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Royal Bank of Canada
Annual Report 2021
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
Table of contents
2021 Highlights
CEO Letter
Chair Letter
> The preferred partner to corporate, institutional and
high net worth clients and their businesses in the U.S.
Management’s Discussion
and Analysis
> A leading financial services partner valued for our
expertise in select global financial centres
We are guided by our Values:
> Client First
> Collaboration
> Accountability
> Diversity & Inclusion
> Integrity
Enhanced Disclosure Task Force
Recommendations Index
Reports and Consolidated
Financial Statements
Ten-Year Statistical Review
Shareholder Information
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7
12
13
123
124
226
228
Connect with us:
facebook.com/rbc
instagram.com/rbc
twitter.com/@RBC
www.youtube.com/user/RBC
linkedin.com/company/rbc
rbc.com/ar2021
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 87,000+ 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
27 other countries.
How we create value has always been as
important as what we achieve. Guided by our
Purpose, we are focused on delivering long-term,
differentiated value for our clients, employees,
communities, and shareholders. In our annual
report, you’ll read about how RBC continues
to demonstrate forward momentum and an
unwavering commitment to creating long-term,
sustainable value for those we serve.
Why invest?
> Diversified business model with scale and market-
leading franchises that provide a full suite of
products, advice and services for clients
> Leading presence in Canada and an established
multi-platform U.S. strategy with a long runway for
premium growth
> Differentiated technology and innovation
investments that go beyond banking
> Premium ROE and disciplined expense management
> Strong balance sheet and prudent risk management
> Well-positioned to benefit from evolving macro
environment
> Recognized leader in ESG and corporate citizenship
By the numbers
17 million
clients
87,000+
employees
29
countries
Royal Bank of Canada: Annual Report 2021
1
Royal Bank of Canada: Annual Report 2021 2021 HIGHLIGHTS ACROSS OUR BALANCED SCORECARD
Clients
We are united in our commitment to delivering exceptional client experiences.
RBC is uniquely positioned to create long-term value for our clients through the
power of our ideas, investments in talent and technology, and our differentiated
advice, products and services.
Customer Service
Award Winner among
the Big Five Banks –
Recognized in all 11
categories of the 2021
Ipsos Financial Service
Excellence Awards
RBC Global Asset
Management named
TopGun Investment
Team of the Year
(Brendan Wood
International)
Celent Model Winner
in three categories –
demonstrating
industry-leading
practices in our
Capital Markets
and Personal &
Commercial Banking
businesses that
enhance clients’
digital experiences
Outstanding Global
Private Bank
Outstanding Global
Private Bank in North
America for the sixth
year in a row(4)
Highest in Customer
Satisfaction among the Big
Five Retail Banks, 5 out of the
last 6 years (J.D. Power)
Enabled 5.5 million active
mobile users as clients’
digital adoption accelerated,
with mobile sessions up
15% YoY to over 114 million(5)
14 Ventures in market as
part of our strategy to go
beyond banking by creating
meaningful solutions and
value-added experiences
Launched RBC VantageTM:
Transformed our core
Everyday Banking value
proposition for our Canadian
Banking clients and advisors,
providing them with a
comprehensive and seamless
banking experience
(1) Dealogic, fiscal 2021
(2) Refer to the Glossary definition on page 121
(3) US$; loan growth includes $2 billion relating to PPP loans
(4) Private Banker International Global Wealth Awards 2021
(5) 90-day active mobile users in Canadian Banking only
Market-Leading Client Franchises
#1 and #2 market share in all
key product categories across
Canadian Banking
#1 in market share for High
Net Worth/Ultra High Net
Worth in Canada
11th largest global investment
bank with #1 market share
in Canada and #1 Canadian
investment bank in the
United States(1)
Largest retail fund company in
Canada based on assets under
management (AUM)(2)
Average volume growth of 15%
in loans and 29% in deposits at
City National Bank(3)
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Royal Bank of Canada: Annual Report 2021
Employees
Our 87,000+ employees live our Purpose and values every day in delivering for our clients and
communities. We remain focused on ensuring employees feel supported, trusted and engaged,
while creating opportunities to learn and innovate. As we adapt to an ever-changing world
of work and a competitive talent landscape, we’ll continue to enable an inclusive, always-
learning culture as we attract, inspire and grow talent to set RBC apart.
Great Place
to Work – Best
Workplaces
for Mental
Wellness 2021
#2 globally and the top Canadian company and financial
institution in the 2021 Refinitiv Diversity & Inclusion Index,
ranking more than 11,000 publicly listed companies,
up from #4 in 2020
2021 Catalyst Award winner
for accelerating the advancement
of women and elevating inclusion,
the second time RBC has been
honoured with this award
Welcomed 1,400+
summer students
across the globe,
50% were BIPOC
Expanded our
technology
teams, including
the creation
of 300 roles at
a new Calgary
Innovation Hub
Recognized
as one of
Canada’s
Top 100
Employers
Invested in our
employees’ well-
being through a
paid subscription
to Headspace, the
mindfulness and
meditation app,
and an additional
day off
(1) Based on self-identification; Canada and United States only; excludes summer interns, students and co-ops
(2) Defined as upward change in position level or HR Class
(3) Represents data for our businesses in Canada governed by the Employment Equity Act
(4) Global; excludes summer interns, students and co-ops
(5) Headcount under 30 globally, excluding City National and BlueBay Asset Management employees
(6) Employee Engagement Survey conducted between April 21-May 5, 2021; participation rate was 76%
Accelerating our progress in
Diversity & Inclusion
Black, Indigenous and
People of Colour (BIPOC)
represented:
37% of new hires(1)
43% of promotions(1)(2)
43% of new executive
appointments, surpassing our
goal of 30% for the year(3)
Women represented:
51% new hires(4)
54% of promotions(2)(4)
44% of executives(3)
18% young people(5)
94% of RBC employees
and contractors have
completed Anti-Racism
Awareness Training
2021 Employee Engagement
Survey(6) found that employees
remain highly engaged and
proud to be part of RBC
94% of employees feel
they contribute to the
overall success of RBC
91% feel proud to be
part of RBC
90% willing to go above
and beyond
$16.5 billion in competitive
compensation and benefits
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Royal Bank of Canada: Annual Report 2021
2021 HIGHLIGHTS ACROSS OUR BALANCED SCORECARD
Communities
When our communities prosper, we all do. Through our partnerships, volunteering
and employee giving initiatives, and donations, we are committed to supporting the
communities around the world where we live and work. Our approach is aligned to
our priority pillars, including youth, climate and diversity & inclusion, with the goal of
building vibrant, socially inclusive and sustainable communities.
$265+ million
provided through RBC Future
Launch® reaching over 3.6 million
Canadian youth through 875+ partner
programs since 2017
By investing $5 million into the RBC
Future Launch® suite of scholarships
over three years, 1,600+ young
Canadians will benefit from these
awards, including resources tailored
to their needs through input from
diverse business, academic, and
non-profit leaders
$23 million
Our annual Employee Giving
Campaign went virtual and achieved
record participation results with 82%
of employees taking part, raising
$23 million for 5,000+ charities
across Canada
$100 million
commitment to help Black
entrepreneurs reach their full
potential through the RBC Black
Entrepreneur Program providing
access to capital and resources
necessary to start and grow a
successful business
$2 million
donation from the RBC Foundation
to help launch first-ever Brain
Canada Youth Mental Health
Platform Program, powered by the
RBC Future Launch® program
$8 billion(1)
in support of our communities as one
of the largest taxpayers in Canada, and
as a taxpayer in other countries where
we operate
$140+ million(2)
given globally through cash donations
and community investments, including
support to mitigate the human
and economic impacts of the
COVID-19 pandemic
Launched the RBC
Community Junior Golf
Program, an initiative that
will focus on building greater
diversity and equity in golf
by enabling affordable
access to the game for
youth in underrepresented
communities in Canada
(1) Refer to page 97 of the 2021 Annual Report for additional information
(2) Includes employee volunteer grants and gifts in kind, as well as contributions to non-profits and non-registered charities. Figure includes sponsorships
In 2021, RBC Race
for the Kids’ 35,000+
participants raised
$8+ million for 35 youth-
focused charities in
19 countries
Since it began in 2009, the
RBC Race for the Kids event
series has hosted 325,000
participants and raised over
$73 million for youth-focused
causes around the world
RBC Charity Day for
the Kids donated
US$5 million to more
than 50 youth-focused
charities around
the globe
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Royal Bank of Canada: Annual Report 2021
Empowering our clients
on their journey to net-zero
emissions with solutions,
products and advice,
highlighted by our $500 billion
sustainable financing target
Committed to net-zero
emissions in our lending
by 2050, aligned with
Committed to
the principles of the
net-zero emissions in our
Paris Agreement
lending by 2050, aligned with
the principles of
the Paris Agreement
Committed to reducing
our own global emissions
by 70% and sourcing
100% of our electricity
from renewable and non-
emitting sources by 2025
Issued second Green Bond,
a US$750 million issue in
partnership with a syndicate
that included diverse-owned
broker dealers
$597+ billion in AUM that integrate
material ESG factors in 2021
1.6 billion tonnes of carbon
traded in 2021
RBC InvestEase® saw a 145% increase
in funded accounts with a Responsible
Investing portfolio YoY. AUM growth
continues to accelerate with a 131%
increase YoY driven by strong growth in
new deposits and new funded accounts
$33+ billion in financing for sustainable
bonds and loans(1)
Joined the Partnership for Carbon
Accounting Financials (PCAF) and RMI’s
Center for Climate-Aligned Finance
RBC joined the Net-Zero
Banking Alliance (NZBA), a
global, industry-led initiative
to accelerate and support
efforts to address climate
change and drive credible
progress toward achieving
net-zero emissions by 2050
RBC Tech for Nature™
supports partners leveraging
technology and innovation
capabilities to solve climate
change and other pressing
environmental challenges through a
multi-year commitment. Since 2019,
more than 100 organizations have
benefitted from over $27 million in
community investments
[RBC’s InvestEase Responsible
Investing Portfolio saw an increase xx ]
Launched our first ESG equity-linked GIC,
RBC ESG Market-Linked GIC, built for
environmentally and socially-focused investors
(1) Reflects enhancements in data collection methodology in fiscal 2021
For more stories on how we lead
with Purpose in creating value for
our clients, communities, employees,
and shareholders, please visit our
newly launched RBC Stories site
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Royal Bank of Canada: Annual Report 2021
2021 HIGHLIGHTS ACROSS OUR BALANCED SCORECARD
Shareholders
18.6% return on
common equity(1),
up from 14.2%
in 2020
$9.6 billion
remainder of our
profit available
to reinvest in
future growth
$4.32 dividends
declared per share
85(6)
average percentile ranking
on priority ESG indices
13.7%
robust common equity
tier 1 (CET1) ratio,
up 120 bps from 2020
40%(7)
of profits returned to
our shareholders
through dividends
$11.06
diluted earnings per share
(EPS), up from $7.82 in 2020
Financial performance metrics
Medium-Term Objectives(2)
Diluted EPS growth of 7%+
ROE of 16%+
Strong capital ratio (CET1)
Dividend payout ratio of 40%–50%
Total shareholder return(3)
RBC
Global peer average
3-Year
10%
16.5%
12.8%
47%
3-Year
16%
14%
Earnings
net income (C$ billion)
Revenue by segment(4)
(C$ billion)
$16.1
Annualized Dividend
Increase of:
$11.4
6%
Five year(5)
8%
Ten year(5)
2020
2021
$10.2
Capital
Markets
$2.2
I&TS
$5.6
Insurance
5-Year
10%
16.8%
12.1%
46%
5-Year
13%
12%
$18.3
P&CB
$13.3
Wealth
Management
(1) Refer to the Glossary for definition on page 121
(2) 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
(3) Annualized TSR is calculated based on the TSX common share price appreciation plus reinvested dividend income. Source: Bloomberg, as at
October 31, 2021. Please refer to page 16-17
(4) Excludes Corporate Support
(5) Compound Annual Growth Rate
(6) Average percentile ranking compiled from our four top-tier ESG ratings/rankings, including Sustainalytics, MSCI ESG Rating, FTSE4Good and
S&P Global’s Corporate Sustainability Assessment (informing the DJSI) – FTSE4Good and MSCI ratings reflect 2020 scores
(7) Includes dividends paid on both common and preferred shares. Dividends were $6.2 billion on common shares and dividends on preferred shares
and distributions on other equity instruments were $0.3 billion
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(1) 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)
(2) Includes dividends paid on both common and preferred
shares. Dividends were $XX billion on common shares and
$XX billion on preferred shares
Royal Bank of Canada: Annual Report 2021
MESSAGE FROM DAVE McKAY
2021 Reflections
2021 was another year defined by
the pandemic and it presented both
challenges and opportunities for RBC
and those we serve in ways we couldn’t
have predicted as the year began.
The rollout of multiple vaccines marked an important step forward
in society’s collective efforts to slow the spread of COVID-19 and
a path towards ending the global pandemic. As some normality
returned, many of us began to look to the future with greater hope
and confidence. Improving business and consumer sentiment
spurred on economic activity, reinforcing RBC’s view that better
days were ahead of us.
At the same time, however, we learned that progress against the
virus didn’t follow a predictable or straight line. Successive waves
of the virus were devastating in some regions and continued to
disrupt lives and livelihoods, and rising cases coupled with an
uneven vaccination rollout led to significant market volatility and
uncertainty for businesses and consumers.
And after more than a year of social distancing and isolation, many
people felt fatigued and affected by uncertain times, marked by a
rising need to support mental health and well-being.
Geopolitical divisions intensified, and systemic barriers and
inequalities exposed by the pandemic became more pronounced,
reinforcing the need for meaningful change across our society
and institutions. Several events, including the tragic discovery of
unmarked Indigenous children’s graves at former residential school
sites in Canada, only added to the urgency.
Moreover, the frequent impacts of climate change were ever-
present as many countries and communities experienced
devastating heat waves, floods and other extreme weather events.
In 2021, it was never more evident that urgent action is needed to
place our planet on a more sustainable path. This will come with
significant new costs, and require all of us to understand and make
tough choices as society adapts and we all adopt new behaviours.
It also became clear that the pandemic has accelerated
and reshaped our world and our future in permanent ways –
transforming the way we live, work, shop, and connect with each
other. These changes represent tectonic shifts that won’t revert
back to the way things were.
Within this uncertain and rapidly evolving context, society and
economies showed incredible resilience, backed by significant
financial support from governments – facilitated by financial
institutions, including RBC, which worked extensively with clients
across the spectrum – to help manage through a very challenging
first half of the year until we started to see progressive re-opening.
These conditions supported increasingly strong client activity and
demand throughout 2021, in what was a defining year for RBC.
David McKay
President and
Chief Executive Officer
We executed very well in support of our medium-term objectives
and vision of the future, and against our balanced scorecard.
This meant bringing all our stakeholders – clients, employees,
communities, and shareholders – along with us as we helped build
a stronger and more sustainable future.
Our balanced scorecard: Purpose drives performance
Looking back on the year, I’m most proud of the ways our over
87,000 employees led RBC through significant disruption and
uncertainty, and responded to our clients and communities while
supporting each other. Despite navigating a working environment
largely defined by lockdowns, their empathy, care and commitment
to those we serve was the most powerful reflection of our culture
and Purpose – to help clients thrive and communities prosper.
Nowhere was this truer than RBC’s annual Employee Giving
Campaign which broke previous fundraising records with a
combined total of $23 million raised, supporting more charities
than ever before.
Thanks to our teams, we accelerated our vision to
transform our bank for the future while executing
and growing through the global pandemic. RBC kept
investing in people and technology at a time when
others pulled back, and continued building more
value for our clients. This is emblematic of how we
run the bank, delivering in the short-term while
continuing to build for the long-term.
To support our employees, we doubled down on our commitment to
their physical and mental health and well-being, including through
new benefits, initiatives and resources for those working on-site,
from home or returning to premises. We also gave employees
an additional day off and provided them with a mindfulness and
meditation app to help manage the mental fatigue of the pandemic.
We also engaged employees for input on the future of work at
RBC. In actively surveying our employees for feedback on their
experiences, 88% told us their engagement remained high, and they
felt well-supported by RBC leaders. Over 90% said they were proud
to be part of RBC. I was also proud RBC continued to be recognized
externally as an employer of choice in 2021.
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Royal Bank of Canada: Annual Report 2021 MESSAGE FROM DAVE McKAY
This recognition also included the bank’s leadership on diversity
and inclusion, which is a cornerstone of RBC’s values. RBC was
awarded the global Catalyst Award in 2021 for the second time
in our history. Furthermore, we ranked second in Refinitiv’s Top
100 Company Diversity & Inclusion Index, making RBC the top-
ranked company in Banking Services globally and the top ranked
organization in Canada. While we are honoured by this recognition
and have made good progress, we know there is more to be done
and we’re committed to accelerating change.
The biggest testament to our culture and strong employee
engagement is how our people have gone above and beyond to
serve our 17 million clients, and attract new ones.
Our Canadian Personal & Commercial Banking businesses grew
volumes and gained market share in lending, deposits and
investments. As a result of this client activity, in Canada, we
maintained or extended our #1 and #2 share in key categories of
our Personal & Commercial Banking businesses. We also achieved
progress in deepening client relationships, both within Canadian
Banking, where nearly 19% of clients have all four of transaction
accounts, credit cards, investments, and borrowing products with
RBC, and between segments. And for the fifth time in six years,
J.D. Power ranked RBC highest in retail customer satisfaction in
2021, among our peer banks.
We also saw strong client activity across our wealth management
franchises. In Canadian Wealth Management, we grew assets under
administration (AUA) by 26% and, for the 15th consecutive year, RBC
Dominion Securities was ranked #1 in advisor satisfaction amongst
bank-owned wealth management firms in the 2021 Investment
Executive Brokerage Report Card. RBC Global Asset Management
gained $45 billion of total net sales with 17% market share of
Canadian retail long-term mutual fund flows.
In the U.S., City National Bank continued to see strong momentum
with double-digit growth in loans and deposits. Our U.S. Wealth
Management franchise also achieved strong asset growth, in part
by hiring experienced advisor teams who are attracted to our client-
first culture coupled with the capabilities and resources of a large
bank, including an integrated technology platform.
Our global Capital Markets businesses generated strong advisory
and underwriting activity, deepening client relationships, including
financing in support of their strategic objectives. Strong Corporate
and Investment Banking results more than offset normalizing
Global Markets performance, and robust M&A activity propelled an
increase in loan syndication across our core regions. RBC Capital
Markets’ solid overall business performance in 2021 also helped to
offset interest rate pressures in our other businesses, which further
reinforces the importance of our diversified model.
Collectively, the growth in our core client franchises speaks to the
success of our longstanding strategy to harness the power of our
talent and technology with our scale and distribution power to
deliver differentiated advice, insights and experiences that create
value for clients and deepen relationships across our businesses.
8
The biggest testament to our
culture and strong employee
engagement is how our people
have gone above and beyond to
serve our 17 million clients.
In the communities where we live and work, RBC stood tall as an
active corporate citizen through the more than $140 million in
donations and investments our bank directed throughout 2021 to
local community organizations and causes. During the year, we
were particularly proud of our initiatives that broaden economic
opportunity amongst youth and underrepresented groups,
foster community spirit and encourage innovation to address
climate change.
A great example of this is RBC Future Launch®, our 10-year, $500
million commitment to preparing youth for the jobs of tomorrow.
With a focus on networking, skills development, practical work
experience, and mental well-being supports and services, RBC
Future Launch® is helping prepare youth in critical ways to address
the skills shortage and build more inclusive workforces. More than
three million young people across Canada have already benefitted
from the program run by our 500+ community partners. In 2021,
the program relaunched three scholarship programs to support
Indigenous, Black and all youth. The scholarships will benefit over
500 youth with tailored resources developed with input from diverse
business, academic and non-profit leaders.
More broadly, RBC used our leadership voice and took action
in response to several global events in 2021. We spoke out and
supported truth and reconciliation efforts following the tragic
discoveries of unmarked graves at residential schools in Canada,
and condemned the tragic anti-Muslim hate crime in London,
Ontario. In the year’s ongoing fight against COVID-19, we provided
much needed relief funding through the WHO Foundation when
India experienced unparalleled challenges. And we made important
donations to humanitarian efforts and disaster relief following the
historic power outage in Texas, the wildfires and floods in British
Columbia, the Iqaluit water crisis, and the devastating impacts of
Hurricane Ida on Haiti. In times of need, RBC was there.
From a shareholder’s perspective, RBC’s overall performance
in 2021 demonstrated very strong results, premium shareholder
performance, and highlighted our superior ability to manage
through a complex and uncertain operating environment while
remaining focused on the long-term and investing for future growth.
Notably, we have been growing our investments in people and
technology throughout the pandemic.
Royal Bank of Canada: Annual Report 2021
During the year, we generated earnings of $16.1 billion and an
ROE of 18.6%. Our CET1 ratio stood at 13.7% at year-end, maintaining
a strong capital base. Earnings per share grew by 41%, reflecting
strong underlying business growth and an improving credit
environment, and we delivered $6.2 billion in dividends to our
common shareholders. In terms of Total Shareholder Return,
RBC outperformed our global peer group over the three- and
five-year periods.
Following the easing of regulatory restrictions on dividend
increases and share buybacks in late 2021, we were pleased to
increase our quarterly dividend by 11% and announce our
intention to repurchase up to 45 million outstanding common
shares, in line with our commitment to create long-term value for
our shareholders.
A complex macro backdrop defines our
operating environment
As the past several years have shown, and 2021 reinforced, the pace
of change and disruption in our world has accelerated significantly,
in part due to COVID-19, the effect of technology platforms, and
evolving consumer expectations. As a result, the context in
which we serve and advise clients continues to be defined by an
increasingly complex world and big forces of change over the near-
and longer-term.
For example, economies are experiencing a series of supply and
demand imbalances that are all happening simultaneously, causing
uncertainty and also inflation risk.
Impacting factors include: skills and labour shortages; housing
supply; energy supply and prices; changing client preferences; and,
unprecedented liquidity and wealth creation. These imbalances add
complexity to a smooth transition to a new normal economy.
These strengths enable differentiation in our markets and reflect
how we allocate capital in smart and balanced ways to manage the
short-term context and build future growth horizons.
Looking forward, we’re adapting RBC for long-term success and
executing on our vision for the future by focusing on four key
strategic priorities:
•
Creating a broader value equation for clients and extending
our lead in Canada
• Accelerating growth in the U.S. – our second home market
•
•
Investing in talent and enhancing our brand as an employer
of choice
Playing an active leadership role in accelerating the transition
to net-zero emissions
Delivering on these priorities while continuing to manage expenses
and improve our efficiency will support our transformation and
ongoing investments to future proof our bank and widen the gap
with the competition.
Creating a broader value equation for clients,
underpinned by significant digital investment,
and extending our lead in Canada
At RBC, we have a strong vision for the future. We know that to
remain successful requires us to operate in two worlds – our
traditional businesses and the pivot to a far more digital world.
Doing so takes more innovation, integration, and breaking down
business silos of what we do so we can redefine relationships and
create more value for our clients and deepen relationships. We do
this in three main ways:
• Digitally enabled, client-centric advice and insights
Notwithstanding these short- to medium-term challenges, I remain
cautiously optimistic that we’ll see global economic growth through
an ongoing recovery over the next 12–24 months based on trends
we’ve experienced in credit card spending, business investment in
term assets, and utilization of working capital.
As a leader in harnessing the power of artificial intelligence (AI)
solutions, for years we’ve been empowering clients, simplifying
and digitizing their interactions with us – saving them time, adding
convenience and delivering meaningful value and insights which
has fostered stronger relationships.
Confidence in RBC’s strategy
Our outlook for the future is bolstered by the combination of
several strengths RBC possesses. We have a strong balance sheet,
capital and liquidity positions, and our risk and cost discipline as
foundational pillars.
Next, the size, scale and reach of our diversified business model
and market-leading franchises have significant momentum and
focused growth strategies. Our businesses are supported by more
than $4 billion in annual technology spend, our great people and
investments in talent, backed by our world-class brand.
We have also been anticipating a more open market with disruptive
technology platforms for some time, and have been actively
preparing for these competitive forces by continuously evolving our
client value proposition and investing in talent and technology.
AI-based solutions like NOMI® deliver personalized services tailored
to individual banking needs and NOMI Find & Save®, for instance,
has helped clients save an average of more than $420 per month
in fiscal 2021. Since the launch of NOMI®, close to 2 billion insights
have been viewed by clients through RBC’s mobile app.
MyAdvisor® is our online financial planning platform that enables
our clients to receive insights and counsel in real time. Since its
launch in 2017, more than 2.8 million clients have activated their
personalized investment plans.
For our institutional clients, Capital Markets’ AI-based electronic
platform, Aiden™, executes trades based on live market data, and
dynamically adjusts to new information and learnings from each of
its previous actions. Since its inception in March 2018, there have
been more than four billion shares and US$158 billion of notional
volumes traded through Aiden™.
9
Royal Bank of Canada: Annual Report 2021
MESSAGE FROM DAVE McKAY
• Delivering more value
Accelerating growth in the U.S. – our second home market
We are continually focused on providing clients with more value
for money, and rewarding them for the depth and breadth of their
relationship with us, and extending unique offers through the power
of our partnerships.
Through RBC Vantage™, our enhanced everyday banking value
proposition in Canada, clients can use their personal debit cards to
earn RBC Rewards® points and have more ways to save on monthly
account fees.
RBC Ampli™, our consumer cash-back app, allows us to increasingly
partner with merchants across Canada to provide even more value
to our retail and business clients. We have expanded our slate of
partners who continue to be a differentiator for RBC, adding 43 new
merchants in 2021, including Lyft, McDonald’s, Lowe’s, and other
leading retailers.
• Moving Beyond Banking
Another differentiated element of our strategy is building
ecosystems that go beyond banking to enable RBC to participate in
a broader part of the client journey and value chain – reimagining
our business and the role we play.
In 2021, we continued the momentum in our RBC
Ventures business, with 14 Ventures in market,
six moved to national scale, and several others in
validation mode or development. These Ventures
have attracted over four million registered users,
or new connections with RBC that go beyond
banking in three core ecosystems – business,
home and new to banking.
One example is in the increasingly competitive Canadian
commercial and small business segment. Several of these
capabilities are made in RBC proprietary solutions. Ownr®, an
RBC Venture, has helped over 55,000 entrepreneurs launch their
businesses using its online platform, including over 26,000 this
year, while driving a significant proportion of our small business
acquisition. With RBC Insight Edge™, our business clients can
leverage aggregated data to gain relevant insights into their
markets to enable them to attract more clients.
We have also made investments in building a digital platform with
enriched payments and cash management capabilities for our
business clients. RBC PayEdge™ helps our clients save time and
money with a secure solution for automating the accounts payable
and reconciliation process.
This expanded ecosystem approach and continuum of offerings
allows us to support our clients and attract new ones with
differentiated advice and solutions, and creates competitive
advantages for RBC that will help enable us to extend our lead in
Canada and grow at a premium to peers.
RBC has a unique and differentiated strategy in the U.S. – to be the
preferred partner to corporate, institutional and high net worth
clients and their businesses through our core client franchises –
City National Bank, U.S. Wealth Management and Capital Markets.
We’ve been consistently executing on our client-centric approach,
leveraging the strength of RBC’s balance sheet to support clients
and making ongoing investments in talent and technology to
support future growth.
For example, at City National, we’ve added US$14 billion in loans
over the last two years, including over US$5 billion in mortgages. In
U.S. Wealth Management, we’re the sixth largest advisory firm by
AUA and we added over US$130 billion of AUA, growing client assets
30% year-over-year and surpassing US$550 billion for the first time.
And, in Capital Markets, we’re the 11th largest global investment
bank by fees and continue to deepen relationships with clients and
earn high-quality mandates.
Throughout, we’ve consistently added talent to our platform,
including ultra high net worth private banking teams in high growth
regions, including on the U.S. east coast and in our core California
markets, experienced financial advisors, and investment bankers in
key verticals, such as technology, healthcare and aerospace.
Looking forward, we believe we are well-positioned to accelerate
growth by deepening relationships in our core franchises to deliver
our full expertise to all our clients, including in key sectors like
entertainment. We will also focus on driving greater cross-sell,
such as through mortgages and banking into wealth management,
and expanding other growth vectors such as our recently launched
mid-market corporate banking strategy which has already booked
US$1.8 billion in new commitments in the first year. Finally, as we
pursue our growth ambitions in the U.S., RBC will also consider
highly targeted acquisitions to augment our strong organic growth
strategies or enhance our existing capabilities, provided there is a
near- and long-term view to shareholder value creation.
Investing in talent and enhancing our brand as an
employer of choice
Our focus on attracting and retaining the people and capabilities
needed to propel us forward in the world of work is underpinned by
our Purpose-led values and unique culture.
Key to our success is continuing to foster a diverse and inclusive
culture that celebrates unique perspectives and embraces the
power of diversity to drive innovation and growth. We have
established ourselves as a change leader on diversity and are
exceeding the goals we set for hiring BIPOC youth and investing
in Black entrepreneurship. We’ve made significant progress
on BIPOC executive appointments, which represented 43% of
appointments in 2021, up from 23% in 2020, surpassing our goal
of 30% for the year. And we’ve focused on advancing women
in leadership, with women representing 41% of executive
appointments and 54% of promotions.
10
Royal Bank of Canada: Annual Report 2021
Accelerating growth in the U.S.
Looking forward, we’re well
positioned to accelerate growth
by deepening relationships in our
core franchises to deliver our full
expertise to all our clients.
Our success as a leading digitally enabled relationship bank means
building and hiring skills, such as data, design, app development
and product ownership, enabling RBC to create seamless and
exceptional client experiences. Through the pandemic, it has
become even more important to attract and retain these skills,
and our efforts resulted in over 600 digital hires in 2021, with an
offer acceptance rate of 95%. We also expanded our existing Tech
Hubs and announced plans to welcome 300 tech employees over
the next three years to a new Calgary Innovation Hub.
As we transition into the future world of work, we’re increasing
our investments in talent, including leadership growth and
development, and enhancing the overall employee experience. This
includes challenging assumptions about how and where work is
done. Teams across RBC are establishing work arrangements that
best match their needs and strategies, with an objective to hold
onto the best of everything we’ve learned over the past 18 months,
while recapturing what we’ve missed from our pre-pandemic world.
We’re also transforming the way we deliver learning experiences
and development programs by expanding virtual offerings and
micro-learning resources, along with creating more meaningful
connections through coaching and mentoring opportunities.
Underpinning our commitment to supporting our people is a greater
focus on mental health and well-being to enable employees to
achieve their goals and thrive in an increasingly complex world.
Finally, as a strong believer in the power of work-integrated
learning, RBC provides meaningful, paid work experiences to
students from high school to post-graduate programs. More than
2,000 students joined us in 2021, and we remain committed to
continuing to grow the next generation of talent.
Playing an active leadership role in accelerating
the transition to net-zero emissions
Climate is a complex issue and one of the most pressing of our age.
It presents risk but also opportunity. Global plans to drastically
reduce greenhouse gas emissions down to net-zero by 2050 requires
the largest change to our economies in our lifetime, change that
RBC is fully committed to supporting. RBC believes we need to
make this transition in an orderly fashion so we create prosperity
for society rather than destroy industries and sectors that our
economies and social fabric rely upon.
RBC will engage through our people and capabilities in every
sector and community to address climate change in four key ways:
eliminate our own emissions; support our clients with transition
financing; monitor and measure our clients’ progress; and, be
a leader within Canada to advance climate solutions through
thought leadership and policy for change and active partnerships
across public and private sectors, technology experts and
Indigenous leadership.
We have committed $500 billion in sustainable financing by 2025
and are well on our way to meeting this commitment. Through a
wide range of products, services and advice, we will continue to
help our personal, commercial and institutional clients across all
sectors and regions where we operate, establish and accelerate
their climate plans, achieve their goals and adapt to net-zero.
How we collectively make the transition is just as important as
the destination itself. Getting this transition right will not be easy,
but we must move forward together with a sense of urgency and
thoughtful action.
RBC is well-positioned to build on our Purpose
and performance
RBC enters 2022 with market-leading client franchises in our core
businesses and key markets. A world-renowned brand, an engaged
workforce, and a culture recognized for elevating the performance
of our people. And our financial discipline, risk management culture
and robust capital position provides the foundation to deliver
sustainable growth for the long-term.
We will continue to align our Purpose with performance to grow
RBC in a more inclusive, sustainable world, and create value for
all of our stakeholders – clients, employees, communities, and
shareholders.
As we move forward, we will continue to leverage the size and
strength of our balance sheet to support our clients. And we believe
that 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. We will
also continue to prioritize investments to accelerate growth, and
sustain leadership in areas of strategic focus. By doing so, we can
find new and engaging ways to fulfill our Purpose.
Our continued momentum is the result of our tremendous
employees, and the oversight and counsel of our Board. I am so
thankful for everything they do.
David McKay
President and Chief Executive Officer
11
Royal Bank of Canada: Annual Report 2021
MESSAGE FROM KATIE TAYLOR
In a year largely defined by the ongoing uncertainty of the global
pandemic, RBC’s performance revealed its core strengths and
competitive advantages.
A mix of industry-leading franchises, diversified across business
segments and geographies, generated earnings of $16.1 billion
for fiscal 2021. The bank’s financial discipline, risk management
culture as well as robust capital position provided a solid
foundation for growth today and into the future. RBC’s talented
team of more than 87,000 people around the world — inspired
by Purpose, guided by values and empowered by technology —
created the differentiated client experiences that the bank is
known for. Their efforts also helped to fulfill the promises RBC
makes in the communities in which it serves.
Providing this kind of certainty to all of our stakeholders, especially
in a time of great change and disruption, reinforced the trust and
confidence our stakeholders have in the bank.
Indeed, over the past year RBC employees could count on the
bank’s unwavering commitment to prioritize their safety, health
and well-being, and to sustain a work environment that empowers
people to be their best. Millions of clients also relied on RBC to
place their wants and needs at the centre of everything we do, and
to find new ways to create value for them. Indeed, as Dave McKay
points out in his letter, in a year of uncertain and rapidly evolving
circumstances, client activity levels were strong and demand high
across business lines, reflecting the trust they placed in RBC in 2021.
And, at the same time thousands of communities looked to RBC to
help create a more inclusive, sustainable and prosperous future.
We are especially proud of the bank’s conscious choice to lead
on issues that matter most to those we serve. In particular,
Dave McKay has been a catalyst for important policy discussions
on re-imagining the post-pandemic economy, a vocal advocate for
small- and medium-sized businesses, and a strong promoter of an
orderly transition to a net-zero world.
In combination, these commitments help explain why the bank’s
engaged workforce continued to earn high satisfaction levels with
clients, deliver market-leading results in business volume and
market share growth, and build momentum in areas of strategic
importance, including in the United States. These efforts have also
driven superior shareholder returns. Indeed, over three- and five-
year periods, the bank’s Total Shareholder Return has outperformed
its global peers.
For the Board, the vast majority of our work was still done remotely
in 2021, as we stayed agile to support management in the first
full year of the pandemic. But importantly, we never lost sight of
our agenda and core responsibilities to ensure RBC has the right
strategy and execution, talent and risk management to deliver value
in the near- and longer-term.
We engaged with management on all businesses and, in some
cases, subset of businesses to ensure plans were carefully
developed. The bank’s approach to its climate action plan was an
important area of focus in 2021. This included evaluating the bank’s
strategy and ensuring its clarity and viability. It also included an
assessment of the measurement and milestones necessary to
gauge meaningful progress in the years ahead. In aligning the
net-zero ambitions of the bank with the needs of society, we are
collectively in a better position to serve the broader goal of an
orderly — and inclusive — transition to a cleaner economy. To this
end, the central tenets of our plan are designed to support clients in
their own net-zero journey, be publicly accountable for our actions,
including financed emissions, and contribute ideas on how we can
move forward together in a coordinated way.
12
Kathleen Taylor
Chair of the Board
The Board continued its work on succession planning for senior
management. Directors regularly engaged with senior managers to
maintain our connection with high-potential leaders, either through
special Board presentations or dedicated sessions. Last year, we
also focused on the orderly transition of the bank’s new Chief
Financial Officer, the assumption of responsibilities for RBC Ventures
by the Group Head, Personal & Commercial Banking, as well as the
appointment of a Chief Legal Officer, reporting to our CEO. These
changes build strength and capacity in our senior executive team
while reinforcing the bank’s ongoing efforts to enhance its diversity.
On matters related to diversity and inclusion, the symmetry between
management and the Board is paramount, as it helps create a holistic
approach to advance the bank’s goals. In 2021, the appointment
of Roberta Jamieson to our Board underscores the inherent value
in bringing more voices from different backgrounds to our table.
Heading into 2022, I am proud to say 46% of Board members are
women, and 23% are Black, Indigenous and People of Colour.
Promoting strong risk conduct and embedding a risk management
culture throughout RBC are also key priorities for the Board. In
2021, the Board carefully assessed whether management’s plans
appropriately balance strategic opportunities with risk discipline
and we continued to provide oversight on key regulatory matters
where RBC operates. The overall strength of our portfolios speak to
the soundness of our risk strategy and execution.
An array of awards and accolades highlight the success of the bank’s
efforts last year, some of which are cited in the preceding pages. I
am most proud of what these recognitions say about how the bank’s
highly engaged teams make meaning of RBC’s Purpose every day.
Our gratitude goes out to each and every employee, especially
those on the frontlines, who never lost focus on serving others,
even as the global pandemic continued to pose risks to them and
their communities. Indeed, the collective actions reveal the kind of
organization RBC is and aspires to be – ever-present, empathic and
responsive to help our clients thrive and communities prosper. I join
Dave in saying the collective response of RBC employees was my
greatest point of pride in 2021.
I also want to express my gratitude to each RBC Director for their
invaluable insight and counsel, and acknowledge the important
contributions of Alice Laberge, Michael McCain and Heather
Munroe-Blum, who retired from our Board in 2021.
On behalf of the RBC Board, I also want to convey our confidence
in, and support for, Dave McKay and his executive team. In 2021,
their leadership reinforced the considerable strengths RBC
possesses to create value for its clients, employees, communities,
and shareholders as the bank brings its Purpose to life in everything
it does.
Kathleen Taylor
Chair of the Board
Royal Bank of Canada: Annual Report 2021 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, 2021, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2021 Annual Consolidated
Financial Statements and related notes and is dated November 30, 2021. All amounts are in Canadian dollars, unless otherwise specified, and are based
on financial statements presented 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 2021 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
13
Overview and outlook
14
Selected financial and other highlights 14
15
About Royal Bank of Canada
Vision and strategic goals
15
Economic, market and regulatory
review and outlook
Defining and measuring success
through total shareholder returns
Impact of COVID-19 pandemic
15
16
17
Financial performance
20
20
Overview
Impact of foreign currency translation 20
21
Total revenue
Provision for credit losses
22
Insurance policyholder benefits, claims
and acquisition expense
Non-interest expense
Income and other taxes
Client assets
Business segment results
Results by business segment
22
22
23
23
24
24
How we measure and report our
Insurance risk
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
25
26
27
32
38
41
43
47
47
47
48
49
49
50
52
52
55
56
60
60
72
78
91
91
91
93
Operational/regulatory compliance
risk drivers
Operational risk
Regulatory compliance risk
Strategic risk drivers
93
Strategic risk
93
Reputation risk
93
Legal and regulatory environment risk 94
Competitive risk
95
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
Glossary
Enhanced Disclosure Task Force
recommendations index
96
96
96
100
109
109
112
113
113
121
123
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 2021 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, climate related 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, market 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, competitive, legal and regulatory environment, and
systemic risks and other risks discussed in the risk sections and Impact of COVID-19 pandemic section of this 2021 Annual Report including business and
economic conditions, information technology and cyber risks, environmental and social risk (including climate change), digital disruption and innovation,
Canadian housing and household indebtedness, geopolitical uncertainty, privacy, data and third-party related risks, regulatory changes, 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, 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, financial market conditions and our business operations, and financial results,
condition and objectives. In addition, as we work to advance our climate goals, external factors outside of RBC’s reasonable control may act as constraints
on their achievement, including varying decarbonization efforts across economies, the need for thoughtful climate policies around the world, more and
better data, reasonably supported methodologies, technological advancements, the evolution of consumer behaviour, the challenges of balancing interim
emissions goals with an orderly and just transition, and other significant considerations such as legal and regulatory obligations.
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 2021 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 Impact of COVID-19 pandemic section of this 2021 Annual
Report.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
13
Overview and outlook
Selected financial and other highlights
(Millions of Canadian dollars, except per share, number of and percentage amounts)
Total revenue
Provision for credit losses (PCL)
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
Non-interest expense
Income before income taxes
Net income
Segments – net income
Personal & Commercial Banking
Wealth Management (1)
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support (1)
Net income
Selected information
Earnings per share (EPS) – basic
– diluted
Return on common equity (ROE) (2)
Average common equity (2)
Net interest margin (NIM) – on average earning assets, net (3)
PCL on loans as a % of average net loans and acceptances
PCL on performing loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances
Gross impaired loans (GIL) as a % of loans and acceptances
Liquidity coverage ratio (LCR) (4)
Net stable funding ratio (NSFR) (5)
$
$
$
$
$
$
Capital ratios and Leverage ratio (6)
Common Equity Tier 1 (CET1) ratio
Tier 1 capital ratio
Total capital ratio
Leverage ratio
Selected balance sheet and other information (7)
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) (3)
Assets under administration (AUA) (3), (8)
Common share information
Shares outstanding (000s) – average basic
– average diluted
– end of period
Dividends declared per common share
Dividend yield (3)
Dividend payout ratio (3)
Common share price (RY on TSX) (9)
Market capitalization (TSX) (9)
Business information (number of)
Employees (full-time equivalent) (FTE)
Bank branches
Automated teller machines (ATMs)
Period average US$ equivalent of C$1.00 (10)
Period-end US$ equivalent of C$1.00
2021
49,693 $
(753)
3,891
25,924
20,631
2020
47,181 $
4,351
3,683
24,758
14,389
Table 1
2021 vs. 2020
Increase (decrease)
2,512
(5,104)
208
1,166
6,242
5.3%
(117.3)%
5.6%
4.7%
43.4%
16,050 $
11,437 $
4,613
40.3%
7,847 $
2,626
889
440
4,187
61
5,087 $
2,154
831
536
2,776
53
16,050 $
11,437 $
11.08 $
11.06
18.6%
84,850 $
1.48%
(0.10)%
(0.20)%
0.10%
0.31%
123%
116%
13.7%
14.9%
16.7%
4.9%
7.84 $
7.82
14.2%
78,800 $
1.55%
0.63%
0.39%
0.24%
0.47%
145%
n.a.
12.5%
13.5%
15.5%
4.8%
2,760
472
58
(96)
1,411
8
4,613
3.24
3.24
n.m.
6,050
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.a.
n.m.
n.m.
n.m.
n.m.
$ 1,706,323 $ 1,624,548 $
284,724
717,575
95,541
1,100,831
91,983
552,541
1,008,700
6,347,300
275,814
660,992
113,488
1,011,885
80,719
546,242
843,600
5,891,200
81,775
8,910
56,583
(17,947)
88,946
11,264
6,299
165,100
456,100
54.3%
21.9%
7.0%
(17.9)%
50.8%
n.m.
40.3%
41.3%
41.4%
440 bps
7.7%
(7) bps
(73) bps
(59) bps
(14) bps
(16) bps
(2200) bps
n.a.
120 bps
140 bps
120 bps
10 bps
5.0%
3.2%
8.6%
(15.8)%
8.8%
14.0%
1.2%
19.6%
7.7%
1,424,343
1,426,735
1,424,525
1,423,915
1,428,770
1,422,473
4.32 $
3.8%
39%
128.82 $
4.29 $
4.7%
55%
93.16 $
183,507
132,518
428
(2,035)
2,052
0.03
n.m.
n.m.
35.66
50,989
0.0%
(0.1)%
0.1%
0.7%
(90) bps
(1600) bps
38.3%
38.5%
85,301
1,295
4,378
83,842
1,329
4,557
0.796 $
0.808 $
0.744 $
0.751 $
1,459
(34)
(179)
0.052
0.057
1.7%
(2.6)%
(3.9)%
7.0%
7.5%
$
$
$
$
(1)
(2)
(3)
(4)
Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth
Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
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.
See Glossary for composition of this measure.
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. For further details, refer to the Liquidity and funding risk section.
(5) Beginning in Q1 2021, OSFI requires Canadian Domestic Systemically Important Banks (D-SIBs) to disclose the NSFR on a prospective basis. The NSFR is calculated in
accordance with OSFI’s Liquidity Adequacy Requirements (LAR) guideline. For further details, refer to the Liquidity and funding risk section.
(6) 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.
Represents year-end spot balances.
AUA includes $15 billion and $3 billion (2020 – $16 billion and $7 billion) of securitized residential mortgages and credit card loans, respectively.
(7)
(8)
(9) Based on TSX closing market price at period-end.
(10) Average amounts are calculated using month-end spot rates for the period.
n.a. not applicable
n.m. not meaningful
14
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 87,000+ 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 27 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 deep and meaningful relationships with our clients
is underscored by the breadth of our product suite, 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 advice-based
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, reinsurance advice and
solutions, as well as business insurance solutions, to individual, business and group clients.
Investor & Treasury
Services
Provides asset servicing, custody, payments and treasury services to financial and other
investors worldwide. Trusted with over $4 trillion in assets under administration, and with offices
in 16 countries in North America, Europe, the U.K., and Asia-Pacific, our focus is on safeguarding
client assets and simplifying our clients’ operations in support of their growth.
Capital Markets
Provides expertise in advisory & origination, sales & trading, and lending & financing to
corporations, institutional investors, asset managers, private equity firms and governments
globally. 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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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 2021 against our business strategies and strategic goals, refer to the Business segment results section.
Economic, market and regulatory review and outlook – data as at November 30, 2021
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
While the global economic recovery has continued, momentum has waned amid ongoing uncertainty regarding the extent and
duration of the impacts of the COVID-19 pandemic. Reopening of economies and the significant fiscal and monetary policy
stimulus put in place to support the recovery are contributing to stronger GDP growth and improved labour market conditions
globally, though this remains uneven. Although increasing vaccination rates are expected to support a continued economic
recovery, exceptional government support programs have begun to wind down, and uncertainty remains regarding the emergence
and progression of new variants of COVID-19 and the potential impact of vaccine hesitancy. Supply chain disruptions, rising
business input costs, and labour shortages are also limiting the pace of further improvement, particularly in goods-producing
industries, and adding to rising inflation concerns.
Canada
Canadian GDP is expected to increase by 5.1% in calendar 2021 following a 5.2% contraction in calendar 2020. Activity in high-
contact service sectors like restaurants and accommodations improved over the summer as provincial economies reopened,
although travel-related industries remain depressed relative to pre-pandemic levels. Output on the goods-producing side of the
economy is being constrained by ongoing supply chain disruptions. Consumer price growth has accelerated as the economy
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
15
reopened, and higher business input costs driven by rising demand and supply chain disruptions are threatening further
increases at above pre-pandemic rates through calendar 2022. Although the unemployment rate remained above pre-pandemic
levels at 6.7% in October, labour markets have improved substantially since the onset of the COVID-19 pandemic and are expected
to continue to improve into 2022. While government support programs have begun to wind down, household purchasing power
continues to be supported by large amounts of savings. An improved economic growth backdrop and above-target inflation rates
are expected to prompt the Bank of Canada (BoC) to begin raising interest rates in calendar 2022. GDP is expected to increase a
further 4.3% in calendar 2022. Despite substantial improvement to date, the economy has yet to fully recover from the impacts of
the pandemic, particularly in the high-contact and travel service sectors.
U.S.
U.S. GDP is expected to increase 5.5% in calendar 2021 after a 3.4% contraction in calendar 2020. The pace of the economic
recovery slowed over the summer amid ongoing supply chain disruptions and the continued spread of COVID-19 in some regions.
While employment remains well below pre-pandemic levels, labour markets have continued to improve with the unemployment
rate declining to 4.6% in October, down from 6.9% a year earlier. Consumer spending on goods has declined from elevated levels
in the spring of 2021 but spending on services has increased as spending rotates away from merchandise and back to leisure and
hospitality services that have been in many cases unavailable through the pandemic. Households have accumulated substantial
savings, in part due to exceptional government income transfers, to support a further recovery in spending as the virus threat
continues to ease. Consumer prices have increased sharply as the economy has re-opened. Higher business input costs and
expected further growth in household demand are increasing the risk that inflation growth will persist at rates above pre-
pandemic levels for longer than expected. The Federal Reserve (Fed) has committed to maintaining extraordinary policy support
until the economic slack is fully absorbed and the labour market has recovered. The Fed is expected to begin the process of
raising interest rates in calendar 2022.
Europe
Euro area GDP is expected to rise by 5.2% in calendar 2021 following a 6.5% drop in calendar 2020, amid lifting of most
containment measures across member states. Similarly, U.K. GDP is projected to rise by 7.1% in calendar 2021 after a larger 9.7%
decline in 2020. Labour market conditions also improved throughout the year, both in the U.K. and Euro area. While labour
shortages and supply chain challenges continue to curtail businesses’ abilities to increase production to meet rising demand,
leading to inflation concerns, a further economic rebound in both the Euro area and the U.K. is expected in calendar 2022, though
likely at a slower pace relative to 2021 in light of these challenges. In the U.K., the Bank of England is expected to begin raising
interest rates before the end of calendar 2021, while the European Central Bank (ECB) is expected to hold policy rates through
calendar 2022.
Financial markets
Government bond yields remain low but have risen in the latter half of calendar 2021 as the global economic recovery has
continued and inflation rates have risen. Equity markets have broadly continued to improve, supported by the positive economic
outlook, and prices for some raw materials, including crude oil, have increased to well above pre-pandemic levels reflecting
limited supply and rising demand as the virus threat eases globally.
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 2021 Annual Report. A summary of the additional regulatory changes instituted by governments
globally and by OSFI in response to the COVID-19 pandemic are included in the Impact of COVID-19 pandemic and Capital
management sections of this 2021 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 2021 Annual Report. For further details on our framework and activities to manage risks,
refer to the Impact of COVID-19 pandemic, risk and Capital management sections of this 2021 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.
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Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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)
10%
16.5%
12.8%
47%
Table 2
5-year (2)
10%
16.8%
12.1%
46%
(1)
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.
(2) Diluted EPS growth is calculated using a Compound Annual Growth Rate (CAGR). ROE, CET1 and dividend payout ratio are calculated using an average.
(3)
For further details on the CET1 ratio, refer to the Capital management section.
Our 3-year and 5-year medium-term financial performance objectives will remain unchanged in fiscal 2022.
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
Table 3
Royal Bank of Canada
Peer group average (excluding RBC)
3-year TSR (1)
5-year TSR (1)
16%
Top half
14%
13%
Top half
12%
(1)
The 3- and 5-year annualized TSR are calculated based on our common share price appreciation as per the TSX closing market price plus reinvested dividends for the
period October 31, 2018 to October 31, 2021 and October 31, 2016 to October 31, 2021.
Common share and dividend information
Table 4
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
2021
$ 128.82
4.32
38.3%
43.8%
$
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%
Impact of COVID-19 pandemic
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, clients and communities, with resultant impacts on our operations, financial results and present and future risks
to our business.
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 widespread. These measures have had and
continue to have extensive implications for the global economy, including the pace and magnitude of recovery, as well as on
related market functions, unemployment rates, inflation, fiscal and monetary policies and supply chains. As the COVID-19
pandemic evolves, including through the emergence and progression of new variants of COVID-19 in different regions,
governments continue to adjust their response and approach to the pandemic. While rising vaccination rates have supported a
substantial or full easing of containment measures in some regions, progress towards re-opening has been accompanied by
resurgences in the spread of COVID-19 and the re-imposition of restrictions in other regions. Consequently, the extent of
containment measures and progress towards reopening continues to vary and fluctuate across regions. Despite positive
developments, uncertainty remains regarding new variants of COVID-19, the potential impact of vaccine hesitancy, and global
vaccine supply and availability, including uneven vaccine access across regions. All of these factors contribute to the uncertainty
regarding the timing of a full recovery. Moreover, the COVID-19 pandemic, the containment measures and the phased reopening
approach taken in many 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
provided and continue 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. While
some programs and temporary measures have come to an end, others remain in place or have continued to be developed in an
effort to support the overall economy. We expect that governments, regulatory bodies, central banks and private organizations
will continue to assess the need for these programs and measures.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
17
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 2021 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 impacted and may continue to impact our financial results. Results across all of our business segments
have been and continue to be impacted to varying degrees by downstream implications from changes in the macroeconomic
environment, including lower interest rates, changes in consumer spending patterns, market volatility, fluctuations in credit
spreads, as well as other impacts including changes in credit risk, 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 fiscal 2020 and 2021.
We are closely monitoring the potential effects and impacts of the COVID-19 pandemic. 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.
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, has affected and may continue to adversely affect our business and our clients to varying
degrees, 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 rising vaccination rates have supported a substantial or full easing of containment measures in a
number of regions, the extent of containment measures and progress towards reopening continues to vary and fluctuate across
different regions. As a result, containment measures continue to impact the macroeconomic environment and global economic
activity, including the pace and magnitude of recovery. As the impacts of the COVID-19 pandemic continue to evolve, the
prolonged effects of the disruption continue to have an impact on our business strategies and initiatives, and could adversely
affect our financial results.
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. We expect that these
governments, monetary authorities, regulators, and institutions will continue to assess the need for these programs and measures.
Additionally, we implemented various temporary relief programs beyond the available government programs to further support
our clients in financial need. Although the temporary relief programs have largely concluded, 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. For more
information on these programs, refer to the Relief programs, Liquidity and funding risk and Capital management sections.
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 positive developments,
uncertainty remains regarding new variants of COVID-19, the potential impact of vaccine hesitancy, and global vaccine supply
and availability, including uneven vaccine access.
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 and could continue to adversely impact our business operations and the quality and continuity of service to clients. We
have taken proactive measures through our business continuity plans to adapt to the ongoing work from home arrangements
and carefully plan the return to premise for some of our employees, and are maintaining our focus on the well-being of our
employees and our ability to serve clients.
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, possibly arising from support programs coming to an end, on some of our clients. This, in conjunction
with operational constraints due to the impacts of social distancing, could lead to increased pressure on the financial
performance of some of our clients, which, to some extent, creates uncertainty around potential future expected credit losses for
us.
If the COVID-19 pandemic is further 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 could potentially result in volatility
and declines in financial markets. Moreover, it remains uncertain how the macroeconomic environment, and societal and
business norms will be impacted following the 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.
We are closely monitoring the potential continued effects and impacts of the COVID-19 pandemic, which continues to be an
evolving situation.
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 2021 Annual Report.
Relief programs
In response to the COVID-19 pandemic, several government programs have been developed to provide financial aid to individuals
and businesses, which include wage replacement for individuals, wage subsidies and rent relief for businesses, and lending
18
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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.
RBC relief programs
During the second quarter of 2020, we announced the RBC Client Relief program which aimed to provide relief for clients
impacted by the COVID-19 pandemic. 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. Payment deferral
periods for clients that participated in these programs largely concluded by the end of the second quarter of 2021, however 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.
Government programs in response to the COVID-19 pandemic
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 were 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 were funded by the Government of Canada, with the Canadian banks retaining no credit risk. The application window
for the CEBA program closed on June 30, 2021.
Export Development Canada (EDC) Business Credit Availability Program 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. On June 2, 2021, the EDC announced that the application
deadline for this program has been extended to December 31, 2021.
Business Development Canada (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. On June 2, 2021, the BDC announced that the application deadline for
this program has been extended to December 31, 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. On June 2, 2021, the BDC announced that the application deadline for this
program has been extended to December 31, 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. On June 2, 2021, the EDC announced that
the application deadline for this program has been extended to December 31, 2021.
On January 26, 2021, the Canadian Federal government announced the BDC Highly Affected Sectors Credit Availability
Program (HASCAP). Under this program, Canadian banks are able to provide low-interest loans ranging from $25,000 to
$1 million to businesses that have been heavily impacted by the COVID-19 pandemic to cover operational cash flow needs.
Loans funded under this program are fully guaranteed by the BDC. The application deadline for this program has been
extended from June 30, 2021 to December 31, 2021.
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As at October 31, 2021, we have facilitated the administration of relief to more than 203,100 clients (July 31, 2021 – 200,900) who
have enrolled in the Canadian federal government programs, with corresponding exposures of $12 billion (July 31, 2021 – $12
billion), of which $11 billion (July 31, 2021 – $11 billion) was funded. For further details, refer to Note 6 of our 2021 Annual
Consolidated Financial Statements.
U.S. Government
In March 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.
In January 2021, the U.S. Small Business Administration (SBA), in consultation with the U.S. Treasury Department, pursuant to
the “Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act” (Economic Aid Act) relaunched the PPP, extending it
through March 31, 2021, and announced a number of updates to the PPP for current and future loans. The expanded program
includes new categories of eligible expenses, including operating expenditures, property damage costs, supplier costs and
worker protection expenditures, in addition to payroll costs, utilities and mortgage interest. Borrowers are also provided with
additional flexibility, including the ability to set their covered period for forgivable expenditures to be any length between 8 and
24 weeks. Certain borrowers with existing PPP loans may qualify for a second draw loan and may be eligible for a supplemental
increase to their first draw. On March 30, 2021, the “PPP Extension Act” was signed into law, extending the PPP for an additional
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
19
two months to May 31, 2021, and providing an additional 30-day period for the SBA to process pending applications. The
application window for the PPP closed on May 31, 2021.
As at October 31, 2021, loans outstanding under the PPP were $2 billion (US$2 billion) (July 31, 2021 – $3 billion, (US$3 billion)) to
10,441 clients (July 31, 2021 – 12,220 clients).
Programs in support of liquidity and funding
Commencing in the second quarter of 2020, governments and federal agencies expanded the eligibility criteria to existing funding
programs and announced new programs to provide further liquidity to banks as well as providing additional sources to access
funding to support clients during this time of uncertainty. The majority of these measures or programs have been discontinued or
are winding down and we expect that governments and federal agencies will continue to assess the need for these programs as
the global economy continues to recover from the effects of the COVID-19 pandemic.
For further details on how we are managing our liquidity and funding profile, refer to the Liquidity and funding risk section of this
2021 Annual Report.
Financial performance
Overview
2021 vs. 2020
Net income of $16,050 million increased $4,613 million or 40% from last year. Diluted EPS of $11.06 was up $3.24 or 41% and ROE of
18.6% was up 440 bps. Our Common Equity Tier 1 (CET1) ratio was 13.7%, up 120 bps from last year.
Our results reflected higher earnings in Personal & Commercial Banking, Capital Markets, Wealth Management, and
Insurance, partially offset by lower earnings in Investor & Treasury Services. The prior year reflected elevated provisions on
performing loans due to the impact of the COVID-19 pandemic, which unfavourably impacted results in Personal & Commercial
Banking, Capital Markets and Wealth Management, whereas current year results reflect releases of provisions on performing
loans primarily driven by improvements in our macroeconomic and credit quality outlook.
For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital
management sections, respectively.
Impact of foreign currency translation
The following table reflects the estimated impact of foreign currency translation on key income statement items:
(Millions of Canadian dollars, except per share amounts)
Increase (decrease):
Total revenue
PCL
Non-interest expense
Income taxes
Net income
Impact on EPS
Basic
Diluted
Table 5
2021 vs. 2020
$
$
(977)
28
(707)
(50)
(248)
(0.17)
(0.17)
The relevant average exchange rates that impact our business are shown in the following table:
(Average foreign currency equivalent of C$1.00) (1)
U.S. dollar
British pound
Euro
(1)
Average amounts are calculated using month-end spot rates for the period.
Table 6
2020
0.744
0.579
0.658
2021
0.796
0.579
0.668
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Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Total revenue
(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
$
$
$
$
$
$
2021
28,145
8,143
20,002
1.48%
5,600
1,183
7,132
4,251
1,538
1,858
2,692
1,066
1,078
1,530
145
130
1,488
Table 7
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
$
$
29,691
49,693
$
$
26,346
47,181
2021 vs. 2020
Total revenue increased $2,512 million or 5% from last year, largely due to higher investment management and custodial fees,
other revenue, mutual fund revenue, and underwriting and other advisory fees. Higher insurance premiums, investment and fee
income (Insurance revenue) and credit fees also contributed to the increase. These factors were partially offset by a decrease in
net interest income. The impact of foreign exchange translation decreased total revenue by $977 million.
Net interest income decreased $833 million or 4%, largely reflecting lower trading revenue in Capital Markets and the impact
of foreign exchange translation. In Canadian Banking and U.S. Wealth Management (including City National), volume growth
more than offset the impact of lower spreads.
NIM was down 7 bps compared to last year, largely reflecting lower spreads in U.S. Wealth Management (including City
National) driven by the impact of lower interest rates and changes in average earning assets mix, and lower spreads in Canadian
Banking primarily due to the impact of lower interest rates and changes in product mix.
Insurance revenue increased $239 million or 4%, mainly reflecting higher group annuity sales as well as business growth,
both of which are largely offset in PBCAE. These factors were partially offset by the change in fair value of investments backing
policyholder liabilities and the impact of realized investment gains in the prior year.
Investment management and custodial fees increased $1,031 million or 17%, primarily driven by higher average fee-based
client assets reflecting market appreciation and net sales, partially offset by the impact of foreign exchange translation.
Mutual fund revenue increased $539 million or 15%, primarily due to higher average fee-based client assets reflecting market
appreciation and net sales in Wealth Management, and higher average mutual fund balances driving higher distribution fees in
Canadian Banking.
Underwriting and other advisory fees increased $373 million or 16%, mainly due to higher M&A activity and higher equity
origination, across most regions.
Credit fees increased $209 million or 16%, primarily driven by higher loan syndication activity across most regions.
Other revenue increased $624 million or 72%, largely attributable to changes in the fair value of the hedges related to our
U.S. share-based compensation plans, which was largely offset in Non-interest expense, and the impact of economic hedges.
Additional trading information
(Millions of Canadian dollars)
Net interest income (1)
Non-interest income
Total trading revenue
Total trading revenue by product
Interest rate and credit
Equities
Foreign exchange and commodities
Total trading revenue
Table 8
2020
3,459
1,239
4,698
2,838
1,234
626
4,698
2021
2,623
1,183
3,806
1,948
1,285
573
$
$
$
3,806
$
$
$
$
$
(1)
Reflects net interest income arising from trading-related positions, including assets and liabilities that are classified or
designated at fair value through profit or loss (FVTPL).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
21
2021 vs. 2020
Total trading revenue of $3,806 million, which is comprised of trading-related revenue recorded in Net interest income and
Non-interest income, decreased $892 million or 19% from last year, mainly reflecting lower fixed income trading across all regions
due to spread compression in repo and secured financing products and reduced client activity.
Provision for credit losses
2021 vs. 2020
Total PCL decreased $5,104 million from last year, primarily reflecting elevated provisions on performing loans in the prior year
due to the impact of the COVID-19 pandemic and releases in the current year primarily driven by improvements in our
macroeconomic and credit quality outlook. The PCL on loans ratio of (10) bps decreased 73 bps.
For further details on PCL, refer to Credit quality performance in the Credit risk section.
Insurance policyholder benefits, claims and acquisition expense (PBCAE)
2021 vs. 2020
PBCAE of $3,891 million increased $208 million or 6% from last year, mainly reflecting higher group annuity sales and business
growth, both of which are largely offset in revenue. Lower favourable investment-related experience and a lower impact from
reinsurance contract renegotiations also contributed to the increase. These factors were partially offset by the change in fair
value of investments backing policyholder liabilities, favourable annual actuarial assumption updates in the current year largely
related to mortality and economic assumptions, and lower claims costs mainly in our travel and disability products.
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)
$
$
2021
6,724
7,145
2,053
617
16,539
1,986
1,584
931
1,351
1,287
2,246
25,924
52.2%
52.2%
$
$
Table 9
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%
(1)
(2)
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
This is a non-GAAP ratio. This measure has been adjusted by excluding the change in fair value of investments backing
policyholder liabilities from total revenue. For further details, refer to the Key performance and non-GAAP measures
section.
2021 vs. 2020
Non-interest expense increased $1,166 million or 5% from last year, primarily attributable to higher variable compensation on
improved results. Higher staff-related costs and the change in the fair value of our U.S share-based compensation plans, which
was largely offset in Other revenue, also contributed to the increase. These factors were partially offset by the impact of foreign
exchange translation.
Our efficiency ratio of 52.2% decreased 30 bps from last year. Excluding the change in fair value of investments backing
policyholder liabilities, our efficiency ratio of 52.2% decreased 60 bps from last year.
Efficiency ratio excluding the change in fair value of investments backing policyholder liabilities is a non-GAAP ratio. For further
details, including a reconciliation, refer to the Key performance and non-GAAP measures section.
22
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Income and other taxes
(Millions of Canadian dollars, except percentage amounts)
Income taxes
Other taxes
Value added and sales taxes
Payroll taxes
Capital taxes
Property taxes
Insurance premium taxes
Business taxes
Total income and other taxes
Income before income taxes
Effective income tax rate
Effective total tax rate (1)
Table 10
2021
4,581
$
2020
2,952
$
443
810
73
140
31
39
$
$
1,536
6,117
20,631
22.2%
27.6%
$
$
496
771
52
140
29
43
1,531
4,483
14,389
20.5%
28.2%
(1)
Total income and other taxes as a percentage of income before income taxes and other taxes.
2021 vs. 2020
Income tax expense increased $1,629 million or 55% from last year, primarily due to higher income before income taxes.
The effective income tax rate of 22.2% increased 170 bps, as the prior year reflected a higher proportion of income from lower
tax rate jurisdictions and tax exempt income relative to the decline in earnings experienced last year.
Other taxes increased $5 million from last year, mainly due to higher payroll taxes driven by higher staff-related costs and
higher capital taxes, largely offset by lower value added and sales taxes commensurate with reduced purchase activity.
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 73% of total
AUA, as at October 31, 2021, followed by our Wealth Management and Personal & Commercial Banking businesses with
approximately 21% and 6% of total AUA, respectively.
2021 vs. 2020
AUA increased $456 billion or 8% from last year, primarily reflecting market appreciation, partially offset by lower client activity
in Investor & Treasury Services and the impact of foreign exchange translation.
The following table summarizes AUA by geography and asset class:
AUA by geographic mix and asset class
(Millions of Canadian dollars)
Canada (1)
Money market
Fixed income
Equity
Multi-asset and other
Total Canada
U.S. (1)
Money market
Fixed income
Equity
Multi-asset and other
Total U.S.
Other International (1)
Money market
Fixed income
Equity
Multi-asset and other
Total International
Total AUA
Table 11
2021
2020
$
$
42,700
772,400
781,400
1,150,400
42,800
763,500
591,200
954,800
2,746,900
2,352,300
49,800
90,400
256,000
324,600
720,800
32,800
308,200
865,000
1,673,600
40,100
107,300
195,400
256,000
598,800
40,700
375,400
837,200
1,686,800
2,879,600
2,940,100
$ 6,347,300
$ 5,891,200
(1) Geographic information is based on the location from where our clients are serviced.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
23
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, 2021.
2021 vs. 2020
AUM increased $165 billion or 20% from last year, primarily due to market appreciation and net sales, partially offset by the
impact of foreign exchange translation.
The following table presents the change in AUM for the year ended October 31, 2021:
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
2021
Table 12
2020
Money market Fixed income
Equity
Multi-asset
and other
Total
Total
$
48,900 $ 227,600 $ 96,000 $ 471,100 $ 843,600 $ 762,300
106,700
20,200
(80,300)
(16,300)
31,600
(2,400)
98,000
(73,700)
51,500
55,000
(42,200)
3,300
10,500
(8,900)
47,100
12,300
(6,300)
3,500
1,500
–
(4,500)
(2,400)
16,100
(300)
–
(8,000)
9,500
33,400
–
(1,300)
48,700
90,700
–
(18,300)
75,800
123,800
(4,500)
(30,000)
58,000
17,900
700
4,700
Total market, acquisition/dispositions
and foreign exchange impact
(6,900)
(8,300)
32,100
72,400
89,300
23,300
AUM, balance at end of year
$
43,500 $ 235,400 $ 137,600 $ 592,200 $ 1,008,700 $ 843,600
Business segment results
Results by business segments
(Millions of Canadian dollars,
except percentage amounts)
Personal &
Commercial
Banking
Wealth
Management Insurance
2021
Investor &
Treasury
Services
Table 13
2020
Capital
Markets (1)
Corporate
Support (1)
Total
Total
Net interest income
Non-interest income
$ 12,621 $
2,689 $
– $
460 $
5,725
10,607
5,600
1,704
4,553 $
5,634
(321) $
421
20,002 $
29,691
Total revenue
PCL
PBCAE
Non-interest expense
Income before income taxes
Income taxes
18,346
(187)
–
7,978
10,555
2,708
13,296
(47)
–
9,929
3,414
788
5,600
(1)
3,891
596
1,114
225
2,164
(8)
–
1,589
583
143
10,187
(509)
–
5,427
5,269
1,082
100
(1)
–
405
(304)
(365)
49,693
(753)
3,891
25,924
20,631
4,581
20,835
26,346
47,181
4,351
3,683
24,758
14,389
2,952
Net income
ROE (2)
$
7,847 $
2,626 $
889 $
440 $
4,187 $
61 $
16,050 $
11,437
32.0%
15.9%
37.4%
14.0%
18.3%
n.m.
18.6%
14.2%
Average assets
$ 527,100 $ 136,000 $ 21,600 $235,400 $710,200 $ 47,900 $ 1,678,200 $ 1,636,700
(1)
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.
For further details, refer to the Key performance and non-GAAP measures section.
(2)
n.m. not meaningful
24
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 amounts 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
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 2021
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.
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 certain treasury and liquidity management activities, including
amounts associated with unattributed capital, and consolidation adjustments, including the elimination of the teb gross-up
amounts. In addition, we record gains (losses) on economic hedges of our U.S. Wealth Management (including City National)
share-based compensation plans, which are reflected in revenue, and related variability in share-based compensation
expense driven by changes in the fair value of liabilities relating to these plans in Corporate Support as we believe this
presentation more closely aligns with how we view business performance and manage the underlying risks.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
25
Key performance and non-GAAP measures
Performance measures
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. Certain financial metrics, including ROE, do not have a standardized meaning
under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other
financial institutions.
Return on common equity
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
common shareholders
Total average common
equity (1), (2)
ROE (3)
Personal &
Commercial
Banking
Wealth
Management Insurance
2021
Investor &
Treasury
Services
Table 14
2020
Capital
Markets
Corporate
Support
Total
Total
$
7,761 $
2,577 $
882 $
431 $ 4,119 $
11 $ 15,781 $ 11,164
24,200
32.0%
16,200
15.9%
2,350
37.4%
3,100
22,550
16,450
84,850
78,800
14.0%
18.3%
n.m.
18.6%
14.2%
Total average common equity represents rounded figures.
The amounts for the segments are referred to as attributed capital.
(1)
(2)
(3) ROE is based on actual balances of average common equity before rounding.
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 also enhance the
comparability of our financial performance for the year ended October 31, 2021 with the results from last year. Non-GAAP
measures (including non-GAAP ratios) 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.
Adjusted efficiency ratio
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. The adjusted efficiency ratio is a non-GAAP ratio and is calculated using adjusted total
revenue, which is a non-GAAP measure as it excludes the impact from the change in fair value of investments backing
policyholder liabilities. We believe the adjusted efficiency ratio is a useful measure as changes in the fair value of investments
backing policyholder liabilities can lead to volatility in total revenue that could obscure trends in underlying business
performance and reduce comparability with prior periods.
Consolidated non-GAAP efficiency ratio
2021
Item excluded
As reported
Change in fair value
of investments backing
policyholder liabilities
Adjusted
As reported
2020
Item excluded
Change in fair value
of investments backing
policyholder liabilities
Table 15
Adjusted
$ 49,693 $
25,924
52.2%
13
–
$ 49,706 $ 47,181
24,758
25,924
$
(277)
–
$ 46,904
24,758
52.2%
52.5%
52.8%
(Millions of Canadian dollars,
except percentage amounts)
Total revenue
Non-interest expense
Efficiency ratio
26
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Personal & Commercial Banking
Personal & Commercial Banking provides a broad suite of financial products and services to individuals and businesses for their
day-to-day banking, investing and financing needs. We are focused on building deep and meaningful relationships with our
clients, underscored by our exceptional client experience, the breadth of our product suite, our depth of expertise, and the
features of our digital solutions.
> 14 million
Number of clients
8 million
36,675
Active digital users in Canada1
Employees
Revenue by business lines
$18.3 billion
Total revenue
73% Personal Banking
23% Business Banking
4% 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.
2021 Operating environment
› While impacts from the COVID-19 pandemic continued to persist, client activity improved driving strong volume and fee-based
revenue growth throughout fiscal 2021 as economies re-opened due to progress on vaccination distribution, reduced
containment measures and continued government support. Further, as businesses began re-opening, unemployment rates also
improved.
› Improvements in the credit environment, driven by the economic recovery from the COVID-19 pandemic, led to favourable
changes in our macroeconomic and credit quality outlook, resulting in releases of provisions on performing assets. Lower
provisions on impaired loans in our Canadian Banking retail portfolios also reflected the economic recovery underway and the
continued impact of the COVID-19 related government support programs.
› Personal and business deposits continued to see significant growth throughout fiscal 2021, reflecting clients’ preference for the
safety of higher cash balances amidst the COVID-19 pandemic.
› Housing activity was strong with record levels of mortgage originations in fiscal 2021. Despite the industry-wide tightening of
mortgage lending criteria in the third quarter, low interest rates and demand for housing continued to support strong growth in
residential mortgages.
› Throughout fiscal 2021, we saw favourable market conditions resulting in solid growth in mutual fund balances from a
combination of market appreciation and strong net sales. We also saw significant market activity in the first half of the fiscal
year which benefitted our Direct Investing business. While market activity moderated in the second half of the fiscal year,
average trading volumes remained above pre-pandemic levels.
› The ongoing low interest rate environment continued to be a headwind in fiscal 2021, resulting in a further decline in NIM. NIM
was also negatively impacted by changes in product mix and competitive pricing pressures.
› Client preferences for digital offerings continue to evolve and this shift has been accelerated due to the impact of the COVID-19
pandemic. We continued to invest in digital solutions to improve the client experience and deliver personalized advice.
› Our Caribbean Banking business continued to be negatively impacted by the ongoing low interest rate environment; however,
we also saw releases of provisions on performing assets. We also closed the sale of our Eastern Caribbean operations in the
second quarter of 2021.
› In the U.S., earnings were unfavourably impacted by the low interest rate environment and severe limitations on cross-border
travel, as a result of the COVID-19 pandemic.
1
Represents 90-day active clients
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
27
Strategic priorities
OUR STRATEGY
PROGRESS IN 2021
PRIORITIES IN 2022
Transform how we serve our clients
Enabled the expedited digital processing of nearly 200,000
small business loans under the CEBA program since inception
of the program
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
Opened new format branches to address the needs of specific
client segments including students and newcomers to Canada
Continue to reimagine our branch network to meet the
evolving needs of our clients
Focus on engaging key high-growth client segments and
enabling our advisors to build new and deeper relationships
and achieve industry-leading volume growth
Establish key partnerships to continue to add value for our
clients
Build a suite of best-in-class value propositions, digital
experiences and Beyond Banking ventures
Continue to invest in RBC Ventures by working to scale
Ventures and accelerate client acquisition
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
Lead in mobile capabilities, enable fulfillment of servicing
through digital channels, and move towards a higher degree
of agile delivery to transform end-to-end client experience
Accelerate our growth
Introduced RBC VantageTM that allows clients to unlock
rewards, savings, insights and more with any eligible bank
account
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
Continued to further our partnerships, including helping our
clients realize over $90 million in fuel savings with Petro
Canada, a Suncor business
Partnered with DoorDash to bring eligible RBC credit cardholders
additional value through savings and special offers
Established a new partnership with GrantMatch, leveraging its
Funding Assessment & Strategy Tool to make it easy for
business owners to pursue government funding that matches
their business needs
Launched the RBC ESG Market-Linked GIC which allows
investors to support a global portfolio of companies that
follow a set of rigorous ESG standards
Offered Responsible Investing Portfolios through RBC
InvestEase®, which are built with a focus on companies that score
highest on a wide range of ESG factors, including carbon
emissions, product safety and quality, and business ethics
Rapidly deliver digital solutions to
our clients
Continued to deliver leading digital capabilities and
functionalities through our award-winning RBC mobile app
Enhanced our Direct Investing client experience by launching
a customizable, web-based Trading Dashboard, free for all
clients
Introduced NOMI® Forecast, the latest capability in our award-
winning NOMI® offering, which gives clients a view into their future
cash flow by forecasting upcoming preauthorized payment
withdrawals from their deposit account
Continued to expand the capabilities of MyAdvisor®, an online
advice platform that digitally connects our clients to an
advisor, resulting in over 2.8 million clients activating their
personalized investment plans since its launch in 2017
Launched RBCxTM, a full-service platform designed to provide
our business clients with access to capital solutions,
innovative products and services, and operational expertise to
help technology companies scale
Expanded RBC Insight EdgeTM, our Beyond Banking solution, to
provide direct access through a subscription to small and
medium retail business and commercial clients
Launched an integrated accounts payable solution for
business clients through RBC PayEdgeTM, which helped us
earn the 2021 Celent Model Bank Award for Payments
Transformation
Launched a new way for Canadians to pay for their purchases
through PayPlan which offers clients a transparent and
convenient pay-over-time solution for big-ticket purchases at
participating retailers and merchants throughout Canada
Innovate to become a more agile and
efficient bank
Continued to invest in solutions that simplify, digitize and
automate experiences for clients and employees, and enable
employees to deliver relevant and expert advice
Invest in new tools and capabilities and proactively seek ways
to simplify and streamline both our internal processes and the
end to end client experience at an accelerated speed
Continued to help small businesses thrive by simplifying and
automating business formation and everyday legal work with
Ownr®, Canada’s leading business and legal management
platform
In the Caribbean
Continued transforming the business and overall client
experience while driving profitability, simplifying operations,
and strategically navigating the COVID-19 pandemic and its
continued impact on our clients and employees
Remain focused on becoming the premier digitally-enabled
relationship bank by transforming the client experience
through automation, digitization and process simplification,
and enabling our employees for success
In the U.S.
Successfully executed Eastern Caribbean divestiture which
included the sale of 11 branches in 7 countries. This transaction
aligns our investments and resources into markets where our
vision can be executed more successfully
Despite travel restrictions associated with the COVID-19
pandemic, continued to attract new clients and drive record
real estate lending
Made focused investments in digital capabilities to improve
productivity, offer a more digitally-enabled client experience,
and enhance small business services to support Canadian
businesses needing U.S. payment and collection services
Drive accelerated cross-border client growth leading with real
estate financing tailored specifically for Canadians, offering
advice, tools and resources, value offers and discounts, and
access to cross-border experts to guide clients through the
full life cycle of owning U.S. property
Ongoing digitization of end-to-end processes and controls to
enhance client self-serve capabilities and improve
operational scalability
28
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Outlook
While uncertainty remains regarding the COVID-19 pandemic, we expect the global economic recovery to continue in 2022, though
this could vary or be uneven across different regions. The BoC and other central banks are expected to begin raising interest
rates in fiscal 2022. Ongoing inflationary pressures also have the potential to impact our results in fiscal 2022. 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, an economic recovery is expected as travel and tourism continue to improve, supported by rising vaccination
rates. Continued fiscal stimulus and accommodative monetary conditions in some countries are expected to bolster consumer
spending and unemployment relief. We will continue to focus on growth strategies in our 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 (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)
Average AUA
AUM (3)
Number of employees (FTE)
Credit information
PCL on impaired loans as a % of average net loans and acceptances
Other selected information – Canadian Banking
Net income
NIM
Efficiency ratio
Operating leverage
$
$
$
$
$
$
2021
12,621 $
5,725
18,346
(909)
722
(187)
7,978
10,555
7,847 $
17,570 $
13,337
4,233
776
32.0%
2.51%
43.5%
3.1%
Table 16
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)%
527,100 $
502,000
505,600
504,300
367,700 $
340,800
5,400
36,675
494,600
470,200
473,400
447,300
292,800
287,600
5,300
35,964
0.14%
0.23%
7,620 $
2.50%
42.0%
2.9%
5,077
2.64%
43.2%
(3.3)%
(1)
(2)
See Glossary for composition of this measure.
AUA includes securitized residential mortgages and credit card loans as at October 31, 2021 of $15 billion and $3 billion, respectively (October 31, 2020 – $16 billion and
$7 billion).
(3) Represents year-end spot balances.
Financial performance
2021 vs. 2020
Net income increased $2,760 million or 54% from last year, primarily attributable to lower PCL. Average volume growth of 10% in
Canadian Banking and higher non-interest income also contributed to the increase. These factors were partially offset by lower
spreads.
Total revenue increased $615 million or 3%, largely due to average volume growth in Canadian Banking of 7% in loans and
13% in deposits, and higher average mutual fund balances driving higher distribution fees. Increased client activity also
contributed to higher card service revenue, securities brokerage commissions and foreign exchange revenue. These factors were
partially offset by lower spreads.
NIM decreased 16 bps, primarily due to the impact of lower interest rates and changes in product mix.
PCL decreased $3,078 million, as last year reflected elevated provisions on performing loans due to the impact of the COVID-19
pandemic as compared to releases in the current year primarily driven by improvements in our macroeconomic and credit quality
outlook. Lower provisions on impaired loans in our Canadian Banking retail portfolios also contributed to the decrease, resulting in a
decrease of 9 bps in the PCL on impaired loans ratio. For further details, refer to Credit quality performance in the Credit risk section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
29
Non-interest expense increased $32 million, largely due to higher staff-related costs, partially offset by the prior year impact
of additional compensation for certain employees, primarily those client facing amidst the COVID-19 pandemic, and lower other
operating costs.
Average loans and acceptances increased $32 billion or 7%, driven by growth in residential mortgages.
Average deposits increased $57 billion or 13%, 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 1,182 branches and 4,032 ATMs.
Financial performance
Total revenue increased $634 million or 5% compared to last year, largely reflecting average volume growth of 8% and higher
average mutual fund balances of 17% driving higher distribution fees. Increased client activity also contributed to higher card
service revenue, securities brokerage commissions and foreign exchange revenue. These factors were partially offset by lower
spreads driven by the ongoing impact of the low interest rate environment and changes in product mix.
Average residential mortgages increased 12% compared to last year, largely driven by strong housing activity driving record
mortgage originations, partially offset by higher mortgage prepayment activity.
Average deposits increased 9% from last year, largely driven by clients’ preference for the safety of higher cash balances
amidst the COVID-19 pandemic.
Selected highlights
Table 17
Average residential mortgages, loans and deposits
(Millions of Canadian dollars)
(Millions of Canadian dollars, except number of)
Total revenue
Other information
Average residential mortgages
Average other loans and acceptances, net
Average deposits
Average credit card balances
Credit card purchase volumes
Branch mutual fund balances (1)
Average branch mutual fund balances
AUA – Self-directed brokerage (1)
Number as at October 31:
Branches
ATMs
(1)
Represents year-end spot balances.
2021
2020
$ 13,337 $ 12,703
305,400
74,800
270,500
16,600
132,400
205,500
191,300
135,900
273,200
77,800
248,100
18,100
118,100
166,000
163,600
96,400
1,182
4,032
1,201
4,182
320,000
280,000
240,000
200,000
160,000
120,000
80,000
40,000
0
2021
2020
Residential mortgages
Other loans and
acceptances, net
Deposits
30
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Business Banking
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 $98 million or 2% compared to last year, largely due to average volume growth of 14% and higher credit
fees reflecting increased client activity. These factors were partially offset by lower spreads, primarily driven by the impact of
lower interest rates.
Average loans and acceptances increased 5%, due to the deepening of our existing client relationships.
Average deposits increased 19% from last year, mainly reflecting higher liquidity maintained by our clients amidst the COVID-
19 pandemic.
Selected highlights
Table 18
Average loans and acceptances and deposits
(Millions of Canadian dollars)
(Millions of Canadian dollars)
Total revenue
Other information (average)
Loans and acceptances, net
Deposits
2021
4,233 $
2020
4,135
$
99,800
215,200
94,600
180,800
225,000
200,000
175,000
150,000
125,000
100,000
75,000
50,000
25,000
0
2021
2020
Loans and acceptances, net
Deposits
Caribbean & U.S. Banking
Our Caribbean Banking business offers a comprehensive suite of banking products and services, as well as international
financing and trade promotion services through extensive branch, ATM, online, and mobile banking networks.
Our U.S. Banking business serves the needs of our Canadian retail and small business clients through banking solutions
which help to enable a cross-border lifestyle in the U.S. across all 50 states.
Financial performance
Total revenue was down $117 million or 13% from last year, primarily due to lower spreads and the impact of foreign exchange
translation. Reduced revenue due to the sale of our Eastern Caribbean operations also contributed to the decrease.
Average loans and acceptances decreased 6% primarily due to the impact of foreign exchange translation.
Average deposits increased 2%.
Selected highlights
Table 19
Average loans and deposits (Millions of Canadian dollars)
(Millions of Canadian dollars,
except number of and percentage amounts)
Total revenue
Other information
NIM
Average loans and acceptances, net
Average deposits
AUA (1)
Average AUA
AUM (1)
Number as at October 31:
Branches
ATMs
2021
776 $
2020
893
$
2.85%
9,100
18,700
5,700
5,700
5,100
38
271
3.46%
9,700
18,400
5,900
6,400
5,200
51
298
(1)
Represents year-end spot balances.
20,000
15,000
10,000
5,000
0
2021
2020
Loans and acceptances, net
Deposits
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
31
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.
$13.3 billion
Total revenue
> 5,500
Client-facing advisors
> $53 billion
AUA net flows
> $75 billion
AUM net flows
Assets under Administration
(AUA)
Assets under Management
(AUM)
$1,322 billion
Total AUA
$1,001 billion
Total AUM
94% Personal
5% Institutional
1% Mutual Funds
41% Personal
30% Mutual Funds
29% Institutional
Our lines of business include Canadian Wealth
Management, U.S. Wealth Management (including
City National), Global Asset Management (GAM),
and International Wealth Management.
• Canadian Wealth Management is the largest
full-service wealth advisory business in
Canada, as measured by AUA, serving HNW and
UHNW clients
(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 AUM, 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
2021 Operating environment
› Earnings in the current fiscal year benefitted from a strong rebound in equity markets, which reached record highs after a
sharp decline in the prior fiscal year due to global impacts from the COVID-19 pandemic, while the ongoing low interest rate
environment unfavorably impacted our earnings throughout fiscal 2021.
› Our core businesses performed well with continued volume growth in City National, strong sales in GAM, as well as strong
inflows of fee-generating client assets in our wealth advisory businesses reflecting the strength of our business driven by the
quality of our advice, the breadth of our investment and holistic wealth planning solutions and clients’ trust in our brand.
› We continued to invest in our people and technology to maintain our competitive advantage and increase efficiencies in an
environment characterized by market volatility, rapidly changing client preferences and increasing regulatory requirements.
› Improvements in the credit environment, driven by the economic recovery from the COVID-19 pandemic, led to favourable
changes in our macroeconomic and credit quality outlook, resulting in releases of provisions on performing assets and lower
provisions on impaired loans.
32
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
PROGRESS IN 2021
PRIORITIES IN 2022
In Canada, be the premier service provider
for HNW and UHNW clients
Further extended our position as industry leader
in our full-service private wealth business
Continue to retain and attract top-performing and
new advisors to strengthen our talent advantage
Continued to focus on holistic wealth planning,
including advisor training on intergenerational
and business wealth transfer
Deliver a differentiated client experience through
enriched advisor-client interactions and seamless
digital experiences
Continued to expand 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 integration of Wealth
Management Online with the RBC Mobile app
Invested in key areas needed to grow our U.S.
Wealth Management business, including
substantial financial advisor recruitment, solid
execution on our technology transformation and
provided proactive liquidity to our clients via a
revamped securities-based lending platform
In City National, we continued to focus on our
core high-growth banking businesses, bolstered
our footprint in the entertainment industry,
expanded our digital capabilities, and invested in
productivity and efficiency programs
Continued to deliver on successful growth
initiatives, bringing the full strength and breadth
of RBC to our clients
Focused on delivering a differentiated client
experience by leveraging our global capabilities
In Asia, made significant progress in execution of
our strategy, reflected by strong growth in AUA
and AUM
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 RBC GAM’s first annual Task Force on
Climate-related Financial Disclosures (TCFD)
report
Continue to invest in digital solutions to
streamline and simplify the business and improve
efficiency and advisor productivity
Renew legacy infrastructure to ensure ongoing
resiliency in our technology platforms
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.
Further build out our personal banking business
through new client acquisition strategies, diverse
lending programs, and mortgage-led growth
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
Focus on growing the business in Asia by
attracting new advisors, enhancing digital
capabilities, expanding the product suite, and
deepening cross–business collaboration
Continue to expand our investment capabilities to
meet evolving client needs in our target
distribution regions
Continue shift to a more unified asset
management operating model to take better
advantage of enterprise and GAM global scale,
resources and infrastructure
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
Outlook
While uncertainty remains regarding the COVID-19 pandemic, we expect the global economic recovery to continue in 2022, though
this could vary or be uneven across different regions. The U.S. Fed and other central banks are expected to begin raising interest
rates in fiscal 2022. Ongoing inflationary pressures also have the potential to impact our results in fiscal 2022.
We believe our diversified businesses are well-positioned to continue growing our leading position in Canada and increasing
our market share in the HNW and UHNW client segments globally, leveraging the strength of our brand, reputation and solid
financial position. 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 invest in our people and technology to improve client and
advisor experiences, drive operational efficiencies, and further strengthen our risk, compliance and controls infrastructure to
meet heightened regulatory requirements.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
33
Wealth Management
(Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted)
Net interest income
Non-interest income (1)
Total revenue (1)
PCL on performing assets
PCL on impaired assets
PCL
Non-interest expense (1)
Income before income taxes (1)
Net income (1)
Revenue by business
Canadian Wealth Management
U.S. Wealth Management (including City National) (1)
U.S. Wealth Management (including City National) (US$ millions) (1)
Global Asset Management
International Wealth Management
Key ratios
ROE
NIM
Pre-tax margin (1), (2)
Selected balance sheet information
Average total assets
Average total earning assets, net
Average loans and acceptances, net
Average deposits
Other information
AUA (3), (4)
AUM (3)
Average AUA
Average AUM
PCL on impaired loans as a % of average net loans and acceptances
Number of employees (FTE)
Number of advisors (5)
$
$
$
$
$
2021
2,689 $
10,607
13,296
(33)
(14)
(47)
9,929
3,414
2,626 $
3,908 $
6,320
5,035
2,726
342
15.9%
2.25%
25.7%
Table 20
2020
2,860
9,270
12,130
157
57
214
9,123
2,793
2,154
3,319
6,116
4,553
2,308
387
13.1%
2.79%
23.0%
136,000 $
119,500
84,000
143,000
1,322,300 $
1,000,600
1,242,400
937,200
(0.02)%
19,486
5,548
119,500
102,600
76,700
122,000
1,100,000
836,400
1,082,000
801,500
0.07%
18,978
5,428
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2021 vs. 2020
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
$
(468)
3
(390)
(66)
7%
–
2%
(1)
Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth
Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
Pre-tax margin is defined as Income before income taxes divided by Total revenue.
In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), and International Wealth Management, AUA includes $7,100 million
(2020: $6,100 million) related to GAM.
(5) 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
$
2021
1,100,000 $
352,800
(299,200)
53,600
235,900
(12,100)
(55,100)
168,700
Table 21
2020
1,062,200
356,800
(345,400)
11,400
17,500
–
8,900
26,400
AUA, balance at end of year
$
1,322,300 $
1,100,000
34
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
(2)
(3) Represents year-end spot balances.
(4)
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
2021
Money
market
Fixed
income
Equity
Multi-asset
and other
$ 48,800 $225,400 $ 95,800 $ 466,400 $
20,200
(16,300)
(2,400)
1,500
–
(4,500)
(2,400)
55,000
(42,100)
3,300
16,200
(400)
–
(7,900)
12,200
(6,300)
3,400
9,300
33,400
–
(1,300)
10,500
(8,900)
46,700
48,300
90,200
–
(18,200)
Total
836,400 $
97,900
(73,600)
51,000
75,300
123,200
(4,500)
(29,800)
Table 22
2020
Total
755,700
106,700
(80,300)
31,300
57,700
17,700
700
4,600
Total market, acquisition/dispositions and
foreign exchange impact
(6,900)
(8,300)
32,100
72,000
88,900
23,000
AUM, balance at end of year
$ 43,400 $233,300 $ 137,200 $ 586,700 $ 1,000,600 $
836,400
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 23
2021
2020
$
24,700 $
29,200
91,300
377,400
522,600
49,500
90,300
256,000
308,400
704,200
15,300
8,100
37,700
34,400
25,900
32,000
68,800
288,800
415,500
39,700
107,300
195,400
241,400
583,800
17,400
10,100
38,800
34,400
95,500
100,700
$ 1,322,300 $ 1,100,000
(1) Geographic information is based on the location from where our clients are served.
Financial performance
2021 vs. 2020
Net income increased $472 million or 22% from last year, mainly due to higher average fee-based client assets and average
volume growth. These factors were partially offset by higher variable compensation and the impact of lower spreads.
Total revenue increased $1,166 million or 10%, mainly due to higher average fee-based client assets reflecting market
appreciation and net sales, as well as average volume growth of 10% in loans and 17% in deposits. These factors were partially
offset by lower spreads and the impact of foreign exchange translation.
PCL decreased $261 million in U.S. Wealth Management (including City National), as last year reflected elevated provisions
on performing loans due to the impact of the COVID-19 pandemic as compared to releases in the current year primarily driven by
improvements in our macroeconomic and credit quality outlook. Provisions on impaired loans in the prior year as compared to
recoveries in the current year also contributed to the decrease, resulting in a decrease of 9 bps in the PCL on impaired loans
ratio. For further details, refer to Credit quality performance in the Credit risk section.
Non-interest expense increased $806 million or 9%, mainly due to higher variable compensation commensurate with
improved results. A legal provision in U.S. Wealth Management (including City National) as well as higher technology and staff-
related costs also contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.
AUA and AUM increased $222 billion or 20% and $164 billion or 20%, respectively, primarily due to market appreciation and
net sales, partially offset by the impact of foreign exchange translation.
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 1,900 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
35
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 $589 million or 18% from last year, primarily due to higher average fee-based client assets reflecting market
appreciation and net sales.
Table 24
Average AUA and AUM (Millions of Canadian dollars)
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
2021
3,908 $
2020
3,319
$
Average loans and acceptances, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
4,600
26,200
524,200
168,900
486,100
151,900
3,900
21,900
416,700
125,700
410,300
121,600
(1)
Represents year-end spot balances.
U.S. Wealth Management (including City National)
500,000
400,000
300,000
200,000
100,000
0
2021
2020
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 2,100 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 $204 million or 3% from last year. In U.S. dollars, revenue increased $482 million or 11%, primarily due to
higher average fee-based client assets reflecting market appreciation and net sales, as well as average volume growth of 17% in
loans and 28% in deposits. These factors were partially offset by lower spreads.
Lower spreads, mainly driven by the impact of lower interest rates and changes in average earning assets mix, resulted in
NIM compression of 48 bps compared to the prior year.
Selected highlights
Table 25
Average AUA and AUM (Millions of U.S. dollars)
600,000
500,000
400,000
300,000
200,000
100,000
0
(Millions of Canadian dollars,
except as otherwise noted)
Total revenue (1)
Other information
(Millions of U.S. dollars)
Total revenue (1)
NIM
Average earning assets, net
Average loans, guarantees and
letters of credit, net
Average deposits
AUA (2)
AUM (2)
Average AUA
Average AUM
2021
6,320 $
2020
6,116
$
5,035
2.17%
86,300
60,200
83,000
568,800
182,100
525,300
165,600
4,553
2.65%
68,900
51,600
64,700
438,200
137,300
424,600
130,200
(1)
Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based
compensation plans, which are reflected in revenue, and related variability in
share-based compensation expense driven by changes in the fair value of
liabilities relating to our U.S. share-based compensation plans have been
reclassified from our Wealth Management segment to Corporate Support.
Comparative amounts have been reclassified to conform with this
presentation.
(2) Represents year-end spot balances.
36
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
2021
2020
AUA
AUM
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 increased $418 million or 18% from last year, primarily due to higher average fee-based client assets reflecting market
appreciation and net sales.
Table 26
Average AUM (Millions of Canadian dollars)
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
2021
2,726 $
2020
2,308
$
Canadian net long-term mutual
fund sales (1)
Canadian net money market mutual
fund sales (redemptions) (1)
AUM (2)
Average AUM
21,830
7,710
(2,757)
597,300
568,200
1,323
518,500
496,000
(1)
As reported to the Investment Funds Institute of Canada. Includes all
prospectus-based mutual funds across our Canadian GAM businesses.
(2) Represents year-end spot balances.
International Wealth Management
600,000
500,000
400,000
300,000
200,000
100,000
0
2021
2020
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 decreased $45 million or 12% from last year, mainly attributable to a decline in net interest income reflecting lower
spreads.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Average loans, guarantees and
letters of credit, net
Average deposits
AUA (1)
AUM (1)
Average AUA
Average AUM
(1)
Represents year-end spot balances.
Table 27
Average AUA and AUM (Millions of Canadian dollars)
2021
342 $
2020
387
$
4,600
12,500
86,800
8,900
90,500
9,300
4,400
13,000
93,400
9,200
95,500
9,000
150,000
100,000
50,000
0
2021
2020
AUA
AUM
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
37
Insurance
RBC Insurance® offers a wide range of life, health, home, auto, travel, wealth, annuities, reinsurance advice and solutions, as well
as business insurance solutions, to individual, business and group clients.
$5.6 billion
Total revenue
> 4.8 million
Number of clients
2,573
Employees
RBC Insurance® is the largest Canadian bank-owned insurance organization on
a total revenue basis 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
$5.7 billion
Total premiums
and deposits
55% Annuity and Segregated
Fund Deposits
44% Life and Health
1% Property and Casualty
2021 Operating environment
› During fiscal 2021 the COVID-19 pandemic continued to amplify interest in insurance, increasing the need for information and
advice, changing client preferences and behaviours, and challenging traditional operating models. We remained focused on
strengthening our client-first culture, investing in new ways for clients to do business with us, enhancing access and
convenience through digitization, and delivering increased value to clients beyond our products and pricing.
› In Canada, regulators maintained their focus on fair treatment of customers, capital adequacy, insurer solvency, and data
privacy. 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., there was a strong and sustained appetite for longevity risk transfer as companies continued to actively manage
longevity risk. As a result, the longevity reinsurance market remained highly competitive in fiscal 2021. We continued to achieve
strong growth in this market, within our risk limits.
38
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Strategic priorities
OUR STRATEGY
Deepen client relationships
Simplify.Agile.Innovate
Improve distribution effectiveness and
efficiency
Grow the longevity business in Canada and the
U.K.
PROGRESS IN 2021
PRIORITIES IN 2022
Launched a new whole life insurance product
RBC Growth Insurance™ offering the benefits of
tax-deferred growth to our clients
Enhanced our RBC® Guaranteed Investment
Funds product with a new option that provides
clients with greater flexibility to access their
funds at any time without paying extra fees
Introduced a wellness spending account for our
group insurance clients that provides flexible
coverage for a variety of wellness-related
expenses including stress management,
personal development, and family care
Expanded our reach to home and auto clients
through digital campaigns to ensure that they
received assistance during the COVID-19
pandemic
Launched a new simplified electronic
application process for some of our life
insurance products to facilitate quicker
decisions on applications and reduced time to
purchase, making it easier to do business with
us
Added Maple’s virtual primary care services as
part of our offering for group insurance clients,
providing a platform for our clients to consult
with a physician at their convenience
Continued to innovate by investing in research
and development to understand and meet the
changing needs and expectations of
underinsured Canadians
Enabled our agents and advisors with tools and
technology to continue providing trusted advice
in a virtual setting
Reduced wait times for our clients by simplifying
and automating the underwriting processes for
RBC Simplified Term
Continued to enhance the client experience by
launching digital signature technology for our
life insurance products, enabling clients to use
their own personal devices to sign applications
remotely
Achieved strong growth in our longevity
reinsurance business, largely due to our
relationships within the U.K. reinsurance
market, our longevity operations, and our
underwriting expertise
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
Simplify and innovate by continuing to
accelerate our investments in digital initiatives,
improving quality and cost effectiveness
Continue to improve our distribution
effectiveness and efficiency by enhancing both
our proprietary and independent channels, and
focusing on the delivery of technology and
operational solutions
Pursue niche opportunities to grow our
longevity product lines within our risk limits
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. Forces of change include evolving client expectations, accelerated digital disruption, and distribution
innovation. Government and regulatory pressures are also expected to continue into fiscal 2022. 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. Additionally, the COVID-19 pandemic has created more
awareness of the importance of financial security and has prompted people to take a closer look at their insurance coverage. We
see this renewed demand continuing to drive growth opportunities. 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
39
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
PCL
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 28
2020
4,267
938
156
5,361
–
3,384
299
592
1,086
831
2,974
2,387
2021
4,840 $
577
183
5,600
(1)
3,547
344
596
1,114
889 $
2,917 $
2,683
37.4%
36.1%
21,600 $
20,300
5,721 $
3,162
2,559
12,816
(13)
2,573
4,950
2,493
2,457
12,215
277
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
2021 vs. 2020
Net income increased $58 million or 7% from last year, largely due to favourable annual actuarial assumption updates and lower
claims costs. These factors were partially offset by lower favourable investment-related experience, including the impact of
realized investment gains in the prior year, as well as a lower impact from reinsurance contract renegotiations.
Total revenue increased $239 million or 4%, mainly reflecting higher group annuity sales as well as business growth, both of
which are largely offset in PBCAE as indicated below. These factors were partially offset by the change in fair value of
investments backing policyholder liabilities and the impact of realized investment gains in the prior year.
PBCAE increased $208 million or 6%, mainly reflecting higher group annuity sales and business growth, both of which are
largely offset in revenue. Lower favourable investment-related experience and a lower impact from reinsurance contract
renegotiations also contributed to the increase. These factors were partially offset by the change in fair value of investments
backing policyholder liabilities, favourable annual actuarial assumption updates in the current year largely related to mortality
and economic assumptions, and lower claims costs mainly in our travel and disability products.
Non-interest expense increased $4 million or 1%, as higher legal costs were largely offset by the benefit of ongoing efficiency
initiatives.
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 participating whole life, universal life, term life, critical illness, disability, and group benefits such as long-term
disability, and health and dental. Wealth solutions include a family of segregated funds as well as individual payout annuities.
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 aimed at building our momentum and positioning us for growth in this product line where
companies are increasingly looking to transfer the risks associated with their pension obligations to insurance companies –
either through group annuity contracts or longevity swap products.
In Canada, many of our competitors specialize in life and health or property and casualty products. As a multi-line carrier,
we offer a broad suite of solutions for individuals and businesses, including disability, life, home, auto and travel products along
with wealth, group health and dental and pension solutions. Within these product lines, we hold market leadership positions in
disability insurance and wealth products.
Financial performance
Total revenue decreased $57 million or 2% from last year, mainly due to the change in fair value of investments backing
policyholder liabilities and the impact of realized investment gains in the prior year. These factors were partially offset by higher
group annuity sales and business growth, primarily in segregated fund and individual life products, both of which are largely
offset in PBCAE.
40
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Premiums and deposits increased $669 million or 27%, mainly due to group annuity, segregated fund and individual life
products.
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 29
Premiums and deposits (Millions of Canadian dollars)
2021
2020
$ 2,917 $ 2,974
1,434
77
1,651
(119)
1,397
98
998
351
4,000
3,000
2,000
1,000
0
2021
2020
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 $296 million or 12% from last year, mainly due to the change in fair value of investments backing
policyholder liabilities and business growth in longevity reinsurance.
Premiums and deposits increased $102 million or 4% as growth in longevity reinsurance was partially offset by declining
volumes in International life and life retrocession products.
Selected highlights
(Millions of Canadian dollars)
Total revenue
Other information
Premiums and deposits
Life and health
Annuity
Fair value changes on investments
backing policyholder liabilities
Investor & Treasury Services
Table 30
Premiums and deposits (Millions of Canadian dollars)
2021
2020
$ 2,683 $ 2,387
1,050
1,509
1,144
1,313
106
(74)
4,000
3,000
2,000
1,000
0
2021
2020
Life and health
Annuity
Investor & Treasury Services provides asset servicing, custody, payments and treasury services to financial and other investors
worldwide. We are a trusted partner with offices in 16 countries in North America, Europe, the U.K., and Asia-Pacific. Our focus is
on safeguarding client assets and simplifying our clients’ operations in support of their growth.
$4.6 trillion
Assets under administration
14.0%
Return on equity
$64.4 billion
Average client deposits
Revenue by Geography
$2.2 billion
Total revenue
39% North America
33% Europe (Ex. U.K.)
17% U.K.
11% Asia-Pacific
Our product and service offering includes custody, fund and investment
administration, shareholder services, private capital services, performance
measurement and compliance monitoring, distribution, transaction banking, and
treasury and market services (including cash and liquidity management, foreign
exchange services and global securities finance). We deliver digitally-enabled
products and services which continue to be enhanced and evolved in line with our
clients’ changing needs.
We compete against the world’s largest custodians in selected countries in North
America, Europe, the U.K., and Asia-Pacific.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
41
2021 Operating environment
› Results for our asset services business were impacted by industry headwinds such as persistent low interest rates and
continued pricing pressure.
› Our funding and liquidity business also managed through revenue headwinds from the ongoing low interest rate environment,
including compressed spreads.
› We continued to execute on initiatives to improve our cost structure and upgrade our technology capabilities.
Strategic priorities
OUR STRATEGY
PROGRESS IN 2021
PRIORITIES IN 2022
Be the #1 asset services provider in Canada
Our AUA in Canada grew by 12% year-over-year
Compete in selected fast growing asset
servicing segments and markets
Achieved higher Fund Finance sales, driven by
strong brand recognition and cross-segment
collaboration
Deliver seamless client experiences and
employ technology to enable our clients’
success
Evolved our digital offering, improving interactive
applications to increase clients’ digital self-
service capacity and reduce operational risk
Continue to grow income and market share
among Canadian asset managers, investment
counsellors, pension funds, insurance
companies and transaction banking clients
Focus on fast growing markets and products
where we have competitive advantages
Complete the execution of our ongoing
repositioning initiatives by exiting non-core
operations
Continue to deliver seamless digital client
experiences
Continue to invest in technology to enable our
clients’ success
Outlook
In fiscal 2022, we expect the global asset services industry will remain challenging. While we expect some benefit from rising
interest rates in fiscal 2022, ongoing fee reductions, competition from global custody providers in key markets and the impact of
reduced client activities are expected to constrain revenue growth. Ongoing inflationary pressures also have the potential to
impact our results in fiscal 2022. Improving operational efficiency and completing ongoing repositioning initiatives will continue
to be a priority. We will focus on business opportunities in our chosen fast-growing markets and segments where we have
competitive advantages, and leveraging our investment in technology to enable our clients’ success.
We will continue to prioritize prudent risk and funding management amidst an evolving interest rate and liquidity
environment. Market liquidity levels are anticipated to remain elevated as monetary policy is expected to remain accommodative.
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) (2)
$
$
$
Table 31
2020
329
1,982
2,311
6
–
6
1,589
716
536
2021
460 $
1,704
2,164
(8)
–
(8)
1,589
583
440 $
14.0%
15.9%
235,400 $
219,800
64,400
155,400
204,300
187,900
63,000
124,900
$ 4,640,900 $ 4,483,500
4,386,300
3,851
4,634,900
3,718
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
2021 vs. 2020
$
(22)
–
(15)
(9)
7%
–
2%
(1)
(2)
Represents year-end spot balances.
Effective Q1 2021, certain employees have been reclassified from Investor & Treasury Services to Corporate Support. Prior period amounts have been reclassified to
conform with this presentation.
42
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Financial performance
2021 vs. 2020
Net income decreased $96 million or 18% from last year, primarily driven by lower revenue from client deposits and funding and
liquidity.
Total revenue decreased $147 million or 6%, mainly due to lower client deposit revenue largely driven by lower interest rates.
Lower funding and liquidity revenue also contributed to the decrease, mainly reflecting net favourable impacts from market
volatility and interest rate movements in the prior year, as well as the impact of lower interest rates and lower gains from the
disposition of securities, partially offset by a greater impact in the prior year from elevated enterprise liquidity.
Non-interest expense remained relatively flat as higher technology-related costs and higher net costs associated with
ongoing efficiency initiatives were largely offset by the impact of foreign exchange translation.
Capital Markets
RBC Capital Markets® is a premier global investment bank providing expertise in advisory & origination, sales & trading, and
lending & financing to corporations, institutional investors, asset managers, private equity firms and governments globally. 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
#11
Global league table rankings1
6,414
Employees
Revenue by Geography
We operate two main business lines, Corporate and Investment Banking and
Global Markets.
$10.2 billion
Total revenue
55% U.S.
25% Canada
15% U.K. & Europe
5% Australia, Asia &
other regions
In North America, we offer a full suite of products and services which include
equity and debt origination and distribution, advisory services, and sales &
trading. In Canada, we are a market leader with a strategic presence in all lines
of capital markets businesses. In the U.S., where our competitors include large
global investment banks, we have a full industry sector coverage and investment
banking product range, as well as capabilities in credit, secured lending,
municipal finance, fixed income, currencies & commodities, and equities.
Outside North America, we have a targeted strategic presence in the U.K. &
Europe, Australia, Asia & other markets aligned to our global expertise. In the
U.K. & Europe, we offer a diversified set of capabilities in key industry sectors of
focus. 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 financing, as well as corporate and
investment banking.
2021 Operating environment
› The fiscal 2021 operating environment was characterized by a rebound in investment banking activity as a result of robust deal
flow commensurate with global investment banking fee pool growth of 37%1. Equity Capital Markets (ECM), M&A, and loan
syndication fee pools reached record highs during the fiscal year, benefitting from the re-opening of economies resulting in
strong deal flow, compared to a muted environment in the prior fiscal year against an uncertain economic outlook and
backdrop.
› Trading activity was elevated in the first quarter of the fiscal year as markets continued to benefit from volatility-driven
tailwinds that characterized the second half of 2020. However, toward the end of the second quarter of fiscal 2021, trading
results began to be impacted by market normalization, albeit remaining above pre-pandemic levels. This was particularly
prevalent in fixed income trading which saw results impacted by reduced client activity. Repo–related financing also decreased
driven by spread compression as the market became more liquid and client demand for secured funding declined.
› Improvements in the credit environment, driven by the economic recovery from the COVID-19 pandemic, led to favourable
changes in our macroeconomic and credit quality outlook, resulting in releases of provisions on performing assets and lower
provisions on impaired loans.
1
Source: Dealogic, based on global investment bank fees, Fiscal 2021 as of November 21, 2021
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
43
Strategic priorities
OUR STRATEGY
PROGRESS IN 2021
PRIORITIES IN 2022
Build Deep, Multi-Product Client
Relationships
Lead with Advice, Solutions and Innovation
Continued to deepen relationships with clients
resulting in high quality mandates in Corporate
and Investment Banking and numerous franchise
firsts in Global Markets
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
Acted as lead-left bookrunner on Alexandria Real
Estate’s US$1.3 billion equity follow-on offering
which was the largest REIT equity offering since
2013
Continue to be a leader in targeted areas in the
U.K., Europe and Australia, Asia & other regions
aligned with our global expertise
Expand client coverage in underpenetrated
sectors and products
Drove higher levels of client engagement through
the provision of differentiated insights and
services
Reorganized our Global Markets business,
elevating our research platform and embedding
electronic and digital capabilities across sales &
trading businesses
Grow advisory & origination and accelerate
Sustainable Finance across all business areas
and continue to provide Environmental, Social
and Governance (ESG) related and sustainability
advice to clients
Enhance sales & trading client value and insights
from scaled electronic and digital strategy
Leverage Cross Platform Collaboration
Invest in, Engage and Enable our Talent
Simplify, Prioritize and Leverage our Scale
Evolve our Brand as an Innovative, Trusted
Partner
Acted as lead structuring agent and joint
bookrunner on Telus’ C$750 million sustainability-
linked bond which was the first of its kind in the
Canadian Market
Further aligned our delivery capabilities with how
our clients do business
Shifted to global business structures to improve
collaboration and drive enhanced client coverage
Advised Blackstone on its US$5.6 billion
acquisition of U.K. company Signature Aviation
Engaged and developed our talent at all levels,
with numerous key senior hires made across
businesses while championing internal mobility
Advanced our Diversity & Inclusion strategy and
continued to improve representation of diverse
talent
Focused on productivity and efficiency measures,
supported by key performance indicators to
monitor progress
Successfully maintained #1 market share position
in Canada1 and ranked as #1 Canadian Investment
Bank in the U.S.1 and continued to be viewed as a
trusted advisor / financer in the U.K., Europe, Asia
and Australia
Recognized by Greenwich Associates2 as a market
leader in Canada for equities trading and
research and won the Celent Model Sell Side
Award 20213 for Aiden®4
Advised Australia’s New South Wales government
on its A$11.1 billion sale of WestConnex Motorway
to Sydney Transport Partners
Continue to drive cross-platform and geographic
collaboration across businesses and asset
classes
Renew focus on talent development programs
and accelerate Diversity & Inclusion strategy
Continue to optimize balance sheet utilization
and strategically reallocate resources
Be recognized by our clients as an innovative,
trusted partner with best in class capabilities
Outlook
In fiscal 2022, we see constructive markets as a potential tailwind for M&A activity. We will continue to pursue market share
growth opportunities in our Investment Banking business, with a focus on targeted sectors and investment in talent. While we
anticipate our trading businesses will continue to be impacted by normalization, our focus remains on delivering robust results
across our Global Markets franchise through continued resource optimization, acceleration of cross-selling activities, further
deployment of electronic and digital capabilities, and building on our strong risk management practices. In Corporate Banking,
we will continue to pursue a moderate growth approach consistent with our focus on our balance sheet-enabled strategy to
deepen relationships with lending clients in order to drive growth in our non-lending businesses. This strategy will continue to be
underpinned by strong credit risk management practices, optimization of risk-weighted assets (RWA), and supporting our clients
in the execution of their strategies.
For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook
section.
1
2
3
4
Source: Dealogic, based on global investment bank fees, Fiscal 2021
Source: Greenwich Associates Awards, Fiscal 2021
Source: Celent Model, Fiscal 2021
Aiden® is an AI-based electronic trading platform that uses the computational power of deep reinforcement learning in its pursuit of improved trading results and insights
for clients.
44
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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) (2)
Credit information
PCL on impaired loans as a % of average net loans and acceptances
$
$
$
$
2021
4,553 $
5,634
10,187
(476)
(33)
(509)
5,427
5,269
4,187 $
4,823 $
5,542
(178)
Table 32
2020
5,135
4,749
9,884
750
489
1,239
5,362
3,283
2,776
4,031
6,251
(398)
18.3%
11.7%
710,200 $
122,900
100,000
73,500
6,414
(0.04)%
755,400
108,300
108,700
76,800
6,258
0.44%
Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)
2021 vs. 2020
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
$
(423)
25
(219)
(187)
7%
–
2%
(1)
(2)
The teb adjustment for 2021 was $518 million (2020 – $513 million). For further discussion, refer to the How we measure and report our business segments section.
Amounts have been revised from those previously presented.
Revenue by region (Millions of Canadian dollars)
10,500
9,000
7,500
6,000
4,500
3,000
1,500
0
2021
2020
Australia, Asia & other regions
U.K. & Europe
U.S.
Canada
Financial performance
2021 vs. 2020
Net income increased $1,411 million or 51% from last year, primarily driven by lower PCL and higher revenue in Corporate and
Investment Banking. These factors were partially offset by higher taxes reflecting an increase in the proportion of earnings from
higher tax rate jurisdictions, and lower revenue in Global Markets.
Total revenue increased $303 million or 3%, mainly due to higher M&A and loan syndication activity, as well as higher equity
trading revenue, across most regions. Lower residual funding costs, higher revenue associated with certain non-trading
portfolios, higher equity origination across most regions, and gains from the disposition of certain investment securities also
contributed to the increase. These factors were partially offset by lower fixed income trading revenue across all regions due to
spread compression in repo and secured financing products and reduced client activity, as well as the impact of foreign
exchange translation.
PCL decreased $1,748 million, as last year reflected elevated provisions on performing assets due to the impact of the
COVID-19 pandemic as compared to releases in the current year primarily driven by improvements in our macroeconomic and
credit quality outlook. Provisions on impaired loans in the prior year as compared to recoveries in the current year, largely in the
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
45
oil and gas sector, also contributed to the decrease, resulting in a decrease of 48 bps in the PCL on impaired loans ratio. For
further details, refer to Credit quality performance in the Credit risk section.
Non-interest expense increased $65 million or 1%, as higher compensation on improved results was largely offset by the
impact of foreign exchange translation.
Business line review
Corporate and Investment Banking
Corporate and Investment Banking comprises our corporate lending, municipal finance, loan syndication, debt and equity
origination, and M&A advisory services. 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 $4,823 million increased $792 million or 20% from last year.
Investment Banking revenue increased $802 million or 46%, primarily due to higher M&A and loan syndication activity across
most regions. Higher fixed income trading revenue in the U.S. and Europe, reflecting the impact of loan underwriting markdowns
in the prior year, higher equity origination across most regions, and higher revenue associated with certain non-trading
portfolios also contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.
Lending and other revenue remained relatively flat.
Table 33
Breakdown of total revenue (Millions of Canadian dollars)
Selected highlights
(Millions of Canadian dollars)
Total revenue (1)
Breakdown of revenue (1)
Investment banking
Lending and other (2)
Other information
Average assets
Average loans and acceptances, net
2021
2020
4,823 $ 4,031
$
2,559
2,264
1,757
2,274
81,400
73,300
92,600
83,000
(1)
The teb adjustment for the year ended October 31, 2021 was $37 million
(October 31, 2020 – $56 million). For further discussion, refer to the How we
measure and report our business segments section.
(2) Comprises our corporate lending, client securitization, and global credit
businesses.
Global Markets
5,000
4,000
3,000
2,000
1,000
0
2021
2020
Lending and other
Investment banking
Global Markets comprises our sales and trading businesses including fixed income, foreign exchange, commodities, and equities,
as well as our repo and secured financing products.
Financial performance
Global Markets revenue of $5,542 million decreased $709 million or 11% from last year.
Revenue in our Fixed income, currencies and commodities business decreased $365 million or 11%, largely driven by lower
fixed income trading revenue across all regions due to reduced client activity, and the impact of foreign exchange translation.
These factors were partially offset by gains from the disposition of certain investment securities.
Revenue in our Equities business increased $128 million or 9%, primarily due to higher equity trading revenue across all
regions, partially offset by the impact of foreign exchange translation.
Revenue in our Repo and secured financing business decreased $472 million or 29%, mainly due to spread compression and
reduced client activity driven by increased market liquidity.
Selected highlights
Table 34
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
2021
2020
5,542 $ 6,251
$
2,878
1,531
1,133
3,243
1,403
1,605
626,500
667,900
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
(1)
The teb adjustment for the year ended October 31, 2021 was $481 million
(October 31, 2020 – $457 million). For further discussion, refer to the How we
measure and report our business segments section.
(2) Comprises our secured funding businesses for internal businesses and
external clients.
Other
2021
2020
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.
46
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Financial performance
Revenue increased $220 million from last year, largely due to lower residual funding costs.
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), (2)
Total revenue (1), (2)
PCL
Non-interest expense (2)
Income (loss) before income taxes (1), (2)
Income taxes (recoveries) (1), (2)
Net income (loss) (2)
Table 35
2021
(321) $
421
100
(1)
405
(304)
(365)
61
$
$
$
2020
(57)
(179)
(236)
1
146
(383)
(436)
53
(1)
(2)
Teb adjusted.
Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth
Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
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, 2021 was $518 million and was $513 million last year. For the year ended October 31,
2021, revenue included gains of $394 million (October 31, 2020: gains of $90 million) on economic hedges of our U.S. Wealth
Management (including City National) share-based compensation plans, and non-interest expense included $382 million
(October 31, 2020: $89 million) of share-based compensation expense driven by changes in the fair value of liabilities relating to
our U.S. Wealth Management (including City National) share-based compensation plans.
The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each
year.
2021
Net income was $61 million, primarily due to asset/liability management activities and residual unallocated items, partially offset
by net unfavourable tax adjustments.
2020
Net income was $53 million, largely due to asset/liability management activities, partially offset by net unfavourable tax
adjustments and residual unallocated costs.
Quarterly financial information
Fourth quarter performance
Q4 2021 vs. Q4 2020
Fourth quarter net income of $3,892 million was up $646 million or 20% from a year ago. Diluted earnings per share (EPS) of $2.68
was up $0.45 and return on common equity (ROE) of 16.9% was up 90 bps. Our Common Equity Tier 1 (CET1) ratio of 13.7% was up
120 bps from a year ago. Our results reflected higher earnings across all of our business segments.
Total revenue increased $1,284 million or 12%, mainly due to higher group annuity sales, which is largely offset in PBCAE as
indicated below, and higher average fee-based client assets reflecting market appreciation and net sales. Higher M&A activity
across all regions and higher revenue associated with certain non-trading portfolios in Capital Markets also contributed to the
increase. In Canadian Banking and U.S. Wealth Management (including City National), volume growth more than offset the
impact of lower spreads. These factors were partially offset by the impact of foreign exchange translation, and lower fixed
income trading revenue across all regions as the prior year benefitted from increased client activity amidst elevated market
volatility.
Total PCL decreased $654 million and the PCL on loans ratio of (12) bps decreased 35 bps from last year, due to lower
provisions in Personal & Commercial Banking, Capital Markets and Wealth Management.
PBCAE increased $571 million, primarily due to higher group annuity sales, which is largely offset in revenue. Lower
favourable investment-related experience and business growth, primarily in longevity reinsurance, also contributed to the
increase. These factors were partially offset by favourable annual actuarial assumption updates in the current year largely
related to mortality and economic assumptions.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
47
Non-interest expense increased $525 million or 9%, mainly attributable to higher variable compensation on improved results
and higher staff-related costs. A legal provision in U.S. Wealth Management (including City National) also contributed to the
increase. These factors were partially offset by the impact of foreign exchange translation.
Income tax expense increased $196 million or 22%, primarily due to higher income before income taxes in the current
quarter. The effective income tax rate of 22.0% increased 30 bps from last year, mainly due to the impact of changes in earnings
mix.
Q4 2021 vs. Q3 2021
Net income of $3,892 million was down $404 million or 9% compared to last quarter, primarily due to lower releases of PCL, lower
spreads in Canadian Banking and U.S. Wealth Management (including City National), and a legal provision in U.S. Wealth
Management (including City National). These factors were partially offset by lower variable compensation.
Quarterly results and trend analysis
Our quarterly results are impacted by a number of trends and recurring factors, which include seasonality of certain businesses,
general economic and market conditions, and fluctuations in the Canadian dollar relative to other currencies. The following table
summarizes our results for the last eight quarters (the period):
Quarterly results (1)
(Millions of Canadian dollars, except per
share and percentage amounts)
Personal & Commercial Banking
Wealth Management (2)
Insurance
Investor & Treasury Services
Capital Markets (3)
Corporate Support (2), (3)
Total revenue
PCL
PBCAE
Non-interest expense
Income before income taxes
Income taxes
Net income
EPS – basic
– diluted
Effective income tax rate
Period average US$ equivalent
of C$1.00
2021
2020
Table 36
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
$ 4,605
3,444
1,501
548
2,298
(20)
12,376
(227)
1,032
6,583
4,988
1,096
$ 4,651 $ 4,527 $ 4,563
3,373
1,754
517
2,463
(2)
12,756
(540)
1,304
6,420
5,572
1,276
3,260
536
534
2,718
43
11,618
(96)
149
6,379
5,186
1,171
$ 4,373 $ 4,348 $ 4,400 $ 4,610
3,106
1,994
597
2,548
(19)
2,955
197
709
2,313
(241)
3,061
958
521
2,275
(96)
3,008
2,212
484
2,748
120
3,219
1,809
565
2,708
79
12,943
110
1,406
6,542
4,885
1,038
11,092
427
461
6,058
4,146
900
12,920
675
1,785
6,380
4,080
879
10,333
2,830
(177)
5,942
1,738
257
12,836
419
1,614
6,378
4,425
916
$ 3,892
$ 4,296 $ 4,015 $ 3,847 $ 3,246 $ 3,201 $ 1,481 $ 3,509
$ 2.68
2.68
$
2.97 $
2.97
2.76 $
2.76
2.66 $
2.66
2.23 $
2.23
2.20 $ 1.00 $ 2.41
2.40
1.00
2.20
22.0%
22.9%
22.6%
21.2%
21.7%
21.5%
14.8%
20.7%
$ 0.796
$ 0.812 $ 0.798 $ 0.779
$ 0.756 $ 0.737 $ 0.725 $ 0.760
(1)
(2)
(3)
Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth
Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
Teb adjusted. For further discussion, refer to the How we measure and report our business segments section of this 2021 Annual Report.
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 trading 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.
Market conditions subsequently improved, and while impacts from the COVID-19 pandemic and its associated downstream
implications persist, earnings have increased since the second quarter of 2020. 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. NIM has been negatively
impacted by margin compression over the period from the lower interest rate environment, mainly reflecting cumulative BoC rate
cuts of 150 bps in the second quarter of 2020.
Wealth Management revenue has benefitted from growth in average-fee based client assets, as well as volume growth over
the period. The lower interest rate environment, mainly reflecting the cumulative U.S. Fed rate cuts of 150 bps in the second
quarter of 2020, has negatively impacted revenue over the period.
Insurance revenue has fluctuated over the period, primarily due to the impact of changes in the fair value of investments
backing policyholder liabilities as well as the timing of group annuity sales, both of which are largely offset in PBCAE. The first
quarters of 2020 and 2021 as well as Q4 2021 reflect higher group annuity sales.
Investor & Treasury Services revenue has been impacted by interest rate movements, market volatility and client activity
over the period, which resulted in heightened fluctuations in the second and third quarters of 2020 following the onset of the
COVID-19 pandemic.
48
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity, with first quarter
results generally stronger than those in the remaining quarters. Markets experienced significant levels of volatility following the
onset of the COVID-19 pandemic, which resulted in increased client activity and fluctuations in trading revenue, including higher
trading revenue in the third quarter of 2020 and the first quarter of 2021. Elevated market volatility in the second quarter of 2020
also resulted in loan underwriting markdowns, with partial reversals in the latter half of 2020. 2021 generally saw strong results
from M&A and loan syndication activity as well as equity origination.
PCL on assets is comprised of provisions taken on performing assets and provisions taken on impaired assets. PCL on
performing assets has fluctuated over the period as it is impacted by macroeconomic conditions, changes in exposures and
credit quality. The impact of the COVID-19 pandemic resulted in a significant increase in provisions in 2020, largely in the second
quarter. Throughout 2021, we saw improvements in our macroeconomic and credit quality outlook resulting in releases of
provisions on performing assets. PCL on impaired assets trended lower over the period. The recovery that has been underway
since the sharp drop of economic activity in calendar Q2 2020 as well as the impact of the COVID-19 related government support
and calendar 2020 payment deferral programs, resulted in lower provisions, largely in our Canadian Banking retail portfolios
beginning the second half of 2020. We saw higher provisions on impaired loans in Capital Markets, largely in the oil and gas
sector, over the majority of 2020. Throughout 2021, we saw lower provisions on impaired loans in Capital Markets, largely due to
recoveries in the oil and gas sector.
PBCAE has fluctuated over the period as it includes the impact of changes in the fair value of investments backing
policyholder liabilities and the impact of group annuity sales, both of which are largely offset in Revenue. The fair value of
investments backing policyholder liabilities is impacted by changes in market conditions. PBCAE has also fluctuated due to the
impact of investment-related experience and claims costs over the period. Actuarial adjustments, which generally occur in the
fourth quarter of each year, also impact PBCAE.
Non-interest expense has generally trended upwards over the period. Variable compensation has fluctuated over the period,
commensurate with fluctuations in revenue and earnings, including the impact of decreased results in the second quarter of
2020. Changes in the fair value of our U.S. share-based compensation plans, which are largely offset in revenue, have also
contributed to fluctuations over the period and are impacted by market conditions. While we continue to focus on efficiency
management activities, expenses over the period reflect our ongoing investments in people and technology, including digital
initiatives. Beginning in the second quarter of 2020, Non-interest expense also reflected incremental COVID-19 related costs,
though these costs have subsided in 2021.
Our effective income tax rate has fluctuated over the period, mostly due to varying levels of tax adjustments and changes in
earnings mix. 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
Table 37
2021
2020
$
113,846 $
79,638
284,724
307,903
503,598
218,066
(4,089)
95,541
107,096
118,888
39,013
275,814
313,015
457,976
208,655
(5,639)
113,488
103,338
$ 1,706,323 $ 1,624,548
$ 1,100,831 $ 1,011,885
109,927
406,102
9,867
91,439
405,698
9,593
1,607,561
1,537,781
98,667
95
98,762
86,664
103
86,767
$ 1,706,323 $ 1,624,548
Securities are comprised of trading and investment securities.
(1)
(2) Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively.
2021 vs. 2020
Total assets increased $82 billion or 5% from last year. Foreign exchange translation decreased total assets by $68 billion.
Cash and due from banks was down $5 billion or 4%, primarily due to lower deposits with central banks, reflecting our short
term cash management activities. The impact of foreign exchange translation also contributed to the decrease.
Interest-bearing deposits with banks increased $41 billion, primarily due to higher deposits with central banks, reflecting our
short term cash and liquidity management activities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
49
Securities, net of applicable allowance, were up $9 billion or 3%, mainly due to higher equity trading securities reflecting
favourable market conditions and higher corporate debt securities, partially offset by the impact of foreign exchange translation
and lower government securities.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed decreased $5 billion or 2%,
largely due to the impact of foreign exchange translation and our liquidity management activities, partially offset by increased
client demand.
Loans (net of Allowance for loan losses) were up $57 billion or 9%, largely due to volume growth in residential mortgages and
wholesale loans. These factors were partially offset by the impact of foreign exchange translation.
Derivative assets were down $18 billion or 16%, mainly attributable to the impact of foreign exchange translation and lower
fair values on interest rate contracts. These factors were partially offset by higher fair values on foreign exchange contracts.
Other assets were up $4 billion or 4%, largely reflecting higher commodity trading receivables and increased employee
benefit assets. These factors were largely offset by the impact of foreign exchange translation.
Total liabilities increased $70 billion or 5% from last year. Foreign exchange translation decreased total liabilities by $68 billion.
Deposits increased $89 billion or 9%, mainly due to higher business and retail deposits driven by both higher liquidity
maintained by our clients amidst the COVID-19 pandemic and higher client activity. Higher issuances of short-term notes also
contributed to the increase. These factors were partially offset by the impact of foreign exchange translation.
Derivative liabilities were down $18 billion or 17%, mainly attributable to the impact of foreign exchange translation and
lower fair values on interest rate contracts. These factors were partially offset by higher fair values on foreign exchange
contracts.
Other liabilities remained flat as higher obligations related to securities sold short were fully offset by the impact of foreign
exchange translation.
Total equity increased $12 billion or 14% primarily reflecting earnings, net of dividends.
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 2021 and 2020, we did not derecognize any mortgages securitized through the NHA MBS program.
For further details, refer to Note 6 and Note 7 of our 2021 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, 2021, we did not securitize any
commercial mortgages (October 31, 2020 – $469 million). Our continuing involvement with the transferred assets is limited to
servicing certain of the underlying commercial mortgages sold. As at October 31, 2021, there was $2 billion of commercial
mortgages outstanding that we continue to service related to these securitization activities (October 31, 2020 – $2 billion).
Involvement with unconsolidated structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our
customers’ financing and investing needs, including securitization of our clients’ financial assets, creation of investment
products, and other types of structured financing.
We have the ability to use credit mitigation tools such as third-party guarantees, credit default swaps, and collateral to
mitigate risks assumed through securitization and re-securitization exposures. The process in place to monitor the credit quality
of our securitization and re-securitization exposures involves, among other things, reviewing the performance data of the
underlying assets. We affirm our ratings each quarter and formally confirm or assign a new rating at least annually. For further
details on our activities to manage risks, refer to the Risk management section.
Below is a description of our activities with respect to certain significant unconsolidated structured entities. For a complete
discussion of our interests in consolidated and unconsolidated structured entities, refer to Note 7 of our 2021 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.
50
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 $304 million during the year (October 31,
2020 – $277 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)
2021
Allocable
notional
amounts
Maximum
exposure
to loss (2)
Notional of
committed
amounts (1)
Table 38
2020
Allocable
notional
amounts
Maximum
exposure
to loss (2)
$ 40,876 $ 38,330 $ 38,330 $ 42,803 $ 40,137 $ 40,137
2,666
2,666
2,666
2,546
2,546
2,546
$ 43,422 $ 40,876 $ 40,876 $ 45,469 $ 42,803 $ 42,803
Based on total committed financing limit.
(1)
(2) Not presented in the table above are derivative assets with a fair value of $17 million (October 31, 2020 – $60 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 2021 Annual Consolidated Financial Statements for more details.
Includes $9 million (October 31, 2020 – $2 million) of Financial standby letters of credit.
(3)
As at October 31, 2021, the notional amount of backstop liquidity facilities we provide decreased by $1,927 million or 5% from last
year, primarily due to the impact of foreign exchange translation. The notional amount of partial credit enhancement facilities we
provide decreased by $120 million or 5% from last year, primarily due to the impact of foreign exchange translation.
Maximum exposure to loss by client type
Table 39
As at October 31 (Millions of dollars)
Outstanding securitized assets
Auto and truck loans and leases
Consumer loans
Credit cards
Dealer floor plan receivables
Equipment receivables
Fleet finance receivables
Insurance premiums
Residential mortgages
Student loans
Trade receivables
Transportation finance
Total
Canadian equivalent
2021
2020
US$
C$
Total C$
US$
C$
Total C$
$
$ 11,546 $
2,466
3,876
906
2,227
366
170
–
1,587
2,337
2,163
3,752 $ 18,048 $ 10,163
2,869
3,054
4,070
5,309
889
1,892
2,349
2,757
715
667
216
638
–
873
1,956
1,965
2,445
2,893
1,394
2,780
–
510
770
–
213
428
873
–
–
102
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
$ 27,644 $
6,648 $ 40,876 $ 27,066
$ 34,228 $
6,648 $ 40,876 $ 36,058
$
$
6,745
$ 42,803
6,745
$ 42,803
Our overall exposure decreased by 5% compared to last year primarily due to the impact of foreign exchange translation.
Correspondingly, total assets of the multi-seller conduits decreased by $1,890 million or 5% from last year. All of the multi-seller
conduits assets were internally rated A or above. 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 two of the Canadian multi-seller conduits are reviewed by Dominion Bond Rating Service (DBRS) and
Moody’s while one of the Canadian multi-seller conduits is also reviewed by S&P. 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, 2021, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $25 billion, an
increase of $1,488 million or 6% from last year, primarily due to higher client usage. The rating agencies that rate the ABCP rated
100% (October 31, 2020 – 100%) of the total amount issued within the top ratings category.
Structured finance
We 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, 2021, our
maximum exposure to loss from these unconsolidated municipal bond TOB trusts was $3 billion (October 31, 2020 – $3 billion).
We provide senior warehouse financing to 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, 2021, our maximum exposure to loss associated with
the outstanding senior warehouse financing facilities was $951 million (October 31, 2020 – $88 million). The increase in our
maximum exposure to loss from last year was driven by increased client utilization and the addition of new financing facilities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
51
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, 2021, our maximum exposure to loss associated with the outstanding senior
financing facilities was $4 billion (October 31, 2020 – $3 billion). The increase in our maximum exposure to loss from last year was
driven by the addition of new financing facilities partially offset by the repayment and termination of existing 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, 2021, our maximum exposure
to loss was $3 billion (October 31, 2020 – $2 billion). The increase in our maximum exposure to loss from 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, 2021, our maximum exposure to loss on these funds was
$606 million (October 31, 2020 – $278 million). The increase in our maximum exposure to loss from last year was driven by the
addition of new financing facilities.
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, 2021, our maximum exposure to loss in
these entities was $12 billion (October 31, 2020 – $10 billion). The increase in our maximum exposure to loss compared to last year
reflects an increase in client activity with third-party securitization vehicles partially offset by the impact of foreign exchange
translation. Interest and non-interest income earned in respect of these investments was $89 million (October 31, 2020 –
$112 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, 2021 amounted to $414
billion compared to $387 billion last year. The increase compared to last year was primarily driven by growth in securities lending
indemnifications and other commitments to extend credit partly offset by decreases in back stop liquidity facilities and
sponsored repo guarantees. Refer to Liquidity and funding risk and Note 23 of our 2021 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 risk-aware culture and risk management approach. 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 and addressed in our risk frameworks and policies. 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.
52
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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, financial and operational resilience, reputation, business model, or strategy, as well as those that
could potentially materially impact us as the risks evolve. In addition to the Impact of pandemic risk factor outlined in the Impact
of COVID-19 pandemic section, the following represents our top and emerging risks:
Top & emerging risks
Description
Business and economic
conditions
Information technology and
cyber risks
Environmental and
social risk
(including climate change)
Digital disruption
and innovation
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, spending habits and sentiment, as well as consumer borrowing and repayment
patterns, unemployment rates, the differing paths to economic recovery among nations across the
globe, particularly in light of the prolonged COVID-19 pandemic and range of containment measures, the
level of business investment and overall business sentiment, the long-term impact from the pandemic on
vulnerable sectors, the level of government spending as well as fiscal and monetary policy, the level of
activity and volatility of the financial markets, supply chain challenges and labour shortages affecting
certain sectors, and inflation or possible stagflation. Moreover, interest rate changes and actions taken
by central banks to manage inflation or the broader economy would have implications for us. Our
financial results are sensitive to changes in interest rates, as described in the Systemic risk section.
For example, a slowdown in economic growth or an economic downturn could adversely impact
employment rates and household incomes, consumer spending, corporate earnings and business
investment 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. Additional risks are
emerging around governments’ withdrawal of COVID-19 pandemic support measures, and how they will
seek to recoup the unprecedented levels of support. This may include, for example, changes to tax policy
to address fiscal capacity concerns and to balance budgets in the future.
There are also emerging risks related to changing demographics as well as the potential implications
that a prolonged low interest rate environment will have, for example, on increasing wealth inequality
and delayed 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 Impact of COVID-19 pandemic section of this 2021 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. Ransomware threats are
growing in sophistication and being used to launch major supply chain attacks. IT and cyber risks have
also 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 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.
We, like other organizations, are increasingly under scrutiny to address social and racial inequality and
human rights issues, and failure to do so may result in strategic, reputational and regulatory risks.
Risks associated with climate change are evolving as it relates to the global transition to a net-zero
economy and physical climate risks (e.g., extreme weather events), 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. 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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
53
Top & emerging risks
Description
Canadian housing and
household indebtedness
Geopolitical uncertainty
Privacy, data and third-party
related risks
Regulatory changes
Culture and conduct risks
Canadian housing and household indebtedness risks remain elevated, but have moderated as
restrictions related to the COVID-19 pandemic have eased and employment has rebounded. However, the
unemployment rate remains above pre-pandemic levels. Concerns related to housing affordability in
certain markets and levels of mortgage-related Canadian household debt – which were already elevated
before and during the COVID-19 pandemic – could escalate if additional waves of the COVID-19 pandemic
emerge, if the period of economic recovery is prolonged, or if the lending environment changes,
potentially resulting in, among other things, higher credit losses.
While real estate rental activity has rebounded in certain markets, changing consumer preferences and
work arrangements, and the impact from possible future waves of the COVID-19 pandemic, may continue
to have an impact on future real estate investment and demand.
Persistent trade tensions, supply chain disruptions, policy changes, COVID-19 vaccine nationalism and
vaccine diplomacy 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. and its allies over a
number of issues, including trade, technology, human rights, Hong Kong, Macau, and Taiwan. Tensions
between China and its neighbours over territorial claims add further global and economic uncertainty. In
addition, tensions with Russia remain high over allegations of cyber-attacks, election interference,
adventurism, and the mistreatment of anti-corruption and pro-democracy activists. Other geopolitical
tensions could also add to economic and market uncertainties.
More broadly, the post-pandemic future of global trade remains uncertain, as countries look to decrease
reliance on the global supply chain. Increased protectionism and economic nationalism could reshape
global alliances as a steady COVID-19 vaccine supply and the supply of other critical goods of economic
and national importance (e.g., semiconductors) remain one of the top priorities of governments. We will
continue to monitor these developments and others, and will assess the implications they have on us.
The protection and responsible use of personal information are critical to maintaining our clients’ trust.
In addition, the management and governance of our data also remains a top risk given the high value
attributed to our data for the insights it can generate for clients and communities. Resulting implications
from failing to manage data and privacy risks could include financial loss, theft of intellectual property
and/or 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 increases as we continue to partner with
third-party service providers and adopting new business models and technologies (e.g., cloud
computing, AI and machine learning). Attackers gravitate towards vulnerabilities in an ecosystem, and
the weakest link in the supply chain can be a supplier or third-party service provider, who may not have
sufficiently robust controls. Privacy, data and third-party related risks have been heightened as the use
of work from home arrangements remains common practice. Third-party providers critical to our
operations are 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 or are coming into effect, across multiple
jurisdictions, such as anti-money laundering regulations, interest rate benchmark reform, as well as
privacy, climate and consumer protection, continue to impact our operations and strategies. For more
details, refer to the Legal and regulatory environment risk section.
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 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 steps to continue to strengthen our conduct
practices, and prevent and detect outcomes which could potentially harm clients, 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.
54
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Overview
As a global financial institution with a diversified business model, we actively manage a variety of risks to help protect and
enable our businesses by following these risk management principles:
Risk management principles
(cid:129)
(cid:129)
(cid:129)
(cid:129)
Effectively balance risk and reward to enable sustainable growth.
Collectively share the responsibility for risk management.
Undertake only risks we understand and make thoughtful and future-focused risk decisions.
Always uphold our Purpose and Vision, and consistently abide by our Values and Code of Conduct to maintain our
reputation and the trust of our clients, colleagues and communities.
(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 responding 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, 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 vulnerabilities in the short-, medium- or long-term that may impact our financial results, financial
and operational resilience, reputation, business model, or strategy. 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
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
55
Enterprise risk management
Under the oversight of the Board and senior management, the Enterprise Risk Management Framework (ERMF) provides an
overview of our enterprise-wide programs for managing risk, including identifying, assessing, measuring, controlling, monitoring
and reporting on the significant risks that face the organization.
Risk governance
We have an effective and well-established governance framework in place to ensure that risks impacting our businesses are
identified, appropriately categorized, assessed, managed and communicated to the Board in a timely manner. The risk
governance framework has been established, and is maintained in alignment with, the expectations of 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
responsibility for ensuring 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
and 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
56
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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.
k A p p e t ite Components
Risk Capacity
R i s
Risk Appetite &
Board Delegated Authorities
Management Delegated
Authorities & Risk Limits
Risk Profile
Risk Posture
Quantitative statements
Qualitative statements
Risk appetite statements
(cid:129)
(cid:129)
(cid:129) Manage earnings volatility and exposure to future
losses under normal and stressed conditions.
Avoid excessive concentrations of risk.
Ensure capital adequacy and sound management of
liquidity and funding risk.
Ensure sound management of operational and
regulatory compliance risk.
(cid:129)
(cid:129) Maintain strong credit ratings and a risk profile in the
top half of our peer group.
(cid:129)
(cid:129)
(cid:129)
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 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)
protect our stakeholders.
Always be operationally prepared and financially
resilient for a potential crisis.
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.
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, especially in regards to forward-looking projections and analyses,
including but not limited to, stress testing, recovery and resolution planning, and 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 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: 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: evaluates, from a forward looking perspective, 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: the realized values are compared 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)
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
57
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 our fiscal 2021 stress testing exercises, we addressed several
emerging risks inclusive of further waves of the COVID-19 pandemic, inflation risk as well as physical and transitional climate risk,
with a focus on the impacts of these risks on revenue, net income and capital projections.
Ongoing stress testing and scenario analyses within specific risk types, such as market risk (including Interest Rate Risk in
the Banking Book (IRRBB)), liquidity risk, retail and wholesale credit risk, operational risk, and insurance risk, supplement and
support our enterprise-wide analyses. Results from these risk-specific programs are used in a variety of decision-making
processes including risk limit setting, portfolio composition evaluation, risk appetite articulation and business strategy
implementation.
In addition to ongoing enterprise-wide and risk specific stress testing programs, we use ad hoc and reverse stress testing to
deepen our knowledge of the risks we face. Ad hoc stress tests are one-off analyses used to investigate developing conditions or
to stress a particular portfolio in more depth. Reverse stress tests, starting with a severe outcome and aiming to reverse-
engineer scenarios that might lead to it, are used in risk identification and understanding of risk/return boundaries.
In addition to internal stress tests, we participate in a number of regulator-required stress test exercises, on a periodic basis,
across several jurisdictions.
Model governance and validation
Quantitative models are used for many purposes including, but not limited to, the valuation of financial products, the
identification, measurement and management of different types of risk, stress testing, assessing capital adequacy, informing
business and risk decisions, measuring compliance with internal limits, meeting financial reporting and regulatory requirements,
and issuing public disclosures.
Model risk is the risk of adverse financial and/or reputational consequences to the enterprise arising from the use or misuse
of 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 any new risk considerations that may emerge from the
growing use of Artificial Intelligence (AI) methods and applications in our models across our organization.
Prior to being used, 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 risk 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.
58
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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
Internal
Controls
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 and Suitability Risk 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. Risk Appetite is supported by Risk Approval Authorities delegated
by the Board to senior management which provide thresholds for escalation of exposures and transactions to the Risk
Committee of the Board for review and approval. The allocation of Risk Appetite and Board Delegated Authorities may be
supported by the establishment of management delegated authorities and/or risk limits. These represent the maximum level of
risk permitted for a line of business, portfolio, individual or other group, and are used to implement risk management strategies
and govern ongoing operations. 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.
Risk review and approval processes
Risk review and approval processes provide an important 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 are 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 internal 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. The Risk Committee of the Board receives a CRO report at each meeting that has been reviewed by senior
management, and which includes, among others, top and emerging risks, industry trends or other notable items. 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 to
drive positive outcomes for our clients, employees, stakeholders, financial markets and our reputation. We hold ourselves to the
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
59
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 purpose and values and support our risk appetite statements.
Risk culture is a subset of our overall culture that influences how, individually and collectively, we take and manage risks.
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 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
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 2021 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 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.
60
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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;
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.
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
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 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. 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.
These parameters are determined based primarily on historical experience from internal credit risk rating systems in
(cid:129)
(cid:129)
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
61
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.
For further details, refer to the Critical accounting policies and estimates section.
(cid:129)
(cid:129)
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
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. For further details on replacement cost
and credit equivalent amounts, refer to Note 8 of our 2021 Annual Consolidated Financial Statements.
(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 an obligor 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.
62
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Internal ratings map*
Table 40
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%
0.0000% – 0.0300% 0.0151% – 0.0250%
0.0000% – 0.0350% 0.0251% – 0.0350%
0.0351% – 0.0450%
0.0451% – 0.0550%
0.0551% – 0.0650%
0.0651% – 0.0750%
0.0751% – 0.0850%
0.0851% – 0.1000%
0.1001% – 0.1770%
0.1771% – 0.3705%
0.3706% – 0.7065%
0.7066% – 1.1600%
1.1601% – 1.6810%
1.6811% – 2.3490%
2.3491% – 4.4040%
4.4041% – 7.0010%
7.0011% – 13.1760%
13.1761% – 24.9670%
24.9671% – 99.9990%
100%
100%
1+
1H
1M
1L
2+H
2+M
2+L
2H
2M
2L
2-H
2-M
2-L
3+H
3+M
3+L
3H
3M
3L
4
5
6
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 2021 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 2021 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.
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.
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.
(cid:129)
(cid:129)
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
63
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 the COVID-19 pandemic, 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 maps PD bands to various summarized risk levels for retail exposures:
Internal ratings map*
Table 41
PD bands
0.030% – 3.844%
3.845% – 6.786%
6.787% – 99.99%
100%
Description
Low risk
Medium risk
High risk
Impaired/Default
*
This table represents an integral part of our 2021 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 (LTV) 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.
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 LTV
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.
64
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 risk approval
authorities. If a transaction exceeds 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 risk 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)
The allocation of risk appetite and Board delegated authorities are supported by the establishment of risk limits which
take into account both regulatory constraints and internal risk management judgment. Risk 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 2021
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 42
October 31
2021
October 31
2020
As at
Credit risk (1), (2)
Counterparty credit risk (3)
Credit risk (1)
Counterparty credit risk (3)
On-balance
sheet amount
Off-balance sheet
amount (4)
Undrawn Other (5)
Repo-style
transactions
Derivatives
Total
exposure
On-balance
sheet amount
Off-balance sheet
amount (4)
Undrawn Other (5)
Repo-style
transactions
Derivatives
Total
exposure
(Millions of Canadian dollars)
Retail
Residential secured (6)
Qualifying revolving (7)
Other retail
Total retail
$ 478,235 $ 206,963 $
146 $
$ 362,793 $ 96,609 $
30,080
85,362
90,932
19,422
– $
–
146
– $
–
–
– $
– $ 459,402 $
–
–
121,012
104,930
338,653 $ 88,728 $
24,328
68,325
67,779
14,183
– $ 685,344 $
431,306 $ 170,690 $
$
Wholesale (8)
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil and gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining and metals
Public works and infrastructure
Real estate and related
Other services
Telecommunication and media
Transportation
Utilities
Other sectors
9,400 $
6,288
37,053
14,792
6,254
5,678
32,977
11,277
969
293,250
7,308
3,591
22,238
993
1,427
76,141
23,872
5,294
6,151
9,059
3,084
1,756 $
9,184
4,545
9,380
6,949
10,328
19,252
2,405
991
4,794
8,933
5,715
3,201
3,730
1,963
14,223
13,362
9,748
6,832
17,152
1,139
30 $
173
765
573
180
1,474
2,623
485
201
1,533
594
237
412
952
391
1,568
1,860
598
1,319
4,131
7
– $
–
117,996
–
–
–
64,593
388
–
23,536
–
49
12
–
–
–
47
–
–
–
7
84 $
1,124
30,888
698
1,058
7,493
16,262
848
17
5,692
811
5,447
174
237
239
1,176
1,316
1,976
1,426
4,464
6,960
11,270 $
16,769
191,247
25,443
14,441
24,973
135,707
15,403
2,178
328,805
17,646
15,039
26,037
5,912
4,020
93,108
40,457
17,616
15,728
34,806
11,197
9,562 $
8,464
47,547
15,119
6,303
7,805
24,623
3,755
1,170
245,204
7,285
4,626
17,518
1,692
1,369
69,949
25,570
5,104
7,516
8,745
1,699
1,854 $
7,564
5,136
9,282
6,945
10,779
18,664
1,098
851
4,727
9,398
5,065
2,969
3,930
2,007
13,712
12,289
7,444
5,612
18,705
647
– $
–
67
67 $
34 $
289
648
509
538
1,600
3,171
522
125
1,624
723
257
437
979
340
1,573
1,336
83
1,533
3,849
1
– $
–
–
– $
– $
–
–
427,381
92,107
82,575
– $
602,063
– $
–
95,412
–
–
–
57,105
90
–
43,806
–
13
13
–
–
–
5
–
–
–
17
108 $
791
26,069
649
1,252
2,492
14,984
1,055
41
6,963
801
3,898
230
338
239
1,180
1,857
1,752
1,714
3,852
9,291
11,558
17,108
174,812
25,559
15,038
22,676
118,547
6,520
2,187
302,324
18,207
13,859
21,167
6,939
3,955
86,414
41,057
14,383
16,375
35,151
11,655
Total wholesale
$ 577,096 $ 155,582 $20,106 $ 206,628 $ 88,390 $1,047,802 $
520,625 $ 148,678 $ 20,171 $ 196,461 $ 79,556 $
965,491
Total exposure (9)
$1,055,331 $ 362,545 $20,252 $ 206,628 $ 88,390 $1,733,146 $
951,931 $ 319,368 $ 20,238 $ 196,461 $ 79,556 $ 1,567,554
By geography (8), (10)
Canada
U.S.
Europe
Other International
$ 693,700 $ 264,708 $ 9,141 $
245,929
62,509
53,193
69,295
22,667
5,875
7,866
1,991
1,254
88,523 $ 27,978 $1,084,050 $
54,617
42,483
21,005
404,977
155,407
88,712
27,270
25,757
7,385
655,560 $ 227,837 $ 9,595 $
63,423
199,705
21,158
50,940
6,950
45,726
6,404
2,312
1,927
84,761 $ 27,044 $ 1,004,797
334,612
23,142
41,938
140,593
22,429
43,754
87,552
6,941
26,008
Total exposure (9)
$1,055,331 $ 362,545 $20,252 $ 206,628 $ 88,390 $1,733,146 $
951,931 $ 319,368 $ 20,238 $ 196,461 $ 79,556 $ 1,567,554
(1)
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.
(2) Commencing Q2 2021, certain exposures are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital
measurement and reporting.
(3) Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory
(4)
(5)
(6)
(7)
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. Beginning Q1 2021, we have prospectively implemented the transitional methodology
changes to the securitization framework under the Capital Adequacy Requirement (CAR) guidelines, which increased undrawn and drawn exposures.
(8) Certain amounts by sector and geography have been revised from those previously presented.
(9)
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 Impact of COVID-19 pandemic section.
(10) Geographic profile is based on country of residence of the borrower.
2021 vs. 2020
Total credit risk exposure increased $166 billion or 11% from last year, primarily due to volume growth in loans and acceptances in
our retail and wholesale portfolios, higher deposits with central banks, an increase in derivatives exposure, and higher repo-style
transactions, partially offset by the impact of foreign exchange translation.
66
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Net European exposure by country and client type (1), (2)
As at
October 31
2021
Table 43
October 31
2020 (3)
(Millions of Canadian dollars)
Outstanding Securities (4)
transactions Derivatives
Financials
Sovereign
Corporate
Total
Total
Asset type
Client type
Loans
Repo-style
U.K.
Germany
France
$ 10,128 $ 20,462 $
1,582
1,505
7,515
3,222
Total U.K., Germany, France
13,215
31,199
Ireland
Italy
Portugal
Spain
Total peripheral
Luxembourg
Netherlands
Norway
Sweden
Switzerland
Other
1,098
94
1
343
1,536
3,567
872
166
425
948
3,251
861
328
11
251
1,451
4,497
847
1,358
1,666
10,557
2,661
Total other Europe
9,229
21,586
652 $ 2,833 $ 12,025 $ 11,494 $ 10,556 $ 34,075 $ 26,920
9,811
2,382
4,629
2,207
9,335
5,174
1,941
986
5,012
1,981
214
407
24
40
716
433
–
–
16
449
27
62
118
9
235
112
563
3,454
19,018
16,083
13,483
48,584 41,360
37
10
–
4
51
45
244
16
14
86
114
519
941
159
10
177
1,287
2,532
807
1,296
826
888
1,727
–
83
–
–
83
3,867
–
142
1,074
10,147
1,493
1,488
190
2
437
2,117
1,737
1,218
220
214
791
2,918
2,429
432
12
614
1,390
273
20
542
3,487
2,225
8,136
2,025
1,658
2,114
11,826
6,138
9,724
2,534
1,568
1,874
6,466
4,443
8,076
16,723
7,098
31,897 26,609
Net exposure to Europe (5), (6)
$ 23,980 $ 54,236 $
1,728 $ 4,024 $ 28,381 $ 32,889 $ 22,698 $ 83,968 $ 70,194
(1) 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
(2)
(3)
(4)
the borrower.
Exposures are calculated on a fair value basis and net of collateral, which includes $164 billion against repo-style transactions (October 31, 2020 – $138 billion) and
$9 billion against derivatives (October 31, 2020 – $14 billion).
Amounts have been revised from those previously presented.
Securities include $12 billion of trading securities (October 31, 2020 – $9 billion), $29 billion of deposits (October 31, 2020 – $19 billion), and $13 billion of investment
securities (October 31, 2020 – $13 billion). Trading and investment securities amounts have been revised from those previously presented.
Excludes $2 billion (October 31, 2020 – $3 billion) of exposures to supranational agencies, predominantly in Luxembourg.
(5)
(6) Reflects $1 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2020 – $1 billion).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
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 44
(Millions of Canadian dollars,
except percentage amounts)
Region (2)
Canada
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
Total Canada (3)
U.S. (4)
Other International (4)
Total International
As at October 31, 2021
Residential mortgages
Home equity
lines of credit
Insured (1)
Uninsured
Total
Total
$
8,407 48% $
12,742 32
34,211 20
20,680 50
9,179 46
13,314 20
98,533 28
–
1
–
–
8,944
27,567
135,767
20,821
10,714
51,823
52% $
68
80
50
54
80
255,636
72
23,422 100
2,740 100
1
–
26,162 100
$
17,351
40,309
169,978
41,501
19,893
65,137
354,169
23,423
2,740
26,163
1,602
3,135
15,891
5,343
1,970
7,383
35,324
1,413
1,518
2,931
Total
$ 98,534 26% $ 281,798
74% $ 380,332
$
38,255
(Millions of Canadian dollars,
except percentage amounts)
Region (2)
Canada
$
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
Total Canada (3)
U.S. (4)
Other International (4)
Total International
As at October 31, 2020
Residential mortgages
Home equity
lines of credit
Insured (1)
Uninsured
Total
Total
$
8,181
13,265
37,779
21,245
9,350
14,491
104,311
1
–
1
51% $
36
26
52
48
25
33
–
–
–
7,824
24,059
110,247
19,300
10,163
43,383
214,976
20,331
2,978
23,309
49% $
64
74
48
52
75
67
100
100
100
16,005
37,324
148,026
40,545
19,513
57,874
319,287
20,332
2,978
23,310
1,684
3,300
16,147
5,830
2,148
7,926
37,035
1,651
1,282
2,933
39,968
Total
$ 104,312
30% $ 238,285
70% $ 342,597
$
(1)
Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canadian
Mortgage and Housing Corporation or other private mortgage default insurers.
(2) Region is based upon the address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador,
(3)
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 $354 billion (October 31, 2020 – $319 billion) includes $11 billion (October 31,
2020 – $10 billion) of mortgages with commercial clients in Canadian Banking, of which $8 billion (October 31, 2020 – $7 billion) are
insured mortgages, and $18 billion (October 31, 2020 – $18 billion) of residential mortgages held for securitization purposes in Capital
Markets. All of the residential mortgages held for securitization purposes are insured (October 31, 2020 – all insured).
(4) 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.
68
Royal Bank of Canada: Annual Report 2021
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 45
As at
October 31
2021
October 31
2020
Canada
U.S. and other
International
Total
Canada
U.S. and other
International (1)
27%
71
2
71%
28
1
77%
22
1
29%
68
3
100% 100%
100%
100%
100%
Total
74%
25
1
Amortization period
≤ 25 years
> 25 years ≤ 30 years
> 30 years ≤ 35 years
Total
75%
25
–
100%
(1)
The percentage amounts of residential mortgages by remaining amortization period have been revised from those previously presented.
Average LTV ratios
The following table provides a summary of our average LTV ratios for newly originated and acquired uninsured residential
mortgages and RBC Homeline Plan® products by geographic region, as well as the respective LTV ratios for our total Canadian
Banking residential mortgage portfolio outstanding:
Average LTV ratios
Table 46
For the year ended
October 31
2021
Uninsured
October 31
2020
Uninsured
Residential
mortgages (1)
RBC Homeline
Plan® products (2)
Residential
mortgages (1)
RBC Homeline
Plan® products (2)
Average of newly originated
and acquired for the period,
by region (3)
Atlantic provinces
Quebec
Ontario
Alberta
Saskatchewan and Manitoba
B.C. and territories
U.S.
Other International
Average of newly originated
and acquired for the
period (4), (5)
Total Canadian Banking
residential mortgages
portfolio (6)
74%
72
71
73
74
69
74
73
72%
52%
75%
74
68
72
75
67
n.m.
n.m.
74%
73
71
73
74
69
72
69
69%
71%
46%
57%
75%
73
68
72
75
66
n.m.
n.m.
69%
49%
Residential mortgages exclude residential mortgages within the RBC Homeline Plan® products.
(1)
(2) RBC Homeline Plan® products are comprised of both residential mortgages and home equity lines of credit.
(3) 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.
(4)
(5)
(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 2021
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
Table 47
(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
For the year ended
October 31
2021
$ (168)
(46)
(453)
(5)
(672)
(81)
October 31
2020
$ 2,875
212
1,140
4
4,231
120
$ (753)
$ 4,351
$ (684)
(666)
$ 1,071
1,560
(1,350)
2,631
604
74
678
937
663
1,600
$ (672)
$ 4,231
PCL on loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances
(0.10)%
0.10%
0.63%
0.24%
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
$
24
254
288
31
597
86
683
7
(10)
(3)
–
(2)
(2)
$
35
395
471
49
950
163
1,113
5
377
382
(18)
123
105
$
678
$ 1,600
(1) Geographic information is based on residence of the borrower.
2021 vs. 2020
Total PCL was $(753) million. PCL on loans of $(672) million decreased $4,903 million from last year, due to lower provisions in
Personal & Commercial Banking, Capital Markets and Wealth Management. The PCL on loans ratio of (10) bps decreased 73 bps.
PCL on performing loans was $(1,350) million, compared to $2,631 million in the prior year, reflecting elevated provisions in
Personal & Commercial Banking, Capital Markets and Wealth Management in the prior year due to the impact of the COVID-19
pandemic and releases in the current year primarily driven by improvements in our macroeconomic and credit quality outlook.
PCL on impaired loans of $678 million decreased $922 million or 58%, largely reflecting the economic recovery underway in
the current year. The decrease largely related to provisions taken in the prior year in Capital Markets and Wealth Management as
compared to recoveries in the current year. Lower provisions in Personal & Commercial Banking also contributed to the
decrease.
PCL on loans in Personal & Commercial Banking decreased $3,043 million, primarily reflecting provisions on performing loans in
our Canadian Banking portfolios in the prior year as compared to releases in the current year, as described above. Lower
provisions on impaired loans in our Canadian Banking retail portfolios also contributed to the decrease due to the economic
recovery underway and the continued impact of the COVID-19 related government support programs.
70
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
PCL on loans in Wealth Management decreased $258 million, due to lower provisions in U.S. Wealth Management (including
City National). The decrease largely reflected provisions on performing loans in the prior year as compared to releases in the
current year, as described above. Lower provisions on impaired loans, as described above, also contributed to the decrease, as
the prior year reflected provisions on impaired loans compared to recoveries in the current year.
PCL on loans in Capital Markets decreased $1,593 million, mainly reflecting provisions on performing loans in the prior year
as compared to releases in the current year, as described above. Lower provisions on impaired loans, as described above, also
contributed to the decrease, as the prior year reflected provisions on impaired loans compared to recoveries in the current year,
largely in the oil and gas sector.
Gross impaired loans (GIL)
(Millions of Canadian dollars, except percentage amounts)
Personal & Commercial Banking
Wealth Management
Capital Markets
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 48
As at and for the year ended
October 31
2021
October 31
2020
$ 1,590 $ 1,645
345
1,205
233
485
$ 2,308 $ 3,195
$
716 $
555
692
754
1,271
1,446
23
412
435
212
390
602
32
1,039
1,071
216
462
678
$ 2,308 $ 3,195
$ 3,195 $ 2,976
3,837
(1,498)
(1,681)
(439)
1,726
(721)
(1,169)
(723)
$ 2,308 $ 3,195
0.31%
0.30%
0.24%
4.65%
0.26%
0.45%
0.47%
0.33%
0.26%
4.59%
0.41%
1.22%
(1) Geographic information is based on residence of the borrower.
(2) 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.
(3)
2021 vs. 2020
Total GIL of $2,308 million decreased $887 million or 28% from last year and the total GIL ratio of 31 bps decreased 16 bps, due to
lower impaired loans in Capital Markets, Wealth Management and Personal & Commercial Banking, reflecting the economic
recovery underway.
GIL in Personal & Commercial Banking decreased $55 million or 3%, primarily due to lower impaired loans in our Canadian
Banking commercial portfolios, reflecting the economic recovery underway and the continued impact of the COVID-19 related
government support programs.
GIL in Wealth Management decreased $112 million or 32%, primarily due to lower impaired loans in U.S. Wealth Management
(including City National), as described above, largely in the consumer staples sector.
GIL in Capital Markets decreased $720 million or 60%, due to lower impaired loans in most sectors, as described above,
including the oil and gas sector.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
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 49
As at
October 31
2021
October 31
2020
$ 3,478 $ 4,424
404
1,281
6
320
620
1
4,419
52
6,115
147
$ 4,471 $ 6,262
$ 2,287 $ 2,932
2,234
1,435
$ 3,722 $ 5,166
949
697
$
150 $
182
332
3
126
129
107
129
236
$
697 $
164
220
384
1
267
268
116
181
297
949
(1) Geographic information is based on residence of the borrower.
2021 vs. 2020
Total ACL of $4,471 million decreased $1,791 million or 29% from last year, primarily reflecting a decrease of $1,696 million in ACL
on loans.
ACL on performing loans of $3,722 million decreased $1,444 million or 28%, due to lower ACL in Personal & Commercial
Banking, Capital Markets and Wealth Management, reflecting improvements in our macroeconomic and credit quality outlook
driven by the economic recovery underway in the current year.
ACL on impaired loans of $697 million decreased $252 million or 27%, due to lower ACL in Capital Markets, Wealth
Management and Personal & Commercial Banking.
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. 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.
2. 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.
3. 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.
4. 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.
72
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 Counterparty 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, Incremental Risk Charge
and stress tests as defined below:
Value-at-Risk (VaR) is a statistical measure of potential loss for a financial portfolio computed at a given level of
confidence and over a defined holding period. We measure VaR at the 99th percentile confidence level for price movements
over a one-day holding period using historic simulation of the last two years of equally weighted historic market data.
These calculations are updated daily with current risk positions, with the exception of certain less material positions that
are not actively traded and are updated on at least a monthly basis.
Stressed Value-at-Risk (SVaR) is calculated in an identical manner as VaR with the exception that it is computed using a
fixed historical one-year period of extreme volatility and its inverse rather than the most recent two-year history. The
stress period used is 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 and hedging
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 Pandemic of 2020, Global Financial Crisis of
2008 and the Taper Tantrum 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.
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, 2021
For the year ended
October 31, 2020
For the year ended
Table 50
(Millions of Canadian dollars)
As at
Average
High
Low
As at
Average
High
Equity
Foreign exchange
Commodities
Interest rate (1)
Credit specific (2)
Diversification (3)
$
24 $
20 $
38 $
12 $
23 $
33 $
64 $
4
3
61
9
(51)
4
3
44
8
(35)
6
4
64
11
n.m.
2
2
21
6
n.m.
3
3
47
7
(18)
3
3
54
6
(25)
6
7
178
7
n.m.
Market risk VaR
Market risk Stressed VaR
$
$
50 $
44 $
72 $
59 $
53 $
101 $
23 $
29 $
65 $
74 $ 232 $
86 $ 109 $ 228 $
Low
13
1
1
11
4
n.m.
18
49
This table represents an integral part of our 2021 Annual Consolidated Financial Statements.
*
(1) General credit spread risk and funding spread risk associated with uncollateralized derivatives are included under interest rate VaR.
(2) Credit specific risk captures issuer-specific credit spread volatility.
(3) Market risk VaR is less than the sum of the individual risk factor VaR results due to risk factor diversification.
n.m. not meaningful
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
73
2021 vs. 2020
Average market risk VaR of $44 million decreased $30 million and average SVaR of $53 million decreased $56 million from last
year, as overall market volatility and credit spreads improved in 2021 relative to the market turmoil observed in 2020. Loan
underwriting commitments as well as fixed income and equity portfolios were impacted by the heightened market volatility last
year. In 2021, VaR also reflected increased diversification across our trading businesses.
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
incurred no net trading losses in 2021.
Trading revenue (teb), (1) and VaR (Millions of Canadian dollars)
80
60
40
20
0
-20
-40
-60
-80
0
2
0
v 1, 2
o
N
2 1
0
n 3 1, 2
J a
2 1
0
0 , 2
r 3
p
A
2 1
0
J u l 3 1, 2
2 1
0
c t 3 1, 2
O
(1)
Includes loan underwriting commitments.
Trading revenue (1)
VaR
The following chart displays the distribution of daily trading profit and loss in 2021 and 2020 with no net trading losses in 2021 and
13 days of trading losses in 2020. The largest reported profit was $55 million with an average daily profit of $17 million.
Trading revenue (teb), (1)
s
y
a
D
f
o
r
e
b
m
u
N
n
i
y
c
n
e
u
q
e
r
F
90
80
70
60
50
40
30
20
10
0
0
0
1
-
<
0
9
-
0
8
-
0
7
-
0
6
-
0
5
-
0
4
-
0
3
-
0
2
-
0 0
1
-
0
1
0
2
0
3
0
4
0
5
0
6
0
7
0
8
0
9
0
0
1
Daily net trading revenue (C$ millions), excluding structured entities
2021
2020
(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, 2021, we held assets in support of $13 billion of liabilities with respect to insurance
obligations (October 31, 2020 – $12 billion).
74
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Market risk controls – Interest Rate Risk in the Banking Book (IRRBB) positions1
IRRBB arises primarily from traditional customer-originated banking products such as deposits and loans, and includes
related hedges and interest rate risk from securities held for liquidity management purposes. Factors contributing to IRRBB
include mismatches between asset and liability repricing dates, relative changes in asset and liability rates in response to
market rate scenarios, and other product features affecting the expected timing of cash flows, such as options to pre-pay
loans or redeem term deposits prior to contractual maturity. IRRBB sensitivities are regularly measured and reported, and
subject to limits and controls with independent oversight from GRM.
The Board approves the risk appetite for IRRBB, and the Asset-Liability Committee (ALCO) and GRM provide ongoing
governance through IRRBB 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 interest rate shock scenarios prescribed by
regulators.
In measuring NII risk, detailed banking book balance sheets and income statements are dynamically simulated to
estimate 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 maturities, renewals, and new originations along with
prepayment and redemption behaviour. Product pricing and volumes are forecast based on past experience to determine
response expectations under a given market shock 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 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. IRRBB measures do not include beneficial management actions
that could be taken 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 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 on current on and off-balance sheet
positions which can change over time in response to business activity and management actions.
Market risk – IRRBB measures*
(Millions of Canadian dollars)
Before-tax impact of:
100 bps increase in rates
100 bps decrease in rates
October 31
2021
EVE risk
NII risk (1)
Table 51
October 31
2020
Canadian
dollar impact
U.S. dollar
impact
Total
Canadian
dollar impact
U.S. dollar
impact
Total
EVE risk
NII risk (1)
$ (1,641) $ (368) $(2,009) $
1,540
(3)
1,537
571 $ 358 $ 929 $ (1,756) $ 818
(621)
(921)
(603)
(318)
1,321
*
(1)
This table represents an integral part of our 2021 Annual Consolidated Financial Statements.
Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates.
As at October 31, 2021, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $921 million, up
from $621 million last year, and an immediate and sustained +100 bps shock would have had a negative impact to our EVE of
$2,009 million, up from $1,756 million last year. The year-over-year change in NII sensitivity is largely attributable to continued low
cost deposit growth, while the year-over-year change in EVE sensitivity is mainly due to overall growth in the balance sheet, in
particular growth in book capital. During 2021, NII and EVE risks remained within approved limits.
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 2021
75
Market risk measures for other material non-trading portfolios
Investment securities carried at FVOCI
We held $78 billion of investment securities carried at FVOCI as at October 31, 2021, compared to $82 billion at the end of 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, 2021, our portfolio of investment securities carried at FVOCI
is interest rate sensitive and would impact OCI by a pre-tax change in value of $8 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 $14 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 measures as at October 31, 2021 was $75 billion. Our investment
securities carried at FVOCI also include equity exposures of $1 billion as at October 31, 2021, compared to $1 billion at the end of
the prior year.
Non-trading foreign exchange rate risk
Foreign exchange rate risk is the potential adverse impact on earnings and economic value due to changes in foreign currency
rates. Our revenue, expenses and income denominated in currencies other than the Canadian dollar are subject to
fluctuations as a result of changes in the value of the average Canadian dollar relative to the average value of those
currencies. Our most significant exposure is to the U.S. dollar, due to our operations in the U.S. and other activities conducted
in U.S. dollars. Other significant exposures are to the British pound and the Euro, due to our activities conducted
internationally in these currencies. A strengthening or weakening of the Canadian dollar compared to the U.S. dollar, British
pound and the Euro could reduce or increase, as applicable, the translated value of our foreign currency denominated
revenue, expenses and earnings and could have a significant effect on the results of our operations. We are also exposed to
foreign exchange rate risk arising from our investments in foreign operations. For unhedged equity investments, when the
Canadian dollar appreciates against other currencies, the unrealized translation losses on net foreign investments decreases
our shareholders’ equity through the other components of equity and decreases the translated value of the RWA of the foreign
currency-denominated asset. The reverse is true when the Canadian dollar depreciates against other currencies.
Consequently, we consider these impacts in selecting an appropriate level of our investments in foreign operations to be
hedged.
Derivatives related to non-trading activity
Derivatives are also used to hedge market risk exposure unrelated to our trading activity. Hedge accounting is elected where
applicable. These derivatives are included in our IRRBB measures 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 2021 Annual Consolidated Financial Statements.
76
Royal Bank of Canada: Annual Report 2021
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 52
(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)
As at October 31, 2021
Market risk measure
Balance sheet
amount Traded risk (1)
Non-traded
risk (2)
Non-traded risk
primary risk sensitivity
$
113,846 $
79,638
–
56,896
$
113,846
22,742
Interest rate
Interest rate
139,240
145,484
127,259
–
11,981
145,484
Interest rate, credit spread
Interest rate, credit spread, equity
Interest rate
Interest rate
Interest rate
Interest rate
Interest rate
307,903
265,011
42,892
503,598
218,066
(4,089)
2,666
95,541
92,157
12,273
9,231
9,685
–
–
92,829
8,615
494,367
208,381
(4,089)
2,666
2,712
83,542
Interest rate, foreign exchange
Interest rate
1,706,323 $
569,526
$ 1,124,524
1,100,831 $
2,666
136,927
–
$
963,904
2,666
Interest rate
Interest rate
37,841
37,841
–
262,201
91,439
87,084
9,593
15,906
236,146
89,290
8,528
–
26,055
2,149
78,556
9,593
Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate
Total liabilities
Total equity
Total liabilities and equity
$
1,607,561 $
508,732
$ 1,082,923
98,762
$
1,706,323
(1)
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 tests are used as risk controls for traded risk.
(2) Non-traded risk includes positions used in the management of 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 physical and other assets.
Liabilities not subject to market risk include payroll related and other liabilities.
(3)
(4)
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
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, 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
10,392
6,855
–
–
447,584
201,800
(5,639)
1,922
457,976
208,655
(5,639)
1,922
113,488
90,937
10,479
109,175
6,475
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)
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 tests are used as risk controls for traded risk.
(2) Non-traded risk includes positions used in the management of 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 physical and other assets.
Liabilities not subject to market risk include payroll related and other liabilities.
(3)
(4)
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. 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)
78
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Risk control
Our liquidity risk objectives, policies, models 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 enterprise liquidity risk appetite recommended by the Risk Committee of the Board. The
Risk Committee of the Board reviews and recommends the liquidity risk appetite and approves the LRMF. The Board, the Risk
Committee of the Board, the GRC and the ALCO regularly review reporting on our consolidated 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 approves the Liquidity Risk Policy, which establishes minimum risk control elements in accordance with the
Board-approved risk appetite and the LRMF, and the Pledging Policy, which outlines the requirements and authorities for
the management of our pledging activities.
The ALCO annually approves the Enterprise Liquidity Contingency Plan (ELCP) 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 ELCP,
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 ELCP, 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 2021
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. Similarly, 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, 2021
Table 53
Securities
received as
collateral from
securities
financing and
derivative
transactions
Bank-owned
liquid assets
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
$ 113,846
79,638
$
– $ 113,846 $
–
79,638
3,405 $ 110,441
79,638
–
214,326
114,692
27,600
313,732
115,396
–
528,058
230,088
27,600
357,927
132,360
25,981
170,131
97,728
1,619
$ 550,102
$ 429,128 $ 979,230 $519,673 $ 459,557
As at October 31, 2020
Securities
received as
collateral from
securities
financing and
derivative
transactions
Bank-owned
liquid assets
Total liquid
assets
Encumbered
liquid assets
Unencumbered
liquid assets
$
118,888
39,013
$
– $ 118,888 $
–
39,013
4,022 $
–
114,866
39,013
236,910
93,781
30,305
309,512
101,317
–
546,422
195,098
30,305
358,233
89,764
27,934
188,189
105,334
2,371
$
518,897
$ 410,829 $ 929,726 $ 479,953 $
449,773
(Millions of Canadian dollars)
Royal Bank of Canada
Foreign branches
Subsidiaries
Total unencumbered liquid assets
As at
October
2021
$ 233,342
68,567
157,648
October 31
2020
$ 261,940
44,037
143,796
$ 459,557
$ 449,773
(1)
(2)
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 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 2021
Management’s Discussion and Analysis
2021 vs. 2020
Total liquid assets increased $50 billion or 5% and total unencumbered liquid assets increased $10 billion or 2% from last year,
mainly due to an increase in deposits with central banks reflecting higher wholesale funding and deposit levels, and an increase
in securities received as collateral under collateral swap transactions and reverse repurchase agreements. However, the
increase in collateral received was offset by an increase in collateral pledged under repurchase and collateral swap
transactions.
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, 2021, our unencumbered assets available as collateral comprised 26% of
total assets (October 31, 2020 – 28%).
Asset encumbrance
Table 54
October 31
2021
October 31
2020
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)
Pledged as
Available as
collateral (2)
Other (3)
Total
– $ 3,405 $
110,441 $
– $ 113,846 $
– $ 4,022 $
114,866 $
– $
118,888
Cash and due from banks $
Interest-bearing deposits
with banks
Securities
Trading
Investment, net of
–
56,602
applicable allowance
12,055
–
–
–
79,638
–
79,638
–
87,311
3,633
147,546
48,505
133,429
–
145,484
13,337
–
–
–
39,013
–
39,013
91,245
3,684
143,434
126,353
53
139,743
Assets purchased under
reverse repurchase
agreements and
securities borrowed (4)
Loans
Retail
Mortgage securities
Mortgage loans
Non-mortgage loans
Wholesale
Allowance for loan losses
Segregated fund net
assets
Other
Derivatives
Others (5)
437,408
18,310
17,436
5,343
478,497
400,807
17,209
37,879
5,037
460,932
29,370
46,699
3,213
–
–
–
–
25,981
–
–
–
–
–
–
–
–
30,778
29,858
8,110
–
–
–
243,627
111,943
218,066
(4,089)
60,148
320,184
123,266
218,066
(4,089)
31,460
62,131
5,711
–
–
–
2,666
2,666
–
–
1,619
95,541
76,830
95,541
104,430
–
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)
–
1,922
1,922
–
2,371
113,488
71,111
113,488
101,416
Total assets
$ 611,328 $ 21,715 $
498,620 $ 753,560 $1,885,223 $ 589,885 $ 21,231 $
490,172 $
678,540 $ 1,779,828
Includes assets restricted from use to generate secured funding due to legal or other constraints.
(1)
(2) 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.
(3) 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.
(4)
Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing, derivative transactions, and margin lending. Includes
$18 billion (October 31, 2020 – $17 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.
(5)
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, 2021, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were
$771 billion or 55% of our total funding (October 31, 2020 – $708 billion or 54%). The remaining portion is comprised of short- and
long-term wholesale funding.
Funding for highly liquid assets consists primarily of short-term wholesale funding that reflects the monetization period of
those assets. Long-term wholesale funding is used mostly to fund less liquid wholesale assets and to support liquid asset buffers.
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 Canada Deposit Insurance Corporation (CDIC) to convert all or a portion of
certain shares and liabilities of that bank into common shares. As at October 31, 2021, the notional value of issued and
outstanding long-term debt subject to conversion under the Bail-in regime was $53 billion (October 31, 2020 – $37 billion).
For further details on our wholesale funding, refer to the Composition of wholesale funding tables below.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
81
Long-term debt issuance
During 2021, we continued to experience favourable unsecured wholesale funding access and pricing. We issued, either directly
or through our subsidiaries, unsecured long-term funding of $28 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 2020, our outstanding MBS sold decreased $1.7 billion. Our covered bonds and securitized credit card
receivables decreased $2.2 billion and $2.5 billion, respectively.
For further details, refer to the Off-balance sheet arrangements section.
Long-term funding sources*(1)
Table 55
(Millions of Canadian dollars)
Unsecured long-term funding
Secured long-term funding
Subordinated debentures
As at
October 31
2021
October 31
2020
$ 89,447
56,688
9,620
$ 88,055
63,043
9,574
$ 155,755
$ 160,672
*
(1)
This table represents an integral part of our 2021 Annual Consolidated Financial Statements.
Based on original term to maturity greater than 1 year.
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 56
Canada
U.S.
Europe/Asia
(cid:129) Canadian Shelf Program – $25 billion
(cid:129) U.S. Shelf Program – US$50 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
U.S. dollar
39%
Euro
16%
Other
12%
MBS/CMB (2)
12%
Covered Bonds
25%
Cards
securitization
2%
Canadian dollar
33%
Unsecured
funding
61%
(1)
Includes unsecured and secured long-term funding with an original
term to maturity greater than 1 year
(1)
Includes unsecured and secured long-term funding with an original
term to maturity greater than 1 year
(2) Mortgage-backed securities and Canada Mortgage Bonds
82
Royal Bank of Canada: Annual Report 2021
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 57
(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, 2021
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
$ 5,202 $
7,118
2,378
27
118
–
–
–
6,637
– $
– $
– $
5,202 $
– $
17,013
2,563
939
825
354
847
–
2,194
19,046
4,076
8,944
817
1,302
495
–
1,448
27,053
3,697
2,622
714
917
5,189
188
827
70,230
12,714
12,532
2,474
2,573
6,531
188
11,106
918
–
16,296
2,914
4,260
6,087
165
7,531
– $
–
–
37,617
5,879
9,729
27,521
9,267
466
Total
5,202
71,148
12,714
66,445
11,267
16,562
40,139
9,620
19,103
$ 21,480 $ 24,735 $ 36,128 $ 41,207 $ 123,550 $ 38,171 $ 90,479 $ 252,200
$ 8,467 $ 4,017 $ 6,108 $ 9,803 $ 28,395 $ 10,347 $ 37,695 $ 76,437
175,763
30,020
20,718
27,824
95,155
13,013
31,404
52,784
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 $
11,925
7,508 $
7,643 $ 13,573 $
13,531
22,513
33,936
38,813 $
81,905
9,457 $ 35,421 $
11,727
56,188
83,691
149,820
Excludes bankers’ acceptances and repos.
Excludes deposits associated with services we provide to banks (e.g., custody, cash management).
(1)
(2)
(3) Only includes consolidated liabilities, including our collateralized commercial paper program.
(4)
(5)
(6)
(7)
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 $7,020 million (October 31, 2020 – $8,199 million), bearer deposit notes (unsecured) of $3,798 million (October 31, 2020 – $2,036
million), other long-term structured deposits (unsecured) of $8,285 million (October 31, 2020 – $8,071 million), and FHLB advances (secured) of $nil (October 31, 2020 –
$13 million).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
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 58
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 under review
stable
stable
stable
A
AA-
AA
As at November 30, 2021
(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 October 7, 2021, Moody’s placed our long-term ratings and assessments on review for upgrade. Our short-term debt ratings were affirmed.
(5)
(6) On July 15, 2021, Fitch Ratings downgraded our legacy senior long-term debt rating to AA from AA+ and our senior long-term debt rating to AA- from AA and
Standard & Poor’s affirmed our ratings with a stable outlook as of July 19, 2021 in a report published on October 7, 2021.
revised our ratings outlook to stable from negative.
(7) On May 14, 2021, 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 59
(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)
$
312 $
157
112 $
13
140 $
–
318 $
187
78 $
–
149
–
(1)
Includes GICs issued by our municipal markets business out of New York.
As at
October 31
2021
October 31
2020
84
Royal Bank of Canada: Annual Report 2021
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%.
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.
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
Liquidity coverage ratio (1)
(Millions of Canadian dollars, except percentage amounts)
High-quality liquid assets
Total high-quality liquid assets (HQLA)
Cash outflows
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
(Millions of Canadian dollars, except percentage amounts)
Total HQLA
Total net cash outflows
Liquidity coverage ratio
Table 60
For the three months ended
October 31
2021
Total unweighted
value (average) (2)
Total weighted
value (average)
$
351,831
365,319 $
127,834
237,485
434,693
192,918
211,916
29,859
277,097
46,158
8,558
222,381
25,405
625,278
33,871
3,835
30,036
203,998
45,812
128,327
29,859
25,855
64,671
16,656
8,558
39,457
25,405
10,012
$
363,812
$
260,070 $
14,648
27,744
41,814
8,940
27,744
$
78,498
$
July 31
2021
$
Total adjusted
value
351,831
285,314
123%
Total adjusted
value
341,167
271,938
125%
(1)
The LCR is calculated in accordance with OSFI’s LAR guideline, which, in turn, reflects liquidity-related requirements issued by the BCBS. The LCR for the quarter ended
October 31, 2021 is calculated as an average of 61 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.
(5) Other contractual funding obligations primarily include outflows from unsettled securities trades and outflows from obligations related to securities sold short.
(6) Other contingent funding obligations include outflows related to other off-balance sheet facilities that carry low LCR runoff factors (0% – 5%).
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
85
We manage our LCR position within a target range that reflects our liquidity risk tolerance and takes into account business mix,
asset composition and funding capabilities. The range is subject to periodic review in light of changes to internal requirements
and external developments.
We maintain HQLAs in major currencies with dependable market depth and breadth. Our treasury management practices
ensure that the levels of HQLA are actively managed to meet target LCR objectives. Our Level 1 assets, as calculated according to
OSFI LAR and the BCBS LCR requirements, represent 88% of total HQLA. These assets consist of cash, placements with central
banks and highly rated securities issued or guaranteed by governments, central banks and supranational entities.
LCR captures cash flows from on- and off-balance sheet activities that are either expected or could potentially occur within
30 days in an acute stress scenario. Cash outflows result from the application of withdrawal and non-renewal factors to demand
and term deposits, differentiated by client type (wholesale, retail and small- and medium-sized enterprises). Cash outflows also
arise from business activities that create contingent funding and collateral requirements, such as repo funding, derivatives, short
sales of securities and the extension of credit and liquidity commitments to clients. Cash inflows arise primarily from maturing
secured loans, interbank loans and non-HQLA securities.
LCR does not reflect any market funding capacity that we believe would be available in a stress situation. All maturing
wholesale debt is assigned 100% outflow in the LCR calculation.
Q4 2021 vs. Q3 2021
The average LCR for the quarter ended October 31, 2021 was 123%, which translates into a surplus of approximately $67 billion,
compared to 125% and a surplus of approximately $69 billion in the prior quarter. LCR has remained relatively stable compared to
the previous quarter as growth in retail and wholesale loans was offset by the issuance of term funding and increases in client
deposits.
Net Stable Funding Ratio (NSFR)
NSFR is a Basel III metric that measures the sufficiency of available stable funding relative to the amount of required stable
funding. The BCBS and OSFI regulatory minimum coverage level for NSFR is 100%.
Available stable funding is defined as the portion of capital and liabilities expected to be reliable over the time horizon
considered by the NSFR, which extends to one year. Required stable funding is a function of the liquidity characteristics and
residual maturities of the various assets held by the bank as well as those of its off-balance sheet exposures.
Beginning in Q1 2021, OSFI requires Canadian D-SIBs to disclose the NSFR using the standard Basel disclosure template.
Amounts presented in this disclosure template are determined in accordance with the requirements of OSFI’s Liquidity Adequacy
Requirements (LAR) guideline and are not necessarily aligned with the classification requirements prescribed under IFRS.
86
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Net Stable Funding Ratio (1)
Table 61
(Millions of Canadian dollars, except percentage amounts)
No maturity
< 6 months
6 months to
< 1 year
> 1 year
Weighted
value
As at October 31, 2021
Unweighted value by residual maturity (2)
Available Stable Funding (ASF) Item
Capital:
Regulatory Capital
Other Capital Instruments
Retail deposits and deposits from small business customers:
Stable deposits (3)
Less stable deposits
Wholesale funding:
Operational deposits (4)
Other wholesale funding
Liabilities with matching interdependent assets (5)
Other liabilities:
NSFR derivative liabilities
All other liabilities and equity not included in the
above categories
Total ASF
Required Stable Funding (RSF) Item
Total NSFR high-quality liquid assets (HQLA)
Deposits held at other financial institutions for
operational purposes
Performing loans and securities:
Performing loans to financial institutions secured by
Level 1 HQLA
Performing loans to financial institutions secured by
non-Level 1 HQLA and unsecured performing loans to
financial institutions
Performing loans to non-financial corporate clients, loans to
retail and small business customers, and loans to sovereigns,
central banks and PSEs, of which:
With a risk weight of less than or equal to 35% under the
Basel II standardized approach for credit risk
Performing residential mortgages, of which:
With a risk weight of less than or equal to 35% under the
Basel II standardized approach for credit risk
Securities that are not in default and do not qualify as HQLA,
including exchange-traded equities
Assets with matching interdependent liabilities (5)
Other assets:
Physical traded commodities, including gold
Assets posted as initial margin for derivative contracts and
contributions to default funds of CCPs
NSFR derivative assets
NSFR derivative liabilities before deduction of variation
margin posted
$ 98,657 $
98,657
–
338,850
112,745
226,105
325,980
200,589
125,391
–
41,303
– $
–
–
56,126
27,678
28,448
380,619
–
380,619
3,285
– $
–
–
19,180
11,442
7,738
45,376
–
45,376
1,823
227,149
16,437
9,780 $ 108,437
108,437
9,780
–
–
402,072
21,077
152,556
8,284
249,516
12,793
304,767
102,542
100,294
–
204,473
102,542
–
25,814
12,551
41,303
197,838
646
12,228
12,551
$ 827,827
$ 39,600
–
173,103
2,296
263,702
–
108,916
–
428,508
1,148
580,182
–
99,892
13,113
1
12,573
4,050
61,165
31,185
21,766
48,234
101,495
84,678
35,109
124,475
246,561
–
37,141
1,189
15,776
915
29,033
3,800
261,615
3,522
228,078
37,141
15,747
29,002
260,656
227,233
30,417
–
1,619
1,619
2,191
3,285
476
1,823
20,651
25,814
278,154
16,650
17,103
34,777
All other assets not included in the above categories
–
161,184
46
48,394
Off-balance sheet items
Total RSF
Net Stable Funding Ratio (%)
(Millions of Canadian dollars, except percentage amounts)
Total ASF
Total RSF
Net Stable Funding Ratio (%)
649,799
As at July 31, 2021
44,736
–
68,743
1,376
14,153
666
1,739
50,809
23,665
$ 713,338
116%
Weighted
value
$ 805,804
695,368
116%
(1)
(2)
(3)
The NSFR is calculated in accordance with OSFI’s Liquidity Adequacy Requirements (LAR) guideline, which, in turn, reflects liquidity-related requirements issued by the
BCBS.
Totals for the following rows encompass the residual maturity categories of less than 6 months, 6 months to less than 1 year, and greater than or equal to 1 year in
accordance with the requirements of the common disclosure template prescribed by OSFI: Other liabilities, NSFR derivative liabilities, Other assets, Assets posted as
initial margin for derivative contracts and contributions to default funds of CCPs, NSFR derivative assets, NSFR derivative liabilities before deduction of variation margin
posted, and Off-balance sheet items.
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
(5)
facilitate their access and ability to use payment and settlement systems primarily for clearing, custody and cash management activities.
Interdependent assets and liabilities represent National Housing Act Mortgage-Backed Securities (NHA MBS) liabilities, including liabilities arising from transactions
involving the Canada Mortgage Bond program and their corresponding encumbered mortgages.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
87
Available stable funding is comprised primarily of a diversified pool of personal and commercial deposits, capital, as well as
long-term wholesale liabilities. Required stable funding is driven mainly by the bank’s mortgage and loan portfolio, secured loans
to financial institutions and to a lesser extent by other less liquid assets. NSFR does not reflect any unused market funding
capacity that we believe is available to the bank.
Volume and composition of available stable funding is actively managed to optimize our structural funding position and
meet NSFR objectives. Our NSFR is managed in accordance with our comprehensive LRMF.
Q4 2021 vs. Q3 2021
The NSFR as at October 31, 2021 was 116%, which translates into a surplus of approximately $114 billion, compared to 116% and a
surplus of approximately $110 billion in the prior quarter. NSFR has remained stable compared to the previous quarter as growth
in retail and wholesale loans was offset by the issuance of term funding and increases in client deposits.
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 (2)
Loans, net of applicable allowance
Other
Customers’ liability
under acceptances
Derivatives
Other financial assets
Total financial assets
Other non-financial assets
Less than
1 month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 year
to 2 years
2 years
to 5 years
5 years
and greater
With no
specific
maturity
Total
As at October 31, 2021
$ 190,995 $
2 $
1 $
– $
– $
– $
– $
– $
2,486 $
193,484
67,655
46
87
41
6
20
169
9,845
61,371
139,240
7,220
4,811
5,546
5,832
5,514
22,368
31,393
62,289
511
145,484
104,301
28,517
89,612
21,630
51,664
26,094
22,982
31,910
16,987
26,921
98
139,050
–
298,659
–
62,215
22,259
82,579
307,903
717,575
12,654
5,325
33,149
7,209
10,788
1,523
5
4,318
1,942
–
4,334
145
–
3,005
135
5
10,139
270
–
17,890
277
–
39,733
2,044
(75)
9
3,351
19,798
95,541
42,836
449,816
6,079
135,621
1,681
89,657
164
65,244
217
52,568
185
171,950
1,957
348,388
2,377
176,126
5,898
172,491
25,904
1,661,861
44,462
Total assets
$ 455,895 $ 137,302 $ 89,821 $ 65,461 $ 52,753 $ 173,907 $ 350,765 $
182,024 $ 198,395 $ 1,706,323
Liabilities and equity
Deposits (3)
Unsecured borrowing
Secured borrowing
Covered bonds
Other
Acceptances
Obligations related to securities
sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned (2)
Derivatives
Other financial liabilities
Subordinated debentures
Total financial liabilities
Other non-financial liabilities
Equity
$ 82,183 $ 44,058 $ 56,519 $ 36,342 $ 35,792 $
30,625 $ 45,745 $
2,442
1
4,244
848
7,543
–
4,362
2,693
2,804
1,878
9,557
5,350
15,040
18,321
18,320 $ 661,924 $ 1,011,508
52,110
37,213
6,118
8,122
–
–
12,653
7,207
37,841
–
5
–
2
–
–
–
5
–
–
–
–
–
1
–
19,873
37,841
168,763
5,456
33,489
–
342,828
1,663
–
62,338
9,903
1,299
–
5,610
4,938
1,048
–
4,742
3,747
439
–
848
2,723
373
188
668
9,211
1,000
110
–
18,727
2,115
1,912
129,897
6,907
–
75,663
434
–
52,327
290
–
44,606
155
–
56,526
1,108
–
101,860
1,172
–
–
36,733
10,226
7,383
86,902
13,360
–
19,232
1
795
–
262,201
91,439
50,784
9,593
681,953
9,910
98,762
1,572,562
34,999
98,762
Total liabilities and equity
$ 344,491 $ 136,804 $ 76,097 $ 52,617 $ 44,761 $
57,634 $ 103,032 $
100,262 $ 790,625 $ 1,706,323
Off-balance sheet items
Financial guarantees
Commitments to extend credit
Other credit-related commitments
Other commitments
$
387 $
5,964
966
101
1,950 $ 2,999 $ 2,928 $ 2,206 $
5,538
1,064
11
12,024
1,376
21
16,231
1,536
21
11,400
1,569
20
1,829 $
3,326 $
1,181 $
61 $
56,688
370
64
160,789
726
144
16,733
38
278
4,544
99,815
618
16,867
289,911
107,460
1,278
Total off-balance sheet items
$
7,418 $
8,563 $ 15,988 $ 20,716 $ 15,627 $
58,951 $ 164,985 $
18,230 $ 105,038 $
415,516
(1)
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.
(2) Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
(3)
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.
88
Royal Bank of Canada: Annual Report 2021
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 (2), (3)
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, 2020
$ 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
147,453
24,334
62,905
21,593
47,211
24,742
25,083
28,236
9,990
25,951
2
132,783
–
266,935
–
56,253
20,371
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
462,809
4,540
109,402
1,411
84,949
97
68,041
860
47,897
234
173,021
1,939
312,815
1,802
173,972
5,988
149,726
25,045
1,582,632
41,916
Total assets
$ 467,349 $ 110,813 $ 85,046 $ 68,901 $ 48,131 $ 174,960 $ 314,617 $
179,960 $ 174,771 $ 1,624,548
Liabilities and equity
Deposits (4)
Unsecured borrowing (3)
Secured borrowing
Covered bonds
Other
Acceptances
Obligations related to securities
sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned (2), (3)
Derivatives
Other financial liabilities (3)
Subordinated debentures
Total financial liabilities
Other non-financial liabilities
Equity
$ 75,380 $ 36,569 $ 56,348 $ 35,881 $ 30,676 $ 23,293 $ 52,029 $
6,242
1,295
18,705
16,195
4,142
2,501
7,400
3,707
4,022
5,412
2,794
–
6,605
1,942
12,158
6,401
29,285
–
50
–
–
–
–
–
215,814
4,467
34,768
–
374,666
1,053
–
19,396
11,553
2,187
–
84,653
5,395
–
20,606
4,423
1,140
–
92,001
209
–
376
3,355
477
–
47,626
212
–
1,492
2,709
430
–
41,950
193
–
–
–
4,971
11,900
851
205
52,327
951
–
–
–
–
20,985
2,180
110
110,204
1,010
–
15,360 $ 590,020 $
6,427
8,940
–
–
–
–
9
–
915,556
56,337
39,992
18,618
29,285
–
50,396
10,994
9,552
101,669
11,910
–
11,576
139
563
–
602,307
9,445
86,767
274,231
109,927
53,590
9,867
1,507,403
30,378
86,767
Total liabilities and equity
$ 375,719 $ 90,048 $ 92,210 $ 47,838 $ 42,143 $ 53,278 $ 111,214 $
113,579 $ 698,519 $ 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 $ 2,186 $ 3,137 $ 3,004 $
4,803
903
14
12,306
1,400
20
16,163
1,745
20
14,821
1,634
20
700 $
4,529 $
1,383 $
56 $
45,633
260
82
161,524
623
209
16,876
10
344
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)
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.
(2) Open reverse repo and repo contracts, which have no set maturity date and are typically short term, have been included in the with no specific maturity category.
(3)
(4) 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
Amounts previously presented were reclassified to reflect the contractual maturities of certain financial assets and liabilities.
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 2021
89
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, 2021
$ 576,161 $ 367,389 $ 44,951 $ 78,071 $
33,063 $ 1,099,635
1
–
19,867
37,462
19,234
620
–
–
242,314
35,984
631
188
5
–
669
384
582
110
–
–
–
544
1,522
1,916
–
–
–
7,873
2,342
7,392
19,873
37,462
262,217
45,405
5,077
9,606
596,016
703,835
46,701
82,053
50,670
1,479,275
$
16,867 $
– $
– $
– $
– $
–
248,594
265,461
81
41,238
41,319
82
77
159
209
2
211
344
–
344
16,867
716
289,911
307,494
Total financial liabilities and off-balance sheet items $ 861,477 $ 745,154 $ 46,860 $ 82,264 $
51,014 $ 1,786,769
(Millions of Canadian dollars)
Financial liabilities
Deposits (1), (4)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned (4)
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 $ 350,298 $ 34,618 $ 85,198 $
29,832 $
1,010,795
9
–
18,609
29,121
11,576
199
–
–
257,684
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
522,633
694,026
40,586
87,211
50,637
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 $ 778,986 $ 737,132 $ 40,670 $ 87,420 $
50,981 $
1,695,189
*
(1)
This table represents an integral part of our 2021 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)
(4) Amounts previously presented were reclassified to reflect the contractual maturities of certain financial liabilities.
90
Royal Bank of Canada: Annual Report 2021
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 five insurance sub-risks are: morbidity, mortality, longevity, policyholder
behaviour (lapse), and travel risk.
Our Insurance Risk Management 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, which is consistent with our Enterprise Risk Management Framework.
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 are intended to 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, including surfaces risk vulnerabilities, and
informs strategic and capital planning decisions, which are ultimately intended to ensure 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 our 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 2021
91
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 risk
Data management and
privacy risk
Money laundering and
Terrorist financing risk
Third-party risk
Business continuity risk
Cybersecurity risk 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, we continued to invest in our cybersecurity program,
and multiple scenarios, assessments and simulations were conducted to test our resiliency
strategy.
Data management risk 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 risk 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 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 monitor third-party providers that we consider 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 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, 2021, our operational risk losses remain within our risk appetite. For further details on our contingencies,
including litigation, refer to Notes 23 and 24 of our 2021 Annual Consolidated Financial Statements.
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Royal Bank of Canada: Annual Report 2021
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 large
complex financial institutions, such as ourselves, and are often the result of inadequate or failed internal processes, controls,
people or systems. We currently are, and may be at any given time, subject to a number of legal and regulatory proceedings and
subject to numerous governmental and regulatory examinations, investigations and other inquiries.
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. Such regulation continues to become increasingly extensive and complex. In addition, regulatory scrutiny and
expectations in Canada, the U.S., the U.K., Europe and other jurisdictions for large financial institutions with respect to, among
other things, governance, risk management practices and controls, and conduct, as well as the enforcement of regulatory
compliance matters, has intensified. Failure to comply with these regulatory requirements and expectations or to resolve any
identified deficiencies could result in increased regulatory oversight and restrictions. Resolution of such matters can also result
in the payment of substantial penalties, agreements with respect to future operation of their business, actions with respect to
relevant personnel, admission of wrongdoing, 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 our 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,
controls 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. In addition, the severity of the remedies sought in legal and regulatory proceedings to which RBC is subject
have increased. 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 significant 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. We are also 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 to 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,
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
93
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
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 provides an integrated view of potential reputation issues across
the organization. This governance structure is designed to ensure that ownership and accountability for reputation risk are
understood across the enterprise, both proactive and reactive reputation risk decisions are escalated to senior management 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 in response to the COVID-19 pandemic are included in the Impact of COVID-19 pandemic and Capital management sections
of this 2021 Annual Report.
Global uncertainty
Significant uncertainty about the impacts of the COVID-19 pandemic, supply chain disruptions, trade policy and geopolitical
tensions continue to pose risks to the global economic outlook. In October 2021, the International Monetary Fund (IMF) projected
global growth of 5.9% in calendar 2021, down 0.1% from its July forecast, reflecting supply chain disruptions in advanced
economies and limited vaccine access in developing countries. Despite largely positive economic developments throughout the
year, uncertainty remains regarding new variants of COVID-19 and the potential impacts of uneven vaccine access and vaccine
hesitancy. Trade policy also remains a source of global uncertainty as countries consider ways to incorporate climate policy into
trade policy and the U.K. continues to develop its post-Brexit international trade policies. Finally, global financial markets remain
vulnerable to geopolitical tensions, such as those between the U.S. and China, many of which center around trade and
technology. Our diversified business model, as well as our product and geographic diversification, continue to help mitigate the
risks posed by global uncertainty.
Consumer protection
On August 18, 2021, the Canadian federal government published the Financial Consumer Protection Framework Regulations which
are the underlying regulations to support the new Financial Consumer Protection Framework (FCPF). The FCPF encompasses a
number of new consumer protection requirements, including complaint handling, access to banking services, and disclosures.
We will be required to comply with the regulations by June 30, 2022 and we expect to be in compliance by the effective date.
Minimum qualifying rates for insured and uninsured mortgages in Canada
Effective June 1, 2021, the proposed minimum qualifying rate for uninsured mortgages is the greater of the mortgage contract rate
plus 2% or 5.25%. OSFI also announced that it will review and communicate the qualifying rate at a minimum annually, every
December. The Department of Finance Canada, who is responsible for setting the benchmark rate for qualifying insured
mortgages, also announced that it would align the rate for insured mortgages with the rate set by OSFI for uninsured mortgages
and that this new rate would apply to insured mortgages approved on June 1, 2021 or later. The minimum qualifying rate for
insured mortgages will be subject to review and periodic adjustment.
Interest rate benchmark reform
London Interbank Offered Rate (LIBOR) is the most widely referenced benchmark interest rate across the globe for derivatives,
bonds, loans and other floating rate instruments; however, there is a regulator-led push to transition the market away from
LIBOR and certain other benchmark rates to alternative benchmark rates (ABRs) that are based on actual overnight transactions.
On March 5, 2021, the Financial Conduct Authority (FCA), the regulator of the ICE Benchmark Administration (IBA) which
administers LIBOR, announced the permanent cessation or loss of representativeness of all 35 LIBOR benchmark settings
currently published by the IBA as of December 31, 2021 or June 30, 2023.
Details related to certain settings to which we are exposed are noted below.
(cid:129)
(cid:129)
Publication of the 1-week and 2-month USD LIBOR settings will cease immediately after December 31, 2021. Publication of
the overnight and 12-month USD LIBOR settings will cease immediately after June 30, 2023, while the 1-month, 3-month
and 6-month USD LIBOR settings will no longer be representative of the underlying market and economic reality they are
intended to measure after June 30, 2023. The FCA may consult on requiring the IBA to publish 1-month, 3-month and
6-month USD LIBOR settings after the end of June 2023 on a non-representative “synthetic” basis.
Publication of the overnight, 1-week, 2-month and 12-month GBP LIBOR settings will cease immediately after
December 31, 2021, while the 1-month, 3-month and 6-month GBP LIBOR settings will no longer be representative of the
underlying market and economic reality they are intended to measure after December 31, 2021. The FCA will require the
IBA to continue to publish 1, 3 and 6 month GBP LIBOR settings until the end of 2022 on a non-representative “synthetic”
basis.
94
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
The FCA announcement engaged contractual triggers for the calculation and future application of fallback provisions related to
our LIBOR linked products, including certain loans, bonds and derivatives.
Additionally, on June 22, 2021, OSFI issued a letter setting out their expectation that Federally Regulated Financial Institutions
(FRFIs) will stop using USD LIBOR settings as soon as possible and will not enter into new transactions referencing these rates
after December 31, 2021. OSFI further expects FRFIs to prioritize system and model updates to accommodate ABRs by
December 31, 2021, and be fully prepared to transact in ABRs that are available in markets in which the FRFI operates by
December 31, 2021.
To manage our transition away from LIBOR, 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 and client education and communication. Transition
activities are focused on two broad streams of work: (i) developing new ABR linked products, and (ii) conversion of existing
LIBOR based contracts to ABRs. Our program timelines are ultimately dependent on broader market acceptance of products that
reference the new ABRs 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
continue to work towards the recommended target dates for the cessation of LIBOR-based products provided by our regulators
and are on track with our transition activities to move to ABRs.
For further details, refer to the Critical accounting policies and estimates section in this 2021 Annual Report and Note 2 of our
2021 Annual Consolidated Financial Statements.
Client Focused Reforms
The Canadian Securities Administrators 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
are coming into effect in two phases: the first phase relating to conflicts of interest and the related disclosure requirements came
into effect on June 30, 2021, and the second phase relating to the remaining requirements comes into effect on December 31, 2021.
The requirements primarily impact our Personal & Commercial Banking and Wealth Management platforms. We are well
positioned to comply with the requirements.
U.S. regulatory initiatives
Policymakers continue to evaluate and implement reforms to various U.S. financial regulations, which could result in either
expansion or reduction to the U.S. regulatory requirements and associated changes in compliance costs. On January 1, 2021, the
U.S. Congress enacted the Anti-Money Laundering Act of 2020 (AMLA) which represents a comprehensive set of reforms to U.S.
anti-money laundering laws. Regulations pertaining to this legislation have yet to be issued; the extent, timing and impact of
which are unknown at this time. We will continue to monitor developments and any resulting implications for us.
U.K. and European regulatory reform
EU Sustainability-Related Disclosures Regulation requires 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
were effective on March 10, 2021 and to date there has been no material impact on us; however, we will continue to monitor future
guidance and the impact, if any, on us.
For further details on regulatory capital and related requirements, refer to the risk and Capital management sections of this 2021
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
95
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
markets, strength of the economy and inflation. Given the importance of our Canadian and U.S. operations, an 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. With interest rates remaining low throughout 2021, and expected to continue to remain low into
fiscal 2022, we could see 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 could 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 requires 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 in accordance with applicable transfer pricing requirements;
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.
96
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 29 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.
Tax contribution
In 2021, 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 $8 billion (2020 – $4 billion). In Canada, total income
and other tax expense for the year ended October 31, 2021 to various levels of government totalled $7 billion (2020 – $3 billion).
Income and other tax expense – by category
(Millions of Canadian dollars)
Income and other tax expense – by geography
(Millions of Canadian dollars)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2021
2020
2021
2020
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 disclosures. Global practices in the identification, assessment and management of climate-related risks and
opportunities are rapidly evolving. We are working to advance our climate risk measurement, management, monitoring and
reporting capabilities and to advance our understanding of the impact climate-related risks may have on our business and our
clients’ businesses. The TCFD Disclosure section below discusses our participation in climate initiatives and industry working
groups. In addition, as a signatory to the Equator Principles (EP), we report annually on projects assessed according to the EP
framework. RBC Global Asset Management (GAM)1 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 annual ESG Performance Report provides disclosure on our approach and
performance towards addressing significant E&S and human rights issues. We published our Human Rights Position Statement in
October 2020, recognizing the need to consider human rights impacts in our business activities. The Human Rights Position
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 policies
and processes that are in place to prevent slavery and human trafficking from taking place in our operations and supply chains,
and climate-related disclosures that consider the recommendations of the FSB’s Task Force on Climate-related Financial
Disclosures (TCFD).
We also continue to explore opportunities to expand the products and services we provide to respond to the evolving ESG
landscape, help our clients navigate the transition to a net-zero economy, and advance their sustainability strategies. The TCFD
Disclosure section below discusses a number of products and services that we provide to respond to climate-related
opportunities and these offerings also often address broader ESG-related considerations.
1
RBC GAM includes the following affiliates: BlueBay Asset Management LLP (BlueBay), RBC Global Asset Management Inc. (including Phillips, Hager & North Investment
Management), RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, and RBC Global Asset Management (Asia) Limited, which are
separate, but affiliated subsidiaries of RBC.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
97
TCFD Disclosure
Governance
The Board of Directors and its Committees oversee senior management, who is responsible for managing 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. Each of the four Committees of the Board, the
Risk Committee, the Governance Committee, the Audit Committee and the Human Resources Committee, have oversight of
climate-related risks and opportunities that are specific to their respective oversight responsibilities. The Board reviewed our
updated climate strategy, RBC’s Climate Blueprint, in February 2021. The Board and its Committees also received reports on a
range of climate change-related issues, which included our climate change strategy, climate risks including physical and
transition risk in our enterprise-wide stress testing, measurement and reporting of emissions, the regulatory landscape and
regulatory initiatives, increasing stakeholder focus, as well as our engagement with stakeholders. We have established a Climate
Strategy Steering Committee and a Climate Strategy & Governance Team, focused on providing enterprise-wide strategic
direction on advancing our understanding and developing strategies to address climate-related risks and opportunities for us
and our clients. GRM has senior executive representation on the Climate Strategy Steering Committee and also has a dedicated
E&S risk team that develops approaches to identify, assess, monitor and report on climate-related risks, as appropriate.
Strategy
We recognize we have a role to play in accelerating the transition to a net-zero economy and mitigating the risks associated with
climate change. Our RBC Climate Blueprint outlines our climate strategy and includes our commitment to net-zero emissions in
our lending by 2050, beginning with measuring and reporting our financed emissions for key sectors. Our enterprise strategy for
addressing climate-related opportunities includes supporting our clients in the net-zero transition, advancing our capabilities in
climate risk measurement and management, reducing emissions from our own operations, speaking up for smart climate
solutions, and investing in technology to address complex environmental challenges. RBC GAM published its approach to climate
change that lays out its commitments and actions related to climate change.
We are working to develop products, solutions and advice to assist our clients as they transition to a net-zero economy. In
2021, we committed to achieving $500 billion in sustainable financing by 2025, and we issued a 5-year US$750 million green bond,
our second green bond offering and our first issuance through our Sustainable Bond Framework which was launched in 2020. Our
participation in the rapidly evolving sustainable finance and green bond market helps to enable and advance the net-zero
transition.
We are active participants in industry groups that support the development of strategies and plans to transition to a net-
zero economy. In 2021:
(cid:129) We joined the Partnership for Carbon Accounting Financials (PCAF) and have begun work to measure and report our
financed emissions for key sectors.
(cid:129) We joined RMI’s Center for Climate-Aligned Finance to convene stakeholders and advance progress on sector-based
decarbonisation pathways.
(cid:129) We pledged to join the Net-Zero Banking Alliance (NZBA) as part of a global, industry-led initiative to accelerate and
support efforts to address climate change.
Risk Management
We regard climate risk as a transverse risk, which impacts all the other risk categories for which we have established limits, and
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 approach to managing it is reported on a regular basis to senior
management and to the Risk Committee of the Board. We define climate risk as risk related to the transition to a net-zero
economy (transition risk) and risk related to the physical impacts of climate change (physical risk), which includes both chronic
and acute risks. We continue to advance our capabilities and approach to climate risk management:
(cid:129) We conduct portfolio, client and scenario analyses to assess our exposure to, and the impact of, climate-related risks.
(cid:129) We participated in a climate scenario analysis pilot project with the Bank of Canada and OSFI to build our climate scenario
analysis knowledge and understanding of our potential exposure to climate-related transition risks.
(cid:129) We have committed to refining our climate risk appetite and setting interim reduction goals on our path to net-zero
emissions in our lending by 2050.
(cid:129) We are building out climate-related scenario analysis and stress testing capabilities. As part of our annual stress testing and
analysis, we incorporated components of climate risk through transition and physical risk stresses and assessed its impact
on our key portfolios.
(cid:129) With the potential for climate risk to translate to increased credit risk, we have done work to identify those sectors within
our wholesale portfolio that are most affected by physical and transition risk, which allows us to better focus ongoing
monitoring of climate risk.
As with risk appetite, as we continue to develop our climate risk measurement capabilities this will inform the steps we take to
further the implementation of climate-related risk limits and advance the integration of climate risks into our policies and
procedures.
98
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 and societal 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 have taken steps towards introducing or have
already introduced rules to address the financial and economic risks of climate change. As regulations
and formal requirements evolve, we will monitor such developments and update our risk management
practices and disclosures as necessary.
(cid:129) For clients in RBC’s Corporate Client Group and Capital Markets that are in sectors categorized as high
environmental risk, such as those in carbon-intensive sectors, we evaluate whether clients have
assessed and quantified the regulatory impacts of climate change as part of our due diligence and risk
assessment process.
(cid:129) We identify properties that we lease or own, which contain business processes and supporting applica-
tions 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.
(cid:129) We deliver advice and solutions to our clients to support their transition to a net-zero economy and the
advancement of their sustainability strategies. For example, we provide sustainable finance products
such as green, social and sustainability bond underwriting, sustainability-linked bonds and loans as well
as advisory services to integrate ESG factors for companies that are in the pre-initial public offering or
pre-acquisition stage. In addition, our offerings include ESG-integrated investment solutions, structured
products, carbon trading services, ESG research and thought leadership.
(cid:129) RBC GAM integrates material environmental, social and governance (ESG) factors in its investment
processes to help mitigate risk and/or enhance long-term, risk-adjusted returns.
(cid:129) RBC Insurance® (through its insurance agency) sells property and casualty insurance products that are
underwritten and insured by Aviva Canada Inc. As such, RBC Insurance is not directly exposed to climate-
related risks associated with these products. The property and casualty 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. We are working to advance our under-
standing of the impact of acute and longer term weather events on travel insurance, and for life and
health insurance products sold to group/business clients.
Metrics & Targets
We have committed to net-zero emissions in our lending by 2050 and also have commitments associated with financing,
investments, risk management and carbon reduction in our operations, research, partnerships, and philanthropy. Performance is
reported on in our annual TCFD Report and in the RBC GAM TCFD Report. The first RBC GAM TCFD report was published in April
2021. We have commenced efforts to measure our financed emissions in accordance with the PCAF methodology. As a signatory
to the Carbon Disclosure Project, we have publicly reported climate-related data since 2003, including multi-year data in
accordance with the Greenhouse Gas (GHG) Protocol. We also receive third-party limited assurance on our energy and emissions
metrics.
Other factors
Other factors that may affect our results include changes in government trade policy, changes in accounting standards and their
effect on our accounting policies, estimates and judgments, currency and interest rate movements in Canada, the U.S., and other
jurisdictions in which we operate or conduct business, changes to our credit ratings, the timely and successful development of
new products and services, technological changes, effective design, implementation and execution of processes and their
associated controls, fraud by internal and external parties, the possible impact on our business from disease or illness that
affects local, national or global economies, disruptions to public infrastructure, including transportation, communication, power
and water, international conflicts and other political developments and our success in anticipating and managing the associated
risks.
We caution that the foregoing discussion of risk factors, many of which are beyond our control, is not exhaustive and other
factors could also affect our results.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
99
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
optimal returns for our shareholders, while protecting depositors and creditors.
Capital management framework
Our capital management framework establishes policies and processes for defining, measuring, raising and investing all forms of
capital in a coordinated and consistent manner. It sets our overall approach to capital management, including guiding principles
and roles and responsibilities relating to capital adequacy and transactions, dividends, solo capital and management of RWA
and leverage ratio exposures. We manage and monitor capital from several perspectives, including regulatory capital and solo
capital.
Our capital planning process is dynamic and involves various teams including Finance, Corporate Treasury, GRM, Economics
and our businesses, and covers internal capital ratio targets, potential capital transactions as well as projected dividend payouts
and share repurchases. This process considers our business operating plans, enterprise-wide stress testing and 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 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 Group Executive (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 (SA) 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 the Internal Models-based and Standardized Approaches, and for
consolidated regulatory reporting of operational risk capital we use the Standardized Approach. We determine our regulatory
leverage ratio based on OSFI’s Leverage Requirements (LR) Guideline, which reflects the BCBS Basel III leverage ratio
requirements.
100
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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 23, 2021, 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. As at October 31, 2021, our TLAC
ratio of 25.7% was above the minimum TLAC ratio requirement of 24%, which includes the DSB requirement of 2.5% mentioned
below, and our TLAC leverage ratio of 8.6% was above the minimum requirement of 6.75%. We do not anticipate any challenges in
complying with these requirements.
OSFI requires all D-SIBs 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 Pillar 2 buffer ranges between 0% and 2.5% of the entity’s total RWA for
each of the six systemically important banks in Canada. The DSB requirements must be met at the CET1 capital level. OSFI
undertakes 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 also announced its expectation that all banks should not increase their dividend payments and should stop any
share buybacks. On June 17, 2021, OSFI announced an increase in the DSB from 1.0% to 2.5% of total RWA effective October 31,
2021. The 2.5% reflects the highest DSB requirement under OSFI capital requirements. On November 4, 2021, OSFI announced that
banks are permitted to increase their dividend payments and to execute share buybacks, once approved.
In Q2 2020, OSFI announced a series of regulatory adjustments and guidance to support the financial and operational resilience
of the banking sector in response to the ongoing COVID-19 pandemic, and continues, as needed, to release regulations
implementing, clarifying, updating or unwinding certain aspects or requirements. Such measures and guidance include:
(cid:129)
Regulatory adjustments to RWA, including temporary measures to reduce stressed VaR multipliers from three to one and the
permanent exclusion of Funding Valuation Adjustment hedges from market risk.
O
Effective May 1, 2021, OSFI unwound the temporary measures to reduce SVaR multipliers, requiring banks to revert to pre-
pandemic levels.
(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 quarters of fiscal 2020. The exclusion rate was
reduced to the current 50% in fiscal 2021 and will be reduced to 25% in fiscal 2022. 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.
Exclusion of central bank reserves and sovereign-issued securities that qualify as HQLA from leverage ratio exposure
amounts until December 31, 2021.
O On August 12, 2021, OSFI announced that the exclusion of sovereign-issued securities that qualify as HQLA from the
(cid:129)
leverage ratio exposure measure will not extend beyond December 31, 2021 and that central bank reserves will continue
to be excluded from the leverage ratio exposure measure.
(cid:129)
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 relation to the relief programs launched by both the Canadian and U.S. federal governments and described in the Impact of
COVID-19 pandemic section of this 2021 Annual Report, OSFI has 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.
Risk-weighting for both the guaranteed and unsecured portion of loans issued as part of the EDC BCAP Guarantee program,
as well as for the BDC Highly Affected Sectors Credit Availability Program (HASCAP), should be in accordance with existing
regulatory guidelines. The full amount of these loans are 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.
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)
(cid:129)
OSFI has assessed and will continue to assess the need for these relief measures. We have incorporated the above adjustments
and guidance, as applicable, into our results and in our ongoing capital planning activities.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
101
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,
2021
Domestic
Stability
Buffer (3)
Table 64
Minimum
including
Capital
Buffers,
D-SIB/G-SIB
surcharge and
Domestic
Stability
Buffer as at
October 31,
2021
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%
13.7%
14.9%
16.7%
4.9%
2.5%
2.5%
2.5%
n.a.
10.5%
12.0%
14.0%
3.0%
The capital buffers include the capital conservation buffer and the countercyclical capital buffer as prescribed by OSFI.
A capital surcharge, equal to the higher of our D-SIB surcharge and the BCBS’s G-SIB surcharge, is applicable to risk-weighted capital.
The DSB was increased from 1.0% to 2.5% of total RWA effective October 31, 2021.
(1)
(2)
(3)
n.a. not applicable
Regulatory capital, RWA and capital ratios
Under Basel III, regulatory capital consists of CET1, Additional Tier 1 and Tier 2 capital.
CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of
certain items and additional capital components that are subject to threshold deductions.
Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares 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 total 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)
In accordance with OSFI’s regulatory adjustments announced in Q2 2020, and as discussed above, includes capital modifications associated with Stage 1 and 2
allowances which were subject to a 50% after-tax exclusion rate in fiscal 2021 that will be reduced to 25% in fiscal 2022.
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%.
(3) Non-significant investments are subject to certain CAR criteria that drive the amount eligible for deduction.
102
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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
2021
October 31
2020
$
75,583
82,246
92,026
$ 68,082
74,005
84,928
$ 444,142
34,806
73,593
$ 448,821
27,374
70,047
$ 552,541
$ 546,242
13.7%
14.9%
16.7%
4.9%
1,662
$
12.5%
13.5%
15.5%
4.8%
1,553
$
(1)
Capital, RWA, and capital ratios are calculated using OSFI’s CAR guideline and the Leverage ratio is calculated using OSFI’s Leverage
Requirements (LR) guideline as updated in accordance with the regulatory guidance issued by OSFI in response to the COVID-19
pandemic. Both the CAR guideline and LR guideline are based on the Basel III framework.
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)
Table 66
As at
October 31
2021
October 31
2020
$
17,887
71,563
2,533
$ 17,732
59,573
3,414
–
–
11
(16,411)
12
(12,649)
$
75,583
$ 68,082
$
$
$
$
6,661
–
$
5,921
–
2
–
2
–
6,663
$
5,923
82,246
$ 74,005
8,443
448
$
26
863
–
9,049
488
29
1,357
–
$
9,780
$ 10,923
$
92,026
$ 84,928
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
103
2021 vs. 2020
Continuity of CET1 ratio (Basel III)
176 bps
12.5%
66 bps
21 bps
(145) bps
(19) bps
22 bps
13.7%
October 31,
2020 (1)
Internal
capital
generation (2)
RWA decrease -
models &
methodology
updates
RWA decrease -
net credit
migration
RWA growth -
business
Capital
modification
Other
October 31,
2021 (1)
(1)
(2)
Represents rounded figures.
Internal capital generation of $9.6 billion which represents Net income available to shareholders, less common and preferred share dividends and
distributions on other equity instruments.
Our CET1 ratio was 13.7%, up 120 bps from last year, mainly reflecting internal capital generation, partially offset by higher RWA
and the impact of lower capital modification related to eligible Stage 1 and Stage 2 allowances.
Our Tier 1 capital ratio of 14.9% was up 140 bps, reflecting the factors noted above under the CET1 ratio. Our Tier 1 ratio was
also positively impacted by the issuance of LRCNs, partially offset by the redemption of preferred shares.
Our Total capital ratio of 16.7% was up 120 bps, reflecting the factors noted above under the Tier 1 capital ratio.
Our Leverage ratio of 4.9% was up 10 bps, mainly reflecting internal capital generation and the issuance of LRCNs, partially offset
by growth in leverage exposures, the redemption of preferred shares and the impact of lower capital modification as noted above
under the CET1 ratio.
Leverage exposures increased by $109 billion mainly driven by business growth in loans, interest-bearing deposits with
banks, securities, undrawn commitments, repo-style transactions and derivatives, partially offset by the impact of foreign
exchange translation and higher regulatory modifications for central bank reserves and sovereign-issued securities qualifying as
HQLA.
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 which
is currently 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.
104
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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
2021
Risk-weighted assets
Table 67
2020
Standardized
approach
Advanced
approach
Other
Total
Total
Average
of risk-
weights (2)
Exposure (1)
$ 328,787
356,586
400,607
325,994
26,231
8% $
20%
50%
4%
18%
9,975 $ 16,768 $
6,548
58,233
3,640
1,728
65,089
142,320
10,772
3,028
– $ 26,743 $ 24,604
60,544
–
218,803
–
15,371
–
5,228
–
71,637
200,553
14,412
4,756
Total lending-related and other
$1,438,205
22% $ 80,124 $237,977 $
– $318,101 $ 324,550
Trading-related
Repo-style transactions
Derivatives
Total trading-related
Total lending-related and other and trading-
$ 962,491
104,524
1% $
41%
54 $ 9,415 $
68 $ 9,537 $
2,049
21,882 18,446
42,377
9,496
42,917
$1,067,015
5% $
2,103 $ 31,297 $18,514 $ 51,914 $ 52,413
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
$2,505,220
3,951
63,617
n.a.
29,753
15% $ 82,227 $269,274 $18,514 $370,015 $ 376,963
4,931
11,489
17,385
38,053
–
–
–
n.a. 41,840
5,474
10,328
16,485
41,840
-
5,069
n.a.
n.a.
5,474
5,259
16,485
139%
16%
n.a.
141%
$2,602,541
17% $ 87,296 $296,492 $60,354 $444,142 $ 448,821
$
2,760
1,822
2,524
692
5,532
–
11,620
2,356
559
70
2,069
4,802
–
–
–
–
–
–
14,380 $
4,178
3,083
762
7,601
4,802
7,841
3,628
2,917
287
5,985
6,716
$ 13,330 $ 21,476 $
– $ 34,806 $ 27,374
$ 73,593
–
n.a. $ 73,593 $ 70,047
Total risk-weighted assets
$2,602,541
$ 174,219 $317,968 $60,354 $552,541 $ 546,242
(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.
(2) Represents the average of counterparty risk weights within a particular category.
n.a. not applicable
2021 vs. 2020
During the year, RWA was up $6 billion, mainly reflecting business growth in wholesale lending, including loan underwriting
commitments, client-driven trading activity, residential mortgages and personal lending. These factors were partially offset by
the net impact of models and methodology updates, the impact of foreign exchange translation and net credit migration in
wholesale and retail portfolios. The models and methodology updates mainly include recalibration of the probability of default
parameters in our wholesale portfolio, partially offset by an increase in SVaR multipliers reflecting the unwinding of temporary
measures introduced by OSFI in response to the COVID-19 pandemic and transitional methodology changes to the securitization
framework. 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 2021
105
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)
Issuance of LRCN Series 2 (2), (3), (4)
Redemption of preferred shares, Series BK (3), (4)
Issuance of LRCN Series 3 (2), (3), (4)
Redemption of preferred shares, Series BM (3), (4)
Tier 2 capital
Redemption of January 20, 2026 subordinated
debentures (4), (5)
Issuance of January 28, 2033 subordinated
debentures (4), (5)
Redemption of September 29, 2026 subordinated
debentures (4), (5)
Issuance of November 3, 2031 subordinated
debentures (4), (5)
For the year ended October 31, 2021
Issuance or
redemption date
Number of
shares (000s) Amount
November 2, 2020
May 24, 2021
June 8, 2021
August 24, 2021
1,326 $
1,250
(29,000)
1,000
(30,000)
100
1,250
(725)
1,000
(750)
January 20, 2021
$(1,500)
January 28, 2021
September 29, 2021
October 14, 2021
1,000
(1,000)
1,750
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 19 of our 2021 Annual Consolidated Financial Statements.
(1)
(2)
(3)
(4) NVCC instruments.
(5)
For further details, refer to Note 18 of our 2021 Annual Consolidated Financial Statements.
On February 27, 2020, we announced a normal course issuer bid (NCIB) to purchase up to 20 million of our common shares. This
NCIB expired on March 1, 2021, with 0.4 million common shares repurchased and cancelled at a cost of $39 million. In accordance
with OSFI’s announcement on March 13, 2020 of its expectation that share buybacks be stopped, we ceased the repurchase of our
common shares effective March 13, 2020.
As at October 31, 2021, we did not have an active NCIB. When we do have an active NCIB, we determine the amount and
timing of purchases under an 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 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 4.0% 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.
On January 20, 2021, we redeemed all $1,500 million of our outstanding NVCC 3.31% subordinated debentures due on
January 20, 2026 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
On January 28, 2021, we issued $1,000 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of
1.67% per annum until January 28, 2028, and at the three-month Canadian Dollar Offered Rate plus 0.55% thereafter until their
maturity on January 28, 2033.
On May 24, 2021, we redeemed all 29 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred
Shares Series BK at a price of $25 per share.
On June 8, 2021, we issued $1,000 million of LRCN Series 3, at a price per note of $1,000. The LRCN Series 3 bear interest at a
fixed rate of 3.65% per annum until November 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the
5-Year Government of Canada Yield plus 2.665% until maturity on November 24, 2081.
On August 24, 2021, we redeemed all 30 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First
Preferred Shares Series BM at a price of $25 per share.
On September 29, 2021, we redeemed all $1,000 million of our outstanding NVCC 3.45% subordinated debentures due on
September 29, 2026 for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
On October 14, 2021, we issued $1,750 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of
2.14% per annum until November 3, 2026, and at the three-month Canadian Dollar Offered Rate plus 0.61% thereafter until their
maturity on November 3, 2031.
On November 5, 2021, we issued 750 thousand of Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares Series BT to
certain institutional investors at a price of $1,000 per share.
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 2021, our dividend payout ratio was 39%. Common share dividends paid during the
year were $6 billion. In accordance with OSFI’s announcement on March 13, 2020 of its expectation that all banks should not
increase their dividend payment, we did not increase our dividend payments in fiscal 2021. OSFI lifted this restriction on
November 4, 2021.
106
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Selected share data (1)
2021
2020
(Millions of Canadian dollars, except number of shares
and as otherwise noted)
Number of
shares (000s)
Amount
1,425,187 $17,728
(73)
(662)
1,424,525 $17,655
Dividends
declared
per share
$ 4.32
Number of
shares (000s)
Amount
1,423,861
(1,388)
$ 17,628
(129)
1,422,473
$ 17,499
Table 69
Dividends
declared
per share
$ 4.29
Common shares issued
Treasury shares – common shares (2)
Common shares outstanding
Stock options and awards
Outstanding
Exercisable
Available for grant
First preferred shares issued
Non-cumulative Series AZ (3), (4)
Non-cumulative Series BB (3), (4)
Non-cumulative Series BD (3), (4)
Non-cumulative Series BF (3), (4)
Non-cumulative Series BH (4)
Non-cumulative Series BI (4)
Non-cumulative Series BJ (4)
Non-cumulative Series BK (3), (4), (5)
Non-cumulative Series BM (3), (4), (5)
Non-cumulative Series BO (3), (4)
Non-cumulative Series C-2 (6)
Other equity instruments issued
Limited recourse capital notes
Series 1 (3), (4), (7), (8)
Limited recourse capital notes
Series 2 (3), (4), (7), (8)
Limited recourse capital notes
Series 3 (3), (4), (7), (8)
Preferred shares and other equity
instruments issued
Treasury instruments – preferred shares
and other equity instruments (2)
Preferred shares and other equity
instruments outstanding
Dividends on common shares
Dividends on preferred shares and
distributions on other equity
instruments (9)
7,653
3,273
5,847
20,000 $
20,000
24,000
12,000
6,000
6,000
6,000
–
–
14,000
15
500
500
600
300
150
150
150
–
–
350
$ 0.93
0.91
0.80
0.75
1.23
1.23
1.31
0.69
1.03
1.20
23 US$ 67.50
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
$ 0.93
0.91
0.85
0.90
1.23
1.23
1.31
1.38
1.38
1.20
23 US$ 67.50
1,750
1,750
4.50%
1,750
1,750
4.50%
1,250
1,250
4.00%
1,000
1,000
3.65%
–
–
–
–
–
–
112,015 $ 6,723
168,765
$ 5,948
(164)
(39)
(2)
(3)
111,851 $ 6,684
$ 6,158
168,763
$ 5,945
$ 6,111
257
268
For further details about our capital management activity, refer to Note 19 of our 2021 Annual Consolidated Financial Statements.
Positive amounts represent a short position and negative amounts represent a long position.
(1)
(2)
(3) Dividend rate will reset every five years.
(4) NVCC instruments.
(5) On May 24, 2021, we redeemed all 29 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BK at a price of $25 per share.
On August 24, 2021, we redeemed all 30 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BM at a price of $25 per
share.
(6) 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.
(7)
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); in connection with the issuance
of LRCN Series 2, on November 2, 2020, we issued $1,250 million of First Preferred Shares Series BR (Series BR); and in connection with the issuance of LRCN Series 3, on
June 8, 2021, we issued $1,000 million of First Preferred Shares Series BS (Series BS). The Series BQ, BR and BS preferred shares were issued at a price of $1,000 per share
and were issued to a consolidated trust to be held as trust assets in connection with the LRCN structure. For further details, refer to Note 19 of our 2021 Annual
Consolidated Financial Statements.
Excludes distributions to non-controlling interests.
(8)
(9)
As at November 26, 2021, the number of outstanding common shares was 1,424,669,359, net of treasury shares held of 609,742,
and the number of stock options and awards was 7,549,006.
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, 2021, which were the preferred shares Series AZ, BB, BD, BF, BH, BI, BJ, BO, LRCN Series 1, LRCN Series 2, LRCN Series 3
and subordinated debentures due on January 27, 2026, July 25, 2029, December 23, 2029, June 30, 2030, January 28, 2033, and
November 3, 2031 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 $5.00 and including an estimate for accrued dividends
and interest, these NVCC capital instruments would convert into a maximum of 4,057 million common shares, in aggregate, which
would represent a dilution impact of 74.01% based on the number of common shares outstanding as at October 31, 2021.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
107
Attributed capital
Our methodology for allocating capital to our business segments is based on the Basel III regulatory capital requirements, with
the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified economic capital. Risk-based
capital attribution provides a uniform base for performance measurement among business segments, which compares to our
overall corporate return objective and facilitates management decisions in resource allocation in conjunction with other factors.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are
monitored to ensure that the regulatory capital framework remains comprehensive and consistent. The models are benchmarked
to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk
management industry professionals.
For additional information on the risks highlighted below, refer to the Risk management section.
RWA (C$ millions) (1)
$444,142
Credit
34,806
Market
Operational 73,593
$552,541
Royal Bank of
Canada
65%
5
11
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
17
2
Personal &
Commercial
Banking
Wealth
Management
Insurance
Investor &
Treasury Services
Capital Markets
RWA (C$ millions) (1)
$169,063
Credit
Market
377
Operational 28,921
$198,361
RWA (C$ millions) (1)
$80,119
Credit
Market
444
Operational 20,188
$100,751
RWA (C$ millions) (1), (3)
$13,772
Credit
–
Market
Operational
–
$13,772
RWA (C$ millions) (1)
$15,278
Credit
1,811
Market
Operational
4,619
$21,708
RWA (C$ millions) (1)
$155,815
Credit
Market
30,838
Operational 19,298
$205,951
70%
–
12
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles 18
Other (2)
–
47%
–
12
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles 41
Other (2)
–
11%
Attributed capital (1)
Based on Economic
Capital:
Credit
Market 12
Operational
8
Goodwill
and other
intangibles
Other (2)
10
59
58%
10
15
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
17
–
74%
11
8
Attributed capital (1)
Credit
Market
Operational
Goodwill
and other
intangibles
Other (2)
7
–
RWA amount represents period-end spot balances. Attributed Capital represents average balances.
(1)
(2) 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.
(3)
Other considerations affecting capital
Capital treatment for equity investments in other entities is determined by a combination of accounting and regulatory
guidelines based on the size or nature of the investment. Three broad approaches apply as follows:
Consolidation: entities which we control are consolidated on our Consolidated Balance Sheets.
(cid:129)
Deduction: certain holdings are deducted from our regulatory capital. These include all unconsolidated “substantial
(cid:129)
investments,” as defined by the Bank Act (Canada) in the capital of financial institutions, as well as all investments in
insurance subsidiaries.
Risk-weighting: equity investments that are not deducted from capital are risk-weighted at a prescribed rate for
determination of capital charges.
(cid:129)
Regulatory capital approach for securitization exposures
Our securitization regulatory capital approach reflects Chapter 7 of OSFI’s CAR guidelines. For our securitization exposures, we
use an internal assessment approach (IAA) for exposures related to our ABCP business, and as per regulatory guidelines for
other securitization exposures we use a combination of approaches including an external ratings based approach, an 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.
108
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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
On March 11, 2021, OSFI launched industry consultations on the adoption of the BCBS Basel III reforms into its existing Capital
Adequacy Requirements, Leverage Requirements and Liquidity Adequacy Requirements Guidelines and related Pillar 3 disclosure
requirements. While adopting the international standards, OSFI is also tailoring requirements for the Canadian market. On
November 29, 2021, OSFI announced a one quarter implementation delay of its adoption timeline for these reforms to April 30,
2023.
On June 18, 2021, OSFI launched an industry consultation on proposed regulatory changes to the treatment of credit valuation
adjustments (CVA) and market risk hedges of other valuation adjustments of over-the-counter derivatives referred to as XVA. The
proposed changes are a continuation of OSFI’s aforementioned industry consultation announced in March 2021 to incorporate
the latest and final round of Basel III reforms into its capital, leverage and related disclosure guidelines for banks. These revised
guidelines will be effective in Q1 2024.
On November 11, 2021, BCBS finalized the disclosure requirements for the Minimum capital requirements for market risk
standards published in January 2019. OSFI has not yet released their disclosure requirements; however, OSFI requires
implementation of the Minimum capital requirements for market risk standards in Q1 2024.
We expect to continue to engage with OSFI on the domestic implementation of the Basel III reforms and are taking
appropriate steps to ensure required adoption readiness based on guidance provided to date.
Global systemically important banks (G-SIBs)
On August 13, 2021, OSFI released revised G-SIB disclosure requirements which take into consideration the 2022 revised G-SIB
assessment methodology incorporating a new trading volume indicator and inclusion of insurance activities for certain
indicators. The new disclosure requirements are effective for us in Q1 2022 and we are well-positioned to comply with the new
requirements. In addition, we are currently assessing the impact of the revised G-SIB framework and we do not anticipate any
material impact to our current G-SIB surcharge loss absorbency requirement of 1%.
On November 9, 2021, the BCBS finalized a technical amendment to the G-SIB methodology to replace the existing three-year
review cycle requirement with one of ongoing monitoring and review. BCBS will consider updating the G-SIB methodology only if
monitoring findings suggest material unintended consequences or deficiencies.
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 2021 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. The COVID-19 pandemic has continued to evolve and the economic
environment in which we operate could continue to be subject to sustained uncertainty, which could continue to impact our
financial results. While the global economic recovery has continued, momentum has waned amid ongoing uncertainty regarding
the extent and duration of the impacts of the COVID-19 pandemic. 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 our 2021 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.
Changes in accounting policies
During the first quarter of 2021, we adopted the revised Conceptual Framework, which replaces the previous version of the
Conceptual Framework issued in 2010. 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 had no material impact on our 2021 Annual Consolidated Financial
Statements.
During the first quarter of 2021, we early adopted the Phase 2 amendments to IFRS 9 Financial Instruments, IAS 39 Financial
Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance contracts, and IFRS 16
Leases (the Amendments) in response to the market transition away from interbank offered rates (IBORs) to alternative
benchmark rates (ABRs) as part of the IBOR reform (the Reform). Refer to Note 2 of our 2021 Annual Consolidated Financial
Statements for details of these changes.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
109
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 2021 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.
For further information on allowance for credit losses, refer to Notes 2, 4 and 5 of our 2021 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.
110
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Performing financial assets
(cid:129)
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
future cash flows 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 2021 Annual Consolidated Financial Statements.
Employee benefits
We sponsor a number of benefit programs for eligible employees, including registered pension plans, supplemental pension
plans, health, dental, disability and life insurance plans.
The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates,
healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. Discount rates are
determined using a yield curve based on spot rates from high quality corporate bonds. All other assumptions are determined by
us and are reviewed by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of
benefit obligations and remeasurements that we recognize. The weighted average assumptions used and the sensitivity of key
assumptions are presented in Note 16 of our 2021 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 2021 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 2021 Annual Consolidated Financial Statements.
Application of the effective interest method
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income generally for all interest
bearing financial instruments using the effective interest method. The effective interest rate is the rate that discounts estimated
future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition.
Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future
cash flows.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
111
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 14 of our 2021 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 21 of our 2021 Annual Consolidated Financial Statements for
further information.
Future changes in accounting policy and disclosure
IFRS 17 Insurance Contracts (IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive global insurance standard which provides guidance on the
recognition, measurement, presentation and disclosures of insurance contracts. IFRS 17 requires entities to measure insurance
contract liabilities at their current fulfillment values using one of three approaches. 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, 2021, 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, 2021.
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, 2021 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
112
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Related party transactions
In the ordinary course of business, we provide normal banking services and operational services, and enter into other
transactions with associated and other related corporations, including our joint venture entities, on terms similar to those
offered to non-related parties. We grant loans to directors, officers and other employees at rates normally accorded to preferred
clients. In addition, we offer deferred share and other plans to non-employee directors, executives and certain other key
employees. For further information, refer to Notes 11 and 25 of our audited 2021 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
2021
2020
2019
$
49,693
$
47,181
$
46,002
16,038
12
11,432
5
12,860
11
$
16,050
$
11,437
$
12,871
$
11.08
11.06
4.32
$1,706,323
1,100,831
$
7.84
7.82
4.29
$1,624,548
1,011,885
$
8.78
8.75
4.07
$1,428,935
886,005
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
113
Net interest income on average assets and liabilities
Table 71
(Millions of Canadian dollars, except for percentage amounts) (1)
2021
2020
2019
2021
2020
2019
2021
2020
2019
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
$
10,580 $
56,973
22,244
13,891 $
36,008
22,202
10,990 $
25,392
20,463
106 $
63
136
115 $
160
32
1.00% 0.83% 2.10%
231
1.99
505
0.11
(0.26)
(53) 0.61
0.44
0.14
89,797
72,101
56,845
305
307
683
0.34
0.43
1.20
128,977
131,612
131,685
128,121
130,647
97,764
3,736
1,141
260,589
259,806
228,411
4,877
4,622
1,866
6,488
4,573
2,254
2.90
0.87
3.51
1.46
3.50
2.31
6,827
1.87
2.50
2.99
317,997
363,418
346,173
1,309
4,668
8,960
0.41
1.28
2.59
441,380
86,978
528,358
110,314
40,619
404,051
93,238
497,289
111,931
37,985
379,853 13,658
3,557
89,503
469,356 17,215
2,880
1,559
96,492
32,430
14,534
4,179
18,713
3,034
1,673
15,352
4,988
3.09
4.09
20,340
3,099
1,424
3.26
2.61
3.84
3.60
4.48
3.76
2.71
4.40
4.04
5.57
4.33
3.21
4.39
679,291
647,205
598,278 21,654
23,420
24,863
3.19
3.62
4.16
Total interest-earning assets
Non-interest-bearing deposits with other banks
Customers’ liability under acceptances
Other assets
1,347,674
120,154
19,410
190,963
1,342,530
72,698
18,572
202,893
1,229,707 28,145
–
–
–
29,430
17,447
159,599
34,883
–
–
–
41,333
–
–
–
2.09
–
–
–
2.60
–
–
–
3.36
–
–
–
Total assets
$1,678,200 $ 1,636,700 $ 1,436,200 $ 28,145 $ 34,883 $ 41,333
1.68% 2.13% 2.88%
Liabilities and shareholders’ equity
Deposits (3)
Canada
U.S.
Other International
$ 626,549 $ 612,675 $
132,833
97,355
105,892
93,597
555,467 $ 4,700 $ 7,378 $ 10,420
1,524
1,044
97,563
83,349
658
747
231
517
0.75% 1.20% 1.88%
1.56
0.17
1.25
0.53
0.62
0.80
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
856,737
812,164
736,379
5,448
8,783
12,988
0.64
1.08
1.76
33,566
35,937
34,799
1,809
2,200
1,995
5.39
6.12
5.73
275,870
9,174
23,486
1,198,833
202,316
19,516
165,286
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
574
179
133
8,143
–
–
–
2,622
280
163
14,048
–
–
–
6,147
365
89
0.21
1.95
0.57
21,584
–
–
–
0.68
–
–
–
0.85
2.94
0.65
1.18
–
–
–
2.34
3.88
0.54
2.04
–
–
–
$1,585,951 $ 1,551,768 $ 1,355,131 $ 8,143 $ 14,048 $ 21,584
0.51% 0.91% 1.59%
$
92,250 $
84,925 $
81,052
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Total liabilities and shareholders’ equity
$1,678,200 $ 1,636,700 $ 1,436,200 $ 8,143 $ 14,048 $ 21,584
0.49% 0.86% 1.50%
Net interest income and margin
$1,678,200 $ 1,636,700 $ 1,436,200 $ 20,002 $ 20,835 $ 19,749
1.19% 1.27% 1.38%
Net interest income and margin (average earning
assets, net)
Canada
U.S.
Other International
Total
$ 793,130 $ 779,433 $
349,840
204,706
356,916
206,183
700,153 $ 13,947 $ 14,185 $ 14,375
4,058
329,655
1,316
199,898
4,447
1,608
4,959
1,691
1.76% 1.82% 2.05%
1.23
1.27
0.66
0.79
1.39
0.82
$1,347,676 $ 1,342,532 $ 1,229,706 $ 20,002 $ 20,835 $ 19,749
1.48% 1.55% 1.61%
Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively.
Interest income includes loan fees of $888 million (2020 – $797 million; 2019 – $672 million).
(1)
(2)
(3) Deposits include personal chequing and savings deposits with average balances of $258 billion (2020 – $218 billion; 2019 – $189 billion), interest expense of $175 million
(2020 – $498 million; 2019 – $1,051 million) and average rates of 0.07% (2020 – 0.2%; 2019 – 0.6%). Deposits also include term deposits with average balances of $437 billion
(2020 – $443 billion; 2019 – $421 billion), interest expense of $4,487 million (2020 – $6,774 million; 2019 – $9,205 million) and average rates of 1.03% (2020 – 1.53%; 2019 –
2.19%).
n.a. not applicable
114
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
Change in net interest income
Table 72
Asset purchased under reverse repurchase agreements
and securities borrowed
(583)
(2,776)
(3,359)
(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
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
2021 vs. 2020
Increase (decrease) due
to changes in
2020 vs. 2019
Increase (decrease) due
to changes in
Average
volume (2)
Average
rate (2)
Net change
Average
volume (2)
Average
rate (2)
Net change
$
(27) $
93
–
(95)
51
18
(190)
104
(791)
(776)
$
(9) $
(97)
104
(886)
(725)
$
61
211
(5)
(177) $
(556)
90
(116)
(345)
85
49
(388)
13
(1,088)
(4,738)
(4,292)
(1,796)
(1,017)
(561)
5
(818)
(809)
(65)
249
36
700
446
978
208
496
244
1,343
(281)
(44)
116
(2,219)
(341)
(110)
(230)
(876)
(622)
(154)
(114)
$
573
$ (7,311) $ (6,738) $ 3,375
$ (9,825) $ (6,450)
167
167
30
(145)
(279)
(10)
(10)
(2,845)
(594)
(260)
(246)
(1,769)
(91)
(20)
(2,678)
(427)
(230)
(391)
(2,048)
(101)
(30)
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
$
$
(80) $ (5,825) $ (5,905) $ 2,517
$ (10,053) $ (7,536)
653
$ (1,486) $
(833) $
858
$
228
$ 1,086
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.
(1)
(2)
(3) Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
Loans and acceptances by geography
Table 73
As at October 31 (Millions of Canadian dollars)
2021
2020
2019
2018
2017
Canada (1)
Residential mortgages
Personal
Credit cards
Small business (2)
Retail
Wholesale (2), (3)
U.S. (1)
Retail
Wholesale (3)
Other International (1)
Retail
Wholesale (3)
Total loans and acceptances
Total allowance for credit losses
$ 354,169 $ 319,287 $ 287,767 $ 265,831 $ 255,799
82,022
17,491
4,493
78,232
17,235
12,003
81,547
19,617
5,434
82,112
18,793
4,866
79,778
17,060
5,742
461,639
107,750
421,867
106,283
394,365
108,215
371,602
99,530
359,805
94,326
$ 569,389 $ 528,150 $ 502,580 $ 471,132 $ 454,131
35,601
86,041
29,721
85,947
121,642
115,668
6,358
44,148
50,506
6,388
35,039
41,427
24,850
71,607
96,457
6,871
34,134
41,005
21,033
67,894
88,927
6,817
28,516
35,333
18,100
57,773
75,873
7,265
23,966
31,231
$ 741,537 $ 685,245 $ 640,042 $ 595,392 $ 561,235
(4,164)
(5,746)
(3,124)
(2,933)
(2,159)
Total loans and acceptances, net of allowance for credit losses
$ 737,373 $ 679,499 $ 636,918 $ 592,459 $ 559,076
(1) Geographic information is based on residence of borrower.
(2) Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital
measurement and reporting.
Amounts by geography have been revised from those previously presented.
(3)
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
115
Loans and acceptances by portfolio and sector
Table 74
As at October 31 (Millions of Canadian dollars)
Residential mortgages
Personal
Credit cards
Small business (1)
Retail
Agriculture
Automotive
Banking
Consumer discretionary
Consumer staples
Oil and gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining and metals
Public works and infrastructure
Real estate and related
Other services
Telecommunication and media
Transportation
Utilities
Other sectors
Wholesale (1), (2)
Total loans and acceptances
Total allowance for credit losses
2021
2020
2019
2018
2017
$ 380,332
93,441
17,822
12,003
$ 342,597 $ 308,091
92,250
20,311
5,434
92,011
17,626
5,742
$ 282,471
92,700
19,415
4,866
$ 270,348
92,294
18,035
4,493
$ 503,598
$ 457,976 $ 426,086
$ 399,452
$ 385,170
9,250
6,198
7,734
14,806
6,142
5,283
29,192
10,273
931
6,677
7,193
3,569
19,392
984
1,890
66,798
20,550
5,047
6,251
8,699
1,080
9,418
8,361
8,189
15,093
6,021
7,552
22,153
5,827
1,120
10,409
6,825
4,591
15,232
1,044
1,868
61,047
21,138
4,851
7,662
8,241
627
8,951
9,695
6,977
16,448
5,395
8,126
18,985
6,368
1,452
4,533
7,477
4,562
14,352
1,175
2,208
54,353
21,086
4,853
5,539
9,066
2,355
8,325
8,761
7,620
15,453
4,505
6,144
15,567
5,569
1,101
4,363
7,615
4,635
8,991
1,301
2,311
48,493
18,642
7,018
5,593
8,382
5,551
7,397
8,319
6,413
14,428
4,590
5,599
10,210
4,475
913
9,884
5,684
4,086
8,871
1,114
1,932
43,694
16,640
4,867
5,391
6,978
4,580
$ 237,939
$ 227,269 $ 213,956
$ 195,940
$ 176,065
$ 741,537
$ 685,245 $ 640,042
$ 595,392
$ 561,235
(4,164)
(5,746)
(3,124)
(2,933)
(2,159)
Total loans and acceptances, net of allowance for
credit losses
$ 737,373
$ 679,499 $ 636,918
$ 592,459
$ 559,076
(1)
Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital
measurement and reporting.
(2) Certain loan amounts by sector have been revised from those previously presented to align with our view of credit risk by industry.
116
Royal Bank of Canada: Annual Report 2021
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 and gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining and metals
Public works and infrastructure
Real estate and related
Other services
Telecommunication and 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 and gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining and metals
Public works and infrastructure
Real estate and related
Other services
Telecommunication and 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
$
$
2021
645
197
109
951
11
8
–
274
32
131
77
–
4
25
35
5
31
3
6
314
220
6
137
–
32
1,351
6
$ 2,308
$
443
164
109
716
11
5
–
107
25
48
–
–
4
25
31
3
–
3
5
157
110
5
16
–
–
555
$ 1,271
$
$
$
$
23
412
435
212
390
602
$ 2,308
(697)
$
$
$
$
$
$
$
$
$
$
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
2,246
9
3,195
425
177
90
692
69
20
4
117
34
90
–
–
13
2
54
3
–
4
7
233
85
4
15
–
–
754
1,446
32
1,039
1,071
216
462
678
3,195
(949)
$
$
$
$
$
$
$
$
$
$
2019
732
306
57
1,095
37
28
10
171
51
509
81
–
35
5
92
16
7
1
12
408
134
12
13
211
35
1,868
13
2,976
481
250
57
788
36
18
10
71
24
97
–
–
9
5
48
4
2
1
10
195
65
11
13
59
–
678
1,466
36
869
905
272
333
605
2,976
(832)
$
$
$
$
$
$
$
$
$
$
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)
$ 1,611
$
2,246
$
2,144
$
1,483
$
1,839
0.17%
0.21%
0.91%
0.19%
0.57%
0.31%
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%
Allowance on impaired loans as a % of GIL (4)
30.21%
29.71%
27.96%
32.08%
28.61%
(1)
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 $137 million in 2021 (2020 – $142 million; 2019 – $189 million; 2018 – $179 million; 2017 –
$307 million). For further details, refer to Note 5 of our 2021 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.
(2)
(3) Geographic information is based on residence of borrower.
(4)
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 2021
117
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 and gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining and metals
Public works and infrastructure
Real estate and related
Other services
Telecommunication and 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 and gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining and metals
Public works and infrastructure
Real estate and related
Other services
Telecommunication and 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)
2019
51
487
518
36
$
2018
51
462
468
30
1,092
1,011
$
$
$
$
$
$
$
$
$
$
2021
34
243
296
31
604
(5)
(5)
–
7
(14)
(51)
2
–
(5)
2
2
24
(3)
(5)
2
30
53
9
32
(1)
(1)
73
1
678
24
254
288
31
597
(4)
(5)
–
11
–
(19)
–
–
(5)
2
2
2
–
–
2
26
62
2
10
–
–
86
683
7
(10)
(3)
–
(2)
(2)
678
(1,350)
(81)
$
$
$
$
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
–
8
10
–
61
33
98
–
–
9
6
104
30
–
–
57
57
35
7
9
70
5
599
–
$
$
1,600
35
395
471
49
950
$
$
1,691
32
488
505
36
1,061
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
1,113
5
377
382
(18)
123
105
1,600
2,631
120
$
$
$
$
$
$
292
1,353
12
223
235
19
84
103
1,691
200
(27)
$
$
$
$
$
$
$
$
$
1
5
(1)
81
1
1
–
–
3
4
8
(21)
3
–
2
13
22
–
32
1
(8)
147
2
1,160
44
458
456
30
988
1
1
(1)
28
2
4
–
–
3
1
6
1
–
–
1
14
17
–
2
–
–
80
1,068
4
64
68
19
5
24
1,160
123
24
$
$
$
$
$
$
$
$
$
$
2017
56
409
435
32
932
4
14
3
12
6
(28)
(18)
–
3
1
11
4
–
(4)
1
120
20
8
1
5
53
216
2
1,150
33
413
426
32
904
2
1
3
20
3
(17)
–
–
3
1
8
1
–
1
1
43
15
9
2
–
(1)
95
999
3
117
120
25
6
31
1,150
–
$
(753)
$
4,351
$
1,864
$
1,307
$
1,150
(0.10)%
0.10%
0.63%
0.24%
0.31%
0.27%
0.23%
0.20%
0.21%
0.21%
Effective November 1, 2017, represents Stage 3 PCL under IFRS 9 and PCL on impaired loans under IAS 39.
(1)
(2) Geographic information is based on residence of borrower.
(3)
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.
118
Royal Bank of Canada: Annual Report 2021
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 and gas
Financial services
Financing products
Forest products
Governments
Industrial products
Information technology
Investments
Mining and metals
Public works and infrastructure
Real estate and related
Other services
Telecommunication and 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
2021
$ 6,115
(672)
2020
$ 3,419
4,231
2019
$ 3,088
1,891
2018
$ 2,976
1,283
2017
$ 2,326
1,150
(37)
(387)
(460)
(32)
(44)
(545)
(617)
(38)
(45)
(600)
(655)
(36)
(51)
(552)
(599)
(35)
(53)
(543)
(565)
(38)
$
$
(916)
$ (1,244)
$ (1,336)
$ (1,237)
$ (1,199)
(253)
$
(437)
$
(440)
$
(207)
$
(226)
$ (1,169)
$ (1,681)
$ (1,776)
$ (1,444)
$ (1,425)
$
$
$
$
$
10
140
163
9
322
53
375
$
$
$
$
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
(794)
(230)
$ (1,340)
(195)
$ (1,454)
(106)
$ (1,112)
(59)
$ (1,095)
(131)
$ 4,419
$ 6,115
$ 3,419
$ 3,088
$ 2,250
$
$
$
$
$
$
$
$
$
$
$
45
71
34
150
3
1
–
9
5
29
–
–
1
3
9
1
–
1
2
27
81
1
9
–
–
182
332
3
126
129
107
129
236
697
278
991
875
143
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
$ 2,287
$ 2,932
$ 1,886
$ 1,753
$ 1,435
$ 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
$ 3,722
$ 5,166
$ 2,587
$ 2,388
$ 1,513
$ 4,419
$ 6,115
$ 3,419
$ 3,088
$ 2,250
Allowance on loans as a % of loans and acceptances
Net write-offs as a % of average net loans and acceptances
0.60%
0.11%
0.89%
0.20%
0.53%
0.24%
0.52%
0.20%
0.40%
0.20%
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.
(1)
(2)
(3) Geographic information is based on residence of borrower.
(4)
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 2021
119
Credit quality information by Canadian province (1)
Table 78
(Millions of Canadian dollars)
Loans and acceptances (2)
Atlantic provinces (3)
Quebec
Ontario
Alberta
Other Prairie provinces (4)
B.C. and territories (5)
2021
2020
2019
2018
2017
$
29,078 $ 27,615
64,534
68,595
240,673
268,317
71,161
71,506
33,758
33,956
90,409
97,937
$ 26,990
62,286
224,055
70,873
33,303
85,073
$ 25,420
58,256
205,792
69,719
32,415
79,530
$ 24,589
56,802
196,877
68,122
31,649
76,092
Total loans and acceptances in Canada
$ 569,389 $ 528,150
$ 502,580
$ 471,132
$ 454,131
Gross impaired loans (6)
Atlantic provinces (3)
Quebec
Ontario
Alberta
Other Prairie provinces (4)
B.C. and territories (5)
Total GIL in Canada
PCL on impaired loans (7)
Atlantic provinces (3)
Quebec
Ontario
Alberta
Other Prairie provinces (4)
B.C. and territories (5)
$
$
$
$
97 $
198
379
321
173
103
111
271
393
386
178
107
$
$
1,271 $
1,446
22 $
22
483
83
39
34
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
$
683 $
1,113
$
1,353
$
1,068
$
77
176
213
284
125
110
985
66
85
617
112
64
55
999
(1) Geographic information is based on residence of borrower.
(2) Certain loan amounts by Canadian province have been revised from those previously presented.
(3) Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
(4) Comprises Manitoba and Saskatchewan.
(5) Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
(6)
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.
(7)
120
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
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.
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.
Dividend yield
Dividends per common share divided by the
average of the high and low share price in the
relevant period.
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.
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
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.
Management’s Discussion and Analysis
Royal Bank of Canada: Annual Report 2021
121
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.
Net Stable Funding Ratio (NSFR)
The Net Stable Funding Ratio is a Basel III
metric that measures the sufficiency of
available stable funding to meet the minimum
coverage level of required stable funding.
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 securities
agrees to lend it under the terms of a
prearranged contract to a borrower for a fee.
Collateral for the loan consists of either high
quality securities or cash and collateral value
must be at least equal to the market value of
the loaned securities. Borrowers pay a
negotiated fee for loans collateralized by
securities, whereas for cash collateral lenders
pay borrowers interest at a negotiated rate
and reinvest the cash collateral to earn a
return. An intermediary such as a bank often
acts as agent lender for the owner of the
security in return for a share of the revenue
earned by the owner from lending securities.
Most often, agent lenders indemnify the owner
against the risk of the borrower’s failure to
redeliver the loaned securities – counterparty
credit risk if a borrower defaults and market
risk if the value of the non-cash collateral
declines. The agent lender does not indemnify
against the investment risk of re-investing
cash collateral which is borne by the owner.
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.
122
Royal Bank of Canada: Annual Report 2021
Management’s Discussion and Analysis
EDTF recommendations index
We aim to present transparent, high-quality risk disclosures by providing disclosures in this 2021 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 2021 Annual Report.
The following index summarizes our disclosure by EDTF recommendation:
Type of Risk
Recommendation Disclosure
Location of disclosure
Annual Report page
123
55-60, 121-122
52-54
100-105
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
55-60
56-60
108
57-58, 73
100-105
–
–
100-105
–
61-64
–
–
57, 61
Quantitative and qualitative analysis of our
80-81, 85-86
liquidity reserve
Encumbered and unencumbered assets by
balance sheet category, and contractual
obligations for rating downgrades
Maturity analysis of consolidated total
assets, liabilities and off-balance sheet
commitments analyzed by remaining
contractual maturity at the balance
sheet date
Sources of funding and funding strategy
Relationship between the market risk
measures for trading and non-trading
portfolios and the balance sheet
Decomposition of market risk factors
Market risk validation and back-testing
Primary risk management techniques
beyond reported risk measures and
parameters
Bank’s credit risk profile
Quantitative summary of aggregate credit
risk exposures that reconciles to the
balance sheet
Policies for identifying impaired loans
Reconciliation of the opening and closing
balances of impaired loans and
impairment allowances during the year
Quantification of gross notional exposure
for OTC derivatives or exchange-traded
derivatives
Credit risk mitigation, including collateral
held for all sources of credit risk
81, 84
88-89
81-83
77-78
72-76
73
72-76
60-72, 170-177
115-120
62-65, 110, 143-146
–
66
64-65
Other risk types
Publicly known risk events
91-99
94-95, 215-216
–
–
–
–
–
*
20
–
21
*
*
21
32
–
–
–
–
–
–
–
–
22-32, *
*
–
24, 29
33
*
–
–
*
These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report for the quarter ended October 31, 2021 and for the year
ended October 31, 2020.
Index for Enhanced Disclosure Task Force recommendations
Royal Bank of Canada: Annual Report 2021
123
REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
Reports
125 Management’s Responsibility for Financial Reporting
125 Management’s Report on Internal Control over
Financial Reporting
126
Independent Auditor’s Report
Notes to Consolidated Financial Statements
138 Note 1
General information
138 Note 2
Summary of significant accounting
policies, estimates and judgments
153 Note 3
Fair value of financial instruments
130 Report of Independent Registered Public Accounting
166 Note 4
Securities
Firm
Consolidated Financial Statements
133 Consolidated Balance Sheets
134 Consolidated Statements of Income
135 Consolidated Statements of Comprehensive Income
136 Consolidated Statements of Changes in Equity
137 Consolidated Statements of Cash Flows
170 Note 5
Loans and allowance for credit losses
177 Note 6
Derecognition of financial assets
178 Note 7
Structured entities
182 Note 8
Derivative financial instruments and
hedging activities
192 Note 9
Premises and equipment
193 Note 10 Goodwill and other intangible assets
195 Note 11
Joint ventures and associated companies
196 Note 12 Other assets
196 Note 13 Deposits
197 Note 14
Insurance
199 Note 15 Segregated funds
200 Note 16 Employee benefits – Pension and other
post-employment benefits
204 Note 17 Other liabilities
205 Note 18 Subordinated debentures
205 Note 19 Equity
208 Note 20 Share-based compensation
210 Note 21
Income taxes
212 Note 22 Earnings per share
213 Note 23 Guarantees, commitments, pledged
assets and contingencies
215 Note 24 Legal and regulatory matters
216 Note 25 Related party transactions
218 Note 26 Results by business segment
220 Note 27 Nature and extent of risks arising from
financial instruments segment
221 Note 28 Capital management
221 Note 29 Offsetting financial assets and financial
liabilities
223 Note 30 Recovery and settlement of on-balance
sheet assets and liabilities
224 Note 31 Parent company information
225 Note 32 Subsequent events
124
Royal Bank of Canada: Annual Report 2021
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 (United States) 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
Nadine Ahn
Chief Financial Officer
Toronto, November 30, 2021
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, 2021, 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, 2021, 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, 2021, 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
Nadine Ahn
Chief Financial Officer
Toronto, November 30, 2021
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
125
Independent Auditor’s Report
To the Shareholders and Board of Directors of Royal Bank of Canada
Our opinion
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 of October 31, 2021 and 2020, 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 of October 31, 2021 and 2020;
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.
Basis for opinion
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.
Key audit matters
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, 2021. 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
Allowance for Credit Losses (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 $4,471 million as of
October 31, 2021 and represents management’s estimate of
expected credit losses on financial assets as of 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
126
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
How our audit addressed the key audit matter
Our approach to addressing the matter included the following
procedures, amongst others:
(cid:129) Testing the effectiveness of controls relating to the
estimation of the ACL, incorporating consideration of the
ongoing uncertainty regarding the extent and duration of
the impacts of the COVID-19 pandemic, including controls
over:
O
Probability of default, loss given default and
exposure at default models.
Design of multiple future macroeconomic scenarios,
the forecasting of macroeconomic variables, and the
probability-weighting of these scenarios.
Completeness and accuracy of the data inputs
underlying the ACL calculation.
Application of expert credit judgment.
O
O
O
(cid:129) Testing management’s process for estimating the Stage 1
and Stage 2 ACL, including their consideration of the
ongoing uncertainty regarding the extent and duration of
the impacts of the COVID-19 pandemic, which consisted of:
O
O
Testing the completeness, accuracy, and relevance of
underlying data.
Using professionals with specialized skill and
knowledge to assist in evaluating:
(cid:129)
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.
Key audit matter
likelihood of the range of outcomes that each scenario
represents at the reporting date. As disclosed in Note 5, while
the global economic recovery has continued throughout fiscal
2021, momentum has waned over the year amid ongoing
uncertainty regarding the extent and duration of the impacts of
the COVID-19 pandemic. As a result, the estimation of the ACL
continues to require the application of heightened judgment,
as there is 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. The possibility of a more prolonged recovery
period, including monetary policy responses to elevated
inflation rates which may increase credit risk, has been
reflected in management’s general downside scenario.
To address the uncertainties inherent in the current and future
environment and to reflect relevant risk factors not captured in
the Bank’s modelled results, management applied expert credit
judgment in quantitative and qualitative adjustments for the
impacts of the unprecedented macroeconomic environment
including the impact of government support programs in
offsetting the effect of COVID-19 related unemployment on the
economy and on mitigating the losses for the sectors most
sensitive to the economic impact of the COVID-19 pandemic.
We considered this a key audit matter due to:
(cid:129) Significant judgment required by management when:
O
O
O
O
Designing future macroeconomic scenarios.
Forecasting macroeconomic variables.
Probability-weighting scenarios.
Applying expert credit judgment to reflect
characteristics not already considered in the models.
(cid:129) High degree of estimation uncertainty due to the ongoing
uncertainty regarding the extent and duration of the impacts
of the COVID-19 pandemic, which led to a high degree of
auditor judgment.
(cid:129) 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.
(cid:129) Audit effort included the use of professionals with
specialized skill and knowledge.
Goodwill Impairment Assessment of the Caribbean Banking
Cash Generating Unit (CGU)
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.
The goodwill allocated to the Caribbean Banking CGU was
$1,600 million. Management conducts a goodwill impairment
test as of August 1 of each year by comparing the carrying
amount of each Cash Generating Unit (CGU) to its recoverable
amount. The recoverable amount of a CGU is represented by its
value in use (VIU), except in circumstances where the carrying
amount of a CGU exceeds its VIU. In such cases, the greater of
the CGU’s fair value less costs of disposal (FVLCD) and its VIU
is the recoverable amount.
Management estimated the recoverable amount of the
Caribbean Banking CGU based on its FVLCD. Management
calculated the FVLCD using a discounted cash flow method
that projects future cash flows over a 5-year period 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 by management
to increase at a constant rate using a nominal long-term
growth rate. The discount rate used to determine the present
value of the Caribbean Banking CGU’s projected future cash
flows is based on the bank-wide cost of capital, adjusted for
the risks to which the CGU is exposed.
How our audit addressed the key audit matter
(cid:129)
Reasonableness of significant inputs and
assumptions used in the estimation of the ACL
related to:
(cid:129)
(cid:129)
(cid:129)
Design of future macroeconomic
scenarios.
Forecasted macroeconomic variables.
Probability-weights assigned to the
scenarios.
Appropriateness of the ACL calculation.
(cid:129)
(cid:129) Management’s application of expert credit
judgment.
Our approach to addressing the matter included 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 CGU.
(cid:129) Testing management’s process for determining the
recoverable amount of the CGU, which consisted of:
O
O
O
O
Evaluating the appropriateness of the discounted
cash flow model.
Testing the completeness, accuracy, and relevance of
underlying data used in the model.
Evaluating the reasonableness of assumptions used
by management, related to future cash flows, which
involved evaluating the consistency with:
Current and past performance of the CGU.
(cid:129)
External market data and industry data.
(cid:129)
(cid:129)
Evidence obtained in other areas of the audit.
Evaluating consistency of the recoverable amount
with market comparable transactions.
(cid:129) Professionals with specialized skill and knowledge assisted
us in evaluating:
O
Appropriateness of management’s discounted cash
flow model.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
127
How our audit addressed the key audit matter
O
Consistency of the recoverable amount of the CGU
with market comparable transactions.
Our approach to addressing the matter included 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; and
(ii) estimating provisions relating to uncertain tax positions,
if applicable, which reflects management’s best estimate of
tax positions that are under audit or appeal by relevant
taxation authorities. This involved:
(cid:129)
(cid:129)
(cid:129)
Evaluating the appropriateness of the methods used.
Testing the completeness, accuracy, and relevance of
underlying data used.
Reviewing correspondence with relevant taxation
authorities.
(cid:129) Making inquiries of the Bank’s internal and external
(cid:129)
legal counsel.
Evaluating, with the assistance of professionals with
specialized skill and knowledge:
Application of relevant tax laws.
O
O Whether it is probable that the relevant tax
authorities will accept the tax positions.
Evidence used by management.
O
Key audit matter
As disclosed by management, with the improved economic
environment in 2021, tempered by continued uncertainty
related to COVID-19, the recoverable amount of the Caribbean
Banking CGU has increased. As of August 1, 2021, management
determined that the recoverable amount was 123% of its
carrying amount. Management also considered reasonably
possible alternative scenarios, including market comparable
transactions, which yielded valuations ranging from a material
surplus to an immaterial deficit.
Management uses significant judgment to determine inputs to
the discounted cash flow model. If the future cash flows and
other assumptions in future periods deviate significantly from
the current amounts used in management’s impairment
testing, the value of goodwill could become impaired.
We considered this a key audit matter due to:
(cid:129)
(cid:129)
(cid:129)
Significant judgment required by management when
determining the recoverable amount of the CGU,
including projecting future cash flows.
High degree of auditor judgment and subjectivity in
performing procedures over management’s
calculation of the recoverable amount of the CGU, and
evaluating audit evidence.
Audit effort included the use of professionals with
specialized skill and knowledge.
Uncertain Tax Positions
Refer to Note 2 - Summary of significant accounting policies,
estimates and judgments and Note 21 - 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 considered this a key audit matter due to:
(cid:129) Significant judgment required by management, including a
high degree of estimation uncertainty, when:
O
O
Interpreting the relevant tax laws.
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.
(cid:129) High degree of auditor judgment and subjectivity in
performing procedures to evaluate the uncertain tax
positions.
(cid:129) Audit effort included the use of professionals with
specialized skill and knowledge.
Other information
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.
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Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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.
Responsibilities of management and those charged with governance for the consolidated financial statements
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’s responsibilities for the audit of the consolidated financial statements
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.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 30, 2021
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
129
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Royal Bank of Canada
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Royal Bank of Canada and its subsidiaries (together, the
Bank) as of October 31, 2021 and 2020, 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, 2021, 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, 2021 and 2020, 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,
2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
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.
Definition and Limitations of Internal Control over Financial Reporting
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.
Critical Audit Matters
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 $4,471 million as
of October 31, 2021 and represents management’s estimate of expected credit losses on financial assets as of 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
130
Royal Bank of Canada: Annual Report 2021
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, while the global
economic recovery has continued throughout fiscal 2021, momentum has waned over the year amid ongoing uncertainty
regarding the extent and duration of the impacts of the COVID-19 pandemic. As a result, the estimation of the ACL continues to
require the application of heightened judgment, as there is 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. The
possibility of a more prolonged recovery period, including monetary policy responses to elevated inflation rates which may
increase credit risk, has been reflected in management’s general downside scenario. To address the uncertainties inherent in the
current and future environment and to reflect relevant risk factors not captured in the Bank’s modelled results, management
applied expert credit judgment in quantitative and qualitative adjustments for the impacts of the unprecedented macroeconomic
environment, including the impact of government support programs in offsetting the effect of COVID-19 related unemployment on
the economy and on mitigating the losses for the sectors most sensitive to the economic impact of the COVID-19 pandemic.
The principal considerations for our determination that performing procedures relating to 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 ongoing uncertainty
regarding the extent and duration of the impacts of the COVID-19 pandemic, 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 ongoing uncertainty regarding the extent and duration of the impacts of
the COVID-19 pandemic, 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, among others, testing management’s process for
estimating the Stage 1 and Stage 2 ACL, including their consideration of the ongoing uncertainty regarding the extent and
duration of the impacts of the COVID-19 pandemic. This consisted of (i) testing the completeness, accuracy, and relevance of
underlying data; and (ii) with the assistance of professionals with specialized skill and knowledge, evaluating: (a) 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, (b) the reasonableness of significant inputs and assumptions used in the estimation of the ACL related
to: 1) the design of future macroeconomic scenarios, 2) the forecasted macroeconomic variables, 3) the probability-weights
assigned to the scenarios, (c) the appropriateness of the ACL calculation, and (d) management’s application of expert credit
judgment.
Goodwill Impairment Assessment of the Caribbean Banking Cash Generating Unit (CGU)
As described in Notes 2 and 10 to the consolidated financial statements, the goodwill allocated to the Caribbean Banking CGU
was $1,600 million. Management conducts a goodwill impairment test as of August 1 of each year by comparing the carrying
amount of each Cash Generating Unit (CGU) to its recoverable amount. The recoverable amount of a CGU is represented by its
value in use (VIU), except in circumstances where the carrying amount of a CGU exceeds its VIU. In such cases, the greater of the
CGU’s fair value less costs of disposal (FVLCD) and its VIU is the recoverable amount. Management estimated the recoverable
amount of the Caribbean Banking CGU based on its FVLCD. Management calculated the FVLCD using a discounted cash flow
method that projects future cash flows over a 5-year period 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 by management to
increase at a constant rate using a nominal long-term growth rate. The discount rate used to determine the present value of the
Caribbean Banking CGU’s projected future cash flows is based on the bank-wide cost of capital, adjusted for the risks to which
the CGU is exposed. As disclosed by management, with the improved economic environment in 2021, tempered by continued
uncertainty related to COVID-19, the recoverable amount of the Caribbean Banking CGU has increased. As of August 1, 2021,
management determined that the recoverable amount was 123% of its carrying amount. Management also considered reasonably
possible alternative scenarios, including market comparable transactions, which yielded valuations ranging from a material
surplus to an immaterial deficit. Management uses significant judgment to determine inputs to the discounted cash flow model. If
the future cash flows and other assumptions in future periods deviate significantly from the current amounts used in
management’s impairment testing, the value of goodwill could become impaired.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment
of the Caribbean Banking CGU is a critical audit matter are: (i) there was significant judgment required by management when
determining the recoverable amount of the CGU, including projecting future cash flows; (ii) there was a high degree of auditor
judgment and subjectivity in performing procedures over management’s calculation of the recoverable amount of the CGU, and
evaluating audit evidence; and (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 CGU. These procedures also included, among others, testing management’s process for determining the recoverable
amount of the CGU, which consisted of, among others: (i) evaluating the appropriateness of the discounted cash flow model
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
131
(ii) testing the completeness, accuracy, and relevance of underlying data used in the model; (iii) evaluating the reasonableness
of assumptions used by management, related to future cash flows, which involved evaluating the consistency with (a) current
and past performance of the CGU, (b) external market data and industry data, and (c) evidence obtained in other areas of the
audit; and iv) evaluating consistency of the recoverable amount with market comparable transactions. Professionals with
specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of management’s discounted cash flow
model; and ii) the consistency of the recoverable amount of the 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 21, 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; and (ii) estimating
provisions relating to uncertain tax positions, if applicable, which reflects management’s best estimate of tax positions that are
under audit or appeal by relevant taxation authorities. 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, with the
assistance of professionals with specialized skill and knowledge, the application of relevant tax laws, whether it is probable that
the relevant tax authorities will accept the tax positions, and evidence used by management.
/s/ PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
November 30, 2021
We have served as the Bank’s auditor since 2016.
132
Royal Bank of Canada: Annual Report 2021
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
As at
October 31
2021
October 31
2020
$
113,846
$
118,888
79,638
39,013
139,240
145,484
284,724
136,071
139,743
275,814
Assets purchased under reverse repurchase agreements and securities borrowed
307,903
313,015
Loans (Note 5)
Retail
Wholesale
Allowance for loan losses (Note 5)
Segregated fund net assets (Note 15)
Other
Customers’ liability under acceptances
Derivatives (Note 8)
Premises and equipment (Note 9)
Goodwill (Note 10)
Other intangibles (Note 10)
Other assets (Note 12)
Total assets
Liabilities and equity
Deposits (Note 13)
Personal
Business and government
Bank
Segregated fund net liabilities (Note 15)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivatives (Note 8)
Insurance claims and policy benefit liabilities (Note 14)
Other liabilities (Note 17)
Subordinated debentures (Note 18)
Total liabilities
Equity attributable to shareholders
Preferred shares and other equity instruments (Note 19)
Common shares (Note 19)
Retained earnings
Other components of equity
Non-controlling interests
Total equity
Total liabilities and equity
503,598
218,066
721,664
(4,089)
717,575
457,976
208,655
666,631
(5,639)
660,992
2,666
1,922
19,798
95,541
7,424
10,854
4,471
61,883
199,971
18,507
113,488
7,934
11,302
4,752
58,921
214,904
$ 1,706,323
$ 1,624,548
$
362,488
696,353
41,990
$
343,052
624,311
44,522
1,100,831
1,011,885
2,666
1,922
19,873
37,841
262,201
91,439
12,816
70,301
494,471
18,618
29,285
274,231
109,927
12,215
69,831
514,107
9,593
9,867
1,607,561
1,537,781
6,684
17,655
71,795
2,533
98,667
95
98,762
5,945
17,499
59,806
3,414
86,664
103
86,767
$ 1,706,323
$ 1,624,548
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 2021
133
Consolidated Statements of Income
(Millions of Canadian dollars, except per share amounts)
Interest and dividend income (Note 3)
Loans
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits and other
$
Interest expense (Note 3)
Deposits and other
Other liabilities
Subordinated debentures
Net interest income
Non-interest income
Insurance premiums, investment and fee income (Note 14)
Trading revenue
Investment management and custodial fees
Mutual fund revenue
Securities brokerage commissions
Service charges
Underwriting and other advisory fees
Foreign exchange revenue, other than trading
Card service revenue
Credit fees
Net gains on investment securities
Share of profit in joint ventures and associates (Note 11)
Other
Total revenue
Provision for credit losses (Notes 4 and 5)
Insurance policyholder benefits, claims and acquisition expense (Note 14)
Non-interest expense
Human resources (Note 16 and 20)
Equipment
Occupancy
Communications
Professional fees
Amortization of other intangibles (Note 10)
Other
Income before income taxes
Income taxes (Note 21)
Net income
Net income attributable to:
Shareholders
Non-controlling interests
Basic earnings per share (in dollars) (Note 22)
Diluted earnings per share (in dollars) (Note 22)
Dividends per common share (in dollars)
The accompanying notes are an integral part of these Consolidated Financial Statements.
$
$
$
$
For the year ended
October 31
2021
October 31
2020
$
$
$
$
$
21,654
4,877
1,309
305
28,145
5,448
2,516
179
8,143
20,002
5,600
1,183
7,132
4,251
1,538
1,858
2,692
1,066
1,078
1,530
145
130
1,488
29,691
49,693
(753)
3,891
16,539
1,986
1,584
931
1,351
1,287
2,246
25,924
20,631
4,581
16,050
16,038
12
16,050
11.08
11.06
4.32
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
134
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
(Millions of Canadian dollars)
Net income
Other comprehensive income (loss), net of taxes (Note 21)
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
2021
October 31
2020
$
16,050
$
11,437
177
(9)
(117)
51
(4,316)
1,740
(7)
(1)
(2,584)
1,373
272
1,645
2,251
55
38
2,344
1,456
17,506
17,501
5
17,506
$
$
$
(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
$
$
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
135
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136
Royal Bank of Canada: Annual Report 2021
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
2021
October 31
2020
$
16,050
$
11,437
(753)
1,276
581
1,316
(127)
(151)
(26)
601
(509)
1,738
17,947
(18,488)
(3,164)
(54,987)
5,112
(12,030)
8,556
88,876
35
9,191
61,044
(40,618)
108,925
(123,547)
(2,186)
78
–
(57,348)
2,750
(2,500)
90
–
2,245
(1,475)
4,763
(4,743)
(6,420)
(3)
(14)
(621)
(5,928)
(2,810)
$
$
(5,042)
118,888
113,846
7,555
26,412
2,575
4,198
$
$
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
(1) We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2 billion as at October 31, 2021 (October 31, 2020 –
$3 billion; October 31, 2019 – $3 billion).
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
137
Note 1 General information
Royal Bank of Canada and its subsidiaries (the Bank) provide diversified financial services including Personal & Commercial
Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets products and services on a global
basis. Refer to Note 26 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 November 30, 2021, 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 has continued to evolve and the economic environment in which we operate could continue to be
subject to sustained uncertainty, which could continue to impact our financial results. While the global economic recovery has
continued, momentum has waned amid ongoing uncertainty regarding the extent and duration of the impacts of the COVID-19
pandemic. 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
Application of the effective interest method
Note 2
Derecognition of financial assets
Income taxes
Provisions
Note 2
Note 6
Note 2
Note 21
Note 2
Note 23
Note 24
Note 2
Note 7
Note 2
Note 3
Note 2
Note 4
Note 5
Note 2
Note 16
Note 2
Note 10
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.
138
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are
exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns
through our power over the investee. We have power over an entity when we have existing rights that give us the current ability
to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the
basis of voting rights or, in the case of structured entities, other contractual arrangements.
We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining
whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the
arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other
parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some
circumstances, different factors and conditions may indicate that 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 coordinated 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
Conceptual Framework for Financial Reporting (Conceptual Framework)
During the first quarter of 2021, we adopted the revised Conceptual Framework, which replaces the previous version of the
Conceptual Framework issued in 2010. 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 had no material impact on our Consolidated Financial Statements.
Interest Rate Benchmark Reform
During the first quarter of 2021, we early adopted the Phase 2 amendments to IFRS 9 Financial Instruments, IAS 39 Financial
Instruments: Recognition and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance contracts, and IFRS 16
Leases (the Amendments) in response to the market transition away from interbank offered rates (IBORs) to alternative
benchmark rates (ABRs) as part of the IBOR reform (the Reform). The Amendments provide two key reliefs which are applicable
to changes undertaken as a direct consequence of the Reform and where the transition from IBOR to ABRs rates are transacted
on an economically equivalent basis:
(cid:129)
(cid:129)
For modifications of financial instruments carried at amortized cost resulting from the Reform which are transacted on
an economically equivalent basis, the Amendments allow the benchmark interest 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 ABRs.
Progress in and risks arising from the transition to ABRs
To manage our transition to ABRs, 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 and client education and communication. Transition activities are focused
on two broad streams of work: (i) developing new ABR linked products, and (ii) conversion of existing LIBOR based contracts to
ABRs. Our program timelines are ultimately dependent on broader market acceptance of products that reference the new ABRs
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
139
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
We continue to work towards the recommended target dates for the cessation of LIBOR-based products provided by our
regulators and are on track with our transition activities to move to ABRs. These target dates reflect the announcement made on
March 5, 2021 when the Financial Conduct Authority, the regulator of the ICE Benchmark Administration (IBA) which administers
LIBOR, announced the permanent cessation or loss of representativeness of all 35 LIBOR settings currently published by the IBA.
As a result of this announcement, GBP LIBOR settings to which we have significant exposure will cease or lose their
representativeness after December 31, 2021. USD LIBOR settings to which we have significant exposure will predominantly cease
or lose their representativeness after June 30, 2023.
The following tables show the Bank’s significant exposures to financial instruments referencing benchmark interest rates subject
to the Reform that have yet to transition to ABRs and maturing after December 31, 2021 for non-USD LIBOR instruments and after
June 30, 2023 for USD LIBOR instruments. In the normal course of business, our derivative notional amounts may fluctuate with
minimal impact to our IBOR conversion plans.
October 31, 2021
November 1, 2020 (1)
As at
Non-derivative
financial liabilities (3)
Derivative
notional (4)
Non-derivative
financial assets (2)
Non-derivative
financial liabilities (3)
1,420 $4,533,965 $
1,175
2,260
4,855 $6,934,491 $
2,308,125
92,401
57,432 $
7,518
324
65,274 $
Derivative
notional (4)
941 $ 3,368,307
1,773,893
263,299
1,227
2,456
4,624 $ 5,405,499
Non-derivative
financial assets (2)
$
68,325 $
3,250
340
$
71,915 $
(Millions of Canadian dollars)
USD LIBOR
GBP LIBOR
Other IBOR currencies
Cross currency swaps
USD LIBOR – GBP
LIBOR
Other combinations
n.a.
n.a.
n.a.
$
71,915 $
n.a. $ 507,437
67,404
n.a.
n.a. $ 574,841
4,855 $7,509,332 $
n.a.
n.a.
n.a.
n.a. $
n.a.
384,263
52,875
n.a. $
437,138
65,274 $
4,624 $ 5,842,637
Amounts have been updated from those previously presented to reflect the regulatory developments related to the USD LIBOR cessation date.
(1)
(2) Non-derivative assets represent the drawn outstanding balance of Loans and the fair value of Securities.
(3) Non-derivative liabilities represent Deposits.
(4)
The notional amount of derivative instruments excludes cross currency swaps with multiple LIBOR legs, which are presented separately in the Cross currency swaps
section of this table.
n.a. not applicable
The following table presents the undrawn balances of loan commitments referencing benchmark interest rates subject to the
Reform.
(Millions of Canadian dollars)
Authorized and committed undrawn commitments
USD LIBOR
GBP LIBOR
Other IBOR currencies
As at
October 31, 2021
November 1, 2020 (1)
$
$
122,437 $
3,026
5
125,468 $
82,054
7,533
1,370
90,957
(1)
Amounts have been updated from those previously presented to reflect the regulatory developments related to the USD LIBOR cessation date.
We continue to manage significant exposures to benchmarks that have no announced plans for cessation or further reform,
including the Canadian Dollar Offered Rate (CDOR), EURO Interbank Offered Rate (EURIBOR) and Australian Bank Bill Swap Rate
(BBSW), which are excluded from the tables above.
Financial Instruments
Classification of financial assets
Financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at fair value
through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost based on our business
model for managing the financial instruments and the contractual cash flow characteristics of the instrument.
Debt instruments are measured at amortized cost if both of the following conditions are met and the asset is not designated
as FVTPL: (a) the asset is held within a business model that is Held-to-Collect (HTC) as described below, and (b) the contractual
terms of the instrument give rise to cash flows that are solely payments of principal and interest on the principal amount
outstanding (SPPI).
Debt instruments are measured at FVOCI if both of the following conditions are met and the asset is not designated as
FVTPL: (a) the asset is held within a business model that is Held-to-Collect-and-Sell (HTC&S) as described below, and (b) the
contractual terms of the instrument give rise, on specified dates, to cash flows that are SPPI.
All other debt instruments are measured at FVTPL.
Equity instruments are measured at FVTPL, unless the asset is not held for trading purposes and we make an irrevocable
election to designate the asset as FVOCI. This election is made on an instrument-by-instrument basis.
140
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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
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
Consolidated Financial Statements
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Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
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.
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Consolidated Financial Statements
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)
(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 model changes and new originations, sales 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
Consolidated Financial Statements
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Performing financial assets
(cid:129)
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
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
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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.
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
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Royal Bank of Canada: Annual Report 2021
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Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
If a modification of terms does not result in derecognition of the financial asset, the carrying amount of the financial asset is
recalculated as the present value of the renegotiated or modified contractual cash flows, discounted at the original effective
interest rate and a gain or loss is recognized. The financial asset continues to be subject to the same assessments for significant
increase in credit risk relative to initial recognition and credit-impairment, as described above. A modified financial asset will
transfer out of Stage 3 if the conditions that led to it being identified as credit-impaired are no longer present and relate
objectively to an event occurring after the original credit-impairment was recognized. A modified financial asset will transfer out
of Stage 2 when it no longer satisfies the relative thresholds set to identify significant increases in credit risk, which are based on
changes in its lifetime PD, days past due and other qualitative considerations. The financial asset continues to be monitored for
significant increases in credit risk and credit-impairment.
If a modification of terms results in derecognition of the original financial asset and recognition of the new financial asset,
the new financial asset will generally be recorded in Stage 1, unless it is determined to be credit-impaired at the time of the
renegotiation. For the purposes of assessing for significant increases in credit risk, the date of initial recognition for the new
financial asset is the date of the modification.
Derivatives
When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid
instruments. Some of the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract
is a financial asset within the scope of IFRS 9, the classification and measurement criteria are applied to the entire hybrid
instrument as described in the Classification of financial assets section of Note 2. If the host contract is a financial liability or an
asset that is not within the scope of IFRS 9, embedded derivatives are separately recognized if the economic characteristics and
risks of the embedded derivative are not clearly and closely related to the host contract, unless an election has been made to
elect the fair value option, as described above. The host contract is accounted for in accordance with the relevant standards.
Derivatives are primarily used in trading activities. Derivatives are also used to manage our exposure to interest, currency,
credit and other market risks. The most frequently used derivative products are interest rate and foreign exchange swaps,
options, futures and forward rate agreements, equity swaps and credit derivatives. All derivative instruments are recorded on our
Consolidated Balance Sheets at fair value.
When derivatives are used in trading activities, the realized and unrealized gains and losses on these derivatives are
recognized in Trading revenue in Non-interest income. Derivatives with positive fair values are reported as Derivative assets and
derivatives with negative fair values are reported as Derivative liabilities. In accordance with our policy for offsetting financial
assets and financial liabilities, the net fair value of certain derivative assets and liabilities are reported as an asset or liability, as
appropriate. Valuation adjustments are included in the fair value of Derivative assets and Derivative liabilities. Premiums paid
and premiums received are shown in Derivative assets and Derivative liabilities, respectively.
When derivatives are used to manage our own exposures, we determine for each derivative whether hedge accounting can
be applied, as discussed in the Hedge accounting section below.
Derecognition of financial assets
Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the
assets have expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash
flows to a third party subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash
flows and substantially all of the risk and rewards of the assets have been transferred. When we retain substantially all of the
risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets
and are accounted for as secured financing transactions. When we neither retain nor transfer substantially all risks and rewards
of ownership of the assets, we derecognize the assets if control over the assets is relinquished. If we retain control over the
transferred assets, we continue to recognize the transferred assets to the extent of our continuing involvement.
Management’s judgment is applied in determining whether the contractual rights to the cash flows from the transferred
assets have expired or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those
cash flows. We derecognize transferred financial assets if we transfer substantially all the risks and rewards of the ownership in
the assets. When assessing whether we have transferred substantially all of the risk and rewards of the transferred assets,
management considers the Bank’s exposure before and after the transfer with the variability in the amount and timing of the net
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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
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.
Until the hedging relationships impacted by the Reform fully transition to ABRs, our prospective effectiveness testing is
based on existing hedged cash flows or hedged risks and any ineffectiveness arising from retrospective testing does not result in
a discontinuation of the hedge. Additionally, effectiveness testing is applied separately to hedged items referencing IBORs and
those referencing ABRs, in accordance with the Amendments. Subsequently, when these relationships fully transition to ABRs,
and provided qualifying criteria are met, we will amend the related hedge documentation for the ABR risk, including
consequential changes to the description of the hedging instrument(s), the hedged item(s), and the method for assessing hedge
effectiveness, without discontinuing the existing hedging relationships.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
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Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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. Until the hedging relationships impacted by the Reform fully transition to ABRs, 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 OCI are reclassified to Net interest income during the periods when the variability in the cash flows of the hedged
item affects Net interest income. Unrealized gains and losses on derivatives are reclassified immediately to Net income when the
hedged item is sold or terminated early, or when the forecast transaction is no longer expected to occur.
We predominantly use interest rate swaps to hedge the variability in cash flows related to a variable-rate asset or liability.
Until the hedging relationships impacted by the Reform fully transition to ABRs, we treat the highly probable hedged IBOR based
cash flows of groups of similar assets or liabilities with similar risk characteristics as unchanged 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 IBORs to ABRs. Subsequently, when some items in the group transition to ABRs before other items, the individual hedged
items are allocated to subgroups based on the benchmark interest rate being hedged. We test hedge effectiveness based on the
defined subgroups, in accordance with the Amendments, if eligibility requirements are met. If a subgroup fails the eligibility
requirements, we would discontinue hedge accounting prospectively for the hedging relationship in its entirety.
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
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
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recognized in Insurance claims and policy benefit liabilities by CALM. For property and casualty insurance, these costs are
classified as Other assets and amortized over the policy term.
Segregated funds are lines of business in which we issue an insurance contract where the benefit amount is directly linked to
the market value of the investments held in the underlying fund. The contractual arrangement is such that the underlying
segregated fund assets are registered in our name but the segregated fund policyholders bear the risks and rewards of the funds’
investment performance. Liabilities for these contracts are calculated based on contractual obligations using actuarial
assumptions and are at least equivalent to the surrender or transfer value calculated by reference to the value of the relevant
underlying funds or indices. Segregated funds’ assets and liabilities are separately presented on our Consolidated Balance
Sheets. As the segregated fund policyholders bear the risks and rewards of the funds’ performance, investment income earned by
the segregated funds and expenses incurred by the segregated funds are offset and are not separately presented in our
Consolidated Statements of Income. Fee income we earn from segregated funds includes management fees, mortality, policy
administration and surrender charges, and these fees are recorded in Non-interest income – Insurance premiums, investment
and fee income. We provide minimum death benefit and maturity value guarantees on segregated funds. The liability associated
with these minimum guarantees is recorded in Insurance claims and policy benefit liabilities.
Liability adequacy tests are performed for all insurance contract portfolios at each balance sheet date to ensure the
adequacy of insurance contract liabilities. Current best estimates of future contractual cash flows, claims handling and
administration costs, and investment returns from the assets backing the liabilities are taken into account in the tests. When the
test results indicate that there is a deficiency in liabilities, the deficiency is charged immediately to our Consolidated Statements
of Income by writing down the deferred acquisition costs in Other assets and/or increasing Insurance claims and policy benefit
liabilities.
Employee benefits – Pensions and other post-employment benefits
Our defined benefit pension expense, which is included in Non-interest expense – Human resources, consists of the cost of
employee pension benefits for the current year’s service, net interest on the net defined benefit liability (asset), past service cost
and gains or losses on settlement. Remeasurements of the net defined benefit obligation, which comprise actuarial gains and
losses and return on plan assets (excluding amounts included in net interest on the net defined benefit liability), are recognized
immediately in OCI in the period in which they occur. Actuarial gains and losses comprise experience adjustments (the effects of
differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in
actuarial assumptions. Amounts recognized in OCI will not be reclassified subsequently to net income. Past service cost is the
change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment and is charged
immediately to income.
For each defined benefit pension plan, we recognize the present value of our defined benefit obligations less the fair value of
the plan assets as a defined benefit liability reported in Other liabilities – Employee benefit liabilities on our Consolidated
Balance Sheets. For plans where there is a net defined benefit asset, the amount is reported as an asset in Other assets –
Employee benefit assets on our Consolidated Balance sheets.
The calculation of defined benefit expenses and obligations requires significant judgment as the recognition is dependent on
discount rates and various actuarial assumptions such as healthcare cost trend rates, projected salary increases, retirement age
and mortality and termination rates. Due to the long-term nature of these plans, such estimates and assumptions are subject to
inherent risks and uncertainties. For our pension and other post-employment benefit plans, the discount rate is determined by
reference to market yields on high quality corporate bonds. Since the discount rate is based on currently available yields, and
involves management’s assessment of market liquidity, it is only a proxy for future yields. Actuarial assumptions, set in
accordance with current practices in the respective countries of our plans, may differ from actual experience as country specific
statistics are only estimates of future employee behaviour. These assumptions are determined by management and are reviewed
by actuaries at least annually. Changes to any of the above assumptions may affect the amounts of benefits obligations,
expenses and remeasurements that we recognize.
Our contributions to defined contribution pension plans are expensed when employees have rendered services in exchange
for such contributions. Defined contribution pension expense is included in Non-interest expense – Human resources.
Share-based compensation
We offer share-based compensation plans to certain key employees and to our non-employee directors.
To account for stock options granted to employees, compensation expense is recognized over the applicable vesting period
with a corresponding increase in equity. Fair value is determined by using option valuation models, which take into account the
exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the
life of the option and other relevant factors. When the options are exercised, the exercise price proceeds together with the
amount initially recorded in equity are credited to common shares. Our other share-based compensation plans include
performance deferred share plans and deferred share unit plans for key employees (the Plans). The obligations for the Plans are
accrued over their vesting periods. The Plans are settled in cash.
For cash-settled awards, our accrued obligations are adjusted to their fair value at each balance sheet date. For share-
settled awards, our expected obligations recognized in equity are based on the fair value of our common shares at the date of
grant. Changes in our obligations, net of related hedges, are recorded as Non-interest expense – Human resources in our
Consolidated Statements of Income with a corresponding increase in Other liabilities for cash-settled awards and in Retained
earnings for share-settled awards. Compensation expense is recognized in the year the awards are earned by plan participants
based on the vesting schedule of the relevant plans, net of estimated forfeitures.
The compensation cost attributable to options and awards granted to employees who are eligible to retire or will become
eligible to retire during the vesting period, is recognized immediately if the employee is eligible to retire on the grant date or over
the period between the grant date and the date the employee becomes eligible to retire.
Our contributions to the employee savings and share ownership plans are expensed as incurred.
Income taxes
Income tax comprises current tax and deferred tax and is recognized in our Consolidated Statements of Income except to the
extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in
the period in which profits arise, calculated using tax rates enacted or substantively enacted by the balance sheet date. Deferred
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
149
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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 (VIU) and its fair value less costs of disposal (FVLCD). VIU is the present value of the expected future cash flows
from a CGU. FVLCD 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 are based on the long-term
steady state growth expectations in the countries within which the CGU operates. If the future cash flows 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, with any such impairment loss recognized in Non-interest expense.
The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the
recoverable amount is less than the carrying value, the impairment loss is allocated first to reduce the carrying amount of any
goodwill allocated to the CGU and then to the other non-financial assets of the CGU proportionately based on the carrying
amount of each asset. Any impairment loss is charged to income in the period in which the impairment is identified. Goodwill is
stated at cost less accumulated impairment losses. Subsequent reversals of goodwill impairment are prohibited.
Upon disposal of a portion of a CGU, the carrying amount of goodwill related to the portion of the CGU sold is included in the
determination of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed
portion to the total CGU.
Other intangibles
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business
combination, or generated internally. Intangible assets acquired through a business combination are recognized separately from
goodwill when they are separable or arise from contractual or other legal rights, and their fair value can be measured reliably.
The cost of a separately acquired intangible asset includes its purchase price and directly attributable costs of preparing the
asset for its intended use. In respect of internally generated intangible assets, cost includes all directly attributable costs
necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.
Research and development costs that are not eligible for capitalization are expensed. After initial recognition, an intangible asset
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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.
Right-of-use assets are also included in premises and equipment.
Leasing
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.
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. Costs related to dismantling and removing leasehold improvements are
capitalized as part of the leasehold improvement asset (rather than the right-of-use asset of the lease) when the leasehold
improvements are separately capitalized.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
151
Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
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 included
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.
152
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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.
Future changes in accounting policy and disclosure
The following standards have been issued, but are not yet effective for us.
IFRS 17 Insurance Contracts (IFRS 17)
In May 2017, the IASB issued IFRS 17 to establish a comprehensive global insurance standard which provides guidance on the
recognition, measurement, presentation and disclosures of insurance contracts. IFRS 17 requires entities to measure insurance
contract liabilities at their current fulfillment values using one of three approaches. 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.
Note 3 Fair value of financial instruments
Carrying value and fair value of financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instruments.
Embedded derivatives are presented on a combined basis with the host contracts. For measurement purposes, they are carried
at fair value when conditions requiring separation are met.
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable allowance
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans, net of applicable allowance
Retail
Wholesale
Other
Derivatives
Other assets (1)
Financial liabilities
Deposits
Personal
Business and government (2)
Bank (3)
Other
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned
Derivatives
Other liabilities (4)
Subordinated debentures
Carrying value and fair value
Carrying value
Fair value
As at October 31, 2021
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
$
– $
56,896 $
– $
– $
22,742 $
22,742 $
79,638 $
79,638
125,801
–
125,801
13,439
–
13,439
–
77,802
77,802
265,011
–
–
–
8,428
8,428
95,541
4,109
241
2,769
3,010
–
–
327
813
1,140
–
–
–
533
533
–
–
–
—
–
–
–
67,149
67,149
–
66,823
139,240
145,484
139,240
145,158
66,823
284,724
284,398
42,892
42,892
307,903
307,903
500,621
204,376
704,997
502,277
204,683
501,189
216,386
502,845
216,693
706,960
717,575
719,538
–
58,483
–
58,483
95,541
62,592
95,541
62,592
$
321 $
739
–
18,328
131,630
17,251
1,060
167,209
$
343,839 $
563,984
24,739
344,040 $ 362,488 $ 362,689
697,475
696,353
565,106
41,994
41,990
24,743
932,562
933,889 1,100,831 1,102,158
37,841
–
–
–
37,841
37,841
–
91,439
654
–
236,147
–
171
–
26,054
–
64,746
9,593
26,054
–
64,749
9,601
262,201
91,439
65,571
9,593
262,201
91,439
65,574
9,601
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
153
Note 3 Fair value of financial instruments (continued)
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Investment, net of applicable allowance
Assets purchased under reverse repurchase
agreements and securities borrowed
Loans, net of applicable allowance
Retail
Wholesale
Other
Derivatives
Other assets (1)
Financial liabilities
Deposits
Personal
Business and government (2)
Bank (3)
Other
Obligations related to securities sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned
Derivatives
Other liabilities (4)
Subordinated debentures
Carrying value and fair value
Carrying value
Fair value
As at October 31, 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
–
525
525
–
57,823
57,823
–
58,627
136,071
139,743
136,071
140,547
58,627
275,814
276,618
264,394
–
–
–
6,197
6,197
113,488
3,414
253
2,363
2,616
–
–
260
744
1,004
–
–
–
–
–
–
–
–
48,621
48,621
313,015
313,015
454,429
196,746
651,175
462,884
198,753
454,942
206,050
463,397
208,057
661,637
660,992
671,454
–
57,065
–
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 $ 343,052 $ 342,004
626,356
624,311
518,501
44,533
44,522
26,518
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
Includes Customers’ liability under acceptances and financial instruments recognized in Other assets.
(1)
(2) Business and government deposits include deposits from regulated deposit-taking institutions other than banks.
(3) Bank deposits refer to deposits from regulated banks and central banks.
(4)
Includes Acceptances and financial instruments recognized in Other liabilities.
Financial assets designated as fair value through profit or loss
For our financial assets designated as FVTPL, we measure the change in fair value attributable to changes in credit risk as the
difference between the total change in the fair value of the instrument during the period and the change in fair value calculated
using the appropriate risk-free yield curves. For the year ended October 31, 2021, the change in fair value during the period
attributable to changes in credit risk for positions still held was a gain of $613 million and the cumulative change in fair value
attributable to changes in credit risk for positions still held was a gain of $173 million. 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. As at
October 31, 2021, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was
$484 million (October 31, 2020 – $520 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, 2021 (1)
Contractual
maturity
amount Carrying value
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)
(Millions of Canadian dollars)
Term deposits
Personal
Business and government (3)
Bank (4)
$
18,205 $
131,830
17,253
18,328
131,630
17,251
167,288
167,209
$
123
(200)
(2)
(79)
Obligations related to assets sold under
repurchase agreements and securities loaned
Other liabilities
236,164
171
236,147
171
$ 403,623 $ 403,527
$
(17)
–
(96)
154
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
$
(17)
(75)
–
(92)
(8)
–
$
72
416
–
488
–
–
$ (100)
$ 488
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
141,448
17,096
107,466
18,015
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
–
(1)
(2)
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, 2021, $25 million of fair value losses previously
included in OCI relate to financial liabilities derecognized during the year (October 31, 2020 – $2 million of fair value gains).
(3) Business and government term deposits include amounts from regulated deposit-taking institutions other than regulated banks.
(4) Bank term deposits refer to amounts from regulated banks and central banks.
$
397,442 $ 398,585
$ 1,143
$ 356
$ 588
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
2021
October 31
2020
$
$
$
$
3,447 $
(1,407)
2,040 $
1,033 $
57
950
2,040 $
(69)
1,533
1,464
1,490
(501)
475
1,464
(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 losses from financial instruments designated as FVTPL of $14 million (October 31, 2020 – gains of $329 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, 2021, $1,408 million of net fair value losses on financial liabilities designated as FVTPL, other than those attributable to changes in our own
credit risk, were included in Non-interest income (October 31, 2020 – gains of $1,532 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
2021
October 31
2020
$
4,551 $
375
23,219
28,145
$
2,865 $
5,278
8,143
$ 20,002 $
8,480
957
25,446
34,883
6,065
7,983
14,048
20,835
(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 $576 million (October 31, 2020 – $521 million), and Interest expense of $4 million (October 31, 2020 – $7 million).
Includes dividend income for the year ended October 31, 2021 of $2,436 million (October 31, 2020 – $2,670 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, 2021 of $110 million (October 31, 2020 – $123 million).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
155
Note 3 Fair value of financial instruments (continued)
Fee income arising from financial instruments
For the year ended October 31, 2021, we earned $5,583 million in fees from banking services (October 31, 2020 – $5,134 million). For
the year ended October 31, 2021, we also earned $15,167 million in fees from investment management, trust, custodial,
underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2020 – $13,166 million).
These fees are included in Non-interest income.
Fair value of assets and liabilities measured at fair value on a recurring basis and classified using the fair value hierarchy
(Millions of Canadian dollars)
Financial assets
Interest-bearing deposits with banks
Securities
Trading
Debt issued or guaranteed by:
Canadian government (1)
Federal
Provincial and municipal
U.S. federal, 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. federal, 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, 2021
Fair value
measurements using
Level 1
Level 2
Level 3
Netting
adjustments
As at
October 31, 2020
Fair value
measurements using
Fair value
Level 1
Level 2
Level 3
Netting
adjustments
Fair value
$
– $ 56,896 $
– $
$ 56,896
$
– $ 21,603 $
– $
$ 21,603
8,977
–
215
2,729
–
–
–
56,826
2,380
11,068
22,738
5,730
4
891
23,085
3,015
–
–
25
–
–
2
25
1,530
11,357
11,068
22,978
8,459
4
12,773
–
1,508
3,085
–
893
23,110
61,371
–
–
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
68,747
68,911
1,582
139,240
57,161
77,573
1,337
136,071
1,973
–
12
–
–
–
–
–
46
1,730
3,132
34,815
5,956
2,727
7,074
586
19,625
153
2,031
75,798
–
–
–
–
20
–
–
152
334
506
3,703
3,132
34,827
5,956
2,747
7,074
586
19,777
533
647
–
160
–
–
–
–
–
38
1,894
3,233
38,364
7,345
2,343
7,414
854
18,954
152
78,335
845
80,553
–
–
–
–
27
–
–
160
335
522
–
–
265,011
11,501
–
1,077
265,011
12,578
–
–
264,394
8,747
–
1,070
–
–
–
3,175
–
33,857
41,224
34
17,955
(819)
3,175
92,251
320
74
–
26
9
429
34,177
41,298
34
21,156
(810)
1
–
–
4,458
–
53,720
39,246
463
16,767
(1,112)
95,855
4,459
109,084
501
57
–
36
8
602
1,474
2,635
–
95,541
4,109
1,154
2,207
53
(314)
(314)
(657)
2,541
3,233
38,524
7,345
2,370
7,414
854
19,114
525
81,920
264,394
9,817
54,222
39,303
463
21,261
(1,104)
114,145
(657)
113,488
3,414
$75,427 $573,003 $ 3,594 $
(314) $ 651,710
$63,619 $564,161 $ 3,584 $
(657) $ 630,707
$
– $ 18,498 $
–
–
132,369
17,251
151 $
–
–
$
$ 18,649
132,369
17,251
– $ 17,061 $
107,855
–
18,015
–
139 $
–
–
$ 17,200
107,855
18,015
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and
18,345
19,496
securities loaned
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments
Total gross derivatives
Netting adjustments
Total derivatives
Other liabilities
–
236,147
–
–
–
3,699
–
28,566
40,484
120
17,456
38
–
–
955
27
–
419
(11)
37,841
12,484
16,801
236,147
–
255,922
–
–
29,521
40,511
120
21,574
27
–
–
–
5,734
–
46,723
38,210
531
18,041
(84)
1,089
35
–
337
(32)
3,699
86,664
1,390
91,753
5,734
103,421
1,429
(314)
(314)
(657)
258
560
7
91,439
825
118
10
38
29,285
255,922
47,812
38,245
531
24,112
(116)
110,584
(657)
109,927
166
(1)
As at October 31, 2021, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $13,124 million and $nil
(October 31, 2020 – $20,520 million and $nil), respectively, and in all fair value levels of Investment securities were $13,542 million and $2,592 million (October 31, 2020 –
$9,487 million and $2,137 million), respectively.
$22,302 $510,985 $ 1,548 $
(314) $ 534,521
$18,336 $519,085 $ 1,606 $
(657) $ 538,370
(2) Organisation for Economic Co-operation and Development (OECD).
(3) Collateralized debt obligations (CDO).
156
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value
hierarchy table using the following valuation techniques and inputs.
Interest-bearing deposits with banks
The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short-
dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The
fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models
include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the
hierarchy as the inputs are observable.
Government bonds (Canadian, U.S. and other OECD governments)
Government bonds are included in Canadian government debt, U.S. federal, 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. federal, 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 (CDOR, 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. federal, 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.
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
157
Note 3 Fair value of financial instruments (continued)
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, 2021 (Millions of Canadian dollars, except for prices, percentages and ratios)
Products
Corporate debt and related
derivatives
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
Corporate debt and other debt
Loans
Derivative related liabilities
$
27
1,077
Price-based
Discounted cash flows
Prices $ 29.18 $ 127.09 $
Credit spread
1.15%
Credit enhancement 11.92%
6.92%
15.90%
$
9
Government debt and
municipal bonds
Private equities, hedge fund
investments and related
equity derivatives
Corporate debt and other debt
150
Equities
Derivative related liabilities
1,864
Price-based
Discounted cash flows
Market comparable
Price-based
2 Discounted cash flows
Prices
Yields
n.a.
3.91%
n.a.
8.17%
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
8.82X
9.40X
1.14X
Liquidity discounts (4) 10.00%
Discount rate 10.65%
n.a.
NAV / prices (5)
26.00X
38.00X
20.80X
40.00%
10.65%
n.a.
2.46%
2.42%
67.00%
56.00%
68.00%
96.36
4.04%
13.25%
n.a.
5.91%
9.16X
10.96X
5.40X
16.40%
10.65%
n.a.
High
Even
Even
Even
Even
Lower
Middle
Middle
Upper
Interest rate derivatives and
interest-rate-linked
structured notes (6), (7)
Derivative related assets
Derivative related liabilities
367
Discounted cash flows
Option pricing model
974
Interest rates
CPI swap rates
0.13%
1.76%
IR-IR correlations 19.00%
FX-IR correlations 29.00%
FX-FX correlations 68.00%
Dividend yields
0.00%
Equity (EQ)-EQ correlations 32.00%
EQ-FX correlations (60.60)%
6.37%
95.00%
27.30%
8.00% 128.00%
EQ volatilities
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
25
2
37
–
20
25
Discounted cash flows
Option pricing model
151
381
24
7
Total
$ 3,594 $ 1,548
158
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Prices $ 64.62 $ 64.62 $
Yields
7.89%
4.21%
EV/EBITDA multiples
P/E multiples
EV/Rev multiples
7.00X
9.40X
1.61X
Liquidity discounts (4) 10.00%
Discount rate 10.52%
n.a.
NAV / prices (5)
15.38X
33.47X
9.10X
40.00%
10.52%
n.a.
1.60%
1.83%
67.00%
56.00%
68.00%
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
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
Corporate debt and other debt
Loans
Derivative related liabilities
$
33
1,070
Price-based
Discounted cash flows
Prices $
1.33 $ 136.34 $
Credit spread
1.75%
Credit enhancement 11.82%
14.10%
15.75%
$
25
Corporate debt and other debt
157
Equities
Derivative related liabilities
1,596
Price-based
Discounted cash flows
Market comparable
Price-based
10 Discounted cash flows
Products
Corporate debt and related
derivatives
Government debt and
municipal bonds
Private equities, hedge fund
investments and related
equity derivatives
Interest rate derivatives and
interest-rate-linked
structured notes (6), (7)
Derivative related assets
Derivative related liabilities
540
Discounted cash flows
Option pricing model
1,103
Interest rates
CPI swap rates
1.20%
1.46%
IR-IR correlations 19.00%
FX-IR correlations 29.00%
FX-FX correlations 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
Discounted cash flows
0.00%
Option pricing model Equity (EQ)-EQ correlations 21.90%
EQ-FX correlations (71.40)%
Dividend yields
11.38%
97.00%
45.10%
9.00% 176.00%
EQ volatilities
139
238
36
2
26
53
27
44
53
38
$ 3,584 $ 1,606
Total
(1)
(2)
(3)
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 significant unobservable inputs include 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 $385 million (October 31, 2020 – $286 million).
(4)
(5) 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
(6)
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.
(7)
(8) 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
159
Note 3 Fair value of financial instruments (continued)
Default rates
A default rate is the rate at which borrowers fail to make scheduled loan payments. A decrease in the default rate will typically
increase the fair value of the loan, and vice versa. This effect will be significantly more pronounced for a non-government
guaranteed loan than a government guaranteed loan.
Prepayment rates
A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments
change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when
the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in
a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally
negatively correlated with interest rates.
Recovery and loss severity rates
A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered
amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss
severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount
divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss
severity rate will increase the loan fair value, and vice versa.
Volatility rates
Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements.
Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing
equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate
movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the
option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s
market price, the strike price and maturity.
Dividend yields
A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is
used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice
versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms.
Correlation rates
Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of
derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When
variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are
negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be
within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in
different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either
increase or decrease a financial instrument’s fair value depending on the terms of the instrument.
Interest rates
An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the
discounted cash flow value of a financial instrument, and vice versa.
Consumer Price Index swap rates
A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services,
such as transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger,
and vice versa.
EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts
Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate
either enterprise value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples
equate to higher fair values for all multiple types, and vice versa. A liquidity discount may be applied when few or no transactions
exist to support the valuations.
Credit Enhancement
Credit enhancement is an input to the valuation of securitized transactions and is the amount of loan loss protection for a senior
tranche. Credit enhancement is expressed as a percentage of the transaction sizes. An increase in credit enhancement will cause
the credit spread to decrease and the tranche fair value to increase, and vice versa.
Interrelationships between unobservable inputs
Unobservable inputs, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates,
may not be independent of each other. For example, the discount margin can be affected by a change in default rate, prepayment
rate, or recovery and loss severity rates. Discount margins will generally decrease when default rates decline or when recovery
rates increase.
160
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3
(Millions of Canadian dollars)
Assets
Securities
Trading
Debt issued or guaranteed by:
U.S. state, municipal and agencies
Asset-backed securities
Non-CDO securities
Corporate debt and other debt
Equities
Investment
Mortgage-backed securities
Corporate debt and other debt
Equities
Loans
Other
Net derivative balances (3)
Interest rate contracts
Foreign exchange contracts
Other contracts
Valuation adjustments
Other assets
Liabilities
Deposits
Other
Other liabilities
(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
Other
Other liabilities
For the year ended October 31, 2021
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
$
44 $
– $
(2) $
– $
(17) $
– $
– $
25
$
2
30
1,261
1,337
27
160
335
522
–
(2)
96
94
–
–
–
–
1,070
(5)
(588)
22
(301)
40
53
84
14
(20)
–
(39)
–
–
(60)
(62)
(7)
(12)
34
15
(19)
(1)
–
11
–
(2)
–
12
338
350
–
–
5
5
264
–
(5)
(125)
(147)
–
4
(2)
2
(8)
–
14
26
40
–
–
–
–
–
(24)
(6)
(30)
–
–
(38)
(38)
2
25
1,530
1,582
20
152
334
506
73
(298)
1,077
5
38
(142)
6
–
(109)
(25)
102
(26)
(12)
(4)
7
(276)
–
–
(22)
(9)
233
–
–
(635)
47
(393)
20
–
2,155 $
128 $
(58) $
526 $
(223) $ (160) $ (164) $ 2,204
(139) $
(66) $
5 $
(191) $
51 $ (154) $
343 $ (151)
$
$
(38)
22
1
–
8
–
–
(7)
(177) $
(44) $
6 $
(191) $
59 $ (154) $
343 $ (158)
$
$
$
$
1
–
(1)
164
164
n.a.
n.a.
n.a.
n.a.
30
84
1
(10)
–
–
269
6
23
29
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
(216) $
57 $
(1)
(4) $
4
14
–
–
(38)
(292) $
44 $
(113) $
347 $
(177)
$
$
$
$
–
–
–
(47)
(47)
n.a.
n.a.
n.a.
n.a.
(15)
(57)
(13)
(8)
–
(7)
(147)
29
5
34
(1)
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 $46 million for the year ended October 31, 2021 (October 31, 2020 – gains of $32 million)
excluding the translation gains or losses arising on consolidation.
(2) Other includes amortization of premiums or discounts recognized in net income.
(3) Net derivatives as at October 31, 2021 included derivative assets of $429 million (October 31, 2020 – $602 million) and derivative liabilities of $1,390 million (October 31,
2020 – $1,429 million).
n.a. not applicable
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
161
Note 3 Fair value of financial instruments (continued)
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, 2021, transfers out of Level 1 to Level 2 included Obligations related to securities sold short
of $498 million. During the year ended October 31, 2020, transfers out of Level 1 to Level 2 included Investment U.S. federal, state,
municipal and agencies debt of $1,200 million, Trading U.S. federal, 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, 2021, transfers out of Level 2 to Level 1 included Obligations related to securities sold short
of $130 million. During the year ended October 31, 2020, transfers out of Level 2 to Level 1 included Investment U.S. federal, state,
municipal and agencies debt of $937 million.
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, 2021, significant transfers out of Level 2 to Level 3 included:
(cid:129)
$277 million of OTC equity options in Other contracts comprised of $17 million of derivative related assets and
$294 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the
significance of unobservable inputs.
$154 million of Personal deposits, due to changes in the significance of unobservable inputs.
(cid:129)
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, 2021, significant transfers out of Level 3 to Level 2 included:
(cid:129)
(cid:129)
$298 million of Loans, due to changes in the significance of unobservable inputs.
$245 million of OTC equity options in Other contracts comprised of $69 million of derivative related assets and
$314 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the
significance of unobservable inputs.
$343 million of Personal deposits, due to changes in the significance of unobservable inputs.
(cid:129)
During the year ended October 31, 2020, significant transfers out of Level 3 to Level 2 included:
(cid:129)
(cid:129)
$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)
(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.
162
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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.
October 31, 2021
October 31, 2020
As at
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Positive fair value
movement from
using reasonably
possible
alternatives
Negative fair value
movement from
using reasonably
possible
alternatives
Level 3
fair value
Level 3
fair value
(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
25 $
2
25
1,530
20
152
334
1,077
429
–
$
$
3,594 $
(151) $
(1,390)
(7)
$
(1,548) $
– $
–
1
19
4
14
33
23
7
–
101 $
– $
30
–
30 $
(1) $
–
(1)
(16)
44 $
2
30
1,261
(4)
(13)
(34)
(24)
(5)
–
27
160
335
1,070
602
53
(98) $
$
–
(77)
3,584 $
(139) $
(1,429)
–
(38)
(77) $
(1,606) $
1 $
–
1
15
3
18
28
49
2
–
117 $
4 $
13
–
17 $
(1)
–
(1)
(15)
(3)
(16)
(28)
(49)
(2)
–
(115)
(4)
(55)
–
(59)
Sensitivity results
As at October 31, 2021, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions
would be an increase of $101 million and a reduction of $98 million in fair value, of which $51 million and $51 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 $30 million and an increase of $77 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
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.
Bank funding and deposits
Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain
basis points.
Structured notes
Sensitivities for interest-rate-linked and equity-linked structured notes are derived by adjusting
inputs by plus or minus one standard deviation, and for other deposits, by estimating a
reasonable move in the funding curve by plus or minus certain basis points.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
163
Note 3 Fair value of financial instruments (continued)
Fair value for financial instruments that are carried at amortized cost and classified using the fair value hierarchy
(Millions of Canadian dollars)
As at October 31, 2021
Fair value
approximates
carrying value (1)
Fair value may not approximate carrying value
Fair value measurements using
Level 1
Level 2
Level 3
Total
22,742 $
–
– $
– $
1,025
65,798
– $
–
– $
66,823
Total
fair value
22,742
66,823
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
11,524
–
11,524
42,892
31,368
68,377
16,228
84,605
57,859
–
–
–
–
–
429,672
184,055
613,727
489
196,574
1,025
691,538
272,675
418,185
16,943
707,803
26,054
55,495
–
–
–
–
–
–
–
–
70,908
146,334
7,792
225,034
–
1,256
9,545
4,228
4,400
8,628
135
8,763
457
587
8
1,052
–
7,998
56
433,900
188,455
622,355
624
701,326
71,365
146,921
7,800
226,086
502,277
204,683
706,960
58,483
897,900
344,040
565,106
24,743
933,889
–
9,254
9,601
26,054
64,749
9,601
$
789,352 $
– $ 235,835 $ 9,106 $ 244,941 $ 1,034,293
As at October 31, 2020
Fair value may not approximate carrying value
Fair value measurements using
Fair value
approximates
carrying value (1)
Level 1
17,410
–
$
$
–
502
Level 2
–
58,125
$
Level 3
–
–
–
$
Total
–
58,627
$
Total
fair value
17,410
58,627
11,557
48,621
37,064
66,151
11,278
77,429
56,484
–
–
–
–
–
11,557
392,093
182,094
574,187
450
4,640
5,381
10,021
131
396,733
187,475
584,208
581
188,387
502
644,319
10,152
654,973
Personal
Business and government
Bank
Obligations related to assets sold
under repurchase agreements and
securities loaned
Other liabilities
Subordinated debentures
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
–
9,519
10,071
$ 250,350
$
9,765
$ 260,115
$
963,922
(1)
(2)
Certain financial instruments have not been assigned to a level as the carrying amount approximates their fair values.
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.
164
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
462,884
198,753
661,637
57,065
843,360
324,804
518,501
26,518
869,823
18,309
65,719
10,071
Amortized cost securities
Fair values of government bonds, corporate bonds, and ABS are based on quoted prices. Fair values of certain Non-OECD
government bonds are based on vendor prices or the discounted cash flow method with yield curves of other countries’
government bonds as inputs. For ABS, where market prices are not available, the fair value is determined using the discounted
cash flow method. The inputs to the valuation model generally include market interest rates, spreads and yields derived from
comparable securities, prepayment, and LGD.
Assets purchased under reverse repurchase agreements and securities borrowed, and Obligations related to assets sold
under repurchase agreements and securities loaned
Valuation methods used for the long-term instruments are described in the Fair value of assets and liabilities measured on a
recurring basis and classified using the fair value hierarchy section of this note. The carrying values of short-term instruments
generally approximate their fair values.
Loans – Retail
Retail loans include residential mortgages, personal and small business loans and credit cards. For residential mortgages, and
personal and small business loans, we segregate the portfolio based on certain attributes such as product type, contractual
interest rate, term to maturity and credit scores, if applicable. Fair values of these loans are determined by the discounted cash
flow method using applicable inputs such as prevailing interest rates, contractual and posted client rates, client discounts, credit
spreads, prepayment rates and loan-to-value (LTV) 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
165
Note 4 Securities
Carrying value of securities
(Millions of Canadian dollars)
Trading (2)
Debt issued or guaranteed by:
Canadian government
U.S. federal, 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. federal, 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. federal, state, municipal and
agencies
Other OECD government
Asset-backed securities
Corporate debt and other debt
Amortized cost, net of allowance
Fair value
Total carrying value of securities
As at October 31, 2021
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
$ 1,244 $ 4,252 $ 6,187 $
3,339 $ 7,403 $
– $ 22,425
2,381
2,049
–
288
316
–
2,317
1,616
2,073
–
27
135
–
2,526
6,203
1,231
–
275
–
–
5,433
4,092
294
–
116
–
–
3,716
8,686
2,812
4
187
–
–
8,667
8,595
10,629
19,329
11,557
27,759
–
–
–
–
–
–
–
61,371
61,371
22,978
8,459
4
893
451
–
22,659
61,371
139,240
161
161
0.4%
3
3
4.2%
1,131
1,132
–
176
176
1.7%
–
–
–
–
–
–
1,180
1,178
0.7%
283
283
2.6%
5,010
5,013
0.9%
1,274
1,274
1.0%
–
–
–
–
–
–
1,382
1,375
1.8%
1,326
1,322
2.4%
7,960
7,960
0.4%
4,498
4,505
1.3%
56
56
1.2%
–
–
–
5,965
5,965
0.9%
2,597
2,599
1.2%
9,676
9,699
1.5%
592
544
0.9%
158
158
1.7%
526
445
2.4%
1,558
1,366
2.9%
2,380
2,446
2.6%
18,197
18,276
1.3%
1
1
3.9%
55
55
1.3%
4,719
4,719
1.2%
1,451
1,463
0.8%
–
–
–
2,646
2,636
1.2%
2,935
2,941
1.3%
42
51
3.6%
7,436
7,437
10,344
10,347
24,898
24,917
9,356
9,386
25,904
25,715
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
242
533
242
533
3,841
3,703
1.3%
3,328
3,132
2.6%
34,678
34,827
1.1%
5,949
5,956
1.2%
2,757
2,747
1.2%
7,654
7,660
1.3%
19,731
19,777
1.2%
242
533
78,180
78,335
453
2,979
17,589
3,601
194
–
24,816
1,093
1,914
–
1,133
4,593
4,597
27,411
5,974
663
8,285
67,149
66,823
$ 20,625 $ 27,513 $73,087 $ 28,338 $73,257 $ 61,904 $284,724
19,559
–
7
23
19,783
19,647
3,718
2,790
320
4,424
28,841
28,701
2,767
58
336
633
7,395
7,311
274
1,212
–
2,072
6,537
6,567
–
–
–
–
–
–
166
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
(Millions of Canadian dollars)
Trading (2)
Debt issued or guaranteed by:
Canadian government
U.S. federal, 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. federal, 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. federal, state, municipal and
agencies
Other OECD government
Asset-backed securities
Corporate debt and other debt
Amortized cost, net of allowance
Fair value
Total carrying value of securities
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
$ 7,004
$ 6,054
$
3,569
$ 8,419
$
559
56
–
3
65
2
1,048
4,532
695
–
164
227
63
3,472
12,546
3,010
–
82
–
35
5,521
4,134
584
–
181
–
7
3,007
14,810
2,120
39
98
–
4
8,043
4,034
16,157
27,248
11,482
33,533
–
–
–
5
5
4.5%
1,772
1,775
0.1%
274
274
1.7%
–
–
–
–
–
–
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%
4,721
4,724
18,932
18,944
26,303
26,356
7,085
7,057
24,439
24,314
–
–
–
–
–
–
–
–
43,617
43,617
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
276
525
276
525
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
438
1,862
16,044
1,819
–
–
20,163
8
2,178
–
625
3,249
3,252
$ 12,007
787
2,045
1
2,644
7,339
7,392
$ 42,440
1,615
2,643
159
4,805
25,266
25,663
$ 78,870
1,622
–
–
219
3,660
3,798
$ 22,199
18,281
–
–
28
18,309
18,522
$ 76,156
–
–
–
–
–
–
$ 44,142
22,313
6,866
160
8,321
57,823
58,627
$ 275,814
(1)
(2)
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.
(3)
(4)
(5) Certain equity securities that are not held-for-trading purposes are designated as FVOCI.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
167
Note 4 Securities (continued)
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. federal, 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, 2021
October 31, 2020
As at
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Cost/
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$
3,841 $
3,328
1 $
3
(139) $ 3,703 $
(199)
3,132
2,562 $
3,237
1 $
27
(22) $ 2,541
3,233
(31)
34,678
5,949
2,757
7,074
580
19,731
242
353
8
2
1
6
57
292
(204)
(1)
(12)
34,827
5,956
2,747
(1)
–
(11)
(1)
7,074
586
19,777
533
38,523
7,336
2,418
7,504
859
19,041
276
323
11
5
–
2
76
253
(322)
(2)
(53)
38,524
7,345
2,370
(90)
(7)
(3)
(4)
7,414
854
19,114
525
$ 78,180 $
723 $
(568) $ 78,335 $ 81,756 $
698 $
(534) $ 81,920
(1)
Excludes $67,149 million of held-to-collect securities as at October 31, 2021 that are carried at amortized cost, net of allowance for credit losses (October 31, 2020 – $57,823
million).
(2) Gross unrealized gains and losses includes $(9) million of allowance for credit losses on debt securities at FVOCI as at October 31, 2021 (October 31, 2020 – $8 million)
(3)
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
$2,603 million, $1 million, $12 million and $2,592 million, respectively as at October 31, 2021 (October 31, 2020 – $2,185 million, $nil, $48 million and $2,137 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) Model changes, which generally comprise the impact of significant changes to the quantitative models used to estimate
(cid:129)
(cid:129)
(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 remeasurement of the allowance.
Purchases, which reflect the allowance related to assets newly recognized during the period, including those assets that
were derecognized following a modification of terms.
Sales and maturities, which reflect the allowance related to assets derecognized during the period without a credit loss
being incurred, including those assets that were derecognized following a modification of terms.
Changes in risk, parameters and exposures, which comprise the impact of changes in model inputs or assumptions, including
changes in forward-looking macroeconomic conditions; partial repayments; changes in the measurement following a
transfer between stages; and unwinding of the time value discount due to the passage of time.
Allowance for credit losses – securities at FVOCI (1)
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Purchases
Sales and maturities
Changes in risk, parameters and exposures
Exchange rate and other
October 31, 2021
October 31, 2020
Performing
Impaired
Performing
Impaired
For the year ended
Stage 1
Stage 2
Stage 3 (2)
Total
Stage 1
Stage 2
Stage 3 (2)
Total
$ 12
$
–
$
(4) $ 8 $
4
$
– $
(7) $ (3)
(4)
1
–
–
8
(10)
(4)
(1)
–
(1)
–
–
–
(1)
3
–
–
–
–
–
–
–
(9)
1
(4)
–
–
–
8
(11)
(10)
–
–
–
–
–
18
(13)
3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4
(1)
–
–
–
–
18
(13)
7
(1)
Balance at end of period
$
2
$
1
$
(12) $ (9) $ 12
$
– $
(4) $ 8
(1)
Expected credit losses on debt securities at FVOCI are not separately recognized on the balance sheet as the related securities are recorded at fair value. The cumulative
amount of credit losses recognized in income is presented in Other components of equity.
(2) Reflects changes in the allowance for purchased credit impaired securities.
168
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Allowance for credit losses – securities at amortized cost
(Millions of Canadian dollars)
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Purchases
Sales and maturities
Changes in risk, parameters and exposures
Exchange rate and other
Balance at end of period
October 31, 2021
October 31, 2020
Performing
Impaired
Performing
Impaired
For the year ended
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
$ 10
$ 19 $
(4)
–
–
–
9
(1)
(9)
–
–
–
–
–
–
–
1
(2)
$
5
$ 18 $
–
–
–
–
–
–
–
–
–
–
$ 29
$
5
$ 19 $
(4)
–
–
–
9
(1)
(8)
(2)
–
–
–
–
9
(2)
(2)
–
–
–
–
–
–
–
1
(1)
$ 23
$ 10
$ 19 $
–
–
–
–
–
–
–
–
–
–
$ 24
–
–
–
–
9
(2)
(1)
(1)
$ 29
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
October 31, 2021
October 31, 2020
Performing
Impaired
Performing
Impaired
As at
Stage 1
Stage 2
Stage 3 (1)
Total
Stage 1
Stage 2
Stage 3 (1)
Total
$ 77,147
423
–
$ 82 $
–
–
– $ 77,229 $ 80,719
431
423
–
–
150
150
$ 87 $
1
–
77,570
82
150
77,802
533
81,150
88
$ 78,335
$ 66,033
928
–
66,961
5
$
– $
211
–
211
18
– $ 66,033 $ 56,885
647
1,139
–
–
–
–
–
–
67,172
23
57,532
10
$
– $
320
–
320
19
–
–
157
157
–
–
–
–
–
–
$ 80,806
432
157
81,395
525
$ 81,920
$ 56,885
967
–
57,852
29
$ 57,823
Amortized cost
$ 66,956
$ 193 $
– $ 67,149 $ 57,522
$ 301 $
(1)
(2)
Reflects $150 million of purchased credit impaired securities (October 31, 2020 – $157 million).
Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
169
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), (5)
Wholesale (2), (5)
Total loans
Canada
United
States
Other
International
Allowance for
loan losses (1)
Total net
of allowance
Total
As at October 31, 2021
$ 354,169 $
78,232
17,235
12,003
88,083
23,423 $
11,794
384
–
86,028
2,740 $ 380,332 $
3,415
203
–
43,955
93,441
17,822
12,003
218,066
(416) $
(973)
(852)
(168)
(1,680)
379,916
92,468
16,970
11,835
216,386
$ 549,722 $ 121,629 $
50,313 $ 721,664 $
(4,089) $
717,575
Undrawn loan commitments – Retail
Undrawn loan commitments – Wholesale
240,242
107,070
3,713
189,177
1,989
75,331
245,944
371,578
(136)
(105)
(Millions of Canadian dollars)
Retail (2)
Residential mortgages
Personal
Credit cards (3)
Small business (4)
Wholesale (2), (6), (7)
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
87,785
20,331 $
9,050
340
–
85,941
2,979 $ 342,597 $
3,183
226
–
34,929
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
$ 509,652 $ 115,662 $
41,317 $ 666,631 $
(5,639) $
660,992
Undrawn loan commitments – Retail
Undrawn loan commitments – Wholesale (7)
226,439
109,900
4,314
183,847
1,628
67,280
232,381
361,027
(176)
(187)
Excludes allowance for loans measured at FVOCI of $14 million (October 31, 2020 – $6 million).
(1)
(2) Geographic information is based on residence of the borrower.
(3)
(4)
(5) Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital
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.
measurement and reporting.
Includes small business exposure managed on an individual client basis.
Amounts by geography have been revised from those previously presented.
(6)
(7)
Loans maturity and rate sensitivity
(Millions of Canadian dollars)
Retail (3)
Wholesale (3)
Total loans
Allowance for loan losses
Maturity term (1)
Rate sensitivity
As at October 31, 2021
Under
1 year (2)
1 to 5
years
Over 5
years
Total
Floating
Fixed
Rate
Non-rate-
sensitive
Total
$ 249,363 $ 222,408 $ 31,827 $ 503,598 $ 166,910 $ 329,185 $ 7,503 $ 503,598
218,066
218,066
179,588
174,345
36,143
33,882
9,839
2,335
$ 423,708 $ 256,290 $ 41,666 $ 721,664 $ 203,053 $ 508,773 $ 9,838 $ 721,664
(4,089)
(4,089)
Total loans net of allowance for loan losses
$ 717,575
$ 717,575
(Millions of Canadian dollars)
Retail
Wholesale
Total loans
Allowance for loan losses
Total loans net of allowance for loan losses
Maturity term (1)
Rate sensitivity
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 $
160,031
37,346
11,278
208,655
34,686
171,171
$ 373,977 $ 255,688 $ 36,966 $ 666,631 $ 164,556 $ 493,293 $
(5,639)
$ 660,992
5,984 $ 457,976
208,655
2,798
8,782 $ 666,631
(5,639)
$ 660,992
(1) Generally, based on the earlier of contractual repricing or maturity date.
(2)
(3) Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital
Includes variable rate loans that can be repriced at the clients’ discretion without penalty.
measurement and reporting.
170
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Allowance for credit losses
(Millions of Canadian dollars)
Retail
Residential mortgages
Personal
Credit cards
Small business
Wholesale
Customers’ liability under
acceptances
October 31, 2021
October 31, 2020
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
$
518 $
1,309
1,246
140
2,795
(43) $
23
(72)
12
(27) $
(247)
(297)
(23)
(32) $ 416 $
(6) 1,079
875
(2)
177
48
402 $ 190 $
935
832
61
801
900
117
(560)
(200)
(238) 1,797
1,165
2,140
(34) $
(411)
(484)
(31)
(380)
(40) $ 518
(16) 1,309
(2) 1,246
140
(7)
(130) 2,795
107
(32)
–
–
75
24
83
–
–
107
$ 6,115 $ (672) $
(794) $ (230) $4,419 $ 3,419 $ 4,231 $ (1,340) $ (195) $ 6,115
Presented as:
Allowance for loan losses
Other liabilities – Provisions
Customers’ liability under
acceptances
Other components of equity
$ 5,639
363
107
6
$4,089 $ 3,100
295
241
75
14
24
–
$ 5,639
363
107
6
(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, 2021 that are no longer subject to enforcement activity was $93 million (October 31, 2020 – $193 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
171
Note 5 Loans and allowance for credit losses (continued)
Allowance for credit losses – Retail and wholesale loans
(Millions of Canadian dollars)
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
Total
October 31, 2021
October 31, 2020
Performing
Impaired
Performing
Impaired
For the year ended
Residential mortgages
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Personal
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Credit cards
Balance at beginning of period
Provision for credit losses
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Small business
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
Balance at end of period
Wholesale
Balance at beginning of period
Provision for credit losses
Model changes
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Originations
Maturities
Changes in risk, parameters and
exposures
Write-offs
Recoveries
Exchange rate and other
$
206 $
160
$
152 $
518
$
146 $
77
$
179 $
402
(6)
205
(14)
(2)
113
(30)
(284)
–
–
(2)
(5)
(182)
18
(44)
–
(24)
178
–
–
(9)
–
(23)
(4)
46
–
–
15
(37)
10
(21)
(11)
–
–
–
113
(54)
(91)
(37)
10
(32)
–
221
(35)
(3)
76
(16)
(180)
–
–
(3)
–
(186)
42
(33)
–
(15)
291
–
–
(16)
–
(35)
(7)
36
–
–
34
(44)
10
(21)
186 $
92
$
138 $
416
$
206 $
160
$
152 $
–
–
–
–
76
(31)
145
(44)
10
(40)
518
480 $
733
$
96 $
1,309
$
272 $
520
$
143 $
935
(1)
710
(97)
(3)
128
(96)
(697)
–
–
(2)
–
(706)
97
(58)
–
(130)
633
–
–
–
–
(4)
–
61
–
–
186
(387)
140
(4)
(1)
–
–
–
128
(226)
122
(387)
140
(6)
–
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)
422 $
569
$
88 $
1,079
$
480 $
733
$
96 $
1,309
364 $
882
$
– $
1,246
$
173 $
659
$
– $
832
723
(105)
(4)
6
(7)
(742)
–
–
(2)
(723)
105
(309)
–
(31)
719
–
–
(1)
–
–
313
–
–
(17)
(460)
163
1
–
–
–
6
(38)
(40)
(460)
163
(2)
470
(98)
(2)
7
(8)
(177)
–
–
(1)
(470)
98
(372)
–
(29)
997
–
–
(1)
–
–
374
–
–
110
(617)
133
–
–
–
–
7
(37)
930
(617)
133
(2)
233 $
642
$
– $
875
$
364 $
882
$
– $
1,246
78 $
29
$
33 $
140
$
29 $
10
$
22 $
3
57
(11)
(1)
36
(21)
(77)
–
–
24
1
(57)
11
(2)
–
(22)
64
–
–
31
–
–
–
3
–
–
28
(32)
9
(7)
4
–
–
–
36
(43)
15
(32)
9
48
–
12
(11)
–
20
(7)
35
–
–
–
–
(12)
11
(2)
–
(6)
28
–
–
–
–
–
–
2
–
–
47
(38)
7
(7)
88 $
55
$
34 $
177
$
78 $
29
$
33 $
61
–
–
–
–
20
(13)
110
(38)
7
(7)
140
995 $
1,132
$
668 $
2,795
$
281 $
396
$
488 $
1,165
$
$
$
$
$
$
$
$
1
581
(132)
(4)
601
(488)
(931)
–
–
(57)
24
(576)
161
(60)
–
(500)
689
–
–
(76)
–
(5)
(29)
64
–
–
44
(253)
53
(105)
25
–
–
–
601
(988)
(198)
(253)
53
(238)
–
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)
2,795
Balance at end of period
$
566 $
794
$
437 $
1,797
$
995 $
1,132
$
668 $
172
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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.
While the global economic recovery has continued throughout fiscal 2021, momentum has waned over the year amid ongoing
uncertainty regarding the extent and duration of the impacts of the COVID-19 pandemic. The reopening of economies and
significant fiscal and monetary policy stimulus have generally supported lower defaults, and are contributing to stronger GDP
growth and improved labour markets globally, though this remains uneven. Though increasing vaccination rates are expected to
support a continued economic recovery, exceptional government support programs have begun to wind down, and uncertainty
remains regarding the duration and ultimate impact on future losses from these programs. Supply chain disruptions, rising
business input costs, and labour shortages are also limiting the pace of further improvement and adding to rising inflation
concerns. As these factors may impact future losses, our allowances continue to require the application of heightened judgment,
as there is 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 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 on the progress of the economic recovery, the
impact of expert credit judgment on our allowances remains elevated as compared to pre-pandemic levels. We applied
quantitative and qualitative adjustments for the impacts of the unprecedented macroeconomic environment, including the
impact of government support programs in offsetting the effect of COVID-19 related unemployment on the economy and on
mitigating the losses for the sectors most sensitive to the economic impact of 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, 2021. Subsequent changes to this forecast and
related estimates will be reflected in our allowance for credit losses in future periods. All of our IFRS 9 scenarios are designed to
include the impact of COVID-19. Despite positive developments and continuous economic improvement, the possibility of a more
prolonged recovery period, including monetary policy responses to rising inflation rates brought on in part by global supply chain
disruptions, as well as heightened risk in the real estate sector, have been reflected in our scenario design and weights.
Our base scenario reflects a continuation of the recovery that has been underway since the sharp drop in economic activity
in calendar Q2 2020. Canadian and U.S. unemployment rates are expected to remain above pre-shock levels at the end of
calendar 2021 and we expect GDP to continue growing from Q4 2021 consistent with our expectation that higher vaccination rates
will enable a more significant and sustainable easing of containment measures.
Downside scenarios, including two additional and more severe downside scenarios designed for the energy and real estate
sectors, reflect the possibility of a second macroeconomic shock beginning in calendar 2022, in addition to the first shock in Q2
2020, with conditions deteriorating from Q4 2021 levels for up to 18 months, 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 possibility of a more prolonged recovery period, including monetary policy responses to elevated
inflation rates which may increase credit risk, have been reflected in our general downside scenario.
The upside scenario reflects a slightly faster and larger economic recovery than the base scenario, without prompting an
offsetting monetary policy response, followed by a return to a long-run sustainable growth rate within the forecast period.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
173
Note 5 Loans and allowance for credit losses (continued)
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 – In our base forecast, calendar Q4 2021 unemployment rates are expected to decline to 6.7% in Canada and
4.7% in the U.S. We expect unemployment rates to continuously improve in both regions for the remainder of the year. We
expect the Canadian unemployment rate to stabilize around its long run equilibrium by the latter half of calendar 2022 and
for the U.S. unemployment rate to improve to better than the long run equilibrium beginning in calendar Q2 2022 reverting to
the long run equilibrium towards the latter end of the forecast horizon.
Canada Unemployment Rate (1)
%
11
9
7
5
3
Q 1-2021
Q 4-2020
Q 2-2021
Q 3-2021
Q 4-2021
Q 2-2022
Q 1-2022
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 4-2025
Q 1-2026
Q 2-2026
Q 3-2026
U.S. Unemployment Rate (1)
%
10
8
6
4
2
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
Q 4-2025
Q 1-2026
Q 2-2026
Q 3-2026
Range of alternative scenarios (October 31, 2021)
Base case (October 31, 2021)
Range of alternative scenarios (October 31, 2021)
Base case (October 31, 2021)
Base case (July 31, 2021)
Base case (October 31, 2020)
Base case (July 31, 2021)
Base case (October 31, 2020)
(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) – In our base forecast, we expect Canadian GDP in calendar Q4 2021 to be 0.5% above pre-
shock levels and 2.7% above such levels in the U.S., with continuous improvement over the forecast horizon.
Canada Real GDP (1)
Trillions of Canadian dollars
2.5
2.4
2.3
2.2
2.1
2.0
U.S. Real GDP (1)
Trillions of U.S. dollars
22.5
22.0
21.5
21.0
20.5
20.0
19.5
19.0
18.5
1.9
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 1-2025
Q 4-2024
Q 2-2025
Q 3-2025
Q 4-2025
Q 1-2026
Q 2-2026
Q 3-2026
18.0
Q 4-2020
Q 1-2021
Q 2-2021
Q 3-2021
Q 4-2021
Q 2-2022
Q 1-2022
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 4-2025
Q 1-2026
Q 2-2026
Q 3-2026
Range of alternative scenarios (October 31, 2021)
Base case (October 31, 2021)
Range of alternative scenarios (October 31, 2021)
Base case (October 31, 2021)
Base case (July 31, 2021)
Base case (October 31, 2020)
Base case (July 31, 2021)
Base case (October 31, 2020)
(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 average $71 per barrel over the
next 12 months and $56 per barrel in the following 2 to 5 years. The range of average prices in our alternative energy
downside and upside scenarios is $27 to $89 per barrel for the next 12 months and $36 to $61 per barrel for the following 2 to
5 years. As at October 31, 2020, our base forecast included an average price of $43 per barrel for the next 12 months and $48
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 0.1% over the next 12 months, with
a compound annual growth rate of 4.1% for the following 2 to 5 years. The range of annual housing price growth (contraction)
in our alternative real estate downside and upside scenarios is (29.6)% to 10.9% over the next 12 months and 4.2% to 9.6%
for the following 2 to 5 years. As at October 31, 2020, our base forecast included housing price growth of 0.6% for the next
12 months and 4.5% 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, Canadian and U.S. 10 year BBB corporate bond yield and credit spreads,
10 year government bond yields, Canadian consumer confidence index, Canadian and U.S. commercial real estate price indices,
U.S. housing price index, natural gas prices (Henry Hub), and S&P 500 and EuroStoxx equity indices.
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 yield and credit
spreads, and 10 year government bond yields.
174
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Increases in the following macroeconomic variables will generally correlate with lower expected credit losses: Canadian and
U.S. housing price indices, Canadian and U.S. GDP, Canadian consumer confidence index, Canadian and U.S. commercial real
estate price indices, oil and natural gas prices, and S&P 500 and EuroStoxx equity indices.
Scenario design and weightings
Our estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic scenarios.
Scenarios are designed to capture a wide range of possible outcomes and are weighted according to our expectation of the
relative likelihood of the range of outcomes that each scenario represents at the reporting date. We then weight each scenario
to take into account historical frequency, current trends, and forward-looking conditions which will change over time. The base
case scenario is based on forecasts of the expected rate, value or yield for each of the macroeconomic variables identified
above. The upside and downside scenarios are set by adjusting our base projections to construct reasonably possible scenarios
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, 2021, reflective of current market conditions which have improved relative to the prior year.
In determining our IFRS 9 allowance for credit losses, and to reflect the continued uncertainty and downside risk of a slower
recovery than contemplated in our base scenario, we reassessed our scenario weights to more heavily weight the downside
scenarios relative to October 31, 2020.
The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by
$726 million at October 31, 2021 (October 31, 2020 – $606 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, reflects the economic recovery underway in 2021 following the sharp drop in economic
activity in 2020 and is dependent on the expected remaining life at the date of the transfer. Stage transfers may result in
significant fluctuations in expected credit losses.
The following table illustrates the impact of staging on our ACL by comparing our allowance if all performing loans were in
stage 1 to the actual ACL recorded on these assets.
October 31, 2021
October 31, 2020
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)
$ 2,521 $ 1,125
$ 3,646
$ 4,028
$ 1,031
$ 5,059
(1)
Represents loans and commitments in stage 1 and stage 2.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
175
Note 5 Loans and allowance for credit losses (continued)
Credit risk exposure by internal risk rating
The following table presents the gross carrying amount of loans measured at amortized cost, and the full contractual amount of
undrawn loan commitments subject to the impairment requirements of IFRS 9. Risk ratings are based on internal ratings used in
the measurement of expected credit losses as at the reporting date, as outlined in the internal ratings maps for Wholesale and
Retail facilities in the Credit risk section of Management’s Discussion and Analysis.
(Millions of Canadian dollars)
Stage 1
Stage 2 Stage 3 (1)
Total
Stage 1
Stage 2 Stage 3 (1)
Total
October 31, 2021
October 31, 2020
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
$ 310,334 $ 1,507 $
15,152
3,343
45,512
–
374,341
2,051
634
913
–
5,105
$ 72,267 $
698 $
4,974
687
8,934
–
4,551
1,045
88
–
– $ 311,841 $ 270,396 $ 2,848 $
–
–
–
645
17,203
3,977
46,425
645
15,230
4,346
43,176
–
3,307
1,467
936
–
– $ 273,244
18,537
–
5,813
–
44,112
–
638
638
645
380,091
333,148
8,558
638
342,344
241
$ 380,332
– $ 72,965 $ 71,245 $ 1,084 $
–
–
–
197
9,525
1,732
9,022
197
5,415
1,416
144
–
3,974
817
7,704
–
253
$ 342,597
– $ 72,329
9,389
–
2,233
–
7,848
–
212
212
Total
$ 86,862 $ 6,382 $
197 $ 93,441 $ 83,740 $ 8,059 $
212 $ 92,011
Loans outstanding – Credit cards
Low risk
Medium risk
High risk
Not rated (2)
$ 12,864 $
24 $
1,646
136
527
1,645
937
43
– $ 12,888 $ 11,824 $
–
–
–
3,291
1,073
570
1,596
132
490
63 $
2,360
1,105
56
– $ 11,887
3,956
–
1,237
–
546
–
Total
$ 15,173 $ 2,649 $
– $ 17,822 $ 14,042 $ 3,584 $
– $ 17,626
Loans outstanding –Small business (4)
Low risk
Medium risk
High risk
Not rated (2)
Impaired
$
8,609 $
1,583
227
4
–
274 $
979
218
–
–
– $
–
–
–
109
8,883 $
2,562
445
4
109
2,034 $
1,976
126
9
–
172 $
1,143
192
–
–
– $
–
–
–
90
2,206
3,119
318
9
90
Total
$ 10,423 $ 1,471 $
109 $ 12,003 $
4,145 $ 1,507 $
90 $
5,742
Undrawn loan commitments – Retail
Low risk
Medium risk
High risk
Not rated (2)
$ 229,516 $
9,475
1,205
4,854
574 $
133
97
90
– $ 230,090 $ 214,176 $
–
–
–
9,608
1,302
4,944
10,402
1,141
5,238
887 $
291
129
117
– $ 215,063
10,693
–
1,270
–
5,355
–
Total
$ 245,050 $
894 $
– $ 245,944 $ 230,957 $ 1,424 $
– $ 232,381
Wholesale – Loans outstanding (4)
Investment grade
Non-investment grade
Not rated (2)
Impaired
$ 62,975 $
117,396
9,339
–
226 $
15,146
430
–
– $ 63,201 $ 50,998 $
–
–
1,357
132,542
9,769
1,357
112,434
7,093
–
328 $
26,575
432
–
– $ 51,326
139,009
–
7,525
–
2,235
2,235
189,710
15,802
1,357
206,869
170,525
27,335
2,235
200,095
Items not subject to impairment (3)
Total
Undrawn loan commitments –
Wholesale
Investment grade
Non-investment grade
Not rated (2)
Total
11,197
$ 218,066
$ 246,539 $ 1,122 $
108,063
3,476
12,377
1
– $ 247,661 $ 242,244 $ 1,022 $
–
–
120,440
3,477
21,581
–
92,262
3,918
8,560
$ 208,655
– $ 243,266
113,843
–
3,918
–
$ 358,078 $ 13,500 $
– $ 371,578 $ 338,424 $ 22,603 $
– $ 361,027
(1)
(2)
As at October 31, 2021, 86% of credit-impaired loans were either fully or partially collateralized (October 31, 2020 – 90%). 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.
(3)
(4) Commencing Q2 2021, certain loans are now classified as Retail – Small business and were previously classified as Wholesale, reflecting an alignment with capital
measurement and reporting.
176
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Loans past due but not impaired (1), (2)
(Millions of Canadian dollars)
Retail
Wholesale
October 31, 2021
October 31, 2020
As at
30 to 89 days
90 days
and greater
Total 30 to 89 days
90 days
and greater
Total
$
$
1,105 $
1,230
2,335 $
137 $ 1,242 $
–
1,230
137 $ 2,472 $
1,013 $
574
1,587 $
129 $ 1,142
587
13
142 $ 1,729
(1)
(2)
Excludes loans less than 30 days past due as they are not generally representative of the borrowers’ ability to meet their payment obligations.
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
For the year ended October 31, 2021, the amortized cost of the loans whose contractual terms were modified while in Stage 2 or
Stage 3 was not material.
In 2020, we 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 as a result of the modification whose contractual terms were
previously modified while in Stage 2 or Stage 3 was not material for the years ended October 31, 2020 and October 31, 2021.
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. The application window for the CEBA program closed on June 30, 2021.
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 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 (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 2021 and 2020.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
177
Note 6 Derecognition of financial assets (continued)
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, 2021
October 31, 2020
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
$ 34,052 $
252,920 $
9,281 $296,253
$
35,001 $
267,361 $
6,870 $ 309,232
(Millions of Canadian dollars)
Carrying amount of transferred
assets that do not qualify for
derecognition
Carrying amount of associated
liabilities
33,769
252,920
9,281 295,970
34,805
267,361
6,870
309,036
Fair value of transferred assets
Fair value of associated liabilities
$ 34,142 $
34,073
252,920 $
252,920
9,281 $296,343
9,281 296,274
$
35,293 $
35,957
267,361 $
267,361
6,870 $ 309,524
310,188
6,870
Fair value of net position
$
69 $
– $
– $
69
$
(664) $
– $
– $
(664)
(1)
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.
(2) CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
(3) 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, 2021, $1,076 million of financial assets held by the conduit was included in
Loans (October 31, 2020 – $957 million) and $665 million of ABCP issued by the conduit was included in Deposits (October 31, 2020
– $558 million) 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 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 have also provided subordinated loans to the entity to pay upfront
expenses; the loans were fully repaid during the year ended October 31, 2021.
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, 2021, $3 billion of notes issued by our credit card securitization vehicle were included in Deposits on our Consolidated
Balance Sheets (October 31, 2020 – $6 billion).
178
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Collateralized commercial paper vehicle
We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party
investors. The structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to
advance funds to the entity in the event there are insufficient funds from other sources to settle maturing commercial paper. We
pledge collateral to secure the loans and are exposed to the market and credit risks of the pledged securities.
We consolidate the structured entity because we have decision-making power over the relevant activities, are the sole
borrower from the structure, and are exposed to a majority of the residual ownership risks through the credit support provided.
As at October 31, 2021, $13 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated
Balance Sheets (October 31, 2020 – $12 billion).
Covered bonds
We periodically transfer mortgages to RBC Covered Bond Guarantor Limited Partnership (the Guarantor LP) to support funding
activities and asset coverage requirements under our covered bonds program. The Guarantor LP was created to guarantee
interest and principal payments under the covered bond program. The covered bonds guaranteed by the Guarantor LP are direct,
unsecured and unconditional obligations of RBC; therefore, investors have a claim against the Bank which will continue if the
covered bonds are not paid by the Bank and the mortgage assets in the Guarantor LP are insufficient to satisfy the obligations
owing on the covered bonds. We act as general partner, limited partner, swap counterparty, lender and liquidity provider to the
Guarantor LP, servicer for the underlying mortgages as well as the registered issuer of the covered bonds.
We consolidate the Guarantor LP as we have the decision-making power over the relevant activities through our role as
general partner and are exposed to variability from the performance of the underlying mortgages. As at October 31, 2021, the total
amount of mortgages transferred and outstanding was $80 billion (October 31, 2020 – $106 billion) and $37 billion of covered
bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2020 – $40 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, 2021, $7 billion of municipal bonds
were included in Investment securities related to consolidated TOB structures (October 31, 2020 – $8 billion) and a corresponding
$7 billion of floating-rate certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2020 – $8 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, 2021, $514 million
of Trading securities held in the consolidated funds (October 31, 2020 – $516 million) and $365 million of Other liabilities
representing the fund units held by third parties (October 31, 2020 – $293 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, 2021
Non-RBC
managed
investment
funds
Third-party
securitization
vehicles
Other
Total
$
$
$
$
12 $
–
17
–
– $
4,569
–
27
3,047 $
–
–
–
– $
537 $
6,855
–
–
1,453
108
363
3,596
12,877
125
390
29 $ 4,596 $
3,047 $
6,855 $
2,461 $
16,988
93 $
–
93 $
– $
–
– $
– $
–
– $
– $
–
– $
– $
–
– $
93
–
93
Maximum exposure to loss (2)
$ 40,893 $ 8,361 $
3,651 $ 12,214 $
4,057 $
69,176
Total assets of unconsolidated structured entities
$ 40,074 $ 19,881 $506,699 $ 80,458 $392,348 $1,039,460
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
179
Note 7 Structured entities (continued)
(Millions of Canadian dollars)
On-balance sheet assets
Securities
Loans
Derivatives
Other assets
On-balance sheet liabilities
Derivatives
Other liabilities
Maximum exposure to loss (2)
Total assets of unconsolidated structured entities
Multi-seller
conduits (1)
Structured
finance
As at October 31, 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
42,863 $ 6,522 $
2,557 $
10,389 $
2,108 $
64,439
41,964 $ 18,200 $ 462,947 $
87,631 $ 286,200 $
896,942
(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 $25 billion as at October 31, 2021 (October 31, 2020 –
$23 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 23.
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 conduits as noted above.
Structured finance
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
180
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
warehouse phase by one or more third-party equity investors. We act as the arranger and placement agent for the term CLO
transaction. Proceeds from the sale of the term CLO are used to repay our senior warehouse financing, at which point we have no
further involvement with the transaction. We do not consolidate these CLO structures as we do not have decision-making power
over the relevant activities of the entity, which include the initial selection and subsequent management of the underlying debt
portfolio.
We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. These
facilities tend to be longer in term than the CLO warehouse facilities and benefit from credit enhancement 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, 2021 and 2020, 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, 2021, we did not transfer any commercial mortgages (October 31, 2020 –
$469 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, 2021 and 2020, we have not provided any financial or non-financial support to any
consolidated or unconsolidated structured entities when we were not contractually obligated to do so. Furthermore, we have no
intention to provide such support in the future.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
181
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.
182
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Interest rate swaps are used to manage our exposure to interest rate risk by modifying the repricing or maturity
characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. Purchased options
are used to hedge redeemable deposits and other options embedded in consumer products. We manage our exposure to foreign
currency risk with cross currency swaps and foreign exchange forward contracts. We predominantly use credit derivatives to
manage our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit
portfolio by purchasing credit derivatives to transfer credit risk to third parties.
Certain derivatives and cash instruments are specifically designated and qualify for hedge accounting. From time to time, we
also enter into derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge
accounting, or where hedge accounting is not considered economically feasible to implement. In such circumstances, changes in
fair value are reflected in Other income in Non-interest income.
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
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
Other contracts
As at October 31, 2021
Term to maturity
Within
1 year
1 through
5 years
Over
5 years
Total
Trading
Other than
Trading
$ 866,704 $ 161,835 $
3,936,638
266,798
271,000
6,559,032
312,149
309,540
158 $ 1,028,697 $ 1,015,263 $ 13,434
504,156
–
–
4,268,243 14,763,913 14,259,757
764,494
764,494
784,205
784,205
185,547
203,665
1,730,712
82,316
439,169
46,060
53,342
1,027
218,270
56,335
57,968
1,193,669
16,097
16,122
35,759
98,850
2,491
72,864
776,062
3,059
3,060
6,125
20,757
1,789,538
213,148
2,408,900
65,216
72,524
42,911
337,877
1,753,075
204,789
2,376,225
65,216
72,524
42,428
325,226
110,285
173,039
28,071
22,272
129
391,339
148,262
97,364
15,250
1,300
–
84,135
333
126
–
–
–
1,175
258,880
270,529
43,321
23,572
129
476,649
256,020
270,129
43,321
23,572
129
476,649
36,463
8,359
32,675
–
–
483
12,651
2,860
400
–
–
–
–
$ 8,637,171 $ 9,163,667 $ 5,543,665 $ 23,344,503 $ 22,733,022 $ 611,481
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 $
3,409,078
282,837
303,347
427,464 $
340 $
3,210,251 $
3,172,950 $
5,990,160
407,782
410,237
3,755,593
185,667
198,222
13,154,831
876,286
911,806
12,685,595
876,153
911,806
37,301
469,236
133
–
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
164,925
205,927
74,494
58,116
75
179,681
112,363
167,350
14,188
10,391
–
30,768
113
233
–
–
–
240
1,725,341
201,289
2,162,124
64,031
66,916
48,763
291,724
277,401
373,510
88,682
68,507
75
210,689
1,707,082
194,773
2,112,625
64,031
66,916
48,244
282,321
277,401
373,510
88,682
68,507
75
210,689
18,259
6,516
49,499
–
–
519
9,403
–
–
–
–
–
–
$ 9,919,592 $ 8,938,413 $ 4,874,221 $ 23,732,226 $ 23,141,360 $ 590,866
(1)
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).
(2) Credit derivatives with a notional value of $1 billion (October 31, 2020 – $1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of
$25 billion (October 31, 2020 – $26 billion) and protection sold of $17 billion (October 31, 2020 – $22 billion).
(3) Other contracts exclude loan-related commitment derivatives of $9 billion (October 31, 2020 – $2 billion), which are not classified as derivatives under CAR guidelines.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
183
Note 8 Derivative financial instruments and hedging activities (continued)
Fair value of derivative instruments (1)
(Millions of Canadian dollars)
Held or issued for trading purposes
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives
Other contracts
Held or issued for other-than-trading purposes
Interest rate contracts
Swaps
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Credit derivatives
Other contracts
Total gross fair values before:
Valuation adjustments determined on a pooled basis
Impact of netting agreements that qualify for balance sheet offset
As at
October 31, 2021
October 31, 2020
Positive
Negative
Positive
Negative
$
10 $
28,400
4,580
–
11
23,136
–
5,258
$
33 $
44,732
7,498
–
33
37,453
–
8,916
32,990
28,405
52,263
46,402
11,404
4,469
23,208
1,021
–
11,515
4,929
22,382
–
978
10,765
5,117
19,880
1,292
–
10,190
5,080
21,826
–
910
40,102
39,804
37,054
38,006
34
20,827
115
21,253
463
21,156
526
23,985
93,953
89,577
110,936
108,919
1,187
1,187
305
32
859
1,196
–
329
1,116
1,116
260
–
447
707
5
321
1,959
1,959
76
89
2,084
2,249
–
105
1,410
1,410
85
22
132
239
5
126
2,712
2,149
4,313
1,780
96,665
(810)
(314)
91,726
27
(314)
115,249
(1,104)
(657)
110,699
(115)
(657)
$ 95,541 $ 91,439
$ 113,488 $ 109,927
(1)
The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain
central counterparties.
Fair value of derivative instruments by term to maturity (1)
October 31, 2021
October 31, 2020
As at
(Millions of Canadian dollars)
Derivative assets
Derivative liabilities
Less than
1 year
1 through
5 years
Over
5 years
Less than
1 year
1 through
5 years
Over
5 years
Total
$ 27,771 28,029 39,741 $ 95,541 $ 27,072 33,755 52,661 $ 113,488
109,927
26,507 32,885 50,535
26,766 27,938 36,735
91,439
Total
(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.
184
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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 IBORs in multiple jurisdictions and will be affected by the Reform as the markets transition to ABRs
as discussed in Note 2.
The following table presents the notional or principal amount of our hedging instruments which reference IBORs that will be
affected by the Reform as discussed in Note 2. 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, 2021
October 31, 2020 (2)
Notional/Principal
amounts
Notional/Principal
amounts
$
38,730 $
290
215
–
22,640
591
231
691
$
39,235 $
24,153
(1)
(2)
Excludes interest rate contracts and non-derivative instruments which reference rates in multi-rate jurisdictions, including CDOR, EURO Interbank Offered Rate and
Australian Bank Bill Swap Rate (BBSW).
Amounts have been updated from those previously presented to reflect the regulatory developments related to the USD LIBOR cessation date.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
185
Note 8 Derivative financial instruments and hedging activities (continued)
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
As at
October 31, 2021
October 31, 2020
Replacement
cost
Credit
equivalent
amount
Risk-weighted
equivalent (2)
Replacement
cost
Credit
equivalent
amount
Risk-weighted
equivalent (2)
$
9 $
64 $
20 $
4,519
113
23
3,085
2,621
177
2
913
7,668
1,814
16,203
403
415
19,097
16,484
510
196
2,234
26,567
6,218
4,569
187
141
4,232
4,092
145
43
213
10,480
124
$
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
$ 20,944 $88,391 $ 24,246 $ 20,085
$ 79,418
$ 24,721
(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, 2020 – $18 billion).
Replacement cost of derivative instruments by risk rating and by counterparty type
Risk rating (1)
Counterparty type (2)
As at October 31, 2021
(Millions of Canadian dollars)
Gross positive fair values
Impact of master netting agreements and
applicable margins
AAA, AA
A
BBB BB or lower
$ 22,801 $ 37,938 $ 16,333 $
Total
19,593 $ 96,665 $ 42,361 $
Banks
Total
Other
15,964 $ 38,340 $ 96,665
OECD
governments
20,545
33,257
12,050
9,869
75,721
41,554
15,731
18,436
75,721
Replacement cost (after netting agreements)
$ 2,256 $ 4,681 $ 4,283 $
9,724 $ 20,944 $
807 $
233 $ 19,904 $ 20,944
Risk rating (1)
Counterparty type (2)
As at October 31, 2020
(Millions of Canadian dollars)
AAA, AA
A
BBB BB or lower
Total
Banks
OECD
governments
Other
Total
Gross positive fair values
Impact of master netting agreements and
$ 30,097 $ 44,736 $ 18,392
$ 22,024 $ 115,249 $ 49,146
$
22,109 $ 43,994 $ 115,249
applicable margins
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
(1) 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.
(2) 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.
186
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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 predominantly reference IBORs across multiple jurisdictions. Certain swaps will be
affected by the Reform as the market transitions to ABRs 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 USD, GBP 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 principal of the foreign denominated deposit liabilities 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, 2021
Designated as hedging instruments
in hedging relationships
(Millions of Canadian dollars)
Fair value Cash flow
Net
investment
Assets
As at
October 31, 2020
Not designated
in a hedging
relationship
Designated as hedging instruments
in hedging relationships
Fair value Cash flow
Net
investment
Not designated
in a hedging
relationship
Derivative instruments
$
66 $
9 $
98 $
95,368 $ 102 $
1 $
19 $
113,366
Liabilities
Derivative instruments
Non-derivative instruments
131
–
20
–
18
27,157
91,270
n.a.
298
–
30
–
58
28,702
109,541
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
187
Note 8 Derivative financial instruments and hedging activities (continued)
The following tables provide the remaining term to 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, 2021
Notional amounts
Carrying amount (1)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 10,503 $ 25,008 $ 6,568 $ 42,079 $
8,939
44,870
11,646
65,455
19 $
47
116
15
0.8%
1.5%
0.7%
1.2%
1.9%
1.5%
0.9%
1.3%
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%
(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
(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
As at October 31, 2021
Notional amounts
Carrying amount (1)
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$ 57,304 $ 28,707 $ 4,112 $ 90,123 $
16,659
55,556
13,784
85,999
– $
–
–
–
0.5%
0.8%
1.0%
1.2%
1.2%
1.5%
0.7%
1.2%
$
– $
n.a.
n.a.
183 $
n.a.
1.52
– $
n.a.
n.a.
183 $
n.a.
1.52
9 $
–
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%
1.4%
1.5%
1.8%
1.4%
1.0%
1.5%
$
$
700
0.01
n.a.
$
160
n.a.
1.52
$
–
n.a.
n.a.
860 $
0.01
1.52
1
$
2
(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.
n.a. not applicable
188
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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, 2021
Notional/Principal
Carrying amount
Within
1 year
1 through
5 years
Over
5 years
Total
Assets
Liabilities
$
433 $ 26,294 $
1.32
–
–
1.29
1.51
1.72
$ 4,951 $
1.26
1.45
1.73
– $
n.a.
n.a.
n.a.
n.a. $ 27,157
401 $ 27,128
1.29
1.30
1.51
1.48
1.72
–
– $ 4,951 $ 98 $
18
n.a.
n.a.
n.a.
1.26
1.45
1.73
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
–
n.a.
n.a.
n.a.
$
$ 2,274
1.31
1.50
–
–
n.a.
n.a.
n.a.
$
$ 28,702
1.30
1.51
1.69
7,869 $
1.33
1.56
1.71
$
n.a.
$ 29,175
19
$
58
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, 2021
Accumulated amount of fair
value adjustments on the
hedged item included in the
carrying amount
Carrying amount
(Millions of Canadian dollars)
Assets Liabilities
Assets Liabilities
Balance sheet items:
Changes in fair
values used for
calculating hedge
ineffectiveness
Interest rate risk
Fixed rate assets (1)
Fixed rate liabilities (1)
$42,810 $
– $
(78) $
–
Loans – Wholesale $
(1,027)
– 65,355
–
(59)
Deposits – Business and government;
Subordinated debentures
1,842
Securities – Investment, net of
applicable allowance; Loans – Retail;
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)
Assets Liabilities
Assets Liabilities
Balance sheet items:
Changes in fair
values used for
calculating hedge
ineffectiveness
Interest rate risk
Fixed rate assets (1)
Fixed rate liabilities (1)
$ 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;
(1)
As at October 31, 2021, 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 $125 million for fixed-rate assets and a loss of $62 million for fixed-rate liabilities (October 31, 2020 – gain of $32 million and loss of
$94 million, respectively).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
189
Note 8 Derivative financial instruments and hedging activities (continued)
Cash flow and net investment hedges – assets and liabilities designated as hedged items
As at and for the year ended October 31, 2021
(Millions of Canadian dollars)
Balance sheet items:
Cash flow hedges
Interest rate risk
Variable rate assets
Securities – Investment, net of
Changes in fair
values used for
calculating hedge
ineffectiveness
Cash flow hedge/foreign
currency translation reserve
Continuing hedges
Discontinued
hedges
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
applicable allowance; Loans – Retail $
Deposits – Business and government;
Deposits – Personal
614
$
(402) $
206
(2,641)
1,310
(399)
Securities – Investment, net of
applicable allowance; Loans – Retail
Deposits – Business and government
(98)
–
1
–
–
–
n.a.
(2,331)
(4,032)
(421)
As at and for the year ended October 31, 2020
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)
Effectiveness of designated hedging relationships
(Millions of Canadian dollars)
Fair value hedges
Interest rate risk
For the year ended October 31, 2021
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
$
929 $
(1,802)
(98)
40
n.a.
n.a.
n.a.
n.a.
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
(631)
2,579
98
–
1,882
449
(17) $
9
(497) $
1,949
279
(1,024)
–
–
–
–
98
–
1,882
449
103
–
–
1
190
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
(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
n.a.
n.a.
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
532
(2,127)
$
–
–
5
1
3
113
(410)
(125)
n.a.
n.a.
200
(367)
(5)
122
–
(28)
(1) Hedge ineffectiveness recognized in income included losses of $101 million that are excluded from the assessment of hedge effectiveness and are offset by economic
hedges (October 31, 2020 – $94 million).
n.a. not applicable
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, 2021
For the year ended October 31, 2020
Cash flow hedge
reserve
Foreign currency
translation reserve
Cash flow hedge
reserve
$
(1,079) $
4,632 $
Foreign currency
translation reserve
4,221
(6) $
(Millions of Canadian dollars)
Balance at the beginning of the year
Cash flow hedges
Effective portion of changes in fair value:
Interest rate risk
Foreign exchange risk
Equity price risk
Net amount reclassified to profit or loss:
Ongoing hedges:
Interest rate risk
Foreign exchange risk
Equity price risk
De-designated hedges:
Interest rate risk
Net gain on hedge of net investment in
foreign operations
Foreign exchange denominated debt
Forward foreign exchange contracts
Foreign currency translation differences
for foreign operations
Reclassification of losses (gains) on
foreign currency translation to income
Reclassification of losses (gains) on net
investment hedging activities to income
Tax on movements on reserves during the
period
Balance at the end of the year
$
1,452
100
306
505
(105)
(271)
240
(1,595)
115
(77)
277
(119)
53
(110)
1,882
449
(4,308)
(7)
(1)
(582)
566 $
(592)
2,055 $
383
(1,079) $
(410)
(125)
813
(21)
28
126
4,632
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
191
Note 9 Premises and equipment
(Millions of Canadian dollars)
Land Buildings
For the year ended October 31, 2021
Owned by the Bank (1)
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 $ 152 $ 1,416 $
Additions
Transfers from work in process
Disposals
Foreign exchange translation
Other
–
13
(19)
(20)
29
1
–
(2)
(6)
–
2,222 $
28
180
(85)
(46)
81
1,684 $
6
47
(21)
(25)
(85)
3,383 $ 203 $ 5,171 $
388
(410)
(1)
(5)
(5)
379
–
(49)
(167)
60
94
170
(70)
(66)
(17)
421 $14,652
1,005
109
–
–
(283)
(36)
(336)
(1)
63
–
Balance at end of period
$ 145 $ 1,419 $
2,380 $
1,606 $
3,494 $ 170 $ 5,394 $
493 $15,101
Accumulated depreciation
Balance at beginning of period $
Depreciation
Disposals
Foreign exchange translation
Other
Balance at end of period
$
Net carrying amount at end of
– $
–
–
–
–
– $
754 $
49
(7)
(9)
(12)
1,652 $
245
(83)
(35)
59
1,265 $
94
(20)
(16)
(63)
2,188 $
222
(56)
(35)
10
– $
–
–
–
–
584 $
578
(5)
(24)
–
275 $ 6,718
1,276
(191)
(120)
(6)
88
(20)
(1)
–
775 $
1,838 $
1,260 $
2,329 $
– $ 1,133 $
342 $ 7,677
period
$ 145 $
644 $
542 $
346 $
1,165 $ 170 $ 4,261 $
151 $ 7,424
(Millions of Canadian dollars)
Land Buildings
For the year ended October 31, 2020
Owned by the Bank (1)
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)
1
(1)
1,395 $
26
9
(4)
4
(14)
2,062 $
82
279
(157)
7
(51)
1,557 $
42
93
(42)
4
30
3,001 $
14
449
(124)
10
33
432 $
623
(830)
(2)
(2)
(18)
4,956 $
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 $
267
(155)
4
(17)
1,137 $
109
(39)
3
55
754 $
1,652 $
1,265 $
2,074 $
224
(112)
3
(1)
2,188 $
– $
–
–
–
–
– $
– $
600
(12)
(2)
(2)
205 $
86
(16)
–
–
5,672
1,333
(337)
9
41
584 $
275 $
6,718
period
$ 152 $
662 $
570 $
419 $
1,195 $
203 $
4,587 $
146 $
7,934
(1)
As at October 31, 2021, we had total contractual commitments of $162 million to purchase premises and equipment (October 31, 2020 – $94 million).
Lease payments
Total lease payments for the year ended October 31, 2021 were $1,259 million, of which $613 million or 49% relates to variable
payments and $646 million or 51% relates to fixed payments. 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 $603 million for the year ended
October 31, 2021 (October 31, 2020 – $635 million).
192
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Note 10 Goodwill and other intangible assets
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, 2021
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
$ 2,557 $ 1,719 $
–
–
–
–
(3)
(116)
587 $
–
–
(10)
577 $
2,001 $
2,978 $
–
–
(37)
–
–
(210)
121 $
–
(4)
(2)
112 $
–
–
–
149 $ 1,078 $11,302
–
–
–
(7)
(441)
(65)
–
–
(1)
1,964 $
2,768 $
115 $
112 $
148 $ 1,013 $10,854
Balance at end of period $ 2,557 $ 1,600 $
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 $
2,943 $
–
–
16
1
–
34
2,001 $
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 $
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 VIU, except in circumstances where the carrying amount of a CGU exceeds its
VIU. In such cases, the greater of the CGU’s FVLCD and its VIU is the recoverable amount. Our annual impairment test is
performed as at August 1.
In our 2021 and 2020 annual impairment tests, the recoverable amounts of our Caribbean Banking and International Wealth
Management CGUs were based on their FVLCD. The recoverable amounts of all other CGUs tested were based on their VIU.
Value in use
We calculate VIU 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 long-term steady state growth expectations in the countries within which the CGU operates. The discount rates
used to determine the present value of each CGU’s projected future cash flows are based on the bank-wide cost of capital,
adjusted for the risks to which each CGU is exposed. CGU-specific risks include: country risk, business/operational risk,
geographic risk (including political risk, devaluation risk, and government regulation), currency risk, and price risk (including
product pricing risk and inflation).
The estimation of VIU 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 VIU to key inputs and assumptions used was tested by recalculating the recoverable
amount using reasonably possible changes to those parameters. As at August 1, 2021, 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 VIU.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
193
Note 10 Goodwill and other intangible assets (continued)
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, 2021
August 1, 2020
Discount
rate (1)
Terminal
growth
rate
Discount
rate (1)
Terminal
growth
rate
9.4%
10.9
10.5
10.5
11.1
n.m.
10.2
9.9
11.8
3.0%
3.5
3.0
3.0
3.0
n.m.
3.0
3.0
3.0
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
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 FVLCD 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 a material 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 FVLCD to key inputs and assumptions was tested by recalculating
the recoverable amount using reasonably possible change to those parameters.
With the improved economic environment in 2021, tempered by continued uncertainty related to COVID-19, the recoverable
amount of our Caribbean Banking CGU has increased. As at August 1, 2021, the recoverable amount of our Caribbean Banking
CGU, based on FVLCD, was 123% of its carrying amount (August 1, 2020 – the recoverable amount based on FVLCD approximated
the carrying amount). In determining the recoverable amount, forecast future cash flows were discounted using a pre-tax rate of
10.9% (August 1, 2020 – 11.4%), reflecting geographic inflation rate expectations, partially offset by a lower terminal growth rate of
3.5% (August 1, 2020 – 3.7%), reflecting a long-term steady state growth rate for the CGU. A 50 bps change in the terminal growth
rate would increase and decrease the recoverable amount by $339 million and $289 million, respectively. A 50 bps increase in the
discount rate would decrease the recoverable amount by $360 million. A reduction in the forecasted cash flows of 10% per annum
would reduce the recoverable amount by $469 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.
194
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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
Internally
generated
software
$
7,676
48
–
1,022
(66)
(157)
(126)
(7)
Other
software
$ 1,901
15
–
69
(87)
–
(60)
8
For the year ended October 31, 2021
Core
deposit
intangibles
Customer
list and
relationships
In process
software
Total
$
$
1,586
–
–
–
–
–
(112)
–
$
1,916
–
–
–
(38)
–
(41)
5
1,241
1,129
–
(1,091)
(8)
(9)
(29)
3
$ 14,320
1,192
–
–
(199)
(166)
(368)
9
$
8,390
$ 1,846
$
1,474
$
1,842
$
1,236
$ 14,788
$ (5,884) $ (1,500) $
(898)
65
137
88
9
(138)
86
–
41
(13)
(793) $
(150)
–
–
58
–
(1,391) $
(101)
38
–
29
–
$ (6,483) $ (1,524) $
(885) $
(1,425) $
–
–
–
–
–
–
–
$ (9,568)
(1,287)
189
137
216
(4)
$ (10,317)
$
1,907
$
322
$
589
$
417
$
1,236
$
4,471
Internally
generated
software
Other
software
For the year ended October 31, 2020
Core
deposit
intangibles
Customer
list and
relationships
In process
software
$
$
$
$
$
$
$
6,941
54
–
936
(149)
(116)
20
(10)
1,684
47
6
193
(13)
(4)
7
(19)
$
1,567
–
–
–
–
–
19
–
$
1,773
143
10
–
–
–
13
(23)
1,240
1,157
–
(1,129)
(4)
(10)
8
(21)
7,676
$
1,901
$
1,586
$
1,916
$
1,241
(5,256) $ (1,357) $
(855)
147
88
(14)
6
(144)
12
–
(6)
(5)
(5,884) $ (1,500) $
1,792
$
401
$
(627) $
(160)
–
–
(6)
–
(793) $
793
$
(1,291) $
(114)
–
–
(9)
23
(1,391) $
–
–
–
–
–
–
–
525
$
1,241
Total
13,205
1,401
16
–
(166)
(130)
67
(73)
14,320
(8,531)
(1,273)
159
88
(35)
24
(9,568)
4,752
$
$
$
$
$
Note 11
Joint ventures and associated companies
The following table summarizes the carrying value of our interests in joint ventures and associated companies accounted for
under the equity method as well as our share of the income of those entities.
Joint ventures
Associated companies
As at and for the year ended
(Millions of Canadian dollars)
Carrying amount
Share of:
Net income
October 31
2021
223
$
$
107
$
$
October 31
October 31
2020
2021
193 $ 431
October 31
2020
459
$
87 $
23
$
(10)
We do not have any joint ventures or associated companies that are individually material to our financial results.
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, 2021,
restricted net assets of these subsidiaries, joint ventures and associates were $39 billion (October 31, 2020 – $38 billion).
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
195
Note 12 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 13 Deposits
As at
$
October 31
2021
5,056
2,195
14,541
6,996
2,011
2,640
October 31
2020
$ 4,600
2,362
18,119
4,104
2,579
143
615
87
1,032
62
654
11,441
1,619
3,395
4,891
4,648
801
97
949
93
652
9,816
2,371
2,077
5,487
4,671
$ 61,883
$ 58,921
October 31, 2021
October 31, 2020
As at
(Millions of Canadian dollars)
Personal
Business and government
Bank
Demand (1) Notice (2)
$ 207,493 $ 64,613 $
Term (3)
90,382 $
356,020
12,549
20,800
449
319,533
28,992
Total Demand (1) Notice (2)
Term (3)
362,488 $ 182,745 $ 61,761 $ 98,546 $
696,353
41,990
315,472
12,502
292,254
31,064
16,585
956
Total
343,052
624,311
44,522
Non-interest-bearing (4)
Canada
United States
Europe (5)
Other International
Interest-bearing (4)
Canada
United States
Europe (5)
Other International
$ 576,062 $ 85,862 $ 438,907 $ 1,100,831 $ 510,719 $ 79,302 $ 421,864 $ 1,011,885
$ 151,475 $
54,021
632
8,002
8,051 $
–
–
–
713 $
–
–
–
315,464
6,978
34,278
5,212
19,857
57,260
693
1
312,987
77,597
36,788
10,822
160,239 $ 123,402 $
54,021
632
8,002
648,308
141,835
71,759
16,035
43,831
654
7,372
287,046
7,190
33,810
7,414
7,390 $
–
–
–
368 $
–
–
–
19,036
52,046
830
–
310,492
57,037
37,250
16,717
131,160
43,831
654
7,372
616,574
116,273
71,890
24,131
$ 576,062 $ 85,862 $ 438,907 $ 1,100,831 $ 510,719 $ 79,302 $ 421,864 $ 1,011,885
Demand deposits are deposits for which we do not have the right to require notice of withdrawal, which include both savings and chequing accounts.
(1)
(2) Notice deposits are deposits for which we can legally require notice of withdrawal. These deposits are primarily savings accounts.
(3)
(4)
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, 2021, deposits denominated
in U.S. dollars, British pounds, Euro and other foreign currencies were $399 billion, $35 billion, $43 billion and $27 billion, respectively (October 31, 2020 – $347 billion,
$32 billion, $47 billion and $33 billion, respectively).
Europe includes the United Kingdom, Luxembourg, the Channel Islands, France and Italy.
(5)
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
2021
October 31
2020 (1)
$ 133,776
64,062
83,871
45,532
29,204
24,573
25,329
32,560
$ 438,907
$ 123,290
65,782
80,737
34,400
42,907
21,136
22,885
30,727
$ 421,864
Aggregate amount of term deposits in denominations of one hundred thousand dollars or more
$ 416,000
$ 388,000
(1)
Amounts previously presented were reclassified to reflect the contractual maturities of certain term deposits.
196
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Average deposit balances and average rates of interest
(Millions of Canadian dollars, except for percentage amounts)
Canada
United States
Europe
Other International
Note 14 Insurance
For the year ended
October 31, 2021
October 31, 2020
$
Average
balances
772,875
180,230
77,217
28,731
Average
rates
0.61%
0.13
0.55
0.33
Average
balances
$ 725,021
144,011
73,317
28,283
Average
rates
1.02%
0.46
0.76
0.68
$ 1,059,053
0.51%
$ 970,632
0.90%
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 Canadian insurance business 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 controls over 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
2021
5,090 $
(250)
4,840 $
3,834 $
(287)
3,547 $
$
$
$
$
October 31
2020
4,515
(249)
4,266
3,700
(316)
3,384
(1)
Includes the change in fair value of investments backing our policyholder liabilities.
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, 2021 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
197
Note 14 Insurance (continued)
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
2021
October 31
2020
0.12%
1.78
3.76
0.50
0.11%
1.81
3.82
0.50
0.79
2.90
0.66
3.05
Average annual death rate for the largest portfolio of insured policies.
Average net termination rate for the individual and group disability insurance portfolio.
(1)
(2)
(3) Ultimate reinvestment rate of the insurance operations.
(4) Ultimate policy termination rate (lapse rate) for the largest permanent life insurance portfolio that relies on a 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, 2021
October 31, 2020
Gross
Ceded
Net
Gross
Ceded
Net
As at
$ 12,775 $
42
$ 12,817 $
$
$
6 $
41
47 $
$ 12,864 $
861 $ 11,914 $ 12,089 $
42
861 $ 11,956 $ 12,123 $
34
–
– $
3
6 $
7 $
38
44 $
864 $ 12,000 $ 12,256 $
133 $
126
3 $
752 $ 11,337
34
–
752 $ 11,371
– $
31
31 $
7
95
102
783 $ 11,473
(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, 2021
October 31, 2020
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
Balances at end of period
Gross
$ 12,123 $
775
(89)
8
$ 12,817 $
(1)
Includes the change in fair value of investments backing our policyholder liabilities.
Ceded
Gross
Net
752 $ 11,371 $ 11,377 $
667
108
(90)
1
8
–
861 $ 11,956 $ 12,123 $
735
15
(4)
Ceded
Net
601 $ 10,776
594
141
5
10
(4)
–
752 $ 11,371
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 $90 million net decrease to insurance liabilities comprised of: (i) a decrease of $94 million for revised actuarial
reserves on interest rate risk; (ii) a decrease of $5 million due to reinsurance contract renegotiations; (iii) an increase of
$34 million arising from insurance risk related assumption updates largely due to mortality, morbidity, and expense assumptions;
and (iv) a decrease of $25 million due to changes to valuation models and related data.
198
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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
October 31
2021
(14) $
17
8
(10)
(37)
(287)
(67)
(213)
(253)
October 31
2020
5
(11)
8
(22)
(37)
(278)
(70)
(219)
(252)
Change in
variable
1% $
1
10
10
5
2
2
5
10
(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 15 Segregated funds
We offer certain individual variable insurance contracts that allow policyholders to invest in segregated funds. The investment
returns on these funds are passed directly to the policyholders. Amounts invested are at the policyholders’ risk, except where the
policyholders have selected options providing maturity and death benefit guarantees. A liability for the guarantees is recorded in
Insurance claims and policy benefit liabilities.
Segregated funds net assets are recorded at fair value. All of our segregated funds net assets are categorized as Level 1 in
the fair value hierarchy. The fair value of the segregated funds liabilities is equal to the fair value of the segregated funds net
assets. Segregated funds net assets and segregated funds liabilities are presented on separate lines on the Consolidated
Balance Sheets. The following tables present the composition of net assets and the changes in net assets for the year.
Segregated funds net assets
(Millions of Canadian dollars)
Cash
Investment in mutual funds
Other assets (liabilities), net
Changes in net assets
(Millions of Canadian dollars)
Net assets at beginning of period
Additions (deductions):
Deposits from policyholders
Net realized and unrealized gains (losses)
Interest and dividends
Payment to policyholders
Management and administrative fees
Net assets at end of period
$
$
$
As at
October 31
2021
40 $
2,625
1
2,666 $
October 31
2020
35
1,886
1
1,922
For the year ended
October 31
2021
1,922 $
October 31
2020
1,663
975
381
51
(604)
(59)
724
12
49
(479)
(47)
$
2,666 $
1,922
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
199
Note 16 Employee benefits – Pension and other post-employment benefits
Plan characteristics
We sponsor a number of programs that provide pension and post-employment benefits to eligible employees. The majority of
beneficiaries of the pension plans are located in Canada and other beneficiaries of the pension plans are primarily located in the
U.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, 2021, and the next valuation will be completed on January 1, 2022.
For the year ended October 31, 2021, total contributions to our pension plans (defined benefit and defined contribution plans)
and other post-employment benefit plans were $456 million and $75 million (October 31, 2020 – $1,024 million and $63 million),
respectively. For 2022, total contributions to our pension plans and other post-employment benefit plans are expected to be
$520 million and $84 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, 2021
October 31, 2020
Defined benefit
pension plans
Other post-
employment
benefit plans
Defined benefit
pension plans
Other post-
employment
benefit plans
$
$
$
$
$
$
$
$
$
16,698 $
14,403
– $
1,703
15,044 $
15,408
–
1,863
2,295 $
(1,703) $
(364) $
(1,863)
1,005 $
912
93 $
– $
77
(77) $
980 $
943
37 $
–
90
(90)
17,703 $
15,315
– $
1,780
16,024 $
16,351
–
1,953
2,388 $
(1,780) $
(327) $
(1,953)
(6)
–
(1)
–
2,382 $
(1,780) $
(328) $
(1,953)
2,640 $
(258)
– $
(1,780)
2,382 $
(1,780) $
143 $
(471)
(328) $
–
(1,953)
(1,953)
200
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
The following table presents an analysis of the movement in the financial position related to all of our material pension and other
post-employment benefit plans worldwide, including executive retirement arrangements.
(Millions of Canadian dollars)
As at or for the year ended
October 31, 2021
October 31, 2020
Defined benefit
pension plans (1)
Other post-
employment
benefit plans
Defined benefit
pension plans (1)
Other post-
employment
benefit plans
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
Business combinations/Disposals
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
Business combinations/Disposals
Benefit obligation at end of period
Unfunded obligation
Wholly or partly funded obligation
Total benefit obligation
$
$
$
$
$
16,024 $
432
– $
–
14,785 $
447
1,614
(21)
221
46
(594)
(2)
(4)
(13)
17,703 $
16,351 $
359
–
2
439
–
(1,253)
(5)
(24)
46
(594)
(2)
(4)
15,315 $
26 $
15,289
15,315 $
–
–
75
19
(94)
–
–
– $
1,953 $
46
(1)
–
57
(6)
(184)
(2)
(7)
19
(94)
–
(1)
1,780 $
1,633 $
147
1,780 $
793
17
798
48
(623)
(223)
(18)
16,024 $
15,517 $
367
–
(5)
462
–
791
2
15
48
(623)
(223)
–
16,351 $
30 $
16,321
16,351 $
1
–
–
–
63
19
(83)
–
–
–
1,820
46
(12)
–
59
(5)
68
38
3
19
(83)
–
–
1,953
1,792
161
1,953
(1)
For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2021 were $413 million and $155 million, respectively
(October 31, 2020 – $15,054 million and $14,583 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.
For the year ended
Pension plans
Other post-employment
benefit plans
(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
$
October 31
2021
359
–
2
7
–
13
$
$
October 31
2020
367
–
(5)
15
–
18
October 31
2021
46
(1)
–
57
(12)
–
$
October 31
2020
46
(12)
–
59
13
–
$
$
381
235
616
$
$
$
395
226
621
$
90
–
90
$
$
106
–
106
Service costs for the year ended October 31, 2021 totalled $356 million (October 31, 2020 – $363 million) for pension plans in
Canada and $3 million (October 31, 2020 – $4 million) for International plans. Net interest expense (income) for the year ended
October 31, 2021 totalled $7 million (October 31, 2020 – $14 million) for pension plans in Canada and $nil (October 31, 2020 –
$1 million) for International plans.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
201
Note 16 Employee benefits – Pension and other post-employment benefits (continued)
Pension and other post-employment benefit remeasurements
The following table presents the composition of our remeasurements recorded in OCI related to our material pension and other
post-employment benefit plans worldwide.
(Millions of Canadian dollars)
Actuarial (gains) losses:
Changes in demographic assumptions
Changes in financial assumptions
Experience adjustments
Return on plan assets (excluding interest based on discount rate)
Change in asset ceiling (excluding interest income)
For the year ended
Defined benefit pension
plans
Other post-employment
benefit plans
October 31
2021
October 31
2020
October 31
2021
October 31
2020
$
$
–
(1,253)
(5)
(1,614)
5
$
–
791
2
(793)
–
(6) $
(177)
3
–
–
$ (2,867) $
–
$ (180) $
(14)
62
40
–
–
88
Remeasurements recorded in OCI for the year ended October 31, 2021 were gains of $2,819 million (October 31, 2020 – gains of $7
million) for pension plans in Canada and gains of $48 million (October 31, 2020 – losses of $7 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 equity, real estate leases and private debt and equity. 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, 2021, the management of defined benefit pension investments continued to focus on an
increased allocation to risk reducing investments and strategies, improving diversification, while striving to maintain expected
investment return. Over time, an increasing allocation to debt securities and debt securities sold under repurchase agreements 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), (2)
(Millions of Canadian dollars, except percentages)
Equity securities
Domestic
Foreign
Debt securities
Domestic government bonds (4)
Foreign government bonds
Corporate and other bonds
Alternative investments and other
Fair value
$
1,879
4,202
3,766
71
3,844
3,941
As at
October 31, 2021
Percentage
of total
plan assets
Quoted
in active
market (3) Fair value
October 31, 2020
Percentage
of total
plan assets
Quoted
in active
market (3)
11%
24
100% $
100
21
–
22
22
–
–
–
12
1,493
3,859
3,259
81
3,701
3,631
9%
24
20
1
23
23
100%
100
–
–
–
13
$ 17,703
100%
37% $ 16,024
100%
36%
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.
(1)
(2) Represents the total plan assets held in our Canadian and International pension plans.
(3)
If our assessment of whether or not an asset was quoted in an active market was based on direct investments, 41% of our total plan assets would be classified as quoted
in an active market (October 31, 2020 – 38%).
(4) Amounts are net of securities sold under repurchase agreements.
202
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
As at October 31, 2021, the plan assets include 1 million (October 31, 2020 – 1 million) of our common shares with a fair value
of $128 million (October 31, 2020 – $96 million) and $29 million (October 31, 2020 – $32 million) of our debt securities. For the year
ended October 31, 2021, dividends received on our common shares held in the plan assets were $4 million (October 31, 2020 –
$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 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
Benefits expected to be paid 2027-2031
Weighted average duration of defined benefit payments
As at October 31, 2021
Canada
International
Total
$
67,580
564
659
679
700
720
738
3,914
15.0 years
$
5,321
32
34
34
35
35
35
182
20.8 years
$
72,901
596
693
713
735
755
773
4,096
15.3 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
2021
October 31
2020
October 31
2021
October 31
2020
3.3%
3.0%
n.a.
n.a.
2.7%
3.3%
n.a.
n.a.
3.6%
n.a.
3.4%
3.1%
3.0%
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
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
203
Note 16 Employee benefits – Pension and other post-employment benefits (continued)
Mortality assumptions
Mortality assumptions are significant in measuring our obligations under the defined benefit pension plans. These assumptions
have been set based on country specific statistics. Future longevity improvements have been considered and included where
appropriate. The following table summarizes the mortality assumptions used for material plans.
October 31, 2021
October 31, 2020
As at
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
(In years)
Country
Canada
United Kingdom
23.8
23.6
24.2
25.4
24.8
25.3
25.1
27.2
23.8
23.5
24.1
25.3
24.7
25.2
25.1
27.1
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 2021.
(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 17 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
204
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Increase (decrease)
in obligation
Defined benefit
pension plans
Other post-
employment
benefit plans
$
(2,113) $
2,625
(223)
282
56
(62)
444
n.a.
n.a.
–
–
31
64
(54)
As at
October 31
2021
1,867 $
2,178
16,712
7,916
3,518
74
1,622
2,038
366
5,077
1,774
6,461
9,340
613
601
3,403
6,741
70,301 $
$
$
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
Note 18 Subordinated debentures
The debentures are unsecured obligations and are subordinated in right of payment to the claims of depositors and certain other
creditors. The amounts presented below are net of our own holdings in these debentures, and include the impact of fair value
hedges used for managing interest rate risk.
(Millions of Canadian dollars, except percentage and foreign currency)
Maturity
July 15, 2022
June 8, 2023
January 20, 2026 (1), (2)
January 27, 2026 (2)
September 29, 2026 (2), (3)
November 1, 2027
July 25, 2029 (2)
December 23, 2029 (2)
June 30, 2030 (2)
November 3, 2031 (2)
January 28, 2033 (2)
October 1, 2083
June 29, 2085
Deferred financing costs
Earliest par value
redemption date
Interest
rate
January 20, 2021
September 29, 2021
November 1, 2022
July 25, 2024
December 23, 2024
June 30, 2025
November 3, 2026
January 28, 2028
Any interest payment date
Any interest payment date
5.38%
9.30%
3.31%
4.65%
3.45%
4.75%
2.74% (4)
2.88% (5)
2.09% (6)
2.14% (7)
1.67% (8)
(9)
(10)
Denominated in
foreign currency
(millions)
US$150 $
US$1,500
TT$300
US$174
$
$
As at
October 31
2021
188 $
110
–
1,916
–
55
1,499
1,489
1,250
1,717
943
224
215
9,606 $
(13)
9,593 $
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
The terms and conditions of the debentures are as follows:
(1) On January 20, 2021, we redeemed all $1,500 million of our outstanding non-viability contingency capital (NVCC) 3.31% subordinated debentures due on January 20, 2026
(2)
for 100% of their principal amount plus interest accrued to, but excluding, the redemption date.
The notes include 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.
(3) On September 29, 2021, we redeemed all $1,000 million of our issued and outstanding NVCC 3.45% subordinated debentures due on September 29, 2026 for 100% of their
(4)
(5)
(6)
(7)
(8)
(9)
(10)
principal amount plus interest accrued to, but excluding, the redemption date.
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 stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.61% above the 3-month CDOR.
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 0.55% above the 3-month CDOR.
Interest at a rate of 0.40% above the 30-day Bankers’ Acceptance rate.
Interest at a rate of 0.25% 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 19 Equity
As at
October 31
2021
188
2,026
4,293
3,099
9,606
$
$
Share capital
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value, issuable in
series; the aggregate consideration for which all the First Preferred Shares and all the Second Preferred Shares that may be
issued may not exceed $20 billion and $5 billion, respectively.
Common – An unlimited number of shares without nominal or par value may be issued.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
205
Note 19 Equity (continued)
Outstanding share capital
The following table details our common and preferred shares and other equity instruments outstanding.
(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 (3)
Purchases
Sales
Balance at end of period (3)
Common shares outstanding
Preferred shares and other equity
instruments issued
First preferred (4)
Non-cumulative, fixed rate
Series BH
Series BI
Series BJ
Non-cumulative, 5-Year Rate Reset
Series AZ
Series BB
Series BD
Series BF
Series BK (5)
Series BM (6)
Series BO
Non-cumulative, fixed rate/floating rate
Series C-2
Other equity instruments
Limited recourse capital notes (LRCNs) (7)
Series 1 (8)
Series 2 (8)
Series 3 (8)
Treasury – preferred shares and other
equity instruments
Balance at beginning of period (3)
Purchases
Sales
Balance at end of period (3)
Preferred shares and other equity
instruments outstanding
October 31, 2021
October 31, 2020
As at and for the year ended
Number of
shares
(thousands)
Dividends
declared
per share
Number of
shares
(thousands)
Dividends
declared
per share
Amount
Amount
1,423,861 $ 17,628
1,430,678 $ 17,645
1,326
–
100
–
1,043
(7,860)
80
(97)
1,425,187 $ 17,728
$
4.32
1,423,861 $ 17,628
$ 4.29
(1,388) $
(37,603)
38,329
(129)
(4,060)
4,116
(662) $
(73)
(582) $
(58,775)
57,969
(58)
(4,739)
4,668
(1,388) $
(129)
1,424,525 $ 17,655
1,422,473 $ 17,499
6,000 $
6,000
6,000
150 $
150
150
20,000
20,000
24,000
12,000
–
–
14,000
500
500
600
300
–
–
350
1.23
1.23
1.31
0.93
0.91
0.80
0.75
0.69
1.03
1.20
6,000 $
6,000
6,000
150 $
150
150
20,000
20,000
24,000
12,000
29,000
30,000
14,000
500
500
600
300
725
750
350
1.23
1.23
1.31
0.93
0.91
0.85
0.90
1.38
1.38
1.20
15
23 US$ 67.50
15
23 US$ 67.50
1,750
1,250
1,000
1,750
1,250
1,000
112,015 $ 6,723
4.50%
4.00%
3.65%
1,750
–
–
1,750
–
–
168,765 $ 5,948
4.50%
–
–
(2) $
(6,306)
6,144
(164) $
(3)
(683)
647
(39)
34 $
(5,319)
5,283
(2) $
1
(114)
110
(3)
111,851 $ 6,684
168,763 $ 5,945
Includes fair value adjustments to stock options of $11 million (October 31, 2020 – $9 million).
(1)
(2) 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.
(3)
(4)
Positive amounts represent a short position and negative amounts represent a long position.
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).
(5) On May 24, 2021, we redeemed all 29 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BK at a price of $25 per share.
(6) On August 24, 2021, we redeemed all 30 million of our issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BM at a price of $25 per
(7)
(8)
share.
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.
In connection with the issuance of LRCN Series 1, we issued $1,750 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BQ (Series BQ); in
connection with the issuance of LRCN Series 2, we issued $1,250 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BR (Series BR); in connection
with the issuance of LRCN Series 3, we issued $1,000 million of Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BS (Series BS).The Series BQ, BR and BS
preferred shares were issued at a price of $1,000 per share and were issued to a consolidated trust to be held as trust assets in connection with each respective LRCN
Series.
206
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Significant terms and conditions of preferred shares and other equity instruments
As at October 31, 2021
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 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%
4.80%
$
.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
2.21%
2.26%
2.74%
2.62%
2.38%
May 24, 2019
.231250
August 24, 2019
.228125
May 24, 2020
.200000
.187500 November 24, 2020
.300000
January 30, 2014
June 3, 2014
January 30, 2015
March 13, 2015
February 24, 2024 November 2, 2018
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)
Series 2 (9)
Series 3 (10)
4.50% 4.137%
4.00% 3.617%
3.65% 2.665%
n.a.
n.a.
n.a.
October 24, 2025
July 28, 2020
January 24, 2026 November 2, 2020
June 8, 2021
October 24, 2026
$1,000.00
1,000.00
1,000.00
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Non-cumulative preferential dividends of each Series are payable quarterly, as and when declared by the Board of Directors, on or about the 24th day (7th day for
Series C-2) of February, May, August and November.
Subject to the consent of OSFI and the requirements of the Bank Act (Canada), we may, on or after the dates specified above, redeem First Preferred Shares. In the case
of Series AZ, BB, BD, BF, 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 May and November. 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).
LRCN Series 2 bear interest at a fixed rate of 4.0% 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. The interest is paid semi-annually on or about the 24th day of February and August. LRCN
Series 2 is redeemable during the period from January 24 to and including February 24, commencing in 2026 and every fifth year thereafter to the extent we redeem
Series BR pursuant to their terms and subject to the consent of OSFI and requirements of the Bank Act (Canada).
(10) LRCN Series 3 bear interest at a fixed rate of 3.65% per annum until November 24, 2026, and thereafter at a rate per annum, reset every fifth year, equal to the 5-Year
Government of Canada Yield plus 2.665% until maturity on November 24, 2081. The interest is paid semi-annually on or about the 24th day of May and November. LRCN
Series 3 is redeemable during the period from October 24 to and including November 24, commencing in 2026 and every fifth year thereafter to the extent we redeem
Series BS pursuant to their terms and subject to the consent of OSFI and requirements of the Bank Act (Canada).
n.a. not applicable
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
207
Note 19 Equity (continued)
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 2021
and 2020, the requirements of our DRIP were satisfied through open market share purchases.
Shares available for future issuances
As at October 31, 2021, 42.8 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 20 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, 2021, in respect of the stock option plans was $6 million
(October 31, 2020 – $7 million). The compensation expense related to non-vested options was $3 million at October 31, 2021
(October 31, 2020 – $2 million), to be recognized over the weighted average period of 2.0 years (October 31, 2020 – 1.9 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
October 31, 2021
October 31, 2020
For the year ended
(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
Number of
options
(thousands)
Weighted
average
6,973 $
1,251
(1,150)
(19)
exercise price (1)
86.02
106.00
65.56
93.23
Number of
options
(thousands)
6,950
1,089
(1,044)
(22)
Weighted
average
exercise price (1)
79.88
$
103.64
65.39
50.28
7,055 $
3,273 $
92.27
80.38
6,973
3,314
$
$
86.02
71.77
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2021 and October 31, 2020.
For foreign currency-denominated options exercised during the year, the weighted average exercise prices are translated using exchange rates as at the settlement date.
(2) Cash received for options exercised during the year was $75 million (October 31, 2020 – $68 million) and the weighted average share price at the date of exercise was
$115.11 (October 31, 2020 – $100.20).
(3) New shares were issued for all stock options exercised in 2021 and 2020.
Options outstanding as at October 31, 2021 by range of exercise price
Options outstanding
Options exercisable
(Canadian dollars per share except
share amounts and years)
$36.68 – $71.11
$73.14 – $78.59
$90.23 – $96.55
$102.33 – $104.70
$106.00
Number
outstanding
(thousands)
Weighted
average
exercise price (1)
59.67
75.70
93.23
103.73
106.00
739 $
968
2,285
1,818
1,245
Weighted
average
remaining
contractual
life (years)
1.91
3.80
5.66
7.13
9.12
Number
exercisable
(thousands)
Weighted
average
exercise price (1)
59.67
75.70
90.25
102.35
–
739 $
968
1,202
364
–
(1)
The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2021.
7,055 $
92.27
6.00
3,273 $
80.38
208
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
The weighted average fair value of options granted during the year ended October 31, 2021 was estimated at $4.65 (October 31,
2020 – $6.08). 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
2021
$ 104.86
0.48%
4.59%
14%
6 Years
October 31
2020
$104.80
1.64%
3.90%
13%
6 Years
Employee savings and share ownership plans
We offer many employees an opportunity to own our common shares through savings and share ownership plans. Under these
plans, the employees can generally contribute between 1% and 10% of their annual salary or benefit base for commission-based
employees. For each contribution between 1% and 6%, we will match 50% of the employee contributions in our common shares.
For the RBC Dominion Securities Savings Plan, our maximum annual contribution is $4,500 per employee. For the RBC U.K. Share
Incentive Plan, our maximum annual contribution is £1,500 per employee. For the year ended October 31, 2021, we contributed
$123 million (October 31, 2020 – $116 million), under the terms of these plans, towards the purchase of our common shares. As at
October 31, 2021, an aggregate of 36 million common shares were held under these plans (October 31, 2020 – 36 million common
shares).
Deferred share and other plans
We offer deferred share unit plans to executives, certain key employees and non-employee directors of 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, 2021
October 31, 2020
Units
granted
(thousands)
462
4,066
2,486
87
767
Weighted
average
fair value
per unit
$ 113.34
128.95
106.10
104.21
109.24
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
7,868
$ 118.62
8,559
$
96.74
Our liabilities for the awards granted under the deferred share and other plans are measured at fair value, determined based on
the quoted market price of our common shares and specified fund choices as applicable. Annually, our obligation is increased by
additional units earned by plan participants, and is reduced by forfeitures, cancellations, and the settlement of vested units. In
addition, our obligation is impacted by fluctuations in the market price of our common shares and specified fund units. For
performance deferred share award plans, the estimated outcome of meeting the performance conditions also impacts our
obligation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
209
Note 20 Share-based compensation (continued)
The following tables present the units that have been earned by the participants, our obligations for these earned units
under the deferred share and other plans, and the related compensation expenses (recoveries) recognized for the year.
Obligations under deferred share and other plans
October 31, 2021
October 31, 2020
As at
(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
Units
(thousands)
Carrying
amount
644
1,280
801
331
216
3,272
Units
(thousands)
5,221
9,560
5,860
2,685
1,828
Carrying
amount
486
$
874
550
250
167
25,154
$ 2,327
5,001 $
9,925
6,216
2,574
1,724
25,440 $
(1)
Excludes obligations not determined based on the quoted market price of our common shares.
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 21
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
210
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
For the year ended
$
October 31
2021
205
518
506
627
142
$
October 31
2020
(48)
115
190
137
60
$ 1,998
$
454
For the year ended
October 31
2021
October 31
2020
$ 4,893
(92)
$ 3,673
(106)
(16)
4,785
(216)
(4)
74
(58)
(204)
4,581
(35)
–
(28)
1
591
–
485
97
796
(25)
3,542
(655)
6
98
(39)
(590)
2,952
43
3
(56)
5
(138)
7
(410)
27
(20)
20
17
(17)
(42)
1,885
$ 6,466
(93)
6
7
(12)
(631)
$ 2,321
The effective tax rate of 22.2% increased 170 bps, as the prior year reflected a higher proportion of income from lower tax rate
jurisdictions and tax exempt income relative to the decline in earnings experienced last year.
The following is an analysis of the differences between the income tax expense reflected in the Consolidated Statements of
Income and the amounts calculated at the Canadian statutory rate.
Reconciliation to statutory tax rate
(Millions of Canadian dollars, except for percentage amounts)
October 31, 2021
October 31, 2020
For the year ended
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
$ 5,405
26.2%
$ 3,799
26.4%
(361)
(379)
(4)
(80)
(1.8)
(1.8)
–
(0.4)
(513)
(364)
6
24
(3.6)
(2.5)
–
0.2
Income taxes in Consolidated Statements of Income / effective tax rate
$ 4,581
22.2%
$ 2,952
20.5%
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) expense
Financial instruments measured at fair value
through other comprehensive income
Premises and equipment and intangibles
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) expense
Financial instruments measured at fair value
through other comprehensive income
Premises and equipment and intangibles
Pension and post-employment related
Other
Comprising
Deferred tax assets
Deferred tax liabilities
As at and for the year ended October 31, 2021
Net asset
beginning of
period
Change
through
equity
Change
through
profit or loss
Exchange
rate
differences Other
Net asset
end of
period
$
$
$
$
1,362 $
1,269
9
204
(104)
– $
17
–
–
6
(68)
(784)
592
47
45
–
(796)
(12)
(372) $
396
2
40
205
(1)
(82)
45
(29)
(16) $
(68)
–
(2)
3
– $
–
–
–
–
974
1,614
11
242
110
5
30
(4)
3
–
–
–
(5)
(19)
(836)
(163)
4
2,527 $ (740) $
204 $
(49) $ (5) $ 1,937
2,579
(52)
2,527
$ 2,011
(74)
$ 1,937
As at and for the year ended October 31, 2020
Net asset
beginning of
period
Change
through
equity
Change
through
profit or loss
Exchange
rate
differences Other
Net asset
end of
period
$
$
$
$
$
716
1,246
10
202
(15)
(43)
(831)
631
29
$
–
(7)
–
–
5
(23)
–
20
4
$
646
19
(1)
2
(93)
(2)
60
(59)
18
$
$
–
11
–
–
(1)
–
(10)
–
(4)
–
–
–
–
–
–
(3)
–
–
1,362
1,269
9
204
(104)
(68)
(784)
592
47
1,945
$
(1) $
590
$
(4) $
(3) $
2,527
2,027
(82)
1,945
$
$
2,579
(52)
2,527
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
211
Note 21
Income taxes (continued)
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 $242 million were recognized at October 31, 2021 (October 31, 2020 – $204
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, 2021, unused tax losses and tax credits of $384 million and $207 million (October 31, 2020 – $389 million and
$305 million) available to be offset against potential tax adjustments or future taxable income were not recognized as deferred
tax assets. There are no unused tax losses that will expire within one year (October 31, 2020 – $nil), $2 million that will expire in
two to four years (October 31, 2020 – $10 million) and $382 million that will expire after four years (October 31, 2020 –
$379 million). There are no tax credits that will expire in one year (October 31, 2020 – $nil), $115 million that will expire in two to
four years (October 31, 2020 – $143 million) and $92 million that will expire after four years (October 31, 2020 – $162 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 $20 billion as at October 31, 2021
(October 31, 2020 – $22 billion).
Tax examinations and assessments
During the year, we received reassessments from the Canada Revenue Agency (CRA), in respect of the 2015 and 2016 taxation
years, which suggest that Royal Bank of Canada owes additional taxes of approximately $635 million as they denied the
deductibility of certain dividends. The reassessments received during the year 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 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 22 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
Average number of diluted common shares (in thousands)
Diluted earnings per share (in dollars)
$
$
$
$
$
For the year ended
October 31
2021
October 31
2020
16,050
(257)
(12)
15,781
1,424,343
11.08
15,781
–
$
$
$
$
11,437
(268)
(5)
11,164
1,423,915
7.84
11,164
13
15,781
$
11,177
1,424,343
1,737
655
–
1,423,915
1,054
755
3,046
1,426,735
11.06
$
1,428,770
7.82
$
(1)
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, 2021, no outstanding options
were 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.
212
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Note 23 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
2021
October 31
2020
$ 16,867
$ 17,141
38,405
2,537
447
248,522
99,797
7,195
142
326
40,212
2,664
286
239,077
77,953
7,040
1,302
1,030
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 acquired or financed 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 required to be provided by the third-party sellers 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 client.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
213
Note 23 Guarantees, commitments, pledged assets and contingencies (continued)
Other credit-related commitments
Securities lending indemnifications
In securities lending transactions, we act as an agent for the owner of a security, who agrees to lend the security to a borrower
for a fee, under the terms of a pre-arranged contract. The borrower must fully collateralize the security loaned at all times. As
part of this custodial business, an indemnification may be provided to securities lending customers to ensure that the fair value
of securities loaned will be returned in the event that the borrower fails to return the borrowed securities and the collateral held
is insufficient to cover the fair value of those securities. These indemnifications normally terminate without being drawn upon.
The term of these indemnifications varies, as the securities loaned are recallable on demand. Collateral held for our securities
lending transactions typically includes cash, securities that are issued or guaranteed by the Canadian government, U.S.
government or other OECD countries or high quality debt or equity instruments.
Performance guarantees
Performance guarantees represent irrevocable assurances that we will make payments to third-party beneficiaries in the event
that a client fails to perform under a specified non-financial contractual obligation. Such obligations typically include works and
service contracts, performance bonds, and warranties related to international trade. The term of these guarantees can range up
to 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, 2021, the total
balance of uncommitted amounts was $333 billion (October 31, 2020 – $317 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, 2021, we have unfunded
commitments of $1,396 million (October 31, 2020 – $882 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 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 our Canadian dollar large-value or time-critical payments 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 following table. For the year ended
October 31, 2021, we had on average $2 billion of assets pledged intraday to the Bank of Canada on a daily basis
(October 31, 2020 – $3 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, 2021 and October 31, 2020.
214
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Assets pledged against liabilities and collateral assets held or re-pledged
(Millions of Canadian dollars)
Sources of pledged assets and collateral
Bank assets
Loans
Securities
Other assets
Client assets (1)
Collateral received and available for sale or re-pledging
Less: not sold or re-pledged
Uses of pledged assets and collateral
Securities borrowing and lending
Obligations related to securities sold short
Obligations related to securities lent or sold under repurchase agreements
Securitization
Covered bonds
Derivative transactions
Foreign governments and central banks
Clearing systems, payment systems and depositories
Other
As at
October 31
2021
October 31
2020
$
79,282
66,277
25,981
$ 99,302
59,479
27,934
$ 171,540
$ 186,715
454,844
(17,436)
438,686
(37,879)
$ 437,408
$ 400,807
$ 608,948
$ 587,522
$ 154,699
46,151
263,005
39,687
46,699
31,941
7,314
3,809
15,643
$ 127,852
36,647
252,425
45,440
62,131
35,044
6,456
6,380
15,147
$ 608,948
$ 587,522
(1)
Primarily relates to Obligations related to securities lent or sold under repurchase agreements, Securities lent and Derivative transactions.
Note 24 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) 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 on January 6, 2021, the French Supreme Court issued a
judgment reversing the decision of the French Court of Appeal and sent the case back to the French Court of Appeal for
rehearing.
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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
215
Note 24 Legal and regulatory matters (continued)
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.
A settlement agreement has been reached with class counsel, contingent on court approval. This settlement upon final court
approval would resolve the claims of all Canadian merchants subject to limited rights to opt-out for Quebec merchants.
Foreign exchange matters
Various regulators are conducting inquiries regarding potential violations of antitrust law by a number of banks, including Royal
Bank of Canada, regarding foreign exchange trading.
Beginning in 2015, putative class actions were brought against Royal Bank of Canada and/or RBC Capital Markets, LLC in the
United States, Canada, the United Kingdom and Brazil. 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 U.S. District
Court. In May 2020, the U.S. 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
plaintiffs refiled their claim and in July 2021, the U.S. District Court granted a motion in favour of RBC Capital Markets to dismiss
the action, however, denied the motion as to Royal Bank of Canada.
One other U.S. action that is purportedly brought on behalf of different classes of plaintiffs also remains pending. The
Canadian class actions have been settled.
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 25 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.
216
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
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 the Chief Officers and Group Heads, who report directly to him. The Directors do
not plan, direct, or control the activities of the entity; they oversee the management of the business and provide stewardship.
Compensation of Key management personnel and Directors
(Millions of Canadian dollars)
Salaries and other short-term employee benefits (2)
Post-employment benefits (3)
Share-based payments
For the year ended
October 31
2021
19
3
35
$
October 31
2020 (1)
21
$
2
32
$
57
$
55
(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. 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 20 for further details.
Directors receive retainers but do not receive salaries and other short-term employee benefits.
(3) 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 (3)
Other non-option stock based awards (3)
RBC common and preferred shares
As at
October 31, 2021 (1)
October 31, 2020 (2)
No. of
units held
2,369,659
983,004
183,783
Value
$ 81
127
24
No. of
units held
1,912,482
869,756
206,652
$
Value
15
81
19
3,536,446
$ 232
2,988,890
$ 115
(1)
During the year ended October 31, 2021 certain directors, who were members of the Board of Directors as at October 31, 2020, retired. Total shareholdings held upon their
retirement was 21,723 units with a value of $3 million.
(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.
(3) 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, 2021, total loans to KMP, Directors and their close family members were $14 million (October 31, 2020 –
$6 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, 2021 and October 31, 2020. 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, 2021, loans to joint ventures and associates were $340 million (October 31, 2020 – $215 million) and deposits
from joint ventures and associates were $13 million (October 31, 2020 – $15 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, 2021 and October 31,
2020. $1 million of guarantees have been given to joint ventures and associates for the year ended October 31, 2021 (October 31,
2020 – $1 million).
Other transactions, arrangements or agreements involving joint ventures and associates
(Millions of Canadian dollars)
Commitments and other contingencies
Other fees received for services rendered
Other fees paid for services received
As at or for the year
ended
October 31
2021
$ 1,017
48
108
October 31
2020
589
43
117
$
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
217
Note 26 Results by business segment
Composition of business segments
For management purposes, based on the products and services offered, we are organized into five business segments:
Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services and Capital Markets.
Personal & Commercial Banking provides a broad suite of financial products and services to individuals and businesses for their
day-to-day banking, investing and financing needs through two businesses: Canadian Banking and Caribbean & U.S. Banking. In
Canada, we provide a broad suite of financial products and services through our large branch network, automated teller
machines, and mobile sales network. In the Caribbean and the U.S., we offer a broad range of financial products and services in
targeted markets. Non-interest income in Personal & Commercial Banking mainly comprises 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 lines 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, reinsurance advice and
solutions, and business insurance solutions to individual, business and group clients. In Canada, we offer our products and
services through a wide variety of channels, comprised of mobile advisors, advice centres, RBC insurance stores, and digital,
mobile and social platforms as well as through independent brokers and travel partners. 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 offers custody, fund and investment administration, shareholder services, private capital services,
performance measurement and compliance monitoring, distribution, transaction banking, and treasury and market services
(including cash and liquidity management, foreign exchange services and global securities finance). Non-interest income in
Investor & Treasury Services mainly comprises Investment management and custodial fees, and Foreign exchange revenue,
other than trading.
Capital Markets provides expertise in advisory & origination, sales & trading, and lending & financing to corporations,
institutional clients, asset managers, private equity firms and governments globally 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 equity
and debt origination and distribution, advisory services, and sales & trading. Outside North America, we have a targeted strategic
presence in the U.K. & Europe, Australia, Asia & other markets aligned to our global expertise. In the U.K. & Europe, we offer a
diversified set of capabilities in key industry sectors of focus. 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 financing, as well as corporate and investment banking. 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 certain treasury and liquidity
management activities, including amounts 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,
2021 was $518 million (October 31, 2020 – $513 million). Gains (losses) on economic hedges of our U.S. Wealth Management
(including City National) share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to these plans are also included in Corporate
Support as this presentation more closely aligns with how we view business performance and manage the underlying risks.
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
218
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
1,608
6,154
7,762
(273)
1,855
3,920
2,260
333
1,927
(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)
5,725
18,346
(187)
–
7,978
10,555
2,708
segments and that assists in the attribution of capital and the transfer pricing of funds to our business segments in a manner that
consistently measures and aligns the economic costs with the underlying benefits and risks of that specific business segment.
Activities and business conducted between our business segments are generally at market rates. All other enterprise level
activities that are not allocated to our five business segments are reported under Corporate Support.
Our assumptions and methodologies used in our management reporting framework are periodically reviewed by us to
ensure that they remain valid. The capital attribution methodologies involve a number of assumptions that are revised
periodically.
Personal &
Commercial
Banking
Wealth
Management Insurance
Investor &
Treasury
Services
Capital
Markets (1)
Corporate
Support (1)
Total
Canada
United
States
Other
International
For the year ended October 31, 2021
$ 12,621 $
2,689 $
– $
460 $
10,607
5,600
1,704
4,553 $
5,634
13,296
(47)
5,600
(1)
2,164
(8)
10,187
(509)
(321) $
421
100
(1)
20,002 $ 13,947 $ 4,447 $
29,691
15,454
8,083
49,693
(753)
29,401
(203)
12,530
(277)
–
9,929
3,891
596
–
1,589
3,414
788
1,114
225
583
143
–
5,427
5,269
1,082
–
405
3,891
25,924
2,036
12,897
–
9,107
(304)
(365)
20,631
4,581
14,671
3,599
3,700
649
Net income
$
7,847 $
2,626 $
889 $
440 $
4,187 $
61 $
16,050 $ 11,072 $ 3,051 $
Non-interest expense
includes:
Depreciation and
amortization
Impairment of other
intangibles
$
923 $
883 $
59 $
197 $
497 $
4 $
2,563 $ 1,594 $
728 $
241
5
3
1
2
18
–
29
16
11
2
Total assets
$ 549,702 $
148,990 $ 22,724 $240,055 $ 692,278 $
52,574 $1,706,323 $964,747 $454,949 $ 286,627
Total assets include:
Additions to premises and
equipment and
intangibles
$
503 $
752 $
48 $
80 $
355 $
459 $
2,197 $ 1,238 $
739 $
220
Total liabilities
$ 549,619 $
149,096 $ 22,966 $239,960 $ 691,767 $
(45,847) $1,607,561 $866,287 $454,903 $ 286,371
(Millions of Canadian dollars)
Personal &
Commercial
Banking
Wealth
Management (3)
Insurance
Investor &
Treasury
Services
Capital
Markets (1)
Corporate
Support (1), (3)
Total
Canada
United
States
Other
International
For the year ended October 31, 2020
Net interest income (2)
Non-interest income
$
12,568 $
5,163
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)
17,731
2,891
–
7,946
6,894
1,807
2,860 $
9,270
12,130
214
– $
329 $
5,361
5,361
–
1,982
2,311
6
5,135 $
4,749
9,884
1,239
(57) $
(179)
(236)
1
20,835 $ 14,185 $
26,346
13,510
4,959 $
6,775
47,181
4,351
27,695
2,881
11,734
949
–
9,123
3,683
592
–
1,589
2,793
639
1,086
255
716
180
–
5,362
3,283
507
–
146
3,683
24,758
1,993
12,513
(383)
(436)
14,389
2,952
10,308
2,516
–
8,380
2,405
209
Net income
$
5,087 $
2,154 $
831 $
536 $
2,776 $
53 $
11,437 $
7,792 $
2,196 $
1,691
6,061
7,752
521
1,690
3,865
1,676
227
1,449
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
(1)
(2)
(3)
Taxable equivalent basis.
Interest revenue is reported net of interest expense as we rely primarily on net interest income as a performance measure.
Effective Q4 2021, gains (losses) on economic hedges of our U.S. share-based compensation plans, which are reflected in revenue, and related variability in share-based
compensation expense driven by changes in the fair value of liabilities relating to our U.S. share-based compensation plans have been reclassified from our Wealth
Management segment to Corporate Support. Comparative amounts have been reclassified to conform with this presentation.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
219
Note 27 Nature and extent of risks arising from financial instruments
We are exposed to credit, market and liquidity and funding risks as a result of holding financial instruments. Our risk
measurement and objectives, policies and methodologies for managing these risks are disclosed in the shaded text along with
those tables specifically marked with an asterisk (*) in the Credit risk section of Management’s Discussion and Analysis. These
shaded text and tables are an integral part of these Consolidated Financial Statements.
Concentrations of credit risk exist if a number of our counterparties are engaged in similar activities, are located in the same
geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be
similarly affected by changes in economic, political or other conditions.
Concentrations of credit risk indicate the relative sensitivity of our performance to developments affecting a particular
industry or geographic location. The amounts of credit exposure associated with certain of our on- and off-balance sheet
financial instruments are summarized in the following 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, 2021
$ 701,779 67% $ 213,389 20% $
85,271
8% $
49,001 5% $ 1,049,440
19,927 21%
23,910 25%
45,717 47%
7,111 7%
96,665
$ 721,706 63% $ 237,299 21% $ 130,988 11% $
56,112 5% $ 1,146,105
Committed and uncommitted (5)
Other
$ 370,479 59% $ 196,692 32% $
82,010 66%
14,014 11%
46,187
26,920 22%
8% $
9,335 1% $
1,383 1%
622,693
124,327
$ 452,489 61% $ 210,706 28% $
73,107 10% $
10,718 1% $
747,020
(Millions of Canadian dollars,
except percentage amounts)
On-balance sheet assets other
than derivatives (1), (6)
Derivatives before master
netting agreements (2), (3)
Off-balance sheet credit
instruments (4)
Canada
%
United
States
%
Europe
%
Other
International %
Total
As at October 31, 2020
$ 650,311 65% $ 222,087 22% $
78,836
8% $
47,026 5% $
998,260
22,761 20%
28,074 24%
56,229 49%
8,185 7%
115,249
$ 673,072 61% $ 250,161 22% $ 135,065 12% $
55,211 5% $ 1,113,509
Committed and uncommitted (5), (6) $ 380,352 63% $ 171,922 29% $
Other
12,697 12%
62,329 60%
34,785
27,232 26%
6% $
11,689 2% $
2,208 2%
598,748
104,466
$ 442,681 63% $ 184,619 26% $
62,017
9% $
13,897 2% $
703,214
(1)
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, 2020 – 56%), the Prairies at 16% (October 31, 2020 – 16%), British Columbia and the territories at 14% (October 31, 2020 – 14%)
and Quebec at 10% (October 31, 2020 – 10%). No industry accounts for more than 24% (October 31, 2020 – 25%) 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.
(2)
(3)
(4) Balances presented are contractual amounts representing our maximum exposure to credit risk.
(5) Represents our maximum exposure to credit risk. Retail and wholesale commitments respectively comprise 45% and 55% of our total commitments (October 31, 2020 –
46% and 54%). The largest concentrations in the wholesale portfolio relate to Financial services at 13% (October 31, 2020 – 13%), Utilities at 10% (October 31, 2020 – 12%),
Real estate & related at 10% (October 31, 2020 – 10%), Other services at 8% (October 31, 2020 – 8%), and Oil & gas at 6% (October 31, 2020 – 7%). The classification of our
sectors aligns with our view of credit risk by industry. Certain sector percentage amounts have been revised from those previously presented.
Amounts and percentage amounts by geography have been revised from those previously presented.
(6)
220
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Note 28 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.
During 2021 and 2020, 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
2021
October 31
2020
$
75,583
82,246
92,026
$ 68,082
74,005
84,928
$ 444,142
34,806
73,593
$ 448,821
27,374
70,047
$ 552,541
$ 546,242
13.7%
14.9%
16.7%
4.9%
1,662
$
12.5%
13.5%
15.5%
4.8%
1,553
$
(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 by OSFI in response to the COVID-19 pandemic. Both the CAR guideline and LR
guideline are based on the Basel III framework.
Note 29 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.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
221
Note 29 Offsetting financial assets and financial liabilities (continued)
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, 2021
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
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
$
$
384,439 $
84,595
412
469,446 $
77,028 $
314
240
77,582 $
307,411 $
84,281
172
391,864 $
101 $ 305,071 $
57,101
1
12,978
61
57,203 $ 318,110 $
2,239 $
14,202
110
16,551 $
492 $
11,260
–
11,752 $
307,903
95,541
172
403,616
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)
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 $ 310,128 $
69,300
2
18,627
50
69,338 $ 328,805 $
1,380 $
10,951
201
12,532 $
1,471 $
14,610
–
16,081 $
313,015
113,488
253
426,756
(Millions of Canadian dollars)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Derivative assets (3)
Other financial assets
(Millions of Canadian dollars)
Assets purchased under reverse
repurchase agreements and
securities borrowed
Derivative assets (3)
Other financial assets
(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 $12 billion (October 31, 2020 – $15 billion) and non-cash collateral of $307 billion (October 31, 2020 – $314 billion).
Includes cash margin of $3 billion (October 31, 2020 - $5 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, 2021
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify for offsetting on
the balance sheet (1)
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
$
$
338,737 $
77,514
412
416,663 $
77,028 $
314
240
77,582 $
261,709 $
77,200
172
339,081 $
101 $ 261,135 $
57,101
1
10,503
–
57,203 $ 271,638 $
473 $
9,596
171
10,240 $
492 $
14,239
–
14,731 $
262,201
91,439
172
353,812
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)
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 $ 272,871 $
69,300
2
16,232
–
69,338 $ 289,103 $
440 $
9,949
164
10,553 $
884 $
14,446
–
15,330 $
274,231
109,927
166
384,324
(Millions of Canadian dollars)
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivative liabilities (3)
Other financial liabilities
(Millions of Canadian dollars)
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivative liabilities (3)
Other financial liabilities
(1)
(2)
(3)
222
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 $9 billion (October 31, 2020 – $14 billion) and non-cash collateral of $262 billion (October 31, 2020 – $276 billion).
Includes cash margin of $3 billion (October 31, 2020 – $2 billion) which offset against the derivative balance on the balance sheet.
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Note 30 Recovery and settlement of on-balance sheet assets and liabilities
The table below presents an analysis of assets and liabilities recorded on our Consolidated Balance Sheets by amounts to be
recovered or settled within one year and after one year, as at the balance sheet date, based on contractual maturities and
certain other assumptions outlined in the footnotes below. As warranted, we manage the liquidity risk of various products based
on historical behavioural patterns that are often not aligned with contractual maturities. Amounts to be recovered or settled
within one year, as presented below, may not be reflective of our long-term view of the liquidity profile of certain balance sheet
categories.
(Millions of Canadian dollars)
Assets
Cash and due from banks (1)
Interest-bearing deposits with
banks
Securities
Trading (2)
Investment, net of applicable
allowance
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans
Retail
Wholesale
Allowance for loan losses
Segregated fund net assets
Other
Customers’ liability under
acceptances
Derivatives (2)
Premises and equipment
Goodwill
Other intangibles
Other assets
Liabilities
Deposits (3), (4)
Segregated fund net liabilities
Other
Acceptances
Obligations related to securities
sold short
Obligations related to assets sold
under repurchase agreements
and securities loaned
Derivatives (2)
Insurance claims and policy
benefit liabilities
Other liabilities
Subordinated debentures
Within one
year
October 31, 2021
After one
year
October 31, 2020
Total
Within one
year
After one
year
Total
As at
$
112,924 $
922 $
113,846 $
117,375 $
1,513 $
118,888
79,638
–
79,638
39,013
–
39,013
129,206
10,034
139,240
126,309
9,762
136,071
29,831
115,653
145,484
34,728
105,015
139,743
307,805
98
307,903
313,013
2
313,015
98,946
60,099
404,652
157,967
–
2,666
503,598
218,066
(4,089)
2,666
97,223
51,296
360,753
157,359
–
1,922
19,793
93,409
28
–
–
47,634
5
2,132
7,396
10,854
4,471
14,249
19,798
95,541
7,424
10,854
4,471
61,883
18,507
110,217
–
–
–
46,953
–
3,271
7,934
11,302
4,752
11,968
457,976
208,655
(5,639)
1,922
18,507
113,488
7,934
11,302
4,752
58,921
$
$
979,313 $
731,099 $ 1,706,323
943,633 $
–
157,198 $ 1,100,831
2,666
2,666
$
$
954,634 $
675,553 $
1,624,548
859,829 $
–
152,056 $
1,922
1,011,885
1,922
19,868
5
19,873
18,618
–
18,618
35,524
2,317
37,841
26,754
2,531
29,285
261,533
89,804
1,867
48,901
188
668
1,635
10,949
21,400
9,405
262,201
91,439
12,816
70,301
9,593
269,260
108,407
1,798
48,844
–
4,971
1,520
10,417
20,987
9,867
274,231
109,927
12,215
69,831
9,867
$ 1,401,318 $
206,243 $ 1,607,561
$ 1,333,510 $
204,271 $
1,537,781
(1)
(2)
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.
(3) Demand deposits of $576 billion (October 31, 2020 – $511 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.
(4) Amounts previously presented were reclassified to reflect the contractual maturities of certain term deposits.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
223
Note 31 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
2021
97,617 $
56,896
153,780
43,546
80,216
125,590
601,742
155,421
October 31
2020
109,397
21,603
146,524
41,029
76,358
134,037
554,173
171,622
$ 1,314,808 $
1,254,743
$
854,833 $
28,201
38,309
285,447
782,637
42,157
36,421
297,261
1,206,790
1,158,476
9,351
98,667
9,603
86,664
$ 1,314,808 $
1,254,743
For the year ended
October 31
2021
19,793 $
5,615
14,178
5,393
19,571
(606)
9,466
10,711
2,088
8,623
7,415
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
16,038 $
11,432
1,463
(1,137)
17,501 $
10,295
$
$
$
(1)
(2)
Includes dividend income from investments in subsidiaries and associated corporations of $5 million (October 31, 2020 – $27 million).
Includes a nominal share of profit (loss) from associated corporations (October 31, 2020 – nominal).
224
Royal Bank of Canada: Annual Report 2021
Consolidated Financial Statements
Condensed Statements of Cash Flows
(Millions of Canadian dollars)
Cash flows from operating activities
Net income
Adjustments to determine net cash from operating activities:
Change in undistributed earnings of subsidiaries
Change in deposits, net of securitizations
Change in loans, net of securitizations
Change in trading securities
Change in obligations related to assets sold under repurchase agreements and
securities loaned
Change in assets purchased under reverse repurchase agreements and securities borrowed
Change in obligations related to securities sold short
Other operating activities, net
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
Proceeds from 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 32 Subsequent events
For the year ended
October 31
2021
October 31
2020
$
16,038 $
11,432
(7,415)
72,196
(46,194)
(8,756)
5,228
8,447
2,405
6,316
48,265
(35,293)
70,260
(73,150)
(1,093)
(3,078)
(12,068)
(54,422)
2,750
(2,500)
90
–
2,245
(1,475)
(6,420)
(313)
(5,623)
(11,780)
109,397
(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
$
$
97,617 $
109,397
6,306 $
17,831
2,185
1,772
10,335
22,340
1,977
917
On November 5, 2021, we issued 750 thousand of Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares, Series BT
(Preferred Shares Series BT) to certain institutional investors, at a price of $1,000 per share. The Preferred Shares Series BT will
bear interest at a fixed rate of 4.2% per annum until February 24, 2027, payable semi-annually, and thereafter, at a rate per
annum, reset every fifth year, equal to the 5-year Government of Canada Yield plus 2.71%.
Consolidated Financial Statements
Royal Bank of Canada: Annual Report 2021
225
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
Total liabilities
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
$ 113,846 $ 118,888 $
79,638
284,724
307,903
717,575
202,637
39,013
275,814
313,015
660,992
216,826
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
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
17,421 $
15,550 $
8,399
199,148
135,580
435,229
144,773
9,039
182,710
117,517
408,850
126,079
12,428
10,246
161,602
112,257
378,241
149,180
$1,706,323 $1,624,548 $1,428,935 $1,334,734 $1,212,853 $1,180,258 $1,074,208 $ 940,550 $ 859,745 $ 823,954
$1,100,831 $1,011,885 $ 886,005 $ 836,197 $ 789,036 $ 757,589 $ 697,227 $ 614,100 $ 563,079 $ 512,244
259,174
7,615
239,763
7,443
264,088
7,859
305,675
7,362
341,295
9,762
340,124
9,265
409,451
9,131
449,490
9,815
516,029
9,867
497,137
9,593
1,607,561
1,537,781
1,345,310
1,254,779
1,138,425
1,108,646
1,010,264
886,047
810,285
779,033
Equity attributable to shareholders
98,667
86,664
83,523
79,861
73,829
71,017
Non-controlling interest
Total equity
95
103
102
94
599
595
98,762
86,767
83,625
79,955
74,428
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
Total liabilities and equity
$1,706,323 $1,624,548 $1,428,935 $1,334,734 $1,212,853 $1,180,258 $1,074,208 $ 940,550 $ 859,745 $ 823,954
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
Efficiency ratio (4)
KEY RATIOS
PCL on impaired loans as a % of average
net loans and acceptances (9)
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 (10)
Dividend payout ratio
Book value per share (11)
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
$
$
$
$
$
$
$
2021
20,002 $
29,691
49,693
(753)
3,891
25,924
16,050
–
16,050 $
2020
20,835 $
26,346
47,181
4,351
3,683
24,758
11,437
–
11,437 $
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
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
11.08 $
11.06 $
18.6%
2.90%
52.2%
7.84 $
7.82 $
8.78 $
8.75 $
8.39 $
8.36 $
7.59 $
7.56 $
6.80 $
6.78 $
6.75 $
6.73 $
6.03 $
6.00 $
5.53 $
5.49 $
14.2%
2.10%
52.5%
16.8%
2.52%
52.5%
17.6%
2.55%
53.6%
17.0%
2.49%
53.6%
16.3%
2.34%
52.9%
18.6%
2.45%
53.3%
19.0%
2.52%
51.8%
19.7%
2.67%
52.8%
4.96
4.91
19.6%
2.70%
50.2%
0.10%
1.48%
0.24%
0.27%
0.20%
0.21%
0.28%
0.24%
0.27%
0.31%
0.35%
1.55%
1.61%
1.64%
1.69%
1.70%
1.71%
1.86%
1.88%
1.97%
1,424,525
1,422,473
1,430,096
1,438,794
1,452,535
1,484,235
1,443,955
1,443,125
1,441,722
4.32 $
3.8%
39%
64.57 $
128.82 $
4.29 $
4.7%
55%
56.75 $
93.16 $
4.07 $
4.1%
46%
54.41 $
106.24 $
3.77 $
3.7%
45%
51.12 $
95.92 $
3.48 $
3.8%
46%
46.41 $
100.87 $
3.24 $
4.3%
48%
43.32 $
83.80 $
3.08 $
4.1%
46%
39.51 $
74.77 $
2.84 $
3.8%
47%
33.69 $
80.01 $
2.53 $
4.0%
46%
29.87 $
70.02 $
183,507
2.00
132,518
1.64
151,933
1.95
138,009
1.88
146,554
2.17
124,476
1.93
107,925
1.89
115,393
2.38
100,903
2.34
1,445,846
2.28
4.5%
46%
26.52
56.94
82,296
2.15
13.7%
14.9%
16.7%
4.9%
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.
(1)
(2)
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 2021 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 2021 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 2021 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.
(3) 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.
(4)
(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).
(6) Ratios for 2012 represent continuing operations.
(7)
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.
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.
(8)
(9)
(10) Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
(11) Calculated as common equity divided by the number of common shares outstanding at the end of the 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. 2012 capital and leverage ratios were calculated using
the Basel II framework.
n.a. not applicable
226
Royal Bank of Canada: Annual Report 2021
Ten-year statistical review
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
As at October 31, 2021
Carrying value of
voting shares owned
by the Bank (3)
$
69,976
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
Camana Bay, Grand Cayman, Cayman Islands
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 U.S. 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.
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
Royal Bank Mortgage Corporation
Toronto, Ontario, Canada
RBC Europe Limited
The Royal Trust Company
London, England
Montreal, Quebec, Canada
Royal Trust Corporation of Canada
Toronto, Ontario, Canada
23,691
12,223
5,059
2,851
1,090
422
(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 U.S. 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.
Principal subsidiaries
Royal Bank of Canada: Annual Report 2021
227
Shareholder Information
Valuation day price
For Canadian income tax purposes,
Royal Bank of Canada’s common
stock was quoted at $29.52 per share
on the Valuation Day (December 22,
1971). This is equivalent to $7.38 per
share after adjusting for the
two-for-one stock split of March 1981
and the two-for-one stock split of
February 1990. The one-for-one stock
dividends in October 2000 and April
2006 did not affect the Valuation Day
amount for our common shares.
Shareholder contacts
For dividend information, change
in share registration or address,
lost stock certificates, tax forms,
estate transfers or dividend
reinvestment, please contact:
Computershare Trust Company
of Canada
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1
Canada
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 1-888-453-0330 (Canada and
the U.S.) or 416-263-9394
(International)
email: service@computershare.com
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
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 and BO are listed on the
TSX. The related depository
shares of the series C-2 preferred
shares are listed on the NYSE.
Common share repurchases
As at October 31, 2021, we did
not have an active normal
course issuer bid (NCIB). For
further details, refer to the
Capital management section.
2022 Quarterly earnings
release dates
First quarter
Second quarter May 26
Third quarter
Fourth quarter November 30
February 24
August 24
2022 Annual Meeting
The Annual Meeting of Common
Shareholders will be held on
Thursday, April 7, 2022.
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.
Dividend dates for 2022
Subject to approval by the Board of Directors
Common and preferred shares series
AZ, BB, BD, BF, BH, BI, BJ and BO
Preferred shares series C-2
(US$)
Preferred shares series BT
* Record date is subject to change.
Record
dates
January 26
April 25
July 26
October 26
January 28
April 26
July 29
October 28
Payment
dates
February 24
May 24
August 24
November 23
February 7
May 6
August 8
November 7
February 16
August 17*
February 24
August 24
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 AMPLI, RBC CAPITAL MARKETS, RBC FUTURE LAUNCH, RBC
GLOBAL ASSET MANAGEMENT, RBC INSIGHT EDGE, RBC INSURANCE, RBC INVESTEASE, RBC HOMELINE PLAN, RBC PAYEDGE, RBC REWARDS, RBC TECH FOR
NATURE, RBC VANTAGE, RBC WEALTH MANAGEMENT, RBCx, MYADVISOR, INVESTEASE, AIDEN, ADVISOR’S VIRTUAL ASSISTANT (AVA), OWNR, NOMI, NOMI INSIGHTS,
and NOMI FIND & SAVE 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.
228
Royal Bank of Canada: Annual Report 2021
Shareholder information