C
T G 150 Y
S
A Bold
Future
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 and their businesses in the U.S.
> A leading financial services partner valued for our
We are guided by
our Values:
> Client First
> Collaboration
> Accountability
> Diversity & Inclusion
expertise in select global financial centres
> Integrity
TABLE OF CONTENTS
2019 Highlights
Chair Message
CEO Message
2
4
Management’s Discussion and Analysis
Enhanced Disclosure Task Force Recommendations Index
Reports and Consolidated Financial Statements
12
110
111
Ten-Year Statistical Review
Glossary
Shareholder Information
5
212
213
216
Connect with us:
facebook.com/rbc
instagram.com/rbc
twitter.com/@RBC
linkedin.com/company/rbc
www.youtube.com/user/RBC
rbc.com/ar2019
Who we are
BY THE NUMBERS
85,000+
employees
17 million
clients
36
countries
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 85,000+
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 17 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 our clients at the centre of everything
we do, create an exceptional employee experience and make
our communities stronger.
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
Royal Bank of Canada: Annual Report 2019
1
2019 Highlights
Clients
7.2 million
active digital users(1)
Top 10 Global
Investment
Bank
by fees(2)
11 out of 11
top rankings among
the big five Canadian
banks in the 2019
Ipsos Financial Service
Excellence Awards
Outstanding
Global Private
Bank
in North America for the
fourth year in a row(3)
$100 billion
commitment to finance
companies and projects
with environmental and
social benefits by 2025
€500 million
inaugural green
bond issuance to
fund a portfolio of
environmental assets
Canada’s
Most
Valuable
Brand
named by
Brand Finance
Employees
#3 globally
in the 2019 Refinitiv
Diversity & Inclusion
Index, ranking over
7,000 listed companies
46%
women executives(4)
19%
minority executives(4)(5)
18%
young people(6)
95%
of employees are proud to
be part of RBC(7)
$14.6 billion
in competitive
compensation and
benefits
86%
of employees are inspired
by our purpose of
helping clients thrive and
communities prosper(7)
Communities $137 million
provided through
RBC Future Launch®
reaching over 1.9 million
Canadian youth through
500+ partner programs
since 2017
$4 billion
in support of our
communities as one
of the largest taxpayers
in Canada, and as
a taxpayer in other
countries where
we operate(8)
$9.9 million
raised through
RBC Race for the Kids
in support of youth
and children’s
charities globally
Carbon neutral
since 2017
achieved net-zero carbon
emissions in our global
operations as part of our
strategy to accelerate
clean growth(10)
$19 million
raised through our
annual Employee Giving
Campaign by employees
and retirees in Canada
for 4,000+ charities
$130 million
donated to nearly 5,000
charitable organizations
globally through cash
donations and
community investments(9)
Represents 90-day active customers in Canadian Banking only.
(1)
(2) Dealogic, YTD as at October 31, 2019.
(3) Private Banker International Global Wealth Awards 2019.
(4) Represents data as at October 31, 2019 for our businesses in Canada governed by the Employment
Equity Act.
(6) Headcount under 30 globally, excluding City National Bank and BlueBay Asset Management employees.
(7)
2019 Employee Opinion Survey (EOS).
(8) Refer to page 88 for additional information.
(9)
Includes employee volunteer grants and gifts in kind, as well contributions to non-profits and
non-registered charities. Figure does not include sponsorships.
(5) Based on employee self-identification and aligned to the definitions of the Employment Equity Act in
(10) Achieved carbon neutrality through energy and emission reduction programs, and the purchase of
Canada and the U.S. Equal Employment Opportunities Commission.
renewable energy credits and high-quality carbon offsets.
2
Royal Bank of Canada: Annual Report 2019
Shareholders
$8.75
diluted earnings per
share (EPS), up from
$8.36 in 2018
16.8%
return on equity
(ROE), down from
17.6% in 2018
12.1%
common equity tier 1
(CET1) ratio, up from
11.5% in 2018
$4.07
dividends declared
per share, increased
by $0.30 since 2018
55%
of profits returned to
our shareholders
through dividends(1)
and repurchases
$5.7 billion
remainder of our profit
available to reinvest in
future growth
Earnings by business segment(3)
49%
21%
20%
6%
4%
Personal & Commercial Banking
Capital Markets
Wealth Management
Insurance
Investor & Treasury Services
3-YEAR(5)
5-YEAR(5)
9%
17.1%
11.5%
46%
3-YEAR
12%
11%
8%
17.3%
11.2%
46%
5-YEAR
10%
8%
Strong earnings
net income (C$ billion)
$12.9
$12.4
2018
2019
ANNUALIZED DIVIDEND INCREASE OF:
8%
One year
7%
Ten year(2)
Financial performance metrics
MEDIUM-TERM OBJECTIVES(4)
Diluted EPS growth of 7%+
ROE of 16%+
Strong capital ratio (CET 1)
Dividend payout ratio of 40%-50%
Total shareholder return(6)
RBC
Global peer average
(1) Includes dividends paid on both common and preferred shares. Dividends were $5.8 billion on common shares and $0.3 billion on preferred shares.
(2) Compound Annual Growth Rate.
(3) Excludes Corporate Support.
(4) A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period.
(5) Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.
(6) Annualized TSR is calculated based on the TSX common share price appreciation plus reinvested dividend income. Source: Bloomberg, as at October 31, 2019. RBC is compared to our global peer group. The peer group
average excludes RBC; for the list of peers, please refer to pages 15-16.
Royal Bank of Canada: Annual Report 2019
3
Message from Katie Taylor
Imaginative leadership will
ensure a prosperous future
for both RBC and the
communities it serves. That
message was delivered to a
gathering of RBC shareholders
following the Second World
War, and it rings true today.
It is the willingness to reimagine – and
disrupt – the way RBC operates that helps
the bank create meaningful value in our
clients’ lives. And as this year’s results
attest, RBC’s approach continues to
resonate in the marketplace, reinforcing its
stature as one of the most trusted and
successful financial institutions in the world.
The primary role of the Board is to support
RBC’s executive team to sustain the bank’s
leadership position today, and into the
future. To this end, we act as stewards and
provide oversight to ensure the bank’s
strategic plans and priorities create value
and align with our risk appetite.
Importantly, we do so on a continuous basis
– constructively challenging management
and monitoring initiatives. We provide
guidance to the bank’s leadership team as it
anticipates the ever-evolving needs of its
clients while seizing the right business
opportunities in a rapidly changing and
increasingly competitive global
marketplace.
Sustaining success over the long term also
requires a pipeline of qualified leaders. To
ensure continuity, the Board oversees talent
management and succession planning. In
2019, this included key appointments for the
Group Head, Capital Markets and the Chief
Administrative Officer.
Culture is critical in any winning
organization. Directors champion the core
values underpinning the way the bank
operates – internally and externally. For us,
leadership is about setting an example for
others. To this end, we work with
management to set the right tone, and
signal the behaviours each and every
employee must embody. We recognize the
value of respectful and inclusive
workplaces, where people can speak up for
the good of RBC, and in turn, contribute to
the business and brand in meaningful ways.
In 2019, our Governance Committee
4
Royal Bank of Canada: Annual Report 2019
continued to enhance Board and Committee
reporting on conduct and culture matters
and proactively monitored emerging trends
and best practices.
Risk management is another core focus
area. Millions of people and thousands of
communities trust RBC to act prudently and
be a model corporate citizen. The Board
oversees risk management on an
enterprise-wide basis and carefully
assesses whether management’s plans
appropriately balance strategic
opportunities with risk discipline. An
important area of focus that relates to both
risk management and community and social
impact is climate change. As part of the
Board’s oversight, several important steps
were taken in 2019, including the
development of an enterprise climate
change strategy, advancement of our
capabilities in climate risk management,
and the enhancement of our climate-related
disclosures to better align with the
recommendations of the Financial Stability
Board’s Task Force on Climate-related
Financial Disclosures.
In all of this, continuing our history of
demonstrating the highest standards of
good governance is an essential foundation
for strong performance and fundamental to
the bank’s success. Directors contribute to
effective and transparent oversight by
setting the structure through which
management work to meet our strategic
objectives and achieve long-term value for
our shareholders, as well as the clients,
communities and other stakeholders who
we are privileged to serve. Building upon
an already very strong Board, we were
pleased to appoint a new RBC director,
Frank Vettese, who brings a wide array of
global experience to our discussions.
RBC continues to unlock the imagination
and insights of its people to create even
greater value for its clients, and the
communities where RBC operates. Your
Board is proud to support the CEO and
Group Executive team in making this
happen through sound counsel, a
supportive culture, strong risk
management, and good governance.
On this very special year, when we
celebrate our 150th anniversary, the Board
appreciates everything Dave McKay, his
leadership team and our incredibly
talented employees have done to celebrate
the bank’s storied history, and set it up for
an exciting future. We are confident in the
bank’s strategic direction and believe the
bank’s purpose-led approach will help
clients thrive and communities prosper for
years to come.
Kathleen Taylor
Chair of the Board
Message from Dave McKay
A Bold
Future
One hundred and fifty years ago, our Halifax founders expanded
aggressively westward to support the ambitions of a young and
growing country. In doing so, a powerful statement was made
about the kind of company we set out to be: RBC moves ‘quick
to the frontier’ to help clients thrive and communities prosper.
The same bold spirit has propelled us forward ever since;
whether that’s by entering new markets and geographies,
expanding our value proposition, or reimagining the role we
play in our clients’ lives. RBC is here to build a better future for
those we serve.
Progress towards this goal can be measured by the scale and
strength of our franchise in Canada, the U.S. and across our
global footprint; the engagement of our people; the meaningful
value we create for our clients; the investments we make in the
community; and the strong financial performance we delivered
in 2019. In my conversations with the Board, this balanced
approach defines what a performance scorecard means to RBC.
Royal Bank of Canada: Annual Report 2019
5
CEO MESSAGE
I’m particularly proud of our employee
engagement levels. They reached new
heights in 2019, surpassing external
benchmarks of high-performing companies
in North America.
In part, this is a reflection of our culture, which provides
our people with opportunities to achieve their long-term
career objectives. This includes helping our employees
gain the skills to thrive in the workplace of the future.
Equally important, RBCers believe in our Values,
understand our Vision, and are motivated by our Purpose
– to help clients thrive and communities prosper.
Strong engagement translates into employees going
above and beyond to deliver for our clients. Across our
five business segments, client satisfaction levels
increased in 2019 – and in many cases, RBC is leading our
Canadian and global peers. Thanks to our employees, we
are developing deeper and more meaningful relationships
with those we serve, and attracting new clients. Indeed,
our aim is to add 2.5 million new clients by 2023. Our
volume of business, revenue and market share growth
speaks to the trust clients have placed in us, and the value
we continue to create for them. It also tells us that the
significant investments we’re making in talent, technology
and our trusted global brand, are paying off.
We are proud of the contributions we make in the
communities where we work and live – our long-term
success depends on it. That begins with caring deeply
about what matters most to our community stakeholders.
In 2019, this included thousands of employees
volunteering hundreds of thousands of hours to make life
better in Canada, the U.S. and around the world. And since
our inception, we have donated more than $1 billion to
local communities and causes. Through our resources and
talented people, RBC is casting light on important
conversations about our collective future, and acting as a
catalyst to move these conversations forward.
In the near term, we expect the world to remain in the
midst of profound change and disruption, driven by a wide
array of geopolitical, economic and technological forces
as well as social and demographic trends.
TRANSFORMING THE EMPLOYEE EXPERIENCE
In a world where change is
constant, having the right
people in the right roles is key to
how we create more value for
our clients. We are building
opportunities and experiences
that not only attract top talent,
but also inspire our people to
grow and embark on exciting
career paths across RBC.
Our culture is built on innovation and
inclusion. Behind every technology
and business agility project, there are
diverse teams delivering advice,
products and services, while
developing new skills and advancing
their careers. Our teams are working
and thinking differently because
we’re nurturing a growth mindset and
providing unique learning
opportunities so our people can
thrive in the new world of work.
(1) 2019 Employee Opinion Survey.
6
Royal Bank of Canada: Annual Report 2019
This year, 93%(1) of our employees said
they feel confident they can learn new
skills to adapt as their job changes. This
tells us we’re succeeding in delivering
exceptional employee experiences that
unlock the potential of our people. We
know that our ability to harness diverse
skills and perspectives is essential to
driving engagement, and, ultimately, to
building the bank of the future and
achieving our Purpose of helping clients
thrive and communities prosper.
The proof is in our culture
“Building a culture of diversity and inclusion where everyone can thrive and feel a sense of
belonging is key to attracting the best talent. It’s also how we differentiate ourselves and earn
our clients’ trust. Our team tapped into this strength as the sole advisor to BB&T in their merger
of equals with SunTrust – the largest deal of its kind since the financial crisis.”
Vinnie Badinehal
Head, Financial Institutions Group, Capital Markets
As RBC navigates this evolving world, we will strive to
build long-term sustainable client franchises in our core
markets that are focused on delivering a premium return
on equity, and support earnings growth and value
creation for all our stakeholders.
To do so, we will leverage our scale, strong risk and capital
management and diversified business mix to drive long-
term growth.
We are proud to be recognized as the most valuable brand
in Canada and a top 100 global brand, and will continue to
find new and exciting ways to bring it to life to foster
unique and powerful bonds with our clients and
communities.
This includes partnering with other market-
leading brands and developing capabilities
to differentiate our offerings.
We will sustain our technological leadership by investing
significantly in our digital and innovation strategies,
enabling RBC to deliver even more insights and advice that
create meaningful value for our clients. Our differentiated
technology platform and strong data foundation are
supporting business growth, operational efficiencies and
leading-edge capabilities. RBC’s next-generation delivery
platform, including a multi-cloud strategy, accelerates our
ability to bring products and services to market quickly,
scale across our businesses, and leverage world-class
artificial intelligence (AI) and analytics to deliver superior
business outcomes.
Our leaders and teams will keep looking for ways to make
our business less complex to run, and faster to operate.
Strength in our second home market
Growth in the U.S. remains a key pillar of our strategy. We generated 23%(1)
of our revenue in the U.S. in 2019, and will continue building our businesses
and leveraging synergies across our teams. We’re seizing the right
opportunities to gain market share, attract top talent and expand our
footprint in new and existing markets. From every transaction and trade,
to our advice and technology, our teams work across geographies and
business lines to deliver results for clients and drive shareholder value.
13,000+
employees across our
businesses in the U.S.
Expanded
City National’s presence in
Los Angeles, New York, Washington,
and opened in Miami
10th
largest investment bank(2) advisors in U.S. Wealth
in the U.S. with 35 offices Management across
in 23 states
1,900+
42 states
LEADING PARTNERSHIPS
We believe in the power of partnerships to help
us bring new value-added products and services
to market faster.
It’s why we partnered our best-in-class RBC Rewards®
program with iconic brands like Expedia, WestJet,
Petro-Canada, Indigo and many more – to provide our
clients with a unique rewards program that gives them
more of what they actually want and unparalleled
flexibility. They can even pay bills with their points – a
first in Canada. With rewards like this and strong
partners, we’ve maintained a leadership position in
premium travel with both our Avion flagship card and
WestJet co-brand card.
Our value proposition extends even further. This year,
we teamed up with Microsoft to launch RBC Go Digital,
bringing together our cutting-edge financing solutions
with Microsoft’s technology to help our commercial
clients accelerate their digital transformation and
journey towards achieving their business goals.
And, to bring more choice and expertise to the
Canadian Exchange-Traded Fund (ETF) market, we
introduced RBC iShares. This strategic alliance between
RBC Global Asset Management and BlackRock Canada
connects our clients to the largest and broadest ETF
lineup in Canada with over $60 billion in assets across
150 ETFs.
It’s a win-win. By partnering with industry leaders and
retailers, we’re increasing engagement and enhancing
our day-to-day relevance to expand our reach and
deliver a differentiated experience for our clients. This
will continue to be a fundamental part of our growth
story as we build the bank of the future.
(1) Excludes Corporate Support.
(2) Dealogic, based on global investment bank fees, YTD at October 31, 2019.
Royal Bank of Canada: Annual Report 2019
7
CEO MESSAGE
And we will attract and grow the best
talent, placing our diverse and inclusive
culture at the centre of what we do and how
we do things.
Our people will always be what differentiates RBC in the
marketplace.
Our willingness to reimagine – and disrupt – the way we
operate will ensure RBC remains relevant in our clients’
lives. The RBC story tells us we are at our best when we
are at our boldest. It’s in our DNA.
The dividend of bold decisions
Consider one way we are challenging our business model
to build the bank of the future. We don’t just digitize
existing products, we co-create new services and
experiences. Importantly, these efforts extend beyond
what you expect from a bank.
RBC Ventures is a great example. It supports innovation
and the development of technologies by co-investing and
partnering to develop new products and services – such
as searching for a home, managing household chores, or
assisting with mobility needs. By doing so, we play a more
integral role in people’s lives which, in turn, broadens our
value proposition.
To date, 17 ventures are making life easier for our clients.
For instance, Ownr has helped nearly 12,000 Canadians
start small businesses, and in 2019, we went further to
empower small businesses by introducing Dipp, a digital
platform that helps owners acquire new customers and
grow their revenues.
Bold to the future
Acting boldly in an age of change and disruption is central
to our ongoing success.
The same could be said for the countries we operate in,
including our home market, Canada, where the majority of
our employees and shareholders reside. This nation is
certainly not immune to many of the world’s challenges
and opportunities.
I’ve spoken publicly on a number of them throughout the
year which, I believe, is one of my responsibilities as the
CEO of one of the largest Canadian employers. Let me
highlight three areas of focus that require bold leadership
from both the public and private sector.
We mirror these initiatives internally
through leadership programs for
women and minorities, inclusive
behaviour training programs,
employee resource groups that boost
inclusion, and with measurable goals
to further diversify our talent pipeline.
Active engagement is vital to creating
an inclusive and respectful work
environment. This year, 92%(1) of our
employees said they feel they are
treated with respect, and 90%(1) said
that management supports diversity
in the workplace: recognizing,
respecting and leveraging
differences. We all benefit when we
build and protect a culture where
everyone can contribute, and has the
opportunity to reach their full
potential.
IMPACT THROUGH INCLUSION
Diversity and inclusion is more
than just a value at RBC; it’s
critical to our success as an
organization and in our
communities. That’s why we have
a bold vision that applies inside
and outside of RBC – to unleash
the full potential of diversity, and
drive innovation and growth
more broadly.
This translates into taking steps that
drive meaningful change: joining the
Equality Fund in Canada to bring our
expertise in sustainable finance to
fund projects that advance gender
equality, supporting key legal
initiatives that bolster LGBT+ rights
globally, and working with
organizations like the Toronto Region
Immigrant Employment Council to
mentor newcomers. It’s about
speaking up for and about inclusion.
(1) 2019 Employee Opinion Survey.
8
Royal Bank of Canada: Annual Report 2019
“Being part of the team that advises RBC in its
support of initiatives that protect LGBT+ rights
has been a highlight of my career. I’ve seen
firsthand how the company ‘walks the talk’ as we
take a stand in key causes that align with our
values. I’ve had the opportunity to bring my
passion for the legal world to projects that have a
positive impact in our communities.”
Lisa Ford
Senior Counsel, RBC Law Group
Climate change is one of the most pressing issues of our
age. It’s a primary concern of our employees, clients,
many shareholders and the public, including the youngest
generations who are, in many regards, leading the
conversation.
There is general agreement on the reality of a warming
climate and the various causes of climate change. But
talking about the way forward has done more to divide
than unite our efforts to mitigate carbon emissions.
Coming together starts with a common
vision – one that is economically beneficial
and politically acceptable to Canadians.
RBC will elevate its efforts to convene
leaders, and act as a catalyst for
meaningful change.
This year, RBC announced a business target of $100 billion
in sustainable financing by 2025. These funds will support
investments in sustainable companies and projects that
today are widely recognized as contributing to the
low-carbon, sustainable economy of the future. We’re also
committed to advancing the way we assess climate-
related risks, provide climate-related disclosures and
support our clients in this pursuit.
In doing so, we must be pragmatic. Fossil fuels will
continue to be the primary source of energy to warm our
homes, cook our meals, and travel to and from work over
the next decade. Moreover, global energy demand will
continue to rise which is, in part, the result of a growing
population. Canada needs to meet this demand by selling
our oil and gas overseas, where we can derive a premium
for our goods and, in turn, generate public monies to invest
further in clean energy and, more broadly, social programs.
Indeed, our oil and gas sector already stands out as an
investor in clean tech – let’s build on its momentum so that
the industry plays a central role in the transition to a
low-carbon economy in Canada and around the world.
TAKING ACTION TOWARDS A SUSTAINABLE FUTURE
We believe capital can be a
force for positive change, and
we know we have an essential
role to play in supporting the
move to a sustainable future.
Sustainable finance also represents a growth opportunity for our business and our clients
– this is clearly demonstrated by our new business target: $100 billion in sustainable
finance by 2025. It’s also why we established a Sustainable Finance team within Capital
Markets – to support the growing number of corporate and institutional clients globally
who view Environmental, Social and Governance factors as important considerations in
their corporate strategy and investment process.
We are committed to an enterprise climate strategy aimed at accelerating clean growth
and supporting our clients in the low-carbon transition through five key actions:
> Supporting clients in the low-carbon transition with RBC products, services and advice
> Advancing RBC’s capabilities in climate risk management and publishing annual
disclosures aligned to the Task Force on Climate-related Financial Disclosures
> Achieving net-zero carbon emissions in global operations annually
> Speaking up for smart climate solutions
> Using technology to address complex environmental challenges
For more information, see the RBC Climate Blueprint available at
https://www.rbc.com/community-social-impact/reporting-performance/
Royal Bank of Canada: Annual Report 2019
9
CEO MESSAGE
DIFFERENTIATED ADVICE AND INSIGHTS
Our size and scale set us apart, but it’s more than
that. We’ve combined our trusted brand with a
differentiated technology platform and data scale
to simplify and enhance our clients’ banking
experience.
Whether it’s expanding personalized services like
MyAdvisor®, which reached more than 1.4 million clients
this year, or better serving our more than four million
mobile users(1) with tailored experiences – we’re unlocking
extraordinary insights and advice to bring our clients’
biggest ambitions to life.
We’re also developing world-class AI capabilities to boost
our clients’ financial confidence because we know every
dollar counts. With the introduction of NOMI Budgets, we
helped our clients set more than 730,000 budgets, and
NOMI Find & Save® has helped our active clients save an
average of $197 per month.
For our business clients, real-time data and insights are
game changers. Sorting through mountains of
information about customer preferences and industry
trends is the new normal. So we launched RBC Insight
Edge, a Canadian first, which provides our advisors with
actionable insights to help our 27,000+ retail business
clients make more informed decisions to grow their
businesses.
Likewise, we scaled RBC Elements™ for our Capital
Markets clients. Our research and data science team have
redefined what’s possible when it comes to data analytics
to produce differentiated research. To date, they’ve
delivered more than 70 unique reports to clients globally.
By investing in new capabilities, technologies and
business models, we’re bringing the physical and digital
worlds together to provide our clients with best-in-class
digital experiences at the speed they expect. Because
we’re not just thinking about what isn’t, but what could –
and can – be.
(1) Represents 90-day active customers in Canadian Banking Only.
10
Royal Bank of Canada: Annual Report 2019
A technological revolution sweeping the world presents
Canada with huge opportunities. We are well positioned,
for instance, to be a global hub of data innovation. But
some high profile data events have undermined consumer
confidence in the way some organizations handle the data
economy. Trust will underpin our digital economy.
Ottawa’s introduction of a Data Charter is an important step
forward in helping provide a framework. But, at the end of
the day, it’s actions not words that will instill public trust.
Leaders in the public and private sectors must work together
to define societal norms around personal data usage.
RBC has a clear approach to how we think
about data.
Transparency is key. People need to know how the data is
used. It’s also vital that consumers understand what they
receive for sharing their data. And organizations must help
people exercise control of what personal information is
shared and used.
Additionally, RBC has made significant investments in
cutting-edge technology to protect our customers and our
business every day.
We’ve nearly doubled our investment in cyber security
technology over the last five years. We lead and convene
industry initiatives. A federal government advisory
committee on AI is co-chaired by an RBC executive who
oversees Borealis AI™, our research institute. RBC also
collaborates with a wide range of stakeholders on industry-
wide strategies including training, commercial acceleration
and applied research and development.
The world of work is also changing in profound and
permanent ways. Even as many jobs transform, or
disappear, millions more are expected to be created.
Digital literacy will be essential for workers at all career
stages in the new skills economy. There is also an
increasing need for human skills – the ability to
communicate and collaborate; to think creatively and
critically. At RBC, we are helping all employees develop the
skills to prepare them for the future of work. But there’s
more we can do.
Safeguarding trust
Protecting our clients’ privacy and upholding their trust is core to our
Purpose. We’ve built a team of over 500 cybersecurity specialists to
enhance our capabilities and keep pace with the fast-changing landscape.
At Borealis AI™, we’re researching and developing artificial intelligence
tools to stay ahead of the curve. And we’ve invested $5 million to support
the Rogers Cybersecure Catalyst, a centre for education in cybersecurity
at Ryerson University, to help address the cyber skills gap in Canada.
Our current system – educators and employers alike –
does not adequately teach or train youth and workers to
develop the portfolio of skills that help people thrive in the
workplace.
We need to rethink the way we teach and
prepare all workers, including the next
generation.
Work-integrated learning programs, such as co-ops, can
help break down this barrier. Research suggests university
co-op graduates achieved higher earnings and
employment rates than their non-co-op peers.
RBC has developed a number of programs to help youth
get work experience, develop skills and grow their
professional network. This summer, we welcomed more
than 1,600 students to RBC from nearly 100 colleges and
universities from across Canada and the U.S. And we
established a partnership with Riipen to increase access
to, and deliver, experiential learning for post-secondary
students. This initiative is part of our 10-year, $500-million
commitment to empowering youth for the jobs of
tomorrow through RBC Future Launch®.
History shows that Canada has the courage and
conviction to overcome challenges and seize opportunity.
RBC is convinced history will repeat itself, thanks to an
incredible mix of people, ideas and resources. Let’s
harness these advantages to advance our ambitions.
And let’s do it in a way that stays true to our national
character. That means engaging on key issues such as
supplying the world’s energy needs while still moving
towards a low-carbon economy. It means deploying our
competitive strengths in the digital economy while
protecting personal privacy. And it means rethinking how
we prepare the next generation of workers for jobs that
don’t yet exist today.
You can count on RBC to forge new paths to innovate and
reimagine our business. Indeed, we are on a path that very
few can achieve: a journey to transform our bank for the
benefit of our shareholders, employees, clients and
communities.
PREPARING THE NEXT GENERATION
There are seven million young people in Canada
between the ages of 15 and 29(1). We believe that
we have a collective opportunity – and a
responsibility – to help them prepare for the
future of work. Young people deserve to succeed,
and that’s why we created RBC Future Launch®.
It’s important to get this right; Canada’s future
prosperity is counting on it.
1.9 million
youth across Canada
reached through RBC
Future Launch®
77%
of youth surveyed
reported feeling better
prepared for the future(2)
Empowering youth to pursue impactful careers
means equipping them with skills, networks, work
experience and access to mental well-being support
and services so they can face a changing workforce
with confidence. We are building tools and
engineering opportunities through RBC Upskill®, RBC
Career Launch®, Ten Thousand Coffees, and Riipen,
and supporting initiatives like WE Are Social
Entrepreneurs and Boys & Girls Clubs of Canada, to
accelerate their readiness for the changing world of
work. We’ve also expanded our national network of
charitable partners, allowing us to reach more youth
across Canada. And they’re telling us our investments
are making a difference so we’re going to keep
building on these efforts and leading the
conversation.
We are excited about the horizon ahead of us.
Banking for students by students
Dave McKay
President and Chief Executive Officer
“Banking with RBC is more than managing money. Our goal is to
empower young people to learn about money management and to
confidently take on their financial future,” said Erica Nielsen,
Vice-President, Payments and Banking. That’s why we launched a
customized, easy-to-use banking experience geared specifically
to students within the RBC Mobile app.
(1) Statistics Canada, 2018 Demographic Estimates Program.
(2) Based on a sample of 14,000 survey responses from Future Launch program participants.
Royal Bank of Canada: Annual Report 2019
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, 2019, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2019 Annual Consolidated
Financial Statements and related notes and is dated December 3, 2019. 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 2019 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
Financial performance
14
13
Selected financial and other highlights 13
14
About Royal Bank of Canada
Vision and strategic goals
14
Economic, market and regulatory
review and outlook
Defining and measuring success
through total shareholder returns
15
16
Overview
16
Impact of foreign currency translation 16
17
Total revenue
Provision for credit losses
18
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
18
18
19
19
21
21
21
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
Top and emerging risks
Overview
Enterprise risk management
Transactional/positional risk drivers
Credit risk
Market risk
Liquidity and funding risk
Insurance risk
22
24
28
33
36
38
42
42
42
43
44
44
45
47
47
49
50
54
54
66
71
82
Operational/regulatory compliance
Strategic risk drivers
risk drivers
Operational risk
Regulatory compliance risk
82
82
83
84
84
Strategic risk
Reputation risk
84
Legal and regulatory environment risk 85
86
Competitive risk
86
86
87
Systemic risk
Macroeconomic risk drivers
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
90
98
99
99
102
102
102
110
Caution regarding forward-looking statements
From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions
of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. We may make forward-looking
statements in this 2019 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 this 2019 Annual Report including information technology and cyber risk, privacy, data and third-party related risks,
geopolitical uncertainty, Canadian housing and household indebtedness, regulatory changes, digital disruption and innovation, 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 2019 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 2019 Annual Report.
12
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Overview and outlook
Selected financial and other highlights
(Millions of Canadian dollars, except per share, number of and percentage amounts)
Total revenue
Provision for credit losses (PCL)
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
Non-interest expense
Income before income taxes
Net income
Segments – net income
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
Net income
Selected information
Earnings per share (EPS) – basic
– diluted
Return on common equity (ROE) (1) (2)
Average common equity (1)
Net interest margin (NIM) – on average earning assets, net (3)
PCL on loans as a % of average net loans and acceptances
PCL on performing loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances
Gross impaired loans (GIL) as a % of loans and acceptances
Liquidity coverage ratio (LCR) (4)
Capital ratios and Leverage ratio
Common Equity Tier 1 (CET1) ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Selected balance sheet and other information (5)
Total assets
Securities, net of applicable allowance
Loans, net of allowance for loan losses
Derivative related assets
Deposits (3)
Common equity
Total capital risk-weighted assets
Assets under management (AUM)
Assets under administration (AUA) (6)
Common share information
Shares outstanding (000s) – average basic
– average diluted
– end of period
Dividends declared per common share
Dividend yield (7)
Dividend payout ratio
Common share price (RY on TSX) (8)
Market capitalization (TSX) (8)
Business information (number of)
Employees (full-time equivalent) (FTE)
Bank branches
Automated teller machines (ATMs)
Period average US$ equivalent of C$1.00 (9)
Period-end US$ equivalent of C$1.00
$
$
$
$
$
$
$
$
$
$
$
$
2019
46,002
1,864
4,085
24,139
15,914
12,871
6,402
2,550
806
475
2,666
(28)
12,871
8.78
8.75
16.8%
75,000
1.61%
0.31%
0.04%
0.27%
0.46%
127%
12.1%
13.2%
15.2%
4.3%
Table 1
2019 vs. 2018
Increase (decrease)
8.0%
$ 3,426
42.6%
557
52.7%
1,409
5.7%
1,306
1.0%
154
$
$
$
440
3.5%
374
285
31
(266)
(111)
127
440
6.2%
12.6%
4.0%
(35.9)%
(4.0)%
n.m.
3.5%
$
4.6%
0.39
4.7%
0.39
(80) bps
n.m.
8.9%
$ 6,100
(3) bps
n.m.
8 bps
n.m.
1 bps
n.m.
7 bps
n.m.
n.m.
9 bps
n.m. 400 bps
n.m.
n.m.
n.m.
n.m.
60 bps
40 bps
60 bps
(10) bps
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
1.64%
0.23%
0.03%
0.20%
0.37%
123%
11.5%
12.8%
14.6%
4.4%
$ 1,428,935
249,004
618,856
101,560
886,005
77,816
512,856
762,300
5,678,000
1,434,779
1,440,682
1,430,096
4.07
4.1%
46%
106.24
151,933
82,801
1,327
4,600
0.752
0.759
$
$
$
$
$ 1,334,734
222,866
576,818
94,039
836,197
73,552
496,459
671,000
5,533,700
$ 94,201
26,138
42,038
7,521
49,808
4,264
16,397
91,300
144,300
7.1%
11.7%
7.3%
8.0%
6.0%
5.8%
3.3%
13.6%
2.6%
1,443,894
1,450,485
1,438,794
3.77
3.7%
45%
95.92
138,009
$
(0.6)%
(9,115)
(0.7)%
(9,803)
(0.6)%
(8,698)
8.0%
0.30
40 bps
n.m.
n.m. 100 bps
10.8%
10.1%
$ 10.32
13,924
81,870
1,333
4,537
0.776
0.760
931
(6)
63
$ (0.024)
$ (0.001)
1.1%
(0.5)%
1.4%
(3.1)%
(0.1)%
$
$
$
$
(1)
(2)
(3)
(4)
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.
Commencing Q4 2019, the interest component and the accrued interest payable recorded on certain deposits carried at Fair Value Through Profit and Loss (FVTPL)
previously presented in trading revenue and deposits, respectively, are presented in net interest income and other liabilities, respectively. Comparative amounts have
been reclassified to conform with this presentation.
LCR is the average for the three months ended for each respective period and is calculated in accordance with the Office of the Superintendent of Financial Institutions’
(OSFI) Liquidity Adequacy Requirements (LAR) guideline. For further details, refer to the Liquidity and funding risk section.
Represents year-end spot balances.
AUA includes $15.5 billion and $8.1 billion (2018 – $16.7 billion and $9.6 billion) of securitized residential mortgages and credit card loans, respectively.
Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
Based on TSX closing market price at period-end.
Average amounts are calculated using month-end spot rates for the period.
(5)
(6)
(7)
(8)
(9)
n.m. not meaningful
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
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 85,000+ 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
17 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 meaningful relationships with our clients is underscored by the breadth of our products, our
depth of expertise and the features of our digital solutions.
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 solutions including creditor, life, health, home, auto, travel, wealth, and
annuities to individuals as well as reinsurance advice and solutions, and business insurance
services to business and group clients.
Investor & Treasury
Services
Acts as 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.
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. & Europe, and Australia, Asia &
other regions.
Corporate Support
Corporate Support consists of Technology & Operations, which provides the technological and
operational foundation required to effectively deliver products and services to our clients,
Functions, which includes our finance, human resources, risk management, internal audit and
other functional groups, as well as our Corporate Treasury function.
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:
(cid:129)
(cid:129)
(cid:129)
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 2019 against our business strategies and strategic goals, refer to the Business segment results section.
Economic, market and regulatory review and outlook – data as at December 3, 2019
The predictions and forecasts in this section are based on information and assumptions from sources we consider reliable. If this
information or these assumptions are not accurate, actual economic outcomes may differ materially from the outlook presented
in this section.
Canada
The Canadian economy is expected to grow by 1.6% in calendar 2019, which is down from a 1.9% increase in calendar 2018.
Business investment has declined amid an uncertain global economic backdrop, rising trade tensions, and challenges in the
energy sector. Strong labour market conditions and rising wages have supported household income growth, but consumer
spending has been moderate due to elevated debt levels and higher debt service costs. While the Bank of Canada (BoC) has left
its overnight rate unchanged at 1.75% since October 2018, Canadian borrowing costs have declined due to global central bank
easing. The BoC has signaled a willingness to lower rates if the global outlook deteriorates further and weakness in
manufacturing and investment spreads to the rest of the economy. Canadian GDP growth is expected to remain slightly below the
economy’s longer-run trend in calendar 2020 amid moderate growth in consumer spending and housing as well as slow business
investment.
U.S.
The U.S. economy is expected to grow by 2.3% in calendar 2019, which is down from a 2.9% increase in calendar 2018. Consumer
spending growth has remained strong, though the stimulative effect of 2018’s tax cuts has faded. Job growth has slowed in
calendar 2019 relative to calendar 2018 though the unemployment rate has declined further. Following sluggish growth in
calendar 2018, housing activity continued to slow in early calendar 2019 due to the dragging impact from higher interest rates in
2018, but has picked up more recently with the Federal Reserve (Fed) cutting interest rates. Business investment growth has
14
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
slowed with rising trade tensions and uncertainty about the global economic outlook weighing on sentiment. The Fed cut its
benchmark interest rate for the third time in calendar 2019 in October but signaled that further rate cuts are unlikely as long as
the economic outlook evolves in line with its expectations. U.S. GDP growth is expected to slow further in calendar 2020 with
business investment and exports remaining subdued while consumer spending is expected to increase at a more moderate, but
still healthy rate.
Europe
Euro area GDP is expected to grow by 1.2% in calendar 2019, which is down from a 1.9% increase in calendar 2018. Growth in
Germany, the euro area’s largest economy, has slowed amid a sustained downturn in the industrial sector. Growth in other major
euro area economies remains modest, with weakness in manufacturing generally being offset by stronger services sector
activity. The European Central Bank (ECB) announced additional monetary policy stimulus in September, cutting its key interest
rate further into negative territory and restarting quantitative easing. Growth in the U.K. is expected to slow to 1.3% in calendar
2019 from 1.4% in calendar 2018 as ongoing uncertainty about Brexit continues to weigh on business sentiment and investment.
Euro area GDP growth is expected to remain steady at a relatively modest pace in 2020, with some help from slightly more
stimulative fiscal policy, while growth in the U.K. economy is expected to slow further.
Financialmarkets
Government bond yields remain historically low due to low inflation and expectations that monetary policy will remain
accommodative for an extended period. Monetary policy stimulus, and more recently optimism regarding U.S.-China and Brexit
deals, has supported equity markets. Oil prices have been relatively flat in recent months as global demand concerns have offset
geopolitical risks. Yield curves in Canada and the U.S. remain flat, suggesting investors remain concerned about the risk of an
economic downturn.
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, amendments to anti-money laundering regulations and the U.S., the U.K. and European regulatory reforms.
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 our performance against our medium-term TSR objectives and are
used as goals as we execute against our strategic priorities. 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 3-year and 5-year performance against our medium-term financial
performance objectives:
Financial performance compared to our medium-term objectives
Medium-term objectives (1)
Diluted EPS growth of 7% +
ROE of 16% +
Strong capital ratio (CET1) (3)
Dividend payout ratio 40% – 50%
3-year (2)
9%
17.1%
11.5%
46%
Table 2
5-year (2)
8%
17.3%
11.2%
46%
(1)
(2)
(3)
A medium-term (3-5 year) objective is considered to be achieved when the performance goal is met in either a 3- or 5-year period.
Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.
For further details on the CET1 ratio, refer to the Capital Management section.
For 2020, our medium-term financial performance objectives will remain unchanged.
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:
(cid:129)
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.
(cid:129)
(cid:129)
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
15
Medium-term objectives – 3- and 5-year TSR vs. peer group average
Royal Bank of Canada
Peer group average (excluding RBC)
Table 3
3-year TSR (1)
5-year TSR (1)
12%
Top half
11%
10%
Top half
8%
(1)
The 3- and 5-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, 2016 to October 31, 2019 and October 31, 2014 to October 31, 2019, 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
2019
$ 106.24
4.00
10.8%
15.2%
$
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%
$
Table 4
2015
74.77
3.04
(6.5)%
(3.0)%
Financial performance
Overview
2019 vs. 2018
Net income of $12,871 million increased $440 million or 4% from a year ago. Diluted EPS of $8.75 was up $0.39 or 5% and ROE of
16.8% was down 80 bps. Our Common Equity Tier 1 (CET1) ratio was 12.1%, up 60 bps from a year ago.
Our results reflected strong earnings in Personal & Commercial Banking and Wealth Management, and solid results in
Insurance, partially offset by lower results in Investor & Treasury Services and Capital Markets. Our results also reflected the
impact in the prior year of the U.S Tax Reform which resulted in the write-down of net deferred tax assets, as well as an increase
due to the impact of foreign exchange translation.
Personal & Commercial Banking earnings increased mainly due to average volume growth of 7% and higher spreads. These
factors were partially offset by higher PCL and an increase in staff-related costs as well as technology and related costs.
Wealth Management results increased mainly due to higher average fee-based client assets, an increase in net interest
income and a gain on the sale of the private debt business of BlueBay of $134 million (after-tax). These factors were partially
offset by increased costs in support of business growth, higher variable compensation commensurate with revenue growth and
higher PCL.
Insurance earnings were up mainly due to the impact of new longevity reinsurance contracts, partially offset by higher
claims costs.
Investor & Treasury Services results decreased primarily due to lower funding and liquidity revenue, severance and related
costs associated with repositioning of the business, as well as lower revenue from our asset services business.
Capital Markets results were down driven by lower revenue in Corporate and Investment Banking, higher PCL and higher
technology and related costs. These factors were partially offset by a lower effective tax rate largely reflecting changes in
earnings mix, higher revenue in Global Markets and the impact of foreign exchange translation.
Corporate Support net loss was $28 million, largely due to the impact of an unfavourable accounting adjustment, residual
unallocated costs and unfavourable tax impacts, partially offset by asset/liability management activities. Net loss was
$155 million in the prior year, largely due to the impact of the U.S. Tax Reform of $178 million as noted above, 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
Non-interest expense
Income taxes
Net income
Impact on EPS
Basic
Diluted
Table 5
2019 vs. 2018
$
$
339
7
203
13
116
0.08
0.08
16
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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.
Total revenue
(Millions of Canadian dollars)
Interest and dividend income
Interest expense (1)
Net interest income
NIM (1)
Insurance premiums, investment and fee income
Trading revenue (1)
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
Share of profit in joint ventures and associates
Other
Non-interest income
Total revenue
2019
0.752
0.591
0.670
Table 6
2018
0.776
0.578
0.654
2019
$ 41,333
21,584
$ 19,749
1.61%
Table 7
2018
$ 33,021
15,069
$ 17,952
1.64%
$
$
5,710
995
5,748
3,628
1,305
1,907
1,815
986
1,072
1,269
125
76
1,617
4,279
1,150
5,377
3,551
1,372
1,800
2,053
1,098
1,054
1,394
147
21
1,328
$ 26,253
$ 46,002
$ 24,624
$ 42,576
(1)
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented
in trading revenue is presented in net interest income. Comparative amounts have been reclassified to conform with this
presentation.
2019 vs. 2018
Total revenue increased $3,426 million or 8%, largely due to higher net interest income and an increase in insurance premiums,
investment and fee income (Insurance revenue). Higher investment management and custodial fees and other revenue also
contributed to the increase. The impact of foreign exchange translation also increased total revenue by $339 million. These
factors were partially offset by lower underwriting and other advisory fees.
Net interest income increased $1,797 million or 10%, largely due to average volume growth and higher spreads in Personal
and Commercial Banking and Wealth Management. Higher trading revenue and lending revenue in Capital Markets and the
impact of foreign exchange translation also contributed to the increase. Net interest income was also impacted by lower funding
and liquidity revenue, which was more than offset by the related gains on non-trading derivatives in Other revenue.
NIM was down 3 bps compared to last year mainly due to changes in average earning asset mix with volume growth primarily
in reverse repos and lower funding and liquidity revenue. These factors were partially offset by improved spreads in Canadian
Banking and Wealth Management. The impact associated with lower funding and liquidity revenue was more than offset by the
related gains on non-trading derivatives in Other revenue.
Insurance revenue increased $1,431 million or 33%, mainly due to the change in fair value of investments backing our
policyholder liabilities and business growth in International Insurance, both of which are largely offset by in PBCAE. Realized
investment gains also contributed to the increase. These factors were partially offset by lower group annuity sales, which are
largely offset in PBCAE.
Investment management and custodial fees increased $371 million or 7%, due to higher average fee-based client assets
reflecting market appreciation and net sales, and the impact of foreign exchange translation.
Other revenue increased $289 million or 22%, primarily due to gains on non-trading derivatives in our funding and liquidity
business, which were largely offset in Net interest income and a gain on the sale of the private debt business of BlueBay. The
change in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in Non-
interest expense, also contributed to the increase. These factors were partially offset by lower net gains in our non-trading
investment portfolios. The prior year also included a gain related to the sale of a mutual fund product and its associated team, a
favourable accounting adjustment related to City National and a gain related to the reorganization of Interac.
Underwriting and other advisory fees decreased $238 million or 12%, mainly due to lower equity origination primarily in North
America and lower M&A largely in Europe and Canada.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
17
Additional trading information
(Millions of Canadian dollars)
Total trading revenue
Net interest income (1)
Non-interest income (1)
Total trading revenue
Total trading revenue by product
Interest rate and credit
Equities
Foreign exchange and commodities
Total trading revenue
Table 8
2019
2018
$ 2,266
995
$ 3,261
$ 1,664
1,037
560
$ 3,261
$
$
$
$
1,960
1,150
3,110
1,573
1,014
523
3,110
(1)
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented
in trading revenue is presented in net interest income. Comparative amounts have been reclassified to conform with this
presentation.
2019 vs. 2018
Total trading revenue of $3,261 million, which is comprised of trading-related revenue recorded in Net interest income and
Non-interest income, was up $151 million or 5%, mainly due to higher fixed income trading revenue across all regions and the
impact of foreign exchange translation.
Provision for credit losses
2019 vs. 2018
Total PCL increased $557 million from the prior year.
PCL on loans increased $608 million or 47% from the prior year, mainly due to higher provisions on impaired loans in
Personal & Commercial Banking, Capital Markets and Wealth Management. The PCL ratio on loans increased 8 bps.
For further details on PCL, refer to Credit quality performance in the Credit risk section.
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
2019 vs. 2018
PBCAE of $4,085 million increased $1,409 million or 53% from the prior year, mainly reflecting the change in fair value of
investments backing our policyholder liabilities and lower favourable investment-related experience. Business growth in
International Insurance and higher claims costs also contributed to the increase. These factors were partially offset by lower
group annuity sales and the favourable impact of new longevity reinsurance contracts.
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)
$
2019
6,600
5,706
1,876
418
$ 14,600
1,777
1,635
1,090
1,305
1,197
2,535
$ 24,139
52.5%
53.6%
Table 9
$
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%
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
(1)
(2) 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 2019
Management’s Discussion and Analysis
2019 vs. 2018
Non-interest expense increased $1,306 million or 6%, primarily due to increased costs in support of business growth and higher
staff-related costs, the impact of foreign exchange translation, as well as an increase in technology and related costs, including
digital initiatives. Higher variable compensation commensurate with revenue growth, severance and related costs associated
with repositioning of our Investor & Treasury Services business, and the change in fair value of our U.S. share-based
compensation plans, which was largely offset in revenue, also contributed to the increase.
Our efficiency ratio of 52.5% decreased 110 bps from last year. Excluding the change in fair value of investments backing our
policyholder liabilities, our efficiency ratio of 53.6% increased 50 bps from last year.
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
Value added and sales taxes
Payroll taxes
Capital taxes
Property taxes
Insurance premium taxes
Business taxes
Total income and other taxes
Income before income taxes
Effective income tax rate
Effective total tax rate (1)
Table 10
2019
3,043
$
2018
3,329
$
$
519
738
73
139
30
55
1,554
$
$
4,597
$ 15,914
19.1%
26.3%
$
468
687
80
132
29
37
1,433
$
$
4,762
$ 15,760
21.1%
27.7%
(1)
Total income and other taxes as a percentage of income before income taxes and other taxes.
2019 vs. 2018
Income tax expense decreased $286 million or 9% from last year, primarily due to an increase in income from lower tax rate
jurisdictions and the impact of the U.S. Tax Reform which resulted in the write-down of net deferred tax assets in the prior year.
These factors were partially offset by higher income before income taxes.
The effective income tax rate of 19.1% decreased 200 bps, primarily due to an increase in income from lower tax rate
jurisdictions and the impact of the U.S. Tax Reform which resulted in the write-down of net deferred tax assets in the prior year.
Other taxes increased $121 million or 8% from 2018, mainly due to higher value added and sales taxes commensurate with
purchase activity, and 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 76% of total
AUA, as at October 31, 2019, followed by our Wealth Management and Personal & Commercial Banking businesses with
approximately 19% and 5% of total AUA, respectively.
2019 vs. 2018
AUA increased $144 billion or 3% compared to last year, mainly reflecting market appreciation and net sales.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
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) (2)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
Total International
Total AUA
Table 11
2019
2018
$
35,300
752,000
652,000
902,100
$ 2,341,400
$
$
$
26,500
114,500
189,600
226,700
557,300
44,100
358,200
787,900
1,589,100
$
$
$
$
$
31,800
706,800
635,700
934,500
2,308,800
26,400
103,500
173,200
193,400
496,500
43,900
356,000
871,700
1,456,800
$ 2,779,300
$
2,728,400
$ 5,678,000
$
5,533,700
(1)
(2)
Geographic information is based on the location from where our clients are serviced.
Amounts have been revised from those previously presented.
Assets under management
Assets under management (AUM) are assets managed by us which are beneficially owned by our clients. Management fees are
paid by the investment funds and other clients 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.
2019 vs. 2018
AUM increased $91 billion or 14% compared to last year, mainly reflecting market appreciation and net sales.
The following table presents the change in AUM for the year ended October 31, 2019:
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance (1)
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition/dispositions
Foreign exchange
2019
Money
market
Fixed
income
Total
$ 25,000 $ 184,000 $ 79,100 $ 382,900 $ 671,000
111,000
(105,100)
31,200
15,900
(18,100)
25,900
55,200
(51,700)
800
33,400
(32,300)
5,600
6,500
(3,000)
(1,100)
Equity
Multi-asset
and other
4,300
500
–
100
6,700
16,900
(100)
(600)
2,400
9,400
(900)
–
23,700
33,200
(4,500)
200
37,100
60,000
(5,500)
(300)
Total market, acquisition/dispositions and
foreign exchange impact
AUM, balance at end of year
600
16,200
8,500
28,900
54,200
$ 29,900 $ 206,900 $ 90,000 $ 435,500 $ 762,300
(1)
Amounts have been revised from those previously presented.
20
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Table 12
2018
Total
$ 639,900
104,600
(98,600)
30,400
36,400
(9,200)
–
3,900
(5,300)
$ 671,000
Business segment results
Results by business segments
(Millions of Canadian dollars,
except percentage amounts)
Net interest income (2)
Non-interest income (2)
Total revenue
PCL
PBCAE
Non-interest expense
Net income before
income taxes
Income tax
Net income
ROE (3)
Average assets
$
$
$
$
Personal &
Commercial
Banking
Wealth
Management
Insurance
2019
Investor &
Treasury
Services
Capital
Markets (1)
Corporate
Support (1)
12,653 $
5,212
17,865 $
1,448
–
7,768
2,993 $
9,150
12,143 $
117
–
8,813
– $
(44) $
5,710
2,389
5,710 $
–
4,085
606
2,345 $
–
–
1,725
4,043 $
4,245
8,288 $
299
–
5,096
104 $
(453)
(349) $
–
–
131
Table 13
2018
Total
17,952
24,624
42,576
1,307
2,676
22,833
15,760
3,329
12,431
Total
19,749 $
26,253
46,002 $
1,864
4,085
24,139
12,871 $
16.8%
8,649 $
2,247
3,213 $
663
1,019 $
213
620 $
145
2,893 $
227
(480) $
(452)
15,914 $
3,043
6,402 $
2,550 $
806 $
475 $
2,666 $
(28) $
27.2%
$ 466,200 $
17.4%
39.6%
17.6%
98,500 $ 17,600 $ 146,100 $ 666,500 $ 41,300 $ 1,436,200 $ 1,294,900
13.2%
11.4%
n.m.
(1)
(2)
(3)
Net interest income, Non-interest income, Total revenue, Net income before income taxes, and Income tax are presented in Capital Markets on a teb basis. 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.
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest
income. Comparative amounts have been reclassified to conform with this presentation.
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.
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
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
(ACL), refer to Note 2 of our 2019 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
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:
(cid:129) Wealth Management reported results also include disclosure in U.S. dollars, primarily for U.S. Wealth Management
(cid:129)
(cid:129)
(including City National) as we review and manage the results of this business largely in this currency.
Capital Markets results are reported on a teb basis, 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
Wealth
Management
Insurance
2019
Investor &
Treasury
Services
Table 14
2018
Capital
Markets
Corporate
Support
Total
Total
$
6,309 $
2,498 $
798 $
461 $ 2,584 $
23,200
27.2%
14,350
17.4%
2,000
39.6%
3,500
22,750
(59) $ 12,591 $ 12,115
68,900
75,000
9,200
13.2%
11.4%
n.m.
16.8%
17.6%
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
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, 2019 with the results from last year. 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.
Results excluding specified item
There were no specified items for the years ended October 31, 2019 and October 31, 2018. Our results for the year ended
October 31, 2017 were impacted by the following specified item:
(cid:129)
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.
22
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
The following tables provide calculations of our Personal & Commercial Banking and Canadian Banking results and measures
excluding the specified item for the year ended October 31, 2017 for the purpose of calculating the adjusted operating leverage
ratio for the year ended October 31, 2018, which is a non-GAAP measure:
Personal & Commercial Banking
Table 15
(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.
Canadian Banking
2017
Item excluded
As reported
Gain related to the
sale by Moneris (1)
Adjusted
$
$
$
$
$
$
$
$
15,863
1,054
7,176
7,633
5,755
7,176
15,863
45.2%
5.7%
3.5%
2.2%
(212) $ 15,651
1,054
7,176
–
–
(212) $
(212) $
7,421
5,543
–
(212)
$
7,176
15,651
45.9%
4.3%
3.5%
0.8%
Table 16
Adjusted
(Millions of Canadian dollars, except percentage amounts)
As reported
2017
Item excluded
Gain related to the
sale by Moneris (1)
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.
$
$
$
$
$
$
$
$
14,877
1,016
6,423
7,438
5,571
6,423
14,877
43.2%
6.2%
3.8%
2.4%
(212) $ 14,665
1,016
6,423
–
–
(212) $
(212) $
7,226
5,359
–
(212)
$
6,423
14,665
43.8%
4.7%
3.8%
0.9%
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
2019
Item excluded
(Millions of Canadian dollars,
except percentage amounts)
Total revenue
Non-interest expense
Efficiency ratio
As reported
$ 46,002
24,139
52.5%
Change in fair value
of investments backing
policyholder liabilities
$
Adjusted
(987) $ 45,015
24,139
–
53.6%
2018
Item excluded
Change in fair value
of investments backing
policyholder liabilities
Table 17
Adjusted
$
435
–
$ 43,011
22,833
53.1%
As reported
$ 42,576
22,833
53.6%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
23
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 are focused on building meaningful relationships with our clients,
underscored by our exceptional client experience, the breadth of our products, our depth of expertise and the features of our
digital solutions.
> 14 million
Number of clients
> 7 million
Active digital users in Canada(1)
35,467
Employees
Revenue by business lines
$17.9 billion
Total revenue
72% Personal Banking
23% Business Banking
5% Caribbean and U.S. Banking
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 clients, as well
as public institutions. In the U.S., we compete primarily with other Canadian
banking institutions that have U.S. operations.
2019 Operating environment
› Following the rising interest rate environment throughout fiscal 2018, we experienced higher net interest margin this year.
However, market interest rates moderated in the latter half of this year, as the overall economic outlook softened.
› Consumer spending has been supported by strong labour markets and income growth, though the impact of last year’s interest
rate increases has raised debt servicing costs for some Canadian households.
› Homebuyers have adjusted to stricter mortgage regulations and benefitted from declining mortgage rates this year. This has
led to an improvement in housing activity, which has contributed to solid growth in residential mortgages this year.
› Business loan growth remained strong, however, it moderated slightly since the beginning of the calendar year. A decline in
energy sector investment, an uncertain global growth environment and trade tensions have likely contributed to more modest
growth in lending.
› After relatively benign credit conditions in the prior year, we returned to a more normalized level of credit losses towards the
end of 2019.
› Growth in our investment product balances was driven by market returns, despite volatility experienced largely during the
beginning of this year.
› 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 challenges in various regions resulting in weak to moderate economic growth during
the year.
(1)
24
Represents 90-day active clients
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
PROGRESS IN 2019
PRIORITIES IN 2020
Transform how we serve our clients
Accelerate our growth
Continued to provide exceptional and secure
client experiences via our digital platforms,
including a student mobile banking experience
that is the first-of-its-kind in Canada
Continued to innovate our branch network,
including expansion of student and newcomer
formats
Continued to give clients more value for their
loyalty points by offering the flexibility to pay bills
with RBC Rewards® points
Continued to provide personalized advice and
valued banking solutions to our existing and new
clients, including key high-growth and high-value
segments such as retirees, youth, newcomers,
business owners and high net worth clients
Advanced our partnership with Petro-Canada,
which helped our clients realize savings on gas
while also earning RBC Rewards® and Petro-
Canada points
Continued to achieve exceptional growth while
helping clients save money on travel with our
WestJet credit card
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 and enabling our advisors to build new
and deeper relationships and achieve industry-
leading volume growth
Establish key partnerships to continue to add
value for our clients
Rapidly deliver digital solutions to our
clients
Continued to release significant additional
functionalities in our RBC Mobile app, including
credit and debit card lock features
Deliver more personalized insights to improve the
client experience while continuing to simplify and
digitize everyday banking
Launched NOMI BudgetsTM that leverages
artificial intelligence (AI) to analyze clients’
spending patterns to help them stay on track to
achieve their financial goals
Continued to roll out MyAdvisor®, an online
advice platform that digitally connects our clients
to an advisor, resulting in over 1.4 million clients
with a personalized investment plan
Continued to invest in InvestEase®, a low-cost
automated investment advice and portfolio
management business, with the launch of the
responsible investing portfolio and no minimum
requirement features
Enhanced the digital experience for our business
clients with the ability to open accounts online
and obtain credit digitally as well as launched
new capabilities allowing them to gain insights to
grow their business with RBC Insight EdgeTM
Continued to prioritize investments in programs
that simplify, digitize and automate experiences
for clients, as well as enabling employees to
deliver relevant and expert advice
Continued to simplify operations, de-risk the
business and improve internal controls, while
transforming our business through digitization
and physical footprint optimization
Enhance the digital experience for our small
business and commercial clients and make it
easier for them to transact with us
Invest in new tools and capabilities and
proactively seek ways to simplify and streamline
internal processes and the client experience
Become the premier digitally-enabled
relationship bank while accelerating growth in
key client segments, continue to transform the
client experience to drive profitability and
continue to simplify our operations
Growth in U.S. cross-border client activity through
the implementation of new account opening
processes and continued leveraging of our brand
marketing and sales enablement strategies
driving accelerated growth
Deliver an improved digitally-enabled real estate
lending experience, expand marketing and
develop partnerships to provide personalized
value to clients, and enhance the deposit
gathering capabilities of the banking platform
Innovate to become a more agile and
efficient bank
In the Caribbean
In the U.S.
Outlook
Canada’s economy is expected to grow by 1.6% in calendar 2019, with a slightly stronger 1.7% pace in calendar 2020. Despite the
BoC leaving its policy rate unchanged during fiscal 2019, market interest rates have declined, due in part to easing by other
central banks globally. We expect the low interest rate environment, alongside a strong labour market and growing population, to
continue to support housing demand in 2020. The impact of this is expected to be solid loan volume growth offset by interest
margin compression. We will 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 expect weak to moderate growth throughout the region. We will continue to de-risk the business, improve
our operating efficiency and focus on growth strategies in target markets.
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 2019
25
Personal & Commercial Banking
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Total revenue
PCL on performing assets
PCL on impaired assets
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 (1)
Selected balance sheet and other information
Average total assets
Average total earning assets, net
Average loans and acceptances, net
Average deposits
Other information
AUA (2), (3)
Average AUA
AUM (3)
Number of employees (FTE)
Credit information
PCL on impaired loans as a % of average net loans and acceptances
Other selected information – Canadian Banking
$
$
$
$
$
2019
12,653 $
5,212
17,865
109
1,339
1,448
7,768
8,649
6,402 $
16,894 $
12,843
4,051
971
27.2%
2.84%
43.5%
2.4%
n.a.
466,200 $
445,200
447,100
393,200
283,800 $
276,100
5,000
35,467
0.30%
Table 18
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
0.26%
Net income
NIM
Efficiency ratio
Operating leverage
Operating leverage adjusted (4)
5,860
2.73%
42.5%
1.5%
3.1%
These are non-GAAP measures. Measures for the year ended October 31, 2018 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, 2019 of $15.5 billion and $8.1 billion, respectively (October 31, 2018 – $16.7 billion and
$9.6 billion).
Represents year-end spot balances.
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%.
6,168 $
2.79%
41.8%
2.0%
n.a.
$
(1)
(2)
(3)
(4)
n.a. not applicable
Financial performance
2019 vs. 2018
Net income increased $374 million or 6% from last year, mainly due to average volume growth of 7% and higher spreads. These
factors were partially offset by higher PCL and an increase in staff-related costs as well as technology and related costs.
Total revenue increased $949 million or 6% from last year, largely reflecting average volume growth of 6% in loans and 9% in
deposits and improved spreads.
NIM increased 6 bps, mainly due to improved spreads on deposits in Canadian Banking, reflecting higher interest rates,
partially offset by the impact of competitive pricing pressures.
PCL increased $175 million or 14%, largely reflecting higher provisions on impaired loans in our commercial portfolios in
Canadian Banking. PCL on impaired loans ratio increased 4 bps. For further details, refer to Credit quality performance in the
Credit risk section.
Non-interest expense increased $242 million or 3%, primarily attributable to higher staff-related costs and an increase in
technology and related costs, including digital initiatives.
Average loans and acceptances increased $23 billion or 6%, largely due to 6% growth in residential mortgages and 11%
growth in business loans.
Average deposits increased $32 billion or 9%, reflecting 9% growth in both business and personal deposits.
Business line review
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,
26
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 1,201 branches and 4,240 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 $606 million or 5% compared to last year largely reflecting volume growth in deposits and residential
mortgages and improved spreads on deposits, partially offset by the impact of competitive pricing pressures.
Average residential mortgages increased 6% compared to last year, mainly due to strong mortgage origination as well as
high levels of client retention.
Average deposits increased 9% from last year, largely reflecting acquisitions of new clients and an increase in activity from
existing clients.
Selected highlights
Table 19
Average residential mortgages, personal loans and deposits
(Millions of Canadian dollars)
(Millions of Canadian dollars, except number of)
Total revenue
Other information
Average residential mortgages
Average other loans and acceptances, net
Average deposits
Average credit card balances
Credit card purchase volumes
Branch mutual fund balances (1)
Average branch mutual fund balances
AUA – Self-directed brokerage (1)
Number as at October 31:
Branches
ATMs
(1)
Represents year-end spot balances.
2019
2018
$ 12,843 $ 12,237
$ 249,600 $ 235,700
80,200
202,800
18,100
117,900
147,900
151,500
82,900
79,800
221,400
19,100
125,800
162,000
155,300
89,500
1,201
4,240
1,203
4,194
280,000
240,000
200,000
160,000
120,000
80,000
40,000
0
Business Banking
120,000
100,000
80,000
60,000
40,000
20,000
0
2019
2018
2019
2018
2019
2018
Residential mortgages
Deposits
Other loans
and acceptances
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. With one of the
largest teams of relationship managers and specialists in the industry, our commitment to client experience and trusted advice
has earned us leading market share in business lending and deposits.
Financial performance
Total revenue increased $318 million or 9% compared to last year, largely reflecting average volume growth of 10%.
Average loans and acceptances increased 11% and average deposits were up 9%, 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
Caribbean & U.S. Banking
Table 20
Average business loans and acceptances and business deposits
(Millions of Canadian dollars)
2019
2018
$ 4,051 $ 3,733
$ 89,400 $ 80,800
153,400
140,600
120,000
100,000
80,000
60,000
40,000
20,000
0
180,000
150,000
120,000
90,000
60,000
30,000
0
2019
2018
2019
2018
Business loans and acceptances
Business deposits
Our Caribbean Banking business offers a comprehensive suite of banking products and services, as well as international
financing and trade promotion services through extensive branch, ATM, online and mobile banking networks.
Our U.S. Banking business serves the banking needs of our Canadian retail and small business clients in the U.S. across all
50 states.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
27
Financial performance
Total revenue was up $25 million or 3% from last year, primarily due to the impact of foreign exchange translation.
Average loans and acceptances increased 4% and average deposits increased 1%, primarily due to the impact of foreign
exchange translation.
Selected highlights
Table 21
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 as at October 31:
Branches
ATMs
(1)
Represents year-end spot balances.
Wealth Management
$
$
2019
971 $
2018
946
4.13%
9,300 $
18,500
6,700
7,100
4,900
52
287
3.95%
8,900
18,300
7,700
8,200
4,700
57
269
10,000
8,000
6,000
4,000
2,000
0
20,000
16,000
12,000
8,000
4,000
0
2019
2018
2019
2018
Loans and acceptances
Deposits
Wealth Management is a global business serving clients in key financial centres. We serve HNW and UHNW individual and
institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial
goals.
$12.1 billion
Total revenue
> 5,200
Client-facing advisors
> $22 billion
AUA net flows
Assets under Administration
(AUA)
Assets under Management
(AUM)
$1,062 billion
Total AUA
$756 billion
Total AUM
91% Personal
8% Institutional
1% Mutual Funds
39% Personal
31% Institutional
30% 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.
(cid:129) Canadian Wealth Management is the largest
full-service wealth advisory business in
Canada, as measured by AUA, serving HNW and
UHNW clients
(cid:129) U.S. Wealth Management (including City
National) also encompasses our private client
group (PCG) and correspondent and advisor
services (CAS) businesses. 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
(cid:129) GAM is the largest retail fund company in
Canada as well as a leading institutional asset
manager
(cid:129) International Wealth Management serves HNW
and UHNW clients primarily through key
financial centres in Europe, the U.K., and Asia
2019 Operating environment
› The Fed raised its policy rate once in the first half of the year, and subsequently made three cuts towards the latter part of
2019, resulting in a net reduction of 50 basis points in fiscal 2019. The resulting NIM compression in the latter part of the year
was more than offset by strong volume growth and market appreciation in our U.S. businesses as we continued to grow in
select U.S. markets.
› The wealth management industry continued to face the challenge of adapting in an environment of rapid technological
advancements, shifting investor preferences, stricter regulations and changing demographics.
› Amid ongoing trade tensions and market volatility, growth in our client assets was driven by market returns, our relationship-
focused advisory network, distribution scale and the strength of our brand.
› We continued to prioritize investments in digital solutions to maintain our competitive advantage, increase efficiencies in
response to rapidly changing client preferences and address regulatory requirements.
› After relatively benign credit conditions in the prior year, we returned to a more normalized level of credit losses towards the
end of 2019.
28
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
PROGRESS IN 2019
PRIORITIES IN 2020
In Canada, be the premier service provider
for HNW and UHNW clients
Extended our position as industry leader in our
full-service private wealth business
Continue to retain and attract top-performing and
new advisors to strengthen our talent advantage
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)
Fully rolled out RBC Premier Banking to deepen
banking relationships with Wealth Management
clients
Enhanced our digital and data capabilities to
drive increased client satisfaction and advisor
productivity
Invested further in capabilities, technology and
talent needed to grow our U.S. Wealth
Management business, including solid execution
on our technology transformation
Continued expansion in City National’s existing
footprint, including growing our presence within
the entertainment ecosystem through the
acquisition of FilmTrack, as well as solid progress
on expanding offerings to select high growth
markets with strong U.S. Wealth Management and
Capital Markets presence, including greater New
York City and D.C. areas
Enhanced our distribution capabilities by
leveraging our global strengths, while delivering
an exceptional client experience
Focused on delivering a differentiated client
experience by leveraging our global capabilities
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
Maintained #1 market share in Canadian mutual
fund AUM
Launched the RBC iShares strategic alliance,
bringing Canadian investors the largest and most
comprehensive ETF solution suite in Canada
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
Streamline and simplify the business to continue
improving efficiency and advisor productivity
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.
Build out digital capabilities to improve client
experience and drive operational efficiencies
Focus on growing market share in target markets
Continue to leverage our global strengths to
better serve clients
Continue to deliver an exceptional client
experience
Continue to increase business effectiveness and
talent capabilities
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
Outlook
Global economies are likely to continue to experience uncertainty driven in part by ongoing geopolitical tensions and trade
conflicts. Central banks in Canada and the U.S. are closely monitoring the impacts on the economy.
We expect our businesses will continue to lead in domestic markets and grow market share in the HNW and UHNW client
segments globally, leveraging the strength of our brand and through continually enhancing our solutions and capabilities to
address evolving client needs. We will continue to deliver world class client experiences by investing in our people and
technology to drive digitized solutions.
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 2019
29
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
PCL on impaired assets
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 (1)
Selected balance sheet
Average total assets
Average total earning assets, net
Average loans and acceptances, net
Average deposits
Other information
AUA (2) (3)
AUM (2)
Average AUA
Average AUM
PCL on impaired loans as a % of average net loans and acceptances
Number of employees (FTE)
Number of advisors (4)
$
$
$
$
2019
2,993 $
6,903
2,247
12,143
37
80
117
8,813
3,213
2,550 $
3,294 $
6,112
4,601
2,361
376
17.4%
3.55%
26.5%
98,500 $
84,400
63,600
95,800
Table 22
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
75,500
55,500
92,300
$ 1,062,200 $
755,700
1,027,400
717,500
0.13%
18,613
5,296
970,500
664,900
962,600
664,500
0.01%
17,975
5,042
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
2019 vs. 2018
$
169
130
30
(3)%
2%
2%
(1)
(2)
(3)
(4)
Pre-tax margin is defined as Income before income taxes divided by Total revenue.
Represents year-end spot balances.
In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), and International Wealth Management, AUA includes $6,000 million
(2018: $5,800 million) related to GAM.
Represents client-facing advisors across all our wealth management businesses.
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
2019
970,500 $
315,500
(293,400)
22,100
72,100
(2,200)
(300)
69,600
1,062,200 $
$
$
Table 23
2018
929,200
292,600
(261,600)
31,000
5,600
(5,700)
10,400
10,300
970,500
30
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance (1)
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition/dispositions
Foreign exchange
Total market, acquisition/
dispositions and foreign
exchange impact
2019
Money market
25,000
$
55,200
(51,700)
800
4,300
500
–
100
Fixed income
182,000
$
33,400
(32,300)
5,700
6,800
16,700
(100)
(600)
Equity
$ 79,100
6,500
(3,000)
(1,200)
2,300
9,400
(900)
–
Multi-asset
and other
$ 378,800 $
15,900
(18,100)
25,700
23,500
33,100
(4,500)
200
Total
664,900 $
111,000
(105,100)
31,000
36,900
59,700
(5,500)
(300)
Table 24
2018
Total
634,100
104,500
(98,500)
30,200
36,200
(9,200)
–
3,800
AUM, balance at end of year
$
600
29,900
$
16,000
204,800
8,500
$ 89,900
28,800
$ 431,100 $
53,900
755,700 $
(5,400)
664,900
(1)
Amounts have been revised from those previously presented.
AUA by geographic mix and asset class
(Millions of Canadian dollars)
Canada (1)
Money market
Fixed income
Equity
Multi-asset and other
Total Canada
U.S. (1) (2)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
Total International
Total AUA
(1)
(2)
Geographic information is based on the location from where our clients are served.
Amounts have been revised from those previously presented.
Table 25
2019
2018
$
$
$
$
23,200 $
36,300
90,500
255,800
405,800 $
26,100 $
114,500
189,600
213,100
543,300 $
$
17,700 $
13,500
39,500
42,400
$
113,100 $
$ 1,062,200 $
20,500
35,400
86,700
225,300
367,900
26,000
103,500
173,300
180,100
482,900
16,100
12,300
49,100
42,200
119,700
970,500
Financial performance
2019 vs. 2018
Net income increased $285 million or 13%, from a year ago, mainly due to higher average fee-based client assets, an increase in net
interest income and a gain on the sale of the private debt business of BlueBay of $134 million (after-tax). These factors were partially
offset by increased costs in support of business growth, higher variable compensation commensurate with revenue growth and higher
PCL.
Total revenue increased $1,217 million or 11%, primarily due to higher average fee-based client assets reflecting market
appreciation and net sales, and an increase in net interest income largely driven by average loan growth of 15%, and higher
spreads. The impact of foreign exchange translation, a gain on the sale of the private debt business of BlueBay of $151 million and
the change in the fair value of the hedges related to our U.S. share-based compensation plans, which was largely offset in
non-interest expense, also contributed to the increase.
PCL increased $132 million, primarily in U.S. Wealth Management (including City National). PCL on impaired loans ratio
increased 12 bps, mainly in a few sectors, including consumer discretionary and consumer staples. For further details, refer to
Credit quality performance in the Credit risk section.
Non-interest expense increased $743 million or 9%, primarily due to increased costs in support of business growth mainly
reflecting higher staff-related costs and higher variable compensation commensurate with revenue growth. The impact of foreign
exchange translation and the change in the fair value of our U.S. share-based compensation plans, which was largely offset in
revenue, also contributed to the increase.
AUA and AUM increased $92 billion or 9% and $91 billion or 14%, respectively, primarily due to market appreciation and net
sales.
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 1,850 investment advisors providing comprehensive financial solutions to HNW and UHNW clients.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
31
Additionally, we provide discretionary investment management and estate and trust services to our clients through approximately
90 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 $246 million or 8% from a year ago, primarily due to higher average fee-based client assets reflecting market
appreciation and net sales and the impact of a favourable accounting adjustment.
Selected highlights
Table 26
Average AUA and AUM (Millions of Canadian dollars)
(Millions of Canadian dollars)
Total revenue
Other information
Average loans and
acceptances, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
$
$
2019
3,294 $
2018
3,048
3,700 $ 3,600
17,300
368,900
100,200
370,300
97,900
17,100
407,000
116,700
391,100
109,400
500,000
400,000
300,000
200,000
100,000
0
(1)
Represents year-end spot balances.
U.S. Wealth Management (including City National)
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2019
2018
2019
2018
AUA
AUM
U.S. Wealth Management (including City National) also encompasses PCG and our CAS businesses. 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. Our CAS
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. Our competitors include other broker-dealers, commercial banks and other financial institutions that
service HNW and UHNW individuals, entrepreneurs and their businesses.
Financial performance
Revenue increased $693 million or 13%. In U.S. dollars, revenue increased $392 million or 9%, mainly due to an increase in net
interest income largely driven by average loan growth of 14% and higher spreads, an increase in average fee-based client assets
reflecting market appreciation and net sales, and the change in the fair value of the hedges related to our U.S. share-based
compensation plans, which was largely offset in non-interest expense.
NIM increased 9 bps, mainly due to higher interest rates, partially offset by higher funding and deposit costs.
Selected highlights
Table 27
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
NIM
Average earning assets, net
Average loans, guarantees and letters of
credit, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
(1)
Represents year-end spot balances.
Global Asset Management
2019
6,112 $
2018
5,419
$
$
4,601 $
3.37%
4,209
3.28%
$ 56,100 $ 50,900
42,400
50,200
412,600
123,700
393,900
112,800
37,300
48,600
367,100
102,900
366,100
100,600
500,000
400,000
300,000
200,000
100,000
0
2019
2018
2019
2018
AUA
AUM
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
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.
32
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 $269 million or 13%, mainly due to a gain on the sale of the private debt business of BlueBay of $151 million as
we have focused on growing our core business and complementary strategies, and higher average fee-based client assets
reflecting market appreciation and net sales.
Table 28
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
$
$
2019
2,361 $
2018
2,092
8,263 $
5,908
552
467,200
449,700
562
421,100
428,200
(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
500,000
400,000
300,000
200,000
100,000
0
2019
2018
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 increased $9 million or 2%, primarily due to an increase in net interest income driven by higher spreads.
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.
Insurance
Table 29
Average AUA and AUM (Millions of Canadian dollars)
$
$
2019
376 $
2018
367
4,400 $
11,900
105,900
8,800
106,700
8,600
4,800
12,500
112,800
8,300
114,300
8,800
160,000
120,000
80,000
40,000
0
16,000
12,000
8,000
4,000
0
2019
2018
2019
2018
AUA
AUM
RBC Insurance® offers a wide range of solutions including creditor, life, health, home, auto, travel, wealth, and annuities to
individuals as well as reinsurance advice and solutions, and business insurance services to business and group clients.
$5.7 billion
Total revenue
> 5 million
Number of clients
2,927
Employees
RBC Insurance® is among the largest Canadian bank-owned insurance
organizations and operates under two business lines: Canadian Insurance and
International Insurance.
In Canada, we offer our products and services through a wide variety of
channels: advice centers, RBC Insurance stores, mobile advisors, digital, mobile
and social platforms, independent brokers, and travel partners.
Outside Canada, we operate globally in the reinsurance and retrocession
markets offering life, disability and longevity reinsurance products.
Premiums and Deposits
$4.6 billion
Total premiums
and deposits
56% Life and Health
41% Annuity and Segregated
Fund Deposits
3% Property and Casualty
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
33
2019 Operating environment
› The insurance industry continued to face a number of challenges and opportunities, including changing client preferences and
digital and mobile transformation impacting all aspects of the business. In Canada, provincial and federal regulators have
expanded their focus on sales practices and fair treatment of customers. Insurers globally have been investing in products and
building distribution capacity in order to achieve higher operational efficiencies and manage expenses. To overcome these
challenges and take advantage of these opportunities, we continued to evolve our robust frameworks, controls, and risk
culture to protect clients and meet the expectations of both federal and provincial regulators.
› We continued to invest in digital capabilities to enhance access and convenience, reduce costs and deliver value to clients
beyond traditional insurance products and services.
› In Europe, life insurance companies are actively managing longevity risk to preserve capital and to mitigate the volatility of
pension costs. As a result, the longevity reinsurance market has become highly competitive and attractive to many global
reinsurers. We continued to achieve strong growth in this market within our risk tolerance.
Strategic priorities
OUR STRATEGY
PROGRESS IN 2019
PRIORITIES IN 2020
Improve distribution effectiveness
and efficiency
Launched the redesigned RBC Simplified Term
Digital Application to our field sales and advice
centres, improving reliability and simplifying the
application process for our simplified term life
insurance offering
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
Simplify.Agile.Innovate
Completed a technology transformation initiative
to deliver a single integrated platform, which
provides a better experience for clients,
employees and plan administrators
Began testing new business models, concepts and
product ideas focused on the underinsured
market; in order to provide innovative ways for
clients to acquire the coverage that they need
Introduced the Family Compassionate Care Rider.
This is a first of its kind in the Canadian insurance
industry and provides an optional Individual
Disability Insurance product rider, which pays a
monthly benefit to the insured in the event of
spousal/child terminal illness
Launched an industry-first segregated fund
assessment tool which allows advisors to guide
clients through the process, ensuring product
recommendations are aligned with clients’ needs,
goals and risk profile
Launched mobile device coverage on selected
Avion credit cards, providing protection to clients
if a mobile device is lost, stolen or accidentally
damaged
Launched the Fundamental Series disability
electronic application to our proprietary sales and
brokerage channels offering a streamlined, quick
and seamless experience for users
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 to
grow our reinsurance business
Achieved very strong growth in our longevity
reinsurance business due to heightened market
activity in 2019
Pursue niche opportunities in mortality and
longevity markets to grow our reinsurance
business within our risk tolerance
Outlook
The insurance industry will continue to experience substantial forces of change, innovation and disruption. In this rapidly
evolving industry, we will seek to maintain our strength through investments in technology, product and service innovation and
efficient digital distribution channels. We will also continue to re-define how we advise our clients to provide them peace of mind.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
34
Royal Bank of Canada: Annual Report 2019
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
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)
Table 30
2019
2018
3,984 $ 4,032
1,569
30
157
217
5,710
4,279
3,749
2,391
336
285
606
602
1,019
1,001
775
806 $
3,643 $ 2,213
2,067
2,066
$
$
$
39.6%
39.3%
$ 17,600 $ 15,800
$
4,604 $ 4,647
2,415
2,584
2,189
2,063
$ 11,401 $ 10,000
(435)
2,964
987
2,927
(1)
(2)
Investment income can experience volatility arising from fluctuation of assets designated as FVTPL. 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 (PBCAE).
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
2019 vs. 2018
Net income increased $31 million or 4% from a year ago, mainly due to the impact of new longevity reinsurance contracts,
partially offset by higher claims costs.
Total revenue increased $1,431 million or 33%, mainly due to the change in fair value of investments backing our policyholder
liabilities and business growth in International Insurance, both of which are largely offset in PBCAE as indicated below. Realized
investment gains also contributed to the increase. These factors were partially offset by lower group annuity sales, which are
largely offset in PBCAE as indicated below.
PBCAE increased $1,409 million or 53%, mainly reflecting the change in fair value of investments backing our policyholder
liabilities and lower favourable investment-related experience. Business growth in International Insurance and higher claims
costs also contributed to the increase. These factors were partially offset by lower group annuity sales and the favourable impact
of new longevity reinsurance contracts.
Non-interest expense increased $4 million or 1%.
Business line review
Canadian Insurance
We offer life, health, travel, home and auto insurance products (in partnership with Aviva Canada), 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 increased $1,430 million or 65% from last year, primarily reflecting the change in fair value of investments backing
our policyholder liabilities, which is largely offset in PBCAE, and realized investment gains. These factors were partially offset by
lower group annuity sales, which is largely offset in PBCAE.
Premiums and deposits decreased $169 million or 7%, as lower group annuity sales were partially offset by growth across
other product lines.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
35
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Premiums and deposits
Life and health
Property and casualty
Annuity and segregated fund
deposits
Fair value changes on investments
backing policyholder liabilities
2019
$ 3,643
Table 31
2018
$ 2,213
$ 1,328
131
$ 1,280
126
956
1,178
1,099
(434)
International Insurance
Premiums and deposits (Millions of Canadian dollars)
3,000
2,500
2,000
1,500
1,000
500
0
2019
2018
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 $1 million due to business growth, primarily in longevity reinsurance and higher favourable reinsurance
contract renegotiations. These factors were offset by the change in the fair value of investments backing our policyholder
liabilities, which is largely offset in PBCAE.
Premiums and deposits increased $126 million or 6%, reflecting growth in longevity reinsurance.
Selected highlights
Table 32
(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
2019
$ 2,067
2018
$ 2,066
$ 1,254
(1)
936
$ 1,225
(5)
843
(112)
(1)
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
13.2%
Return on equity
$58.8 billion
Average client deposits
Revenue by Geography
$2.3 billion
Total revenue
43% North America
30% Europe (Ex. U.K.)
14% U.K.
13% 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
sophisticated investors. We compete in selected countries in North America,
Europe, the U.K., and Asia-Pacific.
We specialize in creating digitally-enabled client-centric products and services.
We have top-rated global custody, transfer agency and securities lending
products. 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.
36
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
2019 Operating environment
› Investments to execute efficiency opportunities and improve the client experience drove higher costs. In Q4, we recognized
severance and related costs associated with repositioning of the business to improve cost structures and drive efficiencies.
› Results in our asset services business reflected challenging market conditions in the earlier part of 2019 and secular industry
headwinds.
› The outlook on interest rates drove lower earnings in treasury services and resulted in margin compression associated with
our client deposits.
Strategic priorities
OUR STRATEGY
Be #1 in Canada
PROGRESS IN 2019
PRIORITIES IN 2020
Increased AUA in Canada by 5% year-over-year
Continue to grow income and market share
among Canadian asset managers, investment
counsellors, pension funds, insurance companies
and transaction banking clients
Compete in segments and markets which offer
the highest risk-adjusted returns
Lead in selected fast growing asset
servicing segments and markets to support
our clients’ growth
Continued to expand relationships in our chosen
markets, fueling our business in Luxembourg and
Ireland
Deliver seamless digital client experiences
and employ technology to enable our
clients’ success
Continued to invest in infrastructure and
automation to increase the robustness of our
technology platforms
Continue to provide our clients with seamless
digital journeys and secure, robust and
continuous service
Rolled-out new functionality on our web-based
portal (RBC One®), which provides clients with
access to data, dynamic reporting and analytics
Provided clients with secure, flexible access to
their data via Application Program Interfaces
(APIs)
Enhanced our alternative asset services offering
Design and re-engineer our services to improve
client satisfaction, efficiency and risk controls
Continue to use technology and data insights to
solve our clients’ current and future challenges
Outlook
In 2020, our focus is to enable our clients’ success and to be the best at what we do in our chosen markets, by operating as one
highly-skilled and client-focused team. We will execute on our repositioning initiatives with the aim to return to growth and
higher levels of profitability. 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. We will
continue to deliver class-leading capabilities to our clients by creating a culture of quality, collaboration and innovation, and
focusing investment in digitally-enabled solutions.
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
PCL
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
Other Information
AUA (1)
Average AUA
Number of employees (FTE)
Represents year-end spot balances.
(1)
$
$
$
2019
(44) $
2,389
2,345
–
1,725
620
475
$
$
13.2%
146,100
175,100
58,800
116,300
Table 33
2018
297
2,294
2,591
1
1,617
973
741
23.5%
132,100
161,200
58,600
102,600
$ 4,318,100
4,262,300
4,684
$ 4,283,100
4,377,300
4,846
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
37
Financial performance
2019 vs. 2018
Net income decreased $266 million or 36%, primarily due to lower funding and liquidity revenue, severance and related costs, as
well as lower revenue from our asset services business.
Total revenue decreased $246 million or 9%, mainly due to lower funding and liquidity revenue primarily driven by the impact
of reduced money market opportunities in the current year and lower gains from the disposition of certain securities. Lower
revenue from our asset services business due to challenging market conditions throughout the earlier part of 2019 and lower
client activity also contributed to the decrease.
Non-interest expense increased $108 million or 7%, mainly due to severance and related costs associated with repositioning
of the business.
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. & Europe, and Australia, Asia & other regions.
> 15,500
Number of clients
#10
Global league rankings(1)
4,269
Employees
Revenue by Geography
We operate two main business lines, Corporate and Investment Banking and
Global Markets.
$8.3 billion
Total revenue
51% U.S.
29% Canada
14% U.K. & Europe
6% Australia, Asia &
other regions
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 a 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
have leading capabilities in credit, secured lending, municipal finance, fixed
income, currencies & commodities, equities and advisory.
Outside North America, we have a select presence in the U.K. & Europe,
Australia, Asia & other markets. In the U.K. & Europe, we offer a diversified set of
capabilities in key sectors of expertise such as energy, mining, infrastructure,
industrial, consumer, healthcare, technology and financial services. In Australia
and Asia, we compete with global and regional investment banks in targeted
areas aligned to our global expertise, including fixed income distribution and
currencies trading, secured finance and corporate and investment banking.
2019 Operating environment
› We saw an industry-wide decrease in investment banking activities in fiscal 2019 due to challenging market conditions. The
market was negatively impacted by ongoing political and economic uncertainty, trade tensions and elevated equity valuations.
The global investment banking fee pool was down 11 %(1) in fiscal 2019 compared to the prior year with decreases across the
majority of products, most notably in loan syndication and equity origination activity. Despite the challenging industry
environment, we improved our ranking to 10th place in global league tables(1).
› The trading environment at the beginning of fiscal 2019 was characterised by an increase in volatility, reflecting some of the
factors noted above. The volatility benefited our equity derivatives business by driving higher client activity. We also saw lower
liquidity and widening of credit spreads in the first two months of fiscal 2019 which drove lower corporate bond trading with a
pickup in activity in January 2019. The second half of fiscal 2019 was characterized by heightened levels of market uncertainty
which drove lower results in our equity and interest rate trading businesses. Overall, our trading businesses performed well
despite a less favourable market environment in the current year.
› After relatively benign credit conditions in the prior year, we returned to a more normalized level of credit losses towards the
end of 2019.
(1)
38
Source: Dealogic, based on global investment bank fees, Fiscal 2019
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
To be among the world’s most successful
investment banks by serving clients in the
most attractive markets
Deepen client relationships as an innovative,
trusted partner
PROGRESS IN 2019
PRIORITIES IN 2020
Improved our ranking to 10th(1) place in the global
league table
Successfully maintained #1 market share position
in Canada(1) and ranked Best Investment Bank in
Canada(2)
Successfully grew our M&A advisory practice
which was reflected in attaining 10th place ranking
for advising on announced U.S. M&A deals this
year(3)
U.K./Europe Equity Capital Markets (ECM) ranking
improved to 16th place in the global league table,
from 28th place in fiscal 2018(1)
Continued focus on the largest users of our
products and have strengthened our senior
coverage teams in the U.S., the U.K. and Europe
by adding more senior bankers to the platform
Invested in technology and innovation to enhance
existing capabilities to drive growth in our Global
Markets business, including investment in an
artificial intelligence powered platform
Expanded and strengthened our product offering
within the Global Markets business
Continued to win significant mandates and won
our largest-ever U.S. advisory mandate as sole
financial advisor to Branch Banking and Trust
Company (BB&T) in its merger of equals with
SunTrust, a transaction with a value of
US$66 billion when announced in February 2019
Maintain our leadership position in Canada
Continue to be the Canadian leader in the U.S.,
our largest market with the best opportunity for
growth
Continue to be a leader in targeted areas in the
U.K., Europe and Asia-Pacific aligned with our
global expertise
Support our clients by partnering with them to
understand their strategic objectives and
delivering solutions to achieve their goals
Continue to grow and strengthen our senior
coverage teams
Focus on long-term client relationships aligned
with our global capabilities
Continue to drive technology innovations through
our data strategy, electronification and artificial
intelligence initiatives
Collaborate to deliver clients our full suite of
global products and services
Continue to focus on deepening client
relationships by driving cross business
collaboration within RBC Capital Markets and
across the enterprise
Continue disciplined approach to managing costs
and risk, maintain a balance between investment
banking and trading revenue and align our
resources around top client opportunities
Drive collaboration, simplify our business
and optimize capital use to earn high risk-
adjusted returns on assets and equity
Continued to drive increased collaboration
across our geographies and businesses to
provide our clients with holistic solutions
Continued to focus on 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
Acted as exclusive financial advisor to Permira
Funds on the acquisition of Cambrex Corporation
and provided committed debt financing in
support of the transaction valued at
approximately US$2.4 billion
Outlook
Despite a challenging market environment in fiscal 2019, we have made good progress on delivering on our strategic priorities. In
our investment banking business, we have been successful in winning more and higher quality mandates. In 2020, we expect solid
momentum in our investment banking business, driven by M&A fees as we are participating in a number of marquee transactions
that have been announced across various sectors. Global Markets performed well in 2019 despite macro headwinds as we have a
diversified geographic and product mix which can perform well even in challenging market environments. We expect these
businesses to continue to see solid performances into 2020 by continuing to leverage investments in technology innovation,
expanding and strengthening our product offering and focusing on ensuring financial resources are deployed appropriately to
key target clients in an effort to maximize return. Our lending business will continue to focus on Risk Weighted Asset optimization
and the execution of client plans. Although regulatory headwinds continue to impact earnings growth, we will look to drive
strategic value from recent technology investments and continually optimize our capital deployment.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
(1)
(2)
(3)
Source: Dealogic, based on global investment bank fees, Fiscal 2019
Source: Global Finance and Euromoney 2019
Source: BNN Bloomberg based on announced M&A deals as at October 31, 2019
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
39
Capital Markets
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
Net interest income (1), (2)
Non-interest income (1), (2)
Total revenue (1)
PCL on performing assets
PCL on impaired assets
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 (2)
Other information
Number of employees (FTE)
Credit information
PCL on impaired loans as a % of average net loans and acceptances
$
$
$
$
$
$
$
$
2019
4,043
4,245
8,288
36
263
299
5,096
2,893
2,666
3,792
4,663
(167)
11.4%
666,500
102,100
99,800
77,300
4,269
0.26%
Table 34
2018
3,328
5,070
8,398
(13)
61
48
4,960
3,390
2,777
4,113
4,496
(211)
13.0%
576,300
95,800
85,000
70,100
4,162
0.07%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
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
2019 vs. 2018
$
148
67
67
(3)%
2%
2%
(1)
(2)
The teb adjustment for 2019 was $450 million (2018 – $542 million). For further discussion, refer to the How we measure and report our business segments section.
Commencing Q4 2019, the interest component and the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in trading revenue
and deposits, respectively, are presented in net interest income and other liabilities, respectively. Comparative amounts have been reclassified to conform with this
presentation.
Revenue by region (Millions of Canadian dollars)
10,000
7,500
5,000
2,500
0
2019
2018
Australia, Asia & other regions
Europe
U.S.
Canada
Financial performance
2019 vs. 2018
Net income decreased $111 million or 4%, driven by lower revenue in Corporate and Investment Banking, higher PCL and higher
technology and related costs. These factors were partially offset by a lower effective tax rate largely reflecting changes in
earnings mix, higher revenue in Global Markets and the impact of foreign exchange translation.
Total revenue decreased $110 million or 1%, largely due to lower loan syndication activity, lower equity origination primarily
in North America, and lower M&A largely in Europe and Canada. These factors were partially offset by the impact of foreign
exchange translation, lower residual funding costs and higher fixed income trading revenue across all regions.
PCL increased $251 million, driven by an increase in provisions on impaired loans in the oil & gas and industrial products
sectors and higher provisions on performing loans. PCL on impaired loans ratio increased 19 bps. For further details, refer to
Credit quality performance in the Credit risk section.
Non-interest expense increased $136 million or 3%, largely due to the impact of foreign exchange translation and higher
technology and related costs, partially offset by lower compensation on decreased results.
40
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 $3,792 million decreased $321 million or 8% as compared to last year.
Investment banking revenue decreased $435 million or 21%, primarily due to lower loan syndication activity, lower M&A
primarily in Europe and Canada, lower equity origination mainly in North America, and reduced municipal banking activity. These
factors were partially offset by the impact of foreign exchange translation.
Lending and other revenue increased $114 million or 6%, reflecting the impact of foreign exchange translation, as well as
increased client activity mainly in the U.S.
Selected highlights
Table 35
Breakdown of total revenue (Millions of Canadian dollars)
(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
$
$
2018
2019
3,792 $ 4,113
1,672 $ 2,107
2,120
2,006
$ 86,400 $ 74,400
61,100
76,700
(1)
(2)
The teb adjustment for the year ended October 31, 2019 was $80 million
(October 31, 2018 – $224 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.
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Global Markets
2019
2018
Investment banking
Lending and other
Global Markets comprises our fixed income, foreign exchange, equity sales and trading, repos and secured financing and
commodities businesses.
Financial performance
Total revenue of $4,663 million increased $167 million or 4% as compared to last year.
Revenue in our Fixed income, currencies and commodities business increased $28 million or 1%.
Revenue in our Equities business increased $30 million or 3%, primarily due to higher equity trading revenue mainly in North
America, partially offset by lower equity origination primarily in North America.
Revenue in our Repo and secured financing business increased $109 million or 9%, mainly due to increased client activity.
Selected highlights
Table 36
Breakdown of total revenue (Millions of Canadian dollars)
(Millions of Canadian dollars)
Total revenue (1)
Breakdown of revenue (1)
Fixed income, currencies
and commodities
Equities
Repo and secured financing (2)
Other information
Average assets
$
$
2019
4,663
2,150
1,166
1,347
$
$
2018
4,496
2,122
1,136
1,238
$ 583,700
$ 508,900
(1)
(2)
The teb adjustment for the year ended October 31, 2019 was $370 million
(October 31, 2018 – $318 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.
5,000
4,000
3,000
2,000
1,000
0
Other
2019
2018
Repo and secured
financing
Global equities
Fixed income, currencies
and commodities
Other includes our legacy portfolio, which mainly consists of our U.S. commercial mortgage-backed securities and structured
rates in Asia.
Financial performance
Revenue increased $44 million or 21% as compared to last year, largely due to lower residual funding costs.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
41
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, Functions, which includes our finance, human resources, risk
management, internal audit and other functional groups, as well as our Corporate Treasury function. Reported results for
Corporate Support mainly reflect certain activities related to monitoring and oversight of enterprise activities which are not
allocated to business segments. 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
Income (loss) before income taxes (1)
Income taxes (recoveries) (1)
Table 37
$
$
2019
104
(453)
(349)
131
(480)
(452)
$
(28) $
2018
(51)
(483)
(534)
58
(592)
(437)
(155)
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, 2019 was
(2)
$(1) million (October 31, 2018 – $22 million).
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 year.
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, 2019 was $450 million and was $542 million last year.
The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each
year.
2019
Net loss was $28 million, largely due to the impact of an unfavourable accounting adjustment, residual unallocated costs and
unfavourable tax impacts, partially offset by asset/liability management activities.
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.
Quarterly financial information
Fourth quarter performance
Q4 2019 vs. Q4 2018
Fourth quarter net income of $3,206 million was down $44 million or 1% from last year. Diluted EPS of $2.18 was down $0.02 and
ROE of 16.2% was down 140 bps. Lower results in Investor & Treasury Services, Capital Markets and Insurance were partially
offset by strong earnings in Wealth Management and Personal & Commercial Banking. Our results also reflected a net loss in
Corporate Support.
Total revenue increased $701 million or 7%, largely due to the change in the fair value of investments backing our
policyholder liabilities, which is largely offset in PBCAE as indicated below, and an increase in net interest income reflecting
average volume growth in Canadian Banking and U.S. Wealth Management (including City National), partially offset by lower
spreads in U.S. Wealth Management (including City National), and a gain on the sale of the private debt business of BlueBay.
Higher average fee-based client assets reflecting market appreciation and net sales, higher fixed income trading revenue,
realized investment gains in Insurance, and the change in fair value of the hedges related to our U.S. share-based compensation
plans, which was largely offset in non-interest expense, also contributed to the increase. These factors were partially offset by
lower group annuity sales, which are largely offset in PBCAE as indicated below, and lower M&A and equity trading revenue in
Capital Markets.
Total PCL increased $146 million and the PCL ratio on loans of 32 bps increased 9 bps from last year, due to higher provisions
in Personal & Commercial Banking, Capital Markets, and Wealth Management. After relatively benign credit conditions in the
prior year, we returned to a more normalized level of credit losses towards the end of 2019.
PBCAE increased $160 million or 32%, mainly due to the change in fair value of investments backing our policyholder
liabilities, lower favourable investment-related experience, business growth and lower favourable reinsurance contract
renegotiations. Lower favourable annual actuarial assumption updates, largely related to unfavourable mortality, morbidity and
commission experience, partially offset by favourable economic assumptions, and higher claims costs also contributed to the
increase. These factors were partially offset by lower group annuity sales and the favourable impact of new longevity
reinsurance contracts.
Non-interest expense increased $437 million or 7%, mainly due to severance and related costs associated with repositioning
of our Investor & Treasury Services business. Increased costs in support of business growth and higher staff-related costs, the
change in the fair value of our U.S. share-based compensation plans, which was largely offset in revenue, and the impact of an
unfavourable accounting adjustment in Corporate Support also contributed to the increase.
42
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Income tax expense increased $2 million from last year. The effective income tax rate increased from 17.5% last year to 17.8%,
mainly due to higher favourable tax adjustments in the prior year, partially offset by higher tax-exempt income in the current
year.
Q4 2019 vs. Q3 2019
Net income of $3,206 million was down $57 million or 2% compared to the prior quarter, primarily due to severance and related
costs associated with repositioning our Investor & Treasury Services business and higher PCL. Lower results in Capital Markets
driven by lower M&A and lower equity origination, and the impact of an unfavourable accounting adjustment in Corporate
Support also contributed to the decrease. These factors were partially offset by a gain on the sale of the private debt business of
BlueBay, and the favourable impact of new longevity reinsurance contracts in the current quarter in Insurance.
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses,
general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table
summarizes our results for the last eight quarters (the period):
Quarterly results (1)
(Millions of Canadian dollars, except per
share and percentage amounts)
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets (2)
Corporate Support (2)
Total revenue
PCL
PBCAE
Non-interest expense
Income before income taxes
Income taxes
Net income
EPS – basic
– diluted
Effective income tax rate
Period average US$ equivalent
of C$1.00
Q4
$ 4,568
3,187
1,153
566
1,987
(91)
$ 11,370
499
654
6,319
$ 3,898
692
$ 3,206
2.19
$
2.18
17.8%
$ 0.755
2019
2018
Q3
$ 4,546
3,029
1,463
561
2,034
(89)
$ 11,544
425
1,046
5,992
$ 4,081
818
$ 3,263
2.23
$
2.22
20.0%
Q2
$ 4,333
2,979
1,515
587
2,169
(84)
$ 11,499
426
1,160
5,916
$ 3,997
767
$ 3,230
2.20
$
2.20
19.2%
Q1
$ 4,418
2,948
1,579
631
2,098
(85)
$ 11,589
514
1,225
5,912
$ 3,938
766
$ 3,172
2.15
$
2.15
19.5%
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
17.5%
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
20.2%
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
21.1%
Table 38
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
25.6%
$ 0.754
$ 0.751
$ 0.749
$ 0.767
$ 0.767
$ 0.778
$ 0.794
(1)
(2)
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.
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.
Trend analysis
Earnings have generally trended upward over the period. However, results in the first quarter of 2019 were impacted by
challenging market conditions throughout the earlier part of the quarter. Quarterly earnings are also affected by the impact of
foreign exchange translation.
Personal & Commercial Banking revenue has benefitted from solid volume growth since the beginning of the period. Higher
spreads across the period reflecting higher interest rates have been partially offset by the impact of competitive pricing
pressures. Overall, however, market interest rates have moderated in the latter half of the 2019.
Wealth Management revenue has generally trended upwards primarily due to growth in average fee-based client assets
which benefitted from market appreciation and net sales. Net interest income has also increased largely driven by volume
growth across the period and the impact of higher interest rates throughout the majority of the period. The impact of the U.S. Fed
rate cuts resulted in lower spreads in the fourth quarter of 2019. A gain on the sale of the private debt business of BlueBay
contributed to the increase in the fourth quarter of 2019. The change in the fair value of the hedges related to our U.S. share-
based compensation plans, which is largely offset in Non-interest expense, also contributed to fluctuations in revenue over the
period.
Insurance revenue fluctuated over the period, primarily due to the impact of changes in the fair value of investments backing
our policyholder liabilities. Revenue has benefited from business growth in Canadian and International Insurance over the
majority of the period with lower group annuity sales impacting the fourth quarter of 2019.
Investor & Treasury Services revenue has been impacted by fluctuations in market conditions and client activity across the
period. The first half of 2018 trended higher due to generally higher market volatility, growth in client deposits, and increased
client activity from our asset service business, combined with an improvement in funding and liquidity performance. Revenue
from our funding and liquidity business was impacted by reduced money market opportunities in the current year and our asset
services business was impacted by challenging market conditions during the first half of 2019. The latter part of the period was
impacted by lower client activity and lower client deposit margins.
Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity in our Corporate and
Investment Banking and Global Markets businesses, with the first quarter results generally stronger than the remaining quarters.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
43
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. Client activity in 2019 was impacted by challenging market conditions resulting
in lower investment banking fee revenues experienced across the industry. The impact of challenging market conditions also
resulted in lower equity trading revenue in the second half of 2019.
PCL on performing assets has fluctuated over the period as it is impacted by volume growth, changes in portfolio mix, model
changes and macroeconomic conditions. PCL saw lower provisions and higher recoveries on impaired loans across a few sectors
for the majority of 2018. The fourth quarter of 2018 was also impacted by the restructuring of portfolios in Barbados. After
relatively benign credit conditions in 2018, we returned to a more normalized level of credit losses towards the end of 2019.
PBCAE has fluctuated quarterly as it includes the changes to the fair value of investments backing our policyholder liabilities
and business growth, including the impact of group annuity sales, both of which are largely offset in Revenue. PBCAE has also
fluctuated due to investment-related experience and claims costs over the period. Since late 2018, PBCAE has been positively
impacted by favourable reinsurance contract renegotiations. Actuarial adjustments, which generally occur in the fourth quarter
of each year, also impact PBCAE results.
While we continue to focus on efficiency management activities, Non-interest expense generally trended upwards over the
period. Growth mainly reflects higher costs in support of business growth and our ongoing investments in technology and related
costs, including digital initiatives, and higher staff-related costs, including variable compensation. The increase in the fourth
quarter of 2019 reflected severance and related costs associated with repositioning of our Investor & Treasury Services business.
Our effective income tax rate has fluctuated over the period, mostly due to various levels of tax adjustments and changes in
earnings mix. 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 during 2018 by the ongoing lower corporate tax rate. The first quarter of
2019 included a write-down of deferred tax assets resulting from a change in the corporate tax rate in Barbados.
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 (3)
Other – Derivatives
– Other (2), (3)
Subordinated debentures
Total liabilities
Equity attributable to shareholders
Non-controlling interests
Total equity
Total liabilities and equity
Table 39
2019
2018
$
$
26,310
38,345
249,004
306,961
30,209
36,471
222,866
294,602
426,086
195,870
(3,100)
101,560
87,899
$ 1,428,935
399,452
180,278
(2,912)
94,039
79,729
$ 1,334,734
$
886,005
98,543
350,947
9,815
1,345,310
83,523
102
83,625
$ 1,428,935
$
836,197
90,238
319,213
9,131
1,254,779
79,861
94
79,955
$ 1,334,734
(1)
(2)
(3)
Securities are comprised of trading and investment securities.
Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
2019 vs. 2018
Total assets increased $94 billion or 7% from last year. Foreign exchange translation increased total assets by $2 billion.
Cash and due from banks was down $4 billion or 13%, mainly due to lower deposits with central banks, reflecting our short-
term cash management activities.
Interest-bearing deposits with banks increased $2 billion or 5%, largely due to higher deposits with central banks, reflecting
our cash management activities.
Securities, net of applicable allowance, were up $26 billion or 12%, largely driven by higher government debt securities,
driven by client and business activities. Higher equity trading securities, reflecting favourable market conditions, also
contributed to the increase.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $12 billion or
4%, driven by client and business activities, partially offset by higher financial netting.
Loans (net of Allowance for loan losses) were up $42 billion or 7%, primarily due to volume growth, which was driven by
higher residential mortgages loans and wholesale loans.
Derivative assets were up $8 billion or 8%, mainly attributable to higher fair values on interest rate contracts, partially offset
by lower fair values on foreign exchange contracts.
44
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Other assets were up $8 billion or 10%, driven by higher customers’ liability under acceptances and higher commodities
trading receivables, driven by client demand. Higher cash collateral also contributed to the increase.
Total liabilities increased $91 billion or 7% from last year. Foreign exchange translation increased total liabilities by
$2 billion.
Deposits increased $50 billion or 6%, mainly as a result of higher business and retail deposits, driven by client activities.
Derivative liabilities were up $8 billion or 9%, mainly attributable to higher fair values on interest rate contracts, partially
offset by lower fair values on foreign exchange contracts.
Other liabilities increased $32 billion or 10%, mainly attributable to higher obligations related to repurchase agreements due
to increased client activity, partially offset by higher financial netting. Higher obligations related to securities sold short and
higher acceptances also contributed to the increase.
Total equity increased $4 billion or 5% reflecting earnings, net of dividends and share repurchases, redemptions of preferred
shares and the impact of lower discount rates on the remeasurement of our employee benefit plans, partially offset by
favourable returns on plan assets.
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. During 2019, we did not derecognize any mortgages securitized through the NHA MBS program. As at
October 31, 2018, we derecognized $1.3 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 2019 Annual Consolidated Financial Statements.
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, 2019, we securitized $696 million
of commercial mortgages (October 31, 2018 – $352 million). Our continuing involvement with the transferred assets is limited to
servicing certain of the underlying commercial mortgages sold. As at October 31, 2019, there was $1.9 billion of commercial
mortgages outstanding that we continue to service related to these securitization activities (October 31, 2018 – $1.5 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 2019 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.
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 $254 million during the year (October 31,
2018 – $262 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
45
Liquidity and credit enhancement facilities
As at October 31 (Millions of Canadian dollars)
Backstop liquidity facilities
Credit enhancement facilities (3)
Total
Notional of
committed
amounts (1)
$ 37,935
1,706
$ 39,641
2019
Allocable
notional
amounts
$ 36,229
1,706
$ 37,935
Maximum
exposure
to loss (2)
$ 36,229
1,706
$ 37,935
Notional of
committed
amounts (1)
38,342
$
2,149
40,491
$
Table 40
Maximum
exposure
to loss (2)
36,193
2,149
38,342
$
$
2018
Allocable
notional
amounts
$ 36,193
2,149
$ 38,342
(1)
(2)
(3)
Based on total committed financing limit.
Not presented in the table above are derivative assets with a fair value of $97 million (October 31, 2018 –$nil) 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 2019 Annual Consolidated Financial Statements for more details.
Includes $14 million (October 31, 2018 - $22 million) of Financial standby letters of credit.
As at October 31, 2019, the notional amount of backstop liquidity facilities we provide decreased by $407 million or 1% from last
year. The decrease as compared to last year was primarily due to lower outstanding securitized assets in the multi-seller
conduits. The notional amount of partial credit enhancement facilities we provide decreased by $443 million from last year. The
decrease in the credit enhancement facilities reflects lower client usage.
Maximum exposure to loss by client type
Table 41
As at October 31 (Millions of dollars)
Outstanding securitized assets
Credit cards
Auto loans and leases
Student loans
Trade receivables
Equipment receivables
Consumer loans
Dealer floor plan receivables
Fleet finance receivables
Insurance premiums
Residential mortgages
Transportation finance
Total
Canadian equivalent
2019
2018
US$
C$
Total C$
US$
C$
Total C$
$
4,258
9,003
1,777
2,338
1,479
2,150
910
602
213
–
1,498
$ 24,228
$
510
2,882
–
–
–
–
878
306
286
1,014
153
$ 6,029
$
6,117
14,738
2,340
3,079
1,948
2,831
2,077
1,099
566
1,014
2,126
$ 37,935
$ 4,406
10,726
1,707
2,220
1,581
1,387
833
614
122
–
1,335
$ 24,931
$
510
2,148
–
–
–
–
852
306
194
1,377
153
$ 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
$ 31,906
$ 6,029
$ 37,935
$ 32,802
$ 5,540
$ 38,342
Our overall exposure decreased by 1% compared to last year, reflecting a decrease in the outstanding securitized assets of the
multi-seller conduits. Correspondingly, total assets of the multi-seller conduits decreased by $398 million or 1% from last year,
primarily due to decreases in the Auto loans and leases and Residential mortgages asset classes, which were offset by increases
in the Consumer loans, Insurance premiums and Transportation finance 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, 2019, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $23.8 billion, a
decrease of $1.1 billion or 4.4% from last year. The decrease in the amount of ABCP issued by the multi-seller conduits compared
to last year is primarily due to lower client usage. The rating agencies that rate the ABCP rated 100% (October 31, 2018 – 71%) of
the total amount issued within the top 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, 2019 was
$60 million (October 31, 2018 – $176 million). The decrease in our maximum exposure to loss was primarily related to sales 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, 2019,
our maximum exposure to loss from these unconsolidated municipal bond TOB trusts was $3.1 billion (October 31, 2018 –
$2.4 billion). The increase in our maximum exposure to loss relative to last year was primarily due to the addition of new trusts.
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, 2019, our maximum exposure to loss
associated with the outstanding senior warehouse financing facilities was $253 million (October 31, 2018 – $837 million). The
decrease in our maximum exposure to loss relative to last year was related to the termination of existing financing facilities.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. These
facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement designed to cover a
46
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
multiple of historical losses. As at October 31, 2019, our maximum exposure to loss associated with the outstanding senior
financing facilities was $2.8 billion (October 31, 2018 – $1.8 billion). The increase in our maximum exposure to loss relative to last
year was driven by 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, 2019, our maximum exposure
to loss was $1.8 billion (October 31, 2018 – $2.7 billion). The decrease in our maximum exposure to loss relative to last year was
due to reduced holdings in third-party investment funds.
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, 2019, our maximum exposure to these funds was
$275 million (October 31, 2018 – $275 million).
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, 2019, our maximum exposure to loss in
these entities was $10.7 billion (October 31, 2018 – $10.2 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 $195 million (October 31, 2018 – $126 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, 2019 amounted to $380.3
billion compared to $392.7 billion last year. The decrease compared to last year was driven primarily by lower business activity in
securities lending indemnifications partially offset by growth in both commitments to extend credit and financial standby letters
of credit. Refer to Liquidity and funding risk and Note 25 of our 2019 Annual Consolidated Financial Statements for details
regarding our guarantees and commitments.
Risk management
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 risk-aware culture. Our view of risks is dynamic, reflecting the pace of change in the
financial services industry.
Top and emerging risks
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 in the course of business
development and as part of the execution of ongoing risk oversight responsibilities. Top and emerging risks are discussed by
senior management and the Board on a regular basis.
We have developed separate definitions for Top Risks and Emerging Risks, as well as supplementary internal guidance, to
support enterprise-wide identification and assessment of all material risks, including those that are not readily apparent.
(cid:129)
(cid:129)
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.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
47
Top Risks
Description
Information Technology and
Cyber Risks
Privacy, Data and Third Party
Related Risks
Information technology (IT) and cyber risks remain as top risks, not only for the financial services sector,
but for other industries worldwide. We are subject to heightened risks in the form of cyber-attacks, data
breaches, cyber extortion and similar compromises, due to the size, scale, and global nature of our
operations, our heavy reliance on the internet to conduct day-to-day business activities, our intricate
technological infrastructure and our use of third party service providers. 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
continue 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 (AI) 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.
The management, use, and protection of data is a top risk given the high value attributed to data and the
potential exposure to operational risks, reputational risks, and regulatory compliance risks. The growing
importance of effective privacy and information management practices and controls has been
demonstrated by the pace and size of recent regulatory enforcement. Further, as we continue to partner
with third party service providers and adopt new technologies and business models (e.g., cloud
computing), our potential exposure to these risks increases. For details on how we are managing these
risks, refer to the Operational risk section.
Geopolitical Uncertainty
Persisting trade tensions, policy changes, and uncertainties pertaining to Brexit and the political
direction of the U.S., U.K. and Europe, have continued to impact global economic growth prospects and
market sentiment. The Canadian economy is vulnerable to continued trade tensions given the country’s
trading relationships with the U.S. and China. Tensions also remain elevated between China and the U.S.
as they continue to negotiate a trade deal. In addition, the changing political landscape in Hong Kong
and ongoing tensions in the Middle East add further to global and economic uncertainty.
Canadian Housing and
Household Indebtedness
The Government of Canada, and a number of provincial governments, have introduced measures to
respond to concerns related to housing affordability in certain markets and elevated levels of Canadian
household debt. Lower mortgage rates, along with a solid labour market and strong population growth,
helped spark a recovery in the Canadian housing market in 2019. The turnaround, however, has been
slower in Western Canada due to the presence of additional cooling measures in British Columbia,
coupled with more modest economic growth in Alberta and Saskatchewan. Low interest rates should
help ease upward pressures on household debt service ratios but should interest rates begin to rise, this
could have materially negative credit implications for our broader consumer lending activities.
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 into effect, across multiple jurisdictions, such
as the Canadian Anti-Money Laundering regulations and Interest Rate Benchmark Reform, continue to
provide challenges and impact our operations and strategies. For more details, refer to the Legal and
regulatory environment risk section.
Emerging Risks
Description
Digital Disruption and
Innovation
Demographic trends, evolving client expectations, the increased power to analyze data and the
emergence of disruptors are creating competitive pressures across a number of sectors. Established
technology companies, newer competitors, and regulatory changes continue to foster new business
models that could challenge traditional banks and financial products. In addition, these trends and
developments are eliciting re-energized efforts from traditional competitors to meet the evolving needs
of clients and compete with non-traditional competitors. Finally, the adoption of new technologies, such
as AI and machine learning, presents opportunities for us, but could result in new and complex risks that
would need to be managed effectively.
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 addition, climate change regulations, frameworks, and guidance are rapidly emerging and
evolving across the globe. Increasing regulatory expectations create a new set of compliance risks that
need to be managed. For details on how we are managing these risks, refer to the Environmental and
social risk discussion within the Overview of other risks section.
48
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Overview
As a global financial institution with a diversified business model, we actively manage a variety of risks to help protect and
enable our businesses by following these risk management principles:
Risk Management Principles
(cid:129)
(cid:129)
(cid:129)
Effectively balance risk and reward to enable sustainable growth;
Shared responsibility for risk management;
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;
Undertake only risks we understand and make thoughtful and future-focused risk decisions;
(cid:129)
(cid:129) Maintain a healthy and robust control environment to protect our stakeholders;
(cid:129)
(cid:129)
Use judgment and common sense;
Always be operationally prepared and financially resilient for a potential crisis.
The dynamic nature of the financial services industry, and technological innovation, necessitate that our processes, tools and
practices are continuously improving and responsive to the changing landscape and emerging risks. We accomplish this through
an effective and evolving risk management approach. All risk-taking activities and exposures are within the Board-approved risk
appetite, risk limits and corresponding capital and liquidity requirements. We ensure that our business activities and
transactions provide an appropriate balance of return for the risks assumed and the costs incurred. Our organizational design
and governance processes ensure that our Group Risk Management (GRM) function is independent from the businesses it
supports.
Risk drivers
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 principal risks include credit, market, liquidity, insurance, operational, regulatory compliance, strategic, reputation, legal and
regulatory environment, competitive, and systemic risks, which have been classified into four categories based on the level of
control and influence that we can exert against these risks. These categories are maintained by GRM and reviewed regularly to
ensure all principal risks are reflected. This classification methodology provides a common language and discipline for the
identification and assessment of risk in existing businesses, new businesses, products or initiatives, as well as acquisitions and
alliances.
LessLess
Macroeconomic
Strategic
e
c
n
e
u
fl
n
I
&
l
o
r
t
n
o
C
MoreMore
Adverse changes in the macroeconomic environment can impact 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.
Macroeconomic risk is the least controllable type of risk arising from the business environment in which we
operate.
However, we have controls in place to mitigate the impacts. These include our diversified business model
and funding sources, financial crisis management strategies and protocols, stress testing programs, and
product and geographic diversification.
Business strategy is a major driver of our risk appetite, including acquisitions and dispositions, responses
to threats posed by non-traditional competitors and responses to proposed changes in the regulatory
environment.
Choosing the wrong strategy, or poorly executing on the correct strategy, could have reputational risk
consequences, impact our revenue mix, and/or affect our exposure to earnings volatility and loss
absorption capacity.
We have a fair degree of control and influence we can exert in managing strategic and reputation risk.
While the legal and regulatory environment and competitive risks are less controllable, we seek to
influence them through our role as a corporate entity and as an active participant in the Canadian
and global financial services industry.
Operational /
Regulatory
Compliance
The complexity and scope of our operations across the globe exposes us to operational and regulatory
compliance risks, which include fraud, anti-money laundering, cybersecurity and conduct risk.
We have a certain level of control over these risks through our people and systems as well as how we
respond to external events.
Transactional /
Positional
Credit, market, liquidity and insurance risks are an integral part of our day-to-day business activities.
We earn revenue by taking these transactional / positional risks.
We understand these risks well and have the greatest level of control and influence over them.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
49
Enterprise risk management
Under the oversight of the Board and senior management, the Enterprise Risk Management Framework (ERMF) 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.
Risk governance
We have an effective and well-established governance framework in place to ensure that risks impacting our businesses are
identified, appropriately categorized, assessed, managed and communicated to the Board in a timely manner. The risk
governance framework has been established, and is maintained in alignment with, the expectations of the Office of the
Superintendent of Financial Institutions (OSFI), the Basel Committee on Banking Supervision’s (BCBS) corporative governance
principles, and the requirements and expectations of other regulators in the jurisdictions and businesses in which we conduct
business, and in accordance with industry best practices. The Board 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 mandates. As illustrated below, we use the three lines of defence governance model to ensure that risks are
appropriately and adequately managed throughout the enterprise in order to achieve our strategic objectives.
BOARD OF DIRECTORS
RISK COMMITTEE
AUDIT COMMITTEE
GOVERNANCE COMMITTEE
HUMAN RESOURCES COMMITTEE
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 Risk Committee oversees 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
oversees management of conduct, including breaches of the Code of Conduct. 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 (GE), 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 principles, policies, authorities, resources, responsibilities and reporting are in place to support the control infrastructure necessary
for an effective enterprise-wide risk management program.
Oversees conduct and risk culture strategy and key activities.
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 (FSB) 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 OWNERS
RISK OVERSIGHT
RISK OVERSIGHT
INDEPENDENT ASSURANCE
INDEPENDENT ASSURANCE
Employees in the 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
The CRO has direct access to the
Risk Committee
The Chief Compliance Officer (CCO) and the
Chief Anti-Money Laundering Officer (CAMLO)
have direct access to the Audit Committee
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
50
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
i
t
e
p
p
Ris k A
Risk appetite
Effective risk management protects us from unacceptable losses or
undesirable outcomes with respect to earnings volatility, capital
adequacy or liquidity, reputational risk or other risks while supporting
and enabling our overall business strategy. It requires the clear
articulation of our risk appetite, which is the amount and type of risk
that we are able and willing to accept in the pursuit of our business
objectives, and how our risk profile will be managed in relation to our
risk appetite. Our risk appetite provides clear boundaries and sets an
overall tone for balancing risk-reward trade-offs to ensure the long-
term viability of the organization. Our Enterprise Risk Appetite
Framework (ERAF) outlines the foundational aspects of 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 our risk posture
as the expression of the anticipated shift in risk profile as a result of
changes in objectives, strategies, or external and other factors over a
one year timeframe. Our risk appetite is articulated in several
complimentary qualitative and quantitative risk appetite statements,
which can be applied at the enterprise, business segment, business
unit and legal entity levels.
Risk appetite is also integrated into our strategic, financial, and
capital planning processes, as well as ongoing business decision-
making processes. It is reviewed annually by senior management for
recommendation to the Board for approval.
t e F r amework Co
m
p
o
n
e
n
t
s
Risk Capacity
Risk Appetite
Risk Limits
Risk Profile
Risk Posture
Quantitative Statements
Qualitative Statements
Risk Appetite Statements
(cid:129)
(cid:129)
(cid:129) 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.
(cid:129)
(cid:129) Maintain strong credit ratings and a risk profile that is
in the top half of our peer group.
(cid:129)
(cid:129)
Undertake only risk we understand and make
thoughtful and future-focused risk decisions.
Effectively balance risk and reward to enable
sustainable growth.
(cid:129) Maintain a healthy and robust control environment to
(cid:129)
(cid:129)
protect our stakeholders.
Always be operationally prepared and financially
resilient for a potential crisis.
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.
Our qualitative risk appetite statements are based on our Risk Management Principles, which aim to articulate clear motivations
for taking on, or avoiding, non-financial and less quantifiable risks, such as reputation and conduct risks. Our quantitative risk
appetite statements are underpinned by specific quantitative risk measures.
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, we use judgment-based risk measures and various risk techniques, such as stress testing,
and scenario and sensitivity analyses to assess and measure risks. Our primary methods for measuring risk include:
(cid:129)
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.
(cid:129)
(cid:129)
(cid:129)
Assessing the viability of long-term business plans and strategies;
Stress testing
Stress testing is an important component of our risk management framework. Stress testing results are used for:
(cid:129)
(cid:129) Monitoring our risk profile relative to our risk appetite in terms of earnings and capital at risk;
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 potential adverse events; and
Assessing the adequacy of our target capital and liquidity levels.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
51
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, 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.
We annually evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities.
Our Board 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,
higher sovereign risks, a global trade war, increases in interest rates, real estate price corrections, and shocks to credit spreads
and commodity markets.
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 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
to 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
Quantitative 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 its 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 the model’s life
cycle. We are evolving our governance model to take into account the growing use of AI methods and applications in our models
across our organization.
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 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 serve its intended purpose.
Risk control
Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls that are defined in our
ERMF. The ERMF serves as the foundation for our approach to risk management and sets the expectations for the development
and communication of policies, the establishment of formal independent risk review and approval processes, and the
establishment of delegated authorities and limits. The ERMF is further reinforced and supported by a number of additional
Board-approved risk frameworks, various policies thereunder and a comprehensive set of risk controls. Together, our risk
frameworks and supporting policies provide direction and insight on how respective risks are identified, assessed, measured,
managed, mitigated, monitored and reported. The enterprise-wide policies are considered our minimum requirements,
articulating the parameters within which business groups and employees must operate.
52
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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
Market Risk
Policy
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 of Directors or Board Committees
Senior management committees (e.g. Policy Review Committee, Operational Risk Committee, Asset Liability Committee) for most policies.
The Board or Board Committee approval is required in some instances (e.g. RBC Code of Conduct, Dividend Policy)
Generally by business or Functional Unit management/committees. Group Risk Management 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 and risk limits based on the
following categories: transactions, projects and initiatives, and new products and services.
Authorities and limits
Risk appetite is designed to account for strategic and forward-looking considerations whereas authorities and risk limits are
used to govern and monitor our day-to-day business activities. Delegated authorities and limits for credit, market, liquidity and
insurance risks are established by the Board and delegated to senior management at levels below risk appetite and regulatory
requirements. Senior management can then delegate some or all of their authorities onwards to others in the organization. The
delegated authorities enable the approval of single name, geographic and industry sectors, and product and portfolio exposures
within defined parameters and limits. They are also used 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, business segment, business unit and legal entity 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, key trends and, when required,
management actions. On an annual basis, we provide a benchmarking review to the Board 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 on top and emerging risks or changes in our risk profile.
Conduct and risk 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. We define conduct as the manifestation of culture through the behaviours, judgment, 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
53
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 FSB’s four fundamental risk culture practices, are:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 control
functions. These behavioural expectations are supported by multiple online tools and resources which are designed to help
employees live our values, report misconduct and raise concerns, including those that might have ethical implications. We are
committed to fostering an environment where employees feel safe to speak up without retaliation. Employees have the ability to
report matters through a global anonymous Conduct Hotline. In addition, our 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.
Organizational Direction
Values
Leadership Model
Code of Conduct
Sets expected outcomes
Drives actual outcomes
Conduct Outcomes
Clients
Financial Markets
Employees
Our Reputation
Strategy
Influences
Organizational Practices
(including Sales Conduct
and Practices)
Influences
Risk Culture
Apply lessons learned from Conduct Risk and Misconduct
Conduct
Behaviours
Judgement
Decisions
Actions
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 2019 Annual Consolidated Financial
Statements.
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 and 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 arising 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 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 of the Board. To facilitate day-to-day business activities, the CRO has
been empowered to further delegate credit risk approval authorities to individuals within GRM, the business segments, and
functional units as necessary.
Ensuring credit quality is not compromised for growth;
We balance our risk and return by setting the following objectives for the management of credit risk:
(cid:129)
(cid:129) Mitigating credit risk in transactions, relationships and portfolios;
(cid:129)
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;
(cid:129)
54
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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.
The Enterprise Credit Risk Management Framework (ECRMF) describes the principles, methodologies, systems, roles and
responsibilities, reports and controls that exist for managing credit risk within the enterprise. Additional supporting policies
exist that are designed to provide further clarification of roles and responsibilities, acceptable practices, limits and key
controls within the enterprise.
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 high net worth 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 economic and regulatory capital
Economic capital, which is our internal quantification of risks, is used for limit setting and internal capital adequacy and
allocation of capital to Insurance. Our methodology for allocating capital to our business segments, other than Insurance, is
based on regulatory requirements. For further details, refer to the Capital management section.
In measuring credit risk to determine regulatory capital, two principal approaches are available: Internal Ratings Based
(IRB) Approach and Standardized Approach.
The Standardized Approach applies primarily to our Caribbean banking operations and City National and is based on risk
weights prescribed by OSFI that are used to calculate risk-weighted assets (RWA) for credit risk exposure.
The IRB Approach, which applies to most of our credit risk exposures, utilizes three key parameters which form the basis of
our credit risk measures for both regulatory and economic capital.
(cid:129)
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.
(cid:129)
(cid:129)
These parameters are determined based primarily on historical experience from internal credit risk rating systems in
accordance with supervisory standards.
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 and the industry sector in which the
obligor operates. Estimated LGD rates draw primarily on internal loss experiences. 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.
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
reporting frameworks which could lead to significantly different expected loss estimates, including:
(cid:129)
Basel PDs are based on long-run averages over an entire economic cycle. IFRS 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 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 LGDs are based on current conditions,
adjusted for estimates of future conditions that will impact LGD under probability-weighted macroeconomic scenarios.
(cid:129)
(cid:129)
For further details, refer to the Critical accounting policies and estimates section.
Gross credit risk exposure
Gross credit risk is categorized as i) lending-related and other credit risk or ii) trading-related credit risk; and is calculated
based on the Basel III framework. Under this method, EAD for all lending-related and other credit transactions and trading-
related repo-style transactions is calculated before taking into account any collateral and is inclusive of an estimate of
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
55
potential future changes to that credit exposure. EAD for derivatives is calculated inclusive of collateral in accordance with
regulatory guidelines.
Lending-related and other credit risk includes:
(cid:129)
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 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 risk includes:
(cid:129)
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, as defined by OSFI as the replacement cost plus an
add-on amount for potential future credit exposure, scaled by a regulatory factor.
(cid:129)
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 through fundamental credit analysis, as well
as data-driven modelling. The determination of the PD associated with each BRR relies primarily on internal default history
since 2006. PD estimates are designed to be a long-run average of our experience across the economic cycle in accordance
with regulatory guidelines.
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 external ratings used by S&P and Moody’s.
Internal ratings map*
Table 42
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 2019 Annual Consolidated Financial Statements.
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 incorporates not only the contract’s current value, but also
considers how that value can move as market conditions change. Counterparty credit risk usually arises from trading-related
derivative and repo-style transactions. Derivative transactions include forwards, futures, swaps and options, and can have
underlying references that are either financial (e.g., interest rate, foreign exchange, credit, or equity) or non-financial (e.g.,
precious metal and commodities). For further details on our derivative instruments and credit risk mitigation, refer to Note 8 of
our 2019 Annual Consolidated Financial Statements.
Trading counterparty credit activities are undertaken in a manner consistent with the relevant requirements under the
ECRMF and the Enterprise Market Risk Management Framework (EMRMF), in line with our credit risk management policy
documents and with approval in accordance with the appropriate delegated authorities.
56
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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:
(cid:129)
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.
(cid:129)
(cid:129)
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:
(cid:129)
Specific wrong-way risk, which exists when our exposure to a particular counterparty is positively correlated with the PD 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 PD of the 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 terms of financing.
(cid:129)
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 43
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 2019 Annual Consolidated Financial Statements.
Credit risk mitigation
We seek to reduce our exposure to credit risk through a variety of means, including the structuring of transactions and the use
of collateral.
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
When we advance credit, we often require obligors to pledge collateral as security. 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
57
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.
(cid:129) 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.
(cid:129) 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.
(cid:129) 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, GE, GRC and other senior management committees work together to ensure the ECRMF and supporting policies,
processes and procedures exist to manage credit risk and approve related credit risk limits. Reports are provided to the
Board, the GRC, and senior executives to keep them informed of our risk profile, including significant credit risk issues, shifts
in exposures and trending information, to ensure appropriate and timely 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 risk drivers, including credit risk. All existing products must be reviewed following a risk-based
assessment approach on a regular basis.
Credit risk limits
(cid:129)
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.
(cid:129) 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 concentration risk.
(cid:129)
Concentration risk is defined as the risk arising from large exposures 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.
Credit concentration limits are reviewed on a regular basis after taking into account business, economic, financial
and regulatory environments.
(cid:129)
Credit risk administration
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.
58
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Credit risk exposure by portfolio, sector and geography
The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects exposures at
default (EAD). The classification of our sectors aligns with our view of credit risk by industry. Beginning in Q1 2019 we have
prospectively implemented the standardized approach for measuring counterparty credit risk (SA-CCR) under the Capital
Adequacy Requirements (CAR) guidelines, which primarily impacted on-balance sheet cash collateral and derivatives exposures.
Credit risk exposure by portfolio, sector and geography
Table 44
October 31
2019
October 31
2018 (1)
As at
Credit risk (2)
Counterparty credit risk (3)
Credit risk (2)
Counterparty credit risk (3)
On-balance
sheet amount
Off-balance sheet
amount (4)
Repo-style
Undrawn Other (5)
transactions Derivatives
Total
exposure
On-balance
sheet amount
Off-balance sheet
amount (4)
Repo-style
Undrawn Other (5)
transactions Derivatives
Total
exposure
$ 316,047 $ 64,825 $
26,834
61,095
73,530
13,927
– $
–
72
$ 403,976 $ 152,282 $
72 $
– $
–
–
– $
– $
–
–
– $
380,872 $
100,364
75,094
556,330 $
298,555 $ 59,840 $
24,223
54,170
65,617
12,693
376,948 $ 138,150 $
$
9,084 $
9,710
45,444
15,972
5,346
8,165
30,194
667
1,468
105,011
7,793
4,604
16,507
1,698
1,738
61,178
25,528
4,855
5,390
9,189
1,677
1,744 $
6,990
1,857
8,641
8,543
10,661
21,023
848
688
8,120
8,237
5,704
2,722
4,209
1,769
12,372
11,811
9,645
6,557
19,233
382
46 $
298
615
766
518
1,390
2,749
516
97
1,432
565
229
398
878
397
1,374
1,148
109
2,141
4,266
2
– $
–
46,601
–
–
–
118,239
81
–
8,228
–
9
9
–
–
–
35
–
–
–
8
79 $
1,217
17,908
533
1,116
1,551
16,688
1,146
27
7,214
644
2,355
309
227
192
728
1,645
1,872
1,844
3,347
19,904
$ 371,218 $ 151,756 $19,934 $
173,210 $
80,546 $
10,953 $
18,215
112,425
25,912
15,523
21,767
188,893
3,258
2,280
130,005
17,239
12,901
19,945
7,012
4,096
75,652
40,167
16,481
15,932
36,035
21,973
796,664 $
8,510 $
8,936
47,868
15,784
4,662
6,186
25,798
1,234
1,140
110,192
7,751
4,843
16,157
1,486
1,899
54,490
23,892
7,957
5,861
9,357
1,931
1,760 $
6,435
1,734
7,928
6,316
10,704
22,345
1,269
933
7,566
8,219
5,152
956
3,886
1,836
11,832
12,452
12,116
5,600
19,598
303
– $
–
52
52 $
43 $
345
549
587
517
1,483
2,164
359
89
1,798
686
178
389
917
425
1,338
877
134
2,185
3,561
1
– $
–
–
– $
– $
–
–
– $
358,395
89,840
66,915
515,150
– $
–
52,394
–
–
–
110,246
–
–
9,476
–
15
11
–
–
–
2
–
–
–
126
45 $
504
26,313
293
672
1,717
30,580
352
23
7,182
455
1,967
157
184
115
385
551
1,534
1,270
2,581
11,898
10,358
16,220
128,858
24,592
12,167
20,090
191,133
3,214
2,185
136,214
17,111
12,155
17,670
6,473
4,275
68,045
37,774
21,741
14,916
35,097
14,259
$ 775,194 $ 304,038 $20,006 $
173,210 $
80,546 $ 1,352,994 $
742,882 $ 287,090 $ 18,677 $
172,270 $
88,778 $ 1,309,697
$ 551,503 $ 224,258 $ 9,890 $
149,514
41,860
32,317
58,344
18,600
2,836
8,694
1,258
164
65,915 $
55,391
40,529
11,375
37,273 $
17,387
21,644
4,242
888,839 $
289,330
123,891
50,934
510,445 $ 205,875 $ 9,387 $
60,172
147,543
18,450
54,061
2,593
30,833
7,981
1,150
159
78,172 $
41,897
48,874
3,327
29,195 $
16,059
39,719
3,805
833,074
273,652
162,254
40,717
$ 775,194 $ 304,038 $20,006 $
173,210 $
80,546 $ 1,352,994 $
742,882 $ 287,090 $ 18,677 $
172,270 $
88,778 $ 1,309,697
365,934 $ 148,940 $ 18,625 $
172,270 $
88,778 $
794,547
(Millions of
Canadian dollars)
Retail
Residential secured (6)
Qualifying revolving (7)
Other retail
Total retail
Wholesale
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil & gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining & metals
Public works & infrastructure
Real estate & related
Other services
Telecommunication & media
Transportation
Utilities
Other sectors
Total wholesale
Total exposure (8)
By geography (9)
Canada
U.S.
Europe
Other International
Total exposure (8)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Amounts previously reflected gross credit exposures.
EAD for standardized exposures are reported net of allowance for impaired assets and EAD for internal ratings based exposures are reported gross of all allowance for
credit losses and partial write-offs as per regulatory definitions.
Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory
guidelines.
EAD for undrawn credit commitments and other off-balance sheet amounts are reported after the application of credit conversion factors.
Includes other off-balance sheet exposures such as letters of credit and guarantees.
Includes residential mortgages and home equity lines of credit.
Includes credit cards, unsecured lines of credit and overdraft protection products.
Excludes securitization, banking book equities and other assets not subject to the standardized or internal ratings based approach.
Geographic profile is based on country of residence of the borrower.
2019 vs. 2018
Total credit risk exposure increased $43 billion or 3% from last year, primarily due to business growth in loans and acceptance
exposures in our retail and wholesale portfolios, partially offset by decreases related to on-balance sheet cash collateral and
derivatives due to the adoption of SA-CCR in Q1 2019.
Retail exposure increased $41 billion or 8%, largely driven by business growth.
Wholesale exposure was up $2 billion, primarily driven by business growth in loans, acceptances and increased securities,
largely offset by decreases related to the adoption of SA-CCR, as noted above.
The geographic mix of our credit risk exposure changed slightly from the prior year. Our exposure in Canada, the U.S., Europe
and Other International was 66%, 21%, 9%, and 4%, respectively (October 31, 2018 – 64%, 21%, 12% and 3%, respectively).
Our exposure in Canada increased $56 billion or 7% compared to the prior year, largely driven by business growth in loans
and acceptances exposures, partially offset by decreases in repo-style transactions, mainly from lower volume.
Our exposure in the U.S. increased $16 billion or 6% compared to the prior year, mainly due to business growth in repo-style
transactions.
Our exposure in Europe decreased $38 billion or 24% compared to the prior year, reflecting a reduction of on-balance sheet
cash collateral and derivatives, both due to the adoption of SA-CCR, as noted above. Lower repo-style transactions, loans and
deposits with central banks, also contributed to the decrease.
Our exposure in Other International increased $10 billion or 25% compared to the prior year, primarily due to business
growth in repo-style transactions.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
59
Net European exposure by country and client type (1), (2)
As at
October 31
2019
Asset type
Client type
Loans
Repo-style
Outstanding Securities (3)
$
8,624 $
1,388
956
10,248 $
5,421
8,001
transactions Derivatives Financials Sovereign Corporate
4,184 $ 12,700 $ 2,435 $
416
214
4,392
1,904
1,005
6,499
Total
Total
8,352 $ 23,487 $ 20,078
7,227
1,830
9,417
9,211
808
10,668
Table 45
October 31
2018
(Millions of Canadian
dollars)
U.K.
Germany
France
Total U.K., Germany,
France
Ireland
Italy
Portugal
Spain
Total peripheral
Luxembourg (4)
Netherlands (4)
Norway
Sweden
Switzerland
Other
Total other Europe
Net exposure to
Europe (5)
$
$
$
$
$
$
431 $
2
40
473 $
486 $
–
58
2
546 $
334 $
100
10
18
204
330
996 $
10,968 $
23,670 $
839 $
84
–
348
1,271 $
2,254 $
1,089
182
280
1,025
1,971
97 $
721
9
111
938 $
9,096 $
778
2,331
1,907
3,882
2,233
6,801 $
20,227 $
4,814 $ 18,996 $ 9,939 $ 10,990 $ 39,925 $ 40,163
931
677
33
1,443
800 $ 1,467 $
125
8
399
646 $
62
59
116
45 $
16
–
59
821
67
520
634
–
5
21 $
120 $
883 $
660 $
39 $
1,883 $ 8,492 $
283
30
20
197
284
707
2,287
1,537
746
1,567
2
47
396
3,489
1,302
853 $
8,727 $ 13,728 $
3,084
1,332 $ 2,875 $
1,348 $ 11,723 $
9,000
1,541
2,250
2,815
219
2,553
1,871
292
2,225
4,308
1,073
5,308
6,835
1,949
4,818
3,795
6,422 $ 28,877 $ 28,624
19,040 $
44,835 $
2,015 $
5,787 $ 28,606 $ 24,327 $ 18,744 $ 71,677 $ 71,871
(1)
(2)
(3)
(4)
(5)
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 $120.5 billion against repo-style transactions (October 31, 2018 – $111.1 billion) and
$11.4 billion against derivatives (October 31, 2018 – $11.6 billion).
Securities include $9.4 billion of trading securities (October 31, 2018 – $16.2 billion), $22.5 billion of deposits (October 31, 2018 – $23.3 billion), and $12.9 billion of debt
securities carried at FVOCI (October 31, 2018 – $12.5 billion).
Excludes $1.5 billion (October 31, 2018 – $2.5 billion) of exposures to supranational agencies.
Reflects $1.0 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2018 – $1.2 billion).
2019 vs. 2018
Net credit risk exposure to Europe decreased $0.2 billion from last year, mainly driven by lower trading securities, largely in
Germany, mainly offset by higher loans, across a few countries, and higher derivatives.
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 during the year was $77 million. The
gross impaired loans ratio of this loan book was 44 bps, up 34 bps from last year, mainly in the industrial products and other
services sectors.
60
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Residential mortgages and home equity lines of credit (insured vs. uninsured)
Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a
breakdown by geographic region.
Residential mortgages and home equity lines of credit
Table 46
(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
As at October 31, 2019
Residential mortgages
Home equity
lines of credit
Insured (1)
Uninsured
Total
Total
$
7,715
12,385
36,195
20,688
8,951
14,711
$ 100,645
1
5
52% $
36
28
53
49
28
7,169
22,091
92,947
18,143
9,238
37,534
35% $ 187,122
17,011
3,307
–
–
48% $ 14,884
34,476
64
129,142
72
38,831
47
18,189
51
52,245
72
65% $ 287,767
17,012
3,312
100
100
$
6
–% $ 20,318
100% $ 20,324
$ 100,651
33% $ 207,440
67% $ 308,091
$
$
$
$
1,838
3,512
16,585
6,324
2,363
8,267
38,889
1,652
1,373
3,025
41,914
As at October 31, 2018
Residential mortgages
Home equity
lines of credit
Insured (1)
Uninsured
Total
Total
(Millions of Canadian dollars,
except percentage amounts)
Region (2)
Canada
$
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
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
46% $ 14,014
31,956
59
116,357
67
37,353
45
17,510
49
48,641
68
Total Canada (3)
U.S. (4)
Other International (4)
$ 104,443
1
7
39% $ 161,388
13,492
3,140
–
–
61% $ 265,831
13,493
3,147
100
100
Total International
$
8
–% $ 16,632
100% $ 16,640
Total
$ 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
(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 $288 billion (October 31, 2018 – $266 billion) is largely comprised of $263 billion
(October 31, 2018 – $243 billion) of residential mortgages and $7 billion (October 31, 2018 – $7 billion) of mortgages with commercial
clients, of which $4 billion (October 31, 2018 – $4 billion) are insured mortgages, both in Canadian Banking, and $18 billion (October 31,
2018 – $16 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, 2019, home equity
lines of credit in Canadian Banking were $39 billion (October 31, 2018 – $40 billion).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
61
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 47
As at
October 31
2019
October 31
2018
Canada
U.S. and other
International
Total
Canada
U.S. and other
International Total
72%
24
3
1
38%
62
–
–
70%
26
3
1
70%
23
5
2
40%
60
–
–
68%
25
5
2
100%
100%
100%
100%
100%
100%
Amortization period
≤ 25 years
> 25 years ≤ 30 years
> 30 years ≤ 35 years
> 35 years
Total
Average loan–to–value (LTV) ratios
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
Table 48
For the year ended
October 31
2019
Uninsured
October 31
2018
Uninsured
Residential
mortgages (1)
Homeline
products (2)
Residential
mortgages (1)
Homeline
products (2)
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)
74%
72
70
73
74
68
74
71
71%
57%
74%
73
68
72
74
65
n.m.
n.m.
69%
50%
73%
72
70
73
74
67
71
60
70%
55%
74%
73
67
71
74
64
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.
(6) Weighted by mortgage balances and adjusted for property values based on the Teranet – National Bank National Composite House Price
Index.
n.m. not meaningful
62
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Credit quality performance
The following credit quality performance tables and analysis provide information on loans, which represents loans, acceptances
and commitments, and other financial assets.
Provision for credit losses
Table 49
For the year ended
(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
PCL on loans is comprised of:
Retail
Wholesale
PCL on performing loans
Retail
Wholesale
PCL on impaired loans
PCL – Loans
PCL on loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and
acceptances
Additional information by geography (1)
Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
PCL on impaired loans
U.S.
Retail
Wholesale
PCL on impaired loans
Other International
Retail
Wholesale
PCL on impaired loans
PCL on impaired loans
$
October 31
2019
1,470
117
304
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,891
(27)
1,864
133
67
200
1,092
599
1,691
1,891
0.31%
0.27%
32
488
505
36
1,061
292
1,353
12
223
235
19
84
103
1,691
October 31
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
(1)
Geographic information is based on residence of the borrower.
2019 vs. 2018
Total PCL was $1,864 million. PCL on loans of $1,891 million increased $608 million, or 47% from the prior year, due to higher
provisions in Capital Markets, Personal & Commercial Banking and Wealth Management. The PCL ratio on loans of 31 bps
increased by 8 bps.
PCL on performing loans of $200 million increased $77 million, reflecting higher provisions in Wealth Management and
Capital Markets, partially offset by lower provisions in Personal & Commercial Banking.
PCL on impaired loans of $1,691 million increased $531 million, due to higher provisions in Personal & Commercial Banking,
Capital Markets and Wealth Management.
PCL on other financial assets of $(27) million, compared to $24 million in the prior year, primarily related to Personal &
Commercial Banking. The prior year included provisions related to the restructuring of portfolios in Barbados, while the current
year reflected recoveries, mainly due to favourable parameter updates.
PCL on loans in Personal & Commercial Banking increased $225 million, largely reflecting higher provisions on impaired loans in
our Canadian Banking commercial and retail portfolios. This was partially offset by lower provisions on our performing loans,
mainly due to favourable macroeconomic factors, largely offset by unfavourable changes in portfolio mix.
PCL on loans in Wealth Management increased $132 million, primarily in U.S. Wealth Management (including City National).
PCL on impaired loans increased $76 million, mainly in a few sectors, including consumer discretionary and consumer staples.
PCL on performing loans increased by $56 million, largely due to higher repayments and maturities in the prior year. The current
year also reflected unfavourable changes in macroeconomic factors compared to last year.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
63
PCL on loans in Capital Markets increased $252 million, largely driven by an increase in provisions on impaired loans, mainly
in the oil & gas and industrial products sectors. Higher provisions on performing loans, mainly driven by unfavourable changes in
macroeconomic factors compared to the prior year, also contributed to the increase.
Gross impaired loans (GIL)
(Millions of Canadian dollars, except percentage amounts)
Personal & Commercial Banking
Wealth Management
Capital Markets
Corporate Support and other
Total GIL
Canada (1)
Retail
Wholesale
GIL
U.S. (1)
Retail
Wholesale
GIL
Other International (1)
Retail
Wholesale
GIL
Total GIL
Impaired loans, beginning balance
Classified as impaired during the period (new impaired) (2)
Net repayments (2)
Amounts written off
Other (2), (3)
Impaired loans, balance at end of period
GIL as a % of related loans and acceptances
Total GIL as a % of related loans and acceptances
Personal & Commercial Banking
Canadian Banking
Caribbean Banking
Wealth Management
Capital Markets
Table 50
As at and for the year
ended
$
October 31
2019
1,712
266
998
–
$
$
$
$
$
$
2,976
788
678
1,466
36
869
905
272
333
605
2,976
2,183
3,749
(657)
(1,776)
(523)
October 31
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)
$
2,976
$
2,183
0.46%
0.37%
0.29%
5.05%
0.39%
1.02%
0.37%
0.37%
0.26%
6.36%
0.34%
0.41%
(1)
(2)
(3)
Geographic information is based on residence of the 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 foreign exchange translation 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
foreign exchange translation and other movements.
2019 vs. 2018
Total GIL of $2,976 million increased $793 million or 36% from the prior year, and the total GIL ratio of 46 bps increased 9 bps,
primarily reflecting higher impaired loans in Capital Markets. Higher impaired loans in Personal & Commercial Banking and
Wealth Management also contributed to the increase.
GIL in Personal & Commercial Banking increased $107 million or 7%, primarily due to higher impaired loans in our Canadian
Banking commercial and retail portfolios, partially offset by lower impaired loans in our Caribbean Banking portfolios.
GIL in Wealth Management increased $63 million or 31%, primarily reflecting higher impaired loans in U.S. Wealth
Management (including City National), mainly in a few sectors, including consumer discretionary and consumer staples, partially
offset by repayments and write-offs.
GIL in Capital Markets increased $623 million or 166%, mainly due to new impaired loans in the oil & gas and utilities sectors,
partially offset by sales and repayments.
64
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Allowance for credit losses – Loans and acceptances
Table 51
(Millions of Canadian dollars)
Personal & Commercial Banking
Wealth Management
Capital Markets
Corporate Support and other
ACL on loans
ACL on other financial assets
Total ACL
ACL on loans is comprised of:
Retail
Wholesale
ACL on performing loans
ACL on impaired loans
Additional information by geography (1)
Canada
Retail
Wholesale
ACL on impaired loans
U.S.
Retail
Wholesale
ACL on impaired loans
Other International
Retail
Wholesale
ACL on impaired loans
ACL on impaired loans
As at
$
October 31
2019
2,710
252
455
2
$
$
$
$
$
$
$
$
$
$
$
$
3,419
45
3,464
1,886
701
2,587
832
187
172
359
1
141
142
156
175
331
832
October 31
2018
$
$
$
$
$
$
$
$
$
$
$
$
$
2,536
202
347
3
3,088
71
3,159
1,753
635
2,388
700
168
92
260
1
164
165
166
109
275
700
(1)
Geographic information is based on residence of the borrower.
2019 vs. 2018
Total ACL of $3,464 million increased $305 million or 10% from the prior year, largely reflecting an increase of $331 million in ACL
on loans.
ACL on performing loans of $2,587 million increased $199 million from the prior year, reflecting higher ACL in Personal &
Commercial Banking, Capital Markets and Wealth Management, mainly driven by volume growth and unfavourable changes in
portfolio mix.
ACL on impaired loans of $832 million increased $132 million from the prior year, mainly due to higher provisions, partially
offset by write-offs, in Capital Markets and Personal & Commercial Banking.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
65
Market risk
Market risk is defined to be the impact of market prices upon our financial condition. This includes potential gains or losses
due to changes in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign
exchange rates and implied volatilities.
The measures of financial condition impacted by market risk are as follows:
1.
2.
3.
4.
Positions whose revaluation gains and losses are reported in Revenue, which includes:
a) Changes in the fair value of instruments classified or designated as fair value through profit and loss (FVTPL), and
b) Hedge ineffectiveness.
CET1 capital, which includes:
a) All of the above, plus
b) Changes in the fair value of FVOCI securities where revaluation gains and losses are reported as Other
comprehensive income (OCI),
c) Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange
translation, and
d) Changes in the fair value of employee benefit plan deficits.
CET1 ratio, which includes:
a) All of the above, plus
b) Changes in RWA resulting from changes in traded market risk factors, and
c) Changes in the Canadian dollar value of RWA due to foreign exchange translation.
The economic value of the Bank, which includes:
a) Points 1 and 2 above, plus
b) Changes in the economic value of other non-trading positions, net interest income, and fee based income, as a
result of changes in 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:
(cid:129)
(cid:129)
(cid:129)
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.
66
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Market risk measures – FVTPL positions
VaR and SVaR
The following table presents our Market risk VaR and Market risk SVaR figures for 2019 and 2018.
Market risk VaR*
Table 52
(Millions of Canadian dollars)
Equity
Foreign exchange
Commodities
Interest rate (1)
Credit specific (2)
Diversification (3)
Market risk VaR
Market risk Stressed VaR
October 31, 2019
For the year ended
October 31, 2018
For the year ended
As at
22
3
2
13
5
(17)
28
85
$
$
$
Average
19
$
4
2
14
5
(17)
27
106
$
$
High
32
13
4
19
6
n.m
45
161
$
$
$
Low
11
2
1
11
4
n.m.
15
76
$
$
$
As at
34
12
2
15
5
(29)
39
91
$
$
$
Average
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
$
$
$
This table represents an integral part of our 2019 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.
*
(1)
(2)
(3) Market risk VaR is less than the sum of the individual risk factor VaR results due to portfolio diversification.
n.m. not meaningful
2019 vs. 2018
Average market risk VaR of $27 million increased $2 million from the prior year, mainly reflecting the impact of heightened equity
market volatility from the first and fourth quarter of fiscal 2019, balanced out by lower average inventory levels in our fixed
income portfolio.
Average SVaR of $106 million increased $27 million from the prior year, largely due to growth in certain fixed income
portfolios sustained since the first quarter of fiscal 2019, in addition to the impact from heightened equity market volatility
mentioned above.
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
1 day of losses totaling $0.4 million in 2019, which did not exceed VaR on that day.
Trading revenue and VaR (Millions of Canadian dollars)
60
40
20
0
-20
-40
-60
0 1 8
v 1, 2
o
N
0 1 9
n 3 1, 2
J a
0 1 9
0 , 2
r 3
p
A
0 1 9
J u l 3 1, 2
0 1 9
c t 3 1, 2
O
Trading Revenue
Market Risk VaR
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
67
The following chart displays the distribution of daily trading profit and loss in 2019 and 2018 with 1 day of losses in 2019 of
$0.4 million as mentioned above. The largest reported profit was $33 million with an average daily profit of $14 million.
Trading Revenue for the year ended October 31, 2019 (teb)
s
y
a
D
f
o
r
e
b
m
u
N
n
i
y
c
n
e
u
q
e
r
F
110
100
90
80
70
60
50
40
30
20
10
0
5
2
-
5
1
-
5
-
5
5
1
5
2
5
3
5
4
5
5
Daily net trading revenue (C$ millions), excluding structured entities
2019
2018
Market risk measures for 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, 2019, we held assets in support of $11.4 billion liabilities with respect to insurance
obligations (October 31, 2018 – $10.0 billion).
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 GRC, the Risk Committee of the Board and the Board.
Details on the non-trading risks included in SIRR are outlined in Table 54.
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.
(1)
68
SIRR positions include impact of derivatives in hedge accounting relationships and FVOCI securities used for interest rate risk management.
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Market risk – SIRR measures*
EVE risk
NII risk (1)
2019
Table 53
2018
(Millions of Canadian dollars)
Before-tax impact of:
100 bps increase in rates
100 bps decrease in rates
Before-tax impact of:
200 bps increase in rates
200 bps 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)
$
$
(1,151) $ (205) $(1,356) $
(107)
1,027
920
351
(486)
(2,311) $ (690) $(3,001) $
(86)
2,030
1,944
620
(1,071)
$
$
128
(151)
$
479
(637)
$(1,140) $
755
505
(582)
247
(285)
$
867
(1,356)
$(2,407) $
1,067
923
(1,370)
*
(1)
(2)
This table represents an integral part of our 2019 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, 2019, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $637 million, up
from $582 million last year. An immediate and sustained +100 bps shock at the end of October 31, 2019 would have had a negative
impact to our EVE of $1,356 million, up from $1,140 million reported last year. The year-over-year change in NII sensitivity is largely
attributed to balance sheet growth, while the year-over-year change in EVE sensitivity is mainly due to net growth in fixed rate
assets. During 2019, NII and EVE risks remained well within approved limits.
Market risk measures for other material non-trading portfolios
Investment securities carried at FVOCI
We held $57.7 billion of investment securities carried at FVOCI as at October 31, 2019, compared to $48.5 billion in the prior year.
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, 2019, 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 $20 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, 2019 was $9.9 billion. Our investment
securities carried at FVOCI also include equity exposures of $0.4 billion as at October 31, 2019, compared to $0.4 billion in the
prior 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.
Derivatives related to non-trading activity
Derivatives are also used to hedge market risk exposure unrelated to our trading activity. Hedge accounting is elected where
applicable. These derivatives 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. Interest rate swaps are also used to hedge changes in
the fair value of certain fixed-rate instruments. 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.
For further details on the application of hedge accounting and the use of derivatives for hedging activities, refer to Notes 2 and 8
of our 2019 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
69
Linkage of market risk to selected balance sheet items
The following tables provide 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 54
(Millions of Canadian dollars)
Assets subject to market risk
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
Derivatives
Other assets
Assets not subject to market risk (3)
Total assets
Liabilities subject to market risk
Deposits
Segregated fund liabilities
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Derivatives
Other liabilities
Subordinated debentures
Liabilities not subject to market risk (4)
Total liabilities
Total equity
Total liabilities and equity
As at October 31, 2019
Market risk measure
Balance sheet
amount Traded risk (1)
Non-traded
risk (2)
Non-traded risk
primary risk sensitivity
$
26,310 $
38,345
–
22,287
$ 26,310
16,058
Interest rate
Interest rate
146,534
102,470
136,609
–
9,925
102,470
Interest rate, credit spread
Interest rate, credit spread, equity
306,961
246,068
60,893
426,086
195,870
(3,100)
1,663
101,560
79,802
6,434
10,876
7,111
–
–
99,318
4,648
415,210
188,759
(3,100)
1,663
2,242
75,154
1,428,935 $
526,917
$ 895,584
886,005 $
1,663
99,137
–
$ 786,868
1,663
35,069
35,069
–
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
Interest rate
226,586
98,543
79,040
9,815
8,589
218,612
96,512
8,918
–
7,974
2,031
70,122
9,815
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
1,345,310 $
458,248
$ 878,473
83,625
1,428,935
$
$
$
$
$
(1)
(2)
(3)
(4)
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.
Assets not subject to market risk include $6,434 million of physical and other assets.
Liabilities not subject to market risk include $8,589 million of payroll related and other liabilities.
70
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
(Millions of Canadian dollars)
Assets subject to market risk
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
Derivatives
Other assets
Assets not subject to market risk (3)
Total assets
Liabilities subject to market risk
Deposits (4)
Segregated fund liabilities
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Derivatives
Other liabilities
Subordinated debentures
Liabilities not subject to market risk (4), (5)
Total liabilities
Total equity
Total liabilities and equity
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
Interest rate, credit spread
94,608 Interest rate, credit spread, equity
294,602
219,108
75,494
Interest rate
$
$
4,307
9,128
–
–
91,275
2,259
466,517
81,432
–
32,247
201,839
87,352
7,661
–
395,145
171,150
(2,912)
1,368
2,764
69,396
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
$
$
861,511
754,765
1,368
–
4,975
2,886
64,455
9,131
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
$
410,531
$
837,580
399,452
180,278
(2,912)
1,368
94,039
71,655
6,706
1,334,734
836,197
1,368
32,247
206,814
90,238
72,116
9,131
6,668
1,254,779
79,955
1,334,734
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
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.
Assets not subject to market risk include $6,706 million of physical and other assets.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in liabilities not subject
to market risk. Amounts have been reclassified to conform with this presentation.
Liabilities not subject to market risk include $6,668 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
(cid:129)
mitigation;
(cid:129) 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 capacity 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.
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Risk control
Our liquidity risk objectives, policies and methodologies are reviewed regularly, and are 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. The GRC,
the Policy Review Committee (PRC) and/or the ALCO also review liquidity documents prepared for the Board or its
committees.
(cid:129)
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
71
(cid:129)
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-based 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
generally accepted industry 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 regional 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, 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, to varying degrees, a ready source of funding. Unencumbered assets are the difference between total and encumbered
assets from both on- and off-balance sheet sources. 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 regional 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.
72
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Liquidity reserve
Our liquidity reserve consists of available unencumbered liquid assets as well as uncommitted and undrawn central bank
borrowing facilities that could be accessed under extraordinary circumstances subject to satisfying certain preconditions as set
by various central banks (e.g., BoC, the Fed, Bank of England, and Bank of France).
Although unused wholesale funding capacity, which is regularly assessed, could be another potential source of liquidity to
mitigate stressed conditions, it is excluded in the determination of the liquidity reserve.
Liquidity reserve
Table 55
As at October 31, 2019
(Millions of Canadian dollars)
Cash and due from banks
Interest-bearing deposits with banks
Securities issued or guaranteed by sovereigns,
central 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)
Total liquid assets
(Millions of Canadian dollars)
Cash and due from banks
Interest-bearing deposits with banks
Securities issued or guaranteed by sovereigns,
central 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)
Total liquid assets
(Millions of Canadian dollars)
Royal Bank of Canada
Foreign branches
Subsidiaries
Total unencumbered liquid assets
Securities received
as collateral from
securities financing
and derivative
transactions
Bank-owned
liquid assets
$
26,310 $
38,345
Total liquid
assets
26,310 $
38,345
– $
–
Encumbered
liquid assets
Unencumbered
liquid assets
23,450
38,016
2,860 $
329
206,960
90,026
9,534
109,327
21,732
311,019
115,261
517,979
205,287
345,753
96,184
172,226
109,103
–
–
–
9,534
109,327
21,732
–
9,534
–
21,316
109,327
416
462,072
$
502,234 $
426,280 $ 928,514 $
466,442 $
As at October 31, 2018
Securities received
as collateral from
securities financing
and derivative
transactions
Bank-owned
liquid assets
$
30,209 $
36,471
Total liquid
assets
30,209 $
36,471
– $
–
Encumbered
liquid assets
Unencumbered
liquid assets
27,636
36,105
2,573 $
366
188,911
78,090
9,988
99,120
19,758
261,119
126,209
450,030
204,299
–
–
–
9,988
99,120
19,758
297,681
84,589
–
–
19,406
$
462,547 $
387,328 $
849,875 $
404,615 $
152,349
119,710
9,988
99,120
352
445,260
As at
October 31
2019
$ 224,063
71,062
166,947
$ 462,072
October 31
2018
$ 219,197
73,015
153,048
$ 445,260
(1)
(2)
(3)
(4)
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 at 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. ELA is not considered a source 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. The balance also includes our unencumbered mortgage loans
that qualify as eligible collateral at Federal Home Loan Bank (FHLB).
Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
The liquidity reserve is typically most affected by routine flows of client banking activity where liquid asset portfolios adjust to
the change in cash balances, and additionally from capital markets activities where business strategies and client flows may also
affect the addition or subtraction of liquid assets in the overall calculation of the liquidity reserve. Corporate Treasury also
affects liquidity reserves through the management of funding issuances where reserves absorb timing mismatches between debt
issuances and deployment into business activities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
73
2019 vs. 2018
Total liquid assets increased $79 billion or 9%, primarily due to an increase in securities received as collateral under collateral
swap and reverse repurchase transactions as well as the on-balance sheet securities portfolio. The increase in collateral
received was offset by a corresponding increase in collateral pledged under encumbered liquid assets due to repurchase and
collateral swap transactions.
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, 2019, our unencumbered assets available as collateral comprised 29% of total assets (October 31, 2018 – 29%).
Asset encumbrance
Table 56
October 31
2019
October 31
2018
As at
Encumbered
Unencumbered
Encumbered
Unencumbered
(Millions of Canadian dollars)
collateral Other (1)
Pledged as
Available as
collateral (2)
Other (3)
Pledged as
collateral Other (1)
Available as
collateral (2) Other (3)
Total
$
– $ 2,860 $
23,450 $
– $
– $ 2,573 $
27,636 $
– $
30,209
Total
26,310 $
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 (4)
Loans
Retail
Mortgage securities
Mortgage loans
Non-mortgage loans
Wholesale
Allowance for loan losses
Segregated fund net assets
Other
Derivatives
Other (5)
Total assets
–
329
38,016
–
38,345
–
366
36,105
–
36,471
44,431
16,376
–
–
99,420
2,683
146,534
86,045
49
102,470
40,640
12,195
–
–
84,270
3,348
128,258
82,351
62
94,608
399,013
22,793
49,325
5,214
476,345
348,597
22,188
53,590
5,722
430,097
31,345
42,103
7,094
–
–
–
–
21,316
–
–
–
–
–
–
–
–
40,401
22,598
62,204
34,882
–
–
–
171,644
48,697
160,988
(3,100)
1,663
71,746
236,345
117,995
195,870
(3,100)
1,663
–
416
101,560
64,504
101,560
86,236
34,286
36,959
8,553
–
–
–
–
19,406
–
–
–
–
–
–
–
–
36,234
17,784
59,611
32,478
–
–
–
157,208
48,817
147,800
(2,912)
1,368
70,520
211,951
116,981
180,278
(2,912)
1,368
–
352
94,039
58,603
94,039
78,361
$ 561,678 $ 25,982 $
456,757 $ 553,902 $ 1,598,319 $ 500,636 $ 25,127 $
430,411 $ 514,055 $ 1,470,229
(1)
(2)
(3)
(4)
(5)
Includes assets restricted from use to generate secured funding due to legal or other constraints.
Includes loans that could be used to collateralize central bank advances. Our unencumbered Canadian dollar non-mortgage loan book (at face value) could, subject to
satisfying conditions for borrowing and application of prescribed collateral margin requirements, be pledged to the 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 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
$22.8 billion (October 31, 2018 – $22.2 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, 2019, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were
$594 billion or 51% of our total funding (October 31, 2018 – $545 billion or 50%). 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.
On April 18, 2018, the Department of Finance published bail-in regulations under the Canada Deposit Insurance Corporation
(CDIC) Act and the Bank Act, which became effective September 23, 2018. Senior long-term debt issued by the bank on or after
September 23, 2018, that has an original term greater than 400 days and is marketable, subject to certain exceptions, is subject to
the Canadian Bank Recapitalization (Bail-in) regime. Under the Bail-in regime, 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. As at October 31, 2019, the notional
value of issued and outstanding long-term debt subject to conversion under the Bail-in regime was $20,320 million (October 31,
2018 – $4,467 million).
For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.
74
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Long-term debt issuance
During 2019, we continued to experience more favourable unsecured wholesale funding access and pricing compared to many
global peers. We issued, either directly or through our subsidiaries, unsecured long-term funding of $19.1 billion in various
currencies and markets, which was more than 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.
Compared to 2018, our outstanding MBS sold decreased $1.8 billion. Our covered bonds and securitized credit card
receivables increased $2.3 billion and decreased $1.5 billion, respectively.
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
Subordinated debentures
Table 57
As at
October 31
2019
$ 94,662
63,853
9,788
$ 168,303
October 31
2018
$ 102,325
64,843
9,397
$ 176,565
*
This table represents an integral part of our 2019 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
Canada
(cid:129) Canadian Shelf Program –
$25 billion
U.S.
(cid:129) U.S. Shelf Program –
US$40 billion
Table 58
Europe/Asia
(cid:129) European Debt Issuance Program –
US$40 billion
(cid:129) Global Covered Bond Program –
€32 billion
(cid:129) Japanese Issuance Programs –
¥1 trillion
We also raise long-term funding using Canadian Senior 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
Long-term debt (1) – funding mix by product
Other
10%
Euro
19%
Canadian dollar
36%
October 31, 2019
U.S. dollar
35%
Cards securitization
5%
October 31, 2019
Unsecured
funding
53%
Covered Bonds
29%
MBS/CMB (2)
13%
(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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
75
The following table provides our composition of wholesale funding based on remaining term to maturity:
Composition of wholesale funding (1)
As at October 31, 2019
Less than
1 month
1 to 3
months
3 to 6
months
6 to 12
months
Less than
1 year
sub-total
1 year to
2 years
2 years
and
greater
$
4,087 $
– $
388 $
33 $
4,508 $
– $
– $
2,917
12,037
17,390
22,038
54,382
132
2,542
3,188
6,543
3,905
16,178
–
–
–
Table 59
Total
4,508
54,514
16,178
11
2,293
9,183
14,188
25,675
18,856
29,756
74,287
847
–
–
–
9,489
676
524
–
2,000
1,224
171
1,796
6,282
–
157
1,342
727
2,305
998
1,663
3,036
3,047
8,587
2,998
12,533
1,810
3,523
14,337
2,500
141
5,047
11,015
23,426
4,290
9,976
9,893
17,585
46,350
9,788
22,650
$ 19,893 $ 21,942 $ 41,910 $ 47,199 $ 130,944 $ 41,299 $ 83,510 $ 255,753
$ 10,339 $
9,554
3,929 $ 14,621 $
6,937 $
18,013
27,289
40,262
35,826 $ 17,860 $ 34,441 $
95,118
23,439
49,069
88,127
167,626
(Millions of Canadian dollars)
Deposits from banks (2)
Certificates of deposit and
commercial paper
Asset-backed
commercial paper (3)
Senior unsecured medium-
term notes (4)
Senior unsecured
structured notes (5)
Mortgage securitization
Covered bonds/asset-
backed securities (6)
Subordinated liabilities
Other (7)
Total
Of which:
Secured
Unsecured
(Millions of Canadian dollars)
Deposits from banks (2)
Certificates of deposit and
commercial paper
Asset-backed commercial
paper (3)
Senior unsecured medium-
term notes (4)
Senior unsecured structured
notes (5)
Mortgage securitization
Covered bonds/asset-backed
securities (6)
Subordinated liabilities
Other (7)
Total
Of which:
Secured
Unsecured
As at October 31, 2018
Less than
1 month
1 to 3
months
3 to 6
months
6 to 12
months
Less than
1 year
sub-total
1 year to
2 years
2 years
and
greater
$
4,507
$
10
$
42
$
–
$
4,559
$
–
$
–
$
Total
4,559
3,658
9,000
20,994
14,926
48,578
1,908
2,581
5,877
6,197
16,563
197
–
132
48,907
–
16,563
122
185
–
–
–
7,639
6,132
7,424
8,090
21,768
23,125
33,513
78,406
215
2,473
21
–
1,658
353
527
4,641
–
419
693
1,099
5,409
1,103
1,189
1,446
4,099
10,071
1,103
10,905
2,603
3,027
8,581
2,993
4
5,608
12,193
26,861
5,301
9,122
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
9,727
$ 5,666
16,424
$ 11,045
29,232
$ 12,706
26,000
$ 37,709
81,383
$ 11,608
28,922
$ 39,054
53,676
$ 88,371
163,981
(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 $8,014 million (October 31, 2018 – $6,978 million), bearer deposit notes (unsecured) of $4,813 million (October 31, 2018 – $4,084
million) and other long-term structured deposits (unsecured) of $9,823 million (October 31, 2018 – $8,969 million).
76
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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
Table 60
Short-term debt
Legacy senior long-term debt (2)
Senior long-term debt (3) Outlook
Moody’s (4)
Standard & Poor’s (5)
Fitch Ratings (6)
DBRS (7)
P-1
A-1+
F1+
R-1(high)
Aa2
AA-
AA
AA (high)
A2
A
AA
AA
stable
stable
stable
stable
As at December 3, 2019
(1)
(2)
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 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.
(3)
(4) On August 1, 2019, Moody’s affirmed our ratings with a stable outlook.
(5)
(6)
(7)
On June 24, 2019, Standard & Poor’s affirmed our ratings with a stable outlook.
On October 22, 2018, Fitch Ratings affirmed our ratings with a stable outlook.
On June 18, 2019, DBRS revised our outlook to stable from positive, upgraded our legacy senior long-term debt rating to AA (high) from AA and upgraded our
senior long-term debt rating to AA from 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 61
As at
October 31
2019
October 31
2018
(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
$
165
$
64
$
124
$
125
$
45
$
191
180
176
–
185
176
–
(1)
Includes GICs issued by our municipal markets business out of New York.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
77
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 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)
Table 62
For the three months ended
October 31
2019
July 31
2019
(Millions of Canadian dollars, except percentage amounts)
Total unweighted
value (average) (2)
Total weighted
value (average)
Total unweighted
value (average) (2)
Total weighted
value (average)
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
n.a.
$
234,605
n.a.
$
224,629
$
$
$
266,868
89,565
177,303
303,129
133,484
145,888
23,757
n.a.
265,287
57,869
7,761
199,657
19,108
441,413
n.a.
313,698
15,692
43,442
$
20,417
2,687
17,730
137,946
31,907
82,282
23,757
33,904
72,268
33,108
7,761
31,399
19,108
7,999
291,642
$
52,469
11,154
43,442
$
$
$
258,989
88,841
170,148
302,672
130,030
148,207
24,435
n.a.
269,355
66,828
6,080
196,447
20,370
431,682
n.a.
327,511
14,399
55,667
19,680
2,665
17,015
142,038
31,079
86,524
24,435
33,351
82,274
44,430
6,080
31,764
20,370
7,842
305,555
56,368
9,909
55,667
n.a.
$
107,065
n.a.
$
121,944
Total adjusted
value
$
234,605
184,577
127%
Total adjusted
value
$
224,629
183,611
122%
(1)
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, 2019 is calculated as an average of 63 daily positions.
(2) 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
(3)
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.
(4) 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%).
(5)
(6)
n.a. not applicable
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
78
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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.
Q4 2019 vs. Q3 2019
The average LCR for the quarter ended October 31, 2019 was 127%, which translates into a surplus of approximately $50 billion,
compared to 122% in the prior quarter. The increase in the LCR surplus from the previous quarter is primarily due to a change in
funding and business mix.
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 63
(Millions of Canadian dollars)
Assets
Cash and deposits with banks
Securities
Trading (1)
Investment, net of applicable
allowance
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
Total assets
Liabilities and equity
Deposits (2)
Unsecured borrowing
Secured borrowing
Covered bonds
Other
Acceptances
Obligations related to securities
sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivatives
Other financial liabilities
Subordinated debentures
Total financial liabilities
Other non-financial liabilities
Equity
Total liabilities and equity
Off-balance sheet items
Financial guarantees
Lease commitments
Commitments to extend credit
Other credit-related commitments
Other commitments
Total off-balance sheet items
As at October 31, 2019
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
$ 62,095
$
3
$
–
$
–
$
–
$
–
$
–
$
–
$ 2,557
$
64,655
96,229
14
45
10
21
64
97
8,601
41,453
146,534
3,069
3,960
3,857
2,886
3,511
16,203
24,638
43,907
439
102,470
164,870
23,097
62,971
17,145
41,569
25,854
10,985
28,796
14,993
29,533
133
120,524
–
232,364
–
51,049
11,440
90,494
306,961
618,856
12,940
5,668
28,296
5,119
8,635
1,400
27
4,265
1,193
–
3,227
48
–
3,547
61
–
9,815
169
–
18,753
277
–
47,649
1,861
(24)
1
2,164
18,062
101,560
35,469
$396,264
2,907
$ 99,247
1,475
$76,810
108
$45,952
865
$51,666
109
$146,908
1,373
$276,129
1,507
$153,067
1,696
$148,524
24,328
$1,394,567
34,368
$399,171
$100,722
$76,918
$46,817
$51,775
$148,281
$277,636
$154,763
$172,852
$1,428,935
$ 50,872
2,588
–
$ 36,251
4,874
–
$47,307
10,679
4,828
$38,376
3,596
–
$42,885
2,395
5,255
$ 28,886
10,351
10,818
$ 51,557
19,535
13,263
$ 20,230
5,755
5,677
$470,027
–
–
$ 786,391
59,773
39,841
12,944
5,119
35,069
–
27
–
–
–
–
–
–
–
–
–
–
–
192,855
6,325
29,008
–
14,281
7,779
1,066
–
13,462
4,519
849
–
6
3,430
290
–
–
3,442
443
–
4
9,155
272
–
–
17,348
701
316
–
46,515
8,510
9,499
1
–
5,978
30
691
–
18,091
35,069
226,586
98,543
41,830
9,815
$329,661
1,314
–
$ 69,370
5,288
–
$81,671
276
–
$45,698
154
–
$54,420
142
–
$ 59,486
898
–
$102,720
903
–
$ 96,186
11,179
–
$476,727
9,217
83,625
$1,315,939
29,371
83,625
$330,975
$ 74,658
$81,947
$45,852
$54,562
$ 60,384
$103,623
$107,365
$569,569
$1,428,935
$
427
69
2,996
469
35
$ 2,409
137
6,367
934
–
$ 2,088
204
8,821
1,615
–
$ 2,829
197
10,655
1,863
–
$ 2,382
198
11,638
1,365
–
$
986
719
41,740
191
–
$
5,394
1,619
150,267
634
–
$
45
3,032
27,827
10
–
$
48
–
3,865
92,392
484
$
16,608
6,175
264,176
99,473
519
$
3,996
$ 9,847
$12,728
$15,544
$15,583
$ 43,636
$157,914
$ 30,914
$ 96,789
$ 386,951
(1)
(2)
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.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
79
(Millions of Canadian dollars)
Assets
Cash and deposits with banks
Securities
Trading (1)
Investment, net of applicable
allowance
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans, net of applicable allowance
Other
Customers’ liability under
acceptances
Derivatives
Other financial assets
As at October 31, 2018
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
$ 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
22,534
66,854
14,967
28,828
21,079
10,298
26,753
11,692
25,271
552
122,687
–
211,768
–
44,191
7,568
87,568
294,602
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
Total financial assets
Other non-financial assets
$ 388,139 $ 104,538 $ 57,310 $ 43,771 $ 42,550 $ 147,527 $ 255,199 $
1,809
1,268
590
364
559
971
1,352
128,908 $ 134,641 $ 1,302,583
32,151
24,113
1,125
Total assets
Liabilities and equity
Deposits (2), (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 (3)
Subordinated debentures
Total financial liabilities
Other non-financial liabilities
Equity
$ 389,948 $ 105,806 $ 57,900 $ 44,135 $ 43,109 $ 148,498 $ 256,551 $
130,033 $ 158,754 $ 1,334,734
$ 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
–
9,321
2,579
4,232
2,982
6,571
–
10,775
4,787
32,247
–
146,205
5,998
27,414
–
44,248
8,585
1,003
–
94
–
9,030
4,650
582
–
1
–
–
–
5
–
–
–
91
4,176
233
–
–
3,311
414
103
–
9,808
154
–
–
17,205
522
318
14,844 $ 440,246 $
5,902
3,432
–
–
–
36,496
7,633
8,710
–
–
–
–
7,240
9
733
–
735,001
64,322
36,874
15,662
32,247
206,814
90,238
38,688
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 $
2,026 $ 1,647 $ 2,696 $ 1,337 $
66
4,122
577
141
131
3,417
795
–
194
8,736
1,586
–
199
9,667
1,498
–
194
11,406
1,324
–
1,910 $
695
33,030
478
–
4,179 $
1,517
168,071
680
–
1,125 $
2,814
23,899
148
–
50 $
–
269
107,499
556
15,502
5,810
262,617
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.
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.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other financial
liabilities. Amounts have been reclassified to conform with this presentation.
80
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 64
(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)
Total financial liabilities and off-balance sheet items
(Millions of Canadian dollars)
Financial liabilities
Deposits (1), (3)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities (3)
Subordinated debentures
Off-balance sheet items
Financial guarantees (2)
Lease commitments
Commitments to extend credit (2)
As at October 31, 2019
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
$ 406,042 $ 315,398 $ 50,218 $ 83,651 $
30,560 $
885,869
–
–
18,091
35,125
5,977
617
–
412,636
220,592
31,794
–
621,000
–
–
4
190
–
–
–
–
640
316
–
–
–
8,512
9,499
18,091
35,125
226,573
41,753
9,815
50,412
84,607
48,571
1,217,226
$
16,608 $
– $
– $
– $
– $
–
226,021
242,629
805
38,148
38,953
719
6
725
1,619
1
1,620
3,032
–
3,032
16,608
6,175
264,176
286,959
$ 655,265 $ 659,953 $ 51,137 $ 86,227 $
51,603 $ 1,504,185
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 $
24,240 $
838,277
–
–
7,240
1,753
–
391,840
15,657
32,222
199,574
28,568
103
564,052
5
–
–
98
–
–
–
–
383
318
–
–
–
7,700
8,710
15,662
32,222
206,814
38,502
9,131
52,211
91,855
40,650
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
Total financial liabilities and off-balance sheet items
$ 631,400 $ 603,364 $ 52,908 $ 93,401 $
43,464 $
1,424,537
*
(1)
This table represents an integral part of our 2019 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.
(2) 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
(3)
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.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Amounts have been reclassified to conform with this presentation.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
81
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.
Operational/regulatory compliance 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 of our activities and third party activities and failure to manage operational
risk can result in direct or indirect financial loss, reputational impact or regulatory censure.
Our management of operational risk follows the three lines of defence governance model, encompassing the organizational roles
and responsibilities for a co-ordinated enterprise-wide approach. For further details, refer to the Risk management – Enterprise
risk management section.
Operational Risk Framework
We have an Enterprise Operational Risk Framework which sets out the processes to identify, assess, monitor, measure, report
and communicate on operational risk. The processes are established through the following:
(cid:129)
Risk identification and assessment tools, including the collection and analysis of risk event data, help risk owners
understand and proactively manage operational risk exposures. Risk assessments ensure alignment between risk exposures
and efforts to manage them. Management uses outputs of these tools to make informed risk decisions.
Risk monitoring tools alert management to changes in the operational risk profile. When paired with escalation and
monitoring triggers, risk monitoring tools can identify risk trends, warn management of risk levels that approach or exceed
defined limits, as well as prompt actions and mitigation plans to be undertaken.
Risk capital measurement provides credible estimation of potential risk exposure, surfaces risk vulnerabilities, and informs
strategic and capital planning decisions, which ultimately ensures that the bank is sufficiently resilient to withstand
operational risk losses both in normal times and under stress situations.
Risk reporting and communication processes ensure that relevant operational risk information is made available to
management in a timely manner to support risk-informed business decisions.
(cid:129)
(cid:129)
(cid:129)
Conclusions from the operational risk programs enable learning based on what has happened to us, whether it could happen
elsewhere in the bank, and what controls we need to amend or implement. These conclusions support the articulation of our
operational risk appetite and are used to inform the overall level of operational risk exposure which thereby defines our
operational risk profile. This 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 the potential risks and rewards of our decisions to strike 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 to support proactive management of operational risk and
transparency of risk exposures. These reports are provided to senior management 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 at
GRC and the Risk Committee of the Board.
82
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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
Cybersecurity
We have a dedicated team of technology and cybersecurity professionals that manage a
comprehensive program to help protect the organization against breaches and other incidents by
ensuring appropriate security and operational controls are in place. We continue to strengthen our
cyber-control framework and to improve our resilience and cybersecurity capabilities including 24
hour monitoring and alerting of potentially suspicious security events and incidents. Throughout
the year, investments continued to be made on the program and multiple scenarios and
simulations were conducted to test our resiliency strategy.
Data management and
privacy
The use and management of data and the governance over data, are becoming increasingly
important as we continue to invest in digital solutions and innovation, as well as, expanding our
business activities. This is also reflected through recent regulatory developments relating to
privacy, such as the General Data Protection Regulation by the European Union (EU) and the
California Consumer Privacy Act (CCPA). Refer to the Legal and regulatory environment risk
section. The Chief Privacy Office and the Chief Data Officer partner with cross-functional teams to
develop and implement enterprise-wide standards and practices that describe how data (including
personal information) is used, protected, managed and governed.
Money laundering and
Terrorist financing
Third party risk
We maintain an enterprise-wide program designed to deter, detect and report suspected money
laundering and terrorist financing activities across our organization, while ensuring compliance
with the laws and regulations of the various jurisdictions in which we operate. Our Global AML
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. The global anti-money
laundering/anti-terrorist financing program is regularly evaluated to ensure it remains aligned with
industry standards, best practices and all applicable laws, regulations and guidance. Risks of
non-compliance include enforcement actions, criminal prosecutions and reputational damage.
We have a risk-based enterprise-wide program designed to provide oversight for third party
relationships that enables us to respond effectively to events that can cause service disruptions,
financial loss or various other risks that could impact us. Our approach to third party risk
mitigation is outlined in policies and standards that establish the minimum requirements for
identifying and managing risks throughout the engagement with a third party, while ensuring
compliance with global regulatory expectations.
Operational risk capital
We have been approved by OSFI to use the Advanced Measurement Approach (AMA) for operational risk capital measurement
subject to the application of a Standardized Approach (TSA) floor. Currently, 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.
Effective in Q1 2020, OSFI will require banks to use only TSA for operational risk capital calculations as the use of AMA will no
longer be allowed. This change comes in effect pending the implementation of the new Standardized Approach (SA) for
measurement of operational risk capital under the final Basel III reforms. The SA methodology is based on the Business Indicator
Component (BIC), which is 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, SA will replace TSA.
Operational risk loss events
During 2019, we did not experience any material operational risk loss events. For further details on our contingencies, including
litigation, refer to Notes 25 and 26 of our 2019 Annual Consolidated Financial Statements.
Regulatory compliance risk
Regulatory compliance risk is the risk of potential non-conformance with laws, rules, regulations and prescribed practices in any
jurisdiction in which we operate. Issues regarding compliance with laws and regulations can arise in a number of areas in a large
complex financial institution such as 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
83
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 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.
Our Regulatory Compliance Management Framework outlines 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 achieve the expected benefits. 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 group, the GE, 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, third party service providers 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.
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Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 in the other jurisdictions in
which we conduct business. 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 Uncertainty
Trade policy remains a risk to the global economic outlook. Throughout 2019, the International Monetary Fund lowered its 2019
and 2020 global growth projections due to continued geopolitical uncertainty, weaker than anticipated global trade activity and
softening inflation. While Canada, the U.S. and Mexico successfully renegotiated the North American Free Trade Agreement, it
remains uncertain whether the new Canada-United States-Mexico Agreement (CUSMA) will be ratified by the end of calendar
2019. The Canadian economy is vulnerable to continued trade tensions given Canada’s trading relationships with both the U.S.
and China. Tensions remain elevated between China and the U.S. as they continue to negotiate a trade deal. The outcome of the
Brexit negotiations remains uncertain, as the EU granted the U.K. an extension until January 31, 2020 to determine the terms of its
withdrawal from the EU.
Consumer Protection
The Canadian federal government has focused its attention on issues relating to consumer protection and the sales practices of
banks. While the government’s proposed legislative changes to consumer protection provisions applicable to banks were
approved on December 13, 2018, some of the changes have not yet become effective and the government remains in the early
stages of developing a regulatory framework to support the new provisions.
Privacy
In May 2019, the Canadian government released a digital charter with principles for data use and governance, along with
proposed privacy law reforms that include greater individual control over data and stronger regulatory enforcement and
oversight. In addition, in June 2019, the Standing Senate Committee on Banking, Trade and Commerce released its report calling
for urgent legal reform to quickly advance open banking. Although timing is uncertain, significant reform is anticipated that may
impact Canadian and international business processes and privacy risk management practices.
Outside of Canada, unprecedented privacy breach fines and settlements have been issued, demonstrating increasing
regulatory vigilance and enforcement. The CCPA, which becomes effective on January 1, 2020, is currently the most
comprehensive state privacy law in the U.S., and includes numerous new and expanded privacy requirements and obligations for
companies doing business in the state, or collecting California residents’ personal information. The U.S. Regional Head of Privacy
is coordinating activities across our U.S. businesses, and a U.S. Information Governance and Privacy Committee was established
to monitor the implementation of the CCPA and future state privacy laws as well as to oversee privacy issues. Legislative and
regulatory developments are also being closely monitored since the General Data Protection Regulation became law in the EU.
The Office of the Privacy Commissioner of Canada (OPC) continues to call for more modern legislation, including the ability to
audit businesses and fine companies that do not adhere to privacy laws. These actions demonstrate the ongoing trend toward
increased regulatory intervention in the use and safeguarding of personal information, and we are reviewing the potential
implications for our various businesses. Our Global Privacy Program is responsible for ensuring our organization meets these
evolving global principles.
Canadian Anti-Money Laundering (AML) regulations
In July 2019, amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act regulations were
released and will become effective by June 2021. These amendments aim to improve the effectiveness of Canada’s anti-money
laundering and counter-terrorism financing regime, and to improve compliance with international standards. New regulations,
which represent increased oversight and regulatory monitoring, will require substantial changes to our client-facing, transaction
and payment processing, and records management systems mainly due to the need for the capture of additional client data.
Canadian Housing Market and Consumer Debt
The Government of Canada and a number of provincial governments 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.
Interest Rate Benchmark Reform
London Interbank Offered Rate (LIBOR) is the most widely referenced benchmark interest 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 and
certain other benchmark rates to alternative risk-free, or nearly risk-free, rates that are based on actual overnight transactions.
However, some regulators and market participants continue to evaluate other options. In addition to the U.S. and U.K., regulators
and national central banks internationally, including the BoC, have warned the market they will need to be prepared for certain
benchmark rates 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 certain benchmark rates as the reference rate, will be impacted. For further details, refer to
the Critical accounting policies and estimates section.
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; 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
85
United States Tax Reform
The majority of the provisions of the U.S. Tax Cuts and Jobs Act legislation (U.S. Tax Reform), which was passed in December 2017,
took effect at the beginning of calendar 2018 or for fiscal years beginning in 2018. Regulations clarifying certain aspects of the
new law, however, continue to be released. In December 2018, the U.S. Treasury released proposed regulations clarifying some of
the international tax provisions of the law. In December 2019, the U.S. Treasury released final regulations and additional
proposed regulations clarifying many of the rules for calculating a Base Erosion Anti-Abuse Tax (BEAT). We are currently
reviewing the impact of these regulations and are awaiting release of further guidance on other international tax provisions.
United States Regulatory Initiatives
Policymakers continue to evaluate and implement reforms to various U.S. financial regulations, which could result in either
expansion or reduction to the U.S. regulatory requirements and associated changes in compliance costs. For example, the SEC
has enacted Regulation Best Interest that establishes new standards of conduct for broker-dealers that make investment
recommendations to retail customers. Broker-dealers will be required to comply starting in June 2020. Additionally, since August
2019, the financial regulatory agencies responsible for implementing the Volcker Rule have adopted amendments revising the
requirements regarding proprietary trading and compliance programs, which are expected to reduce our related compliance
costs. In October 2019, the Fed and the Federal Deposit Insurance Corporation (FDIC) finalized rules related to resolution plans
for bank holding companies, insured depository institutions, as well as foreign banks and their intermediate holding companies.
Also in October 2019, the Fed, FDIC, and the Office of the Comptroller of the Currency (OCC) finalized rules related to enhanced
prudential standards, regulatory capital, and liquidity requirements for foreign banking organizations operating in the U.S. We
will continue to monitor developments and any resulting implications for us.
U.K. and European Regulatory Reform
In addition to the implications from Brexit, other forthcoming regulatory initiatives include:
(cid:129)
(cid:129)
Transaction reporting of securities financing transactions which is expected to take effect in the second calendar
quarter of 2020, extended from its previous effective date of the first calendar quarter of 2019; and
The EU’s Central Securities Depositary Regulation rules which are intended to increase discipline in the settlement of
securities transactions and is scheduled to take effect in 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. There is
intense competition for clients among financial services companies in the markets in which we operate. 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, as
well as new technological applications, are increasingly offering services traditionally provided by banks. This competition could
also reduce our revenue which could 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. The U.S. economy is vulnerable to trade tensions with China as they continue to negotiate a trade deal. The Canadian
economy is vulnerable to trade tensions with, and between, the U.S. and China, given Canada’s trade relationship with both
nations.
Our earnings are also sensitive to changes in interest rates. While the Bank of Canada left its policy rate unchanged in 2019,
market interest rates have generally declined, due in part to easing by other central banks globally. 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 across many of our businesses while an increase in interest rates would benefit our businesses. However, 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.
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Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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.
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 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 us 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 reputation and our relationship with clients, shareholders,
and regulators.
Our approach to taxation is grounded in principles which are reflected in our Code of Conduct, is governed by our Enterprise
Tax Risk Management Policy, and incorporates the fundamentals of our risk drivers. Oversight of our tax policy and the
management of tax risk is the responsibility of the GE, 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:
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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.
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(cid:129)
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With respect to assessing the needs of our clients, we consider a number of factors including the purpose of the
transactions. 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
87
Tax contribution
In 2019, 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 $4.0 billion (2018 – $5.0 billion). In Canada, total income and
other tax expense for the year ended October 31, 2019 to various levels of government totalled $2.9 billion (2018 – $3.8 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
2019
2018
2019
2018
Business taxes
Insurance premium taxes
Property taxes
Other International
U.S.
Canada
Capital taxes
Payroll taxes
Income taxes
Value added and
sales tax
For further details on income and other tax expense, refer to the Financial performance section.
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 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 Global Asset Management (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 (RBCEL), a wholly owned subsidiary of the bank, 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) Performance 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, and disclosures that consider 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 execution of the management of E&S risks and
opportunities, which include climate change. The Board provides oversight of our strategic approach to climate change and our
E&S risks, which includes how we manage climate-related risks and opportunities. 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.
Our participation in the rapidly evolving sustainable finance and green bond market is an element to the low carbon
transition. We have committed to providing $100 billion in sustainable finance to support our clients in renewable energy, clean
transportation and other socially and environmentally beneficial activities. We issued our inaugural €500 million 5-year green
bond which funds a portfolio of assets primarily in the categories of renewable energy and green buildings. These activities are
aligned with the Green Bond Principles noted above, and the Social Bond Principals, that promote integrity in the social bond
market.
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Management’s Discussion and Analysis
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, our strategy and approach to
managing it is reported on a regular basis to senior management and the Board.
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). We conduct portfolio, client and scenario analyses 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 regularly
review the risks that we face and the actions to mitigate these risks:
Emerging
regulatory and
legal
requirements
Disruptions to
operations
and client
services
(cid:129) Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers
are rapidly evolving. The BoC and European Central Bank Financial Systems Reviews were published in May
2019 and address the financial and economic risks of climate change. While no specific requirements have
been released, we will continue to monitor development.
(cid:129) RBCEL established a Senior Management Function responsible for the financial risk from climate change,
and has developed an initial plan for meeting the Bank of England Prudential Regulation Authority’s
Supervisory Statement SS3/19 and Policy Statement PS11/19.
(cid:129) 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.
(cid:129) 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.
(cid:129) We take steps to mitigate and adapt to climate change through our building design and our purchasing
decisions.
(cid:129) As required, we assess the impact of climate-related events (e.g., floods, hurricanes) on our businesses and
client operations.
(cid:129) 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 lending and
advisory services and responsible investing).
(cid:129) We maintain a diversified lending portfolio, which improves our resilience to geographic or sectoral
downturns and minimizes concentrations of credit exposure.
Products and
services we
provide
(cid:129) Each business segment is responsible for identifying material climate-related risks and opportunities,
which are integrated into risk management processes as necessary. We have conducted climate scenario
analysis on parts of our portfolio to assess the impact of transition and physical risk drivers under different
scenarios, including a 2oC scenario.
(cid:129) Our asset management businesses integrate ESG issues into their investment process when doing so may
have a material impact on investment risk or return.
(cid:129) RBC Insurance® provides policy administration for property and casualty products sold through Aviva
Canada Inc., and is therefore not directly exposed to climate-related risks associated with these products.
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.
Metrics & Targets
We have commitments associated with financing, investments, risk management and 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 Greenhouse Gas (GHG) Protocol. We also receive third-
party limited assurance on our energy and emissions metrics.
Other factors
Other factors that may affect our results include changes in government trade policy, changes in accounting standards and 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 or conduct business, 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
89
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 to provide support for our business segments and clients. We also aim to generate
better returns for our shareholders, while protecting depositors and creditors.
Capital management framework
Our capital management framework establishes policies and processes for defining, measuring, raising and investing all forms of
capital in a coordinated 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 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 testing and ICAAP,
regulatory capital changes and requirements, 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.
Capital impacts of stress scenarios
Enterprise-wide
Stress Testing
Capital impacts of
stress scenarios
Total capital requirements
ICAAP
Capital Plan and
Business
Operating Plan
Capital available and target
capital ratios
Our enterprise-wide stress testing and annual ICAAP processes 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, 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 regulatory
targets. The stress test results of our enterprise-wide stress testing and ICAAP processes 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 ensure that 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’s
regulatory targets 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 Audit and Risk Committees jointly approve the ICAAP process. The Audit Committee is also
responsible for the ongoing review of internal controls over capital management.
Basel III
Our 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, and were fully phased-in to 7.0%, 8.5% and 10.5%, respectively, effective for us in 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 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).
Effective January 1, 2014, OSFI allowed Canadian banks to phase in the Basel III Credit Valuation Adjustment (CVA) risk
capital charge over a five-year period ending December 31, 2018. As of January 1, 2019, the CVA scalars were fully phased-in for
each tier of capital, resulting in all tiers of capital having the same risk-weighted assets value. In fiscal 2018, the CVA scalars were
80%, 83% and 86% for CET1, Tier 1 and Total capital, respectively.
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
90
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 currently use the higher of TSA and the AMA; however, effective in Q1 2020 we will be
required to use the current TSA as the use of the AMA will no longer be allowed. 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 22, 2019, we were re-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%. 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 April 18, 2018, OSFI released its final guideline on Total Loss Absorbing Capacity (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 G-SIBs, but tailored to the Canadian context. The TLAC requirement is 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.
TLAC requirements established two minimum standards, which are required to be met effective November 1, 2021: the risk-
based TLAC ratio, which builds on the risk-based capital ratios described in the CAR guideline, and the TLAC leverage ratio, which
builds on the leverage ratio described in OSFI’s Leverage Requirements guideline. OSFI has provided notification requiring
systemically important banks to maintain a minimum TLAC ratio of 23.5%, which includes the revised DSB effective October 31,
2019 of 2.0% of RWA, as noted below, and a TLAC leverage ratio of 6.75%. We began issuing bail-in eligible debt in the fourth
quarter of 2018 and this has contributed to increasing our TLAC ratio. We expect our TLAC ratio to increase through normal
course refinancing of maturing unsecured term debt.
On June 20, 2018, OSFI announced that all D-SIBs are 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 2.0% of total RWA (1.5% of total RWA in 2018) 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.
Effective November 1, 2018, we were required to adopt OSFI’s revisions to the CAR guidelines relating to the Securitization
framework and the Standardized Approach for measuring counterparty credit risk. Our adoption reflected the permissible
grandfathering and transitioning of certain exposures under these frameworks. On November 1, 2019, the impact of adoption of
IFRS 16, and removal of allowed grandfathering and transitioning treatment for certain securitization and counterparty credit risk
exposures is expected to decrease our CET1 ratio by approximately 25-30bps.
For further details on regulatory developments during the year, 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 current capital and leverage requirements imposed by OSFI:
Basel III – OSFI regulatory targets
Basel III
capital and
leverage ratios
OSFI regulatory target requirements
for large banks under Basel III
Minimum
Capital
Buffers (1)
Minimum
including
Capital
Buffers
D-SIB/G-SIB
Surcharge (2)
Minimum
including
Capital
Buffers and
D-SIB/G-SIB
surcharge (2)
RBC capital
and
leverage
ratios as at
October 31,
2019
Domestic
Stability
Buffer (3)
Table 65
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer
Common Equity Tier 1
Tier 1 capital
Total capital
Leverage ratio
4.5%
6.0%
8.0%
3.0%
2.5%
2.5%
2.5%
n.a.
7.0%
8.5%
10.5%
3.0%
1.0%
1.0%
1.0%
n.a.
8.0%
9.5%
11.5%
3.0%
12.1%
13.2%
15.2%
4.3%
2.0%
2.0%
2.0%
n.a.
10.0%
11.5%
13.5%
3.0%
The capital buffers include the capital conservation buffer and the countercyclical capital buffer as prescribed by OSFI.
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 October 31, 2019, OSFI has further raised the DSB from 1.75% (in Q2 2019) to 2.0% of RWA.
(1)
(2)
(3)
n.a. not applicable.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
91
Regulatory capital, RWA and capital ratios
Under Basel III, regulatory capital consists of CET1, Additional Tier 1 and Tier 2 capital.
CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of
certain items and additional capital components that are subject to threshold deductions.
Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares that meet
certain criteria. Tier 2 capital primarily includes subordinated debentures that meet certain criteria and certain loan loss
allowances. 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 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 66
(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
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
2019
October 31
2018
$ 62,184
67,861
77,888
$ 512,856
512,856
512,856
$ 417,835
28,917
66,104
$ 512,856
12.1%
13.2%
15.2%
4.3%
1,570
$
$
57,001
63,279
72,494
$ 495,528
495,993
496,459
$ 401,534
32,209
62,716
$ 496,459
11.5%
12.8%
14.6%
4.4%
1,451
$
(1)
(2)
Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline based on the Basel III framework. The Leverage ratio is
calculated using OSFI Leverage Requirements Guideline based on the Basel III framework.
In fiscal 2018, amounts included CVA scalars of 80%, 83% and 86%, respectively.
92
Royal Bank of Canada: Annual Report 2019
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)
2019 vs. 2018
Continuity of CET1 ratio (Basel III)
Table 67
As at
October 31
2019
October 31
2018
$ 17,888
55,680
4,248
–
12
(15,644)
$ 62,184
$
4,175
1,500
2
–
$
5,677
$ 67,861
$
6,998
2,509
25
495
–
$ 10,027
$ 77,888
$
$
$
$
$
$
$
$
17,922
50,807
4,823
–
13
(16,564)
57,001
3,825
2,450
3
–
6,278
63,279
6,230
2,509
14
462
–
9,215
72,494
136 bps
11 bps
(42) bps
(21) bps
(12) bps
(9) bps
(1) bps
12.1%
11.5%
October 31,
2018 (1)
Internal
capital
generation (2)
Model
updates
Share
repurchases
Pension and
post-
employment
benefit
obligations
RWA growth
(excluding
regulatory
changes,
model
updates,
and FX)
Regulatory
changes
Other
October 31,
2019 (1)
(1)
(2)
Represents rounded figures.
Internal capital generation of $6.8 billion which represents Net income available to shareholders, less common and preferred shares dividends.
Our CET1 ratio was 12.1%, up 60 bps from last year, mainly reflecting internal capital generation, partially offset by higher RWA,
share repurchases and the impact of lower discount rates in determining our pension and other post-employment benefit
obligations.
Our Tier 1 capital ratio of 13.2% was up 40 bps, reflecting the factors noted above under the CET1 ratio. Tier 1 capital ratio was
also negatively impacted by the net redemption of preferred shares.
Our Total capital ratio of 15.2% was up 60 bps, reflecting the factors noted above under the Tier 1 ratio. Total capital ratio
was also favourably impacted by the net issuance of subordinated debentures.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
93
Our Leverage ratio of 4.3% was down 10 bps, mainly reflecting higher leverage ratio exposures, share repurchases, and the
net redemption of preferred shares, partially offset by internal capital generation. The increase in leverage exposures was
primarily attributable to growth in retail and wholesale lending, repo-style transactions, securities and the impact of regulatory
changes.
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 minimum capital floor requirement must be maintained as prescribed under OSFI’s CAR guidelines.
Effective February 1, 2018, the capital floor requirement was set to 75% of RWA as calculated under current Basel III standardized
credit risk and market risk approaches as defined in the CAR guidelines. If the capital requirement is less than the required
threshold, a floor adjustment to RWA must be applied to the reported RWA as prescribed by OSFI CAR guidelines.
Total capital risk-weighted assets
As at October 31 (Millions of Canadian dollars,
except percentage amounts)
Credit risk
Lending-related and other
Residential mortgages
Other retail
Business
Sovereign
Bank
Total lending-related and other
Trading-related
Repo-style transactions
Derivatives – including CVA – CET1
phase-in adjustment
Total trading-related
Total lending-related and other and
trading-related
Bank book equities
Securitization exposures
Regulatory scaling factor
Other assets
Total credit risk
Market risk
Interest rate
Equity
Foreign exchange
Commodities
Specific risk
Incremental risk charge
Total market risk
Operational risk
2019
Risk-weighted assets
Table 68
2018
Standardized
approach
Advanced
approach
Other
Total
Total
Average
of risk-
weights (2)
8% $
21%
59%
7%
22%
29% $
8,204 $ 15,425 $
6,635
46,474
1,045
1,672
52,808
168,868
8,355
5,976
64,030 $ 251,432 $
– $ 23,629 $ 21,919
–
55,669
–
205,735
–
11,437
–
10,239
– $315,462 $ 304,999
59,443
215,342
9,400
7,648
Exposure (1)
$ 278,628
277,818
364,274
143,261
35,425
$ 1,099,406
$ 909,124
1% $
109 $ 10,238 $
122 $ 10,469 $
8,116
90,896
$ 1,000,020
$ 2,099,426
3,248
64,989
n.a.
20,155
$ 2,187,818
37%
4% $
17% $
141%
12%
n.a.
143%
19% $
1,194
31,173
1,303 $ 28,808 $13,975 $ 44,086 $ 39,289
18,570
33,617
13,853
–
4,962
n.a.
n.a.
65,333 $ 280,240 $13,975 $359,548 $ 344,288
–
4,161
–
9,984
–
16,608
28,821
25,562
70,295 $ 304,744 $42,796 $417,835 $ 400,603
4,583
2,832
17,089
n.a.
4,583
7,794
17,089
28,821
2,155 $
1,082
1,548
237
7,144
–
5,109 $
2,299
208
59
1,741
7,335
– $ 7,264 $
9,497
–
3,865
–
962
–
190
–
8,005
–
9,690
– $ 28,917 $ 32,209
n.a. $ 66,104 $ 62,716
88,031 $ 382,029 $42,796 $512,856 $ 495,528
3,381
1,756
296
8,885
7,335
12,166 $ 16,751 $
5,570 $ 60,534
465
88,031 $ 382,029 $42,796 $512,856 $ 495,993
–
–
–
–
466
88,031 $ 382,029 $42,796 $512,856 $ 496,459
$
$
$
$
$
$
CET1 capital risk-weighted assets (3)
Additional CVA adjustment, prescribed
by OSFI, for Tier 1 capital
Tier 1 capital risk-weighted assets (3)
Additional CVA adjustment, prescribed
by OSFI, for Total capital
Total capital risk-weighted assets (3)
$ 2,187,818
$ 2,187,818
$ 2,187,818
(1)
(2)
(3)
Total exposure represents exposure at default which is the expected gross exposure upon the default of an obligor. This amount is before any allowance against impaired
loans or partial write-offs and does not reflect the impact of credit risk mitigation and collateral held.
Represents the average of counterparty risk weights within a particular category.
In 2018, there were three different levels of RWAs for the calculation of the CET1, Tier 1 and Total capital ratios arising from the option we chose for the phase-in of the
CVA capital charge. As a result, the CVA scalars of 80%, 83% and 86% were applied to CET1, Tier 1 and Total capital ratios, respectively.
n.a. not applicable.
94
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
2019 vs. 2018
During the year, CET1 RWA was up $17 billion, mainly driven by business growth in wholesale and retail lending as well as the
impact of regulatory changes relating to the phase-out of CVA scalars and revisions to the CAR guidelines. These factors were
partially offset by model updates relating to standardized to AIRB portfolio conversion in retail banking, derivatives parameters
enhancement and market risk.
Selected capital management activity
The following table provides our selected capital management activity:
Selected capital management activity
Table 69
(Millions of Canadian dollars, except number of shares)
Tier 1 capital
Common shares activity
Issued in connection with share-based
compensation plans (1)
Purchased for cancellation
Issuance of preferred shares, Series BO (2) (3)
Redemption of preferred shares, Series AD (2)
Redemption of preferred shares, Series AJ (2)
Redemption of preferred shares, Series AK (2)
Redemption of preferred shares, Series AL (2)
Tier 2 capital
Issuance of July 25, 2029 subordinated
debentures (3) (4)
Redemption of July 17, 2024 subordinated
debentures (4)
For the year ended October 31, 2019
Issuance or
redemption date
Number of
shares (000s)
Amount
November 2, 2018
November 24, 2018
February 24, 2019
February 24, 2019
February 24, 2019
1,900 $
(10,251)
14,000
(10,000)
(13,579)
(2,421)
(12,000)
136
(126)
350
(250)
(339)
(61)
(300)
July 25, 2019
July 17, 2019
$ 1,500
(1,000)
(1)
(2)
(3)
(4)
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 21 of our 2019 Annual Consolidated Financial Statements.
Non-Viable Contingent Capital (NVCC) instruments.
For further details, refer to Note 19 of our 2019 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. This
NCIB was completed on February 26, 2019, with 9.7 million common shares repurchased and cancelled at a total cost of
approximately $947 million.
On February 27, 2019, we announced an NCIB to purchase up to 20 million of our common shares, commencing on March 1,
2019 and continuing until February 29, 2020, or such earlier date as we complete the repurchase of all shares permitted under the
bid. Since the inception of this NCIB, the total number of common shares repurchased and cancelled was approximately
6.6 million, at a cost of approximately $682 million.
In 2019, the total number of common shares repurchased and cancelled under our NCIB programs was approximately
10.3 million. The total cost of the shares repurchased was $1,030 million.
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. The price
paid for repurchased shares is at the prevailing market price at the time of acquisition.
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.
On February 24, 2019, we redeemed 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, at a price of $25 per share.
On July 17, 2019, we redeemed all $1,000 million of our outstanding NVCC 3.04% subordinated debentures due on July 17, 2024
for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
On July 25, 2019, we issued $1,500 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of 2.74%
per annum until July 25, 2024, and at the three-month Canadian Dollar Offered Rate (CDOR) plus 0.98% thereafter until their
maturity on July 25, 2029.
On October 18, 2019, we also announced our intention to redeem all $2,000 million of our outstanding 2.99% subordinated
debentures due on December 6, 2024 for 100% of their principal amount plus interest accrued to, but excluding, the redemption
date, on December 6, 2019.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
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 2019, our dividend payout ratio was 46%, which met our dividend payout ratio
target of 40% to 50%. Common share dividends paid during the year were $5.8 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 AC
Non-cumulative Series AD (3)
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 (5), (6)
Non-cumulative Series BB (5), (6)
Non-cumulative Series BD (5), (6)
Non-cumulative Series BF (5), (6)
Non-cumulative Series BH (6)
Non-cumulative Series BI (6)
Non-cumulative Series BJ (6)
Non-cumulative Series BK (5), (6)
Non-cumulative Series BM (5), (6)
Non-cumulative Series BO (5), (6)
Non-cumulative Series C-2 (7)
Preferred shares issued
Treasury shares – preferred shares (8)
Preferred shares outstanding
Dividends
Common
Preferred (9)
2019
2018
Number of
shares (000s)
1,430,678
(582)
Amount
$ 17,645
(58)
1,430,096
$ 17,587
Dividends
declared
per share
$
4.07
Number of
shares (000s)
Amount
1,439,029
(235)
$ 17,635
(18)
1,438,794
$ 17,617
Table 70
Dividends
declared
per share
$
3.77
7,697
2,980
8,171
12,000
12,000
8,000
–
10,000
8,000
10,000
–
–
–
20,000
20,000
24,000
12,000
6,000
6,000
6,000
29,000
30,000
14,000
20
227,020
34
227,054
$
300
300
200
–
250
200
250
–
–
–
500
500
600
300
150
150
150
725
750
350
31
$
1.23
1.11
1.15
–
1.13
1.11
1.13
0.22
0.23
0.27
0.96
0.96
0.90
0.90
1.23
1.23
1.31
1.38
1.38
1.27
US$67.50
$
$
$
5,706
1
5,707
5,840
269
$
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$ 67.50
251,020
114
$ 6,306
3
251,134
$ 6,309
$ 5,442
285
For further details about our capital management activity, refer to Note 21 of our 2019 Annual Consolidated Financial Statements.
Effective February 24, 2010, we have the right to convert these shares into common shares at our option, subject to certain restrictions.
On November 24, 2018, we redeemed all 10 million Non-Cumulative First Preferred Shares Series AD at a price of $25 per share.
(1)
(2)
(3)
(4) On February 24, 2019, we redeemed 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, at a price of $25 per share.
Dividend rate will reset every five years.
NVCC instruments.
Represents 815,400 depositary shares relating to preferred shares Series C-2. Each depositary share represents one-fortieth interest in a share of Series C-2.
Positive amounts represent a short position in treasury shares.
Dividends on preferred shares excludes distributions to non-controlling interests.
(5)
(6)
(7)
(8)
(9)
As at November 29, 2019, the number of outstanding common shares was 1,430,517,057, net of treasury shares held of 206,508, and
the number of stock options and awards was 7,654,702.
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, BB, BD, BF, BH, BI, BJ, BK, BM, BO, and subordinated debentures due on September 29, 2026,
June 4, 2025, January 20, 2026, January 27, 2026 and July 25, 2029, 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
$5.00 and including an estimate for accrued dividends and interest, these NVCC capital instruments would convert into a
maximum of 2,973 million RBC common shares, in aggregate, which would represent a dilution impact of 67.52% based on the
number of RBC common shares outstanding as at October 31, 2019.
96
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Attributed capital
Effective November 1, 2018, our methodology for allocating capital to our business segments is based on the Basel III regulatory
capital requirements, with the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified
economic capital. Risk-based capital attribution provides a uniform base for performance measurement among business
segments, which compares to our overall corporate return objective and facilitates management decisions in resource allocation
in conjunction with other factors.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are
monitored to ensure that the regulator capital framework remains comprehensive and consistent. The models are benchmarked
to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk
management industry professionals.
For additional information on the risks highlighted below, refer to the Risk management section.
RWA (C$ millions) (1)
$417,835
Credit
28,917
Market
Operational
66,104
$512,856
Royal Bank of
Canada
62%
5
10
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other(2)
20
3
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury Services
Capital Markets
RWA (C$ millions) (1)
$157,355
Credit
305
Market
Operational
26,228
$183,888
RWA (C$ millions) (1)
$62,955
Credit
801
Market
Operational
17,665
$81,421
RWA (C$ millions) (1), (3)
$10,026
Credit
–
Market
Operational
–
$10,026
RWA (C$ millions) (1)
$15,844
Credit
6,292
Market
Operational
4,927
$27,063
RWA (C$ millions) (1)
$164,414
Credit
20,807
Market
Operational
16,760
$201,981
68%
0
11
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other(2)
19
2
39%
0
12
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other(2)
49
0
Attributed capital (1)
Based on Economic
Capital:
Credit
Market
Operational
Goodwill
and other
intangibles
Other(2)
10%
20
11
10
49
47%
22
14
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other(2)
15
2
74%
10
7
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other(2)
7
2
(1)
(2)
(3)
RWA amount represents period-end spot balances. Attributed Capital represents average balances.
Other includes (a) non-Insurance segments: equity required to underpin Basel III regulatory capital deductions other than Goodwill and other intangibles and
(b) Insurance segment: equity required to underpin risks associated with business, fixed assets and insurance risks.
Insurance RWA represents our investments in the insurance subsidiaries capitalized at the regulatory prescribed rate as required under OSFI CAR guideline.
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.
(cid:129)
Deduction: certain holdings are deducted from our regulatory capital. These include all unconsolidated “substantial
(cid:129)
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.
(cid:129)
Regulatory capital approach for securitization exposures
Our securitization regulatory capital approach reflects Chapter 7 of OSFI’s CAR guidelines. For our securitization exposures, we
use an internal assessment approach (IAA) for exposures related to our ABCP business, and as per regulatory guidelines for
other securitization exposures we use a combination of approaches including an external ratings-based approach, an internal
ratings based approach and a 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
97
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.
Most of the other securitization exposures (non-ABCP) carry external ratings and we use the 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
Pillar 3 disclosure requirements
In December 2018, the BCBS issued its third and final phase of the Pillar 3 disclosure requirements, Pillar 3 disclosure
requirements – updated framework. This phase incorporates revisions and additions to the Pillar 3 framework arising from the
finalization of the Basel III reforms in December 2017, such as additional disclosure requirements comparing RWA as determined
by banks’ internal models against results based on the standardized approach, and new disclosure requirements on asset
encumbrance and capital distribution constraints. The phase three requirements, together with the phase one and two
disclosure requirements released in January 2015 and March 2017, respectively, complete the Pillar 3 framework. The phase one
requirements were effective for us in the fourth quarter of 2018. At this time, OSFI has not yet released the implementation date
for the BCBS phase two and three disclosure requirements.
Minimum Capital Requirements for Market Risk
On January 19, 2019, the BCBS released its final standards on the Minimum capital requirement for market risk, which replaces an
earlier version published in January 2016. The revisions refined the standardized approach framework, clarified the scope of
exposures subject to market risk capital requirements, revised the assessment process for evaluating the adequacy of internal
risk management models, and revised the requirements for identifying risk factors eligible for internal modelling. The BCBS
expects member jurisdictions to implement these revisions by 2022. We currently expect OSFI to release their draft guidelines for
public consultation in 2020.
Basel III reforms
On July 18, 2019, OSFI revised its capital requirements for operational risk applicable to deposit taking institutions. Currently, we
are required to apply the higher of the current Basel III Standardized Approach (TSA) and the Advanced Measurement Approach
(AMA) for measuring operational risk. Effective Q1 2020, institutions will be required to use the current TSA as the use of AMA will
no longer be allowed. We do not expect an impact to our capital ratios resulting from this change.
Liquidity
Liquidity Adequacy Requirements (LAR) Guidelines
On April 11, 2019, OSFI issued the final LAR guidelines for LCR, Net Cumulative Cash Flow, Net Stable Funding Ratio and liquidity
monitoring tools. This concluded public consultations on guidelines affecting the liquidity reserves banks are required to hold in
order to withstand stress, how banks fund their balance sheets and the monitoring of related metrics. We are well positioned to
comply with the final rules, and changes are not expected to have a material impact on our ability to provide our full range of
retail and wholesale financial services. The revised guideline will be effective January 1, 2020.
Net Stable Funding Ratio Disclosure
On April 11, 2019, OSFI finalized the Net Stable Funding Ratio (NSFR) Disclosure Requirements guideline. In line with the guideline,
we will disclose our consolidated NSFR and its major components in a template prescribed by OSFI on a quarterly basis and it will
complement the information that we already disclose about our LCR position. The new disclosure requirements are effective
January 31, 2021 and we are well positioned to comply with the new requirements.
Other Regulatory Changes
Large Exposure Limits Guideline
On April 10, 2019, OSFI revised its Large Exposure Limits guideline, which is intended to constrain the maximum loss an institution
could face in the event of a sudden failure of a counterparty by limiting exposures to a single counterparty or interconnected
group of companies. The guideline enhances existing policies for managing the risks of large exposures and ensures consistent
and robust practices across all the systemically important banks in Canada. We will be required to implement the new guideline
in the first quarter of 2020 and we are well positioned to stay below the limits.
Interest rate risk management guidelines
On May 30, 2019, OSFI revised its Interest Rate Risk Management guidelines providing more comprehensive guidance on
practices relating to the stress testing scenarios, risk assessment and governance, including standardized interest rate
scenarios. We will be required to implement the new guidelines on January 1, 2020 and we are well positioned to comply with the
new requirements.
98
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 2019 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 instruments, 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, we adopted IFRS 15 Revenue from Contracts with Customers (IFRS 15). As permitted by the transition
provisions of IFRS 15, we elected not to restate comparative period results; accordingly, all comparative information is presented
in accordance with our previous accounting policies, as indicated below. As a result of the adoption of IFRS 15, we reduced our
opening retained earnings by $94 million(1), on an after tax basis as at November 1, 2018 (the date of initial application), to align
with the recognition of certain fees with the transfer of the performance obligations.
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.
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 include 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
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:
(cid:129)
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.
(cid:129)
Performing financial assets
(cid:129)
(1)
Revised from the amount previously presented.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
99
(cid:129)
Impaired financial assets
(cid:129)
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 income 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 2019 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 intangible assets with indefinite lives.
For further details, refer to Notes 2 and 10 of our 2019 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 17 of our 2019 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 2019 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 assets have been transferred. When we retain substantially all
100
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
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 Notes 2 and 6 of
our 2019 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. 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, asset retirement obligations and other items.
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.
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. Key assumptions are reviewed annually and updated in response
to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for
reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and
policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder
benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change.
Refer to Note 15 of our 2019 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 23 of our 2019 Annual Consolidated Financial Statements for
further information.
Future changes in accounting policy and disclosure
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 accounting model that requires the recognition of right-of-use assets and lease liabilities on the
balance sheet for most leases. Lessees will recognize interest expense on the lease liability and depreciation expense on the
right-of-use asset in the statement of income.
IFRS 16 will be effective for us on November 1, 2019. We will adopt IFRS 16 by adjusting our Consolidated Balance Sheet as at
November 1, 2019, the date of initial application, with no restatement of comparative periods. On transition to IFRS 16, we intend
to apply certain practical expedients, including the following:
(cid:129)
(cid:129)
Election to not separate lease and non-lease components, to be applied to our real estate leases;
Election to measure the right-of-use asset as if IFRS 16 had been applied since the commencement date of the lease, to be
applied on a lease-by-lease basis to a select number of properties; and
Exemption from recognition for short-term and low value leases.
(cid:129)
Based on current estimates, the adoption of IFRS 16 as at November 1, 2019 is expected to result in increases to total assets and
total liabilities of approximately $5 billion, primarily representing leases of premises and equipment previously classified as
operating leases, and a reduction to retained earnings of approximately $0.1 billion, net of taxes. The adoption of IFRS 16 is also
expected to decrease our CET1 capital ratio by approximately 14 bps.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
101
Interest Rate Benchmark Reform
In September 2019, the IASB issued amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and
Measurement and IFRS 7 Financial Instruments: Disclosures (Amendments) which modify certain hedge accounting requirements
to provide relief from the potential effect of uncertainty caused by the Interest Rate Benchmark Reform, prior to the transition to
alternative interest rates. The Amendments will be effective for us on November 1, 2020, with earlier adoption permitted.
To manage our transition to alternative interest rates, we have implemented a comprehensive enterprise-wide program and
governance structure that focuses on key areas of impact including contract changes with clients, capital and liquidity planning,
financial reporting and valuation, systems, processes, education and communication. The exact timing of our transition and
assessment of the implications are uncertain as the interest rate replacement process differs across major jurisdictions.
We will continue to monitor regulatory guidance and expect to adjust our implementation accordingly.
ConceptualFrameworkforFinancialReporting(ConceptualFramework)
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 17 InsuranceContracts(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 June 2019, the
IASB issued an exposure draft to amend IFRS 17, including deferral of the effective date by one year. We will continue to monitor
the IASB’s developments. We are currently assessing the impact of adopting this standard and the proposed amendments 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, 2019, 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, 2019.
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.
There were no changes in our internal control over financial reporting during the year ended October 31, 2019 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Related party transactions
In the ordinary course of business, we provide normal banking services and operational services, and enter into other
transactions with associated and other related corporations, including our joint venture entities, on terms similar to those
offered to non-related parties. We grant loans to directors, officers and other employees at rates normally accorded to preferred
clients. In addition, we offer deferred share and other plans to non-employee directors, executives and certain other key
employees. For further information, refer to Notes 12 and 27 of our audited 2019 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 (1)
2019
46,002
$
12,860
11
$
12,871
8.78
$
8.75
$
$
4.07
$1,428,935
$ 886,005
Table 71
2018
2017
$
42,576
$
40,669
12,400
31
11,428
41
$
12,431
$
11,469
8.39
$
8.36
$
$
3.77
$1,334,734
$ 836,197
7.59
$
7.56
$
$
3.48
$1,212,853
$ 789,036
(1)
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
102
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Net interest income on average assets and liabilities
Table 72
(Millions of Canadian dollars, except for percentage amounts) (1)
2019
2018
2017
2019
2018
2017
2019
2018
2017
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 (2)
Canada
Retail
Wholesale
U.S.
Other International
Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets
Total assets
Liabilities and shareholders’ equity
Deposits (3)
Canada
U.S.
Other International (4)
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 (4)
Total liabilities
Equity
Total liabilities and shareholders’ equity
Net interest income and margin
Net interest income and margin (average earning
assets)
Canada
U.S.
Other International (4)
Total
$
10,990 $
25,392
20,463
56,845
10,300 $
27,522
21,587
11,380 $
21,508
17,215
59,409
50,103
231 $
505
(53)
683
198 $
429
(61)
566
146 2.10% 1.92% 1.28%
0.89
192
(0.18)
(31)
1.99
(0.26)
1.56
(0.28)
307
1.20
0.95
0.61
130,647
97,764
228,411
125,153
90,470
215,623
130,816
83,787
214,603
346,173
266,709
205,993
379,853
89,503
469,356
96,492
32,430
598,278
364,473
77,985
442,458
79,695
28,932
551,085
350,155
74,955
425,110
75,967
27,201
528,278
4,573
2,254
6,827
8,960
15,352
4,988
20,340
3,099
1,424
24,863
3,785
1,885
5,670
3,520
1,379
4,899
5,536
3,021
13,533
3,682
17,215
3,008
1,026
11,672
3,534
15,206
2,391
1,080
21,249
18,677
3.50
2.31
2.99
2.59
4.04
5.57
4.33
3.21
4.39
4.16
3.02
2.08
2.63
2.69
1.65
2.28
2.08
1.47
3.71
4.72
3.89
3.77
3.55
3.86
3.33
4.71
3.58
3.15
3.97
3.54
1,229,707
29,430
17,447
159,599
2.69
–
–
–
$1,436,200 $ 1,294,900 $ 1,186,600 $41,333 $ 33,021 $ 26,904 2.88% 2.55% 2.27%
1,092,826
31,695
16,015
154,395
998,977
23,953
14,550
149,114
33,021
–
–
–
26,904
–
–
–
41,333
–
–
–
3.36
–
–
–
3.02
–
–
–
$ 555,467 $
97,563
83,349
513,240 $
98,651
77,414
498,134 $10,420 $ 7,718 $ 5,560 1.88% 1.50% 1.12%
0.81
79,354
0.83
69,532
1,524
1,044
1,313
811
1.56
1.25
1.33
1.05
640
578
736,379
34,799
262,929
9,405
16,496
689,305
647,020
32,642
37,205
184,934
9,131
15,352
128,831
9,460
14,839
12,988
1,995
6,147
365
89
9,842
1,627
3,261
322
17
6,778
1,515
1,396
270
19
1.76
5.73
2.34
3.88
0.54
1.43
4.98
1.76
3.53
0.11
1.05
4.07
1.08
2.85
0.13
21,584
–
–
–
1,060,008
133,702
17,473
143,948
931,364
129,696
16,030
142,122
837,355
122,800
14,549
139,293
1.19
–
–
–
$1,355,131 $ 1,219,212 $ 1,113,997 $21,584 $ 15,069 $ 9,978 1.59% 1.24% 0.90%
n.a.
n.a.
$1,436,200 $ 1,294,900 $ 1,186,600 $21,584 $ 15,069 $ 9,978 1.50% 1.16% 0.84%
$1,436,200 $ 1,294,900 $ 1,186,600 $19,749 $ 17,952 $ 16,926 1.38% 1.39% 1.43%
15,069
–
–
–
9,978
–
–
–
2.04
–
–
–
1.62
–
–
–
81,052
72,607
75,720
n.a.
n.a.
n.a.
n.a.
$ 700,153 $
329,655
199,898
637,214 $
275,895
179,717
$1,229,706 $ 1,092,826 $
595,790 $14,375 $ 13,076 $ 12,104 2.05% 2.05% 2.03%
1.43
243,276
159,912
0.85
998,978 $19,749 $ 17,952 $ 16,926 1.61% 1.64% 1.69%
4,058
1,316
3,469
1,353
3,616
1,260
1.23
0.66
1.31
0.70
(1)
(2)
(3)
(4)
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
Interest income includes loan fees of $672 million (2018 – $621 million; 2017 – $561 million).
Deposits include personal chequing and savings deposits with average balances of $189 billion (2018 – $182 billion; 2017 – $178 billion), interest expense of $1.1 billion (2018
– $0.8 billion; 2017 – $0.5 billion) and average rates of 0.6% (2018 – 0.4%; 2017 – 0.3%). Deposits also include term deposits with average balances of $421 billion (2018 –
$389 billion; 2017 – $353 billion), interest expense of $9.2 billion (2018 – $7.4 billion; 2017 – $5.2 billion) and average rates of 2.19% (2018 – 1.89%; 2017 – 1.48%).
Commencing Q4 2019, the interest component and the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in trading revenue
and deposits, respectively, is presented in net interest income and other liabilities respectively. Comparative amounts have been reclassified to conform with this
presentation.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
103
Change in net interest income
Table 73
(Millions of Canadian dollars) (1)
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 (4)
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
2019 vs. 2018
Increase (decrease)
due to changes in
2018 vs. 2017
Increase (decrease)
due to changes in
Average
volume (2)
Average
rate (2)
Net change
Average
volume (2)
Average
rate (2)
Net change
$
$
$
13
(33)
3
166
152
20
109
5
622
217
$
33
76
8
788
369
$
$
(14)
54
(8)
(152)
110
66
183
(22)
417
396
52
237
(30)
265
506
1,649
1,775
3,424
890
1,625
2,515
571
544
634
124
1,248
762
(543)
274
$
3,823
$ 4,489
$
635
(14)
62
108
1,375
10
1
2,177
1,646
$
$
2,067
225
171
260
1,511
33
71
$ 4,338
$
151
$
$
1,819
1,306
91
398
8,312
2,702
211
233
368
2,886
43
72
6,515
1,797
477
143
117
70
1,384
5
500
(123)
$
1,687
$ 4,431
$
169
156
66
(186)
608
(9)
1
805
882
$
$
1,990
517
167
298
1,257
61
(3)
$ 4,287
$
144
$
$
1,861
148
617
(53)
6,118
2,159
673
233
112
1,865
52
(2)
5,092
1,026
(1)
(2)
(3)
(4)
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.
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest
income. Comparative amounts have been reclassified to conform with this presentation.
Loans and acceptances by geography
Table 74
As at October 31 (Millions of Canadian dollars)
2019
2018
2017
2016
2015
Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale (1)
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
$ 287,767 $ 265,831
82,112
18,793
4,866
81,547
19,617
5,434
394,365
142,334
371,602
118,627
$ 536,699 $ 490,229
$ 255,799
82,022
17,491
4,493
$ 241,800
82,205
16,601
3,878
$ 229,987
84,637
15,516
4,003
359,805
99,158
344,484
86,130
334,143
80,284
$ 458,963
$ 430,614
$ 414,427
24,850
53,784
78,634
6,871
17,838
21,033
59,476
80,509
6,817
17,837
24,709
24,654
$ 640,042 $ 595,392
(2,933)
$ 636,918 $ 592,459
(3,124)
18,100
55,037
73,137
7,265
21,870
29,135
17,134
59,349
76,483
7,852
21,733
29,585
5,484
34,702
40,186
8,556
24,536
33,092
$ 561,235
$ 536,682
$ 487,705
(2,159)
(2,235)
(2,029)
$ 559,076
$ 534,447
$ 485,676
(1)
In 2015, we reclassified $4 billion from Investment securities (Available-for-sale securities under IAS 39) to Loans.
104
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Loans and acceptances by portfolio and sector (1)
Table 75
As at October 31 (Millions of Canadian dollars)
Residential mortgages
Personal
Credit cards
Small business
Retail
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil & gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining & metals
Public works & infrastructure
Real estate & related
Other services
Telecommunication & media
Transportation
Utilities
Other sectors
2019
$ 308,091
92,250
20,311
5,434
$ 426,086
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
$ 399,452
$ 385,170
$ 369,470
$ 348,183
9,369
9,788
2,005
16,741
5,290
8,145
24,961
6,368
1,486
4,252
7,388
4,606
14,657
1,179
1,717
54,032
21,373
4,757
5,426
8,826
1,590
8,325
8,761
1,826
15,453
4,497
6,061
21,350
5,569
1,101
4,103
7,607
4,635
8,987
1,301
1,853
49,889
18,467
7,018
5,347
8,239
5,551
7,397
8,319
1,163
14,428
4,581
5,599
15,448
4,475
913
9,624
5,674
4,086
8,867
1,114
1,586
44,759
16,492
4,867
5,223
6,870
4,580
6,538
7,293
1,536
13,543
5,024
5,346
10,139
7,255
1,100
8,538
5,722
5,235
7,221
1,456
1,626
38,164
17,092
5,765
5,110
8,752
4,757
6,068
6,625
1,911
8,195
3,111
6,763
7,965
8,485
1,171
7,631
4,958
2,017
7,040
1,518
1,635
32,057
12,769
4,590
5,044
6,209
3,760
Wholesale
Total loans and acceptances
Total allowance for credit losses
$ 213,956
$ 640,042
(3,124)
$ 195,940
$ 176,065
$ 167,212
$ 139,522
$ 595,392
$ 561,235
$ 536,682
$ 487,705
(2,933)
(2,159)
(2,235)
(2,029)
Total loans and acceptances, net of allowance for
credit losses
$ 636,918
$ 592,459
$ 559,076
$ 534,447
$ 485,676
(1)
Sectors have been revised from those previously presented to align with our view of credit risk by industry.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2019
105
Gross impaired loans by portfolio and geography (1)
Table 76
As at October 31 (Millions of Canadian dollars, except for percentage amounts)
Residential mortgages
Personal
Small business
Retail
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil & gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining & metals
Public works & infrastructure
Real estate & related
Other services
Telecommunication & media
Transportation
Utilities
Other sectors
Wholesale
Acquired credit-impaired loans
Total GIL (2) (3)
Canada
Residential mortgages
Personal
Small business
Retail
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil & gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining & metals
Public works & infrastructure
Real estate & related
Other services
Telecommunication & media
Transportation
Utilities
Other sectors
Wholesale
Total
U.S.
Retail
Wholesale
Total
Other International
Retail
Wholesale
Total
Total GIL (2) (3)
Allowance on impaired loans (4)
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 (4)
$
2019
732
306
57
1,095
$
37
28
10
171
51
509
81
–
35
5
92
16
7
1
12
408
134
12
13
211
35
1,868
13
$ 2,976
$
481
250
57
788
36
18
10
71
24
97
–
–
9
5
48
4
2
1
10
195
65
11
13
59
–
678
$ 1,466
$
$
36
869
905
$
272
333
$
605
$ 2,976
(832)
$ 2,144
0.24%
0.33%
1.05%
0.26%
0.88%
0.46%
27.96%
$
2018
725
302
44
1,071
$
29
7
18
138
23
230
80
–
9
15
42
2
8
2
3
290
73
8
58
8
48
1,091
21
$ 2,183
$
431
248
44
723
29
5
18
62
10
38
1
–
9
11
31
1
–
2
3
134
24
7
11
–
–
396
$ 1,119
$
$
23
401
424
$
2017
634
276
38
948
$
28
29
26
77
55
318
113
–
7
8
34
70
25
3
4
340
158
12
7
10
48
1,372
256
$ 2,576
$
$
$
$
323
198
38
559
22
4
26
54
10
16
3
–
7
2
25
2
1
3
4
182
47
10
7
1
–
426
985
59
736
795
$
2016
709
304
46
1,059
$
37
43
2
181
36
1,263
114
–
21
2
43
66
70
15
16
225
97
27
31
79
58
2,426
418
$ 3,903
$
368
228
46
642
27
9
–
105
14
56
–
–
21
2
40
4
3
12
16
105
58
24
10
16
–
522
$ 1,164
$
56
1,736
$ 1,792
$
2015
646
299
45
990
$
41
11
2
130
41
154
110
–
28
2
45
6
183
17
24
274
54
28
38
57
50
1,295
–
$ 2,285
$
356
223
45
624
39
8
–
76
15
38
–
–
5
1
39
6
2
7
24
137
52
28
15
20
–
512
$ 1,136
$
$
10
204
214
$
327
313
$
640
$ 2,183
(700)
$ 1,483
$
345
451
$
796
$ 2,576
(737)
$ 1,839
$
380
567
$
947
$ 3,903
(809)
$ 3,094
$
356
579
$
935
$ 2,285
(654)
$ 1,631
0.26%
0.33%
0.90%
0.27%
0.57%
0.37%
32.08%
0.23%
0.30%
0.85%
0.25%
0.92%
0.46%
28.61%
0.28%
0.33%
1.19%
0.29%
1.69%
0.73%
20.72%
0.28%
0.32%
1.13%
0.28%
0.93%
0.47%
28.64%
(1)
(2)
(3)
(4)
106
Sectors have been revised from those previously presented to align with our view of credit risk by industry.
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. Past due loans greater than 90 days not included in impaired loans were $189 million in 2019 (2018 – $179 million; 2017 – $307 million; 2016 – $337 million; 2015 – $314
million). For further details, refer to Note 5 of our 2019 Annual Consolidated Financial Statements.
Effective November 1, 2017, GIL excludes $229 million of acquired credit impaired 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 2019
Management’s Discussion and Analysis
Provision for credit losses by portfolio and geography (1)
(Millions of Canadian dollars, except for percentage amounts)
Residential mortgages
Personal
Credit cards
Small business
Retail
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil & gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining & metals
Public works & infrastructure
Real estate & related
Other services
Telecommunication & media
Transportation
Utilities
Other sectors
Wholesale
Acquired credit-impaired loans
Total PCL on impaired loans (2)
Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil & gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining & metals
Public works & infrastructure
Real estate & related
Other services
Telecommunication & media
Transportation
Utilities
Other sectors
Wholesale
Total (2)
U.S.
Retail
Wholesale
Other International
Retail
Wholesale
Total PCL on impaired loans (2)
Total PCL on performing loans (3)
Total PCL on other financial assets
Total PCL
PCL on loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances (2)
$
2019
51
487
518
36
1,092
$
8
10
–
61
33
98
–
–
9
6
104
30
–
–
57
57
35
7
9
70
5
599
–
$ 1,691
$
32
488
505
36
1,061
8
4
–
24
14
34
–
–
5
4
27
28
–
–
45
53
29
5
9
2
1
292
$ 1,353
$
$
12
223
235
$
19
84
$
103
$ 1,691
200
(27)
$ 1,864
0.31%
0.27%
$
2018
51
462
468
30
1,011
$
1
5
(1)
81
1
1
–
–
3
4
8
(21)
3
–
2
13
22
–
32
1
(8)
147
2
$ 1,160
$
2017
56
409
435
32
932
$
4
14
3
12
6
(28)
(18)
–
3
1
11
4
–
(4)
1
120
20
8
1
5
53
216
2
$ 1,150
Table 77
$
2015
47
388
378
32
845
$
8
2
(1)
43
8
47
47
–
5
1
(1)
1
19
7
3
28
17
4
5
9
–
252
–
$ 1,097
$
2016
77
458
442
34
1,011
$
10
13
(3)
20
10
320
1
–
3
–
10
7
1
6
3
34
(1)
1
(6)
16
30
475
10
$ 1,496
$
$
44
458
456
30
988
$
$
42
459
435
34
970
33
413
426
32
904
2
1
3
20
3
(17)
–
–
3
1
8
1
–
1
1
43
15
9
2
–
(1)
95
999
3
117
120
$
$
$
$
25
6
$
31
$ 1,150
–
10
3
–
27
5
99
–
–
4
1
8
2
1
5
3
23
18
1
3
–
–
213
$ 1,183
$
$
1
227
228
$
41
44
$
85
$ 1,496
50
27
393
371
32
823
8
2
–
29
6
22
–
–
1
1
2
2
–
2
3
12
18
4
3
1
–
116
939
1
40
41
$
$
$
$
21
96
$
117
$ 1,097
–
$ 1,150
0.21%
0.21%
$ 1,546
0.29%
0.28%
$ 1,097
0.24%
0.24%
1
1
(1)
28
2
4
–
–
3
1
6
1
–
–
1
14
17
–
2
–
–
80
$ 1,068
$
$
4
64
68
$
19
5
$
24
$ 1,160
123
24
$ 1,307
0.23%
0.20%
(1)
(2)
(3)
Sectors have been revised from those previously presented to align with our view of credit risk by industry.
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 2019
107
Allowance on loans by portfolio and geography (1) (2)
Table 78
(Millions of Canadian dollars, except percentage amounts)
Allowance on loans at beginning of year
Provision for credit losses (2)
Write-offs by portfolio
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
Total write-offs by portfolio
Recoveries by portfolio
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
Total recoveries by portfolio
Net write-offs
Exchange rate and other
Total allowance on loans at end of year
Allowance against impaired loans (3)
Canada
Residential mortgages
Personal
Small business
Retail
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil & gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining & metals
Public works & infrastructure
Real estate & related
Other services
Telecommunication & media
Transportation
Utilities
Other sectors
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
2019
$ 3,088
1,891
2018
$ 2,976
1,283
2017
$ 2,326
1,150
2016
$ 2,120
1,546
2015
$ 2,085
1,097
(45)
(600)
(655)
(36)
$ (1,336)
$
(440)
$ (1,776)
$
$
$
$
8
126
137
8
279
43
322
(51)
(552)
(599)
(35)
(53)
(543)
(565)
(38)
(42)
(556)
(564)
(40)
(64)
(494)
(497)
(40)
$ (1,237)
$ (1,199)
$ (1,202)
$ (1,095)
$
(207)
$
(226)
$
(321)
$
(243)
$ (1,444)
$ (1,425)
$ (1,523)
$ (1,338)
$
$
$
$
8
121
131
7
267
65
332
$
$
$
$
8
116
131
9
264
66
330
$
$
$
$
5
111
122
10
248
38
286
$
$
$
$
7
105
119
10
241
34
275
$ (1,454)
(106)
$ 3,419
$ (1,112)
(59)
$ (1,095)
(131)
$ (1,237)
(103)
$ (1,063)
1
$ 3,088
$ 2,250
$ 2,326
$ 2,120
$
$
$
$
$
$
$
$
$
$
$
50
115
22
187
6
3
–
11
2
29
–
–
7
5
11
3
2
1
1
35
34
11
10
1
–
172
359
1
141
142
156
175
331
832
223
792
832
39
$
$
$
$
$
$
$
$
$
$
$
43
107
18
168
4
4
1
22
3
4
–
–
3
1
8
–
–
–
1
28
7
3
3
–
–
92
260
1
164
165
166
109
275
700
206
754
760
33
$ 1,886
$
701
$ 1,753
$
635
$
$
$
$
$
$
$
$
$
$
$
$
$
$
31
91
19
141
5
4
2
18
2
4
1
–
3
1
9
1
–
3
1
47
17
4
2
–
–
124
265
1
150
151
168
153
321
737
128
391
379
37
935
487
91
$
$
$
$
$
$
$
$
$
$
$
$
$
$
35
105
20
160
6
4
–
20
4
7
–
–
5
1
10
1
1
3
2
29
19
4
3
–
–
119
279
2
177
179
180
171
351
809
96
385
386
45
912
514
91
$
$
$
$
$
$
$
$
$
$
$
$
$
$
27
96
19
142
5
4
–
20
3
1
–
–
3
–
13
2
–
1
2
35
13
6
2
1
–
111
253
1
47
48
169
184
353
654
83
396
386
45
910
465
91
$ 2,587
$ 3,419
0.53%
0.24%
$ 2,388
$ 1,513
$ 1,517
$ 1,466
$ 3,088
$ 2,250
$ 2,326
$ 2,120
0.52%
0.20%
0.40%
0.20%
0.43%
0.23%
0.43%
0.23%
(1)
(2)
(3)
(4)
Sectors have been revised from those previously presented to align with our view of credit risk by industry.
Includes loans, acceptances, and commitments.
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.
108
Royal Bank of Canada: Annual Report 2019
Management’s Discussion and Analysis
Credit quality information by Canadian province
Table 79
(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)
2019
2018
2017
2016
2015
$
27,008
62,734
257,009
71,165
33,278
85,505
$ 536,699
$ 25,305
58,067
225,606
69,497
32,101
79,653
$ 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
$ 490,229
$ 458,963
$ 430,614
$ 414,427
$
$
$
94
250
290
448
215
169
1,466
73
104
844
175
85
72
$
$
$
$
$
$
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
Total PCL on impaired loans in Canada
$
1,353
$
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 2019
109
EDTF recommendations index
We aim to present transparent, high-quality risk disclosures by providing disclosures in our 2019 Annual Report and
Supplementary Financial Information package (SFI), and Pillar 3 Report, in accordance with recommendations from the FSB’s
Enhanced Disclosure Task Force (EDTF). Information within the SFI and Pillar 3 Report is not and should not be considered
incorporated by reference into our 2019 Annual Report.
The following index summarizes our disclosure by EDTF recommendation:
Type of Risk
Recommendation Disclosure
Annual Report page
SFI page
Location of disclosure
General
Risk governance,
risk management
and business
model
Capital adequacy
and risk-weighted
assets (RWA)
Liquidity
Funding
Market risk
Credit risk
Other
1
2
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
Table of contents for EDTF risk disclosure
Define risk terminology and measures
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
110
49-54, 213-214
47-48
90-94
49-54
50-54
97
51-52, 66
90-94
–
–
90-94
–
55-58
–
–
51, 55
72-74,
78-79
74, 77
79-80
74-76
70-71
66-69
66
66-69
1
–
–
–
–
–
–
–
–
20-23
24
–
25
*
*
25
37
–
–
–
–
–
–
–
–
54-65, 156-163
104-109
26-37,*
*
56-58, 99-100, 129-132
–
–
28,33
59
57-58
82-89
85-86, 201-202
39
36
–
–
*
110
These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report as at October 31, 2019 and October 31, 2018.
Royal Bank of Canada: Annual Report 2019
Index for Enhanced Disclosure Task Force recommendations
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
Reports
Notes to Consolidated Financial Statements
112 Management’s Responsibility for Financial Reporting
112 Management’s Report on Internal Control over
113
117
Financial Reporting
Independent Auditor’s Report
Report of Independent Registered Public Accounting
Firm
Consolidated Financial Statements
120
Consolidated Balance Sheets
121
122
123
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
124 Consolidated Statements of Cash Flows
125
125
139
153
156
163
164
168
177
178
180
181
181
182
182
185
185
190
190
191
191
194
196
198
199
201
203
204
205
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
Significant dispositions
Note 12
Joint ventures and associated companies
Note 13 Other assets
Note 14 Deposits
Note 15
Insurance
Note 16
Segregated funds
Note 17
Employee benefits – Pension and other
post-employment benefits
Note 18 Other liabilities
Note 19
Subordinated debentures
Note 20
Trust capital securities
Note 21
Equity
Note 22
Share-based compensation
Note 23
Income taxes
Note 24 Earnings per share
Note 25 Guarantees, commitments, pledged
assets and contingencies
Note 26
Legal and regulatory matters
Note 27 Related party transactions
Note 28 Results by business segment
Note 29 Nature and extent of risks arising from
financial instruments
Note 30 Capital management
Note 31 Offsetting financial assets and financial
liabilities
209
Note 32 Recovery and settlement of on-balance
sheet assets and liabilities
210
Note 33
Parent company information
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
111
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
in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting
Oversight Board as stated in their Independent Auditor’s Report and Report of Independent Registered Public Accounting Firm,
respectively. 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, December 3, 2019
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:
(cid:129) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions related to and
dispositions of our assets;
(cid:129) 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
(cid:129) 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, 2019, 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, 2019, 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, 2019, has been audited by
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, as stated in their Report of Independent
Registered Public Accounting Firm, which appears herein.
David I. McKay
President and Chief Executive Officer
Rod Bolger
Chief Financial Officer
Toronto, December 3, 2019
112
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Independent Auditor’s Report
To the Shareholders and Board of Directors of Royal Bank of Canada
Ouropinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position
of Royal Bank of Canada and its subsidiaries (together, the Bank) as at October 31, 2019 and 2018, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS).
What we have audited
The Bank’s consolidated financial statements comprise:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
the consolidated balance sheets as at October 31, 2019 and 2018;
the consolidated statements of income for the years then ended;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Certain required disclosures have been presented elsewhere in the Management’s Discussion and Analysis, rather than in the
notes to the consolidated financial statements. These disclosures are cross-referenced from the consolidated financial
statements and are identified as audited.
Basisforopinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of
our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Bank in accordance with the ethical requirements that are relevant to our audit of the consolidated
financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.
Keyauditmatters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated
financial statements for the year ended October 31, 2019. These matters were addressed in the context of our audit of the
consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
Key audit matters
ValuationoftheAllowanceforCreditLosses(ACL)
Refer to Note 2, Summary of significant accounting policies,
estimates and judgments, Note 4, Securities and Note 5, Loans
and allowance for credit losses
The Bank’s ACL for financial assets was $3,440 million as at
October 31, 2019, and represents management’s estimate of
expected credit losses on financial assets as at the balance
sheet date. Performing financial assets are categorized as
Stage 1 from initial recognition to the date on which the asset
has experienced a significant increase in credit risk relative to
its initial recognition. Performing financial assets transfer into
Stage 2 following a significant increase in credit risk relative to
the initial recognition. Impaired financial assets are
categorized as Stage 3 when the asset is considered to be
credit-impaired. As disclosed by management, the
measurement of expected credit losses is a complex
calculation that involves a large number of interrelated inputs
and assumptions such as the financial asset’s probability of
default, loss given default, and exposure at default discounted
at the reporting date.
Management’s estimation of expected credit losses in Stage 1
and Stage 2 considers five distinct future macroeconomic
scenarios, each of which includes forward-looking information
designed to capture a wide range of possible outcomes and are
weighted according to management’s expectation of the
relative likelihood of the range of outcomes that each scenario
represents at the reporting date. Management’s scenarios
include a base case, upside and downside scenarios which are
set by adjusting the base projections to construct reasonably
How our audit addressed the key audit matters
Our approach to addressing the matter involved the following
procedures, amongst others:
(cid:129) testing the effectiveness of controls relating to the
valuation of the ACL, including controls over the design of
multiple future macroeconomic scenarios, the
determination and application of the weightings for these
scenarios, and the completeness and accuracy of the data
inputs underlying the ACL calculation;
(cid:129) testing management’s process for determining the Stage 1
and Stage 2 ACL, including evaluating the appropriateness
of the models used to determine the Stage 1 and Stage 2
ACL, testing the completeness, accuracy, and relevance of
underlying data used in the model, and evaluating the
reasonableness of significant assumptions related to the
determination of significant increases in credit risk relative
to the initial recognition of the financial asset, the
determination of the future macroeconomic scenarios and
the weights assigned thereto;
(cid:129) testing the appropriateness of the complex expected credit
loss calculation and its interrelated inputs and assumptions
with the assistance of professionals with specialized skill
and knowledge; and
(cid:129) evaluating management’s assumptions related to the
determination of macroeconomic scenarios which involved
evaluating the identification of material portfolios of
financial assets that have exhibited a non-linear nature of
potential credit losses, and evaluating the reasonableness
of potential credit losses under the five future
macroeconomic scenarios considering the Bank’s historical
loss experience.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
113
How our audit addressed the key audit matters
Our approach to addressing the matter involved the following
procedures, amongst others:
(cid:129) testing the effectiveness of controls relating to
management’s goodwill impairment test, including controls
over the determination of the recoverable amount of the
CGU;
(cid:129) testing management’s process for determining the
recoverable amount of the CGU, evaluating the
appropriateness of the discounted cash flow model, and
testing the completeness, accuracy, and relevance of
underlying data used in the model;
(cid:129) evaluating the significant assumptions used by
management, including the discount rates, terminal growth
rates, and future cash flows and adjustments made thereto
to approximate the considerations of a prospective third-
party buyer;
(cid:129) evaluating management’s discounted cash flow model and
certain significant assumptions, including the discount
rates and terminal growth rates with the assistance of
professionals with specialized skill and knowledge; and
(cid:129) evaluating management’s assumptions related to terminal
growth rates and future cash flows which involved
evaluating whether the assumptions used by management
were reasonable considering (i) the current and past
performance of the CGU; (ii) the consistency with external
market data and industry data; and (iii) whether these
assumptions were consistent with evidence obtained in
other areas of the audit.
Key audit matters (continued)
possible scenarios that are more optimistic and pessimistic,
respectively, than the base case. Two additional downside
scenarios are designed for the real estate and energy sectors
to capture the non-linear nature of potential credit losses
across the Bank’s portfolios of financial assets.
We determined that the valuation of the ACL is a matter of
most significance to the audit of the current year consolidated
financial statements due to:
(cid:129) significant judgment required by management when
designing the future macroeconomic scenarios and
assigning weights to each scenario to determine the Stage 1
and Stage 2 ACL. This in turn led to a high degree of auditor
subjectivity in performing audit procedures relating to these
scenarios;
(cid:129) significant auditor judgment and significant audit effort
necessary to evaluate audit evidence as the measurement of
expected credit losses is a complex calculation that involves
a large volume of data, interrelated inputs and assumptions;
and
(cid:129) the audit effort included the use of professionals with
specialized skill and knowledge to assist in evaluating the
audit evidence obtained.
GoodwillImpairmentAssessmentoftheCaribbeanBanking
CashGeneratingUnit(CGU)
Refer to Note 2, Summary of significant accounting policies,
estimates and judgments, and Note 10, Goodwill and other
intangible assets
The goodwill allocated to the Caribbean Banking CGU was
$1,727 million. Management conducts an impairment test as of
August 1 of each year by comparing the carrying value of each
CGU to its recoverable amount.
For the Caribbean Banking CGU, management calculated the
recoverable amount as the fair value less costs of disposal
using a discounted cash flow model that projects future cash
flows based on management forecasts, adjusted to
approximate the considerations of a prospective third-party
buyer, over a 5-year period. Cash flows beyond the initial
5-year period are assumed by management to increase at a
constant rate using a nominal long-term growth rate. As
disclosed by management, the Caribbean continued to
experience challenges in various regions resulting in weak to
moderate economic growth during the year. As at August 1,
2019, the recoverable amount of the Caribbean Banking CGU,
based on management’s estimated fair value less costs of
disposal, was 126% of its carrying amount. As management has
disclosed, the determination of fair value using a discounted
cash flow model requires the use of significant judgment to
determine the inputs and the model is most sensitive to
changes in future cash flows, discount rates, and terminal
growth rates applied to cash flows beyond the forecast period.
If the post-tax discount rate was increased by 1.8%, holding
other individual factors constant, the recoverable amount
would approximate the carrying amount.
We determined that the goodwill impairment assessment of
the Caribbean Banking CGU is a matter of most significance to
the audit of the current year consolidated financial statements
due to:
(cid:129) significant judgment required by management when
determining the fair value of the CGU including future cash
flows and adjustments made thereto to approximate the
considerations of a prospective third-party buyer, discount
rates and terminal growth rates. This in turn led to a high
degree of auditor judgment and subjectivity in performing
procedures over management’s calculation of the
recoverable amount of the CGU, and evaluating audit
evidence; and
(cid:129) the audit effort included the use of professionals with
specialized skill and knowledge to assist in performing these
procedures and evaluating the audit evidence obtained.
114
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
How our audit addressed the key audit matters
Our approach to addressing the matter involved the following
procedures, amongst others:
(cid:129) testing the effectiveness of controls relating to the
evaluation of uncertain tax positions;
(cid:129) testing management’s process used in estimating the
amount of future cash flows relating to uncertain tax
positions;
(cid:129) evaluating the appropriateness of the methods used;
(cid:129) testing the completeness, accuracy, and relevance of
underlying data used;
(cid:129) evaluating the reasonableness of significant assumptions
used by management for estimating the results of tax
positions that are under audit or appeal by relevant
taxation authorities; and
(cid:129) professionals with specialized skill and knowledge were
used to assist in assessing the significant assumptions,
including the application of relevant tax laws and whether it
is probable that the relevant tax authorities will accept the
tax positions and evidence used by management in
determining and projecting the amount of future cash flows.
Key audit matters (continued)
UncertainTaxPositions
Refer to Note 2, Summary of significant accounting policies,
estimates and judgments, and Note 23, Income taxes
The Bank is subject to income tax laws in various jurisdictions
where it operates and the complex tax laws are potentially
subject to different interpretations by management and
relevant taxation authorities. In some cases, the Bank has
received reassessments denying the tax deductibility of
dividends from transactions including those with Tax
Indifferent Investors. As disclosed by management, significant
judgment is required in the interpretation of the relevant tax
laws, and the determination of the Bank’s tax provision, which
includes management’s best estimate of tax positions that are
under audit or appeal by relevant taxation authorities. The
forward-looking nature of these estimates requires
management to use a significant amount of judgment in
projecting the timing and amount of future cash flows. As
management has further disclosed, management records
provisions related to uncertain tax positions on the basis of all
available information at the end of the reporting period to
reflect current expectations.
We determined that uncertain tax positions are a matter of
most significance to the audit of the current year consolidated
financial statements due to:
(cid:129) significant judgment required by management, including a
high degree of estimation uncertainty, when interpreting the
relevant tax laws and projecting the amount of future cash
flows relating to uncertain tax positions. This in turn led to a
high degree of auditor judgment and subjectivity in
performing procedures to evaluate the uncertain tax
positions; and
(cid:129) the audit effort included the use of professionals with
specialized skill and knowledge to assist in evaluating the
audit evidence obtained.
Otherinformation
Management is responsible for the other information. The other information comprises the Management’s Discussion and
Analysis and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the
annual report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard.
Responsibilitiesofmanagementandthosechargedwithgovernancefortheconsolidatedfinancialstatements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance
with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Bank’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
Auditor’sresponsibilitiesfortheauditoftheconsolidatedfinancialstatements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
115
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
(cid:129)
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and
appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on
the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the underlying transactions and events in a manner that
achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within
the Bank to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision
and performance of the group audit. We remain solely responsible for our audit opinion.
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters.
We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when,
in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse
consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 3, 2019
116
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Royal Bank of Canada
OpinionsontheFinancialStatementsandInternalControloverFinancialReporting
We have audited the accompanying consolidated balance sheets of Royal Bank of Canada and its subsidiaries (together, the
Bank) as of October 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in
equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial
statements). We also have audited the Bank’s internal control over financial reporting as of October 31, 2019, 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, 2019 and 2018, and its financial performance and its cash flows for the years then ended in
conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).
Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
BasisforOpinions
The Bank’s management is responsible for these consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express 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 U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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.
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. Our audits also included evaluating the accounting principles used and 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.
DefinitionandLimitationsofInternalControloverFinancialReporting
An entity’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. An entity’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 entity; (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
entity are being made only in accordance with authorizations of management and directors of the entity; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’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.
CriticalAuditMatters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of the Allowance for Credit Losses (ACL)
As described in Notes 2, 4 and 5 to the consolidated financial statements, the Bank’s ACL for financial assets was $3,440 million
as at October 31, 2019, and represents management’s estimate of expected credit losses on financial assets as at the balance
sheet date. Performing financial assets are categorized as Stage 1 from initial recognition to the date on which the asset has
experienced a significant increase in credit risk relative to its initial recognition. Performing financial assets transfer into Stage 2
following a significant increase in credit risk relative to the initial recognition. Impaired financial assets are categorized as Stage
3 when the asset is considered to be credit-impaired. As disclosed by management, the measurement of expected credit losses is
a complex calculation that involves a large number of interrelated inputs and assumptions such as the financial asset’s
probability of default, loss given default, and exposure at default discounted at the reporting date. Management’s estimation of
expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios, each of which includes
forward-looking information designed to capture a wide range of possible outcomes and are weighted according to
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
117
management’s expectation of the relative likelihood of the range of outcomes that each scenario represents at the reporting
date. Management’s scenarios include a base case, upside and downside scenarios which are set by adjusting the base
projections to construct reasonably possible scenarios that are more optimistic and pessimistic, respectively, than the base
case. Two additional downside scenarios were designed for the real estate and energy sectors to capture the non-linear nature of
potential credit losses across the Bank’s portfolios of financial assets.
The principal consideration for our determination that performing procedures relating to the valuation of the ACL is a critical
audit matter is that there was significant judgment required by management when designing the future macroeconomic
scenarios and assigning weights to each scenario to determine the Stage 1 and Stage 2 ACL. This in turn led to a high degree of
auditor subjectivity in performing audit procedures relating to these scenarios. In addition, significant auditor judgment and
significant audit effort was necessary to evaluate audit evidence as the measurement of expected credit losses is a complex
calculation that involves a large volume of data, interrelated inputs and assumptions. The audit effort also included the use of
professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
valuation of the ACL, including controls over the design of multiple future macroeconomic scenarios, the determination and
application of the weightings for these scenarios, and the completeness and accuracy of the data inputs underlying the ACL
calculation. These procedures also included, among others, testing management’s process for determining the Stage 1 and Stage
2 ACL, including evaluating the appropriateness of the models used to determine the Stage 1 and Stage 2 ACL, testing the
completeness, accuracy, and relevance of underlying data used in the model, and evaluating the reasonableness of significant
assumptions related to the determination of significant increases in credit risk relative to the initial recognition of the financial
asset, the determination of the future macroeconomic scenarios and the weights assigned thereto. Professionals with
specialized skill and knowledge were used to assist in testing the appropriateness of the complex expected credit loss
calculation and its interrelated inputs and assumptions. Evaluating management’s assumptions related to the determination of
macroeconomic scenarios involved evaluating the identification of material portfolios of financial assets that have exhibited a
non-linear nature of potential credit losses, and evaluating the reasonableness of potential credit losses under the five future
macroeconomic scenarios considering the Bank’s historical loss experience.
Goodwill Impairment Assessment of the Caribbean Banking Cash Generating Unit (CGU)
As described in Notes 2 and 10 to the consolidated financial statements, the goodwill allocated to the Caribbean Banking CGU
was $1,727 million. Management conducts an impairment test as of August 1 of each year by comparing the carrying value of each
CGU to its recoverable amount. For the Caribbean Banking CGU, management calculated the recoverable amount as the fair
value less costs of disposal using a discounted cash flow model that projects future cash flows based on management forecasts,
adjusted to approximate the considerations of a prospective third-party buyer, over a 5-year period. Cash flows beyond the initial
5-year period are assumed by management to increase at a constant rate using a nominal long-term growth rate. As disclosed by
management, the Caribbean continued to experience challenges in various regions resulting in weak to moderate economic
growth during the year. As at August 1, 2019, the recoverable amount of the Caribbean Banking CGU, based on management’s
estimated fair value less costs of disposal, was 126% of its carrying amount. As management has disclosed, the determination of
fair value using a discounted cash flow model requires the use of significant judgment to determine the inputs and the model is
most sensitive to changes in future cash flows, discount rates, and terminal growth rates applied to cash flows beyond the
forecast period. If the post-tax discount rate was increased by 1.8%, holding other individual factors constant, the recoverable
amount would approximate the carrying amount.
The principal consideration for our determination that performing procedures relating to the goodwill impairment assessment of
the Caribbean Banking CGU is a critical audit matter is that there was significant judgment required by management when
determining the fair value of the CGU including future cash flows and adjustments made thereto to approximate the
considerations of a prospective third-party buyer, discount rates and terminal growth rates. This in turn led to a high degree of
auditor judgment and subjectivity in performing procedures over management’s calculation of the recoverable amount of the
CGU, and evaluating audit evidence. In addition, the audit effort included the use of professionals with specialized skill and
knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
management’s goodwill impairment test, including controls over the determination of the recoverable amount of the CGU. These
procedures also included, among others, testing management’s process for determining the recoverable amount of the CGU,
evaluating the appropriateness of the discounted cash flow model, and testing the completeness, accuracy, and relevance of
underlying data used in the model. These procedures also included evaluating the significant assumptions used by management,
including the discount rates, terminal growth rates, and future cash flows and adjustments made thereto to approximate the
considerations of a prospective third-party buyer. Professionals with specialized skill and knowledge were used to assist in
evaluating management’s discounted cash flow model and certain significant assumptions, including the discount rates and
terminal growth rates. Evaluating management’s assumptions related to terminal growth rates and future cash flows involved
evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of
the CGU, (ii) the consistency with external market data and industry data; and (iii) whether these assumptions were consistent
with evidence obtained in other areas of the audit.
Uncertain Tax Positions
As described in Note 2 to the consolidated financial statements, the Bank is subject to income tax laws in various jurisdictions
where it operates and the complex tax laws are potentially subject to different interpretations by management and relevant
taxation authorities. In some cases, as described in Note 23, the Bank has received reassessments denying the tax deductibility
of dividends from transactions including those with Tax Indifferent Investors. As disclosed by management, significant judgment
is required in the interpretation of the relevant tax laws, and the determination of the Bank’s tax provision, which includes
management’s best estimate of tax positions that are under audit or appeal by relevant taxation authorities. The forward-looking
nature of these estimates requires management to use a significant amount of judgment in projecting the timing and amount of
future cash flows. As management has further disclosed, management records provisions related to uncertain tax positions on
the basis of all available information at the end of the reporting period to reflect current expectations.
118
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
The principal consideration for our determination that performing procedures relating to the uncertain tax positions is a critical
audit matter is that there was significant judgment required by management, including a high degree of estimation uncertainty,
when interpreting the relevant tax laws and projecting the amount of future cash flows relating to uncertain tax positions. This in
turn led to a high degree of auditor judgment and subjectivity in performing procedures to evaluate the uncertain tax positions.
In addition, the audit effort included the use of professionals with specialized skill and knowledge to assist in evaluating the
audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
evaluation of uncertain tax positions. These procedures also included, among others, testing management’s process used in
estimating the amount of future cash flows relating to uncertain tax positions. This involved evaluating the appropriateness of
the methods used, testing the completeness, accuracy, and relevance of underlying data used, and evaluating the
reasonableness of significant assumptions used by management for estimating the results of tax positions that are under audit
or appeal by relevant taxation authorities. Professionals with specialized skill and knowledge were used to assist in assessing
the significant assumptions, including the application of relevant tax laws and whether it is probable that the relevant tax
authorities will accept the tax positions, and evidence used by management in determining and projecting the amount of future
cash flows.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 3, 2019
We have served as the Bank’s auditor since 2016.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
119
Consolidated Balance Sheets
(Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities (Note 4)
Trading
Investment, net of applicable allowance
Assets purchased under reverse repurchase agreements and securities borrowed
Loans (Note 5)
Retail
Wholesale
Allowance for loan losses (Note 5)
Segregated fund net assets (Note 16)
Other
Customers’ liability under acceptances
Derivatives (Note 8)
Premises and equipment (Note 9)
Goodwill (Note 10)
Other intangibles (Note 10)
Other assets (Note 13)
Total assets
Liabilities and equity
Deposits (Note 14)
Personal
Business and government
Bank
Segregated fund net liabilities (Note 16)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivatives (Note 8)
Insurance claims and policy benefit liabilities (Note 15)
Other liabilities (Note 18)
Subordinated debentures (Note 19)
Total liabilities
Equity attributable to shareholders (Note 21)
Preferred shares
Common shares
Retained earnings
Other components of equity
Non-controlling interests
Total equity
Total liabilities and equity
As at
October 31
2019
October 31
2018
$
26,310
$
30,209
38,345
36,471
146,534
102,470
249,004
306,961
426,086
195,870
621,956
(3,100)
618,856
1,663
18,062
101,560
3,191
11,236
4,674
49,073
187,796
$ 1,428,935
$
294,732
565,482
25,791
886,005
1,663
18,091
35,069
226,586
98,543
11,401
58,137
447,827
128,258
94,608
222,866
294,602
399,452
180,278
579,730
(2,912)
576,818
1,368
15,641
94,039
2,832
11,137
4,687
44,064
172,400
$ 1,334,734
$
270,154
533,522
32,521
836,197
1,368
15,662
32,247
206,814
90,238
10,000
53,122
408,083
9,815
1,345,310
9,131
1,254,779
5,707
17,587
55,981
4,248
83,523
102
83,625
6,309
17,617
51,112
4,823
79,861
94
79,955
$ 1,428,935
$ 1,334,734
The accompanying notes are an integral part of these Consolidated Financial Statements.
David I. McKay
President and Chief Executive Officer
David F. Denison
Director
120
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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 15)
Trading revenue
Investment management and custodial fees
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Net gains on investment securities
Share of profit in joint ventures and associates (Note 12)
Other
Total revenue
Provision for credit losses (Notes 4 and 5)
Insurance policyholder benefits, claims and acquisition expense (Note 15)
Non-interest expense
Human resources (Notes 17 and 22)
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles (Note 10)
Other
Income before income taxes
Income taxes (Note 23)
Net income
Net income attributable to:
Shareholders
Non-controlling interests
Basic earnings per share (in dollars) (Note 24)
Diluted earnings per share (in dollars) (Note 24)
Dividends per common share (in dollars)
The accompanying notes are an integral part of these Consolidated Financial Statements.
For the year ended
October 31
2019
October 31
2018
$
$ 24,863
6,827
8,960
683
41,333
12,988
8,231
365
21,584
19,749
5,710
995
5,748
3,628
1,305
1,907
1,815
986
1,072
1,269
125
76
1,617
26,253
46,002
1,864
4,085
14,600
1,777
1,635
1,090
1,305
1,197
2,535
24,139
15,914
3,043
$ 12,871
$ 12,860
11
$ 12,871
$
8.78
8.75
4.07
$
$
$
$
21,249
5,670
5,536
566
33,021
9,842
4,905
322
15,069
17,952
4,279
1,150
5,377
3,551
1,372
1,800
2,053
1,098
1,054
1,394
147
21
1,328
24,624
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
121
Consolidated Statements of Comprehensive Income
(Millions of Canadian dollars)
Net income
Other comprehensive income (loss), net of taxes (Note 23)
Items that will be reclassified subsequently 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
Reclassification of losses (gains) on net investment hedging activities to income
Net change in cash flow hedges
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Items that will not be reclassified subsequently to income:
Remeasurements of employee benefit plans (Note 17)
Net fair value change due to credit risk on financial liabilities designated as 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
2019
$ 12,871
October 31
2018
$
12,431
192
(14)
(133)
45
65
5
2
1
73
(559)
(135)
(694)
(942)
51
25
(866)
(1,442)
$ 11,429
$ 11,419
10
$ 11,429
$
$
$
(70)
(9)
(94)
(173)
840
(237)
–
–
603
150
107
257
724
123
(2)
845
1,532
13,963
13,931
32
13,963
122
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
123
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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 investment securities
Losses (Gains) on disposition of businesses
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
Obligations related to assets sold under repurchase agreements and securities loaned
Obligations related to securities sold short
Deposits, net of securitizations
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 sales and maturities of investment securities
Purchases of investment securities
Net acquisitions of premises and equipment and other intangibles
Proceeds from dispositions
Cash used in acquisitions
Net cash from (used in) investing activities
Cash flows from financing activities
Redemption of trust capital securities
Issuance of subordinated debentures
Repayment of subordinated debentures
Issue of common shares, net of issuance costs
Common shares purchased for cancellation
Issue of preferred shares, net of issuance costs
Redemption of preferred shares
Sales of treasury shares
Purchases of treasury shares
Dividends paid
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 dividends received
Amount of income taxes paid
For the year ended
October 31
2019
October 31
2018
$
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$
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(213)
(158)
1,401
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8,305
(18,276)
(42,672)
(12,359)
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(2,413)
14,265
(1,874)
65,377
(72,435)
(2,261)
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26,310
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30,209
13,513
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(1) We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2.6 billion as at October 31, 2019 (October 31, 2018 –
$2.4 billion; October 31, 2017 – $2.3 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
124
Royal Bank of Canada: Annual Report 2019
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 28 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
Office of the Superintendent of Financial Institutions Canada (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 December 3, 2019, 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: 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 17
Note 2
Note 10
Application of the effective interest method
Note 2
Derecognition of financial assets
Income taxes
Provisions
Note 2
Note 6
Note 2
Note 23
Note 2
Note 25
Note 26
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
125
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
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 equity attributable to our shareholders. The net income attributable to
non-controlling interests is separately disclosed in our Consolidated Statements of Income.
Investments in joint ventures and associates
Our investments in associated corporations and limited partnerships over which we have significant influence are accounted for
using the equity method. The equity method is also applied to our interests in joint ventures over which we have joint control.
Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is increased or
decreased to recognize our share of the investee’s net profit or loss, including our proportionate share of the investee’s Other
comprehensive income (OCI), subsequent to the date of acquisition.
Non-current assets held for sale and discontinued operations
Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally
through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for
immediate sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount
and fair value less costs to sell and if significant, are presented separately from other assets on our Consolidated Balance
Sheets.
A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can
be distinguished operationally and financially from the rest of our operations and (ii) it represents either a separate major line of
business or is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of
operations. Disposal groups classified as discontinued operations are presented separately from our continuing operations in
our Consolidated Statements of Income.
Changes in accounting policies
During the first quarter, we adopted IFRS 15 Revenue from Contracts with Customers (IFRS 15). As permitted by the transition
provisions of IFRS 15, we elected not to restate comparative period results; accordingly, all comparative information is presented
in accordance with our previous accounting policies, as indicated below. As a result of the adoption of IFRS 15, we reduced our
opening retained earnings by $94 million(1), on an after tax basis as at November 1, 2018 (the date of initial application), to align
with the recognition of certain fees with the transfer of the performance obligations.
Financial Instruments
Classification of financial assets
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:
(cid:129)
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
(cid:129)
(cid:129)
(1)
Revised from the amount previously presented.
126
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
(cid:129)
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:
(cid:129)
(cid:129)
(cid:129)
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.
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
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
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
127
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Determination of fair value
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We determine fair value by incorporating all factors
that market participants would consider in setting a price, including commonly accepted valuation approaches.
The Board of Directors provides oversight on valuation of financial instruments, primarily through the Audit Committee and
Risk Committee. The Audit Committee reviews the presentation and disclosure of financial instruments that are measured at fair
value, while the Risk Committee assesses 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 (PD) 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 (EAD), PD, recovery rates on a counterparty basis and market and
credit factor correlations. EAD is the value of expected derivative related assets and liabilities at the time of default, estimated
through modelling using underlying risk factors. PD 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
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date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial
instrument in the hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement
of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by
assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through
extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required in the
determination of the model used, the selection of model inputs, and in some cases the application of valuation adjustments to
the model value or quoted price for inactively traded financial instruments, as the selection of model inputs may be subjective
and the inputs may be unobservable. Unobservable inputs are inherently uncertain as there is little or no market data available
from which to determine the level at which the transaction would occur under normal business circumstances. Appropriate
parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are
assessed in all such instances.
Loans
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
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 loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts
and accrued interest receivable, and finance and operating lease receivables. ACL on loans measured at amortized cost 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.
ACL on off-balance sheet items 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:
(cid:129)
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.
(cid:129)
Performing financial assets
(cid:129)
(cid:129)
Impaired financial assets
(cid:129)
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 income 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
changes in risk, parameters and exposures 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 PD, loss given default (LGD),
and 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
129
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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. For our wholesale portfolio, a decrease in the borrower’s risk rating is also
required to determine that credit risk has increased significantly.
(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.
(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, equity return indices, 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
PDs as at the reporting date, using the same macroeconomic scenarios as the calculation of expected credit losses.
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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 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
131
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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 the expected changes. 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
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.
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.
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.
Derecognition of financial assets
Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the
assets have expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash
flows to a third party subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash
flows and substantially all of the risk and rewards of the assets have been transferred. When we retain substantially all of the
risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets
and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards
of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the
transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement.
Management’s judgment is applied in determining whether the contractual rights to the cash flows from the transferred
assets have expired or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those
cash flows. We derecognize transferred financial assets if we transfer substantially all the 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
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
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
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Consolidated Financial Statements
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
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
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 that do not have fixed or determinable payments and no
fixed maturity, capitalized transaction costs are recognized in net income when the asset is derecognized or becomes impaired.
Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset on the balance sheet when there exists both a legally enforceable right to
offset the recognized amounts and an intention to settle on a net basis, or realize the asset and settle the liability
simultaneously.
Assets purchased under reverse repurchase agreements and sold under repurchase agreements
We purchase securities under agreements to resell (reverse repurchase agreements) and take possession of these securities. We
monitor the market value of the securities purchased and additional collateral is obtained when appropriate. We have the right
to liquidate the collateral held in the event of counterparty default. Reverse repurchase agreements are treated as collateralized
lending transactions. We also sell securities under agreements to repurchase (repurchase agreements), which are treated as
collateralized borrowing transactions. The securities received under reverse repurchase agreements and securities delivered
under repurchase agreements are not recognized on, or derecognized from, our Consolidated Balance Sheets, respectively,
unless the risks and rewards of ownership are obtained or relinquished.
Reverse repurchase agreements and repurchase agreements are carried on our Consolidated Balance Sheets at the
amounts at which the securities were initially acquired or sold, except when they are 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.
Hedge accounting
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 and reclassified to profit or loss as the associated hedged forecast transaction occurs, 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
133
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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
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,
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.
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
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Consolidated Financial Statements
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 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 on our Consolidated Statements of Income.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
135
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
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.
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Consolidated Financial Statements
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 5 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.
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, asset retirement obligations and other items.
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 – Policies applicable beginning November 1, 2018 (IFRS 15)
Commissions and fees primarily relate to Investment management and custodial fees, Mutual fund revenue, Securities brokerage
commissions, Services charges, Underwriting and other advisory fees, Card service revenue and Credit fees, and are recognized
based on the applicable service contracts with customers.
Investment management and custodial fees and Mutual fund revenue are generally calculated as a percentage of daily or
period-end net asset values (NAV) based on the terms of the contract with customers and are received monthly, quarterly,
semiannually or annually, depending on the terms of the contract. Investment management and custodial fees are generally
derived from assets under management (AUM) when our clients solicit the investment capabilities of an investment manager or
from assets under administration (AUA) where the investment strategy is directed by the client or a designated third party
manager. Mutual fund revenue is derived from the daily NAV of the mutual funds. Investment management and custodial fees and
Mutual fund revenue are recognized over time when the service is provided to the customer, provided that it is highly probable
that a significant reversal in the amount of revenue recognized will not occur.
Commissions earned on Securities brokerage services and Service charges that are related to the provision of specific
transaction-type services are recognized when the service is fulfilled. Where services are provided over time, revenue is
recognized as the services are provided.
Underwriting and other advisory fees primarily relate to underwriting of new issuances of debt or equity and various
advisory services. Underwriting fees are generally expressed as a percentage of the funds raised through issuance and are
recognized when the service has been completed. Advisory fees vary depending on the scope and type of engagement and can be
fixed in nature or contingent on a future event. Advisory fees are recognized over the period in which the service is provided and
are recognized only to the extent that it is highly probable that a significant reversal in the amount of revenue will not occur.
Card service revenue primarily includes interchange revenue and annual card fees. Interchange revenue is calculated as a
fixed percentage of the transaction amount and recognized when the card transaction is settled. Annual card fees are fixed fees
and are recognized over a 12 month period.
Credit fees are primarily earned for arranging syndicated loans and making credit available on undrawn facilities. The timing
of the recognition of credit fees varies based on the nature of the services provided.
When service fees and other costs are incurred in relation to commissions and fees earned, we record these costs on a gross
basis in either Non-interest expense – Other or Non-interest expense – Human resources based on our assessment of whether we
have primary responsibility to fulfill the contract with the customer and have discretion in establishing the price for the
commissions and fees earned, which may require judgment.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
137
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Commissions and fees – Policies applicable prior to November 1, 2018 (IAS 18 – Revenue)
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 AUM when our clients solicit the investment capabilities of an investment manager and administrative
fees are derived from 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.
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 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 accounting model that requires the recognition of right-of-use assets and lease liabilities on the
balance sheet for most leases. Lessees will recognize interest expense on the lease liability and depreciation expense on the
right-of-use asset in the statement of income.
IFRS 16 will be effective for us on November 1, 2019. We will adopt IFRS 16 by adjusting our Consolidated Balance Sheet as at
November 1, 2019, the date of initial application, with no restatement of comparative periods. On transition to IFRS 16, we intend
to apply certain practical expedients, including the following:
(cid:129)
Election to not separate lease and non-lease components, to be applied to our real estate leases;
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Consolidated Financial Statements
(cid:129)
(cid:129)
Election to measure the right-of-use asset as if IFRS 16 had been applied since the commencement date of the lease, to be
applied on a lease-by-lease basis to a select number of properties; and
Exemption from recognition for short-term and low value leases.
Based on current estimates, the adoption of IFRS 16 as at November 1, 2019 is expected to result in increases to total assets and
total liabilities of approximately $5 billion, primarily representing leases of premises and equipment previously classified as
operating leases, and a reduction to retained earnings of approximately $0.1 billion, net of taxes. The adoption of IFRS 16 is also
expected to decrease our CET1 capital ratio by approximately 14 bps.
IFRS Interpretations Committee Interpretation 23 Uncertaintyoverincometaxtreatments (IFRIC 23)
In June 2017, the IASB issued IFRIC 23, which provides guidance on the recognition and measurement of tax assets and liabilities
under IAS 12 Income taxes when there is uncertainty over income tax treatments. IFRIC 23 will be effective for us on November 1,
2019. We do not expect the adoption of this interpretation to impact our consolidated financial statements.
Interest Rate Benchmark Reform
In September 2019, the IASB issued amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and
Measurement and IFRS 7 Financial Instruments: Disclosures (Amendments) which modify certain hedge accounting requirements
to provide relief from the potential effect of uncertainty caused by the Interest Rate Benchmark Reform, prior to the transition to
alternative interest rates. The Amendments will be effective for us on November 1, 2020, with earlier adoption permitted. To
manage our transition to alternative interest rates, we have implemented a comprehensive enterprise-wide program and
governance structure that focuses on key areas of impact including contract changes with clients, capital and liquidity planning,
financial reporting and valuation, systems, processes, education and communication.
We are currently assessing the impact of adoption on our Consolidated Financial Statements.
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 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 June 2019, the
IASB issued an exposure draft to amend IFRS 17, including deferral of the effective date by one year. We will continue to monitor
the IASB’s developments. We are currently assessing the impact of adopting this standard and the proposed amendments on our
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.
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable allowance
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans, net of applicable allowance
Retail
Wholesale
Other
Derivatives
Other assets (1)
Financial liabilities
Deposits
Personal
Business and government (2)
Bank (3)
Other
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and
securities loaned
Derivatives
Other liabilities (4)
Subordinated debentures
Carrying value and fair value
Carrying value
Fair value
As at October 31, 2019
Financial
instruments
classified as
FVTPL
Financial
instruments
designated as
FVTPL
Financial
instruments
classified as
FVOCI
Financial
instruments
designated as
FVOCI
Financial
instruments
measured at
amortized cost
Financial
instruments
measured at
amortized cost
Total
carrying
amount
Total
fair value
$
– $
22,283 $
– $
–
$
16,062
$
16,062 $ 38,345 $ 38,345
137,600
–
137,600
8,934
–
8,934
–
57,223
57,223
246,068
–
275
7,055
7,330
101,560
3,156
242
1,856
2,098
–
–
–
95
451
546
–
–
–
463
463
–
–
–
–
–
–
–
44,784
44,784
–
45,104
45,104
146,534
102,470
249,004
146,534
102,790
249,324
60,893
60,894
306,961
306,962
423,469
185,413
608,882
–
50,375
424,416
184,645
609,061
424,081
194,775
618,856
425,028
194,007
619,035
–
50,375
101,560
53,531
101,560
53,531
$
140 $
151
–
291
17,394
111,389
3,032
131,815
$
277,198
453,942
22,759
753,899
$
277,353 $294,732 $294,887
564,076
565,482
452,536
25,805
25,791
22,773
884,768
886,005
752,662
35,069
–
–
–
35,069
35,069
–
98,543
(1,209)
–
218,612
–
91
–
7,974
–
61,039
9,815
7,974
–
61,024
9,930
226,586
98,543
59,921
9,815
226,586
98,543
59,906
9,930
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
139
Note 3 Fair value of financial instruments (continued)
Carrying value and fair value
Carrying value
Fair value
As at October 31, 2018
Financial
instruments
classified as
FVTPL
Financial
instruments
designated as
FVTPL
Financial
instruments
classified as
FVOCI
Financial
instruments
designated as
FVOCI
Financial
instruments
measured at
amortized cost
Financial
instruments
measured at
amortized cost
Total
carrying
amount
Total
fair value
$
– $
20,274 $
– $
–
$
16,197
$
16,197 $ 36,471 $ 36,471
7,227
–
7,227
–
190
1,540
1,730
–
–
–
48,093
48,093
–
94
458
552
–
–
–
406
406
–
–
–
–
–
–
–
46,109
46,109
–
45,367
45,367
128,258
94,608
222,866
128,258
93,866
222,124
75,494
75,490
294,602
294,598
397,102
170,236
567,338
–
46,205
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
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable allowance
121,031
–
121,031
Assets purchased under reverse repurchase
agreements and securities borrowed
219,108
Loans, net of applicable allowance
Retail
Wholesale
Other
Derivatives
Other assets (1)
Financial liabilities
Deposits
69
7,129
7,198
94,039
1,373
Personal
Business and government (2), (3)
Bank (4)
$
150 $
(11)
–
139
14,602
102,597
7,072
124,271
Other
Obligations related to securities sold short
Obligations related to assets sold under
32,247
–
repurchase agreements and
securities loaned
Derivatives
Other liabilities (3), (5)
Subordinated debentures
–
90,238
(1,434)
–
201,839
–
18
–
$
$
255,402
430,936
25,449
711,787
255,115 $ 270,154 $ 269,867
533,744
533,522
431,158
32,534
32,521
25,462
836,145
836,197
711,735
–
–
32,247
32,247
4,975
–
55,766
9,131
4,976
–
55,729
9,319
206,814
90,238
54,350
9,131
206,815
90,238
54,313
9,319
(1)
(2)
(3)
(4)
(5)
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.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Amounts have been reclassified to conform with this presentation.
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, 2019 and October 31, 2018, 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,
2019, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was $514 million
(October 31, 2018 – $nil).
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.
.
As at or for the year ended October 31, 2019 (1)
(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
Contractual
maturity
amount
$
17,307 $
110,763
3,031
131,101
Carrying
value
17,394
111,389
3,032
131,815
218,604
91
218,612
91
$ 349,796 $ 350,518
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)
$
$
87
626
1
714
8
–
722
$
$
3
(76)
–
(73)
–
–
(73)
$
22
210
–
232
–
–
$ 232
140
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
.
As at or for the year ended October 31, 2018 (1)
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (3), (5)
Bank (4)
Obligations related to assets sold under
repurchase agreements and securities loaned
Other liabilities
Contractual
maturity
amount
$
14,726 $
102,640
7,067
124,433
Carrying
value
14,602
102,597
7,072
124,271
201,924
18
201,839
18
326,375 $ 326,128
$
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
(1)
(2)
(3)
(4)
(5)
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, 2019, $4 million of fair value losses previously
included in OCI relate to financial liabilities derecognized during the year (October 31, 2018 – $7 million fair value losses).
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.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Amounts have been reclassified to conform with this presentation.
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), (4)
By product line (1)
Interest rate and credit (4), (5)
Equities
Foreign exchange and commodities
For the year ended
October 31
2019
October 31
2018
$
$
$
$
3,564
(1,821)
1,743
1,534
(144)
353
1,743
$
$
$
$
(265)
2,067
1,802
1,535
(164)
431
1,802
(1)
(2)
(3)
(4)
(5)
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 gains from financial instruments designated as FVTPL of $1,303 million (October 31, 2018 – losses of $400 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, 2019, $1,810 million of net fair value losses 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, 2018 – gains of $2,052 million).
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest
income. Comparative amounts have been reclassified to conform with this presentation.
Includes gains (losses) recognized on cross currency interest rate swaps.
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 and dividend income (2), (3)
Financial instruments measured at fair value through profit or loss (4)
Financial instruments measured at fair value through other comprehensive income
Financial instruments measured at amortized cost
Interest expense (2)
Financial instruments measured at fair value through profit or loss (4)
Financial instruments measured at amortized cost
Net interest income
For the year ended
October 31
2019
October 31
2018 (1)
$ 12,103
1,132
28,098
41,333
$ 10,507
11,077
21,584
$ 19,749
$
$
$
7,800
802
24,419
33,021
6,542
8,527
15,069
17,952
(1)
(2)
(3)
(4)
Amounts have been revised from those previously presented.
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 $486 million (October 31, 2018 – $479 million), and Interest expense of $4 million (October 31, 2018 – $4 million).
Includes dividend income for the year ended October 31, 2019 of $2,057 million (October 31, 2018 – $1,561 million), which is presented in Interest and dividend income in the
Consolidated Statements of Income.
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest
income. Comparative amounts have been reclassified to conform with this presentation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
141
Note 3 Fair value of financial instruments (continued)
Fee income arising from financial instruments
For the year ended October 31, 2019, we earned $5,270 million in fees from banking services (October 31, 2018 – $5,426 million). For
the year ended October 31, 2019, we also earned $12,117 million in fees from investment management, trust, custodial,
underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2018 – $11,944 million).
These fees are included in Non-interest income.
Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Debt issued or guaranteed by:
Canadian government (1)
Federal
Provincial and municipal
U.S. state, municipal and agencies (1)
Other OECD government (2)
Mortgage-backed securities (1)
Asset-backed securities
Non-CDO securities (3)
Corporate debt and other debt
Equities
Investment
Debt issued or guaranteed by:
Canadian government (1)
Federal
Provincial and municipal
U.S. state, municipal and agencies (1)
Other OECD government
Mortgage-backed securities (1)
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
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 (4)
Bank
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and
securities loaned
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments
Total gross derivatives
Netting adjustments
Total derivatives
Other liabilities
October 31, 2019
October 31, 2018
Fair value
measurements using
Netting
Fair value
measurements using
Netting
Level 1
Level 2
Level 3
adjustments Fair value
Level 1
Level 2
Level 3
adjustments Fair value
As at
$
– $ 22,283 $
– $
$ 22,283
$
– $
20,274 $
– $
$ 20,274
14,655
–
2,050
2,786
–
–
1
38,309
5,474
11,282
39,584
3,710
482
1,333
23,643
1,925
–
–
58
–
–
2
21
1,219
57,801
87,433
1,300
–
–
210
–
–
–
–
–
42
657
2,898
20,666
4,251
2,675
7,300
849
17,537
127
252
56,960
–
–
246,068
9,294
1
–
–
2,852
–
2,853
46,095
40,768
169
12,674
(712)
98,994
–
–
–
–
27
–
–
153
294
474
–
680
349
48
–
11
15
423
(710)
1,119
1,960
77
20,129
11,282
41,692
6,496
482
1,335
23,665
41,453
146,534
657
2,898
20,876
4,251
2,702
7,300
849
17,690
463
57,686
246,068
9,974
46,445
40,816
169
15,537
(697)
102,270
(710)
101,560
3,156
8,342
–
2,068
1,151
–
–
2
30,847
42,410
–
–
–
–
–
–
–
–
42
42
–
–
1
–
–
5,868
–
5,869
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
127
48,028
219,108
8,929
33,862
43,253
38
11,654
(631)
88,176
–
–
66
–
–
110
21
1,148
1,345
–
–
–
–
–
–
–
192
237
429
–
551
222
53
–
296
6
577
(583)
1,020
288
65
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
406
48,499
219,108
9,480
34,085
43,306
38
17,818
(625)
94,622
(583)
94,039
1,373
$62,025 $522,992 $ 2,954 $
(710) $ 587,261
$ 49,341 $ 469,306 $ 2,967 $
(583) $ 521,031
$
– $ 17,378 $
111,540
–
3,032
–
156 $
–
–
$
$ 17,534
111,540
3,032
– $
–
–
14,362 $
102,591
7,072
390 $
(5)
–
20,512
14,557
–
218,612
39,165
40,183
282
15,776
12
–
–
–
2,675
–
2,675
–
–
934
27
–
206
(7)
35,069
17,732
14,515
218,612
–
201,839
29,620
41,836
94
13,730
29
–
–
–
4,369
–
4,369
40,099
40,210
282
18,657
5
99,253
(710)
98,543
(1,118)
–
–
726
32
–
380
5
95,418
1,160
(710)
85,309
1,143
(583)
$ 14,752
102,586
7,072
32,247
201,839
30,346
41,868
94
18,479
34
90,821
(583)
90,238
(1,416)
102
(1,280)
60
170
(1,654)
68
$23,289 $459,257 $ 1,376 $
(710) $ 483,212
$ 22,271 $ 424,034 $ 1,596 $
(583) $ 447,318
(1)
(2)
(3)
(4)
As at October 31, 2019, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $22,365 million and $nil
(October 31, 2018 – $16,776 million and $nil), respectively, and in all fair value levels of Investment securities were $6,474 million and $2,046 million (October 31,
2018 – $4,713 million and $1,348 million), respectively.
OECD stands for Organisation for Economic Co-operation and Development.
CDO stands for collateralized debt obligations.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
142
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value
hierarchy table using the following valuation techniques and inputs.
Interest-bearing deposits with banks
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.
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.
Loans
Loans include base metal loans, corporate loans, banker acceptances and asset-backed financing loans. Fair values are
determined based on market prices, if available, or discounted cash flow method using the following inputs: market interest
rates, base metal commodity prices, market based spreads of assets with similar credit ratings and terms to maturity, LGD,
expected default frequency implied from credit derivative prices, if available, and relevant pricing information such as
contractual rate, origination and maturity dates, redemption price, coupon payment frequency and day count convention. Loans
with market prices or observable inputs are classified as Level 2 in the hierarchy and loans with unobservable inputs that have
significant impacts on the fair values are 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
143
Note 3 Fair value of financial instruments (continued)
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, issuances of certificates of deposits and promissory notes, and interest rate and equity
linked notes. The fair values of these instruments are determined using the discounted cash flow method and derivative option
valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, equity and
interest rate volatility, dividends and correlation, where applicable. They are classified as Level 2 or 3 instruments in the
hierarchy, depending on the significance of the unobservable credit spreads, volatility, dividend and correlation rates.
Quantitative information about fair value measurements using significant unobservable inputs (Level 3 Instruments)
The following table presents fair values of our significant Level 3 financial instruments, valuation techniques used to determine
their fair values, ranges and weighted averages of unobservable inputs.
As at October 31, 2019 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values (1), (2)
Products
Reporting line in the fair value
hierarchy table
Assets Liabilities
Valuation
techniques
Significant
unobservable
inputs (3)
Low
High
Weighted
average
/ Inputs
distribution
Non-derivative financial instruments
Auction rate securities
Corporate debt
Government debt and
municipal bonds
U.S. state, municipal and
agencies debt
Asset-backed securities
Corporate debt and other debt
Loans
U.S. state, municipal and
agencies debt
Mortgage-backed securities
Corporate debt and other debt
58
2
24
680
–
27
150
Discounted cash flows
Discount margins
Default rates
1.60%
3.00%
3.00%
3.00%
Price-based
Discounted cash flows
Price-based
Discounted cash flows
Prepayment rates
Recovery rates
8.00%
8.00%
96.50% 96.50%
Prices
Credit spread
Credit enhancement
$ 20.00 $131.78 $
1.02% 11.34%
11.82% 15.75%
Prices
Yields
$ 65.50 $100.00 $
4.70%
6.63%
Private equities, hedge fund
investments and related
equity derivatives
Equities
Derivative related liabilities
1,513
Market comparable
Price-based
10 Discounted cash flows
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (4)
Discount rate
NAV / prices (5)
4.00X
9.70X
0.90X
24.90X
29.90X
5.93X
10.00% 40.00%
10.00% 12.00%
n.a.
n.a.
Derivative financial instruments (6)
Interest rate derivatives and
Derivative related assets
Derivative related liabilities
interest-rate-linked
structured notes (7)
Equity derivatives and equity-
linked structured notes (7)
Other (8)
Total
380
943
Discounted cash flows
Option pricing model
Interest rates
CPI swap rates
IR-IR correlations
FX-IR correlations
FX-FX correlations
1.27%
1.40%
2.16%
2.00%
19.00% 67.00%
29.00% 56.00%
68.00% 68.00%
Discounted cash flows
Option pricing model
Dividend yields
Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.10%
8.77%
34.00% 95.40%
(71.40)% 30.50%
4.00% 110.00%
Derivative related assets
Deposits
Derivative related liabilities
Derivative related assets
Other assets
Deposits
Derivative related liabilities
Other liabilities
11
32
77
156
180
–
27
60
$ 2,954 $
1,376
1.65%
3.00%
8.00%
96.50%
110.30
6.18%
13.13%
65.67
5.80%
10.23X
16.11X
3.55X
17.64%
10.45%
n.a.
Even
Even
Even
Even
Even
Lower
Middle
Middle
Upper
144
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
As at October 31, 2018 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values (1), (2)
Products
Reporting line in the fair value
hierarchy table
Assets Liabilities
Valuation
techniques
Significant
unobservable
inputs (3)
Low
High
Weighted
average
/ Inputs
distribution
Non-derivative financial instruments
Auction rate securities
U.S. state, municipal and agencies debt
Asset-backed securities
45
110
Corporate debt
Government debt and
municipal bonds
Corporate debt and other debt
Loans
U.S. state, municipal and agencies debt
Mortgage-backed securities
Corporate debt and other debt
Private equities, hedge fund
investments and related
equity derivatives
Equities
Derivative related liabilities
28
551
21
–
185
1,385
Discounted cash flows
Price-based
Discounted cash flows
Price-based
Discounted cash flows
Discount margins
Default rates
Prepayment rates
Recovery rates
1.32%
3.00%
4.00%
96.50%
2.70%
3.00%
5.50%
97.50%
Prices $
Credit spread
Credit enhancement
72.00 $ 123.06 $
0.90%
11.80%
11.30%
15.80%
Prices $
Yields
65.50 $ 100.00 $
3.50%
7.60%
Market comparable
Price-based
24 Discounted cash flows
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (4)
Discount rate
NAV / prices (5)
Interest rates
CPI swap rates
IR-IR correlations
FX-IR correlations
FX-FX correlations
6.16X
9.10X
0.90X
10.00%
10.52%
n.a.
2.30%
1.90%
19.00%
29.00%
68.00%
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
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)
Derivative related assets
Deposits
Derivative related liabilities
Derivative related assets
Other assets
Deposits
Derivative related liabilities
Other liabilities
Discounted cash flows
Dividend yields
Option pricing model Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.30%
8.40%
(55.00)% 100.00%
30.50%
(71.40)%
8.00% 164.00%
390
328
281
36
65
(5)
51
68
$ 2,967 $ 1,596
Total
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
The low and high input values represent the actual highest and lowest level inputs used to value a group of financial instruments in a particular product category. These
input ranges do not reflect the level of input uncertainty, but are affected by the different underlying instruments within the product category. The input ranges will
therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date. Where provided, the weighted average
of the input values is calculated based on the relative fair values of the instruments within the product category. The weighted averages for derivatives are not presented
in the table as they would not provide a comparable metric; instead, distribution of significant unobservable inputs within the range for each product category is
indicated in the table.
Price-based inputs are significant for certain debt securities and are based on external benchmarks, comparable proxy instruments or pre-quarter-end trade data. For
these instruments, the price input is expressed in dollars for each $100 par value. For example, with an input price of $105, an instrument is valued at a premium over its
par value.
The 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).
Fair value of securities with liquidity discount inputs totalled $255 million (October 31, 2018 – $207 million).
NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. 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
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
the fair value of our liabilities, and vice versa.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
145
Note 3 Fair value of financial instruments (continued)
Default rates
A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically
increase the fair value of the loan, and vice versa. This effect will be significantly more pronounced for a non-government
guaranteed loan than a government guaranteed loan.
Prepayment rates
A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments
change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when
the loan interest rate is lower than the 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 transactions and is the amount of loan loss protection for a senior
tranche. Credit enhancement is expressed as a percentage of the transaction sizes. 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.
146
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3
(Millions of Canadian dollars)
Assets
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies
Asset-backed securities
Non-CDO securities
Corporate debt and other debt
Equities
Investment
Mortgage-backed securities
Corporate debt and other debt
Equities
Loans
Other
Net derivative balances (3)
Interest rate contracts
Foreign exchange contracts
Other contracts
Valuation adjustments
Other assets
Liabilities
Deposits
Personal
Business and government
Other
Other liabilities
For the year ended October 31, 2019
Fair value
at beginning
of period
Gains
(losses)
included in
earnings
Gains
(losses)
included
in OCI (1)
Purchases
(issuances)
Settlement
(sales) and
other (2)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
at end of
period
Gains
(losses) included
in earnings for
positions
still held
$
66 $
– $
1 $
– $
(9) $
– $
– $
58 $
110
21
1,148
1,345
–
192
237
429
551
(504)
21
(84)
1
65
15
1
(76)
(60)
–
(3)
–
(3)
40
(79)
12
131
–
28
–
1
2
4
–
24
16
40
2
–
–
2
–
–
–
–
333
333
27
–
5
32
(123)
(2)
(226)
(360)
–
(60)
36
(24)
–
–
39
39
–
–
–
–
–
–
(1)
(1)
–
–
–
–
830
(481)
55
(317)
2
21
1,219
1,300
27
153
294
474
680
(197)
–
(131)
–
–
217
(6)
18
21
(16)
(7)
4
(38)
–
–
(15)
(10)
(93)
–
–
(585)
21
(195)
22
77
$
1,824 $
69 $
48 $
867 $
(631) $
53 $ (436) $ 1,794 $
$
(390) $
5
(38) $
–
– $
–
(102) $
–
(68)
(16)
(1)
1
29 $ (214) $
–
24
–
–
559 $
(5)
(156) $
–
–
(60)
$
(453) $
(54) $
(1) $
(101) $
53 $ (214) $
554 $
(216) $
–
3
1
(20)
(16)
n.a.
n.a.
n.a.
n.a.
19
(42)
32
115
–
27
135
–
–
(12)
(12)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
147
Note 3 Fair value of financial instruments (continued)
For the year ended October 31, 2018
Fair value
at beginning
of period
Gains
(losses)
included
in earnings
Gains
(losses)
included in
OCI (1)
Purchases
(issuances)
Settlement
(sales)
and other (2)
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value
at end of
period
Gains
(losses) included
in earnings for
positions
still held
(Millions of Canadian dollars)
Assets
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies $
508 $
16 $
(3) $
– $
(455) $
– $
– $
66 $
Asset-backed securities
Non-CDO securities
Corporate debt and other debt
Equities
Investment
Mortgage-backed securities
Corporate debt and other debt
Equities
Loans
Other
Net derivative balances (3)
Interest rate contracts
Foreign exchange contracts
Other contracts
Valuation adjustments
Other assets
Liabilities
Deposits
Personal
Business and government
Other
Other liabilities
$
$
196
30
923
1,657
–
29
220
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 $
(465) $
–
(36) $
–
(4) $
–
(301) $
5
(24)
–
(1)
(53)
44 $ (431) $
–
10
–
–
803 $
–
(390) $
5
–
(68)
$
(489) $
(36) $
(5) $
(349) $
54 $ (431) $
803 $
(453) $
(1)
1
(1)
(24)
(25)
n.a.
n.a.
n.a.
n.a.
14
(3)
(5)
79
–
(5)
55
(8)
–
4
(4)
(1)
(2)
(3)
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 $43 million for the year ended October 31, 2019 (October 31, 2018 – gains of $33 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, 2019 included derivative assets of $423 million (October 31, 2018 – $577 million) and derivative liabilities of $1,160 million (October 31, 2018
– $1,143 million).
n.a. 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, 2019, transfers out of Level 1 to Level 2 included Other contracts, consisting of derivative
related assets and derivative related liabilities of $1,996 million and $621 million, respectively and Trading U.S. state, municipal
and agencies debt of $1,250 million and Obligations related to securities sold short of $202 million. 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, 2019, there were no significant transfers out of Level 2 to Level 1. 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.
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, 2019, significant transfers out of Level 2 to Level 3 included $214 million of Personal
deposits, due to changes in the significance of unobservable inputs.
During the year ended October 31, 2018, significant transfers out of Level 2 to Level 3 included $125 million of Trading Equities,
$206 million of Corporate debt and other debt and $431 million of Personal deposits.
148
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
During the year ended October 31, 2019, significant transfers out of Level 3 to Level 2 included:
(cid:129)
(cid:129)
$317 million of Loans, due to changes in the significance of unobservable inputs.
$86 million of OTC equity options in Other contracts comprised of $459 million of derivative related assets and
$373 million of derivative related liabilities, due to changes in the market observability of inputs.
$559 million of Personal deposits, due to changes in the significance of unobservable inputs.
(cid:129)
During the year ended October 31, 2018, significant transfers out of Level 3 to Level 2 included:
(cid:129)
$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.
$231 million of OTC equity options in Other contracts comprised of $703 million of derivative related assets and
$934 million of derivative related liabilities.
$803 million of Personal deposits.
(cid:129)
(cid:129)
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
Debt issued or guaranteed by:
U.S. state, municipal and
agencies
Asset-backed securities
Corporate debt and other debt
Equities
Investment
Mortgage-backed securities
Corporate debt and other debt
Equities
Loans
Derivatives
Other assets
Deposits
Derivatives
Other
Other liabilities
October 31, 2019
October 31, 2018
As at
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Level 3
fair value
Level 3
fair value
$
58 $
2
21
1,219
27
153
294
680
423
77
$
$
2,954 $
(156) $
(1,160)
(60)
$
(1,376) $
1 $
–
–
13
1
15
26
9
6
–
71 $
4 $
20
–
24 $
(1) $
–
–
(14)
(1)
(13)
(27)
(12)
(3)
–
(71) $
(4) $
(17)
–
(21) $
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)
–
(90)
(11)
(54)
–
(65)
Sensitivity results
As at October 31, 2019, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions
would be an increase of $71 million and a decrease of $71 million in fair value, of which $43 million and $42 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 $24 million and an increase of $21 million in fair value.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
149
Note 3 Fair value of financial instruments (continued)
Level 3 valuation inputs and approaches to developing reasonably possible alternative assumptions
The following is a summary of the unobservable inputs used in the valuation of the Level 3 instruments and our approaches to
developing reasonably possible alternative assumptions used to determine sensitivity.
Financial assets or
liabilities
Asset-backed securities,
corporate debt, government
debt, municipal bonds and
loans
Auction rate securities
Private equities, hedge fund
investments and related
equity derivatives
Interest rate derivatives
Equity derivatives
Sensitivity methodology
Sensitivities are determined based on adjusting, plus or minus one standard deviation, the
bid-offer spreads or input prices if a sufficient number of prices is received, adjusting input
parameters such as credit spreads or using high and low vendor prices as reasonably possible
alternative assumptions.
Sensitivity of ARS is determined by decreasing the discount margin between 13% and 17% and
increasing the discount margin between 27% and 31%, 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 ABS 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-multiples-
based models are used, or (iii) using an alternative valuation approach. The private equity fund,
hedge fund and related equity derivative NAVs 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
As at October 31, 2019
Fair value always
approximates
carrying value (1)
16,062
$
–
Fair value may not approximate carrying value
Fair value measurements using
Level 1
–
$
523
$
Level 2
–
44,581
$
Level 3
–
–
$
Total
–
45,104
Total
fair value
$ 16,062
45,104
48,784
66,647
6,596
73,243
49,761
–
–
–
–
–
12,110
352,717
173,274
525,991
469
187,850
523
583,151
195,583
296,166
15,093
506,842
7,974
50,601
8
$
565,425
$
–
–
–
–
–
–
–
–
81,179
155,646
7,671
244,496
–
445
9,864
–
12,110
60,894
5,052
4,775
9,827
145
9,972
591
724
9
1,324
–
9,978
58
357,769
178,049
535,818
614
424,416
184,645
609,061
50,375
593,646
781,496
81,770
156,370
7,680
245,820
277,353
452,536
22,773
752,662
–
10,423
9,922
7,974
61,024
9,930
$ 254,805
$ 11,360
$ 266,165
$ 831,590
150
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
As at October 31, 2018
Fair value may not approximate carrying value
Fair value measurements using
(Millions of Canadian dollars)
Fair value
always
approximates
carrying value (1)
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 (3)
Subordinated debentures
16,197
–
57,099
65,847
8,889
74,736
45,559
Level 1
$
–
470
$
–
–
–
–
–
Level 2
–
44,897
18,391
323,114
154,781
477,895
480
193,591
470
541,663
184,887
270,349
15,218
470,454
4,264
46,195
–
$
520,913
$
–
–
–
–
–
–
–
–
69,606
160,010
10,235
239,851
712
406
9,260
$
Level 3
$
–
–
–
5,090
4,417
9,507
166
9,673
622
799
9
1,430
–
9,128
59
Total
–
45,367
18,391
328,204
159,198
487,402
646
551,806
70,228
160,809
10,244
241,281
712
9,534
9,319
$
Total
fair value
16,197
45,367
75,490
394,051
168,087
562,138
46,205
745,397
255,115
431,158
25,462
711,735
4,976
55,729
9,319
$
250,229
$
10,617
$
260,846
$
781,759
(1)
(2)
(3)
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.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Amounts have been reclassified to conform with this presentation.
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
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 LGD.
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.
Loans – Wholesale
Where market prices are available, wholesale 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, LGD, 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
151
Note 3 Fair value of financial instruments (continued)
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.
152
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Note 4 Securities
Carrying value of securities
(Millions of Canadian dollars)
Trading (2)
Debt issued or guaranteed by:
Canadian government
U.S. state, municipal and agencies
Other OECD government
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)
Debt issued or guaranteed by:
Canadian government
Federal
Amortized cost
Fair value
Yield (4)
Provincial and municipal
Amortized cost
Fair value
Yield (4)
U.S. state, municipal and agencies
Amortized cost
Fair value
Yield (4)
Other OECD government
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)
Amortized cost
Fair value
Amortized Cost (2)
Debt issued or guaranteed by:
Canadian government
U.S. state, municipal and agencies
Other OECD government
Asset-backed securities
Corporate debt and other debt
Amortized cost, net of allowance
Fair value
Total carrying value of securities
433
586
1,369
–
6,030
–
–
–
–
–
–
1,597
1,598
2.1%
236
236
1.2%
–
–
–
1
–
0.0%
1,564
1,565
1.4%
–
–
3,398
3,399
682
297
2,252
–
400
3,631
3,631
As at October 31, 2019
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
$ 1,974
771
538
–
359
$ 11,265
7,122
1,418
–
63
$ 7,783
8,601
2,211
–
308
$
–
383
2,773
–
–
75
8,268
–
1,778
9,537
1,466
–
267
–
20
2,827
–
$ 8,611
15,661
863
482
338
–
6
6,925
–
23,024
27,246
15,895
32,886
5
5
1.1%
4
4
4.8%
1,085
1,087
1.8%
178
178
2.1%
–
–
–
–
–
–
596
595
1.4%
954
953
2.7%
3,290
3,294
2.0%
3,839
3,836
2.4%
–
–
–
8
8
3.2%
3,222
3,225
1.9%
12,668
12,673
2.0%
–
–
–
–
–
–
–
13
14
4.5%
829
844
2.9%
1
1
3.8%
206
205
3.0%
3,982
3,972
3.2%
79
89
2.0%
–
–
54
57
4.2%
1,907
1,927
2.8%
13,986
14,053
2.7%
–
–
–
2,503
2,497
2.7%
4,190
4,169
3.1%
122
138
3.1%
–
–
4,494
4,499
21,355
21,359
5,110
5,125
22,762
22,841
1,978
478
1,431
9
1,853
5,749
5,822
9,831
1,680
1,634
616
5,717
19,478
19,628
1,515
2,018
–
–
145
3,678
3,746
–
12,190
–
–
58
12,248
12,277
With no
specific
maturity
Total
$
–
–
–
–
–
$ 31,411
41,692
6,496
482
1,335
–
–
–
41,453
41,453
433
1,070
22,162
41,453
146,534
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
248
463
248
463
–
–
–
–
–
–
–
655
657
1.7%
2,878
2,898
2.8%
20,787
20,876
2.5%
4,254
4,251
2.3%
2,709
2,702
2.7%
8,181
8,149
3.2%
17,655
17,690
1.9%
248
463
57,367
57,686
14,006
16,663
5,317
625
8,173
44,784
45,104
$13,060
$ 33,272
$68,083
$ 24,698
$67,975
$ 41,916
$249,004
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
153
Note 4 Securities (continued)
(Millions of Canadian dollars)
Trading (2)
Debt issued or guaranteed by:
Canadian government
U.S. state, municipal and agencies
Other OECD government
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)
Debt issued or guaranteed by:
Canadian government
Federal
Amortized cost
Fair value
Yield (4)
Provincial and municipal
Amortized cost
Fair value
Yield (4)
U.S. state, municipal and agencies
Amortized cost
Fair value
Yield (4)
Other OECD government
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)
Amortized cost
Fair value
Amortized Cost (2)
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
$
326
300
2,120
–
6,694
–
84
4,058
–
19,040
–
48
6,720
–
28,372
2,244
5,119
635
93
369
–
3
3,099
–
11,562
$ 6,599
13,899
779
794
409
–
25
5,543
–
28,048
$
–
–
–
–
–
$ 25,923
33,164
10,169
1,001
1,133
–
–
–
34,542
34,542
326
460
21,540
34,542
128,258
–
–
–
–
–
–
1,355
1,355
2.4%
225
225
0.6%
–
–
–
–
–
–
4,119
4,120
1.5%
–
–
5,699
5,700
–
–
–
51
51
1.7%
132
131
2.1%
86
86
2.4%
–
–
–
–
–
–
1,769
1,772
1.8%
–
–
2,038
2,040
173
169
1.7%
673
672
2.9%
2,766
2,768
2.3%
1,090
1,091
2.3%
59
59
1.6%
–
–
–
10,785
10,783
2.0%
–
–
15,546
15,542
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
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
$58,474
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
222
406
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%
222
406
48,232
48,499
–
–
–
–
–
–
–
$ 34,948
16,433
14,328
6,787
1,069
7,492
46,109
45,367
$ 222,866
Debt issued or guaranteed by:
Canadian government
U.S. state, municipal and agencies
Other OECD government
Asset-backed securities
Corporate debt and other debt
Amortized cost, net of allowance
Fair value
Total carrying value of securities
1,762
69
2,601
–
253
4,685
4,687
$ 17,079
1,427
115
1,386
5
1,434
4,367
4,360
$ 25,447
10,863
2,231
2,800
1,035
5,566
22,495
22,286
$ 66,409
2,381
2,177
–
29
161
4,748
4,635
$ 20,509
(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 are recorded at fair value. Amortized cost securities, included in Investment securities, are recorded at amortized cost and
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. During the year ended October 31, 2019, we disposed of $129 million of equity
securities measured at FVOCI (October 31, 2018 – $8 million). The cumulative gain on the date of disposals was $1 million (October 31, 2018 – $(1) million).
154
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Unrealized gains and losses on securities at FVOCI (1), (2)
(Millions of Canadian dollars)
Debt issued or guaranteed by:
Canadian government
Federal (3)
Provincial and municipal
U.S. state, municipal and agencies (3)
Other OECD government
Mortgage-backed securities (3)
Asset-backed securities
CDO
Non-CDO securities
Corporate debt and other debt
Equities
October 31, 2019
October 31, 2018
As at
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$
655 $
3 $
(1) $
657 $
2,878
20,787
4,254
2,709
7,334
847
17,655
248
43
215
2
1
1
4
45
218
(23)
2,898
(126) 20,876
4,251
2,702
(5)
(8)
(35)
(2)
7,300
849
(10) 17,690
463
(3)
244 $
1,578
18,000
1,469
2,176
6,248
856
17,439
222
– $
2
285
2
1
1
9
22
186
(26)
(6) $
238
1,554
(149) 18,136
1,470
2,174
(1)
(3)
(10)
(2)
6,239
863
(42) 17,419
406
(2)
$ 57,367 $
532 $
(213) $57,686 $ 48,232 $
508 $
(241) $48,499
(1)
(2)
(3)
Excludes $44,784 million of held-to-collect securities as at October 31, 2019 that are carried at amortized cost, net of allowance for credit losses (October 31, 2018 – $46,109
million).
Gross unrealized gains and losses includes $(3) million of allowance for credit losses on debt securities at FVOCI as at October 31, 2019 (October 31, 2018 – $11 million)
recognized in income and Other components of equity.
The majority of the MBS are residential. Cost/Amortized cost, Gross unrealized gains, Gross unrealized losses and Fair value related to commercial MBS are
$2,051 million, $1 million, $6 million and $2,046 million, respectively as at October 31, 2019 (October 31, 2018 – $1,442 million, $nil, $6 million and $1,436 million, respectively).
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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Transfers between stages, which are presumed to occur before any corresponding remeasurement of the allowance.
Purchases, which reflect the allowance related to assets newly recognized during the period, including those assets that
were derecognized following a modification of terms.
Sales 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.
Changes in risk, parameters and exposures, which comprise the impact of changes in model inputs or assumptions,
including changes in forward-looking macroeconomic conditions; partial repayments; changes in the measurement
following a transfer between stages; and unwinding of the time value discount due to the passage of time.
Allowance for credit losses – securities at FVOCI (1)
October 31, 2019
October 31, 2018
Performing
Impaired
Performing
Impaired
For the year ended
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Purchases
Sales and maturities
Changes in risk, parameters and exposures
Write-offs
Exchange rate and other
Balance at end of period
Stage 1
4
$
Stage 2
7
$
Stage 3 (2)
–
$
Total
$ 11
Stage 1
Stage 2
Stage 3
$
3
$
22
$
–
Total
$ 25
–
–
–
5
(3)
(2)
–
–
$
4
$
–
–
–
–
(7)
1
–
(1)
–
–
–
–
–
–
(8)
–
1
–
–
–
5
(10)
(9)
–
–
5
–
(36)
85
(47)
(8)
–
2
(5)
–
–
–
(17)
7
–
–
–
–
36
–
25
–
(62)
1
–
–
–
85
(39)
(1)
(62)
3
$
(7) $ (3)
$
4
$
7
$
–
$ 11
(1)
(2)
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 income is presented in Other components of equity.
Reflects changes in the allowance for purchased credit impaired securities.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
155
Note 4 Securities (continued)
Allowance for credit losses – securities at amortized cost
For the year ended
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Purchases
Sales and maturities
Changes in risk, parameters and exposures
Write-offs
Exchange rate and other
Balance at end of period
October 31, 2019
Performing
Stage 1
6
$
Stage 2
32
$
Impaired
Stage 3
–
$
Total
$ 38
October 31, 2018
Performing
Impaired
Stage 1
Stage 2
Stage 3
$
9
$
45
$
–
–
–
7
(1)
(6)
–
(1)
–
–
–
–
–
(15)
–
2
$
5
$
19
$
–
–
–
–
–
–
–
–
–
–
–
–
7
(1)
(21)
–
1
3
(7)
–
5
(3)
(2)
–
1
(3)
7
(2)
–
(11)
(3)
–
(1)
$ 24
$
6
$
32
$
–
$ 38
Total
$ 54
–
–
–
5
(14)
(5)
(2)
–
–
–
–
2
–
–
–
(2)
–
Credit risk exposure by internal risk rating
The following table presents the fair value of debt securities at FVOCI and gross carrying amount of securities at amortized cost.
Risk ratings are based on internal ratings used in the measurement of expected credit losses, 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
October 31, 2019
October 31, 2018
Performing
Impaired
Performing
Impaired
Stage 1
Stage 2
Stage 3 (1)
Total
Stage 1
Stage 2
Stage 3 (1)
Total
As at
$
$ 56,671
400
–
$ 57,071
$
1
1
–
2
$ 43,681
695
–
$ 44,376
5
$
46
386
–
$ 432
19
$ 44,371
$ 413
$
$
$
$
$
–
–
150
150
–
–
–
–
–
–
$ 56,672
401
150
$ 57,223
463
$ 57,686
$ 43,727
1,081
–
$ 44,808
24
$ 44,784
$ 46,956
500
–
$ 479
33
–
$ 47,456
$ 512
$ 44,958
367
–
$ 45,325
6
$ 119
703
–
$ 822
32
$ 45,319
$ 790
$
$
$
$
$
–
–
125
125
–
–
–
–
–
–
$ 47,435
533
125
$ 48,093
406
$ 48,499
$ 45,077
1,070
–
$ 46,147
38
$ 46,109
(1)
(2)
Includes $150 million of purchased credit impaired securities (October 31, 2018 – $125 million).
Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.
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), (5)
Total loans
Undrawn loan commitments – Retail
Undrawn loan commitments – Wholesale
As at October 31, 2019
Canada
United
States
Other
International
Total
Allowance for
losses (1)
Total net
of allowance
$ 287,767 $ 17,012 $
81,547
19,617
5,434
124,312
7,399
439
–
53,782
3,312 $ 308,091 $
3,304
255
–
17,776
92,250
20,311
5,434
195,870
(402) $
(762)
(791)
(50)
(1,095)
307,689
91,488
19,520
5,384
194,775
$ 518,677 $ 78,632 $
24,647 $ 621,956 $
(3,100) $
618,856
208,336
101,017
5,063
176,022
801
54,982
214,200
332,021
(225)
(70)
156
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
(Millions of Canadian dollars)
Retail (2)
Residential mortgages
Personal
Credit cards (3)
Small business (4)
Wholesale (2), (5)
Total loans
Undrawn loan commitments – Retail (6)
Undrawn loan commitments – Wholesale (6)
As at October 31, 2018
United
States
Other
International
Total
Allowance for
losses (1)
Total net
of allowance
$
$
$
$
13,493
7,172
368
–
59,442
80,475
4,007
169,910
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
204,652
319,853
$
$
(382)
(841)
(725)
(49)
(915)
(2,912)
(90)
(64)
$
282,089
91,859
18,690
4,817
179,363
$
576,818
Canada
$ 265,831
82,112
18,793
4,866
103,069
$ 474,671
199,395
96,146
(1)
(2)
(3)
(4)
(5)
(6)
Excludes allowance for loans measured at FVOCI of $nil (October 31, 2018 – $1 million).
Geographic information is based on residence of the 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.
Amounts have been revised from those previously presented.
Loans maturity and rate sensitivity
Maturity term (1)
Rate sensitivity
As at October 31, 2019
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Under
1 year (2)
1 to 5
years
Over 5
years
Total
$ 216,610 $ 187,721 $ 21,755 $ 426,086 $ 114,736 $ 304,448 $ 6,902 $ 426,086
195,870
165,502
154,445
195,870
Floating
10,913
30,512
27,329
3,039
Total
Fixed
Rate
Non-rate-
sensitive
$ 371,055 $ 218,233 $ 32,668 $ 621,956 $ 142,065 $ 469,950 $ 9,941 $ 621,956
(3,100)
(3,100)
Total loans net of allowance for loan losses
$ 618,856
$ 618,856
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Total loans net of allowance for loan losses
(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.
Maturity term (1)
Rate sensitivity
As at October 31, 2018
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-rate-
sensitive
Total
$ 217,188 $ 163,291 $ 18,973 $ 399,452 $ 123,826 $ 268,793 $
144,208
27,789
8,281
180,278
31,016
147,970
$ 361,396 $ 191,080 $ 27,254 $ 579,730 $ 154,842 $ 416,763 $
6,833 $ 399,452
180,278
1,292
8,125 $ 579,730
(2,912)
$ 576,818
(2,912)
$ 576,818
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
157
Note 5 Loans and allowance for credit losses (continued)
Allowance for credit losses
October 31, 2019
October 31, 2018
For the year ended
Balance at
beginning
of period
Provision
for credit
losses
Net
write-offs (1)
Exchange
rate and
other
Balance
at end
of period
Balance at
beginning
of period
Provision
for credit
losses
Net
write-offs (1)
Exchange
rate and
other
Balance
at end
of period
$
382 $
895
760
51
979
21
526
590
41
661
5
68 $
(37)$
(474)
(518)
(28)
(397)
(11)$
(12)
–
(3)
402 $
935
832
61
(78)
1,165
–
(2)
24
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
(Millions of Canadian dollars)
Retail
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Customers’ liability under
acceptances
$
3,088 $ 1,891 $
(1,454)$
(106)$ 3,419 $
2,976 $ 1,283 $
(1,112) $
(59) $ 3,088
Presented as:
Allowance for loan losses $
Other liabilities –
Provisions
Customers’ liability under
acceptances
Other components of
equity
2,912
154
21
1
$ 3,100 $
2,749
295
24
–
207
20
–
$ 2,912
154
21
1
(1)
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, 2019 that are no longer subject to enforcement activity was $179 million (October 31, 2018 – $83 million).
The following table reconciles the opening and closing allowance for loans and commitments, by stage, for each major product
category.
Reconciling items include the following:
(cid:129) Model changes, which generally comprise the impact of significant changes to the quantitative models used to estimate
(cid:129)
(cid:129)
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.
Originations, which reflect the allowance related to assets newly recognized during the period, including those assets that
were derecognized following a modification of terms.
(cid:129) Maturities, which reflect the allowance related to assets derecognized during the period without a credit loss being incurred,
(cid:129)
including those assets that were derecognized following a modification of terms.
Changes in risk, parameters and exposures, 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.
158
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Allowance for credit losses – Retail and Wholesale loans
October 31, 2019
October 31, 2018
Performing
Impaired
Performing
Impaired
For the year ended
(Millions of Canadian dollars)
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
Residential mortgages
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Personal
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Credit cards
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Small business
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Wholesale
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
$
142
$
64
$
176
$
382
$
140
$
65
$
173
$
378
–
87
(13)
(3)
51
(14)
(104)
–
–
–
–
(66)
16
(31)
–
(10)
104
–
–
–
–
(21)
(3)
34
–
–
41
(45)
8
(11)
146
$
77
$
179
$
–
–
–
–
51
(24)
41
(45)
8
(11)
402
242
$
512
$
141
$
895
23
544
(87)
(2)
101
(31)
(517)
–
–
(1)
272
$
(48)
(537)
88
(142)
1
(112)
758
–
–
–
520
–
(7)
(1)
144
–
–
351
(600)
126
(11)
$
143
$
(25)
–
–
–
102
(143)
592
(600)
126
(12)
935
161
$
599
$
–
$
760
–
452
(81)
(2)
5
(5)
(358)
–
–
1
–
(452)
81
(341)
–
(27)
800
–
–
(1)
–
–
–
343
–
–
175
(655)
137
–
173
$
659
$
–
$
17
$
16
$
18
$
11
18
(3)
–
13
(5)
(22)
–
–
–
29
$
(7)
(18)
3
(9)
–
(8)
32
–
–
1
10
–
–
–
9
–
–
27
(36)
8
(4)
$
22
$
–
–
–
–
5
(32)
617
(655)
137
–
832
51
4
–
–
–
13
(13)
37
(36)
8
(3)
61
274
$
340
$
365
$
979
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20
59
(18)
(2)
63
(13)
(110)
–
–
3
142
$
2
(59)
23
(16)
1
(10)
56
–
–
2
64
4
–
(5)
18
–
–
34
(51)
8
(5)
$
176
$
26
–
–
–
64
(23)
(20)
(51)
8
–
382
278
$
427
$
121
$
826
(10)
712
(140)
(3)
107
(33)
(668)
–
–
(1)
1
(712)
141
(157)
5
(130)
938
–
–
(1)
(6)
–
(1)
160
–
–
309
(552)
121
(11)
242
$
512
$
141
$
(15)
–
–
–
112
(163)
579
(552)
121
(13)
895
251
$
442
$
–
$
693
(65)
693
(123)
(2)
11
(12)
(592)
–
–
–
161
$
64
(693)
123
(227)
2
(60)
947
–
–
1
599
–
–
–
229
–
–
239
(599)
131
–
$
–
$
15
$
15
$
19
$
–
31
(5)
–
10
(4)
(31)
–
–
1
–
(31)
5
(11)
–
(9)
48
–
–
(1)
–
–
–
11
–
–
19
(35)
7
(3)
17
$
16
$
18
$
(1)
–
–
–
13
(72)
594
(599)
131
1
760
49
–
–
–
–
10
(13)
36
(35)
7
(3)
51
251
$
352
$
407
$
1,010
–
145
(33)
(5)
239
(162)
(178)
–
–
1
$
281
$
–
(133)
36
(57)
44
(165)
331
–
–
–
396
–
(12)
(3)
62
–
–
552
(440)
43
(79)
–
–
–
–
283
(327)
705
(440)
43
(78)
(17)
207
(66)
(2)
227
(153)
(176)
–
–
3
$
488
$
1,165
$
274
$
(12)
(207)
93
(43)
46
(179)
289
–
–
1
340
(6)
–
(27)
45
–
–
137
(207)
65
(49)
$
365
$
(35)
–
–
–
273
(332)
250
(207)
65
(45)
979
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
159
Note 5 Loans and allowance for credit losses (continued)
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:
(cid:129)
(cid:129)
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 triggered by changes to any of the above inputs.
(cid:129)
(cid:129)
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.
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 macroeconomic 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. The upside scenario reflects stronger economic growth than the base
scenario for the first two years, without a monetary policy response, followed by a return to a long-run sustainable growth rate
within the forecast period.
As at
October 31, 2019
October 31, 2018
Base Scenario
Upside
Scenario
Downside
Scenario
Base Scenario
Upside
Scenario
Downside
Scenario
Next 12
months
2 to 5
years
Next 12
months
2 to 5
years
Next 12
months
2 to 5
years
Next 12
months
2 to 5
years
Next 12
months
2 to 5
years
Next 12
months
2 to 5
years
5.8% 6.0%
3.8% 4.2%
5.4% 4.8%
3.7% 3.4%
6.6% 6.8%
4.8% 5.3%
5.8% 6.0%
3.6% 4.1%
5.7% 5.1%
3.6% 3.3%
6.8% 7.1%
4.8% 5.3%
1.6% 1.8%
1.7% 1.5%
2.4% 2.1% (2.0)% 2.8%
2.1% 1.9% (2.3)% 2.6%
1.7% 1.7%
2.1% 1.4%
2.3% 2.1% (2.0)% 2.7%
2.1% 1.9% (2.3)% 2.6%
$ 59
$ 68
$ 69
$ 70
$ 43
$ 56
$ 76
$ 72
$ 88
$ 76
$ 56
$ 61
4.5% 4.7%
5.3% 2.5% (9.2)% 5.8%
0.1% 3.9%
5.3% 2.5% (9.2)% 5.8%
Driver
Unemployment rate: (1)
Canada
U.S.
Gross domestic product: (2)
Canada
U.S.
Oil price (West Texas
Intermediate) average price
(US$) (3)
Canadian housing price index
growth rate (4)
(1)
(2)
(3)
(4)
Represents the average quarterly unemployment level over the period.
Represents the average quarter-over-quarter gross domestic product annualized over the period.
Represents the average quarterly price per barrel over the period.
Growth rates are calculated on an annualized basis spanning years 2 to 5.
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 yields, the U.S. 10 year
government bond yields, 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 rates, 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 products, TSX index, S&P 500 index, oil prices, natural gas prices, and
commercial real estate price index.
In addition to the scenarios described above, two additional downside scenarios were designed for the energy and real
estate sectors. The average oil price (West Texas Intermediate) used in our energy downside scenario in the next 12 months is $25
per barrel, and subsequently recovers to an average price of $45 per barrel in the following 2 to 5 years (October 31, 2018 – $27
and $45 per barrel). The housing price index in our real estate downside scenario contracts by 30% in the next twelve months,
and subsequently recovers to an average growth rate of 11% on an annualized basis in the following 2 to 5 years (October 31, 2018
– (30)% and 11%).
160
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Scenariodesignandweightings
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 and
weightings that are more optimistic and pessimistic, respectively, than the base case. As described above, two additional
downside scenarios capture the non-linear nature of potential credit losses across our 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
$376 million at October 31, 2019 (October 31, 2018 – $290 million).
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.
October 31, 2019
October 31, 2018
As at
Performing loans (1)
ACL – All performing
loans in Stage 1
1,737
$
Impact of
staging
826
$
Stage 1 and 2
ACL
2,563
$
ACL – All performing
loans in Stage 1
Impact of
staging
Stage 1 and 2
ACL
$
1,526
$
841
$
2,367
(1)
Represents loans and commitments in stage 1 and stage 2.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
161
Note 5 Loans and allowance for credit losses (continued)
Credit risk exposure by internal risk rating
The following table presents 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 used in
the measurement of expected credit losses 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)
Stage 1
Stage 2 Stage 3 (1)
Total
Stage 1
Stage 2 Stage 3 (1)
Total
October 31, 2019
October 31, 2018
As at
Retail
Loans outstanding –
Residential mortgages
Low risk
Medium risk
High risk
Not rated (2)
Impaired
$ 238,377 $ 6,764 $
14,033
2,843
40,030
–
1,347
2,722
726
–
– $ 245,141 $ 222,026 $ 3,688 $
–
–
–
732
15,380
5,565
40,756
732
13,681
2,577
34,670
–
1,369
2,897
578
–
– $ 225,714
15,050
–
5,474
–
35,248
–
726
726
295,283
11,559
732
307,574
272,954
8,532
726
282,212
Items not subject to impairment (3)
Total
Loans outstanding – Personal
Low risk
Medium risk
High risk
Not rated (2)
Impaired
Total
Loans outstanding – Credit cards
Low risk
Medium risk
High risk
Not rated (2)
Total
$ 71,619 $ 1,944 $
5,254
843
7,293
–
85,009
3,011
1,874
105
–
6,934
$ 13,840 $
2,250
137
677
16,904
103 $
1,827
1,432
45
3,407
Loans outstanding –Small business
Low risk
Medium risk
High risk
Not rated (2)
Impaired
$
Total
Undrawn loan commitments –
2,200 $
2,163
138
10
–
4,511
107 $
563
196
–
–
866
517
308,091
– $ 73,563 $ 71,763 $ 1,256 $
–
–
–
307
8,265
2,717
7,398
307
6,124
998
8,595
–
1,925
1,672
64
–
259
282,471
– $ 73,019
8,049
–
2,670
–
8,659
–
303
303
307
92,250
87,480
4,917
303
92,700
– $ 13,943 $ 13,185 $
–
–
–
4,077
1,569
722
2,234
139
764
–
20,311
16,322
– $
–
–
–
57
57
2,307 $
2,726
334
10
57
5,434
2,004 $
2,230
95
166
–
4,495
100 $
1,632
1,331
30
3,093
46 $
102
178
1
–
327
– $ 13,285
3,866
–
1,470
–
794
–
–
19,415
– $
–
–
–
44
44
2,050
2,332
273
167
44
4,866
– $ 183,696
11,033
–
3,906
–
6,017
–
–
204,652
Retail (4)
Low risk
Medium risk
High risk
Not rated (2)
Total
$ 196,743 $ 1,894 $
8,251
851
5,861
246
208
146
– $ 198,637 $ 182,426 $ 1,270 $
–
–
–
8,497
1,059
6,007
10,794
3,740
5,937
239
166
80
211,706
2,494
–
214,200
202,897
1,755
Wholesale – Loans outstanding
Investment grade
Non-investment grade
Not rated (2)
Impaired
Items not subject to impairment (3)
Total
Undrawn loan commitments –
Wholesale (4)
Investment grade
Non-investment grade
Not rated (2)
Total
$ 47,133 $
119,778
5,862
–
172,773
97 $
11,940
320
–
12,357
$ 222,819 $
96,191
3,986
322,996
18 $
9,007
–
9,025
– $ 47,230 $ 46,869 $
–
–
1,829
131,718
6,182
1,829
106,027
6,692
–
1,829
186,959
159,588
8,911
195,870
– $ 222,837 $ 220,626 $
–
–
105,198
3,986
87,894
4,246
–
332,021
312,766
324 $
10,190
411
–
10,925
– $ 47,193
116,217
–
7,103
–
1,096
1,096
1,096
171,609
8,669
180,278
92 $
6,995
–
7,087
– $ 220,718
94,889
–
4,246
–
–
319,853
(1)
(2)
(3)
(4)
As at October 31, 2019, 86% of credit-impaired loans were either fully or partially collateralized (October 31, 2018 – 88%). 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.
In certain cases where an internal risk rating is not assigned, we use other approved credit risk assessments or rating methodologies, policies and tools to manage our
credit risk.
Items not subject to impairment are loans held at FVTPL.
Amounts have been revised from those previously presented.
162
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Loans past due but not impaired (1)
October 31, 2019
October 31, 2018
As at
(Millions of Canadian dollars)
Retail
Wholesale
1 to 29 days 30 to 89 days
$
3,173 $
1,543
1,369 $
460
186 $ 4,728 $
3
2,006
$
4,716 $
1,829 $
189 $ 6,734 $
2,995 $
1,246
4,241 $
1,402 $
468
1,870 $
179 $ 4,576
1,714
–
179 $ 6,290
90 days
and greater
Total
1 to 29 days 30 to 89 days
90 days
and greater
Total
(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.
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 2019 and 2018.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
163
Note 6 Derecognition of financial assets (continued)
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.
October 31, 2019
October 31, 2018
As at
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
$ 32,794 $
220,250 $
6,336 $259,380 $
34,105 $
202,543 $
4,271 $ 240,919
(Millions of Canadian dollars)
Carrying amount of transferred
assets that do not qualify for
derecognition
Carrying amount of associated
liabilities
Fair value of transferred assets
Fair value of associated liabilities
Fair value of net position
$ 32,757 $
33,143
$
(386) $
32,615
220,250
220,250 $
220,250
6,336 259,201
6,336 $259,343 $
6,336 259,729
– $
– $
(386) $
33,975
202,543
4,271
240,789
33,490 $
33,916
(426) $
202,544 $
202,544
4,271 $ 240,305
240,731
4,271
– $
– $
(426)
(1)
(2)
(3)
Includes Canadian residential mortgage loans transferred primarily to Canada Housing Trust at the initial securitization and other permitted investments used for
funding requirements after the initial securitization.
CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
Does not include over-collateralization of assets pledged.
Note 7 Structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our
financing and investing needs as well as those of our customers. A structured entity is an entity in which voting or similar rights
are not the dominant factor in deciding control. Structured entities are generally created to achieve a narrow and well defined
objective with restrictions around their ongoing activities. We consolidate a structured entity when we control the entity in
accordance with our accounting policy as described in Note 2. In other cases, we may sponsor or have an interest in such an
entity but 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 that we administer and generally do not have rights to, or
control of, their assets. However, we issue asset-backed commercial paper (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, 2019, $1.2 billion of financial assets held by the conduit was included in Loans
(October 31, 2018 – $2.4 billion) and $0.7 billion of ABCP issued by the conduit was included in Deposits (October 31, 2018 – $1.3
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, 2019, $7.1 billion of notes issued by our credit card securitization vehicle were included in Deposits on our
Consolidated Balance Sheets (October 31, 2018 – $8.5 billion).
164
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Collateralized commercial paper vehicle
We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party
investors. The structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to
advance funds to the entity in the event there are insufficient funds from other sources to settle maturing commercial paper. We
pledge collateral to secure the loans and are exposed to the market and 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, 2019, $16.2 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated
Balance Sheets (October 31, 2018 – $16.6 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 RBC; therefore, investors have a claim against the Bank which will continue if the
covered bonds are not paid by the Bank and the mortgage assets in 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, 2019, the total
amount of mortgages transferred and outstanding was $53.9 billion (October 31, 2018 – $53.0 billion) and $39.8 billion of covered
bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2018 – $36.9 billion).
Municipal bond TOB structures
We sell taxable and tax-exempt municipal bonds into Tender Option Bond (TOB) structures, which consist of a credit
enhancement (CE) trust and a TOB trust. The CE trust purchases a bond from us, financed with a trust certificate issued to the
TOB trust. The TOB trust then issues floating-rate certificates to short-term investors and a residual certificate that is held by us.
We are the remarketing agent for the floating-rate certificates and provide a liquidity facility to the TOB trust which requires us to
purchase any certificates tendered but not successfully remarketed. We also provide a letter of credit to the CE trust under which
we are required to extend funding if there are any losses on the underlying bonds. We earn interest on the residual certificate and
receive market-based fees for acting as remarketing agent and providing the liquidity facility and letter of credit.
We consolidate both the CE trust and TOB trust when we are the holder of the residual certificate as we have decision-
making power over the relevant activities, including the selection of the underlying municipal bonds and the ability to terminate
the structure, and are exposed to variability from the performance of the underlying municipal bonds. As at October 31, 2019,
$8.3 billion of municipal bonds were included in Investment securities related to consolidated TOB structures (October 31, 2018 –
$7.1 billion) and a corresponding $8.7 billion of floating-rate certificates were included in Deposits on our Consolidated Balance
Sheets (October 31, 2018 – $7.6 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, 2019, $465 million
of Trading securities held in the consolidated funds (October 31, 2018 – $548 million) and $95 million of Other liabilities
representing the fund units held by third parties (October 31, 2018 – $128 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)
Multi-seller
conduits (1)
Structured
finance
As at October 31, 2019
Non-RBC
managed
investment
funds
Third-party
securitization
vehicles
Other
Total
$
$
$
75 $
–
97
–
– $
2,718
–
60
1,865 $
–
–
–
– $
503 $
6,392
–
–
1,517
83
244
2,443
10,627
180
304
172 $ 2,778 $
1,865 $
6,392 $
2,347 $
13,554
20 $
30
– $
–
– $
–
– $
–
– $
–
20
30
50 $
$
– $
$ 38,032 $ 6,446 $
– $
– $
2,123 $ 10,756 $
– $
2,667 $
50
60,024
Total assets of unconsolidated structured entities
$ 37,192 $ 17,571 $412,046 $ 84,282 $293,423 $ 844,514
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
165
Note 7 Structured entities (continued)
(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
2,721 $
–
–
–
– $
906 $
6,292
–
–
1,647
52
288
65 $ 2,477 $
2,721 $
6,292 $
2,893 $
3,692
10,240
52
464
14,448
84 $
–
84 $
– $
–
– $
– $
–
– $
– $
–
– $
– $
–
– $
84
–
84
38,342 $ 5,477 $
2,981 $
10,215 $
3,556 $
60,571
37,590 $ 15,776 $ 523,176 $
67,446 $ 454,567 $ 1,098,555
(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 $23.6 billion as at October 31, 2019 (October 31, 2018 –
$24.7 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 25.
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
166
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. These
facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement designed to cover a
multiple of historical losses. We do not consolidate these 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 financial assets from the sponsor. 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.
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, new market tax credits or renewable energy tax credits to third parties (tax credit funds). We
are sponsors of the tax credit funds as a result of our responsibility to manage the funds, arrange the financing, and perform the
administrative duties of these tax credit funds. We do not consolidate the tax credit funds as the third-party investors in these
funds have the decision-making power to select the underlying investments and are exposed to the majority of the residual
ownership and tax risks of the funds.
We also purchase passive interests in renewable energy tax credit entities created and controlled by third parties. We do not
consolidate these third party funds as we do not have decision-making power over the relevant activities and our investments
are managed as part of larger portfolios which are held for trading purposes.
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 ABS 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, 2019 and 2018, 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, 2019, we transferred commercial mortgages with a carrying amount of
$696 million (October 31, 2018 – $352 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, 2019 and 2018, 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
167
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 EAD.
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 clearing
houses which act as central counterparties. Cross currency swaps involve the exchange of fixed payments in one currency for the
receipt of fixed payments in another currency. Cross currency interest rate swaps involve the exchange of both interest and
notional amounts in two different currencies.
Equity swaps are contracts in which one counterparty agrees to pay or receive from the other cash flows based on changes
in the value of an equity index, a basket of stocks or a single stock.
Options
Options are contractual agreements under which the seller (writer) grants the purchaser the right, but not the obligation, either to buy
(call option) or sell (put option) a security, exchange rate, interest rate, or other financial instrument or commodity at a specified
price, at or by a predetermined future date. The seller (writer) of an option can also settle the contract by paying the cash settlement
value of the purchaser’s right. The seller (writer) receives a premium from the purchaser for this right. The various option agreements
that we enter into include but are not limited to interest rate options, foreign currency options, equity options and index options.
Credit derivatives
Credit derivatives are OTC contracts that transfer credit risk related to an underlying financial instrument (referenced asset)
from one counterparty to another. Credit derivatives include credit default swaps, credit default baskets and total return swaps.
Credit default swaps provide protection against the decline in the value of the referenced asset as a result of specified credit
events such as default or bankruptcy. They are similar in structure to an option, whereby the purchaser pays a premium to the
seller of the credit default swap in return for payment contingent on a credit event affecting the referenced asset.
Credit default baskets are similar to credit default swaps except that the underlying referenced financial instrument is a
group of assets instead of a single asset.
Total return swaps are contracts where one counterparty agrees to pay or receive from the other cash amounts based on
changes in the value of a 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
168
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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.
Notional amount of derivatives by term to maturity (absolute amounts)
(Millions of Canadian dollars)
Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (2)
Other contracts (3)
Exchange-traded contracts
Interest rate contracts
Futures – long positions
Futures – short positions
Options purchased
Options written
Foreign exchange contracts
Futures – long positions
Futures – short positions
Other contracts
(Millions of Canadian dollars)
Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (2)
Other contracts
Exchange-traded contracts
Interest rate contracts
Futures – long positions
Futures – short positions
Options purchased
Options written
Foreign exchange contracts
Futures – long positions
Futures – short positions
Other contracts
As at October 31, 2019 (1)
Term to maturity
Within
1 year
1 through
5 years
Over
5 years
Total
Trading
Other than
Trading
$ 2,014,752 $ 179,624 $
387 $ 2,194,763 $ 2,186,862 $
3,294,746
83,247
77,601
1,715,266
79,264
469,910
54,756
54,985
2,693
201,489
107,054
363,947
56,657
59,840
5,026,410
462,599
464,906
3,331,025
174,042
182,690
11,652,181
719,888
725,197
11,180,497
719,888
725,197
30,523
50,416
894,250
14,409
14,969
14,724
90,436
118,805
120,247
36,985
16,395
985
55,166
425,301
3,061
3,383
3,437
18,463
1,746,774
184,846
1,789,461
72,226
73,337
20,854
310,388
1,724,606
177,622
1,743,465
72,226
73,337
20,341
303,893
187
46
–
–
226,046
484,240
93,642
76,235
226,046
484,240
93,642
76,235
7,901
471,684
–
–
22,168
7,224
45,996
–
–
513
6,495
–
–
–
–
28
–
214,725
–
–
–
$ 8,850,960 $ 7,579,943 $ 4,198,173 $ 20,629,076 $ 20,067,095 $ 561,981
28
–
258,970
28
–
258,970
–
–
44,245
–
–
–
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 $
– $
1,904,401 $
1,904,401 $
4,377,512
155,985
156,886
2,856,403
27,273
37,217
11,768,955
284,921
281,357
11,424,094
284,921
281,357
1,397,520
30,358
347,477
33,202
37,716
1,578
81,720
38,825
32,424
2,587
2,544
30,688
4,379
767,742
11,037
12,250
5,263
66,686
22,465
23,072
3,312
1,291
616
1,170
365,880
1,807
4,515
3,424
17,409
11
6
–
–
1,428,824
35,907
1,481,099
46,046
54,481
10,265
165,815
61,301
55,502
5,899
3,835
1,420,575
27,545
1,430,437
46,046
54,481
9,752
161,323
61,301
55,502
5,899
3,835
–
344,861
–
–
8,249
8,362
50,662
–
–
513
4,492
–
–
–
–
277
340
228,549
–
–
–
$ 8,854,687 $ 5,706,664 $ 3,316,103 $ 17,877,454 $ 17,460,315 $ 417,139
277
340
288,229
277
340
288,229
–
–
59,308
–
–
372
(1)
(2)
(3)
On November 1, 2018, we prospectively implemented the standardized approach for measuring counterparty credit risk (SA-CCR) in accordance with the Capital Adequacy
Requirements (CAR) guidelines in determining our derivative notional amounts.
Credit derivatives with a notional value of $0.5 billion (October 31, 2018 – $0.5 billion) are economic hedges. Trading credit derivatives comprise protection purchased of
$12.6 billion (October 31, 2018 – $6.2 billion) and protection sold of $7.7 billion (October 31, 2018 – $3.6 billion).
Under SA-CCR, Other contracts exclude loan syndication derivatives of $7.7 billion.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
169
Note 8 Derivative financial instruments and hedging activities (continued)
Fair value of derivative instruments (1)
(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
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Credit derivatives
Other contracts
As at
October 31, 2019
October 31, 2018
Positive Negative
Positive
Negative
$
30 $
39,669
5,898
–
45,597
11,263
529
26,569
1,242
–
39,603
169
15,356
100,725
848
848
116
193
904
1,213
–
181
2,242
31
32,570
–
6,756
39,357
11,755
223
26,188
–
898
39,064
279
18,517
97,217
742
742
118
527
501
1,146
3
140
2,031
$
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
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
2,886
Total gross fair values before:
Valuation adjustments determined on a pooled basis
Impact of netting agreements that qualify for balance sheet offset
102,967
(697)
(710)
99,248
5
(710)
$ 101,560 $ 98,543
95,247
(625)
(583)
90,787
34
(583)
$ 94,039 $ 90,238
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Fair value of derivative instruments by term to maturity (1)
October 31, 2019
October 31, 2018
As at
(Millions of Canadian dollars)
Derivative assets
Derivative liabilities
Less than
1 year
1 through
5 years
Over
5 years
Total
Total
$ 25,342 $ 28,568 $ 47,650 $ 101,560 $ 28,241 $ 29,197 $ 36,601 $ 94,039
90,238
98,543
46,545
25,495
26,503
27,013
36,505
26,720
Less than
1 year
1 through
5 years
Over
5 years
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
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 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
170
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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 and credit equivalent amounts are determined in accordance with OSFI’s non-modelled regulatory SA-CCR
under the CAR guidelines beginning November 1, 2018. The replacement cost represents the total fair value of all outstanding
contracts in a gain position after factoring in the master netting agreements and applicable margins, scaled by a regulatory
factor. The credit equivalent amount is defined as the replacement cost plus an additional amount for potential future credit
exposure also scaled by a regulatory factor. The risk-weighted equivalent is determined by applying appropriate risk-weights to
the credit equivalent amount, including those risk weights reflective of model approval under the internal ratings based
approach. As at October 31, 2018, the replacement cost and credit equivalent amounts were calculated under OFSI’s
non-modelled regulatory current exposure method for counterparty risk.
Derivative-related credit risk (1)
.
October 31, 2019 (2)
As at
(Millions of Canadian dollars)
Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Swaps
Options purchased
Options written
Credit derivatives (5)
Other contracts
Exchange-traded contracts
Replacement
cost
Credit
equivalent
amount (3)
Risk-weighted
equivalent (4)
Replacement
cost
October 31, 2018
Credit
equivalent
amount (3)
Risk-weighted
equivalent (4)
$
18
6,487
149
–
2,333
3,047
404
4
156
1,972
5,439
$ 20,009
$
73
15,911
547
256
15,822
15,678
908
213
613
10,766
19,630
$ 80,417
$
19
6,229
326
113
3,899
4,001
285
67
40
4,853
393
$ 20,225
$
307
9,671
610
–
4,589
9,342
443
–
71
9,709
2,912
$ 37,654
$
324
20,321
857
–
10,944
13,718
1,100
–
770
9,959
11,285
$ 69,278
$
13
3,363
407
–
3,439
5,002
478
–
153
4,303
225
$ 17,383
(1)
(2)
(3)
(4)
(5)
The amounts presented are net of master netting agreements in accordance with CAR guidelines.
On November 1, 2018, we prospectively implemented SA-CCR in accordance with CAR guidelines in determining our replacement cost, credit equivalent amount and risk-
weighted equivalent.
Beginning on November 1, 2018, the credit equivalent amount includes collateral in accordance with CAR guidelines. As at October 31, 2018, the credit equivalent amount
included $16 billion of collateral applied.
The risk-weighted balances are calculated in accordance with CAR guidelines and exclude CVA of $13 billion (October 31, 2018 – $12 billion).
The October 31, 2018 amounts exclude 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 (2)
Counterparty type (3)
As at October 31, 2019 (1)
(Millions of Canadian dollars)
Gross positive replacement cost
Impact of master netting agreements and
applicable margins
Replacement cost (after netting agreements)
AAA, AA
A
$ 27,126 $ 38,812 $ 20,620 $
BBB BB or lower
Total
16,409 $ 102,967 $ 48,509 $
Banks
Other
Total
18,126 $ 36,332 $ 102,967
OECD
governments
23,146
35,088
16,719
8,005
82,958
47,376
17,705
17,877
82,958
$ 3,980 $ 3,724 $ 3,901 $
8,404 $ 20,009 $ 1,133 $
421 $ 18,455 $ 20,009
(Millions of Canadian dollars)
AAA, AA
A
BBB BB or lower
Total
Banks
OECD
governments
Other
Risk rating (2)
Counterparty type (3)
As at October 31, 2018
Gross positive replacement cost
Impact of master netting agreements
$ 25,458 $ 32,693 $ 21,215 $
24,255
14,544
15,046
15,881 $
3,748
95,247 $ 42,937 $
57,593
36,081
18,749 $ 33,561 $
8,348
13,164
Total
95,247
57,593
Replacement cost (after netting agreements)
$ 10,914 $
8,438 $
6,169 $
12,133 $
37,654 $
6,856 $
10,401 $ 20,397 $
37,654
(1)
(2)
(3)
On November 1, 2018, we prospectively implemented SA-CCR in accordance with CAR guidelines in determining our replacement cost.
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 CAR guidelines.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
171
Note 8 Derivative financial instruments and hedging activities (continued)
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.
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:
(cid:129) Mismatches in the terms of hedged items and hedging instruments, for example the frequency and timing of when
(cid:129)
(cid:129)
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 and predominately reference Interbank Offered Rates (IBORs) across multiple jurisdictions.
Certain swaps will be affected by the Interest Rate Benchmark Reform as the market transitions to alternative risk free or nearly
risk free rates by the end of 2021.
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, we have adopted dynamic hedging 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. The variable rate instruments and forecast transactions which
reference certain IBORs will be affected by the Interest Rate Benchmark Reform. 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 use cross currency swaps and forward contracts to manage the cash flow variability arising from
fluctuations in foreign exchange rates on our issued foreign denominated fixed rate liabilities and highly probable forecasted
transactions. The maturity profile and repayment terms of these swaps are matched to those of our foreign denominated
exposures 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, some of which reference IBORs that will be affected by the Interest Rate Benchmark Reform, 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.
172
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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 (1)
October 31, 2019
October 31, 2018
As at
Designated as hedging
instruments in hedging
relationships
Designated as hedging
instruments in hedging
relationships
Fair
Value
Cash
Flow
Net
investment
Not designated
in a hedging
relationship
Fair
Value (2)
Cash
Flow (2)
Net
investment
Not designated
in a hedging
relationship (2)
$ 146 $
77 $
52 $ 101,285 $ 404 $
12 $
13 $
93,610
187
–
526
70
– 27,688
97,760
n.a.
4
–
413
–
28
25,565
89,793
n.a.
(Millions of Canadian dollars)
Assets
Derivative instruments
Liabilities
Derivative instruments
Non-derivative instruments
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Amounts have been revised from those previously presented.
(2)
n.a. not applicable
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
(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
As at October 31, 2019
Notional amounts
Carrying amount (1)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 4,625
16,003
$ 20,439
48,361
$ 3,909
9,065
$ 28,973
73,429
$
2
144
$
187
–
1.9%
1.7%
2.2%
1.8%
2.7%
1.8%
2.2%
1.7%
As at October 31, 2018
Notional amounts
Carrying amount (1), (2)
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
$ 311
93
$
4
–
1.1%
1.6%
2.4%
1.8%
2.8%
1.8%
2.3%
1.8%
(1)
(2)
The carrying value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Amounts have been revised from those previously presented.
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
As at October 31, 2019
Notional amounts
Carrying amount (1)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 17,327
200
$ 11,729
54,610
$ 1,696
4,803
$ 30,752
59,613
$
$
–
–
–
–
2.1%
2.6%
$
$ 2,937
–
–
1.33
2.0%
1.9%
63
–
1.48
–
$
2.6%
2.4%
88
–
1.55
–
2.1%
2.0%
$ 3,088
–
1.52
1.33
$
2
$
526
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
173
Note 8 Derivative financial instruments and hedging activities (continued)
(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
As at October 31, 2018
Notional amounts
Carrying amount (1), (2)
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
$
$
–
–
–
–
$
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
(1)
(2)
The carrying value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Amounts have been revised from those previously presented.
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
(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
n.a. not applicable
As at October 31, 2019
Notional/Principal
Carrying amount
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 8,701
1.31
–
–
$ 5,355
1.33
1.47
1.67
$ 14,843
1.29
–
1.69
–
–
–
–
$
$ 4,144
1.31
1.51
–
–
–
–
–
$
$ 27,688
1.30
1.51
1.69
$ 5,355
1.33
1.47
1.67
n.a.
$ 27,859
$
52
$
70
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
n.a.
$ 25,043
$
13
$
28
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
As at and for the year ended October 31, 2019
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
Carrying amount
(Millions of Canadian dollars)
Interest rate risk
Fixed rate assets (1)
Fixed rate liabilities (1)
Assets Liabilities
Assets Liabilities
Balance sheet item(s):
Changes in fair
values used for
calculating hedge
ineffectiveness
$29,985 $
– $ 569 $
–
– 74,099
–
693
Securities – Investment, net of
applicable allowance; Loans – Retail $
Deposits – Business and government;
Subordinated debentures
1,028
(2,045)
174
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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
(Millions of Canadian dollars)
Interest rate risk
Fixed rate assets (1)
Fixed rate liabilities (1)
Assets Liabilities
Assets Liabilities
Balance sheet item(s):
Changes in fair
values used for
calculating hedge
ineffectiveness
$ 20,172 $
– $ (529) $
–
–
68,714
–
(1,302)
Securities – Investment, net of
applicable allowance; Loans – Retail $
Deposits – Business and government;
Subordinated debentures
(650)
1,018
(1)
As at October 31, 2019, 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 $53 million for fixed-rate assets and a loss of $170 million for fixed-rate liabilities (October 31, 2018 – $105 million and $277 million,
respectively).
Cash flow and net investment hedges – assets and liabilities designated as hedged items
As at and for the year ended October 31, 2019
(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
(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):
Changes in fair
values used for
calculating hedge
ineffectiveness
Cash flow hedge/foreign
currency translation reserve
Continuing hedges
Discontinued
hedges
Securities – Investment, net of
applicable allowance; Loans – Retail
Deposits – Business and government;
Deposits – Personal
Securities – Investment, net of
applicable allowance; Loans – Retail
Deposits – Business and government
$
(608)
$
163
$
1,274
(372)
(5)
125
(1)
9
84
70
–
–
n.a.
(7)
(5,407)
(871)
As at and for the year ended October 31, 2018
Changes in fair
values used for
calculating hedge
ineffectiveness
Cash flow hedge/foreign
currency translation reserve
Continuing hedges
Discontinued
hedges
Balance sheet item(s):
Securities – Investment, net of
applicable allowance; Loans – Retail
Deposits – Business and government;
Deposits – Personal
Securities – Investment, net of
applicable allowance; Loans – Retail
Deposits – Business and government
n.a.
$
308
$
(187)
$
(171)
(769)
706
477
19
60
315
(4)
95
–
–
(5,365)
(923)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
175
Note 8 Derivative financial instruments and hedging activities (continued)
Effectiveness of designated hedging relationships
(Millions of Canadian dollars)
Fair value hedges
Interest rate risk
Interest rate contracts – fixed rate assets
Interest rate contracts – fixed rate liabilities
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
(Millions of Canadian dollars)
Fair value hedges
Interest rate risk
For the year ended October 31, 2019
Change in fair value
of hedging
instrument
Hedge
ineffectiveness
recognized in
income (1)
Changes in the value of
the hedging instrument
recognized in OCI
Amount reclassified
from hedge reserves
to income
$
(1,060) $
2,032
(32) $
(13)
$
–
–
605
(1,261)
5
(125)
(50)
57
8
(5)
–
–
–
–
582
(1,265)
8
(193)
(50)
57
–
–
(25)
220
5
(106)
–
(2)
For the year ended October 31, 2018
Change in fair value
of hedging
instrument
Hedge
ineffectiveness
recognized in
income (1)
Changes in the value of
the hedging instrument
recognized in OCI
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 $70 million that are excluded from the assessment of hedge effectiveness and are offset by economic
hedges (October 31, 2018 – $46 million).
176
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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:
For the year ended October 31, 2019
Foreign currency
Cash flow hedge
translation reserve
reserve
4,147
688 $
$
For the year ended October 31, 2018
Cash flow hedge
reserve
$
431 $
Foreign currency
translation reserve
3,545
(Millions of Canadian dollars)
Balance at the beginning of the year
Cash flow hedges
Effective portion of changes in fair value:
Interest rate risk
Foreign exchange risk
Equity price risk
Net amount reclassified to profit or loss:
Ongoing hedges:
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
Reclassification of losses (gains) on
foreign currency translation to income
Reclassification of losses (gains) on net
investment hedging activities to income
Tax on movements on reserves during
the period
Balance at the end of the year
$
Note 9 Premises and equipment
(683)
(185)
108
24
104
(93)
(219)
–
–
–
250
(6) $
399
(147)
(18)
44
172
7
(108)
–
–
–
(92)
688 $
(50)
57
66
2
2
(3)
4,221
$
(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
$ 153
For the year ended October 31, 2019
Land Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
process
$ 153
–
–
–
–
–
$ 153
$
$
–
–
–
–
–
–
$ 1,399
–
4
(10)
–
2
$ 1,395
$
$
$
669
45
(8)
–
(3)
703
692
$
$
$
$
$
2,123
195
84
(68)
3
(12)
2,325
1,556
273
(61)
1
(11)
1,758
567
$
$
$
$
$
1,373
129
82
(29)
(1)
3
1,557
1,051
113
(26)
–
(1)
1,137
420
$
$
$
$
$
2,726
81
262
(65)
2
(5)
$ 264
591
(432)
–
–
9
3,001
$ 432
$ 8,863
$
1,930
196
(56)
1
3
2,074
$
–
–
–
–
–
–
$ 5,206
627
(151)
2
(12)
$ 5,672
927
$ 432
$ 3,191
(331)
17
841
–
–
75
4,147
Total
$ 8,038
996
–
(172)
4
(3)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
177
Note 9 Premises and equipment (continued)
(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
For the year ended October 31, 2018
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
process
Total
$ 157
–
–
(5)
1
–
$ 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
$ 7,448
733
–
(186)
22
21
264
$ 8,038
–
–
–
–
–
–
$ 4,778
569
(147)
11
(5)
$ 5,206
264
$ 2,832
Net carrying amount at end of period
$ 153
(1)
As at October 31, 2019, we had total contractual commitments of $338 million to acquire premises and equipment (October 31, 2018 – $273 million).
Note 10 Goodwill and other intangible assets
Goodwill
(Millions of
Canadian dollars)
Balance at beginning
of period
Acquisitions
Dispositions
Currency translations
Balance at end
of period
(Millions of
Canadian dollars)
Balance at beginning
of period
Acquisitions
Dispositions
Currency translations
Balance at end
of period
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
Total
For the year ended October 31, 2019
$ 2,528 $ 1,729 $
27
–
–
–
–
(2)
579 $
–
–
–
1,986 $
–
(20)
19
2,870 $
71
–
2
118 $
–
–
2
112 $
–
–
–
148 $ 1,067 $ 11,137
98
–
(20)
–
21
–
–
–
–
$ 2,555 $ 1,727 $
579 $
1,985 $
2,943 $
120 $
112 $
148 $ 1,067 $ 11,236
Canadian
Banking
Caribbean
Banking
Canadian
Wealth
Management
Global Asset
Management
U.S. Wealth
Management
(including
City National)
International
Wealth
Management
Investor &
Treasury
Services
Capital
Markets
Insurance
Total
For the year ended October 31, 2018
$ 2,527 $
1
–
–
1,694 $
–
–
35
576 $
–
–
3
2,006 $
–
–
(20)
2,745 $
80
(8)
53
120 $
–
–
(2)
112 $
–
–
–
148 $ 1,049 $ 10,977
81
–
–
(8)
87
18
–
–
–
$ 2,528 $
1,729 $
579 $
1,986 $
2,870 $
118 $
112 $
148 $ 1,067 $ 11,137
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 2019 and 2018 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 six-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
178
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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), with
the exception of our U.S. Wealth Management (including City National) CGU where we applied a mid-term growth rate consistent
with our growth expectations for this business, reverting to the terminal growth rate after 10 years. Terminal growth rates are
based on the current market assessment of gross domestic product and inflation for the countries within which the CGU
operates. The discount rates used to determine the present value of each CGU’s projected future cash flows are based on the
bank-wide cost of capital, adjusted for the risks to which each CGU is exposed. CGU-specific risks include: country risk, business/
operational risk, geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price
risk (including product pricing risk and inflation).
The estimation of value in use involves significant judgment in the determination of inputs to the discounted cash flow model
and is most sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the
forecast period. The sensitivity of key inputs and assumptions used was tested by recalculating the recoverable amount using
reasonably possible changes 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, 2019, 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)
(2)
Pre-tax discount rates are determined implicitly based on post-tax discount rates.
Discount rates have been revised from those previously presented.
As at
August 1, 2019
August 1, 2018
Discount
rate (1)
Terminal
growth
rate
Discount
rate (1), (2)
Terminal
growth
rate
10.2%
11.9
11.2
11.1
11.2
10.8
11.0
10.9
11.8
3.0%
4.2
3.0
3.0
3.0
3.0
3.0
3.0
3.0
10.0%
11.8
11.2
11.0
11.0
10.1
11.0
11.2
12.4
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, 2019, the recoverable
amount of our Caribbean Banking CGU, based on fair value less costs of disposal, was 126% 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 2.4% or reducing future cash flows by 21%, 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 2019, we applied a P/AUA multiple of
2.25% to AUA as at August 1 (August 1, 2018 – 2.5%) and a P/Rev multiple of 2.5x (August 1, 2018 – 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,
2019, 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
179
Note 10 Goodwill and other intangible assets (continued)
Other intangible assets
(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
Impairment losses
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
Impairment losses
Currency translations
Other changes
Balance at end of period
Net balance at end of period
Note 11 Significant dispositions
For the year ended October 31, 2019
Internally
generated
software
$
5,984
42
–
1,009
–
(94)
–
–
Other
software
$ 1,582
49
16
42
(1)
(6)
1
1
Core
deposit
intangibles
Customer
list and
relationships
In process
software
$
$
1,750
–
–
–
–
–
1
(184)
$
1,768
–
6
–
–
–
7
(8)
1,146
1,184
–
(1,051)
–
(42)
(2)
5
Total
$ 12,230
1,275
22
–
(1)
(142)
7
(186)
$
6,941
$ 1,684
$
1,567
$
1,773
$
1,240
$ 13,205
$ (4,501) $ (1,226) $
(793)
–
30
(1)
9
(121)
–
2
(1)
(11)
(654) $
(159)
–
–
1
185
(1,162) $
(124)
–
–
(6)
1
$ (5,256) $ (1,357) $
(627) $
(1,291) $
–
–
–
–
–
–
–
$ (7,543)
(1,197)
–
32
(7)
184
$ (8,531)
$
1,685
$
327
$
940
$
482
$
1,240
$ 4,674
For the year ended October 31, 2018
Internally
generated
software
Other
software
Core
deposit
intangibles
Customer
list and
relationships
In process
software
Total
$
$
$
$
$
5,143
40
–
798
(1)
(1)
16
(11)
$
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
$
$
$
$
$
1,715
–
–
–
–
–
35
–
1,750
(487)
(153)
–
–
(14)
–
(654)
1,096
$
$
$
$
$
1,753
–
16
–
–
–
(1)
–
1,768
(1,022)
(143)
–
–
3
–
(1,162)
606
$
$
$
$
$
892
1,111
–
(849)
(2)
(7)
4
(3)
$ 10,935
1,230
16
–
(4)
(8)
65
(4)
1,146
$ 12,230
–
–
–
–
–
–
–
$ (6,428)
(1,077)
2
–
(29)
(11)
$ (7,543)
1,146
$
4,687
Wealth Management
On October 30, 2019, we completed the sale of our private debt Global Asset Management business in the United Kingdom to Dyal
Capital Partners. As a result of the transaction, we recorded a pre-tax gain of $142 million in Non-interest income – Other
($134 million after-tax). The assets, liabilities and equity that were included in the disposal group are not significant.
180
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Note 12 Joint ventures and associated companies
The following table summarizes the carrying value of our interests in joint ventures and associated companies accounted for
under the equity method as well as our share of the income of those entities.
(Millions of Canadian dollars)
Carrying amount
Share of:
Net income
Joint ventures
Associated companies
As at and for the year ended
October 31
2019
178
$
October 31
2018
165
$
October 31
2019
474
$
October 31
2018
521
$
$
107
$
113 $
(31) $
(92)
We do not have any joint ventures or associated companies that are individually material to our financial results.
During the year ended October 31, 2019, we recognized impairment losses of $2 million with respect to our interests in joint
ventures and associated companies (October 31, 2018 – impairment losses of $12 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, 2019,
restricted net assets of these subsidiaries, joint ventures and associates were $34.9 billion (October 31, 2018 – $33.9 billion).
Note 13 Other assets
(Millions of Canadian dollars)
Cash collateral
Margin deposits
Receivable from brokers, dealers and clients
Accounts receivable and prepaids
Investments in joint ventures and associates
Employee benefit assets
Insurance-related assets
Collateral loans
Policy loans
Reinsurance assets
Other
Deferred income tax asset
Taxes receivable
Accrued interest receivable
Precious metals
Commodity trading receivables
Other
As at
October 31
2019
$ 15,629
5,688
2,511
4,569
652
147
$
October 31
2018
14,467
4,940
2,868
4,047
686
626
926
95
748
78
1,989
5,553
2,866
416
4,232
2,974
991
99
656
163
1,475
5,456
2,641
361
1,898
2,690
$ 49,073
$
44,064
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
181
Note 14 Deposits
(Millions of Canadian dollars)
Personal
Business and government (4)
Bank
Non-interest-bearing (5)
Canada
United States
Europe (6)
Other International
Interest-bearing (5)
Canada
United States
Europe (4), (6)
Other International
October 31, 2019
October 31, 2018
As at
Term (3)
Total
Demand (1) Notice (2)
$ 143,958 $ 49,806 $ 100,968 $ 294,732 $ 135,101 $ 48,873 $ 86,180 $ 270,154
533,522
32,521
$ 405,434 $ 64,593 $ 415,978 $ 886,005 $ 382,468 $ 57,778 $ 395,951 $ 836,197
Total Demand (1) Notice (2)
298,502
16,508
253,113
8,363
565,482
25,791
286,299
23,472
238,617
8,750
13,867
920
8,606
299
Term (3)
$
93,163 $
34,632
760
5,225
5,692 $
–
–
5
137 $
–
–
–
98,992 $
34,632
760
5,230
88,119 $ 5,086 $
34,098
564
5,495
–
–
5
– $ 93,205
34,098
–
564
–
5,500
–
228,386
4,704
33,073
5,491
521,500
102,788
60,091
18,451
$ 405,434 $ 64,593 $ 415,978 $ 886,005 $ 382,468 $ 57,778 $ 395,951 $ 836,197
213,747
2,478
32,930
5,037
292,641
67,211
25,749
10,350
15,112
33,099
1,412
3,064
576,810
86,106
63,988
19,487
333,118
41,776
30,090
10,857
15,306
39,626
825
3,139
(1)
(2)
(3)
(4)
(5)
(6)
Demand deposits are deposits for which we do not have the right to require notice of withdrawal, which include 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.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
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, 2019, deposits denominated
in U.S. dollars, British pounds, Euro and other foreign currencies were $321 billion, $23 billion, $45 billion and $31 billion, respectively (October 31, 2018 – $309 billion,
$20 billion, $38 billion and $31 billion, respectively).
Europe includes the United Kingdom, Luxembourg, the Channel Islands, France and Italy.
Contractual maturities of term deposits
(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 (1)
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more (2)
As at
October 31
2019
October 31
2018
$ 94,585
62,814
92,507
50,055
31,852
31,373
21,130
31,662
$ 415,978
$ 379,000
$
89,553
59,109
80,773
51,798
45,550
21,127
23,863
24,178
$ 395,951
$ 362,000
(1)
(2)
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
Aggregate amounts of term deposits in denominations of one hundred thousand dollars or more have been revised from those previously presented.
Average deposit balances and average rates of interest
(Millions of Canadian dollars, except for percentage amounts)
Canada
United States
Europe (1)
Other International
For the year ended
October 31, 2019
Average
balances
$ 650,555
129,903
63,333
26,290
Average
rates
1.60%
1.17
1.15
1.20
$ 870,081
1.49%
October 31, 2018
Average
balances
$ 603,582
131,715
59,916
23,788
Average
rates
1.28%
1.00
0.91
1.11
$ 819,001
1.20%
(1)
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
Note 15 Insurance
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-
182
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
specific characteristics. Reinsurance is also used for a majority of our 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 information technology (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 our direct obligations to the insured parties. 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 (1)
Reinsurers’ share of claims and benefits
Net claims
For the year ended
October 31
2019
4,209
(225)
$
October 31
2018
4,236
(204)
$
$
$
$
3,984
3,990
(241)
3,749
$
$
$
4,032
2,615
(224)
2,391
(1)
Includes the change in fair value of investments backing our policyholder liabilities, which are largely offset in revenue.
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, 2019 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.
Significant insurance assumptions
Life Insurance
Canadian Insurance
Mortality rates (1)
Morbidity rates (2)
Future reinvestment yield (3)
Lapse rates (4)
International Insurance
Mortality rates (1)
Future reinvestment yield (3)
As at
October 31
2019
October 31
2018
0.12%
1.82
3.69
0.50
0.57
3.06
0.11%
1.82
3.80
0.50
0.52
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).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
183
Note 15 Insurance (continued)
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, 2019
October 31, 2018
Gross
Ceded
Net
Gross
Ceded
Net
$ 11,339 $
38
$ 11,377 $
$
$
29 $
62
91 $
$ 11,468 $
601 $ 10,738 $
–
38
601 $ 10,776 $ 10,024 $
9,982 $
42
– $
2
29 $
60
89 $
44 $
603 $ 10,865 $ 10,068 $
26 $
18
2 $
493 $
–
493 $
9,489
42
9,531
– $
3
3 $
26
15
41
496 $
9,572
(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
For the year ended
October 31, 2019
October 31, 2018
(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
Gross
$ 10,024 $
1,479
(122)
(4)
$ 11,377 $
Ceded
Net
493 $ 9,531 $
103
5
–
1,376
(127)
(4)
601 $ 10,776 $ 10,024 $
Gross
9,687 $
502
(173)
8
Ceded
393 $
83
17
–
Net
9,294
419
(190)
8
493 $
9,531
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 market movements on assets backing life and health liabilities and business
growth. During the year, we reviewed all key actuarial methods and assumptions which are used in determining the policy benefit
liabilities resulting in a $127 million net decrease to insurance liabilities comprised of: (i) a decrease of $104 million for revised
actuarial reserves for updated growth assumptions on investments in equity and commercial real estate; (ii) a decrease of $78
million due to reinsurance contract renegotiations; (iii) a decrease of $17 million due to valuation system and data changes and
(iv) an increase of $72 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.
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 the year ended
Change in
variable
October 31
2019
1% $
1
10
10
5
2
2
5
10
(7) $
4
1
(3)
(33)
(205)
(60)
(205)
(247)
October 31
2018
(2)
–
6
(8)
(29)
(131)
(59)
(188)
(226)
(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 in-force policies.
184
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Note 16 Segregated funds
We offer certain individual variable insurance contracts that allow policyholders to invest in segregated funds. The investment
returns on these funds are passed directly to the policyholders. Amounts invested are at the policyholders’ risk, except where the
policyholders have selected options providing maturity and death benefit guarantees. A liability for the guarantees is recorded in
Insurance claims and policy benefit liabilities.
Segregated funds net assets are recorded at fair value. All of our segregated funds net assets are categorized as Level 1 in
the fair value hierarchy. The fair value of the segregated funds liabilities is equal to the fair value of the segregated funds net
assets. Segregated funds net assets and segregated funds liabilities are presented on separate lines on the Consolidated
Balance Sheets. The following tables present the composition of net assets and the changes in net assets for the year.
Segregated funds net assets
(Millions of Canadian dollars)
Cash
Investment in mutual funds
Other 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
2019
31 $
1,631
1
1,663 $
October 31
2018
19
1,348
1
1,368
For the year ended
October 31
2019
1,368 $
October 31
2018
1,216
557
124
39
(386)
(39)
1,663 $
537
(40)
31
(342)
(34)
1,368
$
$
$
$
Note 17 Employee benefits – Pension and other post-employment benefits
Plan characteristics
We sponsor a number of programs that provide pension and post-employment benefits to eligible employees. The majority of
beneficiaries of the pension plans are located in Canada and other beneficiaries of the pension plans are primarily located in the
U.S., the U.K. and the Caribbean. The pension arrangements including investment, plan benefits and funding decisions are
governed by local pension committees or trustees, who are legally segregated from the Bank, or management. Significant plan
changes require the approval of the Board of Directors.
Our defined benefit pension plans provide pension benefits based on years of service, contributions and average earnings at
retirement. Our 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, 2019, and the next valuation will be completed on January 1, 2020.
For the year ended October 31, 2019, total contributions to our pension plans (defined benefit and defined contribution plans)
and other post-employment benefit plans were $551 million and $72 million (October 31, 2018 – $594 million and $65 million),
respectively. For 2020, total contributions to our pension plans and other post-employment benefit plans are expected to be
$549 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
185
Note 17 Employee benefits – Pension and other post-employment benefits (continued)
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, 2019
October 31, 2018
Defined benefit
pension plans
Other post-
employment
benefit plans
Defined benefit
pension plans
Other post-
employment
benefit plans
$
$
$
$
$
$
$
$
$
13,679 $
14,428
(749) $
1,106 $
1,089
17 $
14,785 $
15,517
(732) $
(1)
(733) $
147 $
(880)
(733) $
$
1
1,722
(1,721) $
$
–
98
(98) $
$
1
1,820
(1,819) $
–
(1,819) $
$
–
(1,819)
(1,819) $
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)
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.
As at or for the year ended
October 31, 2019
October 31, 2018
(Millions of Canadian dollars)
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
Fair value of plan assets at end of period
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
Benefit obligation at end of period
Unfunded obligation
Wholly or partly funded obligation
Total benefit obligation
Defined benefit
pension plans (1)
$
13,564 $
532
Other post-
employment
benefit plans
1
–
Defined benefit
pension plans (1)
$
13,573 $
476
Other post-
employment
benefit plans
1
–
910
9
339
48
(601)
–
(16)
14,785 $
13,218 $
297
1
–
510
(4)
1,977
59
12
48
(601)
–
15,517 $
29 $
15,488
15,517 $
–
–
72
18
(90)
–
–
1
1,622
39
–
–
65
(7)
196
(23)
–
18
(90)
–
1,820
1,671
149
1,820
$
$
$
$
$
$
$
$
$
$
(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
(1)
For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2019 were $14,329 million and $13,449 million, respectively
(October 31, 2018 – $685 million and $404 million, respectively).
186
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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 (income)
Remeasurements of other long term benefits
Administrative expense
Defined benefit pension expense
Defined contribution pension expense
For the year ended
Pension plans
$
October 31
2019
297
1
–
(22)
–
16
$
October 31
2018
359
(13)
13
8
–
15
Other post-employment
benefit plans
$
October 31
2019
39
–
–
65
13
–
$
October 31
2018
34
(25)
–
66
(4)
–
$
$
292
212
504
$
$
382
185
567
$
$
117
–
117
$
$
71
–
71
Service costs for the year ended October 31, 2019 totalled $293 million (October 31, 2018 – $354 million) for pension plans in
Canada and $5 million (October 31, 2018 – $(8) million) for International plans. Net interest expense (income) for the year ended
October 31, 2019 totalled $(21) million (October 31, 2018 – $4 million) for pension plans in Canada and $(1) million (October 31,
2018 – $4 million) for International plans.
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)
For the year ended
Defined benefit pension
plans
Other post-employment
benefit plans
October 31
2019
October 31
2018
October 31
2019
October 31
2018
$
(4)
1,977
59
(910)
$
1,122
$
$
(164)
(828)
(22)
268
(746)
$
$
(11)
186
(22)
–
153
$
$
(65)
(134)
(35)
–
(234)
Remeasurements recorded in OCI for the year ended October 31, 2019 were losses of $1,102 million (October 31, 2018 – gains of
$633 million) for pension plans in Canada and losses of $20 million (October 31, 2018 – gains of $113 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 plan’s assets follows an asset/liability framework as investment 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. Factors
taken into consideration in developing our asset mix include but are not limited to the following:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 correlations, along with liquidity requirements of the plan.
To implement our asset mix policy, we may invest in debt securities, equity securities, and alternative investments. 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 plan. To manage our credit risk exposure, where derivative 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
187
Note 17 Employee benefits – Pension and other post-employment benefits (continued)
During the year ended October 31, 2019, the management of defined benefit pension investments focused on increased
allocation to risk reducing investments and strategies, maintaining diversification, while striving to improve expected investment
return. Over time, an increasing allocation to debt securities is being used to reduce asset/liability duration mismatch and hence
variability of the plan’s 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 plan’s 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)
Equity securities
Domestic
Foreign
Debt securities
Domestic government bonds
Foreign government bonds
Corporate and other bonds
Alternative investments and other
October 31, 2019
October 31, 2018
As at
Percentage
of total
plan assets
Quoted
in active
market (2)
Percentage
of total
plan assets
Quoted
in active
market (2)
Fair value
10%
22
100%
98
$
21
3
23
21
–
–
–
13
1,259
3,243
2,643
288
3,265
2,866
10%
24
100%
99
19
2
24
21
–
–
–
15
Fair value
$
1,544
3,215
3,014
396
3,458
3,158
$ 14,785
100%
35%
$ 13,564
100%
36%
(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, 36% of our total plan assets would be classified as quoted
in an active market (October 31, 2018 – 40%).
The allocation of equity securities in our pension plans in Canada is 33% (October 31, 2018 – 33%) and that of our International
plans is 16% (October 31, 2018 – 23%). The allocation of debt securities in our pension plans in Canada is 47% (October 31, 2018 –
46%) and that of our International plans is 44% (October 31, 2018 – 42%). The allocation of alternative investments and other in
our pension plans in Canada is 20% (October 31, 2018 – 21%) and that of our International plans is 40% (October 31, 2018 – 35%).
As at October 31, 2019, the plan assets include 1 million (October 31, 2018 – 1 million) of our common shares with a fair value of
$104 million (October 31, 2018 – $95 million) and $57 million (October 31, 2018 – $49 million) of our debt securities. For the year
ended October 31, 2019, dividends received on our common shares held in the plan assets were $4 million (October 31, 2018 – $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 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
Benefits expected to be paid 2025-2029
Weighted average duration of defined benefit payments
As at October 31, 2019
$
Canada
69,084
551
610
630
650
670
690
3,709
16.0 years
$
International
7,635
50
50
52
52
52
53
258
19.2 years
$
Total
76,719
601
660
682
702
722
743
3,967
16.2 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.
188
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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
2019
3.0%
3.3%
n.a.
n.a.
October 31
2018
4.0%
3.3%
n.a.
n.a.
October 31
2019
3.3%
n.a.
3.5%
3.1%
October 31
2018
4.1%
n.a.
3.5%
3.1%
(1)
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.
n.a. not applicable
Mortality assumptions
Mortality assumptions are significant in measuring our obligations under the defined benefit pension plans. These assumptions
have been set based on country specific statistics. Future longevity improvements have been considered and included where
appropriate. The following table summarizes the mortality assumptions used for material plans.
As at
October 31, 2019
October 31, 2018
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
23.5
24.1
22.6
25.2
24.7
22.2
25.1
25.0
24.1
27.0
23.7
20.6
23.4
24.1
22.7
25.2
24.7
22.3
25.0
25.0
24.2
26.9
(In years)
Country
Canada
United States
United Kingdom
Sensitivity analysis
Assumptions adopted can have a significant effect on the value of the obligations for defined benefit pension and other post-
employment benefit plans and are based on historical experience and market inputs. The increase (decrease) in obligation in the
following table has been determined for key assumptions 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 2019.
(Millions of Canadian dollars)
Discount rate
Impact of 100 bps increase in discount rate
Impact of 100 bps decrease in discount rate
Rate of increase in future compensation
Impact of 50 bps increase in rate of increase in future compensation
Impact of 50 bps 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 100 bps increase in healthcare cost trend rate
Impact of 100 bps decrease in healthcare cost trend rate
n.a. not applicable
Increase (decrease)
in obligation
Defined benefit
pension plans
Other post-
employment
benefit plans
$
(2,248) $
2,834
(239)
304
66
(70)
425
n.a.
n.a.
1
(1)
36
81
(68)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
189
Note 18 Other liabilities
(Millions of Canadian dollars)
Cash collateral
Accounts payable and accrued expenses
Payroll and related compensation
Payable to brokers, dealers and clients
Negotiable instruments
Accrued interest payable (1)
Deferred income
Taxes payable
Precious metals certificates
Dividends payable
Insurance related liabilities
Deferred income taxes
Provisions
Employee benefit liabilities
Commodity liabilities
Other
As at
October 31
2019
16,195 $
1,598
7,416
3,241
1,671
3,496
2,563
2,202
431
1,567
387
82
581
2,699
8,487
5,521
58,137 $
$
$
October 31
2018
13,907
1,531
7,073
4,078
1,693
3,072
2,259
2,071
346
1,482
364
84
507
1,902
7,315
5,438
53,122
(1)
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
Note 19 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 (1)
July 15, 2022
June 8, 2023
July 17, 2024 (2), (3)
December 6, 2024
June 4, 2025 (3)
January 20, 2026 (3)
January 27, 2026 (3)
September 29, 2026 (3)
November 1, 2027
July 25, 2029 (3)
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
July 25, 2024
Any interest payment date
Any interest payment date
Interest
rate
9.00%
5.38%
9.30%
3.04%
2.99% (4)
2.48% (4)
3.31% (5)
4.65%
3.45% (6)
4.75%
2.74% (7)
(8)
(9)
Denominated
foreign currency
(millions)
US$75
US$150
US$1,500
TT$300
US$174
As at
October 31
2019
– $
206
110
–
1,999
997
1,483
2,023
1,009
59
1,486
224
229
9,825 $
(10)
9,815 $
$
$
$
October 31
2018
103
208
110
998
1,978
988
1,443
1,813
988
59
–
224
229
9,141
(10)
9,131
The terms and conditions of the debentures are as follows:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
All US$75 million outstanding subordinated debentures were redeemed on August 12, 2019 for 100% of their principal amount plus interest accrued to, but excluding, the
redemption date.
All $1,000 million outstanding subordinated debentures were redeemed on July 17, 2019 for 100% of their principal amount plus interest accrued to, but excluding, the
redemption date.
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 1.10% above the 3-month Canadian Dollar Offered Rate (CDOR).
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 2.35% above the 3-month CDOR.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.12% above the 3-month CDOR.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.98% above the 3-month CDOR.
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.
190
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
All redemptions, cancellations and exchanges of subordinated debentures are subject to the consent and approval of OSFI,
except for the debentures maturing 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 20 Trust capital securities
$
October 31
2019
–
316
9,056
453
$
9,825
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.
Note 21 Equity
Share capital
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value, issuable in
series; the aggregate consideration for which all the First Preferred Shares and all the Second Preferred Shares that may be
issued may not exceed $20 billion and $5 billion, respectively.
Common – An unlimited number of shares without nominal or par value may be issued.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
191
Note 21 Equity (continued)
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 AC
Series AD (4)
Series AE
Series AF
Series AG
Series BH
Series BI
Series BJ
Non-cumulative, 5-Year Rate Reset
Series AJ (5)
Series AL (5)
Series AZ
Series BB
Series BD
Series BF
Series BK
Series BM
Series BO (6)
Non-cumulative, floating rate
Series AK (5)
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, 2019
October 31, 2018
Number of
shares
(thousands)
Dividends
declared
per share
Number of
shares
(thousands)
Dividends
declared
per share
Amount
Amount
1,439,029 $ 17,635
1,900
(10,251)
136
(126)
1,452,898 $ 17,730
1,466
(15,335)
92
(187)
1,430,678 $ 17,645 $
4.07
1,439,029 $ 17,635 $
3.77
(235) $
(54,263)
53,916
(582) $
(18)
(5,380)
5,340
(58)
1,430,096 $ 17,587
(363) $
(53,964)
54,092
(235) $
(27)
(5,470)
5,479
(18)
1,438,794 $ 17,617
12,000 $
12,000
8,000
–
10,000
8,000
10,000
6,000
6,000
6,000
300 $
300
200
–
250
200
250
150
150
150
–
–
20,000
20,000
24,000
12,000
29,000
30,000
14,000
–
20
–
–
500
500
600
300
725
750
350
–
1.23
1.11
1.15
–
1.13
1.11
1.13
1.23
1.23
1.31
0.22
0.27
0.96
0.96
0.90
0.90
1.38
1.38
1.27
0.23
12,000 $
12,000
8,000
10,000
10,000
8,000
10,000
6,000
6,000
6,000
300 $
300
200
250
250
200
250
150
150
150
13,579
12,000
20,000
20,000
24,000
12,000
29,000
30,000
–
2,421
339
300
500
500
600
300
725
750
–
61
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
31 US$ 67.50
20
31 US$ 67.50
227,020 $ 5,706
114 $
(8,021)
7,941
34 $
3
(184)
182
1
227,054 $ 5,707
251,020 $ 6,306
6 $
(10,215)
10,323
114 $
–
(256)
259
3
251,134 $ 6,309
(1)
(2)
(3)
Includes fair value adjustments to stock options of $29 million (2018 – $15 million).
During the year ended October 31, 2019, we purchased common shares for cancellation at an average cost of $100.41 per share with a book value of $12.29 per share.
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.
First Preferred Shares were issued at $25 per share with the exception of 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).
(4) On November 24, 2018, we redeemed all 10 million issued and outstanding Non-Cumulative First Preferred Shares, Series AD, for cash at a redemption price of $25 per
share.
On February 24, 2019, we redeemed all 2.4 million issued and outstanding Non-Cumulative First Preferred Shares Series AK, all 13.6 million issued and outstanding
Non-Cumulative 5 year Rate Reset First Preferred Shares Series AJ, and all 12 million issued and outstanding Non-Cumulative 5-year Rate Reset First Preferred Shares
Series AL, at a price of $25 per share.
On November 2, 2018, we issued 14 million Non-Cumulative 5-year Rate Reset First Preferred Shares, Series BO, totalling $350 million.
Positive amounts represent a short position in treasury shares.
(5)
(6)
(7)
192
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Significant terms and conditions of preferred shares
As at October 31, 2019
Preferred shares
First preferred
Non-cumulative, fixed rate
Series W (4)
Series AA
Series AC
Series AE
Series AF
Series AG
Series BH (5)
Series BI (5)
Series BJ (5)
Non-cumulative, 5-Year
Rate Reset (6)
Series AZ (5)
Series BB (5)
Series BD (5)
Series BF (5)
Series BK (5)
Series BM (5)
Series BO (5)
Non-cumulative, fixed rate/
floating rate
Series C-2 (7)
Current
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%
4.45%
4.50%
4.90%
4.90%
5.25%
3.70%
3.65%
3.60%
3.60%
5.50%
5.50%
4.80%
$
.306250
.278125
.287500
.281250
.278125
.281250
.306250
.306250
.328125
.231250
.228125
.225000
.225000
.343750
.343750
.300000
2.21%
2.26%
2.74%
2.62%
4.53%
4.80%
2.38%
February 24, 2010
May 24, 2011
November 24, 2011
February 24, 2012
May 24, 2012
May 24, 2012
November 24, 2020
November 24, 2020
February 24, 2021
$
January 31, 2005
April 4, 2006
November 1, 2006
January 19, 2007
March 14, 2007
April 26, 2007
June 5, 2015
July 22, 2015
October 2, 2015
May 24, 2019
August 24, 2019
May 24, 2020
November 24, 2020
May 24, 2021
August 24, 2021
February 24, 2024
January 30, 2014
June 3, 2014
January 30, 2015
March 13, 2015
December 16, 2015
March 7, 2016
November 2, 2018
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
6.75%
4.052% US$16.875000
November 7, 2023
November 2, 2015
US$1,000.00
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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 AZ, BB, BD, BF, BK, BM, and BO, 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, 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.
The preferred shares include 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 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 2019
and 2018, the requirements of our DRIP were satisfied through open market share purchases.
Shares available for future issuances
As at October 31, 2019, 42.9 million common shares are available for future issue relating to our DRIP and potential exercise of
stock options and awards 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
193
Note 22 Share-based compensation
Stock option plans
We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common
shares. The exercise price for the majority of the grants is determined as the higher of the volume-weighted average of the
trading prices per board lot (100 shares) of our common shares on the Toronto Stock Exchange (i) on the day preceding the day
of grant; and (ii) the five consecutive trading days immediately preceding the day of grant. The exercise price for the remaining
grants is the closing market share price of our common shares on the New York Stock Exchange on the date of grant. All options
vest over a four-year period, and are exercisable for a period not exceeding 10 years from the grant date.
The compensation expense recorded for the year ended October 31, 2019, in respect of the stock option plans was $6 million
(October 31, 2018 – $6 million). The compensation expense related to non-vested options was $3 million at October 31, 2019
(October 31, 2018 – $3 million), to be recognized over the weighted average period of 1.8 years (October 31, 2018 – 1.1 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 (2), (3)
Forfeited in the period
Outstanding at end of period
Exercisable at end of period
For the year ended
October 31, 2019
October 31, 2018
Number of
options
(thousands)
7,770
1,090
(1,900)
(10)
6,950
Weighted
average
exercise price (1)
71.40
$
96.55
55.05
54.99
79.88
$
Number of
options
(thousands)
8,566
773
(1,440)
(129)
7,770
Weighted
average
exercise price (1)
64.96
$
102.33
50.42
78.12
71.40
$
2,980
$
64.24
3,726
$
55.82
(1)
(2)
(3)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2019 and October 31, 2018.
For foreign currency-denominated options exercised during the year, the weighted average exercise prices are translated using exchange rates as at the settlement date.
Cash received for options exercised during the year was $105 million (October 31, 2018 – $73 million) and the weighted average share price at the date of exercise was
$103.15 (October 31, 2018 – $101.81).
New shares were issued for all stock options exercised in 2019 and 2018.
Options outstanding as at October 31, 2019 by range of exercise price
(Canadian dollars per share except
share amounts and years)
$36.46 – $52.23
$52.60 – $69.17
$73.14 – $76.68
$78.59 – $90.23
$96.55 – $102.33
Options outstanding
Options exercisable
Number
outstanding
(thousands)
704
907
1,490
1,986
1,863
6,950
Weighted
average
exercise price (1)
45.63
$
60.47
74.57
87.00
98.95
79.88
$
Weighted
average
remaining
contractual
life (years)
2.35
3.15
5.92
6.49
8.70
6.10
Number
exercisable
(thousands)
704
907
818
551
–
2,980
Weighted
average
exercise price (1)
45.63
$
60.47
74.76
78.59
–
64.24
$
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2019.
The weighted average fair value of options granted during the year ended October 31, 2019 was estimated at $5.61 (October 31,
2018 – $6.66). 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 the historic average share price volatility over a historical period corresponding to the expected option
life. 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
2019
94.09
2.01%
3.77%
12%
6 Years
$
October 31
2018
101.83
1.71%
3.66%
13%
6 Years
194
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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, 2019, we contributed
$112 million (October 31, 2018 – $97 million), under the terms of these plans, towards the purchase of our common shares. As at
October 31, 2019, an aggregate of 35 million common shares were held under these plans (October 31, 2018 – 35 million common
shares).
Deferred share and other plans
We offer deferred share unit plans to executives, certain key employees and non-employee directors of the Bank. Under these
plans, participants may choose to receive all or a percentage of their annual variable short-term incentive bonus, commission, 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 also offer 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 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.
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, 2019
October 31, 2018
Units
granted
(thousands)
495
3,423
2,471
116
1,210
Weighted
average
fair value
per unit
$ 99.69
105.12
96.39
94.06
96.28
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
$
7,715
$ 100.42
8,364
$
97.85
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.
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
October 31, 2019
October 31, 2018
As at
(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
Units
(thousands)
5,288
8,820
5,621
3,072
1,787
24,588
(1)
Excludes obligations not determined based on the quoted market price of our common shares.
Carrying
amount
562
937
597
326
185
2,607
$
$
Units
(thousands)
4,631
10,347
5,892
3,299
2,140
26,309
Carrying
amount
446
$
990
565
317
202
$ 2,520
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
195
Note 22 Share-based compensation (continued)
Compensation expenses recognized under deferred share and other plans
(Millions of Canadian dollars)
Deferred share unit plans
Deferred bonus plan
Performance deferred share award plans
Deferred compensation plans
Other share-based plans
Note 23 Income taxes
Components of tax expense
(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, net
Income taxes (recoveries) in Consolidated Statements of Comprehensive Income and Changes
in Equity
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
Unrealized foreign currency translation gains (losses)
Net foreign currency translation gains (losses) from hedging activities
Reclassification of losses (gains) on net investment hedging activities to income
Net gains (losses) on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Remeasurements of employee benefit plans
Net fair value change due to credit risk on financial liabilities designated as 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
For the year ended
$
October 31
2019
77
274
294
250
106
$
1,001
$
October 31
2018
6
139
190
80
78
$
493
For the year ended
October 31
2019
October 31
2018
$
3,256
(26)
$
(31)
3,199
(114)
29
(57)
(14)
(156)
3,043
51
–
(60)
2
2
1
(200)
(50)
(333)
18
5
(9)
(573)
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
$
2,470
$
3,612
The effective tax rate of 19.1% decreased 200 bps, primarily due to an increase in income from lower tax rate jurisdictions and the
impact of the U.S. Tax Reform which resulted in the write-down of net deferred tax assets 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.
196
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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
Income taxes in Consolidated Statements of Income / effective tax rate
For the year ended
October 31, 2019
$ 4,217
26.5%
October 31, 2018
26.5%
$ 4,176
(815)
(310)
29
(78)
$ 3,043
(5.1)
(1.9)
0.1
(0.5)
19.1%
(752)
(285)
148
42
$ 3,329
(4.8)
(1.8)
0.9
0.3
21.1%
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
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
As at and for the year ended October 31, 2019
Net asset
beginning
of period
Change
through
equity
Change
through
profit or loss
Exchange
rate
differences Other
Net asset
end of
period
$
$
–
9
–
–
–
(33)
–
36
339
3
354
$
$
$
$
$
$
695
1,033
3
203
(48)
(8)
(858)
55
295
21
1,391
1,475
(84)
1,391
23
197
7
(10)
(11)
(1)
(4)
(47)
(6)
8
156
$
$
(2) $
7
–
–
(1)
–
–
–
9
–
$
716
1,246
10
202
(60)
(1)
(4)
1
3
(3)
–
$
–
(3)
–
–
–
6
(43)
(869)
45
631
29
$ 1,907
$ 1,989
(82)
$ 1,907
As at and for the year ended October 31, 2018
Net asset
beginning of
period
Change
through
equity
Change
through profit
or loss
Exchange rate
differences
Other
Net asset
end of
period
$
(6) $
(15)
–
–
–
19
(1)
–
(260)
3
$
1
(502)
(8)
188
(37)
(74)
182
(23)
(16)
88
$ (260) $
(201) $
$
$
$
$
703
1,491
11
19
(11)
48
(1,003)
76
571
(54)
1,851
1,948
(97)
1,851
(3) $
59
–
(4)
–
(1)
(36)
2
–
(16)
1
$
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
695
1,033
3
203
(48)
(8)
(858)
55
295
21
1,391
1,475
(84)
1,391
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 $202 million were recognized at October 31, 2019 (October 31, 2018 –
$203 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
197
Note 23 Income taxes (continued)
As at October 31, 2019, unused tax losses, tax credits and deductible temporary differences of $413 million, $365 million and
$nil (October 31, 2018 – $443 million, $426 million and $39 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 $1 million which
expire within one year (October 31, 2018 – $4 million), $7 million which expire in two to four years (October 31, 2018 – $2 million)
and $405 million which expire after four years (October 31, 2018 – $437 million). There are no tax credits that will expire in one
year (October 31, 2018 – $nil), $60 million that will expire in two to four years (October 31, 2018 – $45 million) and $305 million that
will expire after four years (October 31, 2018 – $381 million). In addition, there are no deductible temporary differences that will
expire in one year (October 31, 2018 – $1 million), nor that will expire in two to four years (October 31, 2018 – $1 million) or that will
expire after four years (October 31, 2018 – $37 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 $17.9 billion as at October 31, 2019
(October 31, 2018 – $14.6 billion).
Tax examinations and assessments
We have received reassessments during the year from the Canada Revenue Agency (CRA), in respect of the 2014, 2013 and 2012
taxation years, which suggest that Royal Bank of Canada owes additional income taxes of approximately $756 million as they
denied the deductibility of certain dividends. These are consistent with the reassessments 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.
Legislative amendments introduced in the 2015 Canadian Federal Budget resulted in disallowed deduction of dividends from
transactions with Taxable Canadian Corporations including those hedged with Tax Indifferent Investors, namely pension funds
and non-resident entities with prospective application effective May 1, 2017. The dividends to which the reassessments relate
include both dividends in transactions similar to those which are the target of the 2015 legislative amendments and dividends
which are unrelated to the legislative amendments.
It is possible that the CRA will reassess us for significant additional income tax for subsequent years on the same basis. In all
cases, we are confident that our tax filing position was appropriate and intend to defend ourselves vigorously.
U.S. Tax Reform
The majority of the provisions in the U.S. Tax Cuts and Jobs Act legislation (U.S. Tax Reform), which was passed in December 2017,
took effect at the beginning of calendar year 2018 or for fiscal years beginning in 2018. 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 in the prior year.
Note 24 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 interests
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
2019
October 31
2018
$
$
$
12,871
(269)
(11)
12,591
1,434,779
8.78
12,591
15
12,606
1,434,779
2,011
742
3,150
$
$
$
12,431
(285)
(31)
12,115
1,443,894
8.39
12,115
15
12,130
1,443,894
2,691
742
3,158
1,440,682
8.75
$
1,450,485
8.36
$
(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, 2019, an average of 767,225
outstanding options with an average exercise price of $102.33 were 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 exercise price of $102.33 were excluded from the calculation of diluted earnings per share.
Includes exchangeable preferred shares.
198
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Note 25 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
Maximum exposure
to credit losses
As at
October 31
2019
October 31
2018
$ 16,608
$
15,502
36,305
1,692
268
225,911
91,625
7,061
787
36,267
2,128
268
223,954
107,239
6,955
391
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 generally have a term of five 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 2019
199
Note 25 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 five 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, 2019, the total
balance of uncommitted amounts was $287 billion (October 31, 2018 – $264 billion).
Other commitments
We act as underwriter for certain new issuances under which we alone or together with a syndicate of financial institutions
purchase the new issue for resale to investors. In connection with these activities, our commitments were $35 million as at
October 31, 2019, (October 31, 2018 – $141 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, 2019, we have unfunded
commitments of $684 million (October 31, 2018 – $948 million) 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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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, 2019, we had on average $4.9 billion of assets pledged intraday to the Bank of Canada on a daily basis (October 31,
2018 – $4.0 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, 2019 and October 31, 2018.
200
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Assets pledged against liabilities and collateral assets held or re-pledged
(Millions of Canadian dollars)
Sources of pledged assets and collateral
Bank assets
Loans
Securities
Other assets
Client assets (1)
Collateral received and available for sale or re-pledging
Less: not sold or re-pledged
Uses of pledged assets and collateral
Securities 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
2019
October 31
2018
$ 80,542
55,544
21,316
157,402
$
79,798
48,993
19,406
148,197
448,338
(49,325)
399,013
402,187
(53,590)
348,597
$ 556,415
$ 496,794
$ 146,590
34,686
229,905
47,254
42,103
26,448
5,963
4,804
18,662
$ 556,415
$ 119,087
32,247
209,353
49,997
36,959
21,110
5,058
4,006
18,977
$ 496,794
(1)
Primarily relates to Obligations related to securities lent or sold under repurchase agreements, Securities lent and Derivative transactions.
Lease commitments
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, 2019
October 31, 2018
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
Net future minimum lease payments
Note 26
Legal and regulatory matters
Land and
buildings
$
721
2,251
3,039
6,011
(25)
$
$ 5,986
$
Equipment
Land and
buildings
Equipment
88
101
–
189
–
189
$
$
684
2,081
2,816
5,581
(11)
$
5,570
$
103
137
–
240
–
240
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.
London interbank offered rate (LIBOR) regulatory investigations and litigation
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 U.S. dollar 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
201
Note 26
Legal and regulatory matters (continued)
In addition to the LIBOR actions, in January 2019, a number of financial institutions, including Royal Bank of Canada and RBC
Capital Markets LLC, were named in a purported class action in New York alleging violations of the U.S. antitrust laws and
common law principles of unjust enrichment in the setting of LIBOR after the Intercontinental Exchange took over administration
of the benchmark interest rate from the British Bankers’ Association in 2014. 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.
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 (the 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 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. The trial
in the Watson proceeding has been rescheduled from October 14, 2019 to October 19, 2020.
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 action as to the remaining claims. The merchants appealed and
on July 25, 2019, the Quebec Court of Appeal allowed the appeal to also authorize the merchants to proceed under section 45 of
the Competition Act for claims after March 12, 2010 and for claims under section 49 of the Competition Act.
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 and Canada. 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
and one other U.S. action that is purportedly brought on behalf of different classes of plaintiffs remain pending.
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.
202
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Note 27 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 (GE). The GE 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
For the year ended
(Millions of Canadian dollars)
Salaries and other short-term employee benefits (1)
Post-employment benefits (2)
Share-based payments
$
October 31
2019
26
2
44
72
$
$
October 31
2018
34
2
42
78
$
(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 22 for further details.
Directors receive retainers but do not receive salaries and other short-term employee benefits.
Directors do not receive post-employment benefits.
Stock options, stock awards and shares held by Key management personnel, Directors and their close family members
(Millions of Canadian dollars, except number of units)
Stock options (1)
Other non-option stock based awards (1)
RBC common and preferred shares
As at
October 31, 2019
October 31, 2018
No. of
units held
2,372,714
1,481,096
463,362
4,317,172
Value
$ 51
157
49
$ 257
No. of
units held
2,154,835
1,440,002
453,316
4,048,153
Value
$ 37
138
43
$ 218
(1)
Directors do not receive stock options or any other non-option stock based awards.
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, 2019, total loans to KMP, Directors and their close family members were $8 million (October 31, 2018 – $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, 2019 and October 31, 2018. 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, 2019, loans to joint ventures and associates were $222 million (October 31, 2018 – $225 million) and deposits
from joint ventures and associates were $180 million (October 31, 2018 – $203 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, 2019 and October 31,
2018. $1 million of guarantees have been given to joint ventures and associates for the year ended October 31, 2019 (October 31,
2018 – $1 million).
Other transactions, arrangements or agreements involving joint ventures and associates
(Millions of Canadian dollars)
Commitments and other contingencies
Other fees received for services rendered
Other fees paid for services received
As at or for the year
ended
$
October 31
2019
430
47
128
October 31
2018
621
41
150
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
203
Note 28 Results by business segment
Composition of business segments
For management purposes, based on the products and services offered, we are organized into five business segments:
Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets.
Personal & Commercial Banking 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. & Europe, Australia, Asia & other markets. In the U.K. & Europe, we offer a diversified set of capabilities in
our key sectors of expertise such as energy, mining and infrastructure, industrial, consumer, healthcare, technology and financial
services. 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, 2019
was $450 million (October 31, 2018 – $542 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.
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.
204
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
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.
(Millions of Canadian dollars)
Net interest income (2)
Non-interest income
Total revenue
Provision for credit losses
Insurance policyholder
benefits, claims and
acquisition expense
Non-interest expense
Net income (loss) before
income taxes
Income taxes (recoveries)
Net income
Non-interest expense
includes:
Depreciation and
amortization
Impairment of other
intangibles
Total assets
Total assets include:
Additions to premises
and equipment and
intangibles
Total liabilities
(Millions of Canadian dollars)
Net interest income (2), (3)
Non-interest income (3)
Total revenue
Provision for credit losses
Insurance policyholder
benefits, claims and
acquisition expense
Non-interest expense
Net income (loss) before
income taxes
Income taxes (recoveries)
For the year ended October 31, 2019
Investor &
Treasury
Services
Insurance
Capital
Markets (1)
Corporate
Support (1)
4,043 $
4,245
8,288
299
104 $
(453)
(349)
–
Total
Canada
19,749 $ 14,375 $
26,253
14,037
United
States
4,058 $
6,411
Other
International
1,316
5,805
46,002
1,864
28,412
1,512
10,469
282
Personal &
Commercial
Banking
$ 12,653 $
5,212
Wealth
Management
2,993 $
9,150
17,865
1,448
12,143
117
–
7,768
8,649
2,247
–
8,813
3,213
663
– $
(44) $
5,710
5,710
–
4,085
606
1,019
213
2,389
2,345
–
–
1,725
620
145
$
6,402 $
2,550 $
806 $
475 $
2,666 $
(28) $
12,871 $
9,177 $
2,060 $
–
5,096
2,893
227
–
131
(480)
(452)
4,085
24,139
2,800
12,175
15,914
3,043
11,925
2,748
–
7,994
2,193
133
7,121
70
1,285
3,970
1,796
162
1,634
$
632 $
593 $
48 $
143 $
408 $
– $
1,824 $
1,176 $
486 $
162
–
–
–
44
2
64
110
20
54
36
$ 481,720 $ 106,579 $ 19,012 $ 144,406 $ 634,313 $ 42,905 $ 1,428,935 $ 753,142 $ 399,792 $ 276,001
$
408 $
565 $
44 $
142 $
491 $
621 $
2,271 $
1,326 $
669 $
276
$ 481,745 $ 106,770 $ 19,038 $ 144,378 $ 634,126 $ (40,747) $ 1,345,310 $ 669,543 $ 399,800 $ 275,967
Personal &
Commercial
Banking
11,776 $
5,140
$
Wealth
Management
For the year ended October 31, 2018
Investor &
Treasury
Services
Insurance
– $
297 $
4,279
4,279
–
2,676
602
1,001
226
2,294
2,591
1
–
1,617
973
232
Capital
Markets (1)
Corporate
Support (1)
3,328 $
5,070
8,398
48
(51) $
(483)
(534)
–
Total
17,952 $
24,624
42,576
1,307
Canada
13,076 $
12,698
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
2,602 $
8,324
10,926
(15)
–
8,070
2,871
606
16,916
1,273
–
7,526
8,117
2,089
United
States
3,616 $
6,080
Other
International
1,260
5,846
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
(1)
(2)
(3)
Taxable equivalent basis.
Interest revenue is reported net of interest expense as we rely primarily on net interest income as a performance measure.
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest
income. Comparative amounts have been reclassified to conform with this presentation.
Note 29 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
205
Note 29 Nature and extent of risks arising from financial instruments (continued)
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 tables.
(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
Canada
%
United
States
%
Europe
%
International %
Total
Other
As at October 31, 2019
$ 646,567 69% $ 189,240 20% $
60,554
6% $
50,642 5% $
947,003
19,544 19%
23,250 23%
53,752 52%
6,421 6%
102,967
$ 666,111 64% $ 212,490 20% $ 114,306 11% $
57,063 5% $ 1,049,970
$ 367,907 67% $ 148,326 27% $
67,410 58%
15,246 13%
29,462
31,934 28%
5% $
5,774 1% $
1,491 1%
551,469
116,081
$ 435,317 65% $ 163,572 25% $
61,396
9% $
7,265 1% $
667,550
Canada
%
United
States
%
Europe
%
Other
International %
Total
As at October 31, 2018
than derivatives (1)
$ 594,823 66% $ 184,040 21% $
60,645
7% $
50,486 6% $
889,994
Derivatives before master netting
agreements (2), (3)
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
Off-balance sheet
credit instruments (4)
Committed and uncommitted (5)
Other
$ 345,545 66% $ 142,692 27% $
79,399 61%
14,852 11%
31,530
34,849 27%
6% $
7,140 1% $
987 1%
526,907
130,087
$ 424,944 65% $ 157,544 24% $
66,379 10% $
8,127 1% $
656,994
(1)
(2)
(3)
(4)
(5)
Includes assets purchased under reverse repurchase agreements and securities borrowed, loans and customers’ liability under acceptances. The largest concentrations
in Canada are Ontario at 56% (October 31, 2018 – 54%), the Prairies at 16% (October 31, 2018 – 18%), British Columbia and the territories at 14% (October 31, 2018 – 14%) and
Quebec at 10% (October 31, 2018 – 10%). No industry accounts for more than 35% (October 31, 2018 – 32%) of total on-balance sheet credit instruments. The classification
of our sectors aligns with our view of credit risk by industry. Sectors have been revised from those previously presented.
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 43% and 57% of our total commitments (October 31, 2018 –
42% and 58%). The largest concentrations in the wholesale portfolio relate to Financial services at 13% (October 31, 2018 – 14%), Utilities at 11% (October 31, 2018 – 11%),
Real estate & related at 9% (October 31, 2018 – 9%), Other services at 7% (October 31, 2018 – 8%), and Oil & gas at 7% (October 31, 2018 – 7%). The classification of our
sectors aligns with our view of credit risk by industry. Sector percentages have been revised from those previously presented.
Note 30 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 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 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 2019
Consolidated Financial Statements
During 2019 and 2018, we complied with all Pillar 1 capital and leverage requirements, including the domestic stability buffer,
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
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
2019
October 31
2018
$ 62,184
67,861
77,888
$ 512,856
512,856
512,856
$ 417,835
28,917
66,104
$ 512,856
12.1%
13.2%
15.2%
4.3%
1,570
$
$
57,001
63,279
72,494
$ 495,528
495,993
496,459
$ 401,534
32,209
62,716
$ 496,459
11.5%
12.8%
14.6%
4.4%
1,451
$
(1)
(2)
Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline based on the Basel III framework. The Leverage ratio is calculated using OSFI Leverage
Requirements Guideline based on the Basel III framework.
In fiscal 2018, amounts included CVA scalars of 80%, 83% and 86%, respectively.
Note 31 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 International Swaps and Derivatives Association 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.
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, 2019
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
$
$
374,617
88,996
994
464,607
$
$
69,420
710
281
70,411
$
$
305,197
88,286
713
394,196
$
$
527
62,524
1
63,052
$ 303,539
15,458
89
$ 319,086
$
$
1,131
10,304
623
12,058
$
$
1,764
13,274
–
15,038
$
$
306,961
101,560
713
409,234
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
207
Note 31 Offsetting financial assets and financial liabilities (continued)
As at October 31, 2018
Amounts subject to offsetting and enforceable netting arrangements
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 (4)
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
1,636
395,798
$
$
18,379
583
814
19,776
$
$
294,013
81,187
822
376,022
$
$
481
57,010
–
57,491
$
$
292,412
14,720
244
307,376
$
$
1,120
9,457
578
11,155
$
$
589
12,852
–
13,441
$
$
294,602
94,039
822
389,463
(1)
(2)
(3)
(4)
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 $11.6 billion (October 31, 2018 – $10.7 billion) and non-cash collateral of $307.5 billion (October 31, 2018 – $296.7 billion).
Includes cash margin of $3.6 billion (October 31, 2018 – $2.2 billion) which offset against the derivative balance on the balance sheet.
Amounts have been revised from those previously presented.
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2019
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting
on the balance sheet (1)
(Millions of Canadian dollars)
Obligations related to assets sold
under repurchase agreements and
securities loaned
Derivative liabilities (3)
Other financial liabilities
Gross amounts
of financial
liabilities before
balance sheet
offsetting
Amounts of
financial
assets
offset on the
balance sheet
Net amount of
financial liabilities
presented on the
balance sheet
Impact of
master
netting
agreements
Financial
collateral
pledged (2) Net amount
Amounts not
subject to
enforceable
netting
arrangements
Total amount
recognized
on the
balance sheet
$
$
294,758 $
84,624
492
379,874 $
69,420 $
710
281
70,411 $
225,338 $
83,914
211
309,463 $
527 $ 224,506 $
62,524
1
13,540
–
63,052 $ 238,046 $
305 $
7,850
210
8,365 $
1,248 $
14,629
–
15,877 $
226,586
98,543
211
325,340
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)
Obligations related to assets sold
under repurchase agreements and
securities loaned
Derivative liabilities (3)
Other financial liabilities (4)
Gross amounts
of financial
liabilities before
balance sheet
offsetting
Amounts of
financial
assets
offset on the
balance sheet
Net amount of
financial liabilities
presented on the
balance sheet
Impact of
master
netting
agreements
Financial
collateral
pledged (2)
Net amount
Amounts not
subject to
enforceable
netting
arrangements
Total amount
recognized
on the
balance sheet
$
$
225,193
76,877
991
303,061
$
$
18,379
583
814
19,776
$
$
206,814
76,294
177
283,285
$
$
481
57,010
–
57,491
$ 206,106
11,446
–
$ 217,552
$
$
227
7,838
177
8,242
$
$
–
13,944
–
13,944
$
$
206,814
90,238
177
297,229
(1)
(2)
(3)
(4)
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 $11.5 billion (October 31, 2018 – $11.1 billion) and non-cash collateral of $226.5 billion (October 31, 2018 – $206.5 billion).
Includes cash margin of $1.3 billion (October 31, 2018 – $2.3 billion) which offset against the derivative balance on the balance sheet.
Amounts have been revised from those previously presented.
208
Royal Bank of Canada: Annual Report 2019
Consolidated Financial Statements
Note 32 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), (4)
Segregated fund net liabilities
Other
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 (4)
Subordinated debentures
As at
Within one
year
October 31, 2019
After one
year
Within one
year
October 31, 2018
After one
year
Total
Total
$
24,822 $
38,345
1,488 $
–
26,310 $
38,345
28,583 $
36,471
1,626 $
–
30,209
36,471
137,772
17,283
8,762
85,187
146,534
102,470
121,152
16,795
7,106
77,813
128,258
94,608
306,828
133
306,961
294,049
553
294,602
108,382
48,737
317,704
147,133
–
1,663
426,086
195,870
(3,100)
1,663
97,414
43,280
302,038
136,998
–
1,368
399,452
180,278
(2,912)
1,368
18,062
99,792
–
–
–
38,775
–
1,768
3,191
11,236
4,674
10,298
$ 838,798 $ 593,237 $ 1,428,935 $
18,062
101,560
3,191
11,236
4,674
49,073
15,635
91,833
–
–
–
33,578
15,641
6
94,039
2,206
2,832
2,832
11,137
11,137
4,687
4,687
44,064
10,486
778,790 $ 558,856 $ 1,334,734
$ 719,933 $ 166,072 $ 886,005 $
1,663
1,663
–
669,682 $ 166,515 $
–
1,368
18,091
32,668
–
2,401
18,091
35,069
15,657
29,725
5
2,522
836,197
1,368
15,662
32,247
226,582
97,415
1,726
41,612
1,999
206,814
90,238
10,000
53,122
9,131
$1,140,026 $ 205,284 $ 1,345,310 $ 1,048,689 $ 206,090 $ 1,254,779
206,813
88,112
1,691
36,906
103
1
2,126
8,309
16,216
9,028
226,586
98,543
11,401
58,137
9,815
4
1,128
9,675
16,525
7,816
(1)
(2)
(3)
(4)
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 are presented as within one year as this best represents in most instances the short-term nature of our
trading activities. Non-trading derivatives are presented according to the recovery or settlement of the hedging transaction.
Demand deposits of $405 billion (October 31, 2018 – $382 billion) are presented as within one year due to their being repayable on demand or at short notice on a
contractual basis. In practice, these deposits relate to a broad range of individuals and customer-types which form a stable base for our operations and liquidity needs.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
209
Note 33 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 (2)
Net balances due to bank subsidiaries (1)
Net balances due to other subsidiaries
Other liabilities (2)
Subordinated debentures
Shareholders’ equity
As at
October 31
2019
October 31
2018
$
$
$
$
14,264 $
22,279
118,716
37,234
73,785
123,755
526,078
–
152,422
1,068,533 $
681,509 $
2,678
36,594
254,678
975,459
9,551
83,523
1,068,533 $
16,398
20,261
111,072
34,547
69,063
107,941
494,922
4,329
137,821
996,354
642,271
–
38,985
226,475
907,731
8,762
79,861
996,354
(1)
(2)
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Commencing Q4 2019, the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in deposits is presented in other liabilities.
Comparative amounts have been reclassified to conform with this presentation.
Condensed Statements of Income and Comprehensive Income
(Millions of Canadian dollars)
Interest income (1)
Interest expense (2)
Net interest income
Non-interest income (2), (3)
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
For the year ended
October 31
2019
27,630 $
14,966
$
October 31
2018
22,578
10,662
12,664
5,569
18,233
1,730
9,212
7,291
1,568
5,723
7,137
12,860 $
(1,441)
11,419 $
11,916
6,119
18,035
1,294
9,085
7,656
1,546
6,110
6,321
12,431
1,532
13,963
$
$
(1)
(2)
(3)
Includes dividend income from investments in subsidiaries and associated corporations of $27 million (October 31, 2018 – $12 million).
Commencing Q4 2019, the interest component of the valuation of certain deposits carried at FVTPL previously presented in trading revenue is presented in net interest
income. Comparative amounts have been reclassified to conform with this presentation.
Includes a nominal share of profit (losses) from associated corporations (October 31, 2018 – $(31) million).
210
Royal Bank of Canada: Annual Report 2019
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 (1)
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 (1)
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
Proceeds from sales and maturities 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) investing activities
Cash flows from financing activities
Issue of subordinated debentures
Repayment of subordinated debentures
Issue of common shares, net of issuance costs
Common shares purchased for cancellation
Issue of preferred shares, net of issuance costs
Redemption of preferred shares
Dividends paid
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
Amount of interest paid (1)
Amount of interest received
Amount of dividends received
Amount of income taxes paid
For the year ended
October 31
2019
October 31
2018
$
12,860 $
12,431
(7,137)
39,238
(31,744)
2,350
12,449
(15,814)
797
(8,149)
4,850
(2,018)
37,963
(39,461)
(1,266)
332
4,616
166
1,500
(1,100)
105
(1,030)
350
(950)
(6,025)
(7,150)
(2,134)
16,398
14,264 $
14,574 $
25,883
1,694
1,789
(6,321)
38,331
(26,281)
3,730
49,811
(58,326)
2,600
763
16,738
603
30,355
(32,561)
(1,173)
93
(3,363)
(6,046)
–
–
72
(1,522)
–
(105)
(5,640)
(7,195)
3,497
12,901
16,398
9,475
20,490
1,414
3,562
$
$
(1)
Commencing Q4 2019, the interest component and the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in trading revenue
and deposits, respectively, is presented in net interest income and other liabilities respectively. Comparative amounts have been reclassified to conform with this
presentation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2019
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 (3)
Other (3)
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
2019
2018
2017
2016
2015
2014
2013
2012
2011
2011
2010
IFRS
CGAAP
$
26,310 $
38,345
249,004
30,209 $
36,471
222,866
28,407 $
32,662
218,379
14,929 $
27,851
236,093
12,452 $
22,690
215,508
17,421 $
8,399
199,148
15,550 $
9,039
182,710
12,428 $
10,246
161,602
12,428
6,460
167,022
$
13,247 $
12,181
179,558
8,440
13,254
183,519
306,961
618,856
189,459
84,947
347,530
175,446
$1,428,935 $1,334,734 $1,212,853 $1,180,258 $1,074,208 $ 940,550 $ 859,745 $ 823,954 $ 793,833
117,517
408,850
126,079
112,257
378,241
149,180
135,580
435,229
144,773
186,302
521,604
193,479
220,977
542,617
169,811
174,723
472,223
176,612
294,602
576,818
173,768
449,490
9,815
–
n.a.
$ 886,005 $ 836,197 $ 789,036 $ 757,589 $ 697,227 $ 614,100 $ 563,079 $ 512,244 $ 479,102
263,625
8,749
894
n.a.
$1,345,310 $1,254,779 $1,138,425 $1,108,646 $1,010,264 $ 886,047 $ 810,285 $ 779,033 $ 752,370
259,174
7,615
–
n.a.
239,763
7,443
–
n.a.
264,088
7,859
–
n.a.
341,295
9,762
–
n.a.
305,675
7,362
–
n.a.
340,124
9,265
–
n.a.
409,451
9,131
–
n.a.
83,523
102
79,861
73,829
71,017
94
599
595
62,146
1,798
52,690
1,813
47,665
1,795
43,160
1,761
39,702
1,761
83,625
41,463
$1,428,935 $1,334,734 $1,212,853 $1,180,258 $1,074,208 $ 940,550 $ 859,745 $ 823,954 $ 793,833
79,955
74,428
71,612
63,944
54,503
49,460
44,921
84,947
296,284
165,485
72,698
273,006
175,289
$ 751,702 $ 726,206
$ 444,181 $ 414,561
263,030
6,681
727
2,256
256,124
7,749
–
1,941
$ 709,995 $ 687,255
41,707
38,951
n.a.
n.a.
41,707
38,951
$ 751,702 $ 726,206
Condensed Income Statements
(Millions of Canadian dollars) (1)
Net interest income (3)
Non-interest income (3), (4)
Total revenue (4)
Provision for credit losses (5)
Insurance policyholder benefits, claims
and acquisition expense
Non-interest expense (4)
Non-controlling interest
Net income from continuing operations
Net loss from discontinued operations
Net income
Other Statistics – reported
IFRS
$
2019
19,749 $
26,253
46,002
1,864
2018
17,952 $
24,624
42,576
1,307
2017
16,926 $
23,743
40,669
1,150
2016
16,531 $
22,264
38,795
1,546
2015
14,771 $
20,932
35,703
1,097
4,085
24,139
n.a.
12,871
–
$
12,871 $
2,676
22,833
n.a.
12,431
–
3,053
21,794
n.a.
11,469
–
3,424
20,526
n.a.
10,458
–
2,963
19,020
n.a.
10,026
–
12,431 $
11,469 $
10,458 $
10,026 $
2014
14,116 $
19,992
34,108
1,164
3,573
17,661
n.a.
9,004
–
9,004 $
2013
13,249 $
17,433
30,682
1,237
2,784
16,214
n.a.
8,342
–
8,342 $
2012
12,439
16,708
29,147
1,299
3,621
14,641
n.a.
7,558
(51)
7,507
2011
11,357
16,281
27,638
1,133
3,358
14,167
n.a.
6,970
(526)
6,444
$
$
CGAAP
2011
10,600 $
16,830
27,430
975
3,360
14,453
104
6,650
(1,798)
4,852 $
2010
10,338
15,744
26,082
1,240
3,546
13,469
99
5,732
(509)
5,223
(Millions of Canadian dollars, except
percentages and per share amounts) (1)
PROFITABILITY MEASURES (6)
Earnings per shares –basic
–diluted
Return on common equity (7), (8)
Return on risk-weighted assets (9)
Efficiency ratio (4)
KEY RATIOS
PCL on impaired loans as a % of average
net loans and acceptances (10)
Net interest margin
(average earning assets, net) (3), (7)
SHARE INFORMATION
Common shares outstanding (000s)
– end of period
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
$
$
$
$
$
2019
2018
2017
2016
2015
2014
2013
2012
2011
2011
2010
IFRS
CGAAP
8.78 $
8.75 $
16.8%
2.52%
52.5%
0.27%
1.61%
1,430,096
4.07 $
4.1%
46%
54.41 $
106.24 $
151,933
1.95
12.1%
13.2%
15.2%
4.3%
8.39 $
8.36 $
7.59 $
7.56 $
6.80 $
6.78 $
6.75 $
6.73 $
6.03 $
6.00 $
5.53 $
5.49 $
4.96 $
4.91 $
17.6%
2.55%
53.6%
17.0%
2.49%
53.6%
16.3%
2.34%
52.9%
18.6%
2.45%
53.3%
19.0%
2.52%
51.8%
19.7%
2.67%
52.8%
19.6%
2.70%
50.2%
4.25
4.19
18.7%
2.44%
51.3%
$
$
3.21 $
3.19 $
12.9%
1.87%
52.7%
3.49
3.46
14.9%
2.03%
51.6%
0.20%
0.21%
0.28%
0.24%
0.27%
0.31%
0.35%
0.33%
0.34%
0.45%
1.64%
1.69%
1.70%
1.71%
1.86%
1.88%
1.97%
1.86%
1.84%
1.99%
1,438,794
1,452,535
1,484,235
1,443,955
1,443,125
1,441,722
1,445,846
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 $
3.08 $
4.1%
46%
39.51 $
74.77 $
2.84 $
3.8%
47%
33.69 $
80.01 $
2.53 $
4.0%
46%
29.87 $
70.02 $
2.28 $
4.5%
46%
26.52 $
56.94 $
138,009
1.88
146,554
2.17
124,476
1.93
107,925
1.89
115,393
2.38
100,903
2.34
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.
82,296
2.15
n.a.
13.1%
15.1%
n.a.
1,438,522
2.08
3.9%
45%
24.25
48.62
69,934
2.00
n.a.
n.a.
n.a.
n.a.
1,438,522
$
$
$
2.08 $
3.9%
47%
25.65 $
48.62 $
69,934
1.90
n.a.
13.3%
15.3%
n.a.
1,423,203
2.00
3.6%
52%
23.99
54.39
77,502
2.27
n.a.
13.0%
14.4%
n.a.
(1)
(3)
(2)
(4)
Effective November 1, 2018, we adopted IFRS 15 Revenue from Contracts with Customers. Results from periods prior to November 1, 2018 are reported in accordance with IAS
18 Revenue in this 2019 Annual Report. 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 2019 Annual Report.
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.
Commencing Q4 2019, the interest component and the accrued interest payable recorded on certain deposits carried at FVTPL previously presented in trading revenue and
deposits, respectively are presented in net interest income and other liabilities respectively. As at November 1, 2016, comparative amounts have been reclassified to
conform with this presentation.
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).
Ratios for 2010-2012 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.
(9)
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.
(10) 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-
(6)
(7)
(8)
(5)
impaired loans, acceptances and commitments.
(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 calculated the capital and leverage ratios using the Basel III framework unless otherwise stated. 2010-2012 capital and leverage ratios were calculated
using the Basel II framework. Capital and leverage ratios for 2011 were determined under CGAAP and Basel II framework.
212
Royal Bank of Canada: Annual Report 2019
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.
Allowance for credit losses (ACL)
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.
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.
Attributed capital
Attributed capital is based on the Basel III
regulatory capital requirements and economic
capital.
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 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.
Auction rate securities (ARS)
Debt securities whose interest rates are
regularly reset through an auction process.
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.
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.
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.
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.
Homeline 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.
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.
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.
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.
Glossary
Royal Bank of Canada: Annual Report 2019
213
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.
Provision for credit losses (PCL)
The amount charged to income necessary to
bring the allowance for credit losses to a level
determined appropriate by management. This
includes provisions on performing and
impaired financial assets.
finance their activities, and financing in the
form of multiple contractually-linked
instruments.
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
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.
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.
Unattributed capital
Unattributed capital represents common
equity in excess of common equity attributed
to our business segments and is reported in
the Corporate Support segment.
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.
214
Royal Bank of Canada: Annual Report 2019
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
As at October 31, 2019
Carrying value of
voting shares owned
by the Bank (3)
$
65,288
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.à r.l./B.V. (2)
RBC Holdings (Luxembourg) S.A R.L.
RBC Holdings (Channel Islands) Limited
Royal Bank of Canada (Channel Islands)
Limited
RBC 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
22,329
10,068
2,907
2,570
1,321
858
298
(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 are incorporated under the laws of the State of Delaware, U.S., RBC Capital Markets, LLC, which is organized under the laws of the State of
Minnesota, U.S., and RBC Finance S.à r.l. / B.V. which 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 2019
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
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 20 million
common shares during the
period spanning from March 1,
2019 to February 29, 2020, 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.
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 1-888-453-0330 (Canada and
the U.S.) or 416-263-9394
(International)
email: service@computershare.com
For other shareholder inquiries,
please contact:
Shareholder Relations
Royal Bank of Canada
200 Bay Street
South Tower
Toronto, Ontario M5J 2J5
Canada
Tel: 416-955-7806
Financial analysts, portfolio
managers, institutional
investors
For financial information
inquiries, please contact:
Investor Relations
Royal Bank of Canada
200 Bay Street
South Tower
Toronto, Ontario M5J 2J5
Canada
Tel: 416-955-7802
or visit our website at
rbc.com/investorrelations
2020 Quarterly earnings
release dates
First quarter
Second quarter May 27
Third quarter
Fourth quarter
August 26
December 2
February 21
2020 Annual Meeting
The Annual Meeting of Common
Shareholders will be held on
Wednesday, April 8, 2020, at 9:30
a.m. (Eastern Time) at the Metro
Toronto Convention Centre,
255 Front Street West, Toronto,
Ontario, Canada
Dividend dates for 2020
Subject to approval by the Board of Directors
Common and preferred shares
series W, AA, AC, AE, AF, AG,
AZ, BB, BD, BF, BH, BI, BJ, BK,
BM and BO
Preferred shares series C-2
(US$)
Record
dates
January 27
April 23
July 27
October 26
January 28
April 27
July 28
October 27
Payment
dates
February 24
May 22
August 24
November 24
February 7
May 7
August 7
November 6
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 CAPITAL MARKETS, RBC CAPITAL TRUST, RBC ELEMENTS,
RBC FUTURE LAUNCH, RBC GLOBAL ASSET MANAGEMENT, RBC INSURANCE, RBC REWARDS, RBC WEALTH MANAGEMENT, MYADVISOR, NOMI FIND & SAVE, RBC
UPSKILL, RBC CAREER LAUNCH, INVESTEASE and RBC ONE which are trademarks of Royal Bank of Canada used by Royal Bank of Canada and/or by its subsidiaries
under license. All other trademarks mentioned in this report which are not the property of Royal Bank of Canada, are owned by their respective holders.
216
Royal Bank of Canada: Annual Report 2019
Shareholder information
81104 (12/2019)