Royal Bank of Canada Annual Report 2010

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FY2010 Annual Report · Royal Bank of Canada

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Royal Bank of Canada

2010

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.

Globally, our goal is to be a leading
provider of capital markets and wealth
management solutions

In targeted markets, our goal is to
be a leading provider of select
financial services complementary to
our core strengths.

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 79,000 full- and part-time employees who serve close to 18 million
personal, business, public sector and institutional clients through offices in Canada, the U.S. and 50 other countries. For more
information, please visit rbc.com.

CONTENTS
1

Chief Executive Officer’s message

Chairman’s message

5 Management’s Discussion and Analysis

Overview and outlook

Financial performance

12 Business segment results

30 Quarterly financial information

32 Results by geographic segment

33 Financial condition

37 Risk management

48 Overview of other risks

50 Capital management

54 Additional financial information

56 Accounting and control matters

63 Key performance and non-GAAP measures

64 Related party transactions

65 Supplemental information

Reports and Consolidated Financial Statements

74 Management’s Responsibility for Financial Reporting

Report of Independent Registered Chartered
Accountants

Comments by Independent Registered Chartered
Accountants on Canada-U.S. Reporting Difference

75 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

152 Glossary

156 Directors and executive officers

157 Principal subsidiaries

158 Shareholder information

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

In the midst of continued and significant changes in the
financial services sector, RBC remained focused on our long-
term strategy and delivered strong shareholder results. We
grew our franchise both in Canada and internationally,
illustrating once more our commitment to putting clients first,
the power of our diversified business mix, our values-based
culture and our people.

Although economic and market conditions for financial
institutions improved, they remained challenging in 2010,
marked by low interest rates, regulatory reform and the
changing needs and expectations of clients.

In the face of this, we maintained our disciplined approach to
risk and capital management while taking significant steps to
advance our leading position in Canada, expand globally,
strengthen our competitive position and invest in future
sources of growth.

We launched new products to meet clients’ changing needs,
entered new markets and collaborated across our enterprise
to deepen relationships and provide a richer client experience.
We made significant investments in the areas of risk controls
and technology to ensure we have the sound infrastructure to
effectively and efficiently support both our clients and our
growth.

Our financial results from fiscal 2010 demonstrate this
progress, with net income of $5.2 billion, compared to
$3.9 billion last year. Excluding certain items, earnings were
up 10 per cent for the year1. These results reflect record
performance in Canadian Banking and solid results in Wealth
Management, Capital Markets and Insurance.

We also delivered top quartile shareholder returns for three-
and five-year time horizons versus our global peer group. Our
Tier 1 capital ratio of 13 per cent and Tier 1 common ratio of
9.8 per cent (as at October 31), coupled with our low leverage,
demonstrate the strength of our balance sheet and capital
position.

Standing behind this performance are the capabilities and
client focus of 79,000 dedicated RBC employees across
52 countries who advised and served close to 18 million
clients.

Fundamental to long-term success is our continued leadership
in Canada, which generates approximately two-thirds of our
total revenues. Strong businesses and a recognized and
respected brand in our home market have enabled us to
extend our businesses into new markets around the world.

Advancing our leadership through 2010
We are committed to maintaining our leadership in Canada
across all our businesses through a range of industry-leading
financial and non-financial measures including client
retention, satisfaction, loyalty and brand strength.

Virtually all our Canadian lines of business have advanced
their position in each market and product category. We see
more opportunities to increase market share based on the
strength of our brand and the desire of Canadian families and
businesses for sound advice and solutions that help them
achieve their financial goals.

In Canadian Banking, RBC serves approximately 11 million
personal, small business and commercial clients through the
most extensive and integrated distribution network in Canada
including branches, Automated teller machines (ATMs), a
specialized mobile sales force, online channels and contact
centres.

This year, Canadian Banking grew market share and
implemented cost reduction initiatives while making
significant investments in its distribution network, products,
services and processes in order to improve our efficiency. We
were the first Canadian issuer of both Visa and MasterCard
and we launched our first new retail store, which transforms
the branch experience into an interactive learning and
shopping opportunity for both existing and prospective
clients.

In Canada, we are the leading full-service brokerage firm as
measured by assets under administration (AUA), with close to
1,440 investment advisors serving affluent and high-net-worth
clients. We are the largest fund company and one of the
largest money managers in Canada, with a 15 per cent market
share as measured by assets under management (AUM).
Additionally, we provide discretionary investment
management and estate and trust services to our clients
across Canada. We were recognized for having the best
private banking services in Canada (Euromoney), and RBC
Global Asset Management’s PH&N fund family was awarded
the Best Overall Fund Group and Bond Fund Family in Canada
(Lipper Inc.).

We have the largest bank-owned insurance company in
Canada with a strong and growing position in new sales. Our
insurance business complements our retail banking offering
and contributes considerable and stable earnings to RBC. We
continued to improve our profitability through shared and
streamlined processes, and we deepened our client

(1)

Excluding a $116 million loss on the announced sale of Liberty Life Insurance Company (Liberty Life) in 2010 and a $1 billion goodwill impairment charge in 2009, we had net income of
$5.3 billion in 2010 and $4.9 billion in 2009, respectively. For more information relating to non-GAAP measures, refer to 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 2010

CHIEF EXECUTIVE OFFICER’S MESSAGE

relationships and simplified the way we do business. We also
expanded our retail insurance network to 52 branches,
providing clients with more access to insurance services.

This year, we maintained our position as Canada’s leading
global investment bank, providing corporate, public sector
and institutional clients with a wide range of products and
services. We were named Dealmaker of the Year in Canada
(Financial Post), named Best Investment Bank in Canada
(Euromoney), recognized for excellence in Canadian equity
research (Brendan Wood International), and ranked number
one in debt, equity and M&A in Canada (Bloomberg).

Outside Canada, our global expansion provided RBC with new
opportunities to diversify our revenue streams, grow our
earnings base and build our wealth management and capital
markets businesses. Our capital markets capabilities are by
far the most global of any Canadian bank.

We are also the only Canadian bank with a global wealth
management capability. RBC provides customized trust,
banking, credit and investment solutions to high-net-worth
clients in 21 countries around the world. We are now the sixth-
largest full-service brokerage firm in the U.S., serving
correspondent clients and individual investors directly with
over 2,100 financial consultants through a national network in
42 states.

In 2010, we were recognized as a top 10 global wealth
manager in Scorpio Partnership’s Global Private Banking KPI
Benchmark. Our announced intention to acquire BlueBay
Asset Management will further expand our global capability2.

In Capital Markets, we significantly deepened our U.S.
franchise, resulting in market share increases and winning us
key mandates for both mid-cap and large-cap companies. We
expanded our New York trading floor, now one of the largest
on Wall Street. In Europe, we broadened our investment
banking, equity and research businesses and now have
primary dealer status in France and Germany, in addition to
the U.S., Canada, the U.K. and Australia.

In the U.K., we continued to extend our capabilities in fixed
income and currency, and are a top five Gilt-edged market
maker. Our credit trading business in Europe received top
rankings from institutional investors in several categories,
including the Best Bank for Fixed Income, e-Trading and

Non-Core Currency Bonds (Credit Magazine). We continued to
methodically build out our global capital markets platform in
all major geographies including Asia, through strategic hires
and a new trading floor in Hong Kong.

Our International Banking segment includes our banking
businesses in the U.S. and Caribbean, as well as our 50 per
cent interest in RBC Dexia Investor Services.

RBC Bank in the U.S. provides a comprehensive line of
products and services through 426 banking centres and
approximately 480 ATMs. In 2010, we were ranked among the
top five deposit holders in North Carolina and ranked seventh
overall as measured by deposits in our southeastern U.S.
footprint. Throughout the year, we continued to focus on
managing our loan portfolio and restructuring our retail
operations. While weak economic, credit and market
conditions remain challenges, we are committed to restoring
our operating performance.

RBTT is one of the largest banking networks in the Caribbean,
serving nearly 700,000 clients in 12 countries through 85
branches. We made solid progress in implementing a new
technology infrastructure and leveraging the capabilities of
the broader RBC network to enhance the client experience.

RBC Dexia Investor Services, our global custody and investor
services joint venture, is a top 10 global custodian and was
awarded Top-Rated status across the categories of Leading
Clients, Cross-Border/Non-Affiliated and Domestic, as
reported in Global Custodian Magazine’s 2010 Agent Banks in
Major Markets Survey.

Across all these businesses and geographies, RBC is, at its
core, a people business. To deliver value to clients and
sustain top quartile results for shareholders, we make
sustaining a high-performance, high-employee engagement
culture a priority. This year we were recognized as one of
Canada’s Top 100 employers (Mediacorp Canada Inc.), a Top
Employer in London, England (City of London Corporation) and
one of the best places to work in the U.S. (Human Rights
Campaign). In addition, we received the prestigious Catalyst
Award for our achievements and longstanding commitment to
diversity and inclusion.

Our employees helped build, strengthen and connect the
communities we serve through our leading corporate
citizenship program, the Vancouver 2010 Olympic Torch Relay

(2)

The BlueBay acquisition is subject to the satisfaction of all customary closing conditions and is expected to close by the end of December 2010.

Royal Bank of Canada: Annual Report 2010

Chief Executive Officer’s message

CHIEF EXECUTIVE OFFICER’S MESSAGE

and the RBC Foundation. These programs, grants and
donations are a great source of pride for everyone at RBC.

Outlook
Looking ahead, the global economy and the global banking
industry will continue to undergo a significant amount of
change. An extended period of slower economic growth in a
low interest rate environment will make revenue growth more
challenging. Increased regulation of financial institutions’
capital and liquidity requirements will add more complexity
and higher operating costs and make generating reasonable
rates of return on investments more difficult.

In this environment, well-capitalized, stable financial
institutions will be positioned to take advantage of emerging
opportunities and to differentiate themselves in the
marketplace. At RBC, our performance history, diversified
business mix and long-term strategy provide us with a wide
range of strategic opportunities.

2011 Strategic goals
As a result of changes in the financial services industry over
the past few years and the opportunities for growth they
present both in Canada and globally, we have refined our
strategic goals, while retaining our vision of Always earning
the right to be our clients’ first choice. Our goals are:
•

In Canada, to be the undisputed leader in financial
services;
Globally, to be a leading provider of capital markets and
wealth management solutions; and
In targeted markets, to be a leading provider of select
financial services complementary to our core strengths.

•

Seizing opportunities for long-term growth
RBC is well positioned for long-term growth and success. We
have a proven track record of excellence in execution, and this
strength will continue to drive our success. In the face of
scarce capital, our commitment to disciplined capital
deployment for long-term business-building opportunities will
differentiate us from our peers. And as other financial
institutions remain challenged by regulatory requirements, we
will invest in our businesses, attract expert advisors and make
selective acquisitions to enhance our capabilities.

In Canadian Banking, we will extend our leading position
through a best-in-class customer experience differentiated on
advice, convenience, service and value for money.

Our focus on establishing Wealth Management as a global
leader in both asset and wealth management will be a key
driver for long-term growth.

In Insurance, we plan to enhance client attraction and loyalty,
efficiency and employee engagement through cross-platform
collaboration.

Our success in Capital Markets will come from maintaining our
leading position in Canada and growing client relationships in
the U.S. and Europe through enhanced product capabilities,
investment banking coverage and prudent management of our
balance sheet. We intend to strengthen our position in select
industry sectors in the U.S. and U.K. and broaden our
European fixed income and equities product offering.

In Asia, we will focus on building on our existing capabilities
in Capital Markets and Wealth Management through
collaboration across both platforms, strategic hires, an
enhanced distribution presence and product capabilities.

Improving the operating performance of our International
Banking portfolio remains a priority. We will achieve this by
executing transformational initiatives that improve our
distribution footprint and drive efficiency enhancements.

Our confidence in our long-term growth comes from more than
140 years of experience in serving clients well. We are
committed to finding new ways to innovate, be efficient and
proactive, and better serve our clients. We will work diligently
to remain a leading corporate citizen, helping to build and
strengthen the communities we serve. We will rely on the
strengths that have made RBC what it is today: our core values
of service, teamwork, responsibility, diversity and integrity;
our commitment to strong risk management; and our vision of
always earning the right to be our clients’ first choice.

I would like to take this opportunity to thank our employees
around the world, who are without a doubt the driving force
behind all our achievements. Their continued commitment to
our values, to our clients and to one another is a source of
personal pride to me and I thank them all sincerely for their
professionalism and integrity.

Finally, I thank our clients and shareholders for choosing RBC.

Gordon M. Nixon
President and Chief Executive Officer

Chief Executive Officer’s message

Royal Bank of Canada: Annual Report 2010

CHAIRMAN’S MESSAGE

While the past few years have been transformative and
challenging for the global financial system, RBC has continued
to demonstrate the strength, stability and prudent
management that shareholders have come to expect.

As steward of this dynamic enterprise, the Board of Directors
of RBC takes its role seriously. We have long been committed
to continuous improvement of our leading governance
practices, which are carefully designed to support our ability
to advise and supervise management. Your independent
Board of Directors does not hesitate to test management and
challenge its approach, and we are able to do so because of
an environment of confidence and mutual trust, created from
clear demarcation of roles and transparency between the
board and the senior management team.

Over the 2010 fiscal year, your board has continued to focus
on overseeing the strategic direction for the organization. With
regulatory and economic uncertainties continuing throughout
the international marketplace, our challenge has been to
balance our strategic role with thorough oversight of risk
management while paying careful attention to the changing
regulatory landscape. In this environment, the board’s
independent insights, diverse areas of expertise and
collective business experience are especially critical to
strategic planning. Our strong foundation of corporate
governance enables us to oversee management in a manner
that prudently assesses and mitigates risk without stifling
innovation and the ability to grow shareholder value.

As global capital markets remained volatile over the past
year, this emphasis on oversight of key risks has taken on
added significance. The board attentively reviews the
enterprise stress testing program, and we actively engage in
defining the organization’s risk appetite and assessing its risk
profile against that risk appetite. To focus management on
achieving success within an effective risk control
environment, business opportunities are considered in the
context of associated risks.

The board discusses key risk issues as they arise and seeks to
anticipate trends that may impact the risk profile of RBC. In
assessing strategy, we endeavour to ensure there will be
appropriate returns for the risks assumed. Our regular reviews
of the quality and adequacy of risk controls position the Board
of Directors to assess management’s ability to execute
business strategy effectively in this rapidly changing business
and regulatory environment.

Over the past year, your Board of Directors has also paid
particular attention to the governance and controls in place for
executive compensation, giving careful oversight to the
alignment of compensation programs to performance and
sound risk management. We have remained at the forefront of
best practices, seeking to ensure that our compensation
structure and design continue to result in incentive awards
that are symmetric with risk outcomes. Our approach to
compensation begins with the recognition that compensation
programs must be designed to attract and retain the talent
needed for the organization’s continued success in a highly
competitive global marketplace. These programs are aligned
with performance goals that motivate executives to achieve
strategic goals prudently and within acceptable risk
tolerances. Our compensation programs are designed to
reward individual contribution to superior financial
performance and sustainable long-term shareholder value.

I wish to express my appreciation to all board members for the
leadership and commitment they demonstrate in providing
RBC with an independent, balanced and value-added
perspective and supervising and guiding management in
enhancing the stability and strength of the enterprise and
creating long-term value for shareholders. Your Board of
Directors is proud to be actively engaged in the achievements
of the organization. We thank management and employees
around the world for their contributions to the continuing
success of RBC.

On behalf of the Board of Directors,

David P. O’Brien
Chairman of the Board

Royal Bank of Canada: Annual Report 2010

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, 2010, 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 2, 2010. 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 2010 Annual Information Form, is available free of charge on our website at rbc.com/investor
relations, 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 and outlook

7
7
7

Selected financial and other
highlights
About Royal Bank of Canada
Vision and strategic goals
Economic, market and
regulatory review and outlook

Financial performance
Overview
9

12 Business segment results

12
12

13
16
20
23
26
29

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

30 Quarterly financial information

Fourth quarter 2010
performance
Results and trend analysis

32 Results by geographic segment

33 Financial condition

33
33

Condensed balance sheet
Off-balance sheet
arrangements

37 Risk management

37
39
42
43
45

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

48 Overview of other risks
Operational risk
Strategic risk

48
48

48
48
48
49
49

Regulatory and legal risk
Reputation risk
Insurance risk
Environmental risk
Other risk factors

50 Capital management

54 Additional financial information

Total RBC available-for-sale
portfolio

56 Accounting and control matters

63 Key performance and non-GAAP

measures

64 Related party transactions

65 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 2010 Annual Report
to Shareholders, 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, state-
ments relating to our financial performance objectives, our vision and
strategic goals, the Economic, market and regulatory review and
outlook for Canadian, U.S. and global economies, the outlook and
priorities for each of our business segments, and the risk environment
including our 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 financial performance objectives, and may not be
appropriate for other purposes. Forward-looking statements are
typically identified by words such as “believe”, “expect”, “foresee”,
“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
financial performance 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 management and Overview of other risks
sections; general business, economic and financial market conditions
in Canada, the United States and certain other countries in which we
conduct business, including the effects of the European sovereign
debt crisis; 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, changes to and new interpretations of risk-based capital
guidelines, and reporting instructions and liquidity regulatory
guidance, and the Dodd-Frank Wall Street Reform and Consumer
Protection Act and the regulations to be issued thereunder; judicial or
regulatory judgments and legal proceedings; the accuracy and
completeness of information concerning our clients and counter-
parties; 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 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 2010

Table 1

2008

2010 vs. 2009
Increase (decrease)

21,582 $
1,595

1,631
12,351
–

(776)
(1,552)

499
(165)
(1,000)

6,005
4,555 $

1,442
1,365

Overview and outlook

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 (NCI) 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

– diluted
Return on common equity (ROE) (1)
Return on risk capital (RORC) (1)
Specific PCL as a % of average net loans and acceptances
Gross impaired loans (GIL) as a % of loans and acceptances

Capital ratios and multiples

Tier 1 capital ratio
Total capital ratio
Assets-to-capital multiple
Tier 1 common ratio (2)

Selected balance sheet and other information

Total assets
Securities
Loans (net of allowance for loan losses)
Derivative related assets
Deposits
Average common equity (1)
Average risk capital (1)
Risk-weighted assets (RWA)
Assets under management (AUM)
Assets under administration (AUA) – RBC

– RBC Dexia IS (3)

Common share information

Shares outstanding (000s) – average basic
Shares outstanding (000s) – average diluted
Shares outstanding (000s) – end of period
Dividends declared per share
Dividend yield (4)
Common share price (RY on TSX) – close, end of period
Market capitalization (TSX)
Business information (number of)

Employees: full-time equivalent (FTE)
Banking branches
Automated teller machines (ATMs)

Period average US$ equivalent of C$1.00 (5)
Period-end US$ equivalent of C$1.00

$
$

2010

28,330
1,861

5,108
14,393
–

6,968
5,223

3,044
669
405
(317)
1,647
(225)
5,223

3.49
3.46
14.9%
25.4%
.63%
1.65%

13.0%
14.4%
16.5X
9.8%

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%
.97%
1.86%

13.0%
14.2%
16.3X
9.2%

$
$

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

3.41 $
3.38 $

18.1%
29.6%
.53%
.96%

9.0%
11.0%
20.1X
6.5%

726,206
193,331
292,206
106,246
433,033
33,250
19,500
260,456
264,700
683,800
2,779,500

1,420,719
1,433,754
1,424,922
2.00
3.6%
54.39
77,502

72,126
1,762
5,033

$ 654,989
186,272
280,963
92,173
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

$ 723,859 $
171,134
289,540
136,134
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

71,186
1,761
5,030

73,323
1,741
4,964

.959
.980

$
$

.858
.924

$
$

.969 $
.830 $

381
86
(91)
1,129
(121)
(19)
1,365

.90
.89
n.m.
n.m.
n.m.
n.m.

n.m.
n.m.
n.m.
n.m.

71,217
7,059
11,243
14,073
34,729
2,800
900
15,619
15,000
35,000
295,100

22,044
21,628
7,312
–
n.m.
(.41)
(183)

940
1
3

.101
.056

(2.7)%
(45.5)%

10.8%
(1.1)%
n.m.

26.1%
35.4%

14.3%
14.8%
(18.3)%
78.1%
(6.8)%
(9.2)%
35.4%

34.7%
34.6%
300 bps
590 bps
(34) bps
(21) bps

– bps
20 bps
n.m.
60 bps

10.9%
3.8%
4.0%
15.3%
8.7%
9.2%
4.8%
6.4%
6.0%
5.4%
11.9%

1.6%
1.5%
.5%
n.m.
(120) bps
(.7)%
(.2)%

1.3%
.1%
.1%

11.8%
6.1%

(1)

Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes ROE, RORC, Average common equity, and Average risk
capital. For further discussion on Average risk capital and RORC, refer to the Key performance and non-GAAP measures section.
For further discussion, refer to the Key performance and non-GAAP measures section.
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.

(2)
(3)
(4)
(5)
n.m. not meaningful

Royal Bank of Canada: Annual Report 2010

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 79,000 full- and part-time employees who serve close
to 18 million personal, business, public sector and institutional
clients through offices in Canada, the U.S. and 50 other countries. For
more information, please visit rbc.com.

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. In 2010, our
strategic goals were:
•
•

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

•

For our progress in 2010 against these objectives, refer to the
Business segment results section.

•

Effective Q1, 2011, we refined our strategic goals to address
changes in the external environment including increased regulation,
and to capitalize on opportunities in the financial services industry by
including a focus on target markets and further global expansion. We
aspire to be a top performing diversified financial institution that
delivers sustainable, profitable growth and top quartile results for our
shareholders. The following 2011 strategic goals reflect this
aspiration:
•
•

In Canada, to be the undisputed leader in financial services;
Globally, to be a leading provider of capital markets and wealth
management solutions; and
In targeted markets, to be a leading provider of select financial
services complementary to our core strengths.

Overview and outlook

Economic, market and regulatory review and outlook – data as at
December 2, 2010

Canada
The Canadian economy grew at an estimated 3.1% during 2010, up
from our estimate of 2.6% as at December 3, 2009. This mainly
reflected gains in the first half of the year driven by increased levels of
consumer, government and business spending. Strong housing
activity in the first half of 2010, largely reflecting the low interest rate
environment, slowed significantly in the latter part of the year with the
introduction of the Harmonized Sales Tax (HST) in British Columbia
and Ontario in July 2010. GDP growth also moderated in the second
half of the year, in part due to a decrease in net exports.
Unemployment of 8.1% in the third quarter was down slightly from a
year ago. The Bank of Canada increased the overnight rate to 1%
reflecting increased domestic demand in the first half of the year.
The Canadian economy is expected to grow by 2.9% in 2011
reflecting moderate consumer and business spending supported by a
continued low interest rate environment. The Bank of Canada is
expected to hold overnight rates steady at 1% in the first quarter of
2011. Rates are expected to increase to 2.0% by the end of the year,
reflecting expected mild inflationary pressure. While labour markets
are expected to strengthen, improvement will be gradual, which may
put pressure on credit quality.

United States
The U.S. economy grew at an estimated 2.7% during 2010, up from
the estimated rate of 2.5% projected as at December 3, 2009, largely
in response to government stimulus programs and business spending
on previously deferred inventory purchases in the first half of 2010.
Growth slowed in the second half of the year as the effects of the
stimulus faded and consumer confidence deteriorated. Weakening in
the housing and labour markets during mid 2010 raised concerns
that the U.S. economic recovery would be slower than expected. In
response, the Federal Reserve maintained the target range for the
federal funds rate at 0% to .25%.

In 2011, the U.S. economy is projected to grow by 2.8%
reflecting moderate consumer and business spending. The U.S.
Federal Reserve continues to apply policy stimulus through its
quantitative easing program. We anticipate that the Federal Reserve
will maintain the federal funds rate in the 0% to .25% range until the
middle of 2012 in order to provide continued economic stimulus.

Other global economies
Most global economies experienced overall improvement in 2010.
However, growth tempered in the latter part of the year due to the

European sovereign debt crisis and fiscal austerity measures in Europe.
The second quarter of 2010 reflected better than expected growth in the
U.K. and Germany offset by continued weakness in Greece and Portugal.
The European Central Bank (ECB) maintained its policy rate at 1% given
renewed concerns about the global economic recovery. The Euro-zone is
expected to moderately grow at 1.7% in 2011 reflecting recent sovereign
credit rating downgrades, fiscal austerity measures and persistent
weakness in domestic demand. As a result, the ECB is likely to maintain
its policy rate steady at 1% until early 2012.

Globally, the world economy grew at an estimated 4.6%
reflecting solid growth in the first half of the year. Growth in China
remained strong, reflecting solid domestic demand. We expect
moderation in 2011 with world economic growth tempering to 4.25%.

Financial markets
Global capital markets improved in early 2010; however were volatile
in the latter half of the year. The European sovereign debt crisis put
pressure on global financial markets particularly in the second half of
the year. As well, uncertainty over U.S. regulatory reform and global
capital requirements for financial institutions persisted. This resulted
in increased investor caution and reduced client trading volumes
which negatively impacted certain of our capital markets trading
businesses.

In 2011, we expect global capital markets to remain under
pressure until the sustainability of economic recovery becomes
evident.

Effective for the first quarter of 2010, we no longer considered

gains and losses on certain securities to be as a result of the volatile
market environment that prevailed in 2008 and 2009. Certain of
these securities continued to be impacted by accounting volatility
and we disclose the respective gains and losses separately as certain
market and credit related items when material.

The predictions and forecasts in this section are based on
information and assumptions from sources we consider reliable. If
this information or these assumptions are not accurate, actual
economic outcomes may differ materially from the outlook presented
in this section.

Regulatory environment
In September 2010, the Basel Committee on Banking Supervision
(Basel Committee) announced amendments to the capital proposals
initially published in December 2009. The Basel Committee’s reforms
changed the definition of capital, recalibrated minimum regulatory
capital requirements and introduced new capital buffers aimed to
ensure that banks are better able to withstand future periods of

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

economic and financial stress. These reforms will likely result in
higher capital and liquidity requirements with phased-in
implementation from 2013 to 2019.

Based on our current strong capital position, we expect to meet

the Basel III requirements within the established timelines. We will
continue to be proactive and make the optimal decisions to mitigate
the impact these requirements will have on our business.

In November 2010, the group of 20 industrial and emerging

economies (G20) endorsed the Basel Committee’s proposed
timelines. In addition, they committed to identify by the middle of
2011, financial institutions considered systematically important to
the global financial system. These companies would be held to
enhanced regulatory supervision and stricter standards on capital,
liquidity and risk assessment.

In the U.S., the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act) was enacted in July 2010 and
contains financial reforms including increased consumer protection,
regulation of the over-the-counter derivatives markets, heightened
capital and other prudential standards, restrictions on proprietary
trading and investments and sponsorships in hedge funds and
private equity funds by foreign banking organizations with U.S.
operations. We continue to assess the potential impact as inter-
pretation and implementation of the Dodd-Frank Act’s provisions are
developed by U.S. regulators.

In the U.K., an overhaul of the system of financial regulation

continues as significant regulatory powers are transferred from the
Financial Services Authority to the Bank of England. We continue to
assess the potential impact of these and other U.K. reforms, such as
the introduction of bank levies.

We monitor the evolving market and regulatory environment on

an ongoing basis and reflect these changes through enhancements to
our risk management framework. 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. For
further details on our risk management framework and our activities
to manage risks, refer to the Risk management, Overview of other
risks and Capital management sections.

Defining and measuring success through Total Shareholder Returns
Our focus is to maximize shareholder returns through the
achievement of top quartile Total Shareholder Returns (TSR) over the
medium term (3-5 years) which reflects a longer term view of strong
and consistent financial performance.

Common share and dividend information

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

Estimated impact of foreign currency translation on our consolidated
financial results
Our foreign currency-denominated results are impacted by exchange
rate fluctuations. Revenue, provision for credit losses (PCL), Insurance
policyholder benefits, claims and acquisitions expense (PBCAE),
non-interest expense and income denominated in foreign currency
are translated at the average rate of exchange for the year.

In 2010, foreign currency translation of our earnings had a

significant impact on our consolidated financial results due to the
considerable strengthening of the Canadian dollar relative to other
currencies. The translation approximately reduced revenue by
$1.2 billion, net income by $150 million and diluted EPS by $.10.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

TSR aligns to our three strategic goals and we believe represents
the most appropriate measure of shareholder value creation. 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 and the relative position
reflects the market’s perception of our overall performance relative to
our peers over a period of time.

Financial performance objectives are annual metrics used to

assess overall performance and measure progress against our
medium term TSR objective. We review and revise these metrics as
the economic, market and regulatory environment change.

Our financial objectives are diluted EPS growth of 7%+, ROE of

16% – 20% and strong capital ratios. The outcome of these financial
objectives is the dividend payout ratio targeted at 40% – 50%.
Defined operating leverage is no longer a suitable metric given our
diversified business mix and the lack of comparability against our
peer group.

By focusing on these financial performance objectives in our
decision-making, we believe we will be well positioned to provide
sustainable earnings growth and solid returns to our shareholders.

Our three- and five-year average annual TSR of 3% and 10%
respectively, ranked us in the first quartile within our global peer
group for both periods. The three-year and five-year average annual
TSR for our global peer group was negative 9% and 0% respectively.

Three- and five-year TSR vs. peer group average

Table 2

Royal Bank of Canada

Peer Group Average (2)

3-Year TSR (1)

5-Year TSR (1)

10%

Top Quartile

(9)%

(1)

(2)

The three- and the five-year average annual TSR are calculated based on our common
share price appreciation plus reinvested dividend income for the period October 31,
2007 to October 31, 2010 and October 31, 2005 to October 31, 2010 respectively,
based on information as disclosed by Bloomberg L.P.
We are part of a global peer group consisting of 20 financial institutions (seven large
Canadian financial institutions in addition to us (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).

2010
$ 54.39 $
2.00
(.7)%
2.9%

2009

2008

2007

54.80 $
2.00
17.0%
22.7%

56.04 $
46.84 $
1.72
2.00
(16.4)% 12.5%
(12.8)% 16.2%

Table 3

2006

49.80
1.32
19.5%
23.2%

The following table reflects the estimated impact of foreign

currency translation on key income statement items:

(C$ millions, except per share amounts)

Impact on income increase (decrease):

Total revenue
PCL
PBCAE
Non-interest expense
Net income

Impact on EPS:

Basic
Diluted

Table 4

2010 vs.
2009

2009 vs.
2008

$ (1,180)
95
235
680
(150)

745
(95)
(150)
(485)
10

$
$

(.11)
(.10)

$
$

.01
.01

Changes in the average exchange rates are shown in the following
table:

(Average foreign currency equivalent of C$1.00) (1)

U.S. dollar
British pound
Euro
TTD (2)

Table 5

2009

.858
.556
.627
5.354

2010

.959
.617
.713
6.085

(1)
(2)

Average amounts are calculated using month-end spot rates for the period.
TTD represents the Trinidad and Tobago dollar. The TTD fluctuates within a narrow band
of the U.S. dollar.

Financial performance

Overview

2010 vs. 2009
We reported net income of $5,223 million for the year ended
October 31, 2010, up $1,365 million or 35% from the prior year.
Diluted earnings per share (EPS) of $3.46 increased $.89 and return
on common equity (ROE) of 14.9% was up 300 basis points (bps)
from the prior year. Our Tier 1 capital ratio of 13.0% was unchanged
from the prior year. Our current year results included a loss on Liberty
Life Insurance Company (Liberty Life) of $116 million on a before-and
after-tax basis. Our prior year results reflected a goodwill impairment
charge of $1 billion on a before-and after-tax basis.

Excluding these items above, net income increased $481
million, or 10%, diluted EPS increased $.26 and ROE increased
40 bps compared to prior year. Our results reflected solid business
growth in Canadian Banking, our wealth management businesses and
Insurance as economic conditions improved, particularly in the first
half of the year. In addition, PCL decreased reflecting stabilizing asset
quality. These factors were offset by lower trading revenues in Capital
Markets reflecting unfavourable trading conditions. The prior year
reflected strong trading results from favourable market opportunities.
Canadian Banking net income was $3,044 million, up $381

million or 14% from last year, reflecting revenue growth in all
businesses and lower PCL. These results were driven by strong
volume growth in home equity and personal deposit products,
increased credit card transaction volumes and higher mutual fund
distribution fees. Higher pension and performance-related
compensation expense and increased costs supporting business
growth partially offset the increase.

Wealth Management net income was $669 million, up
$86 million, or 15% from a year ago mainly due to higher average
fee-based client assets and higher transaction volumes reflecting
improved market conditions. Favourable income tax adjustments in
the current year also contributed to the increase. These factors were
partially offset by spread compression and the impact of the stronger
Canadian dollar.

Insurance net income was $405 million, down $91 million or
18%, from last year largely reflecting the $116 million loss on Liberty
Life. Excluding the loss on Liberty Life, net income was $521 million,
up $25 million, or 5%, mainly due to favourable actuarial adjust-
ments, higher net investment gains, our ongoing focus on cost
management and volume growth. These factors were partially offset
by higher disability and auto claims costs and unfavourable life
policyholder experience. For further details on the loss on Liberty Life
refer to the Insurance segment.

International Banking net loss of $317 million compared to a net
loss of $1,446 million from a year ago, mainly reflecting the prior year
goodwill impairment charge. Lower provisions in our U.S. banking
loan portfolio and the impact of the stronger Canadian dollar also
contributed to the lower loss. These factors were partially offset by
higher losses on our available for sale (AFS) securities.

Capital Markets net income of $1,647 million, decreased
$121 million or 7% from a year ago as trading revenue was impacted

Certain of our business segment results are impacted by fluctuations
in the U.S. dollar, Euro, British pound and the TTD exchange rates
relative to the Canadian dollar. Wealth Management, Insurance,
International Banking and Capital Markets each have significant U.S.
dollar-denominated exposure, Insurance has significant British
pound-denominated exposure and Capital Markets also has
significant Euro and British pound-denominated exposure. In
addition, International Banking has TTD denominated exposure. For
further details on the impact to our segments, refer to the Business
segment results section.

by lower client volumes and tighter credit spreads. Our results were
also unfavourably impacted by the stronger Canadian dollar. Losses
on certain market and credit related items this year were significantly
lower than market environment-related losses of $1.5 billion ($648
million after tax and compensation adjustments) in the prior year. The
decrease was also partially offset by lower PCL and strong growth in
our investment banking businesses.

Corporate Support net loss was $225 million compared to a net

loss of $206 million a year ago. The current year net loss mainly
reflected net unfavourable tax and accounting adjustments. Our prior
year results included a general provision for credit losses of $589
million ($391 million after tax), losses on certain AFS securities of
$419 million ($287 million after tax), losses on fair value adjustments
of $217 million ($151 million after tax) on certain RBC debt
designated as held-for-trading (HFT), and securitization gains
inclusive of new and re-investment related activity, net of economic
hedging activity of $918 million ($630 million after tax).

For a detailed discussion on measures excluding the goodwill

impairment charge and the loss on Liberty Life, refer to the Key
performance and non-GAAP measures section. For a further
discussion on our treatment of market environment-related losses,
refer to the Economic market and regulatory review and outlook
section.

Medium-term objectives
In 2010, we compared favourably to our medium-term objective for
Tier 1 capital ratio and compared unfavourably to our diluted EPS
growth, ROE and dividend payout ratio objectives. We also compared
unfavourably to our defined operating leverage objective.

Summary of 2009 and 2008
In 2009, net income was $3,858 million, down 15% from 2008 mainly
reflecting the goodwill impairment charge. Excluding the goodwill
impairment charge, net income was $4,858 million, an increase of
$303 million, or 7%. This increase was driven by stronger trading
results in Capital Markets, which included lower market environment-
related losses, and higher net securitization gains. Solid growth in our
banking-related businesses, partly reflecting our 2008 acquisitions,
and volume growth in our insurance businesses also contributed to
the increase. These factors were partially offset by net losses on fair
value adjustments on certain RBC debt designated as Held-for-trading
(HFT) and losses on credit default swaps used to economically hedge
the corporate lending portfolio and higher provision for credit losses.
In 2008, net income was $4,555 million, down 17% from 2007.

Our results included higher market environment-related net losses
and higher PCL, partially offset by 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 2007 results also included a gain of
$326 million ($269 million after tax) relating to the Visa Inc.
restructuring.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Total revenue

(C$ millions)

Interest income
Interest expense

Table 6

2010

2009 (1)

2008 (1)

$ 18,673
7,696

$ 20,578
9,037

$ 25,038
15,984

Net interest income

$ 10,977

$ 11,541

$ 9,054

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

advisory

Other (5)

$ 4,620
6,174
1,315
3,218

$ 4,377
5,718
2,750
3,349

$ 4,697
2,609
(81)
3,076

1,193
833

1,050
321

875
1,352

Non-interest income

$ 17,353

$ 17,565

$ 12,528

Total revenue

$ 28,330

$ 29,106

$ 21,582

Additional information

Total trading revenue (6)
Net interest income
Non-interest income

Total

Total trading revenue by

product
Interest rate and credit
Equities
Foreign exchange and

commodities

$ 1,443
1,315

$ 2,316
2,750

$ 2,758

$ 5,066

$ 1,992
351

$ 3,405
1,008

415

653

Total

$ 2,758

$ 5,066

680
(81)

599

(250)
265

584

599

(1)

(2)

(3)

(4)

(5)

(6)

We reclassified certain amounts in Corporate Support which were previously reported in
trading revenue to the Other revenue to better reflect the nature of the amounts.
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.

Total revenue
2010 vs. 2009
Total revenue decreased $776 million, or 3%, from a year ago
primarily attributable to significantly lower Total trading revenue. The
impact of the stronger Canadian dollar which reduced revenue by an
estimated $1.2 billion and lower securitization gains also contributed
to the decrease. These factors were partially offset by solid volume
growth in our Canadian banking businesses, higher average
fee-based client assets and higher transaction volumes in our wealth
management businesses, strong growth in our investment banking
businesses, and higher insurance-related revenue. Certain market
and credit related losses this year were significantly lower than our
market environment-related losses in the prior year. For a discussion
on market environment-related losses, refer to the Economic market
and regulatory review and outlook section.

Total trading revenue, comprised of trading related revenue
recorded in Net interest income and Non-interest income, decreased
$2.3 billion mainly due to weaker trading revenues in our fixed
income and currency, money market and U.S. global equity
businesses, which were impacted by lower client volumes and tighter
credit spreads reflecting less favourable trading conditions in the
current year.

Net interest income decreased $564 million, or 5%, primarily as

a result of lower trading-related net interest income as discussed
above. Non-trading net interest income was up $309 million, or 3%,
largely due to volume growth in our Canadian banking businesses,
partially offset by spread compression in our banking-related and
wealth management businesses.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Investments-related revenue increased $243 million, or 6%,

mainly due to higher average fee-based client assets resulting from
capital appreciation and higher transaction volumes in our wealth
management businesses reflecting improved market conditions and
investor confidence.

Insurance-related revenue increased $456 million or 8%, mainly
due to volume growth across all businesses, including annuity growth
in our U.S. and International businesses and higher net investment
gains. These factors were partially offset by the change in fair value of
investments backing our life and health policyholder liabilities, and
the impact of the stronger Canadian dollar. The annuity volumes and
the change in fair value of investments were largely offset in PBCAE.
The loss on Liberty Life was recorded in Non-interest revenue – Other.

Banking revenue was down $131 million, or 4%, largely
reflecting a portion of our credit card interchange fees, previously
recorded in Banking revenue, now being included with our credit card
securitization in Other revenue, and a favourable adjustment in the
prior year related to our credit card customer loyalty reward program
liability. These factors were partially offset by higher syndicated
finance activity and higher credit card service revenue in the current
year.

Underwriting and other advisory revenue increased $143 million,
or 14% , mainly due to higher debt origination activity and merger and
acquisition (M&A) activity.

Other revenue increased $512 million mainly due to gains as

compared to losses last year on certain AFS securities, gains on the
fair value adjustments on certain RBC debt designated as HFT in
Capital Markets and Corporate Support, lower losses on credit default
swaps recorded at fair value used to economically hedge our
corporate loan portfolio in Capital Markets, and the inclusion of credit
card interchange fees, as noted above. These factors were partially
offset by lower securitization gains in the current year due to a higher
than historical level of securitization activity in the prior year, higher
net losses on instruments related to funding, and the loss on Liberty
Life.

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

Net interest income increased $2,487 million, or 27%, largely

due to lower funding costs on certain trading positions in our capital
markets businesses. Loan and deposit growth, largely due to solid
volume growth in our Canadian banking businesses, and a full year of
revenue from our 2008 acquisitions in Wealth Management and
International Banking also contributed to the increase. These factors
were partially offset by spread compression in our banking-related
and wealth management businesses.

Investments-related revenue decreased $320 million, or 7%,
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.

Trading revenue in Non-interest income increased $2,831
million. Total trading revenue, which comprises trading-related
revenue recorded in Net interest income and Non-interest income,
was $5,066 million, up $4,467 million. Stronger trading revenue,
which included lower market-environment related losses on HFT
instruments, benefited 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 2008 also contributed
to the increase.

Banking revenue was up $273 million, or 9%, 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 M&A activity.

Other revenue was down $1,031 million, primarily due to losses
on the fair value adjustments on certain RBC debt designated as HFT
as compared to gains in 2008 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
hedge certain corporate loan portfolios as compared to gains in 2008
in Capital Markets also contributed to the decrease. These factors
were partially offset by higher securitization revenue reflecting a
higher than historical level of securitization activity from our partic-
ipation in government-sponsored funding programs.

Our revenue for 2009 was favourably impacted by the weaker

Canadian dollar.

Provision for credit losses
Credit quality has generally improved from the prior year reflecting
stabilizing asset quality due to the general improvement in the global
economic environment. For further details on our PCL, refer to the
Credit quality performance section.

2010 vs. 2009
Total PCL in 2010 was $1.9 billion, down $1.6 billion from last year.
Specific PCL of $1.8 billion decreased $1 billion mainly due to lower
provisions in our corporate loan portfolio and residential builder
finance portfolio in U.S. banking. We incurred a general provision of
$26 million during the current year as compared to $589 million in
the prior year, reflecting improved credit quality in our commercial
U.S. banking and Canadian retail portfolios.

2009 vs. 2008
Total PCL of $3.4 billion increased $1.8 billion from 2008, largely
reflecting 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, mainly in 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.

Insurance policyholder benefits, claims and acquisition expense
2010 vs. 2009
PBCAE increased $499 million, or 11%, primarily reflecting higher
costs commensurate with volume growth, partially offset by the
change in fair value of investments backing our life and health
policyholder liabilities and the impact of the stronger Canadian dollar.
The increase in PBCAE from annuity volumes and the change in fair
value of investments was largely offset in revenue. For further details,
refer to the Insurance segment section.

2009 vs. 2008
PBCAE increased $2,978 million from 2008, largely reflecting the
change in fair value of investments and higher costs commensurate
with the increased annuity volumes, largely offset in revenue.

Non-interest expense
2010 vs. 2009
Non-interest expense decreased $165 million, or 1%, mainly due to
the favourable impact of the stronger Canadian dollar which reduced
non-interest expense by approximately $680 million. Lower variable
compensation reflecting lower trading results and our continued
focus on cost management also contributed to the decrease. These
factors were largely offset by higher costs in support of our business
growth, an increase in marketing costs largely for our Olympic
sponsorship, higher professional fees, and higher stock-based
compensation partly reflecting the increase in fair value of our earned
compensation liability related to the Wealth Management stock-
based compensation plan.

2009 vs. 2008
Non-interest expense increased $2,207 million, or 18% from 2008,
largely due to increased variable compensation driven by higher
trading results. Increased costs in support of business growth, which
included acquisition-related staff and occupancy costs, reflecting a
full year of expenses from our 2008 acquisitions, the impact of the
weaker Canadian dollar, and the favourable impact of $542 million in
2008 related to the reduction of the Enron-related litigation provision
also contributed to the increase. These factors were partially offset by
our ongoing focus on cost management.

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

2010

4,023
3,384

1,216
201

8,824
1,000
1,053
813

934
1,769

2009

2008

$ 4,146
3,561

$ 3,845
2,689

1,189
82

1,168
77

$ 8,978
1,025
1,045
761

$ 7,779
934
926
749

860
1,889

903
1,060

Non-interest expense

14,393

$ 14,558

$ 12,351

Goodwill impairment
In 2009, we recorded a goodwill impairment charge in International
Banking of $1 billion on both a before-and after-tax basis. For further
details, refer to Note 10 to our 2010 Annual 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.

2010 vs. 2009
Income tax expense increased $78 million, or 5%, from a year ago
due to higher earnings before income taxes in 2010. The effective tax
rate of 23.6% decreased 4.8% from 28.4% a year ago, largely due to
the goodwill impairment charge reported in the prior year, which was
not deductible for tax purposes. Excluding the goodwill impairment
charge, the effective tax rate decreased .4%, mainly due to a
reduction in Canadian corporate income tax rates. For further details
on the 2009 effective income tax rate, excluding the goodwill
impairment charge, refer to the Key performance and non-GAAP
measures section.

Other taxes increased by $38 million from 2009, due to the
introduction of the HST in Ontario and British Columbia in the current
year and the favourable resolution of a goods and services tax audit
in the prior year, partially offset by lower capital taxes, reflecting
lower capital tax rates. In addition to the income and other taxes
reported in our Consolidated Statements of Income, we recorded
income taxes of $685 million in 2010 (2009 – $1,706 million) in
shareholders’ equity, a decrease of $1,021 million, primarily
reflecting decreased unrealized foreign currency translation gains, net
of hedging activities, unrealized losses in our derivatives designated
as cash flow hedges, and lower unrealized gains in our AFS portfolio.
The effective total tax rate of 31.6% decreased 5.5% from a year

ago primarily reflecting the goodwill impairment charge discussed
above.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

2009 vs. 2008
Income tax expense increased $199 million, or 15%, from 2008
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 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.

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

higher capital taxes, and higher property taxes, net of a release of
amounts accrued due to favourable resolution of a goods and
services tax audit.

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)

2008
2009
2010
1,646 $ 1,568 $ 1,369

180 $
249
161
115
46
20
771 $

250 $
249
134
114
51
11
809 $

204
242
104
103
42
16
711
2,455 $ 2,339 $ 2,080
6,968 $ 5,526 $ 6,005
22.8%
28.4%
23.6%
31.0%
37.1%
31.6%

(1)
(2)

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.

2010

Table 9

2009

2008

Business segment results

Results by business segment

(C$ millions, except for percentage
amounts)

Net interest income
Non-interest income

Total revenue

PCL
PBCAE
Goodwill impairment charge
Non-interest expense

Net income before income

taxes and NCI in net income
of subsidiaries

Net income

ROE
RORC
Average assets

Canadian
Banking
7,488 $
3,067

Wealth
Management

Insurance

305 $

– $

3,883

6,062

International
Banking
1,367 $
869

$ 10,555 $
1,191
–
–
4,995

4,188 $
3
–
–
3,295

6,062 $
–
5,108
–
552

2,236 $
743
–
–
2,105

Capital
Markets (1)

Corporate
Support (1)

Total

2,719 $
3,168

5,887 $
20
–
–
3,420

(902) $
304

(598) $
(96)
–
–
26

Total
9,054
12,528

17,565

10,977 $ 11,541 $
17,353
28,330 $ 29,106 $ 21,582
1,595
3,413
1,631
4,609
1,000
–
12,351
14,558

1,861
5,108
–
14,393

$
$

4,369 $
3,044 $

890 $
669 $

402 $
405 $

(612) $
(317) $

2,447 $
1,647 $

(528) $
(225) $

6,968 $
5,223 $

5,526 $
3,858 $

6,005
4,555

35.6%
46.9%

18.1%
19.5%
29.6%
22.3%
$ 279,900 $ 18,400 $ 15,200 $ 55,300 $ 327,500 $ (13,300) $ 683,000 $ 695,300 $ 650,300

(5.5)%
(12.2)%

11.9%
19.5%

26.6%
30.1%

17.6%
64.6%

14.9%
25.4%

n.m.
n.m.

(1)

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

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 the 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

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

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 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 enter-
prise.

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 2010
We reclassified certain amounts in Corporate Support which were
previously reported primarily in Trading revenue, to the Other category
of non-interest income to better reflect the nature of these amounts.
Certain comparative amounts have been reclassified to conform to
the current period’s presentation.

Securitization reporting
The gains/losses on the sale of and hedging activities related to our
Canadian originated mortgage securitizations and our securitized
credit card loans are recorded in Corporate Support. Hedging activ-
ities include current net mark-to-market movement of the related
instruments and the amortization gains/losses of cash flow hedges
that were previously terminated. As the securitization activities
related to our Canadian originated mortgages and credit card loans is
done for funding purposes, Canadian Banking recognizes the
mortgage and credit card loan related income and provision for credit
losses, as if balances had not been securitized, with the
corresponding offset recorded in Corporate Support.

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 other Schedule I banks, independent trust
companies, foreign banks, 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
• We became the first Canadian issuer of both Visa and

MasterCard with the launch of Westjet MasterCard co-brand card
in March; a travel rewards card offering Westjet travel credit
rewards to clients. We also launched our new Cash back credit
card in June which rewards our clients a portion of their
purchases in the form of cash back.

• We made significant investments in technology for the benefit of
our clients, including a new commercial sales platform and a

new online banking website. Our newly designed online banking
website includes myFinanceTrackerTM, Canada’s first online
financial management tool integrated into an online banking
system. myFinanceTracker will automatically categorize trans-
actions, track expenses and provide advanced budgeting
capabilities for all personal banking and credit card accounts.
• We launched the $6 low fee small business account providing

value conscious business clients with the most competitive
product available in the industry.

• We opened our new RBC retail store concept, a dramatically new
retail banking environment with merchandising areas and
interactive digital technologies which will redesign and simplify
the customer shopping experience.

Economic and market review
Continued improvement in the Canadian economy in the first half of
the year, drove volume growth in our home equity products, personal
lending, and personal and business deposits. Volume growth
moderated in the latter part of the year due to the effects of a slowing
Canadian economy. The improvement in global capital markets
contributed to higher mutual fund revenue from overall capital
appreciation and net sales of long-term funds as retail investor
confidence returned. Stabilizing asset quality and the continued
recovery of the Canadian labour market resulted in lower PCL. For
further details on our general economic review, refer to the Economic,
market and regulatory review and outlook section.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

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
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 (FTE)

Credit information

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

$
$

2010
7,488
3,067
10,555
1,191
4,995
4,369
3,044

35.6%
46.9%
2.75%
1.1%

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

35.9%
48.4%
2.76%
3.8%

$
$

Table 10

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

38.1%
52.2%
2.98%
2.6%

279,900
272,100
269,500
191,400
8,350
6,350

$ 258,900
251,600
249,600
176,000
7,250
5,400

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

148,200
23,122

$ 133,800
23,280

$ 109,500
24,222

.52%
.44%

.50%
.51%

.36%
.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
$3 billion, respectively (2009 – $37 billion and $4 billion; 2008 – $22 billion and $4 billion).

Revenue by business line (C$ millions)

12,000

10,000

8,000

6,000

4,000

2,000

Cards and Payment Solutions

Business Financial Services

Personal Financial Services

2010

2009

2008

Financial performance
2010 vs. 2009
Net income was $3,044 million, up $381 million or 14% from last
year, reflecting revenue growth in all businesses and lower PCL.

Total revenue increased $665 million, or 7%, from the previous

year largely driven by strong volume growth in home equity and
personal deposits products and higher credit card transaction
volumes. Mutual fund distribution fees also increased primarily
reflecting capital appreciation and net long-term fund sales. These
factors were partially offset by a favourable adjustment to our credit
card customer loyalty reward program in the prior year.

Net interest margin remained flat from a year ago reflecting the

continued low interest rate environment and higher mortgage
breakage costs, which was partially offset by favourable repricing.

PCL decreased $84 million, or 7%, due to lower provisions in our

business lending, personal and small business portfolios reflecting
improving economic conditions. For further details, refer to the Credit
quality performance section.

Non-interest expense increased $266 million, or 6%, driven by
higher pension costs and performance-related compensation costs,
higher costs in support of business growth, increased marketing
costs largely for our Olympic sponsorship, higher occupancy costs
and the introduction of the HST on July 1, 2010. These factors were
partly offset by our continued focus on efficiency and cost reduction
initiatives, including the impact of lower staff levels as a result of
sales productivity improvements.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Average assets increased $21 billion, or 8% largely due to

continued growth in home equity and personal lending products.
Average deposits were up $15 billion or 9%, reflecting solid growth in
both personal and business deposits.

2009 vs. 2008
Net income of $2.7 billion was flat compared to 2008 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 2008 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 2009. These factors were
partly offset by lower spreads and a decline in mutual fund
distribution fees.

Net interest margin decreased 22 bps from 2008 reflecting lower
interest rates, higher term funding costs and the impact of changes in
product mix.

PCL increased $408 million, or 47%, reflecting higher loss rates

in credit cards, and unsecured personal portfolios, and higher
impaired loans in our business lending portfolio.

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

to cost management, partly offset by higher operational costs in
support of business volume growth and branch network expansion.

Outlook and priorities
While continued economic improvement is expected to drive strength
in home equity products and improvements in credit quality,
mortgage volumes are expected to moderate in 2011 due to a slowing
housing market. A continued low interest rate environment and
increased price competition is expected to maintain pressure on
spreads of retail banking products. Competitors who reduced their
presence during the financial crisis are re-entering the market in
addition to non-traditional entrants to the market which is expected
to put pressure on spreads for business lending and credit cards. For
further details on our general economic outlook, refer to the
Economic, market and regulatory review and outlook section.

Key strategic priorities for 2011
•

Continue to deliver superior client experience and advice to drive
industry leading volume growth.
Continue to simplify our end-to-end processes to reduce
complexity and improve efficiency.

•

Enable collaboration and convergence of people and channels to
increase employee engagement and productivity and strengthen
our distribution capabilities.

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 1,209 branches and 4,227 ATMs.

Financial performance
Total revenue increased $455 million, or 9%, compared to the prior
year reflecting strong volume growth in residential mortgages,
personal loans and personal deposits. Mutual fund distribution fees
also increased on solid balance growth reflecting capital appreciation
and net sales of long-term funds.

Average residential mortgages were up 7% over last year,
supported by continued low interest rates and a solid housing
market. Average personal deposits grew by 14% from last year, driven
by the continued success of our key savings products and customer
preference for reduced risk.

Selected highlights

Table 11

(C$ millions except number of)

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
ATMs

(1)

Represents year-end spot balances.

2010

2009

2008

$ 5,760 $ 5,305 $ 5,315

151,000 141,800 129,800
43,700
53,000
41,200
49,000
55,600
58,000
58,000
63,300
26,500
35,500

63,700
56,100
55,500
70,100
42,400

968

990

1,129

1,209
4,227

1,197
4,214

1,174
4,149

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

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 increased $100 million or 4%, compared to the prior
year largely reflecting volume growth in business deposits.

Over the course of the year, businesses have continued to

increase their liquidity levels, leading to solid growth of 6% in
business deposits; however this resulted in reduced demand for
credit, limiting our business loan growth, which was flat compared to
the prior year.

150,000

120,000

90,000

60,000

30,000

2010 2009 2008

2010

2009

2008

65,000

Residential mortgages

52,000

Personal loans

Personal deposits

39,000

26,000

13,000

Selected highlights

Table 12

(C$ millions)

Total revenue
Other information (average)

Business loans (1)
Business deposits (2)

2010
2,557 $

2009

2008

2,457 $

2,441

42,400
69,400

42,400
65,400

39,900
58,000

(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

2010

2009

2008

2010

2009

2008

Business loans

Business deposits

70,000

56,000

42,000

28,000

14,000

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Selected highlights

Table 13

(C$ millions)

Total revenue
Other information

2010
2,238 $

2009

2008

2,128 $

1,830

Average credit card balances
Net purchase volumes

12,500
58,400

12,500
53,200

12,400
52,600

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

15,000

12,000

9,000

6,000

3,000

2010

2009

2008

2010

2009

2008

Average credit
card balances

Net purchase
volumes

60,000

48,000

36,000

24,000

12,000

• We were recognized as a top 10 global wealth manager in AUM,
net income and employees in Scorpio Partnership’s Global
Private Banking KPI Benchmark 2010, an annual independent
survey, reflecting both our comprehensive offering of investment
management solutions and our global reach. We also received
numerous Canadian, U.S. and international awards including
those for the Best Overall Fund Group and Best Bond Fund
Family in Canada by Lipper Inc.

Economic and market review
Capital market appreciation over most of the year resulted in an
increase in fee-based client assets and revenue, as well as higher
transaction volumes reflecting growing investor confidence. However,
our results were negatively impacted by the stronger Canadian dollar
as well as spread compression due to the continued low interest rate
environment. While recruiting efforts for experienced client-facing
professionals continued into 2010, these efforts slowed in the latter
part of the year due to increased competition especially in the U.S. For
further details on our general economic review, refer to the Economic,
market and regulatory review and outlook section.

(1)

The proposed acquisition is subject to customary closing conditions including
regulatory approval and is expected to close by the end of December 2010.

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 rank second in
market share in outstanding balances.

In addition, this business line includes our 50% interest in
Moneris Solutions, Inc., our merchant card processing joint venture
with the Bank of Montreal.

Financial performance
Total revenue increased $110 million or 5%, compared to the past
year primarily reflecting higher spreads, higher transactional volumes
and higher revenues from Moneris Solutions, Inc. A gain of $34
million on the sale of a portion of our remaining Visa IPO shares this
year, as compared to a gain of $18 million last year, also contributed
to the increase. These factors were partially offset by a $52 million
favourable adjustment to our credit card customer loyalty program in
the prior year.

Balances remained flat compared to last year reflecting the
continuation of strategies and programs implemented in 2009 to limit
credit losses, which included a reduction in our marketing and direct
mail programs. Some of these programs were re-introduced in the
latter half of 2010.

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, Europe, Asia and Latin America with a full suite of
investment, trust and other wealth management solutions. We also
provide asset management products and services through other RBC
distribution channels and third-party distributors, and directly to
institutional and individual clients. Our competitive environment is
discussed below in each business.

Year in review
•

In September 2010, we announced a number of transformational
changes effective November 1, 2010 to better align our
operating structure with our goals and to accelerate our global
growth strategy. By leveraging the breadth and depth of our
global expertise, as well as our reputation and brand equity, we
intend to be a global leader in wealth and asset management.
In October 2010, we announced an agreement to acquire U.K.-
based BlueBay Asset Management plc (BlueBay), which will
expand our Global Asset Management business and align with
our global expansion objectives. (1)

•

• We acquired the wealth management business of Fortis Wealth
Management Hong Kong Limited in early November 2010 which
reflects our particular focus on significantly expanding our
operations in Asia. Earlier in 2010, we also acquired J.P. Morgan
Securities’ Third Party Registered Investment Advisory Servicing
Business representing our ongoing commitment to high-net-
worth clients in the U.S.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Wealth Management financial highlights

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

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

Total revenue

PCL
Non-interest expense

Net income before income taxes
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 (FTE)
Number of advisors (3)

$
$

2010

2009

305

397

2,362
1,521
4,188
3
3,295
890
669

17.6%
64.6%
21.3%

18,400
6,800
29,000
3,650
1,000

703
521,600
261,800
10,677
4,299

$
$

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

$
$

Table 14

2008

468

2,276
1,243
3,987
1
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

Estimated impact of US$ translation on key income statement items

2010 vs. 2009

Impact on income increase (decrease):

Total revenue
Non-interest expense
Net income

Percentage change in average US$ equivalent of C$1.00

(1)
(2)
(3)

Pre-tax margin is defined as net income before income taxes divided by total revenue.
Represents investment advisors and financial consultants of our Canadian and U.S. full-service brokerage businesses.
Represents client-facing advisors across all our wealth management businesses.

(200)
160
(35)

12%

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

2010

2009

2008

Financial performance
2010 vs. 2009
Net income increased $86 million, or 15%, from a year ago, primarily
due to higher average fee-based client assets and higher transaction
volumes as well as favourable income tax adjustments recorded in
the current year. These factors were partially offset by spread
compression and the impact of the stronger Canadian dollar.

Total revenue increased $108 million, or 3%, largely reflecting

higher average fee-based client assets resulting from capital
appreciation and higher transaction volumes reflecting improved
market conditions and investor confidence. These factors were
partially offset by the impact of the stronger Canadian dollar, lower
spreads on client cash deposits and higher fee waivers largely on
U.S. money market funds resulting from the continued low interest
rate environment.

Non-interest expense increased $33 million, or 1%, primarily
due to higher variable compensation driven by higher commission-
based revenue, and the increase in fair value of our earned
compensation liability related to our stock-based compensation plan.
These factors were largely offset by the impact of the stronger
Canadian dollar and the reversal of the remaining provision related to
the Reserve Primary Fund. For further details refer to the 2009 vs 2008
discussion below.

2009 vs. 2008
Net income decreased $82 million, or 12%, from 2008, 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 2008, on our stock-based compensation plan,
the provisions related to the Reserve Primary Fund and auction rate
securities in 2008, the impact of the weaker Canadian dollar and the
full year of results from our Phillips, Hager & North Investment
Management Ltd. (PH&N) acquisition.

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

impact of the weaker Canadian dollar. A gain, as compared to a loss
in 2008, on our stock-based compensation plan in our U.S. brokerage
business and higher transaction volumes reflecting a full year of
revenue from Ferris, Baker Watts Inc. (FBW) also contributed to the
increase. These factors were largely offset by lower average fee-based
client assets, 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 as well as higher infra-
structure and staff costs in support of business growth. These factors
were partially offset by our focus on cost management, the provisions
related to our support agreement for clients of FBW invested in the
Reserve Primary Fund in 2008 and Wealth Management’s share of the
settlement with U.S. regulators relating to auction rate securities.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Outlook and priorities
As market conditions improve and investor confidence returns, the
environment should continue to benefit our fee-based revenues and
increase transaction volumes. However, while interest rates have
modestly increased in Canada they are expected to remain at low
levels in markets in which we compete, resulting in continued spread
compression along with the unfavourable impact from money market
fund fee waivers. We expect growth to accelerate under our new
operating structure, and remain committed to prudent cost
management, and leveraging platform enhancements to continue to
achieve global efficiencies. For further details on our general
economic outlook, refer to the Economic, market and regulatory
review and outlook section.

Key strategic priorities for 2011
•

Build a leading Global Asset Management business that
complements our wealth distribution businesses by growing our
footprint organically and through acquisitions. This growth will
also enhance our investment management and high net worth
product development capabilities globally in the retirement

market as well as emerging markets, while deepening the
breadth of our global leadership team.
Deepen our high and ultra high net worth client relationships,
ensuring we deliver the full range of wealth management
solutions including investments, trusts, banking and credit, and
insurance solutions. Continuing to improve client satisfaction
from already high levels, will drive productivity of our client-
facing advisors in the U.S., Canada, and globally, and improve
financial performance in our wealth distribution businesses.
Focus on key areas with the greatest potential including
(i) growing our industry-leading share of high net worth client
assets in Canada; (ii) expanding our geographic footprint to
attract high net worth clients from emerging markets, particularly
in Hong Kong and Singapore as well as Latin America and
Europe, the Middle East and Africa (EMEA); and (iii) growing our
onshore U.K. wealth management business in pace with our
Global Asset Management business and RBC Capital Markets
expansion.
Accelerate our Operations and Technology investments to
achieve global operating efficiencies to support our growth.

•

Business line review

Canadian Wealth Management

Canadian Wealth Management includes our full-service Canadian
brokerage, which is the market leader as measured by AUA, with
close to 1,440 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 60 investment counsellors and more than 120 trust
professionals in locations across Canada.

We compete with domestic banks and trust companies, global

private banks, investment counselling firms, bank-owned full service
and boutique brokerages, and mutual fund companies. In Canada,
bank-owned wealth managers continue to be the major players.

Financial performance
Revenue increased $126 million, or 10%, compared to the prior year,
primarily due to higher average fee-based client assets resulting from
capital appreciation and higher transaction volumes reflecting
improved market conditions and investor confidence. These factors
were partially offset by spread compression.

Assets under administration increased 11% from a year ago,
mainly due to capital appreciation resulting from improved market
conditions.

Selected highlights

Table 15

(C$ millions)

Total revenue
Other information

2010
1,449 $

2009

1,323 $

2008

1,474

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

193,000
29,200

174,200
24,700

160,700
23,000

programs

99,000

88,000

78,800

(1)

Represents year-end spot balances.

Average AUA and AUM (1) (C$ millions)

200,000

160,000

120,000

80,000

40,000

2010 2009 2008

AUA

AUM

30,000

24,000

18,000

12,000

6,000

(1)

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

U.S. & International Wealth Management

U.S. & International Wealth Management includes one of the largest
full-service brokerage firms in the U.S., with more than 2,100 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 2,400 employees across a network of 27 offices
located in 18 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 decreased $129 million, or 6%. In U.S. dollars, revenue
increased $88 million, or 5%, largely due to higher average fee-based
client assets resulting from capital appreciation and higher trans-
action volumes reflecting improved market conditions and investor
confidence. Partially offsetting the increase were higher fee waivers
on money market funds resulting from the continued low interest rate
environment and lower spreads on client cash deposits.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

In U.S. dollars, assets under administration increased 6% from a
year ago, mainly due to capital appreciation resulting from improved
market conditions.

Average AUA and AUM (1) (US$ millions)

Selected highlights

Table 16

(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

2010
2,003 $

2009

2008

2,132 $

1,869

1,927

1,839

1,812

6,700
18,200
322,100
22,900

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

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

programs (4)

39,200

31,000

21,300

(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.

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 15% market
share as measured by AUM as recognized by the Investment Funds
Institute of Canada.

As discussed above, in October 2010 we announced our
intention to acquire BlueBay, which is one of Europe’s largest
independent managers of fixed income funds and products. BlueBay
will enable a broader product offering and distribution presence, and
coupled with its strong management, is capable of leading asset
management growth across the U.K., EMEA, Latin America and Asian
markets.

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 increased $111 million, or 18%, from a year ago, mainly
due to higher average fee-based client assets resulting from capital
appreciation, and clients’ preference for higher-yielding long-term
funds.

350,000

280,000

210,000

140,000

70,000

2010 2009 2008

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.

AUM increased 5% from a year ago, mainly due to capital
appreciation from improved market conditions and increased long-
term mutual fund sales, partially offset by the impact of the stronger
Canadian dollar and increased Canadian money market fund net
redemptions.

Selected highlights

Table 17

2010

2009

2008

736 $

625 $

644

6,400

2,100

600

(8,700)

8,200
209,200 199,700 180,100

(2,000)

AUM

(C$ millions)

Total revenue
Other information

Canadian net long-term mutual

fund sales

Canadian net money market

mutual fund (redemptions)
sales
AUM (1)

(1)

Represents year end spot balances.

Average AUM (1) (C$ millions)

250,000

200,000

150,000

100,000

50,000

2010

2009

2008

(1)

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

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

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 centres, and our career sales force, as well as through
independent insurance advisors and travel agencies. Outside North
America, we operate in reinsurance markets globally. Our competitive
environment is discussed in each business.

Divestiture of Liberty Life
In October 2010, we announced our intention to sell Liberty Life, our
U.S. life insurance business, to Athene Holding Ltd., for US$628
million. The transaction is subject to regulatory approvals and
customary closing conditions, and is expected to close in early 2011.
As a result of this transaction, we recorded a loss of $116 million
(US$114 million) in the fourth quarter of 2010 on both a before- and
after-tax basis. For further details, refer to Note 11 and Note 31 to our
2010 Annual Consolidated Financial Statements.

Subsequent to the completion of the divestiture, we will realign

Insurance into two lines of business, Canadian Insurance and
International & Other. The travel insurance businesses in the U.S. will
be included in International & Other.

Year in review
•

In Canada, we continued to improve our distribution economics
through shared and streamlined processes, while deepening our
client relationships and simplifying the way we do business.

• We continued to expand and improve our Canadian retail

insurance network to 52 branches in 2010, from 49 branches in
2009 giving our clients more convenient access to insurance
services.

• We launched an improved Universal Life product, with a new

supporting team working across all channels to efficiently deliver
a better product to our clients.
Internationally, we have continued to develop our reinsurance
businesses with solid business growth during the year.

•

Economic and market review
Improved market conditions contributed to higher investment returns
in the current year as well as annuity growth in our International and
other businesses. During the year, we experienced higher disability
and auto claims costs. The higher auto claims cost partly resulted
from higher auto claim activity in advance of the Ontario auto
insurance reform which was passed in late 2010. For further details
on our general economic review, refer to the Economic, market and
regulatory review and outlook section.

Insurance financial highlights

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

Non-interest income

Net earned premiums
Investment income (1)
Fee income
Other (2)
Total revenue

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

Net income before income taxes
Net income

Key ratios
ROE
RORC

Selected average balance sheet information

Total assets
Attributed capital
Risk capital
Other information

Premiums and deposits (3)
Insurance claims and policy benefit liabilities
Fair value changes on investments backing policyholder liabilities (1)
Embedded value (4)
AUM
Number of employees (FTE) (5)

Estimated impact of US$ and British pound translation on key income statement items

Impact on income increase (decrease):

Total revenue
PBCAE
Non-interest expense
Net income

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

$
$

Table 18

2010

2009

2008

4,484 $
1,443
251
(116)
6,062 $
4,421 $
687
552
402 $
405 $

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

26.6%
30.1%

37.0%
42.9%

32.8%
37.1%

15,200 $
1,500
1,300

13,100 $
1,300
1,150

12,600
1,150
1,050

5,704 $
10,750 $
662
6,427
300
2,957

4,970 $
8,922 $
917
5,924
200
2,777

3,861
7,385
(870)
4,919
400
2,939

2010 vs. 2009

(250)
235
10
(5)

12%
11%

(1)

(2)
(3)
(4)

(5)

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. Consequently changes in fair values of these assets are recorded in investment income in the consolidated statements of income and 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.
Relates to loss on Liberty Life.
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.
2009 and 2008 amounts have been restated to reflect the realignment of our insurance operations and technology teams in 2009.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Revenue by business line (C$ millions)

Premiums and deposits by business line (C$ millions)

7,000

5,600

4,200

2,800

1,400

U.S. Insurance

International & Other
Insurance

Canadian Insurance

7,000

5,600

4,200

2,800

1,400

2010

2009

2008

2010

2009

2008

U.S. Insurance

International & Other
Insurance

Canadian Insurance

Financial performance
2010 vs. 2009
Net income decreased $91 million or 18%, compared to the prior
year. Excluding the loss on Liberty Life, net income increased
$25 million, or 5%, mainly due to favourable actuarial adjustments
reflecting management actions and assumption changes, higher net
investment gains, our ongoing focus on cost management and
volume growth. These factors were partially offset by higher disability
and auto claims costs, and unfavourable life policyholder experience.
Total revenue increased $347 million, compared to the prior

year. Excluding the loss on Liberty Life, total revenue increased
$463 million, or 8%, mainly reflecting volume growth across all
businesses, including annuity growth in our U.S. and International
businesses, and higher net investment gains. These factors were
partially offset by the change in fair value of investments backing our
life and health policyholder liabilities, and the impact of the stronger
Canadian dollar. The annuity volumes and the change in fair value of
investments were largely offset in PBCAE. Results excluding the loss
on Liberty Life are non-GAAP measures. Refer to the Key performance
and non-GAAP measures section.

PBCAE increased $499 million, or 11%, primarily reflecting

higher costs commensurate with volume growth across all
businesses, including annuity growth in our U.S. and International
businesses, higher disability and auto claims costs, and unfavourable
life policyholder experience. These factors were partially offset by the
change in fair value of investments, the impact of the stronger
Canadian dollar, and favourable actuarial adjustments.

Non-interest expense was down $7 million, or 1%, mainly due to

our ongoing focus on cost management and the impact of the
stronger Canadian dollar. These factors were largely offset by higher
costs in support of volume growth.

Premiums and deposits were up $734 million, or 15%, reflecting

volume growth in all business lines due to strong sales and client
retention, partially offset by the impact of the stronger Canadian
dollar.

Embedded value increased $503 million, or 8%, largely
reflecting growth from new sales and favourable experience
adjustments. These items were partially offset by the impact of the
transfer of capital from our Insurance businesses and the impact of
the stronger Canadian dollar. For further details, refer to the Key
performance and non-GAAP measures section.

2009 vs. 2008
Net income increased by $107 million, or 28%, compared to 2008, as
2008 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 volume growth across all
businesses, including annuity growth in our U.S. and International &
Other insurance businesses. The impact of the weaker Canadian
dollar and the 2008 investment losses on disposals and impairments
also contributed to the increase. The change in fair value of
investments and the annuity volumes were largely offset in PBCAE.

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. The unfavourable actuarial adjustments and the impact of
the weaker Canadian 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 and higher costs in support of volume
growth, including the addition of new Canadian retail insurance
branches.

Outlook and priorities
We expect continued volume growth driven by new and improved
client focused products delivered through our growing proprietary
channels. Our investment returns are expected to continue to improve
with stabilized market conditions. The recent Ontario auto reform is
anticipated to have a favourable impact on auto claims experience.
For further details on our general economic outlook, refer to the
Economic, market and regulatory review and outlook section.

Key strategic priorities for 2011
•
•

Increase sales through low cost distribution channels.
Deepen our relationships with clients by providing customers
with a comprehensive suite of RBC Insurance products and
services based on their needs.
Simplify the way we do business by enhancing and streamlining
all business processes to ensure that clients find it easy and
simple to do business with us, while managing our expenses.
Pursue selected international niche opportunities with the aim of
growing our reinsurance business.

•

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Business line review

Canadian Insurance

We offer life and health, property and casualty 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 and group
benefits. We offer a wide range of property and casualty products
including home, auto and travel insurance. Our travel products
include out of province/country medical coverage, trip cancellation
insurance and interruption insurance. We also offer commercial
insurance through our partnership with Aon Reed Stenhouse Inc.

In Canada, we compete against approximately 250 insurance
companies, with the bulk of the organizations specializing in either
life and health, or property and casualty products. 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.

Selected highlights

Table 19

(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

Premiums and deposits (C$ millions)

2010

2009

2008

$ 2,735 $ 2,654 $ 1,400

1,249
838

1,210
708

1,188
643

382

452

(524)

Financial performance
Total revenue increased $81 million, or 3%, compared to the prior
year, mainly due to volume growth in auto, home and life and health
products. These factors were partially offset by the change in fair
value of investments backing our life and health policyholder
liabilities, largely offset in PBCAE.

Premiums and deposits increased $206 million, or 10%,
reflecting sales growth in home, auto and life and health products
and continued strong client retention.

2,500

2,000

1,500

1,000

500

2010

2009

2008

Premiums and deposits

U.S. Insurance

In 2010, we offered life and health 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 offered traditional fixed
and fixed-indexed annuities. Travel insurance products include trip
cancellation, interruption insurance and emergency medical
coverage.

In October 2010, we announced our intention to sell Liberty Life.

Refer to Notes 11 and 31 to our 2010 Annual Consolidated Financial
Statements. While we grew our U.S. life insurance business under our
brand, it lacks the scale required to build and maintain a significant
portfolio of insurance products in a very competitive market place. We
will retain our U.S. travel business as this business is separate and
distinct from the other U.S. Insurance businesses (life and annuity).
The U.S. travel business is a strategic extension of our Canadian
travel operations allowing us to leverage the existing scale and
expertise built over the years.

Financial performance
Total revenue decreased $60 million, or 4%, compared to the prior
year. In U.S. dollars, total revenue increased $83 million, or 6%.
Excluding the loss on Liberty Life, total revenue in U.S. dollars
increased $197 million, or 14%, mainly due to an increase in annuity
volumes and lower investment losses. These factors were partially
offset by the change in fair value of investments backing our life and
annuity policyholder liabilities. The annuity volumes and the change
in fair value of investments were largely offset in PBCAE. Total
revenue excluding the loss on Liberty Life is a non-GAAP measure.
Refer to the Key performance and non-GAAP measures section.

Premiums and deposits increased $165 million. In U.S. dollars,

premiums and deposits increased $255 million, reflecting the
increase in annuity volumes.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Selected highlights

Table 20

(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

2010

2009

2008

$ 1,602 $ 1,662 $

146

274

458

(346)

1,531

1,448

244
21
952

259

247
11
704

400

166

263
4
115

(313)

Premiums and deposits (US$ millions)

Premiums and deposits

1,500

1,200

900

600

300

2010

2009

2008

International & Other Insurance

International & Other Insurance is primarily comprised of our
Reinsurance businesses which insure risks of other international
insurance and reinsurance companies. We offer life and health,
accident, annuity and trade credit reinsurance products.

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 but barriers to entry remain high.

Financial performance
Total revenue increased $326 million, or 23%, mainly reflecting
volume growth in our life and annuity reinsurance products, partially
offset by the impact of the stronger Canadian dollar.

Premiums and deposits increased $363 million or 19%, primarily

for the reasons noted above.

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
•

Our U.S. retail bank continued to be challenged in 2010 by weak
economic, credit and market conditions. We remained focused
on managing our loan portfolio and restructuring our operations.
In the Caribbean, we continued to integrate RBTT Financial Group
(RBTT) to a common banking platform for growth and expansion
in the region.

•

Selected highlights

Table 21

(C$ millions)

Total revenue
Other information

Premiums and deposits

Life and health
Property and casualty
Annuity

2010

2009

2008

$ 1,725 $ 1,399 $ 1,064

1,896
49
321

1,643
41
219

1,374
52
125

Premiums and deposits (C$ millions)

Premiums and deposits

2,500

2,000

1,500

1,000

500

2010

2009

2008

•

RBC Dexia IS closed its acquisition of Unione di Banche Italiane
Scpa’s (UBI) depositary bank business, making RBC Dexia IS the
second largest third-party fund administration company and the
fifth largest depositary bank in the Italian market.

Economic and market review
The recovery of the U.S. economy remained under pressure although
signs of asset quality stabilization resulted in lower PCL. Our banking
revenue continued to be affected by historically low interest rates
which compressed spreads. We also experienced pricing pressures
from increased competition for client deposits and loans. Loan
demand in the U.S. continued to be weak and persistent
unemployment in the U.S. negatively affected the travel industry and
the local Caribbean economy. This resulted in reduced banking
volumes and higher PCL in the Caribbean. For further details on our
general economic review, refer to the Economic, market and
regulatory review and outlook section.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 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) before income taxes and NCI in subsidiaries
Net (loss)

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 (FTE)

Credit information

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

$
$

$
$
$

2010

1,367
869
2,236
743
2,105
–
(612)
(317)

(5.5)%
(12.2)%

55,300
29,600
45,800
6,650
3,000

7,800
2,779,500
2,600
11,174

10.32%
2.51%

$
$

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

$
$

Table 22

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

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

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

8.80%
2.74%

5.97%
1.84%

Estimated impact of US$, Euro and TTD translation on key income statement items

2010 vs. 2009

Impact on income increase (decrease):

Total revenue
PCL
Non-interest expense
Net income

Percentage change in average US$ equivalent of C$1.00
Percentage change in average Euro equivalent of C$1.00
Percentage change in average TTD equivalent of C$1.00

(250)
80
225
20

12%
14%
14%

(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.

Revenue by business line (C$ millions)

3,000

2,500

2,000

1,500

1,000

500

RBC Dexia IS

Banking

2010

2009

2008

Financial performance
2010 vs. 2009
Net loss of $317 million compares to a net loss of $1,446 million a
year ago, mainly reflecting the prior year goodwill impairment charge
of $1 billion on both a before-and after-tax basis. Our lower loss also
reflected reduced provisions in our U.S. banking loan portfolio, and
the impact of the stronger Canadian dollar. These factors were
partially offset by higher losses on our AFS securities.

Total revenue decreased $354 million, or 14%, primarily
reflecting the impact of the stronger Canadian dollar. The decrease
was also due to higher losses on our AFS securities and foreclosed
assets, as well as a strategic reduction in our U.S. banking portfolio.
These factors were partially offset by a $52 million ($39 million after
tax) provision recorded in the prior year related to the restructuring of
certain Caribbean banking mutual funds of which $11 million ($8
million after tax) was reversed in the current year.

PCL decreased $237 million, or 24%, largely as a result of lower

provisions in U.S. banking, primarily due to our residential builder
finance loans and AFS securities reclassified to loans. These factors
were partially offset by higher provisions in our commercial portfolio
in the Caribbean. For further details, refer to the Credit quality
performance section.

Non-interest expense was down $241 million, or 10%, primarily

due to the impact of the stronger Canadian dollar. Our continued
focus on cost management, including the ongoing restructuring of our
U.S. banking business, also contributed to the decrease.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

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

Total revenue increased $489 million, or 23%, mainly due to a
full year of revenue from RBTT, and to a lesser extent from Alabama
National BanCorporation (ABN) acquired in 2008. Lower losses on our
AFS securities 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.

PCL was up $483 million, mainly attributable to U.S. banking,

reflecting impaired loans in commercial, residential builder finance,
lot loan, home equity and residential mortgage portfolios. The impact
of the weaker Canadian dollar on the translation of U.S. specific PCL,
higher provisions of $59 million resulting from reclassification of
certain AFS securities to loans due to our adoption of the amend-
ments to Canadian Institute of Chartered Accountants (CICA) section
3855 and a full year of results from RBTT also contributed to the
increase.

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

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 426 banking centres,
476 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

1,100 other banks, savings banks, and thrifts as well as a large
number of credit unions. Deteriorating economic and market
conditions in 2009 led to significant consolidation in the U.S. retail
banking industry, with numerous bank failures and some acquis-
itions. During 2010, the industry continued to experience a number of
bank failures. 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 127 branches in 16 countries.

Financial performance
Total revenue decreased $301 million, or 16%, from the prior year. In
U.S. dollars, total revenue decreased $97 million, or 6%. The
decrease primarily reflects higher losses on our AFS securities and
higher losses on foreclosed assets. These factors were partially offset
by a provision related to the restructuring of certain Caribbean
banking mutual funds in the prior year.

In U.S. dollars, average loans and acceptances decreased
$2 billion, or 7% and average deposits decreased $500 million, or
2%, mainly due to the strategic reduction in our U.S. banking
portfolio, partially offset by business growth in Caribbean banking.

(1)

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

Outlook and priorities
The economic outlook for the U.S. remains weak, with high levels of
unemployment, low absolute home values, soft demand for credit
and low interest rates anticipated to continue for some time. Earnings
generated from our U.S. banking operations will continue to be
challenged in 2011 by difficult economic conditions, increasing
regulatory costs and elevated levels of PCL.

In the Caribbean, low economic growth will place continued

pressure on loan portfolios and PCL.

RBC Dexia IS is expected to see returns improve with new client

mandates, the demand for outsourcing continuing to grow and market
values continuing to increase, all driving the expansion of assets
under administration. For further details on our general economic
outlook, refer to the Economic, market and regulatory review and
outlook section.

Key strategic priorities for 2011
•

•

Continue to strengthen our operating performance by improving
product and distribution capabilities in order to deliver a
differentiated client experience and value proposition.
Build upon the productivity and efficiency enhancements
generated by the integration of our Caribbean banking
businesses to leverage our sales force capabilities and deliver
distinctive relationship-based financial advice to our Caribbean
clients.
Enhance and broaden our suite of products and services at RBC
Dexia IS to maximize client and revenue growth opportunities
across our geographic footprint and deliver a globally integrated
and differentiated client experience.

Selected highlights (1)

Table 23

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

Total revenue
Other information (US$ millions)

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

2010

2009

2008

$ 1,579

$ 1,880

$ 1,246

1,515
3.72%

1,612
3.56%

1,221
3.63%

$ 27,800
29,800
7,600
2,500

$ 30,000
30,300
7,100
3,500

$ 24,100
24,100
9,300
3,300

553
806

563
816

566
815

(1)

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

Average loans and deposits (US$ millions)

Loans and acceptances

Deposits

35,000

28,000

21,000

14,000

7,000

2010

2009

2008

2010

2009

2008

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

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.

RBC Dexia IS, with offices in 15 countries on four continents,

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 by $53 million, or 7%, compared to last year,
mainly due to the impact of the stronger Canadian dollar, and lower
spreads on client cash deposits due to the continued low interest rate

environment, partially offset by higher transaction volumes, and
higher fee-based client assets as a result of capital appreciation.

Assets under administration increased 12%, largely reflecting

improved market conditions, and business growth. These factors
were partially offset by the impact of the stronger Canadian dollar.

Selected highlights

(C$ millions)
Total revenue
Other information

AUA (1)

2010
657

2009
710

Table 24

2008
855

2,779,500

2,484,400

2,585,000

(1)

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

In the U.K., we continued to extend our capabilities in fixed
income and currency, and are a top five Gilt-edged Market
Maker. We acted as the joint bookrunner and hedge manager to
the largest ever U.K. Gilt offering of £8 billion. Our credit trading
business in Europe received top rankings in several categories,
including the Best Bank for Fixed Income, e-Trading and Non-
Core Currency bonds, by institutional investors in Credit
magazine’s 2010 European Credit awards.
In Europe, we became a European Primary Dealer in Germany
and France. In our investment banking, equity and research
businesses, we have broadened our sector focus beyond oil and
gas and mining to growth industries where we have well
established North American capabilities. We also acted as sole
sponsor, joint global coordinator and joint bookrunner in a
£2.0 billion equity offering for Resolution plc, underpinning our
role as a top tier investment bank in Europe.

Economic and market review
Global capital markets continued to improve in early 2010 reflecting
general economic recovery. However, trading conditions were volatile
in the latter half of 2010 largely due to uncertainty over the European
sovereign debt crisis, U.S. regulatory reform and evolving global
capital and liquidity requirements. Most of our trading businesses
were negatively impacted in the second half of 2010 by investor
uncertainty which reduced client volumes across all geographies. We
were also impacted by tightening credit spreads and narrow bid/ask
spreads. Investment banking activities demonstrated strong growth,
particularly in debt origination, M&A and loan syndication, as a result
of overall improved economic conditions. For further details on our
general economic outlook, refer to the Economic, market and
regulatory review and outlook.

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. Outside North America, we have a
select but diversified set of global capabilities, which includes fixed
income origination and distribution, structuring and trading, foreign
exchange, commodities and investment banking. Capital Markets is
comprised of two primary businesses: Capital Markets Sales and
Trading and Corporate and Investment Banking. Our competitive
environment is discussed below in each business.

•

Year in review
• We continued to win significant mandates throughout the year
and remained Canada’s leading global investment bank. In
recognition of our ongoing success, we were named Best
Investment Bank in Canada by Euromoney Magazine for the third
year in a row and Dealmaker of the Year in Canada (Financial
Post) for this year and for six of the last seven years. We were
also ranked number one in debt, equity and M&A in Canada
(Bloomberg).
Outside Canada, we have continued to invest in our key
businesses, extending our capabilities, adding new clients and
expanding our market share. As a result of our strategic growth
initiatives, we now generate approximately 60% of our revenues
outside Canada.

•

• We made significant progress in expanding our business in the

U.S., reflecting our investments in top talent, the build-out of our
infrastructure and the strength of our brand. This has resulted in
market share increases across several businesses including U.S.
dollar fixed income and currency trading, debt and equity
origination.

Royal Bank of Canada: Annual Report 2010

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)

PCL
Non-interest expense

Net income before income taxes and NCI in subsidiaries
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 (FTE)

Credit information

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

$
$

2010

2,719
3,168
5,887
20
3,420
2,447
1,647

19.5%
22.3%

2009

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

21.0%
24.3%

$
$

Table 25

2008

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

20.5%
24.5%

327,500
130,700
29,600
94,800
8,100
7,100

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

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

3,399

3,097

1.38%
.07%

2.32%
1.78%

3,296

1.30%
.48%

Estimated impact of US$, British pound and Euro translation on key income statement items (1)

2010 vs. 2009

Impact on income increase (decrease):

Total revenue
Non-interest expense
Net income

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

(450)
220
(130)

12%
11%
14%

(1)

Taxable equivalent basis. The teb adjustment for 2010 was $489 million (2009 – $366 million, 2008 – $410 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

2010

2009

2008

2010

2009

2008

Other International

U.S.

Canada

Financial performance
2010 vs. 2009
Net income decreased $121 million or 7% from a year ago, mainly
due to lower trading revenues resulting from lower client volumes and
tighter credit spreads reflecting less favourable trading conditions.
Our results were also unfavourably impacted by the stronger
Canadian dollar. These factors were partially offset by losses on
certain market and credit related items this year that were
significantly lower than market environment-related losses in the
prior year. Lower PCL and strong growth in our investment banking
business also partially offset the decrease.

Total revenue decreased $1,036 million or 15%, mainly
reflecting weaker trading revenues in our fixed income business
particularly in the latter part of the year and primarily in the U.S. and
Europe. Our revenues were also unfavourably impacted by the
stronger Canadian dollar. This was partially offset by strong revenue
growth in our investment banking business across all products and
geographies. Certain market and credit related losses this year were
significantly lower than market environment-related losses recorded
in the prior year.

PCL decreased $682 million, primarily reflecting a number of

provisions in our portfolio in the prior period and recoveries of a few
large accounts in the current period. For further details, refer to the
Credit quality performance section.

Non-interest expense decreased $208 million, or 6%, mainly due

to lower variable compensation reflecting lower trading results and
the favourable impact of the stronger Canadian dollar. This was
partially offset by higher costs in support of business growth and new
regulatory requirements.

For a further discussion on our treatment of market environment-

related losses, refer to the Economic market and regulatory review
and outlook section.

2009 vs. 2008
Net income increased $598 million or 51% compared to 2008,
primarily due to stronger trading revenue, improved results in our
corporate and investment banking businesses, and decreased total
market environment-related net losses. The increase was partially
offset by higher PCL and the reduction of the Enron-related litigation
provision recorded in the prior year.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Key strategic priorities for 2011
•

Remain the undisputed market leader in Canada with a leading
global franchise as a market-maker, originator and distributor of
a select but diversified set of products and currencies.
Sustain the momentum we have achieved in our U.S. investment
banking business through ongoing investment in our brand and
a focus on clients in industry sectors that match our product and
distribution strengths.
Extend our European investment banking, equity sales and
trading, and research business and make further investments to
broaden our sector focus and enhance our product capabilities.
Leverage our U.S. and European primary dealer status to grow
our fixed income and currency trading, and investment banking
businesses. We will continue to expand our global capabilities in
infrastructure finance, energy, mining, and structured products
businesses in the U.S., Europe and Asia.
Further invest in our commodities business to establish a
leading energy trading platform in North America.
Continue to follow our disciplined approach to growth, managing
our balance sheet within our established risk and return
parameters and diversifying our operations to support stable
earnings over the long term.
Continue to make the requisite investments in our risk and
control infrastructure to support our growth across all
businesses.

•

Selected highlights

Table 26

(C$ millions, except number of amounts)

Total revenue
Breakdown of revenue

Trading (1)
Commissions and non-trading

related items
Other information
Average assets
FTE

2010

2009

2008

$3,743

$5,247

$1,824

3,186

5,260

1,028

557

(13)

796

305,000
1,606

315,700
1,493

309,700
1,595

(1)

Taxable equivalent basis. The teb adjustment for 2010 was $465 million (2009 – $353
million, 2008 – $394 million). For further discussion, refer to the How we measure and
report our business segments section.

Breakdown of total revenue (C$ millions)

Commissions and
non-trading related items

Trading revenue

5,500

4,400

3,300

2,200

1,100

2010

2009

2008

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 2008.

PCL increased $519 million reflecting a number of impaired

loans in our corporate lending portfolio.

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. In
2008, the reduction of the Enron-related litigation provision
favourably impacted non-interest expense.

Outlook and priorities
As the economic, market and regulatory environments stabilize, we
expect continued growth in our global equity and debt origination,
and M&A activities as a result of our strategic investments in the U.S.
and Europe. We anticipate moderate improvement in our 2011
trading revenues driven by growth in our sovereign and agency debt-
related activities, and increased client volumes due to a stabilizing
market environment, partially offset by narrow bid/ask spreads.
However, our trading revenue may be impacted by evolving regulatory
capital rules in which stricter risk and liquidity requirements will
increase our funding costs. Our lending businesses will likely be
negatively impacted by narrower credit spreads. We expect PCL to
remain at moderate levels given the current economic environment.
For further details on our general economic outlook, refer to the
Economic, market and regulatory review and outlook section.

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, commodities and derivative products for institu-
tional, public sector and corporate clients and our proprietary trading
operations.

Our Capital Markets Sales and Trading businesses compete with

global and regional investment banks. Over the last year, we have
strategically expanded our investments in talent and businesses
mainly in the U.S. and Europe to provide broader product capabilities
and leverage relationships between our market making and origi-
nation activities.

Financial performance
Capital Markets Sales and Trading revenue of $3,743 million,
decreased $1,504 million, or 29%, as compared to prior year.

Our trading revenues decreased $2,074 million, or 39%, largely

in our fixed income and currency, money market and U.S. global
equity businesses, particularly in the U.S. and Europe. Trading
revenue was significantly impacted by lower client volumes in the
latter half of 2010, resulting from sovereign debt concerns and
regulatory uncertainty, in addition to the unfavourable impact of
tightening credit and bid/ask spreads. Trading revenue was also
unfavourably impacted by the stronger Canadian dollar. Losses on
certain market and credit related items were significantly lower than
our market environment-related losses in the prior year. Our revenue
from commissions and non-trading related items increased $570
million, mainly due to gains instead of losses on the fair value
adjustment of certain RBC debt designated as HFT and an accounting
adjustment recorded in the prior year which reduced prior year
revenue. This was partially offset by lower commissions, reflecting the
impact of reduced client volumes.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

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
global investment bank with a strategic presence in virtually all lines
of wholesale business in Canada and the U.S., and a select set of
capabilities in Europe and Asia. We are also now ranked as one of the
top 15 global investment banks (Thomson Reuters).

Financial performance
Corporate and Investment Banking revenue of $2,144 million
increased $468 million, or 28% as compared to the prior year.

Gross underwriting and advisory fees increased $106 million, or

13% reflecting growth in all geographies, particularly in the U.S.
Growth was driven by higher debt origination mainly due to increased
activity in high yield debt. Revenues from M&A activity increased,
largely reflecting solid growth primarily in the U.S. and Europe. Other
revenues increased due to lower losses on credit default swaps used
to economically hedge our corporate loan portfolio, and gains,
instead of losses, on our municipal banking business. We also saw
strong growth in our syndicated finance business in the U.S. and
Europe. Revenues from our corporate lending portfolio remained flat
as volume and pricing improvements were mostly offset by decreased
corporate loan utilization. The increase in revenue was partially offset
by losses primarily relating to U.S. commercial mortgage
backed securities.

Corporate Support

Selected highlights

Table 27

(C$ millions, except number of amounts)

Total revenue
Breakdown of revenue

Gross underwriting and

advisory fees
Other revenue (1)
Other Information
Average assets
FTE

2010
$ 2,144 $

2009

2008

1,676 $

2,111

895
1,249

789
887

650
1,461

22,500
1,793

32,200
1,604

30,600
1,701

(1)

Other revenue includes revenue associated with our core lending portfolio and
syndicated finance, private equity distributions and gains/losses on private equity
investments. It also includes losses mainly relating to commercial mortgage backed
securities of $67 million (2009 – $55 million, 2008 – $61 million).

Breakdown of total revenue (C$ millions)

Other revenue

Gross underwriting
and advisory fees

2,200

1,760

1,320

880

440

2010

2009

2008

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 significant items affecting
the reported results in each year.

Corporate Support financial highlights

(C$ millions, except number of employees)

Net interest loss (2)
Non-interest income

Total revenue (2)

PCL (3)
Non-interest expense

Net loss before income taxes and NCI in subsidiaries (2)
Net loss

Securitization

Total securitizations sold and outstanding (4)
New securitization activity in the period (5)

Other information

Number of employees (FTE) (6)

$
$

Table 28

2010

2009 (1)

2008 (1)

(902)
304
(598)
(96)
26
(528)
(225)

$
$

(889)
797
(92)
456
34
(582)
(206)

$
$

(989)
352
(637)
47
(18)
(666)
(178)

31,503
5,818

$ 32,685
18,689

$ 19,316
6,482

20,797

19,752

19,577

(1)
(2)

(3)

(4)
(5)

(6)

Certain amounts have been reclassified. For further details, refer to the How we measure and report our business segments section.
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 $489 million in 2010 (2009 – $366 million, 2008 – $410 million).
PCL in Corporate Support primarily comprises 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 in 2009. 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 2010 Annual
Consolidated Financial Statements. This amount does not include Canadian residential mortgage and commercial mortgage securitization activity of Capital Markets.
2009 and 2008 amounts have been restated to reflect the realignment of our insurance operations and technology teams in 2009.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

2010
Net loss of $225 million largely reflected net unfavourable tax and
accounting adjustments, including cumulative accounting adjust-
ments of $51 million ($36 million after tax) related to securitization
activity. Losses of $21 million on both a before-and after-tax basis
attributed to an equity accounted for investment and a general
provision for credit losses of $26 million ($18 million after tax) also
increased our net loss.

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)
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, totalling $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.

2008
Net loss of $178 million included 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), gains related to the change in fair value of certain
derivatives used to economically hedge our funding activities and
gains related to securitization activity.

Quarterly financial information

Fourth quarter 2010 performance

Q4 2010 vs. Q4 2009
Fourth quarter net income of $1,121 million was down $116 million,
or 9% from the prior year. Excluding the $116 million loss on Liberty
Life, earnings of $1,237 million were flat. We had solid volume growth
in Canadian Banking, favourable actuarial adjustments in Insurance,
higher average fee-based client assets in Wealth Management and
lower PCL. Losses on certain market and credit related items this year
were significantly lower than our market environment-related losses
in the prior year. These factors were offset by lower trading
revenue, higher costs in support of our business growth, the impact
of the stronger Canadian dollar and an adjustment in the prior year
which reduced variable compensation expense in Capital Markets. For
a further discussion on our treatment of market environment-related
losses, refer to the Economic market and regulatory review and
outlook section.

Total revenue decreased $257 million, or 3%. Excluding the loss
on Liberty Life, revenue decreased $141 million, or 2% mainly due to
lower trading revenue reflecting less favourable trading conditions
and the impact of the stronger Canadian dollar. These factors were
partially offset by lower losses on AFS securities, volume growth in
Canadian banking-related businesses, higher average fee-based
client assets in Wealth Management, and higher insurance-related
revenue.

Total PCL decreased by $451 million, or 51% from a year ago,
mainly reflecting lower provisions in our corporate lending portfolio
mainly in the U.S. and lower loss rates in our Canadian credit card
and unsecured personal portfolios. Several large corporate provisions
in the prior year also contributed to the decrease. We incurred a lower
general provision of $4 million in the current period as compared to
$156 million in the prior period reflecting generally improved credit
quality in our commercial U.S. banking and Canadian retail portfolios.
PBCAE increased $101 million, or 8%, mainly reflecting the
change in fair value of investments and higher costs commensurate
with volume growth. These factors were partially offset by favourable
actuarial adjustments and the impact of the stronger Canadian dollar.
Non-interest expense increased $212 million, or 6%, mainly

reflecting higher costs in support of our business growth and a full
quarter impact of the HST. Also contributing to the increase was an
adjustment to variable compensation in the prior year which lowered
the expense. These factors were partially offset by our ongoing focus
on cost management and the impact of the stronger Canadian dollar
in the current quarter.

For a detailed discussion on measures excluding the loss on
Liberty Life, refer to the Key performance and non-GAAP measures
section.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Results and trend analysis

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

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

Quarterly results

(C$ millions, except percentage amounts)

Net interest income
Non-interest income

Total revenue

PCL
PBCAE
Non-interest expense
Goodwill impairment charge

2010

2009

Table 29

$ 2,783 $ 2,748 $ 2,699 $ 2,747 $ 2,876 $ 2,904 $ 2,914 $ 2,847
4,216

4,583

4,919

3,847

4,419

4,268

4,587

4,079

$ 7,202 $ 6,827 $ 6,967 $ 7,334 $ 7,459 $ 7,823 $ 6,761 $ 7,063
786
1,076
3,622
–

974
958
3,575
1,000

770
1,253
3,755
–

883
1,322
3,606
–

493
1,130
3,626
–

432
1,423
3,818
–

432
1,459
3,377
–

504
1,096
3,572
–

Net income before income taxes and NCI in subsidiaries

$ 1,529 $ 1,559 $ 1,795 $ 2,085 $ 1,648 $ 2,045 $

Income taxes
NCI in net income of subsidiaries

381
27

257
26

443
23

565
23

389
22

449
35

254 $ 1,579
464
266
5
38

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 income tax rate

$ 1,121 $ 1,276 $ 1,329 $ 1,497 $ 1,237 $ 1,561 $

(50) $ 1,110

$
$

.74 $
.74 $

.85 $
.84 $

.89 $ 1.01 $
.88 $ 1.00 $

.83 $ 1.06 $
.82 $ 1.05 $

(.07) $
(.07) $

.78
.78

$ 765 $
175
27
(157)
373
(62)

766 $
185
153
(76)
201
47

736 $
90
107
(27)
502
(79)

777 $
219
118
(57)
571
(131)

717 $
161
104
(125)
561
(181)

669 $
168
167
(95)
562
90

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

696
128
112
(100)
225
49

$ 1,121 $ 1,276 $ 1,329 $ 1,497 $ 1,237 $ 1,561 $

(50) $ 1,110

24.9%

16.5%

24.7%

27.1%

23.6% 22.0% 104.7% 29.4%

Period average US$ equivalent of C$1.00

$ .963 $ .957 $ .973 $ .945 $ .924 $ .900 $ .805 $ .815

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.

Notable items affecting our consolidated results
•

In the fourth quarter of 2010 we recorded a loss of $116 million
relating to the loss on the announced sale of Liberty Life.
Market environment-related losses adversely affected our
results, mainly in the first half of 2009. For a further discussion
on our treatment of market environment-related losses, refer to
the Economic market and regulatory review and outlook section.
In the second quarter of 2009, we recorded a goodwill
impairment charge in International Banking of $1 billion.

•

• We incurred significant additions to our general provision during
2009 largely reflecting credit deterioration mainly related to the
recessionary conditions in the prior year.
Fluctuations in the Canadian dollar relative to other foreign
currencies have affected our consolidated results over the
period.

•

Trend analysis
Challenging economic and market conditions impacted our earnings,
particularly during the first half of 2009. Since that period, we have
seen improvement in economic conditions although growth slowed in
the latter half of 2010. The recovery of the U.S. economy remains
under pressure and there continues to be general uncertainty over
global markets.

Revenue generally fluctuated over the period with solid volume

growth in Canadian Banking, strong trading revenue in 2009 and early

2010, changes in the fair value of our investment portfolios backing
our life and health policyholder liabilities in Insurance, largely offset
in PBCAE, and revenue growth in our wealth management businesses.
Revenue was unfavourably impacted by market environment-related
losses particularly in the first half of 2009. We incurred significantly
lower losses on certain market and credit related items in 2010.
Lower trading revenues in the latter half of 2010 were negatively
impacted by lower client volumes and tighter credit spreads reflecting
less favourable market conditions. Spread compression in our
banking-related and wealth management businesses unfavourably
impacted revenue throughout the period due to the continuing low
interest rate environment.

PCL has generally trended lower during 2010 from the elevated

levels in 2009, reflecting stabilizing asset quality. The increase in
2009 was due to credit deterioration mainly related to the challenging
economic environment. For further details, refer to the Credit quality
performance section.

PBCAE has been subject to quarterly fluctuations resulting from
changes in the fair value of investments backing our life and health
policyholder liabilities due to market volatility, higher costs
commensurate with volume growth, actuarial liability adjustments
and claims experience.

Non-interest expense has fluctuated throughout the period.
Higher variable compensation resulting from strong performance
mainly in 2009 and increased costs in support of business growth,
partly due to changes in the regulatory environment were largely
offset by our ongoing focus on cost management.

Our effective income tax rate has generally fluctuated over the
period, reflecting a varying portion of income being reported by our
subsidiaries operating in jurisdictions with differing income tax rates,
a fluctuating level of income from tax-advantaged sources (Canadian
taxable corporate dividends), and tax adjustments. The goodwill
impairment charge, loss on Liberty Life and a reduction in statutory
Canadian corporate income tax rates over the period also impacted
our effective income tax rate.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Results by geographic segment (1)

2010

(C$ millions)

Canada

U.S. (2)

Other
International

Total

Canada

U.S.

2009

Other
International

Table 30

2008

Total

Canada

U.S.

Other
International

Total

Net interest income
Non-interest income

Total revenue
PCL
PBCAE
Non-interest expense
Goodwill impairment

charge

Income taxes and NCI

$ 8,405 $ 1,718 $

854 $ 10,977 $ 7,863 $ 2,134 $

8,869

4,647

3,837

17,353

9,429

5,565

1,544 $ 11,541 $ 6,935 $ 1,132 $
2,571

17,565

8,214

2,521

$ 17,274 $ 6,365 $

4,691 $ 28,330 $ 17,292 $ 7,699 $

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

1,026
2,343
7,944

–
1,729

675
1,582
4,055

–
(77)

160
1,183
2,394

1,861
5,108
14,393

1,479
2,100
7,632

1,821
1,571
4,572

113
938
2,354

3,413
4,609
14,558

–
93

–
1,745

–
1,799

1,000
(133)

–
2

1,000
1,668

924
922
7,490

–
1,826

643
30
2,991

–
(163)

987 $ 9,054
1,793 $ 12,528

2,780 $ 21,582
1,595
1,631
12,351

28
679
1,870

–
(213)

–
1,450

Net income (loss)

$ 4,232 $

130 $

861 $ 5,223 $ 4,282 $(1,132) $

708 $ 3,858 $ 3,987 $

152 $

416 $ 4,555

(1)

(2)

For geographic reporting, our segments are grouped into Canada, U.S. 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 2010 Annual Consolidated Financial Statements.
Includes the results of Liberty Life. Refer to Notes 11 and 31 to our 2010 Annual Consolidated Financial Statements.

2010 vs. 2009
Net income in Canada of $4,232 million was essentially flat compared
to last year. Lower securitization gains, higher costs in support of
business growth and spread compression in our banking related
business were largely offset by solid volume growth in our Canadian
banking and wealth management businesses, lower PCL and gains on
fair value adjustments on certain RBC debt designated as HFT,
compared to losses in the prior year.

U.S. net income of $130 million compares to a net loss of
$1,132 million, mainly reflecting the prior year goodwill impairment
charge. Our improved results also reflected lower PCL mainly in our
U.S. banking business. These factors were largely offset by lower
trading revenue reflecting lower client volumes and tighter credit
spreads. Our results were also unfavourably impacted by the stronger
Canadian dollar and the loss on Liberty Life. For further details on the
loss on Liberty Life, refer to the Insurance segment.

Other International net income of $861 million was up

$153 million, largely reflecting significantly lower losses on certain
market and credit related items as compared to prior year market
environment-related losses and gains on fair value adjustments on
certain RBC debt designated as HFT. Also, volume growth in our life
reinsurance and annuity products contributed to the increase. This
was partially offset by lower trading revenues, spread compression in
certain businesses and higher PCL in our commercial portfolio in the
Caribbean. Our results were also unfavourably impacted by the
stronger Canadian dollar. For a further discussion on our treatment of
market environment-related losses, refer to the Economic market and
regulatory review and outlook section.

2009 vs. 2008
Net income in Canada was $4,282 million, up $295 million, or 7%,
from 2008. The increase primarily reflected higher net securitization
gains, strong volume growth and cost management in our banking-
related businesses, and higher trading revenue. 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 2008.
Spread compression in our banking-related and certain wealth
management businesses and higher losses on our AFS securities also
partly offset this increase.

U.S. net loss of $1,132 million compared to net income of
$152 million in 2008, primarily reflecting the goodwill impairment
charge, higher PCL and the reduction of the Enron-related litigation
provision in 2008. 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 and lower market environment-
related losses on our HFT and AFS instruments.

Other International net income was $708 million, up

$292 million, mainly reflecting lower market environment-related
losses on our HFT and AFS instruments, and higher trading revenue. A
full year of results from RBTT, growth in our life and other life retro-
cession 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.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Financial condition

Condensed balance sheet (1) (2)

Table 31

As at October 31 (C$ millions)

2010

2009

Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Assets purchased under reverse repurchase

agreements and securities borrowed
Loans (net of allowance for loan losses)

Retail loans
Wholesale loans
Other – Derivatives
– Other

Total assets

Liabilities and shareholders’ equity
Deposits
Other – Derivatives
– Other

Subordinated debentures
Trust capital securities
NCI in subsidiaries

Total liabilities
Total shareholders’ equity

9,330 $

13,252
193,331

8,353
8,923
186,272

72,698

41,580

220,321
71,885
106,246
39,143

203,856
77,107
92,173
36,725

$ 726,206 $ 654,989

$ 433,033 $ 398,304
84,390
125,462
6,461
1,395
2,071

108,910
135,648
6,681
727
2,256

$ 687,255 $ 618,083
36,906

38,951

Total liabilities and shareholders’ equity

$ 726,206 $ 654,989

(1)

(2)

Foreign currency denominated assets and liabilities are translated to Canadian dollars.
Refer to Note 1 to our 2010 Annual Consolidated Financial Statements.
Refer to Table 1 for period-end Canadian/U.S. dollar spot exchange rates.

Our consolidated balance sheet was impacted by foreign currency
translation which reduced our total assets by approximately
$16 billion due to the strengthening of the Canadian dollar compared
to last year.

2010 vs. 2009
Total assets were up $71 billion, or 11%, from the prior year.

Interest bearing deposits with banks increased $4 billion, or

49%, largely reflecting higher collateral requirements.

Off-balance sheet arrangements

Securities were up $7 billion, or 4%, primarily due to increased

positions in government debt instruments in support of increased
business activity from our newly formed European Government Bond
(EGB) trading business and increased holdings of our securitized
residential mortgages. These factors were partially offset by the
impact of the stronger Canadian dollar.

Assets purchased under reverse repurchase agreements (reverse

repos) and securities borrowed increased $31 billion, or 75% mainly
attributable to higher market activity from the EGB trading business
and increased volume from our primary dealer activities. This was
partially offset by the impact of the stronger Canadian dollar.

Loans were up $11 billion, or 4%, predominantly due to solid
retail lending growth mainly as a result of volume growth in Canadian
home equity and personal lending products. This was partially offset
by a decrease in our wholesale loans due to a strategic reduction in
our U.S. loan portfolio, maturity and repayments and the impact of
the stronger Canadian dollar particularly on our wholesale loans.
Derivative assets increased $14 billion, or 15%, mainly
attributable to the higher fair values as a result of the impact of
increased interest rate and foreign exchange contract positions driven
by higher client activity and the impact of decreasing interest rates on
receive fixed rate positions partially offset by the impact of the
stronger Canadian dollar.

Other assets were up $2 billion, or 7%, primarily due to

increased business activity.

Total liabilities were up $69 billion, or 11%.
Deposits increased $35 billion, or 9%, mainly reflecting an
increase in corporate deposits due to an increase in our internal
funding requirements and demand for our high-yield savings and
other product offerings. This was partially offset by the impact of the
stronger Canadian dollar.

Derivative liabilities increased $25 billion, or 29%, mainly
attributable to higher fair values resulting primarily from the impact of
an increasing interest rate and foreign exchange contract positions
driven by higher client activity and the impact of decreasing interest
rates on pay fixed rate positions.

Other liabilities increased by $10 billion, or 8% mainly resulting
from an increase in obligations related to securities sold short and an
increase in repurchase agreements, largely due to increased volume
from our primary dealer activities and from the EGB trading business.

Shareholders’ equity increased $2 billion, or 6%, largely

reflecting earnings, net of dividends.

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 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 2010
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),
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.

Securitization of our financial assets
We periodically securitize portions of 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 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 2010 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 2010

The following table provides details of our securitized assets

sold and the assets retained on our balance sheet as a result of our
securitization activities.

Our financial asset securitizations

Table 32

As at October 31 (C$ millions)

2010

2009

Securitized assets
Credit cards
Commercial and residential mortgages
Bond participation certificates (1)

Total

Retained

Residential mortgages

3,265 $

39,962
935

3,870
39,796
1,105

$ 44,162 $ 44,771

Mortgage-backed securities retained (2) $ 10,687 $
Retained rights to future excess interest

1,397

8,920
1,497

Credit cards

Asset-backed securities purchased (3)
Retained rights to future excess interest
Subordinated loan receivables

Commercial mortgages

Asset-backed securities purchased (3)
Bond participation certificates retained

421
15
9

2
19

981
33
5

2
55

Total

$ 12,550 $ 11,493

(1)
(2)

(3)

Includes securitization activities prior to the acquisition of RBTT.
All residential mortgages securitized are Canadian mortgages and are government
guaranteed.
Securities purchased during the securitization process.

Securitization activities during 2010
During the year, we securitized $17.7 billion of residential mortgages,
of which $6.0 billion were sold and the remaining $11.7 billion
(notional value) were retained. Our securitization activity this year
was lower compared to the prior year primarily because we have not
participated in the Government of Canada’s Insured Mortgage
Purchase Program subsequent to September 2009. We also securi-
tized and sold $1.3 billion in credit card receivables. We did not
securitize bond participation certificates or commercial mortgages

Variable interest entities

during the year. Refer to Note 5 to our 2010 Annual Consolidated
Financial Statements for further details including the amounts of
impaired loans past due that we manage, and any gains recognized
on securitization activities during the year.

Capital trusts
In prior periods we issued 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, 2010 and October 31, 2009,
we held residual interests of $1 million in each of Trust II and Trust III.
We had loan receivables of $3 million (2009 – $3 million) and
$30 million (2009 – $30 million) from Trust II and Trust III,
respectively, and reported in our deposit liabilities the senior deposit
notes of $900 million and $1,000 million (2009 – $900 million and
$1,000 million) that we issued to Trust II and Trust III, respectively.
Under certain circumstances, RBC TruCS of Trust II will be automati-
cally 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
their securities for our preferred shares as outlined in Note 17 to our
2010 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
(2009 – $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 2010 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 2010 Annual Consolidated Financial Statements.

Total assets by credit ratings (3)

Total assets by average maturities

Total assets by geographic
location of borrowers

2010

Table 33

2009

As at October 31
(C$ millions)
Unconsolidated VIEs
in which we have
significant variable
interests:
Multi-seller

conduits (5)
Structured finance

VIEs (6)

Credit investment
product VIEs

Third-party
conduits

Investment funds
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

U.S.

Other
International

Total
assets (1)

Maximum
exposure
(1),(2)

$ 21,847 $ 22,139 $ 21,679 $

168 $

–

$ 4,302 $ 14,795 $ 2,750 $

4,669

2,030

4,549

–

120

502

–
249
165

–
61
39

–
–
–

452

–

–
–
–

–
249
165

–

–
–
–

–

–
–
–

4,669

502

–
–
–

$ 27,432 $ 24,288 $ 26,278 $

620 $ 534

$ 4,302 $ 14,795 $ 7,921 $

–

–
249
165

414

$ 3,845 $ 15,997 $

2,005

$ 26,181 $ 26,550

–

–
26
31

4,669

–

5,907

2,527

–

–
15
130

502

–
208
4

930

575
84
340

505

250
28
103

$ 3,902 $ 20,811 $

2,719

$ 34,017 $ 29,963

Consolidated VIEs:

Structured finance

VIEs

Investment funds
Compensation
vehicles

Other

$ 2,998
1,012

53
3

2,982 $
–

– $
–

16
1,012

– $
–

– $ 2,998 $
–

–

–
1,012

– $ 2,998 $

210

166

–
636

$ 2,620
588

–
–

53
3

–
–

–
3

53
–

–
3

–
–

64
3

$ 4,066

2,982 $

– $1,084

– $

– $ 3,001 $

1,065

263 $ 3,167 $

636

$ 3,275

(1)
(2)

(3)

(4)

(5)
(6)

Total assets and maximum exposure to loss correspond to disclosures provided in Note 6 to our 2010 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.
Our October 31, 2009 comparatives have been revised to present information related to a certain entity on a net basis that was previously presented on a gross basis. The total gross and net
assets related to this entity as at October 31, 2009 were $4,177 million and $471 million, respectively.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Over 94% of assets in unconsolidated VIEs in which we have
significant variable interests and over 73% of assets in consolidated
VIEs were rated A or above. For multi-seller conduits and uncon-
solidated structured finance VIEs, over 97% of assets were rated A
or above.

Approximately 76% of the assets in unconsolidated VIEs were

originated in the U.S., compared to 75% in the prior year. Approx-
imately 14% of the assets in unconsolidated VIEs were originated in
Canada compared to 20% in the prior year. The decrease in assets
originated in Canada since the prior year primarily reflected the
amortization of existing transactions.

The assets in unconsolidated VIEs as at October 31, 2010 have
varying maturities and a remaining expected weighted average life of
approximately 3.8 years.

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. 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 conduits offer us a favourable revenue stream,
risk-adjusted return and cross-selling opportunities.

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. Over 99% of the

Liquidity and credit enhancement facilities

outstanding securitized assets of the multi-seller conduits are
internally rated as investment grade. Less than 1% (2009 – 1%) of
outstanding securitized assets comprised U.S. Alt-A or subprime
mortgages and the securitized assets do not contain commercial
mortgage loans. The remaining expected weighted average life of the
assets is approximately 2.5 years.

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 have
decreased to $181 million in 2010 from $271 million in 2009, due to
lower client demand and declining spreads and fees 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 2010 Annual Consolidated
Financial Statements.

2010

2009

Notional of
committed
amounts (1)

Allocable
notional
amounts

Outstanding
loans (2)

Total
maximum
exposure
to loss

Notional of
committed
amounts (1)

Allocable
notional
amounts

Outstanding
loans (2)

22,251 $ 18,429 $

1,517 $ 19,946 $

26,669 $ 22,200 $

2,193

–

2,193

2,667

1,683 $ 23,883
2,667

24,444 $ 20,622 $

1,517 $ 22,139 $

29,336 $ 24,867 $

1,683 $ 26,550

Table 34

Total
maximum
exposure
to loss

As at October 31 (C$ millions)

Backstop liquidity facilities
Credit enhancement facilities

Total

(1)
(2)

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

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
Electricity market
receivables
Dealer floor plan
receivables
Fleet finance
receivables
Corporate loans
receivables

Residential

mortgages
Truck loans and

leases
Insurance

premiums

2010

2009

(US$)

(C$)

Total
(C$)

(US$)

(C$)

Total
(C$)

$ 6,213

510

$ 6,849

$ 9,180

$ 1,494

$11,426

3,656
2,637
2,300

1,890

820

–

102

162

–

2,052
–
255

5,782
2,690
2,601

2,611
2,358
1,464

2,488
–
867

5,312
2,551
2,451

–

1,928

2,087

–

2,258

475

255

102

–

1,312

596

255

333

206

165

–

206

–

290

–

986

255

1,631

255

–

223

314

Total

$17,856

$ 3,922

$22,139

$18,792

$ 6,219

$26,550

Canadian equivalent $18,217

$ 3,922

$22,139

$20,331

$ 6,219

$26,550

Our overall exposure has decreased compared to the prior year
reflecting the decrease in assets financed by multi-seller conduits due
to decreased client demand as a result of lower global economic
activity. The maximum assets that may have to be purchased by the

conduits under purchase commitments outstanding as of October 31,
2010 were $21.8 billion (2009 – $26.1 billion). The changes from
year to year are as follows: U.S. dollar assets decreased by U.S.
$918 million from the prior year, mainly in the Credit cards, Asset-
backed securities, and Truck loans and leases asset classes;
Canadian dollar assets decreased $2.3 billion from the prior year,
mainly in the Credit cards, Trade receivables and Equipment receiv-
ables asset classes. Of the total purchase commitments outstanding,
the multi-seller conduits have purchased financial assets totalling
$14.0 billion as at October 31, 2010 (2009 – $18.9 billion). As 82%
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, 2009, our maximum
exposure to loss would have decreased by approximately 12% to
$23.2 billion from October 31, 2009 to October 31, 2010, rather than
the 17% decrease highlighted above.

As of September 30, 2010, the weighted averaged first loss credit

protection provided by the sellers of the financial assets was 49% of
total assets (2009 – 40%), providing a coverage multiple of 13.1 times
(2009 – 8.3 times) the weighted average annual expected loss rate on
the client asset portfolio of 3.8% (2009 – 4.8%). The short term nature
of many of the conduit transactions allows us to adjust the amount of
first loss protection in response to changing economic conditions and
portfolio performance. Our fee structure also reduces our risk exposure
on the portfolio. For 93% of the securitized assets as at October 31,
2010 (2009 – 93%), 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 services 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

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

(expected loss investor) agreed to absorb credit losses, up to a
maximum contractual amount, that may occur in the future on the
assets in the multi-seller conduits before us and the multi-seller
conduit’s debt holders.

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 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.

The total ABCP issued by the conduits amounted to

$14.0 billion, a decrease of $4.9 billion or 26% since the prior year
due to the amortization of existing transactions and decreased client
usage. The rating agencies that rate the ABCP rated 67% (2009 –
70%) of the total amount issued within the top ratings category and
the remaining amount in the second highest ratings category. The
weighted average maturities (U.S. conduits 30.1 and 45.3 days and
Canadian conduits 38.2 and 31.3 days as at October 31, 2010 and
October 31, 2009, 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, 2010, the fair value of our
inventory was $4 million (2009 – $4 million), classified as
Securities – Trading.

The U.S. multi-seller conduits include $2 billion of asset-backed

securities (ABS). There are no ABS in the Canadian multi-seller
conduits and there have been no new ABS in the U.S. multi-seller
conduits since 2007. The existing ABS transactions are amortizing
and building first loss protection. In 2008 and 2009, certain U.S.
multi-seller conduits drew down some of our backstop liquidity
facilities to fund a portion of the ABS. These loans, net of write offs
and allowances, amounted to $1.5 billion (2009 – $ 1.7 billion), and
are included in Loans – Wholesale. We continue to receive principal
repayments on these loans.

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 2010
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
$1.5 billion as at October 31, 2010 (2009 – $2.9 billion), of which
none were consolidated as at October 31, 2010 and October 31,
2009. As at October 31, 2010, our investments in the funded notes,
the derivative-related receivables, and the notional amounts of the
unfunded notes related to the unconsolidated SPEs were $19 million
(2009 – $18 million), $nil (2009 – $317 million) and $nil (2009 –
$170 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, 2010,
the total assets of the unconsolidated ARS VIEs in which we have
significant investments were $3.5 billion (2009 – $4.7 billion). Our
maximum exposure to loss in these ARS VIEs was $834 million
(2009 – $1.3 billion). Our maximum exposure to loss has decreased
from 2009 primarily reflecting of the sale of our investments in one of
these entities. As a result of no longer being involved in this ARS VIE,

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

the total assets of the unconsolidated ARS VIEs in which we have
significant interest have also decreased. As at October 31, 2010,
approximately 92% of these investments were AAA rated. Interest
income from the ARS investments, which is reported in Net-interest
income, amounted to $36 million during the year (2009 –
$78 million, 2008 – $93 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 2010 Annual Consolidated Financial
Statements. As at October 31, 2010, the total assets of uncon-
solidated ARS TOB programs in which we have significant
investments were $743 million (2009 – $791 million). We did not
hold any floating-rate certificates as market maker for the ARS TOB
programs as at October 31, 2010 or October 31, 2009. 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 $1 million during the year (2009 – $3 million, 2008 –
$3 million).

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, 2010, total assets of this entity
and our maximum exposure to loss were $450 million (2009 –
$471 million) and $426 million (2009 – $449 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 million during the year (2009 – $ 4 million,
2008 – $4 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 $5 million for the year
(2009 – $7 million, 2008 – $7 million).

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 to the referenced funds, and we hedge our exposure
from these derivatives by investing in those referenced funds. Our
total exposure, which is primarily related to our investments in the
referenced funds, increased by $33 million to $61 million as at
October 31, 2010. In addition, the total assets held in the uncon-
solidated referenced funds also increased by $165 million to
$249 million as at October 31, 2010 due to overall redemptions in the
referenced funds by third party investors of the funds, resulting in our
investments in certain of these referenced funds becoming
significant.

Trusts, mutual and pooled funds
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 interest in the joint venture. Refer to Note 9 to our 2010 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.

Guarantees, retail and commercial commitments
We issue guarantee products, as described in Note 25 to our 2010
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, 2010, amounted to $73.5 billion (2009 – $88.9 billion).
The decline compared to the prior year relates primarily to fewer credit
derivatives and backstop liquidity facilities. In addition, as at
October 31, 2010, RBC Dexia IS securities lending indemnifications
totalled $52.1 billion (2009 – 34.7 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 of October 31, 2010, our maximum potential amount of
future payments for our backstop liquidity facilities related to ABCP
programs were $19.1 billion (2009 – $22.6 billion) of which 96%
(2009 – 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 expose us
to liquidity and funding risks. The following is a summary of our
off-balance sheet commitments. Refer to Note 25 to our 2010 Annual
Consolidated Financial Statements for details regarding our
guarantees and commitments.

Retail and commercial commitments (1)

Table 36

(C$ millions)

Documentary and

Within
1 year

1 to
3 years

Over 3 to
5 years

Over
5 years

Total

commercial letters of credit $ 255

–

255

Commitments to extend
credit and liquidity
facilities

Uncommitted amounts (2)

7,998
17

63,113
166,963

8,463
–

6,826
–

86,400
166,980

$ 8,270

$230,076

$ 8,463

$ 6,826

$253,635

(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 management

Overview

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
risks assumed and remain within our Risk Appetite, which is collec-
tively managed throughout the organization, through adherence to
our Enterprise Risk Appetite Framework.

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 & Drivers

Risk Limits & 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 by maintaining capital ratios in
excess of rating agency and regulatory thresholds,
maintaining low exposure to “stress events”,
maintaining stability of earnings,
ensuring sound management of liquidity and funding risk,
maintaining a generally acceptable regulatory risk and
compliance control environment, 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.

We apply our Risk Appetite Framework at an enterprise-wide level, as
well as at the business segment, Corporate Support, and line of
business levels. Risk Appetite is integrated into our business
strategies and our planning process.

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.

wnership – Monitoring – Escalation – Oversight

Canadian
Banking

Board of
Directors

Risk and other
Board Committees

Group Executive

Group Risk Committee

–

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

Group Risk Management + Global Compliance
+ Corporate Treasury

t
i

Risk Committees

Business Segments

Insurance

International
Banking

Capital
Markets

Wealth
Management

Corporate Support

–

i
l
i
t

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

The Board of Directors provides oversight and carries out its risk
management mandate primarily through its Risk and other Board
Committees, consisting of the Audit Committee, Corporate Gover-
nance and Public Policy Committee (CG&PPC) and Human Resources
Committee. The Group Executive (GE) is 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 (GRC). GRC, with the assistance of its supporting Risk
Committees, is the senior management risk committee responsible
for ensuring that our overall risk profile is consistent with strategic
objectives and there are ongoing, appropriate and effective risk
management processes. In addition, our risk governance structure is
supported by:
•

The Chief Risk Officer (CRO) and Group Risk Management (GRM)
which have overall responsibility for the promotion of our risk
culture; and maintain our enterprise-wide program for
identifying, measuring, controlling and reporting the significant
risks that face the organization;
The Chief Compliance Officer and Global Compliance which are
responsible for our compliance policies and processes designed
to mitigate and manage regulatory risk;
Corporate Treasury which manages and oversees our capital
position, structural interest rate risk and liquidity and funding
risks; and
The business segments which are responsible for specific risks,
alignment of business strategies with risk appetite, and identi-
fication, control and management of their risks.

•

The roles of the various stakeholders in our enterprise risk
management program are described further in the discussion of
specific risks below.

Risk measurement
Our ability to measure risks is a key component of our enterprise-wide
risk and capital management processes. 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. We hold economic
capital to offset these unexpected losses, should they occur. 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 potential impacts on the organization of Credit, Market, Liquidity
and Funding and Operational risks under 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 possible adverse market and economic events.
These 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

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

into stress impacts on various types of risk across the organization.
Macroeconomic scenarios evaluated this year include mild recession,
prolonged recession, real estate weakness, crisis in China, and
sovereign debt crisis. Our evaluations indicate that the resulting
capital and financial impacts of these stress scenarios are within our
ability to manage.

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. Validation activities, results and conclusions are
also reviewed by Internal Audit Services on a regular basis.

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, Liquidity, Compliance and
Capital 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 risk management frameworks and policies are organized

into the following five levels:

Level 1: Enterprise Risk Management Framework provides an
overview of our enterprise-wide program for identifying, measuring,
controlling and reporting on the significant risks we face. The Risk
Appetite Framework underpins this Framework.

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 limits, risk
approval authorities and model risk management.

Level 5: Business Segments and Corporate Support 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.

Authorities and limits
The Risk Committee of the Board of Directors delegates Credit,
Market, and Insurance risk authorities to the President and Chief
Executive Officer 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 tolerances.

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.
This report includes a comprehensive review of our 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.

The shaded texts 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 include discussion on how we measure our
risks and the objectives, policies and methodologies for managing
these risks. Therefore, these shaded texts and tables represent an
integral part of our audited 2010 Annual Consolidated Financial
Statements for the years ended October 31, 2010 and October 31,
2009.

Credit risk

Credit risk is the risk of loss associated with an obligor’s inability or
unwillingness to fulfill its contractual obligations. Credit risk may
arise directly from the risk of default of a primary obligor (e.g. issuer,
debtor, counterparty, borrower or policyholder), or indirectly from a
secondary obligor (e.g. guarantor, reinsurer).

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.

•
•

•

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.
Avoiding business activities that are not consistent with our
Values, Code of Conduct or policies.

•

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.

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.

Economic capital, which represents our internal estimate of
unexpected loss, is used extensively for performance measurement,
limit setting and internal capital adequacy.

The key parameters that form the basis of our credit risk

•

measures for both regulatory and economic capital are:
•

Probability of default (PD): An estimated percentage that
represents the likelihood of default within a one-year period of
an obligor for a specific rating grade or for a particular pool of
exposures.
Exposure at default (EAD): An amount expected to be owed by
an obligor at the time of default.
Loss given default (LGD): An estimated percentage of EAD that
is not expected to be recovered during the collections and
recoveries process.
These parameters are determined based on historical
experience from internal credit risk rating systems in accordance
with supervisory standards, and are independently validated 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 the Office of the Superintendent of
Financial Institutions (OSFI) are used to calculate risk-weighted
assets (RWA) 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
exposures, primarily in the sovereign and bank classes, we assign
the risk weight corresponding to OSFI’s standard mapping. For
unrated exposures, mainly in the business and retail classes, we
generally apply 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 the
credit risk inherent in our wholesale lending activities along two
dimensions.

First, 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. 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 following table 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

Second, each credit facility is assigned an LGD rate. LGD rates are
largely driven by factors such as seniority of debt, collateral security,
product type, and the industry in which the obligor operates and
market environment.

EAD is estimated based on the current exposure to the obligor
and the possible future changes of that exposure driven by factors
such as credit quality of the obligor and type of credit commitment.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

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

consider 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% - 1.0%

1.1% - 6.4%

6.5% - 99.99%

100.00%

Description

Low Risk

Medium Risk

High Risk

Impaired/Default

Risk Control

The Board of Directors and its Committees, Group Executive, Group
Risk Committee (GRC) and other management risk committees work
in combination to 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 set out the minimum requirements for the
management of credit risk in a variety of borrower, transactional
and portfolio management contexts.

Credit policies are an integral component of our Credit Risk
Management Framework and set out the minimum requirements for
the management of credit risk as follows:

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

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 often require obligors to pledge collateral as security
when we advance credit. The extent of risk mitigation
provided by collateral depends on the amount, type and
quality of the collateral taken.

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 2010 Annual Consolidated
Financial Statements.

Product approval
•

Proposals for credit products and services are compre-
hensively reviewed and approved under a risk assessment
framework.

Credit portfolio management
•

•

Limits are used to ensure our portfolio is well diversified,
reduce concentration risk and remain within our risk appetite.
Our credit limits are established at the following levels: single
name limits (notional and economic capital), underwriting
risk limits, geographic (country and region) limits, industry
sector limits (notional and economic capital), and product
and portfolio limits, where deemed necessary.

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 2009.

As at October 31
(C$ millions)

Residential

mortgages

Personal
Credit cards
Small business (3)

Business (3)
Agriculture
Automotive
Consumer
goods

Energy
Non-bank

financial
services

Forest products
Industrial

products

Mining & metals
Real estate &
related
Technology &

media

Transportation

and
environment

Other

Sovereign (3)
Bank (3)

Wholesale

Gross credit risk exposure by portfolio and sector* (2)

Table 39

Lending-related and other

Trading-related

Lending-related and other

Trading-related

2010

2009

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)

$ 128,832 $

12 $

80,174
10,110
2,712

61,181
30,144
3,136

160 $
59
–
45

264 $

Retail

$ 221,828 $

94,473 $

– $ 129,004 $ 122,130 $
–
–
–

141,414
40,254
5,893

71,542
8,701
2,851

11 $

– $

51,132
20,113
2,382

47
–
48

– $ 316,565 $ 205,224 $

73,638 $

95 $

7 $

321

5,350 $
5,737

5,090 $
3,657

396 $

1,608

23 $

144

224
1,429

8,977
19,489

2,284
8,302

435
2,241

– $
–
–
–

– $

–
18

– $ 122,141
122,721
–
28,814
–
5,281
–

– $ 278,957

8 $

248

5,517
5,669

234
1,411

9,094
19,027

6,141
7,055

3,541
830

3,972
1,774

81,008
–

10,123
17

108,360
1,267

6,738
453

6,569
89

49,837
–

7,771
15

74,456
1,387

147
198

6,691
3,035

2,307
1,275

340
543

275

22,626

21,049

2,853

1,259

528

6,660

2,562

2,730

293

–
2

–

198
335

6,817
3,929

320

25,481

768

6,353

– $
–
–
–

– $

– $
–

–
–

–

4,815 $
3,527

504 $

1,747

24 $

142

5,912
5,945

4,769
792

3,731
635

2,358
9,942

483
2,173

5,973
371

2,387
1,565

6,487
87

426
637

18,358

2,701

1,292

2,569

3,241

322

3,759
20,253
3,765
1,916

1,658
4,894
3,580
622

483
6,862
28,123
46,093

–
9,625
3,770
58,587

582
5,840
8,322
30,908

6,482
47,474
47,560
138,126

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

419
1,791
6,884
4,962
2,145 20,937
763 37,316

–
9,835
2,830
63,514

459
6,686
8,178
27,678

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

80,746 $

41,543 $ 93,634 $ 152,990 $

58,921 $ 427,834 $

87,951 $

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

54,309 $ 384,407

Total exposure

$ 302,574 $

136,016 $ 93,898 $ 152,990 $

58,921 $ 744,399 $ 293,175 $

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

54,309 $ 663,364

*
(1)
(2)

(3)

This table represents an integral part of our 2010 Annual Consolidated Financial Statements.
Credit equivalent amount after factoring in master netting agreements.
Gross credit risk exposure is before allowance for loan losses. 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.
Refer to Note 4 to our 2010 Annual Consolidated Financial Statements for the definition of these terms.

2010 vs. 2009
Total gross credit risk exposure increased $81 billion, or 12%, from a
year ago, reflecting increases in both retail and wholesale portfolios.
Retail exposure increased $38 billion, or 14%, primarily driven

by the implementation of updated risk parameters for undrawn
commitments and the realignment of the retail risk rating system
reflecting recent credit experience. Retail exposure also increased as
a result of solid volume growth in Canadian home equity and personal
lending products. The use of guarantees and collateral represents an
integral part of our credit risk mitigation in the retail portfolio. Insured
mortgages accounted for 20% of our residential mortgage portfolio in
2010 as compared to 24% in 2009. Secured personal lending
represented 56% of personal loans outstanding in 2010 as compared
to 54% in 2009.

Wholesale exposure increased $43 billion, or 11%, mainly
reflecting increases in most exposure types. Repo-style transactions
increased $27 billion, primarily in non-bank financial services, due to
higher market activity from the European Government Bond business
and increased volume for our primary dealer activities, partially offset
by the impact of the stronger Canadian dollar. Other exposure
increased $16 billion in bank and sovereign, largely due to higher
guarantees and securities exposures. Loans and acceptances
decreased $7 billion, mainly in the business portfolio across most
sectors largely due to a strategic reduction in our U.S. loan portfolio,
maturity and repayments and the impact of the stronger Canadian
dollar. Most of the decrease in business exposure was in real estate
and related, mining and metals, energy and other services within the
other category. The decrease was partially offset by increases in non-
bank financial services and sovereign. The loan utilization rate
remained stable at 42%.

Loans and acceptances

Loans and acceptances by portfolio and sector (1)

Table 40

(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

$
$

2010

2009
128,832 $ 122,130
71,542
8,701
2,851
221,828 $ 205,224

80,174
10,110
2,712

4,815
3,527
5,912
5,945
4,769
792
3,731
635
18,358
2,569
3,759
20,253
3,765
1,916
80,746 $

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
87,951
302,574 $ 293,175
(3,188)

(2,997)

Total loans and acceptances, net of allowance

for loan losses

299,577 $ 289,987

(1)
(2)

Total loans and acceptances do not reflect the impact of credit risk mitigation.
2010 relates to Other services – $8.1 billion, Financing products – $5.1 billion, Holding
and investments – $4.0 billion, Health – $2.7 billion and Other – $.4 billion. Other in
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.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

the current period. This was offset by provisions in the current year
mainly in the U.S. in our real estate and related, and technology and
media sectors.

We incurred a lower general provision in the current year

reflecting improved credit quality in our commercial U.S. banking and
Canadian retail portfolios.

Gross impaired loans

(C$ millions)
Canadian Banking (1)
International Banking (1)
Capital Markets (1)
Corporate Support and Other (1)
Canada
Retail
Wholesale
United States

Retail
Wholesale

Other International

Retail
Wholesale

Total GIL

Table 42

2009
1,253
3,149
915
140

673
839

227
3,194

209
315
5,457

2010
1,406
3,051
409
133

767
771

222
2,462

251
526
4,999

(1)

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

2010 vs. 2009
Total gross impaired loans (GIL) decreased by $458 million, or 8%
from a year ago.

GIL in Canadian Banking increased $153 million, or 12% mainly

reflecting higher impaired loans in our residential mortgages and
commercial portfolios.

GIL in International Banking decreased $98 million, or 3%,
mainly reflecting reductions in our residential builder finance portfolio
from higher write-offs and foreclosures, and declines in certain
impaired AFS securities reclassified to loans. These factors were
partially offset by higher impaired loans in our U.S. commercial
portfolio. Both our Caribbean wholesale and retail portfolios
remained under pressure from the slow economic recovery and
continued weakness in commercial real estate asset values.

GIL in Capital Markets decreased $506 million, or 55%, mainly
due to lower new impaired loans in our non-bank financial services,
and other portfolios primarily in the U.S.

GIL in Corporate Support and Other decreased slightly by

$7 million.

Allowance for credit losses

(C$ millions)

Specific ACL
Canada
United States
Other International

Total specific ACL

General allowance

Retail
Wholesale

Total general allowance

Total ACL

Table 43

2010

2009

360
475
276

417
667
195

1,111

1,279

1,230
755

1,985

3,096

1,095
928

2,023

3,302

2010 vs. 2009
Loans and acceptances increased by $9 billion, or 3%, from the prior
year, mainly reflecting strong retail growth in Canada, partially offset
by decreases in our wholesale portfolio.

Solid retail growth of $17 billion was driven by volume growth in

Canadian personal lending and residential mortgages.

Wholesale loans and acceptances decreased by $7 billion

mainly due to the same reasons discussed in the gross credit risk
exposure section.

Credit quality performance

Provision for (recovery of) credit losses

(C$ millions)

Canadian Banking (1)
International Banking (1)
Capital Markets (1)
Corporate Support and Other (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

2009

1,275
980
702
456

18
467
393
55

933
436

2010

1,191
743
20
(93)

7
444
399
45

895
122

1,017

1,369

187
476

663

31
124

155

267
1,096

1,363

31
61

1,835

1,861

2,824

589

3,413

(1)
(2)

(3)

Segments with significant PCL have been presented in the table above.
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 in 2009.
Geographic information is based on residence of borrower.

2010 vs. 2009
Total PCL of $1.9 billion decreased $1.6 billion from a year ago,
mainly reflecting decreased specific PCL of $1.0 billion. We incurred a
general provision of $26 million in the current year, as compared to
$589 million in 2009.

Specific PCL in Canadian Banking decreased by $84 million, or

7%, largely due to lower provisions in our business lending, personal
and small business portfolios reflecting improved economic
conditions. Lower personal lending provisions were driven by lower
loss rates in our fixed and variable, and unsecured loans.

Specific PCL in International Banking decreased $237 million, or

24%, primarily reflecting declines in our provision in U.S. banking
primarily due to our residential builder finance portfolio, AFS
securities reclassified to loans, lot loans and the impact of the
stronger Canadian dollar. These factors were partially offset by higher
provisions in our commercial portfolios in the Caribbean. Although
asset quality has stabilized compared to prior year, PCL remained
elevated, reflecting continued weakness in residential and
commercial property values.

Specific PCL in Capital Markets decreased $682 million,
primarily reflecting a number of provisions in our U.S. and Canadian
portfolios in the prior period and recoveries of a few large accounts in

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

2010 vs. 2009
Total allowance for credit losses (ACL) decreased $206 million, or 6%,
from a year ago, mainly due to a $168 million decrease in the specific
allowance, reflecting the same factors as previously discussed. It also
includes a $38 million decrease in the general allowance largely as a
result of the impact of a stronger Canadian dollar. This was offset by
an increased provision relating to our U.S. banking business. Refer to
the Supplemental information section 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 volatility dissipated in the early part of the year, but
increased gradually in the latter half of 2010 due to the European
sovereign debt crisis and fiscal austerity measures in Europe.

•

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, credit,
foreign exchange, equity, and commodities markets. 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.
Credit specific risk arises from the change in the
creditworthiness and default of issuers of our holdings in fixed
income products.
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.
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
We employ 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 including
bank-owned life insurance stable value contracts (BOLI), 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
under the standardized approach are not included in our VaR, as
discussed below.

Refer to Table 51 for market risk RWA under the internal models and
standardized approaches. For management purposes, we calculate
VaR for all of our trading positions, including those under the
standardized approach.

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. The VaR scenario model has incorporated
market events from much of 2010, while the higher volatility levels
witnessed during late 2008 and early 2009 remain in the model.

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.

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 assump-
tions will cover every market scenario that may unfold.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

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.
Market risk limit approval authorities are established by the Board of
Directors, upon recommendation of the Risk Committee, 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 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

2010

For the year ended
October 31

2009
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

10 $
2
2
33
20
(34)

16 $
5
2
44
18
(37)

30 $
11
7
61
22
(51)

7 $
1
–
30
11
(22)

9 $
4
2
48
16
(26)

10 $
4
1
49
11
(22)

21 $
13
4
69
17
(33)

VaR

33 $

48 $

66 $

33 $

53 $

70 $

This table represents an integral part of our 2010 Annual Consolidated Financial
Statements.

6
2
–
20
7
(7)

VaR by major risk category
Year ended October 31, 2010
(C$ millions)

-10

-20

-30

-40

-50

-60

-70

Nov-09

Jan-10

Apr-10

Jul-10

Oct-10

Daily interest rate VaR
Daily commodities VaR
Daily foreign exchange VaR

Daily equity VaR
Daily credit specific risk VaR

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

120

-40

-80

-120

117

110

N ov-2009

Jan-2010

-91

Apr-2010

Jul-2010

Daily Trading Revenue

Trading VaR

-40

Oct-2010

(1)

Trading revenue on a taxable equivalent basis excluding revenue related to
consolidated VIEs.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Trading revenue for the year ended October 31, 2010 (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
2010 vs. 2009
Average VaR of $48 million for the year was down $5 million
compared to a year ago. This was largely due to the impact of the
stronger Canadian dollar on foreign-denominated portfolios and an
increase in diversification from 29% to 44%. These factors were
partially offset by the increases in Credit Specific and Equity VaR. The
increase in Credit Specific VaR is attributed to the Credit Specific VaR
model incorporating higher probabilities of credit events. The
increase in Equity VaR was largely driven by a combination of
business activity and market volatility.

Trading revenue
Trading revenue includes all positions included in VaR as well as
those under the standardized approach for regulatory capital
treatment. Also included in trading revenue are gains and losses
associated with changes in our credit valuation adjustment (CVA) for
derivatives. CVA, including that with monoline insurer MBIA Inc.
(MBIA), is not included in VaR, and is not included in the standardized
approach for regulatory capital. The breadth of our trading activities is
designed to diversify market risk to any particular strategy, and to
reduce trading revenue volatility.

2010 vs. 2009
During the year, we experienced 30 days of net trading losses
compared to 13 days in 2009. Two of the losses in 2010 exceeded
VaR. The volatility in daily trading revenue during the second and
third quarters reflected the increased volatility in the market driven by
the European sovereign debt crisis. The largest loss occurred on
May 31, 2010, totalling $91 million, exceeding the VaR for that day.
This loss as well as two large profit days on April 30, 2010 and
October 29, 2010, were primarily due to a month-end credit valuation
adjustment on a certain MBIA exposure.

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 the target level.
The key sources of interest rate risk include exposures due to maturity
and re-pricing characteristics of bank loans, investments, liabilities,
derivatives, off-balance sheet items, as well as embedded options
such as interest rate caps and floors, and prepayment options in
products.

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
2010 Annual Consolidated Financial Statements.

Risk measurement
We continually evaluate opportunities to adopt leading practices in
instrument valuation, econometric modeling and hedging techniques.
Assessment of our practices ranges from the evaluation of traditional
asset/liability management processes to 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 one of the
tools utilized for risk management. It provides us with an assessment
of the sensitivity of the exposure of our economic value of equity to
instantaneous changes in individual points on the yield curve. The
economic value of equity is equal to the net present value of our
assets, liabilities and off-balance sheet instruments.

We 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 value and earnings
bases, and model assumptions are validated against actual client
behaviour.

Risk control

The Asset Liability Committee (ALCO) provides oversight over
non-trading market risk policies, limits, 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 (bps) parallel shifts 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
3.75% of shareholder’s 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 actions. Over the course
of 2010, our interest rate risk exposure was well within our target
level.

Market risk measures – Non-trading banking activities*

Table 45

2010

2009

2008

Economic value of equity risk

Net interest income risk (2)

Canadian
dollar
impact

U.S.
dollar
impact (1)

Canadian
dollar
impact

U.S.
dollar
impact (1)

Total

Economic
value of
equity risk

Total

Net interest
income risk (2)

Economic
value of
equity risk

Net interest
income risk

(491)
445

7
(20)

$ (484)
425

(994)
733

(9)
2

(1,003)
735

57
(86)

132
(81)

36
(12)

$ 93
(98)

(230)
214

100
(14)

232
(95)

(487)
323

339
(112)

619
(169)

(508)
448

(1,050)
838

45
(90)

62
(279)

(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

*
(1)
(2)

This table represents an integral part of our 2010 Annual Consolidated Financial Statements.
Represents the impact on the non-trading portfolios held in our U.S. banking operations.
Represents the 12-month net interest income exposure to an instantaneous and sustained shift in interest rates.

Non-trading foreign exchange rate risk

Liquidity and funding management

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 the results of our 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 investments decreases our
shareholders’ equity through the cumulative translation account and
decreases the translated value of the RWA 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 2009.

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 position 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 operate under a comprehensive
liquidity management framework and employ key liquidity risk
mitigation strategies that include the maintenance of:
•

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 but various
considerations outlined in this section influence the extent to which
this can be pursued.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Risk measurement
A variety of limit-based measures and metrics have been estab-
lished to monitor and control risk within appropriate tolerances
using a variety of time horizons and severity of stress levels. 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 cash capital and other structural metrics, 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 flow limits in Canadian dollar and foreign
currencies for key short-term time horizons (overnight to nine
weeks) under various stages of stress 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. We also control this risk by adhering to
various prescribed regulatory standards.

Contingency liquidity risk
Contingency 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, which include elements of scenario

and sensitivity testing, are based on models that measure our
potential exposure to global, country-specific or RBC-specific events
(or a combination thereof), consider both historical and hypothetical
events and cover a nine week period consistent with our key tactical
liquidity risk measure and our view of the most critical time span for
such events. Different levels of severity are considered for each type
of crisis. Key tests are run monthly, while others are 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. The risk of more prolonged crises is addressed
through our measures of structural liquidity risk that assume a
stressed environment.

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 sized through models we have developed or by the
scenario analyses and stress tests 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.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Risk governance and control
The Board of Directors approves delegation of liquidity risk approval
authorities annually to senior management. The Audit Committee and
the Conduct Review and Risk Policy Committee of the Board annually
approve the liquidity management framework and are responsible for
its oversight. The Board of Directors and these committees also
review, on a regular basis, reporting on RBC’s enterprise-wide
liquidity position and status. Group Risk Committee (GRC) and ALCO
share management oversight responsibility and review all liquidity
documents prepared for the Board of Directors or its committees.
ALCO annually approves the liquidity management framework’s key
supporting documents and provides strategic direction and primary
management oversight to Corporate Treasury, other functions and
business platforms in the area of liquidity risk management. To
maximize funding and operational efficiencies, we monitor and
manage our liquidity position on a consolidated basis and for key
units and consider market, 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.

Policies
Our principal liquidity policies define risk tolerance parameters. They
authorize senior management committees or Corporate Treasury to
approve more detailed policies and limits that govern management,
measurement and reporting requirements for specific businesses and
products.

Authorities and limits
Limits for our structural liquidity risk positions are approved at least
annually and measured and monitored, 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 liquidity factors 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. During the fiscal year, OSFI
introduced a regulatory enterprise liquidity metric, which we formally
report to OSFI on a monthly basis and monitor intra-month.

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 rating 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. For a discussion on the
potential impact of a downgrade on certain derivative instruments,
see Note 31, Reconciliation of the application of Canadian and United
States generally accepted accounting principles – Fair value of
derivatives by major types of products.

On September 14, 2010 we were placed on review for possible

downgrade by Moody’s. During its review Moody’s will focus on
gaining a better understanding of our capital markets business and
our growth plans for the business. Moody’s is expected to announce
the results of its review in mid-December 2010.

The following table presents our major credit ratings and outlook

as at December 2, 2010:

Credit ratings*

Table 46

Moody’s
S&P
Fitch
DBRS

As at December 2, 2010 (1)

Short-
term debt

P-1
A-1+
F1+
R-1(high)

Senior long-
term debt

Aaa
AA-
AA
AA

Outlook

UR (neg)
positive
stable
stable

(1)

This table represents an integral part of our 2010 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 were unchanged during the year at 63% of
our total deposits.

Contractual obligations*

As at October 31
(C$ millions) (1)

Unsecured long-term funding
Covered bonds
Subordinated debentures
Obligations under leases (2)

Term funding sources*

Table 47

(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

2010

2009

2008
$ 61,224 $58,831 $ 70,906
15,196
28,815
2,159
1,916

28,238
1,705

2,850

2,913

3,163

This table represents an integral part of our 2010 Annual Consolidated Financial
Statements.

During 2010, we continued to expand our long-term funding base by
selectively issuing, either directly or through our subsidiaries,
$21.5 billion of senior deposit notes in various currencies and
markets. Total long-term funding outstanding increased by
$3.2 billion. Outstanding senior debt containing ratings triggers,
which would accelerate repayment, constitutes a very small
proportion of our overall outstanding debt of $62 billion.

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 mortgage backed
securities sold decreased year over year by $577 million. Our credit
card receivables, which are financed through notes issued by a
securitization special purpose entity, decreased year over year by
$63 million. For further details, refer to the Off-balance sheet
arrangements section and Note 5 to our 2010 Annual Consolidated
Financial Statements.

Impact of global market developments on liquidity management
During 2010, public sector initiatives introduced to facilitate bank
financing requirements during late 2008 and 2009 that were relevant
to our funding activities were all discontinued as term market access
for non-government guaranteed bank names improved materially.
While bank financing markets generally improved, we continued to
experience more favourable wholesale funding access and pricing
compared both to peers and to the prior year and opportunistically
executed longer-term issues into this much better funding environ-
ment. We also continued to focus on aggressively building our core
deposit base. Regulatory reforms, including global minimum liquidity
standards, directed at strengthening the global banking system were
announced and refined during the year and will be implemented over
the coming years. The liquidity measures are subject to monitoring or
observation periods prior to becoming minimum standards.

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.

Our liquidity and funding risk objectives, policies and methodologies
have not changed materially from 2009. However, certain limits and
strategies have been revised as a result of the market conditions and
evolving regulatory standards.

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 following
table provides a summary of our future contractual funding
commitments.

Within 1
year

1 to 3
years

2010

3 to 5
years

Over 5
years

Table 48

2009

2008

Total

$17,563 $18,222 $ 8,789 $ 9,469 $54,043 $52,416 $58,615
5,248
8,258
3,196
$18,450 $22,212 $13,022 $18,964 $72,648 $68,082 $75,317

1,890
6,482
1,123

3,025
–
965

8,456
6,789
3,360

3,334
199
700

5,740
6,564
3,362

207
108
572

*
(1)
(2)

This table represents an integral part of our 2010 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.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Overview of other risks

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.

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 and expect to implement the Advanced Measurement
Approach in 2013.

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 (i) Risk and control assessment,
(ii) Operational event data collection and analysis, (iii) Industry loss
analysis, and (iv) Key risk indicators.

Strategic risk

Strategic risk is the risk that the enterprise or particular business
areas will make inappropriate strategic choices, or will be unable to
successfully implement selected strategies or related plans and
decisions. For example, failure to successfully integrate and retain
clients and key employees from our strategic acquisitions or joint
ventures may adversely affect our financial performance.

Oversight of strategic risk is the responsibility of the heads of

the business segments, the Enterprise Strategy Office, Group
Executive, and the Board of Directors. Management of strategic risk is
supported by the Enterprise Strategy Group through the use of an
enterprise strategy framework that synthesizes business portfolio
strategies with the enterprise vision.

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.

Laws and regulations are in place to protect the financial and
other interests of our clients, investors and the public. 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. Further, there is no assurance that we always will be or
will be deemed to be in compliance with laws, regulations or
regulatory policies. 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 licenses or
registrations that would damage our reputation and negatively impact
on our earnings. In addition, we are subject to litigation arising in the
ordinary course of our business and the adverse resolution of any
litigation could have a material adverse effect on our results or could
give rise to significant reputational damage, which in turn could
impact our future business prospects.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

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.

We have a strong ethical and compliance culture grounded in our

Code of Conduct which broadly addresses a variety of ethical and
legal concerns that face our employees on a day-to-day basis. We
regularly review and update the Code 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.

Our Code of Conduct is supported by a number of global and
regional compliance policies, training programs, online tools, job
aids, and new employee orientation materials. We also have several
other core ethics and compliance courses that apply enterprise wide
or to a significant number of businesses globally including anti-
money laundering and anti-terrorist financing, anti-bribery and anti-
corruption, privacy and information risk management.

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 guide our 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.

Insurance risk

Insurance risk is the exposure to potential financial loss arising from
payments that are different than anticipated (e.g. number, amount or
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 is further
categorized into the following sub-risks:

Claims Risk
Claims risk represents the risk that the actual severity, frequency or
timing of claims differs from the levels assumed in pricing calcu-

lations or reserves. Claims risk may be realized in two ways: 1) Pricing
risk – the mis-estimation of expected claims activities relative to
actual activities or, 2) Underwriting risk – the strategy and/or 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 (Lapse 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 administering policies, or of
processing claims, exceeds the costs assumed in pricing calculations.

We have policies and procedures that support the management
of insurance risk through the establishment of risk approval author-
ities and limits, independent risk oversight and approval by
GRM-Insurance and risk mitigation, which include identifying,
assessing and managing insurance risk through a risk review and
approval process.

Environmental risk

Environmental risk is the risk of loss to financial, operational or
reputational 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 Group Executive and the Corporate Governance and Public Policy
Committee of the Board of Directors. 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.

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. We manage environmental risk by maintaining an
environmental management system, including policies, management
and mitigation strategies, training, communication, 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. For example, we have a Policy on Social and
Environmental Review in Project Finance to reflect our commitment to
the Equator Principles. Periodically, we verify that our environmental
risk management policies and processes are operating as intended.
On an annual basis, and more frequently as required, environmental
risk management activities, issues, and trends are reported to GE and
to the CG&PPC of the Board of Directors. In addition, 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
Statements.

Other risk factors

In addition to the risks described above, there are numerous other
risk factors as described below, 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 financial performance objectives, our
vision and strategic goals, the Economic, market and regulatory
review and 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 risk 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 appropriate for other
purposes.

We caution that the discussion of risk factors, many of which are

beyond our control, 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 and following 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.

General business and economic conditions in Canada, the U.S. and
other countries in which we conduct business
Our earnings are significantly affected by the general business and
economic conditions in the geographic regions in which we operate.
These conditions include consumer saving and spending habits as
well as consumer borrowing and repayment patterns, business
investment, government spending, the level of activity and volatility
of the capital markets and inflation. For example, an economic
downturn in a country may result in high unemployment and lower
family income, corporate earnings, business investment and
consumer spending, and could adversely affect the demand for our
loan and other products. In addition, our provision for credit losses
would likely increase, resulting in lower earnings.

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 state-
ments. Significant accounting policies are described in Note 1 to our
2010 Annual Consolidated Financial Statements.

We are required to adopt International Financial Reporting
Standards (IFRS) commencing November 1, 2011. For further details
on our future adoption of IFRS refer to the Accounting and control
matters section.

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 U.S. 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.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Level of competition
The competition for clients among financial services companies in the
markets in which we operate is intense. Client loyalty and retention
can be influenced by a number of factors, including relative service
levels, the prices and attributes of our products or services, our
reputation and actions taken by our competitors. Other financial
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.

Ability to attract and to retain employees
Competition for qualified employees is intense within the financial
services industry and from non-financial industries looking to recruit.
If we are unable to retain and attract qualified employees, our results
of operations and financial condition, including our competitive
position, may be materially adversely affected.

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 whom we rely do
not comply with GAAP or are materially misleading.

Development and integration of our distribution networks
Although we regularly explore opportunities to expand our
distribution networks, either through acquisitions or organically by
adding, for example, new bank branches, insurance offices, online
savings accounts and ATMs in high-growth, receptive markets in
Canada, the U.S. 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.

Capital management

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.

Capital management framework
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, economic capital and subsidiary capital.

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.

The Board of Directors is responsible for ultimate oversight of
capital management, including the annual review and approval of our
Capital Plan and ICAAP. The Audit Committee is responsible for the
governance of capital management, which includes; approval of
capital management policies, regular review of our capital position
and management processes, approval of ICAAP, and ongoing review
of internal controls over financial reporting.

The ALCO and Group Executive share management oversight
responsibility for capital management and receive regular reports
detailing compliance with established limits and guidelines.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Basel II
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.

Regulatory capital, risk weighted assets
and capital ratios

Table 49

As at October 31 (C$ millions, except percentage and
multiple amounts)

2010

2009

Capital

Tier 1 capital
Total capital

Risk-weighted assets

Credit risk
Market risk
Operational risk

Total risk-weighted assets

Capital ratios

Tier 1 capital
Total capital
Assets-to-capital multiple

33,972 $
37,625

31,774
34,881

$ 197,195 $ 185,051
23,321
36,465

24,828
38,433

$ 260,456 $ 244,837

13.0%
14.4%
16.5X

13.0%
14.2%
16.3X

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 on Banking Supervision.
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 50. For further details on the terms and conditions of the
various capital components, refer to the Selected share data section
and Notes 16, 17 and 18 to our 2010 Annual Consolidated Financial
Statements.

Regulatory capital ratios are calculated by dividing Tier 1 and
Total capital by RWA. 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.

Basel III regulatory capital and capital ratios
As noted in the Economic, market and regulatory review and outlook
section, the capital reforms known as Basel III will redefine Tier 1
capital to consist of predominantly common shares and retained
earnings. There will be new deductions from common equity –
including intangible assets, defined benefit pension fund assets and
investments in common equity of other financial institutions. Also
changes in counterparty credit risk and treatment of securitization
related exposures will result in higher RWA.

Further, the Basel Committee proposes to increase the minimum
capital requirements for common equity and Tier 1 capital from 2% to
4.5% and 4% to 6% respectively.

In addition, banks will be required to hold capital buffers to help

withstand future periods of stress. A capital conservation buffer of
2.5% (to be met with common equity) will bring total common equity
requirements to 7%. A countercyclical buffer of up to 2.5% of
common equity or other fully loss absorbing capital may also be
required in periods of excess aggregated credit growth. This buffer
will be implemented according to national circumstances and subject
to national supervisory discretion. The minimum Total capital
requirement will be 8%, with a capital conservation buffer of 2.5%.
A framework requiring systemically important financial

institutions to have additional loss absorption capacity beyond the
Basel III standards has also been proposed.

The common equity and Tier 1 capital rules are expected to be

phased-in from January 2013, with the capital conservation buffer
phased-in between January 2016 and January 2019.

Based on our current strong capital position, we expect to meet

the Basel III requirements within the established timelines. We will
continue to be proactive and make the optimal decisions to mitigate
the impact these requirements will have on our business.

Capital

As at October 31 (C$ millions)

Tier 1 regulatory capital

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

Total Tier 1 capital

Tier 2 regulatory capital

Table 50

2010

2009

$ 13,287
236
22,706

$ 12,959
246
20,585

(17)
(1,685)

–
4,810
3,327
351
(8,064)
(101)
(810)
(29)

(9)
(1,374)

(68)
4,811
3,991
353
(8,368)
(148)
(1,172)
(13)

(39)

(19)

$ 33,972

$ 31,774

Permanent subordinated debentures
Non-permanent subordinated debentures (1)
Net after tax unrealized gain on available-for-sale

863
5,778

878
5,583

equity securities

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

12
1,023
517
(101)
(3,607)
(792)

(39)
(1)

–
1,017
575
(147)
(3,628)
(1,150)

(20)
(1)

3,653

3,107

$ 37,625

$ 34,881

(1)

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)

13.0%

9.0%

9.4%

9.6%

15%

12%

2010

2009

2008

2007

2006

Basel II

Basel I

(1)

Basel I and Basel II Tier 1 capital ratios are not directly comparable.

Our capital position remained strong in 2010 primarily through
internal capital generation from earnings and the issuance of
additional regulatory capital for general business purposes. Our
capital ratios remain well above OSFI regulatory capital targets.

As at October 31, 2010, our Tier 1 capital ratio was 13.0% and

our Total capital ratio was 14.4%.

Our Tier 1 capital ratio was unchanged from the previous year, as

additional capital from earnings generation and lower securitization
related deductions were largely offset by higher RWA and the
redemption of innovative Tier 1 capital instruments.

Our Total capital ratio was up 20bps primarily due to the factors
discussed under Tier 1 capital and the net issuance of subordinated
debentures.

As at October 31, 2010, our assets-to-capital multiple was
16.5 times compared to 16.3 times a year ago. Our assets-to-capital
multiple remains below the maximum level prescribed by OSFI.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Risk-weighted assets
Under Basel II, OSFI requires banks to meet minimum risk-based
capital requirements for exposures to credit risk, operational risk,
and, where they have significant trading activity, market risk. RWA is
calculated for each of these risk types and added together to
determine total RWA.

During the year, RWA increased by $15.6 billion, mainly due to

credit migration and risk parameter revisions primarily in our
wholesale and retail portfolios. This increase was partially offset by
the impact of the stronger Canadian dollar on our foreign currency-
denominated assets and a decrease in our securitized assets
portfolio.

Risk-weighted assets – Basel II

As at October 31 (C$ millions, except percentage amount)

Exposure (1)

$ 112,696
193,396
136,089
35,468
48,631

$ 526,280

$ 152,990
58,921

$ 211,911

$ 738,191
1,686
45,753
n.a.
39,088

$ 824,718

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-

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

Average
of risk
weights
(2)

7%
21%
60%
6%
6%

26%

1%
34%

10%

21%
87%
13%
n.a.
64%

24%

2010

Risk-weighted assets

Table 51

2009

Standardized
approach

Advanced
approach

Other

Total

1,489
7,514
30,290
394
1,686

6,299
33,629
51,356
1,725
1,455

$ 41,373

$ 94,464

7,788
41,143
81,646
2,119
3,141

6,350
32,821
84,084
2,272
2,375

$ 135,837

$ 127,902

–

$ 25,123

380
2,232

2,612

$ 43,985
–
825
n.a.
n.a.

$ 44,810

4,588
497
698
797
6,304

$ 12,884

$ 38,433

972
18,004

$ 18,976

$ 113,440
1,465
5,154
7,203
n.a.

$ 127,262

2,282
1,752
13
3
7,894

$ 11,944

1,352
20,236

$ 21,588

$ 157,425
1,465
5,979
7,203
25,123

$ 197,195

6,870
2,249
711
800
14,198

$ 24,828

$ 38,433

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

n.a.

Total risk-weighted assets

$ 824,718

$ 96,127

$ 139,206

$ 25,123

$ 260,456

(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

(C$ millions, except number of shares)

Tier 1
Common shares issued

Dividend reinvestment plan (DRIP) (1)
Stock option exercised (2)

Redemption of innovative capital instruments

RBC TruCS Series 2010 (3)

Tier 2
Redemption of January 25, 2015 subordinated debentures (3)
Redemption of June 24, 2015 subordinated debentures (3)
Issuance of June 15, 2020 subordinated debentures (3)

Issuance or
redemption
date

2010

Number of
shares
(000s)

2,862
4,450

June 30, 2010

January 25, 2010
June 24, 2010
June 15, 2010

Table 52

Amount

161
142

650

500
800
1,500

(1)

(2)

(3)

For the first quarter of 2010, shares were issued from treasury at a 3% discount from the average closing price of the five trading days preceding the dividend payment date. For the last three
quarters of 2010, we funded our DRIP through open market share purchases.
Amount included cash received for stock options exercised during the period, the fair value adjustments to stock options and the exercise of stock options from tandem stock appreciation
rights (SARS) awards and from renounced tandem SARS.
For further details, refer to Note 16 to our 2010 Annual Consolidated Financial Statements.

During 2010, we did not repurchase any common shares under our
normal course issuer bid (NCIB), which expired on October 31, 2010.
We did not renew our NCIB for 2011.

Subsequent to October 31, 2010, the following capital transaction
occurred:

On November 1, 2010, we issued $1.5 billion of subordinated

debentures Series 14 through our Canadian Medium Term Note
Program.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

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 dividend payout ratio
target is 40% to 50%. In 2010, the dividend payout ratio was 57%,
down from 78% in 2009, as last year’s earnings were impacted by the
goodwill impairment charge and a higher level of credit losses.
Common share dividends paid during the year were $2.8 billion,
relatively flat from a year ago.

Selected share data (1)

Table 53

2010

2009

2008

(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
1,424,922 $ 13,378 $ 2.00 1,417,610 $ 13,075 $ 2.00 1,341,260 $ 10,384 $ 2.00

Dividends
declared
per share

Number
of shares
(000s)

Amount

– $

300
300
300
200
250
250
200
250
213
400
300
225
275
350
275
400
325
(2)
(81)

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
(86)
(1,719)

6,413

15,659
10,170

–
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
1.41
1.25
1.40
1.56
1.56
1.56
1.56
1.56
1.53

–
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

2,843
258

2,819
233

.88
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
.81
–

– $

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

(1)
(2)
(3)

For further details about our capital management activity, refer to Note 18 to our 2010 Annual Consolidated Financial Statements.
Effective February 24, 2010, we have the right to convert into common shares at our option, subject to certain restrictions.
Dividend rate will reset every five years.

As at November 29, 2010, the number of outstanding common shares
and stock options were 1,425,184,000 and 15,487,000, respectively.
As at November 29, 2010, the number of Treasury shares – preferred
and Treasury shares – common were 131,000 and 1,532,000,
respectively. For further information about our share capital, refer to
Notes 18 and 21 to our 2010 Annual 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 exceed economic
capital with a comfortable cushion.

For further discussion on credit, market, operational and

insurance risks, refer to the relevant Risk management, and Overview
of other risks 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.

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

Table 54

2010

2009

$ 9,950
3,400
3,350
2,400
400

$ 19,500
10,100

$ 29,600
3,650

$ 10,100
2,450
3,550
2,350
150

$ 18,600
11,250

$ 29,850
600

Economic capital is calculated and attributed on a wider array of

Average common equity

$ 33,250

$ 30,450

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.

•

Economic capital decreased $250 million from a year ago mainly due
to lower goodwill and intangibles reflecting the impact of the goodwill
impairment charge in the prior year and the stronger Canadian dollar
on the translation of foreign currency-denominated goodwill. Lower
operational risk due to lower revenue also contributed to the
decrease. These factors were partially offset by higher market risk
reflecting methodology changes for both credit valuation adjustments
and modeled market risk, and higher insurance specific risk resulting
from methodology changes and a lower diversification factor.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

We remain well capitalized with current levels of available
capital exceeding the economic capital required to underpin all of our
material risks.

provides centralized oversight and consolidated capital management
across all subsidiary entities.

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. 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

Additional financial information

Total RBC available-for-sale portfolio

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.

•

As at October 31, 2010, 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, they mature or they are
redeemed. For further details regarding the assessment of other-than-
temporary impairment, refer to Note 3 to our 2010 Annual
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 securities

Total (1)

2010

2009

Amortized
cost (1)

Fair
value (1)

Net
unrealized
gains
(losses)

Net gains
(losses)
recognized
in income

Amortized
cost (1)

Fair
value (1)

Net
unrealized
gains
(losses)

$ 25,800 $ 26,248 $

1,079
3,599
10,985
1,719
256

1,027
3,499
11,010
1,764
228

448 $
(52)
(100)
25
45
(28)

73 $ 22,166 $ 22,622 $
(27)
(6)
(47)
48
–

1,852
4,427
14,711
2,412
186

2,057
4,516
14,718
2,437
256

456 $
(205)
(89)
(7)
(25)
(70)

Net gains
(losses)
recognized
in income
(17)
(173)
(45)
(198)
(207)
–

$ 43,438 $ 43,776 $

338 $

41 $ 46,150 $ 46,210 $

60 $

(640)

(1)

Includes held-to-maturity of $225 million (2009 – $156 million) that is grouped with AFS on the balance sheet.

The total amortized cost of the AFS portfolio was $43.4 billion as at
October 31, 2010, down $2.7 billion, or 6% from the prior year. The
decrease largely reflected the reduction in holdings of certain AFS
securities including certificate of deposits, and U.S. agency mortgage-
backed securities (MBS), exiting of positions held in U.S. student loan
auction rate securities (ARS) and U.S. non-agency MBS in order to
manage our exposures as well as the impact of the stronger Canadian
dollar. The decrease was partially offset by an increase in RBC
originated MBS resulting from securitization activities as well as
purchases of Canadian government bonds.

We recognized $41 million of net gains in income this year, as
compared to $640 million of net losses in the prior year. The net gains
in the current year largely reflected net gains of $309 million on the
sale of certain U.S. agency MBS classified as government and agency
and listed common shares as well as gains from capital distributions
from private equities. These gains were largely offset by net losses of
$268 million primarily on securities that were deemed to be impaired
such as corporate trust preferred securities which are included in
corporate debt and other debt, certain listed common shares, private
equities and U.S. non-agency MBS. The prior year net losses of
$640 million were largely due to losses on Canadian bank common
shares, U.S. non-agency MBS and corporate debt and other debt.

As at October 31, 2010, the portfolio had net unrealized gains of

$338 million compared to net unrealized gains of $60 million a year
ago. This largely reflected the reduction in unrealized losses due to
price improvements on U.S. non-agency MBS and other
non-government securities primarily due to tightening of spreads and
lower interest rates. The MBS portfolio mainly consists of high quality
super-senior tranches of U.S. Alt A and U.S. prime securities. There
were also fair value improvements for loan substitute securities which
are predominantly perpetual preferred shares of highly rated
Canadian entities as well as equities which include listed common
shares and listed preferred shares.

Exposures to selected financial instruments

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 less than .3% of our
total assets as at October 31, 2010, compared to .4% the prior year.
Of our total holdings of residential mortgage-backed securities

(RMBS), holdings with a fair value of $145 million, net of MBIA
hedging of $250 million, may be exposed to U.S. subprime risk. U.S.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

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, 2010, refer to the Off-balance sheet
arrangements section.

Leveraged finance
Leveraged finance comprises infrastructure finance, essential
services and other types of finance. It excludes investment grade
financing and non-investment grade financing where there is no
private equity sponsor involvement. Our total commitments,
combined funded and unfunded, as at October 31, 2010 were $4,343
million which was .6% of our total assets, unchanged from prior year.

Direct and indirect monoline insurance
We have direct and indirect monoline insurance on subprime and
non-subprime assets as presented below:

Direct monoline insurance

(C$ millions)
MBIA
Assured Guaranty Municipal Corp.

(Formerly FSA)

Syncora Holdings Ltd. (Formerly XL Capital Ltd.)
AMBAC Financial Group (AMBAC)

Table 57

As at October 31, 2010

Principal/
notional
3,656 $ 327

Fair value

270
244
102

14
11
–

4,272 $ 352

As at October 31, 2010, we held monoline insurance protection of
$4,272 million against default of the issuer or counterparty on both
subprime and non-subprime trading assets with a recorded fair value
of $352 million, net of credit valuation adjustments. Our valuation
methodology related to our MBIA exposure is consistent with the prior
year while we have updated our parameter estimates to reflect current
market conditions.

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, interest rate swaps, and
public infrastructure bonds. In these cases, we obtain a benefit from
the insurance protection. The principal/notional value of these assets
as at October 31, 2010 is $1,605 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 $295 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, 2010.

subprime RMBS exposures increased $59 million from last year. Of
this potential exposure, over 55% of our related holdings are rated A
and above, compared to over 66% in the prior year. As at October 31,
2010, U.S. subprime RMBS holdings rated AAA, on a net basis,
comprised 17% of total U.S. subprime RMBS holdings, compared to
37% in 2009. Exposure to U.S. subprime loans was $319 million as at
October 31, 2010, representing .04% of total assets, $170 million
lower than last year, partly due to principal pay downs and the
stronger Canadian dollar.

Of our total holdings of RMBS, holdings with a fair value of $557

million, net of hedging, may be exposed to U.S. Alt-A risk. U.S. Alt-A
exposures decreased $431 million from the prior year mainly due to
the sale of holdings. Less than 49% of these RMBS were issued
during 2006 and onwards. Our exposure to U.S. Alt-A loans was $973
million as at October 31, 2010, representing .1% of total assets and a
decrease of $314 million from the prior year partly due to principal
pay downs and the stronger Canadian dollar.

Of our total holdings of collateralized debt obligations (CDOs),
holdings of $21 million, net of MBIA hedging of $4 million, may be
exposed to U.S. subprime or Alt-A risk, a decrease of $1 million from
2009. The fair value of our Corporate CDOs, net of hedging of $312
million as at October 31, 2010, increased $34 million from last year.

Net exposure to U.S. subprime and Alt-A through
RMBS, CDOs and mortgages

Table 56

Total

145 $

557 $

21 $

723

2010

Subprime
RMBS

Alt-A
RMBS

CDOs that
may contain
subprime or
Alt-A

Total

395 $

557 $

25 $

977

24 $
56
–
13
52

53 $
46
26
73
359

–
–
–
–
21

29 $
43
29
33
11

32 $
49
204
92
180

–
–
21
–
–

145 $

557 $

21 $

723

180 $

722 $

– $

902

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)

Fair value of securities net of

hedging by vintage

2003 (or before)
2004
2005
2006
2007 and greater

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

139 $

251 $

– $

390

464 $ 1,530 $

21 $ 2,015

Commercial mortgage-backed securities disclosure
The fair value of our total direct holdings of CMBS was $316 million
as at October 31, 2010.

(4) $
(4)
(4)

(2)

(35)
(38)
(38)

(32)

Assets and liabilities measured at fair value
There were no material transfers in or out of levels 1, 2 or 3 in the
current year, as classified by the fair value hierarchy set out in
Section 3862, Financial Instruments – Disclosures. For further
details, refer to Note 2 to our 2010 Annual Consolidated Financial
Statements.

(1)

The subprime RMBS exposures rated below BBB- represents our net bought protection
position.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

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
2010 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 judgment 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, 2010, approximately $353 billion, or 52%, of

our financial assets and $257 billion, or 38%, of our financial
liabilities were carried at fair value ($299 billion, or 48%, of financial
assets and $202 billion, or 34%, of financial liabilities as at
October 31, 2009).

CICA Section 3862, Financial Instruments – Disclosures,
establishes 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 instru-
ments:
•

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.

•

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

•

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 2010 Annual Consolidated Financial Statements
discloses the fair values of our financial instruments as at October 31,
2010.

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 use 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 or loss 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 2010 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 and Finance are

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.

gain or loss that is recognized from the sale of the loans. Refer to
Note 5 to our 2010 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 2010 Annual Consolidated Financial
Statements, we concluded that none of the SPEs used to securitize
our financial assets should be consolidated.

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 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 2010
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
2010 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

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 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 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. 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.

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.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Total allowance for credit losses
Based on the procedures discussed above, management believes
that the total allowance for credit losses of $3,096 million is
adequate to absorb estimated credit losses incurred in the lending
portfolio as at October 31, 2010. This amount includes $99 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 2010 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.

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 2010 Annual

Consolidated Financial Statements. Also refer to the “Goodwill
Impairment Assessment” later in this section.

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 2010
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.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Changes in accounting policies

Significant changes in accounting policies and disclosures during
2010
Canadian GAAP
We did not adopt any new significant accounting policies during the
year.

U.S. GAAP
Fair value measurement and disclosures on non-financial assets and
liabilities
Guidance on fair value measurement and disclosures (Topic 820, Fair
Value Measurements and Disclosures) for nonfinancial assets and
liabilities became effective for us on November 1, 2009. The new
standards require additional disclosure on inputs and valuation
techniques used to measure assets and liabilities that are measured
at fair value on a nonrecurring basis in periods subsequent to initial
recognition. Refer to the section entitled “Framework on fair value
measurement” in Note 31 to our 2010 Annual Consolidated Financial
Statements for expanded disclosures.

Investments in Certain Entities that Calculate Net Asset Value Per
Share
Financial Accounting Standard Board (FASB) issued Accounting
Standards Update (ASU) 2009-12, Fair Value Measurements and
Disclosures (ASC Topic 820) – Investments in Certain Entities that
Calculate Net Asset Value Per Share (or its Equivalent), which provides
guidance on measuring fair value of certain alternative investments,
and permits entities to use net asset value as a practical expedient to
measure the fair value of its investments in certain investment funds.
We adopted this standard on November 1, 2009.

Our alternative investments primarily include hedge funds held
in connection with hedging of exposure related to fee-based equity
derivative transactions with third parties. Fair value of these
investments are based on the net asset value of the hedge funds.
Refer to Note 31 to our 2010 Annual Consolidated Financial
Statements for additional disclosures and information.

Improving Disclosures about Fair Value Measurements
FASB issued ASU 2010-06, Fair Value Measurements and Disclosures
which amends and adds new disclosure requirements to Topic 820
Fair Value Measurement and Disclosures – Overall. New requirements
are applicable for transfers into and out of Levels 1 and 2 and
separate disclosures are required for purchases, sales, issuances,
and settlements relating to Level 3 financial instruments.
Clarifications are also provided on existing fair value disclosures on
level of disaggregation and on inputs and valuation techniques used
to measure fair value. This guidance became effective for us on
February 1, 2010. Refer to Note 2 to our 2010 Annual Consolidated
Financial Statements for the expanded fair value hierarchy
disclosures. Additional disclosures are also required regarding the
nature and risk of such investments; these are provided in the
“Framework on fair value measurement section” of Note 2 to our 2010
Annual Consolidated Financial Statements.

Non-controlling interest
In December 2007, the FASB issued guidance under ASC Topic 810,
Consolidation, which was effective for us on November 1, 2009.
Significant requirements include:
•

•

Non-controlling interest should continue to be attributed its
share of losses even if that attribution results in a deficit
non-controlling interest balance;
After control is obtained, a change in ownership interests that
does not result in a loss of control should be accounted for as an
equity transaction; and
A change in ownership of a consolidated subsidiary that results
in a loss of control and deconsolidation will trigger recognition of
a gain or loss and any retained non-controlling equity investment
in the former subsidiary will be initially measured at fair value.

Business combinations
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 includes the following
changes in 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.

There is no impact to our 2010 Annual Consolidated Financial

Statements as we did not close any acquisitions during the year.

In addition, several new U.S. GAAP accounting pronouncements
issued by FASB became effective for us on November 1, 2009 but the
impact of adopting these pronouncements is not material to our
consolidated financial position or results of operations. For further
details about the new U.S. GAAP pronouncements, refer to Note 31 to
our 2010 Annual Consolidated Financial Statements.

Future changes in accounting policies and disclosure
Canadian GAAP
There is no significant future accounting change applicable for us.

U.S. GAAP
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 prospectively on
November 1, 2010. FAS 166 eliminates the concept of qualifying
special purpose entities (QSPEs) and provides additional criteria and
clarifies certain principles of the derecognition requirement in FAS
140 that the transferor must use to assess transfers of financial
assets. 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
retrospectively on November 1, 2010. FAS167 modifies the character-
istics 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. We are currently in the
process of assessing the impact of adopting this new standard on our
consolidated financial position and results of operations.

Refer to Note 31 to our 2010 Annual Consolidated Financial

Statements for more information about these and other future
accounting standards.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Future adoption of International Financial Reporting Standards

Pursuant to the decision made by the Canadian Accounting Standards
Board, we will begin reporting our financial statements in accordance
with IFRS on November 1, 2011, including fiscal 2011 comparative
results. In order 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. Our changeover
to IFRS is tracking our initial timeline, including the start of our
comparative (transition) year which began November 1, 2010.
We began our transition process in 2008 by completing a
thorough organization diagnostic to assess the scope and complexity
for us of converting to IFRS. This process identified the areas with
significant differences between IFRS and existing Canadian GAAP. In
2009, we completed activities and deliverables which support the key
areas of impact. We also:
•

Developed preliminary assessments regarding accounting policy
elections for first-time IFRS adoption;
Initiated multiple projects within a program framework which
conducted more thorough GAAP analysis, assessed financial and
economic impacts, and identified process and systems
requirements to ensure a successful transition; and,
Developed a resourcing model to ensure sufficient program
resources are available to meet key deliverables.
We also initiated a series of ongoing activities which include:
•

•

Establishing frequent and recurring communications with the
Board of Directors, Audit Committee, executive and senior
management to ensure timely decisions on key issues and risks;
Providing frequent updates to our internal and external auditors
and OSFI on key elements of program status, program structure
and preliminary assessment of accounting impacts;
Identifying preliminary external communication requirements for
the investor and analyst community; and,
Conducting internal education seminars for key stakeholders
across RBC in the various business platforms and functional
groups.

•

We continued with these activities throughout 2010 in addition to
making the following significant decisions:
•

Preliminary conclusions regarding accounting policy elections for
first-time IFRS adoption;
Identifying key changes in our significant accounting policies;
and,
Conducting more thorough GAAP analysis, assessing financial
and economic impacts, and identifying process and systems
requirements to ensure a successful transition.

•

Impact of Adopting International Financial Reporting Standards
Our adoption of IFRS will be impacted by our IFRS 1 elections and by
our ongoing policy choices. IFRS 1 sets out the procedures that we
must follow when we prepare our consolidated financial statements
for the first time after adopting IFRS. The IFRS 1 elections we expect to
make upon transition are summarized below; these elections may
change pending further developments in IFRS during our transition
year. Included in this section and the subsequent “Critical Accounting
Policies” section is a description of those key areas that we expect
will cause the most significant transition impacts which are:
employee benefits, cumulative translation adjustments, securitization
and variable interest entities (also referred to as derecognition and
consolidation), and goodwill.

Classification of Financial Instruments
Upon adoption of IFRS, an issuer is required to retrospectively apply
IAS 39, Financial Instruments: Recognition and Measurement, and
classify their financial instruments as of the date that the financial
instrument was originally acquired. Alternatively, IFRS 1 permits an
issuer to classify at the transition date any financial instrument using
the fair value option or as available-for-sale. We expect to elect this
option and will change the designation of certain financial
instruments where appropriate.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Employee Benefits
IFRS 1 provides the option to recognize all cumulative actuarial gains
and losses currently deferred under Canadian GAAP directly in
Retained earnings. We expect to elect this option which will decrease
our Retained earnings on transition. The balance of our Cumulative
actuarial gains and losses represents the sum of our unrecognized
net actuarial loss, transitional (asset) obligation and prior service
cost. We are in the process of calculating the Cumulative actuarial
gains and losses under Canadian GAAP as at October 31, 2010 as we
currently use a measurement date of September 30, 2010 as
described in Note 20 to our 2010 Annual Consolidated Financial
Statements.

Business Combinations
IFRS 1 provides the option to apply prospectively IFRS 3, Business
Combinations, such that business combinations that occur before the
transition date need not be restated. We expect to elect this option.

Insurance Contracts
IFRS 1 provides the option to use transitional guidance found in
IFRS 4 Insurance Contracts. As permitted by IFRS 4, we have decided
to continue following our existing insurance contract accounting
policies.

Cumulative Translation Adjustments
IFRS 1 provides the option to reclassify cumulative translation gains
and losses from foreign operations to Retained Earnings. We expect
to elect this option thereby decreasing our Retained earnings on
transition, although neither Shareholders’ equity or Tier 1 capital will
be impacted. The balance of our Unrealized foreign currency trans-
lation gains and losses, net of hedging activities as calculated under
Canadian GAAP, is $1.7 billion as at October 31, 2010, as presented
in our Consolidated Statements of Changes in Shareholders’ Equity.

Critical Accounting Policies
We have determined that our critical accounting policies under IFRS
will be the same as those under Canadian GAAP. The following
summarizes the changes to those policies that we expect to make
upon transition.

Financial instruments – Recognition and measurement

The recognition and measurement of financial instruments under IFRS
are significantly aligned with Canadian GAAP. We will continue to
recognize at inception, financial instruments at fair value. IFRS also
has the same categories for financial instruments as Canadian GAAP:
held-for-trading, available-for-sale, held-to-maturity, held-for-trading
using the fair value option, and loans and receivables.

Impairment of Available-for-sale and Held-to-maturity securities
(Other-than-temporary impairment of securities under Canadian
GAAP)
Similar to Canadian GAAP, IFRS requires all financial assets to be
reviewed for impairment except those measured at fair value through
profit or loss. Unlike Canadian GAAP, impairment review under IFRS
does not have the concept of other-than-temporary decline in fair
value nor does an entity’s intention to sell or hold a security factor
into the assessment of whether it is impaired. Instead, IFRS focuses
on specific events and objective evidence of impairment including a
significant or prolonged decline in fair value below cost to be
evidence of impairment. As a result, when an impairment is
recognized and how it is measured, may differ under IFRS.

Securitization
Under IFRS, the approach to derecognizing financial assets is
significantly different than the approach under Canadian GAAP. IFRS
requires consideration of the risks and rewards of ownership with a
secondary focus on control over transferred assets. Under Canadian

GAAP, the derecognition model follows the legal form of the trans-
action and the ability to shield assets from bankruptcy. We have
determined that most of our securitizations will not qualify for
derecognition under IAS 39; this will result in the associated assets,
namely, mortgages and credit card receivables, being recognized on
our consolidated balance sheets and the gains previously recognized
will be included in the transition adjustment as a reduction to
retained earnings. Although the initial impact of this policy change
will be significant, including a decrease to Retained earnings, we will
recognize the net income they generate over their remaining lives.
Information regarding our securitization activities as at October 31,
2010 is presented in Note 5 to our 2010 Annual Consolidated
Financial Statements.

Banking and Caribbean Banking. The goodwill that arose upon the
acquisition of RBTT will be attributed to the Caribbean Banking CGU
with the remainder residing in the U.S. Banking CGU, resulting in
approximately equal balances.

Our current goodwill allocation, which is presented in Note 10 to
our 2010 Annual Consolidated Financial Statements, will be realigned
to the new CGUs for impairment testing; the first such assessment
must be completed as of November 1, 2010. Any resulting
impairment will be recorded as a transition adjustment but it will have
no impact on our Tier 1 ratio.

Employee Benefits – Actuarial Gains and Losses (Pensions and post-
employment benefits under Canadian GAAP)

Loans – Allowance for credit losses

IFRS and Canadian GAAP are significantly aligned in this area with an
entity recognizing incurred losses that have been identified and yet to
be specifically identified. The grouping of these allowances will differ
under IFRS as they will now be grouped into loans where the
allowance is determined individually (wholesale loan allowance) and
those that were determined collectively (allowances based on pools
of loans or portfolios, i.e. specific retail loan allowances and our
general allowance).

Special Purpose Entities (Variable Interest Entities under Canadian
GAAP)

Under IFRS, consolidation of an entity is determined on the basis of
control which is broader than the concepts of voting control and
exposure to variable interests that are applied under Canadian GAAP.
We have determined that as a result of this change in policy, we will
now consolidate certain entities and not consolidate others. We will
continue to monitor our structures for changes in business activities
that may impact our initial consolidation decisions. The full impact of
this policy change upon adoption of IFRS will depend on the assets
and liabilities in the structures on the transition date. Information
regarding entities in which we have a significant variable interest and
those we consolidate under Canadian GAAP as at October 31, 2010 is
in Note 6 to our 2010 Annual Consolidated Financial Statements.

Goodwill and Intangibles

IFRS and Canadian GAAP both require goodwill and intangibles to be
assessed for impairment. Under IFRS, impairment testing is required to
be performed at the level of cash generating units (CGU) which in some
cases is lower than that of reporting units used for Canadian GAAP.
IFRS and Canadian GAAP both use discounted cash flow models in
determining fair value, but IFRS has specific guidance regarding the
use of forecasted cash flows. We have eight reporting units under
Canadian GAAP and we expect to have nine CGUs under IFRS.

The goodwill that is attributable to a CGU is generally that which
arose upon the acquisition of the entities that comprise that CGU. Our
International Banking reporting unit will reside in two CGUs, U.S.

Goodwill Impairment Assessment

GAAP requires us to test goodwill for impairment at least annually or
more often if events or circumstances indicate that it may be impaired.
For further details, refer to ‘Goodwill and other intangible assets’ in the
Critical accounting policies and estimates section described above
and to Note 1 to our 2010 Annual Consolidated Financial Statements.
The results of our annual test for possible impairment of goodwill as at
August 1, 2010, indicated that the fair values of all of our reporting
units except International Banking exceeded their carrying values. As a
result, further analysis was required to determine if the $2.9 billion of
goodwill allocated to the International Banking reporting unit, of which
approximately half relates to our U.S. banking operations and the
remainder to our Caribbean banking operations, was impaired. This
further analysis compares the fair value of goodwill to its carrying
value, with any shortfall indicating impairment. The fair value of
goodwill is imputed by reference to the fair value of the reporting unit
over the fair value of its net identifiable assets.

IFRS provides four alternatives for accounting for changes in our
defined benefit liability. We may elect any one of the following:
•

Apply the corridor approach, which we currently apply under
Canadian GAAP, and continue to recognize a portion of our
actuarial gains and losses as income or expense;
Recognize actuarial gains and losses related to benefit plans
over the expected average remaining working lives of the
employees participating in that plan;
Recognize actuarial gains and losses in the period in which they
occur in the Consolidated Statements of Income; or
Recognize actuarial gains and losses in Other Comprehensive
Income (OCI).

•

We have elected to continue applying the corridor approach under
IFRS.

Income Taxes

Under both IFRS and Canadian GAAP, income taxes are assessed
based on the balance sheet approach; however, differences exist in
the detailed application of the guidance related to the recognition
and measurement of deferred taxes. With respect to the areas with
significant judgment, primarily uncertain tax positions and the
recognition of deferred tax assets, we believe that there is no
significant change required in how we recognize and measure these
items.

Other Significant Accounting Policies
We will continue to monitor changes in IFRS to determine the
implications on our current accounting policies as well as our
business and capital position. In addition to the critical accounting
policies described above, the following change in accounting policy is
expected to have an impact upon transition.

Interests in Joint Ventures

Under IFRS, jointly controlled entities may be accounted for using the
proportionate consolidation or the equity method. We have elected to
use the equity method for measurement of investments whereas we
are currently applying proportionate consolidation under Canadian
GAAP.

The fair value of our International Banking reporting unit was
estimated using an earnings-based approach which incorporated
internal forecasts of revenues and expenses. Given the inability to
rely on recent performance as evidence supporting the probability
that our U.S. banking operations will achieve its forecast under the
earnings based approach, which is exacerbated by the uncertainties
and challenges created by the current market environment, we
modelled various scenarios reflecting different reasonably possible
outcomes within the current market environment. The estimated fair
value of the reporting unit also contains other significant judgments
and assumptions, one of the most significant of which is the discount
rate applied to the cash flows supporting our earnings based
valuation approach. In determining the range of possible discount
rates, we considered various factors including our ability to raise
capital in the current market, the risk premium associated with the
specific entities, and the potential impact of the Dodd-Frank Wall

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Street Reform and Consumer Protection Act on interchange revenue.
We decided that the appropriate range was between 10.5% and
11.5%, reflecting our internally generated cost of equity, uncertainty
in achieving forecasted results and our ability to raise capital relative
to our peers. We also considered the impact of higher market
observable discount rates within our U.S. Banking peer group which
we determined to be of lower relevance as most of these discount
rates reflected some level of TARP financing, which we had not
received.

The outcome of our analysis was also highly sensitive to the

valuation of the loan portfolios, which required significant
management judgement regarding key assumptions including the
probability of default, liquidity premiums, and exit prices in
distressed markets. The selection of these assumptions was partic-
ularly challenging in the current market conditions, given the relative
lack of market-observable data in the U.S. and Caribbean.

After considering the weight of evidence available to us, our

conclusion regarding the goodwill of our International Banking
reporting unit was that it was not impaired. This conclusion was
based on our review of various scenarios where we adjusted certain
factors to identify the range of reasonably possible outcomes. Given
that the goodwill testing process is a complex one, requiring
management to make numerous assumptions and judgments, based
in many cases on uncertain information about future periods, the
ultimate margin between a decision of impairment and non-
impairment could change significantly if any one of these
assumptions or judgments changes. Prolonged weakness or deterio-
ration in economic market conditions, or additional regulatory
changes, may result in declines in business performance beyond
management expectations, which could lead to a significantly
different outcome, including a material impairment charge to
earnings, in a future period related to some portion of the associated
goodwill.

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 measured our benefit obligations and pension plan assets as
at September 30, 2010. During the year, corporate bond yields, which
impact the selection of a discount rate we use to measure our benefit
obligations, have decreased across all maturities, mainly in the mid
and long ranges of the curve. This has resulted in an actuarial loss of
$1,118 million in our benefit obligation, which more than offsets our
pension plan asset gains of $644 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. 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. For our principal pension plans, the most
recent actuarial valuation performed for funding purposes was
completed on January 1, 2010. Based on the result of this valuation,
we increased our pension plan contributions for 2010 for an amount
that is in excess of the minimum funding requirement set by pension
regulators. Total contributions to our defined benefit pension plans
for 2010 were $1,288 million. For further information, refer to Note 20
to our 2010 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, 2010, 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 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, 2010.

Internal control over financial reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control
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. 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, 2010, that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Key performance and non-GAAP measures

Performance measures

Tier 1 common ratio
We use the Tier 1 common ratio in conjunction with regulatory capital
ratios to evaluate our capital adequacy specifically related to common
equity. We believe that it is a useful supplemental measure of capital
adequacy. The Tier 1 common 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 Tier 1 common ratio:

Tier 1 common ratio

(C$ millions, except percentage
amounts)

Tier 1 capital

Less:

Table 58

2010

2009

2008

$ 33,972 $ 31,774 $ 25,031

Qualifying other NCI in

subsidiaries

Innovative Tier 1 capital

instruments (1)
Non-cumulative First
Preferred shares (1)

351

3,327

4,810

353

357

4,811

2,657

Tier 1 common capital
Risk-weighted assets

Tier 1 common ratio

(1)

Net of treasury shares.

$ 25,484 $ 22,619 $ 18,160
$ 260,456 $ 244,837 $ 278,579

9.8%

9.2%

6.5%

Return on common 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
metrics such as net income, 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 by management for supporting

Calculation of Return on equity and Return on risk capital

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).

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

2010

Table 59

2009

2008

3,991

3,857

The attribution of capital and risk capital involves the use of

(C$ millions, except percentage amounts) (1)

Net income (loss) available to

common shareholders

Average risk capital (2)

add: Under/(over) attribution of capital
add: Goodwill and intangible capital

Average common equity (3)

Canadian
Banking

Wealth
Management

Insurance

International
Banking

Capital
Markets

Corporate
Support

Total

$ 2,979 $

640 $ 393 $

$ 6,350 $

1,000 $ 1,300 $

–
2,000

–
2,650

–
200

$ 8,350 $

3,650 $ 1,500 $

(369) $ 1,584 $ (262) $ 4,965 $ 3,625 $ 4,454
3,000 $ 7,100 $ 750 $19,500 $18,600 $15,050
1,900
7,700

600
11,250

3,650
10,100

3,650
600

–
1,000

–
3,650

6,650 $ 8,100 $ 5,000 $33,250 $30,450 $24,650
–

550

–

add: Impact of goodwill impairment charge

–

Average common equity, excluding goodwill

$ 8,350 $

3,650 $ 1,500 $

6,650 $ 8,100 $ 5,000 $33,250 $31,000 $24,650

ROE

add: Impact of goodwill impairment charge

ROE

RORC

35.6%
–

35.6%

46.9%

17.6% 26.6%
–

–

(5.5)% 19.5%
–

–

17.6% 26.6%

(5.5)% 19.5%

64.6% 30.1%

(12.2)% 22.3%

n.m.
–

n.m.

14.9%
–

14.9%

25.4%

11.9%
3.0%

14.9%

19.5%

18.1%
–

18.1%

29.6%

(1)

(2)

Average risk capital, Goodwill and intangible capital, and Average common 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.
The amounts for the segments are referred to as attributed capital or economic capital.

(3)
n.m. not meaningful

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

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

Overview
Given the nature and purpose of our management reporting
framework, we use and report certain non-GAAP financial measures
which are not defined nor do they have a standardized meaning
under GAAP. As a result, these reported amounts and related ratios
are not necessarily comparable with similar information disclosed by
other financial institutions. We believe that excluding the items noted
below should enhance the comparability of our financial performance
compared to prior periods and will provide readers with a better
understanding of management’s perspective on our 2010 and 2009
performance.

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 that 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.

2010 results excluding the loss on Liberty Life
In October 2010, we announced our intention to sell Liberty Life, our
U.S. life insurance business, to Athene Holding Ltd. for US$628
million. We recorded a loss of $116 million (US $114 million) on both
a before-and after-tax basis in the fourth quarter of 2010.

2009 results excluding the goodwill impairment charge
In the second quarter of 2009, we recorded a goodwill impairment
charge of $1 billion on both a before-and after-tax basis.

The following table provides a reconciliation of our results
excluding the loss on Liberty Life and the goodwill impairment charge
for the years ended October 31, 2010 and October 31, 2009,
respectively.

(C$ millions, except percentage and per share amounts)
Income before income taxes and NCI
Add: Goodwill impairment charge
Add:
Loss on Liberty Life
Income before income taxes and NCI, excluding the items noted above
Income taxes
Net income before NCI excluding the items noted above
NCI in net income of subsidiaries
Net income excluding the items noted above
Preferred dividends
Net income available to common shareholders excluding the items noted above

Average number of common shares (thousands)
Basic EPS
Add: Goodwill impairment charge
Add:
Loss on Liberty Life
Basic EPS excluding the items noted above (1)
Average number of diluted common shares (thousands)
Diluted EPS
Add: Goodwill impairment charge
Add:
Loss on Liberty Life
Diluted EPS excluding the items noted above
Average common equity
ROE (1)
Average common equity excluding the items noted above
ROE (1) excluding the items noted above
Effective income tax rate
Effective income tax rate excluding the items noted above

(1)

Based on actual balances before rounding.

Related party transactions

2010
6,968
–
116
7,084
1,646
5,438
99
5,339
258
5,081

1,420,719
3.49
$
–
.08
3.57
$
1,433,754
3.46
$
–
.08
3.54
33,250
14.9%
33,250
15.3%
23.6%
23.2%

Table 60

2009
5,526
1,000
–
6,526
1,568
4,958
100
4,858
233
4,625

1,398,675
2.59
.71
–
3.31
1,412,126
2.57
.71
–
3.28
30,450
11.9%
31,000
14.9%
28.4%
24.0%

In the ordinary course of business, we provide normal banking
services, operational services, and enter into other transactions with
associated and other related corporations, including our joint venture
entities, on terms similar to those offered to non-related parties.

We grant loans to directors, officers and other employees at
rates normally accorded to preferred clients. In addition, we offer
deferred share and other plans to non-employee directors, executives
and certain other key employees. For further information, refer to
Notes 9 and 27 to our 2010 Annual Consolidated Financial State-
ments.

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Supplemental information

Net interest income on average assets and liabilities

Table 61

(C$ millions, except percentage amounts)

2010

2009

2008

2010

2009

2008

2010

2009

2008

Average balances

Interest (1)

Average rate

Assets
Deposits with other banks

Canada
United States
Other International

Securities

Trading (3)
Available–for–sale

$ 1,060 $ 2,692 $ 1,837 $
4,674
3,976

4,168
7,802

4,167
4,846

14 $
12
33

37 $
11
114

10,073

11,342

13,807

162

45
137
316

498

151,724
42,589

136,963
50,686

149,098
39,626

194,313

187,649

188,724

3,729
1,041

4,770

4,041
1,905

5,946

4,862
1,800

6,662

1.32%
0.29
0.68

0.59

2.46
2.44

2.45

1.37%
.24
2.87

2.45%
3.29
4.05

1.43

3.61

2.95
3.76

3.17

3.26
4.54

3.53

Asset purchased under reverse repurchase
agreements and securities borrowed

57,508

44,476

68,356

474

931

2,889

0.82

2.09

4.23

Loans

Canada

Retail (3)
Wholesale

United States
Other International

Total interest–earning assets
Non–interest–bearing deposits with other

banks

Customers’ liability under acceptances
Other assets

204,592
30,716

185,318
35,074

170,300
38,558

9,138
1,035

235,308

220,392

208,858

10,173

34,739
15,243

42,227
17,559

35,096
15,623

1,376
1,821

8,660
1,179

9,839

1,777
1,923

7,446
2,443

9,889

2,161
2,939

285,290

280,178

259,577

13,370

13,539

14,989

547,184

523,645

530,464

18,673

20,578

25,038

5,923
7,984
121,909

5,895
10,247
155,513

3,702
11,274
104,860

–
–
–

4.47
3.37

4.32

3.96
11.95

4.69

3.41

–
–
–

4.67
3.36

4.46

4.21
10.95

4.83

3.93

–
–
–

4.37
6.34

4.73

6.16
18.81

5.77

4.72

–
–
–

Total assets

$683,000 $695,300 $650,300 $18,673 $20,578 $25,038

2.73%

2.96%

3.85%

Liabilities and shareholders’ equity
Deposits (2), (3)
Canada
United States
Other International

$177,830 $172,736 $165,400 $ 2,646 $ 2,946 $ 4,423
1,758
5,977

58,679
143,736

56,234
150,564

54,483
126,460

334
2,111

778
3,038

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 (3)
Acceptances
Other liabilities

358,773

375,151

372,198

47,689

37,597

45,367

42,941
6,321
1,849

457,573
51,906
7,984
127,578

36,647
7,377
3,943

460,715
46,807
10,247
142,964

36,558
7,183
3,962

465,268
38,843
11,274
108,116

5,091

1,749

374
307
175

7,696
–
–
–

6,762

12,158

1,286

1,525

409
350
230

9,037
–
–
–

1,613
354
334

15,984
–
–
–

1.49%
0.61
1.67

1.71%
1.33
2.11

2.67%
3.13
3.97

1.42

3.67

0.87
4.86
9.46

1.68
–
–
–

1.80

3.42

1.12
4.74
5.83

1.96
–
–
–

3.27

3.36

4.41
4.93
8.43

3.44
–
–
–

Total liabilities

Shareholders’ Equity

Preferred
Common

$645,041 $660,733 $623,501 $ 7,696 $ 9,037 $15,984

1.19%

1.37%

2.56%

4,718
33,241

4,130
30,437

1,795
25,004

–
–

Total liabilities and shareholders’ equity $683,000 $695,300 $650,300 $ 7,696 $ 9,037 $15,984

1.13%

1.30%

2.46%

Net interest income and margin

$683,000 $695,300 $650,300 $10,977 $11,541 $ 9,054

1.61%

1.66%

1.39%

Net interest income and margin (average

earning assets)
Canada
United States
Other International

$333,546 $311,715 $308,574 $ 8,405 $ 7,863 $ 6,935
1,132
987

108,733
113,157

107,131
104,799

98,193
115,445

1,718
854

2,134
1,544

Total

$547,184 $523,645 $530,464 $10,977 $11,541 $ 9,054

2.52%
1.75
0.74

2.01%

2.52%
1.99
1.47

2.25%
1.04
.87

2.20%

1.71%

(1)
(2)

(3)

Interest income includes loan fees of $410 million (2009 – $398 million; 2008 – $343 million).
Deposits include savings deposits with average balances of $90 billion (2009 – $72 billion; 2008 – $56 billion), interest expense of $.4 billion (2009 – $.4 billion; 2008 – $.6 billion) and
average rates of .5% (2009 – .5%; 2008 – 1.0%). Deposits also include term deposits with average balances of $236 billion (2009 – $271 billion; 2008 – $287 billion), interest expense of
$3.9 billion (2009 – $5.6 billion; 2008 – $10.1 billion) and average rates of 1.65% (2009 – 2.07%; 2008 – 3.53%).
Comparative amounts have been reclassified from those previously reported.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Change in net interest income (1)

Table 62

(C$ millions)
Assets
Deposits with other banks

Canada
U.S.
Other international

Securities

Trading (3)
Available-for-sale

Asset purchased under reverse repurchase agreements and

securities borrowed

Loans

Canada

Retail (3)
Wholesale

U.S.
Other international

Total interest income

Liabilities
Deposits (3)
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

2010 vs. 2009
Increase (decrease) due
to changes in

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

Average
volume (2)

Average
rate (2)

Net
change

Average
volume (2)

Average
rate (2)

Net
change

(22)
(1)
21

407
(272)

(1)
2
(102)

(719)
(592)

(23)
1
(81)

(312)
(864)

16
15
(127)

(378)
448

(24)
(141)
(75)

(443)
(343)

(8)
(126)
(202)

(821)
105

219

(676)

(457)

(801)

(1,157)

(1,958)

873
(147)
(301)
(267)

(395)
3
(100)
165

478
(144)
(401)
(102)

682
(204)
385
330

532
(1,060)
(769)
(1,346)

1,214
(1,264)
(384)
(1,016)

510

$(2,415)

$(1,905)

366

$(4,826)

$ (4,460)

85
(52)
(337)
365

64
(51)
(158)

$ (385)
(392)
(590)
98

$ (300)
(444)
(927)
463

188
73
(260)
(265)

$(1,665)
(1,053)
(2,679)
26

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

(99)
8
103

(35)
(43)
(55)

4
9
–

(1,208)
(13)
(104)

(1,204)
(4)
(104)

(84)

$(1,257)

$(1,341)

$ (251)

$(6,696)

$ (6,947)

594

$(1,158)

$ (564)

617

$ 1,870

$ 2,487

(1)
(2)
(3)

Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Volume/rate variance is allocated on the percentage relationship of changes in balances and changes in rates to the total net change in net interest income.
Comparative amounts have been reclassified from those previously reported.

Loans and acceptances by geography

Table 63

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

2010

2009

2008

2007

2006

$124,064
69,291
9,704
2,712

$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

205,771

188,921

177,812

160,753

141,502

$ 45,217
2,785
808

$ 47,110
1,394
1,096

$ 53,775
1,544
978

$ 51,237
585
521

$ 44,353
553
160

48,810

49,600

56,297

52,343

45,066

$254,581

$238,521

$234,109

$213,096

$186,568

$ 11,121
20,852

$ 11,678
25,387

$ 12,931
30,943

$ 6,804
18,548

$ 7,652
13,847

31,973

37,065

43,874

25,352

21,499

$ 4,936
11,084

$ 4,625
12,964

$ 4,712
20,345

$ 1,905
10,862

$ 1,896
9,084

16,020

17,589

25,057

12,767

10,980

$302,574

$293,175

$303,040

$251,215

$219,047

(2,997)

(3,188)

(2,215)

(1,493)

(1,409)

Total loans and acceptances, net of allowance for loan losses

$299,577

$289,987

$300,825

$249,722

$217,638

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Loans and acceptances by portfolio and sector

Table 64

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

2010

2009

2008

2007

2006

$ 128,832
80,174
10,110
2,712

$ 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

221,828

205,224

195,455

169,462

151,050

4,815
3,527
5,912
5,945
4,769
792
3,731
635
18,358
2,569
3,759
20,253
3,765
1,916

80,746

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

87,951

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

107,585

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

81,753

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

67,997

$ 302,574

$ 293,175

$ 303,040

$ 251,215

$ 219,047

(2,997)

(3,188)

(2,215)

(1,493)

(1,409)

Total loans and acceptances, net of allowance for loan losses

$ 299,577

$ 289,987

$ 300,825

$ 249,722

$ 217,638

(1)

Other in 2010 related to other services, $8.1 billion; financing products, $5.1 billion; holding and investments, $4.0 billion; health, $2.7 billion; and other, $.4 billion.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Impaired loans by portfolio and geography

As at October 31 (C$ millions except percentage amounts)

Residential mortgages
Personal
Small business

Retail

Business

Sovereign
Bank
Wholesale
Total impaired loans (2)

Canada

Residential mortgages
Personal
Small business

Retail

Business

Residential mortgages
Personal

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
Sovereign
Bank
Wholesale
Total
Other International

Retail
Wholesale

Total
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

$
$

2010
808
383
49
1,240

77
111
132
112
70
56
142
12
1,627
70
69
1,238
9
34
3,759
4,999

544
174
49
767

71
87
53
65
1
11
99
4
177
55
42
106
–
–
771
1,538

117
105
222

3
22
41
43
54
26
40
6
1,162
10
17
1,038
–
–
2,462
2,684

251
526
777
4,999

(1,111)
3,888

.63%
.48%
1.81%
.56%
4.66%
1.65%
22.22%

$
$

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
1,512

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

.52%
.57%
2.07%
.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
957

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

.28%
.57%
1.43%
.37%
2.04%
.96%
26.24%

$
$

Table 65

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
589

8
7
15

–
3
12
–
–
1
3
–
48
40
13
23
–
–
143
158

45
34
79
826

(263)
563

.17%
.46%
.56%
.25%
.65%
.38%
31.84%

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
697

6
21
27

1
1
2
–
–
1
1
–
300
–
–
16
–
–
322
349

41
31
72
1,118

(351)
767

.16%
.39%
.72%
.23%
.89%
.45%
31.40%

(1)
(2)

Other in 2010 is related to other, $108 million; financing products, $865 million; other services, $157 million; holding and investments, $75 million; and health, $33 million.
Past due loans greater than 90 days not included in impaired loans were $202 million in 2010 (2009 – $359 million; 2008 – $347 million; 2007 – $280 million; 2006 – $305 million).

Royal Bank of Canada: Annual Report 2010

Management’s Discussion and Analysis

Provision for (recovery of) credit losses by portfolio and geography (1)

Table 66

(C$ millions, except percentage amounts)

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
Sovereign
Bank

Wholesale
Total specific provision

Canada

Residential mortgages
Personal
Credit cards
Small business

Retail

Business

Total

United States

Residential mortgages
Personal
Credit cards
Small business

Retail

Business

Wholesale
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

2010
60
595
413
45
1,113

19
21
37
(6)
(30)
5
3
–
512
5
12
129
–
15
722
1,835

7
444
399
45
895

18
15
17
3
(1)
3
(4)
2
35
(6)
10
30
–
–
122
1,017

35
138
14
–
187

1
6
8
(7)
(29)
2
7
(2)
419
11
2
58
–
–
476
663

31
124
155
1,835

1,861

.63%

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

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%

(1)

Other in 2010 is related to financing products, nil; other services, $50 million; health, $8 million; holdings and investments, $28 million; and other, $43 million.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

Allowance for credit losses by portfolio and geography

(C$ millions, except percentage amounts)

Allowance at beginning of year
Provision for credit losses
Write–offs by portfolio

Residential mortgages
Personal
Credit cards
Small business

Retail

Business
Sovereign
Bank
Wholesale
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

$
$

2010
3,302
1,861

(46)
(690)
(477)
(56)
(1,269)

(949)
–
–
(949)
(2,218)

2
91
64
7
164
72
–
–
72
236

(1,982)
(85)
3,096

47
88
18
153

14
27
20
10
1
4
36
1
36
12
6
40
–
–
207
360

12
29
–
41

1
8
8
12
5
2
8
–
162
6
2
220
–
–
434
475

83
193
276
1,111

77
709
384
60
1,230
656
99
1,985
3,096

1.02%
.68%

$
$

2009 (1)
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%

$
$

Table 67

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%

(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 2010

Management’s Discussion and Analysis

Credit quality information by Canadian province

Table 68

(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

2010

2009

2008

2007

2006

13,942
31,396
112,559
51,563
45,121

254,581

12,709
28,739
106,957
47,654
42,462

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

$ 238,521

$ 234,109

$ 213,096

$ 186,568

72
162
598
429
277

1,538

50
85
659
146
77

57
190
647
300
318

1,512

56
90
942
138
143

1,017

1,369

66
122
504
158
107

957

43
63
610
60
48

824

2010

332
643
2,367
393
73
305
1,712
113
3,205
318
941
5,360

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

Table 69

2006

248
601
2,043
284
73
366
1,377
88
2,565
300
774
4,098

15,762

15,123

14,712

14,246

12,817

(1)

Other sector in 2010 related primarily to other services, $3.2 billion; health, $1.6 billion; holding and investment, $474 million; financing products, $73 million; and other, $46 million.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2010

REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS

74 Reports

80 Notes to the Consolidated Financial

Management’s Responsibility
for Financial Reporting

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

76 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

Statements

Note 1

Note 2

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

122 Note 23

Income taxes

Note 4

Loans

123 Note 24

Earnings per share

100 Note 5

Securitizations

123 Note 25

103 Note 6

104 Note 7

Variable interest
entities

Derivative
instruments and
hedging activities

109 Note 8

Premises and
equipment

109 Note 9

109 Note 10

110 Note 11

RBC Dexia Investor
Services joint
venture

Goodwill and other
Intangibles

Significant acquis-
itions and
dispositions

126 Note 26

Guarantees,
commitments and
contingencies

Contractual
repricing and
maturity schedule

127 Note 27

Related party
transactions

128 Note 28

130 Note 29

Results by business
and geographic
segment

Nature and extent
of risks arising from
financial instru-
ments

130 Note 30

Capital
management

110 Note 12 Other assets

131 Note 31

111 Note 13

Deposits

111 Note 14

Insurance

Reconciliation
of the application of
Canadian and
United States
generally accepted
accounting
principles

112 Note 15 Other liabilities

150 Note 32

Parent company
information

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

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

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
Board for approval. Other key responsibilities of the Audit Committee

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, 2010 and 2009 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, 2010. 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.

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 2, 2010

In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the Bank as at
October 31, 2010 and 2009 and the results of its operations and its
cash flows for each of the years in the three year period ended
October 31, 2010 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, 2010
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 2, 2010
expressed an unqualified opinion on the Bank’s internal control over
financial reporting.

Deloitte & Touche LLP
Independent Registered Chartered Accountant
Licensed Public Accountants

Toronto, Canada
December 2, 2010

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, 19, 20, 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 2, 2010, 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 2, 2010

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

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

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, 2010 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

procedures may deteriorate.

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, 2010, 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, 2010, 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, 2010.

The internal control over financial reporting of RBC as of
October 31, 2010 has been audited by Deloitte & Touche LLP,
Independent Registered Chartered Accountants, who also audited our
Consolidated Financial Statements for the year ended October 31,
2010, 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 2, 2010

preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of
the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely 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,
2010 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, 2010 of the Bank and our report dated December 2, 2010
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 2, 2010

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Consolidated Balance Sheets

As of 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 (Note 4 and 5)

Retail
Wholesale

Allowance for loan losses

Other

Customers’ liability under acceptances
Derivatives (Note 7)
Premises and equipment, net (Note 8)
Goodwill (Note 10)
Other intangibles (Note 10)
Other assets (Note 12)

Liabilities and shareholders’ equity

Deposits (Note 13)

Personal
Business and government
Bank

Other

Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivatives (Note 7)
Insurance claims and policy benefit liabilities (Note 14)
Other liabilities (Note 15)

Subordinated debentures (Note 16)

Trust capital securities (Note 17)

Non-controlling interest in subsidiaries (Note 19)

Shareholders’ equity (Note 18)

Preferred shares
Common shares (shares issued – 1,424,921,817 and 1,417,609,720)
Contributed surplus
Treasury shares – preferred (shares held – 86,400 and 64,600)
Treasury shares – common (shares held – 1,719,092 and 2,126,699)
Retained earnings
Accumulated other comprehensive (loss)

2010

2009

9,330 $

13,252

149,555
43,776

193,331

72,698

221,828
73,375

295,203

8,353

8,923

140,062
46,210

186,272

41,580

205,224
78,927

284,151

(2,997)

(3,188)

292,206

280,963

7,371
106,246
2,503
8,064
1,930
19,275

9,024
92,173
2,367
8,368
2,033
14,933

145,389
726,206 $

128,898

654,989

161,693 $
247,197
24,143

433,033

7,371
46,597
41,582
108,910
10,750
29,348

244,558

6,681

727

2,256

4,813
13,378
236
(2)
(81)
22,706
(2,099)

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

Gordon M. Nixon
President and Chief Executive Officer

Victor L. Young
Director

38,951
726,206 $

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

Consolidated Statements of Income

For the year ended October 31 (C$ millions)

Interest income

Loans
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits with banks

Interest expense

Deposits
Other liabilities
Subordinated debentures

Net interest income

Non-interest income

Insurance premiums, investment and fee income
Trading revenue
Investment management and custodial fees
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Securitization revenue (Note 5)
Net gain (loss) 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 (Note 20 and 21)
Equipment
Occupancy
Communications
Professional fees
Outsourced item processing
Amortization of other intangibles (Note 10)
Other

Goodwill impairment charge (Note 10)

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)

Certain comparative information has been reclassified. Refer to Note 1.

2010

2009 (1)

2008 (1)

13,370 $
4,770
474
59

18,673

13,539 $
5,946
931
162

20,578

5,091
2,298
307

7,696

6,762
1,925
350

9,037

10,977

11,541

6,174
1,315
1,778
1,571
1,271
1,453
1,193
614
524
627
764
34
35

17,353

28,330

1,861

5,108

8,824
1,000
1,053
813
644
290
500
1,269

5,718
2,750
1,619
1,400
1,358
1,449
1,050
638
732
530
1,169
(630)
(218)

17,565

29,106

3,413

4,609

8,978
1,025
1,045
761
559
301
462
1,427

14,989
6,662
2,889
498

25,038

12,158
3,472
354

15,984

9,054

2,609
(81)
1,759
1,561
1,377
1,367
875
646
648
415
461
(617)
1,508

12,528

21,582

1,595

1,631

7,779
934
926
749
562
341
356
704

14,393

14,558

12,351

–

6,968
1,646

5,322

99
5,223 $

(258)
4,965 $

1,000

5,526
1,568

3,958

100

3,858 $

(233)

3,625 $

–

6,005
1,369

4,636

4,555

(101)

4,454

1,420,719

1,398,675

3.49 $

2.59 $

1,433,754

1,412,126

3.46 $

2.00 $

2.57 $

2.00 $

1,305,706
3.41

1,319,744
3.38

2.00

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

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 (gains) 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 (gains) losses on foreign currency translation to income
Net foreign currency translation gains (losses) from hedging activities
Foreign currency translation adjustments
Net (losses) gains on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Net change in cash flow hedges
Other comprehensive (loss) income

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
Balance at end of year

Common shares (Note 18)

Balance at beginning of year
Issued
Purchased for cancellation
Balance at end of year

Contributed surplus

Balance at beginning of year
Renounced stock appreciation rights
Stock-based compensation awards
Other
Balance at end of year

Treasury shares – preferred (Note 18)
Balance at beginning of year
Sales
Purchases
Balance at end of year

Treasury shares – common (Note 18)
Balance at beginning of year
Sales
Purchases
Balance at end of year

Retained earnings

Balance at beginning of year
Transition adjustment – Financial instruments (1)
Net income
Preferred share dividends (Note 18)
Common share dividends (Note 18)
Premium paid on common shares purchased for cancellation
Issuance costs and other
Balance at end of year

2010

2009

2008

5,223 $

3,858 $

4,555

441
(261)
180
(1,785)
(5)
1,479
(311)
(334)
82
(252)
(383)
4,840 $

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

2010

2009

2008

4,813 $
–
4,813

2,663 $
2,150
4,813

2,050
613
2,663

13,075
303
–
13,378

10,384
2,691
–
13,075

7,300
3,090
(6)
10,384

246
–
(9)
(1)
236

(2)
8
(8)
(2)

(95)
64
(50)
(81)

20,585
–
5,223
(258)
(2,843)
–
(1)
22,706

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

(45)
(1,068)
(802)
(443)
(2,358)
17,458
30,638

Accumulated other comprehensive (loss) income

Transition adjustment – Financial instruments (1)
Unrealized gains and losses on available-for-sale securities
Unrealized foreign currency translation gains and losses, net of hedging activities
Gains and losses on derivatives designated as cash flow hedges
Balance at end of year

Retained earnings and Accumulated other comprehensive income
Shareholders’ equity at end of year

59
104
(1,685)
(577)
(2,099)
20,607
38,951 $

59
(76)
(1,374)
(325)
(1,716)
18,869
36,906 $

(1)

Transition adjustment relates to amendments to CICA Handbook Section 3855 that were effective November 1, 2008. Refer to Note 1 to our 2009 Annual Consolidated Financial Statements
for details.

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

Consolidated Statements of Cash Flows

For the year ended October 31 (C$ millions)

Cash flows from operating activities

Net income
Adjustments to determine net cash from (used in) operating activities

Provision for credit losses
Depreciation
Future income taxes
Impairment of goodwill and amortization of other intangibles
Loss (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 (used in) from investing activities

Cash flows from financing activities

Change in deposits
Issue of RBC Trust capital Securities (RBC TruCS)
Redemption of RBC Trust Capital securities (RBC TruCS)
Issue of subordinated debentures
Repayment of subordinated debentures
Issue of preferred shares
Redemption of preferred shares for cancellation
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 from (used in) financing activities

Effect of exchange rate changes on cash and due from banks

Net change in cash and due from banks
Cash and due from banks at beginning of year

Cash and due from banks at end of period

Supplemental disclosure of cash flow information

Amount of interest paid in year
Amount of income taxes (recovery) paid in year

2010

2009

2008

5,223

3,858

4,555

1,861
410
77
500
125
(163)
(308)
267

1,828
(44)
(1,789)
(14,073)
24,520
(4,124)
(2,592)
(424)

11,294

(4,330)
(29,345)
8,473
11,620
34,143
(39,863)
(1,072)
(31,118)
(82)

(51,574)

34,729
–
(650)
1,500
(1,305)
–
–
125
–
72
(58)
(2,934)
–
(93)

6,432
5,238
–
(1,631)

41,425

(168)

977
8,353

9,330

7,790
4,654

$
$

3,413
389
(97)
1,462
5
(934)
(17)
657

1,537
(147)
3,546
43,961
(44,315)
(11,382)
2,396
3,071

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
(455)
356
(17)
(207)
1
631

102
164
(2,705)
(69,527)
56,685
24,966
(552)
(4,529)

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
(500)
613
(300)
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

$
$

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

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 recorded as Other Non-interest income. The propor-
tionate 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.

Change in financial statement presentation
During the year, we reclassified the income statement impact of
certain financial instruments held by Corporate Support for funding
purposes in order to better reflect management’s intention for those
instruments. The following table presents the increase (decrease) to
the line items affected by the reclassification:

Interest income – Loans
Non-interest income – Trading revenue
Non-interest income – Other

2009 2008

35 $
79
(114)

6
15
(21)

Significant accounting changes
No significant accounting changes were effective for us in 2010.

Financial Instruments – Recognition and measurement
Securities
Securities are classified, based on management’s intentions, as
held-for-trading, available-for-sale, held-to-maturity or loans and
receivables.

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

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

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; (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, and
(iii) loans and receivables for which we may not recover substantially
all of our initial investment, other than because of credit deterio-
ration. 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 Other
comprehensive income (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-
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. Impairments are assessed using the same impairment model
for loans in accordance with the Canadian Institute of Chartered
Accountant’s (CICA) Handbook Section 3855. 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) there is an embedded derivative in the 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.

To determine the fair value adjustments on our 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.

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
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 SPE (QSPE) 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 for accounting purposes and the assets
remain on our Consolidated Balance Sheets, with the net proceeds
recognized as a liability.

In the case of with loan securitizations, we generally sell loans or

package mortgage-backed securities (MBS) to SPEs or trusts that
issue securities to investors, but occasionally sell to third-party
investors through dealers.

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 – Acceptance 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 – Customers’ liability under
acceptances. 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 a 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 conditions requiring separation are
met.

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

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 1 Significant accounting policies and estimates (continued)

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 in the Hedge accounting section below.

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.

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
are amortized to net income over the remaining life of the hedged
items.

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 accumulated in Accumulated other comprehensive income
(AOCI) are reclassified to Net interest income during the periods when
the variability in the cash flows of the hedged item affects Net interest
income. Gains and losses on derivatives are reclassified immediately
to Net income when the hedged item is sold or terminated early. We
predominantly use interest rate swaps to hedge the variability in cash
flows related to a variable rate asset or liability.

Net investment hedges
In hedging a foreign currency exposure of a net investment in a self-
sustaining foreign operation, the effective portion of foreign exchange
gains and losses on the hedging instruments, net of applicable taxes,
is recognized in OCI and the ineffective portion is recognized in
Non-interest income. The amounts accumulated in AOCI are recog-
nized 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

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

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 generally recorded at amortized cost net of an allowance for
loan losses and unearned income which comprises unearned interest
and unamortized loan fees. Loans for which we have elected the fair
value option or which we intend to sell immediately or in the near
term must be classified as held-for-trading and carried at fair value.
Non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market may also be classified as
loans and receivables.

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
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 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. Refer to Note 20. These plans include

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 1 Significant accounting policies and estimates (continued)

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.

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.

Actuarial valuations for the defined benefit plans are performed

Our contributions to the employee savings and share ownership

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 accumulated 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.

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-

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

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, causing 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
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.

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

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

Note 2 Fair value of financial instruments

period, if reasonably assured of renewal, up to a maximum of 10
years. Gains and losses on disposal are recorded in Non-interest
income. Premises and equipment are tested for recoverability
whenever changes in circumstances indicate that a potential
impairment has occurred. An impairment loss is recorded when the
projected discounted cash flows from the use of premises and
equipment is less than their carrying value.

Earnings per share
Earnings per share is computed by dividing Net income available to
common shareholders by the weighted average number of common
shares outstanding for the period, net of treasury shares. Net income
available to common shareholders is determined after deducting
dividend entitlements of preferred shareholders and any gain (loss)
on redemption of preferred shares net of related income taxes.
Diluted earnings per share reflects the potential dilution that could
occur if additional common shares are assumed to be issued under
securities or contracts that entitle their holders to obtain common
shares in the future, to the extent such entitlement is not subject to
unresolved contingencies. The number of additional shares for
inclusion in diluted earnings per share calculations is determined
using the treasury stock method. Under this method, stock options
whose exercise price is less than the average market price of our
common shares are assumed to be exercised and the proceeds are
used to repurchase common shares at the average market price for
the period. The incremental number of common shares issued under
stock options and repurchased from proceeds is included in the
calculation of diluted earnings per share.

Future accounting changes
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 appli-
cable to us on November 1, 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 International Financial
Reporting Standards (IFRS) over a transition period expected to end in
2011. We will begin reporting our financial statements in accordance
with IFRS on November 1, 2011.

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. For
financial assets and liabilities on our Consolidated Balance Sheets,
we use current bid or asking price, respectively, as the quoted price.
For financial assets and liabilities to be acquired, we use current
asking or bid price, respectively, to value them. In the absence of an
active market, we determine fair values based on quoted prices for
instruments with similar characteristics and risk profiles or where
appropriate a valuation model. 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.

Valuation adjustments are required to be made in certain
circumstances to determine fair value of the financial instrument. 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

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 2 Fair value of financial instruments (continued)

estimated fair value due to insufficient liquidity in the market over a
short period of time.

between market factors such as foreign exchange rates, interest rates
and equity prices.

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
are consistently applied and periodically reviewed by Group Risk
Management and Finance.

Valuation techniques and inputs
Trading and available-for-sale securities and derivative-related assets
represent 84% of the total fair-value assets, and deposits designated
as held-for-trading and derivative-related liabilities represent 72% 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 debt and equity securities.

For debt securities, equity securities and exchange traded
derivatives, the fair value of these instruments is based on quoted
market prices from an exchange, dealer, broker, industry group or
pricing service, when available. When quoted market prices are not
available, the fair value is determined by reference to quoted market
prices for similar instruments, adjusted as appropriate for the specific
circumstances of the instruments.

When quoted market prices for identical or similar instruments

are not available, instrument fair value is determined using valuation
models based on the calculation of the present value of the
instrument’s expected future cash flows. The inputs to these
valuation models are derived from observable market data and,
where relevant, assumptions in respect of unobservable inputs.

All of our derivatives transactions are accounted for on a fair
value basis. Over-the-counter (non-exchange traded) derivatives are
valued using valuation models. Valuation models calculate the
present value of expected future cash flows using an arbitrage-free
principle. The modeling approaches for most vanilla derivative
products are standard in the industry. When possible, inputs to
valuation models are determined from observable market data,
including prices available from exchanges, dealers, brokers or pricing
services.

Certain inputs may not be directly observable and these may be
derived from observable prices using model calibration techniques,
historical data or other sources. Examples of observable inputs
include foreign exchange spot and forward rates, benchmark interest
rate curves and volatilities for commonly traded option products.
Examples of inputs that may be unobservable include some or all of
the volatility surfaces of option products, and correlations of or

Certificates of deposits, term deposits, bearer deposit notes and

GICs designated as held-for-trading are valued by discounting future
contractual cash flows at the discount rates. Discount rates are
derived from our observed liability issuance and trading, and trading
of comparable banks’ liabilities and issuance auctions. Valuation
methods and inputs used in measuring changes in fair value
attributable to changes in our credit spreads 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
inception is deferred and is included 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
and interest rate structured notes. The following table summarizes
changes in the aggregate amount of deferred unrealized gains at
inception for our financial instruments.

Deferred unrealized gains or losses at inception

2010

2009

2008

Deferred unrealized gains not yet recognized in net

income, as at beginning of period

Less: Adjustments (1)
Adjusted balance, as at beginning of the year
Add: Deferred unrealized gains (losses) arising

during the period

Less: Deferred gains reclassified to net income

during the period

Deferred unrealized gains, as at end of period

46
–
46

5
56

$ 198
(130)
68

$ 186
–
$ 186

(5)

17
46

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. There was no material impact on the results of operation for 2009
due to this change in accounting estimate.

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

Carrying value and fair value of the 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

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

131,211
–
131,211

–

–
–
–

106,246
–

–
–
–
–

46,597

–
108,910
(509)
–
–

18,344
–
18,344

51,713

–
2,899
2,899

–
296

3,237
62,654
9,479
75,370

–

26,242
–
127
119
–

–
42,467
42,467

–

–
–
–

–
–

–
–
–
–

–

–
–
–
–
–

Financial assets
Securities
Trading
Available-for-sale
Total securities

Assets purchased under reverse repurchase

agreements and securities borrowed

Loans

Retail
Wholesale
Total loans

Other

Derivatives
Other assets

Financial liabilities
Deposits

Personal
Business and government (2)
Bank (3)
Total deposits

Other

Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned

Derivatives (4)
Other liabilities

Subordinated debentures
Trust capital securities

2010

Carrying
value

Fair value

Loans and
receivables
and non-
trading
liabilities

–
–
–

20,985

–
–
–

20,985

$ 220,321
68,986
$ 289,307

$ 218,477
67,544
$ 286,021

–
19,585

$ 158,456
184,543
14,664
$ 357,663

$ 159,255
183,892
14,664
$ 357,811

–

15,340
–
30,598
6,562
727

15,340
–
30,833
6,488
753

Loans and
receivables
and non-
trading
liabilities

Available-
for-sale
instruments
measured
at cost (1)

Total
carrying
amount

Total fair
value

–
1,309
1,309

$149,555
43,776
$193,331

–

–
–
–

–
–

–
–
–
–

–

–
–
–
–
–

$ 72,698

$220,321
71,885
$292,206

$218,477
70,443
$288,920

$106,246
19,881

$161,693
247,197
24,143
$433,033

$162,492
246,546
24,143
$433,181

$ 46,597

41,582
108,910
30,216
6,681
727

41,582
108,910
30,451
6,607
753

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

Includes $225 million of our held-to-maturity investments which are carried at amortized cost.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.
Includes stable value contracts on $170 million of bank-owned life insurance policies and $2 million of 401(k) plans.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 2 Fair value of financial instruments (continued)

Carrying value and fair value of

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

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

–

–
–
–

–
–

–
–
–
–

–

–
–
–
–
–

Financial assets
Securities
Trading
Available-for-sale
Total securities

Assets purchased under reverse repurchase

agreements and securities borrowed

Loans

Retail
Wholesale
Total loans

Other

Derivatives
Other assets

Financial liabilities
Deposits

Personal
Business and government (2)
Bank (3)
Total deposits

Other

Obligations related to securities sold short
Obligations related to assets sold under repurchase

agreements and securities loaned

Derivatives (4)
Other liabilities

Subordinated debentures
Trust capital securities

2009

Carrying
value

Fair value

Loans and
receivables
and non-
trading
liabilities

–
–
–

22,669

–
–
–

22,669

$ 203,856
74,289
$ 278,145

$ 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

Loans and
receivables
and non-
trading
liabilities

Available-
for-sale
instruments
measured
at cost (1)

Total
carrying
amount

Total
fair
value

–
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)

Includes $156 million of our held-to-maturity investments which are carried at amortized cost.
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.

Financial instruments designated as held-for-trading using the fair
value option
The following table presents information on loans and receivables
designated as held-for-trading using the fair value option, the
maximum exposure to credit risk, the extent to which the risk is
mitigated by credit derivatives and similar instruments, and changes

in the fair value of these assets. 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
value of
loans and
receivables
designated
as held-for-
trading

Maximum
exposure to
credit risk

Change in fair
value since
November 1,
2009
attributable to
changes in
credit risk

2010

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,
2009

Cumulative
change in fair
value of credit
derivatives
or similar
instruments (1)

6,193 $

6,193

–

51,713
2,899

60,805 $ 60,805

–
(51)

(51)

–
(180)

(180)

–
346

346

–
(4)

(4)

–

–
(2)

(2)

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.

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

Carrying
value of
loans and
receivables
designated
as held-for-
trading
2,773

Maximum
exposure to
credit risk
$ 2,773

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)
–
$

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.

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
values of the instruments’ contractual cash flows discounted at the
appropriate market interest rates. Appropriate market rates comprise
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 instruments’ 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.

2010

Contractual
maturity
amount

3,300
62,597
9,479

Carrying
value

3,237
62,654
9,479

Difference
between
carrying
value and
contractual
maturity
amount

Changes in fair
value since
November 1, 2009
attributable to
changes in RBC
credit spread

Cumulative
change in fair
value attributable
to changes in
RBC credit
spread (1)

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

Other liabilities
Subordinated debentures

Total

75,376

75,370

(6)

26,243
127
127

26,242
127
119

(1)
–
(8)

(63)
57
–

(13)
(20)
1

(32)

–
–
(6)

(19)
(77)
–

(96)

–
–
(18)

101,873

101,858

(15)

(38)

(114)

(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

Other liabilities
Subordinated debentures

Total

2009

Contractual
maturity
amount

Carrying
value

Difference
between
carrying
value and
contractual
maturity
amount

Changes in fair
value since
November 1, 2008
attributable to
changes in RBC
credit spread

Cumulative
change in fair
value attributable
to changes in
RBC credit
spread (1)

2,605
40,167
10,880

2,605
40,335
10,880

53,652

53,820

21,626
240
120

21,628
240
110

–
168
–

168

2
–
(10)

40
507
3

550

–
–
36

75,638

75,798

160

586

(6)
(57)
(1)

(64)

–
–
(12)

(76)

(1)
(2)
(3)

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 2 Fair value of financial instruments (continued)

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, Financial Instruments – Disclosures. Section 3862
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 classification
of a financial instrument in the hierarchy is based upon the lowest
level of input that is significant to the measurement of fair value.

As at October 31, 2010

As at October 31, 2009

Fair value
measurements using (1)
Level 1

Level 2 Level 3

Total
gross fair
value

Netting
adjustments (2)

Assets/
liabilities
at fair
value

Fair value
measurements using (1)

Level 1

Level 2

Level 3

Total
gross fair
value

Netting
adjustments (2)

Assets/
liabilities
at fair
value

– $ 6,193 $

– $

2,773 $

– $

2,773 $

– $ 2,773

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

–
–

–
–
–

–
–
30
35,767

29,337
7,243

13,637
12,114
10

–
276
43,529
221

14
5

41
42
975

2,460
541
771
2,542

29,351
7,248

13,678
12,156
985

2,460
817
44,330
38,530

$35,797 $106,367 $ 7,391 $149,555 $

–
–

–
–
–

29,351
7,248

13,678
12,156
985

–
–

–
–
–

25,269
5,073

13,289
8,033
20

5
54

9
–
1,052

25,274
5,127

13,298
8,033
1,072

2,460
817
44,330
38,530

–
–
–
–
– $149,555 $ 34,313 $ 98,029 $ 7,720 $ 140,062 $

–
–
–
34,313

–
211
46,015
119

3,074
532
46,318
37,334

3,074
321
303
2,902

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 (5)
Non–CDO securities

Corporate debt and other debt
Equities
Loan substitute securities

Assets purchased under reverse
repurchase agreements and
securities borrowed

Loans
Other

Derivatives

Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments determined

on a pooled basis
Total gross derivative
Netting adjustments (2)
Total derivatives

Other assets

–
–

14,685
1,536

–
–

14,685
1,536

–
1,450
–

–
–
378
173
–

3,246
3,630
–

9
2,379
7,776
144
192

1,697
–
1,027

215
896
2,635
399
–

4,943
5,080
1,027

224
3,275
10,789
716
192

$ 2,001 $ 33,597 $ 6,869 $ 42,467 $

–
–

–
–
–

14,685
1,536

4,943
5,080
1,027

–
237

–
908
–

12,161
897

3,435
2,622
4

–
–

12,161
1,134

2,358
–
1,848

5,793
3,530
1,852

224
3,275
10,789
716
192

–
–
–
–
–
– $ 42,467 $ 1,859 $ 33,268 $ 9,723 $ 44,850 $

–
3,050
10,802
147
150

222
4,205
14,559
1,244
150

222
1,155
3,580
560
–

–
–
177
537
–

–
–

51,713
2,307

–
592

51,713
2,899

–
–

51,713
2,899

–
–

18,911
2,441

–
377

18,911
2,818

3
–
–
1,960

66,803
29,619
965
2,207

780
101
1,038
3,743

67,586
29,720
2,003
7,910

(1)
1,962

(228)
99,366

(490)

(719)
5,172 106,500

1,962
286

99,366
10

5,172 106,500
296

–

24
1
–
3,394

53,070
25,331
2,865
2,869

842
236
2,455
1,987

53,936
25,568
5,320
8,250

(6)
3,413

(396)
83,739

(231)
5,289

(633)
92,441

3,413
244

83,739
–

5,289
–

92,441
244

(254)
(254) 106,246
296

–

$40,046 $299,553 $20,024 $359,623 $

(254) $359,369 $ 39,829 $ 239,161 $ 23,109 $ 302,099 $

(268)
(268)
–

92,173
244
(268) $301,831

(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 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, 2010 residential and commercial MBS included in Trading securities were $11,995 million and $194 million, respectively (2009 – $12,414 million and $185 million,
respectively), and in Available-for-sale securities, $8,720 million and $152 million, respectively (2009 – $8,454 million and $213 million, respectively).
OECD stands for Organisation for Economic Co-operation and Development.
CDOs stand for Collateralized Debt Obligations.
Excludes $1,309 million of Available-for-sale and held-to-maturity securities (2009 – $1,360 million) that are carried at cost.

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

–
–

–
–
–

25,274
5,127

13,298
8,033
1,072

3,074
–
532
–
46,318
–
37,334
–
– $140,062

–
–

–
–
–

12,161
1,134

5,793
3,530
1,852

222
–
4,205
–
14,559
–
1,244
–
–
150
– $ 44,850

–
–

18,911
2,818

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

Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Total gross derivative
Netting adjustments (2)
Total derivatives

Other liabilities
Subordinated debentures

As at October 31, 2010

As at October 31, 2009

Fair value
measurements using (1)
Level 1

Level 2 Level 3

Total
gross fair
value

Netting
adjustments (2)

Assets/
liabilities
at fair
value

Fair value
measurements using (1)

Level 1

Level 2

Level 3

Total
gross fair
value

Netting
adjustments (2)

Assets/
liabilities
at fair
value

– $
–
–

– $ 3,237 $ 3,237 $

59,510
9,479

3,144
–

62,654
9,479

– $ 3,237 $
–
–

62,654
9,479

– $
–
–

– $ 2,605 $

2,605 $

35,994
10,880

4,341
–

40,335
10,880

14,780

31,577

240

46,597

–

26,242

–

26,242

1
61,683
–
34,960
–
1,112
3,742
1,203
1,204 101,497

415
62,099
27
34,987
606
1,718
10,360
5,415
6,463 109,164

1,204 101,497
–
–

–
–

6,463 109,164
(382)
119

(382)
119

–

46,597

14,006

27,203

150

41,359

26,242

–

21,628

–

21,628

18
–
–
1,350
1,368

1,368
–
–

47,688
23,983
2,863
3,290
77,824

77,824
–
–

423
16
1,555
3,472
5,466

5,466
240
110

48,129
23,999
4,418
8,112
84,658

84,658
240
110

(254)
(254) 108,910
(382)
119

–
–

$15,984 $228,305 $12,821 $257,110 $

(254) $256,856 $ 15,374 $173,529 $ 12,912 $201,815 $

– $ 2,605
40,335
–
10,880
–

–

41,359

21,628

(268)
(268)
–
–

84,390
240
110
(268) $201,547

(1)
(2)

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

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:

2010

Total
realized/
unrealized
gains
(losses)
included in
earnings (1)

Total
unrealized
gains (losses)
included in
other
comprehensive
income (2)

Sales of
assets/
settlements
of liabilities
and
others (3)

Purchases
of assets/
issuances of
liabilities

Fair value
November 1,
2009

Transfers
into
Level 3 (1)

Transfers
out of
Level 3 (1)

Fair value
October 31,
2010

Changes in
unrealized gains
(losses) included
in earnings for
assets and
liabilities for the
year ended
October 31, 2010
for positions
still held

Assets

Securities
Trading

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

5 $

54
9
–
1,052

3,074
321
303
2,902

– $
1
15
–
199

(467)
22
269
182

– $
–
(8)
–
(59)

24 $
12
70
42
2,253

(1) $
5
(32)
–
(2,458)

4 $
–
–
–
21

(18) $
(67)
(13)
–
(33)

14 $
5
41
42
975

(166)
(9)
(33)
(137)

36
4,838
3,639
714

(67)
(4,618)
(3,757)
(1,114)

50
–
512
–

–
(13)
(162)
(5)

2,460
541
771
2,542

7,720 $

221 $

(412) $ 11,628 $ (12,042) $

587 $

(311) $

7,391 $

Available-for-sale

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

Loans – Wholesale
Other

Derivatives, net of derivative related

liabilities (4)

Liabilities

Deposits

Personal
Business and government

Other

2,358 $
–
1,848

222
1,155
3,580
560

9,723 $

377 $

(9) $
–
23

–
(22)
(22)
–

(30) $

(32) $

(75) $
–
66

191 $
–
18

(768) $
1
(928)

(6)
(75)
(122)
(31)

–
60
486
45

(1)
(222)
(970)
(179)

– $

112
–

–
–
218
4

(113)
–

–
–
(535)
–

1,697 $
–
1,027

215
896
2,635
399

(243) $

800 $

(3,067) $

334 $

(648) $

6,869 $

(17) $

155 $

(244) $

467 $

(114) $

592 $

(33)

(177)

(1,057)

(114)

(35)

(48)

(1,291)

17,643 $

(898) $

(594) $ 12,645 $ (15,467) $ 1,353 $ (1,121) $ 13,561 $

(2,605) $
(4,341)

(358) $
207

61 $

212

(3,295) $
(1,407)

2,960 $
2,185

– $
–

– $ (3,237) $
–

(3,144)

Obligations related to securities sold short
Other liabilities
Subordinated debentures

(150)
(240)
(110)

83
469
(2)

2
13
(8)

(1,265)
(1)
–

1,108
141
1

(18)
–
–

–
–
–

(240)
382
(119)

(7,446) $

399 $

280 $

(5,968) $

6,395 $

(18) $

– $ (6,358) $

(1)

(2)

(3)
(4)

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 same column of the reconciliation. During the year ended October 31, 2010, there were no significant transfers into or out of Level 3.
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 $253 million for the year, excluding the translation gains or losses.
Other includes amortization of premiums or discounts recognized in net income.
Net derivatives as at October 31, 2010 included derivative assets of $5,172 million and derivative liabilities of $6,463 million.

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

–
–
8
–
91

(24)
6
336
124

541

–
–
–

–
–
–
–

–

(1,172)

(664)

(143)
50

(4)
622
(2)

523

2009

Total
realized/
unrealized
gains
(losses)
included in
earnings (1)

Total
unrealized
gains (losses)
included in
other
comprehensive
income (2)

Purchases
of assets/
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

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

Available-for-sale

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

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 $ (1,035) $
–
69

(411)
(895)

9
(1)

797 $
–
212

(799) $
–
–

2,358 $
–
1,848

43
(102)
(306)
(67)

–
725
569
626

(57)
(1,045)
(343)
(60)

–
9
44
1

–
–
(31)
(18)

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 (4)

(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)

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.
Net derivatives as at October 31, 2009 included derivative assets of $5,289 million and derivative liabilities of $5,466 million.

Level 3 financial instruments include hedge fund investments with
certain redemption restrictions, certain structured debt securities
(asset-backed securities (ABS) including Collateralized Loan Obliga-
tions and CDOs, auction-rate securities (ARS) 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
derivatives, equity-linked and interest-rate-linked structured notes,
and deposit notes with long-dated maturities and significant
unobservable spreads.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 2 Fair value of financial instruments (continued)

Positive and negative fair value movement of Level 3 financial
instruments from using reasonably possible alternative assumptions
There may be uncertainty about valuation of Level 3 financial
instruments using valuation techniques based on assumptions that

are not supported by market observable prices or rates. The following
table summarizes the impact to fair values of Level 3 financial
instruments using reasonably possible alternative assumptions:

2010

Positive fair value
movement from
using reasonably
possible
alternative
assumptions

Negative fair value
movement from
using reasonably
possible
alternative
assumptions

Level 3 fair value

2009 (1)

Positive fair value
movement from
using reasonably
possible
alternative
assumptions

Negative fair value
movement from
using reasonably
possible
alternative
assumptions

Level 3 fair value

Securities (2)
Trading

Mortgage-backed securities
Asset-backed securities (3)
Corporate debt and other debt (3)
Equities (4)

Available-for-sale

U.S. state, municipal and agencies

debt

Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities (5)

Loans
Derivatives (3)

Total

Deposits

Derivatives
Obligations related to securities sold

short, other liabilities and
subordinated debentures (5)

975
3,001
771
2,542

1,697
1,027
1,111
2,635
399

592
5,172

19,922

(6,381)

(6,463)

37
20
16
–

25
38
17
39
–

3
197

392

–

(33)
(31)
(11)
–

(49)
(39)
(29)
(31)
–

(18)
(173)

(414)

(10)

(86)

1,052
3,395
303
2,902

2,358
1,848
1,377
3,580
560

377
5,289

23,041

(6,946)

(5,466)

–

(500)

31
18
13
–

25
79
17
33
–

–
280

496

–

136

–

Total

(12,821)

106

(96)

(12,912)

136

(38)
(21)
(6)
–

(106)
(101)
(60)
(96)
–

(13)
(252)

(693)

–

(125)

–

(125)

(1)

(2)
(3)

(4)

(5)

During the year, we revisited the scope and methodologies for calculating the reasonably possible alternative assumptions. As a result, the comparatives have been prepared on this basis
and thus, are different from those previously reported.
Exclude Securities – Trading Canadian government debt, U.S. state, municipal and agencies debt, and Other OECD government debt as their Level 3 balances were not material for both years.
The sensitivity of our MBIA asset, which is included in Derivatives (Assets), arises from the variability of the underlying assets which are included in Asset-backed securities and Corporate
debt and other debt. The fair value movements in these assets from using reasonably possible alternative assumptions have been reported on a net basis in Derivatives (Assets).
Include primarily hedge funds units to which we have not applied another reasonably possible alternative assumption as the fair value movements of the hedge funds units and the
associated client hedges in the Derivatives (Liability) would be symmetrical.
Positive or negative fair value movement from using reasonably possible alternative assumptions is not material.

The fair value of Level 3 financial instruments is in whole or in part
based on unobservable inputs. In preparing the financial statements,
appropriate levels for these unobservable input parameters are
chosen so that they are consistent with prevailing market evidence or
management judgment. The effects of applying other reasonably
possible alternative assumptions to the Level 3 asset positions would
be an increase of $392 million and a reduction of $414 million in fair
value, of which $119 million and $148 million would be recorded in
Accumulated other comprehensive income, and to the Level 3 liability
positions a decrease of $106 million and an increase of $96 million in
fair value.

This sensitivity disclosure is intended to illustrate the potential
impact of the relative uncertainty in the fair value of Level 3 financial
instruments. However, it is unlikely in practice that all reasonably
possible alternative assumptions would be simultaneously realized.

The following is a summary of our approach to develop
reasonably possible alternative assumptions used to determine
sensitivity. For fixed income instruments valued using pricing
services, such as mortgage-backed securities, the positive and
negative sensitivity was calculated using the high and low range of
the pricing services’ values (i.e. over and above bid-offer valuation
adjustments). Alternatively, for some corporate bonds, private
placements, ARS and non-OECD government debt, we changed the
discount margin between .1% and 1.0%, depending on the specific
reasonable range of fair value uncertainty for each particular financial

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

instrument’s market. The sensitivity for the derivative credit valuation
adjustment was calculated using a combination of changing the
credit default swap (CDS) spread by .1% and an amount for model
uncertainty. For monoline insurers, the recovery rate, CDS spread and
asset duration were all changed for negative and positive results and,
as this would impact a number of financial instrument valuations, the
sensitivities were aggregated and reported under Derivatives (Assets).
For certain structured interest rate and currency derivatives, the
model parameter uncertainties were stressed to determine the
reasonably possible alternative assumptions. For other derivative
positions, such as commodity swaps, a one-standard deviation range
of commodity prices were used on the net exposure. Similarly, a one-
standard deviation range of model inputs for equity derivatives was
applied to equity and foreign exchange volatility, dividends and
correlation to assess the reasonably possible outcome. For bank
owned life insurance contracts, the sensitivity of a range of values
was determined by adjusting the default rates, prepayments and
severity by 10%.

Certain Level 3 instruments, such as hedge funds units reported
in the Securities-Trading Equities and the associated client hedges in
Derivatives (Liability), are valued using net asset values provided by
the fund managers, and we have not applied another reasonably
possible alternative assumption to those positions as the impacted
value would be symmetrical.

Note 3 Securities

The following table presents the financial instruments we held at the end of the period, measured at carrying value:

Term to maturity (1)

Within 3
months

3 months
to 1 year

1 to 5
years

Over 5 years
to 10 years

Over
10 years

With no
specific
maturity

2010
Total

2009
Total

2,065 $
948
1,055
7
50

5,346 $ 19,296 $
1,193
2,802
20
203

3,876
4,390
337
1,836

5,195 $
2,539
2,271
205
565

4,697 $
5,122
1,638
617
421

– $
–
–
–
–

36,599 $
13,678
12,156
1,186
3,075

30,401 $
13,298
8,033
1,310
2,994

Trading account

Canadian government debt
U.S. government debt
Other OECD government debt (2)
Mortgage-backed securities (3)
Asset-backed securities (3)
Corporate debt and other debt (3)

Bankers’ acceptances
Certificates of deposit
Other (4), (5)

Equities

Available-for-sale securities (6)
Canadian government debt

Federal

Amortized cost
Fair value
Yield (7)

Provincial and municipal

Amortized cost
Fair value
Yield (7)

U.S. state, municipal and agencies debt

Amortized cost
Fair value
Yield (7)

Other OECD government debt (2)

Amortized cost
Fair value
Yield (7)

Mortgage-backed securities (4)

Amortized cost
Fair value
Yield (7)

Asset-backed securities
Amortized cost
Fair value
Yield (7)

Corporate debt and other debt (4)

Amortized cost
Fair value
Yield (7)

Equities (8)

Cost
Fair value

Loan substitute
Cost
Fair value
Yield (7)

Amortized cost
Fair value

Held-to-maturity securities (6)

Amortized cost
Fair value

508
1,645
2,569
–

8,847

145
145
.8%

22
22
1.6%

596
596
.7%

1,418
1,418
.1%

3
3
6.6%

5
5
3.7%

2,325
2,328
4.1%

–
–

–
–
–

4,514
4,517

122
122

249
1,906
5,098
–

16,817

–
500
19,860
–

50,095

–
15
5,139
–

–
43
6,717
–

15,929

19,255

–
–
82
38,530

38,612

4,331
4,374
4.4%

144
144
2.3%

1,011
1,013
1.0%

1,152
1,152
.6%

2
3
5.1%

331
336
4.6%

2,255
2,267
2.2%

–
–

–
–
–

9,231
9,562
2.5%

1,148
1,179
3.7%

354
357
1.7%

2,311
2,326
4.3%

79
82
4.5%

416
424
2.4%

3,573
3,730
2.5%

–
–

–
–
–

534
540
3.1%

32
34
5.0%

15
15
5.0%

183
184
3.9%

75
78
4.7%

1,162
1,156
.7%

655
624
5.7%

–
–

–
–
–

64
64
3.9%

147
157
4.3%

2,958
2,962
1.0%

–
–
–

920
861
3.4%

1,685
1,578
3.5%

1,908
1,782
2.6%

–
–

–
–
–

9,226
9,289

17,112
17,660

2,656
2,631

7,682
7,404

40
40

34
34

28
28

1
1

–
–
–

48
58
.1%

1,719
1,764

256
228
3.7%

2,023
2,050

–
–

2008
Total

20,911
8,728
2,488
2,476
4,551

13
2,174
39,063
42,104

757
4,109
39,465
38,530

428
1,866
44,398
37,334

149,555

140,062

122,508

14,305
14,685
3.1%

11,764
12,161
3.3%

13,123
13,544
3.6%

1,493
1,536
3.6%

4,934
4,943
1.0%

5,064
5,080
2.3%

1,079
1,027
3.6%

3,599
3,499
2.5%

10,764
10,789
3.0%

1,719
1,764

256
228
3.7%

42,213
43,551

225
225

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

Total carrying value of securities (6)

$ 13,486 $ 26,146 $ 67,789 $

18,588 $ 26,660 $ 40,662 $ 193,331 $ 186,272 $ 171,134

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

(5)
(6)
(7)
(8)

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.
2008 balances include certain held-for-trading and available-for-sale securities that were subsequently reclassified to loans on November 1, 2008 in accordance with the CICA’s amendments
to Section 3855.
Primarily comprise corporate debt and floating rate notes, supra-national debt and floating rate notes, and commercial paper.
Available-for-sale securities, including loan substitutes, are carried at fair value and held-to-maturity securities are carried at amortized cost.
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 2010

Note 3 Securities (continued)

Reclassification of financial instruments
The following table provides information regarding certain securities that we reclassified from held-for-trading to available-for-sale effective
August 1, 2008, in accordance with amendments to Sections 3855, 3861 and 3862. Refer to Note 3 to our 2009 Annual Consolidated Financial
Statements for details.

As at and for the year ended October 31, 2010

As at and for the year ended October 31, 2009

Financial assets
U.S. state, municipal and agency debt
Mortgage-backed securities (MBS)
Asset-backed securities
Corporate debt and other debt

Total
carrying
value and
fair value

Change in
fair value
during the
year (1)

1,126 $
69
748
408

2,351 $

64 $
47
(16)
32

127 $

Interest
income/gains
(losses)
recognized
in net income
during the
year (2)

Total
carrying
value and
fair value

Change in
fair value
during the
year (1)

(5) $
13
1
5

1,904 $
500
1,007
641

4,052 $

Interest
income/gains
(losses)
recognized
in net income
during the
year (2)
54
28
29
17

13 $
67
48
(2)

126 $

128

(1)
(2)

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 gain of $4 million related to securities and debt redeemed or sold during the year ended October 31, 2010 (2009 – net gain of $27 million).

Unrealized gains and losses on available-for-sale securities (1), (2)

2010

2009

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 agency debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities

$ 14,305 $
1,493
4,934
5,068
1,079

381 $
43
65
24
20

(1) $ 14,685 $ 11,764 $
–
(56)
(8)
(72)

1,536
4,943
5,084
1,027

1,104
5,781
3,517
2,057

CDOs
Non-CDO securities

Corporate debt and other debt
Equities
Loan substitute securities

220
3,379
10,985
1,719
256

12
37
273
58
–

(17)
(132)
(248)
(13)
(28)

215
3,284
11,010
1,764
228

234
4,282
14,718
2,437
256

404 $
31
129
18
24

(7) $ 12,161
1,134
(1)
5,793
(117)
3,534
(1)
1,852
(229)

11
67
382
45
–

(24)
(143)
(389)
(70)
(70)

222
4,205
14,711
2,412
186

(1)
(2)

Includes $225 million (2009 – $156 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 $148 million, $4 million, $nil and $152
million, respectively for 2010 (2009 – $224 million, $1million, $(11) million and $213 million).

$ 43,438 $

913 $

(575) $ 43,776 $ 46,150 $ 1,111 $ (1,051) $ 46,210

Realized gains and losses on available-for-sale securities (1), (2)

Realized gains
Realized losses and writedowns

Net gains (losses) on available-for-sale securities

2010

440
(399)

2009

296
(936)

(640)

2008

99
(731)

(632)

(1)
(2)

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: Realized gains –
2010 – $12 million, 2009 – $12 million, and 2008 – $1 million; Realized losses and writedowns – 2010 – $5 million, 2009 – $22 million, and 2008 – $16 million.

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

Fair value and unrealized losses position for available-for-sale securities

Canadian government debt

Federal
Provincial and municipal

U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities

CDOs
Non-CDO securities

Corporate debt and other debt
Equities
Loan substitute securities

Total temporarily impaired securities

2010 (1)

Less than 12 months

12 months or more

Total

Fair value

Unrealized
losses

Fair value

Unrealized
losses

Fair value

Unrealized
losses

510
154
832
3,119
51
–
–
1,441
2,519
35
–

8,661

1
–
13
8
3
–
–
37
76
8
–

–
–
493
–
637
–
198
843
1,230
46
192

146

$ 3,639

–
–
43
–
69
–
17
95
172
5
28

429

510
154
1,325
3,119
688
–
198
2,284
3,749
81
192

$ 12,300

1
–
56
8
72
–
17
132
248
13
28

575

(1)

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 $20 million
and $0.1 million, respectively.

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
Other OECD government debt
Mortgage-backed securities
Asset-backed securities

CDOs
Non-CDO securities

Corporate debt and other debt
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)

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.

Available-for-sale 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,
2010, our gross unrealized losses on available-for-sale securities
were $575 million (2009 – $1,051 million).

When assessing other-than-temporary impairment for debt

instruments we primarily considered counterparty ratings and
security-specific factors, including collateral, external ratings,
subordination and other market factors. For complex debt instru-
ments including U.S. non-agency MBS, ABS and other structured
products, we also 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. For U.S. non-
agency MBS, recovery rates are largely dependent upon forecasted
property prices which were assessed at the municipal level, provided
by a third-party vendor. In addition, we also consider the transaction
structure and credit enhancement for the structured securities. If the
model predicts that it is probable that we will not be able to recover
the entire principal and interest amount, we do a further review of the
security 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 the 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 suggests 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 and 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 and which have 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 $56 million (2009 – $117 million) unrealized
loss on U.S. state, municipal and agencies debt securities are related
to U.S. 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.

The MBS largely consist of U.S. non-agency Alt-A and prime
securities. The Alt-A and prime securities are high quality super senior
tranches with credit support through subordination,

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 3 Securities (continued)

overcollateralization, and excess spread. The unrealized losses of
$72 million (2009 – $229 million) are primarily on Alt-A and prime
securities reflecting the impact of the current credit spreads. The
losses on U.S. non-agency MBS are significantly lower compared to
the prior year as we exited certain positions in order to effectively
manage our exposure

ABS mainly comprise U.S. insured and uninsured student loans
U.S. ARS, CDOs and securities backed by credit card receivables. 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 $149 million (2009 – $167
million) which primarily relate to U.S. ARS and uninsured student
loans.

Corporate and other debt mainly includes certificate of deposits,

corporate debt and bonds, Non-Organization for Economic Co-operation
and Development (OECD) government securities, tender option bonds
and hybrid instruments. The Non-OECD government securities primarily
relate to Caribbean countries where we have ongoing operations. The
unrealized losses of $248 million (2009 – $389 million) are significantly
lower compared to a year ago and mainly reflect the decreasing interest
rate environment along with improved credit spreads.

Equity holdings largely comprise publicly traded common and

preferred shares. To a lesser extent, we also hold investments in
private and venture companies. As at October 31, 2010, there were
unrealized losses of $13 million, compared to unrealized losses of
$70 million a year ago due to the impairment losses recognized in
2010 in net income on certain common shares as well as fair value
improvements on equities mainly for listed common and preferred
shares. The loan substitute securities are predominantly perpetual
preferred shares of highly rated Canadian entities.

Management believes that the unrealized losses on the above-

mentioned securities as at October 31, 2010, are temporary in nature
and intends 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 and interest. The

Note 4

Loans

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. Management is of the view that there is no impairment
on held-to-maturity investments as at October 31, 2010.

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 its fair
value and the previous loss in AOCI is reclassified to net income.
During 2010, $41 million of net gains were recognized in net income
(2009 – net losses of $640 million) on available-for sale securities.
The net gains in the current year largely reflected net gains of
$309 million on the sale of certain U.S. agency MBS classified as
government and agency and listed common shares as well as gains
from capital distributions from private equities. These gains were
mainly offset by net losses of $268 million primarily on securities that
were deemed to be impaired such as corporate trust preferreds which
are included in corporate debt and other debt, certain listed common
shares and private equities and U.S. non-agency MBS. Included in
this amount is $3 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 (2009 – $21 million).

Interest and dividends on available-for-sale and held-to-maturity
securities (1), (2)

Taxable interest income
Non-taxable interest income
Dividends

2010
1,602 $
97
35
1,734 $

2009

2,362 $
110
82

2008

2,089
99
110

2,554 $

2,298

(1)

(2)

Available-for-sale securities 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 – 2010 – $640 million, 2009 – $601 million, and 2008 –
$452 million; Non-taxable interest income – 2010 – $39 million, 2009 – $33 million
and 2008 – $29 million; Dividends – 2010 – $14 million, 2009 – $15 million, and
2008 – $17 million.

2010

United
States

Other
International

2,350
8,551
220
–

11,121

20,616
233
–

20,849

31,970
(1,144)

2,418
2,332
186
–

4,936

9,216
875
980

11,071

16,007
(363)

Canada

124,064
69,291
9,704
2,712

205,771

39,015
808
1,632

41,455

247,226
(1,490)

Total

Canada

2009

United
States

Other
International

128,832
80,174
10,110
2,712

221,828

68,847
1,916
2,612

73,375

295,203
(2,997)

117,292
60,493
8,285
2,851

188,921

38,624
1,096
860

40,580

229,501
(1,474)

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)

Total

122,130
71,542
8,701
2,851

205,224

74,166
2,516
2,245

78,927

284,151
(3,188)

Retail (1)

Residential mortgages
Personal
Credit cards
Small business (2)

Wholesale (1)

Business (3), (4)
Bank (5)
Sovereign (6)

Total loans (7)
Allowance for loan losses

Total loans net of allowance for

loan losses

245,736

30,826

15,644

292,206

228,027

35,601

17,335

280,963

(1)
(2)
(3)
(4)
(5)
(6)
(7)

Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Included under Canada and U.S. for 2010 are loans totalling $nil (2009 – $1.0 billion) and $1.5 billion (2009 – $1.7 billion), respectively, to VIEs administered by us.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Loans are net of unearned income of $306 million (2009 – $229 million).

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

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, intangible assets
and securities, and (ii) recourse to the commercial real estate
properties being financed.

Loan maturities and rate sensitivity

Retail
Wholesale

Total loans
Allowance for loan losses

Total loans net of allowance for loan losses

Retail
Wholesale

Total loans
Allowance for loan losses

Total loans net of allowance for loan losses

2010

Maturity term (1)

Rate sensitivity

Under
1 year (2), (3)

95,579 $
39,351

1 to 5
years
103,183 $
20,818

Over 5
years
23,066 $
13,206

134,930 $

124,001 $

36,272 $

–

Total
221,828 $

73,375

295,203 $
(2,997)

Floating
112,263 $
40,101

Fixed
Rate
106,781 $
32,778

152,364 $

139,559 $

–

Non-rate-
sensitive

2,784 $
496

3,280 $
–

Total
221,828
73,375

295,203
(2,997)

134,930 $

124,001 $

36,272 $

292,206 $

152,364 $

139,559 $

3,280 $

292,206

2009

Maturity term (1)

Rate sensitivity

Under
1 year (2), (3)

99,558 $
45,922

1 to 5
years
87,956 $
23,148

Over 5
years
17,710 $
9,857

145,480 $

111,104 $

27,567 $

–

Total
205,224 $

78,927

284,151 $
(3,188)

Floating
106,627 $
47,756

Fixed
Rate
96,175 $
30,497

154,383 $

126,672 $

–

Non-rate-
sensitive

2,422 $
674

3,096 $
–

Total
205,224
78,927

284,151
(3,188)

145,480 $

111,104 $

27,567 $

280,963 $

154,383 $

126,672 $

3,096 $

280,963

(1)
(2)
(3)

Generally, based on the earlier of contractual repricing or maturity date.
Included in Wholesale are loans totalling $1.5 billion (2009 – $2.7 billion) 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.

During the year ended October 31, 2010, we acquired $336 million of assets in respect of problem loans (2009 – $1,658 million). The related
reduction in the Allowance for credit losses was $331 million (2009 – $156 million).

Allowance for loan losses and impaired loans

2010

Balance at
beginning
of year

Write-
offs

Recoveries

Provision
for credit
losses

Other
adjustments (1)

Balance
at end
of year

Retail

Residential mortgages
Personal
Credit cards
Small business (2)

Wholesale

Business (3)
Bank (4)
Sovereign (5)

Specific allowances

Retail

Residential mortgages
Personal
Credit cards
Small business (2)

Wholesale

Business (3)
Bank (4)
Sovereign (5)

Allowance for off-balance sheet and other items (6)

General allowance (6)

Total allowance for credit losses
Allowance for off-balance sheet and other items (7)

Total allowance for loan losses

54
197
–
22

273

976
20
10

(46) $

(690)
(477)
(56)

2
91
64
7

60
595
413
45

$(1,269) $

164

$ 1,113

$ (949) $
–
–

72
–
–

707
15
–

722

$ 1,006

$ (949) $

$ 1,279

$(2,218) $

236

$ 1,835

50
671
327
47

$ 1,095

814
–
–

814

114

$ 2,023

–
–
–
–

–

–
–
–

–

–
–
–
–

–

–
–
–

–

30
49
7
–

(58) $

–
–

(58) $

(2) $

$ 3,302
(114)

$(2,218) $
–

$ 3,188

$(2,218) $

236
–

236

$ 1,861
2

$ 1,863

2009

Balance
at end
of year

54
197
–
22

7
(11)
–
–

77
182
–
18

(4) $ 277

$ 273

(15) $ 791
34
9

(1)
(1)

$ 976
20
10

(17) $ 834

$1,006

(21) $1,111

$1,279

(3) $

(11)
50
13

77
709
384
60

50
671
327
47

$1,230

$1,095

(100) $ 656
–
–

–
–

$ 814
–
–

(100) $ 656

$ 814

(13) $

$ 114

(64) $1,985

$2,023

(85) $3,096
(99)
13

$3,302
(114)

(72) $2,997

$3,188

(1)

(2)
(3)

(4)
(5)
(6)
(7)

Primarily represents; (i) the translation impact of foreign currency-denominated allowance for loan losses and (ii) a reclassification of $30 million of the general allowance to specific
allowance to more appropriately reflect the nature of these provisions.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis. Includes $2 million (2009 – $2 million) of provisions related to loans extended under liquidity facilities drawn on by
RBC-administered multi-seller asset-backed commercial paper conduit programs.
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.
Includes $99 million related to off-balance sheet and other items (2009 – $114 million).
The allowance for off-balance sheet is reported separately under Other liabilities.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

Note 4 Loans (continued)

Net interest income after provision for credit losses

Net interest income
Provision for credit losses

Net interest income after

provision for credit losses

Loans past due but not impaired

2010

2009

2008

10,977
1,861

11,541
3,413

9,054
1,595

9,116

8,128

7,459

A loan is considered past due when a counterparty has not made a
payment by the contractual due date. The following table presents the
carrying value of loans that are past due but not classified as
impaired because they are either (i) less than 90 days past due, or
(ii) fully secured and collection efforts are reasonably expected to
result in repayment. Credit card balances are written off when a
payment is 180 days in arrears.

Retail
Wholesale

Total

Impaired loans (1)

Retail

Residential mortgages
Personal
Small business (2)

Wholesale

Business (3)
Sovereign (4)
Bank (5)

Total

2010

1-29 days
2,641
1,206

30-89 days
$ 1,239
496

90 days
and greater
184
$
18

2009

Total
$ 4,064
1,720

1-29 days
$ 2,841
1,313

30-89 days
$ 1,359
563

90 days
and greater
323
$
36

Total
$ 4,523
1,912

3,847

$ 1,735

202

$ 5,784

$ 4,154

$ 1,922

359

$ 6,435

2010

Specific
allowances

(77)
(182)
(18)
(277)

(791)
(9)
(34)
$
(834)
$ (1,111)

Net

731
201
31
963

2,925
–
–
2,925
3,888

$
$

2009

Net

587
212
37
836

3,300
–
42
3,342
4,178

$
$

Gross

808
383
49
1,240

3,716
9
34
3,759
4,999

$
$

(1)
(2)
(3)

(4)
(5)

Average balance of gross impaired loans for the year was $5.1 billion (2009 – $4.6 billion).
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 $57 million (2009 – $65 million) and $55 million (2009 – $63 million),
respectively, related to loans extended under liquidity facilities drawn on by RBC-administered multi-seller asset-backed commercial paper conduit programs.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Bank refers primarily to regulated deposit-taking institutions and securities firms.

Note 5

Securitizations

Securitization activities by major product type
We periodically securitize our credit card receivables, residential
mortgage loans and we participate in bond securitization 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 Available-for-sale (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. We may own some senior securities as investments or for
market-making activities and retain a cash reserve account from time
to time. The subordinated securities and senior securities owned by
us represent approximately 4.5% and 5.98% of the total securities
issued by the QSPE as at October 31, 2010, respectively. The
subordinated securities 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.

Canadian residential mortgage loans
We securitize insured Canadian residential mortgage loans through
the creation of MBS pools under the NHA MBS program and sell them
to third party investors, or pre-dominantly to a government sponsored
trust under the Canada Mortgage Bond (CMB) program. The trust
periodically issues CMB, which are guaranteed by the government,
and sells them to third-party investors. Proceeds of the CMB
issuances are used by the trust to purchase the MBS pools from
eligible MBS issuers who participate in the issuance of a particular
CMB series.

100

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

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 the CMB
program which we pay the SPE the coupon interest due to CMB
investors and receive the interest on the underlying MBS which we
sold to the trust.

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.

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. We
have not securitized commercial mortgages since 2008.

Bond Securitizations
We participate in bond securitizations activities where we purchase
government, government related and corporate bonds, and repackage
those bonds in participation certificates. A structuring fee is charged
and is recognized in our Income Statement at the time of sale of the
participation certificates 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 2010, 2009 and 2008.

2010

Canadian
residential
mortgage
loans
(1), (3), (5)

Credit
card
receivables
(1), (2)

$ 1,283 $ 6,512 $

1,225

6,427

–

230

2009

2008

U.S.
residential
mortgage
loans (4)
754
763

U.S.
residential
mortgage
loans (4)

Canadian
residential
mortgage
loans
(1), (3), (5)
$21,392 $
21,202

568 $
570

Bond
participation
certificates
(1), (6)
15
16

Credit
card
receivables
(1), (2)

Canadian
residential
mortgage
loans
(1), (3), (5)

U.S.
residential
mortgage
loans (4)

Commercial
mortgage
loans (1)

$ 1,470 $ 7,892 $

1,404

7,846

516 $
519

166 $
156

Bond
participation
certificates
(1), (6)
47
48

–

1,121

770

–

242

168

–

(1)

–

Securitized and sold (7)
Net cash proceeds received
Asset-backed securities

purchased

Retained rights to future

excess interest

Pre-tax gain (loss) on sale,
net of hedging activities

(1)
(2)

(3)

(4)

(5)
(6)
(7)

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 receivables in 2010, the net cash proceeds received represent gross cash proceeds of $1,283 million (2008 – $1,469 million) less funds used
to purchase notes of $58 million (2008 – $65 million) issued by Golden Credit Card Trust. The principal value of the purchased notes was $58 million (2008 – $65 million). We did not
securitize any credit card loans during 2009.
Canadian insured residential mortgage loans securitized during the year through the creation of MBS and retained as at October 31, 2010 were $6,845 million (2009 – $6,456 million;
2008 –$9,464 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.
Pre-tax gain (loss) on sale includes the results of our economic hedging activities of $(47) million (2009 – $(161) million; 2008 – $(28) million).
Includes bond securitizations activities of RBTT. None of the securities sold were retained. There were no bond securitization activities during 2010.
Includes Canadian residential mortgage loans securitized during the period and prior periods.

Cash flows from securitizations (1)

2010

2009

2008

Proceeds reinvested in revolving securitizations
Cash flows from excess spread (2)
Other cash flows received (3)

Credit
card
receivables
16,173
472
40

Canadian
residential
mortgage
loans
$ 6,551
692
–

Credit
card
receivables
$ 17,157 $
270
42

Canadian
residential
mortgage
loans (4)
4,959
629
–

Credit
card
receivables

Canadian
residential
mortgage
loans (4)
$ 17,934 $ 2,228
179
–

254
39

(1)

(2)
(3)
(4)

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 payments received.
Comparative amounts presented have been revised from those previously reported.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

101

Note 5 Securitizations (continued)

The key assumptions used to value the retained interests at the date of the securitization activities are as follows:

Key assumptions (1), (2)

2010

2009 (3)

2008

Expected weighted average life of prepayable receivables (in years)
Payment rate
Excess spread, net of credit losses
Discount rate
Expected credit losses

Credit
card
receivables
.25
38.00%
4.66

Canadian
residential
mortgage loans
3.53
19.28%
1.30

Canadian
residential
mortgage loans
2.70
26.76%
2.34
10.50% .40% – 3.19% .40 – 3.07%
–

3.88

–

Credit
card
receivables
.25
37.02%
3.86

Canadian
residential
mortgage loans
4.05
27.55%
1.05
10.00% 2.22 – 4.77%
–

2.49

(1)
(2)

(3)

All rates are annualized except the payment rate for credit card receivables 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 receivables during the period.

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, 2010 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)

2010

2009

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

Credit
card
receivables
15.3
.25
38.81%
(1.0)
(1.9)
3.10%
(3.8)
(7.6)
3.05%
(1.5)
(3.1)
10.00%
–
–

Canadian residential
mortgage loans
1,090.1
2.57 – 4.49
16.07 – 23.74%
(27.4)
(53.9)
.97% – 1.87%
(123.8)
(247.4)
–%
–
–

1.19% – 2.04%
(2.1)
(3.9)

Credit
card
receivables
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)

(1)
(2)

All rates are annualized except for the credit card receivables 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.

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 receivables at October 31, 2010 was
.77% (2009 –.87%). Static pool credit losses are not applicable to
residential mortgages as substantially all the mortgages are
government guaranteed.

The following table summarizes the loan principal, past due and net write-offs for total loans reported on our Consolidated Balance Sheets and
securitized loans that we manage.

Loans managed

Retail
Wholesale
Total loans managed (2)
Less: Loans securitized and managed

Credit card receivables
Canadian residential mortgage-backed securities

created and sold

Canadian residential mortgage-backed securities

created and retained

Loan principal
$ 262,601 $
73,375
335,976

3,265

28,238

9,270

Total loans reported on the Consolidated Balance Sheets

$ 295,203 $

2010

2009

Past due (1)

Net write–offs

Loan principal

Past due (1)

1,782 $
3,777
5,559

1,234 $ 245,430 $

877
2,111

78,927
324,357

1,746 $
4,384
6,130

Net write–offs
1,300
1,233
2,533

232

76
5,201 $

129

3,870

–

28,815

7,521

1,982 $ 284,151 $

204

140

–

53
5,816 $

–
2,393

(1)
(2)

Includes impaired loans as well as loans that are contractually 90 days past due but are not considered impaired.
Excludes any assets we have temporarily acquired with the intent at acquisition to sell to SPEs.

102

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

In addition to the above securitization transactions, our loan sales activities are presented in the following table:

Loan sales (1)

Sold

2010 (2)

Wholesale
loans (3)
58

Commercial
mortgage
loans
129 $

Wholesale
loans (3)

25 $

2009

Residential
mortgage
loans
1,021

Commercial
mortgage
loans

Wholesale
loans (3)

23 $

31 $

2008

Residential
mortgage
loans
237

Commercial
mortgage
loans
70

(1)
(2)
(3)

Gains on whole loan sales are nominal.
No residential mortgage loans were sold during the year.
Includes only the portions that are funded by Royal Bank of Canada.

Note 6 Variable interest entities (VIEs)

The following table provides information about VIEs as at October 31, 2010 and 2009, 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
Other

Consolidated VIEs (4), (5)

Structured finance VIEs
Investment funds
Compensation vehicles
Other

2010

2009

Total
assets

Maximum
exposure
to loss

21,847 $
4,669
502
–
249
165
27,432 $

22,139 $
2,030
19
–
61
39

24,288 $

Total
assets

26,181 $
5,907
930
575
84
340
34,017 $

Maximum
exposure
to loss

26,550
2,527
505
250
28
103
29,963

2,998
1,012
53
3
4,066

2,620
588
64
3
3,275

(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 $2,918 million (2009 – $4,020 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, 2010. Actual assets held by these
conduits as at October 31, 2010, were $13,969 million (2009 – $18,908 million).
Our October 31, 2009 comparatives have been revised to present information related to a certain entity on a net basis that was previously presented on a gross basis. The total gross and net
assets related to this entity as at October 31, 2009 were $4,177 million and $471 million, respectively.
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 $76 million
(2009 – $120 million), Trading securities of $740 million (2009 – $272 million), Available-for-sale securities of $1,786 million (2009 – $1,234 million), Loans of $1,346 million (2009 –
$1,496 million) and Other assets of $65 million (2009 – $91 million). The compensation vehicles hold $53 million (2009 – $64 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 of a consolidated VIE have recourse only to the assets of that VIE and do not have recourse to our general assets unless we breach our contractual obligations relating to that VIE,
provide liquidity facilities or credit enhancement facilities to, or enter into derivative transactions with, that VIE.

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 (greater than fifty percent) of each multi-seller
conduit’s expected losses; therefore, we are not the Primary Benefi-
ciary 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 held 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.

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
and subordinated notes. Certain of these entities are VIEs (U.S. ARS
VIEs). We are subject 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 certain of these U.S. ARS VIEs where our
expected loss calculations indicate that we are exposed to a majority
of the expected loss through our note holdings in these entities.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

103

Note 6 Variable interest entities (VIEs) (continued)

We also sold ARS into Tender Option Bond (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 successfully
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. We consolidate
certain of these ARS TOB programs where our expected loss calcu-
lations indicate 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 exposes us to interest rate basis
risk and may provide liquidity facilities and/or credit enhancements
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.

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

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.

104

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

commitments 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.

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 information about our VIEs are provided in Note 31.

Foreign exchange forwards and futures are contractual

obligations to exchange one currency for another at a specified price
for settlement at a predetermined future date.

Equity forwards and futures are contractual obligations to buy or
sell at a fixed value (the contracted price) of an equity index, a basket
of stocks or a single stock at a predetermined future date.

Swaps
Swaps are over-the-counter contracts in which two counterparties
exchange a series of cash flows based on agreed upon rates to a
notional amount. The various swap agreements that we enter into are
as follows:

Interest rate swaps are agreements where two counterparties

exchange a series of payments based on different interest rates
applied to a notional amount in a single currency. Cross currency
swaps involve the exchange of payments in one currency for the
receipt of payments in another currency. Cross currency interest rate
swaps may 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.

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 applied hedge accounting
to anticipated transactions and 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, 2010, after-tax net unrealized losses of
$334 million (2009 – after-tax net unrealized gain of $156 million)
were recognized in AOCI, representing the cumulative effective
portions of our cash flow hedges.

After-tax unrealized losses relating to de-designated hedges of
$386 million (before-tax unrealized losses of $269 million) included
in AOCI as at October 31, 2010 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

Assets

Derivative instruments

Liabilities

Derivative instruments
Non-derivative instruments

2010 (1)

Designated as hedging
instruments in hedging
relationships

2009 (1)

Designated as hedging
instruments in hedging
relationships

Cash
flow
hedges

Fair
value
hedges

Net
investment
hedges

Not designated
in a hedging
relationship (2)

Cash
flow
hedges

Fair
value
hedges

Net
investment
hedges

Not designated
in a hedging
relationship (2)

505

$ 2,059

812
–

60
1,002

307

119
8,732

103,375

$ 1,130

$ 2,107

107,919
n.a.

$ 1,493
–

82
278

139

327
5,233

88,797

82,488
n.a.

(1)
(2)
n.a.

All derivative instruments are carried at fair value while all non-derivative instruments are carried at amortized cost.
Derivative liabilities include stable value contracts on $170 million (2009 – $257 million) of bank-owned life insurance policies and $2 million (2009 – $3 million) of 401(k) plans.
not applicable

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

105

Note 7 Derivative instruments and hedging activities (continued)

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 period (1)

Net investment hedges

Foreign currency (losses)
Gains (losses) from hedges

2010

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

Net gains
(losses)
included in
Net interest
income

After-tax
unrealized
gains
(losses)
included in
OCI

(5) $

n.a.

(20)
n.a.
n.a.

n.a.
n.a.

n.a.
n.a.
(118)

n.a.
n.a.

n.a.
(334)
n.a.

(1,785)
1,479

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

(25) $

(118) $

(639)

(418)

(1)
n.a.

After-tax losses of $82 million were reclassified from AOCI to income for the year ended October 31, 2010 (2009 – gains of $38 million).
not applicable

Notional amount of derivatives by term to maturity (absolute amounts)

2010

Term to maturity

2009

Within
1 year

1 to
5 years

Over 5
years (1)

Total

Trading

Other than
Trading

Trading

Other than
Trading

560,552 $

188,012 $

– $

748,564 $

– $

356,064 $

1,316,860
21,888
23,560

1,645,185
32,555
48,037

860,528
6,029

94,034
29,947
29,935
8,026
41,275

34,281
39,135
32,205
19,149

140
28
92,507

31,738
6,881

241,216
7,996
7,969
57,273
39,962

18,314
18,212
4,557
3,572

–
–
36,990

829,809
31,801
84,429

579
12,056

114,243
2,456
2,004
24,252
11,466

42,655
56,372
97
–

–
–
9,503

3,791,854
86,244
156,026

3,585,016
86,244
156,026

206,838
–
–

2,467,890
113,067
176,826

892,845
24,966

449,493
40,399
39,908
89,551
92,703

95,250
113,719
36,859
22,721

140
28
139,000

821,974
24,789

414,750
40,392
39,908
88,072
90,946

95,241
113,719
36,859
22,721

140
28
139,000

70,871
177

34,743
7
–
1,479
1,757

9
–
–
–

–
–
–

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

–
208,104
324
–

58,583
288

36,854
3
1
2,173
1,216

48
–
–
–

–
–
–

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)

$ 3,210,079 $ 2,388,469 $ 1,221,722 $ 6,820,270 $ 6,504,389 $ 315,881 $ 4,692,178

$307,594

(1)

(2)

(3)

Includes contracts maturing in over 10 years with a notional value of $337.9 billion (2009 – $287.0 billion). The related gross positive replacement cost is $21.7 billion (2009 –
$14.1 billion).
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 $1.5 billion (2009 – $2.2 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $48.0 billion (2009 – $68.6 billion) and
protection sold of $40.1 billion (2009 – $58.4 billion); other–than-trading credit derivatives comprise protection purchased of $1.5 billion (2009 –$2.2 billion) and protection sold of $nil
(2009 – $10 million).
Comprises precious metal, commodity, stable value and equity derivative contracts.

106

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

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

Foreign exchange contracts

Forward contracts
Cross currency swaps
Cross currency interest rate swaps

Credit derivatives (2)
Other contracts (3)

Total gross fair values before netting (4)

Valuation adjustments determined on a pooled basis
Impact of master netting agreements

With intent to settle net or simultaneously (5)

Impact of master netting agreements

Without intent to settle net or simultaneously (6)

2010

2009

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

288 $

52,912
1,601
–

245
48,114
–
2,009

316 $

286 $

336 $

274 $

221 $

62,197
2,099
–

57,351
–
2,486

56,487
1,744
–

51,138
–
2,353

47,660
1,712
–

196
43,119
–
2,007

54,801

50,368

64,612

60,123

58,567

53,765

49,593

45,322

9,988
2,001
11,128
1,266
–

9,820
1,690
13,838
–
1,110

12,201
1,902
12,211
1,421
–

12,134
1,540
17,797
–
1,190

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

24,383

26,458

27,735

32,661

34,941

33,612

23,232

21,915

2,943
7,081

2,500
8,400

1,996
7,769

1,690
10,360

11,739
12,298

10,343
10,774

5,192
8,148

4,398
8,112

$ 89,208 $ 87,726

$ 102,112 $ 104,834 $ 117,545 $ 108,494 $ 86,165 $ 79,747

2,974 $
–

2,974

533
2
1,450

1,985

7
141

1,976
–

1,976

480
3
1,843

2,326

28
–

5,107

4,330

107,219
(719)

109,164
–

(254)

$ 106,246 $ 108,910

(76,383)

$ 29,863 $ 32,527

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

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

(5)

(6)

Average fair value amounts are calculated based on monthly balances.
Comprises credit default swaps, total return swaps and credit default baskets, including credit derivatives given guarantee treatment for OSFI regulatory reporting purposes.
Comprises precious metal, commodity, stable value and equity derivative contracts.
Total gross fair values before netting include market and credit valuation adjustments that are determined on an instrument-specific basis. Certain warrants and loan commitments that meet
the definition of derivatives are also included.
Impact of offsetting credit exposures on contracts where we have both a legally enforceable 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 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

2010

2009

Derivative assets (1)
Derivative liabilities (2)

1 to
5 years

Less than
1 year

Over
Total
5 years
$ 22,213 $38,485 $45,548 $106,246 $92,173
84,390
44,613

108,910

40,635

23,662

Total

(1)

(2)

Market and credit valuation adjustments that are determined on an instrument-specific
basis and on a pooled basis are included.
Includes stable value contracts on $170 million (2009 – $257 million) of bank-owned
life insurance policies and $2 million (2009 – $3 million) of 401(k) plans.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

107

Note 7 Derivative instruments and hedging activities (continued)

Derivative-related credit risk
Credit risk from derivative transactions is generated by the potential
for the counterparty to default on its contractual obligations when one
or more transactions have a positive market value to us. Therefore,
derivative-related credit risk is represented by the positive fair value
of the instrument and is normally a small fraction of the contract’s
notional amount.

We subject our derivative-related credit risk to the same credit
approval, limit and monitoring standards that we use for managing
other transactions that create credit exposure. This includes
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

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

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 $2,278 million (2009 – $3,234 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 weighted amount is determined by applying the
standard OSFI-defined measures of counterparty risk to the credit
equivalent amount.

2010 (1)

2009 (1)

Replacement
cost

Credit
equivalent
amount (2)

Risk-
weighted
balance (3)

Replacement
cost

Credit
equivalent
amount (2)

Risk-
weighted
balance (3)

41 $

479 $

91 $

152 $

365 $

14,081
356
14,478

4,290
3,709
1,035
9,034

17,693
562
18,734

8,954
12,956
1,716
23,626

6,577
269
6,937

2,024
3,101
583
5,708

11,794
466
12,412

3,280
4,697
892
8,869

15,773
975
17,113

6,663
12,744
1,504
20,911

352
5,485
316
6,153

1,214
2,888
346
4,448

937
3,849

4,096
2,476
28,298 $ 51,515 $ 20,237 $ 26,576 $ 47,032 $ 17,173

2,379
6,776

2,553
5,039

2,409
2,886

4,140
4,868

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

(5)

The amounts presented are net of master netting agreements.
The total credit equivalent amount includes collateral applied of $7.4 billion (2009 – $7.3 billion).
The risk-weighted 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 $7 million (2009 – $128 million). Credit derivatives issued for other-than-trading purposes related to sold protection with a replacement cost of $nil
(2009 – $nil), credit equivalent amount of $nil (2009 – $10 million) and risk-adjusted asset amount of $nil (2009 – $3 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

Risk rating (1)

Counterparty type (2)

2010

Gross positive replacement cost
Impact of master netting agreements
Replacement cost (after netting agreements) (3)
$
Replacement cost (after netting agreements) – 2009 (3) $

AAA, AA
31,724 $
24,228

7,496 $
9,349 $

49,339 $
38,862
10,477 $
9,991 $

16,544 $
10,889

5,655 $
4,077 $

Total
7,334 $ 104,941
76,637
2,658
28,304
4,676 $
26,704
3,287 $

$
$

BBB BB or lower

OECD
governments

Banks
68,475 $
55,638
12,837 $
11,166 $

Total
Other
11,118 $ 25,348 $ 104,941
76,637
12,858
28,304
26,704

8,141
2,977 $ 12,490 $
2,835 $ 12,703 $

(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 $7 million (2009 – $128 million).

108

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

Note 8 Premises and equipment

Land
Buildings
Computer equipment
Furniture, fixtures and other equipment
Leasehold improvements

2010

Accumulated
depreciation
–
$
(498)
(1,512)
(993)
(1,003)
$ (4,006)

Net book
value
236
504
529
492
742
2,503

Cost
250 $
942
2,018
1,401
1,642
6,253 $

2009

Accumulated
depreciation
–
(479)
(1,537)
(972)
(898)
(3,886)

Net book
value
250
463
481
429
744
2,367

Cost
236
1,002
2,041
1,485
1,745
6,509

The depreciation expense for premises and equipment for 2010 was $410 million (2009 – $389 million; 2008 – $318 million).

Note 9 RBC Dexia Investor Services joint venture

RBC Dexia Investor Services
We operate our institutional and investor services business (IIS)
through our joint venture, RBC Dexia Investor Services (RBC Dexia IS).

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

2010

2009

$ 15,465 $ 15,502
14,438

14,213

(1)

Includes $107 million (2009 – $73 million) of goodwill and $154 million (2009 –
$137 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

2010

2009

2008

57 $

528
541
29

152 $
496
593
34

162
647
602
135

1,916 $

446 $

(1,433)

(1,594)

2,869

(2,158)

(260)

(3,328)

3,713

Note 10 Goodwill and other intangibles

Goodwill
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, 2010 (2009 – $ 1 billion;
2008 – $nil).

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 Royal
Bank of Canada are as follows:

Net interest income
Non-interest income
Non-interest expense

2010

2009

11 $
28
31

49 $
25
37

2008

145
28
38

The following tables disclose the changes in goodwill during 2009
and 2010.

Balance at October 31, 2008
Goodwill acquired during the year
Goodwill impairment charge
Other adjustments (2)

Balance at October 31, 2009
Goodwill acquired during the year
Other adjustments (2)

Balance at October 31, 2010

Wealth
Management

Insurance (1)

Canadian
Banking
1,919 $
15
–
2

1,936 $

–
(5)

2,246 $
20
–
(121)

2,145 $

–
(79)

1,931 $

2,066 $

International
Banking
4,606 $

–
(1,000)
(398)

3,208 $
35
(203)

3,040 $

Capital
Markets
1,053 $

4
–
(118)

939 $
2
(40)

901 $

Total
9,977
39
(1,000)
(648)

8,368
37
(341)

8,064

153 $
–
–
(13)

140 $
–
(14)

126 $

(1)
(2)

Other adjustments for 2010 include $7 million of goodwill attributable to the sale of Liberty Life Insurance Company. Refer to Note 11.
Other adjustments primarily include the impact of foreign exchange translations on foreign currency-denominated goodwill.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

109

Note 10 Goodwill and other intangibles (continued)

Other intangibles

Core deposit intangibles
Customer lists and relationships
Computer software

Gross carrying
amount
648
1,074
2,482

2010

Accumulated
amortization (1)
(387)
$
(420)
(1,483)

Net carrying
amount
261
654
999

Gross carrying
amount
738
1,121
2,136

2009

Accumulated
amortization (1)
(378)
$
(388)
(1,213)

Net carrying
amount
360
733
923

4,204

(2,290)

$ 1,914

3,995

(1,979)

$ 2,016

(1)

Total amortization expense for 2010 was $500 million (2009 – $462 million).

Other intangibles presented in the Consolidated Balance Sheet
include $16 million of mortgage servicing rights that are carried at fair
value (2009 – $17 million). The projected amortization of Other
intangibles for each of the years ending October 31, 2011 to

October 31, 2015 is approximately $146 million. There was $1 million
in writedowns of intangible assets due to impairment for the year
ended October 31, 2010 (2009 – $nil).

Note 11 Significant acquisitions and dispositions

Pending acquisition
On October 18, 2010, RBC Wealth Management and BlueBay Asset
Management plc (BlueBay) announced that they had reached an
agreement on terms for a recommended acquisition of BlueBay.
Under the terms of the acquisition, BlueBay shareholders will be
entitled to receive 485 pence in cash for each BlueBay share, for a
total purchase price of approximately £963 million (C$1.56 billion).
This transaction is subject to regulatory approval and other customary
closing conditions and is expected to be completed by the end of
December 2010.

Dispositions
On October 22, 2010, we announced our intention to sell Liberty Life
Insurance Company (Liberty Life), our U.S. life insurance business, to
Athene Holding Ltd. for US$628 million (C$641 million). The trans-
action is expected to close in early 2011, and this is subject to
regulatory approval and other customary closing conditions. An
estimated loss of $116 million, before and after-taxes, has been
recorded in Non-interest income – Other. This amount includes a
write-off of $7 million of goodwill. Refer to Note 10.

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

Our consolidated financial statements include the results of

Liberty Life for the year ended October 31, 2010. Selected financial
information for Liberty, including the loss on sale, is set out below.

Non interest income
Insurance policyholder benefits,
claims and actuarial expenses

Net interest expense

Net loss before tax

Net loss

Total assets

Total liabilities

2010

1,581

(1,562)
(85)

(66)

(78)

October 31
2010

5,366

4,638

2009

1,652

(1,567)
(102)

(17)

(30)

October 31
2009

4,591

3,899

2010

4,263
1,685
171
1,563
1,648
1,992
7,953

2009

3,185
1,735
637
1,297
1,726
1,028
5,325

19,275

14,933

(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 2010

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

2010

Demand (1)
85,774
111,490
3,607
200,871

Notice (2)
12,206
2,394
11
14,611

Term (3), (4), (5)
63,713
$
133,313
20,525
217,551

Total
$ 161,693
247,197
24,143
$ 433,033

2009

Total
$ 152,328
220,772
25,204
$ 398,304

47,337
4,988
3,639

41,175
4,893
3,041

185,636
62,359
129,074
$ 433,033

174,345
47,930
126,920
$ 398,304

(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, 2010, the balance
of term deposits also includes senior deposit Notes we have issued to provide long-term funding of $60 billion (2009 – $58 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.

The following table presents the average deposit balances and
average rate of interest during 2010 and 2009.

Deposits (1)

Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years

2010
$ 340,820
31,370
26,585
8,340
11,992
13,926
$ 433,033

2009 (2)
$ 295,910
42,277
27,751
15,916
6,194
10,256
$ 398,304

Average deposit balances and average of interest paid rates

Average balances

Average rates

2010

2009 (1)

Canada
United States
Other International

$ 221,555 $ 210,873
63,507
147,578

59,364
129,760

2010 2009 (1)
1.19% 1.40%
1.23
2.06

0.56
1.63

$ 410,679 $ 421,958

1.24% 1.60%

(1)

Certain amounts have been reclassified from those previously reported.

(1)

(2)

The aggregate amount of term deposits in denominations of 100,000 or more as at
October 31, 2010 was $181 billion (2009 – $167 billion).
Certain amounts have been reclassified from those previously reported.

Note 14 Insurance

Insurance claims and policy benefit liabilities

Life and Health
Property and Casualty
Reinsurance
Total

Future policy benefit liabilities
Claims liabilities
Total

2010
9,842
675
233
10,750

9,746
1,004
10,750

2009
$ 8,151
532
239
$ 8,922

8,093
829
$ 8,922

The net increase in Insurance claims and policy benefit liabilities over
the prior year comprised: (i) the net increase in life and health
insurance as well as property and casualty insurance liabilities
attributable to business growth; (ii) the increase due to market
movements on assets backing life and health insurance, reinsurance
and property and casualty insurance liabilities, partially offset by
(iii) the favourable impact of the appreciation of the Canadian dollar
on U.S. dollar-denominated liabilities.

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

2010
$ 5,541
(1,057)
$ 4,484

2009
$4,884
(995)
$3,889

2008
$3,760
(896)
$2,864

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

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

2010

2009

$ 1,664
3,408
1,958
1,477
560
778
5,357
1,893
109
2,675
9,469

$ 3,295
4,922
2,052
1,436
488
775
5,010
1,500
1,946
2,099
7,484

$ 29,348

$ 31,007

(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

November 14, 2014
January 25, 2015
June 24, 2015
April 12, 2016
March 11, 2018
June 6, 2018
November 4, 2018
June 15, 2020
June 8, 2023
June 26, 2037
October 1, 2083
June 6, 2085
June 18, 2103

Deferred financing costs

Earliest par value redemption date

Interest rate

Denominated in foreign currency

January 25, 2010 (1)
June 24, 2010 (1)
April 12, 2011 (3)
March 11, 2013 (4)
June 6, 2013 (6)
November 4, 2013 (8)
June 15, 2015 (9)

June 26, 2017 (11)
(13)

(13)
June 18, 2009 (16)

10.00%

7.10% (2)
3.70% (2)
6.30% (2)
4.84% (5)
5.00% (7)
5.45% (2)
4.35% (10)
9.30%
2.86% (12)
(14)

(15)
5.95% (17)

JPY 10,000

US$184

2010

259
–
–
405
1,050
1,002
1,096
1,562
110
120
224
187
676

2009

264
506
809
403
1,048
1,013
1,106
–
110
110
224
205
673

$ 6,691
(10)

$ 6,471
(10)

$ 6,681

$ 6,461

The terms and conditions of the debentures are as follows:
(1)

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 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.
Redeemable on or after June 15, 2015 at par value.
Interest at stated interest rate until earliest par value redemption date, and thereafter at
a rate of 1.41% above the 90-day Bankers’ Acceptance rate.
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.

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)
(10)

(11)
(12)
(13)
(14)

112

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

(15)

(16)

(17)

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.

On November 1, 2010 , we issued $1.5 billion of subordinated
debentures that bear interest at a fixed rate of 3.18% per annum
(paid semi-annually) until November 2, 2015, and at the 90-day
Banker’s Acceptance rate plus 1.21% thereafter until their maturity on
November 2, 2020 (paid quarterly).

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

2010

–
259
5,115
1,317

$ 6,691

Note 17 Trust capital securities

In prior years, we issued 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.
We also issued non-voting RBC Trust Capital Securities Series
2010, 2011, 2015 and 2008-1 (RBC TruCS 2010, 2011, 2015 and 2008-
1) through the Trust. RBC TruCS 2010 were redeemed for cash, at a
redemption price of $1,000 per unit for a total of $650 million on
June 30, 2010. RBC TruCS 2011 are classified as Trust capital securities.
The proceeds of the RBC TruCS 2011 were used to fund the Trust’s
acquisition of trust assets. Holders of RBC TruCS 2011 are eligible to
receive semi-annual non-cumulative fixed cash distributions.

Unlike the RBC TruCS 2011, the holders of RBC TruCS 2015 and

2008-1 do not have any conversion rights or any other redemption
rights. As a result, upon consolidation of the Trust, RBC TruCS 2015
and 2008-1 are classified as Non-controlling interest in subsidiaries
(refer to Note 19). Holders of RBC TruCS 2015 and 2008-1 are eligible
to receive semi-annual non-cumulative fixed cash distributions until
December 31, 2015 and June 30, 2018, respectively, and a floating-
rate cash distribution thereafter.

Trust II, an open-end trust, has issued non-voting RBC TruCS
2013, the proceeds of which were used to purchase a senior deposit
note from us. Trust II is a VIE under AcG-15 (refer to Note 6). We do not
consolidate Trust II as we are not the Primary Beneficiary; therefore,
the RBC TruCS 2013 issued by Trust II are not reported on our

Consolidated Balance Sheets, but the senior deposit note is reported
in Business and government deposit liabilities (refer to Note 13).
Holders of RBC TruCS 2013 are eligible to receive semi-annual
non-cumulative fixed cash distributions.

No cash distributions will be payable by the trusts on RBC TruCS

if we fail to declare regular dividends (i) on our preferred shares, or
(ii) on our common shares if no preferred shares are then
outstanding. In this case, the net distributable funds of the trusts will
be distributed to us as holders of residual interest in the trusts.
Should the trusts fail to pay the semi-annual distributions in full, we
will not declare dividends of any kind on any of our preferred or
common shares for a specified period of time.

In 2007, we issued $1 billion innovative subordinated
debentures, RBC TSNs – Series A, through Trust III. Trust III is a
closed-end trust. 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, 2010 and 2009.

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

Conversion date
At the option of the
holder

2010
Principal
amount

2009
Principal
amount

650,000 Trust Capital Securities – Series

July 24, 2000

June 30, December 31

7.288% December 31, 2005

2010 (8)

750,000 Trust Capital Securities – Series

December 6, 2000

June 30, December 31

7.183% December 31, 2005

2011

Included in Non-controlling interest in

subsidiaries
1,200,000 Trust Capital Securities – Series

2015

October 28, 2005

June 30, December 31

4.87% (9) December 31, 2010

500,000 Trust Capital Securities – Series

April 28, 2008

June 30, December 31

6.821% (9)

June 30, 2013

December 31,
2010
December 31,
2011

– $

650

750

750 $ 1,400

Holder does not have
conversion option

1,200

500

$ 2,450 $ 3,100

2008-1

RBC Capital Trust II (2),(3),(4),(6),(7),(10)

900,000 Trust Capital Securities – Series

2013

RBC Subordinated Notes Trust
(3),(4),(5),(6),(7),(11),(12)
$1 billion 4.58% Trust Subordinated

Notes – Series A

July 23, 2003

June 30, December 31

5.812% December 31, 2008

Any time $

900 $

900

April 30, 2007

April 30, October 30

4.584%

Any time

Holder does not have
conversion option

$ 1,000 $ 1,000

The significant terms and conditions of the RBC TruCS and RBC TSNs are as follows:
(1)

Subject to the approval of OSFI, the Trust may, in whole (but not in part), on the
Redemption date specified above, and on any Distribution date thereafter, redeem the
RBC TruCS 2008-1, 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, 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 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, 2011, plus 40 basis points, for RBC TruCS
2011 and a maturity date of December 31, 2013 and 2015, plus 23 basis points and
19.5 basis points, for RBC TruCS 2013 and 2015, respectively; and a maturity date of
April 30, 2012, plus 11 basis points for RBC TSNs – Series A.
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

(2)

(3)

(4)

Preferred Shares Series AI, each RBC TruCS 2011, 2013 and 2015 will be exchanged
automatically for 40 of our non-cumulative redeemable First Preferred Shares Series 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, 2010, we held none of RBC TruCS 2008-1
(2009 – $5 million), none of RBC TruCS 2010 (2009 – $2 million), $22 million of RBC
TruCS 2011 (2009 – $2 million) and $4 million of RBC TSNs – Series A (2009 – $10
million) as treasury holdings which were deducted from regulatory capital.
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, 2010, $3,327
million represents Tier 1 capital (2009 – $3,991 million), $1,023 million represents Tier
2B capital (2009 – $1,017 million) and $26 million of our treasury holdings of
innovative capital is deducted for regulatory capital purposes (2009 – $19 million).
Holder Exchange Right: Holders of RBC TruCS 2011 may exchange, on any distribution
date on or after the conversion date specified above, RBC TruCS 2011 for 40
non-cumulative redeemable Bank First Preferred Shares, Series R. 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 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.

(5)

(6)

(7)

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2010

113

Note 17 Trust capital securities (continued)

(8)

(9)

On June 30, 2010, the Trust redeemed all issued and outstanding RBC TruCS 2010 for
cash, at a redemption price of $1,000 per unit for a total of $650 million.
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.

(10) Subject to the approval of OSFI, Trust II may, in whole or in part, on the Redemption date

(11)

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.

(12) 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.

Issued and outstanding shares (1)

Common – An unlimited number of shares without nominal or

par value may be issued.

Preferred share liabilities

First preferred

Non-cumulative Series N (2)

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

2010

2009

2008

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

– $
– $

– $
–

–

– $
– $

– $
–

–

– $
– $

– $
–

.88

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
1.25
1.40
1.56
1.56
1.56
1.56
1.56
1.53

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

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
–
–
–
–
–
–
–
–

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

1,417,610 $ 13,075
–
–
161
142
–

–
–
2,862
4,450
–

1,424,922 $ 13,378 $

1,341,260 $ 10,384
–
2,301
232
158
–

–
65,263
5,279
5,808
–
2.00 1,417,610 $ 13,075 $

1,276,260 $ 7,300
2,937
–
–
153
(6)

59,675
–
–
6,445
(1,120)

2.00 1,341,260 $10,384 $

2.00

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

(65) $
313
(334)

(86) $

(2,127) $
1,262
(854)
(1,719) $

(2)
8
(8)
(2)

(95)
64
(50)
(81)

(260) $
618
(423)

(65) $

(2,258) $
1,364
(1,233)
(2,127) $

(5)
13
(10)
(2)

(104)
59
(50)
(95)

(249) $

1,060
(1,071)

(260) $

(6)
23
(22)
(5)

(2,444) $ (101)
51
1,269
(1,083)
(54)
(2,258) $ (104)

(1)

(2)
(3)
(4)

The 6.75 million exchangeable shares of a wholly owned subsidiary of Royal Bank of Canada issued for the acquisition of Phillips, Hager & North Investment Management Ltd. (PH&N) are not
included in this table.
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.
Includes fair value adjustments to stock options of $7 million (2009 – $6 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 $17 million (2009 – $13 million), and from renounced tandem SARs, net of related income taxes, which are nominal for the current period
(2009 – $7 million).

114

Royal Bank of Canada: Annual Report 2010

Consolidated Financial Statements

Terms of preferred share liabilities and preferred shares

Preferred shares
First preferred

Dividend
per share (1)

.306250
.278125
.293750
.287500
.281250
.281250
.278125
.281250
.353125
.312500
.350000
.390625
.390625
.390625
.390625
.390625
.381250

Initial
period
annual
yield

4.90%
4.45%
4.70%
4.60%
4.50%
4.50%
4.45%
4.50%
5.65%
5.00%
5.60%
6.25%
6.25%
6.25%
6.25%
6.25%
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, 2010 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
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,

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)

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, 2010, 57.5 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 2010

115

Note 18 Preferred share liabilities and share capital (continued)

Normal Course Issuer Bid
Details of common shares repurchased under NCIBs during 2010, 2009 and 2008 are given below.

2010

Number of
shares
eligible for
repurchase
(000s)

Number of
shares
repurchased
(000s)

Average
cost per

share Amount

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

20,000

– $

–

– $

20,000

–

– $

–

20,000

1,120

49.50

–

NCIB period
November 1, 2009 –
October 31, 2010
November 1, 2008 –
October 31, 2009
November 1, 2007 –
October 31, 2008

Note 19 Non-controlling interest in subsidiaries

RBC Trust Capital Securities (TruCS)

– Series 2015
– Series 2008-1
Consolidated VIEs
Others

2010

2009

We issued RBC TruCS Series 2015 in 2005 and Series 2008-1 in

1,219 $ 1,219
506
7
339

511
163
363

2,256 $ 2,071

2008 which are reported as Non-controlling interest in subsidiaries
upon consolidation as discussed in Note 17. As at October 31, 2010,
$20 million (2009 – $20 million) of accrued interest was included in
RBC TruCS Series 2015. Series 2008-1 includes $11 million (2009 –
$11 million) of accrued interest, net of $nil (2009 – $5 million) of
treasury holdings.

We consolidate VIEs in which we are the Primary Beneficiary. These
VIEs include structured finance VIEs, investment funds, and
compensation vehicles as described in Note 6.

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, 2010.
Based on the results of this valuation, we increased our pension plan

contributions for 2010 for an amount that is in excess of the minimum
funding requirement set by pension regulators.

For 2010, total contributions to our pension and other post-

employment benefit plans were $1,318 million and $43 million
(2009 – $757 million and $40 million), respectively. For 2011, total
contributions to pension plans and other post-employment benefit
plans are expected to be approximately $276 million and $51 million,
respectively. For our principal pension plans, the next actuarial
valuation for funding purposes will be completed on January 1, 2011.

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 2010

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
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
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)