realized
through the receipt and/or payment of cash or once the input
parameters are observable in the market. We also record fair value
adjustments to account for measurement uncertainty due to model
risk and parameter uncertainty when valuing complex or less actively
traded financial instruments. For further information on our derivative
instruments, refer to Note 7 to our 2009 Annual Consolidated
Financial Statements.

To determine the fair value adjustments on RBC debt designated as

HFT, 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 unrealized change in the present value recorded in net income.
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 appropriate.
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
independent perspective. Refer to the Risk, capital and liquidity
management section for further details on the sensitivity of financial
instruments used in trading and non-trading activities.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Controls over valuations of financial instruments
An independent control infrastructure is critical to ensure that our
financial instruments fair value measurements are reliable, consistently
determined and appropriately valued at market exit price levels. Our
valuation control infrastructure has senior management oversight and is
independent of business functions that trade or invest in financial
instruments. Valuations are governed by policies and controls, including
independent price verification, review of daily profit and loss, and
determination of valuation adjustments for non-readily observable
market prices or parameters, by staff with appropriate knowledge and
expertise of the instruments and markets in which we transact. These
policies and controls include a review of all new business initiatives to
ensure minimum standards are met prior to approval.

Other-than-temporary impairment of available-for-sale and
held-to-maturity securities
AFS and HTM securities with unrealized losses are assessed for
impairment at each reporting date and more frequently when
conditions warrant. When the fair value of any security has declined
below its amortized cost, management is required to assess whether
the decline is other-than-temporary. In making this assessment for AFS
securities, we consider 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 impairment; (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. 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 AFS securities previously recognized in accumulated
other comprehensive income (AOCI) are reclassified to net income
during that period. We assess our HTM securities for impairment using
the same impairment model for Loans. For further details, refer to
Notes 1 and 3 to our 2009 Annual Consolidated Financial Statements.

Securitization
We periodically securitize Canadian residential mortgages, credit card
receivables and commercial mortgage loans by selling them to
special purpose entities (SPEs) or trusts that issue securities to
investors. Some of the key accounting determinations in a
securitization of our loans are whether the transfer of the loans meets
the criteria required to be treated as a sale and, if so, the valuation of
our retained interests in the securitized loans. Refer to Note 1 to our
2009 Annual Consolidated Financial Statements for a detailed
description of the accounting policy for loan securitization.

When we securitize loans and retain an interest in the securi-
tized loans, it is a matter of judgment whether the loans have been
legally isolated. We obtain legal opinions where required to give us
comfort that legal isolation of the transferred loans has been
achieved. We often retain interests in securitized loans such as
interest-only strips, servicing rights or cash reserve accounts. Where
quoted market prices are not available, the valuation of retained
interests in sold assets is based on our best estimate of several key
assumptions such as the payment rate of the transferred loans,
weighted average life of the prepayable receivables, excess spread,
expected credit losses and discount rate. The fair value of such
retained interests calculated using these assumptions affects the
gain or loss that is recognized from the sale of the loans. Refer to
Note 5 to our 2009 Annual 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 2009 Annual Consolidated Financial
Statements, we concluded that none of the SPEs used to securitize
our financial assets should be consolidated.

Allowance for credit losses
The allowance for credit losses is maintained at levels that
management considers appropriate to cover estimated identified

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

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 determined based on management’s identi-
fication 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.

The process for determining the allowances involves quantitative

and qualitative assessments using current and historical credit
information. Our lending portfolio is reviewed on an ongoing basis to
assess whether any borrowers should be classified as impaired and
whether an allowance or write-off is required. The process inherently
requires the use of certain assumptions and judgments including:
(i) assessing the impaired status and risk ratings of loans;
(ii) estimating cash flows and collateral values; (iii) developing default
and loss rates based on historical and industry data; (iv) adjusting loss
rates and risk parameters based on the relevance of historical 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 characteristics and composition; and (vi) determining the
current position in the economic and credit cycles. Changes in these
assumptions or using other reasonable judgments can materially
affect the allowance level and thereby our net income.

Specific allowances
Specific allowances are recorded to recognize estimated losses on
both retail and wholesale loans that have become impaired. The
losses relating to wholesale borrowers are estimated using
management’s judgment relating to the timing of future cash flow
amounts that can be reasonably expected from the borrowers,
financially responsible guarantors and the realization of collateral.
The amounts expected to be recovered are reduced by estimated
collection costs and discounted at the effective interest rate of the
obligation. The losses relating to retail portfolios are managed on a
pooled basis and 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 wholesale portfolios 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
retail portfolios 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.

Total allowance for credit losses
Based on the procedures discussed above, management believes
that the total allowance for credit losses of $3,302 million is
adequate to absorb estimated credit losses incurred in the lending
portfolio as at October 31, 2009. This amount includes $114 million
classified in other liabilities, which relates to letters of credit and
guarantees and unfunded commitments.

Variable interest entities

AcG-15 provides guidance on applying the principles of consolidation
to certain entities defined as variable interest entities (VIEs). Where
an entity is considered a VIE, the Primary Beneficiary is required to
consolidate the assets, liabilities and results of operations of the VIE.
The Primary Beneficiary is the entity that is exposed, through variable
interests, to a majority of the VIE’s expected losses (as defined in

AcG-15) or is entitled to a majority of the VIE’s expected residual
returns (as defined in AcG-15), or both.

We use a variety of complex estimation processes involving both
qualitative and quantitative factors to determine whether an entity is
a VIE and, 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 identified parties holding variable interests to
determine who is the Primary Beneficiary. In addition, there is a
significant amount of judgment exercised in interpreting the provi-
sions 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 that we administer, credit
investment products and structured finance transactions. For further
details on our involvement with VIEs, refer to the Off-balance sheet
arrangements section and Note 6 to our 2009 Annual 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
impairment 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
estimates or assumptions could have an impact on the determination
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
appropriate fair value of each reporting unit may be in the current
market based on actual market events and comparable companies.

Changes in accounting policies

Significant changes in accounting policies and disclosures
during 2009
Canadian GAAP
Goodwill and Intangible Assets
On November 1, 2008, we adopted CICA Handbook Section 3064,
Goodwill and Intangible Assets (Section 3064) which provides clarifying
guidance on the criteria that must be satisfied in order for an intangible
asset to be recognized, including internally developed intangible assets.
It replaces Section 3062, Goodwill and Other Intangible Assets, and
Section 3450, Research and Development Costs.

As a result of adopting Section 3064, we reclassified $789 million of

software from Premises and equipment to Other intangibles on our
Consolidated Balance Sheets as of November 1, 2008 and corresponding
depreciation of $221 million from Non-interest expense – Equipment to
Non-interest expense – Amortization of other intangibles on our
Consolidated Statements of Income for the year ended October 31, 2008.

Impairment of Financial Assets
In August 2009, the CICA issued various amendments to Section
3855 including: non-derivative financial assets with fixed or

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.

For further details, refer to Notes 1 and 10 to our 2009 Annual

Consolidated Financial Statements.

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,
supplemental pension plans, and health, dental, disability and life
insurance plans. The pension plans provide benefits based on years
of service, contributions and average earnings at retirement.

Due to the long-term nature of these plans, the calculation of

benefit 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 2009
Annual Consolidated Financial Statements.

Income taxes

Management exercises judgment in estimating the provision for
income taxes. We are subject to income tax laws in various juris-
dictions where we operate. These complex tax laws are potentially
subject to different interpretations by us and the relevant tax
authority. The provision for income taxes represents management’s
interpretation of the relevant tax laws and its estimate of current and
future income tax implications of transactions and events during the
period. A future income tax asset or liability is determined for each
temporary difference based on the future tax rates that are expected
to be in effect and management’s assumptions regarding the
expected timing of the reversal of such temporary differences. We
review both positive and negative evidence in assessing whether
future income tax assets are more likely than not to be realized.

determinable payments that are not quoted in an active market may
be classified as loans and receivables; loan and receivables for which
we may not recover substantially all of our initial investment, other
than because of credit deterioration, must be classified as AFS; and
loans and receivables that we intend to sell immediately or in the
near term must be classified as HFT. The amendments also permit
certain financial assets to be reclassified from the HFT and AFS
categories into the loans and receivables category. Impairment losses
on AFS debt instruments may be reversed under certain circum-
stances and impairment for debt instruments classified as loans and
receivables will be assessed using the impairment model for loans.

We adopted these amendments with retrospective application to
November 1, 2008, as required by the standard. Accordingly, we have
reclassified $179 million of HFT and $929 million of AFS securities to
loans. The impact on adoption was: (i) an increase of $66 million, net
of taxes of $30 million, to our Retained earnings as of November 1,
2008, representing an adjustment to the impairment amount
calculated as a result of using the impairment model for loans; and
(ii) an increase of $104 million, net of taxes of $57 million, to our
Accumulated other comprehensive income (AOCI) as of November 1,

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

2008, representing the cumulative marked-to-market adjustments
previously recorded. Refer to Note 1 to our 2009 Annual Consolidated
Financial Statements for additional information.

Fair Value and Liquidity Risk Disclosure
In June 2009, the CICA issued Fair Value and Liquidity Risk Disclosure –
Amendments to: Financial Instruments – Disclosures, Section 3862 to
improve fair value and liquidity risk disclosures by requiring all financial
instruments measured at fair value to be categorized into one of three
fair value hierarchy levels for disclosure purposes. This hierarchy is
essentially the same as the hierarchy under U.S. GAAP (Topic 820). We
adopted these amendments for our fiscal year ended October 31, 2009.

U.S. GAAP
Framework on fair value measurement
Topic 820, Fair Value Measurements and Disclosures (Topic 820)
(FASB Statement No. 157, Fair Value Measurements (FAS 157) and
related pronouncements) was effective for us on November 1, 2008
except for certain non-financial assets and non-financial liabilities for
which the amendments will be effective on November 1, 2009. Topic
820 requires that all financial instruments measured at fair value be
categorized into the fair value hierarchy levels and measured based
on the guidance for those levels.

Fair value option for financial assets and liabilities
Financial Accounting Standards Board (FASB) guidance under Topic
825-10, Financial Instruments (Topic 825-10) (Statement No. 159
The Fair Value Option for Financial Assets and Liabilities (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. We
adopted this guidance on November 1, 2008. The impact on adoption
was an increase to opening retained earnings of $81 million after
taxes, representing the difference between the carrying amount and
the fair value of the eligible items for which the fair value option was
elected as at November 1, 2008.

Other-than-temporary impairment of securities
Guidance under Topic 320, Investments – Debt and Equity Securities
(FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-
than-Temporary Impairments) became effective for us on May 1,
2009. It amends the impairment assessment guidance and recog-
nition principles of other-than-temporary impairment for debt
securities and enhances the presentation and disclosure require-
ments for debt as well as equity securities. The impact on adoption
was an increase in retained earnings of $225 million and a corre-
sponding decrease to AOCI.

Offsetting of amounts related to certain contracts
We adopted FASB guidance (Staff Position FIN 39-1, Amendment of
FASB Interpretation No. 39) which amends certain aspects of Topic
210-20, Balance Sheet – Offsetting and Topic 815 (FIN 39, Offsetting
of Amounts Related to Certain Contracts) on November 1, 2008. This
guidance permits the fair value of derivative instruments and the right
to reclaim cash collateral (a receivable) or the obligation to return
cash collateral (a payable) to be offset against the fair value of
derivative instruments executed with the same counterparty under
the same master netting agreement, regardless of whether there is an
intention to settle on a net basis. We have offset fair value amounts
on our U.S. GAAP Consolidated Balance Sheets pursuant to this
guidance, including the comparative periods presented, as follows:
as at October 31, 2009, the fair value amounts of derivative
instruments that we netted against derivative assets and derivative
liabilities was $62.9 billion (October 31, 2008 – $76.2 billion); as at
October 31, 2009, and the cash collateral applied against derivative
assets and derivative liabilities was $7.9 billion and $3.5 billion,
respectively (October 31, 2008 – $5.0 billion and $7.5 billion,
respectively). Refer to Note 31 to our 2009 Annual Consolidated
Financial Statements for additional information.

Accounting adjustments
During the first quarter of 2009, we corrected certain errors pertaining
to prior periods which are described in Note 1 to our 2009 Annual

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Consolidated Financial Statements. These errors were not material to
the periods to which they relate; however, as correcting the errors in
the first quarter of 2009 would have materially distorted net income
for the quarter, we corrected them by decreasing opening retained
earnings for the quarter ended January 31, 2007 by $120 million.

Future changes in accounting policies and disclosure
Canadian GAAP
Business combinations
In January 2009, the CICA issued three new accounting standards:
Handbook Section 1582, Business Combinations, Section 1601,
Consolidated Financial Statements and Section 1602, Non-controlling
interests. Section 1582 provides clarification as to what an acquirer
must measure when it obtains control of a business, the basis of
valuation and the date at which valuation should be determined.
Acquisition-related costs must be accounted for as expenses in the
periods they are incurred, except for costs incurred to issue debt or
share capital. This new standard will be applicable for acquisitions we
complete on or after November 1, 2011 although adoption in 2010 is
permitted to facilitate the transition to IFRS in 2011.

Section 1601 establishes standards for preparing consolidated

financial statements after the acquisition date; Section 1602
establishes standards for the accounting and presentation of
non-controlling interest. These two standards must be adopted
concurrently with Section 1582.

U.S. GAAP
Business combinations
In December 2007, the FASB issued guidance under Topic 805,
Business Combinations (Statement No. 141 (revised 2007), Business
Combinations), which replaces previous guidance under Topic 805
(Statement No. 141, Business Combinations). The new guidance,
which will be effective for us on November 1, 2009, includes the
following requirements: more assets acquired and liabilities assumed
must be measured at fair value at the acquisition date, liabilities
related to contingent consideration must be remeasured at fair value
and each subsequent reporting period, and all acquisition related
costs must be expensed.

Amendments to Guidance on Accounting for Transfers of Financial
Assets
In June 2009, the FASB issued Statement No. 166, Accounting for
Transfers of Financial Assets – an amendment of FASB Statement No.
140 (FAS 166), which will be effective for us on November 1, 2010.
FAS 166 eliminates the exception for qualifying special purpose
entities from consolidation guidance. It also eliminates the exception
that permitted sale accounting for certain mortgage securitizations
when control has not been completely surrendered by the transferor.

Amendments to Consolidation Guidance
In June 2009, the FASB issued Statement No. 167, Amendments to
FASB Interpretation No. 46(R) (FAS167) which will be effective for us
on November 1, 2010. FAS167 modifies the characteristics that
identify a variable interest entity, provides new criteria for
determining the primary beneficiary and increases the frequency of
required assessments to determine whether an entity is the primary
beneficiary of a variable interest entity.

Future adoption of International Financial Reporting Standards
Pursuant to the decision made by the CICA, we will begin reporting our
financial statements in accordance with IFRS on November 1, 2011,
including 2010 comparative results. To manage our transition to IFRS,
we have implemented a comprehensive enterprise-wide program that
focuses on the key areas of impact including financial reporting,
systems and processes, as well as communications and training.

In 2008, we completed a thorough organization diagnostic to

assess the scope and complexity of the IFRS conversion to us which
identified the areas with significant differences between IFRS and
existing Canadian GAAP. Generally, the areas that are expected to
have the greatest financial and capital impacts on us include balance
sheet de-recognition and consolidation, business combinations, and
cumulative foreign exchange translation differences.

However, as IFRS evolves, we continue to monitor and frequently
revisit our preliminary conclusions to determine further financial,
capital and business implications.

Throughout 2009, we continued to manage the transition to IFRS

through the completion of activities and deliverables to support the
key areas of impact noted above. To date, we have:
•

Conducted preliminary assessments of the various accounting
policy elections for first-time IFRS adoption;
Initiated multiple projects within a program framework which are
in progress conducting more thorough GAAP analysis, assessing
financial and economic impacts, and identifying process and
systems requirements to ensure a successful transition;
Established frequent and recurring communications with the
Board of Directors, Audit Committee, executive and senior
management to ensure timely decisions on key issues and risks;
Provided frequent updates to our internal and external auditors
and OSFI on key elements of program status, program structure
and preliminary assessment of accounting impacts;

•

Developed a resourcing model to ensure sufficient program
resources are available to meet key deliverables;
Identified preliminary external communication requirements for
the investor and analyst community; and
Conducted internal education seminars for key stakeholders
across RBC in the various business platforms and functional
groups.
As we prepare for our transition, we continue to monitor ongoing

changes to IFRS and adjust our transition and implementation plans
accordingly. Our transition remains aligned to our implementation
schedule and we are on track to meet the timelines essential to our
changeover.

For additional information regarding changes to our current and future
accounting policies, refer to Notes 1 and 31 to our 2009 Annual
Consolidated Financial Statements.

Pension obligations

Through a number of defined benefit and defined contribution plans
we 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 benefits 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. We
continue to fund our pension plans in accordance with federal and
provincial regulations.

We measured our benefit obligations and pension plan assets as

at September 30, 2009. During 2009, corporate bond yields, which
impact the selection of a discount rate we use to measure our benefit

obligations and pension plan assets, have decreased in the short and
mid ranges of the curve as a result of improving market conditions.
This has resulted in an actuarial loss of $389 million in our benefit
obligation, which offsets our pension plan asset gains of $272 million
and increased 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 strengthening of the Canadian
dollar at year-end resulted in a decrease of our pension liability for
our U.S. and international plans. Based on our recent funding
valuation at January 1, 2009, we were required to make plan
contributions of $610 million during the year. For further information,
refer to Note 20 to our 2009 Annual Consolidated Financial
Statements.

Controls and procedures

Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed by us
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
procedures that are designed to ensure that information is accumu-
lated and communicated to management, including the President and
Chief Executive Officer, and the Chief Administrative Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosure.

As of October 31, 2009, management evaluated, under the
supervision of and with the participation of the President and Chief
Executive Officer and the Chief Administrative 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 the Chief Administrative Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective as of October 31, 2009.

Internal control over financial reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control

Related party transactions

In the ordinary course of business, we provide normal banking
services, operational services, and enter into other transactions with
associated and other related corporations, including our joint venture
entities, on terms similar to those offered to non-related parties.

over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP.
However, because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements on a
timely basis.

Management evaluated, under the supervision of and with the

participation of the President and Chief Executive Officer and the
Chief Administrative Officer and Chief Financial Officer, the
effectiveness of our internal control over financial reporting based on
the criteria set forth in the Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and, based on that evaluation, concluded that
our internal control over financial reporting was effective as of
October 31, 2009 and that there were no material weaknesses that
have been identified in our internal control over financial reporting as
of October 31, 2009. See Management’s Report on Internal Control
over Financial Reporting and the Report of Independent Registered
Chartered Accountants.

No changes were made in our internal control over financial

reporting during the year ended October 31, 2009, that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

We grant loans to directors, officers and other employees at rates
normally accorded to preferred clients. In addition, we offer deferred
share and other plans to non-employee directors, executives and
certain other key employees. For further information, refer to Notes 9
and 27 to our Consolidated Financial Statements.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Supplemental information

Net interest income on average assets and liabilities

Table 66

(C$ millions, except percentage amounts)

2009

2008

2007

2009

2008

2007

2009

2008

2007

Average balances

Interest (1)

Average rate

Assets
Deposits with other banks

Canada
United States
Other International

Securities
Trading
Available-for-sale

2,692 $
4,674
3,976

1,837 $
4,168
7,802

1,570 $
2,904
5,436

37 $
11
114

11,342

13,807

9,910

162

45 $

137
316

498

43 1.37% 2.45% 2.74%
6.06
5.87

3.29
4.05

.24
2.87

176
319

538

1.43

3.61

5.43

136,963
50,686

149,098
39,626

162,828
31,516

187,649

188,724

194,344

4,041
1,905

5,946

4,862
1,800

6,621
1,044

6,662

7,665

2.95
3.76

3.17

3.26
4.54

4.07
3.31

3.53

3.94

Asset purchased under reverse repurchase
agreements and securities borrowed

44,476

68,356

71,759

931

2,889

3,620

2.09

4.23

5.04

Loans

Canada
Retail
Wholesale

United States
Other International

185,318
35,074

170,300
38,558

152,588
31,541

220,392

208,858

184,129

42,227
17,559

35,096
15,623

25,718
13,388

8,625
1,179

9,804

1,777
1,923

7,440
2,443

9,376
1,047

9,883

10,423

4.65
3.36

4.45

4.37
6.34

6.14
3.32

4.73

5.66

2,161
2,939

2,240
8.71
2,061 10.95 18.81 15.39

4.21

6.16

280,178

259,577

223,235

13,504

14,983

14,724

4.82

5.77

6.60

Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets

523,645
5,895
10,247
155,513

530,464
3,702
11,274
104,860

499,248
2,137
10,270
69,345

20,543
–
–
–

25,032
–
–
–

26,547
–
–
–

3.92
–
–
–

4.72
–
–
–

5.32
–
–
–

Total assets

$ 695,300 $ 650,300 $ 581,000 $ 20,543 $ 25,032 $ 26,547 2.95% 3.85% 4.57%

Liabilities and shareholders’ equity
Deposits (2)
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

$ 183,563 $ 174,441 $ 166,983 $
56,329
163,487

53,817
121,924

61,990
147,441

2,946 $ 4,423 $ 5,669 1.60% 2.54% 3.39%
4.76
4.54

1,758
5,977

2,563
5,538

778
3,038

1.26
2.06

3.12
3.66

392,994

394,257

342,724

6,762

12,158

13,770

1.72

3.08

4.02

37,597

45,367

46,654

1,286

1,525

1,997

3.42

3.36

4.28

36,647
7,377
3,943

478,558
28,964
10,247
142,964

36,558
7,183
3,962

487,327
16,784
11,274
108,116

42,503
6,704
3,569

442,154
25,752
10,270
79,087

409
350
230

9,037
–
–
–

1,613
354
334

15,984
–
–
–

2,364
338
376

18,845
–
–
–

1.12
4.74
5.83

1.89
–
–
–

5.56
4.41
4.93
5.04
8.43 10.54

3.28
–
–
–

4.26
–
–
–

$ 660,733 $ 623,501 $ 557,263 $

9,037 $ 15,984 $ 18,845 1.37% 2.56% 3.38%

4,130
30,437

1,795
25,004

1,553
22,184

–
–

Total liabilities and shareholders’ equity

$ 695,300 $ 650,300 $ 581,000 $

9,037 $ 15,984 $ 18,845 1.30% 2.46% 3.24%

Net interest income and margin

$ 695,300 $ 650,300 $ 581,000 $ 11,506 $ 9,048 $ 7,702 1.65% 1.39% 1.33%

Net interest income and margin (average earning

assets)
Canada
United States
Other International

Total

$ 311,715 $ 308,574 $ 280,385 $
108,733
113,157

106,044
112,819

107,131
104,799

7,828 $ 6,929 $ 6,402 2.51% 2.25% 2.28%
.39
412
2,134
.79
888
1,544

1,132
987

1.99
1.47

1.04
.87

$ 523,645 $ 530,464 $ 499,248 $ 11,506 $ 9,048 $ 7,702 2.20% 1.71% 1.54%

(1)
(2)

Interest income includes loan fees of $398 million (2008 – $343 million; 2007 – $331 million).
Deposits include savings deposits with average balances of $64 billion (2008 – $48 billion; 2007 – $46 billion), interest expense of $.3 billion (2008 – $.5 billion; 2007 – $.4 billion) and
average rates of .5% (2008 – 1.0%; 2007 – .9%). Deposits also include term deposits with average balances of $193 billion (2008 – $227 billion; 2007 – $240 billion), interest expense of
$3.8 billion (2008 – $8.0 billion; 2007 – $10.7 billion) and average rates of 1.98% (2008 – 3.50%; 2007 – 4.43%).

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Loans and acceptances by geography

Table 67

As at October 31 (C$ millions)

Canada

Residential mortgages
Personal
Credit cards
Small business

Retail

Business
Sovereign
Bank

Wholesale

United States
Retail
Wholesale

Other International

Retail
Wholesale

Total loans and acceptances

Total allowance for loan losses

2009

2008

2007

2006

2005

117,292
60,493
8,285
2,851

$ 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

188,921

177,812

160,753

141,502

130,769

47,110
1,394
1,096

53,775
1,544
978

51,237
585
521

44,353
553
160

42,383
521
74

49,600

$ 56,297

$ 52,343

$ 45,066

$ 42,978

238,521

$ 234,109

$ 213,096

$ 186,568

$ 173,747

11,678
25,387

37,065

4,625
12,964

17,589

12,931
30,943

43,874

4,712
20,345

25,057

6,804
18,548

25,352

1,905
10,862

12,767

7,652
13,847

21,499

1,896
9,084

10,980

7,741
12,317

20,058

1,729
3,454

5,183

293,175

$ 303,040

$ 251,215

$ 219,047

$ 198,988

(3,188)

(2,215)

(1,493)

(1,409)

(1,498)

Total loans and acceptances, net of allowance for loan losses

289,987

$ 300,825

$ 249,722

$ 217,638

$ 197,490

Loans and acceptances by portfolio and sector

Table 68

As at October 31 (C$ millions)

Residential mortgages
Personal
Credit cards
Small business

Retail

Business

Wholesale

Total loans and acceptances

Total allowance for loan losses

2009

2008

2007

2006

2005

122,130
71,542
8,701
2,851

$ 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

205,224

$ 195,455

$ 169,462

$ 151,050

$ 140,239

5,090
3,657
6,141
7,055
3,541
830
3,972
1,774
21,049
2,562
4,413
22,572
2,779
2,516

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

87,951

$ 107,585

$ 81,753

$ 67,997

$ 58,749

293,175

$ 303,040

$ 251,215

$ 219,047

$ 198,988

(3,188)

(2,215)

(1,493)

(1,409)

(1,498)

Total loans and acceptances, net of allowance for loan losses

289,987

$ 300,825

$ 249,722

$ 217,638

$ 197,490

(1)

Other in 2009 related to other services, $10.0 billion; financing products, $5.7 billion; holding and investments, $3.9 billion; health, $2.4 billion; and other, $.6 billion.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Impaired loans by portfolio and geography

As at October 31 (C$ millions except percentage amounts)

Residential mortgages
Personal
Small business

Retail

Business

Wholesale
Total impaired loans (2)

Canada

Residential mortgages
Personal
Small business

Retail

Business

United States

Residential mortgages
Personal

Retail

Business

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

Retail
Wholesale
Total

Specific allowance for loan losses as a % of gross impaired loans

$
$

2009
641
409
59
1,109

82
41
145
107
227
53
172
22
1,625
115
29
1,658
10
62
4,348
5,457

441
173
59
673

77
27
53
5
1
20
140
6
232
88
17
173
–
–
839

108
119
227

3
14
34
100
213
33
32
16
1,365
20
9
1,355
–
–
3,194
3,421

209
315
524
5,457

(1,279)
4,178

0.52%
0.57%
2.07%
0.54%
4.94%
1.86%
23.44%

$
$

2008
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)
2,156

0.28%
0.57%
1.43%
0.37%
2.04%
0.96%
26.24%

$
$

2007
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
21
27

1
1
2
–
–
1
1
–
300
–
–
16
–
–
322
349

41
31
72
1,118

(351)
767

0.16%
0.39%
0.72%
0.23%
0.89%
0.45%
31.40%

$
$

Table 69

2005
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
8
16

4
2
4
43
–
–
1
–
25
46
7
25
–
–
157
173

46
36
82
758

(282)
476

0.16%
0.45%
0.56%
0.24%
0.71%
0.38%
37.20%

2006
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
7
15

–
3
12
–
–
1
3
–
48
40
13
23
–
–
143
158

45
34
79
826

(263)
563

0.17%
0.46%
0.56%
0.25%
0.65%
0.38%
31.84%

(1)
(2)

Other in 2009 is related to other, $148 million; financing products, $1,203 million; other services, $230 million; holding and investments, $50 million; and health, $27 million.
Past due loans greater than 90 days not included in impaired loans were $359 million in 2009 (2008 – $347 million; 2007 – $280 million; 2006 – $305 million; 2005 – $304 million).

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Provision for (recovery of) credit losses by portfolio and geography

Table 70

(C$ millions, except percentage amounts)

Residential mortgages
Personal
Credit cards
Small business

Retail

Business

Wholesale
Total specific provision

Canada

Residential mortgages
Personal
Credit cards
Small business

Retail

Business

Wholesale
Total

United States

Residential mortgages
Personal
Credit cards
Small business

Retail

Business

Total

Other International

Retail
Wholesale

Total
Total specific provision
Total general provision
Total provision for credit losses
Specific provision as a % of average net loans and acceptances

$
$

2009
73
701
402
55
1,231

20
21
61
16
266
13
67
7
587
96
11
408
–
20
1,593
2,824

18
467
393
55
933

18
17
26
(4)
36
9
36
2
52
33
7
204
–
–
436
1,369

51
207
9
–
267

2
4
23
20
230
4
31
5
527
60
3
187
–
–

1,096
1,363

31
61
92
2,824
589
3,413
.97%

$
$

2008
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%

$
$

2007
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
9
791
.33%

$
$

2006
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%

$
$

2005
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%

(1)

Other in 2009 is related to financing products, $244 million; other services, $94 million; health, $18 million; holdings and investments, $14 million; and other, $38 million.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

Allowance for credit losses by portfolio and geography

(C$ millions, except percentage amounts)

Allowance at beginning of year (1)
Provision for credit losses
Write-offs by portfolio

Residential mortgages
Personal
Credit cards
Small business

Retail

Business
Sovereign
Bank
Wholesale
Less developed countries exposures
Total write-offs by portfolio

Recoveries by portfolio

Residential mortgages
Personal
Credit cards
Small business

Retail

Business
Sovereign
Bank
Wholesale
Total recoveries by portfolio

Net write-offs

Adjustments (2)

Total allowance for credit losses at end of year

Specific allowance for loan losses
Canada

Residential mortgages
Personal
Small business

Retail

Business

United States

Residential mortgages
Personal
Small business

Retail

Business

Other International

Retail
Wholesale

Total specific allowance for loan losses
General allowance

Residential mortgages
Personal
Credit cards
Small business

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

$
$
$

$
$

$
$
$
$
$

2009
2,438
3,413

(52)
(732)
(455)
(54)
(1,293)

(1,373)
–
–
(1,373)
–
(2,666)

1
74
53
5
133
140
–
–
140
273

(2,393)
(156)
3,302

39
94
22
155

10
6
18
1
–
8
63
1
44
32
7
72
–
–
262
417

10
34
–
44

1
5
9
42
62
2
17
5
241
3
3
233
–
–
623
667

74
121
195
1,279

50
671
327
47
1,095
814
114
2,023
3,302

1.13%
.82%

$
$
$

$
$

$
$
$
$
$

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%

$
$
$

$
$

$
$
$
$
$

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
9
108

8
3
32
2
10
2
8
1
10
5
7
24
–
–
112
220

1
2
–
3

1
2
3
–
1
–
–
–
1
–
–
4
–
–
12
15

12
16
28
263

19
365
195
37
616
349
258
1,223
1,486

.68%
.25%

$
$
$

$
$

$
$
$
$
$

Table 71

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
8
118

14
1
31
5
10
6
7
–
15
3
4
16
–
–
112
230

1
2
–
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%

(1)
(2)

Opening allowance for credit losses as at November 1, 2008 has been restated due to the implementation of amendments to CICA section 3855.
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; and Flag Bank $21 million in 2007.

Royal Bank of Canada: Annual Report 2009

Management’s Discussion and Analysis

Credit quality information by Canadian province

Table 72

As at October 31 (C$ millions)

Loans and acceptances
Atlantic provinces (1)
Quebec
Ontario
Prairie provinces (2)
B.C. and territories (3)

Total loans and acceptances in Canada

Gross impaired loans

Atlantic provinces (1)
Quebec
Ontario
Prairie provinces (2)
B.C. and territories (3)

Total gross impaired loans in Canada

Specific provision

Atlantic provinces (1)
Quebec
Ontario
Prairie provinces (2)
B.C. and territories (3)

Total specific provision for credit losses in Canada

(1)
(2)
(3)

Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
Comprises Manitoba, Saskatchewan and Alberta.
Comprises British Columbia, Nunavut, Northwest Territories and Yukon.

Small business loans and acceptances in Canada by sector

As at October 31 (C$ millions)

Total small business loans

2009

2008

2007

2006

2005

11,831
26,666
121,394
44,144
41,158

245,193

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

$ 234,109

$ 213,096

$ 186,568

$ 173,747

57
190
647
300
318

1,512

56
90
942
138
143

1,369

66
122
504
158
107

957

43
63
610
60
48

824

2009

304
666
2,261
367
66
316
1,696
102
3,053
318
961
5,013

2008

261
636
2,234
384
84
346
1,672
100
3,052
316
940
4,687

53
118
322
112
92

697

40
66
490
51
48

695

2007

271
650
2,350
370
88
351
1,543
98
2,822
314
901
4,488

53
68
286
107
75

589

33
47
344
38
45

507

2006

248
601
2,043
284
73
366
1,377
88
2,565
300
774
4,098

47
44
269
78
65

503

30
7
368
44
(14)

435

Table 73

2005

715
490
1,728
182
78
311
1,057
57
1,982
243
549
3,365

15,123

14,712

14,246

12,817

10,757

(1)

Other sector in 2009 related primarily to other services, $3,144 million; health, $1,290 million; holding and investment, $452 million; and financing products, $82 million.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2009

REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS

Reports

Notes to the Consolidated
Financial Statements

75 Management’s Responsibility
for Financial Reporting

Note 1

Significant
accounting
policies and
estimates

Fair value of
financial
instruments

119 Note 21

121 Note 22

Stock-based
compensation

Revenue from
trading and
selected non-
trading financial
instruments

Note 3

Securities

121 Note 23

Income taxes

Note 4

Loans

122 Note 24

Report of Independent
Registered Chartered
Accountants

Comments by Independent
Registered Chartered
Accountants on Canada-
United States of America
Reporting Difference

76 Management’s Report on

Internal Control over Financial
Reporting

Report of Independent
Registered Chartered
Accountants

Consolidated Financial Statements

Consolidated Balance Sheets

Consolidated Statements of
Income

Consolidated Statements of
Comprehensive Income and
Changes in Shareholders’
Equity

Consolidated Statements of
Cash Flows

Note 2

102

Note 5

Securitizations

Note 6

Variable interest
entities

103 Note 7

108 Note 8

108 Note 9

109 Note 10

Derivative
instruments and
hedging activities

Premises and
equipment

RBC Dexia
Investor Services
joint venture

Goodwill and
other Intangibles

109 Note 11

Significant
acquisitions

110 Note 12 Other assets

111 Note 13

Deposits

111 Note 14

Insurance

112 Note 15 Other liabilities

112 Note 16

113 Note 17

114 Note 18

116 Note 19

116 Note 20

Subordinated
debentures

Trust capital
securities

Preferred share
liabilities and
share capital

Non-controlling
interest in
subsidiaries

Pensions and
other post-
employment
benefits

123 Note 25

126 Note 26

127 Note 27

127 Note 28

129 Note 29

Earnings per
share

Guarantees,
commitments
and
contingencies

Contractual
repricing and
maturity
schedule

Related party
transactions

Results by
business and
geographic
segment

Nature and extent
of risks arising
from financial
instruments

129 Note 30

Capital
management

130 Note 31

145 Note 32

Reconciliation
of the application
of Canadian and
United States
generally
accepted
accounting
principles

Parent company
information

146 Note 33

Subsequent Event

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Management’s Responsibility for Financial Reporting

The accompanying consolidated financial statements of Royal Bank of
Canada (RBC) were prepared by management, which is responsible
for the integrity and fairness of the information presented, including
the many amounts that must of necessity be based on estimates and
judgments. These consolidated financial statements were prepared in
accordance with the Bank Act (Canada) and Canadian generally
accepted accounting principles (GAAP). Financial information
appearing throughout our Management’s Discussion and Analysis is
consistent with these consolidated financial statements.

RBC’s internal controls are designed to provide reasonable
assurance 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 proce-
dures manuals, a corporate code of conduct and accountability for
performance within appropriate and well-defined areas of responsi-
bility.

The system of internal controls is further supported by a
compliance function, which is designed to ensure that we and our
employees comply with securities legislation and conflict of interest
rules, and by an internal audit staff, which conducts periodic audits of
all aspects of our operations.

The Board of Directors oversees management’s responsibilities

for financial reporting through an Audit Committee, which is
composed entirely of independent directors. This Committee reviews
our consolidated financial statements and recommends them to the

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, 2009 and 2008 and the
consolidated statements of income, comprehensive income, changes
in shareholders’ equity and cash flows for each of the years in the
three year period ended October 31, 2009. These financial state-
ments 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 estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present

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 Chief Compliance
Officer and Chief Internal Auditor have full and unrestricted access to
the Audit Committee.

The Office of the Superintendent of Financial Institutions Canada

(OSFI) examines and inquires into the business and affairs of RBC as
deemed necessary to determine whether the provisions of the Bank
Act are being complied with, and that RBC is in sound financial
condition. In carrying out its mandate, OSFI strives to protect the
rights and interests of depositors and creditors of RBC.

Deloitte & Touche LLP, Independent Registered Chartered

Accountants appointed by the shareholders of RBC upon the
recommendation 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 Administrative Officer and Chief Financial Officer

Toronto, December 3, 2009

fairly, in all material respects, the financial position of the Bank as at
October 31, 2009 and 2008 and the results of its operations and its
cash flows for each of the years in the three year period ended
October 31, 2009 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, 2009
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 3, 2009
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 3, 2009

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, 4, and 31 to the consolidated financial statements.
Although we conducted our audits in accordance with both Canadian
generally accepted auditing standards and the standards of the
Public Company Accounting Oversight Board (United States), our
report to the shareholders dated December 3, 2009, 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 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 3, 2009

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

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 Administrative Officer and 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 our 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 directors of RBC
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of RBC
assets that could have a material effect on our financial
statements.

•

Due to its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements on a timely basis. Also,
projections of any evaluation of the effectiveness of internal control
over financial reporting to future periods are subject to the risk that
the 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, 2009 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
assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Bank’s internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the

Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable 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 evaluating 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,
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. A company’s internal
control over financial reporting includes those policies and proce-
dures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of
the company are being made only in accordance with authorizations

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Management evaluated, under the supervision of and with the

participation of the President and Chief Executive Officer and the
Chief Administrative Officer and Chief Financial Officer, the
effectiveness of the internal control over financial reporting of RBC as
of October 31, 2009, 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 evalua-
tion, management concluded that, as of October 31, 2009, internal
control over financial reporting was effective based on the criteria
established in the Internal Control – Integrated Framework. Also,
based on the results of our evaluation, management concluded that
there were no material weaknesses that have been identified in
internal control over financial reporting as of October 31, 2009.

The internal control over financial reporting of RBC as of
October 31, 2009 has been audited by Deloitte & Touche LLP,
Independent Registered Chartered Accountants, who also audited our
Consolidated Financial Statements for the year ended October 31,
2009, as stated in the Report of Independent Registered Chartered
Accountants, which report expressed an unqualified opinion on the
effectiveness of our internal control over financial reporting.

Gordon M. Nixon
President and Chief Executive Officer

Janice R. Fukakusa
Chief Administrative Officer and Chief Financial Officer

Toronto, December 3, 2009

of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection 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, projections 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
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, the Bank maintained, in all material respects,
effective internal control over financial reporting as of October 31,
2009 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, 2009 of the Bank and our report dated December 3, 2009
expressed an unqualified opinion on those consolidated financial
statements and includes a separate report titled Comments by
Independent Registered Chartered Accountants on Canada-United
States of America Reporting Difference referring to changes in
accounting principles.

Deloitte & Touche LLP
Independent Registered Chartered Accountants
Licensed Public Accountants

Toronto, Canada
December 3, 2009

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 (2) (Note 8)
Goodwill (Note 10)
Other intangibles (2) (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)

Non-controlling interest in subsidiaries (Note 19)

Shareholders’ equity (Note 18)

Preferred shares
Common shares (shares issued – 1,417,609,720 and 1,341,260,229)
Contributed surplus
Treasury shares – preferred (shares held – 64,600 and 259,700)

– common (shares held – 2,126,699 and 2,258,047)

Retained earnings (1)
Accumulated other comprehensive income (loss)

2009 (1)

2008 (1)

8,353 $

8,923

140,062
46,210

186,272

41,580

205,224
78,927

284,151

11,086

20,041

122,508
48,626

171,134

44,818

195,455
96,300

291,755

(3,188)

(2,215)

280,963

289,540

9,024
92,173
2,367
8,368
2,033
14,933

128,898
654,989 $

152,328 $
220,772
25,204

398,304

9,024
41,359
35,150
84,390
8,922
31,007

209,852

6,461

1,395

2,071

4,813
13,075
246
(2)
(95)
20,585
(1,716)

36,906
654,989 $

11,285
136,134
2,471
9,977
2,042
25,331

187,240

723,859

139,036
269,994
29,545

438,575

11,285
27,507
32,053
128,705
7,385
35,809

242,744

8,131

1,400

2,371

2,663
10,384
242
(5)
(104)
19,816
(2,358)

30,638

723,859

(1)
(2)

Opening retained earnings as at November 1, 2006 has been restated. Refer to ‘Accounting adjustments’ in Note 1.
Comparative information has been reclassified as a result of adopting CICA Handbook Section 3064. Refer to ‘Significant accounting changes’ in Note 1.

Gordon M. Nixon
President and Chief Executive Officer

Victor L. Young
Director

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

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)
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 (1)
Occupancy
Communications
Professional fees
Outsourced item processing
Amortization of other intangibles (1) (Note 10)
Other

Goodwill impairment charge

Income before income taxes
Income taxes (Note 23)

Net income before non-controlling interest

Non-controlling interest in net income of subsidiaries

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)

Average number of diluted common shares (in thousands) (Note 24)
Diluted earnings per share (in dollars)

Dividends per share (in dollars)

(1)

Comparative information has been reclassified as a result of adopting CICA Handbook Section 3064. Refer to Note 1.

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

2009

2008

2007

13,504
5,946
931
162

20,543

6,762
1,925
350

9,037

11,506

5,718
2,671
1,619
1,293
1,358
1,556
1,050
638
732
530
1,169
(630)
(104)

17,600

29,106

3,413

4,609

8,978
1,025
1,045
761
559
301
462
1,427

14,558

1,000

5,526
1,568

3,958

100

3,858

(233)

3,625

14,983
6,662
2,889
498

25,032

12,158
3,472
354

15,984

9,048

2,609
(96)
1,759
1,561
1,377
1,367
875
646
648
415
461
(617)
1,529

12,534

21,582

1,595

1,631

7,779
934
926
749
562
341
356
704

14,724
7,665
3,620
538

26,547

13,770
4,737
338

18,845

7,702

3,152
1,999
1,579
1,473
1,353
1,303
1,217
533
491
293
261
63
1,043

14,760

22,462

791

2,173

7,860
847
839
723
530
308
258
1,108

12,351

12,473

–

6,005
1,369

4,636

4,555

(101)

4,454

–

7,025
1,392

5,633

141

5,492

(88)

5,404

1,398,675
2.59

1,412,126
2.57

1,305,706
$3.41

1,319,744
$3.38

1,273,185
$4.24

1,289,314
$4.19

2.00

$2.00

$1.82

Consolidated Statements of Comprehensive Income

For the year ended October 31 (C$ millions)

Comprehensive income

Net income
Other comprehensive income, net of taxes
Net unrealized gains (losses) on available-for-sale securities
Reclassification of losses on available-for-sale securities to income
Net change in unrealized gains (losses) on available-for-sale securities
Unrealized foreign currency translation (losses) gains
Reclassification of losses (gains) on foreign currency translation to income
Net foreign currency translation gains (losses) from hedging activities
Foreign currency translation adjustments
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification of (gains) losses on derivatives designated as cash flow hedges to income
Net change in cash flow hedges
Other comprehensive income (loss)

Total comprehensive income

Consolidated Statements of Changes in Shareholders’ Equity

For the year ended October 31 (C$ millions)

Preferred shares (Note 18)

Balance at beginning of year
Issued
Redeemed for cancellation
Balance at end of year

Common shares (Note 18)

Balance at beginning of year
Issued
Purchased for cancellation
Balance at end of year

Contributed surplus

Balance at beginning of year
Renounced stock appreciation rights
Stock-based compensation awards
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 (1)
Transition adjustment – Financial instruments (2)
Adjustment (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 (loss) income

Transition adjustment – Financial instruments (2)
Unrealized losses on available-for-sale securities
Unrealized foreign currency translation 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

2009

2008

2007

3,858 $

4,555 $

5,492

662
330
992
(2,973)
2
2,399
(572)
156
(38)
118
538
4,396 $

(1,376)
373
(1,003)
5,080
(3)
(2,672)
2,405
(603)
49
(554)
848
5,403 $

(93)
28
(65)
(2,965)
(42)
1,804
(1,203)
80
31
111
(1,157)
4,335

2009

2008 (1)

2007 (1)

2,663 $
2,150
–
4,813

2,050 $
613
–
2,663

10,384
2,691
–
13,075

7,300
3,090
(6)
10,384

242
(7)
(11)
22
246

(5)
13
(10)
(2)

(104)
59
(50)
(95)

19,816
66
–
3,858
(233)
(2,819)
–
(103)
20,585

235
(5)
14
(2)
242

(6)
23
(22)
(5)

(101)
51
(54)
(104)

18,047
–
–
4,555
(101)
(2,624)
(49)
(12)
19,816

59
(76)
(1,374)
(325)
(1,716)
18,869
36,906 $

(45)
(1,068)
(802)
(443)
(2,358)
17,458
30,638 $

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)

15,771
(86)
(120)
5,492
(88)
(2,321)
(580)
(21)
18,047

(45)
(65)
(3,207)
111
(3,206)
14,841
24,319

(1)
(2)

Opening retained earnings as at November 1, 2006 has been restated. Refer to Note 1.
The 2007 transition adjustment relates to the implementation of the financial instruments accounting standards on November 1, 2006. The 2009 transition adjustment relates to the
amendments to certain of these standards that were effective November 1, 2008. Refer to Note 1.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Consolidated Statements of Cash Flows

For the year ended October 31 (C$ millions)

Cash flows from operating activities

2009

2008

2007

Net income
Adjustments to determine net cash from (used in) operating activities

3,858

4,555

5,492

Provision for credit losses
Depreciation (1)
Business realignment payments
Future income taxes
Impairment of goodwill and amortization of other intangibles (1)
Gain on sale of premises and equipment
Gain on securitizations
(Gain) loss on 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
Net change in brokers and dealers receivable and payable
Other

Net cash from operating activities

Cash flows from investing activities

Change in interest-bearing deposits with banks
Change in loans, net of securitizations
Proceeds from securitizations
Proceeds from sale of available-for-sale securities
Proceeds from maturity of available-for-sale securities
Purchases of available-for-sale securities
Net acquisitions of premises and equipment and software
Change in assets purchased under reverse repurchase agreements

and securities borrowed
Net cash used in acquisitions

Net cash from (used in) investing activities

Cash flows from financing activities

Change in deposits
Issue of Trust Subordinated Notes
Repayment of subordinated debentures
Issue of subordinated debentures
Issue of preferred shares
Redemption of preferred shares for cancellation
Issue of RBC Trust Capital Securities (RBC TruCS)
Issue of common shares
Purchase of common shares for cancellation
Sales of treasury shares
Purchase of treasury shares
Dividends paid
Issuance costs
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
Redemption of trust preferred notes
Change in short-term borrowings of subsidiaries

Net cash (used in) 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

(1)

Comparative information has been reclassified as a result of adopting CICA Handbook Section 3064. Refer to Note 1.

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

3,413
389
(2)
(97)
1,462
5
(934)
(17)
657

1,537
(147)
3,546
43,961
(44,315)
(11,382)
2,396
3,073

7,403

11,118
(17,854)
21,788
12,515
18,108
(32,268)
(700)

3,238
(27)

15,918

(40,742)
–
(1,659)
–
2,150
–
–
2,439
–
72
(60)
(2,744)
(77)
(4)

3,097
13,852
(140)
(1,967)

(25,783)

(271)

(2,733)
11,086

8,353

9,910
(102)

$
$

1,595
318
(11)
(455)
356
(17)
(207)
1
631

102
164
(2,705)
(69,527)
56,685
24,966
(552)
(4,518)

11,381

(8,160)
(62,725)
10,047
8,885
14,804
(24,864)
(1,265)

19,650
(974)

(44,602)

61,271
–
(500)
2,000
613
(300)
500
149
(55)
74
(76)
(2,688)
(11)
(33)

(6,172)
(17,192)
–
1,618

39,198

883

6,860
4,226

11,086

15,967
2,025

$
$

791
434
(38)
(147)
96
(16)
(44)
(146)
66

(54)
(28)
1,034
(28,856)
29,916
10,976
(317)
3,341

22,500

(1,379)
(42,097)
8,318
8,117
15,350
(22,012)
(706)

(4,935)
(373)

(39,717)

16,831
1,000
(989)
87
1,150
(150)
–
155
(646)
208
(133)
(2,278)
(23)
(59)

(4,070)
6,436
–
(145)

17,374

(332)

(175)
4,401

4,226

18,494
1,352

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
accordance with Canadian generally accepted accounting principles
(GAAP). The significant accounting policies used in the preparation of
these financial statements, including the accounting requirements of
OSFI, are summarized below. These accounting policies conform, in
all material respects, to Canadian GAAP.

General
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 investments 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 is 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.

Use of estimates and assumptions
In preparing our Consolidated Financial Statements, 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, VIEs, 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 subjective or complex judgments. Accordingly,
actual results could differ from these and other estimates thereby
impacting our future Consolidated Financial Statements.

Accounting adjustments
In 2009, we corrected the following errors pertaining to prior periods:
an under accrual of $90 million ($62 million after-tax) of our cards
points liability; a $63 million ($43 million after-tax) over capital-
ization of software development costs; and a $15 million
understatement of income taxes. These errors are not material to the
periods to which they relate; however, as correcting them in the first
quarter of 2009 would have materially distorted the net income for
that quarter, we corrected them by decreasing opening retained
earnings for the quarter ended January 31, 2007, by $120 million.

Significant accounting changes
Goodwill and Intangible Assets
On November 1, 2008, we adopted Canadian Institute of Chartered
Accountants (CICA) Handbook Section 3064, Goodwill and Intangible
Assets (Section 3064). Section 3064, which replaces Section 3062,
Goodwill and Other Intangible Assets, and Section 3450, Research
and Development Costs, provides clarifying guidance on the criteria
that must be satisfied in order for an intangible asset to be recog-
nized, including internally developed intangible assets. The CICA’s
Emerging Issues Committee (EIC) Abstract No. 27, Revenues and
Expenditures During the Pre-operating Period, is no longer applicable
once Section 3064 has been adopted. As a result of adopting
Section 3064, we reclassified $789 million of software from Premises
and equipment to Other intangibles on our Consolidated Balance
Sheets as at November 1, 2008. We have also reclassified
depreciation of $221 million and $162 million from Non-interest
expense – Equipment to Non-interest expense – Amortization of other
intangibles on our Consolidated Statements of Income for the year
ended October 31, 2008 and October 31, 2007, respectively.

Credit Risk and the Fair Value of Financial Assets and Financial
Liabilities
In January 2009, the EIC issued Abstract No. 173, Credit Risk and the
Fair Value of Financial Assets and Financial Liabilities (EIC-173).
EIC-173 requires an entity to take into account its own credit risk and
that of the relevant counterparty(s) when determining the fair value of
financial assets and financial liabilities, including derivative
instruments. This EIC, which was effective for us on November 1,
2008, had no impact on our financial position or results of operations
because we had been incorporating the aforementioned credit risks
into our valuation methodology before the EIC was issued.

Effective Interest Method – Amendments to: Financial Instruments –
Recognition and Measurement, Section 3855.
In June 2009, the CICA clarified Section 3855 with respect to the
effective interest method which is a method of calculating the
amortized cost of financial assets and financial liabilities and of
allocating the interest income or interest expense over the relevant
period. The impact of the clarification had no material impact on our
consolidated financial position or results of operations.

Embedded Derivatives on Reclassification of Financial Assets –
Amendments to: Financial Instruments – Recognition and
Measurement, Section 3855.
In June 2009, the CICA clarified Section 3855 with respect to the
reclassification of financial instruments with embedded derivatives. A
financial instrument classified as held-for-trading may not be
reclassified when the embedded derivative that would have to be
separated on reclassification of the combined contract cannot be
measured separately. The amendment was effective for
reclassifications made on or after July 1, 2009 and had no material
impact on our consolidated financial position or results of operations.

Fair Value and Liquidity Risk Disclosure – Amendments to: Financial
Instruments – Disclosures, Section 3862.
In June 2009, the CICA amended Section 3862 to improve fair value
and liquidity risk disclosures. Section 3862 now requires that all
financial instruments measured at fair value be categorized into one
of three hierarchy levels, described below, for disclosure purposes.
Each level is based on the transparency of the inputs used to
measure the fair values of assets and liabilities:

Level 1 – inputs are unadjusted quoted prices of identical

instruments in active markets.

Level 2 – inputs other than quoted prices included in Level 1 that

are observable for the asset or liability, either directly or indirectly.

Level 3 – one or more significant inputs used in a valuation

technique are unobservable in determining fair values of the
instruments.

Determination of fair value and the resulting hierarchy requires

the use of observable market data whenever available. The classi-
fication of a financial instrument in the hierarchy is based upon the
lowest level of input that is significant to the measurement of fair
value. The amendments only impact our disclosures. Refer to Note 2.
We have also enhanced our liquidity disclosures by including details
on our sources of funding. Refer to Note 29.

Impairment of Financial Assets – Amendments to: Financial
Instruments – Recognition and Measurement, Section 3855.
In August 2009, the CICA issued various amendments to
Section 3855 which eliminated the distinction between debt
securities and other debt instruments and changed the categories to
which debt instruments are required or are permitted to be classified.
As a result of these amendments non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market may be classified as loans and receivables; loan and receiv-
ables for which we may not recover substantially all of our initial
investment, other than because of credit deterioration, must be
classified as available-for-sale; and loans and receivables that we
intend to sell immediately or in the near term must be classified as
held-for-trading.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 1 Significant accounting policies and estimates (continued)

The amendments also permit, upon adoption and on an on-going
basis, certain financial assets be reclassified from the held-for-trading
and available-for-sale categories into the loans and receivables
category, when specified conditions are met. They also require
reversing an impairment loss relating to an available-for-sale debt
instrument when, in a subsequent period, the fair value of the
instrument increases and the increase can be objectively related to an
event occurring after the loss was recognized. Impairment for debt
instruments classified as loans and receivables will be assessed
using the impairment model for loans.

We adopted these amendments with retrospective application to

November 1, 2008, in accordance with the transitional provisions of
the amendments; accordingly, we have reclassified $179 million of
held-for-trading and $929 million of available-for-sale securities to
loans and recorded the following transition adjustments in our
Consolidated Financial Statements: (i) an increase of $66 million, net
of taxes of $30 million, to our Retained earnings as of November 1,
2008, representing an adjustment to the impairment amount
calculated as a result of using the impairment model for loans, and
(ii) an increase of $104 million, net of taxes of $57 million, to our
Accumulated other comprehensive income (AOCI) as of November 1,
2008, representing the cumulative marked-to-market adjustments
previously recorded. Our results for 2009 were also impacted by the
amendments as follows: (i) an increase of $64 million, net of taxes, to
our Net income, representing an adjustment to the impairment
amount calculated as a result of using the impairment model for
loans, and (ii) a reduction to Other comprehensive income (OCI) of
$26 million, net of taxes, representing the cumulative unrealized
gains adjustments previously recorded.

We have reclassified $179 million of loans intended to be sold in

the near future upon origination to the held-for-trading category. We
recorded an increase of $2 million, net of taxes, to our Net income,
representing marked-to-market adjustments on these reclassified
loans.

Financial Instruments – Recognition and Measurement
Securities
Securities are classified, based on management’s intentions, as
held-for-trading, available-for-sale or held-to-maturity. Certain debt
securities may be classified as loans and receivables as of
November 1, 2008 in accordance with the CICA’s amendments to
Section 3855 discussed earlier in this Note under “Significant
accounting changes.”

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
difference 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.

At each reporting date, and more frequently when conditions
warrant, we evaluate our available-for-sale securities with unrealized
losses to determine whether those unrealized losses are other-than-

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

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
impairment; (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
securities and losses related to other-than-temporary impairment in
value of available-for-sale securities are included in Non-interest
income as Net gains or losses on available-for-sale securities.

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.

We assess our held-to-maturity securities for impairment using
the same impairment model for loans in accordance with the CICA’s
amendments to Section 3855 discussed earlier in this Note under
“Significant accounting changes.” Refer to the Loans section for
details.

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 income. These instru-
ments cannot 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 repurchase 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, and interest incurred on repurchase agreements is included
in Interest expense, respectively, 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.

Securitizations
Our various securitization activities generally consist of the transfer of
financial assets to independent special purpose entities (SPEs) or
trusts that issue securities to investors. SPEs may be a VIE as defined
by CICA Accounting Guideline (AcG) 15, Consolidation of Variable
Interest Entities (AcG-15) or a Qualifying SPEs (QSPEs) as defined
under AcG-12, Transfer of Receivables.

These transactions are accounted for as sales and the trans-
ferred 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 transferred assets. For control to be surrendered, all of the
following must occur: (i) the transferred assets 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 assets or, if
the purchaser is a QSPE, its investors have the right to sell or pledge
their ownership interest in the entity; and (iii) the seller must not
continue to control the transferred assets through an agreement to
repurchase them or have a right to cause the assets to be returned. If
any one of these conditions is not met, the transfer is considered to
be a secured borrowing, the assets remain on our Consolidated
Balance Sheets, and the proceeds are recognized as a liability.

In the case of loan securitizations, we sell loans or package

mortgage-backed securities (MBS) to SPEs or trusts that issue
securities to investors.

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 largely represents the excess spread of
loan interest over the MBS rate of return. The initial carrying value of
the MBS and the related retained interests are determined based on
their relative fair value on the date of securitization. MBS are
classified as held-for-trading 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 retained interests classified as available-for-sale 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 average life of the pre-
payable 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 – Other
assets. When the benefits of servicing are not expected to be
adequate, we recognize a servicing liability in Other – Other
liabilities. Neither an asset nor a liability is recognized when we have
received adequate compensation. A servicing asset or liability is
amortized in proportion to and over the period of estimated net
servicing income.

In the case of bond securitizations, we purchase municipal

government, government related and corporate bonds, and issue
securities that are sold to third party investors. We do not retain any

beneficial interest unless we purchase some of the certificates
issued.

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 Other – Other Liabilities 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 Other – Other Assets. 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 rate,
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 recog-
nized 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, 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 rate, 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.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 1 Significant accounting policies and estimates (continued)

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 discontinued, 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 previously
recognized in AOCI are reclassified to Net interest income during the
periods when the variability in the cash flows of the hedged item
affects Net interest income. Gains and losses on derivatives are
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
reduction in equity of the foreign operation as a result of dividend
distributions. We use foreign currency-denominated liabilities and
foreign exchange contracts to manage our foreign currency exposures
to net investments in self-sustaining foreign operations having a
functional currency other than the Canadian dollar.

Loans
Loans are recorded at amortized cost unless upon origination, we
intend to sell them in the near future or 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 recorded at amortized cost are subject to periodic

impairment review and are classified as impaired when, in
management’s opinion, there is no longer reasonable assurance of
the timely collection of the full amount of principal or interest.
Whenever a payment is 90 days past due, loans other than credit card
balances and loans guaranteed or insured by a Canadian government
(federal or provincial) or a Canadian government agency (collectively,
Canadian government) are classified as impaired unless they are fully
secured and collection efforts are reasonably expected to result in
repayment of debt within 180 days of the loan becoming 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 carrying value of the loan. If the loan is completely
written off, subsequent payments are credited to the Provision for

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

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, which is
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.

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 determi-
nation 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.

Guarantees
In the normal course of our business, we enter into numerous
agreements 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.
Liabilities are recognized on our Consolidated Balance Sheets at the
inception of a guarantee for the fair value of the obligation under-
taken 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.

Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are presented net when we
have a legally enforceable right to set off the recognized amounts and
intend to settle on a net basis or to realize the asset and settle the
liability simultaneously.

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 receiv-
ables, 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
mortality, morbidity, policy lapses and surrenders, investment yields,
policy dividends, operating and policy maintenance expenses, and
provisions for adverse deviation. These assumptions are reviewed at
least annually and updated in response to actual experience and
market conditions. Liabilities for property and casualty insurance
represent estimated provisions for reported and unreported claims.
Liabilities for life and property and casualty insurance are included in
Insurance claims and policy benefit liabilities. Changes in Insurance
claims and policy benefit liabilities are included in the Insurance

policyholder benefits, claims and acquisition expense in our
Consolidated Statements of Income in the period in which the
estimates changed.

Reinsurance recoverables related to property and casualty
insurance 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.

Acquisition costs for new insurance business consist of
commissions, premium taxes, certain underwriting costs and other
costs that vary with the acquisition of new business. Deferred
acquisition costs for life insurance products are implicitly recognized
in Insurance claims and policy benefit liabilities by CALM. For property
and casualty insurance, these costs are classified as Other assets and
amortized over the policy term.

Segregated funds are lines of business in which we issue a contract

where the benefit amount is directly linked to the market value of the
investments held in the underlying fund. The contractual arrangement is
such that the underlying assets are registered in our name but the
segregated fund policyholders bear the risk and rewards of the fund’s
investment performance. We provide minimum death benefit and
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.

Pensions and other post-employment benefits and stock-based
compensation
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
calculated using a market-related value approach. Under this
approach, assets are valued at an adjusted market value, whereby
realized and unrealized capital gains and losses are amortized over 3
years on a straight-line basis. For the majority of the non-principal
and supplemental defined benefit pension plans, the expected return
on plan assets is calculated based on fair value of assets.

Actuarial valuations for the defined benefit plans are performed

on a regular basis to determine the present value of the accrued
pension and other post-employment benefits, based on projections
of employees’ compensation levels to the time of retirement and the
costs of health, dental, disability and life insurance, respectively.

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 liabilities, expected investment return on the market-related
value or market value of plan assets and the amortization of prior
service costs, net actuarial gains or losses and transitional assets or
obligations. For some of our defined benefit plans, including the
principal defined benefit plans, actuarial gains or losses are
determined each year and amortized over the expected 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 10% of the greater 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 Non-interest expense – Human Resources when
settlement occurs. Curtailment gains and losses are recognized in the
period when the curtailment becomes probable and the impact can
be reasonably estimated.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 1 Significant accounting policies and estimates (continued)

The cumulative excess of pension fund contributions over the

amounts recorded as expenses is reported as a Prepaid pension
benefit cost in Other assets. The cumulative excess of expense over
fund contributions is reported as Accrued pension and other post-
employment benefit expense in Other liabilities.

Our defined contribution plan expense is included in

Non-interest expense – Human resources for services rendered by
employees during the period.

Stock-based compensation
We offer stock-based compensation plans to certain key employees
and to our non-employee directors as described in Note 21.

We use the fair value method to account for stock options
granted to employees whereby compensation expense is recognized
over the applicable vesting period with a corresponding increase in
contributed surplus. When the options are exercised, the exercise
price proceeds together with the amount initially recorded in
contributed surplus are credited to common shares. Stock
appreciation rights (SARs) obligations that are fully vested give rise to
compensation expense as a result of changes in the market price of
our common shares. These expenses, net of related hedges, are
recorded as Non-interest expense – Human resources in our
Consolidated Statements of Income with a corresponding increase in
Other liabilities on our Consolidated Balance Sheets.

Our other compensation plans include performance deferred
share plans and deferred share unit plans for key employees (the
Plans). The deferred share plans are settled in our common shares or
cash and the deferred share unit plans are settled in cash. The
obligations for the Plans are accrued over their vesting period. For
share-settled awards, our accrued obligations are based on the
market price of our common shares at the date of grant. For cash-
settled awards, our accrued obligations are periodically adjusted for
fluctuations in the market price of our common shares and dividends
accrued. Changes in our obligations under the Plans, net of related
hedges, are recorded as Non-interest expense – Human resources in
our Consolidated Statements of Income with a corresponding
increase in Other liabilities or Contributed surplus on our
Consolidated Balance Sheets.

The compensation cost attributable to options and awards, granted

to employees who are eligible to retire or will become eligible to retire
during the vesting period, is recognized immediately if the employee is
eligible to retire on the grant date or over the period between the grant
date and the date the employee becomes eligible to retire.

Our contributions to the employee savings and share ownership

plans are expensed as incurred.

Income taxes
We use the asset and liability method whereby income taxes reflect
the expected future tax consequences of temporary differences
between the carrying amounts of assets or liabilities for accounting
purposes compared with tax purposes. A future income tax asset or
liability is determined for each temporary difference based on the tax
rates that are expected to be in effect when the underlying items of
income and expense are expected to be realized, except for earnings
related to our foreign operations where repatriation of such amounts
is not contemplated in the foreseeable future. Income taxes reported
on 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. Our Consolidated Statements of Income include 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.

Net future income taxes accumulated as a result of temporary
differences and tax loss carryforwards are included in Other assets.
On a quarterly basis, we review our future tax assets to determine
whether it is more likely than not that the benefits associated with
these assets will be realized; this review involves evaluating both

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

positive and negative evidence. A valuation allowance is established
to reduce future income tax assets to the amount that we believe is
more likely than not to be realized. We review both positive and
negative evidence in assessing whether future income tax assets are
more likely than not to be realized.

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. The goodwill allocated to
the portion of the reporting unit to be retained is tested for impair-
ment.

Goodwill is evaluated for impairment annually as at August 1 or

more often if events or circumstances indicate there may be an
impairment. We test our goodwill by first determining the fair value of
each reporting unit and comparing it to its carrying value, including
the allocated 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 assets and
liabilities of the reporting unit. 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, and is charged to
Income in the period in which the impairment is identified.
Subsequent reversals of impairment are prohibited.

The fair value of each reporting unit is determined primarily
using an earnings-based approach which incorporates each reporting
unit’s internal forecasts of revenue and expenses. Estimates and
assumptions of discount rates, growth rates, and terminal growth
rates are incorporated in this approach. Changes to these estimates
or assumptions could have an impact on the determination 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 estimate the fair value of each
reporting unit 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, 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.

Other
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at rates prevailing at the balance
sheet date. Non-monetary assets and liabilities are translated into
Canadian dollars at historical rates. Income and expenses denomi-
nated in foreign currencies are translated at average rates of
exchange for the year.

Assets and liabilities of our self-sustaining operations with
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 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

Section 1601 establishes standards for preparing consolidated

in Non-interest income.

Premises and equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is recorded principally on a straight-line
basis over the estimated useful lives of the assets, which are 25 to
50 years for buildings, 3 to 10 years for computer equipment, and
7 to 10 years for furniture, fixtures and other equipment. The
amortization period for leasehold improvements is the lesser of the
useful life of the leasehold improvements or the lease term plus the
first renewal period, if reasonably assured of renewal, up to a
maximum of 10 years. Gains and losses on disposal are recorded in
Non-interest income.

Future accounting changes
Business Combinations, Consolidated Financial Statements, and
Non-controlling Interests
In January 2009, the CICA issued three new accounting standards:
Handbook Section 1582, Business Combinations, Section 1601,
Consolidated Financial Statements and Section 1602, Non-controlling
Interests. Section 1582 provides clarification as to what an acquirer
must measure when it obtains control of a business, the basis of
valuation and the date at which the valuation should be determined.
Acquisition-related costs must be accounted for as expenses in the
periods they are incurred, except for costs incurred to issue debt or
share capital. This new standard will be applicable for acquisitions we
complete on or after November 1, 2011 although adoption in 2010 is
permitted to facilitate the transition to IFRS in 2011.

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 trans-
action between knowledgeable and willing parties under no
compulsion to act. Fair values of identical instruments traded in
active markets are determined by reference to last quoted prices, in
the most advantageous active market for that instrument. In the
absence of an active market, we determine fair values based on
quoted prices for instruments with similar characteristics and risk
profiles. Fair values of financial instruments determined using
valuation models require the use of inputs. In determining those
inputs, we look primarily to external, readily observable market
inputs, when available, including factors such as interest rate yield
curves, currency rates, and price and rate volatilities, as applicable. In
some circumstances, we use input parameters that are not based on
observable market data. In these cases, we may adjust model values
to reflect the valuation uncertainty (model and parameter valuation
adjustments) in order to determine what the fair value would be
based on the assumptions that market participants would use in
pricing the financial instrument. These adjustments are made in order
to determine the fair value of the instruments.

For some securities, we may record valuation adjustments 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. We also include 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.
We make valuation adjustments for the credit risk of our

derivative portfolios in order to arrive at their fair values. These
adjustments take into account the creditworthiness of our counter-
parties, the current and potential future mark-to-market of the
transactions, and the effects of credit mitigants such as master
netting agreements and collateral agreements. Credit valuation
adjustments are frequently updated due to the changes in derivative
values and counterparty performance risk. Changes to credit
valuation adjustments are recorded in current period income.
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

financial statements after the acquisition date; Section 1602
establishes standards for the accounting and presentation of
non-controlling interest. These new standards must be adopted
concurrently with Section 1582.

Embedded Prepayment Option – Amendments to: Financial
Instruments – Recognition and Measurement, Section 3855.
In June 2009, the CICA provided clarification to Section 3855 with
respect to the accounting for embedded prepayment option. An
embedded prepayment option in an interest-only or principal-only strip
is closely related to the host contract, provided the host contract
initially resulted from separating the right to receive contractual cash
flows of a financial instrument, that, in and of itself, did not contain an
embedded derivative; and does not contain any terms not present in
the original host debt contract. This new standard will be applicable to
us on November 1, 2011 although adoption in 2010 is permitted to
facilitate the transition to IFRS in 2011. We are currently assessing the
impact of adopting this amendment on our consolidated financial
position and results of operations.

International Financial Reporting Standards
The CICA has announced that Canadian GAAP for publicly accountable
enterprises companies will be replaced with 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.

are consistently applied and periodically reviewed by Group Risk
Management.

Trading and available-for-sale securities and derivative-related

assets represent 92% of the total fair-value assets, and deposits
designated as held-for-trading and derivative-related liabilities
represent 69% of the total fair-value liabilities.

The majority of our financial instruments classified as held-for-

trading (other than derivatives) and as available-for-sale comprise
actively traded debt and equity securities and are carried at fair value
based on available quoted prices.

All of our derivatives transactions are accounted for on a fair
value basis. Fair values of exchange-traded derivatives are based on
last exchange prices. Over-the-counter derivatives are valued using
either industry standard or internally developed valuation models.
Valuation model inputs are either observable or unobservable.
Observable inputs of the financial instruments include G7
interest-rate-yield curves, currency rates and volatility of certain
prices or rates. Unobservable inputs consist of non-G7 interest-rate-
yield curves, prepayment speeds, credit speads, probability of
defaults, recovery rates, equity volatility and correlations of proba-
bility of defaults, market reference interest rates or baskets of
common stock.

Valuation methods and assumptions used in measuring fair values
of deposits designated as held-for-trading are described in the Carrying
value and fair value of selected financial instruments section below.

Deferred unrealized gains or losses at inception
An unrealized gain or loss at inception for financial instruments is the
difference between the transaction price and its fair value on the
trade date. Unrealized gains or losses at inception are 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 observable current
market transactions that are substantially the same; (ii) based on a
valuation technique that uses all significant observable market
inputs; or (iii) the risks associated with the derivative contract are
fully offset by another contract(s) with a third party(ies). 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

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 2 Fair value of financial instruments (continued)

inception is deferred and is include in Other-Derivatives. The deferred
gain or loss is recognized only 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
offset 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.

Deferred unrealized gains at inception primarily arise in equity
structured notes, structured credit and interest rate derivatives, and
stable value contracts on bank-owned life insurance policies and
401(k) plans.

The following table summarizes changes in the aggregate amount of
deferred unrealized gains at inception for our financial instruments.

Deferred unrealized gains not yet recognized

in net income, as at the beginning of the year

Less: Adjustments (1)
Adjusted balance, as at 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 end of the year

2009

2008

198
(130) $
68
(5)
17

$ 186
–
$ 186
24
12

$ 198

(1)

During 2009, we revised the valuation model that we use to fair value the stable value
contracts on bank-owned life insurance policies and 401(k) plans, as a result of newly
available data and information. The new valuation model eliminates the requirement for
deferred unrealized gains or losses at inception on these instruments which is reflected
in the table above.

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

Carrying value

Fair value

2009

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

Available-
for-sale
instruments
measured
at cost (1)

Total
carrying
amount

Total
fair
value

Financial assets
Securities

Trading (2)
Available-for-sale (2)
Total securities

Assets purchased under reverse repurchase

agreements and securities borrowed

Loans

Retail
Wholesale (2)
Total loans

Other

Derivatives
Other assets

Financial liabilities
Deposits

Personal
Business and government (3)
Bank (4)
Total deposits

Other

Obligations related to securities sold short $
Obligations related to assets sold under
repurchase agreements and securities
loaned

Derivatives (5)
Other liabilities

Subordinated debentures
Trust capital securities

127,394
–
127,394

–

–
–
–

92,173
–

–
–
–
–

41,359

–
84,390
–
–
–

12,668
–
12,668

18,911

–
2,818
2,818

–
244

2,605
40,335
10,880
53,820

–

21,628
–
240
110
–

–
44,850
44,850

–

–
–
–

–
–

–
–
–
–

–

–
–
–
–
–

–
–
–

22,669

203,856
74,289
278,145

–
–
–

22,669

$ 201,166
69,712
$ 270,878

–
18,590

149,723
180,437
14,324
344,484

$ 151,051
180,354
14,324
$ 345,729

–

13,522
–
33,757
6,351
1,395

13,522
–
33,757
6,262
1,482

–
1,360
1,360

$ 140,062
46,210
$ 186,272

–

–
–
–

–
–

–
–
–
–

–

–
–
–
–
–

41,580

$ 203,856
77,107
$ 280,963

$ 201,166
72,530
$ 273,696

92,173
18,834

$ 152,328
220,772
25,204
$ 398,304

$ 153,656
220,689
25,204
$ 399,549

41,359

35,150
84,390
33,997
6,461
1,395

35,150
84,390
33,997
6,372
1,482

(1)
(2)

(3)
(4)
(5)

Includes the nominal value of our held-to-maturity investments which are carried at amortized cost.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from held-for-trading and available-for-sale to loans in accordance with the CICA’s amendments to
Sections 3855. In addition, loans intended to be sold in the near future upon origination were reclassified from Loans to Trading.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.
Includes stable value contracts on $257 million of bank-owned life insurance policies and $3 million of 401(k) plans.

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Carrying value and fair value of

Carrying value

Fair value

2008

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

Available-
for-sale
instruments
measured
at cost (1)

Total
carrying
amount

Total
fair
value

104,414
–
104,414

–

–
–
–

136,134
–

–
–
–
–

27,507

–
128,705
–
–
–

18,094
–
18,094

15,607

–
7,137
7,137

–
136

2,678
67,462
7,268
77,408

–

17,870
–
–
81
–

–
47,039
47,039

–

–
–
–

–
–

–
–
–
–

–

–
–
–
–
–

–
–
–

29,211

194,448
87,955
282,403

–
–
–

29,211

$ 198,127
88,615
$ 286,742

–
30,903

136,358
202,532
22,277
361,167

$ 137,181
202,564
22,277
$ 362,022

–

14,183
–
42,271
8,050
1,400

14,183
–
42,458
7,605
1,448

–
1,587
1,587

$122,508
48,626
$171,134

–

–
–
–

–
–

–
–
–
–

–

–
–
–
–
–

$ 44,818

$194,448
95,092
$289,540

$198,127
95,752
$293,879

$136,134
31,039

$139,036
269,994
29,545
$438,575

$139,859
270,026
29,545
$439,430

$ 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

(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 stable value contracts on $2 million of bank-owned life insurance policies and $1 million of 401 (k) plans.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.

The following tables present information on loans and receivables
designated as held-for-trading using the fair value option, the
maximum exposure to credit risk, the extent to which the risk is
mitigated by credit derivatives and similar instruments, and changes
in the fair value of these assets. 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 calculated using the appropriate risk-free yield curves.

Carrying
amount of
loans and
receivables
designated
as held-for-
trading

Maximum
exposure to
credit risk

Change in fair
value since
November 1,
2008
attributable to
changes in
credit risk

2009

Cumulative
change in fair
value since
initial
recognition
attributable 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,
2008

Cumulative
change in fair
value of credit
derivatives
or similar
instruments (1)

2,773 $ 2,773

–

18,911
2,818

24,502 $ 24,502

–
27

–
(75)

(75)

–
428

428

–
(52)

(52)

–

–
10

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

(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 2009

Note 2 Fair value of financial instruments (continued)

Carrying
amount of
loans and
receivables
designated
as held-for-
trading

Maximum
exposure to
credit risk

Change in fair
value since
November 1,
2007
attributable to
changes in
credit risk

2008

Cumulative
change in fair
value since
initial
recognition
attributable 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,
2007

Cumulative
change in fair
value of credit
derivatives
or similar
instruments (1)

11,211 $

11,211

–

15,607
7,137

–
(201)

–
(248)

33,955 $

33,955

(201)

(248)

–
817

817

–
40

–

–
48

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

(1)

The cumulative change is measured from the later of November 1, 2006, or the initial recognition of the credit derivative or similar instruments.

The following tables present the changes in the fair value of our
financial liabilities designated as held-for-trading using the fair value
option as well as their contractual maturity and carrying amounts. The
carrying values (fair values) of these liabilities are based on present
value of the instruments’ contractual cash flows discounted at the
appropriate market interest rates. Appropriate markets rates
comprised observable benchmark interest rates and our credit
spreads which are either observable or unobservable. In order to

determine the changes in fair value attributable to changes in our
credit spreads as presented in the table below, we first calculate the
difference in present values of the instrument's contractual cash
flows by including and excluding our credit spreads in the discount
rate as at the beginning of the year. We then re-perform the same
calculations using the end-of-the-year rates. The difference between
those values represents the changes in fair value attributable to
changes in our credit spreads.

Liabilities designated as held-for-trading
Term deposits
Personal
Business and government (2)
Bank (3)

Total term deposits
Obligations related to assets sold under repurchase

agreements and securities loaned

Subordinated debentures
Other liabilities

Total

2009

Contractual
maturity
amount

2,605
40,167
10,880

Carrying
value

2,605
40,335
10,880

53,652

53,820

21,626
120
240

21,628
110
240

Difference
between
carrying
value and
contractual
maturity
amount

Changes in fair
value since
November 1, 2008
attributable to
changes in RBC
credit spreads

Cumulative
change in fair
value attributable
to changes in
RBC credit
spreads (1)

–
168
–

168

2
(10)
–

40
507
3

550

–
36
–

(6)
(57)
(1)

(64)

–
(12)
–

(76)

75,638

75,798

160

586

(1)
(2)
(3)

The cumulative change attributable to changes in our credit spreads 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 (2)
Bank (3)

Total term deposits
Obligations related to assets sold under repurchase

agreements and securities loaned

Subordinated debentures

Total

2008

Contractual
maturity
amount

Carrying
value

Difference
between
carrying
value and
contractual
maturity
amount

Changes in fair
value since
November 1, 2007
attributable to
changes in RBC
credit spreads

Cumulative
change in fair
value attributable
to changes in
RBC credit
spreads (1)

2,724
67,541
7,265

2,678
67,462
7,268

(46)
(79)
3

(40)
(449)
(3)

77,530

77,408

(122)

(492)

17,877
122

17,870
81

(7)
(41)

–
(41)

95,529

95,359

(170)

(533)

(46)
(524)
(4)

(574)

–
(48)

(622)

(1)
(2)
(3)

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Fair value of assets and liabilities classified using the fair value hierarchy
The following table presents the financial instruments measured at fair value classified by the fair value hierarchy set out in Section 3862 as
described in Note 1:

Financial assets

Interest bearing deposits with banks

Securities
Trading

Canadian government debt (3)

Federal
Provincial and municipal

U.S. state, municipal and agencies debt (3)
Other OECD government debt (4)
Mortgage-backed securities (3)
Asset-backed securities

CDOs (5)
Non-CDO securities

Corporate debt and other debt
Equities

Available-for-sale (6)

Canadian government debt (3)

Federal
Provincial and municipal

U.S. state, municipal and agencies debt (3)
Other OECD government debt (4)
Mortgage-backed securities (3)
Asset-backed securities

CDOs
Non-CDO securities

Corporate debt and other debt
Equities
Loan substitute securities

Assets purchased under reverse repurchase agreements and

securities borrowed

Loans

Other

Derivatives
Other assets

Financial Liabilities

Deposits

Personal
Business and government
Bank

Other

Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements

and securities loaned

Derivatives
Other liabilities
Subordinated debentures

As at October 31, 2009

Fair value measurements using (1)

Level 1

Level 2

Level 3

Netting
adjustments (2)

Assets/
liabilities
at fair value

– $

2,773 $

– $

2,773

–
–
–
–
–

–
–
–
34,313

25,269
5,073
13,289
8,033
20

–
211
46,015
119

5
54
9
–
1,052

3,074
321
303
2,902

–
–
–
–
–

–
–
–
–

25,274
5,127
13,298
8,033
1,072

3,074
532
46,318
37,334

$ 34,313 $ 98,029 $ 7,720 $

– $ 140,062

–
237
–
908
–

–
–
177
537
–

12,161
897
3,435
2,622
4

–
3,050
10,802
147
150

–
–
2,358
–
1,848

222
1,155
3,580
560
–

–
–
–
–
–

12,161
1,134
5,793
3,530
1,852

222
4,205
14,559
1,244
150

$ 1,859 $ 33,268 $ 9,723 $

– $

44,850

–

18,911

2,441

–

377

3,413
244

83,739
–

5,289
–

–

(268)
–

18,911

2,818

92,173
244

$ 39,829 $ 239,161 $ 23,109 $

(268) $ 301,831

– $
–
–

– $ 2,605 $

35,994
10,880

4,341
–

– $
–
–

2,605
40,335
10,880

14,006

27,203

150

–

41,359

–
1,368
–
–

21,628
77,824
–
–

–
5,466
240
110

–
(268)
–
–

21,628
84,390
240
110

$ 15,374 $ 173,529 $ 12,912 $

(268) $ 201,547

(1)
(2)

(3)

(4)
(5)
(6)

There were no significant transfers between Levels 1 and 2.
The netting adjustments represent the impact of offsetting derivative 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. Hence, some of the derivative related assets and liabilities are reported on a net basis.
As at October 31, 2009, residential and commercial MBS included in Trading securities were $12,414 million and $185 million, respectively, and in Available-for-sale securities, $8,454
million and $213 million, respectively.
OECD stands for Organisation for Economic Corporation and Development.
CDOs stand for Collateralized Debt Obligations.
Excludes $1,360 million of Availabe-for-sale securities that are carried at cost.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 2 Fair value of financial instruments (continued)

Changes in fair value measurement for instruments categorized in Level 3
The following table presents the changes in fair value measurements for instruments included in Level 3 of the fair value hierarchy set out in
Section 3862 as described in Note 1:

2009

Total
realized/
unrealized
gains
(losses)
included in
earnings (1)

Total
unrealized
gains (losses)
included in
other
comprehensive
income (2)

Purchases
of asset/
issuances
of
liabilities

Sales of
assets/
settlements
of liabilities
and
others (3)

Fair value
November 1,
2008

Transfers
into
Level 3 (1)

Transfers
out of
Level 3 (1)

Fair value
October 31,
2009

Changes in
unrealized gains
(losses) included
earnings for
assets and
liabilities for the
year ended
October 31, 2009
for positions
still held

Assets

Securities
Trading

Canadian government debt (4)

Federal
Provincial and municipal

U.S. state, municipal and agencies debt (4)
Other OECD government debt
Mortgage-backed securities (4)
Asset-backed securities

CDOs
Non-CDO securities

Corporate debt and other debt
Equities

Available-for-sale

U.S. state, municipal and agencies debt (4)
Other OECD government debt
Mortgage-backed securities (4)
Asset-backed securities

CDOs
Non-CDO securities

Corporate debt and other debt
Equities

Loans – Wholesale
Other

– $
–
206
150
1,531

4,208
605
1,482
10,315

– $

(13)
4
9
110

256
(12)
(150)
(301)

– $
–
(3)
7
(191)

5 $
2
42
22
2,788

(308)
(4)
(63)
(354)

337
3,628
1,384
32

– $

16
3
(110)
(1,645)

(1,403)
(3,780)
(2,000)
(7,068)

51
–
–
101

85
168
831
289

– $
(2)
(243)
(78)
(1,642)

(101)
(284)
(1,181)
(11)

5 $

54
9
–
1,052

3,074
321
303
2,902

18,497 $

(97) $

(916) $ 8,240 $ (15,987) $ 1,525 $ (3,542) $

7,720 $

2,522 $
402
2,646

(16) $
–
(183)

256
1,568
3,783
78

(20)
–
(136)
–

(215) $ 1,104 $

9
(1)

43
(102)
(306)
(67)

–
69

–
725
569
626

(1,035) $
(411)
(895)

797 $
–
212

(799) $
–
–

(57)
(1,045)
(343)
(60)

–
9
44
1

–
–
(31)
(18)

2,358
–
1,848

222
1,155
3,580
560

11,255 $

(355) $

(639) $ 3,093 $

(3,846) $ 1,063 $

(848) $

9,723 $

–
–
(2)
–
117

153
–
(9)
(256)

–
–
–

–
–
–
–

–

651 $

(202) $

(45) $

26 $

(53) $

– $

377 $

Derivatives, net of derivative related liabilities (5)

(1,010)

(52)

(32)

4,275

(3,562)

164

(177)

29,393 $

(706) $

(1,632) $ 15,634 $ (23,448) $ 2,752 $ (4,350) $ 17,643 $

1,159

1,180

Liabilities

Deposits

Personal
Business and government

Other

(2,656) $

(355) $

(12,214)

1,120

(42) $ (1,511) $
591

1,695 $
3,346

– $

264 $ (2,605) $

(703)

3,501

(4,341)

(157)
(1,073)

Obligations related to securities sold short
Other liabilities
Subordinated debentures

(22)
–
(81)

12
–
(31)

(6)
–
2

459
–
–

(917)
–
–

(98)
(240)
–

422
–
–

(150)
(240)
(110)

23
–
(31)

$ (14,973) $

746 $

545 $ (1,034) $

4,124 $ (1,041) $ 4,187 $ (7,446) $

(1,238)

(1)

(2)

(3)
(4)

(5)

Transfers in and out of Level 3 are assumed to occur at the end of the period. For an asset or a liability that transfers into Level 3 during the period, the entire change in fair value for the
period is excluded from the "Total realized/unrealized gains/(losses) included in earnings" column of the reconciliation, whereas for transfers out of Level 3 during the period, the entire
change in fair value for the period is included in the said column of the reconciliation. During the year ended October 31, 2009, we transferred approximately $1.6 billion of MBS and
approximately $1.2 billion of corporate debt and other debt out of Level 3 due to the reclassification of certain Agency residential MBS and the improved price transparency, respectively. A
further $3.5 billion of business and government deposits were transferred out of Level 3 due to the decline of credit spreads and the improved observability of credit spreads.
Includes the foreign currency translation gains or losses arising on consolidation of foreign subsidiaries relating to the Level 3 instruments, where applicable. The unrealized gains or (losses)
on Available-for-sale securities were $398 million for the year ended October 31, 2009, excluding the translation gains or losses.
Other includes amortization of premiums or discounts recognized in net income.
As at October 31, 2009, residential and commercial MBS included in Trading securities were $12,414 million and $185 million, respectively, and in Available-for-sale securities were $8,454
million and $213 million, respectively.
Net derivatives as at October 31, 2009 included derivative assets of $5,289 million and derivative liabilities of $5,466 million.

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Level 3 financial instruments include hedge fund investments with
certain redemption restrictions, certain structured debt securities
(asset-backed securities, auction-rate securities and U.S. Non-agency
MBS), non-OECD government and corporate debt with long-dated
maturities and significant unobservable spreads, derivatives
referenced to the performance of certain CDOs, commodity swaps,
credit default swaps, equity derivatives and structured notes.

Fair values of certain Level 3 instruments are based on broker

quotes, pricing services, fund managers’ information, and
unobservable credit spreads and therefore, no other reasonably

possible alternative assumptions could be applied to the valuations.
In addition, some of the instruments are fully hedged and any
changes in fair values of the instruments due to the use of other
reasonably possible alternative assumptions would have equal and
offsetting valuation effects on the hedges. For the significant
instruments that other reasonably possible alternative assumptions
are available to the valuation models, we used these assumptions to
recalculate the fair values of the instruments, resulting in an increase
in total Level 3 fair value by $103 million and a decrease of total
Level 3 fair value of $216 million.

Note 3 Securities (1)

The following table presents the financial instruments we held at the end of the period, measured at carrying value:

Trading account

Canadian government debt
U.S. government debt
Other OECD government debt (3)
Mortgage-backed securities (4)
Asset-backed securities (4)
Corporate debt and other debt (4)

Bankers’ acceptances
Certificates of deposit
Other (5)

Equities

Available-for-sale securities (1)
Canadian government debt

Federal

Amortized cost
Fair value
Yield (6)

Provincial and municipal

Amortized cost
Fair value
Yield (6)

U.S. state, municipal and agencies debt

Amortized cost
Fair value
Yield (6)

Other OECD government debt (3)

Amortized cost
Fair value
Yield (6)

Mortgage-backed securities (5)

Amortized cost
Fair value
Yield (6)

Asset-backed securities
Amortized cost
Fair value
Yield (6)

Corporate debt and other debt (5)

Amortized cost
Fair value
Yield (6)

Equities (7)

Cost
Fair value

Loan substitute
Cost
Fair value
Yield (6)

Amortized cost
Fair value

Held-to-maturity securities (1)

Amortized cost
Fair value

Term to maturity (2)

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

2009
Total

2008
Total

1,749 $
1,736
224
36
73

390
349
3,371
–

4,863 $
1,030
860
26
161

15,484 $
2,746
3,460
379
1,878

38
1,047
7,877
–

–
403
19,776
–

5,023 $
1,341
1,898
232
623

–
27
5,251
–

3,282 $
6,445
1,591
637
259

–
40
7,652
–

– $
–
–
–
–

30,401 $
13,298
8,033
1,310
2,994

20,911 $
8,728
2,488
2,476
4,551

–
–
471
37,334

428
1,866
44,398
37,334

13
2,174
39,063
42,104

2007
Total

15,207
6,603
4,236
4,408
9,387

374
4,712
42,438
60,120

7,928

15,902

44,126

14,395

19,906

37,805

140,062

122,508

147,485

45
46
5.5%

1
1
1.7%

545
546
.2%

1,579
1,580
.9%

–
–
–

133
126
.7%

5,073
5,101
2.3%

–
–

–
–
–

7,376
7,400

82
82

4
4
1.0%

242
242
1.1%

869
870
1.7%

1,365
1,369
1.4%

–
–
–

644
662
4.0%

3,128
3,161
2.0%

–
–

–
–
–

11,493
11,883
3.3%

832
862
4.3%

452
472
5.1%

467
477
3.7%

56
55
2.2%

885
909
2.5%

3,163
3,343
2.9%

–
–

–
–
–

6,252
6,308

17,348
18,001

2
2

41
41

209
216
3.9%

19
19
5.1%

359
374
4.4%

102
104
4.5%

54
55
4.9%

948
945
1.0%

1,061
1,046
4.0%

–
–

–
–
–

2,752
2,759

14
14

13
12
5.7%

10
10
4.5%

3,556
3,531
2.4%

–
–
–

1,947
1,742
4.7%

1,906
1,785
1.3%

1,914
1,717
2.7%

–
–

–
–
–

9,346
8,797

17
17

–
–
–

227
191
2.2%

2,437
2,412

256
186
3.7%

2,920
2,789

–
–

11,764
12,161
3.3%

13,123
13,544
3.6%

1,104
1,134
3.7%

5,781
5,793
2.4%

3,513
3,530
1.6%

2,057
1,852
4.6%

4,516
4,427
1.9%

14,566
14,559
2.5%

2,437
2,412

256
186
3.7%

45,994
46,054

156
156

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%

3,057
2,683

256
227
5.6%

50,179
48,421

205
205

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%

2,715
2,874

656
652
5.1%

30,790
30,765

5
5

Total carrying value of securities (1)

15,410 $

22,212 $

62,168 $

17,168 $

28,720 $

40,594 $

186,272 $

171,134 $

178,255

(1)
(2)
(3)
(4)
(5)

(6)
(7)

Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost.
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.
Includes CDOs which are presented as Asset-backed securities – CDOs in the table entitled “Fair value of assets and liabilities classified using the fair value hierarchy” in Note 2.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from held-for-trading and available-for-sale to loans in accordance with the CICA’s amendments to
Section 3855. The reclassified securities are included in the 2008 balances and excluded from the 2009 balances in this table.
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.
Includes the value of the shares received in 2008 upon the Visa Inc. restructuring which are carried at cost.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 3 Securities (1) (continued)

Reclassification of financial instruments
As reported in Note 3 to our 2008 Annual Consolidated Financial
Statements, as of August 1, 2008, we had reclassified certain
securities from held-for-trading to available-for-sale in accordance
with the CICA’s amendments to Sections 3855, 3861 and 3862 which
were issued in October 2008. Current year information regarding

these securities, which were not impacted by the 2009 amendments
to Section 3855 discussed in Note 1, and additional MBS that were
reclassified but not included in the table entitled “Reclassification of
securities from held-for-trading securities to available-for-sale” in
Note 3 to our 2008 Annual Consolidated Financial Statements, is
presented in the following table.

As at and for the year ended October 31, 2009

As at and for the year ended October 31, 2008

Financial assets
U.S. state, municipal and agency debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt

Total
carrying
value and
fair value

Change in
fair value
during the
year (1)

1,904 $
500
1,007
641

4,052 $

Income/gains
(losses)
recognized
in net income
during the
year (2)
54
28
29
17

13 $
67
48
(2)

Total
carrying
value and
fair value (3)

Change in
fair value
during the
year (1)

4,267 $
939
1,326
723

7,255 $

(87) $

(167)
(122)
(102)

Income/gains
(losses)
recognized
in net income
during the
year (2)
40
17
9
8

126 $

128

(478) $

(1)
(2)
(3)

This amount represents the change in fair value of securities we held at the end of the period and includes any principal draw downs or redemptions on these securities.
The total amount includes net income of $27 million related to securities and debt redeemed or sold during the year ended October 31, 2009 (year ended October 31, 2008 – $nil).
Certain amounts presented have been reclassified from those reported in prior periods. The reclassifications have no impact to the total balance.

Unrealized gains and losses on available-for-sale securities (1), (2)

2009

2008

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Fair
value

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Fair
value

Canadian government debt

Federal
Provincial and municipal

U.S. federal, state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities (3)
Asset-backed securities

$ 11,764 $
1,104
5,781
3,517
2,057

404 $
31
129
18
24

(7) $ 12,161 $ 13,123 $
(1)
(117)
(1)
(229)

1,134
5,793
3,534
1,852

674
9,230
1,271
4,280

CDOs
Non-CDO securities

Corporate debt and other debt (3)
Equities
Loan substitute securities

234
4,282
14,718
2,437
256

11
67
382
45
–

(24)
(143)
(389)
(70)
(70)

222
4,205
14,711
2,412
186

335
4,857
13,301
3,057
256

422 $
5
16
4
4

(1) $ 13,544
678
(1)
8,890
(356)
1,274
(1)
3,550
(734)

1
10
136
4
–

(82)
(325)
(453)
(378)
(29)

253
4,543
12,984
2,683
227

$ 46,150 $ 1,111 $ (1,051) $ 46,210 $ 50,384 $

602 $ (2,360) $ 48,626

(1)
(2)

(3)

Includes $156 million (2008 – $205 million) held-to-maturity securities.
The majority of the MBS are residential. Amortized cost, gross unrealized gains, gross unrealized losses and fair value related to commercial MBS are $224 million, $1 million, $(11) million
and $213 million, respectively for 2009 (2008 – $249 million, $nil, $(14) million and $235 million).
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from available-for-sale to loans in accordance with the CICA’s amendments to Section 3855. The
reclassified securities are included in the 2008 balances in this table but excluded from the 2009 balances.

Realized gains and losses on available-for-sale securities (1), (2)

Realized gains
Realized losses and writedowns

Net (losses) gains on available-for-sale securities

2009

296
(936)

(640)

2008

99
(731)

(632)

2007

204
(124)

(1)
(2)

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Fair value and unrealized losses position for available-for-sale securities

2009 (1)

Less than 12 months

12 months or more

Total

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

Fair
value

Unrealized
losses

Canadian government debt

Federal
Provincial and municipal

U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities (2)
Asset-backed securities

CDOs
Non-CDO securities

Corporate debt and other debt (2)
Equities
Loan substitute securities

1,108
13
154
456
83

–
770
924
60
–

7
1
7
1
11

–
8
42
42
–

–
–
1,081
44
1,475

205
721
1,321
103
150

Total temporarily impaired securities

3,568

119

$ 5,100

–
–
110
–
218

24
135
347
28
70

932

$ 1,108
13
1,235
500
1,558

205
1,491
2,245
163
150

7
1
117
1
229

24
143
389
70
70

$ 8,668

$ 1,051

(1)

(2)

The majority of the MBS are residential. Fair value and unrealized losses of commercial MBS for less than 12 months are $nil and $nil, respectively and for 12 months or more are $156
million and $11 million, respectively.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from available-for-sale to loans in accordance with the CICA’s amendments to Section 3855. The
reclassified securities are included in the 2008 balances in the table below, but excluded from the 2009 balances.

Less than 12 months

12 months or more

Total

2008 (1)

Canadian government debt

Federal
Provincial and municipal

U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities

CDOs
Non-CDO securities

Corporate debt and other debt
Equities
Loan substitute securities

Fair
value

Unrealized
losses

126
236
6,546
99
2,128

–
4,073
3,360
970
–

1
1
321
1
348

–
314
294
217
–

Fair
value

–
–
270
–
996

246
115
633
347
191

Total temporarily impaired securities

17,538

$ 1,497

$ 2,798

Unrealized
losses

Fair
value

Unrealized
losses

–
–
35
–
386

82
11
159
161
29

863

126
236
6,816
99
3,124

246
4,188
3,993
1,317
191

1
1
356
1
734

82
325
453
378
29

$ 20,336

$ 2,360

(1)

The majority of the MBS are residential. Fair value and unrealized losses of commercial MBS for less than 12 months are $103 million and $3 million, respectively and for 12 months or more
are $109 million and $11 million, respectively.

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.
As at October 31, 2009, our gross unrealized losses on
available-for-sale and held-to-maturity securities were $1,051 million.
When assessing other-than-temporary impairment for debt

instruments including Government, State, Municipal, Agency and
Corporate debt and perpetual preferred shares we primarily
considered counterparty ratings and security-specific factors,
including internal and external ratings, subordination, transaction
structure, credit enhancement and other market and security-specific
factors. For more complex debt instruments including Non-agency
U.S. MBS, asset-backed securities (ABS) and other structured
products, we primarily use cash flow projection models which
incorporate actual and projected cash flows for each security using a
number of assumptions and inputs that are based on security specific
factors. The inputs and assumptions used such as default,
prepayment and recovery rates are based on updated market data,
the latter being largely dependent upon forecasted house prices
which were assessed at the municipal level, provided by a third-party
vendor. We also consider internal and external ratings, subordination,
transaction structure, credit enhancement 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.

With respect to debt securities where, 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.

As equity securities do not have contractual cash flows, they are
assessed differently than debt securities. For equity securities held at
cost and those with unrealized losses we assess whether there is any
objective evidence that suggest that the security is other-than-
temporarily impaired. The factors we consider include the length of
time and extent the fair value has been below the cost, the financial
condition and near term prospects of the issuer. We also consider the
estimated recoverable value and the period of recovery. We conduct
further analysis for securities where the fair value had been below
cost for greater than twelve months. For equity securities, where
management believes that the fair value will not recover prior to their
disposition, there has been an unrealized loss for a prolonged period
of time or the unrealized loss is significant, these securities were
deemed to be other-than-temporarily impaired and were written down
to their fair value.

The majority of the $117 million unrealized loss on U.S. state,
municipal and agencies debt securities related to U.S. agency MBS
and U.S. auction rate securities (ARS). The issuing agencies are
supported by the U.S. government and the unrealized losses on these
securities largely reflect the liquidity concerns in the current market.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 3 Securities (1) (continued)

The MBS largely consist of Non-agency U.S. Alt-A, prime and
subprime securities. The U.S. Alt-A and the prime are high quality
super senior tranches with credit support through subordination,
overcollateralization, and excess spread. The unrealized losses of
$229 million are primarily on Alt A and prime securities. The losses on
Non-agency U.S. MBS are significantly lower compared to the prior
year reflecting the price improvements during the year resulting from
improved U.S. housing and financial markets.

ABS are mainly comprised of U.S. insured and uninsured student

loans U.S. ARS, CDOs and securities backed by credit card receiv-
ables. The majority of these instruments are highly rated with
significant credit support and have experienced significant price
improvements over the year. There are unrealized losses of $167
million which primarily relate to U.S. ARS and uninsured student
loans. Based on our assessment, these losses are temporary in
nature and we do not intend to sell these securities prior to recovery
of value.

Corporate and other debt mainly includes certificate of deposits

issued by global financial institutions, corporate debt and bonds,
Non-OECD government securities and hybrid instruments. The
majority of these securities are highly rated and are well diversified
with global financial institutions being the largest concentration. The
Non-OECD government securities are primarily related to Caribbean
countries where we have ongoing operations. The net unrealized
losses of $389 million are significantly lower compared to a year ago
and mainly reflect the low interest rate environment and improved
spreads.

Equity holdings are largely comprised of publicly traded common

and preferred shares. To a lesser extent, we also hold investments in
private and venture companies. As at October 31, 2009, the Canadian
bank common shares that we hold were deemed to be other-than-
temporarily impaired due to the prolonged decline in value and were
written down to their fair value. The remaining unrealized losses of
$70 million mainly relates to publicly traded common and preferred
shares.

The loan substitute securities are predominantly perpetual

preferred shares of highly rated Canadian entities.

Based on our assessment, the unrealized losses on the above

mentioned securities as at October 31, 2009, are temporary in nature
and we intend to hold them until recovery of their fair value which
may be on maturity of the debt securities.

Held-to-maturity securities
Held-to-maturity securities 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. In
accordance with the recent amendments to CICA Section 3855 our
impairment review of held-to-maturity securities is primarily based on
the impairment model for loans as described in Note 1 to the financial
statements. Based on our assessment, there is no impairment on
held-to-maturity investments as at October 31, 2009.

Net gains /losses on Available-for-sale securities
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 previous loss in AOCI is reclassified in net income.
During 2009, $640 million of net losses were recognized in net
income (2008 – $631 million) on available-for sale securities. The
majority of these losses were attributable to Non-agency U.S. MBS,
Canadian bank common shares, hybrid instruments and CDOs. The
losses also included write-downs of securities we intend to sell.
Included in this amount is $21 million of write-down 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 (2008 –
$10 million). During 2009, $17 million net gains (2008 – $1 million
net loss) were realized due to sales of available-for-sale securities.

Interest and dividends on available-for-sale and held-to-maturity securities (1), (2)

Taxable interest income (3)
Non-taxable interest income
Dividends

2009
2,362 $
110
82
2,554 $

2008

2,089 $
99
110

2,298 $

2007

1,373
31
85

1,489

(1)
(2)

(3)

Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost.
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
– 2009 – $601 million, 2008 – $452 million, and 2007 – $405 million; Non-taxable interest income – 2009 – $33 million, 2008 – $29 million and 2007 – $29 million; Dividends – 2009 –
$15 million, 2008 – $17 million, and 2007 – $11 million.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from available-for-sale to loans in accordance with CICA’s amendments to Section 3855. Interest
income recognized on the reclassified loans are included in the 2008 balances in this table but excluded from the 2009 balances.

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Note 4

Loans

Retail (1)

Residential mortgages
Personal
Credit cards
Small business (2)

Wholesale (1)

Business (3), (4), (5)
Bank (6)
Sovereign (5), (7)

Total loans (8)
Allowance for loan losses (5)

Total loans net of allowance for

2009

United
States

Other
International

2,490
8,975
213
–

11,678

25,206
177
–

25,383

37,061
(1,460)

2,348
2,074
203
–

4,625

10,336
1,243
1,385

12,964

17,589
(254)

Canada

117,292
60,493
8,285
2,851

188,921

38,624
1,096
860

40,580

229,501
(1,474)

Total

Canada

2008

United
States

Other
International

122,130
71,542
8,701
2,851

205,224

74,166
2,516
2,245

78,927

284,151
(3,188)

117,690
48,780
8,538
2,804

177,812

43,497
831
815

45,143

222,955
(1,199)

2,948
9,796
187
–

12,931

30,424
445
–

30,869

43,800
(834)

2,353
2,151
208
–

4,712

15,475
3,861
952

20,288

25,000
(182)

Total

122,991
60,727
8,933
2,804

195,455

89,396
5,137
1,767

96,300

291,755
(2,215)

loan losses

228,027

35,601

17,335

280,963

221,756

42,966

24,818

289,540

(1)
(2)
(3)
(4)
(5)

(6)
(7)
(8)

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 2009 are loans totalling $1,050 million (2008 – $1,200 million) and $1,686 million (2008 – $1,947 million), respectively, to VIEs administered by us.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from held-for-trading and available-for-sale to loans in accordance with CICA’s amendments to Section
3855. The reclassified securities are excluded from the 2008 balances and included in 2009 balances in the table above. In addition, we have also reclassified certain loans to held-for-
trading. These reclassified securities are included in the 2008 balances and excluded from 2009 balances in the table above.
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 $198 million (2008 – $160 million).

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, and (ii) recourse to the
personal assets being financed such as automobiles, as well as
personal guarantees, 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.

Loan maturities and rate sensitivity

Retail
Wholesale (4)

Total loans
Allowance for loan losses (4)

Maturity term (1)

1 to 5
years

Over 5
years

2009

Total

Floating

87,956 $ 17,710 $ 205,224 $ 106,627 $
23,148

78,927

47,756

9,857

Under
1 year (2), (3)
$

99,558 $
45,922

Rate sensitivity

Fixed
Rate

Non-rate-
sensitive
Total
96,175 $ 2,422 $ 205,224
78,927
674
30,497

$ 145,480 $ 111,104 $ 27,567 $ 284,151 $ 154,383 $ 126,672 $ 3,096 $ 284,151
(3,188)

(3,188)

–

Total loans net of allowance for loan losses

$ 145,480 $ 111,104 $ 27,567 $ 280,963 $ 154,383 $ 126,672 $ 3,096 $ 280,963

Retail
Wholesale (4)

Total loans
Allowance for loan losses (4)

Maturity term (1)

1 to 5
years

Over 5
years

2008

Total

87,862 $ 15,437 $ 195,455 $
30,052

11,512

96,300

Floating
98,752 $
65,095

Under
1 year (2), (3)
$

92,156 $
54,736

Rate sensitivity

Fixed
Rate

Non-rate-
sensitive
Total
93,861 $ 2,842 $ 195,455
96,300
31,201

$ 146,892 $ 117,914 $ 26,949 $ 291,755 $ 163,847 $ 125,062 $ 2,846 $ 291,755
(2,215)

(2,215)

–

Total loans net of allowance for loan losses

$ 146,892 $ 117,914 $ 26,949 $ 289,540 $ 163,847 $ 125,062 $ 2,846 $ 289,540

(1)
(2)
(3)
(4)

Generally, based on the earlier of contractual repricing or maturity date.
Included in Wholesale are loans totalling $2,736 million (2008 – $3,147 million) to variable interest entities administered by us. All of the loans reprice monthly or quarterly.
Includes variable rate loans that can be repriced at the clients’ discretion without penalty.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from held-for-trading and available-for-sale to loans in accordance with CICA’s amendments to Section
3855. The reclassified securities are excluded from the 2008 balances and included in the 2009 balances in this table.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 4

Loans (continued)

During the year ended October 31, 2009, we acquired $1,658 million of assets in respect of problem loans (2008 – $236 million). The related
reduction in the Allowance for credit losses was $156 million (2008 – $98 million).

Allowance for loan losses

Retail

Residential mortgages
Personal
Credit cards
Small business (2)

Wholesale

Business (3), (4)
Sovereign (5)
Bank (6)

Specific allowances
Retail

Residential mortgages
Personal
Credit cards
Small business (2)

Wholesale

Business (3)
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)
Total allowance for loan losses

2009

Balance at
beginning
of year

Write-offs

Recoveries

Provision
for credit losses

Other
adjustments (1)

Balance at
end
of year

2008

Balance at
end
of year

$
$
$

30 $

161
–
17
208 $

698 $
–
–
698 $

906 $

20 $

461
270
47
798 $

650 $
–
–
650 $

(52) $

(732)
(455)
(54)
(1,293) $

(1,373) $
–
–
(1,373) $

(2,666) $

– $
–
–
–
– $

– $
–
–
– $

84 $
1,532 $
2,438 $
(84)
2,354 $

– $
– $
(2,666) $
–
(2,666) $

1 $

74
53
5
133 $

140 $
–
–
140 $

273 $

– $
–
–
–
– $

– $
–
–
– $

– $
– $
273 $
–
273 $

73 $

701
402
55
1,231 $

1,573 $
–
20
1,593 $

2,824 $

32 $

236
58
–
326 $

263 $
–
–
263 $

– $
589 $
3,413 $
–
3,413 $

2 $
(7)
–
(1)
(6) $

(62) $
10
–
(52) $

(58) $

(2) $

(26)
(1)
–
(29) $

(99) $
–
–
(99) $

30 $
(98) $
(156) $
(30)
(186) $

54
197
–
22
273

976
10
20
1,006

1,279

50
671
327
47
1,095

814
–
–
814

114
2,023
3,302
(114)
3,188

$
$
$

30
161
–
17
208

559
–
–
559

767

20
461
270
47
798

650
–
–
650

84
1,532
2,299
(84)
2,215

(1)

(2)
(3)

(4)

(5)
(6)
(7)
(8)

Primarily represents the translation impact of foreign currency-denominated allowance for loan losses. Included in the wholesale general allowance adjustment is $27 million related to the
loans acquired in connection with the acquisition of RBTT Financial Group (RBTT), of which we have reclassified $22 million to the specific allowance as it relates to specific wholesale loans;
the remaining $5 million was recorded in net income during the year.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis. Includes $2 million (2008 – $65 million) of provisions related to loans extended under liquidity facilities drawn on
by RBC-administered multi-seller asset-backed commercial paper conduit programs.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from available-for-sale to loans in accordance with CICA’s amendments to Section 3855. As a result,
wholesale specific allowance relating to the securities that were reclassified are excluded from 2008 balances and included in the 2009 balances in this table.
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 $114 million related to off-balance sheet and other items (2008 – $84 million).
The allowance for off-balance sheet is reported separately under Other liabilities.

Net interest income after provision for credit losses

Net interest income (1)
Provision for credit losses (1)

Net interest income after

provision for credit losses

2009

2008

2007

11,506
3,413

9,048
1,595

7,702
791

8,093

7,453

6,911

(1)

As explained in Note 1, as of November 1, 2008, we have reclassified certain securities
from available-for-sale to loans in accordance with the CICA’s amendments to Section
3855. Net interest income after provision for credit losses, if any, recognized on the
reclassified loans are excluded from the 2008 balances and included in the 2009
balances in this table.

Loans past due but not impaired

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 less than 90 days past due, or 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.

Retail
Wholesale

Total

2009

1-29 days
2,841
1,313

30-89 days
$ 1,359
563

90 days
and greater
323
36

2008

Total
$ 4,523
1,912

1-29 days
$ 3,043
1,748

30-89 days
$ 1,245
560

90 days
and greater
253
$
94

Total
$ 4,541
2,402

4,154

$ 1,922

359

$ 6,435

$ 4,791

$ 1,805

347

$ 6,943

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Impaired loans (1)

Retail

Residential mortgages
Personal
Small business (2)

Wholesale

Business (3), (4)
Sovereign (5)
Bank (6)

Total

2009

Specific
allowances

(54)
(197)
(22)
(273)

(976)
(10)
(20)
$ (1,006)
$ (1,279)

Net

587
212
37
836

3,300
–
42
3,342
4,178

$
$

2008

Net

310
187
23
520

1,636
–
–
1,636
2,156

$
$

Gross

641
409
59
1,109

4,276
10
62
4,348
5,457

$
$

(1)
(2)
(3)

(4)

(5)
(6)

Average balance of gross impaired loans for the year was $4,643 million (2008 – $1,906 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 $65 million (2008 – $203 million) and $63 million (2008 – $138 million),
respectively, related to loans extended under liquidity facilities drawn on by RBC-administered multi-seller asset-backed commercial paper conduit programs.
As explained in Note 1, as of November 1, 2008, we have reclassified certain securities from available-for-sale to loans in accordance with CICA’s amendments to Section 3855. The
reclassified securities are excluded from the 2008 balances and included in the 2009 balances in this table.
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.

Note 5

Securitizations

Securitization activities by major product type
We periodically securitize our credit card receivables, residential
mortgage loans and bond securitizations primarily to diversify our
funding sources, enhance our liquidity position and for capital
purposes. We also securitize residential and commercial mortgage
loans for sales and trading activities.

Credit card receivables
We securitize a portion of our credit card receivables through a SPE on
a revolving basis. The SPE is financed 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 it.

Our continuing involvement includes servicing the credit card
receivables sold to the QSPE and performing an administrative role
for the QSPE. We also provide first-loss protection to the QSPE in two
forms. First, 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.

We own all of the subordinated securities issued by the QSPE
and report them within our AFS securities in our Consolidated Balance
Sheets. The subordinated securities owned by us represent
approximately 4.5% of the total securities issued by the QSPE as at
October 31, 2009 and provide credit support for the senior securities.
We also act as counterparty in interest rate and cross currency swap
agreements under which we pay the QSPE the interest due to
investors, we may own some senior securities as investments or for
market-making activities and retain a cash reserve account from time
to time.

Canadian residential mortgage loans
We securitize insured 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 a government-sponsored SPE on a
revolving basis. The SPE is financed through the issuance of
government-guaranteed mortgage bonds which are sold to third party
investors. Proceeds of the issuances are used by the SPE to purchase
the government-guaranteed MBS from eligible sellers.

Our continuing involvement includes servicing the underlying

mortgages we have securitized ourselves or through an independent
servicer. We also retain interests in the form of excess spread on the
sold MBS. The present value of this excess spread is reported as a
retained interest within our available-for-sale or held-for-trading
securities on our Consolidated Balance Sheets. In addition, we also
act as counterparty in interest rate swap agreements under which we
pay the SPE the interest due to investors and receive the interest on
the government-guaranteed MBS relating to our sold portion.

U.S. residential mortgage loans
We originate and sell U.S. residential mortgage loans into the
secondary mortgage market to issuers or guarantors of MBS. The
issuers are usually government-sponsored entities which securitize
these mortgages into MBS securities and guarantee as to timely
payment of principal and interest. Our continuing involvement
includes only servicing the underlying mortgages we have sold for
funding and liquidity purposes ourselves or through an independent
servicer.

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 purchase of these pools by issuing certificates with 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.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

Note 5 Securitizations (continued)

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.

Bond Securitizations
We participate in bond securitizations activities where we purchase
government, government related and corporate bonds, repackages

those bonds in participation certificates, add a structure fee income
and sell to third party investors. The structure fee income is recog-
nized in our Income Statement at the time of sale to third party
investors. Our continuing involvement includes only servicing the
underlying bonds we sold to third party investors and we do not retain
any beneficial interest unless we purchase some of the certificates
issued.

The following table summarizes our securitization activities for 2009, 2008 and 2007.

2009 (1)

2008

Canadian
residential
mortgage
loans
(2), (4), (7)
$ 21,392 $
21,202

–

1,121

770

568 $
570

–

Securitized and sold
Net cash proceeds received
Asset-backed securities

purchased

Retained rights to future excess

interest

Pre-tax gain (loss) on

sale, net of hedging activities

U.S.
residential
mortgage
loans (5)

Bond
participation
certificates
(2), (8)

Credit
card
loans
(2), (3)

Canadian
residential
mortgage
loans
(2), (4), (7)

U.S.
residential
mortgage
loans (5)

Commercial
mortgage
loans
(2), (6)

Bond
participation
certificates
(2), (8)

2007 (1)

U.S.
residential
mortgage
loans (5)

Canadian
residential
mortgage
loans
(2), (4), (7)

Commercial
mortgage
loans
(2), (6)
1937
1876

15 $ 1,470 $ 7,892 $
16

7,846

1,404

516 $
519

166 $
156

47 $ 6,188 $
48

6,097

295 $
298

–

242

168

–

(1)

–

146

–

(14)

(1)
(2)
(3)

(4)

(5)

(6)

(7)
(8)

We did not securitize any credit card loans during the period.
We did not recognize an asset or a liability for our servicing rights with respect to the securitized transactions as we received adequate compensation for our services.
With respect to the securitization of credit card loans in 2008, the net cash proceeds received represent gross cash proceeds of $1,469 million less funds used to purchase notes of
$65 million issued by Golden Credit Card Trust. The principal value of the notes was $65 million.
Canadian insured residential mortgage loans securitized during the year through the creation of MBS and retained as at October 31, 2009 were $6,745 million (2008 – $9,464 million; 2007
– $3,110 million). These securities are carried at fair value.
U.S. residential mortgage loans securitized and sold include insured and non-insured mortgages. We recognized nominal servicing rights with respect to securitized loans during the period.
None of these securities were retained.
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). There were no activities during 2009.
Pre-tax gain (loss) on sale includes the results of our economic hedging activities of $(161) million (2008 – $(28) million). Economic hedging activities during 2007 were nominal.
Includes bond securitizations activities of RBTT. None of the securities sold were retained.

Cash flows from securitizations (1)

2009

2008

2007

Proceeds reinvested in revolving securitizations
Cash flows from excess spread (2)
Other cash flows received (3)

Credit
card
loans
17,157
270
42

Canadian
residential
mortgage
loans
$ 14,100
629
–

Credit
card
loans
$ 17,934 $
254
39

Canadian
residential
mortgage
loans
4,320
179
–

Credit
card
loans

Canadian
residential
mortgage
loans
$ 15,684 $ 4,602
234
–

256
48

(1)

(2)
(3)

This analysis is not applicable for commercial mortgage loans, U.S. residential mortgage loans and bond securitizations as we have not retained rights to future excess spread in these
transactions.
Includes servicing fees received.
Includes cash flows received on AFS securities held by us including principal and interest payment received.

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
Discount rate

2009 (3)

Canadian
residential
mortgage loans
2.70
26.76%
2.34
.40 - 3.07%

2008

Credit card
loans
.25
37.02%
3.86

Canadian
residential
mortgage loans
4.05
27.55%
1.05
10.00% 2.22 - 4.77%

2007 (3)

Canadian
residential
mortgage loans
2.91
28.59%
.86
4.15 - 5.05%

(1)
(2)

(3)

All rates are annualized except the payment rate for credit card loans which is monthly.
This analysis is not applicable for commercial mortgage loans, U.S. residential mortgage loans and bond securitizations as we have not retained rights to future excess spread in these
transactions.
We did not securitize any credit card loans during the period.

Static pool credit losses provide a measure of the credit risk in our
securitized assets and are calculated by totalling actual incurred and
projected credit losses and dividing the result by the original balance
of the loans securitized. The expected static pool credit loss ratio for

securitized credit card loans at October 31, 2009 was .87% (2008 –
.54%). Static credit pool losses are not applicable to residential
mortgages as substantially all the mortgages are government
guaranteed.

100

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

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.

Loans managed

Retail
Wholesale

2009

2008

Loan principal

Past due (1)

Net write-offs

Loan principal

Past due (1)

245,430 $
78,927

1,746 $
4,384

1,300 $ 225,775 $
1,233

96,300

1,144 $
2,309

Net write-offs
842
406

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

U.S. residential mortgage-backed securities created

and sold (3)

324,357

6,130

2,533

322,075

3,453

1,248

3,870

28,815

7,521

–

204

–

140

4,120

–

15,196

10,696

308

–

Total loans reported on the Consolidated Balance Sheets

284,151 $

5,816 $

2,393 $ 291,755 $

3,402 $

1,149

(1)
(2)
(3)

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.
Loans held as at August 1, 2009, were reclassified to held-for-trading securities in accordance with CICA’s amendments to Section 3855. The reclassified securities are included in the 2008
balances and excluded from 2009 balances in the table above. Refer to Note 1.

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, 2009 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

2009

2008

Credit
card
loans
33.5
.25
38.33%
(2.0)
(4.1)

5.61%
(6.1)
(12.2)

3.86%
(2.3)
(4.6)

10.50%
–
(.1)

Canadian
residential
mortgage loans
1,240.6
2.90 - 3.77
9.00 - 28.00%
(35.0)
(68.9)

.8 - 1.98%
(137.8)
(296.1)

–%
–
–

.4 - 2.76%
(1.8)
(4.2)

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)

Canadian
residential
mortgage loans
425.0
2.58 - 5.89
9.00 - 40.00%
(13.8)
(25.2)

.8 - 1.03%
(57.8)
(113.2)

–%
–
–

2.15 - 4.00%
(1.2)
(2.5)

(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, U.S. residential mortgage loans and bond 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 assump-
tions. Generally, the changes in one factor may result in changes in
another, which may magnify or counteract the sensitivity.

In addition to the above securitization transactions, our whole loan sales activities are presented in the following table:

Whole loan sales (1)

Sold

(1)

Gains on whole loan sales are nominal.

2009

2008

2007

U.S.
residential
mortgage
loans
1,021

U.S.
commercial
mortgage
loans
23

U.S.
residential
mortgage
loans
237

U.S.
commercial
mortgage
loans
70

U.S.
residential
mortgage
loans
264

U.S.
commercial
mortgage
loans
–

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

101

Note 6 Variable interest entities (VIEs)

The following table provides information about VIEs as at October 31, 2009 and 2008, in which we have significant variable interests, and those
we consolidate under 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)
Credit investment product VIEs
Third-party conduits
Investment funds (3)
Other

Consolidated VIEs (4), (5)

Structured finance VIEs (3)
Investment funds
Compensation vehicles
Credit investment product VIEs
Other

2009

2008

Total
assets

Maximum
exposure to
loss

Total
assets

Maximum
exposure to
loss

43,448
3,927
1,281
386
184
63

49,289

26,181 $
9,613
930
575
84
340

37,723 $

2,620
588
64
–
3

3,275

26,550 $
2,527
505
250
28
103

29,963 $

42,698 $
10,904
2,649
734
816
155

57,956 $

2,491
1,268
76
196
113

4,144

(1)

(2)

(3)

(4)

(5)

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 $4,020 million (2008 – $5,586 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, 2009. Actual assets held by these
conduits as at October 31, 2009, were $18,908 million (2008 – $33,591 million).
We revisited certain unconsolidated structured finance VIEs in which we previously reported we have significant variable interests and determined that they should have been excluded from the
disclosure in the comparative period. The total assets and maximum exposure to loss related to these entities as at October 31, 2008 was $4,341 million and $1,392 million, respectively. Similarly, our
October 31, 2008 comparatives for investment funds have been revised to exclude certain VIEs. The total assets and maximum exposure to loss related to these entities as at October 31, 2008 was
$366 million and $165 million, respectively. In addition, certain consolidated structured finance VIEs which were not previously disclosed should have been included in the comparative numbers. The
total assets of these entities as at October 31, 2008 was $803 million.
The assets that support the obligations of the consolidated VIEs are reported on our Consolidated Balance Sheets primarily as follows: Interest-bearing deposits with banks of $120 million
(2008 – $114 million), Trading securities of $272 million (2008 – $1,409 million), Available-for-sale securities of $1,234 million (2008 – $798 million), Loans of $1,496 million (2008 –
$1,543 million) and Other assets of $91 million (2008 – $204 million). The compensation vehicles hold $64 million (2008 – $76 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.

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.

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
commensurate with its risk position. The expected loss investor
absorbs a majority of each multi-seller conduit’s expected losses;
therefore, we are not the Primary Beneficiary and do not consolidate
these conduits. However, we continue to hold a significant variable
interest in these multi-seller conduits resulting from our provision of
backstop liquidity and partial credit enhancement facilities and
entitlement to residual fees.

We hold significant variable interests in third-party asset-backed

security conduits primarily through providing liquidity support and
credit enhancement facilities. However, we are not the Primary
Beneficiary and do not consolidate these conduits.

As the result of the restructuring of non-bank-sponsored ABCP

conduits in 2009, Master Asset Vehicle II (MAV II), which is a VIE, was
created. We are not required to consolidate MAV II as we do not have a
majority of its exposure. Our significant variable interests in MAV II consist
of our participating in the margin funding facility and the note investments.

The liquidity and credit enhancement facilities are described in

Note 25.

Structured finance VIEs
In 2008, we purchased U.S. ARS from entities which funded their
long-term investments in student loans by issuing short-term senior

102

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

and subordinated notes. Certain of these entities are VIEs (U.S. ARS
VIEs). We are subjected to losses on these U.S. ARS VIEs if defaults
are experienced on the underlying student loans; however, the
principal and accrued interest on the student loans are largely
guaranteed by U.S. government agencies. In our role as auction
remarketing agent for some of 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 sold ARS into Tender Option Bond (ARS TOB) programs,
where each ARS 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, which requires us to extend funding
if there are any credit losses on the ARS, 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 ARS TOB programs to purchase any
floating-rate certificates that have been tendered but not remarketed.
We receive market-based fees for acting as the remarketing agent and
providing the letters of credit and liquidity facilities. Both the CE and
the TOB trusts are VIEs. In 2009, the ARS underlying certain of the ARS
TOB programs experienced cash flow deterioration which resulted in
external rating downgrades. As a result, we consolidated certain of
these ARS TOB programs where our updated expected loss calcu-
lations indicated that we are exposed to a majority of the expected
loss through our letters of credit and liquidity facilities. We continue
to hold significant variable interests through the provision of the
facilities in other unconsolidated ARS TOB programs where the
residual certificate holder is exposed to a majority of the expected
losses in these trusts. The liquidity facilities and letters of credit are
described in Note 25.

The structure of other non-ARS TOB programs that we are

involved with is similar to the structure of the ARS TOB program
described above. We also hold the residual certificates issued by
these non-ARS TOB programs which will expose us to interest rate
basis risk and may provide liquidity facilities and credit enhance-
ments to these non-ARS TOB programs. We consolidate the non-ARS
TOB programs where we are exposed to a majority of the expected
losses as a result of our continuing involvement with the non-ARS
TOB programs.

In 2008, we sold ARS to an unaffiliated and unconsolidated VIE
at fair market value. The purchase of the ARS by the VIE 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 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 collateral, to
the VIE. This VIE also enters into interest rate derivatives with other
counterparties who are exposed to the majority of its variability; as a
result, we do not consolidate this entity.

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
protection 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 may hold significant variable interests in VIEs as a
result of our investment in the notes.

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, credit risk, and equity or equity index. Non-financial
derivatives are contracts whose value is derived from a precious
metal, commodity instrument or index. Notional amount of
derivatives represents the contract amount used as a reference point
to calculate payments. Notional amounts are generally not exchanged
by counterparties, and do not reflect our exposure at default.

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 financial
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.

Investment funds
We enter into fee-based equity derivative transactions with third
parties including mutual funds, unit investment trusts and other
investment funds. These transactions provide their investors with the
desired exposure, and we 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.

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
consolidate the trusts in which we are the Primary Beneficiary.

Capital trusts
RBC Subordinated Notes Trust (Trust III) and RBC Capital Trust II
(Trust II) were created to issue innovative capital instruments, the
proceeds of which were used to purchase senior deposit notes from
us. 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
variable interest in these trusts. For details on the senior deposit
notes and innovative capital instruments, refer to Notes 13 and 17,
respectively.

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, which is specifically
exempt from consolidation, 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 variable interests in
these VIEs. For details on our securitization activities, refer to Note 5.

Additional details about our VIEs are provided in Note 31.

Swaps
Swaps are over-the-counter contracts in which two counterparties
exchange a series of cash flows based on agreed upon rates to a
notional amount. The various swap agreements that we enter into are
as follows:

Interest rate swaps are agreements where two counterparties

exchange a series of payments based on different interest rates
applied to a notional amount in a single currency. Cross currency
swaps involve the exchange of fixed payments in one currency for the
receipt of fixed payments in another currency. Cross currency interest
rate swaps involve the exchange of both interest and principal
amounts in two different currencies.

Equity swaps are contracts in which one counterparty agrees to

pay or receive from the other cash flows based on changes in the
value of an equity index, a basket of stocks or a single stock.

Options
Options are contractual agreements under which the seller (writer)
grants the purchaser the right, but not the obligation, either to buy
(call option) or sell (put option), a security, exchange rate, interest
rate, or other financial instrument or commodity at a predetermined
price, at or by a specified future date. The seller (writer) of an option
can also settle the contract by paying the cash settlement value of the
purchaser’s right. The seller (writer) receives a premium from the
purchaser for this right. The various option agreements that we enter
into include interest rate options, foreign currency options, equity
options and index options.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

103

Note 7 Derivative instruments and hedging activities (continued)

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 contingent on a credit event
affecting the referenced asset.

Credit default baskets are similar to credit default swaps except

that the underlying referenced financial instrument is a group of
assets instead of a single asset.

Total return swaps are contracts where one counterparty agrees
to pay or receive from the other cash flows based on changes in the
value of the referenced asset.

Other derivative products
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 activ-
ities. 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,

equity and foreign exchange risk related to our funding, lending,
investment activities and asset/liability management.

Interest rate swaps are used to manage our exposure to interest

rate risk by modifying the repricing or maturity characteristics of
existing 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 predominantly use credit derivatives to manage our credit
exposures. We mitigate industry sector concentrations and single-
name exposures related to our credit portfolio by purchasing credit
derivatives to transfer credit risk to third parties.

Certain derivatives and cash instruments are specifically
designated and qualify for hedge accounting. We apply hedge
accounting to minimize volatility in earnings caused by changes in
interest rates or foreign exchange rates. Interest rate and currency
fluctuations will either cause assets and liabilities to appreciate 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 largely 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 transactions or firm commitments
during the year.

From time to time, we also enter into derivative transactions to
economically hedge certain exposures that do not otherwise qualify
for hedge accounting, or where hedge accounting is not considered
economically feasible to implement. In such circumstances, changes
in fair value are reflected in Non-interest income.

As at October 31, 2009, after-tax net unrealized losses of
$423 million (2008 – after-tax net unrealized losses of $579 million)
were recognized in AOCI, representing the cumulative effective
portions of our cash flow hedges.

After-tax unrealized losses of $7 million (before-tax unrealized

losses of $10 million) included in AOCI as at October 31, 2009 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

2009

Designated as hedging instruments in
hedging relationships

2008

Designated as hedging instruments
in hedging relationships

Cash flow
hedges

Fair
value
hedges

Net
investment
hedges

Not designated
in a hedging
relationship (1)

Cash flow
hedges

Fair
value
hedges

Net
investment
hedges

Not designated
in a hedging
relationship (1)

Assets

Derivative instruments

Liabilities

Derivative instruments
Non-derivative instruments (2)

1,130

$ 2,107

1,493
–

82
278

139

327
5,233

88,797

879

$ 1,397

355

$ 133,503

82,488
n.a.

$ 1,597
–

61
449

$ 1,229
5,886

$ 125,818
n.a.

(1)

(2)
n.a.

Derivative liabilities include stable value contracts on $257 million of bank-owned life insurance policies and $3 million of 401(k) plans; in 2008 – these were derivative assets of $2 million
and $1 million, respectively.
Non-derivative instruments are carried at amortized cost.
not applicable

104

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Results of hedge activities recorded in Net income and OCI

Fair value hedges

Ineffective portion

Cash flow hedges

Ineffective portion
Effective portion
Reclassified to income during the year (1)

Net investment hedges

Foreign currency (losses) gains
Gains (losses) from hedges

2009

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

2008

Net gains
(losses)
included in
Net interest
income

After-tax
unrealized
gains
(losses)
included in
OCI

n.a.

(6) $

n.a.

9
n.a.
n.a.

n.a.
n.a.

n.a.
n.a.
56

n.a.
n.a.

n.a.
156
n.a.

(2,973)
2,399

(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)

(418)

(14) $

(72) $ 1,805

(1)
n.a.

After-tax gains of $38 million were reclassified from AOCI to income for the year ended October 31, 2009 (2008 – losses of $49 million).
not applicable

Notional amount of derivatives by term to maturity (absolute amounts)

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)

2009

Term to maturity

2008

Within
1 year

1 to
5 years

Over 5
years (1)

Total

Trading

Other than
Trading

Trading

Other than
Trading

308,668 $
744,559
9,228
21,924

617,524
5,990
55,422
29,740
30,418
19,800
40,825

16,915
21,823
25,666
28,473

14
32
97,477

47,396 $

– $

356,064 $

– $

265,042 $

1,282,069
50,440
51,746

25,924
7,505
196,419
6,639
5,947
79,757
38,203

16,994
9,253
–
129

–
–
16,149

649,366
53,723
103,156

1,048
11,991
100,266
2,023
1,382
29,628
7,436

57,272
67,414
–
–

–
–
5,999

2,675,994
113,391
176,826

2,467,890
113,067
176,826

208,104
324
–

2,534,700
91,826
164,847

644,496
25,486
352,107
38,402
37,747
129,185
86,464

91,181
98,490
25,666
28,602

14
32
119,625

585,913
25,198
315,253
38,399
37,746
127,012
85,248

91,133
98,490
25,666
28,602

14
32
119,625

58,583
288
36,854
3
1
2,173
1,216

48
–
–
–

–
–
–

856,124
25,484
291,688
46,334
46,234
272,525
104,037

72,024
96,872
14,693
11,565

222
394
196,650

–
223,502
781
218

45,599
545
53,470
63
57
3,314
959

164
–
–
–

–
–
–

$ 2,074,498 $ 1,834,570 $ 1,090,704 $ 4,999,772 $ 4,692,178 $

307,594 $ 5,091,261 $

328,672

(1)

(2)

(3)

Includes contracts maturing in over 10 years with a notional value of $286,951 million (2008 – $255,281 million). The related gross positive replacement cost is $14,067 million (2008 –
$9,840 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 $2,163 million (2008 – $3,167 million) are economic hedges. Trading credit derivatives comprise protection purchased of $68,643 million (2008 – $140,010 million)
and protection sold of $58,369 million (2008 – $132,515 million); other-than-trading credit derivatives comprise protection purchased of $2,163 million (2008 – $3,167 million) and
protection sold of $10 million (2008 – $147 million).
Comprises precious metal, commodity, stable value and equity derivative contracts.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

105

Note 7 Derivative instruments and hedging activities (continued)

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

Credit derivatives (2)
Other contracts (3)

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), (5)

Valuation adjustments determined on a pooled basis
Impact of master netting agreements

With intent to settle net or simultaneously (6)

Impact of master netting agreements

Without intent to settle net or simultaneously (7)

2009

2008

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

336 $

56,487
1,744
–

274
51,138
–
2,353

221 $

196 $

191 $

143 $

329 $

47,660
1,712
–

43,119
–
2,007

21,632
797
–

21,559
–
1,216

32,596
1,569
–

220
30,448
–
1,714

58,567

53,765

49,593

45,322

22,620

22,918

34,494

32,382

17,465
2,004
13,787
1,685
–

17,631
1,665
12,725
–
1,591

8,790
2,219
10,846
1,377
–

8,923
1,614
9,993
–
1,385

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

34,941

33,612

23,232

21,915

29,069

27,536

59,197

58,714

11,739
12,298

10,343
10,774

5,192
8,148

4,398
8,112

13,131
8,617

11,868
11,486

16,456
18,914

15,344
17,322

$ 117,545 $ 108,494

$ 86,165 $ 79,747 $ 73,437 $ 73,808 $ 129,061 $ 123,762

4,334 $
9
–

4,343

466
4
1,866
–
–

2,336

128
102

2,807
–
–

2,807

490
7
1,587
–
–

2,084

20
–

6,909

4,911

93,074
(633)

84,658
–

(268)

$ 92,173 $ 84,390

(62,868)

$ 29,305 $ 21,522

3,687 $
19
–

3,706

1,404
10
3,377
10
–

4,801

400
15

2,774
–
31

2,805

1,299
24
2,544
–
6

3,873

15
6

8,922

6,699

137,983
(1,117)

130,461
–

(1,756)

$ 135,110 $ 128,705

(76,179)

$ 58,931 $ 52,526

(1)
(2)
(3)
(4)

(5)
(6)

(7)

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, stable value and equity derivative contracts. Certain warrants and loan commitments that meet the definition of derivatives are also included.
Total gross fair values before netting include market and credit valuation adjustments that are determined on an instrument-specific basis. Positive year-end fair values exclude margin
requirements of $67 million (2008 – $1,024 million).
In our Consolidated Balance Sheets, the margin requirements are included in Derivative assets for 2008 but are included in Other assets for 2009.
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.

Fair value of derivative instruments by term to maturity

2009

Derivative assets (1)
Derivative liabilities (2)

Less than
1 year

1 to
5 years

Over
5 years

Total
$ 22,819 $ 37,748 $ 31,606 $ 92,173
84,390

28,656

35,162

20,572

2008

Total
$ 135,110
128,705

(1)

(2)

Market and credit valuation adjustments that are determined on an instrument-specific
basis and on a pooled basis are included. For 2009, Derivative assets in the table above
and in our Consolidated Balance Sheets exclude margin requirements of $67 million
that are included in Other assets. For 2008, Derivative assets in the table above exclude
margin requirements of $1,024 million which are included in our Consolidated Balance
Sheets.
Includes stable value contracts on $257 million of bank-owned life insurance policies
and $3 million of 401(k) plans; in 2008 – these were derivative assets of $2 million and
$1 million respectively.

106

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Derivative-related credit risk
Credit risk from derivative transactions is generated by the potential
for the counterparty to default on its contractual obligations when one
or more transactions have a positive market value to us. Therefore,
derivative-related credit risk is represented by the positive fair value
of the instrument and is normally a small fraction of the contract’s
notional amount.

We subject our derivative-related credit risk to the same credit
approval, limit and monitoring standards that we use for managing
other transactions that create credit exposure. This includes
evaluating the creditworthiness of counterparties, and managing the
size, 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
netting 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. 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 trans-
actions 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 counter-
parties, typically in the form of a Credit Support Annex, provide us
with the right to request that the counterparty pay down or collater-
alize the current market value of its derivatives positions when the
value passes a specified threshold amount.

Replacement cost represents the total fair value of all

outstanding contracts in a gain position after factoring in the master
netting agreements. The amounts in the table below exclude fair
value of $3,234 million (2008 – $5,999 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
replacement 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.

Derivative-related credit risk

Interest rate contracts

Forward rate agreements
Swaps
Options purchased

Foreign exchange contracts

Forward contracts
Swaps
Options purchased

Credit derivatives (4)
Other contracts (5)
Total

2009 (1)

2008 (1)

Replacement
cost

Credit equivalent
amount (2)

Risk-adjusted
balance (3)

Replacement
cost

Credit equivalent
amount (2)

Risk-adjusted
balance (3)

152 $

365 $

352 $

329 $

430 $

11,794
466
12,412

3,280
4,697
892
8,869

2,409
2,886

26,576 $

15,773
975
17,113

6,663
12,744
1,504
20,911

5,485
316
6,153

1,214
2,888
346
4,448

7,743
353
8,425

16,438
9,692
508
26,638

12,938
729
14,097

19,797
19,212
1,101
40,110

244
4,106
230
4,580

3,938
3,806
274
8,018

4,140
4,868

4,096
2,476
47,032 $ 17,173 $ 53,649 $

5,607
12,979

8,130
10,344
17,680
5,168
82,231 $ 25,896

(1)
(2)
(3)
(4)

(5)

The amounts presented are net of master netting agreements in accordance with Basel II.
The total credit equivalent amount includes collateral applied of $7,277 million (2008 – $4,721 million).
The risk-adjusted balance was calculated in accordance with Basel II.
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 $128 million (2008 – $400 million). Credit derivatives issued for other-than-trading purposes related to sold protection with a replacement cost of $nil
(2008 – $3 million), credit equivalent amount of $10 million (2008 – $147 million) and risk-adjusted asset amount of $3 million (2008 – $35 million) which were given guarantee treatment
per OSFI guidance.
Comprises precious metal, commodity and equity derivative contracts.

Replacement cost of derivative instruments by risk rating and by counterparty type

2009

Gross positive replacement cost
Impact of master netting agreements
Replacement cost (after netting

agreements) (3)

Replacement cost (after netting

agreements) – 2008 (3)

Risk rating (1)

Counterparty type (2)

AAA, AA
31,331
21,982

A
40,549
30,558

BBB
12,521
8,444

BB or
lower
5,439
2,152

Total
89,840
63,136

9,349 $

9,991 $

4,077 $

3,287 $

26,704

26,741 $

16,043 $

6,901 $

4,364 $

54,049

Banks
59,786
48,620

OECD
governments
8,900
$
6,065

Other
21,154
8,451

Total
89,840
63,136

11,166 $

2,835 $

12,703 $

26,704

17,439 $

6,593 $

30,017 $

54,049

(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 $128 million (2008 – $400 million).

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

107

Note 8 Premises and equipment

Land
Buildings
Computer equipment
Furniture, fixtures and other equipment
Leasehold improvements

2009

Accumulated
depreciation
–
$
479
1,537
972
898
3,886

Cost
250
942
2,018
1,401
1,642
6,253

Net book
value
250
463
481
429
744
2,367

Cost
216
845
2,100
1,395
1,624
6,180

2008

Accumulated
depreciation
–
$
427
1,444
981
857
3,709

Net book
value
216
418
656
414
767
2,471

The depreciation expense for premises and equipment for 2009 was $389 million (2008 – $318 million; 2007 – $272 million).

We provide certain services to RBC Dexia IS, which include
administrative and technology support, human resources, and credit
and banking facilities to support its operations. RBC Dexia IS also
provides certain services to us, including custody and trusteeship,
fund and investment administration, transfer agency and investor
services. These services and facilities are provided by the respective
parties in the normal course of operations on terms similar to those
offered to non-related parties. The amount of income earned and
expenses incurred by RBC Dexia IS related to transactions with RBC
are as follows:

Net interest income
Non-interest income
Non-interest expense

For the year ended

October 31
2009

49 $
25
37

October 31
2008
145 $
28
38

October 31
2007
157
26
34

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
2009

October 31
2008

$ 15,502 $ 19,136
18,114

14,438

(1)

Includes $73 million (2008 – $72 million) of goodwill and $137 million (2008 – $158
million) of intangible assets.

Consolidated Statements

of Income
Net interest income
Non-interest income
Non-interest expense
Net income

Consolidated Statements of

Cash Flows
Cash flows from (used in)
operating activities
Cash flows from (used in)
investing activities
Cash flows (used in) from
financing activities

For the year ended

October 31
2009

October 31
2008

October 31
2007

152 $
496
593
34

162 $
647
602
135

116
600
529
125

446 $

(1,433) $

(546)

2,869

(2,158)

(2,299)

(3,328)

3,713

2,856

108

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Note 10 Goodwill and other intangibles

Goodwill
During the second quarter, we determined that the goodwill of our
International Banking reporting unit was impaired by $1 billion. This
impairment reflected the continuing impact of the deterioration in the
overall U.S. economic environment, including declines in the U.S.
housing market and in the market value of U.S. banks. The $1 billion
impairment charge impacted our United States geographic results for

the year ended October 31, 2009 and was recorded in our Interna-
tional Banking business segment; refer to Note 28.

We also completed our annual assessment for goodwill
impairment in all reporting units and determined that there was no
other goodwill impairment for the year ended October 31, 2009
(2008 – $nil; 2007 – $nil).

The following tables disclose the changes in goodwill during 2008 and 2009.

Balance at October 31, 2007
Business reorganization (1)
Goodwill acquired during the year
Other adjustments (2)
Balance at October 31, 2008
Goodwill acquired during the year
Goodwill impairment charge
Other adjustments (2)
Balance at October 31, 2009

Canadian
Banking
2,050 $
(131)
–
–
1,919 $
15
–
2

1,936 $

Wealth
Management

Insurance

International
Banking (1)

Capital
Markets

882 $
–
1,147
217
2,246 $
20
–
(121)
2,145 $

– $

131
–
22
153 $
–
–
(13)
140 $

996 $
–
2,877
733
4,606 $
–
(1,000)
(398)
3,208 $

824 $
–
21
208
1,053 $

4
–
(118)
939 $

Total
4,752
–
4,045
1,180
9,977
39
(1,000)
(648)
8,368

(1)
(2)

The reorganization during 2008 resulted in the creation of our Insurance segment and the U.S. & International Banking segment being renamed International Banking.
Other adjustments primarily include the impact of foreign exchange translations on foreign currency-denominated goodwill.

Other intangibles

Core deposit intangibles
Customer lists and relationships
Mortgage servicing rights
Computer software (2)

Gross carrying
amount
688
1,121
67
2,136
4,012

2009

Accumulated
amortization (1)
(328)
$
(388)
(50)
(1,213)
(1,979)

Net carrying
amount
360
733
17
923
2,033

Gross carrying
amount
725
1,073
70
1,782
3,650

2008

Accumulated
amortization (1)
(273)
$
(288)
(54)
(993)
(1,608)

Net carrying
amount
452
785
16
789
2,042

(1)
(2)

Total amortization expense for 2009 was $462 million (2008 – $356 million).
Computer software was reclassified from Premises and Equipment effective November 1, 2008 in accordance with Section 3064. Refer to Note 1.

The projected amortization of Other intangibles for each of the years ending October 31, 2010 to October 31, 2014 is approximately $147
million. There were no writedowns of intangible assets due to impairment for the year ended October 31, 2009 (2008 – $nil).

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
billion). 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.

Details of the final purchase price and the allocation, including an adjustment made in the fourth quarter for RBTT, 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%
Total cash payment of US$934 million
and 16.4 million RBC common
shares valued at US $49.9067 each
1,775

RBTT
June 16, 2008
100%
Total cash payment of TT$8.3 billion
and 18.2 million RBC common shares
valued at US$48.2540 each
2,281

7,444
(7,067)

377
91
1,307
1,775

8,787
(8,219)

568
160
1,553
2,281

(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 $19 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.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

109

Note 11 Significant acquisitions (continued)

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.

Details of the final 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%
20.2 million RBC common shares and
6.75 million exchangeable shares of a
wholly owned subsidiary of RBC
valued at $48.0025 each
1,297

FBW
June 20, 2008
100%
Total cash payment of
US $27 million and 4.8 million
RBC common shares
valued at US $48.2485 each
265

68
(179)

(111)
423
985
1,297

420
(299)

121
7
137
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 $115 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.

Other acquisitions
During the year ended October 31, 2008, we also completed the
following 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 final purchase price of these acquisitions, which were not
material to the respective segments, was $389 million and resulted in
goodwill of $26 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

2009
3,185 $
1,735
637
1,297
1,726
1,028
5,325
14,933 $

2008
10,269
2,461
1,156
1,062
1,706
551
8,126
25,331

(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.

110

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Note 13 Deposits

The following table details our deposit liabilities.

Personal
Business and government (4), (5)
Bank

Non-interest-bearing

Canada
United States
Other International

Interest-bearing
Canada (4), (5)
United States
Other International

2009

Demand (1)
73,629
105,220
4,023
182,872

Notice (2)
9,837
1,717
18
11,572

Term (3), (4), (5)
68,862
$
113,835
21,163
$ 203,860

Total
$ 152,328
220,772
25,204
$ 398,304

2008

Total
$ 139,036
269,994
29,545
$ 438,575

41,175
4,893
3,041

34,463
4,682
4,579

174,345
47,930
126,920
$ 398,304

168,246
68,450
158,155
$ 438,575

(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, 2009, the balance
of term deposits also includes senior deposit notes we have issued to provide long-term funding of $75.5 billion (2008 – $63.9 billion).
The senior deposit note of $900 million issued to Trust II (refer to Note 17) is included in Business and government deposits. This senior deposit note bears interest at an annual rate of
5.812% and will mature on December 31, 2053. The note is redeemable at our option, in whole or in part, on and after December 31, 2008, subject to the approval of 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 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

2009

2008
$ 258,322 $ 357,112
30,768
19,912
10,871
11,319
8,593
$ 398,304 $ 438,575

78,338
28,892
15,570
5,464
11,718

(1)

The aggregate amount of term deposits in denominations of $100,000 or more as at
October 31, 2009 was $167 billion (2008 – $221 billion).

Note 14 Insurance

Insurance claims and policy benefit liabilities

Life and Health
Property and Casualty
Reinsurance
Total

2009

2008
$ 8,151 $ 6,676
459
250
$ 8,922 $ 7,385

532
239

Future policy benefit liabilities
Claims liabilities
Total

8,093
829

6,660
725
$ 8,922 $ 7,385

The net increase in Insurance claims and policy benefit liabilities over
the prior year comprised: (i) the net increase in life and health and
property and casualty liabilities attributable to business growth;
(ii) the increase due to market movements on assets backing life and
health, reinsurance and property and casualty liabilities; and (iii) the
favourable impact of the appreciation of the Canadian dollar on U.S.
dollar-denominated liabilities.

Furthermore, the review of various actuarial assumptions and
completion of certain actuarial experience studies resulted in a net
increase of $20 million in life and health insurance liabilities (2008 –
a net decrease of $144 million). This was predominantly driven by the

Average deposit balances and average of interest paid rates

Average balances

Average rates

2009

2008

2009

2008

Canada
United States
Other International

$ 207,506 $ 187,182
58,997
164,862

65,138
149,314

1.42% 2.36%
2.98
3.63

1.19
2.03

$ 421,958 $ 411,041

1.60% 2.96%

impact of ongoing experience studies, refinements to cash flow
models and methods, investment portfolio changes and updated
interest rate assumptions.

Reinsurance
In the ordinary course of business, our insurance operations reinsure
risks to other insurance and reinsurance companies in order to
provide greater diversification, limit loss exposure to large risks, and
provide additional capacity for future growth. These ceding
reinsurance arrangements do not relieve our insurance subsidiaries
from their direct obligation to the insureds. We evaluate the financial
condition of the reinsurers and monitor our concentrations of credit
risks to minimize our exposure to losses from reinsurer insolvency.

Reinsurance 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

2008

2009

2007
$ 4,884 $ 3,760 $ 3,445
(852)
$ 3,889 $ 2,864 $ 2,593

(896)

(995)

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

111

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

2009
3,295 $
4,922
2,052
1,436
488
775
5,010
1,500
1,946
2,099
7,484

2008

5,402
9,610
2,925
1,383
428
701
3,855
2,329
139
1,193
7,844

$ 31,007 $ 35,809

(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.

Note 16 Subordinated debentures

The debentures are unsecured obligations and are subordinated in
right of payment to the claims of depositors and certain other
creditors. All redemptions, cancellations and exchanges of
subordinated 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 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

The terms and conditions of the debentures are as follows:
(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Redeemed on the earliest par value redemption date at principal plus accrued interest
to the redemption date.
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.
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.
Redeemable at any time prior to the earliest par value redemption date at the greater of:
(i) the fair value of the subordinated debentures based on the yield on Government of
Canada bonds plus 22 basis points and (ii) par value, and thereafter at any time at par
value.
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.
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.
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.
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.

112

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Earliest par value redemption date

Interest rate

January 27, 2009 (1)
June 1, 2009 (1)

January 25, 2010 (3)
June 24, 2010
April 12, 2011 (4)
March 11, 2013 (5)
June 6, 2013 (7)
November 4, 2013 (9)

June 26, 2017 (10)
(12)

(12)
June 18, 2009 (15)

6.50%
3.96% (2)
4.18% (2)

10.00%

7.10% (2)
3.70% (2)
6.30% (2)
4.84% (6)
5.00% (8)
5.45% (2)
9.30%
2.86% (11)
(13)

(14)
5.95% (16)

Denominated in
foreign currency

US$125 $

JPY10,000

US$189

2009

–
–
–
264
506
809
403
1,048
1,013
1,106
110
110
224
205
673

2008

151
500
1,001
271
528
816
407
1,039
1,012
1,102
110
81
224
228
672

6,471
(10)

6,461

8,142
(11)

8,131

(10)
(11)
(12)
(13)
(14)

(15)

(16)

Redeemable on or after June 26, 2017 at par value.
Fixed interest rate at 2.86% per annum, payable semi-annually.
Redeemable on any interest payment date at par value.
Interest at a rate of 40 basis points above the 30-day Bankers’ Acceptance rate.
Interest at a rate of 25 basis points above the U.S. dollar 3-month LIMEAN. In the event
of a reduction of the annual dividend we declare on our common shares, the interest
payable on the debentures is reduced pro rata to the dividend reduction and the interest
reduction is payable with the proceeds from the sale of newly issued common shares.
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.
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

2009

–
–
5,149
1,322

$ 6,471

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), Trust II and Trust III.

In 2008, we issued $500 million of RBC Trust Capital Securities

Series 2008-1 (RBC TruCS 2008-1) through our consolidated
subsidiary, Trust, a closed-end trust. 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 on our preferred shares, or 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. 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 the Primary Beneficiary (refer to
Note 6); therefore, the RBC TSNs – Series A issued by Trust III are not
reported on our Consolidated Balance Sheet but the senior deposit
note issued by us to Trust III is reported 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, 2009 and 2008.

Issuer
RBC Capital Trust (1),(2),(3),(4),(5),(6),(7)
Included in Trust capital securities

Issuance date

Distribution dates

Annual
yield

Redemption date

At the option of
the issuer

650,000 Trust Capital Securities – Series 2010
750,000 Trust Capital Securities – Series 2011

July 24, 2000 June 30, December 31 7.288% December 31, 2005
December 6, 2000 June 30, December 31 7.183% December 31, 2005

Included in Non-controlling interest in subsidiaries
1,200,000 Trust Capital Securities – Series 2015

October 28, 2005 June 30, December 31 4.87%(8) December 31, 2010

500,000 Trust Capital Securities – Series 2008-1

April 28, 2008 June 30, December 31 6.821%(8)

June 30, 2013

Conversion date 2009 2008
Principal
amount

At the option
of the holder

Principal
amount

December 31, 2010 $
December 31, 2011

650 $
750

650
750
$ 1,400 $ 1,400

Holder does not have
conversion option
Holder does not have
conversion option

1,200

500

$ 3,100 $ 3,100

RBC Capital Trust II (2),(3),(4),(6),(7),(9)

900,000 Trust Capital Securities – Series 2013

July 23, 2003 June 30, December 31 5.812% December 31, 2008

Any time $

900 $

900

RBC Subordinated Notes Trust (3),(4),(5),(6),(7),(10),(11)

$1 billion 4.58% Trust Subordinated Notes – Series A

April 30, 2007

April 30, October 30 4.584%

Any time

Holder does not have
conversion option

$ 1,000 $ 1,000

(2)

(3)

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.
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 redemption 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 provide an annual yield, equal to the yield on a Government of Canada
bond issued on the Redemption date with a maturity date of June 30, 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

(4)

(5)

(6)

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.
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 instruments and hold
them temporarily. As at October 31, 2009 we held $5 million of RBC TruCS 2008-1,
$2 million of RBC TruCS 2010, $2 million of RBC TruCS 2011 and $10 million of RBC
TSNs – Series A as treasury holdings which were deducted from regulatory capital. As at
October 31, 2008 we held none.
Regulatory capital: According to OSFI guidelines, innovative capital instruments may
comprise up to 15% of net Tier 1 capital with an additional 5% eligible for Tier 2B
capital. RBC TSN-Series A qualifies as Tier 2B capital. As at October 31, 2009, $3,991
million represents Tier 1 capital (2008 – $3,857 million), $1,017 million represents Tier
2B capital (2008 – $1,169 million) and $19 million of our treasury holdings of
innovative capital is deducted for regulatory capital purposes (2008 – $nil).

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

113

Note 17 Trust capital securities (continued)

(7)

(8)

Holder Exchange Right: Holders of RBC TruCS 2010 and 2011 may exchange, on any
distribution date on or after the conversion date specified above, RBC TruCS 2010 and
2011 for 40 non-cumulative redeemable Bank First Preferred Shares, Series Q and
Series R, respectively. Holders of RBC TruCS 2013 may, at any time, exchange all or part
of their holdings for 40 non-cumulative redeemable First Preferred Shares Series U, for
each RBC TruCS 2013 held. The First Preferred Shares Series Q, R and U pay semi-annual
non-cumulative cash dividends as and when declared by our Board of Directors and are
convertible at the option of the holder into a variable number of common shares.
Holders of RBC TruCS 2008-1, RBC TruCS 2015 and RBC TSNs- Series A do not have
similar exchange rights.
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 of each year until June 30, 2018, and floating distributions thereafter
at the six-month Bankers’ Acceptance rate plus 350 basis points.
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.
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.

(9)

(10)

(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 redemption, automatic exchange or otherwise
according to the terms of the Bank Subordinated Guarantee and the Trust Indenture.

Note 18 Preferred share liabilities and share capital

Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second
Preferred Shares without nominal or par value, issuable in series; the
aggregate consideration for which all the First Preferred Shares and all

the Second Preferred Shares that may be issued may not exceed
$20 billion and $5 billion, respectively.

Common – An unlimited number of shares without nominal or

par value may be issued.

Issued and outstanding shares (1)

Preferred share liabilities

First preferred

Non-cumulative Series N (2)
Treasury shares – sales
Treasury shares – purchases

Preferred share liabilities, net of treasury holdings

Preferred shares

First preferred (3)

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, 5-Year Rate Reset Series AJ
Non-cumulative, 5-Year Rate Reset Series AL
Non-cumulative, 5-Year Rate Reset Series AN
Non-cumulative, 5-Year Rate Reset Series AP
Non-cumulative, 5-Year Rate Reset Series AR
Non-cumulative, 5-Year Rate Reset Series AT
Non-cumulative, 5-Year Rate Reset Series AV
Non-cumulative, 5-Year Rate Reset Series AX

Common shares

Balance at beginning of year
Issued on new acquisitions
Issued for general business purpose
Issued under Dividend Reinvestment Plan
Issued under the stock option plan (4)
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

2009

2008

2007

Number of
shares
(000s)

Dividends
declared
per share

Number of
shares
(000s)

Dividends
declared
per share

Number of
shares
(000s)

Amount

Dividends
declared
per share

Amount

– $
–
–
– $

– $
–
–
–

12,000 $
12,000
12,000
8,000
10,000
10,000
8,000
10,000
8,500
16,000
12,000
9,000
11,000
14,000
11,000
16,000
13,000

300 $
300
300
200
250
250
200
250
213
400
300
225
275
350
275
400
325
$ 4,813

–

1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
1.41
1.49
1.48
1.50
1.34
1.27
1.11
1.01
.87

– $
–
–
– $

– $
–
–
–

.88

11,916 $ 298 $

1.18

152
(68)

4
(2)
12,000 $ 300

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
–
–
–
–
–
–
–
$ 2,663

1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
.81
–
–
–
–
–
–
–
–

12,000 $ 300 $
12,000
12,000
8,000
10,000
10,000
8,000
10,000
–
–
–
–
–
–
–
–
–

300
300
200
250
250
200
250
–
–
–
–
–
–
–
–
–
$2,050

1.23
1.11
1.18
1.22
1.06
.95
.77
.65
–
–
–
–
–
–
–
–
–

1,341,260 $10,384
–
–
2,301
65,263
232
5,279
158
5,808
–
–

1,276,260 $ 7,300
2,937
–
–
153
(6)

59,675
–
–
6,445
(1,120)

1,280,890 $7,196
–
–
–
–
–
–
170
7,215
(66)
(11,845)

1,417,610 $13,075 $

2.00 1,341,260 $10,384 $

2.00 1,276,260 $7,300 $

1.82

(260) $
618
(423)

(65) $

(5)
13
(10)
(2)

(2,258) $ (104)
59
1,364
(50)
(1,233)
(95)
(2,127) $

(249) $

1,060
(1,071)

(260) $

(6)
23
(22)
(5)

(2,444) $ (101)
1,269
51
(54)
(1,083)
(2,258) $ (104)

(94)
1,345
(1,500)

(249) $

(2)
33
(37)
(6)

(5,486) $ (180)
4,756
175
(96)
(1,714)
(2,444) $ (101)

(1)

(2)

(3)

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.
On August 22, 2008, we redeemed Non-cumulative First Preferred Shares Series N at a
redemption price equal to the carrying value.
First Preferred Shares Series were issued at $25 per share.

(4)

Includes fair value adjustments to stock options of $6 million (2008 – $5 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 $13 million
(2008 – $4 million), and from renounced tandem SARs, net of related income taxes, of
$7 million (2008 – $4 million).

114

Royal Bank of Canada: Annual Report 2009

Consolidated Financial Statements

Terms of preferred share liabilities and preferred shares

Preferred shares
First preferred

Dividend
per share (1)

Initial
period
annual
yield

.306250 4.90%
.278125 4.45%
.293750 4.70%
.287500 4.60%
.281250 4.50%
.281250 4.50%
.278125 4.45%
.281250 4.50%
.353125 5.65%
.312500 5.00%
.350000 5.60%
.390625 6.25%
.390625 6.25%
.390625 6.25%
.390625 6.25%
.390625 6.25%
.381250 6.10%

Dividend
reset rate (6)

Redemption
date (2)

Issue
date

Redemption
price (2), (3)

At the option of
the bank (2), (4)

At the option of
the holder

Conversion date (5)

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
1.93%
February 24, 2014
2.67%
February 24, 2014
3.50%
February 24, 2014
4.19%
February 24, 2014
4.50%
August 24, 2014
4.06%
4.42%
August 24, 2014
4.13% November 24, 2014

January 31, 2005 $
April 4, 2006
July 20, 2006
November 1, 2006
December 13, 2006
January 19, 2007
March 14, 2007
April 26, 2007
April 29, 2008
September 16, 2008
November 3, 2008
December 8, 2008
January 14, 2009
January 29, 2009
March 9, 2009
April 1, 2009
April 29, 2009

26.00
26.00
26.00
26.00
26.00
26.00
26.00
26.00
26.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
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
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)

(2)

Non-cumulative preferential dividends on Series W, AA, AB, AC, AD, AE, AF, AG, AH, AJ,
AL, AN, AP, AR, AT, AV and AX are payable quarterly, as and when declared by the Board
of Directors, on or about the 24th day of February, May, August and November.
The redemption price represents the price as at October 31, 2009 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 during the 12 months commencing August 24, 2011, and decreasing
by $.25 each 12-month period thereafter to a price per share of $25 if redeemed on or
after August 24, 2015; and in the case of Series AC, at a price per share of $26, if
redeemed during the 12 months commencing November 24, 2011, and decreasing by
$.25 each 12- month period thereafter to a price per share of $25 if redeemed on or
after November 24, 2015; and in the case of Series AD, at a price per share of $26, if
redeemed during the 12 months commencing February 24, 2012, and decreasing by
$.25 each 12- month period thereafter to a price per share of $25 if redeemed on or
after February 24, 2016; and in the case of Series AE, at a price per share of $26, if
redeemed during the 12 months commencing February 24, 2012, and decreasing by
$.25 each 12- month period thereafter to a price per share of $25 if redeemed on or
after February 24, 2016; and in the case of Series AF, at a price per share of $26, if
redeemed during the 12 months commencing May 24, 2012, and decreasing by $.25
each 12- month period 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 during the
12 months commencing May 24, 2013, and decreasing by $.25 each 12- month period

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

dividends on our preferred or common shares.

We have also agreed that if, on any day we report financial
results for a quarter: (i) we report a cumulative consolidated net loss
for the immediately preceding four quarters, and (ii) during the
immediately preceding quarter we fail to declare any cash dividends
on all of our outstanding preferred and common shares, we may defer
payments of interest on the Series 2014-1 Reset Subordinated Notes
(matures on June 18, 2103). During any period while interest is being

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; and in the case of Series AL, at a price per
share of $25, if redeemed on February 24, 2014 and on each February 24 every fifth year
thereafter; and in the case of Series AN, at a price per share of $25, if redeemed on
February 24, 2014 and on each February 24 every fifth year thereafter; and in the case of
Series AP, at a price per share of $25, if redeemed on February 24, 2014 and on each
February 24 every fifth year thereafter; and in the case of Series AR, at a price per share
of $25, if redeemed on February 24, 2014 and on each February 24 every fifth year
thereafter; and in the case of Series AT, at a price per share of $25, if redeemed on
August 24, 2014 and on each August 24 every fifth year thereafter; and in the case of
Series AV, at a price per share of $25, if redeemed on August 24, 2014 and on each
August 24 every fifth year thereafter; and in the case of Series AX, at a price per share of
$25, if redeemed on November 24, 2014 and on each November 24 every fifth year
thereafter.
Subject to the consent of OSFI and the requirements of the Act, we may purchase the
First Preferred Shares W, AA, AB, AC, AD, AE, AF, AG, AH, AJ, AL, AN, AP, AR, AT, AV and
AX for cancellation at the lowest price or prices at which, in the opinion of the Board of
Directors, such shares are obtainable.
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.
The conversion date refers to the date of conversion to common shares.
The dividend rate will reset on the earliest redemption date and every fifth year
thereafter at a rate equal to the 5-year Government of Canada bond yield plus the
premium indicated. The holders have the option to convert their shares into non-
cumulative floating rate First Preferred Shares subject to certain conditions on the
earliest redemption date and every fifth year thereafter at a rate equal to the three-
month Government of Canada Treasury Bill rate plus the premium indicated.

(3)

(4)

(5)
(6)

deferred: (i) interest will accrue on these notes but will not
compound; (ii) we may not declare or pay dividends (except by way of
stock dividend) on, or redeem or repurchase, any of our preferred or
common shares; and (iii) we may not make any payment of interest,
principal or premium on any debt securities or indebtedness for
borrowed money issued or incurred by us that rank subordinate to
these notes.

Dividend reinvestment plan
Our dividend reinvestment plan (plan) provides registered common
shareholders with a means to receive additional common shares
rather than cash dividends. The plan is only open to registered
shareholders residing in Canada or the United States.

Management has the flexibility to fund the plan through open

market share purchases or treasury issuances.

Shares available for future issuances
As at October 31, 2009, 62.6 million common shares are available for
future issue relating to our dividend reinvestment plan and potential
exercise of stock options outstanding. In addition, we may issue up to
40 million shares from treasury under the RBC Umbrella Savings and
Securities Purchase Plan that was approved by shareholders on
February 26, 2009.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2009

115

Note 18 Preferred share liabilities and share capital (continued)

Others
We announced on October 29, 2009, 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, 2009 and
will terminate on October 31, 2010.

Normal Course Issuer Bid
Details of common shares repurchased under NCIBs during 2009,
2008 and 2007 are given below.

2009

Number of
shares
eligible for
repurchase
(000s)

Number of
shares
repurchased
(000s)

Average
cost per

share Amount

2008

Number of
shares
eligible for
repurchase
(000s)

Number of
shares
repurchased
(000s)

Average
cost per

share Amount

2007

Number of
shares
eligible for
repurchase
(000s)

Number of
shares
repurchased
(000s)

Average
cost per

share Amount

20,000

– $

–

20,000

1,120 $ 49.50 $

–

40,000

11,845 $ 54.59 $ 646

NCIB period
November 1, 2008 –
October 31, 2009
November 1, 2007 –
October 31, 2008
November 1, 2006 –
October 31, 2007

Note 19 Non-controlling interest in subsidiaries

RBC Trust Capital Securities (TruCS)

– Series 2015
– Series 2008-1
Consolidated VIEs
Others

2009

2008

$ 1,219 $ 1,220
511
205
435

506
7
339

$ 2,071 $ 2,371

We consolidate VIEs in which we are the Primary Beneficiary. These
VIEs include structured finance VIEs, investment funds, credit
investment product VIEs and compensation vehicles as described in
Note 6.

We issued RBC TruCS 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, 2009,
$20 million (2008 – $20 million) of accrued interest was included in
RBC TruCS Series 2015. Series 2008-1 includes $11 million (2008 –
$11 million) of accrued interest, net of $5 million (2008 – $nil) of
treasury holdings.

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, 2009.

Due to the market conditions in late 2008, we were required to
increase our pension plans contributions before December 31, 2009
based on the results of our January 1, 2009 funding valuation.

For 2009, total contributions to our pension and other post-
employment benefit plans were $757 million and $40 million (2008 –
$285 million and $43 million), respectively. For 2010, total
contributions to pension plans and other post-employment benefit
plans are expected to be approximately $833 million and $43 million,
respectively. The next actuarial valuation for funding purposes will be
completed on January 1, 2010.

For financial reporting purposes, we measure our benefit
obligations and pension plan assets as at September 30 each year.

116

Royal Bank of Canada: Annual Report 2009

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 (3)
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 (3)
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)