ROYAL BANK
OF CANADA
› ›
ANNUAL REPORT 2016
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Who we are
› ›
Royal Bank of Canada is Canada’s largest bank, and one of 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,
insurance, investor services and capital markets products and services on a global basis.
›80,000 employees
worldwide
16 million+ clients
38 countries
Personal & Commercial Banking provides personal
and business financial services in Canada, the
Caribbean and the U.S.
Wealth Management in Canada, the U.S. and
internationally offers solutions to affluent, high net
worth, and ultra-high net worth clients. Global Asset
Management provides investment management to
retail clients and directly to institutional clients.
Insurance offers a full range of insurance products
via proprietary channels and third-party distributors,
and participates in reinsurance internationally.
Investor & Treasury Services provides asset and
treasury services, custody, payments and transaction
banking for financial institutions and other
institutional investors worldwide.
Capital Markets is an investment bank that provides
focused expertise in banking, finance and capital
markets to corporations, institutional investors,
asset managers, and governments.
Contents
Our strategy for success
Our solid performance
Innovating to help clients thrive
Delivering to help communities
prosper
Message from Dave McKay
Message from Kathleen Taylor
Management’s Discussion
and Analysis
1
2
3
4
5
7
8
Enhanced Disclosure Task Force
Recommendations Index
Reports and Consolidated
Financial Statements
Ten-Year Statistical Review
Glossary
Directors and Executive Officers
Principal Subsidiaries
Shareholder Information
115
116
206
207
210
211
212
To view our online annual report,
please visit: rbc.com/ar2016
Our strategy for success
Our strategy is deeply rooted in our commitment to clients and communities. Our vision
and goals reflect our long-term focus, and our values guide our day-to-day actions. In a
rapidly changing environment, we have capabilities, strengths and a diversified business model
that position us well to achieve continued growth.
PURPOSE DRIVEN
Helping clients thrive and communities prosper
PERFORMANCE FOCUSED
Vision
To be among the world’s most trusted and successful financial institutions
Goals
How We Will Win
In Canada: to be the undisputed
leader in financial services
In the U.S.: to be the preferred
partner to corporate, institutional
and high net worth clients and their
businesses
In select global financial centres:
to be a leading financial services
partner valued for our expertise
Sustainable Growth
Exceptional Client Experience
Best Talent
Simplify. Agile. Innovate.
Community & Social Impact
PRINCIPLES LED
Values
Client First:
We will always
earn the right
to be our clients’
first choice
Collaboration:
We win as
One RBC
Accountability:
We take owner-
ship for personal
and collective
high performance
Diversity &
Inclusion:
We embrace
diversity for
innovation
and growth
Integrity:
We hold ourselves
to the highest
standards to
build trust
Royal Bank of Canada: Annual Report 2016
1
Our solid performance
In 2016, we delivered solid returns to shareholders. We grew earnings by 4%, increased
our dividend by 5%, achieved return on equity of 16.3% and strengthened our Common
Equity Tier 1 capital ratio to 10.8%. We are diversified by business and geography.
$9.0 $10.0 $10.5
Solid
Earnings
Net Income (C$ billion)
Diluted
Earnings
per Share1
(C$)
$6.00 $6.73 $6.78
19.0% 18.6% 16.3%
Profitable
Growth1
Return on Equity (ROE)
14
15
16
14
15
16
14
15
16
9.9% 10.6% 10.8%
Financial
Strength
Common Equity Tier 1
Capital Ratio
Solid
Returns to
Shareholders
Dividends Declared
per Share
$2.84 $3.08 $3.24
14
15
16
14
15
16
Annualized
dividend
increase of:
5% – one year
8% – ten year2
Earnings by
business
segment3
50% Personal &
Commercial Banking
22% Capital Markets
14% Wealth Management
8% Insurance
6% Investor & Treasury Services
Revenue by
geography3
62% Canada
22% United States
16% International
Financial Performance Metrics4
Total Shareholder Return5
Diluted EPS Growth1
Return on Equity1
Capital Ratio (CET 1)
MEDIUM-TERM
OBJECTIVES
7%+
18%+
Strong
Dividend Payout Ratio
40%–50%
2016
RESULTS
0.7%
16.3%
10.8%
48%
Three-year
Five-year
Ten-year
RBC
10%
16%
10%
GLOBAL PEER
AVERAGE
8%
13%
6%
1 Impacted in 2016 by our acquisition of City National Corporation (City National) due to the issuance of RBC common shares.
2 Compound Annual Growth Rate.
3 Excludes Corporate Support.
4 Our focus is to maximize total shareholder returns (TSR) through the achievement of top half performance compared to our global peer group over the medium term (3-5 years), which we
believe reflects a longer-term view of strong and consistent financial performance.
5 Reflects annualized TSR and is calculated based on the TSX common share price appreciation plus reinvested dividend income. Source: Bloomberg, as at October 31, 2016. RBC is
compared to our global peer group. The peer group average excludes RBC; for the list of peers, please refer to our financial performance objectives section of our 2016 Management’s
Discussion and Analysis.
2
Royal Bank of Canada: Annual Report 2016
Innovating to help clients thrive
Innovation is core to our thinking at RBC. We’re building a
digitally-enabled relationship bank, and changing how we work.
We’re also collaborating with a diverse set of partners to explore
new technology, and investing in the digital ecosystem to help
drive the future prosperity and economic success of Canada.
We’re building a digitally-enabled relationship bank
» Providing an exceptional and secure experience that’s
available when, how, and where it’s most convenient
for clients
» Using digital channels to better understand our clients so
that we can deliver solutions tailored to their preferences
» We’re not just digitizing our existing products, but rethinking
how we deliver services and advice
We’re changing the way we work and becoming more agile
» Seeking better, smarter ways of working across teams and
fostering intrapreneurship within RBC
» Using dynamic, agile teams to create and adjust offerings and
bring them to market more quickly
RECENT INNOVATION
HIGHLIGHTS
2010
Launched mobile wallet
First investment bank to introduce
proprietary smart order router
technology
2013
Launched mobile payments service
First North American financial institution
to bring person-to-person electronic
money transfers to Facebook Messenger‡
2015
First North American financial institution
to introduce a fully cloud-based
payment solution
Launched SecureVoice conversational
biometrics
» Working together with our clients to build new products and
platforms in an agile lab environment1
2016
We’re bringing the outside in to RBC
» Welcoming students through work-integrated learning
programs to help solve some of our toughest problems
» Building innovation labs, partnering with startups and
conducting proof of concepts and pilots
» Investing in FinTech focused venture funds and startups
to access emerging trends
We’re a leading partner in the Canadian digital ecosystem
» Investing in innovation which will help drive Canada’s future
prosperity and economic success
» Working with leading universities to partner with the best,
brightest and boldest minds
» Supporting the advancement of machine learning and
artificial intelligence in Canada
Introduced our new mobile banking app
Joined the first interbank group for
global payments based on blockchain
technology
Used blockchain technology to improve
functionality for our loyalty program2
Executed 60% of all financial transactions
through digital and mobile channels3
1 Advanced Client Experience Program
2 RBC Rewards®
3 Personal & Commercial Banking, excluding
cash withdrawals
Royal Bank of Canada: Annual Report 2016
3
Delivering to help communities prosper
Our social and environmental initiatives and investments will deliver
a positive and lasting impact to shape the future. Our expertise, efforts
and energetic employees are the foundation of our leadership in corporate citizenship.
WHAT WE’RE FOCUSED ON
Creating value for society through our commitment to young people
Supporting the development of a clean economy
Using our capabilities as an engine for public good
Creating value for employees and fostering diversity & inclusion
HOW WE EMBED CITIZENSHIP
Innovating new products and services that create positive social
and environmental impact
Making it easier for employees to get involved in their communities
Committed to unlocking the potential
of young people to be better prepared
for the future of work and pursue their
path to success
Sharing our learnings to advance the social and environmental sectors
Deepening our expertise in the way we measure, track and report
our impacts
Launched a one-stop digital
platform that enables employees to
identify volunteer opportunities,
apply for volunteer grants and donate
to the charity of their choice
PERFORMANCE HIGHLIGHTS
$90 million+
Cash donations and community
investments through more than
11,500 donations to support
communities around the world1
LEADERSHIP IN CITIZENSHIP
$2.3 billion
Green bonds underwritten in 2016,
bringing our total to $7.4 billion
since 2014
200,000+ hours
Volunteered by employees who took
part in our volunteer grant programs
in 20162
1 Includes employee volunteer grants and gifts-in-kind, as well as non-profit
contributions to non-registered charities. Figure does not include sponsorships.
2 Includes non-work time volunteer hours reported by employees globally
and pensioners in Canada.
For more information, please visit: rbc.com/community-sustainability/index.html
4
Royal Bank of Canada: Annual Report 2016
Dave McKay
President and Chief Executive Officer
We believe that we are
uniquely positioned
among our competitors
to achieve even greater
client relevance in the
digital world of the future.
Message from Dave McKay
We live in an uncertain and changing world.
2016 offered continuing challenges for the
financial services industry, from a subdued
macroeconomic outlook to political and
technological disruption, to name just a few.
Amid this uncertainty, RBC moves with a
clear purpose, helping clients thrive and
communities prosper. This is our north star
that guides everything that we do. Our
performance-focused and principles-led
strategy enables us to navigate with
conviction, to spot and create opportunities
for our clients and ultimately to create
sustainable value for shareholders.
Our 2016 results demonstrate that this
strategy continues to deliver success. Our
record earnings of $10.5 billion were up 4%
from last year, driven by strong results in
Wealth Management, higher earnings in
Insurance, solid results in Personal &
Commercial Banking, and record earnings in
Investor & Treasury Services. We earned
$6.78 per share on a diluted basis, delivered
a return on equity of 16.3% and strengthened
our Common Equity Tier 1 capital ratio to
10.8%. During 2016, we returned $5.2 billion
to shareholders as we raised our dividend
twice for a combined increase of 5% and
repurchased 4.6 million common shares. We
delivered compound annual Total Shareholder
Returns of 10% and 16%, over the three- and
five-year periods.
These results, delivered against the backdrop
of a challenging economic environment, show
how RBC continues to bring our strengths and
capabilities to bear: strong client relationships;
scale; an internationally-respected brand;
prudent capital and risk management; a client-
focused culture and highly-engaged
employees. We also continue to be well
positioned given the strength of our
diversification, by business and by geography,
and our ability to effectively manage costs.
In addition, we believe that we are uniquely
positioned among our competitors to achieve
even greater client relevance in the digital
world of the future. As our clients increasingly
move online, we are quickly transforming our
business to build a truly digitally-enabled
relationship bank. This focus on digitization
will ultimately help us realize our vision to be
among the world’s most trusted and
successful financial institutions.
Our strategic goals remain unchanged: to be
the undisputed financial services leader in
Canada; the preferred partner to corporate,
institutional and high net worth clients and
their businesses in the U.S.; and a leading
financial services partner valued for our
expertise in select global financial centres
internationally. In all of these markets we are
targeting high growth and high value client
segments to achieve sustainable growth.
Achieving sustainable growth
We believe our focus on innovation and
technology will help enable us to extend our
lead in Canada. In 2016, we maintained our
number one or two market position in all key
retail categories and we remain the leader in
business banking. Our scale in Canada
affords us the opportunity to leverage
unrivalled digital and data insights. It
provides our clients with an improved
experience, leading to increased loyalty and
improved profitability, despite the challenging
macroeconomic environment.
Looking forward, as Canada’s top wealth and
asset manager, we also see an opportunity to
further grow our business serving high net
worth clients, including assisting our many
business owner clients with their succession
and ownership transition plans. We will also
continue to focus on building our business
with newcomers to Canada, an increasingly
important and growing market. And we
expect to prudently grow our Capital Markets
business segment, currently the number one
investment bank in Canada and the 10th
largest global investment bank by fees.
Wherever we operate, our brand strength,
breadth and scale enable us to bring the best
we have to offer for the benefit of our clients.
In the U.S., our acquisition of Los Angeles-
We continue to be well positioned given the
strength of our diversification, by business
and by geography.
Royal Bank of Canada: Annual Report 2016
5
Wherever we operate, our brand
strength, breadth and scale enable
us to bring the best we have to offer
for the benefit of our clients.
based City National provides us with
significant opportunities to deepen our
relationship with high net worth and mid-
market commercial clients. In its first year as
part of RBC, City National has generated
$290 million of additional earnings,
complementing our existing U.S. Wealth
Management and Capital Markets franchises,
and underlining the value of City National to
our U.S. strategy. This helped us generate
24% of revenue in the U.S. in 2016.
Across our businesses in Canada, the U.S.
and internationally, we continue to invest in
areas where we see the greatest potential for
sustainable growth, focusing on specific
markets and client segments where we can
be a leader. In select global centres in the
U.K., Europe and Asia, we continue to
prudently grow our wealth management,
asset management, capital markets, and
investor and treasury services businesses.
Meanwhile in the Caribbean, we’ve continued
to strengthen our retail business, following
our decision to exit non-core regions last
year. In Canada, we made the decision this
year to sell RBC General Insurance Company,
our home and auto insurance business to
Aviva Canada, for $582 million. Under the
distribution agreement entered into as part of
the sale, we maintained our deep
relationships with our clients, while
continuing to offer a full suite of property and
casualty insurance products.
Providing exceptional client experience
We are continually working to provide an
exceptional client experience to our personal,
institutional, and commercial clients,
whether they choose to interact with us in
person, on the phone, or digitally. This year,
we were immensely honoured to have been
awarded the rank of ‘Highest in Customer
Satisfaction Among the Big Five Retail
Banks,’ by J.D. Power’s 2016 Canadian Retail
Banking Satisfaction Study. This recognition
speaks to our commitment to clients and our
6
Royal Bank of Canada: Annual Report 2016
ongoing efforts to put them first and is
further evidenced by the fact that our net
promoter score, an indicator of client loyalty
and satisfaction, has doubled over the last
15 years.
Our focus on innovation
Thanks to our focus on efficiency, we are
able to reinvest in innovation and technology
in ways that others can’t. This innovation
will itself drive further efficiency, enabling
us to simplify how we work and digitize our
operations.
Today within Personal & Commercial
Banking, 60% of all financial transactions,
excluding cash withdrawals, come through
digital and mobile channels. The insights that
we are deriving from these channels are
helping us to provide an exceptional and
secure experience that is available to our
clients when, how and where it is most
convenient for them.
In developing the technologies of the future,
we know that we don’t hold all of the
answers. We are partnering with and
investing in start-ups and universities to
tackle some of the most interesting
opportunities in financial technology,
bringing the outside in to RBC. While many of
these ideas are being incubated through our
innovation labs in Canada, the U.S. and
Europe, we are also increasingly seeing
innovative ideas emerging from new and
exciting avenues, including from students
working with RBC. As an example, this year,
our new Amplify internship program within
our technology and operations division,
challenged students to take on projects in
agile teams. All of the projects have been
funded for further development and two have
been submitted for patent approval. This is
just one way that we believe our investment
in innovation will not only support future
business opportunities, but will also help
drive the future prosperity and economic
success of Canada and benefit each of the
communities in which we operate.
Our colleagues continue to drive results
Our success this year would not have been
possible without the dedication and
professionalism of our colleagues, whose
high engagement and client focus continues
to drive our results. We will ensure that we
evolve for uncertain times and a digital age.
We are creating a culture that nurtures
innovation and collaboration, and is
increasingly fast-paced, adaptive and
execution-focused, in order to meet clients’
needs. We are building a better workplace for
our colleagues that harnesses diversity and
inclusion and where everyone has the
opportunity to realize their full potential.
Helping our communities prosper
That potential is more likely achieved thanks
to our colleagues’ pride in working for an
organization that is confident in its role in
building a future for clients, their families,
their businesses and their communities. As a
purpose-driven company – and as Canada’s
largest corporation by market capitalization –
we understand the important role that we
play in addressing societal challenges that
could impact our business over time. That is
why this year we announced a new
commitment aimed at unlocking the potential
of young people to thrive and drive Canada’s
future prosperity ahead of Canada’s 150th
anniversary year – #make150count. We are
passionate about making a positive social
impact in all of the communities in which we
live and work.
Our thanks to you
In a changing world, I’d like to thank all our
clients for putting their trust in RBC. I also
want to thank our colleagues whose
commitment enables our ongoing success.
And finally, to you, our shareholders, I would
like to reiterate our focus on delivering high-
quality and sustainable earnings growth and
moving with clear purpose in 2017 and
beyond.
David McKay
President and Chief Executive Officer
Message from Kathleen Taylor
Dear fellow shareholders,
The key responsibility of your Board of
Directors is to keep RBC focused on
delivering strong and positive outcomes for
shareholders, customers, employees and the
communities we serve. This means engaging
actively with the Bank’s outstanding
management team to ensure we have the
right strategy, talent and risk management to
identify suitable opportunities for growth and
continue to create long-term value.
The right strategy
The Board of Directors and management share
a vision for RBC: to be among the world’s
most trusted and successful financial
institutions. To help realize this vision, the
Board oversees the organization’s strategic
direction, maintaining its focus on markets
and segments where RBC can apply its
strengths to win business and deepen
relationships with clients and our
communities. Your Board is well suited to the
transformational nature of our industry,
remaining agile and responsive to the
evolving marketplace. At every board meeting
we examine and discuss aspects of enterprise
and business segment strategy to identify
opportunities for organic growth. We also
spend time analyzing prospects for the Bank’s
long-term growth plans. Earlier this year RBC
completed the acquisition of City National,
which is already proving to be the right
platform to complement our existing U.S.
presence, advancing RBC toward our long-
term strategic goal of becoming the preferred
partner to corporate, institutional, and high
net worth clients and their businesses in the
U.S.
The right talent
The continued superior performance of RBC,
including the ongoing, successful integration
of City National demonstrates that having the
right strategy is critical to our success. But
equally essential is the leadership of a
talented executive team and dedicated
employees to execute our strategy with
excellence. A key responsibility of the Board
is talent management and succession
planning for the top executive team, in order
to ensure we have a strong pipeline of
leaders to drive both short and long-term
performance. This includes an in-depth
evaluation of the strengths and
opportunities for high-performance
executives who are key candidates in both
the near and medium term. Building diverse
teams at every level is a priority that we
embed into our talent management
strategies, recognizing that a diversity of
viewpoints, backgrounds and experience is
an important driver of innovation and
profitable growth.
Prudent risk management
In overseeing the ongoing operations and
strategic direction of RBC, the Board carefully
assesses whether management’s plans
appropriately balance business opportunities
with sound risk discipline. We seek to instill
and support a strong risk culture, monitoring
the alignment of risk conduct with our
enterprise-wide framework. The Board
ensures that the Bank’s risk management
function is independent from the businesses.
We approve Risk Appetite, oversee strategic
risk management and regularly meet with
regulators to discuss the Bank’s control
environment.
Fostering a culture of integrity and
good governance
Your Board also champions the strong
corporate values that are entrenched in the
culture of RBC. We recognize that integrity
and accountability are the foundation for the
Bank’s strong reputation and brand. We
establish standards of integrity designed to
promote ethical behaviour throughout the
organization, and foster a business approach
in which we work to make a positive impact
on society, the environment and the
economy.
Beyond the setting of prudent structures and
strong policies, corporate governance at
RBC is a matter of board culture where active
engagement and open and productive debate
are not only encouraged but expected. We
regard certain characteristics and behaviours
as essential for board members. Directors
must be dedicated to the needs of RBC,
engage fully, appropriately challenge the
status quo, assess opportunities from a
strategic context, exhibit sound business
judgment and uphold RBC values. Our
governance approach continues to receive
recognition, with RBC winning Best Overall
Corporate Governance – International at the
2016 Corporate Governance Awards in
New York.
Kathleen Taylor
Chair of the Board
Creating long-term value for our
shareholders and other stakeholders
We place strong emphasis upon board
renewal, assessing the strengths of
candidates for the Board against the evolving
needs of the Bank. We were pleased this year
to welcome Andrew Chisholm, the recently
retired Advisory Director and Senior Strategy
Officer at Goldman Sachs & Co., who brings
to the Board extensive experience in strategic
advice, mergers and acquisitions, and capital
markets, as well as risk and capital
management.
I would like to thank the members of your
Board for delivering valuable advice and
oversight throughout the year. In turn, the
Board extends its thanks to Dave McKay and
his leadership team for their dedication to
helping clients thrive, communities prosper
and employees succeed. And finally, thank
you to all RBC employees, whose daily
commitment to our clients and communities
continues to drive our success.
Kathleen Taylor
Chair of the Board
Royal Bank of Canada: Annual Report 2016
7
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, 2016, compared to the preceding two fiscal years. This MD&A should be read in conjunction with our 2016 Annual Consolidated Financial Statements and
related notes and is dated November 29, 2016. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements prepared in
accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise noted.
Additional information about us, including our 2016 Annual Information Form, is available free of charge on our website at rbc.com/investorrelations, on the Canadian
Securities Administrators’ website at sedar.com and on the EDGAR section of the United States (U.S.) Securities and Exchange Commission’s (SEC) website at sec.gov.
Information contained in or otherwise accessible through the websites mentioned does not form part of this report. All references in this report to websites are inactive
textual references and are for your information only.
Table of contents
Caution regarding forward-looking
statements
Overview and outlook
Selected financial and other highlights
About Royal Bank of Canada
Vision and strategic goals
Economic, market and regulatory review
and outlook
Defining and measuring success through
Total Shareholder Returns
Key corporate events of 2016
Financial performance
Overview
Impact of foreign currency translation
Total revenue
Provision for credit losses
Insurance policyholder benefits, claims
and acquisition expense
Non-interest expense
Income and other taxes
Client assets
Business segment results
Results by business segment
8
9
9
10
10
11
12
12
13
13
13
14
15
15
16
17
17
19
19
How we measure and report our business
segments
Key performance and non-GAAP
measures
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
Results by geographic segment
Quarterly financial information
Fourth quarter 2016 performance
Quarterly results and trend analysis
Financial condition
Condensed balance sheets
Off-balance sheet arrangements
Risk management
Overview
Top and emerging risks
Enterprise risk management
Credit risk
19
20
22
27
32
35
36
40
41
41
41
42
43
43
44
46
46
47
49
54
Market risk
Liquidity and funding risk
Insurance risk
Operational risk
Regulatory compliance risk
Strategic risk
Reputation risk
Legal and regulatory environment risk
Competitive risk
Systemic risk
Overview of other risks
Capital management
Additional financial information
Accounting and control matters
Critical accounting policies and
estimates
Regulatory developments
Controls and procedures
Related party transactions
Supplementary information
Enhanced Disclosure Task Force
recommendation index
66
72
82
83
84
85
85
85
87
87
87
89
99
99
99
106
107
107
108
115
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 2016 Annual Report, in
other filings with Canadian regulators or the SEC, in other reports to shareholders and in other communications. Forward-looking statements in this document include, but are
not limited to, statements relating to our financial performance objectives, vision and strategic goals, the economic and market review and outlook for Canadian, U.S., European
and global economies, the regulatory environment in which we operate, the outlook and priorities for each of our business segments, and the risk environment including our
liquidity and funding risk. 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, as well as our financial performance
objectives, vision and strategic goals, 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, liquidity and funding, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory
environment, competitive and systemic risks and other risks discussed in the Risk management and Overview of other risks sections of our 2016 Annual Report; global
uncertainty, the Brexit vote to have the United Kingdom leave the European Union, weak oil and gas prices, cyber risk, anti-money laundering, exposure to more volatile sectors,
technological innovation and new Fintech entrants, increasing complexity of regulation, data management, litigation and administrative penalties; the business and economic
conditions in the geographic regions in which we operate; the effects of changes in government fiscal, monetary and other policies; tax risk and transparency; and
environmental risk.
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. Material economic
assumptions underlying the forward-looking statements contained in this 2016 Annual Report are set out in the Overview and outlook section and for each business segment
under the heading Outlook and priorities. 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 of our 2016 Annual Report.
8
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Overview and outlook
Selected financial and other highlights
(Millions of Canadian dollars, 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
Income before income taxes
Net income
Segments – net income
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
Net income
Selected information
Earnings per share (EPS) – basic
– diluted
Return on common equity (ROE) (1), (2)
Average common equity (1)
Net interest margin (on average earning assets) (3)
Total PCL as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and
acceptances
Gross impaired loans (GIL) as a % of loans and acceptances (4)
Liquidity coverage ratio (LCR) (5)
Capital ratios, Leverage ratio and multiples
Common Equity Tier 1 (CET1) ratio (6)
Tier 1 capital ratio (6)
Total capital ratio (6)
Assets-to-capital multiple (6)
Leverage ratio (6)
Selected balance sheet and other information (7)
Total assets
Securities
Loans (net of allowance for loan losses)
Derivative related assets
Deposits
Common equity
Total capital risk-weighted assets
Assets under management (AUM)
Assets under administration (AUA) (8)
Common share information
Shares outstanding (000s) – average basic
– average diluted
– end of period
Dividends declared per common share
Dividend yield (9)
Common share price (RY on TSX) (10)
Market capitalization (TSX) (10)
Business information (number of)
Employees (full-time equivalent) (FTE)
Bank branches
Automated teller machines (ATMs)
Period average US$ equivalent of C$1.00 (11)
Period-end US$ equivalent of C$1.00
$
$
$
$
$
$
2016
38,405 $
1,546
3,424
20,136
13,299
10,458 $
5,184 $
1,473
900
613
2,270
18
10,458 $
6.80 $
6.78
16.3%
62,200 $
1.70%
0.29%
0.28%
0.73%
127%
10.8%
12.3%
14.4%
n.a.
4.4%
2015
35,321 $
1,097
2,963
18,638
12,623
10,026 $
5,006 $
1,041
706
556
2,319
398
10,026 $
6.75 $
6.73
18.6%
52,300 $
1.71%
0.24%
0.24%
0.47%
127%
10.6%
12.2%
14.0%
n.a.
4.3%
$ 1,180,258 $ 1,074,208 $
236,093
521,604
118,944
757,589
64,304
449,712
586,300
5,058,900
215,508
472,223
105,626
697,227
57,048
413,957
498,400
4,683,100
1,485,876
1,494,137
1,485,394
3.24 $
4.3%
83.80 $
124,476
1,442,935
1,449,509
1,443,423
3.08 $
4.1%
74.77 $
107,925
2014
34,108
1,164
3,573
17,661
11,710
9,004
4,475
1,083
781
441
2,055
169
9,004
6.03
6.00
19.0%
45,700
1.86%
0.27%
0.27%
0.44%
n.a.
9.9%
11.4%
13.4%
17.0X
n.a.
940,550
199,148
435,229
87,402
614,100
48,615
372,050
457,000
4,710,900
1,442,553
1,452,003
1,442,233
2.84
3.8%
80.01
115,393
75,510
1,419
4,905
0.755 $
0.746 $
72,839
1,355
4,816
0.797 $
0.765 $
73,498
1,366
4,929
0.914
0.887
$
$
$
$
Table 1
2016 vs. 2015
Increase (decrease)
$
$
$
$
$
$
3,084
449
461
1,498
676
432
178
432
194
57
(49)
(380)
432
0.05
0.05
n.m.
9,900
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.a.
n.m.
$ 106,050
20,585
49,381
13,318
60,362
7,256
35,755
87,900
375,800
42,941
44,628
41,971
0.16
n.m.
9.03
16,551
2,671
64
89
(0.042)
(0.019)
$
$
$
$
8.7%
40.9%
15.6%
8.0%
5.4%
4.3%
3.6%
41.5%
27.5%
10.3%
(2.1)%
(95.5)%
4.3%
0.7%
0.7%
(230) bps
18.9%
(1) bps
5 bps
4 bps
26 bps
– bps
20 bps
10 bps
40 bps
n.a.
10 bps
9.9%
9.6%
10.5%
12.6%
8.7%
12.7%
8.6%
17.6%
8.0%
3.0%
3.1%
2.9%
5.2%
20 bps
12.1%
15.3%
3.7%
4.7%
1.8%
(5.3)%
(2.5)%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes Average common equity used in the calculation of
ROE. For further details, refer to the Key performance and non-GAAP measures section.
These measures may not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other financial
institutions. For further details, refer to the Key performance and non-GAAP measures section.
Net interest margin (on average earning assets) is calculated as net interest income divided by average earning assets. Average amounts are calculated using methods intended to
approximate the average of the daily balances for the period.
GIL includes $418 million (2015 – $nil) related to the acquired credit impaired (ACI) loans portfolio from our acquisition of City National, with over 80% covered by loss-sharing agreements
with the Federal Deposit Insurance Corporation (FDIC). ACI loans added 8 bps to our 2016 GIL ratio (2015 – n.a.). For further details, refer to Notes 2 and 5 of our 2016 Annual Consolidated
Financial Statements.
LCR is a new regulatory measure under the Basel III Framework, and is calculated using the Liquidity Adequacy Requirements (LAR) guideline. Effective in the second quarter of 2015, LCR was
adopted prospectively. For further details, refer to the Liquidity and funding risk section.
Capital and Leverage ratios presented above are on an “all-in” basis. Effective the first quarter of 2015, the Leverage ratio has replaced the Assets-to-capital multiple (ACM). The Leverage
ratio is a regulatory measure under the Basel III framework. The ACM is presented on a transitional basis for prior periods. For further details, refer to the Capital management section.
Represents period-end spot balances.
AUA includes $18.6 billion and $9.6 billion (2015 – $21.0 billion and $8.0 billion; 2014 – $23.2 billion and $8.0 billion) of securitized residential mortgages and credit card loans,
respectively. Prior period figures have been revised from those previously disclosed.
Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
(9)
(10) Based on TSX closing market price at period-end.
(11) Average amounts are calculated using month-end spot rates for the period.
n.a.
not applicable
n.m. not meaningful
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
9
About Royal Bank of Canada
Royal Bank of Canada is Canada’s largest bank, and one of 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, insurance,
investor services and capital markets products and services on a global basis. We have over 80,000 full- and part-time employees who serve
more than 16 million personal, business, public sector and institutional clients through offices in Canada, the U.S. and 36 other countries. For
more information, please visit rbc.com.
Our business segments are described below.
Personal & Commercial Banking operates in Canada, the Caribbean and the U.S., and comprises our personal and business banking
operations, as well as our auto financing and retail investment businesses.
Wealth Management serves affluent, high net worth and ultra-high net worth clients from our offices in key financial centres mainly in
Canada, the U.S., the U.K., the Channel Islands and Asia with a comprehensive suite of investment, trust, banking, credit and other wealth
management solutions. We also provide asset management products and services directly to institutional and individual clients through our
distribution channels and third-party distributors.
Insurance provides a wide range of life, health, home, auto, travel, wealth, group and reinsurance products and solutions. In Canada, we
offer insurance products and services through our proprietary distribution channels, comprised of the field sales force which includes retail
insurance branches, our field sales representatives, advice centres and online, as well as through independent insurance advisors and affinity
relationships. Outside Canada, we operate in reinsurance markets globally offering life, accident and annuity reinsurance products.
Investor & Treasury Services serves the needs of institutional investing clients by providing asset services, custodial, advisory, financing
and other services to safeguard assets, maximize liquidity and manage risk in multiple jurisdictions around the world. We also provide short-
term funding and liquidity management for RBC.
Capital Markets provides public and private companies, institutional investors, governments and central banks with a wide range of
products and services. In North America, we offer a full suite of products and services which include corporate and investment banking, equity
and debt origination and distribution, and structuring and trading. Outside North America, we offer a diversified set of capabilities in our key
sectors of expertise such as energy, mining and infrastructure, and we have expanded into industrial, consumer and healthcare in Europe.
Our business segments are supported by Corporate Support, which consists of Technology & Operations and Functions. Technology &
Operations provides the technological and operational foundation required to effectively deliver products and services to our clients, while
Functions includes our finance, human resources, risk management, internal audit and other functional groups.
The following chart presents our business segments and respective lines of business:
ROYAL BANK OF CANADA
Insurance
O Canadian
Insurance
O International
Insurance
Investor & Treasury
Services
Capital
Markets
O Corporate and
Investment
Banking
O Global Markets
O Other
Personal &
Commercial Banking
O Canadian Banking
O Caribbean &
U.S. Banking
Wealth
Management
O Canadian Wealth
Management
O U.S. Wealth
Management
(including City
National)
O International
Wealth
Management
O Global Asset
Management
O Technology & Operations
O Functions
Corporate Support
Vision and strategic goals
Our business strategies and actions are guided by our vision, “To be among the world’s most trusted and successful financial institutions.” Our
three strategic goals are:
•
•
•
In Canada, to be the undisputed leader in financial services;
In the U.S., to be the preferred partner to corporate, institutional and high net worth clients and their businesses; and
In select global financial centres, to be a leading financial services partner valued for our expertise.
For our progress in 2016 against our business strategies and strategic goals, refer to the Business segment results section.
10
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Economic, market and regulatory review and outlook – data as at November 29, 2016
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.
Canada
The Canadian economy is expected to grow by 1.3%1 during calendar 2016, which is below our estimate of 2.2%1 as at December 1, 2015 and
consistent with our estimate as at August 23, 2016. Growth over the first half of the calendar year was supported by solid consumer spending
and housing activity, reflecting low interest rates and a resilient labour market. Business investment remained weak as firms in the energy sector
continued to reduce capital spending. Weakness in the energy sector was compounded by wildfires in Alberta that resulted in temporary
shutdowns by oil and gas producers, destroyed over 2,000 buildings and displaced 80,000 individuals. The economy has rebounded in the
second half of the year as oil and gas production normalized and non-energy exports recovered from earlier weakness. The unemployment rate
rose to 7.0%, slightly higher than July’s rate of 6.9% as labour force participation increased. The Bank of Canada (BoC) has held the overnight
rate steady in calendar 2016 amid persistent slack in the economy, due to slower-than-expected growth in non-energy industries, as well as
inflation results that were below target.
In calendar 2017, we expect the Canadian economy will grow at a 1.8%1 rate, driven by firm consumer spending, fiscal stimulus, stronger
export growth and a modest recovery in business investment. Due to federal and provincial policy changes announced in 2016, we expect
housing market activity will soften in calendar 2017. The BoC has maintained a cautious tone recently amid uncertainty surrounding the
economic outlook; however, we expect the overnight rate will be held steady throughout 2017 as growth moves in line with the BoC’s latest
projection.
U.S.
The U.S. economy is expected to grow by 1.6%1 in calendar 2016, which is below our estimate of 2.8%1 as at December 1, 2015 and slightly
above our estimate of 1.5%1 as at August 23, 2016. Consumer spending growth was strong over the first half of the year, reflecting solid job
growth, rising wages, elevated consumer confidence and low interest rates. However, declining inventory investment and a reduction in business
investment, partially reflecting further weakness in the energy sector, had an adverse impact on growth earlier this year. The unemployment rate
of 4.9% has been relatively stable this year amid rising labour force participation, falling within the range that the Federal Reserve (Fed) views as
consistent with full employment. The Fed has noted that the case for higher rates continues to strengthen with growth having rebounded in the
second half of the year and inflation picking up gradually. Barring an extended period of market volatility following the recent U.S. election result,
we expect the Fed will raise the federal funds target range to 0.50%-0.75% in December from its current range of 0.25%-0.50%.
In calendar 2017, we expect the U.S. economy will grow at a 2.2%1 rate as consumer spending growth remains firm and business
investment picks up in both energy and non-energy industries. As growth continues at a solid pace, the labour market improves further and
inflation rises toward the Fed’s 2% target, we expect the gradual withdrawal of monetary policy stimulus to continue, with the Fed raising rates by
another 50 basis points in calendar 2017. The recent U.S. election could result in policy changes that impact the economic outlook though any
revisions to our expectations await further details being announced by the new administration.
Europe
The Eurozone economy is expected to grow by 1.6% in calendar 2016, which is below our estimate of 1.7% as at December 1, 2015, but slightly
above our estimate of 1.5% as at August 23, 2016. The steady economic recovery has continued over the last year and the threat of deflation has
subsided, although inflation remains well below the European Central Bank’s (ECB) target. Growth has been driven by consumer spending and
business investment, reflecting a gradually improving labour market and rising business sentiment. The unemployment rate of 10.0% in
September matched the lowest level since July 2011. The ECB left monetary policy unchanged in October, awaiting the results of a review of its
asset purchase program that will be available in December.
In calendar 2017, we expect the Eurozone economy will grow by 1.3% as political uncertainty, including evolving Brexit negotiations,
weighs on business sentiment. We expect the ECB will continue to provide substantial monetary policy stimulus with monthly asset purchases
likely to be extended beyond March 2017.
Financial markets
Global equity markets recorded minimal gains this year amid several periods of heightened volatility related to global growth concerns and
political uncertainty related to Brexit and the U.S. election. Central banks have maintained highly stimulative monetary policy and some
governments are increasing fiscal stimulus. Yields on Canadian and U.S. long-term government bonds generally declined over the first half of the
year but increased more recently as inflation expectations rose. Oil prices hit year-to-date highs of around $50/barrel in October but declined
more recently on concerns that the Organization of the Petroleum Exporting Countries (OPEC) would have difficulty reaching a consensus to
cap output.
The macroeconomic headwinds discussed above, such as the volatility of oil prices, the potential for greater uncertainty or financial market
instability related to Brexit and the U.S. election, and greater global economic uncertainty may alter our outlook and results for fiscal 2017 and
future periods. These continuing pressures may lead to higher PCL in our wholesale and retail loan portfolios and impact the general business
and economic conditions in the regions we operate.
Regulatory environment
We continue to monitor and prepare for regulatory developments in a manner that seeks to ensure compliance with new requirements while
mitigating any adverse business or economic impacts. Such impacts could result from new or amended regulations and the expectations of
those who enforce them. Significant developments include continuing changes to global and domestic standards for capital and liquidity, over-
the-counter (OTC) derivatives reform, initiatives to enhance requirements for institutions deemed systemically important to the financial sector,
and changes to resolution regimes addressing government bail-in and total loss-absorbing capacity. We also continue to implement reforms
enacted under the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act including those related to the Fed’s enhanced prudential
standards for Bank Holding Companies and Foreign Banking Organizations.
For a discussion on risk factors resulting from these and other regulatory developments which may affect our business and financial results,
refer to the Risk management – Top and emerging risks section. For further details on our framework and activities to manage risks, refer to the
Risk management and Capital management sections.
1
Annualized rate
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
11
Defining and measuring success through total shareholder returns
Our focus is to maximize total shareholder returns (TSR) through the achievement of top half performance compared to our global peer group
over the medium-term (3-5 years), which we believe reflects a longer-term view of strong and consistent financial performance.
Maximizing TSR is aligned with our three strategic goals discussed earlier 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 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 used to measure progress against our medium-term TSR objectives. We review and revise these
financial performance objectives as economic, market and regulatory environments change. By focusing on our medium-term objectives in our
decision-making, we believe we will be well-positioned to provide sustainable earnings growth and solid returns to our common shareholders.
The following table provides a summary of our 2016 performance against our medium-term financial performance objectives:
2016 Financial performance compared to our medium-term objectives
Table 2
Diluted EPS growth of 7% +
ROE of 18% +
Strong capital ratios (CET1) (1)
Dividend payout ratio 40% – 50%
(1)
For further details on the CET1 ratio, refer to the Capital management section.
2016 results
0.7%
16.3%
10.8%
48%
Both our diluted EPS and ROE were impacted by our acquisition of City National due to the issuance of RBC common shares, as noted below.
For 2017, we maintained our financial performance objectives relating to diluted EPS growth, strong capital ratios and dividend payout ratio. We
have revised our ROE financial objective to 16%+ to reflect higher ongoing regulatory capital requirements and the impact related to the issuance
of RBC common shares on the acquisition of City National.
We compare our TSR to that of a global peer group approved by our Board of Directors. The global peer group remains unchanged from last year
and consists of the following 10 financial institutions:
•
Canadian financial institutions: Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation, National Bank of
Canada, Power Financial Corporation, The Bank of Nova Scotia, and Toronto-Dominion Bank.
U.S. banks: JPMorgan Chase & Co. and Wells Fargo & Company.
International banks: Westpac Banking Corporation.
•
•
Medium-term objectives – three and five year annualized TSR vs. peer group average
Table 3
Royal Bank of Canada
Peer group average (excluding RBC)
Three year TSR (1)
Five year TSR (1)
10%
Top half
8%
16%
Top half
13%
(1)
The three and the five year annualized TSR are calculated based on our common share price appreciation as per the TSX closing market price plus reinvested dividends for the period
October 31, 2013 to October 31, 2016 and October 31, 2011 to October 31, 2016, respectively.
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
$
$
2016
83.80
3.20
12.1%
16.8%
$
2015
74.77
3.04
(6.5)%
(3.0)%
$
2014
80.01
2.76
14.3%
19.0%
$
2013
70.02
2.46
23.0%
28.0%
Table 4
2012
56.94
2.22
17.1%
22.0%
Key corporate events of 2016
RBC General Insurance Company
On July 1, 2016, we completed the sale of RBC General Insurance Company to Aviva Canada Inc. (Aviva), which was previously announced on
January 21, 2016. The transaction involved the sale of our home and auto insurance manufacturing business and included a 15-year strategic
distribution agreement between RBC Insurance and Aviva. As a result of the transaction, we recorded a gain of $287 million ($235 million after-
tax) in our 2016 results, which was recorded in Non-interest income – Other. For further details, refer to Note 11 of our 2016 Annual Consolidated
Financial Statements.
City National Corporation
On November 2, 2015, we completed the acquisition of City National Corporation (City National), the holding company for City National Bank.
Total consideration of $7.1 billion (US$5.5 billion) was paid with $3.4 billion (US$2.6 billion) in cash, 41.6 million RBC common shares and
$360 million (US$275 million) of RBC first preferred shares. City National has been combined with the U.S. Wealth Management business within
our Wealth Management segment. For further details, refer to Note 11 of our 2016 Annual Consolidated Financial Statements.
12
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Financial performance
Overview
2016 vs. 2015
Net income of $10,458 million was up $432 million or 4% from a year ago. Diluted earnings per share (EPS) of $6.78 was up $0.05 and return on
common equity (ROE) of 16.3% was down 230 bps from 18.6% last year. In 2016, both our diluted EPS and ROE were impacted by our
acquisition of City National due to the issuance of RBC common shares as noted above. Our Common Equity Tier 1 (CET1) ratio was 10.8%, up
20 bps.
Our results were driven by higher earnings in Wealth Management, Insurance, Personal & Commercial Banking, and Investor & Treasury
Services, partially offset by lower earnings in Capital Markets. Our results include the after-tax gain of $235 million on the sale of RBC General
Insurance Company to Aviva and the favourable impact of foreign exchange translation. Results in 2015 included a gain of $108 million (before-
and after-tax) from the wind-up of a U.S.-based subsidiary that resulted in the release of foreign currency translation adjustment (CTA) which was
recorded in Corporate Support.
Wealth Management earnings increased primarily reflecting the inclusion of our acquisition of City National, which contributed $290 million
to earnings, lower restructuring costs relating to the International Wealth Management business, and benefits from our efficiency management
activities. These factors were partially offset by lower transaction volumes.
Insurance earnings increased largely due to the gain on the sale of RBC General Insurance Company, as noted above. Lower earnings from
new U.K. annuity contracts and the reduction in earnings from the sale of our home and auto insurance manufacturing business, as noted above,
were partially offset by growth in International Insurance.
Personal & Commercial Banking earnings increased largely reflecting solid volume and fee-based revenue growth across most businesses in
Canada, and higher earnings in the Caribbean. These factors were partially offset by lower spreads, higher costs in support of business growth
and higher PCL in Canada.
Investor & Treasury Services earnings increased primarily due to higher funding and liquidity earnings reflecting tightening credit spreads
and favourable interest rate movements, and higher client deposit spreads. These factors were partially offset by increased investment in
technology initiatives, higher staff costs and lower earnings from foreign exchange market execution. In addition, the prior year included an
additional month of earnings in Investor Services of $42 million ($28 million after-tax).
Capital Markets earnings decreased largely driven by higher PCL, lower results in our Global Markets and Corporate and Investment Banking
businesses reflecting lower client activity, and higher compliance costs. These factors were partially offset by lower variable compensation, the
impact from foreign exchange translation, and lower litigation provisions.
For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital management sections,
respectively.
2015 vs. 2014
In 2015, net income of $10,026 million was up $1,022 million or 11% from 2014. Diluted EPS of $6.73 was up $0.73 and ROE of 18.6% was
down 40 bps. Our CET1 ratio was 10.6%, up 70 bps.
Our results were driven by higher earnings in Personal & Commercial Banking, Capital Markets and Investor & Treasury Services, partially
offset by lower earnings in Insurance and Wealth Management. Our results were also favourably impacted by a lower effective tax rate reflecting
favourable income tax adjustments, the positive impact of foreign exchange translation, and a gain of $108 million (before- and after-tax) from
the wind-up of a U.S.-based funding subsidiary as noted above. In addition, results in 2014 included a loss of $100 million (before- and
after-tax) related to the sale of RBC Royal Bank (Jamaica) Limited (RBC Jamaica) and a provision of $40 million ($32 million after-tax) related to
post-employment benefits and restructuring charges in the Caribbean.
Personal & Commercial Banking earnings mainly reflected solid volume growth across most businesses in Canada, strong fee-based
revenue growth, and higher earnings in the Caribbean, partially offset by higher costs to support business growth and lower spreads.
Capital Markets earnings were driven by growth in our Global Markets business mainly reflecting increased client activity, continued solid
performance in our Corporate and Investment Banking business, and the impact from foreign exchange translation, partially offset by lower
results in certain legacy portfolios.
Investor & Treasury Services earnings mainly reflected higher earnings from foreign exchange market execution, an additional month of
earnings in Investor Services of $42 million ($28 million after-tax), increased custodial fees, and higher earnings from growth in client deposits.
These factors were partially offset by lower funding and liquidity results.
Insurance results decreased mainly due to a change in Canadian tax legislation impacting certain foreign affiliates which became effective
November 1, 2014, a lower level of favourable actuarial adjustments, and higher net claims costs. These factors were partially offset by higher
earnings from new U.K. annuity contracts, and a favourable impact of investment-related activities on the Canadian life business.
Wealth Management earnings decreased primarily reflecting higher costs in support of business growth in our Global Asset Management
and Canadian Wealth Management businesses, restructuring costs of $122 million ($90 million after-tax) largely related to our International
Wealth Management business, lower transaction volumes and higher PCL. These factors were partly offset by higher earnings from growth in
average fee-based client assets.
Impact of foreign currency translation
Our foreign currency-denominated results are impacted by exchange rate fluctuations. Revenue, PCL, insurance policyholder benefits, claims and
acquisition expense (PBCAE), non-interest expense and net income denominated in foreign currency are translated at the average rate of
exchange for the period.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
13
The following table reflects the estimated impact of foreign currency translation on key income statement items:
(Millions of Canadian dollars, except per share amounts)
2016 vs. 2015
2015 vs. 2014
Table 5
Increase (decrease):
Total revenue
PCL
PBCAE
Non-interest expense
Income taxes
Net income
Impact on EPS
Basic
Diluted
$
$
338
20
(39)
165
64
128
0.09
0.09
$
$
1,012
11
75
652
113
161
0.11
0.11
The relevant average exchange rates that impact our business are shown in the following table:
(Average foreign currency equivalent of C$1.00) (1)
U.S. dollar
British pound
Euro
(1)
Average amounts are calculated using month-end spot rates for the period.
2016
0.755
0.544
0.683
2015
0.797
0.519
0.707
Table 6
2014
0.914
0.551
0.680
Total revenue
(Millions of Canadian dollars, except percentage amounts)
Interest income
Interest expense
Net interest income
Net interest margin (on average earning assets)
Investments (1)
Insurance (2)
Trading (see additional trading information section)
Banking (3)
Underwriting and other advisory
Other (4)
Non-interest income
Total revenue
$
$
$
2016
24,452
7,921
16,531
1.70%
8,556
4,868
701
4,848
1,876
1,025
Table 7
2015
2014
$ 22,729
7,958
$ 14,771
1.71%
$ 22,019
7,903
$ 14,116
1.86%
$
8,095
4,436
552
4,388
1,885
1,194
$
7,355
4,957
742
4,090
1,809
1,039
$
$
21,874
38,405
$ 20,550
$ 19,992
$ 35,321
$ 34,108
(1)
(2)
(3)
(4)
Includes securities brokerage commissions, investment management and custodial fees, and mutual fund revenue.
Includes premiums and 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 and share of profit in joint ventures and
associates.
2016 vs. 2015
Total revenue increased $3,084 million or 9% from last year. The impact of foreign exchange translation this year increased our total revenue by
$338 million.
Net interest income increased $1,760 million or 12%, mainly due to the inclusion of our acquisition of City National, and volume growth of
6% across most of our businesses in Canadian Banking.
Net interest margin was down 1 bp compared to last year, largely due to the continued low interest rate environment and competitive
pressures.
Investments revenue increased $461 million or 6%, mainly due to the inclusion of our acquisition of City National and higher average
fee-based client assets reflecting net sales and capital appreciation. These factors were partially offset by lower transaction volumes.
Insurance revenue increased $432 million or 10%, mainly reflecting the change in fair value of investments backing our policyholder
liabilities resulting from changes in long-term interest rates, largely offset in PBCAE. This was partially offset by lower premiums reflecting the
impact of the sale of our home and auto insurance manufacturing business.
Banking revenue increased $460 million or 10% mainly due to the change in fair value of certain Canadian dollar-denominated available-
for-sale (AFS) securities that were funded with U.S. dollar-denominated deposits which is offset in Other revenue, and increased client activity.
Underwriting and other advisory revenue decreased $9 million, largely reflecting lower debt and equity origination activity and decreased
loan syndication revenue largely in the U.S. These factors were mostly offset by increased M&A activity and the impact from foreign exchange
translation.
Other revenue decreased $169 million or 14% from last year mainly due to the change in fair value of certain derivatives used to
economically hedge the AFS securities as noted above, partially offset by the gain related to the sale of RBC General Insurance Company.
14
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
2015 vs. 2014
Total revenue in 2015 increased $1,213 million or 4% as compared to 2014, primarily due to the impact from foreign exchange translation which
increased revenue by $1,012 million, growth in average fee-based client assets in Wealth Management resulting from capital appreciation and
net sales, solid volume growth across most of our businesses in Canadian Banking, and higher fee-based revenue primarily attributable to strong
mutual funds distribution fees in Canadian Banking reflecting higher average client fee-based assets. Higher debt origination reflecting increased
client issuance activity, strong growth in M&A activity reflecting increased mandates in the U.S. and Europe, higher trading-related net interest
income and solid lending growth in Capital Markets as well as a gain of $108 million from the wind-up of a U.S.-based funding subsidiary also
contributed to the increase. These factors were partially offset by the negative change in fair value of investments backing our policyholder
liabilities of $463 million resulting from an increase in long-term interest rates, and a reduction of revenue related to our retrocession contracts,
both of which were largely offset in PBCAE.
Additional trading information
(Millions of Canadian dollars)
Total trading revenue (1)
Net interest income
Non-interest income
Total trading revenue
Total trading revenue by product
Interest rate and credit
Equities
Foreign exchange and commodities
Total trading revenue
Trading revenue (teb) by product
Interest rate and credit
Equities
Foreign exchange and commodities
Total trading revenue (teb)
Trading revenue (teb) by product – Capital Markets
Interest rate and credit
Equities
Foreign exchange and commodities
Total Capital Markets trading revenue (teb)
Table 8
2016
2015
2014
$
$
$
$
$
$
$
$
2,376
701
3,077
1,804
684
589
3,077
1,804
1,166
590
3,560
1,473
1,205
402
3,080
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2,398
552
2,950
1,400
1,045
505
2,950
1,400
1,614
504
3,518
1,238
1,590
376
$
3,204
$
2,029
742
2,771
1,560
814
397
2,771
1,560
1,305
397
3,262
1,293
1,244
333
2,870
(1)
Includes a gain of $49 million (2015 – $40 million gain; 2014 – $105 million loss) related to a funding valuation adjustment on
uncollateralized OTC derivatives.
2016 vs. 2015
Total trading revenue of $3,077 million, which comprises trading-related revenue recorded in Net interest income and Non-interest income, was
up $127 million, or 4% including the impact from foreign exchange translation, mainly due to higher fixed income and foreign exchange trading
revenue mainly in Europe and Canada. These factors were partially offset by lower equities trading revenue reflecting lower client activity.
2015 vs. 2014
Total trading revenue in 2015 of $2,950 million, which comprises trading-related revenue recorded in Net interest income and Non-interest
income, was up $179 million, or 6% compared to 2014 including the impact from foreign exchange translation, mainly due to higher equities
trading revenue reflecting increased client activity primarily in the first half of 2015. This factor was partially offset by lower revenue in certain
legacy portfolios including the exit from certain proprietary trading strategies in 2014 to comply with the Volcker Rule, and lower fixed income
trading revenue reflecting challenging market conditions in the second half of 2015. In addition, trading revenue in 2014 was unfavourably
impacted by the implementation of funding valuation adjustments.
Provision for credit losses (PCL)
2016 vs. 2015
Total PCL increased $449 million or 41% from a year ago, mainly due to higher PCL in Capital Markets, Personal & Commercial Banking, and a
$50 million increase in PCL for loans not yet identified as impaired reflecting volume growth and ongoing economic uncertainty. The PCL ratio of
29 bps increased 5 bps.
2015 vs. 2014
Total PCL in 2015 decreased $67 million or 6% as compared to 2014, mainly due to lower PCL in Personal & Commercial Banking, partially offset
by higher PCL in Capital Markets and Wealth Management.
For further details on PCL, refer to Credit quality performance in the Credit Risk section.
Insurance policyholder benefits, claims and acquisition expense
2016 vs. 2015
PBCAE increased $461 million or 16% from a year ago, mainly due to a change in the fair value of investments backing our policyholder
liabilities, which was largely offset in revenue. This factor was partially offset by lower claims reflecting the impact from the sale of our home and
auto insurance manufacturing business.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
15
2015 vs. 2014
PBCAE in 2015 decreased $610 million or 17% from 2014, mainly due to a reduction of PBCAE related to our retrocession contracts, and the
change in fair value of investments backing our policyholder liabilities resulting from the change in long-term interest rates, both of which were
largely offset in revenue. These factors were partially offset by business growth in Canadian and International Insurance, a lower level of
favourable actuarial adjustments in 2015 reflecting management actions and assumption changes, and an increase due to the impact of foreign
exchange translation.
Non-interest expense
(Millions of Canadian dollars, except percentage amounts)
Salaries
Variable compensation
Benefits and retention compensation
Share-based compensation
Human resources
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles
Other
Non-interest expense
Efficiency ratio (1)
$
$
$
2016
5,865
4,407
1,674
255
12,201
1,438
1,568
945
1,078
970
1,936
20,136
52.4%
$
$
$
2015
5,197
4,533
1,607
246
11,583
1,277
1,410
888
932
712
1,836
18,638
52.8%
Table 9
2014
4,834
4,388
1,561
248
11,031
1,147
1,330
847
763
666
1,877
17,661
51.8%
$
$
$
(1)
Efficiency ratio is calculated as non-interest expense divided by total revenue.
2016 vs. 2015
Non-interest expense increased $1,498 million or 8%, due to the inclusion of City National, which increased non-interest expense
$1,648 million, and included $196 million related to the amortization of intangibles, and $91 million related to integration costs. Lower variable
compensation, largely due to changes in the deferral policy of the compensation plan in Capital Markets, continuing benefits from our efficiency
management activities, lower restructuring costs relating to the International Wealth Management business, and lower litigation provisions in
Capital Markets were partially offset by higher costs in support of business growth, the impact from foreign exchange translation of $165 million,
increased investment in technology initiatives and higher compliance costs.
Our efficiency ratio of 52.4% decreased 40 bps from 52.8% last year, mainly reflecting the increase in revenue due to the change in fair
value of investments backing our policyholder liabilities, which was largely offset in PBCAE, continuing benefits from our efficiency management
activities, and the gain on sale of RBC General Insurance Company. These factors were partially offset by the inclusion of our acquisition of City
National.
2015 vs. 2014
Non-interest expense in 2015 increased $977 million or 6% compared to 2014, mainly reflecting the impact from foreign exchange translation of
$652 million and higher costs in support of business growth. Restructuring costs of $122 million ($90 million after-tax) largely related to our
International Wealth Management business also contributed to the increase. These factors were partially offset by lower litigation provisions and
related legal costs in Capital Markets, and continuing benefits from our efficiency management activities. Non-interest expense in 2014 included
the loss of $100 million related to the sale of RBC Jamaica and a provision of $40 million related to post-employment benefits and restructuring
charges in the Caribbean.
Our efficiency ratio of 52.8% increased 100 bps from 51.8% in 2014, mainly reflecting the decrease in revenue due to the change in fair
value of investments backing our policyholder liabilities, and higher costs in support of business growth, partially offset by continuing benefits
from our efficiency management activities.
16
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Income and other taxes
(Millions of Canadian dollars, except percentage amounts)
Income taxes
Other taxes
Goods and services sales taxes
Payroll taxes
Capital taxes
Property taxes
Insurance premium taxes
Business taxes
Total income and other taxes
Income before income taxes
Canadian statutory income tax rate (1)
Lower average tax rate applicable to subsidiaries
Tax-exempt income from securities
Tax rate change
Effect of previously unrecognized tax loss, tax credit or
temporary differences
Other
Effective income tax rate
Effective total tax rate (2)
$
$
$
$
$
2016
2,841 $
2015
2,597
442 $
627
106
134
45
69
1,423 $
4,264 $
13,299 $
26.5%
(2.6)%
(3.1)%
–%
(0.4)%
1.0%
21.4%
29.0%
426
577
100
121
50
59
1,333
3,930
12,623
26.3%
(0.9)%
(3.6)%
0.3%
(0.1)%
(1.4)%
20.6%
28.2%
$
$
$
$
$
Table 10
2014
2,706
395
529
86
106
51
8
1,175
3,881
11,710
26.3%
(2.3)%
(3.3)%
–%
(0.1)%
2.5%
23.1%
30.1%
(1)
(2)
Blended Federal and Provincial statutory income tax rate.
Total income and other taxes as a percentage of net income before income taxes and other taxes.
2016 vs. 2015
Income tax expense increased $244 million or 9% from last year, mainly due to higher earnings before income tax. The effective tax rate of
21.4% increased 80 basis points as last year included net favourable tax adjustments.
Other taxes increased $90 million or 7% from 2015 mainly due to higher payroll resulting from the inclusion of our acquisition of City
National. In addition to the income and other taxes reported in our Consolidated Statements of Income, we recorded income tax recoveries of
$438 million (2015 – $878 million) in shareholders’ equity, primarily reflecting remeasurements of employee benefit plans.
2015 vs. 2014
Income tax expense decreased $109 million or 4% and the effective income tax rate of 20.6% decreased 250 bps from 2014, mainly due to net
favourable tax adjustments in 2015, partially offset by higher earnings before income taxes.
Other taxes increased $158 million or 13% from 2014, mainly due to higher business and payroll taxes, as well as higher goods and
services sales taxes.
Client assets
Assets under administration
Assets under administration (AUA) are assets administered by us which are beneficially owned by our clients. We provide services that are
administrative in nature, including safekeeping, collecting investment income, settling purchase and sale transactions, and record keeping.
Underlying investment strategies within AUA are determined by our clients and generally do not impact the administrative fees that we receive.
Administrative fees can be impacted by factors such as asset valuation level changes from market movements, types of services administered,
transaction volumes, geography and client relationship pricing based on volumes or multiple services.
Our Investor & Treasury Services business is the primary business segment that has AUA with approximately 78% of total AUA, as at
October 31, 2016, followed by our Wealth Management business with approximately 17% of total AUA.
2016 vs. 2015
AUA increased $376 billion or 8% compared to last year, mainly reflecting capital appreciation, net sales, the impact from foreign exchange
translation and the inclusion of our acquisition of City National.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
17
The following table summarizes AUA by geography and asset class:
AUA by geographic mix and asset class
(Millions of Canadian dollars)
Canada (1)
Money market
Fixed income
Equity
Multi-asset and other
Total Canada
U.S. (1), (2)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
Total International
Total AUA (2)
Table 11
2016
2015
$
33,000
731,200
705,900
733,800
31,500
685,600
669,900
642,400
2,203,900
$ 2,029,400
36,400
126,800
200,800
44,800
408,800
50,300
426,200
856,400
1,113,300
$
$
$
32,900
114,600
189,300
35,600
372,400
47,500
375,400
804,000
1,054,400
2,446,200
$ 2,281,300
5,058,900
$ 4,683,100
$
$
$
$
$
$
$
(1)
(2)
Geographic information is based on the location from where our clients are serviced.
Amounts have been revised from those previously presented.
Assets under management
Assets under management (AUM) are assets managed by us which are beneficially owned by our clients. Management fees are paid by the
investment funds for the investment capabilities of an investment manager and can also include administrative services. Management fees may
be calculated daily, monthly or quarterly as a percentage of the AUM, depending on the distribution channel, underlying products and
investment strategies. In general, equity strategies carry a higher fee rate than fixed income or money market strategies. Fees are also impacted
by asset mix and relationship pricing for clients using multiple services. Higher risk assets generally produce higher fees, while clients using
multiple services can take advantage of synergies which reduce the fees they are charged. Certain funds may also include performance fee
arrangements, which are recorded when certain benchmarks or performance targets are achieved. These factors could lead to differences on fees
earned by products and therefore net return by asset class may vary despite similar average AUM. Our Wealth Management segment is the
primary business segment that has AUM.
2016 vs. 2015
AUM increased $88 billion or 18% compared to last year, primarily due to the inclusion of our acquisition of City National and capital
appreciation.
The following table presents the change in AUM for the year ended October 31, 2016:
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition
Foreign exchange
2016
Table 12
2015
Money market
Fixed income
Equity
Multi-asset
and other
Total
$
39,800 $
11,200
(14,400)
700
(2,500)
200
9,800
600
196,300 $
83,600 $
35,800
(52,000)
4,300
(11,900)
8,100
4,200
2,000
4,800
(3,900)
500
1,400
5,100
10,200
500
178,700 $ 498,400
55,200
(72,100)
21,600
3,400
(1,800)
16,100
$ 457,000
n.a.
n.a.
n.a.
17,700
8,100
33,900
500
4,700
21,500
58,100
3,600
18,200
n.a.
n.a.
n.a.
Total market, acquisition and foreign exchange
impact
10,600
14,300
15,800
42,500
83,200
23,200
AUM, balance at end of year
$
47,900 $
198,700 $ 100,800 $
238,900 $ 586,300
$ 498,400
n.a.
not available
18
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Business segment results
Results by business segment
(Millions of Canadian dollars,
except percentage amounts)
Net interest income
Non-interest income
Total revenue
PCL
PBCAE
Non-interest expense
Net income before income
taxes
Income tax
Net income
ROE (2)
Personal &
Commercial
Banking
Wealth
Management
2016
Investor &
Treasury
Services
Capital
Markets (1)
Corporate
Support (1)
$
$
$
$
$
$
$
$
10,337
4,499
14,836
1,122
–
6,757
6,957
1,773
5,184
27.5%
Insurance
$
–
5,151
$ 5,151
1
3,424
622
1,955
6,834
8,789
48
–
6,801
1,940
467
$ 1,104
204
1,473
$
900
$
$
$
$
825
1,446
2,271
(3)
–
1,460
814
201
613
$
$
$
$
3,804
4,146
7,950
327
–
4,466
3,157
887
2,270
$
$
$
$
(390) $
(202)
(592) $
51
–
30
Total
16,531
21,874
38,405
1,546
3,424
20,136
(673) $
(691)
13,299
2,841
18
$
10,458
10.9%
52.8%
17.9%
12.2%
n.m.
16.3%
Table 13
2015
2014
$
$
$
$
Total
14,771
20,550
35,321
1,097
2,963
18,638
12,623
2,597
10,026
18.6%
$
$
$
$
Total
14,116
19,992
34,108
1,164
3,573
17,661
11,710
2,706
9,004
19.0%
Average assets
$ 403,800
$
83,200
$ 14,400
$ 142,500
$ 508,200
$ 24,300
$ 1,176,400
$ 1,052,800
$ 906,500
(1)
(2)
Net interest income, total revenue and net income before income taxes are presented in Capital Markets on a taxable equivalent basis (teb). The teb adjustment is eliminated in the Corporate
Support segment. For a further discussion, refer to the How we measure and report our business segments section.
These measures may not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other financial institutions. For further details, refer to the
Key performance and non-GAAP measures 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 reflects 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:
• Wealth Management reported results also include disclosure in U.S. dollars, primarily for U.S. Wealth Management (including City National)
•
•
as we review and manage the results of this business largely in this currency.
Capital Markets results are reported on a taxable equivalent basis (teb), which grosses up total revenue from certain tax-advantaged
sources (Canadian taxable corporate dividends and the U.S. tax credit investment business) to their effective taxable equivalent value with
a corresponding offset recorded in the provision for income taxes. We record the elimination of the teb adjustments in Corporate Support.
We believe these adjustments are useful and reflect how Capital Markets manages its business, since it enhances the comparability of
revenue and related ratios across taxable revenue and our principal tax-advantaged source of revenue. The use of teb adjustments and
measures may not be comparable to similar generally accepted accounting principles (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, including residual asset/liability management results, impact from income tax adjustments, net charges
associated with unattributed capital and PCL on loans not yet identified as impaired.
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 Technology & Operations and Functions, which are 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 is intended to reflect 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 section.
Funds transfer pricing
Funds transfer pricing refers to the pricing of intra-company borrowing or lending for management reporting purposes. We employ a funds
transfer pricing process to enable risk-adjusted management reporting of segments. This process determines the costs and revenue for intra-
company borrowing and lending of funds after taking into consideration our interest rate risk and liquidity risk management objectives, as well
as applicable regulatory requirements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
19
Provisions for credit losses
PCL are recorded to recognize estimated losses on impaired loans, as well as losses that have been incurred but are not yet identified in our
loans portfolio. This portfolio includes on-balance sheet exposures, such as loans and acceptances, and off-balance sheet items such as letters
of credit, guarantees and unfunded commitments. PCL on impaired loans are included in the results of each business segment to fully reflect the
appropriate expenses related to the conduct of each business segment. PCL on loans not yet identified as impaired are included in Corporate
Support, as Group Risk Management (GRM) effectively controls this through its monitoring and oversight of various lending portfolios throughout
the enterprise. For details on our accounting policy on Allowance for credit losses, refer to Note 2 of our 2016 Annual Consolidated Financial
Statements.
Key performance and non-GAAP measures
Performance measures
Return on common equity (ROE)
We measure and evaluate the performance of our consolidated operations and each business segment using a number of financial metrics, such
as net income and ROE. We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in
our business. Management views the business segment ROE measure as a useful measure for supporting investment and resource allocation
decisions because it adjusts for certain items that may affect comparability between business segments and certain competitors.
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 includes the capital required to underpin various risks as described in the Capital
Management section and amounts invested in goodwill and intangibles.
The attribution of capital and risk capital involves the use of assumptions, judgments and methodologies that are regularly reviewed and
revised by management as deemed necessary. Changes to such assumptions, judgments and methodologies can have a material effect on the
segment ROE 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 calculations:
Calculation of ROE
Personal &
Commercial
Banking
Wealth
Management
Insurance
2016
Investor &
Treasury
Services
Table 14
2015
2014
Capital
Markets
Corporate
Support
Total
Total
Total
$
$
5,089
18,550
27.5%
1,412
12,950
10.9%
$
891
1,700
52.8%
$
596
3,350
17.9%
$ 2,186
17,900
$
(63)
7,750
$ 10,111
62,200
$ 9,734
52,300
$ 8,697
45,700
12.2%
n.m.
16.3%
18.6%
19.0%
(Millions of Canadian dollars, except
percentage amounts)
Net income available to common
shareholders
Total average common equity (1), (2)
ROE (3)
(1)
(2)
Average common equity represents rounded figures.
The amounts for the segments are referred to as attributed capital. Effective the first quarter of 2016, we increased our capital attribution rate to better align with higher regulatory capital
requirements.
ROE is based on actual balances of average common equity before rounding.
(3)
n.m. not meaningful
Embedded value for Insurance operations
Embedded value is a measure of shareholder value embedded in the balance sheet of our Insurance segment, excluding any value 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 cost of capital required to
support in-force business. We use discount rates equal to long-term risk free rates plus a spread. Required capital uses the capital frameworks in
the jurisdictions in which we operate.
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.
Non-GAAP measures
We believe that certain non-GAAP measures described below are more reflective of our ongoing operating results, and provide readers with a
better understanding of management’s perspective on our performance. These measures enhance the comparability of our financial performance
for the year ended October 31, 2016 with results from last year as well as, in the case of economic profit, measure relative contribution to
shareholder value. Non-GAAP measures do not have a standardized meaning under GAAP and may not be comparable to similar measures
disclosed by other financial institutions.
The following discussion describes the non-GAAP measures we use in evaluating our operating results.
Economic profit
Economic profit is net income excluding the after-tax effect of amortization of other intangibles less a capital charge for use of attributed capital.
It measures the return generated by our businesses in excess of our cost of shareholder’s equity, thus enabling users to identify relative
contributions to shareholder value.
20
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
The capital charge includes a charge for common equity and preferred shares. For 2016, our cost of common equity remained unchanged at
9.0%.
The following table provides a summary of our Economic profit:
Economic profit
(Millions of Canadian dollars)
Net income
add: Non-controlling interests
After-tax effect of amortization
of other intangibles
Goodwill and intangibles write-down
Adjusted net income (loss)
less: Capital charge
Economic profit (loss)
Personal &
Commercial
Banking
$
$
$
5,184
(8)
12
–
5,188
1,756
3,432
Wealth
Management
Insurance
$
$
$
1,473
–
183
–
1,656
1,229
427
$
$
$
900
–
–
–
900
160
740
Table 15
2016
Investor &
Treasury
Services
$
$
$
613
(1)
16
–
628
316
312
Capital
Markets
2,270
–
–
–
2,270
1,694
576
$
$
$
Corporate
Support
Total
$
$
$
18
(44)
$ 10,458
(53)
1
–
212
–
(25)
738
$ 10,617
5,893
(763)
$
4,724
(Millions of Canadian dollars)
Net income
add: Non-controlling interests
After-tax effect of amortization
of other intangibles
Goodwill and intangibles write-down
Adjusted net income (loss)
less: Capital charge
Economic profit (loss)
2015
2014
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets
Corporate
Support
Total
Total
$
$
$
5,006
(8)
$
22
–
5,020
1,544
3,476
$
$
1,041
2
69
4
1,116
551
565
$
$
$
706
–
–
–
706
148
558
$
$
$
556
(1)
$ 2,319
–
21
–
576
251
325
–
–
$ 2,319
1,550
$
769
$
$
$
398
(94)
$ 10,026
(101)
$ 9,004
(94)
1
–
113
4
123
8
305
852
$ 10,042
4,896
$ 9,041
4,341
(547) $ 5,146
$ 4,700
Results excluding specified items
Our results were impacted by the following specified items:
•
For the year ended October 31, 2016, a gain of $287 million ($235 million after-tax) recorded in our Insurance segment, related to the sale
of RBC General Insurance Company to Aviva Canada Inc., which involved the sale of our home and auto insurance manufacturing business.
For the year ended October 31, 2014, in our Personal & Commercial Banking segment:
– A total loss of $100 million (before- and after-tax) related to the sale of RBC Jamaica, comprised of a loss of $60 million (before- and
•
after-tax) in the first quarter of 2014, and a further loss of $40 million (before- and after-tax) in the third quarter of 2014 which includes
foreign currency translation related to the closing of the sale of RBC Jamaica; and
– A provision of $40 million ($32 million after-tax) related to post-employment benefits and restructuring charges in the Caribbean.
The following tables provide calculations of our business segment results and measures excluding these specified items for the years ended
October 31, 2016 and October 31, 2014.
Insurance
(Millions of Canadian dollars, except percentage amounts)
Total revenue
PBCAE
Non-interest expense (1)
Net income before income taxes
Net income
Selected balance and other information
ROE
(1)
Includes Provision for credit losses of $1 million.
2016
Item excluded
Gain related to
the sale of RBC
General Insurance
$ (287)
–
–
(287)
$ (235)
Table 16
Adjusted
$ 4,864
3,424
623
817
665
$
41.0%
As
reported
$ 5,151
3,424
623
1,104
900
$
52.8%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
21
Personal & Commercial Banking
(Millions of Canadian dollars, except percentage amounts)
As reported
2014
Items excluded
Loss related to
the sale of
RBC Jamaica (1)
Provision for
post-employment
benefits and
restructuring charges
Total revenue
PCL
Non-interest expense
Net income before taxes
Net income
Selected balances and other information
Non-interest expense
Total revenue
Efficiency ratio
Revenue growth rate
Non-interest expense growth rate
Operating leverage
$
$
$
–
–
(100)
100
100
(100)
$
$
$
$
$
$
13,730
1,103
6,563
6,064
4,475
6,563
13,730
47.8%
5.5%
6.4%
(0.9%)
Table 17
Adjusted
$ 13,730
1,103
6,423
6,204
4,607
$
–
–
(40)
40
32
(40)
$
6,423
13,730
46.8%
5.5%
4.2%
1.3%
(1)
Total loss is comprised of a loss of $60 million (before- and after-tax) recorded in Q1 2014 and a further loss of $40 million (before- and after-tax) in Q3 2014, including foreign currency
translation.
Personal & Commercial Banking
Operating through two businesses – Canadian Banking and Caribbean & U.S. Banking, Personal & Commercial Banking is comprised of our
personal and business banking operations, and our auto financing and retail investment businesses, including our online discount brokerage
channel. We provide services to more than 13.5 million individual, business and institutional clients across Canada, the Caribbean and the U.S.
In Canada, we provide a broad suite of financial products and services through our extensive branch, automated teller machine (ATM), online,
mobile and telephone banking networks, as well as through a large number of proprietary sales professionals. In the Caribbean, we offer a broad
range of financial products and services to individuals and business clients, and public institutions in targeted markets. In the U.S., we serve the
cross-border banking needs of Canadian clients within the U.S. through online channels.
In Canada, we compete with other Schedule I banks, independent trust companies, foreign banks, credit unions, caisses populaires and
auto financing companies. We maintain top (#1 or #2) rankings in market share in this competitive environment for all key retail and business
financial product categories, and have the largest branch network, the most ATMs and the largest mobile sales network across Canada. In the
Caribbean, our competition includes banks, trust companies and investment management companies serving retail and corporate customers
and public institutions. We continue to be the second-largest bank as measured by assets in the English Caribbean, with 77 branches in
17 countries and territories. In the U.S., we compete primarily with other Canadian banking institutions with operations in the U.S.
Economic and market review
We continued to see solid volume growth across most of our Canadian Banking businesses despite challenging economic conditions in Canada,
particularly in the oil exposed regions. Overall, credit conditions have weakened from historically strong levels last year primarily due to higher
unemployment in oil exposed provinces, while credit conditions remained relatively stable in other provinces. Our businesses continued to be
impacted by competitive pressures and the low interest rate environment. In the Caribbean, unfavourable economic conditions continued to
negatively impact our results through lower loan volume growth, and spread compression.
Highlights
In Canada:
• We achieved solid volume growth across most products with particular strengths in:
–
Home equity supported by our focus on the key newcomer and first time home buyer segments, coupled with our Employee Pricing
campaigns;
Credit cards through strong account and balance growth in our industry leading Avion® card;
Personal and business deposits through acquisition of new clients and strengthening our existing client relationships;
Business lending through higher focus on select business segments and markets to strengthen our market share; and
–
–
–
– Mutual fund branch investments through strong net inflows and capital appreciation strengthening our leading market share position.
Became the first Canadian bank to offer free Interac e-Transfer payments for all personal chequing accounts.
•
• We currently service 5.2 million active clients through our online and mobile platforms, and continued to invest in digitizing our client
–
–
–
experience with a focus on speed of service and simplifying end-to-end processes:
–
First North American financial institution to provide an in-branch, real-time, multi-language video capability available in more than 200
languages;
Implemented “Disbursement Hub”, a new automated system that reduces the time it takes to provide funds to our mortgage clients
upon closing, and connects all transaction stakeholders, including lawyers and notaries;
Launched “Add It”, whereby pre-approved clients can set up their Royal Credit Line® with just four clicks, and without the need for
paperwork or a branch visit;
Rolled out Touch ID Login (iPhone) and our iWatch app release providing more options for our clients to bank securely with us
anywhere, anytime; and
Launched contactless point-of-sale at participating merchants by making Apple Pay‡ available to RBC debit and credit cardholders.
–
As a result of our successes, we received external recognition as an industry leader and were named or ranked:
–
– World’s Best Global Bank for Consumer Banking; Best Trade Finance Bank in Canada 4 years in a row (Global Finance)
–
Highest in Customer Satisfaction among the Big Five Retail Banks in Canada 2016 (J.D. Power)
Best Payment Innovation and Best Use of Data Analytics for 2016 (Retail Banker International)
•
22
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
In the Caribbean:
•
Improving our client experience through transformation of our branches, upgrade of our ATM network, rollout of the new mobile banking
app and investment in specialized sales force capabilities.
Continued to focus on quality asset growth in key client segments while reducing structural costs.
As a result of our successes, we were named #1 Bank in the Caribbean for the second year in a row (The Banker).
•
•
Outlook and priorities
The Canadian economy is expected to grow by 1.8% in calendar 2017, driven by firm consumer spending, recovery in business investments and
stable to improving unemployment rates. However, with risks remaining to the economic outlook, interest rates are expected to stay at their
current low levels throughout 2017, underpinning solid volume growth for certain lending products. In addition, though the recent regulatory
measures taken by Federal and Provincial governments to curb the pace of housing market growth in certain regions is expected to affect the
demand for mortgage products, the continued low interest rate environment is expected to remain supportive of solid mortgage volume growth.
As the low interest rate environment has resulted in compressed interest margins for industry participants, we continue to expect competitive
pressures in the coming year. In 2017, we will continue to focus on building a digitally-enabled relationship bank and improving the client
experience to successfully attract and retain new and existing clients.
In the Caribbean, challenging market conditions and slow economic growth continue to temper our outlook for 2017. We expect net interest
margins to remain challenged primarily due to competitive pressures. However, we expect to strengthen our business performance through
efficiency management, increases in fee revenue and quality asset growth.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
Key strategic priorities for 2017
In Canada, our priorities are to:
•
Transform how we serve clients by increasing points of access to our digital platforms and services and providing our clients with
personalized advice and solutions, offers and client loyalty rewards.
Accelerate growth in key segments and increase our presence in underpenetrated areas to achieve industry-leading volume growth.
Rapidly deliver digital solutions to our clients.
Innovate to become a more agile and efficient bank and accelerate our investments to simplify, digitize and automate for clients and
employees.
•
•
•
In the Caribbean, we are focused on transforming our distribution channels to better serve our clients in target markets where we can compete
and drive sustainable profitability, with a strategic focus on corporate, business, professional and business owner clientele. In the U.S., we are
focused on meeting the banking and borrowing needs of our cross-border clients through an innovative direct banking approach by providing
seamless access to their entire suite of RBC products.
Personal & Commercial Banking
(Millions of Canadian dollars, except number of and percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Total revenue
PCL
Non-interest expense
Net income before income taxes
Net income
Revenue by business
Canadian Banking
Caribbean & U.S. Banking
Key ratios
ROE
NIM (1)
Efficiency ratio (2)
Efficiency ratio adjusted (2), (3)
Operating leverage
Operating leverage adjusted (3)
Selected average balance sheet information
Total assets
Total earning assets
Loans and acceptances
Deposits
Other information
AUA (4)
AUM
Number of employees (FTE) (5)
Effective income tax rate
Credit information
Gross impaired loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances
$
$
$
$
$
2016
10,337
4,499
14,836
1,122
6,757
6,957
5,184
13,833
1,003
27.5%
2.68%
45.5%
n.a.
1.5%
n.a.
403,800
385,400
383,900
320,100
239,600
4,600
33,896
25.5%
0.43%
0.29%
$
$
$
$
$
2015
10,004
4,309
14,313
984
6,611
6,718
5,006
13,379
934
30.0%
2.71%
46.2%
n.a.
3.5%
1.3%
386,100
369,000
367,500
298,600
223,500
4,800
35,211
25.5%
0.49%
0.27%
$
$
$
$
$
Table 18
2014
9,743
3,987
13,730
1,103
6,563
6,064
4,475
12,869
861
29.0%
2.77%
47.8%
46.8%
(0.9)%
1.3%
367,900
351,300
350,700
278,800
214,200
4,000
36,315
26.2%
0.55%
0.31%
(1)
(2)
(3)
(4)
(5)
n.a.
NIM is calculated as Net interest income divided by Average total earning assets.
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
Measures have been adjusted by excluding the Q3 2014 loss of $40 million related to the closing of RBC Jamaica, and the Q1 2014 loss of $60 million related to the sale of RBC Jamaica and
the provision of $40 million related to post-employment benefits and restructuring charges in the Caribbean. These are non-GAAP measures. For further details, refer to the Key performance
and non-GAAP measures section.
AUA represents period-end spot balances and includes securitized residential mortgages and credit card loans as at October 31, 2016 of $18.6 billion and $9.6 billion, respectively
(October 31, 2015 – $21.0 billion and $8.0 billion; October 31, 2014 – $23.2 billion and $8.0 billion).
Amounts have been revised from those previously presented.
not applicable
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
23
Financial performance
2016 vs. 2015
Net income increased $178 million or 4%, largely reflecting solid volume growth across most businesses partially offset by lower spreads and
fee-based revenue growth in Canadian Banking. Higher earnings in the Caribbean also contributed to the increase. These factors were partially
offset by higher costs in support of business growth and higher PCL in Canada.
Total revenue increased $523 million or 4% largely reflecting volume growth of 6% partly offset by lower spreads in Canada and higher fee-
based revenue.
Net interest margin decreased 3 bps mainly due to the low interest rate environment.
PCL increased $138 million, with the PCL ratio increasing 2 bps, largely due to higher provisions in our Canadian personal and commercial
lending portfolios and higher write-offs in our Canadian credit cards portfolio. These factors were partially offset by lower PCL in our Caribbean
portfolios.
Non-interest expense increased $146 million or 2%, primarily attributable to higher technology spend and increased costs in support of
business growth. These factors were partially offset by continuing benefits from our efficiency management activities.
Average loans and acceptances increased $16 billion or 4%, largely due to growth in Canadian residential mortgages and business loans.
Average deposits increased $22 billion or 7%, as a result of growth in business and personal deposits.
2015 vs. 2014
Net income was up $531 million or 12% from 2014. Excluding the loss of $100 million (before- and after-tax) related to the sale of RBC Jamaica,
and a provision of $40 million ($32 million after-tax) related to post-employment benefits and restructuring charges in the Caribbean in 2014,
net income increased $399 million or 9%, largely reflecting solid volume growth across most businesses in Canada, higher fee-based revenue
primarily attributable to higher mutual fund distribution fees reflecting higher average client fee-based assets, higher card service revenue,
higher earnings in the Caribbean and lower PCL. These factors were partially offset by higher technology and staff costs to support business
growth and lower spreads.
Results excluding the specified items noted above are non-GAAP measures. For further details, including a reconciliation, refer to the Key
performance and non-GAAP measures section.
In Canada, we operate through three business lines: Personal Financial Services, Business Financial Services, and Cards and Payment
Solutions. The following provides a discussion of our consolidated Canadian Banking results.
Canadian Banking financial highlights
Table 19
(Millions of Canadian dollars, except number of and percentage amounts and as
otherwise noted)
Net interest income
Non-interest income
Total revenue
PCL
Non-interest expense
Net income before income taxes
Net income
Revenue by business
Personal Financial Services
Business Financial Services
Cards and Payment Solutions
Key Ratios
ROE
NIM (1)
Efficiency ratio (2)
Operating leverage
Selected average balance sheet information
Total assets
Total earning assets
Loans and acceptances
Deposits
Other information
AUA (3)
Number of employees (FTE) (4)
Effective income tax rate
Credit information
$
$
$
$
2016
9,683 $
4,150
13,833
1,080
6,010
6,743
5,002 $
7,810 $
3,190
2,833
32.6%
2.63%
43.4%
1.4%
2015
9,377
4,002
13,379
912
5,891
6,576
4,877
7,634
3,091
2,654
36.4%
2.66%
44.0%
0.4%
$
$
$
2014
9,168
3,701
12,869
928
5,687
6,254
4,642
7,285
3,135
2,449
37.0%
2.71%
44.2%
1.2%
381,000 $ 364,900
352,800
368,100
358,500
374,600
281,200
301,400
$ 349,500
337,900
343,100
263,600
231,400
29,982
25.8%
213,700
31,057
25.8%
205,200
31,583
25.8%
Gross impaired loans as a % of average net loans and
acceptances
PCL on impaired loans as a % of average net loans and
acceptances
0.27%
0.30%
0.29%
0.25%
0.33%
0.27%
(1)
(2)
(3)
(4)
NIM is calculated as Net interest income divided by Average total earning assets.
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
AUA represents period-end spot balances and includes securitized residential mortgages and credit card loans as at October 31, 2016
of $18.6 billion and $9.6 billion, respectively, (October 31, 2015 – $21.0 billion and $8.0 billion; October 31, 2014 – $23.2 billion and
$8.0 billion).
Amounts have been revised from those previously presented.
24
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Financial performance
2016 vs. 2015
Net income increased $125 million or 3% largely reflecting solid volume growth across most businesses partially offset by lower spreads, and
fee-based revenue growth. These factors were partially offset by higher PCL and higher costs in support of business growth.
Total revenue increased $454 million or 3%, largely reflecting volume growth of 6% partly offset by lower spreads. Fee-based revenue
growth mainly from higher credit card balances and transaction volumes driving higher card service revenue, and increased client activity also
contributed to the increase.
Net interest margin decreased 3 bps compared to last year mainly due to the low interest rate environment.
PCL increased $168 million, with the PCL ratio increasing 4 bps, mostly due to higher provisions in our personal and commercial lending
portfolios and higher write-offs in our credit cards portfolio.
Non-interest expense increased $119 million or 2% mainly due to higher technology spend and increased costs in support of business
growth. These factors were partially offset by continuing benefits from our efficiency management activities.
Average loans and acceptances increased $16 billion or 4%, mainly due to 7% average growth in residential mortgages and business loans.
Average deposits increased $20 billion or 7%, primarily reflecting growth in both business and personal deposits.
2015 vs. 2014
Net income increased $235 million or 5% from 2014, reflecting solid volume growth across most businesses, strong fee-based revenue growth
primarily attributable to higher mutual fund distribution fees due to higher average client fee-based assets, as well as higher credit card balances
and transaction volumes driving higher card service revenue. These factors were partially offset by higher technology and staff costs to support
business growth, and lower spreads.
Business line review
Personal Financial Services
Personal Financial Services offers a full range of products focused on meeting the needs of our individual Canadian 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, Canadian private banking, indirect lending (including auto financing), mutual funds and self-directed brokerage accounts, and
Guaranteed Investment Certificates (GICs). We rank #1 or #2 in market share for all key personal banking products in Canada and our retail
banking network is the largest in Canada with 1,268 branches and over 4,550 ATMs.
Financial performance
Total revenue increased $176 million or 2% compared to last year, primarily reflecting volume growth of 7% in deposits and residential
mortgages partially offset by lower spreads, and increased client activity.
Average residential mortgages increased 7% compared to last year, resulting from solid housing market activity supported by the continuing
low interest rate environment and our targeted marketing strategy. Average other loans and acceptances decreased 3% from last year largely due
to lower indirect lending volumes. Average deposits increased 7% from last year largely reflecting the acquisition of new clients as well as
continued growth of existing client balances. Strong client acquisition contributed to increased client activity and continued growth of average
client fee-based assets.
Selected highlights
Table 20
Average residential mortgages, personal loans and deposits
(Millions of Canadian dollars)
(Millions of Canadian dollars, except number of)
2016
2015
2014
Total revenue
Other information (average)
Residential mortgages
Other loans and acceptances
Deposits (1)
Branch mutual fund balances (2)
AUA – Self-directed brokerage (2)
Number of:
New deposit accounts opened
(thousands)
Branches
ATM
(1)
(2)
Includes GIC balances.
Represents year-end spot balances.
$
7,810 $
7,634 $
7,285
210,400
81,800
185,600
132,100
69,700
197,300
84,100
173,000
122,000
61,400
186,000
85,400
165,100
111,600
60,500
1,346
1,268
4,555
1,420
1,275
4,542
1,514
1,272
4,620
216,000
180,000
144,000
108,000
72,000
36,000
0
120,000
100,000
80,000
60,000
40,000
20,000
0
2016 2015 2014
2016 2015 2014
2016 2015 2014
Residential mortgages
Other loans
and acceptances
Deposits
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
25
Business Financial Services
Business Financial Services offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer
financing (floor plan), trade products and services to small and medium-sized commercial businesses, as well as agriculture and agribusiness
clients across Canada. Our business banking network has the largest team of relationship managers and specialists in the industry. Our strong
commitment to our clients has resulted in our leading market share in business loans and deposits.
Financial performance
Total revenue increased $99 million or 3% compared to last year primarily due to volume growth in both loans and deposits, which was partially
offset by lower spreads reflecting the continuing low interest rate environment and competitive pressures.
Average loans and acceptances increased 7% and average deposits were up 7%, despite a competitive environment, due to increased
activity from existing and new clients.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information (average)
Loans and acceptances
Deposits (1)
(1)
Includes GIC balances.
Table 21
Average business loans and acceptances and business deposits
(Millions of Canadian dollars)
2016
3,190 $
2015
3,091 $
2014
3,135
$
66,400
115,800
62,000
108,200
57,600
98,500
68,000
59,500
51,000
42,500
34,000
25,500
17,000
8,500
0
120,000
105,000
90,000
75,000
60,000
45,000
30,000
15,000
0
2016 2015 2014
2016 2015 2014
Business loans and acceptances
Business deposits
Cards and Payment Solutions
Cards and Payment Solutions provides a wide array of credit cards with loyalty and reward benefits, and payment products and solutions within
Canada. We have over 7 million credit card accounts and have approximately 24% market share of Canada’s credit card purchase volume.
In addition, this business line includes our 50% interest in Moneris Solutions, Inc., our merchant card processing joint venture with the
Bank of Montreal. Moneris processes approximately $235 billion in annual credit and debit card transaction volumes.
Financial performance
Total revenue increased $179 million or 7% compared to last year, driven by higher credit card balances, increased transaction volumes, and
improved spreads.
Average credit card balances increased 6% and net purchase volumes increased 7% due to higher client activity, including strong new
account acquisition.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
2016
2015
2014
$ 2,833 $ 2,654 $ 2,449
Average credit card balances
Net purchase volumes
16,000
97,400
15,100
90,800
14,100
84,200
Table 22
Average credit card balances and net purchase volumes
(Millions of Canadian dollars)
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
98,000
85,750
73,500
61,250
49,000
36,750
24,500
12,250
0
2016 2015 2014
2016 2015 2014
Average credit card balances
Net purchase volumes
Caribbean & U.S. Banking
Our Caribbean banking business offers a comprehensive suite of banking products and services, as well as international financing and trade
promotion services through extensive branch, ATM, online and mobile banking networks.
Our U.S. cross-border banking business serves the needs of our Canadian clients within the U.S. through online and mobile channels, and
offers a broad range of financial products and services to individual and business clients across all 50 states.
26
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Financial performance
Total revenue was up $69 million or 7% from last year, primarily due to the positive impact of foreign exchange translation, higher fee-based
revenue reflecting full service pricing in the Caribbean, and higher interest earned in our securities investment portfolio.
Average loans and acceptances increased 3%, and average deposits increased 7%, mostly due to the impact from foreign exchange
translation.
Selected highlights
Table 23
Average loans and deposits (Millions of Canadian dollars)
(Millions of Canadian dollars, number of and
percentage amounts)
Total revenue
Other information
Net interest margin
Average loans and acceptances
Average deposits
AUA
AUM
Number of:
Branches
ATM
Wealth Management
2016
2015
2014
$ 1,003 $
934
$
861
3.78%
3.87%
$ 9,300 $ 9,000
17,400
9,800
4,800
18,700
8,200
4,600
4.29%
$ 7,600
15,200
9,000
4,000
77
276
79
274
93
309
10,000
8,000
6,000
4,000
2,000
0
2016 2015 2014
2016 2015 2014
Loans and acceptances
Deposits
20,000
16,000
12,000
8,000
4,000
0
Wealth Management comprises Canadian Wealth Management, U.S. Wealth Management (including City National), International Wealth
Management and Global Asset Management (GAM). Wealth Management serves individual and institutional clients in target markets around the
world. From our offices in key financial centres mainly in Canada, the U.S., the U.K., the Channel Islands and Asia, Wealth Management offers a
comprehensive suite of investment, trust, banking, credit and other wealth management solutions to affluent, high net worth (HNW) and ultra-
high net worth (UHNW) clients. Our asset management group, Global Asset Management, which includes BlueBay Asset Management (BlueBay),
is an established global leader in investment management services, providing investment strategies and fund solutions directly to institutional
investors and also to individual clients through our distribution channels and third-party distributors. On November 2, 2015, we completed the
acquisition of City National, which has enhanced and complemented our existing U.S. businesses and product offerings.
Economic and market review
Canada and the U.S. saw a softening in growth and economic performance in 2016, which resulted in a challenging market environment during
the first half of 2016. In the latter part of the year, we saw improved investor confidence and market conditions driving growth in our average fee-
based client assets through capital appreciation and higher net sales. The Eurozone continued to stimulate economic activity through the ECB’s
quantitative easing program. Globally, volatile capital markets have led to lower transactional volumes. Furthermore, increased regulatory
requirements have had an adverse impact on compliance and technology costs.
Highlights
•
The integration of City National has enhanced and complemented our presence in the U.S., further expanding our product offerings to select
HNW clients, leveraging the combined platform for commercial clients, and continuing to extend industry verticals with RBC Capital
Markets® expertise.
• We continue to grow and invest in our high-performing global asset management business and maintain leading market share of 14.8% in
•
•
•
•
the Canadian mutual fund industry with strong positive net inflows. We continued to increase BlueBay’s distribution footprint with
institutional clients and expand our international distribution capabilities to the U.S. and international institutional clients and professional
buyers.
In Canada, our full service private wealth business is the industry leader. We continue to extend our leadership amongst HNW clients by
focusing on delivering comprehensive value to our clients, leveraging our expertise around business owners, succession and wealth
planning.
In the U.S., we are among the top 10 full service brokerage firms in terms of assets under administration and number of advisors, and we
continue to focus on improving advisor productivity. Furthermore, our recent acquisition of City National has enhanced our U.S. product
offering.
Outside Canada and the U.S., we continued to realign our International Wealth Management business to focus on key client segments,
including HNW and UHNW clients in select target markets, while enhancing our product offering and operating environment to a more
conservative risk profile.
The strength of our global capabilities and continued commitment to deliver integrated global wealth management advice and solutions
to HNW and UHNW clients has helped us earn significant industry awards. We were ranked or named:
–
Fifth largest global wealth manager by client assets (Scorpio Partnership’s 2016 Global Private Banking KPI Benchmark) for the third
year in a row.
Best Private Bank in Canada (PWM/The Banker Global Private Banking Awards, 2016) for the fifth consecutive year.
Best Canadian Private Bank (Family Wealth Report Awards, 2016).
–
–
Outlook and priorities
With continued uncertainty in the major global economies, including Canada, low interest rates are expected to continue into 2017. Despite the
overall economic uncertainty and volatile equity markets, we expect global private wealth to continue to drive growth in the HNW and UHNW
client segments. We will continue to leverage our brand, reputation and financial strength to increase our market share of HNW and UHNW
globally. In addition, changing demographics and rapid advancements in digitization are expected to drive change in client preferences, needs
and service models, requiring a greater focus on delivering a digitally-integrated, multi-channel experience for our clients and client-facing
professionals.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
27
Key strategic priorities for 2017
•
•
•
Focus on extending our leadership position in Canadian retail asset management (e.g., GAM penetration of Personal & Commercial Banking,
Wealth Management and third-party channels) while expanding distribution to primarily U.S., U.K. and certain European institutional clients
Drive profitable growth through continued acquisition and retention of HNW and UHNW clients in priority segments and markets, driven
by a differentiated client experience that is increasingly digitally-enabled and supported by data-driven insights
Continue to deepen client relationships in Canada jointly with our partners (e.g., Private Banking and Commercial Banking in Personal &
Commercial Banking), and leverage the combined strengths of City National, RBC U.S. Wealth Management and Capital Markets to
accelerate growth in the U.S.
Wealth Management
(Millions of Canadian dollars, except number of and percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Fee-based revenue
Transactional and other revenue
Total revenue
PCL
Non-interest expense
Income before income taxes
Net income
Revenue by business
Canadian Wealth Management
U.S. Wealth Management (including City National)
U.S. Wealth Management (including City National) (US$ millions)
International Wealth Management
Global Asset Management (1)
Key Ratios
ROE
NIM (2)
Pre-tax margin (3)
Selected average balance sheet information
Total assets
Loans and acceptances
Deposits
Attributed capital
Other information
Revenue per advisor (000s) (4)
AUA (5), (6)
AUM (5)
Average AUA (6)
Average AUM
Number of employees (FTE) (6)
Number of advisors (7)
$
$
$
$
$
2016
1,955 $
5,109
1,725
8,789
48
6,801
1,940
1,473 $
2,450 $
4,123
3,118
430
1,786
10.9%
2.84%
22.1%
83,200 $
49,200
85,400
12,950
1,157 $
875,300
580,700
845,800
560,800
16,385
4,780
$
$
$
$
$
Table 24
2014
469
4,185
1,659
6,313
19
4,800
1,494
1,083
2,146
1,748
1,599
722
1,697
19.2%
2.68%
23.7%
25,800
15,700
36,200
5,500
983
781,400
452,300
711,700
427,800
12,636
4,245
2015
493
4,699
1,583
6,775
46
5,292
1,437
1,041
2,308
2,008
1,603
639
1,820
17.4%
2.50%
21.2%
29,100
17,700
39,500
5,900
1,089
823,700
492,800
826,700
484,700
12,325
3,954
Estimated impact of U.S. dollar, British pound and Euro translation on key income
statement items
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2016 vs. 2015
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
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Effective the first quarter of 2014, we have aligned the reporting period of BlueBay, which resulted in an additional month of earnings being included in 2014.
NIM is calculated as Net interest income divided by Average total earning assets.
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 wealth businesses.
Represents year-end spot balances.
Amounts have been revised from those previously presented.
Represents client-facing advisors across all our wealth management businesses.
$
94
74
14
(5)%
5%
(3)%
Client assets – AUA
(Millions of Canadian dollars)
AUA, beginning balance
Asset inflows
Asset outflows
Total net flows
Market impact
Acquisitions
Foreign exchange
Total market, acquisition and foreign exchange impact
AUA, balance at end of year
(1)
n.a.
Amount has been revised from those previously presented.
not available
28
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
2016
823,700 $
251,000
(257,500)
(6,500)
31,100
17,800
9,200
58,100
875,300 $
$
$
Table 25
2015 (1)
781,400
n.a.
n.a.
(28,900)
n.a.
n.a.
n.a.
71,200
823,700
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition
Foreign exchange
Total market, acquisition and foreign exchange
impact
AUM, balance at end of year
n.a.
not available
AUA by geographic mix and asset class
(Millions of Canadian dollars)
Canada (1)
Money market
Fixed income
Equity
Multi-asset and other
Total Canada
U.S. (1), (2)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
Total International
2016
$
$
Money market
39,800
11,300
(14,400)
700
(2,400)
200
9,800
600
Fixed income
194,300
$
35,300
(51,500)
4,300
(11,900)
8,200
4,200
2,000
Equity
83,600
4,800
(3,900)
500
1,400
5,100
10,200
500
Multi-asset
and other
$ 175,100
3,300
(1,800)
16,000
17,500
8,100
33,900
500
Total
$ 492,800 $
54,700
(71,600)
21,500
4,600
21,600
58,100
3,600
Table 26
2015
452,300
n.a.
n.a.
n.a.
18,200
n.a.
n.a.
n.a.
10,600
48,000
14,400
196,800
15,800
$ 100,800
42,500
$ 235,100
83,300
$ 580,700 $
22,300
492,800
$
$
Table 27
2016
2015
$
21,600 $
36,300
89,100
180,700
$ 327,700 $
$
36,100 $
126,800
200,800
30,500
$ 394,200 $
$
23,300 $
21,400
89,600
19,100
$ 153,400 $
21,500
34,900
79,800
157,400
293,600
32,700
114,600
189,300
20,200
356,800
24,500
26,500
93,300
29,000
173,300
$ 875,300 $
823,700
Total AUA (2)
(1)
(2)
Geographic information is based on the location from where our clients are serviced.
Amounts have been revised from those previously presented.
On November 2, 2015, we completed the acquisition of City National, which was combined with our U.S. Wealth Management business. Our
U.S. & International Wealth Management business line was divided into two businesses: U.S. Wealth Management (including City National), and
International Wealth Management.
Financial performance
2016 vs. 2015
Net income increased $432 million or 41% compared to last year, largely reflecting the inclusion of our acquisition of City National, which
contributed $290 million to net income, lower restructuring costs relating to the International Wealth Management business, and benefits from
our efficiency management activities. These factors were partially offset by lower transaction volumes.
Total revenue increased $2,014 million or 30%, mainly attributable to our inclusion of City National, which contributed $1,988 million
(US$1,502 million), the impact from foreign exchange translation, and higher fee-based revenue primarily in our Canadian Wealth Management
and U.S. Wealth Management businesses. These factors were partially offset by lower transaction volumes.
PCL increased $2 million. PCL in the current year largely reflects provisions of $43 million recorded in City National. PCL in the prior year
largely reflected provisions related to the International Wealth Management business.
Non-interest expense increased $1,509 million or 29%, primarily reflecting our inclusion of City National, which increased expenses by
$1,648 million, and included $196 million related to amortization of intangibles and $91 million related to integration costs. The impact from
foreign exchange translation and costs relating to the exit of certain international businesses also contributed to the increase. These factors were
partially offset by lower restructuring costs and benefits from our efficiency management activities.
Assets under administration increased by $52 billion or 6% compared to the prior year, mainly reflecting capital appreciation, the impact of
foreign exchange translation and the inclusion of our acquisition of City National.
Assets under management increased by $88 billion or 18% compared to the prior year, primarily due to the inclusion of our acquisition of
City National and capital appreciation.
2015 vs. 2014
Net income decreased $42 million or 4% from 2014, primarily reflecting higher costs in support of business growth in our Global Asset
Management and Canadian Wealth Management businesses, restructuring costs of $122 million ($90 million after-tax) largely related to our
International Wealth Management business, lower transaction volumes and higher PCL. These factors were partly offset by higher earnings from
growth in average fee-based client assets resulting from capital appreciation and net sales.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
29
Business line review
Canadian Wealth Management
Canadian Wealth Management includes our full service Canadian wealth advisory business, which is the largest in Canada as measured by AUA,
with over 1,650 investment advisors providing comprehensive advice-based financial solutions to affluent, HNW and UHNW clients. Additionally,
we provide discretionary investment management and estate and trust services to our clients through approximately 70 investment counsellors
and 91 trust professionals across Canada.
We compete with domestic banks and trust companies, investment counselling firms, bank-owned full service brokerages and boutique
brokerages, mutual fund companies and global private banks. In Canada, bank-owned wealth managers continue to be the major players.
Financial performance
Revenue increased $142 million or 6% from a year ago, mainly due to higher average fee-based client assets reflecting strong net sales and
capital appreciation and higher net interest income reflecting growth in average deposits.
Selected highlights (1)
Table 28
Average AUA and AUM (1) (Millions of Canadian dollars)
(Millions of Canadian dollars)
Total revenue
Other information
Total loans and acceptances (2)
Total deposits (2)
AUA
AUM
Average AUA
Average AUM
Total assets under fee-based
2016
2015
2014
$ 2,450 $ 2,308 $ 2,146
3,200
16,300
326,600
76,000
309,100
69,400
3,100
15,200
297,400
62,800
289,500
58,100
2,700
13,600
280,400
55,100
265,000
49,100
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2016 2015 2014
2016 2015 2014
programs
206,900
184,500
168,300
AUA
AUM
(1)
(2)
Amounts have been revised from those previously presented.
Represents an average amount, which is calculated using methods intended to
approximate the average of the daily balances for the period.
(1)
Represents average balances, which we believe are more representative of the impact
client balances have upon our revenue.
U.S. Wealth Management (including City National)
U.S. Wealth Management (including City National) includes our private client group, which is the 7th largest full service wealth advisory firm in
the U.S., as measured by number of advisors, with over 1,800 financial advisors. Additionally, our correspondent and advisor services
businesses deliver clearing and execution services for small to mid-sized independent broker-dealers and registered investment advisor firms.
In the U.S., we operate in a fragmented and extremely competitive industry. There are approximately 4,000 registered broker-dealers in the U.S.,
comprising independent, regional and global players. As previously announced, we combined U.S. Wealth Management and City National into
one line of business effective the first quarter of 2016.
City National is headquartered in Los Angeles, California and operates through 73 offices, including 16 full service regional centres in
Southern California, the San Francisco Bay area, New York City, Nashville and Atlanta. City National provides comprehensive financial solutions
to affluent individuals, entrepreneurs, professionals, their businesses and their families and provides a premier banking and financial
experience through a high-touch service model, proactive advice and financial solutions. City National offers a broad range of lending, deposit,
cash management, international banking, equipment financing, and other products and services. City National competes with a variety of
commercial banks and other financial institutions which serve high net worth individuals, entrepreneurs and their businesses.
Financial performance
Revenue increased $2,115 million or 105% from a year ago, mainly reflecting the inclusion of City National, which contributed $1,988 million
(US$1,502 million).
Selected highlights
Table 29
Average AUA and AUM (1) (Millions of U.S. dollars)
(Millions of Canadian dollars, except
as otherwise noted)
Total revenue
Other information (Millions of
U.S. dollars)
Total revenue
Total loans, guarantees and
letters of credit (1)
Total deposits (1)
AUA
AUM
Average AUA
Average AUM
Total assets under fee-based
programs
2016
2015
2014
$ 4,123 $ 2,008 $ 1,748
3,118
1,603
1,599
29,900
41,200
293,900
76,700
289,200
74,200
4,400
3,700
272,900
28,600
275,100
27,300
4,000
1,800
275,500
25,600
232,300
23,200
98,400
94,500
94,500
(1)
Represents an average amount, which is calculated using methods intended to
approximate the average of the daily balances for the period.
30
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
300,000
250,000
200,000
150,000
100,000
50,000
0
2016 2015 2014
2016 2015 2014
AUA
AUM
75,000
62,500
50,000
37,500
25,000
12,500
0
(1)
Represents average balances, which we believe are more representative of the impact
client balances have upon our revenue.
International Wealth Management
International Wealth Management includes operations in the British Isles and Asia. We provide customized and integrated trust, banking, credit
and investment solutions to HNW and UHNW clients and corporate clients with over 1,400 employees located in key financial centres in Europe
and Asia. Competitors to our International Wealth Management business comprise global wealth managers, traditional offshore private banks,
domestic wealth managers and U.S. investment-led private client operations.
Financial performance
Revenue decreased $209 million or 33% from a year ago, mainly reflecting the exit of certain international businesses.
Table 30
Average AUA and AUM (1) (Millions of Canadian dollars)
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Total loans, guarantees and
letters of credit (1)
Total deposits (1)
AUA
AUM
Average AUA
Average AUM
2016
2015
2014
$
430 $
639 $
722
7,200
14,600
154,500
9,100
153,700
9,700
11,700
19,700
169,500
10,900
192,300
17,700
12,000
20,600
190,500
17,700
192,300
18,000
200,000
160,000
120,000
80,000
40,000
0
(1)
Represents an average amount, which is calculated using methods intended to
approximate the average of the daily balances for the period.
Global Asset Management
20,000
16,000
12,000
8,000
4,000
0
2016 2015 2014
2016 2015 2014
AUA
AUM
(1)
Represents average balances, which we believe are more representative of the impact
client balances have upon our revenue.
Global Asset Management provides global investment management services and solutions for individual and institutional investors in Canada,
the U.S., the U.K., Europe and Asia. We provide a broad range of investment management services through mutual, pooled and private funds,
fee-based accounts and separately managed portfolios. We distribute our investment solutions through a broad network of bank branches, our
self-directed and full service wealth advisory businesses, independent third-party advisors and private banks, and directly to individual clients.
We also provide investment solutions directly to institutional clients, including pension plans, insurance companies, corporations, and
endowments and foundations.
We are the largest retail fund company in Canada as well as a leading institutional asset manager. We face competition in Canada from
banks, insurance companies, asset management organizations and boutique firms. The Canadian fund management industry is large and
mature, but still a relatively fragmented industry.
In the U.S., our asset management business offers investment management solutions and services primarily to institutional investors and
competes with independent asset management firms, as well as those that are part of national and international banks, and insurance
companies.
Internationally, through our leading global capabilities of BlueBay and RBC Global Asset Management®, we offer investment management
solutions for institutions and, through private banks including RBC Wealth Management®, to HNW and UHNW investors. We face competition
from asset managers that are part of international banks as well as national, regional and boutique asset managers in the geographies where we
serve clients.
Financial performance
Revenue decreased $34 million or 2% from a year ago, reflecting unfavourable market conditions resulting in net redemptions in the first half of
the year. This was partially offset by strong performance in the Canadian business in the second half of the year due to improved market
conditions.
Table 31
Average AUM (1) (Millions of Canadian dollars)
Selected highlights
(Millions of Canadian dollars)
Total revenue (1)
Other information
2016
2015
2014
$ 1,786 $ 1,820 $ 1,697
Canadian net long-term mutual
fund sales (2)
Canadian net money market
mutual fund (redemptions)
sales (2)
AUM
Average AUM
7,868
9,857
10,982
(439)
392,600
383,400
(605)
381,700
374,700
(1,229)
350,600
335,300
(1)
(2)
Effective the first quarter of 2014, we have aligned the reporting period of BlueBay,
which resulted in an additional month of earnings being included in 2014.
As reported to the Investment Funds Institute of Canada. Includes all prospectus-based
mutual funds across our Canadian Global Asset Management businesses.
400,000
300,000
200,000
100,000
0
2016 2015 2014
(1)
AUM
Represents average balances, which we believe are more representative of the impact
client balances have upon our revenue.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
31
Insurance
Insurance comprises our operations in Canada and globally and operates under two business lines: Canadian Insurance and International
Insurance, providing a wide range of life, health, home, auto, travel, wealth, group and reinsurance products and solutions. In Canada, we offer
our products and services through our proprietary distribution channels, comprised of the field sales force which includes retail insurance stores,
our field sales representatives, advice centres and online, as well as through independent insurance advisors and affinity relationships. Outside
Canada, we operate in reinsurance markets globally offering life, accident and annuity reinsurance products. The competitive environment for
each business is discussed below.
Economic and market review
The global macroeconomic environment continues to show improvement, with both the middle class and high net worth populations in quantity
and financial resources on the rise in many countries. Key challenges for the insurance industry remain due to the increasing regulatory
pressures, low interest rates, record high levels of debt, shifting demographics, changes in client expectations, and growth in non-traditional
competitors. To overcome these challenges, many insurers are heavily investing in technological and digital solutions to improve the client
experience and provide differentiation, refining products and distribution capability, and enhancing operational efficiency and managing
expenses.
Highlights
•
On July 1, 2016, we completed the sale of RBC General Insurance Company to Aviva Canada Inc. (Aviva). The transaction involved the sale of
our home and auto insurance manufacturing business and included a 15-year strategic distribution agreement between RBC Insurance and
Aviva.
In our Canadian Insurance business, we experienced strong sales growth, maintaining our #1 ranking in individual disability sales, #11 in
individual life products and have been increasing market share in Group Insurance and Wealth, which are targeted areas of focus.
• We launched YourTermTM, a new life insurance product, as part of an innovative renewal and client retention strategy, allowing clients to
•
select a specific term for their life insurance.
• We have partnered with digital insurer League to underwrite its expanded offerings, providing comprehensive coverage for unexpected
emergencies, as well as a range of group life and health insurance products, including life, accidental death and dismemberment, and
disability coverage.
• We continued to focus on enhancing our client experience and our cost effectiveness through ongoing transformation of our legacy
•
business and enhancing our digital capabilities.
In the fall of 2016, we introduced new and innovative tools to help clients who are on disability recover and return to work more quickly.
These include an exclusive arrangement with Best Doctors Onward as well as a partnership with Medical Confidence.
• We continued to expand our U.K. annuity business, though we experienced some volatility reflecting changing market conditions, including
foreign exchange impacts after the Brexit vote.
Outlook and priorities
While we see signs of improvement in the macroeconomic environment, growing risk and economic insecurity continue to prevail; therefore,
growth in the industry is projected to be moderate in the short to medium term. We are focusing on organic growth through our proprietary sales
channels, improved claims performance and increased operational efficiency.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
Key strategic priorities for 2017
•
•
Deepen client relationships by continuing to be an innovative, client-focused provider of a full suite of insurance products.
Continue to improve our distribution efficiency by expanding our proprietary distribution channels and focusing on the delivery of
technology and operational solutions.
Simplify and innovate by accelerating our digital initiatives time to market, improving quality and cost effectiveness.
Pursue select international opportunities, within our risk appetite, with the aim of continuing to grow our core reinsurance business.
•
•
32
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Insurance
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2016
2015
Non-interest income
Net earned premiums
Investment income (1)
Fee income
Total revenue
Insurance policyholder benefits and claims (1)
Insurance policyholder acquisition expense
Non-interest expense (2)
Income before income taxes
Net income
Revenue by business
Canadian Insurance
International Insurance
Key ratios
ROE
Selected balances and other information
Total assets
Attributed capital
Other information
Premiums and deposits (3)
Canadian Insurance
International Insurance
Insurance claims and policy benefit liabilities
Fair value changes on investments backing policyholder liabilities (1)
Embedded value (4)
Number of employees (FTE)
$
$
$
$
$
Table 32
2014
3,742
938
284
4,964
3,194
379
579
812
781
2,911
2,053
3,175 $
1,422
554
5,151
3,208
216
623
1,104
900 $
3,373 $
1,778
3,507 $
445
484
4,436
2,741
222
613
860
706 $
2,725 $
1,711
52.8%
44.3%
49.7%
14,400 $
1,700
13,700 $
1,600
12,000
1,550
4,594 $
2,424
2,170
9,164
633
6,886
2,657
5,016 $
2,725
2,291
9,110
(24)
6,952
3,163
5,164
2,419
2,745
8,564
439
6,239
3,126
Estimated impact of U.S. dollar and British pound translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2016 vs. 2015
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
$
(54)
(39)
–
(15)
(5)%
5%
(1)
(2)
(3)
(4)
Investment income can experience volatility arising from fluctuation of fair value through profit or loss (FVTPL) assets. The investments which support actuarial liabilities are predominantly
fixed income assets designated as at FVTPL. Consequently, changes in the fair values of these assets are recorded in investment income in the consolidated statement 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.
For 2016, includes PCL of $1 million (2015 - $nil; 2014 - $nil).
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 sum of 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.
On July 1, 2016, we completed the sale of RBC General Insurance Company to Aviva Canada Inc. (Aviva) as previously announced on January 21,
2016. The transaction involved the sale of our home and auto insurance manufacturing business and included a 15-year strategic distribution
agreement between RBC Insurance and Aviva. As a result of the transaction, we recorded a gain of $287 million ($235 million after-tax) in our
results. For further details, refer to Note 11 of our 2016 Annual Consolidated Financial Statements.
Financial performance
2016 vs. 2015
Net income increased $194 million or 27% from a year ago. Excluding the after-tax gain of $235 million on the sale of RBC General Insurance
Company to Aviva, net income decreased $41 million or 6%, mainly due to lower earnings from new U.K. annuity contracts as well as lower
earnings reflecting the impact from the sale of our home and auto insurance manufacturing business as noted above. These items were partially
offset by growth in International Insurance.
Total revenue increased $715 million or 16%, mainly due to a change of $657 million related to the fair value of investments backing our
policyholder liabilities resulting from changes in long-term interest rates, largely offset in PBCAE, and the gain on the sale of RBC General
Insurance Company as noted above. These factors were partially offset by lower premiums reflecting the impact of the sale of our home and
auto insurance manufacturing business and the impact due to foreign exchange translation.
PBCAE increased $461 million or 16%, mainly due to a change in the fair value of investments backing our policyholder liabilities, largely
offset in revenue. This factor was partially offset by lower costs reflecting the impact from the sale of our home and auto insurance manufacturing
business as noted above.
Non-interest expense increased $10 million or 2%, largely in support of business growth and strategic initiatives, partially offset by reduced
expenses reflecting the impact of the sale of our home and auto insurance manufacturing business, as noted above, and efficiency management
activities.
Premiums and deposits were down $422 million or 8%, reflecting the impact of the sale of our home and auto insurance manufacturing
business, as noted above, and a reduction related to our retrocession contracts. This was partially offset by growth in International Insurance.
Embedded value decreased $66 million, reflecting the impact of the sale of our home and auto insurance manufacturing business, as noted
above, and the transfer of capital though dividends paid, largely offset by business growth. For further details, refer to the Key performance and
non-GAAP measures section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
33
2015 vs. 2014
Net income decreased $75 million or 10% from 2014, mainly due to a change in Canadian tax legislation impacting certain foreign affiliates that
became effective November 1, 2014, a lower level of favourable actuarial adjustments in 2015, and higher net claims costs. These factors were
partially offset by higher earnings from new U.K. annuity contracts and the favourable impact of investment-related activities on the Canadian life
business.
Results excluding the specified item noted above are non-GAAP measures. For further details, including a reconciliation, refer to the Key
performance and non-GAAP measures section.
Business line review
Canadian Insurance
We offer life, 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, term 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, and trip cancellation and interruption insurance.
In Canada, the majority of our competitors specialize in life and health or property and casualty products. We hold a leading market position
in disability insurance products, have a significant presence in life and travel products, and have a growing presence in wealth as well as in
home and auto through our distribution agreement with Aviva.
Financial performance
Total revenue increased $648 million or 24% from last year, mainly due to the fair value of investments backing our policyholder liabilities
resulting from changes in long-term interest rates, largely offset in PBCAE, and the gain on sale of our home and auto insurance manufacturing
business as noted above, partially offset by lower premiums reflecting the impact of the sale.
Premiums and deposits decreased $301 million or 11%, reflecting the impact of the sale of our home and auto insurance manufacturing
business, as noted above.
Selected highlights
(Millions of Canadian dollars)
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
International Insurance
Table 33
Premiums and deposits (Millions of Canadian dollars)
2016
3,373 $
2015
2014
2,725 $
2,911
$
1,438
674
1,484
958
1,266
951
312
283
202
3,000
2,500
2,000
1,500
1,000
500
0
575
54
490
Annuity and segregated
fund deposits
Property and
casualty
Life and health
2016
2015
2014
International Insurance is primarily comprised of our reinsurance businesses which insure risks of other insurance and reinsurance companies.
We offer life and health, accident and annuity reinsurance products.
The global reinsurance market is dominated by a few large players, with significant presence in the U.S., the U.K. and the Euro area. The
reinsurance industry is competitive but barriers to entry remain high.
Financial performance
Total revenue increased $67 million or 4%, mainly due to a change in the fair value of investments backing our policyholder liabilities resulting
from changes in long-term interest rates, largely offset in PBCAE. This factor was partially offset by a reduction in revenue related to our
retrocession contracts, largely offset in PBCAE, and the impact due to foreign exchange translation.
Premiums and deposits decreased $121 million or 5%, driven by the reduction in premium related to our retrocession contracts, partly
offset by growth in the U.K. annuity contracts.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Premiums and deposits
Life and health
Property and casualty
Annuity
Fair value changes on
investments backing
policyholder liabilities
Table 34
2016
1,778 $
2015
2014
1,711 $
2,053
$
1,335
–
835
1,483
(4)
812
2,128
6
611
58
(78)
(51)
34
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Investor & Treasury Services
Investor & Treasury Services is a specialist provider of asset services, custody, payments and treasury services for financial and other
institutional investors worldwide. We deliver custodial, advisory, financing and other services to safeguard client assets, maximize liquidity, and
manage risk across multiple jurisdictions. We also provide short-term funding and liquidity management for RBC. We are a global custodian with
a network of offices across North America, Europe and Asia-Pacific. While we compete against the world’s largest global custodians, we remain a
specialist provider with a focus on asset managers offering offshore fund structures in Luxembourg and Ireland, and alternative asset managers
of real estate and private equity funds. Our transaction banking business is a leading provider of Canadian dollar cash management,
correspondent banking, and trade finance for financial institutions globally.
Economic and market review
The highly competitive environment in the global asset services industry continued to pressure margins. Sustained low to negative interest rates
globally have reduced deposit rates, leading to margin compression from our deposit-gathering activities. Moreover, continued increases in
financial services regulations have driven up compliance and technology costs. Market uncertainty (including Brexit and central bank policy
rates) has impacted our core fees and foreign exchange transaction volumes; however, tightening credit spreads and favourable interest rate
movements benefited our funding and liquidity business.
Highlights
•
•
•
•
•
•
Rated by our clients the #1 global custodian for six consecutive years (Global Investor/ISF Global Custody Survey, 2016).
Rated #1 custodian overall in Canada and Europe (excl. Switzerland and the U.K.) (R&M Investor Services Survey, 2016).
Named #1 Canadian sub-custodian (Global Custodian Agent Banks in Major Markets Survey, 2016).
Maintained global position as the #1 fund administrator overall for four consecutive years (R&M Fund Accounting and Administration
Survey, 2016).
Named Best Trade Finance Bank in Canada for four consecutive years (Global Finance, 2016).
High level of investment in client-focused technology solutions.
Outlook and priorities
In 2017, our aim is to continue to be the leading provider of domestic asset services and cash management in Canada and a leading provider of
fund services to asset managers in select offshore markets. Our focus is on driving top-line growth by leveraging our leadership position in
Canada and recognized capabilities in the offshore fund services markets in Luxembourg and Ireland to win new business and deepen existing
client relationships. We continue to execute on our strategic and transformational technology initiatives to enhance client experiences. While we
expect the global asset services industry to remain challenging in the near-term, we are well-positioned to compete in the continuously changing
operating environment.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
Key strategic priorities for 2017
•
•
•
•
Maintain our position as the #1 provider of domestic custody, asset services and cash management in Canada.
Compete as a leading provider of asset services in the major offshore fund domicile markets of Luxembourg and Ireland.
Continue to deliver a high-level of investment in client-focused technology solutions.
Enhance our client centric service offering and improve efficiency.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
35
Investor & Treasury Services
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Total revenue (1)
Non-interest expense
Net income before income taxes
Net income
Key Ratios
ROE
Selected average balance sheet information
Total assets
Deposits
Client deposits
Wholesale funding deposits
Attributed capital
Other Information
AUA (2)
Average AUA
Number of employees (FTE)
$
$
$
2016
825 $
1,446
2,271
1,457
814
613 $
Table 35
2014
732
1,152
1,884
1,286
598
441
2015
818 $
1,220
2,038
1,300
738
556 $
17.9%
20.3%
19.8%
142,500 $
134,300
52,800
81,500
3,350
125,300 $
139,600
50,400
89,200
2,700
94,200
112,100
42,700
69,400
2,150
3,929,400
3,770,200
4,776
3,620,300
3,793,000
4,774
3,702,800
3,463,000
4,963
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement
items
(Millions of Canadian dollars, except percentage amounts)
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
2016 vs. 2015
$
40
10
20
(5)%
5%
(3)%
(1)
(2)
Effective the third quarter of 2015, we have aligned the reporting period of Investor Services, which resulted in an additional month of earnings being included in 2015. The net impact of the
additional month was recorded in revenue.
Represents period-end spot balances.
Financial performance
2016 vs. 2015
Net income increased $57 million or 10%, primarily due to higher funding and liquidity earnings reflecting tightening credit spreads and
favourable interest rate movements, and higher client deposit spreads. These factors were partially offset by increased investment in technology
initiatives, higher staff costs and lower earnings from foreign exchange market execution. In addition, the prior year included an additional
month of earnings in Investor Services of $42 million ($28 million after-tax).
Total revenue increased $233 million or 11%, mainly related to higher funding and liquidity revenue reflecting tightening credit spreads and
favourable interest rate movements, increased revenue on higher client deposit spreads, and the impact from foreign exchange translation.
These factors were partially offset by lower revenue from foreign exchange market execution. In addition, the prior year included the impact of an
additional month in Investor Services as noted above.
Non-interest expense increased $157 million or 12%, largely reflecting increased investment in technology initiatives, higher staff costs,
and the impact from foreign exchange translation.
2015 vs. 2014
Net income was up $115 million or 26% from 2014, primarily due to higher earnings from foreign exchange market execution, an additional
month of earnings in Investor Services as noted above, increased custodial fees and higher earnings from growth in client deposits. These
factors were partially offset by lower funding and liquidity results.
Capital Markets
Capital Markets provides public and private companies, institutional investors, governments and central banks globally with a wide range of
capital markets products and services across our two main business lines, Corporate and Investment Banking and Global Markets. Our legacy
portfolio is grouped under Other.
In North America, we offer a full suite of products and services which include corporate and investment banking, equity and debt origination
and distribution, and structuring and trading. In Canada, we compete mainly with Canadian banks where we are a premier global investment
bank and market leader with a strategic presence in all lines of capital markets businesses. In the U.S., we have full industry sector coverage and
investment banking product range and compete with large U.S. and global investment banks as well as smaller regional firms. Outside North
America, we have a select presence in the U.K. and Europe, and Other international, where we offer a diversified set of capabilities in our key
sectors of expertise such as energy, mining and infrastructure and we have a growing presence in industrial, consumer and healthcare in Europe.
In the U.K. and Europe, we compete in our key sectors of expertise with global and regional investment banks. In Other international, we compete
with global and regional investment banks in select products, consisting of fixed income distribution and currencies trading and corporate and
investment banking in Australia, Asia and the Caribbean.
36
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Economic and market review
Following the deterioration of market conditions throughout the latter half of fiscal 2015, the first half of 2016 was characterized by volatile debt
and equity markets as well as difficult market conditions. This was driven by the effect of stronger but still lower than historical levels for global
oil and commodity prices, as well as diverging monetary policies amongst global central banks. This led to decreased levels of client activity and
volumes. Our corporate and investment banking businesses saw debt underwriting rebound in the latter part of the year with good activity in
investment grade and a recovery in high yield. Although the market backdrop improved in the latter half of the year, equity market volatility
remained through the end of the year.
Highlights
• We continued to focus on the efficient deployment of our capital and growth throughout our businesses by re-allocating capital from trading
•
•
•
•
•
to corporate and investment banking businesses and managed risk by focusing on optimizing our trading products.
In Canada, we maintained our market leadership by deepening our existing client relationships despite soft markets in both the energy and
commodity sectors, gaining new clients by leveraging our strong global capabilities and improving collaboration with enterprise partners to
drive operational efficiencies. We continued to win significant mandates including acting as lead left bookrunner on the TransCanada
Pipelines $4.4 billion bought deal offering of subscription receipts in addition to being the joint bookrunner on the supporting
US$3.2 billion equity bridge and the US$7.1 billion asset sale bridge.
In the U.S., we continued to leverage our key strategic investments to expand our corporate and investment banking businesses as we
optimized our lending relationships, focusing on leveraging these relationships to generate additional revenue. Despite softer investment
banking fees from lighter industry-wide underwriting activity, we continued to win significant mandates including acting as joint bookrunner
on the acquisition financing and financial advisor to Dell Inc. on the acquisition of EMC Corporation for US$49 billion in cash and stock
transaction, joint lead arranger and joint bookrunner on the financing supporting Western Digital Corporation’s US$17 billion acquisition of
SanDisk, as well as acting as financial advisor, joint lead arranger and joint bookrunner on the US$12.4 billion acquisition of ADT by
Protection 1 and Apollo Global Management.
In the U.K. and Europe, we continued to focus on maintaining momentum throughout the year and improving profitability through
repositioning our fixed income business, as well as growing our corporate and investment banking presence in key markets, by developing
strong client relationships. We acted as sole financial adviser to Kohlberg Kravis Roberts & Co. on the sale of Coriance Group SAS, a leading
French district heating concession business, to First State Investments for an undisclosed amount. The transaction represents a successful
example of cross-border cooperation involving an integrated advisory team across Utilities & Renewables, France and M&A.
In Other international, we continued to focus on our corporate and investment banking, fixed income trading distribution and foreign
exchange trading capabilities.
As a result of our successes in each of our regions, we received external recognition as an industry leader and were named or ranked:
Best Investment Bank in Canada (Euromoney Magazine) for the ninth consecutive year.
–
–
Best Bank for Markets in North America (Euromoney Magazine)
– World’s Best Developed Markets Banks (Canada) (Global Finance)
–
–
The largest investment bank in Canada by fees for the first nine months of 2016 (Dealogic).
The 10th largest investment bank globally and in the Americas by fees for the first nine months of 2016 (Thomson Reuters).
Outlook and priorities
Global market volatility dominated headlines for Investment Banking with the global fee pool down 10% in the first nine months of 2016 from
the same period in 2015. With an improved market environment expected in 2017, our investment banking revenue is forecast to improve and
healthier origination volumes should help lift secondary trading activity. We will focus on maximizing returns through business structure and
continual optimization of the balance sheet, as well as improving operating leverage through cost containment initiatives. Regulatory impacts
continue to make earnings growth a challenge as regulatory and tax changes constrain revenue growth and regulatory reform implementation
continues to exert upward pressure on expenses and capital.
For further details, refer to our Risk management – Top and emerging risks section. For further details on our general economic outlook, refer to
the Economic, market and regulatory review and outlook section.
Key strategic priorities for 2017
•
•
Capital Markets will maintain its focus on full service activities in Canada, the U.S. and Europe.
Maintain our leadership position in Canada by focusing on long-term client relationships, leveraging our global capabilities and continuing
to improve collaboration with Wealth Management.
Continue to expand and strengthen client relationships in the U.S. by building on our momentum through expanded origination, advisory
and distribution activity, and driving cross-selling through our diversified loan book. We expect the U.S. to continue to be the world’s most
attractive market and it will remain Capital Markets’ priority growth market.
Build on our core strengths in Europe in both Corporate and Investment Banking and Global Markets by continuing to grow and deepen
client relationships and in Asia by optimizing the performance of our existing footprint.
Optimize capital use to earn high risk-adjusted returns by maintaining both a balanced approach between investment banking and trading
revenue and a disciplined approach to managing the risks and costs of our business.
Manage through the significant changes in the regulatory environment.
•
•
•
•
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
37
Capital Markets financial highlights
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
Net interest income (1)
Non-interest income (1)
Total revenue (1)
PCL
Non-interest expense
Net income before income taxes
Net income
Revenue by business
Corporate and Investment Banking
Global Markets (2)
Other (2)
Key ratios
ROE
Selected average balance sheet information
Total assets
Trading securities
Loans and acceptances
Deposits
Attributed capital
Other information
Number of employees (FTE)
Credit information
Gross impaired loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances
$
$
$
$
$
$
$
$
2016
3,804 $
4,146
7,950
327
4,466
3,157
2,270 $
3,694 $
4,361
(105)
2015
3,970
4,093
8,063
71
4,696
3,296
2,319
3,697
4,477
(111)
12.2%
13.6%
508,200 $
104,900
88,100
61,500
17,900
3,883
1.73%
0.37%
477,300
116,200
79,700
60,300
16,550
3,996
0.37%
0.09%
Table 36
2014
3,485
3,881
7,366
44
4,344
2,978
2,055
3,437
3,896
33
14.1%
392,300
103,800
64,800
47,600
14,100
3,917
0.08%
0.07%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement
items
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
2016 vs. 2015
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
$
259
72
115
(5)%
5%
(3)%
(1)
(2)
The taxable equivalent basis (teb) adjustment for 2016 was $736 million (2015 – $570 million, 2014 – $492 million). For further discussion, refer to the How we measure and report our
business segments section of our 2016 Annual Report.
Effective the first quarter of 2015, we reclassified amounts from Global Markets to Other related to certain proprietary trading strategies which we exited in the fourth quarter of 2014 to
comply with the Volcker Rule. Prior period amounts have been revised from those previously presented.
Revenue by region (Millions of Canadian dollars)
10,000
7,500
5,000
2,500
0
2016
2015
2014
Asia and other
Europe
U.S.
Canada
Financial performance
2016 vs. 2015
Net income decreased $49 million or 2%, driven by higher PCL, lower results in our Global Markets and Corporate and Investment Banking
businesses reflecting lower client activity, and higher compliance costs. These factors were partially offset by lower variable compensation, the
impact from foreign exchange translation and lower litigation provisions.
Total revenue decreased $113 million or 1%, largely reflecting lower equity trading revenue and lower lending revenue primarily in the U.S.
and Europe, and lower private equity investment gains. These factors were partially offset by the impact from foreign exchange translation and
higher fixed income trading revenue mainly in Europe and Canada.
PCL increased $256 million, primarily due to higher provisions in the oil & gas sector. For further details, refer to the Credit quality
performance section.
Non-interest expense decreased $230 million or 5%, reflecting lower variable compensation largely due to changes in the deferral policy of
the compensation plan and lower litigation provisions, partially offset by the impact from foreign exchange translation and higher compliance
costs.
38
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
2015 vs. 2014
Net income increased $264 million or 13% from 2014, driven by growth in our Global Markets business mainly reflecting increased client
activity, continued solid performance in our Corporate and Investment Banking business, and the impact from foreign exchange translation.
These factors were partially offset by lower results in certain legacy portfolios.
Business line review
Corporate and Investment Banking
Corporate and Investment Banking comprises our corporate lending, loan syndications, debt and equity origination, M&A advisory services,
private equity, research, client securitization and the global credit businesses. For debt and equity origination, revenue is allocated between
Corporate and Investment Banking and Global Markets based on the contribution of each group in accordance with an established agreement.
Financial performance
Corporate and Investment Banking revenue of $3,694 million decreased $3 million as compared to last year.
Investment banking revenue increased $59 million or 3%, primarily due to growth in Municipal Banking in the U.S. and higher M&A activity
across most regions, partially offset by lower private equity investment gains and lower equity origination activity largely in the U.S.
Lending and other revenue decreased $62 million or 3%, due to lower spreads across most regions.
Selected highlights
(Millions of Canadian dollars)
Total revenue (1)
Breakdown of revenue (1)
Investment banking
Lending and other (2)
Other information
Average assets
Average loans and acceptances
Table 37
Breakdown of total revenue (Millions of Canadian dollars)
2016
2015
2014
$ 3,694
$ 3,697
$ 3,437
1,892
1,802
1,833
1,864
1,736
1,701
73,200
65,300
63,900
56,200
49,500
42,500
4,000
3,200
2,400
1,600
800
0
(1)
(2)
The teb adjustment for 2016 was $279 million (2015 – $25 million, 2014 – $13
million). For further discussion, refer to the How we measure and report our business
segments section.
Comprises our corporate lending, client securitization, and global credit businesses.
2016
2015
2014
Investment banking
Lending and other
Global Markets
Global Markets comprises our fixed income, foreign exchange, equity sales and trading, repos and secured financing and commodities
businesses.
Financial performance
Total revenue of $4,361 million decreased $116 million or 3% as compared to last year.
Revenue in our Fixed income, currencies and commodities business increased $226 million or 12%, mainly due to higher fixed income and
foreign exchange trading revenue, partially offset by lower debt origination activity across all regions.
Revenue in our Equities business decreased $288 million or 20%, primarily due to lower equity trading revenue across most regions and
lower volume in our cash equities businesses.
Revenue in our Repo and secured financing business decreased $54 million or 5%, mainly due to lower trading revenue reflecting
Table 38
Breakdown of total revenue (Millions of Canadian dollars)
decreased client activity.
Selected highlights
(Millions of Canadian dollars)
Total revenue (2)
Breakdown of revenue (2)
Fixed income, currencies and
commodities
Equities
Repo and secured financing (3)
Other information
Average assets
2016
2015 (1)
2014 (1)
$ 4,361 $ 4,477
$ 3,896
2,113
1,147
1,101
1,887
1,435
1,155
1,760
1,204
932
472,100 494,400
366,000
5,000
4,000
3,000
2,000
1,000
0
(1)
(2)
(3)
Amounts have been revised from those previously presented.
The teb adjustment for 2016 was $457 million (2015 – $545 million, 2014 – $470
million). For further discussion, refer to the How we measure and report our business
segments section.
Comprises our secured funding businesses for internal businesses and external clients.
2016
2015
2014
Repo and secured
financing
Global equities
Fixed income, currencies
and commodities
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
39
Other
Other includes our legacy portfolio, which consists of our bank-owned life insurance (BOLI) stable value products, U.S. commercial mortgage-
backed securities, U.S. auction rate securities (ARS), and structured rates in Asia. In recent years, in order to optimize our capital employed to
improve our risk-adjusted returns and reduce our liquidity risk on various products, we have significantly reduced several of our legacy portfolios.
Our legacy portfolio assets decreased by 3% as compared to last year.
Financial performance
Revenue increased $6 million as compared to last year.
Corporate Support
Corporate Support comprises Technology & Operations, which provide the technological and operational foundation required to effectively
deliver products and services to our clients, and Functions, which includes our finance, human resources, risk management, internal audit and
other functional groups. Reported results for Corporate Support mainly reflect certain activities related to monitoring and oversight of enterprise
activities which are not allocated to business segments. Corporate Support also includes our Corporate Treasury function. For further details,
refer to the How we measure and report our business segments section.
Corporate Support
(Millions of Canadian dollars, except as otherwise noted)
Net interest income (loss) (1)
Non-interest income (loss) (1)
Total revenue (1)
PCL
Non-interest expense
Net income (loss) before income taxes (1)
Income taxes (recoveries) (1)
Net income (loss) (2)
Other information
Number of employees (FTE) (3)
Table 39
2016
2015
2014
(390)
(202)
(592)
51
30
(673)
(691)
18
$ (514)
210
(304)
(3)
125
(426)
(824)
398
$
$ (313)
164
(149)
(2)
89
(236)
(405)
169
$
$
$
13,913
13,371
12,540
(1)
(2)
(3)
Teb adjusted.
Net income reflects income attributable to both shareholders and Non-Controlling Interests (NCI). Net income attributable to NCI for the year ended October 31, 2016 was $44 million
(October 31, 2015 – $94 million; October 31, 2014 – $93 million).
Amounts have been revised from previously presented.
Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period analysis is not
relevant. The following identifies material items affecting the reported results in each period.
Total revenue and income taxes (recoveries) in each period in Corporate Support include the deduction of the teb adjustments related to the
gross-up of income from Canadian taxable corporate dividends and the U.S. tax credit investment business recorded in Capital Markets. The
amount deducted from revenue was offset by an equivalent increase in income taxes (recoveries). The teb amount for the year ended October 31,
2016 was $736 million as compared to $570 million last year and $492 million for the year ended October 31, 2014.
In addition to the teb impacts noted above, the following identifies the other material items affecting the reported results in each period.
2016
Net income was $18 million largely reflecting asset/liability management activities, partially offset by net unfavourable tax adjustments and a
$50 million ($37 million after-tax) increase in the provision for loans not yet identified as impaired.
2015
Net income was $398 million largely reflecting net favourable tax adjustments, asset/liability management activities, a gain of $108 million
(before- and after-tax) from the wind-up of a U.S.-based funding subsidiary that resulted in the release of CTA, and a gain on sale of a real estate
asset. These factors were partially offset by transaction costs related to our acquisition of City National.
2014
Net income was $169 million largely reflecting asset/liability management activities and gains on private equity investments mainly related to
the sale of a legacy portfolio, partially offset by net unfavourable tax adjustments.
40
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Results by geographic segment (1)
For geographic reporting, our segments are grouped into the following: 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. The following table summarizes our financial results by geographic region:
Table 40
2016
2015
2014
(Millions of Canadian dollars)
Canada
U.S.
Other
International
Total
Canada
U.S.
Other
International
Total
Canada
U.S.
Other
International
Total
Net interest income
Non-interest income
$ 11,685 $ 3,241 $
12,054
4,992
1,605 $ 16,531
21,874
4,828
$ 11,538 $ 1,977 $
10,889
4,619
1,256 $ 14,771
20,550
5,042
$ 11,128 $ 1,697 $
10,488
4,257
1,291 $ 14,116
19,992
5,247
Total revenue
$ 23,739 $ 8,233 $
6,433 $ 38,405
$ 22,427 $ 6,596 $
6,298 $ 35,321
$ 21,616 $ 5,954 $
6,538 $ 34,108
PCL
PBCAE
Non-interest expense
Income taxes
1,231
2,304
10,229
2,158
254
–
6,151
397
61
1,120
3,756
286
1,546
3,424
20,136
2,841
933
1,976
10,139
1,727
98
–
4,762
649
66
987
3,737
221
1,097
2,963
18,638
2,597
922
2,188
9,650
1,983
52
1
4,199
660
190
1,384
3,812
63
1,164
3,573
17,661
2,706
Net income
$
7,817 $ 1,431 $
1,210 $ 10,458
$
7,652 $ 1,087 $
1,287 $ 10,026
$
6,873 $ 1,042 $
1,089 $
9,004
(1)
For further details, refer to Note 30 of our audited 2016 Annual Consolidated Financial Statements.
2016 vs. 2015
Net income in Canada was up $165 million or 2% from the prior year, mainly due to higher earnings from growth in average fee-based client
assets in Wealth Management, the gain on sale of our home and auto insurance manufacturing business, and volume and fee-based revenue
growth across most businesses in Canadian Banking. These factors were partially offset by higher PCL, increased investment in technology, and
higher costs to support business growth. In addition, the prior year benefited from a lower effective tax rate reflecting net favourable income tax
adjustments, as well as a gain from the wind-up of a U.S. subsidiary.
U.S. net income increased $344 million or 32% compared to last year, largely reflecting lower taxes, the inclusion of earnings from our
acquisition of City National, and lower variable compensation in Capital Markets. This was partly offset by lower equity trading and lending
earnings and higher PCL.
Other International net income was down $77 million or 6% from the prior year, mainly due to higher costs to support business growth in
Investor & Treasury Services and in the Caribbean, lower earnings from new U.K. annuity contracts in Insurance, and the exit of certain
international businesses in Wealth Management. This was partially offset by higher fixed income trading results and increased M&A activity in
Capital Markets, higher funding and liquidity earnings in Investor & Treasury Services reflecting tightening credit spreads and favourable interest
rate movements, the impact from foreign exchange translation and higher fee-based revenue in the Caribbean.
2015 vs. 2014
Net income in Canada was up $779 million or 11% as compared to 2014, mainly due to solid volume growth and strong fee-based revenue
growth across most businesses in Canadian Banking, a lower effective tax rate reflecting net favourable income tax adjustments, and higher
earnings in Investor & Treasury Services. A gain of $108 million (before- and after-tax) from the wind-up of a U.S.-based funding subsidiary that
resulted in the release of CTA also contributed to the increase. These factors were partially offset by higher costs in support of business growth,
and lower spreads.
U.S. net income was up $45 million or 4% as compared to 2014, primarily due to the impact from foreign exchange translation, growth in
our global markets businesses reflecting increased client activity and more favourable market conditions in the first half of 2015, and higher
results in most corporate and investment banking businesses. Lower litigation provisions and related legal costs in Capital Markets also
contributed to the increase. These factors were partially offset by higher costs in support of business growth.
Other International net income was up $198 million or 18% as compared to 2014, mainly due to lower PCL in our Caribbean portfolios, and
higher lending activity in Europe. These factors were partially offset by restructuring costs related to our International Wealth Management
business. In addition, our results in 2014 were unfavourably impacted by a loss of $100 million (before- and after-tax) related to the sale of RBC
Jamaica and a provision of $40 million ($32 million after-tax) related to post-employment benefits and restructuring charges in the Caribbean.
Quarterly financial information
Fourth quarter 2016 performance
Q4 2016 vs. Q4 2015
Fourth quarter net income of $2,543 million was down $50 million or 2% from last year. Diluted EPS of $1.65 was down $0.09 and ROE of 15.5%
was down 240 bps. Our fourth quarter earnings decreased as lower results in Capital Markets were mostly offset by strong earnings in Wealth
Management and Investor & Treasury Services, and higher earnings in Personal & Commercial Banking and Insurance. In addition, the prior year
benefited from net favourable tax adjustments.
Total revenue increased $1,246 million or 16%, mainly due to the inclusion of City National, which contributed $543 million
(US$411 million), the change in the fair value of investments backing our policyholder liabilities, largely offset in PBCAE, and higher fixed income
trading revenue and strong debt and equity origination activity. Higher funding and liquidity revenue reflecting tightening credit spreads and
favourable interest rate movements, increased loan syndication revenue, and solid volume growth across most businesses in Canadian Banking
also contributed to the increase. These factors were partially offset by lower equity trading revenue across most regions and lower premiums
reflecting the impact of the sale of our home and auto insurance manufacturing business.
Total PCL increased $83 million and the PCL ratio of 27 bps increased 4 bps from last year, mainly reflecting higher provisions in our
Canadian personal and commercial lending portfolios and higher write-offs in our Canadian credit cards portfolio. Higher provisions, net of
recoveries, in the energy sector in Capital Markets also contributed to the increase.
PBCAE increased $105 million or 36%, largely reflecting the change in fair value of investments backing our policyholder liabilities, largely
offset in revenue, and growth mainly in International Insurance. These factors were partially offset by the impact from the sale of our home and
auto insurance manufacturing business as noted above.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
41
Non-interest expense increased $551 million or 12%, primarily reflecting the inclusion of our acquisition of City National, which increased
expenses by $440 million, including $49 million related to the amortization of intangibles and $16 million related to integration costs. Higher
variable compensation on improved results in Capital Markets and Wealth Management, and higher costs in support of business growth also
contributed to the increase. These factors were partially offset by continuing benefits from our efficiency management activities and lower costs
as a result of the sale of the home and auto insurance manufacturing business as noted above. The prior year also included restructuring costs
largely related to our International Wealth Management business, including the sale of RBC Suisse.
Income tax expense increased $557 million from last year, and the effective income tax rate increased from 7.6% last year to 23.2%, as the
prior year included net favourable tax adjustments mainly in Corporate Support and Capital Markets.
Q4 2016 vs. Q3 2016
Net income of $2,543 million decreased $352 million, or 12% compared to the prior quarter. The prior quarter included a gain of $287 million
($235 million after-tax) on the sale of our home and auto insurance manufacturing business. Lower earnings in Capital Markets mainly due to
lower fixed income and equity trading results, and lower earnings in Personal & Commercial Banking largely driven by higher technology spend
and seasonally higher marketing costs in support of business growth also contributed to the decrease. These factors were partially offset by
strong earnings in Insurance mainly due to favourable actuarial adjustments reflecting management actions and assumption changes, and
strong earnings in Investor & Treasury Services largely driven by higher funding and liquidity revenue reflecting tightening credit spreads and
favourable interest rate movements.
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses, general
economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table summarizes our results
for the last eight quarters (the period):
Quarterly results (1)
Table 41
(Millions of Canadian dollars, except per share and percentage
amounts)
Net interest income
Non-interest income
Total revenue
PCL
PBCAE
Non-interest expense
Net income before income taxes
Income taxes
Net income
EPS – basic
– diluted
Segments – net income (loss)
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
Net income
2016
2015
Q4
$ 4,187
5,078
$ 9,265
358
397
5,198
$ 3,312
769
Q3
Q2
Q1
$ 4,123
6,132
$10,255
318
1,210
5,091
$ 3,636
741
$ 4,025
5,501
$ 9,526
460
988
4,887
$ 3,191
618
$ 4,196
5,163
$ 9,359
410
829
4,960
$ 3,160
713
Q4
$3,800
4,219
$8,019
275
292
4,647
$2,805
212
Q3
Q2
Q1
$ 3,783
5,045
$ 8,828
270
656
4,635
$ 3,267
792
$ 3,557
5,273
$ 8,830
282
493
4,736
$ 3,319
817
$ 3,631
6,013
$ 9,644
270
1,522
4,620
$ 3,232
776
$ 2,543
$ 2,895
$ 2,573
$ 2,447
$2,593
$ 2,475
$ 2,502
$ 2,456
$ 1.66
1.65
$ 1.88
1.88
$ 1.67
1.66
$ 1.59
1.58
$ 1.74
1.74
$ 1.66
1.66
$ 1.68
1.68
$ 1.66
1.65
$ 1,275
396
228
174
482
(12)
$ 1,322
388
364
157
635
29
$ 1,297
386
177
139
583
(9)
$ 1,290
303
131
143
570
10
$1,270
255
225
88
555
200
$ 1,281
285
173
167
545
24
$ 1,200
271
123
159
625
124
$ 1,255
230
185
142
594
50
$ 2,543
$ 2,895
$ 2,573
$ 2,447
$2,593
$ 2,475
$ 2,502
$ 2,456
Effective income tax rate
Period average US$ equivalent of C$1.00
23.2%
$ 0.757
20.4%
$ 0.768
19.4%
$ 0.768
22.6%
$ 0.728
7.6%
$0.758
24.2%
$ 0.789
24.6%
$ 0.806
24.0%
$ 0.839
(1)
Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
Seasonality
Seasonal factors may impact our results in certain quarters. The first quarter has historically been seasonally stronger for our capital markets
businesses. The second quarter has fewer days than the other quarters, which generally results in a decrease in net interest income and certain
expense items. The third and fourth quarters include the summer months which results in lower client activity and may negatively impact the
results of our capital markets, brokerage and investment management businesses.
Specified items affecting our consolidated results
•
•
In the third quarter of 2016, our results included a gain of $287 million ($235 million after-tax) related to the sale of RBC General Insurance
Company to Aviva Canada Inc.
In the second quarter of 2015, our results included a gain of $108 million (before- and after-tax) from the wind-up of a U.S.-based
subsidiary that resulted in the release of a foreign currency translation adjustment that was previously booked in other components of
equity.
Trend analysis
The Canadian economy has generally improved over the period expanding in the first half of calendar 2016 due to solid consumer spending and
housing activity, reflecting low interest rates and a resilient labour market. However, business investment remained weak and was compounded
by the Alberta wildfires which temporarily halted oil production in the region. The U.S. economy has generally seen growth over the period,
42
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
experiencing modest growth in the second calendar quarter of 2016 boosted by robust consumer spending reflecting solid job growth and rising
wages, offset by declines in business and residential investment. Global markets recorded minimal gains this year amid several periods of
heightened volatility related to global growth concerns. For further details, refer to the Economic and market review and outlook section.
Earnings have generally trended upwards over the period, driven by volume growth partially offset by lower spreads and higher fee-based
revenue in our Canadian Banking businesses, as well as higher earnings from growth in average fee-based client assets reflecting strong net
sales and capital appreciation in Wealth Management driven by improved market conditions. Results of our acquisition of City National have
been reflected in our Wealth Management segment since the first quarter of 2016. Capital Markets results have remained relatively stable over
the period, declining in the fourth quarter of 2016 primarily due to lower trading revenue largely in the U.S. and Europe, and lower equity
origination activity in Canada. Results in our Insurance segment were impacted by the gain on the sale of RBC General Insurance Company in the
third quarter of 2016. Investor & Treasury Services results have fluctuated over the period, and in the third quarter of 2015 benefited from an
additional month of earnings in Investor Services. Higher funding and liquidity earnings reflecting tightening credit spreads and favourable
interest rate movements contributed to the increase in the fourth quarter of 2016.
Revenue has generally increased over the period reflecting solid volume and fee-based revenue growth in our Canadian Banking
businesses, as well as growth in average fee-based client assets in Wealth Management. Wealth Management revenue has reflected the
inclusion of our acquisition of City National since the first quarter of 2016. Trading revenue has generally trended upwards over the period, and
has fluctuated since the second half of 2015 reflecting widening credit spreads, which stabilized in the first quarter of 2016, and lower client
activity. Net interest income has trended upwards over the period, largely due to solid volume growth across our Canadian Banking businesses,
higher trading-related net interest income, and the inclusion of City National since the first quarter of 2016. Over the period, the impact from
foreign exchange translation due to a generally weaker Canadian dollar has also contributed to the increase in revenue. Insurance revenue was
primarily impacted by changes in the fair value of investments backing our policyholder liabilities, which is largely offset in PBCAE.
The credit quality of our portfolios has generally remained stable over the period, with an increase in 2016 to PCL recorded in our Capital
Markets and Canadian Banking businesses mainly reflecting the impact of the sustained low oil price environment.
PBCAE has fluctuated quarterly as it includes the changes to the fair value of investments backing our policyholder liabilities, which is
largely offset in revenue. PBCAE has also increased due to business growth, and has been impacted by actuarial liability adjustments and claims
costs over the period.
While we continue to focus on efficiency management activities, non-interest expense has generally trended upwards over the period,
mostly to support business growth and due to the inclusion of City National since the first quarter of 2016. Over the period, non-interest expense
also increased due to higher compliance costs as well as the impact from foreign exchange translation.
Our effective income tax rate has fluctuated over the period, mostly due to varying levels of income reported in jurisdictions with different
tax rates, as well as fluctuating levels of income from tax-advantaged sources, principally Canadian taxable corporate dividends. Our effective
income tax rate has generally been impacted over the period by higher earnings before income taxes, increased earnings in higher tax
jurisdictions, and by net favourable tax adjustments.
Financial condition
Condensed balance sheets
The following table shows our condensed balance sheet:
(Millions of Canadian dollars)
Assets (1)
Cash and due from banks
Interest-bearing deposits with banks
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
Retail
Wholesale
Allowance for loan losses
Segregated fund net assets
Other – Derivatives
– Other
Total assets
Liabilities (1)
Deposits
Segregated fund liabilities
Other – Derivatives
– Other
Subordinated debentures
Total liabilities
Equity attributable to shareholders
Non-controlling interests
Total equity
Total liabilities and equity
Table 42
2016
2015
2014
$
14,929
27,851
236,093
186,302
369,470
154,369
(2,235)
981
118,944
73,554
$
12,452
22,690
215,508
174,723
348,183
126,069
(2,029)
830
105,626
70,156
$
17,421
8,399
199,148
135,580
334,269
102,954
(1,994)
675
87,402
56,696
$ 1,180,258
$ 1,074,208
$ 940,550
$
757,589
981
116,550
223,764
9,762
$ 697,227
830
107,860
196,985
7,362
$ 614,100
675
88,982
174,431
7,859
1,108,646
1,010,264
886,047
71,017
595
71,612
62,146
1,798
63,944
52,690
1,813
54,503
$ 1,180,258
$ 1,074,208
$ 940,550
(1)
Foreign currency-denominated assets and liabilities are translated to Canadian dollars.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
43
2016 vs. 2015
Total assets were up $106 billion or 10% from last year. Foreign exchange translation decreased total assets by $4 billion.
Interest-bearing deposits with banks increased $5 billion, largely reflecting higher deposits with the Federal Reserve.
Securities were up $21 billion or 10% compared to last year, largely driven by our acquisition of City National, and higher corporate and
government debt securities reflecting our management of liquidity and funding risk and increased client activities, partially offset by lower equity
trading positions in support of business activities.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $12 billion or 7%, mainly
attributable to higher client activity.
Loans were up $50 billion or 10%, largely due to our acquisition of City National, and continued solid volume growth in residential
mortgages and wholesale loans reflecting increased client activity.
Derivative assets were up $13 billion or 13%, mainly attributable to higher fair values on foreign exchange contracts and interest rate
swaps, partially offset by higher financial netting and the impact from foreign exchange translation.
Other assets were up $3 billion or 5%, largely reflecting higher goodwill and intangible assets related to our acquisition of City National.
Total liabilities were up $98 billion or 10% from last year. Foreign exchange translation decreased total liabilities by $4 billion.
Deposits increased $60 billion or 9%, mainly driven by our acquisition of City National and growth in retail deposits largely reflecting
increased client demand.
Derivative liabilities were up $9 billion or 8%, mainly attributable to higher fair values on foreign exchange contracts and interest rate
swaps, partially offset by higher financial netting and the impact from foreign exchange translation.
Other liabilities increased $27 billion or 14%, mainly reflecting higher obligations related to repurchase agreements driven by increased
business and client activities.
Total equity increased $8 billion or 12%, largely reflecting earnings, net of dividends, and the issuance of common shares related to our
acquisition of City National.
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded on our
Consolidated Balance Sheets. Off-balance sheet transactions are generally undertaken for risk, capital and funding management purposes which
benefit us and our clients. These include transactions with structured entities and may also include the issuance of guarantees. These
transactions give rise to, among other risks, varying degrees of market, credit, liquidity and funding risk, which are discussed in the Risk
management section.
We use structured entities to securitize our financial assets as well as assist our clients in securitizing their financial assets. These entities
are not operating entities, typically have no employees, and may or may not be recorded on our Consolidated Balance Sheets.
In the normal course of business, we engage in a variety of financial transactions that may qualify for derecognition. We apply the
derecognition rules to determine whether we have effectively transferred substantially all the risks and rewards or control associated with the
financial assets to a third party. If the transaction meets specific criteria, it may qualify for full or partial derecognition from our Consolidated
Balance Sheets.
Securitizations of our financial assets
We periodically securitize our credit card receivables, residential and commercial mortgage loans and bond participation certificates 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.
We securitize our credit card receivables, on a revolving basis, through a consolidated structured entity. We securitize our single and
multiple-family residential mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program. The mortgages
associated with these securitization activities are recorded on our Consolidated Balance Sheets as they do not meet the derecognition criteria.
We also securitize mortgages which we purchased from third party lenders. We derecognize these purchased mortgages from our Consolidated
Balance Sheets when all the risks and rewards related to these mortgages have been substantially transferred. During 2016, no purchased
mortgages were derecognized. During 2015, $967 million of purchased mortgages were derecognized where both the NHA MBS and the residual
interests in the mortgages were sold to third parties resulting in the transfer of substantially all of the risks and rewards. For additional details of
our securitization activities, refer to Note 6 and Note 7 of our audited 2016 Annual Consolidated Financial Statements.
We periodically securitize residential mortgage loans for the Canadian social housing program through the NHA MBS program, which are
derecognized from our Consolidated Balance Sheets when sold to third party investors. During 2016, there were no securitization activities
associated with residential mortgage loans for the Canadian social housing program (2015 – $112 million).
We also periodically securitize commercial mortgage loans by selling them in collateral pools, which meet certain diversification, leverage
and debt coverage criteria, to structured entities, one of which is sponsored by us. Securitized commercial mortgage loans are derecognized from
our Consolidated Balance Sheets as we have transferred substantially all of the risk and rewards of ownership of the securitized assets. During
2016, we securitized $700 million of commercial mortgages (2015 - $195 million). Our continuing involvement with the transferred assets is
limited to servicing certain of the underlying commercial mortgages sold. As at October 31, 2016, there were $1.3 billion of commercial
mortgages outstanding that we continue to service related to these securitization activities (October 31, 2015 – $1.1 billion).
In prior years, we participated in bond securitization activities where we purchased government, government related and corporate bonds
and repackaged those bonds in trusts that issue participation certificates, which were sold to third party investors. Securitized bonds are
derecognized from our Consolidated Balance Sheets as we have transferred substantially all of the risk and rewards of ownership of the
securitized assets. We did not securitize bond participation certificates during 2016 or 2015. Our continuing involvement with the transferred
assets is limited to servicing the underlying bonds. As at October 31, 2016, there were $81 million of bond participation certificates outstanding
related to these prior period securitization activities (October 31, 2015 – $138 million).
Involvement with unconsolidated structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our customers’ financing and
investing needs, including securitization of our client’s financial assets, creation of investment products, and other types of structured financing.
We have the ability to use credit mitigation tools such as third party guarantees, credit default swaps, and collateral to mitigate risks
assumed through securitization and re-securitization exposures. The process in place to monitor the credit quality of our securitization and re-
securitization exposures involves, among other things, reviewing the performance data of the underlying assets. We affirm our ratings each
quarter and formally confirm or assign a new rating at least annually. For further details on our activities to manage risks, refer to the Risk
management section.
44
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Below is a description of our activities with respect to certain significant unconsolidated structured entities. For a complete discussion of
our interests in consolidated and unconsolidated structured entities, refer to Note 7 of our audited 2016 Annual Consolidated Financial
Statements.
RBC-administered multi-seller conduits
We administer multi-seller conduits which are used primarily for the securitization of our clients’ financial assets. We are involved in these
conduit markets because our clients value these transactions. Our clients primarily use 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 and risk-
adjusted return.
We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit enhancements to the
multi-seller conduits. Fee revenue for all such services amounted to $252 million during the year (2015 – $213 million). We do not maintain any
ownership 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 amounts of these facilities.
Liquidity and credit enhancement facilities
Table 43
As at October 31 (Millions of Canadian dollars)
Backstop liquidity facilities
Credit enhancement facilities
Total
(1)
(2)
(3)
2016
2015
Notional of
committed
amounts (1)
Allocable
notional
amounts
Outstanding
loans (2)
Maximum
exposure
to loss (3)
Notional of
committed
amounts (1)
Allocable
notional
amounts
Outstanding
loans (2)
Maximum
exposure
to loss (3)
$
$
39,462 $ 36,494 $
733 $ 37,227 $
37,770 $ 34,163 $
2,235
2,235
–
2,235
2,974
2,843
764 $ 34,927
2,843
–
41,697 $ 38,729 $
733 $ 39,462 $
40,744 $ 37,006 $
764 $ 37,770
Based on total committed financing limit.
Net of allowance for loan losses and write-offs.
Not presented in the table above are derivative assets with a fair value of $11 million (2015 – $19 million) which are a component of our total maximum exposure to loss from our interests in
the multi-seller conduits. Refer to Note 7 of our audited 2016 Annual Consolidated Financial Statements for more details.
As at October 31, 2016, the notional amount of backstop liquidity facilities we provide increased by $1,692 million or 4% from last year. The
increase in the amount of backstop liquidity facilities provided to the multi-seller conduits as compared to last year reflects increases in the
foreign exchange translation and the outstanding securitized assets of the multi-seller conduits. The notional amount of partial credit
enhancement facilities we provide decreased by $739 million from last year. The decrease in the credit enhancement facilities reflects fewer
transactions requiring program-level credit enhancement due to support provided directly to those transactions and decreased client usage.
Total loans extended to the multi-seller conduits under the backstop liquidity facilities decreased by $31 million from last year primarily due to
principal repayments which were partially offset by the impact of foreign exchange translation.
Maximum exposure to loss by client type
Table 44
As at October 31 (Millions)
Outstanding securitized assets
Credit cards
Auto loans and leases
Student loans
Trade receivables
Asset-backed securities
Equipment receivables
Consumer loans
Dealer floor plan receivables
Fleet finance receivables
Insurance premiums
Residential mortgages
Transportation finance
Total
Canadian equivalent
2016
2015
(US$)
(C$)
Total (C$)
(US$)
(C$)
Total (C$)
$
$
5,057
9,489
2,352
2,002
547
1,428
1,470
760
914
–
–
1,041
$ 25,060
$ 33,608
$
$
510
2,646
–
51
–
–
–
903
306
163
1,122
153
5,854
$
7,292
15,372
3,154
2,736
734
1,915
1,971
1,922
1,532
163
1,122
1,549
$
4,679
8,606
3,473
2,175
584
1,362
706
1,261
441
128
–
1,204
$ 39,462
$ 24,619
5,854
$ 39,462
$ 32,190
$
$
$
510
2,352
–
112
–
–
–
903
377
153
1,020
153
5,580
$
6,628
13,604
4,541
2,956
764
1,781
923
2,552
954
320
1,020
1,727
$ 37,770
5,580
$ 37,770
Our overall exposure increased by 4% compared to last year, reflecting an increase in the outstanding securitized assets of the multi-seller
conduits and foreign exchange translation. Correspondingly, total assets of the multi-seller conduits increased by $1,659 million or 4% over last
year, primarily due to increases in the Auto loans and leases, Consumer loans and Credit cards asset classes, which were partially offset by
decreases in the Student loans and Dealer floor plan asset classes. 100% of multi-seller conduits assets were internally rated A or above,
consistent with last year. All transactions funded by the unconsolidated multi-seller conduits are internally rated using a rating system which is
largely consistent with that of the external rating agencies.
Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed in two U.S.
multi-seller conduits are reviewed by Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch). One U.S. multi-
seller conduit is reviewed by S&P. Transactions in the Canadian multi-seller conduits are reviewed by DBRS and Moody’s. 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
45
As at October 31, 2016, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $24.7 billion, a decrease of
$790 million or 3% from last year. The decrease in the amount of ABCP issued by the multi-seller conduits compared to last year is primarily due
to a decrease in client usage partially offset by foreign exchange translation. The rating agencies that rate the ABCP rated 67% (October 31, 2015
– 71%) of the total amount issued within the top ratings category and the remaining amount in the second highest ratings category.
In October 2014, the U.S. federal regulators adopted regulations related to the credit risk retention requirements of Section 15G of the
Securities Exchange Act of 1934 (as added by Section 941 of the Dodd-Frank Act) for asset-backed securities (the Risk Retention Rules). To
comply with the Risk Retention Rules, we plan to hold, on each day on and after December 24, 2016, ABCP from RBC administered U.S. multi-
seller conduits in an amount equal to at least 5% of the aggregate principal amount of the then outstanding ABCP and any advances under
the liquidity loan agreement. As at October 31, 2016, the fair value of the ABCP purchased in anticipation of the Risk Retention Rules was
$670 million (October 31, 2015 – $nil). Based on the current outstanding amount of ABCP issued, we expect to hold approximately $1.2 billion
of ABCP by December 24, 2016. This inventory is classified as Securities – Available-for-sale on our Consolidated Balance Sheet.
We also purchase 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, 2016, the fair value of our inventory was $5 million, a decrease of $12 million from last year. The fluctuations in
inventory held reflect normal trading activity. This inventory is classified as Securities – Trading on our Consolidated Balance Sheets.
Structured finance
We invest in ARS of certain trusts which fund their long-term investments in student loans by issuing short-term senior and subordinated notes.
Our maximum exposure to loss in these ARS trusts as at October 31, 2016 was $549 million (October 31, 2015 – $546 million). The increase in
our maximum exposure to loss is primarily related to the impact of foreign exchange translation. Interest income from the ARS investments,
which is reported in Net-interest income, was $6.3 million during the year (2015 – $6.9 million).
We also provide liquidity facilities to certain municipal bond Tender Option Bond (TOB) trusts in which we have an interest but do not
consolidate because the residual certificates issued by the TOB trusts are held by third parties. As at October 31, 2016, our maximum exposure
to loss from these unconsolidated municipal bond TOB trusts was $1,640 million (October 31, 2015 – $856 million). The increase in our
maximum exposure to loss relative to last year is primarily due to the addition of new trusts and the impact of foreign exchange translation. Fee
revenue from provision of liquidity facilities to these entities reported in Non-interest income was $4.7 million during the year (2015 – $3.7
million).
We provide senior warehouse financing to discrete unaffiliated structured entities that are established by third parties to acquire loans and
issue term collateralized loan obligations. A portion of the proceeds from the sale of the term collateralized loan obligations is used to fully repay
the senior warehouse financing that we provide. As at October 31, 2016, our maximum exposure to loss associated with the outstanding senior
warehouse financing facilities was $141 million (October 31, 2015 – $444 million). The decrease in our maximum exposure to loss relative to
last year is related to the issuance of term collateralized loan obligations where a portion of the proceeds were used to repay some of the senior
warehouse financing that we provided and a decrease in the outstanding drawings on certain financing facilities.
Investment funds
We invest in hedge funds primarily to provide clients with desired exposures to reference funds. As we make investments in the reference funds,
exposures to the funds are simultaneously transferred to clients through derivative transactions. Our maximum exposure to loss in the reference
funds is limited to our investments in the funds. As at October 31, 2016, our maximum exposure to loss was $2.6 billion (October 31, 2015 –
$2.6 billion).
We also provide liquidity facilities to certain third party investment funds. The funds issue unsecured variable-rate preferred shares and
invest in portfolios of tax exempt bonds. As at October 31, 2016, our maximum exposure to these funds was $764 million (October 31, 2015 –
$744 million). The increase in our maximum exposure compared to last year is primarily due to the impact of foreign exchange translation.
Third-party securitization vehicles
We hold interests in certain unconsolidated third-party securitization vehicles, which are structured entities. We, as well as other financial
institutions, are obligated to provide funding to these entities up to our maximum commitment level and are exposed to credit losses on the
underlying assets after various credit enhancements. As at October 31, 2016, our maximum exposure to loss in these entities was $9 billion
(October 31, 2015 – $9.7 billion). The decrease in our maximum exposure to loss compared to last year reflects a reduction in the securitized
assets in these entities partially offset by foreign currency translation. Interest and non-interest income earned in respect of these investments
was $95 million (2015 – $56 million).
Guarantees, retail and commercial commitments
We provide guarantees and commitments to our clients that expose us to liquidity and funding risks. Our maximum potential amount of future
payments in relation to our commitments and guarantee products as at October 31, 2016 amounted to $340 billion compared to $315 billion
last year. The increase compared to last year relates primarily to business growth, the acquisition of City National, and the impact of foreign
exchange translation in other credit-related commitments and securities lending indemnifications. Refer to Liquidity and funding risk and Note
26 to our audited 2016 Annual Consolidated Financial Statements for details regarding our guarantees and commitments.
Risk management
Overview
The ability to manage risk well is a core competency at RBC, and is supported by our strong risk conduct and culture, and an effective risk
management approach. We define risk as the potential for loss or an undesirable outcome with respect to volatility of actual earnings in relation
to expected earnings, capital adequacy or liquidity. Organizational design and governance processes ensure that our Group Risk Management
(GRM) function is independent from the businesses it supports.
We manage our risks by ensuring that business activities and transactions provide an appropriate balance of return for the risks assumed
and remain within our risk appetite, which is collectively managed throughout RBC, through adherence to our Enterprise Risk Appetite
Framework. Our major risk categories include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal
and regulatory environment, competitive, and systemic risks. In order to avoid excessive concentration of risks, we strive to diversify our
business lines, products and sector exposures.
46
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Build shareholder value through leadership in strategic management risk
Mission statement
Objectives
Identify, assess and
measure our exposure
to material individual,
aggregate and
emerging risks
Ensure all risk taking
activities and risk
exposures are within
the board-approved risk
appetite, and risk limits
Maintain and ensure
continued enhancement
of the Enterprise Risk
Management Framework
Provide independent
and objective oversight
of the management of
risks arising from our
businesses and
operations
Maintain an effective
enterprise-wide risk
management process
Ensure continuous
improvement in risk
management
processes, tools and
practices
Risk priorities
Enable growth while
ensuring top and
emerging risks remain
within risk appetite
Continue to strengthen
our risk conduct and
culture practices
Increase GRM’s
efficiency and
effectiveness
Maintain focus on
talent management,
diversity and employee
engagement
Manage regulatory
changes
Enhance the risk
organization for the
U.S. region
Risk management principles
Effectively
balancing risk and
reward is essential
for our success
Responsibility for
risk management is
shared
Business decisions
must be based on
an understanding
of risk
Avoid activities
that are
inconsistent with
our vision, values,
code of conduct or
policies
Proper focus on the
client reduces
our risks
Use judgment and
common sense
Be operationally
prepared for a
potential crisis
2016 Accomplishments
Throughout 2016, we have:
•
•
•
•
•
•
•
Kept our risk profile within our risk appetite;
Maintained strong credit quality, notwithstanding sustained low energy prices impacting the oil & gas sector and oil-exposed regions;
Maintained strong capital and liquidity ratios;
Avoided major operational risk events;
Enhanced stress testing capabilities and risk analysis frameworks;
Increased focus on further strengthening risk conduct and culture; and
Enhanced the risk organization for the U.S.
CET1 ratio
Total Capital ratio
Total PCL ratio
GIL ratio
10.8%
10.6%
14.4%
9.9%
9.6%
14.0%
14.0%
13.4%
0.29%
0.27%
0.24%
0.31%
0.73%
0.47%
0.44%
0.52%
2016
2015
2014
2013
2016
2015
2014
2013
2016
2015
2014
2013
2016
2015
2014
2013
Our capital position was strong
with a Basel III CET1 ratio well in
excess of regulatory requirements
Our total capital ratio increased
relative to last year mainly due
to strong internal capital
generation
Our total PCL ratio remained
within historical norms, up
modestly compared to last year
primarily as a result of the low
oil price environment
The quality of our credit portfolio
remained high, notwithstanding
the low oil prices, which led to
higher impaired loans in the oil
and gas sector
Top and emerging risks
Our view of risks is not static. An important component of our enterprise risk management approach is to ensure that continuously evolving top
risks and emerging risks are appropriately identified, managed, and incorporated into existing enterprise risk management assessment,
measurement, monitoring and escalation processes.
These practices ensure management is forward-looking in its assessment of risks to the organization. Identification of top and emerging
risks occurs in the course of business development and as part of the execution of risk oversight responsibilities by GRM, Finance, Corporate
Treasury, Global Compliance and other control functions.
Top and emerging risks occur as a result of exogenous factors, such as changes in the macroeconomic or regulatory environment, or
endogenous factors, such as changes to our strategic imperatives, or failure to adapt to an evolving competitive or operational environment.
A top risk is an existing, significant risk that can potentially affect our earnings or capital within a one-year time horizon.
An emerging risk has a lower probability of occurring within a one-year horizon, but, in the event it materializes, can have a significant
adverse impact on our ability to achieve our goals. Emerging risks are defined as “new” risks, “familiar risks in new or unfamiliar conditions”, or
“existing risks that are expected to increase in significance” that have the potential of creating new or changing top risks within the next annual
reporting cycle that may or could prevent us from achieving our business objectives.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
47
Top Risks
Trend
Commentary
(cid:2) Risk did not increase in 2016
(cid:3) Risk heightened during 2016
(cid:3) Top Risk in 2016
Global
uncertainty
Brexit
Oil & gas
Cyber risk
Anti-money
laundering
Exposure to
more volatile
sectors
(cid:3)
(cid:3)
(cid:2)
(cid:3)
(cid:3)
(cid:2)
Uncertainty around the potential for a global recession remained heightened during 2016. Concerns
remain around the social, political and economic impacts of mass immigration in continental
Europe led by the Middle East’s changing political landscape, Russia-Ukraine tension and territorial
disputes between Japan and China. Increasing income inequality, unemployment and decline in
living standards against the backdrop of growing foreign ownership of strategic assets is driving an
increase in nationalism and extremist political movements around the globe. Slow global growth
and the attempts of central banks around the world to use monetary policy to stimulate their
economies, even using negative interest rates, remains a key risk. Following the recent U.S. election,
drastic policy changes including trade and fiscal policy, could be a key risk that may result in
economic uncertainty for the U.S. and its trading partners, including Canada.
The Brexit vote has resulted in increased concerns about the economic, legal, political, regulatory
and trade consequences for the U.K. and Europe. We will be monitoring negotiations between the
U.K., the EU and individual member states closely to assess the potential impacts to our business
strategy in the U.K. and in Europe.
The oil & gas sector experienced a partial recovery during 2016, easing pressure on Provision for
Credit Losses (PCL) in the latter half of the year. However, the risks associated with sustained low
oil prices remain. The low oil prices might lead to additional PCL in the longer term. We have
performed a number of low oil price stress tests, which focus specifically on the impact to our retail
and wholesale portfolios. In our view, our exposure to weak oil and gas prices remains within our
risk appetite.
Information and cybersecurity continue to be an increasingly problematic issue, not only for the
financial services sector, but for other industries in Canada and around the globe. The volume and
sophistication of cyber-attacks in the industry continue to increase and adversaries are becoming
more organized. We continue to see challenges in the management of IT Risk with respect to third
party hosted applications, eMessaging and social media related risks. We continue to leverage and
mature advancements in cyber defense capabilities to support our business model, protect our
systems and enhance the experience of our clients on a global basis by employing industry best
practices and collaborating with peers and experts, to provide our customers with confidence in
their financial transactions.
We are subject to a dynamic set of anti-money laundering/anti-terrorist financing, economic
sanctions and anti-bribery/anti-corruption (AML) laws and regulations across the multiple
jurisdictions in which we operate. As the scope of criminal activities such as tax evasion, human
trafficking, bribery and corruption continues to expand, regulators worldwide are intensifying
regulatory requirements and increasing enforcement actions and penalties for those who fail to
comply. We are committed to the management of AML risk and have implemented advanced and
evolving AML policies, processes and controls to mitigate the risk of money laundering activities
and meet our regulatory obligations to deter, detect and report such activities.
We manage risks associated with our wholesale loan portfolio by focusing on diversification, driven
by limits on single name, country and industry exposures across all businesses, portfolios and
transactions. We continue to adhere to strict lending standards and stress test our portfolio to
assist in evaluating the potential impact of severe economic conditions.
48
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Emerging Risks
Trend
Commentary
(cid:2) Risk did not increase in 2016
(cid:3) Risk heightened during 2016
(cid:3) New Emerging Risk in 2016
Technological
innovation and
new entrants
Increasing
complexity of
regulation
Data
management
Litigation and
administrative
penalties
(cid:2)
(cid:2)
(cid:3)
(cid:2)
The financial system continues to be subject to rapid technological change resulting in changing
consumer habits and additional regulatory expectations and oversight responsibilities. New Fintech
entrants have the potential to disrupt existing financial services value chains. These companies
offer new payment methods and alternative lending solutions. In response, we have made digital
and IT innovation a key strategic priority.
We operate in multiple jurisdictions, and the continued expansion of the breadth and depth of
regulations may lead to declining profitability and slower response to market needs. Financial
reforms coming on stream in multiple jurisdictions may have significant impact on our businesses
and could affect their strategies.
Financial institutions are subject to increased informational demands from regulators and other
stakeholders. We are continually investing in building better data management capabilities,
including data ownership and stewardship, data architecture, metadata management, and data
delivery, in order to enable consistent data aggregation, reporting and management.
Some financial institutions have been affected by inadequate internal controls on risky or unlawful
behaviour, including not conducting adequate due diligence on new clients, new products,
misrepresentation, and not addressing customer privacy amid rapid increases in the scope and
volume of personal data, leading to increased scrutiny from regulators.
Enterprise risk management
Under the oversight of the Board of Directors and senior management, the Enterprise Risk Management Framework provides an overview of our
enterprise-wide programs for managing risk, including identifying, assessing, measuring, controlling, monitoring and reporting on the significant
risks that face the organization. While our risk appetite encompasses “what” risks we are able and willing to take, our risk conduct and culture
articulates “how” we expect to take those risks.
Risk governance
The risk governance model is well-established. The Board of Directors oversees the implementation of our risk management framework, while
employees at all levels of the organization are responsible for managing the day-to-day risks that arise in the context of their mandate. As shown
below, we use three lines of defence governance model to manage risks across the enterprise.
BOARD OF DIRECTORS
•
•
The Board of Directors establishes the tone from the top, approves our risk appetite, provides oversight and carries out its risk management mandate primarily
through its committees which include the Risk Committee, the Audit Committee, the Governance Committee and the Human Resources Committee.
The purpose of the Risk Committee is to oversee our risk management program. The Risk Committee’s oversight role is designed to ensure that the risk
management function is adequately independent from the businesses whose activities it reviews, and that the policies, procedures and controls used by
management are sufficient to keep risks within our risk appetite.
Group Executive and Group Risk Committee
• Actively shape enterprise risk appetite and recommend it for Board of Directors approval
•
Establish the tone from the top and visibly support and communicate enterprise risk appetite, ensuring that sufficient resources and expertise are in place to
help provide effective oversight of adherence to the enterprise risk appetite
Ensure alignment of strategic planning, financial planning, capital planning and risk appetite
•
• Via the Compensation Risk Management Oversight Committee, oversees the design of major compensation programs to ensure alignment with sound risk
management principles and that risks that may not be fully captured in our current financial performance are appropriately considered in variable
compensation payouts, including enterprise risk profile relative to risk appetite
First line of defence
Second line of defence
Third line of defence
Risk Owners
Risk Oversight
Independent Assurance
•
•
Business and Support Functions embedded in
the business
Accountable for:
– Identification
– Assessment
– Mitigation
– Monitoring and
– Reporting of risk against approved
policies and appetite
•
•
Establishes risk management practices and
provides risk guidance
Provides oversight of the effectiveness of
First Line risk management practices
• Monitors and independently reports on the
level of risk against established appetite
•
•
Internal and External Audit
Independent assurance to management and
the Board of Directors on the effectiveness
of risk management practices
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
49
Risk Appetite
Our risk appetite is the amount and type of risk that we are able and willing to accept in the pursuit of its business objectives. The goal in
managing risk is to protect us from an unacceptable loss or an undesirable outcome with respect to earnings volatility, capital adequacy or
liquidity, while supporting and enabling our overall business strategy.
Our approach to articulating our risk appetite is focused around three key concepts:
1)
The amount of “earnings at risk” that is determined to be acceptable over an economic cycle and including periods of moderate stress,
using an expected future loss lens and considering potential revenue and expense contributions to earnings volatility;
The amount of “capital at risk” that is determined to be acceptable under severe and very severe stress, using an unexpected future loss
lens; and
Ensuring adequate liquidity in times of stress.
2)
3)
•
•
Our Enterprise Risk Appetite Framework has several major components as follows:
Define our risk capacity by identifying regulatory constraints
that restrict our ability to accept risk.
Establish and regularly confirm our risk appetite, comprised of
strategic drivers and self-imposed constraints that define both
the minimum and maximum amount of risk we are willing to
accept given our financial strength, corporate objectives and
business strategies.
Set risk limits and tolerances to ensure that risk-taking
activities are within our risk appetite.
Assess our risk posture to confirm whether our strategic
priorities entail taking on more risk over a one-year time
frame, using a scale of contracting, stable or expanding.
Regularly measure and evaluate our risk profile, representing
the risks we are exposed to, relative to our risk appetite, and
ensure appropriate action is taken to prevent risk profile from
surpassing risk appetite.
•
•
•
Risk Capacity
Risk Appetite
Risk Limits and
Tolerances
Risk Profile
We are in the business of taking risk; however, we balance the risk-reward trade-off to ensure the long-term viability of the organization by
remaining within our risk appetite. Our risk appetite is articulated in several complementary qualitative and quantitative risk appetite
statements.
Qualitative statements
• Undertake only those risks that we understand.
Our risk decisions are thoughtful and future-
focused
• Make decisions that balance risk with sustainable
and stable business growth
• Maintain a healthy control environment built to
protect our stakeholders and meet regulatory and
legal requirements
• Avoid activities that compromise our values or
code of conduct. Our compensation practices and
code of conduct are built to reflect our culture of
integrity
• Never compromising our reputation and the trust
of our clients for profits
• Maintain our financial resilience and operational
readiness for extreme events, both to protect
stakeholder interests and to ensure we do not
threaten financial stability or the broader economy
Risk
Appetite
Quantitative statements
• Manage exposure to future losses
• Manage volatility of earnings
• Avoid excessive concentrations of risk
•
•
•
•
Low exposure to stress events
Ensure sound management of liquidity and
funding risk
Ensure sound management of regulatory
compliance risk and operational risk
Ensure capital adequacy by maintaining capital
ratios in excess of rating agency and regulatory
expectations
• Maintain strong credit ratings
• Maintain a risk profile that is in the top half of our
peer group
The Enterprise Risk Appetite Framework is structured in such a way that it can be applied at the enterprise, business segment, business unit and
legal entity levels. The risk appetite is integrated into our business strategies and capital plan. We also ensure that the business strategy aligns
with the enterprise and business segment level risk appetite.
Risk Conduct and Culture
We define our risk conduct and culture as a shared set of behavioural norms that sustains our core values and enables us to proactively identify,
understand and act upon our risks, thereby protecting our clients, safeguarding our shareholders’ value, and supporting the integrity, soundness
and resilience of financial markets.
Risk behaviour expectations are in place and articulated through:
•
•
•
•
•
•
•
Our Values;
Code of Conduct;
Risk management principles;
Risk appetite statements;
Regulatory conduct rules, practices and policies;
Performance management processes; and
The Risk Conduct and Culture Framework.
50
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
We have adopted the Financial Stability Board’s four fundamental practices as foundational to an effective risk conduct and culture in order to
enable and reward the desired risk behaviours and outcomes, namely:
•
•
•
•
Tone from the top;
Accountability;
Effective communication and challenge; and
Incentives that reinforce desired risk management behaviours.
These practices are largely grounded in our existing risk management and human resource disciplines and protocols, and, when combined with
the elements of effective leadership and values, provide a base from which the resulting risk conduct and culture can be assessed, monitored,
sustained and subject to ongoing enhancement.
We hold ourselves to the highest standards of conduct to build the trust of our clients, investors, colleagues and community. The desired
outcomes from effective risk conduct and culture practices align with our values and support our risk appetite statements:
Practices
Tone from the top
Accountability
Effective communication and
challenge
Incentives that reinforce desired risk
management behaviours
Support desired outcomes
Undertaking only
those risks that we
understand.
Our risk decisions
are thoughtful and
future-focused
Making decisions that
balance risk with
sustainable and stable
business growth
Maintaining a healthy
control environment
built to protect our
stakeholders and meet
regulatory and legal
requirements
Avoiding activities that
compromise our Values
or Code of Conduct. Our
compensation practices
and Code of Conduct
are built to reflect that
culture of integrity
Never compromising
our reputation and the
trust of our clients for
profits
Maintaining our
financial resilience and
operational readiness
for extreme events,
both to protect
stakeholder interests
and to ensure RBC does
not threaten financial
stability or the broader
economy
Sustaining and strengthening our risk conduct and culture relies upon effective linkages between our risk appetite, our enterprise-wide risk
management program, our Code of Conduct, values, and human resources policies and practices. Regular assessment and monitoring is in place
to identify strengths and weaknesses and areas for remediation. Our objective is to continually assess the effectiveness of our risk conduct and
culture and to identify issues that could be signs of cultural problems and which, if not addressed, could undermine our long-term success, and,
potentially jeopardize our safety and soundness.
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. In addition, judgmental
risk measures are developed, and techniques such as stress testing, and scenario and sensitivity analyses can also be used to assess and
measure risks.
Quantifying expected loss
Expected loss is used to assess earnings at risk and is a representation of losses that are statistically expected to occur in the normal course of
business in a given period of time. For credit risk, the key parameters used to measure our exposure to expected loss are probability of default,
loss given default, and exposure at default. For market risk, a statistical technique known as Value-at-Risk (VaR) is used to measure losses under
normal market conditions.
Quantifying unexpected loss
Unexpected loss is used to assess capital at risk and is a statistical estimate of the amount by which actual earnings depart from the expected,
over a specified time horizon, measured at a specified level of confidence. We hold capital to withstand these unexpected losses, should they
occur. For further details, refer to the Capital management section.
Stress testing
Stress testing examines potential impacts arising from exceptional but plausible adverse events, and is an important component of our risk
management framework. Stress testing results are used in:
•
•
•
•
•
Monitoring our risk profile relative to our risk appetite in terms of earnings and capital at risk;
Setting limits;
Identifying key risks to and potential shifts in our capital and liquidity levels, and our financial position;
Enhancing our understanding of available mitigating actions in response to adverse events; and
Assessing the adequacy of our target capital levels.
Our enterprise-wide stress tests evaluate key balance sheet, income statement, leverage, capital, and liquidity impacts arising from risk
exposures and changes in earnings. The results are used by the Group Risk Committee (GRC), the Board of Directors and senior management risk
committees to understand our performance drivers under stress, and review stressed capital, leverage, and liquidity ratios against regulatory
thresholds and internal targets. The results are also incorporated into our Internal Capital Adequacy Assessment Process (ICAAP) and capital
plan analyses.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
51
We annually evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities. Our Board of
Directors reviews the recommended scenarios, and GRM leads the scenario assessment process. Results from across the organization are
integrated to develop an enterprise-wide view of the impacts, with input from subject matter experts in GRM, Corporate Treasury, Finance, and
Economics. Recent scenarios evaluated include global recessions, Canadian recessions, and energy price shocks.
Ongoing stress testing and scenario analyses within specific risk types such as market risk, liquidity risk, structural interest rate risk, retail
and wholesale credit risk, operational risk, and insurance risk supplement and support our enterprise-wide analyses. Results from these
risk-specific programs are used in a variety of decision-making processes including risk limit setting, portfolio composition evaluation, our
risk appetite articulation, and business strategy implementation.
In addition to ongoing enterprise-wide and risk specific stress testing programs, we also use ad hoc and reverse stress testing to deepen
our knowledge of the risks we face. Ad hoc stress tests are one-off analyses used to investigate developing conditions or stress a particular
portfolio in more depth. Reverse stress tests, starting with a severe outcome and aiming to reverse-engineer scenarios that might lead to it, are
used in risk identification and understanding of risk/return boundaries.
In addition to internal stress tests, we participate in a number of regulator-required stress test exercises at both the consolidated and
subsidiary levels.
Back-testing
We back-test many market and credit risk parameters, including probability of default, loss given default, and usage given default. Back-testing
is performed on a quarterly basis by comparing the realized values to the parameter estimates that are currently used to ensure the parameters
remain appropriate for regulatory and economic capital calculations.
Validation of measurement models
Models are widely used for many purposes at RBC, including the valuation of financial products and the measurement and management of
different types of risk. Prior to their use, models are subject to an independent validation and approval by our model risk management function,
a team of modelling professionals with reporting lines independent of those of the model developers and model users. The validation ensures
that models are conceptually sound and capable of fulfilling their intended use. In addition to independently validating models prior to use, our
model risk function provides controls that span the life-cycle of a model, including model change management procedures, requirements for
ongoing monitoring, and annual assessments to ensure each model continues to be applicable.
Risk control
Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls. 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, assessing,
measuring, controlling, monitoring and reporting on the significant risks we face. This framework is underpinned by our Risk Appetite
Framework and Risk Conduct and Culture Framework.
Level 2: Risk-Specific Frameworks elaborate on each specific risk type and the mechanisms for identifying, measuring, monitoring and
reporting of our principal risks; key policies; and roles 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 and Procedures are established to manage the risks that are unique
to their operations.
Risk controls are anchored by our Enterprise Risk Management and Risk-Specific 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.
52
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Enterprise Risk Policy Architecture
Enterprise Risk
Management
Framework
RBC Code of
Conduct
Enterprise Risk
Conduct and Culture
Framework
Enterprise Risk
Appetite
Framework
Credit
Risk
Framework
Market
Risk
Framework
Operational
Risk
Management
Framework
IT Risk
Management
Framework
Reputation
Risk
Framework
Regulatory
Compliance
Management
Framework
Insurance
Risk
Framework
Capital
Management
Framework
Liquidity Risk
Management
Framework
Risk Data
Aggregation and
Risk Reporting
Framework
Supporting Risk-Specific Enterprise-Wide Frameworks and Policy Documents (examples)
Credit Risk
Mitigation
Policy
Management of
Market Risk
Standing Order
Fraud Risk
Framework
Information
Security Policy
Fiduciary Risk
Policy
Global AML
Framework,
Privacy Policy
Insurance
Risk
Mitigation Policy
Dividend
Policy
Liquidity
Risk
Policy
Risk Data
Standards, Risk
Reporting
Standards
Enterprise-Wide Policies for Multiple Risk Types
(e.g., Product Risk Review and Approval Policy; Risk Limits Policy; Stress-Testing Policy)
Segment or Region Specific Risk Policy and Procedures
Capital Markets Insurance Investor & Treasury Services Personal & Commercial Banking Wealth Management Corporate Support
The approval hierarchy for risk frameworks and policy documents is as follows:
Board of Directors or Board Committees
Senior Management Committees (e.g., Policy Review Committee, Ethics and Compliance Committee, Asset Liability Committee) for most other frameworks and
policies. Board or Board Committee approval is required in some instances (e.g., RBC Code of Conduct, Dividend Policy and AML Framework)
Generally within businesses or Corporate support Committees. Group Risk Management approval required if there are significant risk implications
Risk review and approval processes
Risk review and approval processes are established by GRM based on the nature, size and complexity of the risk involved. In general, the risk
review and approval process involves a formal review and approval by an individual, group or committee that is independent from the originator.
The approval responsibilities are governed by delegated authorities based on the following categories: transactions, structured 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 & CEO and the Group Credit
Risk Officer (GCRO). The delegated authorities allow these officers to approve single name, geographic (country and region) and industry sector
exposures within defined parameters to manage concentration risk, establish underwriting and inventory limits for trading and investment
banking activities and set market risk tolerances.
The Board of Directors also delegates liquidity risk authorities to the President & CEO, CAO & CFO, and GCRO. These limits act as a key risk
control designed to ensure that reliable and cost-effective sources of cash or its equivalent are available to satisfy our current and prospective
commitments.
Reporting
Enterprise and business segment 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.
In addition, we publish a number of external reports on risk matters to comply with regulatory requirements. On a quarterly basis, we provide to
senior management and the Board of Directors the Enterprise Risk Report which includes a comprehensive review of our risk profile relative to
our risk appetite and focuses on the range of risks we face along with an analysis of the related issues and trends. On an annual basis, we
provide a benchmarking review which compares our performance to peers across a variety of risk metrics and includes a composite risk
scorecard providing a more objective measure of our ranking relative to the peer group. In addition to our regular risk monitoring, other risk
specific presentations are provided to and discussed with senior management and the Board of Directors on top and emerging risks or changes
in our risk profile.
Risk Pyramid
Our risk pyramid identifies and categorizes our principal risks and provides a common language and discipline for the identification and
assessment of risk in existing businesses, new businesses, products or initiatives, and acquisitions and alliances. It is maintained by GRM and
reviewed regularly to ensure all key risks are reflected and ranked appropriately.
The placement of the principal risks within the risk pyramid is a function of two primary criteria:
•
•
Risk Drivers – Key factors that would have a strong influence on whether or not one or more of our risks will materialize, and
Control and Influence – The risk types are organized vertically from the top of the pyramid to its base according to the relative degree of
control and influence we are considered to have over each risk driver.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
53
Risk Drivers
•
Macroeconomic: Adverse changes in the macroeconomic environment can lead to a partial or total collapse of the real economy or the
financial system in any of the regions in which we operate. Examples include a rapid deterioration in the Canadian housing market,
severe North American recession and a downturn in China. Resultant impacts can materialize as loss of revenue, as well as realization
of credit, market or operational risk losses.
Strategic: Business strategy is a major driver of our risk appetite and consequently the strategic choices and capital allocations we
make determine how our risk profile changes. Examples include acquisitions, responding to the threats posed by non-traditional
competitors and responding to proposed changes in the regulatory framework. These choices also impact our revenue mix, affecting
our exposure to earnings volatility and loss absorption capacity.
Execution: The complexity and scope of our operations across the globe exposes us to operational and regulatory compliance risks,
including fraud, anti-money laundering, cybersecurity and conduct/fiduciary risk.
Transactional/Positional: This driver of risk presents a more traditional risk perspective. This involves the risk of credit or market losses
arising from the lending transactions and balance sheet positions we undertake every day.
•
•
•
The base of the pyramid – The risk categories along the base level of our risk pyramid are those over which we have the greatest level of control
and influence. We understand these risks and earn revenue by taking them. These are credit, market, liquidity and insurance risks. Operational
risk and regulatory compliance risk, while still viewed as risks over which we have greater level of control and influence, are ranked higher on the
pyramid than the other highly controllable risks. This ranking acknowledges the level of controllability associated with people, systems and
external events.
The top of the pyramid – Systemic risk is placed at the top of our risk pyramid, and is generally considered the least controllable type of risk
arising from the business environment impacting us. However, we have in place measures for mitigating the impacts of systemic risk such as our
diversified business model and funding sources, financial crisis management strategies and protocols, stress testing programs, and product and
geographic diversification. Legal and regulatory environment and competitive risks, which can be viewed as somewhat controllable, can be
influenced through our role as a corporate entity, and as an active participant in the Canadian and global financial services industry.
MACROECONOMIC
STRATEGIC
EXECUTION
L
E
S
S
SYSTEMIC
LEGAL &
REGULATORY
ENVIRONMENT
COMPETITIVE
C
o
n
t
r
o
l
&
I
n
f
l
u
e
n
c
e
STRATEGIC
REPUTATION
OPERATIONAL
REGULATORY
COMPLIANCE
M
O
R
E
TRANSACTIONAL / POSITIONAL
CREDIT
MARKET
LIQUIDITY
INSURANCE
The shaded text along with the tables specifically marked with an asterisk (*) in the following sections of the MD&A represent our disclosures
on credit, market and liquidity and funding risks in accordance with IFRS 7, Financial Instruments: Disclosures, and include discussion on
how we measure our risks and the objectives, policies and methodologies for managing these risks. Therefore, these shaded text and marked
tables represent an integral part of our 2016 Annual Consolidated Financial Statements.
Credit risk
Credit risk is the risk of loss associated with an obligor’s potential 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 or reinsurer). Credit risk includes counterparty credit risk from both trading and non-trading activities.
The failure to effectively manage credit risk across all our products, services and activities can have a direct, immediate and material impact
on our earnings and reputation.
The responsibility for managing credit risk is shared broadly following the three lines of defence governance model. The Board of Directors,
through its Risk Committee, delegates credit risk approval authorities to the CEO and GCRO. Credit transactions in excess of these authorities
must be approved by the Risk Committee. To facilitate day-to-day business operations, the Group Chief Risk Officer has been empowered to
further delegate credit risk approval authorities to individuals within Group Risk Management, the business segments, and Corporate Support
as necessary.
We maintain a Credit Risk Framework and supporting policies that are designed to clearly define roles and responsibilities, acceptable
practices, limits and key controls. The Credit Risk Framework describes the principles, methodologies, systems, roles and responsibilities,
reports and controls that exist for managing credit risk within RBC.
54
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
We balance our risk and return by:
•
•
•
•
•
•
•
•
Ensuring credit quality is not compromised for growth;
Mitigating credit risks in transactions, relationships and portfolios;
Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies, policies and tools;
Pricing appropriately for the credit risk taken;
Detecting and preventing inappropriate credit risk through effective systems and controls;
Applying consistent credit risk exposure measurements;
Ongoing credit risk monitoring and administration;
Transferring credit risk to third parties where appropriate through approved credit risk mitigation techniques (e.g., sale, hedging,
insurance, securitization); and
Avoiding activities that are inconsistent with our values, Code of Conduct or policies.
•
Risk measurement – Credit risk
We quantify credit risk, at both the individual obligor and portfolio levels, to manage expected credit losses in order to limit earnings volatility
and minimize unexpected losses.
We employ different risk measurement processes for our wholesale and retail credit portfolios. The wholesale portfolio comprises
businesses, sovereigns, public sector entities, banks and other financial institutions, and certain individuals and small businesses that are
managed on an individual client basis. The retail portfolio is comprised of residential mortgages, 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 and setting regulatory capital, two principal approaches are available: Internal Ratings Based Approach (IRB)
and Standardized Approach. Most of our credit risk exposure is measured under the IRB.
Economic capital, which is our internal quantification of risks, 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 given time period of an obligor for
a specific rating grade or for a particular pool of exposure.
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 recovery
process.
•
•
These parameters are determined based primarily 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 our Caribbean banking operations and City National, 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.
Wholesale credit risk
The wholesale credit risk rating system is designed to measure the credit risk inherent in our wholesale credit activities.
Each obligor is assigned a borrower risk rating (BRR), reflecting an assessment of the credit quality of the obligor. Each BRR has a PD
calibrated against it. The BRR differentiates the riskiness of obligors and represents our evaluation of the obligor’s ability and willingness to
meet its contractual obligations on time over a three year time horizon. The assignment of BRRs is based on the evaluation of the obligor’s
business risk and financial risk and is based on fundamental credit analysis. The determination of the PD associated with each BRR relies
primarily on internal default history since the early 2000s. PD estimates are designed to be a conservative reflection of our experience across
the economic cycle including periods of economic downturn.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
55
Our rating system is designed to stratify obligors into 22 grades, consistent with the external rating agencies. The following table aligns
the relative rankings of our 22-grade internal risk ratings with the ratings used by S&P and Moody’s.
Internal ratings map*
Table 45
Ratings
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
BRR
1+
1H
1M
1L
2+H
2+M
2+L
2H
2M
2L
2-H
2-M
2-L
3+H
3+M
3+L
3H
3M
3L
4
5
6
S&P
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
CCC
CCC-
CC
Moody’s
Description
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
Investment Grade
Non-investment Grade
C
Bankruptcy
C
Bankruptcy
Impaired
* This table represents an integral part of our 2016 Annual Consolidated Financial Statements.
Each credit facility is assigned an LGD rate that is largely driven by factors that impact the extent of losses in the event the obligor defaults;
including seniority of debt, collateral security, and the industry sector in which the obligor operates. Estimated LGD rates draw primarily on
internal loss experience since the late 1990s. Where we have limited internal loss data we also refer to appropriate external data to
supplement the estimation process. LGD rates are estimated to reflect conditions that might be expected to prevail in a period of an economic
downturn, with additional conservatism added to reflect data limitations and statistical uncertainties identified in the estimation process.
EAD is estimated based on the current exposure to the obligor and the possible future changes in that exposure driven by factors such
as the nature of the credit commitment and the type of obligor. As with LGD, rates are estimated to reflect an economic downturn, with added
conservatism to reflect data and statistical uncertainties identified in the modelling process.
Estimates of PD, LGD and EAD are updated, and then validated and back-tested by an independent validation team within the bank,
on an annual basis. In addition, quarterly monitoring and back-testing is performed by the estimation team. These ratings and risk
measurements are used to determine our expected losses as well as economic and regulatory capital, setting of risk limits, portfolio
management and product pricing.
Counterparty credit risk
Counterparty credit risk is the risk that a party with whom the bank has entered into a financial or non-financial contract will fail to fulfill its
contractual agreement and default on the obligation. It is measured not only by its current value, but also by how this value can move as market
conditions change. Counterparty credit risk usually occurs in trading-related derivative and repo-style transactions. Derivative transactions
include financial (e.g., forwards, futures, swaps and options) and non-financial derivatives (e.g., precious metal and commodities). For further
details on our derivative instruments and credit risk mitigation, refer to Note 8 of our 2016 Annual Consolidated Financial Statements.
Wrong-way risk
Wrong-way risk is the risk that exposure to a counterparty or obligor is adversely correlated with the credit quality of that counterparty. There are
two types of wrong-way risk:
•
Specific wrong-way risk, which exists when our exposure to a particular counterparty is positively and highly correlated with the probability
of default of the counterparty due to the nature of our transactions with them (e.g., loan collateralized by shares or debt issued by the
counterparty or a related party); and
General wrong-way risk, which exists when there is a positive correlation between the probability of default of counterparties and general
macroeconomic or market factors This typically occurs with derivatives (e.g., the size of the exposure increases) or with collateralized
transactions (the value of the collateral declines).
•
56
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Retail credit risk
Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Credit scores are one of the
factors employed in the acquisition of new clients and management of existing clients.
Retail exposures are managed on a pooled basis, with each pool consisting of a group or segment of exposures that possess similar
homogeneous characteristics. Criteria used to pool exposures for risk quantification include behavioural score, product type (mortgages,
credit cards, lines of credit and instalment loans), collateral type (chattel, liquid assets and real estate), utilization rate, loan-to-value, and
the delinquency status (performing, delinquent and default) of the exposure. Regular monitoring and periodic adjustments & alignments are
conducted to ensure that this process provides for a meaningful differentiation of risk.
Credit risk parameters (PD and EAD) are estimated based on pools which consider borrower and transaction characteristics, including
behavioural credit score, product type, utilization rate and delinquency status. LGD parameter estimates are based on transaction specific
factors, including products, loan-to-value and collateral types. All parameters are determined based on over 10 years of historical economic
losses with a high degree of granularity and additional margins of conservatism. Parameters are back-tested regularly by the retail Basel team
and validated by an independent team within Group Risk Management.
The following table maps PD bands to various risk levels:
Internal ratings map*
Table 46
PD bands
0.000% – 1.718%
1.719% – 6.430%
6.431% – 99.99%
100%
Description
Low risk
Medium risk
High risk
Impaired/Default
* This table represents an integral part of our 2016 Annual Consolidated Financial Statements.
Risk control – Credit risk
The Board of Directors and its committees, the Group Executive (GE), the GRC and other senior management risk committees work together to
ensure a Credit Risk Framework and supporting policies, processes and procedures exist to manage credit risk and approve related credit risk
limits. Reports are distributed to the Board of Directors, the 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 Framework and set out the minimum requirements for the management of
credit risk as follows:
Credit risk assessment
•
•
•
Mandatory use of credit risk rating and scoring systems.
Consistent credit risk assessment criteria.
Standard content requirements in credit application documents.
Credit risk mitigation
Structuring of transactions
•
Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use of
guarantees, collateral, seniority, loan-to-value requirements and covenants. Product-specific guidelines set out appropriate product
structuring as well as client and guarantor criteria.
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. Specific requirements relating to collateral valuation and management
are set out in our credit risk management policies. The types of collateral used to secure credit or trading facilities within the bank are
varied. For example, the majority of our securities finance and over-the-counter (OTC) derivatives activities are secured by cash and
liquid government securities such as Organisation for Economic Co-operation and Development (OECD) securities. Wholesale lending is
often secured by pledges of the assets of a business, such as accounts receivable, inventory, operating assets and commercial real
estate. In our Canadian Banking business and Wealth Management segment, collateral typically consists of a pledge over a real estate
property, or a portfolio of debt securities and equities trading on a recognized exchange.
• We are compliant with regulatory requirements that govern residential mortgage underwriting practices, including loan-to-value
parameters and property valuation requirements. For further information regarding residential mortgages, refer to table 55.
Credit derivatives
• We use credit derivatives as a tool to mitigate industry sector concentration and single-name exposure. For a more detailed description
of the types of credit derivatives we enter into and how we manage related credit risk, refer to Note 8 of our 2016 Annual Consolidated
Financial Statements.
Loan forbearance
In our overall management of borrower relationships, economic or legal reasons may necessitate forbearance to certain clients with respect to
the original terms and conditions of their loans. We have specialized groups and formalized policies that direct the management of delinquent or
defaulted borrowers. We strive to identify borrowers in financial difficulty early and modify their loan terms in order to maximize collection and to
avoid foreclosure, repossession, or other legal remedies. In these circumstances, a borrower may be granted concessions that would not
otherwise be considered. Examples of such concessions to retail borrowers may include rate reduction, principal forgiveness, and term
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
57
extensions. Concessions to wholesale borrowers may include restructuring the agreements, modifying the original terms of the agreement and/
or relaxation of covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the individual borrower’s
situation, the bank’s policy and the customer’s willingness and capacity to meet the new arrangement. During 2016, some concessions were
made to clients affected by low oil prices, the associated slowdown in Alberta’s economy and the wildfires in Fort McMurray; however, the overall
impact of these concessions on our financial results was minimal.
Product approval
•
Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment framework. New,
amended and existing products must be reviewed relative to all risks in our risk pyramid, including credit risk. All products must be
reviewed on a periodic basis, with high risk products being reviewed more frequently.
Credit portfolio management
•
Concentration risk is defined as the risk arising from large exposures to borrowers aggregated under one or more single names, industry
sectors, countries or credit products within a portfolio that are highly correlated such that their ability to meet contractual obligations
could be similarly affected by changes in economic, political or other risk drivers.
• We manage credit exposures and limits to ensure alignment with our risk appetite, to maintain our target business mix and to ensure
•
that there is no undue risk concentration. Credit concentration limits are reviewed on a regular basis after taking into account business,
economic, financial and regulatory environments.
Credit limits are established at the following levels: single name limits (notional and economic capital), underwriting risk limits,
leveraged lending limits, geographic (country and region) limits (notional and economic capital), industry sector limits (notional and
economic capital), and product and portfolio limits, where deemed necessary.
Gross credit risk exposure
Gross credit risk exposure is calculated based on the definitions provided under the Basel III framework. Under this method, EAD is calculated
before taking into account any collateral and is inclusive of an estimate of potential future changes to that credit exposure. Gross credit risk is
categorized into lending-related and other, and trading-related.
Lending-related and other includes:
•
Loans and acceptances outstanding, undrawn commitments, and other exposures, including contingent liabilities such as letters of
credit and guarantees, available-for-sale (AFS) debt securities and deposits with financial institutions. Undrawn commitments represent
an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.
Trading-related credit includes:
•
Repo-style transactions, which include repurchase and reverse repurchase agreements and securities lending and borrowing
transactions. For repo-style transactions, gross exposure represents the amount at which securities were initially financed, before taking
into account collateral.
Derivative amount which represents the credit equivalent amount, which is defined by OSFI as the replacement cost plus an add-on
amount for potential future credit exposure.
•
58
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Gross credit risk exposure by portfolio and sector*
Table 47
October 31
2016
October 31
2015
As at
Lending-related and other
Trading-related
Lending-related and other
Trading-related
Loans and acceptances
Loans and acceptances
(Millions of Canadian
Undrawn
Repo-style
Total
Undrawn
Repo-style
dollars)
Outstanding
commitments (1) Other (2)
transactions Derivatives (3)
exposure (4) Outstanding
commitments (1) Other (2)
transactions Derivatives (3)
Total
exposure (4)
Residential mortgages $ 254,998
Personal
93,466
Credit cards
17,128
Small business (5)
3,878
$
1,063 $
82,527
24,571
6,188
214 $
145
–
5
Retail
$ 369,470
$ 114,349 $
364 $
Business (5)
Agriculture
Automotive
Consumer goods
Energy
Oil & Gas
Utilities
Forest products
Industrial products
Mining & metals
Non-bank financial
services
Real estate & related
Technology & media
Transportation &
environment
Other sectors
Sovereign (5)
Bank (5)
$
6,515
7,279
10,052
$
1,310 $
5,785
9,562
74 $
567
756
6,259
7,680
1,099
5,508
1,455
8,408
40,419
11,019
6,060
42,948
10,581
1,930
10,747
13,694
561
7,757
3,640
13,149
11,215
14,758
4,393
19,607
6,972
1,815
1,656
3,496
85
546
1,135
15,830
1,847
873
3,603
18,647
84,017
119,324
–
–
–
–
–
–
–
–
–
–
–
–
–
249,732
4
470
–
2,786
38,707
104,314
$
$
$
$
$
$
–
–
–
–
–
109
497
551
1,198
1,748
27
632
144
41,381
499
1,832
1,637
3,391
17,319
25,600
256,275 $ 233,975
94,346
176,138
15,859
41,699
4,003
10,071
$
– $
78,885
24,827
5,370
206 $
154
–
9
484,183 $ 348,183
$ 109,082 $
369 $
8,008 $
14,128
20,921
19,860
26,618
1,772
14,443
6,374
328,500
53,984
28,952
15,693
87,379
157,596
252,983
6,057
6,614
7,146
7,691
5,162
1,169
4,725
1,402
6,428
33,802
6,599
5,907
35,133
9,887
1,800
$
1,279 $
5,104
7,093
80 $
407
594
13,274
13,389
535
5,418
3,883
13,060
9,210
14,182
4,300
17,166
5,614
1,015
1,330
3,149
108
513
906
18,002
1,910
574
2,960
15,620
57,413
86,106
–
–
–
–
–
–
–
–
–
60
–
–
–
201,845
63
6
–
4,915
30,871
102,371
$
$
$
– $
–
–
–
234,181
173,385
40,686
9,382
– $
457,634
86 $
984
470
839
1,482
40
538
255
29,769
373
1,703
1,474
15,386
10,162
27,221
7,502
13,109
15,303
23,134
23,242
1,852
11,194
6,446
269,104
45,358
23,064
14,641
88,220
113,947
218,513
Wholesale
$ 167,212
$ 124,965 $252,456 $ 396,013
$ 96,565
$ 1,037,211 $ 139,522
$ 114,522 $189,672 $ 340,131
$ 90,782 $
874,629
Total exposure
$ 536,682
$ 239,314 $252,820 $ 396,013
$ 96,565
$ 1,521,394 $ 487,705
$ 223,604 $190,041 $ 340,131
$ 90,782 $ 1,332,263
*
(1)
(2)
(3)
(4)
(5)
This table represents an integral part of our 2016 audited Annual Consolidated Financial Statements.
Undrawn commitments represent an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.
Includes credit equivalent amounts for contingent liabilities such as letters of credit and guarantees, outstanding amounts for AFS debt securities, deposits with financial institutions and
other assets.
Credit equivalent amount after factoring in master netting agreements.
Gross credit risk exposure is before allowance for loan losses. Exposures under Basel III asset classes of qualifying revolving retail and other retail are largely included within Personal and
Credit cards, while HELOC are included in Personal.
Refer to Note 5 of our audited 2016 Annual Consolidated Financial Statements for the definitions of these terms.
2016 vs. 2015
Total gross credit risk exposure increased $189 billion or 14% from last year, primarily due to the inclusion of City National, an increase in
repo-style transactions and Other exposure related to AFS debt securities, higher deposits balances and volume growth in residential mortgages.
The increase in wholesale loans mainly reflected increased client activity, as well as the impact from foreign exchange translation.
Retail exposure increased $27 billion or 6%, mainly due to the inclusion of City National and continued volume growth in residential
mortgages and credit cards.
Wholesale exposure increased $163 billion or 19%, primarily attributable to the inclusion of City National, an increase in repo-style
transactions, higher Other exposure related to corporate and government AFS debt securities and higher deposits with the Federal Reserve
reflecting our management of liquidity and funding risk. Volume growth in wholesale loans across various industry sectors, higher fair values on
foreign exchange contracts and interest rate swaps, and the impact from foreign exchange translation also contributed to the increase.
Wholesale loan utilization was 40%, up from 37% last year.
As at October 31, 2016, our loans and acceptances exposure to oil and gas was $17 billion (October 31, 2015 – $21 billion); which is
comprised of outstanding loans of $6 billion (October 31, 2015 – $8 billion), and undrawn commitments of $11 billion (October 31, 2015 –
$13 billion). The oil and gas portfolio represents 2.19% (October 31, 2015 – 2.95%) of our total loan and acceptances portfolio. Of the
$17 billion exposure, 42% was to investment grade while 58% was to non-investment grade counterparties (October 31, 2015 – 46% and 54%,
respectively).
Our AFS Securities (banking book) exposures are rated 95% investment grade and 5% non-investment grade.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
59
Gross credit risk exposure by geography* (1)
Table 48
October 31
2016
October 31
2015
As at
Lending-related and other
Trading-related
Lending-related and other
Trading-related
Loans and acceptances
Loans and acceptances
(Millions of
Canadian dollars)
Outstanding
Undrawn
commitments
Repo-style
Total
Other
transactions Derivatives
exposure Outstanding
Undrawn
commitments
Repo-style
Other
transactions Derivatives
Total
exposure
Canada
U.S.
Europe
Other International
$ 430,616 $
76,481
14,886
14,699
151,481 $ 81,800 $
76,094 $ 27,647 $
69,006
15,367
3,460
81,168
74,547
15,305
208,759
71,722
39,438
14,315
48,318
6,285
767,638 $ 414,427 $
449,729
224,840
79,187
40,186
17,706
15,386
144,352 $ 70,774 $
60,031
15,574
3,647
50,915
52,294
16,058
64,855 $ 27,272 $ 721,680
344,176
188,954
77,453
14,023
44,480
5,007
179,021
58,900
37,355
Total Exposure
$ 536,682 $
239,314 $ 252,820 $ 396,013 $ 96,565 $ 1,521,394 $ 487,705 $
223,604 $ 190,041 $ 340,131 $ 90,782 $ 1,332,263
*
(1)
This table represents an integral part of our 2016 audited Annual Consolidated Financial Statements.
Geographic profile is based on country of residence of the borrower.
2016 vs. 2015
Canada exposure increased $46 billion or 6% compared to the prior year, primarily due to higher loans and acceptances and growth in repo-style
transactions.
U.S. exposure increased $106 billion or 31% compared to the prior year, mainly due to the inclusion of City National, growth in repo-style
transactions, higher Other exposure related to AFS debt securities, higher deposits with the Federal Reserve, and the impact from foreign
exchange translation.
Europe exposure increased $36 billion or 19% compared to the prior year, mainly due to an increase in repo-style transactions, higher Other
exposure related to AFS debt securities, and increased deposits with central banks.
Other International exposure increased $2 billion or 2% compared to the prior year.
Loans and acceptances outstanding and undrawn commitments* (1), (2)
Table 49
(Millions of Canadian dollars)
Retail (3)
Residential mortgages
Personal
Credit cards
Small business
October 31
2016
Medium
As at
October 31
2015
Medium
Low risk
risk High risk Impaired
Total
Low risk
risk High risk Impaired
Total
$ 231,399 $ 12,750 $ 2,090 $
10,624
5,342
1,201
159,841
34,758
7,148
2,768
1,437
1,671
667 $ 246,906 $ 218,151 $ 13,080 $ 2,098 $
300
–
46
173,533
41,537
10,066
157,996
34,547
6,878
12,020
4,772
1,047
2,916
1,367
1,403
$ 433,146 $ 29,917 $ 7,966 $ 1,013 $ 472,042 $ 417,572 $ 30,919 $ 7,784 $
As at
October 31
2016
October 31
2015
646 $ 233,975
173,231
299
40,686
–
9,373
45
990 $ 457,265
(Millions of Canadian dollars)
Wholesale (4)
Business
Sovereign
Bank
Total
Investment
grade
Non-investment
grade
Impaired
Total
Investment
grade
Non-investment
grade
Impaired
Total
$ 107,510
15,939
1,881
$ 125,330
$
$
132,967
786
943
134,696
$ 2,339
–
2
$ 2,341
$ 242,816
16,725
2,826
$ 262,367
$ 105,871
14,704
2,475
$ 123,050
$
$
128,564
797
338
129,699
$ 1,293
–
2
$ 1,295
$235,728
15,501
2,815
$254,044
*
(1)
(2)
(3)
(4)
This table represents an integral part of our audited 2016 Annual Consolidated Financial Statements.
This table represents our retail and wholesale loans and acceptances outstanding and undrawn commitments by portfolio and risk category, excluding City National exposures of
$41.6 billion.
The amounts in the table are before allowance for impaired loans.
Includes undrawn commitments of $1.0 billion, $82.4 billion, $24.6 billion, and $6.2 billion for Residential mortgages, Personal, Credit cards and Small business, respectively (October 31,
2015 – $nil, $78.9 billion, $24.8 billion and $5.4 billion, respectively).
Includes undrawn commitments of $111.3 billion, $7.0 billion, and $1.2 billion for Business, Sovereign and Bank, respectively (October 31, 2015 – $107.9 billion, $5.6 billion, and $1.0
billion, respectively).
2016 vs. 2015
Growth in retail exposures was largely attributable to continued volume growth in residential mortgages and credit cards. Growth in wholesale
exposures mainly reflects increased volumes across various industry sectors in investment grade and non-investment grade categories, as well
as the impact from foreign exchange translation.
60
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Net European exposure by country (1), (2)
(Millions of Canadian dollars)
U.K.
Germany
France
Total U.K., Germany, France
Greece
Ireland
Italy
Portugal
Spain
Total Peripheral (4)
Luxembourg
Netherlands
Norway
Sweden
Switzerland
Other
Total Other Europe
Net exposure to Europe (5), (6)
As at
October 31
2016
Repo-style
Table 50
October 31
2015
Securities (3)
transactions Derivatives
Total
Total
Loans
outstanding
$
$
$
$
$
$
$
8,027
783
1,066
9,876
–
684
54
6
339
1,083
898
1,067
227
258
1,178
1,447
5,075
16,034
$
$
$
$
$
$
$
$
$
$
$
$
5,409
10,014
6,878
22,301
–
32
58
–
51
141
428
6,757
3,709
3,888
766
1,399
$
$
$
$
$
1,102
1
1
1,104
–
80
–
–
–
80
5
7
–
1
97
32
3,418
475
453
$ 17,956
11,273
8,398
$ 20,964
9,496
4,533
4,346
$ 37,627
$ 34,993
$
$
$
–
84
8
10
56
158
53
743
9
21
230
104
$
–
880
120
16
446
$ 1,462
$ 1,384
8,574
3,945
4,168
2,271
2,982
–
1,319
100
9
439
1,867
4,890
4,983
4,886
3,376
1,753
3,345
16,947
39,389
$
$
142
1,326
$
$
1,160
$ 23,324
$ 23,233
5,664
$ 62,413
$ 60,093
(1)
(2)
(3)
(4)
(5)
(6)
Geographic profile is based on country of risk, which reflects our assessment of the geographic risk associated with a given exposure. Typically, this is the residence of the borrower.
Exposures are calculated on a fair value basis and net of collateral, which includes $64.0 billion against repo-style transactions (October 31, 2015 – $58 billion) and $15.7 billion against
derivatives (October 31, 2015 – $10.7 billion).
Securities include $11.1 billion of trading securities (October 31, 2015 – $12.8 billion), $12.3 billion of deposits (October 31, 2015 – $11.5 billion), and $15.9 billion of AFS securities
(October 31, 2015 – $13.0 billion).
Gross credit risk exposure to peripheral Europe is comprised of Greece $nil (October 31, 2015 – $nil), Ireland $18.9 billion (October 31, 2015 – $11.7 billion), Italy $0.3 billion (October 31,
2015 – $0.3 billion), Portugal $0.1 billion (October 31, 2015 – $nil), and Spain $1.1 billion (October 31, 2015 – $1.2 billion).
Excludes $1.9 billion (October 31, 2015 – $2.6 billion) of exposures to supranational agencies.
Reflects $1.5 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2015 – $1.8 billion).
2016 vs. 2015
Net credit risk exposure to Europe increased $2.3 billion from last year, largely driven by increased exposure to France, the Netherlands and
Germany, partially offset by a decrease in exposure to Luxembourg, the U.K. and Norway. Our net exposure to peripheral Europe, which includes
Greece, Ireland, Italy, Portugal and Spain, remained minimal, with total outstanding exposure decreasing $0.4 billion during the year to
$1.5 billion.
Our European corporate loan book is managed on a global basis and the underwriting standards for this loan book reflect the same
approach to the use of our balance sheet as we have applied in both Canada and the U.S. PCL taken during the year on this portfolio was not
material. The gross impaired loans ratio of this loan book was 1.1%, up from 0.6% last year.
Net European exposure by client type
As at
October 31
2016
Table 51
October 31
2015
(Millions of Canadian
dollars)
Financials
Sovereign
Corporate
Total
U.K. Germany
France
France Greece Ireland
Italy Portugal
Spain
Total U.K.,
Germany,
Total
Peripheral
Other
Europe
Total
Europe
Total
Europe
$ 8,372 $ 8,507 $ 1,176 $ 18,055 $
1,746
7,838
1,671
1,095
6,762
460
10,179
9,393
– $ 158 $
–
–
12
710
64 $
12
44
10 $
–
6
27 $
–
419
259 $ 11,347 $ 29,661 $ 27,835
14,815
17,443
17,342
15,410
7,139
4,838
24
1,179
$ 17,956 $ 11,273 $ 8,398 $ 37,627 $
– $ 880 $ 120 $
16 $ 446 $ 1,462 $ 23,324 $ 62,413 $ 60,093
2016 vs. 2015
Our net exposure to Sovereign increased $2.5 billion, mainly due to increases in France, Germany and Other Europe, partly offset by decreases in
the U.K. The net exposure to Financials increased $1.8 billion, mostly in Germany and the U.K., partly offset by decreases in Other Europe. The
net exposure to Corporate decreased $2.0 billion, mainly in the U.K. and Germany.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
61
Residential mortgages and home equity lines of credit (insured vs. uninsured)
Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a breakdown by
geographic region:
Residential mortgages and home equity lines of credit
Table 52
As at October 31, 2016
Residential mortgages (1)
Home equity
lines of credit (2)
Insured (3)
Uninsured
Total
Total
$
7,633
14,432
43,314
21,746
8,897
17,657
$ 113,679
2
13
$
15
59%
50
43
58
54
40
47%
–
–
–
$
5,409
14,429
58,016
15,429
7,730
27,024
$ 128,037
10,012
3,171
41%
50
57
42
46
60
53%
100
100
$
13,042
28,861
101,330
37,175
16,627
44,681
$ 241,716
10,014
3,184
$ 13,183
100%
$ 13,198
$ 113,694
45%
$ 141,220
55%
$ 254,914
$
$
$
$
2,034
4,060
16,512
7,066
2,682
8,739
41,093
1,464
2,442
3,906
44,999
As at October 31, 2015
Residential mortgages (1)
Home equity
lines of credit (2)
Insured (3)
Uninsured
Total
Total
$
6,856
12,414
36,555
19,872
7,690
15,755
$ 99,142
–
14
$
14
55%
46
39
55
48
36
43%
–
–
–
$
5,586
14,621
58,036
16,423
8,174
27,555
$ 130,395
772
3,202
45%
54
61
45
52
64
57%
100
100
$
12,442
27,035
94,591
36,295
15,864
43,310
$ 229,537
772
3,216
$
3,974
100%
$
3,988
$ 99,156
42%
$ 134,369
58%
$ 233,525
$
$
$
$
2,060
4,157
16,785
7,189
2,751
9,085
42,027
334
3,107
3,441
45,468
(Millions of Canadian dollars,
except percentage amounts)
Region (4)
Canada
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
Total Canada (5)
U.S.
Other International
Total International
Total
(Millions of Canadian dollars, except
percentage amounts)
Region (4)
Canada
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
Total Canada (5)
U.S.
Other International
Total International
Total
(1)
(2)
(3)
(4)
(5)
The residential mortgages amounts exclude our third-party mortgage-backed securities (MBS) of $84 million (2015 – $450 million).
HELOC includes revolving and non-revolving loans.
Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canada Mortgage and Housing Corporation (CMHC) or
other private mortgage default insurers.
Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and
New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.
Total consolidated residential mortgages in Canada of $242 billion (2015 – $230 billion) is largely comprised of $217 billion (2015 – $205 billion) of residential
mortgages and $6 billion (2015 – $5 billion) of mortgages with commercial clients, of which $3 billion (2015 – $3 billion) are insured mortgages, both in Canadian
Banking, and $19 billion (2015 – $19 billion) of residential mortgages in Capital Markets held for securitization purposes.
Home equity lines of credit are uninsured and reported within the personal loan category. As at October 31, 2016, home equity lines of credit in
Canadian Banking were $41 billion (2015 – $42 billion). Approximately 98% of these home equity lines of credit (2015 – 98%) are secured by a
first lien on real estate, and 7% of the total homeline clients (2015 – 8%) pay the scheduled interest payment only.
62
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Residential mortgages portfolio by amortization period
The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization periods based
upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of
payments:
Residential mortgages portfolio by amortization period
Table 53
As at
October 31
2016
Canada
U.S. and Other
International
Total
Canada
October 31
2015
U.S. and Other
International
74%
25
1
–
40%
58
2
–
72%
27
1
–
75%
23
2
–
77%
23
–
–
100%
100%
100%
100%
100%
Total
75%
23
2
–
100%
Amortization period
≤ 25 years
> 25 years ≤ 30 years
> 30 years ≤ 35 years
> 35 years
Total
Average loan-to-value (LTV) ratio for newly originated and acquired uninsured residential mortgages and homeline products
The following table provides a summary of our average LTV ratio for newly originated and acquired uninsured residential mortgages and homeline
products by geographic region:
Average LTV ratio
Region (3)
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
U.S.
Other International
Average of newly originated and acquired for
the year (4), (5)
Total Canadian Banking residential mortgages
portfolio (6)
October 31
2016
Uninsured
Table 54
October 31
2015
Uninsured
Residential
mortgages (1)
Homeline
products (2)
Residential
mortgages (1)
Homeline
products (2)
73%
71
70
73
74
68
72
63
71%
54%
74%
74
69
72
74
65
n.m.
n.m.
69%
51%
74%
71
70
73
74
69
72
61
71%
55%
75%
73
70
73
75
66
n.m.
n.m.
70%
54%
(1)
(2)
(3)
(4)
(5)
Residential mortgages exclude residential mortgages within the homeline products.
Homeline products are comprised of both residential mortgages and home equity lines of credit.
Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and
New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon.
The average LTV ratio for newly originated and acquired uninsured residential mortgages and homeline products is calculated on a weighted basis by mortgage amounts at
origination.
For newly originated mortgages and homeline products, LTV is calculated based on the total facility amount for the residential mortgage and homeline product divided by
the value of the related residential property.
Weighted by mortgage balances and adjusted for property values based on the Teranet – National Bank National Composite House Price Index.
(6)
n.m. not meaningful
We employ a risk-based approach to property valuation. Property valuation methods include automated valuation models (AVM) and appraisals.
An AVM is a tool that estimates the value of a property by reference to market data including sales of comparable properties and price trends
specific to the Metropolitan Statistical Area in which the property being valued is located. Using a risk-based approach, we also employ
appraisals which can include drive-by or full on-site appraisals.
We continue to actively manage our entire mortgage portfolio and perform stress testing, based on a combination of increasing
unemployment, rising interest rates and a downturn in real estate markets.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
63
Credit quality performance
Provision for (recovery of) credit loss
(Millions of Canadian dollars, except percentage amounts)
Personal & Commercial Banking
Wealth Management
Capital Markets
Corporate Support and Other (1)
Total PCL
Canada (2)
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
PCL on impaired loans
U.S. (2), (3)
Retail
Wholesale
PCL on impaired loans
Other International (2), (3)
Retail
Wholesale
PCL on impaired loans
PCL on loans not yet identified as impaired
Total PCL
PCL ratio
Total PCL ratio
PCL on impaired loans ratio
Personal & Commercial Banking
Canadian Banking
Caribbean Banking
Wealth Management
PCL ratio – loans
PCL ratio – acquired credit-impaired loans
Capital Markets
$
$
$
$
$
2016
1,122
48
327
49
1,546
42
459
435
34
970
213
1,183
1
227
228
41
44
85
50
Table 55
$
2015
984
46
71
(4)
$ 1,097
$
$
$
27
393
371
32
823
116
939
1
40
41
21
96
117
–
$
1,546
$ 1,097
0.29%
0.28%
0.29%
0.29%
0.53%
0.10%
0.08%
0.02%
0.37%
0.24%
0.24%
0.27%
0.25%
0.85%
0.26%
0.26%
n.a.
0.09%
(1)
(2)
(3)
n.a.
PCL in Corporate Support and Other primarily comprised of PCL for loans not yet identified as impaired. For further information, refer to
the How we measure and report our business segments section.
Geographic information is based on residence of borrower.
Includes acquired credit-impaired loans.
not applicable
2016 vs. 2015
Total PCL increased $449 million, or 41% from the prior year. The PCL ratio of 29 bps increased 5 bps.
PCL in Personal & Commercial Banking increased $138 million or 14%, and the PCL ratio of 29 bps increased 2 bps, largely due to higher
provisions in our Canadian personal and commercial lending portfolios and higher write-offs in our Canadian credit cards portfolio. These factors
were partially offset by lower PCL in our Caribbean portfolios.
PCL in Wealth Management increased $2 million mainly reflecting provisions recorded in City National. PCL in the prior year largely reflected
provisions related to the International Wealth Management business.
PCL in Capital Markets increased $256 million, primarily due to higher provisions in the oil & gas sector.
PCL in Corporate Support and Other increased $52 million, reflecting a $50 million increase in PCL for loans not yet identified as impaired.
64
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Gross impaired loans (GIL)
(Millions of Canadian dollars, except percentage amounts)
Personal & Commercial Banking
Wealth Management (1)
Capital Markets
Investor & Treasury Services
Corporate Support and Other
Total GIL
Canada (2)
Retail
Wholesale
GIL
U.S. (1), (2)
Retail
Wholesale
GIL
Other International (2)
Retail
Wholesale
GIL
Total GIL
Impaired loans, beginning balance
Classified as impaired during the period (new impaired) (3)
Net repayments (3)
Amounts written off
Other (3), (4)
Impaired loans, balance at end of period
GIL ratio (5)
Total GIL ratio
Personal & Commercial Banking
Canadian Banking
Caribbean Banking
Wealth Management
GIL ratio – loans
GIL ratio – acquired credit-impaired loans
Capital Markets
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
1,651
710
1,524
2
16
3,903
642
522
1,164
56
1,736
1,792
380
567
947
3,903
2,285
3,673
(946)
(1,523)
414
3,903
$
0.73%
0.43%
0.27%
7.56%
1.44%
0.59%
0.85%
1.73%
Table 56
2015
1,809
178
296
2
–
2,285
624
512
1,136
10
204
214
356
579
935
2,285
1,977
1,709
(158)
(1,338)
95
2,285
0.47%
0.49%
0.30%
9.13%
1.01%
1.01%
n.a.
0.37%
(1)
(2)
(3)
(4)
(5)
n.a.
Includes $418 million (2015 – $nil) related to acquired credit impaired loans, with over 80% covered by loss-sharing agreements
with the Federal Deposit Insurance Corporation (FDIC). For further details refer to Notes 2 and 5 of our 2016 Annual Consolidated
Financial Statements.
Geographic information is based on residence of borrower.
Certain GIL movements for Canadian Banking retail and wholesale portfolios are generally allocated to New Impaired, as Return to
performing status, Net repayments, Sold, and Exchange and other movements amounts are not reasonably determinable. Certain
GIL movements for Caribbean Banking retail and wholesale portfolios are generally allocated to Net repayments and New Impaired,
as Return to performing status, Sold, and Exchange and other movements amounts are not reasonably determinable.
Includes Return to performing status during the year, Recoveries of loans and advances previously written off, Sold, and Exchange
and other movements.
GIL as a % of loans and acceptances.
not applicable
2016 vs. 2015
Total GIL increased $1,618 million or 71%, and the GIL ratio of 73 bps increased 26 bps, from a year ago.
GIL in Personal & Commercial Banking decreased $158 million or 9%, and the GIL ratio of 43 bps decreased 6 bps, mainly due to lower
impaired loans in our commercial lending portfolios.
GIL in Wealth Management increased $532 million, mainly due to the inclusion of our acquisition of City National, largely reflecting acquired
credit impaired loans (ACI) of $418 million. Over 80% of these loans are covered by loss-sharing agreements with the Federal Deposit Insurance
Corporation (FDIC). For further details on ACI loans, refer to Notes 2 and 5 of our 2016 Annual Consolidated Financial Statements.
GIL in Capital Markets increased $1,228 million, primarily due to higher impaired loans in the oil & gas sector reflecting the lower oil price
environment.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
65
Allowance for credit losses (ACL)
(Millions of Canadian dollars)
Allowance for impaired loans
Personal & Commercial Banking
Wealth Management (1)
Capital Markets
Investor & Treasury Services
Total allowance for impaired loans
Canada (2)
Retail
Wholesale
Allowance for impaired loans
U.S. (1), (2)
Retail
Wholesale
Allowance for impaired loans
Other International (2)
Retail
Wholesale
Allowance for impaired loans
Total allowance for impaired loans
Allowance for loans not yet identified as impaired
Total ACL
Table 57
2016
2015
520
73
216
–
809
160
119
279
2
177
179
180
171
351
809
1,517
2,326
$
$
$
$
$
$
$
548
43
61
2
654
142
111
253
1
47
48
169
184
353
654
1,466
2,120
$
$
$
$
$
$
$
(1)
(2)
Effective Q1 2016, includes ACL related to acquired credit-impaired loans from our acquisition of City National.
Geographic information is based on residence of borrower.
2016 vs. 2015
Total ACL increased $206 million or 10% from a year ago, mainly related to higher ACL in Capital Markets, reflecting the low oil price
environment, and higher ACL in Wealth Management, largely due to the inclusion of our acquisition of City National. This was partially offset by
lower ACL in Personal & Commercial Banking. In addition, we recorded a $50 million increase in the allowance for loans not yet identified as
impaired recorded in the second quarter of 2016.
Market risk
Market risk is defined to be the impact of market prices upon our financial condition. This includes potential gains or losses due to changes
in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign exchange rates and implied
volatilities.
The measures of financial condition impacted by market risk are as follows:
1.
2.
3.
4.
Positions whose revaluation gains and losses are reported in Revenue, which includes:
a)
Changes in the fair value of instruments classified or designated as at fair value through profit and loss (FVTPL), including
impaired securities, and
b) Hedge ineffectiveness.
CET1 capital, which includes:
All of the above, plus
a)
Changes in the fair value of AFS securities where revaluation gains and losses are reported as other comprehensive income,
b)
Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange translation,
c)
and
Remeasurements of employee benefit plans, including pension fund assets underperforming in the market resulting in a deficit
and volatility between the pension liabilities and the fund assets, and/or estimated actuarial parameters not being realized such
that pension liabilities exceed pension fund assets.
d)
CET1 ratio, which includes:
All of the above, plus
a)
Changes in risk-weighted assets (RWA) resulting from changes in traded market risk factors, and
b)
Changes in the Canadian dollar value of RWA due to foreign exchange translation.
c)
The economic value of the Bank, which includes:
a)
b)
Points 1 and 2 above, plus
Changes in the value of other non-trading positions whose value is a function of market risk factors.
66
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Market risk controls – FVTPL positions
As an element of the Enterprise Risk Appetite Framework, the Board of Directors approves our overall market risk constraints. GRM creates
and manages the control structure for FVTPL positions that ensures that business is conducted consistent with Board requirements. The
Market and Trading Credit Risk function within GRM is responsible for creating and managing the controls and governance procedures that
ensure that risk taken is consistent with risk appetite constraints set by the Board. These controls include limits on probabilistic measures of
potential loss such as Value-at-Risk and Stressed Value-at-Risk as defined below:
Value-at-Risk (VaR) – is a statistical measure of potential loss for a financial portfolio computed at a given level of confidence and over a
defined holding period. We measure VaR at the 99th percentile confidence level for price movements over a one day holding period using
historic simulation of the last two years of equally weighted historic market data. These calculations are updated daily with current risk
positions, with the exception of certain less material positions that are not actively traded and are updated on at least a monthly basis.
Stressed Value-at-Risk (SVaR) – is calculated in an identical manner as VaR with the exception that it is computed using a fixed historical
one-year period of extreme volatility and its inverse rather than the most recent two-year history. The stress period used is the interval
from September 2008 through August 2009. Stressed VaR is calculated daily for all portfolios, with the exception of certain less material
positions that are not actively traded and are updated on at least a monthly basis.
VaR and SVaR are statistical estimates based on historical market data and should be interpreted with knowledge of their limitations –
which include the following:
•
VaR and SVaR will not be predictive of future losses if the realized market movements differ significantly from the historical periods
used to compute them.
VaR and SVaR project potential losses over a one-day holding period and do not project potential losses for risk positions held over
longer time periods.
VaR and SVaR are measured using positions at close of business and do not include the impact of trading activity over the course of
a day.
•
•
We validate our VaR and SVaR measures through a variety of means – including subjecting the models to vetting and validation by a group
independent of the model developers and by back-testing the VaR against daily marked-to-market revenue to identify and examine events
in which actual outcomes in trading revenue exceed the VaR projections.
Stress Tests – Our market risk stress testing program is used to identify and control risk due to large changes in market prices and rates. We
conduct stress testing daily on positions that are marked-to-market. The stress tests simulate both historical and hypothetical events which
are severe and long term in duration. Historical scenarios are taken from actual market events over the last 30 years and range in duration up
to 90 days. Examples include the equity market crash of 1987 and the global financial crisis of 2008. Hypothetical scenarios are designed to
be forward looking at potential future market stresses, and are designed to be severe but plausible. We are constantly evaluating and refining
these scenarios as market conditions change. Stress results are calculated assuming an instantaneous revaluation of our positions with no
management action.
These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a designated
hedging relationship and those in our insurance businesses.
Market risk measures – FVTPL positions
VaR and SVaR
The following table presents our Market risk VaR and Market risk SVaR figures for 2016 and 2015.
Market Risk VaR*
(Millions of Canadian dollars)
Equity
Foreign exchange
Commodities
Interest rate
Credit specific (1)
Diversification (2)
Market risk VaR
Market risk SVaR
Table 58
2015
For the year ended October 31
2016
For the year ended October 31
As at
Oct. 31
Average
High
$
$
$
13
5
5
18
4
(21)
24
46
$
$
$
16
5
3
21
5
(17)
33
82
$
$
$
32
8
5
32
7
(23)
53
150
$
$
$
As at
Oct. 31
Low
7
3
2
14
4
(11)
20
41
$
$
$
Average
High
20
4
3
26
6
(18)
41
109
$
$
$
12
4
3
28
8
(22)
33
104
$
$
$
31
8
6
34
9
(34)
45
157
$
$
$
Low
6
3
2
23
6
(15)
26
73
*
(1)
(2)
This table represents an integral part of our 2016 Annual Consolidated Financial Statements.
General credit spread risk is measured under interest rate VaR while credit specific risk captures issuer-specific credit spread volatility.
Market risk VaR is less than the sum of the individual risk factor VaR results due to portfolio diversification.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
67
2016 vs. 2015
Average market risk VaR of $33 million remained unchanged from the prior year. Reduced inventories in fixed income and securitized product
portfolios, as reflected in lower average interest rate and credit specific VaR in the year, and the impact from foreign exchange translation were
offset by an increase in equity risk mainly attributable to client-driven activity and increased volatility in the historical window used to calculate
VaR.
Average SVaR of $82 million was down $22 million compared to last year largely due to the reduced inventories in fixed income and
securitized product portfolios as noted above and reduced risk in certain legacy businesses. During Q4 2016, SVaR reached the lowest level
observed during the two-year period encompassing fiscal 2015 and 2016.
The following chart graphically displays a bar chart of our daily trading profit and loss and a line chart of our daily market risk VaR. We incurred
net trading losses on 7 days in the year totalling $63 million, as compared to 9 days of losses totalling $25 million in 2015, with none of the
losses exceeding VaR.
Trading revenue and VaR (Millions of Canadian dollars)
60
40
20
0
-20
-40
-60
5
1
0
v . 1 , 2
o
N
6
1
0
1 , 2
n . 3
J a
6
1
0
0 , 2
p r. 3
A
6
1
0
1 , 2
J u l. 3
6
1
0
1 , 2
c t. 3
O
Daily Trading Revenue
Market Risk VaR
The following chart displays the distribution of daily trading profit and loss in 2016. The largest daily reported loss of $22 million on February 11,
2016 was primarily driven by volatility in equities and credit spreads resulting from global growth concerns. Of the 7 loss days in fiscal 2016,
1 occurred in the fourth quarter. This loss day was largely driven by market conditions that negatively impacted trading activity across major
business lines. The largest reported profit was $39 million with an average daily profit of $14 million.
Trading revenue for the year ended October 31, 2016 (teb)
s
y
a
D
f
o
r
e
b
m
u
N
n
i
y
c
n
e
u
q
e
r
F
80
70
60
50
40
30
20
10
0
0
7
-
0
6
-
0
5
-
0
4
-
0
3
-
0
2
-
0
1
-
0
0
1
0
2
0
3
0
4
0
5
0
6
0
7
Daily net trading revenue (C$ millions), excluding VIEs
2016
2015
Market risk measures for other FVTPL positions – Assets and liabilities of RBC Insurance
We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The investments which
support actuarial liabilities are predominantly fixed income assets designated as fair value through profit or loss (FVTPL). Consequently, changes
in the 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. As at October 31, 2016,
we had liabilities with respect to insurance obligations of $9.2 billion, up from $9.1 billion in the prior year, and trading securities of $7.2 billion
in support of the liabilities, unchanged from last year.
68
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Market risk controls – Structural Interest Rate Risk (SIRR) positions (1)
The interest rate risk arising from traditional banking products, such as deposits and loans, is referred to as SIRR and is subject to limits and
controls. SIRR measures also include related hedges as well as the interest rate risk from securities held for liquidity management. Factors
contributing to SIRR include the mismatch between asset and liability repricing dates, relative changes in asset and liability rates, and other
product features that could affect the expected timing of cash flows, such as options to pre-pay loans or redeem term deposits prior to
contractual maturity.
The Board of Directors approves the risk appetite for SIRR, and the Asset-Liability Committee (ALCO), along with GRM, provides ongoing
oversight of SIRR through risk policies, limits, operating standards and other controls. SIRR reports are reviewed regularly by GRM, ALCO, the
Group Risk Committee, the Risk Committee of the Board and the Board of Directors.
Details on the non-trading risks included in SIRR are outlined in Table 60.
Structural Interest Rate Risk measurement
To monitor and control SIRR, the Bank assesses two primary financial metrics, 12-month Net Interest Income (NII) risk and Economic Value of
Equity (EVE) risk, under a range of market shocks and scenarios. Market scenarios include currency-specific parallel and non-parallel yield
curve changes and interest rate volatility shocks.
In measuring NII risk, detailed structural balance sheets and income statements are dynamically simulated to determine the impact of
market stress scenarios on projected NII. Assets, liabilities and off-balance sheet positions are simulated using monthly time steps over a
one-year horizon. The simulations incorporate product maturities, renewals and growth along with prepayment and redemption behaviour.
Product pricing and volumes are calibrated from past experience and projected consistent with expectations for a given market stress
scenario. EVE risk captures the market value sensitivity of structural positions to changes in longer-term rates. In measuring EVE risk,
deterministic (single-scenario) and stochastic (multiple-scenario) valuation techniques are applied to detailed spot position data. NII and EVE
risks are measured for a range of market risk stress scenarios which include extreme but plausible market rate changes, across interest rate
curves and interest rate volatilities.
The management of NII and EVE risks is complementary and supports efforts by the Bank to generate a sustainable high-quality NII
stream. NII and EVE risks are measured daily, weekly or monthly depending on the size, complexity and hedge strategy applicable to a
balance sheet or business activity.
A number of assumptions affecting cash flows, product re-pricing and the administration of rates underlie the models used to measure
NII and EVE risks. The key assumptions pertain to the expected funding profiles for retail mortgage rate commitments, prepayment behaviour
for fixed-rate loans, term deposit redemption behaviour, and the treatment of non-maturity deposits. All assumptions are derived empirically
from historical client and product experience and consider future product pricing and customer needs. All models and assumptions used to
measure SIRR are subject to independent oversight by GRM.
Market risk measures – Structural Interest Rate Sensitivities
The following table shows the potential before-tax impact of an immediate and sustained 100 bps and 200 bps increase or decrease in
interest rates on projected 12-month NII and EVE for the Bank’s non-trading balance sheet, assuming no subsequent hedging. Rate floors are
applied within the declining rates scenarios, with floor levels set based on global rate movement experience. Interest rate risk measures are
based upon interest rate exposures at a specific time and continuously change as a result of business activities and risk management
actions.
Market risk – SIRR measures*
Table 59
Economic value of equity risk
Net interest income risk (1)
2016
2015
2014
Canadian
dollar impact
U.S. dollar
impact (2)
Total
Canadian
dollar impact
U.S. dollar
impact (2)
Total
Economic
value of
equity risk
Net interest
income risk (2)
Economic
value of
equity risk
Net interest
income risk (2)
(Millions of Canadian dollars)
Before-tax impact of:
100bps increase in rates
100bps decrease in rates
$
(1,321) $
1,083
(56) $(1,377) $
(439)
644
235 $
(300)
Before-tax impact of:
185 $ 420 $ (1,072) $
(165)
(465)
829
289
(370)
$ (916) $
754
200bps increase in rates
200bps decrease in rates
(2,682)
1,105
(201)
(441)
(2,883)
664
344
(290)
367
(177)
711
(467)
(2,221)
925
472
(379)
(1,910)
1,259
*
(1)
(2)
This table represents an integral part of our audited 2016 Annual Consolidated Financial Statements.
Represents the 12-month Net interest income exposure to an instantaneous and sustained shift in interest rates.
Represents the impact on the SIRR portfolios held in our U.S. banking operations.
414
(348)
763
(434)
At the end of fiscal 2016, an immediate and sustained -100 bps shock would have had a negative impact to the Bank’s NII of $465 million, up
from $370 million at the end of 2015. An immediate and sustained +100 bps shock at the end of fiscal 2016 would have had a negative impact
to the Bank’s EVE of $1,377 million, up from $1,072 million in 2015. The year-over-year increases in NII and EVE risks are primarily attributed to
our acquisition of City National and growth in our balance sheet, in particular the fixed-rate asset position. During fiscal 2016, NII and EVE risks
were maintained well within approved limits.
Market risk measures for other material non-trading portfolios
AFS securities
We held $70 billion of securities classified as AFS as at October 31, 2016, compared to $48 billion as at October 31, 2015. Growth in AFS
securities was primarily driven by the consolidation of the City National AFS portfolio. We hold debt securities designated as AFS primarily as
investments and to manage liquidity and interest rate risk in our non-trading banking activity. Certain legacy debt portfolios are also classified as
AFS. As at October 31, 2016, our portfolio of AFS securities exposes us to interest rate risk of a pre-tax loss of $8.9 million as measured by the
change in the value of the securities for a one basis point parallel increase in yields. The portfolio also exposes us to credit spread risk of a pre-
tax loss of $22.8 million, as measured by the change in value for a one basis point widening of credit spreads. Changes in the value of these
securities are reported in other comprehensive income. The value of the AFS securities included in our SIRR measure as at October 31, 2016 was
$48.6 billion. Our AFS securities also include equity exposures of $1.6 billion as at October 31, 2016, down from $1.8 billion as at October 31,
2015.
(1)
SIRR positions include impact of derivatives in hedge accounting relationships and AFS securities used for interest rate risk management.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
69
Derivatives related to non-trading activity
Derivatives are also used to hedge market risk exposures unrelated to our trading activity. In aggregate, derivative assets not related to trading
activity of $5.1 billion as at October 31, 2016 were down from $6.4 billion as at October 31, 2015, and derivative liabilities of $4.1 billion as at
October 31, 2016 were down from $4.5 billion last year.
Non-trading derivatives in hedge accounting relationships
The derivative assets and liabilities described above include derivative assets in a designated hedge accounting relationship of $2.4 billion as at
October 31, 2016, down from $2.8 billion as at October 31, 2015, and derivative liabilities of $1.8 billion as at October 31, 2016, down from
$2.0 billion last year. These derivative assets and liabilities are included in our Structural Interest Rate Risk measure and other internal non-
trading market risk measures. We use interest rate swaps to manage our AFS securities and structural interest rate risk, as described above. To
the extent these swaps are considered effective hedges, changes in their fair value are recognized in other comprehensive income. The interest
rate risk for the designated cash flow hedges, measured as the change in the fair value of the derivatives for a one basis point parallel increase in
yields, was $5.2 million as of October 31, 2016 compared to $5.5 million as of October 31, 2015.
Interest rate swaps are also used to hedge changes in the fair value of certain fixed-rate instruments. Changes in fair value of the interest
rate swaps and the hedged instruments that are related to interest rate movements are reflected in income.
We also use foreign exchange derivatives to manage our exposure to equity investments in subsidiaries that are denominated in foreign
currencies, particularly the U.S. dollar, British pound, and Euro. Changes in the fair value of these hedges and the cumulative translation
adjustment related to our structural foreign exchange risk are reported in other comprehensive income.
Other non-trading derivatives
Derivatives, including interest rate swaps and foreign exchange derivatives, that are not in designated hedge accounting relationships are used
to manage other non-trading exposures. These derivatives have been designated as FVTPL, with changes in the fair value of these derivatives
reflected in income. Derivative assets of $2.7 billion as at October 31, 2016 on these trades were down from $3.6 billion as at October 31, 2015,
and derivative liabilities of $2.3 billion as at October 31, 2016 were down from $2.5 billion last year.
Non-trading foreign exchange rate risk
Foreign exchange rate risk is the potential adverse impact on earnings and economic value due to changes in foreign currency rates. Our
revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to fluctuations as a result of changes in
the value of the average Canadian dollar relative to the average value of those currencies. Our most significant exposure is to the U.S. dollar,
due to our level of operations in the U.S. and other activities conducted in U.S. dollars. Other significant exposures are 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 unhedged equity investments, when the Canadian dollar
appreciates against other currencies, the unrealized translation losses on net foreign investments decreases our shareholders’ equity
through the other components of equity and decreases the translated value of the RWA of the foreign currency-denominated asset. 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 trading and non-trading market risk objectives, policies and methodologies have not changed significantly from 2015.
70
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Linkage of market risk to selected balance sheet items
The following table provides the linkages between selected balance sheet items with positions included in our trading market risk and non-
trading market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through different risk measures:
Linkage of market risk to selected balance sheet items
Table 60
(Millions of Canadian dollars)
Assets subject to market risk
Cash and due from banks (3)
Interest-bearing deposits with banks (4)
Securities
Trading (5)
Available-for-sale (6)
Assets purchased under reverse repurchase agreements
and securities borrowed (7)
Loans
Retail (8)
Wholesale (9)
Allowance for loan losses
Segregated fund net assets (10)
Derivatives
Other assets (11)
Assets not subject to market risk (12)
Total assets
Liabilities subject to market risk
Deposits (13)
Segregated fund liabilities (14)
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Derivatives
Other liabilities (15)
Subordinated debentures
Liabilities not subject to market risk (16)
Total liabilities
Total equity
Total liabilities and equity
As at October 31, 2016
Market risk measure
Balance sheet
amount
Traded risk (1)
Non-traded
risk (2)
Non-traded risk
primary risk sensitivity
$
14,929
27,851
$
5,906
16,058
$
9,023
11,793
Interest rate
Interest rate
151,292
84,801
144,001
–
7,291
84,801
Interest rate, credit spread
Interest rate, credit spread, equity
186,302
186,033
269
Interest rate
369,470
154,369
(2,235)
981
118,944
68,353
5,201
9,081
2,341
–
–
113,862
24,727
360,389
152,028
(2,235)
981
5,082
43,626
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
$ 1,180,258
$
757,589
981
$
$
502,009
$ 673,048
118,815
–
$ 638,774
981
50,369
50,369
–
Interest rate
Interest rate
103,441
116,550
61,987
9,762
7,967
103,441
112,500
19,984
–
–
4,050
42,003
9,762
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
$ 1,108,646
$
405,109
$ 695,570
$
71,612
$ 1,180,258
(1)
(2)
Traded risk includes FVTPL positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR and Stress testing are used as risk controls for traded
risk.
Non-traded risk includes positions used in the management of the SIRR and other non-trading portfolios. Other material non-trading portfolios include positions from our Insurance business
and AFS securities not included in SIRR.
The following footnotes provide additional information on the Non-traded risk amounts:
(3)
(4)
(5)
(6)
Cash and due from banks includes $8,954 million included in SIRR. An additional $69 million is included in other risk controls.
Interest-bearing deposits with banks of $11,793 million are included in SIRR.
Trading securities include $7,291 million in securities used in the management of the SIRR of RBC Insurance, which is not included in our disclosed SIRR measure.
Includes available-for-sale securities of $69,922 million and held-to-maturity securities of $14,879 million. $63,475 million of the total securities are included in SIRR. An additional
$1,901 million are held by our insurance businesses that do not contribute to our disclosed SIRR measures. The remaining $19,425 million are captured in other internal non-trading market
risk reporting.
Assets purchased under reverse repurchase agreements include $269 million reflected in SIRR.
Retail loans include $360,138 million reflected in SIRR. An additional $251 million is used in the management of the SIRR of RBC Insurance.
Wholesale loans include $150,619 million reflected in SIRR. An additional $1,409 million is used in the management of the SIRR of RBC Insurance.
Investments for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
(7)
(8)
(9)
(10)
(11) Other assets include $41,168 million reflected in SIRR. An additional $2,458 million is used in the management of the SIRR of RBC Insurance.
(12) Assets not subject to market risk include $5,201 million of physical and other assets.
(13) Deposits include $638,774 million reflected in SIRR.
(14)
Insurance and investment contracts for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
(15) Other liabilities include $9,900 million used in the management of the SIRR of RBC Insurance and $32,103 million contribute to our SIRR measure.
(16)
Liabilities not subject to market risk include $7,967 million of payroll related and other liabilities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
71
(Millions of Canadian dollars)
Assets subject to market risk
Cash and due from banks (3)
Interest-bearing deposits with banks (4)
Securities
Trading (5)
Available-for-sale (6)
Assets purchased under reverse repurchase
agreements and securities borrowed (7)
Loans
Retail (8)
Wholesale (9)
Allowance for loan losses
Segregated fund net assets (10)
Derivatives
Other assets (11)
Assets not subject to market risk (12)
Total assets
Liabilities subject to market risk
Deposits (13)
Segregated fund liabilities (14)
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned (15)
Derivatives
Other liabilities (16)
Subordinated debentures
Liabilities not subject to market risk (17)
Total liabilities
Total equity
Total liabilities and equity
As at October 31, 2015
Market risk measure
Balance sheet
amount
Traded risk (1)
Non-traded
risk (2)
Non-traded risk
primary risk sensitivity
$
12,452
22,690
$
5,720
15,764
$
6,732
6,926
Interest rate
Interest rate
158,703
56,805
151,420
–
7,283
56,805
Interest rate, credit spread
Interest rate, credit spread, equity
174,723
174,594
129
Interest rate
348,183
126,069
(2,029)
830
105,626
64,082
6,074
16,337
140
–
–
99,233
24,578
331,846
125,929
(2,029)
830
6,393
39,504
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
$ 1,074,208
$
697,227
830
$
$
487,786
$ 580,348
151,776
–
$ 545,451
830
47,658
47,658
–
Interest rate
Interest rate
83,288
107,860
58,184
7,362
7,855
83,165
103,348
19,757
–
123
4,512
38,427
7,362
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
$ 1,010,264
$
405,704
$ 596,705
$
63,944
$ 1,074,208
(1)
(2)
Traded risk includes FVTPL positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR and Stress testing are used as risk controls for traded
risk.
Non-traded risk includes positions used in the management of the SIRR and other non-trading portfolios. Other material non-trading portfolios include positions from our Insurance business
and AFS securities not included in SIRR.
The following footnotes provide additional information on the Non-traded risk amounts:
(3)
(4)
(5)
(6)
Cash and due from banks includes $5,829 million included in SIRR. An additional $903 million is included in other risk controls.
Interest-bearing deposits with banks of $6,926 million are included in SIRR.
Trading securities include $7,283 million in securities used in the management of the SIRR of RBC Insurance, which is not included in our disclosed SIRR measure.
Includes available-for-sale securities of $48,164 million and held-to-maturity securities of $8,641 million. $43,528 million of the total securities are included in SIRR. An additional $1,917
million are held by our insurance businesses that do not contribute to our disclosed SIRR measures. The remaining $11,360 million are captured in other internal non-trading market risk
reporting.
Assets purchased under reverse repurchase agreements include $129 million reflected in SIRR.
Retail loans include $331,846 million reflected in SIRR.
Wholesale loans include $124,701 million reflected in SIRR. An additional $1,228 million is used in the management of the SIRR of RBC Insurance.
Investments for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
(7)
(8)
(9)
(10)
(11) Other assets include $36,728 million reflected in SIRR. An additional $2,776 million is used in the management of the SIRR of RBC Insurance.
(12) Assets not subject to market risk include $6,074 million of physical and other assets.
(13) Deposits include $545,451 million reflected in SIRR.
(14)
(15) Obligations related to assets sold under repurchase agreements include $123 million reflected in SIRR.
(16) Other liabilities include $10,019 million used in the management of the SIRR of RBC Insurance, and $28,408 million contribute to our SIRR measure.
(17)
Insurance and investment contracts for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
Liabilities not subject to market risk include $7,855 million of payroll related and other liabilities.
Liquidity and funding risk
Liquidity and funding risk (liquidity risk) is the risk that we may be unable to generate sufficient cash or its equivalents in a timely and cost-
effective manner to meet our commitments as they come due. Liquidity risk arises from mismatches in the timing and value of on-balance
sheet and off-balance sheet cash flows.
Our liquidity profile is structured to ensure that we have sufficient liquidity to satisfy current and prospective commitments in both
normal and stressed business and liquidity environments. To achieve these goals, we operate under a comprehensive Liquidity Risk
Management Framework (LRMF) and employ several liquidity risk mitigation strategies that include:
•
•
An appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk mitigation;
Broad funding access, including preserving and promoting a reliable base of core client deposits and ongoing access to diversified
sources of wholesale funding;
A comprehensive liquidity stress testing program, contingency, recovery and resolution planning and status monitoring to ensure
sufficiency of unencumbered marketable securities and demonstrated capacities to monetize specific asset classes;
Timely and granular risk measurement information;
Transparent liquidity transfer pricing and cost allocation; and
A rigorous first and second line of defense governance model.
•
•
•
•
72
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Risk control
Our liquidity risk objectives, policies and methodologies are reviewed regularly, and updated to reflect changing market conditions and
business mix, to align with local regulatory developments and to position ourselves for the phase-in of Basel III regulatory liquidity standards.
We continue to maintain liquidity and funding that is appropriate for the execution of our strategy. Liquidity risk remains well within our risk
appetite.
The Board of Directors annually approves the delegation of liquidity risk authorities to senior management. The Risk Committee of the
Board annually approves the LRMF and the Pledging Policy and is responsible for their oversight. The Board of Directors, the Risk Committee
of the Board, the Group Risk Committee (GRC) and the Asset/Liability Committee (ALCO) regularly review reporting on our enterprise-wide
liquidity position and status. The GRC, the Policy Review Committee (PRC) and/or the ALCO also review liquidity documents prepared for the
Board of Directors or its committees.
•
PRC annually approves the Liquidity Risk Policy (LRP), which establishes minimum risk control elements in accordance with the Board-
approved risk appetite and LRMF.
The ALCO annually approves the Liquidity Contingency Plan (LCP) and provides strategic direction and oversight to Corporate Treasury,
other functions, and business segments on the management of liquidity.
•
These policies are supported by operational, desk and product-level policies that implement risk control elements, such as parameters,
methodologies, management limits and authorities that govern the measurement and management of liquidity. Stress testing is also
employed to assess the robustness of the control framework and inform liquidity contingency plans.
Risk measurement
Liquidity risk is measured by applying scenario-based assumptions against our assets and liabilities and off-balance sheet commitments to
derive expected cash flow profiles over varying time horizons. For instance, government bonds can be quickly and reliably monetized without
significant loss of value to generate cash inflow prior to their contractual maturity, and similarly, relationship demand deposits can be
deemed as having little risk of short-term cash outflow, although depositors have the contractual right to redeem on demand. 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.
To manage liquidity risk within our liquidity risk appetite, we set limits on various metrics reflecting a range of time horizons and severity of
stress conditions and develop contingency, recovery and resolution plans. Our liquidity risk measurement and control activities are divided
into three categories as follows:
Structural (longer-term) liquidity risk
To guide our secured and unsecured wholesale term funding activities, we employ an internal metric to focus on the structural alignment
between long-term illiquid assets and longer-term funding sourced from wholesale investors and core relationship deposits.
Tactical (shorter-term) liquidity risk
To address more immediate cash flow risks we may experience in times of stress, we use short-term net cash flow limits in conjunction with
stress testing, to contain risk within the risk appetite at branch, subsidiary and currency levels. Net cash flow positions are derived from the
application of internally generated risk assumptions and parameters to known and anticipated cash flows for all material unencumbered
assets, liabilities and off-balance sheet activities. Encumbered assets are not considered a source of available liquidity. We also control
tactical liquidity by adhering to group-wide and unit-specific prescribed regulatory standards, such as LCR.
Contingency liquidity risk
Contingency liquidity risk planning 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. This plan establishes a
Liquidity Crisis Team, led by Corporate Treasury, and consisting of senior representatives with relevant subject matter expertise from key
business segments, Group Risk Management, Finance, and Operations. This team contributes to the development of stress tests and funding
plans and meets regularly to assess our liquidity status, conduct stress tests and review liquidity contingency preparedness.
Our stress tests, which include elements of scenario and sensitivity analyses, measure our prospective exposure to global, country-specific
and RBC-specific events over a period of several weeks. Different levels of severity are considered for each type of crisis with some scenarios
reflecting multiple notch downgrades to our credit ratings.
The contingency liquidity risk planning process identifies contingent funding needs (e.g., draws on committed credit and liquidity lines,
demands for more collateral and deposit run-off) and sources (e.g., contingent liquid asset sales and incremental wholesale funding capacity)
under various stress scenarios, and as a result, informs requirements for our earmarked contingent unencumbered liquid asset pools.
Our contingent liquid asset pools consist of diversified, highly rated and liquid marketable securities, overnight government reverse repos,
and deposits with central banks. These portfolios are subject to minimum asset quality levels and, as appropriate, other strict eligibility
guidelines (e.g., maturity, diversification and eligibility for central bank advances) to maximize ready access to cash in emergencies. These
securities, when added to other unencumbered liquid assets that we hold as a result of capital markets or other activities, combine to populate
our liquidity reserve and asset encumbrance disclosures provided below.
Liquidity reserve and asset encumbrance
As recommended by the Enhanced Disclosure Task Force (EDTF), the following tables provide summaries of our liquidity reserve and asset
encumbrance. In both tables, unencumbered assets represent, for the most part, a ready source of funding that can be accessed quickly. For the
purpose of constructing the following tables, encumbered assets include: (i) bank-owned liquid assets that are either pledged as collateral (e.g.,
repo financing and derivative pledging) or not freely available due to regulatory or internal policy requirements (e.g., earmarked to satisfy
mandatory reserve or local capital adequacy requirements and to maintain continuous access to payment and settlement systems); (ii) securities
received as collateral from securities financing and derivative transactions which have either been re-hypothecated where permissible (e.g., to
obtain financing through repos or to cover securities sold short) or have no liquidity value since re-hypothecation is prohibited; and (iii) illiquid
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
73
assets that have been securitized and sold into the market or that have been pledged as collateral in support of structured term funding vehicles.
As per our liquidity management framework and practice, we do not include encumbered assets as a source of available liquidity in measuring
liquidity risk. Unencumbered assets are the difference between total and encumbered assets from both on- and off-balance sheet sources.
Liquidity reserve
In the liquidity reserve table, available liquid assets consist of on-balance sheet cash and securities holdings, as well as securities received as
collateral from securities financing (reverse repos and off-balance sheet collateral swaps) and derivative transactions, and constitute the
preferred source for quickly accessing liquidity. The other component of our liquidity reserve consists primarily of uncommitted and undrawn
central bank credit facilities that could be accessed under exceptional circumstances, provided certain pre-conditions could be met and where
advances could be supported by eligible assets (e.g., certain unencumbered loans) not included in the liquid assets category.
Liquidity reserve
Table 61
(Millions of Canadian dollars)
Cash and holding at central banks
Deposits in other banks available overnight
Securities issued or guaranteed by sovereigns, central
banks or multicultural development banks (2)
Other
Liquidity assets eligible at central banks (not included
above) (3)
Undrawn credit lines granted by central banks (4)
Other assets eligible as collateral for discount (5)
Other liquid assets (6)
Bank-owned
liquid
assets (1)
$ 31,771
1,679
295,603
146,269
600
13,558
141,888
23,307
As at October 31, 2016
Securities received
as collateral from
securities financing
and derivative
transactions
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
$
–
–
$
31,771
1,679
$
1,781
262
$
29,990
1,417
28,564
34,386
–
–
–
–
324,167
180,655
600
13,558
141,888
23,307
168,395
72,765
–
–
–
23,307
155,772
107,890
600
13,558
141,888
–
Total liquid assets
$ 654,675
$ 62,950
$ 717,625
$ 266,510
$ 451,115
(Millions of Canadian dollars)
Cash and holding at central banks
Deposits in other banks available overnight
Securities issued or guaranteed by sovereigns, central
banks or multilateral development banks (2)
Other
Liquidity assets eligible at central banks (not included
above) (3)
Undrawn credit lines granted by central banks (4)
Other assets eligible as collateral for discount (5)
Other liquid assets (6)
As at October 31, 2015
Securities received
as collateral from
securities financing
and derivative
transactions
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
$
–
–
$
25,075
2,298
$
1,719
1
$
23,356
2,297
21,216
31,751
–
–
–
–
278,554
174,464
63
11,844
128,401
21,675
127,702
80,349
–
–
–
21,675
150,852
94,115
63
11,844
128,401
–
Bank-owned
liquid
assets (1)
$
25,075
2,298
257,338
142,713
63
11,844
128,401
21,675
Total liquid assets
$ 589,407
$ 52,967
$ 642,374
$ 231,446
$ 410,928
(Millions of Canadian dollars)
Royal Bank of Canada
Foreign branches
Subsidiaries
Total unencumbered liquid assets
As at
October 31
2016
$ 264,522
53,006
133,587
October 31
2015
$ 252,052
64,684
94,192
$ 451,115
$ 410,928
(1)
(2)
(3)
(4)
(5)
(6)
74
The bank-owned liquid assets amount includes securities owned outright by the bank as well as collateral received through reverse repurchase transactions.
Includes liquid securities issued by provincial governments and U.S. government-sponsored entities working under U.S. Federal government’s conservatorship (e.g., Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation).
Includes Auction Rate Securities.
Includes loans that qualify as eligible collateral for the discount window facility available to us at the Federal Reserve Bank of New York (Federal Reserve Bank). Amounts are face value and
would be subject to collateral margin requirements applied by the Federal Reserve Bank to determine collateral value/borrowing capacity. Access to the discount window borrowing program
is conditional on meeting requirements set by the Federal Reserve Bank and borrowings are typically expected to be infrequent and due to uncommon occurrences requiring temporary
accommodation.
Represents our unencumbered Canadian dollar non-mortgage loan book (at face value) that could, subject to satisfying conditions precedent to borrowing and application of prescribed
collateral margin requirements, be pledged to the Bank of Canada for advances under its Emergency Lending Assistance (ELA) program. ELA and other central bank facilities are not
considered sources of available liquidity in our normal liquidity risk profile but could in extraordinary circumstances, where normal market liquidity is seriously impaired, allow us and other
banks to monetize assets eligible as central bank collateral to meet requirements and mitigate further market liquidity disruption.
Represents pledges related to OTC and exchange-traded derivative transactions.
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
2016 vs. 2015
Total liquid assets increased $75.3 billion or 12%, primarily due to our acquisition of City National as well as an increase in collateral received
under reverse repurchase and securities financing transactions.
Asset encumbrance
The table below provides a summary of cash, securities and other assets, distinguishing between those that are encumbered assets and those
available for sale or use as collateral in secured funding transactions. Other assets, such as mortgages and credit card receivables can also be
monetized, although over a longer timeframe than that required for marketable securities. As at October 31, 2016, our Unencumbered assets
available as collateral comprised 38% of our total assets (October 31, 2015 – 38%).
Asset encumbrance
Table 62
October 31
2016
October 31
2015
As at
Encumbered
Unencumbered
Encumbered
Unencumbered
(Millions of Canadian
dollars)
Pledged as
collateral Other (1)
Available as
collateral (2)
Other (3)
Total (4)
Pledged as
collateral
Other (1)
Available as
collateral (2)
Other (3)
Total (4)
Cash and due from
banks
$
– $ 1,781 $ 13,148 $
– $
14,929
$
– $ 1,719 $ 10,733 $
– $
12,452
Interest-bearing
deposits with
banks
Securities
Trading
Available-for-sale
Assets purchased
under reverse
repurchase
agreements and
securities
borrowed
Loans
Retail
Mortgage
securities
Mortgage loans
Non-mortgage
loans
Wholesale
Allowance for loan
losses
Segregated fund net
assets
Other – Derivatives
– Others (5)
–
262
27,589
–
27,851
1
–
22,689
–
22,690
66,734
2,858
179,534
34,624
40,293
10,422
3,477
–
–
–
23,307
–
–
–
–
–
–
–
–
–
–
–
83,219
78,966
1,339
2,977
151,292
84,801
66,752
7,800
–
669
90,551
45,548
1,400
2,788
158,703
56,805
89,200
15,204
283,938
148,117
35,591
12,796
–
131,694
100,612
41,445
3,438
109,447
70,215
184,783
114,472
154,369
35,889
36,422
8,314
3,376
–
–
–
–
(2,235)
(2,235)
–
981
118,944
50,247
981
118,944
73,554
–
–
22,286
–
–
–
–
–
–
–
–
–
89,929
18,398
256,444
33,921
–
–
127,743
100,040
40,867
5,854
81,826
69,810
164,165
114,208
126,069
–
–
–
–
(2,029)
(2,029)
830
105,626
47,870
830
105,626
70,156
Total assets
$361,249 $ 2,043 $ 482,566 $ 432,036 $ 1,277,894
$ 328,957 $ 2,388 $ 434,278 $ 390,306 $ 1,155,929
(1)
(2)
(3)
(4)
(5)
Includes assets restricted from use to generate secured funding due to legal or other constraints.
Includes loans that could be used to collateralize central bank advances. Our unencumbered Canadian dollar non-mortgage loan book (at face value) could, subject to satisfying conditions
for borrowing and application of prescribed collateral margin requirements, be pledged to the Bank of Canada for advances under its ELA program. We also lodge loans that qualify as eligible
collateral for the discount window facility available to us at the Federal Reserve Bank of New York. ELA and other central bank facilities are not considered sources of available liquidity in our
normal liquidity risk profile. However, banks could monetize assets meeting central bank collateral criteria during periods of extraordinary and severe disruption to market-wide liquidity.
Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but would not be considered readily available since they may not be acceptable
at central banks or for other lending programs.
Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing and derivative transactions.
The Pledged as collateral amounts relate to OTC and exchange-traded derivative transactions.
Funding
Funding strategy
Core funding, comprising capital, longer-term wholesale liabilities and a diversified pool of personal and, to a lesser extent, commercial and
institutional deposits, is the foundation of our structural liquidity position.
Deposit and funding profile
As at October 31, 2016, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were $506 billion or
55% of our total funding (October 31, 2015 – $422 billion or 51%). The remaining portion is comprised of short- and long-term wholesale
funding.
Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of those assets.
Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquidity asset buffers.
For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.
Long-term debt issuance
During 2016, we continued to experience more favourable unsecured wholesale funding access and pricing compared to many of our global
peers. We also continued to expand our unsecured long-term funding base by selectively issuing, either directly or through our subsidiaries,
$25.4 billion of term funding in various currencies and markets. Total unsecured long-term funding outstanding decreased by $3.3 billion from
the prior year due to maturities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
75
We primarily use residential mortgage and credit card securitization programs as alternative sources of funding and for liquidity and asset/
liability management purposes. Our total secured long-term funding includes outstanding mortgage-backed securities (MBS) sold, covered
bonds that are collateralized with residential mortgages, and securities backed by credit card receivables.
Compared to 2015, our outstanding MBS sold decreased $2.2 billion. Our covered bonds and securitized credit card receivables increased
$3.2 billion and $744 million.
For further details, refer to the Off-balance sheet arrangements section.
Long-term funding sources*
(Millions of Canadian dollars)
Unsecured long-term funding
Secured long-term funding
Commercial mortgage-backed securities sold
Subordinated debentures
Table 63
As at
October 31
2016
October 31
2015
$
98,827
69,971
1,297
9,597
$
102,081
68,228
1,080
7,227
$
179,692
$
178,616
*
This table represents an integral part of our 2016 Annual Consolidated Financial Statements.
Our wholesale funding activities are well-diversified by geography, investor segment, instrument, currency, structure and maturity. We maintain
an ongoing presence in different funding markets, which allows us to continuously monitor market developments and trends, identify
opportunities and risks, and take appropriate and timely actions. We operate longer-term debt issuance registered programs. The following table
summarizes these programs with their authorized limits by geography.
Programs by geography
Table 64
Canada
U.S.
Europe/Asia
• Canadian Shelf – $25 billion
• SEC Registered Medium Term Note
• European Debt Issuance Program –
Program – US$40 billion
US$40 billion
• SEC Registered Covered Bond Program –
• Global Covered Bond Program –
US$15 billion (1)
€32 billion
• Japanese Issuance Programs –
¥1 trillion
(1)
Subject to the €32 billion Global Covered Bond Program limit.
We also raise long-term funding using Canadian Deposit Notes, Canadian NHA MBS, Canada Mortgage Bonds, credit card receivable-backed
securities, Kangaroo Bonds (issued in the Australian domestic market by foreign firms) and Yankee Certificates of Deposit (issued in the U.S.
domestic market by foreign firms). We continuously evaluate opportunities to expand into new markets and untapped investor segments since
diversification expands our wholesale funding flexibility, minimizes funding concentration and dependency, and generally reduces financing
costs. As presented in the following charts, our current long-term debt profile is well-diversified by both currency and product. Maintaining
competitive credit ratings is also critical to cost-effective funding.
76
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Long-term debt (1) – funding mix by currency of issuance
($151 billion as at October 31, 2016)
Long-term debt (1) – funding mix by product
($151 billion as at October 31, 2016)
Other
8%
Euro
14%
Canadian dollar
37%
October 31, 2016
$151 B
U.S. dollar
41%
Cards securitization
6%
Unsecured
funding
54%
October 31, 2016
$151 B
Covered bonds
26%
MBS/CMB (2)
14%
(1)
Based on original term to maturity greater than 1 year
(1)
(2)
Based on original term to maturity greater than 1 year
Mortgage-backed securities and Canada Mortgage Bonds
The following table provides our composition of wholesale funding based on remaining term to maturity and represents our enhanced disclosure
in response to EDTF recommendations:
Composition of wholesale funding (1)
Table 65
(Millions of Canadian dollars)
Deposits from banks (2)
Certificates of deposit and commercial paper
Asset-backed commercial paper (3)
Senior unsecured medium-term notes (4)
Senior unsecured structured notes (5)
Mortgage securitization
Covered bonds/asset-backed securities (6)
Subordinated liabilities
Other (7)
Total
Of which:
– Secured
– Unsecured
(Millions of Canadian dollars)
Deposits from banks (2)
Certificates of deposit and commercial paper
Asset-backed commercial paper (3)
Senior unsecured medium-term notes (4)
Senior unsecured structured notes (5)
Mortgage securitization
Covered bonds/asset-backed securities (6)
Subordinated liabilities
Other (7)
Total
Of which:
– Secured
– Unsecured
$
$
$
$
$
$
As at October 31, 2016
Less than 1
month
1 to 3
months
3 to 6
months
6 to 12
months
Less than
1 year
sub-total
1 year to
2 years
2 years
and
greater
1,375 $
3,072
1,503
1,135
141
–
–
–
1,173
80 $
30 $
8,950
1,600
9,140
305
686
1,674
–
2,053
10,692
3,551
7,582
213
514
626
–
43
38
5,199
2,923
7,282
554
1,435
5,834
128
738
$ 1,523 $
27,913
9,577
25,139
1,213
2,635
8,134
128
4,007
– $
– $
1,220
–
18,156
1,871
3,432
10,700
–
13
54
–
43,073
6,493
14,378
30,692
9,469
5,073
Total
1,523
29,187
9,577
86,368
9,577
20,445
49,526
9,597
9,093
8,399 $ 24,488 $ 23,251 $ 24,131
$ 80,269 $ 35,392 $ 109,232 $ 224,893
2,502 $ 5,528 $ 4,691 $ 10,192
13,939
5,897
18,560
18,960
$ 22,913 $ 14,132 $ 45,071 $ 82,116
142,777
21,260
64,161
57,356
As at October 31, 2015
Less than 1
month
1 to 3
months
3 to 6
months
5,107 $
9,355
883
944
151
41
–
1,500
4,126
62 $
13 $
9,648
2,317
6,403
535
1,088
1,961
–
3,283
18,591
6,989
4,165
376
673
654
–
252
6 to 12
months
30
10,071
1,572
11,348
577
2,139
5,438
–
1,318
Less than
1 year
sub-total
1 year to
2 years
2 years
and
greater
$ 5,212 $
47,665
11,761
22,860
1,639
3,941
8,053
1,500
8,979
– $
– $
451
–
17,670
679
2,656
7,518
108
12
207
–
42,520
6,070
16,049
30,041
5,619
4,408
Total
5,212
48,323
11,761
83,050
8,388
22,646
45,612
7,227
13,399
22,107 $ 25,297 $ 31,713 $ 32,493
$111,610 $ 29,094 $ 104,914 $ 245,618
4,952 $ 7,506 $ 8,315 $ 9,149
23,344
23,398
17,791
17,155
$ 29,922 $ 10,174 $ 46,090 $ 86,186
159,432
18,920
58,824
81,688
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Excludes bankers’ acceptances and repos.
Only includes deposits raised by treasury. Excludes deposits associated with services we provide to these banks (e.g., custody, cash management).
Only includes consolidated liabilities, including our collateralized commercial paper program.
Includes deposit notes.
Includes notes where the payout is tied to movements in foreign exchange, commodities and equities.
Includes credit card, auto and mortgage loans.
Includes tender option bonds (secured) of $2,567 million (October 31, 2015 – $6,088 million), bearer deposit notes (unsecured) of $1,652 million (October 31, 2015 – $3,186 million) and
other long-term structured deposits (unsecured) of $4,874 million (October 31, 2015 – $4,125 million).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
77
Credit ratings
Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective basis are primarily
dependent upon maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies reflect their views and
methodologies. Ratings are subject to change, based on a number of factors including, but not limited to, our financial strength, competitive
position and liquidity and other factors not completely within our control.
On June 6, 2016, S&P revised our outlook to negative from stable and affirmed our ratings.
On July 19, 2016, Moody’s affirmed our ratings with a negative outlook.
On July 28, 2016, DBRS affirmed our ratings with a negative outlook.
On October 28, 2016, Fitch Ratings affirmed our ratings with a negative outlook.
The following table presents our major credit ratings (1) and outlooks:
Credit ratings
Table 66
As at November 29, 2016
Short-term debt
Senior long-term debt
Outlook
Moody’s
Standard & Poor’s
Fitch Ratings
Dominion Bond Rating Services
P-1
A-1+
F1+
R-1(high)
Aa3
AA-
AA
AA
negative
negative
negative
negative
(1)
Credit ratings are not recommendations to purchase, sell or hold a financial obligation inasmuch as they do not
comment on market price or suitability for a particular investor. Ratings are determined by the rating agencies based
on criteria established from time to time by them, and are subject to revision or withdrawal at any time by the rating
organization.
Additional contractual obligations for rating downgrades
We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The following table
presents the additional collateral obligations required at the reporting date in the event of a one-, two- or three-notch downgrade to our credit
ratings. These additional collateral obligations are incremental requirements for each successive downgrade and do not represent the
cumulative impact of multiple downgrades. The amounts reported change periodically as a result of several factors, including the transfer of
trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of transactions with downgrade triggers, the
imposition of internal limitations on new agreements to exclude downgrade triggers, as well as normal course mark-to-market of positions with
collateralized counterparties moving from a negative to a positive position. There is no outstanding senior debt issued in the market that
contains rating triggers that would lead to early prepayment of principal.
Additional contractual obligations for rating downgrades
Table 67
As at
October 31
2016
October 31
2015
(Millions of Canadian dollars)
Contractual derivatives funding or margin
requirements
Other contractual funding or margin requirements (1)
One-notch
downgrade
Two-notch
downgrade
Three-notch
downgrade
One-notch
downgrade
Two-notch
downgrade
Three-notch
downgrade
$
$
487
293
$
117
473
$
501
–
$
760
421
$
132
88
972
–
(1)
Includes GICs issued by our municipal markets business out of New York.
Liquidity Coverage Ratio (LCR)
The LCR is a Basel III metric that measures the sufficiency of HQLA available to meet liquidity needs over a 30-day period in an acute stress
scenario. The BCBS and OSFI regulatory minimum coverage level for LCR is currently 100%.
OSFI requires Canadian banks to disclose the LCR using the standard Basel disclosure template and calculated using the average of month-
end positions during the quarter.
78
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Liquidity coverage ratio (1)
Table 68
(Millions of Canadian dollars, except percentage amounts)
High-quality liquid assets
Total high-quality liquid assets (HQLA)
Cash outflows
Retail deposits and deposits from small business customers,
of which:
Stable deposits (3)
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits (4) in
networks of cooperative banks
Non-operational deposits
Unsecured debt
Secured wholesale funding
Additional requirements, of which:
Outflows related to derivative exposures and other collateral
requirements
Outflows related to loss of funding on debt products
Credit and liquidity facilities
Other contractual funding obligations (5)
Other contingent funding obligations (6)
Total cash outflows
Cash inflows
Secured lending (e.g., reverse repos)
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Total HQLA
Total net cash outflows
Liquidity coverage ratio
For the three-months ended
October 31
2016
October 31
2015
Total unweighted
value (average) (2)
Total weighted
value (average)
Total unweighted
value (average) (2)
Total weighted
value (average)
224,518
72,570
151,948
234,455
106,040
113,719
14,696
226,706
59,910
5,364
161,432
30,951
448,854
126,615
10,559
45,207
207,541
17,372
2,177
15,195
99,877
25,491
59,690
14,696
26,069
67,106
34,299
5,364
27,443
30,951
6,814
248,189
31,978
7,042
45,207
84,227
180,831
60,399
120,432
217,592
97,255
101,632
18,705
195,694
43,709
4,893
147,092
28,056
433,181
119,274
11,709
29,309
194,785
13,856
1,813
12,043
97,305
23,342
55,258
18,705
26,709
51,288
17,747
4,893
28,648
28,056
6,224
223,438
32,982
8,013
29,309
70,304
Total adjusted
value
207,541
163,962
127%
Total adjusted
value
194,785
153,134
127%
(1)
(2)
(3)
(4)
(5)
(6)
LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS.
With the exception of other contingent funding obligations, unweighted inflow and outflow amounts are items maturing or callable in 30 days or less. Other contingent funding obligations
also include debt securities with remaining maturity greater than 30 days.
As defined by BCBS, stable deposits from retail and small business customers are deposits that are insured and are either held in transactional accounts or the bank has an established
relationship with the client making the withdrawal unlikely.
Operational deposits from non-retail and non-small and medium-sized enterprise customers are deposits which clients need to keep with the bank in order to facilitate their access and
ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
Other contractual funding obligations primarily include outflows from unsettled securities trades and outflows from obligations related to securities sold short.
Other contingent funding obligations include outflows related to other off-balance sheet facilities that carry low LCR runoff factors (0% – 5%).
We manage our LCR position within a target range that reflects management’s liquidity risk tolerance and takes into account business mix, asset
composition and funding capabilities. The range is subject to periodic review in light of changes to internal requirements and external
developments.
We maintain HQLAs in major currencies with dependable market depth and breadth. Our treasury management practices ensure that the
levels of HQLA are actively managed to meet target LCR objectives. Our Level 1 assets, as calculated according to OSFI LAR and the BCBS LCR
requirements, represent 80% of total HQLA. These assets consist of cash, placements with central banks and highly rated securities issued or
guaranteed by governments, central banks and supranational entities.
LCR captures cash flows from on- and off-balance sheet activities that are either expected or could potentially occur within 30 days in an
acute stress scenario. Cash outflows result from application of withdrawal and non-renewal factors to demand and term deposits, differentiated
by client type (wholesale, retail and small- and medium-sized enterprises). Cash outflows also arise from business activities that create
contingent funding and collateral requirements, such as repo funding, derivatives, short sales of securities and the extension of credit and
liquidity commitments to clients. Cash inflows arise primarily from maturing secured loans, interbank loans and non-HQLA securities.
LCR does not reflect any market funding capacity that management believes would be available to the Bank in a stress situation. All
maturing wholesale debt is assigned 100% outflow in the LCR calculation.
Q4 2016 vs. Q4 2015
The average LCR for the quarter ended October 31, 2016 of 127% was consistent with the prior year, reflecting active liquidity management in
response to balance sheet growth and funding maturities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
79
Contractual maturities of financial assets, financial liabilities and off-balance sheet items
The following tables provide remaining contractual maturity profiles of all our assets, liabilities, and off-balance sheet items at their carrying
value (e.g., amortized cost or fair value) at the balance sheet date. Off-balance sheet items are allocated based on the expiry date of the contract.
Details of contractual maturities and commitments to extend funds are a source of information for the management of liquidity risk. Among
other purposes, these details form a basis for modelling a behavioural balance sheet with effective maturities to calculate liquidity risk
measures. For further details, refer to the Risk measurement section.
Contractual maturities of financial assets, financial liabilities and off-balance sheet items
Table 69
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 year
to 2 years
2 years
to 5 years
5 years
and greater
With no
specific
maturity
Total
As at October 31, 2016
$ 38,931 $
342 $
2 $
– $
192 $
– $
– $
– $
3,313 $
42,780
98,843
1,648
5
4,854
18
2,011
–
1,810
24
1,687
40
8,869
117
25,709
6,183
36,587
46,062
1,626
151,292
84,801
81,801
42,092
24,771
14,988
11,090
3,380
303
–
7,877
186,302
15,526
13,154
16,863
21,512
23,120
109,075
198,054
38,887
85,413
521,604
8,362
8,443
28,659
4,403
10,367
741
73
4,800
484
3
3,355
222
–
3,511
62
–
12,794
43
2
26,563
38
–
49,099
414
–
12
1,372
12,843
118,944
32,035
$ 282,213 $ 75,958 $ 49,022 $ 41,890 $ 39,686 $ 134,201 $ 250,786 $ 131,170 $ 145,675 $ 1,150,601
29,657
19,455
2,991
1,824
1,259
2,579
887
130
295
237
(Millions of Canadian dollars)
Assets
Cash and deposits with
banks
Securities
Trading (1)
Available-for-sale
Assets purchased under
reverse repurchase
agreements and securities
borrowed
Loans (net of allowance for
loan losses)
Other
Customers’ liability
under acceptances
Derivatives
Other financial assets
Total financial assets
Other non-financial assets
Total assets
$ 283,472 $ 76,845 $ 49,152 $ 42,185 $ 39,923 $ 136,780 $ 252,610 $ 134,161 $ 165,130 $ 1,180,258
Liabilities and equity
Deposits (2)
Unsecured borrowing
Secured borrowing
Covered bonds
Other
Acceptances
Obligations related to
securities sold short
Obligations related to
assets sold under
repurchase agreements
and securities loaned
Derivatives
Other financial liabilities
Subordinated debentures
Total financial liabilities
Other non-financial
liabilities
Equity
$ 30,680 $ 35,333 $ 35,540 $ 16,684 $ 23,586 $ 34,044 $
1,545
–
4,788
–
4,947
–
5,700
–
2,290
3,348
7,256
9,376
55,239 $
20,660
24,936
8,362
4,403
50,369
–
73
–
3
–
–
–
–
–
2
–
15,123 $ 415,130 $
8,569
2,815
–
–
–
–
–
–
661,359
55,755
40,475
12,843
50,369
88,702
7,334
22,700
–
6,113
10,904
2,212
–
1,568
5,809
375
–
–
3,939
125
–
756
2,976
218
–
8
13,562
154
–
21
25,945
290
115
–
46,081
4,762
9,647
6,273
–
482
–
103,441
116,550
31,318
9,762
$ 209,692 $ 63,753 $ 48,312 $ 26,451 $ 33,174 $ 64,400 $ 127,208 $
86,997 $ 421,885 $ 1,081,872
863
–
3,692
–
276
–
155
–
154
–
1,199
–
2,466
–
9,408
–
8,561
71,612
26,774
71,612
Total liabilities and equity
$ 210,555 $ 67,445 $ 48,588 $ 26,606 $ 33,328 $ 65,599 $ 129,674 $
96,405 $ 502,058 $ 1,180,258
Off-balance sheet items
Financial guarantees
Lease commitments
Commitments to extend
credit
Other credit-related
commitments
Other commitments
Total off-balance sheet
items
$
736 $
62
2,255 $
123
1,897 $
184
3,199 $
181
1,251 $
177
3,010 $
661
6,403 $
1,528
79 $
2,131
56 $
–
18,886
5,047
3,723
5,481
9,783
7,190
12,074
31,384
132,092
18,284
3,220
223,231
433
477
791
63
1,420
–
1,339
–
1,158
–
678
–
758
–
306
–
90,241
–
97,124
540
$
5,431 $
8,713 $ 13,284 $ 11,909 $ 14,660 $ 35,733 $ 140,781 $
20,800 $
93,517 $
344,828
(1)
(2)
Trading debt securities classified as fair value through profit or loss have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual
maturity.
A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base, as explained
in the preceding Deposit profile section, for our operations and liquidity needs.
80
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
(Millions of Canadian dollars)
Assets
Cash and deposits with banks
Securities
Trading (1)
Available-for-sale
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans (net of allowance for loan losses)
Other
Customers’ liability under acceptances
Derivatives
Other financial assets
Total financial assets
Other non-financial assets
Total assets
Liabilities and equity
Deposits (2)
Unsecured borrowing
Secured borrowing
Covered bonds
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned
Derivatives
Other financial liabilities
Subordinated debentures
Total financial liabilities
Other non-financial liabilities
Equity
Total liabilities and equity
Off-balance sheet items
Financial guarantees
Lease commitments
Commitments to extend credit
Other credit-related commitments
Other commitments
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 year
to 2 years
2 years
to 5 years
5 years
and greater
With no
specific
maturity
Total
As at October 31, 2015
$ 31,355 $
56 $
17 $
530 $
– $
– $
– $
– $ 3,184 $
35,142
103,718
2,947
21
3,682
26
1,345
77
3,259
51
988
188
4,778
552
20,154
82,017
15,020
30,851
11,828
27,871
23,196
16,570
22,295
7,320
18,234
2,601
89,179
–
184,249
10,343
7,492
29,187
3,032
8,129
624
71
3,747
711
–
3,074
169
–
2,479
33
6
10,639
83
1
25,244
26
$ 282,079 $58,223 $56,984 $45,974 $29,105 $ 107,474 $ 230,226 $
374
1,573
1,506
1,792
526
866
60
5,580
17,802
–
22,833
–
44,811
525
48,490
1,850
7,493
85,389
–
11
966
158,703
56,805
174,723
472,223
13,453
105,626
32,324
91,551 $147,383 $1,048,999
25,209
16,087
2,425
$ 283,871 $59,729 $57,510 $46,348 $29,165 $ 108,340 $ 231,799 $
93,976 $163,470 $1,074,208
970
–
10,343
47,658
66,099
5,376
23,210
–
4,818
1,961
3,032
–
7,580
8,481
1,236
–
$ 40,992 $29,994 $41,298 $20,175 $27,220 $ 30,697 $ 53,403 $
8,602
–
7,567
2,293
2,676
1,165
9,708
3,269
19,318
24,064
14,479 $338,378 $ 596,636
63,395
37,196
9,736
4,444
–
–
71
–
–
–
–
–
6
–
1
–
–
–
–
–
13,453
47,658
1,419
4,146
391
–
422
4,205
120
–
800
3,884
198
–
780
12,240
72
–
10
28,140
239
–
$ 194,648 $57,102 $55,927 $34,782 $35,943 $ 56,772 $ 125,175 $
142
–
2,564
–
3,291
–
894
–
170
–
169
–
990
–
–
41,383
4,188
7,362
6,178
5
349
–
83,288
107,860
30,003
7,362
81,592 $344,910 $ 986,851
23,413
6,671
63,944
63,944
8,522
–
$ 195,638 $60,393 $56,097 $34,924 $36,112 $ 57,666 $ 127,739 $
90,114 $415,525 $1,074,208
$
828 $ 2,798 $ 1,348 $ 2,115 $ 1,552 $
62
3,801
623
353
123
6,005
828
–
180
9,854
1,172
–
175
10,976
1,169
–
177
8,281
1,014
–
2,861 $
602
32,971
343
–
5,813 $
1,293
127,747
834
–
147 $
32 $
1,808
14,127
272
–
–
3,113
74,247
–
17,494
4,420
216,875
80,502
353
Total off-balance sheet items
$
5,667 $ 9,754 $12,554 $14,435 $11,024 $ 36,777 $ 135,687 $
16,354 $ 77,392 $ 319,644
(1)
(2)
Trading debt securities classified as fair value through profit or loss have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual
maturity.
A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base, as explained
in the preceding Deposit profile section, for our operations and liquidity needs.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
81
Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis
The following tables provide remaining contractual maturity analysis of our financial liabilities and off-balance sheet items. The amounts
disclosed in the following table are the contractual undiscounted cash flows of all financial liabilities (e.g., par value or amount payable upon
maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table incorporates only cash flows
relating to payments on maturity and do not recognize premiums, discounts or mark-to-market adjustments recognized in the instruments’
carrying values as at the balance sheet date. Financial liabilities are based upon the earliest period in which they are required to be paid. For
off-balance sheet items, the undiscounted cash flows potentially payable under financial guarantees and commitments to extend credit are
classified on the basis of the earliest date they can be called.
Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis *
Table 70
(Millions of Canadian dollars)
Financial liabilities
Deposits (1)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
Subordinated debentures
Off-balance sheet items
Financial guarantees (2)
Operating leases
Commitments to extend credit (2)
As at October 31, 2016
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
$ 358,254
$ 221,852
$ 50,293
$ 100,295
$ 25,422
$
756,116
6,618
–
6,274
445
–
6,224
49,911
97,139
24,198
–
–
–
8
112
–
1
–
21
289
115
–
–
–
4,761
9,646
371,591
399,324
50,413
100,721
39,829
7,616
–
181,496
189,112
11,258
727
41,671
53,656
11
661
5
677
–
1,528
59
1,587
1
2,131
–
2,132
12,843
49,911
103,442
29,805
9,761
961,878
18,886
5,047
223,231
247,164
Total financial liabilities and off-balance sheet items
$ 560,703
$ 452,980
$ 51,090
$ 102,308
$ 41,961
$ 1,209,042
(Millions of Canadian dollars)
Financial liabilities
Deposits (1)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
Subordinated debentures
Off-balance sheet items
Financial guarantees (2)
Operating leases
Commitments to extend credit (2)
As at October 31, 2015
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
$ 311,743
$ 216,876
$ 43,631
$ 96,104
$ 28,539
$
696,893
–
–
6,179
334
–
13,446
47,658
76,320
25,174
–
6
–
780
72
–
1
–
10
237
–
–
–
–
4,139
7,227
13,453
47,658
83,289
29,956
7,227
318,256
379,474
44,489
96,352
39,905
878,476
7,079
–
172,927
180,006
10,399
717
43,929
55,045
11
602
4
617
4
1,293
2
1,299
1
1,808
13
1,822
17,494
4,420
216,875
238,789
Total financial liabilities and off-balance sheet items
$ 498,262
$ 434,519
$ 45,106
$ 97,651
$ 41,727
$ 1,117,265
*
(1)
(2)
This table represents an integral part of our 2016 Annual Consolidated Financial Statements.
A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base, as explained
in the preceding Deposit profile section, for our operations and liquidity needs.
We believe that it is highly unlikely that all or substantially all of these guarantees and commitments will be drawn or settled within one year, and contracts may expire without being drawn or
settled. The management of the liquidity risk associated with potential extensions of funds is outlined in the preceding Risk measurement section.
Insurance risk
Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit payments under
insurance and reinsurance contracts are different than expected. Insurance risk is distinct from those risks covered by other parts of our risk
management framework (e.g., credit, market and operational risk) where those risks are ancillary to, or accompany the risk transfer.
We have implemented an Insurance Risk Framework that provides an overview of our processes and tools for identifying, assessing,
managing and reporting on the insurance risks that face the organization. Key insurance-specific processes and tools include: risk appetite,
delegated authorities and risk limits, capital management, own risk and solvency assessment, comprehensive identification and assessment of
risk process, stress testing, insurance product and project risk review and approval, insurance product pricing, reinsurance, insurance
underwriting, insurance claims management, experience study analysis, actuarial liabilities, and embedded value.
82
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Operational risk
Operational risk is the risk of loss or harm resulting from people, inadequate or failed internal processes and systems or from external events.
Operational risk is inherent 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, reputational impact, regulatory censure, or failure in the management of other risks
such as credit or market risk.
Three lines of defence
Our management of operational risk follows our established three lines of defence governance model. This model encompasses the
organizational roles and responsibilities for a co-ordinated enterprise-wide approach for the management of operational risk. For further details,
refer to the Risk management – Enterprise risk management section.
Operational Risk Framework
We have put in place an Enterprise Operational Risk Framework, which is founded on the principles of our Enterprise Risk Management
Framework and sets out the processes to identify, assess, manage, monitor and report operational risk. The processes are established through
the following core programs:
•
Internal events – Internal events are specific instances where operational risk leads to or could have led to an unintended, identifiable
impact. The internal events program provides a structured and consistent approach for collecting and analyzing internal event data to
facilitate the analysis of the operational risk events affecting us.
External events – External events are operational risk events that affect institutions other than RBC. External event monitoring and analysis
is critical to gain awareness of operational risk experience within the industry and to identify emerging industry trends.
Business Environment and Internal Control Factors (BEICF) Assessments – BEICF Assessments are conducted to improve business decision-
making by gaining awareness of the key risks and the strengths and vulnerabilities of internal controls. Key BEICF Assessment processes
include: risk and control self-assessments conducted at both enterprise and business levels; change initiatives & new/amended product
assessments conducted to ensure understanding of the risk and reward trade-off for initiatives (e.g., new products, acquisitions, changes in
business processes, implementation of new technology, etc.) and that we do not assume risks not aligned with our risk appetite.
Scenario analysis – Scenario analysis is a structured and disciplined process for making reasonable assessments of infrequent, yet
plausible, severe operational risk events. Understanding how vulnerable we are to such “tail risks” identifies mitigating actions and informs
the determination of related operational risk thresholds as part of the articulation of operational risk appetite.
BEICF monitoring – BEICF monitoring is conducted on an ongoing basis through key risk indicators (KRIs) and other assurance/monitoring
programs (e.g., business unit monitoring, second line of defence monitoring, audit results, etc.).
•
•
•
•
Conclusions from the operational risk programs enable learning based on “what has happened to us, could it happen again elsewhere in RBC
and what controls do we need to amend or implement,” support the articulation of operational risk appetite and are used to inform the overall
level of exposure to operational risk, which defines our operational risk profile. The profile includes significant operational risk exposures,
potential new and emerging exposures and trends, and overall conclusions on the control environment and risk outlook. We proactively identify
and investigate corporate insurance opportunities to mitigate and reduce potential future impacts of operational risk.
We consider risk/reward decisions in striking the balance between accepting potential losses versus incurring costs of mitigation, the
expression of which is in the form of our operational risk appetite. Our operational risk appetite is established at the board level and cascaded
throughout each of our business segments.
Management reports have been implemented at various levels in order to support proactive management of operational risk and
transparency of risk exposures. Reports are provided on a regular basis and provide detail on the main drivers of the risk status and trend for
each of our business segments and RBC overall. In addition, changes to the operational risk profile that are not aligned to our business strategy
or operational risk appetite are identified and discussed.
Our operations expose us to many different operational risks, which may adversely affect our businesses and financial results. The following list
is not exhaustive, as other factors could also adversely affect our results.
Model risk
The use of models plays an important role in many of our business activities. We use a variety of models for many purposes, including the
valuation of financial products, risk measurement and management of different types of risk. Model risk is the risk of error in the design,
development, implementation or subsequent use of models. We have established an enterprise-wide Model Risk Management Policy, including
principles, policies and procedures, roles and responsibilities to manage model risk. One of the key factors in the policy to mitigate model risk is
independent validation.
Information technology and cybersecurity risk
We use information technology for business operations and the enablement of strategic business goals and objectives. Information technology
risk is the risk to our business associated with the use, ownership, operation, involvement, influence and adoption of information technology
within the enterprise. It consists of information technology related events (e.g., cybersecurity incidents) that could potentially have an adverse
impact on our business. Such events could result in business interruption, service disruptions, theft of intellectual property and confidential
information, additional regulatory scrutiny, litigation and reputational damage. To manage our information technology risk, we have established
an enterprise-wide Information Technology Risk Management Framework.
Information management risk
Information management risk is the risk of loss or harm resulting from the failure to manage information appropriately throughout its life-cycle.
Exposure to this risk exists when information is acquired or created, processed, used, shared, accessed, retained or disposed. With respect to
personal information, the failure to manage information appropriately can result in the misuse of personal information or privacy breaches. With
respect to client information, the inability to process information accurately and on a timely basis can result in service disruptions. With respect
to corporate and proprietary information, the mismanagement of information can result in the disclosure of confidential information, the
unavailability of information when it is required and the reliance on inaccurate information for decision-making purposes. Such events could
lead to legal and regulatory consequences, reputational damage and financial loss.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
83
Third-party and outsourcing risk
Failing to effectively manage our service providers may expose us to service disruptions, regulatory action, financial loss, litigation or
reputational damage. Third-party and outsourcing risk has received increased oversight from regulators and attention from the media. We
formalized and standardized our expectations of our suppliers with a principles-based supplier code of conduct to ensure their behaviour aligns
with our standards in the following key areas: business integrity, responsible business practices, responsible treatment of individuals, and the
environment.
Social media
The scale and profile of social media has grown to present a number of risks. These risks include brand and reputational damage, information
leaks, non-compliance with regulatory requirements and governance risk. To manage the risks associated with social media, we have
implemented an enterprise-wide policy as well as business unit policies on the usage of external social media, which sets out the requirements
for the business and corporate use of social media and is part of our larger Social Media Governance Framework.
Processing and execution risk
Processing and execution risk is the risk of failure to effectively design, implement and execute a process. Exposure to this risk is global, existing
in all of our locations and operations, and in our employee’s actions. Examples of processing and execution events range from selecting the
wrong interest rates, duplicating wire payment instructions, transposing figures, processing a foreign exchange transaction incorrectly,
underinsuring a property and incorrectly investing funds. The potential impacts of such events include financial loss, legal and regulatory
consequences and reputational damage. When identified, these situations are assessed, analyzed and mitigating actions are undertaken.
Fraud
Fraud risk is defined as the risk of intentional unauthorized activities designed to obtain benefits either from us or assets under our care, or using
our products. Fraud can be initiated by one or more parties who can include employees, potential or existing clients, agents, suppliers or
outsourcers, or other external parties. We have extensive professional resources allocated for the recovery of lost assets as a result of fraudulent
activity or operational errors, as well as the improvement of loss avoidance experience through both enhanced intelligence and aggressive
pursuit of those who attack enterprise assets.
Operational risk capital
On May 10, 2016, OSFI approved our application to use the Advanced Measurement Approach (AMA) for operational risk, subject to a capital
floor. In Q3 2016, we formally began utilizing AMA to report regulatory capital.
Operational risk loss events
During 2016, we did not experience any material operational risk loss event. For further details on our contingencies, including litigation, refer to
Notes 26 and 27 of our 2016 Annual Consolidated Financial Statements.
Regulatory compliance risk
Regulatory compliance risk is the risk of potential non-conformance with laws, rules, regulations and prescribed practices in any jurisdiction in
which we operate. Issues regarding compliance with laws and regulations can arise in a number of areas in a large complex financial institution
such as RBC, and are often the result of inadequate or failed internal processes, people or systems.
Laws and regulations are in place to protect the financial and other interests of our clients, investors and the public. As a large-scale global
financial institution, we are subject to numerous laws and to extensive and evolving regulation by governmental agencies, supervisory
authorities and self-regulatory organizations in Canada, the U.S., Europe and other jurisdictions in which we operate. In recent years, such
regulation has become increasingly extensive and complex. In addition, the enforcement of regulatory matters has intensified. Recent resolution
of such matters involving other global financial institutions have involved the payment of substantial penalties, agreements with respect to
future operation of their business, actions with respect to relevant personnel and guilty pleas with respect to criminal charges.
Operating in this increasingly complex regulatory environment and intense regulatory enforcement environment, we are and have been
subject to a variety of legal proceedings, including civil claims and lawsuits, criminal charges, regulatory examinations, investigations, audits
and requests for information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions, and we
anticipate that our ongoing business activities will give rise to such matters in the future. 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, increasing our costs of compliance or limiting our activities and ability to
execute our strategic plans. 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,
penalties, and other costs or injunctions, criminal convictions or loss of licences or registrations that would damage our reputation and
negatively impact 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 significant adverse effect on our results or could give rise to significant reputational damage, which in turn could
impact our future business prospects.
Global compliance has developed a Regulatory Compliance Management Framework consistent with regulatory expectations from OSFI and
other regulators. The framework is designed to manage and mitigate the regulatory compliance risks associated with failing to comply with, or
adapt to, current and changing laws and regulations in the jurisdictions in which we operate.
Regulatory compliance risk has been further defined as risks associated with financial crime (which includes, but is not limited to, money
laundering, bribery and sanctions), privacy, market conduct, consumer protection, business conduct and prudential requirements. Specific
compliance policies, procedures and supporting frameworks have been developed to support the minimum requirements for the prudent
management of regulatory compliance risk. Within the framework there are six elements that form a cycle by which all regulatory compliance risk
management programs are developed, implemented and maintained.
The cycle revolves around and is informed by the people, processes, and technology that exist within the organization.
•
•
Global compliance practices and methodologies: compliance policies, processes and methodologies that drive the regulatory
compliance management approach.
Regulatory compliance requirements: laws, rules and regulations with which we must comply.
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Management’s Discussion and Analysis
•
•
•
•
Risk assessment: identification and assessment of regulatory compliance risk to ensure appropriate risk-based monitoring and testing
programs are in place.
Monitoring and testing: risk-based activities conducted to assess compliance with regulatory requirements.
Issues identification and management: identification, timely escalation and management of compliance related issues.
Communication and reporting: timely, accurate and complete reporting to key stakeholders, senior management and the Board of
Directors.
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. Business strategy is the major driver of our risk profile and
consequently the strategic choices we make in terms of business mix determine how our risk profile changes.
Responsibility for selecting and successfully implementing business strategies is mandated to the individual heads of the businesses.
Oversight of strategic risk is the responsibility of the heads of the business segments and their operating committees, the Enterprise Strategy
Office, Group Executive, and the Board of Directors. The Enterprise Strategy group supports the management of strategic risk through the
strategic planning process (articulated within our Enterprise Strategic Planning Policy) ensuring alignment across our business, financial, capital
and risk planning.
For details on the key strategic priorities for our business segments, refer to the Business segment results section.
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 credit risk, regulatory, legal and operational risks
and failure to maintain strong risk conduct. Operational failures and non-compliance with laws and regulations can have a significant
reputational impact on us.
We have put in place a Reputation Risk Framework which provides an overview of our approach to the management of this risk. It focuses on
our organizational responsibilities, and controls in place to mitigate reputation risks.
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 the Board of
Directors.
Legal and regulatory environment risk
Certain regulatory reforms will impact the way in which we operate, both in Canada and abroad, and the full impact of some of these reforms on
our business will not be known until final rules are implemented and market practices have developed in response. We continue to respond to
these and other developments and are working to minimize any potential adverse business or economic impact. The following regulatory reforms
have potential to increase our operational, compliance, and technology costs and adversely affect our profitability.
Canadian Housing Market and Consumer Debt
The Government of Canada (GoC) continues to express concerns with the level and sustainability of Canadian household debt, driven in part by
higher levels of mortgage debt as a result of persistent and unprecedented low interest rates and continued elevation of house prices in the
Vancouver and Toronto markets. The Office of the Superintendent of Financial Institutions (OSFI) has introduced a number of measures to
address these concerns. These include updates to the regulatory capital requirements for loans secured by residential real estate, effective
November 1, 2016, and proposals issued on September 23, 2016 to change the regulatory framework for mortgage insurers to better align
capital requirements to market conditions and more accurately reflect underlying risks. In addition, on July 7, 2016, OSFI released a letter to all
federally regulated financial institutions (FRFIs) outlining the regulator’s expectation for the internal controls and risk management practices of
mortgage lenders and insurers to be sound and take into account changing market developments.
The GoC has also been studying the Canadian housing market, particularly in areas such as affordability, supply and demand, and
long-term sustainability, and, on October 3, 2016, announced additional measures. These include: (i) standardizing the eligibility criteria for
high- and low-ratio insured mortgages (effective November 30, 2016); (ii) introducing a mortgage rate stress test for all insured mortgages
(effective October 17, 2016); (iii) modifying eligibility for the capital gains tax exemption on the sale of a principal residence by non-residents
and certain trusts; and (iv) expanding the authority of the Canada Revenue Agency to improve compliance and administration of the tax system
with respect to the disposition of real estate. In addition, the GoC announced it will be holding further public consultations on whether lender-
risk sharing for government-backed insured mortgages could enhance the current system.
Credit Cards and Interchange Fees
On September 14, 2016, the GoC announced its intention to further assess the fees charged by credit card networks in order to ensure adequate
competition and transparency for Canadian businesses and consumers when it comes to the fees they incur when using credit cards. At the same
time, the GoC indicated it will review the effects of the November 2014 voluntary fee reductions undertaken by Visa and MasterCard‡.
Supervision of Foreign Banking Organizations (FBO)
On February 18, 2014, the U.S. Federal Reserve (Fed) finalized a new oversight regime for non-U.S. banks with subsidiaries, affiliates and
branches operating in the U.S. The Enhanced Prudential Standards applies to all Bank Holding Companies and FBOs and is intended to address
the perceived systemic risk that large foreign banks could pose to U.S. financial markets.
As an FBO with more than US$50 billion in U.S. non-branch assets, we were required to establish a separately capitalized U.S. Intermediate
Holding Company (IHC), into which all of our U.S. legal entities must be placed and for which certain U.S.-based requirements apply. The IHC is
subject to Fed oversight comparable to U.S. bank holding companies. On November 2, 2015, our existing U.S. holding company, RBC USA Holdco
Corporation, became a U.S. bank holding company, subjecting it to certain U.S.-based requirements as a result of our acquisition of City National
Bank Corporation, a U.S. insured depository institution. As of July 1, 2016, our required non-branch and non-agency U.S. assets were transferred
into our U.S. holding company in order to establish the requisite IHC as it applies to RBC as an FBO.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
85
On March 4, 2016, the Fed re-proposed a rule to limit the credit exposures of large banking organizations, including FBOs and IHCs, to
any single counterparty or group of related counterparties. We expect we will need to modify our existing systems and put in place appropriate
monitoring and reporting mechanisms in order to comply with the prescribed limits by the implementation deadline that will be established
once the final rule is issued. If the rule is adopted as proposed, compliance will be required to be met daily, with monthly reporting to the Fed
evidencing compliance.
We continue to enhance our existing risk management oversight and governance framework and practices in order to provide the
governance and infrastructure needed to implement and support the remaining FBO-related requirements over the next several years, including
those that relate to U.S. stress test and capital planning requirements.
Canadian Bail-in Regime
Bail-in regimes are being implemented in a number of jurisdictions in an effort to limit taxpayer exposure to potential losses of a failing
institution and ensure the institution’s shareholders and creditors remain responsible for bearing such losses. On April 20, 2016, the GoC
introduced legislation to create a bank recapitalization or “bail-in” regime for the six domestic systemically important banks (D-SIBs). On
June 22, 2016, legislation came into force, amending the Bank Act, the Canada Deposit Insurance Corporation Act and certain other federal
statutes pertaining to banks to create such a regime for D-SIBs.
Under the regime, if OSFI is of the opinion that a D-SIB has ceased or is about to cease to be viable and its viability cannot be restored
through the exercise of the Superintendent’s powers, the GoC can direct the Canada Deposit Insurance Corporation to convert certain shares and
liabilities of the bank into common shares of the bank or its affiliates. The shares and liabilities that will be subject to conversion, as well as the
terms and conditions of conversion, will be prescribed by regulations to be made at a future date. The legislation also provides that OSFI will
require such designated D-SIBs to maintain a minimum capacity to absorb losses, also known as total loss-absorbing capital (TLAC).
While the specific parameters around conversion and loss-absorbency are not yet known, these changes are not expected to have a
material impact on our cost of long-term unsecured funding.
Total Loss-Absorbing Capacity (TLAC)
On November 9, 2015, the Financial Stability Board (FSB) finalized minimum common international standards related to TLAC of global
systemically important banks (G-SIBs). The standards are intended to address the sufficiency of G-SIBs’ capital to absorb losses in a resolution
situation in a manner that minimizes impact on financial stability and ensures continuity of critical and long-term debt functions. Under the final
standards, G-SIBs would be expected to meet a 16% Risk-Weighted Asset (RWA) requirement by 2019, increasing to 18% by 2022. In addition,
G-SIBs would be expected by 2019 to maintain a TLAC leverage ratio exposure of 6% of the Basel III leverage ratio denominator, increasing to
6.75% by 2022. We would become subject to these enhanced requirements if we are designated as a G-SIB by the FSB in the future. To date,
neither RBC nor any other Canadian bank has been designated as a G-SIB. It is also uncertain how these standards will be integrated into the
Canadian bail-in regime described above.
On October 30, 2015, the Fed proposed rules establishing TLAC, long-term debt, and “clean holding company” requirements for U.S. G-SIBs
and the IHCs of non-U.S. G-SIBs. We are not covered at this time by the proposal, but our U.S. IHC would become subject to these U.S.
requirements should we be designated as a G-SIB in the future.
Global Over-the-Counter (OTC) Derivatives Reform
OTC derivatives reform continues on a global basis, with G20 governments transforming the capital regimes, regulatory frameworks and
infrastructures in which market participants operate. On September 1, 2016, we began to exchange margin on bilateral OTC derivatives in
accordance with U.S. regulatory guidelines and expect to become subject to Canadian rules on March 1, 2017. We will also be subject to EU and
other jurisdictions’ margin rules once deadlines are finalized. Global margin rules represent a fundamental change in how non-centrally cleared
OTC derivatives are traded and require specific documents to be in place with all in-scope counterparties.
To avoid duplicative regulatory requirements and to mitigate banks’ regulatory costs, the Commodity Futures Trading Commission (CFTC)
has issued substituted compliance relief to us and other Canadian banks who are registered as non-U.S. swap dealers. Such relief allows us to
comply with Canadian rules in areas deemed comparable by the CFTC. We, along with other Canadian banks, continues to engage with the CFTC
to ensure ongoing availability of no-action relief and substituted compliance determinations in connection with these U.S. rules.
OTC derivatives reform in the EU is implemented through the European Market Infrastructure Regulation (EMIR) and the review of Markets in
Financial Instruments Directive and accompanying Regulation (together, MiFID II/MiFIR). EU regulations will introduce requirements that certain
products be traded on a new trading venue category, subject to a determination of sufficient liquidity by the European Securities and Markets
Authority (ESMA), for certain OTC derivatives that ESMA has deemed to be subject to the clearing obligation under EMIR. The EU also announced
it would delay implementation of MiFID II/MiFIR until January 2018.
Uniform Fiduciary Standards
On April 6, 2016, the U.S. Department of Labor issued a final rule establishing a uniform fiduciary standard for providers of investment advice
and related services in connection with U.S. retirement plans and holders of individual retirement accounts, effective April 10, 2017. As reported
previously, the rule will impose new requirements and costs on our U.S. Wealth Management brokers and investment advisors who currently
provide individualized investment advice according to a “suitability” standard rather than a fiduciary interest standard.
On April 28, 2016, the Canadian Securities Administrators proposed their own version of a regulatory “best interest standard” intended to
replace the current requirement for registered advisors, dealers and representatives to deal “fairly, honestly, and in good faith” with their clients.
Similar standards have been proposed or finalized in other jurisdictions, including the U.K. and Australia.
While these impacts are not expected to materially affect our overall results, the U.S. rules could significantly impact our U.S. Wealth
Management business. We are considering ways to minimize these impacts, including through changes to our current business structure and
product offerings.
Regulatory Capital and Related Requirements
We continue to monitor and prepare for developments related to regulatory capital. The BCBS has issued a number of proposed revisions and
new measures on a consultative basis that would reform the manner in which banks calculate, measure, and report regulatory capital and related
risks, including with respect to the use of banks’ own internal risk models. The impact of these proposals on us will depend on the final
standards adopted by the BCBS and how these standards are implemented by our regulators. The BCBS expects these proposals to have a
relatively modest impact on capital and leverage for most banks upon finalization. For further details on regulatory capital and related
requirements, refer to the Capital Management section.
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U.K. and European regulatory reform
In March 2016, certain RBC entities became subject to the U.K. Senior Managers Regime, which places a statutory duty on certain employees to
take reasonable steps to prevent regulatory breaches in their areas of responsibility. A certification regime also applied to employees performing
‘significant harm’ roles. New conduct rules will also apply to in-scope employees from March 2017.
The Market Abuse Regulation became effective July 2016 and brought changes to the civil regime for market abuse in the EU, establishing
rules relating to investment recommendations, market soundings, insider lists, and monitoring of suspicious transactions and orders.
Various articles within the Securities Financing Transactions Regulation took effect in 2016, including conditions around the re-use of
collateral provided in the form of securities by EU counterparties.
The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, effective December 2016, requires prescribed
disclosure documents to be provided to retail investors before they purchase PRIIPs. We will be responsible for creating and updating these
documents for products which are manufactured by us, and for providing the relevant documents to clients who purchase PRIIPs from us,
whether manufactured by us or by third parties.
MiFID II/MiFIR becomes effective January 2018 and will have a significant technological and procedural impact for certain businesses
operating in the EU. The reforms will introduce changes to pre- and post-trade transparency, market structure, trade and transaction reporting,
algorithmic trading, and conduct of business.
Following the result of the June 2016 referendum, the U.K. is planning to exit the EU. A formal notice of the U.K. Government’s intention to
withdraw from the EU must be provided to European Council, triggering a two-year negotiation period during which the terms of the U.K.’s exit will
be determined. Until those negotiations are concluded or the negotiation period expires, the U.K. will remain an EU Member State, subject to all
EU legislation.
Competitive risk
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 new technology used or services offered by our competitors, relative service levels, relative prices,
product and service attributes, our reputation, actions taken by our competitors, and adherence with competition and anti-trust laws. Other
companies, such as insurance companies and non-financial companies, are increasingly offering services traditionally provided by banks. For
example, our payments business is facing intense competition from emerging non-traditional competitors. This competition could also reduce
net interest income, fee revenue and adversely affect our results.
Systemic risk
Systemic risk is the risk that the financial system as a whole, or a major part of it – either in an individual country, a region, or globally – is put in
real and immediate danger of collapse or serious damage with the likelihood of material damage to the economy, and that this will result in
financial, reputation or other risks for us.
Systemic risk is considered to be the least controllable risk facing us. Our ability to mitigate this risk when undertaking business activities is
limited, other than through collaborative mechanisms between key industry participants, and, as appropriate, the public sector, to reduce the
frequency and impact of these risks. The two most significant measures in mitigating the impact of systemic risk are diversification and stress
testing.
Our diversified business portfolios, products, activities and funding sources help mitigate the potential impacts from systemic risk. We also
mitigate systemic risk by establishing risk limits to ensure our portfolio is well-diversified, and concentration risk is reduced and remains within
our risk appetite.
Stress testing involves consideration of the simultaneous movements in a number of risk factors. It is used to ensure our business
strategies and capital planning are robust by measuring the potential impacts of credit, market, liquidity and funding and operational risks on us,
under adverse economic conditions. Our enterprise-wide stress testing program uses stress scenarios featuring a range of severities based on
plausible adverse economic and financial market 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. For further details on our stress
testing, refer to the Risk management – Enterprise risk management section.
Overview of other risks
In addition to the risks described in the Risk management section, there are other risk factors, described below, which may adversely affect our
businesses and financial results. The following discussion is not exhaustive as other factors could also adversely affect our results.
Business and economic conditions
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, exchange rates, sovereign debt risks, the level of activity and volatility of the capital markets, strength of the economy
and inflation. For example, an extended economic downturn 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 and result in higher
provisions for credit losses. Given the importance of our Canadian operations, an economic downturn in Canada or in the U.S. impacting Canada
would largely affect our personal and business lending activities in our Canadian banking businesses, including mortgages and credit cards, and
could significantly impact our results of operations.
Our earnings are also sensitive to changes in interest rates. A continuing low interest rate environment in Canada, the U.S. and globally
would result in net interest income being unfavourably impacted by spread compression largely in Personal & Commercial Banking and Wealth
Management. While an increase in interest rates would benefit our businesses that are currently impacted by spread compression, a significant
increase in interest rates could also adversely impact household balance sheets. This could result in credit deterioration which might negatively
impact our financial results, particularly in some of our personal and commercial banking and Wealth Management businesses.
Deterioration in global capital markets could result in volatility that would impact results in Capital Markets while in Wealth Management,
weaker market conditions would lead to lower average fee-based client assets and transaction volumes. In addition, worsening financial and
credit market conditions may adversely affect our ability to access capital markets on favourable terms and could negatively affect our liquidity,
resulting in increased funding costs and lower transaction volumes in Capital Markets and Investor & Treasury Services. For further details on
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
87
economic and market factors which may impact our financial performance, refer to the Wealth Management, Investor & Treasury Services and
Capital Markets sections.
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 Fed 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. Such policies can also adversely affect our clients and counterparties in Canada,
the U.S. and internationally, which may increase the risk of default by such clients and counterparties.
Tax risk and transparency
Tax risk refers to the risk of loss related to unexpected tax liabilities. The tax laws and systems that are applicable to RBC are complex and wide
ranging. As a result, we ensure that any decisions or actions related to tax always reflect our assessment of the long-term costs and risks
involved, including their impact on our relationship with clients, shareholders, and regulators, and our reputation.
Our approach to tax is governed by our Taxation Policy and Risk Management Framework, and reflects the fundamentals of our Risk
Pyramid. Oversight of our tax policy and the management of tax risk is the responsibility of Group Executive, the CAO & CFO and the Senior Vice
President, Taxation. We discuss our tax position with the Audit Committee on a regular basis and discuss our tax strategy with the Audit and Risk
Committees.
Our tax strategy is designed to ensure transparency and support our business strategy, and is aligned with our corporate vision and values.
We seek to maximize shareholder value by ensuring that our businesses are structured in a tax-efficient manner while considering reputational
risk by being in compliance with all laws and regulations. Our framework seeks to ensure that we:
•
•
•
•
Act with integrity and in a straightforward, open and honest manner in all tax matters;
Ensure tax strategy is aligned with our business strategy supporting only bona fide transactions with a business purpose and economic
substance;
Ensure our full compliance and full disclosure to tax authorities of our statutory obligations; and
Endeavour to work with the tax authorities to build positive long-term relationships and where disputes occur, address them
constructively.
With respect to assessing the needs of our clients, we consider a number of factors including the purposes of the transaction. We seek to
ensure that we only support bona fide client transactions with a business purpose and economic substance. Should we become aware of client
transactions that are aimed at evading their tax obligations, we will not proceed with the transaction.
We operate in 38 countries worldwide. Our activities in these countries are subject to both Canadian and international tax legislation and
other regulation, and are fully disclosed to the relevant tax authorities. The Taxation group and GRM both regularly review the activities of all
entities to ensure compliance with tax requirements and other regulations.
Given that we operate globally, complex tax legislation and accounting principles has resulted in differing legal interpretations between the
respective tax authorities we deal with and ourselves, and we are at risk of tax authorities disagreeing with prior positions we have taken for tax
purposes. When this occurs, we are committed to an open and transparent dialogue with the tax authorities to ensure a quick assessment and
prompt resolution of the issues where possible. Failure to adequately manage tax risk and resolve issues with tax authorities in a satisfactory
manner could adversely impact our results, potentially to a material extent in a particular period, and/or significantly impact our reputation.
Tax contribution
In 2016, total income and other tax expense to various levels of governments globally totalled $3.8 billion (2015 – $3.1 billion; 2014 –
$3.2 billion). In Canada, total income and other tax expense for the year ended October 31, 2016 to various levels of government totalled
$2.8 billion (2015 – $1.9 billion; 2014 – $2.2 billion).
Income and other tax expense – by category
(Millions of Canadian dollars)
Income and other tax expense – by geography
(Millions of Canadian dollars)
4,000
3,000
2,000
1,000
0
4,000
3,000
2,000
1,000
0
2016
2015
2014
2016
2015
2014
Business taxes
Insurance premium taxes
Property taxes
Other International
U.S.
Canada
Capital taxes
Payroll taxes
Income taxes
Goods and services
sales taxes
For further details on income and other tax expense, refer to the Financial performance section.
Environmental risk
Environmental risk is the risk of loss to financial, operational or reputational value resulting from the impact of environmental issues. It arises
from the business activities and operations of both us and our clients. Environmental issues that lead to environmental risk are broad and may
include: air emissions, wastewater discharge, waste management, site contamination, environmental regulation, climate change and community
and social impacts. Group Risk Management (GRM) is responsible for establishing policy requirements for the identification, assessment,
control, monitoring and reporting of environmental risk, and for ensuring the policies are reviewed and updated periodically. The environmental
risk associated with our clients and their operations is evaluated in order to establish the due diligence requirements for transactions. Business
segments and corporate functions are responsible for incorporating environmental risk management requirements and controls within their
operations.
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Management’s Discussion and Analysis
We are a signatory to the Equator Principles and applies its credit risk management framework to determine, assess and manage
environmental and social risks in project finance transactions. RBC Global Asset Management is a signatory to the UN Principles for Responsible
Investment. Our approach to responsible investment integrates environmental, social and governance (ESG) issues into the investment process
when doing so may have a material impact on our investment risk or return. Through the Carbon Disclosure Project we regularly publish corporate
disclosure on risks associated with climate change and the management of greenhouse gas emissions from our own operations. We will continue
to investigate and assess climate change risks related to the physical effects of changing climate, transitioning to a low-carbon economy, and
regulatory requirements, and appropriate future climate-related financial disclosures. RBC Corporate Citizenship sets corporate environmental
strategy and reports annually on environmental management in the Corporate Responsibility Report and Public Accountability Statements.
Property insurance businesses can be affected due to changing climate patterns and an increase in the number and cost of claims associated
with severe storms and other natural disasters. On July 1, 2016, we completed the sale of RBC General Insurance Company to Aviva Canada Inc.,
which involved the sale of our home and auto insurance manufacturing business. RBC Insurance had already exited the Property Reinsurance
market in 2006. As a result of these transactions, RBC Insurance does not have any exposure to losses related to property and auto insurance.
Other factors
Other factors that may affect actual results include changes in government trade policy, changes in accounting standards, including their effect
on our accounting policies, estimates and judgments, currency and interest rate movements in Canada, the U.S., and other jurisdictions in which
we operate, changes to our credit ratings, the timely and successful development of new products and services, technological changes, effective
design, implementation and execution of processes and their associated controls, fraud by internal and external parties, the possible impact on
our business from disease or illness that affects local, national or global economies, disruptions to public infrastructure, including
transportation, communication, power and water, international conflicts and other political developments including those relating to the war on
terrorism, and our success in anticipating and managing the associated risks.
We caution that the foregoing discussion of risk factors, many of which are beyond our control, is not exhaustive and other factors could
also affect our results.
Capital management
We actively manage our capital to maintain strong capital ratios and high ratings while providing strong returns to our shareholders. In addition
to the regulatory requirements, we consider the expectations of credit rating agencies, depositors and shareholders, as well as our business
plans, stress tests, 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. It includes our overall approach to capital management, including guiding principles as well as roles and
responsibilities relating to capital adequacy and transactions, dividends, solo capital and management of risk-weighted assets (RWA) and
leverage ratio exposures. We manage and monitor capital from several perspectives, including regulatory capital, economic capital and
subsidiary capital.
Our capital planning is a dynamic process which involves various teams including Finance, Corporate Treasury, GRM, Economics and our
businesses, and covers internal capital ratio targets, potential capital transactions as well as projected dividend payouts and share repurchases.
The integral parts of our capital planning are comprised of our business operating plans, enterprise-wide stress testing and Internal Capital
Adequacy Assessment Process (ICAAP), along with the considerations of regulatory capital requirements and accounting changes, internal
capital requirements, rating agency metrics and solo capital.
Our capital plan is established on an annual basis and is aligned with the management actions included in the annual business operating
plan, which includes forecast growth in assets and earnings taking into account our business strategies, projected market and economic
environment and peer positioning. This includes incorporating potential capital transactions based on our projected internal capital generation,
business forecasts, market conditions and other developments, such as accounting and regulatory changes that may impact capital
requirements. All of the components in the capital plan are monitored throughout the year and are revised as deemed appropriate.
Capital impacts of severe but plausible scenarios
Enterprise-wide
Stress Testing
Capital impacts of
severe but plausible
scenarios
ICAAP
Total capital requirements
Capital available and target
capital ratios
Capital Plan and
Business
Operating Plan
Our Enterprise-wide stress testing and ICAAP provide key inputs for capital planning, including setting the appropriate internal capital ratio
targets. The stress scenarios are evaluated across the organization, and results are integrated to develop an enterprise-wide view of financial
impacts and capital requirements, which in turn facilitate the planning of mitigating actions to absorb exceptional adverse events. ICAAP is an
OSFI mandated annual process to assess capital adequacy and requirements to cover all material risks, with a cushion to cover severe but
plausible contingencies. In accordance with the OSFI guideline, the major components of our ICAAP process include comprehensive risk
assessment, stress testing, capital assessment and planning (both economic and regulatory capital), board and senior management oversight,
monitoring and reporting and internal control review.
Our internal capital targets are established to maintain robust capital positions in excess of OSFI’s Basel III “all-in” regulatory targets. The
stress test results of our Enterprise-wide stress testing and ICAAP are incorporated into the OSFI capital conservation buffer and D-SIBs
surcharge, with a view to ensuring the bank has adequate capital to underpin risks and absorb losses under all plausible stress scenarios given
our risk profile and appetite. In addition, we include a discretionary cushion on top of the OSFI regulatory targets to maintain capital strength for
forthcoming regulatory and accounting changes, peer comparatives, rating agencies sensitivities and solo capital level.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
89
The Board of Directors is responsible for ultimate oversight of capital management, including the annual review and approval of the Capital
Plan. ALCO and GE share responsibility for capital management and receive regular reports detailing our compliance with established limits and
guidelines. The Risk Committee annually approves the Capital Management Framework. The Audit and Risk Committees jointly approve the ICAAP
process. The Audit Committee is also responsible for the ongoing review of internal controls over capital management.
Basel III
Our regulatory capital requirements are determined by guidelines issued by OSFI, which are based on the minimum Basel III capital ratios
proposed by the Basel Committee on Banking Supervision (BCBS). Our capital requirements are determined at a consolidated level.
The BCBS sets out the Basel III transitional requirements for Common Equity Tier 1 capital (CET1), Tier 1 capital and Total capital ratios at
5.125%, 6.625% and 8.625%, respectively for 2016, which would be required to be fully phased-in (“all-in”) to 7.0%, 8.5% and 10.5%,
respectively, by January 1, 2019 (including minimums plus capital conservation buffer of 2.5%). However, other than providing phase-out rules
for non-qualifying capital instruments, OSFI required Canadian banks to meet the BCBS Basel III “all-in” targets for CET1, Tier 1 capital and Total
capital ratios in 2013. Effective January 1, 2016, we were required to include an additional 1% risk-weighted capital surcharge to each tier of
capital for the above all-in requirements given our designation as a domestic systemic important bank (D-SIB) by OSFI in 2013 (similar to five
other Canadian banks designated as D-SIBs).
In 2014, OSFI also advised Canadian banks that it would begin phasing in the Credit Valuation Adjustment (CVA) risk capital charge
required under the Basel III framework. In accordance with OSFI’s guidance, there are two possible options to phase in the CVA capital charge
that a bank may consider. Under the option selected by RBC, the CVA capital charge for CET1, Tier 1 capital and Total capital was 64%, 71%, and
77%, respectively, for 2016. In 2017, the CVA capital charge will be 72%, 77% and 81%, respectively, and will reach 100% for each tier of capital
by 2019.
Under Basel III, banks select from two main approaches, the Standardized Approach or the Internal Ratings Based (IRB) Approach, to
calculate their minimum regulatory capital required to support credit, market and operational risks. We adopted the Basel III IRB approach to
calculate credit risk capital for consolidated regulatory reporting purposes. While the majority of our credit risk exposures are reported under the
Basel III IRB Approach for regulatory capital purposes, certain portfolios continue to use the Basel III Standardized Approach for credit risk (for
example, our Caribbean banking operations and City National). For consolidated regulatory reporting of market risk capital, we use both Internal
Models-based and Standardized Approaches. For consolidated regulatory reporting of operational risk capital, we received approval from OSFI
on May 10, 2016 for the use of the Advance Measurement Approach (AMA) for operational risk capital measurement subject to the application of
a Standardized Approach floor. We commenced reflecting operational risk capital under the AMA in the third quarter of 2016.
In October 2014, OSFI issued its “Leverage Requirements (LR) Guideline”, which replaced the OSFI Assets-to-Capital Multiple (ACM) with the
Basel III Leverage ratio, beginning in the first quarter of 2015. The leverage ratio is defined as Tier 1 capital divided by leverage ratio exposure.
The leverage ratio exposure is the sum of (a) on-balance sheet exposures; (b) derivative exposures; (c) securities financing transaction
exposures and (d) off-balance sheet items. Canadian banks are expected to maintain a leverage ratio that meets or exceeds 3% at all times.
All federally regulated banks with a Basel III leverage ratio total exposure exceeding €200 billion at their financial year-end are required, at a
minimum, to publicly disclose in the first quarter following their year-end, the twelve indicators used in the G-SIB assessment methodology, with
the goal of enhancing the transparency of the relative scale of banks’ potential global systemic importance and data quality. The FSB publishes an
updated list of G-SIBs annually. We were not designated as a G-SIB as of November 2016. However, as we met the BCBS size threshold, we
disclosed the 12 indicators using the OSFI prescribed template for the financial years ended 2014 and 2015 in our Q2 2016 Report to Shareholders.
In January 2016, BCBS issued the revised minimum capital requirements for market risk, with an effective date no later than December
2019. The purpose of the revised market risk framework is to ensure that the standardized and internal model approaches to market risk deliver
credible capital outcomes and promote consistent implementation of the standards across jurisdictions.
In March 2016, the BCBS released a consultation paper entitled, “Pillar 3 disclosure requirements – consolidated and enhanced
framework”. The proposed disclosure enhancements include the addition of a dashboard of key metrics and the disclosure of a risk-weighted
asset benchmark determined only by the application of Basel standardized approaches, referred to as the hypothetical risk-weighted asset
disclosure. In addition, the proposal also includes enhanced granularity for disclosure of prudent valuation adjustments and incorporates
additions to the Pillar 3 framework to reflect ongoing reforms to the regulatory framework, such as the total loss-absorbing capacity regime for G-
SIBs, the proposed operational risk framework, and the final standard for market risk. The BCBS’s proposal would also consolidate all existing
Pillar 3 disclosure requirements of the Basel framework, including the leverage and liquidity ratios disclosure templates. Together with the BCBS
Revised Pillar 3 disclosure requirements issued in January 2015, the proposed disclosure requirements included in this consultation paper
would comprise the single Pillar 3 framework. OSFI originally required D-SIBs to implement the Basel Pillar 3 disclosure requirement by
October 31, 2017, however, in August 2016, the implementation date was extended to October 31, 2018. OSFI’s final Pillar 3 guideline is
expected to be issued in 2017.
In July 2016, BCBS issued an updated version of the Basel III Document – Revisions to the securization framework, incorporating simple,
transparent, and comparable securitization requirements. The revisions set out revised methodologies for the calculation of regulatory capital
requirements for securitization exposures held by banks in the banking book in order to address certain shortcomings identified by the Basel
Committee under the current Basel II securitization framework. It is expected to become effective in January 2018.
We continue to monitor and prepare for developments related to regulatory capital and leverage. The BCBS has issued a number of proposed
revisions and new measures on a consultative basis that would reform the manner in which banks calculate, measure, and report regulatory
capital and related risks, including with respect to the use of banks’ own internal risk models. The BCBS is currently reviewing feedback and
commentary on these revisions and will likely finalize these proposals in early 2017. The BCBS has indicated it does not expect these proposals
to significantly increase capital and leverage for most banks upon finalization.
90
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
The following table provides a summary of OSFI regulatory target ratios under Basel III:
Basel III – OSFI regulatory target
Basel III
Capital ratios
and leverage
OSFI regulatory target requirements for large banks under Basel III
Minimum
including Capital
Conservation
Buffer and D-SIB
surcharge (1)
Minimum
including
Capital
Conservation
Buffer
Capital
Conservation
Buffer
D-SIB
Surcharge (1)
Minimum
Table 71
RBC capital
and leverage
ratios as at
October 31,
2016
Meet or
exceed OSFI
regulatory
target ratios
Common Equity Tier 1
Tier 1 capital
Total capital
Leverage ratio
> 4.5%
> 6.0%
> 8.0%
> 3.0%
2.5%
2.5%
2.5%
n.a.
> 7.0%
> 8.5%
> 10.5%
> 3.0%
1.0%
1.0%
1.0%
n.a.
> 8.0%
> 9.5%
> 11.5%
> 3.0%
10.8%
12.3%
14.4%
4.4%
✓
✓
✓
✓
(1)
n.a.
Effective January 1, 2016, the D-SIBs surcharge is applicable to risk-weighted capital.
not applicable
Regulatory capital, RWA and capital ratios
Under Basel III, regulatory capital consists of CET1, Additional Tier 1 and Tier 2 capital.
CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of certain items and
additional capital components that are subject to threshold deductions.
Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares that meet certain
criteria. Tier 2 capital includes subordinated debentures that meet certain criteria, certain loan loss allowances and non-controlling interests in
subsidiaries Tier 2 instruments. Total capital is defined as the sum of Tier 1 and Tier 2 capital. Preferred shares and subordinated debentures
issued after January 1, 2013 require NVCC features to be included into regulatory capital. For further details on NVCC, refer to the discussion
above.
Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by their respective RWA.
The following chart provides a summary of the major components of CET1, Additional Tier 1 and Tier 2 capital.
Total Capital
Tier 1 Capital
Common Equity Tier 1 (CET1)
+
Additional Tier 1 Capital
+
Tier 2 Capital
Common shares
Retained earnings
Other components of equity
Non-controlling interests in subsidiaries
CET1 instruments
Goodwill and other intangibles
Deferred tax assets on loss
carryforwards
Defined benefit pension funds assets
Non-significant investments in CET1
instruments of Financial Institutions(2)
Shortfall of provisions to expected losses
Significant investments in insurance
subsidiaries and CET1 instruments in
other Financial Institutions
Mortgage servicing rights
Deferred tax assets relating to
temporary differences
Higher quality
capital
s
n
o
i
t
c
u
d
e
D
d
l
o
h
s
e
r
h
T
)
1
(
s
n
o
i
t
c
u
d
e
D
Preferred shares
Non-controlling interests in subsidiaries
Tier 1 instruments
Subordinated debentures
Certain loan loss allowances
Non-controlling interests in subsidiaries
Tier 2 instruments
Non-significant investments in Tier 1
instruments of Financial Institutions(2)
Significant investments in other Financial
Institutions and insurance subsidiaries
Tier 1 instruments
Non-significant investments in Tier 2
instruments of Financial Institutions(2)
Significant investments in other Financial
Institutions and insurance subsidiaries
Tier 2 instruments
Lower quality
capital
(1)
(2)
First level: The amount by which each of the items exceeds a 10% threshold of CET1 capital (after all deductions but before threshold deductions) will be deducted from CET1
capital. Second level: The aggregate amount of the three items not deducted from the first level above and in excess of 15% of CET1 capital after regulatory adjustments will be
deducted from capital, and the remaining balance not deducted will be risk-weighted at 250%.
Non-significant investments are subject to certain CAR criteria that drive the amount eligible for deduction.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
91
The following tables provide details on our regulatory capital, RWA and capital ratios. Our capital position remained strong and our capital ratios
remain well above OSFI regulatory targets:
Regulatory capital, risk-weighted assets (RWA) and capital ratios
Table 72
(Millions of Canadian dollars, except percentage and multiple amounts and as otherwise noted)
Capital (1)
CET1 capital
Tier 1 capital
Total capital
Risk-weighted Assets (RWA) used in calculation of capital ratios (1), (2)
CET1 capital RWA
Tier 1 capital RWA
Total capital RWA
Total capital RWA consisting of: (1)
Credit risk
Market risk
Operational risk
Total capital RWA
Capital ratios and Leverage ratio (1), (3)
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Leverage ratio exposure (billions)
As at
October 31
2016
October 31
2015
$
$
48,181
55,270
64,950
43,715
50,541
58,004
447,436
448,662
449,712
411,756
412,941
413,957
$ 369,751
23,964
55,997
$ 323,870
39,786
50,301
$ 449,712
$ 413,957
10.8%
12.3%
14.4%
4.4%
1,265.1
$
10.6%
12.2%
14.0%
4.3%
1,170.2
$
(1)
(2)
(3)
Capital, RWA, and capital ratios are calculated using OSFI Capital Adequacy Requirements based on the Basel III framework. Leverage
ratios are calculated using OSFI Leverage Requirements Guideline based on the Basel III framework.
In 2015 and 2016, the CVA scalars of 64%, 71% and 77% were applied to CET1, Tier 1 and Total Capital, respectively. In fiscal 2017,
the scalars will be 72%, 77% and 81%, respectively.
To enhance comparability among other global financial institutions, our transitional CET1, Tier 1, Total capital and leverage ratios as at
October 31, 2016 were 11.8%, 12.3%, 14.4%, and 4.5%, respectively. Transitional is defined as capital calculated according to the
current year’s phase-in of regulatory adjustments and phase-out of non-qualifying capital instruments.
92
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Regulatory Capital
(Millions of Canadian dollars)
CET1 capital: instruments and reserves and regulatory adjustments
Directly issued qualifying common share capital (and equivalent for
non-joint stock companies) plus related stock surplus
Retained earnings
Accumulated other comprehensive income (and other reserves)
Directly issued capital subject to phase out from CET1 (only applicable
to non-joint stock companies)
Common share capital issued by subsidiaries and held by third parties
(amount allowed in group CET1)
Regulatory adjustments applied to CET1 under Basel III
Common Equity Tier 1 capital (CET1)
Additional Tier 1 capital: instruments and regulatory adjustments
Directly issued qualifying Additional Tier 1 instruments plus related stock
surplus
Directly issued capital instruments to phase out from Additional Tier 1
Additional Tier 1 instruments issued by subsidiaries and held by third
parties (amount allowed in group AT1)
Regulatory adjustments applied to Additional Tier 1 under Basel III
Additional Tier 1 capital (AT1)
Tier 1 capital (T1 = CET1 + AT1)
Tier 2 capital: instruments and provisions and regulatory adjustments
Directly issued qualifying Tier 2 instruments plus related stock surplus
Directly issued capital instruments subject to phase out from Tier 2
Tier 2 instruments issued by subsidiaries and held by third parties
(amount allowed in group Tier 2)
Collective allowance
Regulatory adjustments applied to Tier 2 under Basel III
Tier 2 capital (T2)
Table 73
All-in basis
2016
2015
$ 18,161
41,217
4,926
$ 14,739
37,645
4,626
–
–
13
(16,136)
13
(13,308)
$ 48,181
$ 43,715
3,825
3,261
3
–
2,350
4,473
3
–
7,089
6,826
$ 55,270
$ 50,541
6,630
2,738
18
294
–
3,073
4,227
29
134
–
$
9,680
$
7,463
Total capital (TC = T1 + T2)
$ 64,950
$ 58,004
2016 vs. 2015
Continuity of CET1 ratio (Basel III)
123 bps
18 bps
(94) bps
10.6%
(24) bps
(9) bps
10.8%
October 31, 2015 (1)
Internal
capital
generation (2)
Net FX
Impact
CNB
acquisition
Pension and
post-employment
benefit obligations
Share
repurchases
October 31, 2016 (1)
(1)
(2)
Represents rounded figures.
Internal capital generation includes $5.1 billion which represents Net income available to shareholders, less common and preferred shares dividends and
excludes $235 million relating to the gain on the sale of RBC General Insurance Company to Aviva Canada Inc.
Our CET1 ratio was 10.8%, up 20 bps from last year, mainly reflecting internal capital generation and the impact of foreign exchange translation.
These factors were partially offset by the acquisition of City National, the impact of lower discount rates in determining our pension and other
post-employment benefit obligations, and share repurchases.
Our Tier 1 capital ratio of 12.3% was up 10 bps, mainly due to the factors noted above under the CET1 ratio and the net issuance of
additional Tier 1 capital instruments.
Our Total capital ratio of 14.4% was up 40 bps, mainly due to the factors noted above under the Tier 1 capital ratio and the net issuance of
subordinated debentures.
Our Leverage ratio was up 10 bps, mainly due to internal capital generation, partially offset by the acquisition of City National and higher
leverage ratio exposures reflecting business growth, primarily in loans.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
93
Basel III RWA
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. In addition,
OSFI requires the minimum risk-based capital to be no less than 90% of the capital requirements as calculated under the Basel I standards.
If the capital requirement is less than 90%, a transitional adjustment to RWA must be applied as prescribed by OSFI CAR guidelines.
Total capital risk-weighted assets
As at October 31 (Millions of Canadian dollars,
except percentage amounts)
Credit risk
Lending-related and other
Residential mortgages
Other retail
Business
Sovereign
Bank
2016
Risk-weighted assets
Table 74
2015
Standardized
approach
Advanced
approach
Other
Total
Total
Average
of risk
weights (2)
Exposure (1)
$
232,398
230,376
319,208
103,218
123,799
7% $
23%
58%
9%
10%
6,546 $ 10,818 $
5,632
42,933
2,929
2,161
46,532
143,352
6,847
9,640
– $ 17,364
52,164
–
186,285
–
9,776
–
11,801
–
$ 12,797
51,157
151,565
9,175
7,695
Total lending-related and other
$ 1,008,999
27% $
60,201 $ 217,189 $
– $ 277,390
$ 232,389
Trading-related
Repo-style transactions
Derivatives – including CVA – CET1
phase-in adjustment
$
396,013
2% $
69 $
7,780 $
75 $
7,924
$
6,680
96,565
31%
815
17,197
11,784
29,796
29,332
Total trading-related
$
492,578
8% $
884 $ 24,977 $ 11,859 $ 37,720
$ 36,012
Total lending-related and other and
$ 1,501,577
2,442
59,933
n.a.
45,259
$ 1,609,211
trading-related
Bank book equities
Securitization exposures
Regulatory scaling factor
Other assets
Total credit risk
Market risk
Interest rate
Equity
Foreign exchange
Commodities
Specific risk
Incremental risk charge
Total market risk
Operational risk
CET1 capital risk-weighted assets (3)
$ 1,609,211
Additional CVA adjustment, prescribed
by OSFI, for Tier 1 capital
Tier 1 capital risk-weighted assets (3)
$ 1,609,211
Additional CVA adjustment, prescribed
by OSFI, for Total capital
Total capital risk-weighted assets (3)
$ 1,609,211
21% $
97%
16%
n.a.
56%
61,085 $ 242,166 $ 11,859 $ 315,110
2,362
9,591
15,028
25,384
2,362
6,700
15,028
n.a.
–
–
–
25,384
–
2,891
n.a.
n.a.
$ 268,401
2,045
7,363
14,400
29,460
23% $
63,976 $ 266,256 $ 37,243 $ 367,475
$ 321,669
$
$
$
$
$
$
1,835 $
1,518
875
313
3,824
–
2,649 $
1,487
56
13
1,906
9,488
– $
–
–
–
–
–
4,484
3,005
931
326
5,730
9,488
$
8,174
3,731
988
956
11,800
14,137
8,365 $ 15,599 $
– $ 23,964
$ 39,786
3,891
52,106
n.a. $ 55,997
$ 50,301
76,232
333,961
37,243 $ 447,436
$ 411,756
76,232
333,961
38,469 $ 448,662
$ 412,941
1,226
1,226
1,185
76,232 $ 333,961 $ 39,519 $ 449,712
$ 413,957
1,050
1,050
1,016
(1)
(2)
(3)
n.a.
Total exposure represents exposure at default which is the expected gross exposure upon the default of an obligor. This amount is before any allowance against impaired loans 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.
In fiscal 2015 and 2016, the CVA scalars of 64%, 71% and 77%, were applied to CET1, Tier 1 and Total Capital, respectively. In 2017, the scalars will be 72%, 77% and 81%, respectively.
not applicable
2016 vs. 2015
During the year, CET1 RWA was up $36 billion, primarily as a result of the acquisition of City National and higher RWA (excluding the impact of
foreign exchange translation), mainly in loans, partially offset by the impact of foreign exchange translation.
94
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Selected capital management activity
The following table provides our selected capital management activity for the year ended October 31, 2016.
Selected capital management activity
(Millions of Canadian dollars, except number of shares)
Tier 1 capital
Common shares issued
Issued in connection with share-based compensation
plans (1)
Table 75
2016
Issuance or
redemption date
Number of
shares (000s)
Amount
Issued in connection with the acquisition of City National
Purchased for cancellation (2)
Issuance of preferred shares Series BK (3), (4)
Issuance of preferred shares Series BM (3), (4)
Redemption of RBC Trust Capital Securities – Series 2015 (3)
Tier 2 capital
Issuance of January 20, 2026 subordinated debentures (3), (4)
Issuance of January 27, 2026 subordinated debentures (3), (4)
Redemption of November 2, 2020 subordinated debentures (3)
Other
Issuance of preferred shares Series C-1 (3), (5)
Issuance of preferred shares Series C-2 (3), (5)
Purchase for cancellation of preferred shares Series C-1 (3), (5)
Purchase for cancellation of preferred shares Series C-2 (3), (5)
November 2, 2015
December 16, 2015
March 7, 2016
December 31, 2015
January 20, 2016
January 27, 2016
November 2, 2015
November 2, 2015
November 2, 2015
February 24, 2016
February 24, 2016
4,981 $
41,619
(4,629)
29,000
30,000
175
100
(93)
(80)
307
3,115
(56)
725
750
(1,200)
1,500
2,106
(1,500)
227
153
(120)
(122)
(1)
(2)
(3)
(4)
(5)
Amounts include cash received for stock options exercised during the period and the fair value adjustments to stock options.
Based on book value.
For further details, refer to Notes 19 and 21 of our audited 2016 Annual Consolidated Financial Statements.
Non-Viable Contingent Capital (NVCC) capital instruments.
Based on fair value.
On May 30, 2016, we announced our normal course issuer bid (NCIB), which commenced on June 1, 2016 and continues until May 31, 2017.
In 2016, we repurchased approximately 4.6 million of our common shares. The total cost of the shares repurchased was $362 million, comprised
of a book value of $56 million, with an additional $306 million premium paid on repurchase.
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. In 2016, our dividend payout ratio was 48%, which met our dividend payout ratio target of 40% to 50%. Common
share dividends paid during the year were $4.8 billion.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
95
Selected share data (1)
(Millions of Canadian dollars, except
number of shares and as otherwise noted)
Common shares outstanding
First preferred shares outstanding
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 AJ (3)
Non-cumulative Series AK (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)
Non-cumulative Series AZ (3), (4)
Non-cumulative Series BB (3), (4)
Non-cumulative Series BD (3), (4)
Non-cumulative Series BF (3), (4)
Non-cumulative Series BH (4)
Non-cumulative Series BI (4)
Non-cumulative Series BJ (4)
Non-cumulative Series BK (3), (4)
Non-cumulative Series BM (3), (4)
Non-cumulative Series C-1 (5)
Non-cumulative Series C-2 (5)
Treasury shares held – preferred
Treasury shares held – common
Stock options
Outstanding (6)
Exercisable
Dividends
Common
Preferred
2016
2015
Number of
shares
(000s)
Dividends
declared
per share
Number of
shares
(000s)
Amount
Dividends
declared
per share
Number of
shares
(000s)
Amount
Table 76
Dividends
declared
per share
2014
Amount
1,485,394 $ 17,939 $
3.24
1,443,423 $ 14,573 $
3.08
1,442,233 $ 14,511 $
2.84
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
13,579
2,421
12,000
–
–
–
–
–
–
20,000
20,000
24,000
12,000
6,000
6,000
6,000
29,000
30,000
82
20
31
(1,159)
11,388
6,909
1.23
300
1.11
300
1.18
300
1.15
200
1.13
250
1.13
250
1.11
200
1.13
250
0.88
339
0.60
61
1.07
300
–
–
–
–
–
–
–
–
–
–
–
–
1.00
500
0.98
500
0.90
600
0.90
300
1.23
150
1.23
150
1.51
150
1.29
725
750
0.98
107 US$55.00
31 US$67.50
–
(80)
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
13,579
2,421
12,000
–
–
–
–
–
–
20,000
20,000
24,000
12,000
6,000
6,000
6,000
–
–
–
–
(63)
532
8,182
5,231
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
0.88
0.67
1.07
–
–
–
–
–
–
1.00
0.98
0.73
0.63
0.58
0.42
–
–
–
–
–
300
300
300
200
250
250
200
250
339
61
300
–
–
–
–
–
–
500
500
600
300
150
150
150
–
–
–
–
(2)
38
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
13,579
2,421
12,000
–
–
–
–
–
13,000
20,000
20,000
–
–
–
–
–
–
–
–
–
1
892
8,579
4,987
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
0.97
0.53
1.15
0.39
0.39
0.39
1.17
1.17
1.53
0.50
0.46
–
–
–
–
–
–
–
–
–
300
300
300
200
250
250
200
250
339
61
300
–
–
–
–
–
325
500
500
–
–
–
–
–
–
–
–
–
–
71
4,817
294
4,443
191
4,097
213
(1)
(2)
(3)
(4)
(5)
(6)
For further details about our capital management activity, refer to Note 21 of our audited 2016 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.
NVCC capital instruments.
Represents 3,282,000 and 815,400 depositary shares relating to preferred shares Series C-1 and Series C-2, respectively. Each depositary share represents one-fortieth interest in a share
of Series C-1 and Series C-2, respectively.
Effective Q1 2016, includes share-based compensation awards from our acquisition of City National.
As at November 25, 2016, the number of outstanding common shares and stock options and awards was 1,485,641,741 and 11,136,292,
respectively, and the number of Treasury shares – preferred and Treasury shares – common was (30,253) and (369,236), respectively.
NVCC provisions require the conversion of the capital instrument into a variable number of common shares in the event that OSFI deems
the Bank to be non-viable or a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept
a capital injection. If a NVCC trigger event were to occur, our NVCC capital instruments preferred shares Series AZ, preferred shares Series BB,
preferred shares Series BD, preferred shares Series BF, preferred shares Series BH, preferred shares Series BI, preferred shares Series BJ,
preferred shares Series BK, preferred shares Series BM, subordinated debentures due on July 17, 2024, subordinated debentures due on
September 29, 2026, subordinated debentures due on June 4, 2025, subordinated debentures due on January 20, 2026 and subordinated
debentures due on January 27, 2026 would be converted into RBC common shares pursuant to an automatic conversion formula with a
conversion price based on the greater of: (i) a contractual floor price of $5.00, and (ii) the current market price of our common shares at the time
of the trigger event (10-day weighted average). Based on a floor price of $5.00 and including an estimate for accrued dividends and interest,
these NVCC capital instruments would convert into a maximum of 2,762 million RBC common shares, on aggregate, which would represent a
dilution impact of 65% based on the number of RBC common shares outstanding as at October 31, 2016.
Attributed capital
Our methodology for allocating capital to our business segments is based on the higher of fully diversified economic capital and the Basel III
regulatory capital requirements. Risk-based capital attribution provides a uniform base for performance measurement among business
segments, which compares to our overall corporate return objective and facilitates management decisions in resource allocation in conjunction
with other factors.
Attributed capital is calculated and attributed on a wider array of risks compared to Basel III regulatory capital requirements, which are
calibrated predominantly to target credit, market (trading) and operational risk measures. 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
96
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
maintain strong credit ratings. Economic capital is calculated based on credit, market (trading and non-trading), operational, business and fixed
asset, and insurance risks, along with capital attribution for goodwill and other intangibles. The common risks between the two frameworks are
aligned to reflect increased regulatory requirements.
•
Business risk is the risk of loss or harm due to variances in volumes, prices and costs caused by competitive forces, regulatory changes,
reputation and strategic risks.
Fixed asset risk is defined as the risk that the value of fixed assets will be less than their book value at a future date.
•
For further discussion on Credit, Market, Operational and Insurance risks, refer to the Risk management section.
Attributed 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 loss absorption features such as preferred shares that exceed Economic capital
with a comfortable cushion.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are monitored to ensure
that the economic capital framework remains comprehensive and consistent. The models are benchmarked to leading industry practices via
participation in surveys, reviews of methodologies and ongoing interaction with external risk management industry professionals.
The following outlines our attributed capital:
Attributed capital
(Millions of Canadian dollars)
Credit risk
Market risk (trading and non-trading)
Operational risk
Business and fixed asset risk
Insurance risk
Goodwill and other intangibles
Regulatory capital allocation
Attributed capital
Unattributed capital
Average common equity
Table 77
2016
2015
$ 20,550
3,200
4,900
3,100
650
16,100
8,900
$ 57,400
4,800
$ 16,400
3,900
4,600
2,900
550
11,900
5,400
$ 45,650
6,650
$ 62,200
$ 52,300
2016 vs. 2015
Attributed capital increased $12 billion largely due to higher Credit and Goodwill and other intangibles risks, reflecting the acquisition of
City National, business growth, and the impact of foreign exchange translation. Higher regulatory capital allocation, reflecting a higher capital
attribution rate, also contributed to the increase.
The increase in Operational and Business and fixed asset risks reflects higher revenue.
Market risk decreased largely due to changes in risk treatment of certain portfolios and reduced inventories in fixed income and securitized
product portfolios.
We remain well capitalized with current levels of available capital exceeding the attributed capital required to underpin all of our material
risks.
Attributed capital in the context of our business activities
In carrying out our business activities, we are exposed to a range of risks. The following chart provides a high level view of risks within our
business segments, which includes credit, market and operational risks. We have used attributed capital to illustrate the relative size of the
risks in each of our businesses. The attributed capital distribution reflects the diversified nature of our business activities. RWA represents our
exposure to credit, market and operational risk for regulatory capital requirements.
Within Personal & Commercial Banking, credit risk is the most significant risk, largely related to our personal financial services, business
financial services and cards businesses. The primary risks within Wealth Management, which provides services to institutional and individual
clients, are operational risk and credit risk. Risks within our Insurance operations are primarily related to insurance risk in our life and health
businesses followed by market risk and operational risk. The largest risk within Investor & Treasury Services is market risk, followed by credit risk
and operational risk. The most significant risk within Capital Markets is credit risk, followed by market risk.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
97
For additional information on the risks highlighted below, refer to the Risk management section.
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill and other
intangibles
Other (3)
26
28
33%
5
8
RWA (C$ millions) (4)
Credit
Market
Operational
$367,475
23,964
55,997
Royal Bank of
Canada
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury Services
Capital Markets
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill and other
intangibles
Other (5)
26
17
45%
2
10
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill and other
intangibles
Other (5)
63
9
19%
1
8
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill and other
intangibles
Other (5)
9
50
12%
14
15
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill and other
intangibles
Other (5)
15
40
11%
24
10
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill and other
intangibles
Other (5)
6
31
47%
9
7
RWA (C$ millions) (4)
Credit
Market
Operational
$128,691
156
22,746
RWA (C$ millions) (4)
Credit
Market
Operational
$51,498
573
12,895
RWA (C$ millions) (6)
Credit
Market
Operational
$8,011
1
–
RWA (C$ millions) (4)
Credit
Market
Operational
$18,007
8,453
3,880
RWA (C$ millions) (4)
Credit
Market
Operational
$156,938
14,432
15,880
(1)
(2)
(3)
(4)
(5)
(6)
Attributed capital: An estimate of the amount of equity capital required to underpin risks. It is calculated by estimating the level of capital that is necessary to support our various business,
given their risks, consistent with our desired solvency standard and credit ratings.
Market risk attributed capital: An estimate of the amount of equity capital required to underpin trading market risk and interest rate risk.
Other – RBC: Includes (a) an estimate of the amount of equity capital required to underpin risks associated with business, fixed assets and insurance risks; (b) a regulatory capital adjustment
since attributed capital is determined at the higher of regulatory or economic capital; and (c) unattributed capital reported representing common equity in excess of common equity attributed
to our business segments which is reported in the Corporate Support segment only.
RWA amount above represents RWA for CET1.
Other – Business segments: Includes (a) an estimate of the amount of equity capital required to underpin risks associated with business, fixed assets and insurance risks; and (b) a
regulatory capital adjustment since attributed capital is determined at the business segment level as the greater of regulatory or economic capital.
Insurance RWA amount above represents our investments in the insurance subsidiaries capitalized at the regulatory prescribed rate as required under Basel CAR filing.
Subsidiary capital
Our capital management framework includes the management of our subsidiaries’ capital. We invest capital across the enterprise to meet any
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 any local regulatory capital adequacy requirements, which
may include restrictions on the transfer of assets in the form of cash, dividends, loans or advances. Concurrently, Corporate Treasury provides
centralized oversight of capital adequacy across all subsidiary entities.
Other considerations affecting capital
Capital treatment for equity investments in other entities is determined by a combination of accounting and regulatory guidelines based on the
size or nature of the investment. Three broad approaches apply as follows:
•
•
Consolidation: entities which we control are consolidated on our Consolidated Balance Sheets.
Deduction: certain holdings are deducted from our regulatory capital. These include all unconsolidated “substantial investments,” as
defined by the Bank Act (Canada) in the capital of financial institutions, as well as all investments in insurance subsidiaries.
Risk weighting: equity investments that are not deducted from capital are risk weighted at a prescribed rate for determination of capital
charges.
•
Regulatory capital approach for securitization exposures
For our securitization exposures, we use an internal assessment approach (IAA) for exposures related to our ABCP business, and for other
securitization exposures we use a combination of approaches including a ratings-based approach and the standardized approach.
While our IAA rating methodologies are based in large part on criteria that are published by External Credit Assessment Institutions (ECAIs)
such as S&P and therefore are similar to the methodologies used by these institutions, they are not identical. Our ratings process includes a
comparison of the available credit enhancement in a securitization structure to a stressed level of projected losses. The stress level used is
determined by the desired risk profile of the transaction. As a result, we stress the cash flows of a given transaction at a higher level in order to
achieve a higher rating. Conversely, transactions that only pass lower stress levels achieve lower ratings.
98
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Most of the other securitization exposures (non-ABCP) carry external ratings and we use the lower of our own rating or the lowest external
rating for determining the proper capital allocation for these positions. We periodically compare our own ratings to ECAIs ratings to ensure that
the ratings provided by ECAIs are reasonable.
GRM has responsibility for providing risk assessments for capital purposes in respect of all our banking book exposures. GRM is
independent of the business originating the securitization exposures and performs its own analysis, sometimes in conjunction with but always
independent of the applicable business. GRM has developed asset class specific criteria guidelines which provide the rating methodologies for
each asset class. The guidelines are reviewed periodically and are subject to the ratings replication process mandated by Pillar I of the Basel
rules.
Additional financial information
Exposure to U.S. subprime and Alt-A through 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 exposures
to U.S. subprime and Alt-A residential mortgages of $71 million represented less than 0.1% of our total assets as at October 31, 2016, compared
to $423 million or less than 0.1% last year. The decrease of $352 million was primarily due to the sale of certain securities.
Commercial mortgage-backed securities
The fair value of our total direct holdings of Canadian and U.S. commercial mortgage-backed securities was $355 million as at October 31, 2016.
Assets and liabilities measured at fair value
Our financial instruments carried at fair value are classified as Level 1, 2 or 3, in accordance with the fair value hierarchy set out in International
Financial Reporting Standards (IFRS) 13, Fair Value Measurement. For further details on the fair value of our financial instruments and transfers
between levels of the fair value hierarchy, refer to Note 3 of our audited 2016 Annual Consolidated Financial Statements.
The following table presents the total fair value of each major class of financial assets and financial liabilities measured at fair value and the
percentage of the fair value of each class categorized as Level 1, 2 or 3:
Assets and liabilities measured at fair value
Table 78
As at October 31, 2016
(Millions of Canadian dollars, except percentage amounts)
Fair value
Level 1
Level 2
Level 3
Total
Financial assets
Securities at FVTPL
Available-for-sale
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans
Derivatives (1)
Financial liabilities
Deposits
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned
Derivatives (1)
$ 151,292
69,833
40%
6
60%
90
–% 100%
4
100
121,692
2,412
216,086
–
–
1
100
86
99
–
14
–
100
100
100
$ 98,856
50,369
–%
65
100%
35
–% 100%
–
100
88,863
212,781
–
1
100
98
–
1
100
100
(1)
The derivative assets and liabilities presented in the table above do not reflect the impact of netting.
Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies, judgments, estimates and assumptions
Our significant accounting policies are described in Note 2 to our audited 2016 Annual Consolidated Financial Statements. Certain of these
policies, as well as estimates made by management in applying such policies, are recognized as critical because they require us to make
particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that significantly different
amounts could be reported under different conditions or using different assumptions. Our critical accounting judgments, estimates and
assumptions relate to the fair value of financial instruments, allowance for credit losses, goodwill and other intangible assets, employee
benefits, consolidation, derecognition of financial assets, securities impairment, application of the effective interest method, provisions,
insurance claims and policy benefit liabilities, 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,
judgments, estimates and assumptions.
Fair value of financial instruments and securities impairment
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. We determine fair value by incorporating all factors that market participants would
consider in setting a price, including commonly accepted valuation approaches.
The Board of Directors provides oversight on valuation of financial instruments, primarily through the Audit Committee and Risk Committee.
The Audit Committee reviews the presentation and disclosure of financial instruments that are measured at fair value, while the Risk Committee
assesses adequacy of governance structures and control processes for valuation of these instruments.
We have established policies, procedures and controls for valuation methodologies and techniques to ensure fair value is reasonably
estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition, independent price verification
(IPV) and model validation standards. These control processes are managed by either Finance or GRM and are independent of the relevant
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
99
businesses and their trading functions. Profit and loss decomposition is a process to explain the fair value changes of certain positions and is
performed daily for trading portfolios. All fair value instruments are subject to IPV, a process whereby trading function valuations are verified
against external market prices and other relevant market data. Market data sources include traded prices, brokers and price vendors. We give
priority to those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is determined over
time by comparing third-party price values to traders’ or system values, to other pricing service values and, when available, to actual trade data.
Other valuation techniques are used when a price or quote is not available. Some valuation processes use models to determine fair value. We
have a systematic and consistent approach to control model use. Valuation models are approved for use within our model risk management
framework. The framework addresses, among other things, model development standards, validation processes and procedures, and approval
authorities. Model validation ensures that a model is suitable for its intended use and sets parameters for its use. All models are revalidated
regularly by qualified personnel who are independent of the model design and development. Annually our model risk profile is reported to the
Board of Directors.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). Determination of fair value based on this hierarchy requires the use of observable market data whenever available. Level 1 inputs are
unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2
inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full term
of the assets or liabilities. Level 3 inputs are one or more inputs that are unobservable and significant to the fair value of the asset or liability.
Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. The
availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the hierarchy for
disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant
sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation
techniques. For more complex or illiquid instruments, significant judgment is required in the determination of the model used, the selection of
model inputs, and in some cases the application of valuation adjustments to the model value or quoted price for inactively traded financial
instruments, as the selection of model inputs may be subjective and the inputs may be unobservable. Unobservable inputs are inherently
uncertain as there is little or no market data available from which to determine the level at which the transaction would occur under normal
business circumstances. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk
valuation adjustments are assessed in all such instances.
We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences between the
overnight index swap (OIS) curve and London Interbank Offered Rates (LIBOR) for collateralized derivatives, funding valuation adjustments (FVA)
for uncollateralized and under-collateralized OTC derivatives, unrealized gains or losses at inception of the transaction, bid-offer spreads,
unobservable parameters and model limitations. These adjustments may be subjective as they require significant judgment in the input
selection, such as probability of default and recovery rate, and are intended to arrive at fair value that is determined based on assumptions that
market participants would use in pricing the financial instrument. The realized price for a transaction may be different from its recorded value
that is previously estimated using management judgment, and may therefore impact unrealized gains and losses recognized in Non-interest
income – Trading revenue or Other.
Valuation adjustments are recorded for the credit risk of our derivative portfolios in order to arrive at their fair values. CVA takes into account
our counterparties’ creditworthiness, the current and potential future mark-to-market of the transactions, and the effects of credit mitigants such
as master netting and collateral agreements. CVA amounts are derived from estimates of exposure at default, probability of default, recovery
rates on a counterparty basis, and market and credit factor correlations. Exposure at default is the amount of expected derivative related assets
and liabilities at the time of default, estimated through modelling using underlying risk factors. Probability of default and recovery rate are
generally implied from the market prices for credit protection and credit ratings of the counterparty. Correlation is the statistical measure of how
credit and market factors may move in relation to one another. Correlation is estimated using historical data and market data where available.
CVA is calculated daily and changes are recorded in Non-interest income – Trading revenue.
In the determination of fair value of collateralized OTC derivatives using the OIS curve, our valuation approach accounts for the difference
between certain OIS rates and LIBOR for derivatives valuation as valuation adjustments.
FVA are also calculated to incorporate cost and benefit of funding in the valuation of uncollateralized and under-collateralized OTC
derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a
funding curve, implied volatilities and correlations as inputs.
Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument contract where
the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by other observable market
transactions based on a valuation technique incorporating observable market data.
A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid or offer price
for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the mid to either the bid or offer price.
Some valuation models require parameter calibration from such factors as market observed option prices. The calibration of parameters
may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation adjustment is also estimated to mitigate
the uncertainties of parameter calibration and model limitations.
We classify our financial instruments measured at fair value on a recurring basis into three levels based on the transparency of the inputs
used to measure the fair values of the instruments. As at October 31, 2016, Level 2 instruments, whose fair values are based on observable
inputs, include $505 billion of financial assets (October 31, 2015 – $456 billion) and $413 billion of financial liabilities (October 31, 2015 –
$394 billion). These amounts represent 87% of our total financial assets at fair value (October 31, 2015 – 85%) and 92% of our total financial
liabilities at fair value (October 31, 2015 – 91%), respectively. Level 3 instruments, whose valuations include significant unobservable inputs,
include $4 billion of financial assets (October 31, 2015 – $6 billion) and $2 billion of financial liabilities (October 31, 2015 – $2 billion),
representing 1% of our total financial assets at fair value (October 31, 2015 – 1%) and 0.4% of our total financial liabilities at fair value
(October 31, 2015 – 1%), respectively.
At each reporting date or more frequently when conditions warrant, we evaluate our AFS securities to determine whether there is any
objective evidence of impairment, such as a significant or prolonged decline in the fair value of the security below its cost or when an adverse
effect on future cash flows from the security can be reliably estimated. When assessing impairment for debt instruments we primarily consider
counterparty ratings and security-specific factors, including collateral, external ratings, subordination and other market factors. For complex debt
instruments 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,
100
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
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 result indicates 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. As equity securities do not have contractual cash flows, they are assessed differently than debt securities. In
assessing whether there is any objective evidence that suggests that the security is impaired we consider factors which 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. If an AFS security is impaired, the cumulative unrealized losses previously recognized in Other components of
equity are recognized directly in income under Non-interest income. As at October 31, 2016, our gross unrealized losses on AFS securities were
$254 million (October 31, 2015 – $304 million). Refer to Note 4 to our audited 2016 Annual Consolidated Financial Statements for more
information.
Allowance for credit losses
We maintain allowance for credit losses relating to on-balance sheet exposures, such as loans and acceptances, and off-balance sheet items
such as letters of credit, guarantees and unfunded commitments, at levels that management considers appropriate to cover credit related losses
incurred as at the balance sheet date.
Allowances are determined individually for loans that are individually significant, and collectively for loans that are not individually
significant and loans which are significant but for which there is no objective evidence of impairment, using current and historical credit
information in both quantitative and qualitative assessments. For further information on allowance for credit losses, refer to Note 5 to our
audited 2016 Annual Consolidated Financial Statements.
Individually assessed loans
Loans which are individually significant are assessed individually for objective indicators of impairment. A loan is considered impaired when
management determines that it will not be able to collect all amounts due according to the original contractual terms or the equivalent value.
Credit exposures of individually significant loans are evaluated based on factors including the borrower’s overall financial condition,
resources and payment record, and where applicable, the realizable value of any collateral. If there is evidence of impairment leading to an
impairment loss, then the amount of the loss is determined as the difference between the carrying amount of the loan, including accrued
interest, and the estimated recoverable amount. The estimated recoverable amount is measured as the present value of expected future cash
flows discounted at the loan’s original effective interest rate, including cash flows that may result from the realization of collateral less costs
to sell.
Collectively assessed loans
Loans which are not individually significant, or which are individually assessed and not determined to be impaired, are collectively assessed for
impairment. For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar risk characteristics, taking into
account loan type, industry, geographic location, collateral type, past due status and other relevant factors.
The collective impairment allowance is determined by reviewing factors including: (i) historical loss experience, which takes into
consideration historical probabilities of default, loss given default and exposure at default, in portfolios of similar credit risk characteristics, and
(ii) management’s judgment on the level of impairment losses based on historical experience relative to the actual level as reported at the
balance sheet date, taking into consideration the current portfolio credit quality trends, business and economic and credit conditions, the impact
of policy and process changes, and other supporting factors. Future cash flows for a group of loans are collectively evaluated for impairment on
the basis of the contractual cash flows of the loans in the group and historical loss experience for loans with credit risk characteristics similar to
those in the group. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not
affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not
currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience.
Write-off of loans
Loans and the related impairment allowance for credit losses are written off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realization of the collateral. In
circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery,
write off may be earlier. For credit cards, the balances and related allowance for credit losses are written off when payment is 180 days in arrears.
Personal loans are generally written off at 150 days past due.
Total allowance for credit losses
Based on the procedures discussed above, management believes that the total allowance for credit losses of $2,326 million is adequate to
absorb estimated credit losses incurred in the lending portfolio as at October 31, 2016 (October 31, 2015 – $2,120 million). This amount
includes $91 million (October 31, 2015 – $91 million) classified in Provisions under Other liabilities on our Consolidated Balance Sheets, which
relates to off-balance sheet and other items.
Goodwill and other intangible assets
We allocate goodwill to groups of cash-generating units (CGU). Goodwill is not amortized and is tested for impairment on an annual basis, or
more frequently if there are objective indications of impairment. We test for impairment by comparing the recoverable amount of a CGU with its
carrying amount. A CGU’s recoverable amount is the higher of its fair value less cost of disposal and its value in use. The carrying amount of a
CGU comprises the carrying amount of assets, liabilities, and goodwill allocated to the CGU. When the carrying value of a CGU exceeds its
recoverable amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the
other assets of the CGU proportionally based on the carrying amount of each asset. Any impairment charge is recognized in income in the period
it is identified. Subsequent reversals of goodwill impairment are prohibited.
We estimate the value in use and fair value less costs of disposal of our CGUs primarily using a discounted cash flow method which
incorporates each CGU’s internal forecasts of revenues and expenses. Significant management judgment is applied in the determination of
expected future cash flows (uncertainty in timing and amount), discount rates (based on CGU-specific risks) and terminal growth rates.
CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk and government
regulation), currency risk and price risk (including product pricing risk and inflation). If the forecast earnings and other assumptions in future
periods deviate significantly from the current amounts used in our impairment testing, the value of our goodwill could become impaired.
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Other intangible assets with a finite life are amortized on a straight-line basis over their estimated useful lives as follows: computer
software – 3 to 10 years and customer relationships – 10 to 20 years. They are assessed for indicators of impairment at each reporting period if
there is an indication that an asset may be impaired. An impairment test is performed by comparing the carrying amount of the intangible asset
to its recoverable amount. Where it is not possible to estimate the recoverable amount of an individual asset, we estimate the recoverable
amount of the CGU to which the asset belongs. If the recoverable amount of the asset (or CGU) is less than its carrying amount, the carrying
amount of the intangible asset is written down to its recoverable amount as an impairment loss. An impairment loss recognized previously is
reversed if there is a change in the estimates used to determine the recoverable amount of the asset (or CGU) since the last impairment loss was
recognized. If an impairment loss is subsequently reversed, the carrying amount of the asset (or CGU) is revised to the lower of its recoverable
amount and the carrying amount that would have been determined (net of amortization) had there been no prior impairment.
Significant judgment is applied in estimating the useful lives and recoverable amounts of our intangible assets and assessing whether
certain events or circumstances constitute objective evidence of impairment. We do not have any other intangible assets with indefinite lives.
As at October 31, 2016, we had $11.2 billion of goodwill (October 31, 2015 – $9.3 billion) and $4.6 billion of other intangible assets
(October 31, 2015 – $2.8 billion). For further details, refer to Notes 2 and 10 to our 2016 Annual Consolidated Financial Statements.
Employee benefits
We sponsor a number of benefit programs for eligible employees, including registered pension plans, supplemental pension plans, health,
dental, disability and life insurance plans.
The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates, healthcare cost trend
rates, projected salary increases, retirement age, and mortality and termination rates. The discount rate assumption is determined using spot
rates from a derived AA corporate bond yield curve for our Canadian pension and other post-employment benefit plans, and spot rates from an
AA corporate bond yield curve for our International pension and other post-employment benefit plans. All other assumptions are determined by
management and are reviewed by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of benefit
obligations and remeasurements that we recognize. The weighted average assumptions used and the sensitivity of key assumptions are
presented in Note 17 to our audited 2016 Annual Consolidated Financial Statements.
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have
rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee.
We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the
entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual
arrangements.
We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining whether we are acting
as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following
factors: (i) the scope of our decision making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and
(iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances,
different factors and conditions may indicate that various parties control an entity depending on whether those factors and conditions are
assessed in isolation or in totality. Significant judgment is applied in assessing the relevant factors and conditions in totality when determining
whether we control an entity. Specifically, judgment is applied in assessing whether we have substantive decision making rights over the
relevant activities and whether we are exercising our power as a principal or an agent.
We consolidate all subsidiaries from the date control is transferred to us, and cease consolidation when an entity is no longer controlled by
us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses reported in our Consolidated
Financial Statements.
Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate component of
equity which is distinct from our shareholders’ equity. The net income attributable to non-controlling interests is separately disclosed in our
Consolidated Statements of Income.
For further details, refer to the Off-balance sheet arrangements section and Note 7 to our audited 2016 Annual Consolidated Financial
Statements.
Derecognition of financial assets
We periodically enter into transactions in which we transfer financial assets such as loans or packaged MBS to structured entities or trusts that
issue securities to investors. We derecognized the assets when our contractual rights to the cash flows from the assets have expired, when we
retain the rights to receive the cash flows but assume an obligation to pay those cash flows to a third party subject to certain pass-through
requirements, or when we transfer our contractual rights to receive the cash flows and substantially all of the risks and rewards of the assets
have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the transferred assets are not
derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When we neither retain nor
transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we
retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement.
Management’s judgment is applied in determining whether we have transferred or retained substantially all risk and rewards of ownership of the
transferred financial asset.
The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian residential mortgage
securitization transactions do not qualify for derecognition; as a result, we continue to record the associated transferred assets on our
Consolidated Balance Sheets and no gains or losses are recognized for these securitization activities. Otherwise, a gain or loss is recognized on
securitization by comparing the carrying amount of the transferred asset with its fair value at the date of the transfer. As at October 31, 2016, the
carrying and fair values of the transferred assets that do not qualify for derecognition were $137 billion and $137 billion, respectively
(October 31, 2015 – $119 billion and $119 billion, respectively), and the carrying and fair values of the associated liabilities totalled $137
billion and $138 billion, respectively (October 31, 2015 – $119 billion and $120 billion, respectively). For further information on derecognition of
financial assets, refer to Note 6 to our audited 2016 Annual Consolidated Financial Statements.
Application of the effective interest method
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest bearing financial
instruments using the effective interest method. The effective interest rate is the rate that discounts estimated future cash flows over the
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Management’s Discussion and Analysis
expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining
the effective interest rate due to uncertainty in the timing and amounts of future cash flows.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive obligation as a result of a
past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount
of the obligation. Provisions are measured as the best estimate of the consideration required to settle the present obligation at the reporting
date. Significant judgment is required in determining whether a present obligation exists and in estimating the probability, timing and amount of
any outflows. We record provisions related to litigation, asset retirement obligations, and the allowance for off-balance sheet and other items.
Provisions are recorded under Other liabilities on our Consolidated Balance Sheets.
We are required to estimate the results of ongoing legal proceedings, expenses to be incurred to dispose of capital assets, and credit losses
on undrawn commitments and guarantees. The forward-looking nature of these estimates requires us to use a significant amount of judgment in
projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the
reporting period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our expectations, we
may incur expenses in excess of the provisions recognized.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, such as an insurer,
a separate asset is recognized if it is virtually certain that reimbursement will be received.
Insurance claims and policy benefit liabilities
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, 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
change. Refer to Note 15 to our audited 2016 Annual Consolidated Financial Statements for further information.
Income taxes
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different
interpretations by us and the relevant taxation authority. Management’s judgment is applied in the interpretation of the relevant tax laws and in
the estimation of the provision for current and deferred income taxes, including the expected timing and amount of the realization. A deferred tax
asset or liability is determined for each temporary difference based on the tax rates that are expected to be in effect in the period that the asset is
realized or the liability is settled. Where the temporary differences will not reverse in the foreseeable future, no deferred tax amount is
recognized.
On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be realized, using both
positive and negative evidence. Refer to Note 24 to our audited 2016 Annual Consolidated Financial Statements for further information.
Changes in accounting policies and disclosure
As a result of the acquisition of City National, we updated our accounting policies in the first quarter to reflect policies on Acquired Loans,
Acquired Credit-Impaired Loans and Federal Deposit Insurance Corporation Covered Loans. Refer to Note 2 of our audited 2016 Annual
Consolidated Financial Statements for details of these changes.
Future changes in accounting policy and disclosure
IFRS 15 Revenue from Contracts with Customers (IFRS 15)
In May 2014, the International Accounting Standards Board (IASB) issued IFRS 15 which establishes principles for reporting about the nature,
amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard provides a single,
principles based five-step model for revenue recognition to be applied to contracts with customers except for revenue arising from items such as
financial instruments, insurance contracts and leases. In April 2016, the IASB issued amendments to IFRS 15, which clarify the underlying
principles of IFRS 15 and provide additional transitional relief on initial application. IFRS 15 and its amendments will be effective for us on
November 1, 2018.
IFRS 9 Financial Instruments (IFRS 9)
In July 2014, the IASB issued the complete version of IFRS 9, which brings together the classification and measurement, impairment and hedge
accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (IAS 39).
In January 2015, OSFI issued an advisory with respect to the early adoption of IFRS 9 for D-SIBs, requiring D-SIBs to adopt IFRS 9 for the
annual period beginning on November 1, 2017. As a result, we will be required to adopt IFRS 9 on November 1, 2017, with the exception of the
own credit provisions of IFRS 9, which we adopted in the second quarter of 2014.
On June 21, 2016, OSFI issued its final guideline on IFRS 9 Financial Instruments and Disclosures. The guideline provides guidance to
Federally Regulated Entities on the application of IFRS 9, including the implementation of the expected credit loss framework under IFRS 9. The
guideline is consistent with the BCBS Guidance on credit risk and accounting for expected credit losses, issued on December 18, 2015, which
sets out supervisory expectations on sound credit risk practices associated with the implementation of expected credit loss accounting models.
The OSFI guideline will be effective for us on November 1, 2017, consistent with the adoption of IFRS 9.
Classification and measurement
IFRS 9 introduces a principles-based approach to the classification of financial assets. Debt instruments, including hybrid contracts, are
measured at FVTPL, fair value through other comprehensive income (FVOCI) or amortized cost based on an entity’s business model and the
nature of the cash flows of the assets. These categories replace the existing IAS 39 classifications of AFS, loans and receivables, and held-to-
maturity. Equity instruments are measured at FVTPL, unless they are not held for trading purposes, in which case an election can be made on
initial recognition to measure them at FVOCI with no subsequent reclassification to profit or loss.
The combined application of the contractual cash flow characteristics and business model tests as at November 1, 2017 are expected to
result in some differences in the classification of financial assets when compared to our classification under IAS 39. We do not expect significant
changes to the classification of most financial assets on our balance sheet; however we have identified certain assets currently held at amortized
cost and AFS that may be reclassified to FVTPL under IFRS 9.
For financial liabilities, IFRS 9 includes the pre-existing requirements for classification and measurement previously included in IAS 39.
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103
Impairment
IFRS 9 introduces an expected credit loss impairment model that differs significantly from the incurred loss model under IAS 39 and is expected
to result in earlier recognition of credit losses.
Scope
Under IFRS 9, the same impairment model is applied to all financial assets, except for financial assets classified or designated as at FVTPL and
equity securities designated as at FVOCI, which are not subject to impairment assessment. The scope of the IFRS 9 expected credit loss
impairment model includes amortized cost financial assets, debt securities classified as at FVOCI, and off balance sheet loan commitments and
financial guarantees which were previously provided for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets (IAS 37). The
above-mentioned reclassifications into or out of these categories under IFRS 9 and items that previously fell under the IAS 37 framework will be
considered in determining the scope of our application of the new expected credit loss impairment model.
Expected credit loss impairment model
Under IFRS 9, credit loss allowances will be measured on each reporting date according to a three-stage expected credit loss impairment model:
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Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk
relative to its initial recognition, a loss allowance is recognized equal to the credit losses expected to result from defaults occurring
over the next 12 months.
Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is
recognized equal to the credit losses expected over the remaining lifetime of the asset.
Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance equal to full lifetime expected credit losses will
be recognized. Interest revenue is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its
gross carrying amount.
Stage 1 and Stage 2 credit loss allowances effectively replace the collectively-assessed allowance for incurred but not identified losses recorded
under IAS 39, while Stage 3 credit loss allowances effectively replace the individually and collectively assessed allowances for impaired loans.
Under IFRS 9, the population of financial assets and corresponding allowances disclosed as Stage 3 will not necessarily correspond to the
amounts of financial assets currently disclosed as impaired in accordance with IAS 39. Consistent with IAS 39, loans are written off when there
is no realistic probability of recovery. Accordingly, our policy on when financial assets are written off is not expected to significantly change on
adoption of IFRS 9.
Because all financial assets within the scope of the IFRS 9 impairment model will be assessed for at least 12-months of expected credit
losses, and the population of financial assets to which full lifetime expected credit losses applies is larger than the population of impaired loans
for which there is objective evidence of impairment in accordance with IAS 39, the total allowance for credit losses is expected to increase under
IFRS 9 relative to the allowance for credit losses under IAS 39.
Changes in the required credit loss allowance, including the impact of movements between Stage 1 (12 month expected credit losses) and
Stage 2 (lifetime expected credit losses), will be recorded in profit or loss. Because of the impact of moving between 12 month and lifetime
expected credit losses and the application of forward looking information, provisions are expected to be more volatile under IFRS 9 than IAS 39.
Measurement
The measurement of expected credit losses will primarily be based on the product of the instrument’s PD, LGD, and EAD, discounted to the
reporting date. The main difference between Stage 1 and Stage 2 expected credit losses is the respective PD horizon. Stage 1 estimates will use
a maximum of a 12-month PD parameter while Stage 2 estimates will use a lifetime PD parameter. Stage 3 estimates will continue to leverage
existing processes for estimating losses on impaired loans, but will consider the lifetime expected loss estimate produced by the Stage 2
models.
An expected credit loss estimate will be produced for each individual exposure, including amounts which are subject to a more simplified
model for estimating expected credit losses; however the relevant parameters will be modeled on a collective basis using the same underlying
data pool supporting our stress testing and regulatory capital expected loss processes. Models have been developed, primarily leveraging our
existing models for enterprise-wide stress testing, which will be validated and tested during 2017.
For the small percentage of our portfolios that lack detailed historical information and/or loss experience, we will apply simplified
measurement approaches that may differ from what is described above. These approaches will be designed to maximize the available
information that is reliable and supportable for each portfolio and may be collective in nature.
Movement between stages
Movements between Stage 1 and Stage 2 are based on whether an instrument’s credit risk as at the reporting date has increased significantly
relative to the date it was initially recognized. For the purposes of this assessment, credit risk is based on an instrument’s lifetime probability of
default, not the losses we expect to incur. The assessment of significant increases in credit risk is a new concept under IFRS 9 and will require
significant judgment.
Our assessment of significant increases in credit risk will be based on changes in lifetime PD. We have established preliminary thresholds
for significant increases in credit risk which will be validated throughout 2017. Additional qualitative reviews of the staging criteria by business,
finance and risk representatives will be performed to verify the positions identified as having significantly increased in risk and identify any
additional positions whose credit risk has increased significantly. As a backstop, instruments that are 30 days past due will move to Stage 2
even if our other metrics do not indicate that a significant increase in credit risk has occurred.
Movements between Stage 2 and Stage 3 are based on whether financial assets are credit-impaired as at the reporting date. The
determination of credit-impairment under IFRS 9 is expected to be similar to the individual assessment of financial assets for objective evidence
of impairment under IAS 39.
The assessments for significant increases in credit risk since initial recognition and credit-impairment are performed independently as at
each reporting period. Assets can move in both directions through the stages of the impairment model. After a financial asset has migrated to
Stage 2, once it is no longer considered that credit risk has significantly increased relative to initial recognition as at a subsequent reporting
period, it will move back to Stage 1. Similarly, an asset that is in Stage 3 will move back to Stage 2 when it is no longer considered to be credit-
impaired.
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Forward-looking information
The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk must consider information
about past events and current conditions as well as reasonable and supportable forecasts of future events and economic conditions. The
estimation and application of forward-looking information will require significant judgment.
Our estimation of expected credit losses is expected to be a discounted probability-weighted estimate that considers multiple future
macroeconomic scenarios. Scenarios will cover our base macroeconomic expectations as well as possible upside and downside conditions,
and will be designed to capture the point of non-linearity of losses. Scenarios will be probability-weighted according to our best estimate of their
relative likelihood based on historical frequency and current trends and conditions and macroeconomic factors such as gross domestic product
and unemployment rates.
Our assessment of significant increases in credit risk will be based on changes in probability-weighted forward-looking lifetime PD, using
the same macroeconomic scenarios as the calculation of expected credit losses.
Definition of default
The definition of default used in the measurement of expected credit losses and the assessment for movement between stages is expected to be
consistent with the definition of default used for internal credit risk management purposes. IFRS 9 does not define default, but contains a
rebuttable presumption that default has occurred when an exposure is greater than 90 days past due. We are still assessing whether it is
appropriate to rebut this presumption for any of our products.
Regulatory capital
Under the current Basel III regulatory capital framework, any shortfall of accounting allowances to expected losses calculated according to the
Basel rules for IRB portfolios is a deduction from CET1 capital. If accounting allowances exceed Basel expected losses, the excess is included as
Tier 2 capital.
After the adoption of IFRS 9, expected loss models will be used for both regulatory capital and accounting purposes. Under both models,
expected losses are calculated as the product of PD, LGD and EAD. However, there are several key differences under current Basel rules which
could lead to significantly different expected loss estimates:
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Basel PDs are based on long-run averages over an entire economic cycle. IFRS 9 PDs are based on current conditions, adjusted for
estimates of future conditions that will impact PD under several probability-weighted macroeconomic scenarios.
Basel PDs consider the probability of default over the next 12 months. IFRS 9 PDs consider the probability of default over the next 12
months only for instruments in Stage 1. Expected credit losses for instruments in Stage 2 are calculated using lifetime PDs.
Basel LGDs are based on severe but plausible downturn economic conditions. IFRS 9 LGDs are based on current conditions, adjusted
for estimates of future conditions that will impact LGD under several probability-weighted macroeconomic scenarios.
As at October 31, 2016, our shortfall of accounting allowances under IAS 39 to Basel expected losses was $1.4 billion. Based on the current
regulatory rules, the regulatory capital impact of an increase in our accounting allowances under IFRS 9 relative to IAS 39 will be mitigated to the
extent of our current deduction from CET1 capital.
Hedge accounting
The new hedge accounting model under IFRS 9 aims to simplify hedge accounting, align the accounting for hedge relationships more closely with
an entity’s risk management activities and permit hedge accounting to be applied more broadly to a greater variety of hedging instruments and
risks eligible for hedge accounting.
The new standard does not explicitly address the accounting for macro hedging activities, which is being addressed by the IASB through a
separate project. As a result, IFRS 9 includes an accounting policy choice to retain IAS 39 for hedge accounting requirements until the amended
standard resulting from the IASB’s project on macro hedge accounting is effective. We expect to elect the accounting policy choice to continue
applying hedge accounting under the IAS 39 framework. The new hedge accounting disclosures required by the related amendments to IFRS 7
Financial Instruments: Disclosures, however, are required for the annual period beginning November 1, 2017.
Transition
The impairment and classification and measurement requirements of IFRS 9 will be applied retrospectively by adjusting our Consolidated
Balance Sheet at November 1, 2017, the date of initial application of IFRS 9. There is no requirement to restate comparative periods other than
for hedge accounting. At this stage, it is not possible to reliably quantify the potential financial effect to the Bank from the adoption of IFRS 9.
To manage our transition to IFRS 9, we have implemented a comprehensive enterprise-wide program led jointly by Finance and Risk
Management that focuses on key areas of impact, including financial reporting, data, systems and processes, as well as communications and
training. During fiscal 2015, we completed a detailed assessment of the scope and complexity of the adoption of IFRS 9 which identified areas
with differences between IFRS 9 and IAS 39 and secured resources to complete the implementation. We continue to monitor and revisit our
preliminary conclusions in order to identify any further financial, capital and business implications.
During fiscal 2016, we have continued to manage the IFRS 9 program through the completion of activities and deliverables to support the
key areas of impact noted above. These include the following steps completed to date:
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•
Assessed the classification of financial assets based on our business model and the nature of the cash flows of the assets under
review;
Assessed the financial and economic impacts and identified process and systems requirements to ensure a successful transition;
Continually evaluated our resourcing model, including cost analysis and timeline, to ensure that sufficient program resources are
available to meet key deliverables;
Agreed on many key accounting interpretations and formulated position papers on key issues;
Completed design specifications for data sourcing, systems, models, controls and processes to ensure alignment between finance and
risk processes and systems;
Leveraged our stress testing and Basel expected loss processes to build new impairment models and parameters;
Prepared dry-run expected credit loss estimates based on initial models and staging parameters;
Designed key performance indicators to assist in assessing our dry-run and parallel run results;
Initiated design of controls and governance over future processes, including key judgmental areas such as the forecasting and
probability-weighting of future macroeconomic scenarios;
Continued to roll out training and educational seminars to key stakeholders across the Bank in the various business platforms and
functional groups; and
Provided regular updates to the Audit Committee, Risk Committee and senior management to ensure escalation of key issues and
risks.
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In the upcoming year, steps we expect to complete include the following:
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Complete a parallel run, the results of which will be used to test our models and methodologies against our key performance
indicators;
Validate new impairment models through back-testing and other methods;
Prepare for future system changes, including a tool to determine the appropriate classification of new assets, where appropriate;
Complete documentation of updated bank-wide accounting and risk policies;
Finalize governance and control frameworks over new processes and test internal controls;
Document the roll-out and implementation of the IFRS 9 project and governance structure including key controls;
Continue to provide training and educational seminars to impacted internal stakeholders; and
Draft future external disclosures and transition adjustments.
As we prepare for our transition to IFRS 9, we continue to monitor industry interpretations of the new standard and expect to adjust our transition
and implementation plans accordingly. Our IFRS 9 program remains aligned to our implementation schedule and we are on track to meet the
timelines essential to our transition.
IFRS 16 Leases (IFRS 16)
In January 2016, the IASB issued IFRS 16, which sets out the principles for the recognition, measurement, presentation and disclosure of leases.
The standard removes the current requirement for lessees to classify leases as finance leases or operating leases by introducing a single lessee
accounting model that requires the recognition of lease assets and lease liabilities on the balance sheet for most leases. Lessees will also
recognize depreciation expense on the lease asset and interest expense on the lease liability in the statement of income. There are no significant
changes to lessor accounting aside from enhanced disclosure requirements. IFRS 16 will be effective for us on November 1, 2019.
IAS 7 Statement of Cash Flows (IAS 7)
In January 2016, the IASB issued amendments to IAS 7, which will require specific disclosures for movements in certain liabilities on the
statement of cash flow. These amendments will be effective for us on November 1, 2017.
Regulatory developments
BCBS revised Pillar 3 disclosure requirements
On March 11, 2016, the BCBS released a consultation paper entitled, “Pillar 3 disclosure requirements – consolidated and enhanced
framework”. The proposed enhancements include the addition of a “dashboard” of key metrics, a draft disclosure requirement of hypothetical
risk-weighted assets calculated based on the Basel framework’s standardized approaches. The proposal also includes enhanced granularity for
disclosure of prudent valuation adjustments and incorporates additions to the Pillar 3 framework to reflect ongoing reforms to the regulatory
framework such as the total loss-absorbing capacity regime for global systemically important banks, the proposed operational risk framework,
and the final standard for market risk. The BCBS’s proposal would also consolidate all existing Pillar 3 disclosure requirements of the Basel
framework, including the leverage and liquidity ratios disclosure templates. Together with the Revised Pillar 3 disclosure requirements issued
in January 2015, the proposed disclosure requirements included in this consultation paper would comprise the single Pillar 3 framework.
In January 2016, OSFI issued a draft guideline indicating that all domestic systemically important banks are expected to implement the
Basel Pillar 3 disclosure requirements for the reporting period ending October 31, 2017. In August 2016, OSFI revised its expectation on the
implementation date to the reporting period ending October 31, 2018. The final guideline is expected to be issued in 2017.
BCBS standards on interest rate risk in the banking book
On April 21, 2016, the BCBS issued new standards for Interest Rate Risk in the Banking Book (IRRBB), which enhances disclosure requirements
to promote greater consistency, transparency, and compatibility in the measurement and management of IRRBB. This includes quantitative
disclosure requirements based on common interest rate shock scenarios. These disclosure requirements will be effective for us in the reporting
period ending October 31, 2018.
BCBS guidance on regulatory capital treatment of accounting provisions
On October 12, 2016, the BCBS released a consultative document and a discussion paper on the regulatory treatment of accounting provisions
under the Basel III regulatory capital framework. The papers address the impact of new expected credit loss accounting standards, such as
IFRS 9, that will replace the current incurred loss models used for accounting purposes. IFRS 9 will be effective for us on November 1, 2017. For
further details on the adoption of IFRS 9, including application regulatory guidance, refer to the Critical accounting policies and estimates
section.
The consultative document sets out the BCBS’s proposal to retain, for an interim period, the current regulatory treatment of credit loss
provisions under the standardized and the IRB approaches. The document also considers the adoption of transitional arrangements to phase-in
the impact of the new expected credit loss accounting standards on regulatory capital. The discussion paper explores policy options for the
long-term regulatory treatment of loss allowances under the new expected credit loss accounting standards. Both papers are open for public
comment until January 13, 2017.
106
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
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 accumulated 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, 2016, 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, 2016.
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 IFRS. 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 Public Accounting Firm.
No changes were made in our internal control over financial reporting during the year ended October 31, 2016 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Related party transactions
In the ordinary course of business, we provide normal banking services and 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 12 and 29 of our audited
2016 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
107
Supplementary information
Net interest income on average assets and liabilities
Table 79
Average balances
Interest
Average rate
2016
2015
2014
2016
2015
2014
2016
2015
2014
$
11,679 $
16,842
15,415
43,936
8,463 $
5,567
14,837
28,867
1,692 $
540
5,227
7,459
114 $
71
(18)
167
70 $
12
(5)
77
61
1
14
76
0.98%
0.42
(0.12)
0.38%
0.83%
0.22
(0.03)
0.27%
3.61%
0.19
0.27
1.02%
153,114
72,440
225,554
164,509
52,833
217,342
149,920
43,047
192,967
3,366
1,227
4,593
3,543
976
4,519
3,322
671
3,993
2.20
1.69
2.04
2.15
1.85
2.08
2.22
1.56
2.07
191,243
165,602
136,857
1,816
1,251
971
0.95
0.76
0.71
338,270
69,028
407,298
75,734
29,409
512,441
973,174
326,153
58,946
385,099
36,581
31,261
452,941
864,752
314,159
54,681
368,840
28,402
25,067
422,309
759,592
11,141
3,249
14,390
2,038
1,448
17,876
24,452
11,842
2,959
14,801
780
1,301
16,882
22,729
11,996
2,970
14,966
888
1,125
16,979
22,019
17,586
19,283
13,495
–
–
–
13,247
172,393
–
–
$ 1,176,400 $1,052,800 $ 906,500 $ 24,452 $ 22,729 $ 22,019
10,725
122,688
12,423
156,342
–
–
–
–
3.29
4.71
3.53
2.69
4.92
3.49
2.51
–
3.63
5.02
3.84
2.13
4.16
3.73
2.63
–
3.82
5.43
4.06
3.13
4.49
4.02
2.90
–
–
–
2.08%
–
–
2.16%
–
–
2.43%
487,194
83,001
67,365
637,560
459,679
68,909
62,029
590,617
418,780
50,459
54,267
523,506
4,714
413
340
5,467
5,162
214
347
5,723
5,416
158
299
5,873
0.97%
0.50
0.50
0.86
1.12%
0.31
0.56
0.97
1.29%
0.31
0.55
1.12
50,262
56,827
50,548
1,579
1,645
1,494
3.14
2.89
2.96
(Millions of Canadian dollars,
except for percentage amounts)
Assets
Deposits with other banks (1)
Canada
U.S.
Other International
Securities
Trading
Available-for-sale
Asset purchased under reverse
repurchase agreements and
securities borrowed
Loans (2)
Canada
Retail (3)
Wholesale (3)
U.S.
Other International
Total interest-earning assets
Non-interest-bearing deposits
with other banks
Customers’ liability under
acceptances
Other assets (1)
Total assets
Liabilities and shareholders’ equity
Deposits (4)
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 (1)
Total interest-bearing liabilities
Non-interest-bearing deposits
Acceptances
Other liabilities (1)
Total liabilities
110,231
8,931
15,437
822,421
112,071
13,248
159,215
278
246
12
7,903
–
–
–
$ 1,106,955 $ 994,160 $ 854,495 $ 7,921 $ 7,958 $ 7,903
68,594
6,632
251
649,531
69,596
10,725
124,643
84,380
7,654
13,585
753,063
76,830
12,422
151,845
629
227
19
7,921
–
–
–
337
240
13
7,958
–
–
–
Equity
69,445
58,640
52,005
n.a.
n.a.
n.a.
Total liabilities and shareholders’
equity
$ 1,176,400 $1,052,800 $ 906,500 $ 7,921 $ 7,958 $ 7,903
Net interest income and margin
$ 1,176,400 $1,052,800 $ 906,500 $ 16,531 $ 14,771 $ 14,116
Net interest income and margin
(average earning assets)
Canada
U.S.
Other International
Total
$ 572,671 $ 539,333 $ 497,436 $ 11,694 $ 11,538 $ 11,121
1,896
1,099
$ 973,174 $ 864,752 $ 759,592 $ 16,531 $ 14,771 $ 14,116
246,065
154,438
135,876
126,280
165,083
160,336
3,241
1,596
1,977
1,256
0.57
2.54
0.12
0.96
–
–
–
0.72%
n.a.
0.67%
1.41%
2.04%
1.32
1.03
1.70%
0.40
3.14
0.10
1.06
–
–
–
0.80%
n.a.
0.76%
1.40%
2.14%
1.20
0.78
1.71%
0.41
3.71
4.78
1.22
–
–
–
0.92%
n.a.
0.87%
1.56%
2.24%
1.40
0.87
1.86%
(1)
(2)
(3)
(4)
Starting in 2015, we have included cash collateral and margin deposits, and cash collateral received in Deposits with other banks and Other interest-bearing liabilities, respectively
(previously, in Other assets and Other liabilities). Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
Interest income includes loan fees of $573 million (2015 – $503 million; 2014 – $516 million).
Amounts have been revised from those previously presented.
Deposits include personal savings deposits with average balances of $166 billion (2015 – $142 billion; 2014 – $133 billion), interest expense of $.4 billion (2015 – $.6 billion; 2014 –
$.7 billion) and average rates of .3% (2015 – .4%; 2014 – .5%). Deposits also include term deposits with average balances of $362 billion (2015 – $345 billion; 2014 – $302 billion),
interest expense of $4.3 billion (2015 – $4.5 billion; 2014 – $4.4 billion) and average rates of 1.20% (2015 – 1.30%; 2014 – 1.47%).
108
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Change in net interest income
Table 80
(Millions of Canadian dollars)
Assets
Deposits with other banks (3)
Canada (4)
U.S. (4)
Other international (4)
Securities
Trading
Available-for-sale
Asset purchased under reverse repurchase
agreements and securities borrowed
Loans
Canada
Retail (5)
Wholesale (5)
U.S.
Other international
Total interest income
Liabilities
Deposits
Canada
U.S.
Other international
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Subordinated debentures
Other interest-bearing liabilities (3)
Total interest expense
Net interest income
2016 (1) vs. 2015
Increase (decrease)
due to changes in
2015 vs. 2014
Increase (decrease)
due to changes in
Average
volume (2)
Average
rate (2)
Net change
Average
volume (2)
Average
rate (2)
Net change
$
$
$
$
$
27
24
–
$
17
35
(13)
(245)
362
194
440
506
835
(77)
2,066
309
44
30
(190)
103
40
2
338
1,728
$
$
$
68
(111)
371
(1,141)
(216)
423
224
(343) $
(757)
155
(37)
124
189
(53)
4
(375) $
$
32
44
59
(13)
(177)
251
565
(701)
290
1,258
147
1,723
(448)
199
(7)
(66)
292
(13)
6
(37)
1,760
$
$
$
$
244
9
26
323
153
204
458
232
256
278
2,183
529
58
43
186
64
38
637
1,555
628
$
$
$
$
(235) $
2
(45)
(102)
152
76
(612)
(243)
(364)
(102)
(1,473) $
(783)
(2)
5
(35)
(5)
(44)
(636)
(1,500) $
$
27
9
11
(19)
221
305
280
(154)
(11)
(108)
176
710
(254)
56
48
151
59
(6)
1
55
655
(1)
(2)
(3)
(4)
(5)
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
Volume/rate variance is allocated on the percentage relationships of changes in balances and changes in rates to the total net change in net interest income.
Starting in 2015, we have included cash collateral and margin deposits, and cash collateral received in Deposits with other banks and Other interest-bearing liabilities,
respectively (previously, in Other assets and Other liabilities).
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Amounts have been revised from those previously presented.
Loans and acceptances by geography
Table 81
As at October 31 (Millions of Canadian dollars)
Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Sovereign (2)
Bank
Wholesale
U.S.
Retail
Wholesale
Other International
Retail
Wholesale
Total loans and acceptances
Total allowance for loan losses
Total loans and acceptances, net of allowance for loan losses
(1)
(2)
On a continuing operations basis.
In 2015, we reclassified $4 billion from AFS securities to Loans.
2016
2015
2014
2013
2012 (1)
$ 241,800
82,205
16,601
3,878
344,484
76,266
8,586
1,278
$ 86,130
$ 430,614
$ 229,987
84,637
15,516
4,003
334,143
71,246
8,508
530
$
80,284
$ 414,427
$ 215,624
86,984
14,650
4,067
321,325
64,643
3,840
413
$
68,896
$ 390,221
$ 206,134
86,102
13,902
4,026
310,164
58,920
3,807
823
$
63,550
$ 373,714
$ 195,552
80,000
13,422
2,503
291,477
51,212
3,751
390
$
55,353
$ 346,830
17,134
59,349
76,483
5,484
34,702
40,186
4,686
23,639
28,325
3,734
19,443
23,177
3,138
17,081
20,219
7,852
21,733
29,585
$ 536,682
(2,235)
$ 534,447
8,556
24,536
33,092
$ 487,705
(2,029)
$ 485,676
8,258
21,881
30,139
$ 448,685
(1,994)
$ 446,691
6,768
17,103
23,871
$ 420,762
(1,959)
$ 418,803
5,673
16,900
22,573
$ 389,622
(1,996)
$ 387,626
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
109
Loans and acceptances by portfolio and sector
As at October 31 (Millions of Canadian dollars)
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Oil & gas
Utilities
Financial products
Forest products
Health services
Holding and investments
Industrial products
Mining & metals
Non-bank financial services
Other services
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale
Total loans and acceptances
Total allowance for loan losses
Table 82
2016
2015
2014
2013
2012 (1)
$ 254,998
93,466
17,128
3,878
$ 233,975
94,346
15,859
4,003
$ 219,257
96,021
14,924
4,067
$ 209,238
93,260
14,142
4,026
$ 198,324
85,800
13,661
2,503
$ 369,470
$ 348,183
$ 334,269
$ 320,666
$ 300,288
6,515
7,279
10,052
6,259
7,680
8,840
1,099
7,763
7,195
5,508
1,455
8,408
11,582
40,419
11,019
6,060
7,568
10,581
1,930
6,057
6,614
7,146
7,691
5,162
10,093
1,169
6,023
6,935
4,725
1,402
6,428
8,834
33,802
6,599
5,907
3,248
9,887
1,800
5,694
6,209
7,172
5,849
3,766
3,670
979
4,052
6,865
4,665
1,320
5,688
8,322
30,387
4,822
5,432
3,695
4,628
1,201
5,441
6,167
6,230
5,046
3,860
3,162
893
3,786
4,973
4,038
1,074
4,903
8,090
24,413
4,006
5,593
2,705
4,396
1,320
5,202
3,585
5,432
4,981
3,821
4,316
811
3,766
4,625
3,938
965
3,895
7,003
20,650
4,203
5,221
1,737
4,193
990
$ 167,212
$ 139,522
$ 114,416
$ 100,096
$
89,334
$ 536,682
$ 487,705
$ 448,685
$ 420,762
$ 389,622
(2,235)
(2,029)
(1,994)
(1,959)
(1,996)
Total loans and acceptances, net of allowance for loan losses
$ 534,447
$ 485,676
$ 446,691
$ 418,803
$ 387,626
(1)
On a continuing operations basis.
110
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
Impaired loans by portfolio and geography
As at October 31 (Millions of Canadian dollars, except for percentage amounts)
Residential mortgages
Personal
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Oil and gas
Utilities
Financing products
Forest products
Health services
Holding and investments
Industrial products
Mining & metals
Non-bank financial services
Other services
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale
Acquired credit-impaired loans
Total impaired loans (2)
Canada
Residential mortgages
Personal
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Oil & gas
Utilities
Financing products
Forest products
Health services
Holding and investments
Industrial products
Mining & metals
Non-bank financial services
Other services
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale
Total
U.S.
Retail
Wholesale
Total
Other International
Retail
Wholesale
Total
Total impaired loans
Allowance for impaired loans
Net impaired loans
Gross impaired loans as a % of loans and acceptances
Residential mortgages
Personal
Small business
Retail
Wholesale
Total
Allowance for impaired loans as a % of gross impaired loans
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
709
304
46
1,059
43
43
165
1,264
78
111
21
21
72
43
15
3
109
241
93
45
57
–
2
2,426
418
3,903
368
228
46
642
34
9
91
57
15
–
21
18
5
39
12
–
49
121
27
24
–
–
–
522
1,164
56
1,736
1,792
380
567
947
3,903
(809)
3,094
0.28%
0.33%
1.19%
0.29%
1.69%
0.73%
20.72%
2015
646
299
45
990
41
11
130
156
57
109
28
17
185
45
17
1
69
297
34
53
43
–
2
1,295
–
2,285
356
223
45
624
39
8
65
39
20
–
5
17
3
39
7
–
51
161
34
29
(5)
–
–
512
1,136
10
204
214
356
579
935
2,285
(654)
1,631
$
$
$
$
$
$
$
$
$
$
$
0.28%
0.32%
1.13%
0.28%
0.93%
0.47%
28.64%
$
$
$
$
$
$
$
$
$
$
$
2014
678
300
47
1,025
40
12
108
6
–
–
25
18
132
48
9
3
99
314
38
32
66
–
2
952
–
1,977
388
224
47
659
36
11
70
4
–
–
6
19
3
41
9
1
67
171
37
11
1
–
–
487
1,146
13
18
31
353
447
800
1,977
(632)
1,345
0.31%
0.31%
1.16%
0.31%
0.84%
0.44%
31.98%
Table 83
2012 (1)
674
273
33
980
52
17
83
2
–
50
30
17
38
88
2
5
97
353
251
73
110
–
2
1,270
2,250
475
206
34
715
44
11
34
–
–
–
12
15
22
34
2
3
50
153
238
22
1
–
–
641
1,356
7
162
169
258
467
725
2,250
(636)
1,614
0.34%
0.32%
1.32%
0.33%
1.42%
0.58%
28.33%
$
$
$
$
$
$
$
$
$
$
$
2013
691
363
37
1,091
43
12
101
14
–
39
26
25
40
54
2
1
101
367
117
98
67
–
3
1,110
2,201
464
229
36
729
38
9
58
14
–
–
8
15
3
40
2
1
59
169
86
21
3
–
–
526
1,255
14
98
112
348
486
834
2,201
(599)
1,602
0.33%
0.39%
0.83%
0.34%
1.11%
0.52%
27.22%
(1)
(2)
On a continuing operations basis.
Past due loans greater than 90 days not included in impaired loans were $337 million in 2016 (2015 – $314 million; 2014 – $316 million; 2013 – $346 million; 2012 – $393 million).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
111
Provision for credit losses by portfolio and geography
Table 84
(Millions of Canadian dollars, except for percentage amounts)
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Oil and gas
Utilities
Financial products
Forest products
Health services
Holding and investments
Industrial products
Mining & metals
Non-bank financial services
Other services
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale
Acquired credit-impaired loans
Total provision for credit losses on impaired loans
Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Oil & gas
Utilities
Financing products
Forest products
Health services
Holding and investments
Industrial products
Mining & metals
Non-bank financial services
Other services
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale
Total
U.S.
Retail
Wholesale
Other International
Retail
Wholesale
Total provision for credit losses on impaired loans
Total provision for credit losses on non-impaired loans
Total provision for credit losses
Total PCL as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances
(1)
On a continuing operations basis.
112
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
$
2016
77
458
442
34
$ 1,011
$
10
13
20
320
16
1
4
4
–
12
7
–
(5)
36
8
(4)
36
–
(3)
475
10
$ 1,496
$
$
$
42
459
435
34
970
10
3
19
99
–
–
5
4
–
10
7
–
14
26
2
8
6
–
–
$
213
$ 1,183
1
227
228
$
41
44
85
$
$ 1,496
50
$ 1,546
0.29%
0.28%
$
$
$
2015
47
388
378
32
845
9
3
33
47
9
39
6
–
18
4
8
7
4
29
5
8
24
–
(1)
252
–
$ 1,097
$
$
$
$
$
$
27
393
371
32
823
9
3
21
22
1
–
1
–
–
7
3
–
–
13
6
7
23
–
–
116
939
1
40
41
$
$
$
2014
94
441
353
44
932
3
2
27
(5)
32
3
7
–
29
14
2
–
18
58
14
2
26
–
–
232
–
$ 1,164
$
$
$
$
$
$
27
393
345
44
809
4
3
25
(5)
–
–
1
–
–
14
2
–
6
34
14
3
22
–
–
123
932
2
40
42
$
$
$
2013
41
458
354
32
885
4
3
17
(6)
–
1
4
–
(6)
21
1
10
14
62
157
35
35
–
–
352
–
$ 1,237
$
$
$
$
$
$
27
391
346
32
796
4
3
16
(6)
–
–
3
–
(8)
14
1
–
3
37
50
2
30
–
–
149
945
3
32
35
21
96
117
$
$ 1,097
–
$ 1,097
0.24%
0.24%
121
69
190
$
$ 1,164
–
$ 1,164
0.27%
0.27%
86
171
257
$
$ 1,237
–
$ 1,237
0.31%
0.31%
$
$
$
$
$
$
$
$
$
$
$
$
$
2012 (1)
67
445
394
43
949
8
(2)
27
(11)
2
5
–
(1)
32
–
1
(3)
82
102
47
63
–
–
352
–
1,301
34
413
391
43
881
8
(2)
13
(11)
–
–
5
–
–
12
–
1
–
43
98
10
30
–
–
207
1,088
4
29
33
64
116
180
1,301
(2)
1,299
0.35%
0.35%
Allowance for credit losses by portfolio and geography
(Millions of Canadian dollars, 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 (3)
Total allowance for credit losses at end of year
Allowance against impaired loans
Canada
Residential mortgages
Personal
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Oil & gas
Utilities
Financing products
Forest products
Health services
Holding and investments
Industrial products
Mining and metals
Non-bank financial services
Other services
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale
U.S.
Retail
Wholesale
Other International
Retail
Wholesale
Total allowance against impaired loans
Allowance against non-impaired loans
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
Off-balance sheet and other items
Total allowance against non-impaired loans
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Table 85
2013
2,087
1,237
2012 (1), (2)
2,056
1,299
$
2016
2,120
1,546
(42)
(556)
(564)
(40)
(1,202)
(321)
–
–
(321)
(1,523)
$
$
$
$
$
2015
2,085
1,097
$
(64)
(494)
(497)
(40)
(1,095) $
(243) $
–
–
(243) $
(1,338) $
2014
2,050
1,164
$
(30)
(565)
(466)
(47)
(1,108) $
(221) $
–
–
(221) $
(1,329) $
$
$
$
5
111
122
10
248
38
–
–
$
38
$
286
(1,237) $
(103)
2,326
$
$
$
$
7
105
119
10
241
33
–
1
$
34
275
$
(1,063) $
1
2,120
$
$
$
$
2
106
114
9
231
32
–
–
$
32
263
$
(1,066) $
(63)
2,085
$
(24)
(498)
(466)
(35)
(1,023) $
(448) $
–
–
(448) $
(1,471) $
$
$
$
2
96
112
9
219
51
–
–
$
51
270
$
(1,201) $
(73)
2,050
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
35
105
20
160
6
4
14
6
–
–
5
6
1
11
4
–
18
23
10
11
–
–
–
119
279
2
177
179
180
171
351
809
96
385
386
45
912
514
91
1,517
2,326
0.43%
0.23%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
27
96
19
142
5
4
12
–
1
–
3
6
1
13
1
–
19
28
12
7
(1)
–
–
111
253
1
47
48
169
184
353
654
83
396
386
45
910
465
91
1,466
2,120
0.43%
0.23%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
31
93
19
143
6
4
22
–
–
–
3
6
1
18
1
–
28
48
17
5
1
–
–
160
303
1
16
17
172
140
312
632
78
400
385
45
908
454
91
1,453
2,085
0.46%
0.25%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
36
97
16
149
6
4
15
1
–
–
4
6
2
15
1
–
23
42
46
6
(1)
–
–
170
319
2
19
21
146
113
259
599
48
405
385
45
883
477
91
1,451
2,050
0.49%
0.30%
(32)
(499)
(496)
(50)
(1,077)
(288)
–
(32)
(320)
(1,397)
1
83
102
8
194
39
–
–
39
233
(1,164)
(104)
2,087
41
89
12
142
9
7
14
1
–
–
6
6
10
10
1
–
20
45
107
8
(5)
–
–
239
381
1
38
39
96
120
216
636
48
392
403
60
903
457
91
1,451
2,087
0.54%
0.31%
(1)
(2)
(3)
On a continuing operations basis.
Opening allowance for credit losses as at November 1, 2011 has been restated due to the implementation of amendments to IFRS 11.
Under IFRS, other adjustments include $100 million of unwind of discount and $3 million of changes in exchange rate (2015 – $80 million and $(81) million; 2014 – $87 million and
$(24) million; 2013 – $86 million and $(13) million). For further details, refer to Note 5 of our audited 2016 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2016
113
Credit quality information by Canadian province
Table 86
(Millions of Canadian dollars)
Loans and acceptances
Atlantic provinces (2)
Quebec
Ontario
Alberta
Other Prairie provinces (3)
B.C. and territories (4)
Total loans and acceptances in Canada
Gross impaired loans
Atlantic provinces (2)
Quebec
Ontario
Alberta
Other Prairie provinces (3)
B.C. and territories (4)
Total gross impaired loans in Canada
Provision for credit losses on impaired loans
Atlantic provinces (2)
Quebec
Ontario
Alberta
Other Prairie provinces (3)
B.C. and territories (4)
2016
2015
2014
2013
2012 (1)
$ 23,947
53,518
185,434
66,277
30,143
71,295
$ 23,040
51,197
175,315
28,607
65,785
70,483
$ 22,130
50,748
159,817
61,197
27,341
68,988
$ 21,263
48,060
152,258
58,318
25,697
68,118
$ 19,953
42,920
141,566
53,987
23,200
65,204
$ 430,614
$ 414,427
$ 390,221
$ 373,714
$ 346,830
$
$
$
$
$
$
101
207
336
313
93
114
1,164
67
92
654
226
64
80
93
213
341
224
115
150
1,136
57
96
590
77
52
67
939
$
$
$
$
81
205
391
185
73
211
1,146
51
92
588
71
40
90
932
$
$
$
$
83
177
424
233
97
241
1,255
50
78
605
74
39
99
945
$
$
$
67
180
502
250
88
269
1,356
62
96
704
79
41
106
$
1,088
Total provision for credit losses on impaired loans in Canada
$
1,183
$
(1)
(2)
(3)
(4)
On a continuing operations basis.
Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
Comprises Manitoba and Saskatchewan.
Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
114
Royal Bank of Canada: Annual Report 2016
Management’s Discussion and Analysis
EDTF recommendations index
On October 29, 2012, the Enhanced Disclosure Task Force (EDTF), established by the Financial Stability Board, issued its report Enhancing the
Risk Disclosures of Banks, which included 32 recommendations aimed at achieving transparent, high-quality risk disclosures. As a result, our
enhanced disclosures have been provided in our 2016 Annual Report and Supplementary Financial Information package (SFI).
The following index summarizes our disclosure by EDTF recommendation:
Location of
disclosure
Recommendation
1
2
Disclosure
Table of contents for EDTF risk disclosure
Define risk terminology and measures
Type of Risk
General
Risk governance,
risk management
and business model
Capital adequacy
and risk-weighted
assets (RWA)
Liquidity
Funding
Market risk
Credit risk
Other
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
Annual
Report
page
115
49-54,
208-210
47-49
90-93
49-54
49-51
98
51-52,
67
90-93
Top and emerging risks
New regulatory ratios
Risk management organization
Risk culture
Risk in the context of our business activities
Stress testing
Minimum Basel III capital ratios and Domestic systemically
important bank surcharge
Composition of capital and reconciliation of the accounting
–
balance sheet to the regulatory balance sheet
Flow statement of the movements in regulatory capital
Capital strategic planning
RWA by business segments
Analysis of capital requirement, and related measurement
model information
RWA credit risk and related risk measurements
Movement of risk-weighted assets by risk type
Basel back-testing
Quantitative and qualitative analysis of our liquidity reserve
Encumbered and unencumbered assets by balance sheet
category, and contractual obligations for rating downgrades
Maturity analysis of consolidated total assets, liabilities and
off-balance sheet commitments analyzed by remaining
contractual maturity at the balance sheet date
Sources of funding and funding strategy
Relationship between the market risk measures for trading
and non-trading portfolios and the balance sheet
Decomposition of market risk factors
Market risk validation and back-testing
Primary risk management techniques beyond reported risk
measures and parameters
Bank’s credit risk profile
Quantitative summary of aggregate credit risk exposures
that reconciles to the balance sheet
Policies for identifying impaired loans
Reconciliation of the opening and closing balances of impaired
loans and impairment allowances during the year
Quantification of gross notional exposure for OTC derivatives
or exchange-traded derivatives
Credit risk mitigation, including collateral held for all sources
of credit risk
Other risk types
Publicly known risk events
–
89-93
–
54-58
–
–
52, 56
73-75,
78-79
75, 78
80-81
75-77
71-72
66-70
67
66-71
54-66,
156-158
110-114
57-58,
101
131-132
–
60
57
82-89
85-87,
195-196
SFI
page
1
–
–
–
–
–
–
–
–
21-24
25
–
28
26-27
42-44
28
42
–
–
–
–
–
–
–
–
31-44
40
–
33,37
46
41
–
–
Index for Enhanced Disclosure Task Force recommendations
Royal Bank of Canada: Annual Report 2016
115
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
117 Reports
117 Management’s Responsibility for Financial Reporting
117 Management’s Report on Internal Control over Financial
Reporting
126 Notes to Consolidated Financial Statements
126 Note 1
General information
126 Note 2
Summary of significant accounting policies,
estimates and judgments
118 Reports of Independent Registered Public Accounting
138 Note 3
Fair value of financial instruments
Firms
121
Consolidated Financial Statements
121 Consolidated Balance Sheets
122 Consolidated Statements of Income
123 Consolidated Statements of Comprehensive Income
124 Consolidated Statements of Changes in Equity
125 Consolidated Statements of Cash Flows
116
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
151 Note 4
Securities
155 Note 5
Loans
157 Note 6
Derecognition of financial assets
158 Note 7
Structured entities
162 Note 8
Derivative financial instruments and
hedging activities
167 Note 9
Premises and equipment
168 Note 10
Goodwill and other intangible assets
170 Note 11
Significant acquisition and dispositions
171 Note 12
Joint ventures and associated companies
172 Note 13
Other assets
172 Note 14
Deposits
173 Note 15
Insurance
175 Note 16
Segregated funds
176 Note 17
Employee benefits – Pension and other
post-employment benefits
181 Note 18
Other liabilities
181 Note 19
Subordinated debentures
182 Note 20
Trust capital securities
183 Note 21
Equity
185 Note 22
Share-based compensation
187 Note 23
Income and expenses from selected
financial instruments
188 Note 24
Income taxes
190 Note 25
Earnings per share
190 Note 26
Guarantees, commitments, pledged assets
and contingencies
194 Note 27
Legal and regulatory matters
195 Note 28
Contractual repricing and maturity schedule
196 Note 29
Related party transactions
197 Note 30
Results by business segment
200 Note 31
Nature and extent of risks arising from
financial instruments
201 Note 32
Capital management
201 Note 33
Offsetting financial assets and financial
liabilities
203 Note 34
Recovery and settlement of on-balance sheet
assets and liabilities
204 Note 35
Parent company information
205 Note 36
Subsequent events
Management’s Responsibility for Financial Reporting
The accompanying consolidated financial statements of Royal Bank of Canada 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 International Financial Reporting
Standards as issued by the International Accounting Standards Board. Financial information appearing throughout our Management’s
Discussion and Analysis is consistent with these consolidated financial statements.
Our 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 procedures manuals, a
corporate code of conduct and accountability for performance within appropriate and well-defined areas of responsibility.
The system of internal controls is further supported by a compliance function, which is designed to ensure that we and our employees
comply with securities legislation and conflict of interest rules, and by an internal audit staff, which conducts periodic audits of all aspects of our
operations.
The Board of Directors oversees management’s responsibilities for financial reporting through an Audit Committee, which is composed
entirely of independent directors. This Committee reviews our consolidated financial statements and recommends them to the Board for
approval. Other key responsibilities of the Audit Committee include reviewing our existing internal control procedures and planned revisions to
those procedures, and advising the directors on auditing matters and financial reporting issues. Our 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 our business and affairs as deemed
necessary to determine whether the provisions of the Bank Act are being complied with, and that we are in sound financial condition. In carrying
out its mandate, OSFI strives to protect the rights and interests of our depositors and creditors.
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm appointed by our shareholders upon the recommendation of
the Audit Committee and Board, has performed an independent audit of the consolidated balance sheet as at October 31, 2016 and the related
consolidated statements of income, comprehensive income, changes in equity and cash flows for the year ended October 31, 2016 and the
effectiveness of our internal control over financial reporting as at October 31, 2016. Their report, which expressed an unqualified opinion, can be
found on the following pages of the consolidated financial statements. PricewaterhouseCoopers LLP has full and unrestricted access to the Audit
Committee to discuss their audit and related findings. The consolidated balance sheet as at October 31, 2015, and the consolidated statements
of income, comprehensive income, changes in equity and cash flows for each of the years in the two-year period ended October 31, 2015 were
audited by our previous auditors, Deloitte LLP, who expressed an unqualified opinion on those statements in their report dated December 1,
2015.
David I. McKay
President and Chief Executive Officer
Janice R. Fukakusa
Chief Administrative Officer and Chief Financial Officer
Toronto, November 29, 2016
Management’s Report on Internal Control over Financial Reporting
Management of Royal Bank of Canada 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 our receipts and expenditures are made only in accordance with authorizations of our
management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also,
projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and the Chief
Administrative Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of October 31, 2016, based
on the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, management concluded that, as of October 31, 2016, internal control over financial reporting was
effective based on the criteria established in the Internal Control—Integrated Framework (2013). 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, 2016.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
117
The effectiveness of our internal control over financial reporting as of October 31, 2016, has been audited by PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm, as stated in their report, which expressed an unqualified opinion on our internal control over
financial reporting and appears herein.
David I. McKay
President and Chief Executive Officer
Janice R. Fukakusa
Chief Administrative Officer and Chief Financial Officer
Toronto, November 29, 2016
Reports of Independent Registered Public Accounting Firms
Independent Auditor’s Report – Current Auditor
To the Shareholders of Royal Bank of Canada
We have completed an integrated audit of Royal Bank of Canada’s (the Bank) 2016 consolidated financial statements and its internal control
over financial reporting as at October 31, 2016. Our opinions, based on our audits, are presented below.
Report on the consolidated financial statements
We have audited the accompanying 2016 consolidated financial statements of Royal Bank of Canada, which comprise the consolidated balance
sheet as at October 31, 2016, and the consolidated statements of income, comprehensive income, changes in equity, and cash flows for the
year ended October 31, 2016 and the related notes, which comprise a summary of significant accounting policies and other explanatory
information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit as at
October 31, 2016 and for the year then ended in accordance with Canadian generally accepted auditing standards and 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 the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing
standards also require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement
of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the Bank’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion on the
consolidated financial statements.
Opinion
In our opinion, the 2016 consolidated financial statements present fairly, in all material respects, the financial position of Royal Bank of Canada
as at October 31, 2016 and its financial performance and its cash flows for the year then ended in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.
Report on internal control over financial reporting
We have also audited Royal Bank of Canada’s internal control over financial reporting as at October 31, 2016, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management’s responsibility for internal control over financial reporting
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.
118
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Auditor’s responsibility
Our responsibility is to express an opinion on the Bank’s internal control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting 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.
An audit of internal control over financial reporting includes 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 consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our audit opinion on the company’s internal control over financial reporting.
Definition of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) 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.
Inherent limitations
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may deteriorate.
Opinion
In our opinion, Royal Bank of Canada maintained, in all material respects, effective internal control over financial reporting as at October 31,
2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
PricewaterhouseCoopers LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
November 29, 2016
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
119
Independent Auditor’s Report – Predecessor Auditor
To the Shareholders of Royal Bank of Canada
We have audited the accompanying consolidated financial statements of Royal Bank of Canada and subsidiaries (the “Bank”), which comprise
the consolidated balance sheet as at October 31, 2015, and the consolidated statements of income, statements of comprehensive income,
statements of changes in equity, and statements of cash flows for each of the years in the two-year period ended October 31, 2015, and a
summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated 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). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the balance sheet of Royal Bank of Canada and
subsidiaries as at October 31, 2015, and their financial performance and cash flows for each of the years in the two-year period ended
October 31, 2015 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
December 1, 2015
120
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Consolidated Balance Sheets
(Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities (Note 4)
Trading
Available-for-sale
Assets purchased under reverse repurchase agreements and securities borrowed
Loans (Note 5)
Retail
Wholesale
Allowance for loan losses (Note 5)
Segregated fund net assets (Note 16)
Other
Customers’ liability under acceptances
Derivatives (Note 8)
Premises and equipment, net (Note 9)
Goodwill (Note 10)
Other intangibles (Note 10)
Other assets (Note 13)
Total assets
Liabilities and equity
Deposits (Note 14)
Personal
Business and government
Bank
Segregated fund net liabilities (Note 16)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivatives (Note 8)
Insurance claims and policy benefit liabilities (Note 15)
Other liabilities (Note 18)
Subordinated debentures (Note 19)
Total liabilities
Equity attributable to shareholders (Note 21)
Preferred shares
Common shares (shares issued – 1,484,234,375 and 1,443,954,789)
Retained earnings
Other components of equity
Non-controlling interests (Note 21)
Total equity
Total liabilities and equity
As at
October 31
2016
October 31
2015
$
14,929 $
12,452
27,851
22,690
151,292
84,801
236,093
158,703
56,805
215,508
186,302
174,723
369,470
154,369
523,839
(2,235)
521,604
348,183
126,069
474,252
(2,029)
472,223
981
830
12,843
118,944
2,836
11,156
4,648
42,071
192,498
13,453
105,626
2,728
9,289
2,814
41,872
175,782
$ 1,180,258 $ 1,074,208
$
250,550 $
488,007
19,032
757,589
220,566
455,578
21,083
697,227
981
830
12,843
50,369
103,441
116,550
9,164
47,947
340,314
13,453
47,658
83,288
107,860
9,110
43,476
304,845
9,762
7,362
1,108,646
1,010,264
6,713
17,859
41,519
4,926
71,017
595
71,612
5,098
14,611
37,811
4,626
62,146
1,798
63,944
$ 1,180,258 $ 1,074,208
The accompanying notes are an integral part of these Consolidated Financial Statements.
David I. McKay
President and Chief Executive Officer
David F. Denison
Director
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
121
Consolidated Statements of Income
(Millions of Canadian dollars, except per share amounts)
Interest income
Loans
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits and other
Interest expense
Deposits and other
Other liabilities
Subordinated debentures
Net interest income
Non-interest income
Insurance premiums, investment and fee income (Note 15)
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
Net gains on available-for-sale securities (Note 4)
Share of profit in joint ventures and associates (Note 12)
Other
Total revenue
Provision for credit losses (Note 5)
Insurance policyholder benefits, claims and acquisition expense (Note 15)
Non-interest expense
Human resources (Note 17 and 22)
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles (Note 10)
Other
Income before income taxes
Income taxes (Note 24)
Net income
Net income attributable to:
Shareholders
Non-controlling interests
Basic earnings per share (in dollars) (Note 25)
Diluted earnings per share (in dollars) (Note 25)
Dividends per common share (in dollars)
The accompanying notes are an integral part of these Consolidated Financial Statements.
122
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
For the year ended
October 31
2016
October 31
2015
October 31
2014
$ 17,876
4,593
1,816
167
$ 16,882
4,519
1,251
77
$ 16,979
3,993
971
76
24,452
22,729
22,019
5,467
2,227
227
7,921
5,723
1,995
240
7,958
5,873
1,784
246
7,903
16,531
14,771
14,116
4,868
701
4,240
2,887
1,429
1,756
1,876
964
889
1,239
76
176
773
21,874
38,405
1,546
3,424
12,201
1,438
1,568
945
1,078
970
1,936
20,136
13,299
2,841
4,436
552
3,778
2,881
1,436
1,592
1,885
814
798
1,184
145
149
900
20,550
35,321
1,097
2,963
11,583
1,277
1,410
888
932
712
1,836
18,638
12,623
2,597
$ 10,458
$ 10,026
$ 10,405
53
$
9,925
101
$ 10,458
$ 10,026
$
$
6.80
6.78
3.24
6.75
6.73
3.08
$
$
$
$
4,957
742
3,355
2,621
1,379
1,494
1,809
827
689
1,080
192
162
685
19,992
34,108
1,164
3,573
11,031
1,147
1,330
847
763
666
1,877
17,661
11,710
2,706
9,004
8,910
94
9,004
6.03
6.00
2.84
Consolidated Statements of Comprehensive Income
(Millions of Canadian dollars)
Net income
Other comprehensive income (loss), net of taxes (Note 24)
Items that will be reclassified subsequently to income:
Net change in unrealized gains (losses) on available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
Reclassification of net losses (gains) on available-for-sale securities to income
Foreign currency translation adjustments
Unrealized foreign currency translation gains (losses)
Net foreign currency translation gains (losses) from hedging activities
Reclassification of losses (gains) on foreign currency translation to income
Reclassification of losses (gains) on net investment hedging activities to income
Net change in cash flow hedges
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Items that will not be reclassified subsequently to income:
Remeasurements of employee benefit plans (Note 17)
Net fair value change due to credit risk on financial liabilities designated as at fair value
through profit or loss
Total other comprehensive income (loss), net of taxes
Total comprehensive income
Total comprehensive income attributable to:
Shareholders
Non-controlling interests
The accompanying notes are an integral part of these Consolidated Financial Statements.
For the year ended
October 31
2016
October 31
2015
October 31
2014
$
10,458 $
10,026 $
9,004
73
(48)
25
147
113
–
–
260
(35)
52
17
(1,077)
(322)
(1,399)
(1,097)
(76)
(41)
(117)
5,885
(3,223)
(224)
111
2,549
(541)
330
(211)
582
350
932
3,153
143
(58)
85
2,743
(1,585)
44
3
1,205
(108)
28
(80)
(236)
(59)
(295)
915
$
$
$
9,361 $
13,179 $
9,919
9,306 $
55
9,361 $
13,065 $
114
13,179 $
9,825
94
9,919
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
123
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124
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
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Consolidated Statements of Cash Flows
(Millions of Canadian dollars)
Cash flows from operating activities
Net income
Adjustments for non-cash items and others
Provision for credit losses
Depreciation
Deferred income taxes
Amortization and impairment of other intangibles
Net changes in investments in joint ventures and associates
Losses (Gains) on sale of premises and equipment
Losses (Gains) on available-for-sale securities
Losses (Gains) on disposition of business
Impairment of available-for-sale securities
Adjustments for net 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
Loans, net of securitizations
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits, net of securitizations
Obligations related to assets sold under repurchase agreements and securities loaned
Obligations related to securities sold short
Brokers and dealers receivable and payable
Other
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
Proceeds from sale of available-for-sale securities
Proceeds from maturity of available-for-sale securities
Purchases of available-for-sale securities
Proceeds from maturity of held-to-maturity securities
Purchases of held-to-maturity securities
Net acquisitions of premises and equipment and other intangibles
Proceeds from dispositions
Cash used in acquisitions
Net cash from (used in) investing activities
Cash flows from financing activities
Redemption of trust capital securities
Issue of subordinated debentures
Repayment of subordinated debentures
Issue of common shares
Common shares purchased for cancellation
Issue of preferred shares
Redemption of preferred shares
Preferred shares purchased for cancellation
Sales of treasury shares
Purchases of treasury shares
Dividends paid
Issuance costs
Dividends/distributions paid to non-controlling interests
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 period (1)
Cash and due from banks at end of period (1)
Cash flows from operating activities include:
Amount of interest paid
Amount of interest received
Amount of dividend received
Amount of income taxes paid
For the year ended
October 31
2016
October 31
2015
October 31
2014
$
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10,026 $
9,004
1,546
573
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973
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19
(176)
(268)
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1,189
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6,827
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(11,369)
18,931
20,153
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26,856
(3,109)
8,056
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1,691
(3,155)
(1,257)
634
(2,964)
(21,426)
1,097
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302
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(32)
(220)
(77)
59
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(905)
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(34,964)
(39,143)
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(1,337)
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307
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14,929 $
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(92)
(105)
(4,430)
455
(4,969)
17,421
12,452 $
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7,096 $
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1,680
1,581
21,132
1,843
2,046
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(224)
14
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187
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(12,580)
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(27,096)
(18,063)
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3,233
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(2,247)
15,174
640
8,795
38,950
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285
(1,625)
(1,227)
173
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(900)
2,000
(1,600)
150
(113)
1,000
(1,525)
–
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(5,428)
(4,211)
(14)
(94)
(6)
(5,284)
198
1,871
15,550
17,421
7,186
20,552
1,702
2,315
(1)
We are required to maintain balances with central banks and other regulatory authorities. The total balances were $3.3 billion as at October 31, 2016 (October 31, 2015 – $2.6 billion;
October 31, 2014 – $2.0 billion; November 1, 2013 – $2.6 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
125
Note 1 General information
Royal Bank of Canada and its subsidiaries (the Bank) provide diversified financial services including personal and commercial banking, wealth
management, insurance, investor services and capital markets products and services on a global basis. Refer to Note 30 for further details on our
business segments.
The parent bank, Royal Bank of Canada, is a Schedule I Bank under the Bank Act (Canada) incorporated and domiciled in Canada. Our
corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada and our head office is located at 1 Place Ville-
Marie, Montreal, Quebec, Canada. Our common shares are listed on the Toronto Stock Exchange and New York Stock Exchange with the ticker
symbol RY.
These Consolidated Financial Statements are prepared in compliance with International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (IASB). Unless otherwise stated, monetary amounts are stated in Canadian dollars. Tabular
information is stated in millions of dollars, except per share amounts and percentages. These Consolidated Financial Statements also comply
with Subsection 308 of the Bank Act (Canada), which states that, except as otherwise specified by the Office of the Superintendent of Financial
Institutions (OSFI), our Consolidated Financial Statements are to be prepared in accordance with IFRS. The accounting policies outlined in Note 2
have been consistently applied to all periods presented.
On November 29, 2016, the Board of Directors authorized the Consolidated Financial Statements for issue.
Note 2 Summary of significant accounting policies, estimates and judgments
The significant accounting policies used in the preparation of these Consolidated Financial Statements, including the accounting requirements
prescribed by OSFI, are summarized below. These accounting policies conform, in all material respects, to IFRS.
General
Use of estimates and assumptions
In preparing our Consolidated Financial Statements, management is required to make subjective estimates and assumptions that affect the
reported amount of assets, liabilities, net income and related disclosures. Estimates made by management are based on historical experience
and other assumptions that are believed to be reasonable. Key sources of estimation uncertainty include: securities impairment, determination
of fair value of financial instruments, the allowance for credit losses, derecognition of financial assets, insurance claims and policy benefit
liabilities, pensions and other post-employment benefits, income taxes, carrying value of goodwill and other intangible assets, litigation
provisions, and deferred revenue under the credit card customer loyalty reward program. Accordingly, actual results may differ from these and
other estimates thereby impacting our future Consolidated Financial Statements. Refer to the relevant accounting policies in this Note for details
on our use of estimates and assumptions.
Significant judgments
In preparation of these Consolidated Financial Statements, management is required to make significant judgments that affect the carrying
amounts of certain assets and liabilities and the reported amounts of revenues and expenses recorded during the period. Significant judgments
have been made in the following areas and discussed as noted in the Consolidated Financial Statements:
Consolidation of structured entities
Fair value of financial instruments
Allowance for credit losses
Employee benefits
Goodwill and other intangibles
Note 2 – page 126
Note 7 – page 158
Note 2 – page 129
Note 3 – page 138
Note 2 – page 131
Note 5 – page 155
Note 2 – page 133
Note 17 – page 176
Note 2 – page 134
Note 10 – page 168
Note 11 – page 170
Securities impairment
Application of the effective
interest method
Derecognition of financial
assets
Income taxes
Provisions
Note 2 – page 128
Note 4 – page 151
Note 2 – page 131
Note 2 – page 132
Note 6 – page 157
Note 2 – page 134
Note 24 – page 188
Note 2 – page 135
Note 26 – page 190
Note 27 – page 194
Basis of consolidation
Our Consolidated Financial Statements include the assets and liabilities and results of operations of the parent company, Royal Bank of Canada,
and its subsidiaries, including certain structured entities, after elimination of intercompany transactions, balances, revenues and expenses.
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have
rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee.
We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the
entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual
arrangements.
We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining whether we are acting
as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following
factors: (i) the scope of our decision making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and
(iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances,
different factors and conditions may indicate that different parties control an entity depending on whether those factors and conditions are
assessed in isolation or in totality. Significant judgment is applied in assessing the relevant factors and conditions in totality when determining
whether we control an entity. Specifically, judgment is applied in assessing whether we have substantive decision making rights over the
relevant activities and whether we are exercising our power as a principal or an agent.
126
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
We consolidate all subsidiaries from the date we obtain control and cease consolidation when an entity is no longer controlled by us. Our
consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses reported in our Consolidated
Financial Statements.
Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate component of
equity which is distinct from our shareholders’ equity. The net income attributable to non-controlling interests is separately disclosed in our
Consolidated Statements of Income.
Investments in joint ventures and associates
Our investments in associated corporations and limited partnerships over which we have significant influence are accounted for using the equity
method. The equity method is also applied to our interests in joint ventures over which we have joint control. Under the equity method of
accounting, investments are initially recorded at cost, and the carrying amount is increased or decreased to recognize our share of the investee’s
net profit or loss, including our proportionate share of the investee’s other comprehensive income (OCI), subsequent to the date of acquisition.
Non-current assets held for sale and discontinued operations
Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally through a sale
transaction rather than through continuing use. This condition is satisfied when the asset is available for immediate sale in its present condition,
management is committed to the sale, and it is highly probable to occur within one year. Non-current assets (and disposal groups) classified as
held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell and if significant, are presented
separately from other assets on our Consolidated Balance Sheets.
A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can be
distinguished operationally and financially from the rest of our operations and (ii) it represents either a separate major line of business or is part
of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations. Disposal groups classified as
discontinued operations are presented separately from our continuing operations in our Consolidated Statements of Income.
Changes in accounting policies
During the first quarter, we adopted the following accounting policies as a result of the acquisition of City National Corporation (City National).
Acquired Loans
Acquired loans are initially measured at fair value, which reflects estimates of incurred and expected future credit losses at the acquisition date
and interest rate premiums or discounts relative to prevailing market rates. No allowance for credit losses is recorded on acquisition. At the
purchase date, acquired loans are classified as performing where we expect timely collection of all amounts due according to the original
contractual terms and as acquired credit-impaired (ACI) where it is probable that we will be unable to collect all amounts due according to the
original contractual terms.
Acquired performing loans are subsequently accounted for at amortized cost using the effective interest method. The expected future cash
flows used in this calculation are based on the contractual terms of the asset and any acquisition-related premiums and discounts. Credit-related
discounts relating to incurred losses for acquired loans are not accreted. Acquired loans are assessed for impairment at each balance sheet date
in a manner consistent with assessments performed for our originated loan portfolio.
Acquired Credit-Impaired Loans
ACI loans, which include Federal Deposit Insurance Corporation (FDIC) covered loans, are identified as impaired on acquisition based on the
specific risk characteristics of the loans, including indications that the borrower is experiencing significant financial difficulty, probability of
bankruptcy or other financial reorganization, payment status or economic conditions that correlate with defaults.
ACI loans are measured at fair value on acquisition based on the present value of expected future cash flows and subsequently accounted
for at amortized cost using the effective interest method. Estimates of expected future cash flows are reassessed at each balance sheet date for
changes in expected default rates, loss severities, the amount and timing of prepayments, and other factors that are reflective of current market
conditions. Probable decreases in expected future cash flows result in an impairment loss, which is measured as the difference between the
carrying amount of the loan and the present value of the revised expected future cash flows, discounted at the loan’s effective interest rate.
Impairment losses result in an increase to the Allowance for credit losses which is recorded through the Provision for credit losses in our
Consolidated Statements of Income. Probable increases in expected future cash flows result in a reversal of previous impairment losses, with the
present value of any remaining increase recognized as Interest income.
Federal Deposit Insurance Corporation Covered Loans
FDIC covered loans are loans subject to loss-share agreements with the FDIC. Under these agreements, the FDIC reimburses us for 80% of the net
losses incurred on the underlying loan portfolio. Impairment losses are recognized on acquired FDIC covered loans consistent with other ACI
loans, as described above. The amounts expected to be reimbursed by the FDIC are recognized separately as indemnification assets.
Indemnification assets are initially recorded at fair value and are subsequently adjusted for any changes in estimates related to the overall
collectability of the underlying loan portfolio. Additional impairment losses on the underlying loan portfolio generally result in an increase of the
indemnification asset through the Provision for credit losses. Decreases in expected losses on the underlying loan portfolio generally result in a
decrease of the indemnification asset through the Provision for credit losses to the extent that impairment losses were previously taken, with the
remainder recorded in Net interest income. The indemnification asset is drawn down as payments are received from the FDIC pertaining to the
loss-share agreements. Indemnification assets are recorded in Other assets on the Consolidated Balance Sheets.
In accordance with each loss-share agreement, we may be required to make a payment to the FDIC if actual losses incurred are less than the
intrinsic loss estimate as defined in the loss-share agreements (clawback liability). The clawback liability is determined as 20% of the excess
between the intrinsic loss estimate and actual covered losses determined in accordance with each loss-share agreement, net of specified
servicing costs. Subsequent changes to the estimated clawback liability are considered in determining the adjustment to the indemnification
asset as described above. Clawback liabilities are recorded in Other liabilities on the Consolidated Balance Sheets.
Financial instruments – Recognition and measurement
Securities
Securities are classified at inception, based on management’s intention, as at fair value through profit or loss (FVTPL), available-for-sale (AFS) or
held-to-maturity. Certain debt securities with fixed or determinable payments and which are not quoted in an active market may be classified as
loans and receivables.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
127
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Trading securities include securities purchased for sale in the near term which are classified as at FVTPL by nature and securities designated
as at FVTPL under the fair value option. 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. Dividends
and interest income accruing on Trading securities are recorded in Interest income. Interest and dividends accrued on interest-bearing and equity
securities sold short are recorded in Interest expense.
AFS securities include: (i) securities which may be sold to meet liquidity needs, 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, and (ii) loan substitute securities which are
client financings that have been structured as after-tax investments rather than conventional loans in order to provide the clients with a
borrowing rate advantage. AFS securities are measured at fair value. Unrealized gains and losses arising from changes in fair value are recorded
in OCI. Changes in foreign exchange rates for AFS equity securities are recognized in Other components of equity, while changes in foreign
exchange rates for AFS debt securities are recognized in Foreign exchange revenue, other than trading in Non-interest income. When the security
is sold, the cumulative gain or loss recorded in Other components of equity is included as Net gains on AFS securities in Non-interest income.
Purchase premiums or discounts on AFS debt securities are amortized over the life of the security using the effective interest method and are
recognized in Net interest income. Dividends and interest income accruing on AFS securities are recorded in Interest income.
At each reporting date, and more frequently when conditions warrant, we evaluate our AFS securities to determine whether there is any
objective evidence of impairment. Such evidence includes: for debt instruments, when an adverse effect on future cash flows from the asset or
group of assets can be reliably estimated; for equity securities, when there is a significant or prolonged decline in the fair value of the investment
below its cost.
When assessing debt securities for impairment, we primarily consider counterparty ratings and security-specific factors, including
subordination, external ratings, and the value of any collateral held for which there may not be a readily-accessible market. Significant judgment
is required in assessing impairment as management is required to consider all available evidence in determining whether objective evidence of
impairment exists and whether the principal and interest on the AFS debt security can be fully recovered. For complex debt instruments, we use
cash flow projection models which incorporate actual and projected cash flows for each security based on security-specific factors using a
number of assumptions and inputs that involve management judgment, such as default, prepayment and recovery rates. Due to the subjective
nature of choosing these inputs and assumptions, the actual amount of the future cash flows and their timing may differ from the estimates used
by management and consequently may cause a different conclusion as to the recognition of impairment or measurement of impairment loss.
When assessing equity securities for impairment, we consider factors which include the length of time and extent the fair value has been
below cost, along with management’s assessment of the financial condition, business and other risks of the issuer. Management weighs all
these factors to determine the impairment but to the extent that management judgment may differ from the actual experience of the timing and
amount of the recovery of the fair value, the estimate for impairment could change from period to period based upon future events that may or
may not occur, and the conclusion for the impairment of the equity securities may differ.
If an AFS security is impaired, the cumulative unrealized loss previously recognized in Other components of equity is removed from equity
and recognized in Net gains on AFS securities under Non-interest income. This amount is determined as the difference between the cost/
amortized cost and current fair value of the security less any impairment loss previously recognized. Subsequent to impairment, further declines
in fair value are recorded in Non-interest income, while increases in fair value are recognized in Other components of equity until sold. For AFS
debt securities, reversal of previously recognized impairment losses is recognized in our Consolidated Statements of Income if the recovery is
objectively related to a specific event occurring after recognition of the impairment loss.
Held-to-maturity securities are debt securities where we have the intention and the ability to hold the investment until its maturity date.
These securities are initially recorded at fair value and are subsequently measured at amortized cost using the effective interest method, less any
impairment losses which we assess using the same impairment model as for loans. Interest income and amortization of premiums and discounts
on debt securities are recorded in Net interest income. For held-to-maturity securities, reversal of previously recognized impairment losses is
recognized in our Consolidated Statements of Income if the recovery is objectively related to a specific event occurring after the recognition of
the impairment loss. Reversals of impairment losses on held-to-maturity securities are recorded to a maximum of what the amortized cost of the
investment would have been, had the impairment not been recognized at the date the impairment is reversed. Held-to-maturity securities have
been included with AFS securities on our Consolidated Balance Sheets.
We account for all of our securities using settlement date accounting and changes in fair value between the trade date and settlement date
are reflected in income for securities classified or designated as at FVTPL, and changes in the fair value of AFS securities between the trade and
settlement dates are recorded in OCI except for changes in foreign exchange rates on debt securities, which are recorded in Non-interest income.
Fair value option
A financial instrument can be designated as at FVTPL (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 designated as at FVTPL by way
of this fair value option must have a reliably measurable fair value and satisfy one of the following criteria: (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 (an accounting mismatch); (ii) it belongs to a group of financial assets or financial liabilities or both that are
managed, evaluated, and reported to key management personnel on a fair value basis in accordance with our risk management strategy, and we
can demonstrate that significant financial risks are eliminated or significantly reduced; 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. These instruments cannot be reclassified out of the
FVTPL category while they are held or issued.
Financial assets designated as at FVTPL are recorded at fair value and any unrealized gain or loss arising due to changes in fair value is
included in Trading revenue or Non-interest income – Other. Financial liabilities designated as at FVTPL are recorded at fair value and fair value
changes attributable to changes in our own credit risk are recorded in OCI. Amounts recognized in OCI will not be reclassified subsequently to net
income. The remaining fair value changes are recorded in Trading revenue or Non-interest income – Other. Upon initial recognition, if we
determine that presenting the effects of own credit risk changes in OCI would create or enlarge an accounting mismatch in net income, the full
fair value change in our debt designated as at FVTPL is recognized in net income.
To determine the fair value adjustments on our debt designated as at FVTPL, we calculate the present value of the instruments based on the
contractual cash flows over the term of the arrangement by using our effective funding rate at the beginning and end of the period with the
change in present value recorded in OCI, Trading revenue or Non-interest income – Other as appropriate.
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Consolidated Financial Statements
Determination of fair value
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. We determine fair value by incorporating all factors that market participants would
consider in setting a price, including commonly accepted valuation approaches.
The Board of Directors provides oversight on valuation of financial instruments, primarily through the Audit Committee and Risk Committee.
The Audit Committee reviews the presentation and disclosure of financial instruments that are measured at fair value, while the Risk Committee
assesses adequacy of governance structures and control processes for valuation of these instruments.
We have established policies, procedures and controls for valuation methodologies and techniques to ensure fair value is reasonably
estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition, independent price verification
(IPV) and model validation standards. These control processes are managed by either Finance or Group Risk Management and are independent
of the relevant businesses and their trading functions. Profit and loss decomposition is a process to explain the fair value changes of certain
positions and is performed daily for trading portfolios. All fair value instruments are subject to IPV, a process whereby trading function valuations
are verified against external market prices and other relevant market data. Market data sources include traded prices, brokers and price vendors.
We give priority to those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is
determined over time by comparing third-party price values to traders’ or system values, to other pricing service values and, when available, to
actual trade data. Other valuation techniques are used when a price or quote is not available. Some valuation processes use models to
determine fair value. We have a systematic and consistent approach to control model use. Valuation models are approved for use within our
model risk management framework. The framework addresses, among other things, model development standards, validation processes and
procedures, and approval authorities. Model validation ensures that a model is suitable for its intended use and sets parameters for its use. All
models are revalidated regularly by qualified personnel who are independent of the model design and development. Annually our model risk
profile is reported to the Board of Directors.
IFRS 13 Fair Value Measurement permits an exception, through an accounting policy choice, to measure fair value of a portfolio of financial
instruments on a net open risk position basis when certain criteria are met. We have elected to use this policy choice to determine fair value of
certain portfolios of financial instruments, primarily derivatives, based on a net exposure to market or credit risk.
We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences between the
overnight index swap (OIS) curve and London Interbank Offered Rates (LIBOR) for collateralized derivatives, funding valuation adjustments (FVA)
for uncollateralized and under-collateralized over-the-counter (OTC) derivatives, unrealized gains or losses at inception of the transaction, bid-
offer spreads, unobservable parameters and model limitations. These adjustments may be subjective as they require significant judgment in the
input selection, such as implied probability of default and recovery rate, and are intended to arrive at fair value that is determined based on
assumptions that market participants would use in pricing the financial instrument. The realized price for a transaction may be different from its
recorded value that is previously estimated using management judgment, and may therefore impact unrealized gains and losses recognized in
Non-interest income – Trading revenue or Other.
Valuation adjustments are recorded for the credit risk of our derivative portfolios in order to arrive at their fair values. Credit valuation
adjustments (CVA) take into account our counterparties’ creditworthiness, the current and potential future mark-to-market of the transactions,
and the effects of credit mitigants such as master netting and collateral agreements. CVA amounts are derived from estimates of exposure at
default, probability of default, recovery rates on a counterparty basis, and market and credit factor correlations. Exposure at default is the
amounts of expected derivative related assets and liabilities at the time of default, estimated through modeling using underlying risk factors.
Probability of default and recovery rate are implied from the market prices for credit protection and credit ratings of the counterparty. When
market data is unavailable, it is estimated by incorporating assumptions and adjustments that market participants would use in determining fair
value using these inputs. Correlation is the statistical measure of how credit and market factors may move in relation to one another. Correlation
is estimated using historical data. CVA is calculated daily and changes are recorded in Non-interest income – Trading revenue.
In the determination of fair value of collateralized OTC derivatives using the OIS curve, our valuation approach accounts for the difference
between certain OIS rates and LIBOR for derivatives valuation as valuation adjustments.
FVA are also calculated to incorporate cost and benefit of funding in the valuation of uncollateralized and under-collateralized OTC
derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a
funding curve, implied volatilities and correlations as inputs.
Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument contract where
the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by other observable market
transactions based on a valuation technique incorporating observable market data.
A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid or offer price
for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the mid to either the bid or offer price.
Some valuation models require parameter calibration from such factors as market observed option prices. The calibration of parameters
may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation adjustment is also estimated to mitigate
the uncertainties of parameter calibration and model limitations.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). Determination of fair value based on this hierarchy requires the use of observable market data whenever available. Level 1 inputs are
unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2
inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full term
of the assets or liabilities. Level 3 inputs are one or more inputs that are unobservable and significant to the fair value of the asset or liability.
Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement date. The
availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial instrument in the hierarchy for
disclosure purposes is based upon the lowest level of input that is significant to the measurement of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant
sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation
techniques. For more complex or illiquid instruments, significant judgment is required in the determination of the model used, the selection of
model inputs, and in some cases the application of valuation adjustments to the model value or quoted price for inactively traded financial
instruments, as the selection of model inputs may be subjective and the inputs may be unobservable. Unobservable inputs are inherently
uncertain as there is little or no market data available from which to determine the level at which the transaction would occur under normal
business circumstances. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk
valuation adjustments are assessed in all such instances.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
129
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Interest
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest-bearing financial
instruments using the effective interest method. The effective interest rate is the rate that discounts estimated future cash flows over the
expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining
the effective interest rate due to uncertainty in the timing and amounts of future cash flows.
Transaction costs
Transaction costs are expensed as incurred for financial instruments classified or designated as at FVTPL. For other financial instruments,
transaction costs are capitalized on initial recognition. For financial assets and financial liabilities measured at amortized cost, capitalized
transaction costs are amortized through net income over the estimated life of the instrument using the effective interest method. For AFS
financial assets measured at fair value that do not have fixed or determinable payments and no fixed maturity, capitalized transaction costs are
recognized in net income when the asset is derecognized or becomes impaired.
Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset on the balance sheet when there exists both a legally enforceable right to offset the recognized
amounts and an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
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. 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. Reverse repurchase agreements are treated as collateralized lending transactions. We also sell
securities under agreements to repurchase (repurchase agreements), which are treated as collateralized borrowing transactions. The securities
received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognized on, or derecognized
from, our Consolidated Balance Sheets, respectively, unless the risks and rewards of ownership are obtained or relinquished.
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, except when they are designated as at FVTPL 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 in our
Consolidated Statements of Income. Changes in fair value for reverse repurchase agreements and repurchase agreements designated as at
FVTPL are included in Trading revenue or Other in Non-interest income.
Derivatives
Derivatives are primarily used in sales and trading activities. Derivatives are also used to manage our exposure to interest, currency, credit and
other market risks. The most frequently used derivative products are interest rate swaps, interest rate futures, forward rate agreements, interest
rate options, foreign exchange forward contracts, cross 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 and are not closely related to the host contracts.
When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid instruments with
the effect that some of the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract is not carried at
fair value with changes in fair value reported in our Consolidated Statements of Income, the embedded derivative is generally required to be
separated from the host contract and accounted for separately as at FVTPL if the economic characteristics and risks of the embedded derivative
are not closely related to those of the host contract. 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 these derivatives are recognized
in Trading revenue in Non-interest income. Derivatives with positive fair values are reported as Derivative assets and derivatives with negative
fair values are reported as Derivative liabilities. In accordance with our policy for offsetting financial assets and financial liabilities, the net fair
value of certain derivative assets and liabilities are reported as an asset or liability, as appropriate. Valuation adjustments are included in the fair
value of Derivative assets and Derivative liabilities. Premiums paid and premiums received are shown in Derivative assets and Derivative
liabilities, respectively.
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 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.
We assess, both at the inception of the hedge and on an ongoing basis, whether the hedging instruments are ‘highly effective’ in offsetting
changes in the fair value or cash flows of the hedged items. A hedge is regarded as highly effective only if the following criteria are met: (i) at
inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash
flows attributable to the hedged risk, and (ii) actual results of the hedge are within a pre-determined range. In the case of hedging a forecast
transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could
ultimately affect the reported net profit or loss. Hedge accounting is discontinued when it is determined that the hedging instrument is no longer
effective as a hedge, the hedging instrument or hedged item is terminated or sold, or the forecast transaction is no longer deemed highly
probable. Refer to Note 8 for the fair value of derivatives and non-derivative instruments categorized by their hedging relationships as well as
derivatives that are not designated in hedging relationships.
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Consolidated Financial Statements
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 fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by
changes in the fair value of the hedging derivative, which are also recognized in Non-interest income. When hedge accounting is discontinued,
the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged items
are amortized to Net income over the remaining life of the hedged items.
We predominantly use interest rate swaps to hedge our exposure to changes in a fixed interest rate instrument’s fair value caused by
changes in interest 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 cumulative amounts
previously recognized in Other components of equity are reclassified to Net interest income during the periods when the variability in the cash
flows of the hedged item affects Net interest income. Unrealized gains and losses on derivatives are reclassified immediately to Net income
when the hedged item is sold or terminated early, or when the forecast transaction is no longer expected to occur.
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 our foreign currency exposure to a net investment in a 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, or a portion thereof, previously recognized in Other components of equity are recognized in Net income on the disposal, or partial
disposal, of the foreign operation.
We use foreign exchange contracts and foreign currency-denominated liabilities to manage our foreign currency exposures to net
investments in foreign operations having a functional currency other than the Canadian dollar.
Loans
Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which are not
classified as AFS. Loans are initially recognized at fair value. When loans are issued at a market rate, fair value is represented by the cash
advanced to the borrowers. Loans are subsequently measured at amortized cost using the effective interest method less impairment, unless we
intend to sell them in the near future upon origination or they have been designated as at FVTPL, in which case they are carried at fair value.
We assess at each balance sheet date whether there is objective evidence that the loans (including debt securities reclassified as loans) are
impaired. Evidence of impairment may include indications that the borrower is experiencing significant financial difficulty, probability of
bankruptcy or other financial reorganization, as well as a measurable decrease in the estimated future cash flows evidenced by the adverse
changes in the payments status of the borrower or economic conditions that correlate with defaults. 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 loans becoming past due. Loans guaranteed by a Canadian
government are classified as impaired when the loan is contractually 365 days in arrears. Credit card balances are written off when a payment is
180 days in arrears.
Assets acquired to satisfy loan commitments are recorded at their fair value less costs to sell. 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 fair value of the assets
acquired is recognized by a charge to Provision for credit losses.
Interest on loans is recognized in Interest income – Loans using the effective interest method. The estimated future cash flows used in this
calculation include those determined by the contractual term of the asset, all fees that are considered to be integral to the effective interest rate,
transaction costs and all other premiums or discounts. 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 a
reasonable expectation that a loan will be originated, commitment and standby fees are also recognized as interest income over the expected
term of the resulting loans using the effective interest method. Otherwise, such fees are recorded as Other Liabilities and amortized into
Non-interest income over the commitment or standby period. Prepayment fees on mortgage loans are not included as part of the effective
interest rate at origination as the amounts are not reliably measurable. If prepayment fees are received on a renewal of a mortgage loan, the fee
is included as part of the effective interest rate, and if not renewed, the prepayment fee is recognized in interest income at the prepayment date.
Allowance for credit losses
An allowance for credit losses is established if there is objective evidence that we will be unable to collect all amounts due on our loans portfolio
according to the original contractual terms or the equivalent value. This portfolio includes 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 for credit losses is increased by the impairment losses recognized 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 for credit losses
relating to off-balance sheet items is included in Provisions under Other Liabilities.
We assess whether objective evidence of impairment exists individually for loans that are individually significant and collectively for loans
that are not individually significant. If we determine that no objective evidence of impairment exists for an individually assessed loan, whether
significant or not, the loan is included in a group of loans with similar credit risk characteristics and collectively assessed for impairment. Loans
that are individually assessed for impairment and for which an impairment loss is recognized are not included in a collective assessment of
impairment.
Allowance for credit losses represent management’s best estimates of losses incurred in our loan portfolio at the balance sheet date.
Management’s judgment is required in making assumptions and estimations when calculating allowances on both individually and collectively
assessed loans. The underlying assumptions and estimates used for both individually and collectively assessed loans can change from period to
period and may significantly affect our results of operations.
Individually assessed loans
Loans which are individually significant are assessed individually for objective indicators of impairment. A loan is considered impaired when
management determines that it will not be able to collect all amounts due according to the original contractual terms or the equivalent value.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
131
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Credit exposures of individually significant loans are evaluated based on factors including the borrower’s overall financial condition,
resources and payment record, and where applicable, the realizable value of any collateral. If there is evidence of impairment leading to an
impairment loss, then the amount of the loss is determined as the difference between the carrying amount of the loan, including accrued
interest, and the estimated recoverable amount. The estimated recoverable amount is measured as the present value of expected future cash
flows discounted at the loan’s original effective interest rate, including cash flows that may result from the realization of collateral less costs to
sell. Individually-assessed impairment losses reduce the carrying amount of the loan through the use of an allowance account and the amount of
the loss is recognized in Provision for credit losses in our Consolidated Statements of Income. Following impairment, interest income is
recognized on the unwinding of the discount from the initial recognition of impairment.
Significant judgment is required in assessing evidence of impairment and estimation of the amount and timing of future cash flows when
determining the impairment loss. When assessing objective evidence of impairment, we primarily consider specific factors such as the financial
condition of the borrower, borrower’s default or delinquency in interest or principal payments, local economic conditions and other observable
data. In determining the estimated recoverable amount, we consider discounted expected future cash flows at the effective interest rate using a
number of assumptions and inputs. Management judgment is involved when choosing these inputs and assumptions used, such as the
expected amount of the loan that will not be recovered and the cost of time delays in collecting principal and/or interest, and when estimating
the value of any collateral held for which there may not be a readily accessible market. Changes in the amount expected to be recovered would
have a direct impact on the Provision for credit losses and may result in a change in the Allowance for credit losses.
Collectively assessed loans
Loans which are not individually significant, or which are individually assessed and not determined to be impaired, are collectively assessed for
impairment. For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar risk characteristics, taking into
account loan type, industry, geographic location, collateral type, past due status and other relevant factors.
The collective impairment allowance is determined by reviewing factors including: (i) historical loss experience, which takes into
consideration historical probabilities of default, loss given default and exposure at default, in portfolios of similar credit risk characteristics, and
(ii) management’s judgment on the level of impairment losses based on historical experience relative to the actual level as reported at the
balance sheet date, taking into consideration the current portfolio credit quality trends, business and economic and credit conditions, the impact
of policy and process changes, and other supporting factors. Future cash flows for a group of loans are collectively evaluated for impairment on
the basis of the contractual cash flows of the loans in the group and historical loss experience for loans with credit risk characteristics similar to
those in the group. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not
affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not
currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience. Collectively-assessed impairment losses reduce the carrying amount of the aggregated loan
position through an allowance account and the amount of the loss is recognized in Provision for credit losses. Following impairment, interest
income is recognized on the unwinding of the discount from the initial recognition of impairment.
The methodology and assumptions used to calculate collective impairment allowances are subject to uncertainty, in part because it is not
practicable to identify losses on an individual loan basis due to the large number of individually insignificant loans in the portfolio. Significant
judgment is required in assessing historical loss experience, the loss identification period and its relationship to current portfolios including
delinquency, and loan balances; and current business, economic and credit conditions including industry specific performance, unemployment
and country risks. Changes in these assumptions would have a direct impact on the Provision for credit losses and may result in changes in the
related Allowance for credit losses.
Write-off of loans
Loans and the related impairment allowance for credit losses are written off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realization of the collateral. In
circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery,
write off may be earlier. For credit cards, the balances and related allowance for credit losses are written off when payment is 180 days in arrears.
Personal loans are generally written off at 150 days past due.
Derecognition of financial assets
Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the assets have
expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash flows to a third party
subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash flows and substantially all of the risk
and rewards of the assets have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the
transferred assets are not derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When
we neither retain nor transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets
is relinquished. If we retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing
involvement.
Management’s judgment is applied in determining whether the contractual rights to the cash flows from the transferred assets have expired
or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those cash flows. We derecognize
transferred financial assets if we transfer substantially all the risk and rewards of the ownership in the assets. When assessing whether we have
transferred substantially all of the risk and rewards of the transferred assets, management considers the Bank’s exposure before and after the
transfer with the variability in the amount and timing of the net cash flows of the transferred assets. In transfers in which we retain the servicing
rights, management has applied judgment in assessing the benefits of servicing against market expectations. When the benefits of servicing are
greater than fair value, a servicing asset is recognized in Other assets in our Consolidated Balance Sheets. When the benefits of servicing are
less than fair value, a servicing liability is recognized in Other liabilities in our Consolidated Balance Sheets.
Derecognition of financial liabilities
We derecognize a financial liability from our Consolidated Balance Sheets when our obligation specified in the contract expires, or is discharged
or cancelled. We recognize the difference between the carrying amount of a financial liability transferred and the consideration paid in our
Consolidated Statements of Income.
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Consolidated Financial Statements
Guarantees
Financial guarantee contracts are contracts that contingently require us to make specified payments (in cash, other assets, our own shares or
provision of services) to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with
the original or modified terms of a debt instrument. Liabilities are recognized on our Consolidated Balance Sheets at the inception of a guarantee
for the fair value of the obligation undertaken in issuing the guarantee. Financial guarantees are subsequently remeasured at the higher of (i) the
amount initially recognized less accumulated amortization and (ii) our best estimate of the present value of the expenditure required to settle the
present obligation at the end of the reporting period.
If the financial guarantee contract meets the definition of a derivative, it is measured at fair value at each balance sheet date and reported
under Derivatives on our Consolidated Balance Sheets.
Insurance and segregated funds
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 AFS or loans and receivables, except for investments supporting the policy benefit liabilities on life and health insurance contracts
and a portion of property and casualty contracts. These are designated as at FVTPL 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 change.
Premiums ceded for reinsurance and reinsurance recoveries on policyholder benefits and claims incurred are reported in income and
expense as appropriate. Reinsurance recoverables, which relate to paid benefits and unpaid claims, are included in Other assets.
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 an insurance 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 segregated fund assets are
registered in our name but the segregated fund policyholders bear the risks and rewards of the funds’ investment performance. Liabilities for
these contracts are calculated based on contractual obligations using actuarial assumptions and are at least equivalent to the surrender or
transfer value calculated by reference to the value of the relevant underlying funds or indices. Segregated funds’ assets and liabilities are
separately presented on our Consolidated Balance Sheets. As the segregated fund policyholders bear the risks and rewards of the funds’
performance, investment income earned by the segregated funds and expenses incurred by the segregated funds are offset and are not
separately presented in our Consolidated Statements of Income. Fee income we earn from segregated funds includes management fees,
mortality, policy administration and surrender charges, and these fees are recorded in Non-interest income – Insurance premiums, investment
and fee income. 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.
Liability adequacy tests are performed for all insurance contract portfolios at each balance sheet date to ensure the adequacy of insurance
contract liabilities. Current best estimates of future contractual cash flows, claims handling and administration costs, and investment returns
from the assets backing the liabilities are taken into account in the tests. When the test results indicate that there is a deficiency in liabilities, the
deficiency is charged immediately to our Consolidated Statements of Income by writing down the deferred acquisition costs in Other assets and/
or increasing Insurance claims and policy benefit liabilities.
Employee benefits – Pensions and other post-employment benefits
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, net interest on the net defined benefit liability (asset), past service cost and gains or losses on settlement.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses and return on plan assets (excluding amounts
included in net interest on the net defined benefit liability), are recognized immediately in OCI in the period in which they occur. Actuarial gains
and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually
occurred), as well as the effects of changes in actuarial assumptions. Amounts recognized in OCI will not be reclassified subsequently to net
income. Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment
and is charged immediately to income.
For each defined benefit plan, we recognize the present value of our defined benefit obligations less the fair value of the plan assets as a
defined benefit liability reported in Employee benefit liabilities on our Consolidated Balance Sheets. For plans where there is a net defined
benefit asset, the amount is reported as an asset in Employee benefit assets on our Consolidated Balance sheets.
The calculation of defined benefit expenses and obligations requires significant judgment as the recognition is dependent on discount rates
and various actuarial assumptions such as healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination
rates. Due to the long-term nature of these plans, such estimates and assumptions are subject to inherent risks and uncertainties. For our
pension and other post-employment plans, the discount rate is determined by reference to market yields on high quality corporate bonds. Since
the discount rate is based on currently available yields, and involves management’s assessment of market liquidity, it is only a proxy for future
yields. Actuarial assumptions, set in accordance with current practices in the respective countries of our plans, may differ from actual experience
as country specific statistics are only estimates of future employee behaviour. These assumptions are determined by management and are
reviewed by actuaries at least annually. Changes to any of the above assumptions may affect the amounts of benefits obligations, expenses and
remeasurements that we recognize.
Our contributions to defined contribution plans are expensed when employees have rendered services in exchange for such contributions.
Defined contribution plan expense is included in Non-interest expense – Human resources.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
133
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Share-based compensation
We offer share-based compensation plans to certain key employees and to our non-employee directors.
To account for stock options granted to employees, compensation expense is recognized over the applicable vesting period with a
corresponding increase in equity. Fair value is determined by using option valuation models, which take into account the exercise price of the
option, the current share price, the risk free interest rate, the expected volatility of the share price over the life of the option and other relevant
factors. When the options are exercised, the exercise price proceeds together with the amount initially recorded in equity are credited to common
shares. Our other compensation plans include performance deferred share plans and deferred share unit plans for key employees (the Plans).
The obligations for the Plans are accrued over their vesting periods. The Plans are settled in cash.
For cash-settled awards, our accrued obligations are adjusted to their fair value at each balance sheet date. For share-settled awards, our
accrued obligations are based on the fair value of our common shares at the date of grant. Changes in our obligations, 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 for cash-settled awards and in Retained earnings for share-settled awards.
The compensation cost attributable to options and awards granted to employees who are eligible to retire or will become eligible to retire
during the vesting period, is recognized immediately if the employee is eligible to retire on the grant date or over the period between the grant
date and the date the employee becomes eligible to retire.
Our contributions to the employee savings and share ownership plans are expensed as incurred.
Income taxes
Income tax comprises current tax and deferred tax and is recognized in our Consolidated Statements of Income except to the extent that it relates
to items recognized directly in equity, in which case it is recognized in equity.
Current income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in
which profits arise, calculated using tax rates enacted or substantively enacted by the balance sheet date. Deferred tax is recognized on
temporary differences between the carrying amounts of assets and liabilities for accounting and tax purposes. A deferred income tax asset or
liability is determined for each temporary difference, except for earnings related to our subsidiaries, branches, associates and interests in joint
ventures where the temporary differences will not reverse in the foreseeable future and we have the ability to control the timing of reversal.
Deferred tax assets and liabilities are determined based on the tax rates that are expected to be in effect in the period that the asset is realized
or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Current tax
assets and liabilities are offset when they are levied by the same taxation authority on either the same taxable entity or different taxable entities
within the same tax reporting group (which intends to settle on a net basis), and when there is a legal right to offset. Deferred tax assets and
liabilities are offset when the same conditions are satisfied. Our Consolidated Statements of Income include items that are non-taxable or non-
deductible for income tax purposes and, accordingly, this causes the income tax provision to be different from what it would be if based on
statutory rates.
Deferred income taxes accumulated as a result of temporary differences and tax loss carryforwards are included in Other assets and Other
liabilities. On a quarterly basis, we review our deferred income tax assets to determine whether it is probable that the benefits associated with
these assets will be realized; this review involves evaluating both positive and negative evidence.
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different
interpretations by us and the relevant taxation authorities. Significant judgment is required in the interpretation of the relevant tax laws, and the
determination of our tax provision which includes our best estimate of tax positions that are under audit or appeal by relevant taxation
authorities. We perform a review on a quarterly basis to incorporate our best assessment based on information available, but additional liability
and income tax expense could result based on decisions made by the relevant tax authorities.
The determination of our deferred tax asset or liability also requires significant management judgment as the recognition is dependent on
our projection of future taxable profits and tax rates that are expected to be in effect in the period the asset is realized or the liability is settled.
Any changes in our projection will result in changes in deferred tax assets or liabilities on our Consolidated Balance Sheets, and also deferred tax
expense in our Consolidated Statements of Income.
Business combinations, goodwill and other intangibles
All business combinations are accounted for using the acquisition method. Non-controlling interests, if any, are recognized at their proportionate
share of the fair value of identifiable assets and liabilities, unless otherwise indicated. 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 on the date of acquisition.
Goodwill
Goodwill is allocated to cash-generating units or groups of cash-generating units (CGU) for the purpose of impairment testing, which is
undertaken at the lowest level at which goodwill is monitored for internal management purposes. Impairment testing is performed annually as at
August 1, or more frequently if there are objective indicators of impairment, by comparing the recoverable amount of a CGU with its carrying
amount. The recoverable amount of a CGU is the higher of its value in use and its fair value less costs of disposal. Value in use is the present
value of the expected future cash flows from a CGU. Fair value less costs of disposal is the amount obtainable from the sale of a CGU in an
orderly transaction between market participants, less disposal costs. The fair value of a CGU is estimated using valuation techniques such as a
discounted cash flow method, adjusted to reflect the considerations of a prospective third-party buyer. External evidence such as binding sale
agreements or recent transactions for similar businesses within the same industry is considered to the extent that it is available.
Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGU, in particular future
cash flows, discount rates and terminal growth rates, due to the uncertainty in the timing and amount of cash flows and the forward-looking
nature of these inputs. Future cash flows are based on financial plans agreed by management which are estimated based on forecast results,
business initiatives, planned capital investments and returns to shareholders. Discount rates are based on the bank-wide cost of capital,
adjusted for CGU-specific risks and currency exposure as reflected by differences in expected inflation. Bank-wide cost of capital is based on the
Capital Asset Pricing Model. CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk,
devaluation risk, and government regulation), currency risk, and price risk (including product pricing risk and inflation). Terminal growth rates
reflect the expected long-term gross domestic product growth and inflation for the countries within which the CGU operates. Changes in these
assumptions may impact the amount of impairment loss recognized in Non-interest expense.
The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the recoverable
amount is less than the carrying value, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU
134
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
and then to the other non-financial assets of the CGU proportionately based on the carrying amount of each asset. Any impairment loss is
charged to income in the period in which the impairment is identified. Goodwill is stated at cost less accumulated impairment losses.
Subsequent reversals of goodwill impairment are prohibited.
Upon disposal of a portion of a CGU, the carrying amount of goodwill relating to the portion of the CGU sold is included in the determination
of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed portion to the total CGU.
Other intangibles
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business combination, or generated
internally. Intangible assets acquired through a business combination are recognized separately from goodwill when they are separable or arise
from contractual or other legal rights, and their fair value can be measured reliably. The cost of a separately acquired intangible asset includes its
purchase price and directly attributable costs of preparing the asset for its intended use. In respect of internally generated intangible assets, cost
includes all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by
management. Research and development costs that are not eligible for capitalization are expensed. After initial recognition, an intangible asset
is carried at its cost less any accumulated amortization and accumulated impairment losses, if any. Intangible assets with a finite-life are
amortized on a straight-line basis over their estimated useful lives as follows: computer software – 3 to 10 years; and customer relationships –
10 to 20 years. We do not have any intangible assets with indefinite lives.
Intangible assets are assessed for indicators of impairment at each reporting period. If there is an indication that an intangible asset may be
impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its recoverable amount. Where it is not
possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs.
If the recoverable amount of the asset (or CGU) is less than its carrying amount, the carrying amount of the intangible asset is written down to its
recoverable amount as an impairment loss.
An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable amount of the
asset (or CGU) since the last impairment loss was recognized. If an impairment loss is subsequently reversed, the carrying amount of the asset
(or CGU) is revised to the lower of its recoverable amount and the carrying amount that would have been determined (net of amortization) had
there been no prior impairment.
Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives and recoverable amounts of
our intangible assets, and assessing whether certain events or circumstances constitute objective evidence of impairment. Estimates of the
recoverable amounts of our intangible assets rely on certain key inputs, including future cash flows and discount rates. Future cash flows are
based on sales projections and allocated costs which are estimated based on forecast results and business initiatives. Discount rates are based
on the bank-wide cost of capital, adjusted for asset-specific risks. Changes in these assumptions may impact the amount of impairment loss
recognized in Non-interest expense.
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. Foreign exchange gains and losses resulting from the translation and settlement of these items are recognized in Non-interest income in
the Consolidated Statements of Income.
Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars at historical rates. Non-
monetary financial assets classified as AFS securities, such as equity instruments, that are measured at fair value are translated into Canadian
dollars at rates prevailing at the balance sheet date, and the resulting foreign exchange gains and losses are recorded in Other components of
equity until the asset is sold or becomes impaired.
Assets and liabilities of our foreign operations with functional currencies other than Canadian dollars 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 reporting period.
Unrealized gains or losses arising as a result of the translation of our foreign operations along with the effective portion of related hedges
are reported in Other components of equity on an after-tax basis. Upon disposal or partial disposal of a foreign operation, an appropriate portion
of the accumulated net translation gains or losses is included in Non-interest income.
Premises and equipment
Premises and equipment includes land, buildings, leasehold improvements, computer equipment, furniture, fixtures and other equipment, and
are stated at cost less accumulated depreciation, except for land which is not depreciated, and accumulated impairment losses. Cost comprises
the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use, and the
initial estimate of any disposal costs. Depreciation is recorded principally on a straight–line basis over the estimated useful lives of the assets,
which are 25 to 50 years for buildings, 3 to 10 years for computer equipment, and 7 to 10 years for furniture, fixtures and other equipment. The
amortization period for leasehold improvements is the lesser of the useful life of the leasehold improvements or the lease term plus the first
renewal period, if reasonably assured of renewal, up to a maximum of 10 years. Depreciation methods, useful lives, and residual values are
reassessed at each reporting period and adjusted as appropriate. Gains and losses on disposal are recorded in Non–interest income.
Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an asset may be
impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount. Where it is not possible to
estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs and test for
impairment at the CGU level. An impairment charge is recorded to the extent the recoverable amount of an asset (or CGU), which is the higher of
value in use and fair value less costs of disposal, is less than its carrying amount. Value in use is the present value of the future cash flows
expected to be derived from the asset (or CGU). Fair value less costs of disposal is the amount obtainable from the sale of the asset (or CGU) in
an orderly transaction between market participants, less costs of disposal.
After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised carrying amount. If an
impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s recoverable amount and the carrying amount
that would have been determined (net of depreciation) had there been no prior impairment loss. The depreciation charge in future periods is
adjusted to reflect the revised carrying amount.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive obligation as a result of a
past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount
of the obligation. Provisions are measured as the best estimate of the consideration required to settle the present obligation at the reporting
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
135
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
date. Significant judgment is required in determining whether a present obligation exists and in estimating the probability, timing and amount of
any outflows. We record provisions related to litigation, asset retirement obligations, and the allowance for off-balance sheet and other items.
Provisions are recorded under Other liabilities on our Consolidated Balance Sheets.
We are required to estimate the results of ongoing legal proceedings, expenses to be incurred to dispose of capital assets, and credit losses
on undrawn commitments and guarantees. The forward-looking nature of these estimates requires us to use a significant amount of judgment in
projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the
reporting period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our expectations, we
may incur expenses in excess of the provisions recognized.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, such as an insurer,
a separate asset is recognized if it is virtually certain that reimbursement will be received.
Commissions and fees
Portfolio management and other management advisory and service fees are recognized based on the applicable service contracts. Fees related
to provision of services including asset management, wealth management, financial planning and custody services that cover a specified service
period, are recognized over the period in which the service is provided. Investment management and custodial fees are generally calculated as a
percentage of daily or period-end net asset values, and are received monthly, quarterly, semi-annually or annually, depending on the terms of the
contracts. Management fees are generally derived from assets under management (AUM) when our clients solicit the investment capabilities of
an investment manager and administrative fees are derived from assets under administration (AUA) where the investment strategy is directed by
the client or a designated third party manager. Performance-based fees, which are earned upon exceeding certain benchmarks or performance
targets, are recognized only when the benchmark or performance targets are achieved. Fees such as underwriting fees and brokerage fees that
are related to the provision of specific transaction type services are recognized when the service has been completed.
Dividend income
Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and
usually the date when shareholders have approved the dividend for unlisted equity securities.
Leasing
A lease is an agreement whereby the lessor conveys to the lessee the right to use an asset for an agreed upon period of time in return for a
payment or series of payments. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of the
leased asset to the lessee, where title may or may not eventually be transferred. An operating lease is a lease other than a finance lease.
Operating leases
When we are the lessee in an operating lease, we record rental payments on a straight-line basis over the lease term in Non-interest expense.
Finance leases
When we are the lessee in a finance lease, we initially record both the leased asset and the related lease obligation in Premises and equipment,
Other intangibles and Other liabilities on our Consolidated Balance Sheets at an amount equal to the fair value of the leased asset or, if lower,
the present value of the minimum lease payments, each determined at the date of inception of the lease. Initial direct costs directly attributed to
the lease are recognized as an asset under the finance lease.
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 income available to common shareholders is determined after deducting dividend entitlements of preferred
shareholders, any gains (losses) on redemption of preferred shares net of related income taxes and the net income attributable to non-
controlling interests.
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. For contracts that may be settled in cash or in common shares at our option, diluted earnings per share is calculated
based on the assumption that such contracts will be settled in shares. Income and expenses associated with these types of contracts are
excluded from the Net income available to common shareholders, and the additional number of shares that would be issued is included in the
diluted earnings per share calculation. These contracts include our convertible Preferred Shares and Trust Capital Securities with the conversion
assumed to have taken place at the beginning of the period or on the date of issue, if later. For stock options whose exercise price is less than
the average market price of our common shares, they 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.
Share capital
We classify a financial instrument that we issue as a financial asset, financial liability or an equity instrument in accordance with the substance
of the contractual arrangement.
Our common shares held by us are classified as treasury shares in equity and accounted for at weighted average cost. Upon the sale of
treasury shares, the difference between the sale proceeds and the cost of the shares is recognized in Retained earnings. Financial instruments
issued by us are classified as equity instruments when there is no contractual obligation to transfer cash or other financial assets. Incremental
costs directly attributable to the issue of equity instruments are included in equity as a deduction from the proceeds, net of tax. Financial
instruments that will be settled by a variable number of our common shares upon their conversion by the holders as well as the related accrued
distributions are classified as liabilities on our Consolidated Balance Sheets. Dividends and yield distributions on these instruments are
classified as Interest expense in our Consolidated Statements of Income.
136
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Future changes in accounting policy and disclosure
The following standards have been issued, but are not yet effective for us. We are currently assessing the impact of adopting these standards on
our Consolidated Financial Statements:
IFRS 15 Revenue from Contracts with Customers (IFRS 15)
In May 2014, the IASB issued IFRS 15 which establishes principles for reporting about the nature, amount, timing and uncertainty of revenue and
cash flows arising from an entity’s contracts with customers. The standard provides a single, principles based five-step model for revenue
recognition to be applied to contracts with customers except for revenue arising from items such as financial instruments, insurance contracts
and leases. In April 2016, the IASB issued amendments to IFRS 15, which clarify the underlying principles of IFRS 15 and provide additional
transitional relief on initial application. IFRS 15 and its amendments will be effective for us on November 1, 2018.
IFRS 9 Financial Instruments (IFRS 9)
In July 2014, the IASB issued the complete version of IFRS 9, first issued in November 2009, which brings together the classification and
measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and
Measurement (IAS 39).
IFRS 9 introduces a principles-based approach to the classification of financial assets based on an entity’s business model and the nature
of the cash flows of the asset. All financial assets, including hybrid contracts, are measured as at FVTPL, fair value through OCI or amortized cost.
For financial liabilities, IFRS 9 includes the requirements for classification and measurement previously included in IAS 39.
IFRS 9 also introduces an expected credit loss impairment model for all financial assets not measured as at FVTPL. The model has three
stages: (1) on initial recognition, a loss allowance is recognized equal to 12 months expected credit losses; (2) if credit risk increases
significantly relative to initial recognition, a loss allowance equal to full lifetime expected credit losses is recognized; and (3) when a financial
asset is considered credit-impaired, a loss allowance equal to lifetime expected credit losses is recognized and interest revenue is calculated
based on the carrying amount of the asset, net of the loss allowance, rather than its gross carrying amount. Changes in the required loss
allowance, including the impact of movement between 12 months and lifetime expected credit losses, will be recorded in profit or loss.
Finally, IFRS 9 introduces a new hedge accounting model that aligns the accounting for hedge relationships more closely with an entity’s
risk management activities, permits hedge accounting to be applied more broadly to a greater variety of hedging instruments and risks and
requires additional disclosures.
We adopted the own credit provisions of IFRS 9 in the second quarter of 2014. The remaining sections of IFRS 9 will be effective for us on
November 1, 2017.
IFRS 16 Leases (IFRS 16)
In January 2016, the IASB issued IFRS 16, which sets out the principles for the recognition, measurement, presentation and disclosure of leases.
The standard removes the current requirement for lessees to classify leases as finance leases or operating leases by introducing a single lessee
accounting model that requires the recognition of lease assets and lease liabilities on the balance sheet for most leases. Lessees will also
recognize depreciation expense on the lease asset and interest expense on the lease liability in the statement of income. There are no significant
changes to lessor accounting aside from enhanced disclosure requirements. IFRS 16 will be effective for us on November 1, 2019.
IAS 7 Statement of Cash Flows (IAS 7)
In January 2016, the IASB issued amendments to IAS 7, which will require specific disclosures for movements in certain liabilities on the
statement of cash flow. These amendments will be effective for us on November 1, 2017.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
137
Note 3 Fair value of financial instruments
Carrying value and fair value of selected financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instrument.
Carrying value and fair value
Financial
instruments
classified as
at FVTPL
Financial
instruments
designated as
at FVTPL
Available-
for-sale
instruments
measured at
fair value
As at October 31, 2016
Carrying value
Fair value
Financial
instruments
measured at
amortized cost
Financial
instruments
measured at
amortized cost
Total
carrying
amount
Total
fair value
(Millions of Canadian dollars)
Financial assets
Securities
Trading
Available-for-sale (1)
$
141,265 $
10,027 $
–
141,265
–
10,027
$
–
69,922
69,922
Assets purchased under reverse repurchase
agreements and securities borrowed
–
121,692
Loans
Retail
Wholesale
Other
Derivatives
Other assets (2)
Financial liabilities
Deposits
Personal
Business and government (3)
Bank (4)
Other
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Derivatives
Other liabilities (5)
Subordinated debentures
71
1,437
1,508
118,944
–
$
113 $
–
–
113
50,369
–
116,550
282
–
–
904
904
–
894
15,142
82,871
730
98,743
–
88,863
–
10
131
–
–
–
–
–
–
$
–
14,879
14,879
64,610
368,145
151,047
519,192
–
43,981
235,295
405,136
18,302
658,733
–
14,578
–
43,865
9,631
$
– $
15,207
15,207
151,292 $
84,801
236,093
151,292
85,129
236,421
64,498
186,302
186,190
369,012
150,720
519,732
–
43,979
368,216
153,388
521,604
118,944
44,875
369,083
153,061
522,144
118,944
44,873
$
235,490 $
406,881
18,312
660,683
250,550 $
488,007
19,032
757,589
250,745
489,752
19,042
759,539
–
50,369
50,369
14,583
–
43,838
9,700
103,441
116,550
44,157
9,762
103,446
116,550
44,130
9,831
(Millions of Canadian dollars)
Financial assets
Securities
Trading
Available-for-sale (1)
Carrying value and fair value
Carrying value
Fair value
As at October 31, 2015
Financial
instruments
classified as
at FVTPL
Financial
instruments
designated as
at FVTPL
Available-
for-sale
instruments
measured at
fair value
Financial
instruments
measured at
amortized cost
Financial
instruments
measured at
amortized cost
Total
carrying
amount
Total
fair value
$
148,939 $
–
148,939
9,764 $
–
9,764
–
48,164
48,164
$
$
–
8,641
8,641
– $
8,759
8,759
158,703 $
56,805
215,508
158,703
56,923
215,626
Assets purchased under reverse repurchase
agreements and securities borrowed
–
114,692
Loans
Retail
Wholesale
Other
Derivatives
Other assets (2)
Financial liabilities
Deposits
Personal
Business and government (3)
Bank (4)
Other
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Derivatives
Other liabilities (5)
Subordinated debentures
166
1,280
1,446
105,626
–
$
69 $
–
–
69
47,658
–
107,860
192
–
–
1,327
1,327
–
925
16,828
93,319
5,376
115,523
–
73,362
–
13
112
–
–
–
–
–
–
$
60,031
346,795
122,655
469,450
–
44,852
203,669
362,259
15,707
581,635
–
9,926
–
43,251
7,250
60,071
174,723
174,763
348,513
121,316
469,829
–
44,852
346,961
125,262
472,223
105,626
45,777
348,679
123,923
472,602
105,626
45,777
$
204,019 $
363,305
15,713
583,037
220,566 $
455,578
21,083
697,227
220,916
456,624
21,089
698,629
–
47,658
47,658
9,928
–
43,196
7,078
83,288
107,860
43,456
7,362
83,290
107,860
43,401
7,190
(1)
(2)
(3)
(4)
(5)
AFS securities include held-to-maturity securities that are recorded at amortized cost.
Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
Bank deposits refer to deposits from regulated deposit-taking institutions.
Includes Acceptances and financial instruments recognized in Other liabilities.
138
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Loans and receivables designated as at fair value through profit or loss
For our loans and receivables designated as at FVTPL, we measure the change in fair value attributable 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.
(Millions of Canadian dollars)
Interest-bearing deposits with banks
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans – Wholesale
Other assets
As at
October 31, 2016
October 31, 2015
Carrying amount of
loans and receivables
designated as at FVTPL
15,967
$
Maximum
exposure to
credit risk
15,967
$
Carrying amount of
loans and receivables
designated as at FVTPL
15,717
$
Maximum
exposure to
credit risk
15,717
$
121,692
904
132
121,692
904
132
114,692
1,327
202
114,692
1,327
202
$
138,695
$ 138,695
$
131,938
$ 131,938
There were no significant changes in the fair value of the loans and receivables designated as at FVTPL attributable to changes in credit risk
during the years ended October 31, 2016 and October 31, 2015, and cumulatively since initial recognition of the assets. The extent to which
credit derivatives or similar instruments mitigate the maximum exposure to credit risk is nominal as at October 31, 2016 and October 31, 2015.
Liabilities designated as at fair value through profit or loss
For our financial liabilities designated as at FVTPL, we take into account changes in our own credit spread and the expected duration of the
instrument to measure the change in fair value attributable to changes in credit risk.
As at or for the year ended October 31, 2016
Difference
between
carrying value
and contractual
maturity amount
Changes in fair value
attributable
to changes in
credit risk included
in net income for
positions still held
Changes in fair value
attributable to
changes in credit
risk included in OCI
for positions still held
Cumulative change
in fair value
attributable to
changes in credit
risk for positions
still held (1)
Contractual
maturity
amount
Carrying
value
$ 15,138 $ 15,142 $
4 $
81,860
730
97,728
82,871
730
98,743
1,011
–
1,015
88,863
10
128
88,863
10
131
$ 186,729 $ 187,747 $
–
–
3
1,018 $
– $
–
–
–
–
–
–
– $
99 $
354
–
453
–
–
1
454 $
25
25
–
50
–
–
(2)
48
As at or for the year ended October 31, 2015
Difference
between
carrying value
and contractual
maturity amount
Changes in fair value
attributable
to changes in
credit risk included
in net income for
positions still held
Changes in fair value
attributable to
changes in credit
risk included in OCI
for positions still held
Cumulative change
in fair value
attributable to
changes in credit
risk for positions
still held (1)
Contractual
maturity
amount
Carrying
value
$ 16,595 $ 16,828 $
93,225
5,376
115,196
93,319
5,376
115,523
73,364
13
108
73,362
13
112
$ 188,681 $ 189,010 $
233 $
94
–
327
(2)
–
4
329 $
– $
–
–
–
–
–
–
– $
(93) $
(387)
–
(480)
–
–
–
(480) $
(74)
(329)
–
(403)
–
–
(3)
(406)
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (2)
Bank (3)
Obligations related to assets
sold under repurchase
agreements and securities
loaned
Other liabilities
Subordinated debentures
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (2)
Bank (3)
Obligations related to assets
sold under repurchase
agreements and securities
loaned
Other liabilities
Subordinated debentures
(1)
(2)
(3)
The cumulative change is measured from the initial recognition of the liabilities designated as at FVTPL. For the year ended October 31, 2016, $14 million of fair value gains previously
included in OCI relate to financial liabilities derecognized during the year (October 31, 2015 – $3 million fair value losses).
Business and government term deposits include deposits from regulated deposit-taking institutions other than regulated banks.
Bank term deposits refer to deposits from regulated deposit-taking institutions.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
139
Note 3 Fair value of financial instruments (continued)
Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Canadian government debt (1)
Federal
Provincial and municipal
U.S. state, municipal and agencies debt (1)
Other OECD government debt (2)
Mortgage-backed securities (1)
Asset-backed securities
CDO (3)
Non-CDO securities
Corporate debt and other debt
Equities
Available-for-sale (4)
Canadian government debt (1)
Federal
Provincial and municipal
U.S. state, municipal and agencies debt (1)
Other OECD government debt
Mortgage-backed securities (1)
Asset-backed securities
CDO
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
Total gross derivatives
Netting adjustments
Total derivatives
Other assets
Financial Liabilities
Deposits
Personal
Business and government
Bank
Other
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments
Total gross derivatives
Netting adjustments
Total derivatives
Other liabilities
Subordinated debentures
October 31, 2016
October 31, 2015
As at
Fair value measurements using
Level 1
Level 2
Level 3
Total
gross fair
value
Netting
adjustments
Assets/
liabilities
at fair value
Fair value measurements using
Level 1
Level 2
Level 3
Total
gross fair
value
Netting
adjustments
Assets/
liabilities
at fair value
$
–
$ 15,967
$
–
$ 15,967
$
$
15,967
$
– $ 15,717
$
– $ 15,717
$
$
15,717
13,072
–
3,358
1,390
–
–
–
25
43,155
61,000
44
–
1
3,416
–
–
–
–
376
49
3,886
10,214
11,928
37,002
5,530
1,457
–
557
20,630
2,531
89,849
378
2,364
24,668
10,484
395
1,630
1,886
21,110
331
25
63,271
–
–
1
–
–
–
4
62
376
443
–
–
747
–
–
–
217
956
756
–
2,676
23,286
11,928
40,361
6,920
1,457
–
561
20,717
46,062
151,292
422
2,364
25,416
13,900
395
1,630
2,103
22,066
1,463
74
69,833
23,286
11,928
40,361
6,920
1,457
–
561
20,717
46,062
151,292
422
2,364
25,416
13,900
395
1,630
2,103
22,066
1,463
74
69,833
10,793
–
1,641
3,131
–
–
–
16
45,811
61,392
346
–
–
4,752
–
–
–
–
431
94
5,623
9,364
13,888
32,798
9,215
2,907
67
1,636
24,502
2,556
96,933
2,198
1,600
12,051
7,535
318
1,510
881
12,372
323
–
38,788
–
5
16
–
15
5
23
191
123
378
–
–
797
–
–
–
197
1,757
987
–
3,738
20,157
13,893
34,455
12,346
2,922
72
1,659
24,709
48,490
158,703
2,544
1,600
12,848
12,287
318
1,510
1,078
14,129
1,741
94
48,149
–
–
121,692
2,083
–
329
121,692
2,412
121,692
2,412
–
–
114,692
2,301
–
472
114,692
2,773
3
–
–
2,855
–
2,858
153,216
56,752
191
3,613
(1,429)
212,343
555
26
–
307
(3)
885
153,774
56,778
191
6,775
(1,432)
216,086
762
132
–
894
153,774
56,778
191
6,775
(1,432)
216,086
(97,142)
118,944
894
7
–
–
4,424
–
4,431
142,096
41,021
90
5,637
(1,265)
374
91
4
712
(38)
142,477
41,112
94
10,773
(1,303)
187,579
1,143
193,153
723
202
–
925
(97,142)
(87,527)
20,157
13,893
34,455
12,346
2,922
72
1,659
24,709
48,490
158,703
2,544
1,600
12,848
12,287
318
1,510
1,078
14,129
1,741
94
48,149
114,692
2,773
142,477
41,112
94
10,773
(1,303)
193,153
(87,527)
105,626
925
$68,506 $505,337 $ 4,333
$578,176 $
(97,142) $ 481,034
$72,169
$456,212
$ 5,731
$534,112
$
(87,527) $ 446,585
$
$
–
–
–
$ 14,830
82,869
730
425
2
–
$ 15,255
82,871
730
$
$
$
15,255
82,871
730
$
– $ 16,508
93,311
–
5,376
–
389
8
–
$ 16,897
93,319
5,376
$
50,369
50,369
31,945
15,713
32,672
17,696
–
88,863
–
–
–
3,135
–
3,135
145,055
57,438
263
5,543
(133)
208,166
1
–
1,003
41
–
429
7
1,480
88,863
146,058
57,479
263
9,107
(126)
212,781
124
–
80
131
88
–
292
131
88,863
–
73,362
3
–
–
3,835
–
3,838
135,455
46,675
166
8,075
(281)
190,090
146,058
57,479
263
9,107
(126)
212,781
(96,231)
116,550
292
131
(96,231)
–
–
820
33
5
1,025
9
1,892
47,658
73,362
136,278
46,708
171
12,935
(272)
195,820
(87,960)
145
–
13
112
47
–
205
112
$
16,897
93,319
5,376
47,658
73,362
136,278
46,708
171
12,935
(272)
195,820
(87,960)
107,860
205
112
$35,931 $413,365 $ 1,996
$451,292 $
(96,231) $ 355,061
$35,928
$394,485
$ 2,336
$432,749
$ (87,960)
$ 344,789
(1)
(2)
(3)
(4)
As at October 31, 2016, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $14,987 million and $10 million (October 31,
2015 – $10,315 million and $137 million), respectively, and in all fair value levels of AFS securities were $13,212 million and $346 million (October 31, 2015 – $3,394 million and $242
million), respectively.
OECD stands for Organisation for Economic Co-operation and Development.
CDO stands for collateralized debt obligations.
Excludes $89 million of AFS securities (October 31, 2015 – $15 million) that are carried at cost.
140
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value hierarchy table
using the following valuation techniques and inputs.
Interest-bearing deposits with banks
A majority of our deposits with banks are designated as at FVTPL. These FVTPL deposits are composed of short-dated deposits placed with
banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The fair values of these instruments are
determined using the discounted cash flow method. The inputs to the valuation models include interest rate swap curves and credit spreads,
where applicable. They are classified as Level 2 instruments in the hierarchy as the inputs are observable.
Government bonds (Canadian, U.S. and other OECD governments)
Government bonds are included in Canadian government debt, U.S. state, municipal and agencies debt, Other OECD government debt and
Obligations related to securities sold short in the fair value hierarchy table. The fair values of government issued or guaranteed debt securities in
active markets are determined by reference to recent transaction prices, broker quotes, or third-party vendor prices and are classified as Level 1
in the hierarchy. The fair values of securities that are not traded in active markets are based on either security prices, or valuation techniques
using implied yields and risk spreads derived from prices of actively traded and similar government securities. Securities with observable prices
or rate inputs as compared to transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy. Securities where inputs
are unobservable are classified as Level 3 in the hierarchy.
Corporate and U.S. municipal bonds
The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. state, municipal and agencies
debt and Obligations related to securities sold short in the fair value hierarchy table, are determined using either recently executed transaction
prices, broker quotes, pricing services, or in certain instances, the discounted cash flow method using rate inputs such as benchmark yields
(Canadian Dealer Offered Rate, LIBOR and other similar reference rates) and risk spreads of comparable securities. Securities with observable
prices or rate inputs are classified as Level 2 in the hierarchy. Securities where inputs are unobservable are classified as Level 3 in the hierarchy.
Asset-backed securities and Mortgage-backed securities
Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian government debt, U.S.
state, municipal and agencies debt, and Obligations related to securities sold short in the fair value hierarchy table. ABS include collateralized
debt obligations (CDO). Inputs for valuation of MBS and CDO are, when available, traded prices, dealer or lead manager quotes, broker quotes
and vendor prices of the identical securities. When prices of the identical securities are not readily available, we use industry standard models
with inputs such as discount margins, yields, default, prepayment and loss severity rates that are implied from transaction prices, dealer quotes
or vendor prices of comparable instruments. Where security prices and inputs are observable, ABS and MBS are classified as Level 2 in the
hierarchy. Otherwise, they are classified as Level 3 in the hierarchy.
Auction rate securities
Auction rate securities (ARS) are included in U.S. state, municipal and agencies debt, and Asset-backed securities in the fair value hierarchy
table. The valuation of ARS involves discounting forecasted cash flows from the underlying student loan collateral and incorporating multiple
inputs such as default, prepayment, deferment and redemption rates, and credit spreads. These inputs are unobservable, and therefore, ARS are
classified as Level 3 in the hierarchy. All relevant data must be assessed and significant judgment is required to determine the appropriate
valuation inputs.
Equities
Equities and Obligations related to securities sold short in the fair value hierarchy table consist of listed and unlisted common shares, private
equities and hedge funds with certain redemption restrictions. The fair values of common shares are based on quoted prices in active markets,
where available, and are classified as Level 1 in the hierarchy. Where quoted prices in active markets are not readily available, fair value is
determined based on quoted market prices for similar securities or through valuation techniques, such as multiples of earnings and the
discounted cash flow method with forecasted cash flows and discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as
their inputs are not observable. Hedge funds are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next
quarter end, the fund is classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy.
Derivatives
The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market prices and are
classified as Level 1 in the hierarchy. OTC derivatives primarily consist of interest rate and cross currency swaps, interest rate options, foreign
exchange forward contracts and options, and commodity options and swaps. The exchange-traded or OTC interest rate, foreign exchange and
equity derivatives are included in Interest rate contracts, Foreign exchange contracts and Other contracts, respectively, in the fair value hierarchy
table. The fair values of OTC derivatives are determined using valuation models when quoted market prices or third-party consensus pricing
information are not available. The valuation models, such as discounted cash flow method or Black-Scholes option model, incorporate
observable or unobservable inputs for interest and foreign exchange rates, equity and commodity prices (including indices), credit spreads,
corresponding market volatility levels, and other market-based pricing factors. Other adjustments to fair value include bid-offer, CVA, FVA, OIS,
parameter and model uncertainties, and unrealized gain or loss at inception of a transaction. A derivative instrument is classified as Level 2 in
the hierarchy if observable market inputs are available or the unobservable inputs are not significant to the fair value. Otherwise, it is classified
as Level 3 in the hierarchy.
Securities borrowed or purchased under resale agreements and securities loaned or sold under repurchase agreements
In the fair value hierarchy table, these instruments are included in Assets purchased under reverse repurchase agreements and securities
borrowed, and Obligations related to assets sold under repurchase agreements and securities loaned. The fair values of these contracts are
determined using valuation techniques such as the discounted cash flow method using interest rate curves as inputs. They are classified as
Level 2 instruments in the hierarchy as the inputs are observable.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
141
Note 3 Fair value of financial instruments (continued)
Deposits
A majority of our deposits are measured at amortized cost but certain deposits are designated as at FVTPL. These FVTPL deposits include
deposits taken from clients, the issuance of certificates of deposits and promissory notes, and interest rate and equity linked notes, and are
included in Deposits in the fair value hierarchy table. The fair values of these instruments are determined using the discounted cash flow method
and derivative option valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity
and interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the hierarchy,
depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates.
Quantitative information about fair value measurements using significant unobservable inputs (Level 3 Instruments)
The following table presents fair values of our significant Level 3 financial instruments, valuation techniques used to determine their fair values,
ranges and weighted averages of unobservable inputs.
As at October 31, 2016 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values (2), (3)
Products
Reporting line in the fair value
hierarchy table
Assets
Liabilities
Valuation
techniques
Non-derivative financial instruments
Asset-backed securities
Asset-backed securities
$
28
$
Price-based
Discounted cash flows
Auction rate securities
Discounted cash flows
Corporate debt
Government debt and municipal
bonds
U.S. state, municipal and agencies debt
Asset-backed securities
Corporate debt and other debt
Loans
Obligations related to securities
sold short
Canadian government debt
U.S. state, municipal and agencies debt
Corporate debt and other debt
Private equities, hedge fund
investments and related equity
derivatives
Equities
Derivative-related assets
Derivative-related liabilities
717
193
98
329
–
31
920
1,132
77
1
168
Significant
unobservable
inputs (1)
Low
High
Weighted
average / Inputs
distribution (4)
Prices
Discount margins
Yields
Default rates
Prepayment rates
Loss severity rates
Discount margins
Default rates
Prepayment rates
Recovery rates
100.06
n.a.
2.44%
n.a.
n.a.
n.a.
1.57%
3.00%
4.00%
40.00%
100.19
n.a.
2.44%
n.a.
n.a.
n.a.
3.75%
9.30%
10.00%
97.50%
Prices
Yields
Capitalization rates
Credit Spread
Credit enhancement
$ 20.00
5.25%
5.99%
1.51%
12.04%
$ 127.54
8.85%
8.35%
12.54%
16.05%
Price-based
Discounted cash flows
Price-based
Discounted cash flows
Prices
Yields
$ 60.00
1.48%
$ 99.79
20.92%
Market comparable
Price-based
Discounted cash flows
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (5)
Discount rate
Net asset values / prices (6)
6.94X
12.12X
0.30X
15.00%
12.00%
n.a.
1.79%
1.49%
19.00%
29.00%
68.00%
n.a.
15.50X
23.25X
5.90X
40.00%
17.00%
n.a.
2.43%
1.97%
67.00%
56.00%
68.00%
n.a.
$
$
100.12
n.a.
2.44%
n.a.
n.a.
n.a.
2.43%
3.02%
4.44%
92.37%
111.93
7.39%
7.17%
7.02%
14.04%
63.30
4.16%
9.65X
14.45X
3.42X
29.21%
16.53%
n.a.
Even
Even
Even
Even
Even
n.a.
Lower
Middle
Middle
Lower
Derivative financial instruments
Interest rate derivatives and
interest-rate-linked structured
notes (7)
Equity derivatives and equity-
linked structured notes (7)
Other (8)
Total
Derivative-related assets
Derivative-related liabilities
566
Discounted cash flows
Option pricing model
1,014
Interest rates
CPI swap rates
IR-IR correlations
FX-IR correlations
FX-FX correlations
IR volatilities
Discounted cash flows
Dividend yields
Option pricing model Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.04%
13.90%
(71.40)%
20.64%
97.40%
32.40%
3.00% 118.00%
Derivative-related assets
Deposits
Derivative-related liabilities
Mortgage-backed securities
Derivative-related assets
Deposits
Derivative-related liabilities
Other liabilities
217
–
25
425
242
2
56
88
$ 4,333
$ 1,996
142
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
As at October 31, 2015 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values (2), (3)
Significant
unobservable
inputs (1)
Low
High
Weighted
average / Inputs
distribution (4)
Prices
Discount margins
Yields
Default rates
Prepayment rates
Loss severity rates
Discount margins
Default rates
Prepayment rates
Recovery rates
Prices
Yields
Capitalization rates
Credit Spread
Credit enhancement
n.a.
3.43%
1.39%
–%
–%
20.00%
1.65%
9.00%
4.00%
40.00%
n.a.
13.10%
2.78%
5.00%
30.00%
70.00%
4.50%
10.00%
8.00%
97.50%
$ 47.61 $ 164.29 $
2.98%
6.07%
n.a.
n.a.
8.00%
8.50%
n.a.
n.a.
Products
Reporting line in the fair value
hierarchy table
Assets
Liabilities
Valuation techniques
Non-derivative financial instruments
Asset-backed securities
Asset-backed securities
$
48 $
Price-based
Discounted cash flows
Auction rate securities
Discounted cash flows
Corporate debt
Government debt and municipal
bonds
U.S. state, municipal and agencies debt
Asset-backed securities
Corporate debt and other debt
Loans
Obligations related to securities
sold short
Canadian government debt
U.S. state, municipal and agencies debt
Corporate debt and other debt
Private equities, hedge fund
investments and related equity
derivatives
Equities
Derivative-related assets
Derivative-related liabilities
699
177
198
472
5
114
1,750
1,110
3
–
218
Price-based
Discounted cash flows
Price-based
Discounted cash flows
Prices
Yields
$ 64.98 $ 126.22 $
0.27%
31.37%
Market comparable
Price-based
Discounted cash flows
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (5)
Discount rate
Net asset values / prices (6)
4.67X
9.40X
0.28X
15.00%
12.00%
n.a.
2.25%
1.67%
19.00%
29.00%
68.00%
0.11%
15.50X
22.40X
5.90X
40.00%
17.00%
n.a.
2.27%
1.90%
67.00%
56.00%
68.00%
6.11%
Derivative-related assets
Derivative-related liabilities
428
Discounted cash flows
Option pricing model
822
Interest rates
CPI swap rates
IR-IR correlations
FX-IR correlations
FX-FX correlations
IR volatilities
Discounted cash flows
Dividend yields
Option pricing model Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.01%
13.90%
(69.10)%
29.09%
96.90%
29.20%
1.70% 190.00%
Derivative-related assets
Deposits
Derivative-related liabilities
Mortgage-backed securities
Derivative-related assets
Deposits
Derivative-related liabilities
Other liabilities
559
15
153
389
569
8
283
47
$ 5,731 $ 2,336
Derivative financial instruments
Interest rate derivatives and
interest-rate-linked structured
notes (7)
Equity derivatives and equity-
linked structured notes (7)
Other (8)
n.a.
8.27%
1.79%
2.50%
15.00%
45.00%
2.78%
9.96%
4.35%
91.66%
96.57
3.89%
7.28%
n.a.
n.a.
84.50
3.89%
7.38X
12.14X
2.64X
27.34%
16.46%
n.a.
Even
Even
Even
Even
Even
Middle
Lower
Middle
Middle
Lower
Total
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
n.a.
The acronyms stand for the following: (i) Enterprise Value (EV); (ii) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); (iii) Price / Earnings (P/E); (iv) Revenue (Rev); and
(v) Consumer Price Index (CPI).
The low and high input values represent the actual highest and lowest level inputs used to value a group of financial instruments in a particular product category. These input ranges do not
reflect the level of input uncertainty, but are affected by the different underlying instruments within the product category. The input ranges will therefore vary from period to period based on
the characteristics of the underlying instruments held at each balance sheet date. Where provided, the weighted average of the input values is calculated based on the relative fair values of
the instruments within the product category. The weighted averages for derivatives are not presented in the table as they would not provide a comparable metric; instead, distribution of
significant unobservable inputs within the range for each product category is indicated in the table.
Price-based inputs are significant for certain debt securities and are based on external benchmarks, comparable proxy instruments or pre-quarter-end trade data. For these instruments, the
price input is expressed in dollars for each $100 par value. For example, with an input price of $105, an instrument is valued at a premium over its par value.
The level of aggregation and diversity within each derivative instrument category may result in certain ranges of inputs being wide and inputs being unevenly distributed across the range. In
the table, we indicated whether the majority of the inputs are concentrated toward the upper, middle, or lower end of the range, or evenly distributed throughout the range.
Fair value of securities with liquidity discount inputs totalled $127 million (October 31, 2015 – $131 million).
NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. The NAV of the funds and the corresponding equity derivatives referenced to NAV are not
considered observable as we cannot redeem certain of these hedge funds at NAV prior to the next quarter end. Private equities are valued based on NAV or valuation techniques. The range
for NAV per unit or price per share has not been disclosed for the hedge funds or private equities due to the dispersion of prices given the diverse nature of the investments.
The structured notes contain embedded equity or interest rate derivatives with unobservable inputs that are similar to those of the equity or interest rate derivatives.
Other primarily includes certain insignificant instruments such as commodity derivatives, foreign exchange derivatives, credit derivatives, bank-owned life insurance and Bank funding and
deposits.
not applicable
Sensitivity to unobservable inputs and interrelationships between unobservable inputs
Yield, credit spreads/discount margins
A financial instrument’s yield is the interest rate used to discount future cash flows in a valuation model. An increase in the yield, in isolation,
would result in a decrease in a fair value measurement and vice versa. A credit spread/discount margin is the difference between a debt
instrument’s yield and a benchmark instrument’s yield. Benchmark instruments have high credit quality ratings, similar maturities and are often
government bonds. The credit spread/discount margin therefore represents the discount rate used to determine the present value of future cash
flows of an asset to reflect the market return required for uncertainty in the estimated cash flows. The credit spread/discount margin for an
instrument forms part of the yield used in a discounted cash flow method. Generally, an increase in the credit spread or discount margin will
result in a decrease in fair value, and vice versa.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
143
Note 3 Fair value of financial instruments (continued)
Funding spread
Funding spreads are credit spreads specific to our funding or deposit rates. A decrease in funding spreads, on its own, will increase fair value of
our liabilities, and vice versa.
Default rates
A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically increase the fair
value of the loan, and vice versa. This effect will be significantly more pronounced for a non-government guaranteed loan than a government
guaranteed loan.
Prepayment rates
A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments change the future
cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when the loan interest rate is lower
than the then current reinvestment rate, and a decrease in the prepayment rate in isolation will result in a decrease in fair value when the loan
interest rate is lower than the then current reinvestment rate. Prepayment rates are generally negatively correlated with interest rates.
Recovery and loss severity rates
A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered amount divided
by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss severity rate is an estimation of the
loan amount not collected when a loan defaults. The loss severity rate is the loss amount divided by the loan balance due, expressed as a
percentage. Generally, an increase in the recovery rate or a decrease in the loss severity rate will increase the loan fair value, and vice versa.
Capitalization rates
A capitalization rate is a rate of return on a real estate property investment calculated by dividing a property’s income by the property’s value.
A lower capitalization rate increases the property value, and vice versa.
Volatility rates
Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements. Volatility is an
input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing equity, interest rate, commodity
and foreign exchange options. A higher volatility rate means that the underlying price or rate movements are more likely to occur. Higher volatility
rates may increase or decrease an option’s fair value depending on the option’s terms. The determination of volatility rates is dependent on
various factors, including but not limited to, the underlying’s market price, the strike price and maturity.
Dividend yields
A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is used as an input
for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice versa. A higher dividend yield will
increase or decrease an option’s value, depending on the option’s terms.
Correlation rates
Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of derivative
contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When variables are positively
correlated, an increase in one variable will result in an increase in the other variable. When variables are negatively correlated, an increase in one
variable will result in a decrease in the other variable. The referenced variables can be within a single asset class or market (equity, interest rate,
commodities, credit and foreign exchange) or between variables in different asset classes (equity to foreign exchange, or interest rate to foreign
exchange). Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of its contractual
payout.
Interest rates
An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the discounted cash
flow value of a financial instrument, and vice versa.
Consumer Price Index swap rates
A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services, such as
transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger, and vice versa.
EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts
Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate either enterprise
value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples equate to higher fair values for all
multiple types, and vice versa. A liquidity discount may be applied when few or no transactions exist to support the valuations.
Credit Enhancement
Credit enhancement is an input to the valuation of securitized transaction and is the amount of loan loss protection for a senior tranche. Credit
enhancement is expressed as a percentage of the transaction size. An increase in credit enhancement will cause the credit spread to decrease
and the tranche fair value to increase, and vice versa.
Interrelationships between unobservable inputs
Unobservable inputs of ARS, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates, may not
be independent of each other. The discount margin of ARS can be affected by a change in default rate, prepayment rate, or recovery and loss
severity rates. Discount margins will generally decrease when default rates decline or when recovery rates increase. Prepayments may cause fair
value to either increase or decrease.
144
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3
The following tables present the changes in fair value measurements on a recurring basis for instruments included in Level 3 of the fair value
hierarchy.
(Millions of Canadian dollars)
Assets
Securities
Trading
Canadian government debt
Provincial and municipal
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
Available-for-sale
U.S. state, municipal and agencies debt
Other OECD government debt
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
Loans
Other
Net derivative balances (3)
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments
Other assets
Liabilities
Deposits
Personal
Business and government
Other
For the year ended October 31, 2016
Total
realized/
unrealized
gains
(losses)
included in
earnings
Total
unrealized
gains
(losses)
included
in OCI (1)
Fair value
November 1,
2015
Purchases
of assets/
issuances
of liabilities
Sales of
assets/
settlements
of liabilities
and other (2)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
October 31,
2016
Changes in
unrealized gains
(losses) included
in earnings for
assets and
liabilities for
positions still held
– $
– $
– $
–
–
–
(5) $
–
–
–
– $
1
–
–
$
5 $
16
–
15
5
23
191
123
378
797
–
–
197
1,757
987
3,738
472
(446)
58
(1)
(313)
(47)
–
– $
(2)
–
(1)
– $
–
–
–
–
(4)
–
(160)
(167)
(12)
–
–
(1)
(5)
50
32
17
(18)
(66)
–
(121)
–
(2)
–
–
5
7
12
26
–
–
18
17
(49)
12
(13)
1
(6)
–
(1)
–
–
21
–
8
–
23
144
492
688
93
–
–
26
2,437
76
2,632
102
30
(19)
–
(39)
–
2
(34)
–
(22)
(5)
(39)
(294)
(89)
(483)
(157)
–
–
(23)
(2,825)
(308)
(3,313)
1
1
159
10
171
–
–
–
–
21
–
21
(641)
396
(18)
(2)
1
213
23
–
29
23
–
51
–
–
(1)
–
(143)
(7)
(156)
–
–
–
–
(446)
–
(446)
(4)
(26)
(3)
–
88
14
–
–
4
62
376
443
747
–
–
217
956
756
2,676
329
(448)
(15)
–
(122)
(10)
–
$
3,839 $
(325) $
5 $
3,396 $
(4,220) $
691 $ (533) $
2,853 $
(191)
–
–
–
–
–
–
–
(163)
(163)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
–
(17)
(64)
(2)
55
–
–
(16)
(1)
–
(11)
(28)
Obligations related to securities sold short
Other liabilities
–
(47)
–
(22)
–
(3)
(1)
(93)
$
(389) $
(8)
(24) $
(1)
2 $
–
(207) $
–
82 $ (562) $
9
–
23
(2)
–
–
673 $
–
(425) $
(2)
–
54
(1)
(88)
$
(444) $
(47) $
(1) $
(301) $
114 $ (564) $
727 $
(516) $
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
145
Note 3 Fair value of financial instruments (continued)
For the year ended October 31, 2015
Total
realized/
unrealized
gains
(losses)
included in
earnings
Total
unrealized
gains
(losses)
included
in OCI (1)
Fair value
November 1,
2014
Purchases
of assets/
issuances
of liabilities
Sales of
assets/
settlements
of liabilities
and other (2)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
October 31,
2015
Changes in
unrealized gains
(losses) included
in earnings for
assets and
liabilities for
positions still held
(Millions of Canadian dollars)
Assets
Securities
Trading
– $
6
–
4
– $
(1)
–
(4)
– $
1
–
–
Canadian government debt
Provincial and municipal
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
$
CDO
Non-CDO securities
Corporate debt and other debt
Equities
Available-for-sale
U.S. state, municipal and agencies debt
Other OECD government debt
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
Loans
Other
Net derivative balances (3)
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments
Other assets
Liabilities
Deposits
Personal
Business and government
Other
Obligations related to securities sold short
Other liabilities
74
364
149
166
763
1,389
11
24
182
1,573
1,028
4,207
461
24
(7)
(1)
(29)
(18)
7
–
–
(1)
–
105
111
(8)
(370)
9
(5)
(502)
(85)
–
4,478 $
(497) $
(70)
(4)
(20)
(591) $
(89)
46
(15)
(113)
(3)
–
(89) $
73 $
(5)
–
(28)
40 $
$
$
$
– $
– $
40
–
25
102
137
93
16
413
136
4
30
–
2,524
52
2,746
605
(30)
–
(27)
(146)
(345)
(143)
(75)
(766)
(846)
(2)
–
(24)
(2,586)
(225)
(3,683)
(547)
37
34
–
28
1
–
3,864 $
(7)
(7)
19
216
45
–
(4,730) $
5 $
–
20
30
– $
–
(20)
(13)
13
24
211
45
348
–
–
–
–
37
17
54
1
(11)
7
(1)
(98)
(3)
–
(44)
(197)
(123)
(24)
(421)
(46)
(13)
(57)
–
(37)
(55)
(208)
(87)
(4)
(37)
2
233
–
–
297 $ (522) $
5 $
16
–
15
5
23
191
123
378
797
–
–
197
1,757
987
3,738
472
(446)
58
(1)
(313)
(47)
–
3,839 $
(545) $
(78)
(11)
–
(634) $
88 $ (376) $
51
–
909 $
93
(389) $
(8)
15
6
(1)
–
160 $ (377) $ 1,003 $
1
–
–
(47)
(444) $
–
–
–
–
–
(2)
–
(28)
(30)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
–
(15)
36
(3)
124
–
–
112
45
–
–
(22)
23
(18)
47
5
24
59
157
–
3
40
246
65
511
47
(2)
6
(1)
(77)
(2)
–
541 $
(41) $
1
–
(5)
(45) $
(1)
(2)
(3)
n.a.
These amounts include the foreign currency translation gains or losses arising on consolidation of foreign subsidiaries relating to the Level 3 instruments, where applicable. The unrealized
losses on AFS securities recognized in OCI were $27 million for the year ended October 31, 2016 (October 31, 2015 – losses of $5 million), excluding the translation gains or losses arising on
consolidation.
Other includes amortization of premiums or discounts recognized in net income.
Net derivatives as at October 31, 2016 included derivative assets of $885 million (October 31, 2015 – $1,143 million) and derivative liabilities of $1,480 million (October 31, 2015 –
$1,892 million).
not applicable
Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis
Transfers between Level 1 and Level 2, and transfers into 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 above 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 above reconciliation.
Transfers between Level 1 and Level 2 are dependent on whether fair value is obtained on the basis of quoted market prices in active
markets (Level 1).
During the year ended October 31, 2016, transfers out of Level 1 to Level 2 included $266 million of Trading U.S. state, municipal and
agencies debt and $490 million of Obligations related to securities sold short. During the year ended October 31, 2015, transfers out of Level 1
to Level 2 included $284 million of Trading Canadian government debt, $1,988 million of Trading and AFS U.S. state, municipal and agencies
debt and $641 million of Obligations related to securities sold short.
During the year ended October 31, 2016, transfers out of Level 2 to Level 1 included $424 million of Trading U.S. state, municipal and
agencies debt, $65 million of AFS U.S. state, municipal and agencies debt and $11 million of Obligations related to securities sold short. During
the year ended October 31, 2015, transfers out of Level 2 to Level 1 included $128 million of Trading Canadian government debt, $331 million of
Trading U.S. state, municipal and agencies debt, $840 million of Trading and AFS Equities, $412 million of AFS Other OECD government debt and
$61 million of Obligations related to securities sold short.
Transfers between Level 2 and Level 3 are primarily due to either a change in the market observability for an input, or a change in an
unobservable input’s significance to a financial instrument’s fair value.
For the year ended October 31, 2016, transfers of Trading and AFS Corporate debt and other debt, Other contracts, Trading Non-CDO
securities and Loans were due to changes in the market observability of inputs, and transfers relating to Personal deposits were due to changes
in the significance of unobservable inputs to their fair value.
146
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
During the year ended October 31, 2016, significant transfers out of Level 3 to Level 2 included $143 million of Trading Corporate debt and
other debt, $446 million of AFS Corporate debt and other debt and $673 million of Personal deposits. In addition, during the year ended
October 31, 2016, significant transfers out of Level 3 to Level 2 included $28 million (net assets) of OTC equity options in Other contracts
comprised of $682 million of derivative-related assets and $654 million of derivative related liabilities and $24 million (net assets) of commodity
swaps in Other contracts comprised of $126 million of derivative-related assets and $102 million of derivative related liabilities. During the year
ended October 31, 2015, significant transfers out of Level 3 to Level 2 included $201 million of net OTC equity options in Other contracts,
$197 million of Trading Non-CDO securities, $123 million of Trading Corporate debt and other debt and $909 million of Personal deposits.
During the year ended October 31, 2016, significant transfers out of Level 2 to Level 3 included $159 million of Trading Corporate debt and
other debt, $396 million of Loans and $562 million of Personal deposits. In addition, during the year ended October 31, 2016, significant
transfers out of Level 2 to Level 3 included $58 million (net assets) of OTC equity options in Other contracts comprised of $407 million of
derivative-related assets and $349 million of derivative-related liabilities. During the year ended October 31, 2015, significant transfers out of
Level 2 to Level 3 included $211 million of Trading Corporate debt and other debt and $314 million of Personal deposits.
Positive and negative fair value movement of Level 3 financial instruments from using reasonably possible alternative assumptions
A financial instrument is classified as Level 3 in the fair value hierarchy if one or more of its unobservable inputs may significantly affect the
measurement of its fair value. 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. Due to the unobservable nature of the prices or rates, there
may be uncertainty about the valuation of these Level 3 financial instruments.
The following table summarizes the impacts to fair values of Level 3 financial instruments using reasonably possible alternative
assumptions. This sensitivity disclosure is intended to illustrate the potential impact of the relative uncertainty in the fair value of Level 3
financial instruments. In reporting the sensitivities below, we offset balances in instances where: (i) the move in valuation factor caused an
offsetting positive and negative fair value movement, (ii) both offsetting instruments are in Level 3, and (iii) exposures are managed and reported
on a net basis. With respect to overall sensitivity, it is unlikely in practice that all reasonably possible alternative assumptions would
simultaneously be realized.
(Millions of Canadian dollars)
Securities
Trading
Canadian government debt
Provincial and municipal
U.S. state, municipal and agencies debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Available-for-sale
U.S. state, municipal and agencies debt
Asset-backed securities
Corporate debt and other debt
Equities
Loans
Derivatives
Deposits
Derivatives
Other
Securities sold short, other liabilities
October 31, 2016
October 31, 2015
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Level 3
fair value
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Level 3
fair value
$
– $
1
–
4
62
376
747
217
956
756
329
885
$ 4,333 $
$
(427) $
(1,480)
(89)
$ (1,996) $
– $
–
–
–
1
–
14
13
8
74
9
17
136 $
13 $
33
–
46 $
–
–
–
–
(1)
–
(31)
(19)
(8)
(13)
(10)
(16)
(98)
(13)
(53)
–
(66)
$
5 $
16
15
28
191
123
797
197
1,757
987
472
1,143
$ 5,731 $
$
(397) $
(1,892)
(47)
$ (2,336) $
– $
1
1
2
2
–
12
11
11
76
8
16
140 $
13 $
33
–
46 $
–
(1)
(1)
(3)
(2)
–
(36)
(16)
(11)
(33)
(23)
(10)
(136)
(13)
(43)
–
(56)
Sensitivity results
As at October 31, 2016, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions would be an
increase of $136 million and a reduction of $98 million in fair value, of which $109 million and $67 million would be recorded in Other
components of equity, respectively. The effects of applying these assumptions to the Level 3 liability positions would result in a decrease of
$46 million and an increase of $66 million in fair value.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
147
Note 3 Fair value of financial instruments (continued)
Level 3 valuation inputs and approaches to developing reasonably possible alternative assumptions
The following is a summary of the unobservable inputs used in the valuation of the Level 3 instruments and our approaches to developing
reasonably possible alternative assumptions used to determine sensitivity.
Financial assets or liabilities
Asset-backed securities,
corporate debt, government debt
and municipal bonds
Sensitivity methodology
Sensitivities are determined based on adjusting, plus or minus one standard deviation, the bid-offer
spreads or input prices if a sufficient number of prices is received, or using high and low vendor prices as
reasonably possible alternative assumptions.
Auction rate securities
Private equities, hedge fund
investments and related equity
derivatives
Interest rate derivatives
Equity derivatives
Sensitivity of ARS is determined by decreasing the discount margin between 11% and 16% and increasing
the discount margin between 22% and 32%, depending on the specific reasonable range of fair value
uncertainty for each particular financial instrument’s market. Changes to the discount margin reflect
historical monthly movements in the student loan asset-backed securities market.
Sensitivity of direct private equity investments is determined by (i) adjusting the discount rate by 2% when
the discounted cash flow method is used to determine fair value, (ii) adjusting the price multiples based on
the range of multiples of comparable companies when price-based models are used, or (iii) using an
alternative valuation approach. Net asset values of the private equity funds, hedge funds and related equity
derivatives are provided by the fund managers, and as a result, there are no other reasonably possible
alternative assumptions for these investments.
Sensitivities of interest rate and cross currency swaps are derived using plus or minus one standard
deviation of the inputs, and an amount based on model and parameter uncertainty, where applicable.
Sensitivity of the Level 3 position is determined by shifting the unobservable model inputs by plus or minus
one standard deviation of the pricing service market data including volatility, dividends or correlations, as
applicable.
Bank funding and deposits
Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain basis points.
Structured notes
Sensitivities for interest-rate-linked and equity-linked structured notes are derived by adjusting inputs by
plus or minus one standard deviation, and for other deposits, by estimating a reasonable move in the
funding curve by plus or minus certain basis points.
148
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Fair value for selected financial instruments that are carried at amortized cost and classified using the fair value hierarchy
(Millions of Canadian dollars)
Held-to-maturity securities (2)
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans
Retail
Wholesale
Other assets
Deposits
Personal
Business and government
Bank
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
Subordinated debentures
(Millions of Canadian dollars)
Held-to-maturity securities (2)
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans
Retail
Wholesale
Other assets
Deposits
Personal
Business and government
Bank
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
Subordinated debentures
As at October 31, 2016
Fair value always
approximates
carrying value (1)
Fair value may not approximate carrying value
Fair value measurements using
Level 1
Level 2
Level 3
Total
Total
fair value
$
–
$
41,686
66,404
6,155
72,559
43,229
157,474
175,114
241,950
12,387
429,451
13,032
38,467
–
$ 480,950
$
2
–
–
–
–
–
2
–
–
–
–
–
–
–
–
$ 15,194
$
11
$ 15,207
$
15,207
22,812
–
22,812
64,498
297,602
137,216
434,818
457
5,006
7,349
12,355
293
302,608
144,565
447,173
750
473,281
12,659
485,942
59,475
163,782
5,883
229,140
1,551
265
9,643
901
1,149
42
2,092
–
5,106
57
60,376
164,931
5,925
231,232
1,551
5,371
9,700
369,012
150,720
519,732
43,979
643,416
235,490
406,881
18,312
660,683
14,583
43,838
9,700
$ 240,599
$ 7,255
$ 247,854
$ 728,804
As at October 31, 2015
Fair value always
approximates
carrying value (1)
Fair value may not approximate carrying value
Fair value measurements using
Level 1
Level 2
Level 3
Total
Total
fair value
$
–
$
39,587
67,330
5,525
72,855
43,889
156,331
148,570
197,435
10,538
356,543
9,095
38,344
–
$
403,982
$
2
–
–
–
–
–
2
–
–
–
–
–
–
–
–
$
8,750
$
20,484
276,661
110,816
387,477
583
417,294
54,400
164,415
5,107
223,922
833
381
7,022
7
–
4,522
4,975
9,497
380
9,884
1,049
1,455
68
2,572
–
4,471
56
$
8,759
$
8,759
20,484
60,071
281,183
115,791
396,974
963
427,180
55,449
165,870
5,175
226,494
833
4,852
7,078
348,513
121,316
469,829
44,852
583,511
204,019
363,305
15,713
583,037
9,928
43,196
7,078
$ 232,158
$ 7,099
$ 239,257
$ 643,239
(1)
(2)
Certain financial instruments have not been assigned to a level as the carrying amount always approximates their fair values due to the short-term nature (instruments that are receivable or
payable on demand, or with original maturity of three months or less) and insignificant credit risk.
Included in Securities – Available-for-sale on the Consolidated Balance Sheets.
Fair values of financial assets and liabilities carried at amortized cost and disclosed in the table above are determined using the following
valuation techniques and inputs.
Held-to-maturity securities
Fair values of Canadian Federal and OECD government bonds, and corporate bonds are based on quoted prices. Fair values of certain Non-OECD
government bonds are based on vendor prices or the discounted cash flow method with yield curves of other countries’ government bonds as
inputs.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
149
Note 3 Fair value of financial instruments (continued)
Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold under repurchase
agreements and securities loaned
Valuation methods used for the long-term instruments are described in the Fair value of assets and liabilities measured on a recurring basis and
classified using the fair value hierarchy section of this note. The carrying values of short-term instruments generally approximate their fair values.
Loans – Retail
Retail loans include residential mortgages, personal and small business loans and credit cards. For residential mortgages, and personal and
small business loans, we segregate the portfolio based on certain attributes such as product type, contractual interest rate, term to maturity and
credit scores, if applicable. Fair values of these loans are determined by the discounted cash flow method using applicable inputs such as
prevailing interest rates, contractual and posted client rates, client discounts, credit spreads, prepayment rates and loan-to-value ratios. Fair
values of credit card receivables are also calculated based on a discounted cash flow method with portfolio yields, charge offs and monthly
payment rates as inputs. The carrying values of short-term and variable rate loans generally approximate their fair values.
Loans – Wholesale
Wholesale loans include Business, Bank and Sovereign loans. Where market prices are available, loans are valued based on market prices.
Otherwise, fair value is determined by the discounted cash flow method using the following inputs: market interest rates and market based
spreads of assets with similar credit ratings and terms to maturity, loss given default, expected default frequency implied from credit default
swap prices, if available, and relevant pricing information such as contractual rate, origination and maturity dates, redemption price, coupon
payment frequency and date convention.
Deposits
Deposits are comprised of demand, notice, and term deposits which include senior deposit notes we have issued to provide us with long-term
funding. Fair values of term deposits are determined by one of several valuation techniques: (i) for term deposits and similar instruments, we
segregate the portfolio based on term to maturity. Fair values of these instruments are determined by the discounted cash flow method using
inputs such as client rates for new sales of the corresponding terms; and (ii) for senior deposit notes, we use actual traded prices, vendor prices
or the discounted cash flow method using a market interest rate curve and our funding spreads as inputs. The carrying values of short-term term
deposits, and demand and notice deposits generally approximate their fair values.
Other assets and Other liabilities
Other assets and Other liabilities include receivables and payables relating to certain commodities. Fair values of the commodity receivables and
payables are calculated by the discounted cash flow method using applicable inputs such as market interest rates, counterparties’ credit
spreads, our funding spreads, commodity forward prices and spot prices.
Subordinated debentures
Fair values of Subordinated debentures are based on recent transaction prices.
150
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Note 4 Securities
Carrying value of securities
The following table presents the contractual maturities of the carrying values of financial instruments held at the end of the period:
(Millions of Canadian dollars)
Trading (2)
Canadian government debt
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities (3)
Corporate debt and other debt
Bankers’ acceptances
Certificates of deposit
Other (4)
Equities
Available-for-sale (2)
Canadian government debt
Federal
Amortized cost
Fair value
Yield (5)
Provincial and municipal
Amortized cost
Fair value
Yield (5)
U.S. state, municipal and agencies debt
Amortized cost
Fair value
Yield (5)
Other OECD government debt
Amortized cost
Fair value
Yield (5)
Mortgage-backed securities
Amortized cost
Fair value
Yield (5)
Asset-backed securities
Amortized cost
Fair value
Yield (5)
Corporate debt and other debt
Amortized cost
Fair value
Yield (5)
Equities
Cost
Fair value
Loan substitute securities
Cost
Fair value
Yield (5)
Amortized cost
Fair value
Held-to-maturity (2)
Amortized cost
Fair value
As at October 31, 2016
Term to maturity (1)
Within 3
months
3 months
to 1 year
1 year to
5 years
5 years to
10 years
Over
10 years
With no
specific
maturity
Total
$ 6,761
6,582
1,639
–
42
$ 10,350
6,150
1,646
34
80
$ 9,208
5,912
2,808
3
219
$ 2,742
5,988
389
1
139
$ 6,153
15,729
438
1,419
81
$
–
–
–
–
–
$ 35,214
40,361
6,920
1,457
561
361
155
1,748
–
–
132
4,450
–
–
14
7,473
–
–
2
2,472
–
–
19
3,891
–
17,288
22,842
25,637
11,733
27,730
–
–
–
46,062
46,062
361
322
20,034
46,062
151,292
43
43
0.5%
–
–
–
1,030
1,029
2.7%
3,109
3,108
(0.1%)
–
–
–
671
671
–
1,520
1,521
1.7%
–
–
–
–
–
6,373
6,372
130
130
1
1
0.3%
139
139
1.3%
895
896
0.9%
1,396
1,398
1.1%
16
16
2.2%
9
8
1.1%
2,933
2,934
1.8%
–
–
–
–
–
291
293
1.5%
1,863
1,873
1.9%
1,735
1,734
1.9%
9,070
9,095
1.1%
27
27
2.2%
539
540
1.1%
16,457
16,495
1.6%
–
–
–
–
–
27
27
1.8%
90
92
4.1%
1,161
1,159
2.7%
293
292
1.0%
19
20
2.8%
834
835
2.2%
553
558
2.8%
–
–
–
–
–
56
58
4.2%
252
260
3.8%
20,668
20,598
2.4%
7
7
3.9%
330
332
2.3%
1,733
1,679
2.2%
552
558
4.7%
–
–
–
–
–
5,389
5,392
29,982
30,057
116
116
4,521
4,583
2,977
2,983
5,718
5,953
23,598
23,492
4,394
4,425
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,291
1,552
70
74
4.5%
1,361
1,626
–
–
418
422
1.7%
2,344
2,364
2.2%
25,489
25,416
2.4%
13,875
13,900
0.8%
392
395
2.3%
3,786
3,733
1.6%
22,015
22,066
1.8%
1,291
1,552
70
74
4.5%
69,680
69,922
14,879
15,207
Total carrying value of securities (2)
$23,790
$ 28,350
$60,215
$ 20,434
$55,616
$47,688
$236,093
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
151
Note 4 Securities (continued)
(Millions of Canadian dollars)
Trading (2)
Canadian government debt
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities (3)
Corporate debt and other debt
Bankers’ acceptances
Certificates of deposit
Other (4)
Equities
Available-for-sale (2)
Canadian government debt
Federal
Amortized cost
Fair value
Yield (5)
Provincial and municipal
Amortized cost
Fair value
Yield (5)
U.S. state, municipal and agencies debt
Amortized cost
Fair value
Yield (5)
Other OECD government debt
Amortized cost
Fair value
Yield (5)
Mortgage-backed securities
Amortized cost
Fair value
Yield (5)
Asset-backed securities
Amortized cost
Fair value
Yield (5)
Corporate debt and other debt
Amortized cost
Fair value
Yield (5)
Equities
Cost
Fair value
Loan substitute securities
Cost
Fair value
Yield (5)
Amortized cost
Fair value
Held-to-maturity (2)
Amortized cost
Fair value
As at October 31, 2015
Term to maturity (1)
Within 3
months
3 months
to 1 year
1 year to
5 years
5 years to
10 years
Over
10 years
With no
specific
maturity
Total
$ 2,310
1,450
2,237
–
90
$ 9,737
12,867
4,373
20
64
$ 9,755
7,906
4,402
42
263
–
38
14,318
–
36,724
$
$ 3,618
3,056
941
33
846
$ 8,630
9,176
393
2,827
468
– $ 34,050
34,455
–
12,346
–
2,922
–
1,731
–
–
12
1,836
–
–
18
3,714
–
–
–
–
48,490
105
456
24,148
48,490
10,342
25,226
48,490
158,703
1
329
2,866
–
30,257
572
574
0.9%
11
11
3.3%
2,563
2,563
0.6%
503
503
1.2%
–
–
–
6
6
2.2%
1,603
1,601
1.9%
–
–
–
–
–
104
59
1,414
–
7,664
251
251
0.4%
–
–
–
379
379
0.2%
3,946
3,947
–
–
–
–
–
–
–
1,164
1,163
1.2%
–
–
–
–
–
5,740
5,740
889
889
1,603
1,605
1.3%
1,271
1,274
1.8%
161
154
5.7%
7,491
7,501
1.0%
57
57
1.8%
644
650
0.6%
10,545
10,516
1.7%
–
–
–
–
–
68
68
2.9%
64
64
3.1%
304
302
1.6%
338
336
2.2%
–
–
–
702
710
0.9%
369
369
3.9%
–
–
–
–
–
47
46
4.3%
253
251
4.2%
9,533
9,450
2.3%
–
–
–
258
261
1.9%
1,291
1,222
1.7%
490
480
4.4%
–
–
–
–
–
5,258
5,258
21,772
21,757
334
334
3,175
3,189
1,845
1,849
4,133
4,239
11,872
11,710
110
108
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,457
1,756
95
94
5.1%
1,552
1,850
2,541
2,544
1.2%
1,599
1,600
2.2%
12,940
12,848
1.9%
12,278
12,287
0.7%
315
318
1.9%
2,643
2,588
1.2%
14,171
14,129
1.8%
1,457
1,756
95
94
5.1%
48,039
48,164
–
–
8,641
8,759
Total carrying value of securities (2)
$14,293
$ 35,849
$61,656
$ 16,324
$37,046
$50,340 $215,508
(1)
(2)
(3)
(4)
(5)
Actual maturities may differ from contractual maturities shown above since borrowers may have the right to extend or prepay obligations with or without penalties.
Trading securities and AFS securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost.
Includes CDO which are presented as Asset-backed securities – CDO in the table entitled Fair value of assets and liabilities measured on a recurring basis and classified using the fair value
hierarchy in Note 3.
Primarily composed of corporate debt, supra-national debt, and commercial paper.
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.
152
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Unrealized gains and losses on available-for-sale securities (1), (2)
(Millions of Canadian dollars)
Canadian government debt
Federal
Provincial and municipal
U.S. state, municipal and agencies debt (3)
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
Loan substitute securities
October 31, 2016
October 31, 2015
As at
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Fair
value
$
418 $
4 $
2,344
25,489
13,875
392
1,628
2,158
22,015
1,291
70
22
57
35
5
2
5
89
273
4
– $
(2)
(130)
(10)
(2)
422
2,364
25,416
13,900
395
$
2,541 $
1,599
12,940
12,278
315
7 $
8
14
24
4
(4) $ 2,544
1,600
(7)
12,848
(106)
12,287
(15)
318
(1)
–
(60)
(38)
(12)
–
1,630
2,103
22,066
1,552
74
1,506
1,137
14,171
1,457
95
12
7
39
314
–
(8)
(66)
(81)
(15)
(1)
1,510
1,078
14,129
1,756
94
$ 69,680 $
496 $
(254) $ 69,922
$ 48,039 $
429 $
(304) $ 48,164
(1)
(2)
(3)
Excludes $14,879 million of held-to-maturity securities as at October 31, 2016 (October 31, 2015 – $8,641 million) that are carried at amortized cost.
The majority of the MBS are residential. Cost/Amortized cost, gross unrealized gains, gross unrealized losses and fair value related to commercial MBS are $346 million, $1 million, $1 million
and $346 million, respectively as at October 31, 2016 (October 31, 2015 – $243 million, $nil, $1 million and $242 million).
Includes securities issued by U.S. non-agencies backed by government insured assets, MBS and asset-backed securities issued by U.S. government agencies.
AFS securities are assessed for objective evidence of impairment at each reporting date and more frequently when conditions warrant.
Depending on the nature of the securities under review, we apply specific methodologies to assess whether the cost/amortized cost of the
security would be recovered. As at October 31, 2016, our gross unrealized losses on AFS securities were $254 million (October 31, 2015 –
$304 million). We believe that there is no objective evidence of impairment on our AFS securities that are in an unrealized loss position as at
October 31, 2016.
Net gain and loss on available-for-sale securities (1)
(Millions of Canadian dollars)
Realized gains
Realized losses
Impairment losses
For the year ended
October 31
2016
October 31
2015
October 31
2014
$
$
179 $
(17)
(86)
76 $
218 $
(20)
(53)
145 $
232
(15)
(25)
192
(1)
The following related to our insurance operations are excluded from Net gains on AFS securities and included in Insurance premiums, investment and fee income in the Consolidated
Statements of Income for the year ended October 31, 2016: Realized gains of $14 million (October 31, 2015 – $22 million; October 31, 2014 – $12 million) and $4 million in impairment
losses (October 31, 2015 – $6 million; October 31, 2014 – $nil). There were no realized losses for the year ended October 31, 2016 (October 31, 2015 – $nil; October 31, 2014 – $1 million).
During the year ended October 31, 2016, $76 million of net gains were recognized in Non-interest income as compared to $145 million in the
prior year. The current year reflects net realized gains of $162 million mainly comprised of distributions from, and gains on sales of certain
Equities and U.S. state, municipal and agencies debt. Also included in the net gains are $86 million of impairment losses primarily on certain
Equities, U.S. state, municipal and agencies debt, and Loan substitute securities. This compares to net realized gains for the year ended
October 31, 2015 of $198 million which was partially offset by $53 million of impairment losses.
Held-to-maturity securities
Held-to-maturity securities measured 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 and interest. The
impairment review of held-to-maturity securities is primarily based on the impairment model for loans. We believe that there is no objective
evidence of impairment on our held-to-maturity securities as at October 31, 2016.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
153
Note 4 Securities (continued)
Reclassification of financial instruments
During 2016, we reclassified debt securities with carrying amounts of $897 million from AFS to loans and receivables as a result of a change in
our intention to hold these securities for the foreseeable future. Upon reclassification, the previous carrying amount of these AFS securities
became the new amortized cost under the loans and receivables classification. The net unrealized losses in Other components of equity at the
respective reclassification dates will be amortized to Net interest income over the remaining life of the reclassified securities using the effective
interest method. This amortization will be offset by the accretion of the fair value discount on these securities.
On their respective reclassification dates, the AFS debt securities reclassified to loans and receivables had a weighted average effective
interest rate of 1.31%, with aggregate estimated cash flows expected to be recovered on an undiscounted basis of $925 million. As at October
31, 2016, the fair value and carrying value of the securities reclassified to loans and receivables were $781 million and $782 million,
respectively.
During the year ended October 31, 2016, a nominal amount of unrealized gains was recorded in OCI related to changes in the fair value of
these debt securities. A nominal amount of unrealized losses would also have been recognized in OCI for the year ended October 31, 2016 had
these debt securities not been reclassified. Interest income of $15 million was recognized in net income for the year ended October 31, 2016.
The following table provides information regarding certain securities that we reclassified in prior reporting periods.
Financial instruments reclassified in prior periods
(Millions of Canadian dollars)
Financial assets – FVTPL reclassified to available-for-sale (1)
CDO
Mortgage-backed securities
Financial assets – Available-for-sale reclassified to loans and receivables (2)
Canadian government debt – Federal
Financial assets – Available-for-sale reclassified to held-to-maturity (3)
Canadian government debt – Federal
As at
October 31, 2016
October 31, 2015
Carrying value
Fair value
Carrying value
Fair value
$
$
–
–
2,910
3,923
6,833
$
$
–
–
2,916
3,970
6,886
$
$
561
19
4,083
5,231
9,894
$
$
561
19
4,078
5,231
9,889
(1)
(2)
(3)
On October 1, 2011 and November 1, 2011, we reclassified $1,872 million and $255 million, respectively, of certain CDO and U.S. non-agency MBS from classified as at FVTPL to AFS.
On October 1, 2015, we reclassified $4,132 million of certain debt securities from classified as AFS to loans and receivables.
On October 1, 2015, we reclassified $5,240 million of certain debt securities from classified as AFS to held-to-maturity.
The following table provides the amounts recorded in net income and OCI from the debt securities after the reclassification.
(Millions of Canadian dollars)
FVTPL reclassified to available-for-sale
CDO
Mortgage-backed securities
Available-for-sale reclassified to loans and
receivables (2)
Canadian government debt – Federal
Available-for-sale reclassified to held-to-
maturity (2)
Canadian government debt – Federal
October 31, 2016
For the year ended
October 31, 2015
October 31, 2014
Unrealized gains
(losses) during
the period (1)
Interest income/
gains (losses)
recognized in net
income during
the period
Unrealized gains
(losses) during
the period (1)
Interest income/
gains (losses)
recognized in net
income during
the period
Unrealized gains
(losses) during
the period (1)
Interest income/
gains (losses)
recognized in net
income during
the period
$
$
(4) $
–
(7)
$
11
–
76
(38)
(49) $
135
222
$
(17) $
–
(8)
(9)
(34) $
28
2
7
14
51
$
$
(29) $
(2)
n.a.
n.a.
(31) $
58
4
n.a.
n.a.
62
(1)
(2)
n.a.
This represents the unrealized gains or losses that would have been recognized in profit or loss (for reclassifications from FVTPL) or OCI (for reclassifications from AFS) had the assets not
been reclassified.
Interest income/gains (losses) recognized in net income during the period includes amortization of net unrealized gains associated with reclassified assets that were included in Other
components of equity on the date of reclassification.
not applicable
154
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Note 5 Loans
(Millions of Canadian dollars)
Canada
October 31, 2016
United
States
Other
International
As at
Total
Canada
Retail (1)
Residential mortgages
Personal
Credit cards
Small business (2)
Wholesale (1)
Business (3)
Bank (4)
Sovereign (5)
Total loans
Allowance for loan losses
$ 241,800
82,205
16,601
3,878
$ 10,014
6,853
267
–
$ 3,184 $ 254,998
93,466
17,128
3,878
4,408
260
–
$ 229,987
84,637
15,516
4,003
$
344,484
17,134
7,852
369,470
334,143
65,756
1,027
6,625
73,408
417,892
(1,491)
58,010
445
827
59,282
76,416
(262)
20,304
207
1,168
21,679
29,531
(482)
144,070
1,679
8,620
154,369
523,839
(2,235)
60,221
530
6,332
67,083
401,226
(1,416)
October 31, 2015
United
States
Other
International
Total
772
4,623
89
–
5,484
34,385
115
–
34,500
39,984
(131)
$ 3,216 $ 233,975
94,346
15,859
4,003
5,086
254
–
8,556
348,183
21,952
1,155
1,379
24,486
116,558
1,800
7,711
126,069
33,042
(482)
474,252
(2,029)
Total loans net of allowance for loan losses $ 416,401
$ 76,154
$ 29,049 $ 521,604
$ 399,810
$ 39,853
$ 32,560 $ 472,223
(1)
(2)
(3)
(4)
(5)
Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
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 maturity and rate sensitivity
Maturity term (1)
Rate sensitivity
As at October 31, 2016
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Total loans net of allowance for loan losses
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-rate-
sensitive
Total
$ 190,834 $ 161,953
23,721
121,625
$ 16,683 $ 369,470
154,369
9,023
$ 116,355 $ 247,021
95,133
55,639
$ 6,094 $ 369,470
154,369
3,597
$ 312,459 $ 185,674
$ 25,706 $ 523,839
(2,235)
$ 521,604
$ 171,994 $ 342,154
$ 9,691 $ 523,839
(2,235)
$ 521,604
Maturity term (1)
Rate sensitivity
As at October 31, 2015
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Total loans net of allowance for loan losses
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-rate-
sensitive
Total
$ 194,596 $ 143,352
19,505
101,922
$ 10,235 $ 348,183
126,069
4,642
$ 126,141
53,799
216,841
70,827
5,201 $ 348,183
126,069
1,443
$ 296,518 $ 162,857
$ 14,877 $ 474,252
(2,029)
$ 472,223
$ 179,940 $ 287,668
$ 6,644 $ 474,252
(2,029)
$ 472,223
(1)
(2)
Generally, based on the earlier of contractual repricing or maturity date.
Includes variable rate loans that can be repriced at the clients’ discretion without penalty.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
155
Note 5 Loans (continued)
Allowance for credit losses
(Millions of Canadian dollars)
Retail
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Business
Bank
Acquired credit-impaired loans
Total allowance for loan losses
Allowance for off-balance sheet and other items (1)
Total allowance for credit losses
Individually assessed
Collectively assessed
Total allowance for credit losses
(Millions of Canadian dollars)
Retail
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Business
Bank
Total allowance for loan losses
Allowance for off-balance sheet and other items (1)
Total allowance for credit losses
Individually assessed
Collectively assessed
Total allowance for credit losses
(Millions of Canadian dollars)
Retail
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Business
Bank
Total allowance for loan losses
Allowance for off-balance sheet and other items (1)
Total allowance for credit losses
Individually assessed
Collectively assessed
Total allowance for credit losses
For the year ended October 31, 2016
Balance at
beginning of
period
Provision
for credit
losses Write-offs Recoveries
Unwind of
discount
Exchange
rate changes/
other
Balance
at end
of period
$
$
$
$
77 $
(42) $
5 $
242 $
530
386
64
1,222
458
442
34
1,011
(556)
(564)
(40)
(1,202)
805
2
807
–
2,029
91
528
(3)
525
10
1,546
–
2,120 $ 1,546 $ (1,523) $
(321)
–
(321)
–
(1,523)
–
252 $
351 $
(224) $
1,868
2,120 $ 1,546 $ (1,523) $
(1,299)
1,195
111
122
10
248
38
–
38
–
286
–
286 $
25 $
261
286 $
(24) $
(14)
–
(3)
(41)
(59)
–
(59)
–
(100)
–
(100) $
(50) $
(50)
(100) $
15 $
–
–
–
15
273
529
386
65
1,253
979
(12)
–
1
979
(11)
3
(7)
2,235
(3)
–
91
(3) $ 2,326
11 $
(14)
365
1,961
(3) $ 2,326
For the year ended October 31, 2015
Balance at
beginning of
period
Provision
for credit
losses Write-offs Recoveries
Unwind of
discount
Exchange
rate changes/
other
Balance
at end
of period
46 $
(64) $
7 $
$
240 $
535
385
64
1,224
768
2
770
1,994
91
384
378
32
840
258
(1)
257
1,097
–
(494)
(497)
(40)
(1,095)
(243)
–
(243)
(1,338)
–
$ 2,085 $ 1,097 $ (1,338) $
$
214 $
149 $
948
$ 2,085 $ 1,097 $ (1,338) $
(132) $
(1,206)
1,871
$
151 $
583
385
61
1,180
777
2
779
1,959
91
444
353
44
936
228
–
228
1,164
–
(565)
(466)
(47)
(1,108)
(221)
–
(221)
(1,329)
–
$ 2,050 $ 1,164 $ (1,329) $
$
240 $
160 $
(188) $
1,810
1,004
$ 2,050 $ 1,164 $ (1,329) $
(1,141)
105
119
10
241
33
1
34
275
–
275 $
18 $
257
275 $
106
114
9
231
32
–
32
263
–
263 $
16 $
247
263 $
(23) $
(16)
–
(2)
(41)
(39)
–
(39)
(80)
–
(80) $
(26) $
(54)
(80) $
36 $
16
1
–
53
242
530
386
64
1,222
28
–
28
81
–
805
2
807
2,029
91
81 $ 2,120
252
29 $
52
1,868
81 $ 2,120
(26) $
(23)
–
(2)
(51)
(36)
–
(36)
(87)
–
(87) $
(24) $
(63)
(87) $
48 $
(10)
(1)
(1)
36
240
535
385
64
1,224
(12)
–
(12)
24
–
768
2
770
1,994
91
24 $ 2,085
10 $
214
1,871
14
24 $ 2,085
For the year ended October 31, 2014
Balance at
beginning of
period
Provision
for credit
losses Write-offs Recoveries
Unwind of
discount
Exchange
rate changes/
other
Balance
at end
of period
95 $
(30) $
2 $
(1)
The allowance for off-balance sheet and other items is reported separately in Other liabilities – Provisions.
156
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Net interest income after provision for credit losses
(Millions of Canadian dollars)
Net interest income
Provision for credit losses
For the year ended
October 31
2016
October 31
2015
October 31
2014
$ 16,531 $ 14,771 $ 14,116
1,164
1,097
1,546
Net interest income after provision for credit losses
$ 14,985 $ 13,674 $ 12,952
Loans past due but not impaired
October 31, 2016
October 31, 2015
As at
(Millions of Canadian dollars)
1 to 29 days
30 to 89 days
90 days
and greater
Retail
Wholesale
$
$
3,450
848
4,298
$
$
1,296
372
1,668
$
$
337
–
337
$
$
Total
5,083
1,220
6,303
1 to 29 days
30 to 89 days
90 days
and greater
$
$
3,054
417
3,471
$
$
1,298
184
1,482
$
$
314
–
314
Total
$ 4,666
601
$ 5,267
Gross carrying value of loans individually determined to be impaired (1)
(Millions of Canadian dollars)
Retail (2)
Wholesale (2)
Business
Bank
Acquired credit-impaired loans
As at
October 31
2016
October 31
2015
$
$
16 $
2,130
2
418
2,566 $
–
991
2
–
993
(1)
(2)
Average balance of gross individually assessed impaired loans for the year ended October 31, 2016 was $2,037 million (October 31, 2015 – $830 million).
Excludes ACI loans.
Acquired Credit-Impaired Loans
ACI loans resulting from the acquisition of City National include Retail, Wholesale and FDIC covered loans with outstanding unpaid principal
balances of $27 million, $73 million and $642 million and fair values of $22 million, $62 million and $596 million, respectively, as at
November 2, 2015 (the acquisition date).
The following table provides further details of our ACI loans.
(Millions of Canadian dollars)
City National
Unpaid principal balance (1)
Credit related fair value adjustments
Interest rate and other related premium/(discount)
Carrying value
Individually assessed allowance
Carrying value net of related allowance (2)
(1)
(2)
Represents contractual amount owed net of write-offs since the acquisition of the loan.
Carrying value does not include the effect of FDIC loss-share agreements.
As at
October 31
2016
$
$
409
(12)
21
418
(3)
415
FDIC Covered Loans
As at October 31, 2016, the balance of FDIC covered loans was $374 million and was recorded in Loans on the Consolidated Balance Sheet. As
at October 31, 2016, the balances for indemnification assets and clawback liabilities were $2 million and $26 million, respectively.
Note 6 Derecognition of financial assets
We enter into transactions in which we transfer financial assets such as loans or securities to structured entities or other third parties. The
majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian residential mortgage
securitization transactions do not qualify for derecognition as we continue to be exposed to substantially all of the risks and rewards of the
transferred assets, such as prepayment, credit, price, interest rate and foreign exchange risks.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
157
Note 6 Derecognition of financial assets (continued)
Transferred financial assets not derecognized
Securitization of Canadian residential mortgage loans
We securitize insured Canadian residential mortgage loans through the creation of MBS pools under the National Housing Act MBS (NHA MBS)
program. All loans securitized under the NHA MBS program are required to be insured by the Canadian Mortgage Housing Corporation or a third-
party insurer. We require the borrower to pay the insurance for mortgages in which the loan amount is greater than 80% of the original appraised
value of the property (loan-to-value (LTV) ratio). For residential mortgage loans securitized under this program with an LTV ratio less than 80%,
we are required to insure the mortgages at our own expense. Under the NHA MBS program, we are responsible for making all payments due on
our issued MBS, regardless of whether we collect the necessary funds from the mortgagor or the insurer. When a borrower defaults on a
mortgage payment, we submit a claim to the insurer if the amount recovered from the collection or foreclosure process is lower than the sum of
the principal balance, accrued interest and collection costs on the outstanding loan. The insurance claim process is managed by the insurance
provider in accordance with the insurer’s policies and covers the entire unpaid loan balance plus generally up to 12 months of interest, selling
costs and other eligible expenses. If an insurance claim is denied, a loss is recognized in Provision for credit losses in our Consolidated
Statements of Income. The amount recorded as a loss is not significant to our Consolidated Financial Statements and no significant losses were
incurred due to legal action arising from a mortgage default during 2016 and 2015.
We sell the NHA MBS pools primarily to a government-sponsored structured entity under the Canada Mortgage Bond (CMB) program. The
entity periodically issues CMBs, which are guaranteed by the government, and sells them to third-party investors. Proceeds of the CMB issuances
are used by the entity to purchase the NHA MBS pools from eligible NHA MBS issuers who participate in the issuance of a particular CMB series.
Our continuing involvement includes servicing the underlying residential mortgage loans we have securitized, either ourselves or through a third-
party servicer. We also act as counterparty in interest rate swap agreements where we pay the entity the interest due to CMB investors and
receive the interest on the underlying MBS and reinvested assets. As part of the swaps, we are also required to maintain a principal reinvestment
account for principal payments received on the underlying mortgage loans to meet the repayment obligation upon maturity of the CMB. We
reinvest the collected principal payments in permitted investments as outlined in the swap agreements.
We have determined that certain of the NHA MBS program loans transferred to the entity do not qualify for derecognition as we have not
transferred substantially all of the risks and rewards of ownership. As a result, these transferred MBS continue to be classified as residential
mortgage loans and recognized on our Consolidated Balance Sheets. The cash received for these transferred MBS is treated as a secured
borrowing and a corresponding liability recorded in Deposits – Business and government on our Consolidated Balance Sheets.
Securities sold under repurchase agreements and securities loaned
We also enter into transactions such as repurchase agreements and securities lending agreements where we transfer assets under agreements
to repurchase them on a future day and retain substantially all of the risks and rewards associated with the assets. These transferred assets
remain on our Consolidated Balance Sheets and are accounted for as collateralized borrowing transactions.
The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for derecognition,
and their associated liabilities.
As at
October 31, 2016
October 31, 2015
Canadian
residential
mortgage
loans (1) (2)
Securities
sold under
repurchase
agreements (3)
Securities
loaned (3)
Total
Canadian
residential
mortgage
loans (1) (2)
Securities
sold under
repurchase
agreements (3)
Securities
loaned (3)
Total
$ 33,648 $
100,556 $
2,885 $ 137,089
$ 35,707 $
78,327 $ 4,961 $ 118,995
(Millions of Canadian dollars)
Carrying amount of transferred
assets that do not qualify for
derecognition
Carrying amount of associated
liabilities
33,670
100,556
2,885
137,111
36,130
78,327
4,961
119,418
Fair value of transferred assets
Fair value of associated
$ 33,574 $
100,556 $
2,885 $ 137,015
$ 35,770 $
78,327 $ 4,961 $ 119,058
liabilities
34,730
100,556
2,885
138,171
37,150
78,327
4,961
120,438
Fair value of net position
$
(1,156) $
– $
– $
(1,156) $ (1,380) $
– $
– $
(1,380)
(1)
(2)
(3)
Includes Canadian residential mortgage loans transferred primarily to Canada Housing Trust at the initial securitization and other permitted investments used for funding requirements after
the initial securitization.
CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
Does not include over-collateralization of assets pledged.
Note 7 Structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our financing and investing
needs as well as those of our customers. A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding
control. Structured entities are generally created to achieve a narrow and well defined objective with restrictions around their ongoing activities.
We consolidate a structured entity when we control the entity in accordance with our accounting policy as described in Note 2. In other cases, we
may sponsor or have an interest in such an entity but not consolidate it.
Consolidated structured entities
We consolidate the following structured entities, whose assets and liabilities are recorded on our Consolidated Balance Sheets. Third-party
investors in these structured entities generally have recourse only to the assets of the related entity and do not have recourse to our general
assets unless we breach our contractual obligations to those entities. In the ordinary course of business, the assets of each consolidated
structured entity can generally only be used to settle the obligations of that entity.
158
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Credit card securitization vehicle
We securitize a portion of our credit card receivables through a structured entity on a revolving basis. The entity purchases co-ownership
interests in a pool of credit card receivables and issues senior and subordinated term notes collateralized by the underlying pool of credit card
receivables. Investors who purchase the term notes have recourse only to the underlying pool of credit card receivables.
We continue to service the credit card receivables sold and perform an administrative role for the entity. We also provide first-loss
protection through our retained interest in the transferred assets, the cash reserve balance we fund from time to time, and also through certain
subordinated notes which we retain. Additionally, we may own some senior notes as investments or for market-making activities; we provide
subordinated loans to the entity to pay upfront expenses; and we act as counterparty to interest rate and cross currency swap agreements which
hedge the entity’s interest rate and currency risk exposure.
We consolidate the structured entity because we have decision making power over the timing and size of future issuances and other
relevant activities which were predetermined by us at inception. We also obtain significant funding benefits and are exposed to the majority of
the residual ownership risks through the credit support provided. As at October 31, 2016, $9.8 billion of notes issued by our credit card
securitization vehicle were included in Deposits on our Consolidated Balance Sheets (October 31, 2015 – $9.1 billion).
Collateralized commercial paper vehicle
We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party investors. The
structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to advance funds to the entity in the event
there are insufficient funds from other sources to settle maturing commercial paper. We pledge collateral to secure the loans and are exposed to
the market and credits risks of the pledged securities. We administer the entity and earn an administration fee for providing these services.
We consolidate the structured entity because we have decision making power over the relevant activities, are the sole borrower from the
structure, and are exposed to a majority of the residual ownership risks through the credit support provided. As at October 31, 2016, $9.6 billion
of commercial paper issued by the vehicle was included in Deposits on our Consolidated Balance Sheets (October 31, 2015 – $11.8 billion).
Innovative capital vehicles
RBC Capital Trust was created to issue innovative capital instruments, the proceeds from which were used to purchase mortgages from RBC. We
consolidate the trust as, through our roles as trustee, administrative agent and equity investor, we have the decision making power over the
relevant activities of the trust and are exposed to variability from the performance of the underlying mortgages. Refer to Note 20 for further
details on our innovative capital instruments.
Covered bonds
RBC Covered Bond Guarantor Limited Partnership (Guarantor LP) was created to issue guarantees of covered bonds that we issue. We
periodically transfer mortgages to Guarantor LP to support funding activities and asset coverage requirements under our covered bond program.
The covered bonds guaranteed by Guarantor LP are direct, unsecured and unconditional obligations of RBC; therefore, investors have a claim
against the Bank which will continue if the covered bonds are not paid by the Bank and the mortgage assets in Guarantor LP are insufficient to
satisfy the obligations owing on the covered bonds. We act as general partner, limited partner, swap counterparty, lender and liquidity provider
to Guarantor LP and registered issuer of the covered bonds.
We consolidate Guarantor LP as we have the decision making power over the relevant activities through our role as general partner and are
exposed to variability from the performance of the underlying mortgages. As at October 31, 2016, the total amount of mortgages transferred and
outstanding was $53.8 billion (October 31, 2015 – $54.5 billion) and $40.5 billion of covered bonds were recorded as Deposits on our
Consolidated Balance Sheets (October 31, 2015 – $37.2 billion).
Municipal bond TOB structures
We sell taxable and tax-exempt municipal bonds into Tender Option Bond (TOB) structures, which consist of a credit enhancement (CE) trust and
a TOB trust. The CE trust purchases a bond from us, financed with a trust certificate issued to the TOB trust. The TOB trust then issues floating-
rate certificates to short-term investors and a residual certificate that is held by us. We are the remarketing agent for the floating-rate certificates
and provide a liquidity facility to the TOB trust which requires us to purchase any certificates tendered but not successfully remarketed. We also
provide a letter of credit to the CE trust under which we are required to extend funding if there are any losses on the underlying bonds. We earn
interest on the residual certificate and receive market-based fees for acting as remarketing agent and providing the liquidity facility and letter of
credit.
We consolidate both the CE trust and TOB trust when we are the holder of the residual certificate as we have decision making power over
the relevant activities, including the selection of the underlying municipal bonds and the ability to terminate the structure, and are exposed to
variability from the performance of the underlying municipal bonds. As at October 31, 2016, $2.5 billion of municipal bonds were included in
AFS securities related to consolidated TOB structures (October 31, 2015 – $6.0 billion) and a corresponding $2.5 billion of floating-rate
certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2015 – $6.1 billion).
Non-RBC managed investment funds
We enter into certain fee-based equity derivative transactions where our investments in the reference funds are held by an intermediate limited
partnership entity (intermediate entity) in which we hold a substantial majority of the equity interests. We consolidate the intermediate entity
because we have decision making power to direct all the activities of the entity and are exposed to a majority of the risks and rewards through
our equity investments. As at October 31, 2016, $179 million of Trading securities representing our investments in the reference funds were
recorded on our Consolidated Balance Sheets (October 31, 2015 – $227 million).
RBC managed investment funds
We are sponsors and investment managers of mutual and pooled funds, which give us the ability to direct the investment decisions of the funds.
We consolidate those mutual and pooled funds in which our interests, which include direct investment in seed capital plus management or
performance fees, indicate that we are acting as a principal. As at October 31, 2016, $498 million of Trading securities held in the consolidated
funds (October 31, 2015 – $586 million) and $126 million of Other liabilities representing the fund units held by third parties
(October 31, 2015 – $190 million) were recorded on our Consolidated Balance Sheets.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
159
Note 7 Structured entities (continued)
Unconsolidated structured entities
We have interests in certain structured entities that we do not consolidate but have recorded assets and liabilities on our Consolidated Balance
Sheets related to our transactions and involvement with these entities.
The following table presents the assets and liabilities recorded on our Consolidated Balance Sheets and our maximum exposure to loss
related to our interests in unconsolidated structured entities. It also presents the size of each class of unconsolidated structured entity, as
measured by the total assets of the entities in which we have an interest.
(Millions of Canadian dollars)
On-balance sheet assets
Securities
Loans
Derivatives
Other assets
On-balance sheet liabilities
Derivatives
Other liabilities
Multi-seller
conduits (1) (2)
Structured
finance
As at October 31, 2016
Non-RBC
managed
investment
funds
RBC
managed
investment
funds
Third-party
securitization
vehicles
$
$
$
$
675 $
733
11
–
– $
1,179
–
549
1,419 $ 1,728 $
2,543 $
–
–
3
2,546 $
213 $
–
–
156
369 $
– $
4,359
3
–
4,362 $
68 $
–
68 $
– $
–
– $
– $
27
27 $
– $
–
– $
– $
–
– $
Other
Total
777
–
21
75
873
3
1
4
$
$
$
$
4,208
6,271
35
783
11,297
71
28
99
Maximum exposure to loss (3)
$
Total assets of unconsolidated structured entities $
8,998 $ 1,301
39,475 $ 4,725 $
38,703 $ 20,650 $ 587,125 $ 308,683 $ 113,627 $ 63,792
3,378 $
370 $
58,247
$
$ 1,132,580
(Millions of Canadian dollars)
On-balance sheet assets
Securities
Loans
Derivatives
Other assets
On-balance sheet liabilities
Derivatives
Other liabilities
Maximum exposure to loss (3)
Multi-seller
conduits (1) (2)
Structured
finance
$
$
$
$
$
17 $
– $
764
19
–
1,323
2
547
800 $ 1,872 $
24 $
–
24 $
– $
–
– $
37,789 $ 3,681 $
As at October 31, 2015
Non-RBC
managed
investment
funds
RBC
managed
investment
funds
Third-party
securitization
vehicles
2,661 $
–
–
1
2,662 $
– $
33
33 $
3,440 $
275 $
–
–
225
500 $
– $
–
– $
490 $
– $
5,447
3
–
5,450 $
– $
–
– $
9,694 $
Other
Total
697
–
54
57
808
11
2
13
927
$
$
$
$
$
3,650
7,534
78
830
12,092
35
35
70
56,021
Total assets of unconsolidated structured entities $
37,044 $ 21,621 $ 658,236 $ 278,474 $ 125,294 $ 67,658
$ 1,188,327
(1)
(2)
(3)
Total assets of unconsolidated structured entities represent the maximum assets that may have to be purchased by the conduits under purchase commitments outstanding. Of the purchase
commitments outstanding, the conduits have purchased financial assets totalling $24.6 billion as at October 31, 2016 (October 31, 2015 – $25.2 billion).
Securities include $670 million of asset-backed commercial paper (ABCP) purchased pursuant to the Risk Retention Rules (October 31, 2015 – $nil).
The maximum exposure to loss resulting from our interests in these entities consists mostly of investments, loans, fair value of derivatives, liquidity and credit enhancement facilities. The
maximum exposure to loss of the multi-seller conduits is higher than the on-balance sheet assets primarily by the notional amounts of the backstop liquidity and credit enhancement
facilities. Refer to Note 26.
Below is a description of our involvement with each significant class of unconsolidated structured entity.
Multi-seller conduits
We administer five multi-seller ABCP conduit programs (multi-seller conduits) – two in Canada and three in the U.S. These conduits primarily
purchase financial assets from clients and finance those purchases by issuing ABCP.
We do not maintain any ownership in the multi-seller conduits that we administer and have no rights to, or control of, their assets. As the
administrative agent, we earn a residual fee for providing services such as coordinating funding activities, transaction structuring,
documentation, execution and monitoring of transactions. The ABCP issued by each multi-seller conduit is in the conduit’s own name with
recourse to the financial assets owned by each multi-seller conduit, and is non-recourse to us except through our participation in liquidity and/or
credit enhancement facilities.
In October 2014, the U.S. federal regulators adopted regulations related to the credit risk retention requirements for asset-backed securities
(Risk Retention Rules) of the Dodd-Frank Act. We have begun purchasing ABCP from the U.S. multi-seller conduits as part of our implementation
plan to comply with the Risk Retention Rules by December 24, 2016. We continue to serve as placement agent for the multi-seller conduits and
may purchase ABCP issued by these conduits from time to time in order to facilitate the overall program liquidity.
We provide transaction-specific and program-wide liquidity facilities to the multi-seller conduits. In addition, we provide program-wide
credit enhancement to the multi-seller conduits which obligate us to purchase assets or advance funds in the event the multi-seller conduit does
not otherwise have funds from other sources, such as from the liquidity facilities, to settle maturing ABCP. In some cases, we or another third
party may provide transaction-specific credit enhancement which can take various forms. We receive market-based fees for providing these
liquidity and credit facilities.
For certain transactions, we act as counterparty to foreign exchange forward contracts and interest rate swaps to facilitate our clients’
securitization of fixed rate and/or foreign currency denominated assets through the conduits. These derivatives expose us to foreign exchange
and interest rate risks that are centrally managed by our foreign exchange trading and swap desks, respectively, and credit risk on the underlying
assets that is mitigated by the credit enhancement described below.
160
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Each transaction is structured with transaction-specific first loss protection provided by the third-party seller. This enhancement can take
various forms, including but not limited to overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of
credit. The amount of this enhancement varies but is generally sized to cover a multiple of loss experience.
An unrelated third party (expected loss investor) absorbs losses, up to a maximum contractual amount, that may occur in the future on the
assets in the multi-seller conduits 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 has
substantive power to direct the majority of the activities which significantly impact the conduit’s economic performance, including initial
selection and approval of the asset purchase commitments and liquidity facilities, approval of renewal and amendment of these transactions
and facilities, sale or transfer of assets, ongoing monitoring of asset performance, mitigation of losses, and management of the ABCP liabilities.
We do not consolidate these multi-seller conduits as we do not have decision making power to direct the relevant activities noted above.
Structured finance
We purchased U.S. ARS from certain trusts (U.S. ARS Trusts) which fund their long-term investments in student loans by issuing short-term senior
and subordinated notes. We are subject to losses on these U.S. ARS Trusts if defaults are experienced on the underlying student loans; however,
in the majority of these structures, the principal and accrued interest on the student loans are guaranteed by U.S. government agencies. We act
as auction agent for some of these entities but have no legal obligation to purchase the notes issued by these entities in the auction process. We
do not consolidate these U.S. ARS Trusts as we do not have decision making power over the investing and financing activities of the Trusts,
which are the activities that most significantly affect the performance of the Trusts.
Additionally, we invest in certain municipal bond TOB structures that we do not consolidate. These structures are similar to those
consolidated municipal bond TOB structures described above; however, the residual certificates are held by third-parties and we do not provide
credit enhancement of the underlying assets. We provide liquidity facilities on the floating-rate certificates which may be drawn if certificates are
tendered but not able to be remarketed. We do not have decision making power over the relevant activities of the structures; therefore, we do not
consolidate these structures. The assets transferred into these programs are derecognized from our Consolidated Balance Sheets.
We provide senior warehouse financing to structured entities that are established by third parties to acquire loans for the purposes of
issuing a term collateralized loan obligation (CLO) transaction. Subordinated financing is provided during the warehouse phase by one or more
third-party equity investors. We act as the arranger and placement agent for the term CLO transaction. Proceeds from the sale of the term CLO are
used to repay our senior warehouse financing, at which point we have no further involvement with the transaction. We do not consolidate these
CLO structures as we do not have decision making power over the relevant activities of the entity, which include the initial selection and
subsequent management of the underlying debt portfolio.
Non-RBC managed 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 a reference fund, and we economically hedge our exposure to
these derivatives by investing in those reference funds. We also act as custodian or administrator for several funds. We do not consolidate those
reference funds that are managed by third parties as we do not have power to direct their investing activities.
We provide liquidity facilities to certain third-party investment funds. The funds issued unsecured variable-rate preferred shares and invest
in portfolios of tax-exempt municipal bonds. Undrawn liquidity commitments expose us to liquidity risk of the preferred shares and drawn
commitments expose us to the credit risk of the underlying municipal bonds. We do not consolidate these third-party managed funds as we do
not have power to direct their investing activities.
RBC managed investment funds
We are sponsors and investment managers of mutual and pooled funds, which gives us the ability to direct the investment decisions of the
funds. We do not consolidate those mutual and pooled funds in which our interests indicate that we are exercising our decision making power as
an agent of the other unit holders.
Third-party securitization vehicles
We hold interests in securitization vehicles that provide funding to certain third parties on whose behalf the entities were created. The activities
of these entities are limited to the purchase and sale of specified assets from the sponsor and the issuance of asset-backed notes collateralized
by those assets. The underlying assets are typically receivables, including auto loans and leases. We, as well as other financial institutions, are
obligated to provide funding up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit
enhancements. Enhancement can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of
financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally sized to cover a multiple of loss
experience. We do not consolidate these entities as we do not have decision making power over the relevant activities, including the investing
and financing activities.
Other
Other structured entities include credit investment products and tax credit funds.
We use structured entities 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 entities (credit protection) and convert various risk factors such as yield, currency or credit risk of underlying assets to meet the needs
of the investors. We act as sole arranger and swap provider for certain entities and, in some cases, fulfill other administrative functions for the
entities. We do not consolidate these credit investment product entities as we do not have decision making power over the relevant activities,
which include selection of the collateral and reference portfolio, and are not exposed to a majority of the benefits or risks of the entities.
We created certain funds to pass through tax credits received from underlying low-income housing or historic rehabilitation real estate
projects to third parties (tax credit funds). We are sponsors of the tax credit funds as a result of our responsibility to manage the funds, arrange
the financing, and perform the administrative duties of these tax credit funds. We do not consolidate the tax credit funds as the third-party
investors in these funds have the decision making power to select the underlying investments and are exposed to the majority of the residual
ownership and tax risks of the funds. We also purchase passive interests in renewable energy tax credit entities created and controlled by third
parties. We do not consolidate these third party funds as we do not have decision making power over the relevant activities and our investments
are managed as part of larger portfolios which are held for trading purposes.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
161
Note 7 Structured entities (continued)
Other interests in unconsolidated structured entities
In the normal course of business, we buy and sell passive interests in certain third-party structured entities, including mutual funds, exchange
traded funds, and government-sponsored asset backed securities vehicles. Our investments in these entities are managed as part of larger
portfolios which are held for trading, liquidity or hedging purposes. We did not create or sponsor these entities and do not have any decision
making power over their ongoing activities. Our maximum exposure to loss is limited to our on-balance sheet investments in these entities,
which are not included in the table above. As at October 31, 2016, $51 billion of investments in these entities were included in Trading and AFS
securities on our Consolidated Balance Sheet. Refer to Note 3 and Note 4 for further details on our investment securities.
Sponsored entities
We are a sponsor of certain structured entities in which we have interests but do not consolidate. In determining whether we are a sponsor of a
structured entity, we consider both qualitative and quantitative factors, including the purpose and nature of the entity, our initial and continuing
involvement and whether we hold subordinated interests in the entity. We are considered to be the sponsor of certain credit investment
products, tax credit entities, RBC managed mutual funds and a commercial mortgage securitization vehicle. During the year ended October 31,
2016, we transferred commercial mortgages with a carrying amount of $660 million (October 31, 2015 – $195 million) to a sponsored
securitization vehicle in which we did not have any interests as at the end of the reporting period.
Financial support provided to structured entities
During the years ended October 31, 2016, 2015 and 2014, we have not provided any financial or non-financial support to any consolidated or
unconsolidated structured entities when we were not contractually obligated to do so. Furthermore, we have no intention to provide such support
in the future.
Note 8 Derivative financial 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. The 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 non-standardized agreements that are transacted between counterparties in the OTC market, whereas futures
are standardized contracts with respect to amounts and settlement dates, and are traded on regular futures exchanges. Examples of forwards
and futures are described below.
Interest rate forwards (forward rate agreements) and futures are contractual obligations to buy or sell an interest-rate sensitive financial
instrument on a predetermined future date at a specified price.
Foreign exchange forwards and futures are contractual 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 specified price) of an equity index, a basket of
stocks or a single stock at a predetermined future date.
Swaps
Swaps are OTC contracts in which two counterparties exchange a series of cash flows based on agreed upon rates applied to a notional amount.
Examples of swap agreements are described below.
Interest rate swaps are agreements where two counterparties exchange a series of payments based on different interest rates applied to a
notional amount in a single currency. Cross currency swaps involve the exchange of fixed payments in one currency for the receipt of fixed
payments in another currency. Cross currency interest rate swaps involve the exchange of both interest and notional 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 specified price, at or by a
predetermined 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 but are not
limited to interest rate options, foreign currency options, equity options and index options.
Credit derivatives
Credit derivatives are OTC contracts that transfer credit risk related to an underlying financial instrument (referenced asset) from one
counterparty to another. Credit derivatives include credit default swaps, credit default baskets and total return swaps.
Credit default swaps provide protection against the decline in the value of the referenced asset as a result of specified credit events such as
default or bankruptcy. They are 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 amounts based on changes in the
value of a reference asset or group of assets, including any returns such as interest earned on these assets, in exchange for amounts that are
based on prevailing market funding rates.
Other derivative products
Other contracts include precious metal, commodity, stable value and equity derivative contracts.
162
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Non-financial derivatives
We also transact in non-financial derivative products including precious metal and commodity derivative contracts in both the OTC and exchange
markets.
Derivatives issued for trading purposes
Most of our derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative
products to clients to enable them to transfer, modify or reduce current or expected risks. Trading involves market-making, positioning and
arbitrage activities. Market-making involves quoting bid and offer prices to other market participants with the intention of generating revenue
based on spread and volume. Positioning involves managing market risk positions with the expectation of profiting from favourable movements
in prices, rates or indices. Arbitrage activities involve identifying and profiting from price differentials between markets and products.
Derivatives issued for other-than-trading purposes
We also use derivatives for purposes other than trading, primarily for hedging, in conjunction with the management of interest rate, credit, 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 forecasted assets and liabilities, including funding and investment activities. Purchased 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 and capital 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 forecasted cash flows. When a hedging
relationship is effective, gains, losses, revenue and expenses of the hedging instrument will offset the gains, losses, revenue and expenses of
the hedged item. We assess and measure the effectiveness of a hedging relationship based on the change in the fair value or cash flows of the
derivative hedging instrument relative to the change in the fair value or cash flows of the hedged item attributable to the hedged risk. When cash
instruments are designated as hedges of foreign exchange risks, only changes in their value due to foreign exchange risk are included in the
assessment and measurement of hedge effectiveness.
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.
After-tax unrealized losses relating to de-designated hedges of $70 million (before-tax unrealized losses of $95 million) included in Other
components of equity as at October 31, 2016, 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
October 31, 2016
Designated as hedging instruments
in hedging relationships
As at
October 31, 2015
Designated as hedging instruments
in hedging relationships
Cash flow
hedges
Fair value
hedges
Net
investment
hedges
Not designated
in a hedging
relationship
Cash flow
hedges
Fair value
hedges
Net
investment
hedges
Not designated
in a hedging
relationship
$
546 $ 1,686 $
183 $ 116,529 $
842 $ 1,814 $
167 $ 102,803
1,266
–
430
–
113
19,982
114,741
n.a.
1,629
–
311
–
49
18,804
105,871
n.a.
(Millions of Canadian dollars)
Assets
Derivative instruments
Liabilities
Derivative instruments
Non-derivative instruments
n.a.
not applicable
Results of hedge activities recorded in Net income and Other comprehensive income
(Millions of Canadian dollars)
Fair value hedges
For the year ended
October 31
2016
October 31
2015
October 31
2014
Gains (losses) on hedging instruments (1)
Gains (losses) on hedged items attributable to the hedged risk (1)
Ineffective portion (1) (2)
$
(235) $
135
(100)
313 $
(424)
(111)
Cash flow hedges
Ineffective portion (1)
Effective portion (3)
Reclassified to income during the period (4) (5)
Net investment hedges
Ineffective portion (1)
Foreign currency gains (losses) (3)
Gains (losses) from hedges (3)
1
(35)
(71)
–
147
113
3
(541)
(447)
(1)
5,885
(3,223)
216
(329)
(113)
(13)
(108)
(38)
1
2,743
(1,585)
(1)
(2)
(3)
(4)
(5)
Amounts are recorded in Non-interest income.
Amounts include losses of $97 million (October 31, 2015 – $106 million; October 31, 2014 – $109 million) that are excluded from the assessment of hedge effectiveness and are offset by
economic hedges.
Amounts are included in OCI, net of taxes.
Amounts are recorded in Net interest income.
After-tax losses of $52 million were reclassified from Other components of equity to income during the year ended October 31, 2016 (October 31, 2015 – $330 million; October 31, 2014 –
$28 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
163
Note 8 Derivative financial instruments and hedging activities (continued)
Notional amount of derivatives by term to maturity (absolute amounts)
(Millions of Canadian dollars)
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
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
(Millions of Canadian dollars)
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
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
As at October 31, 2016
Within
1 year
Term to maturity
1 to
5 years
Over 5
years (1)
$
522,944
1,991,365
114,519
97,283
$
9,121
3,485,607
161,584
182,233
$
–
2,285,420
70,160
71,503
$
1,288,656
8,869
272,029
28,601
28,676
1,581
58,863
26,076
35,269
18,196
10,978
312
423
178,615
44,980
34,931
544,195
16,538
14,723
10,314
59,133
14,496
19,551
165
–
–
3
55,820
939
30,866
251,371
4,619
4,924
4,306
22,355
3
–
–
–
–
–
617
Total
Trading
532,065
7,762,392
346,263
351,019
1,334,575
74,666
1,067,595
49,758
48,323
16,201
140,351
40,575
54,820
18,361
10,978
312
426
235,052
$
532,065
7,464,144
346,263
351,019
1,314,103
69,626
1,013,958
49,758
48,323
15,842
136,205
40,575
54,820
18,361
10,978
312
426
235,052
Other than
Trading
$
–
298,248
–
–
20,472
5,040
53,637
–
–
359
4,146
–
–
–
–
–
–
–
$ 4,683,255
$ 4,653,394
$ 2,747,083
$ 12,083,732
$ 11,701,830
$ 381,902
As at October 31, 2015
Within
1 year
Term to maturity
1 to
5 years
Over 5
years (1)
$
602,072
1,717,989
106,908
107,213
$
26,334
3,946,377
99,994
108,237
$
–
2,482,659
34,649
44,268
$
1,273,434
7,404
246,668
25,921
24,933
1,250
75,723
18,934
36,589
17,282
1,281
308
714
170,464
45,591
24,711
609,751
13,773
12,168
9,759
57,344
10,469
25,939
9,119
956
–
13
43,345
1,275
31,010
323,403
4,274
4,677
3,947
24,819
10
2
–
–
–
–
1,197
Total
Trading
628,406
8,147,025
241,551
259,718
1,320,300
63,125
1,179,822
43,968
41,778
14,956
157,886
29,413
62,530
26,401
2,237
308
727
215,006
$
628,406
7,922,567
241,551
259,718
1,271,428
59,423
1,129,357
43,968
41,778
14,286
154,504
29,413
62,530
26,401
2,237
308
727
215,006
Other than
Trading
$
–
224,458
–
–
48,872
3,702
50,465
–
–
670
3,382
–
–
–
–
–
–
–
(1)
(2)
Includes contracts maturing in over 10 years with a notional value of $883 billion (October 31, 2015 – $876 billion). The related gross positive replacement cost is $79 billion
(October 31, 2015 – $60 billion).
Credit derivatives with a notional value of $0.4 billion (October 31, 2015 – $0.7 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $10.1 billion
(October 31, 2015 – $8.9 billion) and protection sold of $5.7 billion (October 31, 2015 – $5.3 billion).
$ 4,435,087
$ 5,043,880
$ 2,956,190
$ 12,435,157
$ 12,103,608
$ 331,549
164
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
The following tables indicate the periods when the cash flows are expected to occur and when they are expected to affect profit or loss for cash
flow hedges.
(Millions of Canadian dollars)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
(Millions of Canadian dollars)
Cash inflows from assets
Cash outflows from liabilities
Net cash flows
Fair value of derivative instruments
(Millions of Canadian dollars)
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
Other contracts
Held or issued for other-than-trading purposes
Interest rate contracts
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Credit derivatives
Other contracts
Total gross fair values before netting
Valuation adjustments determined on a
pooled basis
Impact of netting agreements that qualify for
balance sheet offset
Impact of netting agreements that do not qualify
for balance sheet offset (2)
As at October 31, 2016
Within 1 year
192
$
(387)
1 to 2 years
175
$
(789)
2 to 3 years
122
$
(559)
3 to 5 years
90
$
(3,136)
Over 5 years
39
$
(77)
$
Total
618
(4,948)
$
(195)
$
(614)
$
(437)
$
(3,046)
$
(38)
$ (4,330)
As at October 31, 2015
Within 1 year
156
$
(1,004)
1 to 2 years
189
$
(282)
2 to 3 years
192
$
(730)
3 to 5 years
243
$
(3,556)
Over 5 years
12
$
(151)
$
Total
792
(5,723)
$
(848)
$
(93)
$
(538)
$
(3,313)
$
(139)
$ (4,931)
As at
October 31, 2016
October 31, 2015
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
$
369 $
387 $
267 $
156,800
4,008
–
149,440
–
5,420
146,464
4,455
–
244
138,742
–
5,601
$
340 $
303 $
323 $
136,398
4,155
–
130,623
–
5,380
135,901
3,330
–
291
129,829
–
4,573
161,177
155,247
151,186
144,587
140,893
136,306
139,554
134,693
18,604
4,556
25,010
2,123
–
50,293
137
7,640
18,717
4,191
28,834
–
1,830
53,572
178
10,175
18,565
5,423
27,499
2,084
–
53,571
191
6,662
18,853
4,438
29,165
–
1,857
54,313
242
8,994
16,505
3,039
21,445
3,026
–
44,015
130
9,431
16,294
3,254
27,584
–
2,486
49,618
200
12,868
11,599
3,844
19,931
2,337
–
37,711
94
10,704
11,477
4,109
26,385
–
1,898
43,869
153
12,866
219,247
219,172
211,610
208,136
194,469
198,992
188,063
191,581
2,588
–
–
2,588
257
314
2,636
3,207
–
113
1,471
–
–
1,471
338
542
2,286
3,166
21
113
5,908
4,771
217,518
212,907
(1,432)
(126)
(97,142)
(96,231)
118,944
116,550
(79,296)
(79,296)
$ 39,648 $ 37,254
2,923
–
–
2,923
274
20
3,107
3,401
–
69
1,585
–
–
1,585
253
506
2,080
2,839
18
69
6,393
4,511
194,456
196,092
(1,303)
(272)
(87,527)
(87,960)
105,626
107,860
(71,833)
(71,833)
$ 33,793 $ 36,027
(1)
(2)
Average fair value amounts are calculated based on monthly balances.
Additional impact of offsetting credit exposures on contracts that do not qualify for balance sheet offset.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
165
Note 8 Derivative financial instruments and hedging activities (continued)
Fair value of derivative instruments by term to maturity
October 31, 2016
October 31, 2015
As at
(Millions of Canadian dollars)
Derivative assets
Derivative liabilities
Less than
1 year
1 to
5 years
Over
5 years
Total
$ 30,475 $ 39,357 $ 49,112 $ 118,944
116,550
39,507
46,081
30,962
Less than
1 year
1 to
5 years
Total
$ 24,920 $ 35,883 $ 44,823 $ 105,626
107,860
41,388
40,380
26,092
Over
5 years
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 transactions 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 use a single internal rating system for all credit risk exposure. In most cases, these internal ratings
approximate the external risk ratings of public rating agencies.
Netting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of master netting
agreements. A master netting agreement provides for a single net settlement of all financial instruments covered by the agreement in the event
of default. However, credit risk is reduced only to the extent that our financial obligations to the same counterparty can be set off against
obligations of the counterparty to us. We maximize the use of master netting agreements to reduce derivative-related credit exposure. Our overall
exposure to credit risk that is reduced through master netting agreements may change substantially following the reporting date as the exposure
is affected by each transaction subject to the agreement as well as by changes in underlying market rates. Measurement of our credit exposure
arising out of derivative transactions is reduced to reflect the effects of netting in cases where the enforceability of that netting is supported by
appropriate legal analysis as documented in our trading credit risk policies.
The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit risk. Mark-to-
market provisions in our agreements with some counterparties, typically in the form of a Credit Support Annex, provide us with the right to
request that the counterparty pay down or collateralize the current market value of its derivatives positions when the value passes a specified
threshold amount.
Replacement cost represents the total fair value of all outstanding contracts in a gain position after factoring in the master netting
agreements. 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.
Derivative-related credit risk
(Millions of Canadian dollars)
Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Foreign exchange contracts
Forward contracts
Swaps
Options purchased
Credit derivatives (4)
Other contracts
Exchange traded contracts
October 31, 2016 (1)
October 31, 2015 (1)
Replacement
cost
Credit
equivalent
amount (2)
Risk-weighted
equivalent (3)
Replacement
cost
Credit
equivalent
amount (2)
Risk-weighted
equivalent (3)
As at
$
$
232
15,118
334
6,914
13,763
416
31
1,409
2,933
$
250
27,214
1,092
12,952
12,492
1,045
920
6,188
11,756
53
5,429
662
3,896
3,790
456
188
3,463
235
$
$
182
14,747
340
5,041
7,686
322
34
2,499
4,245
$
233
27,688
700
11,254
9,809
547
913
7,539
12,048
50
5,197
446
3,202
3,878
276
204
4,320
241
$
41,150
$
73,909
$
18,172
$
35,096
$
70,731
$
17,814
(1)
(2)
(3)
(4)
The amounts presented are net of master netting agreements in accordance with Basel III.
The total credit equivalent amount includes collateral applied of $21 billion (October 31, 2015 – $17.8 billion).
The risk-weighted balances are calculated in accordance with Basel III.
Excludes credit derivatives issued for other-than-trading purposes related to bought protection.
Replacement cost of derivative instruments by risk rating and by counterparty type
Risk rating (1)
Counterparty type (2)
As at October 31, 2016
(Millions of Canadian dollars)
Gross positive replacement cost
Impact of master netting agreements
Replacement cost (after netting
agreements)
AAA, AA
Total
$ 37,119 $ 151,992 $ 20,634 $ 7,773 $ 217,518 $ 62,112 $ 21,824 $ 133,582 $ 217,518
176,438
176,438
114,409
139,912
52,535
20,704
14,255
1,567
9,494
Banks
Other
Total
BBB
A
BB or
lower
OECD
governments
$ 16,415 $ 12,080 $ 6,379 $ 6,206 $ 41,080 $ 9,577 $ 12,330 $ 19,173 $ 41,080
166
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
(Millions of Canadian dollars)
Gross positive replacement cost
Impact of master netting agreements
Replacement cost (after netting
Risk rating (1)
Counterparty type (2)
As at October 31, 2015
AAA, AA
Total
$ 30,824 $ 136,843 $ 16,191 $ 10,598 $ 194,456 $ 56,631 $ 16,374 $ 121,451 $ 194,456
159,360
159,360
102,988
124,603
10,971
45,401
22,751
2,746
9,260
Banks
Other
Total
BBB
A
BB or
lower
OECD
governments
agreements)
$ 8,073 $ 12,240 $ 6,931 $ 7,852 $ 35,096 $ 11,230 $
5,403 $ 18,463 $ 35,096
(1)
(2)
Our internal risk ratings for major counterparty types approximate those of public ratings 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.
Note 9 Premises and equipment
(Millions of Canadian dollars)
Cost
Balance at October 31, 2015
Additions (1)
Acquisitions through business combination
Transfers from work in process
Disposals
Foreign exchange translation
Other
Balance at October 31, 2016
Accumulated depreciation
Balance at October 31, 2015
Depreciation
Disposals
Foreign exchange translation
Other
Balance at October 31, 2016
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
process
Total
$ 123
–
52
–
(3)
–
(1)
$ 171
$
$
–
–
–
–
–
–
$
$
$
$
$
1,294
1
94
14
(15)
1
(10)
1,379
534
48
(4)
(1)
(7)
570
809
$
$
$
$
$
1,508
156
55
83
(38)
(17)
(61)
1,686
1,070
219
(38)
(13)
(29)
1,209
477
$
$
$
$
$
1,292
35
2
40
(47)
(4)
34
1,352
875
126
(40)
(8)
8
961
391
$
$
$
$
$
2,464
46
63
137
(111)
(8)
(25)
2,566
1,642
180
(107)
(7)
2
1,710
856
Net carrying amount at October 31, 2016
$ 171
(Millions of Canadian dollars)
Cost
Balance at October 31, 2014
Additions (1)
Transfers from work in process
Disposals
Foreign exchange translation
Other
Balance at October 31, 2015
Accumulated depreciation
Balance at October 31, 2014
Depreciation
Disposals
Foreign exchange translation
Other
Balance at October 31, 2015
Net carrying amount at October 31, 2015
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
$
$
$
$
$
137
–
–
(25)
7
4
123
–
–
–
–
–
–
123
$
$
$
$
$
1,347
4
11
(95)
18
9
1,294
499
44
(8)
6
(7)
534
760
$
$
$
$
$
1,278
195
52
(101)
54
30
1,508
925
197
(98)
42
4
1,070
438
$
$
$
$
$
1,248
53
61
(108)
30
8
1,292
839
103
(96)
21
8
875
417
$
$
$
$
$
2,192
82
212
(98)
69
7
2,464
1,463
183
(64)
42
18
1,642
822
$
$
$
$
$
$
$
$
$
$
168 $ 6,849
487
249
317
51
(274)
–
(214)
–
(29)
(1)
(124)
(61)
132 $ 7,286
– $ 4,121
573
–
(189)
–
(29)
–
(26)
–
– $ 4,450
132 $ 2,836
Work in
process
Total
208 $ 6,410
678
344
(336)
–
(427)
–
182
4
6
(52)
168 $ 6,849
– $ 3,726
527
–
(266)
–
111
–
23
–
– $ 4,121
168 $ 2,728
(1)
At October 31, 2016, we had total contractual commitments of $301 million to acquire premises and equipment (October 31, 2015 – $157 million; October 31, 2014 – $216 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
167
Note 10 Goodwill and other intangible assets
Goodwill
The following table presents changes in the carrying amount of goodwill by CGU for the years ended October 31, 2016 and 2015.
(Millions of Canadian dollars)
At October 31, 2014
Dispositions
Currency translations
At October 31, 2015
Acquisition
Dispositions
Currency translations
At October 31, 2016
Canadian
Banking
Caribbean
Banking
Canadian
Wealth
Management
Global Asset
Management
U.S. Wealth
Management
(including
City National)
International
Wealth
Management
Investor &
Treasury
Services
Insurance
$ 2,527 $ 1,593 $
–
–
(23)
250
$ 2,527 $ 1,820 $
–
–
–
–
–
(49)
558 $
–
21
579 $
–
–
3
2,042 $
–
177
2,219 $
–
–
(256)
582 $
–
91
673 $
2,113
–
68
141 $ 118 $
(15)
16
–
–
142 $ 118 $
–
–
(27)
–
(6)
–
Capital
Markets
Total
937 $ 8,647
(38)
680
–
125
149 $
–
–
149 $ 1,062 $ 9,289
2,113
(7)
(239)
–
(1)
–
–
–
22
$ 2,527 $ 1,771 $
582 $
1,963 $
2,854 $
115 $ 112 $
148 $ 1,084 $ 11,156
We perform our annual impairment test by comparing the carrying amount of each CGU to its recoverable amount. The recoverable amount of a
CGU is represented by its value in use, except in circumstances where the carrying amount of a CGU exceeds its value in use. In such cases, we
determine the CGU’s fair value less costs of disposal and its recoverable amount is the greater of its value in use and fair value less costs of
disposal. Our annual impairment test is performed as at August 1.
In our 2016 and 2015 annual impairment tests, the recoverable amounts of our Caribbean Banking and International Wealth Management
CGUs were based on fair value less costs of disposal. The recoverable amounts of all other CGUs tested were based on value in use.
Value in use
We calculate value in use using a five-year discounted cash flow method, with the exception of our U.S. Wealth Management (including City
National) CGU where cash flow projections covering a ten-year period were used, which more closely aligns with the strategic growth plan
resulting from the acquisition of City National. Future cash flows are based on financial plans agreed by management, estimated based on
forecast results, business initiatives, capital required to support future cash flows and returns to shareholders. Key drivers of future cash flows
include net interest margins and average interest-earning assets. The values assigned to these drivers over the forecast period are based on past
experience, external and internal economic forecasts, and management’s expectations of the impact of economic conditions on our financial
results. Beyond the initial cash flow projection period, cash flows are assumed to increase at a constant rate using a nominal long-term growth
rate (terminal growth rate). Terminal growth rates are based on the current market assessment of gross domestic product and inflation for the
countries within which the CGU operates. The discount rates used to determine the present value of each CGU’s projected future cash flows are
based on the bank-wide cost of capital, adjusted for the risks to which each CGU is exposed. CGU-specific risks include: country risk, business/
operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price risk (including
product pricing risk and inflation).
The estimation of value in use involves significant judgment in the determination of inputs to the discounted cash flow model and is most
sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the forecast period. These key
inputs and assumptions used to determine the recoverable amount of each CGU using value in use were tested for sensitivity by applying a
reasonably possible change to those assumptions. The post-tax discount rates were increased by 1%, terminal growth rates were decreased by
1%, and future cash flows were reduced by 10%. As at August 1, 2016, no change in an individual key input or assumption, as described, would
result in a CGU’s carrying amount exceeding its recoverable amount based on value in use.
The terminal growth rates and pre-tax discount rates used in our discounted cash flow models are summarized below.
As at
August 1, 2016
August 1, 2015
Discount
rate (1)
Terminal
growth
rate
Discount
rate (1)
Terminal
growth
rate
10.0%
12.1
11.2
11.1
13.6
9.6
10.9
12.0
14.1
3.0%
4.3
3.0
3.0
3.0
3.0
3.0
3.0
3.0
10.6%
13.2
11.9
11.7
16.3
11.9
11.2
12.4
15.7
3.0%
4.3
3.0
3.0
3.0
3.0
3.0
3.0
3.0
Group of cash generating units
Canadian Banking
Caribbean Banking
Canadian Wealth Management
Global Asset Management
U.S. Wealth Management (including City National)
International Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
(1)
Pre-tax discount rates are determined implicitly based on post-tax discount rates.
168
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Fair value less costs of disposal – Caribbean Banking
For our Caribbean Banking CGU, we calculated fair value less costs of disposal using a discounted cash flow method that projects future cash
flows over a 5-year period. Cash flows are based on management forecasts, adjusted to approximate the considerations of a prospective third-
party buyer. Cash flows beyond the initial 5-year period are assumed to increase at a constant rate using a nominal long-term growth rate. Future
cash flows, terminal growth rates, and discount rates are based on the same factors noted above. This fair value measurement is categorized as
level 3 in the fair value hierarchy as certain significant inputs are not observable.
The estimation of fair value less costs of disposal involves significant judgment in the determination of inputs to the discounted cash flow
model and is most sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the forecast
period. These key inputs and assumptions were tested for sensitivity by applying a reasonably possible change to those assumptions. The
post-tax discount rates were increased by 1%, terminal growth rates were decreased by 1%, and future cash flows were reduced by 10%. As at
August 1, 2016, no reasonably possible change in an individual key input or assumption, as described, would result in the CGU’s carrying
amount exceeding its recoverable amount based on fair value less costs of disposal.
Fair value less costs of disposal – International Wealth Management
For our International Wealth Management CGU, we calculated fair value less costs of disposal using a multiples-based approach. Each business
within the CGU was valued using either a Price-to-assets-under-administration (P/AUA) or Price-to-revenue (P/Rev) multiple, as appropriate, to
reflect the considerations of a prospective third-party buyer. In 2016 and 2015, we applied a P/AUA multiple of 2.5% to AUA as at August 1 and a
P/Rev multiple of 2.5x to revenue for the 12 months preceding the testing date. These multiples represent our best estimate from a range of
reasonably possible inputs based on precedent transactions for comparable businesses. This fair value measurement is categorized as level 3 in
the fair value hierarchy as certain significant inputs are not observable.
The estimation of fair value less costs of disposal involves significant judgment in the determination of the appropriate valuation approach
and inputs and is most sensitive to changes in the P/AUA and P/Rev multiples. These key inputs were tested for sensitivity by reducing each
multiple to the low end of the range of reasonably possible inputs considered. As at August 1, 2016, no reasonably possible change in an
individual key input or assumption, as described, would result in the CGU’s carrying amount exceeding its recoverable amount based on fair
value less costs of disposal.
Other intangible assets
The following table presents the carrying amount of our other intangible assets.
(Millions of Canadian dollars)
Gross carrying amount
Balance at October 31, 2015
Additions
Acquisitions through business combination
Transfers
Dispositions
Impairment losses
Currency translations
Other changes
Balance at October 31, 2016
Accumulated amortization
Balance at October 31, 2015
Amortization charge for the year
Dispositions
Impairment losses
Currency translations
Other changes
Balance at October 31, 2016
Net balance, at October 31, 2016
Internally
generated
software
$
3,929
11
23
569
(10)
–
(33)
(54)
Other
software
$ 1,193
58
47
34
(6)
–
19
44
$
$
4,435
$ 1,389
$
$ (2,750) $ (893) $
(560)
7
–
31
49
(97)
5
–
(18)
(51)
$ (3,223) $ (1,054) $
As at October 31, 2016
Core
deposit
intangibles
Customer
list and
relationships
In process
software
$
$
1,538
–
322
–
–
–
(99)
–
$
580
765
–
(603)
–
–
(2)
38
194
–
1,558
–
–
–
32
–
1,784
$
1,761
$
778
$ 10,147
Total
7,434
834
1,950
–
(16)
–
(83)
28
(194) $
(158)
–
–
4
–
(348) $
(783) $
(155)
–
–
64
–
(874) $
–
–
–
–
–
–
–
$ (4,620)
(970)
12
–
81
(2)
$ (5,499)
$
1,212
$
335
$
1,436
$
887
$
778
$
4,648
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
169
Note 10 Goodwill and other intangible assets (continued)
(Millions of Canadian dollars)
Gross carrying amount
Balance at October 31, 2014
Additions
Transfers
Dispositions
Impairment losses
Currency translations
Other changes
Balance at October 31, 2015
Accumulated amortization
Balance at October 31, 2014
Amortization charge for the year
Dispositions
Impairment losses
Currency translations
Other changes
Balance at October 31, 2015
Internally
generated
software
$
$
3,402
50
503
(98)
–
84
(12)
3,929
Other
software
$ 1,186
75
19
(132)
–
49
(4)
$ 1,193
$
$
$ (2,293) $
(494)
97
(3)
(60)
3
(888) $
(81)
125
–
(30)
(19)
$ (2,750) $
(893) $
As at October 31, 2015
Core
deposit
intangibles
Customer
list and
relationships
In process
software
168
–
–
–
–
26
–
194
$
$
(151) $
(18)
–
–
(25)
–
(194) $
1,511
–
–
(30)
(22)
79
–
1,538
$
$
(647) $
(119)
9
18
(41)
(3)
(783) $
Total
6,754
740
–
(260)
(22)
255
(33)
7,434
487
615
(522)
–
–
17
(17)
580
$
$
–
–
–
–
–
–
–
$ (3,979)
(712)
231
15
(156)
(19)
$ (4,620)
Net balance, at October 31, 2015
$
1,179
$
300
$
–
$
755
$
580
$
2,814
Note 11 Significant acquisition and dispositions
Acquisition
Wealth Management
On November 2, 2015, we completed the acquisition of City National. City National’s business gives us an expansion platform for long-term
growth in the U.S. and the opportunity to enhance and complement our existing U.S. businesses in line with our strategic goals.
Total consideration of $7.1 billion (US$5.5 billion) at the date of close included $3.4 billion (US$2.6 billion) in cash, 41.6 million RBC
common shares issued at a price of US$57.16 per share for a total value of $3.1 billion (US$2.4 billion), US$275 million of first preferred
shares (Series C-1 and Series C-2), with a fair value of $380 million (US$290 million), as well as share-based compensation amounts of
$204 million (US$156 million), including the conversion of 3.8 million stock options with a fair value of $147 million (US$112 million), based
on the Black-Scholes model.
Our purchase price allocation assigns $47.8 billion to assets and $44.7 billion to liabilities on the acquisition date. Goodwill of $2.1 billion
reflects the expected synergies from the combined U.S. Wealth Management operations, expected growth of the platform, and the ability to cross
sell products between segments. Goodwill is not expected to be deductible for tax purposes. The following table presents the fair value of the
assets acquired and liabilities assumed as at the acquisition date.
(Millions of Canadian dollars, except percentage)
Percentage of shares acquired
Purchase consideration
Fair value of identifiable assets acquired
Cash and due from banks
Interest-bearing deposits with banks
Securities
Trading
Available-for-sale
Held-to-maturity
Loans (1)
Retail
Wholesale
Other assets
Total fair value of identifiable assets acquired
Fair value of identifiable liabilities assumed
Deposits
Personal
Business and government
Bank
Other liabilities
Total fair value of identifiable liabilities assumed
Fair value of identifiable net assets acquired
Intangible assets (2)
Goodwill
Total purchase consideration
$
$
100%
7,138
499
2,779
321
7,409
4,723
9,597
20,555
1,885
$ 47,768
10,481
31,593
169
2,450
$ 44,693
$
3,075
1,950
2,113
$
7,138
(1)
(2)
The fair value of loans reflects estimates of incurred and expected future credit losses at the acquisition date and interest rate premiums or discounts relative to prevailing market rates. Gross
contractual receivables amount to $30.1 billion.
Intangible assets primarily include core deposits and customer relationships which are amortized on a straight-line basis over an estimated useful life of 10 years.
170
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
During the year, we revised our preliminary purchase price allocation, primarily due to additional information on certain tax benefits relating to
City National’s prior business acquisitions. As a result, goodwill was reduced by $233 million.
Since the acquisition date, City National increased our 2016 consolidated revenue and net income by $1,988 million and $290 million,
respectively. All results of operations are included in our Wealth Management segment and goodwill is allocated to our U.S. Wealth Management
(including City National) CGU (previously called U.S. Wealth Management).
Dispositions
Insurance
On July 1, 2016, we completed the sale of RBC General Insurance Company, which includes certain home and auto insurance manufacturing
businesses, including claims, underwriting and product development capabilities, to Aviva Canada Inc. We also entered into an exclusive
15-year distribution agreement with Aviva Canada Inc. to market and sell a full suite of property and casualty insurance products to our existing
and new clients. As a result of the transaction, we recorded a pre-tax gain on disposal of $287 million in Non-interest income – Other ($235
million after-tax).
Investor & Treasury Services
On October 21, 2016, we completed the sale of RBC Investor Services España S.A.U. and its wholly-owned subsidiary to Banco Inversis S.A. The
transaction did not have a significant impact on Non-interest income.
Wealth Management
On November 4, 2015, we entered into a definitive agreement to sell our trust, custody and fund administration business in the Caribbean to
SMP Group Limited. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals. As a result of the
disposition, the assets and liabilities included in the disposal group are classified as held for sale, measured at the lower of their carrying
amount and fair value less costs to sell and presented in Other assets and Other liabilities. The major classes of assets, liabilities and equity that
are included in the disposal group are not significant.
On August 28, 2015, we completed the sale of Royal Bank of Canada (Suisse) SA, announced on July 14, 2015. The transaction did not have
a significant impact on our Consolidated Statements of Income.
Personal & Commercial Banking
On July 31, 2015, we completed the sale of RBC Royal Bank (Suriname) N.V., announced on April 1, 2015. As a result of the transaction, we
recorded a total loss on disposal of $19 million (before and after-tax), consisting of a loss of $23 million in the second quarter included in
Non-interest expense – Other, and a gain of $4 million in the third quarter primarily relating to foreign currency translation gains reclassified from
Other components of equity.
On June 27, 2014, we completed the sale of RBC Royal Bank (Jamaica) Limited and RBTT Securities Jamaica Limited to Sagicor Group
Jamaica Limited, as announced on January 29, 2014. As a result of the transaction, we recorded a total loss on disposal of $100 million (before
and after-tax), including a loss of $60 million in the first quarter and $40 million primarily relating to foreign currency translation losses
reclassified from Other components of equity in the third quarter of 2014. The loss on disposal has been included in Non-Interest expense –
Other.
Note 12 Joint ventures and associated companies
The following table summarizes the carrying value of our interests in joint ventures and associated companies accounted for under the equity
method as well as our share of the income of those entities.
(Millions of Canadian dollars)
Carrying amount
Share of:
Net income
Other comprehensive income
Joint ventures
Associated companies
As at and for the year ended
October 31
2016
151
$
October 31
2015
223
$
October 31
2014
180
$
October 31
2016
465
$
October 31
2015
137
$
October 31
2014
115
$
124
(5)
119
$
119
8
127
$
131
5
136
$
$
52
–
52
$
30
2
32
$
31
–
31
We do not have any joint ventures or associated companies that are individually material to our financial results.
During the year ended October 31, 2016, we reversed previously recognized impairment losses of $8 million with respect to our interests in
associated companies (October 31, 2015 – impairment losses of $3 million; October 31, 2014 – $nil) and recognized no gains on sales of
associated companies (October 31, 2015 – $nil; October 31, 2014 – $62 million).
Certain of our subsidiaries, joint ventures and associates are subject to regulatory requirements of the jurisdictions in which they operate.
When these subsidiaries, joint ventures and associates are subject to such requirements, they may be restricted from transferring to us our share
of their assets in the form of cash dividends, loans or advances. As at October 31, 2016, restricted net assets of these subsidiaries, joint
ventures and associates were $28.4 billion (October 31, 2015 - $30.8 billion).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
171
Note 13 Other assets
(Millions of Canadian dollars)
Cash collateral
Margin deposits
Receivable from brokers, dealers and clients
Accounts receivable and prepaids
Investments in joint ventures and associates
Employee benefit assets
Insurance-related assets
Collateral loans
Policy loans
Reinsurance assets
Other
Deferred income tax asset
Taxes receivable
Accrued interest receivable
Precious metals
Other
Note 14 Deposits
The following table details our deposit liabilities.
As at
October 31
2016
$ 18,979
4,308
2,458
3,487
616
29
October 31
2015
$ 18,619
4,399
2,608
2,843
360
245
1,198
98
713
43
2,827
2,264
1,870
306
2,875
1,176
106
683
576
2,072
2,343
1,757
106
3,979
$ 42,071
$ 41,872
October 31, 2016
October 31, 2015
As at
(Millions of Canadian dollars)
Personal
Business and government
Bank
Demand (1)
$ 128,206
221,506
8,533
Notice (2)
$ 46,096
10,740
49
Term (3)
$ 76,248
255,761
10,450
Total
$ 250,550
488,007
19,032
Demand (1)
$ 128,101
175,931
7,711
Notice (2)
$ 19,758
6,854
23
Term (3)
$ 72,707
272,793
13,349
Total
$ 220,566
455,578
21,083
$ 358,245
$ 56,885
$ 342,459
$ 757,589
$ 311,743
$ 26,635
$ 358,849
$ 697,227
Non-interest-bearing (4)
Canada
United States
Europe (5)
Other International
Interest-bearing (4)
Canada
United States
Europe (5)
Other International
$ 78,692
34,172
1,009
5,753
$ 4,686
93
–
4
$
–
–
–
–
$ 83,378
34,265
1,009
5,757
$ 70,286
1,158
1,172
6,706
$ 3,754
31
–
6
$
–
–
–
–
$ 74,040
1,189
1,172
6,712
200,911
999
32,864
3,845
14,979
32,388
1,108
3,627
272,999
41,427
17,966
10,067
488,889
74,814
51,938
17,539
192,736
4,177
31,554
3,954
13,529
4,966
606
3,743
269,395
67,710
12,270
9,474
475,660
76,853
44,430
17,171
$ 358,245
$ 56,885
$ 342,459
$ 757,589
$ 311,743
$ 26,635
$ 358,849
$ 697,227
(1)
(2)
(3)
(4)
(5)
Deposits payable on demand include all deposits for which we do not have the right to require 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.
The geographical splits of the deposits are based on the point of origin of the deposits and where the revenue is recognized. As at October 31, 2016, deposits denominated in U.S. dollars,
British pounds, Euro and other foreign currencies were $264 billion, $16 billion, $37 billion and $29 billion, respectively (October 31, 2015 – $235 billion, $13 billion, $32 billion and
$28 billion).
Europe includes the United Kingdom, Luxembourg and the Channel Islands.
The following table presents the contractual maturities of our term deposit liabilities.
(Millions of Canadian dollars)
Within 1 year:
less than 3 months
3 to 6 months
6 to 12 months
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more
172
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
As at
October 31
2016
October 31
2015
$ 72,346
40,487
51,608
50,676
39,499
31,482
29,854
26,507
$ 78,735
49,900
61,096
43,674
39,809
26,792
30,184
28,659
$ 342,459
$ 358,849
$ 309,000
$ 331,000
The following table presents the average deposit balances and average rates of interest.
(Millions of Canadian dollars, except for percentage amounts)
Canada
United States
Europe
Other International
Note 15 Insurance
October 31, 2016
Average
balances
$ 561,711
113,125
50,341
24,454
Average
rates
0.84%
0.37
0.15
1.07
For the year ended
October 31, 2015
Average
balances
$ 526,544
70,100
48,173
22,630
Average
rates
0.98%
0.31
0.28
0.95
October 31, 2014
Average
balances
$ 477,316
52,058
43,429
20,299
Average
rates
1.13%
0.30
0.21
1.03
$ 749,631
0.73%
$ 667,447
0.86%
$ 593,102
0.99%
Risk management
Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to our expectations at the time of
underwriting. We do not have a high degree of concentration risk due to our geographic diversity and business mix. Concentration risk is not a
major concern for the life and health insurance business as it does not have a material level of regional specific characteristics like those
exhibited in the property and casualty insurance business. Exposure to concentrations of insurance risks for the property and casualty business,
up to the sale of certain home and auto insurance manufacturing businesses to Aviva Canada Inc. on July 1, 2016, was primarily mitigated
through prudent underwriting practices and diversification by product offerings and geographical areas. Reinsurance is also used for all
insurance businesses to lower our risk profile and limit the liability on a single claim. We manage underwriting and pricing risk through the use of
underwriting guidelines which detail the class, nature and type of business that may be accepted, pricing policies by product line and centralized
control of policy wordings. The risk that claims are handled or paid inappropriately is mitigated by using a range of IT system controls and
manual processes conducted by experienced staff. These, together with a range of detailed policies and procedures, ensure that all claims are
handled in a timely, appropriate and accurate manner.
Reinsurance
In the ordinary course of business, our insurance operations reinsure risks to other insurance and reinsurance companies in order to lower our
risk profile, 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 obligations 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 are shown in the table below.
Net premiums and claims
(Millions of Canadian dollars)
Gross premiums
Premiums ceded to reinsurers
Net premiums
Gross claims and benefits
Reinsurers’ share of claims and benefits
Net claims
October 31
2016
4,335
(1,160)
$
For the year ended
October 31
2015
4,721
(1,214)
$
October 31
2014
4,962
(1,220)
$
$
$
$
3,175
3,754
(546)
3,208
$
$
$
3,507
3,237
(496)
2,741
$
$
$
3,742
3,692
(498)
3,194
Insurance claims and policy benefit liabilities
All actuarial assumptions are set in conjunction with Canadian Institute of Actuaries Standards of Practice and OSFI requirements. The
assumptions that have the greatest effect on the measurement of insurance liabilities, the processes used to determine them and the
assumptions used as at October 31, 2016 are as follows:
Life insurance
Mortality and morbidity – Mortality estimates are based on standard industry insured mortality tables, adjusted where appropriate to reflect our
own experience. Morbidity assumptions are made with respect to the rates of claim incidence and claim termination for health insurance policies
and are based on a combination of industry and our own experience.
Future investment yield – Assumptions are based on the current yield rate, a reinvestment assumption and an allowance for future credit losses
for each line of business, and are developed using interest rate scenario testing, including prescribed scenarios for determination of minimum
liabilities as set out in the actuarial standards.
Policyholder behaviour – Under certain policies, the policyholder has a contractual right to change benefits and premiums, as well as convert
policies to permanent forms of insurance. All policyholders have the right to terminate their policies through lapse. Lapses represent the
termination of policies due to non-payment of premiums. Lapse assumptions are primarily based on our recent experience adjusted for emerging
industry experience where applicable.
Non-life insurance
Assumptions related to unpaid claims concern the patterns of development of claims from inception to ultimate settlement. The reserving
assumptions, based on historical paid/incurred development patterns adjusted for changes in products, claims processes and legislative trends,
result in a collective loss ratio when compared with earned premium.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
173
Note 15 Insurance (continued)
Significant insurance assumptions
Life Insurance
Canadian Insurance
Mortality rates (1)
Morbidity rates (2)
Reinvestment yield (3)
Lapse rates (4)
International Insurance
Mortality rates (1)
Reinvestment yield (3)
Non-life Insurance
Expected loss ratio (5) (6)
As at
October 31
2016
October 31
2015
0.13%
1.68
4.00
0.50
0.43
2.75
n.a.
0.12%
1.69
3.45
0.50
0.46
2.75
60.47
(1)
(2)
(3)
(4)
(5)
(6)
n.a.
Average annual death rate for the largest portfolio of insured policies.
Average net settlement rate for the individual and group disability insurance portfolio.
Ultimate reinvestment rate of the insurance operations.
Ultimate policy termination rate (lapse rate) for the largest permanent life insurance portfolio that relies on higher termination rate to maintain its profitability (lapse-supported policies).
Ratio of incurred claim losses and claim expenses to net premiums of the property and casualty business, measuring the profitability or loss experience on our total book of business.
Due to the sale of RBC General Insurance Company to Aviva Canada Inc. in 2016, which includes certain home and auto insurance manufacturing businesses, the expected loss ratio included
above is no longer applicable. Refer to Note 11.
not applicable
Insurance claims and policy benefit liabilities
The following table summarizes our gross and reinsurers’ share of insurance liabilities at the end of the year.
(Millions of Canadian dollars)
Life insurance policyholder liabilities
Life, health and annuity
Investment contracts (1)
Non-life insurance policyholder liabilities
Unearned premium provision (1)
Unpaid claims provision
As at
October 31, 2016
October 31, 2015
Gross
Ceded
Net
Gross
Ceded
Net
$
$
$
$
$
9,137 $
22
9,159 $
545 $
–
545 $
8,592
22
8,614
23 $
27
50 $
– $
4
4 $
23
23
46
9,209 $
549 $
8,660
$
$
$
$
$
8,084 $
10
8,094 $
450 $
1,026
1,476 $
9,570 $
519 $
–
519 $
– $
38
38 $
557 $
7,565
10
7,575
450
988
1,438
9,013
(1)
Insurance liabilities for investment contracts and unearned premium provision are reported in Other liabilities on the Consolidated Balance Sheets.
Reconciliation of life insurance policyholder liabilities
(Millions of Canadian dollars)
Balances, beginning of the year
New and in-force policies
Changes in assumption and methodology
Net change in investment contracts
Balances, end of the year
Reconciliation of non-life insurance policyholder liabilities
(Millions of Canadian dollars)
Balances, beginning of the year
Changes in unearned premiums provision
Written premiums
Less: Net premiums earned
Less: Disposal (1)
Changes in unpaid claims provision and adjustment expenses
Incurred claims
Less: Claims paid
Less: Disposal (1)
Balances, end of the year
(1)
October 31, 2016
$
Gross
8,094 $
1,132
(78)
11
$
9,159 $
Ceded
519 $
26
–
–
545 $
$
Net
7,575
1,106
(78)
11
October 31, 2015
Gross
7,560 $
598
(69)
5
Ceded
390 $
129
–
–
Net
7,170
469
(69)
5
8,614
$
8,094 $
519 $
7,575
October 31, 2016
October 31, 2015
Gross
1,476 $
$
Ceded
38 $
Net
1,438
$
Gross
1,429 $
Ceded
29 $
Net
1,400
665
(665)
(429)
482
(439)
(1,040)
19
(21)
–
18
(4)
(46)
646
(644)
(429)
464
(435)
(994)
937
(906)
–
614
(598)
–
39
(39)
–
27
(18)
–
898
(867)
–
587
(580)
–
$
50 $
4 $
46
$
1,476 $
38 $
1,438
RBC General Insurance Company was sold to Aviva Canada Inc. in 2016, which includes certain home and auto insurance manufacturing businesses. Refer to Note 11.
174
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
The net decrease in Insurance claims and policy benefit liabilities over the prior year was comprised of the decrease in liabilities resulting from the
impact of the sale of certain home and auto insurance manufacturing businesses (refer to Note 11), partially offset by the net increase in life and
health, reinsurance and property and casualty liabilities attributable to business growth and market movements on assets backing life and health
liabilities. During the year, we reviewed all key actuarial methods and assumptions which are used in determining the policy benefit liabilities
resulting in a $78 million net decrease to insurance liabilities comprised of: (i) a decrease of $72 million for assumption updates due to net
favourable interest rate and equity market changes; (ii) a decrease of $13 million due to valuation system and data changes; and (iii) an increase
of $7 million arising from insurance risk related assumption updates largely due to mortality, morbidity, maintenance, property and casualty
margin for adverse deviation and expense assumptions. Changes in Insurance claims and policy benefit liabilities are included in Insurance
policyholder benefits, claims and acquisition expenses in our Consolidated Statements of Income in the period in which the estimates changed.
Sensitivity analysis
The following table presents the sensitivity of the level of insurance policyholder liabilities disclosed in this note to reasonably possible changes
in the actuarial assumptions used to calculate them. The percentage change in variable is applied to a range of existing actuarial modelling
assumptions to derive the possible impact on net income. The disclosure is not intended to explain the impact of a percentage change in the
insurance assets and liabilities disclosed above. The analyses are performed where a single assumption is changed while holding other
assumptions constant, which is unlikely to occur in practice.
(Millions of Canadian dollars, except for percentage amounts)
Increase in market interest rates (1)
Decrease in market interest rates (1)
Increase in equity market values
Decrease in equity market values
Increase in maintenance expenses
Life Insurance
Adverse change in annuitant mortality rates
Adverse change in assurance mortality rates
Adverse change in morbidity rates
Adverse change in lapse rates
Non-life Insurance
Increase in expected loss ratio (2)
Change in
variable
1%
1
10
10
5
2
2
5
10
5
Net income impact for year ended
$
October 31
2016
(2)
7
4
(4)
(30)
$
October 31
2015
–
14
3
(2)
(28)
(129)
(46)
(183)
(229)
n.a.
(117)
(48)
(156)
(206)
(9)
(1)
(2)
n.a.
Sensitivities for market interest rates have been calculated by increasing or decreasing 100 basis points at all points on the yield curve, with changes persisting for one year.
Due to the sale of RBC General Insurance Company to Aviva Canada Inc. in 2016, which includes certain home and auto insurance manufacturing businesses, the expected loss ratio included
above is no longer applicable. Refer to Note 11.
not applicable
Note 16 Segregated funds
We offer certain individual variable insurance contracts that allow policyholders to invest in segregated funds. The investment returns on these
funds are passed directly to the policyholders. Amounts invested are at the policyholders’ risk, except where the policyholders have selected
options providing maturity and death benefit guarantees. A liability for the guarantees is recorded in Insurance claims and policy benefit
liabilities.
Segregated funds net assets are recorded at fair value. All of our segregated funds net assets are categorized as Level 1 in the fair value
hierarchy. The fair value of the segregated funds liabilities is equal to the fair value of the segregated funds net assets. Segregated funds net
assets and segregated funds liabilities are presented on separate lines on the Consolidated Balance Sheets. The following tables present the
composition of net assets and the changes in net assets for the year.
Segregated funds net assets
(Millions of Canadian dollars)
Cash
Investment in mutual funds
Other liabilities, net
Changes in net assets
(Millions of Canadian dollars)
Net assets, beginning of year
Additions (deductions):
Deposits from policyholders
Net realized and unrealized gains
Interest and dividend
Payment to policyholders
Management and administrative fees
Net assets, end of year
As at
October 31
2016
1
981
(1)
$
October 31
2015
–
832
(2)
$
$
981
$
830
For the year ended
October 31
2016
830
$
October 31
2015
675
$
330
41
25
(221)
(24)
321
2
26
(173)
(21)
$
981
$
830
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
175
Note 17 Employee benefits – Pension and other post-employment benefits
Plan characteristics
We sponsor a number of programs that provide pension and post-employment benefits to eligible employees. The majority of beneficiaries of the
pension plans are located in Canada and other beneficiaries of the pension plans are primarily located in the U.S., the U.K. and the Caribbean.
The pension arrangements including investment, plan benefits and funding decisions are governed by local pension committees or trustees, who
are legally segregated from the Bank, or management. Significant plan changes require the approval of the Board of Directors.
Our defined benefit pension plans provide pension benefits based on years of service, contributions and average earnings at retirement.
Our principal defined benefit pension plans are closed to new members. New employees are generally eligible to join defined contribution
pension plans. The specific features of these plans vary by location. We also provide supplemental non-registered (non-qualified) pension plans
for certain executives and senior management that are typically unfunded or partially funded.
Our defined contribution pension plans provide pension benefits based on accumulated employee and Bank contributions. The Bank
contributions are based on a percentage of an employee’s annual earnings and a portion of the Bank contribution may be dependent on the
amount being contributed by the employee and their years of service.
Our primary other post-employment benefit plans provide health, dental, disability and life insurance coverage and cover a number of
current and retired employees who are mainly located in Canada. These plans are unfunded unless required by legislation.
We measure our benefit obligations and pension assets as at October 31 each year. All plans are valued using the projected unit-credit
method. 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 primary pension plan, the most recent funding actuarial valuation was completed
on January 1, 2016, and the next valuation will be completed on January 1, 2017.
For the year ended October 31, 2016, total contributions to our pension plans (defined benefit and defined contribution plans) and other
post-employment benefit plans were $409 million and $49 million (October 31, 2015 – $391 million and $56 million), respectively. For 2017,
total contributions to our pension plans and other post-employment benefit plans are expected to be $643 million and $77 million, respectively.
Risks
By their design, the defined benefit pension and other post-employment plans expose the Bank to various risks such as investment
performance, reductions in discount rates used to value the obligations, increased longevity of plan members, future inflation levels impacting
future salary increases as well as future increases in healthcare costs. By closing membership in our principal defined benefit pension and other
post-employment plans and migrating to defined contribution plans, the volatility associated with the aforementioned risks will reduce over
time.
The following table presents the financial position related to all of our material pension and other post-employment benefit plans worldwide,
including executive retirement arrangements.
As at
October 31, 2016
October 31, 2015
Defined benefit
pension plans
Other post-
employment
benefit plans
Defined benefit
pension plans
Other post-
employment
benefit plans
$ 11,416
12,680
$
1
1,760
$ 10,847
10,840
$
11
1,569
(1,264)
$ (1,759)
7
$ (1,558)
$
$
$
1,043
1,199
(156)
$
$
$
–
134
(134)
1
1,894
$
$
$
1,049
1,134
(85)
$ 11,896
11,974
$
$
$
$
(78)
–
(78)
245
(323)
(78)
$
$
$
–
88
(88)
11
1,657
$ (1,646)
–
$ (1,646)
$
–
(1,646)
$ (1,646)
(Millions of Canadian dollars)
Canada
Fair value of plan assets
Present value of defined benefit obligation
Net (deficit) surplus
International
Fair value of plan assets
Present value of defined benefit obligation
Net (deficit)
Total
Fair value of plan assets
Present value of defined benefit obligation
$ 12,459
13,879
Total net (deficit)
Effect of asset ceiling
Total net (deficit), net of effect of asset ceiling
Amounts recognized in our Consolidated Balance Sheets
Employee benefit assets
Employee benefit liabilities
Total net (deficit), net of effect of asset ceiling
$
$
$
$
(1,420)
$ (1,893)
(3)
–
(1,423)
$ (1,893)
29
(1,452)
(1,423)
$
–
(1,893)
$ (1,893)
176
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
The following table presents an analysis of the movement in the financial position related to all of our material pension and other post-
employment benefit plans worldwide, including executive retirement arrangements.
(Millions of Canadian dollars)
Change in fair value of plan assets
Opening fair value of plan assets
Interest income
Remeasurements – Return on plan assets (excluding interest
income)
Change in foreign currency exchange rate
Contributions – Employer
Contributions – Plan participant
Payments
Payments – amount paid in respect of any settlements
Other
Closing fair value of plan assets
Change in present value of benefit obligation
Opening benefit obligation
Current service costs
Past service costs
Interest expense
Remeasurements
Actuarial losses (gains) from demographic assumptions
Actuarial losses (gains) from financial assumptions
Actuarial losses (gains) from experience adjustments
Change in foreign currency exchange rate
Contributions – Plan participant
Payments
Payments – amount paid in respect of any settlements
Business combinations/Disposals
Other
Closing benefit obligation
Unfunded obligation
Wholly or partly funded obligation
Total benefit obligation
As at or for the year ended
October 31, 2016
October 31, 2015
Defined benefit
pension plans (1)
Other post-
employment
benefit plans
Defined benefit
pension plans (1)
Other post-
employment
benefit plans
$ 11,896
498
$
447
(138)
257
52
(536)
(4)
(13)
$ 12,459
$
11
–
2
–
49
18
(79)
–
–
1
$ 11,351
460
$
243
113
235
51
(513)
(31)
(13)
$ 11,896
$
4
–
11
–
56
16
(76)
–
–
11
$ 11,974
313
(5)
496
$ 1,657
36
(3)
71
$ 11,805
345
(16)
490
$ 1,832
34
–
75
(5)
1,644
79
(128)
52
(536)
(4)
–
(1)
(17)
194
17
–
18
(79)
–
–
–
7
(296)
(7)
139
51
(513)
(31)
–
–
(176)
(33)
(27)
15
16
(76)
–
(3)
–
$ 13,879
$
33
13,846
$ 13,879
$ 1,894
$ 1,732
162
$ 1,894
$ 11,974
$
33
11,941
$ 11,974
$ 1,657
$
332
1,325
$ 1,657
(1)
For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2016 were $12,705 million and $11,267 million, respectively (October 31, 2015
– $1,020 million and $709 million, respectively).
Pension and other post-employment benefit expense
The following table presents the composition of our pension and other post-employment benefit expense related to our material benefit plans
worldwide.
(Millions of Canadian dollars)
Current service costs
Past service costs
Net interest expense (income)
Remeasurements of other long term benefits
Administrative expense
Defined benefit pension expense
Defined contribution pension expense
Pension plans
Other post-employment benefit plans
For the year ended
October 31
2016
October 31
2015
$
$
$
313 $
(5)
(2)
–
13
319 $
152
471 $
345 $
(16)
30
–
12
371 $
156
527 $
October 31
2014
315
97
14
–
13
439
137
576
$
$
$
October 31
2016
October 31
2015
36 $
(3)
71
16
–
120 $
–
120 $
34 $
–
75
2
–
111 $
–
111 $
October 31
2014
31
–
80
9
–
120
–
120
Service costs for the year ended October 31, 2016 totalled $300 million (October 31, 2015 – $335 million; October 31, 2014 – $307 million) for
pension plans in Canada and $8 million (October 31, 2015 – $(6) million; October 31, 2014 – $105 million) for International plans. Net interest
expense (income) for the year ended October 31, 2016 totalled $(6) million (October 31, 2015 – $25 million; October 31, 2014 – $10 million) for
pension plans in Canada and $4 million (October 31, 2015 – $5 million; October 31, 2014 – $4 million) for International plans.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
177
Note 17 Employee benefits – Pension and other post-employment benefits (continued)
Remeasurements of employee benefit plans
The following table presents the composition of our remeasurements recorded in OCI related to our material benefit plans worldwide.
(Millions of Canadian dollars)
Actuarial (gains) losses:
Changes in demographic assumptions
Changes in financial assumptions
Experience adjustments
Return on plan assets (excluding interest based on
discount rate)
Change in asset ceiling (excluding interest income)
$
$
For the year ended
Defined benefit pension plans
Other post-employment benefit plans
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
(5) $
7 $
1,644
79
(447)
3
1,274 $
(296)
(7)
(243)
–
$
76
830
6
(647)
–
(539) $
265
$
(20) $
186
12
(2)
–
176 $
(174) $
(30)
(34)
(11)
–
(249) $
(54)
113
–
–
–
59
Remeasurements recorded in OCI for the year ended October 31, 2016 were losses of $1,180 million (October 31, 2015 – gains of $526 million;
October 31, 2014 – losses of $238 million) for pension plans in Canada and losses of $94 million (October 31, 2015 – gains of $13 million;
October 31, 2014 – losses of $27 million) for International plans.
Investment policy and strategies
Defined benefit pension plan assets are invested prudently in order to meet our longer-term pension obligations. The pension plan’s investment
strategy is to hold a diversified mix of investments by asset class and geographic location in order to reduce investment-specific risk to the
funded status while maximizing the expected returns to meet pension obligations. Investment of the plan’s assets is conducted with careful
consideration of the pension obligation’s valuation sensitivity to interest rates and credit spreads which are key risk factors impacting the
obligation. The asset mix policy is therefore consistent with an asset/liability framework. Factors taken into consideration in developing our
asset mix include but are not limited to the following:
(i)
(ii)
(iii)
(iv)
(v)
the nature of the underlying benefit obligations, including the duration and term profile of the liabilities;
the member demographics, including expectations for normal retirements, terminations, and deaths;
the financial position of the pension plans;
the diversification benefits obtained by the inclusion of multiple asset classes; and
expected asset returns, including asset and liability volatility and correlations.
To implement our asset mix policy, we may invest in equity securities, debt securities, alternative investments and derivative instruments. Our
holdings in certain investments, including common shares, emerging market equity and debt, debt securities rated lower than BBB and
residential and commercial mortgages, cannot exceed a defined percentage of the market value of our defined benefit pension plan assets. We
may use derivative instruments as either a synthetic investment to more efficiently replicate the performance of an underlying security, or as a
hedge against financial risks within the plan. To manage our credit risk exposure, counterparties of our derivative instruments are required to
meet minimum credit ratings and enter into collateral agreements.
Our defined benefit pension plan assets are primarily comprised of equity and debt securities. Our equity securities generally have
unadjusted quoted market prices in an active market (Level 1) and our debt securities generally have quoted market prices for similar assets in
an active market (Level 2). Alternative investments and other includes cash, hedge funds, and private fund investments including infrastructure,
real estate leases, private equity and derivative financial instruments. In the case of private fund investments, no quoted market prices are
usually available (Level 2 or Level 3). These fund assets are either valued by an independent valuator or priced using observable market inputs.
During the year ended October 31, 2016, investment changes and risk factor diversification continued in support of our efforts to reduce
variability in the funded status primarily through improved credit and duration matching between the plan’s assets and liabilities. An increasing
allocation to debt securities is used to reduce asset liability duration mismatch and hence variability of the plan’s funded status due to interest
rate changes. Longer maturity debt securities, given their price sensitivity to movements in interest rates, are considered to be a good economic
hedge to risk associated with the plan’s liabilities, which are discounted using predominately long maturity bond interest rates as inputs. We
expect to continue to move towards a higher weighting of debt securities as market conditions permit, to further reduce risk of variability in the
funded status.
178
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Asset allocation of defined benefit pension plans (1)
(Millions of Canadian dollars, except percentages)
Fair value
As at
October 31, 2016
October 31, 2015
Percentage
of total
plan assets
Quoted
in active
market (2)
Percentage
of total
plan assets
Quoted
in active
market (2)
Fair value
Equity securities
Domestic
Foreign
Debt securities
Domestic government bonds
Foreign government bonds
Corporate and other bonds
Alternative investments and other
$
1,487
2,971
2,536
533
2,648
2,284
12%
24
20
4
21
19
100%
89
$ 1,277
2,645
–
–
–
24
2,232
561
2,548
2,633
11%
22
19
5
21
22
100%
98
–
–
–
8
$
12,459
100%
38%
$ 11,896
100%
34%
(1)
(2)
The asset allocation is based on the underlying investments held directly and indirectly through the funds as this is how we manage our investment policy and strategies.
If our assessment of whether or not an asset was quoted in an active market was based on direct investments, 42% of our total plan assets would be classified as quoted in an active market
(October 31, 2015 – 36%).
The allocation to equity securities of our pension plans in Canada is 37% (October 31, 2015 – 34%) and that of our International plans is 17%
(October 31, 2015 – 17%). The allocation to debt securities of our pension plans in Canada is 45% (October 31, 2015 – 44%) and that of our
International plans is 60% (October 31, 2015 – 57%). The allocation to alternative investments and other in our pension plans in Canada is 18%
(October 31, 2015 – 22%) and that of our International plans is 23% (October 31, 2015 – 26%).
As at October 31, 2016, the plan assets include 1 million (October 31, 2015 – 1 million) of our common shares with a fair value of
$99 million (October 31, 2015 – $85 million) and $62 million (October 31, 2015 – $71 million) of our debt securities. For the year ended
October 31, 2016, dividends received on our common shares held in the plan assets were $4 million (October 31, 2015 – $4 million).
Maturity profile
The following table presents the maturity profile of our defined benefit pension plan obligation.
(Millions of Canadian dollars, except participants and years)
Number of plan participants
Actual benefit payments 2016
Benefits expected to be paid 2017
Benefits expected to be paid 2018
Benefits expected to be paid 2019
Benefits expected to be paid 2020
Benefits expected to be paid 2021
Benefits expected to be paid 2022-2026
Weighted average duration of defined benefit payments
As at
October 31, 2016
Canada
International
Total
$
72,748
481 $
551
576
598
619
639
3,454
15.7 years
8,595
59 $
51
51
52
58
59
331
19.1 years
81,343
540
602
627
650
677
698
3,785
16.0 years
Significant assumptions
Our methodologies to determine significant assumptions used in calculating the defined benefit pension and other post-employment benefit
expense are as follows:
Discount rate
For the Canadian pension and other post-employment benefit plans, all future expected benefit payments at each measurement date are
discounted at spot rates from a derived AA corporate bond yield curve. The derived curve is based on actual short and mid-maturity corporate
AA rates and extrapolated longer term rates. The extrapolated corporate AA rates are derived from observed corporate A, corporate AA and
provincial AA yields. For the International pension and other post-employment benefit plans, all future expected benefit payments at each
measurement date are discounted at spot rates from an AA corporate bond yield curve. Spot rates beyond 30 years are set to equal the 30-year
spot rate. The discount rate is the equivalent single rate that produces the same discounted value as that determined using the entire discount
curve. This valuation methodology does not rely on assumptions regarding reinvestment returns.
Rate of increase in future compensation
The assumptions for increases in future compensation are developed separately for each plan, where relevant. Each assumption is set based on
the price inflation assumption and compensation policies in each market, as well as relevant local statutory and plan-specific requirements.
Healthcare cost trend rates
Healthcare cost calculations are based on both short and long term trend assumptions established based on the plan’s recent experience as well
as market expectations.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
179
Note 17 Employee benefits – Pension and other post-employment benefits (continued)
Weighted average assumptions to determine benefit obligation
Discount rate
Rate of increase in future compensation
Healthcare cost trend rates (1)
– Medical
– Dental
As at
Defined benefit pension plans
Other post-employment benefit plans
October 31
2016
October 31
2015
October 31
2014
October 31
2016
October 31
2015
October 31
2014
3.50%
3.30%
n.a.
n.a.
4.30%
3.30%
n.a.
n.a.
4.10%
3.30%
n.a.
n.a.
3.60%
n.a.
4.10%
4.00%
4.40%
n.a.
4.10%
4.00%
4.20%
n.a.
3.50%
4.00%
(1)
n.a.
For our other post-employment benefit plans, the 2016 assumed trend rates used to measure the expected benefit costs of the defined benefit obligations are also the ultimate trend rates.
not applicable
Mortality assumptions
Mortality assumptions are significant in measuring our obligations under the defined benefit pension plans. These assumptions have been set
based on country specific statistics. Future longevity improvements have been considered and included where appropriate. The following table
summarizes the mortality assumptions used for major plans.
As at
October 31, 2016
October 31, 2015
Life expectancy at 65 for a member currently at
Life expectancy at 65 for a member currently at
Age 65
Age 45
Age 65
Age 45
Male
Female
Male
Female
Male
Female
Male
Female
23.1
20.8
24.0
23.6
22.8
26.0
24.1
20.5
26.1
24.6
22.9
28.3
23.1
21.2
24.0
23.6
23.2
25.9
24.1
21.7
26.0
24.5
24.1
28.2
(In years)
Country
Canada
United States
United Kingdom
Sensitivity analysis
Assumptions adopted can have a significant effect on the obligations for defined benefit pension and other post-employment benefit plans. The
increase (decrease) in obligation in the following table has been determined assuming all other assumptions are held constant. In practice, this
is unlikely to occur, as changes in some of the assumptions may be correlated. The following table presents the sensitivity analysis of key
assumptions for 2016.
(Millions of Canadian dollars)
Discount rate
Impact of 50bps increase in discount rate
Impact of 50bps decrease in discount rate
Rate of increase in future compensation
Impact of 50bps increase in rate of increase in future compensation
Impact of 50bps decrease in rate of increase in future compensation
Mortality rate
Impact of an increase in longevity by one additional year
Healthcare cost trend rate
Impact of 100bps increase in healthcare cost trend rate
Impact of 100bps decrease in healthcare cost trend rate
n.a.
not applicable
Defined benefit pension
plans – Increase
(decrease) in obligation
Other post-employment
benefit plans – Increase
(decrease) in obligation
$
(1,048) $
1,176
68
(69)
333
n.a.
n.a.
(137)
152
1
(1)
37
113
(92)
180
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Note 18 Other liabilities
(Millions of Canadian dollars)
Cash collateral
Accounts payable and accrued expenses
Payroll and related compensation
Payable to brokers, dealers and clients
Negotiable instruments
Accrued interest payable
Deferred income
Taxes payable
Precious metals certificates
Dividends payable
Insurance related liabilities
Deferred income taxes
Provisions
Employee benefit liabilities
Other
Note 19 Subordinated debentures
As at
October 31
2016
14,545 $
1,191
6,448
2,919
2,277
1,630
1,971
2,730
485
1,309
328
989
485
3,345
7,295
47,947 $
$
$
October 31
2015
15,249
999
6,358
2,981
2,309
1,679
2,028
1,533
420
1,194
735
201
512
1,969
5,309
43,476
The debentures are unsecured obligations and are subordinated in right of payment to the claims of depositors and certain other creditors. The
amounts presented below are net of our own holdings in these debentures, and include the impact of fair value hedges used for managing
interest rate risk.
(Millions of Canadian dollars, except percentage and foreign currency)
Maturity
November 14, 2014 (1)
August 12, 2019
June 15, 2020
November 2, 2020
July 15, 2022
June 8, 2023
July 17, 2024 (6)
December 6, 2024
June 4, 2025 (6)
January 20, 2026 (6)
January 27, 2026 (6)
September 29, 2026 (6)
November 1, 2027
June 26, 2037
October 1, 2083
June 29, 2085
Deferred financing costs
Earliest par value
redemption date
June 15, 2015 (2)
November 2, 2015 (4)
July 17, 2019
December 6, 2019
June 4, 2020
January 20, 2021
September 29, 2021
November 1, 2022
June 26, 2017
Any interest payment date
Any interest payment date
Interest
rate
10.00%
9.00%
4.35% (3)
3.18% (5)
5.38%
9.30%
3.04% (7)
2.99% (8)
2.48% (9)
3.31% (10)
4.65%
3.45% (11)
4.75%
2.86%
(12)
(13)
Denominated in
foreign currency
(millions)
US$75
US$150
US$1,500
TT$300
JPY 10,000
US$174
As at
$
October 31
2016
–
115
–
–
218
110
1,014
2,055
1,003
1,496
2,057
1,061
60
131
224
233
$
October 31
2015
–
–
–
1,500
–
110
1,014
2,061
1,004
–
–
1,055
62
112
224
227
$
$
9,777
(15)
9,762
$
$
7,369
(7)
7,362
The terms and conditions of the debentures are as follows:
(1)
(2)
(3)
(4)
(5)
(6)
All $200 million outstanding 10.00% subordinated debentures matured on November 14, 2014.
All $1.5 billion outstanding subordinated debentures were redeemed on June 15, 2015 for 100% of their principal amount plus accrued interest to the redemption date.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.41% above the 90-day Bankers’ Acceptance rate.
All $1.5 billion outstanding subordinated debentures were redeemed on November 2, 2015 for 100% of their principal amount plus accrued interest to the redemption date.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.21% above the 90-day Bankers’ Acceptance rate.
The notes include non-viability contingency capital (NVCC) provisions, necessary for the notes to qualify as Tier 2 regulatory capital under Basel III. NVCC provisions require the conversion of
the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces that the Bank
has accepted or agreed to accept a capital injection. In such an event, each note is convertible into common shares pursuant to an automatic conversion formula with a multiplier of 1.5 and a
conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common
shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the par value of the note (including accrued and unpaid interest on such note) by the
conversion price and then times the multiplier.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.08% above the 90-day Bankers’ Acceptance rate.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.10% above the 90-day Bankers’ Acceptance rate.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.10% above the 90-day Bankers’ Acceptance rate.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 2.35% above the 90-day Bankers’ Acceptance rate.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.12% above the 90-day Bankers’ Acceptance rate.
Interest at a rate of 40 basis points above the 30-day Bankers’ Acceptance rate.
Interest at a rate of 25 basis points above the U.S. dollar 3-month London Interbank Mean Rate (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.
(7)
(8)
(9)
(10)
(11)
(12)
(13)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
181
Note 19 Subordinated debentures (continued)
All redemptions, cancellations and exchanges of subordinated debentures are subject to the consent and approval of OSFI, except for the
debentures maturing on August 12, 2019 and July 15, 2022.
Maturity schedule
The aggregate maturities of subordinated debentures, based on the maturity dates under the terms of issue, are as follows:
(Millions of Canadian dollars)
1 to 5 years
5 to 10 years
Thereafter
Note 20 Trust capital securities
October 31
2016
115
9,014
648
$
$
9,777
We issued innovative capital instruments, RBC Trust Capital Securities (RBC TruCS), through the structured entity RBC Capital Trust (Trust).
The Trust has issued non-voting RBC TruCS Series 2010, 2011, 2015 and 2008-1 (RBC TruCS 2010, 2011, 2015 and 2008-1). RBC TruCS
2010 and 2011 were redeemed in 2010 and 2011, respectively. On December 31, 2015, the Trust redeemed all issued and outstanding RBC
TruCS 2015 for cash at a redemption price of $1,000 per unit.
The holders of the remaining outstanding RBC TruCS do not have any conversion rights or any other redemption rights. As a result, upon
consolidation of the Trust, RBC TruCS are classified as non-controlling interests. Holders of RBC TruCS 2008-1 are eligible to receive semi-annual
non-cumulative fixed cash distributions until June 30, 2018, and floating-rate cash distributions thereafter.
No cash distributions will be payable by the Trust 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 Trust will be distributed to us as
holders of residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions in full, we will not declare dividends of any kind
on any of our preferred or common shares for a specified period of time.
The table below presents the significant terms and conditions of RBC TruCS.
Significant terms and conditions of RBC Trust Capital Securities
(Millions of Canadian dollars, except for percentage amounts)
Issuance date
Distribution dates
RBC Capital Trust (1) (2) (3) (4) (5) (6)
Included in Non-controlling interests
As at
Earliest
redemption date
At the option
of the issuer
October 31
2016
Principal
amount
October 31
2015
Principal
amount
Annual
yield
1,200,000 Trust Capital Securities – Series 2015
500,000 Trust Capital Securities – Series 2008-1
October 28, 2005
April 28, 2008
June 30, December 31
June 30, December 31
4.87% (7) December 31, 2010
6.82% (7)
June 30, 2013
$
$
–
500
1,200
500
The significant terms and conditions of the RBC TruCS are as follows:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Subject to the approval of OSFI, the Trust may, on the earliest redemption date specified above, and on any distribution date thereafter, redeem in whole (but not in part) RBC TruCS 2008-1,
without the consent of the holders. RBC TruCS 2015 were redeemed on December 31, 3015.
Subject to the approval of OSFI, upon occurrence of a special event as defined in the RBC TruCS 2008-1 prospectus, prior to the earliest redemption date specified above, the Trust may
redeem in whole (but not in part) the RBC TruCS 2008-1 without the consent of the holders.
Issuer Redemption Price: 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. RBC TruCS 2015 were redeemable for cash equivalent to (i) the Early Redemption Price, prior to December 31, 2015, and (ii) the
Redemption Price, on or after December 31, 2015. 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, and a maturity date of December 31, 2015, plus 19.5 basis points, for RBC TruCS 2015.
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 First Preferred Shares
Series AI, upon occurrence of any of the following events: (i) proceedings are commenced for our winding-up; (ii) OSFI takes control of us; (iii) we have a 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 First Preferred Shares Series AI pay semi-annual non-cumulative cash dividends. Without the consent of the holders, each RBC TruCS 2015 was automatically exchangeable for
40 of our non-cumulative redeemable First Preferred Shares Series Z, upon occurrence of any of the aforementioned exchange events.
From time to time, we purchase some of the innovative capital instruments and hold them temporarily. As at October 31, 2016, we held $nil RBC TruCS 2008-1 (October 31, 2015 –
$6 million) as treasury holdings. Treasury holdings are deducted from regulatory capital.
Regulatory capital: In accordance with OSFI Capital Adequacy Requirements, effective January 2013, RBC TruCS no longer qualify as additional Tier 1 capital due to their lack of non-viability
contingent capital terms and conditions. As such, outstanding RBC TruCS are being phased out of regulatory capital in accordance with OSFI guidelines.
The non-cumulative cash distribution on the RBC TruCS 2015 was 4.87% paid semi-annually until December 31, 2015. The non-cumulative cash distribution on the RBC TruCS 2008-1 will be
6.82% paid semi-annually until June 30, 2018, and one half of the sum of 180-day Bankers’ Acceptance rate plus 3.5% thereafter.
182
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Note 21 Equity
Share capital
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value, issuable in series; the
aggregate consideration for which all the First Preferred Shares and all the Second Preferred Shares that may be issued may not exceed
$20 billion and $5 billion, respectively.
Common – An unlimited number of shares without nominal or par value may be issued.
Outstanding share capital
The following table details our common and preferred shares outstanding.
(Millions of Canadian dollars, except the number
of shares and dividends per share)
Preferred shares
First preferred (1)
Non-cumulative, fixed rate
Series W
Series AA
Series AB
Series AC
Series AD
Series AE
Series AF
Series AG
Series BH
Series BI
Series BJ
Series C-1 (2)
Non-cumulative, 5-Year Rate Reset
Series AJ (3)
Series AL
Series AX (4)
Series AZ
Series BB
Series BD
Series BF
Series BK (5)
Series BM (6)
Non-cumulative, floating rate
Series AK (3)
Non-cumulative, fixed rate/floating rate
Series C-2 (7)
Common shares
Balance at beginning of year
Issued in connection with the acquisition of City National
Issued in connection with share-based compensation
plans (8)
Purchased for cancellation (9)
Balance at end of year
Treasury shares – Preferred shares
Balance at beginning of year
Sales
Purchases
Balance at end of year
Treasury shares – Common shares
Balance at beginning of year
Sales
Purchases
Balance at end of year
As at
October 31, 2016
October 31, 2015
Number of
shares
(thousands)
Dividends
declared
per share
Number of
shares
(thousands)
Dividends
declared
per share
Amount
Amount
$
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
0.58
0.42
–
–
0.88
1.07
–
1.00
0.98
0.73
0.63
–
–
0.67
–
$
3.08
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
6,000
6,000
6,000
82
13,579
12,000
–
20,000
20,000
24,000
12,000
29,000
30,000
2,421
20
$
300
300
300
200
250
250
200
250
150
150
150
107
339
300
–
500
500
600
300
725
750
61
$
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
1.23
1.23
1.51
US$ 55.00
0.88
1.07
–
1.00
0.98
0.90
0.90
1.29
0.98
0.60
$
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
6,000
6,000
6,000
–
13,579
12,000
–
20,000
20,000
24,000
12,000
–
–
2,421
300
300
300
200
250
250
200
250
150
150
150
–
339
300
–
500
500
600
300
–
–
61
31
$ 6,713
US$ 67.50
–
–
$ 5,100
$
3.24
1,443,423
41,619
$ 14,573
3,115
4,981
(4,629)
1,485,394
307
(56)
$ 17,939
(63)
7,267
(7,173)
31
532
64,678
(66,369)
(1,159)
$
$
$
$
(2)
172
(170)
–
38
4,973
(5,091)
(80)
1,442,233
–
$ 14,511
–
1,190
–
1,443,423
62
–
$ 14,573
1
4,736
(4,800)
(63)
892
78,852
(79,212)
532
$
$
$
$
–
117
(119)
(2)
71
6,098
(6,131)
38
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
First Preferred Shares were issued at $25 per share with the exception of Non-Cumulative Perpetual First Preferred Shares, Series C-1 (Series C-1) and Non-Cumulative Fixed Rate/Floating Rate
First Preferred Shares, Series C-2 (Series C-2) which were issued at US$25 per depositary share.
On November 2, 2015, we issued 175 thousand Series C-1, totalling $227 million, in connection with the acquisition of City National. On February 24, 2016, we purchased for cash 3,717,969
depositary shares, each representing a one-fortieth interest in a share of Series C-1. The purchased depositary and underlying Series C-1 shares were subsequently cancelled.
On February 24, 2014, we issued 2.4 million Non-Cumulative Floating Rate First Preferred Shares, Series AK, totalling $61 million through a holder option, one-for-one conversion of some of
our Non-Cumulative 5-year Rate Reset First Preferred Shares, Series AJ.
On November 24, 2014, we redeemed all 13 million of issued and outstanding Non-Cumulative 5-year Rate Reset First Preferred Shares Series AX for cash at a redemption price of $25 per
share.
On December 16, 2015, we issued 27 million Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series BK (Series BK) and on December 31, 2015, we issued an additional 2 million
Series BK, totalling $725 million.
On March 7, 2016, we issued 30 million Non-Cumulative 5-year Rate Reset First Preferred Shares, Series BM, totalling $750 million.
On November 2, 2015, we issued 100 thousand Series C-2, totalling $153 million, in connection with the acquisition of City National. On February 24, 2016, we purchased for cash 3,184,562
depositary shares, each representing a one-fortieth interest in a share of Series C-2. The purchased depositary and underlying Series C-2 shares were subsequently cancelled.
Includes fair value adjustments to stock options of $60 million (2015 – $7 million).
During the year ended October 31, 2016, we purchased common shares for cancellation at an average cost of $78.10 per share with a book value of $12.03 per share. During the year ended
October 31, 2015, we did not purchase any common shares for cancellation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
183
Note 21 Equity (continued)
Significant terms and conditions of preferred shares
As at October 31, 2016
Preferred shares
First preferred
Non-cumulative, fixed rate
Series W (4)
Series AA
Series AB
Series AC
Series AD
Series AE
Series AF
Series AG
Series BH (5)
Series BI (5)
Series BJ (5)
Series C-1 (6)
Initial
Period
Annual Yield
Premium
Current
Dividend
per share (1)
Earliest
redemption date (2)
Issue Date
Redemption
price (2), (3)
4.90%
4.45%
4.70%
4.60%
4.50%
4.50%
4.45%
4.50%
4.90%
4.90%
5.25%
5.50%
$
January 31, 2005 $
February 24, 2010
.306250
April 4, 2006
May 24, 2011
.278125
July 20, 2006
.293750
August 24, 2011
November 1, 2006
.287500 November 24, 2011
February 24, 2012 December 13, 2006
.281250
January 19, 2007
February 24, 2012
.281250
March 14, 2007
May 24, 2012
.278125
April 26, 2007
.281250
May 24, 2012
June 5, 2015
.306250 November 24, 2020
.306250 November 24, 2020
July 22, 2015
October 2, 2015
February 24, 2021
.328125
US$ 13.750000 November 13, 2017
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
26.00
26.00
26.00
November 2, 2015 US$ 1,000.00
Non-cumulative, 5-Year Rate Reset (7)
Series AJ
Series AL
Series AZ (5)
Series BB (5)
Series BD (5)
Series BF (5)
Series BK (5)
Series BM (5)
Non-cumulative, floating rate
Series AK (8)
Non-cumulative, fixed rate/floating rate
5.00% 1.93%
5.60% 2.67%
4.00% 2.21%
3.90% 2.26%
3.60% 2.74%
3.60% 2.62%
5.50% 4.53%
5.50% 4.80%
February 24, 2014 September 16, 2008
.220000
November 3, 2008
February 24, 2014
.266250
January 30, 2014
May 24, 2019
.250000
August 24, 2019
June 3, 2014
.243750
January 30, 2015
.225000
May 24, 2020
.225000 November 24, 2020
March 13, 2015
May 24, 2021 December 16, 2015
.343750
March 7, 2016
.343750
August 24, 2021
1.93%
.151359
February 24, 2019
February 24, 2014
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
Series C-2 (9)
6.75% 4.052% US$ 16.875000 November 7, 2023
November 2, 2015 US$ 1,000.00
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Non-cumulative preferential dividends of each Series are payable quarterly, as and when declared by the Board of Directors, on or about the 24th day (13th and 7th day for Series C-1 and
Series C-2, respectively) of February, May, August and November.
Subject to the consent of OSFI and the requirements of the Bank Act (Canada), we may, on or after the dates specified above, redeem First Preferred Shares. In the case of Series AJ, AL, AZ,
BB, BD, BF, BK, BM and AK, these may be redeemed for cash at a price per share of $25 if redeemed on the earliest redemption date and on the same date every fifth year thereafter. In the
case of Series W, AA, AB, AC, AD, AE, AF, AG, BH, BI and BJ, these may be redeemed for cash at a price per share of $26 if redeemed during the 12 months commencing on the earliest
redemption date and decreasing by $0.25 each 12-month period thereafter to a price per share of $25 if redeemed four years from the earliest redemption date or thereafter. Series C-1 and
Series C-2 may be redeemed at a price of US$1,000 on the earliest redemption date and any dividend payment date thereafter.
Subject to the consent of OSFI and the requirements of the Bank Act (Canada), we may purchase the First Preferred Shares of each Series 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 February 24, 2010, convert First Preferred Shares Series W into our common shares. First Preferred Shares Series W
may be converted into that number of common shares determined by dividing the current redemption price by the greater of $2.50 and 95% of the weighted average trading price of common
shares at such time.
The preferred shares include non-viability contingency capital (NVCC) provisions, necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. NVCC provisions require the
conversion of the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces
that the Bank has accepted or agreed to accept a capital injection. In such an event, each preferred share is convertible into common shares pursuant to an automatic conversion formula
with a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our
common shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the preferred share value ($25.00 plus declared and unpaid dividends) by the
conversion price.
Series C-1 do not qualify as Tier 1 regulatory capital.
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.
The dividend rate is equal to the three-month Government of Canada Treasury Bill rate plus the premium indicated. The holders have the option to convert their shares into non-cumulative
First Preferred Shares, Series AJ subject to certain conditions on February 24, 2019 and every fifth year thereafter.
The dividend rate will change on the earliest redemption date at a rate equal to the 3-month LIBOR plus the premium indicated. Series C-2 do not qualify as Tier 1 regulatory capital.
Restrictions on the payment of dividends
We are prohibited by the Bank Act (Canada) 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 the Trust fails 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 20.
Currently, these limitations do not restrict the payment of dividends on our preferred or common shares.
184
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Dividend reinvestment plan
Our dividend reinvestment plan (DRIP) provides common and preferred shareholders with a means to receive additional common shares rather
than cash dividends. The plan is only open to shareholders residing in Canada or the United States. The requirements of our DRIP are satisfied
through either open market share purchases or shares issued from treasury. During 2016 and 2015, the requirements of our DRIP were satisfied
through open market share purchases.
Shares available for future issuances
As at October 31, 2016, 45.8 million common shares are available for future issue relating to our DRIP and potential exercise of stock options
outstanding. In addition, we may issue up to 38.9 million common shares from treasury under the RBC Umbrella Savings and Securities Purchase
Plan that was approved by shareholders on February 26, 2009.
Non-controlling interests
(Millions of Canadian dollars)
RBC Trust Capital Securities (1)
Series 2015
Series 2008-1
Other
As at
October 31
2016
October 31
2015
$
$
–
511
84
595
$
$
1,219
505
74
1,798
(1)
As at October 31, 2016, RBC TruCS Series 2015 includes $nil accrued interest (October 31, 2015 – $20 million). Series 2015 was redeemed on December 31, 2015. Series 2008-1 includes
$11 million of accrued interest (October 31, 2015 – $11 million), net of $nil treasury holdings (October 31, 2015 – $6 million).
Note 22 Share-based compensation
Stock option plans
We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common shares. The
exercise price for the majority of the grants is determined as the higher of the volume-weighted average of the trading prices per board lot (100
shares) of our common shares on the Toronto Stock Exchange (i) on the day preceding the day of grant; and (ii) the five consecutive trading days
immediately preceding the day of grant. The exercise price for the remaining grants is the closing market share price of our common shares on
the New York Stock Exchange on the date of grant. All options vest over a four-year period, and are exercisable for a period not exceeding 10
years from the grant date.
The compensation expense recorded for the year ended October 31, 2016, in respect of the stock option plans was $8 million (October 31,
2015 – $6 million; October 31, 2014 – $7 million). The compensation expense related to non-vested options was $4 million at October 31, 2016
(October 31, 2015 – $3 million; October 31, 2014 – $4 million), to be recognized over the weighted average period of 1.9 years (October 31,
2015 – 1.8 years; October 31, 2014 – 1.4 years).
Analysis of the movement in the number and weighted average exercise price of options is set out below:
A summary of our stock option activity and related information
(Canadian dollars per share except share amounts)
Outstanding at beginning of year
Granted (1)
Exercised (2) (3)
Forfeited in the year
Outstanding at end of year
Exercisable at end of year
Available for grant
October 31, 2016
October 31, 2015
October 31, 2014
Number of
options
(thousands)
8,182
7,403
(4,825)
(110)
Weighted
average
exercise price (4)
55.78
$
55.74
50.97
69.79
10,650
6,909
9,267
$
$
57.64
49.47
Number of
options
(thousands)
8,579
803
(1,190)
(10)
Weighted
average
exercise price
52.36
$
78.59
46.44
70.25
8,182
5,231
10,649
$
$
55.78
50.75
Number of
options
(thousands)
10,604
705
(2,723)
(7)
Weighted
average
exercise price
50.39
$
69.17
49.03
52.92
8,579
4,987
11,443
$
$
52.36
49.60
(1)
(2)
(3)
(4)
Total consideration in our acquisition of City National included share-based compensation amounts of US$156 million, including the conversion of 3.8 million stock options with a fair value
of US$112 million, based on the Black-Scholes model. Refer to Note 11 for details on this acquisition.
Cash received for options exercised during the year was $246 million (October 31, 2015 – $55 million; October 31, 2014 – $133 million) and the weighted average share price at the date of
exercise was $76.90 (October 31, 2015 – $76.87; October 31, 2014 – $74.27).
New shares were issued for all stock options exercised in 2016, 2015 and 2014.
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2016. For foreign currency-denominated options
exercised during the year, the weighted average exercise prices are translated using exchange rates as at the settlement date.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
185
Note 22 Share-based compensation (continued)
Options outstanding as at October 31, 2016 by range of exercise price
(Canadian dollars per share except share amounts and years)
$20.17 – $45.70
$46.72 – $51.83
$52.60 – $58.43
$58.65 – $73.14
$74.39 – $78.59
Options outstanding
Options exercisable
Number
outstanding
(thousands)
1,865
2,007
1,906
2,198
2,674
Weighted
average
exercise price (1)
37.35
$
48.83
53.92
63.61
76.17
Weighted
average
remaining
contractual
life (years)
3.52
4.60
3.31
6.45
8.67
Number
exercisable
(thousands)
1,865
2,007
1,906
1,000
131
Weighted
average
exercise price (1)
37.35
$
48.83
53.92
61.32
77.02
10,650
$
57.64
5.58
6,909
$
49.47
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2016.
The weighted average fair value of options granted during the year ended October 31, 2016 was estimated at $4.83 (October 31, 2015 – $6.75;
October 31, 2014 – $7.19). This was determined by applying the Black-Scholes model on the date of grant, taking into account the specific
terms and conditions under which the options are granted, such as the vesting period and expected share price volatility estimated by
considering both historic average share price volatility and implied volatility derived from traded options over our common shares of similar
maturity to those of the employee options. The following assumptions were used to determine the fair value of options granted:
Weighted average assumptions
(Canadian dollars per share except percentages and years)
Share price at grant date
Risk-free interest rate
Expected dividend yield
Expected share price volatility
Expected life of option
For the year ended
$
October 31
2016
72.49
0.94%
4.07%
16%
6 years
$
October 31
2015
77.58
1.40%
3.76%
17%
6 years
$
October 31
2014
68.75
1.95%
3.94%
18%
6 years
Employee savings and share ownership plans
We offer many employees an opportunity to own our common shares through savings and share ownership plans. Under these plans, the
employees can generally contribute between 1% and 10% of their annual salary or benefit base for commission-based employees. For each
contribution between 1% and 6%, we will match 50% of the employee contributions in our common shares. For the RBC Dominion Securities
Savings Plan, our maximum annual contribution is $4,500 per employee. For the RBC U.K. Share Incentive Plan, our maximum annual
contribution is £1,500 per employee. For the year ended October 31, 2016, we contributed $91 million (October 31, 2015 – $88 million;
October 31, 2014 – $85 million), under the terms of these plans, towards the purchase of our common shares. As at October 31, 2016, an
aggregate of 37 million common shares were held under these plans (October 31, 2015 – 37 million common shares; October 31, 2014 –
38 million common shares).
Deferred share and other plans
We offer deferred share unit plans to executives, non-employee directors and to certain key employees. Under these plans, the executives or
directors may choose to receive all or a percentage of their annual variable short-term incentive bonus or directors’ fee in the form of deferred
share units (DSUs). The executives or directors must elect to participate in the plan prior to the beginning of the year. DSUs earn dividend
equivalents in the form of additional DSUs at the same rate as dividends on common shares. The participant is not allowed to convert the DSUs
until retirement or termination of employment/directorship. The cash value of the DSUs is equivalent to the market value of common shares
when conversion takes place.
We have a deferred bonus plan for certain key employees within Capital Markets. The deferred bonus is invested as RBC share units and a
specified percentage vests on each of the three anniversary dates following the grant date. Each vested amount is paid in cash and is based on
the original number of RBC share units plus accumulated dividends valued using the average closing price of RBC common shares during the five
trading days immediately preceding the vesting date.
We offer performance deferred share award plans to certain key employees, all of which vest at the end of three years. Upon vesting, the
award is paid in cash and is based on the original number of RBC share units granted plus accumulated dividends valued using the average
closing price of RBC common shares during the five trading days immediately preceding the vesting date. A portion of the award under certain
plans may be increased or decreased up to 25%, depending on our total shareholder return compared to a defined peer group of global financial
institutions. We previously offered deferred compensation to certain employees in the form of common shares that were held in trust and
accumulated dividends during the three year vesting period.
We maintain non-qualified deferred compensation plans for non-employee directors and certain key employees in the United States. These
plans allow eligible directors and employees to defer a portion of their annual income and allocate the deferrals among specified fund choices,
including a share unit fund that tracks the value of our common shares. Certain deferrals may also be eligible for matching contributions, all of
which are allocated to the RBC share unit fund.
Our liabilities for the awards granted under the deferred share and other plans are measured at fair value, determined based on the quoted
market price of our common shares. The following tables present our obligations under the deferred share and other plans, and the related
compensation expenses (recoveries) recognized for the year.
186
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Obligation under deferred share and other plans
October 31, 2016
October 31, 2015
October 31, 2014
Units granted
during the year
Units
outstanding
at the end
of the year
Units granted
during the year
Units
outstanding
at the end
of the year
Units granted
during the year
(Millions of Canadian dollars
except units and per unit
amounts)
Deferred share unit plans
Deferred bonus plan
Performance deferred
share award plans
Deferred compensation
plans
Other share-based plans
Number
granted
(thousands)
Weighted
average
fair value
388 $ 74.89
83.30
4,545
2,656
74.49
72.52
124
1,394
76.04
9,107 $ 79.11
$
$
Carrying
amount
376
1,444
Number
granted
(thousands)
Weighted
average
fair value
343 $ 69.68
75.60
5,849
502
2,049
77.69
333
157
2,812
64
879
79.52
76.44
9,184 $ 75.95
$
$
Carrying
amount
334
1,442
Number
granted
(thousands)
Weighted
average
fair value
315 $ 71.57
78.97
5,339
429
2,181
68.09
313
114
2,632
69
845
74.68
70.32
8,749 $ 75.12
Units
outstanding
at the end
of the year
Carrying
amount
333
1,585
503
343
118
2,882
$
$
Compensation expenses recognized under deferred share and other plans
(Millions of Canadian dollars)
Deferred share unit plans
Deferred bonus plan
Performance deferred share award plans
Deferred compensation plans
Other share-based plans
For the year ended
$
October 31
2016
62
195
246
134
91
$
October 31
2015
(1)
(139)
135
36
39
$
October 31
2014
61
121
243
147
65
$
728
$
70
$
637
Note 23 Income and expenses from selected financial instruments
Gains and losses arising from financial instruments held at FVTPL are reported in Non-interest income. Related interest and dividend income are
reported in Net interest income.
Net gains (losses) from financial instruments held at fair value through profit or loss (1)
(Millions of Canadian dollars)
Net gains (losses)
Classified as at fair value through profit or loss (2)
Designated as at fair value through profit or loss (3)
By product line
Interest rate and credit
Equities
Foreign exchange and commodities
For the year ended
October 31
2016
October 31
2015
October 31
2014
$
$
$
$
$
$
$
371
216
587
404
(345)
528
587
$
(218)
750
532
149
(89)
472
532
$
$
$
$
922
(132)
790
603
(190)
377
790
(1)
(2)
(3)
The following related to our insurance operations are included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Net gains from financial
instruments designated as at FVTPL of $617 million (October 31, 2015 – $51 million; October 31, 2014 – $515 million).
Excludes derivatives designated in a hedging relationship. Refer to Note 8 for net gains (losses) on these derivatives.
For the year ended October 31, 2016, $428 million of net fair value gains on financial liabilities designated as at FVTPL, other than those attributable to changes in our own credit risk, were
included in Non-interest income (October 31, 2015 – gains of $1,118 million; October 31, 2014 – losses of $414 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
187
Note 23 Income and expenses from selected financial instruments (continued)
Net interest income from financial instruments (1)
(Millions of Canadian dollars)
Interest income
Financial instruments held as at fair value through profit or loss
Other categories of financial instruments (2)
Interest expense
Financial instruments held as at fair value through profit or loss
Other categories of financial instruments
Net interest income
October 31
2016
For the year ended
October 31
2015
October 31
2014
$
5,181
19,271
24,452
$
4,810
17,919
22,729
$
4,246
17,773
22,019
$
2,952
4,969
7,921
$ 16,531
$
2,621
5,337
7,958
$ 14,771
$
2,198
5,705
7,903
$ 14,116
(1)
(2)
The following related to our insurance operations are included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Interest income of $474 million
(October 31, 2015 – $449 million; October 31, 2014 – $435 million), and Interest expense of $4 million (October 31, 2015 – $3 million; October 31, 2014 – $nil).
Refer to Note 5 for interest income accrued on impaired financial assets.
Income from other categories of financial instruments (1), (2)
(Millions of Canadian dollars)
Net gains (losses) arising from financial instruments measured at amortized cost (3)
Net fee income which does not form an integral part of the effective interest rate of
financial assets and liabilities
Net fee income arising from trust and other fiduciary activities
October 31
2016
(22)
$
For the year ended
October 31
2015
(6)
$
October 31
2014
(7)
$
4,817
9,988
4,604
9,587
4,190
9,138
(1)
(2)
(3)
Refer to Note 4 for net gains (losses) on AFS securities.
Refer to Note 4 for impairment losses on AFS and held-to-maturity securities, and Note 5 for impairment losses on loans.
Financial instruments measured at amortized cost include held-to-maturity securities, loans and financial liabilities measured at amortized cost.
Note 24 Income taxes
The components of tax expense are as follows.
(Millions of Canadian dollars)
Income taxes (recoveries) in Consolidated Statements of Income
Current tax
October 31
2016
For the year ended
October 31
2015
October 31
2014
Tax expense for current year
Adjustments for prior years
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of a
$
prior period
Deferred tax
Origination and reversal of temporary difference
Effects of changes in tax rates
Adjustments for prior years
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of a
prior period
Write-down
Income taxes (recoveries) in Consolidated Statements of Comprehensive Income and Changes in
Equity
Other comprehensive income
Net unrealized gains (losses) on available-for-sale securities
Reclassification of net losses (gains) on available-for-sale securities to income
Unrealized foreign currency translation gains (losses)
Net foreign currency translation gains (losses) from hedging activities
Reclassification of losses (gains) on net investment hedging activities to income
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Remeasurements of employee benefit plans
Net fair value change due to credit risk on financial liabilities designated as at fair value
through profit or loss
Issuance costs
Share-based compensation awards
Total income taxes
$
188
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
3,012
(26)
(61)
2,925
(111)
(3)
27
–
3
(84)
2,841
29
(20)
3
51
–
(13)
19
(373)
(118)
(6)
(10)
(438)
2,403
$
$
2,244
91
(5)
2,330
312
35
(74)
(6)
–
267
2,597
(22)
(12)
8
(1,140)
38
(193)
117
206
127
(7)
–
(878)
1,719
$
$
2,858
(64)
(4)
2,790
(156)
(3)
74
(3)
4
(84)
2,706
70
(12)
5
(561)
1
(39)
10
(88)
(22)
(7)
–
(643)
2,063
Our effective tax rate changed from 20.6% for 2015 to 21.4% for 2016, principally due to net favorable tax adjustments last year.
The following is an analysis of the differences between the income tax expense reflected in the Consolidated Statements of Income and the
amounts calculated at the Canadian statutory rate.
Reconciliation to statutory tax rate
(Millions of Canadian dollars, except for percentage amounts)
Income taxes at Canadian statutory tax rate
Increase (decrease) in income taxes resulting from
Lower average tax rate applicable to subsidiaries
Tax-exempt income from securities
Tax rate change
Effect of previously unrecognized tax loss, tax credit or temporary
differences
Other
Income taxes in Consolidated Statements of Income / effective tax rate
$ 2,841
For the year ended
October 31, 2015
October 31, 2014
October 31, 2016
$ 3,524
26.5% $ 3,320
(340)
(410)
(3)
(61)
131
(2.6)
(3.1)
–
(116)
(452)
35
(0.4)
1.0
(11)
(179)
21.4% $ 2,597
26.3% $ 3,080
26.3%
(0.9)
(3.6)
0.3
(0.1)
(1.4)
(272)
(386)
(3)
(7)
294
(2.3)
(3.3)
–
(0.1)
2.5
20.6% $ 2,706
23.1%
Deferred tax assets and liabilities result from tax loss carryforwards and temporary differences between the tax basis of assets and liabilities and
their carrying amounts on our Consolidated Balance Sheets.
Significant components of deferred tax assets and liabilities
(Millions of Canadian dollars)
Net deferred tax asset/(liability)
Allowance for credit losses
Deferred compensation
Business realignment charges
Tax loss carryforwards
Deferred income
Available-for-sale securities
Premises and equipment and intangibles
Deferred expense
Pension and post-employment related
Other
Comprising
Deferred tax assets
Deferred tax liabilities
(Millions of Canadian dollars)
Net deferred tax asset/(liability)
Allowance for credit losses
Deferred compensation
Business realignment charges
Tax loss carryforwards
Deferred income
Available-for-sale securities
Premises and equipment and intangibles
Deferred expense
Pension and post-employment related
Other
Comprising
Deferred tax assets
Deferred tax liabilities
As at October 31, 2016
Net Asset
November 1,
2015
Change
through
equity
Change
through profit
or loss
Exchange rate
differences
Acquisitions/
disposals
Net Asset
October 31,
2016
$
$
$
$
$
372
1,296
6
54
147
12
(539)
(86)
412
197
$
–
10
–
(1)
–
(12)
–
8
373
8
$
90
40
2
(19)
(32)
1
62
5
39
(104)
1,871
$ 386
$
84
$
2
23
–
(2)
1
4
(10)
–
1
(7)
12
$
$
2,072
(201)
1,871
20
189
–
–
(21)
5
(594)
13
–
(127)
(515)
$
$
$
$
484
1,558
8
32
95
10
(1,081)
(60)
825
(33)
1,838
2,827
(989)
1,838
As at October 31, 2015
Net Asset
November 1,
2014
Change
through
equity
Change
through profit
or loss
Exchange rate
differences
Acquisitions/
disposals
Net Asset
October 31,
2015
(2)
(375)
(4)
4
27
(13)
81
3
46
(34)
(267)
$
$
(2)
158
1
4
–
3
(17)
–
1
10
158
$
$
$
$
$
$
$
376
1,513
9
44
120
30
(604)
(98)
566
222
$
–
–
–
2
–
(8)
–
9
(201)
–
2,178
$ (198)
$
2,382
(204)
2,178
–
–
–
–
–
–
1
–
–
(1)
–
$
$
$
$
372
1,296
6
54
147
12
(539)
(86)
412
197
1,871
2,072
(201)
1,871
The tax loss carryforwards amount of deferred tax assets relates to losses in our Caribbean and Japanese operations. Deferred tax assets of
$32 million were recognized at October 31, 2016 (October 31, 2015 – $54 million) in respect of tax losses incurred in current or preceding years
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
189
Note 24 Income taxes (continued)
for which recognition is dependent on the projection of future taxable profits. Management’s forecasts support the assumption that it is probable
that the results of future operations will generate sufficient taxable income to utilize the deferred tax assets. The forecasts rely on continued
liquidity and capital support to our business operations, including tax planning strategies implemented in relation to such support.
As at October 31, 2016, unused tax losses, tax credits and deductible temporary differences of $372 million, $541 million and $3 million
(October 31, 2015 – $525 million, $356 million and $6 million) available to be offset against potential tax adjustments or future taxable income
were not recognized as deferred tax assets. This amount includes unused tax losses of $26 million which expire within one year (October 31,
2015 – $158 million), $3 million which expire in two to four years (October 31, 2015 – $28 million), and $343 million which expire after four
years (October 31, 2015 – $339 million). There are $73 million of tax credits that will expire in two to four years (October 31, 2015 – $11 million)
and $468 million that will expire after four years (October 31, 2015 – $345 million). In addition, there are no deductible temporary differences
that will expire within one year (October 31, 2015 – $1 million) and $3 million that will expire after four years (October 31, 2015 – $5 million).
The amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures
for which deferred tax liabilities have not been recognized in the parent bank is $11.7 billion as at October 31, 2016 (October 31, 2015 –
$11.2 billion).
Tax examinations and assessments
In September 2016, the Canada Revenue Agency reassessed Royal Bank of Canada approximately $225 million of additional income tax and
interest by denying the tax deductibility of certain dividends received from Canadian Corporations in years 2009 and 2010 on the basis that they
were part of a “dividend rental arrangement.” The circumstances of the dividends subject to the reassessment are similar to those prospectively
addressed by the rules in the 2015 Canadian federal budget. We are confident that our tax filing position was appropriate and intend to defend
ourselves vigorously.
Note 25 Earnings per share
(Millions of Canadian dollars, except share and per share amounts)
Basic earnings per share
Net Income
Preferred share dividends
Net income attributable to non-controlling interest
Net income available to common shareholders
Weighted average number of common shares (in thousands)
Basic earnings per share (in dollars)
Diluted earnings per share
Net income available to common shareholders
Dilutive impact of exchangeable shares
Net income available to common shareholders including dilutive impact of exchangeable
shares
Weighted average number of common shares (in thousands)
Stock options (1)
Issuable under other share-based compensation plans
Exchangeable shares (2)
Average number of diluted common shares (in thousands)
Diluted earnings per share (in dollars)
For the year ended
October 31
2016
October 31
2015
October 31
2014
$
$
$
10,458
(294)
(53)
10,111
1,485,876
6.80
10,111
15
10,126
1,485,876
3,329
731
4,201
$
$
$
10,026
(191)
(101)
9,734
1,442,935
6.75
9,734
15
9,749
1,442,935
2,446
–
4,128
$
$
$
9,004
(213)
(94)
8,697
1,442,553
6.03
8,697
21
8,718
1,442,553
2,938
–
6,512
1,494,137
6.78
$
1,449,509
6.73
$
1,452,003
6.00
$
(1)
(2)
The dilutive effect of stock options was calculated using the treasury stock method. When the exercise price of options outstanding is greater than the average market price of our common
shares, the options are excluded from the calculation of diluted earnings per share. For the year ended October 31, 2016, an average of 802,371 outstanding options with an average exercise
price of $78.58 were excluded from the calculation of diluted earnings per share. For the year ended October 31, 2015, an average of 703,808 outstanding options with an average exercise
price of $78.59 were excluded from calculation of diluted earnings per share. For the year ended October 31, 2014, no outstanding options were excluded from the calculation of diluted
earnings per share.
Includes exchangeable preferred shares and trust capital securities.
Note 26 Guarantees, commitments, pledged assets and contingencies
Guarantees and commitments
We use guarantees and other off-balance sheet credit instruments to meet the financing needs of our clients.
The table below summarizes our maximum exposure to credit losses related to our guarantees and commitments provided to third parties.
The maximum exposure to credit risk relating to a guarantee is the maximum risk of loss if there was a total default by the guaranteed parties,
without consideration of possible recoveries under recourse provisions, insurance policies or from collateral held or pledged. The maximum
exposure to credit risk relating to a commitment to extend credit is the full amount of the commitment. In both cases, the maximum risk
exposure is significantly greater than the amount recognized as a liability in our Consolidated Balance Sheets.
190
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
(Millions of Canadian dollars)
Financial guarantees
Financial standby letters of credit
Commitments to extend credit
Backstop liquidity facilities
Credit enhancements
Documentary and commercial letters of credit
Other commitments to extend credit
Other credit-related commitments
Securities lending indemnifications
Performance guarantees
Other
Maximum exposure to credit losses
As at
October 31
2016
October 31
2015
$
18,886
$
17,494
38,910
2,598
232
181,491
90,230
6,844
50
40,387
3,348
216
172,924
74,239
6,042
221
Our credit review process, our policy for requiring collateral security, and the types of collateral security held are generally the same for
guarantees and commitments as for loans. Our clients generally have the right to request settlement of, or draw on, our guarantees and
commitments within one year. However, certain guarantees can only be drawn if specified conditions are met. These conditions, along with
collateral requirements, are described below. We believe that it is highly unlikely that all or substantially all of the guarantees and commitments
will be drawn or settled within one year, and contracts may expire without being drawn or settled.
Financial guarantees
Financial standby letters of credit
Financial standby letters of credit represent irrevocable assurances that we will make payments in the event that a client cannot meet its
payment obligations to the third party. For certain guarantees, the guaranteed party can request payment from us even though the client has not
defaulted on its obligations. The term of these guarantees can range up to eight years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is generally the same as
for loans. When collateral security is taken, it is determined on an account-by-account basis according to the risk of the borrower and the
specifics of the transaction. Collateral security may include cash, securities and other assets pledged.
Commitments to extend credit
Backstop liquidity facilities
Backstop liquidity facilities are provided to asset-backed commercial paper conduit programs administered by us and third parties, as an
alternative source of financing in the event that such programs are unable to access commercial paper markets, or in limited circumstances,
when predetermined performance measures of the financial assets owned by these programs are not met. The average remaining term of these
liquidity facilities is approximately four years.
Backstop liquidity facilities are also provided to non-asset backed programs such as variable rate demand notes issued by third parties.
These standby facilities provide liquidity support to the issuer to buy the notes if the issuer is unable to remarket the notes, as long as the
instrument and/or the issuer maintain the investment grade rating.
The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of bankruptcy or insolvency
and generally do not require us to purchase non-performing or defaulted assets.
Credit enhancements
We provide partial credit enhancement to multi-seller programs administered by us to protect commercial paper investors in the event that the
collections on the underlying assets together with the transaction-specific credit enhancements or the liquidity facilities prove to be insufficient
to pay for maturing commercial paper. Each of the asset pools is structured to achieve a high investment-grade credit profile through credit
enhancements from us and other third parties related to each transaction. The average remaining term of these credit facilities is approximately
three years.
Documentary and commercial letters of credit
Documentary and commercial letters of credit, which are written undertakings by us on behalf of a client authorizing a third party to draw drafts
on us up to a stipulated amount under specific terms and conditions, where some are collateralized based on the underlying agreement with the
client and others are collateralized by cash deposits or other assets of the company which may include the underlying shipment of goods to
which they relate.
Other commitments to extend credit
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, bankers’ acceptances or letters
of credit.
Other credit-related commitments
Securities lending indemnifications
In securities lending transactions, we act as an agent for the owner of a security, who agrees to lend the security to a borrower for a fee, under the
terms of a pre-arranged contract. The borrower must fully collateralize the security loaned at all times. As part of this custodial business, an
indemnification may be provided to securities lending customers to ensure that the fair value of securities loaned will be returned in the event
that the borrower fails to return the borrowed securities and the collateral held is insufficient to cover the fair value of those securities. These
indemnifications normally terminate without being drawn upon. The term of these indemnifications varies, as the securities loaned are recallable
on demand. Collateral held for our securities lending transactions typically includes cash, securities that are issued or guaranteed by the
Canadian government, U.S. government or other OECD countries or high quality equity instruments.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
191
Note 26 Guarantees, commitments, pledged assets and contingencies (continued)
Performance guarantees
Performance guarantees represent irrevocable assurances that we will make payments to third-party beneficiaries in the event that a client fails
to perform under a specified non-financial contractual obligation. Such obligations typically include works and service contracts, performance
bonds, and warranties related to international trade. The term of these guarantees can range up to eight years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is generally the same
as for loans. When collateral security is taken, it is determined on an account-by-account basis according to the risk of the borrower and the
specifics of the transaction. Collateral security may include cash, securities and other assets pledged.
Indemnifications
In the normal course of our operations, we provide indemnifications which are often standard contractual terms to counterparties in transactions
such as purchase and sale contracts, fiduciary, agency, licensing, custodial and service agreements, clearing system arrangements, director/
officer contracts and leasing transactions. These indemnification agreements may require us to compensate the counterparties for costs incurred
as a result of changes in laws and regulations (including tax legislation) or as a result of litigation claims or statutory sanctions that may be
suffered by the counterparty as a consequence of the transaction. The terms of these indemnification agreements vary based on the contract.
The nature of the indemnification agreements prevents us from making a reasonable estimate of the maximum potential amount we could be
required to pay to counterparties. Historically, we have not made any significant payments under such indemnifications.
Uncommitted amounts
Uncommitted amounts represent undrawn credit facilities for which we have the ability to unilaterally withdraw the credit extended to the
borrower. These include both retail and commercial commitments. As at October 31, 2016, the total balance of uncommitted amounts was
$229 billion (October 31, 2015 – $209 billion).
Other commitments
We act as underwriter for certain new issuances under which we alone or together with a syndicate of financial institutions purchase the new
issue for resale to investors. In connection with these activities, our commitments were $540 million as at October 31, 2016 (October 31, 2015 –
$353 million).
Pledged assets and collateral
In the ordinary course of business, we pledge assets and enter in collateral agreements with terms and conditions that are usual and customary
to our regular lending, borrowing and trading activities recorded on our Consolidated Balance Sheets. The following are examples of our general
terms and conditions on pledged assets and collateral:
•
•
•
•
The risks and rewards of the pledged assets reside with the pledgor.
The pledged asset is returned to the pledgor when the necessary conditions have been satisfied.
The right of the pledgee to sell or re-pledge the asset is dependent on the specific agreement under which the collateral is pledged.
If there is no default, the pledgee must return the comparable asset to the pledgor upon satisfaction of the obligation.
We are also required to provide intraday pledges to the Bank of Canada when we use the Large Value Transfer System (LVTS), which is a real-time
electronic wire transfer system that continuously processes all Canadian dollar large-value or time-critical payments throughout the day. The
pledged assets earmarked for LVTS activities are normally released back to us at the end of the settlement cycle each day. Therefore, the pledged
assets amount is not included in the table below. For the year ended October 31, 2016, we had on average $3.4 billion of assets pledged
intraday to the Bank of Canada on a daily basis (October 31, 2015 – $3.5 billion). There are infrequent occasions where we are required to take
an overnight advance from the Bank of Canada to cover a settlement requirement, in which case an equivalent value of the pledged assets would
be used to secure the advance. There were no overnight advances taken on October 31, 2016 and October 31, 2015.
192
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Details of assets pledged against liabilities and collateral assets held or re-pledged are shown in the following tables:
(Millions of Canadian dollars)
Sources of pledged assets and collateral
Bank assets
Interest-bearing deposits with banks
Loans
Securities
Other assets
Client assets (1)
Collateral received and available for sale or re-pledging
Less: not sold or re-pledged
Uses of pledged assets and collateral
Securities lent
Securities borrowed
Obligations related to securities sold short
Obligations related to securities lent or sold under repurchase agreements
Securitization
Covered bonds
Derivative transactions
Foreign governments and central banks
Clearing systems, payment systems and depositories
Other
As at
October 31
2016
October 31
2015
$
–
85,351
55,479
23,307
$
1
81,397
63,761
22,305
$ 164,137
$ 167,464
266,974
(73,341)
193,633
357,770
$ 25,057
33,980
50,369
116,279
43,502
40,293
29,183
1,574
3,521
14,012
232,499
(74,471)
158,028
325,492
$ 21,767
33,306
47,658
88,834
44,203
36,422
27,411
2,770
4,017
19,104
$ 357,770
$ 325,492
(1)
Primarily relates to Obligations related to securities lent or sold under repurchase agreements, Securities lent and Derivative transactions.
Lease commitments
Finance lease commitments
We lease computer equipment from third parties under finance lease arrangements. The leases have various terms, escalation and renewal
rights. The future minimum lease payments under the finance leases are as follows:
(Millions of Canadian dollars)
Future minimum lease payments
No later than one year
Later than one year and no later than five years
As at
October 31, 2016
October 31, 2015
Total future
minimum
lease
payments
Future
interest
charges
Present
value of
finance lease
commitments
Total future
minimum
lease
payments
Future
interest
charges
Present
value of
finance lease
commitments
$
$
21
20
41
$
$
(2)
(2)
(4)
$
$
19
18
37
$
$
38
22
60
$
$
(4)
(3)
(7)
$
$
34
19
53
The net carrying amount of computer equipment held under finance lease as at October 31, 2016 was $47 million (October 31, 2015 –
$65 million).
Operating lease commitments
We are obligated under a number of non-cancellable operating leases for premises and equipment. These leases have various terms, escalation
and renewal rights. The lease agreements do not include any clauses that impose any restriction on our ability to pay dividends, engage in debt
financing transactions, or enter into further lease agreements. The minimum future lease payments under non-cancellable operating leases are
as follows.
October 31, 2016
October 31, 2015
As at
(Millions of Canadian dollars)
Future minimum lease payments
No later than one year
Later than one year and no later than five years
Later than five years
Less: Future minimum sublease payments to be received
Land and
buildings
$
662
1,993
2,140
4,795
(24)
Equipment
Equipment
$
$
Land and
buildings
$
590
1,822
1,811
4,223
(14)
70
206
–
276
–
276
131
80
–
211
–
211
Net future minimum lease payments
$ 4,771
$
$ 4,209
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
193
Note 27 Legal and regulatory matters
We are a large global institution that is subject to many different complex legal and regulatory requirements that continue to evolve. We are and
have been subject to a variety of legal proceedings, including civil claims and lawsuits, regulatory examinations, investigations, audits and
requests for information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions. Some of these
matters may involve novel legal theories and interpretations and may be advanced under criminal as well as civil statutes, and some
proceedings could result in the imposition of civil, regulatory enforcement or criminal penalties. We review the status of all proceedings on an
ongoing basis and will exercise judgment in resolving them in such manner as we believe to be in our best interest. This is an area of significant
judgment and uncertainty and the extent of our financial and other exposure to these proceedings after taking into account current accruals
could be material to our results of operations in any particular period. The following is a description of our significant legal proceedings.
LIBOR regulatory investigations and litigation
Various regulators and competition and enforcement authorities around the world, including in Canada, the United Kingdom, and the U.S., are
conducting investigations related to certain past submissions made by panel banks in connection with the setting of the U.S. dollar London
interbank offered rate (LIBOR). These investigations focus on allegations of collusion between the banks that were on the panel to make
submissions for certain LIBOR rates. Royal Bank of Canada is a member of certain LIBOR panels, including the U.S. dollar LIBOR panel, and has
been the subject of regulatory requests for information. In addition, Royal Bank of Canada and other U.S. dollar panel banks have been named as
defendants in private lawsuits filed in the U.S. with respect to the setting of LIBOR including a number of class action lawsuits which have been
consolidated before the U.S. District Court for the Southern District of New York. The complaints in those private lawsuits assert claims against us
and other panel banks under various U.S. laws, including U.S. antitrust laws, the U.S. Commodity Exchange Act, and state law.
Based on the facts currently known, it is not possible at this time for us to predict the ultimate outcome of these investigations or
proceedings or the timing of their resolution.
Royal Bank of Canada Trust Company (Bahamas) Limited Proceedings
On April 13, 2015, a French investigating judge notified Royal Bank of Canada Trust Limited (RBC Bahamas) of the issuance of an ordonnance de
renvoi referring RBC Bahamas and other unrelated persons to the French tribunal correctionnel to face the charge of complicity in estate tax fraud
relating to actions taken relating to a trust for which RBC Bahamas serves as trustee. RBC Bahamas believes that its actions did not violate
French law and contested the charge in the French court. The trial of this matter has concluded and a verdict is expected on January 12, 2017. On
October 28, 2016, Royal Bank of Canada was granted a temporary one year exemption by the U.S. Department of Labour that will allow Royal
Bank of Canada and its current and future affiliates to continue to qualify for the Qualified Professional Asset Manager exemption under the
Employee Retirement Income Security Act despite any potential conviction of RBC Bahamas in the French proceeding. An application to grant
more lengthy exemptive relief is pending. Based on the facts currently known, it is not possible at this time to predict the ultimate outcome of the
French proceeding; however, we believe that its ultimate resolution will not have a material effect on our consolidated financial position,
although it may be material to our results of operations in the period it occurs.
Interchange fees litigation
Since 2011, seven proposed class actions have been commenced in Canada: Bancroft-Snell v. Visa Canada Corporation, et al., 9085-4886
Quebec Inc. v. Visa Canada Corporation, et al., Coburn and Watson’s Metropolitan Home v. Bank of America Corporation, et al. (Watson),
Macaronies Hair Club and Laser Centre Inc. v. BofA Canada Bank, et al., 1023926 Alberta Ltd. v. Bank of America Corporation, et al., The Crown &
Hand Pub Ltd. v. Bank of America Corporation, et al., and Hello Baby Equipment Inc. v. BofA Canada Bank, et al. The defendants in each action are
VISA Canada Corporation (Visa), MasterCard International Incorporated (MasterCard), Royal Bank of Canada and other financial institutions. The
plaintiff class members are Canadian merchants who accept Visa and/or MasterCard branded credit cards for payment. The actions allege,
among other things, that from March 2001 to the present, Visa and MasterCard conspired with their issuing banks and acquirers to set default
interchange rates and merchant discount fees and that certain rules (Honour All Cards and No Surcharge) have the effect of increasing the
merchant discount fees. The actions include claims of civil conspiracy, breach of the Competition Act, interference with economic relations and
unjust enrichment. The claims seek unspecified general and punitive damages. In Watson, a decision to partially certify the action as a class
proceeding was released on March 27, 2014, and was appealed. On August 19, 2015, the British Columbia Court of Appeal struck the plaintiff
class representative’s cause of action under section 45 of the Competition Act and reinstated the plaintiff class representative’s cause of action
in civil conspiracy by unlawful means, among other rulings. In October 2016, the trial court in Watson denied a motion by the plaintiff to revive
the stricken section 45 Competition Act claim, and also denied the plaintiff’s motion to add new causes of action. The plaintiff class
representative has now appealed that decision. The Watson proceeding has been set down for trial commencing September 2018. Based on the
facts currently known, it is not possible at this time for us to predict the ultimate outcome of this proceeding or the timing of its resolution.
Foreign Exchange Matters
Various regulators, including the Brazilian civil antitrust authority Administrative Council for Economic Defense (CADE) are conducting inquiries
regarding potential violations of antitrust law by a number of banks, including Royal Bank of Canada, regarding foreign exchange trading.
On July 31, 2015, RBC Capital Markets, LLC was added as a defendant in a pending putative class action initially filed in November 2013 in
the United States District Court for the Southern District of New York. The action is brought against multiple foreign exchange dealers and
alleges, among other things, collusive behaviour in foreign exchange trading. On September 11, 2015, a class action lawsuit was filed in the
Ontario Superior Court of Justice and a motion for authorization of a class action was filed in the Quebec Superior Court, both on behalf of an
alleged class of Canadian investors, against Royal Bank of Canada, RBC Capital Markets, LLC and a number of other foreign exchange dealers.
The Canadian class actions also allege collusive behaviour in foreign exchange trading. Based on the facts currently known, it is not possible at
this time to predict the ultimate outcome of the Foreign Exchange Matters or the timing of their ultimate resolution.
Wisconsin school districts litigation
RBC Capital Markets, LLC, RBC Europe, Ltd. and RBC USA Holdco Corporation are defendants in a lawsuit relating to their role in transactions
involving investments made by a number of Wisconsin school districts in certain CDOs. These CDO transactions were also the subject of a
regulatory investigation and in September 2011, we reached a settlement with the Securities and Exchange Commission which was paid to the
school districts through a Fair Fund. Based on the facts currently known, it is not possible at this time to predict the ultimate outcome of this
proceeding or the timing of its resolution; however, we believe the ultimate resolution of this proceeding will not have a material adverse effect
on our consolidated financial position or results of operations.
194
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Panama Papers inquiries
Following media reports on the contents of files misappropriated from a Panamanian-based law firm, Mossack Fonseca & Co about special
purpose entities associated with that firm, regulatory, tax and enforcement authorities are conducting inquiries. The inquiries focus on, among
other issues, the potential use of such entities by third parties to avoid tax and disclosure obligations. Royal Bank of Canada has received, and is
responding to, information and document requests by a number of such authorities.
Other matters
We are a defendant in a number of other actions alleging that certain of our practices and actions were improper. The lawsuits involve a variety of
complex issues and the timing of their resolution is varied and uncertain. Management believes that we will ultimately be successful in resolving
these lawsuits, to the extent that we are able to assess them, without material financial impact to the Bank. This is, however, an area of
significant judgment and the potential liability resulting from these lawsuits could be material to our results of operations in any particular
period.
Various other legal proceedings are pending that challenge certain of our other practices or actions. While this is an area of significant
judgment and some matters are currently inestimable, we consider that the aggregate liability, to the extent that we are able to assess it,
resulting from these other proceedings will not be material to our consolidated financial position or results of operations.
Note 28 Contractual repricing and maturity schedule
The following table details our exposure to interest rate risk. The carrying amounts of financial assets and financial liabilities are reported below
based on the earlier of their contractual repricing date or maturity date.
The following table does not incorporate management’s expectation of future events where expected repricing or maturity dates differ
significantly from the contractual dates. We incorporate these assumptions in the management of interest rate risk exposure. These assumptions
include expected repricing of trading instruments and certain loans and deposits. Taking into account these assumptions on the consolidated
contractual repricing and maturity schedule at October 31, 2016, would result in a change in the under-one-year gap from $26.2 billion to
$99.0 billion.
(Millions of Canadian dollars)
Assets
Cash and deposits with banks
Trading securities
Available-for-sale securities
Assets purchased under reverse
repurchase agreements and securities
borrowed
Loans (net of allowance for loan losses)
Derivatives
Segregated fund net assets
Other assets
Liabilities
Deposits
Obligations related to assets sold under
repurchase agreements and securities
loaned
Obligations related to securities sold
short
Derivatives
Segregated fund net liabilities
Other liabilities
Subordinated debentures
Non-controlling interests
Shareholders’ equity
Total gap
Canadian dollar
Foreign currency
Total gap
Immediately
interest
rate-sensitive
Under
3 months
3 to 6
months
6 to 12
months
1 to 5
years
Over
5 years
Non-rate-
sensitive
As at October 31, 2016
$
14,036 $ 24,531 $
26 $
62 $
385 $
24 $
3,716 $
27
–
32,091
23,493
6,689
1,904
12,455
2,723
18,194
28,157
36,096
26,898
45,740
1,626
1,533
171,994
118,944
–
2
160,416
90,913
–
–
23,265
17,233
12,811
–
–
–
6,115
36,741
–
–
–
–
185,674
–
–
–
–
16,015
–
–
97
1,005
7,456
–
981
50,190
Total
42,780
151,292
84,801
186,302
521,604
118,944
981
73,554
$
$
$
$
$
$
306,536 $ 354,709 $ 38,663 $ 58,096 $ 232,410 $ 79,130 $ 110,714 $1,180,258
291,941 $ 134,929 $ 24,315 $ 40,176 $ 120,821 $ 20,982 $ 124,425 $ 757,589
2,603
99,332
806
–
–
–
700
103,441
2
116,550
–
43
–
–
–
2,144
–
–
14,540
224
–
200
1,491
–
–
26
233
–
800
216
–
–
57
131
–
1,050
8,877
–
–
1,852
6,738
511
4,524
14,189
–
–
7,194
2,436
–
–
23,450
–
981
46,242
–
84
64,443
50,369
116,550
981
69,954
9,762
595
71,017
411,139 $ 251,369 $ 27,671 $ 41,630 $ 143,323 $ 44,801 $ 260,325 $1,180,258
(104,603) $ 103,340 $ 10,992 $ 16,466 $ 89,087 $ 34,329 $ (149,611) $
(74,619) $ 20,796 $ 1,841 $ 18,661 $ 115,791 $ (1,725) $ (80,745) $
(2,195)
(29,984)
(68,866)
(26,704)
82,544
36,054
9,151
(104,603) $ 103,340 $ 10,992 $ 16,466 $ 89,087 $ 34,329 $ (149,611) $
–
–
–
–
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
195
Note 29 Related party transactions
Related parties
Related parties include associated companies, post-employment benefit plans for the benefit of our employees, key management personnel
(KMP), the Board of Directors (Directors), close family members of KMP and Directors, and entities which are, directly or indirectly, controlled by,
jointly controlled by or significantly influenced by KMP, Directors or their close family members.
Key management personnel and Directors
KMP are defined as those persons having authority and responsibility for planning, directing and controlling our activities, directly or indirectly.
They include the senior members of our organization called the Group Executive. The Group Executive is comprised of the President and Chief
Executive Officer and individuals that report directly to him, including the Chief Administrative Officer and Chief Financial Officer, Chief Human
Resources Officer, Group Chief Risk Officer, and Group Heads for Wealth Management and Insurance, Capital Markets and Investor & Treasury
Services, Technology & Operations, and Personal & Commercial Banking. The Directors do not plan, direct, or control the activities of the entity;
they oversee the management of the business and provide stewardship.
Compensation of key management personnel and Directors
(Millions of Canadian dollars)
Salaries and other short-term employee benefits (2)
Post-employment benefits (3)
Share-based payments
For the year ended
October 31
2016
26
2
41
$
October 31
2015
21
2
37
$
October 31
2014 (1)
22
7
26
$
$
69
$
60
$
55
(1)
(2)
(3)
During the year ended October 31, 2014, certain executives who were members of the Bank’s Group Executive as at October 31, 2013 left the Bank and therefore, were no longer part of KMP.
Compensation for the year ended October 31, 2014, attributable to the former executives, including benefits and share-based payments relating to awards granted in prior years was
$60 million.
Includes the portion of the annual variable short-term incentive bonus that certain executives elected to receive in the form of DSUs. Refer to Note 22 for further details. Directors receive
retainers but do not receive salaries and other short-term employee benefits.
Directors do not receive post-employment benefits.
Stock options, stock awards and shares held by key management personnel, Directors and their close family members
(Millions of Canadian dollars, except number of units)
Stock options (1)
Other non-option stock based awards (1)
RBC common and preferred shares
(1)
Directors do not receive stock options or any other non-option stock based awards.
As at
October 31, 2016
October 31, 2015
No. of
units held
2,110,038
1,703,221
789,295
4,602,554
Value
$ 42
143
66
$ 251
No. of
units held
2,494,007
1,485,976
738,777
4,718,760
Value
$ 44
111
55
$ 210
Transactions, arrangements and agreements involving key management personnel, Directors and their close family members
In the normal course of business, we provide certain banking services to KMP, Directors, and their close family members. These transactions
were made on substantially the same terms, including interest rates and security, as for comparable transactions with persons of a similar
standing and did not involve more than the normal risk of repayment or present other unfavourable features.
As at October 31, 2016, total loans to KMP, Directors and their close family members were $10 million (October 31, 2015 – $7 million). We
have no allowance or provision for credit losses relating to these loans as at and for the year ended October 31, 2016. No guarantees, pledges or
commitments have been given to KMP, Directors or their close family members.
Joint ventures and associates
In the normal course of business, we provide certain banking and financial services to our joint ventures and associates, including loans, interest
and non-interest bearing deposits. These transactions meet the definition of related party transactions and were made on substantially the same
terms as for comparable transactions with third-party counterparties.
As at October 31, 2016, loans to joint ventures and associates were $71 million (October 31, 2015 – $65 million) and deposits from joint
ventures and associates were $25 million (October 31, 2015 – $27 million). We have no allowance or provision for credit losses relating to loans
to joint ventures and associates as at and for the year ended October 31, 2016. No guarantees have been given to joint ventures or associates.
Other transactions, arrangements or agreements involving joint ventures and associates
(Millions of Canadian dollars)
Commitments and other contingencies
Other fees received for services rendered
Other fees paid for services received
As at or for the year ended
October 31
2016
554
40
189
$
October 31
2015
365
41
182
$
October 31
2014
315
45
185
$
196
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Note 30 Results by business segment
Composition of business segments
For management purposes, based on the products and services offered, we are organized into five business segments: Personal & Commercial
Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets.
Personal & Commercial Banking is comprised of our personal and business banking operations, and our auto financing and retail
investment businesses including our online discount brokerage channel and operates through four business lines: Personal Financial Services,
Business Financial Services, Cards and Payment Solutions (Canadian Banking), and Caribbean & U.S. Banking. In Canada, we provide a broad
suite of financial products and services through our extensive branch, automated teller machines, online, mobile and telephone banking
networks, as well as through a large number of proprietary sales professionals. In the Caribbean, we offer a broad range of financial products and
services to individuals, business clients and public institutions in targeted markets. In the U.S., we serve the cross-border banking needs of
Canadian clients within the U.S. through online channels.
Wealth Management is comprised of Canadian Wealth Management, U.S. Wealth Management (including City National), International
Wealth Management and Global Asset Management. We serve affluent, high net worth and ultra-high net worth clients in Canada, the U.S., the
U.K., Europe, and Asia with a comprehensive suite of investment, trust, banking, credit and other wealth management solutions. We also provide
asset management products and services directly to institutional and individual clients as well as through RBC distribution channels and third-
party distributors.
Insurance is comprised of our insurance operations in Canada and globally and operates under two business lines: Canadian Insurance and
International Insurance, providing a wide range of life, health, home, auto, travel, wealth, group and reinsurance products and solutions. In
Canada, we offer our products and services through our proprietary distribution channels, comprised of the field sales force which includes retail
insurance branches, our field sales representatives, advice centers and online, as well as through independent insurance advisors and affinity
relationships. Outside Canada, we operate in reinsurance markets globally offering life, accident and annuity reinsurance products.
Investor & Treasury Services is a specialist provider of asset services, custody, payments and treasury services for financial and other
institutional investors worldwide. We also provide Canadian dollar cash management, correspondent banking and trade finance for financial
institutions globally and short-term funding and liquidity management for RBC.
Capital Markets provides public and private companies, institutional investors, governments and central banks globally with a wide range of
capital markets products and services across our two main business lines: Corporate and Investment Banking and Global Markets. In North
America, we offer a full suite of products and services which include corporate and investment banking, equity and debt origination and
distribution, and structuring and trading. Outside North America, we have a select presence in the U.K., Europe, and Other International, where
we offer a diversified set of capabilities in our key sectors of expertise such as energy, mining and infrastructure and we have a growing presence
in industrial, consumer and health care in Europe.
All other enterprise level activities that are not allocated to these five business segments, such as enterprise funding, securitizations, net
charges associated with unattributed capital, and consolidation adjustments, including the elimination of the Taxable equivalent basis (Teb)
gross-up amounts, are included in Corporate Support. Teb adjustments gross up income from certain tax-advantaged sources from Canadian
taxable corporate dividends and U.S. tax credit investments recorded in Capital Markets to their effective tax equivalent value with the
corresponding offset recorded in the provision for income taxes. Management believes that these Teb adjustments are necessary for Capital
Markets to reflect how it is managed and enhances the comparability of revenue across our taxable and tax-advantaged sources. Our use of Teb
adjustments may not be comparable to similarly adjusted amounts at other financial institutions. The Teb adjustment for the year ended
October 31, 2016 was $736 million (October 31, 2015 – $570 million, October 31, 2014 – $492 million).
Geographic segments
For geographic reporting, our segments are grouped into Canada, United States and Other International. Transactions are primarily recorded in
the location that best reflects the risk due to negative changes in economic conditions and prospects for growth due to positive economic
changes. This location frequently corresponds with the location of the legal entity through which the business is conducted and the location of
our clients. Transactions are recorded in the local currency and are subject to foreign exchange rate fluctuations with respect to the movement in
the Canadian dollar.
Management reporting framework
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-alone business
and reflects the way our business segments are managed. This approach is intended to ensure that our business segments’ results reflect all
relevant revenue and expenses associated with the conduct of their businesses. Management regularly monitors these segments’ results for the
purpose of making decisions about resource allocation and performance assessment. These items do not impact our consolidated results.
The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the enterprise level.
For other costs not directly attributable to one of our business segments, we use a management reporting framework that uses assumptions,
estimates and methodologies for allocating overhead costs and indirect expenses to our business segments and that assists in the attribution of
capital and the transfer pricing of funds to our business segments in a manner that fairly and consistently measures and aligns the economic
costs with the underlying benefits and risks of that specific business segment. Activities and business conducted between our business
segments are generally at market rates. All other enterprise level activities that are not allocated to our five business segments are reported
under Corporate Support.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
197
Note 30 Results by business segment (continued)
Our assumptions and methodologies used in our management reporting framework are periodically reviewed by management to ensure that
they remain valid. The capital attribution methodologies involve a number of assumptions and estimates that are revised periodically.
Personal &
Commercial
Banking
$ 10,337 $
4,499
Wealth
Management (1)
(Millions of Canadian dollars)
Net interest income (3) (4)
Non-interest income
Total revenue
Provision for credit losses
Insurance policyholder benefits,
14,836
1,122
claims and acquisition
expense
Non-interest expense
Net income (loss) before
income taxes
Income taxes (recoveries)
–
6,757
6,957
1,773
For the year ended October 31, 2016
Investor &
Treasury
Services
Insurance
Capital
Markets (2)
Corporate
Support (2)
Total
Canada
1,955 $
6,834
8,789
48
–
6,801
1,940
467
– $
825 $
5,151
5,151
1
3,424
622
1,104
204
1,446
2,271
(3)
–
1,460
814
201
3,804 $
4,146
(390) $
(202)
16,531 $ 11,685 $
21,874
12,054
7,950
327
–
4,466
3,157
887
(592)
51
–
30
(673)
(691)
38,405
1,546
23,739
1,231
3,424
20,136
13,299
2,841
2,304
10,229
9,975
2,158
8,233
254
–
6,151
1,828
397
United
States
3,241 $
4,992
Other
International
1,605
4,828
Net income
$
5,184 $
1,473 $
900 $
613 $
2,270 $
18 $
10,458 $
7,817 $
1,431 $
Non-interest expense includes:
Depreciation and
amortization
Impairment of other
intangibles
Restructuring provisions
$
338 $
420 $
17 $
52 $
22 $
694 $
1,543 $
1,103 $
302 $
138
–
–
–
10
–
–
–
–
–
–
3
–
3
10
3
1
–
4
–
5
Total assets
$ 411,251 $
91,901 $ 14,245 $ 139,701 $ 492,899 $ 30,261 $ 1,180,258 $ 614,834 $ 328,088 $ 237,336
Total assets include:
Additions to premises and
equipment and intangibles $
302 $
2,532 $
27 $
63 $
278 $
386 $
3,588 $
849 $
2,585 $
154
Total liabilities
$ 411,320 $
91,908 $ 14,281 $ 139,608 $ 493,044 $ (41,515) $ 1,108,646 $ 543,072 $ 328,205 $ 237,369
(Millions of Canadian dollars)
Net interest income (3) (4)
Non-interest income
Personal &
Commercial
Banking
$ 10,004 $
4,309
Total revenue
Provision for credit losses
Insurance policyholder benefits,
14,313
984
claims and acquisition
expense
Non-interest expense
Net income (loss) before
income taxes
Income taxes (recoveries)
–
6,611
6,718
1,712
For the year ended October 31, 2015
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets (2)
Corporate
Support (2)
493 $
– $
818 $
6,282
6,775
46
–
5,292
1,437
396
4,436
4,436
–
2,963
613
860
154
1,220
2,038
(1)
–
1,301
738
182
3,970 $
4,093
8,063
71
–
4,696
3,296
977
(514) $
210
(304)
(3)
–
125
(426)
(824)
Total
Canada
14,771 $ 11,538 $
20,550
10,889
35,321
1,097
22,427
933
2,963
18,638
12,623
2,597
1,976
10,139
9,379
1,727
6,596
98
–
4,762
1,736
649
United
States
1,977 $
4,619
Other
International
1,256
5,042
Net income
$
5,006 $
1,041 $
706 $
556 $
2,319 $
398 $
10,026 $
7,652 $
1,087 $
Non-interest expense includes:
Depreciation and
amortization
Impairment of other
intangibles
Restructuring provisions
$
345 $
157 $
16 $
54 $
28 $
639 $
1,239 $
1,046 $
40 $
153
1
–
4
83
–
–
–
–
–
–
2
–
7
83
3
25
1
45
3
13
Total assets
$ 397,132 $
26,891 $ 14,139 $ 132,294 $ 478,289 $ 25,463 $ 1,074,208 $ 584,419 $ 252,845 $ 236,944
Total assets include:
Additions to premises and
equipment and intangibles $
327 $
122 $
23 $
46 $
256 $
644 $
1,418 $
1,071 $
206 $
141
Total liabilities
$ 397,157 $
26,906 $ 14,160 $ 132,275 $ 478,291 $ (38,525) $ 1,010,264 $ 520,420 $ 252,970 $ 236,874
198
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
6,433
61
1,120
3,756
1,496
286
1,210
6,298
66
987
3,737
1,508
221
1,287
(Millions of Canadian dollars)
Net interest income (3) (4)
Non-interest income
Total revenue
Provision for credit losses
Insurance policyholder benefits,
claims and acquisition
expense
Non-interest expense
Net income (loss) before
income taxes
Income taxes (recoveries)
Net income
Personal &
Commercial
Banking
$
9,743 $
3,987
13,730
1,103
–
6,563
For the year ended October 31, 2014
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets (2)
Corporate
Support (2)
469 $
– $
732 $
5,844
6,313
19
4,964
4,964
–
–
4,800
3,573
579
1,152
1,884
–
–
1,286
–
4,344
3,485 $
3,881
7,366
44
(313) $
164
(149)
(2)
United
States
1,697 $
4,257
Other
International
1,291
5,247
Total
Canada
14,116 $ 11,128 $
19,992
10,488
34,108
1,164
21,616
922
3,573
17,661
2,188
9,650
5,954
52
1
4,199
6,064
1,589
4,475 $
$
1,494
812
598
2,978
411
1,083 $
31
781 $
157
441 $
923
2,055 $
11,710
8,856
1,702
2,706
9,004 $
1,983
6,873 $
660
1,042 $
6,538
190
1,384
3,812
1,152
63
1,089
–
89
(236)
(405)
169 $
Non-interest expense includes:
Depreciation and amortization $
Impairment of other
intangibles
Restructuring provisions
338 $
147 $
16 $
58 $
28 $
578 $
1,165 $
971 $
39 $
155
–
20
6
16
–
–
–
–
2
–
–
–
8
36
2
–
6
16
–
20
Total assets
$ 376,188 $
27,084 $ 12,930 $ 103,822 $ 400,314 $ 20,212 $
940,550 $ 496,120 $ 194,879 $ 249,551
Total assets include:
Additions to premises and
equipment and intangibles $
318 $
105 $
16 $
30 $
147 $
563 $
1,179 $
924 $
154 $
101
Total liabilities
$ 376,154 $
27,022 $ 12,988 $ 103,798 $ 400,114 $ (34,029) $
886,047 $ 441,607 $ 194,946 $ 249,494
(1)
(2)
(3)
(4)
In the first quarter of 2016, we changed the organizational structure of our Wealth Management operations resulting in a new operating segment U.S. Wealth Management (including City
National) representing our legacy U.S. Wealth Management operations and City National. This new operating segment is combined with our other Wealth Management operations as a single
reportable segment because they have comparable products, regulatory frameworks, processes, customers and distribution channels, and show similar economic characteristics (such as
pre-tax margin).
Taxable equivalent basis.
Inter-segment revenue and share of profits in joint ventures and associates are not material.
Interest revenue is reported net of interest expense as management relies primarily on net interest income as a performance measure.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
199
Note 31 Nature and extent of risks arising from financial instruments
We are exposed to credit, market and liquidity and funding risks as a result of holding financial instruments. Our risk measurement and
objectives, policies and methodologies for managing these risks are disclosed in the shaded text along with those tables specifically marked
with an asterisk (*) on pages 54 to 82 of the Management’s Discussion and Analysis. These shaded text and tables are an integral part of these
Consolidated Financial Statements.
Concentrations of credit risk exist if a number of our counterparties are engaged in similar activities, are located in the same geographic
region or have comparable economic characteristics such that their ability to meet contractual obligations would be similarly affected by
changes in economic, political or other conditions.
Concentrations of credit risk indicate the relative sensitivity of our performance to developments affecting a particular industry or
geographic location. The amounts of credit exposure associated with certain of our on- and off-balance sheet financial instruments are
summarized in the following table.
(Millions of Canadian dollars, except percentage amounts)
On-balance sheet assets other than
derivatives (1)
Derivatives before master netting
agreements (2) (3)
Off-balance sheet credit instruments (4)
Committed and uncommitted (5)
Other
(Millions of Canadian dollars, except percentage amounts)
On-balance sheet assets other than
derivatives (1)
Derivatives before master netting
agreements (2) (3)
Off-balance sheet credit instruments (4)
Committed and uncommitted (5)
Other
Canada
%
United
States
%
Europe
Other
International
%
%
Total
As at October 31, 2016
$ 485,575
67% $ 141,703
20% $ 55,610
8% $
40,096
5% $ 722,984
19,393
9
23,091
11
167,084
76
7,950
4
217,518
$ 504,968
54% $ 164,794
17% $ 222,694
24% $
48,046
5% $ 940,502
$ 254,680
62,725
57% $ 151,028
18,236
54
33% $ 32,983
34,032
16
7% $
29
$ 317,405
56% $ 169,264
30% $ 67,015
12% $
13,425
1,017
14,442
3% $ 452,116
116,010
1
2% $ 568,126
Canada
%
United
States
%
Europe
Other
International
%
%
Total
As at October 31, 2015
$ 453,650
68% $ 110,341
17% $ 56,984
9% $
41,453
6% $ 662,428
20,911
11
22,877
12
143,414
74
7,254
3
194,456
$ 474,561
55% $ 133,218
16% $ 200,398
23% $
48,707
6% $ 856,884
$ 239,351
49,740
57% $ 137,204
17,520
51
33% $ 32,638
29,213
18
8% $
30
$ 289,091
56% $ 154,724
30% $ 61,851
12% $
10,312
1,523
11,835
2% $ 419,505
97,996
1
2% $ 517,501
(1)
(2)
(3)
(4)
(5)
Includes assets purchased under reverse repurchase agreements and securities borrowed, loans and customers’ liability under acceptances. The largest concentrations in Canada are Ontario
at 49% (October 31, 2015 – 47%), the Prairies at 20% (October 31, 2015 – 21%), British Columbia and the territories at 15% (October 31, 2015 – 16%) and Quebec at 11% (October 31,
2015 – 11%). No industry accounts for more than 36% (October 31, 2015 – 35%) of total on-balance sheet credit instruments.
A further breakdown of our derivative exposures by risk rating and counterparty type is provided in Note 8.
Excludes credit derivatives classified as other than trading.
Balances presented are contractual amounts representing our maximum exposure to credit risk.
Represents our maximum exposure to credit risk. Retail and wholesale commitments respectively comprise 36% and 64% of our total commitments (October 31, 2015 – 36% and 64%). The
largest concentrations in the wholesale portfolio relate to Financing products at 14% (October 31, 2015 – 15%), Non-bank financial services at 9% (October 31, 2015 – 10%), Real estate &
related at 9% (October 31, 2015 – 8%), Technology & media at 8% (October 31, 2015 – 8%), and Utilities at 8% (October 31, 2015 – 9%).
200
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Note 32 Capital management
Regulatory capital and capital ratios
OSFI formally establishes risk-based capital and leverage targets for deposit-taking institutions in Canada. We are required to calculate our
capital ratios using the Basel III framework. Under Basel III, regulatory capital includes Common Equity Tier 1 (CET1), Tier 1 and Tier 2 capital.
CET1 capital mainly consists of common shares, retained earnings and other components of equity. Regulatory adjustments under Basel III
include deductions of goodwill and other intangibles, certain deferred tax assets, defined benefit pension fund assets, investments in banking,
financial and insurance entities, and the shortfall of provisions to expected losses. Tier 1 capital comprises predominantly CET1, with additional
items that consist of capital instruments such as certain preferred shares, and certain non-controlling interests in subsidiaries. Tier 2 capital
includes subordinated debentures that meet certain criteria and certain loan loss allowances. Total capital is the sum of CET1, additional Tier 1
capital and Tier 2 capital.
Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by risk-weighted assets. The leverage ratio is calculated by
dividing Tier 1 capital by an exposure measure. The exposure measure consists of total assets (excluding items deducted from Tier 1 capital) and
certain off-balance sheet items converted into credit exposure equivalents. Adjustments are also made to derivatives and secured financing
transactions to reflect credit and other risks.
During 2016, we complied with all capital and leverage requirements imposed by OSFI.
(Millions of Canadian dollars, except Capital ratios and leverage ratios)
Capital (1)
Common Equity Tier 1 capital
Tier 1 capital
Total capital
Risk-weighted assets used in calculation of capital ratios (1) (2)
Common Equity Tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
Total capital risk-weighted assets (1)
Credit risk
Market risk
Operational risk
Capital ratios and leverage ratios (1)
Common Equity Tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Leverage ratio exposure (billions)
As at
October 31
2016
October 31
2015
$
48,181
55,270
64,950
$ 43,715
50,541
58,004
447,436
448,662
449,712
369,751
23,964
55,997
$ 449,712
10.8%
12.3%
14.4%
4.4%
$ 1,265.1
411,756
412,941
413,957
323,870
39,786
50,301
$ 413,957
10.6%
12.2%
14.0%
4.3%
$ 1,170.2
(1)
(2)
Capital, risk-weighted assets and capital ratios are calculated using OSFI Capital Adequacy Requirements. Leverage ratio is calculated using OSFI Leverage Requirements.
Effective the third quarter of 2014, the credit valuation adjustment to our risk-weighted asset calculation implemented in the first quarter of 2014 must reflect different percentages for each
tier of capital. This change reflects a phase-in of credit valuation adjustments ending in the fourth quarter of 2018. During this phase-in period, risk-weighted assets for Common Equity Tier 1,
Tier 1 and Total capital ratios will be subject to different annual credit valuation adjustment percentages.
Note 33 Offsetting financial assets and financial liabilities
Offsetting within our Consolidated Balance Sheets may be achieved where financial assets and liabilities are subject to master netting
arrangements that provide the currently enforceable right of offset and where there is an intention to settle on a net basis, or realize the assets
and liabilities simultaneously. For derivative contracts and repurchase and reverse repurchase arrangements, this is generally achieved when
there is a market mechanism for settlement (e.g., central counterparty exchange, or clearing house) which provides daily net settlement of cash
flows arising from these contracts. Margin receivables and margin payables are generally offset as they settle simultaneously through a market
settlement mechanism. These are generally presented in Other assets or Other liabilities.
Amounts that do not qualify for offsetting include master netting arrangements that only permit outstanding transactions with the same
counterparty to be offset in an event of default or occurrence of other predetermined events. Such master netting arrangements include the ISDA
Master Agreement or derivative exchange or clearing counterparty agreements for derivative contracts, global master repurchase agreement and
global master securities lending agreements for repurchase, reverse repurchase and other similar secured lending and borrowing arrangements.
The amount of financial collateral received or pledged subject to master netting arrangements or similar agreements but not qualified for
offsetting refers to the collateral received or pledged to cover the net exposure between counterparties by enabling the collateral to be realized in
an event of default or the occurrence of other predetermined events. Certain amounts of collateral are restricted from being sold or re-pledged
unless there is an event of default or the occurrence of other predetermined events.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
201
Note 33 Offsetting financial assets and financial liabilities (continued)
The tables below provide the amount of financial instruments that have been offset on the Consolidated Balance Sheets and the amounts
that do not qualify for offsetting but are subject to enforceable master netting arrangements or similar agreements. The amounts presented are
not intended to represent our actual exposure to credit risk.
Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2016
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Derivative assets (3)
Other financial assets
Gross amounts
of financial
assets before
balance sheet
offsetting
Amounts of
financial
liabilities
offset on the
balance sheet
Net amount of
financial assets
presented on the
balance sheet
Impact of
master
netting
agreements
Financial
collateral
received (2)
Net amount
Amounts not
subject to
enforceable
netting
arrangements
Total amount
recognized
on the
balance sheet
$
$
199,586
208,936
1,244
409,766
$
$
14,290
97,142
803
112,235
$
$
185,296
111,794
441
297,531
$
$
422
79,296
–
79,718
$ 184,359
17,249
46
$ 201,654
$
$
515
15,249
395
16,159
$
$
1,006
7,150
91
8,247
$
$
186,302
118,944
532
305,778
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2015
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Derivative assets (3)
Other financial assets
Gross amounts
of financial
assets before
balance sheet
offsetting
Amounts of
financial
liabilities
offset on the
balance sheet
Net amount of
financial assets
presented on the
balance sheet
Impact of
master
netting
agreements
Financial
collateral
received (2)
Net amount
Amounts not
subject to
enforceable
netting
arrangements
Total amount
recognized
on the
balance sheet
$
$
183,493
185,654
1,560
370,707
$
$
9,846
87,527
1,283
98,656
$
$
173,647
98,127
277
272,051
$
$
30
71,833
–
71,863
$ 172,910
14,956
52
$ 187,918
$
$
707
11,338
225
12,270
$
$
1,076
7,499
78
8,653
$
$
174,723
105,626
355
280,704
(1)
(2)
(3)
Financial collateral is reflected at fair value. The amount of financial instruments and financial collateral disclosed is limited to the net balance sheet exposure, and any over-collateralization
is excluded from the table.
Includes cash collateral of $11 billion (October 31, 2015 – $11 billion) and non-cash collateral of $191 billion (October 31, 2015 – $177 billion).
Includes cash margin of $2.2 billion (October 31, 2015 – $1.5 billion) which offset against the derivative balance on the balance sheet.
Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2016
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
Obligations related to assets sold
under repurchase agreements and
securities loaned
Derivative liabilities (3)
Other financial liabilities
Gross amounts
of financial
liabilities
before balance
sheet offsetting
Amounts of
financial
assets offset
on the
balance sheet
Net amount of
financial liabilities
presented on the
balance sheet
Impact of
master
netting
agreements
Financial
collateral
pledged (2)
Net amount
Amounts not
subject to
enforceable
netting
arrangements
Total amount
recognized
on the
balance sheet
$
$
117,031
203,874
3,271
324,176
$
$
14,290
96,231
2,231
112,752
$
$
102,741
107,643
1,040
211,424
$
$
422
79,296
–
79,718
$ 102,029
15,993
514
$ 118,536
$
$
290
12,354
526
13,170
$
$
700
8,907
15
9,622
$
$
103,441
116,550
1,055
221,046
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2015
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
Obligations related to assets sold
under repurchase agreements and
securities loaned
Derivative liabilities (3)
Other financial liabilities
Gross amounts
of financial
liabilities
before balance
sheet offsetting
Amounts of
financial
assets offset
on the
balance sheet
Net amount of
financial liabilities
presented on the
balance sheet
Impact of
master
netting
agreements
Financial
collateral
pledged (2)
Net amount
Amounts not
subject to
enforceable
netting
arrangements
Total amount
recognized
on the
balance sheet
$
$
92,564
186,400
2,348
281,312
$
$
9,846
87,960
1,517
99,323
$
$
82,718
98,440
831
181,989
$
$
30
71,833
–
71,863
$ 82,476
15,060
551
$ 98,087
$
$
212
11,547
280
12,039
$
$
570
9,420
3
9,993
$
$
83,288
107,860
834
191,982
(1)
(2)
(3)
Financial collateral is reflected at fair value. The amount of financial instruments and financial collateral disclosed is limited to the net balance sheet exposure, and any over-collateralization
is excluded from the table.
Includes cash collateral of $14 billion (October 31, 2015 – $13 billion) and non-cash collateral of $105 billion (October 31, 2015 – $85 billion).
Includes cash margin of $0.8 billion (October 31, 2015 – $1.3 billion) which offset against the derivative balance on the balance sheet.
202
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Note 34
Recovery and settlement of on-balance sheet assets and liabilities
The table below presents an analysis of assets and liabilities recorded on our Consolidated Balance Sheets by amounts to be recovered or
settled within one year and after one year, as at the balance sheet date, based on contractual maturities and certain other assumptions outlined
in the footnotes below. As warranted, we manage the liquidity risk of various products based on historical behavioural patterns that are often not
aligned with contractual maturities. Amounts to be recovered or settled within one year, as presented below, may not be reflective of
management’s long-term view of the liquidity profile of certain balance sheet categories.
(Millions of Canadian dollars)
Assets
Cash and due from banks (1)
Interest-bearing deposits with banks
Securities
Trading (2)
Available-for-sale
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans
Retail
Wholesale
Allowance for loan losses
Segregated fund net assets
Other
Customers’ liability under acceptances
Derivatives (2)
Premises and equipment, net
Goodwill
Other intangibles
Other assets
Liabilities
Deposits (3)
Segregated fund net liabilities
Other
Within one
year
October 31, 2016
After one
year
Total
Within one
year
October 31, 2015
After one
year
Total
As at
$ 12,049
27,850
$
2,880
1
$
14,929
27,851
$ 10,466
22,690
$
1,986
–
$
12,452
22,690
142,045
12,153
9,247
72,648
151,292
84,801
149,150
12,338
9,553
44,467
158,703
56,805
182,618
3,684
186,302
172,122
2,601
174,723
81,683
34,887
287,787
119,482
–
981
12,841
116,533
–
–
–
33,754
2
2,411
2,836
11,156
4,648
8,317
369,470
154,369
(2,235)
981
12,843
118,944
2,836
11,156
4,648
42,071
92,012
25,842
256,171
100,227
–
13,446
103,618
–
–
–
35,350
830
7
2,008
2,728
9,289
2,814
6,522
348,183
126,069
(2,029)
830
13,453
105,626
2,728
9,289
2,814
41,872
$ 656,413
$ 526,080
$ 1,180,258
$ 637,034
$ 439,203
$ 1,074,208
$ 579,571
–
$ 178,018
981
$
757,589
981
$ 528,109
–
$ 169,118
830
$
697,227
830
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Derivatives (2)
Insurance claims and policy benefit liabilities
Other liabilities
Subordinated debentures
12,841
41,927
103,412
114,321
118
33,314
–
2
8,442
29
2,229
9,046
14,633
9,762
12,843
50,369
103,441
116,550
9,164
47,947
9,762
13,446
41,156
82,498
105,271
97
28,563
1,500
7
6,502
790
2,589
9,013
14,913
5,862
13,453
47,658
83,288
107,860
9,110
43,476
7,362
$ 885,504
$ 223,142
$ 1,108,646
$ 800,640
$ 209,624
$ 1,010,264
(1)
(2)
(3)
Cash and due from banks are assumed to be recovered within one year, except for cash balances not available for use by the Bank.
Trading securities classified as at FVTPL and trading derivatives not designated in hedging relationships are presented as within one year as this best represents in most instances the short-
term nature of our trading activities. Non-trading derivatives designated in hedging relationships are presented according to the recovery or settlement of the related hedged item.
Demand deposits of $358 billion (October 31, 2015 – $312 billion) are presented as within one year due to their being repayable on demand or at short notice on a contractual basis. In
practice, these deposits relate to a broad range of individuals and customer-types which form a stable base for our operations and liquidity needs.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
203
Note 35 Parent company information
The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an equity
accounted basis.
Condensed Balance Sheets
(Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Investments in bank subsidiaries and associated corporations (1)
Investments in other subsidiaries and associated corporations
Assets purchased under reverse repurchase agreements and securities borrowed
Loans, net of allowance for loan losses
Net balances due from bank subsidiaries (1)
Other assets
Liabilities and shareholders’ equity
Deposits
Net balances due to other subsidiaries
Other liabilities
Subordinated debentures
Shareholders’ equity
(1)
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Condensed Statements of Income and Comprehensive Income
(Millions of Canadian dollars)
Interest income (1)
Interest expense
Net interest income
Non-interest income (2)
Total revenue
Provision for credit losses
Non-interest expense
Income before income taxes
Income taxes
Net income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
Other comprehensive income, net of taxes
Total comprehensive income
As at
October 31
2016
October 31
2015
$
3,164
16,126
132,100
30,248
61,705
25,129
458,675
5,437
162,790
$
3,123
15,838
130,326
22,907
60,378
23,418
444,169
19,118
147,330
$ 895,374
$ 866,607
$ 573,933
55,473
185,583
$ 566,903
66,879
163,379
814,989
797,161
9,368
71,017
7,300
62,146
$ 895,374
$ 866,607
For the year ended
October 31
2016
$ 17,542
5,486
October 31
2015
$ 18,287
5,785
October 31
2014
$ 18,415
5,882
12,056
3,896
15,952
1,456
8,014
6,482
1,544
4,938
5,520
10,458
(1,097)
12,502
5,474
17,976
1,027
8,051
8,898
1,939
6,959
3,067
10,026
3,153
12,533
6,007
18,540
1,010
7,801
9,729
2,283
7,446
1,558
9,004
915
$
9,361
$ 13,179
$
9,919
(1)
(2)
Includes dividend income from investments in subsidiaries and associated corporations of $23 million (2015 – $120 million; 2014 – $10 million).
Includes share of profit from associated corporations of $19 million (2015 – profit of $15 million; 2014 – profit of $7 million).
204
Royal Bank of Canada: Annual Report 2016
Consolidated Financial Statements
Condensed Statements of Cash Flows
(Millions of Canadian dollars)
Cash flows from operating activities
Net income
Adjustments to determine net cash from operating activities:
Change in undistributed earnings of subsidiaries
Change in deposits, net of securitizations
Change in loans, net of securitizations
Change in trading securities
Change in obligations related to assets sold under repurchase agreements and securities
loaned
Change in assets purchased under reverse repurchase agreements and securities borrowed
Change in obligations related to securities sold short
Other operating activities, net
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
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 other intangibles
Change in cash invested in subsidiaries
Change in net funding provided to subsidiaries
Proceeds from sale of associated corporations
Net cash (used in) from investing activities
Cash flows from financing activities
Issue of subordinated debentures
Repayment of subordinated debentures
Issue of preferred shares
Issuance costs
Redemption of preferred shares
Issue of common shares
Common shares purchased for cancellation
Preferred shares purchased for cancellation
Dividends paid
Net cash used in financing activities
Net change in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
Supplemental disclosure of cash flow information
Amount of interest paid in year
Amount of interest received in year
Amount of dividends received in year
Amount of income taxes paid in year
Note 36 Subsequent events
For the year ended
October 31
2016
October 31
2015
October 31
2014
$ 10,458
$ 10,026
$
9,004
(5,520)
7,030
(14,488)
9,004
8,511
(1,711)
3,145
(2,736)
13,693
(288)
2,868
20,802
(33,668)
(750)
(3,140)
2,275
–
(11,901)
3,606
(1,500)
1,475
(16)
–
307
(362)
(264)
(4,997)
(1,751)
41
3,123
3,164
5,331
17,411
30
736
$
$
(3,067)
70,802
(33,904)
(10,663)
2,687
(6,343)
(1,244)
(7,845)
(1,558)
41,428
(22,865)
(4,193)
(2,712)
(2,497)
(1,305)
182
20,449
15,484
(10,050)
620
25,207
(36,408)
(937)
(978)
2,081
4
(20,461)
1,000
(1,700)
1,350
(21)
(325)
62
–
–
(4,564)
(4,198)
(4,210)
7,333
3,123
5,786
18,001
106
1,323
$
$
(3,081)
1,225
28,875
(36,165)
(803)
(2,409)
4,889
70
(7,399)
2,000
(1,600)
1,000
(14)
(1,525)
150
(113)
–
(4,211)
(4,313)
3,772
3,561
7,333
5,814
18,582
10
1,286
$
$
On November 10, 2016, Moneris Solutions Corporation (Moneris) entered into a definitive agreement to sell its U.S. operations to Vantiv Inc. for
US$425 million. The transaction is expected to close in the first quarter of fiscal 2017 and is subject to customary closing conditions, including
the receipt of regulatory approvals.
We have a 50% interest in Moneris and account for our interest as a joint venture. Our share of the gain to be recognized by Moneris is
currently estimated to be approximately $200 million, based on the exchange rate as at October 31, 2016. This estimate is subject to change.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2016
205
Ten-year statistical review
Condensed Balance Sheet
(Millions of Canadian dollars)
2016
2015
2014
2013
2012
2011
2011
2010
2009
2008
2007
IFRS
CGAAP
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
Other
Total Assets
Liabilities
Deposits
Other
Subordinated debentures
Trust capital securities
Preferred shares liabilities
Non-controlling interest in subsidiaries
$
14,929 $
27,851
236,093
12,452 $ 17,421 $ 15,550 $ 12,428 $ 12,428
6,460
9,039
22,690
167,022
182,710
215,508
8,399
199,148
10,246
161,602
$ 13,247 $
12,181
179,558
186,302
521,604
193,479
174,723
472,223
176,612
135,580
435,229
144,773
117,517
408,850
126,079
112,257
378,241
149,180
84,947
347,530
175,446
84,947
296,284
165,485
8,440 $
13,254
183,519
72,698
273,006
175,289
7,584 $ 11,086 $
8,919
177,298
20,041
171,134
4,226
11,881
178,255
41,580
258,395
161,213
44,818
289,540
187,240
64,313
237,936
103,735
$ 1,180,258 $ 1,074,208 $ 940,550 $ 859,745 $ 823,954 $ 793,833
$ 751,702 $ 726,206 $ 654,989 $ 723,859 $ 600,346
$ 757,589 $ 697,227 $ 614,100 $ 563,079 $ 512,244 $ 479,102
263,625
8,749
894
–
n.a.
305,675
7,362
–
–
n.a.
264,088
7,859
–
–
n.a.
239,763
7,443
–
–
n.a.
259,174
7,615
–
–
n.a.
341,295
9,762
–
–
n.a.
$ 444,181 $ 414,561 $ 378,457 $ 438,575 $ 365,205
201,404
229,699
6,235
6,461
1,400
1,395
300
–
1,483
2,071
256,124
7,749
–
–
1,941
263,030
6,681
727
–
2,256
242,744
8,131
1,400
–
2,371
Total Liabilities
1,108,646
1,010,264
886,047
810,285
779,033
752,370
709,995
687,255
618,083
693,221
576,027
Equity attributable to shareholders
Non-controlling interest
Total equity
71,017
595
71,612
62,146
52,690
47,665
43,160
39,702
41,707
38,951
36,906
30,638
24,319
1,798
1,813
1,795
1,761
1,761
n.a.
n.a.
n.a.
n.a.
n.a.
63,944
54,503
49,460
44,921
41,463
41,707
38,951
36,906
30,638
24,319
Total liabilities and equity
$ 1,180,258 $ 1,074,208 $ 940,550 $ 859,745 $ 823,954 $ 793,833
$ 751,702 $ 726,206 $ 654,989 $ 723,859 $ 600,346
Condensed Income Statement
(Millions of Canadian dollars)
Net interest income
Non-interest income
Total revenue
Provision for credit losses (PCL)
Insurance policyholder benefits, claims and
$
acquisition expense
Non-interest expense (NIE)
Non-controlling interest
Net income from continuing operations
Net loss from discontinued operations
Net income
2016
16,531 $
21,874
38,405
1,546
3,424
20,136
n.a.
10,458
–
10,458
IFRS
CGAAP
2015
2014
2013
2012
2011
2011
2010
2009
2008
14,771 $ 14,116 $ 13,249 $ 12,439 $ 11,357
16,281
17,433
20,550
27,638
30,682
35,321
1,133
1,237
1,097
19,992
34,108
1,164
16,708
29,147
1,299
$ 10,600 $ 10,338 $ 10,705 $
15,744
26,082
1,240
15,736
26,441
2,167
16,830
27,430
975
2,963
18,638
n.a.
10,026
–
10,026
3,573
17,661
n.a.
9,004
–
9,004
2,784
16,214
n.a.
8,342
–
8,342
3,621
14,641
n.a.
7,558
(51)
7,507
3,358
14,167
n.a.
6,970
(526)
6,444
3,360
14,453
104
6,650
(1,798)
4,852
3,546
13,469
99
5,732
(509)
5,223
3,042
13,436
100
5,681
(1,823)
3,858
9,054 $
12,528
21,582
1,595
1,631
12,351
81
4,555
–
4,555
2007
7,700
14,762
22,462
791
2,173
12,473
141
5,492
–
5,492
Other Statistics – reported
(Millions of Canadian dollars, except
percentages and
per share amounts)
PROFITABILITY MEASURES (1)
Earnings per shares (EPS) – basic
– diluted
Return on common equity (ROE)
Return on risk-weighted assets (RWA) (2)
Efficiency ratio (1)
KEY RATIOS
PCL on impaired loans as a % of Average
net loans and acceptances
Net interest margin (total average assets)
Non-interest income as a % of total
revenue
SHARE INFORMATION (3)
Common shares outstanding (000s) –
end of period
Dividends declared per common share
Dividend yield
Dividend payout ratio
Book value per share
Common share price (RY on TSX) – close,
end of period
Market capitalization (TSX)
Market price to book value
CAPITAL MEASURES – CONSOLIDATED (4)
Common Equity Tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
Assets-to-capital multiple
Leverage Ratio
16.3%
2.34%
52.4%
0.28%
1.41%
57.0%
1,485,394
3.24 $
4.3%
48%
43.32 $
$
$
$
2016
2015
2014
2013
2012
2011
2011
2010
2009
2008
2007
IFRS
CGAAP
$
$
6.80 $
6.78 $
6.75 $
6.73 $
6.03 $
6.00 $
5.53 $
5.49 $
4.96 $
4.91 $
18.6%
2.45%
52.8%
19.0%
2.52%
51.8%
19.7%
2.67%
52.8%
19.6%
2.70%
50.2%
4.25
4.19
18.7%
2.44%
51.3%
$
$
3.21 $
3.19 $
3.49 $
3.46 $
2.59 $
2.57 $
3.41 $
3.38 $
12.9%
1.87%
52.7%
14.9%
2.03%
51.6%
11.9%
1.50%
50.8%
18.1%
1.78%
57.2%
4.24
4.19
24.7%
2.23%
55.5%
0.24%
1.40%
0.27%
1.56%
0.31%
1.56%
0.35%
1.55%
0.33%
1.52%
0.34%
1.49%
0.45%
1.59%
0.72%
1.64%
0.53%
1.39%
0.33%
1.33%
58.2%
58.6%
56.8%
57.3%
58.9%
61.4%
60.4%
59.5%
58.0%
65.7%
1,443,423 1,442,233 1,441,056 1,445,303 1,438,376
2.08
3.9%
45%
24.25
2.53 $
4.0%
46%
29.87 $
2.84 $
3.8%
47%
33.69 $
3.08 $
4.1%
46%
39.51 $
2.28 $
4.5%
46%
26.52 $
1,438,376 1,424,922 1,417,610 1,341,260 1,276,260
1.82
$
3.3%
43%
17.49
2.00 $
4.8%
52%
22.67 $
2.00 $
3.6%
52%
23.99 $
2.00 $
4.2%
59%
20.90 $
2.08 $
3.9%
47%
25.65 $
$
83.80 $
74.77 $
80.01 $
70.02 $
56.94 $
124,476
1.93
107,925
1.89
115,393
2.38
100,903
2.34
82,296
2.15
48.62
69,934
2.00
$
48.62 $
54.39 $
54.80 $
46.84 $
69,934
1.90
77,502
2.27
77,685
2.42
62,825
2.24
10.8%
12.3%
14.4%
n.a.
4.4%
10.6%
12.2%
14.0%
n.a.
4.3%
9.9%
11.4%
13.4%
17.0X
n.a.
9.6%
11.7%
14.0%
16.6X
n.a.
n.a.
13.1%
15.1%
16.7X
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
13.3%
15.3%
16.1X
n.a.
n.a.
13.0%
14.4%
16.5X
n.a.
n.a.
13.0%
14.2%
16.3X
n.a.
n.a.
9.0%
11.0%
20.1X
n.a.
56.04
71,522
3.20
n.a.
9.4%
11.5%
20.0X
n.a.
(1)
(2)
(3)
(4)
Ratios for 2009-2012 represent continuing operations.
Return on risk-weighted assets (RWA) for fiscal 2011 is based on RWA reported under CGAAP and Income reported under IFRS.
On April 6, 2006, we paid a stock dividend of one common share on each of our issued and outstanding common shares. The effect was the same as two-for-one split of our common shares.
All common share and per share information have been adjusted retroactively for the stock dividend.
Effective 2013 we calculate the capital ratios and multiples using the Basel III (all-in basis) framework unless otherwise stated. 2008-2012 capital ratios and multiples were calculated using
the Basel II framework. 2004-2007 capital ratios and 2005-2007 asset-to-capital multiples were calculated using the Basel I framework. Capital ratios and multiples for 2011 were
determined under Canadian GAAP.
206
Royal Bank of Canada: Annual Report 2016
Ten-year statistical review
Glossary
Acceptances
A bill of exchange or negotiable instrument
drawn by the borrower for payment at maturity
and accepted by a bank. The acceptance
constitutes a guarantee of payment by the bank
and can be traded in the money market. The
bank earns a “stamping fee” for providing this
guarantee.
Acquired Credit Impaired (ACI) loans
Loans identified as impaired on the acquisition
date based on specific risk characteristics such
as indications that the borrower is experiencing
significant financial difficulty, probability of
bankruptcy or other financial reorganization,
payment status and economic conditions that
correlate with defaults.
Allowance for credit losses
The amount deemed adequate by management
to absorb identified credit losses as well as
losses that have been incurred but are not yet
identifiable as at the balance sheet date. This
allowance is established to cover the lending
portfolio including loans, acceptances,
guarantees, letters of credit, and unfunded
commitments. The allowance is increased by
the provision for credit losses, which is charged
to income and decreased by the amount of
write-offs, net of recoveries in the period.
Alt-A assets
A term used in the U.S. to describe assets
(mainly mortgages) with a borrower risk profile
between the prime and subprime
categorizations. Categorization of assets as Alt-
A (as opposed to prime) varies, such as limited
verification or documentation of borrowers’
income or a limited credit history.
Asset-backed securities (ABS)
Securities created through the securitization of
a pool of assets, for example auto loans or
credit card loans.
Assets-to-capital multiple (ACM)
Total assets plus specified off-balance sheet
items, as defined by OSFI, divided by total
regulatory capital on a transitional basis. ACM
has been replaced in 2015 by the Basel III
Leverage Ratio.
Assets under administration (AUA)
Assets administered by us, which are
beneficially owned by clients, as at October 31,
unless otherwise noted. Services provided in
respect of assets under administration are of
an administrative nature, including
safekeeping, collecting investment income,
settling purchase and sale transactions, and
record keeping.
Assets under management (AUM)
Assets managed by us, which are beneficially
owned by clients, as at October 31, unless
otherwise noted. Services provided in respect
of assets under management include the
selection of investments and the provision of
investment advice. We have assets under
management that are also administered by us
and included in assets under administration.
Auction rate securities (ARS)
Securities issued through structured entities
that hold long-term assets funded with long-
term debt. In the U.S., these securities are
issued by sponsors such as municipalities,
student loan authorities or other sponsors
through bank-managed auctions.
Average earning assets
Average earning assets include interest-
bearing deposits with other banks including
certain components of cash and due from
banks, securities, assets purchased under
reverse repurchase agreements and
securities borrowed, loans, and excludes
segregated fund net assets and other assets.
The averages are based on the daily
balances for the period.
Bank-owned life insurance contracts (BOLI)
Our legacy portfolio includes BOLI where we
provided banks with BOLI stable value
agreements (“wraps”), which insure the life
insurance policy’s cash surrender value from
market fluctuations on the underlying
investments, thereby allowing us to guarantee
a minimum tax-exempt return to the
counterparty. These wraps allow us to account
for the underlying assets on an accrual basis
instead of a mark-to-market basis.
Basis point (bp)
One one-hundredth of a percentage point
(.01%).
Collateral
Assets pledged as security for a loan or other
obligation. Collateral can take many forms,
such as cash, highly rated securities, property,
inventory, equipment and receivables.
Collateralized debt obligation (CDO)
Securities with multiple tranches that are
issued by structured entities and collateralized
by debt obligations including bonds and loans.
Each tranche offers a varying degree of risk and
return so as to meet investor demand.
Commercial mortgage-backed securities
(CMBS)
Securities created through the securitization of
commercial mortgages.
Commitments to extend credit
Unutilized amount of credit facilities available
to clients either in the form of loans, bankers’
acceptances and other on-balance sheet
financing, or through off-balance sheet
products such as guarantees and letters of
credit.
Common Equity Tier 1 (CET1) capital
A regulatory Basel III capital measure
comprised mainly of common shareholders’
equity less regulatory deductions and
adjustments for goodwill and intangibles,
defined benefit pension fund assets, shortfall
in allowances and other specified items.
Common Equity Tier 1 capital ratio
A risk-based capital measure calculated as
CET1 capital divided by risk-weighted assets.
Covered bonds
Full recourse on-balance sheet obligations
issued by banks and credit institutions that are
also fully collateralized by assets over which
investors enjoy a priority claim in the event of
an issuer’s insolvency.
Credit default swaps (CDS)
A derivative contract that provides the
purchaser with a one-time payment should the
referenced entity/entities default (or a similar
triggering event occur).
Derivative
A contract between two parties, which requires
little or no initial investment and where
payments between the parties are dependent
upon the movements in price of an underlying
instrument, index or financial rate. Examples of
derivatives include swaps, options, forward
rate agreements and futures. The notional
amount of the derivative is the contract amount
used as a reference point to calculate the
payments to be exchanged between the two
parties, and the notional amount itself is
generally not exchanged by the parties.
Dividend payout ratio
Common dividends as a percentage of net
income available to common shareholders.
Earnings per share (EPS), basic
Calculated as net income available to common
shareholders divided by the average number of
shares outstanding.
Earnings per share (EPS), diluted
Calculated as net income available to
common shareholders divided by the
average number of shares outstanding
adjusted for the dilutive effects of stock
options and other convertible securities.
Economic capital
An estimate of the amount of equity capital
required to underpin risks. It is calculated by
estimating the level of capital that is necessary
to support our various businesses, given their
risks, consistent with our desired solvency
standard and credit ratings. The identified risks
for which we calculate Economic Capital are
credit, market (trading and non-trading),
operational, business, fixed asset, and
insurance. Additionally, Economic Capital
includes goodwill and intangibles, and allows
for diversification benefits across risks and
business segments.
Expected credit losses
The difference between the contractual cash
flows due to us in accordance with the relevant
contractual terms and the cash flows that we
expect to receive, discounted to the balance
sheet date.
Glossary
Royal Bank of Canada: Annual Report 2016
207
Fair value
Fair value of a financial instrument is the price
that would be received to sell an asset or paid
to transfer a liability in an orderly transaction
between market participants at the
measurement date.
Federal Deposit Insurance Corporation (FDIC)
An independent U.S. government agency that
aims to preserve and promote public
confidence in the U.S. financial system by
insuring deposits in banks and thrift
institutions; identifying, monitoring and
addressing risks to these deposits; and limiting
the effect on the economic and financial system
when a bank or thrift institution fails.
Funding Valuation Adjustment
Funding valuation adjustments are calculated
to incorporate cost and benefit of funding in the
valuation of uncollateralized and under-
collateralized OTC derivatives. Future expected
cash flows of these derivatives are discounted
to reflect the cost and benefit of funding the
derivatives by using a funding curve, implied
volatilities and correlations as inputs.
Gross-adjusted assets (GAA)
GAA are used in the calculation of the Assets-
to-Capital multiple. They represent our total
assets including specified off-balance sheet
items and net of prescribed deductions. Off
balance sheet items for this calculation are
direct credit substitutes, including letters of
credit and guarantees, transaction-related
contingencies, trade-related contingencies and
sale and repurchase agreements. Commencing
Q1/15, the Asset-to-capital multiple and GAA
have been replaced with the leverage ratio and
leverage ratio exposure respectively.
Guarantees and standby letters of credit
These primarily represent irrevocable
assurances that a bank will make payments in
the event that its client cannot meet its
financial obligations to third parties. Certain
other guarantees, such as bid and performance
bonds, represent non-financial undertakings.
Hedge
A risk management technique used to mitigate
exposure from market, interest rate or foreign
currency exchange risk arising from normal
banking operations. The elimination or
reduction of such exposure is accomplished by
establishing offsetting positions. For example,
assets denominated in foreign currencies can
be offset with liabilities in the same currencies
or through the use of foreign exchange hedging
instruments such as futures, options or foreign
exchange contracts.
Hedge funds
A type of investment fund, marketed to
accredited high net worth investors, that is
subject to limited regulation and restrictions on
its investments compared to retail mutual
funds, and that often utilize aggressive
strategies such as selling short, leverage,
program trading, swaps, arbitrage and
derivatives.
High-quality liquid assets (HQLA)
Assets are considered to be HQLA if they can be
easily and immediately converted into cash at
little or no loss of value during a time of stress.
Net interest margin (average assets)
Net interest income as a percentage of total
average assets.
Home equity products
This is comprised of residential mortgages and
secured personal loans whereby the borrower
pledges real estate as collateral.
International Financial Reporting Standards
(IFRS)
IFRS are principles-based standards,
interpretations and the framework adopted by
the International Accounting Standards Board.
Impaired loans
Loans are classified as impaired when there
has been a deterioration of credit quality to the
extent that management no longer has
reasonable assurance of timely collection of the
full amount of principal and interest in
accordance with the contractual terms of the
loan agreement. Credit card balances are not
classified as impaired as they are directly
written off after payments are 180 days past
due.
Innovative capital instruments
Innovative capital instruments are capital
instruments issued by structured entities,
whose primary purpose is to raise capital. We
previously issued innovative capital
instruments, RBC Trust Capital Securities (RBC
TruCS) and RBC Trust Subordinated Notes (RBC
TSNs), through three structured entities: RBC
Capital Trust, RBC Capital Trust II and RBC
Subordinated Notes Trust. As per OSFI Basel III
guidelines, non-qualifying innovative capital
instruments treated as additional Tier 1 capital
are subject to phase out over a ten year period
beginning on January 1, 2013.
Leverage Ratio
A Basel III regulatory measure, the ratio divides
Tier 1 capital by the sum of total assets plus
specified off-balance sheet items.
Liquidity Coverage Ratio (LCR)
The Liquidity Coverage Ratio is a Basel III metric
that measures the sufficiency of HQLA available
to meet net short-term financial obligations
over a thirty day period in an acute stress
scenario.
Loan-to-value (LTV) ratio
Calculated based on the total facility amount
for the residential mortgage and homeline
product divided by the value of the related
residential property.
Master netting agreement
An agreement between us and a counterparty
designed to reduce the credit risk of multiple
derivative transactions through the creation of
a legal right of offset of exposure in the event of
a default.
Net interest income
The difference between what is earned on
assets such as loans and securities and what is
paid on liabilities such as deposits and
subordinated debentures.
Net interest margin (on average earning
assets)
Calculated as net interest income divided by
average earning assets.
Normal course issuer bid (NCIB)
A program for the repurchase of our own shares
for cancellation through a stock exchange that
is subject to the various rules of the relevant
stock exchange and securities commission.
Notional amount
The contract amount used as a reference point
to calculate payments for derivatives.
Off-balance sheet financial instruments
A variety of arrangements offered to clients,
which include credit derivatives, written put
options, backstop liquidity facilities, stable
value products, financial standby letters of
credit, performance guarantees, credit
enhancements, mortgage loans sold with
recourse, commitments to extend credit,
securities lending, documentary and
commercial letters of credit, note issuances
and revolving underwriting facilities, securities
lending indemnifications and indemnifications.
Office of the Superintendent of Financial
Institutions Canada (OSFI)
The primary regulator of federally chartered
financial institutions and federally
administered pension plans in Canada. OSFI’s
mission is to safeguard policyholders,
depositors and pension plan members from
undue loss.
Operating leverage
The difference between our revenue growth rate
and non-interest expense growth rate.
Options
A contract or a provision of a contract that gives
one party (the option holder) the right, but not
the obligation, to perform a specified
transaction with another party (the option
issuer or option writer) according to specified
terms.
Primary dealer
A formal designation provided to a bank or
securities broker-dealer permitted to trade
directly with a country’s central bank. Primary
dealers participate in open market operations,
act as market-makers of government debt and
provide market information and analysis to
assist with monetary policy.
Provision for credit losses (PCL)
The amount charged to income necessary to
bring the allowance for credit losses to a level
determined appropriate by management. This
includes both provisions on impaired loans and
loans not yet identified as impaired.
208
Royal Bank of Canada: Annual Report 2016
Glossary
Repurchase agreements
These involve the sale of securities for cash and
the simultaneous repurchase of the securities
for value at a later date. These transactions
normally do not constitute economic sales and
therefore are treated as collateralized financing
transactions.
Securities sold short
A transaction in which the seller sells securities
and then borrows the securities in order to
deliver them to the purchaser upon settlement.
At a later date, the seller buys identical
securities in the market to replace the
borrowed securities.
Residential mortgage-backed securities
(RMBS)
Securities created through the securitization of
residential mortgage loans.
Securitization
The process by which various financial assets
are packaged into newly issued securities
backed by these assets.
Return on common equity (ROE)
Net income available to common shareholders,
expressed as a percentage of average common
equity.
Reverse repurchase agreements
These involve the purchase of securities for
cash and the simultaneous sale of the
securities for value at a later date. These
transactions normally do not constitute
economic sales and therefore are treated as
collateralized financing transactions.
Risk-weighted assets (RWA)
Assets adjusted by a regulatory risk-weight
factor to reflect the riskiness of on and off-
balance sheet exposures. Certain assets are
not risk-weighted, but deducted from capital.
The calculation is defined by guidelines issued
by OSFI. For more details, refer to the Capital
management section.
Securities lending
Transactions in which the owner of a security
agrees to lend it under the terms of a
prearranged contract to a borrower for a fee.
The borrower must collateralize the security
loan at all times. An intermediary such as a
bank often acts as agent for the owner of the
security. There are two types of securities
lending arrangements: lending with and
without credit or market risk indemnification. In
securities lending without indemnification, the
bank bears no risk of loss. For transactions in
which the bank provides an indemnification, it
bears the risk of loss if the borrower defaults
and the value of the collateral declines
concurrently.
Structured entities
A structured entity is an entity in which voting
or similar rights are not the dominant factor in
deciding who controls the entity, such as when
the activities that significantly affect the
entity’s returns are directed by means of
contractual arrangements. Structured entities
often have restricted activities, narrow and well
defined objectives, insufficient equity to
finance their activities, and financing in the
form of multiple contractually-linked
instruments.
Standardized Approach
Risk weights prescribed by OSFI are used to
calculate risk-weighted assets for the credit risk
exposures. Credit assessments by OSFI-
recognized external credit rating agencies of
S&P, Moody’s, Fitch and DBRS are used to risk-
weight our Sovereign and Bank exposures
based on the standards and guidelines issued
by OSFI. For our Business and Retail exposures,
we use the standard risk weights prescribed by
OSFI.
Structured investment vehicle
Managed investment vehicle that holds mainly
highly rated asset-backed securities and funds
itself using the short-term commercial paper
market as well as the medium-term note (MTN)
market.
Subprime loans
Subprime lending is the practice of making
loans to borrowers who do not qualify for the
best market interest rates because of their
deficient credit history. Subprime lending
carries more risk for lenders due to the
combination of higher interest rates for the
borrowers, poorer credit histories, and adverse
financial situations usually associated with
subprime applicants.
Taxable equivalent basis (teb)
Income from certain specified tax advantaged
sources (eligible Canadian taxable corporate
dividends) is increased to a level that would
make it comparable to income from taxable
sources. There is an offsetting adjustment in
the tax provision, thereby generating the same
after-tax net income.
Tier 1 capital
Tier 1 capital comprises predominantly of CET1
capital, with additional Tier 1 items such as
preferred shares, innovative instruments and
non-controlling interests in subsidiaries Tier 1
instruments.
Tier 2 capital
Tier 2 capital consists mainly of subordinated
debentures that meet certain criteria, certain
loan loss allowances and non-controlling
interests in subsidiaries’ Tier 2 instruments.
Total capital and total capital ratio
Total capital is defined as the total of Tier 1 and
Tier 2 capital. The total capital ratio is
calculated by dividing total capital by risk-
weighted assets.
Tranche
A security class created whereby the risks and
returns associated with a pool of assets are
packaged into several classes of securities
offering different risk and return profiles from
those of the underlying asset pool. Tranches
are typically rated by ratings agencies, and
reflect both the credit quality of underlying
collateral as well as the level of protection
based on the tranches’ relative subordination.
Trust Capital Securities (RBC TruCS)
Transferable trust units issued by structured
entities RBC Capital Trust or RBC Capital Trust II
for the purpose of raising innovative Tier 1
capital.
Value-at-Risk (VaR)
A generally accepted risk-measurement
concept that uses statistical models based on
historical information to estimate within a given
level of confidence the maximum loss in market
value we would experience in our trading
portfolio from an adverse one-day movement in
market rates and prices.
Glossary
Royal Bank of Canada: Annual Report 2016
209
Directors and executive officers
Directors
W. Geoffrey Beattie (2001)
Toronto, Ontario
Chief Executive Officer
Generation Capital
Andrew A. Chisholm (2016)
Toronto, Ontario
Corporate Director
Jacynthe Côté (2014)
Montreal, Quebec
Corporate Director
Toos N. Daruvala (2015)
New York, New York
Senior Advisor and Director
Emeritus
McKinsey & Company
David F. Denison, O.C., FCPA,
FCA (2012)
Toronto, Ontario
Corporate Director
Richard L. George, O.C. (2012)
Calgary, Alberta
Partner, Novo Investment Group
Alice D. Laberge (2005)
Vancouver, British Columbia
Corporate Director
Michael H. McCain (2005)
Toronto, Ontario
President and Chief
Executive Officer
Maple Leaf Foods Inc.
David I. McKay (2014)
Toronto, Ontario
President and Chief
Executive Officer
Royal Bank of Canada
Heather Munroe-Blum,
O.C., O.Q.,
Ph.D., FRSC (2011)
Montreal, Quebec
Professor Emerita and
Principal Emerita
McGill University
Thomas A. Renyi (2013)
New Harbor, Maine
Corporate Director
Edward Sonshine, O.Ont., Q.C.
(2008)
Toronto, Ontario
Chief Executive Officer
RioCan Real Estate
Investment Trust
Kathleen P. Taylor (2001)
Toronto, Ontario
Chair of the Board
Royal Bank of Canada
Bridget A. van Kralingen (2011)
New York, New York
Senior Vice President
Industry Platforms
IBM Corporation
Thierry Vandal (2015)
New York, New York
President
Axium Infrastructure US Inc.
The date appearing after the name of each director indicates the year in which the individual became a director.
Group Executive
Mike Dobbins(1)
Head, Strategy and Corporate Development
Zabeen Hirji
Chief Human Resources Officer
Janice R. Fukakusa, FCPA, FCA(2)
Chief Administrative Officer and Chief
Financial Officer
Doug Guzman
Group Head, Wealth Management and
Insurance
Mark Hughes
Group Chief Risk Officer
A. Douglas McGregor
Group Head, Capital Markets
and Investor & Treasury Services
David I. McKay
President and
Chief Executive Officer
Bruce Ross
Group Head, Technology & Operations
Jennifer Tory
Group Head,
Personal & Commercial Banking
(1)
(2)
Effective November 1, 2016, Mike Dobbins was appointed Head, Strategy and Corporate Development and joined Group Executive.
Janice R. Fukakusa will retire as Chief Administrative Officer and Chief Financial Officer on January 31, 2017. Rod Bolger will take over as Chief Financial Officer effective December 1, 2016
and will join Group Executive on January 31, 2017.
210
Royal Bank of Canada: Annual Report 2016
Directors and executive officers
Principal subsidiaries
Principal subsidiaries (1)
Royal Bank Holding Inc.
Royal Mutual Funds Inc.
RBC Insurance Holdings Inc.
RBC Insurance Company of Canada
RBC Life Insurance Company
RBC Direct Investing Inc.
RBC Phillips, Hager & North Investment Counsel Inc.
R.B.C. Holdings (Bahamas) Limited
RBC Caribbean Investments Limited
Royal Bank of Canada Insurance Company Ltd.
Investment Holdings (Cayman) Limited
RBC (Barbados) Funding Ltd.
Capital Funding Alberta Limited
RBC Global Asset Management Inc.
RBC Investor Services Trust
RBC Investor Services Bank S.A.
RBC (Barbados) Trading Bank Corporation
BlueBay Asset Management (Services) Ltd
RBC USA Holdco Corporation (2)
RBC Capital Markets, LLC (2)
RBC Bank (Georgia), National Association (2)
City National Bank
RBC Global Asset Management (U.S.) Inc.
RBC Dominion Securities Limited
RBC Dominion Securities Inc.
RBC Holdings (Barbados) Ltd.
RBC Financial (Caribbean) Limited
RBC Finance S.à r.l./B.V. (2)
RBC Holdings (Luxembourg) S.A R.L.
RBC Holdings (Channel Islands) Limited
Royal Bank of Canada (Channel Islands) Limited
RBC Capital Trust
RBC Europe Limited
Royal Bank Mortgage Corporation
The Royal Trust Company
Royal Trust Corporation of Canada
Principal office address (2)
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Nassau, New Providence, Bahamas
George Town, Grand Cayman, Cayman Islands
St. Michael, Barbados
George Town, Grand Cayman, Cayman Islands
St. Michael, Barbados
Calgary, Alberta, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Esch-sur-Alzette, Luxembourg
St. James, Barbados
London, England
New York, New York, U.S.
New York, New York, U.S.
Atlanta, Georgia, U.S.
Los Angeles, California, U.S.
Minneapolis, Minnesota, U.S.
Toronto, Ontario, Canada
Toronto, Ontario, Canada
St. Michael, Barbados
Port of Spain, Trinidad and Tobago
Amsterdam, Netherlands
Luxembourg, Luxembourg
Jersey, Channel Islands
Guernsey, Channel Islands
Toronto, Ontario, Canada
London, England
Toronto, Ontario, Canada
Montreal, Quebec, Canada
Toronto, Ontario, Canada
RBC Covered Bond Guarantor Limited Partnership
Toronto, Ontario, Canada
Carrying value of
voting shares owned
by the Bank (3)
$
52,178
18,771
7,926
3,556
3,205
1,633
1,593
1,118
619
255
166
(1)
(2)
(3)
The Bank directly or indirectly controls each subsidiary.
Each subsidiary is incorporated or organized under the law of the state or country in which the principal office is situated, except for RBC USA Holdco Corporation which is incorporated under
the laws of the State of Delaware, U.S., RBC Capital Markets, LLC, which is organized under the laws of the State of Minnesota, U.S. RBC Finance S.à r.l. / B.V. is a company incorporated in the
Netherlands with its official seat in Amsterdam, the Netherlands, and place of effective management, central administration, and principal establishment in Luxembourg, Grand Duchy of
Luxembourg. RBC Bank (Georgia), National Association is a national banking association organized under the laws of the U.S. with its main office in Atlanta, Georgia and management offices
in Raleigh, North Carolina.
The carrying value (in millions of Canadian dollars) of voting shares is stated as the Bank’s equity in such investments.
Principal subsidiaries
Royal Bank of Canada: Annual Report 2016
211
Shareholder Information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario M5J 2J5
Canada
Tel: 1-888-212-5533
Mailing address:
P.O. Box 1
Royal Bank Plaza
Toronto, Ontario M5J 2J5
Canada
website: rbc.com
Transfer Agent and Registrar
Main Agent:
Computershare Trust
Company of Canada
1500 Robert-Bourassa Blvd.
Suite 700
Montreal, Quebec H3A 3S8
Canada
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 514-982-7580
website: computershare.com/rbc
Co-Transfer Agent (U.S.):
Computershare Trust
Company, N.A.
250 Royall Street
Canton, Massachusetts 02021
U.S.A.
Co-Transfer Agent (U.K.):
Computershare Investor
Services PLC
Securities Services – Registrars
P.O. Box 82, The Pavilions,
Bridgwater Road,
Bristol BS99 6ZZ
U.K.
Stock exchange listings
(Symbol: RY)
Common shares are listed on:
Canada – Toronto Stock
Exchange (TSX)
U.S. – New York Stock Exchange
(NYSE)
Switzerland – Swiss Exchange
(SIX)
All preferred shares are listed on
the TSX with the exception of the
series C-1 and C-2. The related
depository shares of the series C-1
and C-2 preferred shares are listed
on the NYSE.
Valuation day price
For Canadian income tax
purposes, Royal Bank of Canada’s
common stock was quoted at
$29.52 per share on the Valuation
Day (December 22, 1971). This is
equivalent to $7.38 per share
after adjusting for the two-for-one
stock split of March 1981 and the
two-for-one stock split of February
1990. The one-for-one stock
dividends in October 2000 and
April 2006 did not affect the
Valuation Day amount for our
common shares.
Shareholder contacts
For dividend information, change
in share registration or address,
lost stock certificates, tax forms,
estate transfers or dividend
reinvestment, please contact:
Computershare Trust Company of
Canada
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1
Canada
Tel: 1-866-586-7635 (Canada
and the U.S.) or 514-982-7555
(International)
Fax: 1-888-453-0330 (Canada and
the U.S.) or 416-263-9394
(International)
email: service@computershare.com
For other shareholder inquiries,
please contact:
Shareholder Relations
Royal Bank of Canada
200 Bay Street
South Tower
Toronto, Ontario M5J 2J5
Canada
Tel: 416-955-7806
Financial analysts, portfolio
managers, institutional
investors
For financial information inquiries,
please contact:
Investor Relations
Royal Bank of Canada
200 Bay Street
North Tower
Toronto, Ontario M5J 2W7
Canada
Tel: 416-955-7802
or visit our website at
rbc.com/investorrelations
Direct deposit service
Shareholders in Canada and the
U.S. may have their RBC common
share dividends deposited directly
to their bank account by
electronic funds transfer. To
arrange for this service, please
contact our Transfer Agent and
Registrar, Computershare Trust
Company of Canada.
Eligible dividend designation
For purposes of the Income Tax
Act (Canada) and any
corresponding provincial and
territorial tax legislation, all
dividends (and deemed
dividends) paid by RBC to
Canadian residents on both its
common and preferred shares, are
designated as “eligible
dividends,” unless stated
otherwise.
Common share repurchases
We are engaged in a Normal
Course Issuer Bid (NCIB). During
the one-year period commencing
June 1, 2016, we may repurchase
for cancellation, up to 20 million
common shares in the open
market at market prices. We
determine the amount and timing
of the purchases under the NCIB,
subject to prior consultation with
the Office of the Superintendent
of Financial Institutions Canada
(OSFI).
A copy of our Notice of Intention
to file a NCIB may be obtained,
without charge, by contacting our
Corporate Secretary at our Toronto
mailing address.
2017 Quarterly earnings release
dates
First quarter
Second quarter
Third quarter
Fourth quarter
February 24
May 25
August 23
November 29
2017 Annual Meeting
The Annual Meeting of Common
Shareholders will be held on
Thursday, April 6, 2017, at
9:30 a.m. (Eastern Time), at the
Sony Centre for the Performing
Arts, 1 Front Street East, Toronto,
Ontario, Canada.
Dividend dates for 2017
Subject to approval by the Board of Directors
Common and preferred
shares series W, AA, AB,
AC, AD, AE, AF, AG, AJ, AK,
AL, AZ, BB, BD, BF, BH, BI,
BJ, BK and BM
Preferred shares series C-1
(US$)
Preferred shares series C-2
(US$)
Ex-dividend
dates
January 24
April 21
July 24
October 24
Record
dates
January 26
April 25
July 26
October 26
Payment
dates
February 24
May 24
August 24
November 24
February 1
May 3
August 2
November 1
January 25
April 26
July 26
October 25
February 5
May 5
August 4
November 3
January 27
April 28
July 28
October 27
February 13
May 15
August 14
November 13
February 7
May 8
August 7
November 7
Governance
Summaries of the significant ways in which corporate governance
practices followed by RBC differ from corporate governance practices
required to be followed by U.S. domestic companies under the NYSE
and Nasdaq listing standards are available on our website at rbc.com/
governance.
Information contained in or otherwise accessible through the websites mentioned in this report to shareholders does not form a part of this report. All references to websites are
inactive textual references and are for your information only.
Trademarks used in this report include the LION & GLOBE Symbol, ROYAL BANK OF CANADA, RBC, RBC CAPITAL MARKETS, RBC CAPITAL TRUST, RBC GLOBAL ASSET MANAGEMENT, RBC
INSURANCE, RBC REWARDS, RBC SUBORDINATED NOTES TRUST, RBC TSNs, RBC TruCS, RBC WEALTH MANAGEMENT, DIGITALLY ENABLED RELATIONSHIP BANK, ROYAL CREDIT LINE,
YOURTERM which are trademarks of Royal Bank of Canada used by Royal Bank of Canada and/or by its subsidiaries under license. VISA is a registered trademark of Visa International
Service Association. All other trademarks mentioned in this report, including those that are identified with the ‡ symbol, which are not the property of Royal Bank of Canada, are
owned by their respective holders.
212
Royal Bank of Canada: Annual Report 2016
Shareholder information
‡
All paper used in the production of this report is FSC® (Forest Stewardship Council®) certified. This paper has been certified to meet the environmental and social standards of the Forest
Stewardship Council® (FSC®) and comes from responsibly managed forests and verified recycled sources.
® / ™ Trademarks of Royal Bank of Canada. ‡ All other trademarks are the property of their respective owner(s).
This is a carbon neutral publication. Carbon dioxide equivalent emissions associated with the production and distribution of this report have been neutralized through the purchase and retirement
of high quality carbon offsets. The carbon offsets were acquired through the RBC Capital Markets emissions trading group.
rbc.com/ar2016
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