Reimagining
our shared
future
RBC client Kathy Cheng, owner of Redwood Classics Apparel
Toronto, Ontario
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
We are guided by our Values:
> Client First
> Collaboration
> Accountability
> The preferred partner to corporate, institutional
and high-net-worth clients and their businesses
in the U.S.
> Diversity & Inclusion
> Integrity
> A leading financial services partner valued for
our expertise in select global financial centres
Table of Contents
2
2020 Highlights
4 CEO Letter
7
Chair Letter
14 Management’s Discussion and Analysis
117
Enhanced Disclosure Task Force
Recommendations Index
Reimagining our shared future
118 Reports and Consolidated Financial Statements
8 Helping Clients Thrive
221 Ten-Year Statistical Review
9 Our Tech and Data Strategy
222 Glossary
10 Transforming the Employee Experience
225 Shareholder Information
11 Driving Diversity & Inclusion
12 Taking Action on Sustainability
13 Supporting and Inspiring Youth
Connect with us:
facebook.com/rbc
www.youtube.com/user/RBC
On the cover:
instagram.com/rbc
linkedin.com/company/rbc
twitter.com/@RBC
rbc.com/ar2020
RBC client Kathy Cheng on the production floor of her family-owned
business, Redwood Classics Apparel, a textiles and manufacturing
company based in Toronto, Ontario.
Who we are
Royal Bank of Canada is a global financial institution with a purpose-
driven, principles-led approach to delivering leading performance.
Our success comes from the 86,000+ employees who leverage their
imaginations and insights to 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 create value has always been as important as what we
achieve. This was even more pronounced in 2020 as the impacts of
the COVID-19 pandemic took hold and continue to reverberate
around the world. In our annual report, you’ll read about how we are
navigating these unprecedented times and leveraging our scale and
financial strength to deliver for our clients, communities, employees,
and shareholders.
Why invest?
> Diversified business model
with scale and market-
leading client franchises
> Resilient earnings with a
premium ROE and dividend
stability
> Robust capital and liquidity
position
> Disciplined approach to risk
and expense management
> Differentiated technology
investments and digital
capabilities
> Recognized leader in ESG
and corporate citizenship
BY THE NUMBERS
36
countries
86,000+
employees
17 million
clients
All figures included in the front section of the annual report are from fiscal 2020 unless otherwise specified.
Royal Bank of Canada Annual Report 2020
1
Some 2020 highlights across our balanced scorecard
Clients
620,000+ clients
have benefitted from
RBC Client Relief programs
5 million
active mobile users, up 12% year-
over-year(1)
Celent Model
Bank of the Year
award winner, demonstrating
industry-leading practices that
drive digital success in banking
Employees
#4 globally
in the 2020 Refinitiv Diversity &
Inclusion Index, ranking over
9,000 publicly-listed companies
Women
represented
51% of new hires(5)
52% of promotions(5)(6)
46% of executives(7)
Communities
#1 market share
in investment banking in Canada(2)
A+ score
on RBC Global Asset Management’s
responsible investing activities, as
assessed by the UN Principles for
Responsible Investment(3)
$8.8 billion
in financing for sustainable bonds
and loans, representing 64% growth
over 2019
Outstanding Global
Private Bank
in North America for the fifth year
in a row(4)
Customer Service
Award Winner
and 10 out of 11 top rankings among
the big five Canadian banks in the
2020 Ipsos Financial Service
Excellence Awards
Black, Indigenous and
People of Colour (BIPOC)
represented
35% of new hires(8)
40% of promotions(6)(8)
23% of new executive appointments,
surpassing our goal of 20% for
the year(7)
18% young people(9)
When asked about their well-being
during the COVID-19 pandemic(10):
91% of employees feel
well-supported by RBC
90% of employees see their
work as meaningful
92% of employees indicated
that they have the information
that matters to them
$201 million
provided through RBC Future Launch®,
reaching over 2.5 million Canadian
youth through 500+ partner programs
since 2017
$142 million
given globally through cash donations
and community investments, including
support to mitigate the economic
impact of the COVID-19 pandemic(11)
$3.9 billion
in support of our communities as
one of the largest taxpayers in Canada,
and as a taxpayer in other countries
where we operate(12)
$23.9 million
raised by employees and retirees for
4,300+ charities through our annual
Employee Giving Campaign in Canada
$10.7 million
raised to support youth and children’s
charities globally through the first
virtual versions of RBC Race for the Kids
and RBC Trade for the Kids
1st financial institution
in Canada
to sign a renewable energy
Power Purchase Agreement
90-day active mobile users in Canadian Banking only
(1)
(2) Dealogic, YTD as at October 31, 2020
(3)
See RBC GAM’s Responsible Investing Transparency Report and the PRI Assessment Methodology
for more details
(4) Private Banker International Global Wealth Awards 2020
(5) Global; excludes summer interns, students and co-ops
(6) Defined as upward change in position level or HR Class
(7) Represents data for our businesses in Canada governed by the Employment Equity Act
2
Royal Bank of Canada Annual Report 2020
(8) North America; excludes summer interns, students and co-ops
(9) Headcount under 30 globally, excluding City National and BlueBay Asset Management employees
(10) Well-being surveys conducted from April to June 2020. The average participation rate was 55%
(11)
Includes employee volunteer grants and gifts in kind, as well as contributions to non-profits and
non-registered charities. Figure includes sponsorships
(12) Refer to page 95 for additional information
Shareholders
$7.82
diluted earnings per share (EPS),
down from $8.75 in 2019
14.2%
return on equity (ROE),
down from 16.8% in 2019
86 average
percentile ranking
on priority ESG indices(2)
63%
of profits returned to our shareholders
12.5%
common equity tier 1 (CET1) ratio,
through dividends(1) and repurchases
up from 12.1% in 2019
$4.2 billion
remainder of our profit available
to reinvest in future growth
$4.29
dividends declared per share,
increased by $0.22 since 2019
Earnings by business segment(4)
Annualized Dividend
Increase of:
5%
One year
8%
Ten year(3)
24%
19%
7%
5%
45%
Personal & Commercial Banking
Capital Markets
Wealth Management
Insurance
Investor & Treasury Services
Earnings
net income (C$ billion)
$12.9
$11.4
2019
2020
Financial performance metrics
MEDIUM-TERM OBJECTIVES(5)
Diluted EPS growth of 7%+
ROE of 16%+
Strong capital ratio (CET1)(7)
Dividend payout ratio of 40%–50%
Total shareholder return(8)
RBC
Global peer average
3-YEAR(6)
5-YEAR(6)
1%
16.2%
12%
49%
3-YEAR
1%
(6)%
3%
16.4%
11.6%
48%
5-YEAR
9%
3%
Includes dividends paid on both common and preferred shares. Dividends were $6.1 billion on common shares and $0.3 billion on preferred shares
(1)
(2) Average percentile ranking compiled from our four top-tier ESG ratings/rankings, including Sustainalytics, MSCI ESG Rating, FTSE4Good and RobecoSAM’s Corporate Sustainability Assessment (informing the DJSI)
(3) Compound Annual Growth Rate
(4) Excludes Corporate Support
(5) 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. These objectives assume a normal business environment and our ability to achieve them in
a period may be adversely affected by extraordinary developments such as the COVID-19 pandemic and the current low interest rate environment
(6) Diluted EPS growth is calculated using a Compound Annual Growth Rate. ROE, CET1 and dividend payout ratio are calculated using an average
(7)
(8)
For further details on the CET1 ratio, refer to the Capital Management section
In fiscal 2020, Power Financial Corporation was removed from the global peer group. 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, 2017 to October 31, 2020 and October 31, 2015 to October 31, 2020
Royal Bank of Canada Annual Report 2020
3
Message from Dave McKay
Amidst historic challenges arise
opportunities to reimagine our
shared future
In what were truly unchartered waters, RBC continued to perform
at a remarkably high level, particularly in the context of the early
days of the crisis. Within weeks, we moved over 80% of our
employees—across 36 countries—to work outside bank premises.
To limit the health risks to clients and our employees and support
slowing the spread of the virus, we temporarily closed hundreds of
branches across our network, and reduced hours of operation. We
moved more employees into contact centre roles to handle an
increasing volume of urgent client calls. All of this was enabled by
the significant investments we had long made in our
infrastructure. This included securing broadband capability well
before the pandemic started, investing in distributed call centre
capability over the past decade, and building out market leading
digital capabilities for clients. These investments have proven to
be a differentiator.
Like most citizens, our employees were understandably anxious
about their future, and it was critical each and every one felt
economically secure, so they could focus on the needs of our
clients. RBC was the first Canadian bank to assure no job losses
due to the pandemic in 2020. Employees unable to work from
home received special compensation and additional days of paid
leave, and employees working remotely were reimbursed for home
offices expenses. A series of employee well-being surveys provided
valuable insights and helped us create new programs and
resources to support them—including a strong focus on mental
health.
Through my frequent client outreach, I heard first-hand how
devastating this past year has been for so many families,
businesses and young people. The sudden loss of loved ones. The
loss of jobs and small businesses. Missing out on the valuable
experiences of a normal school year. The dreams, plans and hard
work of so many have been undermined by the global pandemic.
Throughout this time, RBC actively supported our clients. We
advised millions of personal and commercial clients and made
available billions of dollars of financial relief, including deferrals, to
protect their livelihoods. We rolled out government relief programs
at unprecedented speed. New and additional credit facilities were
also made available for corporate and institutional clients to help
them manage through the volatility. The pandemic presented other
unexpected challenges. Many clients were at risk of being stranded
abroad as border closures and travel bans took effect. Our
Insurance business helped thousands of clients get their families
home safely. I was proud to see our efforts stand out in a year when
it counted most. Among the big five Canadian banks, J.D. Power
ranked RBC highest in retail customer satisfaction.
2020 was one of the most difficult years that society, global
economies and RBC has faced in generations. Tragically, lives
were lost and the rapid spread of COVID-19 forced countries to
shut down significant parts of their economies to protect their
citizens. This led to steep increases in unemployment and the
worst economic downturn since the Great Depression.
The pandemic has also exposed growing foundational cracks in
society. The economic hit has disproportionately impacted people
who can afford it least, underscoring gaps in social infrastructure
and education. These factors have contributed to mounting unrest
and division and revealed ugly truths about the pervasiveness of
systemic racism.
As with any crisis, leadership at all levels was tested and
collaboration was critical. I saw business and civic leaders work
alongside all levels of government to protect the health and
safety of essential workers and citizens; support and advocate
for programs and policy to mitigate the impacts of the crisis; and
implement relief measures designed to help see us through
to recovery.
While each country’s response to these challenges differed,
governments provided significant short-term support for
individuals, and to a varying degree, businesses and communities.
Central banks injected significant liquidity into the global
economy, drawing upon learnings from the global financial crisis.
Amidst this challenging environment, RBC’s strength was never
more evident. Guided by our Purpose to help clients thrive and
communities prosper, the bank led with a heightened sense of
focus on delivering long-term value for our employees, clients,
communities, and shareholders.
4
Royal Bank of Canada Annual Report 2020
In the communities where we live and work, many vulnerable
citizens were at risk and we quickly stepped in to help. RBC made
significant donations to COVID-19 relief—committing over
$11 million towards food security, mental health programs and
pandemic preparedness and response. This was part of
$142 million in donations and investments that RBC directed
throughout 2020 to local community organizations and causes,
including our key focus areas of youth, the environment, the arts,
and diversity and inclusion.
The heart and soul of our communities are the small businesses
that keep our main streets vibrant. Most were not prepared for the
disruption brought on by the pandemic, particularly the sudden
shift to digital and online commerce. We witnessed an economic
shift to strong global brands and technology platforms, leaving
many small business behind. So RBC stepped up, and partnered
with government, chambers of commerce, and other leading
brands to create a national movement to support small and local
businesses through Canada United™. The program helped
generate over $1 billion in purchases and raised additional funding
to help accommodate re-opening guidelines and e-commerce
capabilities.
RBC entered the crisis from a position of strength and the size,
scale and liquidity of our balance sheet coupled with the earnings
power of our diversified business model enabled us to continue
supporting our clients, employees and communities, while also
delivering for our shareholders. In response to the significant
economic shocks and market volatility resulting from the
pandemic, we took measures to further strengthen and protect our
balance sheet. During 2020, we increased total provisions for
potential future credit losses by $2.5 billion, maintained a strong
liquidity coverage ratio—145% at Q4, and increased the capital
buffers by nearly $6 billion to close the year with a robust CET1
ratio of 12.5%.
The sudden decline in interest rates had a material negative
impact on our net interest income. Some of this impact was offset
by very strong growth in client volumes across most of our
businesses and careful management of expenses.
Notwithstanding the increase in reserves and revenue pressure,
RBC generated earnings of $11.4 billion and an ROE of 14.2%. We
delivered $6 billion in dividends to our common shareholders and
outperformed our global peer group in terms of Total Shareholder
Return over three- and five-year periods.
Looking ahead, we expect pandemic-related stresses and a low
interest rate environment will continue to present headwinds and
shape the banking landscape and outlook.
The path ahead—continuously transforming to
create more value
The uncertainty of the scale and duration of the pandemic is one
of the most difficult challenges ahead, straining individual,
business and government financial resources. So too are the
mental health challenges of isolation, prolonged remote work,
school closures and the pressure on working parents.
But what I know for certain is that RBC has the strength and
resilience to manage a range of near-term scenarios as well as
fulfill our longer-term vision to transform our bank for the future. In
many ways, the pandemic has accelerated us toward a future we
have long anticipated and prepared for, as our clients seek out
new ways to bank and be served.
As we move forward, we will continue to leverage the size and
strength of our balance sheet to support our clients. Our ‘bionic’
blend of great people and technology will remain a key success
factor, creating differentiated offerings and solutions that attract
new clients and deepen existing relationships. We will continue to
prioritize a disciplined focus on expense management to remain
financially and strategically flexible. And we will always align our
actions with our Purpose to create meaningful value for clients in
the following four ways:
(cid:129) Advice and Insights—RBC will provide insights, solutions and
services that help our clients understand the world around
them and feel confident about the choices they make. A great
example is MyAdvisor® — our online financial planning
platform that enables our clients to receive insights and
counsel in real time. Since launch, more than two million plans
have been developed using this innovation.
(cid:129) Convenience and Time—Our clients will be empowered to
shape their own banking experiences. We will continue to
simplify and digitize their interactions with us—saving time,
and adding convenience and meaningful value for them.
Artificial Intelligence (AI)-based solutions like NOMI® deliver
personalized services tailored to individual banking needs.
NOMI Find & Save®, for instance, has helped clients save an
average of more than $300 per month. In our growing U.S.
franchises, we have seen positive uptake in our digital
offerings. This includes a 38% increase of mobile users at City
National Bank, and a growth of over 160,000 mobile visits in
U.S. Wealth Management, compared to last year.
(cid:129) Giving our Clients More—For the past 20 years, we have
invested in making RBC Rewards® the largest proprietary
rewards program in Canada, delivering nearly $1 billion in
value to our members in the last year. This broad-based
loyalty program includes points, cash-back, discounts, special
access, member experience through over 400 partners and
brands. We will also continue to offer clients more value
through new ‘beyond banking’ services, as well as rewarding
them for their relationship with us. Consider the biggest
investment most people make: buying a home. RBC Ventures
offers solutions at every stage of their home journey—from
exploring real estate listings to moving into and maintaining
their home.
(cid:129) New Services—Leveraging data and our trusted brand, we will
use data analytics and digital platforms to understand and
meet clients’ needs, and deliver new and differentiated
solutions. Our Capital Markets AI-based electronic trading
platform, Aiden™, executes trades based on live market data,
and dynamically adjusts to new information and learnings
from each of its previous actions.
Reimagining our shared future
Helping to reimagine our collective future is critical for clients and
communities to thrive and prosper. Even as the pandemic
continues to challenge society, it has also presented us with
opportunities to accelerate the pace of progress or, in some cases,
adjust the course we are on. Taking these bold steps now will help
advance our journey toward a more inclusive, digital and
sustainable age.
In doing so, businesses, non-profits and all levels of governments
will need to come together with renewed focus to not only lead us
out of the recession, but create conditions to help people thrive
and communities prosper in a very different world.
Royal Bank of Canada Annual Report 2020
5
For RBC, and in my role as CEO, we are leading from the front in
four key areas:
Building a ‘digital first’ economy: The pandemic has accelerated
digital adoption, changing consumer behaviours and how
organizations create value. And it has become clear that helping
small businesses make the short- and long-term transition to more
digitally scaled operations is more important than ever before—
keeping this vital sector of our economy viable and vibrant.
Advancing a ‘digital first’ economy will require a concerted effort
by public and private sectors to invest in our tech sector, networks
and talent. In Canada, for instance, we need to encourage more
investment capital from abroad, supported by incentive-based tax
policies that take advantage of the new supply chains and services
that we’ll need in a more digital world.
RBC plays many roles in helping build a ‘digital first’ economy.
From teaching seniors to bank online and offering solutions that
enable businesses to harness smart technology, to advocating and
leading the way on the responsible and ethical use of AI. For
instance, RBC’s Institute for Research—Borealis AI™—found a
majority of businesses surveyed want to exploit powerful AI
solutions, but do not have the resources or expertise to do so in a
responsible way. That’s why Borealis AI™ introduced a new online
hub that brings open source research code, tutorials, academic
research and lectures to the AI community, helping to make ethical
AI available to all.
Preparing a new generation for a bolder future: The pandemic
has also accelerated the move from a credentials-based economy
to a skills-based one, critical to addressing current skills shortages
and building a more inclusive workforce. The workplace demands
new and evolving skill sets. This includes the ability to operate in
an increasingly hybrid—virtual/physical—world, building
relationships, communicating, solving problems, and developing
digital services. For RBC, we know it is vital we continue to help
young people prepare for the new world of work, and that’s why in
2017 we committed $500 million over 10 years through RBC Future
Launch®.
But this past year, the crisis required us to move with even greater
urgency and pivot our support for youth at a time when they
needed it most. Participation in networking events and skills
development programs continued through newly created virtual
programs, and in some cases, reached even wider audiences living
in rural and remote areas, as well as on reserves. We also hosted
our first national virtual gathering of industry experts, young
professionals and top athletes to share their advice with Canadian
youth. And finally, notwithstanding the challenges of the
pandemic, it was important to keep our promise of meaningful,
paid work experiences to more than 1,400 summer students,
despite the challenges of working in a virtual environment.
Building a more inclusive and prosperous society: The pandemic
cast even greater light on the inequities and systemic racism that
hold so many people back from living a life that others take for
granted. We cannot create a truly prosperous future without the
full participation of all citizens. That means replacing obstacles
with opportunities, encouraging engagement, speaking up, and
creating room for people to realize their full potential.
Diversity and inclusion has been a cornerstone of RBC’s values for
many years. In 2020, for the second consecutive year, RBC ranked
in the top 10 globally on Refinitiv’s Top 100 Company Diversity &
Inclusion. And while we have made progress against some of our
goals, there is more to be done to accelerate change. This year, I
6
Royal Bank of Canada Annual Report 2020
spent even more time listening to people inside and outside the
bank, including conversations with BIPOC leaders at RBC and a
virtual roundtable of Indigenous leaders that focused on setting up
future generations for success. In these and other discussions,
hard questions were asked about racism that we, as a society,
could not see, or worse, chose not to see for far too long.
Today, I feel an even greater sense of urgency—and
responsibility—to harness RBC’s values and convictions to drive
change within the bank and in society more broadly. That means
building on existing commitments to foster social and economic
mobility, such as our long-standing efforts to support Indigenous
economies, peoples and communities. RBC took another
important step forward with the introduction of $100 million in
small business loans over five years to Black entrepreneurs and a
target to accelerate the growth of our BIPOC executive
representation.
Building a more sustainable world: Many people worry the
pandemic may shift priorities away from tackling one of the most
pressing issues of our age—climate change. I believe the financial
system needs to be leading efforts to support clean economic
growth and the transition to a low-carbon economy. That includes
an aspiration to help the world meet its energy needs and move to
increasingly cleaner fuel sources. RBC’s climate strategy is
focused on working with our clients and communities, using our
capital as a force for positive change. Our $100 billion sustainable
finance commitment by 2025 is balanced with investments we are
making in our energy and natural resource clients. This enables
them to continue investing in innovation to reduce emissions and
remain leaders on the global stage.
In 2020, RBC was the first Canadian bank to sign a long-term
renewable energy power purchase agreement. The agreement will
support the construction of two solar farms in Alberta, which are
anticipated to create 300 new jobs and inject $70 million into the
provincial economy. We also made the decision not to provide
direct funding for any project or transaction that involves
exploration or development in the Arctic National Wildlife Refuge,
the largest national wildlife refuge in the United States. RBC was
the first Canadian bank to make this commitment.
In moments of need come our moments of truth
This year will be remembered through history as one filled with
unimaginable obstacles. It can also be remembered for what we
did with these challenges—and what we can build in the years
ahead.
I am proud of the meaningful difference RBC made for those we
serve. As we look forward, we will continue to use the power of our
Purpose and strength of our franchise to help create a shared and
sustainable future. It’s a role we embrace.
Our momentum is driven by the incredible contributions of our
employees and invaluable counsel of our Board. I want to express
my thanks and gratitude for all they do.
Dave McKay
President and Chief Executive Officer
Message from Katie Taylor
The global pandemic has made perfectly clear what matters most
in life: our health, safety and financial security.
No organization understands that better than RBC. Throughout the
crisis, the bank remained ever present on the front lines, playing
an essential role in the lives of those we serve. RBC responded to
the evolving needs of our employees, advised clients and made
available billions of dollars of financial relief, as well as anticipated
and mobilized resources to protect and promote the viability and
vibrancy of local communities.
Leadership always matters. But it is during times of crisis when it
becomes the defining difference for an organization and its
stakeholders. That is why the honour bestowed upon Dave McKay
by The Globe and Mail was especially meaningful in 2020. Earning
the Corporate Citizen of the Year recognition speaks to why RBC
exists: to help clients thrive and communities prosper.
More than ever, robust communication between the Board and
management has been vital in enabling the Board to provide
sound oversight and pivot quickly to support management during
the global pandemic.
The crisis highlighted the need for the Board to continue to ensure
the bank has the right strategy, risk management and talent to
stay true to its Purpose and pursue its strategic objectives. It is a
central tenet to our role as stewards of the bank, exercising
independent judgment in overseeing management and
safeguarding the interests of shareholders.
To this end, enterprise and business segment strategy are
discussed at each Board meeting and at its annual offsite session,
which was held virtually in 2020. The Board challenges
management on how best to leverage RBC’s strong capital
position and create value by investing in organic growth and
exploring strategic acquisitions.
Promoting strong risk conduct and embedding a risk management
culture throughout RBC are key priorities. This includes careful
assessment that management’s plans appropriately balance
strategic opportunities with risk discipline to ensure long-term
shareholder value. The global pandemic presented an
unprecedented opportunity to test and ultimately confirm the
soundness of the bank’s operational resilience and risk processes.
RBC’s ability to migrate over 80% of its employees to remote work
locations in a matter of weeks—and continue serving clients even
with unprecedented activity levels—reinforced our confidence and
showcased the cohesion between the bank’s business continuity
plans and risk management practices.
The Board was also actively engaged in surveying the bank’s
operating environment and ensured its leaders were well prepared
to address issues impacting the reputation of our business and
ability to operate. In 2020, it has been especially important to
reach out and listen to our clients and be empathetic when dealing
with financial hardship.
An organization’s strategy can only achieve its desired outcomes
when the right people are in place to lead and execute on it. The
Board actively assesses senior management and reviews
development plans for key executives in an effort to ensure the
long-term success of the bank. The selection, appointment and
development of the CEO and the Group Executive is a key focus, as
is the need to ensure our executive compensation programs align
with performance, retain top talent and motivate the bank’s senior
leaders to bring our vision, values and strategy to life. In 2020, the
Board also provided oversight of new initiatives to further enhance
the diversity of the bank’s executive team, which includes efforts
to ensure that enhanced staffing targets for women and those who
identify as Black, Indigenous or People of Colour are detailed and
measureable to deliver desired outcomes.
Last year, the strength of RBC’s financial position and balance
sheet enabled the bank to manage through significant headwinds
and continue to build the bank for the future. Indeed, when
combined with the bank’s prudent risk management, diversified
business mix and proven ability to generate organic earnings, the
Board remains confident in RBC’s growth strategy.
Challenges will persist in the new year. Yet, as 2020 demonstrated,
RBC has the strength to adapt and will remain focused on
delivering for clients, employees, communities, and shareholders.
What’s more, we will continue to shape the future in ways that
serve the best interests of all our stakeholders. That is a defining
trait of who we are and a competitive advantage of what we do.
Your Board will continue to provide management with sound
guidance and oversight and foster robust communication with
management. The appointments of Cynthia Devine and Maryann
Turcke to the Board add to our existing strength, and provide a
unique set of experiences and insights to RBC.
On behalf of the Board, I want to express my ongoing confidence in
and gratitude to Dave McKay, the executive leadership team and
the entire RBC team for being present and purposeful in everything
they do. Our clients, employees and communities are better for it.
Kathleen Taylor
Chair of the Board
Royal Bank of Canada Annual Report 2020
7
Reimagining our shared future
Helping clients thrive
The trust and confidence our clients place in us speak to the value we create and how we go about achieving
results. Over the past year, we reached even higher in honouring that trust by leveraging our scale, talent and
insights to support our clients and help them navigate this unprecedented time.
Stranded travellers find their way
home with RBC’s support
Earlier this year, my wife and I took a trip to Spain. Towards the
end of our holiday, we found ourselves urgently trying to get
back to Canada—borders were closing, flights were cancelled
and countries were going into lockdown in an effort to quell the
spread of COVID-19.
It’s hard to describe the anxiety we experienced as we worried
we would not find a way home. That’s when I decided to call RBC,
knowing that my Preferred Visa card carried travel insurance.
Hours after speaking with RBC Insurance representative Jing, she
had re-booked and pre-paid our tickets so that my wife and I
could return home in a couple of days. Jing and the entire Travel
Claims team went above and beyond, assuring our loyalty as
lifelong clients.
We are truly grateful to be home safely, and it was RBC Insurance
that got us here.
Eric and Molly Scott
Montreal, Quebec
Our Travel Advisors responded
to 288% more calls at the
height of the pandemic(1) to
help clients like Eric and Molly
in their time of need.
Checking in to offer comfort and support
When I discovered some of my elderly clients were alone and
unable to leave their homes to shop for food during the
pandemic, I knew I had to help.
I picked up groceries, put together care packages, made loaves
of homemade bread and dropped everything off at their
doorsteps. That gave me a chance to chat briefly with them from
a safe distance to see how they were coping.
This wasn’t just about helping clients—it was about having a
human touch and supporting other people when they needed
it most.
Even with day-to-day banking and investing becoming more
digital, I found other ways to be there for them. Face-to-face
meetings were replaced with online chats to help set up email
accounts, transfer funds and pay bills. Our team’s clients had my
cellphone number and knew they could reach me anytime they
needed my support.
Stephanie Demestihas
RBC PH&N Investment Counsel, Private Client Associate
Toronto, Ontario
15% more Wealth Management
Canada advisors took
advantage of Advisor’s Virtual
Assistant (AVA™)—an RBC app
to stay connected with their
clients online(2).
Loan relief to save a family’s house
I’m a single mom of seven kids (three with special needs) and a full-time nurse in
Oliver, a small town in British Columbia.
Earlier this year, I lost my job due to the pandemic. I would not have been able to
feed my kids, keep a roof over our heads or have a vehicle on the road if RBC had
not deferred my mortgage.
Not only did the bank provide me with a six-month deferral, but my advisor also
followed up by phone to check in and see how we were doing. That personal
touch meant a lot. Now that I’m back to work, I can continue paying my bills
without having to worry about my credit.
Years ago, RBC gave me and my family a mortgage, and, with it, the opportunity to
own a home. I have never defaulted or missed a payment, and I’m so appreciative
of what they’ve done to make a difficult year much easier for us.
(1) YoY comparison in the number of travel insurance calls received during March 2020 vs. March 2019
(2) YoY increase from April 2019 to April 2020
8
Royal Bank of Canada Annual Report 2020
194,000+ clients
have benefitted
from our residential
mortgage deferral
program.
Michelle Larose
Oliver, British Columbia
Creating more value through our tech and data strategy
We’ve combined our trusted brand, differentiated technology platform and ability to leverage data to unlock
extraordinary insights that will help our clients bring their greatest ambitions to life.
Artificial intelligence (AI) that
delivers tangible results
Almost all of the world’s data has been created in the last few
years(1). This growing reservoir provides our traders with reams
of actionable insights. But only if we can separate the signal from
the noise.
RBC’s AI-based trading platform goes further by explaining
outcomes, so we can continuously monitor and elevate our own
performance. Aiden™ also adapts to our feedback and market
experiences while reducing manual intervention. That delivers
savings in time and money. It also enables our trading team to
increase the value they add to the investment process for the
benefit of our clients. We use innovative platforms such as Aiden™ to
augment our trading desk, and it’s a key to helping us sustain a
competitive advantage.
That said, our relationship with RBC goes deeper than technology
platforms. Together, we are aligned in harnessing big data and AI to
evolve with an ever-changing marketplace and, in turn, we’re
delivering desired results for our respective clients.
Marc Wyatt
Head of Global Trading, T. Rowe Price
Creating an ecosystem for ethical AI
Borealis AI™ developed RESPECT AI™, a new online hub that brings
open source research code, academic research, tutorials and
lectures to the AI community, enabling developers to build more
trusted services and products. The program consists of publicly
available scientific research and research code, as well as training
material and thought leadership to help make ethical and
responsible AI available to all.
In 2020 we launched Aiden™, an AI-based electronic trading
platform. Aiden™ tackles one of the biggest challenges in the
field of AI today—applying deep reinforcement learning in a
constantly changing environment like equities trading. Aiden™
is designed to navigate the challenges of fluid and dynamic
market conditions in real-time, without the need for
continuous re-coding like traditional trading algorithms.
Data-driven insights
Small business clients received nearly 85,000 offers from
RBC Insight Edge™—a digital solution that provides real-time
market insights to help clients grow their businesses.
490 million+ insights
read by clients through NOMI® Insights,
helping them stay on top of their finances
1.5 million+ budgets set
through NOMI® Budgets since launch in April 2019
$349 saved on average per month
for our clients through NOMI Find & Save®
3.8 million+ questions answered
through Ask NOMI—a text– and voice-based chatbot on
RBC’s banking app launched in March 2020
Value beyond banking
2 million+ clients
have personalized plans through MyAdvisor®—an online service
that helps clients create digital, dynamic plans to reach their
financial goals(2).
25,000+ entrepreneurs chose Ownr™
by RBC Ventures as the digital tool to register or incorporate their
business(3). And with the acquisition of Founded Technologies this
year, Ownr™ became a leading platform for entrepreneurs to start
and manage their business in Canada.
Building a secure cloud
RBC and Borealis AI™ invested in an innovative AI private cloud platform in partnership with Red Hat and NVIDIA. This new platform
significantly accelerates our ability to develop AI models, driving efficiency and leading to faster, more innovative solutions for our clients.
(1) U.S. Chamber of Commerce Foundation
(2) Number of plans activated since the launch of MyAdvisor® in 2017
(3) Cumulative figure since the launch of Ownr™ in November 2017
Royal Bank of Canada Annual Report 2020
9
Reimagining our shared future
Transforming the employee experience
Our success comes from the over 86,000 employees who bring our vision, values and strategy to life. We’ve
built a highly-engaged team, and our people are empowered to learn, innovate, grow, and pivot.
This was exemplified in how we mobilized to meet the needs of our clients in 2020.
Switching roles to rise to the challenge
Before the pandemic changed our lives in March, I was working in
our head office in Toronto, managing distribution for our Term
Investments and Savings products. If I was to describe a typical
week back then, I was focused on ensuring RBC clients knew about
the services and products we have available to assist them, and
supporting our advisors.
As the spread of COVID-19 accelerated, “typical” went out
the window. Like so many people across RBC, I looked for an
opportunity to step up and help our clients and my colleagues. In
my case, this meant moving from my head office role to one with
RBC Direct Investing – our online brokerage – responding to the
growing volume of clients looking for new accounts.
Wherever we work in the bank, we know how crucial RBC is to
our clients and our communities. The global pandemic, and the
extraordinary changes that came with it, meant that for the many
RBCers who changed roles to help serve the increased needs of our
clients, we had to hit the ground running. This was made possible by
so many people, whether it was our colleagues who trained us or
the IT team members who helped us move seamlessly from working
at our offices to working from home. Everyone truly came together
to support our clients and each other.
The past several months gave me the opportunity to see the
impact that my colleagues and I can have firsthand. It’s been
a true testament to how focused we are on helping clients,
and how we’re thinking and working differently to do just that,
especially during these very challenging times.
Sara Kassim
Director, Control Design & Remediation
Canadian Banking Operations, Toronto, Ontario
The Technology & Operations team
responded quickly to the new working environment
created by COVID-19
> Over 80% employees moved to work from remote
locations in the early stages of the COVID-19 pandemic
Strong support for our employees’ health, safety and well-being
> Continued to pay eligible employees unable to work due to COVID-19
> Up to 20 days paid leave for employees unable to work from home to manage personal needs
> Special compensation program of $50/day for eligible employees working onsite during the crisis(1)
> $400 stipend towards equipment to enhance home workspace comfort and productivity for
eligible employees
> Enhanced digital capabilities and resources to support client interactions, enable virtual collaboration
and employee wellness
(1) Program implemented from April to June 2020
10
Royal Bank of Canada Annual Report 2020
Driving diversity and inclusion
Diversity and inclusion is more than one of our core values—it’s an engine for growth, innovation and
prosperity. We know our workplaces and communities are stronger when everyone feels respected and
empowered, and we’re committed to driving meaningful change.
A watershed moment can drive positive change
My mother grew up during the Civil Rights Movement in Birmingham,
AL. When she was 14 years old, she marched alongside Dr. Martin
Luther King to help dismantle Jim Crow laws.
As a child, my mom and I would create elaborate collages for school
presentations during Black History Month. She shared candid stories
from her childhood and introduced me to inspiring leaders—people
who had a sense of justice and a sense of purpose. These leaders
came from diverse backgrounds, and each person contributed in
different ways in the fight for equality.
Childhood memories and my mom’s lessons came back to me
earlier this year. Tragic examples of racism triggered feelings that
are often buried deep, and became a sobering reminder that there’s
a long road ahead in the fight for equity.
What I’ve learned, is that we can harness those feelings of
frustration to drive change. As co-chair of RBC’s U.S. Diversity
Leadership Council, I have the pleasure of working with a diverse
group of colleagues who are passionate about speaking up for
inclusion, redefining inclusive leadership and advocating for
marginalized communities.
This moment in our lives is not a closed chapter in our
history books. We need to get comfortable with having those
uncomfortable conversations that can help us heal and grow.
When we do, we will see that our hopes, dreams and ambitions
are interwoven and we all benefit from advancing a culture
of inclusion.
Natasha Holiday
Managing Director, Municipal Finance
RBC Capital Markets, U.S.
D&I/ Highlights
> Since 2015, we have increased the percentage of
women executives from 38% to 46%(1) and the
percentage of BIPOC executives from 16% to 21%(1)(2)
> Recognized as one of Canada’s Best Diversity
Employers by Mediacorp, and named to the
Bloomberg Gender-Equality Index for the fourth
year in a row
> Announced a series of actions to help tackle
systemic racism in our communities, including:
(cid:129) $100-million commitment in small business
loans over five years to Black entrepreneurs
(cid:129) $50-million investment over the next five years
through RBC Future Launch® for skills
development and mentoring programs for
BIPOC youth
(1) Represents data for our businesses in Canada governed by the Employment Equity Act
(2) Based on employee self-identification
Royal Bank of Canada Annual Report 2020
11
Reimagining our shared future
Taking action on sustainability
We believe capital can be a force for positive change, and we are motivated by the role we play in building
a more sustainable future. We are demonstrating this in the communities we serve by supporting clean
economic growth and the transition to a low-carbon economy.
Making history in renewable power purchasing
Renewable energy is now cost competitive with conventional
forms of generation. The delivered cost of energy from a solar
project is about 15% of what it was 10 years ago. It is a bankable,
proven technology. But, like other renewables, solar power is still
an emerging force in the transition to a much needed low-carbon
world. Enabling this transition is about leadership—the tools are at
our fingertips, but adapting to a new world means changing our
ways.
That’s why BluEarth Renewables was proud to partner with
RBC—an organization committed to building a more sustainable
future—on RBC’s first long-term renewable energy Power
Purchase Agreement (PPA) and one of the largest corporate
PPAs in Canadian history.
Despite COVID-19 and other market disruptions, this partnership
demonstrates that renewable energy can be cost-competitive in an
open market, and that PPAs can facilitate green investment
in Alberta.
Together with RBC, we are on the forefront in driving this
change with the purchase of power from the 39 MW Burdett &
Yellow Lake solar project in the province. These solar farms are
anticipated to create over 300 new construction jobs and inject
$70 million into the Alberta economy. Corporate PPAs are a
significant and important part of the growth in renewables.
Leadership in renewables is about demonstrating that a transition
to a low-carbon world is not only doable, it is cost effective. RBC’s
partnership with Burdett & Yellow Lake is demonstrating to others,
including those who might not have thought it possible, that this
transition is actually happening and creating value at the same
time.
Grant Arnold
President & CEO, BluEarth Renewables
Sustainability/ Highlights
> We set new targets to reduce greenhouse
gas emissions by 70% and source 100%
of our electricity from renewable and
non-emitting sources by 2025
> RBC GAM released its Approach to Climate
Change, highlighting its membership in Climate
Action 100+ and its commitment to conduct
climate scenario analysis on investment portfolios
> 124 organizations supported with over
$9 million in funding through RBC Tech for
Nature—a multi-year commitment by the
RBC Foundation to accelerate tech-based
sustainability solutions
Learn more about
RBC’s Climate Blueprint
available at rbc.com/
community-social-impact/
environment/index.html
12
Royal Bank of Canada Annual Report 2020
Supporting and inspiring youth
COVID-19 compounded the challenges facing young people as they prepare for a dramatically changing
workforce, but it also strengthened our resolve to help them chart their path. Through programs like
RBC Future Launch®—our 10-year, $500-million commitment to support young people—we’ve reimagined
how we can continue providing youth with opportunities to develop skills, network, gain work experience,
and access mental health services.
RBC Future Launch® Scholarship helps a new Canadian put his dreams in motion
Roger Clement came to Canada as a refugee in 2016. “The cost
of legal services and settlement had an enormous impact on
my plans to work and study in Canada. Now, these financial
constraints have become my core motivation to start a
financial consultancy service for new immigrants,” Clement
says. His chosen learning opportunity funded with an RBC
Future Launch® Scholarship was the Canadian Securities
Course certification, which will allow him to provide personal
financial advice to newcomers.
In his home country of Pakistan, Clement graduated with the highest
Cumulative Grade Point Average in his school’s business department
while obtaining a Bachelor in Business Sciences, Accounting and
Finance. But when arriving in Canada, he faced two years of
obstacles trying to finance his education.
When asked what kept him motivated, he says, “I was happy to be
in Canada, and knew help would find me. Now I want to use my
experience to pay it forward.”
Since coming to Canada, Clement has completed his Master of
Business, Entrepreneurship and Technology from the University of
Waterloo, and his Master of Accounting and Finance from the
University of Toronto Scarborough. He is currently pursuing his CPA
certification, and will write his CFE in 2021.
In times of adversity, Clement remained resilient and says,
“I want to help people who have been in situations similar to my
own.” Clement’s aspirations include starting a financial
consultancy service for new immigrants, helping create more
prosperous communities.
Roger Clement
Toronto, Ontario
Youth/ Highlights
> Learning doesn’t stop during difficult times
RBC Future Launch® at Home moved online,
helping 141,000+ youth access digital
resources and programming
> 54% of RBC Future Launch® participants
identified as Black, Indigenous or People
of Colour, (BIPOC), 16% higher than the
Canadian population(1)
> 522,000 individuals accessed youth mental well-
being programs supported by RBC Future Launch®
(1) According to research from Forum Research commissioned by RBC
Royal Bank of Canada Annual Report 2020
13
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, 2020, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2020 Annual Consolidated
Financial Statements and related notes and is dated December 1, 2020. 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 2020 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 herein 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
14
Overview and outlook
15
Selected financial and other highlights 15
16
About Royal Bank of Canada
Vision and strategic goals
16
Economic, market and regulatory
review and outlook
Defining and measuring success
through total shareholder returns
16
17
Significant developments: COVID-19
18
Financial performance
21
21
Overview
Impact of foreign currency translation 22
22
Total revenue
Provision for credit losses
23
Insurance policyholder benefits, claims
and acquisition expense
Non-interest expense
Income and other taxes
Client assets
23
23
24
24
Business segment results
Results by business segment
26
26
How we measure and report our
business segments
Key performance and non-GAAP
measures
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
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
26
27
28
33
39
42
44
48
48
48
49
50
50
51
53
53
56
57
61
61
73
78
Insurance risk
Operational/regulatory compliance
risk drivers
Operational risk
Regulatory compliance risk
89
89
89
91
Strategic risk drivers
91
Strategic risk
91
91
Reputation risk
Legal and regulatory environment risk 92
93
Competitive risk
Macroeconomic risk drivers
Systemic risk
Overview of other risks
Capital management
Accounting and control matters
Critical accounting policies and
estimates
Controls and procedures
Related party transactions
Supplementary information
Enhanced Disclosure Task Force
recommendations index
93
93
94
96
105
105
109
109
109
117
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 2020 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, the risk environment including our credit risk, liquidity and funding
risk, and the potential continued impacts of the coronavirus (COVID-19) pandemic on our business operations, financial results, condition and objectives and
on the global economy and financial market conditions 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 (which could lead to us being subject to various legal and regulatory proceedings, the potential
outcome of which could include regulatory restrictions, penalties and fines), strategic, reputation, legal and regulatory environment, competitive and
systemic risks and other risks discussed in the risk sections and Significant developments: COVID-19 section of this 2020 Annual Report including business
and economic conditions, information technology and cyber risks, Canadian housing and household indebtedness, geopolitical uncertainty, privacy, data
and third-party related risks, regulatory changes, environmental and social risk (including climate change), and digital disruption and innovation, culture and
conduct, 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, environmental and social risk, and the emergence of widespread health emergencies or public health crises such as
pandemics and epidemics, including the COVID-19 pandemic and its impact on the global economy and financial market conditions and our business
operations, and financial results, condition and objectives.
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 2020 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 and Significant developments: COVID-19 section of this 2020 Annual
Report.
14
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Overview and outlook
Selected financial and other highlights
(Millions of Canadian dollars, except per share, number of and percentage amounts) (1)
Total revenue
Provision for credit losses (PCL)
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) (2), (3)
Average common equity (2)
Net interest margin (NIM) – on average earning assets, net
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
Common equity
Total 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
Table 1
2019
46,002
1,864
4,085
24,139
15,914
2020 vs. 2019
Increase (decrease)
$ 1,179
2,487
(402)
619
(1,525)
2.6%
133.4%
(9.8)%
2.6%
(9.6)%
12,871
$ (1,434)
(11.1)%
$
$
$
$
$
$
$
$
$
$
$
$
2020
47,181
4,351
3,683
24,758
14,389
11,437
5,087
2,155
831
536
2,776
52
11,437
7.84
7.82
14.2%
78,800
1.55%
0.63%
0.39%
0.24%
0.47%
145%
12.5%
13.5%
15.5%
4.8%
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%
$1,624,548
275,814
660,992
113,488
1,011,885
80,719
546,242
843,600
5,891,200
$ 1,428,935
249,004
618,856
101,560
886,005
77,816
512,856
762,300
5,678,000
1,423,915
1,428,770
1,422,473
4.29
4.7%
55%
93.16
132,518
$
$
83,842
1,329
4,557
0.744
0.751
$
$
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
$
$
$
$
$ (1,315)
(395)
25
61
110
80
$ (1,434)
$
(0.94)
(0.93)
n.m.
$ 3,800
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
$195,613
26,810
42,136
11,928
125,880
2,903
33,386
81,300
213,200
$
(10,864)
(11,912)
(7,623)
0.22
n.m.
n.m.
$ (13.08)
(19,415)
1,041
2
(43)
$ (0.008)
$ (0.008)
(20.5)%
(15.5)%
3.1%
12.8%
4.1%
n.m.
(11.1)%
(10.7)%
(10.6)%
(260) bps
5.1%
(6) bps
32 bps
35 bps
(3) bps
1 bps
1800 bps
40 bps
30 bps
30 bps
50 bps
13.7%
10.8%
6.8%
11.7%
14.2%
3.7%
6.5%
10.7%
3.8%
(0.8)%
(0.8)%
(0.5)%
5.4%
60 bps
900 bps
(12.3)%
(12.8)%
1.3%
0.2%
(0.9)%
(1.1)%
(1.1)%
(1)
(2)
(3)
(4)
Effective November 1, 2019, we adopted IFRS 16 Leases (IFRS 16). Results from periods prior to November 1, 2019 are reported in accordance with IAS 17 Leases (IAS 17) in
this 2020 Annual Report. For further details on the impacts of the adoption of IFRS 16 including the description of accounting policies selected, refer to Note 2 of our 2020
Annual Consolidated Financial Statements.
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.
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) guidance as updated in accordance with the regulatory guidance issued in fiscal 2020. For further details, refer to the
Liquidity and funding risk section.
Represents year-end spot balances.
AUA includes $15.6 billion and $6.7 billion (2019 – $15.5 billion and $8.1 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 2020
15
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 86,000+ employees who leverage their imaginations and insights to 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.
Our commitment to building and maintaining 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 life, health, home, auto, travel, wealth, annuities, and reinsurance advice
and solutions, as well as creditor services and business insurance solutions, to individual,
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 58 offices in 14 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:
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(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 2020 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 1, 2020
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.
Economic and market review and outlook
Measures to contain the COVID-19 pandemic have sharply curtailed economic activity in many countries, resulting in
unprecedented declines in GDP and a substantial increase in unemployment starting in the spring of 2020. Significant fiscal and
monetary policy stimulus has helped to support the partial recovery to date. However, a resurgence of virus spread and
associated re-imposition of containment measures to varying degrees in some regions, along with the tapering off of certain
elements of fiscal support has raised further uncertainty with regards to the timing and extent of recovery. Despite recent positive
trial results, the ongoing evolution of the development and distribution of an effective vaccine also continues to raise uncertainty.
Canada
The Canadian economy is expected to contract by 5.6% in calendar 2020 after the COVID-19 containment measures led to an
unprecedented decline in economic activity in the first half of the calendar year. An easing in containment measures allowed for
a sharp, but partial, rebound in activity over the summer. However, investment in the oil and gas sector fell sharply with drilling
activity continuing to run below year-ago levels in Canada. This, along with activity in the accommodation and food services
industries where social distancing remains more challenging, has lagged the broader recovery. The unemployment rate rose to a
peak of 13.7% in May 2020 from pre-pandemic levels of under 6% and remained elevated at 8.9% as of October 2020. With the
resurgence in the spread of COVID-19 in the latter part of the calendar year, the pace of recovery has slowed and the
re-imposition of containment measures to varying degrees in some regions remains a significant risk to the economic outlook.
Exceptional government income support has helped to offset lost wage income for households and, until reduced or terminated,
will continue to do so with enhanced employment insurance payments and the new Canada Recovery Benefit program. Policy
rates have fallen in calendar 2020 to low levels and we expect the Bank of Canada (BoC) will maintain the overnight rate at the
16
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
current low level for an extended period, as well as continue with the existing quantitative easing (QE) programs. Low rates,
government support programs and the gradual winding down of measures to combat the spread of COVID-19 are expected to
ultimately result in a partial recovery in the economy in 2021.
U.S.
The U.S. economy is expected to contract by 3.6% in calendar 2020. All components of aggregate demand besides government
expenditure slumped in the second calendar quarter of 2020 amid widespread COVID-19 pandemic containment measures. Labour
market conditions also deteriorated rapidly during the onset of the COVID-19 pandemic, with the unemployment rate hitting a
peak of 14.7% in April 2020, markedly higher than February’s pre-pandemic rate of 3.5%. The initial rebound in the economy during
the second half of the calendar year has been rapid, but partial, with the unemployment rate still well-above pre-pandemic levels
at 6.9% in October 2020. Household spending has been supported by exceptional government income transfers and policy rate
cuts. While some federal income support programs expired over the summer, the Federal Reserve (Fed) has committed to
maintaining extraordinary policy support until the economic slack is fully absorbed and the labour market has recovered. Moving
forward we expect a more gradual recovery, and forecast real GDP will partially retrace the 2020 decline in calendar 2021.
Europe
Euro area GDP is expected to contract by 7.2% in calendar 2020, with divergence in country performance across the trading bloc.
Similar to many other central banks, the European Central Bank (ECB) has held interest rates low and announced additional
stimulus measures to combat the impact from the COVID-19 pandemic, including expanding its QE programs. The Bank of England
(BoE) also responded to the COVID-19 pandemic with lower interest rates and expanding their QE programs. GDP in the U.K. is
expected to decline by 11.5% in calendar 2020. A resurgence in the spread of COVID-19 in the fourth calendar quarter 2020, alongside
the re-imposition of containment measures to varying degrees in some regions, is expected to limit the pace of recovery both in the
U.K. and the Euro area after unprecedented declines over the first half of 2020. Uncertainty about Brexit will further weigh on growth
in the U.K. In calendar 2021, GDP growth for both the Euro area and the U.K. is expected to rebound at a relatively modest pace.
Financialmarkets
Government bond yields remain at historically low levels due to subdued inflation and expectations that monetary policy will
remain accommodative for an extended period. Monetary policy stimulus and massive government income support have been
supporting equity markets broadly throughout the COVID-19 pandemic, with major indexes posting a full rebound to
pre-pandemic levels in August 2020. Recent announcements of positive vaccine trial results have further boosted market
sentiment. Oil prices have rebounded somewhat after falling sharply in the spring alongside a price war between Russia and
Saudi Arabia and virus containment measures that weighed heavily on demand. We continue to look for a gradual recovery in oil
prices in 2021, as demand continues to bounce back.
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. Such impacts could result from new or amended laws
or regulations and the expectations of those who enforce them. A high level summary of the key regulatory changes that have the
potential to increase or decrease our costs and the complexity of our operations is included in the Legal and regulatory
environment risk section of this 2020 Annual Report. A summary of the additional regulatory changes instituted by governments
globally and by OSFI during calendar 2020 in response to the COVID-19 pandemic are included in the Significant developments:
COVID-19, Liquidity and funding risk and Capital management sections of this 2020 Annual Report.
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 of this 2020 Annual Report. For further details on our framework and activities to manage risks,
refer to the Significant developments: COVID-19, risk and Capital management sections of this 2020 Annual Report.
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 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.
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)
1%
16.2%
12.0%
49%
Table 2
5-year (2)
3%
16.4%
11.6%
48%
(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. These objectives assume a normal
business environment and our ability to achieve them in a period may be adversely affected by extraordinary developments such as the COVID-19 pandemic and the
current low interest rate environment.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
17
Our 3-year and 5-year medium-term financial performance objectives will remain unchanged in fiscal 2021.
We compare our TSR to that of a global peer group approved by our Board of Directors (the Board). The global peer group
consists of the following 9 financial institutions:
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Canadian financial institutions: Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation,
National Bank of Canada, The Bank of Nova Scotia, and Toronto-Dominion Bank.
U.S. banks: JPMorgan Chase & Co. and Wells Fargo & Company.
International banks: Westpac Banking Corporation.
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Medium-term objectives – 3- and 5-year TSR vs. peer group average (1)
Table 3
Royal Bank of Canada
Peer group average (excluding RBC)
3-year TSR (2)
5-year TSR (2)
1%
Top half
(6)%
9%
Top half
3%
(1)
(2)
In fiscal 2020, Power Financial Corporation was removed from the global peer group.
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, 2017 to October 31, 2020 and October 31, 2015 to October 31, 2020.
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
$
2020
93.16
4.26
(12.3)%
(8.4)%
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%
$
Table 4
2016
83.80
3.20
12.1%
16.8%
Significant developments: COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, COVID-19, a
global pandemic. The breadth and depth of the impact of the COVID-19 pandemic on the global economy and financial markets
has continued to evolve with disruptive effects in countries in which we operate and beyond, while also contributing to increased
market volatility and changes to the macroeconomic environment. In addition, the COVID-19 pandemic has continued to affect
our employees, some of our clients and communities, with resultant impacts on our operations, financial results and present and
future risks to our business. For further details on these risks, refer to the Impact of pandemic risk factor and risk sections of this
2020 Annual Report.
Measures to contain the spread of COVID-19, including business closures, social distancing protocols, travel restrictions,
school closures, quarantines, and restrictions on gatherings and events, have been and continue to be widespread. Although
staged and full reopening plans vary and are fluid across some regions, these measures are continuing to have extensive
implications for the global economy, including the pace and magnitude of recovery, as well as on related market functions,
unemployment rates, and fiscal and monetary policies. The easing of containment measures and reopening plans have been
accompanied by a resurgence in the spread of COVID-19 in some regions, resulting in the re-imposition of restrictions in some
cases. All of these factors are contributing to the uncertainty about the timing of a full recovery. Despite recent positive trial
results, the ongoing evolution of the development and distribution of an effective vaccine also continues to raise uncertainty. The
COVID-19 pandemic, the containment measures and the phased reopening approach taken in several regions could have longer-
term effects on economic and commercial activity and consumer behaviour after the COVID-19 pandemic recedes and
containment measures are fully lifted. In conjunction with the COVID-19 pandemic containment measures, governments,
regulatory bodies, central banks and private organizations around the globe have continued to provide unprecedented relief
programs and temporary measures to facilitate the continued operation of the global economy and financial system, all of which
are intended to provide support to individuals and businesses. Commencing in the second quarter of 2020, regulatory guidance
from the Government of Canada and OSFI were implemented to facilitate the continued strength of the Canadian financial
systems, including the expansion of existing facilities, the introduction of new funding programs and capital modifications to
support the programs implemented in response to the COVID-19 pandemic. In addition, the BoC, the Fed and other central banks
took further steps to stimulate the economy through reductions in benchmark interest rates. Some of these programs remain in
place or have continued to be developed in an effort to support the overall economy. Governments and federal agencies have
assessed and will continue to assess the need for these programs. Despite these measures and programs, the extent and
duration of the impact of COVID-19 continues to be uncertain.
For further details on these measures and their impact on us, refer to Impact of pandemic risk factor and Relief program
sections outlined below as well as the risk and Capital management sections of this 2020 Annual Report.
In addition to the broad impacts of the COVID-19 pandemic on our employees, clients, communities and operations, the COVID-19
pandemic has continued to impact financial results across all of our business segments to varying degrees. The impact on our
consolidated results has been primarily reflected in higher PCL and changes due to the impact of market volatility, including
movements in Other comprehensive income. Results across all of our business segments have also been and continue to be
impacted by downstream implications from the changes in the macroeconomic environment, including lower interest rates,
modest consumer spending relative to pre-pandemic levels, fluctuations in credit spreads, as well as other impacts including
increased client-driven volumes and changes in operating costs. Notwithstanding these challenges, our financial results and
condition amid these challenges demonstrate the resilience of our capital and liquidity positions, which have been bolstered by
our position of strength at the time of entering this crisis and throughout the year.
18
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Given the uncertainty of the extent and duration of the COVID-19 pandemic and its impacts on the economy and society as a
whole, as well as the timeline of the transition to a fully reopened economy, the future impact on our businesses and our
financial results and condition remains uncertain. Despite recent positive trial results, the ongoing evolution of the development
and distribution of an effective vaccine also continues to raise uncertainty.
Commencing in the second quarter of 2020, in response to the COVID-19 pandemic, we instituted various measures and programs
to protect and support our employees, clients and communities, while also striving to ensure continued customer service to our
clients. We have and will continue to review the effectiveness of these measures and programs and adapt them accordingly.
Impact of pandemic risk factor
Pandemics, epidemics or outbreaks of an infectious disease in Canada or worldwide could have an adverse impact on our
business, including changes to the way we operate, and on our financial results and condition. The spread of the COVID-19
pandemic, given its severity and scale, continues to adversely affect our business to varying degrees, some of our clients and
also continues to pose risks to the global economy. At the onset of the COVID-19 pandemic, governments and regulatory bodies in
affected areas imposed a number of measures designed to contain the COVID-19 pandemic, including widespread business
closures, social distancing protocols, travel restrictions, school closures, quarantines, and restrictions on gatherings and events.
While a number of containment measures have been and continue to be gradually eased or lifted across some regions, additional
safety precautions and operating protocols aimed at containing the spread of COVID-19 have been and continue to be instituted.
In addition, the emergence of a second wave of the COVID-19 pandemic has led to the the re-imposition of containment measures
to varying degrees in some regions. As a result, containment measures continue to impact global economic activity, including the
pace and magnitude of recovery as well as contributing to increased market volatility and changes to the macroeconomic
environment. As the impacts of the COVID-19 pandemic continue to materialize, the prolonged effects of the disruption have had
and continue to have adverse impacts on our business strategies and initiatives, resulting in ongoing effects to our financial
results, including the realization of credit, market or operational risk losses.
Governments, monetary authorities, regulators and financial institutions, including us, have taken and continue to take
actions in support of the economy and financial system. These actions include fiscal, monetary and other financial measures to
increase liquidity, and provide financial aid to individual, small business, commercial and corporate clients. Additionally,
regulatory relief measures in support of financial institutions have also been provided. For more information on these programs,
refer to the Relief programs, Liquidity and funding risk and Capital management sections.
We are closely monitoring the potential continued effects and impacts of the COVID-19 pandemic, which continues to be a
rapidly evolving situation. Uncertainty remains as to the full impacts of the COVID-19 pandemic on the global economy, financial
markets, and us, including on our financial results, regulatory capital and liquidity ratios and ability to meet regulatory and other
requirements. The ultimate impacts will depend on future developments that are highly uncertain and cannot be predicted,
including the scope, severity, duration and additional subsequent waves of the COVID-19 pandemic, as well as the effectiveness
of actions and measures taken by government, monetary and regulatory authorities and other third parties. Despite recent
positive trial results, the ongoing evolution of the development and distribution of an effective vaccine also continues to raise
uncertainty. With respect to client relief programs, we may face challenges, including increased risk of client disputes, litigation,
government and regulatory scrutiny as a result of the effects of the COVID-19 pandemic on market and economic conditions and
actions government authorities take in response to those conditions. We may also face increased operational and reputational
risk and financial losses, including higher credit losses amongst other things, depending on the effectiveness of these client relief
programs for our individual, small business, commercial and corporate clients. The effectiveness of these programs will depend
on the duration and scale of the COVID-19 pandemic and will differ by region and industry, with varying degrees of benefit to our
clients.
The COVID-19 pandemic has and may continue to result in disruptions to some of our clients and the way in which we conduct our
business, including the closure of certain branches, prolonged duration of staff working from home, and changes to our
operations due to higher volumes of client requests, as well as disruptions to key suppliers of our goods and services. These
factors have adversely impacted, and may continue to adversely impact, our business operations and the quality and continuity
of service to clients. To date, we have taken proactive measures through our business continuity plans to adapt to the ongoing
work from home arrangements, carefully planning the return to premise for some of our employees, and our crisis management
teams have increased their efforts to preserve the well-being of our employees and our ability to serve clients. Additionally,
various temporary relief programs beyond the available government programs were launched to further support our clients in
financial need. For more information on our relief programs, refer to the Relief programs section below.
In addition to the impact that the COVID-19 pandemic has had and continues to have on our business, it may also continue to
increase financial stress on some of our clients. This, in conjunction with operational constraints due to the impacts of social
distancing, including but not limited to full closures or reduced operating hours, lost sales opportunities and/or increased
operating costs, could lead to increased pressure on some of our individual clients as well as on the financial performance on
some of our small business, commercial and corporate clients, which could result in higher than expected credit losses for us.
If the COVID-19 pandemic is prolonged, including the possibility of additional subsequent waves, or further diseases emerge
that give rise to similar effects, the adverse impact on the economy could deepen and result in further volatility and declines in
financial markets. Moreover, it remains uncertain how the macroeconomic environment, and societal and business norms will be
impacted following this COVID-19 pandemic. Unexpected developments in financial markets, regulatory environments, or
consumer behaviour and confidence may also have adverse impacts on our financial results and condition, business operations
and reputation, for a substantial period of time.
In virtually all aspects of our operations, our view of risks is not static as our business activities expose us to a wide variety of
risks. Consistent with our Enterprise Risk Management Framework (ERMF), we actively manage our risks to help protect and
enable our businesses. Additionally, we continue to evaluate the impacts that the COVID-19 pandemic has had and continues to
have on our business, including the impact on our top and emerging risks, operational and reputational risks as well as credit,
market and liquidity and funding risks. For further details on our Top and emerging and Operational risks, refer to the risk
sections in this 2020 Annual Report.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
19
Relief programs
In response to the COVID-19 pandemic, several government programs have been and continue to be developed to provide
financial aid to individuals and businesses, which include wage replacement for individuals, wage subsidies and rent relief for
businesses, and lending programs for businesses, which we are administering for our clients. To further support our clients in
financial need, various temporary relief programs were launched beyond the available government programs.
RBCreliefprograms
During the second quarter of 2020, we announced the RBC Client Relief program which aimed to provide immediate and long-
term relief for clients impacted by the COVID-19 pandemic. Through this program, we helped our clients by implementing various
relief measures, including payment deferrals, reduced credit card charges and refinancing or credit restructuring, fee waivers
and temporary limit increases across various retail, small business and commercial products. The RBC Client Relief program for
the majority of our commercial and small business clients closed on June 30, 2020 and loan deferrals within the program closed
for retail clients on September 30, 2020; clients who were already participating in this program may have payment deferrals or
other relief that extends past these dates. As the RBC Client Relief programs gradually come to an end, we have assessed and will
continue to assess the needs of each individual client and continue to provide support to clients on a case by case basis.
As at October 31, 2020, more than 51,500 clients (July 31, 2020 – 278,400 clients) globally are benefitting from our payment deferral
program, including clients that have continued to make payments, and the following table summarizes the number of loans and
their associated gross carrying amounts outstanding.
As at
October 31
2020
July 31
2020
Table 5
(Millions of Canadian dollars, except number of loan amounts) Number of loans
Gross carrying
amount of
loans outstanding
Number of loans
Gross carrying
amount of
loans outstanding
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Total
22,300 $
16,291
14,864
984
4,682
59,121 $
6,829
712
172
138
2,618
10,469
138,827 $
74,115
96,542
8,465
26,592
344,541 $
41,270
2,592
1,012
1,134
16,810
62,818
For further details, refer to Notes 2 and 5 of our 2020 Annual Consolidated Financial Statements.
GovernmentprogramsinresponsetotheCOVID-19pandemic
Government of Canada
Commencing in the second quarter of 2020, the Department of Finance Canada announced new programs and revisions to
existing programs to help support the functioning of markets and finance businesses while ensuring the financial sector remains
sound, well-capitalized and resilient, in light of the impact of the COVID-19 pandemic. To support businesses experiencing cash
flow challenges during this unprecedented time, the Canadian Federal government established the following significant
programs in which Canadian financial institutions are assisting with financial relief:
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The Canada Emergency Business Account (CEBA) – Under this program, Canadian banks are able to facilitate interest-free
loans of up to $60,000 to existing eligible small business clients as a source of liquidity for immediate operating costs. The
loans are funded by the Government of Canada, with the Canadian banks retaining no credit risk. The application deadline
for the CEBA program has been extended to December 31, 2020.
The Business Credit Availability Program (BCAP) – This program is comprised of the Export Development Canada (EDC) BCAP
Guarantee and the Business Development Bank of Canada (BDC) Co-Lending Program.
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(cid:129)
EDC BCAP Guarantee – Under this program, Canadian banks are able to provide existing eligible mid-sized and large
business clients, focused on both export oriented and domestic sales-based businesses, with loans of up to $6.25 million
to support short-term liquidity needs. These loans must be used for certain operating costs and are 80% guaranteed by
the EDC. The application deadline for the EDC BCAP Guarantee program has been extended to June 30, 2021.
BDC Co-Lending Program – Under this program, the BDC and Canadian banks jointly provide loans, which are funded
based on an 80%/20% split, respectively, to eligible business clients of up to $6.25 million to meet their operational and
liquidity needs. The maximum loan varies by the size of the business and may be structured with an interest-only
payment obligation for the first year. The application deadline for the BDC Co-Lending program has been extended to
June 30, 2021.
BDC Mid-Market Financing Program – Under this program, the BDC and Canadian banks provide loans, which are funded
based on a 90%/10% split, respectively, to eligible mid-sized business clients ranging between $12.5 million and
$60 million to meet their operational and liquidity needs. The application deadline for the BDC Mid-Market Financing
program is June 30, 2021.
EDC Mid-Market Guarantee and Financing Program – Under this program, Canadian banks are able to provide existing
eligible mid-sized and large business clients, focused on both export oriented and domestic sales-based businesses,
with loans ranging from $12.5 million to a maximum of $80 million for terms up to 5 years, to support their liquidity
needs. These loans must be used for certain operating costs and are 75% guaranteed by the EDC. The application
deadline for the EDC Mid-Market Guarantee and Financing Program is June 30, 2021.
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(cid:129)
(cid:129)
As at October 31, 2020, we have facilitated the administration of relief to more than 174,200 clients (July 31, 2020 – 158,100) who
have enrolled in these programs, with a corresponding total of $7.1 billion (July 31, 2020 – $6.4 billion), of which $5.7 billion (July 31,
2020 – $4.2 billion) was funded. For further details, refer to Note 6 of our 2020 Annual Consolidated Financial Statements.
20
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
In addition to these significant programs, the Government of Canada and other governing bodies have provided guidance in
other areas including but not limited to the extension of regulatory and tax filings, none of which are considered material for us.
U.S. Government
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law, which is in addition to
other programs that were enacted by the U.S. Federal Government. As part of the CARES Act, the Paycheck Protection Program
(PPP) offers small businesses with loans, guaranteed by the U.S. Federal Government, to support the payment of payroll costs,
interest on mortgages, rent, and utilities. Through this program, we have provided loans directly to our clients based on their
assessment of certain eligibility requirements and failure to meet these requirements will result in recourse actions for the
borrower. In some cases, the U.S. Small Business Administration may forgive all or a portion of the loan. On June 5, 2020, the
Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) was signed into law, which amends the CARES Act and is
intended to provide additional relief from the original terms of the PPP, including but not limited to, the extension of the period
available for support payments from 8 to 24 weeks after PPP loan origination, the extension of the maturity of PPP loans granted
from two to five years and the modification of eligibility requirements. Applications for the PPP closed on August 8, 2020. As at
October 31, 2020, we have provided $5,776 million (US$4,336 million) of funding to 15,888 clients through these programs. As at
July 31, 2020, we provided $5,804 million (US$4,334 million) of funding to 15,533 clients through these programs.
Separately, the U.S. Department of the Treasury provided guidance deferring due dates for various tax returns, other tax filings
and tax payments, none of which are considered material for us.
Programs in support of liquidity and funding
Commencing in the second quarter of 2020, governments and federal agencies expanded the eligibility criteria to their existing
funding programs and announced new programs to provide further liquidity to banks as well as providing additional sources to
access funding with which we can support our clients during this time of uncertainty, including:
(cid:129)
Existing funding programs – The BoC increased funding available and broadened eligibility requirements for existing term
repo facilities and the revised insured mortgage purchase programs through the Canada Mortgage and Housing Corporation
(CMHC). These programs also include central banks’ programs in other jurisdictions, such as the BoE’s U.S. dollar swap
facility.
New funding programs – The BoC added the Banker’s Acceptance Purchase Facility and the Standing Term Liquidity Facility.
Additionally, the Fed introduced the Primary Dealer Credit Facility.
(cid:129)
Governments and federal agencies have assessed and will continue to assess the need for these programs. Effective October 21,
2020, certain programs, such as the Bankers’ Acceptance Purchase Facility and the revised insured mortgage purchase program
through the CMHC were discontinued and the existing term repo facilities will be reduced to pre-pandemic levels over time.
For further details on how we are managing our liquidity and funding profile, refer to the Liquidity and funding risk section of
this 2020 Annual Report.
In order to support all of the aforementioned programs, central banks and domestic and global regulators have provided
guidance on regulatory capital, liquidity and reporting requirements. For a discussion on these initiatives, refer to the Liquidity
and funding risk and Capital management sections of this 2020 Annual Report. We will continue to monitor announcements by us,
governments and federal agencies, as applicable.
Financial performance
Overview
2020 vs. 2019
Net income of $11,437 million decreased $1,434 million or 11% from a year ago. Diluted EPS of $7.82 was down $0.93 or 11% and ROE
of 14.2% was down 260 bps. Our Common Equity Tier 1 (CET1) ratio was 12.5%, up 40 bps from a year ago.
Our results reflected lower earnings in Personal & Commercial Banking and Wealth Management, partially offset by strong
earnings in Capital Markets as well as higher results in Corporate Support, Investor & Treasury Services, and Insurance.
Personal & Commercial Banking earnings decreased mainly due to higher PCL, primarily attributable to the impact of the
COVID-19 pandemic on performing loans and lower spreads. The net increase in costs associated with the COVID-19 pandemic,
including additional staff-related costs also contributed to the decrease. These factors were partially offset by average volume
growth of 10% in Canadian Banking.
Wealth Management results decreased primarily due to a gain in the prior year on the sale of the private debt business of
BlueBay, a decline in net interest income and higher staff-related costs. Lower income from sweep deposits also contributed to
the decrease. These factors were partially offset by an increase in earnings from higher average fee-based client assets, net of
the associated variable compensation.
Capital Markets results were up driven by higher revenue in Global Markets and Corporate and Investment Banking. These
factors were partially offset by higher PCL, higher taxes due to an increase in the proportion of earnings from higher tax rate
jurisdictions, lower Other revenue mainly reflecting higher residual funding costs, as well as higher compensation on improved
results.
Corporate Support net income was $52 million, largely due to asset/liability management activities, partially offset by net
unfavourable tax adjustments and residual unallocated costs. Net loss in the prior year 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.
Investor & Treasury Services results increased as the prior year included severance and related costs associated with the
repositioning of the business. The repositioning of the business combined with the impact of ongoing efficiency initiatives also
resulted in lower staff-related costs in the current year. These factors were partially offset by lower client deposit revenue.
Insurance earnings were up, largely due to higher favourable investment-related experience, partially offset by unfavourable
annual actuarial assumption updates.
For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital
management sections, respectively.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
21
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 6
2020 vs. 2019
$
$
172
34
135
(3)
6
0.00
0.00
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.
2020
0.744
0.579
0.658
Total revenue
Table 7
2019
0.752
0.591
0.670
Table 8
2019
41,333
21,584
19,749
1.61%
5,710
995
5,748
3,628
1,305
1,907
1,815
986
1,072
1,269
125
76
1,617
$
$
$
2020
$ 34,883
14,048
$ 20,835
1.55%
$
5,361
1,239
6,101
3,712
1,439
1,842
2,319
1,012
969
1,321
90
77
864
$ 26,346
$ 47,181
$
$
26,253
46,002
(Millions of Canadian dollars, except percentage amounts)
Interest and dividend income
Interest expense
Net interest income
NIM
Insurance premiums, investment and fee income
Trading revenue
Investment management and custodial fees
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Net gains on investment securities
Share of profit in joint ventures and associates
Other
Non-interest income
Total revenue
2020 vs. 2019
Total revenue increased $1,179 million or 3% from last year, largely due to higher net interest income, underwriting and other
advisory fees, investment management and custodial fees, and higher trading revenue. The impact of foreign exchange
translation also increased total revenue by $172 million. These factors were partially offset by a decrease in other revenue and
lower insurance premiums, investment and fee income (Insurance revenue).
Net interest income increased $1,086 million or 5%, primarily driven by volume growth in Canadian Banking and Wealth
Management, and higher fixed income and equity trading revenue in Capital Markets. Higher funding and liquidity revenue within
our Investor & Treasury Services business also contributed to the increase. These factors were partially offset by the impact of
lower interest rates in Personal & Commercial Banking and Wealth Management. The impact associated with higher funding and
liquidity revenue within our Investor & Treasury Services business was more than offset by lower related gains on non-trading
derivatives in Other revenue.
NIM was down 6 bps compared to last year mainly due to lower spreads in Wealth Management primarily due to the impact
of lower interest rates, as well as lower spreads in Canadian Banking primarily due to the impact of lower interest rates and
competitive pricing pressures.
Insurance revenue decreased $349 million or 6%, mainly reflecting the change in fair value of investments backing
policyholder liabilities, which is largely offset in PBCAE. This was partially offset by business growth primarily in longevity
reinsurance and group annuities, both of which are largely offset in PBCAE.
22
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Trading revenue increased $244 million or 25%, mainly due to higher fixed income trading in Europe, higher commodities
trading in Canada, and higher equity trading in the U.S. and Europe. These factors were partially offset by lower equity trading in
Canada and lower fixed income trading in the U.S.
Investment management and custodial fees increased $353 million or 6%, largely driven by higher average fee-based client
assets reflecting net sales and market appreciation, partially offset by the impact of a favourable accounting adjustment in
Canadian Wealth Management in the prior year.
Underwriting and other advisory fees increased $504 million or 28%, mainly due to higher debt and equity origination across
most regions.
Other revenue decreased $753 million or 47%, primarily reflecting lower gains on non-trading derivatives in our Investor &
Treasury Services business, which were largely offset in Net interest income. A gain on the sale of the private debt business of
BlueBay of $151 million in the prior year and lower income from cash sweep deposits, also contributed to the decrease. These
factors were partially offset by the favourable impact of economic hedges.
Additional trading Information
(Millions of Canadian dollars)
Net interest income
Non-interest income
Total trading revenue
Total trading revenue by product
Interest rate and credit
Equities
Foreign exchange and commodities
Total trading revenue
Table 9
2019
2,266
995
3,261
1,664
1,037
560
3,261
2020
3,459
1,239
4,698
2,838
1,234
626
$
$
$
4,698
$
$
$
$
$
2020 vs. 2019
Total trading revenue of $4,698 million, which is comprised of trading-related revenue recorded in Net interest income and
Non-interest income, increased $1,437 million or 44% from last year, mainly due to higher fixed income trading across all regions
and higher equity trading mainly in the U.S.
Provision for credit losses
2020 vs. 2019
Total PCL increased $2,487 million from the prior year.
PCL on loans increased $2,340 million or 124% from the prior year, reflecting higher provisions primarily in Personal &
Commercial Banking, Capital Markets and Wealth Management due to the impact of the COVID-19 pandemic. The PCL on loans
ratio increased 32 bps.
For further details on PCL, refer to Credit quality performance in the Credit risk section.
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
2020 vs. 2019
PBCAE of $3,683 million decreased $402 million or 10% from the prior year, mainly reflecting the change in fair value of
investments backing policyholder liabilities, which was largely offset in revenue, and higher favourable investment-related
experience. These factors were partially offset by business growth, which was largely offset in revenue, and unfavourable annual
actuarial assumption updates in the current year, largely related to mortality experience.
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)
$
2020
6,758
6,040
1,994
460
$ 15,252
1,907
1,660
989
1,330
1,273
2,347
$ 24,758
52.5%
52.8%
Table 10
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%
$
$
$
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 policyholder liabilities. These
are non-GAAP measures. For further details, refer to the Key performance and non-GAAP measures section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
23
2020 vs. 2019
Non-interest expense increased $619 million or 3%, primarily due to higher variable compensation on increased revenue and
higher staff-related costs, including additional compensation for certain employees, primarily those client-facing amidst the
COVID-19 pandemic. An increase in technology and related costs, including digital initiatives, the impact of foreign exchange
translation and higher other incremental COVID-19 related costs also contributed to the increase. These factors were partially
offset by lower discretionary spend, as well as severance and related costs associated with the repositioning our Investor &
Treasury Services business in the prior year.
Our efficiency ratio of 52.5% remained unchanged from last year. Excluding the change in fair value of investments backing
policyholder liabilities, our efficiency ratio of 52.8% decreased 80 bps from last year.
Efficiency ratio excluding the change in fair value of investments backing 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)
2020
2,952
496
771
52
140
29
43
1,531
4,483
$
$
$
$
$ 14,389
20.5%
28.2%
$
$
$
$
$
Table 11
2019
3,043
519
738
73
139
30
55
1,554
4,597
15,914
19.1%
26.3%
(1)
Total income and other taxes as a percentage of income before income taxes and other taxes.
2020 vs. 2019
Income tax expense decreased $91 million or 3% from last year, primarily due to lower income before income taxes and higher tax
exempt income. These factors were partially offset by a decrease in income from lower tax rate jurisdictions in the current year
and net favourable tax adjustments in the prior year.
The effective income tax rate of 20.5% increased 140 bps, mainly due to a decrease in income from lower tax rate
jurisdictions in the current year and net favourable tax adjustments in the prior year, partially offset by higher tax-exempt
income.
Other taxes decreased $23 million or 1% from last year, mainly due to lower value added and sales taxes commensurate with
reduced purchase activity, including lower discretionary spending, and lower capital and business taxes. These factors were
partially offset by 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, 2020, followed by our Wealth Management and Personal & Commercial Banking businesses with
approximately 19% and 5% of total AUA, respectively.
2020 vs. 2019
AUA increased $213 billion or 4% compared to last year, mainly reflecting market appreciation and the impact of foreign
exchange translation, partially offset by lower client activity.
24
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
The following table summarizes AUA by geography and asset class:
AUA by geographic mix and asset class
(Millions of Canadian dollars)
Canada (1)
Money market
Fixed income
Equity
Multi-asset and other
Total Canada
U.S. (1)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
Total International
Total AUA
Table 12
2020
2019
$
$
42,800
763,500
591,200
954,800
35,300
752,000
652,000
902,100
$ 2,352,300
$ 2,341,400
$
$
$
40,100
107,300
195,400
256,000
598,800
40,700
375,400
837,200
1,686,800
$
$
$
26,500
114,500
189,600
226,700
557,300
44,100
358,200
787,900
1,589,100
$ 2,940,100
$ 2,779,300
$ 5,891,200
$ 5,678,000
(1)
Geographic information is based on the location from where our clients are serviced.
Assets under management
Assets under management (AUM) are assets managed by us which are beneficially owned by our clients. Management fees are
paid by the investment funds 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 where fees are recorded when
certain benchmarks or performance targets are achieved. These factors could lead to differences in fees earned by product and
therefore net return by asset class may vary despite similar average AUM. Our Wealth Management segment is the primary
business segment that has AUM with approximately 99% of total AUM as at October 31, 2020.
2020 vs. 2019
AUM increased $81 billion or 11% compared to last year, mainly reflecting net sales and market appreciation.
The following table presents the change in AUM for the year ended October 31, 2020:
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition/dispositions
Foreign exchange
Total market, acquisition/dispositions and
foreign exchange impact
AUM, balance at end of year
$
$
$
$
Money market Fixed income
Equity
Multi-asset
and other
Total
2020
29,900 $ 206,900 $ 90,000 $ 435,500 $ 762,300
106,700
9,900
38,600
(80,300)
(3,300)
(21,000)
31,600
(700)
1,700
49,400
(46,900)
5,300
8,800
(9,100)
25,300
19,300 $
200
–
(500)
7,800 $
10,400
–
2,500
5,900 $
–
–
100
25,000 $ 58,000
17,900
700
4,700
7,300
700
2,600
Table 13
2019
Total
$ 671,000
111,000
(105,100)
31,200
$
37,100
60,000
(5,500)
(300)
(300) $ 12,900 $
100 $
10,600 $ 23,300
$
54,200
48,900 $ 227,600 $ 96,000 $ 471,100 $ 843,600
$ 762,300
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
25
Table 14
2019
Total
19,749
26,253
46,002
1,864
4,085
24,139
15,914
3,043
12,871
16.8%
Business segment results
Results by business segments
(Millions of Canadian dollars,
except percentage amounts)
Net interest income
Non-interest income
Personal &
Commercial
Banking
Wealth
Management
Insurance
2020
Investor &
Treasury
Services
Capital
Markets (1)
Corporate
Support (1)
$ 12,568 $
5,163
2,860 $
9,360
– $
329 $
5,361
1,982
Total revenue
$ 17,731 $
12,220 $ 5,361 $
PCL
PBCAE
Non-interest expense
2,891
–
7,946
214
–
9,212
–
3,683
592
2,311 $
6
–
1,589
Income before income taxes $
Income taxes
6,894 $
1,807
2,794 $ 1,086 $
639
255
716 $
180
3,283 $
507
5,135 $
4,749
9,884 $
1,239
–
5,362
(57) $
(269)
(326) $
1
–
57
(384) $
(436)
Total
20,835 $
26,346
47,181 $
4,351
3,683
24,758
14,389 $
2,952
Net income
ROE (2)
$
5,087 $
2,155 $
831 $
536 $
2,776 $
52 $
11,437 $
21.7%
13.1%
36.1%
15.9%
11.7%
n.m.
14.2%
Average assets
$ 494,600 $ 119,500 $ 20,300 $204,300 $755,400 $ 42,600 $1,636,700 $ 1,436,200
(1)
(2)
Net interest income, Non-interest income, Total revenue, Income before income taxes, and Income taxes are presented in Capital Markets on a taxable equivalent basis
(teb). The teb adjustment is eliminated in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments
section.
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.
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 2020 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.
26
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
In addition to the key methodologies described above, the following components of our management reporting framework also
impact how our business segments are managed and reported:
(cid:129) Wealth Management results include disclosure in U.S. dollars, primarily for U.S. Wealth Management (including City
(cid:129)
(cid:129)
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.
Calculation of ROE
(Millions of Canadian dollars,
except percentage amounts)
Net income available to
Personal &
Commercial
Banking
Wealth
Management
Insurance
2020
Investor &
Treasury
Services
Table 15
2019
Capital
Markets
Corporate
Support
Total
Total
common shareholders $
5,006 $
2,101 $
823 $
523 $ 2,698 $
13 $ 11,164
$ 12,591
Total average common
equity (1), (2)
ROE (3)
23,100
21.7%
16,050
13.1%
2,300
36.1%
3,300
23,150
10,900
78,800
15.9%
11.7%
n.m.
14.2%
75,000
16.8%
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, 2020 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.
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 policyholder liabilities, which is reported in
revenue and largely offset in PBCAE.
Consolidated non-GAAP efficiency ratio
Table 16
(Millions of Canadian dollars,
except percentage amounts)
Total revenue
Non-interest expense
Efficiency ratio
As reported
$ 47,181
24,758
52.5%
2020
Item excluded
Change in fair value
of investments backing
policyholder liabilities
2019
Item excluded
Adjusted
As reported
Change in fair value
of investments backing
policyholder liabilities
Adjusted
$
(277) $ 46,904
24,758
–
$ 46,002
24,139
$
52.8%
52.5%
(987) $ 45,015
24,139
–
53.6%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
27
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 Canada1
35,964
Employees
Revenue by business lines
$17.7 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 for all key retail and business
products. We have the largest branch network, the most ATMs and one of the
largest mobile sales forces 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.
2020 Operating environment
› Earnings in early fiscal 2020 were supported by a favourable operating environment characterized by low unemployment and
modest GDP growth, resulting in solid revenue growth and stable credit losses. However, the remainder of the fiscal year saw
challenging market conditions stemming from the widespread impact of the COVID-19 pandemic.
› To support our clients in financial need as a result of the impact of the COVID-19 pandemic, we launched various temporary
relief programs for individuals and businesses, including payment deferrals, refinancing and limit increases. We also focused
on the safety and well-being of our employees by retrofitting branches with recommended safety measures, as well as
providing additional compensation for certain employees.
› In response to the COVID-19 pandemic, the BoC reduced the benchmark interest rate by 150 basis points. As a result of the low
rate environment in 2020, we experienced a significant decline in NIM this fiscal year.
› Measures to contain the spread of COVID-19 weighed on consumer spending with modest improvement observed across most
of our businesses as reopening began and containment measures were eased. Containment measures also severely limited
travel activity resulting in a decline in card purchase volumes and foreign exchange revenues.
› Personal and business deposits saw significant growth through fiscal 2020, from a combination of lower spending and clients
preference for the safety of higher cash balances.
› While housing activity declined amidst the onset of the COVID-19 pandemic and implementation of associated containment
measures, it quickly rebounded as these conditions eased, largely reflecting the impact of pent-up demand and the low rate
environment. This contributed to strong growth in residential mortgages this fiscal year.
› In the second fiscal quarter, we saw significant market volatility which weighed on our investment product balances,
particularly mutual fund balances. By the third fiscal quarter, mutual fund balances recovered to pre-pandemic levels;
however, we continue to observe higher than normal levels of volatility.
› The credit environment was impacted by the COVID-19 pandemic which led to heightened uncertainty and sustained volatility
in the current year, resulting in elevated provisions on performing loans.
› Client preferences for digital offerings increased due to the impacts of the COVID-19 pandemic. As a result, we continued to
prioritize our investment in digital solutions to improve the client experience and deliver personalized advice.
› The Caribbean experienced challenges in various regions given the evolving impact of the COVID-19 pandemic on the tourism
and oil & gas industries.
› In the U.S., earnings were unfavourably impacted by U.S. Fed rate cuts and severe limitations on cross-border travel, as a result
of the COVID-19 pandemic.
1
28
Represents 90-day active clients
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
PROGRESS IN 2020
PRIORITIES IN 2021
Transform how we serve our clients
Accelerate our growth
Enhanced access to products and services for clients
by introducing Remote Account Open, a fully digitized
account opening experience for personal and
business clients, and by enabling expedited digital
processing of funding to over 170,000 small
businesses under CEBA
Provide flexibility by continuing to 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
Continued to provide personalized advice and valued
banking solutions to our clients
Maintained our focus on key high-growth and high-
value segments such as retirees, youth, newcomers,
business owners, high net worth clients, and
healthcare professionals
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
Continued to further our partnerships, including
helping our clients realize over $60 million in fuel
savings with Petro Canada, a Suncor business
Introduced Points for Canada, a campaign to
stimulate the Canadian economy by encouraging
clients to support Canadian brands and to buy local
Launched Canada United, a national movement to
support local businesses in our communities and the
Canada United Small Business Relief Fund to provide
small business grants to cover specific expenses
Remained focused on optimizing the end-to-end
approach to mortgages, driving market leading
acquisition and retention
Continued to gain commercial market share through
industry-specific credit strategies
Developed a partnership with Wello, enabling
businesses to offer virtual healthcare support to
employees
Rapidly deliver digital solutions to our
clients
Continued to deliver leading digital capabilities and
functionalities through our award-winning mobile app
First Canadian bank to introduce digital government
identity verification solutions using artificial
intelligence (AI) technology, providing clients with
more secure identity verification, stronger fraud
protection and a faster account opening experience
Delivered a re-imagined Direct Investing experience
that allows free, real-time streaming quotes and
enables clients to trade from our RBC® Mobile app
First to market with the launch of Bulk Request
Money, a subscription service to enable businesses
to send multiple payment requests at once
Launched Ask NOMITM functionality, a text and voice-
based chat bot, which uses AI to answer questions,
helps clients navigate the app and simplifies
day-to-day financial tasks such as canceling
e-transfers, reviewing payment details and
understanding spending patterns
Continued to roll out MyAdvisor®, an online advice
platform that digitally connects our clients to an
advisor, resulting in over 2 million clients activating
their personalized investment plans since its launch
in 2017
Accelerated investments in programs that simplify,
digitize and automate experiences for clients and
employees, and enable employees to deliver relevant
and expert advice
Continued to invest in the digital enablement of our
employees to better serve our clients, in addition to
further enhance agile and change capabilities
Continued transforming the client experience while
driving profitability, simplifying operations, and
strategically navigating the COVID-19 pandemic and
its impact on our clients and employees
Continued to focus on key high-growth segments,
including high net worth households as well as
commercial and corporate clients
Continued strong client growth at the start of the
year, with focus on client support and engagement in
light of border closures and travel restrictions
associated with COVID-19 containment measures
Successfully implemented an enhanced real estate
lending platform to improve productivity and offer a
more digitally-enabled client experience
Innovate to become a more agile and
efficient bank
In the Caribbean
In the U.S.
Deliver more personalized insights to improve the
client experience while continuing to simplify and
digitize everyday banking
Enhance the digital experience for our small business
and commercial clients and make it easier for them
to transact with us
Invest in new tools and capabilities and proactively
seek ways to simplify and streamline internal
processes and the client experience
Remain focused on becoming the premier digitally-
enabled relationship bank by accelerating revenue
growth, transforming the client experience,
simplifying our operations, and enabling our
employees for success
Further enhance the U.S. real estate ownership
experience for Canadians by expanding advisory
services and partnerships
Enhancing small business services to support
Canadian businesses needing U.S. payment and
collection services
Further digitization of operational processes to
improve efficiency, scalability and quality assurance
Developing a modern, digital banking platform to
improve client experience and expand deposit
gathering capabilities in the U.S.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
29
Outlook
The extent and duration of the impacts of the COVID-19 pandemic on the global economy remains uncertain, including the
severity of the ongoing second wave and associated re-imposition of containment measures to varying degrees in some regions.
In addition, central banks have signaled the expected continuation of a low interest rate environment for the foreseeable future.
This, along with the pressures on consumer spending, GDP and unemployment rates are expected to continue to impact our
operating results in fiscal 2021. 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 challenging conditions to persist, including the likelihood of reduced travel and tourism as the
impact of the COVID-19 pandemic continues to evolve, as well as the impact of a low interest rate environment. We will continue
to focus on growth strategies in target markets, improving operational efficiency and adding value for our clients.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
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
Selected balance sheet information
Average total assets
Average total earning assets, net
Average loans and acceptances, net
Average deposits
Other information
AUA (1), (2)
Average AUA
AUM (2)
Number of employees (FTE)
Credit information
PCL on impaired loans as a % of average net loans and acceptances
Other selected information – Canadian Banking
Net income
NIM
Efficiency ratio
Operating leverage
$
$
$
$
$
$
2020
12,568 $
5,163
17,731
1,818
1,073
2,891
7,946
6,894
5,087 $
16,838 $
12,703
4,135
893
21.7%
2.67%
44.8%
(3.1)%
494,600 $
470,200
473,400
447,300
292,800 $
287,600
5,300
35,964
0.23%
5,077 $
2.64%
43.2%
(3.3)%
Table 17
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%
466,200
445,200
447,100
393,200
283,800
276,100
5,000
35,467
0.30%
6,168
2.79%
41.8%
2.0%
(1)
(2)
AUA includes securitized residential mortgages and credit card loans as at October 31, 2020 of $15.6 billion and $6.7 billion, respectively (October 31, 2019 – $15.5 billion
and $8.1 billion).
Represents year-end spot balances.
Financial performance
2020 vs. 2019
Net income decreased $1,315 million or 21% from last year, mainly due to higher PCL, primarily attributable to the impact of the
COVID-19 pandemic on performing loans and lower spreads. The net increase in costs associated with the COVID-19 pandemic,
including additional staff-related costs also contributed to the decrease. These factors were partially offset by average volume
growth of 10% in Canadian Banking.
Total revenue decreased $134 million or 1% from last year, mainly due to lower spreads, largely reflecting the impact of lower
interest rates and competitive pricing pressures. Lower card service revenue, mainly driven by a decrease in purchase volumes,
also contributed to the decrease. These factors were partially offset by average volume growth in Canadian Banking of 6% in
loans and 14% in deposits, and higher securities brokerage commissions.
NIM decreased 17 bps, mainly due to lower interest rates and the impact of competitive pricing pressures.
PCL increased $1,443 million, reflecting higher provisions on performing loans in our Canadian Banking and Caribbean
Banking portfolios due to the impact of the COVID-19 pandemic, partially offset by lower provisions on impaired loans in our
Canadian Banking portfolios. For further details, refer to Credit quality performance in the Credit risk section.
30
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Non-interest expense increased $178 million or 2%, primarily attributable to higher staff-related costs, including additional
compensation for certain employees, primarily those client-facing amidst the COVID-19 pandemic, as well as an increase in
technology and related costs, including digital initiatives. Other incremental COVID-19 related costs also contributed to the
increase. These factors were partially offset by lower discretionary spend.
Average loans and acceptances increased $26 billion or 6%, driven by growth in mortgages and business loans.
Average deposits increased $54 billion or 14%, reflecting growth in business and personal deposits.
Business line review
In Canada, we operate through two business lines: Personal Banking and Business Banking.
Personal Banking
Personal Banking offers a full range of products focused on meeting the needs of our individual Canadian clients at every stage
of their lives through a wide range of financing and investment products and services. This includes home equity financing,
personal lending, chequing and savings accounts, private banking, indirect lending (including auto financing), mutual funds and
self-directed brokerage accounts, Guaranteed Investment Certificates (GICs), credit cards, and payment products and solutions.
We rank #1 or #2 in market share for all key Personal Banking products in Canada and our retail banking network is the largest in
Canada with 1,201 branches and 4,182 ATMs.
Financial performance
Total revenue decreased $140 million or 1% compared to last year, largely reflecting lower spreads driven by the impact of lower
interest rates and competitive pricing pressures, as well as lower card service revenue, mainly driven by a decrease in purchase
volumes. Lower service charges and a decline in foreign exchange revenue also contributed to the decrease. These factors were
partially offset by average volume growth in residential mortgages and deposits, an increase in securities brokerage
commissions, and higher average balances driving higher mutual fund distribution fees.
Average residential mortgages increased 9% compared to last year, largely driven by solid housing activity resulting in
strong mortgage originations.
Average deposits increased 12% from last year, largely driven by a combination of lower consumer spending and clients’
preference for the safety of higher cash balances associated with the impacts of the COVID-19 pandemic.
Selected highlights
Table 18
Average residential mortgages, loans and deposits
(Millions of Canadian dollars)
(Millions of Canadian dollars, except number of)
2020
2019
Total revenue
Other information
$ 12,703 $ 12,843
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)
$ 273,200 $ 249,600
79,800
221,400
19,100
125,800
162,000
155,300
89,500
77,800
248,100
18,100
118,100
166,000
163,600
96,400
280,000
240,000
200,000
160,000
120,000
80,000
40,000
0
Number as at October 31:
Branches
ATMs
(1)
Represents year-end spot balances.
Business Banking
1,201
4,182
1,201
4,240
2020
2019
Residential mortgages
Other loans and
acceptances, net
Deposits
Business Banking offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer
financing, trade products, and services to small and medium-sized commercial businesses across Canada. 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 $84 million or 2% compared to last year, largely reflecting average volume growth and higher credit fees.
These factors were partially offset by lower spreads, primarily driven by the impact of lower interest rates, lower service charges
and a decrease in foreign exchange revenue.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
31
Average loans and acceptances increased 6%, due to the deepening of our existing client relationships. Average deposits
were up 18%, mainly due to our clients maintaining higher cash balances amidst the COVID-19 pandemic.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information (average)
Loans and acceptances, net
Deposits
Caribbean & U.S. Banking
Table 19
Average loans and acceptances and deposits
(Millions of Canadian dollars)
2020
4,135 $
2019
4,051
$
$ 94,600 $ 89,400
153,400
180,800
200,000
175,000
150,000
125,000
100,000
75,000
50,000
25,000
0
2020
2019
Loans and acceptances, net
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.
Financial performance
Total revenue was down $78 million or 8% from last year, primarily due to lower spreads driven by the impact of lower interest
rates, partially offset by average volume growth of 1%.
Average loans and acceptances increased 4% due to mortgage growth in U.S. Banking and average deposits decreased 1%.
Selected highlights
Table 20
Average loans and deposits (Millions of Canadian dollars)
(Millions of Canadian dollars,
except number of and percentage amounts)
Total revenue
Other information
2020
893 $
2019
971
$
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.
3.46%
9,700 $
18,400
5,900
6,400
5,200
51
298
4.13%
9,300
18,500
6,700
7,100
4,900
52
287
20,000
15,000
10,000
5,000
0
2020
2019
Loans and acceptances, net
Deposits
32
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Wealth Management
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.
$12.2 billion
Total revenue
> 5,400
Client-facing advisors
> $11 billion
AUA net flows
Assets under Administration
(AUA)
Assets under Management
(AUM)
$1,100 billion
Total AUA
$836 billion
Total AUM
92% Personal
7% Institutional
1% Mutual Funds
38% Personal
33% Institutional
29% 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 clearing and custody (C&C)
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 measured by AUM1, as well as a
leading institutional asset manager
(cid:129) International Wealth Management serves HNW
and UHNW clients, primarily through key
financial centres in the U.K., Channel Islands
and Asia
2020 Operating environment
› Earnings in the current fiscal year were unfavourably impacted by U.S. Fed rate cuts in the latter part of calendar 2019, as well
as market volatility and further U.S. Fed and other central bank rate cuts in early calendar 2020 associated with the global
impacts of the COVID-19 pandemic.
› To support our clients in financial need as a result of the impacts of the COVID-19 pandemic, we launched temporary relief
programs for businesses, including payment deferrals.
› Despite challenging market conditions, our core businesses remained strong with double digit volume growth in City National,
strong sales in GAM, as well as net positive flows of fee-generating client assets in our brokerage businesses. These results
reflect the resilience of our business driven by the quality of our advice, the breadth of our solutions and clients’ trust in our
brand.
› Margin compression, continued expansion of digital and data capabilities, increasing regulatory scrutiny, shifting
demographics, and heightened competition continued to be structural trends challenging the wealth management industry.
› Continued investments in our people and technology enabled us to manage through the market volatility and economic uncertainty
while also providing uninterrupted services to our clients throughout the COVID-19 pandemic. Leveraging our investment in
technology also supported the safety and well-being of our employees by enabling them to work effectively in a virtual setting.
› The credit environment was impacted by the COVID-19 pandemic which led to heightened uncertainty and sustained volatility
in the current fiscal year, resulting in elevated provisions on performing loans.
1
Source: Investment Funds Institute of Canada, September 30, 2020, reported on a quarterly basis.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
33
Strategic priorities
OUR STRATEGY
PROGRESS IN 2020
PRIORITIES IN 2021
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
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 our focus on holistic wealth planning,
including advisor training on intergenerational
and business wealth transfer
Deliver a differentiated client experience through
enriched advisor-client interactions and
compelling digital experiences
Continued to focus on offering RBC® Premier
Banking to deepen banking relationships with
Wealth Management clients
Broaden and deepen client relationships by
leveraging combined strengths across our other
business segments
Enhanced our digital and data capabilities to
drive increased client satisfaction and advisor
productivity, including the launch of eSign
functionality for new or existing accounts
Invested in key areas needed to grow our
U.S. Wealth Management business, including
substantial talent recruitment and solid execution
on our technology transformation
City National continued to focus on our core high-
growth banking businesses, opened new
locations in priority markets including the New
York and D.C. areas, further extended within the
entertainment ecosystem, expanded our digital
capabilities, and invested in productivity and
efficiency programs
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
Maintained #1 market share in Canadian mutual
fund AUM
RBC® iShares strategic alliance maintained #1
market share in Canadian ETFs and continued to
accelerate sales growth
Published our GAM-wide Approach to Climate
Change, which included implementing climate
scenario analysis across our portfolios and
joining the Climate Action 100+ initiative
Continue to invest in digitized solutions to
streamline and simplify the business, improving
efficiency and advisor productivity
Continue 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 further accelerate
growth in the U.S.
Emphasize growth in our affluent and HNW
banking solutions
Further 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 expand our investment capabilities to
meet evolving client needs in our target
distribution regions
Shift to a more unified asset management
operating model to take better advantage of
enterprise and GAM global scale, resources and
infrastructure
Outlook
The extent and duration of the impact of the COVID-19 pandemic on the global economy remains uncertain, including the severity
of the ongoing second wave and associated re-imposition of containment measures to varying degrees in some regions. Central
banks have also signaled the expected continuation of a low interest rate environment.
We believe our diversified businesses are well-positioned to endure through the period of recovery from the impacts of the
COVID-19 pandemic. Our strategy remains unchanged as we continue to focus on delivering an unmatched client experience
through holistic goals-based advice, attracting and retaining top-performing advisors, and collaborating across the enterprise to
bring our full breadth of capabilities to our clients. We will continue to leverage our brand, reputation and solid financial position
to grow our leading position in Canada and increase our market share of the HNW and UHNW client segments globally. In
addition, the rapid shift to work from home arrangements due to the COVID-19 pandemic has reinforced the importance of
digitization, requiring a continued investment in digital capabilities to improve client and advisor experiences and drive
operational efficiencies.
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 2020
Management’s Discussion and Analysis
Wealth Management
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)
Net interest income
Non-interest income
Total revenue
PCL on performing assets
PCL on impaired assets
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 information
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)
$
$
$
$
2020
2,860 $
9,360
12,220
157
57
214
9,212
2,794
2,155 $
3,319 $
6,206
4,624
2,308
387
13.1%
2.79%
22.9%
119,500 $
102,600
76,700
122,000
Table 21
2019
2,993
9,150
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
$ 1,100,000 $
836,400
1,082,000
801,500
0.07%
18,978
5,428
1,062,200
755,700
1,027,400
717,500
0.13%
18,613
5,296
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2020 vs. 2019
Increase (decrease):
Total revenue
PCL
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
$
73
5
62
6
(1)%
(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 $6,100 million
(2019: $6,000 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
2020
$ 1,062,200 $
356,800
(345,400)
$
$
11,400 $
17,500
–
8,900
26,400 $
Table 22
2019
970,500
315,500
(293,400)
22,100
72,100
(2,200)
(300)
69,600
AUA, balance at end of year
$ 1,100,000 $
1,062,200
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
35
Client assets – AUM
(Millions of Canadian dollars)
AUM, beginning balance
Institutional inflows
Institutional outflows
Personal flows, net
Total net flows
Market impact
Acquisition/dispositions
Foreign exchange
Money
market
$ 29,900
38,600
(21,000)
1,600
$ 19,200
200
–
(500)
Fixed
income
$204,800
49,400
(46,900)
5,300
$
7,800
10,300
–
2,500
2020
Equity
$ 89,900
9,900
(3,300)
(800)
$
5,800
–
–
100
Multi-asset
and other
$ 431,100 $
$
8,800
(9,100)
25,200
24,900 $
7,200
700
2,500
Total
755,700 $
106,700
(80,300)
31,300
57,700 $
17,700
700
4,600
Table 23
2019
Total
664,900
111,000
(105,100)
31,000
36,900
59,700
(5,500)
(300)
Total market, acquisition/dispositions and
foreign exchange impact
$
(300) $ 12,800
$
100
$
10,400 $
AUM, balance at end of year
$ 48,800
$225,400
$ 95,800
$ 466,400 $
23,000 $
836,400 $
53,900
755,700
AUA by geographic mix and asset class
(Millions of Canadian dollars)
Canada (1)
Money market
Fixed income
Equity
Multi-asset and other
Total Canada
U.S. (1)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
Total International
Total AUA
Table 24
2020
2019
$
$
$
$
25,900 $
32,000
68,800
288,800
415,500 $
39,700 $
107,300
195,400
241,400
583,800 $
23,200
36,300
90,500
255,800
405,800
26,100
114,500
189,600
213,100
543,300
$
17,400 $
10,100
38,800
34,400
100,700 $
17,700
13,500
39,500
42,400
113,100
$
$ 1,100,000 $ 1,062,200
(1)
Geographic information is based on the location from where our clients are served.
Financial performance
2020 vs. 2019
Net income decreased $395 million or 15% from a year ago, primarily due to a gain in the prior year on the sale of the private debt
business of BlueBay, a decline in net interest income and higher staff-related costs. Lower income from sweep deposits also
contributed to the decrease. These factors were partially offset by an increase in earnings from higher average fee-based client
assets, net of the associated variable compensation.
Total revenue increased $77 million or 1%, largely due to average loan growth of 21% and higher average fee-based client assets,
primarily reflecting net sales and market appreciation. Higher transactional revenue driven by client activity and the impact of foreign
exchange translation also contributed to the increase. These factors were partially offset by the impact of lower interest rates on net
interest income and income from sweep deposits. The prior year also included a gain on the sale of the private debt business of
BlueBay of $151 million and the impact of a favourable accounting adjustment in Canadian Wealth Management.
PCL increased $97 million, or 83%, primarily in U.S. Wealth Management (including City National), largely reflecting higher
provisions on performing loans due to the impact of the COVID-19 pandemic. For further details, refer to Credit quality
performance in the Credit risk section.
Non-interest expense increased $399 million or 5%, primarily due to higher variable compensation commensurate with
increased commissionable revenue and higher staff-related costs in support of business growth. Higher technology and related
costs, as well as the impact of foreign exchange translation also contributed to the increase.
AUA increased $38 billion or 4%, primarily due to market appreciation and net sales. The impact of foreign currency
translation also contributed to the increase.
AUM increased $81 billion or 11%, primarily due to net sales and market appreciation.
36
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Business line review
Canadian Wealth Management
Canadian Wealth Management includes our full-service Canadian wealth advisory business, which is the largest in Canada as
measured by AUA, with over 1,850 investment advisors providing comprehensive financial solutions with a focus on HNW and
UHNW clients. Additionally, we provide discretionary investment management and estate and trust services to our clients
through over 100 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 $25 million or 1% from a year ago, mainly due to higher average fee-based client assets, primarily reflecting
net sales and market appreciation. This was partially offset by lower interest rates resulting in a decline in net interest income,
and the impact in the prior year of a favourable accounting adjustment.
Selected highlights
Table 25
Average AUA and AUM (Millions of Canadian dollars)
(Millions of Canadian dollars)
Total revenue
Other information
2020
3,319 $
2019
3,294
$
Average loans and acceptances, net $
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
3,900 $
21,900
416,700
125,700
410,300
121,600
3,700
17,100
407,000
116,700
391,100
109,400
(1)
Represents year-end spot balances.
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
U.S. Wealth Management (including City National)
2020
2019
AUA
AUM
U.S. Wealth Management (including City National) also encompasses PCG and our C&C businesses. PCG is the 7th largest full-
service wealth advisory firm in the U.S., as measured by number of advisors, with over 2,000 financial advisors. Our C&C business
delivers 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, 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 $94 million or 2% from a year ago. In U.S. dollars, revenue increased $23 million, largely due to average loan
growth of 22% and higher average fee-based client assets, mainly reflecting net sales and market appreciation. Higher
transactional revenue driven by client activity also contributed to the increase. These factors were partially offset by the impact
of lower interest rates on net interest income and income from sweep deposits.
Lower spreads, primarily driven by the impact of lower interest rates, resulted in NIM compression of 72 bps compared to the
prior year.
Selected highlights
(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.
Table 26
Average AUA and AUM (Millions of U.S. dollars)
2020
6,206 $
2019
6,112
$
$
4,624 $
2.65%
4,601
3.37%
$ 68,900 $ 56,100
51,600
64,700
438,200
137,300
424,600
130,200
42,400
50,200
412,600
123,700
393,900
112,800
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2020
2019
AUA
AUM
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
37
Global Asset Management
GAM 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 measured by AUM, as well as a leading institutional asset manager. We
face competition in Canada from banks, insurance companies and asset management organizations. The Canadian fund
management industry is large and mature, but remains a relatively fragmented industry.
In the U.S., our asset management business offers investment management solutions and services, primarily to institutional
investors, and competes with independent asset management firms, as well as those that are part of national and international
banks and insurance companies.
Internationally, through our global capabilities of BlueBay and RBC Global Asset Management®, we offer investment
management solutions for institutions and, through private banks including RBC Wealth Management®, to HNW and UHNW
investors. We face competition from asset managers that are owned by international banks, as well as national and regional
asset managers in the geographies where we serve clients.
Financial performance
Revenue decreased $53 million or 2% from a year ago, mainly due to a gain in the prior year on the sale of the private debt
business of BlueBay of $151 million, partially offset by higher average fee-based client assets reflecting market appreciation and
net sales.
Table 27
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
$
$
2020
2,308 $
2019
2,361
7,710 $
8,263
1,323
518,500
496,000
552
467,200
449,700
(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
600,000
500,000
400,000
300,000
200,000
100,000
0
2020
2019
AUM
International Wealth Management includes operations in the U.K., Channel Islands and Asia. We provide customized and
integrated trust, banking, credit, and investment solutions to HNW, UHNW and corporate clients in key financial centres.
Competitors to our International Wealth Management business include global wealth managers, traditional offshore private
banks and domestic wealth managers.
Financial performance
Revenue increased $11 million or 3% from a year ago, primarily due to higher client transactional activity, the impact of foreign
exchange translation and higher fee-based revenue. These factors were partially offset by a decline in net interest income,
mainly driven by the impact of lower interest rates.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Average loans, guarantees and
letters of credit, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
(1)
Represents year-end spot balances.
Table 28
Average AUA and AUM (Millions of Canadian dollars)
$
$
2020
387 $
2019
376
4,400 $
13,000
93,400
9,200
95,500
9,000
4,400
11,900
105,900
8,800
106,700
8,600
150,000
100,000
50,000
0
2020
2019
AUA
AUM
38
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Insurance
RBC Insurance® offers a wide range of life, health, home, auto, travel, wealth, annuities, and reinsurance advice and solutions, as
well as creditor services and business insurance solutions, to individual, business and group clients.
$5.4 billion
Total revenue
> 5 million
Number of clients
2,772
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 life, health, travel, home, and auto insurance products,
wealth accumulation solutions, annuities, advice, and services through a wide
variety of channels: advice centres, 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
$4.9 billion
Total premiums
and deposits
51% Life and Health
47% Annuity and Segregated
Fund Deposits
2% Property and Casualty
2020 Operating environment
› The COVID-19 pandemic impacted all of our lines of business to varying degrees. We focused on taking care of our clients by
offering client relief programs to help alleviate day-to-day financial pressures, providing trusted support throughout the
COVID-19 pandemic and assisting many of our travel insurance clients by facilitating timely travel-related support and claims
processing. We also focused on the safety and well-being of our employees by fully enabling them with the tools and
technology to continue providing trusted advice in a virtual setting.
› During fiscal 2020, the COVID-19 pandemic amplified and accelerated ongoing challenges within the insurance industry, such as
changing client preferences and behaviours, increased regulatory requirements and oversight, the need for more digital
interactions, and increased need for information and advice. To address these challenges we focused on strengthening our
client first culture, investing in new ways for clients to do business with us, enhancing access and convenience, accelerating
our efforts around digitization, and delivering increased value to clients beyond our products and pricing.
› In Canada, provincial and federal regulators have maintained their focus on fair treatment of customers as well as insurer
solvency throughout the COVID-19 pandemic. As a result, we continued to evolve our robust frameworks, controls and risk
culture to protect clients and meet the expectations of both federal and provincial regulators.
› In the U.K., companies continued to actively manage longevity risk to preserve capital and to mitigate the volatility of pension
costs. As a result, the longevity reinsurance market remained highly competitive in the current fiscal year. However, we
continued to achieve strong growth in this market, within our risk tolerance.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
39
Strategic priorities
OUR STRATEGY
Deepen client relationships
PROGRESS IN 2020
PRIORITIES IN 2021
Launched our Thank-you to Essential Workers
campaign across Canada, offering premium
savings on select individual disability policies for
a limited time
Continue to be an innovative, client-focused
provider of a full suite of insurance solutions for
mass underserved, mass affluent and high net
worth clients
Enhanced the suite of mental health solutions for
our group clients, including therapist assisted
online cognitive behavioural therapy and mental
health training webinars, which supported our
clients and plan members with challenges they
may be facing as a result of the COVID-19
pandemic
Introduced new products to the RBC® Guaranteed
Investment Funds portfolio, providing greater
choice for our clients
Enhanced Group Health & Dental benefits for
certain group clients to include a Modular Flex
option that offers choice to plan members based
on personal circumstances and needs
Launched our online Insurance platform,
delivering our clients self-serve capabilities for all
of their insurance needs in one central and
secure location
Continued to innovate by investing in research
and development to understand and meet
changing needs and expectations of underinsured
Canadians
Enhanced electronic applications that simplified
overall user-experience, and reduced time to
purchase, making it easier to do business with us
Continued to improve automated underwriting
processes for Life insurance to reduce wait times
for clients and simplify the application process
Introduced new digital tools which enable clients
to receive enhanced advice as well as simplify the
purchase and management of their creditor
insurance
Achieved very strong growth in our longevity
reinsurance business, largely due to our
relationships within the U.K. insurance and
reinsurance market, as well as our longevity
operations and underwriting expertise
Simplify and innovate by accelerating our
investments in digital initiatives, improving
quality and cost effectiveness
Continue to improve our distribution
effectiveness and efficiency by enhancing both
our proprietary and third-party channels, and
focusing on the delivery of technology and
operational solutions
Pursue niche opportunities in mortality and
longevity markets to grow our reinsurance
business within our risk tolerance
Simplify.Agile.Innovate
Improve distribution effectiveness and
efficiency
Pursue select international opportunities
to grow our reinsurance business
Outlook
The insurance industry is expected to continue experiencing change in the coming fiscal year driven by the ongoing impacts of
the COVID-19 pandemic, including changing client expectations, accelerated digital disruption and distribution innovation.
Government and regulatory pressures are also expected to continue into fiscal 2021. As consumers focus more attention on
overall health and well-being, we will continue to deliver services and create industry partnerships to assist our clients. In this
rapidly evolving industry and economic environment, we will seek to maintain our strength through investments in technology,
product and service innovation, efficient distribution channels, and a strong risk culture. We will also continue to re-define how
we advise our clients and seek to provide them peace of mind. We believe that delivering on our business strategy will allow us to
continue to thrive in this changing environment.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
40
Royal Bank of Canada: Annual Report 2020
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, gains/(losses) on assets supporting insurance policyholder liabilities (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 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 29
2020
2019
4,267 $ 3,984
1,569
157
5,710
3,749
336
606
1,019
806
938
156
5,361
3,384
299
592
1,086
831 $
2,974 $ 3,643
2,067
2,387
$
$
$
36.1%
39.6%
$ 20,300 $ 17,600
$
4,950 $ 4,604
2,415
2,493
2,189
2,457
11,401
12,215
987
277
2,927
2,772
(1)
(2)
Includes unrealized gains and losses on investments backing policyholder liabilities attributable to 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
Insurance premiums, investment and fee income in the Consolidated Statements of Income and are largely offset by changes in the fair value of the actuarial liabilities,
the impact of which is reflected in 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
2020 vs. 2019
Net income increased $25 million or 3%, largely due to higher favourable investment-related experience, partially offset by
unfavourable annual actuarial assumption updates.
Total revenue decreased $349 million or 6%, mainly reflecting the change in fair value of investments backing policyholder
liabilities, which is largely offset in PBCAE as indicated below. This was partially offset by business growth primarily in longevity
reinsurance and group annuities, both of which are largely offset in PBCAE as indicated below.
PBCAE decreased $402 million or 10%, mainly reflecting the change in fair value of investments backing policyholder
liabilities, and higher favourable investment-related experience. These factors were partially offset by business growth, and
unfavourable annual actuarial assumption updates in the current year, largely related to mortality experience.
Non-interest expense decreased $14 million or 2%, largely reflecting reduced costs associated with efficiencies driven by
technology investments, partially offset by increased costs in support of business growth.
Business line review
Canadian Insurance
We offer life, health, travel, home, and auto insurance products (in partnership agreement 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. As a multi-line
carrier, we hold a leading market position in disability insurance products and growing presence in wealth solutions.
Financial performance
Total revenue decreased $669 million or 18% from last year, mainly due to the change in fair value of investments backing
policyholder liabilities, partially offset by higher group annuity sales, both of which are which are largely offset in PBCAE.
Premiums and deposits increased $78 million or 3%, mainly due individual life product and group annuity sales, partially
offset by a reduction in travel products.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
41
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Premiums and deposits
Life and health
Property and casualty
Annuity and segregated fund
deposits
Fair value changes on investments
backing policyholder liabilities
International Insurance
Table 30
Premiums and deposits (Millions of Canadian dollars)
2020
2019
$ 2,974
$ 3,643
$ 1,397
98
$ 1,328
131
998
351
956
1,099
3,000
2,500
2,000
1,500
1,000
500
0
2020
2019
Life and health
Property and
casualty
Annuity and segregated
fund
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 reflects significant market share in the U.S., U.K, and Europe being held by
a small number of reinsurers.
Financial performance
Total revenue increased $320 million or 15% from last year, mainly due to business growth, primarily in longevity reinsurance.
Premiums and deposits increased $268 million or 12%, reflecting growth in longevity reinsurance.
Selected highlights
Table 31
Premiums and deposits (Millions of Canadian dollars)
(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
2020
2019
$ 2,387
$ 2,067
$ 1,144
–
1,313
$ 1,254
(1)
936
(74)
(112)
3,000
2,500
2,000
1,500
1,000
500
0
2020
2019
Life and health
Annuity
Investor & Treasury Services
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.
$4.5 trillion
Assets under administration
15.9%
Return on equity
$63 billion
Average client deposits
Revenue by Geography
$2.3 billion
Total revenue
38% North America
33% Europe (Ex. U.K.)
16% 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. We
remain focused on providing best-in-class asset services to sophisticated
investors. We compete against the world’s largest global custodians in selected
countries in North America, Europe, the U.K., and Asia-Pacific.
We deliver digitally-enabled products and services which continue to be enhanced
and evolved in line with our clients’ changing needs. We have top-rated global
custody, transfer agency, fund accounting and administration services. 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.
42
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
2020 Operating environment
› Our asset services business benefitted from market volatility despite continued market headwinds and a challenging operating
environment related to the COVID-19 pandemic.
› Amidst the impacts of the COVID-19 pandemic on our business, we also focused on the safety and well-being of our employees
by providing the support necessary to be able to continue to meet client needs in a virtual setting.
› Executed on our repositioning initiatives to improve cost structures and drive efficiencies.
› Effectively managed through a volatile short-term interest rate environment and elevated enterprise liquidity position.
Strategic priorities
OUR STRATEGY
Be #1 in Canada
Compete in selected fast growing asset
servicing segments and markets
PROGRESS IN 2020
PRIORITIES IN 2021
Focused on continuing to deepen existing
relationships and build our pipeline
Executed on our repositioning initiatives by
exiting non-core, minimal profit, or loss-making
operations
Achieved higher Fund Finance sales in Europe
driven by strong brand recognition and cross-
segment collaboration
Continue to grow income and market share
among Canadian asset managers, investment
counsellors, pension funds, insurance companies
and transaction banking clients
Focus on markets and products where we have
competitive advantages
Deliver seamless client experiences and
employ technology to enable our clients’
success
Leveraged technology and data insights to meet
client needs
Continue to deliver seamless digital client
experiences
Evolved our digital offering, improving interactive
applications to increase clients’ digital self-
service capacity and reduce operational risk
Continue to invest in technology to enable our
clients’ success
Outlook
In fiscal 2021, we expect the global asset services industry will continue to remain challenging. We remain focused on improving
operational efficiency as well as continue to deliver on our existing repositioning initiatives. We will aim to scale our business in
our chosen markets and segments where we have competitive advantages, leveraging our investment in technology to deliver
seamless digital client experiences and enable our clients’ success.
We anticipate revenue headwinds due to the likelihood of a persisting low interest rate environment. In the near term we
expect to be challenged by elevated enterprise liquidity levels which we anticipate to decline gradually over time.
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 on performing assets
PCL on impaired assets
PCL
Non-interest expense
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)
$
$
$
2020
329
1,982
2,311
6
–
6
1,589
716
536
15.9%
204,300
187,900
63,000
124,900
$
$
$
Table 32
2019
(44)
2,389
2,345
–
–
–
1,725
620
475
13.2%
146,100
175,100
58,800
116,300
$ 4,483,500
4,386,300
4,564
$ 4,318,100
4,262,300
4,684
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
PCL
Non-interest expense
Net income
Percentage change in average U.S. dollar equivalent of C$1.00
Percentage change in average British pound equivalent of C$1.00
Percentage change in average Euro equivalent of C$1.00
(1)
Represents year-end spot balances.
2020 vs. 2019
$
17
–
18
(1)
(1)%
(2)%
(2)%
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
43
Financial performance
2020 vs. 2019
Net income increased $61 million or 13% from a year ago, as the prior year included severance and related costs associated with
the repositioning of the business. The repositioning of the business combined with the impact of ongoing efficiency initiatives
also resulted in lower staff-related costs in the current year. These factors were partially offset by lower client deposit revenue.
Total revenue decreased $34 million or 1%, mainly due to lower client deposit revenue as the growth in client deposit
volumes was more than offset by margin compression. Lower funding and liquidity revenue also contributed to the decrease,
largely driven by elevated enterprise liquidity, partially offset by higher gains from the disposition of securities and the
favourable impact of market volatility and interest rate movements. These factors were partially offset by the impact of foreign
exchange translation.
Non-interest expense decreased $136 million or 8% as the prior year included severance and related costs associated with
the repositioning of the business. Lower staff-related costs including the benefit from ongoing efficiency initiatives also
contributed to the decrease. These factors were partially offset by the impact of foreign exchange translation.
Capital Markets
RBC Capital Markets® is a premier global investment bank providing expertise in banking, finance and capital markets to
corporations, institutional investors, asset managers, governments and central banks around the world. Our professionals
ensure that clients receive the advice, products, and services their businesses need from 58 offices in 14 countries. Our presence
extends across North America, the U.K. & Europe, and Australia, Asia & other regions.
> 15,500
Number of clients
#12
Global league table rankings1
4,027
Employees
Revenue by Geography
We operate two main business lines, Corporate and Investment Banking and
Global Markets.
$9.9 billion
Total revenue
53% U.S.
26% Canada
15% 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.
2020 Operating environment
› The fiscal 2020 operating environment was characterized by unprecedented levels of market volatility and heightened
uncertainty as a result of the COVID-19 pandemic. In the first half of the fiscal year, our repo and interest rate trading
businesses capitalized on volatility as a result of the declining rate environment; however, this was partially offset by negative
mark-to-market from widening credit spreads and significant market dislocation experienced in equity markets. As market
conditions began to improve in the latter half of the fiscal year, we benefitted from narrowing credit spreads and normalization
of equity markets in addition to strong client activity. Notwithstanding this, trading volumes remained higher throughout the
fiscal year amidst elevated volatility.
› Global investment banking fee pools were up 14%1 as debt issuance activity reached record highs during the fiscal year
benefitting from various government, regulatory and financial institution stimulus programs, reductions in benchmark interest
rates and an increased demand for liquidity. Meanwhile, M&A and loan syndication activity was softer as a number of
transactions were put on hold amidst market uncertainty.
› In addition to supporting our clients during the evolution of the COVID-19 pandemic, we also focused on the safety and well-
being of our employees by fully enabling them with the tools and technology to work effectively in a virtual setting while also
carefully managing our return-to-premises approach.
› The credit environment was impacted by the COVID-19 pandemic which led to heightened uncertainty and sustained volatility
in the current year, resulting in elevated provisions on performing loans.
1
44
Source: Dealogic, based on global investment bank fees, Fiscal 2020
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
PROGRESS IN 2020
PRIORITIES IN 2021
Deepen client relationships as an innovative,
trusted partner
Continued to deepen long-term relationships with
clients by providing value-added insights aligned
with our global capabilities:
Be recognized by our clients as an innovative,
trusted partner with best in class capabilities and
expertise
(cid:129) Acted as joint bookrunner in AT&T’s issuance
of $12.5 billion multi-tranche senior
unsecured notes. The transaction marks a
deepening relationship with a strong focus
client
In our Investment Banking business, gain market
share across all products by focusing on our top
corporate clients and largest private capital firms
while continuing to deepen relationships and lead
with differentiated content
(cid:129) Acted as bookrunner and joint lead arranger
on $23 billion of financing to back T-Mobile’s
acquisition of Sprint
Lead with ideas, advice, and innovation
Launched Aiden®, an AI-based electronic trading
platform as part of our technology innovation
initiatives including data strategy,
electronification, and AI
Provide clients with strategic Advisory &
Origination and Client Trading products and
services while supporting them using the strength
of our lending capabilities
Acted as financial advisor to Cenovus Energy on
its Strategic Combination with Husky Energy,
valuing the combined business at ~$24 billion
Acted as exclusive financial advisor to Kraft Heinz
on its agreement to sell its natural cheese
business to Groupe Lactalis for $3.2 billion
Deliver innovative trading solutions by investing
in technology, machine learning and AI
Drive cross platform collaboration and
convergence
Continued to focus on deepening client
relationships by driving cross-business
collaboration across the enterprise
Continue to encourage cross-platform and cross-
geography collaboration and convergence across
businesses and asset-classes
Simplify our business and optimize our
financial resources
Invest in talent, culture, and brand
Acted as financial advisor to K+S on the sale of its
Americas salt business to Stone Canyon
Industries, a transaction value of $3.2 billion
demonstrating collaborative effort across our
U.S. and European teams
Provided capital to support our clients through
the COVID-19 pandemic while maintaining a
disciplined approach to managing costs and risk
Through our diversified business model, were
able to generate strong results in challenging
market conditions
Continue to strengthen our senior coverage
teams
Focus on reviewing our cost base and funding
strategy to drive efficiencies
Optimizing balance sheet and reallocating
resources to businesses that will support higher
returns on capital
Successfully maintained #1 market share position
in Canada1 and ranked Best Investment Bank in
Canada for the 13th year in a row2
Ranked as #1 Canadian Investment Bank in the
U.S., with 2.3% market share1
In U.K. / Europe we were lead on a number of
innovative and precedent setting mandates,
benefitting from recent investments in this region,
such as:
Maintain our leadership position in Canada and
our position as 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 Australia, Asia & other regions
aligned with our global expertise
Focus on strengthening our Global Diversity and
Inclusion Strategy
Continue to provide Environmental, Social and
Governance (ESG)-related and sustainability
advice to clients, including our commitment to
achieve $100 billion in sustainable financing by
2025
(cid:129) Acted as the lead bank on an $8 billion
sterling bond issue for the U.K. Government’s
Debt Management Office, the largest
government mandate in history
Helped our clients achieve their sustainability
goals using the power of insights and ideas to
deliver innovative advice and solutions
(cid:129) Acted as exclusive financial advisor to
General Motors on a unique Electric Vehicle
Fast Charging Partnership with EVgo,
creating the largest fast charging network
across the U.S.
Outlook
In fiscal 2020, we were able to capitalize on market opportunities as our trading businesses benefitted from elevated levels of
volatility and also saw strong debt issuance activity. In fiscal 2021, while we may see these conditions normalize, our focus
remains on delivering robust results across our Global Markets franchise through continued resource optimization, acceleration
of cross-selling activities, and building on our strong risk management practices. In our Investment Bank, we seek to grow our
market share with a continued focus on targeted sectors. As well, normalization of market conditions could result in tailwinds in
M&A and loan syndication activity. We saw growth in our Corporate Banking business this fiscal year as we supported clients
through the COVID-19 pandemic. Most of these loan draws have been repaid throughout the latter part of the fiscal year. Going
forward we expect to see modest growth in this business with a continued focus on managing credit risk, risk-weighted assets
(RWA) optimization, and the execution of client plans.
1
2
Source: Dealogic, based on global investment bank fees, Fiscal 2020
Source: Euromoney, 2020 Awards for Excellence
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
45
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
Capital Markets
(Millions of Canadian dollars, except percentage amounts and as otherwise noted)
Net interest income (1)
Non-interest income (1)
Total revenue (1)
PCL on performing assets
PCL on impaired assets
PCL
Non-interest expense
Income before income taxes
Net income
Revenue by business
Corporate and Investment Banking
Global Markets
Other
Key ratios
ROE
Selected balance sheet information
Average total assets
Average trading securities
Average loans and acceptances, net
Average deposits
Other information
Number of employees (FTE)
Credit information
PCL on impaired loans as a % of average net loans and acceptances
$
$
$
$
$
$
$
$
2020
5,135
4,749
9,884
750
489
1,239
5,362
3,283
2,776
4,031
6,251
(398)
11.7%
755,400
108,300
108,700
76,800
4,027
0.44%
Table 33
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%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2020 vs. 2019
Increase (decrease):
Total revenue
PCL
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
$
70
27
46
1
(1)%
(2)%
(2)%
(1)
The teb adjustment for 2020 was $513 million (2019 – $450 million). For further discussion, refer to the How we measure and report our business segments section.
Revenue by region (Millions of Canadian dollars)
10,500
9,000
7,500
6,000
4,500
3,000
1,500
0
2020
2019
Australia, Asia & other regions
U.K. & Europe
U.S.
Canada
Financial performance
2020 vs. 2019
Net income increased $110 million or 4% from a year ago, primarily driven by higher revenue in Global Markets and Corporate and
Investment Banking. These factors were partially offset by higher PCL, higher taxes due to an increase in the proportion of earnings
from higher tax rate jurisdictions, lower Other revenue mainly reflecting higher residual funding costs, as well as higher compensation
on improved results.
Total revenue increased $1,596 million or 19%, largely due to higher fixed income trading revenue across all regions driven by
increased client activity, and higher debt origination across most regions.
PCL increased $940 million, largely reflecting higher provisions on performing loans due to the impact of the COVID-19
pandemic. Higher provisions on impaired loans also contributed to the increase, resulting in an increase of 18 bps in the impaired
loans ratio, largely due to provisions taken in the oil & gas sector. For further details, refer to Credit quality performance in the
Credit risk section.
Non-interest expense increased $266 million or 5%, largely due to higher compensation on improved results.
46
Royal Bank of Canada: Annual Report 2020
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 $4,031 million increased $239 million or 6% as compared to last year.
Investment Banking revenue increased $85 million or 5%, primarily due to higher debt origination mainly in the U.S. and
higher equity origination across most regions. These factors were partially offset by lower fixed income trading revenue primarily
from loan underwriting markdowns in the U.S. and Europe.
Lending and other revenue increased $154 million or 7%, reflecting average volume growth mainly in Europe and the U.S.
Selected highlights
Table 34
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
$
$
2020
4,031 $ 3,792
2019
1,757 $ 1,672
2,120
2,274
$ 92,600 $ 86,400
76,700
83,000
(1)
(2)
The teb adjustment for the year ended October 31, 2020 was $56 million
(October 31, 2019 – $80 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
2020
2019
Investment banking
Lending and other
Global Markets comprises our fixed income, foreign exchange, equity sales and trading, repo and secured financing and
commodities businesses.
Financial performance
Total revenue of $6,251 million increased $1,588 million or 34% as compared to last year.
Revenue in our Fixed income, currencies and commodities business increased $1,093 million or 51%, largely driven by higher
fixed income trading revenue across all regions and higher debt origination across most regions.
Revenue in our Equities business increased $237 million or 20%, primarily due to higher equity trading revenue mainly in the
U.S. and higher equity origination across all regions.
Revenue in our Repo and secured financing business increased $258 million or 19%, mainly due to increased client activity.
Selected highlights
Table 35
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
$
$
2020
6,251 $ 4,663
2019
3,243 $ 2,150
1,166
1,403
1,347
1,605
$667,900 $583,700
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
(1)
(2)
The teb adjustment for the year ended October 31, 2020 was $457 million
(October 31, 2019 – $370 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.
Other
2020
2019
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 (MBS), bank-
owned life insurance (BOLI) derivative contracts and structured rates in Asia.
Financial performance
Revenue decreased $231 million as compared to last year, largely due to higher residual funding costs and losses in our legacy
U.S. portfolios.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
47
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. 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)
Net interest income (loss) (1)
Non-interest income (loss) (1)
Total revenue (1)
PCL
Non-interest expense
Income (loss) before income taxes (1)
Income taxes (recoveries) (1)
Net income (loss)
(1)
Teb adjusted.
Table 36
2020
(57)
(269)
(326)
1
57
(384)
(436)
52
$
$
$
$
2019
104
(453)
(349)
–
131
(480)
(452)
(28)
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, 2020 was $513 million and was $450 million last year.
The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each year.
2020
Net income was $52 million, largely due to asset/liability management activities, partially offset by net unfavourable tax
adjustments and residual unallocated costs.
2019
Net loss in the prior year 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.
Quarterly financial information
Fourth quarter performance
Q4 2020 vs. Q4 2019
Fourth quarter net income of $3,246 million was up $40 million or 1% from last year. Diluted EPS of $2.23 was up $0.05 and ROE of
16.0% was down 20 bps. Higher results in Capital Markets, Corporate Support and Investor & Treasury Services were largely
offset by lower earnings in Wealth Management, Personal & Commercial Banking, and Insurance.
Total revenue decreased $278 million or 2%, largely due to the impact of lower interest rates in Personal & Commercial
Banking and Wealth Management, the change in fair value of investments backing policyholder liabilities, which is largely offset
in PBCAE as indicated below, and a gain in the prior year on the sale of the private debt business of BlueBay of $151 million. These
factors were partially offset by volume growth in Canadian Banking and Wealth Management and higher equity trading revenue
primarily in the U.S. reflecting favourable market conditions and increased client activity.
Total PCL decreased $72 million or 14% and PCL on loans ratio of 23 bps decreased 9 bps from last year, primarily due to lower
provisions in Personal & Commercial Banking and Capital Markets, partially offset by higher provisions in Wealth Management.
PBCAE decreased $193 million or 30%, mainly reflecting the change in fair value of investments backing policyholder
liabilities, higher favourable investment-related experience and lower claims costs. These factors were partially offset by
unfavourable annual actuarial assumption updates in the current year largely related to mortality experience, lower favourable
longevity reinsurance contracts, business growth, and the lower impact from reinsurance contract renegotiations.
Non-interest expense decreased $261 million or 4%, as the prior year included severance and related costs associated with
the repositioning of our Investor & Treasury Services business. Lower discretionary spend, lower variable compensation and the
impact of an unfavourable accounting adjustment in the prior year in Corporate Support also contributed to the decrease. These
factors were partially offset by an increase in technology and related costs, including digital initiatives, and incremental
COVID-19 related operating costs.
Income tax expense increased $208 million or 30% and the effective income tax rate of 21.7% increased 390 bps from last
year, mainly due to a decrease in income from lower tax rate jurisdictions in the current quarter and the impact of favourable tax
adjustments in the same quarter last year.
Q4 2020 vs. Q3 2020
Net income of $3,246 million was up $45 million or 1% compared to the prior quarter, primarily due to lower PCL and lower
variable compensation on decreased revenue. Higher average fee-based client assets, largely driven by market appreciation and
net sales, also contributed to the increase. These factors were partially offset by lower fixed income trading revenue in Capital
Markets and higher technology and related costs, including digital initiatives.
48
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses,
general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table
summarizes our results for the last eight quarters (the period):
Quarterly results (1)
Table 37
(Millions of Canadian dollars, except per
share and percentage amounts)
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets (2)
Corporate Support (2)
Total revenue
PCL
PBCAE
Non-interest expense
Income before income taxes
Income taxes
Net income
EPS – basic
– diluted
Effective income tax rate
Period average US$ equivalent
of C$1.00
2020
2019
Q4
$ 4,373
3,068
958
521
2,275
(103)
$ 11,092
427
461
6,058
$ 4,146
900
Q3
$ 4,348
3,164
2,212
484
2,748
(36)
$ 12,920
675
1,785
6,380
$ 4,080
879
Q2
$ 4,400
2,822
197
709
2,313
(108)
$ 10,333
2,830
(177)
5,942
$ 1,738
257
Q1
$ 4,610
3,166
1,994
597
2,548
(79)
$ 12,836
419
1,614
6,378
$ 4,425
916
Q4
$ 4,568
3,187
1,153
566
1,987
(91)
$ 11,370
499
654
6,319
$ 3,898
692
Q3
$ 4,546
3,029
1,463
561
2,034
(89)
$ 11,544
425
1,046
5,992
$ 4,081
818
Q2
$ 4,333
2,979
1,515
587
2,169
(84)
$ 11,499
426
1,160
5,916
$ 3,997
767
Q1
$ 4,418
2,948
1,579
631
2,098
(85)
$ 11,589
514
1,225
5,912
$ 3,938
766
$ 3,246
$ 3,201
$ 1,481
$ 3,509
$ 3,206
$ 3,263
$ 3,230
$ 3,172
$
2.23
2.23
21.7%
$
2.20
2.20
$
1.00
1.00
$
2.41
2.40
$
2.19
2.18
$
2.23
2.22
$
2.20
2.20
$
2.15
2.15
21.5%
14.8%
20.7%
17.8%
20.0%
19.2%
19.5%
$ 0.756
$ 0.737
$ 0.725
$ 0.760
$ 0.755
$ 0.754
$ 0.751
$ 0.749
(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 generally 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, earnings in the second quarter of 2020 reflected the impact of
the onset of the COVID-19 pandemic across all of our business segments which resulted in a significant increase in PCL and
fluctuations in revenue from the impact of market volatility, including interest rates and credit spreads, as well as client activity.
While market conditions improved in the latter part of 2020, our earnings continued to be impacted by the COVID-19 pandemic
and its associated downstream implications. Quarterly earnings are also affected by the impact of foreign exchange translation.
Personal & Commercial Banking revenue has benefitted from solid volume growth over the period. Spreads in the early part
of the period reflected higher interest rates, whereas the latter part of the period primarily reflected spread compression in a
lower interest rate environment. The ongoing impact of competitive pricing pressures has negatively impacted spreads
throughout the majority of the period. NIM in Canadian Banking has generally declined over the latter part of the period, largely
reflecting the impact of lower interest rates, including cumulative BoC rate cuts of 150 bps in the second quarter of 2020. In
addition, the latter part of the period saw lower card service revenue mainly driven by a decrease in purchase volumes.
Wealth Management revenue has generally trended upwards reflecting growth in average fee-based client assets primarily
driven by net sales and market appreciation. Net interest income benefitted from volume growth and the impact of higher
interest rates in the early part of the period and declined in the latter part of the period as continued volume growth was more
than offset by lower spreads, mainly reflecting the impact of the U.S. Fed rate cuts. A gain on the sale of the private debt business
of BlueBay contributed to the increase in revenue in the fourth quarter of 2019. Changes in the fair value of hedges related to our
U.S. share-based compensation plans, which are largely offset in Non-interest expense, have contributed to fluctuations in
revenue over the period. The market volatility in the second quarter of 2020 and subsequent improvement in market conditions in
the third quarter of 2020 resulted in heightened fluctuations in these hedges, as well as in average fee-based client assets and
the fair value of interest rate derivatives and seed capital investments.
Insurance revenue has fluctuated over the period, primarily due to the impact of changes in the fair value of investments
backing policyholder liabilities which is largely offset in PBCAE. Revenue has benefitted from business growth in Canadian and
International Insurance over the majority of the period. The first quarter of 2019 and 2020 also reflect higher group annuity sales.
Investor & Treasury Services revenue has been impacted by fluctuations in market conditions and client activity across the
period. Revenue from our funding and liquidity business has fluctuated over the period, with the latter part of the period impacted by
elevated enterprise liquidity. During the first half of 2019 our asset services business was impacted by challenging market conditions,
whereas the latter half of the period was generally impacted by lower client activity and lower client deposit margins. The fluctuation
in the second and third quarter of 2020 reflects the impact of interest rate movements and market volatility in the second quarter of
2020, with the second quarter benefitting from declining interest rates and market volatility, including gains on the disposition of
securities. Revenue in the third quarter of 2020 experienced a partial offset of the impact of short-term interest rate movements in the
second quarter of 2020.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
49
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 first quarter results generally stronger than those in the remaining
quarters. 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 across much of the latter part of 2019. The first quarter of 2020 saw more favourable market conditions and increased
client activity resulting in higher fixed income trading revenue and M&A activity. Elevated market volatility in the second quarter
of 2020 resulted in increased client activity being more than offset by lower fixed income trading revenue, which included the
impact of loan underwriting markdowns. The third quarter of 2020 saw higher fixed income trading revenue primarily driven by
reversals of loan underwriting markdowns and higher equity trading revenue, reflecting an improvement in market conditions as
well as increased client activity. The fourth quarter of 2020 also benefitted from favourable market conditions and increased
client activity relative to 2019 levels.
PCL on performing assets has fluctuated over the period as it is impacted by macroeconomic conditions, changes in
portfolio balances and credit quality, and model changes. The impact of the COVID-19 pandemic also resulted in a significant
increase in provisions in 2020, largely in the second quarter. PCL on impaired assets reflected normalized levels of credit losses
towards the end of 2019, though the first quarter of 2020 saw lower provisions on impaired loans in Personal & Commercial
Banking and Wealth Management. The remainder of the year saw higher provisions on impaired loans in Capital Markets largely
in the oil & gas sector. The impact of government support and payment deferral programs contributed to lower provisions on
impaired loans in our Canadian Banking retail portfolios in the second half of 2020.
PBCAE has fluctuated quarterly as it includes the impact of changes in the fair value of investments backing 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, and reflects higher travel claims
costs in the second and third quarters of 2020 associated with the COVID-19 pandemic. PBCAE has been positively impacted by
favourable reinsurance contract renegotiations over the period. Actuarial adjustments, which generally occur in the fourth
quarter of each year, also impact PBCAE.
While we continue to focus on efficiency management activities, Non-interest expense trended upwards over majority of 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 the repositioning of our Investor & Treasury Services business. The
second quarter of 2020 reflected lower variable compensation on decreased results and the impact of elevated market volatility
which resulted in unfavourable changes in the fair value of our U.S. share-based compensation plans that subsequently reversed in
the third quarter of 2020 as market conditions improved. The change in the fair value of our U.S. share-based compensation plans is
largely offset in revenue. Beginning in the second quarter of 2020, Non-interest expense was also impacted by additional
compensation for certain employees, primarily those client-facing amidst the COVID-19 pandemic, as well as other incremental
COVID-19 related costs, which were more than offset by lower discretionary spend over that period.
Our effective income tax rate has fluctuated over the period, mostly due to varying levels of tax adjustments and changes in
earnings mix. The first quarter of 2019 included a write-down of deferred tax assets resulting from a change in the corporate tax
rate in Barbados. The second quarter of 2020 saw a decrease mainly due to a higher proportion of tax exempt income and income
from lower tax rate jurisdictions relative to lower earnings in that quarter.
Financial condition
Condensed balance sheets
As at October 31 (Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities, net of applicable allowance (1)
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
Retail
Wholesale
Allowance for loan losses
Other – Derivatives
– Other (2)
Total assets
Liabilities
Deposits
Other – Derivatives
– Other (2)
Subordinated debentures
Total liabilities
Equity attributable to shareholders
Non-controlling interests
Total equity
Total liabilities and equity
(1)
(2)
50
Securities are comprised of trading and investment securities.
Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
$
Table 38
2020
2019
$
118,888
39,013
275,814
313,015
457,976
208,655
(5,639)
113,488
103,338
26,310
38,345
249,004
306,961
426,086
195,870
(3,100)
101,560
87,899
$ 1,624,548
$ 1,428,935
$
$ 1,011,885
109,927
406,102
9,867
886,005
98,543
350,947
9,815
1,537,781
1,345,310
86,664
103
86,767
83,523
102
83,625
$ 1,624,548
$ 1,428,935
2020 vs. 2019
Total assets increased $196 billion or 14% from last year. Foreign exchange translation increased total assets by $15 billion.
Cash and due from banks was up $93 billion, mainly due to higher deposits with central banks, reflecting our short term cash
and liquidity management activities.
Securities, net of applicable allowance, were up $27 billion or 11%, primarily due to higher government debt securities largely
driven by our liquidity management activities.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $6 billion or 2%,
driven by client activity and lower financial netting, partially offset by lower liquidity management activities.
Loans (net of Allowance for loan losses) were up $42 billion or 7%, largely due to volume growth in residential mortgages.
Higher wholesale loans, in part to support our clients during this unprecedented time, also contributed to the increase.
Derivative assets were up $12 billion or 12%, mainly attributable to higher fair values on interest rate contracts and equity
contracts. The impact of foreign exchange translation also contributed to the increase. These factors were partially offset by
lower fair values on foreign exchange contracts.
Other assets were up $15 billion or 18%, largely reflecting an increase in premises and equipment as a result of adopting IFRS
16. Higher margin requirements and an increase in both cash collateral and our precious metals inventory also contributed to the
increase.
Total liabilities increased $192 billion or 14% from last year. Foreign exchange translation increased total liabilities by
$15 billion.
Deposits increased $126 billion or 14%, mainly as a result of higher business and retail deposits driven by both lower client
spending and our clients’ preference for the safety of higher cash balances amidst the COVID-19 pandemic. Higher bank deposits
and the impact of foreign exchange translation also contributed to the increase.
Derivative liabilities were up $11 billion or 12%, mainly attributable to higher fair values on interest rate contracts and equity
contracts, partially offset by lower fair values on foreign exchange contracts.
Other liabilities increased $55 billion or 16%, mainly attributable to higher obligations related to repurchase agreements
reflecting increased funding activities and lower financial netting.
Total equity increased $3 billion or 4% reflecting earnings, net of dividends and share repurchases, and the issuance of
limited recourse capital notes partially offset by both redemptions of preferred shares and the impact of lower interest rates on
cash flow hedges.
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 2020 and 2019, we did not derecognize any mortgages securitized through the NHA MBS program.
For further details, refer to Note 6 and Note 7 of our 2020 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, 2020, we securitized $469 million
of commercial mortgages (October 31, 2019 – $696 million). Our continuing involvement with the transferred assets is limited to
servicing certain of the underlying commercial mortgages sold. As at October 31, 2020, there was $2.0 billion of commercial
mortgages outstanding that we continue to service related to these securitization activities (October 31, 2019 – $1.9 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
51
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 2020 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 $277 million during the year (October 31,
2019 – $254 million).
Our total commitment to the conduits in the form of backstop liquidity and credit enhancement facilities is shown below. The
total committed amount of these facilities exceeds the total amount of the maximum assets that may have to be purchased by
the conduits under the purchase agreements. As a result, the maximum exposure to loss attributable to our backstop liquidity
and credit enhancement facilities is less than the total committed amounts of these facilities.
Liquidity and credit enhancement facilities
As at October 31 (Millions of Canadian dollars)
Backstop liquidity facilities
Credit enhancement facilities (3)
Total
Notional of
committed
amounts (1)
2020
Allocable
notional
amounts
Maximum
exposure
to loss (2)
Notional of
committed
amounts (1)
Table 39
2019
Allocable
notional
amounts
Maximum
exposure
to loss (2)
$ 42,803
2,666
$ 40,137
2,666
$ 40,137
2,666
$ 37,935
1,706
$ 36,229 $ 36,229
1,706
1,706
$ 45,469
$ 42,803
$ 42,803
$ 39,641
$ 37,935 $ 37,935
(1)
(2)
(3)
Based on total committed financing limit.
Not presented in the table above are derivative assets with a fair value of $60 million (October 31, 2019 – $97 million) which are a component of our total maximum
exposure to loss from our interests in the multi-seller conduits. Refer to Note 7 of our 2020 Annual Consolidated Financial Statements for more details.
Includes $2 million (October 31, 2019 - $14 million) of Financial standby letters of credit.
As at October 31, 2020, the notional amount of backstop liquidity facilities we provide increased by $4.9 billion or 13% from last
year. The increase as compared to last year was primarily due to an increase in outstanding securitized assets in the multi-seller
conduits. The notional amount of partial credit enhancement facilities we provide increased by $960 million from last year. The
increase as compared to last year was primarily due to a change in the methodology used to size the available amount under the
credit enhancement facility.
Maximum exposure to loss by client type
Table 40
As at October 31 (Millions of dollars)
Outstanding securitized assets
Auto and truck loans and leases
Consumer loans
Credit cards
Dealer floor plan receivables
Equipment receivables
Fleet finance receivables
Insurance premiums
Residential mortgages
Student loans
Trade receivables
Transportation finance
Total
Canadian equivalent
2020
2019
US$
C$
Total C$
US$
C$
Total C$
$ 10,163
2,869
4,070
889
2,349
715
216
–
1,956
2,445
1,394
$ 27,066
$ 36,058
$
$
$
3,738
–
510
858
–
245
428
864
–
–
102
$ 17,277
3,823
5,932
2,042
3,129
1,197
716
864
2,606
3,258
1,959
$ 9,003
2,150
4,258
910
1,479
602
213
–
1,777
2,338
1,498
$ 2,882
–
510
878
–
306
286
1,014
–
–
153
$ 14,738
2,831
6,117
2,077
1,948
1,099
566
1,014
2,340
3,079
2,126
6,745
$ 42,803
$ 24,228
$ 6,029
$ 37,935
6,745
$ 42,803
$ 31,906
$ 6,029
$ 37,935
Our overall exposure increased by 13% compared to last year, reflecting an increase in the outstanding securitized assets of the
multi-seller conduits. Correspondingly, total assets of the multi-seller conduits increased by $4.8 billion or 13% from last year,
primarily due to increases in the Auto and truck loans and leases, Equipment receivables and Consumer loans asset classes. The
majority of the multi-seller conduits assets were internally rated A or above, consistent with the prior year. All transactions
funded by the unconsolidated multi-seller conduits are internally rated using a rating system as outlined in the internal ratings
map in the credit risk section.
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 Dominion Bond Rating Service (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, 2020, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $23.4 billion, a
decrease of $346 million or 1% 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, 2019 – 100%) of
the total amount issued within the top ratings category.
52
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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, 2020 was
$46 million (October 31, 2019 – $60 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, 2020,
our maximum exposure to loss from these unconsolidated municipal bond TOB trusts was $2.9 billion (October 31, 2019 –
$3.1 billion). The decrease in our maximum exposure to loss relative to last year was primarily due to third-party trust unwinds
throughout the year.
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, 2020, our maximum exposure to loss
associated with the outstanding senior warehouse financing facilities was $88 million (October 31, 2019 – $253 million). The
decrease in our maximum exposure to loss relative to last year was related to the repayment 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
multiple of historical losses. As at October 31, 2020, our maximum exposure to loss associated with the outstanding senior
financing facilities was $3.1 billion (October 31, 2019 – $2.8 billion). The increase in our maximum exposure to loss relative to last
year was driven by increased client utilization and 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, 2020, our maximum exposure
to loss was $2.3 billion (October 31, 2019 – $1.8 billion). The increase in our maximum exposure to loss relative to last year was due
to increased 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, 2020, our maximum exposure to these funds was
$278 million (October 31, 2019 – $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, 2020, our maximum exposure to loss
in these entities was $10.4 billion (October 31, 2019 – $10.7 billion). The decrease in our maximum exposure to loss compared to
last year reflects a decrease in the securitized assets in these entities, partially offset by the impact of foreign exchange
translation. Interest and non-interest income earned in respect of these investments was $112 million (October 31, 2019 –
$195 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, 2020 amounted to
$386.7 billion compared to $380.3 billion last year. The increase compared to last year was primarily driven by growth in other
commitments to extend credit, backstop liquidity facilities and sponsored member guarantees partially offset by a reduction in
securities lending indemnifications. Refer to Liquidity and funding risk and Note 24 of our 2020 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, and reflects 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 and emerging risks, as they evolve, are
identified, managed, and incorporated into our existing risk management assessment, measurement, monitoring and escalation
processes. These practices are intended to 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
53
We have developed supplementary internal guidance to support enterprise-wide identification and assessment of all
material risks, including those that are not readily apparent. Top and emerging risks encompass those that could materially
impact our financial results, reputation, business model, or strategy in the short to medium term, as well as those that could
potentially impact us as the risks evolve. In addition to the Impact of pandemic risk factor outlined in the Significant
developments: COVID-19 section, the following represents our top and emerging risks:
Top & emerging risks
Description
Business and economic
conditions
Information technology and
cyber risks
Canadian housing and
household indebtedness
Geopolitical uncertainty
Our financial results may be affected to varying degrees by the general business and economic
conditions in the geographic regions in which we operate. These conditions may include factors such as
consumer saving and spending habits as well as consumer borrowing and repayment patterns,
unemployment rates, the impact of containment measures associated with the COVID-19 pandemic or
other health crises on businesses’ operations, the level of business investment and overall business
sentiment, the level of government spending as well as fiscal and monetary stimulus, the level of activity
and volatility of the financial markets, and inflation. For example, economic downturns may result in
higher unemployment rates and lower household incomes, lower corporate earnings, changes in
business investment and consumer spending, and could adversely affect our business, including but not
limited to the demand for our loan and other products and result in lower earnings, including higher
credit losses.
Our financial results are also sensitive to changes in interest rates, as described in the Systemic risk
section, and to weaker investor confidence and market conditions, which may lead to lower client
activity and unfavourable changes in earnings.
Additional risks are emerging around how countries will seek to recoup the unprecedented levels of
stimulus measures introduced in response to the COVID-19 pandemic and balance budgets in the future,
and around the potential implications that a prolonged low interest rate environment will have, for
example, on increasing wealth inequality and extended retirement ages, among others.
For details on how we are managing our risks associated with the COVID-19 pandemic, refer to the Impact
of pandemic risk factor in the Significant developments: COVID-19 section of this 2020 Annual Report.
Information technology (IT) and cyber risks remain top risks, not only for the financial services sector,
but for other industries worldwide. We continue to be subject to heightened risks in the form of cyber-
attacks, data breaches, cyber extortion and similar compromises, due to: (i) the size, scale, and global
nature of our operations; (ii) our heavy reliance on the internet to conduct day-to-day business
activities; (iii) our intricate technological infrastructure; and (iv) 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. IT and cyber risks have
increased during the COVID-19 pandemic, as increased malicious activities are creating more threats for
cyberattacks including COVID-19 phishing emails, malware-embedded mobile apps that purport to track
infection rates, and targeting of vulnerabilities in remote access platforms as many companies continue
to operate with work from home arrangements. Resulting implications could include business
interruptions, service disruptions, financial loss, theft of intellectual property and confidential
information, litigation, enhanced regulatory attention and penalties, as well as reputational damage.
Furthermore, the adoption of emerging technologies, such as cloud computing, AI and robotics, call for
continued focus and investment to manage risks effectively. For more details on how we are managing
these risks, refer to the Operational risk section.
Canadian housing and household indebtedness risks are heightened as a result of a rise in
unemployment and decline in labour participation. Interest rate cuts, government support programs and
relief programs offered by financial institutions have helped households and may have contributed
towards an increase in savings and a decrease in household indebtedness. However, concerns related to
housing affordability in certain markets and levels of Canadian household debt that were already
elevated before the additional challenges brought on by the COVID-19 pandemic could continue to rise if
the COVID-19 pandemic worsens, if the period to economic recovery is prolonged or as relief programs
expire, resulting in, among other things, higher credit losses.
Additional risks are emerging with uncertainty surrounding the real estate rental market, changing
consumer preferences and work arrangements, and the continued impact from industries significantly
affected by the COVID-19 pandemic, all of which may have an impact on future real estate investment
and demand. For example, uncertainties within the smaller size condo market have arisen during the
COVID-19 pandemic, driven by a combination of a decline in short-term rentals and a shift in long-term
rental preferences away from key metropolitan areas to adapt to ongoing work from home
arrangements. Both factors have contributed to an increase in vacancy rates and a reduction in rental
income in certain metropolitan markets which could impact sale prices into the future and result in
higher household indebtedness, which could have negative credit implications for this lending portfolio.
Persistent trade tensions, policy changes, and uncertainties pertaining to Brexit and the political
direction of the U.S., U.K. and Europe, continue 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 remain elevated between China and the U.S. over a
number of issues including trade, technology and human rights. More broadly, the post-pandemic future
of global trade remains uncertain, as countries may look to decrease reliance on the global supply chain,
and the impact of Brexit in Europe remains uncertain as the U.K. and Europe have yet to finalize a Brexit
deal in advance of the December 31, 2020 transition date. The changing political landscape in Hong Kong
and tensions between China and its neighbors add further to global and economic uncertainty. We have
and will continue to monitor all of these developments and will assess the implications they have on us.
54
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Top & emerging risks
Description
Privacy, data and third-party
related risks
Regulatory changes
In addition to the management and governance of data, its collection, use, and sharing also remain a top
risk given the high value attributed to our data. Resulting implications from failing to manage this risk
could include financial loss, theft of intellectual property and confidential information, litigation,
enhanced regulatory attention and penalties, as well as reputational damage. Effective privacy and
information management practices continue to grow in importance, as demonstrated by the continued
development of complex regulations in the jurisdictions in which we operate. Our potential exposure to
these risks also increases as we continue to partner with third-party service providers and adopt new
technologies (e.g., cloud computing, AI and machine learning, etc.) and business models. Privacy, data
and third-party related risks have been heightened as the use of work from home arrangements have
become common practice. As the majority of our employees continue to work from home, we are
continuously monitoring and enforcing best practices as we seek to maintain the privacy and
confidentiality of all sensitive information. Our security awareness program is required to be completed
by each employee annually and includes cyber awareness training on managing risks while working
remotely. Third-party providers critical to our operations are being monitored for any impact on their
ability to deliver services, including vendors of our third-party providers. For details on how we are
managing these risks, refer to the Operational risk section.
The ongoing introduction of new or revised regulations will continue to lead to increasing focus across
the organization on meeting additional regulatory requirements across the multiple jurisdictions in
which we operate. Financial and other reforms that have come into effect or are coming into effect,
across multiple jurisdictions, such as Canadian anti-money laundering regulations, the Interest rate
benchmark reform, as well as data, privacy, consumer protection regulations Canadian benchmark rate
for qualifying insured mortgages and Client focused reforms, continue to provide challenges and impact
our operations and strategies. For more details, refer to the Legal and regulatory environment risk
section.
Environmental and
social risk
(including climate change)
Recent events have put organizations, including us, under increasing scrutiny to address social and
racial inequality and human rights issues, and failure to do so may result in strategic, reputational and
regulatory risks.
Digital disruption
and innovation
Additional risks are emerging associated with climate change as it relates to extreme weather events
and the global transition to a low carbon economy, which could result in a broad range of impacts
including potential strategic, reputational, regulatory, compliance, operational and credit related risks
for us and our clients. As concerns continue and global efforts to transition to a low carbon economy
intensify, our regulatory compliance and reputational risks are increasing. For details on how we are
managing these risks, refer to the Overview of other risks section.
The COVID-19 pandemic has changed the way consumers interact with financial services providers.
Demand for digital banking services has increased, and while this represents an opportunity for us to
leverage our technological advantage, the need to meet the rapidly evolving needs of clients and
compete with non-traditional competitors has increased our strategic and reputational risks. Additional
risks also continue to emerge as 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. Moreover, established technology companies, newer competitors, and regulatory changes
continue to foster new business models that could challenge traditional banks and financial products.
Finally, while the adoption of new technologies, such as AI and machine learning, presents opportunities
for us, it could result in new and complex strategic, reputational, operational, regulatory and compliance
risks that would need to be managed effectively.
Culture and conduct risks Our purpose, values and risk principles are key dimensions of our culture. We demonstrate our culture
through our conduct – the behaviours, judgments, decisions, and actions of the organization and our
employees. Culture and conduct risks are considered top risks for the financial services industry due to
the impact our choices, behaviours, and overall risk governance can have on outcomes for our
stakeholders. We embed client considerations into our decision-making processes and aim to ensure
focus on the fair treatment of clients, and continue to implement regulatory changes that align with this
objective. We are responsive to evolving employee needs while expecting employees to always act with
integrity.
Canadian, U.S. and global regulators have been increasingly focused on conduct matters and risks, and
heightened expectations generally from regulators could lead to investigations, remediation
requirements, and higher compliance costs. While we take numerous steps to continue to strengthen its
conduct practices, and prevent and detect outcomes which could potentially harm clients, customers,
employees or the integrity of the markets, such outcomes may not always be prevented or detected. For
more details, refer to the Culture and conduct risk section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
55
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 seek to 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 seek to 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 are intended to 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 the potential for an adverse effect on our resiliency. Risk
can be realized through losses, or an undesirable outcome with respect to volatility of 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, that 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.
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Adverse changes in the macroeconomic environment can lead to a material impact on 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, unfavourable global trade agreements or the outbreak of a pandemic or other health crises.
Resultant impacts can materialize as loss of revenue, as well as the 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 in place a number of controls to mitigate the impacts of systemic risk, including 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 result in reputational risk
consequences, impact our revenue mix, and/or affect our exposure to earnings volatility and loss absorption
capacity.
There is a fair degree of control and influence that 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.
The complexity and scope of our operations across the globe exposes us to operational and regulatory
compliance risks.
We have a certain level of control over these risks through our people and systems, as well as how we
respond to external events.
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.
Macroeconomic
Strategic
Operational /
Regulatory
Compliance
Transactional /
Positional
56
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Enterprise risk management
Under the oversight of the Board and senior management, the 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 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 which is intended to ensure that risks are appropriately and adequately managed throughout
the enterprise to achieve our strategic objectives.
BOARD OF DIRECTORS
RISK COMMITTEE
AUDIT COMMITTEE
GOVERNANCE COMMITTEE
HUMAN RESOURCES COMMITTEE
The Board establishes the tone from above and sets the standards of conduct and champions our values as set out in our Code of Conduct. The Board also
approves our risk appetite, provides oversight and carries out its risk management mandate primarily through its committees:
The Risk Committee oversees our risk management program which is designed to ensure 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 Committee and
director effectiveness, and oversees management of culture and conduct, including breaches of our 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 for key senior leadership roles.
THE GROUP EXECUTIVE AND GROUP RISK COMMITTEE
Actively shapes enterprise risk appetite and recommends it for Board approval.
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.
Seeks to ensure 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 culture and conduct strategy and key activities.
The Compensation Risk Management Oversight Committee (CRMOC) oversees the design of major compensation programs in an effort 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 our enterprise risk profile relative to risk appetite. The CRMOC has the
responsibility for ensuring that our compensation programs align with the Financial Stability Board (FSB) Principles for Sound Compensation
Practices and Implementation Standards 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
All employees across our businesses’
functional areas
Accountable for:
Identification;
Assessment;
Measurement;
Mitigation;
Monitoring; and
Reporting of risk against approved
policies and appetite
RISK
MANAGEMENT
GLOBAL
COMPLIANCE AND
ANTI- MONEY
LAUNDERING
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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
57
Risk appetite
Effective risk management protects us from unacceptable
losses or undesirable outcomes with respect to earnings
volatility, capital adequacy or liquidity, reputation 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. It reflects our
self-imposed upper bound to risk-taking, set at levels inside of
regulatory limits and constraints, and influences our risk
management philosophy, Code of Conduct, business practices
and resource allocation. It provides clear boundaries and sets
an overall tone for balancing risk-reward trade-offs to ensure
the long term viability of the organization.
Our risk appetite is integrated into our strategic, financial,
and capital planning processes, as well as ongoing business
decision-making processes and is reviewed and approved
annually by the Board.
Our Enterprise Risk Appetite Framework (ERAF) outlines the
foundational aspects of our approach to risk appetite,
articulates our quantitative and qualitative risk appetite
statements and their supporting measures and associated
constraints, which can be applied at the enterprise, business
segment, business unit and legal entity level, and describes our
requirements and expectations to embed effective risk appetite
practices throughout the organization.
i
t
e
p
p
Ris k A
t e F r amework Co
Risk Capacity
Risk Appetite
m
p
o
n
e
n
t
s
Delegated Authorities/
Risk Limits
Risk Profile
Risk Posture
The allocation of our risk appetite across the bank is supported by the establishment of delegated authorities or risk
limits. These delegated authorities or risk limits represent the maximum level of risk permitted for a line of business,
portfolio, individual or group and are used to govern ongoing operations. Risk posture, the anticipated shift in risk profile as
a result of changes in objectives, strategies, and external factors, is used to provide insights on key areas that may require
management attention to ensure strategies are able to be executed successfully within our risk appetite.
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. Make thoughtful
and future-focused risk decisions, taking
environmental and social considerations into
account.
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.
Risk measurement
Quantifying risk is a key component of our enterprise-wide risk and capital management processes. Risk measurement and
planning processes are integrated across the enterprise in regards to forward-looking projections and analyses, including among
others, stress testing, recovery and resolution planning as well as credit provisioning. The degree of integration across our
Finance and Risk functions continues to increase in measuring both financial and risk performance.
Certain risks, such as credit, market, liquidity and insurance risks, can be more easily quantified than others, such as
operational, reputation, strategic, legal, and regulatory and compliance risks. For the risks that are more difficult to quantify,
greater emphasis is placed on qualitative risk factors and assessment of activities to gauge the overall level of risk. In addition,
judgmental risk measures and techniques such as stress testing, and scenario and sensitivity analyses can be used to assess and
measure risks, and we are continuously evolving our risk measures and techniques to manage our risks. Our primary methods for
measuring risk include:
(cid:129)
Quantifying expected loss: representing those losses that are statistically expected to occur as a result of conducting
business in a given time period;
Quantifying unexpected loss: an estimate of the deviation of actual earnings from expected earnings, 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 in an effort to ensure the
parameters remain appropriate for regulatory and economic capital calculations.
(cid:129)
(cid:129)
(cid:129)
58
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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 capital and liquidity levels.
Our enterprise-wide stress tests evaluate key balance sheet, income statement, leverage, capital, and liquidity impacts arising
from risk exposures and changes in earnings. The results are used by the Board, 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 limits. The results are also incorporated into our Internal Capital
Adequacy Assessment Process (ICAAP) and capital plan analyses.
We 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. Generally, our stress testing scenarios evaluate global recessions, equity market
corrections, elevated debt levels, trade policies, changes in interest rates, real estate price corrections, and shocks to credit
spreads and commodity markets, among other factors. During fiscal 2020, our stress testing exercises were tailored specifically
to the COVID-19 pandemic, which we assessed through multiple scenarios and sensitivities to estimate the potential impact
through credit, market, liquidity risk and capital planning as well as operational risk projections. The unprecedented economic
impact resulting from the COVID-19 pandemic generated historic stress levels for most parameters on a real-time basis. As a
result, more frequent stress testing was undertaken to focus on the material drivers of stress. Scenarios were adjusted to reflect
a heightened stress and significant deterioration in the macroeconomic and market parameters as a starting point. In tandem,
alternative paths were defined with sustained shocks and potential recovery routes.
Ongoing stress testing and scenario analyses within specific risk types, such as market risk, liquidity risk, Interest Rate Risk
in the Banking Book (IRRBB), 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 a model 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 continue to evolve 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 seeks to ensure 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
59
Enterprise Risk Policy Architecture
Enterprise Risk Management
Framework
Enterprise Culture and
Conduct Risks
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 Risk
Management
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; Policy on Risk Limits and Risk Approval Authorities; 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.
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
Delegated authorities and risk 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 delegated authorities require the approval of the Risk Committee of the Board.
Risk review and approval processes
Risk review and approval processes provide a control mechanism and 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.
Risk monitoring and reporting
Enterprise and business segment level risk monitoring and reporting are critical components of our enterprise risk management
program and support the ability of senior management and the Board to effectively perform their risk management and oversight
responsibilities. In addition, we publish a number of external reports on risk matters to comply with regulatory requirements. On
a quarterly basis, we provide our Enterprise Risk Report to senior management and the Risk Committee of the Board 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 which provides 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.
Culture and conduct risk
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 culture and conduct practices align with our values and support our risk
appetite statements.
60
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Risk culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks.
Our risk culture helps us identify and understand risks, openly discuss risks, and act on the organization’s current and perceived
future risks. Our risk culture practices are grounded in our existing risk management and human resource disciplines and
protocols. When combined with the elements of effective leadership and values, these practices provide a base from which the
resulting risk culture and conduct can be assessed, monitored, sustained and subjected to ongoing enhancement.
Our Board-approved Enterprise Culture and Conduct Risks Framework provides organizational direction and describes our
approach to a set of related topics applicable to all risk categories such as fair outcomes for clients and other stakeholders,
culture, including accountability and risk culture, conduct risk, sales conduct and client practices, and misconduct.
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 outlines an 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 of employment relationships with the
organization.
Sets expected
Organizational Direction
articulated through:
Values
Leadership Model
Code of Conduct
Risk Appetite
Risk Principles
Shapes
Outcomes for
Stakeholders
Clients
Employees
Financial Markets
Regulators
Our Reputation
Shareholders
Culture Factors
Influential to Managing
Conduct Risk
Tone from Above
Accountability
Speaking Up
Incentives
Risk Awareness
Apply lessons learned
Drives actual
Influences
Individual &
Collective Conduct
exhibited through:
Behaviours
Judgment
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 2020 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, associated 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 through risk appetites and risk limits 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;
Detecting and preventing inappropriate credit risk through effective systems and controls;
Applying consistent credit risk exposure measurements;
(cid:129)
(cid:129)
(cid:129)
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
61
(cid:129)
(cid:129)
(cid:129)
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. It is also used for internal capital
adequacy and allocation of capital to the Insurance segment. 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 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 reviewed, 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
62
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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 41
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% – 0.0150%
1+
0.0000% – 0.0300% 0.0151% – 0.0250% 1H
0.0000% – 0.0350% 0.0251% – 0.0350% 1M
0.0351% – 0.0475%
0.0476% – 0.0650%
0.0651% – 0.0875%
0.0876% – 0.1150%
0.1151% – 0.1475%
0.1476% – 0.1925%
0.1926% – 0.3170%
0.3171% – 0.5645%
0.5646% – 0.9360%
0.9361% – 1.5380%
1.5381% – 2.3030%
2.3031% – 3.3460%
3.3461% – 6.7890%
6.7891% – 10.2880%
10.2881% – 13.0635%
13.0636% – 22.1820%
22.1821% – 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
D
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 2020 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 2020 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
63
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 Master Agreement and
Credit Support Annex;
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. Since the onset of COVID-19, we adapted our retail credit risk methodology by enhancing our product level credit
strategies with advanced analytics and portfolio monitoring.
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 approximates the mapping of PD bands to various summarized risk levels for retail
exposures:
Internal ratings map*
Table 42
PD bands
0.030% – 1.828%
1.829% – 5.670%
5.671% – 99.99%
100%
Description
Low risk
Medium risk
High risk
Impaired/Default
*
This table represents an integral part of our 2020 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.
64
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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 governed by our RBC Enterprise Policy on Risk Limits and Risk Approval Authorities that captures the
limits delegated to management and the credit rules policy, which outlines the minimum standards for managing credit risk
at the individual client relationship and/or transaction level. The credit rules policy is further supported by business and/or
product-specific policies and guidelines as appropriate. Transaction approvals are subject to delegated approval authorities
and if they exceed senior management’s authorities the approval of the Risk Committee of the Board is required.
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 authorities are delegated 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, regional, country and
industrial sector limits (notional and economic capital), regulatory large exposure limits, product and portfolio limits,
and underwriting and distribution risk limits. These limits apply across all businesses, portfolios, transactions and
products.
(cid:129) We actively 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 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, payment deferral, principal forgiveness and term extensions. Concessions to wholesale borrowers
may include payment deferral, restructuring the agreements, modifying the original terms of the agreement and/or relaxation of
covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the individual borrower’s
situation, our policy and the customer’s willingness and capacity to meet the new arrangement.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
65
Credit risk exposure by portfolio, sector and geography
The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects EAD. The
classification of our sectors aligns with our view of credit risk by industry.
Credit risk exposure by portfolio, sector and geography
Table 43
October 31
2020
October 31
2019
As at
Credit risk (1)
Counterparty credit risk (2)
Credit risk (1)
Counterparty credit risk (2)
Off-balance sheet
amount (3)
Repo-style
Undrawn
Other (4)
transactions Derivatives
Total
exposure
On-balance
sheet amount
Off-balance sheet
amount (3)
Repo-style
Undrawn Other (4)
transactions Derivatives
Total
exposure
(Millions of Canadian dollars)
On-balance
sheet amount
Retail
Residential secured (5)
Qualifying revolving (6)
Other retail
$ 338,653 $ 88,728 $
24,328
68,325
67,779
14,183
– $
–
67
Total retail
Wholesale
$ 431,306 $ 170,690 $
67 $
– $
–
–
– $
– $
–
–
427,381 $
92,107
82,575
316,047 $ 64,825 $
26,834
61,095
73,530
13,927
– $
602,063 $
403,976 $ 152,282 $
$
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
9,560 $
8,410
39,228
14,436
6,069
7,800
32,853
3,755
1,155
245,204
6,962
4,632
17,636
1,692
1,345
72,006
24,965
4,987
7,492
8,739
1,699
1,854 $
7,564
1,501
9,303
6,945
10,779
22,257
1,098
851
4,727
9,397
5,073
2,963
3,930
2,007
13,729
12,285
7,451
5,612
18,705
647
34 $
289
562
510
538
1,600
3,256
522
125
1,624
723
257
437
979
340
1,573
1,336
83
1,533
3,849
1
– $
–
42,745
–
–
–
109,772
90
–
43,806
–
13
13
–
–
–
5
–
–
–
17
108 $
791
19,891
649
1,252
2,492
21,162
1,055
41
6,963
801
3,898
230
338
239
1,180
1,857
1,752
1,714
3,852
9,291
11,556 $
17,054
103,927
24,898
14,804
22,671
189,300
6,520
2,172
302,324
17,883
13,873
21,279
6,939
3,931
88,488
40,448
14,273
16,351
35,145
11,655
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
– $
–
72
72 $
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
– $
–
–
– $
– $
–
–
380,872
100,364
75,094
– $
556,330
– $
–
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
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
Total wholesale
$ 520,625 $ 148,678 $ 20,171 $ 196,461 $ 79,556 $
965,491 $
371,218 $ 151,756 $ 19,934 $ 173,210 $ 80,546 $
796,664
Total exposure (7)
$ 951,931 $ 319,368 $ 20,238 $ 196,461 $ 79,556 $ 1,567,554 $
775,194 $ 304,038 $ 20,006 $ 173,210 $ 80,546 $ 1,352,994
By geography (8)
Canada
U.S.
Europe
Other International
$ 688,813 $ 247,258 $ 10,887 $
188,791
40,331
33,996
54,101
15,450
2,559
8,086
1,131
134
85,735 $ 31,490 $ 1,064,183 $
53,445
43,287
13,994
325,813
121,736
55,822
21,390
21,537
5,139
551,503 $ 224,258 $ 9,890 $
58,344
149,514
18,600
41,860
2,836
32,317
8,694
1,258
164
65,915 $ 37,273 $
55,391
40,529
11,375
17,387
21,644
4,242
888,839
289,330
123,891
50,934
Total exposure (7)
$ 951,931 $ 319,368 $ 20,238 $ 196,461 $ 79,556 $ 1,567,554 $
775,194 $ 304,038 $ 20,006 $ 173,210 $ 80,546 $ 1,352,994
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
EAD for standardized exposures are reported net of allowance for impaired assets and EAD for IRB 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. Exchange traded derivatives are included in Other sectors.
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 IRB approach as well as exposures from the Paycheck Protection
Program (PPP) instituted by the U.S. government in Q2 2020. For further details on the PPP, refer to the Significant developments: COVID-19 section.
Geographic profile is based on country of residence of the borrower.
2020 vs. 2019
Total credit risk exposure increased $215 billion or 16% from last year, primarily due to higher deposits with the Bank of Canada,
volume growth in loans and acceptances in our retail and wholesale portfolios, an increase in securities and higher repo-style
transactions.
Retail exposure increased $46 billion or 8%, primarily driven by volume growth in the residential secured portfolio.
Wholesale exposure increased $169 billion or 21%, mainly due to higher deposits with the Bank of Canada, higher government
debt securities and repo-style transactions, largely driven by our cash and liquidity management activities. Volume growth in
loans and acceptances also contributed to the increase.
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 68%, 21%, 8%, and 3%, respectively (October 31, 2019 – 66%, 21%, 9% and 4%, respectively).
Our exposure in Canada increased $175 billion or 20% compared to the prior year, largely due to higher deposits with the
Bank of Canada driven by our cash and liquidity management activities and volume growth in the residential secured portfolio.
Our exposure in the U.S. increased $37 billion or 13% compared to the prior year, mainly due to an increase in securities and
volume growth in loans and acceptances.
Our exposure in Europe decreased $2 billion or 2% compared to the prior year.
Our exposure in Other International increased $5 billion or 10% compared to the prior year, largely due to an increase in
securities and higher repo-style transactions.
66
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Net European exposure by country and client type (1), (2)
As at
October 31
2020
Table 44
October 31
2019
(Millions of Canadian dollars)
Outstanding Securities (3)
transactions Derivatives
Financials
Sovereign
Corporate
Total
Total
Asset type
Client type
Loans
Repo-style
U.K.
Germany
France
$ 9,417 $ 10,114 $
2,247
1,498
7,785
2,546
592 $ 4,834 $13,207 $ 2,579 $ 9,171 $ 24,957
10,231
4,442
5,112
1,256
2,548
2,072
2,571
1,114
177
380
22
18
Total U.K., Germany, France $ 13,162 $ 20,445 $
632 $ 5,391 $19,575 $ 7,199 $12,856 $ 39,630
Ireland
Italy
Portugal
Spain
$
761 $
114
–
266
21 $
114
10
215
376 $
–
–
2
50 $
17
–
37
631 $
55
–
109
1 $
82
–
21
576 $ 1,208
245
108
10
10
520
390
Total peripheral
$ 1,141 $
360 $
378 $
104 $
795 $
104 $ 1,084 $ 1,983
Luxembourg
Netherlands
Norway
Sweden
Switzerland
Other
$ 2,696 $
1,406
114
153
827
2,169
6,930 $
754
1,433
1,747
5,239
2,045
38 $
22
28
–
149
88
60 $ 1,887 $ 6,425 $ 1,412 $ 9,724
2,398
7
1,606
57
1,920
910
6,407
5,031
4,472
1,095
1,784
155
147
814
1,973
607
1,394
863
562
1,404
216
31
20
192
170
Total other Europe
$ 7,365 $ 18,148 $
325 $
689 $ 6,717 $13,525 $ 6,285 $ 26,527
Net exposure to Europe (4), (5) $ 21,668 $ 38,953 $ 1,335 $ 6,184 $27,087 $20,828 $20,225 $ 68,140
$23,487
7,227
9,211
$39,925
$ 1,467
821
67
520
$ 2,875
$11,723
2,250
2,553
2,225
5,308
4,818
$28,877
$71,677
(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 $137.7 billion against repo-style transactions (October 31, 2019 – $120.5 billion) and
$13.5 billion against derivatives (October 31, 2019 – $11.4 billion).
Securities include $5.3 billion of trading securities (October 31, 2019 – $9.4 billion), $19.1 billion of deposits (October 31, 2019 – $22.5 billion), and $14.6 billion of debt
securities carried at FVOCI (October 31, 2019 – $12.9 billion).
Excludes $2.5 billion (October 31, 2019 – $1.5 billion) of exposures to supranational agencies, predominately in Luxembourg.
Reflects $1.4 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2019 – $1.0 billion).
2020 vs. 2019
Net credit risk exposure to Europe decreased $3.5 billion or 5% from last year, mainly driven by lower trading securities across
most of Europe. Lower deposits with central banks in France and Luxembourg, partially offset by higher deposits with central
banks in Switzerland and the U.K. also contributed to the decrease. These factors were partially offset by volume growth in loans,
mainly in Germany, the U.K., and France.
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 $303 million.
GIL was $206 million with a GIL ratio of 95 bps, up 51 bps from last year, across a few sectors including the oil & gas sector.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
67
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 45
(Millions of Canadian dollars,
except percentage amounts)
Region (2)
Canada
As at October 31, 2020
Residential mortgages
Home equity
lines of credit
Insured (1)
Uninsured
Total
Total
$
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
8,181
13,265
37,779
21,245
9,350
14,491
51% $
36
26
52
48
25
7,824
24,059
110,247
19,300
10,163
43,383
49% $
64
74
48
52
75
16,005
37,324
148,026
40,545
19,513
57,874
Total Canada (3)
U.S. (4)
Other International (4)
$ 104,311
1
–
33% $ 214,976
20,331
2,978
–
–
67% $ 319,287
20,332
2,978
100
100
Total International
$
1
–% $
23,309
100% $
23,310
Total
$ 104,312
30% $ 238,285
70% $ 342,597
$
$
$
$
1,684
3,300
16,147
5,830
2,148
7,926
37,035
1,651
1,282
2,933
39,968
(Millions of Canadian dollars,
except percentage amounts)
Region (2)
Canada
As at October 31, 2019
Residential mortgages
Home equity
lines of credit
Insured (1)
Uninsured
Total
Total
$
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
7,715
12,385
36,195
20,688
8,951
14,711
52% $
36
28
53
49
28
7,169
22,091
92,947
18,143
9,238
37,534
48% $
64
72
47
51
72
14,884
34,476
129,142
38,831
18,189
52,245
Total Canada (3)
U.S. (4)
Other International (4)
$ 100,645
1
5
35% $ 187,122
17,011
3,307
–
–
65% $ 287,767
17,012
3,312
100
100
Total International
$
6
–% $
20,318
100% $
20,324
Total
$ 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
(1)
(2)
(3)
(4)
Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through CMHC or other
private mortgage default insurers.
Region is based upon the 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 $319 billion (October 31, 2019 – $288 billion) is largely comprised of $291 billion
(October 31, 2019 – $263 billion) of residential mortgages and $10 billion (October 31, 2019 – $7 billion) of mortgages with commercial
clients, of which $7 billion (October 31, 2019 – $4 billion) are insured mortgages, both in Canadian Banking, and $18 billion (October 31,
2019 – $18 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, 2020, home equity
lines of credit in Canadian Banking were $37 billion (October 31, 2019 – $39 billion).
68
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Residential mortgages portfolio by amortization period
The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization
periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual
amount and/or higher frequency of payments.
Residential mortgages portfolio by amortization period
Table 46
As at
October 31
2020
Canada
U.S. and other
International
Total
Canada
October 31
2019
U.S. and other
International
35%
65
–
–
74%
25
1
–
72%
24
3
1
38%
62
–
–
100% 100%
100%
100% 100%
Total
70%
26
3
1
Amortization period
≤ 25 years
> 25 years ≤ 30 years
> 30 years ≤ 35 years
> 35 years
Total
77%
22
1
–
100%
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 RBC Homeline Plan® products by geographic region:
Average LTV ratio
Table 47
For the year ended
October 31
2020
Uninsured
October 31
2019
Uninsured
Residential
mortgages (1)
RBC Homeline
Plan® products (2)
Residential
mortgages (1)
RBC Homeline
Plan® 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%
73
71
73
74
69
72
69
71%
57%
75%
73
68
72
75
66
n.m.
n.m.
74%
72
70
73
74
68
74
71
69%
71%
49%
57%
74%
73
68
72
74
65
n.m.
n.m.
69%
50%
(1)
(2)
(3)
(4)
(5)
Residential mortgages exclude residential mortgages within the RBC Homeline Plan® products.
RBC Homeline Plan® 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 RBC Homeline Plan® products is calculated
on a weighted basis by mortgage amounts at origination.
For newly originated mortgages and RBC Homeline Plan® products, LTV is calculated based on the total facility amount for the residential
mortgage and RBC Homeline Plan® 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
69
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
(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
Table 48
For the year ended
October 31
2020
$ 2,875
212
1,140
4
$ 4,231
120
October 31
2019
$ 1,470
117
304
–
$ 1,891
(27)
$ 4,351
$ 1,864
$ 1,071
1,560
$ 2,631
$
$
133
67
200
$
937
663
$ 1,092
599
$ 1,600
$ 1,691
$ 4,231
$ 1,891
PCL on loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances
0.63%
0.24%
0.31%
0.27%
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
$
$
35
395
471
49
950
163
$
32
488
505
36
$ 1,061
292
$ 1,113
$ 1,353
$
$
$
$
5
377
382
(18)
123
105
$
$
$
$
12
223
235
19
84
103
$ 1,600
$ 1,691
(1)
Geographic information is based on residence of the borrower.
2020 vs. 2019
Total PCL was $4,351 million. PCL on loans of $4,231 million increased $2,340 million, or 124% from the prior year, due to higher
provisions primarily in Personal & Commercial Banking, Capital Markets and Wealth Management. The PCL on loans ratio of
63 bps increased 32 bps.
PCL on performing loans of $2,631 million increased $2,431 million, primarily reflecting higher provisions in Personal &
Commercial Banking, Capital Markets and Wealth Management due to the impact of the COVID-19 pandemic.
PCL on impaired loans of $1,600 million decreased $91 million or 5%, primarily due to lower provisions in Personal &
Commercial Banking, partially offset by higher provisions in Capital Markets.
PCL on other financial assets of $120 million, compared to $(27) million in the prior year, largely reflecting higher provisions
in Capital Markets due to the impact of the COVID-19 pandemic, while the prior year reflected recoveries in Personal &
Commercial Banking, mainly due to favourable parameter updates.
PCL on loans in Personal & Commercial Banking increased $1,405 million, largely reflecting higher provisions on performing loans
in our Canadian Banking and Caribbean Banking portfolios primarily as a result of unfavourable changes in both macroeconomic
factors and our credit quality outlook due to the impact of the COVID-19 pandemic. These factors were partially offset by lower
provisions on impaired loans in our Canadian Banking commercial and retail portfolios due to the impact of the COVID-19 related
government support and payment deferral programs.
70
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
PCL on loans in Wealth Management increased $95 million, primarily in U.S. Wealth Management (including City National),
largely reflecting higher provisions on performing loans as a result of unfavourable changes in both macroeconomic factors and
our credit quality outlook due to the impact of the COVID-19 pandemic.
PCL on loans in Capital Markets increased $836 million, largely reflecting higher provisions on performing loans due to
unfavourable changes in our credit quality outlook and macroeconomic factors due to the impact of the COVID-19 pandemic.
Higher provisions on impaired loans also contributed to the increase, largely due to provisions taken in the oil & gas sector,
reflecting pressure on oil prices, and provisions taken in the consumer discretionary and other services sectors in the current
year. This was partially offset by higher provisions taken in the industrial products and utilities sectors in the prior year.
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 49
As at and for the year ended
October 31
2020
$ 1,645
345
1,205
–
October 31
2019
$ 1,712
266
998
–
$ 3,195
$ 2,976
$
$
$
692
754
1,446
32
1,039
1,071
216
462
678
$
$
$
788
678
1,466
36
869
905
272
333
605
$ 3,195
$ 2,976
$ 2,976
3,837
(1,498)
(1,681)
(439)
$ 2,183
3,749
(657)
(1,776)
(523)
$ 3,195
$ 2,976
0.47%
0.33%
0.26%
4.59%
0.41%
1.22%
0.46%
0.37%
0.29%
5.05%
0.39%
1.02%
(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
Net repayments and certain Other movements are not reasonably determinable. Certain GIL movements for Caribbean
Banking retail and wholesale portfolios are generally allocated to Net repayments and new impaired, as Net repayments
and certain Other movements 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.
2020 vs. 2019
Total GIL of $3,195 million increased $219 million or 7% from the prior year, and the total GIL ratio of 47 bps increased 1 bp,
reflecting higher impaired loans in Capital Markets and Wealth Management, partially offset by lower impaired loans in Personal
& Commercial Banking.
GIL in Personal & Commercial Banking decreased $67 million or 4%, largely due to lower impaired loans in our Canadian
Banking retail portfolios, reflecting the impact of the COVID-19 related government support and payment deferral programs, and
lower impaired loans in our Caribbean Banking portfolios. These factors were partially offset by higher impaired loans in our
Canadian Banking commercial portfolios, mainly in the real estate and related and consumer discretionary sectors.
GIL in Wealth Management increased $79 million or 30%, reflecting higher impaired loans in U.S. Wealth Management
(including City National) and International Wealth Management, in the consumer staples sector and investments sector,
respectively.
GIL in Capital Markets increased $207 million or 21%, mainly due to higher impaired loans in the transportation, other
services and consumer discretionary sectors, partially offset by lower impaired loans in the utilities sector.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
71
Allowance for credit losses
(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
Table 50
As at
October 31
2020
$ 4,424
404
1,281
6
$ 6,115
147
October 31
2019
$ 2,710
252
455
2
$ 3,419
45
$ 6,262
$ 3,464
$ 2,932
2,234
$ 5,166
949
$
$ 1,886
701
$ 2,587
832
$
$
$
$
$
$
$
$
164
220
384
1
267
268
116
181
297
949
$
$
$
$
$
$
$
187
172
359
1
141
142
156
175
331
832
(1)
Geographic information is based on residence of the borrower.
2020 vs. 2019
Total ACL of $6,262 million increased $2,798 million or 81% from the prior year, primarily reflecting an increase of $2,696 million in
ACL on loans.
ACL on performing loans of $5,166 million increased $2,579 million from the prior year, primarily reflecting higher ACL in
Personal & Commercial Banking, Capital Markets and Wealth Management due to the impact of the COVID-19 pandemic.
ACL on impaired loans of $949 million increased $117 million from the prior year, primarily due to higher ACL in Capital
Markets, partially offset by lower ACL in Personal & Commercial Banking.
72
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Market risk
Market risk is defined to be the impact of market prices upon our financial condition. This includes potential gains or losses
due to changes in market determined variables such as interest rates, credit spreads, equity prices, commodity prices, foreign
exchange rates and implied volatilities.
The measures of financial condition impacted by market risk are as follows:
1.
2.
3.
4.
Positions whose revaluation gains and losses are reported in Revenue, which includes:
a) Changes in the fair value of instruments classified or designated as 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 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 on a basis 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, Stressed Value-at-Risk and Incremental Risk Charge
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 was updated in early Q3 2020 from the 2008/2009 period covering the Global Financial Crisis to a one-
year period covering the market volatility observed during Q2 2020. 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.
Incremental Risk Charge (IRC) captures the risk of losses under default or rating changes for issuers of certain traded fixed
income instruments. IRC is measured over a one year horizon at a 99.9% confidence level, and captures different liquidity
horizons for instruments and concentrations in issuers under a constant level of risk assumption. Changes in measured risk
levels are primarily associated with changes in inventory from the applicable fixed income trading portfolios.
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 Global Financial Crisis of 2008 and the Taper Tantrum panic of 2013.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
73
These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a
designated hedging relationship and those in our insurance businesses.
Market risk measures – FVTPL positions
Market risk measures*
October 31, 2020
For the year ended
October 31, 2019
For the year ended
Table 51
(Millions of Canadian dollars)
As at
Average
Equity
Foreign exchange
Commodities
Interest rate (1)
Credit specific (2)
Diversification (3)
Market risk VaR
Market risk Stressed VaR
$
$
$
23
3
3
47
7
(18)
65
86
$
$
33
3
3
54
6
(25)
$
$
74
109
$
$
High
64
6
7
178
7
n.m.
232
228
Low
13
1
1
11
4
n.m.
18
49
$
$
$
As at
Average
$
$
$
22
3
2
13
5
(17)
28
85
$
$ 19
4
2
14
5
(17)
High
32
13
4
19
6
n.m.
$ 27
$
45
$ 106
$ 161
Low
11
2
1
11
4
n.m.
15
76
$
$
$
This table represents an integral part of our 2020 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
2020 vs. 2019
Average market risk VaR of $74 million increased $47 million from the prior year, largely due to the impact of credit spreads
widening and significant market volatility experienced in the second quarter of 2020 being included in the historical VaR periods
starting in April 2020. These factors impacted loan underwriting commitments, as well as fixed income and equity portfolios. As
indicated in the Trading revenue and VaR graph below, VaR levels declined during the second half of fiscal 2020 as overall market
volatility and credit spreads improved, combined with a reduction of loan underwriting commitments.
Average SVaR of $109 million increased $3 million from the prior year. Similar to VaR, SVaR was also impacted by changes in
credit spreads and overall market volatility in fiscal 2020, and the SVaR period was updated this year as outlined in the Market
risk controls section above. However, the increase in average SVaR is lower than that of average VaR as the historical period
used to calculate SVaR reflects a period of similar market volatility.
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
13 days with net trading losses in 2020 largely due to the significant market volatility experienced in the second quarter of 2020.
Four of these net trading loss days exceeded VaR.
Trading revenue (1) and VaR (Millions of Canadian dollars)
150
100
50
0
-50
-100
-150
-200
-250
0 1 9
v 1, 2
o
N
0
2
0
n 3 1, 2
J a
0
2
0
0 , 2
r 3
p
A
0
2
0
J u l 3 1, 2
0
2
0
c t 3 1, 2
O
Trading Revenue (1)
Market Risk VaR
(1)
Includes loan underwriting commitments.
74
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
The following chart displays the distribution of daily trading profit and loss in 2020 and 2019 with 13 days of losses in 2020 as
mentioned above and 1 day of losses in 2019. The largest reported profit was $99 million with an average daily profit of $21 million.
Trading Revenue (1) for the year ended October 31, 2020 (teb)
s
y
a
D
f
o
r
e
b
m
u
N
n
i
y
c
n
e
u
q
e
r
F
100
90
80
70
60
50
40
30
20
10
0
0
0
1
-
<
0
9
-
0
8
-
0
7
-
0
6
-
0
5
-
0
4
-
0
3
-
0
2
-
0 0
1
-
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9
0
0
1
Daily net trading revenue (C$ millions), excluding structured entities
2020
2019
(1)
Includes loan underwriting commitments.
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, 2020, we held assets in support of $12.2 billion of liabilities with respect to insurance
obligations (October 31, 2019 – $11.4 billion).
Market risk controls – Interest Rate Risk in the Banking Book (IRRBB) positions1
IRRBB activity arises primarily from traditional customer-originated banking products such as deposits and loans, and
includes related hedges as well as the interest rate risk from securities held for liquidity management. Factors contributing to
IRRBB include the mismatch between asset and liability repricing dates, relative changes in asset and liability rates in
response to market rate scenarios, 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. IRRBB exposures are subject to limits and
controls and are regularly measured and reported with independent oversight from GRM.
The Board approves the risk appetite for IRRBB, and the Asset-Liability Committee (ALCO), along with GRM, provides
ongoing governance of IRRBB measurement and management through risk policies, limits, operating standards and other
controls. IRRBB reports are reviewed regularly by GRM, ALCO, the GRC, the Risk Committee of the Board and the Board.
IRRBB measurement
To monitor and control IRRBB, 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, interest rate volatility shocks, and regulator-prescribed interest rate shock scenarios.
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 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. The IRRBB measures do not include the benefit of management actions to reduce exposures.
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 IRRBB are subject to independent oversight by GRM.
Market risk measures – IRRBB Sensitivities
The following table shows the potential before-tax impact of an immediate and sustained 100 bps increase or decrease in
interest rates on projected 12-month NII and EVE, assuming no subsequent hedging. Rate floors are applied within the
declining rates scenarios which prevent EVE valuation and NII simulation rate levels from falling below a minimum average
level of negative 25 bps across major currencies. Interest rate risk measures are based upon interest rate exposures at a
specific time, which over time, can change in response to business activities and management actions.
1
IRRBB positions include the impact of derivatives in hedge accounting relationships and FVOCI securities used for interest rate risk management.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
75
Market risk – IRRBB measures*
(Millions of Canadian dollars)
Before-tax impact of:
100 bps increase in rates (2)
100 bps decrease in rates (2)
EVE risk
NII risk (1)
2020
Table 52
2019
Canadian
dollar impact
U.S. dollar
impact
Total
Canadian
dollar impact
U.S. dollar
impact
Total
EVE risk
NII risk (1)
$ (1,486) $ (270) $(1,756) $
176
1,145
1,321
571
(472)
$ 247
(149)
$ 818
(621)
$(1,356) $ 479
(637)
920
*
(1)
(2)
This table represents an integral part of our 2020 Annual Consolidated Financial Statements.
Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates.
The IRRBB 100 bps rate increase and decrease scenarios were updated on a prospective basis in accordance with OSFI’s B-12: Interest Rate Risk Management guideline,
which became effective January 1, 2020. This resulted in the inclusion of EVE and NII risk arising from Capital Markets and treasury related services within Investor &
Treasury Services banking book activities in 2020.
As at October 31, 2020, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $621 million,
down from $637 million last year. An immediate and sustained +100 bps shock at the end of October 31, 2020 would have had a
negative impact to our EVE of $1,756 million, up from $1,356 million reported last year. The year-over-year change in NII sensitivity
is largely attributed to higher business and retail deposit growth, while the year-over-year change in EVE sensitivity is mainly due
to growth in bank’s book capital base. During 2020, NII and EVE risks remained within approved limits.
Market risk measures for other material non-trading portfolios
InvestmentsecuritiescarriedatFVOCI
We held $81.9 billion of investment securities carried at FVOCI as at October 31, 2020, compared to $57.7 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, 2020, 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 IRRBB measure as at October 31, 2020 was $79.0 billion. Our investment
securities carried at FVOCI also include equity exposures of $0.5 billion as at October 31, 2020, compared to $0.4 billion in the
prior year.
Non-tradingforeignexchangeraterisk
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.
Derivativesrelatedtonon-tradingactivity
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 IRRBB measure and other internal non-trading market risk measures. We use
interest rate swaps to manage our IRRBB, 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 2020 Annual Consolidated Financial Statements.
76
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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 53
(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, 2020
Market risk measure
Balance sheet
amount Traded risk (1)
Non-traded
risk (2)
Non-traded risk
primary risk sensitivity
$
118,888 $
39,013
–
21,603
$
118,888
17,410
Interest rate
Interest rate
136,071
139,743
124,884
–
11,187
139,743
Interest rate, credit spread
Interest rate, credit spread, equity
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
313,015
264,394
48,621
457,976
208,655
(5,639)
1,922
113,488
90,937
10,479
10,392
6,855
–
–
109,175
6,475
447,584
201,800
(5,639)
1,922
4,313
84,462
Interest rate, foreign exchange
Interest rate
1,624,548 $
543,778
$ 1,070,291
1,011,885 $
1,922
107,450
–
$
904,435
1,922
Interest rate
Interest rate
29,285
29,285
–
274,231
109,927
86,994
9,867
13,670
255,922
108,147
8,977
–
18,309
1,780
78,017
9,867
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
1,537,781 $
509,781
$ 1,014,330
86,767
1,624,548
(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, SVaR, IRC and stress testing are used as risk controls for traded risk.
Non-traded risk includes positions used in the management of the IRRBB 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 IRRBB.
Assets not subject to market risk include $10,479 million of physical and other assets.
Liabilities not subject to market risk include $13,670 million of payroll related and other liabilities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
77
(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
Interest rate, credit spread
102,470 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
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate
886,005 $
1,663
99,137
–
$ 786,868
1,663
Interest rate
Interest rate
35,069
35,069
226,586
98,543
79,040
9,815
8,589
218,612
96,512
8,918
–
–
7,974
2,031
70,122
9,815
1,345,310 $
458,248
$ 878,473
83,625
1,428,935
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
$
$
$
$
$
(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, SVaR, IRC and stress testing are used as risk controls for traded risk.
Non-traded risk includes positions used in the management of the IRRBB 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 IRRBB.
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.
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)
Commencing in the second quarter of 2020, governments and federal agencies expanded the eligibility criteria to their existing
funding programs and announced new programs to provide further liquidity to banks. In addition to these measures, OSFI
announced a series of regulatory measures and provided additional guidance to allow banks to focus on their resilience efforts
and to enhance the financial system’s stability. Subsequently, governments and federal agencies have assessed and will
continue to assess the need of these programs. Effective October 21, 2020, certain programs, such as the Bankers’ Acceptance
Purchase Facility and the revised insured mortgage purchase program through the CMHC were discontinued and the existing
term repo facilities will be reduced to pre-pandemic levels over time. The remaining measures continue to provide additional
flexibility in lending activities permitting banks to fall below the regulatory minimum through the use of available buffers above
the regulatory authorized minimum for the Liquidity Coverage Ratio (LCR) and temporary modifications in limits, including those
used for covered bonds, and adjustments to other liquidity metrics.
78
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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, which establishes minimum risk control elements in accordance with
the Board-approved risk appetite and the LRMF.
The ALCO annually approves the Liquidity Contingency Plan (LCP) and provides strategic direction and oversight to
Corporate Treasury, other functions, and business segments on the management of liquidity.
(cid:129)
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 both internal and regulatory metrics 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 relevant 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
79
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.
Liquidity reserve
Our liquidity reserve consists of available unencumbered liquid assets. 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. In addition, uncommitted and undrawn central bank borrowing facilities that could be
accessed subject to satisfying certain preconditions as set by various central banks (e.g., BoC, the Fed, Bank of England, and
Bank of France), as well as amounts that qualify as eligible collateral at the Federal Reserve Bank of New York (FRBNY) and
Federal Home Loan Bank (FHLB) are also excluded from the determination of the liquidity reserve.
Liquidity reserve
(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
Other liquid assets (2)
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
Other liquid assets (2)
Total liquid assets
As at October 31, 2020
Table 54
Securities received
as collateral from
securities
financing and
derivative
transactions
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
$
– $118,888 $
–
39,013
4,022 $ 114,866
39,013
–
309,512
101,317
–
546,422
195,098
30,305
358,233
89,764
27,934
188,189
105,334
2,371
Bank-owned
liquid assets
$ 118,888
39,013
236,910
93,781
30,305
$ 518,897
$410,829 $929,726 $ 479,953 $ 449,773
As at October 31, 2019 (3)
Securities received
as collateral from
securities
financing and
derivative
transactions
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
$
– $ 26,310 $
–
38,345
2,860 $
329
23,450
38,016
311,019
115,261
–
517,979
205,287
21,732
345,753
96,184
21,316
172,226
109,103
416
Bank-owned
liquid assets
$ 26,310
38,345
206,960
90,026
21,732
$ 383,373
$ 426,280 $ 809,653 $ 466,442 $
343,211
(Millions of Canadian dollars)
Royal Bank of Canada
Foreign branches
Subsidiaries
Total unencumbered liquid assets
As at
October 31
2020
$261,940
44,037
143,796
$449,773
October 31
2019 (3)
$ 136,511
61,528
145,172
$ 343,211
(1)
(2)
(3)
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).
Encumbered liquid assets amount represents cash collateral and margin deposit amounts pledged related to OTC and exchange-traded derivative transactions.
The presentation has been revised to conform with current period presentation.
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.
80
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
2020 vs. 2019
Total liquid assets increased $120 billion or 15% and total unencumbered liquid assets increased $107 billion or 31% from the prior
year, primarily due to higher deposits with central banks and an increase in on-balance sheet securities, reflecting higher client
deposits and liquidity management activities implemented as a result of the COVID-19 pandemic.
Asset encumbrance
The table below provides a summary of our on- and off-balance sheet amounts for 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, 2020, our unencumbered assets available as collateral comprised 28% of
total assets (October 31, 2019 – 23%)1.
Asset encumbrance
Table 55
October 31
2020
October 31
2019
As at
Encumbered
Unencumbered
Encumbered
Unencumbered
(Millions of
Canadian dollars)
Pledged as
collateral Other (1)
Available as
collateral (2)
Other (3)
Total
collateral Other (1)
collateral (2), (4) Other (3), (4)
Total
Pledged as
Available as
– $ 4,022 $
114,866 $
– $ 118,888 $
– $ 2,860 $
23,450 $
– $
26,310
Cash and due from banks $
Interest-bearing deposits
with banks
Securities
Trading
Investment, net of
–
48,505
applicable allowance
13,337
–
–
–
39,013
–
39,013
–
329
38,016
–
38,345
91,245
3,684
143,434
44,431
126,353
53
139,743
16,376
–
–
99,420
2,683
146,534
86,045
49
102,470
Assets purchased under
reverse repurchase
agreements and
securities borrowed (5)
Loans
Retail
Mortgage securities
Mortgage loans
Non-mortgage loans
Wholesale
Allowance for loan losses
Segregated fund net
assets
Other
Derivatives
Others (6)
400,807
17,209
37,879
5,037
460,932
399,013
22,793
49,325
5,214
476,345
31,460
62,131
5,711
–
–
–
–
27,934
–
–
–
–
–
–
–
–
40,050
26,389
12,006
–
–
–
182,567
97,662
208,655
(5,639)
71,510
271,087
115,379
208,655
(5,639)
31,345
42,103
7,094
–
–
–
1,922
1,922
–
–
2,371
113,488
71,111
113,488
101,416
–
21,316
–
–
–
–
–
–
–
–
40,401
22,598
9,534
–
–
–
–
416
–
171,644
101,367
195,870
(3,100)
71,746
236,345
117,995
195,870
(3,100)
1,663
1,663
101,560
64,504
101,560
86,236
Total assets
$ 589,885 $ 21,231 $
490,172 $ 678,540 $1,779,828 $ 561,678 $ 25,982 $
369,205 $
641,454 $ 1,598,319
(1)
(2)
(3)
(4)
(5)
(6)
Includes assets restricted from use to generate secured funding due to legal or other constraints.
Represents assets that are readily available for use as collateral, including NHA MBS, our unencumbered mortgage loans that qualify as eligible collateral at FHLB, as
well as loans that qualify as eligible collateral for discount window facility available to us and lodged at the FRBNY.
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. This also
includes loans that could be used to collateralize central bank advances, including those for pledging to the BoC under the expanded eligibility criteria announced in Q2
2020.
Amounts have been revised from those previously presented.
Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing, derivative transactions, and margin lending. Includes
$17.2 billion (October 31, 2019 – $22.8 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, 2020, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were
$708 billion or 54% of our total funding (October 31, 2019 – $594 billion or 51%). The remaining portion is comprised of short- and
long-term wholesale funding.
Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of
those assets. Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquidity asset
buffers.
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
1
Amounts have been revised from those previously presented
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
81
to convert all or a portion of certain shares and liabilities of that bank into common shares. As at October 31, 2020, the notional
value of issued and outstanding long-term debt subject to conversion under the Bail-in regime was $37,365 million (October 31,
2019 – $20,320 million).
For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.
Long-term debt issuance
During 2020, 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 $20 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 MBS sold,
covered bonds that are collateralized with residential mortgages and securities backed by credit card receivables.
Compared to 2019, our outstanding MBS sold increased $0.7 billion. Our covered bonds and securitized credit card
receivables decreased $0.1 billion and $1.4 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
As at
October 31
2020
$ 88,055
63,043
9,574
Table 56
October 31
2019
$ 94,662
63,853
9,788
$160,672
$168,303
*
This table represents an integral part of our 2020 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 long-term debt
issuance registered programs. The following table summarizes these programs with their authorized limits by geography.
Programs by geography
Table 57
Canada
U.S.
Europe/Asia
(cid:129) Canadian Shelf Program – $25 billion
(cid:129) U.S. Shelf Program – US$40 billion
(cid:129) European Debt Issuance Program – US$40 billion
(cid:129) Global Covered Bond Program – €60 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
13%
Cards securitization
5%
Euro
19%
U.S. dollar
31%
Canadian dollar
37%
Covered Bonds
30%
Unsecured
funding
51%
MBS/CMB (2)
14%
(1)
Based on original term to maturity greater than 1 year
(1)
(2)
Based on original term to maturity greater than 1 year
Mortgage-backed securities and Canada Mortgage Bonds
82
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
The following table provides our composition of wholesale funding based on remaining term to maturity:
Composition of wholesale funding (1)
Table 58
(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, 2020
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
$
8,681 $
2,542
2,618
37
230
–
–
–
7,906
133 $
73 $
– $
8,887 $
6,858
2,167
4,466
165
1,171
3,688
1,499
892
11,145
1,381
9,836
401
267
5,919
–
1,134
23,783
6,081
7,163
1,136
2,178
5,131
1,000
1,037
44,328
12,247
21,502
1,932
3,616
14,738
2,499
10,969
– $
–
–
9,413
1,485
2,561
6,896
205
624
– $
–
–
37,259
5,333
12,225
23,196
6,870
6,726
Total
8,887
44,328
12,247
68,174
8,750
18,402
44,830
9,574
18,319
$ 22,014 $ 21,039 $ 30,156 $ 47,509 $ 120,718 $ 21,184 $ 91,609 $ 233,511
$ 10,089 $ 7,508 $ 7,643 $ 13,573 $ 38,813 $ 9,457 $ 35,421 $ 83,691
149,820
11,925
11,727
33,936
81,905
22,513
13,531
56,188
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 $
2,917
2,542
11
847
–
–
–
9,489
– $
388 $
33 $
4,508 $
– $
12,037
3,188
2,293
676
524
–
2,000
1,224
17,390
6,543
9,183
171
1,796
6,282
–
157
22,038
3,905
14,188
1,342
727
2,305
998
1,663
54,382
16,178
25,675
3,036
3,047
8,587
2,998
12,533
132
–
18,856
1,810
3,523
14,337
2,500
141
– $
–
–
29,756
5,047
11,015
23,426
4,290
9,976
Total
4,508
54,514
16,178
74,287
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 $
23,439
95,118
49,069
88,127
167,626
(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 $8,199 million (October 31, 2019 – $8,014 million), bearer deposit notes (unsecured) of $2,036 million (October 31, 2019 –
$4,813 million), other long-term structured deposits (unsecured) of $8,071 million (October 31, 2019 – $9,823 million), and FHLB advances (secured) of $13 million
(October 31, 2019 – $nil).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
83
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:
Credit ratings (1)
Table 59
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
stable
stable
AA negative
stable
AA
As at December 1, 2020
(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 November 18, 2020, Moody’s affirmed our ratings with a stable outlook.
(5)
(6)
(7)
On October 28, 2020, Standard & Poor’s affirmed our ratings with a stable outlook.
On April 3, 2020, Fitch Ratings upgraded our rating for legacy senior long-term debt to AA+ from AA and revised our outlook to negative from stable.
On June 11, 2020, DBRS affirmed our ratings with a stable outlook.
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. 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 60
(Millions of Canadian dollars)
One-notch
downgrade
Two-notch
downgrade
Three-notch
downgrade
One-notch
downgrade
Two-notch
downgrade
Three-notch
downgrade
Contractual derivatives funding or margin requirements
Other contractual funding or margin requirements (1)
$
$
318
187
$
78
–
149
–
$
$
165
180
$
64
176
124
–
(1)
Includes GICs issued by our municipal markets business out of New York.
As at
October 31
2020
October 31
2019
84
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Liquidity Coverage Ratio (LCR)
The LCR is a Basel III metric that measures the sufficiency of high-quality liquid assets (HQLA) available to meet liquidity needs
over a 30-day period in an acute stress scenario. The BCBS and OSFI regulatory minimum coverage level for LCR is 100%.
However, in accordance with OSFI’s announcement released during Q2 2020, addressing concerns around the impact of the
COVID-19 pandemic, Canadian banks remain temporarily permitted to fall below the regulatory minimum level of 100% by using
their HQLA buffer.
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 61
(Millions of Canadian dollars, except percentage amounts)
High-quality liquid assets
Total high-quality liquid assets (HQLA)
Cash outflows
Retail deposits and deposits from small business customers,
of which:
Stable deposits (3)
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits in
networks of cooperative banks (4)
Non-operational deposits
Unsecured debt
Secured wholesale funding
Additional requirements, of which:
Outflows related to derivative exposures and other collateral
requirements
Outflows related to loss of funding on debt products
Credit and liquidity facilities
Other contractual funding obligations (5)
Other contingent funding obligations (6)
Total cash outflows
Cash inflows
Secured lending (e.g., reverse repos)
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Total HQLA
Total net cash outflows
Liquidity coverage ratio
For the three months ended
October 31
2020
July 31
2020
Total unweighted
value (average) (2)
Total weighted
value (average)
Total unweighted
value (average) (2)
Total weighted
value (average)
n.a.
$
362,130
n.a.
$
363,107
$
$
$
$
$
328,988
112,745
216,243
381,795
166,253
184,917
30,625
n.a.
253,070
43,442
8,524
201,104
18,928
563,574
n.a.
260,609
10,408
21,656
$
31,305
3,382
27,923
175,207
39,457
105,125
30,625
26,032
58,184
16,668
8,524
32,992
18,928
8,682
318,338
$
40,151
6,121
21,656
315,366
105,342
210,024
362,969
157,399
173,445
32,125
n.a.
252,341
50,398
9,154
192,789
19,408
592,465
n.a.
261,600
10,689
23,108
$
30,611
3,160
27,451
161,583
37,514
91,944
32,125
25,635
61,042
20,632
9,154
31,256
19,408
8,488
306,767
41,235
6,232
23,108
$
$
n.a.
$
67,928
n.a.
$
70,575
Total adjusted
value
$
362,130
250,410
145%
Total adjusted
value
$
363,107
236,192
154%
(1)
The LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS as updated in accordance with
the regulatory guidance issued in fiscal 2020. The LCR for the quarter ended October 31, 2020 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, 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. Our LCR is currently above our normal target range as a result of the ongoing COVID-19 pandemic.
Our increased liquidity levels in the current and prior quarters of 2020 were largely driven by client deposit inflows resulting from
industry-wide impacts of the pandemic and corresponding central bank actions.
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 89% 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
85
and term deposits, differentiated by client type (wholesale, retail and small- and medium-sized enterprises). Cash outflows also
arise from business activities that create contingent funding and collateral requirements, such as repo funding, derivatives, short
sales of securities and the extension of credit and liquidity commitments to clients. Cash inflows arise primarily from maturing
secured loans, interbank loans and non-HQLA securities.
LCR does not reflect any market funding capacity that we believe would be available in a stress situation. All maturing
wholesale debt is assigned 100% outflow in the LCR calculation.
Q4 2020 vs. Q3 2020
The average LCR for the quarter ended October 31, 2020 was 145%, which translates into a surplus of approximately $112 billion,
compared to 154% and a surplus of approximately $127 billion in the prior quarter. While average LCR remains at higher than
normal levels due to sustained increases in client deposits driven largely due to industry-wide impacts of the pandemic and
associated actions taken by central banks, it has declined quarter over quarter due to liquidity optimization actions taken by
management. As we expect liquidity levels will continue to be influenced by central bank policy into fiscal 2021, we will continue
to manage our LCR in reflection of these and other industry-wide developments.
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 62
(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, 2020
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
$155,418
$
2
$
–
$
–
$
–
$
–
$
–
$
–
$ 2,481
$ 157,901
82,486
51
49
25
80
50
98
9,615
43,617
136,071
3,213
4,762
6,445
10,765
9,079
26,313
25,315
53,355
496
139,743
162,269
24,334
61,661
21,593
47,211
24,742
25,083
28,236
9,990
25,951
2
132,783
–
266,935
–
56,253
6,799
80,165
313,015
660,992
12,157
5,035
32,713
6,402
10,946
2,741
50
4,932
1,520
–
3,433
499
–
2,726
71
–
13,550
323
5
20,205
257
–
52,650
2,099
(107)
11
2,692
18,507
113,488
42,915
Total financial assets
Other non-financial assets
$477,625
4,540
$108,158
1,411
$84,949
97
$68,041
860
$47,897
234
$173,021
1,939
$312,815
1,802
$ 173,972
5,988
$136,154
25,045
$1,582,632
41,916
Total assets
$482,165
$109,569
$85,046
$68,901
$48,131
$174,960
$314,617
$ 179,960
$161,199
$1,624,548
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
$ 74,636
2,794
–
$ 35,167
6,605
1,942
$53,458
4,022
5,412
$34,733
6,242
1,295
$29,763
4,142
2,501
$ 21,843
7,400
3,707
$ 58,702
18,705
16,195
$
17,234
6,427
8,940
$590,020
–
–
$ 915,556
56,337
39,992
12,158
6,401
29,285
–
50
–
–
–
–
–
–
–
–
–
–
–
9
–
18,618
29,285
219,075
4,467
34,767
–
19,396
11,553
2,183
–
20,606
4,423
1,133
–
376
3,355
484
–
1,492
2,709
435
–
4,971
11,900
851
205
–
20,985
2,180
110
–
50,396
10,994
9,552
8,315
139
563
–
274,231
109,927
53,590
9,867
$377,182
1,053
–
$ 83,247
5,395
–
$89,104
209
–
$46,485
212
–
$41,042
193
–
$ 50,877
951
–
$116,877
1,010
–
$ 103,543
11,910
–
$599,046
9,445
86,767
$1,507,403
30,378
86,767
Total liabilities and equity
$378,235
$ 88,642
$89,313
$46,697
$41,235
$ 51,828
$117,887
$ 115,453
$695,258
$1,624,548
Off-balance sheet items
Financial guarantees
Commitments to extend credit
Other credit-related commitments
Other commitments
$
401
5,285
1,982
7
$ 1,745
4,803
903
14
$ 2,186
14,821
1,634
20
$ 3,137
16,163
1,745
20
$ 3,004
12,306
1,400
20
$
700
45,633
260
82
$
4,529
161,524
623
209
$
1,383
16,876
10
344
$
56
4,828
78,768
551
$
17,141
282,239
87,325
1,267
Total off-balance sheet items
$
7,675
$ 7,465
$18,661
$21,065
$16,730
$ 46,675
$166,885
$
18,613
$ 84,203
$ 387,972
(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.
86
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
(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
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 year
to 2 years
2 years
to 5 years
5 years
and greater
With no
specific
maturity
Total
As at October 31, 2019
$ 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
Total financial assets
Other non-financial assets
$ 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
Total assets
$ 399,171
$ 100,722
$ 76,918
$ 46,817
$ 51,775
$ 148,281
$ 277,636
$
154,763
$ 172,852
$ 1,428,935
Liabilities and equity
Deposits (2)
Unsecured borrowing
Secured borrowing
Covered bonds
Other
$ 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
Acceptances
Obligations related to securities
12,944
5,119
sold short
35,069
–
27
–
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
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
$ 329,661
1,314
–
$ 69,370
5,288
–
$ 81,671
276
–
$ 45,698
154
–
$ 54,420
142
–
$ 59,486
898
–
$ 102,720
903
–
$
–
–
–
46,515
8,510
9,499
96,186
11,179
–
1
–
5,978
30
691
–
18,091
35,069
226,586
98,543
41,830
9,815
$ 476,727
9,217
83,625
$ 1,315,939
29,371
83,625
Total liabilities and equity
$ 330,975
$ 74,658
$ 81,947
$ 45,852
$ 54,562
$ 60,384
$ 103,623
$
107,365
$ 569,569
$ 1,428,935
Off-balance sheet items
Financial guarantees
Lease commitments
Commitments to extend credit
Other credit-related commitments
Other commitments
$
$
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
Total off-balance sheet items
$
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 2020
87
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 63
(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
Lease liabilities
Subordinated debentures
Off-balance sheet items
Financial guarantees (2)
Other commitments (3)
Commitments to extend credit (2)
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
As at October 31, 2020
$ 510,849 $ 343,201 $ 33,168 $ 91,871 $
31,706 $ 1,010,795
9
–
18,609
29,121
8,315
199
–
–
260,945
37,681
633
–
–
–
4,971
188
604
205
–
–
–
358
1,545
110
–
–
–
8,678
2,575
9,552
18,618
29,121
274,231
47,104
5,357
9,867
519,372
690,190
39,136
93,884
52,511
1,395,093
$
17,141 $
– $
– $
– $
– $
–
239,212
256,353
81
43,025
43,106
82
2
84
209
–
209
344
–
344
17,141
716
282,239
300,096
Total financial liabilities and off-balance sheet items
$ 775,725 $ 733,296 $ 39,220 $ 94,093 $
52,855 $ 1,695,189
(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)
On
demand
Within
1 year
1 year
to 2 years
2 years
to 5 years
5 years
and greater
Total
As at October 31, 2019
$ 406,042 $ 315,398 $ 50,218 $ 83,651 $
30,560 $
885,869
–
–
5,977
617
–
18,091
35,125
220,592
31,794
–
–
–
4
190
–
–
–
–
640
316
–
–
–
8,512
9,499
18,091
35,125
226,573
41,753
9,815
412,636
621,000
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
Total financial liabilities and off-balance sheet items
$ 655,265 $ 659,953 $ 51,137 $ 86,227 $
51,603 $
1,504,185
*
(1)
This table represents an integral part of our 2020 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
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.
Includes commitments related to short-term and low-dollar value leases, leases not yet commenced, and lease payments related to non-recoverable tax.
(3)
Regulatory developments
Net stable funding ratio
On January 1, 2020, the OSFI regulatory minimum for the Net Stable Funding Ratio (NSFR) of 100% became effective, in
accordance with the revised LAR guidelines. The NSFR is determined based on the liquidity characteristics and maturity profile of
our assets, liabilities, and off-balance sheet exposures and is intended to reduce structural funding risk by requiring banks to
maintain a surplus of available stable funding over the required stable funding. We are in compliance with this requirement. The
requirement to disclose consolidated NSFR and its major components will become effective for Canadian Domestic Systemically
Important Banks (D-SIB) on January 31, 2021.
88
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Insurance risk
Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit and/or
premium payments under insurance and reinsurance contracts are different than expected. Insurance risk is distinct from those
risks covered by other parts of our risk management framework (e.g., credit, market and operational risk) where those risks are
ancillary to, or accompany, the risk transfer. The four insurance sub-risks are: morbidity, mortality, longevity, and travel risk.
Our Insurance Risk Framework provides an overview of our processes and tools for identifying, assessing, managing,
mitigating and reporting on the insurance risks that face the organization. These are also supported by our robust three lines of
defence governance structure.
Operational/regulatory compliance risk drivers
Operational risk
Operational risk is the risk of loss or harm resulting from people, inadequate or failed internal processes, controls 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 scrutiny and proceedings in the
various jurisdictions where we operate.
Our management of operational risk follows the three lines of defence governance model, encompassing the organizational roles
and responsibilities for a coordinated 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 organization, 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 a 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
89
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.
Operational risk
Management strategy
Cybersecurity
Data management and
privacy
Money laundering and
Terrorist financing
Third-party risk
Cybersecurity is the risk to the business associated with cyber-attacks initiated to disrupt or
disable our operations or to expose or damage data. 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, cyber
intelligence analysis of internal and external threats and alerting of potentially suspicious security
events and incidents. Throughout the year, investments continued to be made on the program and
multiple scenarios, assessments and simulations were conducted to test our resiliency strategy.
Data management is the risk of failing to manage information appropriately throughout its
lifecycle due to inadequate processes and controls, resulting in legal or regulatory consequences,
reputational damage or financial loss. Privacy is the risk of improper creation or collection, use,
disclosure, retention or destruction of information. The collection, use and sharing of data, as well
as the management and governance of data, are 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 data privacy. The Chief Privacy Office and the
Chief Data Office partner with cross-functional teams to develop and implement enterprise-wide
standards and practices that describe how data is used, protected, managed and governed.
Money laundering and Terrorist financing risk is the risk that our products and services are used to
facilitate the laundering of proceeds of crime, including the financing of terrorist activity. We
maintain an enterprise-wide program designed to deter, detect and report suspected money
laundering and terrorist financing activities across our organization, while seeking to ensure
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 in an effort 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.
Third-party risk is the risk of failure to effectively manage third parties which may expose us to
service disruptions, regulatory action, financial loss, litigation or 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. We seek to monitor third-party providers critical to our operations for any
impact on their ability to deliver services to us, including vendors of our third-party providers.
Business continuity risk Business continuity risk is the risk of being unable to maintain, continue or restore essential
business operations during and/or after an event that prevents us from conducting business in the
normal course. Exposure to disruptive operational events interrupts the continuity of our business
operations and could negatively impact our financial results, reputation, client outcomes and/or
result in harm to our employees. These operational events could result from the impact of severe
weather, pandemics, failed processes, technology failures or cyber threats. Our risk-based
enterprise-wide business continuity management program considers multiple scenarios to
address the consequences of a disruption and its effects on the availability of our people,
processes, facilities, technology, and third-party arrangements. Our approach to business
continuity management is outlined in policies and standards embedded across the organization
and the related risks are regularly measured, monitored, reported and integrated in our
operational risk management and control framework.
Operational risk capital
Requirements for operational risk capital are determined in accordance with OSFI issued guidelines. Currently, our operational
risk capital is assessed using the Standardized Approach (TSA) which is a formula-based calculation predicated on gross income.
Upon implementation of final Basel III reforms, OSFI will require deposit-taking institutions to adopt a new Standardized
Approach (SA) for measurement of operational risk capital. 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 historical internal loss average relative to the BIC. Once implemented, SA will replace TSA. For further details on
operational risk capital, refer to the Capital management section.
Operational risk loss events
As at October 31, 2020, our operational risk losses remain within our risk appetite. For further details on our contingencies,
including litigation, refer to Notes 24 and 25 of our 2020 Annual Consolidated Financial Statements.
90
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Regulatory compliance risk
Regulatory compliance risk is the risk of potential non-conformance with laws, rules, regulations and prescribed practices in any
jurisdiction in which we operate. Issues regarding compliance with laws and regulations can arise in a number of areas in a large
complex financial institution such as the bank, and are often the result of inadequate or failed internal processes, controls,
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., the U.K., Europe and other jurisdictions in
which we operate. In recent years, such regulation has become increasingly extensive and complex. In addition, regulatory
scrutiny and expectations in Canada, the U.S., the U.K., Europe and globally for large financial institutions, with respect to, among
other things, governance, risk management practices and controls, conduct as well as the enforcement of regulatory compliance
matters has intensified. Failure to comply with these requirements and expectations or resolve any identified deficiencies could
result in increased regulatory oversight and restrictions. 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 scrutiny,
examinations and proceedings, 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. The global scope of the bank’s operations also means that a single issue may give rise to overlapping
regulatory investigations, regulatory proceedings and or civil litigation claims in different jurisdictions. RBC can be subject to
such proceedings due to alleged violations of law or, if determined by regulators, allegedly inadequate policies, procedures or
remediation of deficiencies. 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 or expectations. Accordingly, it is possible that we could receive a judicial or regulatory enforcement
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, as well as
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 reviews 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) the actions or inactions of the
bank, its employees, third-party service providers, or clients, ii) the perceived misalignment of these actions or inactions with
stakeholder expectations of the bank, or iii) negative 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, regulatory fines and penalties, restrictive
agreements with regulators or prosecutors, or criminal prosecutions. The sources of reputation risk are widespread; risk to our
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
91
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 and maintain appropriate 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.
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 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 or decrease our costs, impact our profitability and increase
the complexity of our operations. A summary of the additional regulatory changes instituted by governments globally and by
OSFI during 2020 in response to the COVID-19 pandemic are included in the Significant developments: COVID-19, Liquidity and
funding risk and Capital Management sections of this 2020 Annual Report.
Globaluncertainty
Significant uncertainty about the impacts of the COVID-19 pandemic, trade policy and geopolitical tensions continue to pose risks
to the global economic outlook. In October 2020, the International Monetary Fund (IMF) projected global growth to decline -4.4%
in calendar 2020, a moderate improvement from the -4.9% projection in June, yet well below October 2019 levels, as economic
activity in advanced economies improved sooner than expected after initial containment measures were eased. The IMF
projected global growth in 2021 of 5.2%, down from 5.4% projected in June, consistent with the expectations around persistent
social distancing and continued containment measures. Estimates around the expected recovery beyond calendar 2020 remain
uncertain, as timelines are largely dependent on the duration of the COVID-19 pandemic, including additional subsequent waves
of the COVID-19 pandemic, and the effectiveness of the fiscal and monetary policy measures introduced in response to the
COVID-19 pandemic. Trade policy also remains a source of uncertainty, as the U.K. and European Union (EU) have yet to finalize a
Brexit deal in advance of the December 31, 2020 transition date. While the Canada-United States-Mexico Agreement is now
effective, reducing uncertainty about trade within North America, the post-pandemic future of global trade remains uncertain as
countries may look to decrease reliance on the global supply chain. Our diversified business model, as well as our product and
geographic diversification, continue to help mitigate the risks posed by global uncertainty.
Canadiananti-moneylaundering(AML)regulations
The amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act regulations will become
effective June 2021. These amendments aim to improve the effectiveness of Canada’s anti-money laundering and counter-
terrorism financing regime, and align compliance with international standards. We have assessed the requirements and do not
anticipate significant challenges in meeting the requirements by the effective date.
Interestratebenchmarkreform
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.
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 (including most tenors of LIBOR) to be discontinued at the end of
calendar 2021. Derivatives, floating rate notes, loans and other financial contracts whose terms extend beyond the relevant
discontinuation date, and that refer to certain benchmark rates (including LIBOR) as the reference rate, will be impacted. As a
result, clearing agencies are moving towards new benchmark rates and we are working with them on the transition. For further
details, refer to the Critical accounting policies and estimates section in this 2020 Annual Report.
Canadianbenchmarkrateforqualifyinginsuredmortgages
On February 18, 2020, the Department of Finance Canada announced changes to the minimum qualifying rate for insured
mortgages. As a result of a review conducted by the federal financial agencies, it was concluded that the minimum qualifying
benchmark rate should be more responsive to changes in market conditions. While the government has suspended its original
effective date of April 6, 2020 until further notice due to the impact of the COVID-19 pandemic, the new benchmark rate will be the
weekly median 5-year fixed insured mortgage rate plus 2%, compared to the current benchmark rate of the five-year fixed rate
posted by the D-SIBs. We are currently assessing the impacts and we will continue to monitor for any further developments,
including any future changes to the benchmark rate for uninsured mortgages.
92
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Clientfocusedreforms
The Canadian securities administrator published amendments to National Instrument 31-103 to implement the Client Focused
Reforms (Reforms), which are intended to increase the standard of conduct required for Canadian securities registrants. The
Reforms enhance core requirements relating to conflicts of interest, suitability, know-your-product and know-your-client
requirements, and also introduce new requirements relating to relationship disclosure, training and recordkeeping. The changes
come into effect in two phases: the first phase relating to conflicts of interest and the related disclosure requirements comes into
effect on June 30, 2021, extended from its previous effective date of December 31, 2020 due to the impact of the COVID-19
pandemic, and the second phase relating to the remaining requirements, on December 31, 2021. The requirements will primarily
impact our Personal & Commercial Banking and Wealth Management platforms. We are continuing to evaluate the requirements
and their impacts on our businesses.
U.S.regulatoryinitiatives
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. In May 2020, the Office
of the Comptroller of the Currency released revisions to the regulation implementing the Community Reinvestment Act (CRA),
intended to increase bank lending, investment, and services in low- and moderate-income communities, which becomes effective
on January 1, 2023. We will continue to monitor developments and any resulting implications for us.
U.K.andEuropeanregulatoryreform
In addition to the implications from Brexit, other forthcoming regulatory developments include:
(cid:129)
Sustainability-Related Disclosures Regulation which will require financial services firms to disclose their approaches to
considering environmental, social and governance factors as part of their advice and investment decision processes. These
requirements are effective on March 10, 2021 and we are currently assessing the impacts.
The EU’s Central Securities Depositary Regulation rules which are intended to increase discipline in the settlement of
securities transactions. The EU has revised the effective date to February 2022, extended from its previous effective date of
February 2021.
(cid:129)
For further details on regulatory capital and related requirements, refer to the risk and Capital management sections of this 2020
Annual Report.
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 strategy, as well as we seek to 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 due to an unforeseen event causing a substantive
shock to the financial system with the likelihood of material damage to the economy, and which would result in financial,
reputation, legal or other risks for us.
Systemic risk is considered to be the least controllable risk facing us, leading to increased vulnerabilities as experienced
during the 2008 global financial crisis and the COVID-19 pandemic. Our ability to mitigate systemic risk when undertaking
business activities is limited, other than through collaborative mechanisms between key industry participants, and, as
appropriate, the public sector and regulators 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 as well as having established risk limits to ensure our portfolio is 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.
Our financial results are affected by the 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
93
markets, strength of the economy and inflation. Given the importance of our Canadian and U.S. operations, a continued
economic downturn may largely affect our personal and business lending activities and may result in higher provisions for credit
losses. Deterioration and uncertainty in global capital markets could result in continued high volatility that would impact results
in Capital Markets, while in Wealth Management weaker market conditions could 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.
Our financial results are also sensitive to changes in interest rates. Central banks globally reduced benchmark interest rates
in 2020, largely in response to the impact of the COVID-19 pandemic in an effort to provide support to maintain the resilience and
stability of the financial systems. A continuing low interest rate environment in Canada, the U.S. and globally would result in net
interest income continuing to be 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, leading to credit deterioration which might negatively impact our financial results, particularly
in some of our Personal & Commercial Banking and Wealth Management businesses.
Overview of other risks
In addition to the risks described in the risk sections, there are other risk factors, described below, which may 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
strategy with the Audit Committee annually and provide updates on our tax position on a regular basis.
Our tax strategy is designed to provide transparency and support our business strategy, and is aligned with our corporate
vision and values. We seek to maximize shareholder value by structuring our businesses in a tax-efficient manner while
considering reputational risk by being in compliance with all laws and regulations. Our policy seeks to ensure that we:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Act with integrity and in a straightforward, open and honest manner in all tax matters;
Ensure tax strategy is aligned with our business strategy supporting only bona fide transactions with a business purpose
and economic substance;
Ensure all intercompany transactions are conducted on arm’s length terms;
Ensure our full compliance and full disclosure to tax authorities of our statutory obligations; and
Endeavour to work with the tax authorities to build positive long-term relationships and where disputes occur, address
them constructively.
With respect to assessing the needs of our clients, we consider a number of factors including the 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 in an effort 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 facilitate 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.
94
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Tax contribution
In 2020, 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 $3.9 billion (2019 – $4.0 billion). In Canada, total income and
other tax expense for the year ended October 31, 2020 to various levels of government totalled $2.7 billion (2019 – $2.9 billion).
Income and other tax expense – by category
(Millions of Canadian dollars)
Income and other tax expense – by geography
(Millions of Canadian dollars)
6,000
5,000
4,000
3,000
2,000
1,000
0
6,000
5,000
4,000
3,000
2,000
1,000
0
2020
2019
2020
2019
Business taxes
Insurance premium taxes
Property taxes
Other International
U.S.
Canada
Capital taxes
Payroll taxes
Income taxes
Value added and
sales taxes
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 potential for an E&S issue associated with us, a client, transaction, product, supplier
or activity, to have a negative impact on our financial position, operations, legal and regulatory compliance, or reputation. 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 (including, but not limited to, 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 to regularly review and update E&S risk policies. These policies seek to identify sectors, clients and
business activities that may expose us to E&S risk, establish requirements to manage, mitigate and monitor E&S risk, including
when to apply enhanced due diligence and escalation procedures. Business segments and functional areas 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. Global practices in the identification, assessment and management of climate-related risks and opportunities are
rapidly evolving. We are working to advance our understanding of the impact climate-related risks may have on our business and
our clients’ businesses. As a signatory to the Equator Principles (EP), we report annually on projects assessed according to the EP
framework. RBC GAM and BlueBay Asset Management LLP are signatories to the United Nations Principles for Responsible
Investment (UN PRI) and report annually on their responsible investment activities to the UN PRI. RBC Europe Limited (RBCEL), a
wholly owned subsidiary of the bank, is a member of the Green Bond Principles and reports annually on its green bond
underwriting activities. Our Corporate Citizenship team coordinates our enterprise-wide approach to addressing and reporting on
climate change, material E&S and human rights issues, as well as discloses our performance in our annual ESG Performance
Report. We published our Human Rights Statement in October 2020, recognizing the need to consider human rights impacts in our
business and portfolios. The Human Rights Statement sets out our commitment to respect internationally-recognized human rights
in line with the United Nations Guiding Principles on Business and Human Rights. 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 climate-related 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. We have established an internal enterprise-
wide Climate Working Group co-chaired by two GE members, focused on providing strategic direction on advancing our
understanding of climate-related risks and developing strategies to address climate-related risks and opportunities for us and
our clients. 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 mitigating the risks associated
with climate change. Our enterprise strategy to addressing climate-related risks and opportunities includes supporting our
clients in the low-carbon transition, advancing our capabilities in climate risk management and investing in technology to
address complex environmental challenges. Our participation in the rapidly evolving sustainable finance market facilitates in
supporting the low-carbon transition. We are also active participants in industry groups that support the development of
strategies and plans to transition to a low-carbon economy.
Risk Management
Climate-related risks may be a transverse risk type which requires us to consider how financial and non-financial factors may
impact us and our clients. We initially identified climate change as an emerging risk in 2017 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 risk
related to the transition to a lower-carbon economy (transition risk) and risk related to the physical impacts of climate change
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
95
(physical risk). 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. Both we and our clients may also be exposed to climate risk
through technological change and market forces, in addition to the factors outlined above. Additionally, we and our clients may
also be vulnerable to physical climate risk. We regularly review the risks that we face and reflect on those that affect our clients,
considering:
Emerging
regulatory and
legal
requirements
Disruptions to
operations
and client
services
Products and
services we
provide
(cid:129) Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers
are rapidly evolving. Several central banks and regulators are taking steps toward introducing or have
already introduced rules to address the financial and economic risks of climate change, for example, the EU
published regulations on Sustainability-Related Disclosures which will require financial firms to disclose
their approaches to considering environmental, social and governance factors as part of their advice and
investment decision process. As regulations and formal requirements evolve, we will monitor such
developments and update our disclosures as necessary.
(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 maintain a diversified lending portfolio, which improves our resilience to geographic or sectoral
downturns and minimizes concentrations of credit exposure.
(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) 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) 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, and performance is reported on in our annual TCFD Report. 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. We
are working with industry peers toward developing an approach to conducting climate scenario analysis, including a view on
performing stress testing for climate risk.
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.
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.
96
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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 Internal Capital
Adequacy Assessment Process (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, D-SIB/Globally Systemically Important Banks (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, including the
COVID-19 pandemic, given our risk profile and appetite. In addition, we include a discretionary cushion on top of OSFI’s
regulatory targets to reflect our risk appetite, our forecasts of potential negative downturns and to maintain our 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.
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.
Under Basel III, banks select from two main approaches, the Standardized Approach or the IRB Approach, to calculate their
minimum regulatory capital required to support credit, market and operational risks. We adopted the Basel III IRB approach to
calculate credit risk capital for consolidated regulatory reporting purposes. While the majority of our credit risk exposures are
reported under the Basel III IRB Approach for regulatory capital purposes, certain portfolios continue to use the Basel III
Standardized Approach for credit risk (for example, our Caribbean Banking operations and City National). For consolidated
regulatory reporting of market risk capital, we use both Internal Models-based and Standardized Approaches. Effective
November 1, 2019, we adopted the Standardized Approach (SA) for consolidated regulatory reporting of operational risk as the
use of the Advanced Measurement Approach was discontinued by OSFI. 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 11, 2020, 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% consistent with the D-SIB requirement.
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 Capital Adequacy Requirements (CAR) guideline,
and the TLAC leverage ratio, which builds on the leverage ratio described in OSFI’s LR guideline. On April 16, 2020, OSFI notified
systemically important banks of the requirement to maintain a minimum TLAC ratio of 22.5%, which includes the DSB currently
set at 1.0%. OSFI continues to require 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
97
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 ranges between 0% and 2.5%
of the entity’s total RWA for the six systemically important banks in Canada. The DSB requirements must be met at the CET1
capital level. OSFI will undertake a review of the DSB on a semi-annual basis, in June and December, and will publicly announce
any changes at that time. However, on March 13, 2020, OSFI announced a decrease in the DSB from 2.25% to 1.0% of total RWA,
with the buffer decrease effective immediately, in response to the disruption related to the COVID-19 pandemic and in support of
the banks’ ability to supply additional credit to the economy. At that time, OSFI also committed to not increasing the DSB for a
period of 18 months and announced its expectation that all banks should not increase their dividend payments and should stop
any share buybacks. On June 23, 2020, OSFI reaffirmed the DSB at 1.0% of total RWA.
Regulatory adjustments to RWA:
(cid:129)
On March 27, 2020, OSFI announced a series of regulatory adjustments and guidance, and continues to release regulations
implementing and/or clarifying certain aspects on a rolling basis, to further support the financial and operational resilience of
the banking sector in response to the COVID-19 pandemic, including:
(cid:129)
Delaying the past due treatment of all loan deferrals for a period of six months from the grant date, thereby alleviating
any increase to RWA when clients request payment deferrals for their loans including, but not limited to, mortgages,
credit cards, auto loans, small business loans or commercial loans; and
Temporary measures until at least April 2021 to reduce stressed VaR multipliers from three to one and the permanent
exclusion of Funding Valuation Adjustment hedges from market risk.
(cid:129)
(cid:129) Modifications for increases in expected credit loss provisions on CET1 capital by applying a 70% after-tax exclusion rate for
growth in Stage 1 and Stage 2 allowances between Q1 2020 and the respective quarter for the remainder of fiscal 2020.
Thereafter, the exclusion rate will be reduced to 50% and 25% in fiscal 2021 and 2022, respectively. These modifications are
not available for a financial institution’s IRB portfolio in any quarter in which the financial institution has a shortfall in
allowances.
Permitting the use of available buffers above the regulatory authorized minimum for the leverage ratio.
(cid:129)
In relation to the relief programs launched by the Government of Canada and described in the Significant developments:
COVID-19 section in this 2020 Annual Report, on March 30, 2020, OSFI provided guidance on the associated capital treatment of
these programs:
(cid:129)
Loans issued under the CEBA program are to be excluded from risk-based capital and leverage ratios as they are fully
guaranteed by the government.
The appropriate risk-weighting for both the guaranteed and unsecured portion of the loans issued as part of the EDC BCAP
Guarantee program should be in accordance with existing regulatory guidelines. However, the full amount of the loan is
required to be included in the leverage ratio calculation.
Risk-based capital and leverage ratio calculations should reflect only the financial institutions’ own proportion of new loans
issued under the BDC lending programs.
(cid:129)
(cid:129)
Further regulatory guidance was provided by OSFI on April 9, 2020 and April 16, 2020, in support of capital and liquidity
measures, which became effective immediately:
(cid:129)
Leverage ratio exposure amounts are to exclude central bank reserves and sovereign-issued securities that qualify as HQLA
until December 31, 2021, extended from the previous announced end date of April 30, 2021.
Reduction in the current regulatory capital floor for financial institutions using the IRB approach from 75% to 70% of RWA
under the SA. The reduced floor factor will remain in place until the adoption of the Basel III reforms in Q1 2023.
Exclusion of exposures acquired through the Paycheck Protection Program (PPP) instituted by the U.S. government from
RWA and leverage exposure amounts.
(cid:129)
(cid:129)
OSFI has assessed and will continue to assess the need for these relief measures. Effective August 31, 2020, certain relief
measures, such as the past due treatment of all loan deferrals after September 30, 2020, are viewed by OSFI as no longer
warranted and are being gradually phased out based on the timing of when payment deferrals were granted. We have
incorporated the above adjustments and guidance, as applicable, into our results and in our on-going capital planning activities.
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,
2020
Domestic
Stability
Buffer (3)
Table 64
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%
12.5%
13.5%
15.5%
4.8%
1.0%
1.0%
1.0%
n.a.
9.0%
10.5%
12.5%
3.0%
(1)
(2)
(3)
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 March 13, 2020, in accordance with the revised guidance noted above, OSFI lowered the level for the DSB to 1.0% of RWA from 2.25%. On June 23, 2020, OSFI
reaffirmed the DSB at 1.0% of total RWA.
n.a. not applicable.
98
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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 and
limited recourse capital notes (LRCNs) 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, LRCNs, and subordinated debentures issued after January 1, 2013 require Non-viability contingent capital (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) (1)
+
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 fund assets
Non-significant investments in CET1
instruments of financial institutions (3)
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
l
d
o
h
s
e
r
h
T
)
2
(
s
n
o
i
t
c
u
d
e
D
Preferred shares
Limited recourse capital notes
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 (3)
Significant investments in other
Financial Institutions and insurance
subsidiaries Tier 1 instruments
Non-significant investments in Tier 2
instruments of Financial Institutions (3)
Significant investments in other
Financial Institutions and insurance
subsidiaries Tier 2 instruments
Lower quality
capital
(1)
(2)
(3)
Effective March 27, 2020, in accordance with OSFI’s regulatory adjustments, modifications for increases in expected credit loss provisions for CET1 capital are
subject to applying a 70% after-tax exclusion rate for growth in Stage 1 and Stage 2 allowances, relative to January 31, 2020 balances.
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 65
(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)
Credit risk
Market risk
Operational risk
Total 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
2020
October 31
2019
$ 68,082
74,005
84,928
$ 62,184
67,861
77,888
$ 448,821
27,374
70,047
$417,835
28,917
66,104
$ 546,242
$512,856
12.5%
13.5%
15.5%
4.8%
$ 1,552.9
12.1%
13.2%
15.2%
4.3%
$ 1,570.5
(1)
Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline and the Leverage ratio is calculated using OSFI’s LR guideline
as updated in accordance with the regulatory guidance issued in fiscal 2020 by OSFI in response to the COVID-19 pandemic. Both the CAR
guideline and LR guideline are based on the Basel III framework.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
99
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)
2020 vs. 2019
Continuity of CET1 ratio (Basel III)
Table 66
As at
October 31
2020
October 31
2019
$ 17,732
59,573
3,414
$ 17,888
55,680
4,248
–
–
12
(12,649)
12
(15,644)
$ 68,082
$ 62,184
$ 5,921
–
$ 4,175
1,500
2
–
2
–
$ 5,923
$ 5,677
$ 74,005
$ 67,861
$ 9,049
488
$ 6,998
2,509
29
1,357
–
25
495
–
$ 10,923
$ 10,027
$ 84,928
$ 77,888
166 bps
(39) bps
(32) bps
12.1%
(30) bps
(29) bps
18 bps
(16) bps
(3) bps
12.5%
October 31,
2019 (1)
Internal
capital
generation
(excl. PCL) (2)
PCL net of
capital
modification
RWA growth
- downgrades
RWA growth
- business
Regulatory
updates
RWA decrease
- models &
methodology
Share
repurchases
Other
October 31,
2020 (1)
(1)
(2)
Represents rounded figures.
Internal capital generation of $8.5 billion which represents Net income available to shareholders excluding PCL, less common and preferred shares dividends
and distributions on other equity instruments.
Our CET1 ratio was 12.5%, up 40 bps from last year, mainly reflecting internal capital generation, partially offset by higher RWA,
the impact of higher PCL net of related capital modifications for expected loss provisioning, the impact of regulatory changes
and share repurchases.
Our Tier 1 capital ratio of 13.5% was up 30 bps, reflecting the factors noted above under the CET1 ratio and the favourable
impact of the issuance of LRCNs, partially offset by the redemption of preferred shares.
100
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Our Total capital ratio of 15.5% was up 30 bps, reflecting the factors noted above under the Tier 1 capital ratio. Total capital
ratio was also positively impacted by the inclusion of excess provisions, net of capital modifications applied, partially offset by
the net redemption of subordinated debentures.
Our Leverage ratio of 4.8% was up 50 bps, mainly reflecting internal capital generation, the impact of regulatory
modifications for central bank reserves and sovereign-issued securities qualifying as HQLA, and the issuance of LRCNs. These
factors were partially offset by higher leverage exposures, the impact of higher PCL net of capital modifications for expected loss
provisioning, the redemption of preferred shares, share repurchases and the impact of the adoption of IFRS 16.
Leverage exposures decreased by $17.6 billion mainly due to the impact of regulatory modifications for central bank reserves
and sovereign-issued securities qualifying as HQLA, partially offset by business growth mainly in cash, loans and securities, the
impact of foreign exchange translation, and the impact of the adoption of IFRS 16.
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 April 9, 2020, the capital floor requirement was set to 70% 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 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
2020
Risk-weighted assets
Table 67
2019
Standardized
approach
Advanced
approach
Other
Total
Total
Average
of risk-
weights (2)
Exposure (1)
$ 302,980
299,180
378,188
281,426
29,911
8% $
20%
58%
5%
17%
9,294 $ 15,310 $
6,848
51,175
2,385
1,720
53,696
167,628
12,986
3,508
– $ 24,604 $ 23,629
59,443
–
215,342
–
9,400
–
7,648
–
60,544
218,803
15,371
5,228
Total lending-related and other
$1,291,685
25% $ 71,422 $253,128 $
– $324,550 $315,462
Trading-related
Repo-style transactions
Derivatives – including CVA – CET1 phase-in
adjustment
Total trading-related
Total lending-related and other and trading-
$ 857,349
1% $
88 $ 9,352 $
56 $ 9,496 $ 10,469
93,930
46%
2,073
22,347
18,497
42,917
33,617
$ 951,279
6% $
2,161 $ 31,699 $18,553 $ 52,413 $ 44,086
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
$2,242,964
3,456
64,421
n.a.
29,459
17% $ 73,583 $284,827 $18,553 $376,963 $359,548
4,583
7,794
17,089
28,821
4,931
6,219
17,385
n.a.
4,931
11,489
17,385
38,053
–
–
–
38,053
–
5,270
n.a.
n.a.
143%
18%
n.a.
129%
$2,340,300
19% $ 78,853 $313,362 $56,606 $448,821 $417,835
$
2,309 $ 5,532 $
2,066
2,544
238
4,932
–
1,562
373
49
1,053
6,716
– $ 7,841 $ 7,264
3,381
–
1,756
–
296
–
8,885
–
7,335
–
3,628
2,917
287
5,985
6,716
$ 12,089 $ 15,285 $
– $ 27,374 $ 28,917
$ 70,047
n.a.
n.a. $ 70,047 $ 66,104
Total risk-weighted assets
$2,340,300
$ 160,989 $328,647 $56,606 $546,242 $512,856
(1)
Total exposure represents EAD 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.
(2)
n.a. not applicable.
2020 vs. 2019
During the year, RWA was up $33 billion, primarily driven by the impact of net credit downgrades, business growth mainly in
derivatives, cash and lending as well as the impact of foreign exchange translation. The unfavourable impact of regulatory
changes reflecting the adoption of IFRS 16 and removal of allowed grandfathering and transitioning treatment for certain
securitization and counterparty credit risk exposures, also contributed to the increase. These factors were partially offset by net
normal course model and methodology changes, including capital modifications associated with the reduction in market risk.
The impact of foreign exchange translation on RWA is largely mitigated with economic hedges in our CET1 ratio.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
101
Selected capital management activity
Selected capital management activity
Table 68
(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 limited recourse capital notes
Series 1 (2), (3), (4)
Redemption of preferred shares, Series W (3)
Redemption of preferred shares, Series AA (3)
Redemption of preferred shares, Series AC (3)
Redemption of preferred shares, Series AE (3)
Redemption of preferred shares, Series AF (3)
Redemption of preferred shares, Series AG (3)
Tier 2 capital
Redemption of December 6, 2024 subordinated
debentures (5)
Issuance of December 23, 2029 subordinated
debentures (4), (5)
Redemption of June 4, 2025 subordinated
debentures (4), (5)
Issuance of June 30, 2030 subordinated
debentures (4), (5)
Other
Purchase and cancellation of preferred shares
Series C-2 (3)
For the year ended October 31, 2020
Issuance or
redemption date
Number of
shares (000s)
Amount
1,043 $
(7,860)
80
(97)
1,750 $ 1,750
(300)
(300)
(200)
(250)
(200)
(250)
(12,000) $
(12,000)
(8,000)
(10,000)
(8,000)
(10,000)
October 1, 2020
October 1, 2020
October 1, 2020
October 1, 2020
October 1, 2020
October 1, 2020
December 6, 2019
$ (2,000)
December 23, 2019
June 4, 2020
June 23, 2020
1,500
(1,000)
1,250
December 17, 2019
(5) $
(8)
(1)
(2)
(3)
(4)
(5)
Amounts include cash received for stock options exercised during the period and fair value adjustments to stock options.
For the LRCNs, the number of shares represent the number of notes issued.
For further details, refer to Note 20 of our 2020 Annual Consolidated Financial Statements.
NVCC instruments.
For further details, refer to Note 19 of our 2020 Annual Consolidated Financial Statements.
On February 27, 2019, we announced a normal course issuer bid (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. This NCIB was completed on February 26, 2020, with 14.0 million common shares repurchased
and cancelled at a total cost of approximately $1,457 million.
On February 27, 2020, we announced an NCIB program to purchase up to 20 million of our common shares, commencing on
March 2, 2020 and continuing until March 1, 2021, 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 0.4 million, at a cost of approximately $39 million. In accordance with OSFI’s announcement of its expectation that
share buybacks should be stopped, we ceased the repurchase of our common shares effective March 13, 2020.
In fiscal 2020, the total number of common shares repurchased and cancelled under our NCIB programs was approximately
7.9 million. The total cost of the shares repurchased was $814 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 the prevailing market price at the time of acquisition.
On December 6, 2019, we redeemed 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 17, 2019, we purchased for cash 200,000 depositary shares, each representing a one-fortieth interest in a share
of our Fixed Rate/Floating Rate Non-Cumulative First Preferred Shares, Series C-2 (C-2 Preferred Shares), for aggregate total
consideration, including accrued dividends, of US$6 million. The purchased depositary and underlying C-2 Preferred Shares were
subsequently cancelled. The C-2 Preferred Shares do not qualify as Tier 1 regulatory capital.
On December 23, 2019, we issued $1,500 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of
2.88% per annum until December 23, 2024, and at the three-month Canadian Dollar Offered Rate (CDOR) plus 0.89% thereafter
until their maturity on December 23, 2029.
On June 4, 2020, we redeemed all $1,000 million of our outstanding NVCC 2.48% subordinated debentures due on June 4, 2025
for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
On June 23, 2020, we issued $1,250 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of 2.088%
per annum until June 30, 2025, and at the three-month CDOR plus 1.31% thereafter until their maturity on June 30, 2030.
102
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
On July 28, 2020, we issued $1,750 million of LRCN Series 1 at a price of $1,000 per note. The LRCN Series 1 bear interest at a
fixed rate of 4.5% per annum until November 24, 2025, and thereafter at a rate per annum, reset every fifth year, equal to the
5-Year Government of Canada Yield plus 4.137% until maturity on November 24, 2080.
On October 1, 2020, we redeemed Non-Cumulative First Preferred Shares at a price of $25 per share, including all 12 million
issued and outstanding Series W shares; all 12 million issued and outstanding Series AA shares; all 8 million issued and
outstanding Series AC shares; all 10 million issued and outstanding Series AE shares; all 8 million issued and outstanding Series
AF shares; and all 10 million issued and outstanding Series AG shares.
On November 2, 2020, we issued $1,250 million of LRCN Series 2, at a price per note of $1,000. The LRCN Series 2 bear interest at a
fixed rate of 4% per annum until February 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year
Government of Canada Yield plus 3.167% until maturity on February 24, 2081.
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 2020, our dividend payout ratio was 55%. Common share dividends paid during the
year were $6.1 billion. In accordance with OSFI’s announcement on March 13, 2020 of its expectation that all banks should not
increase their dividend payment, we have maintained our dividend payment since that date.
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), (3)
Non-cumulative Series AA (3)
Non-cumulative Series AC (3)
Non-cumulative Series AE (3)
Non-cumulative Series AF (3)
Non-cumulative Series AG (3)
Non-cumulative Series AZ (4), (5)
Non-cumulative Series BB (4), (5)
Non-cumulative Series BD (4), (5)
Non-cumulative Series BF (4), (5)
Non-cumulative Series BH (5)
Non-cumulative Series BI (5)
Non-cumulative Series BJ (5)
Non-cumulative Series BK (4), (5)
Non-cumulative Series BM (4), (5)
Non-cumulative Series BO (4), (5)
Non-cumulative Series C-2 (6)
Other equity instruments issued
Limited recourse capital notes
Series 1 (4), (5), (7)
2020
2019
Number of
shares (000s)
1,423,861
(1,388)
Amount
$17,628
(129)
1,422,473
$17,499
Dividends
declared
per share
4.29
$
Number of
shares (000s)
1,430,678
(582)
Amount
$ 17,645
(58)
1,430,096
$ 17,587
Table 69
Dividends
declared
per share
4.07
$
7,735
3,314
7,082
–
–
–
–
–
–
20,000
20,000
24,000
12,000
6,000
6,000
6,000
29,000
30,000
14,000
15
$
–
–
–
–
–
–
500
500
600
300
150
150
150
725
750
350
23
$
1.05
0.95
0.98
0.96
0.95
0.96
0.93
0.91
0.85
0.90
1.23
1.23
1.31
1.38
1.38
1.20
US$67.50
$
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
1,750
1,750
4.50%
–
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
0.96
0.96
0.90
0.90
1.23
1.23
1.31
1.38
1.38
1.27
US$ 67.50
–
Preferred shares and other equity
instruments issued
Treasury instruments – preferred shares
and other equity instruments (8)
Preferred shares and other equity
instruments outstanding
Dividends on common shares
Dividends on preferred shares and
distributions on other equity
instruments (9)
168,765
$ 5,948
227,020
$ 5,706
(2)
(3)
34
1
168,763
$ 5,945
$ 6,111
227,054
$ 5,707
$ 5,840
268
269
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
For further details about our capital management activity, refer to Note 20 of our 2020 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 October 1, 2020, we redeemed Non-Cumulative First Preferred Shares at a price of $25 per share, including all 12 million issued and outstanding Series W shares; all
12 million issued and outstanding Series AA shares; all 8 million issued and outstanding Series AC shares; all 10 million issued and outstanding Series AE shares; all
8 million issued and outstanding Series AF shares; and all 10 million issued and outstanding Series AG shares.
Dividend rate will reset every five years.
NVCC instruments.
Represents 615,400 depositary shares relating to preferred shares Series C-2. Each depositary share represents one-fortieth interest in a share of Series C-2.
For LRCNs, the number of shares represent the number of notes issued and the dividends declared per share represent the annual interest rate percentage applicable to the
notes issued as at the reporting date. In connection with the issuance of LRCN Series 1, on July 28, 2020, we issued $1,750 million of First Preferred Shares Series BQ (Series
BQ) at a price of $1,000 per Series BQ. The Series BQ were issued to a consolidated trust to be held as trust assets in connection with the LRCN structure.
Positive amounts represent a short position in treasury instruments.
Excludes distributions to non-controlling interests.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
103
As at November 27, 2020, the number of outstanding common shares was 1,423,065,739, net of treasury shares held of 917,878, and
the number of stock options and awards was 7,616,167.
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 as at
October 31, 2020, which are the preferred shares Series AZ, BB, BD, BF, BH, BI, BJ, BK, BM, BO, LRCN Series 1 and subordinated
debentures due on September 29, 2026, January 20, 2026, January 27, 2026, July 25, 2029, December 23, 2029 and June 30, 2030
would be converted into 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 $5.00 and including an estimate for accrued dividends and interest,
these NVCC capital instruments would convert into a maximum of 3,870 million common shares, in aggregate, which would
represent a dilution impact of 73.12% based on the number of common shares outstanding as at October 31, 2020.
Attributed capital
Our methodology for allocating capital to our business segments is based on the Basel III regulatory capital requirements, with
the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified economic capital. Risk-based
capital attribution provides a uniform base for performance measurement among business segments, which compares to our
overall corporate return objective and facilitates management decisions in resource allocation in conjunction with other factors.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are
monitored to ensure that the regulatory capital framework remains comprehensive and consistent. The models are benchmarked
to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk
management industry professionals.
For additional information on the risks highlighted below, refer to the Risk management section.
RWA (C$ millions) (1)
$448,821
Credit
Market
27,374
Operational 70,047
$546,242
Royal Bank of
Canada
64%
5
11
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
19
1
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury Services
Capital Markets
RWA (C$ millions) (1)
$166,609
Credit
424
Market
Operational 27,783
$194,816
RWA (C$ millions) (1)
$74,148
Credit
Market
422
Operational 18,908
$93,478
RWA (C$ millions) (1), (3)
$12,277
Credit
–
Market
Operational
–
$12,277
RWA (C$ millions) (1)
$16,771
Credit
3,373
Market
Operational
4,897
$25,041
RWA (C$ millions) (1)
$168,457
Credit
22,062
Market
Operational 18,028
$208,549
70%
–
12
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
19
(1)
44%
1
11
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
44
–
9%
Attributed capital (1)
Based on Economic
Capital:
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
16
10
10
55
52%
16
15
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
16
1
76%
10
7
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
7
–
(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 as well as capital
modifications for expected loss provisioning 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)
104
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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 IRB
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
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.
Regulatory developments
Basel III reforms
Under the new Basel III reforms, OSFI revised its capital requirement for operational risk applicable to deposit taking institutions
and a new Standardized Approach (SA) will be required. On January 20, 2020, OSFI extended the effective implementation date to
Q1 2022 from the previous effective date of Q1 2021.
On March 27, 2020, the BCBS extended the effective implementation dates of the following regulatory requirements in recognition
of the operational challenges brought about by the COVID-19 pandemic for both bank supervisors such as OSFI and the banks
they supervise, including:
(cid:129)
(cid:129) Minimum capital requirements for market risk to January 1, 2023 from the previous effective date of January 1, 2022.
(cid:129)
Basel III reforms (credit risk and operational risk) to January 1, 2023 from the previous effective date of January 1, 2022.
Revised Pillar 3 disclosure requirements deferred to January 1, 2023.
On March 27, 2020, OSFI also announced the effective implementation requirements for the Basel III reforms applicable to us and
other Canadian D-SIBs to January 31, 2023, which is aligned with the BCBS and the Minimum capital requirements for market risk
to January 31, 2024.
Global systemically important banks (G-SIB)
On April 3, 2020, the BCBS announced its postponement of the implementation of the revised G-SIB framework from 2021 to 2022
in order to provide additional operational capacity for banks and supervisors in light of the COVID-19 pandemic.
Basel III reforms – Credit valuation adjustment (CVA)
On July 8, 2020, BCBS revised its standard on the regulatory capital treatment of CVA risk for derivatives and securities financing
transactions. The revised standard reflects recalibrated risk weights, guidance on the treatment of certain client cleared
derivatives and permits recalibration between the two CVA framework methodologies allowed. These changes bring the CVA
frameworks more in alignment with the updated Minimum capital requirement for market risk. While the BCBS effective date for
this standard is January 1, 2023, OSFI has allowed deferral of the implementation date to January 1, 2024 to align with the OSFI
implementation date of the market risk framework. We are currently assessing the impact of the guidelines and do not anticipate
any issues with meeting OSFI’s effective implementation date.
Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies, judgments, estimates and assumptions
Our significant accounting policies are described in Note 2 of our 2020 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. Certain critical judgments relating to allowance for credit losses and goodwill
are particularly complex in the current uncertain environment. The COVID-19 pandemic has continued to evolve and the
economic environment in which we operate could be subject to sustained volatility, which could continue to impact our financial
results, as the duration of the COVID-19 pandemic, and the effectiveness of steps undertaken by governments and central banks
remains uncertain. We continue to monitor and assess the impacts of the COVID-19 pandemic on our critical accounting
judgments, estimates and assumptions. For further information, refer to Notes 2, 5 and 10 of our 2020 Annual Consolidated
Financial Statements.
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, and income taxes. Our
critical accounting policies and estimates have been reviewed and approved by our Audit Committee, in consultation with
management, as part of their review and approval of our significant accounting policies, judgments, estimates and assumptions.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
105
Changes in accounting policies
During the first quarter of 2020, we adopted IFRS 16. As permitted by the transition provisions of IFRS 16, we elected not to restate
comparative period results; accordingly, all comparative information prior to the first quarter of 2020 is presented in accordance
with our previous accounting policies, as described in Note 2 of our 2020 Annual Consolidated Financial Statements. As a result
of the adoption of IFRS 16, we recognized right-of-use assets, lease liabilities and an adjustment to opening retained earnings as
at November 1, 2019. Refer to Note 2 of our 2020 Annual Consolidated Financial Statements for details of these changes.
During the first quarter of 2020, we early adopted amendments to IFRS 9 Financial Instruments (IFRS 9), IAS 39 Financial
Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (Amendments). Refer to Note 2 of our
2020 Annual Consolidated Financial Statements for details of these changes.
Fair value of financial instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. We determine fair value by incorporating factors that
market participants would consider in setting a price, including commonly accepted valuation approaches.
We give priority to third-party pricing services and valuation techniques with the highest and most consistent accuracy. The
level of accuracy is determined over time by comparing third-party price values to traders’ or system values, other pricing
service values and, when available, actual trade data. Other valuation techniques are used when a price or quote is not available.
Some valuation processes use models to determine fair value. We have a systematic and consistent approach to control the use
of models.
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.
For further information on the fair value of financial instruments, refer to Notes 2 and 3 of our 2020 Annual Consolidated
Financial Statements.
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)
(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, the inclusion of forward looking information and the application of expert credit judgment. The underlying assumptions
and estimates may result in changes to the provisions from period to period that significantly affect our results of operations.
106
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Performing financial assets
(cid:129)
For further information on allowance for credit losses, refer to Notes 2, 4 and 5 of our 2020 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 2020 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 2020 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 2020 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 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 2020 Annual Consolidated Financial Statements.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
107
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,
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 2020 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, in assessing the probability of acceptance of our tax positions by the relevant tax authorities and estimating the
expected timing and amount of the provision for current and deferred income taxes. A deferred tax asset or liability is determined
for each temporary difference based on the tax rates that are expected to be in effect in the period that the asset is realized or
the liability is settled. Where the temporary differences will not reverse in the foreseeable future, no deferred tax amount is
recognized.
On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be
realized, using both positive and negative evidence. Refer to Note 22 of our 2020 Annual Consolidated Financial Statements for
further information.
Future changes in accounting policy and disclosure
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. The Conceptual Framework
is not a standard, and does not override the concepts or requirements in any standard. It may be used to develop consistent
accounting policies where there is no applicable standard in place. The revisions include a few new concepts, updated definitions
and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments are not expected to
have a material impact on our Consolidated Financial Statements.
Interest Rate Benchmark Reform
In August 2020, the IASB issued Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 Insurance
contracts and IFRS 16 (Phase 2 Amendments). The Phase 2 Amendments address issues that arise upon replacing the existing
interest rate benchmark with the alternative interest rates and introduces additional disclosure requirements. The Phase 2
Amendments provide two key reliefs:
(cid:129) Modifications made as a direct result of the Reform on an economically equivalent basis are reflected prospectively in the
(cid:129)
effective interest rate rather than as an immediate gain or loss.
If qualifying criteria are met, hedging relationships that are directly impacted by the Reform would be able to continue hedge
accounting upon transition to alternative interest rates.
The Phase 2 Amendments will be effective for us on November 1, 2021, with earlier adoption permitted. We are currently assessing
the impact of the adoption of the Phase 2 Amendments on our Consolidated Financial Statements.
To manage our transition to alternative interest rates, we have implemented a comprehensive enterprise-wide program and
governance structure that addresses the key areas of impact including contract remediation, funding and liquidity planning, risk
management, financial reporting and valuation, systems, processes, client education and communication. Transition activities
are focused on two broad streams of work: (i) developing new alternative risk-free rate linked products, and (ii) conversion of
existing LIBOR based contracts to alternative risk-free rates. Our program timelines are ultimately dependent on broader market
acceptance of products that reference the new alternative risk-free rates and our clients’ readiness and ability to adopt the
replacement products. Significant matters that we continue to evaluate include client product offerings, short and long term
funding strategies, and our hedging programs. We are following the recommended target dates for cessation of LIBOR-based
products provided by our regulators.
108
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
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. In June 2020, the IASB issued amendments to
IFRS 17, including deferral of the effective date by two years. This new standard will be effective for us on November 1, 2023 and
will be applied retrospectively with restatement of comparatives unless impracticable. We are currently assessing the impact of
adopting this standard and the 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, 2020, 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, 2020.
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, 2020 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 26 of our audited 2020 Annual Consolidated Financial Statements.
Supplementary information
Selected annual information
(Millions of Canadian dollars, except per share amounts)
Total revenue
Net income attributable to:
Shareholders
Non-controlling interest
Basic earnings per share
Diluted earnings per share
Dividends declared per common shares
Total assets
Deposits
Table 70
2020
2019
2018
$
47,181
$
46,002
$
42,576
11,432
5
12,860
11
12,400
31
$
11,437
$
12,871
$
12,431
$
7.84
7.82
4.29
$1,624,548
1,011,885
$
8.78
8.75
4.07
$1,428,935
886,005
$
8.39
8.36
3.77
$1,334,734
836,197
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
109
Net interest income on average assets and liabilities
Table 71
(Millions of Canadian dollars, except for percentage amounts) (1)
2020
2019
2018
2020
2019
2018
2020
2019
2018
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
$
13,891 $
36,008
22,202
10,990 $
25,392
20,463
10,300 $
27,522
21,587
115 $
160
32
231 $
505
(53)
198 0.83% 2.10% 1.92%
1.56
429
(0.28)
(61)
1.99
(0.26)
0.44
0.14
72,101
56,845
59,409
307
683
566
0.43
1.20
0.95
131,685
128,121
130,647
97,764
125,153
90,470
259,806
228,411
215,623
4,622
1,866
6,488
4,573
2,254
6,827
3,785
1,885
5,670
3.51
1.46
2.50
3.50
2.31
2.99
3.02
2.08
2.63
363,418
346,173
266,709
4,668
8,960
5,536
1.28
2.59
2.08
404,051
93,238
497,289
111,931
37,985
379,853
89,503
469,356
96,492
32,430
364,473
77,985
442,458
79,695
28,932
14,534
4,179
18,713
3,034
1,673
15,352
4,988
20,340
3,099
1,424
13,533
3,682
17,215
3,008
1,026
647,205
598,278
551,085
23,420
24,863
21,249
3.60
4.48
3.76
2.71
4.40
3.62
2.60
–
–
–
4.04
5.57
4.33
3.21
4.39
4.16
3.36
–
–
–
3.71
4.72
3.89
3.77
3.55
3.86
3.02
–
–
–
Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets
1,342,530
72,698
18,572
202,893
1,229,707
29,430
17,447
159,599
1,092,826
31,695
16,015
154,395
34,883
–
–
–
41,333
–
–
–
33,021
–
–
–
Total assets
$1,636,700 $ 1,436,200 $ 1,294,900 $ 34,883 $ 41,333 $ 33,021 2.13% 2.88% 2.55%
Liabilities and shareholders’ equity
Deposits (3)
Canada
U.S.
Other International
$ 612,675 $
105,892
93,597
555,467 $
97,563
83,349
513,240 $ 7,378 $ 10,420 $ 7,718 1.20% 1.88% 1.50%
1.33
1.05
98,651
77,414
1,524
1,044
1,313
811
1.56
1.25
0.62
0.80
658
747
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Subordinated debentures
Other interest-bearing liabilities
Total interest-bearing liabilities
Non-interest-bearing deposits
Acceptances
Other liabilities
Total liabilities
Equity
812,164
736,379
689,305
8,783
12,988
35,937
34,799
32,642
2,200
1,995
308,723
9,518
24,957
1,191,299
158,468
18,646
183,355
262,929
9,405
16,496
1,060,008
133,702
17,473
143,948
184,934
9,131
15,352
931,364
129,696
16,030
142,122
2,622
280
163
14,048
–
–
–
6,147
365
89
21,584
–
–
–
9,842
1,627
3,261
322
17
15,069
–
–
–
1.08
6.12
0.85
2.94
0.65
1.18
–
–
–
1.76
5.73
2.34
3.88
0.54
2.04
–
–
–
1.43
4.98
1.76
3.53
0.11
1.62
–
–
–
$1,551,768 $ 1,355,131 $ 1,219,212 $ 14,048 $ 21,584 $ 15,069 0.91% 1.59% 1.24%
$
84,925 $
81,052 $
75,720
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Total liabilities and shareholders’ equity
$1,636,700 $ 1,436,200 $ 1,294,900 $ 14,048 $ 21,584 $ 15,069 0.86% 1.50% 1.16%
Net interest income and margin
$1,636,700 $ 1,436,200 $ 1,294,900 $ 20,835 $ 19,749 $ 17,952 1.27% 1.38% 1.39%
Net interest income and margin (average earning
assets, net)
Canada
U.S.
Other International
$ 779,433 $
356,916
206,183
700,153 $
329,655
199,898
637,214 $ 14,185 $ 14,375 $ 13,076 1.82% 2.05% 2.05%
1.31
275,895
0.70
179,717
3,616
1,260
4,058
1,316
4,959
1,691
1.39
0.82
1.23
0.66
Total
(1)
(2)
(3)
$1,342,532 $ 1,229,706 $ 1,092,826 $ 20,835 $ 19,749 $ 17,952 1.55% 1.61% 1.64%
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
Interest income includes loan fees of $797 million (2019 – $672 million; 2018 – $621 million).
Deposits include personal chequing and savings deposits with average balances of $218 billion (2019 – $189 billion; 2018 – $182 billion), interest expense of $0.5 billion
(2019 – $1.1 billion; 2018 – $0.8 billion) and average rates of 0.2% (2019 – 0.6%; 2018 – 0.4%). Deposits also include term deposits with average balances of $443 billion (2019
– $421 billion; 2018 – $389 billion), interest expense of $6.8 billion (2019 – $9.2 billion; 2018 – $7.4 billion) and average rates of 1.53% (2019 – 2.19%; 2018 – 1.89%).
n.a. not applicable
110
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Change in net interest income
Table 72
(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
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
2020 vs. 2019
Increase (decrease)
due to changes in
2019 vs. 2018
Increase (decrease)
due to changes in
Average
volume (2)
Average
rate (2)
Net change
Average
volume (2)
Average
rate (2)
Net change
$
61
211
(5)
$ (177)
(556)
90
$
36
700
13
(1,088)
$
$
(116)
(345)
85
49
(388)
13
(33)
3
166
152
$
20
109
5
622
217
33
76
8
788
369
446
(4,738)
(4,292)
1,649
1,775
3,424
978
208
496
244
(1,796)
(1,017)
(561)
5
(818)
(809)
(65)
249
571
544
634
124
1,248
762
(543)
274
1,819
1,306
91
398
$ 3,375 $(9,825)
$ (6,450)
$ 3,823
$4,489
$ 8,312
1,073
130
128
65
1,071
4
46
(4,115)
(996)
(425)
140
(4,596)
(89)
28
(3,042)
(866)
(297)
205
(3,525)
(85)
74
635
(14)
62
108
1,375
10
1
2,067
225
171
260
1,511
33
71
2,702
211
233
368
2,886
43
72
$ 2,517 $(10,053)
$ (7,536)
$ 2,177
$4,338
$ 6,515
$
858
$ 228
$ 1,086
$ 1,646
$ 151
$ 1,797
(1)
(2)
(3)
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
Volume/rate variance is allocated on the percentage relationships of changes in balances and changes in rates to the total net change in net interest income.
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Loans and acceptances by geography
Table 73
As at October 31 (Millions of Canadian dollars)
2020
2019
2018
2017
2016
Canada (1)
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
U.S. (1)
Retail
Wholesale
Other International (1)
Retail
Wholesale
Total loans and acceptances
Total allowance for credit losses
$ 319,287 $ 287,767
81,547
19,617
5,434
79,778
17,060
5,742
$ 265,831
82,112
18,793
4,866
$ 255,799
82,022
17,491
4,493
$ 241,800
82,205
16,601
3,878
421,867
144,917
394,365
142,334
371,602
118,627
359,805
99,158
344,484
86,130
$ 566,784 $ 536,699
$ 490,229
$ 458,963
$ 430,614
29,721
64,381
94,102
6,388
17,971
24,359
24,850
53,784
78,634
6,871
17,838
24,709
21,033
59,476
80,509
6,817
17,837
24,654
18,100
55,037
73,137
7,265
21,870
29,135
17,134
59,349
76,483
7,852
21,733
29,585
$ 685,245 $ 640,042
$ 595,392
$ 561,235
$ 536,682
(5,746)
(3,124)
(2,933)
(2,159)
(2,235)
Total loans and acceptances, net of allowance for credit losses
$ 679,499 $ 636,918
$ 592,459
$ 559,076
$ 534,447
(1)
Geographic information is based on residence of borrower.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
111
Loans and acceptances by portfolio and sector
Table 74
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
2020
2019
2018
2017
2016
$ 342,597
92,011
17,626
5,742
$ 308,091
92,250
20,311
5,434
$ 282,471
92,700
19,415
4,866
$ 270,348
92,294
18,035
4,493
$ 254,998
93,466
17,128
3,878
$ 457,976
$ 426,086
$ 399,452
$ 385,170
$ 369,470
9,862
8,535
1,453
16,523
6,116
7,593
28,120
5,828
1,173
4,365
6,955
4,830
15,599
1,070
1,415
62,721
23,062
5,059
7,644
7,955
1,391
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
Wholesale
Total loans and acceptances
Total allowance for credit losses
$ 227,269
$ 213,956
$ 195,940
$ 176,065
$ 167,212
$ 685,245
$ 640,042
$ 595,392
$ 561,235
$ 536,682
(5,746)
(3,124)
(2,933)
(2,159)
(2,235)
Total loans and acceptances, net of allowance for
credit losses
$ 679,499
$ 636,918
$ 592,459
$ 559,076
$ 534,447
112
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Gross impaired loans by portfolio and geography
Table 75
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 (1), (2)
Canada (3)
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. (3)
Retail
Wholesale
Total
Other International (3)
Retail
Wholesale
Total
Total GIL (1), (2)
Allowance on impaired loans (4)
Net impaired loans
GIL as a % of loans and acceptances
Residential mortgages
Personal
Small business
Retail
Wholesale
Total
$
$
2020
638
212
90
940
70
79
4
281
112
552
81
-
13
7
57
14
47
30
8
395
251
6
148
46
45
$
$
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
2,246
9
1,868
13
$ 3,195
$ 2,976
$
425
177
90
692
69
20
4
117
34
90
-
-
13
2
54
3
-
4
7
233
85
4
15
–
–
754
$
481
250
57
788
36
18
10
71
24
97
–
–
9
5
48
4
2
1
10
195
65
11
13
59
–
678
$ 1,446
$ 1,466
$
32
1,039
$ 1,071
$
$
216
462
678
$
$
$
$
36
869
905
272
333
605
$ 3,195
$ 2,976
(949)
(832)
$
$
$
$
$
$
$
$
$
$
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
327
313
640
2,183
(700)
$
$
$
$
$
$
$
$
$
$
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
345
451
796
2,576
(737)
$
$
$
$
$
$
$
$
$
$
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
380
567
947
3,903
(809)
$ 2,246
$ 2,144
$
1,483
$
1,839
$
3,094
0.19%
0.23%
1.56%
0.21%
0.99%
0.47%
0.24%
0.33%
1.05%
0.26%
0.88%
0.46%
0.26%
0.33%
0.90%
0.27%
0.57%
0.37%
0.23%
0.30%
0.85%
0.25%
0.92%
0.46%
0.28%
0.33%
1.19%
0.29%
1.69%
0.73%
Allowance on impaired loans as a % of GIL (4)
29.71%
27.96%
32.08%
28.61%
20.72%
(1)
(2)
(3)
(4)
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 $142 million in 2020 (2019 – $189 million; 2018 – $179 million; 2017 – $307 million; 2016 –
$337 million). For further details, refer to Note 5 of our 2020 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.
Geographic information is based on residence of borrower.
Effective November 1, 2017, represents Stage 3 ACL on loans, acceptances, and commitments under IFRS 9 and Allowances for impaired loans under IAS 39.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
113
Provision for credit losses by portfolio and geography
Table 76
For the year ended October 31 (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 (1)
Canada (2)
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
U.S. (2)
Retail
Wholesale
Total
Other International (2)
Retail
Wholesale
Total
Total PCL on impaired loans (1)
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 (1)
$
$
2020
28
376
484
49
937
14
28
–
98
28
305
4
–
2
(2)
31
(7)
7
9
(9)
54
89
(3)
8
2
5
663
–
$
$
$
$
2019
51
487
518
36
$
2018
51
462
468
30
1,092
1,011
$
8
10
–
61
33
98
–
–
9
6
104
30
–
–
57
57
35
7
9
70
5
599
–
1
5
(1)
81
1
1
–
–
3
4
8
(21)
3
–
2
13
22
–
32
1
(8)
147
2
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
$
$
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
$ 1,600
$ 1,691
$ 1,160
$ 1,150
$ 1,496
$
35
395
471
49
950
$
$
$
32
488
505
36
1,061
44
458
456
30
988
10
17
-
45
8
33
1
-
2
(3)
12
(2)
(2)
-
1
24
25
(4)
(6)
1
1
8
4
–
24
14
34
–
–
5
4
27
28
–
–
45
53
29
5
9
2
1
163
292
1
1
(1)
28
2
4
–
–
3
1
6
1
–
–
1
14
17
–
2
–
–
80
$ 1,113
$ 1,353
$ 1,068
$
$
$
$
5
377
382
(18)
123
105
$
$
$
$
12
223
235
19
84
103
$
$
$
$
4
64
68
19
5
24
$
$
$
$
$
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
$
42
459
435
34
970
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
$ 1,600
$ 1,691
$ 1,160
$ 1,150
$ 1,496
2,631
120
200
(27)
123
24
–
50
$ 4,351
$ 1,864
$ 1,307
$ 1,150
$ 1,546
0.63%
0.24%
0.31%
0.27%
0.23%
0.20%
0.21%
0.21%
0.29%
0.28%
(1)
(2)
(3)
114
Effective November 1, 2017, represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39.
Geographic information is based on residence of borrower.
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.
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
Allowance on loans by portfolio and geography (1)
Table 77
As at and for the year ended October 31 (Millions of Canadian dollars, except percentage amounts)
Allowance on loans at beginning of year
PCL
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 (2)
Canada (3)
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. (3)
Retail
Wholesale
Total
Other International (3)
Retail
Wholesale
Total
Total allowance on impaired loans (2)
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
2020
$ 3,419
4,231
2019
$ 3,088
1,891
2018
$ 2,976
1,283
2017
$ 2,326
1,150
2016
$ 2,120
1,546
(44)
(545)
(617)
(38)
(45)
(600)
(655)
(36)
(51)
(552)
(599)
(35)
(53)
(543)
(565)
(38)
(42)
(556)
(564)
(40)
$ (1,244)
$ (1,336)
$ (1,237)
$ (1,199)
$ (1,202)
$
(437)
$
(440)
$
(207)
$
(226)
$
(321)
$ (1,681)
$ (1,776)
$ (1,444)
$ (1,425)
$ (1,523)
$
$
$
$
10
134
133
7
284
57
341
$
$
$
$
8
126
137
8
279
43
322
$
$
$
$
8
121
131
7
267
65
332
$
$
$
$
8
116
131
9
264
66
330
$
$
$
$
5
111
122
10
248
38
286
$ (1,340)
(195)
$ (1,454)
(106)
$ (1,112)
(59)
$ (1,095)
(131)
$ (1,237)
(103)
$ 6,115
$ 3,419
$ 3,088
$ 2,250
$ 2,326
$
$
$
$
$
$
$
$
$
$
$
53
78
33
164
10
12
–
35
7
49
–
–
9
2
15
1
–
1
2
36
39
–
2
–
–
220
384
1
267
268
116
181
297
949
366
1,213
1,246
107
$
$
$
$
$
$
$
$
$
$
$
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
$ 2,932
$ 1,886
$ 1,753
$ 2,234
$
701
$
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
$ 5,166
$ 6,115
$ 2,587
$ 2,388
$ 1,513
$ 1,517
$ 3,419
$ 3,088
$ 2,250
$ 2,326
Allowance on loans as a % of loans and acceptances
Net write-offs as a % of average net loans and acceptances
0.89%
0.20%
0.53%
0.24%
0.52%
0.20%
0.40%
0.20%
0.43%
0.23%
(1)
(2)
(3)
(4)
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.
Geographic information is based on residence of borrower.
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2020
115
Credit quality information by Canadian province (1)
Table 78
(Millions of Canadian dollars)
Loans and acceptances
Atlantic provinces (2)
Quebec
Ontario
Alberta
Other Prairie provinces (3)
B.C. and territories (4)
2020
2019
2018
2017
2016
$
27,615
64,534
279,276
71,175
33,758
90,426
$ 27,008
62,734
257,009
71,165
33,278
85,505
$ 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
Total loans and acceptances in Canada
$ 566,784
$ 536,699
$ 490,229
$ 458,963
$ 430,614
Gross impaired loans (5)
Atlantic provinces (2)
Quebec
Ontario
Alberta
Other Prairie provinces (3)
B.C. and territories (4)
Total GIL in Canada
PCL on impaired loans (6)
Atlantic provinces (2)
Quebec
Ontario
Alberta
Other Prairie provinces (3)
B.C. and territories (4)
$
$
$
111
271
393
386
178
107
1,446
43
95
710
151
60
54
$
$
$
$
$
$
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
Total PCL on impaired loans in Canada
$
1,113
$
1,353
$
1,068
$
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
(1)
(2)
(3)
(4)
(5)
(6)
Geographic information is based on residence of borrower.
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.
116
Royal Bank of Canada: Annual Report 2020
Management’s Discussion and Analysis
EDTF recommendations index
We aim to present transparent, high-quality risk disclosures by providing disclosures in this 2020 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 this 2020 Annual Report.
The following index summarizes our disclosure by EDTF recommendation:
Type of Risk
Recommendation Disclosure
Location of disclosure
Annual Report page
117
56-61, 222-223
53-55
96-101
SFI page
1
–
–
–
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
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
56-61
57-61
104
58-59, 73
97-101
–
–
96-101
–
62-65
–
–
58, 62
81, 84
86-87
81-83
77-78
73-76
73
73-76
–
–
–
–
–
*
20
–
21
*
*
21
33
–
–
–
–
–
–
–
–
61-72, 165-172
111-116
22-33,*
*
63-65, 106-107, 136-139
–
–
24, 29
66
64-65
89-96
92-93, 210-211
35
32
–
–
Quantitative and qualitative analysis of our
80-81, 85-86
liquidity reserve
*
These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report for the year ended October 31, 2020 and October 31, 2019.
Index for Enhanced Disclosure Task Force recommendations
Royal Bank of Canada: Annual Report 2020
117
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
Reports
Notes to Consolidated Financial Statements
119 Management’s Responsibility for Financial Reporting
119 Management’s Report on Internal Control over
Financial Reporting
120
Independent Auditor’s Report
124
Report of Independent Registered Public Accounting
Firm
Consolidated Financial Statements
127
128
Consolidated Balance Sheets
Consolidated Statements of Income
129
Consolidated Statements of Comprehensive Income
130
Consolidated Statements of Changes in Equity
131
Consolidated Statements of Cash Flows
132
132
148
161
165
172
173
177
187
188
190
190
191
191
192
194
195
199
200
200
203
205
207
208
210
211
212
214
215
216
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 Equity
Note 21
Share-based compensation
Note 22
Income taxes
Note 23
Earnings per share
Note 24 Guarantees, commitments, pledged
assets and contingencies
Note 25
Legal and regulatory matters
Note 26 Related party transactions
Note 27 Results by business
Note 28 Nature and extent of risks arising from
financial instruments segment
Note 29 Capital management
Note 30 Offsetting financial assets and financial
liabilities
218
Note 31
Recovery and settlement of on-balance
sheet assets and liabilities
219
220
Note 32
Parent company information
Note 33
Subsequent events
118
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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 1, 2020
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, 2020, 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, 2020, 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, 2020, 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 1, 2020
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
119
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, 2020 and 2019, 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, 2020 and 2019;
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 significant accounting policies and other explanatory
information.
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, 2020. 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 matter
AllowanceforCreditLosses(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 to the consolidated financial
statements.
The Bank’s ACL for financial assets was $6,262 million as at
October 31, 2020 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. Financial assets are categorized as
Stage 3 when 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, which are modelled based on macroeconomic
variables, and discounted to 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 a forecast of all relevant
macroeconomic variables, designed to capture a wide range of
possible outcomes, and which are probability-weighted
according to management’s expectation of the relative
likelihood of the range of outcomes that each scenario
represents at the reporting date. As disclosed in Note 5, the
How our audit addressed the key audit matter
Our approach to addressing the matter involved the following
procedures, amongst others:
(cid:129) testing the effectiveness of controls relating to the
estimation of the ACL, incorporating consideration of the
economic disruption caused by COVID-19, including controls
over: (i) the probability of default, loss given default and
exposure at default models, (ii) the design of multiple future
macroeconomic scenarios, the forecasting of
macroeconomic variables, and the probability-weighting of
these scenarios, (iii) the completeness and accuracy of the
data inputs underlying the ACL calculation, and (iv) the
application of expert credit judgment;
(cid:129) testing management’s process for estimating the Stage 1
and Stage 2 ACL, including their consideration of the
economic disruption caused by COVID-19:
O
O
O
O
evaluating the appropriateness of the probability of
default, loss given default and exposure at default
models used in the estimation of the Stage 1 and
Stage 2 ACL;
testing the completeness, accuracy, and relevance of
underlying data;
evaluating the reasonableness of significant inputs
and assumptions used in the estimation of the ACL,
including: a) the design of future macroeconomic
scenarios, b) the forecasted macroeconomic
variables, c) the probability-weights assigned to the
scenarios; and
evaluating management’s application of expert credit
judgment;
(cid:129) evaluating the reasonableness of management’s inputs and
assumptions used in the design of the future
macroeconomic scenarios and the forecasted
120
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Key audit matter (continued)
COVID-19 global pandemic significantly impacted
management’s determination of the ACL and required the
application of heightened judgment. As a result, the ACL has a
higher than usual degree of uncertainty and the inputs used
are inherently subject to change, which may materially change
the estimate of Stage 1 and Stage 2 ACL in future periods.
To address the uncertainties inherent in the current and future
environment and to reflect all relevant risk factors not
captured in the Bank’s modelled results, management applied
expert credit judgment; management applied quantitative and
qualitative adjustments for the impacts of the unprecedented
macroeconomic scenarios arising from the pandemic, the
temporary effects of the bank and government led payment
support programs, which may not completely mitigate future
losses, and the impacts to particularly vulnerable sectors
affected by COVID-19.
We determined that this is a key audit matter due to:
(i) the significant judgment required by management when
a) designing future macroeconomic scenarios, b) forecasting
macroeconomic variables, c) probability-weighting scenarios
and d) applying expert credit judgment to reflect
characteristics not already considered in the models;
(ii) a high degree of estimation uncertainty due to the
economic impacts of COVID-19 which led to a high degree of
auditor judgment;
(iii) significant audit effort necessary to evaluate audit
evidence as the estimation of the ACL is a complex calculation
that involves a large volume of data, interrelated inputs and
assumptions, some of which are model based; and
(iv) the audit effort included the use of professionals with
specialized skill and knowledge.
GoodwillImpairmentAssessmentofCertainCash
GeneratingUnits(CGUs)
Refer to Note 2, Summary of significant accounting policies,
estimates and judgments, and Note 10, Goodwill and other
intangible assets to the consolidated financial statements.
Management conducts a goodwill impairment test as of
August 1 of each year by comparing the carrying value of each
CGU to its recoverable amount. Management calculates the
recoverable amount of each CGU using a discounted cash flow
model that projects future cash flows based on management
forecasts. 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. For each of the CGUs, cash flows beyond
the initial cash flow forecast period are assumed by
management to increase at a constant terminal growth rate.
As disclosed by management, as a result of the economic
disruptions triggered by COVID-19, the recoverable amount of
the Caribbean Banking CGU has declined. The goodwill
allocated to the Caribbean Banking CGU as at October 31, 2020
was $1,719 million and management determined in the
impairment test that the recoverable amount approximates the
carrying 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. Management
estimated the recoverable amount of the Caribbean Banking
CGU as the fair value less costs of disposal, and future cash
flows were adjusted to approximate the considerations of a
prospective third-party buyer. In determining the recoverable
amount of the Caribbean Banking CGU, management
discounted forecast future cash flows using a pre-tax rate of
11.4% in 2020, reflecting a lower interest rate environment, and
the terminal growth rate used was 3.7%, reflecting uncertainty
due to the pandemic. Management also considered reasonably
possible alternative scenarios, including market comparable
transactions, which yielded valuations of the Caribbean
Banking CGU ranging from an immaterial surplus to an
immaterial deficit.
How our audit addressed the key audit matter
macroeconomic variables included evaluating the
consistency of these assumptions with external market and
industry data; and
(cid:129) using professionals with specialized skill and knowledge to
assist in testing (i) the appropriateness of the ACL
calculation, (ii) evaluating the interrelated inputs and
assumptions used in the ACL calculation, some of which are
model-based, including: a) the future macroeconomic
scenarios, b) the forecasted macroeconomic variables and
c) the probability-weights assigned to the scenarios, and
(iii) evaluating the reasonableness of expert credit
judgment applied.
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
Caribbean Banking, Capital Markets and U.S. Wealth
Management (including City National) CGUs;
(cid:129) testing management’s process for determining the
recoverable amount of each of these CGUs:
O
O
O
evaluating the appropriateness of the discounted
cash flow models;
testing the completeness, accuracy, and relevance of
underlying data used in the models; and
evaluating the significant assumptions used by
management, including a) discount rates, b) terminal
growth rates, c) future cash flows, and
d) adjustments made thereto to approximate the
considerations of a prospective third-party buyer for
the Caribbean Banking CGU, including evaluating
consistency with market comparable transactions for
the Caribbean Banking CGU;
(cid:129) evaluating management’s assumptions related to future
cash flows involved assessing whether the assumptions
used by management were reasonable considering the
consistency with (i) current and past performance of each
CGU, (ii) external market data and industry data, and
(iii) evidence obtained in other areas of the audit; and
(cid:129) using professionals with specialized skill and knowledge to
assist in evaluating (i) the appropriateness of
management’s discounted cash flow models, and (ii) the
reasonableness of certain significant assumptions,
including a) discount rates, b) terminal growth rates, and
c) evaluating consistency of the recoverable amount of the
Caribbean Banking CGU with market comparable
transactions.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
121
Key audit matter (continued)
As management has also disclosed, as a result of the economic
disruptions triggered by COVID-19, the recoverable amounts of
certain CGUs, including Capital Markets and U.S. Wealth
Management (including City National), which are more
sensitive to economic uncertainties, including interest rate
movements, have declined, but continue to exceed carrying
amounts despite impacts from the COVID-19 pandemic. As at
October 31, 2020 the goodwill allocated to the Capital Markets
and U.S. Wealth Management (including City National) CGUs
was $1,078 million and $2,978 million, respectively. The
recoverable amounts of the Capital Markets and U.S. Wealth
Management (including City National) CGUs are represented
by each CGU’s value in use, estimated using a discounted cash
flow method.
As disclosed by management, the estimation of the
recoverable amount of each CGU requires the use of significant
judgment; and the models are most sensitive to changes in
future cash flows, discount rates, and terminal growth rates.
The environment is rapidly evolving and as a result,
management’s economic outlook has a higher than usual
degree of uncertainty, which may, in future periods, materially
change the expected future cash flows of the CGUs and result
in an impairment charge. Actual experience may differ
materially from current expectations, including in relation to
the duration and severity of the economic contraction and the
ultimate timing and extent of a future recovery.
We determined that performing procedures relating to goodwill
impairment assessment of the Caribbean Banking, Capital
Markets and U.S. Wealth Management (including City National)
CGUs is a key audit matter due to:
(i) the significant judgment required by management when
determining the recoverable amount of each CGU, including
a) future cash flows, b) discount rates, c) terminal growth
rates, and d) for the Caribbean Banking CGU where the fair
value less costs of disposal was estimated, 1) adjustments
made to the cash flows to approximate the considerations of a
prospective third-party buyer and 2) consideration of market
comparable transactions;
(ii) a high degree of auditor judgment and subjectivity in
performing procedures over management’s calculation of the
recoverable amount of each CGU, and evaluating audit
evidence, especially in light of the decline in recoverable
amounts; and
(iii) the audit effort included the use of professionals with
specialized skill and knowledge.
UncertainTaxPositions
Refer to Note 2, Summary of significant accounting policies,
estimates and judgments, and Note 22, Income taxes 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 the
relevant taxation authorities. As disclosed by management,
significant judgment is required in the interpretation of the
relevant tax laws, and in assessing the probability of
acceptance of the Bank’s tax positions to determine tax
provisions, which includes management’s best estimate of
uncertain tax positions that are under audit or appeal by the
relevant taxation authorities. Management performs a review
on a quarterly basis to incorporate its best assessment based
on information available, but additional liability and income
tax expense could result based on the acceptance of the Bank’s
tax positions by the relevant tax authorities.
In some cases, the Bank has received reassessments denying
the tax deductibility of dividends from transactions including
those with Tax Indifferent Investors.
We determined that this is a key audit matter due to:
(i) the significant judgment required by management, including
a high degree of estimation uncertainty, when a) interpreting
the relevant tax laws, and b) assessing the probability of
acceptance of the Bank’s tax positions, which includes
management’s best estimate of tax positions that are under
audit or appeal by relevant taxation authorities;
(ii) a high degree of auditor judgment and subjectivity in
performing procedures to evaluate the uncertain tax positions;
and
(iii) the audit effort included the use of professionals with
specialized skill and knowledge.
How our audit addressed the key audit matter
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 and the impact on tax
provisions;
(cid:129) testing management’s process used in (i) assessing the
probability of acceptance of the Bank’s tax positions, which
includes management’s best estimate of tax positions that
are under audit or appeal by relevant taxation authorities
and (ii) estimating provisions relating to uncertain tax
positions;
O evaluating the appropriateness of the methods used;
O testing the completeness, accuracy, and relevance of
underlying data used;
O reviewing correspondence with relevant taxation
authorities;
O inquiring of the Bank’s internal and external legal
counsel; and
O evaluating the reasonableness of significant
assumptions used by management; and
(cid:129) using professionals with specialized skill and knowledge to
assist in evaluating the significant assumptions, including
a) the application of relevant tax laws, b) whether it is
probable that the relevant tax authorities will accept the
tax positions, and c) evidence used by management.
122
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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.
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.
The engagement partner on the audit resulting in this independent auditor’s report is Samuel May.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 1, 2020
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
123
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, 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. Also in
our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31,
2020, 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.
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 $6,262 million
as at October 31, 2020 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. Financial assets are categorized as Stage 3 when
considered to be credit-impaired. As disclosed by management, the measurement of expected credit losses is a complex
124
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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, which are modelled based on macroeconomic variables, and discounted to
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 a forecast of all relevant macroeconomic variables, designed to capture a
wide range of possible outcomes, and which are probability-weighted according to management’s expectation of the relative
likelihood of the range of outcomes that each scenario represents at the reporting date. As disclosed in Note 5, the COVID-19
global pandemic significantly impacted management’s determination of the ACL and required the application of heightened
judgment. As a result, the ACL has a higher than usual degree of uncertainty and the inputs used are inherently subject to change,
which may materially change the estimate of Stage 1 and Stage 2 ACL in future periods. To address the uncertainties inherent in
the current and future environment and to reflect all relevant risk factors not captured in the Bank’s modelled results,
management applied expert credit judgment; management applied quantitative and qualitative adjustments for the impacts of
the unprecedented macroeconomic scenarios arising from the pandemic, the temporary effects of the bank and government led
payment support programs, which may not completely mitigate future losses, and the impacts to particularly vulnerable sectors
affected by COVID-19.
The principal considerations for our determination that performing procedures relating to the estimation of the ACL is a critical
audit matter are: (i) there was significant judgment required by management when a) designing future macroeconomic
scenarios, b) forecasting macroeconomic variables, c) probability-weighting scenarios and d) applying expert credit judgment to
reflect characteristics not already considered in the models; (ii) there was a high degree of estimation uncertainty due to the
economic impacts of COVID-19, which also led to a high degree of auditor judgment; (iii) there was significant audit effort
necessary to evaluate audit evidence as the estimation of the ACL is a complex calculation that involves a large volume of data,
interrelated inputs and assumptions, some of which are model-based; and (iv) the audit effort included the use of professionals
with specialized skill and knowledge.
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 estimation of the ACL, incorporating consideration of the economic disruption caused by COVID-19, including controls over:
(i) the probability of default, loss given default and exposure at default models, (ii) the design of multiple future macroeconomic
scenarios, the forecasting of macroeconomic variables, and the probability-weighting of these scenarios, (iii) the completeness
and accuracy of the data inputs underlying the ACL calculation, and (iv) the application of expert credit judgment. These
procedures also included testing management’s process for estimating the Stage 1 and Stage 2 ACL, including their consideration
of the economic disruption caused by COVID-19, which consisted of, among others: (i) evaluating the appropriateness of the
probability of default, loss given default and exposure at default models used in the estimation of the Stage 1 and Stage 2 ACL,
(ii) testing the completeness, accuracy, and relevance of underlying data, and (iii) evaluating the reasonableness of significant
inputs and assumptions used in the estimation of the ACL, including: a) the design of future macroeconomic scenarios, b) the
forecasted macroeconomic variables, c) the probability-weights assigned to the scenarios, and iv) evaluating management’s
application of expert credit judgment. Evaluating the reasonableness of management’s inputs and assumptions used in the
design of the future macroeconomic scenarios and the forecasted macroeconomic variables included evaluating the consistency
of these assumptions with external market and industry data. Professionals with specialized skill and knowledge were used to
assist in (i) testing the appropriateness of the ACL calculation, (ii) evaluating the interrelated inputs and assumptions used in the
ACL calculation, some of which are model-based, including: a) the future macroeconomic scenarios, b) the forecasted
macroeconomic variables and c) the probability-weights assigned to the scenarios, and (iii) evaluating the reasonableness of
expert credit judgment applied.
Goodwill Impairment Assessment of Certain Cash Generating Units (CGUs)
As described in Notes 2 and 10 to the consolidated financial statements, management conducts a goodwill impairment test as of
August 1 of each year by comparing the carrying value of each CGU to its recoverable amount. Management calculates the
recoverable amount of each CGU using a discounted cash flow model that projects future cash flows based on management
forecasts. 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. For each of the CGUs, cash flows beyond the
initial cash flow forecast period are assumed by management to increase at a constant terminal growth rate. As disclosed by
management, as a result of the economic disruptions triggered by COVID-19, the recoverable amount of the Caribbean Banking
CGU has declined. As described in Note 10, as at October 31, 2020, the goodwill allocated to the Caribbean Banking CGU was
$1,719 million and management determined in the impairment test that the recoverable amount approximates the carrying
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. Management estimated the recoverable amount of the Caribbean Banking CGU as the fair value less
costs of disposal, and future cash flows were adjusted to approximate the considerations of a prospective third-party buyer. In
determining the recoverable amount of the Caribbean Banking CGU, management discounted forecast future cash flows using a
pre-tax rate of 11.4% in 2020, reflecting a lower interest rate environment, and the terminal growth rate used was 3.7%, reflecting
uncertainty due to the pandemic. Management also considered reasonably possible alternative scenarios, including market
comparable transactions, which yielded valuations of the Caribbean Banking CGU ranging from an immaterial surplus to an
immaterial deficit. As management has also disclosed, as a result of the economic disruptions triggered by COVID-19, the
recoverable amounts of certain CGUs, including Capital Markets and U.S. Wealth Management (including City National), which
are more sensitive to economic uncertainties, including interest rate movements, have declined, but continue to exceed carrying
amounts despite impacts from the COVID-19 pandemic. As at October 31, 2020 the goodwill allocated to the Capital Markets and
U.S. Wealth Management (including City National) CGUs was $1,078 million and $2,978 million, respectively. The recoverable
amounts of the Capital Markets and U.S. Wealth Management (including City National) CGUs are represented by each CGU’s
value in use, estimated using a discounted cash flow method. As disclosed by management, the estimation of the recoverable
amount of each CGU requires the use of significant judgment; and the models are most sensitive to changes in future cash flows,
discount rates, and terminal growth rates. The environment is rapidly evolving and as a result, management’s economic outlook
has a higher than usual degree of uncertainty, which may, in future periods, materially change the expected future cash flows of
the CGUs and result in an impairment charge. Actual experience may differ materially from current expectations, including in
relation to the duration and severity of the economic contraction and the ultimate timing and extent of a future recovery.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
125
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment
of the Caribbean Banking, Capital Markets and U.S. Wealth Management (including City National) CGUs is a critical audit matter
are: (i) there was significant judgment required by management when determining the recoverable amount of each CGU,
including a) future cash flows, b) discount rates, c) terminal growth rates, and d) for the Caribbean Banking CGU where the fair
value less costs of disposal was estimated, 1) adjustments made to the cash flows to approximate the considerations of a
prospective third-party buyer and 2) consideration of market comparable transactions; (ii) there was a high degree of auditor
judgment and subjectivity in performing procedures over management’s calculation of the recoverable amount of each CGU, and
evaluating audit evidence, especially in light of the decline in recoverable amounts; and (iii) the audit effort included the use of
professionals with specialized skill and knowledge.
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 Caribbean
Banking, Capital Markets and U.S. Wealth Management (including City National) CGUs. These procedures also included testing
management’s process for determining the recoverable amount of each of these CGUs, which consisted of, among others:
(i) evaluating the appropriateness of the discounted cash flow models, (ii) testing the completeness, accuracy, and relevance of
underlying data used in the models, and (iii) evaluating the significant assumptions used by management, including a) discount
rates, b) terminal growth rates, c) future cash flows, and d) adjustments made thereto to approximate the considerations of a
prospective third-party buyer for the Caribbean Banking CGU, including evaluating consistency with market comparable
transactions for the Caribbean Banking CGU. Evaluating management’s assumptions related to future cash flows involved
assessing whether the assumptions used by management were reasonable considering the consistency with (i) current and past
performance of each CGU, (ii) external market data and industry data, and (iii) evidence obtained in other areas of the audit.
Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of management’s
discounted cash flow models, and (ii) the reasonableness of certain significant assumptions, including a) discount rates, b)
terminal growth rates, and c) evaluating consistency of the recoverable amount of the Caribbean Banking CGU with market
comparable transactions.
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 the relevant
taxation authorities. As disclosed by management, significant judgment is required in the interpretation of the relevant tax laws,
and in assessing the probability of acceptance of the Bank’s tax positions to determine tax provisions, which includes
management’s best estimate of uncertain tax positions that are under audit or appeal by the relevant taxation authorities.
Management performs a review on a quarterly basis to incorporate its best assessment based on information available, but
additional liability and income tax expense could result based on the acceptance of the Bank’s tax positions by the relevant tax
authorities. In some cases, as described in Note 22, the Bank has received reassessments denying the tax deductibility of
dividends from transactions including those with Tax Indifferent Investors.
The principal considerations for our determination that performing procedures relating to the uncertain tax positions is a critical
audit matter are that: (i) there was significant judgment required by management, including a high degree of estimation
uncertainty, when a) interpreting the relevant tax laws, and b) assessing the probability of acceptance of the Bank’s tax
positions, which includes management’s best estimate of tax positions that are under audit or appeal by relevant taxation
authorities; (ii) there was a high degree of auditor judgment and subjectivity in performing procedures to evaluate the uncertain
tax positions; and (iii) the audit effort included the use of professionals with specialized skill and knowledge.
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 and the impact on tax provisions. These procedures also included, among others, testing
management’s process used in (i) assessing the probability of acceptance of the Bank’s tax positions, which includes
management’s best estimate of tax positions that are under audit or appeal by relevant taxation authorities and (ii) estimating
provisions relating to uncertain tax positions, if applicable. This involved: (i) evaluating the appropriateness of the methods
used, (ii) testing the completeness, accuracy, and relevance of underlying data used, (iii) reviewing correspondence with
relevant taxation authorities, (iv) making inquiries of the Bank’s internal and external legal counsel, and (v) evaluating the
reasonableness of significant assumptions used by management. Professionals with specialized skill and knowledge were used
to assist in evaluating the significant assumptions, including a) the application of relevant tax laws, b) whether it is probable that
the relevant tax authorities will accept the tax positions, and c) evidence used by management.
PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 1, 2020
We have served as the Bank’s auditor since 2016.
126
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Consolidated Balance Sheets
(Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities (Note 4)
Trading
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
Preferred shares and other equity instruments (Note 20)
Common shares (Note 20)
Retained earnings
Other components of equity
Non-controlling interests
Total equity
Total liabilities and equity
As at
October 31
2020
October 31
2019
$
118,888
$
26,310
39,013
38,345
136,071
139,743
275,814
313,015
457,976
208,655
666,631
(5,639)
660,992
146,534
102,470
249,004
306,961
426,086
195,870
621,956
(3,100)
618,856
1,922
1,663
18,507
113,488
7,934
11,302
4,752
58,921
214,904
18,062
101,560
3,191
11,236
4,674
49,073
187,796
$ 1,624,548
$ 1,428,935
$
$
343,052
624,311
44,522
1,011,885
1,922
18,618
29,285
274,231
109,927
12,215
69,831
514,107
9,867
294,732
565,482
25,791
886,005
1,663
18,091
35,069
226,586
98,543
11,401
58,137
447,827
9,815
1,537,781
1,345,310
5,945
17,499
59,806
3,414
86,664
103
86,767
5,707
17,587
55,981
4,248
83,523
102
83,625
$ 1,624,548
$ 1,428,935
The accompanying notes are an integral part of these Consolidated Financial Statements.
David I. McKay
President and Chief Executive Officer
Frank Vettese
Director
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
127
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 (Note 17 and 21)
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles (Note 10)
Other
Income before income taxes
Income taxes (Note 22)
Net income
Net income attributable to:
Shareholders
Non-controlling interests
Basic earnings per share (in dollars) (Note 23)
Diluted earnings per share (in dollars) (Note 23)
Dividends per common share (in dollars)
The accompanying notes are an integral part of these Consolidated Financial Statements.
For the year ended
October 31
2020
October 31
2019
23,420
6,488
4,668
307
34,883
8,783
4,985
280
14,048
20,835
5,361
1,239
6,101
3,712
1,439
1,842
2,319
1,012
969
1,321
90
77
864
26,346
47,181
4,351
3,683
15,252
1,907
1,660
989
1,330
1,273
2,347
24,758
14,389
2,952
11,437
11,432
5
11,437
7.84
7.82
4.29
$
$
$
$
$
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
$
$
$
$
$
128
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
(Millions of Canadian dollars)
Net income
Other comprehensive income (loss), net of taxes (Note 22)
Items that will be reclassified subsequently to income:
Net change in unrealized gains (losses) on 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
Net fair value change due to credit risk on financial liabilities designated at 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
2020
October 31
2019
$
11,437
$
12,871
(24)
13
(161)
(172)
810
(397)
(21)
21
413
(1,145)
72
(1,073)
(68)
(263)
28
(303)
(1,135)
10,302
10,295
7
10,302
$
$
$
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
$
$
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
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130
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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 business
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
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 and other equity instruments, net of issuance costs
Redemption of preferred shares and other equity instruments
Sales of treasury shares
Purchases of treasury shares
Dividends paid on shares and distributions paid on other equity instruments
Dividends/distributions paid to non-controlling interests
Change in short-term borrowings of subsidiaries
Repayment of lease liabilities
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
2020
October 31
2019
$
11,437
$
12,871
4,351
1,333
(586)
1,315
(73)
(218)
8
814
(142)
18
(11,928)
11,384
10,377
(45,639)
(6,054)
47,645
(5,784)
126,826
2,301
(8,566)
138,819
(676)
113,286
(149,516)
(2,629)
–
(22)
(39,557)
2,750
(3,000)
70
(814)
1,745
(1,508)
4,778
(4,853)
(6,333)
(6)
13
(588)
(7,746)
1,062
92,578
26,310
118,888
13,058
33,244
2,753
2,880
$
$
$
$
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627
(519)
1,307
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(213)
(158)
1,401
199
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(7,521)
8,305
(18,276)
(42,672)
(12,359)
19,772
2,822
49,808
(480)
(2,413)
14,265
(1,874)
65,377
(72,435)
(2,261)
173
(106)
(11,126)
1,500
(1,100)
105
(1,030)
350
(950)
5,522
(5,564)
(6,025)
(2)
(263)
(7,457)
419
(3,899)
30,209
26,310
19,984
39,500
2,209
2,977
(1) We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2.5 billion as at October 31, 2020 (October 31, 2019 –
$2.6 billion; October 31, 2018 – $2.4 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
131
Note 1 General information
Royal Bank of Canada and its subsidiaries (the Bank) provide diversified financial services including Personal and Commercial
Banking, Wealth Management, Insurance, Investor and Treasury Services and Capital Markets products and services on a global
basis. Refer to Note 27 for further details on our business segments.
The parent bank, Royal Bank of Canada, is a Schedule I Bank under the Bank Act (Canada) incorporated and domiciled in
Canada. Our corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada and our head
office is located at 1 Place Ville-Marie, Montreal, Quebec, Canada. Our common shares are listed on the Toronto Stock Exchange
and New York Stock Exchange with the ticker symbol RY.
These Consolidated Financial Statements are prepared in compliance with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board (IASB). Unless otherwise stated, monetary amounts are stated
in Canadian dollars. Tabular information is stated in millions of dollars, except as noted. These Consolidated Financial
Statements also comply with Subsection 308 of the Bank Act (Canada), which states that, except as otherwise specified by the
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 1, 2020, 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,
and litigation provisions. 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.
The COVID-19 pandemic continues to evolve and the economic environment in which we operate continues to be subject to
sustained volatility, which could continue to negatively impact our financial results, as the duration of the COVID-19 pandemic
and the effectiveness of steps undertaken by governments and central banks in response to the COVID-19 pandemic remain
uncertain. The current environment requires particularly complex judgments and estimates in certain areas. We are closely
monitoring the changing conditions and their impacts.
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 22
Note 2
Note 24
Note 25
Basis of consolidation
Our Consolidated Financial Statements include the assets and liabilities and results of operations of the parent company, Royal
Bank of Canada, and its subsidiaries including certain structured entities, after elimination of intercompany transactions,
balances, revenues and expenses.
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are
exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns
through our power over the investee. We have power over an entity when we have existing rights that give us the current ability
132
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the
basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining
whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the
arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other
parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some
circumstances, different factors and conditions may indicate that different parties control an entity depending on whether those
factors and conditions are assessed in isolation or in totality. Significant judgment is applied in assessing the relevant factors
and conditions in totality when determining whether we control an entity. Specifically, judgment is applied in assessing whether
we have substantive decision-making rights over the relevant activities and whether we are exercising our power as a principal
or an agent.
We consolidate all subsidiaries from the date we obtain control and cease consolidation when an entity is no longer
controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses
reported in our Consolidated Financial Statements.
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
Leases
During the first quarter of 2020, we adopted IFRS 16 Leases (IFRS 16) replacing the previous accounting standard for leases, IAS 17
Leases (IAS 17) and changed our accounting policies for leases as indicated below. As permitted by the transition provisions for
IFRS 16, we elected not to restate comparative period results; accordingly, all comparative information is presented in
accordance with our previous accounting policies, as indicated below. New or amended disclosures have been provided for the
current period, where applicable, and comparative period disclosures are consistent with those made in the prior year.
Interest Rate Benchmark Reform
During the first quarter of 2020, we early adopted amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments:
Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (Amendments), applicable from November 1, 2019.
These amendments modify certain hedge accounting requirements to provide relief from the effect of uncertainty caused by
interest rate benchmark reform (the Reform) prior to the transition to alternative interest rates. The adoption of the Amendments
also introduced additional disclosure requirements. Refer to Note 8 for the notional amount of the hedging instruments which are
impacted by the Reform.
We will cease to apply these Amendments as interbank offered rate (IBOR) based cash flows transition to new risk free rates
or when the hedging relationships to which the relief is applied are discontinued as indicated below.
IFRS Interpretations Committee Interpretation 23 Uncertainty over income tax treatments (IFRIC 23)
During the first quarter of 2020, we adopted 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, replacing our application of IAS 37
Provisions, contingent liabilities and contingent assets for uncertain tax positions as indicated below. The adoption of IFRIC 23
had no impact on our consolidated financial statements.
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).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
133
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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
The compensation structures for managers of our businesses, to the extent that these are directly linked to the
economic performance of the business model.
(cid:129)
(cid:129)
(cid:129)
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
134
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
135
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
FVA are also calculated to incorporate the cost and benefit of funding in the valuation of uncollateralized and under-
collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of
funding the derivatives by using a funding curve, implied volatilities and correlations as inputs.
Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument
contract where the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by
other observable market transactions based on a valuation technique incorporating observable market data.
A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid
or offer price for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the
mid-market price to either the bid or offer price.
Some valuation models require parameter calibration from such factors as market observable option prices. The calibration
of parameters may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation
adjustment is also estimated to mitigate the uncertainties of parameter calibration and model limitations.
In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). Determination of fair value based on this hierarchy requires the use of observable
market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities
that we have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are
either observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 inputs are one or more inputs that are unobservable and significant to the fair value of the asset or liability.
Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement
date. The availability of inputs for valuation may affect the selection of valuation techniques. The classification of a financial
instrument in the hierarchy for disclosure purposes is based upon the lowest level of input that is significant to the measurement
of fair value.
Where observable prices or inputs are not available, management judgment is required to determine fair values by
assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through
extrapolation and interpolation techniques. For more complex or illiquid instruments, significant judgment is required in the
determination of the model used, the selection of model inputs, and in some cases the application of valuation adjustments to
the model value or quoted price for inactively traded financial 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)
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(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.
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.
To support our clients through the COVID-19 pandemic, we have launched various relief programs. Utilization of a payment
deferral program does not, all else being equal, automatically trigger a significant increase in credit risk.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
137
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
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.
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Consolidated Financial Statements
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 ACL are generally written off when payment is 180 days past due.
Personal loans are generally written off at 150 days past due.
Modifications
The original terms of a financial asset may be renegotiated or otherwise modified, resulting in changes to the contractual terms
of the financial asset that affect the contractual cash flows. The treatment of such modifications is primarily based on the
process undertaken to execute the renegotiation and the nature and extent of the expected changes. In the normal course of
business, 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.
Due to the impact of the COVID-19 pandemic, we have established relief programs to help personal and business banking
clients manage the challenges of the COVID-19 pandemic through payment deferrals, interest rate reductions, covenant waivers,
and refinancing or credit restructuring. In some cases, the original terms of the associated financial asset are renegotiated or
otherwise modified, resulting in changes to the contractual terms of the financial asset that affect the contractual cash flows. For
these programs, where there is a substantial change in terms from the original financial asset, we derecognize the financial asset
and recognize 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
139
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
When derivatives are used to manage our own exposures, we determine for each derivative whether hedge accounting can
be applied, as discussed in the Hedge accounting section below.
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
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
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Consolidated Financial Statements
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. We perform effectiveness testing to demonstrate that the
relationship has been and is expected to be effective over the remaining term of the hedge. 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.
While uncertainty due to the Reform exists on hedging relationships to which the Amendments are applied, beginning on
November 1, 2019, our prospective effectiveness testing is based on existing hedged cash flows or hedged risks. Any
ineffectiveness arising from retrospective testing is recognized in net income, rather than discontinuing the hedge as long as
other hedge accounting requirements are met.
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. As a result of adopting the Amendments, beginning on November 1, 2019, while the
uncertainty due to the Reform exists, we apply hedge accounting to IBOR rates which may not be contractually specified when
that rate is separately identifiable and reliably measurable at inception of the hedge relationship.
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.
While uncertainty due to the Reform exists, beginning on November 1, 2019, we apply the relief provided by the Amendments
that the IBOR benchmarks, on which the highly probable hedged cash flows are based, are not altered as a result of the Reform.
In addition, associated cash flow hedge reserves are not recycled into net income solely due to changes related to the transition
from IBOR to new risk free rates.
We predominantly use interest rate swaps to hedge the variability in cash flows related to a variable-rate asset or liability.
Net investment hedges
In hedging our foreign currency exposure to a net investment in a foreign operation, the effective portion of foreign exchange
gains and losses on the hedging instruments, net of applicable taxes, is recognized in OCI and the ineffective portion is
recognized in Non-interest income. The amounts, or a portion thereof, previously recognized in Other components of equity are
recognized in Net income on the disposal, or partial disposal, of the foreign operation.
We use foreign exchange contracts and foreign currency-denominated liabilities to manage our foreign currency exposures
to net investments in foreign operations having a functional currency other than the Canadian dollar.
Guarantees
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 of expected credit losses and (ii) the amount initially
recognized less, when appropriate, the cumulative amount of income recognized.
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
141
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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
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
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Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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 in assessing the probability of acceptance of our tax positions to determine our tax
provision, which includes our best estimate of uncertain tax positions that are under audit or appeal by the relevant tax
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 the acceptance of our tax positions 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.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
143
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
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.
Beginning on November 1, 2019, Premises and equipment includes right-of-use assets due to the adoption of IFRS 16.
Leasing – Policies applicable beginning November 1, 2019 (IFRS 16)
At inception of a contract, we assess whether a contract is or contains a lease. A contract is, or contains, a lease if the contract
conveys the right to obtain substantially all of the economic benefits from, and direct the use of, an identified asset for a period
of time in return for consideration.
When we are the lessee in a lease arrangement, we initially record a right-of-use asset and corresponding lease liability,
except for short-term leases and leases of low-value assets. Short-term leases are leases with a lease term of 12 months or less.
144
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Low-value assets are unspecialized, common, technologically unsophisticated, widely available, and widely used non-
infrastructure assets. For short-term leases and leases of low-value assets, we record the lease payments as an operating
expense on a straight-line basis over the lease term.
Where we are reasonably certain to exercise extension and termination options, they are included in the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement
date, discounted at our incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the
effective interest method, recorded in Interest expense.
The right-of-use asset is initially measured based on the initial amount of the lease liability, adjusted for lease payments
made on or before the commencement date, initial direct costs incurred, and an estimate of costs to dismantle, remove, or
restore the asset, less any lease incentives received.
The right-of-use asset is depreciated to the earlier of the lease term and the useful life, unless ownership will transfer to RBC
or we are reasonably certain to exercise a purchase option, in which case the useful life of the right-of-use asset is used. We
apply IAS 36 Impairment of assets to determine whether a right-of-use asset is impaired and account for any identified
impairment loss as described in the premises and equipment accounting policies above.
Impact of adoption of IFRS 16 – Leases previously classified as operating leases
As a result of the adoption of IFRS 16, we increased total assets by $5,084 million and total liabilities by $5,191 million, primarily
representing leases of premises and equipment previously classified as operating leases, and reduced retained earnings by
$107 million, net of taxes. The adoption of IFRS 16 reduced our CET 1 capital ratio by 14 bps.
At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at our
incremental borrowing rate as at November 1, 2019. We applied a weighted-average incremental borrowing rate of 2.3%. Right-of-
use assets are generally measured at an amount equal to the lease liability, adjusted by any prepaid or accrued lease payments.
For a select number of properties, the right-of-use assets were measured as if IFRS 16 had been applied since the commencement
date of the lease, discounted using our incremental borrowing rate as at November 1, 2019. The following practical expedients
were adopted when applying IFRS 16 to leases previously classified as operating leases under IAS 17:
(cid:129)
(cid:129)
Election to not separate lease and non-lease components, applied to our real estate leases; and
Exemption from recognition for short-term and low value leases.
The following table reconciles our operating lease commitments at October 31, 2019 to the lease obligations recognized on initial
application of IFRS 16 at November 1, 2019.
(Millions of Canadian dollars)
Lease commitments disclosed as at October 31, 2019
Less: commitments related to non-recoverable tax
Less: commitments for contracts not yet commenced
Less: recognition exemption adopted for short-term and low-value leases
Plus: commitments for renewal options reasonably certain to be exercised
Other
Adjusted operating lease commitments as at October 31, 2019
Discounted as at November 1, 2019
Finance lease liabilities recognized as at October 31, 2019
Lease liabilities recognized as at November 1, 2019
$
$
6,175
(360)
(240)
(83)
977
(26)
6,443
5,557
49
5,606
Impact of adoption of IFRS 16 – Leases previously classified as finance leases
The carrying amount of the right-of-use asset and lease liability at November 1, 2019 for leases previously classified as finance
leases under IAS 17 Leases was determined to be equal to the carrying amount of the lease asset and liability under IAS 17
immediately before the transition date.
Leasing – Policies applicable prior to November 1, 2019 (IAS 17)
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.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a
reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration
required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present
obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation,
asset retirement obligations and other items.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
145
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
We are required to estimate the results of ongoing legal proceedings, 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
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.
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 and distributions on other equity instruments, any gains (losses) on redemption of preferred
shares and other equity instruments 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 and other equity instruments
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. For compound instruments comprised of both liability and equity components, the liability
component is initially measured at fair value with any residual amount assigned to the equity component.
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Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Future changes in accounting policy and disclosure
The following standards have been issued, but are not yet effective for us.
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. The Conceptual Framework
is not a standard, and does not override the concepts or requirements in any standard. It may be used develop consistent
accounting policies where there is no applicable standard in place. The revisions include a few new concepts, updated definitions
and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments are not expected to
have a material impact 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. In June 2020, the IASB issued amendments to
IFRS 17, including deferral of the effective date by two years. This new standard will be effective for us on November 1, 2023 and
will be applied retrospectively with restatement of comparatives unless impracticable. We are currently assessing the impact of
adopting this standard and the amendments on our Consolidated Financial Statements.
Interest Rate Benchmark Reform
In August 2020, the IASB issued Interest Rate Benchmark Reform – Phase 2, Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4
Insurance contracts and IFRS 16 (Phase 2 Amendments). The Phase 2 Amendments address issues that arise upon replacing the
existing interest rate benchmark with the alternative interest rates and introduces additional disclosure requirements. The Phase
2 Amendments provide two key reliefs:
(cid:129)
(cid:129)
For modifications resulting from the Reform which are transacted on an economically equivalent basis, the Reform
allows the benchmark rate change to be reflected prospectively in the effective interest rate of the instrument rather
than as an immediate gain or loss.
If qualifying criteria are met, hedging relationships that are directly impacted by the Reform would be able to continue
hedge accounting upon transition to alternative interest rates.
The Phase 2 Amendments will be effective for us on November 1, 2021, 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,
risk management, financial reporting and valuation, systems, processes, client education and communication.
We are currently assessing the impact of the adoption of the Phase 2 Amendments on our Consolidated Financial
Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
147
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.
Assets purchased under reverse repurchase
agreements and securities borrowed
264,394
–
–
Carrying value and fair value
Carrying value
Fair value
As at October 31, 2020
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
$
– $
21,603 $
– $
–
$
17,410 $
17,410 $
39,013 $
39,013
126,027
–
126,027
10,044
–
10,044
–
81,395
81,395
–
6,197
6,197
113,488
3,414
253
2,363
2,616
–
–
260
744
1,004
–
–
–
525
525
–
–
–
–
–
–
–
57,823
57,823
–
58,627
58,627
136,071
139,743
136,071
140,547
275,814
276,618
48,621
48,621
313,015
313,015
454,429
196,746
651,175
–
57,065
462,884
198,753
661,637
454,942
206,050
463,397
208,057
660,992
671,454
–
57,065
113,488
60,479
113,488
60,479
$
104 $
389
–
493
17,096
107,466
18,015
142,577
$
325,852 $
516,456
26,507
324,804 $
518,501
26,518
343,052 $ 342,004
626,356
624,311
44,533
44,522
868,815
869,823
1,011,885 1,012,893
29,285
–
–
–
29,285
29,285
–
109,927
80
–
255,922
–
86
–
18,309
–
65,712
9,867
18,309
–
65,719
10,071
274,231
109,927
65,878
9,867
274,231
109,927
65,885
10,071
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
246,068
275
7,055
7,330
101,560
3,156
8,934
–
8,934
–
242
1,856
2,098
–
–
–
57,223
57,223
–
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
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable allowance
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
(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)
$
140 $
151
–
291
17,394
111,389
3,032
131,815
Other
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned
Derivatives
Other liabilities (4)
Subordinated debentures
35,069
–
–
98,543
(1,209)
–
218,612
–
91
–
$
277,198 $
453,942
22,759
277,353 $
452,536
22,773
294,732 $
565,482
25,791
753,899
752,662
886,005
294,887
564,076
25,805
884,768
–
–
35,069
35,069
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
(1)
(2)
(3)
(4)
Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
Bank deposits refer to deposits from regulated banks and central banks.
Includes Acceptances and financial instruments recognized in Other liabilities.
148
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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 year ended October 31, 2020, the change in fair value during the period
attributable to changes in credit risk for positions still held was a loss of $379 million and the cumulative change in fair value
attributable to changes in credit risk for positions still held was a loss of $442 million. For the year ended October 31, 2019 there
was no significant change in the fair value of the loans and receivables designated as FVTPL attributable to changes in credit
risk. As at October 31, 2020, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit
risk was $520 million (October 31, 2019 – $514 million).
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, 2020 (1)
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (3)
Bank (4)
Contractual
maturity
amount Carrying value
$
17,279 $
106,153
18,016
17,096
107,466
18,015
141,448
142,577
Obligations related to assets sold under
repurchase agreements and securities loaned
Other liabilities
255,908
86
255,922
86
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)
$ (183)
1,313
(1)
1,129
14
–
$
67
281
–
348
8
–
$
89
491
–
580
8
–
$ 397,442 $ 398,585
$ 1,143
$
356
$ 588
As at or for the year ended October 31, 2019 (1)
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (3)
Bank (4)
Contractual
maturity
amount
Carrying value
$
17,307 $
110,763
3,031
131,101
17,394
111,389
3,032
131,815
Obligations related to assets sold under
repurchase agreements and securities loaned
Other liabilities
218,604
91
218,612
91
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
–
$
3
(76)
–
(73)
–
–
$
22
210
–
232
–
–
(1)
(2)
(3)
(4)
There are no significant 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, 2020, $2 million of fair value gains previously
included in OCI relate to financial liabilities derecognized during the year (October 31, 2019 – $4 million of 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.
$
349,796 $ 350,518
$
722
$
(73)
$ 232
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
149
Note 3 Fair value of financial instruments (continued)
Net gains (losses) from financial instruments classified and designated as fair value through profit or loss
Financial instruments classified as FVTPL, which includes mainly trading securities, derivatives, trading liabilities, and financial
assets and liabilities designated as FVTPL are measured at fair value with realized and unrealized gains and losses recognized in
Non-interest income.
(Millions of Canadian dollars)
Net gains (losses) (1)
Classified as fair value through profit or loss (2)
Designated as fair value through profit or loss (3)
By product line (1)
Interest rate and credit (4)
Equities
Foreign exchange and commodities
For the year ended
October 31
2020
October 31
2019
$
$
$
$
(69)
1,533
1,464
1,490
(501)
475
1,464
$
$
$
$
3,564
(1,821)
1,743
1,534
(144)
353
1,743
(1)
(2)
(3)
(4)
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 $329 million (October 31, 2019 – gains of $1,303 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, 2020, $1,532 million of net fair value gains on financial liabilities designated as FVTPL, other than those attributable to changes in our own
credit risk, were included in Non-interest income (October 31, 2019 – losses of $1,810 million).
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 (1), (2)
Financial instruments measured at fair value through profit or loss
Financial instruments measured at fair value through other comprehensive income
Financial instruments measured at amortized cost
Interest expense (1)
Financial instruments measured at fair value through profit or loss
Financial instruments measured at amortized cost (3)
Net interest income
For the year ended
October 31
2020
October 31
2019
$
$
8,480
957
25,446
34,883
6,065
7,983
14,048
$ 20,835
$
$
$
12,103
1,132
28,098
41,333
10,507
11,077
21,584
19,749
(1)
(2)
(3)
Excludes the following amounts related to our insurance operations and included in Insurance premiums, investment and fee income in the Consolidated Statements of
Income: Interest income of $521 million (October 31, 2019 – $486 million), and Interest expense of $7 million (October 31, 2019 – $4 million).
Includes dividend income for the year ended October 31, 2020 of $2,670 million (October 31, 2019 – $2,057 million), which is presented in Interest and dividend income in
the Consolidated Statements of Income.
Includes interest expense on lease liabilities for the year ended October 31, 2020 of $123 million due to the adoption of IFRS 16.
Fee income arising from financial instruments
For the year ended October 31, 2020, we earned $5,134 million in fees from banking services (October 31, 2019 – $5,270 million). For
the year ended October 31, 2020, we also earned $13,166 million in fees from investment management, trust, custodial,
underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2019 – $12,117 million).
These fees are included in Non-interest income.
150
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
(Millions of Canadian dollars)
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
Bank
Other
October 31, 2020
Fair value
measurements using
Netting
October 31, 2019
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
$
– $ 21,603 $
– $
$ 21,603
$
– $ 22,283 $
– $
$ 22,283
12,773
–
1,508
3,085
–
–
–
39,795
3,012
11,562
35,029
3,380
39
526
21,464
2,561
–
–
44
–
–
2
30
1,261
15,785
11,562
36,581
6,465
39
528
21,494
43,617
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
20,129
11,282
41,692
6,496
482
1,335
23,665
41,453
57,161
77,573
1,337
136,071
57,801
87,433
1,300
146,534
647
–
160
–
–
–
–
–
38
1,894
3,233
38,364
7,345
2,343
7,414
854
18,954
152
845
80,553
–
–
–
–
27
–
–
160
335
522
2,541
3,233
38,524
7,345
2,370
7,414
854
19,114
525
81,920
–
–
210
–
–
–
–
–
42
657
2,898
20,666
4,251
2,675
7,300
849
17,537
127
252
56,960
–
–
264,394
8,747
–
1,070
264,394
9,817
–
–
246,068
9,294
1
–
–
4,458
–
53,720
39,246
463
16,767
(1,112)
4,459
109,084
501
57
–
36
8
602
1,154
2,207
53
54,222
39,303
463
21,261
(1,104)
114,145
(657)
113,488
3,414
(657)
1
–
–
2,852
–
46,095
40,768
169
12,674
(712)
2,853
98,994
(710)
1,119
1,960
77
$63,619 $564,161 $ 3,584 $
(657) $ 630,707
$62,025 $522,992 $ 2,954 $
(710) $ 587,261
$
– $ 17,061 $
107,855
–
18,015
–
139 $
–
–
$
$ 17,200
107,855
18,015
– $ 17,378 $
111,540
–
3,032
–
156 $
–
–
–
–
–
–
27
–
–
153
294
474
–
680
349
48
–
11
15
423
–
–
934
27
–
206
(7)
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
$ 17,534
111,540
3,032
35,069
218,612
40,099
40,210
282
18,657
5
99,253
(710)
98,543
(1,118)
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
12,484
16,801
–
255,922
–
–
–
–
–
5,734
–
46,723
38,210
531
18,041
(84)
1,089
35
–
337
(32)
5,734
103,421
1,429
118
10
38
29,285
20,512
14,557
255,922
–
218,612
–
–
–
2,675
–
39,165
40,183
282
15,776
12
47,812
38,245
531
24,112
(116)
110,584
(657)
109,927
166
(657)
2,675
95,418
1,160
(710)
102
(1,280)
60
(1)
(2)
(3)
As at October 31, 2020, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $20,520 million and $nil
(October 31, 2019 – $22,365 million and $nil), respectively, and in all fair value levels of Investment securities were $9,487 million and $2,137 million (October 31,
2019 – $6,474 million and $2,046 million), respectively.
OECD stands for Organisation for Economic Co-operation and Development.
CDO stands for collateralized debt obligations.
$18,336 $519,085 $ 1,606 $
(657) $ 538,370
$23,289 $459,257 $ 1,376 $
(710) $ 483,212
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
151
Note 3 Fair value of financial instruments (continued)
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 typically 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.
152
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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, 2020 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values (1), (2)
Reporting line in the fair value
hierarchy table
Assets Liabilities
Valuation
techniques
Significant
unobservable
inputs (3)
Low
High
Weighted
average
/ Inputs
distribution
Products
Corporate debt and related
derivatives
Government debt and
municipal bonds
Corporate debt and other debt
Loans
Derivative related liabilities
Mortgage-backed securities
Corporate debt and other debt
Private equities, hedge fund
investments and related
equity derivatives
Equities
Derivative related liabilities
33
1,070
–
157
1,596
Price-based
Discounted cash flows
25
Price-based
Discounted cash flows
Market comparable
Price-based
10 Discounted cash flows
Prices $
1.33 $ 136.34 $
Credit spread
Credit enhancement
1.75% 14.10%
11.82% 15.75%
Prices $ 64.62 $ 64.62 $
Yields
7.89%
4.21%
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (4)
Discount rate
NAV / prices (5)
7.00X
9.40X
1.61X
15.38X
33.47X
9.10X
10.00% 40.00%
10.52% 10.52%
n.a.
n.a.
Interest rate derivatives and
interest-rate-linked
structured notes (6), (7)
Derivative related assets
Derivative related liabilities
540
1,103
Discounted cash flows
Option pricing model
Interest rates
CPI swap rates
IR-IR correlations
FX-IR correlations
FX-FX correlations
1.20%
1.46%
1.60%
1.83%
19.00% 67.00%
29.00% 56.00%
68.00% 68.00%
Equity derivatives and
equity-linked structured
notes (6), (7)
Other (8)
Derivative related assets
Deposits
Derivative related liabilities
Asset-backed securities
Derivative related assets
Other assets
Mortgage-backed securities
U.S. state, municipal and
agencies debt
Derivative related liabilities
Other liabilities
36
2
26
53
27
44
139
238
53
38
Total
$ 3,584
$ 1,606
Discounted cash flows
Option pricing model
Dividend yields
Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.00% 11.38%
21.90% 97.00%
(71.40)% 45.10%
9.00% 176.00%
94.23
7.93%
13.13%
64.62
5.88%
13.31X
19.10X
2.04X
16.40%
10.52%
n.a.
Even
Even
Even
Even
Even
Lower
Middle
Middle
Upper
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
153
Note 3 Fair value of financial instruments (continued)
As at October 31, 2019 (Millions of Canadian dollars, except for prices, percentages and ratios)
Fair value
Range of input values (1), (2)
Reporting line in the fair value
hierarchy table
Assets Liabilities
Products
Corporate debt and related
derivatives
Government debt and
municipal bonds
Corporate debt and other debt
Loans
Derivative related liabilities
Mortgage-backed securities
Corporate debt and other debt
Private equities, hedge fund
investments and related
equity derivatives
Equities
Derivative related liabilities
Valuation
techniques
Price-based
Discounted cash flows
–
Price-based
Discounted cash flows
Market comparable
Price-based
10 Discounted cash flows
24
680
27
150
1,513
Interest rate derivatives and
interest-rate-linked
structured notes (6), (7)
Derivative related assets
Derivative related liabilities
380
943
Discounted cash flows
Option pricing model
Significant
unobservable
inputs (3)
Low
High
Weighted
average
/ Inputs
distribution
Prices $ 20.00 $ 131.78 $
Credit spread
Credit enhancement
1.02%
11.82%
11.34%
15.75%
Prices $ 65.50 $ 100.00 $
Yields
6.63%
4.70%
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
4.00X
9.70X
0.90X
10.00%
10.00%
n.a.
1.27%
1.40%
19.00%
29.00%
68.00%
24.90X
29.90X
5.93X
40.00%
12.00%
n.a.
2.16%
2.00%
67.00%
56.00%
68.00%
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
Equity derivatives and
equity-linked structured
notes (6), (7)
Other (8)
Derivative related assets
Deposits
Derivative related liabilities
Asset-backed securities
Derivative related assets
Other assets
Mortgage-backed securities
U.S. state, municipal and agencies
debt
Derivative related liabilities
Other liabilities
Discounted cash flows
Dividend yields
Option pricing model Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities
0.10%
34.00%
(71.40)%
8.77%
95.40%
30.50%
4.00% 110.00%
156
180
11
2
32
77
–
58
27
60
$ 2,954 $ 1,376
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 $286 million (October 31, 2019 – $255 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 auction rate securities, 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.
154
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
155
Note 3 Fair value of financial instruments (continued)
Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3
For the year ended October 31, 2020
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
$
58 $
– $
1 $
– $
(15) $
– $
– $
44
$
2
21
1,219
1,300
27
153
294
474
680
(585)
21
(195)
22
77
–
(1)
(126)
(127)
–
–
–
–
92
(116)
(7)
(76)
–
(7)
–
–
10
11
–
4
37
41
8
(2)
(3)
(1)
–
2
–
1
231
232
–
–
8
8
–
(3)
(74)
(92)
–
3
(4)
(1)
–
12
3
15
–
–
–
–
–
–
(2)
(2)
–
–
–
–
2
30
1,261
1,337
27
160
335
522
551
(706)
624
(179)
1,070
(31)
23
(174)
–
–
4
–
44
18
(19)
35
(6)
(88)
–
–
107
(6)
189
–
–
(588)
22
(301)
40
53
1,794 $
(241) $
56 $
609 $
(752) $
580 $
109 $ 2,155
(156) $
–
52 $
–
(3) $
–
(296) $
–
30 $
–
(113) $
–
347 $
–
(139)
–
$
$
(60)
5
(1)
4
14
–
–
(38)
(216) $
57 $
(4) $
(292) $
44 $
(113) $
347 $
(177)
$
$
$
$
–
–
–
(47)
(47)
n.a.
n.a.
n.a.
n.a.
(15)
(57)
(13)
(8)
–
(7)
(147)
29
–
5
34
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
(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
(Millions of Canadian dollars)
Assets
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies
$
66 $
– $
1 $
– $
(9) $
– $
– $
58
$
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
$
$
$
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) $
–
(68)
(16)
(453) $
(54) $
– $
–
(1)
(1) $
(102) $
–
29 $
–
(214) $
–
559 $
(5)
(156)
–
1
24
–
–
(60)
(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)
(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 $32 million for the year ended October 31, 2020 (October 31, 2019 – gains of $43 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, 2020 included derivative assets of $602 million (October 31, 2019 – $423 million) and derivative liabilities of $1,429 million (October 31,
2019 – $1,160 million).
n.a. not applicable
156
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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
Gains (losses) included in earnings for positions still held 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, 2020, transfers out of Level 1 to Level 2 included Investment U.S. state, municipal and
agencies debt of $1,200 million, Trading U.S. state, municipal and agencies debt of $1,125 million and Obligations related to
securities sold short of $804 million. 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, 2020, transfers out of Level 2 to Level 1 included Investment U.S. state, municipal and
agencies debt of $937 million. During the year ended October 31, 2019, there were no significant transfers out of Level 2 to Level 1.
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, 2020, significant transfers out of Level 2 to Level 3 included:
(cid:129)
(cid:129)
$624 million of Loans, due to changes in the significance of unobservable inputs.
$69 million of OTC equity options in Other contracts comprised of $51 million of derivative related assets and
$120 million of derivative related liabilities, due to changes in the market observability of inputs.
$113 million of Personal deposits, due to changes in the significance of unobservable inputs.
(cid:129)
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.
(cid:129)
(cid:129)
(cid:129)
During the year ended October 31, 2020, significant transfers out of Level 3 to Level 2 included:
$179 million of Loans, due to changes in significance of unobservable inputs.
$107 million of Interest rate contracts comprised of $211 million of derivative related assets and $318 million of derivative
related liabilities, due to changes in the market observability of inputs.
$109 million of OTC equity options in Other contracts comprised of $76 million of derivative related assets and
$185 million of derivative related liabilities, due to changes in the market observability of inputs.
$347 million of Personal deposits, due to changes in the significance of unobservable inputs.
(cid:129)
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)
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
157
Note 3 Fair value of financial instruments (continued)
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
As at
October 31, 2020
October 31, 2019
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
$
44 $
2
30
1,261
27
160
335
1,070
602
53
$
$
3,584 $
(139) $
(1,429)
(38)
$
(1,606) $
1 $
–
1
15
3
18
28
49
2
–
117 $
4 $
13
–
17 $
(1) $
–
(1)
(15)
58 $
2
21
1,219
(3)
(16)
(28)
(49)
(2)
–
27
153
294
680
423
77
(115) $
2,954 $
(4) $
(55)
(156) $
(1,160)
–
(60)
(59) $
(1,376) $
1 $
–
–
13
1
15
26
9
6
–
71 $
4 $
20
–
24 $
(1)
–
–
(14)
(1)
(13)
(27)
(12)
(3)
–
(71)
(4)
(17)
–
(21)
Sensitivity results
As at October 31, 2020, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions
would be an increase of $117 million and a decrease of $115 million in fair value, of which $49 million and $47 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 $17 million and an increase of $59 million in fair value.
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
Private equities, hedge fund
investments and related
equity derivatives
Interest rate derivatives
Equity derivatives
Bank funding and deposits
Structured notes
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 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.
Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain
basis points.
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.
158
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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
(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, 2020
Fair value always
approximates
carrying value (1)
17,410
$
–
Fair value may not approximate carrying value
Fair value measurements using
Level 1
–
$
502
$
Level 2
–
58,125
$
Level 3
–
–
$
Total
–
58,627
Total
fair value
$ 17,410
58,627
37,064
66,151
11,278
77,429
56,484
–
–
–
–
–
11,557
392,093
182,094
574,187
450
–
11,557
48,621
4,640
5,381
10,021
131
396,733
187,475
584,208
581
462,884
198,753
661,637
57,065
188,387
502
644,319
10,152
654,973
843,360
245,777
364,451
19,070
629,298
18,309
56,200
–
$
703,807
$
–
–
–
–
–
–
–
–
78,500
153,395
7,439
239,334
–
1,004
10,012
527
655
9
1,191
–
8,515
59
79,027
154,050
7,448
240,525
324,804
518,501
26,518
869,823
–
9,519
10,071
18,309
65,719
10,071
$ 250,350
$
9,765
$ 260,115
$ 963,922
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
593,646
81,770
156,370
7,680
245,820
424,416
184,645
609,061
50,375
781,496
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
(1)
(2)
Certain financial instruments have not been assigned to a level as the carrying amount always approximates their fair values due to their short-term nature (instruments
that are receivable or payable on demand, or with original maturity of three months or less) and insignificant credit risk.
Included in Securities – Investment, net of applicable allowance on the Consolidated Balance Sheets.
Fair values of financial assets and liabilities carried at amortized cost and disclosed in the table above are determined using the
following valuation techniques and inputs.
Amortized cost securities
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
159
Note 3 Fair value of financial instruments (continued)
Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold under
repurchase agreements and securities loaned
Valuation methods used for the long-term instruments are described in the Fair value of assets and liabilities measured on a
recurring basis and classified using the fair value hierarchy section of this note. The carrying values of short-term instruments
generally approximate their fair values.
Loans – Retail
Retail loans include residential mortgages, personal and small business loans and credit cards. For residential mortgages, and
personal and small business loans, we segregate the portfolio based on certain attributes such as product type, contractual
interest rate, term to maturity and credit scores, if applicable. Fair values of these loans are determined by the discounted cash
flow method using applicable inputs such as prevailing interest rates, contractual and posted client rates, client discounts, credit
spreads, prepayment rates and loan-to-value ratios. Fair values of credit card receivables are also calculated based on a
discounted cash flow method with portfolio yields, 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.
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.
160
Royal Bank of Canada: Annual Report 2020
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)
As at October 31, 2020
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
$
2,301 $
559
56
–
3
7,004 $
4,532
695
–
164
6,054 $
12,546
3,010
–
82
–
35
5,521
–
3,569 $
4,134
584
–
181
–
7
3,007
–
8,419 $
14,810
2,120
39
98
–
4
8,043
–
16,157
27,248
11,482
33,533
65
2
1,048
–
4,034
–
–
–
5
5
4.5%
1,772
1,775
0.1%
274
274
1.7%
–
–
–
–
–
–
227
63
3,472
–
204
204
1.4%
908
911
1.3%
9,736
9,739
1.7%
2,288
2,289
2.4%
–
–
–
–
–
–
2,670
2,670
0.9%
–
–
5,796
5,801
1.6%
–
–
1,689
1,690
1.4%
629
630
2.7%
8,777
8,779
1.1%
4,773
4,781
1.8%
–
–
–
10
10
1.4%
10,425
10,466
1.5%
–
–
272
269
1.2%
7
8
4.3%
2,227
2,237
2.6%
1
1
3.6%
192
189
1.2%
4,294
4,247
1.4%
92
106
2.1%
–
–
397
378
1.4%
1,688
1,679
2.6%
16,011
15,994
2.2%
–
–
–
2,226
2,181
1.2%
4,059
4,011
1.4%
58
71
2.4%
–
–
Total
27,347
36,581
6,465
39
528
292
111
21,091
43,617
136,071
2,562
2,541
1.4%
3,237
3,233
2.2%
38,523
38,524
1.7%
7,336
7,345
2.0%
2,418
2,370
1.2%
8,363
8,268
1.4%
19,041
19,114
1.5%
276
525
81,756
81,920
20,163
22,313
6,866
160
8,321
57,823
58,627
– $
–
–
–
–
–
–
–
43,617
43,617
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
276
525
276
525
–
–
–
–
–
–
–
4,721
4,724
18,932
18,944
26,303
26,356
7,085
7,057
24,439
24,314
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
438
8
2,178
–
625
3,249
3,252
1,862
787
2,045
1
2,644
7,339
7,392
16,044
1,615
2,643
159
4,805
25,266
25,663
1,819
1,622
–
–
219
3,660
3,798
–
18,281
–
–
28
18,309
18,522
Total carrying value of securities
$ 12,007 $ 42,440 $ 78,870 $ 22,199 $ 76,156 $ 44,142 $ 275,814
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
161
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)
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
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
With no
specific
maturity
Total
$ 1,974
771
538
–
359
$ 11,265
7,122
1,418
–
63
$ 7,783
8,601
2,211
–
308
$ 1,778
9,537
1,466
–
267
$ 8,611
15,661
863
482
338
$
–
–
–
–
–
$ 31,411
41,692
6,496
482
1,335
433
586
1,369
–
6,030
–
383
2,773
–
–
75
8,268
–
–
20
2,827
–
–
6
6,925
–
23,024
27,246
15,895
32,886
–
–
–
41,453
41,453
433
1,070
22,162
41,453
146,534
–
–
–
–
–
–
1,597
1,598
2.1%
236
236
1.2%
–
–
–
1
–
–
1,564
1,565
1.4%
–
–
3,398
3,399
682
297
2,252
–
400
3,631
3,631
5
5
1.1%
4
4
4.8%
1,085
1,087
1.8%
178
178
2.1%
–
–
–
–
–
–
3,222
3,225
1.9%
–
–
596
595
1.4%
954
953
2.7%
3,290
3,294
2.0%
3,839
3,836
2.4%
–
–
–
8
8
3.2%
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
Total carrying value of securities
$ 13,060
$ 33,272
$ 68,083
$ 24,698
$ 67,975
$ 41,916
$ 249,004
(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, 2020, we disposed of $2 million of equity
securities measured at FVOCI (October 31, 2019 – $129 million). The cumulative gain on the dates of disposals was $nil (October 31, 2019 – $1 million).
162
Royal Bank of Canada: Annual Report 2020
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, 2020
October 31, 2019
As at
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
$ 2,562 $
3,237
38,523
7,336
2,418
7,504
859
19,041
276
1 $
27
323
11
5
–
2
76
253
(22) $ 2,541 $
(31)
(322)
(2)
(53)
3,233
38,524
7,345
2,370
(90)
(7)
(3)
(4)
7,414
854
19,114
525
655 $
3 $
(1) $
2,878
20,787
4,254
2,709
7,334
847
17,655
248
43
215
2
1
1
4
45
218
(23)
(126)
(5)
(8)
(35)
(2)
(10)
(3)
Fair
value
657
2,898
20,876
4,251
2,702
7,300
849
17,690
463
$ 81,756 $
698 $
(534) $ 81,920 $ 57,367 $
532 $
(213) $ 57,686
(1)
(2)
(3)
Excludes $57,823 million of held-to-collect securities as at October 31, 2020 that are carried at amortized cost, net of allowance for credit losses (October 31, 2019 –
$44,784 million).
Gross unrealized gains and losses includes $8 million of allowance for credit losses on debt securities at FVOCI as at October 31, 2020 (October 31, 2019 – $(3) 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
$2,185 million, $nil, $48 million and $2,137 million, respectively as at October 31, 2020 (October 31, 2019 – $2,051 million, $1 million, $6 million and $2,046 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)
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.
(cid:129)
(cid:129)
Allowance for credit losses – securities at FVOCI (1)
(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, 2020
October 31, 2019
Performing
Impaired
Performing
Impaired
For the year ended
Stage 1
Stage 2
Stage 3 (2)
Total
Stage 1
Stage 2
Stage 3 (2)
Total
$
4
$
–
–
–
18
(13)
3
–
–
$ 12
$
–
–
–
–
–
–
–
–
–
–
$
(7) $ (3)
$
4
$
7
$
–
$ 11
–
–
–
–
–
4
–
(1)
–
–
–
18
(13)
7
–
(1)
–
–
–
5
(3)
(2)
–
–
–
–
–
–
(7)
1
–
(1)
$
(4) $
8
$
4
$
–
$
–
–
–
–
–
(8)
–
1
(7)
–
–
–
5
(10)
(9)
–
–
$ (3)
(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 2020
163
Note 4 Securities (continued)
Allowance for credit losses – securities at amortized cost
(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, 2020
October 31, 2019
Performing
Impaired
Performing
Impaired
For the year ended
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
$
5
$ 19
$
–
–
–
9
(2)
(2)
–
–
–
–
–
–
–
1
–
(1)
$ 10
$ 19
$
–
–
–
–
–
–
–
–
–
–
$ 24
$
6
$ 32
$
–
–
–
9
(2)
(1)
–
(1)
–
–
–
7
(1)
(6)
–
(1)
–
–
–
–
–
(15)
–
2
$ 29
$
5
$ 19
$
–
–
–
–
–
–
–
–
–
–
$ 38
–
–
–
–
7
(1)
(21)
–
1
$ 24
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, 2020
October 31, 2019
Performing
Impaired
Performing
Impaired
As at
Stage 1
Stage 2
Stage 3 (1)
Total
Stage 1
Stage 2
Stage 3 (1)
Total
$ 80,719
431
–
$ 87
1
–
$
–
–
157
$ 81,150
$ 88
$ 157
$
$ 56,671
400
–
$ 57,071
$
1
1
–
2
$ 80,806
432
157
$ 81,395
525
81,920
$ 56,885
647
–
$ 57,532
10
$
–
320
–
$ 320
19
$ 57,522
$ 301
$
$
$
–
–
–
–
–
–
$ 56,885
967
–
$ 57,852
29
$ 43,681
695
–
$ 44,376
5
$ 46
386
–
$ 432
19
$ 57,823
$ 44,371
$ 413
$
–
–
150
$ 150
$
$
$
–
–
–
–
–
–
$ 56,672
401
150
$ 57,223
463
57,686
$ 43,727
1,081
–
$ 44,808
24
$ 44,784
(1)
(2)
Includes $157 million of purchased credit impaired securities (October 31, 2019 – $150 million).
Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.
164
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Note 5 Loans and allowance for credit losses
Loans by geography and portfolio net of allowance
(Millions of Canadian dollars)
Retail (2)
Residential mortgages
Personal
Credit cards (3)
Small business (4)
Wholesale (2), (5)
Total loans
Canada
United
States
Other
International
Total
Allowance for
loan losses (1)
Total net
of allowance
As at October 31, 2020
$ 319,287 $
79,778
17,060
5,742
126,348
20,331 $
9,050
340
–
64,375
2,979 $ 342,597 $
3,183
226
–
17,932
92,011
17,626
5,742
208,655
(515) $
(1,185)
(1,211)
(123)
(2,605)
342,082
90,826
16,415
5,619
206,050
$ 548,215 $
94,096 $
24,320 $ 666,631 $
(5,639) $
660,992
Undrawn loan commitments – Retail
Undrawn loan commitments – Wholesale
226,439
111,860
4,314
184,308
1,628
64,859
232,381
361,027
(176)
(187)
(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
Canada
United
States
Other
International
Total
Allowance for
loan losses (1)
Total net
of allowance
As at October 31, 2019
$ 287,767 $
81,547
19,617
5,434
124,312
$ 518,677 $
208,336
101,017
17,012 $
7,399
439
–
53,782
3,312 $ 308,091 $
3,304
255
–
17,776
92,250
20,311
5,434
195,870
78,632 $
24,647 $ 621,956 $
5,063
176,022
801
54,982
214,200
332,021
307,689
91,488
19,520
5,384
194,775
618,856
(402) $
(762)
(791)
(50)
(1,095)
(3,100) $
(225)
(70)
(1)
(2)
(3)
(4)
(5)
Excludes allowance for loans measured at FVOCI of $6 million (October 31, 2019 – $nil).
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.
Loans maturity and rate sensitivity
(Millions of Canadian dollars)
Retail
Wholesale
Maturity term (1)
Rate sensitivity
As at October 31, 2020
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating Fixed Rate
Non-rate-
sensitive
Total
$ 213,946 $ 218,342 $ 25,688 $ 457,976 $ 129,870 $ 322,122 $ 5,984 $ 457,976
208,655
160,031
208,655
171,171
34,686
11,278
37,346
2,798
Total loans
Allowance for loan losses
$ 373,977 $ 255,688 $ 36,966 $ 666,631 $ 164,556 $ 493,293 $ 8,782 $ 666,631
(5,639)
(5,639)
Total loans net of allowance for loan losses
$ 660,992
$ 660,992
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Maturity term (1)
Rate sensitivity
As at October 31, 2019
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed Rate
Non-rate-
sensitive
Total
$ 216,610 $ 187,721 $ 21,755 $ 426,086 $ 114,736 $ 304,448 $
154,445
30,512
10,913
195,870
27,329
165,502
$ 371,055 $ 218,233 $ 32,668 $ 621,956 $ 142,065 $ 469,950 $
6,902 $ 426,086
195,870
3,039
9,941 $ 621,956
(3,100)
$ 618,856
(3,100)
$ 618,856
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
165
Note 5 Loans and allowance for credit losses (continued)
Allowance for credit losses
(Millions of Canadian dollars)
Retail
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Customers’ liability under
acceptances
October 31, 2020
October 31, 2019
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
$
402 $ 190 $
935
832
61
801
900
117
1,165
2,140
(34) $
(411)
(484)
(31)
(380)
(40) $ 518 $
(16) 1,309
(2) 1,246
140
(7)
(130) 2,795
24
83
–
–
107
382 $
895
760
51
979
21
526
590
41
661
5
(474)
(518)
(28)
(397)
(11) $ 402
935
(12)
832
–
61
(3)
(78) 1,165
–
(2)
24
68 $
(37) $
$ 3,419 $ 4,231 $ (1,340) $ (195) $6,115 $ 3,088 $ 1,891 $ (1,454) $ (106) $ 3,419
Presented as:
Allowance for loan losses
Other liabilities – Provisions
Customers’ liability under
acceptances
Other components of equity
$ 3,100
295
24
–
$5,639 $ 2,912
154
363
107
6
21
1
$ 3,100
295
24
–
(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, 2020 that are no longer subject to enforcement activity was $193 million (October 31, 2019 – $179 million).
The following table reconciles the opening and closing allowance for each major product of loans and commitments as
determined by our modelled, scenario-weighted allowance and the application of expert credit judgment as applicable.
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.
166
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Allowance for credit losses – Retail and wholesale loans
October 31, 2020
October 31, 2019
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
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
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
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
$
146
$
77
$
179
$
402
$
142
$
64
$
176
$
382
$
$
$
$
$
$
$
$
221
(35)
(3)
76
(16)
(180)
–
–
(3)
(186)
42
(33)
–
(15)
291
–
–
(16)
(35)
(7)
36
–
–
34
(44)
10
(21)
–
–
–
76
(31)
145
(44)
10
(40)
87
(13)
(3)
51
(14)
(104)
–
–
–
(66)
16
(31)
–
(10)
104
–
–
–
(21)
(3)
34
–
–
41
(45)
8
(11)
–
–
–
51
(24)
41
(45)
8
(11)
206
$
160
$
152
$
518
$
146
$
77
$
179
$
402
272
$
520
$
143
$
935
$
242
$
512
$
141
$
895
–
494
(107)
(3)
118
(49)
(245)
–
–
–
–
(487)
109
(64)
–
(97)
756
–
–
(4)
–
(7)
(2)
67
–
–
318
(545)
134
(12)
–
–
–
–
118
(146)
829
(545)
134
(16)
23
544
(87)
(2)
101
(31)
(517)
–
–
(1)
(48)
(537)
88
(142)
1
(112)
758
–
–
–
–
(7)
(1)
144
–
–
351
(600)
126
(11)
480
$
733
$
96
$
1,309
$
272
$
520
$
143
$
(25)
–
–
–
102
(143)
592
(600)
126
(12)
935
173
$
659
$
–
$
832
$
161
$
599
$
–
$
760
470
(98)
(2)
7
(8)
(177)
–
–
(1)
(470)
98
(372)
–
(29)
997
–
–
(1)
–
–
374
–
–
110
(617)
133
–
–
–
–
7
(37)
930
(617)
133
(2)
452
(81)
(2)
5
(5)
(358)
–
–
1
(452)
81
(341)
–
(27)
800
–
–
(1)
–
–
343
–
–
175
(655)
137
–
364
$
882
$
–
$
1,246
$
173
$
659
$
–
$
29
$
10
$
22
$
61
$
17
$
16
$
18
$
–
12
(11)
–
20
(7)
35
–
–
–
78
$
–
(12)
11
(2)
–
(6)
28
–
–
–
29
–
–
–
2
–
–
47
(38)
7
(7)
–
–
–
–
20
(13)
110
(38)
7
(7)
11
18
(3)
–
13
(5)
(22)
–
–
–
$
33
$
140
$
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
281
$
396
$
488
$
1,165
$
274
$
340
$
365
$
979
154
(200)
(14)
860
(479)
410
–
–
(17)
(149)
221
(116)
–
(301)
1,091
–
–
(10)
(5)
(21)
130
–
–
559
(437)
57
(103)
–
–
–
860
(780)
2,060
(437)
57
(130)
145
(33)
(5)
239
(162)
(178)
–
–
1
(133)
36
(57)
44
(165)
331
–
–
–
(12)
(3)
62
–
–
552
(440)
43
(79)
–
–
–
283
(327)
705
(440)
43
(78)
Balance at end of period
$
995
$
1,132
$
668
$
2,795
$
281
$
396
$
488
$
1,165
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
167
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 and the allowance is not sensitive to any one single factor alone. The key drivers of changes in expected credit
losses include the following:
(cid:129) Changes in the credit quality of the borrower or instrument, primarily reflected in changes in internal risk ratings;
(cid:129) 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;
(cid:129) Changes in scenario design and the weights assigned to each scenario; and
(cid:129) Transfers between stages, which can be triggered by changes to any of the above inputs.
The COVID-19 pandemic significantly impacted our determination of allowance for credit losses and required the application of
heightened judgment. Measures to contain the COVID-19 pandemic have sharply curtailed economic activity in many countries,
resulting in unprecedented declines in GDP and a substantial increase in unemployment starting in the spring of 2020. Significant
fiscal and monetary policy stimulus, as well as bank-led deferral programs have generally supported lower defaults during fiscal
2020. However, a resurgence of virus spread and re-imposition of containment measures to varying degrees in some regions,
along with the tapering off of certain elements of fiscal support, has raised further uncertainty with regards to the timing and
extent of recovery. As there is uncertainty as to how containment and support measures will evolve, our allowances have a
higher than usual degree of uncertainty and the inputs used are inherently subject to change, which may materially change our
estimate of Stage 1 and Stage 2 allowance for credit losses in future periods.
To address the uncertainties inherent in the current and future environment and to reflect all relevant risk factors not captured in
our modelled results, we applied expert credit judgment in determining significant increases in credit risk since origination and
our weighted allowance for credit losses. In light of the significant uncertainty, the impact of expert credit judgment on our
allowances increased as compared to the previous year. We applied quantitative and qualitative adjustments for the impacts of
the unprecedented macroeconomic scenarios arising from the COVID-19 pandemic, the temporary effects of the bank and
government led payment support programs which may not completely mitigate future losses, and the impacts to particularly
vulnerable sectors affected by the COVID-19 pandemic.
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 horizon, 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.
Our allowance for credit losses reflects our economic outlook as at October 31, 2020. Subsequent changes to this forecast and
related estimates will be reflected in our allowance for credit losses in future periods.
Our base scenario reflects a continuation of the recovery that has been underway since the sharp drop in economic activity
in calendar Q2. The recovery is expected to be gradual with conditions returning to pre-shock levels for Canadian and U.S. GDP
and unemployment towards the latter part of our forecast horizon.
Downside scenarios, including two additional and more severe downside scenarios designed for the energy and real estate
sectors, reflect the possibility of a double-dip recession, with conditions deteriorating from Q4 2020 levels for up to two years,
followed by a recovery for the remainder of the period. These scenarios assume 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 further
monetary policy responses, followed by a return to a long-run sustainable growth rate within the forecast period.
168
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
The following provides additional detail about our forecasts for certain key macroeconomic variables used in the models to
estimate ACL on performing loans, commitments and acceptances:
(cid:129) Unemployment – Quarterly average Canadian and U.S. unemployment rates both peaked at 13.0% in calendar Q2 2020. In
calendar Q4 2020, unemployment rates are expected to decline to 8.7% in Canada and 7.5% in the U.S. We expect
unemployment to remain elevated in 2021, but gradually improve over the forecast horizon.
Canada Unemployment Rate (1)
%
14
12
10
8
6
4
2
U.S. Unemployment Rate (1)
%
14
12
10
8
6
4
2
0
Q 4-2019
Q 1-2020
Q 2-2020
Q 3-2020
Q 4-2020
Q 1-2021
Q 2-2021
Q 3-2021
Q 1-2022
Q 4-2021
Q 2-2022
Q 3-2022
Q 4-2022
Q 1-2023
Q 2-2023
Q 3-2023
Q 4-2023
Q 1-2024
Q 2-2024
Q 3-2024
Q 4-2024
Q 1-2025
Q 2-2025
Q 3-2025
Q 4-2019
Q 1-2020
Q 2-2020
Q 3-2020
Q 4-2020
Q 1-2021
Q 2-2021
Q 3-2021
Q 4-2021
Q 1-2022
Q 2-2022
Q 3-2022
Q 4-2022
Q 1-2023
Q 2-2023
Q 3-2023
Q 4-2023
Q 1-2024
Q 2-2024
Q 3-2024
Q 4-2024
Q 1-2025
Q 2-2025
Q 3-2025
Range of alternative scenarios (October 31, 2020)
Base case (October 31, 2020)
Range of alternative scenarios (October 31, 2020)
Base case (October 31, 2020)
Base case (July 31, 2020)
Base case (October 31, 2019)
Base case (July 31, 2020)
Base case (October 31, 2019)
(1) Represents the average quarterly unemployment level over the calendar quarters presented.
(1) Represents the average quarterly unemployment level over the calendar quarters presented.
(cid:129) Gross Domestic Product (GDP) – Canadian and U.S. GDP experienced historical troughs in calendar Q2 2020. We expect
GDP in calendar Q4 2020 to be 4.7% below Q4 2019 levels in Canada and 2.4% below such levels in the U.S., returning to
pre-shock forecast levels in calendar 2024 with continuous improvement over the forecast horizon.
Canada Real GDP (1)
Trillions of Canadian dollars
U.S. Real GDP (1)
Trillions of U.S. dollars
2.4
2.3
2.2
2.1
2.0
1.9
1.8
1.7
22.0
21.0
20.0
19.0
18.0
17.0
16.0
15.0
Q 4-2019
Q 1-2020
Q 2-2020
Q 3-2020
Q 4-2020
Q 2-2021
Q 1-2021
Q 3-2021
Q 4-2021
Q 1-2022
Q 2-2022
Q 3-2022
Q 4-2022
Q 1-2023
Q 2-2023
Q 3-2023
Q 4-2023
Q 1-2024
Q 2-2024
Q 3-2024
Q 4-2024
Q 1-2025
Q 2-2025
Q 3-2025
Q 4-2019
Q 1-2020
Q 2-2020
Q 3-2020
Q 4-2020
Q 2-2021
Q 1-2021
Q 3-2021
Q 4-2021
Q 1-2022
Q 2-2022
Q 3-2022
Q 4-2022
Q 1-2023
Q 2-2023
Q 3-2023
Q 4-2023
Q 1-2024
Q 2-2024
Q 3-2024
Q 4-2024
Q 1-2025
Q 2-2025
Q 3-2025
Range of alternative scenarios (October 31, 2020)
Base case (October 31, 2020)
Range of alternative scenarios (October 31, 2020)
Base case (October 31, 2020)
Base case (July 31, 2020)
Base case (October 31, 2019)
Base case (July 31, 2020)
Base case (October 31, 2019)
(1) Represents the seasonally adjusted annual rate indexed to 2012 Canadian dollar over the calendar
(1) Represents the seasonally adjusted annual rate indexed to 2012 U.S. dollars over the calendar
quarters presented.
quarters presented.
(cid:129) Oil price (West Texas Intermediate in US$) – In our base forecast, we expect oil prices to recover from trough prices in April
2020 to an average price of $43 per barrel over the next 12 months and $48 per barrel in the following 2 to 5 years. The
range of average prices in our alternative downside and upside scenarios is $23 to $49 per barrel for the next 12 months
and $35 to $50 per barrel for the following 2 to 5 years. As at October 31, 2019, our base forecast included an average price
of $59 per barrel for the next 12 months and $68 per barrel for the following 2 to 5 years.
(cid:129) Canadian housing price index – In our base forecast, we expect housing prices to grow by 0.6% over the next 12 months,
with a compound annual growth rate of 4.5% for the following 2 to 5 years. The range of annual housing price growth
(contraction) in our alternative downside and upside scenarios is (29.6)% to 6.1% over the next 12 months and 2.9% to 11.1%
for the following 2 to 5 years. As at October 31, 2019, our base forecast included housing price growth of 4.5% for the next 12
months and 4.7% for the following 2 to 5 years.
The primary variables driving credit losses in our retail portfolios are Canadian unemployment rates, Canadian GDP 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 discussed above; however, the specific variables differ by sector. Other variables also impact
our wholesale portfolios including, but not limited to, the Canadian and U.S. 10 year BBB corporate and 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, Canadian and U.S. 10 year BBB corporate bond and 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. GDP, TSX index, S&P 500 index, oil prices, natural gas prices, and commercial real estate
price index.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
169
Note 5 Loans and allowance for credit losses (continued)
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. As described above, all scenarios are designed to include the impact of the COVID-
19 pandemic as at October 31, 2020, reflective of current market conditions. In determining our IFRS 9 allowance for credit losses,
we reassessed our scenario weights to more heavily weight the base case scenario relative to October 31, 2019. Since the onset of
the global spread of the COVID-19 pandemic in the spring of 2020, we have reflected continued uncertainty and downside risk of a
prolonged recovery by shifting additional weighting to our pessimistic scenarios. The possibility of a more prolonged recovery
period, including the re-imposition of containment measures to varying degrees in some regions taken by the government have
been reflected in our scenario design and weights.
The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by
$606 million at October 31, 2020 (October 31, 2019 – $376 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, is dependent on the expected remaining life at the date of the transfer and reflects the
sharp drop in economic activity followed by a gradual recovery. 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, 2020
October 31, 2019
As at
ACL – All performing
loans in Stage 1
Impact of
staging
Stage 1 and 2
ACL
ACL – All performing
loans in Stage 1
Impact of
staging
Stage 1 and 2
ACL
Performing loans (1)
$ 4,028
$ 1,031
$ 5,059
$ 1,737
$ 826
$ 2,563
(1)
Represents loans and commitments in stage 1 and stage 2.
170
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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, 2020
October 31, 2019
As at
Retail
Loans outstanding – Residential
mortgages
Low risk
Medium risk
High risk
Not rated (2)
Impaired
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
$ 270,396 $ 2,848 $
15,230
4,346
43,176
–
333,148
3,307
1,467
936
–
8,558
– $ 273,244
18,537
–
5,813
–
44,112
–
638
638
$ 238,377 $ 6,764 $
14,033
2,843
40,030
–
1,347
2,722
726
–
– $ 245,141
15,380
–
5,565
–
40,756
–
732
732
638
342,344
295,283
11,559
732
307,574
$ 71,245 $ 1,084 $
3,974
817
7,704
–
83,740
5,415
1,416
144
–
8,059
253
342,597
– $ 72,329
9,389
–
2,233
–
7,848
–
212
212
$ 71,619 $ 1,944 $
5,254
843
7,293
–
3,011
1,874
105
–
6,934
212
92,011
85,009
517
308,091
– $ 73,563
8,265
–
2,717
–
7,398
–
307
307
307
92,250
$ 11,824 $
1,596
132
490
14,042
63 $
2,360
1,105
56
3,584
– $ 11,887
3,956
–
1,237
–
546
–
$ 13,840 $
2,250
137
677
–
17,626
16,904
103 $
1,827
1,432
45
3,407
– $ 13,943
4,077
–
1,569
–
722
–
–
20,311
2,034 $
1,976
126
9
–
4,145
172 $
1,143
192
–
–
1,507
$
– $
–
–
–
90
90
2,206
3,119
318
9
90
5,742
2,200 $
2,163
138
10
–
107 $
563
196
–
–
4,511
866
– $
–
–
–
57
57
2,307
2,726
334
10
57
5,434
Loans outstanding – Small business
Low risk
Medium risk
High risk
Not rated (2)
Impaired
$
Total
Undrawn loan commitments – Retail
Low risk
Medium risk
High risk
Not rated (2)
$ 214,176 $
10,402
1,141
5,238
887 $
291
129
117
– $ 215,063
10,693
–
1,270
–
5,355
–
$ 196,743 $ 1,894 $
8,251
851
5,861
246
208
146
– $ 198,637
8,497
–
1,059
–
6,007
–
–
214,200
Total
230,957
1,424
–
232,381
211,706
2,494
Wholesale – Loans outstanding
Investment grade
Non-investment grade
Not rated (2)
Impaired
Items not subject to impairment (3)
Total
Undrawn loan commitments –
Wholesale
Investment grade
Non-investment grade
Not rated (2)
Total
$ 50,998 $
112,434
7,093
–
328 $
26,575
432
–
– $ 51,326
139,009
–
7,525
–
2,235
2,235
$ 47,133 $
119,778
5,862
–
97 $
11,940
320
–
– $ 47,230
131,718
–
6,182
–
1,829
1,829
170,525
27,335
2,235
200,095
172,773
12,357
1,829
186,959
8,560
208,655
8,911
195,870
$ 242,244 $ 1,022 $
92,262
3,918
21,581
–
– $ 243,266
113,843
–
3,918
–
$ 222,819 $
96,191
3,986
338,424
22,603
–
361,027
322,996
18 $
9,007
–
9,025
– $ 222,837
105,198
–
3,986
–
–
332,021
(1)
(2)
(3)
As at October 31, 2020, 90% of credit-impaired loans were either fully or partially collateralized (October 31, 2019 – 86%). 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
171
Note 5 Loans and allowance for credit losses (continued)
Loans past due but not impaired (1)
October 31, 2020
October 31, 2019
As at
(Millions of Canadian dollars)
1 to 29 days 30 to 89 days
90 days
and greater
Total
1 to 29 days 30 to 89 days
90 days
and greater
Total
Retail
Wholesale
$
$
3,346 $
2,129
5,475 $
1,013 $
574
1,587 $
129 $ 4,488 $
13
2,716
3,173 $
1,543
142 $ 7,204 $
4,716 $
1,369 $
460
1,829 $
186 $ 4,728
2,006
3
189 $ 6,734
(1)
Loans in our payment deferral programs established to help clients manage through the challenges of the COVID-19 pandemic have been re-aged to current and are not
aged further during the deferral period. Subsequent to the payment deferral period, loans will commence re-aging from current. 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.
Loan modifications
We have established relief programs to help clients manage through challenges of the COVID-19 pandemic through payment
deferrals, interest rate reductions, covenant waivers, and refinancing or credit restructuring. In some cases, the original terms of
the associated loans were renegotiated or otherwise modified, resulting in changes to the contractual terms of the loans that
affect the contractual cash flows. For the year ended October 31, 2020, the amortized cost of the loans whose contractual terms
were modified while in Stage 2 or Stage 3 at the quarter ended before the modification was $8,437 million, resulting in no material
modification losses. The gross carrying amount of loans transferred to Stage 1 whose contractual terms were previously modified
while in Stage 2 or Stage 3 was not material for the year ended October 31, 2020.
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 derecognized
Government relief programs
To support our clients through unprecedented times due to the COVID-19 pandemic, we are participating in government relief
programs in Canada and in the U.S.
Under the Canadian Emergency Business Account program, we have provided interest-free loans to existing eligible small
business clients funded by the Export Development Bank of Canada (EDC). As we do not retain substantially all of the risks and
rewards of the financial assets, and all cash flows are passed through to the EDC, these loans are not recognized on our
Consolidated Balance Sheets.
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 defaults during 2020 and 2019.
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.
172
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Securities sold under repurchase agreements and securities loaned
We also enter into transactions such as repurchase agreements and securities lending agreements where we transfer assets
under agreements to repurchase them at a future date and retain substantially all of the risks and rewards associated with the
assets. These transferred assets remain on our Consolidated Balance Sheets and are accounted for as collateralized borrowing
transactions.
The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for
derecognition, and their associated liabilities.
October 31, 2020
October 31, 2019
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
$ 35,001 $
267,361 $
6,870 $309,232 $
32,794 $
220,250 $
6,336 $ 259,380
(Millions of Canadian dollars)
Carrying amount of transferred
assets that do not qualify for
derecognition
Carrying amount of associated
liabilities
34,805
267,361
6,870 309,036
32,615
220,250
6,336
259,201
Fair value of transferred assets
Fair value of associated liabilities
$ 35,293 $
35,957
267,361 $
267,361
6,870 $309,524 $
6,870 310,188
32,757 $
33,143
220,250 $
220,250
6,336 $ 259,343
259,729
6,336
Fair value of net position
$
(664) $
– $
– $
(664) $
(386) $
– $
– $
(386)
(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, 2020, $1.0 billion of financial assets held by the conduit was included in Loans
(October 31, 2019 – $1.2 billion) and $0.6 billion of ABCP issued by the conduit was included in Deposits (October 31, 2019 – $0.7
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 provide subordinated loans to the entity to pay upfront expenses, and
we act as counterparty to interest rate and cross currency swap agreements which hedge the entity’s interest rate and currency
risk exposure.
We consolidate the structured entity because we have decision-making power over the timing and size of future issuances
and other relevant activities which were predetermined by us at inception. We also obtain significant funding benefits and are
exposed to variability from the performance of the underlying credit card receivables through our retained interest. As at
October 31, 2020, $5.8 billion of notes issued by our credit card securitization vehicle were included in Deposits on our
Consolidated Balance Sheets (October 31, 2019 – $7.1 billion).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
173
Note 7 Structured entities (continued)
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, 2020, $12.2 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated
Balance Sheets (October 31, 2019 – $16.2 billion).
Covered bonds
We periodically transfer mortgages to RBC Covered Bond Guarantor Limited Partnership (the Guarantor LP) to support funding
activities and asset coverage requirements under our covered bonds program. The Guarantor LP was created to guarantee interest
and principal payments under the covered bond program. The covered bonds guaranteed by the Guarantor LP are direct, unsecured
and unconditional obligations of 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. During the second quarter, OSFI temporarily
increased the limits on covered bond programs and the Bank of Canada temporarily expanded the eligible collateral for its term
repo facility to include banks’ own covered bonds to provide further liquidity due to the COVID-19 pandemic.
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, 2020, the
total amount of mortgages transferred and outstanding was $105.8 billion (October 31, 2019 – $53.9 billion) providing further
liquidity capacity for the covered bond program and $40 billion of covered bonds were recorded as Deposits on our Consolidated
Balance Sheets (October 31, 2019 – $39.8 billion).
Municipal bond TOB structures
We sell taxable and tax-exempt municipal bonds into Tender Option Bond (TOB) structures, which consist of a bond that is credit
enhanced by us and purchased by a TOB trust. The TOB trust finances the purchase from us by issuing floating-rate certificates to
short-term investors and a residual certificate that is purchased by us. We are the remarketing agent for the floating-rate
certificates and provide a liquidity facility to the short-term investors which requires us to purchase any certificates tendered but
not successfully remarketed. We credit enhance the bond purchased by the TOB trust with a letter of credit 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 the 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, 2020, $7.8 billion of municipal bonds
were included in Investment securities related to consolidated TOB structures (October 31, 2019 – $8.3 billion) and a corresponding
$8.2 billion of floating-rate certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2019 – $8.7 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, 2020, $516 million of Trading
securities held in the consolidated funds (October 31, 2019 – $465 million) and $293 million of Other liabilities representing the fund
units held by third parties (October 31, 2019 – $95 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
Multi-seller
conduits (1)
Structured
finance
As at October 31, 2020
Non-RBC
managed
investment
funds
Third-party
securitization
vehicles
Other
Total
$
$
$
$
138 $
–
60
–
– $
2,670
–
46
2,297 $
–
–
–
– $
5,628
–
–
422 $
931
84
261
2,857
9,229
144
307
198 $ 2,716 $
2,297 $
5,628 $
1,698 $
12,537
38 $
–
38 $
– $
–
– $
– $
–
– $
– $
–
– $
– $
–
– $
38
–
38
Maximum exposure to loss (2)
$ 42,863 $ 6,522 $
2,557 $ 10,389 $
2,108 $
64,439
Total assets of unconsolidated structured entities
$ 41,964 $ 18,200 $462,947 $ 87,631 $286,200 $ 896,942
174
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
(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, 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
50 $
– $
–
– $
– $
–
– $
– $
–
– $
– $
–
– $
20
30
50
38,032 $ 6,446 $
2,123 $
10,756 $
2,667 $
60,024
37,192 $ 17,571 $ 412,046 $
84,282 $ 293,423 $
844,514
(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 $23.4 billion as at October 31, 2020 (October 31, 2019 –
$23.6 billion).
The maximum exposure to loss resulting from our interests in these entities consists mostly of investments, loans, fair value of derivatives, liquidity and credit
enhancement facilities. The maximum exposure to loss of the multi-seller conduits is higher than the on-balance sheet assets primarily because of the notional amounts
of the backstop liquidity and credit enhancement facilities. Refer to Note 24.
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 various hedging contracts to facilitate our clients’ securitization of fixed
rate and/or foreign currency denominated assets through the conduits. These may take the form of forward contracts, interest
rate swaps or cross currency swaps. 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 designed to cover a multiple of historical
losses.
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 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 participate 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 for the benefit of floating-rate certificate holders which may be drawn if certificates are tendered but not
able to be remarketed. For a portion of these trusts, we also provide a letter of credit for the underlying bonds held in the trust. We do
not have decision-making power over the relevant activities of the structures; therefore, we do not consolidate these structures.
We provide senior warehouse financing to structured entities that are established by third parties to acquire loans for the
purposes of issuing a term collateralized loan obligation (CLO) transaction. Subordinated financing is provided during the
warehouse phase by one or more third-party equity investors. We act as the arranger and placement agent for the term CLO
transaction. Proceeds from the sale of the term CLO are used to repay our senior warehouse financing, at which point we have no
further involvement with the transaction. We do not consolidate these CLO structures as we do not have decision-making power
over the relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt
portfolio.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
175
Note 7 Structured entities (continued)
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 generally 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 designed to cover a multiple of historical losses. 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, 2020 and 2019, 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, 2020, we transferred commercial mortgages with a carrying amount of
$469 million (October 31, 2019 – $696 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, 2020 and 2019, 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.
176
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
177
Note 8 Derivative financial instruments and hedging activities (continued)
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) (1)
(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 (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
As at October 31, 2020
Term to maturity
Within
1 year
1 through
5 years
Over
5 years
Total
Trading
Other than
Trading
$ 2,782,447 $ 427,464 $
3,409,078
282,837
303,347
5,990,160
407,782
410,237
340 $ 3,210,251 $ 3,172,950 $ 37,301
469,236
133
–
13,154,831
876,286
911,806
12,685,595
876,153
911,806
3,755,593
185,667
198,222
1,691,079
80,186
412,053
46,719
50,099
1,309
177,220
32,474
56,563
1,117,048
13,963
13,407
39,877
94,378
1,788
64,540
633,023
3,349
3,410
7,577
20,126
1,725,341
201,289
2,162,124
64,031
66,916
48,763
291,724
1,707,082
194,773
2,112,625
64,031
66,916
48,244
282,321
18,259
6,516
49,499
–
–
519
9,403
164,925
205,927
74,494
58,116
75
–
179,681
112,363
167,350
14,188
10,391
–
–
30,768
113
233
–
–
–
–
240
277,401
373,510
88,682
68,507
75
–
210,689
277,401
373,510
88,682
68,507
75
–
210,689
–
–
–
–
–
–
–
$ 9,919,592 $ 8,938,413 $ 4,874,221 $ 23,732,226 $ 23,141,360 $ 590,866
As at October 31, 2019
Term to maturity
Within
1 year
1 through
5 years
Over
5 years
Total
Trading
Other than
Trading
$ 2,014,752 $
3,294,746
83,247
77,601
179,624 $
387 $
2,194,763 $
2,186,862 $
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
1,715,266
79,264
469,910
54,756
54,985
2,693
201,489
107,054
363,947
56,657
59,840
28
–
214,725
30,523
50,416
894,250
14,409
14,969
14,724
90,436
118,805
120,247
36,985
16,395
–
–
44,245
985
55,166
425,301
3,061
3,383
3,437
18,463
187
46
–
–
–
–
–
1,746,774
184,846
1,789,461
72,226
73,337
20,854
310,388
226,046
484,240
93,642
76,235
28
–
258,970
1,724,606
177,622
1,743,465
72,226
73,337
20,341
303,893
226,046
484,240
93,642
76,235
28
–
258,970
7,901
471,684
–
–
22,168
7,224
45,996
–
–
513
6,495
–
–
–
–
–
–
–
(1)
(2)
(3)
The derivative notional amounts are determined using the standardized approach for measuring counterparty credit risk (SA-CCR) in accordance with the Capital
Adequacy Requirements (CAR).
Credit derivatives with a notional value of $0.5 billion (October 31, 2019 – $0.5 billion) are economic hedges. Trading credit derivatives comprise protection purchased of
$26.3 billion (October 31, 2019 – $12.6 billion) and protection sold of $21.9 billion (October 31, 2019 – $7.7 billion).
Other contracts exclude loan-related commitment derivatives of $1.9 billion (October 31, 2019 - $7.7 billion), which are not classified as derivatives under CAR guidelines.
$ 8,850,960 $ 7,579,943 $ 4,198,173 $ 20,629,076 $ 20,067,095 $ 561,981
178
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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 (2)
Cross currency interest rate swaps (2)
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, 2020
October 31, 2019
Positive
Negative
Positive
Negative
$
33 $
44,732
7,498
–
52,263
10,765
5,117
19,880
1,292
–
37,054
463
21,156
33
37,453
–
8,916
46,402
10,190
5,080
21,826
–
910
38,006
526
23,985
$
30 $
39,669
5,898
–
45,597
11,263
5,022
22,076
1,242
–
39,603
169
15,356
110,936
108,919
100,725
1,959
1,959
76
89
2,084
2,249
–
105
1,410
1,410
85
22
132
239
5
126
848
848
116
193
904
1,213
1,146
–
181
3
140
31
32,570
–
6,756
39,357
11,755
4,412
21,999
–
898
39,064
279
18,517
97,217
742
742
118
527
501
Total gross fair values before:
Valuation adjustments determined on a pooled basis
Impact of netting agreements that qualify for balance sheet offset
4,313
1,780
2,242
2,031
115,249
(1,104)
(657)
110,699
(115)
(657)
102,967
(697)
(710)
99,248
5
(710)
$113,488 $109,927
$ 101,560 $ 98,543
(1)
(2)
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.
Fair value of derivative instruments by term to maturity (1)
October 31, 2020
October 31, 2019
As at
(Millions of Canadian dollars)
Derivative assets
Derivative liabilities
1 through
5 years
Less than
1 year
Less than
1 year
$27,072 33,755 52,661 $ 113,488 $ 25,342
25,495
26,507 32,885 50,535
Over
5 years
109,927
Total
1 through
5 years
Over
5 years
Total
28,568 47,650 $ 101,560
98,543
26,503 46,545
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values permitted by certain central
counterparties.
Interest rate benchmark reform (1)
We use interest rate contracts in fair value hedges and cash flow hedges to manage our exposure to interest rate risk of our
existing and/or forecast assets and liabilities. We also use foreign denominated deposit liabilities in net investment hedges to
manage the foreign exchange risk arising from our investments in foreign operations. The hedging instruments designated to
manage these risks reference IBOR in multiple jurisdictions and will be affected by the Reform as the markets transition to
alternative risk free or nearly risk-free rates by the end of 2021 or beyond.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
179
Note 8 Derivative financial instruments and hedging activities (continued)
The following table presents the notional or principal amount of our hedging instruments which reference IBOR that will
expire after 2021 and will be affected by the Reform. We continue to monitor the progress to assess which IBORs are impacted by
the Reform. The notional or principal amounts of our hedging instruments also approximates the extent of the risk exposure we
manage through hedging relationships:
(Millions of Canadian dollars)
Interest rate contracts
USD LIBOR
GBP LIBOR
Non-derivative instruments
USD LIBOR
GBP LIBOR
As at
October 31, 2020
November 1, 2019
Notional/Principal
amounts
Notional/Principal
amounts
$
40,676
591
$
26,709
618
2,362
691
888
682
$
44,320
$
28,897
(1)
Excludes interest rate contracts and non-derivative instruments which reference rates in multi-rate jurisdictions, including the Canadian Dollar Offered Rate (CDOR),
EURO Interbank Offered Rate and Australian Bank Bill Swap Rate (BBSW).
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, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
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
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 exceeds 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. 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.
180
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Derivative-related credit risk (1)
(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
Other contracts
Exchange-traded contracts
October 31, 2020
Credit
equivalent
amount
Replacement
cost
Risk-weighted
equivalent (2)
Replacement
cost
October 31, 2019
Credit
equivalent
amount
Risk-weighted
equivalent (2)
As at
$
30
7,112
142
4
2,796
2,392
465
1
429
3,577
3,137
$
191
17,324
392
307
17,641
15,349
923
155
1,839
16,455
8,842
$
79
7,359
285
136
4,537
3,997
292
59
81
7,719
177
$
18
6,487
149
–
2,333
3,047
404
4
156
1,972
5,439
$
73
15,911
547
256
15,822
15,678
908
213
613
10,766
19,630
$
19
6,229
326
113
3,899
4,001
285
67
40
4,853
393
$ 20,085
$ 79,418
$ 24,721
$ 20,009
$ 80,417
$ 20,225
(1)
(2)
The amounts presented are net of master netting agreements in accordance with CAR guidelines.
The risk-weighted balances are calculated in accordance with CAR guidelines and exclude CVA of $18 billion (October 31, 2019 – $13 billion).
Replacement cost of derivative instruments by risk rating and by counterparty type
Risk rating (1)
Counterparty type (2)
As at October 31, 2020
(Millions of Canadian dollars)
Gross positive replacement cost
Impact of master netting agreements and
applicable margins
AAA, AA
A
$ 30,097 $ 44,736 $ 18,392
BBB BB or lower
Banks
$ 22,024 $ 115,249 $ 49,146
Total
OECD
governments
Total
Other
22,109 $ 43,994 $ 115,249
$
27,110
40,359
14,238
13,457
95,164
48,291
21,534
25,339
95,164
Replacement cost (after netting agreements) $ 2,987 $ 4,377 $ 4,154
$
8,567 $ 20,085 $
855
$
575 $ 18,655 $ 20,085
Risk rating (1)
Counterparty type (2)
As at October 31, 2019
(Millions of Canadian dollars)
AAA, AA
A
BBB BB or lower
Total
Banks
OECD
governments
Other
Total
Gross positive replacement cost
Impact of master netting agreements and
$ 27,126 $ 38,812 $ 20,620
$ 16,409 $ 102,967 $ 48,509
$
18,126 $ 36,332 $ 102,967
applicable margins
23,146
35,088
16,719
8,005
82,958
47,376
17,705
17,877
82,958
Replacement cost (after netting agreements)
$
3,980 $
3,724 $
3,901
$
8,404 $
20,009 $
1,133
$
421 $ 18,455 $
20,009
(1)
(2)
Our internal risk ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or lower represent non-investment grade ratings, as outlined in the
internal ratings maps in the Credit risk section of Management’s Discussion and Analysis.
Counterparty type is defined in accordance with CAR guidelines.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
181
Note 8 Derivative financial instruments and hedging activities (continued)
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 IBORs across multiple jurisdictions. Certain swaps will be
affected by the Reform as the market transitions to alternative risk free or nearly risk free rates by the end of 2021 or beyond.
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 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 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.
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, 2020
Designated as hedging instruments
in hedging relationships
As at
October 31, 2019
Designated as hedging instruments
in hedging relationships
(Millions of Canadian dollars)
Fair value Cash flow
Assets
Net
investment
Not designated
in a hedging
relationship
Fair value
Cash flow
Net
investment
Not designated
in a hedging
relationship
Derivative instruments
$ 102 $
1 $
19 $ 113,366 $ 146 $
77 $
52 $
101,285
Liabilities
Derivative instruments
Non-derivative instruments
298
–
30
–
58
28,702
109,541
n.a.
187
–
526
–
70
27,688
97,760
n.a.
(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.
n.a. not applicable
182
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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, 2020
Notional amounts
Carrying amount (1)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 14,410
21,207
$ 28,182
38,704
$ 6,709
6,415
$ 49,301
66,326
$
1
101
$
298
–
1.5%
1.7%
1.0%
1.4%
2.0%
1.8%
1.3%
1.6%
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%
(1)
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.
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-JPY exchange rate
Weighted average CAD-EUR exchange rate
Weighted average USD-EUR exchange rate
(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-JPY exchange rate
Weighted average CAD-EUR exchange rate
Weighted average USD-EUR exchange rate
As at October 31, 2020
Notional amounts
Carrying amount (1)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 15,309
5,616
$ 10,663
61,697
$ 1,762
5,384
$ 27,734
72,697
$
$
–
–
–
–
$
0.6%
1.9%
700
0.01
–
–
$
1.4%
1.5%
160
–
1.52
–
1.8%
1.4%
$
$
–
–
–
–
1.0%
1.5%
860
0.01
1.52
–
$
1
$
2
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
(1)
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
183
Note 8 Derivative financial instruments and hedging activities (continued)
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, 2020
Notional/Principal
Carrying amount
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 7,722
1.29
–
1.73
$ 7,869
1.33
1.56
1.71
$ 18,706
1.31
1.51
1.65
–
–
–
–
$
$ 2,274
1.31
1.50
–
–
–
–
–
$
$ 28,702
1.30
1.51
1.69
$ 7,869
1.33
1.56
1.71
n.a.
$ 29,175
$ 19
$
58
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
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, 2020
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 items:
Changes in fair
values used for
calculating hedge
ineffectiveness
$49,272 $
– $ 1,058 $
–
Loans – Wholesale $
879
– 68,130
–
1,817
Deposits – Business and government;
Subordinated debentures
(1,142)
Securities – Investment, net of
applicable allowance; Loans – Retail;
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 items:
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)
(1)
As at October 31, 2020, 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 gain of $32 million for fixed-rate assets and a loss of $94 million for fixed-rate liabilities (October 31, 2019 – loss of $53 million and $170
million, respectively).
184
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Cash flow and net investment hedges – assets and liabilities designated as hedged items
As at and for the year ended October 31, 2020
(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 items:
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
$
(484)
$
294
$
285
1,839
(1,540)
(523)
2
(164)
6
–
–
–
n.a.
535
(6,363)
(421)
As at and for the year ended October 31, 2019
Changes in fair
values used for
calculating hedge
ineffectiveness
Cash flow hedge/foreign
currency translation reserve
Continuing hedges
Discontinued
hedges
Balance sheet items:
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)
Effectiveness of designated hedging relationships
(Millions of Canadian dollars)
Fair value hedges
Interest rate risk
For the year ended October 31, 2020
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
$
(931) $
1,157
(52) $
15
$
–
–
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
501
(1,803)
(2)
164
(405)
(124)
16
1
–
–
5
1
532
(2,127)
3
113
(410)
(125)
–
–
200
(367)
(5)
122
–
(28)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
185
Note 8 Derivative financial instruments and hedging activities (continued)
(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
Interest rate contracts – fixed rate assets
Interest rate contracts – fixed rate liabilities
$
(1,060) $
2,032
(32) $
(13)
$
–
–
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
605
(1,261)
5
(125)
(50)
57
8
(5)
–
–
–
–
582
(1,265)
8
(193)
(50)
57
–
–
(25)
220
5
(106)
–
(2)
(1)
Hedge ineffectiveness recognized in income included losses of $94 million that are excluded from the assessment of hedge effectiveness and are offset by economic
hedges (October 31, 2019 – $70 million).
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, 2020
For the year ended October 31, 2019
(Millions of Canadian dollars)
Cash flow hedge
reserve
Foreign currency
translation reserve
4,221
(6) $
Cash flow hedge
reserve
$
688 $
Foreign currency
translation reserve
4,147
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
(1,595)
115
(77)
277
(119)
53
(110)
–
383
(410)
(125)
813
(21)
28
126
Balance at the end of the year
$
(1,079) $
4,632
$
186
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
(683)
(185)
108
24
104
(93)
(219)
–
250
(6) $
(50)
57
66
2
2
(3)
4,221
Note 9 Premises and equipment
(Millions of Canadian dollars)
Land Buildings
For the year ended October 31, 2020
Owned by the Bank (1), (2)
Right-of-use lease assets
Furniture,
fixtures
and other
equipment
Computer
equipment
Leasehold
improvements
Work in
process Buildings Equipment
Total
Cost
Balance at beginning of period
Additions
Transfers from work in process
Disposals
Foreign exchange translation
Other
$153 $ 1,395 $
2,062 $ 1,557 $
3,001 $ 432 $ 4,956 $
–
–
(1)
1
(1)
26
9
(4)
4
(14)
82
279
(157)
7
(51)
42
93
(42)
4
30
14
449
(124)
10
33
623
(830)
(2)
(2)
(18)
281
–
(58)
38
(46)
363 $13,919
1,183
115
–
–
(445)
(57)
63
1
(68)
(1)
Balance at end of period
$152 $ 1,416 $
2,222 $ 1,684 $
3,383 $ 203 $ 5,171 $
421 $14,652
Accumulated depreciation
Balance at beginning of period
Depreciation
Disposals
Foreign exchange translation
Other
Balance at end of period
Net carrying amount at end of
$
$
– $
–
–
–
–
– $
703 $
47
(3)
1
6
1,553 $ 1,137 $
267
(155)
4
(17)
109
(39)
3
55
754 $
1,652 $ 1,265 $
2,074 $
224
(112)
3
(1)
2,188 $
– $
–
–
–
–
– $
– $
600
(12)
(2)
(2)
205 $ 5,672
1,333
(337)
9
41
86
(16)
–
–
584 $
275 $ 6,718
period
$152 $
662 $
570 $
419 $
1,195 $ 203 $ 4,587 $
146 $ 7,934
(Millions of Canadian dollars)
Cost
Balance at beginning of period
Additions (1)
Transfers from work in process
Disposals
Foreign exchange translation
Other
Balance at end of period
Accumulated depreciation
Balance at beginning of period
Depreciation
Disposals
Foreign exchange translation
Other
Balance at end of period
Net carrying amount at end of period
For the year ended October 31, 2019
Land
Buildings
Computer
equipment
Furniture,
fixtures
and other
equipment
Leasehold
improvements
Work in
process
$153
–
–
–
–
–
$ 1,399
–
4
(10)
–
2
$153
$ 1,395
$ –
–
–
–
–
$ –
$153
$
$
$
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)
3,001
1,930
196
(56)
1
3
2,074
927
$
$
$
$
$
Total
$8,038
996
–
(172)
4
(3)
264
591
(432)
–
–
9
432
$8,863
–
–
–
–
–
–
$5,206
627
(151)
2
(12)
$5,672
432
$3,191
(1)
(2)
As at October 31, 2020, we had total contractual commitments of $94 million to purchase premises and equipment (October 31, 2019 – $338 million).
These amounts reflect certain transition adjustments made upon adoption of IFRS 16. Refer to Note 2 for further details.
Lease payments (IFRS 16)
Total lease payments for the year ended October 31, 2020 were $1,338 million, of which $654 million or 49% relates to variable
payments and $684 million or 51% relates to fixed payments.
Total variable lease payments not included in the measurement of lease liabilities were $635 million for the year ended
October 31, 2020.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
187
Note 9 Premises and equipment (continued)
Lease commitments (IAS 17)
Operating lease commitments
The minimum future lease payments under non-cancellable operating leases under IAS 17 were as follows:
(Millions of Canadian dollars)
Future minimum lease payments
No later than one year
Later than one year and no later than five years
Later than five years
Less: Future minimum sublease payments to be received
Net future minimum lease payments
Note 10 Goodwill and other intangible assets
As at October 31, 2019
Land and
buildings
Equipment
$
$
721
2,251
3,039
6,011
(25)
$
5,986
$
88
101
–
189
–
189
Goodwill
(Millions of
Canadian dollars)
Balance at beginning of
period
Acquisitions
Dispositions
Currency translations
(Millions of
Canadian dollars)
Balance at beginning of
period
Acquisitions
Dispositions
Currency translations
For the year ended October 31, 2020
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
$ 2,555 $ 1,727 $
2
–
–
–
(16)
8
579 $
6
–
2
587 $
1,985 $
–
–
16
2,001 $
2,943 $
1
–
34
2,978 $
120 $
–
–
1
121 $
112 $
–
–
–
112 $
148 $ 1,067 $11,236
–
9
(16)
–
73
11
–
–
1
149 $ 1,078 $11,302
Balance at end of period
$ 2,557 $ 1,719 $
For the year ended October 31, 2019
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
$ 2,528 $
27
–
–
1,729 $
–
–
(2)
579 $
–
–
–
579 $
1,986 $
–
(20)
19
1,985 $
2,870 $
71
–
2
2,943 $
118 $
–
–
2
120 $
112 $
–
–
–
112 $
148 $ 1,067 $ 11,137
98
–
(20)
–
21
–
–
–
–
148 $ 1,067 $ 11,236
Balance at end of period
$ 2,555 $
1,727 $
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.
The environment is rapidly evolving and as a result, our economic outlook has a higher than usual degree of uncertainty,
which may, in future periods, materially change the expected future cash flows of our CGUs and result in an impairment charge.
Actual experience may differ materially from current expectations, including in relation to the duration and severity of the
economic contraction and the ultimate timing and extent of a future recovery.
In our 2020 and 2019 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. Future cash flows are based on financial plans agreed
by management, estimated based on forecast results, business initiatives, capital required to support future cash flows and
returns to shareholders. Key drivers of future cash flows include net interest margins and average interest-earning assets. The
values assigned to these drivers over the forecast period are based on past experience, external and internal economic
forecasts, and management’s expectations of the impact of economic conditions on our financial results. Beyond the initial cash
flow projection period, cash flows are assumed to increase at a constant rate using a nominal long-term growth rate (terminal
growth rate), 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).
188
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
As a result of the economic disruptions triggered by COVID-19, the recoverable amounts of certain CGUs, including Capital
Markets and U.S. Wealth Management (including City National), which are more sensitive to economic uncertainties, including
interest rate movements, have declined, but continue to exceed carrying amounts despite impacts from the COVID-19 pandemic.
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 the value in use to key inputs and assumptions used was tested by recalculating the
recoverable amount using reasonably possible changes to those parameters. 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, 2020, 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 (2)
Insurance
Investor & Treasury Services
Capital Markets
As at
August 1, 2020
August 1, 2019
Discount
rate (1)
Terminal
growth
rate
Discount
rate (1)
Terminal
growth
rate
9.5%
11.4
10.4
10.5
10.7
n.m.
10.2
10.2
12.0
3.0%
3.7
3.0
3.0
3.0
n.m.
3.0
3.0
3.0
10.2%
11.9
11.2
11.1
11.2
n.m.
11.0
10.9
11.8
3.0%
4.2
3.0
3.0
3.0
n.m.
3.0
3.0
3.0
Pre-tax discount rates are determined implicitly based on post-tax discount rates.
The recoverable amount for our International Wealth Management CGU is determined using a multiples-based approach.
(1)
(2)
n.m. not meaningful
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. We also considered reasonably possible alternative scenarios, including market
comparable transactions, which yielded valuations ranging from an immaterial surplus to an immaterial deficit. 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 judgment to
determine inputs to the discounted cash flow model which are 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 the fair value less costs of disposal to
key inputs and assumptions was tested by recalculating the recoverable amount using reasonably possible change to those
parameters.
As a result of the economic disruptions triggered by COVID-19, the recoverable amount of our Caribbean Banking CGU has
declined. As at August 1, 2020, the recoverable amount of our Caribbean Banking CGU, based on fair value less costs of disposal,
approximates its carrying amount (August 1, 2019 – the fair value less costs of disposal was 126% of its carrying amount). In
determining the recoverable amount, forecast future cash flows were discounted using a pre-tax rate of 11.4% (August 1, 2019 -
11.9%), reflecting a lower interest rate environment, and the terminal growth rate used was 3.7% (August 1, 2019 - 4.2%), reflecting
uncertainty due to the pandemic. A 50 bps change in the discount rate would increase and decrease the recoverable amount by
$335 million and $288 million, respectively. A 50 bps change in the terminal growth rate would increase and decrease the
recoverable amount by $266 million and $228 million, respectively. A reduction in the forecasted cash flows of 10% per annum
would reduce the recoverable amount by $392 million. Changes in these assumptions have been applied holding other individual
factors constant. However, changes in one factor may be magnified or offset by related changes in other assumptions as impacts
to the recoverable amount are highly interdependent and changes in assumptions may not have a linear effect on the
recoverable amount of the CGU. In aggregate, the range of reasonably possible outcomes would not materially affect the
recoverable amount of the CGU.
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 2020, we applied a P/AUA multiple of
2.25% to AUA as at August 1 (August 1, 2019 – 2.25%) and a P/Rev multiple of 2.5x (August 1, 2019 – 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. The sensitivity of the fair value
less costs of disposal to key inputs was tested by reducing each multiple to the low end of the range of reasonably possible
inputs considered. As at August 1, 2020, 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 2020
189
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
Internally
generated
software
$
6,941
54
–
936
(149)
(116)
20
(10)
Other
software
$ 1,684
47
6
193
(13)
(4)
7
(19)
For the year ended October 31, 2020
Core
deposit
intangibles
Customer
list and
relationships
In process
software
$
$
1,567
–
–
–
–
–
19
–
$
1,773
143
10
–
–
–
13
(23)
1,240
1,157
–
(1,129)
(4)
(10)
8
(21)
Total
$ 13,205
1,401
16
–
(166)
(130)
67
(73)
$
7,676
$ 1,901
$
1,586
$
1,916
$
1,241
$ 14,320
$ (5,256) $ (1,357) $
(855)
147
88
(14)
6
(144)
12
–
(6)
(5)
(627) $
(160)
–
–
(6)
–
(1,291) $
(114)
–
–
(9)
23
$ (5,884) $ (1,500) $
(793) $
(1,391) $
–
–
–
–
–
–
–
$ (8,531)
(1,273)
159
88
(35)
24
$ (9,568)
$
1,792
$
401
$
793
$
525
$
1,241
$ 4,752
Internally
generated
software
Other
software
For the year ended October 31, 2019
Core
deposit
intangibles
Customer
list and
relationships
In process
software
$
$
$
$
$
5,984
42
–
1,009
–
(94)
–
–
$
1,582
49
16
42
(1)
(6)
1
1
6,941
$
1,684
(4,501)
(793)
–
30
(1)
9
$ (1,226)
(121)
–
2
(1)
(11)
(5,256)
$ (1,357)
1,685
$
327
$
$
$
$
$
1,750
–
–
–
–
–
1
(184)
1,567
(654)
(159)
–
–
1
185
(627)
940
$
$
$
$
$
1,768
–
6
–
–
–
7
(8)
1,773
(1,162)
(124)
–
–
(6)
1
(1,291)
482
$
$
$
$
$
Total
$ 12,230
1,275
22
–
(1)
(142)
7
(186)
1,146
1,184
–
(1,051)
–
(42)
(2)
5
1,240
$ 13,205
–
–
–
–
–
–
–
$ (7,543)
(1,197)
–
32
(7)
184
$ (8,531)
1,240
$
4,674
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.
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
190
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Joint ventures
Associated companies
As at and for the year ended
October 31
2020
193
$
October 31
2019
178
$
October 31
2020
$ 459
October 31
2019
474
$
$
87
$
107
$
(10)
$
(31)
We do not have any joint ventures or associated companies that are individually material to our financial results.
During the year ended October 31, 2020, we recognized impairment losses of $4 million with respect to our interests in joint
ventures and associated companies (October 31, 2019 – impairment losses of $2 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, 2020, restricted net
assets of these subsidiaries, joint ventures and associates were $37.7 billion (October 31, 2019 – $34.9 billion).
Note 13 Other assets
(Millions of Canadian dollars)
Accounts receivable and prepaids
Accrued interest receivable
Cash collateral
Commodity trading receivables
Deferred income tax asset
Employee benefit assets
Insurance-related assets
Collateral loans
Policy loans
Reinsurance assets
Other
Investments in joint ventures and associates
Margin deposits
Precious metals
Receivable from brokers, dealers and clients
Taxes receivable
Other
Note 14 Deposits
(Millions of Canadian dollars)
Personal
Business and government
Bank
Non-interest-bearing (4)
Canada
United States
Europe (5)
Other International
Interest-bearing (4)
Canada
United States
Europe (5)
Other International
As at
$
October 31
2020
4,600
2,362
18,119
4,104
2,579
143
801
97
949
93
652
9,816
2,371
2,077
5,487
4,671
$ 58,921
$
October 31
2019
4,569
2,866
15,629
4,232
1,989
147
926
95
748
78
652
5,688
416
2,511
5,553
2,974
$ 49,073
October 31, 2020
October 31, 2019
As at
Term (3)
Total
Demand (1) Notice (2)
$ 182,745 $ 61,761 $ 98,546 $ 343,052 $ 143,958 $ 49,806 $ 100,968 $ 294,732
565,482
25,791
$ 510,719 $ 79,302 $421,864 $1,011,885 $ 405,434 $ 64,593 $ 415,978 $ 886,005
Total Demand (1) Notice (2)
624,311
44,522
315,472
12,502
292,254
31,064
253,113
8,363
298,502
16,508
16,585
956
13,867
920
Term (3)
$ 123,402 $ 7,390 $
368 $ 131,160 $
43,831
654
7,372
–
–
–
–
–
–
43,831
654
7,372
93,163 $ 5,692 $
34,632
760
5,225
–
–
5
137 $ 98,992
34,632
760
5,230
–
–
–
287,046
7,190
33,810
7,414
576,810
86,106
63,988
19,487
$ 510,719 $ 79,302 $421,864 $1,011,885 $ 405,434 $ 64,593 $ 415,978 $ 886,005
616,574
116,273
71,890
24,131
310,492
57,037
37,250
16,717
228,386
4,704
33,073
5,491
333,118
41,776
30,090
10,857
19,036
52,046
830
–
15,306
39,626
825
3,139
(1)
(2)
(3)
(4)
(5)
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.
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, 2020, deposits
denominated in U.S. dollars, British pounds, Euro and other foreign currencies were $347 billion, $32 billion, $47 billion and $33 billion, respectively (October 31, 2019 –
$321 billion, $23 billion, $45 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
As at
October 31
2020
October 31
2019
$ 121,144
62,892
78,676
32,950
42,201
26,749
24,651
32,601
$ 94,585
62,814
92,507
50,055
31,852
31,373
21,130
31,662
$ 421,864
$ 415,978
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more
$ 388,000
$ 379,000
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
191
Note 14 Deposits (continued)
Average deposit balances and average rates of interest
(Millions of Canadian dollars, except for percentage amounts)
Canada
United States
Europe
Other International
Note 15 Insurance
For the year ended
October 31, 2020
October 31, 2019
$
Average
balances
725,021
144,011
73,317
28,283
Average
rates
1.02%
0.46
0.76
0.68
Average
balances
$ 650,555
129,903
63,333
26,290
Average
rates
1.60%
1.17
1.15
1.20
$
970,632
0.90%
$ 870,081
1.49%
Risk management
Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to our expectations at the time
of underwriting. We do not have a high degree of concentration risk due to our geographic diversity and business mix. Concentration
risk is not a major concern for the life and health insurance business as it does not have a material level of region-specific
characteristics. 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
2020
$ 4,515
(249)
October 31
2019
$ 4,209
(225)
$ 4,266
$ 3,984
$ 3,700
(316)
$ 3,990
(241)
$ 3,384
$ 3,749
(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, 2020 are as follows:
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.
192
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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
2020
October 31
2019
0.11%
1.81
3.82
0.50
0.66
3.05
0.12%
1.82
3.69
0.50
0.57
3.06
(1)
(2)
(3)
(4)
Average annual death rate for the largest portfolio of insured policies.
Average net termination rate for the individual and group disability insurance portfolio.
Ultimate reinvestment rate of the insurance operations.
Ultimate policy termination rate (lapse rate) for the largest permanent life insurance portfolio that relies on higher termination rate to maintain its profitability (lapse-
supported policies).
Insurance claims and policy benefit liabilities
The following table summarizes our gross and reinsurers’ share of insurance liabilities at the end of the year.
(Millions of Canadian dollars)
Life insurance policyholder liabilities
Life, health and annuity
Investment contracts (1)
Non-life insurance policyholder liabilities
Unearned premium provision (1)
Unpaid claims provision
October 31, 2020
October 31, 2019
Gross
Ceded
Net
Gross
Ceded
Net
As at
$ 12,089 $
34
752 $ 11,337 $ 11,339 $
34
38
–
601 $ 10,738
38
–
$ 12,123 $
752 $ 11,371 $ 11,377 $
601 $ 10,776
$
$
7 $
126
– $
31
7 $
95
133 $
31 $
102 $
29 $
62
91 $
– $
2
2 $
29
60
89
$ 12,256 $
783 $ 11,473 $ 11,468 $
603 $ 10,865
(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
October 31, 2020
October 31, 2019
For the year ended
(Millions of Canadian dollars)
Balances at beginning of period
New and in-force policies (1)
Changes in assumption and methodology
Net change in investment contracts
Gross
$ 11,377 $
735
15
(4)
Ceded
Net
Gross
Ceded
601 $ 10,776 $ 10,024 $
141
10
–
1,479
(122)
(4)
594
5
(4)
493 $
103
5
–
Net
9,531
1,376
(127)
(4)
Balances at end of period
$ 12,123 $
752 $ 11,371 $ 11,377 $
601 $ 10,776
(1)
Includes the change in fair value of investments backing our policyholder liabilities.
The net increase in life insurance claims and policy benefit liabilities over the prior year was attributable to business growth and
market movements on assets backing life and health liabilities, partially offset by asset and liability matching activities. During
the year, we reviewed all key actuarial methods and assumptions which are used in determining the policy benefit liabilities
resulting in a $5 million net increase to insurance liabilities comprised of: (i) a decrease of $74 million for revised actuarial
reserves on interest rate risk; (ii) a decrease of $75 million due to reinsurance contract renegotiations; (iii) an increase of $137
million arising from insurance risk related assumption updates largely due to mortality, morbidity, and expense assumptions;
and (iv) an increase of $17 million due to valuation system and data changes.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
193
Note 15 Insurance (continued)
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
2020
1% $
1
10
10
5
2
2
5
10
5 $
(11)
8
(22)
(37)
(278)
(70)
(219)
(252)
October 31
2019
(7)
4
1
(3)
(33)
(205)
(60)
(205)
(247)
(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.
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
194
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
$
$
$
As at
October 31
2020
35 $
1,886
1
1,922 $
October 31
2019
31
1,631
1
1,663
For the year ended
October 31
2020
1,663 $
October 31
2019
1,368
724
12
49
(479)
(47)
557
124
39
(386)
(39)
$
1,922 $
1,663
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.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, 2020, and the next valuation will be completed on January 1, 2021.
For the year ended October 31, 2020, total contributions to our pension plans (defined benefit and defined contribution
plans) and other post-employment benefit plans were $1,024 million and $63 million (October 31, 2019 – $551 million and
$72 million), respectively. For 2021, total contributions to our pension plans and other post-employment benefit plans are
expected to be $455 million and $82 million, respectively.
Risks
By their design, the defined benefit pension and other post-employment benefit plans expose the Bank to various risks such as
investment performance, reductions in discount rates used to value the obligations, increased longevity of plan members, future
inflation levels impacting future salary increases as well as future increases in healthcare costs. These risks will reduce over time
due to the membership closure of our primary defined benefit pension plans and migration to defined contribution pension plans.
The following table presents the financial position related to all of our material pension and other post-employment benefit plans
worldwide, including executive retirement arrangements.
(Millions of Canadian dollars)
Canada
Fair value of plan assets
Present value of defined benefit obligation
Net surplus (deficit)
International
Fair value of plan assets
Present value of defined benefit obligation
Net surplus (deficit)
Total
Fair value of plan assets
Present value of defined benefit obligation
Total net surplus (deficit)
Effect of asset ceiling
Total net surplus (deficit), net of effect of asset ceiling
Amounts recognized in our Consolidated Balance Sheets
Employee benefit assets
Employee benefit liabilities
Total net surplus (deficit), net of effect of asset ceiling
As at
October 31, 2020
October 31, 2019
Defined benefit
pension plans
Other post-
employment
benefit plans
Defined benefit
pension plans
Other post-
employment
benefit plans
$
$
$
$
$
$
$
$
$
15,044 $
15,408
–
1,863
$
13,679 $
14,428
1
1,722
(364) $
(1,863) $
(749) $
(1,721)
980 $
943
37 $
$
–
90
(90) $
1,106 $
1,089
17 $
–
98
(98)
16,024 $
16,351
–
1,953
$
14,785 $
15,517
1
1,820
(327) $
(1,953) $
(732) $
(1,819)
(1)
–
(1)
–
(328) $
(1,953) $
(733) $
(1,819)
143 $
(471)
(328) $
–
(1,953)
$
(1,953) $
147 $
(880)
(733) $
–
(1,819)
(1,819)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
195
Note 17 Employee benefits – Pension and other post-employment benefits (continued)
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, 2020
October 31, 2019
(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 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 settlements
Benefit obligation at end of period
Unfunded obligation
Wholly or partly funded obligation
Total benefit obligation
Defined benefit
pension plans (1)
$
14,785 $
447
Other post-
employment
benefit plans
1
–
Defined benefit
pension plans (1)
$
13,564 $
532
Other post-
employment
benefit plans
1
–
793
17
798
48
(623)
(223)
(18)
16,024 $
15,517 $
367
–
(5)
462
–
791
2
15
48
(623)
(223)
$
$
–
–
63
19
(83)
–
–
–
1,820
46
(12)
–
59
(5)
68
38
3
19
(83)
–
16,351 $
30 $
16,321
16,351 $
1,953
1,792
161
1,953
$
$
$
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
$
$
$
$
$
(1)
For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2020 were $15,054 million and $14,583 million, respectively
(October 31, 2019 – $14,329 million and $13,449 million, respectively).
Pension and other post-employment benefit expense
The following table presents the composition of our pension and other post-employment benefit expense related to our material
pension and other post-employment benefit plans worldwide.
(Millions of Canadian dollars)
Current service costs
Past service costs
Gains and losses on settlements
Net interest expense (income)
Remeasurements of other long term benefits
Administrative expense
Defined benefit pension expense
Defined contribution pension expense
For the year ended
Pension plans
Other post-employment
benefit plans
$
October 31
2020
367
–
(5)
15
–
18
$
$
395
226
621
$
October 31
2019
297
1
–
(22)
–
16
$
$
292
212
504
$
October 31
2020
46
(12)
–
59
13
–
$
$
106
–
106
$
October 31
2019
39
–
–
65
13
–
$
$
117
–
117
Service costs for the year ended October 31, 2020 totalled $363 million (October 31, 2019 – $293 million) for pension plans in
Canada and $4 million (October 31, 2019 – $5 million) for International plans. Net interest expense (income) for the year ended
October 31, 2020 totalled $14 million (October 31, 2019 – $(21) million) for pension plans in Canada and $1 million (October 31, 2019
– $(1) million) for International plans.
196
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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:
A 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
2020
October 31
2019
October 31
2020
October 31
2019
$
$
$
–
791
2
(793)
$
(4)
1,977
59
(910)
$
(14)
62
40
–
(11)
186
(22)
–
–
$ 1,122
$
88
$
153
Remeasurements recorded in OCI for the year ended October 31, 2020 were gains of $7 million (October 31, 2019 – losses of $1,102
million) for pension plans in Canada and losses of $7 million (October 31, 2019 – losses of $20 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.
During the year ended October 31, 2020, 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 and a debt security overlay program are 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)
Fair value
As at
October 31, 2020
October 31, 2019
Percentage
of total
plan assets
Quoted
in active
market (2)
Percentage
of total
plan assets
Quoted
in active
market (2)
Fair value
Equity securities
Domestic
Foreign
Debt securities
Domestic government bonds
Foreign government bonds
Corporate and other bonds
Alternative investments and other
$
1,493
3,859
3,259
81
3,701
3,631
9%
24
20
1
23
23
100%
100
$
–
–
–
13
1,544
3,215
3,014
396
3,458
3,158
10%
22
21
3
23
21
100%
98
–
–
–
13
$ 16,024
100%
36%
$ 14,785
100%
35%
(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, 38% of our total plan assets would be classified as quoted
in an active market (October 31, 2019 – 36%).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
197
Note 17 Employee benefits – Pension and other post-employment benefits (continued)
The allocation of equity securities in our pension plans in Canada is 34% (October 31, 2019 – 33%) and that of our International
plans is 20% (October 31, 2019 – 16%). The allocation of debt securities in our pension plans in Canada is 44% (October 31, 2019 –
47%) and that of our International plans is 42% (October 31, 2019 – 44%). The allocation of alternative investments and other in
our pension plans in Canada is 22% (October 31, 2019 – 20%) and that of our International plans is 38% (October 31, 2019 – 40%).
As at October 31, 2020, the plan assets include 1 million (October 31, 2019 – 1 million) of our common shares with a fair value
of $96 million (October 31, 2019 – $104 million) and $32 million (October 31, 2019 – $57 million) of our debt securities. For the year
ended October 31, 2020, dividends received on our common shares held in the plan assets were $4 million (October 31, 2019 – $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 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
Benefits expected to be paid 2026-2030
Weighted average duration of defined benefit payments
As at October 31, 2020
Canada
International
Total
$
68,128
571
640
659
679
699
717
3,821
16.1 years
$
5,456
275
33
35
35
36
37
186
21.4 years
$
73,584
846
673
694
714
735
754
4,007
16.4 years
Significant assumptions
Our methodologies to determine significant assumptions used in calculating the defined benefit pension and other post-
employment benefit expense are as follows:
Discount rate
For the Canadian pension and other post-employment benefit plans, all future expected benefit payments at each measurement
date are discounted at spot rates from a derived Canadian AA corporate bond yield curve. The derived curve is based on actual
short and mid-maturity corporate AA rates and extrapolated longer term rates. The extrapolated corporate AA rates are derived
from observed corporate A, corporate AA and provincial AA yields. For the International pension and other post-employment
benefit plans, all future expected benefit payments at each measurement date are discounted at spot rates from a local AA
corporate bond yield curve. Spot rates beyond 30 years are set to equal the 30-year spot rate. The discount rate is the equivalent
single rate that produces the same discounted value as that determined using the entire discount curve. This valuation
methodology does not rely on assumptions regarding reinvestment returns.
Rate of increase in future compensation
The assumptions for increases in future compensation are developed separately for each plan, where relevant. Each assumption
is set based on the price inflation assumption and compensation policies in each market, as well as relevant local statutory and
plan-specific requirements.
Healthcare cost trend rates
Healthcare cost calculations are based on both short and long term trend assumptions established using the plan’s recent
experience as well as market expectations.
Weighted average assumptions to determine benefit obligation
Discount rate
Rate of increase in future compensation
Healthcare cost trend rates (1)
– Medical
– Dental
As at
Defined benefit pension
plans
Other post-employment
benefit plans
October 31
2020
October 31
2019
October 31
2020
October 31
2019
2.7%
3.3%
n.a.
n.a.
3.0%
3.3%
n.a.
n.a.
3.0%
n.a.
3.5%
3.1%
3.3%
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
198
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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, 2020
October 31, 2019
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
23.8
23.5
24.1
25.3
24.7
25.2
25.1
27.1
23.7
23.5
24.1
25.2
24.7
25.1
25.0
27.0
(In years)
Country
Canada
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 2020.
(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
Note 18 Other liabilities
(Millions of Canadian dollars)
Accounts payable and accrued expenses
Accrued interest payable
Cash collateral
Commodity liabilities
Deferred income
Deferred income taxes
Dividends payable
Employee benefit liabilities
Insurance related liabilities
Lease liabilities
Negotiable instruments
Payable to brokers, dealers and clients
Payroll and related compensation
Precious metals certificates
Provisions
Taxes payable
Other
Increase (decrease)
in obligation
Defined benefit
pension plans
Other post-
employment
benefit plans
$
(2,364) $
3,052
(260)
332
63
(67)
466
n.a.
n.a.
–
–
39
75
(63)
$
As at
October 31
2020
1,500 $
2,855
19,433
8,354
2,945
52
1,611
2,424
341
5,357
1,676
5,108
7,476
623
618
2,209
7,249
$
69,831 $
October 31
2019
1,598
3,496
16,195
8,487
2,563
82
1,567
2,699
387
49
1,671
3,241
7,416
431
581
2,202
5,472
58,137
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
199
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
July 15, 2022
June 8, 2023
December 6, 2024 (1)
June 4, 2025 (2), (3)
January 20, 2026 (2)
January 27, 2026 (2)
September 29, 2026 (2)
November 1, 2027
July 25, 2029 (2)
December 23, 2029 (2)
June 30, 2030 (2)
October 1, 2083
June 29, 2085
Deferred financing costs
Earliest par value
redemption date
December 6, 2019
June 4, 2020
January 20, 2021
September 29, 2021
November 1, 2022
July 25, 2024
December 23, 2024
June 30, 2025
Any interest payment date
Any interest payment date
Denominated
in foreign currency
(millions)
US$150
$
US$1,500
TT$300
Interest
rate
5.38%
9.30%
2.99%
2.48%
3.31% (4)
4.65%
3.45% (5)
4.75%
2.74% (6)
2.88% (7)
2.09% (8)
(9)
(10)
US$174
$
$
As at
October 31
2020
205 $
110
–
–
1,501
2,148
1,017
59
1,559
1,578
1,247
224
231
9,879 $
(12)
9,867 $
October 31
2019
206
110
1,999
997
1,483
2,023
1,009
59
1,486
–
–
224
229
9,825
(10)
9,815
The terms and conditions of the debentures are as follows:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
On December 6, 2019, we redeemed 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.
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.
On June 4, 2020, we redeemed all $1,000 million of our outstanding NVCC 2.48% subordinated debentures due on June 4, 2025 for 100% of their principal amount plus
accrued interest to, but excluding, the redemption date.
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 stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.89% above the 3-month CDOR.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.31% 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.
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 Equity
As at
October 31
2020
–
315
9,109
455
9,879
$
$
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.
200
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Outstanding share capital
The following table details our common and preferred shares and other equity instruments outstanding.
As at and for the year ended
October 31, 2020
October 31, 2019
Number of
shares
(thousands)
Dividends
declared
per share
Number of
shares
(thousands)
Dividends
declared
per share
Amount
Amount
1,430,678
$ 17,645
1,439,029
$ 17,635
1,043
(7,860)
80
(97)
1,900
(10,251)
136
(126)
1,423,861
$ 17,628
$
4.29
1,430,678
$ 17,645
$
4.07
(Millions of Canadian dollars, except the number
of shares and as otherwise noted)
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 – common shares
Balance at beginning of period
Purchases
Sales
Balance at end of period
(582) $
(58,775)
57,969
(58)
(4,739)
4,668
(1,388) $
(129)
Common shares outstanding
1,422,473
$ 17,499
Preferred shares and other equity
instruments issued
First preferred (3)
Non-cumulative, fixed rate
Series W (4)
Series AA (4)
Series AC (4)
Series AE (4)
Series AF (4)
Series AG (4)
Series BH
Series BI
Series BJ
Non-cumulative, 5-Year Rate Reset
Series AZ
Series BB
Series BD
Series BF
Series BK
Series BM
Series BO
$
–
–
–
–
–
–
6,000
6,000
6,000
20,000
20,000
24,000
12,000
29,000
30,000
14,000
$
–
–
–
–
–
–
150
150
150
500
500
600
300
725
750
350
1.05
0.95
0.98
0.96
0.95
0.96
1.23
1.23
1.31
0.93
0.91
0.85
0.90
1.38
1.38
1.20
Non-cumulative, fixed rate/floating rate
Series C-2 (5)
Other equity instruments
Limited recourse capital notes (LRCNs) (6)
Series 1 (7)
15
23 US$ 67.50
1,750
1,750
4.50%
(235) $
(54,263)
53,916
(18)
(5,380)
5,340
(582) $
(58)
1,430,096
$ 17,587
$
12,000
12,000
8,000
10,000
8,000
10,000
6,000
6,000
6,000
20,000
20,000
24,000
12,000
29,000
30,000
14,000
20
–
$
300
300
200
250
200
250
150
150
150
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
0.96
0.96
0.90
0.90
1.38
1.38
1.27
31 US$ 67.50
–
–
Treasury – preferred shares and other
equity instruments
Balance at beginning of period (8)
Purchases
Sales
Balance at end of period (8)
Preferred shares and other equity
instruments outstanding
168,765
$
5,948
227,020
$ 5,706
$
34
(5,319)
5,283
(2) $
1
(114)
110
(3)
$
114
(8,021)
7,941
3
(184)
182
34
$
1
168,763
$
5,945
227,054
$ 5,707
(1)
(2)
(3)
Includes fair value adjustments to stock options of $9 million (October 31, 2019 – $29 million).
During the year ended October 31, 2020, we purchased common shares for cancellation at an average cost of $103.62 per share with a book value of $12.34 per share.
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.
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 October 1, 2020, we redeemed all 12 million issued and outstanding Non-Cumulative First Preferred Shares Series W, all 12 million issued and outstanding
Non-Cumulative First Preferred Shares Series AA, all 8 million issued and outstanding Non-Cumulative First Preferred Shares Series AC, all 10 million issued and
outstanding Non-Cumulative First Preferred Shares Series AE, all 8 million issued and outstanding Non-Cumulative First Preferred Shares Series AF, and all 10 million
issued and outstanding Non-Cumulative First Preferred Shares Series AG, for cash at a redemption price of $25 per share.
On December 17, 2019, we purchased for cash 200 thousand depositary shares, each representing a one-fortieth interest in a share of Series C-2, for aggregate total
consideration, including accrued dividends, of US$6 million. The purchased depositary and underlying Series C-2 were subsequently cancelled.
Each series of LRCNs (LRCN Series) were issued at a $1,000 per note. The number of shares represent the number of notes issued and the dividends declared per share
represent the annual interest rate percentage applicable to the notes issued as at the reporting date.
On July 28, 2020, we issued $1,750 million of LRCN Series 1 with recourse limited to assets held by a third party trustee in a consolidated trust. The trust assets in respect of
LRCN Series 1 consist of $1,750 million of our Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BQ (Series BQ) issued concurrently with LRCN Series 1 at a
price of $1,000 per Series BQ.
Positive amounts represent a short position in treasury instruments.
(5)
(6)
(7)
(8)
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
201
Note 20 Equity (continued)
Significant terms and conditions of preferred shares and other equity instruments
As at October 31, 2020
Preferred shares
First preferred
Non-cumulative, fixed rate
Series BH (4)
Series BI (4)
Series BJ (4)
Non-cumulative, 5-Year
Rate Reset (5)
Series AZ (4)
Series BB (4)
Series BD (4)
Series BF (4)
Series BK (4)
Series BM (4)
Series BO (4)
Non-cumulative, fixed rate/
floating rate
Series C-2 (6)
Other equity instruments
Limited recourse capital notes (7)
Current
annual yield
Premium
Current
dividend
per share (1)
Earliest
redemption
date (2)
Issue date
Redemption
price (2), (3)
4.90%
4.90%
5.25%
3.70%
3.65%
3.20%
3.60%
5.50%
5.50%
4.80%
2.21%
2.26%
2.74%
2.62%
4.53%
4.80%
2.38%
$
.306250 November 24, 2020
.306250 November 24, 2020
February 24, 2021
.328125
June 5, 2015
July 22, 2015
October 2, 2015
$
26.00
26.00
26.00
May 24, 2019
.231250
August 24, 2019
.228125
.200000
May 24, 2020
.225000 November 24, 2020
.343750
.343750
.300000
January 30, 2014
June 3, 2014
January 30, 2015
March 13, 2015
May 24, 2021 December 16, 2015
March 7, 2016
November 2, 2018
August 24, 2021
February 24, 2024
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
Series 1 (8)
4.50% 4.137%
n.a.
October 24, 2025
July 28, 2020
$1,000.00
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
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 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.
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.
The current annual yield on each LRCN Series represents the annual interest rate applicable to the notes issued as at the reporting date. The payments of interest and
principal in cash on the LRCN Series are made at our discretion, and non-payment of interest and principal in cash does not constitute an event of default. In the event of
(i) non-payment of interest on any interest payment date, (ii) non-payment of the redemption price in case of a redemption of a LRCN Series, (iii) non-payment of
principal at the maturity of a LRCN Series, or (iv) an event of default on a LRCN Series, holders of such LRCN Series will have recourse only to the assets (Trust Assets)
held by a third party trustee in a consolidated trust in respect of such LRCN Series and each such noteholder will be entitled to receive its pro rata share of the Trust
Assets. In such an event, the delivery of the Trust Assets for each LRCN Series will represent the full and complete extinguishment of our obligations under the related
LRCN Series. The LRCNs 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 note is automatically redeemed and the redemption price will be
satisfied by the delivery of Trust Assets, which will consist of common shares pursuant to an automatic conversion of the series of preferred shares that were issued
concurrently with the related LRCN Series. Each series of preferred shares include an automatic conversion formula 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 common shares issued in respect of each series of preferred shares will be determined by dividing the preferred share value ($1,000 plus
declared and unpaid dividends) by the conversion price. The number of common shares delivered to each noteholder will be based on such noteholder’s pro rata interest
in the Trust Assets. Subject to the consent of OSFI, we may purchase LRCNs for cancellation at such price or prices and upon such terms and conditions as we in our
absolute discretion may determine, subject to any applicable law restricting the purchase of notes.
LRCN Series 1 bear interest at a fixed rate of 4.5% per annum until November 24, 2025, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year
Government of Canada Yield plus 4.137% until maturity on November 24, 2080. The interest is paid semi-annually on or about the 24th day of November and May. LRCN
Series 1 is redeemable during the period from October 24 to and including November 24, commencing in 2025 and every fifth year thereafter to the extent we redeem
Series BQ pursuant to their terms and subject to the consent of OSFI and requirements of the Bank Act (Canada).
n.a. not applicable
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 2020
and 2019, the requirements of our DRIP were satisfied through open market share purchases.
202
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Shares available for future issuances
As at October 31, 2020, 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.
Note 21 Share-based compensation
Stock option plans
We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common
shares. The exercise price for the majority of the grants is determined as the higher of the volume-weighted average of the
trading prices per board lot (100 shares) of our common shares on the Toronto Stock Exchange (i) on the day preceding the day
of grant; and (ii) the five consecutive trading days immediately preceding the day of grant. The exercise price for the remaining
grants is the closing market share price of our common shares on the New York Stock Exchange on the date of grant. All options
vest over a four-year period, and are exercisable for a period not exceeding 10 years from the grant date.
The compensation expense recorded for the year ended October 31, 2020, in respect of the stock option plans was $7 million
(October 31, 2019 – $6 million). The compensation expense related to non-vested options was $2 million at October 31, 2020
(October 31, 2019 – $3 million), to be recognized over the weighted average period of 1.9 years (October 31, 2019 – 1.8 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
October 31, 2020
October 31, 2019
For the year ended
Number of
options
(thousands)
6,950
1,089
(1,044)
(22)
Weighted
average
exercise price (1)
79.88
$
103.64
65.39
50.28
Number of
options
(thousands)
7,770
1,090
(1,900)
(10)
Weighted
average
exercise price (1)
71.40
$
96.55
55.05
54.99
6,973
3,314
$
$
86.02
71.77
6,950
2,980
$
$
79.88
64.24
(1)
(2)
(3)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2020 and October 31, 2019.
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 $68 million (October 31, 2019 – $105 million) and the weighted average share price at the date of exercise was
$100.20 (October 31, 2019 – $103.15).
New shares were issued for all stock options exercised in 2020 and 2019.
Options outstanding as at October 31, 2020 by range of exercise price
(Canadian dollars per share except
share amounts and years)
$36.89 – $69.17
$73.14 – $74.39
$76.51 – $78.59
$90.23 – $96.55
$102.33 – $104.70
Options outstanding
Options exercisable
Number
outstanding
(thousands)
1,112
880
653
2,477
1,851
Weighted
average
exercise price (1)
55.07
$
74.30
77.85
93.01
103.71
Weighted
average
remaining
contractual
life (years)
2.16
4.98
4.19
6.68
8.17
Number
exercisable
(thousands)
1,112
880
653
669
–
Weighted
average
exercise price (1)
55.07
$
74.30
77.85
90.23
–
6,973
$
86.02
5.90
3,314
$
71.77
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2020.
The weighted average fair value of options granted during the year ended October 31, 2020 was estimated at $6.08 (October 31,
2019 – $5.61). 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
2020
$ 104.80
1.64%
3.90%
13%
6 Years
October 31
2019
$ 94.09
2.01%
3.77%
12%
6 Years
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
203
Note 21 Share-based compensation (continued)
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, 2020, we contributed
$116 million (October 31, 2019 – $112 million), under the terms of these plans, towards the purchase of our common shares. As at
October 31, 2020, an aggregate of 36 million common shares were held under these plans (October 31, 2019 – 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 unit awards for certain key employees within Capital Markets. The bonus is invested as RBC share units and a
specified percentage vests on a specified number of anniversary dates each year. 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
Capital Markets compensation plan unit awards
Performance deferred share award plans
Deferred compensation plans
Other share-based plans
For the year ended
October 31, 2020
October 31, 2019
Units
granted
(thousands)
503
4,796
2,409
92
759
Weighted
average
fair value
per unit
$ 98.91
92.06
104.14
103.49
100.55
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
$
8,559
$ 96.74
7,715
$
100.42
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
(Millions of Canadian dollars except units)
Deferred share unit plans
Capital Markets compensation plan unit awards
Performance deferred share award plans
Deferred compensation plans (1)
Other share-based plans
As at
October 31, 2020
October 31, 2019
Units
(thousands)
5,221
9,560
5,860
2,685
1,828
Carrying
amount
486
$
874
550
250
167
Units
(thousands)
5,288
8,820
5,621
3,072
1,787
$
Carrying
amount
562
937
597
326
185
25,154
$ 2,327
24,588
$
2,607
(1)
Excludes obligations not determined based on the quoted market price of our common shares.
204
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Compensation expenses recognized under deferred share and other plans
(Millions of Canadian dollars)
Deferred share unit plans
Capital Markets compensation plan unit awards
Performance deferred share award plans
Deferred compensation plans
Other share-based plans
Note 22 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 at fair value through profit
or loss
Net gains (losses) on equity securities designated at fair value through other comprehensive income
Share-based compensation awards
Distributions on other equity instruments and issuance costs
Total income taxes
For the year ended
$
October 31
2020
(48)
115
190
137
60
$
October 31
2019
77
274
294
250
106
$
454
$ 1,001
For the year ended
October 31
2020
October 31
2019
$ 3,673
(106)
$ 3,256
(26)
(25)
(31)
3,542
3,199
(655)
6
98
(39)
(590)
(114)
29
(57)
(14)
(156)
2,952
3,043
43
3
(56)
5
(138)
7
(410)
27
(20)
(93)
6
7
(12)
51
–
(60)
2
2
1
(200)
(50)
(333)
18
5
(9)
–
(631)
(573)
$ 2,321
$ 2,470
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
205
Note 22 Income taxes (continued)
The effective tax rate of 20.5% increased 140 bps, mainly due to a decrease in income from lower tax rate jurisdictions in the
current year and net favourable tax adjustments in the prior year, partially offset by higher tax-exempt income.
The following is an analysis of the differences between the income tax expense reflected in the Consolidated Statements of
Income and the amounts calculated at the Canadian statutory rate.
Reconciliation to statutory tax rate
(Millions of Canadian dollars, except for percentage amounts)
Income taxes at Canadian statutory tax rate
Increase (decrease) in income taxes resulting from:
Lower average tax rate applicable to subsidiaries
Tax-exempt income from securities
Tax rate change
Other
For the year ended
October 31, 2020
October 31, 2019
$ 3,799
26.4% $ 4,217
26.5%
(513)
(364)
6
24
(3.6)
(2.5)
–
0.2
(815)
(310)
29
(78)
(5.1)
(1.9)
0.1
(0.5)
Income taxes in Consolidated Statements of Income / effective tax rate
$ 2,952
20.5% $ 3,043
19.1%
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, 2020
Net asset
beginning
of period (1)
Change
through
equity
Change
through
profit or loss
Exchange
rate
differences Other
Net asset
end of
period
$
$
$
$
$
716
1,246
10
202
(60)
(43)
(831)
45
631
29
$
–
(7)
–
–
–
(23)
–
5
20
4
$
646
19
(1)
2
(76)
(2)
60
(17)
(59)
18
$
–
11
–
–
(2)
–
(10)
1
–
(4)
–
–
–
–
–
–
(3)
–
–
–
$ 1,362
1,269
9
204
(138)
(68)
(784)
34
592
47
1,945
$
(1) $
590
$
(4) $ (3) $ 2,527
2,027
(82)
1,945
$ 2,579
(52)
$ 2,527
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
$
$
$
$
695
1,033
3
203
(48)
(8)
(858)
55
295
21
$
$
–
9
–
–
–
(33)
–
36
339
3
$
23
197
7
(10)
(11)
(1)
(4)
(47)
(6)
8
(2) $
7
–
–
(1)
(1)
(4)
1
3
(3)
1,391
$
354
$
156
$
–
$
1,475
(84)
1,391
–
–
–
9
–
–
(3)
–
–
–
6
$
$
$
$
716
1,246
10
202
(60)
(43)
(869)
45
631
29
1,907
1,989
(82)
1,907
(1)
These amounts reflect the transition adjustment made upon adoption of IFRS 16. Refer to Note 2 for further details.
206
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
The tax loss and tax credit carryforwards amount of deferred tax assets primarily relates to losses and tax credits in our Canadian,
U.S., and Caribbean operations. Deferred tax assets of $204 million were recognized at October 31, 2020 (October 31, 2019 – $202
million) in respect of tax losses and tax credits incurred in current or preceding years for which recognition is dependent on the
projection of future taxable profits. Management’s forecasts support the assumption that it is probable that the results of future
operations will generate sufficient taxable income to utilize the deferred tax assets. The forecasts rely on continued liquidity and
capital support to our business operations, including tax planning strategies implemented in relation to such support.
As at October 31, 2020, unused tax losses and tax credits of $389 million and $305 million (October 31, 2019 – $413 million and
$365 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 $nil which expire within one year (October 31, 2019 – $1 million), $10 million
which expire in two to four years (October 31, 2019 – $7 million) and $379 million which expire after four years (October 31, 2019 –
$405 million). There are no tax credits that will expire in one year (October 31, 2019 – $nil), $143 million that will expire in two to
four years (October 31, 2019 – $60 million) and $162 million that will expire after four years (October 31, 2019 – $305 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 $21.7 billion as at October 31, 2020
(October 31, 2019 – $17.9 billion).
Tax examinations and assessments
During the year, we received proposal letters (the Proposals) from the Canada Revenue Agency (CRA), in respect of the 2015
taxation year, which suggest that Royal Bank of Canada owes additional taxes of approximately $337 million as they denied the
deductibility of certain dividends. The Proposals are consistent with the reassessments received for taxation years 2012 to 2014
of approximately $756 million of additional income taxes and the reassessments received for taxation years 2009 to 2011 of
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 Proposals and
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.
Note 23 Earnings per share
(Millions of Canadian dollars, except share and per share amounts)
Basic earnings per share
Net income
Dividends on preferred shares and distributions on other equity instruments
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
2020
October 31
2019
$
$
$
11,437
(268)
(5)
11,164
1,423,915
7.84
11,164
13
11,177
1,423,915
1,054
755
3,046
$
$
$
12,871
(269)
(11)
12,591
1,434,779
8.78
12,591
15
12,606
1,434,779
2,011
742
3,150
1,428,770
7.82
$
1,440,682
8.75
$
(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, 2020, an average of 2,809,041
outstanding options with an average exercise price of $100.88 were 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.
Includes exchangeable preferred shares.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
207
Note 24 Guarantees, commitments, pledged assets and contingencies
Guarantees and commitments
We use guarantees and other off-balance sheet credit instruments to meet the financing needs of our clients.
The table below summarizes our maximum exposure to credit losses related to our guarantees and commitments provided
to third parties. The maximum exposure to credit risk relating to a guarantee is the maximum risk of loss if there was a total
default by the guaranteed parties, without consideration of possible recoveries under recourse provisions, insurance policies or
from collateral held or pledged. The maximum exposure to credit risk relating to a commitment to extend credit is the full amount
of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognized as a liability in
our Consolidated Balance Sheets.
(Millions of Canadian dollars)
Financial guarantees
Financial standby letters of credit
Commitments to extend credit
Backstop liquidity facilities
Credit enhancements
Documentary and commercial letters of credit
Other commitments to extend credit
Other credit-related commitments
Securities lending indemnifications
Performance guarantees
Sponsored member guarantees
Other
Maximum exposure
to credit losses
As at
October 31
2020
October 31
2019
$ 17,141
$ 16,608
40,212
2,664
286
239,077
77,953
7,040
1,302
1,030
36,305
1,692
268
225,911
91,625
7,061
–
787
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, reverse
repurchase agreements, bankers’ acceptances or letters of credit where we do not have the ability to unilaterally withdraw the
credit extended to the borrower.
208
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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 three 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.
Sponsored member guarantees
For certain overnight repurchase and reverse repurchase transactions, we act as a sponsoring member to eligible clients to clear
transactions through the Fixed Income Clearing Corporation (FICC). We also provide a guarantee to FICC for the prompt and full
payment and performance of our sponsored member clients’ respective obligations under the FICC rules. The guarantees are
fully collateralized by cash and securities issued or guaranteed by the U.S. government.
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, 2020, the total
balance of uncommitted amounts was $317 billion (October 31, 2019 – $287 billion).
Other commitments
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, 2020, we have unfunded
commitments of $882 million (October 31, 2019 – $684 million) representing the aggregate amount of cash we are obligated to
contribute 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, 2020, we had on average $3.4 billion of assets pledged intraday to the Bank of Canada on a daily basis (October 31,
2019 – $4.9 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, 2020 and October 31, 2019.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
209
Note 24 Guarantees, commitments, pledged assets and contingencies (continued)
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
2020
October 31
2019
$
99,302
59,479
27,934
$ 80,542
55,544
21,316
186,715
157,402
438,686
(37,879)
448,338
(49,325)
400,807
399,013
$ 587,522
$ 556,415
$ 127,852
36,647
252,425
45,440
62,131
35,044
6,456
6,380
15,147
$ 146,590
34,686
229,905
47,254
42,103
26,448
5,963
4,804
18,662
$ 587,522
$ 556,415
(1)
Primarily relates to Obligations related to securities lent or sold under repurchase agreements, Securities lent and Derivative transactions.
Note 25
Legal and regulatory matters
We are a large global institution that is subject to many different complex legal and regulatory requirements that continue to
evolve. We are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, regulatory
examinations, investigations, audits and requests for information by various governmental regulatory agencies and law
enforcement authorities in various jurisdictions. Some of these matters may involve novel legal theories and interpretations and
may be advanced under criminal as well as civil statutes, and some proceedings could result in the imposition of civil, regulatory
enforcement or criminal penalties. We review the status of all proceedings on an ongoing basis and will exercise judgment in
resolving them in such manner as we believe to be in our best interest. This is an area of significant judgment and uncertainty
and the extent of our financial and other exposure to these proceedings after taking into account current accruals could be
material to our results of operations in any particular period. The following is a description of our significant legal proceedings.
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.
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.
On March 26, 2020, Royal Bank of Canada and RBC Capital Markets LLC were dismissed from the 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. On April 24, 2020, the plaintiffs filed a notice of appeal. Based on the facts currently known, it is not possible
at this time for us to predict the ultimate outcome of these proceedings or the timing of their resolution.
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 were appealed and the hearing took place on November 25, 2020. The
court’s decision is expected to be issued in January 2021.
On October 28, 2016, Royal Bank of Canada was granted an exemption by the U.S. Department of Labor that allows Royal
Bank of Canada and its current and future affiliates to continue to qualify for the Qualified Professional Asset Manager (QPAM)
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. On November 3, 2020, the Solicitor of Labor of the U.S.
210
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Department of Labor issued an opinion stating that a conviction under non-U.S. law is not a disqualifying event for purposes of
the QPAM exemption. Based on that opinion, any conviction in a French court would not trigger disqualification of Royal Bank of
Canada and its current and future affiliates under the QPAM exemption.
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. In October 2020, the parties agreed to adjourn the Watson trial.
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.
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. In May 2020, the US
District Court dismissed Royal Bank of Canada from the November 2018 lawsuit brought by certain institutional plaintiffs who had
previously opted-out of participating in the August 2018 settlement with class plaintiffs. 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.
Note 26 Related party transactions
Related parties
Related parties include associated companies, post-employment benefit plans for the benefit of our employees, key management
personnel (KMP), the Board of Directors (Directors), close family members of KMP and Directors, and entities which are, directly
or indirectly, controlled by, jointly controlled by or significantly influenced by KMP, Directors or their close family members.
Key management personnel and Directors
KMP are defined as those persons having authority and responsibility for planning, directing and controlling our activities,
directly or indirectly. They include the senior members of our organization called the Group Executive (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, Chief Risk Officer, and Group Heads for RBC Ventures & Corporate
Development, Wealth Management, Insurance and Investor & Treasury Services, Capital Markets, 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
211
Note 26 Related party transactions (continued)
Compensation of Key management personnel and Directors
(Millions of Canadian dollars)
Salaries and other short-term employee benefits (2)
Post-employment benefits (3)
Share-based payments
For the year ended
October 31
2020 (1)
21
$
2
32
October 31
2019
26
2
44
$
$
55
$
72
(1)
(2)
(3)
During the year ended October 31, 2020, certain executives who were members of the Bank’s Group Executive as at October 31, 2019, left the Bank and therefore, were no
longer part of KMP. Compensation for the year ended October 31, 2020, attributable to the former executives, including benefits and share-based payments relating to
awards granted in prior years was $27 million.
Includes the portion of the annual variable short-term incentive bonus that certain executives elected to receive in the form of DSUs. Refer to Note 21 for further details.
Directors receive retainers but do not receive salaries and other short-term employee benefits.
Directors do not receive post-employment benefits.
Stock options, stock awards and shares held by Key management personnel, Directors and their close family members
(Millions of Canadian dollars, except number of units)
Stock options (2)
Other non-option stock based awards (2)
RBC common and preferred shares
As at
October 31, 2020 (1)
October 31, 2019
No. of
units held
1,912,482
869,756
206,652
Value
15
$
81
19
No. of
units held
2,372,714
1,481,096
463,362
Value
$ 51
157
49
2,988,890
$ 115
4,317,172
$ 257
(1)
(2)
During the year ended October 31, 2020, certain executives who were members of the Bank’s Group Executive as at October 31, 2019, left the Bank and therefore, were no
longer part of KMP. Total shareholdings and options held upon their departure was 1,600,184 units, with a value of $91 million.
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, 2020, total loans to KMP, Directors and their close family members were $6 million (October 31, 2019 –
$8 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, 2020 and October 31, 2019. 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, 2020, loans to joint ventures and associates were $215 million (October 31, 2019 – $222 million) and deposits
from joint ventures and associates were $15 million (October 31, 2019 – $180 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, 2020 and October 31,
2019. $1 million of guarantees have been given to joint ventures and associates for the year ended October 31, 2020 (October 31,
2019 – $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
Note 27 Results by business segment
As at or for the year
ended
October 31
2020
589
43
117
$
October 31
2019
430
47
128
$
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
212
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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 Service charges, Mutual fund
revenue 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, 2020
was $513 million (October 31, 2019 – $450 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.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
213
7,752
521
1,690
3,865
1,676
227
1,449
7,121
70
1,285
3,970
1,796
162
1,634
162
36
Note 27 Results by business segment (continued)
(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)
Personal &
Commercial
Banking
$ 12,568 $
5,163
Wealth
Management
2,860 $
9,360
17,731
2,891
12,220
214
–
7,946
6,894
1,807
–
9,212
2,794
639
– $
329 $
5,361
5,361
–
3,683
592
1,086
255
1,982
2,311
6
–
1,589
716
180
For the year ended October 31, 2020
Investor &
Treasury
Services
Insurance
Capital
Markets (1)
Corporate
Support (1)
5,135 $
4,749
9,884
1,239
(57) $
(269)
(326)
1
Total
Canada
20,835 $ 14,185 $
26,346
13,510
United
States
4,959 $
6,775
Other
International
1,691
6,061
47,181
4,351
27,695
2,881
11,734
949
–
5,362
3,283
507
–
57
3,683
24,758
1,993
12,513
(384)
(436)
14,389
2,952
10,308
2,516
–
8,380
2,405
209
Net income
$
5,087 $
2,155 $
831 $
536 $
2,776 $
52 $
11,437 $
7,792 $
2,196 $
Non-interest expense
includes:
Depreciation and
amortization
Impairment of other
intangibles
$
929 $
879 $
58 $
217 $
517 $
6 $
2,606 $
1,587 $
725 $
294
–
1
–
7
6
28
42
40
1
1
Total assets
$ 509,679 $ 129,706 $ 21,253 $ 230,695 $ 688,054 $ 45,161 $ 1,624,548 $ 911,932 $ 431,473 $ 281,143
Total assets include:
Additions to premises
and equipment and
intangibles
$
722 $
704 $
46 $
101 $
452 $
559 $
2,584 $
1,454 $
706 $
424
Total liabilities
$ 509,682 $ 129,673 $ 21,311 $ 230,618 $ 688,314 $ (41,817) $ 1,537,781 $ 825,034 $ 431,570 $ 281,177
For the year ended October 31, 2019
(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)
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
Investor &
Treasury
Services
Insurance
– $
(44) $
5,710
5,710
–
4,085
606
1,019
213
2,389
2,345
–
–
1,725
620
145
Capital
Markets (1)
Corporate
Support (1)
4,043 $
4,245
8,288
299
104 $
(453)
(349)
–
Total
19,749 $
26,253
Canada
14,375 $
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
–
5,096
2,893
227
–
131
(480)
(452)
4,085
24,139
15,914
3,043
2,800
12,175
11,925
2,748
–
7,994
2,193
133
Net income
$
6,402 $
2,550 $
806 $
475 $
2,666 $
(28) $
12,871 $
9,177 $
2,060 $
Non-interest expense
includes:
Depreciation and
amortization
Impairment of other
intangibles
$
632 $
593 $
48 $
143 $
408 $
– $
1,824 $
1,176 $
486 $
–
–
–
44
2
64
110
20
54
Total assets
$ 481,720 $
106,579 $ 19,012 $ 144,406 $ 634,313 $
42,905 $ 1,428,935 $ 753,142 $ 399,792 $
276,001
Total assets include:
Additions to premises
and equipment and
intangibles
$
408 $
565 $
44 $
142 $
491 $
621 $
2,271 $
1,326 $
669 $
276
Total liabilities
$ 481,745 $
106,770 $ 19,038 $ 144,378 $ 634,126 $ (40,747) $ 1,345,310 $ 669,543 $ 399,800 $
275,967
(1)
(2)
Taxable equivalent basis.
Interest revenue is reported net of interest expense as we rely primarily on net interest income as a performance measure.
Note 28 Nature and extent of risks arising from financial instruments
We are exposed to credit, market and liquidity and funding risks as a result of holding financial instruments. Our risk
measurement and objectives, policies and methodologies for managing these risks are disclosed in the shaded text along with
those tables specifically marked with an asterisk (*) in the Credit risk section of Management’s Discussion and Analysis. These
shaded text and tables are an integral part of these Consolidated Financial Statements.
Concentrations of credit risk exist if a number of our counterparties are engaged in similar activities, are located in the same
geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be
similarly affected by changes in economic, political or other conditions.
214
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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)
Canada
%
United
States
%
Europe
%
International %
Total
Other
As at October 31, 2020
$ 688,945 69% $ 200,521 20% $
68,058
7% $
40,736 4% $
998,260
22,761 20%
28,074 24%
56,229 49%
8,185 7%
115,249
$ 711,706 64% $ 228,595 21% $ 124,287 11% $
48,921 4% $ 1,113,509
Committed and uncommitted (5) $ 394,732 66% $ 162,589 27% $
Other
62,329 60%
12,697 12%
34,892
27,232 26%
6% $
6,535 1% $
2,208 2%
598,748
104,466
$ 457,061 65% $ 175,286 25% $
62,124
9% $
8,743 1% $
703,214
(Millions of Canadian dollars,
except percentage amounts)
On-balance sheet assets other
Canada
%
United
States
%
Europe
%
Other
International %
Total
As at October 31, 2019
than derivatives (1)
$ 646,567 69% $ 189,240 20% $
60,554
6% $
50,642 5% $
947,003
Derivatives before master
netting agreements (2), (3)
Off-balance sheet credit
instruments (4)
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
Committed and uncommitted (5) $ 367,907 67% $ 148,326 27% $
Other
15,246 13%
67,410 58%
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
(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, 2019 – 56%), the Prairies at 16% (October 31, 2019 – 16%), British Columbia and the territories at 14% (October 31, 2019 – 14%)
and Quebec at 10% (October 31, 2019 – 10%). No industry accounts for more than 25% (October 31, 2019 – 35%) of total on-balance sheet credit instruments. The
classification of our sectors aligns with our view of credit risk by industry.
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 46% and 54% of our total commitments (October 31, 2019 –
43% and 57%). The largest concentrations in the wholesale portfolio relate to Financial services at 15% (October 31, 2019 – 13%), Utilities at 12% (October 31, 2019 – 11%),
Real estate & related at 10% (October 31, 2019 – 9%), Other services at 8% (October 31, 2019 – 7%), and Oil & gas at 7% (October 31, 2019 – 7%). The classification of our
sectors aligns with our view of credit risk by industry.
Note 29 Capital management
Regulatory capital and capital ratios
OSFI formally establishes risk-based capital and leverage targets for deposit-taking institutions in Canada. We are required to
calculate our capital ratios using the Basel III framework. Under Basel III, regulatory capital includes Common Equity Tier 1
(CET1), Tier 1 and Tier 2 capital. CET1 capital mainly consists of common shares, retained earnings and other components of
equity. Regulatory adjustments under Basel III include deductions of goodwill and other intangibles, certain deferred tax assets,
defined benefit pension fund assets, investments in banking, financial and insurance entities, and the shortfall of provisions to
expected losses. Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred
shares and LRCNs 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 Tier 1 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
215
Note 29 Capital management (continued)
During 2020 and 2019, we complied with all 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)
Credit risk
Market risk
Operational risk
Total 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
2020
October 31
2019
$
68,082
74,005
84,928
$ 62,184
67,861
77,888
$ 448,821
27,374
70,047
$ 417,835
28,917
66,104
$ 546,242
$ 512,856
12.5%
13.5%
15.5%
4.8%
$ 1,552.9
12.1%
13.2%
15.2%
4.3%
$ 1,570.5
(1)
Capital, RWA, and capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI’s Leverage
Requirements (LR) guideline as updated in accordance with the regulatory guidance issued in fiscal 2020 by OSFI in response to the COVID-19 pandemic. Both the CAR
guideline and LR guideline are based on the Basel III framework.
Note 30 Offsetting financial assets and financial liabilities
Offsetting within our Consolidated Balance Sheets may be achieved where financial assets and liabilities are subject to master
netting arrangements that provide the currently enforceable right of offset and where there is an intention to settle on a net
basis, or realize the assets and settle the liabilities simultaneously. For derivative contracts and repurchase and reverse
repurchase arrangements, this is generally achieved when there is a market mechanism for settlement (e.g., central counterparty
exchange or clearing house) which provides daily net settlement of cash flows arising from these contracts. Margin receivables
and margin payables are generally offset as they settle simultaneously through a market settlement mechanism.
Amounts that do not qualify for offsetting include master netting arrangements that only permit outstanding transactions
with the same counterparty to be offset in an event of default or occurrence of other predetermined events. Such master netting
arrangements include the 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 following tables 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, 2020
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
$
$
347,327
99,535
445
447,307
$
$
35,783
657
192
36,632
$
$
311,544
98,878
253
410,675
$
$
36
69,300
2
69,338
$ 310,128
18,627
50
$ 328,805
$
$
1,380
10,951
201
12,532
$
$
1,471
14,610
–
16,081
$
$
313,015
113,488
253
426,756
216
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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
(1)
(2)
(3)
Financial collateral is reflected at fair value. The amount of financial instruments and financial collateral disclosed is limited to the net balance sheet exposure, and any
over-collateralization is excluded from the table.
Includes cash collateral of $15.2 billion (October 31, 2019 – $11.6 billion) and non-cash collateral of $313.6 billion (October 31, 2019 – $307.5 billion).
Includes cash margin of $4.9 billion (October 31, 2019 – $3.6 billion) which offset against the derivative balance on the balance sheet.
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
Amounts subject to offsetting and enforceable netting arrangements
As at October 31, 2020
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
$
$
309,130
96,138
358
405,626
$
$
35,783
657
192
36,632
$
$
273,347
95,481
166
368,994
$
$
36
69,300
2
69,338
$ 272,871
16,232
–
$ 289,103
$
440
9,949
164
$ 10,553
$
$
884
14,446
–
15,330
$
$
274,231
109,927
166
384,324
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
62,524
1
63,052
$ 224,506
13,540
–
$ 238,046
$
$
305
7,850
210
8,365
$
$
1,248
14,629
–
15,877
$
$
226,586
98,543
211
325,340
(1)
(2)
(3)
Financial collateral is reflected at fair value. The amount of financial instruments and financial collateral disclosed is limited to the net balance sheet exposure, and any
over-collateralization is excluded from the table.
Includes cash collateral of $13.5 billion (October 31, 2019 – $11.5 billion) and non-cash collateral of $275.6 billion (October 31, 2019 – $226.5 billion).
Includes cash margin of $2 billion (October 31, 2019 – $1.3 billion) which offset against the derivative balance on the balance sheet.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
217
Note 31 Recovery and settlement of on-balance sheet assets and liabilities
The table below presents an analysis of assets and liabilities recorded on our Consolidated Balance Sheets by amounts to be
recovered or settled within one year and after one year, as at the balance sheet date, based on contractual maturities and
certain other assumptions outlined in the footnotes below. As warranted, we manage the liquidity risk of various products based
on historical behavioural patterns that are often not aligned with contractual maturities. Amounts to be recovered or settled
within one year, as presented below, may not be reflective of our long-term view of the liquidity profile of certain balance sheet
categories.
(Millions of Canadian dollars)
Assets
Cash and due from banks (1)
Interest-bearing deposits with
banks
Securities
Trading (2)
Investment, net of applicable
allowance
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans
Retail
Wholesale
Allowance for loan losses
Segregated fund net assets
Other
Customers’ liability under
acceptances
Derivatives (2)
Premises and equipment
Goodwill
Other intangibles
Other assets
Liabilities
Deposits (3)
Segregated fund net liabilities
Other
Acceptances
Obligations related to securities
sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivatives (2)
Insurance claims and policy
benefit liabilities
Other liabilities
Subordinated debentures
Within one
year
October 31, 2020
After one
year
October 31, 2019
Total
Within one
year
After one
year
Total
As at
$
117,375 $
1,513 $
118,888
$
24,822 $
1,488 $
26,310
39,013
–
39,013
38,345
–
38,345
126,309
9,762
136,071
137,772
8,762
146,534
34,728
105,015
139,743
17,283
85,187
102,470
313,013
97,223
51,296
360,753
157,359
–
1,922
18,507
110,217
–
–
–
46,953
–
3,271
7,934
11,302
4,752
11,968
2
313,015
306,828
133
306,961
457,976
208,655
(5,639)
1,922
18,507
113,488
7,934
11,302
4,752
58,921
108,382
48,737
317,704
147,133
–
1,663
18,062
99,792
–
–
–
38,775
–
1,768
3,191
11,236
4,674
10,298
426,086
195,870
(3,100)
1,663
18,062
101,560
3,191
11,236
4,674
49,073
$
$
954,634 $
675,553 $ 1,624,548
852,734 $
–
159,151 $ 1,011,885
1,922
1,922
$
$
838,798 $
593,237 $
1,428,935
719,933 $
–
166,072 $
1,663
886,005
1,663
18,618
26,754
269,260
108,407
1,798
48,844
–
–
18,618
2,531
29,285
4,971
1,520
10,417
20,987
9,867
274,231
109,927
12,215
69,831
9,867
18,091
32,668
226,582
97,415
1,726
41,612
1,999
–
2,401
4
1,128
9,675
16,525
7,816
18,091
35,069
226,586
98,543
11,401
58,137
9,815
$ 1,326,415 $
211,366 $ 1,537,781
$ 1,140,026 $
205,284 $
1,345,310
(1)
(2)
(3)
Cash and due from banks are assumed to be recovered within one year, except for cash balances not available for use by the Bank.
Trading securities classified as FVTPL and trading derivatives 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 $511 billion (October 31, 2019 – $405 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.
218
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
Note 32 Parent company information
The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an
equity accounted basis.
Condensed Balance Sheets
(Millions of Canadian dollars)
Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Investments in bank subsidiaries and associated corporations (1)
Investments in other subsidiaries and associated corporations
Assets purchased under reverse repurchase agreements and securities borrowed
Loans, net of allowance for loan losses
Other assets
Liabilities and shareholders’ equity
Deposits
Net balances due to bank subsidiaries (1)
Net balances due to other subsidiaries
Other liabilities
Subordinated debentures
Shareholders’ equity
(1)
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Condensed Statements of Income and Comprehensive Income
(Millions of Canadian dollars)
Interest and dividend income (1)
Interest expense
Net interest income
Non-interest income (2)
Total revenue
Provision for credit losses
Non-interest expense
Income before income taxes
Income taxes
Net income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
Other comprehensive income (loss), net of taxes
Total comprehensive income
$
As at
October 31
2020
109,397 $
21,603
146,524
41,029
76,358
134,037
554,173
171,622
October 31
2019
14,264
22,279
118,716
37,234
73,785
123,755
526,078
152,422
$ 1,254,743 $
1,068,533
$
782,637 $
42,157
36,421
297,261
1,158,476
9,603
86,664
681,509
2,678
36,594
254,678
975,459
9,551
83,523
$ 1,254,743 $
1,068,533
For the year ended
October 31
2020
23,596 $
9,548
14,048
4,792
18,840
3,888
9,580
5,372
1,139
4,233
7,199
11,432 $
(1,137)
10,295 $
October 31
2019
27,630
14,966
12,664
5,569
18,233
1,730
9,212
7,291
1,568
5,723
7,137
12,860
(1,441)
11,419
$
$
$
(1)
(2)
Includes dividend income from investments in subsidiaries and associated corporations of $27 million (October 31, 2019 – $27 million).
Includes a nominal share of profit (loss) from associated corporations (October 31, 2019 – nominal).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2020
219
Note 32 Parent company information (continued)
Condensed Statements of Cash Flows
(Millions of Canadian dollars)
Cash flows from operating activities
Net income
Adjustments to determine net cash from operating activities:
Change in undistributed earnings of subsidiaries
Change in deposits, net of securitizations
Change in loans, net of securitizations
Change in trading securities
Change in obligations related to assets sold under repurchase agreements and
securities loaned
Change in assets purchased under reverse repurchase agreements and securities borrowed
Change in obligations related to securities sold short
Other operating activities, net
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
Proceeds from 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
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 and other equity instruments, net of issuance costs
Redemption of preferred shares and other equity instruments
Dividends paid on shares and distributions paid on other equity instruments
Repayment of lease liabilities
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
Amount of interest received
Amount of dividends received
Amount of income taxes paid
Note 33 Subsequent events
For the year ended
October 31
2020
October 31
2019
$
11,432 $
12,860
(7,199)
101,128
(30,833)
404
26,716
(10,282)
(3,032)
685
89,019
676
74,849
(101,551)
(1,243)
1,484
39,306
13,521
2,750
(3,000)
70
(814)
1,745
(1,508)
(6,333)
(317)
(7,407)
95,133
14,264
$
$
109,397 $
10,335 $
22,340
1,977
917
(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
On November 2, 2020, we issued $1,250 million of LRCN Series 2, at a price per note of $1,000, with recourse limited to assets held
by a third party trustee in a consolidated trust. The trust assets in respect of LRCN Series 2 consist of $1,250 million of our Non-
Cumulative 5-Year Rate Reset First Preferred Shares Series BR (Series BR) issued concurrently with LRCN Series 2 at a price of
$1,000 per Series BR. LRCN Series 2 bear interest at a fixed rate of 4% per annum until February 24, 2026, and thereafter at a rate
per annum, reset every fifth year, equal to the 5-Year Government of Canada Yield plus 3.617% until maturity on February 24, 2081.
220
Royal Bank of Canada: Annual Report 2020
Consolidated Financial Statements
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
Total liabilities
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
$ 118,888
39,013
275,814
$
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
313,015
660,992
216,826
306,961
618,856
189,459
294,602
576,818
173,768
220,977
542,617
169,811
186,302
521,604
193,479
174,723
472,223
176,612
135,580
435,229
144,773
117,517
408,850
126,079
112,257
378,241
149,180
84,947
347,530
175,446
$1,624,548
$1,428,935
$1,334,734
$1,212,853
$1,180,258
$1,074,208
$ 940,550
$ 859,745
$ 823,954
$ 793,833
$1,011,885
516,029
9,867
–
$ 886,005
449,490
9,815
–
$ 836,197
409,451
9,131
–
$ 789,036
340,124
9,265
–
$ 757,589
341,295
9,762
–
$ 697,227
305,675
7,362
–
$ 614,100
264,088
7,859
–
$ 563,079
239,763
7,443
–
$ 512,244
259,174
7,615
–
$ 479,102
263,625
8,749
894
$1,537,781
$1,345,310
$1,254,779
$1,138,425
$1,108,646
$1,010,264
$ 886,047
$ 810,285
$ 779,033
$ 752,370
Equity attributable to shareholders
Non-controlling interest
Total equity
86,664
103
86,767
83,523
102
83,625
79,861
94
79,955
73,829
599
74,428
71,017
595
71,612
62,146
1,798
63,944
52,690
1,813
54,503
47,665
1,795
49,460
43,160
1,761
44,921
39,702
1,761
41,463
Total liabilities and equity
$1,624,548
$1,428,935
$1,334,734
$1,212,853
$1,180,258
$1,074,208
$ 940,550
$ 859,745
$ 823,954
$ 793,833
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)
Net income from continuing operations
Net loss from discontinued operations
Net income
Other Statistics – reported
(Millions of Canadian dollars, except
percentages and per share amounts) (1)
PROFITABILITY MEASURES (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
$
$
$
$
$
$
$
$
2020
20,835
26,346
47,181
4,351
3,683
24,758
11,437
–
11,437
2020
7.84
7.82
14.2%
2.10%
52.5%
0.24%
1.55%
2019
19,749
26,253
46,002
1,864
4,085
24,139
12,871
–
12,871
$
$
2018
17,952
24,624
42,576
1,307
2,676
22,833
12,431
–
12,431
$
$
2017
16,926
23,743
40,669
1,150
3,053
21,794
11,469
–
11,469
$
$
2016
16,531
22,264
38,795
1,546
3,424
20,526
10,458
–
10,458
$
$
2015
14,771
20,932
35,703
1,097
2,963
19,020
10,026
–
10,026
$
$
2014
14,116
19,992
34,108
1,164
3,573
17,661
9,004
–
9,004
$
$
2013
13,249
17,433
30,682
1,237
2,784
16,214
8,342
–
8,342
2012
12,439
16,708
29,147
1,299
3,621
14,641
7,558
(51)
7,507
$
$
2011
11,357
16,281
27,638
1,133
3,358
14,167
6,970
(526)
6,444
$
$
2019
2018
2017
2016
2015
2014
2013
2012
2011
$
$
8.78
8.75
16.8%
2.52%
52.5%
0.27%
1.61%
$
$
8.39
8.36
17.6%
2.55%
53.6%
0.20%
1.64%
$
$
$
$
$
$
7.59
7.56
17.0%
2.49%
53.6%
0.21%
1.69%
6.80
6.78
16.3%
2.34%
52.9%
0.28%
1.70%
6.75
6.73
18.6%
2.45%
53.3%
0.24%
1.71%
$
$
6.03
6.00
19.0%
2.52%
51.8%
0.27%
1.86%
5.53
5.49
19.7%
2.67%
52.8%
0.31%
1.88%
$
$
$
$
4.96
4.91
19.6%
2.70%
50.2%
0.35%
1.97%
4.25
4.19
18.7%
2.44%
51.3%
0.33%
1.86%
$
$
$
1,422,473
4.29
4.7%
55%
56.75
93.16
132,518
1.64
$
$
$
1,430,096
4.07
4.1%
46%
54.41
106.24
151,933
1.95
$
$
$
1,438,794
3.77
3.7%
45%
51.12
95.92
138,009
1.88
$
$
$
1,452,535
3.48
3.8%
46%
46.41
100.87
146,554
2.17
$
$
$
1,484,235
3.24
4.3%
48%
43.32
83.80
124,476
1.93
$
$
$
1,443,955
3.08
4.1%
46%
39.51
74.77
107,925
1.89
$
$
$
1,443,125
2.84
3.8%
47%
33.69
80.01
115,393
2.38
$
$
$
1,441,722
2.53
4.0%
46%
29.87
70.02
100,903
2.34
$
$
$
1,445,846
2.28
4.5%
46%
26.52
56.94
82,296
2.15
$
$
$
1,438,522
2.08
3.9%
45%
24.25
48.62
69,934
2.00
12.5%
13.5%
15.5%
4.8%
12.1%
13.2%
15.2%
4.3%
11.5%
12.8%
14.6%
4.4%
10.9%
12.3%
14.2%
4.4%
10.8%
12.3%
14.4%
4.4%
10.6%
12.2%
14.0%
4.3%
9.9%
11.4%
13.4%
n.a.
9.6%
11.7%
14.0%
n.a.
n.a.
13.1%
15.1%
n.a.
n.a.
n.a.
n.a.
n.a.
(1)
(2)
(3)
(4)
Effective November 1, 2019, we adopted IFRS 16 Leases. Results from periods prior to November 1, 2019 are reported in accordance with IAS 17 Leases in this 2020
Annual Report. 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 2020 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 2020 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.
(6)
(7)
(5) 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 2011-2012 represent continuing operations.
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes Average common equity
used in the calculation of ROE. For further details, refer to the Key performance and non-GAAP measures section of the MD&A.
These measures may not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures
disclosed by other financial institutions. For further details, refer to the Key performance and non-GAAP measures section of the MD&A.
Return on risk-weighted assets (RWA) for fiscal 2011 is based on RWA reported under Canadian Generally Accepted Accounting Policies (CGAAP) and Income reported
under IFRS.
(8)
(9)
(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-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. 2011-2012 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.
n.a. not applicable
Ten-year statistical review
Royal Bank of Canada: Annual Report 2020
221
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.
Auction rate securities (ARS)
Debt securities whose interest rates are
regularly reset through an auction process.
Average earning assets, net
Average earning assets include interest-
bearing deposits with other banks, securities,
net of applicable allowance, assets purchased
under reverse repurchase agreements and
securities borrowed, loans, net of allowance,
cash collateral and margin deposits. Insurance
assets, and all other assets not specified are
excluded. The averages are based on the daily
balances for the period.
Basis point (bp)
One one-hundredth of a percentage point
(.01%).
Collateral
Assets pledged as security for a loan or other
obligation. Collateral can take many forms,
such as cash, highly rated securities, property,
inventory, equipment and receivables.
Collateralized debt obligation (CDO)
Securities with multiple tranches that are
issued by structured entities and
collateralized by debt obligations including
bonds and loans. Each tranche offers a varying
degree of risk and return so as to meet
investor demand.
Commercial mortgage-backed securities
(CMBS)
Securities created through the securitization
of commercial mortgages.
Commitments to extend credit
Unutilized amount of credit facilities available
to clients either in the form of loans, bankers’
acceptances and other on-balance sheet
financing, or through off-balance sheet
products such as guarantees and letters of
credit.
Common Equity Tier 1 (CET1) capital
A regulatory Basel III capital measure
comprised mainly of common shareholders’
equity less regulatory deductions and
adjustments for goodwill and intangibles,
defined benefit pension fund assets, shortfall
in allowances and other specified items.
Common Equity Tier 1 capital ratio
A risk-based capital measure calculated as
CET1 capital divided by risk-weighted assets.
Covered bonds
Full recourse on-balance sheet obligations
issued by banks and credit institutions that
are fully collateralized by assets over which
investors enjoy a priority claim in the event of
an issuer’s insolvency.
Credit default swaps (CDS)
A derivative contract that provides the
purchaser with a one-time payment should the
referenced entity/entities default (or a similar
triggering event occur).
Derivative
A contract between two parties, which
requires little or no initial investment and
where payments between the parties are
dependent upon the movements in price of an
underlying instrument, index or financial rate.
Examples of derivatives include swaps,
options, forward rate agreements and futures.
The notional amount of the derivative is the
contract amount used as a reference point to
calculate the payments to be exchanged
between the two parties, and the notional
amount itself is generally not exchanged by
the parties.
Dividend payout ratio
Common dividends as a percentage of net
income available to common shareholders.
Earnings per share (EPS), basic
Calculated as net income available to common
shareholders divided by the average number
of shares outstanding.
Earnings per share (EPS), diluted
Calculated as net income available to common
shareholders divided by the average number
of shares outstanding adjusted for the dilutive
effects of stock options and other convertible
securities.
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.
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.
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.
International Financial Reporting Standards
(IFRS)
IFRS are principles-based standards,
interpretations and the framework adopted by
the International Accounting Standards Board.
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.
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.
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.
222
Royal Bank of Canada: Annual Report 2020
Glossary
Loan-to-value (LTV) ratio
Calculated based on the total facility amount
for the residential mortgage and RBC
Homeline Plan® 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, net)
Calculated as net interest income divided by
average earning assets, net.
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.
RBC Homeline Plan® products
This is comprised of residential mortgages and
secured personal loans whereby the borrower
pledges real estate as collateral.
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.
Standardized Approach
Risk weights prescribed by OSFI are used to
calculate risk-weighted assets for the credit
risk exposures. Credit assessments by OSFI-
recognized external credit rating agencies of
S&P, Moody’s, Fitch and DBRS are used to risk-
weight our Sovereign and Bank exposures
based on the standards and guidelines issued
by OSFI. For our Business and Retail
exposures, we use the standard risk weights
prescribed by OSFI.
Structured entities
A structured entity is an entity in which voting
or similar rights are not the dominant factor in
deciding who controls the entity, such as when
the activities that significantly affect the
entity’s returns are directed by means of
contractual arrangements. Structured entities
often have restricted activities, narrow and
well defined objectives, insufficient equity to
finance their activities, and financing in the
form of multiple contractually-linked
instruments.
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, limited recourse capital
notes 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.
Glossary
Royal Bank of Canada: Annual Report 2020
223
Principal subsidiaries
(Millions of Canadian dollars)
Principal subsidiaries (1)
Royal Bank Holding Inc.
RBC Direct Investing Inc.
RBC Insurance Holdings Inc.
RBC Life Insurance Company
R.B.C. Holdings (Bahamas) Limited
RBC Caribbean Investments Limited
Royal Bank of Canada Insurance
Company Ltd.
Investment Holdings (Cayman) Limited
RBC (Barbados) Funding Ltd.
Capital Funding Alberta Limited
RBC Global Asset Management Inc.
RBC Investor Services Trust
RBC Investor Services Bank S.A.
RBC (Barbados) Trading Bank Corporation
Principal office address (2)
Toronto, Ontario, Canada
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 Europe Limited
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
London, England
Royal Bank Mortgage Corporation
Toronto, Ontario, Canada
The Royal Trust Company
RBC Holdings (Channel Islands) Limited
Royal Bank of Canada (Channel Islands) Limited
Montreal, Quebec, Canada
Jersey, Channel Islands
Guernsey, Channel Islands
Royal Trust Corporation of Canada
Toronto, Ontario, Canada
As at October 31, 2020
Carrying value of
voting shares owned
by the Bank (3)
$
67,517
24,062
11,126
2,738
1,398
954
912
337
(1)
(2)
(3)
The Bank directly or indirectly controls each subsidiary.
Each subsidiary is incorporated or organized under the laws 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. and RBC Capital Markets, LLC, which is organized under the laws of the
State of Minnesota, U.S.
The carrying value of voting shares is stated as the Bank’s equity in such investments.
224
Royal Bank of Canada: Annual Report 2020
Principal subsidiaries
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)
Preferred shares AZ, BB, BD, BF,
BH, BI, BJ, BK, BM and BO are
listed on the TSX. The related
depository shares of the series
C-2 preferred shares are listed
on the NYSE.
Direct deposit service
Shareholders in Canada and the
U.S. may have their 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.
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
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 2,
2020 to March 1, 2021, 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. For further
details, refer to the Capital
management section.
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
2021 Quarterly earnings
release dates
First quarter
Second quarter May 27
Third quarter
Fourth quarter
August 25
December 1
February 24
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
2021 Annual Meeting
The Annual Meeting of Common
Shareholders will be held on
Thursday, April 8, 2021
Dividend dates for 2021
Subject to approval by the Board of Directors
Common and preferred shares
series AZ, BB, BD, BF, BH, BI, BJ,
BK, BM and BO
Preferred shares series C-2
(US$)
Record
dates
January 26
April 22
July 26
October 26
January 26
April 27
July 27
October 26
Payment
dates
February 24
May 21
August 24
November 24
February 5
May 7
August 6
November 5
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 FUTURE
LAUNCH, RBC GLOBAL ASSET MANAGEMENT, RBC INSURANCE, RBC HOMELINE PLAN, RBC REWARDS, RBC WEALTH MANAGEMENT, MYADVISOR, NOMI FIND & SAVE,
INVESTEASE, BOREALIS AI, AIDEN, ADVISOR’S VIRTUAL ASSISTANT (AVA), MYADVISOR, OWNR, NOMI, NOMI INSIGHTS, RBC INSIGHT EDGE and RESPECT AI 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.
Shareholder information
Royal Bank of Canada: Annual Report 2020
225
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