Our purpose
Helping clients thrive
and communities prosper.
Guided by our vision to be among the world’s most
trusted and successful financial institutions, and driven
by our purpose, we aim to be:
> The undisputed financial services leader in Canada
> The preferred partner to corporate, institutional
and high net worth clients in the U.S.
> A leading financial services partner valued for
our expertise in select global financial centres
We are guided by our values:
> Client First
> Collaboration
> Accountability
> Diversity & Inclusion
> Integrity
Connect with us:
facebook.com/rbc
instagram.com/rbc
twitter.com/@RBC
www.youtube.com/user/RBC
About the cover
Our purpose inspires us every day to bring our best and use our imagination
and insights to build a better future for our clients and communities. Anika and
Arjun, pictured on our cover, think big and dream bigger. The creative children of
RBC employee, Anish Rastogi, wrote to RBC CEO Dave McKay about putting the
first bank branch on Mars. Although interplanetary branches are unlikely in the
linkedin.com/company/rbc
near future, it’s this spirit of bold ambition that has powered RBC for 150 years.
Who we are
Royal Bank of Canada is a global financial institution with
a purpose-driven, principles-led approach to delivering
leading performance. Our success comes from the 84,000+
employees who bring our vision, values and strategy to life
so we can help our clients thrive and communities prosper.
As Canada’s biggest bank, and one of the largest in the world
based on market capitalization, we have a diversified business
model with a focus on innovation and providing exceptional
experiences to our 16 million clients in Canada, the U.S. and
34 other countries.
How we achieved success is as important as what we achieved.
In addition to delivering record financial results this year, you’ll
read about how we put the client at the centre of everything we
do, create an exceptional employee experience and make our
communities stronger.
Table of contents
Why invest?
> Diversified business model
with leading client franchises
> Market leader with a focused
growth strategy
> Financial strength
underpinned by prudent risk
and cost management
> Innovation is in our DNA
> Leading corporate citizen
2018 Highlights
2
CEO message
4 Chair message
5
The stories that shaped our year
Creating value
for clients and
communities
Innovating
through
inclusion
6
Unparalleled
insights and
connectivity
8
Accelerating growth
in our second
home market
9
Leading the
way for a
better future
10
Management’s Discussion and Analysis
Enhanced Disclosure Task Force Recommendations Index
Reports and Consolidated Financial Statements
12
112
113
Ten-Year Statistical Review
Glossary
Shareholder Information
11
212
213
216
Royal Bank of Canada: Annual Report 2018
1
2018 Highlights
Clients
Employees
Communities
CLIENTS SERVED
16 million
ACTIVE DIGITAL USERS(1)
6.7 million
RECOGNITION
Canada’s Most
Valuable Brand
named by Brand Finance
RECOGNITION
#1 in customer
satisfaction
among Big 5 Banks, Banking Advice &
Mobile Banking in 2018 by J.D. Power
GLOBAL COVERAGE
80%
global investment banking fee
pool coverage(2)
GLOBAL EXPERTISE
Top 5
wealth manager globally(3)
GREEN BOND UNDERWRITING
US$2.6 billion
helped our clients raise capital for
environmentally sustainable projects
NUMBER OF EMPLOYEES
TOTAL COMMUNITY INVESTMENT
84,000+
we employ people in 36 countries
DIVERSITY WORKS HERE
45% women executives(4)
18% young people(5)
RECOGNITION
Top 100 Diversity &
Inclusion Index
ranked by Thomson Reuters as one
of the most diverse and inclusive
organizations globally
EMPLOYEE SENTIMENT
86%
our employees view RBC as an
inclusive workplace(6)
SALARIES AND BENEFITS
$13.8 billion
we offer engaging careers and
competitive compensation
and benefits
EMPLOYEE OPINION
95%
of employees are proud to be a part
of RBC(7)
$115 million
donated to 6,250+ charitable
organizations globally through
cash donations and community
investments(8)
VOLUNTEER HOURS
135,000+
raised nearly $5 million from
employee grants for charities
across nine countries(9)
TAXES
$5.0 billion
supported our communities as one of
the largest taxpayers in Canada, and
as a taxpayer in other countries
where we operate(10)
RBC FUTURE LAUNCH™
$46 million
reached over 1.4 million Canadian
youth through 400+ partner
programs
EMPLOYEE GIVING CAMPAIGN
$19.8 million
raised by employees and retirees in
Canada for 4,000+ charities
(1) Represents 90-day active customers in Canadian Banking only.
(2) Thomson Reuters Global Investment Banking Review, H1 2018.
(3) Scorpio Partnership Global Private Banking Benchmark, 2018.
(4) Represents our Employment Equity Data as at October 31, 2018 for our businesses in Canada that are governed by the Employment Equity Act.
(5) FTE under 30 globally, reflecting our commitment to attract, retain and develop young talent as part our broader strategy to provide youth with unique career development programs and opportunities.
(6) Includes fairness, openness, diversity support and flexibility measured by our 2018 Diversity & Inclusion Index score in our annual Employee Opinion Survey.
(7) 2018 Employee Opinion Survey.
(8) Includes employee volunteer grants and gifts in kind, as well as non-profit contributions to non-registered charities. Figure does not include sponsorships.
(9) Includes employees globally and retirees in Canada.
(10) Refer to page 88 for additional details.
2
Royal Bank of Canada: Annual Report 2018
Shareholders
DILUTED EARNINGS PER SHARE
$8.36
up from $7.56 in 2017
PROFITABLE GROWTH
17.6%
return on equity (ROE), up from
17.0% in 2017
FINANCIAL STRENGTH
11.5%
common equity tier 1 (CET1) ratio,
up from 10.9% in 2017
RETURNS TO SHAREHOLDERS
$3.77
dividends declared per share,
increased by $0.29 since 2017
58%
of profits returned to our shareholders
through dividends(1) and repurchases
PREPARING FOR THE FUTURE
$5.2 billion
remainder of our profit available
to reinvest in our business for
future growth
Strong Earnings
net income (C$ billion)
+8%
$11.5
$12.4
2017
2018
Earnings by business segment(2)
48%
22%
18%
6%
6%
Annualized dividend increase of:
8%
One year
7%
Ten year(3)
Personal & Commercial Banking
Capital Markets
Wealth Management
Insurance
Investor & Treasury Services
Financial Performance Metrics(4)
Diluted EPS growth
Return on equity
Capital ratio (CET 1)
Dividend payout ratio
Total Shareholder Return(5)
Three-year
Five-year
Medium-Term
Objectives
7%+
16%+
Strong
40%–50%
2018 Results
10.6%
17.6%
11.5%
45%
RBC
13%
11%
Global Peer Average
9%
8%
(1) Includes dividends paid on both common and preferred shares. Dividends were $5.4 billion on common shares and $0.3 billion on preferred
shares.
(2) Excludes Corporate Support.
(3) Compound Annual Growth Rate.
(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) Annualized TSR is calculated based on the TSX common share price appreciation plus reinvested dividend income. Source: Bloomberg, as at
October 31, 2018. 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 2018 Management’s Discussion and Analysis.
Royal Bank of Canada: Annual Report 2018
3
Message from Dave McKay
sectors, as consumer and business needs
are being served by new entrants, both
large and small. This is fundamentally
altering client expectations and the way
they interact with service providers.
Today, as we stand on the eve of our
150th anniversary, we’re clear that what
has driven our success in the past won’t
guarantee that same success in the future.
This is why we’re continuing to invest
significantly in our digital and innovation
strategies across all of our businesses,
building on the strength of our market-
leading assets to deliver more value
to clients.
For example, our world-class artificial
intelligence (AI) capability is enabling
us to enhance equity trading strategies
for our institutional clients using Aiden
and delivering automated savings and
improved insights to our Canadian
Banking customers through NOMI.
And through our machine learning
institute, Borealis AI, we’re ensuring
we remain at the cutting edge of both
fundamental and applied research,
which will lead to many more innovative
products in the future.
These innovations are enabling us to
deliver value for our clients, increase
customer satisfaction and gain market
share in Canada. In our home market,
we have a significant scale advantage.
We hold the number one or two position
in all key banking products; are the largest
wealth and asset manager and bank-
owned insurer in the country; and lead
in capital markets, asset services and
transaction banking.
Additionally, our technology leadership
is allowing us to attract some of the
best tech talent in the market. This is
leading to superior business outcomes,
improved operational efficiencies and
exceptional client experiences. And with
trust and security more important than
ever, it’s also helping us increase our focus
on cybersecurity and safeguarding our
clients’ data.
At our June Investor Day, we unveiled a
bold strategy to create new, more relevant
and deeper connections with Canadians.
Through RBC Ventures and our unique
loyalty and rewards platform, we are
engaging earlier and more frequently with
Canadians, and creating services that are
open to everyone – whether or not they
are clients of RBC.
Thanks to our market-leading position in
Canada, we hold many crucial assets that
others will find very difficult to replicate:
our deep relationships with our clients; our
scale; our secure data and AI advantage;
the strength of our partnerships; and a
trusted brand.
We are hugely excited by how this can
transform our Canadian banking business,
and have stated a bold goal to acquire
five million new relationships and grow
clients up to three times our current client
acquisition rate, leading to 2.5 million-plus
new clients by 2023.
Building momentum in the U.S. and
in key global markets
I’m particularly proud of what we achieved
in the U.S. this year, which drove 23% of
our revenue. Earnings were up 13%, as
we benefitted from tailwinds, including
interest rate increases, tax cuts and
positive fundamentals. This helped
us invest in dynamic urban markets
including New York, Washington D.C.
and Los Angeles. We hired outstanding
colleagues across our platforms to
accelerate our growth, and realize our aim
to be the preferred partner to corporate,
institutional and high net worth clients in
our second home market.
In the U.S. and in global financial centres
in the U.K., Europe and Asia, we are
committed to providing our clients with
a truly differentiated experience tailored
to their unique needs. We aim to further
deepen our relationships with our clients,
both by offering them the full strength and
depth of RBC, and by delivering insights
and value they can’t find elsewhere.
Reimagining our role in clients’ lives
However, leveraging new technologies
and creating an exceptional digital client
experience is only one part of our strategy.
We believe that in order to maintain
customer relevancy and connectivity in
the future, we also have to reimagine the
role we play in our clients’ lives.
Leading the way for a better future
We are also bringing the full strength of
our organization to help create a lasting
positive social impact in our communities
around the world, including supporting
the transition to a low-carbon future and
understanding the changing skills needs
of young people through RBC Future
On behalf of my fellow RBCers, I’m
honoured to share our story of a record
2018 – a year in which we continued to
focus on creating more value for our
clients, communities and shareholders.
In 2018, we reported record earnings of
$12.4 billion, up 8% from last year. We
met or exceeded all of our medium-term
objectives, delivered double-digit earnings
per share growth of 11%, raised our
dividend by 8% and returned a further
$1.5 billion of capital to shareholders
through buybacks. We also strengthened
our CET1 ratio to 11.5%.
Our financial performance demonstrates
how we are building long-term client
franchises and delivering a premium
return on equity, even as we invest in
creating the bank of the future and pursue
our focused growth strategy in Canada,
the U.S. and key global markets. It also
illustrates the strength of our diversified
business model and our disciplined
approach to controlling costs, deploying
capital and managing risk through
the cycle.
But above all, our record performance
highlights the power of our purpose to
unify every colleague under the common
goal of helping clients thrive and
communities prosper.
Creating more value in a time of
secular change
Over the past year, I repeatedly shared
my belief that we’re at a seminal moment
in our industry, a time of secular change.
Social media, mobile devices and cloud
computing have all contributed to the
erosion of traditional walls between
4
Royal Bank of Canada: Annual Report 2018
Message from Katie Taylor
Dear fellow shareholders,
Opportunities and challenges in the
financial services industry continue to
abound, as businesses face disruption
from changing customer expectations,
new sources of competition and rapidly-
emerging technologies.
Your board plays a critical role in providing
oversight and stewardship of RBC’s
strategic direction, helping to innovate,
grow and build the bank of the future. We
provide guidance to management as they
invest in areas of strategic growth, while
continually assessing whether those plans
are effectively balanced with the bank’s risk
appetite. Our record financial results
in 2018 reflect that focus, and reinforce
RBC’s ability to achieve our medium-term
objectives.
Of course, people are the cornerstone
of our continued success. As part of our
focus on talent management, the board
takes a comprehensive approach to
succession planning for senior executive
positions. In line with the bank’s value of
diversity and inclusion, we also ensure
that this talent pipeline includes the wide
variety of experiences, perspectives and
backgrounds required to successfully lead
RBC into the future.
The board also collaborates closely
with management to set the tone and
promote an open and transparent culture
that influences RBC at every level, both
within the organization as well as externally
in our relationships with clients, community
partners and other stakeholders. In
particular, we encourage employees to
speak up and challenge behaviour that
does not align with our values. Not
only is this the right thing to do, but it is
a critical way to protect and enhance the
reputation of RBC and ensure we achieve
the bank’s vision of being one of the
world’s most trusted financial institutions.
The board believes strongly that achieving
sustainable growth goes beyond
generating profits, and that RBC has an
important role to play as a corporate
citizen that is fully involved in each of
the communities where we do business.
Specifically, we recognize that climate
LaunchTM. In my conversations with
youth, business leaders and community
leaders, I’ve repeatedly heard how we
have a collective opportunity to better
harness the potential of this generation
and help them prepare for and navigate
a new world of work.
Our people: driving innovation
through inclusion
In the past year, we have witnessed
how too many people are struggling
to be treated equally and with dignity
in our society. Diversity and inclusion
has always been a core value at RBC
and we’re committed to championing
inclusion as a catalyst for the change
we need in society. It’s also a source
of competitive advantage for us. It’s
the foundation of our Leadership
Model, helping us drive a bolder, more
nimble culture and encouraging an
entrepreneurial spirit across the whole
of RBC through a talented and diverse
leadership team.
RBCers are continuing to rise to the
challenge, driving new and innovative
ideas every day. The results speak for
themselves; employee engagement is at
an all-time high and more than 95% of
our colleagues say they are proud to be
a part of RBC.
Thank you
For this, I would like to take this
opportunity to thank my colleagues
around the world. This report highlights
just some of the stories that shaped
our year – by serving our clients and the
communities where we live and work.
I continue to be inspired daily by their
conviction, passion and imagination.
I also want to offer a sincere thank you
to the 16 million clients who continue
to put their trust in RBC. As ever, I
appreciate the advice and guidance
from Katie Taylor and the board of
directors. And to you, our shareholders,
I would like to thank you for your
support and reaffirm our commitment to
delivering high-quality earnings growth
in line with our purpose.
David McKay
President and Chief Executive Officer
change is the most pressing issue of our
age, and we oversee the bank’s enterprise-
wide approach to accelerating clean
economic growth and supporting the
transition to a low-carbon economy.
In 2018, we were pleased to have been
recognized for our governance efforts
with two awards from Governance
Professionals of Canada: the Best Overall
Corporate Governance award and the
Best Practices to Enhance Boardroom
Diversity award. This is a validation of
our commitment to good governance,
including our focus on engaging with
clients, communities and investors, which
is an integral part of ensuring the bank’s
continuing success. It also highlights our
strong determination to increase diverse
representation both within RBC and at the
board level.
On behalf of the entire board, I would like
to thank Dave McKay and his leadership
team for their continued dedication to
RBC’s clients, colleagues and communities.
We would also like to thank each and
every RBC employee for their unwavering
commitment to RBC’s purpose of helping
clients thrive and communities prosper.
Kathleen Taylor
Chair of the Board
Royal Bank of Canada: Annual Report 2018
5
The stories that shaped our year
Creating value for clients and communities
Our growth is driven by creating value for our clients and our communities in a changing world.
What sets us apart is our size, scale and how we’re doing it. We’re building trust and loyalty
across our market-leading franchises by thinking differently to reflect the diversity and goals
of those we serve.
Personal & Commercial Banking
#1 or 2 market share in all key Canadian Banking product
categories and a presence in the Caribbean and the U.S.
Welcome home
An increasing number of newcomers arrive in Canada every year. Our business
continues to grow because we’re connecting early and building life-long
relationships by helping them navigate banking in Canada, become homeowners
and make connections in their new communities.
That’s why we introduced RBC Meeting Place, a first-of-its kind branch, staffed
with employees who bring a rich sense of culture, diversity and empathy to
newcomer clients, as many were newcomers themselves. It’s also why we’ve
partnered with community organizations, like ACCES Employment, to help
newcomers find meaningful work and get advice.
With RBC Ventures, we’ve gone a step further. Created by newcomers for
newcomers, Arrive provides personalized human and digital guidance to make
planning and starting a new life in Canada a smoother experience. Co-founder
Shikha Bhuchar has even picked up a few Arrive families from the airport and
marveled how “it was truly amazing to be part of the first few moments these
families had in Canada.”
For complex arrivals, our cross-border teams work together to connect our clients
with local expertise, language support and the right advice for their journey and
beyond. “We were introduced to RBC before we arrived. Our advisor became one of
our closest family friends. He really made us feel like we were home,” said Louise
Chang, RBC Wealth Management client.
Introducing RBC Ventures
We’re moving beyond banking to create
compelling solutions that solve common
problems for consumers and businesses
and add unique value to all Canadians.
It’s the new part of RBC that acts like a
startup, and is backed by all the resources
of a bank. We aim to attract five million
users over the next five years and convert
10% of them to banking clients. In 2018,
we brought 10 ventures to market and we
have more in development.
Awards
Highest in customer satisfaction in 2018
by J.D. Power
> Canada Banking App Satisfaction Studies
> Canada Retail Banking Advice Study
> Canadian Retail Banking Satisfaction
Study of customers’ satisfaction
Hat trick for RBC Rewards® at the
Loyalty360 Customer Awards
North American Retail
Bank of the Year
> Platinum Award in Customer
Experience and Engagement
> Bronze award for Loyalty and
Advocacy
> Loyalty360 Customer Service
Innovation Award
Named by Retail Banker International
magazine for exceptional financial
performance, client strategy,
innovation and leadership.
6
Royal Bank of Canada: Annual Report 2018
Capital Markets
Wealth Management
A leading global wealth and
asset manager providing
trusted advice and
solutions to individuals,
families and institutions.
Infusing social purpose with
family values
Gender and generation are
redefining wealth, legacy planning
and giving. We’re using global
insights about the changing face
of wealth and legacy, including a
study we commissioned with The
Economist Intelligence Unit this
year, to transform how we serve our
clients. With more diverse expertise
and deep knowledge, we’re helping
our clients grow and protect their
wealth, and achieve both their
personal and financial goals.
“I’ve thought about legacy a lot
since having kids. I’m a third
generation of working moms and it’s
important for me to show them the
value of working and at the same
time, being able to give back,” said
Carmyn Aleshka, RBC Dominion
Securities client.
11th largest global
investment bank(1)
providing expertise in
banking, finance and
capital markets to
corporations, institutional
investors, governments,
and central banks.
Going Green for Life
Our teams across Canada and the
U.S. earned the trust of Green for
Life (GFL), one of the largest and
fastest growing environmental
services companies in North
America. We were the lead financial
advisor on the dual track M&A and
IPO process, and the only investment
bank on its IPO, recapitalization
and financing. Our cross-border
capabilities and purpose-driven
approach helped create a foundation
so GFL can continue to grow and
provide diversified environmental
solutions and services beyond its
current 2.5 million households.
“This deal is one of many that
showcases our global strength
and the client-centric approach
that RBC is known for,” said Peter
Buzzi, Global Co-Head M&A, RBC
Capital Markets.
Insurance
Investor & Treasury
Services
Specialist provider of
asset services, a leader in
Canadian cash management
and transaction banking
services, and a provider of
treasury services to
institutional clients
worldwide.
Winning new clients
The way our clients invest is
changing, so our business is too.
With ongoing investments in
technology, we’re meeting increased
demands from managers to launch
exchange-traded funds (ETFs). Our
client-centric approach and focus
on delivering best-in-class products
and experiences won us four new
ETF mandates, such as First Block
Capital, in 2018.
“As newcomers to ETFs, it was
essential for us to partner with
a team whose collaborative,
professional culture and strong
technology platform complemented
our ETF ambitions,” said Bill
Stormont, Chief Operating Officer,
First Block Capital.
Among the largest Canadian bank-owned insurance organizations, serving more than four million
clients globally.
We’re here for you
In 2018, our Life & Health and Travel Claims teams handled approximately 115,000 cases. With a team of 400+ claims specialists
plus 20 nurses and nurse managers, our clients can contact us 24/7 to help handle the unexpected. Whether it is arranging an
international air ambulance, understanding complicated medical jargon or assistance navigating a local healthcare system, we
provide compassion and peace of mind so our clients can focus on what matters most.
“As a nurse, I love using my healthcare skills to help our clients access the treatment and resources they need so they can get back
on their feet as quickly as possible,” said Rommel Asprer, Clinical Specialist, RBC Life & Health Claims.
(1) Dealogic, based on global investment bank fees, Fiscal 2018.
Royal Bank of Canada: Annual Report 2018
7
The stories that shaped our year
Innovating through inclusion
Our people are our competitive advantage. In an organization
of our size, our greatest asset is the 84,000+ employees who
bring our purpose to life. We understand the value of diversity,
opportunity and experience, and bring these together to create
a great workplace.
Our culture aligns business and technology, and embraces imagination and
innovation. As an employer of choice, we attract, inspire and empower our people
with opportunities to learn, grow and lead change. That’s why we’ve stepped up our
initiatives to build a more inclusive and entrepreneurial culture inside and outside
the bank. This happens through training, mentorship, employee resource groups,
innovation challenges, unique speaker series like RBC Disruptors®, and the chance to
create cutting edge technologies.
Diversity and inclusion is more than just a value at RBC; it’s at the heart of creating
equitable opportunities for all employees to reach their potential. When we challenge
ourselves to create an environment where everyone can make an impact, we drive
engagement, and that’s how we fuel innovation and growth.
Top tech talent
With profound disruption in our
industry and environment, we are
hiring and collaborating with people to
shake up and shape the future of the
financial industry. We are changing the
client experience by thinking and
working differently with the support of
new technologies and ideas dreamed
up in our innovation and data labs.
Globally, these ideas have generated
over 225 patents that are either
pending or issued for RBC.
We’re bringing in employees with
emerging skills in areas such as data
analytics, cloud computing, machine
learning, and Blockchain. We were
also the first Canadian bank to invite
innovators to connect and transform
their ideas into apps with the launch
of RBC DevelopersTM, our Application
Programming Interface Developer
Portal.
And as artificial intelligence (AI)
increasingly influences every
decision we make as a bank, we’ve
expanded our curiosity-driven
team of academics and scientists
at Borealis AI, an RBC Institute for
Research. We’re also finding partners
to advance training, amplify new
research and grow emerging AI talent.
With responsible and ethical AI in
mind, we’re pushing the boundaries
of machine learning to enhance
our business, while helping to keep
Canada at the forefront of global
innovation.
Awards
People awards
Digital honours
We have a great workplace and are consistently
recognized as one of the best employers for diversity
and culture.
> 2018 Bloomberg Gender-Equality Index
> 2018 Employment Equity Achievement Award
by the Government of Canada
> 2018 LinkedIn Top Companies – Canada
> Canada’s Top 100 Employers by Mediacorp Canada
> Our digital employee activation strategy won in the
Employee Productivity category (Model Bank Awards)
> Won Best Private Bank for Digital Client Communication
in North America for how technology is transforming our
business model (Global Wealth Tech Awards)
8
Royal Bank of Canada: Annual Report 2018
The stories that shaped our year
Unparalleled insights and connectivity
We see what others don’t. It’s about bringing our scale, data and people together to deliver more
insights, personalized advice and meaningful solutions for our clients.
A Canadian first: linked loyalty
Saving time
We’ve expanded the pilot of our Wealth
Management AI bot, NORA, outside
of the U.K. to Canada, the U.S. and
Singapore. Using NORA’s data and
integration techniques, we are saving
an average of 6.5 hours of preparation
per client, helping our advisors serve
our large business owner clients with
more timely and relevant advice.
The joy of “found money”
We know a little extra money goes a long
way. We were the first bank in North
America to offer AI-driven financial
insights and a fully automated savings
solution through NOMI™. To date, our
clients have used over 400 million
insights to manage their day-to-day
finances. Our NOMI Find & Save™ clients
have saved more than $35 million, with
active clients saving an average of
$140/month. Both NOMI Insights™
and NOMI Find & Save™ won in the
Personal Financial Experience category
at this year’s Model Bank Awards.
Our innovative partnership with
Petro-Canada allows Canadians
to instantly save on fuel, earn RBC
Rewards faster and save through
unique offers. Since launching in
October 2017, over 744,000 clients
have linked their cards, and we’ve
opened more than 15,800 new
credit cards through direct digital
channels; 71% of these are new
RBC relationships.
Data for the win
We’ve introduced new ways to
deliver insights to our Capital
Markets clients. The RBC Elements™
team uses data and AI to provide our
clients with valuable market insights
and research. Another tool, Aiden uses
real-time reinforcement learning to
transact equity orders, delivering
improved execution quality for our
clients globally – over $10 billion
has been traded since its launch
earlier this year.
Canada’s most used money
management platform
More Canadians are using the
RBC Mobile app to bank whenever
and wherever they want. Since
last year, the number of mobile
transactions increased by 32%.
With more than 3.8 million clients(1)
regularly using the app, it topped
many global and North American
rankings for delivering a best-in-class
mobile experience.
(1) Represents 90-day active mobile banking users in Canadian Banking only.
The future of tech is here
With FutureMakers, we are bringing
together tech professionals inside and
outside of RBC to share knowledge
and discuss major industry advances.
The team has secured 34 external
partnerships and sponsored, hosted,
and organized over 50 events with more
than 10,000 tech professionals.
Protecting our clients
We’re committed to keeping our clients
and their information, safe. We’ve
doubled our spend in cybersecurity
over the past four years and hired
more than 400 specialists in our drive
to develop privacy tools and promote
talent and expertise in this increasingly
vital field. This year, we partnered with
Canada’s University of Waterloo and
Israel’s Ben-Gurion University, investing
over $3.5 million to assess risks and
develop new protection methods.
We employ industry best practices and
collaborate with peers and experts to
provide our clients with confidence in
their financial transactions.
Going global
Through the Advanced Client
Experience (ACE) program – one of our
largest technology investments – we
are designing and developing digitally-
enabled products and services that are
transforming how we interact with our
Investor & Treasury Services clients.
Over the past year, we’ve scaled the
program outside of Canada to help our
clients in Europe and Australia grow
their businesses.
Royal Bank of Canada: Annual Report 2018
9
The stories that shaped our year
Accelerating growth in our second home market
For almost 120 years, we have served clients on both sides of the Canadian-U.S. border. Today,
we have a powerful combination of franchises with Capital Markets, U.S. Wealth Management,
including City National Bank (CNB), and RBC Bank.
In 2018, nearly a quarter of our revenue was generated in the U.S. Our well-established
and growing businesses deliver value to corporate, institutional, and high net worth
clients and their businesses. Drawing on our deep cross-border and international
capabilities, we have the ability to exchange referrals, make larger commitments and win
bigger mandates to add more value for our clients. And through our brand and culture,
and targeted investments in people and technology, we’re well positioned to deepen
existing client relationships, attract new clients and drive long-term growth in this
important market.
Better together: Several years ago,
a leading cloud services provider asked
Capital Markets for help with their capital
leasing needs, but we didn’t have the
capabilities in the U.S. The addition
of CNB changed that. By combining its
equipment leasing subsidiary business
with our balance sheet, CNB has
funded leases totalling more $1 billion
since July 2016.
Making our mark
Landmark deals: Capital Markets acted
on a number of landmark transactions
in 2018, including as joint bookrunner on
Vodafone’s US$11.5 billion bond offering,
and as joint lead arranger on Walt Disney’s
US$36 billion debt financing to support the
acquisition of select assets of Twenty First
Century Fox.
Impact investing: RBC Global Asset
Management provides clients across 49
states and the District of Columbia with
impact investing opportunities, which
aim to generate a measurable social
and environmental impact alongside a
financial return. In fiscal 2018, we launched
an impact bond strategy to help clients
align their fixed income portfolios with
their impact goals, including clean energy,
access to healthcare, affordable housing,
and higher education.
BY THE NUMBERS:
13,000+ employees across
our businesses in the U.S.
23% of our total revenue
was generated in the U.S.
11th largest investment
bank(1) in the U.S. with
36 offices in 23 states
1,800+ advisors in U.S.
Wealth Management
across 42 states
With assets over
US$50 billion, City National
has full-service banking
offices in 6 states and
the District of Columbia
Our private client group is the
7th largest wealth advisory
firm in the U.S.
(1) Dealogic, based on global investment bank fees, Fiscal 2018.
Milestones
For the eighth year, our U.S.
businesses were recognized as one of
the Best Places to Work for LGBT
Equality on the Corporate Equality
Index by the Human Rights Campaign.
Our Capital Markets business was
ranked 8th, our highest ever position,
in the Institutional Investor Awards
All-America Research Survey,
recognizing the proprietary insights
and exceptional service we provide
to our clients through the RBC
Research platform.
RBC Correspondent and
Advisor Services won the 2018
WealthManagement.com Industry
Award for Best Broker/Dealer
Technology and was named Best
Innovative Client Solution at the 5th
Family Wealth Report Awards 2018.
RBC Bank offers U.S. banking services
to Canadians with cross-border
needs, such as retirees, students and
business banking clients. Our online
retail platform, which serves clients
in all 50 U.S. states, surpassed more
than 315,000 clients this year, nearly
doubling since our launch in 2012.
10
Royal Bank of Canada: Annual Report 2018
The stories that shaped our year
Leading the way for a better future
We see a better future for this generation and all the ones
that follow. As a purpose-driven company, we know it takes
a more-than-money approach. We’re using our capabilities
to create impact, stimulate public thinking and forge
high-impact partnerships that prepare our economy,
society and the environment for the future.
Shaping the next generation
We do more than open student bank
accounts. To prepare young people for the
future, we are helping them gain the right
skills to build a foundation of financial,
emotional and physical wellness.
We’re working across our businesses and
communities to make a real difference,
encourage learning and shape new
opportunities for young people. Here are
just a few examples of how:
In Canada, we’re committed to
empowering youth for the jobs of
tomorrow through RBC Future Launch™.
Over the next 10 years, we are dedicating
$500 million to help young people gain
meaningful employment through work
experience, skills development and
networking. Beyond the dollars, we are
working with young people, youth-focused
partners, educational institutions and
allies in the private, public and social
sectors to co-create and provide access
to long-term solutions. And we will
continue to lead conversations on
youth employment, the skills economy,
and the future world of work through
proprietary research like our Humans
Wanted report.
> Work-integrated learning initiatives
like RBC Amplify™, our intensive summer
innovation program offers students
exposure to real business challenges
and leaders at RBC. It also helps build
an important talent pipeline. Over 80%
of the 2018 cohort received offers to
return to RBC.
> We encourage the study of science,
technology and engineering skills
through the RBC Teaching Youth to
Code initiative, which has reached 6,000
students globally through more than
40,000 hours of training since 2015.
> We also support the well-being of
children and youth through RBC Race
for the Kids, an exciting series of 15
races across nine countries. Since the
series began, race events have attracted
more than 210,000 participants and
raised over $47 million.
Environmental leadership
Climate change is the most pressing
issue of our age. To safeguard
our future prosperity, we need to
accelerate clean growth and support
the transition to a low carbon and
climate resilient economy. We’re
leading the way by providing our
stakeholders with a better
understanding of how we assess
climate-related risks and opportunities.
We were the first Canadian financial
institution to issue a dedicated climate-
related disclosure statement that
considered the recommendations of
the Task Force on Climate-related
Financial Disclosures (TCFD).
Our role as a leading financial advisor,
underwriter and thought leader in
the green bond market is just one
example of our commitment. In 2018,
RBC was the 13th largest underwriter
of green bonds globally, with a total
underwriting amount of US$2.6 billion
from 19 deals. We also hosted our
fifth annual Green Bond Conference
in Toronto and published our latest
research report on the global green
bond market.
We remain focused on having the
right policies in place, understanding
risk and developing and implementing
strategic responses to give our clients
and communities a sustainable
advantage.
For more information, see our
Environmental Social and Governance
(ESG) Investors Report available
at www.rbc.com/community-
sustainability/.
Milestones
Debuted a new RBC ETF focused
on advancing gender diversity in
Canada. We are also a signatory of
the 30% Club, a global organization
focused on increasing the proportion
of women on boards. We currently
have 38% representation of women on
our board of directors.
Celebrated the RBC Blue Water
Project®, a 10-year global
commitment of $50 million that
brought two million people together
to help provide access to drinkable,
swimmable, fishable water for
future generations.
Launched a Community and Social
Impact Portal to demonstrate
how we are living our purpose
and balancing the impact of our
initiatives and investments.
Named a constituent of the
FTSE4Good Index for 17th year.
Royal Bank of Canada: Annual Report 2018
11
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, 2018, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2018 Annual Consolidated Financial Statements and related
notes and is dated November 27, 2018. 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 2018 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 12
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
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
How we measure and report our business
segments
13
13
14
14
14
15
16
16
16
17
18
18
18
19
19
21
21
21
Caution regarding forward-looking statements
Key performance and non-GAAP measures
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
Quarterly financial information
Fourth quarter 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
Transactional/positional risk drivers
Credit risk
Market risk
Liquidity and funding risk
Insurance risk
22
25
29
35
38
40
44
44
44
45
46
46
47
49
49
50
52
56
56
67
72
83
Execution risk drivers
Operational risk
Regulatory compliance risk
Strategic risk drivers
Strategic risk
Reputation risk
Legal and regulatory environment risk
Competitive risk
Macroeconomic risk drivers
Systemic risk
Overview of other risks
Capital management
Capital, liquidity and other regulatory
developments
Accounting and control matters
Critical accounting policies and estimates
Controls and procedures
Related party transactions
Supplementary information
Enhanced Disclosure Task Force
recommendations index
83
83
85
85
85
85
86
87
87
87
88
90
99
100
100
104
104
104
112
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 2018 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, market, and regulatory review and outlook for Canadian,
U.S., European and global economies, the regulatory environment in which we operate, the Strategic priorities and Outlook sections for each of our business segments, and the
risk environment including our liquidity and funding risk, and includes our President and Chief Executive Officer’s statements. 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 sections of our Annual Report for the fiscal year ended October 31, 2018 (2018 Annual Report)
including global uncertainty, Canadian housing and household indebtedness, information technology and cyber risk, regulatory changes, digital disruption and innovation,
data and third party related risks, climate change, 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 and social 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 2018 Annual Report are set out in the Economic, market, and regulatory review and outlook section
and for each business segment under the Strategic priorities and Outlook headings. 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 sections of this 2018 Annual Report.
12
Royal Bank of Canada: Annual Report 2018
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) (1)
Total revenue
Provision for credit losses (PCL) (2)
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) (3), (4)
Average common equity (3)
Net interest margin (NIM) – on average earning assets, net (3)
PCL as a % of average net loans and acceptances (5)
PCL on impaired loans as a % of average net loans and acceptances (5)
Gross impaired loans (GIL) as a % of loans and acceptances (6), (7)
Liquidity coverage ratio (LCR) (8)
Capital ratios and Leverage ratio (9)
Common Equity Tier 1 (CET1) ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Selected balance sheet and other information (10)
Total assets
Securities, net of applicable allowance
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) (11)
Common share information
Shares outstanding (000s) – average basic
– average diluted
– end of period (12)
Dividends declared per common share
Dividend yield (13)
Common share price (RY on TSX) (14)
Market capitalization (TSX) (14)
Business information (number of)
Employees (full-time equivalent) (FTE)
Bank branches
Automated teller machines (ATMs)
Period average US$ equivalent of C$1.00 (15)
Period-end US$ equivalent of C$1.00
$
$
$
$
$
$
$
$
$
$
$
$
2018
42,576
1,307
2,676
22,833
15,760
12,431
6,028
2,265
775
741
2,777
(155)
12,431
8.39
8.36
17.6%
68,900
1.66%
0.23%
0.20%
0.37%
123%
11.5%
12.8%
14.6%
4.4%
2017
40,669
1,150
3,053
21,794
14,672
11,469
5,755
1,838
726
741
2,525
(116)
11,469
7.59
7.56
17.0%
65,300
1.72%
0.21%
0.21%
0.46%
122%
10.9%
12.3%
14.2%
4.4%
$ 1,334,734
222,866
576,818
94,039
837,046
73,552
496,459
671,000
5,533,700
1,443,894
1,450,485
1,438,794
3.77
3.7%
95.92
138,009
81,870
1,333
4,537
0.776
0.760
$
$
$
$
$ 1,212,853
218,379
542,617
95,023
789,635
67,416
474,478
639,900
5,473,300
1,466,988
1,474,421
1,452,535
3.48
3.8%
100.87
146,554
78,210
1,376
4,630
0.765
0.775
$
$
$
$
Table 1
2018 vs. 2017
Increase (decrease)
1,907
157
(377)
1,039
1,088
962
273
427
49
–
252
(39)
962
0.80
0.80
n.m.
3,600
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
121,881
4,487
34,201
(984)
47,411
6,136
21,981
31,100
60,400
(23,094)
(23,936)
(13,741)
0.29
n.m.
(4.95)
(8,545)
3,660
(43)
(93)
0.011
(0.015)
4.7%
13.7%
(12.3)%
4.8%
7.4%
8.4%
4.7%
23.2%
6.7%
0.0%
10.0%
n.m.
8.4%
10.5%
10.6%
60 bps
5.5%
(6) bps
2 bps
(1) bps
(9) bps
100 bps
60 bps
50 bps
40 bps
– bps
10.0%
2.1%
6.3%
(1.0)%
6.0%
9.1%
4.6%
4.9%
1.1%
(1.6)%
(1.6)%
(0.9)%
8.3%
(10) bps
(4.9)%
(5.8)%
4.7%
(3.1)%
(2.0)%
1.4%
(1.9)%
$
$
$
$
$
$
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Effective November 1, 2017, we adopted IFRS 9 Financial Instruments (IFRS 9). Results from periods prior to November 1, 2017 are reported in accordance with IAS 39 Financial Instruments:
Recognition and Measurement (IAS 39) in this 2018 Annual Report. For further details on the impacts of the adoption of IFRS 9 including the description of accounting policies selected, refer
to Note 2 of our 2018 Annual Consolidated Financial Statements.
Under IFRS 9, PCL relates primarily to loans, acceptances, and commitments, and also applies to all financial assets except for those classified or designated as fair value through profit or
loss (FVTPL) and equity securities designated as fair value through other comprehensive income (FVOCI). Prior to the adoption of IFRS 9, PCL related only to loans, acceptances, and
commitments. PCL on loans, acceptances, and commitments is comprised of PCL on impaired loans (Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39) and PCL on performing
loans (Stage 1 and Stage 2 PCL under IFRS 9 and PCL on loans not yet identified as impaired under IAS 39). Refer to the Credit risk section and Note 2 of our 2018 Annual Consolidated
Financial Statements for further details.
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.
PCL represents PCL on loans, acceptances and commitments. PCL on impaired loans represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39. Stage 3 PCL under IFRS 9 is
comprised of lifetime credit losses of credit-impaired loans, acceptances and commitments.
Effective November 1, 2017, GIL excludes $229 million of acquired credit-impaired (ACI) loans related to our acquisition of City National Bank (City National) that have returned to performing
status. As at October 31, 2018, $21 million of ACI loans that remain impaired are included in GIL. As at October 31, 2017, GIL includes $256 million related to the ACI loans portfolio from our
acquisition of City National. ACI loans included in GIL added 5 bps to our 2017 GIL ratio. For further details, refer to Note 5 of our 2018 Annual Consolidated Financial Statements.
Effective November 1, 2017, the definition of gross impaired loans has been shortened for certain products to align with a definition of default of 90 days past due under IFRS 9, resulting in
an increase in GIL of $134 million.
LCR is calculated using the Basel III Liquidity Adequacy Requirements (LAR) guideline. For further details, refer to the Liquidity and funding risk section.
Capital and Leverage ratios presented above are on an “all-in” basis. The Leverage ratio is a regulatory measure under the Basel III framework. For further details, refer to the Capital
management section.
Represents period-end spot balances.
Common shares outstanding has been adjusted to include the impact of treasury shares.
(10)
(11) AUA includes $16.7 billion and $9.6 billion (2017 – $18.4 billion and $8.4 billion) of securitized residential mortgages and credit card loans, respectively.
(12)
(13) Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
(14) Based on TSX closing market price at period-end.
(15) Average amounts are calculated using month-end spot rates for the period.
n.m. not meaningful
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
13
About Royal Bank of Canada
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our
success comes from the 84,000+ employees who bring our vision, values and strategy to life so we can help our clients thrive and communities
prosper. As Canada’s biggest bank, and one of the largest in the world based on market capitalization, we have a diversified business model
with a focus on innovation and providing exceptional experiences to our 16 million clients in Canada, the U.S. and 34 other countries. Learn
more at rbc.com.
Our business segments are described below.
Personal &
Commercial Banking
Provides a broad suite of financial products and services in Canada, the Caribbean and the U.S. The strength of
our relationships with many of our clients is underscored by the breadth of our products and the depth of
expertise within our businesses.
Wealth
Management
Serves affluent, high net worth (HNW) and ultra-high net worth (UHNW) clients from our offices in key financial
centres mainly in Canada, the U.S., the United Kingdom (U.K.), Europe, and Asia. We offer a comprehensive suite
of investment, trust, banking, credit and other wealth management solutions. We also provide asset management
products to institutional and individual clients through our distribution channels and third-party distributors.
Insurance
Offers a wide range of life, health, home, auto, travel, wealth, annuities and reinsurance advice and solutions, as
well as creditor and business insurance services to individual, business and group clients.
Investor & Treasury
Services
Acts as a specialist provider of asset services, and a provider of cash management, transaction banking, and
treasury services to institutional clients 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 the bank.
Capital Markets
Provides expertise in banking, finance and capital markets to corporations, institutional investors, asset
managers, governments and central banks around the world. We serve clients from 70 offices in 15 countries
across North America, the U.K. and Europe, and Australia, Asia & other regions.
Corporate Support
Corporate Support consists of 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.
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 2018 against our business strategies and strategic goals, refer to the Business segment results section.
Economic, market and regulatory review and outlook – data as at November 27, 2018
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 2.1% in calendar 2018, which is down from 3.0% in the previous calendar year. The
unemployment rate for October was 5.8%, down from 6.3% a year ago. Economic growth has shifted away from consumers as they adjust their
spending habits in response to higher interest rates and a slower housing market. However, consumption is expected to grow at a moderate pace
driven by rising wages and a healthy labour market. The successful conclusion of trade talks between the U.S., Canada, and Mexico (USMCA) has
reduced trade uncertainty, which previously had an adverse effect on business sentiment. The USMCA trade deal should encourage firms to
invest in order to alleviate capacity pressures and improve productivity. In October, the Bank of Canada (BoC) raised its overnight rate by 25
basis points to 1.75%, the fifth rate hike in 15 months. In calendar 2019, we expect the economy to continue to grow at a slightly more moderate
pace.
U.S.
The U.S. economy is expected to grow by 2.9% in calendar 2018, in comparison to 2.2% in the previous calendar year. Consumer spending has
been supported by a strong labour market, rising wages, and strong consumer confidence. Business investment has increased amid solid
domestic demand and still-accommodative financial conditions, and fiscal stimulus continues to provide support. The impact of higher import
tariffs has not influenced growth notably, but rising protectionism still remains a downside risk to the outlook. In November, the Federal Reserve
(Fed) held the federal funds range at 2.0% to 2.25% as its outlook remained “balanced”. With fiscal spending expecting to continue in calendar
2019 and low unemployment, we anticipate growth to moderate in calendar 2019, but remain at an above-trend pace.
14
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Europe
The economy in the Eurozone is expected to grow at a rate of 1.9% in calendar 2018, which is lower than the prior calendar year of 2.5%. Trade
has been impacted by weaker exports to emerging markets, however, domestic demand has supported growth as unemployment and interest
rates remain low. There is still a high level of uncertainty over the future U.K.-European Union (EU) trading relationship as the March 2019 Brexit
deadline draws near. As economic indicators point to a gradual increase in inflation, the European Central Bank (ECB) has announced intentions
to end net asset purchases in December. In calendar 2019, we expect growth to soften slightly as some economies reach capacity limits and
financial conditions begin to tighten somewhat.
Financial markets
Global equity markets have experienced elevated volatility in the fiscal year. A number of indices posted record highs in mid-January, as markets
rallied on optimistic growth outlooks. Rising interest rates, inflationary concerns, recent declines in commodity prices, and global trade tensions,
including potential trade disputes with the U.S., have triggered equity markets to fall from their recent highs. October saw notable corrections as
the S&P 500 declined by nearly 7%, its worst monthly performance in seven years, and the MSCI World index saw declines of 7.4%. As the Fed
continues to raise short-term interest rates, the U.S. yield curve has flattened. As the global economy continues to expand, we expect central
banks in Canada, the U.S. and the Eurozone to continue to raise interest rates in 2019.
Regulatory environment
We continue to monitor and prepare for regulatory developments and changes in a manner that seeks to ensure compliance with new
requirements, while mitigating adverse business or financial impacts to the extent practicable. Such impacts could result from new or amended
laws or regulations and the expectations of those who enforce them. Significant developments include continuing changes to global and
domestic standards for capital and liquidity, global trade agreements, legislative developments on data privacy, the transition from the London
Interbank Offered Rate (LIBOR) to alternative “risk-free” rates, and the U.S., the U.K. and European regulatory reform.
For a discussion on risk factors resulting from these and other developments which may affect our business and financial results, refer to
the risk sections. For further details on our framework and activities to manage risks, refer to the risk and Capital management sections.
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 bank’s
relative position reflects the market’s perception over a period of time of our overall performance relative to our peers.
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 2018 performance against our medium-term financial performance objectives:
2018 Financial performance compared to our medium-term objectives
Diluted EPS growth of 7% +
ROE of 16% +
Strong capital ratios (CET1) (1)
Dividend payout ratio 40% – 50%
(1)
For further details on the CET1 ratio, refer to the Capital management section.
For 2019, our medium-term financial performance objectives will remain unchanged.
Table 2
2018 results
10.6%
17.6%
11.5%
45%
We compare our TSR to that of a global peer group approved by our Board of Directors (the Board). 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 TSR vs. peer group average
Table 3
Royal Bank of Canada
Peer group average (excluding RBC)
Three year TSR (1)
Five year TSR (1)
13%
Top half
9%
11%
Top half
8%
(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, 2015 to October 31, 2018 and October 31, 2013 to October 31, 2018, 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
$
$
2018
95.92
3.70
(4.9)%
(1.0)%
2017
100.87
3.40
20.4%
25.0%
$
$
2016
83.80
3.20
12.1%
16.8%
$
2015
74.77
3.04
(6.5)%
(3.0)%
Table 4
2014
80.01
2.76
14.3%
19.0%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
15
Financial performance
Overview
2018 vs. 2017
Net income of $12,431 million was up $962 million or 8% from a year ago. Diluted earnings per share (EPS) of $8.36 was up $0.80 or 11% and
return on common equity (ROE) of 17.6% was up 60 bps from 17.0% last year. Our Common Equity Tier 1 (CET1) ratio was 11.5%, up 60 bps from
a year ago.
Our results reflected strong earnings growth in Wealth Management, Personal & Commercial Banking, and Capital Markets. Higher results in
Insurance also contributed to the increase, and Investor & Treasury Services earnings remained consistent with the prior year.
Wealth Management earnings increased mainly due to growth in average fee-based client assets, higher net interest income, and a lower
effective tax rate reflecting benefits from the U.S. Tax Reform. These factors were partially offset by higher variable compensation on improved
results, increased costs related to business growth and technology initiatives, and higher regulatory costs.
Personal & Commercial Banking results were higher mainly reflecting higher spreads, volume growth, and higher card service revenue.
These factors were partially offset by our share of the gain related to the sale of the U.S. operations of Moneris Solutions Corporation (Moneris) in
the prior year, higher PCL in Canadian Banking, mainly due to the adoption of IFRS 9, and higher staff-related costs.
Capital Markets results were up largely driven by a lower effective tax rate reflecting changes in earnings mix and benefits from the U.S. Tax
Reform, and higher revenue in Corporate and Investment Banking and Global Markets. These factors were partially offset by higher regulatory
costs, litigation recoveries in the prior year, and higher costs in support of business growth.
Insurance results increased largely driven by higher favourable investment-related experience and life retrocession contract renegotiations.
These factors were partially offset by lower favourable annual actuarial assumption updates, higher claims volumes, and increased costs in
support of sales growth and client service activities.
Investor & Treasury Services results remained unchanged as improved margins and growth in client deposits and higher revenue in our
asset services business was offset by lower funding and liquidity revenue, increased costs in support of business growth, and higher technology
investments.
Corporate Support net loss was $155 million, largely due to the impact of the U.S. Tax Reform of $178 million which was primarily related to
the write-down of net deferred tax assets, partially offset by asset/liability management activities. Net loss was $116 million in the prior year,
largely reflecting severance and related charges, net unfavourable tax adjustments, and legal costs, partially offset by asset/liability
management activities.
For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital management sections,
respectively.
Impact of foreign currency translation
The following table reflects the estimated impact of foreign currency translation on key income statement items:
(Millions of Canadian dollars, except per share amounts)
Increase (decrease):
Total revenue
PCL
PBCAE
Non-interest expense
Income taxes
Net income
Impact on EPS
Basic
Diluted
Table 5
2018 vs. 2017 (1)
$
$
(53)
6
–
(29)
(15)
(15)
(0.01)
(0.01)
(1)
Effective November 1, 2017, we adopted IFRS 9 Financial Instruments. Results from periods prior to November 1, 2017 are reported in
accordance with IAS 39 Financial Instruments: Recognition and Measurement. For further details on the impacts of the adoption of IFRS
9 including the description of accounting policies selected, refer to Note 2 of our 2018 Annual Consolidated Financial Statements.
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.
Table 6
2017
0.765
0.596
0.686
2018
0.776
0.578
0.654
16
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Total revenue
(Millions of Canadian dollars)
Interest income
Interest expense
Net interest income
NIM
Insurance premiums, investment and fee income
Trading revenue
Investment management and custodial fees
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Net gains on investment securities (1)
Share of profit (loss) in joint ventures and associates
Other
Non-interest income
Total revenue
$
$
$
2018
33,021
14,830
18,191
1.66%
4,279
911
5,377
3,551
1,372
1,800
2,053
1,098
1,054
1,394
147
21
1,328
Table 7
2017
$ 26,904
9,764
$ 17,140
1.72%
$
4,566
806
4,803
3,339
1,416
1,770
2,093
974
933
1,433
172
335
889
$
$
24,385
42,576
$ 23,529
$ 40,669
(1)
Under IFRS 9, the Net gains on investment securities represents realized gains (losses) on debt securities at FVOCI and debt securities
at amortized cost. Under IAS 39, the Net gains on investment securities represents realized gains (losses) on debt and equity available-
for-sale securities (AFS).
2018 vs. 2017
Total revenue increased $1,907 million or 5%, largely due to increased net interest income. Higher investment management and custodial fees,
other revenue, and mutual fund revenue also contributed to the increase. These factors were partially offset by a lower share of profit in joint
ventures and associates and lower insurance premiums, investment and fee income (insurance revenue).
Net interest income increased $1,051 million or 6%, largely due to the impact of higher interest rates and volume growth in Canadian
Banking and Wealth Management. These factors were partially offset by lower funding and liquidity revenue.
NIM was down 6 bps compared to last year mainly due to a shift in the average earning asset mix with volume growth primarily in low
margin reverse repos. These factors were partially offset by improved spreads on deposits in Canadian Banking and on loans in Wealth
Management, reflecting the rising interest rate environment.
Investment management and custodial fees increased $574 million or 12%, mainly due to higher average fee-based assets reflecting net
sales and market appreciation.
Other revenue increased $439 million or 49%, primarily due to higher gains on non-trading derivatives in our funding and liquidity
business, which are largely offset in net interest income, and net gains in our non-trading investment portfolios.
Mutual fund revenue increased $212 million or 6%, mainly reflecting higher average fee-based assets reflecting net sales and market
appreciation, and higher balances driving higher mutual fund distribution fees in Canadian Banking.
Share of profit in joint ventures and associates decreased $314 million or 94%, primarily due to our share of the gain related to the sale of
the U.S. operations of Moneris in the prior year and a loss on an investment in an international asset management joint venture.
Insurance revenue decreased $287 million or 6%, mainly reflecting the change in fair value of investments backing our policyholder
liabilities, which is largely offset in PBCAE. This was partially offset by business growth, and the impact of restructured international life
contracts, which is largely offset in PBCAE.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
17
Additional trading information
(Millions of Canadian dollars)
Total trading revenue
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
2018
2017
$
$
$
$
$
$
$
$
2,199
911
3,110
1,573
1,014
523
3,110
1,573
1,332
523
3,428
1,303
1,415
377
3,095
$
$
$
$
$
$
$
$
2,370
806
3,176
1,796
895
485
3,176
1,796
1,221
485
3,502
1,466
1,251
331
3,048
2018 vs. 2017
Total trading revenue of $3,110 million, which is comprised of trading-related revenue recorded in Net interest income and Non-interest income,
was down $66 million, or 2%, mainly due to lower fixed income trading revenue primarily in the U.S. and Europe, largely offset by higher equity
trading revenue primarily in North America.
Provision for credit losses
2018 vs. 2017
Total PCL increased $157 million from the prior year.
PCL on loans increased $133 million, or 12% from the prior year, mainly due to the adoption of IFRS 9 on November 1, 2017 as well as
higher provisions in Personal & Commercial Banking. PCL ratio on loans increased 2 bps.
For further details on PCL, refer to Credit quality performance in the Credit risk section.
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
2018 vs. 2017
PBCAE of $2,676 million decreased $377 million or 12% from the prior year, mainly due to the change in fair value of investments backing our
policyholder liabilities, which is largely offset in revenue, higher favourable investment-related experience, and life retrocession contract
renegotiations. These factors were partially offset by lower favourable annual actuarial assumption updates, largely related to economic,
mortality and longevity experience. Restructured international life contracts, which is largely offset in revenue, higher claims volumes in both
Canadian and International Insurance, and business growth also partially offset the decrease in PBCAE.
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)
Efficiency ratio adjusted (2)
Table 9
2017
5,936
5,203
1,792
399
13,330
1,434
1,588
1,011
1,214
1,015
2,202
21,794
53.6%
53.5%
$
$
$
$
$
$
2018
6,077
5,597
1,779
323
13,776
1,593
1,558
1,049
1,379
1,077
2,401
22,833
53.6%
53.1%
(1)
(2)
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
Measures have been adjusted by excluding the change in fair value of investments backing our policyholder liabilities. These are
non-GAAP measures. For further details, refer to the Key performance and non-GAAP measures section.
18
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
2018 vs. 2017
Non-interest expense increased $1,039 million or 5%, mainly due to increased costs in support of business growth and an increase in
technology and related costs, including digital initiatives, as well as higher staff-related costs, including variable compensation on improved
results. Higher regulatory and marketing costs, and litigation recoveries in the prior year also contributed to the increase.
Our efficiency ratio of 53.6% was flat from last year. Excluding the change in fair value of investments backing our policyholder liabilities,
our efficiency ratio of 53.1% decreased 40 bps from last year mainly driven by higher revenue across most business segments, partially offset by
generally higher expenses as noted by the drivers above.
Efficiency ratio excluding the change in fair value of investments backing our policyholder liabilities is a non-GAAP measure. For further details,
including a reconciliation, refer to the Key performance and non-GAAP measures section.
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 (2)
Tax-exempt income from securities
Tax rate change
Other
Effective income tax rate
Effective total tax rate (3)
$
$
$
$
$
Table 10
2018
3,329 $
2017
3,203
468 $
687
80
132
29
37
1,433 $
4,762 $
15,760 $
26.5%
(4.8)%
(1.8)%
0.9%
0.3%
21.1%
27.7%
446
643
88
140
30
46
1,393
4,596
14,672
26.5%
(3.5)%
(2.0)%
(0.1)%
0.9%
21.8%
28.6%
(1)
(2)
(3)
Blended Federal and Provincial statutory income tax rate.
As the reduced tax rates from the U.S. Tax Reform were effective on January 1, 2018, the Lower average tax rate applicable to
subsidiaries includes the fiscal 2018 blended rate for U.S. subsidiaries.
Total income and other taxes as a percentage of income before income taxes and other taxes.
2018 vs. 2017
Income tax expense increased $126 million or 4% from last year, mainly due to higher earnings before income tax. The writedown of net deferred
tax assets from the impact of the U.S. Tax Reform was more than offset by the lower corporate tax rate on U.S. earnings.
The effective tax rate of 21.1% decreased 70 bps, mainly due to higher net favourable tax adjustments, higher income from lower tax rate
jurisdictions, and the net impact of the U.S. Tax Reform, as the writedown of net deferred tax assets was more than offset by the lower corporate
tax rate on U.S. earnings. These factors were partially offset by the impact of our share of the gain related to the sale of our U.S. operations of
Moneris in the prior year.
Other taxes increased $40 million or 3% from 2017, mainly due to higher payroll taxes driven by higher staff-related costs.
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 77% of total AUA, as at
October 31, 2018, followed by our Wealth Management and Personal & Commercial Banking businesses with approximately 18% and 5% of
total AUA, respectively.
2018 vs. 2017
AUA increased $60 billion or 1% compared to last year, mainly reflecting net sales and the impact of foreign exchange translation.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
19
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)
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
Table 11
2018
2017
$
31,800
706,800
635,700
934,500
33,100
730,100
765,800
774,900
2,308,800
$ 2,303,900
33,000
133,900
264,800
64,800
496,500
43,900
356,000
871,700
1,456,800
$
$
$
35,400
124,500
238,100
57,500
455,500
43,300
387,500
867,600
1,415,500
2,728,400
$ 2,713,900
5,533,700
$ 5,473,300
$
$
$
$
$
$
$
(1)
Geographic information is based on the location from where our clients are serviced.
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 cover administrative services. Management fees may be
calculated daily, monthly or quarterly as a percentage of the AUM, depending on the distribution channel, product 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 have performance fee arrangements. Performance fees
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
with approximately 99% of total AUM.
2018 vs. 2017
AUM increased $31 billion or 5% compared to last year, primarily due to net sales.
The following table presents the change in AUM for the year ended October 31, 2018:
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition/dispositions
Foreign exchange
2018
Table 12
2017
Money market
Fixed income
Equity
$
36,900 $
52,100
(52,800)
3,100
2,400
300
–
600
200,900 $ 128,700 $
38,400
(34,700)
1,700
5,400
(3,100)
–
600
6,600
(7,600)
7,100
6,100
(2,100)
–
1,300
Multi-asset
and other
Total
Total
273,400 $ 639,900
104,600
(98,600)
30,400
7,500
(3,500)
18,500
$ 586,300
69,300
(77,800)
31,600
22,500
(4,300)
–
1,400
36,400
(9,200)
–
3,900
23,100
42,400
(4,000)
(7,900)
Total market, acquisition/dispositions and foreign
exchange impact
AUM, balance at end of year
900
(2,500)
(800)
(2,900)
(5,300)
30,500
$
40,200 $
203,800 $ 134,000 $
293,000 $ 671,000
$ 639,900
20
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Business segment results
Results by business segments
(Millions of Canadian dollars, except percentage
amounts) (1)
Net interest income
Non-interest income
Total revenue
PCL (3)
PBCAE
Non-interest expense
Net income before income taxes
Income tax
Net income
ROE (4)
Average assets
Personal &
Commercial
Banking
Wealth
Management
Insurance
2018
Investor &
Treasury
Services
Capital
Markets (2)
Corporate
Support (2)
2,602
8,324
$
–
4,279
10,926
(15)
–
8,070
$ 4,279
–
2,676
602
2,871
606
$ 1,001
226
2,265
$
775
$
$
$
$
297
2,294
2,591
1
–
1,617
973
232
741
$
$
$
$
3,567
4,831
8,398
48
–
4,960
3,390
613
2,777
$
$
$
$
Total
18,191
24,385
42,576
1,307
2,676
22,833
15,760
3,329
(51) $
(483)
(534) $
–
–
58
(592) $
(437)
(155) $
12,431
$
$
$
$
$
$
$
$
11,776
5,140
16,916
1,273
–
7,526
8,117
2,089
6,028
27.6%
Table 13
2017
$
$
$
$
Total
17,140
23,529
40,669
1,150
3,053
21,794
14,672
3,203
11,469
17.0%
16.3%
39.3%
23.5%
13.0%
n.m.
17.6%
$ 442,500
$
89,600
$ 15,800
$ 132,100
$ 576,300
$ 38,600
$1,294,900
$1,186,600
(1)
(2)
(3)
(4)
Effective November 1, 2017, we adopted IFRS 9 Financial Instruments (IFRS 9). Results from periods prior to November 1, 2017 are reported in accordance with IAS 39 Financial Instruments:
Recognition and Measurement (IAS 39) in this 2018 Annual Report. For further details on the impacts of the adoption of IFRS 9 including the description of accounting policies selected, refer
to Note 2 of our 2018 Annual Consolidated Financial Statements.
Net interest income, Non-interest income, Total revenue, Net income before income taxes, and Income tax 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.
Under IFRS 9, PCL relates primarily to loans, acceptances, and commitments, and also applies to all financial assets except for those classified or designated as fair value through profit or
loss (FVTPL) and equity securities designated as fair value through other comprehensive income (FVOCI). Prior to the adoption of IFRS 9, PCL related only to loans, acceptances, and
commitments. PCL on loans, acceptances, and commitments is comprised of PCL on impaired loans (Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39) and PCL on performing
loans (Stage 1 and Stage 2 PCL under IFRS 9 and PCL on loans not yet identified as impaired under IAS 39). Refer to the Credit risk section and Note 2 of our 2018 Annual Consolidated
Financial Statements for further details.
This measure 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.
n.m. not meaningful
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.
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 and tax 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. In 2018,
Corporate Support included the impact of the write-down of net deferred tax assets related to the U.S. Tax Reform. In 2017, we maintained some
of our severance and related costs in Corporate Support.
Capital attribution
Our management reporting 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 segment results. 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.
Provisions for credit losses
On November 1, 2017, we adopted IFRS 9, which introduced an expected credit loss impairment model that differs from the incurred loss model
under IAS 39. PCL is recorded to recognize estimated credit losses on all financial assets, except for financial assets classified or designated as
fair value through profit or loss (FVTPL) and equity securities designated as fair value through other comprehensive income (FVOCI), which are
not subject to impairment assessment. For details on our accounting policy on Allowance for credit losses, refer to Note 2 of our 2018 Annual
Consolidated Financial Statements.
PCL is included in the results of each business segment to fully reflect the appropriate expenses related to the conduct of each business
segment. Prior to the adoption of IFRS 9, PCL on loans not yet identified as impaired was included in Corporate Support.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
21
In addition to the key methodologies described above, the following are the key aspects of how some of 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 sources of revenue. The use of teb adjustments and
measures may not be comparable to similar GAAP measures or similarly adjusted amounts disclosed by other financial institutions.
Corporate Support results include all enterprise level activities that are undertaken for the benefit of the organization that are not allocated
to our five business segments, such as enterprise funding, securitizations, net charges associated with unattributed capital, and
consolidation adjustments, including the elimination of the teb gross-up amounts.
Key performance and non-GAAP measures
Performance measures
Return on common equity
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 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 business
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
(Millions of Canadian dollars, except percentage amounts)
Net income available to common shareholders
Total average common equity (1), (2)
ROE (3)
Personal &
Commercial
Banking
$
5,931
21,500
27.6%
Wealth
Management
$
2,209
13,500
16.3%
Insurance
$
767
1,950
39.3%
Total average common equity represents rounded figures.
The amounts for the segments are referred to as attributed capital.
ROE is based on actual balances of average common equity before rounding.
(1)
(2)
(3)
n.m. not meaningful
Table 14
2017
Capital
Markets
Corporate
Support
Total
Total
2018
Investor &
Treasury
Services
$
728 $ 2,692
20,700
3,100
$ (212) $ 12,115 $ 11,128
65,300
68,900
8,150
23.5%
13.0%
n.m.
17.6%
17.0%
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, 2018 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 shareholders’ equity, thus enabling users to identify relative
contributions to shareholder value.
The capital charge includes a charge for common equity and preferred shares. For 2018, our cost of common equity remains unchanged at 8.5%.
22
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
The following table provides a summary of our Economic profit:
Economic Profit
Table 15
(Millions of Canadian dollars)
Net income
add: Non-controlling interests
After-tax effect of amortization of
other intangibles
Adjusted net income (loss)
less: Capital charge
Economic profit (loss)
(Millions of Canadian dollars)
Net income
add: Non-controlling interests
After-tax effect of amortization of
other intangibles
Adjusted net income (loss)
less: Capital charge
Economic profit (loss)
Personal &
Commercial
Banking
$
$
$
6,028
(8)
12
6,032
1,918
4,114
Personal &
Commercial
Banking
$
$
$
5,755
(5)
11
5,761
1,791
3,970
Wealth
Management
Insurance
$
$
$
2,265
–
193
2,458
1,205
1,253
$
$
$
775
–
–
775
174
601
Wealth
Management
Insurance
$
$
$
1,838
–
179
2,017
1,206
811
$
$
$
726
–
–
726
154
572
2018
Investor &
Treasury
Services
$
$
$
741
(1)
14
754
276
478
2017
Investor &
Treasury
Services
$
$
$
741
(1)
15
755
286
469
Capital
Markets
$ 2,777
–
–
$ 2,777
1,845
$ 932
Corporate
Support
Total
$
$
$
(155)
(22)
$ 12,431
(31)
–
(177)
726
(903)
219
$ 12,619
6,144
$
6,475
Capital
Markets
$ 2,525
–
–
$ 2,525
1,690
$ 835
Corporate
Support
Total
$
$
$
(116)
(35)
$ 11,469
(41)
1
206
(150)
722
$ 11,634
5,849
(872)
$
5,785
Results excluding specified item
There were no specified items for the year ended October 31, 2018. Our results for the year ended October 31, 2017 were impacted by the
following specified item:
•
Our share of a gain related to the sale, by our payment processing joint venture Moneris, of its U.S. operations to Vantiv, Inc., which was
$212 million (before- and after-tax) and recorded in Personal & Commercial Banking.
The following tables provide calculations of our business segment results and measures excluding the specified item:
Personal & Commercial Banking
(Millions of Canadian dollars, except percentage amounts)
Total revenue
PCL
Non-interest expense
Net income before income taxes
Net income
Other information
Non-interest expense
Total revenue
Efficiency ratio
Revenue growth rate
Non-interest expense growth rate
Operating leverage
(1)
Includes foreign currency translation.
2017
Item excluded
Gain related to the
sale by Moneris (1)
$
$
$
$
(212)
–
–
(212)
(212)
–
(212)
Table 16
Adjusted
$ 15,651
1,054
7,176
$
$
$
7,421
5,543
7,176
15,651
45.9%
4.3%
3.5%
0.8%
As reported
$ 15,863
1,054
7,176
$
$
$
7,633
5,755
7,176
15,863
45.2%
5.7%
3.5%
2.2%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
23
Canadian Banking
(Millions of Canadian dollars, except percentage amounts)
Total revenue
PCL
Non-interest expense
Net income before income taxes
Net income
Other information
Non-interest expense
Total revenue
Efficiency ratio
Revenue growth rate
Non-interest expense growth rate
Operating leverage
(1)
Includes foreign currency translation.
2017
Item excluded
Gain related to the
sale by Moneris (1)
$
$
$
$
(212)
–
–
(212)
(212)
–
(212)
Table 17
Adjusted
$ 14,665
1,016
6,423
$
$
$
7,226
5,359
6,423
14,665
43.8%
4.7%
3.8%
0.9%
As reported
$ 14,877
1,016
6,423
$
$
$
7,438
5,571
6,423
14,877
43.2%
6.2%
3.8%
2.4%
Efficiency ratio excluding the change in fair value of investments in Insurance
Our efficiency ratio is impacted by the change in fair value of investments backing our policyholder liabilities, which is reported in revenue and
largely offset in PBCAE.
The following table provides calculations of our consolidated efficiency ratio excluding the change in fair value of investments backing our
policyholder liabilities:
Consolidated non-GAAP efficiency ratio
(Millions of Canadian dollars, except percentage amounts)
As reported
2018
Item excluded
Change in fair value
of investments backing
policyholder liabilities
Adjusted
As reported
2017
Item excluded
Change in fair value
of investments backing
policyholder liabilities
Table 18
Adjusted
Total revenue
Non-interest expense
Efficiency ratio
$ 42,576
22,833
$
53.6%
435
–
$ 43,011
22,833
$ 40,669
21,794
$
53.1%
53.6%
58
–
$ 40,727
21,794
53.5%
24
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Personal & Commercial Banking
Personal & Commercial Banking provides a broad suite of financial products and services to individuals and businesses for their day-to-day
banking, investing and financing needs. We have meaningful relationships with many of our clients, underscored by our exceptional client
experience, the breadth of our products and the depth of expertise within our businesses.
> 13 million
Number of clients
Revenue by business lines
$16.9 billion
Total revenue
72% Personal Banking
22% Business Banking
6% Caribbean and U.S. Banking
> 6 million
Active digital users in Canada
35,573
Employees
We operate through two businesses – Canadian Banking and Caribbean & U.S. Banking.
Canadian Banking serves our home market in Canada, where we maintain top (#1 or #2)
rankings in market share in this competitive environment for all key retail and business
products. We have the largest branch network, the most ATMs and one of the largest
mobile sales networks across Canada. In Caribbean & U.S. Banking, we offer a broad
range of financial products and services in targeted markets.
In Canada, we compete with other Schedule 1 banks, independent trust companies,
foreign banks, credit unions, caisses populaires and auto financing companies.
In the Caribbean, our competition includes banks, trust companies and investment
management companies serving retail and corporate customers, as well as public
institutions. In the U.S., we compete primarily with other Canadian banking institutions
with U.S. operations.
2018 Operating environment
› Solid economic growth and low unemployment resulted in continued consumer confidence in Canada, driving solid volume growth.
› The Bank of Canada continued to raise interest rates as the economy returns to full capacity, benefitting our net interest margins.
› The housing market has faced headwinds amid regulatory changes and rising interest rates, contributing to softening mortgage volume
growth.
› Growth in our investment product balances was driven by equity market returns and higher investment activity for the majority of the year,
partly offset by unfavourable market conditions in the last quarter.
› Credit conditions continued to improve, due to wage growth and lower national unemployment.
› Client expectations continue to evolve, driving the digitization of our business. As a result, we continued to invest in digital solutions to
improve the client experience and deliver personalized advice.
› The Caribbean continued to experience underlying economic challenges in certain regions, which has negatively impacted growth in our loan
balances.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
25
Strategic priorities
OUR STRATEGY
PROGRESS IN 2018
PRIORITIES IN 2019
Transform how we serve our clients
Accelerate our growth
Rapidly deliver digital solutions to our clients
Deliver anytime, anywhere solutions to our clients
across all channels, seamlessly integrating mobile and
digital services into our clients’ lives
Continue to reimagine our branch network to meet the
evolving needs of our clients
Focus on engaging key high growth client segments to
build new and deeper relationships and achieve
industry-leading volume growth
Deliver more personalized insights to improve the client
experience while continuing to simplify and digitize
everyday banking
Enhance the digital experience for our small business
and commercial clients and make it easier for them to
transact with us
Continued to provide exceptional and secure client
experiences via our digital platforms while continuing to
release significant additional functionality in our RBC
Mobile app
Continued to innovate our branch network, including
introduction and expansion of new formats for students
and newcomers
Continued to provide personalized advice and valued
banking solutions to our existing and new clients,
including key high-growth segments such as retirees,
youth, newcomers and business owners
Introduced the ability to open chequing and savings
accounts, as well as credit cards, via the RBC Mobile
app, in addition to enhancements to credit card
controls
Launched InvestEase client pilot, a low-cost automated
investment advice and portfolio management business
Enhanced NOMI InsightsTM and NOMI Find & SaveTM,
improving the user experience and providing deeper
personalized digital financial insights and a fully
automated savings service
Continued to roll out MyAdvisor®, an online advice
platform to remotely connect a client to an advisor
Innovate to become a more agile and efficient bank
Continued to make strategic investments to simplify,
digitize and automate activities and processes for both
clients and employees
Invest in new tools and capabilities and proactively
seek ways to simplify and streamline internal processes
and the client experience
In the Caribbean
Continued to invest in our digital banking platforms
while streamlining our branch network
In the U.S.
Outlook
Continued strong growth in U.S. cross-border client
activity supported by significant enhancements to
digital banking capabilities, driving increased client
engagement
Transform our business by investing in our distribution
network, supported by digital innovations, self-serve
channels, redesigned branches and a proactive mobile
sales force, to grow and retain our target retail,
business and corporate client base
Continue to fully digitize account opening processes,
deliver on targeted marketing, content and service
partnerships, and further enhance the digital banking
experience to drive client acquisition and volume
growth
Canada’s economy is expected to grow by 2.1% in calendar 2018, with a slightly more moderate pace in calendar 2019. Trends that emerged in
2018, including stronger business investments and exports, offset by moderating consumer spending and housing growth, are expected to
persist into calendar 2019. The Bank of Canada has raised their overnight rate by a cumulative 125 basis points since July 2017 and we expect
further increases over the next calendar year, which will have a favourable impact on net interest margins, offset by competitive pricing
pressures. As a result of regulatory measures implemented by the Federal government in January 2018, we saw a slowdown in the housing
market over the first half of calendar 2018 with a slight rebound in the latter half. We expect only modest increases in home sales going forward
as rising interest rates and a lack of affordability in key markets will continue to act as headwinds to mortgage volume growth. We continue to
pursue industry-leading volume growth, operational efficiency efforts and channel transformation to achieve our vision of being a digitally-
enabled relationship bank.
In the Caribbean, we will continue to focus on transforming our business in order to be the best bank for our target retail, business and corporate
clients, by building an organization with a multi-channel distribution network supported by digital innovations.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
26
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Personal & Commercial Banking
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Total revenue
PCL on performing assets (1)
PCL on impaired assets (2)
Total PCL
Non-interest expense
Income before income taxes
Net income
Revenue by business
Canadian Banking
Personal Banking
Business Banking
Caribbean & U.S. Banking
Key ratios
ROE
NIM
Efficiency ratio
Operating leverage
Operating leverage adjusted (3)
Selected balance sheet information
Average total assets
Average earning assets, net
Average loans and acceptances, net
Average deposits
Other information
AUA (4), (5)
Average AUA
AUM (5)
Number of employees (FTE) (6)
Effective income tax rate
Credit information
Gross impaired loans as a % of related loans and acceptances (7)
PCL on impaired loans as a % of average net loans and acceptances (2)
Other selected information – Canadian Banking
Net income
NIM
Efficiency ratio
Operating leverage
Operating leverage adjusted (8)
Effective income tax rate
$
$
$
$
$
$
2018
11,776 $
5,140
16,916
115
1,158
1,273
7,526
8,117
6,028 $
15,970 $
12,237
3,733
946
27.6%
2.78%
44.5%
1.7%
3.2%
442,500 $
423,100
423,700
361,700
266,500 $
271,800
4,700
35,573
25.7%
0.37%
0.26%
5,860 $
2.73%
42.5%
1.5%
3.1%
26.0%
Table 19
2017
10,787
5,076
15,863
1,054
1,054
7,176
7,633
5,755
14,877
11,520
3,357
986
28.3%
2.68%
45.2%
2.2%
0.8%
421,100
403,100
402,500
344,400
264,800
252,300
4,600
34,601
24.6%
0.36%
0.26%
5,571
2.62%
43.2%
2.4%
0.9%
25.1%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
PCL on performing assets represents Stage 1 and 2 PCL on all performing assets under IFRS 9, except those classified or designated as FVTPL and equity securities designated as FVOCI. Prior
to the adoption of IFRS 9, PCL on performing assets represents PCL for loans not yet identified as impaired and was included in Corporate Support.
PCL on impaired assets includes PCL on credit-impaired loans, acceptances, and commitments (PCL on impaired loans) and PCL on other credit-impaired financial assets. PCL on impaired
assets represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39. Stage 3 PCL under IFRS 9 is comprised of lifetime credit losses of all credit-impaired financial assets,
except those classified or designated as FVTPL and equity securities designated as FVOCI.
These are non-GAAP measures. Measures have been adjusted by excluding our Q1 2017 share of the gain related to the sale of the U.S. operations of Moneris of $212 million (before- and
after-tax). For further details, including a reconciliation, refer to the Key performance and non-GAAP measures section.
AUA includes securitized residential mortgages and credit card loans as at October 31, 2018 of $16.7 billion and $9.6 billion, respectively (October 31, 2017 – $18.4 billion and $8.4 billion).
Represents year-end spot balances.
Amounts have been revised from those previously presented.
Effective November 1, 2017, the definition of gross impaired loans has been shortened for certain products to align with a definition of default of 90 days past due under IFRS 9.
These are non-GAAP measures. The year ended October 31, 2018 operating leverage ratio in Canadian Banking of 1.5% was impacted by our share of the gain related to the sale of the U.S.
operations of Moneris of $212 million (before- and after-tax) in the year ended October 31, 2017, which was a specified item. For further details, including a reconciliation, refer to the Key
performance and non-GAAP measures section. The year ended October 31, 2018 revenue and expense growth rates in Canadian Banking were 7.3% and 5.8%, respectively. Excluding our
share of the gain related to the sale of Moneris, as noted above, the year ended October 31, 2018 adjusted revenue growth rate was 8.9%.
Financial performance
2018 vs. 2017
Net income increased $273 million or 5% from last year as the prior year included our share of the gain related to the sale of the U.S. operations
of Moneris of $212 million (before- and after-tax). Excluding our share of the gain, net income increased $485 million or 9%, mainly due to
higher spreads, volume growth, and higher card service revenue. These factors were partially offset by higher PCL in Canadian Banking, mainly
due to the introduction of PCL on performing financial assets as a result of adopting IFRS 9, and higher staff-related costs.
Total revenue increased $1,053 million or 7%. Excluding our share of the gain related to the sale of Moneris, revenue increased
$1,265 million or 8%, reflecting improved spreads and volume growth of 5% in both loans and deposits in Canadian Banking. Higher purchase
volumes driving higher card service revenue and higher average balances driving higher mutual fund distribution fees also contributed to the
increase.
Net interest margin increased 10 bps, mainly due to improved spreads on deposits in Canadian Banking, reflecting the rising interest rate
environment, partially offset by the impact of competitive pricing pressures.
PCL on impaired loans ratio remained flat, reflecting overall stable credit quality trends. PCL on impaired assets increased $104 million,
which includes the restructuring of portfolios in Barbados. For further details on performing and impaired PCL, refer to Credit quality performance
in the Credit risk section.
Non-interest expense increased $350 million or 5%, primarily attributable to higher staff-related costs in Canadian Banking and an increase
in technology and related costs, including digital initiatives. Higher marketing costs also contributed to the increase.
Average loans and acceptances increased $21 billion or 5%, largely due to growth in residential mortgages and business loans.
Average deposits increased $17 billion or 5%, reflecting growth in business and personal deposits.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
27
Business line review
Effective November 1, 2017, the lines of business within Canadian Banking have been realigned in a manner that emphasizes our client-centric
strategy. Personal Financial Services and Cards and Payment Solutions, previously reported separately, are reported collectively as Personal
Banking, and Business Financial Services has been renamed to Business Banking. The change had no impact on prior period net income for our
Personal & Commercial Banking segment.
Personal Banking
Personal Banking 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. This includes home equity financing, personal lending, chequing and
savings accounts, private banking, indirect lending (including auto financing), mutual funds and self-directed brokerage accounts, Guaranteed
Investment Certificates (GICs), credit cards, and payment products and solutions.
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
1,203 branches and 4,194 ATMs. We have over 7 million credit card accounts and 23% market share of Canada’s credit card purchase volume.
Financial performance
Total revenue increased $717 million or 6% compared to last year. Excluding our share of the gain noted previously, revenue increased
$929 million or 8%, largely reflecting improved spreads and volume growth in residential mortgages and deposits. Higher purchase volumes
driving higher card service revenue and higher average balances driving higher mutual fund distribution fees also contributed to the increase.
Average residential mortgages increased 6% compared to last year, mainly due to solid, but moderating, housing activity.
Average deposits increased 4% from last year, largely reflecting acquisitions of new clients and an increase in activity from existing clients.
Market appreciation and net sales resulted in continued growth in average mutual fund balances.
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.
Selected highlights
(Millions of Canadian dollars, except number of)
Total revenue
Other information
Average residential mortgages
Average other loans and acceptances, net
Average deposits (1)
Average credit card balances
Credit card purchase volumes
Branch mutual fund balances (2)
Average branch mutual fund balances
AUA – Self-directed brokerage (2)
Number of:
Branches
ATMs
(1)
(2)
Includes GIC balances.
Represents year-end spot balances.
Business Banking
Table 20
Average residential mortgages, personal loans and deposits
(Millions of Canadian dollars)
2018
2017
$ 12,237 $ 11,520
235,700
80,200
202,800
18,100
117,900
147,900
151,500
82,900
222,500
81,400
195,700
17,000
106,600
148,400
140,100
79,600
1,203
4,194
1,235
4,290
240,000
200,000
160,000
120,000
80,000
40,000
0
120,000
100,000
80,000
60,000
40,000
20,000
0
2018
2017
2018
2017
2018
2017
Residential mortgages
Other loans
and acceptances
Deposits
Business Banking offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer financing, trade
products, and services to small and medium-sized commercial businesses 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 $376 million or 11% compared to last year, largely reflecting higher spreads and average volume growth of 9%.
Average loans and acceptances increased 11% and average deposits were up 8%, mainly due to new account acquisitions as well as
deepening of our existing client relationships.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information (average)
Loans and acceptances, net
Deposits (1)
(1)
Includes GIC balances.
Table 21
Average business loans and acceptances and business deposits
(Millions of Canadian dollars)
2018
2017
$ 3,733 $ 3,357
80,800
140,600
72,500
130,400
85,000
68,000
51,000
34,000
17,000
0
150,000
120,000
90,000
60,000
30,000
0
2018
2017
2018
2017
Business loans and acceptances
Business deposits
28
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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 cross-border business serves the banking needs of our Canadian retail and small business clients in the U.S. across all 50 states.
Financial performance
Total revenue was down $40 million or 4% from last year, primarily due to lower volumes in Caribbean Banking and the impact of foreign
exchange translation.
Average loans and acceptances decreased 2%, mainly due to lower client activity and the impact of foreign exchange translation. Average
deposits were flat.
Selected highlights
Table 22
Average loans and deposits (Millions of Canadian dollars)
(Millions of Canadian dollars, except number of and
percentage amounts)
Total revenue
Other information
NIM
Average loans and acceptances, net
Average deposits
AUA (1)
Average AUA
AUM (1)
Number of:
Branches
ATMs
(1)
Represents year-end spot balances.
Wealth Management
$
$
2018
946 $
2017
986
3.95%
8,900 $
18,300
7,700
8,200
4,700
57
269
3.85%
9,100
18,300
8,400
8,400
4,600
67
266
10,000
8,000
6,000
4,000
2,000
0
20,000
16,000
12,000
8,000
4,000
0
2018
2017
2018
2017
Loans and acceptances
Deposits
Wealth Management is a global business serving clients in key financial centres. We serve high net worth (HNW) and ultra-high net worth (UHNW)
individual and institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial goals.
$10.9 billion
Total revenue
> 5,000
Client-facing advisors
> $30 billion
AUA net flows
Asset under Administration
Assets under Management
$971 billion
Total AUA
$665 billion
Total AUM
89% Personal
10% Institutional
1% Mutual Funds
37% Personal
32% Institutional
31% Mutual Funds
Our lines of businesses include Canadian Wealth
Management, U.S. Wealth Management (including City
National), Global Asset Management (GAM), and
International Wealth Management.
• Canadian Wealth Management is the largest full-
service wealth advisory business in Canada, as
measured by AUA serving HNW and UHNW clients
• U.S. Wealth Management (including City National)
includes our private client group (PCG) and City
National; PCG is the 7th largest full-service wealth
advisory firm in the U.S., as measured by number of
advisors, and City National is a premier U.S. private
and commercial bank serving HNW, UHNW and
commercial clients
• GAM is the largest retail fund company in Canada as
well as a leading institutional asset manager
• International Wealth Management serves HNW and
UHNW clients primarily through key financial centres
in Europe, the U.K., and Asia.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
29
2018 Operating environment
› The Bank of Canada and the Fed continued to raise interest rates as the economy returned to full capacity and inflation advanced to target
levels.
› The wealth management industry continued to face the challenge of adapting in an environment of rapid technological advancements, stricter
regulations, zero-fee products and changing demographics. The mutual fund sector has seen a slowdown in sales due to market volatility in
late fiscal 2018 and the rising interest rate environment.
› Growth in our client assets was largely driven by net positive flow of assets reflecting our relationship-focused advisory network, distribution
scale and the strength of our brand.
› U.S. businesses benefitted from interest rate increases, the U.S. Tax Reform, strong volume growth and market appreciation.
› We continued to invest in digital solutions to maintain our competitive advantage and increase efficiencies in an environment of rapidly
changing client preferences and regulatory requirements.
Strategic priorities
OUR STRATEGY
PROGRESS IN 2018
PRIORITIES IN 2019
In Canada, be the premier service provider for HNW
and UHNW clients
Maintained our position as industry leader in our full-
service private wealth business
Continue to retain and attract top-performing advisors
to strengthen our talent advantage
In the U.S., become the leading private and
commercial bank, and wealth manager in our key
markets
In select global financial centres, become the most
trusted regional private bank
In asset management, be a leading, diversified asset
manager focused on global institutional and North
American retail clients
Continued to focus on holistic wealth planning,
including advisor training on intergenerational and
business wealth transfer (e.g., delivery of Money in
Motion and Financial Literacy programs)
Launched RBC Premier Banking to deepen banking
relationships with Wealth Management clients
Deliver a differentiated client experience through
enriched advisor-client interactions and compelling
digital experiences
Broaden and deepen client relationships by leveraging
combined strengths across our other business
segments
Enhanced our digital and data capabilities to drive
increased client satisfaction and advisor productivity
Streamline and simplify the business to continue
improving efficiency and advisor productivity
Continued to invest in capabilities, technology and
talent needed to grow RBC Wealth Management U.S.
Continued expansion in City National’s existing
footprint, as well as solid progress on expanding
offerings to select high growth markets with strong RBC
Wealth Management and Capital Markets presence,
including Washington, D.C. and Minneapolis.
Continue to strive to deliver an exceptional client
experience for targeted HNW, UHNW, middle market
and business banking segments
Leverage the combined strengths within U.S. Wealth
Management (including City National) and Capital
Markets with a view to accelerating growth in the U.S.
Created more tailored value propositions and client
coverage for key segments across HNW and UHNW
client groups
Focused on delivering a differentiated client experience
by leveraging our global capabilities
Continue to optimize our product offerings to meet
evolving client needs
Continue to enhance our distribution capabilities and
leverage our global strengths to deliver an exceptional
client experience
Maintained #1 market share in Canadian mutual fund
AUM
Launched a new Portfolio Review Service – a leading-
edge digital tool that leverages GAM expertise in mutual
fund research to provide a holistic review of a potential
client’s assets
Continue to evolve our product capabilities to meet
existing client needs, while expanding our ability to
reach a broader distribution landscape
Build a sustainable and differentiated global
institutional business which materially contributes to
the success of GAM
Reorganized our institutional business to take a more
globally unified approach
Outlook
Global economies are expected to continue to face equity market volatility, and Canadian and U.S. central banks are expected to maintain their
hawkish bias in the absence of major economic events. While unemployment rates remain at low levels, consumer spending may be impacted by
higher interest rates and household indebtedness. However, we believe we are well-positioned to benefit from our continued focus on delivering
a world-class client experience, the strength of our brand, attracting and retaining top-performing client advisors, as well as ongoing investment
in technology to drive a digitized and lower cost business model, while gaining market share in HNW and UHNW client segments globally.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
30
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Wealth Management
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Fee-based revenue
Transaction and other revenue
Total revenue
PCL on performing assets (1)
PCL on impaired assets (2)
Total 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)
Global Asset Management
International Wealth Management
Key Ratios
ROE
NIM
Pre-tax margin (3)
Selected balance sheet and other information
Average total assets
Average loans and acceptances, net
Average deposits
Attributed capital
Other information
Revenue per advisor (000s) (4)
AUA (5), (6)
AUM (5)
Average AUA
Average AUM
PCL on impaired loans as a % of average net loans and acceptances (2)
Number of employees (FTE) (7)
Number of advisors (8)
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)
Increase (decrease):
Total revenue
Non-interest expense
Net income
Percentage change in average U.S. dollar 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
Table 23
2017
2,248
5,799
2,028
10,075
34
34
7,611
2,430
1,838
2,815
4,891
3,744
1,994
375
13.2%
3.02%
24.1%
88,100
51,500
93,100
13,450
1,353
929,200
634,100
898,500
600,400
0.07%
16,946
4,884
$
$
$
$
$
2018
2,602
$
6,447
1,877
10,926
(19)
4
(15)
8,070
2,871
2,265
3,048
5,419
4,209
2,092
367
16.3%
3.45%
26.3%
89,600
55,500
92,300
13,500
1,454
970,500
664,900
962,600
664,500
0.01%
17,975
5,042
$
$
$
$
2018 vs. 2017
$
(56)
(43)
(11)
1%
(3)%
(5)%
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
PCL on performing assets represents Stage 1 and 2 PCL on all performing assets under IFRS 9, except those classified or designated as FVTPL and equity securities designated as FVOCI. Prior
to the adoption of IFRS 9, PCL on performing assets represents PCL for loans not yet identified as impaired and was included in Corporate Support.
PCL on impaired assets includes PCL on credit-impaired loans, acceptances, and commitments (PCL on impaired loans) and PCL on other credit-impaired financial assets. PCL on impaired
assets represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39. Stage 3 PCL under IFRS 9 is comprised of lifetime credit losses of all credit-impaired financial assets,
except those classified or designated as FVTPL and equity securities designated as FVOCI.
Pre-tax margin is defined as 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.
In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), and International Wealth Management, amounts also include AUA of $5,800 million
(2017: $6,600 million) related to GAM.
Amounts have been revised from those previously presented.
Represents client-facing advisors across all our wealth management businesses.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
31
Client assets – AUA
(Millions of Canadian dollars)
AUA, beginning balance
Asset inflows
Asset outflows
Total net flows
Market impact
Acquisitions/dispositions
Foreign exchange
Total market, acquisition/dispositions and foreign exchange impact
AUA, balance at end of year
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition/dispositions
Foreign exchange
Total market, acquisition/dispositions and
foreign exchange impact
AUM, balance at end of year
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)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
2018
Money market
37,000
$
52,100
(52,800)
3,100
2,400
300
–
500
Fixed income
198,900
$
38,300
(34,600)
1,700
5,400
(3,100)
–
600
Equity
$ 128,700
6,600
(7,600)
7,100
6,100
(2,100)
–
1,300
Multi-asset
and other
$ 269,500 $
7,500
(3,500)
18,300
22,300
(4,300)
–
1,400
Total
634,100 $
104,500
(98,500)
30,200
36,200
(9,200)
–
3,800
800
40,200
(2,500)
201,800
(800)
$ 134,000
(2,900)
$ 288,900 $
$
(5,400)
664,900 $
30,400
634,100
$
2018
929,200 $
292,600
(261,600)
31,000
5,600
(5,700)
10,400
10,300
970,500 $
$
$
Table 24
2017
875,300
274,300
(254,800)
19,500
82,700
(28,200)
(20,100)
34,400
929,200
Table 25
2017
Total
580,700
68,900
(77,300)
31,400
23,000
42,100
(4,000)
(7,700)
Table 26
2018
2017
$
$
$
$
$
$
$
20,500 $
35,400
86,700
225,300
367,900 $
32,600 $
133,900
264,900
51,500
482,900 $
16,100 $
12,300
49,100
42,200
119,700 $
970,500 $
21,600
35,700
94,300
208,700
360,300
35,100
124,500
238,100
45,000
442,700
17,000
11,400
50,100
47,700
126,200
929,200
Total International
Total AUA
(1)
Geographic information is based on the location from where our clients are served.
Financial performance
2018 vs. 2017
Net income increased $427 million or 23%, mainly due to growth in average fee-based client assets, higher net interest income, and a lower
effective tax rate reflecting benefits from the U.S. Tax Reform. These factors were partially offset by higher variable compensation on improved
results, increased costs related to business growth and technology initiatives, and higher regulatory costs.
Total revenue increased $851 million or 8%, primarily due to growth in average fee-based client assets which benefitted from net sales and
market appreciation, and the impact of higher interest rates and volume growth driving higher net interest income. These factors were partially
offset by the change in the fair value of the hedge related to our U.S. share-based compensation plan, which was largely offset in non-interest
expense.
PCL on impaired loans ratio improved 6 bps, mainly due to lower provisions on impaired loans in U.S. Wealth Management (including City
National). For further details on performing and impaired PCL, refer to Credit quality performance in the Credit risk section.
Non-interest expense increased $459 million or 6%, primarily due to higher variable compensation on improved results, increased costs
related to business growth and technology initiatives, and higher regulatory costs. These factors were partially offset by the change in the fair
value of our U.S. share-based compensation plan, which was largely offset in revenue.
Assets under administration increased $41 billion or 4%, largely due to net sales.
Assets under management increased $31 billion or 5%, primarily reflecting net sales.
32
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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 1,750 investment advisors providing comprehensive financial solutions to HNW and UHNW clients. Additionally, we provide
discretionary investment management and estate and trust services to our clients through approximately 80 investment counsellors and over
100 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 $233 million or 8% from a year ago, primarily due to higher average fee-based client assets reflecting net sales.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Average loans and acceptances, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
(1)
Represents year-end spot balances.
Table 27
Average AUA and AUM (Millions of Canadian dollars)
2018
2017
$ 3,048 $ 2,815
3,600
17,300
368,900
100,200
370,300
97,900
3,300
17,400
359,600
90,400
344,900
83,700
400,000
300,000
200,000
100,000
0
100,000
75,000
50,000
25,000
0
2018
2017
2018
2017
AUA
AUM
U.S. Wealth Management (including City National)
U.S. Wealth Management (including City National) includes PCG and City National. Our PCG is the 7th largest full-service wealth advisory firm in
the U.S., as measured by number of advisors, with over 1,900 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.
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, wealth management and
other products and services. In the U.S., we operate in a fragmented and highly competitive industry and our competition includes other broker-
dealers, commercial banks and other financial institutions that service HNW and UHNW individuals, entrepreneurs and their businesses.
Financial performance
Revenue increased $528 million or 11%, mainly due to volume growth and improved spreads driving higher net interest income, and an increase
in average fee-based client assets which benefitted from net sales and market appreciation. These factors were partially offset by the change in
the fair value of the hedge related to our U.S. share-based compensation plan, which was largely offset in non-interest expense.
Selected highlights
Table 28
Average AUA and AUM (Millions of U.S. dollars)
(Millions of Canadian dollars, except as otherwise noted)
Total revenue
Other information (Millions of U.S. dollars)
Total revenue
Average loans, guarantees and letters of
credit, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
(1)
Represents year-end spot balances.
2018
2017
$ 5,419 $ 4,891
4,209
3,744
37,300
48,600
367,100
102,900
366,100
100,600
33,500
47,500
343,200
92,200
319,100
83,500
400,000
300,000
200,000
100,000
0
125,000
100,000
75,000
50,000
25,000
0
2018
2017
2018
2017
AUA
AUM
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
33
Global Asset Management
Global Asset Management provides global investment management services and solutions for individual and institutional investors in Canada,
the U.K., the U.S., 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, and asset management organizations. The Canadian fund management industry is large and mature, but remains 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 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 and regional asset managers in the geographies where we serve clients.
Financial performance
Revenue increased $98 million or 5%, reflecting higher average fee-based client assets due to net sales, partially offset by the change in fair
value of seed capital investments, and a loss on an investment in an international asset management joint venture.
Table 29
Average AUM (Millions of Canadian dollars)
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Canadian net long-term mutual fund
sales (1)
Canadian net money market mutual fund
sales (redemptions) (1)
AUM (2)
Average AUM
2018
2017
$ 2,092 $ 1,994
5,908
10,689
562
421,100
428,200
240
415,200
398,300
500,000
400,000
300,000
200,000
100,000
0
(1)
(2)
As reported to the Investment Funds Institute of Canada. Includes all prospectus-based
mutual funds across our Canadian GAM businesses.
Represents year-end spot balances.
International Wealth Management
2018
2017
AUM
International Wealth Management includes operations in Europe, the U.K., and Asia. We provide customized and integrated trust, banking, credit
and investment solutions to HNW and UHNW clients and corporate clients in key financial centres in Europe, the U.K., and Asia. Competitors to
our International Wealth Management business comprise global wealth managers, traditional offshore private banks, and domestic wealth
managers.
Financial performance
Revenue decreased $8 million or 2%, primarily reflecting lower average fee-based client assets.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Average loans, guarantees and letters of
credit, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
(1)
Represents year-end spot balances.
Table 30
Average AUA and AUM (Millions of Canadian dollars)
2018
2017
$
367 $
375
4,800
12,500
112,800
8,300
114,300
8,800
5,300
13,700
120,300
9,400
130,500
9,300
160,000
120,000
80,000
40,000
0
16,000
12,000
8,000
4,000
0
2018
2017
2018
2017
AUA
AUM
34
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Insurance
RBC Insurance® offers a wide range of life, health, home, auto, travel, wealth, annuities, and reinsurance advice and solutions, as well as
creditor and business insurance services to individual, business and group clients.
$4.3 billion
Total revenue
> 4 million
Number of clients
2,964
Employees
Insurance has operations in Canada and globally, operating under two business lines:
Canadian Insurance and International Insurance.
In Canada, we offer our products and services through our proprietary distribution
channels, comprised of the field sales force, advice centres and online, as well as through
independent insurance advisors and affinity relationships.
Outside Canada, we operate in reinsurance and retrocession markets globally offering life,
disability and longevity reinsurance products.
Premiums and Deposits
$4.6 billion
Total premiums
and deposits
54% Life and Health
43% Annuity and Segregated
Fund Deposits
3% Property and Casualty
2018 Operating environment
› The insurance industry continues to face a number of challenges and opportunities, including regulatory changes, changing customer
preferences and expectations, and increasing technological, digital and mobile transformation in every aspect of the business. Insurers are
also refining product and distribution capacities in order to enhance operational efficiencies and manage expenses. To overcome these
challenges and take advantage of these opportunities, we continued to invest in digitization to enhance access and convenience, reduce
costs, and deliver value to clients beyond traditional insurance products.
›
In a rapidly evolving industry, we continue to adapt to maintain strength in the market by providing a holistic set of insurance solutions to our
clients.
› Our International Insurance business continues to be impacted by reduced mortality retrocession opportunities and longevity profit margin
compression as this market has become highly competitive.
› Our Group Annuity business continues to benefit as companies are transferring defined benefit pension risk to life insurance companies as a
way to refocus their efforts and capital on core business strategies and mitigate the volatility of pension costs. We continued to achieve solid
growth in 2018 in a highly competitive environment.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
35
Strategic priorities
OUR STRATEGY
Improve distribution effectiveness and efficiency
Deepen client relationships
Simplify.Agile.Innovate
Pursue select international opportunities to
grow our reinsurance business
Outlook
PROGRESS IN 2018
PRIORITIES IN 2019
In our Life Insurance business, we made progress in
ensuring that those in the underinsured market have the
opportunity to acquire the Life coverage they need
In Group Insurance, we continued to invest in our
infrastructure to position us for future growth. We
launched the Wellness Program to group health clients
as a value-add service
Property insurance sales were strong. High Net Worth
(HNW) home & auto (RBC Private Insurance®) was
launched in April
July 1, 2018 marked the two-year anniversary of our
Aviva Canada Inc. (Aviva) partnership. With this
relationship, our advisors have benefitted from access
to a new set of solutions for automobiles, expanded
home coverage and insurance solutions for HNW clients
and business owners, as well as access to new
technology and tools to offer insurance solutions to our
clients
In 2018, RBC Insurance was ranked highest in client
satisfaction in the JD Power Home Study
Our Wealth Insurance business continues to gain
momentum and RBC Guaranteed Investment Funds
continued to be one of the fastest growing segregated
fund providers in Canada
In 2018, RBC Insurance implemented Life and Disability
needs assessment, quoting and application tools to
deliver enhanced client experiences on
RBCInsurance.com. We also launched an end-to-end
eApp that enables straight-through-processing for
Simplified Term Life and certain disability products
Management continues to implement strategies to
improve the profitability of the life reinsurance business.
U.K. bulk annuity transactions have increased which is
expected to lead to increased longevity reinsurance
growth into 2019
Continue to improve our distribution effectiveness and
efficiency by enhancing our proprietary distribution
channels and focusing on the delivery of technology
and operational solutions
Deepen client relationships by continuing to be an
innovative, client-focused provider of a full suite of
insurance solutions for mass underserved, mass
affluent and HNW clients
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
The insurance industry is expected to continue experiencing tremendous change and disruption in the coming year. Traditional market
incumbents will see their market share erode if they do not adapt to forces of change, including: evolving customer preferences and
expectations, changing demographics and customer profiles, technological transformation in every area of the business, new distribution
models, the emergence of non-traditional competitors, and enhanced compliance requirements.
2018 was another solid year for pension de-risking transactions in the U.K. Generally, pension plans were in a well-funded position in 2018 and
competitive group annuity pricing made risk transfer transactions attractive for plan sponsors. Many life insurance companies continue to seek
longevity reinsurance to support their group annuity transactions. We will continue to build on our capabilities, expand our portfolio of solutions
in the longevity business and diversify our sources of longevity risk to take advantage of continued opportunities for longevity reinsurance
growth into 2019 and beyond.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section.
36
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Insurance
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
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
Income before income taxes
Net income
Revenue by business
Canadian Insurance
International Insurance
Key ratios
ROE
Selected balance sheet and other information
Average total assets
Attributed capital
Other information
Premiums and deposits (2)
Canadian Insurance
International Insurance
Insurance claims and policy benefit liabilities
Fair value changes on investments backing policyholder liabilities (1)
Number of employees (FTE)
2018
4,032 $
30
217
4,279
2,391
285
602
1,001
775 $
2,213 $
2,066
39.3%
15,800 $
1,950
4,647 $
2,584
2,063
10,000 $
(435)
2,964
Table 31
2017
3,875
453
238
4,566
2,787
266
584
929
726
2,569
1,997
41.8%
14,300
1,700
4,546
2,496
2,050
9,676
(58)
2,691
$
$
$
$
$
$
(1)
(2)
Investment income can experience volatility arising from fluctuation of FVTPL assets. The investments which support actuarial liabilities are predominantly fixed income assets designated as
FVTPL. Consequently, changes in the fair values of these assets are recorded 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, claims and acquisition expense.
Premiums and deposits include premiums on risk-based insurance and annuity products, and individual and group segregated fund deposits, consistent with insurance industry practices.
Financial performance
2018 vs. 2017
Net income increased $49 million or 7% from a year ago, largely driven by higher favourable investment-related experience and life retrocession
contract renegotiations. These factors were partially offset by lower favourable annual actuarial assumption updates, higher claims volumes, and
increased costs in support of sales growth and client service activities.
Total revenue decreased $287 million or 6%, primarily due to the change in fair value of investments backing our policyholder liabilities,
which is largely offset in PBCAE, as indicated below. This factor was partially offset by business growth, and the impact of restructured
international life contracts, which is largely offset in PBCAE.
PBCAE decreased $377 million or 12%, mainly due to the change in fair value of investments backing our policyholder liabilities, higher
favourable investment-related experience, and life retrocession contract renegotiations. These factors were partially offset by lower favourable
annual actuarial assumption updates, largely related to economic, mortality and longevity experience. Restructured international life contracts,
higher claims volumes in both Canadian and International Insurance, and business growth also partially offset the decrease in PBCAE.
Non-interest expense increased $18 million or 3%, largely reflecting increased costs in support of sales growth and client service activities,
and strategic initiatives.
Business line review
Canadian Insurance
We offer life, health, travel, home & auto insurance products (in partnership with Aviva), wealth accumulation solutions, and payout annuities to
individual, group, HNW and business clients across Canada. Our life and health portfolio includes universal life, term life, critical illness,
disability, and group benefits such as long term disability, and health and dental. Our travel products include out-of-province/country medical
coverage, and trip cancellation and interruption insurance.
Our group annuities business helps defined benefit pension plan sponsors better manage and control risk. RBC Insurance has a set of
strategies and initiatives with a goal to build our momentum and position us for growth in a product line where companies are increasingly
looking to transfer the risks associated with their pension obligations to insurance companies – either through group annuity contract or
longevity swap products.
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 solutions as well
as in home and auto through our distribution agreement with Aviva.
Financial performance
Total revenue decreased $356 million or 14% from last year, primarily reflecting the change in fair value of investments backing our policyholder
liabilities, which is largely offset in PBCAE. This factor was partially offset by business growth, primarily reflecting higher revenue from our Life
and Health business.
Premiums and deposits increased $88 million or 4%, reflecting growth in our segregated fund and Life and Health businesses, partially
offset by lower group annuity sales.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
37
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Premiums and deposits
Life and health (1)
Property and casualty
Annuity and segregated fund deposits (1)
Fair value changes on investments backing
2018
$ 2,213 $
2017
2,569
1,280
126
1,178
1,270
119
1,107
policyholder liabilities
(434)
(63)
(1)
Amounts have been revised from those previously presented.
International Insurance
Table 32
Premiums and deposits (Millions of Canadian dollars)
3,000
2,500
2,000
1,500
1,000
500
0
2018
2017
Annuity and segregated
fund
Property and
casualty
Life and health
International Insurance is primarily comprised of our reinsurance businesses which insure risks of other insurance and reinsurance companies.
We offer life, disability and longevity reinsurance products.
The global reinsurance market is competitive and is dominated by a few large players, with significant presence in the U.S., the U.K. and
Europe.
Financial performance
Total revenue increased $69 million or 3%, mainly due to the impact of restructured international life contracts, which is largely offset in PBCAE,
and growth in longevity reinsurance.
Premiums and deposits increased $13 million or 1%, as the impact of restructured international life contracts and growth in longevity
reinsurance was largely offset by lower life retrocession premiums.
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
Investor & Treasury Services
Table 33
2018
$ 2,066 $
2017
1,997
1,225
(5)
843
1,276
(1)
775
(1)
5
Investor & Treasury Services is a specialist provider of asset services, a leader in Canadian cash management and transaction banking services,
and a provider of treasury services to institutional clients worldwide.
$4.3 trillion
Assets under administration
23.5%
Return on equity
$58.6 billion
Average client deposits
Revenue by Geography
$2.6 billion
Total revenue
45% North America
31% Europe (Ex. U.K.)
14% U.K.
10% Asia-Pacific
We deliver asset, transaction banking, treasury, and other services to safeguard client
assets, maximize liquidity, and manage risk across multiple jurisdictions. While we
compete against the world’s largest global custodians, we remain a specialist provider
with a focus on providing best-in-class asset services to fast-growing and sophisticated
asset managers. We compete in selected countries in North America, Europe, the U.K.,
and Asia-Pacific.
We continue to specialize and create digitally-enabled client-centric products and
services. We have top-rated global custody, fund accounting and real estate products and
one of the widest transfer agency networks in the market. We are a leading provider of
Canadian dollar cash management, correspondent banking and trade finance for financial
institutions globally and we provide short-term funding and liquidity management for the
bank.
38
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
2018 Operating environment
› We continued to win new business and retain key clients in the highly competitive global asset services industry.
› Business growth and investment in technology to improve the client experience and our efficiency drove higher costs.
Strategic priorities
OUR STRATEGY
PROGRESS IN 2018
PRIORITIES IN 2019
Be #1 in Canada. Be the undisputed leader of
domestic asset, transaction banking and cash
management services
We won over 30% more business than the prior year
and retained a number of key clients, growing our
Canadian asset services revenue and AUA
Grow income and market share among Canadian asset
managers, investment counsellors, pension funds,
insurance companies and transaction banking clients
Lead in selected fast growing asset servicing
markets. Compete in the asset servicing markets of
Luxembourg, Ireland and Australia to support our
clients’ growth
We achieved record annual sales in Luxembourg and
Australia, and increased asset services revenue in
Luxembourg, Ireland and Australia
Continue to develop long-term partnerships with
sophisticated and fast-growing asset managers
Provide best-in-class products, services and digital
experiences for clients. Innovate, automate and
collaborate to adapt to evolving client needs and
market conditions
We continued to invest in client-focused technology and
efficiency initiatives through our Advanced Client
Experience (ACE) and our robotics processing
automation initiatives
We continued to expand our real estate and private
equity platform to meet growing demand
We redesigned our global sub-custodian network to
broaden our partnership network, enhance our service
offering and better safeguard our clients’ assets
Continue to automate and scale our business to
support our clients’ growth ambitions
Design and deliver digitally-enabled products and
services to transform the way we interact with our
clients
Employ sound risk management practices and
commercial insights to mitigate risks in the pursuit of
profitable growth
Inspire and develop a change-ready workforce
Outlook
In 2019, our focus is to drive top-line growth by continuing to leverage our position in Canada, our recognized capabilities in offshore fund
services markets, and our new Australian capabilities, to win new business and deepen existing client relationships. We will continue to execute
on our strategic technology initiatives to enhance the client experience as we scale our business to support our clients’ growth ambitions. While
we expect the global asset services industry to remain challenging in the near-term, our specialized products and services are well-positioned to
grow 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.
Investor & Treasury Services
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Total revenue
Non-interest expense
Net income before income taxes
Net income
Key Ratios
ROE
Selected balance sheet information
Average total assets
Average deposits
Average client deposits
Average wholesale funding deposits
Attributed capital
Other Information
AUA (1)
Average AUA
Number of employees (FTE)
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 U.S. dollar 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)
Represents period-end spot balances.
Table 34
2017
679
1,756
2,435
1,466
969
741
2018
297 $
2,294
2,591
1,618
973
741 $
23.5%
22.7%
132,100 $
161,200
58,600
102,600
3,100
138,100
132,800
54,400
78,400
3,200
4,283,100 $
4,377,300
4,846
4,266,600
4,044,800
4,771
$
$
$
$
2018 vs. 2017
$
48
38
9
1%
(3)%
(5)%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
39
Financial performance
2018 vs. 2017
Net income was flat. Improved margins and growth in client deposits and higher revenue in our asset services business was offset by lower
funding and liquidity revenue, increased costs in support of business growth, and higher technology investments.
Total revenue increased $156 million or 6%, mainly due to improved margins and growth in client deposits, as well as higher revenue in our
asset services business driven by higher client activity and market volatility. The impact of foreign exchange also contributed to the increase.
These factors were partially offset by lower funding and liquidity revenue.
Non-interest expense increased $152 million or 10%, mainly due to higher costs in support of business growth mainly reflecting increased
staff-related costs, higher investment in technology to drive efficiency, and the impact of foreign exchange translation.
Capital Markets
RBC Capital Markets® is a premier global investment bank providing expertise in banking, finance and capital markets to corporations,
institutional investors, asset managers, governments and central banks around the world. Our professionals ensure that clients receive the
advice, products, and services their businesses need from 70 offices in 15 countries. Our presence extends across North America, the U.K. and
Europe, and Australia, Asia & other regions.
> 14,000
Number of clients
Revenue by Geography
$8.4 billion
Total revenue
51% U.S.
27% Canada
16% U.K. & Europe
6% Australia, Asia &
other regions
#11
Global league rankings(1)
4,162
Employees
We operate two main business lines, Corporate and Investment Banking and Global
Markets. Our legacy portfolio, which has been largely exited, 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, as well as sales
and trading. In Canada, we are a 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. We also have leading capabilities in lending, repo
securities, municipal financing, fixed income, currencies & commodities and equities.
Outside North America, we have a select presence in the U.K. and Europe, and Australia,
Asia & other markets. We offer a diversified set of capabilities in key sectors of expertise
such as energy, mining and infrastructure, industrial, consumer, healthcare and
technology in Europe. In the U.K. and Europe, we have continued to grow our senior client
coverage teams to compete in our key sectors of expertise with global and regional
investment banks. In Australia and Asia, we compete with global and regional investment
banks in select products, consisting of fixed income distribution and currencies trading,
secured financing and corporate and investment banking.
2018 Operating environment
› The trading environment at the start of fiscal 2018 was characterized by continued low volatility and subdued client activity carried over from
the second half of fiscal 2017. An increase in volatility near the end of the first fiscal quarter, driven by trade tensions with the U.S. as well as
inflationary concerns, led to favourable market conditions for our equities business. Credit markets remained challenging, however, due to
increased levels of market uncertainty surrounding trade tensions as well as interest rate movements.
› The global investment banking fee pool decreased by 2%(1) in the fiscal year from the same period a year ago due to decreases in debt and
equity origination. The market was impacted by high equity valuations, a rising rate environment and increased geopolitical and global trade
risks. However, we saw an increase in loan syndication activity in the latter half of the year and expect to see increased levels of M&A and
advisory activity heading into fiscal 2019.
› A constructive credit environment and improvements in the oil & gas and real estate sectors led to lower PCL.
(1)
40
Source: Dealogic, based on global investment bank fees, Fiscal 2018
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
Maintain our leadership position in Canada
Expand and strengthen client relationships in the
U.S., build on core strengths and capabilities in the
U.K. & Europe and optimize performance in
Australia, Asia & other regions
PROGRESS IN 2018
PRIORITIES IN 2019
Continue to focus on deepening client relationships and
winning significant mandates as a trusted partner
Continue to grow and strengthen our senior coverage
teams in the U.S., the U.K. and Europe
Focus capital and coverage to deepen relationships
with clients that are the most significant users of
Capital Markets (top fee payers)
Continue to partner with other segments to bring clients
one RBC solution, specifically with U.S. Wealth
Management (including City National)
Drive technology innovation in our Global Markets
businesses through electronification, algorithmic
trading, artificial intelligence, and other initiatives
Enhance our footprint in Frankfurt and Paris to serve
clients in Europe
We deepened key client relationships from our
Corporate and Investment Banking businesses to
generate additional revenue
We continued to win significant mandates including
working with Canada Pension Plan Investment Board on
its issuance of $1.5 billion of green bonds, which was
the first green bond issuance by a pension fund globally
We were the exclusive advisor to Canadian Real Estate
Investment Trust in their sale to Choice Properties
We grew our Corporate and Investment Banking
presence, and continued to focus on the largest users of
Capital Markets’ products
We continued to win significant mandates by
participating in the T-Mobile US$38 billion debt
financing to support the merger with Sprint including
acting as the Joint Lead Arranger and Joint Book Runner
We were appointed Joint Lead Arranger on The Walt
Disney Company’s US$35.7 billion committed debt
financing to support it’s US$85.1 billion acquisition of
select Twenty First Century Fox assets
We advised on Sempra’s $9.6 billion acquisition of
Energy Fortune Holdings, the largest acquisition in its
history
In the U.K. & Europe, we maintained momentum
throughout the year and improved profitability through
repositioning our fixed income business, as well as
growing our Corporate and Investment Banking
presence in key markets
We had our largest ever industrials advisor role in
Europe as part of the $14.5 billion Melrose acquisition
of GKN plc
In Australia, Asia & other regions, we continued to focus
on our corporate and investment banking, fixed income
trading distribution and foreign exchange trading
capabilities
Optimize capital use to earn high risk-adjusted
returns on assets and equity
We continued to focus on the efficient deployment of
our capital and growth throughout our businesses by
reducing unproductive assets and re-allocating capital
to businesses that provide higher returns and increased
profitability
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
Outlook
In 2019, we expect our investment banking business to benefit from continued investments to expand our presence in the U.S., U.K. and Europe
across various industries and from maintaining our leadership position in Canada. Revenue growth is expected to be led by M&A fees. Going
forward we expect to see moderate growth in our loan book as it underpins Capital Markets’ growth strategy of increasing market share by adding
new clients and doing more with existing clients. We anticipate our trading businesses will continue their momentum into 2019, despite
challenges presented by margin compression. Expanded regulatory and capital requirements resulting from global banking reforms are driving
increased technology investment as well as downward pressure on returns from an increasing capital base, however cost optimization will
remain a key focus as well as driving strategic value from these investments.
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 2018
41
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 on performing assets (2)
PCL on impaired assets (3)
Total PCL
Non-interest expense
Net income before income taxes
Net income
Revenue by business
Corporate and Investment Banking
Global Markets
Other
Key ratios
ROE
Selected balance sheet and other information
Average total assets
Average trading securities
Average loans and acceptances, net
Average deposits
Attributed capital
Other information
Number of employees (FTE)
Credit information
Gross impaired loans as a % of related loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances (3)
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)
Increase (decrease):
Total revenue
Non-interest expense
Net income
Percentage change in average U.S. dollar 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
$
$
$
$
Table 35
2017
3,565
4,617
8,182
62
62
4,719
3,401
2,525
4,000
4,466
(284)
2018
3,567 $
4,831
8,398
(13)
61
48
4,960
3,390
2,777 $
4,113 $
4,496
(211)
13.0%
12.9%
576,300 $
95,800
85,000
70,800
20,700
4,162
0.41%
0.07%
494,400
91,800
83,400
60,200
18,850
3,970
0.63%
0.07%
2018 vs. 2017
$
(34)
(15)
(20)
1%
(3)%
(5)%
(1)
(2)
(3)
The teb adjustment for 2018 was $542 million (2017 – $548 million). For further discussion, refer to the How we measure and report our business segments section.
PCL on performing assets represents Stage 1 and 2 PCL on all performing assets under IFRS 9, except those classified or designated as FVTPL and equity securities designated as FVOCI. Prior
to the adoption of IFRS 9, PCL on performing assets represents PCL for loans not yet identified as impaired and was included in Corporate Support.
PCL on impaired assets includes PCL on credit-impaired loans, acceptances, and commitments (PCL on impaired loans) and PCL on other credit-impaired financial assets. PCL on impaired
assets represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39. Stage 3 PCL under IFRS 9 is comprised of lifetime credit losses of all credit-impaired financial assets,
except those classified or designated as FVTPL and equity securities designated as FVOCI.
Revenue by region (Millions of Canadian dollars)
10,000
7,500
5,000
2,500
0
2018
2017
Australia, Asia &
other regions
Europe
U.S.
Canada
Financial performance
2018 vs. 2017
Net income increased $252 million or 10%, driven by a lower effective tax rate reflecting changes in earnings mix and benefits from the U.S. Tax
Reform, and higher revenue in Corporate and Investment Banking and Global Markets. These factors were partially offset by higher regulatory
costs, litigation recoveries in the prior year, and higher costs in support of business growth.
Total revenue increased $216 million or 3%, largely due to higher equity trading revenue primarily in North America, increased lending
revenue in all regions, and increased loan syndication, debt origination, and M&A in Europe. Gains in our legacy U.S. portfolios, higher
commodities trading revenue, and higher gains from the disposition of certain securities also contributed to the increase. These factors were
partially offset by a decrease in fixed income trading revenue largely in the U.S. and Europe, and lower loan syndication, debt origination and
M&A in the U.S.
42
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
PCL on impaired loans ratio was flat. For further details, refer to the Credit quality performance section.
Non-interest expense increased $241 million or 5%, largely due to higher regulatory costs, litigation recoveries in the prior year, and
increased costs in support of business growth. Higher costs related to changes in the timing of deferred compensation, increased technology
and related costs, and higher compensation on improved results also contributed to the increase.
Business line review
Corporate and Investment Banking
Corporate and Investment Banking comprises our corporate lending, loan syndication, debt and equity origination, M&A advisory services, 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 $4,113 million increased $113 million as compared to last year.
Investment banking revenue decreased $33 million or 2%, primarily due to lower loan syndication, debt origination, and M&A in the U.S.
These factors were partially offset by higher loan syndication, debt origination, and M&A in Europe and increased municipal banking activity.
Lending and other revenue increased $146 million or 8%, reflecting loan growth and improved credit conditions.
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, net
Table 36
Breakdown of total revenue (Millions of Canadian dollars)
2018
2017
$ 4,113 $ 4,000
2,107
2,006
2,140
1,860
74,400
61,100
67,900
60,500
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
(1)
(2)
The teb adjustment for the year ended October 31, 2018 was $224 million (October 31,
2017 – $229 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.
2018
2017
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 $4,496 million increased $30 million.
Revenue in our Fixed income, currencies and commodities business decreased $131 million or 6%, mainly due to lower fixed income
trading revenue primarily in Europe and the U.S.
Revenue in our Equities business increased $52 million or 5%, primarily due to increased equity trading revenue mainly in North America,
partially offset by lower volume in our cash equities businesses in the U.S.
Revenue in our Repo and secured financing business increased $108 million or 10%, mainly due to increased client activity.
Table 37
Breakdown of total revenue (Millions of Canadian dollars)
Selected highlights
(Millions of Canadian dollars)
Total revenue (1)
Breakdown of revenue (1)
2018
2017
$ 4,496 $ 4,466
Fixed income, currencies and commodities
Equities
Repo and secured financing (2)
2,122
1,136
1,238
2,253
1,084
1,129
Other information
Average assets
508,900
435,500
5,000
4,000
3,000
2,000
1,000
0
(1)
(2)
The teb adjustment for the year ended October 31, 2018 was $318 million (October 31,
2017 – $319 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.
2018
2017
Repo and secured
financing
Global equities
Fixed income, currencies
and commodities
Other
Other includes our legacy portfolio, which mainly consists of our U.S. commercial mortgage-backed securities and structured rates in Asia. In
recent years we have significantly reduced several of our legacy portfolios. Our legacy portfolio assets decreased by 48% as compared to last
year.
Financial performance
Revenue increased $73 million as compared to last year largely due to gains in our legacy U.S. portfolios.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
43
Corporate Support
Corporate Support consists of 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)
Non-interest expense
Net income (loss) before income taxes (1)
Income taxes (recoveries) (1)
$
Net income (loss) (2)
Teb adjusted.
(1)
Net income reflects income attributable to both shareholders and Non-Controlling Interests (NCI). Net income attributable to NCI for the year ended October 31, 2018 was $22 million
(2)
(October 31, 2017 – $35 million).
$
Table 38
2018
2017
(51)
(483)
(534)
58
(592)
(437)
(155)
$ (139)
(313)
(452)
238
(690)
(574)
$ (116)
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, 2018 was $542 million and $548 million last year.
The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each period.
2018
Net loss was $155 million, largely due to the impact of the U.S. Tax Reform of $178 million which was primarily related to the write-down of net
deferred tax assets, partially offset by asset/liability management activities.
2017
Net loss was $116 million, largely reflecting severance and related charges, net unfavourable tax adjustments, and legal costs. These factors
were partially offset by asset/liability management activities.
Quarterly financial information
Fourth quarter performance
Q4 2018 vs. Q4 2017
Fourth quarter net income of $3,250 million was up $413 million or 15% from last year. Diluted EPS of $2.20 was up $0.32 and ROE of 17.6%
was up 100 bps. Our fourth quarter earnings increased due to higher results in Personal & Commercial Banking, Capital Markets, Wealth
Management, and Insurance. Investor & Treasury Services earnings remained relatively consistent with the prior period.
Total revenue increased $146 million or 1%, largely due to net interest income reflecting the impact of higher interest rates and volume
growth in Canadian Banking and U.S. Wealth Management (including City National), growth in average fee-based assets reflecting net sales, the
impact of foreign exchange translation, and higher equity trading revenue in North America. Higher group annuity sales, which are largely offset
in PBCAE, and higher card service revenue also contributed to the increase. These factors were partially offset by the change in fair value of
investments backing our policyholder liabilities, which is largely offset in PBCAE, and the change in the fair value of the hedge related to our U.S.
share-based compensation plan, which is largely offset in Non-interest expense.
Total PCL increased $119 million and the PCL ratio on loans of 23 bps increased 6 bps from last year, mainly due to higher provisions in
Capital Markets and Personal & Commercial Banking due to the adoption of IFRS 9 on November 1, 2017, as well as higher provisions on
impaired loans in Capital Markets due to recoveries in the prior year.
PBCAE decreased $643 million, largely reflecting the change in fair value of investments backing our policyholder liabilities, which was
largely offset in revenue, higher favourable investment-related experience and life retrocession contract renegotiations. These factors were
partially offset by lower favourable annual actuarial assumption updates, largely related to economic, mortality and longevity experience, and
higher group annuity sales, which was largely offset in revenue.
Non-interest expense increased $271 million or 5%, primarily reflecting increased costs in support of business growth and technology and
related costs, including digital initiatives. Higher staff-related costs, including variable compensation on improved results, and the impact of
foreign exchange translation also contributed to the increase. These factors were partially offset by the change in the fair value of our U.S. share-
based compensation plan, which was largely offset in revenue.
Income tax expense decreased $14 million from last year, despite higher earnings before tax. The effective income tax rate decreased from
19.9% last year to 17.5%, due to the impact of the U.S. tax reform, changes in earnings mix and higher net favourable tax adjustments.
44
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Q4 2018 vs. Q3 2018
Net income of $3,250 million was up $141 million or 5% compared to the prior quarter, due to life retrocession contract renegotiations in
Insurance, higher earnings in Personal & Commercial Banking from higher spreads and average volume growth in loans and deposits in
Canadian Banking, and lower compensation on decreased results in Capital Markets. Higher net favourable tax adjustments, higher favourable
investment-related experience and favourable annual actuarial assumption updates in Insurance, and higher average fee-based client assets
reflecting net sales in Wealth Management also contributed to the increase. These factors were partially offset by lower fixed income trading
revenue, primarily in North America, higher marketing costs in Personal & Commercial Banking, and higher costs in support of business growth in
Wealth Management.
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses, general
economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table summarizes our results
for the last eight quarters (the period):
Quarterly results (1)
(Millions of Canadian dollars, except per share and
percentage amounts)
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets (2)
Corporate Support (2)
Total revenue
PCL (3)
PBCAE
Non-interest expense
Net income before income taxes
Income taxes
Net income
EPS – basic
– diluted
Segments – net income (loss)
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
Net income
Effective income tax rate
Period average US$ equivalent of
C$1.00
2018
2017
Q4
$ 4,364
2,740
1,039
624
2,056
(154)
$ 10,669
353
494
5,882
$ 3,940
690
$ 3,250
2.21
$
2.20
$ 1,538
553
318
155
666
20
$ 3,250
Q3
$ 4,284
2,798
1,290
620
2,157
(124)
$ 11,025
346
925
5,858
$ 3,896
787
$ 3,109
2.10
$
2.10
$ 1,510
578
158
155
698
10
$ 3,109
Q2
$ 4,103
2,605
806
671
2,010
(141)
$ 10,054
274
421
5,482
$ 3,877
817
$ 3,060
2.06
$
2.06
$ 1,459
537
172
212
665
15
$ 3,060
Q1
$ 4,165
2,783
1,144
676
2,175
(115)
$ 10,828
334
836
5,611
$ 4,047
1,035
$ 3,012
2.02
$
2.01
$ 1,521
597
127
219
748
(200)
$ 3,012
Q4
$ 4,019
2,562
1,612
602
1,954
(226)
$ 10,523
234
1,137
5,611
$ 3,541
704
$ 2,837
1.89
$
1.88
$ 1,404
491
265
156
584
(63)
$ 2,837
Q3
$ 3,970
2,547
1,009
594
2,040
(72)
$ 10,088
320
643
5,537
$ 3,588
792
$ 2,796
1.86
$
1.85
$ 1,399
486
161
178
611
(39)
$ 2,796
Q2
$ 3,798
2,481
1,448
608
2,117
(40)
$ 10,412
302
1,090
5,331
$ 3,689
880
$ 2,809
1.86
$
1.85
$ 1,360
431
166
193
668
(9)
$ 2,809
Table 39
Q1
$ 4,076
2,485
497
631
2,071
(114)
$ 9,646
294
183
5,315
$ 3,854
827
$ 3,027
$ 1.98
1.97
$ 1,592
430
134
214
662
(5)
$ 3,027
17.5%
20.2%
21.1%
25.6%
19.9%
22.1%
23.9%
21.5%
$ 0.767
$ 0.767
$ 0.778
$ 0.794
$ 0.792
$ 0.770
$ 0.746
$ 0.752
(1)
(2)
(3)
Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
Teb adjusted. For further discussion, refer to the How we measure and report our business segments section.
Under IFRS 9, PCL relates primarily to loans, acceptances, and commitments, and also applies to all financial assets except for those classified or designated as FVTPL and equity securities
designated as FVOCI. Prior to the adoption of IFRS 9, PCL related only to loans, acceptances, and commitments. PCL on loans, acceptances, and commitments is comprised of PCL on impaired
loans (Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39) and PCL on performing loans (Stage 1 and Stage 2 PCL under IFRS 9 and PCL on loans not yet identified as impaired
under IAS 39). Refer to the Credit risk section and Note 2 of our 2018 Annual Consolidated Financial Statements for further details.
Seasonality
Seasonal factors may impact our results in certain quarters. The first quarter has historically been 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 business and our Wealth Management investment management business.
Specified items affecting our consolidated results
•
In the first quarter of 2017, our results included our share of a gain related to the sale of the U.S. operations of Moneris of $212 million
(before- and after-tax).
Trend analysis
Earnings have generally trended upward over the period. Quarterly earnings are also affected by foreign currency translation.
Personal and Commercial Banking revenue has benefitted from solid volume growth, higher spreads since the latter half of 2017, and
higher fee-based revenue. The first quarter of 2017 was impacted by our share of a gain related to the sale of Moneris, as noted previously.
Wealth Management revenue has generally trended upwards primarily due to growth in average fee-based client assets which benefitted
from net sales and market appreciation, and the impact of higher interest rates and volume growth driving higher net interest income since the
first half of 2017. The second and fourth quarter of 2018 were adversely impacted by the change in the fair value of the hedge related to our U.S.
share-based compensation plan, which was largely offset in Non-interest expense.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
45
Insurance revenue fluctuated over the period, primarily due to the impact of changes in the fair value of investments backing our
policyholder liabilities. Revenues also benefitted from the impact of new group annuity and restructured international life contracts, which are
largely offset in PBCAE.
Investor and Treasury Services revenue was stable throughout the period, with the first half of 2018 experiencing higher trends due to
generally higher market volatility, growth in client deposits, and increased client activity from our asset services business, combined with an
increase in funding & liquidity performance driven by higher spreads generally experienced in the first quarter of each year.
Capital Markets revenue is influenced, to a large extent, by market conditions and activity in the equity trading business, with the first
quarter results generally stronger than the remaining quarters. The second quarter of 2018 experienced lower equity originations driven by lower
market activity, decreased fixed income trading across all regions, and lower equity trading revenue in the U.S. The decline experienced in the
fourth quarter of 2018 largely resulted from lower fixed income trading revenue, primarily in North America.
PCL saw a general improvement in 2017 due to lower provisions and higher recoveries in our Capital Markets and Canadian Banking
portfolios. On November 1, 2017, we adopted IFRS 9, which resulted in the introduction of PCL on performing financial assets. This was partially
offset by lower PCL on impaired loans in Capital Markets and U.S. Wealth Management (including City National) for the majority of 2018.
However, the fourth quarter of 2018 was impacted by higher provisions on impaired loans in Capital Markets, and the restructuring of portfolios
in Barbados.
PBCAE has fluctuated quarterly as it includes the changes to the fair value of investments backing our policyholder liabilities, the impact of
group annuity sales and restructured international life contracts, all of which are largely offset in Revenue. PBCAE has also increased due to
business growth, and has been impacted by investment-related experience, and claims volumes over the period. The results are impacted by
actuarial adjustments, which generally occur in the fourth quarter of each year.
While we continue to focus on efficiency management activities, Non-interest expense has generally trended upwards over the period.
Growth in Non-interest expense mainly reflects higher variable compensation on improved results in Wealth Management and Capital Markets,
as well as higher costs in support of business growth and our ongoing investments in technology, including digital initiatives. The first quarter of
2017 included an impairment related to properties held for sale, while the third quarter of 2017 was impacted by higher severance costs. Fiscal
2018 has been impacted by higher regulatory and compliance costs. In addition, the decrease over the second and fourth quarter of 2018 mainly
reflects the change in the fair value of our U.S. share-based compensation plan, which was largely offset in Revenue.
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 and various levels of tax adjustments. The first quarter of 2018 was
adversely impacted by the U.S. Tax Reform, which resulted in the write-down of net deferred tax assets, however, this was more than offset by
the ongoing lower corporate tax rate in fiscal 2018. Our effective income tax rate has generally been impacted over the period by higher
favourable tax adjustments, lower tax-exempt income, and changes to the earnings mix.
Financial condition
Condensed balance sheets
(Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities, net of applicable allowance (1)
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
Retail
Wholesale
Allowance for loan losses
Other – Derivatives
– Other (2)
Total assets
Liabilities
Deposits
Other – Derivatives
– Other (2)
Subordinated debentures
Total liabilities
Equity attributable to shareholders
Non-controlling interests
Total equity
Total liabilities and equity
$
Table 40
2018
2017
$
30,209
36,471
222,866
294,602
399,452
180,278
(2,912)
94,039
79,729
28,407
32,662
218,379
220,977
385,170
159,606
(2,159)
95,023
74,788
$ 1,334,734
$ 1,212,853
$
$
837,046
90,238
318,364
9,131
789,635
92,127
247,398
9,265
1,254,779
1,138,425
79,861
94
79,955
73,829
599
74,428
$ 1,334,734
$ 1,212,853
(1)
(2)
Securities are comprised of trading and investment securities. Under IFRS 9, investment securities represent debt and equity securities at FVOCI and debt securities at amortized cost, net of
the applicable allowance. Under IAS 39, investment securities represented available-for-sale securities and held-to-maturity securities. For further details on the impacts of the adoption of
IFRS 9, refer to Note 2 of our 2018 Annual Consolidated Financial Statements.
Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
2018 vs. 2017
Total assets increased $122 billion or 10% from October 31, 2017. Foreign exchange translation increased total assets by $15 billion.
Cash and due from banks was up $2 billion or 6%, mainly due to higher deposits with central banks reflecting our cash management
requirements.
46
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Interest-bearing deposits with banks increased $4 billion or 12%, primarily due to higher deposits with central banks reflecting our cash
management activities.
Securities, net of applicable allowance, were up $4 billion or 2%, largely driven by the change in classification of certain securities in loans
and receivables to investment securities as a result of adopting IFRS 9 and the impact of foreign exchange translation. These factors were
partially offset by lower government debt securities reflecting our cash management and liquidity requirements.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $74 billion or 33%, mainly
attributable to increased client activities.
Loans (net of Allowance for loan losses) were up $34 billion or 6%, largely due to volume growth, which led to higher wholesale loans and
residential mortgages, partially offset by the reclassification of certain securities in loans and receivables to investment securities as mentioned
above.
Derivative assets were down $1 billion or 1%.
Other assets were up $5 billion or 7%.
Total liabilities increased $116 billion or 10% from October 31, 2017. Foreign exchange translation increased total liabilities by $15 billion.
Deposits increased $47 billion or 6%, mainly as a result of higher business and retail deposits due to increased client demand, higher
issuances of fixed term notes driven by funding requirements, and higher bank deposits due to increased client activity.
Derivative liabilities were down $2 billion or 2%, mainly attributable to lower fair values on foreign exchange contracts and interest rate
swaps, partially offset by the impact of foreign exchange translation.
Other liabilities increased $71 billion or 29%, mainly due to higher obligations related to repurchase agreements due to client activity.
Total equity increased $6 billion or 7% reflecting earnings, net of dividends and share repurchases, partially offset by our adoption of IFRS 9
which resulted in a decrease in equity of $637 million. For further details on the impacts of the adoption of IFRS 9, refer to Note 2 of our 2018
Annual Consolidated Financial Statements.
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 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 and residential and commercial mortgage loans primarily to diversify our funding sources,
enhance our liquidity position and for capital purposes. We also securitize residential and commercial mortgage loans as part of our sales and
trading activities.
We securitize our credit card receivables, on a revolving basis, through a consolidated structured entity. We securitize single and multiple-
family residential mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program. The majority of our
securitization activities are recorded on our Consolidated Balance Sheets as we do not meet the derecognition criteria. As at October 31, 2018,
we derecognized $1.3 billion (October 31, 2017 – $1.2 billion) of mortgages where both the NHA MBS and the residual interests in the mortgage
pools were sold to third parties resulting in the transfer of substantially all of the risks and rewards. For further details, refer to Note 6 and Note 7
of our 2018 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 2018, there were no securitization activities of
residential mortgage loans for the Canadian social housing program (October 31, 2017 – $13 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 risks and rewards of ownership of the securitized assets. During
the year ended October 31, 2018, we securitized $352 million of commercial mortgages (October 31, 2017 – $407 million). Our continuing
involvement with the transferred assets is limited to servicing certain of the underlying commercial mortgages sold. As at October 31, 2018,
there was $1.5 billion of commercial mortgages outstanding that we continue to service related to these securitization activities (October 31,
2017 – $1.4 billion).
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 clients’ 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.
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 2018 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. Our clients primarily use our
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
47
We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit enhancements to the
multi-seller conduits. Revenue for all such services amounted to $262 million during the year (October 31, 2017 – $287 million).
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 41
2018
2017
As at October 31 (Millions of Canadian dollars)
Backstop liquidity facilities
Credit enhancement facilities
Total
Notional of
committed
amounts (1)
$
Allocable
notional
amounts
Outstanding
loans (2)
38,342 $ 36,193 $
2,149
2,149
$
40,491 $ 38,342 $
Maximum
exposure
to loss (3)
– $ 36,193 $
–
– $ 38,342 $
2,149
Notional of
committed
amounts (1)
Allocable
notional
amounts
Outstanding
loans (2)
38,622 $ 35,981 $
2,270
2,270
40,892 $ 38,251 $
Maximum
exposure
to loss (3)
371 $ 36,352
2,270
371 $ 38,622
–
(1)
(2)
(3)
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 $nil (October 31, 2017 – $17 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 2018 Annual Consolidated Financial Statements for more details.
As at October 31, 2018, the notional amount of backstop liquidity facilities we provide decreased by $280 million or 1% from last year. The
decrease in the amount of backstop liquidity facilities provided to the multi-seller conduits as compared to last year was primarily due to
decreases in the outstanding securitized assets of the multi-seller conduits partially offset by foreign exchange translation. The notional amount
of partial credit enhancement facilities we provide decreased by $121 million from last year. The decrease in the credit enhancement facilities
reflects decreased client usage. Total loans extended to the multi-seller conduits under the backstop liquidity facilities decreased by
$371 million from last year primarily due to principal repayments.
Maximum exposure to loss by client type
Table 42
As at October 31 (Millions of dollars)
Outstanding securitized assets
Credit cards
Auto loans and leases
Student loans
Trade receivables
Asset-backed securities
Equipment receivables
Consumer loans
Dealer floor plan receivables
Fleet finance receivables
Insurance premiums
Residential mortgages
Transportation finance
Total
Canadian equivalent
2018
2017
US$
C$
Total (C$)
US$
C$
Total (C$)
$
4,406
10,726
1,707
2,220
–
1,581
1,387
833
614
122
–
1,335
$ 24,931
$ 32,802
$
$
$
510
2,148
–
–
–
–
–
852
306
194
1,377
153
5,540
5,540
$
6,308
16,260
2,246
2,921
–
2,080
1,825
1,948
1,113
355
1,377
1,909
$ 38,342
$
4,058
10,597
1,747
2,358
287
1,402
1,267
939
766
134
–
1,346
$ 24,901
$ 38,342
$ 32,122
$
$
$
510
3,113
–
–
–
–
–
852
306
163
1,377
179
6,500
6,500
$
5,745
16,783
2,253
3,042
371
1,809
1,634
2,064
1,294
336
1,377
1,914
$ 38,622
$ 38,622
Our overall exposure decreased by 1% compared to last year, primarily reflecting a decrease in the outstanding securitized assets of the multi-
seller conduits, partially offset foreign exchange translation. Correspondingly, total assets of the multi-seller conduits decreased by $281 million
or 1% over last year, primarily due to decreases in the Auto loans and leases, Asset-backed securities and Fleet finance receivables asset
classes, which were partially offset by increases in the Credit card and Equipment 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 the U.S. multi-
seller conduits are reviewed by Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch). Transactions in 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.
As at October 31, 2018, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $24.9 billion, an increase of
$107 million or 0.4% from last year. The increase in the amount of ABCP issued by the multi-seller conduits compared to last year is primarily
due to foreign exchange translation. The rating agencies that rate the ABCP rated 71% (October 31, 2017 – 70%) of the total amount issued
within the top ratings category and the remaining amount in the second highest ratings category.
Structured finance
We invest in auction rate securities (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, 2018 was $176 million (October 31, 2017 –
$443 million). The decrease in our maximum exposure to loss is primarily related to the sale to third parties and redemptions.
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, 2018, our maximum exposure
to loss from these unconsolidated municipal bond TOB trusts was $2.4 billion (October 31, 2017 – $1.7 billion). The increase in our maximum
exposure to loss relative to last year is primarily due to additional TOB trusts.
48
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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 (CLO). A portion of the proceeds from the sale of the term CLO is used to fully repay the senior
warehouse financing that we provide. As at October 31, 2018, our maximum exposure to loss associated with the outstanding senior warehouse
financing facilities was $837 million (October 31, 2017 – $263 million). The increase in our maximum exposure to loss relative to last year is
related to the addition of new financing facilities. We provide senior financing to unaffiliated structured entities to acquire loans. As at
October 31, 2018, our maximum exposure to loss associated with the outstanding senior financing facilities was $1.8 billion (October 31, 2017
– $1.2 billion). The increase in our maximum exposure to loss relative to last year is related to the addition of new 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, 2018, our maximum exposure to loss was $2.7 billion (October 31, 2017 –
$2.9 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, 2018, our maximum exposure to these funds was $275 million (October 31, 2017 –
$268 million). The increase in our maximum exposure compared to last year is due to the impact of foreign currency 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, 2018, our maximum exposure to loss in these entities was $10.2 billion
(October 31, 2017 – $6.1 billion). The increase in our maximum exposure to loss compared to last year reflects growth in the securitized assets
in these entities and the impact of foreign currency translation. Interest and non-interest income earned in respect of these investments was
$126 million (October 31, 2017 – $87 million).
Guarantees, retail and commercial commitments
We provide our clients with guarantees and commitments 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, 2018 amounted to $392.7 billion compared to
$348.8(1) billion last year. The increase compared to last year relates primarily to business growth in securities lending indemnifications, other
credit-related commitments, and by the impact of foreign exchange translation. Refer to Liquidity and funding risk and Note 24 of our 2018
Annual Consolidated Financial Statements for details regarding our guarantees and commitments.
Risk management
Overview
We are in the business of managing the risks inherent to the financial services industry as we aim to create maximum value for our shareholders,
clients, employees and communities. The ability to manage risk is a core competency of the bank, and is supported by our strong risk conduct
and culture and an effective risk management approach. We define risk as the potential for downside volatility of earnings or an adverse effect
on our resilience, due to losses or an undesirable outcome with respect to volatility of actual earnings in relation to expected earnings, capital
adequacy or liquidity. Our organizational design and governance processes ensure that our Group Risk Management (GRM) function is
independent from the businesses it supports.
We ensure 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 across RBC, through adherence to our Enterprise Risk Appetite Framework (ERAF). Our major
principal risks include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal and regulatory
environment, competitive, and systemic risks.
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, risk
limits and
corresponding capital
and liquidity needs
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
and, when necessary,
challenge decisions that
give rise to material risks
Maintain an effective
enterprise-wide risk
management process
through working in
partnership with all
areas of the enterprise
Ensure the
continuous
improvement
in risk
management
processes,
tools and
practices
Risk Management Principles
Effectively
balance risk
and reward to
enable
sustainable
growth
Responsibility
for risk
management
is shared
Undertake only
risks we
understand. Make
thoughtful and
future-focused risk
decisions
Always uphold our Purpose and
Vision, and consistently abide by
our Values and Code of Conduct
to maintain our reputation and
the trust of our clients,
colleagues and communities
Maintain a
healthy and
robust control
environment
to protect our
stakeholders
Use
judgment
and
common
sense
Always be
operationally
prepared and
financially
resilient for a
potential crisis
(1)
Amounts have been revised from those previously presented.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
49
Risk pyramid
Our risk pyramid identifies the principal risks the organization faces 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 and level of control and influence.
1 MACROECONOMIC
2 STRATEGIC
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
3 EXECUTION
OPERATIONAL
REGULATORY
COMPLIANCE
M
O
R
E
4 TRANSACTIONAL / POSITIONAL
CREDIT
MARKET
LIQUIDITY
INSURANCE
Risk drivers
Risk drivers are key factors that would have a strong influence on whether or not one or more of our risks will materialize, which include the
following:
2.
1. 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 deterioration in the Canadian housing market, abrupt
changes in the geopolitical environment, or unfavourable global trade agreements. 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 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 regulatory frameworks. 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 of transactions and balance sheet positions we undertake every day.
4.
3.
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
consider to have over each risk driver.
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 a greater level of control and influence, are ranked higher on the pyramid than the
other more controllable risks. This ranking acknowledges the level of controllability associated with people, systems and external events.
Strategic risk generally arises from us either choosing the wrong strategy, or poorly executing on the right strategy. Both strategic risk and
reputation risk are placed near the middle of the pyramid to denote the fair degree of control and influence we can exert in managing these risk
types relative to others. 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.
Systemic risk is placed at the top of our risk pyramid, which we consider to be the least controllable type of risk arising from the business
environment in which we operate. However, we have controls in place 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.
Top and emerging risks
Our view of risks is not static. An important component of our risk management approach is to ensure that top risks and emerging risks, as they
evolve, are identified, managed, and incorporated into our existing risk management assessment, measurement, monitoring and escalation
processes. These practices ensure a forward-looking risk assessment is maintained by management.
Identification of top and emerging risks occurs in the course of business development and as part of the execution of risk oversight
responsibilities by risk owners and risk oversight stakeholders.
A top risk is a risk already identified and well understood that could materially impact our financial results, reputation, business model, or
strategy in the short to medium term.
50
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Top Risks
Description
Information Technology and
Cyber Risks
Global Uncertainty
Canadian Housing and
Household Indebtedness
Information technology (IT) and cyber risks remained as key risks, not only for the financial services sector,
but for other industries worldwide. Due to the size, scale, and global nature of our operations, our heavy
reliance on the internet to conduct day-to-day business activities, and our evolving intricate technological
infrastructure, we are subject to heightened risks in the form of cyber-attacks, data breaches, cyber extortion
and similar compromises. Our use of third party service providers, which are also subject to these potential
compromises, increases our risk of a potential attack, breach or disruption as we have less immediate
oversight over their IT domain. Additionally, clients’ use of personal devices can create further avenues for
potential cyber-related incidents as the bank has little or no control over the safety of these devices. As the
volume and sophistication of cyber-attacks continues to increase, the resulting implications could include
business interruptions, service disruptions, financial loss, theft of intellectual property and confidential
information, litigation, enhanced regulatory attention and penalties, and reputational damage. Furthermore,
the adoption of emerging technologies, such as cloud computing, artificial intelligence and robotics, call for
continued focus and investment to manage our risks effectively. For details on how we are managing these
risks, refer to the Operational risk section.
Global uncertainty remained a top risk throughout 2018. The U.S. administration continued to advocate for
policy changes, particularly those related to trade which added to overall global uncertainty and volatility.
The Canadian economy continues to face specific risks with respect to the evolving trade environment.
Concerns also remain around the social, political and economic impacts of the changing political landscape
in Europe, including the final outcome of Brexit negotiations. In addition, there are growing concerns over an
economic slowdown in emerging markets in light of capital outflows in favour of developed markets and
expected interest rate increases. Broader geopolitical tensions remained high amongst the U.S., Russia,
China, and across the Middle East.
While the Canadian economy continued to grow and low unemployment rates prevailed this fiscal year, the
housing market remained a concern for the Canadian financial system, although at a diminishing level.
Overall housing prices stayed elevated and affordability remained stretched. The measures implemented by
the Canadian government and regulators over the past two years to help safeguard homebuyers and
financial institutions alike did have the desired effect of cooling the market and returning balance to
demand-supply conditions. Annual price gains decelerated to low single-digits in key markets, specifically
across both the Greater Toronto Area and Greater Vancouver Area. However, as the BoC continues to be on a
path of gradually raising interest rates, this could have materially negative credit implications for our broader
consumer lending activities in the future given current levels of elevated household indebtedness.
Regulatory Changes
We operate in multiple jurisdictions, and the continued introduction of new or revised regulations leads to
increasing focus across the organization on meeting higher regulatory requirements across a number of
different markets. Financial and other reforms coming on stream in multiple jurisdictions continue to provide
challenges and impact our operations and strategies.
An emerging risk is one that could materially impact our financial results, reputation, business model, or strategy, but is distinguished by a lack
of clarity with respect to the probabilities, impacts, timing, and/or ranges of potential outcomes. We are actively monitoring our emerging risks,
which include the following:
Emerging Risks
Description
Digital Disruption
and Innovation
Evolving consumer behaviour, the expansion of online shopping and the emergence of disruptors are
creating competitive pressures across a number of sectors. In addition, established technology companies,
newer competitors, and regulatory changes continue to foster new business models that could challenge
traditional banks and financial products. The adoption of new technologies, such as Artificial Intelligence,
Robotic Process Automation (RPA) and Blockchain could result in new and complex risks that would need to
be managed effectively. We identify, assess, and manage the risks of emerging technologies prior to their
adoption.
Data and Third Party
Related Risks
The management, use, and protection of data are becoming increasingly important, particularly given the
adoption of the General Data Protection Regulation (GDPR) by the EU and its implementation in 2018, and
the expected proliferation of similar regulatory frameworks in other markets. Further, as we increasingly
partner with third parties, our potential exposure to regulatory compliance, operational and reputational risk
increases. For details on how we are managing these risks, refer to the Operational risk section.
Climate Change
Extreme weather events and the global transition to a low carbon economy could result in a broad range of
impacts, including potential strategic, reputational, structural and credit related risks for us and our clients
in climate sensitive sectors. For details on how we are managing these risks, refer to the Operational risk and
Environment and social risk sections.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
51
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 and how much risk 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 the three lines of defence governance model to manage risks across the enterprise.
BOARD OF DIRECTORS
RISK COMMITTEE
AUDIT COMMITTEE
GOVERNANCE COMMITTEE
HUMAN RESOURCES COMMITTEE
The Board of Directors (the Board) establishes the tone from above, 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 by ensuring that the policies, procedures and controls used by management
are sufficient to keep risks within our risk appetite. 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. Its oversight activities include the review of the GRM function which evaluates GRM’s success
against its key priorities, the mandate of the Chief Risk Officer (CRO), the GRM organizational structure, and the function’s budget and resources.
The Audit Committee assists the Board in its oversight of (i) the integrity of our financial statements; (ii) the qualifications, performance and independence
of our external auditors; (iii) the performance of our internal audit function and internal controls; and (iv) compliance with legal and regulatory requirements.
The Governance Committee recommends individuals for Board member election or re-election, oversees the process for evaluating Board members, and serves
as our conduct review committee. Additional responsibilities include (i) developing and recommending governance frameworks, principles and policies to the
Board; (ii) overseeing corporate citizenship matters; (iii) monitoring developments in corporate governance and adapting best practices; and (iv) reviewing
shareholder proposals and recommending responses to the Board.
The Human Resources Committee assists the Board in its oversight of compensation policies and programs, compensation for the CEO and Group Executives,
as well as compensation risk management. It also oversees our pension plans, key talent management strategies and practices, and management succession
plans.
GROUP EXECUTIVES AND GROUP RISK COMMITTEE
Actively shapes enterprise risk appetite and recommends it for Board approval.
Establishes the tone from above and visibly supports and communicates enterprise risk appetite, ensuring that sufficient resources and expertise are in place
to help provide effective oversight of adherence to the enterprise risk appetite.
Ensures alignment of strategic planning, financial planning, capital planning and risk appetite.
The Compensation Risk Management Oversight Committee (CRMOC) 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. The CRMOC ensures our compensation programs align with the Financial
Stability Board Principles for Sound Compensation Practices and Implementation Standards (FSB Principles) and other applicable guidance and best practices.
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
RISK
MANAGEMENT
GLOBAL
COMPLIANCE
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 risk appetite
Internal Audit
Independent assurance to management
and the Board on the effectiveness of risk
management practices
52
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Risk appetite
Effective risk management requires clear articulation of our risk appetite
and how our risk profile will be managed in relation to that appetite. The
ERAF articulates the amount and type of risk that we are able and willing
to accept in the pursuit of our business objectives. The ERAF outlines
the foundational aspects to our approach to risk appetite, articulates
risk appetite statements and their supporting measures and associated
constraints, guides design and implementation of risk appetite, and
defines roles and responsibilities for its implementation and oversight.
It also outlines how to assess our risk posture, which enables our
businesses to succinctly express the impact of strategic priorities and
external factors on our risk profile. Effective implementation of the ERAF
helps protect against unacceptable loss or an undesirable outcome with
respect to earnings volatility, capital adequacy or liquidity, reputational
risk, or other risks while supporting and enabling our overall business
strategy.
Risk appetite is integrated into the periodic strategic, financial, and
capital planning processes, as well as ongoing business decision-
making processes, and is reviewed annually by senior management for
recommendation to the Board for approval. Our risk appetite statements
are structured in such a way that they can be applied at the enterprise,
business segment, business unit and legal entity levels.
Risk Capacity
Risk Appetite
Risk Limits and
Key Risk Indicators
Risk Profile
Risk Posture
We are in the business of taking risks; 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.
Quantitative Statements
Qualitative Statements
Risk Appetite Statements
•
•
•
•
•
Manage earnings volatility and exposure to future losses
under normal and stressed conditions.
Avoid excessive concentrations of risk.
Ensure sound management of operational and regulatory
compliance risk.
Ensure capital adequacy and sound management of
liquidity and funding risk.
Maintain strong credit ratings and a risk profile that is in the
top half of our peer group.
•
•
•
•
•
Undertake only risks we understand. Make thoughtful and
future-focused risk decisions.
Effectively balance risk and reward to enable sustainable
growth.
Maintain a healthy and robust control environment to
protect our stakeholders.
Always uphold our purpose and vision and consistently
abide by our values and Code of Conduct to maintain our
reputation and the trust of our clients, colleagues, and
communities.
Always be operationally prepared and financially resilient for
a potential crisis.
Our quantitative risk appetite statements are underpinned by risk appetite measures and their associated constraints that set boundaries for risk
taking. Our qualitative risk appetite statements are aligned with the overarching Risk Management Principles and aim to articulate clear
motivations for taking on or avoiding non-financial and less quantifiable risks.
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. 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. Our primary methods for measuring risk include:
•
Quantifying expected loss: Assesses earnings at risk and is a representation of losses that are statistically expected to occur in the normal
course of business in a given time period;
Quantifying unexpected loss: Assesses capital at risk under stressed conditions and is a statistical estimate of the amount by which actual
earnings depart from the expected, over a specified time horizon;
Stress testing: Provides a forward-looking perspective and evaluates the potential effects of a set of specified changes in risk factors,
corresponding to exceptional but plausible adverse economic and financial market events; and
Back-testing: Compares the realized values to the parameter estimates that are currently used to ensure the parameters remain appropriate
for regulatory and economic capital calculations.
•
•
•
Stress testing
Stress testing 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, as well as our financial position;
Enhancing our understanding of available mitigating actions in response to adverse events; and
Assessing the adequacy of our target capital and liquidity 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 Board or Board committee(s), Group Risk Committee (GRC) 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 2018
53
We annually evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities. Our Board or
Board committee(s) 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, equity market corrections, geopolitical tensions, protectionism,
additional rises in interest rates, and real estate price corrections, as well as credit spread and commodity 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, 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, on a periodic basis, across several
jurisdictions.
Model governance and validation
Models are used for many purposes including, but not limited to, the valuation of financial products, the identification, measurement and
management of different types of risk, stress testing, assessing capital adequacy, informing business and risk decisions, measuring compliance
with internal limits, meeting financial reporting and regulatory requirements, and issuing public disclosures.
Model risk is the risk of adverse financial and/or reputational consequences to the enterprise arising from the use or misuse of models at
any stage throughout a model’s life cycle and is managed through our model risk governance and oversight structure. The governance and
oversight structure, which is implemented through our three lines of defence governance model, is founded on the basis that model risk
management is a shared responsibility across the three lines spanning all stages of a model’s life cycle.
Prior to their use, models are subject to an independent validation and approval by our enterprise model risk management function, a team
of modelling professionals with reporting lines independent of those of the model owners, developers and 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
enterprise model risk management 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.
These risk controls are defined in our Enterprise Risk Management and Risk-Specific Frameworks, which 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.
Enterprise Risk Policy Architecture
Enterprise Risk Management
Framework
Enterprise Conduct
Framework
Enterprise Risk Appetite
Framework
Credit Risk
Management
Framework
Market Risk
Management
Framework
Operational
Risk
Management
Framework
Information
Technology
Risk
Management
Framework
Reputation
Risk
Management
Framework
Regulatory
Compliance
Management
Framework
Insurance
Risk
Management
Framework
Capital
Management
Framework
Liquidity
Risk
Management
Framework
Data
Management
Framework
Supporting Risk-Specific Enterprise-Wide Policies (examples)
Credit Risk
Mitigation
Policy
Management
of Market Risk
Standing
Order
Operational
Risk
Management
Policy
Information
Security
Policy
Fiduciary
Risk Policy
Privacy
Policy
Insurance
Risk
Mitigation
Policy
Dividend
Policy
Liquidity
Risk Policy
Data Policy
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
The approval hierarchy for risk frameworks and policy documents:
Board or Board Committee(s)
Senior management committees (e.g. Policy Review Committee, Operational Risk Committee, Asset Liability Committee) for most policies.
The Board or Board Committee(s) approval is required in some instances (e.g. RBC Code of Conduct, Dividend Policy)
Generally within businesses or Corporate Support Committees - GRM approval is 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, projects and initiatives, and
new products and services.
54
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Authorities and limits
The Board delegates credit, market, liquidity and insurance risk authorities to senior executives. In order to facilitate day-to-day business
activities, these individuals can then delegate some or all of their authorities onwards. The delegated authorities allow these officers to approve
single name, geographic (country and region) and industry sectors, and product and portfolio exposures within defined parameters and limits to
manage concentration risk, establish underwriting and inventory limits for trading and investment banking activities and set market risk
tolerances. Transactions that exceed senior management’s authorities require the approval of the Risk Committee of the Board.
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 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 Risk Committee of the Board our Enterprise Risk Report which includes, among others, top and emerging risks, risk profile
relative to our risk appetite, portfolio quality metrics and a 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 an 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 or Board Committee(s) on top and
emerging risks or changes in our risk profile.
Risk conduct and culture
Our values set the tone of our organizational culture and translate into desired behaviours as articulated in our Code of Conduct and leadership
model. Our Risk Management Principles provide a risk lens for these desired behaviours, enabling us to focus on a subset of behaviours and
outcomes referred to as our Conduct. We define Conduct as the manifestation of culture through the behaviours, judgement, decisions, and
actions of the organization and its individuals. Our organizational direction establishes the expectation of good Conduct outcomes as the
operating norm for the organization, all employees, and third party service providers operating on our behalf, thereby allowing our good Conduct
to drive positive outcomes for our clients, our employees, stakeholders, financial markets, and our reputation. 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 Conduct and
Risk Culture practices align with our values and support our risk appetite statements.
Risk Culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks. It helps us
identify and understand risks, openly discuss risks, and act on the organization’s current and future risks. Our Risk Culture practices, which are
aligned with the Financial Stability Board’s (FSB) four fundamental Risk Culture practices, are:
•
•
•
•
Tone from above;
Accountability;
Effective challenge; and
Incentives and performance management.
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 Conduct and Risk Culture can be assessed, monitored,
sustained and subjected to ongoing enhancement.
On a regular basis, management communicates behavioural expectations to our employees with an emphasis on Conduct and values. Our
leadership model also supports and encourages effective challenge between the businesses and the risk functions. These behavioural
expectations are supported by multiple online tools and resources, including our Code of Conduct, which are designed to help employees live
our values, report misconduct and raise concerns, including those that might have ethical implications. The Code of Conduct makes it the
employee’s responsibility to be truthful, respect others, and comply with laws, regulations and our policies. Anyone who breaches or fails to
report an actual or possible breach of the Code of Conduct is subject to corrective or disciplinary action. This can range from reprimands and
impacts on performance ratings and compensation, to termination.
Sets expected
Conduct Outcomes
• Clients
• Financial Markets
• Employees
• RBC’s Reputation
Drives actual
Organizational Direction
Values
Leadership Model
Code of Conduct
Strategy
Influences
Organizational Practices
(including Sales Conduct and Practices)
Influences
Risk Culture
Conduct
Behaviours
Judgment
Decisions
Actions
Apply lessons learned from Conduct Risks and Misconduct
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 2018 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
55
Transactional/positional risk drivers
Credit risk
Credit risk is the risk of loss associated with an obligor’s potential inability or unwillingness to fulfill its contractual obligations on a timely
basis. Credit risk may arise directly from the risk of default of a primary obligor (e.g., issuer, debtor, counterparty, borrower or policyholder),
indirectly from a secondary obligor (e.g., guarantor or reinsurer), through off-balance sheet exposures, contingent credit risk and/or
transactional risk. Credit risk includes counterparty credit risk from both trading and non-trading activities.
The responsibility for managing credit risk is shared broadly following the three lines of defence governance model. The Board, through
its Risk Committee, delegates credit risk approval authorities to the President & CEO and CRO. Credit transactions in excess of these
authorities must be approved by the Risk Committee. To facilitate day-to-day business operations, the CRO has been empowered to further
delegate credit risk approval authorities to individuals within GRM, the business segments, and functional units as necessary.
We balance our risk and return by setting the following objectives for the management of credit risk:
•
•
•
•
•
•
•
•
Ensuring credit quality is not compromised for growth;
Mitigating credit risk 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.
•
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 the Bank.
Credit Risk measurement
We quantify credit risk at both the individual obligor and portfolio levels to manage expected credit losses and minimize unexpected losses in
order to limit earnings volatility and ensure we are adequately capitalized.
We employ a variety of risk measurement methodologies to measure and quantify credit risk for our wholesale and retail credit
portfolios. The wholesale portfolio is comprised of businesses, sovereigns, public sector entities, banks and other financial institutions, as
well as certain individuals and small businesses. The retail portfolio is comprised of residential mortgages, personal loans, credit cards, and
small business loans. Our credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate
and consistent manner. The resulting ratings and scores are then used for both client- and transaction-level risk decision-making and as key
inputs for our risk measurement and capital calculations.
Measurement of regulatory and economic capital
In measuring credit risk to determine regulatory capital, two principal approaches are available: Internal Ratings Based (IRB) Approach and
Standardized Approach. Most of our credit risk exposure is measured under the IRB.
Under the Standardized Approach, used primarily for our Caribbean banking operations and City National, risk weights prescribed by
Office of the Superintendent of Financial Institutions (OSFI) are used to calculate risk-weighted assets (RWA) for credit risk exposure.
Economic capital, which is our internal quantification of risks, is used 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.
Each credit facility is assigned an LGD rate that is largely driven by factors that impact the extent of losses anticipated in the event the
obligor defaults. These factors mainly include seniority of debt, collateral security, and the industry sector in which the obligor operates.
Estimated LGD rates draw primarily on internal loss experience. 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. 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.
56
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Financial and regulatory measurement distinctions
Expected loss models are 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 certain key differences under current Basel and IFRS 9 reporting frameworks which could
lead to significantly different expected loss estimates, including:
•
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 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 probability-weighted macroeconomic scenarios.
•
•
For further details on IFRS 9, refer to the Critical accounting policies and estimates section.
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 either lending-related and other, or 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, debt securities carried at FVOCI or amortized cost (AFS under IAS 39) 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
collateral into account.
Derivative amounts which represent the credit equivalent amount, defined by OSFI as the replacement cost plus an add-on amount for
potential future credit exposure.
•
Credit risk assessment
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 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.
Our rating system is designed to stratify obligors into 22 grades. 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 43
Ratings Business and Bank
Sovereign
BRR
S&P Moody’s
Description
PD Bands
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
0.0000% – 0.0300% 0.0000% – 0.0155% 1+
0.0000% – 0.0300% 0.0156% – 0.0265% 1H
0.0301% – 0.0375% 0.0266% – 0.0375% 1M
0.0376% – 0.0490%
0.0491% – 0.0650%
0.0651% – 0.0810%
0.0811% – 0.1120%
0.1121% – 0.1800%
0.1801% – 0.2620%
0.2621% – 0.3845%
0.3846% – 0.6480%
0.6481% – 0.9625%
0.9626% – 1.4070%
1.4071% – 2.1785%
2.1786% – 3.4210%
3.4211% – 5.2775%
5.2776% – 7.9410%
7.9411% – 11.4475%
11.4476% – 19.6535%
19.6536% – 99.9990%
100%
100%
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
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
CCC
CCC-
CC
C
D
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
C
Investment Grade
Non-investment
Grade
Impaired
* This table represents an integral part of our 2018 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
57
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 its 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 (e.g., precious metal and commodities) derivatives. For further
details on our derivative instruments and credit risk mitigation, refer to Note 8 of our 2018 Annual Consolidated Financial Statements.
Trading counterparty credit activities are undertaken in a manner consistent with the relevant requirements under the Credit Risk
Management Framework and the Market Risk Management Framework, in line with our credit risk management policy documents, and with
approval under the appropriate delegated authorities.
The primary risk mitigation techniques for trading counterparty credit risk are close-out netting and collateralization. Close-out netting
considers the net value of contractual obligations between counterparties in a default situation, thereby reducing overall credit exposure.
Collateralization is when a borrower pledges assets as security, which provides recourse to the lender in the event of default. The policies that
we maintain in relation to the recognition of risk mitigation from these techniques incorporate such considerations as:
•
The use of standardized agreements such as the International Swaps and Derivatives Association (ISDA) Master Agreement and Credit
Support Annex (CSA);
Restricting eligible collateral to high quality liquid assets, primarily cash and highly-rated government securities, subject to appropriate
haircuts; and
The use of initial margin and variation margin arrangements in accordance with regulatory requirements and internal risk standards.
•
•
Similarly, for securities finance and repurchase trading activity we mitigate counterparty credit risk via the use of standardized securities finance
agreements, and by taking collateral generally in the form of eligible liquid securities.
We also mitigate counterparty credit risk through the use of central counterparties (CCPs). These highly-regulated entities intermediate
trades between participating bilateral counterparties and mitigate credit risk through the use of initial and variation margin and the ability to net
offsetting trades amongst participants. The specific structure and capitalization, including contingent capital arrangements, of individual CCPs
are analyzed as part of assigning an internal counterparty credit risk rating and determining appropriate counterparty credit risk limits.
Wrong-way risk
Wrong-way risk is the risk that exposure to a counterparty 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 correlated with the probability of default of
the counterparty due to the nature of our transactions with them (e.g., loans collateralized by shares or debt issued by the counterparty or a
related party). Specific wrong-way risk over-the-counter (OTC) derivative trades are done on an exception basis only, and are permitted only
when explicitly pre-approved by GRM. Factors considered in reviewing such trades include the credit quality of the counterparty, the nature
of the asset(s) underlying the derivative and the existence of credit mitigation.
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 (e.g., the value of the collateral declines). We monitor general wrong-way counterparty credit risk using a variety of metrics
including stress scenarios, investment strategy concentration, the ability of counterparties to generate cash and liquidity, liquidity of the
collateral and term of financing.
•
Retail credit risk
Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Scoring models use internal and
external data to assess and “score” borrowers, predict future performance and manage limits for existing loans and collection activities.
Credit scores are one of the factors employed in the acquisition of new clients and management of existing clients. The credit score of the
borrower is used to assess the predicted credit risk for each independent acquisition or account management action, leading to an
automated decision or guidance for an adjudicator. Credit scoring improves credit decision quality, adjudication timeframes and consistency
in the credit decision process and facilitates risk-based pricing.
To arrive at a retail risk rating, borrower scores are categorized and associated with PDs for further grouping into risk rating categories.
The following table maps PD bands to various risk levels for retail exposures:
Internal ratings map*
Table 44
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 2018 Annual Consolidated Financial Statements.
58
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Credit risk mitigation
Credit risk mitigation policies are an integral component of our Credit Risk Framework and set out the minimum requirements for the
mitigation of credit risk.
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, our securities
financing and collateralized OTC derivatives activities are primarily secured by cash and highly-rated liquid government and agency securities.
Wholesale lending to business clients is often secured by pledges of the assets of the business, such as accounts receivable, inventory, operating
assets and commercial real estate. In Canadian Banking and Wealth Management, 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 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.
• We are compliant with regulatory requirements that govern residential mortgage underwriting practices, including loan-to-value
parameters and property valuation requirements.
There were no significant changes regarding our risk management policies on collateral or to the quality of the collateral held during
the period.
Credit risk approval
The Board 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, 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.
Transaction approval
Credit transactions are approved in accordance with the delegated credit risk approval authorities and are subject to our credit rules policy,
which outlines the minimum standards for managing credit risk at the individual client relationship and/or transaction level.
Product approval
Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment framework and are subject
to approval authorities which increase as the level of risk increases. New and amended products must be reviewed relative to all risks in our
risk pyramid, including credit risk. All existing products must be reviewed following a risk-based assessment approach on a regular basis.
Credit risk limits
•
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 risk limits are set by the Board and take into account both regulatory constraints and internal risk management judgment. Limits
are established at the following levels: single name limits (notional and economic capital), geographic (country and region) limits
(notional and economic capital), industry sector limits (notional and economic capital), product and portfolio limits, and underwriting
and distribution risk limits. These limits apply across businesses, portfolios, transactions and products.
Credit risk administration
Effective November 1, 2017, we adopted IFRS 9, which introduced an expected loss accounting model for credit losses that differs significantly
from the incurred loss model under IAS 39 and results in earlier recognition of credit losses. Under IAS 39, credit loss allowances were applied to
loans, acceptances, and commitments. Under IFRS 9, credit loss allowances are applied to all financial assets except for those classified or
designated as FVTPL and equity securities designated as FVOCI. A description of our expected credit loss impairment models is provided in the
Critical accounting policies and estimates section for both IFRS 9 and IAS 39.
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
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, our policy and the customer’s willingness and capacity to meet the new arrangement.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
59
Gross credit risk exposure by portfolio, sector and geography
Table 45
October 31
2018
October 31
2017*
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 (1)
Undrawn
commitments (2)
Other (3)
Repo-style
transactions Derivatives (4)
Total
exposure (5) Outstanding (1)
Undrawn
commitments (2)
Other (3)
Repo-style
transactions Derivatives (4)
Total
exposure (5)
By portfolio
Residential mortgages
Personal
Credit cards
Small business (6)
Retail
Business (6)
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 sectors
Sovereign (6)
Bank (6)
Wholesale
Total exposure
By geography (7)
Canada
U.S.
Europe
Other International
$
$
$
$
$
$
282,471
92,700
19,415
4,866
399,452
8,312
8,726
12,012
6,027
8,090
7,938
1,100
6,982
8,883
7,509
1,301
16,157
16,908
51,563
11,506
6,318
5,551
5,884
5,173
195,940
595,392
490,229
80,509
10,859
13,795
$
759 $
103,583
26,524
7,284
$ 138,150 $
$
1,762 $
6,435
10,046
317 $
201
–
6
524 $
74 $
438
669
$
$
$
–
–
–
–
–
–
–
–
– $ 283,547 $
–
–
–
196,484
45,939
12,156
270,348
92,294
18,035
4,493
$
818 $
88,120
21,826
6,888
– $ 538,126 $
385,170
$ 117,652 $
45 $
488
481
10,193 $
16,087
23,208
7,380
8,248
11,387
$
1,338 $
6,026
8,872
269 $
176
–
6
451 $
78 $
376
605
10,379
17,309
1,449
933
5,612
909
7,991
3,758
19,970
9,709
13,073
17,132
6,220
383
13,160
2,710
1,544
3,318
397
90
2,910
542
640
984
11,939
3,074
1,917
1,332
2,191
1,905
122,805
136,142
–
–
1,753
–
–
60
–
–
476,881
1,058
2
409
–
–
60,597
117,340
1,707
2,394
445
23
415
149
509
120
47,898
435
499
3,500
1,066
632
12,625
24,065
19,657
31,111
11,982
2,146
15,919
10,543
16,649
6,163
572,845
31,184
67,054
33,879
15,795
8,471
215,071
285,430
6,743
5,614
6,556
911
6,998
8,803
5,581
1,113
10,744
14,757
46,197
8,890
5,950
4,570
11,362
4,261
10,322
14,867
2,062
635
4,602
929
7,533
3,816
14,263
7,529
11,267
14,129
5,712
17
11,406
1,423
1,810
3,689
425
85
1,800
566
447
1,027
15,597
4,024
1,603
633
3,300
4,694
110,581
132,644
–
–
–
–
–
–
–
–
–
37
730
–
1
–
–
–
329,214
950
3
305
–
3,018
35,228
106,346
$
$
$
– $
–
–
–
– $
271,435
180,590
39,861
11,387
503,273
63 $
417
525
960
1,347
628
16
522
203
692
101
38,477
654
443
2,456
841
563
14,356
23,735
8,859
15,067
21,389
19,835
25,554
10,401
1,647
13,923
10,501
14,253
6,057
408,295
27,914
59,513
26,413
15,803
12,862
182,933
268,409
$ 148,940 $ 292,911 $ 658,100
$ 287,090 $ 293,435 $ 658,100
$ 188,170 $ 116,423 $
74,680
19,746
4,494
69,616
79,639
27,757
86,800
336,311
113,085
121,904
$
$
$
97,496 $ 1,393,387 $
176,065
$ 126,748 $ 283,984 $ 475,832
$ 86,999 $ 1,149,628
97,496 $ 1,931,513 $
561,235
$ 244,400 $ 284,435 $ 475,832
$ 86,999 $ 1,652,901
29,370 $ 910,992 $
17,145
43,598
7,383
578,261
266,927
175,333
458,963
73,137
13,979
15,156
$ 156,249 $ 100,740 $
64,439
17,934
5,778
79,782
80,319
23,594
68,279
258,883
87,158
61,512
$ 24,018 $
14,333
43,312
5,336
808,249
490,574
242,702
111,376
Total Exposure
$
595,392
$ 287,090 $ 293,435 $ 658,100
$
97,496 $ 1,931,513 $
561,235
$ 244,400 $ 284,435 $ 475,832
$ 86,999 $ 1,652,901
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Results as at 2017 represent an integral part of our 2018 Annual Consolidated Financial Statements.
Represents outstanding balances on loans and acceptances.
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 FVOCI debt securities (AFS debt securities under IAS 39),
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 home equity lines of credit are included in Personal.
For further information, refer to Note 5 of our 2018 Annual Consolidated Financial Statements.
Geographic profile is based on country of residence of the borrower.
2018 vs. 2017
Total gross credit risk exposure increased $279 billion or 17% from the prior year, mainly due to business growth in repo-style transactions and
loans and acceptances, as well as the impact of foreign exchange translation.
Retail exposure increased by $35 billion or 7% largely due to business growth in undrawn commitments related to personal lending and
credit cards, and business growth in residential mortgages.
Wholesale exposure increased by $244 billion or 21%, primarily attributable to business growth in repo-style transactions, driven by the
Non-bank financial services sector and growth in loans and acceptances, as well as the impact of foreign exchange translation. Wholesale loan
utilization was 38%, down from 39% last year.
The geographic mix of our gross credit risk exposure changed slightly from the prior year. Our exposure in Canada, the U.S., Europe and
Other International was 47%, 30%, 14% and 9%, respectively (October 31, 2017 – 49%, 30%, 15% and 6%, respectively).
Our exposure in Canada increased $103 billion or 13% compared to prior year, primarily due to business growth in loans and acceptances
and repo-style transactions.
Our exposure in the U.S. increased $88 billion or 18% compared to the prior year, mainly due to business growth in repo-style transactions
and loans and acceptances, as well as the impact of foreign exchange translation.
Our exposure to Europe increased by $24 billion or 10%, largely due to business growth in repo-style transactions.
Our exposure to Other International increased by $64 billion or 57%, largely due to business growth in repo-style transactions.
60
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Net European exposure by country and client type (1), (2)
October 31
2018
Asset type
Client type
Loans
Repo-style
Table 46
October 31
2017 (3)
(Millions of Canadian dollars)
Outstanding Securities (4)
transactions Derivatives
Financials Sovereign Corporate
Total
Total
U.K.
Germany
France
$
7,975 $
1,259
619
10,393 $
7,846
9,576
Total U.K., Germany, France $
9,853 $
27,815 $
Ireland
Italy
Portugal
Spain
Total Peripheral (5)
Luxembourg (6)
Netherlands (6)
Norway
Sweden
Switzerland
Other
Total Other Europe
Net exposure to Europe (7)
$
$
$
$
$
728 $
534
–
101
1,363 $
1,460 $
918
167
298
510
1,491
59 $
114
3
1,327
1,503 $
7,475 $
1,510
1,642
3,975
6,008
2,075
4,844 $
22,685 $
16,060 $
52,003 $
271 $
1
1
273 $
125 $
–
30
–
155 $
18 $
96
51
25
116
66
372 $
800 $
1,439 $ 11,226 $
311
472
4,413
1,273
1,644 $ 7,208 $ 20,078 $ 19,824
13,167
3,349
10,762
8,482
9,417
10,668
1,655
913
2,222 $ 16,912 $ 13,475 $ 9,776 $ 40,163 $ 43,753
623
319
25
767
931 $
677
33
1,443
158 $
98
30
1,311
758 $
565
3
132
19 $
29
–
15
15 $
14
–
–
1,734
47 $
63 $
888 $
1,597 $
291
11
10
201
163
29 $ 1,458 $ 3,084 $
933 $ 9,000 $
1,816
999
1,558
186
2,555
228
993
276
1,444
1,336
9,254 $ 15,412 $ 3,958 $ 28,624 $ 25,072
3,008 $ 27,763 $ 28,916 $ 15,192 $ 71,871 $ 70,559
7,179 $
–
127
1,525
5,566
1,015
6,596
3,309
4,048
4,240
3,548
3,331
2,815
1,871
4,308
6,835
3,795
723 $
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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 $111.1 billion against repo-style transactions (October 31, 2017 – $77.7 billion) and $11.6 billion against
derivatives (October 31, 2017 – $12.6 billion).
Amounts have been revised from those previously presented.
Securities include $16.2 billion of trading securities (October 31, 2017 – $17.3 billion), $23.3 billion of deposits (October 31, 2017 – $19.7 billion), and $12.5 billion of debt securities
carried at FVOCI (October 31, 2017 – $14.8 billion of AFS debt securities under IAS 39).
Gross credit risk exposure to peripheral Europe is comprised of Ireland $26.8 billion (October 31, 2017 – $19.3 billion), Italy $0.9 billion (October 31, 2017 – $0.4 billion), Portugal
$0.5 billion (October 31, 2017 – $nil), and Spain $0.8 billion (October 31, 2017 – $1.0 billion).
Excludes $2.5 billion (October 31, 2017 – $1.8 billion) of exposures to supranational agencies.
Reflects $1.2 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2017 – $1.4 billion).
2018 vs. 2017
Net credit risk exposure to Europe increased $1.3 billion from last year, primarily driven by increased exposure to Switzerland and Luxembourg,
largely offset by a decrease in exposure to Germany and Norway. Our net exposure to peripheral Europe, which includes Ireland, Italy, Portugal
and Spain, increased by $1.4 billion during the year to $3.1 billion.
Our European corporate loan book is managed on a global basis with underwriting standards reflecting the same approach to the use of our
balance sheet as we have applied in both Canada and the U.S. PCL on loans for this portfolio decreased primarily due to lower provisions on an
impaired loan that returned to performing status. The gross impaired loans ratio of this loan book was 10 bps, down from 100 bps last year
mainly due to a loan returning to performing status.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
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
As at October 31, 2018
Residential mortgages
Table 47
Home equity
lines of credit
(Millions of Canadian dollars,
except percentage amounts)
Region (2)
Canada
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
Total Canada (3)
U.S. (4)
Other International (4)
Total International
Total
(Millions of Canadian dollars,
except percentage amounts)
Region (2)
Canada
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
Total Canada (3)
U.S. (4)
Other International (4)
Total International
Total
Insured (1)
Uninsured
Total
Total
$
7,616
13,045
38,708
20,615
9,007
15,452
54% $
41
33
55
51
32
6,398
18,911
77,649
16,738
8,503
33,189
$ 104,443
1
7
39% $ 161,388
13,492
3,140
–
–
46% $
59
67
45
49
68
14,014
31,956
116,357
37,353
17,510
48,641
61% $ 265,831
13,493
3,147
100
100
$
8
–% $
16,632
100% $
16,640
$ 104,451
37% $ 178,020
63% $ 282,471
$
$
$
$
1,926
3,730
16,811
6,706
2,534
8,436
40,143
2,099
1,513
3,612
43,755
As at October 31, 2017
Residential mortgages
Home equity
lines of credit
Insured (1)
Uninsured
Total
Total
$
7,670
15,089
42,610
21,820
9,305
17,169
57% $
48
39
58
54
37
5,848
16,557
66,549
15,702
7,932
29,521
43% $
52
61
42
46
63
13,518
31,646
109,159
37,522
17,237
46,690
$
1,986
3,964
16,823
6,950
2,627
8,620
$ 113,663
1
9
44% $ 142,109
11,448
3,091
–
–
56% $ 255,772
11,449
3,100
100
100
$ 40,970
1,557
1,992
$
10
–% $
14,539
100% $
14,549
$
3,549
$ 113,673
42% $ 156,648
58% $ 270,321
$ 44,519
(1)
(2)
(3)
(4)
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 $266 billion (2017 – $256 billion) is largely comprised of $243 billion (2017 – $231 billion) of
residential mortgages and $7 billion (2017 – $6 billion) of mortgages with commercial clients, of which $4 billion (2017 – $4 billion) are insured
mortgages, both in Canadian Banking, and $16 billion (2017 – $19 billion) of residential mortgages in Capital Markets held for securitization purposes.
Home equity lines of credit include term loans collateralized by residential mortgages.
Home equity lines of credit are uninsured and reported within the personal loan category. As at October 31, 2018, home equity lines of credit in
Canadian Banking were $40 billion (2017 – $41 billion). Approximately 98% of these home equity lines of credit (2017 – 98%) are secured by a
first lien on real estate, and only 7% (2017 – 7%) of the total homeline clients pay the scheduled interest payment only.
62
Royal Bank of Canada: Annual Report 2018
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 48
As at
October 31
2018
Canada
U.S. and Other
International
Total
Canada
October 31
2017
U.S. and Other
International
70%
23
5
2
40%
60
–
–
68%
25
5
2
73%
24
3
–
43%
57
–
–
100%
100%
100%
100%
100%
Total
71%
26
3
–
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
period (4), (5)
Total Canadian Banking residential mortgages
portfolio (6)
October 31
2018
Uninsured
Table 49
October 31
2017
Uninsured
Residential
mortgages (1)
Homeline
products (2)
Residential
mortgages (1)
Homeline
products (2)
73%
72
70
73
74
67
71
60
70%
55%
74%
73
67
71
74
64
n.m.
n.m.
68%
49%
74%
72
70
73
74
69
73
62
70%
53%
74%
73
67
72
74
65
n.m.
n.m.
68%
49%
(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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
63
Credit quality performance
The following credit quality performance tables and analysis provide information on loans, which represents loans and acceptances and
commitments:
Provision for (recovery of) credit losses
Table 50
(Millions of Canadian dollars, except percentage amounts)
Personal & Commercial Banking
Wealth Management
Capital Markets
Corporate Support and Other
PCL – Loans
PCL – Other financial assets
Total PCL
Retail
Wholesale
PCL on performing loans (1)
Retail
Wholesale
PCL on impaired loans (2)
PCL – Loans
PCL ratio – Loans (3)
PCL on impaired loans ratio (4)
Additional information by geography
Canada (5)
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
PCL on impaired loans (2)
U.S. (5)
Retail
Wholesale
PCL on impaired loans (2)
Other International (5)
Retail
Wholesale
PCL on impaired loans (2)
PCL on impaired loans (2)
IFRS 9
2018
1,245
(15)
52
1
1,283
24
1,307
116
7
123
1,011
149
1,160
1,283
0.23%
0.20%
44
458
456
30
988
80
1,068
4
64
68
19
5
24
1,160
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
IAS 39
2017
1,054
34
62
–
1,150
1,150
–
932
218
1,150
1,150
0.21%
0.21%
33
413
426
32
904
95
999
3
117
120
25
6
31
1,150
(1)
(2)
(3)
(4)
(5)
Represents Stage 1 and 2 PCL on loans, acceptances, and commitments under IFRS 9 and PCL for loans not yet identified as impaired
under IAS 39.
Represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39.
PCL ratio – Loans is calculated using PCL on Loans as a percentage of average net loans and acceptances.
PCL on impaired loans ratio is calculated using PCL on impaired loans as a percentage of average net loans and acceptances. PCL on
impaired loans represents Stage 3 PCL on loans, acceptances, and commitments under IFRS 9 and PCL on impaired loans under IAS 39.
Geographic information is based on residence of borrower.
2018 vs. 2017
Total PCL was $1,307 million. PCL on loans of $1,283 million increased $133 million, or 12% from the prior year, mainly due to the adoption of
IFRS 9 on November 1, 2017 as well as higher provisions in Personal & Commercial Banking. The PCL ratio on loans of 23 bps increased 2 bps.
PCL on performing loans of $123 million since the adoption of IFRS 9 was partially due to volume growth. Though our base economic
outlook generally remained unchanged, we reflected elevated external risks to the macroeconomic outlook in our provisions which also
contributed to the increase. These factors were partially offset by model and parameter updates.
PCL on impaired loans of $1,160 million increased $10 million, primarily due to higher provisions in Personal & Commercial Banking,
largely offset by lower provisions in Wealth Management.
PCL on other financial assets of $24 million largely related to the restructuring of portfolios in Barbados.
PCL on loans in Personal & Commercial Banking increased $191 million, mainly due to the adoption of IFRS 9, which led to higher provisions on
performing loans in the Canadian Personal Banking portfolios as described above, partially offset by lower provisions on performing loans in the
Caribbean Banking portfolios due to model and parameter updates. Higher provisions on impaired loans in the Canadian Personal Banking
portfolios also contributed to the increase.
64
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
PCL on loans in Wealth Management decreased $49 million, primarily due to lower provisions on impaired loans in U.S. Wealth
Management (including City National) mainly due to loans returning to performing status.
PCL on loans in Capital Markets decreased $10 million, mainly reflecting lower provisions on performing loans.
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 (1), (2)
Canada (3)
Retail
Wholesale
GIL
U.S. (1), (3)
Retail
Wholesale
GIL
Other International (3)
Retail
Wholesale
GIL
Total GIL (1), (2)
Impaired loans, beginning balance
Classified as impaired during the period (new impaired) (4)
Net repayments (4)
Amounts written off
Other (1), (2), (4), (5)
Impaired loans, balance at end of period
GIL ratio (6)
Total GIL ratio
Personal & Commercial Banking
Canadian Banking
Caribbean Banking
Wealth Management
Capital Markets
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
IFRS 9
2018
1,605
203
375
–
–
2,183
723
396
1,119
23
401
424
327
313
640
2,183
2,576
2,228
(615)
(1,444)
(562)
2,183
$
0.37%
0.37%
0.26%
6.36%
0.34%
0.41%
Table 51
IAS 39
2017
1,500
549
527
–
–
2,576
559
426
985
59
736
795
345
451
796
2,576
3,903
2,269
(1,192)
(1,425)
(979)
2,576
0.46%
0.36%
0.24%
6.33%
1.04%
0.63%
(1)
(2)
(3)
(4)
(5)
(6)
Effective November 1, 2017, GIL excludes $229 million of ACI loans related to our acquisition of City National that have returned to
performing status. As at October 31, 2018, $21 million of ACI loans that remain impaired are included in GIL. As at October 31,
2017, GIL includes $256 million related to the ACI loans portfolio from our acquisition of City National. ACI loans included in GIL
added 5 bps to our October 31, 2017 GIL ratio. For further details, refer to Note 5 of our Annual Consolidated Financial Statements.
Effective November 1, 2017, the definition of gross impaired loans has been shortened for certain products to align with a
definition of default of 90 days past due under IFRS 9 resulting in an increase in GIL of $134 million.
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 period, recoveries of loans and advances previously written off, sold, and exchange
and other movements.
GIL as a % of related loans and acceptances.
2018 vs. 2017
Total GIL of $2,183 million decreased $393 million or 15% from the prior year, and the total GIL ratio of 37 bps improved 9 bps, largely reflecting
lower impaired loans in Wealth Management and Capital Markets, partially offset by higher impaired loans in Personal & Commercial Banking.
GIL in Personal & Commercial Banking increased $105 million, or 7%, primarily due to a change in the definition of impaired under IFRS 9
for certain products in our Canadian Personal Banking portfolios partially offset by lower impaired loans in our Canadian Business Banking
portfolios.
GIL in Wealth Management decreased $346 million. This mainly reflects fewer impaired loans in U.S. Wealth Management (including City
National) due to the exclusion of $229 million in ACI loans that have returned to performing status since our acquisition of City National and a
change in the definition of impaired for certain products both effective November 1, 2017 and repayments during the year.
GIL in Capital Markets decreased $152 million or 29%, primarily due to repayments in the other services and oil & gas sectors.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
65
Allowance for credit losses (ACL)
(Millions of Canadian dollars)
Personal & Commercial Banking
Wealth Management
Capital Markets
Investor & Treasury Services
Corporate Support & Other (1)
ACL on loans
ACL on other financial assets
Total ACL
ACL on loans is comprised of:
ACL on performing loans (2)
ACL on impaired loans (3)
ACL on loans
Retail
Wholesale
ACL on performing loans (2)
Canada (4)
Retail
Wholesale
ACL on impaired loans (3)
U.S. (4)
Retail
Wholesale
ACL on impaired loans (3)
Other International (4)
Retail
Wholesale
ACL on impaired loans (3)
ACL on impaired loans (3)
Table 52
IFRS 9
IAS 39
2018
2,536
202
347
2
1
3,088
71
3,159
2,388
700
1,753
635
2,388
168
92
260
1
164
165
166
109
275
700
$
$
$
$
$
$
$
$
$
$
$
$
2017
497
80
160
–
1,513
2,250
2,250
1,513
737
1,513
141
124
265
1
150
151
168
153
321
737
$
$
$
$
$
$
$
$
$
$
$
$
$
(1)
(2)
(3)
(4)
Prior period amounts in Corporate Support & Other are primarily comprised of Allowance for loans not yet identified as impaired. Under
IFRS 9, Stage 1 and Stage 2 ACL are recorded within the respective business segment. For further information, refer to the How we
measure and report our business segments section.
Represents Stage 1 and Stage 2 ACL on loans, acceptances, and commitments under IFRS 9 and Allowance for loans not yet identified as
impaired under IAS 39.
Represents Stage 3 ACL on loans, acceptances, and commitments under IFRS 9 and Allowance for impaired loans under IAS 39.
Geographic information is based on residence of borrower.
2018 vs. 2017
Total ACL of $3,159 million increased $909 million from the prior year, reflecting an increase of $838 million in ACL on loans and the inclusion of
$71 million in ACL on other financial assets primarily due to the adoption of IFRS 9.
ACL on performing loans of $2,388 million was $875 million higher than the Allowance for loans not yet identified as impaired of
$1,513 million in the prior year. The increase was largely due to the adoption of IFRS 9 and volume growth, and primarily reflects higher ACL on
loans in Personal & Commercial Banking.
ACL on impaired loans of $700 million decreased $37 million from the prior year, mainly due to lower ACL on loans in Wealth Management.
66
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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)
b) Hedge ineffectiveness.
Changes in the fair value of instruments classified or designated as fair value through profit and loss (FVTPL), and
CET1 capital, which includes:
All of the above, plus
a)
Changes in the fair value of FVOCI securities where revaluation gains and losses are reported as Other comprehensive income
b)
(OCI),
Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange translation,
and
Remeasurements of employee benefit plans; this includes 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)
c)
CET1 ratio, which includes:
All of the above, plus
a)
Changes in 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.
Market risk controls – FVTPL positions
As an element of the ERAF, the Board approves our overall market risk constraints. GRM creates and manages the control structure for FVTPL
positions which 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. SVaR 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 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
67
Market risk measures – FVTPL positions
VaR and SVaR
The following table presents our Market risk VaR and Market risk SVaR figures for 2018 and 2017.
Market Risk VaR*
Table 53
October 31, 2018
For the year ended
October 31, 2017
For the year ended
(Millions of Canadian dollars)
As at
Average
Equity
Foreign exchange
Commodities
Interest rate (1)
Credit specific (2)
Diversification (3)
Market risk VaR
Market risk Stressed VaR
$
$
$
34
12
2
15
5
(29)
39
91
$
$
$
14
4
2
17
5
(17)
25
79
$
$
$
High
40
12
3
30
6
n.m.
44
149
$
$
$
Low
6
2
1
10
4
n.m.
13
40
$
$
$
As at
Average
10
3
3
16
4
(18)
18
43
$
$
$
12
4
3
17
4
(18)
22
53
$
$
$
High
26
6
6
25
5
n.m.
35
95
$
$
$
Low
6
3
2
13
4
n.m.
15
34
This table represents an integral part of our 2018 Annual Consolidated Financial Statements.
General credit spread risk and funding spread risk associated with uncollateralized derivatives are included under interest rate VaR.
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.
*
(1)
(2)
(3)
n.m. not meaningful
2018 vs. 2017
Average market risk VaR of $25 million increased $3 million from the prior year, largely due to the change in classification of certain portfolios
from AFS to FVTPL as a result of adopting IFRS 9. Client-driven activity in volatile equity derivative markets also contributed to larger volatility in
this metric during the year.
Average SVaR of $79 million increased $26 million from the prior year, largely driven by the adoption of IFRS 9 as mentioned above, and the
impact of foreign exchange translation. Expiries and repurchases of certain hedging instruments in our equity derivatives trading portfolio also
contributed to volatility in this metric during the year.
The following chart displays a bar graph of our daily trading profit and loss and a line graph of our daily market risk VaR. We had no net losses in
2018 compared to 1 day of losses totaling $2 million in 2017, which did not exceed VaR on that day.
Trading revenue and VaR (Millions of Canadian dollars)
60
40
20
0
-20
-40
-60
7
1
0
v 1 , 2
o
N
8
1
0
1 , 2
n 3
J a
8
1
0
0 , 2
p r 3
A
8
1
0
1 , 2
J u l 3
8
1
0
1 , 2
c t 3
O
Trading Revenue
Market Risk VaR
The following chart displays the distribution of daily trading profit and loss in 2018 and 2017. There were no daily reported losses in 2018. The
largest reported profit was $47 million with an average daily profit of $13 million.
Trading Revenue for the year ended October 31, 2018 (teb)
s
y
a
D
f
o
r
e
b
m
u
N
n
i
y
c
n
e
u
q
e
r
F
110
100
90
80
70
60
50
40
30
20
10
0
5
2
-
5
1
-
5
-
5
5
1
5
2
5
3
5
4
5
5
Daily net trading revenue (C$ millions), excluding structured entities
2018
2017
68
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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 FVTPL. Consequently, changes in the fair values of these assets
are recorded 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, claims and acquisition expense. As at October 31, 2018, we had liabilities with respect to
insurance obligations of $10.0 billion, up from $9.7 billion in the prior year, and assets of $8.1 billion in support of the liabilities, up from
$7.7 billion last year.
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 approves the risk appetite for SIRR, and the Asset-Liability Committee (ALCO), along with GRM, provides ongoing governance
of SIRR measurement and management 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.
Details on the non-trading risks included in SIRR are outlined in Table 55.
SIRR measurement
To monitor and control SIRR, we assess two primary metrics, Net Interest Income (NII) risk and Economic Value of Equity (EVE) risk, under a
range of market shocks, scenarios, and time horizons. 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 over various time horizons. The
simulations incorporate product maturities, renewals and growth along with prepayment and redemption behaviour. Product pricing and
volumes are forecast based on past experience and expectations for a given market stress scenario. EVE risk captures the market value
sensitivity of structural positions to changes in 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 changes in market rates and volatilities. These SIRR measures do not include the benefit of management
actions.
Management of NII and EVE risk is complementary and supports our efforts to generate a sustainable high-quality NII stream. NII and EVE
risks for specific units are measured daily, weekly or monthly depending on their materiality, complexity and hedge strategy.
A number of assumptions affecting cash flows, product re-pricing and the administration of rates underlie the models used to measure
NII and EVE risk. The key assumptions pertain to the expected funding profile of mortgage rate commitments, fixed rate loan prepayment
behaviour, term deposit redemption behaviour, and the treatment of non-maturity deposits. All assumptions are derived empirically based on
historical client behaviour and product pricing with consideration of possible forward-looking changes. 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 our structural balance sheet, assuming no subsequent hedging. Rate floors are applied
within the declining rates scenarios, with floor levels set based on rate changes experienced globally. Interest rate risk measures are based
upon interest rate exposures at a specific time and continuously change as a result of business activities and management actions.
Market risk – SIRR measures*
2018
EVE risk
NII risk (1)
Table 54
2017
(Millions of Canadian dollars)
Before-tax impact of:
100bps increase in rates
100bps decrease in rates
Before-tax impact of:
200bps increase in rates
200bps decrease in rates
Canadian
dollar impact
U.S. dollar
impact (2)
Total
Canadian
dollar impact
U.S. dollar
impact (2)
Total
EVE risk
NII risk (1)
$
(1,103) $
1,023
(37) $
(268)
(1,140) $
755
330 $
(398)
175 $
(184)
505
(582)
$
(1,215) $
638
451
(604)
(2,217)
2,046
(190)
(979)
(2,407)
1,067
579
(952)
344
(418)
923
(1,370)
(2,507)
1,003
825
(1,007)
*
(1)
(2)
This table represents an integral part of our 2018 Annual Consolidated Financial Statements.
Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates.
Represents the impact on the SIRR portfolios held in our City National and U.S. banking operations.
As at October 31, 2018, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $582 million, down from
$604 million last year. An immediate and sustained +100 bps shock at the end of October 31, 2018 would have had a negative impact to our EVE
of $1,140 million, down from $1,215 million reported last year. The year-over-year NII sensitivity to rate increases was higher in response to
balance sheet positioning and growth. During 2018, NII and EVE risks remained well within approved limits.
(1)
SIRR positions include impact of derivatives in hedge accounting relationships and FVOCI securities used for interest rate risk management.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
69
Market risk measures for other material non-trading portfolios
Investment securities carried at FVOCI
We held $48.5 billion of investment securities carried at FVOCI as at October 31, 2018. At October 31, 2017, we held $75.9 billion of AFS
securities. The year-over-year decrease was largely driven by the change in classification of certain portfolios as a result of adopting IFRS 9 on
November 1, 2017. We hold debt securities carried at FVOCI primarily as investments, as well as to manage liquidity risk and hedge interest rate
risk in our non-trading banking balance sheet. As at October 31, 2018, our portfolio of investment securities carried at FVOCI is interest rate
sensitive and would impact OCI by a pre-tax change in value of $7 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 change in value of $19 million, as measured
by the change in value for a one basis point widening of credit spreads. The value of the investment securities carried at FVOCI included in our
SIRR measure as at October 31, 2018 was $7.1 billion. Our investment securities carried at FVOCI also include equity exposures of $0.4 billion as
at October 31, 2018. As at October 31, 2017, our AFS securities included equity exposures of $1.2 billion.
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 $2.8 billion as at October 31, 2018 were down from $3.2 billion last year, and derivative liabilities of $2.9 billion as at October 31,
2018 were down from $3.2 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 $1.5 billion as at
October 31, 2018, up from $1.3 billion as at October 31, 2017, and derivative liabilities of $2.1 billion as at October 31, 2018, up from
$1.5 billion last year. These derivative assets and liabilities are included in our SIRR measure and other internal non-trading market risk
measures. We use interest rate swaps to manage our SIRR, funding, and investment activities. To the extent these swaps are considered
effective, changes in their fair value are recognized in OCI. The interest rate risk for the swaps designated as cash flow hedges, measured as the
change in the fair value of the derivatives for a one basis point parallel increase in yields, was $7 million as of October 31, 2018 compared to
$8 million as of October 31, 2017.
Interest rate swaps are also used to hedge changes in the fair value of certain fixed-rate instruments. Changes in fair value of the hedged
instruments that are related to interest rate movements and the corresponding interest rate swaps are reflected in the Consolidated Statements
of 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 OCI.
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. Changes in the fair value of these derivatives are reflected in the Consolidated Statements of Income.
Derivative assets of $1.3 billion as at October 31, 2018 were down from $1.9 billion as at October 31, 2017, and derivative liabilities of
$0.8 billion as at October 31, 2018 were down from $1.7 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 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.
70
Royal Bank of Canada: Annual Report 2018
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 55
(Millions of Canadian dollars)
Assets subject to market risk
Cash and due from banks (3)
Interest-bearing deposits with banks (4)
Securities
Trading (5)
Investment, net of applicable allowance (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
As at October 31, 2018
Market risk measure
Balance sheet
amount
Traded risk (1)
Non-traded
risk (2)
Non-traded risk
primary risk sensitivity
$
30,209
36,471
$
–
20,277
$
30,209
16,194
Interest rate
Interest rate
128,258
94,608
120,163
–
8,095
94,608
Interest rate, credit spread
Interest rate, credit spread, equity
294,602
219,108
75,494
Interest rate
399,452
180,278
(2,912)
1,368
94,039
71,655
6,706
$ 1,334,734
$
837,046
1,368
$
$
4,307
9,128
–
–
91,275
2,259
466,517
82,281
–
32,247
201,839
87,352
7,661
–
$
$
395,145
171,150
(2,912)
1,368
2,764
69,396
861,511
754,765
1,368
–
4,975
2,886
64,455
9,131
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
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)
32,247
206,814
90,238
72,116
9,131
5,819
Total liabilities
Total equity
Total liabilities and equity
$ 1,254,779
$
411,380
$
837,580
$
79,955
$ 1,334,734
(1)
(2)
Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR and 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 RBC Insurance and
investment securities, net of applicable allowance, 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 $14,278 million included in SIRR. An additional $15,931 million is included in other risk controls.
Interest-bearing deposits with banks of $16,194 million are included in SIRR.
Trading securities include $8,095 million in securities for asset/liability management of RBC Insurance.
Includes investment securities carried at FVOCI of $48,499 million and investment securities, net of applicable allowance, carried at amortized cost of $46,109 million. $53,190 million of the
total securities are included in SIRR. An additional $2,070 million are held by RBC Insurance. The remaining $39,348 million are captured in other internal non-trading market risk reporting.
Assets purchased under reverse repurchase agreements include $33,335 million reflected in SIRR. An additional $42,159 million is included in other risk controls.
Retail loans include $382,300 million reflected in SIRR and $285 million is used for asset/liability management of RBC Insurance. An additional $12,560 million is included in other risk
controls.
Wholesale loans include $169,152 million reflected in SIRR. An additional $1,998 million is used for asset/liability management of RBC Insurance.
Investments for the account of segregated fund holders are included in RBC Insurance risk measures.
(9)
(10)
(11) Other assets include $43,428 million reflected in SIRR and $2,372 million is used for asset/liability management of RBC Insurance. An additional $23,596 million is included in other risk
(7)
(8)
controls.
(12) Assets not subject to market risk include $6,706 million of physical and other assets.
(13) Deposits include $673,249 million reflected in SIRR. The remaining $81,516 million are captured in other internal non-trading market risk reporting.
(14)
Insurance and investment contracts for the account of segregated fund holders are included in RBC Insurance risk measures.
(15) Obligations related to assets sold under repurchase agreements and securities loaned include $4,975 million in other risk controls.
(16) Other liabilities include $42,604 million reflected in SIRR and $10,669 million of RBC Insurance liabilities. An additional $11,182 million is included in other risk controls.
(17)
Liabilities not subject to market risk include $5,819 million of payroll related and other liabilities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
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)
Investment, net of applicable allowance (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, 2017
Market risk measure
Balance sheet
amount
Traded risk (1)
Non-traded
risk (2)
Non-traded risk
primary risk sensitivity
$
28,407
32,662
$
–
20,792
$ 28,407
11,870
Interest rate
Interest rate
127,657
90,722
119,815
–
7,842
90,722
Interest rate, credit spread
Interest rate, credit spread, equity
220,977
141,532
79,445
Interest rate
385,170
159,606
(2,159)
1,216
95,023
68,545
5,027
$ 1,212,853
$
789,635
1,216
7,638
4,217
–
–
91,791
2,006
377,532
155,389
(2,159)
1,216
3,232
66,539
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
$
$
387,791
$ 820,035
78,194
–
$ 711,441
1,216
Interest rate
Interest rate
30,008
30,008
–
136,371
88,919
4,275
–
6,713
3,208
61,290
9,265
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
$
337,767
$ 793,133
143,084
92,127
65,565
9,265
7,525
$ 1,138,425
$
74,428
$ 1,212,853
(1)
(2)
Traded risk includes positions that are classified or designated as FVTPL and positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR and 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 RBC Insurance 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 $15,895 million included in SIRR. An additional $12,512 million is included in other risk controls.
Interest-bearing deposits with banks of $11,870 million are included in SIRR.
Trading securities include $7,706 million in securities for asset/liability management of RBC Insurance. An additional $136 million is included in other risk controls.
Includes AFS securities of $75,877 million and held-to-maturity securities of $14,845 million. $51,269 million of the total securities are included in SIRR. An additional $1,946 million are
held by RBC Insurance. The remaining $37,507 million are captured in other internal non-trading market risk reporting.
Assets purchased under reverse repurchase agreements include $32,541 million reflected in SIRR. An additional $46,904 million is included in other risk controls.
Retail loans include $366,928 million reflected in SIRR and $241 million is used for asset/liability management of RBC Insurance. An additional $10,363 million is included in other risk
controls.
Wholesale loans include $153,829 million reflected in SIRR. An additional $1,560 million is used for asset/liability management of RBC Insurance.
Investments for the account of segregated fund holders are included in RBC Insurance risk measures.
(9)
(10)
(11) Other assets include $37,999 million reflected in SIRR and $2,428 million is used for asset/liability management of RBC Insurance. An additional $26,112 million is included in other risk
(7)
(8)
controls.
(12) Assets not subject to market risk include $5,027 million of physical and other assets.
(13) Deposits include $650,841 million reflected in SIRR. The remaining $60,600 million are captured in other internal non-trading market risk reporting.
(14)
Insurance and investment contracts for the account of segregated fund holders are included in RBC Insurance risk measures.
(15) Obligations related to assets sold under repurchase agreements and securities loaned include $6,713 million in other risk controls.
(16) Other liabilities include $36,019 million reflected in SIRR and $10,318 million of RBC Insurance liabilities. An additional $14,953 million is included in other risk controls.
(17)
Liabilities not subject to market risk include $7,525 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 conditions. To achieve this goal, we operate under a comprehensive Liquidity Risk Management Framework (LRMF) and
Pledging Policy. We also employ several liquidity risk mitigation strategies that include:
•
•
Achieving an appropriate balance between the level of exposure allowed under our risk appetite and the cost of risk mitigation;
Maintaining broad funding access, including preserving and promoting a reliable base of core client deposits and ongoing access to
diversified wholesale funding sources;
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;
Governance of pledging activity through limits and liquid asset buffers for potential pledging activity;
Timely and granular risk measurement information;
Transparent liquidity transfer pricing and cost allocation; and
Our three lines of defense governance model.
•
•
•
•
•
72
Royal Bank of Canada: Annual Report 2018
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. This includes aligning with local regulatory developments. 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 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, the Risk Committee of the Board, the
GRC and the 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 or its committees.
•
The PRC annually approves the Liquidity Risk Policy (LRP), which establishes minimum risk control elements in accordance with the
Board-approved risk appetite and the 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-specific assumptions against our assets and liabilities and off-balance sheet commitments to
derive expected cash flow profiles over varying time horizons. For example, government bonds generally can be quickly and easily converted
to cash without significant loss of value regardless of their contractual maturity. Similarly, while relationship demand deposits contractually
can be withdrawn immediately, in practice, these balances can be relatively stable sources of funding depending on several factors, such as
the nature of the client and their intended use. Risk methodologies and underlying assumptions are periodically reviewed and validated to
ensure their 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 manage and control 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 potential immediate cash flow risks in times of stress, we use short-term net cash flow limits to control risk of material units,
subsidiaries and currencies, and perform stress testing assessments. Net cash flow positions are determined by applying internally-derived
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 enterprise-
wide and unit-specific prescribed regulatory standards, such as LCR.
Contingency liquidity risk
Contingency liquidity risk planning assesses the impact of sudden stress events, and our planned responses. Our LCP, maintained and
administered by Corporate Treasury, has been developed to guide our potential responses to liquidity crises. Under leadership of Corporate
Treasury, both enterprise and local Liquidity Crisis Teams (LCT) meet regularly to assess our liquidity status, approve the LCP, and in times of
stress provide valuable linkages to front line and risk functions to support the crisis management process. LCT’s include members from key
business segments, GRM, Finance, and Operations, and Communications with relevant subject matter expertise.
Our stress tests, which include elements of scenario and sensitivity analyses, measure our prospective exposure to systemic 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-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 unencumbered liquid asset portfolios.
Our unencumbered liquid asset portfolios 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 eligibility
guidelines (e.g., maturity, diversification and eligibility for central bank advances) to maximize ready access to additional cash should it be
required. These securities, when added to other unencumbered liquid assets that we hold as a result of capital markets or other activities,
contribute to our liquidity reserve, and are reflected in the asset encumbrance disclosures shown below.
Liquidity reserve and asset encumbrance
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. The 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 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, encumbered assets are not
considered a source of liquidity. Unencumbered assets, in turn, are the difference between total and encumbered assets from both on- and
off-balance sheet sources.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
73
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 a potential
quick source of 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.
The liquidity reserve is affected primarily by changes in client banking activity (e.g., liquid asset holdings may change to reflect changes in client
deposit balances), capital markets activities and strategies, and the timing between debt issuances and deployment of funding.
Liquidity reserve
Table 56
(Millions of Canadian dollars)
As at October 31, 2018
Securities received
as collateral from
securities financing
derivative
transactions
Bank-owned
liquid assets
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
Cash and due from banks
Interest-bearing deposits with banks
Securities issued or guaranteed by sovereigns, central
$
30,209 $
36,471
banks or multilateral development banks (1)
Other securities
Undrawn credit lines granted by central banks (2)
Other assets eligible as collateral for discount (3)
Other liquid assets (4)
188,911
78,090
9,988
99,120
19,758
– $
–
30,209 $
36,471
2,573 $
366
261,119
126,209
–
–
–
450,030
204,299
9,988
99,120
19,758
297,681
84,589
–
–
19,406
Total liquid assets
$
462,547 $
387,328 $
849,875 $
404,615 $
27,636
36,105
152,349
119,710
9,988
99,120
352
445,260
(Millions of Canadian dollars) (5)
As at October 31, 2017
Securities received
as collateral from
securities financing
derivative
transactions
Bank-owned
liquid assets
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
Cash and due from banks
Interest-bearing deposits with banks
Securities issued or guaranteed by sovereigns, central
$
28,407 $
32,662
banks or multilateral development banks (1)
Other securities
Undrawn credit lines granted by central banks (2)
Other assets eligible as collateral for discount (3)
Other liquid assets (4)
181,351
76,464
12,007
94,207
20,606
– $
–
28,407 $
32,662
3,044 $
409
167,966
110,300
–
–
–
349,317
186,764
12,007
94,207
20,606
209,528
57,746
–
–
19,524
Total liquid assets
$
445,704 $
278,266 $
723,970 $
290,251 $
25,363
32,253
139,789
129,018
12,007
94,207
1,082
433,719
(Millions of Canadian dollars)
Royal Bank of Canada
Foreign branches
Subsidiaries
Total unencumbered liquid assets
As at
October 31
2018
219,197 $
73,015
153,048
445,260 $
$
$
October 31
2017 (5)
232,674
65,237
135,808
433,719
(1)
(2)
(3)
(4)
(5)
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 loans that qualify as eligible collateral for the discount window facility available to us at the Federal Reserve Bank of New York (FRBNY). Amounts are face value and would be subject
to collateral margin requirements applied by the FRBNY to determine collateral value/borrowing capacity. Access to the discount window borrowing program is conditional on meeting
requirements set by the FRBNY 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 BoC for advances under its Emergency Lending Assistance (ELA) program. It also includes our unencumbered mortgage loans that qualify as
eligible collateral at Federal Home Loan Bank (FHLB). ELA and FHLB 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 collateral to meet requirements and mitigate further market
liquidity disruption.
Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
Amounts have been revised from those previously presented.
74
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
2018 vs. 2017
Total liquid assets increased $126 billion or 17%, primarily due to a significant increase in securities received as collateral under reverse
repurchase agreements and collateral swap transactions. The increase in collateral received however, was offset with a corresponding increase
in collateral pledged under encumbered liquid assets due to repurchase transactions and collateral swaps.
Asset encumbrance
The table below provides a summary of cash, securities and other assets, distinguishing between those that are encumbered or available for sale
or use as collateral in secured funding transactions. Other assets, such as mortgages and credit card receivables, can also be monetized, albeit
over longer timeframes than those required for marketable securities. As at October 31, 2018, our Unencumbered assets available as collateral
comprised 29% of total assets (October 31, 2017 – 32%).
Asset encumbrance
Table 57
October 31
2018
October 31
2017(1)
As at
(Millions of Canadian dollars)
collateral Other (2)
Pledged as
Available as
collateral (3)
Other (4)
Total
Pledged as
collateral
Other (2)
Available as
collateral (3)
Other (4)
Total
Encumbered
Unencumbered
Encumbered
Unencumbered
Cash and due from banks
Interest-bearing deposits with
banks
Securities
Trading
Investment, net of applicable
allowance
Assets purchased under reverse
repurchase agreements and
securities borrowed (5)
Loans
Retail
Mortgage securities
Mortgage loans
Non-mortgage loans
Wholesale
Allowance for loan losses
Segregated fund net assets
Other – Derivatives
– Others (6)
$
– $ 2,573
$
27,636 $
– $
30,209
$
– $ 3,044
$
25,363 $
– $
28,407
–
366
36,105
–
36,471
–
409
32,253
–
32,662
40,640
12,195
–
–
84,270
3,348
128,258
36,844
82,351
62
94,608
10,018
–
–
86,781
4,032
127,657
80,704
–
90,722
348,597
22,188
53,590
5,722
430,097
232,125
23,131
56,820
6,570
318,646
34,286
36,959
8,553
–
–
–
–
19,406
–
–
–
–
–
–
–
–
36,234
17,784
59,611
32,478
–
–
–
352
–
157,208
48,817
147,800
(2,912)
1,368
94,039
58,603
70,520
211,951
116,981
180,278
(2,912)
1,368
94,039
78,361
35,883
37,041
7,543
–
–
–
–
19,524
–
–
–
–
–
–
–
–
34,542
14,737
60,959
30,518
–
–
–
1,082
–
148,145
46,320
129,087
(2,158)
1,216
95,023
52,967
70,425
199,923
114,822
159,605
(2,158)
1,216
95,023
73,573
Total assets
$ 500,636 $ 25,127
$ 430,411 $ 514,055 $ 1,470,229
$ 378,978 $ 26,584
$ 423,759 $ 481,202 $ 1,310,523
(1)
(2)
(3)
(4)
(5)
(6)
Amounts have been revised from those previously presented.
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 BoC for advances under its ELA program. It also includes our unencumbered mortgage loans that
qualify as eligible collateral at FHLB. We also lodge loans that qualify as eligible collateral for the discount window facility available to us at the FRBNY. ELA, FHLB, and other central bank
facilities are not considered sources of available liquidity in our normal liquidity risk profile. However, banks could monetize assets meeting 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, derivative transactions, and margin lending. Includes $22.2 billion
(October 31, 2017 – $23.1 billion) of collateral received through reverse repurchase transactions that cannot be rehypothecated in its current legal form.
The Pledged as collateral amount represents cash collateral and margin deposit amounts pledged related 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, 2018, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were $545 billion or
50% of our total funding (October 31, 2017 – $525 billion or 54%). 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 2018, we continued to experience more favourable unsecured wholesale funding access and pricing relative to many global peers. We
also continued to expand our unsecured long-term funding base by selectively issuing, either directly or through our subsidiaries, $36.0 billion
of term funding in various currencies and markets. Total unsecured long-term funding outstanding increased $6.2 billion from the prior year due
to higher issuances, partially offset by maturities.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
75
Compared to 2017, our outstanding MBS sold, covered bonds, and securitized credit card receivables remained relatively unchanged.
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 58
As at
October 31
2018
October 31
2017
$
$
102,325
64,843
1,535
9,397
96,112
64,758
1,366
9,362
$
178,100
$
171,598
*
This table represents an integral part of our 2018 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 59
Canada
U.S.
Europe/Asia
• Canadian Shelf Program – $25 billion
• SEC Shelf Program –
• European Debt Issuance Program –
US$40 billion
US$40 billion
• Global Covered Bond Program –
€32 billion
• Japanese Issuance Programs –
¥1 trillion
We also raise long-term funding using Canadian Deposit Notes, Canadian National Housing Act 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.
Long-term debt (1) – funding mix by currency of issuance
($139 billion as at October 31, 2018)
Long-term debt (1) – funding mix by product
($139 billion as at October 31, 2018)
Other
10%
Euro
15%
Canadian dollar
36%
October 31, 2018
$139 B
U.S. dollar
39%
Cards securitization
6%
October 31, 2018
$139 B
Unsecured
funding
53%
Covered Bonds
27%
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
76
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
The following table provides our composition of wholesale funding based on remaining term to maturity:
Composition of wholesale funding (1)
Table 60
As at October 31, 2018
(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
$
$
$
$
$
$
Less than 1
month
1 to 3
months
3 to 6
months
4,507 $
3,658
1,908
122
185
–
–
–
7,639
10 $
42 $
9,000
2,581
6,132
215
2,473
21
–
1,658
20,994
5,877
7,424
353
527
4,641
–
419
6 to 12
months
–
14,926
6,197
8,090
693
1,099
5,409
1,103
1,189
Less than
1 year
sub-total
1 year to
2 years
2 years
and
greater
$
4,559 $
– $
– $
48,578
16,563
21,768
1,446
4,099
10,071
1,103
10,905
197
–
23,125
2,603
3,027
8,581
2,993
4
132
–
33,513
5,608
12,193
26,861
5,301
9,122
Total
4,559
48,907
16,563
78,406
9,657
19,319
45,513
9,397
20,031
18,019 $ 22,090 $ 40,277 $ 38,706
$ 119,092 $ 40,530 $ 92,730 $ 252,352
8,292 $ 5,666 $ 11,045 $ 12,706
26,000
9,727
29,232
16,424
$ 37,709 $ 11,608 $ 39,054 $
28,922
81,383
53,676
88,371
163,981
As at October 31, 2017
Less than 1
month
1 to 3
months
3 to 6
months
5,054 $
1,092
997
–
188
–
–
–
4,669
39 $
47 $
8,801
1,385
2,625
192
571
2,685
–
2,005
14,194
4,300
3,402
980
1,310
1,777
–
173
6 to 12
months
13
13,501
5,555
16,691
1,545
1,549
6,179
–
1,488
Less than
1 year
sub-total
1 year to
2 years
2 years
and
greater
$
5,153 $
– $
– $
37,588
12,237
22,718
2,905
3,430
10,641
–
8,335
1,549
–
17,311
1,332
4,094
10,017
1,106
5
39
–
38,695
6,270
12,650
23,925
8,256
5,344
Total
5,153
39,176
12,237
78,724
10,507
20,174
44,583
9,362
13,684
12,000 $ 18,303 $ 26,183 $ 46,521
$ 103,007 $ 35,414 $ 95,179 $ 233,600
5,265 $ 5,541 $ 7,388 $ 13,283
33,238
6,735
12,762
18,795
$ 31,477 $ 14,111 $ 36,575 $
21,303
71,530
58,604
82,163
151,437
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Excludes bankers’ acceptances and repos.
Excludes deposits associated with services we provide to 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 and mortgage loans.
Includes tender option bonds (secured) of $6,978 million (October 31, 2017 – $5,168 million), bearer deposit notes (unsecured) of $4,084 million (October 31, 2017 – $3,342 million) and
other long-term structured deposits (unsecured) of $8,969 million (October 31, 2017 – $5,176 million).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
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, liquidity and other factors not completely within our control.
The following table presents our major credit ratings(1):
Credit ratings
Moody’s (4)
Standard & Poor’s (5)
Fitch Ratings (6)
DBRS (7)
As at November 27, 2018
Table 61
Short-term debt
Legacy senior long-term debt (2)
Senior long-term debt (3) Outlook
P-1
A-1+
F1+
R-1(high)
Aa2
AA-
AA
AA
A2
A
AA
AA (low)
stable
stable
stable
positive
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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.
Includes senior long-term debt issued prior to September 23, 2018 and senior long-term debt issued on or after September 23, 2018 which is excluded from the Canadian
Bank Recapitalization (Bail-in) regime.
Includes senior long-term debt issued on or after September 23, 2018 which is subject to conversion under the Bail-in regime.
On July 16, 2018, Moody’s upgraded our legacy senior long-term debt rating two notches and revised our outlook to stable from negative. On July 16, 2018, Moody’s also
announced our rating for senior long-term debt of A2.
On June 27, 2018, S&P revised our outlook to stable from negative. On August 16, 2018, S&P announced our rating for senior long-term debt of A.
On June 21, 2018, Fitch Ratings announced that our rating for senior long-term debt will be the same as our legacy senior long-term debt, as they did not expect any
immediate rating changes as a result of the Bail-in regime. On October 22, 2018, Fitch Ratings affirmed our ratings with a stable outlook.
On June 26, 2018, DBRS revised our outlook to positive from stable. On April 19, 2018, DBRS announced our rating for senior long-term debt of AA (low).
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 provides
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 62
As at
October 31
2018
October 31
2017
(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
$
$
125
185
$
45
176
$
191
–
$
61
231
$
102
100
307
–
(1)
Includes GICs issued by our municipal markets business out of New York.
78
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Liquidity Coverage Ratio (LCR)
The LCR is a Basel III metric that measures the sufficiency of high-quality liquid assets (HQLA) available to meet liquidity needs over a 30-day
period in an acute stress scenario. The Basel Committee on Banking Supervision (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 daily
LCR positions during the quarter.
Liquidity coverage ratio (1)
(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 in
networks of cooperative banks (4)
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
2018
July 31
2018
Table 63
Total unweighted
value (average) (2)
Total weighted
value (average)
Total unweighted
value (average) (2)
Total weighted
value (average)
252,514
83,611
168,903
285,140
126,889
136,572
21,679
260,417
61,154
6,232
193,031
26,811
420,344
233,784
14,345
59,683
212,818
19,398
2,508
16,890
129,249
30,276
77,294
21,679
29,837
79,668
42,867
6,232
30,569
26,811
7,557
292,520
49,183
10,156
59,683
119,022
252,338
82,520
169,818
282,184
127,159
130,873
24,152
257,140
63,454
5,708
187,978
43,563
427,781
218,333
15,153
64,995
219,719
19,458
2,476
16,982
127,647
30,351
73,144
24,152
24,595
80,032
43,804
5,708
30,520
43,563
7,369
302,664
44,388
10,646
64,995
120,029
Total adjusted
value
212,818
173,498
123%
Total adjusted
value
219,719
182,635
120%
(1)
(2)
(3)
(4)
(5)
(6)
The LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended October 31, 2018 is
calculated as an average of 63 daily positions.
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 the 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 customers other than retail and small and medium-sized enterprises (SMEs), 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 our 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 83% 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 the 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 we believe would be available in a stress situation. All maturing wholesale debt is
assigned 100% outflow in the LCR calculation.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
79
Q4 2018 vs. Q3 2018
The average LCR for the quarter ended October 31, 2018 was 123%, which translates into a surplus of approximately $39 billion, compared to
120% in the prior quarter. The improvement in the LCR surplus from the previous quarter reflects a decline in net cash outflows resulting from a
change in the composition and term profile of the assets and liabilities.
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 64
(Millions of Canadian dollars)
Assets
Cash and deposits with banks
Securities
Trading (1)
Investment, net of
applicable allowance (2)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans, net of applicable
allowance
Other
Customers’ liability under
acceptances
Derivatives
Other financial assets
Total financial assets
Other non-financial assets
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, 2018
$ 64,201 $
2 $
– $
– $
– $
– $
– $
– $
2,477 $
66,680
86,551
20
22
16
1
52
72
6,982
34,542
128,258
3,529
6,855
1,419
2,593
2,399
12,989
25,061
39,396
367
94,608
168,810
66,854
28,828
10,298
11,692
552
–
–
7,568
294,602
22,534
14,967
21,079
26,753
25,271
122,687
211,768
44,191
87,568
576,818
10,774
6,070
25,670
4,788
10,179
873
94
4,930
938
1
4,032
78
–
3,030
157
5
11,130
112
–
18,067
231
–
36,581
1,758
(21)
20
2,120
15,641
94,039
31,937
$ 388,139 $ 104,538 $ 57,310 $ 43,771 $ 42,550 $147,527 $ 255,199 $ 128,908 $ 134,641 $ 1,302,583
32,151
24,113
1,125
1,352
1,268
1,809
364
971
559
590
Total assets
$ 389,948 $ 105,806 $ 57,900 $ 44,135 $ 43,109 $148,498 $ 256,551 $ 130,033 $ 158,754 $ 1,334,734
Liabilities and equity
Deposits (3)
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
$ 46,793 $ 33,849 $ 47,209 $ 30,511 $ 36,116 $ 34,641 $ 50,792 $
5,433
1,499
23,388
16,360
7,135
10,022
2,340
–
6,571
–
9,321
2,579
4,232
2,982
10,775
4,787
32,247
–
94
–
1
–
–
–
5
–
–
–
15,693 $ 440,246 $
5,902
3,432
–
–
–
–
–
–
735,850
64,322
36,874
15,662
32,247
146,205
5,998
27,414
–
44,248
8,585
1,003
–
9,030
4,650
582
–
91
4,176
233
–
–
3,311
414
103
–
9,808
154
–
–
17,205
522
318
–
36,496
6,784
8,710
7,240
9
733
–
206,814
90,238
37,839
9,131
$ 271,772 $ 99,043 $ 73,465 $ 41,944 $ 47,158 $ 61,765 $ 108,585 $
992
–
5,095
–
346
–
183
–
157
–
765
–
868
–
77,017 $ 448,228 $ 1,228,977
25,802
7,947
79,955
79,955
9,449
–
Total liabilities and equity
$ 272,764 $ 104,138 $ 73,811 $ 42,127 $ 47,315 $ 62,530 $ 109,453 $
86,466 $ 536,130 $ 1,334,734
Off-balance sheet items
Financial guarantees
Lease commitments
Commitments to extend credit
Other credit-related
commitments
Other commitments
$
532 $
66
4,122
2,026 $ 1,647 $ 2,696 $ 1,337 $ 1,910 $
199
9,667
695
33,030
194
11,406
194
8,736
131
3,417
4,179 $
1,517
168,071
1,125 $
2,814
23,899
50 $
–
269
15,502
5,810
262,617
577
141
795
–
1,586
–
1,498
–
1,324
–
478
–
680
–
148
–
107,499
556
114,585
697
Total off-balance sheet items
$
5,438 $
6,369 $ 12,163 $ 14,060 $ 14,261 $ 36,113 $ 174,447 $
27,986 $ 108,374 $
399,211
(1)
(2)
(3)
Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.
Under IFRS 9, investment securities represent debt and equity securities at FVOCI and debt securities at amortized cost, net of the applicable allowance. Under IAS 39, investment securities
represented available-for-sale securities and held-to-maturity securities. For further details on the impacts of the adoption of IFRS 9, refer to Note 2 of our 2018 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 for our
operations and liquidity needs, as explained in the preceding Deposit and funding profile section.
80
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
(Millions of Canadian dollars)
Assets
Cash and deposits with banks
Securities
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, 2017
$ 58,675 $
27 $
22 $
4 $
– $
– $
– $
– $
2,341 $
61,069
Trading (1)
Investment, net of applicable allowance (2)
88,083
1,748
9
4,690
72
4,145
3
2,552
12
1,545
91
9,608
61
24,445
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans, net of applicable allowance
Other
106,342
15,228
47,726
16,024
26,207
23,572
13,696
27,220
14,327
24,086
6,624
104,059
–
206,201
Customers’ liability under acceptances
Derivatives
Other financial assets
10,825
5,619
24,577
5,541
10,004
767
77
4,530
523
–
3,290
90
–
2,849
88
11
9,351
183
5
19,459
184
6,374
40,772
–
40,028
–
39,919
1,697
32,952
1,217
127,657
90,722
6,055
86,199
220,977
542,617
–
2
1,243
16,459
95,023
29,352
$ 311,097 $ 84,788 $ 59,148 $ 46,855 $ 42,907 $ 129,927 $ 250,355 $ 128,790 $ 130,009 $1,183,876
28,977
21,750
1,814
1,204
1,820
986
745
229
337
92
$ 312,917 $ 85,992 $ 59,240 $ 47,192 $ 43,136 $ 130,672 $ 252,169 $ 129,776 $ 151,759 $1,212,853
Total financial assets
Other non-financial assets
Total assets
Liabilities and equity
Deposits (3)
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 (4)
Lease commitments
Commitments to extend credit (4)
Other credit-related commitments (4)
Other commitments
1,156
–
10,825
30,008
98,409
5,765
25,137
–
3,989
1,898
5,541
–
32,026
9,436
1,118
–
$ 40,373 $ 24,425 $ 33,825 $ 35,891 $ 30,641 $ 34,737 $
6,289
1,107
5,799
1,331
4,064
4,862
10,178
7,118
48,980 $
20,495
19,732
14,709 $ 429,152 $ 692,733
59,629
37,273
7,659
1,225
–
–
77
–
4,374
4,787
466
–
–
–
–
–
11
–
5
–
–
–
–
–
16,459
30,008
–
3,388
222
–
93
3,038
296
–
–
9,410
138
106
12
16,924
366
207
–
39,378
3,532
8,952
8,170
1
574
–
143,084
92,127
31,849
9,265
$ 211,673 $ 78,433 $ 50,925 $ 46,631 $ 42,994 $ 61,698 $ 106,721 $
135
–
2,747
–
3,910
–
920
–
312
–
180
–
835
–
75,455 $ 437,897 $1,112,427
25,998
7,789
74,428
74,428
9,170
–
$ 212,508 $ 82,343 $ 51,237 $ 46,766 $ 43,174 $ 64,445 $ 107,641 $
84,625 $ 520,114 $1,212,853
$
535 $ 3,030 $
63
4,532
526
38
125
3,808
818
–
1,613 $
182
7,634
1,252
–
2,750 $
181
10,706
1,635
–
1,426 $
181
9,197
1,278
–
1,276 $
720
26,126
409
–
4,906 $
1,471
140,985
661
–
713 $
2,859
13,935
134
–
46 $
–
6,966
101,864
442
16,295
5,782
223,889
108,577
480
Total off-balance sheet items
$
5,694 $ 7,781 $ 10,681 $ 15,272 $ 12,082 $ 28,531 $ 148,023 $
17,641 $ 109,318 $ 355,023
(1)
(2)
(3)
(4)
Trading debt securities classified as FVTPL have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual maturity.
Under IFRS 9, investment securities represent debt and equity securities at FVOCI and debt securities at amortized cost, net of the applicable allowance. Under IAS 39, investment securities
represented available-for-sale securities and held-to-maturity securities. For further details on the impacts of the adoption of IFRS 9, refer to Note 2 of our 2018 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 for our
operations and liquidity needs, as explained in the preceding Deposit and funding profile section.
Amounts have been revised from those previously presented.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
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 65
(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)
Lease commitments
Commitments to extend credit (2)
As at October 31, 2018
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
$ 382,847 $ 287,928 $ 52,108 $ 91,154 $
25,089 $
839,126
–
–
7,240
1,753
–
391,840
15,657
32,222
199,574
28,568
103
564,052
5
–
–
98
–
52,211
–
–
–
383
318
91,855
–
–
–
6,851
8,710
40,650
15,662
32,222
206,814
37,653
9,131
1,140,608
$
15,502 $
–
224,058
239,560
– $
– $
$
784
38,528
39,312
695
2
697
1,517
29
1,546
– $
2,814
–
2,814
15,502
5,810
262,617
283,929
43,464 $ 1,424,537
Total financial liabilities and off-balance sheet items
$ 631,400 $ 603,364 $ 52,908 $ 93,401 $
(Millions of Canadian dollars)
Financial liabilities
Deposits (1)
Other
As at October 31, 2017
On demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
$ 372,108 $ 253,825 $ 52,026 $ 89,456 $
22,280 $
789,695
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
Subordinated debentures
–
–
8,171
1,124
–
381,403
16,443
30,009
134,904
26,730
–
461,911
10
–
–
78
106
6
–
12
261
207
–
–
–
3,553
8,952
16,459
30,009
143,087
31,746
9,265
52,220
89,942
34,785
1,020,261
Off-balance sheet items
Financial guarantees (2), (3)
Lease commitments
Commitments to extend credit (2), (3)
$
16,118 $
–
185,569
177 $
732
38,309
201,687
39,218
– $
– $
– $
720
10
730
1,471
1
1,472
2,859
–
2,859
16,295
5,782
223,889
245,966
Total financial liabilities and off-balance sheet items
$ 583,090 $ 501,129 $ 52,950 $ 91,414 $
37,644 $ 1,266,227
*
(1)
(2)
(3)
This table represents an integral part of our 2018 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 for our
operations and liquidity needs, as explained in the preceding Deposit and funding profile.
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.
Amounts have been revised from those previously presented.
82
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Insurance risk
Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit and/or premium
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. The four insurance sub-risks are: morbidity, mortality, longevity and travel risk.
Our Insurance Risk Framework provides an overview of our processes and tools for identifying, assessing, managing, mitigating and
reporting on the insurance risks that face the organization. These are also supported by our robust three lines of defence governance structure.
Execution risk drivers
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.
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 us. 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 and 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 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 the bank
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 the bank 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
83
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.
Risk
Description
Information Technology and Cyber Risks
Third Party Risk
As we continue to digitize our business operations, IT and cyber risks are present in the use,
ownership, operation, involvement and adoption of IT within our organization. As described in
the Top and emerging risk section of this report, the impact of a cyber-attack could be significant
to our businesses and clients. To manage our technology and cybersecurity risk, we have
established an enterprise-wide Information Technology Risk Management Framework to
establish roles, responsibilities, and proper governance as it relates to IT risk management. We
are also advancing our cyber defence and resiliency capabilities by investing in our people,
process and technologies to support our business model, protect our systems and enhance the
experience of our clients on a global basis.
Third party risk continues to receive attention as we increasingly engage third parties to augment
our operational capabilities. Failure to effectively onboard and manage our service providers may
expose us to service disruption, financial loss, and other risks. We have established a
framework, which sets the guidelines for how to minimize the impact and frequency of exposures
from third party relationships through periodic risk assessments, continuous monitoring, and
review of contract and procurement practices to ensure appropriate safeguards are in place.
Money Laundering Risk
We have an enterprise-wide program to deter, detect and report suspected money laundering
and terrorist financing activities. Our Global Anti-Money Laundering Compliance Group is
dedicated to the continuous development and maintenance of robust policies, guidelines,
training and risk-assessment tools and models to help our employees deal with ever-evolving
money laundering and terrorist financing risks.
Privacy Risk
Climate Change
Privacy risk relates to the improper use of personal information or failing to safeguard
confidential client, employee or our proprietary information. We are dedicated to protecting the
personal information entrusted to the organization. That commitment is fundamental to the way
we do business and is reflected in our privacy policies and enterprise-wide training; keeping
privacy measures top of mind to ensure personal information is protected across all business
processes from the outset.
Climate change continues to impact the frequency and intensity of weather-related events.
Although we have not had a significant adverse impact from weather-related events through the
course of the year, we have a Business Continuity Management program in place to ensure
resiliency in the event of extreme weather to ensure client and business impacts are minimal. We
are also developing products, services and advice to assist our clients in the transition to a low
carbon economy and in building financial resiliency in the face of climate change.
Operational risk capital
On May 10, 2016, OSFI approved our use of the Advance Measurement Approach (AMA) for operational risk capital measurement subject to the
application of a Standardized Approach (TSA) floor. TSA calculates operational risk capital based on an OSFI-established percentage of 3 years’
average gross income for pre-determined industry standardized business activities. AMA is determined using our internal Operational Risk
Measurement System which includes internal loss experience, external loss experience, scenario analysis, and Business Environment Internal
Control Factors. RBC Bank (Georgia), RBC Caribbean, and City National will continue using TSA. RBC Insurance (including insurance recoveries) is
not in the scope of operational risk capital calculations. We do not account for mitigation through insurance or any other risk transfer mechanism
in our AMA model. It is expected that we will implement the new Standardized Measurement Approach (SMA) for measuring operational risk
capital in Q1 2021 under the final Basel III reforms. The SMA methodology is based on the Business Indicator Component (BIC), a financial-
statement-based proxy for operational risk, and the Internal Loss Multiplier, a scaling factor that is based on the internal average historical
losses and the BIC. Once implemented, SMA will replace all existing approaches (TSA and AMA) in the Basel II framework.
Operational risk loss events
During 2018, we did not experience any material operational risk loss events. For further details on our contingencies, including litigation, refer
to Notes 24 and 25 of our 2018 Annual Consolidated Financial Statements.
84
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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 the bank, 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 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 licenses or registrations that would damage our reputation and
negatively impact our earnings and ability to conduct some of our businesses. 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.
Regulatory Compliance has developed a Regulatory Compliance Management Framework, which sets out how we 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 includes the regulatory risks associated with financial crimes (which include, but are not limited to, money
laundering, bribery and sanctions), privacy, market conduct, consumer protection, business conduct, prudential, and other generally applicable
non-financial requirements. Specific compliance policies, procedures and supporting frameworks have been developed to manage regulatory
compliance risk.
Strategic risk drivers
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 a major driver of our risk appetite 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 each business
segment. 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. 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.
Our annual business portfolio review and project approval request processes help identify and mitigate strategic risk by ensuring strategies
for new initiatives, lines of business, and the enterprise as a whole align with our risk appetite and risk posture. GRM provides oversight of
strategic risk by providing independent review of these processes, establishing enterprise risk frameworks, and independently monitoring and
reporting on the level of risk established against our risk appetite metrics in accordance with the three lines of defence governance model.
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 of an adverse impact on stakeholders’ perception of the bank due to i) an activity of the bank, its representatives,
service providers (third parties and intra-group), or clients, or ii) public sentiment towards a global or industry issue. Our reputation is rooted in
the perception of our stakeholders, and the trust and loyalty they place in us is core to our purpose as a financial services organization. A strong
and trustworthy reputation will generally strengthen our market position, reduce the cost of capital, increase shareholder value, strengthen our
resiliency, and help attract and retain top talent. Conversely, damage to our reputation can result in reduced share price and market
capitalization, increased cost of capital, loss of strategic flexibility, inability to enter or expand into markets, loss of client loyalty and business,
or regulatory fines and penalties. The sources of reputation risk are widespread; risk to our reputation can occur in connection with credit,
regulatory, legal and operational risks. We can also experience reputation risk from a failure to maintain an effective control environment, exhibit
good conduct, or have strong risk culture practices.
Managing our reputation risk is an integral part of our organizational culture and our overall enterprise risk management approach, as well
as a priority for employees and our Board. Our Board-approved Reputation Risk Management Framework provides an overview of our approach to
identify, assess, manage, monitor, and report on reputation risk. This framework outlines governance authorities, roles and responsibilities, and
controls and mechanisms to manage our reputation risk, including our culture of integrity, compliance with our Code of Conduct, and operating
within our risk appetite.
Our governance of reputation risk aims to be holistic and provide an integrated view of potential reputation issues across the organization.
This governance structure ensures that ownership and accountability for reputation risk are understood across the enterprise, both proactive and
reactive reputation risk decisions are escalated to a senior executive committee for review and evaluation, and reporting on reputation risk is
comprehensive and integrated.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
85
Legal and regulatory environment risk
Legal and regulatory environment risk is the risk that new or modified laws and regulations, and the interpretation or application of those laws
and regulations, will negatively impact the way in which we operate, both in Canada and abroad. The full impact of some of these changes 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 provides a high-level
summary of some of the key regulatory changes that have potential to increase our costs, impact our profitability, and increase the complexity of
our operations.
Global Trade Agreements
Global trade tensions remain elevated, with both positive and negative developments in recent months. The U.S., Mexico, and Canada
successfully concluded trade talks at the beginning of October 2018. The proposed new agreement, the U.S.-Mexico-Canada Agreement, will
keep the dispute resolution provision, prevent tariffs in the auto sector, and reduce uncertainty regarding future trading relations within North
America; however, certain concessions (such as in the dairy industry) were made and tariffs on steel and aluminum remain in effect. At the same
time, tensions between the U.S. and China escalated with additional tariffs being implemented and limited progress toward a negotiated
solution. In its semi-annual forecast update, the International Monetary Fund noted that trade tensions were partly responsible for the
downgrade of global growth projections for 2018 and 2019.
Consumer Protection
The Canadian federal government has focused attention on issues relating to consumer protection. For example, Canadian regulatory agencies
undertook reviews of sales practices at Canadian banks. On March 20, 2018, the Financial Consumer Agency of Canada (FCAC) released a report
on its review of sales practices. On September 13, 2018, we received a supervisory letter from FCAC which detailed the FCAC’s recommendations
and observations arising out of the domestic retail sales practices review they conducted on the Bank. While no widespread misconduct was
identified, several areas for improvement were noted. On October 29, 2018 the federal government tabled proposed legislative changes to the
consumer protection provisions applicable to banks, including enhancements in areas like corporate governance, business conduct, disclosure
and transparency, and new powers for the FCAC.
Privacy
Legislative developments in data privacy are being closely monitored following the enactment of GDPR. California was the first state to enact
post-GDPR legislation (effective January 2020), articulating specific individual rights and requirements in connection with the sale of data. In
Canada, mandatory breach reporting began on November 1, 2018, and the Privacy Commissioner of Canada (the Commissioner) has called for
modernization of legislation given the pace of technological change, including the ability for the Commissioner to audit businesses and levy
fines. As European privacy laws are further enhanced to align with the GDPR, legislative and regulatory developments are expected to accelerate
around the world.
Canadian Housing Market and Consumer Debt
The Government of Canada and a number of provinces have introduced measures to respond to concerns relating to the level and sustainability
of Canadian household debt. Risks in this area continue to be closely monitored with further regulatory responses possible depending on market
conditions and any heightened concerns that may be raised.
Payments Issues
The federal government is engaged in several initiatives that could have an impact on the payments system in Canada. This includes the
following: amendments to the Canadian Payments Act concerning governance of Payments Canada and access considerations; the development
of a regulatory oversight framework for the retail payments system; and initiatives under consideration to modernize the payments system.
London Interbank Offered Rate (LIBOR)
LIBOR is the most widely referenced interest benchmark rate across the globe for derivatives, bonds, loans and other floating rate instruments;
however, there is a regulator-led push to transition the market from LIBOR to alternative risk-free, or nearly risk-free, rates that are based on
actual overnight transactions. The main accelerator for the change has been the U.K. Financial Conduct Authority’s (FCA) statement last year that
after 2021, the FCA will no longer persuade or compel panel banks to make the submissions required to calculate LIBOR. As a result, U.K. and
U.S. regulators have warned the industry they will need to be prepared for LIBOR to be discontinued at the end of 2021. Derivatives, floating rate
notes and other financial contracts whose terms extend beyond 2021, and that refer to LIBOR as the reference rate, will be impacted.
Other Regulatory Initiatives Impacting Financial Services in Canada
Several initiatives are underway or contemplated. From the perspective of the federal government this includes: a consultation process on the
merits of open banking in a Canadian context; a consultation on the digital/data-driven economy; proposed changes to the regulatory framework
for the anti-money laundering regime in Canada; and consultations on the details of its deposit insurance review. From a provincial perspective,
the Canadian Securities Administrators are engaged in a consultation process on registration and business conduct rules relating to OTC
derivatives products, including bank activities in this area.
United States Regulatory Initiatives
Policymakers are considering reforms to various U.S. regulations, certain of which may, if implemented, result in reduced complexity of the U.S.
regulatory framework and lower compliance costs. These include possible reforms to the Volcker Rule; the SEC’s proposed standards of conduct
for brokers and advisors (i.e. Regulation Best Interest); the regulation of OTC derivatives; and key aspects of the capital, leverage, liquidity, and
oversight framework in the U.S. (e.g., enhanced prudential standards applicable to foreign bank organizations; the Fed’s Comprehensive Capital
Analysis and Review program; and total loss absorbing capacity rules). These initiatives may lead to financial regulatory reforms, the extent,
timing, and impact of which are unknown at this time.
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Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
United States Tax Reform
In December 2017, the U.S. Tax Cuts and Jobs Act legislation (U.S. Tax Reform) was signed into law. Most provisions of the new law took effect at the
beginning of calendar 2018 or for fiscal years starting in 2018. The tax law reduces individual and corporate rates and permits expensing of many
capital expenditures. The law also eliminates deductions for Federal Deposit Insurance Corporation premiums and tightens deductibility rules for
meals and entertainment, as well as certain legal settlement costs. In addition, a portion of executive salaries allocated to the U.S. would be
non-deductible. Effective for fiscal years beginning after December 31, 2017, the law also established a Base Erosion Anti-Abuse Tax (BEAT) that may
have an impact on cross-border related party payments. Regulations implementing and/or clarifying certain aspects of the legislation are being
released on a rolling basis.
U.K. and European Regulatory Reform
The revised directive and regulation on Markets in Financial Instruments (MiFID II/MiFIR) became effective January 2018 with 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.
The U.K. remains in negotiations with regards to its exit from the EU, scheduled to take place on March 29, 2019. There is political
agreement on a transition period which will extend until December 31, 2020; however, legal certainty on transition will only be provided on
ratification of the Withdrawal Agreement which is currently under discussion. Until the date of its exit or, if there is a transition period, until the
period expires, the U.K. will continue to remain an EU Member State, subject to all EU legislation.
Other forthcoming regulatory initiatives include: the extension of the Senior Managers Regime to all U.K. regulated firms which is effective
December 2019; transaction reporting of securities financing transactions which is expected to take effect in the first calendar quarter of 2019;
and the implementation of new settlement disciplines, including mandatory buy-ins, for participants in European Central Securities Depositories
which is effective September 2020.
For further details on regulatory capital and related requirements, refer to the Capital management section and the Capital, liquidity and other
regulatory developments section.
Competitive risk
Competitive risk is the risk of an inability to build or maintain a sustainable competitive advantage in a given market or markets and includes the
potential for loss of market share due to competitors offering superior products and services. Competitive risk can arise within or outside the
financial sector, from traditional or non-traditional competitors, domestically or globally. 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 and 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. This competition could also reduce net interest income and fee
revenue and adversely affect our results.
We identify and assess competitive risks as part of our overall risk management process. Our products and services are regularly
benchmarked against existing and potential competitors. In addition, we regularly conduct risk reviews of our products, services, mergers and
acquisitions as well as ensure adherence to competition and anti-trust laws. Our annual strategy-setting process also plays an integral role in
managing competitive risk.
Macroeconomic risk drivers
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, legal or other risks for us.
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 higher 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. 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, which have increased in Canada and the U.S. over the last year but remain
historically low. 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 a further increase in
interest rates would benefit our businesses, 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 & 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.
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 model, 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
87
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 operational risks on us, under
adverse economic conditions. Our enterprise-wide stress testing program evaluates the potential effects of a set of specified changes in risk
factors, corresponding to exceptional but 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.
Government fiscal, monetary and other policies
Our businesses and earnings are affected by monetary policies that are adopted by the BoC, the Fed in the U.S., the ECB in the EU and monetary
authorities in other jurisdictions in which we operate; as well as the fiscal policies of the governments of Canada, the U.S., Europe and such
other jurisdictions. 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 the bank 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 taxation is grounded in principles which are reflected in our Code of Conduct and 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 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 all intercompany transactions are conducted on arm’s length terms;
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 transactions.
We operate in 36 countries worldwide. Our activities in these countries are subject to both Canadian and international tax legislation and
other regulations, 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 have 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 2018, total income and other tax expense, including income taxes in the Consolidated Statements of Comprehensive Income and Changes in
Equity, to various levels of governments globally totalled $5.0 billion (2017 – $5.1 billion). In Canada, total income and other tax expense for the
year ended October 31, 2018 to various levels of government totalled $3.8 billion (2017 – $3.9 billion).
Income and other tax expense – by category
(Millions of Canadian dollars)
Income and other tax expense – by geography
(Millions of Canadian dollars)
6,000
5,000
4,000
3,000
2,000
1,000
0
6,000
5,000
4,000
3,000
2,000
1,000
0
2018
2017
2018
2017
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.
88
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Environmental and social risk
Environmental and social (E&S) risk is the risk that an E&S issue associated with a client, transaction, product, supplier or activity will create a
risk of loss of financial, operational, legal and/or reputational value to us. E&S issues include, but are not limited to, site contamination, waste
management, land and resource use, biodiversity, water quality and availability, climate change, environmental regulation, human rights,
Indigenous Peoples’ rights and consultation, and community engagement. GRM is responsible for developing and maintaining policies to
identify, assess, monitor and report on E&S risk, and for their regular review and update. E&S risk policies seek to identify sectors, clients and
business activities that may be exposed to E&S risk; apply enhanced due diligence and escalation procedures, as necessary; and establish
requirements to manage, mitigate and monitor E&S risk. Business segments and corporate functions are responsible for incorporating E&S risk
management requirements within their operations.
We recognize the importance of E&S risk management practices and processes and are committed to regular and transparent disclosure. As
a signatory to the Equator Principles (EP), we report annually on projects assessed according to the EP framework. RBC GAM and BlueBay Asset
Management LLP are signatories to the United Nations Principles for Responsible Investment (UN PRI) and report annually on their responsible
investment activities to the UN PRI. RBC Europe Limited is a signatory to the Green Bond Principles and reports annually on its green bond
underwriting activities. Our Corporate Citizenship team sets our corporate environmental strategy and reports annually on our performance in our
Environmental, Social & Governance (ESG) Investor Report. We also publish an annual Modern Slavery Act Statement, which sets out the steps
that we have taken to ensure that slavery and human trafficking are not taking place in our supply chains or our business. This year we
considered the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD).
TCFD Disclosure
Governance
The Board and its Committees oversee senior management who is responsible for the execution of the management of E&S risks and
opportunities. The Board provides oversight of our environmental strategy and our E&S risks, including our approach to managing these risks.
GRM has a dedicated E&S risk team that develops approaches to identify, assess, monitor and report on climate-related risks, as appropriate.
Performance goals on climate-related risks have been established at the management level.
Strategy
We recognize we have a role to play in accelerating the transition to a low carbon economy and to mitigate the risks associated with climate
change. Global practices in the identification, assessment and management of climate-related risks and opportunities are constantly evolving
and we maintain our focus on supporting our clients with our financial products, services and advice as the transition will necessitate access to
capital markets, bank debt and other funding solutions.
Risk Management
Climate change may be a driver of other risk types including systemic, regulatory, competitive, strategic, reputation, credit, and market risk.
Climate change was initially identified in 2017 as an emerging risk and as such it is reported on a regular basis to senior management and the
Board.
We conduct portfolio, client and scenario analysis to assess our exposure to, and the impact of, climate-related risks. We may be exposed
to climate risk through emerging regulatory and legal requirements, disruptions to our operations and services, and the products and services we
provide to our clients. We define climate risk as risks related to the transition to a lower-carbon economy (transition risks) and risks related to the
physical impacts of climate change (physical risks).
Potential Risk
Actions
Emerging regulatory
and legal
requirements
Disruptions to
operations and
client services
Products and
services we provide
• We monitor regulations that may be applicable to the bank, including those related to carbon pricing, climate-related
disclosures, and sustainable finance.
• For clients in sectors categorized as medium and high environmental risk, such as those in carbon-intensive sectors, we
evaluate whether clients have assessed and quantified the regulatory impacts of climate change.
• We identify properties that we lease or own, which contain business processes and supporting applications that require
enhanced facility infrastructure to mitigate site disruptions, such as those caused by extreme weather events. We
classify critical environment sites based on our business risk tolerance for site-specific downtime and, among other
things, site location, power supply, exposure to flooding, geological stability, and other hazards.
• We take steps to mitigate and adapt to climate change through our building design and our purchasing decisions.
• As required, we assess the impact of climate-related events (e.g., floods, hurricanes) on our businesses and client
operations.
• We provide products, services, and advice to assist clients in responding to climate-related risks and opportunities
(i.e., carbon trading services, green bond underwriting, clean technology advisory services, and socially responsible
investing).
• In fiscal 2018, we participated in a United Nations initiative to develop and publish methodologies for assessing the
impact of transition and physical risks on our loan portfolio under different climate change scenarios. We piloted this
methodology on some of our retail and wholesale lending portfolios, selected based on the potential materiality of the
risk and our level of credit exposure to the portfolio. Based on our analysis the impact of climate change was not
deemed financially material to those portfolios.
• Our asset management businesses integrate ESG issues into their investment process when doing so may have a
material impact on investment risk or return. In 2018, our Approach to Responsible Investment, which is applicable to
our asset management business, was amended to include climate change related issues.
• The insurance industry as a whole has exposure to longer term shifts in climate patterns such as rising temperatures
and hurricanes, which may indirectly impact our Insurance business results.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
89
Metrics & Targets
We have commitments associated with financing, investments, risk management, carbon reduction in our operations, research, partnerships,
and philanthropy. As a signatory to the Carbon Disclosure Project, we have publicly reported climate-related data since 2003, including multi-
year data in accordance with the Green House Gas (GHG) Protocol. We also receive third-party limited assurance of our energy and emissions
metrics.
Other factors
Other factors that may affect our 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. We also aim to generate better returns for our shareholders, while protecting depositors and
senior creditors.
Capital management framework
Our capital management framework establishes policies and processes for defining, measuring, raising and investing all forms of capital in a
co-ordinated and consistent manner. It sets our overall approach to capital management, including guiding principles and roles and
responsibilities relating to capital adequacy and transactions, dividends, solo capital and management of RWA and leverage ratio exposures. We
manage and monitor capital from several perspectives, including regulatory capital, economic capital and solo capital.
Our capital planning process is dynamic and 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.
This process considers our business operating plans, enterprise-wide stress test and ICAAP, regulatory capital 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, the 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.
Enterprise-wide
Stress Testing
Capital impacts of
stress scenarios
ICAAP
Capital impacts of stress scenarios
Total capital requirements
Capital available and target
capital ratios
Capital Plan and
Business
Operating Plan
Our Enterprise-wide stress test and annual ICAAP provide key inputs for capital planning, including setting 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 adverse events. ICAAP assesses capital adequacy and
requirements covering all material risks, with a cushion for plausible contingencies. In accordance with OSFI guidelines, major components of
our ICAAP process include comprehensive risk assessment, stress testing, capital assessment and planning (both economic and regulatory),
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 Buffers, Domestic Systemically Important
Bank (D-SIB)/Globally Systemically Important Bank (G-SIB) surcharge, and Domestic Stability Buffer (DSB), 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 OSFI regulatory minimum to maintain capital strength for forthcoming regulatory and accounting
changes, peer comparatives, rating agencies sensitivities and solo capital level.
The Board is responsible for the 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 approved 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.
90
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Basel III
Our consolidated regulatory capital requirements are determined by guidelines issued by OSFI, which are based on the minimum Basel III capital
ratios adopted by the BCBS.
The BCBS set the Basel III transitional requirements for CET1 capital, Tier 1 capital and Total capital ratios at 6.375%, 7.875% and 9.875%,
respectively for 2018, which will be required to be fully phased-in (“all-in”) to 7.0%, 8.5% and 10.5%, respectively, and effective for us for the
first quarter of 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 the first quarter of 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 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.
Under the option selected by RBC, the 2018 CVA capital charge for CET1, Tier 1 capital and Total capital was 80%, 83% and 86%, respectively. In
2019, the CVA capital charge will be 100% for each tier of capital.
Under Basel III, banks select from two main approaches, the Standardized Approach or the 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, we use the higher of the Standardized Approach and the
Advanced Measurement Approach. We determine our regulatory leverage ratio based on OSFI’s Leverage Requirements (LR) Guideline, which
reflects the BCBS Basel III leverage ratio requirements. We are required to maintain a minimum leverage ratio that meets or exceeds 3%.
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. On November 21, 2017, we were designated as a G-SIB by the FSB. This designation requires us to maintain a
higher loss absorbency requirement (common equity as a percentage of RWA) of 1%. OSFI mandates the higher of the D-SIB or G-SIB requirement
to be applied. As the D-SIB requirement is equivalent to the G-SIB requirement of 1% of RWA, the G-SIB designation had no further impact to the
loss absorbency requirements on our CET1 ratio. On November 16, 2018, we remained designated a G-SIB on FSB’s annual updated G-SIB list.
Effective February 1, 2018, OSFI prescribed revisions to the current Basel I regulatory capital floor requiring a transition to a new regulatory
capital floor of 75% of RWA based on the Basel II Standardized Approaches. This new regulatory floor was transitioned over three quarters
reflecting a regulatory capital floor requirement of 70%, 72.5%, and 75% in Q2 2018, Q3 2018, and Q4 2018, respectively.
On June 20, 2018, OSFI announced that all D-SIBs will be required to publicly disclose their Pillar 2 DSB as part of their quarterly
disclosures, similar to other current capital-related disclosure requirements. The level of the buffer will range between 0% and 2.5% of the
entity’s total RWA and is currently set at 1.5% of total RWA for the six systemically important banks in Canada. The DSB requirements must be
met at the CET1 capital level. OSFI will undertake a review of the DSB on a semi-annual basis, in June and December, and will publicly announce
any changes at that time.
In accordance with the BCBS’ Revised Pillar 3 Disclosure Requirements, which were adopted by OSFI in 2017 and effective in the fourth
quarter of 2018, we have published our first standalone Pillar 3 Report for the year ended October 31, 2018. These requirements replace existing
disclosures as applicable in certain areas in the Risk management section. The new requirements require comprehensive disclosure of our risks
and regulatory capital, including our methodologies used in calculating capital requirements. In addition to the quantitative and qualitative
disclosures in our Pillar 3 Report, we have also reflected certain disclosures, as permitted, in this 2018 Annual Report.
For further details on regulatory developments, refer to the Capital, liquidity and other regulatory developments section.
The following table provides a summary of OSFI’s current regulatory target ratios under Basel III and Pillar 2 requirements. We are in compliance
with all capital and leverage requirements imposed by OSFI:
Basel III – OSFI regulatory target
Basel III
Capital ratios
and leverage
OSFI regulatory target requirements
for large banks under Basel III
Minimum
Capital
Buffers (1)
Minimum
including
Capital
Buffers
D-SIB/G-SIB
Surcharge (2)
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.
RBC capital
and
leverage
ratios as at
October 31,
2018
Domestic
Stability
Buffer (3)
Table 66
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer
11.5%
12.8%
14.6%
4.4%
1.5%
1.5%
1.5%
n.a.
> 9.5%
> 11.0%
> 13.0%
> 3.0%
Minimum
including
Capital
Buffers and
D-SIB/G-SIB
surcharge (2)
> 8.0%
> 9.5%
> 11.5%
> 3.0%
(1)
(2)
(3)
n.a.
The capital buffers include the capital conservation buffer and the countercyclical capital buffer as prescribed by OSFI.
Effective January 1, 2018, a capital surcharge, equal to the higher of our D-SIB surcharge and the BCBS’s G-SIB surcharge, is applicable to risk-weighted capital.
Effective June 20, 2018, OSFI required the public disclosure of their Pillar 2 DSB.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
91
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 Non-viability contingent capital requirement (NVCC) features to be included into regulatory capital. NVCC
requirements ensure that non-common regulatory capital instruments bear losses before banks seek government funding.
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 Capital Adequacy Requirements (CAR) criteria that drive the amount eligible for deduction.
The following tables provide details on our regulatory capital, RWA, and capital and leverage ratios. Our capital position remains strong and our
capital and leverage ratios remain well above OSFI regulatory targets:
Regulatory capital, risk-weighted assets (RWA) and capital and leverage ratios
Table 67
(Millions of Canadian dollars, except percentage 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
Regulatory floor adjustment (3)
Total capital RWA
Capital ratios and Leverage ratio (1)
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Leverage ratio exposure (billions)
As at
October 31
2018
October 31
2017
$
$
57,001
63,279
72,494
51,572
58,361
67,556
$ 495,528
495,993
496,459
$ 474,478
474,478
474,478
$ 401,534
32,209
62,716
–
$ 496,459
$ 376,519
27,618
59,203
11,138
$ 474,478
11.5%
12.8%
14.6%
4.4%
1,450.8
$
10.9%
12.3%
14.2%
4.4%
1,315.5
$
(1)
(2)
(3)
Capital, RWA, and capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) based on the Basel III framework
(“all-in” basis). The Leverage ratio is calculated using OSFI Leverage Requirements Guideline based on the Basel III framework.
In fiscal 2018, the CVA scalars are 80%, 83% and 86%, respectively. In 2017, the scalars were 72%, 77% and 81%, respectively.
Before any capital floor requirement as applicable, there are three different levels of RWAs for the calculation of the CET1, Tier 1, and
Total capital ratios arising from the option we have chosen for the phase-in of the CVA capital charge. Since the introduction of Basel II
in 2008, OSFI has prescribed a capital floor requirement for institutions that use the advanced internal ratings-based (AIRB) approach
for credit risk. The capital floor was determined by comparing a capital requirement under Basel I and Basel III, as specified by OSFI. If
the capital requirement under the Basel III standards was less than 90% of the capital requirements as calculated under the Basel I
standards, the difference was added to the RWAs. Effective February 1, 2018, OSFI prescribed the transition from the current Basel I
regulatory capital floor to a new regulatory capital floor of 75% of RWA based on the Basel II Standardized Approaches.
92
Royal Bank of Canada: Annual Report 2018
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)
Total capital (T1 + T2)
2018 vs. 2017
Continuity of CET1 ratio (Basel III)
Table 68
All-in basis
2018
2017
$ 17,922
50,807
4,823
$ 18,019
45,043
4,354
–
–
13
(16,564)
13
(15,857)
$ 57,001
$ 51,572
$
3,825
2,450
$
3,825
2,961
3
–
3
–
$
6,278
$
6,789
$ 63,279
$ 58,361
$
6,230
2,509
$
6,346
2,550
14
462
–
12
287
–
$
9,215
$
9,195
$ 72,494
$ 67,556
30 bps
12 bps
(84) bps
144 bps
(32) bps
(7) bps
11.5%
10.9%
October 31, 2017 (1)
Internal
capital
generation (2)
Regulatory floor
reversal
Risk parameters
changes
Share
repurchases
Other
October 31, 2018 (1)
Higher RWA
(excluding
regulatory
floor reversal,
risk
parameters
changes and FX)
(1)
(2)
Represents rounded figures.
Internal capital generation of $6.9 billion which represents Net income available to shareholders, less common and preferred shares dividends.
Our CET1 ratio was 11.5%, up 60 bps from last year. The increase mainly reflects internal capital generation, the reversal of the Basel I regulatory
floor adjustment, and risk parameters changes. These factors were partially offset by higher RWA due to business growth, and share
repurchases. Our risk parameters and methodology updates are validated on a regular basis.
Our Tier 1 capital ratio of 12.8% was up 50 bps, mainly due to the factors noted above under the CET1 ratio and the redemption of RBC Trust
Capital Securities.
Our Total capital ratio of 14.6% was up 40 bps, mainly due to the factors noted above under the Tier 1 ratio.
Our Leverage ratio of 4.4% was flat, as internal capital generation was offset by higher business growth leverage exposures, primarily in
repo-style transactions, loans, and off-balance sheet exposures, share repurchases, and the redemption of RBC Trust Capital Securities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
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, a
capital floor requirement must be maintained as prescribed by OSFI’s CAR guidelines. Effective February 1, 2018, the capital floor required is
75% of RWA as calculated by Basel II standards. Prior to February 1, 2018, the capital floor required was 90% of RWA as calculated by Basel I
standards. If the capital requirement is less than the required threshold, a floor 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)
Exposure (1)
Average
of risk-
weights (2)
2018
Risk-weighted assets
Table 69
2017
Standardized
approach
Advanced
approach
Other
Total
Total
Credit risk
Lending-related and other
Residential mortgages
Other retail
Business
Sovereign
Bank
$
259,528
255,747
355,587
145,036
140,682
8% $
22%
58%
8%
7%
7,116 $ 14,803 $
6,908
45,630
2,181
1,622
48,761
160,105
9,256
8,617
– $ 21,919
55,669
–
205,735
–
11,437
–
10,239
–
$ 18,197
53,749
187,163
11,735
11,267
Total lending-related and other
$ 1,156,580
26% $
63,457 $ 241,542 $
– $ 304,999
$ 282,111
Trading-related
Repo-style transactions
Derivatives – including CVA – CET1
phase-in adjustment
$
658,100
1% $
106 $
7,976 $
34 $
8,116
$
8,520
97,496
32%
661
17,522
12,990
31,173
28,388
Total trading-related
$
755,596
5% $
767 $ 25,498 $ 13,024 $ 39,289
$ 36,908
Total lending-related and other and
$ 1,912,176
3,245
63,338
n.a.
19,169
$ 1,997,928
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
Regulatory floor adjustment (3)
CET1 capital risk-weighted assets (4)
$ 1,997,928
Additional CVA adjustment, prescribed by
OSFI, for Tier 1 capital
Regulatory floor adjustment (3)
18% $
128%
16%
n.a.
133%
64,224 $ 267,040 $ 13,024 $ 344,288
4,161
9,984
16,608
25,562
4,161
6,134
16,608
n.a.
–
–
–
25,562
–
3,850
n.a.
n.a.
$ 319,019
3,485
8,462
15,306
28,836
20% $
68,074 $ 293,943 $ 38,586 $ 400,603
$ 375,108
$
$
$
$
4,547 $
1,501
862
159
5,907
–
4,950 $
2,364
100
31
2,098
9,690
$
– $
–
–
–
–
–
9,497
3,865
962
190
8,005
9,690
6,910
2,832
735
245
7,193
9,703
12,976 $ 19,233 $
– $ 32,209
$ 27,618
5,194 $ 57,522
n.a. $ 62,716
$ 59,203
–
–
12,549
86,244 $ 370,698 $ 38,586 $ 495,528
$ 474,478
465
–
465
–
784
(784)
Tier 1 capital risk-weighted assets (4)
$ 1,997,928
$
86,244 $ 370,698 $ 39,051 $ 495,993
$ 474,478
Additional CVA adjustment, prescribed by
OSFI, for Total capital
Regulatory floor adjustment (3)
466
–
466
–
627
(627)
Total capital risk-weighted assets (4)
$ 1,997,928
$
86,244 $ 370,698 $ 39,517 $ 496,459
$ 474,478
(1)
(2)
(3)
(4)
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.
Before any capital floor requirement as applicable, there are three different levels of RWAs for the calculation of the CET1, Tier 1, and Total capital ratios arising from the option we have
chosen for the phase-in of the CVA capital charge. Since the introduction of Basel II in 2008, OSFI has prescribed a capital floor requirement for institutions that use the advanced internal
ratings-based (AIRB) approach for credit risk. The capital floor is determined by comparing a capital requirement under Basel I and Basel III, as specified by OSFI. Effective February 1, 2018, if
the capital requirement under the Basel III standards is less than 75% of the capital requirements as calculated under the Basel II Standardized Approaches, the difference is added to the
RWAs. Prior to February 1, 2018, the threshold was 90% of the capital requirements as calculated under the Basel I standards.
In fiscal 2018, the CVA scalars are 80%, 83% and 86%, respectively. In 2017, the scalars were 72%, 77% and 81%, respectively.
not applicable.
2018 vs. 2017
During the year, CET1 RWA was up $21 billion, primarily reflecting business growth in wholesale loans and underwriting activities, trading
portfolios, and residential mortgages, partially offset by the reversal of Basel I regulatory floor adjustment and risk parameters changes.
94
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Selected capital management activity
The following table provides our selected capital management activity:
Selected capital management activity
(Millions of Canadian dollars, except number of shares)
Tier 1 capital
Common shares activity
Table 70
October 31, 2018
Issuance or
redemption date
Number of
shares (000s) Amount
Issued in connection with share-based compensation plans (1)
Purchased for cancellation
Redemption of preferred shares, Series C-1
Redemption of RBC Trust Capital Securities, Series 2008-1 (2)
November 13, 2017
June 30, 2018
1,466 $
(15,335)
(82)
92
(187)
(107)
(500)
(1)
(2)
Amounts include cash received for stock options exercised during the period and includes fair value adjustments to stock options.
For further details, refer to Note 19 of our 2018 Annual Consolidated Financial Statements.
On February 23, 2018, we announced a normal course issuer bid (NCIB) to purchase up to 30 million of our common shares. The NCIB
commenced on February 27, 2018 and will continue until February 26, 2019 or such earlier date as we complete the repurchase of all shares
permitted under the bid. In 2017, we announced a NCIB for the purchase of up to 30 million of our common shares, which commenced on
March 14, 2017 and was completed on January 31, 2018. We determine the amount and timing of the purchases under the NCIB, subject to prior
consultation with OSFI. Purchases may be made through the TSX, the NYSE and other designated exchanges and alternative Canadian trading
systems.
In 2018, the total number of common shares repurchased and cancelled under our NCIB programs was approximately 15.3 million,
including 9.3 million common shares repurchased pursuant to specific share repurchase programs. The total cost of the shares repurchased was
$1,522 million. The total number of common shares repurchased and cancelled under the current NCIB program, which commenced on
February 27, 2018, was approximately 6.0 million. The total cost of these repurchased shares was $599 million. The price paid for repurchased
shares was the prevailing market price at the time of acquisition, with the exception of purchases made under specific share repurchase
programs, which were at a discount to the prevailing market price at the time of the purchases.
We issued innovative capital instruments, RBC Trust Capital Securities, through our structured entity RBC Capital Trust (Trust). On June 30,
2018, the Trust redeemed all 500,000 units of its issued and outstanding RBC Trust Capital Securities – Series 2008-1 at a redemption price of
$1,000 per unit.
On November 2, 2018, we issued 14 million Non-Cumulative 5-Year Rate Reset Preferred Shares Series BO at a price of $25 per share.
On November 24, 2018, we redeemed all 10 million Non-Cumulative First Preferred Shares Series AD at a price of $25 per share.
During the year, we also announced our intention to redeem all 2.4 million Non-Cumulative Floating Rate First Preferred Shares Series AK, all 13.6
million Non-Cumulative 5-Year Rate Reset First Preferred Shares Series AJ, and all 12 million Non-Cumulative 5-Year Rate Reset First Preferred
Shares Series AL, on February 24, 2019. The shares will be redeemed at a price of $25 per share.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
95
Dividends
Our common share dividend policy reflects our earnings outlook, payout ratio objective and the need to maintain adequate levels of capital to
support business plans. In 2018, our dividend payout ratio was 45%, which met our dividend payout ratio target of 40% to 50%. Common share
dividends paid during the year were $5.4 billion.
Selected share data (1)
(Millions of Canadian dollars, except number of shares and as
otherwise noted)
Common shares issued
Treasury shares – common shares
Common shares outstanding
Stock options and awards
Outstanding
Exercisable
Available for grant
First preferred shares issued
Non-cumulative Series W (2)
Non-cumulative Series AA
Non-cumulative Series AB (3)
Non-cumulative Series AC
Non-cumulative Series AD
Non-cumulative Series AE
Non-cumulative Series AF
Non-cumulative Series AG
Non-cumulative Series AJ (4)
Non-cumulative Series AK (4)
Non-cumulative Series AL (4)
Non-cumulative Series AZ (4), (5)
Non-cumulative Series BB (4), (5)
Non-cumulative Series BD (4), (5)
Non-cumulative Series BF (4), (5)
Non-cumulative Series BH (5)
Non-cumulative Series BI (5)
Non-cumulative Series BJ (5)
Non-cumulative Series BK (4), (5)
Non-cumulative Series BM (4), (5)
Non-cumulative Series C-1 (6), (7)
Non-cumulative Series C-2 (7)
Preferred shares issued
Treasury shares – preferred shares (8)
Preferred shares outstanding
Dividends
Common
Preferred
2018
2017
Number of
shares (000s)
Amount
1,439,029
(235)
$ 17,635
(18)
1,438,794
$ 17,617
Dividends
declared
per share
$
3.77
Number of
shares (000s)
Amount
1,452,898
(363)
$ 17,730
(27)
1,452,535
$ 17,703
Table 71
Dividends
declared
per share
$
3.48
$
8,504
3,726
9,262
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
–
20
300
300
–
200
250
250
200
250
339
61
300
500
500
600
300
150
150
150
725
750
–
31
1.23
1.11
–
1.15
1.13
1.13
1.11
1.13
0.88
0.78
1.07
1.00
0.98
0.90
0.90
1.23
1.23
1.31
1.38
1.38
US$
–
US$ 67.50
$
9,315
4,337
9,933
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
300
300
–
200
250
250
200
250
339
61
300
500
500
600
300
150
150
150
725
750
107
31
1.23
1.11
0.99
1.15
1.13
1.13
1.11
1.13
0.88
0.62
1.07
1.00
0.98
0.90
0.90
1.23
1.23
1.31
1.38
1.38
US$ 55.00
US$ 67.50
251,020
114
$ 6,306
3
251,134
$ 6,309
$ 5,442
285
251,102
6
$ 6,413
–
251,108
$ 6,413
$ 5,096
300
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
For further details about our capital management activity, refer to Note 20 of our 2018 Annual Consolidated Financial Statements.
Effective February 24, 2010, we have the right to convert these items into common shares at our option, subject to certain restrictions.
On September 27, 2017, we redeemed all 12 million issued and outstanding Non-cumulative First Preferred Shares, Series AB, for cash at a redemption price of $25 per share.
Dividend rate will reset every five years.
Non-viable contingent capital (NVCC) instruments.
On November 13, 2017, we redeemed all 82,050 issued and outstanding Non-Cumulative Perpetual First Preferred Shares, Series C-1, for cash at a redemption price of US$1,000 per share
(equivalent to US$25 per related depositary share).
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.
Positive amounts represent a short position in treasury shares.
As at November 23, 2018, the number of outstanding common shares was 1,439,643,158, including a short position in treasury shares of
595,209, and the number of outstanding stock options and awards was 8,488,618.
NVCC provisions require the conversion of the capital instrument into a variable number of common shares in the event that OSFI deems a
bank to be non-viable or a federal or provincial government in Canada publicly announces that a bank has accepted or agreed to accept a capital
injection. If a NVCC trigger event were to occur, our NVCC capital instruments, which are the 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 2,751 million RBC common shares, in aggregate, which would represent a
dilution impact of 65.66% based on the number of RBC common shares outstanding as at October 31, 2018.
96
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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
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 72
2018
2017
$ 22,200
3,800
5,600
3,400
700
15,550
12,450
$ 63,700
5,200
$ 21,450
3,250
5,200
3,200
650
15,550
10,950
$ 60,250
5,050
$ 68,900
$ 65,300
2018 vs. 2017
Attributed capital increased $3 billion, mainly due to organic business growth.
We remain well capitalized with current levels of available capital exceeding the attributed capital required to underpin all of our material
risks.
Attributed capital in the context of our business activities
In carrying out our business activities, we are exposed to a range of risks. The following chart provides a high level view of risks within our
business segments, which includes credit, market and operational risks. We have used attributed capital to illustrate the relative size of the risks
in each of our businesses. The attributed capital distribution reflects the diversified nature of our business activities. RWA represents our
exposure to credit, market and operational risk for regulatory capital requirements.
Within Personal & Commercial Banking, credit risk is the most significant risk, largely related to our personal financial services and business
financial services. The primary risks within Wealth Management, which provides services to institutional and individual clients, are operational
risk and credit risk. Risks within our Insurance operations are primarily related to insurance risk in our life and health businesses followed by
market risk and operational risk. The largest risk within Investor & Treasury Services is market risk, followed by credit risk and operational risk.
The most significant risk within Capital Markets is credit risk, followed by market risk.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
97
For additional information on the risks highlighted below, refer to the Risk management section.
32%
6
8
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill
and other
intangibles
Other (3)
23
31
RWA (C$ millions) (4)
Credit
Market
Operational
$400,603
32,209
62,716
Royal Bank of
Canada
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury Services
Capital Markets
42%
3
10
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill
and other
intangibles
Other (5)
21
24
22%
2
10
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill
and other
intangibles
Other (5)
54
12
9%
18
12
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill
and other
intangibles
Other (5)
10
51
10%
16
12
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill
and other
intangibles
Other (5)
17
45
43%
9
6
Attributed capital (1)
Credit
Market (2)
Operational
Goodwill
and other
intangibles
Other (5)
8
34
RWA (C$ millions) (4)
Credit
Market
Operational
$152,486
245
24,845
RWA (C$ millions) (4)
Credit
Market
Operational
$53,338
646
16,097
RWA (C$ millions) (6)
Credit
Market
Operational
$8,984
–
–
RWA (C$ millions) (4)
Credit
Market
Operational
$16,530
7,908
4,742
RWA (C$ millions) (4)
Credit
Market
Operational
$160,972
23,075
16,580
(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 average level of capital that is necessary to support our various
businesses, 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 represents period-end spot balances and 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 subsidiaries’ capital. We invest capital across the enterprise to meet local
regulators’ capital adequacy requirements and maximize returns to our shareholders. 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 compliance with local regulatory capital adequacy requirements, which may
include restrictions on the transfer of assets in the form of cash, dividends, loans or advances. Concurrently, Corporate Treasury provides
centralized oversight 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.
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Royal Bank of Canada: Annual Report 2018
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 is responsible 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.
Capital, liquidity and other regulatory developments
Capital
Capital treatment proposed or issued in connection with accounting changes
On March 29, 2017, the BCBS issued a standard which detailed the interim regulatory treatment of accounting provisions under the Basel III
regulatory capital framework. The standard addressed the treatment of the impact of new expected credit loss accounting requirements under
IFRS 9 for regulatory capital purposes. The standard retained the current Basel lII regulatory treatment of accounting provisions under both the
standardized and the internal ratings-based approaches until a longer-term solution is developed. It also set out transitional arrangements which
allowed for a phase-in of the impact of the new expected credit loss accounting standard on regulatory capital for up to five years, should
individual jurisdictions choose to provide capital relief.
On November 29, 2017, OSFI released the finalized Capital Adequacy Requirements (CAR) Guidelines required to be implemented in the
first quarter of 2018. The updated 2018 CAR Guidelines retained the current regulatory treatment of accounting provisions consistent with the
BCBS standard. However, OSFI elected not to adopt a phase-in approach relating to the regulatory impact of IFRS 9. Therefore, the full transition
impact of IFRS 9 was required to be absorbed by Canadian banks in their first quarter 2018 capital ratios. The updated CAR Guidelines also
included revisions requiring the treatment of ACL on performing financial assets (Stage 1 and Stage 2) under IFRS 9 as general allowances for
regulatory capital purposes. Similarly, ACL on impaired financial assets (Stage 3) under IFRS 9 were required to be treated as specific allowances
for regulatory capital purposes.
As at our transition date of November 1, 2017, our shortfall of accounting allowances under IAS 39 to Basel expected losses was
$1.2 billion. The impact of the impairment requirements of IFRS 9 reduced, but did not eliminate, the shortfall of accounting allowances to Basel
expected losses. Going forward, the regulatory capital impact of further increases in our accounting allowances under IFRS 9 will be mitigated by
way of the reduction of our shortfall allowance deduction from CET1 capital.
Basel III reforms
On December 7, 2017, the BCBS finalized the Basel III reforms, with an effective date of January 2022. The reforms are mainly intended to reduce
the variability in bank capital levels and to address a number of weaknesses in the existing capital framework by revisiting the way capital
requirements for credit, market and operational risks are determined. This includes revisions to the standardized approach for credit risk,
constraints on the use of internal ratings-based approaches, an overhaul of the operational risk framework, calibration of standardized output
floors, revisions to the CVA framework, and changes to the leverage ratio framework.
On July 16, 2018, OSFI issued for public consultation a discussion paper on the implementation of the final Basel III reforms in Canada. In
this discussion paper, OSFI proposed timelines and implementation changes to the BCBS requirements that it is considering to reflect the
Canadian domestic market. We have reviewed OSFI’s initial proposals and have provided an industry response through the Canadian Bankers’
Association by the requested consultation deadline of October 19, 2018. The proposals put forward in the discussion paper are conceptual in
nature. We expect to continue to engage with OSFI in the next year on the domestic implementation of the Basel III reforms and are taking
appropriate steps to ensure required adoption readiness based on guidance provided to date. We continue to refine our assessment of the BCBS
reforms based on any new guidance provided by BCBS and OSFI, including incorporating this directional conceptual guidance provided by OSFI.
Revisions to the CAR Guidelines for Securitization Framework and the Standardized Approach for Measuring Counterparty Credit Risk (SA-CCR)
On October 30, 2018, OSFI revised its securitization framework in the CAR guidelines to reflect the adoption of the BCBS’ Revisions to the
securitisation framework and Capital treatment for short-term “simple, transparent and comparable” securitisations. The revisions also include
additional jurisdictional requirements incorporated by OSFI. The new requirements were effective November 1, 2018, however, OSFI provided
some transitional arrangements for transactions undertaken before January 1, 2019. In addition, OSFI allowed a one-year grandfathering of
securitization credit risk RWA for all exposures held at October 31, 2018. As such, upon the adoption of the revised CAR guidelines, there was no
material impact to our capital ratios on November 1, 2018, the date of initial application.
We currently measure our OTC derivative exposures for regulatory capital purposes based on the current exposure method as reflected in
Chapter 4 of the CAR guidelines. On October 30, 2018, OSFI also revised its CAR guidelines to incorporate the new BCBS standardized approach
methodologies for measuring counterparty credit risk and capital requirements for exposures to central counterparties. This adoption will require
our OTC derivative exposures to be reflected under the SA-CCR, instead of our existing methodology based on the current exposure method (both
non-modelled approaches). The revised guidelines are effective November 1, 2018.
Based on current estimates, the adoption of these guidelines is expected to decrease the CET1 ratio by approximately 10-15 bps, including
the full phase-in of CVA RWA, in the next quarter. This amount is subject to change based on portfolio growth or portfolio mix held.
Leverage Framework
On October 30, 2018, OSFI published its updated Leverage Requirements Guideline, effective for November 1, 2018. The revisions align the
leverage guideline with OSFI’s upcoming Q1 2019 adoption of the BCBS’ standard on The standardized approach for measuring counterparty
credit risk exposures and The revisions to the securitization framework reflected in OSFI’s 2019 CAR guideline. Upon the adoption of these
guidelines, we expect a reduction of approximately 8-12 bps to our leverage ratio in the first quarter of adoption. This amount is subject to
change based on portfolio growth or portfolio mix held.
On November 20, 2018, OSFI also finalized the Leverage Ratio Disclosure Requirements guideline, effective for November 1, 2018. We will
begin disclosing the new requirements in the first quarter of 2019.
Regulatory Capital and Related Requirements
We continue to monitor newly proposed regulatory requirements by BCBS and OSFI. The BCBS’ consultative guidances are reviewed and
responded to where required and we actively engage in discussions with OSFI. The impact of any proposals on us will depend on the final
standards adopted by the BCBS and how these standards are implemented by OSFI. For further details on regulatory capital, refer to the Capital
Management section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
99
Liquidity
Net Stable Funding Ratio (NSFR) implementation timeline
With respect to liquidity measurement, in October 2014, the BCBS released its final Net Stable Funding Ratio (NSFR) standard, which requires
banks to fund their activities with sufficiently stable sources of funding. The NSFR is intended to reduce structural funding risk by requiring banks
to have sufficient stable funding to support their business with less reliance on funding maturing in one year. On February 6, 2018, OSFI
announced that it would extend the implementation timeline for Canadian banks to comply with the NSFR requirements from January 1, 2019 to
January 1, 2020.
Other Regulatory Changes
Canadian Bank Recapitalization (Bail-in) Regime
Bail-in regimes are being implemented in a number of jurisdictions in an effort to limit taxpayer exposure to losses of a failing institution and
ensure the institution’s shareholders and creditors remain responsible for bearing such losses. On June 22, 2016, legislation came into force,
amending certain federal statutes pertaining to banks to create a bank recapitalization, or “bail-in” regime, for the six systemically important
banks in Canada. On April 18, 2018, the Department of Finance published bail-in regulations under the Canada Deposit Insurance Corporation
(CDIC) Act and the Bank Act. Under these regulations, in circumstances when the Superintendent of Financial Institutions has determined that a
bank may no longer be viable, the Governor in Council may, upon a recommendation of the Minister of Finance that he or she is of the opinion
that it is in the public interest to do so, grant an order directing the CDIC to convert all or a portion of certain shares and liabilities of that bank
into common shares. The regulations became effective September 23, 2018. These changes are not expected to have a material impact on our
cost of long-term unsecured funding.
Total Loss Absorbing Capacity (TLAC)
On April 18, 2018, OSFI released its final guideline on TLAC, which applies to Canadian D-SIBs as part of the Federal Government’s Bail-in
Regime. The guideline is consistent with the TLAC standard released on November 9, 2015 by the FSB for institutions designated as a G-SIB, but
tailored to the Canadian context. The standards are intended to address the sufficiency of a systemically important bank’s loss absorbing
capacity in supporting its recapitalization in the event of its failure. TLAC is defined as the aggregate of Tier 1 capital, Tier 2 capital, and other
TLAC instruments, which allow conversion in whole or in part into common shares under the CDIC Act and meet all of the eligibility criteria under
the guideline.
On August 21, 2018, OSFI provided notification requiring systemically important banks to maintain a minimum of 23% (inclusive of the
1.5% DSB) of TLAC-eligible instruments relative to their RWAs and 6.75% relative to their leverage exposures. We are expected to comply with
the minimum TLAC requirements by November 1, 2021 and to begin disclosing our TLAC ratios in the first quarter of 2019. We do not anticipate
any challenges in meeting these TLAC requirements.
Revisions to the G-SIB Framework
On July 5, 2018, the BCBS published the Global systemically important banks: revised assessment methodology and the higher loss absorbency
requirement, which includes revisions to the G-SIB framework. The objective of the G-SIB framework is to ensure G-SIBs hold higher capital
buffers and provides incentives for such firms to reduce their systemic importance. Although core elements of the framework were maintained,
the revisions include amendments to the definition of cross-jurisdictional indicators, the introduction of a trading volume indicator, extending
the scope of consolidation to insurance subsidiaries, revised disclosure requirements, and further guidance on the higher loss absorbency
requirements. We are currently assessing the impact of these amendments. The BCBS expects member jurisdictions to implement these
revisions by 2021. OSFI has not yet released their expected implementation date.
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 of our 2018 Annual Consolidated Financial Statements. Certain of these policies and
related estimates are recognized as critical because they require us to make particularly subjective or complex judgments about matters that are
inherently uncertain and 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 instrument and securities impairment (under IAS 39),
allowance for credit losses, goodwill and other intangible assets, employee benefits, consolidation, derecognition of financial assets,
application of the effective interest method, provisions, insurance claims and policy benefit liabilities, income taxes, and deferred revenue on
our customer loyalty program. 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.
Changes in accounting policies
During the first quarter of 2018, we adopted IFRS 9 Financial Instruments (IFRS 9). As permitted by the transition provisions of IFRS 9, we elected
not to restate comparative period results; accordingly, all comparative period information prior to November 1, 2017 is presented in accordance
with our previous accounting policies. Adjustments to carrying amounts of financial assets and liabilities at November 1, 2017 were recognized
in opening Retained earnings and Other components of equity in the first quarter of 2018. Refer to Note 2 of our Annual Consolidated Financial
Statements for our previous accounting policies and details of these changes.
Fair value of financial instruments
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 factors that market participants would consider
in setting a price, including commonly accepted valuation approaches.
We give priority to third-party pricing services and valuation techniques with 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, other pricing service values and, when available,
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 the use of models.
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Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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 and the lowest priority to unobservable inputs. Fair values established based on this
hierarchy require 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 fair value 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 to determine the model used, select the model inputs, and
in some cases, apply valuation adjustments to the model value or quoted price for inactively traded financial instruments. 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.
Valuation adjustments may be subjective as they require significant judgment in the input selection, such as the probability of default and
recovery rate, and are intended to arrive at a 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 was previously estimated using
management judgment, and may therefore impact unrealized gains and losses recognized in Non-interest income – Trading revenue or Other.
Allowance for credit losses – Policy applicable from November 1, 2017 (IFRS 9)
An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity
securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include certain
loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable,
and finance and operating lease receivables. Off-balance sheet items subject to impairment assessment include financial guarantees and
undrawn loan commitments.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
•
Performing financial assets
•
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 12 months following the reporting date.
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.
•
•
Impaired financial assets
•
Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses
expected over the remaining lifetime of the asset. Interest revenue is calculated based on the carrying amount of the asset, net of
the loss allowance, rather than on its gross carrying amount.
The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time horizon. For
loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn over the relevant time period. For
financial guarantees, credit loss estimates are based on the expected payments required under the guarantee contract. For finance lease
receivables, credit loss estimates are based on cash flows consistent with the cash flows used in measuring the lease receivable.
The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date. Judgment is
required in making assumptions and estimations when calculating the ACL, including movements between the three stages and the application
of forward looking information. The underlying assumptions and estimates may result in changes to the provisions from period to period that
significantly affect our results of operations.
For further information on allowance for credit losses, refer to Notes 2 and 5 of our 2018 Annual Consolidated Financial Statements.
Securities impairment – Policy applicable prior to November 1, 2017 (IAS 39)
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. Evidence of impairment includes, but is not limited to, delinquency or default,
bankruptcy, restructuring or other events that may question the issuer’s creditworthiness. 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.
In addition, we consider the transaction structure and credit enhancement for structured securities. If results indicate 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. When assessing equity
securities for impairment, we consider factors that include the length of time and extent the fair value has been below cost and the financial
condition and near term prospects of the issuer. We also consider the estimated recoverable value and the period of recovery. Refer to Note 4 of
our 2018 Annual Consolidated Financial Statements for more information.
Allowance for credit losses – Policy applicable prior to November 1, 2017 (IAS 39)
We maintain an 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 we consider appropriate to cover credit-related losses incurred as
at the balance sheet date.
Loans which are individually significant are assessed individually for objective indicators of impairment. A loan is considered impaired
when we determine that we will not be able to collect all amounts due according to the original contractual terms. Credit exposures of
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
101
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 value 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.
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 credit 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, 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, 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 contractual cash flows and historical loss experience for
loans with credit risk characteristics similar to those in the group. We use historical loss experience and normalize observable inputs for current
and past conditions that are not relevant to the assessment performed for the current reporting period. The methodology and assumptions used
for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
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 further information on allowance for credit losses, refer to Note 5 of our 2018 Annual Consolidated Financial Statements.
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.
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.
We assess for indicators of impairment of our other intangible assets 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.
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.
For further details, refer to Notes 2 and 10 to our 2018 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. Discount rates are determined using a yield curve based on
spot rates from high quality corporate bonds. All other assumptions are determined by us 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 16 of our 2018 Annual Consolidated Financial
Statements.
Consolidation of structured entities
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 as the agent of a third party or parties. 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 determining whether we control an entity, specifically, 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.
For further details, refer to Note 7 of our 2018 Annual Consolidated Financial Statements.
Derecognition of financial assets
We periodically enter into transactions in which we transfer financial assets such as loans or mortgage-backed securities to structured entities or
trusts that issue securities to investors. We derecognize 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
102
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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 those 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. For further information on
derecognition of financial assets, refer to Note 2 and 6 of our 2018 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 generally 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.
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. We record provisions related to litigation, and asset retirement obligations and other items. Provisions are recorded under
Other liabilities on our Consolidated Balance Sheets.
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.
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 14 of our 2018 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 interpreting the relevant tax laws and estimating
the expected timing and amount of the provision for current and deferred income taxes. 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 22 of our 2018 Annual Consolidated Financial Statements for further information.
Future changes in accounting policy and disclosure
Conceptual Framework for Financial Reporting (Conceptual Framework)
In March 2018, the IASB issued its revised Conceptual Framework. This replaces the previous version of the Conceptual Framework issued in
2010. The revised Conceptual Framework will be effective on November 1, 2020. We are currently assessing the impact of adoption on our
Consolidated Financial Statements.
IFRS 15 Revenue from Contracts with Customers (IFRS 15)
In May 2014, the IASB issued IFRS 15, which establishes the 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. The majority of our revenue, including net interest income, is not expected to be impacted. We will adopt IFRS 15 by adjusting our
Consolidated Balance Sheet at November 1, 2018, the date of initial application, with no restatement of comparative periods.
To manage our transition to IFRS 15, we implemented a comprehensive enterprise-wide program and governance structure led by Finance
that focuses on key areas of impact, including financial reporting, systems and processes, training, as well as communications.
During fiscal 2018, we completed our assessment of the revenue contracts and the changes required to our applicable transition, interim
and annual disclosures. The adoption of IFRS 15 is not expected to have a material impact on our Consolidated Financial Statements.
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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
103
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.
We plan to adopt IFRS 16 by adjusting our Consolidated Balance Sheet at November 1, 2019, the date of initial application, with no
restatement of comparative periods.
Our transition to IFRS 16 includes a centralized enterprise-wide program and governance structure led by Finance to assess our existing
lease portfolio and the impact on systems, processes, training, communication and financial reporting. In the upcoming year, we will finalize our
assessment of our existing lease portfolio and changes required to our applicable transition, interim, and annual disclosures. We are currently
assessing the impact of adopting this standard on our Consolidated Financial Statements.
As we prepare for our transition to IFRS 16, we will continue to monitor industry interpretations of the new standard and expect to adjust our
implementation accordingly.
IFRS 17 Insurance Contracts (IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive global insurance standard which provides guidance on the recognition,
measurement, presentation and disclosures of insurance contracts. This new standard will be effective for us on November 1, 2021. In November
2018, the IASB tentatively decided to defer the IFRS 17 effective date by one year. We will continue to monitor the IASB’s developments. We are
currently assessing the impact of adopting this standard on our Consolidated Financial Statements.
Controls and procedures
Disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports
filed or submitted under Canadian and U.S. securities laws is recorded, processed, summarized and reported within the time periods specified
under those laws and include controls and procedures that are designed to ensure that information is accumulated and communicated to
management, including the President and Chief Executive Officer, and the Chief Financial Officer, to allow timely decisions regarding required
disclosure.
As of October 31, 2018, management evaluated, under the supervision of and with the participation of the President and Chief Executive
Officer and the Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined under rules adopted by the U.S.
SEC. Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of October 31, 2018.
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, 2018 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting. On November 1, 2017, we adopted IFRS 9 and have
updated and modified certain internal controls over financial reporting as a result of the new accounting standard.
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 11 and 26 of our audited
2018 Annual Consolidated Financial Statements.
Supplementary information
Selected annual information
(Millions of Canadian dollars, except as otherwise noted)
Total revenue
Net income attributable to:
Shareholders
Non-controlling interest
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)
Dividends declared per common shares (in dollars)
Total assets
Deposits
104
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Table 73
2018
2017
2016
$ 42,576
$ 40,669
$ 38,795
12,400
31
11,428
41
10,405
53
$ 12,431
$ 11,469
$ 10,458
8.39
8.36
3.77
1,334,734
837,046
7.59
7.56
3.48
1,212,853
789,635
6.80
6.78
3.24
1,180,258
757,589
Net interest income on average assets and liabilities
Table 74
(Millions of Canadian dollars, except for percentage amounts)
2018
2017
2016
2018
2017
2016
2018
2017
2016
Average balances
Interest
Average rate
Assets
Deposits with other banks
Canada
U.S.
Other International
Securities
Trading
Investment, net of applicable allowance
Asset purchased under reverse repurchase
agreements and securities borrowed
Loans (1)
Canada
Retail
Wholesale
U.S.
Other International
Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets
$
10,300 $
27,522
21,587
11,380 $
21,508
17,215
59,409
50,103
$
11,679
16,842
15,415
43,936
198 $
429
(61)
566
146 $
192
(31)
307
114
71
(18)
167
1.92% 1.28% 0.98%
0.42
0.89
(0.12)
(0.18)
1.56
(0.28)
0.95
0.61
0.38
125,153
90,470
215,623
130,816
83,787
214,603
153,114
72,440
225,554
3,785
1,885
5,670
3,520
1,379
4,899
3,366
1,227
4,593
3.02
2.08
2.63
2.69
1.65
2.28
2.20
1.69
2.04
266,709
205,993
191,243
5,536
3,021
1,816
2.08
1.47
0.95
364,473
77,985
442,458
79,695
28,932
551,085
1,092,826
31,695
16,015
154,395
350,155
74,955
425,110
75,967
27,201
528,278
998,977
23,953
14,550
149,114
338,270
69,028
407,298
75,734
29,409
512,441
973,174
17,586
13,247
172,393
13,533
3,682
17,215
3,008
1,026
21,249
33,021
–
–
–
11,672
3,534
15,206
2,391
1,080
18,677
26,904
–
–
–
11,141
3,249
14,390
2,038
1,448
17,876
24,452
–
–
–
3.71
4.72
3.89
3.77
3.55
3.86
3.02
–
–
–
3.33
4.71
3.58
3.15
3.97
3.54
2.69
–
–
–
3.29
4.71
3.53
2.69
4.92
3.49
2.51
–
–
–
Total assets
$ 1,294,900 $ 1,186,600 $ 1,176,400
$ 33,021 $ 26,904 $ 24,452
2.55% 2.27% 2.08%
Liabilities and shareholders’ equity
Deposits (2)
Canada
U.S.
Other International
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities loaned
Subordinated debentures
Other interest-bearing liabilities
Total interest-bearing liabilities
Non-interest-bearing deposits
Acceptances
Other liabilities
Total liabilities
Equity
$
513,240 $
498,134 $
98,651
78,145
690,036
32,642
184,934
9,131
15,352
932,095
129,696
16,030
141,390
79,354
70,028
647,516
37,205
128,831
9,460
14,839
837,851
122,800
14,549
138,797
487,194
83,001
67,365
637,560
50,262
110,231
8,931
15,437
822,421
112,071
13,248
159,215
$ 7,718 $ 5,560 $ 4,714
413
340
1,313
572
640
364
9,603
1,627
3,261
322
17
14,830
–
–
–
6,564
1,515
1,396
270
19
9,764
–
–
–
5,467
1,579
629
227
19
7,921
–
–
–
1.50% 1.12% 0.97%
0.50
0.81
0.50
0.52
1.33
0.73
1.39
4.98
1.76
3.53
0.11
1.59
–
–
–
1.01
4.07
1.08
2.85
0.13
1.17
–
–
–
0.86
3.14
0.57
2.54
0.12
0.96
–
–
–
$ 1,219,211 $ 1,113,997 $ 1,106,955
$ 14,830 $ 9,764 $ 7,921
1.22% 0.88% 0.72%
75,720
72,607
69,445
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Total liabilities and shareholders’ equity
$ 1,294,900 $ 1,186,600 $ 1,176,400
$ 14,830 $ 9,764 $ 7,921
1.15% 0.82% 0.67%
Net interest income and margin
$ 1,294,900 $ 1,186,600 $ 1,176,400
$ 18,191 $ 17,140 $ 16,531
1.40% 1.44% 1.41%
Net interest income and margin (average
earning assets)
Canada
U.S.
Other International
$
637,214 $
275,895
179,717
595,790 $
243,276
159,912
572,671
246,065
154,438
$ 13,076 $ 12,104 $ 11,694
3,241
1,596
3,469
1,567
3,616
1,499
2.05% 2.03% 2.04%
1.32
1.43
1.03
0.98
1.31
0.83
Total
(1)
(2)
$ 1,092,826 $
998,978 $
973,174
$ 18,191 $ 17,140 $ 16,531
1.66% 1.72% 1.70%
Interest income includes loan fees of $621 million (2017 – $561 million; 2016 – $573 million).
Deposits include personal savings deposits with average balances of $182 billion (2017 – $178 billion; 2016 – $166 billion), interest expense of $0.8 billion (2017 – $0.5 billion; 2016 –
$0.4 billion) and average rates of 0.4% (2017 – 0.3%; 2016 – 0.3%). Deposits also include term deposits with average balances of $390 billion (2017 – $353 billion; 2016 – $362 billion),
interest expense of $7.1 billion (2017 – $5.0 billion; 2016 – $4.3 billion) and average rates of 1.83% (2017 – 1.42%; 2016 – 1.20%).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
105
Change in net interest income
Table 75
(Millions of Canadian dollars)
Assets
Deposits with other banks
Canada (3)
U.S. (3)
Other international (3)
Securities
Trading
Investment, net of applicable allowance
Asset purchased under reverse repurchase agreements and
securities borrowed
Loans
Canada
Retail
Wholesale
U.S.
Other international
Total interest income
Liabilities
Deposits
Canada
U.S.
Other international
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Subordinated debentures
Other interest-bearing liabilities
Total interest expense
Net interest income
2018 (1) vs. 2017
Increase (decrease)
due to changes in
2017 vs. 2016
Increase (decrease)
due to changes in
Average
volume (2)
Average
rate (2)
Net change
Average
volume (2)
Average
rate (2)
Net change
$
$
(14)
54
(8)
(152)
110
$
66
183
(22)
417
396
52
237
(30)
265
506
$
$
(3)
20
(2)
(490)
192
$
35
101
(11)
644
(40)
32
121
(13)
154
152
890
1,625
2,515
140
1,065
1,205
477
143
117
70
$ 1,687
1,384
5
500
(123)
$ 4,431
169
156
42
(186)
608
(9)
1
781
906
1,990
517
166
298
1,257
61
(3)
$ 4,286
145
$
$
$
$
$
$
1,861
148
617
(53)
6,118
2,159
673
208
112
1,865
52
(2)
5,067
1,051
$
$
$
391
279
6
(109)
424
106
(18)
13
(410)
106
13
(1)
(191)
615
140
6
347
(259)
$ 2,028
740
245
11
346
661
30
1
$ 2,034
(6)
$
$
$
$
531
285
353
(368)
2,452
846
227
24
(64)
767
43
–
1,843
609
(1)
(2)
(3)
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.
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Loans and acceptances by geography
Table 76
As at October 31 (Millions of Canadian dollars)
2018
2017
2016
2015
2014
Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Sovereign (1)
Bank
Wholesale
U.S.
Retail
Wholesale
Other International
Retail
Wholesale
Total loans and acceptances
Total allowance for credit losses
Total loans and acceptances, net of allowance for credit losses
$ 265,831
82,112
18,793
4,866
371,602
112,447
4,307
1,873
$ 118,627
$ 490,229
$ 255,799
82,022
17,491
4,493
359,805
88,453
9,379
1,326
$
99,158
$ 458,963
$ 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
21,033
59,476
80,509
18,100
55,037
73,137
17,134
59,349
76,483
5,484
34,702
40,186
4,686
23,639
28,325
6,817
17,837
24,654
$ 595,392
(2,933)
$ 592,459
7,265
21,870
29,135
$ 561,235
(2,159)
$ 559,076
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
(1)
In 2015, we reclassified $4 billion from Investment securities (AFS securities under IAS 39) to Loans.
106
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
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
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 loans and acceptances
Total allowance for credit losses
2018
2017
2016
2015
$ 282,471
92,700
19,415
4,866
$ 270,348
92,294
18,035
4,493
$ 254,998
93,466
17,128
3,878
$ 233,975 $
94,346
15,859
4,003
Table 77
2014
219,257
96,021
14,924
4,067
$ 399,452
$ 385,170
$ 369,470
$ 348,183 $
334,269
8,312
8,726
12,012
6,027
8,090
7,938
1,100
6,982
8,883
7,509
1,301
16,157
16,908
51,563
11,506
6,318
5,551
5,884
5,173
7,380
8,248
11,387
6,743
5,614
6,556
911
6,998
8,803
5,581
1,113
10,744
14,757
46,197
8,890
5,950
4,570
11,362
4,261
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
$ 195,940
$ 176,065
$ 167,212
$ 139,522 $
114,416
$ 595,392
$ 561,235
$ 536,682
$ 487,705 $
448,685
(2,933)
(2,159)
(2,235)
(2,029)
(1,994)
Total loans and acceptances, net of allowance for credit losses
$ 592,459
$ 559,076
$ 534,447
$ 485,676 $
446,691
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
107
Gross impaired loans by portfolio and geography
Table 78
IFRS 9
IAS 39
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 GIL (1) (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 GIL (1) (2)
Allowance for impaired loans (3)
Net impaired loans
GIL as a % of loans and acceptances
Residential mortgages
Personal
Small business
Retail
Wholesale
Total
Allowance on impaired loans as a % of GIL (3)
$
$
$
$
$
$
$
$
$
$
$
2018
725
302
44
1,071
29
7
68
231
7
78
9
6
10
42
2
20
140
293
10
91
48
–
–
1,091
21
2,183
431
248
44
723
29
5
47
39
–
–
9
4
3
31
2
19
48
137
8
15
–
–
–
396
1,119
23
401
424
327
313
640
2,183
(700)
1,483
0.26%
0.33%
0.90%
0.27%
0.57%
0.37%
32.08%
$
$
$
$
$
$
$
$
$
$
$
2017
634
276
38
948
28
29
105
315
10
107
7
21
27
34
3
32
157
345
82
23
47
–
–
1,372
256
2,576
323
198
38
559
22
4
45
13
–
–
7
5
3
25
3
29
48
187
12
23
–
–
–
426
985
59
736
795
345
451
796
2,576
(737)
1,839
0.23%
0.30%
0.85%
0.25%
0.92%
0.46%
28.61%
$
$
$
$
$
$
$
$
$
$
$
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%
(1)
(2)
(3)
108
Effective November 1, 2017, the definition of gross impaired loans has been shortened for certain products to align with a definition of default of 90 days past due under IFRS 9, resulting in
an increase in GIL of $134 million. Past due loans greater than 90 days not included in impaired loans were $179 million in 2018 (2017 – $307 million; 2016 – $337 million; 2015 –
$314 million; 2014 – $316 million). For further details, refer to Note 5 of our 2018 Annual Consolidated Financial Statements.
Effective November 1, 2017, GIL excludes $229 million of ACI loans related to our acquisition of City National that have returned to performing status.
Effective November 1, 2017, represents Stage 3 ACL on loans, acceptances, and commitments under IFRS 9 and Allowances for impaired loans under IAS 39.
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Provision for credit losses by portfolio and geography
(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
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 PCL on impaired loans (1)
Canada
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 (1)
U.S.
Retail
Wholesale
Other International
Retail
Wholesale
Total PCL on impaired loans (1)
Total PCL on performing loans (2)
Total PCL on other financial assets
Total PCL
PCL – Loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances (1)
IFRS 9
$
2018
51
462
468
30
$ 1,011
$
1
5
48
(1)
1
–
5
4
3
4
–
(2)
58
11
(21)
37
(6)
–
–
147
2
$ 1,160
$
$
$
44
458
456
30
988
1
1
21
2
1
–
5
6
–
3
–
(1)
25
11
1
4
–
–
–
80
$
$ 1,068
4
64
68
$
19
5
$
24
$ 1,160
123
24
$ 1,307
0.23%
0.20%
IAS 39
Table 79
$
$
$
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
$
$
$
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
21
96
$
117
$ 1,097
–
121
69
$
190
$ 1,164
–
$
$
$
2017
56
409
435
32
932
$
2016
77
458
442
34
$ 1,011
$
2
14
11
10
13
20
(27)
5
(19)
4
10
1
16
(4)
2
20
115
13
–
53
–
–
216
2
$ 1,150
$
$
$
$
$
$
33
413
426
32
904
–
1
11
(15)
1
–
4
7
–
13
1
2
21
38
10
2
(1)
–
–
95
999
3
117
120
25
6
$
31
$ 1,150
–
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
$ 1,150
0.21%
0.21%
$ 1,546
0.29%
0.28%
$ 1,097
0.24%
0.24%
$ 1,164
0.27%
0.27%
(1)
(2)
Effective November 1, 2017, represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39.
Effective November 1, 2017, represents Stage 1 and 2 PCL on loans, acceptances, and commitments under IFRS 9 and PCL for loans not yet identified as impaired under IAS 39.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
109
Allowance on loans (1) by portfolio and geography
Table 80
IFRS 9
IAS 39
(Millions of Canadian dollars, except percentage amounts)
Allowance on loans at beginning of year
Provision for credit losses (1)
Write-offs by portfolio
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Sovereign
Bank
Wholesale
Total write-offs by portfolio
Recoveries by portfolio
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Sovereign
Bank
Wholesale
Total recoveries by portfolio
Net write-offs
Adjustments (2)
Total allowance on loans at end of year
Allowance against impaired loans (3)
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 on impaired loans (3)
Allowance on performing loans (4)
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
Off-balance sheet and other items
Total allowance on performing loans (4)
Total allowance on loans
Key ratios
Allowance on loans as a % of loans and acceptances
Net write-offs as a % of average net loans and acceptances
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
2,976
1,283
(51)
(552)
(599)
(35)
(1,237)
(207)
–
–
(207)
(1,444)
8
121
131
7
267
65
–
–
65
332
(1,112)
(59)
3,088
43
107
18
168
2
4
15
2
–
–
5
6
1
5
1
–
22
15
10
4
–
–
–
92
260
1
164
165
166
109
275
700
206
754
760
33
1,753
635
2,388
3,088
0.52%
0.20%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
2,326
1,150
(53)
(543)
(565)
(38)
(1,199)
(226)
–
–
(226)
(1,425)
8
116
131
9
264
66
–
–
66
330
(1,095)
(131)
2,250
31
91
19
141
3
4
11
3
–
–
3
6
1
13
4
1
19
36
11
8
1
–
–
124
265
1
150
151
168
153
321
737
128
391
379
37
935
487
91
1,513
2,250
0.40%
0.20%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
2,120
1,546
(42)
(556)
(564)
(40)
(1,202)
(321)
–
–
(321)
(1,523)
5
111
122
10
248
38
–
–
38
286
(1,237)
(103)
2,326
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%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2015
2,085
1,097
(64)
(494)
(497)
(40)
(1,095)
(243)
–
–
(243)
(1,338)
7
105
119
10
241
33
–
1
34
275
(1,063)
1
2,120
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%
2014
2,050
1,164
(30)
(565)
(466)
(47)
(1,108)
(221)
–
–
(221)
(1,329)
2
106
114
9
231
32
–
–
32
263
(1,066)
(63)
2,085
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%
(1)
(2)
(3)
(4)
Includes loans, acceptances, and commitments.
Other adjustments include $77 million of unwind of discount and $(18) million of changes in exchange rate (2017 – $104 million and $27 million; 2016 – $100 million and $3 million; 2015
– $80 million and $(81) million). For further details, refer to Note 5 of our 2018 Annual Consolidated Financial Statements.
Effective November 1, 2017, represents Stage 3 ACL on loans, acceptances, and commitments under IFRS 9 and Allowance for impaired loans under IAS 39.
Effective November 1, 2017, represents Stage 1 and Stage 2 ACL on loans, acceptances, and commitments under IFRS 9 and Allowance for loans not yet identified as impaired under IAS 39.
110
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
Credit quality information by Canadian province
Table 81
(Millions of Canadian dollars)
Loans and acceptances
Atlantic provinces (1)
Quebec
Ontario
Alberta
Other Prairie provinces (2)
B.C. and territories (3)
Total loans and acceptances in Canada
Gross impaired loans (4)
Atlantic provinces (1)
Quebec
Ontario
Alberta
Other Prairie provinces (2)
B.C. and territories (3)
Total GIL in Canada
Provision for credit losses on impaired loans (5)
Atlantic provinces (1)
Quebec
Ontario
Alberta
Other Prairie provinces (2)
B.C. and territories (3)
IFRS 9
IAS 39
2018
2017
2016
2015
2014
$ 25,305
58,067
225,606
69,497
32,101
79,653
$ 490,229
$ 24,471
56,749
202,272
68,051
31,318
76,102
$ 23,947
53,518
185,434
66,277
30,143
71,295
$ 23,040
51,197
175,315
64,902
29,490
70,483
$ 22,130
50,748
159,817
61,197
27,341
68,988
$ 458,963
$ 430,614
$ 414,427
$ 390,221
$
$
$
$
$
$
89
185
227
335
176
107
1,119
59
94
678
116
68
53
77
176
213
284
125
110
985
66
85
617
112
64
55
999
$
$
$
$
$
$
101
207
336
313
93
114
1,164
67
92
654
226
64
80
$
1,183
$
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
Total PCL on impaired loans in Canada
$
1,068
$
(1)
(2)
(3)
(4)
(5)
Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
Comprises Manitoba and Saskatchewan.
Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
Effective November 1, 2017, the definition of gross impaired loans has been shortened for certain products to align with a definition of default of 90 days past due under IFRS 9.
Effective November 1, 2017, represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2018
111
EDTF recommendations index
We aim to present transparent, high-quality risk disclosures by providing disclosures in our 2018 Annual Report and Supplementary Financial
Information package (SFI), in accordance with recommendations from the FSB’s Enhanced Disclosure Task Force (EDTF).
The following index summarizes our disclosure by EDTF recommendation:
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
Recommendation
1
2
Disclosure
Table of contents for EDTF risk disclosure
Define risk terminology and measures
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
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
Location of disclosure
Annual Report
page
112
50, 52-55,
213-214
50-51
91-93
50, 52-55
52-55
98
53-54
67
91-93
SFI
page
1
–
–
–
–
–
–
–
–
–
20-23
–
90-93
–
56-59
–
–
53, 56-57
73-75
79-80
75, 78
80-81
75-77
71-72
67-70
67
67-70
56-66
159-165
106-111
57-59,
101-102,
123-126,
128-129
–
60
59
83-90
86-87,
202-203
24
–
26
25,*
*
26
41
–
–
–
–
–
–
–
–
29-41,*
39
–
31, 36
43
40
–
–
*
In accordance with the BCBS’ Revised Pillar 3 Disclosure Requirements we have published our first standalone Pillar 3 Report for the year ended October 31, 2018. As a result these
disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report.
112
Royal Bank of Canada: Annual Report 2018
Management’s Discussion and Analysis
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
113
Reports
121 Notes to Consolidated Financial Statements
114 Management’s Responsibility for Financial Reporting
114 Management’s Report on Internal Control over Financial
Reporting
115
Report of Independent Registered Public Accounting
Firm
116
Consolidated Financial Statements
116
Consolidated Balance Sheets
117
Consolidated Statements of Income
118
Consolidated Statements of Comprehensive Income
119
Consolidated Statements of Changes in Equity
120
Consolidated Statements of Cash Flows
121
121
139
154
159
166
167
170
178
179
181
182
182
183
185
186
190
191
191
192
194
196
198
199
202
203
204
206
206
207
Note 1
General information
Note 2
Summary of significant accounting policies,
estimates and judgments
Note 3
Fair value of financial instruments
Note 4
Securities
Note 5
Loans and allowance for credit losses
Note 6
Derecognition of financial assets
Note 7
Structured entities
Note 8
Derivative financial instruments and
hedging activities
Note 9
Premises and equipment
Note 10 Goodwill and other intangible assets
Note 11
Joint ventures and associated companies
Note 12 Other assets
Note 13 Deposits
Note 14
Insurance
Note 15
Segregated funds
Note 16
Employee benefits – Pension and other
post-employment benefits
Note 17 Other liabilities
Note 18
Subordinated debentures
Note 19
Trust capital securities
Note 20
Equity
Note 21
Share-based compensation
Note 22
Income taxes
Note 23
Earnings per share
Note 24 Guarantees, commitments, pledged assets
and contingencies
Note 25
Legal and regulatory matters
Note 26
Related party transactions
Note 27
Results by business segment
Note 28 Nature and extent of risks arising from
financial instruments
Note 29
Capital management
Note 30 Offsetting financial assets and financial
liabilities
209
Note 31
Recovery and settlement of on-balance
sheet assets and liabilities
210
211
Note 32
Parent company information
Note 33
Subsequent events
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
113
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 financial statements and their report follows. The
auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings.
David I. McKay
President and Chief Executive Officer
Rod Bolger
Chief Financial Officer
Toronto, November 27, 2018
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 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 International Financial
Reporting Standards as issued by the International Accounting Standards Board. 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 Chief Financial
Officer, the effectiveness of our internal control over financial reporting as of October 31, 2018, 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, 2018, internal control over financial reporting was effective based on the criteria established in
the Internal Control – Integrated Framework (2013).
The effectiveness of our internal control over financial reporting as of October 31, 2018, has been audited by PricewaterhouseCoopers LLP,
Independent Registered Public Accounting Firm.
David I. McKay
President and Chief Executive Officer
Rod Bolger
Chief Financial Officer
Toronto, November 27, 2018
114
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Directors of Royal Bank of Canada
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Royal Bank of Canada and its subsidiaries (the Bank) as of October 31, 2018
and October 31, 2017, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the
years then ended, including the related notes, which comprise a summary of significant accounting policies and other explanatory information
(collectively referred to as the consolidated financial statements). We also have audited the Bank’s internal control over financial reporting as of
October 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Bank
as of October 31, 2018 and October 31, 2017, and its financial performance and its cash flows for the years then ended in conformity with
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Also in our opinion, the Bank
maintained, in all material respects, effective internal control over financial reporting as of October 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
Without qualifying our opinion on the consolidated financial statements, we draw attention to Note 2 to the consolidated financial statements,
which indicates that the Bank has changed the manner in which it accounts for financial instruments in 2018 due to the adoption of IFRS 9,
Financial Instruments.
Basis for Opinions
Management’s Responsibility for the Consolidated Financial Statements and Internal Control over Financial Reporting
The Bank’s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board, for maintaining effective internal
control over financial reporting necessary to enable the preparation of the consolidated financial statements that are free from material
misstatement, whether due to fraud or error, 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.
Auditor’s Responsibility
Our responsibility is to express opinions on the Bank’s consolidated financial statements and on the Bank’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States)(PCAOB) and are required to be independent with respect to the Bank in accordance with the ethical requirements that are relevant to our
audits, which include those set forth in Canada, the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits of the Bank’s consolidated financial statements and of its internal control over financial reporting in accordance with
the standards of the PCAOB and we also conducted our audits of the Bank’s consolidated financial statements in accordance with Canadian
generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects. Those standards also require that we comply with ethical requirements.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on our 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, we consider 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. Our audits
also included evaluating the appropriateness of accounting policies and principles used and the reasonableness of significant estimates made
by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
Definition and Limitations 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.
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.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 27, 2018
We have served as the Bank’s auditor since 2016.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
115
Consolidated Balance Sheets
(Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities (Notes 2 and 4)
Trading
Investment, net of applicable allowance
Assets purchased under reverse repurchase agreements and securities borrowed
Loans (Notes 2 and 5)
Retail
Wholesale
Allowance for loan losses (Notes 2 and 5)
Segregated fund net assets (Note 15)
Other
Customers’ liability under acceptances
Derivatives (Note 8)
Premises and equipment (Note 9)
Goodwill (Note 10)
Other intangibles (Note 10)
Other assets (Note 12)
Total assets
Liabilities and equity
Deposits (Note 13)
Personal
Business and government
Bank
Segregated fund net liabilities (Note 15)
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 14)
Other liabilities (Note 17)
Subordinated debentures (Note 18)
Total liabilities
Equity attributable to shareholders (Note 20)
Preferred shares
Common shares
Retained earnings
Other components of equity
Non-controlling interests (Note 20)
Total equity
Total liabilities and equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
David I. McKay
President and Chief Executive Officer
David F. Denison
Director
116
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
As at
October 31
2018
October 31
2017
$
30,209 $
28,407
36,471
32,662
128,258
94,608
222,866
127,657
90,722
218,379
294,602
220,977
399,452
180,278
579,730
(2,912)
576,818
385,170
159,606
544,776
(2,159)
542,617
1,368
1,216
15,641
94,039
2,832
11,137
4,687
44,064
16,459
95,023
2,670
10,977
4,507
38,959
172,400
168,595
$ 1,334,734 $ 1,212,853
$
270,154 $
534,371
32,521
837,046
260,213
505,665
23,757
789,635
1,368
1,216
15,662
32,247
206,814
90,238
10,000
52,273
407,234
16,459
30,008
143,084
92,127
9,676
46,955
338,309
9,131
9,265
1,254,779
1,138,425
6,309
17,617
51,112
4,823
79,861
94
6,413
17,703
45,359
4,354
73,829
599
79,955
74,428
$ 1,334,734 $ 1,212,853
Consolidated Statements of Income
(Millions of Canadian dollars, except per share amounts)
Interest and dividend income (Note 3)
Loans
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits and other
Interest expense (Note 3)
Deposits and other
Other liabilities
Subordinated debentures
Net interest income
Non-interest income
Insurance premiums, investment and fee income (Note 14)
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 investment securities (Notes 2 and 4)
Share of profit in joint ventures and associates (Note 11)
Other
Total revenue
Provision for credit losses (Notes 2, 4 and 5)
Insurance policyholder benefits, claims and acquisition expense (Note 14)
Non-interest expense
Human resources (Notes 16 and 21)
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles (Note 10)
Other
Income before income taxes
Income taxes (Note 22)
Net income
Net income attributable to:
Shareholders
Non-controlling interests
Basic earnings per share (in dollars) (Note 23)
Diluted earnings per share (in dollars) (Note 23)
Dividends per common share (in dollars)
The accompanying notes are an integral part of these Consolidated Financial Statements.
For the year ended
October 31
2018
October 31
2017
$
21,249 $
5,670
5,536
566
33,021
9,603
4,905
322
14,830
18,191
4,279
911
5,377
3,551
1,372
1,800
2,053
1,098
1,054
1,394
147
21
1,328
24,385
42,576
1,307
2,676
13,776
1,593
1,558
1,049
1,379
1,077
2,401
22,833
$
$
$
$
15,760
3,329
12,431 $
12,400 $
31
12,431 $
8.39 $
8.36
3.77
18,677
4,899
3,021
307
26,904
6,564
2,930
270
9,764
17,140
4,566
806
4,803
3,339
1,416
1,770
2,093
974
933
1,433
172
335
889
23,529
40,669
1,150
3,053
13,330
1,434
1,588
1,011
1,214
1,015
2,202
21,794
14,672
3,203
11,469
11,428
41
11,469
7.59
7.56
3.48
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
117
Consolidated Statements of Comprehensive Income
(Millions of Canadian dollars)
Net income
Other comprehensive income (loss), net of taxes (Note 22)
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
Net change in unrealized gains (losses) on debt securities and loans at fair value through other comprehensive
income
Net unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income
Provision for credit losses recognized in income
Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive
income 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
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 16)
Net fair value change due to credit risk on financial liabilities designated as fair value through profit or loss
Net gains (losses) on equity securities designated at fair value through other comprehensive income
Total other comprehensive income (loss), net of taxes
Total comprehensive income (loss)
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
2018
October 31
2017
$
12,431 $
11,469
134
(96)
38
(1,570)
438
(10)
(1,142)
622
(92)
530
790
(323)
467
(107)
(70)
(9)
(94)
(173)
840
(237)
–
603
150
107
257
724
123
(2)
845
1,532
$
$
$
13,963 $
11,362
13,931 $
32
13,963 $
11,323
39
11,362
118
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
119
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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 investment securities (Note 2)
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 investment securities (Note 2)
Proceeds from maturity of investment securities (Note 2)
Purchases of investment securities (Note 2)
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
Repayment of subordinated debentures
Issue of common shares
Common shares purchased for cancellation
Redemption of preferred shares
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
2018
October 31
2017
$
12,431 $
11,469
1,307
569
459
1,083
(1)
–
(149)
(40)
218
(88)
(2,707)
984
(1,889)
2,297
(41,477)
(73,626)
48,749
63,730
2,239
147
3,238
17,474
(3,809)
19,572
37,536
(59,286)
(1,980)
14
(65)
(8,018)
(500)
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72
(1,522)
(105)
5,738
(5,726)
(5,640)
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(37)
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(7,720)
66
1,802
28,407
30,209 $
13,524 $
31,386
1,706
5,818
1,150
600
203
1,017
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(1)
(246)
2
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(1,183)
23,921
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23,624
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(34,675)
33,296
39,643
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601
5,553
37,725
(4,811)
11,432
40,844
(61,559)
(1,364)
–
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(15,458)
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(119)
199
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(300)
4,544
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(5,309)
(1)
(34)
(30)
(8,651)
(138)
13,478
14,929
28,407
8,803
25,602
1,729
4,708
$
$
(1)
We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2.4 billion as at October 31, 2018 (October 31, 2017 – $2.3 billion;
October 31, 2016 – $3.3 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
120
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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 and Treasury Services and Capital Markets products and services on a global basis. Refer to Note 27 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 as noted. These Consolidated Financial Statements also comply with Subsection 308 of the
Bank Act (Canada), which states that, except as otherwise specified by the OSFI, our Consolidated Financial Statements are to be prepared in
accordance with IFRS. Except where otherwise noted, the accounting policies outlined in Note 2 have been consistently applied to all periods
presented.
On November 27, 2018, 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. Except where otherwise noted,
the same accounting policies have been applied to all periods presented.
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, 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
Note 7
Note 2
Note 3
Note 2
Note 4
Note 5
Note 2
Note 16
Note 2
Note 10
Securities impairment
(under IAS 39)
Application of the effective
interest method
Derecognition of financial
assets
Income taxes
Provisions
Note 2
Note 4
Note 2
Note 2
Note 6
Note 2
Note 22
Note 2
Note 24
Note 25
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.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
121
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
Financial Instruments
Changes in accounting policies
During the first quarter, we adopted IFRS 9 Financial Instruments (IFRS 9). As a result of the application of IFRS 9, we changed our accounting
policies in the areas indicated below, and these new policies were applicable from November 1, 2017. As permitted by the transition provisions
of IFRS 9, we elected not to restate comparative period results; accordingly, all comparative period information is presented in accordance with
our previous accounting policies, as indicated below. Adjustments to carrying amounts of financial assets and liabilities at the date of initial
application (November 1, 2017) were recognized in opening Retained earnings and Other components of equity in the current period. New or
amended disclosures have been provided for the current period, where applicable, and comparative period disclosures are consistent with those
made in the prior year.
Policies applicable beginning November 1, 2017 (IFRS 9)
Classification of financial assets (IFRS 9)
Financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at fair value through profit or loss
(FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost based on our business model for managing the financial
instruments and the contractual cash flow characteristics of the instrument.
Debt instruments are measured at amortized cost if both of the following conditions are met and the asset is not designated as FVTPL:
(a) the asset is held within a business model that is Held-to-Collect (HTC) as described below, and (b) the contractual terms of the instrument
give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).
Debt instruments are measured at FVOCI if both of the following conditions are met and the asset is not designated as FVTPL: (a) the asset is
held within a business model that is Held-to-Collect-and-Sell (HTC&S) as described below, and (b) the contractual terms of the instrument give
rise, on specified dates, to cash flows that are SPPI.
All other debt instruments are measured at FVTPL.
Equity instruments are measured at FVTPL, unless the asset is not held for trading purposes and we make an irrevocable election to
designate the asset as FVOCI. This election is made on an instrument-by-instrument basis.
Business model assessment
We determine our business models at the level that best reflects how we manage portfolios of financial assets to achieve our business
objectives. Judgment is used in determining our business models, which is supported by relevant, objective evidence including:
•
•
•
•
How the economic activities of our businesses generate benefits, for example through trading revenue, enhancing yields or hedging
funding or other costs and how such economic activities are evaluated and reported to key management personnel;
The significant risks affecting the performance of our businesses, for example, market risk, credit risk, or other risks as described in the
Risk Management section of Management’s Discussion and Analysis, and the activities undertaken to manage those risks;
Historical and future expectations of sales of the loans or securities portfolios managed as part of a business model; and
The compensation structures for managers of our businesses, to the extent that these are directly linked to the economic performance
of the business model.
Our business models fall into three categories, which are indicative of the key strategies used to generate returns:
•
•
•
HTC: The objective of this business model is to hold loans and securities to collect contractual principal and interest cash flows. Sales
are incidental to this objective and are expected to be insignificant or infrequent.
HTC&S: Both collecting contractual cash flows and sales are integral to achieving the objective of the business model.
Other fair value business models: These business models are neither HTC nor HTC&S, and primarily represent business models where
assets are held-for-trading or managed on a fair value basis.
SPPI assessment
Instruments held within a HTC or HTC&S business model are assessed to evaluate if their contractual cash flows are comprised of solely
payments of principal and interest. SPPI payments are those which would typically be expected from basic lending arrangements. Principal
amounts include par repayments from lending and financing arrangements, and interest primarily relates to basic lending returns, including
compensation for credit risk and the time value of money associated with the principal amount outstanding over a period of time. Interest can
also include other basic lending risks and costs (for example, liquidity risk, servicing or administrative costs) associated with holding the
financial asset for a period of time, and a profit margin.
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Where the contractual terms introduce exposure to risk or variability of cash flows that are inconsistent with a basic lending arrangement,
the related financial asset is classified and measured at FVTPL.
Securities (IFRS 9)
Trading securities include all securities that are classified as FVTPL by nature and securities designated as FVTPL. 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 generally recorded as Trading revenue or Non-interest income – Other. 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.
Investment securities include all securities classified as FVOCI and amortized cost. All investment securities are initially recorded at fair
value and subsequently measured according to the respective classification.
Investment securities carried at amortized cost are measured using the effective interest method, and are presented net of any allowance
for credit losses, calculated in accordance with our policy for Allowance for credit losses, as described below. Interest income, including the
amortization of premiums and discounts on securities measured at amortized cost are recorded in interest income. Impairment gains or losses
recognized on amortized cost securities are recorded in Provision for credit losses (PCL). When a debt instrument measured at amortized cost is
sold, the difference between the sale proceeds and the amortized cost of the security at the time of the sale is recorded as Net gains on
Investment securities in Non-interest income.
Debt securities carried at FVOCI are measured at fair value with unrealized gains and losses arising from changes in fair value included in
Other components of equity. Impairment gains and losses are included in PCL and correspondingly reduce the accumulated changes in fair value
included in Other components of equity. When a debt instrument measured at FVOCI is sold, the cumulative gain or loss is reclassified from
Other components of equity to Net gains on Investment securities in Non-interest income.
Equity securities carried at FVOCI are measured at fair value. Unrealized gains and losses arising from changes in fair value are recorded in
Other components of equity and not subsequently reclassified to profit or loss when realized. Dividends from FVOCI equity securities are
recognized in Interest income.
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 measured at FVTPL, and changes in the fair value of securities measured at FVOCI 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-
Other.
Fair value option (IFRS 9)
A financial instrument with a reliably measurable fair value can be designated as 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. The fair value option can be used for
financial assets if it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring
assets or liabilities, or recognizing related gains and losses on a different basis (an accounting mismatch). The fair value option can be elected
for financial liabilities if: (i) the election eliminates an accounting mismatch; (ii) the financial liability is part of a portfolio that is managed on a
fair value basis, in accordance with a documented risk management or investment strategy; 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 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, depending on our business purpose for holding the financial asset.
Financial liabilities designated as FVTPL are recorded at fair value and fair value changes attributable to changes in our own credit risk are
recorded in OCI. Own credit risk amounts recognized in OCI will not be reclassified subsequently to net income. The remaining fair value changes
not attributable to changes in our own credit risk are recorded in Trading revenue or Non-interest income – Other, depending on our business
purpose for holding the financial liability. 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 FVTPL is recognized in net
income. To make that determination, we assess whether we expect that the effects of changes in the liability’s credit risk will be offset in profit or
loss by a change in the fair value of another financial instrument measured at FVTPL. Such an expectation is based on an economic relationship
between the characteristics of the liability and the characteristics of the other financial instrument. The determination is made at initial
recognition and is not reassessed. To determine the fair value adjustments on our debt instruments designated as 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.
Loans (IFRS 9)
Loans are debt instruments recognized initially at fair value and are subsequently measured in accordance with the Classification of financial
assets policy provided above. The majority of our loans are carried at amortized cost using the effective interest method, which represents the
gross carrying amount less allowance for credit losses.
Interest on loans is recognized in Interest income using the effective interest method. The estimated future cash flows used in this
calculation include those determined by the contractual term of the asset and all fees that are considered to be integral to the effective interest
rate. Also included in this amount are 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. Future prepayment fees on mortgage loans are not
included as part of the effective interest rate at origination. If prepayment fees are received on a renewal of a mortgage loan before maturity, 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.
For loans carried at amortized cost or FVOCI, impairment losses are recognized at each balance sheet date in accordance with the three-
stage impairment model outlined below.
Allowance for credit losses (IFRS 9)
An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity
securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include certain
loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable,
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
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Note 2 Summary of significant accounting policies, estimates and judgments (continued)
and finance and operating lease receivables. ACL on loans is presented in Allowance for loan losses. ACL on debt securities measured at FVOCI is
presented in Other components of equity. Other financial assets carried at amortized cost are presented net of ACL on our Consolidated Balance
Sheets.
Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments. For certain retail
products, expected credit losses are measured based on the total exposure and are not attributable to the on- and off-balance sheet
components. For these products, ACL is presented in Allowance for loan losses to the extent that ACL does not exceed the related loan balance,
and thereafter presented in Other Liabilities – Provisions. For all other off-balance sheet products subject to impairment assessment, ACL is
separately calculated and included in Other Liabilities – Provisions.
We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model:
•
Performing financial assets
•
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 12 months following the reporting date.
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.
•
•
Impaired financial assets
•
Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses
expected over the remaining lifetime of the asset. Interest revenue is calculated based on the carrying amount of the asset, net of
the loss allowance, rather than on its gross carrying amount.
The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time horizon. For
loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn over the relevant time period. For
financial guarantees, credit loss estimates are based on the expected payments required under the guarantee contract. For finance lease
receivables, credit loss estimates are based on cash flows consistent with the cash flows used in measuring the lease receivable.
Increases or decreases in the required ACL attributable to purchases and new originations, derecognitions or maturities, and
remeasurements due to changes in loss expectations or stage transfers are recorded in PCL. Write-offs and recoveries of amounts previously
written off are recorded against ACL.
The ACL represents an unbiased estimate of expected credit losses on our financial assets as at the balance sheet date. Judgment is
required in making assumptions and estimations when calculating the ACL, including movements between the three stages and the application
of forward looking information. The underlying assumptions and estimates may result in changes to the provisions from period to period that
significantly affect our results of operations.
Measurement of expected credit losses
Expected credit losses are based on a range of possible outcomes and consider all available reasonable and supportable information including
internal and external ratings, historical credit loss experience, and expectations about future cash flows. The measurement of expected credit
losses is based primarily on the product of the instrument’s probability of default (PD), loss given default (LGD), and exposure at default (EAD)
discounted to the reporting date. The main difference between Stage 1 and Stage 2 expected credit losses for performing financial assets is the
respective calculation horizon. Stage 1 estimates project PD, LGD and EAD over a maximum period of 12 months while Stage 2 estimates project
PD, LGD and EAD over the remaining lifetime of the instrument.
An expected credit loss estimate is produced for each individual exposure. Relevant parameters are modeled on a collective basis using
portfolio segmentation that allows for appropriate incorporation of forward looking information. To reflect other characteristics that are not
already considered through modelling, expert credit judgment is exercised in determining the final expected credit losses.
For a small percentage of our portfolios which lack detailed historical information and/or loss experience, we apply simplified measurement
approaches that may differ from what is described above. These approaches have been designed to maximize the available information that is
reliable and supportable for each portfolio and may be collective in nature.
Expected credit losses are discounted to the reporting period date using the effective interest rate.
Expected life
For instruments in Stage 2 or Stage 3, loss allowances reflect expected credit losses over the expected remaining lifetime of the instrument. For
most instruments, the expected life is limited to the remaining contractual life.
An exemption is provided for certain instruments with the following characteristics: (a) the instrument includes both a loan and undrawn
commitment component; (b) we have the contractual ability to demand repayment and cancel the undrawn commitment; and (c) our exposure to
credit losses is not limited to the contractual notice period. For products in scope of this exemption, the expected life may exceed the remaining
contractual life and is the period over which our exposure to credit losses is not mitigated by our normal credit risk management actions. This
period varies by product and risk category and is estimated based on our historical experience with similar exposures and consideration of credit
risk management actions taken as part of our regular credit review cycle. Products in scope of this exemption include credit cards, overdraft
balances and certain revolving lines of credit. Judgment is required in determining the instruments in scope for this exemption and estimating
the appropriate remaining life based on our historical experience and credit risk mitigation practices.
Assessment of significant increase in credit risk
The assessment of significant increase in credit risk requires significant judgment. 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 PD, not the losses we expect to incur. The assessment is generally
performed at the instrument level.
Our assessment of significant increases in credit risk is performed at least quarterly based on three factors. If any of the following factors
indicates that a significant increase in credit risk has occurred, the instrument is moved from Stage 1 to Stage 2:
(1) We have established thresholds for significant increases in credit risk based on both a percentage and absolute change in lifetime PD
relative to initial recognition.
(2) Additional qualitative reviews are performed to assess the staging results and make adjustments, as necessary, to better reflect the
positions whose credit risk has increased significantly.
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(3)
Instruments which are 30 days past due are generally considered to have experienced a significant increase in credit risk, even if our
other metrics do not indicate that a significant increase in credit risk has occurred.
The thresholds for movement between Stage 1 and Stage 2 are symmetrical. After a financial asset has transferred to Stage 2, if its credit risk is
no longer considered to have significantly increased relative to its initial recognition, the financial asset will move back to Stage 1.
For certain instruments with low credit risk as at the reporting date, it is presumed that credit risk has not increased significantly relative to
initial recognition. Credit risk is considered to be low if the instrument has a low risk of default, and the borrower has the ability to fulfill their
contractual obligations both in the near term and in the longer term, including periods of adverse changes in the economic or business
environment. Certain interest-bearing deposits with banks, assets purchased under reverse repurchase agreements, insurance policy loans, and
liquidity facilities extended to our multi-seller conduits have been identified as having low credit risk.
Use of forward-looking information
The measurement of expected credit losses for each stage and the assessment of significant increase in credit risk considers information about
past events and current conditions as well as reasonable and supportable projections of future events and economic conditions. The estimation
and application of forward-looking information requires significant judgment.
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the macroeconomic
variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each
macroeconomic scenario used in our expected credit loss calculation includes a projection of all relevant macroeconomic variables used in our
models for a five year period, subsequently reverting to long-run averages. Macroeconomic variables used in our expected credit loss models
include, but are not limited to, unemployment rates, gross domestic product growth rates, commodity prices, and Canadian housing prices.
Depending on their usage in the models, macroeconomic variables may be projected at a country, province/state or more granular level.
Our estimation of expected credit losses in Stage 1 and Stage 2 is a discounted probability-weighted estimate that considers a minimum of
three future macroeconomic scenarios. Our base case scenario is based on macroeconomic forecasts published by our internal economics
group. Upside and downside scenarios vary relative to our base case scenario based on reasonably possible alternative macroeconomic
conditions. Additional and more severe downside scenarios are designed to capture a broader range of potential credit losses in certain sectors.
Scenario design, including the identification of additional downside scenarios, occurs at least on an annual basis and more frequently if
conditions warrant.
Scenarios are designed to capture a wide range of possible outcomes and weighted according to our best estimate of the relative likelihood
of the range of outcomes that each scenario represents. Scenario weights take into account historical frequency, current trends, and forward-
looking conditions and are updated on a quarterly basis. All scenarios considered are applied to all portfolios subject to expected credit losses
with the same probabilities.
Our assessment of significant increases in credit risk is based on changes in probability-weighted forward-looking lifetime PD as at the
reporting date, 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 is consistent with the definition of default used for our internal credit
risk management purposes. Our definition of default may differ across products and consider both quantitative and qualitative factors, such as
the terms of financial covenants and days past due. For retail and wholesale borrowers, except as detailed below, default occurs when the
borrower is more than 90 days past due on any material obligation to us, and/or we consider the borrower unlikely to make their payments in full
without recourse action on our part, such as taking formal possession of any collateral held. For certain credit card balances, default occurs when
payments are 180 days past due. For these balances, the use of a period in excess of 90 days past due is reasonable and supported by
observable data on write-off and recovery rates experienced on historical credit card portfolios. The definition of default used is applied
consistently from period to period and to all financial instruments unless it can be demonstrated that circumstances have changed such that
another definition of default is more appropriate.
Credit-impaired financial assets (Stage 3)
Financial assets are assessed for credit-impairment at each balance sheet date and more frequently when circumstances warrant further
assessment. Evidence of credit-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. An asset that is in Stage 3 will move back to
Stage 2 when, as at the reporting date, it is no longer considered to be credit-impaired. The asset will transfer back to Stage 1 when its credit risk
at the reporting date is no longer considered to have increased significantly from initial recognition, which could occur during the same reporting
period as the transfer from Stage 3 to Stage 2.
When a financial asset has been identified as credit-impaired, expected credit losses are measured as the difference between the asset’s
gross carrying amount and the present value of estimated future cash flows discounted at the instrument’s original effective interest rate. For
impaired financial assets with drawn and undrawn components, expected credit losses also reflect any credit losses related to the portion of the
loan commitment that is expected to be drawn down over the remaining life of the instrument.
When a financial asset is credit-impaired, interest ceases to be recognized on the regular accrual basis, which accrues income based on the
gross carrying amount of the asset. Rather, interest income is calculated by applying the original effective interest rate to the amortized cost of
the asset, which is the gross carrying amount less the related ACL. Following impairment, interest income is recognized on the unwinding of the
discount from the initial recognition of impairment.
ACL for credit-impaired loans in Stage 3 are established at the borrower level, where losses related to impaired loans are identified on
individually significant loans, or collectively assessed and determined through the use of portfolio-based rates, without reference to particular
loans.
Individually assessed loans (Stage 3)
When individually significant loans are identified as impaired, we reduce the carrying value of the loans to their estimated realizable value by
recording an individually assessed ACL to cover identified credit losses. The individually assessed ACL reflects the expected amount of principal
and interest calculated under the terms of the original loan agreement that will not be recovered, and the impact of time delays in collecting
principal and/or interest (time value of money). The estimated realizable value for each individually significant loan is the present value of
expected future cash flows discounted using the original effective interest rate for each loan. When the amounts and timing of future cash flows
cannot be estimated with reasonable reliability, the estimated realizable amount may be determined using observable market prices for
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
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Note 2 Summary of significant accounting policies, estimates and judgments (continued)
comparable loans, the fair value of collateral underlying the loans, and other reasonable and supported methods based on management
judgment.
Individually-assessed allowances are established in consideration of a range of possible outcomes, which may include macroeconomic or
non-macroeconomic scenarios, to the extent relevant to the circumstances of the specific borrower being assessed. Assumptions used in
estimating expected future cash flows reflect current and expected future economic conditions and are generally consistent with those used in
Stage 1 and Stage 2 measurement.
Significant judgment is required in assessing evidence of credit-impairment and estimation of the amount and timing of future cash flows
when determining expected credit losses. Changes in the amount expected to be recovered would have a direct impact on PCL and may result in
a change in the ACL.
Collectively assessed loans (Stage 3)
Loans that are collectively assessed 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 collectively-assessed ACL reflects: (i) the expected amount of principal and interest calculated under the terms of the original loan
agreement that will not be recovered, and (ii) the impact of time delays in collecting principal and/or interest (time value of money).
The expected principal and interest collection is estimated on a portfolio basis and references historical loss experience of comparable
portfolios with similar credit risk characteristics, adjusted for the current environment and expected future conditions. A portfolio specific
coverage ratio is applied against the impaired loan balance in determining the collectively-assessed ACL. The time value of money component is
calculated by using the discount factors applied to groups of loans sharing common characteristics. The discount factors represent the expected
recovery pattern of the comparable group of loans, and reflect the historical experience of these groups adjusted for current and expected future
economic conditions and/or industry factors. Significant judgment is required in assessing evidence of impairment and estimation of the amount
and timing of future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct
impact on PCL and may result in a change in the ACL.
Write-off of loans
Loans and the related ACL 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 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 generally written off when payment is 180 days past due. Personal loans are generally written off at
150 days past due.
Modifications
The original terms of a financial asset may be renegotiated or otherwise modified, resulting in changes to the contractual terms of the financial
asset that affect the contractual cash flows. The treatment of such modifications is primarily based on the process undertaken to execute the
renegotiation and the nature and extent of changes expected to result. Modifications which are performed for credit reasons, primarily related to
troubled debt restructurings, are generally treated as modifications of the original financial asset. Modifications which are performed for other
than credit reasons are generally considered to be an expiry of the original cash flows; accordingly, such renegotiations are treated as a
derecognition of the original financial asset and recognition of a new financial asset.
If a modification of terms does not result in derecognition of the financial asset, the carrying amount of the financial asset is recalculated as
the present value of the renegotiated or modified contractual cash flows, discounted at the original effective interest rate and a gain or loss is
recognized. The financial asset continues to be subject to the same assessments for significant increase in credit risk relative to initial
recognition and credit-impairment, as described above. A modified financial asset will transfer out of Stage 3 if the conditions that led to it being
identified as credit-impaired are no longer present and relate objectively to an event occurring after the original credit-impairment was
recognized. A modified financial asset will transfer out of Stage 2 when it no longer satisfies the relative thresholds set to identify significant
increases in credit risk, which are based on changes in its lifetime PD, days past due and other qualitative considerations. The financial asset
continues to be monitored for significant increases in credit risk and credit-impairment.
If a modification of terms results in derecognition of the original financial asset and recognition of the new financial asset, the new financial
asset will generally be recorded in Stage 1, unless it is determined to be credit-impaired at the time of the renegotiation. For the purposes of
assessing for significant increases in credit risk, the date of initial recognition for the new financial asset is the date of the modification.
Derivatives (IFRS 9)
When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid instruments. Some of
the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract is a financial asset within the scope of
IFRS 9, the classification and measurement criteria are applied to the entire hybrid instrument as described in the Classification of financial
assets section of Note 2. If the host contract is a financial liability or an asset that is not within the scope of IFRS 9, embedded derivatives are
separately recognized if the economic characteristics and risks of the embedded derivative are not clearly and closely related to the host
contract, unless an election has been made to elect the fair value option, as described above. The host contract is accounted for in accordance
with the relevant standards.
Policies applicable prior to November 1, 2017 (IAS 39)
Securities (IAS 39)
Securities are classified at inception, based on management’s intention, as 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.
Trading securities include securities purchased for sale in the near term which are classified as FVTPL by nature and securities designated
as 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 generally 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.
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Consolidated Financial Statements
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 instruments 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 losses.
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 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 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 (IAS 39)
A financial instrument can be designated as FVTPL (the fair value option) on its initial recognition. An instrument that is designated as 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 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 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 FVTPL is recognized in net income.
To determine the fair value adjustments on our debt designated as 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.
Loans (IAS 39)
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 FVTPL, in which case they are carried at fair value.
We assess our loans (including debt securities classified as loans) for objective evidence of impairment at each balance sheet date.
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
certain credit card balances and loans guaranteed or insured by a Canadian government (Federal or Provincial) or a Canadian government agency
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
127
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
(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 generally classified as impaired 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 (IAS 39)
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 we
determine that we 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. 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, the 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 with 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.
128
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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 generally written off when payment is 180 days
in arrears. Personal loans are generally written off at 150 days past due, except for loans guaranteed or insured by a Canadian government or
Canadian government agency, which are written off when the loan is contractually 365 days in arrears.
Derivatives (IAS 39)
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.
Impact of adoption of IFRS 9
Mandatory reclassifications
The combined application of the business model and SPPI tests on adoption of IFRS 9 resulted in the reclassification of the following financial
assets and liabilities.
(Millions of Canadian dollars)
Measurement category Carrying amount
Previous measurement
category
Carrying amount
IFRS 9
IAS 39
As at
November 1, 2017
October 31, 2017
Financial assets:
Trading securities (1)
Trading securities (2)
Investment securities (3)
Assets purchased under reverse repurchase
agreements and securities borrowed (4)
Loans (2)
Loans (5)
Financial liabilities:
Other
FVTPL
FVTPL
Amortized cost
$
FVTPL
FVTPL
FVOCI
2,572
398
23,602
11,720
380
547
Available-for-sale
Loans and receivables
Available-for-sale
$
Loans and receivables
Loans and receivables
Loans and receivables
2,572
398
23,473
11,720
405
540
Obligations related to assets sold under repurchase
agreements and securities loaned (4)
FVTPL (designated)
$
2,534
Amortized cost
$
2,534
(1)
(2)
(3)
(4)
(5)
$833 million of equity securities previously classified as available-for-sale were reclassified to FVTPL by nature. $1,739 million of debt securities previously classified as available-for-sale
whose cash flows are not solely payments of principal or interest were reclassified to FVTPL.
Loans and securities whose cash flows are not solely payments of principal or interest were reclassified to FVTPL.
Debt securities managed within a HTC business model were reclassified from available-for-sale to amortized cost. As at October 31, 2018, the fair value of these securities was
$17,870 million. For the year ended October 31, 2018, $271 million of losses would have been recognized in OCI if the securities had not been reclassified.
Assets purchased under reverse repurchase agreements and securities borrowed previously classified as loans and receivables were reclassified to FVTPL as they are managed on a fair value
basis. Obligations related to assets sold under repurchase agreements and securities loaned, previously measured at amortized cost, were designated as FVTPL as they are similarly managed
on a fair value basis.
Loans managed under a business model to HTC&S were reclassified to FVOCI.
Items previously designated as FVTPL
The following financial assets previously designated as FVTPL were classified as FVTPL by nature because the assets are managed on a fair value
basis or FVOCI as they are managed under a business model to HTC&S.
IFRS 9
IAS 39
As at
November 1, 2017
October 31, 2017
(Millions of Canadian dollars)
Measurement category Carrying amount
Previous Measurement
category
Carrying amount
Financial assets:
Investment securities
Trading securities
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans
Other assets
FVOCI
FVTPL
FVTPL
FVTPL
FVTPL
$
18
4,291
FVTPL (designated)
FVTPL (designated)
$
138,979
2,296
1,212
FVTPL (designated)
FVTPL (designated)
FVTPL (designated)
18
4,291
138,979
2,296
1,212
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
129
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Optional designations
In conjunction with the classification changes required by IFRS 9, the following optional designations have been made on transition to IFRS 9.
(Millions of Canadian dollars)
Financial assets:
Investment securities (1)
Loans (2)
Financial liabilities:
Deposits (3)
IFRS 9
IAS 39
As at
November 1, 2017
October 31, 2017
Measurement category
Carrying amount
Previous measurement
category
Carrying amount
FVOCI (designated)
FVTPL (designated)
FVTPL (designated)
$
$
384
1,368
Available for sale
Loans and receivables
295
Amortized cost
$
$
384
1,263
324
(1)
(2)
(3)
Certain equity securities that are not held for trading purposes have been designated as FVOCI.
Loans in our insurance business were designated as FVTPL to address an accounting mismatch with the related liabilities.
Certain deposits were designated as FVTPL to address an accounting mismatch with the related loans, which were reclassified to FVTPL because their cash flows are not solely payments of
principal or interest.
Other
The following table presents other changes resulting from the adoption of IFRS 9.
(Millions of Canadian dollars)
Financial assets:
Investment securities (1)
Investment securities (1)
IFRS 9
IAS 39
As at
November 1, 2017
October 31, 2017
Measurement category
Carrying amount
Previous measurement
category
Carrying amount
Amortized cost
Amortized cost
$
7,220
14,665
Loans and receivables
Held to maturity
$
7,232
14,845
(1)
Prior to the adoption of IFRS 9, certain financial assets were reclassified from available-for-sale to held-to-maturity or loans and receivables. Upon adoption of IFRS 9, these financial assets
were remeasured as if they had always been carried at amortized cost and reclassified to Investment Securities.
Balance sheet presentation
On November 1, 2017, the balance sheet line item under Securities previously titled Available for sale was re-named to ‘Investment’. Investment
securities represent all securities other than those measured at FVTPL, which are presented as Trading. For comparative periods, Investment
securities represent securities previously classified as available-for-sale and held-to-maturity under IAS 39. For the current period, Investment
securities represent securities classified as FVOCI and amortized cost under IFRS 9.
Allowance for credit losses
The following table is a comparison of impairment allowances determined in accordance with IAS 39 and IAS 37 to the corresponding impairment
allowance determined in accordance with IFRS 9 as at November 1, 2017.
(Millions of Canadian dollars)
IAS 39 / IAS 37 as at October 31, 2017
IFRS 9 as at November 1, 2017
Collectively
assessed (1)
Individually
assessed
Transition
Adjustments
Total
Stage 1
Stage 2 Stage 3
Total
Debt securities at fair value through other
comprehensive income (2) (3)
$
Debt securities at amortized cost (4)
Assets purchased under reverse repurchase
agreements and securities borrowed at
amortized cost
Loans at amortized cost
Customer liability under acceptances at
amortized cost
Other assets at amortized cost
Off-balance sheet loan commitments and
financial guarantees
Total allowance for credit losses
– $
–
– $
–
– $
–
25 $
54
3 $
9
22 $
45
– $
–
25
54
–
1,855
–
–
–
304
–
–
–
2,159
–
–
1
590
20
1
1
845
15
–
–
1,184
5
1
–
720
–
–
1
2,749
20
1
91
1,946 $
$
–
304 $
91
2,250 $
104
143
234
130
834 $ 977 $ 1,387 $ 720 $ 3,084
–
(1)
(2)
(3)
(4)
Includes the allowance for loans not yet identified as impaired and collectively-assessed allowances for impaired loans.
The allowance for credit losses on financial assets at FVOCI is presented in Other components of equity.
Previously available-for-sale debt securities under IAS 39.
Previously held-to-maturity securities under IAS 39.
130
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
The table below provides the reconciliations from IAS 39 to IFRS 9 for our Consolidated Balance Sheets, showing separately the impacts of
adopting the IFRS 9 impairment, and classification and measurement, requirements. The related tax impacts are included in Other assets – Other.
Consolidated Balance Sheets
(Millions of Canadian Dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable allowance
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
Premises and equipment
Goodwill
Other intangibles
Other assets
Total Assets
Liabilities
Deposits
Personal
Business and government
Bank
Segregated fund net liabilities
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Derivatives
Insurance claims and policy benefit
Other liabilities
Subordinated debentures
Total liabilities
Equity attributable to shareholders
Preferred shares
Common shares
Retained earnings
Other components of equity
Non-controlling interests
Total equity
Total liabilities and equity
As at
October 31,
2017
IAS 39
Impact of
classification
and measurement
Impact of
impairment
Total
Impact
As at
November 1,
2017
IFRS 9
$
28,407
32,662
$
$
–
–
$
–
–
$
–
–
28,407
32,662
127,657
90,722
218,379
220,977
385,170
159,606
544,776
(2,159)
1,216
16,459
95,023
2,670
10,977
4,507
38,959
168,595
$ 1,212,853
$
260,213
505,665
23,757
789,635
1,216
16,459
30,008
143,084
92,127
9,676
46,955
338,309
9,265
1,138,425
6,413
17,703
45,359
4,354
73,829
599
74,428
$ 1,212,853
$
$
$
2,952
4,615
7,567
–
(8)
(7,535)
(7,543)
–
–
–
–
–
–
–
(1)
(1)
23
–
(29)
–
(29)
–
–
–
–
–
106
–
106
–
77
–
–
44
(98)
(54)
–
(54)
23
$
$
$
–
(54)
(54)
(1)
–
8
8
(590)
–
(20)
–
–
–
–
217
197
(440)
–
–
–
–
–
–
–
–
–
–
143
143
–
143
–
–
(602)
19
(583)
–
(583)
(440)
$
$
$
2,952
4,561
7,513
130,609
95,283
225,892
(1)
220,976
(8)
(7,527)
(7,535)
(590)
385,162
152,079
537,241
(2,749)
–
1,216
(20)
–
–
–
–
216
196
(417)
16,439
95,023
2,670
10,977
4,507
39,175
168,791
$ 1,212,436
$
–
(29)
–
(29)
–
–
–
–
–
106
143
249
–
220
260,213
505,636
23,757
789,606
1,216
16,459
30,008
143,084
92,127
9,782
47,098
338,558
9,265
1,138,645
–
–
(558)
(79)
(637)
–
(637)
(417)
6,413
17,703
44,801
4,275
73,192
599
73,791
$ 1,212,436
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
131
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Policies under both IFRS 9 and IAS 39
Determination of fair value (IFRS 9 and IAS 39)
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 the adequacy of governance structures and control processes for the valuation of these instruments.
We have established policies, procedures and controls for valuation methodologies and techniques to ensure that 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. Quoted prices for identical instruments from pricing services or brokers are generally not adjusted unless there are issues such
as stale prices. If multiple quotes for identical instruments are received, fair value is based on an average of the prices received or the quote from
the most reliable vendor, after the outlier prices that fall outside of the pricing range are removed. 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 the use of models. 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 the 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 the
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
actual counterparty collateral discount curve and standard overnight index swap (OIS) discounting 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 a 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, previously estimated using management judgment. Valuation adjustments 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 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 value of
expected derivative related assets and liabilities at the time of default, estimated through modelling using underlying risk factors. Probability of
default is implied from the market prices for credit protection and the credit ratings of the counterparty. When market data is unavailable, it is
estimated by incorporating assumptions and adjustments that market participants would use for 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.
FVA are also calculated to incorporate the 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-market price to either the bid or
offer price.
Some valuation models require parameter calibration from such factors as market observable 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
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Consolidated Financial Statements
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.
Derecognition of financial assets (IFRS 9 and IAS 39)
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 risks 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 (IFRS 9 and IAS 39)
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.
Interest (IFRS 9 and IAS 39)
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest-bearing financial
instruments. 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.
Dividend income (IFRS 9 and IAS 39)
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.
Transaction costs (IFRS 9 and IAS 39)
Transaction costs are expensed as incurred for financial instruments classified or designated as 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 financial
assets measured at FVOCI (AFS financial assets under IAS 39) 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 (IFRS 9 and IAS 39)
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 (IFRS 9 and IAS 39)
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 classified or designated as 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
FVTPL are included in Trading revenue or Other in Non-interest income.
Derivatives (IFRS 9 and IAS 39)
Derivatives are primarily used in 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 and foreign exchange swaps, options, futures and forward rate
agreements, equity swaps and credit derivatives. All derivative instruments are recorded on our Consolidated Balance Sheets at fair value.
When derivatives are used in 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
133
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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 (IFRS 9 and IAS 39)
We have elected to continue to apply the hedge accounting principles under IAS 39 instead of those under IFRS 9.
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.
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 expected 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.
Guarantees (IFRS 9 and IAS 39)
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 FVOCI instruments and amortized cost instruments under IFRS 9 (previously classified as AFS securities under IAS 39 and 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 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.
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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 contracts consist of commissions, premium taxes, certain underwriting costs and other costs that vary
with the acquisition of new contracts. 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 obligation, 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 pension 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 Other liabilities – 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 Other assets – 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 benefit 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 pension plans are expensed when employees have rendered services in exchange for such
contributions. Defined contribution pension expense is included in Non-interest expense – Human resources.
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 share-based 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
expected obligations recognized in equity 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. Compensation expense is recognized in
the year the awards are earned by plan participants based on the vesting schedule of the relevant plans, net of estimated forfeitures.
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
135
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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 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 cash-generating unit (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 CGUs, 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
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 related 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.
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Consolidated Financial Statements
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.
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
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, uncertain tax positions, and asset retirement obligations 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, tax positions that are under audit or appeal by relevant taxation
authorities, and expenses to be incurred to dispose of capital assets. 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. It may not be possible
to predict the resolution of these matters or the timing of their ultimate resolution. Should actual results differ from our expectations, we may
incur expenses in excess of the provisions recognized. Where appropriate, we apply judgment in limiting the extent of our provisions related
disclosures as not to prejudice our positions in matters of dispute.
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.
When service fees and other costs are incurred in relation to commissions and fees earned and we have significant risks and rewards
associated with delivering the service, we record these costs on a gross basis in either Non-interest expense-Other or Non-interest expense-
Human resources, as applicable.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
137
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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. This includes certain convertible shares 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, using the treasury stock method, 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.
Future changes in accounting policy and disclosure
The following standards have been issued, but are not yet effective for us.
IFRS 15 Revenue from Contracts with Customers (IFRS 15)
In May 2014, the IASB issued IFRS 15, which establishes the 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.
We will adopt IFRS 15 by adjusting our Consolidated Financial Statements at November 1, 2018, the date of initial application, with no
restatement of comparative periods. The adoption of IFRS 15 is not expected to have a material impact on our Consolidated Financial
Statements.
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. We are
currently assessing the impact of adopting this standard on our Consolidated Financial Statements.
IFRS 17 Insurance Contracts (IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive global insurance standard which provides guidance on the recognition,
measurement, presentation and disclosures of insurance contracts. IFRS 17 requires entities to measure insurance contract liabilities at their
current fulfillment values using one of three approaches. This new standard will be effective for us on November 1, 2021 and will be applied
retrospectively with restatement of comparatives unless impracticable. In November 2018, the IASB tentatively decided to defer the IFRS 17
effective date by one year. We will continue to monitor the IASB’s developments. We are currently assessing the impact of adopting this standard
on our Consolidated Financial Statements.
Conceptual Framework for Financial Reporting
In March 2018, the IASB issued its revised Conceptual Framework for Financial Reporting (Conceptual Framework). This replaces the previous
version of the Conceptual Framework issued in 2010. The revised Conceptual Framework will be effective on November 1, 2020. We are currently
assessing the impact of adoption on our Consolidated Financial Statements.
138
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Note 3 Fair value of financial instruments
Carrying value and fair value of financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instruments. Embedded derivatives
are presented on a combined basis with the host contracts. For measurement purposes, they are carried at fair value when conditions requiring
separation are met.
IFRS 9
As at October 31, 2018
Carrying value and fair value
Financial
instruments
classified as
FVTPL
Financial
instruments
designated as
FVTPL
Financial
instruments
classified as
FVOCI
Financial
instruments
designated as
FVOCI
Carrying value
Financial
instruments
measured at
amortized cost
Fair value
Financial
instruments
measured at
amortized cost
Total
carrying
amount
Total
fair value
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable
allowance (1)
Assets purchased under reverse
repurchase agreements and securities
borrowed
Loans, net of applicable allowance
Retail
Wholesale
Other
Derivatives
Other assets (2)
Financial liabilities
Deposits
$
– $
20,274 $
– $
121,031
–
121,031
219,108
69
7,129
7,198
94,039
1,373
7,227
–
7,227
–
190
1,540
1,730
–
–
–
48,093
48,093
–
94
458
552
–
–
Personal
Business and government (3)
Bank (4)
$
150 $
(11)
–
139
14,602
103,446
7,072
125,120
–
–
406
406
–
–
–
–
–
–
$
16,197
$
16,197 $
36,471 $
36,471
–
46,109
46,109
–
128,258
128,258
45,367
45,367
94,608
222,866
93,866
222,124
75,494
75,490
294,602
294,598
397,102
170,236
567,338
–
46,205
255,402
430,936
25,449
711,787
$
394,051
168,087
562,138
397,455
179,363
576,818
394,404
177,214
571,618
–
46,205
94,039
47,578
94,039
47,578
$
255,115 $
431,158
25,462
711,735
270,154 $
534,371
32,521
837,046
269,867
534,593
32,534
836,994
Other
Obligations related to securities sold
short
Obligations related to assets sold
under repurchase agreements and
securities loaned
Derivatives
Other liabilities (5)
Subordinated debentures
32,247
–
–
–
32,247
32,247
–
90,238
(1,434)
–
201,839
–
18
–
4,975
–
54,917
9,131
4,976
–
54,880
9,319
206,814
90,238
53,501
9,131
206,815
90,238
53,464
9,319
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
139
Note 3 Fair value of financial instruments (continued)
IAS 39
As at October 31, 2017
Carrying value and fair value
Carrying value
Fair value
Financial
instruments
classified as
FVTPL
Financial
instruments
designated as
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
$
– $
20,752 $
–
$
11,910
$
11,910 $
32,662 $
32,662
116,720
–
116,720
10,937
–
10,937
–
75,877
75,877
–
–
–
–
–
–
$
–
138,979
69
1,837
1,906
95,023
–
$
184 $
(9)
–
175
30,008
–
92,127
(1,132)
–
–
2,329
2,329
–
1,213
13,794
94,518
2,072
110,384
–
133,947
–
–
–
–
14,845
14,845
81,998
383,857
154,525
538,382
–
44,598
246,235
411,156
21,685
679,076
–
9,137
–
49,440
9,265
–
14,771
14,771
127,657
90,722
218,379
127,657
90,648
218,305
81,999
220,977
220,978
380,782
153,967
534,749
–
44,598
383,926
158,691
542,617
95,023
45,811
380,851
158,133
538,984
95,023
45,811
$
246,147 $
412,495
21,708
680,350
260,213 $
505,665
23,757
789,635
260,125
507,004
23,780
790,909
–
30,008
30,008
9,138
–
49,426
9,559
143,084
92,127
48,308
9,265
143,085
92,127
48,294
9,559
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable allowance (1)
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans, net of applicable allowance
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
(1)
(2)
(3)
(4)
(5)
Investment securities include securities measured at FVOCI and amortized cost under IFRS 9 and AFS and held-to-maturity securities under IAS 39.
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 banks and central banks.
Includes Acceptances and financial instruments recognized in Other liabilities.
Financial assets designated as fair value through profit or loss
For our financial assets designated as 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. For the years ended October 31, 2018 and October 31, 2017, there were no significant changes in the fair value of the loans and
receivables designated as FVTPL attributable to changes in credit risk. As at October 31, 2018 and October 31, 2017, the extent to which credit
derivatives or similar instruments mitigate the maximum exposure to credit risk was nominal.
140
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Financial liabilities designated as fair value through profit or loss
For our financial liabilities designated as 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.
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (3)
Bank (4)
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (3)
Bank (4)
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
As at or for the year ended October 31, 2018 (1)
Contractual
maturity
amount
Carrying
value
$ 14,726 $ 14,602
103,446
7,072
125,120
103,489
7,067
125,282
201,924
18
201,839
18
$ 327,224 $ 326,977
Difference
between
carrying value
and contractual
maturity amount
Changes in fair value attributable to
changes in credit risk included in OCI for
positions still held
During the period
Cumulative (2)
$
$
(124)
(43)
5
(162)
(85)
–
(247)
$
$
(41)
(134)
–
(175)
–
–
(175)
$
$
19
285
–
304
–
–
304
As at or for the year ended October 31, 2017 (1)
Contractual
maturity
amount
Carrying
value
$ 13,633 $ 13,794
94,518
2,072
110,384
93,532
2,072
109,237
133,967
–
133,947
–
$ 243,204 $ 244,331
Difference
between
carrying value
and contractual
maturity amount
Changes in fair value attributable to
changes in credit risk included in OCI for
positions still held
During the period
Cumulative (2)
$
$
161
986
–
1,147
(20)
–
1,127
$
$
34
398
–
432
–
–
432
$
$
59
423
–
482
–
–
482
(1)
(2)
(3)
(4)
There are no changes in fair value attributable to changes in credit risk included in net income for positions still held.
The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2018, $7 million of fair value losses previously included in OCI relate
to financial liabilities derecognized during the year (October 31, 2017 – $16 million fair value gains).
Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
Bank term deposits refer to amounts from regulated banks and central banks.
Net gains (losses) from financial instruments classified and designated as fair value through profit or loss
Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial assets and
liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in Non-interest income.
(Millions of Canadian dollars)
Net gains (losses) (1)
Classified as fair value through profit or loss (2)
Designated as fair value through profit or loss (3)
By product line (1)
Interest rate and credit
Equities
Foreign exchange and commodities
IFRS 9
IAS 39
For the year ended
October 31
2018
October 31
2017
$
$
$
$
(265) $
1,828
1,563
1,296
(164)
431
$
$
1,112
(68)
1,044
662
(54)
436
1,563
$
1,044
(1)
(2)
(3)
Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Net losses
from financial instruments designated as FVTPL of $400 million (October 31, 2017 – losses of $148 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, 2018, $1,832 million of net fair value gains on financial liabilities designated as FVTPL, other than those attributable to changes in our own credit risk, were
included in Non-interest income (October 31, 2017 – losses of $645 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
141
Note 3 Fair value of financial instruments (continued)
Net interest income from financial instruments
Interest and dividend income arising from financial assets and financial liabilities and the associated costs of funding are reported in Net interest
income.
(Millions of Canadian dollars)
Interest income and dividend income (1), (2)
Financial instruments measured at fair value through profit or loss
Financial instruments measured at fair value through other comprehensive income
Financial instruments measured at amortized cost
Other categories of financial instruments (3)
Interest expense (1)
Financial instruments measured at fair value through profit or loss
Financial instruments measured at amortized cost
Other categories of financial instruments (3)
Net interest income
IFRS 9
IAS 39
For the year ended
October 31
2018
October 31
2017
$
$
7,811
802
24,408
33,021
6,964
7,866
14,830
$
6,043
20,861
26,904
$
3,934
5,830
9,764
$ 18,191
$ 17,140
(1)
(2)
(3)
Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of Income: Interest
income of $479 million (October 31, 2017 – $459 million), and Interest expense of $4 million (October 31, 2017 – $5 million).
Includes dividend income for the year ended October 31, 2018 of $1,561 million (October 31, 2017 – $1,357 million), which is presented in Interest and dividend income in the Consolidated
Statements of Income.
Includes assets classified as available-for-sale, loans and receivables, and held-to-maturity, and liabilities classified as amortized cost.
Fee income arising from financial instruments
For the year ended October 31, 2018, we earned $5,426 million in fees from banking services (October 31, 2017 – $5,139 million). For the year
ended October 31, 2018, we also earned $11,944 million in fees from investment management, trust, custodial, underwriting, brokerage and
other similar fiduciary services to retail and institutional clients (October 31, 2017 – $11,191 million). These fees are included in Non-interest
income.
142
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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)
Level 1
Level 2
Level 3
Fair value measurements using
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
IFRS 9
October 31, 2018
As at
IAS 39
October 31, 2017
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
Non-CDO securities (3)
Corporate debt and other debt
Equities
Investment (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
$
–
$ 20,274
$
–
$ 20,274
$
$
20,274
$
– $ 20,752
$
– $ 20,752
$
$
20,752
8,342
–
2,068
1,151
–
–
2
30,847
42,410
–
–
–
–
–
–
–
–
42
–
42
–
–
6,231
11,350
31,030
9,018
1,001
1,023
22,303
2,547
84,503
238
1,554
18,136
1,470
2,174
6,239
863
17,227
103
24
48,028
–
–
66
–
–
110
21
1,148
14,573
11,350
33,164
10,169
1,001
1,133
22,326
34,542
1,345
128,258
–
–
–
–
–
–
–
192
237
–
429
238
1,554
18,136
1,470
2,174
6,239
863
17,419
382
24
48,499
14,573
11,350
33,164
10,169
1,001
1,133
22,326
34,542
128,258
238
1,554
18,136
1,470
2,174
6,239
863
17,419
382
24
48,499
9,374
–
1,226
934
–
–
52
29,674
41,260
477
–
8
479
–
–
–
–
339
–
1,303
7,929
11,422
29,634
10,420
1,298
732
21,655
2,853
85,943
1,124
2,503
28,999
8,673
934
3,623
2,671
23,662
38
24
72,251
–
–
–
–
–
–
29
425
454
–
–
508
–
–
–
203
797
711
4
2,223
17,303
11,422
30,860
11,354
1,298
732
21,736
32,952
127,657
1,601
2,503
29,515
9,152
934
3,623
2,874
24,459
1,088
28
75,777
219,108
8,929
–
551
219,108
9,480
219,108
9,480
–
–
138,979
4,056
–
179
138,979
4,235
1
–
–
5,868
–
5,869
33,862
43,253
38
11,654
(631)
88,176
222
53
–
296
6
577
34,085
43,306
38
17,818
(625)
94,622
1,020
288
65
1,373
34,085
43,306
38
17,818
(625)
94,622
(583)
94,039
1,373
(583)
–
–
–
3,510
–
3,510
106,145
42,871
157
10,141
(722)
158,592
380
63
–
307
(3)
747
106,525
42,934
157
13,958
(725)
162,849
966
247
–
1,213
(67,826)
17,303
11,422
30,860
11,354
1,298
732
21,736
32,952
127,657
1,601
2,503
29,515
9,152
934
3,623
2,874
24,459
1,088
28
75,777
138,979
4,235
106,525
42,934
157
13,958
(725)
162,849
(67,826)
95,023
1,213
$ 49,341
$ 469,306
$ 2,967
$521,614
$
(583) $ 521,031
$ 47,039
$ 480,820
$ 3,603
$ 531,462
$
(67,826) $ 463,636
$
–
–
–
$ 14,362
103,440
7,072
$
390
(5)
–
$ 14,752
103,435
7,072
$
$
$
14,752
103,435
7,072
– $ 13,513
94,509
–
2,072
–
$
465
–
–
$ 13,978
94,509
2,072
$
$
13,978
94,509
2,072
Obligations related to securities sold
short
17,732
14,515
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
–
–
726
32
–
380
5
1,143
30,346
41,868
94
18,479
34
90,821
–
201,839
–
–
–
4,369
–
4,369
29,620
41,836
94
13,730
29
85,309
32,247
32,247
12,407
17,601
201,839
201,839
–
133,947
30,008
30,008
100,765
40,497
258
13,461
55
–
–
–
3,417
–
3,417
30,346
41,868
94
18,479
34
90,821
(583)
90,238
(1,416)
(583)
155,036
1,378
159,831
(67,704)
133,947
101,600
40,539
258
17,366
68
159,831
(67,704)
92,127
(1,132)
–
–
835
42
–
488
13
133,947
101,600
40,539
258
17,366
68
170
(1,654)
68
(1,416)
130
(1,286)
24
(1,132)
$ 22,271
$ 424,883
$ 1,596
$448,750
$
(583) $ 448,167
$ 15,954
$ 415,392
$ 1,867
$ 433,213
$ (67,704)
$ 365,509
(1)
(2)
(3)
(4)
As at October 31, 2018, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $16,776 million and $nil (October 31, 2017 –
$17,977 million and $nil), respectively, and in all fair value levels of Investment securities were $4,713 million and $1,348 million (October 31, 2017 – $13,352 million and $727 million),
respectively.
OECD stands for Organisation for Economic Co-operation and Development.
CDO stands for collateralized debt obligations.
Amounts as of October 31, 2017 exclude $100 million of Investment securities that are carried at cost.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
143
Note 3 Fair value of financial instruments (continued)
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
The majority of our Interest-bearing deposits with banks are designated as 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. Inputs for valuation of ABS
and MBS 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 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 consist of listed and unlisted common shares, private equities, mutual funds and hedge funds with certain redemption restrictions and
are included in equities and obligations for securities sold short. 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 contracts, foreign exchange contracts and credit
derivatives. 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.
Deposits
A majority of our deposits are measured at amortized cost but certain deposits are designated as 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. The fair values of
144
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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, dividend and correlation rates, 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, 2018 (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
Significant
unobservable
inputs (1)
Low
High
Weighted
average / Inputs
distribution
Non-derivative financial instruments
Auction rate securities
U.S. state, municipal and agencies debt
Asset-backed securities
Corporate debt
Government debt and municipal
bonds
Private equities, hedge fund
investments and related
equity derivatives
Corporate debt and other debt
Loans
U.S. state, municipal and agencies debt
Corporate debt and other debt
Equities
Derivative related liabilities
Loan substitute securities
45
110
28
551
21
185
1,385
–
Discounted cash flows
Price-based
Discounted cash flows
Price-based
Discounted cash flows
Market comparable
Price-based
Discounted cash flows
24
Derivative related assets
Derivative related liabilities
260
Discounted cash flows
Option pricing model
740
Derivative financial instruments (6)
Interest rate derivatives and
interest-rate-linked structured
notes (7)
Equity derivatives and equity-
linked structured notes (7)
Other (8)
Discount margins
Default rates
Prepayment rates
Recovery rates
Prices
Credit spread
Credit enhancement
Prices
Yields
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (4)
Discount rate
Net asset values / prices (5)
Interest rates
CPI swap rates
IR-IR correlations
FX-IR correlations
FX-FX correlations
1.32%
3.00%
4.00%
96.50%
$ 72.00
0.90%
11.80%
$ 65.50
3.50%
6.16X
9.10X
0.90X
10.00%
10.52%
n.a.
2.30%
1.90%
19.00%
29.00%
68.00%
$
$
2.70%
3.00%
5.50%
97.50%
$123.06
11.30%
15.80%
$100.00
7.60%
17.80X
26.41X
6.63X
40.00%
10.52%
n.a.
3.00%
2.10%
67.00%
56.00%
68.00%
1.95%
3.00%
4.56%
96.59%
103.84
4.50%
13.10%
66,41
5.75%
14.46X
18.26X
4.86X
18.27%
10.52%
n.a.
Even
Even
Even
Even
Even
Lower
Middle
Middle
Upper
Discounted cash flows
Option pricing model
Dividend yields
Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.30%
(55.00)%
(71.40)%
8.00%
8.40%
100.00%
30.50%
164.00%
Derivative related assets
Deposits
Derivative related liabilities
Asset-backed securities
Derivative related assets
Other assets
Deposits
Derivative related liabilities
Other liabilities
281
–
36
65
390
328
(5)
51
68
Total
$ 2,967
$ 1,596
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
145
Note 3 Fair value of financial instruments (continued)
As at October 31, 2017 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values (2) (3)
Weighted
average / Inputs
distribution
Significant
unobservable
inputs (1)
Discount margins
Default rates
Prepayment rates
Recovery rates
Prices
Credit spread
Credit enhancement
Prices
Yields
Low
High
1.13%
3.00%
4.00%
40.00%
2.95%
3.40%
10.00%
97.50%
$
$
20.00 $ 119.30 $
1.11%
12.82%
11.59%
17.10%
63.43 $
0.17%
93.29 $
13.04%
Products
Reporting line in the fair value
hierarchy table
Assets
Liabilities
Valuation
techniques
Discounted cash flows
Price-based
Discounted cash flows
Price-based
Discounted cash flows
Market comparable
Price-based
97 Discounted cash flows
Discounted cash flows
Option pricing model
Non-derivative financial instruments
Auction rate securities
U.S. state, municipal and agencies debt
Asset-backed securities
Corporate debt
Government debt and municipal
bonds
Private equities, hedge fund
investments and related
equity derivatives
Corporate debt and other debt
Loans
U.S. state, municipal and agencies debt
Corporate debt and other debt
Equities
Derivative related liabilities
Loan substitute securities
Derivative financial instruments (6)
Interest rate derivatives and
interest-rate-linked structured
notes (7)
Equity derivatives and equity-
linked structured notes (7)
Other (8)
Total
Derivative related assets
Deposits
Derivative related liabilities
Derivative related assets
Deposits
Derivative related liabilities
Asset-backed securities
Derivative related assets
Deposits
Derivative related liabilities
Other liabilities
508
197
33
179
–
793
1,136
4
415
302
6
30
843
465
369
–
69
24
$ 3,603 $ 1,867
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (4)
Discount rate
Net asset values / prices (5)
Interest rates
CPI swap rates
IR-IR correlations
FX-IR correlations
FX-FX correlations
9.30X
4.80X
1.50X
15.00%
11.00%
n.a.
2.23%
1.72%
19.00%
29.00%
68.00%
16.60X
27.40X
9.51X
40.00%
11.00%
n.a.
2.56%
1.90%
67.00%
56.00%
68.00%
Discounted cash flows
Dividend yields
Option pricing model Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.02%
15.00%
(70.00)%
10.49%
97.34%
39.10%
3.00% 110.00%
1.71%
3.00%
4.29%
95.95%
113.77
6.35%
14.16%
64.18
3.22%
13.32X
19.42X
5.75X
25.24%
11.00%
n.a.
Even
Even
Even
Even
Even
Lower
Middle
Middle
Lower
(2)
(1)
(3)
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);
(v) Consumer Price Index (CPI); (vi) Interest Rate (IR); (vii) Foreign Exchange (FX); and (viii) Equity (EQ).
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.
Fair value of securities with liquidity discount inputs totalled $207 million (October 31, 2017 – $54 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 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.
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, contingent considerations, bank-owned life insurance and retractable
shares.
n.a. not applicable
(4)
(5)
(7)
(8)
(6)
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.
Funding spread
Funding spreads are credit spreads specific to 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.
146
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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 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 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.
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 the instrument.
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, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates, may not be
independent of each other. For example, the discount margin 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
147
Note 3 Fair value of financial instruments (continued)
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
U.S. state, municipal and agencies debt
Asset-backed securities
Non-CDO securities
Corporate debt and other debt
Equities
Investment
U.S. state, municipal and agencies debt
Asset-backed securities
Non-CDO securities
Corporate debt and other debt
Equities
Loan substitute securities
Loans
Other
Net derivative balances (4)
Interest rate contracts
Foreign exchange contracts
Other contracts
Valuation adjustments
Other assets
Liabilities
Deposits
Personal
Business and government
Other
IFRS 9
For the year ended October 31, 2018
Total
realized/
unrealized
gains
included in
earnings
Fair value
at beginning
of period (1)
Total
unrealized
gains
included
in OCI (2)
Purchases
of assets/
issuances
of liabilities
Sales of
assets/
settlements
of liabilities
and other (3)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
at end of
period
Changes in
unrealized gains
(losses) included
in earnings for
assets and
liabilities for
positions still held
$
508 $
16 $
(3) $
– $
(455) $
– $
– $
66
$
(1)
196
30
923
1,657
–
–
29
217
3
249
477
(455)
21
(181)
(16)
–
28
(2)
(160)
(118)
–
–
(30)
–
–
(30)
(3)
21
(10)
34
–
(5)
2
–
37
36
–
–
6
20
–
26
(3)
–
(4)
(2)
–
–
–
–
395
395
–
–
125
–
–
125
450
67
11
(88)
–
71
(116)
(2)
(170)
(743)
–
–
(144)
–
(3)
(147)
(291)
73
2
(42)
17
(1)
–
–
125
125
–
–
206
–
–
206
16
7
5
(36)
–
–
–
(5)
(2)
(7)
–
–
–
–
–
–
(95)
(217)
(4)
231
–
–
110
21
1,148
1,345
–
–
192
237
–
429
551
(504)
21
(84)
1
65
$
1,752 $
(111) $
53 $
1,031 $
(1,132) $
323 $
(92) $ 1,824
1
(1)
(24)
(25)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
14
(3)
(5)
79
–
(5)
55
(8)
–
–
4
(4)
$
$
$
$
(465) $
–
(36) $
–
(4) $
–
(301) $
5
44 $ (431) $
–
–
10
–
–
–
803 $ (390)
5
–
–
–
–
(68)
Obligations related to securities sold short
Other liabilities
–
(24)
–
–
–
(1)
–
(53)
$
(489) $
(36) $
(5) $
(349) $
54 $ (431) $
803 $ (453)
148
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
(Millions of Canadian dollars)
Assets
Securities
Trading
U.S. state, municipal and agencies debt
Asset-backed securities
Non-CDO securities
Corporate debt and other debt
Equities
Investment
U.S. state, municipal and agencies debt
Asset-backed securities
Non-CDO securities
Corporate debt and other debt
Equities
Loan substitute securities
Loans
Other
Net derivative balances (4)
Interest rate contracts
Foreign exchange contracts
Other contracts
Valuation adjustments
Other assets
Liabilities
Deposits
Personal
Business and government
Other
IAS 39
For the year ended October 31, 2017
Total
realized/
unrealized
gains (losses)
included
in earnings
Fair value
at beginning
of period
Total
unrealized
gains (losses)
included in
OCI (2)
Purchases
of assets/
issuances
of liabilities
Sales of
assets/
settlements
of liabilities
and other (3)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
at end of
period
Changes in
unrealized gains
(losses) included
in earnings for
assets and
liabilities for
positions still held
$
1 $
– $
– $
– $
(1) $
– $
– $
– $
4
62
376
443
747
217
956
756
–
2,676
329
(448)
(15)
(122)
(10)
–
–
(4)
(143)
(147)
(5)
–
(1)
62
–
56
(5)
49
49
80
–
–
–
1
(18)
(17)
(19)
7
(34)
45
–
(1)
(5)
(20)
2
2
–
–
7
52
275
334
–
–
119
45
4
168
405
33
(3)
(76)
–
–
(10)
(68)
(81)
(160)
(215)
(21)
(55)
(197)
–
(488)
(512)
(2)
(7)
2
(6)
–
–
20
17
37
–
–
–
–
–
–
–
4
1
(58)
–
–
(1)
(34)
(1)
(36)
–
–
(188)
–
–
(188)
(33)
(71)
(6)
(9)
–
–
–
29
425
454
508
203
797
711
4
2,223
179
(455)
21
(181)
(16)
–
$
2,853 $
82 $
(39) $
861 $
(1,173) $
(16) $ (343) $ 2,225 $
–
–
(3)
(119)
(122)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
–
74
17
52
–
–
21
5
–
–
–
5
Obligations related to securities sold short
Other liabilities
(1)
(88)
–
(4)
–
2
–
–
$
(425) $
(2)
(20) $
–
14 $
–
(387) $
–
85 $ (277) $ 545 $ (465) $
–
1
66
–
–
–
2
–
–
–
–
(24)
$
(516) $
(24) $
16 $
(387) $
152 $ (277) $ 547 $ (489) $
(1)
(2)
(3)
(4)
n.a.
These amounts reflect certain reclassifications made upon adoption of IFRS 9. Refer to Note 2 for further details.
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
gains on Investment securities recognized in OCI were $33 million for the year ended October 31, 2018 (October 31, 2017 – gains of $84 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, 2018 included derivative assets of $577 million (October 31, 2017 – $747 million) and derivative liabilities of $1,143 million (October 31, 2017 – $1,378
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 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, 2018, transfers out of Level 1 to Level 2 included $529 million of Trading U.S. state, municipal and
agencies debt and $809 million of Obligations related to securities sold short. During the year ended October 31, 2017, transfers out of Level 1
to Level 2 included $1,143 million of Trading U.S. state, municipal and agencies debt and $1,472 million of Obligations related to securities sold
short.
During the year ended October 31, 2018, transfers out of Level 2 to Level 1 included $65 million of Trading U.S. state, municipal and
agencies debt and $96 million of Obligations related to securities sold short. During the year ended October 31, 2017, transfers out of Level 2 to
Level 1 included $339 million of Trading U.S. state, municipal and agencies debt and $80 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.
During the year ended October 31, 2018, significant transfers out of Level 2 to Level 3 included $125 million of Trading Equities due to
unobservable inputs to their fair values, $206 million of Corporate debt and other debt due to changes in the market observability of inputs, and
$431 million of Personal deposits due to changes in the significance of unobservable inputs to their fair values. During the year ended
October 31, 2017, significant transfers out of Level 2 to Level 3 included $277 million of Personal deposits. In addition, during the year ended
October 31, 2017, significant transfers out of Level 2 to Level 3 included $11 million of OTC equity options in Other contracts comprised of
$94 million of derivative related assets and $105 million of derivative related liabilities.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
149
Note 3 Fair value of financial instruments (continued)
During the year ended October 31, 2018, significant transfers out of Level 3 to Level 2 included $217 million of interest rate swaps in
Interest rate contracts comprised of $244 million of derivative related assets and $27 million of derivative related liabilities due to changes in
the market observability of inputs, and $231 million of OTC equity options in Other contracts comprised of $703 million of derivative related
assets and $934 million of derivative related liabilities due to changes in the market observability of inputs. In addition, during the year ended
October 31, 2018, significant transfers out of Level 3 to Level 2 included $803 million of Personal deposits due to changes in the significance of
unobservable inputs to their fair values. During the year ended October 31, 2017, significant transfers out of Level 3 to Level 2 included $188
million of AFS Corporate debt and other debt, and $545 million of Personal deposits. In addition, during the year ended October 31, 2017,
significant transfers out of Level 3 to Level 2 included $52 million of OTC equity options in Other contracts comprised of $321 million of
derivative related assets and $269 million of derivative related liabilities.
Positive and negative fair value movements 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 factors cause 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
U.S. state, municipal and agencies debt
Asset-backed securities
Corporate debt and other debt
Equities
Investment
U.S. state, municipal and agencies debt
Asset-backed securities
Corporate debt and other debt
Equities
Loan substitute securities
Loans
Derivatives
Other assets
Deposits
Derivatives
Other
Other liabilities
IFRS 9
IAS 39
As at
October 31, 2018
October 31, 2017
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
$
66 $
110
21
1,148
–
–
192
237
–
551
577
65
$
$
2,967 $
(385) $
(1,143)
(68)
$
(1,596) $
– $
7
–
12
–
–
19
24
–
5
20
–
87 $
12 $
47
–
59 $
(1) $
(10)
–
(12)
–
–
(16)
(26)
–
(7)
(18)
–
– $
–
29
425
508
203
797
711
4
179
747
–
(90) $
(11) $
(54)
3,603 $
(465) $
(1,378)
–
(24)
(65) $
(1,867) $
– $
–
–
–
8
15
6
40
2
2
34
–
107 $
11 $
37
–
48 $
–
–
–
–
(20)
(21)
(6)
(24)
–
(3)
(30)
–
(104)
(11)
(48)
–
(59)
Sensitivity results
As at October 31, 2018, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions would be an
increase of $87 million and a decrease of $90 million in fair value, of which $24 million and $26 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 $59 million and
an increase of $65 million in fair value.
150
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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, municipal bonds and loans
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 are received, adjusting input parameters such as
credit spreads 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 15% and 28% and increasing
the discount margin between 30% and 45%, 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 representing 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.
Fair value for financial instruments that are carried at amortized cost and classified using the fair value hierarchy
(Millions of Canadian dollars)
Interest-bearing deposits with banks
Amortized cost 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
IFRS 9
As at October 31, 2018
Fair value may not approximate carrying value
Fair value measurements using
Level 1
$
–
470
$
–
–
–
–
–
Level 2
–
44,897
18,391
323,114
154,781
477,895
480
$
Level 3
–
–
–
5,090
4,417
9,507
166
$
Total
–
45,367
Total
fair value
16,197
45,367
$
18,391
75,490
328,204
159,198
487,402
646
394,051
168,087
562,138
46,205
Fair value always
approximates
carrying value (1)
$
16,197
–
57,099
65,847
8,889
74,736
45,559
$ 193,591
$ 470
$ 541,663
$ 9,673
$ 551,806
$ 745,397
$
$ 184,887
270,349
15,218
470,454
4,264
45,346
–
$ 520,064
$
–
–
–
–
–
–
–
–
$
$ 69,606
160,010
10,235
622
799
9
$ 70,228
160,809
10,244
$ 255,115
431,158
25,462
239,851
1,430
241,281
711,735
712
406
9,260
–
9,128
59
712
9,534
9,319
4,976
54,880
9,319
$ 250,229
$ 10,617
$ 260,846
$ 780,910
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
151
Note 3 Fair value of financial instruments (continued)
(Millions of Canadian dollars)
Interest-bearing deposits with banks
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
IAS 39
As at October 31, 2017
Fair value may not approximate carrying value
Fair value measurements using
Fair value always
approximates
carrying value (1)
Level 1
$
$
$
$
$
$
11,880
–
58,605
65,991
8,930
74,921
43,963
189,369
182,440
261,898
16,615
460,953
7,774
43,733
–
$
512,460
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
Level 2
30
14,754
23,394
309,855
139,128
448,983
433
$
Level 3
–
17
–
4,936
5,909
10,845
202
$
Total
30
14,771
Total
fair value
11,910
14,771
$
23,394
81,999
314,791
145,037
459,828
635
380,782
153,967
534,749
44,598
$ 487,594
$ 11,064
$ 498,658
$ 688,027
$
$ 62,981
149,618
5,079
726
979
14
$ 63,707
150,597
5,093
$ 246,147
412,495
21,708
217,678
1,719
219,397
680,350
1,364
311
9,504
–
5,382
55
1,364
5,693
9,559
9,138
49,426
9,559
$ 228,857
$
7,156
$ 236,013
$ 748,473
(1)
(2)
Certain financial instruments have not been assigned to a level as the carrying amount always approximates their fair values due to their 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 – Investment, net of applicable allowance 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.
Amortized cost securities (Held to maturity under IAS 39)
Fair values of government bonds, corporate bonds, and ABS 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. For ABS, where
market prices are not available, the fair value is determined using the discounted cash flow method. The inputs to the valuation model generally
include market interest rates, spreads and yields derived from comparable securities, prepayment, and loss given default.
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, write-offs and monthly
payment rates as inputs. The carrying values of short-term and variable rate loans generally approximate their fair values.
152
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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 demand, notice,
and short-term term 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 market prices, dealer quotes or vendor prices when available. Where prices cannot be
observed, fair value is determined using the discounted cash flow method, with applicable inputs such as market interest rates and credit
spreads.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
153
Note 4 Securities
Carrying value of securities
(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
Corporate debt and other debt
Bankers’ acceptances
Certificates of deposit
Other (3)
Equities
Fair value through other comprehensive income (2)
Canadian government debt
Federal
Amortized cost
Fair value
Yield (4)
Provincial and municipal
Amortized cost
Fair value
Yield (4)
U.S. state, municipal and agencies debt
Amortized cost
Fair value
Yield (4)
Other OECD government debt
Amortized cost
Fair value
Yield (4)
Mortgage-backed securities
Amortized cost
Fair value
Yield (4)
Asset-backed securities
Amortized cost
Fair value
Yield (4)
Corporate debt and other debt
Amortized cost
Fair value
Yield (4)
Equities
Cost
Fair value (5)
Loan substitute securities
Cost
Fair value
Yield (4)
Amortized cost
Fair value
Amortized Cost (2)
Canadian government debt
U.S. state, municipal and agencies debt
Other OECD government debt
Asset-backed securities
Corporate debt and other debt
Amortized cost, net of allowance
Fair value
IFRS 9
As at October 31, 2018
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
$ 1,860
595
1,367
–
126
$ 7,237
3,715
3,932
–
14
$ 7,983
9,836
3,456
114
215
$ 2,244
5,119
635
93
369
$ 6,599
13,899
779
794
409
$
–
–
–
–
–
$ 25,923
33,164
10,169
1,001
1,133
326
300
2,120
–
6,694
–
84
4,058
–
–
48
6,720
–
–
3
3,099
–
–
25
5,543
–
19,040
28,372
11,562
28,048
–
–
–
34,542
34,542
326
460
21,540
34,542
128,258
–
–
–
–
–
–
1,355
1,355
2.4%
225
225
0.6%
–
–
–
–
–
–
–
–
–
51
51
1.7%
132
131
2.1%
86
86
2.4%
–
–
–
–
–
–
173
169
1.7%
673
672
2.9%
2,766
2,768
2.3%
1,090
1,091
2.3%
59
59
1.6%
–
–
–
4,119
4,120
1.5%
1,769
1,772
1.8%
10,785
10,783
2.0%
–
–
–
–
–
5,699
5,700
1,762
69
2,601
–
253
4,685
4,687
–
–
–
–
–
2,038
2,040
1,427
115
1,386
5
1,434
4,367
4,360
–
–
–
–
–
15,546
15,542
10,863
2,231
2,800
1,035
5,566
22,495
22,286
15
15
1.8%
236
234
2.0%
635
643
3.2%
67
67
1.4%
193
193
3.4%
2,662
2,657
3.6%
399
390
3.0%
–
–
–
–
–
4,207
4,199
2,381
2,177
–
29
161
4,748
4,635
56
54
4.5%
618
597
4.0%
13,112
13,239
3.0%
1
1
4.2%
1,924
1,922
2.9%
4,442
4,445
3.4%
367
354
4.1%
–
–
–
–
–
20,520
20,612
–
9,736
–
–
78
9,814
9,399
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
197
382
25
24
5.7%
222
406
–
–
–
–
–
–
–
244
238
2.3%
1,578
1,554
3.1%
18,000
18,136
2.8%
1,469
1,470
2.0%
2,176
2,174
2.9%
7,104
7,102
3.4%
17,439
17,419
1.9%
197
382
25
24
5.7%
48,232
48,499
16,433
14,328
6,787
1,069
7,492
46,109
45,367
Total carrying value of securities
$ 17,079
$ 25,447
$ 66,409
$ 20,509
$ 58,474
$ 34,948
$ 222,866
154
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
(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
Corporate debt and other debt
Bankers’ acceptances
Certificates of deposit
Other (3)
Equities
Available-for-sale (2)
Canadian government debt
Federal
Amortized cost
Fair value
Yield (4)
Provincial and municipal
Amortized cost
Fair value
Yield (4)
U.S. state, municipal and agencies debt
Amortized cost
Fair value
Yield (4)
Other OECD government debt
Amortized cost
Fair value
Yield (4)
Mortgage-backed securities
Amortized cost
Fair value
Yield (4)
Asset-backed securities
Amortized cost
Fair value
Yield (4)
Corporate debt and other debt
Amortized cost
Fair value
Yield (4)
Equities
Cost
Fair value
Loan substitute securities
Cost
Fair value
Yield (4)
Amortized cost
Fair value
Amortized Cost (2)
Amortized cost
Fair value
IAS 39
As at October 31, 2017
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
$ 1,757
3,527
834
–
85
$ 11,362
2,031
4,846
–
63
$ 8,047
4,685
4,843
67
249
$ 1,447
4,145
260
22
162
$ 6,112
16,472
571
1,209
173
$
– $ 28,725
30,860
–
11,354
–
1,298
–
732
–
246
28
2,625
–
9,102
5
5
1.7%
25
25
1.6%
1,284
1,284
1.2%
824
824
0.4%
–
–
–
960
956
1.2%
3,332
3,336
1.3%
–
–
–
–
–
–
22
5,038
–
–
67
6,010
–
23,362
23,968
–
–
–
71
71
2.0%
2,768
2,765
1.6%
2,367
2,367
1.0%
–
–
–
67
67
1.6%
2,917
2,918
1.5%
–
–
–
–
–
1,528
1,521
0.9%
1,838
1,836
2.1%
1,087
1,085
1.5%
5,894
5,901
1.5%
–
–
–
688
690
1.6%
17,006
17,060
1.8%
–
–
–
–
–
6,430
6,430
8,190
8,188
28,041
28,093
9
9
54
54
5,960
5,941
–
4
2,784
–
8,824
17
17
1.8%
41
40
2.8%
1,723
1,720
3.0%
60
60
1.1%
15
15
2.9%
3,030
3,039
2.6%
461
464
2.8%
–
–
–
–
–
5,347
5,355
4,754
4,761
–
5
4,907
–
29,449
58
58
4.3%
539
531
4.1%
22,615
22,661
2.7%
–
–
–
919
919
2.2%
1,774
1,745
2.4%
680
681
4.6%
–
–
–
–
–
26,585
26,595
4,068
4,006
–
–
–
32,952
32,952
246
126
21,364
32,952
127,657
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
875
1,188
29
28
4.3%
904
1,216
–
–
1,608
1,601
1.1%
2,514
2,503
2.5%
29,477
29,515
2.5%
9,145
9,152
1.3%
934
934
2.3%
6,519
6,497
2.2%
24,396
24,459
1.8%
875
1,188
29
28
4.3%
75,497
75,877
14,845
14,771
Total carrying value of securities
$ 15,541
$ 31,604
$ 58,021
$ 18,933
$ 60,112
$ 34,168 $ 218,379
(1)
(2)
(3)
(4)
(5)
Actual maturities may differ from contractual maturities shown above as borrowers may have the right to extend or prepay obligations with or without penalties.
Trading securities and FVOCI securities (Available-for-sale securities under IAS 39) are recorded at fair value. Amortized cost securities, included in Investment securities (Held-to-maturity
under IAS 39), are recorded at amortized cost, and under IFRS 9 are presented net of allowance for credit losses.
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.
Certain equity securities that are not held-for-trading purposes are designated as FVOCI. For the year ended October 31, 2018, we disposed of $8 million of equity securities measured at
FVOCI. The cumulative loss on the date of disposals was $1 million.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
155
Note 4 Securities (continued)
Unrealized gains and losses on securities at fair value through other comprehensive income (1) (2) (3)
(Millions of Canadian dollars)
Canadian government debt
Federal
Provincial and municipal
U.S. state, municipal and agencies debt (4)
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
Loan substitute securities
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 (4)
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
Loan substitute securities
IFRS 9
As at October 31, 2018
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
$
244 $
1,578
18,000
1,469
2,176
6,248
856
17,439
197
25
– $
2
285
2
1
1
9
22
186
–
(6) $
(26)
(149)
(1)
(3)
(10)
(2)
(42)
(1)
(1)
Fair
value
238
1,554
18,136
1,470
2,174
6,239
863
17,419
382
24
$ 48,232 $
508 $
(241) $ 48,499
IAS 39
As at October 31, 2017
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
$
1,608 $
2,514
29,477
9,145
934
3,610
2,909
24,396
875
29
2 $
7
242
18
1
13
10
106
320
–
(9) $
(18)
(204)
(11)
(1)
–
(45)
(43)
(7)
(1)
Fair
value
1,601
2,503
29,515
9,152
934
3,623
2,874
24,459
1,188
28
$ 75,497 $
719 $
(339) $ 75,877
(1)
(2)
(3)
(4)
The majority of the MBS are residential. Cost/Amortized cost, gross unrealized gains, gross unrealized losses and fair value related to commercial MBS are $1,442 million, $nil, $6 million and
$1,436 million, respectively as at October 31, 2018 (October 31, 2017 – $727 million, $1 million, $1 million and $727 million, respectively).
Excludes $46,109 million of held-to-collect securities as at October 31, 2018 that are carried at amortized cost, net of allowance for credit losses (October 31, 2017 – $14,845 million of
held-to-maturity securities that are carried at amortized cost).
Gross unrealized gains and losses includes $11 million of allowance for credit losses on debt securities at FVOCI as at October 31, 2018 recognized in income and Other components of
equity.
Includes securities issued by U.S. non-agency entities backed by government insured assets, MBS and asset-backed securities issued by U.S. government agencies.
Allowance for credit losses on investment securities
The following tables reconcile the opening and closing allowance for debt securities at FVOCI and amortized cost by stage. Reconciling items
include the following:
•
•
•
•
Transfers between stages, which are presumed to occur before any corresponding remeasurement of the allowance.
Purchases and originations, which reflect the allowance related to assets newly recognized during the period, including those assets
that were derecognized following a modification of terms.
Derecognitions and maturities, which reflect the allowance related to assets derecognized during the period without a credit loss being
incurred, including those assets that were derecognized following a modification of terms.
Remeasurements, which comprise the impact of changes in model inputs or assumptions, including changes in forward-looking
macroeconomic conditions and partial repayments; changes in the measurement following a transfer between stages; and unwinding
of the time value discount due to the passage of time.
During the year ended October 31, 2018, there were no significant changes to the models used to estimate expected credit losses.
156
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Allowance for credit losses – securities at FVOCI (1)
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Transfers in (out) to Stage 1
Transfers in (out) to Stage 2
Transfers in (out) to Stage 3
Purchases and originations
Derecognitions and maturities
Remeasurements
Write-offs
Exchange rate and other
Balance at end of period
IFRS 9
For the year ended October 31, 2018
Performing
Impaired
Stage 1
3
$
Stage 2
22
$
Stage 3
–
$
Total
25
$
5
–
(36)
85
(47)
(8)
–
2
4
(5)
–
–
–
(17)
7
–
–
7
$
–
–
36
–
25
–
(62)
1
–
$
$
–
–
–
85
(39)
(1)
(62)
3
11
$
(1)
Expected credit losses on debt securities at FVOCI are not separately recognized on the balance sheet as the related securities are recorded at fair value. The cumulative amount of credit
losses recognized in profit or loss is presented in Other components of equity.
Allowance for credit losses – securities at amortized cost
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Transfers in (out) to Stage 1
Transfers in (out) to Stage 2
Transfers in (out) to Stage 3
Purchases and originations
Derecognitions and maturities
Remeasurements
Write-offs
Exchange rate and other
Balance at end of period
IFRS 9
For the year ended October 31, 2018
Performing
Impaired
Stage 1
9
$
Stage 2
45
$
Stage 3
–
$
Total
54
$
3
(7)
–
5
(3)
(2)
–
1
6
(3)
7
(2)
–
(11)
(3)
–
(1)
32
$
$
–
–
2
–
–
–
(2)
–
–
$
–
–
–
5
(14)
(5)
(2)
–
38
$
Credit risk exposure by internal risk rating
The following table presents the fair value of debt securities at FVOCI and the gross carrying amount of securities at amortized cost. Risk ratings
are based on internal ratings as at the reporting date as outlined in the internal ratings maps in the Credit Risk section of Management’s
Discussion and Analysis.
(Millions of Canadian dollars)
Investment securities
Securities at FVOCI
Investment grade
Non-investment grade
Impaired
Items not subject to impairment (2)
Securities at amortized cost
Investment grade
Non-investment grade
Impaired
Allowance for credit losses
Amortized cost
IFRS 9
As at October 31, 2018
Performing
Impaired
Stage 1
Stage 2 Stage 3 (1)
Total
$ 46,956
500
–
47,456
$ 479
33
–
512
$
–
–
125
125
44,958
367
–
45,325
6
$ 45,319
119
703
–
822
32
$ 790
$
–
–
–
–
–
–
$ 47,435
533
125
48,093
406
48,499
45,077
1,070
–
46,147
38
$ 46,109
(1)
(2)
Includes $125 million of purchased credit impaired securities of which $67 million represents expected credit losses recorded on initial recognition.
Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.
Impairment of available-for-sale securities (IAS 39)
AFS securities were 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 applied specific methodologies to assess whether the cost/amortized cost of the
security would be recovered. As at October 31, 2017, our gross unrealized losses on AFS securities were $339 million. There was no objective
evidence of impairment on our AFS securities that were in an unrealized loss position as at October 31, 2017.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
157
Note 4 Securities (continued)
Net gains and losses on available-for-sale securities (1)
(Millions of Canadian dollars)
Realized gains
Realized losses
Impairment losses
IAS 39
For the year ended October 31, 2017
$
$
246
(22)
(52)
172
(1)
The following related to our insurance operations were excluded from Net gains and losses on AFS securities and were included in Insurance premiums, investment and fee income in the
Consolidated Statements of Income for the year ended October 31, 2017: Realized gains of $23 million, realized losses of $1 million and $nil in impairment losses.
During the year ended October 31, 2017, $172 million of net gains were recognized in Non-interest income. Net realized gains of $224 million
were mainly comprised of distributions from, and gains on sales of certain Equities, Other OECD government debt, and Loan substitute
securities. Also included in the net gains were $52 million of impairment losses primarily on certain Equities and U.S. state, municipal and
agencies debt.
Held-to-maturity securities (IAS 39)
Held-to-maturity securities measured at amortized cost were subject to periodic impairment review and were classified as impaired when, in
management’s opinion, there was no longer reasonable assurance of the timely collection of the full amount of principal and interest. The
impairment review of held-to-maturity securities was primarily based on the impairment model for loans. As at October 31, 2017, there was no
objective evidence of impairment on our held-to-maturity securities.
Financial instruments reclassified in prior periods
(Millions of Canadian dollars)
Financial assets – Available-for-sale reclassified to loans and receivables (1) (2)
Canadian government debt – Federal
Financial assets – Available-for-sale reclassified to held-to-maturity (1)
Canadian government debt – Federal
IAS 39
As at October 31, 2017
Carrying value
Fair value
$
$
2,747
$ 2,737
3,674
6,421
3,645
$ 6,382
(1)
(2)
On October 1, 2015, we reclassified $4,132 million and $5,240 million, respectively, of certain debt securities from classified as AFS to loans and receivables, and from classified as AFS to
held-to-maturity.
During the year ended October 31, 2016, we reclassified $897 million of certain debt securities from classified as AFS to loans and receivables.
The following table provides the amounts recorded in net income and OCI from the debt securities after the reclassification.
(Millions of Canadian dollars)
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
IAS 39
For the year ended October 31, 2017
Unrealized
gains (losses)
during the period (1)
Interest income/
gains (losses)
recognized in net
income during
the period
$
$
(15)
$
(77)
(92)
$
56
128
184
(1)
(2)
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.
158
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Note 5 Loans and allowance for credit losses
Loans by geography and portfolio net of allowance
(Millions of Canadian dollars)
Retail (2)
Residential mortgages
Personal
Credit cards (3)
Small business (4)
Wholesale (2)
Business, Sovereign and Bank (5), (6), (7)
Total loans
Undrawn loan commitments – Retail
Undrawn loan commitments – Wholesale
IFRS 9
As at October 31, 2018
$
Canada
265,831
82,112
18,793
4,866
103,069
$ 474,671
199,395
96,146
United
States
Other
International
Total
Allowance for
losses (1)
Total net
of allowance
$
$
$
13,493
7,172
368
–
59,442
$ 80,475
609
173,308
3,147
3,416
254
–
17,767
24,584
1,250
53,797
$
282,471
92,700
19,415
4,866
180,278
$ 579,730
201,254
323,251
$
$
(382)
(841)
(725)
(49)
$
282,089
91,859
18,690
4,817
179,363
$ 576,818
(915)
(2,912)
(90)
(64)
(Millions of Canadian dollars)
Retail (2)
Residential mortgages
Personal
Credit cards (3)
Small business (4)
Wholesale (2)
Business (5)
Bank (6)
Sovereign (7)
Total loans
Allowance for loan losses
IAS 39
As at October 31, 2017
United
States
Other
International
Canada
Total
$
$ 255,799
82,022
17,491
4,493
$ 11,449
6,357
294
–
359,805
18,100
3,100
3,915
250
–
7,265
$ 270,348
92,294
18,035
4,493
385,170
74,425
1,027
7,370
82,822
442,627
(1,406)
51,556
2,498
934
54,988
73,088
(234)
20,310
437
1,049
21,796
29,061
(519)
146,291
3,962
9,353
159,606
544,776
(2,159)
Total loans net of allowance for loan losses
$ 441,221
$ 72,854
$
28,542
$ 542,617
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Excludes allowance for loans measured at FVOCI of $1 million under IFRS 9.
Geographic information is based on residence of borrower.
The credit cards business is managed as a single portfolio and includes both consumer and business cards.
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
IFRS 9
As at October 31, 2018
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Total loans net of allowance for loan losses
Maturity term (1)
Rate sensitivity
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-rate-
sensitive
Total
$ 217,188 $ 163,291 $
144,208
27,789
18,973 $ 399,452
180,278
8,281
$ 123,826 $ 268,793 $
31,016
147,970
6,833 $ 399,452
180,278
1,292
$ 361,396 $ 191,080 $
27,254 $ 579,730
(2,912)
$ 576,818
$ 154,842 $ 416,763 $
8,125 $ 579,730
(2,912)
$ 576,818
IAS 39
As at October 31, 2017
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Total loans net of allowance for loan losses
Maturity term (1)
Rate sensitivity
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-rate-
sensitive
Total
$ 202,221 $ 165,337 $
123,570
27,907
17,612 $ 385,170
159,606
8,129
$ 112,299 $ 267,124 $
21,202
136,111
5,747 $ 385,170
159,606
2,293
$ 325,791 $ 193,244 $
25,741 $ 544,776
(2,159)
$ 542,617
$ 133,501 $ 403,235 $
8,040 $ 544,776
(2,159)
$ 542,617
(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 2018
159
Note 5 Loans and Allowance for Credit Losses (continued)
Allowance for credit losses
(Millions of Canadian dollars)
Retail
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Business, sovereign and bank
Customers’ liability under acceptances
Presented as:
Allowance for loan losses
Other liabilities – Provisions
Customers’ liability under acceptances
Other components of equity
IFRS 9
For the year ended October 31, 2018
Balance at
beginning of
period
Provision
for credit
losses
Net
write-offs (1)
Exchange
rate and
other (2)
Balance
at end
of period
$
$
$
378 $
826
693
49
1,010
20
47 $
(43) $
– $
513
534
33
156
–
(431)
(468)
(28)
(142)
–
(13)
1
(3)
(45)
1
382
895
760
51
979
21
2,976 $ 1,283 $
(1,112) $
(59) $ 3,088
2,749
207
20
–
$ 2,912
154
21
1
(1)
(2)
Loans written-off are generally subject to continued collection efforts for a period of time following write-off. The contractual amount outstanding on loans written-off during the year ended
October 31, 2018 that are no longer subject to enforcement activity was $83 million.
Includes interest income on impaired loans of $77 million for the year ended October 31, 2018.
The following tables reconcile the opening and closing allowance for credit losses by stage, for each major product category.
Reconciling items include the following:
•
•
•
•
•
Model changes, which generally comprise the impact of significant changes to the quantitative models used to estimate expected credit
losses, and any staging impacts that may arise.
Transfers between stages, which are presumed to occur before any corresponding remeasurements of the allowance.
Purchases and originations, which reflect the allowance related to assets newly recognized during the period, including those assets that
were derecognized following a modification of terms.
Derecognitions and maturities, which reflect the allowance related to assets derecognized during the period without a credit loss being
incurred, including those assets that were derecognized following a modification of terms.
Remeasurements which comprise the impact of changes in model inputs or assumptions, including changes in forward-looking
macroeconomic conditions; partial repayments and additional draws on existing facilities; changes in the measurement following a transfer
between stages; and unwinding of the time value discount due to the passage of time in Stage 1 and Stage 2.
Allowance for credit losses – Residential mortgages
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Model changes
Transfers in (out) to Stage 1
Transfers in (out) to Stage 2
Transfers in (out) to Stage 3
Purchases and originations
Derecognitions and maturities
Remeasurements
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
IFRS 9
For the year ended October 31, 2018
Performing
Stage 1
$
140 $
Stage 2
65
Impaired
Stage 3
$
173 $
20
59
(18)
(2)
63
(13)
(110)
–
–
3
2
(59)
23
(16)
1
(10)
56
–
–
2
4
–
(5)
18
–
–
34
(51)
8
(5)
Total
378
26
–
–
–
64
(23)
(20)
(51)
8
–
$
142 $
64
$
176 $
382
160
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Allowance for credit losses – Personal
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Model changes
Transfers in (out) to Stage 1
Transfers in (out) to Stage 2
Transfers in (out) to Stage 3
Purchases and originations
Derecognitions and maturities
Remeasurements
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Allowance for credit losses – Credit cards
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Model changes
Transfers in (out) to Stage 1
Transfers in (out) to Stage 2
Transfers in (out) to Stage 3
Purchases and originations
Derecognitions and maturities
Remeasurements
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Allowance for credit losses – Small business
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Model changes
Transfers in (out) to Stage 1
Transfers in (out) to Stage 2
Transfers in (out) to Stage 3
Purchases and originations
Derecognitions and maturities
Remeasurements
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
IFRS 9
For the year ended October 31, 2018
Performing
Stage 1
$
278 $
Stage 2
427
Impaired
Stage 3
$
121 $
(10)
712
(140)
(3)
107
(33)
(668)
–
–
(1)
242 $
$
(6)
–
(1)
160
–
–
309
(552)
121
(11)
141 $
1
(712)
141
(157)
5
(130)
938
–
–
(1)
512
$
IFRS 9
For the year ended October 31, 2018
Performing
Stage 1
$
251 $
Stage 2
442
Impaired
Stage 3
$
– $
(65)
693
(123)
(2)
11
(12)
(592)
–
–
–
161 $
$
–
–
–
229
–
–
239
(599)
131
–
– $
64
(693)
123
(227)
2
(60)
947
–
–
1
599
$
IFRS 9
For the year ended October 31, 2018
Performing
Impaired
Stage 1
Stage 2
Stage 3
$
15 $
15
$
19 $
–
31
(5)
–
10
(4)
(31)
–
–
1
–
(31)
5
(11)
–
(9)
48
–
–
(1)
–
–
–
11
–
–
19
(35)
7
(3)
$
17 $
16
$
18 $
Total
826
(15)
–
–
–
112
(163)
579
(552)
121
(13)
895
Total
693
(1)
–
–
–
13
(72)
594
(599)
131
1
760
Total
49
–
–
–
–
10
(13)
36
(35)
7
(3)
51
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
161
Note 5 Loans and Allowance for Credit Losses (continued)
Allowance for credit losses – Business, sovereign and bank
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Model changes
Transfers in (out) to Stage 1
Transfers in (out) to Stage 2
Transfers in (out) to Stage 3
Purchases and originations
Derecognitions and maturities
Remeasurements
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
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
IFRS 9
For the year ended October 31, 2018
Performing
Impaired
Stage 1
Stage 2
Stage 3
Total
$
251 $
352
$
407 $
1,010
(17)
207
(66)
(2)
227
(153)
(176)
–
–
3
(12)
(207)
93
(43)
46
(179)
289
–
–
1
(6)
–
(27)
45
–
–
137
(207)
65
(49)
$
274 $
340
$
365 $
(35)
–
–
–
273
(332)
250
(207)
65
(45)
979
IAS 39
For the year ended October 31, 2017
Balance at
beginning of
period
Provision
for credit
losses Write-offs
Recoveries
Unwind of
discount
Exchange
rate changes/
other
Balance
at end
of period
$
$
$
$
273
529
386
65
1,253
979
–
979
3
2,235
91
2,326
365
1,961
2,326
$
90
422
427
29
968
180
–
180
2
1,150
–
$ 1,150
$
86
1,064
$ 1,150
$
(53)
(543)
(565)
(38)
(1,199)
(226)
–
(226)
–
(1,425)
–
$ (1,425)
$
(139)
(1,286)
$ (1,425)
$
$
$
$
8
116
131
9
264
66
–
66
–
330
–
330
47
283
330
$
$
$
$
(21)
(11)
–
(3)
(35)
(69)
–
(69)
–
(104)
–
(104)
(52)
(52)
(104)
$
$
$
$
–
(1)
–
(6)
(7)
(18)
–
(18)
(2)
(27)
–
(27)
(3)
(24)
(27)
$
297
512
379
56
1,244
912
–
912
3
2,159
91
$ 2,250
$
304
1,946
$ 2,250
(1)
The allowance for off-balance sheet and other items is reported separately in Other liabilities – Provisions.
Key inputs and assumptions
The measurement of expected credit losses is a complex calculation that involves a large number of interrelated inputs and assumptions. The
key drivers of changes in expected credit losses include the following:
•
•
Changes in the credit quality of the borrower or instrument, primarily reflected in changes in internal risk ratings;
Changes in forward-looking macroeconomic conditions, specifically the macroeconomic variables to which our models are calibrated, which
are those most closely correlated with credit losses in the relevant portfolio;
Changes in scenario design and the weights assigned to each scenario; and
Transfers between stages, which can be trigged by changes to any of the above inputs.
•
•
Internal risk ratings
Internal risk ratings are assigned according to the risk management framework outlined under the headings “Wholesale credit risk” and “Retail
credit risk” of the Credit risk section of Management’s Discussion and Analysis. Changes in internal risk ratings are primarily reflected in the PD
parameters, which are estimated based on our historical loss experience at the relevant risk segment or risk rating level, adjusted for forward-
looking information.
Forward looking macroeconomic variables
The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the macroeconomic variables
(or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each macroeconomic
scenario used in our expected credit loss calculation includes a projection of all relevant macroeconomic variables used in our models for a five
year period, reverting to long-run averages generally within the 2 to 5 year period. Depending on their usage in the models, macroeconomic
variables are projected at a country, province/state or more granular level. These include one or more of the variables described below, which
differ by portfolio and region.
162
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
The following table shows the primary macroeconomic variables used in the models to estimate ACL on performing loans, commitments,
and acceptances. The downside scenario reflects a negative macro-economic event occurring within the first 12 months, with conditions
deteriorating for up to two years, followed by a recovery for the remainder of the period. This scenario is grounded in historical experience and
assumes a monetary policy response that returns the economy to a long-run, sustainable growth rate within the forecast period. In addition to
the scenarios described below, we also apply other downside scenarios that allow us to consider a broader range of possible outcomes for our
credit portfolios.
Driver
Unemployment rate: (1)
Canada
U.S.
Gross domestic product: (2)
Canada
U.S.
Oil price (West Texas Intermediate) growth rate (3)
Canadian housing price index growth rate (3)
(1)
(2)
(3)
Represents the average quarterly unemployment level over the period.
Represents the average quarter-over-quarter gross domestic product annualized over the period.
Growth rates are calculated on an annualized basis spanning years 2 to 5.
IFRS 9
As at October 31, 2018
Base Scenario
Next 12
months
2 to 5
years
Upside Scenario
2 to 5
Next 12
years
months
Downside
Scenario
Next 12
months
2 to 5
years
5.8% 6.0%
3.6% 4.1%
5.7% 5.1%
3.6% 3.3%
6.8%
4.8%
7.1%
5.3%
(2.0)% 2.7%
2.3% 2.1%
1.7% 1.7%
2.1% 1.4%
(2.3)% 2.6%
2.1% 1.9%
5.6% (2.1)% 36.0% (7.9)% (36.0)% 11.8%
(9.2)% 5.8%
5.3% 2.5%
0.1% 3.9%
The primary variables driving credit losses in our Retail portfolios are Canadian unemployment rates, Canadian gross domestic product and
Canadian housing price index. The Canadian overnight interest rate also impacts our retail portfolios. Our Wholesale portfolios are affected by all
of the variables in the table above; however, the specific variables differ by sector. Other variables also impact our wholesale portfolios
including, but not limited to, the U.S. 10 year BBB corporate bond interest rate, the U.S. 10 year government bond yield, the TSX and S&P 500
indices, natural gas prices (Henry Hub) and the commercial real estate price index.
Increases in the following macroeconomic variables will generally correlate with higher expected credit losses: Canadian and U.S.
unemployment rate, Canadian overnight interest rates, U.S. 10 year BBB corporate bond yields, and U.S. 10 year government bond yields.
Increases in the following macroeconomic variables will generally correlate with lower expected credit losses: Canadian housing price
index, Canadian and U.S. gross domestic product, TSX index, S&P 500 index, oil prices, natural gas prices, and commercial real estate price
index.
Scenario design and weightings
Our estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios. Scenarios are designed
to capture a wide range of possible outcomes and are weighted according to our expectation of the relative likelihood of the range of outcomes
that each scenario represents at the reporting date. We then weight each scenario to take into account historical frequency, current trends, and
forward-looking conditions which will change over time. The base case scenario is based on forecasts of the expected rate, value or yield for each
of the macroeconomic variables identified above. The upside and downside scenarios are set by adjusting our base projections to construct
reasonably possible scenarios that are more optimistic and pessimistic, respectively. Two additional downside scenarios were designed for the
real estate and energy sectors to capture the broader range of potential credit losses across the bank’s portfolios.
The impact of each of our five scenarios varies across our portfolios given the portfolios have different sensitivities to movements in each
macroeconomic variable.
The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by $290 million at
October 31, 2018.
Transfers between stages
Transfers between Stage 1 and Stage 2 are based on the assessment of significant increases in credit risk relative to initial recognition, as
described in Note 2. The impact of moving from 12 months expected credit losses to lifetime expected credit losses, or vice versa, varies by
product and is dependent on the expected remaining life at the date of the transfer. Stage transfers may result in significant fluctuations in
expected credit losses.
The following table illustrates the impact of staging on our ACL by comparing our allowance if all performing loans were in Stage 1 to the
actual ACL recorded on these assets.
Performing loans (1)
(1)
Represents loans and commitments in Stage 1 and Stage 2.
IFRS 9
As at October 31, 2018
ACL – All performing
loans in Stage 1
Impact of
staging
Stage 1 and 2
ACL
$
1,526
$
841
$
2,367
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
163
Note 5 Loans and Allowance for Credit Losses (continued)
Credit risk exposure by internal risk rating
The following tables present the gross carrying amount of loans measured at amortized cost, and the full contractual amount of undrawn loan
commitments subject to the impairment requirements of IFRS 9. Risk ratings are based on internal ratings as at the reporting date as outlined in
the internal ratings maps for Wholesale and Retail facilities in the Credit risk section of Management’s Discussion and Analysis.
(Millions of Canadian dollars)
Retail
Loans outstanding – Residential mortgages
Low risk
Medium risk
High risk
Not rated
Impaired
Items not subject to impairment (2)
Total
Loans outstanding – Personal
Low risk
Medium risk
High risk
Not rated
Impaired
Total
Loans outstanding – Credit cards
Low risk
Medium risk
High risk
Not rated
Total
Loans outstanding – Small business
Low risk
Medium risk
High risk
Not rated
Impaired
Total
Undrawn loan commitments – Retail
Low risk
Medium risk
High risk
Not rated
Total
Wholesale
Loans outstanding – Business, sovereign and bank
Investment grade
Non-investment grade
Not rated
Impaired
Items not subject to impairment (2)
Total
Undrawn loan commitments – Wholesale
Investment grade
Non-investment grade
Not rated
Total
$
$
$
$
$
$
$
IFRS 9
As at October 31, 2018
Stage 1
Stage 2
Stage 3 (1)
Total
$
$
$
$
$
$
222,026
13,681
2,577
34,670
–
272,954
71,763
6,124
998
8,595
–
87,480
13,185
2,234
139
764
16,322
2,004
2,230
95
166
–
4,495
182,426
10,794
3,740
2,584
199,544
46,869
106,027
6,692
–
159,588
$
$
$
$
$
$
3,688
1,369
2,897
578
–
8,532
1,256
1,925
1,672
64
–
4,917
100
1,632
1,331
30
3,093
46
102
178
1
–
327
1,270
239
166
35
1,710
324
10,190
411
–
10,925
–
–
–
–
726
726
–
–
–
–
303
303
–
–
–
–
–
–
–
–
–
44
44
–
–
–
–
–
$ 225,714
15,050
5,474
35,248
726
282,212
259
282,471
$
$
$
73,019
8,049
2,670
8,659
303
92,700
92,700
13,285
3,866
1,470
794
19,415
19,415
2,050
2,332
273
167
44
4,866
4,866
$ 183,696
11,033
3,906
2,619
201,254
$
–
–
–
1,096
1,096
47,193
116,217
7,103
1,096
171,609
8,669
180,278
159,588
10,925
1,096
$
222,970
88,828
4,291
316,089
$
93
7,069
–
7,162
–
–
–
–
$ 223,063
95,897
4,291
323,251
(1)
(2)
As at October 31, 2018, 88% of credit-impaired loans were either fully or partially collateralized. For details on the types of collateral held against credit-impaired assets and our policies on
collateral, refer to the Credit risk mitigation section of Management’s Discussion and Analysis.
Retail Loans outstanding – Residential mortgages and Wholesale loans outstanding – Business, sovereign and bank items not subject to impairment are loans held at FVTPL.
164
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Loans and acceptances and undrawn commitments (1)
(Millions of Canadian dollars)
Retail (3)
Residential mortgages
Personal
Credit cards
Small business
(Millions of Canadian dollars)
Wholesale (4)
Business
Sovereign
Bank
Total
IAS 39
As at October 31, 2017
Low risk Medium risk
High risk
Impaired
Standardized
and
Non-Rated (2)
Total
$ 221,911
161,484
31,883
7,770
$ 423,048
$ 12,388
12,238
5,320
1,908
$ 31,854
$ 2,383
2,736
1,396
433
$ 6,948
$ 284 $
193
–
31
34,200 $
3,763
1,262
1,239
271,166
180,414
39,861
11,381
$ 508 $
40,464 $
502,822
IAS 39
As at October 31, 2017
Investment
grade
Non-
investment
grade
Impaired
Total
$
108,733 $
21,457
3,519
164,256 $
1,311
2,165
1,372 $
–
–
274,361
22,768
5,684
$
133,709 $
167,732 $
1,372 $
302,813
(1)
(2)
(3)
(4)
This table represents our retail and wholesale loans and acceptances outstanding and undrawn commitments by portfolio and risk category. The amounts in the tables are before allowance
for loans.
Under the standardized approach, credit risk exposure is based on risk weights prescribed by OSFI.
Includes undrawn commitments of $1.0 billion, $88.1 billion, $21.8 billion, and $6.9 billion for Residential mortgages, Personal, Credit cards and Small business, respectively.
Includes undrawn commitments of $113.9 billion, $11.4 billion, and $1.4 billion for Business, Sovereign and Bank, respectively.
Loans past due but not impaired (1)
IFRS 9
IAS 39
As at
October 31, 2018
October 31, 2017
(Millions of Canadian dollars)
1 to 29 days 30 to 89 days
90 days
and greater
Total
1 to 29 days 30 to 89 days
90 days
and greater
Total
Retail
Wholesale
$
$
2,995 $
1,246
4,241 $
1,402 $
468
1,870 $
179 $ 4,576
1,714
–
179 $ 6,290
$
$
3,097 $
1,251
4,348 $
1,337 $
424
1,761 $
307 $ 4,741
1,675
–
307 $ 6,416
(1)
Amounts presented may include loans past due as a result of administrative processes, such as mortgage loans on which payments are restrained pending payout due to sale or refinancing.
Past due loans arising from administrative processes are not representative of the borrowers’ ability to meet their payment obligations.
Gross carrying value of loans individually determined to be impaired (1)
(Millions of Canadian dollars)
Wholesale (2)
Business
Acquired credit-impaired loans
Total
IAS 39
As at
October 31
2017
$
$
1,126
256
1,382
(1)
(2)
Average balance of gross individually assessed impaired loans for the year ended October 31, 2017 – $2,065 million.
Excludes acquired credit-impaired (ACI) loans.
Acquired credit-impaired loans
As at October 31, 2018, the carrying value of ACI loans resulting from the acquisition of City National, comprised of Retail, Wholesale and Federal
Deposit Insurance Corporation (FDIC) covered loans, and the related allowance were $217 million and $4 million (October 31, 2017 –
$256 million and $3 million respectively).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
165
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.
Transferred financial assets not derecognized
Securitization of Canadian residential mortgage loans
We periodically 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 and Housing
Corporation (CMHC) or a third-party insurer. We require the borrower to pay for mortgage insurance when 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 LTV
ratios 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, 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 mortgage default during 2018 and 2017.
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 is 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 at a future date 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, 2018
October 31, 2017
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
$ 34,105
$
202,543
$
4,271
$ 240,919
$ 33,948
$
139,249
$ 3,835
$ 177,032
(Millions of Canadian dollars)
Carrying amount of
transferred assets that
do not qualify for
derecognition
Carrying amount of
associated liabilities
33,975
202,543
4,271
240,789
33,861
139,249
3,835
176,945
Fair value of transferred
assets
$ 33,490
$
202,544
$
4,271
$ 240,305
$ 33,529
$
139,249
$ 3,835
$ 176,613
Fair value of associated
liabilities
Fair value of net position $
(1)
33,916
202,544
4,271
240,731
34,314
139,249
3,835
177,398
(426) $
–
$
–
$
(426)
$
(785) $
–
$
–
$
(785)
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.
(2)
(3)
Transferred financial assets derecognized
Generally, the securitization of Canadian residential mortgage loans into the NHA MBS program do not qualify for derecognition as we have not
transferred substantially all of the risks and rewards of ownership. During the year ended October 31, 2018, we recognized net gains
of $16 million in Non-interest income arising from the derecognition of residential mortgage loans measured at amortized cost. The assets were
derecognized as both the NHA MBS and the residual interests in the underlying residential mortgage loans were sold to third parties resulting in
the transfer of substantially all of the risks and rewards.
166
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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 may 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.
RBC-administered multi-seller conduits
We generally do not maintain ownership in the multi-seller conduits and generally do not have rights to, or control of, their assets. However, we
issue ABCP through a multi-seller conduit that does not have a first loss investor with substantive power to direct the significant operating
activities of the conduit. This conduit is consolidated because we have exposure to variability of returns from performance in the multi-seller
arrangements through providing transaction-specific and program-wide liquidity, credit and loan facilities to the conduit and have decision-
making power over the relevant activities. As of October 31, 2018, $2.4 billion of financial assets held by the conduit was included in Loans
(October 31, 2017 – $0.6 billion) and $1.3 billion of ABCP issued by the conduit was included in Deposits (October 31, 2017 – $0.5 billion) on
our Consolidated Balance Sheets.
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 that co-ownership interest in the
underlying pool of credit card receivables. Investors who purchase the term notes have recourse only to that co-ownership interest in the
underlying pool of credit card receivables.
We continue to service the credit card receivables and perform an administrative role for the entity. We also retain risk in the underlying pool
of credit card receivables 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 have provided 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 variability from
the performance of the underlying credit card receivables through our retained interest. As at October 31, 2018, $8.5 billion of notes issued by
our credit card securitization vehicle were included in Deposits on our Consolidated Balance Sheets (October 31, 2017 – $7.5 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 Royal Bank of Canada 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 credit risks of the pledged securities.
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, 2018,
$16.6 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated Balance Sheets (October 31, 2017 –
$12.2 billion).
Covered bonds
We periodically transfer mortgages to RBC Covered Bond Guarantor Limited Partnership (the Guarantor LP) to support funding activities and asset
coverage requirements under our covered bonds program. The Guarantor LP was created to guarantee interest and principal payments under the
covered bond program. The covered bonds guaranteed by the Guarantor LP are direct, unsecured and unconditional obligations of Royal Bank of
Canada; 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 the 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 the Guarantor LP, servicer for the underlying mortgages as well as the registered issuer of the
covered bonds.
We consolidate the 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, 2018, the total amount of mortgages transferred
and outstanding was $53.0 billion (October 31, 2017 – $52.5 billion) and $36.9 billion of covered bonds were recorded as Deposits on our
Consolidated Balance Sheets (October 31, 2017 – $37.3 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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
167
Note 7 Structured entities (continued)
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, 2018, $7.1 billion of municipal bonds were included in
Investment securities related to consolidated TOB structures (October 31, 2017 – $5.2 billion) and a corresponding $7.6 billion of floating-rate
certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2017 – $5.2 billion).
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, 2018, $548 million of Trading securities held in the consolidated
funds (October 31, 2017 – $473 million) and $128 million of Other liabilities representing the fund units held by third parties (October 31, 2017
– $148 million) were recorded on our Consolidated Balance Sheets.
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
Maximum exposure to loss (2)
Total assets of unconsolidated structured entities
(Millions of Canadian dollars)
On-balance sheet assets
Securities
Loans
Derivatives
Other assets
On-balance sheet liabilities
Derivatives
Other liabilities
Maximum exposure to loss (2)
Total assets of unconsolidated structured entities
$
$
$
$
$
$
$
$
$
$
$
$
Multi-seller
conduits (1)
Structured
finance
As at October 31, 2018
Non-RBC
managed
investment
funds
Third-party
securitization
vehicles
Other
Total
65 $
–
–
–
– $
2,301
–
176
65 $ 2,477 $
84 $
–
84 $
– $
–
– $
38,342 $ 5,477 $
2,721 $
–
–
–
2,721 $
– $
–
– $
2,981 $
– $
6,292
–
–
6,292 $
– $
–
– $
10,215 $
906 $
1,647
52
288
2,893 $
– $
–
– $
3,556 $
3,692
10,240
52
464
14,448
84
–
84
60,571
37,590 $ 15,776 $ 523,176 $
67,446 $ 454,567 $ 1,098,555
Multi-seller
conduits (1)
Structured
finance
As at October 31, 2017
Non-RBC
managed
investment
funds
Third-party
securitization
vehicles
Other
Total
1,028 $
371
17
–
1,416 $
– $
1,078
–
443
1,521 $
2,903 $
–
–
–
2,903 $
– $
3,246
–
–
3,246 $
869 $
750
32
254
1,905 $
4,800
5,445
49
697
10,991
– $
– $
41 $
–
–
–
– $
– $
41 $
3,153 $
4,280 $
38,639 $
37,871 $ 16,778 $ 533,219 $
– $
–
– $
6,767 $
41
–
41
55,268
62,411 $ 409,562 $ 1,059,841
– $
–
– $
2,429 $
(1)
(2)
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 $24.7 billion as at October 31, 2018 (October 31, 2017 – $25.2 billion).
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 because of the notional amounts of the backstop liquidity and credit enhancement
facilities. Refer to Note 24.
168
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Below is a description of our involvement with each significant class of unconsolidated structured entity.
Multi-seller conduits
We administer multi-seller ABCP conduit programs. Multi-seller conduits primarily purchase financial assets from clients and finance those
purchases by issuing ABCP.
In certain multi-seller conduit arrangements, we do not maintain any ownership of the multi-seller conduits that we administer and have no
rights to, or control of, its assets. As the administrative agent, we earn a residual fee for providing services such as coordinating funding
activities, transaction structuring, documentation, execution and monitoring. The ABCP issued by each multi-seller conduit is in the conduit’s
own name with recourse to the financial assets owned by the multi-seller conduit, and is non-recourse to us except through our participation in
liquidity and/or credit enhancement facilities.
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.
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 control the conduit as 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,
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. 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 issue unsecured variable-rate preferred shares and invest in
portfolios of tax-exempt municipal bonds. Undrawn liquidity commitments expose us to the 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.
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. Enhancements 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 entities’
investing and financing activities.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
169
Note 7 Structured entities (continued)
Other
Other unconsolidated structured entities include managed investment funds, credit investment products and tax credit 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 if we exercise our decision-making power as an agent on behalf of other unit
holders.
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, historic rehabilitation real estate
projects to third parties, or new market tax credits (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.
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, 2018 and 2017, our investments in these entities were included in Trading and
Investment securities on our Consolidated Balance Sheets. Refer to Note 3 and Note 4 for further details on our Trading and 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,
2018, we transferred commercial mortgages with a carrying amount of $352 million (October 31, 2017 – $407 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, 2018 and 2017, 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 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. Certain interest rate swaps are transacted and settled through a clearing house which acts as a central
counterparty. 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.
170
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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 referenced 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 are stable value and equity derivative contracts.
Non-financial derivatives
Other contracts also include non-financial derivative products such as 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 client-driven sales and trading activities, and associated market risk hedging. Sales activities
include the structuring and marketing of derivative products to clients, enabling them to modify or reduce 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 the active management of derivative transactions 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 product types. Any realized and unrealized gains or losses on derivatives used for trading purposes are recognized
immediately in Non-interest income – Trading revenue.
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. 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 Other income in Non-interest
income.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
171
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 (1)
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 (2)
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (1)
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, 2018
Term to maturity
Within
1 year
1 through
5 years
Over 5
years
Total
Trading
Other than
Trading
$ 1,895,613
4,535,040
101,663
87,254
$
8,788
4,377,512
155,985
156,886
$
–
2,856,403
27,273
37,217
$ 1,904,401
11,768,955
284,921
281,357
$ 1,904,401
11,424,094
284,921
281,357
$
–
344,861
–
–
1,397,520
30,358
347,477
33,202
37,716
1,578
81,720
38,825
32,424
2,587
2,544
277
340
228,549
30,688
4,379
767,742
11,037
12,250
5,263
66,686
22,465
23,072
3,312
1,291
–
–
59,308
616
1,170
365,880
1,807
4,515
3,424
17,409
11
6
–
–
–
–
372
1,428,824
35,907
1,481,099
46,046
54,481
10,265
165,815
61,301
55,502
5,899
3,835
277
340
288,229
1,420,575
27,545
1,430,437
46,046
54,481
9,752
161,323
61,301
55,502
5,899
3,835
277
340
288,229
8,249
8,362
50,662
–
–
513
4,492
–
–
–
–
–
–
–
$ 8,854,687
$ 5,706,664
$ 3,316,103
$ 17,877,454
$ 17,460,315
$ 417,139
As at October 31, 2017
Term to maturity
Within
1 year
1 through
5 years
Over 5
years
Total
Trading
Other than
Trading
$ 1,156,843
2,570,180
77,953
61,765
$
31,989
3,450,280
124,083
106,887
$
–
2,331,289
59,435
63,685
$ 1,188,832
8,351,749
261,471
232,337
$ 1,188,832
7,854,309
261,471
232,337
$
–
497,440
–
–
1,326,223
20,436
281,590
55,851
55,922
1,975
56,166
33,195
35,726
8,274
10,872
83
291
198,360
33,543
35,662
551,576
13,913
9,187
7,686
49,652
19,688
23,478
695
317
–
142
44,858
623
39,440
268,119
3,386
2,829
3,814
19,241
55
9
–
–
–
–
528
1,360,389
95,538
1,101,285
73,150
67,938
13,475
125,059
52,938
59,213
8,969
11,189
83
433
243,746
1,343,196
89,254
1,048,891
73,150
67,938
13,330
120,737
52,938
59,213
8,969
11,189
83
433
243,607
17,193
6,284
52,394
–
–
145
4,322
–
–
–
–
–
–
139
(1)
(2)
Credit derivatives with a notional value of $0.5 billion (October 31, 2017 - $0.1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $6.2 billion
(October 31, 2017 – $8.5 billion) and protection sold of $3.6 billion (October 31, 2017 – $4.8 billion).
Amounts have been revised from those previously presented.
$ 5,951,705
$ 4,503,636
$ 2,792,453
$ 13,247,794
$ 12,669,877
$ 577,917
172
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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:
Valuation adjustments determined on a pooled basis
Impact of netting agreements that qualify for balance sheet offset
As at
October 31, 2018
October 31, 2017
Positive
Negative
Positive
Negative
$
308 $
29,340
3,211
–
32,859
13,367
174
26,837
1,540
–
41,918
38
17,668
92,483
1,226
–
–
1,226
31
212
1,145
1,388
–
150
2,764
95,247
(625)
(583)
94,039
232
25,501
–
3,471
29,204
12,929
258
25,849
–
1,272
40,308
89
18,300
87,901
1,142
–
–
1,142
33
423
1,104
1,560
5
179
$
324 $
101,481
3,108
–
104,913
13,643
4,229
21,740
1,324
–
40,936
157
13,775
319
96,408
–
3,696
100,423
14,562
3,438
19,054
–
1,217
38,271
246
17,183
159,781
156,123
1,612
–
–
1,612
246
207
1,545
1,998
–
184
1,177
–
–
1,177
250
318
1,700
2,268
12
184
2,886
90,787
34
(583)
90,238
3,794
3,641
163,575
(725)
(67,827)
159,764
68
(67,705)
95,023
92,127
Impact of netting agreements that do not qualify for balance sheet offset (1)
(57,010)
(57,010)
(58,804)
(58,804)
$ 37,029 $ 33,228
$ 36,219 $ 33,323
(1)
Additional impact of offsetting credit exposures on contracts that do not qualify for balance sheet offset.
Fair value of derivative instruments by term to maturity
October 31, 2018
October 31, 2017
As at
(Millions of Canadian dollars)
Derivative assets
Derivative liabilities
Less than
1 year
1 through
5 years
Total
$ 28,241 $ 29,197 $ 36,601 $ 94,039
90,238
27,013
36,505
26,720
Over 5
years
Less than
1 year
1 through
5 years
Total
$ 26,292 $ 28,810 $ 39,921 $ 95,023
92,127
26,414
39,379
26,334
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.
Offsetting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of master netting
agreements and achieved when specific criteria are met in accordance with our accounting policy in Note 2. 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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
173
Note 8 Derivative financial instruments and hedging activities (continued)
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 OSFI’s non-modelled current exposure measure 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, 2018 (1)
October 31, 2017 (1)
Replacement
cost
Credit
equivalent
amount (2)
Risk-weighted
equivalent (3)
Replacement
cost
Credit
equivalent
amount (2)
Risk-weighted
equivalent (3)
As at
$
$
307
9,671
610
4,589
9,342
443
71
9,709
2,912
$
324
20,321
857
10,944
13,718
1,100
770
9,959
11,285
$
13
3,363
407
3,439
5,002
478
153
4,303
225
$
264
10,890
283
5,421
10,476
360
109
7,750
1,391
$
328
24,318
883
11,555
12,643
1,125
936
6,332
8,340
59
4,187
527
3,634
4,498
472
149
2,945
167
$
37,654
$
69,278
$
17,383
$
36,944
$
66,460
$
16,638
(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 $16 billion (October 31, 2017 – $18 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, 2018
(Millions of Canadian dollars)
Gross positive replacement cost
Impact of master netting
agreements
Replacement cost (after netting
agreements)
(Millions of Canadian dollars)
Gross positive replacement cost
Impact of master netting
AAA, AA
Total
$ 25,458 $ 32,693 $ 21,215 $15,881 $ 95,247 $ 42,937 $ 18,749 $ 33,561 $ 95,247
Banks
Other
Total
BBB
A
BB or
lower
OECD
governments
14,544
24,255
15,046
3,748
57,593
36,081
8,348
13,164
57,593
$ 10,914 $
8,438 $ 6,169 $12,133 $ 37,654 $ 6,856 $ 10,401 $ 20,397 $ 37,654
Risk rating (1)
Counterparty type (2)
As at October 31, 2017
AAA, AA
Total
$ 26,707 $ 108,320 $ 19,672 $ 8,876 $ 163,575 $ 45,723 $ 18,694 $ 99,158 $ 163,575
Banks
Other
Total
BBB
A
BB or
lower
OECD
governments
agreements
14,468
98,605
10,167
3,391
126,631
38,508
8,342
79,781
126,631
Replacement cost (after netting
agreements)
$ 12,239 $
9,715 $ 9,505 $ 5,485 $ 36,944 $ 7,215 $ 10,352 $ 19,377 $ 36,944
(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.
Derivatives in hedging relationships
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.
Derivatives used in hedging relationships are recorded in Other Assets – Derivatives or Other Liabilities – Derivatives on the Balance Sheet.
Foreign currency-denominated liabilities used in net investment hedging relationships are recorded in Deposits – Business and Government and
Subordinated debentures on the Balance Sheet. Gains and losses relating to hedging ineffectiveness is recorded in Non-Interest income and
amounts reclassified from hedge reserves in OCI to income is recorded in Net-interest income for Cash flow hedges and Non-interest income for
Net Investment hedges.
174
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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.
Potential sources of ineffectiveness can be attributed to differences between hedging instruments and hedged items:
•
•
•
Mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of when interest rates are
reset and frequency of payment.
Difference in the discounting factors between the hedged item and the hedging instrument, taking into consideration the different
reset frequency of the hedged item and hedging instrument.
Hedging derivatives with a non-zero fair value at inception date of the hedging relationship, resulting in mismatch in terms with the
hedged item.
Below is a description of our risk management strategy for each risk exposure that we decide to hedge:
Interest rate risk
We use interest rate contracts to manage our exposure to interest rate risk by modifying the repricing characteristics of existing and/or
forecasted assets and liabilities, including funding and investment activities. The swaps are designated in either a fair value hedge or a cash flow
hedge.
For fair value hedges, we use interest rate contracts to manage the fair value movements of our fixed-rate instruments due to changes in
benchmark interest. The interest rate swaps are entered into on a one-to-one basis to manage the benchmark interest rate risk, and its terms are
critically matched to the specified fixed rate instruments.
We also use interest rate swaps in fair value hedges to manage interest rate risk from residential mortgage assets and funding liabilities.
Our exposure from this portfolio changes with the origination of new loans, repayments of existing loans, and sale of securitized mortgages.
Accordingly, dynamic hedging is adopted for that portfolio, in which the hedge relationship is rebalanced on a more frequent basis, such as on a
bi-weekly or on a monthly basis.
For cash flow hedges, we use interest rate swaps to manage the exposure to cash flow variability of our variable rate instruments as a result
of changes in benchmark interest rates. Whilst some of the interest rate derivatives are entered into on a one-to-one basis to manage a specific
exposure, other interest rate derivatives may be entered into for managing interest rate risks of a portfolio of assets and liabilities.
Foreign exchange risk
We manage our exposure to foreign currency risk with cross currency swaps in a cash flow hedge, and foreign exchange forward contracts in a net
investment hedge. Certain cash instruments may also be designated in a net investment hedge, where applicable.
For cash flow hedges, we predominately use cross currency swaps to manage the cash flow variability arising from fluctuations in foreign
exchange rates on our issued foreign denominated fixed rate liabilities. The maturity profile and repayment terms of these swaps are matched to
those of our foreign denominated assets and liabilities to limit our cash flow volatility from changes in foreign exchange rates.
For net investment hedges, we use a combination of foreign exchange forwards and cash instruments, such as foreign denominated deposit
liabilities to manage our foreign exchange risk arising from our investments in foreign operations. Our most significant exposures include U.S.
dollar, British pound and Euro. When hedging net investments in foreign operations using foreign exchange forwards, only the undiscounted
spot element of the foreign exchange forward is designated as the hedging instrument. Accordingly, changes in the fair value of the hedging
instrument as a result of changes in forward rates and the effects of discounting are not included in the hedging effectiveness assessment.
Foreign operations are only hedged to the extent of the liability or notional amount of the derivative; we generally do not expect to incur
significant ineffectiveness on hedges of net investments in foreign operations.
Equity price risk
We use total return swaps in cash flow hedges to mitigate the cash flow variability of the expected payment associated with our cash settled
share-based compensation plan for certain key employees by exchanging interest payments for indexed RBC share price change and dividend
returns.
Credit risk
We predominantly use credit derivatives to economically hedge 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.
Derivative instruments designated in hedging relationships
The following table presents the fair values of the derivative instruments and the principal amounts of the non-derivative liabilities, categorized
by their hedging relationships, as well as derivatives that are not designated in hedging relationships.
Derivatives and non-derivative instruments
(Millions of Canadian dollars)
Assets
Derivative instruments
Liabilities
Derivative instruments
Non-derivative instruments
n.a.
not applicable
October 31, 2018
Designated as hedging instruments
in hedging relationships
As at
October 31, 2017
Designated as hedging instruments
in hedging relationships
Fair Value
Cash Flow
Net
investment
Not designated
in a hedging
relationship
Fair Value
Cash Flow
Net
investment
Not designated
in a hedging
relationship
$
642 $
809 $
13 $
92,575
$
736 $
482 $
41 $
93,764
1,437
–
598
–
28
25,565
88,175
n.a.
740
–
499
–
246
19,950
90,642
n.a.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
175
Note 8 Derivative financial instruments and hedging activities (continued)
The following tables provide the maturity analysis of the notional amounts and the weighted average rates of the hedging instruments and their
carrying amounts by types of hedging relationships:
Fair value hedges
(Millions of Canadian dollars, except average rates)
Interest rate risk
Interest rate contracts
Hedge of fixed rate assets
Hedge of fixed rate liabilities
Weighted average fixed interest rate
Hedge of fixed rate assets
Hedge of fixed rate liabilities
Cash flow hedges
(Millions of Canadian dollars, except average rates)
Interest rate risk
Interest rate contracts
Hedge of variable rate assets
Hedge of variable rate liabilities
Weighted average fixed interest rate
Hedge of variable rate assets
Hedge of variable rate liabilities
Foreign exchange risk
Cross currency swaps
Weighted average CAD-CHF exchange rate
Weighted average CAD-EUR exchange rate
Weighted average USD-EUR exchange rate
Net investment hedges
(Millions of Canadian dollars, except average rates)
Foreign exchange risk
Foreign currency liabilities
Weighted average CAD-USD exchange rate
Weighted average CAD-EUR exchange rate
Weighted average CAD-GBP exchange rate
Forward contracts
Weighted average CAD-USD exchange rate
Weighted average CAD-EUR exchange rate
Weighted average CAD-GBP exchange rate
IFRS 9
As at October 31, 2018
Notional amounts
Carrying amount
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 2,518
14,946
$ 12,778
47,658
$ 4,668
7,432
$ 19,964
70,036
$ 498
144
$
8
1,429
1.1%
1.6%
2.4%
1.8%
2.8%
1.8%
2.3%
1.8%
IFRS 9
As at October 31, 2018
Notional amounts
Carrying amount
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 12,686
2,000
$ 12,805
38,256
$ 1,615
3,978
$ 27,106
44,234
$
1
796
$
184
1
$
2.2%
2.1%
326
1.27
–
–
2.4%
1.9%
$
$ 2,978
–
–
1.33
2.7%
2.5%
153
–
1.52
–
2.3%
2.0%
$ 3,457
1.27
1.52
1.33
$
12
$
368
IFRS 9
As at October 31, 2018
Notional/Principal
Carrying amount
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 3,457
1.20
–
1.91
$ 3,372
1.31
1.49
1.68
$ 18,233
1.28
–
1.69
–
–
–
–
$
$ 3,875
1.31
1.53
–
–
–
–
–
$
$ 25,565
1.27
1.53
1.73
$ 3,372
1.31
1.49
1.68
$
–
$ 25,043
$
13
$
28
The following table indicates 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
Within 1 year
938
(1,070)
(132)
$
$
1 to 2 years
243
(939)
(696)
$
$
2 to 3 years
151
(3,501)
(3,350)
$
$
3 to 5 years
59
(476)
(417)
$
$
$
$
Over 5 years
98
(71)
Total
$ 1,489
(6,057)
27
$ (4,568)
IAS 39
As at October 31, 2017
176
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
The following tables present the details of the hedged items categorized by their hedging relationships:
Fair value hedges – assets and liabilities designated as hedged items
IFRS 9
As at and for the year ended October 31, 2018
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
Carrying amount
Assets
Liabilities
Assets
Liabilities
Balance sheet item(s):
Changes in fair
values used for
calculating hedge
ineffectiveness
(Millions of Canadian dollars)
Interest rate risk
Fixed rate assets (1)
Fixed rate liabilities (1)
–
68,714
–
(1,302)
$ 20,172 $
– $
(529) $
–
Investment securities; Loans – Retail $
Deposits – Business and government;
Subordinated debentures
(650)
1,018
(1)
As at October 31, 2018, the accumulated amount of fair value hedge adjustments remaining in the Balance Sheet for hedged items that have ceased to be adjusted for hedging gains and
losses is a loss of $105 million for fixed-rate assets and a loss of $277 million for fixed-rate liabilities.
Cash flow and net investment hedges – assets and liabilities designated as hedged items
IFRS 9
As at and for the year ended October 31, 2018
(Millions of Canadian dollars)
Cash flow hedges
Interest rate risk
Variable rate assets
Variable rate liabilities
Foreign exchange risk
Fixed rate assets
Fixed rate liabilities
Net investment hedges
Foreign exchange risk
Foreign subsidiaries
n.a.
not applicable
Balance sheet item(s):
Investment securities; Loans – Retail
Deposits – Business and government;
Subordinated debentures
Loans – Retail
Deposits – Business and government
n.a.
Changes in fair
values used for
calculating hedge
ineffectiveness
Cash flow hedge/foreign
currency translation reserve
Continuing hedges
Discontinued
hedges
$
308
$
(187)
$
(171)
(769)
19
60
315
706
(4)
95
477
–
–
(5,365)
(923)
Effectiveness of designated hedging relationships
(Millions of Canadian dollars)
Fair value hedges
Interest rate risk
IFRS 9
For the year ended October 31, 2018
Hedge
ineffectiveness
recognized in
income (1)
Changes in the value of
the hedging
instrument recognized
in OCI
Change in fair value
of hedging
instrument
Amount reclassified
from hedge reserves
to income
Interest rate contracts – fixed rate assets
Interest rate contracts – fixed rate liabilities
$
605
(1,000)
$
$
(45)
18
$
–
–
Cash flow hedges
Interest rate risk
Interest rate contracts – variable rate assets
Interest rate contracts – variable rate liabilities
Foreign exchange risk
Cross currency swap – fixed rate assets
Cross currency swap – fixed rate liabilities
Net investment hedges
Foreign exchange risk
Foreign currency liabilities
Forward contracts
(318)
751
(19)
(61)
(331)
16
(11)
(1)
–
–
–
–
(275)
674
(10)
(137)
(331)
17
–
–
(37)
101
(7)
(165)
–
–
(1)
Hedge ineffectiveness recognized in income included losses of $46 million that are excluded from the assessment of hedge effectiveness and are offset by economic hedges.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
177
Note 8 Derivative financial instruments and hedging activities (continued)
Results of hedge activities recorded in Net income and Other comprehensive income
(Millions of Canadian dollars)
Fair value hedges
Gains (losses) on hedging instruments (1)
Gains (losses) on hedged items attributable to the hedged risk (1)
Ineffective portion (1) (2)
Cash flow hedges
Ineffective portion (1)
Effective portion (3)
Reclassified to income during the period (4)
Net investment hedges
Ineffective portion (1)
Foreign currency gains (losses) (3)
Gains (losses) from hedges (3)
IAS 39
October 31
2017
$ (1,076)
991
(85)
(1)
622
95
–
(1,570)
438
(1)
(2)
(3)
(4)
Amounts are recorded in Non-interest income.
Amounts include losses of $82 million that are excluded from the assessment of hedge effectiveness and are offset by economic hedges.
Amounts are included in OCI, net of taxes.
After-tax gains of $70 million were reclassified from Other components of equity to Net interest income during the year ended October 31, 2017.
Reconciliation of components of equity
The following table provides a reconciliation by risk category of each component of equity and an analysis of other comprehensive income
relating to hedge accounting:
(Millions of Canadian dollars)
Balance at the beginning of the year
Cash flow hedges
Effective portion of changes in fair value:
Net amount reclassified to profit or loss:
Ongoing hedges:
Interest rate risk
Foreign exchange risk
Equity price risk
Interest rate risk
Foreign exchange risk
Equity price risk
De-designated hedges:
Interest rate risk
Foreign exchange risk
Net gain on hedge of net investment in foreign operations
Foreign exchange denominated debt
Forward foreign exchange contracts
Foreign currency translation differences for foreign operations
Tax on movements on reserves during the period
Balance at the end of the year
Note 9 Premises and equipment
(Millions of Canadian dollars)
Cost
Balance at beginning of period
Additions (1)
Transfers from work in process
Disposals
Foreign exchange translation
Other
Balance at end of period
Accumulated depreciation
Balance at beginning of period
Depreciation
Disposals
Foreign exchange translation
Other
Balance at end of period
Net carrying amount at end of period
For the year ended October 31, 2018
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
process
$ 157
–
–
(5)
1
–
$ 153
$
–
–
–
–
–
$
–
$ 153
$ 1,363
–
7
(17)
5
41
$ 1,399
$
$
$
608
44
(10)
2
25
669
730
$
$
$
$
$
1,875
255
44
(50)
4
(5)
2,123
1,367
246
(48)
1
(10)
1,556
567
$
$
$
$
$
1,314
43
56
(41)
4
(3)
1,373
984
100
(34)
2
(1)
1,051
322
$
$
$
$
$
2,586
61
184
(73)
8
(40)
2,726
1,819
179
(55)
6
(19)
1,930
796
$ 153
374
(291)
–
–
28
$ 264
$
–
–
–
–
–
$
–
$ 264
178
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
IFRS 9
For the year ended October 31, 2018
Cash flow hedge
reserve
431
$
Foreign currency
translation reserve
3,545
$
399
(147)
(18)
44
172
7
(108)
–
$
(92)
688
$
(331)
17
841
75
4,147
Total
$ 7,448
733
–
(186)
22
21
$ 8,038
$ 4,778
569
(147)
11
(5)
$ 5,206
$ 2,832
(Millions of Canadian dollars)
Cost
Balance at beginning of period
Additions (1)
Transfers from work in process
Disposals
Foreign exchange translation
Other
Balance at end of period
Accumulated depreciation
Balance at beginning of period
Depreciation
Disposals
Foreign exchange translation
Other
Balance at end of period
Net carrying amount at end of period
For the year ended October 31, 2017
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
process
$ 171
–
–
(9)
(4)
(1)
$ 157
$
–
–
–
–
–
$
–
$ 157
$ 1,379
1
7
(23)
(9)
8
$ 1,363
$
$
$
570
74
(15)
(2)
(19)
608
755
$
$
$
$
$
1,686
211
43
(90)
(11)
36
1,875
1,209
229
(89)
(8)
26
1,367
508
$
$
$
$
$
1,352
25
37
(47)
(7)
(46)
1,314
961
111
(44)
(3)
(41)
984
330
$
$
$
$
$
2,566
43
96
(68)
(18)
(33)
2,586
1,710
186
(61)
(12)
(4)
1,819
767
$ 132
226
(183)
–
–
(22)
$ 153
$
–
–
–
–
–
$
–
$ 153
Total
$ 7,286
506
–
(237)
(49)
(58)
$ 7,448
$ 4,450
600
(209)
(25)
(38)
$ 4,778
$ 2,670
(1)
As at October 31, 2018, we had total contractual commitments of $273 million to acquire premises and equipment (October 31, 2017 – $268 million).
Note 10 Goodwill and other intangible assets
Goodwill
For the year ended October 31, 2018
Canadian
Banking
Caribbean
Banking
Canadian
Wealth
Management
Global Asset
Management
U.S. Wealth
Management
(including
City National)
International
Wealth
Management
Investor &
Treasury
Services
Insurance
Capital
Markets
Total
$ 2,527 $ 1,694 $
1
–
–
–
–
35
576 $
–
–
3
2,006 $
–
–
(20)
2,745 $
80
(8)
53
120 $
–
–
(2)
112 $
–
–
–
148 $ 1,049 $ 10,977
81
–
(8)
–
87
18
–
–
–
(Millions of Canadian dollars)
Balance at beginning of
period
Acquisitions
Dispositions
Currency translations
Balance at end of period
$ 2,528 $ 1,729 $
579 $
1,986 $
2,870 $
118 $
112 $
148 $ 1,067 $ 11,137
For the year ended October 31, 2017
Canadian
Banking
Caribbean
Banking
Canadian
Wealth
Management
Global Asset
Management
U.S. Wealth
Management
(including
City National)
International
Wealth
Management
Investor &
Treasury
Services
Insurance
Capital
Markets
Total
$ 2,527 $ 1,771 $
–
–
–
–
–
(77)
582 $
–
–
(6)
1,963 $
–
–
43
2,854 $
–
(2)
(107)
115 $
–
–
5
112 $
–
–
–
148 $ 1,084 $ 11,156
–
–
–
(2)
(177)
(35)
–
–
–
(Millions of Canadian dollars)
Balance at beginning of
period
Acquisitions
Dispositions
Currency translations
Balance at end of period
$ 2,527 $ 1,694 $
576 $
2,006 $
2,745 $
120 $
112 $
148 $ 1,049 $ 10,977
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, the
greater of the CGU’s fair value less costs of disposal and its value in use is the recoverable amount. Our annual impairment test is performed as
at August 1.
In our 2018 and 2017 annual impairment tests, the recoverable amounts of our Caribbean Banking and International Wealth Management
CGUs were based on their fair value less costs of disposal. The recoverable amounts of all other CGUs tested were based on their 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 seven-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).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
179
Note 10 Goodwill and other intangible assets (continued)
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. The
sensitivity of key inputs and assumptions used was tested by recalculating the recoverable amount using reasonably possible variances 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, 2018, no reasonably possible 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.
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.
As at
August 1, 2018
August 1, 2017
Discount
rate (1)
Terminal
growth
rate
Discount
rate (1)
Terminal
growth
rate
10.5%
11.8
10.7
10.6
10.5
9.2
10.5
10.8
10.9
3.0%
4.3
3.0
3.0
3.0
3.0
3.0
3.0
3.0
10.1%
12.0
11.2
11.1
13.4
10.5
10.6
11.0
15.0
3.0%
4.3
3.0
3.0
3.0
3.0
3.0
3.0
3.0
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.
We use significant judgement to determine inputs to the discounted cash flow model which is most sensitive to changes in future cash
flows, discount rates and terminal growth rates applied to cash flows beyond the forecast period. The sensitivity of these key inputs was tested
by applying a reasonably possible change to these assumptions. As at August 1, 2018, the recoverable amount of our Caribbean Banking CGU,
based on fair value less costs of disposal, was 129% of its carrying amount. If the post-tax discount rate was increased by 1.8%, holding other
individual factors constant, the recoverable amount would approximate the carrying amount. No other reasonably possible change in an
individual key input or assumption, including decreasing the terminal growth rates by 2.5% or reducing future cash flows by 22%, 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 2018 and 2017, 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, 2018, 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.
180
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Other intangible assets
(Millions of Canadian dollars)
Gross carrying amount
Balance at beginning of period
Additions
Acquisitions through business combination
Transfers
Dispositions
Impairment losses
Currency translations
Other changes
Balance at end of period
Accumulated amortization
Balance at beginning of period
Amortization charge for the year
Dispositions
Currency translations
Other changes
Balance at end of period
Net balance at end of period
(Millions of Canadian dollars)
Gross carrying amount
Balance at beginning of period
Additions
Acquisitions through business combinations
Transfers
Dispositions
Impairment losses
Currency translations
Other changes
Balance at end of period
Accumulated amortization
Balance at beginning of period
Amortization charge for the year
Dispositions
Currency translations
Other changes
Balance at end of period
Internally
generated
software
$
5,143
40
–
798
(1)
(1)
16
(11)
Other
software
$ 1,432
79
–
51
(1)
–
11
10
$
5,984
$ 1,582
$ (3,825)
(669)
1
(11)
3
$ (1,094)
(112)
1
(7)
(14)
$ (4,501)
$ (1,226)
$
1,483
$
356
Internally
generated
software
$
$
4,435
26
–
692
–
(2)
(22)
14
5,143
$ (3,223)
(595)
–
15
(22)
$ (3,825)
Other
software
$ 1,389
70
–
60
(8)
(12)
(16)
(51)
$ 1,432
$ (1,054)
(111)
7
10
54
$ (1,094)
For the year ended October 31, 2018
Core
deposit
intangibles
Customer
list and
relationships
In process
software
$
$
$
$
$
1,715
–
–
–
–
–
35
–
1,750
(487)
(153)
–
(14)
–
(654)
1,096
$
$
$
$
$
1,753
–
16
–
–
–
(1)
–
1,768
(1,022)
(143)
–
3
–
(1,162)
606
$
$
$
$
$
Total
$ 10,935
1,230
16
–
(4)
(8)
65
(4)
892
1,111
–
(849)
(2)
(7)
4
(3)
1,146
$ 12,230
–
–
–
–
–
–
$ (6,428)
(1,077)
2
(29)
(11)
$ (7,543)
1,146
$ 4,687
For the year ended October 31, 2017
Core
deposit
intangibles
Customer list
and
relationships
In process
software
$
$
$
$
$
1,784
–
–
–
–
–
(69)
–
1,715
(348)
(156)
–
17
–
(487)
1,228
$
$
$
$
$
1,761
–
–
–
–
–
6
(14)
1,753
(874)
(153)
–
(10)
15
(1,022)
731
$
$
$
$
$
Total
$ 10,147
992
–
–
(10)
(14)
(106)
(74)
$ 10,935
$ (5,499)
(1,015)
7
32
47
$ (6,428)
778
896
–
(752)
(2)
–
(5)
(23)
892
–
–
–
–
–
–
892
$ 4,507
Net balance at end of period
$
1,318
$
338
Note 11 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
2018
165
$
October 31
2017
164
$
October 31
2018
521
$
October 31
2017
526
$
113
–
113
$
328
(8)
320
$
(92)
–
(92)
$
$
7
–
7
We do not have any joint ventures or associated companies that are individually material to our financial results.
During the year ended October 31, 2018, we recognized impairment losses of $12 million with respect to our interests in joint ventures and
associated companies (October 31, 2017 – impairment losses of $4 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, 2018, restricted net assets of these subsidiaries, joint
ventures and associates were $33.9 billion (October 31, 2017 – $29.4 billion).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
181
Note 12 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 13 Deposits
As at
October 31
2018
$ 14,467
4,940
2,868
4,047
686
626
991
99
656
163
1,475
5,456
2,641
361
4,588
$ 44,064
October 31
2017
$ 13,657
5,867
1,870
3,574
690
59
1,103
95
549
268
1,732
3,031
2,111
1,082
3,271
$ 38,959
October 31, 2018
October 31, 2017
As at
(Millions of Canadian dollars)
Personal
Business and government
Bank
Demand (1)
$ 135,101
238,617
8,750
Notice (2)
$ 48,873
8,606
299
Term (3)
$ 86,180
287,148
23,472
Total
$ 270,154
534,371
32,521
Demand (1)
$ 134,184
229,337
8,587
Notice (2)
$ 47,366
9,520
158
Term (3)
$ 78,663
266,808
15,012
Total
$ 260,213
505,665
23,757
$ 382,468
$ 57,778
$ 396,800
$ 837,046
$ 372,108
$ 57,044
$ 360,483
$ 789,635
Non-interest-bearing (4)
Canada
United States
Europe (5)
Other International
Interest-bearing (4)
Canada
United States
Europe (5)
Other International
$ 88,119
34,098
564
5,495
$ 5,086
–
–
5
$
–
–
–
–
$ 93,205
34,098
564
5,500
$ 84,498
34,441
616
6,059
$ 4,871
90
–
5
$
–
–
–
–
$ 89,369
34,531
616
6,064
213,747
2,478
32,930
5,037
15,112
33,099
1,412
3,064
292,641
67,211
26,598
10,350
521,500
102,788
60,940
18,451
212,456
847
30,148
3,043
14,990
32,263
1,585
3,240
274,934
55,840
19,613
10,096
502,380
88,950
51,346
16,379
$ 382,468
$ 57,778
$ 396,800
$ 837,046
$ 372,108
$ 57,044
$ 360,483
$ 789,635
(1)
(2)
(3)
(4)
(5)
Demand deposits are deposits for which we do not have the right to require notice of withdrawal, which includes both savings and chequing accounts.
Notice deposits are deposits for which we can legally require notice of withdrawal. These deposits are primarily savings accounts.
Term deposits are deposits payable on a fixed date, and 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, 2018, deposits denominated in U.S. dollars,
British pounds, Euro and other foreign currencies were $309 billion, $20 billion, $38 billion and $32 billion, respectively (October 31, 2017 – $283 billion, $16 billion, $37 billion and $29
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
182
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
As at
October 31
2018
October 31
2017
$
89,553
59,109
80,773
51,798
45,550
21,127
23,863
25,027
$ 71,841
41,221
82,588
52,033
40,400
30,062
18,745
23,593
$ 396,800
$ 360,483
$ 335,000
$ 328,000
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 14
Insurance
For the year ended
October 31, 2018
Average
balances
$ 603,582
131,715
60,647
23,788
Average
rates
1.28%
1.00
0.51
1.11
October 31, 2017
Average
balances
$ 581,059
112,551
53,928
22,778
Average
rates
0.96%
0.57
0.25
1.01
$ 819,732
1.17%
$ 770,316
0.85%
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 region-specific characteristics like those exhibited
in the property and casualty insurance business. Exposure to concentrations of insurance risks for the property and casualty business is not
significant. 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 insured. 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
For the year ended
October 31
2018
4,236
(204)
October 31
2017
4,215
(340)
$
4,032
2,615
(224)
2,391
$
$
$
3,875
2,840
(53)
2,787
$
$
$
$
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, 2018 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
183
Note 14 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)
As at
October 31
2018
October 31
2017
0.11%
1.82
3.80
0.50
0.52
3.14
0.11%
1.74
3.90
0.50
0.47
3.14
(1)
(2)
(3)
(4)
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).
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, 2018
October 31, 2017
Gross
Ceded
Net
Gross
Ceded
Net
$
9,982 $
42
$ 10,024 $
493 $
–
493 $
9,489
42
9,531
$
$
26 $
18
44 $
– $
3
3 $
26
15
41
$ 10,068 $
496 $
9,572
$
$
$
$
$
9,653 $
34
9,687 $
393 $
–
393 $
9,260
34
9,294
23 $
23
46 $
– $
2
2 $
23
21
44
9,733 $
395 $
9,338
(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 at beginning of period
New and in-force policies
Changes in assumption and methodology
Net change in investment contracts
Balances at end of period
For the year ended
October 31, 2018
$
Gross
9,687 $
502
(173)
8
$ 10,024 $
Ceded
393 $
83
17
–
493 $
$
Net
9,294
419
(190)
8
October 31, 2017
Gross
9,159 $
865
(349)
12
Ceded
545 $
53
(205)
–
Net
8,614
812
(144)
12
9,531
$
9,687 $
393 $
9,294
The net increase in Insurance claims and policy benefit liabilities over the prior year was comprised of the net increase in life and health liabilities
and reinsurance attributable to business growth partially offset by 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 $190 million net
decrease to insurance liabilities comprised of: (i) a decrease of $90 million for revised actuarial reserves on interest rate risk; (ii) a decrease of
$84 million due to reinsurance contract renegotiations; (iii) decrease of $11 million arising from insurance risk related assumption updates largely
due to mortality, morbidity, maintenance, property and casualty margin for adverse deviation and expense assumptions, impacting both gross
and ceded insurance policyholder liabilities; and (iv) a decrease of $5 million due to valuation system and data changes.
Reconciliation of non-life insurance policyholder liabilities
(Millions of Canadian dollars)
Balances at beginning of period
Changes in unearned premiums provision
Written premiums
Less: Net premiums earned
Changes in unpaid claims provision and adjustment expenses
Incurred claims
Less: Claims paid
Balances at end of period
184
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
For the year ended
October 31, 2018
October 31, 2017
Gross
Ceded
$
46 $
2 $
126
(123)
75
(80)
1
–
–
–
Net
44
125
(123)
75
(80)
Gross
Ceded
$
50 $
4 $
119
(119)
64
(68)
1
(1)
(2)
–
$
44 $
3 $
41
$
46 $
2 $
Net
46
118
(118)
66
(68)
44
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 each variable is applied to a range of existing actuarial modelling
assumptions to derive the possible impact on net income. 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 (2)
Decrease in equity market values (2)
Increase in maintenance expenses (3)
Life Insurance (3)
Adverse change in annuitant mortality rates
Adverse change in assurance mortality rates
Adverse change in morbidity rates
Adverse change in lapse rates
Net income impact for year ended
Change in
variable
October 31
2018
1% $
1
10
10
5
2
2
5
10
(2) $
–
6
(8)
(29)
(131)
(59)
(188)
(226)
October 31
2017
(1)
3
3
(4)
(29)
(117)
(60)
(183)
(220)
(1)
(2)
(3)
Sensitivities for market interest rates include the expected current period earnings impact of a 100 basis points shift in the yield curve by increasing the current reinvestment rates while
holding the assumed ultimate rates constant. The sensitivity consists of both the impact on assumed reinvestment rates in the actuarial liabilities and any changes in fair value of assets and
liabilities from the yield curve shift.
Sensitivities to changes in equity market values are composed of the expected current period earnings impact from differences in the changes in fair value of the equity asset holdings and
the partially offsetting impact on the actuarial liabilities.
Sensitivities to changes in maintenance expenses and life insurance actuarial assumptions include the expected current period earnings impact from recognition of increased liabilities due
to an adverse change in the given assumption over the lifetime of all inforce policies.
Note 15 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 assets (liabilities) net
Changes in net assets
(Millions of Canadian dollars)
Net assets at beginning of period
Additions (deductions):
Deposits from policyholders
Net realized and unrealized gains (losses)
Interest and dividends
Payment to policyholders
Management and administrative fees
Net assets at end of period
As at
October 31
2018
$
$
19 $
1,348
1
1,368 $
October 31
2017
1
1,217
(2)
1,216
For the year ended
October 31
2018
1,216 $
October 31
2017
981
$
537
(40)
31
(342)
(34)
1,368 $
430
87
26
(279)
(29)
1,216
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
185
Note 16 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 primary 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 principal pension plan, the most recent funding actuarial valuation was completed
on January 1, 2018, and the next valuation will be completed on January 1, 2019.
For the year ended October 31, 2018, total contributions to our pension plans (defined benefit and defined contribution plans) and other
post-employment benefit plans were $594 million and $65 million (October 31, 2017 – $612 million and $62 million), respectively. For 2019,
total contributions to our pension plans and other post-employment benefit plans are expected to be $578 million and $78 million, respectively.
Risks
By their design, the defined benefit pension and other post-employment benefit 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. These risks will reduce over time due to the membership closure of our
primary defined benefit pension plans and migration to defined contribution pension plans.
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.
(Millions of Canadian dollars)
Canada
Fair value of plan assets
Present value of defined benefit obligation
Net surplus (deficit)
International
Fair value of plan assets
Present value of defined benefit obligation
Net surplus (deficit)
Total
Fair value of plan assets
Present value of defined benefit obligation
Total net surplus (deficit)
Effect of asset ceiling
Total net surplus (deficit), net of effect of asset ceiling
Amounts recognized in our Consolidated Balance Sheets
Employee benefit assets
Employee benefit liabilities
Total net surplus (deficit), net of effect of asset ceiling
As at
October 31, 2018
October 31, 2017
Defined benefit
pension plans
Other post-
employment
benefit plans
Defined benefit
pension plans
Other post-
employment
benefit plans
$ 12,587
12,270
$
$
$
317
977
948
29
$ 13,564
13,218
$
$
$
$
346
(1)
345
626
(281)
345
$
$
$
$
$
$
$
$
$
1
1,522
(1,521)
–
100
(100)
1
1,622
(1,621)
–
(1,621)
–
(1,621)
(1,621)
$
$
$
$
$
$
$
$
$
12,505
12,834
$
1
1,714
(329)
$ (1,713)
1,068
1,171
(103)
13,573
14,005
$
$
$
–
131
(131)
1
1,845
(432)
$ (1,844)
(1)
–
(433)
$ (1,844)
59
(492)
(433)
$
–
(1,844)
$ (1,844)
186
Royal Bank of Canada: Annual Report 2018
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)
Opening Fair value of plan assets at beginning of period
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 at end of period
Opening Benefit obligation at beginning of period
Current service costs
Past service costs
Gains and losses on settlements
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
Other
Closing Benefit obligation at end of period
Unfunded obligation
Wholly or partly funded obligation
Total benefit obligation
As at or for the year ended
October 31, 2018
October 31, 2017
Defined benefit
pension plans (1)
13,573
$
476
Other post-
employment
benefit plans
1
$
–
Defined benefit
pension plans (1)
12,459
$
426
Other post-
employment
benefit plans
1
$
–
$
$
(268)
(10)
409
49
(586)
(64)
(15)
13,564
14,005
359
(13)
13
484
(164)
(828)
(22)
(15)
49
(586)
(64)
–
13,218
27
13,191
13,218
$
$
$
–
–
65
19
(84)
–
–
1
1,845
34
(25)
–
66
(66)
(140)
(32)
5
19
(84)
–
–
1,622
1,481
141
1,622
$
$
$
$
$
$
$
749
25
444
50
(566)
–
(14)
13,573
13,879
380
(2)
–
468
(2)
(188)
(31)
18
50
(566)
–
(1)
14,005
30
13,975
14,005
$
$
$
1
–
62
19
(82)
–
–
1
1,894
40
–
–
68
(36)
3
(59)
(2)
19
(82)
–
–
1,845
1,694
151
1,845
$
$
$
$
$
(1)
For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2018 were $685 million and $404 million, respectively (October 31, 2017 –
$12,824 million and $12,332 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 pension and
other post-employment benefit plans worldwide.
(Millions of Canadian dollars)
Current service costs
Past service costs
Gains and losses on settlements
Net interest expense
Remeasurements of other long term benefits
Administrative expense
Defined benefit pension expense
Defined contribution pension expense
For the year ended
Pension plans
Other post-employment
benefit plans
October 31
2018
$ 359
(13)
13
8
–
15
$ 382
185
$ 567
$
October 31
2017
380
(2)
–
42
–
14
$
$
434
168
602
$
October 31
2018
34
(25)
–
66
(4)
–
$
$
71
–
71
$
October 31
2017
40
–
–
68
(2)
–
$
$
106
–
106
Service costs for the year ended October 31, 2018 totalled $354 million (October 31, 2017 – $370 million) for pension plans in Canada and
$(8) million (October 31, 2017 – $8 million) for International plans. Net interest expense (income) for the year ended October 31, 2018 totalled
$4 million (October 31, 2017 – $37 million) for pension plans in Canada and $4 million (October 31, 2017 – $5 million) for International plans.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
187
Note 16 Employee benefits – Pension and other post-employment benefits (continued)
Pension and other post-employment benefit remeasurements
The following table presents the composition of our remeasurements recorded in OCI related to our material pension and other post-employment
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
2018
October 31
2017
October 31
2018
October 31
2017
$
$
(164)
(828)
(22)
268
–
(746)
$
$
(2)
(188)
(31)
(749)
(2)
(972)
$
$
(65)
(134)
(35)
–
–
(234)
$
$
(34)
6
(62)
(1)
–
(91)
Remeasurements recorded in OCI for the year ended October 31, 2018 were gains of $633 million (October 31, 2017 – gains of $963 million) for
pension plans in Canada and gains of $113 million (October 31, 2017 – gains of $9 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 plans’ 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 plans’ assets is conducted with careful
consideration of the pension obligation’s sensitivity to interest rates and credit spreads which are key risk factors impacting the obligation’s
value. 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 debt securities, equity securities, alternative investments and derivative instruments. Our
holdings in certain investments, including common shares, 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
plans. To manage our credit risk exposure, where derivatives instruments are not centrally cleared, counterparties are required to meet minimum
credit ratings and enter into collateral agreements.
Our defined benefit pension plan assets are primarily comprised of debt and equity securities and alternative investments. 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 debt. 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, 2018, management of defined benefit pension investment focused on opportunistically investing in
funds which increased diversification, reduced pension plan risk and improved expected return. Over time, an increasing allocation to debt
securities is being used to reduce asset/liability duration mismatch and hence variability of the plans’ funded status due to interest rate
movement. 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 plans’ liabilities, which are discounted using predominantly long maturity bond interest rates as inputs.
Asset allocation of defined benefit pension plans (1)
(Millions of Canadian dollars, except percentages)
Fair value
As at
October 31, 2018
October 31, 2017
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
$
1,259
3,243
2,643
288
3,265
2,866
10%
24
19
2
24
21
100%
99
$ 1,752
3,314
–
–
–
15
2,502
387
2,896
2,722
13%
25
18
3
21
20
100%
100
–
–
–
16
$
13,564
100%
36%
$ 13,573
100%
41%
(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, 40% of our total plan assets would be classified as quoted in an active market
(October 31, 2017 – 45%).
188
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
The allocation of equity securities in our pension plans in Canada is 33% (October 31, 2017 – 38%) and that of our International plans is 23%
(October 31, 2017 – 22%). The allocation of debt securities in our pension plans in Canada is 46% (October 31, 2017 – 42%) and that of our
International plans is 42% (October 31, 2017 – 42%). The allocation of alternative investments and other in our pension plans in Canada is 21%
(October 31, 2017 – 20%) and that of our International plans is 35% (October 31, 2017 – 36%).
As at October 31, 2018, the plan assets include 1 million (October 31, 2017 – 1 million) of our common shares with a fair value of
$95 million (October 31, 2017 – $121 million) and $49 million (October 31, 2017 – $41 million) of our debt securities. For the year ended
October 31, 2018, dividends received on our common shares held in the plan assets were $4 million (October 31, 2017 – $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 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
Benefits expected to be paid 2023
Benefits expected to be paid 2024-2028
Weighted average duration of defined benefit payments
As at October 31, 2018
Canada
International
Total
$
70,096
521 $
575
594
615
636
657
3,567
14.9 years
7,687
65 $
57
59
61
61
61
297
17.9 years
77,783
586
632
653
676
697
718
3,864
15.1 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 Canadian 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 a local 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 using the plan’s recent experience as well as
market expectations.
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
2018
October 31
2017
October 31
2018
October 31
2017
4.00%
3.30%
n.a.
n.a.
3.50%
3.30%
n.a.
n.a.
4.10%
n.a.
3.50%
3.10%
3.70%
n.a.
4.00%
3.90%
(1)
n.a.
For our other post-employment benefit plans, the assumed trend rates used to measure the expected benefit costs of the defined benefit obligations are also the ultimate trend rates.
not applicable
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
189
Note 16 Employee benefits – Pension and other post-employment benefits (continued)
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 material plans.
As at
October 31, 2018
October 31, 2017
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
23.7
20.6
23.4
24.1
22.7
25.2
24.7
22.3
25.0
25.0
24.2
26.9
23.2
20.7
24.1
23.7
22.7
26.2
24.2
22.3
26.2
24.6
24.2
28.4
(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 2018.
(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
Note 17 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
190
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Increase (decrease) in obligation
Defined benefit
pension plans
Other post-
employment
benefit plans
$ (946)
1,060
$ (107)
120
59
(62)
331
n.a.
n.a.
1
(1)
29
79
(66)
As at
October 31
2018
13,907 $
1,531
7,073
4,078
1,693
2,223
2,259
2,071
346
1,482
364
84
507
1,902
12,753
52,273 $
$
$
October 31
2017
15,422
1,293
7,192
2,932
2,080
1,781
2,079
2,342
387
1,394
334
97
460
2,336
6,826
46,955
Note 18 Subordinated debentures
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
August 12, 2019
July 15, 2022
June 8, 2023
July 17, 2024 (1)
December 6, 2024
June 4, 2025 (1)
January 20, 2026 (1)
January 27, 2026 (1)
September 29, 2026 (1)
November 1, 2027
June 26, 2037
October 1, 2083
June 29, 2085
Deferred financing costs
Earliest par value
redemption date
July 17, 2019
December 6, 2019
June 4, 2020
January 20, 2021
September 29, 2021
November 1, 2022
June 26, 2017 (6)
Any interest payment date
Any interest payment date
Interest
rate
9.00%
5.38%
9.30%
3.04% (2)
2.99% (3)
2.48% (3)
3.31% (4)
4.65%
3.45% (5)
4.75%
2.86%
(7)
(8)
Denominated
foreign currency
(millions)
US$75
US$150
US$1,500
TT$300
JPY 10,000
US$174
As at
$
October 31
2018
103
208
110
998
1,978
988
1,443
1,813
988
59
–
224
229
$
October 31
2017
106
207
110
1,002
2,003
992
1,456
1,882
1,014
57
–
224
224
$
$
9,141
(10)
9,131
$
$
9,277
(12)
9,265
The terms and conditions of the debentures are as follows:
(1)
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 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.
All ¥10,000 million outstanding subordinated debentures were redeemed on June 26, 2017 for 100% of their principal amount plus accrued interest to the redemption date.
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.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
All redemptions, cancellations and exchanges of subordinated debentures are subject to the consent and approval of OSFI, except for the
debentures maturing 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)
Within 1 year
1 to 5 years
5 to 10 years
Thereafter
Note 19 Trust capital securities
$
October 31
2018
103
318
8,267
453
$
9,141
We issued innovative capital instruments, RBC Trust Capital Securities (RBC TruCS), through the structured entity RBC Capital Trust (Trust).
On June 30, 2018, the Trust redeemed all issued and outstanding RBC TruCS 2008-1 for cash at a redemption price of $1,000 per unit.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
191
Note 20 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)
Common shares issued
Balance at beginning of period
Issued in connection with share-based compensation
plans (1)
Purchased for cancellation (2)
Balance at end of period
Treasury shares – common shares
Balance at beginning of period
Purchases
Sales
Balance at end of period
Common shares outstanding
Preferred shares issued
First preferred (3)
Non-cumulative, fixed rate
Series W
Series AA
Series AB (4)
Series AC
Series AD (5)
Series AE
Series AF
Series AG
Series BH
Series BI
Series BJ
Series C-1 (6)
Non-cumulative, 5-Year Rate Reset
Series AJ
Series AL
Series AZ
Series BB
Series BD
Series BF
Series BK
Series BM
Non-cumulative, floating rate
Series AK
Non-cumulative, fixed rate/floating rate
Series C-2
Treasury shares – preferred shares
Balance at beginning of period (7)
Purchases
Sales
Balance at end of period (7)
Preferred shares outstanding
As at and for the year ended
October 31, 2018
October 31, 2017
Number of
shares
(thousands)
Dividends
declared
per share
Number of
shares
(thousands)
Dividends
declared per
share
Amount
Amount
1,452,898
$ 17,730
1,485,394
$ 17,939
1,466
(15,335)
1,439,029
92
(187)
$ 17,635
$
3.77
3,477
(35,973)
1,452,898
227
(436)
$ 17,730
$
3.48
(363)
(53,964)
54,092
(235)
$
$
(27)
(5,470)
5,479
(18)
(1,159)
(46,066)
46,862
(363)
$
$
(80)
(4,361)
4,414
(27)
1,438,794
$ 17,617
1,452,535
$ 17,703
$
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
29,000
30,000
2,421
300
300
–
200
250
250
200
250
150
150
150
–
339
300
500
500
600
300
725
750
61
$
US$
1.23
1.11
–
1.15
1.13
1.13
1.11
1.13
1.23
1.23
1.31
–
0.88
1.07
1.00
0.98
0.90
0.90
1.38
1.38
0.78
$
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
300
300
–
200
250
250
200
250
150
150
150
107
339
300
500
500
600
300
725
750
61
$
1.23
1.11
0.99
1.15
1.13
1.13
1.11
1.13
1.23
1.23
1.31
US$ 55.00
0.88
1.07
1.00
0.98
0.90
0.90
1.38
1.38
0.62
20
251,020
31
$ 6,306
US$ 67.50
20
251,102
31
$ 6,413
US$ 67.50
6
(10,215)
10,323
114
$
$
–
(256)
259
3
251,134
$ 6,309
31
(5,311)
5,286
6
$
$
–
(130)
130
–
251,108
$ 6,413
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Includes fair value adjustments to stock options of $15 million (2017 – $46 million).
During the year ended October 31, 2018, we purchased common shares for cancellation at an average cost of $99.29 per share with a book value of $12.22 per share. During the year ended
October 31, 2017, we purchased common shares for cancellation at an average cost of $86.47 per share with a book value of $12.15 per share.
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$1,000 per share (equivalent to US$25 per depositary share).
On September 27, 2017, we redeemed all 12 million issued and outstanding Non-Cumulative First Preferred Shares, Series AB, for cash at a redemption price of $25 per share.
On November 24, 2018, we redeemed all 10 million Non-Cumulative First Preferred Shares Series AD at a price of $25 per share.
On November 13, 2017, we redeemed all 82,050 issued and outstanding Series C-1 shares for cash at a redemption price of US$1,000 per share (equivalent to US$25 per related depositary
share).
Positive amounts represent a short position in treasury shares.
192
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Significant terms and conditions of preferred shares
As at October 31, 2018
Preferred shares
First preferred
Non-cumulative, fixed rate
Series W (4)
Series AA
Series AC
Series AD (5)
Series AE
Series AF
Series AG
Series BH (6)
Series BI (6)
Series BJ (6)
Non-cumulative, 5-Year Rate Reset (7)
Series AJ
Series AL
Series AZ (6)
Series BB (6)
Series BD (6)
Series BF (6)
Series BK (6)
Series BM (6)
Non-cumulative, floating rate
Series AK (8)
Non-cumulative, fixed rate/floating rate
Initial
Period
Annual Yield
Premium
Current
Dividend
per share (1)
Earliest
redemption date (2)
Issue Date
Redemption
price (2) (3)
4.90%
4.45%
4.60%
4.50%
4.50%
4.45%
4.50%
4.90%
4.90%
5.25%
$
January 31, 2005 $
February 24, 2010
.306250
April 4, 2006
.278125
May 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
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%
.212482
February 24, 2019
February 24, 2014
25.00
25.00
25.00
25.00
25.00
25.00
25.00
26.00
26.00
26.00
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 (7th day for Series C-2) 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, 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-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.
On November 24, 2018, we redeemed all 10 million Non-Cumulative First Preferred Shares Series AD at a price of $25 per share.
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 multiplier of 1 and with a conversion price based on the greater of: (i) a floor price of $5 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 plus declared and unpaid
dividends) by the conversion price.
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.
Currently, these limitations do not restrict the payment of dividends on our preferred or common shares.
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 2018 and 2017, the requirements of our DRIP were satisfied
through open market share purchases.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
193
Note 20 Equity (continued)
Shares available for future issuances
As at October 31, 2018, 43.7 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 2008-1
Other
As at
October 31
2018
October 31
2017
$
$
–
94
94
$
$
511
88
599
(1)
As at October 31, 2018, we have redeemed all remaining outstanding RBC TruCS Series 2008-1.
Note 21 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, 2018, in respect of the stock option plans was $6 million (October 31,
2017 – $8 million). The compensation expense related to non-vested options was $3 million at October 31, 2018 (October 31, 2017 –
$5 million), to be recognized over the weighted average period of 1.1 years (October 31, 2017 – 1.5 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 period
Granted
Exercised (1) (2)
Forfeited in the period
Outstanding at end of period
Exercisable at end of period
For the year ended
October 31, 2018
October 31, 2017
Number of
options
(thousands)
8,566
773
(1,440)
(129)
7,770
Weighted
average
exercise price (3)
64.96
$
102.33
50.42
78.12
71.40
$
Number of
options
(thousands)
10,650
1,509
(3,477)
(116)
8,566
Weighted
average
exercise price (3)
57.64
$
90.23
51.14
75.96
64.96
$
3,726
$
55.82
4,337
$
50.04
(1)
(2)
(3)
Cash received for options exercised during the year was $73 million (October 31, 2017 – $178 million) and the weighted average share price at the date of exercise was $101.81 (October 31,
2017 – $93.48).
New shares were issued for all stock options exercised in 2018 and 2017.
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2018 and October 31, 2017. For foreign currency-
denominated options exercised during the year, the weighted average exercise prices are translated using exchange rates as at the settlement date.
Options outstanding as at October 31, 2018 by range of exercise price
(Canadian dollars per share except share amounts and years)
$19.79 – $46.55
$47.06 – $55.04
$58.65 – $74.22
$74.39 – $76.61
$78.59 – $102.33
Options outstanding
Options exercisable
Number
outstanding
(thousands)
1,065
1,132
1,003
1,636
2,934
7,770
Weighted
average
exercise price (1)
40.60
$
52.14
64.55
74.65
90.53
71.40
$
Weighted
average
remaining
contractual
life (years)
2.66
2.09
5.04
6.89
7.83
5.72
Number
exercisable
(thousands)
1,065
1,132
937
247
345
3,726
Weighted
average
exercise price (1)
40.60
$
52.14
63.94
75.57
78.59
55.82
$
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2018.
The weighted average fair value of options granted during the year ended October 31, 2018 was estimated at $6.66 (October 31, 2017 – $5.28).
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
194
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
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
2018
101.83
1.71%
3.66%
13%
6 years
$
October 31
2017
90.30
1.27%
4.14%
14%
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, 2018, we contributed $97 million (October 31, 2017 – $92 million), under
the terms of these plans, towards the purchase of our common shares. As at October 31, 2018, an aggregate of 35 million common shares were
held under these plans (October 31, 2017 – 36 million common shares).
Deferred share and other plans
We offer deferred share unit plans to executives, certain key employees and non-employee directors of RBC. Under these plans, participants 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 participants 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 maintain non-qualified deferred compensation plans for certain key employees in the United States. These plans allow eligible
employees to defer a portion of their annual income and a variety of productivity and recruitment bonuses and allocate the deferrals among
specified fund choices, including a RBC Share Accounted fund that tracks the value of our common shares.
The following table presents the units granted under the deferred share and other plans for the year.
Units granted under deferred share and other plans
(Units and per unit amounts)
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, 2018
October 31, 2017
Units
granted
(thousands)
376
4,820
2,099
91
978
Weighted
average
fair value
per unit
$ 100.71
95.18
101.55
103.55
101.48
Units
granted
(thousands)
343
4,347
2,185
99
794
Weighted
average
fair value
per unit
$ 91.87
100.30
88.79
91.49
90.68
8,364
$ 97.85
7,768
$ 93.24
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 and specified fund choices as applicable. Annually, our obligation is increased by additional units earned by
plan participants, and is reduced by forfeitures, cancellations, and the settlement of vested units. In addition, our obligation is impacted by
fluctuations in the market price of our common shares and specified fund units. For performance deferred share award plans, the estimated
outcome of meeting the performance conditions also impacts our obligation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
195
Note 21 Share-based compensation (continued)
The following tables present the units that have been earned by the participants, our obligations for these earned units under the deferred
share and other plans, and the related compensation expenses (recoveries) recognized for the year.
Obligations under deferred share and other plans
(Millions of Canadian dollars except units)
Deferred share unit plans
Deferred bonus plan
Performance deferred share award plans
Deferred compensation plans (1)
Other share-based plans
(1)
Excludes obligations not determined based on the quoted market price of our common shares.
Compensation expenses recognized under deferred share and other plans
As at
October 31, 2018
October 31, 2017
Units
(thousands)
4,631 $
10,347
5,892
3,299
2,140
26,309 $
Carrying
amount
446
990
565
317
202
2,520
Units
(thousands)
4,642
12,021
5,924
3,651
2,021
28,259
Carrying
amount
468
$
1,213
597
368
201
$ 2,847
For the year ended
(Millions of Canadian dollars)
Deferred share unit plans
Deferred bonus plan
Performance deferred share award plans
Deferred compensation plans
Other share-based plans
Note 22 Income taxes
Components of tax expense
$
October 31
2018
6
139
190
80
78
493
$
$
October 31
2017
96
343
312
342
108
1,201
$
(Millions of Canadian dollars)
Income taxes (recoveries) in Consolidated Statements of Income
Current tax
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 (reversal of a previous 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
Net unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income
Provision for credit losses recognized in income
Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive
income to income
Unrealized foreign currency translation gains (losses)
Net foreign currency translation gains (losses) from hedging activities
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 fair value through profit or loss
Net gains (losses) on equity securities designated at fair value through other comprehensive income
Share-based compensation awards
Total income taxes
196
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
$
For the year ended
October 31
2018
October 31
2017
3,351
(212)
(11)
3,128
28
148
152
(127)
–
201
3,329
12
(5)
(52)
2
(77)
84
8
256
45
(5)
15
283
3,612
$
$
3,261
(22)
–
3,239
(32)
(8)
5
–
(1)
(36)
3,203
62
(38)
(3)
142
195
(3)
273
(124)
(35)
469
3,672
Our effective tax rate changed from 21.8% for 2017 to 21.1% for 2018, principally due to higher net favourable tax adjustments, higher income
from lower tax rate jurisdictions, and the net impact of the U.S. Tax Reform, as the writedown of net deferred taxes was more than offset by the
lower corporate tax rate on U.S. earnings. These factors were partially offset by the impact of our share of the gain related to the sale of our
U.S. operations of Moneris in the prior 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
Other
For the year ended
October 31, 2018
26.5%
$ 4,176
October 31, 2017
26.5%
$ 3,888
(752)
(285)
148
42
(4.8)
(1.8)
0.9
0.3
(518)
(293)
(8)
134
(3.5)
(2.0)
(0.1)
0.9
Income taxes in Consolidated Statements of Income / effective tax rate
$ 3,329
21.1%
$ 3,203
21.8%
Deferred tax assets and liabilities result from tax loss and tax credit 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 and tax credit carryforwards
Deferred income
Financial instruments measured at fair value through other
comprehensive income
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 and tax credit 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 and for the year ended October 31, 2018
Net asset
beginning of
period (1)
Change
through
equity
Change
through profit
or loss
Exchange rate
differences
Net asset
end of
period
$
$
$
$
$
703
1,491
11
19
(11)
48
(1,003)
76
571
(54)
$
(6)
(15)
–
–
–
19
(1)
–
(260)
3
$
1
(502)
(8)
188
(37)
(74)
182
(23)
(16)
88
1,851
$ (260)
$
(201)
$
(3)
59
–
(4)
–
(1)
(36)
2
–
(16)
1
1,948
(97)
1,851
As at and for the year ended October 31, 2017
Net asset
beginning of
period
Change
through
equity
Change
through profit
or loss
Exchange rate
differences
$
$
$
$
$
484
1,558
8
32
95
10
(1,081)
(60)
825
(33)
$
–
35
–
–
–
47
(1)
–
(273)
(12)
$
9
(65)
3
(12)
(105)
(5)
66
135
23
(13)
1,838
$ (204)
$
36
$
(7)
(37)
–
(1)
(1)
(3)
13
1
(4)
4
(35)
2,827
(989)
1,838
$
$
$
$
$
$
$
$
695
1,033
3
203
(48)
(8)
(858)
55
295
21
1,391
1,475
(84)
1,391
Net asset
end of
period
486
1,491
11
19
(11)
49
(1,003)
76
571
(54)
1,635
1,732
(97)
1,635
(1)
These amounts reflect certain transition adjustments made upon adoption of IFRS 9. Refer to Note 2 for further details.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
197
Note 22 Income taxes (continued)
The tax loss and tax credit carryforwards amount of deferred tax assets relates to losses and tax credits in our Canadian, U.S., Caribbean, and
Japanese operations. Deferred tax assets of $203 million were recognized at October 31, 2018 (October 31, 2017 – $19 million) in respect of tax
losses and tax credits incurred in current or preceding years 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, 2018, unused tax losses, tax credits and deductible temporary differences of $443 million, $426 million and $39 million
(October 31, 2017 – $387 million, $582 million and $40 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 $4 million which expire within one year
(October 31, 2017 – $2 million), $2 million which expire in two to four years (October 31, 2017 – $4 million) and $437 million which expire after
four years (October 31, 2017 – $381 million). There are no tax credits that will expire in one year (October 31, 2017 – $7 million), $45 million
that will expire in two to four years (October 31, 2017 – $92 million) and $381 million that will expire after four years (October 31, 2017 –
$483 million). In addition, there are deductible temporary differences of $1 million that will expire in one year (October 31, 2017 – $nil),
$1 million that will expire in two to four years (October 31, 2017 – $1 million) and $37 million that will expire after four years (October 31,
2017 – $39 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 $14.6 billion as at October 31, 2018 (October 31, 2017 –
$13.5 billion).
Tax examinations and assessments
We have received proposal letters (the Proposals) from the Canada Revenue Agency (CRA), in respect of the 2013 and 2012 taxation years, which
suggest that Royal Bank of Canada owes additional income taxes of approximately $211 million and $250 million, respectively, as the tax
deductibility of certain dividends was denied on the basis that they were part of a “dividend rental arrangement”. The Proposals are consistent
with reassessments previously received for taxation years 2011, 2010, and 2009 for approximately $434 million of additional income taxes and
interest in respect of the same matter. These amounts represent the maximum additional taxes owing for those years. It is possible that the CRA
will reassess us for significant additional income tax for subsequent years on the same basis. We are confident that our tax filing position was
appropriate and intend to defend ourselves vigorously.
U.S. Tax Reform
In December 2017, U.S. H.R. 1 was passed into law. The changes include a reduction in the corporate income tax rate from 35% to 21% which
resulted in a write-down of $178 million (US$142 million), primarily related to net deferred tax assets. As the reduced tax rates were effective on
January 1, 2018, the lower average tax rate applicable to subsidiaries includes the fiscal 2018 blended rate for U.S. subsidiaries. Please refer to
the Legal and regulatory environment risk – United States Tax Reform section of the Management’s Discussion and Analysis for further details.
Note 23 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
2018
October 31
2017
$
$
$
12,431
(285)
(31)
12,115
1,443,894
8.39
12,115
15
12,130
1,443,894
2,691
742
3,158
$
$
$
11,469
(300)
(41)
11,128
1,466,988
7.59
11,128
15
11,143
1,466,988
3,273
744
3,416
1,450,485
8.36
$
1,474,421
7.56
$
(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, 2018, an average of 657,353 outstanding options with an average price of
$102.33 were excluded from the calculation of diluted earnings per share. For the year ended October 31, 2017, no outstanding options were excluded from the calculation of diluted
earnings per share.
Includes exchangeable preferred shares.
198
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Note 24 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.
(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
(1)
Amounts have been revised from those previously presented.
Maximum exposure to credit losses
As at
October 31
2018
October 31
2017(1)
$
15,502
$
16,295
36,267
2,128
268
223,954
107,239
6,955
391
36,056
2,261
286
185,286
101,844
6,579
154
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 seven 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 ABCP 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.
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 ABCP 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 third party 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 where we do not have the ability to unilaterally withdraw the credit extended to the borrower.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
199
Note 24 Guarantees, commitments, pledged assets and contingencies (continued)
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 debt or equity instruments.
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 seven 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, participation
as a member of exchanges, 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 at any time. These include both retail and commercial commitments. As at October 31, 2018, the total balance of uncommitted
amounts was $264 billion (October 31, 2017 – $245 billion(1)).
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 $141 million as at October 31, 2018, (October 31,
2017 – $38 million).
We invest in private companies, directly or through third party investment funds, including Small Business Investment Companies, real estate
funds and Low Income Housing Tax Credit funds. These funds are generally structured as closed-end limited partnerships wherein we hold a
limited partner interest. For the year ended October 31, 2018, we have unfunded commitments of $948 million (October 31, 2017 –
$1,081 million(1)) representing the aggregate amount of cash we are obligated to be contributed as capital to these partnerships under the terms
of the relevant contracts.
Pledged assets and collateral
In the ordinary course of business, we pledge assets and enter into 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, 2018, we had on average $4.0 billion of assets pledged
intraday to the Bank of Canada on a daily basis (October 31, 2017 – $3.7 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, 2018 and October 31, 2017.
(1)
Amounts have been revised from those previously presented.
200
Royal Bank of Canada: Annual Report 2018
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
Loans
Securities
Other assets
Client assets (2)
Collateral received and available for sale or re-pledging
Less: not sold or re-pledged
Uses of pledged assets and collateral
Securities borrowing and lending
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
2018
October 31
2017 (1)
$ 79,798
48,993
19,406
$ 80,467
43,149
19,524
148,197
143,140
402,187
(53,590)
348,597
288,945
(56,820)
232,125
$ 496,794
$ 375,265
$ 119,087
32,247
209,353
49,997
36,959
21,110
5,058
4,006
18,977
$ 70,893
30,008
145,342
48,461
37,041
21,508
3,280
3,621
15,111
$ 496,794
$ 375,265
(1)
(2)
Amounts have been revised from those previously presented.
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, 2018
October 31, 2017
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
$
$
25
25
50
$
$
(2)
(2)
(4)
$
$
23
23
46
$
$
17
21
38
$
$
(2)
(2)
(4)
$
$
15
19
34
The net carrying amount of computer equipment held under finance lease as at October 31, 2018 was $47 million (October 31, 2017 –
$44 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, 2018
October 31, 2017
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
$
684
2,081
2,816
5,581
(11)
Equipment
Equipment
$
$
Land and
buildings
$
643
2,006
2,868
5,517
(21)
103
137
–
240
–
240
94
192
–
286
–
286
Net future minimum lease payments
$ 5,570
$
$ 5,496
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
201
Note 25 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 in
the past 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.
On February 28, 2018, the motion by the plaintiffs in the class action lawsuits to have the class certified was denied in relation to Royal Bank of
Canada. As such, unless that ruling is reversed on appeal, Royal Bank of Canada is no longer a defendant in any pending class action. Royal
Bank of Canada is still a party to the various individual LIBOR actions. 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 Company (Bahamas) 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. On January 12, 2017, the French court acquitted all parties
including RBC Bahamas and on June 29, 2018, the French appellate court affirmed the acquittals. The acquittals are being appealed.
On October 28, 2016, Royal Bank of Canada was granted an exemption by the U.S. Department of Labor 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 for a temporary one year period from
the date of conviction. An application to grant more lengthy exemptive relief is pending.
RBC Bahamas continues to review the trustee’s and the trust’s legal obligations, including liabilities and potential liabilities under
applicable tax and other laws. Based on the facts currently known, it is not possible at this time to predict the ultimate outcome of these matters;
however, we believe that the 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 Supreme Court of Canada
declined the B.C. class action plaintiffs’ request to appeal the decision striking the plaintiffs’ cause of action under section 45 of the Competition
Act.
In 9085-4886 Quebec Inc. v. Visa Canada Corporation, et al., the Quebec-court dismissed the Competition Act claims by Quebec merchants
for post-2010 damages and certified a class as to the remaining claims. The merchants have appealed the dismissal of their claims in the
Quebec authorization decision. No date has yet been assigned to the appeal.
Based on the facts currently known, it is not possible at this time for us to predict the ultimate outcome of these proceedings or the timing
of their resolution.
Foreign exchange matters
Various regulators are conducting inquiries regarding potential violations of antitrust law by a number of banks, including Royal Bank of Canada,
regarding foreign exchange trading.
Beginning in 2015, putative class actions were brought against Royal Bank of Canada and/or RBC Capital Markets, LLC in the United States,
Canada, and Israel. These actions were each brought against multiple foreign exchange dealers and allege, among other things, collusive
behaviour in global foreign exchange trading. In August 2018, the U.S. District Court entered a final order approving RBC Capital Markets’
pending settlement with class plaintiffs. In November 2018, certain institutional plaintiffs who had previously opted-out of participating in the
settlement filed their own lawsuit in US District Court. The Canadian class actions, one other U.S. action that is purportedly brought on behalf of
different classes of plaintiffs, and a purported class action recently filed in Israel remain pending.
202
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
In its discretion Royal Bank of Canada may choose to resolve claims, litigations, or similar matters at any time. 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.
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 26
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, Chief Financial Officer, Chief Human
Resources Officer, Group Chief Risk Officer, Chief Strategy & Corporate Development 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 (1)
Post-employment benefits (2)
Share-based payments
For the year ended
$
October 31
2018
34
2
42
78
$
$
October 31
2017
33
2
37
72
$
(1)
(2)
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 21 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, 2018
October 31, 2017
No. of
units held
2,154,835
1,440,002
453,316
4,048,153
Value
$ 37
138
43
$ 218
No. of
units held
2,174,841
1,371,104
632,631
4,178,576
Value
$ 60
138
64
$ 262
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, 2018, total loans to KMP, Directors and their close family members were $10 million (October 31, 2017 – $10 million). We
have no Stage 3 allowance or provision for credit losses relating to these loans as at and for the years ended October 31, 2018 and October 31,
2017. 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 parties.
As at October 31, 2018, loans to joint ventures and associates were $225 million (October 31, 2017 – $200 million) and deposits from joint
ventures and associates were $203 million (October 31, 2017 – $123 million). We have no Stage 3 allowance or provision for credit losses
relating to loans to joint ventures and associates as at and for the years ended October 31, 2018 and October 31, 2017. $1 million of guarantees
have been given to joint ventures and associates for the year ended October 31, 2018 (October 31, 2017 – $1 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
203
Note 26 Related party transactions (continued)
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
Note 27 Results by business segment
As at or for the year
ended
October 31
2018
621
41
150
$
October 31
2017
870
40
182
$
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 provides a broad suite of financial products and services to individuals and businesses for their day-to-day
banking, investing and financing needs through two businesses: Canadian Banking and Caribbean & U.S. Banking. In Canada, we provide a
broad suite of financial products and services through our large branch network, automated teller machines, and mobile sales network. In the
Caribbean and the U.S., we offer a broad range of financial products and services in targeted markets. Non-interest income in Personal &
Commercial Banking mainly comprises Mutual fund revenue, Service charges and Card service revenue.
Wealth Management serves high net worth and ultra-high net worth individual and institutional clients with a comprehensive suite of advice-
based solutions and strategies to help them achieve their financial goals through our line of businesses in Canada, the U.S., the U.K., Europe
and Asia, including Canadian Wealth Management, U.S. Wealth Management (including City National), Global Asset Management, and
International Wealth Management. Non-interest income in Wealth Management mainly comprises Investment management and custodial fees,
Mutual fund revenue and Securities brokerage commissions.
Insurance has operations in Canada and globally, operating under two business lines: Canadian Insurance and International Insurance,
providing a wide range of life, health, home, auto, travel, wealth, annuities and reinsurance advice and solutions as well as creditor and
business insurance services to individual, business and group clients. In Canada, we offer our products and services through our proprietary
distribution channels, comprised of the field sales force, advice centers and online, as well as through independent insurance advisors and
affinity relationships. Outside Canada, we operate in reinsurance and retrocession markets globally offering life, disability and longevity
reinsurance products. Non-interest income in Insurance comprises Insurance premiums, investment and fee income.
Investor & Treasury Services is a provider of asset, cash management, transaction banking, and treasury services to institutional clients
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 the bank. Non-interest income in Investor & Treasury Services mainly comprises Investment
management and custodial fees.
Capital Markets provides expertise in banking, finance and capital markets to corporations, institutional investors, asset managers, governments
and central banks around the world in 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, as well
as sales and trading. Outside North America, we have a select presence in the U.K. and Europe, and Australia, Asia and other markets, where we
offer a diversified set of capabilities in our key sectors of expertise such as energy, mining and infrastructure, industrial, consumer, health care
and technology in Europe. Non-interest income in Capital Markets mainly includes Trading revenue, Underwriting and other advisory fees and
Credit fees.
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, 2018 was $542 million (October 31, 2017 – $548 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 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. We regularly
monitor these segment results for the purpose of making decisions about resource allocation and performance assessment. These items do not
impact our consolidated results.
204
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the enterprise level.
For other costs not directly attributable to one of our business segments, we use a management reporting framework that uses assumptions 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 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.
Our assumptions and methodologies used in our management reporting framework are periodically reviewed by us to ensure that they
remain valid. The capital attribution methodologies involve a number of assumptions that are revised periodically.
Personal &
Commercial
Banking
$ 11,776 $
5,140
(Millions of Canadian dollars)
Net interest income (2) (3)
Non-interest income (2)
Total revenue
Provision for credit losses (4)
Insurance policyholder benefits,
16,916
1,273
claims and acquisition
expense
Non-interest expense
Net income (loss) before income
taxes
Income taxes (recoveries)
–
7,526
8,117
2,089
For the year ended October 31, 2018
Investor &
Treasury
Services
Insurance
Capital
Markets (1)
Corporate
Support (1)
Wealth
Management
2,602 $
8,324
10,926
(15)
–
8,070
2,871
606
– $
297 $
4,279
4,279
–
2,676
602
1,001
226
2,294
2,591
1
–
1,617
973
232
3,567 $
4,831
8,398
48
(51) $
(483)
(534)
–
Total
Canada
18,191 $ 13,076 $
24,385
12,698
42,576
1,307
25,774
1,259
–
4,960
3,390
613
–
58
(592)
(437)
2,676
22,833
15,760
3,329
1,347
11,634
11,534
2,661
United
States
3,616 $
6,080
Other
International
1,499
5,607
9,696
41
–
7,322
2,333
402
7,106
7
1,329
3,877
1,893
266
1,627
Net income
$
6,028 $
2,265 $
775 $
741 $
2,777 $
(155) $
12,431 $
8,873 $
1,931 $
Non-interest expense includes:
Depreciation and
amortization
Impairment of other
intangibles
$
579 $
544 $
36 $
124 $
363 $
– $
1,646 $
1,102 $
389 $
155
–
–
–
1
1
4
6
4
1
1
Total assets
$ 453,879 $
93,063 $ 16,210 $ 136,030 $ 590,950 $ 44,602 $ 1,334,734 $ 680,276 $ 384,921 $ 269,537
Total assets include:
Additions to premises and
equipment and intangibles $
279 $
431 $
45 $
187 $
442 $
579 $
1,963 $
1,196 $
503 $
264
Total liabilities
$ 453,878 $
93,162 $ 16,289 $ 135,944 $ 590,582 $ (35,076) $ 1,254,779 $ 600,619 $ 384,816 $ 269,344
6,825
92
1,260
3,686
1,787
263
1,524
(Millions of Canadian dollars)
Net interest income (2) (3)
Non-interest income (2)
Personal &
Commercial
Banking
$ 10,787 $
5,076
Total revenue
Provision for credit losses (4)
Insurance policyholder benefits,
15,863
1,054
claims and acquisition
expense
Non-interest expense
Net income (loss) before income
taxes
Income taxes (recoveries)
–
7,176
7,633
1,878
For the year ended October 31, 2017
Wealth
Management
Insurance
Investor &
Treasury
Services
Capital
Markets (1)
Corporate
Support (1)
Total
Canada
2,248 $
7,827
10,075
34
–
7,611
2,430
592
– $
679 $
4,566
4,566
–
3,053
584
929
203
1,756
2,435
–
–
1,466
969
228
3,565 $
4,617
(139) $
(313)
17,140 $ 11,965 $
23,529
12,701
8,182
62
–
4,719
3,401
876
(452)
–
–
238
(690)
(574)
40,669
1,150
24,666
951
3,053
21,794
14,672
3,203
1,793
11,219
10,703
2,472
9,178
107
–
6,889
2,182
468
United
States
3,572 $
5,606
Other
International
1,603
5,222
Net income
$
5,755 $
1,838 $
726 $
741 $
2,525 $
(116) $
11,469 $
8,231 $
1,714 $
Non-interest expense includes:
Depreciation and
amortization
Impairment of other
intangibles
$
582 $
526 $
33 $
105 $
352 $
17 $
1,615 $
959 $
465 $
191
–
–
–
–
–
2
2
2
–
–
Total assets
$ 433,532 $
89,493 $ 15,122 $ 133,126 $ 506,118 $ 35,462 $ 1,212,853 $ 644,292 $ 323,895 $ 244,666
Total assets include:
Additions to premises and
equipment and intangibles $
331 $
269 $
43 $
74 $
296 $
485 $
1,498 $
1,021 $
321 $
156
Total liabilities
$ 433,554 $
89,571 $ 15,172 $ 132,987 $ 505,952 $ (38,811) $ 1,138,425 $ 569,889 $ 323,911 $ 244,625
(1)
(2)
(3)
(4)
Taxable equivalent basis.
Inter-segment revenue and share of profit (loss) in joint ventures and associates are not material except as disclosed in Note 11.
Interest revenue is reported net of interest expense as we rely primarily on net interest income as a performance measure.
Under IFRS 9, PCL on performing (Stages 1 and 2) financial assets is recorded within the respective business segment. Under IAS 39 and prior to November 1, 2017, PCL on loans not yet
identified as impaired was included in Corporate Support.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
205
Note 28 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 (*) in the Credit risk section of 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) (6)
Other (6)
Canada
%
United
States
%
Europe
%
Other
International
%
Total
As at October 31, 2018
$ 594,823
66% $ 184,040
21% $ 60,645
7% $
50,486
6% $ 889,994
18,364
19
20,053
21
50,767
53
6,063
7
95,247
$ 613,187
62% $ 204,093
21% $ 111,412
11% $
56,549
6% $ 985,241
$ 345,545
79,399
66% $ 142,692
14,852
61
27% $ 31,530
34,849
11
6% $
27
$ 424,944
65% $ 157,544
24% $ 66,379
10% $
7,140
987
8,127
1% $ 526,907
130,087
1
1% $ 656,994
Canada
%
United
States
%
Europe
%
Other
International
%
Total
As at October 31, 2017
$ 531,294
68% $ 145,824
19% $ 55,265
7% $
49,829
6% $ 782,212
14,915
9
24,530
15
118,469
72
5,661
4
163,575
$ 546,209
58% $ 170,354
18% $ 173,734
18% $
55,490
6% $ 945,787
$ 294,710
72,876
63% $ 133,197
17,090
58
28% $ 29,561
33,970
14
7% $
27
$ 367,586
62% $ 150,287
25% $ 63,531
11% $
11,437
936
12,373
2% $ 468,905
124,872
1
2% $ 593,777
(1)
(2)
(3)
(4)
(5)
(6)
Includes assets purchased under reverse repurchase agreements and securities borrowed, loans and customers’ liability under acceptances. The largest concentrations in Canada are Ontario
at 54% (October 31, 2017 – 50%), the Prairies at 18% (October 31, 2017 – 19%), British Columbia and the territories at 14% (October 31, 2017 – 15%) and Quebec at 10% (October 31,
2017 – 11%). No industry accounts for more than 47% (October 31, 2017 – 42%) 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 valuation adjustments determined on a pooled basis.
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 42% and 58% of our total commitments (October 31, 2017 – 39% and 61%). The
largest concentrations in the wholesale portfolio relate to Non-bank financial services at 15% (October 31, 2017 – 9%), Utilities at 13% (October 31, 2017 – 9%), Technology & Media at 11%
(October 31, 2017 – 8%), Consumer goods at 9% (October 31, 2017 – 6%), and Real estate & related at 8% (October 31, 2017 – 9%).
Amount have been revised from those previously presented.
Note 29
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.
206
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
During 2018 and 2017, we complied with all capital and leverage requirements imposed by OSFI.
(Millions of Canadian dollars, except percentage 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
Regulatory floor adjustment (3)
Total capital RWA
Capital ratios and Leverage ratio (1)
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Leverage ratio exposure (billions)
As at
October 31
2018
October 31
2017
$ 57,001
63,279
72,494
$ 51,572
58,361
67,556
$ 495,528
495,993
496,459
$ 401,534
32,209
62,716
–
$ 474,478
474,478
474,478
$ 376,519
27,618
59,203
11,138
$ 496,459
$ 474,478
11.5%
12.8%
14.6%
4.4%
$ 1,450.8
10.9%
12.3%
14.2%
4.4%
$ 1,315.5
(1)
(2)
(3)
Capital, RWA, and capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) based on the Basel III framework (“all-in” basis). The Leverage ratio is calculated using OSFI
Leverage Requirements Guideline based on the Basel III framework.
In fiscal 2018, the CVA scalars are 80%, 83% and 86%, respectively. In 2017, the scalars were 72%, 77% and 81%, respectively.
Before any capital floor requirement as applicable, there are three different levels of RWAs for the calculation of the CET1, Tier 1, and Total capital ratios arising from the option we have
chosen for the phase-in of the CVA capital charge. Since the introduction of Basel II in 2008, OSFI has prescribed a capital floor requirement for institutions that use the advanced internal
ratings-based (AIRB) approach for credit risk. The capital floor was determined by comparing a capital requirement under Basel I and Basel III, as specified by OSFI. If the capital requirement
under the Basel III standards was less than 90% of the capital requirements as calculated under the Basel I standards, the difference was added to the RWAs. Effective February 1, 2018, OSFI
prescribed the transition from the current Basel I regulatory capital floor to a new regulatory capital floor of 75% of RWA based on the Basel II Standardized Approaches.
Note 30 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 settle the 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.
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 certain 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 do not qualify 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 2018
207
Note 30 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 or similar agreements
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2018
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
(Millions of Canadian dollars)
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
$
$
312,392
81,770
3,315
397,477
$
$
18,379
583
3,054
22,016
$
$
294,013
81,187
261
375,461
$
$
85
57,010
–
57,095
$ 292,808
14,720
244
$ 307,772
$
$
1,120
9,457
17
10,594
$
$
589
12,852
–
13,441
$
$
294,602
94,039
261
388,902
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2017
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
(Millions of Canadian dollars)
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
$
$
239,944
151,451
2,593
393,988
$
$
20,470
67,827
1,050
89,347
$
$
219,474
83,624
1,543
304,641
$
$
24
58,804
–
58,828
$ 218,970
16,357
78
$ 235,405
$
$
480
8,463
1,465
10,408
$
$
1,503
11,399
62
12,964
$
$
220,977
95,023
1,605
317,605
(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 $10 billion (October 31, 2017 – $12 billion) and non-cash collateral of $297 billion (October 31, 2017 – $224 billion).
Includes cash margin of $2.2 billion (October 31, 2017 – $0.6 billion) which offset against the derivative balance on the balance sheet.
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2018
Gross amounts
of financial
liabilities before
balance sheet
offsetting
Amounts of
financial
assets
offset on the
balance sheet
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
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
$
$
225,193
76,877
3,061
305,131
$
$
18,379
583
3,005
21,967
$
$
206,814
76,294
56
283,164
$
$
85
57,010
–
57,095
$ 205,790
11,446
$ 217,236
$
$
939
7,838
56
8,833
$
$
–
13,944
–
13,944
$
$
206,814
90,238
56
297,108
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2017
Gross amounts
of financial
liabilities before
balance sheet
offsetting
Amounts of
financial
assets
offset on the
balance sheet
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
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
$
$
161,883
145,855
3,027
310,765
$
$
20,470
67,705
1,364
89,539
$
$
141,413
78,150
1,663
221,226
$
$
24
58,804
–
58,828
$ 141,256
10,697
444
$ 152,397
$
$
133
8,649
1,219
10,001
$
$
1,671
13,977
5
15,653
$
$
143,084
92,127
1,668
236,879
(Millions of Canadian dollars)
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivative liabilities (3)
Other financial liabilities
(Millions of Canadian dollars)
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivative liabilities (3)
Other financial liabilities
(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, 2017 – $10 billion) and non-cash collateral of $206 billion (October 31, 2017 – $142 billion).
Includes cash margin of $2.3 billion (October 31, 2017 – $0.3 billion) which offset against the derivative balance on the balance sheet.
208
Royal Bank of Canada: Annual Report 2018
Consolidated Financial Statements
Note 31 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 our 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)
Investment, net of applicable allowance
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
Goodwill
Other intangibles
Other assets
Liabilities
Deposits (3)
Segregated fund net liabilities
Other
Within one
year
October 31, 2018
After one
year
Total
Within one
year
October 31, 2017
After one
year
Total
As at
$
28,583
36,471
$
1,626
–
$
30,209
36,471
$
26,695
32,662
$
1,712
–
$
28,407
32,662
121,152
16,795
7,106
77,813
128,258
94,608
116,841
15,930
10,816
74,792
127,657
90,722
294,049
553
294,602
214,353
6,624
220,977
97,414
43,280
302,038
136,998
–
1,368
15,635
91,833
–
–
–
33,578
6
2,206
2,832
11,137
4,687
10,486
399,452
180,278
(2,912)
1,368
15,641
94,039
2,832
11,137
4,687
44,064
97,784
38,573
287,386
121,033
–
1,216
16,443
92,606
–
–
–
30,738
16
2,417
2,670
10,977
4,507
8,221
385,170
159,606
(2,159)
1,216
16,459
95,023
2,670
10,977
4,507
38,959
778,790
$ 558,856
$ 1,334,734
$ 682,625
$ 532,387
$ 1,212,853
669,682
–
$ 167,364
1,368
$
837,046
1,368
$ 624,802
–
$ 164,833
1,216
$
789,635
1,216
$
$
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
15,657
29,725
206,813
88,112
1,691
36,906
103
5
2,522
1
2,126
8,309
15,367
9,028
15,662
32,247
206,814
90,238
10,000
52,273
9,131
16,443
28,041
143,072
90,156
131
34,980
–
16
1,967
12
1,971
9,545
11,975
9,265
16,459
30,008
143,084
92,127
9,676
46,955
9,265
$ 1,048,689
$ 206,090
$ 1,254,779
$ 937,625
$ 200,800
$ 1,138,425
(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 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 $382 billion (October 31, 2017 – $372 billion) are presented as within one year due to their being repayable on demand or at short notice on a contractual basis.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
209
Note 32 Parent company information
The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an equity
accounted basis.
Condensed Balance Sheets
(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 (loss), net of taxes
Total comprehensive income
(1)
(2)
Includes dividend income from investments in subsidiaries and associated corporations of $12 million (October 31, 2017 – $25 million).
Includes share of profit (losses) from associated corporations of $(31) million (October 31, 2017 – $12 million).
As at
October 31
2018
October 31
2017
$ 16,398
20,261
111,072
34,547
69,063
107,941
494,922
4,329
137,821
$ 12,901
20,864
109,082
31,302
65,576
49,615
474,052
20,579
136,069
$ 996,354
$ 920,040
$ 643,120
38,985
225,626
$ 605,849
58,598
172,869
907,731
837,316
8,762
79,861
8,895
73,829
$ 996,354
$ 920,040
For the year ended
October 31
2018
$ 22,578
10,423
October 31
2017
$ 18,419
6,556
12,155
5,880
18,035
1,294
9,085
7,656
1,546
6,110
6,321
11,863
4,476
16,339
1,033
8,631
6,675
1,601
5,074
6,395
$ 12,431
$ 11,469
1,532
(107)
$ 13,963
$ 11,362
210
Royal Bank of Canada: Annual Report 2018
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 investment securities
Proceeds from maturity of investment securities
Purchases of investment securities
Net acquisitions of premises and equipment and other intangibles
Change in cash invested in subsidiaries
Change in net funding provided to subsidiaries
Net cash from (used in) from investing activities
Cash flows from financing activities
Repayment of subordinated debentures
Issue of common shares
Common shares purchased for cancellation
Redemption of preferred shares
Dividends paid
Issuance costs
Net cash from (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 (1)
Amount of interest paid
Amount of interest received
Amount of dividends received
Amount of income taxes paid
(1)
Amounts have been revised from those previously presented.
Note 33 Subsequent events
For the year ended
October 31
2018
October 31
2017
$ 12,431
$ 11,469
(6,321)
38,580
(26,281)
3,730
49,811
(58,326)
2,600
514
16,738
603
12,519
17,836
(32,561)
(1,173)
93
(3,363)
(6,046)
–
72
(1,522)
(105)
(5,640)
–
(7,195)
3,497
12,901
(6,395)
33,166
(14,025)
24,671
14,018
(24,486)
(4,809)
6,059
39,668
(4,738)
5,823
25,599
(34,903)
(938)
(116)
(12,018)
(21,291)
(119)
199
(3,110)
(300)
(5,309)
(1)
(8,640)
9,737
3,164
$ 16,398
$ 12,901
$ 9,486
20,490
1,414
3,562
$
6,152
16,877
1,291
1,656
On November 2, 2018, we issued 14 million Non-Cumulative 5-Year Rate Reset Preferred Shares Series BO at a price of $25 per share to raise
gross proceeds of $350 million.
On November 24, 2018, we redeemed all 10 million Non-Cumulative First Preferred Shares Series AD at a price of $25 per share.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2018
211
Ten-year statistical review
Condensed Balance Sheets
(Millions of Canadian dollars) (1)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities, net of applicable
allowance (2)
Assets purchased under reverse
repurchase agreements and securities
borrowed
Loans net of allowance
Other
Total Assets
Liabilities
Deposits
Other
Subordinated debentures
Trust capital securities
Non-controlling interest in subsidiaries
Total Liabilities
Equity attributable to shareholders
Non-controlling interest
Total equity
Total liabilities and equity
2018
2017
2016
$
30,209 $
36,471
28,407 $
32,662
14,929 $
27,851
IFRS
2015
2014
2013
2012
2011
2011
2010
2009
CGAAP
12,452 $ 17,421 $ 15,550 $ 12,428 $ 12,428
6,460
9,039
22,690
10,246
8,399
$ 13,247 $
12,181
8,440 $
13,254
7,584
8,919
222,866
218,379
236,093
215,508
199,148
182,710
161,602
167,022
179,558
183,519
177,298
294,602
576,818
173,768
84,947
347,530
175,446
$1,334,734 $ 1,212,853 $ 1,180,258 $ 1,074,208 $ 940,550 $ 859,745 $ 823,954 $ 793,833
174,723
472,223
176,612
220,977
542,617
169,811
186,302
521,604
193,479
135,580
435,229
144,773
117,517
408,850
126,079
112,257
378,241
149,180
339,525
9,265
–
n.a.
341,295
9,762
–
n.a.
408,602
9,131
–
n.a.
$ 837,046 $ 789,635 $ 757,589 $ 697,227 $ 614,100 $ 563,079 $ 512,244 $ 479,102
263,625
305,675
8,749
7,362
894
–
n.a.
n.a.
$1,254,779 $ 1,138,425 $ 1,108,646 $ 1,010,264 $ 886,047 $ 810,285 $ 779,033 $ 752,370
39,702
1,761
41,463
$1,334,734 $ 1,212,853 $ 1,180,258 $ 1,074,208 $ 940,550 $ 859,745 $ 823,954 $ 793,833
264,088
7,859
–
n.a.
239,763
7,443
–
n.a.
79,861
94
79,955
62,146
1,798
63,944
52,690
1,813
54,503
47,665
1,795
49,460
43,160
1,761
44,921
71,017
595
71,612
73,829
599
74,428
259,174
7,615
n.a.
84,947
296,284
165,485
41,580
72,698
258,395
273,006
161,213
175,289
$ 751,702 $ 726,206 $ 654,989
256,124
7,749
–
1,941
$ 444,181 $ 414,561 $ 378,457
229,699
263,030
6,461
6,681
1,395
727
2,071
2,256
$ 709,995 $ 687,255 $ 618,083
36,906
n.a.
36,906
$ 751,702 $ 726,206 $ 654,989
41,707
n.a.
41,707
38,951
n.a.
38,951
Condensed Income Statements
IFRS
CGAAP
(Millions of Canadian dollars) (1)
Net interest income
Non-interest income (3)
Total revenue (3)
Provision for credit losses (4)
Insurance policyholder benefits, claims
and acquisition expense
Non-interest expense (3)
Non-controlling interest
Net income from continuing operations
Net loss from discontinued operations
Net income
Other Statistics – reported
(Millions of Canadian dollars, except
percentages and per share amounts) (1)
PROFITABILITY MEASURES (5)
Earnings per shares – basic
– diluted
Return on common equity (6), (7)
Return on risk-weighted assets (8)
Efficiency ratio (3)
KEY RATIOS
PCL on impaired loans as a % of
average net loans and
acceptances (9)
Net interest margin (average earning
assets, net) (6)
SHARE INFORMATION
Common shares outstanding (000s) –
end of period (10)
Dividends declared per common share $
Dividend yield (11)
Dividend payout ratio
Book value per share
Common share price (RY on TSX) (12)
Market capitalization (TSX) (12)
Market price to book value
$
$
CAPITAL MEASURES –
CONSOLIDATED (13)
Common Equity Tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
$
$
$
$
2018
18,191 $
24,385
42,576
1,307
2,676
22,833
n.a.
12,431
–
12,431 $
2017
17,140 $
23,529
40,669
1,150
3,053
21,794
n.a.
11,469
–
11,469 $
2016
16,531 $
22,264
38,795
1,546
3,424
20,526
n.a.
10,458
–
10,458 $
2014
2015
2011
2013
14,771 $ 14,116 $ 13,249 $ 12,439 $ 11,357
16,281
17,433
20,932
27,638
30,682
35,703
1,133
1,237
1,097
16,708
29,147
1,299
19,992
34,108
1,164
2012
2011
2010
2009
$ 10,600 $ 10,338 $ 10,705
15,736
26,441
2,167
15,744
26,082
1,240
16,830
27,430
975
2,963
19,020
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
$
IFRS
CGAAP
2018
2017
2016
2015
2014
2013
2012
2011
2011
2010
2009
8.39 $
8.36 $
17.6%
2.55%
53.6%
7.59 $
7.56 $
17.0%
2.49%
53.6%
6.80 $
6.78 $
16.3%
2.34%
52.9%
6.75 $
6.73 $
18.6%
2.45%
53.3%
6.03 $
6.00 $
19.0%
2.52%
51.8%
5.53 $
5.49 $
19.7%
2.67%
52.8%
4.96 $
4.91 $
19.6%
2.70%
50.2%
4.25
4.19
18.7%
2.44%
51.3%
$
$
3.21 $
3.19 $
12.9%
1.87%
52.7%
3.49 $
3.46 $
14.9%
2.03%
51.6%
2.59
2.57
11.9%
1.50%
50.8%
0.20%
1.66%
0.21%
1.72%
0.28%
1.70%
0.24%
1.71%
0.27%
1.86%
0.31%
1.88%
0.35%
1.97%
0.33%
1.86%
0.34%
1.84%
0.45%
1.99%
0.72%
2.19%
1,438,794
1,452,535
1,484,235
3.77 $
3.7%
45%
51.12 $
95.92 $
3.48 $
3.8%
46%
46.41 $
100.87 $
3.24 $
4.3%
48%
43.32 $
83.80 $
138,009
1.88
146,554
2.17
124,476
1.93
3.08 $
4.1%
46%
39.51 $
74.77 $
1,443,955 1,443,125 1,441,722 1,445,846 1,438,522
2.08
3.9%
45%
24.25
48.62
69,934
2.00
2.28 $
4.5%
46%
26.52 $
56.94 $
2.84 $
3.8%
47%
33.69 $
80.01 $
2.53 $
4.0%
46%
29.87 $
70.02 $
107,925
1.89
115,393
2.38
100,903
2.34
82,296
2.15
2.08 $
3.9%
47%
25.65 $
48.62 $
1,438,522 1,423,203 1,415,483
2.00
$
4.8%
52%
22.67
54.80
77,685
2.42
2.00 $
3.6%
52%
23.99 $
54.39 $
69,934
1.90
77,502
2.27
$
$
11.5%
12.8%
14.6%
4.4%
10.9%
12.3%
14.2%
4.4%
10.8%
12.3%
14.4%
4.4%
10.6%
12.2%
14.0%
4.3%
9.9%
11.4%
13.4%
n.a.
9.6%
11.7%
14.0%
n.a.
n.a.
13.1%
15.1%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
13.3%
15.3%
n.a.
n.a.
13.0%
14.4%
n.a.
n.a.
13.0%
14.2%
n.a.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Effective November 1, 2017, we adopted IFRS 9 Financial Instruments (IFRS 9). Results from periods prior to November 1, 2017 are reported in accordance with IAS 39 Financial Instruments:
Recognition and Measurement (IAS 39) in this 2018 Annual Report. For further details on the impacts of the adoption of IFRS 9 including the description of accounting policies selected, refer
to Note 2 of our 2018 Annual Consolidated Financial Statements.
Securities are comprised of trading and investment securities. Under IFRS 9, investment securities represent debt and equity securities at FVOCI and debt securities at amortized cost, net of
the applicable allowance. Under IAS 39, investment securities represented available-for-sale securities and held-to-maturity securities. For further details on the impacts of the adoption of
IFRS 9, refer to Note 2 of our 2018 Annual Consolidated Financial Statements.
Effective Q4 2017, service fees and other costs incurred in association with certain commissions and fees earned are presented on a gross basis in non-interest expense. As at November 1,
2014 comparative amounts have been reclassified to conform with this presentation.
Under IFRS 9, PCL relates primarily to loans, acceptances, and commitments, and also applies to all financial assets except for those classified or designated as FVTPL and equity securities
designated as FVOCI. Prior to the adoption of IFRS 9, PCL related only to loans, acceptances, and commitments. PCL on loans, acceptances, and commitments is comprised of PCL on impaired
loans (Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39) and PCL on performing loans (Stage 1 and Stage 2 PCL under IFRS 9 and PCL on loans not yet identified as impaired
under IAS 39). Refer to the Credit risk section and Note 2 of our 2018 Annual Consolidated Financial Statements for further details.
Ratios for 2009-2012 represent continuing operations.
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 of the MD&A.
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 of the MD&A.
Return on risk-weighted assets (RWA) for fiscal 2011 is based on RWA reported under Canadian Generally Accepted Accounting Policies (CGAAP) and Income reported under IFRS.
PCL represents PCL on loans, acceptances and commitments. PCL on impaired loans represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39. Stage 3 PCL under IFRS 9 is
comprised of lifetime credit losses of credit-impaired loans, acceptances and commitments.
Common shares outstanding has been adjusted to include the impact of treasury shares.
(10)
(11) Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
(12) Based on TSX closing market price at period-end.
(13)
Effective 2013, we calculate the capital ratios and multiples using the Basel III (all-in basis) framework unless otherwise stated. 2009-2012 capital ratios and multiples were calculated using
the Basel II framework. Capital ratios and multiples for 2011 were determined under CGAAP.
212
Royal Bank of Canada: Annual Report 2018
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
Represents 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 (IFRS 9)
The amount deemed adequate by management to
absorb expected credit losses as at the balance
sheet date. The allowance is established for all
financial assets subject to impairment assessment,
including certain loans, debt securities, customers’
liability under acceptances, financial guarantees,
and undrawn loan commitments. The allowance is
changed by the amount of provision for credit losses
recorded, which is charged to income, and
decreased by the amount of write-offs net of
recoveries in the period.
Allowance for credit losses (IAS 39)
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.
Asset-backed securities (ABS)
Securities created through the securitization of a
pool of assets, for example auto loans or credit card
loans.
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)
Debt securities whose interest rate is regularly reset
through an auction process
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.
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.
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.
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.
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.
Glossary
Royal Bank of Canada: Annual Report 2018
213
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.
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.
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), through RBC Capital
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. Under IFRS 9, this
includes provisions on performing and impaired
financial assets. Prior to November 1, 2017, this
included provisions on impaired loans and loans not
yet identified as impaired.
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.
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.
Securities sold short
A transaction in which the seller sells securities and
then borrows the securities in order to deliver them
to the purchaser upon settlement. At a later date,
the seller buys identical securities in the market to
replace the borrowed securities.
Securitization
The process by which various financial assets are
packaged into newly issued securities backed by
these assets.
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.
214
Royal Bank of Canada: Annual Report 2018
Glossary
Principal subsidiaries
(Millions of Canadian dollars)
Principal subsidiaries (1)
Royal Bank Holding Inc.
RBC Insurance Holdings Inc.
RBC Life Insurance Company
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
Principal office address (2)
Toronto, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, 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
RBC US Group Holdings LLC (2)
RBC USA Holdco Corporation (2)
RBC Capital Markets, LLC (2)
City National Bank
RBC Dominion Securities Limited
RBC Dominion Securities Inc.
RBC Finance S.a` 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 Europe Limited
Royal Bank Mortgage Corporation
The Royal Trust Company
Royal Trust Corporation of Canada
Toronto, Ontario, Canada
New York, New York, U.S.
New York, New York, U.S.
Los Angeles, California, U.S.
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Amsterdam, Netherlands
Luxembourg, Luxembourg
Jersey, Channel Islands
Guernsey, Channel Islands
London, England
Toronto, Ontario, Canada
Montreal, Quebec, Canada
Toronto, Ontario, Canada
Carrying value of
voting shares owned
by the Bank (3)
$
60,725
21,184
9,249
3,048
2,202
1,241
777
273
(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 US Group Holdings LLC and RBC USA Holdco
Corporation which is incorporated under the laws of the State of Delaware, U.S., RBC Capital Markets, LLC, which are 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.
The carrying value of voting shares is stated as the Bank’s equity in such investments.
Principal subsidiaries
Royal Bank of Canada: Annual Report 2018
215
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-2. The related depository
shares of the series 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
155 Wellington Street West
Toronto, Ontario M5V 3K7
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) which
allows us to repurchase for
cancellation, up to 30 million
common shares during the period
spanning from February 27, 2018
to February 26, 2019, when the
bid expires, or such earlier date as
we may complete the purchases
pursuant to our Notice of Intention
filed with the Toronto Stock
Exchange.
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.
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.
2019 Quarterly earnings release
dates
First quarter
Second quarter
Third quarter
Fourth quarter
February 22
May 23
August 21
December 4
2019 Annual Meeting
The Annual Meeting of Common
Shareholders will be held on
Thursday, April 4, 2019, at
9:30 a.m. (Atlantic Time) at the
Halifax Convention Centre,
1650 Argyle Street, Halifax,
Nova Scotia, Canada.
Dividend dates for 2019
Subject to approval by the Board of Directors
Common and preferred shares
series W, AA, AC, AE, AF, AG, AJ, AK,
AL, AZ, BB, BD, BF, BH, BI, BJ, BK,
BM and BO
Preferred shares series C-2
(US$)
Record
dates
January 24
April 25
July 25
October 24
January 28
April 26
July 26
October 28
Payment
dates
February 22
May 24
August 23
November 22
February 7
May 7
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
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 AMPLIFY, RBC BLUE WATER PROJECT, RBC CAPITAL MARKETS, RBC CAPITAL
TRUST, RBC DEVELOPERS, RBC DISRUPTORS, RBC ELEMENTS, RBC FUTURE LAUNCH, RBC GLOBAL ASSET MANAGEMENT, RBC INSURANCE, RBC REWARDS, RBC TruCS, RBC WEALTH
MANAGEMENT, AIDEN, MYADVISOR, NOMI, NOMI FIND & SAVE and NOMI INSIGHTS 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 which are not the property of Royal
Bank of Canada, are owned by their respective holders.
216
Royal Bank of Canada: Annual Report 2018
Shareholder information