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Provident Bancorp, Inc.Ent_HNW_NRG_Col_Bleed_NoMask_CMYK Royal Bank of Canada Annual Report 2022 Table of contents CEO Letter Chair Letter 2022 Highlights Management’s Discussion and Analysis Enhanced Disclosure Task Force Recommendations Index Reports and Consolidated Financial Statements Ten-Year Statistical Review Shareholder Information 4 8 10 20 128 129 230 232 About the cover Participants at the starting gate of the Kids’ Mile as part of the RBC Race for the Kids event held in Hyde Park, Chicago, U.S. on October 16, 2022. The event raised close to US$300,000 to support pediatric research at the University of Chicago Medicine Comer Children’s Hospital. To learn more about how we are helping communities prosper across the regions where we live and work, please refer to pages 14 and 15 of this report. (Photo/Jason Smith) Connect with us facebook.com/rbc instagram.com/rbc twitter.com/@rbc youtube.com/user/RBC linkedin.com/company/rbc tiktok.com/@rbc For more information on how we are leading with Purpose in creating differentiated value for our clients, communities, employees and shareholders, please visit RBC Stories. 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: In Canada: the undisputed leader in financial services In the United States: the preferred partner to corporate, institutional and high net worth clients and their businesses In select global financial centres: a leading financial services partner valued for our expertise We are guided by our Values: Client First Collaboration Accountability Diversity & Inclusion Integrity Royal Bank of Canada Annual Report 2022 | 1 Who we are By the numbers 17 million clients 95,000+ employees 29 countries 2 | Royal Bank of Canada Annual Report 2022 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 95,000+ 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.This report showcases our 2022 results and the many stories that defined our year, including how we’re performing against our balanced scorecard and the strong industry and client recognition awarded to our products, services, brand and people. Why invest? (1) Based on our 80.25 average percentile ranking compiled from our four top-tier ESG rankings and ratings; refer to page 19 of the 2022 Annual Report for additional information Royal Bank of Canada Annual Report 2022 | 3 Diversified business model with scale and market-leading franchises that provide a full suite of products, advice and services for clients Market-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 Leading Canadian core deposit franchise that serves as a stable source of funding Well-positioned to benefit from evolving macro environment Strong performance in ESG rankings and ratings(1) Fellow shareholders, I’m writing this letter as we all continue to live through a period of historic economic and societal change. Many of our clients and communities are anxious about the future, including the effects of rising inflation, higher interest rates and volatile markets. The onset of a tragic and senseless war in Ukraine has intensified post-pandemic economic challenges while also contributing to supply chain disruptions and global energy market turmoil. Against this backdrop, our communities continue to grapple with combating climate change – arguably the most complex challenge of all – and shifting toward a more inclusive and sustainable net-zero future. In these uncertain times, one thing is clear to me: the leadership, stability and guidance that RBC can bring to our clients and communities is more important than ever. The future is bright for RBC. Much of my optimism comes from working alongside tens of thousands of passionate, imaginative and inspirational RBC colleagues who bring support and new ideas to our stakeholders every single day. These ideas are more than advice and can come in many shapes and sizes – from big ideas that can change whole industries to in-the-moment ideas that make things easier for a young person starting their career or a growing family. As I’ve expressed in the past, our bank’s prosperity rests on the strength and stability of our 17 million clients and the communities where they raise families, build businesses and live their lives. In these challenging times, our colleagues take seriously the responsibility of helping clients navigate risks and opportunities to make the best decisions possible for them. They bring that same dedication to helping build and grow sustainable, vibrant and inclusive communities. It is a true privilege to work alongside my colleagues, and this report shares many examples of how Team RBC is helping make progress possible for people, places and projects that matter to our collective future. An all-weather bank with our sights set on growth We aspire to be one of the most highly valued and most respected financial institutions in the world. On that journey, I’m pleased to share that we ended the fiscal year as a top-10 global bank by market capitalization and the highest valued bank on a Price-to-Book Ratio among global banks(1). We’ve also been recognized yet again as the most valuable brand in Canada and second among all global banks. In 2022, we generated earnings of $15.8 billion and an ROE of 16.4 per cent, and we delivered $6.9 billion in dividends to our common shareholders while buying back $5.4 billion in common shares. A message from Dave McKay President and CEO 4 | Royal Bank of Canada Annual Report 2022 (1) Banks with over $850 billion in loans Our financial performance demonstrates how we continue to build long-term client franchises and deliver a premium return on equity, even as we transform RBC for the future and pursue targeted growth strategies in Canada, the U.S., the U.K. and Europe. This has been one of the most challenging operating environments in decades, but our size, scale, strong and prudent risk and capital management, and diversified business mix put us in a position of strategic and financial strength. In short, we’re an all-weather bank that’s not only built to perform through the economic cycle, but also pursue big opportunities to grow where others simply can’t. In Canada, we are the leading bank with deep and trusted client relationships across our franchises. We have #1 or #2 in market share in all key product categories, supported by the largest retail network in the country. This year, we partnered with ICICI Bank Canada to create a seamless banking experience for newcomers. We also prioritized building more engaging digital experiences that clients truly value. We’ve received industry recognition numerous times this year, including ranking highest in mobile banking client satisfaction by J.D. Power. In the U.S., our second home market, we’re continuing to win and have a long runway for premium growth through our differentiated strategy to serve corporate, institutional and high-net-worth clients and their businesses. As a top-10 capital markets business in the U.S., we continue to deliver notable wins in corporate and investment banking and global markets. At City National, we kept our focus on organically growing the core banking business and enhancing our risk resilience. As the 6th largest wealth manager in the country(2), our U.S. Wealth Management business continues to add more products and talent to support our growing client base. In the U.K. and Europe, steady and consistent growth has led us to build a trusted and competitive franchise that’s just getting started. With the acquisition of Brewin Dolphin, we’re now one of the largest wealth managers in the U.K., Ireland and Channel Islands, and are able to leverage our global capabilities for clients. We have big ambitions for targeted growth in these regions, with plans to continue leading with advice and recruiting top talent. Across all these key regions, we’ve spent years building our core deposit franchises – both on the consumer side and the business side. Deposits are the long-term lifeblood of any bank, giving it the ability to fund loans and growth. Our focus and scale in this area has given us a significant advantage against our peers, which we’ll continue to prioritize in the years ahead. This report showcases our 2022 results and the many stories that defined our year, including how we’re performing against our balanced scorecard and the strong industry and client recognition awarded to our products, services, brand and people. I’m proud of these highlights and encourage you to read them for a deeper understanding of what we accomplished this year. Despite our recent success, we are not content to coast on our brand and size. We’re striving to be even better. Here are just a few things I’m most excited about heading into 2023: (2) U.S. wealth advisory firms quarterly earnings releases (10-Q) Royal Bank of Canada Annual Report 2022 | 5 100 Bishopsgate – RBC’s London, U.K. headquartersCity National Bank – New York City, U.S. Dave McKay addresses an all-employee town hall, October 18, 2022 More digitally-backed, client-centric experiences in banking – and beyond We have a bold ambition to grow our market-leading franchises, add clients and serve them more deeply. To do that, we’re investing in building the best and most personalized client experiences possible. We will continue to challenge the status quo and rethink the experiences we deliver to engage with our clients in newer, smarter and simpler ways. We’re always on the lookout for the next great idea. That means more innovative products, insightful advice backed by the power of data and the creativity of our people, and leading partnerships that add more value. This is especially critical amidst the generational changes in the way people live and work, including what they expect from a bank. Our RBCx™ division shows how we’re doing things differently. This team is supporting 4,000+ tech and innovation clients of all sizes and also redefining what a bank can do through in- house ventures like Ownr®, Mydoh® and Dr. Bill® – services that collectively reach hundreds of thousands of people who are looking to pursue big ambitions or just make life a little easier. We’re innovating across all our businesses, including in Capital Markets with our AI-based Aiden® trading platform; P&CB with our Vantage banking experience and the continued build out of our healthcare strategy with the recent acquisition of cloud-based MDBilling.ca; and other examples across our Wealth Management, Investor & Treasury Services and Insurance teams. I truly believe there’s no other large bank in the world that delivers the differentiated client experience we do at scale. Of course, none of this is possible without investing in our collaborative and client-focused people. Every day, our employees are turning ambitious and bold ideas into 6 | Royal Bank of Canada Annual Report 2022 game-changing reality – in areas from cyber security to AI and machine learning, digital to software development, architecture to data science. We’re building the bank of the future, and right now we’re tracking ahead of the game. If it doesn’t exist, we’re probably working on it. Climate and inclusion plans that can make progress possible In a complex environment, our clients and communities look to us to make sense of the world around them, share our views, speak up and lean in on issues that demand action. In fact, this is a business imperative for RBC, and what we’re doing fills me with optimism about the inclusive, sustainable and prosperous communities we’re helping to build. Climate change is one of the world’s most pressing issues – one that can impact where we live, our food supply and the world around us. The actions we take in the coming years will have a lasting effect for generations to come. The best way RBC can help is by partnering with our clients to reduce their emissions. We committed to providing $500 billion in sustainable financing by 2025 – which means financing activities that take into account environmental, social and governance factors – and are on our way to reaching that goal. This supports everything from the development and deployment of clean energy technologies to new opportunities in carbon capture use and storage, low-carbon fuels, grid innovations and electric vehicles, just to name a few examples. We recently released our initial interim emissions reduction targets across three key sectors – oil & gas, power generation and automotive – to help us track and measure how we’re doing in working with our clients to reduce their emissions and keep us accountable along the way. It’s critical that businesses, governments and individuals work together to reshape our economies and societies if we are to be successful. We cannot act independently and expect to make progress. RBC is committed to helping play a coordinating role in this effort to build a cleaner future and bring green solutions to market. This also includes helping to promote climate literacy and offering ideas and research that inform and inspire a successful transition. Taking collective action on the net-zero transition requires more than financial capital. We must also unlock the incredible potential of people, particularly talent from historically underrepresented groups(3) and young people. Our society cannot move forward to address the big economic and societal issues if people and communities are at risk of falling behind or being left out completely. To address the climate challenge and other skills challenges across our changing economy, societies need to transform the way we train and reskill people and build more inclusive workforces. To help, we created RBC Future Launch® – a 10-year, $500 million commitment to prepare youth for the jobs of tomorrow – and we’ve reached more than five million young Canadians through tools, scholarships and partnerships since 2017. Alongside new entrepreneur loan programs and scholarship assistance, I’m particularly proud of the impact RBC Future Launch® continues to have in helping empower Black and Indigenous leaders of tomorrow to reach their potential. People and culture that will define our future As a relationship-driven bank, our culture and people are a major factor in determining what we strive to achieve and how we perform against those aspirations. Many of RBC’s best moments happen when our people are together – problem solving with our clients, being active in our communities and collaborating alongside each other. Over the past few months, we’ve been finding the right balance as we continue to build our flexible and hybrid working model for the future – a model that will strengthen our creative, collaborative, inclusive and always-learning culture. It hasn’t been easy to get to where we are today, but I’m proud of the way our teams led through tremendous disruption and uncertainty, and responded to the needs of our clients and communities throughout the pandemic with resilience and determination. Looking ahead, we aim to continue to be an organization that leads the way on skills and career development, equity and inclusion and the new world of work. This year, we were recognized as one of Canada’s top employers for diversity, young people and professional development(4). We were also named one of the best workplaces in Canada for hybrid working(5). (3) A group that is historically underrepresented may include those who self-identify as women; Black, Indigenous, and People of Colour (BIPOC); LGBTQ+ and/or persons with disabilities (4) MediaCorp Canada Inc. (5) Great Place to Work Institute Lastly, what our people across the globe do in our communities is what will continue to drive our culture. We bring our resources, talents and connections together to make positive change – from empowering ascending artists who are the heart of our vibrant and inclusive cities and towns, to supporting relief and recovery efforts when a natural disaster strikes one of our communities. This year, through our first-ever global Employee Giving Campaign, our people rallied to support communities at a time of great need, collectively contributing nearly $22 million to over 9,500 charities in more than two dozen countries around the world. Alongside this program, our global RBC Race for the Kids event series has brought together communities in support of critical youth mental health and wellness causes for over a decade. To date, we’ve raised more than $83 million for youth-focused charities around the world. These are just two examples of the impact RBC colleagues can achieve when working together to help solve important societal or community challenges. Looking ahead While it might be hard to imagine in an increasingly disruptive and complex world, I have a great deal of optimism and hope for the year ahead. Part of the strength of RBC is our ability to adapt to the many needs of our clients and communities. Right now, RBC needs to be both a beacon and an anchor to those we proudly serve. We’ve embraced this role throughout the pandemic, and I’m confident we’ll continue doing so. This is just one of the reasons why we say ideas happen here. I want to thank you for your trust and belief in Team RBC and what we’ll do to thrive and prosper together in the years ahead. As we enter 2023, I have more conviction than ever in where our great organization is going and how we’ll get there together. We have an ambitious plan to build even more amazing digital experiences for our clients and help play an important role to solve some of society’s biggest challenges. I look forward to sharing our progress in the year ahead. Dave McKay President and CEO Royal Bank of Canada Annual Report 2022 | 7 RBC employees – WaterPark Place, Toronto, Canada RBC believes leadership centres on serving others. Helping clients make smart decisions today and remain confident in their financial future is at the heart of everything we do. Providing our colleagues with greater flexibility and personalized work experiences, while remaining engaged and inspired to make meaningful contributions to our success is a central focus of RBC’s employee experience. Addressing economic and social ills exposed by the pandemic and placing the planet on a more sustainable path is not only essential to the success of the communities where we serve, but also our own. RBC continued to align its Purpose with performance to drive premium growth and, in turn, create value for all its stakeholders, including shareholders. The Board’s ongoing confidence in RBC is underpinned by its leadership team, financial strength and scale, growth strategy, diverse business mix, powerful brand and engaged and motivated workforce. Directors serve as stewards of the bank, exercising independent judgement in overseeing management and safeguarding the interests of its shareholders. We also recognize the bank is not a passive participant in society. It must – and does – take responsibility for its commitments and actions. Governance is key in all of this. The Board not only helps set a strategic direction for the bank, but also oversees the policies and practices that monitor, measure and report on its performance in a timely and transparent manner. Promoting a strong risk-aware culture and conduct-related practices throughout RBC are also priorities for the Board. Climate continues to be a key area of focus for the Board. Directors oversee the bank’s climate strategy, the RBC Climate Blueprint, and how environmental and social risks are managed. They assess and evaluate progress against the bank’s goals, commitments, plans, targets and metrics to determine their effectiveness and impact. An important milestone was reached this year with the release of RBC’s 2030 initial interim emissions reduction targets for certain high-emitting sectors: oil & gas, power generation and automotive. In addition, a Sustainable Finance Framework was published which outlines the bank’s approach and methodology for classifying, tracking and disclosing its progress towards the commitment to provide $500 billion in sustainable financing by 2025. Sustainable finance solutions provide clients with products and services that contribute to key environmental, social and governance (ESG) objectives. More broadly, we believe the bank’s approach to ESG has and will continue to have a significant impact on RBC’s success and those we serve. For instance, oversight of RBC’s diversity and inclusion (D&I) practices, policies and initiatives are carried out at the Board. A message from Katie Taylor Chair of the Board 8 | Royal Bank of Canada Annual Report 2022 In 2022, the Board reviewed a refreshed D&I strategy that serves both colleagues and communities with, for instance, a focus on improving representation in leadership at all levels and influencing equitable access to financial products and services. Additionally, 31 per cent of new executive appointments were Black, Indigenous or people of colour, surpassing our goal for 2022. We nonetheless still need to do more to further increase women representation at the executive level, as women made up 43 per cent of new executive appointments, below our 50 per cent target(1). Similarly, good governance is a never-ending journey. A large, vibrant enterprise like RBC will regularly come across new themes or issues that require the Board’s engagement. That’s why the Board’s areas of focus are continuously assessed to align with regulatory requirements, stakeholders’ expectations, evolving best practices as well as changes in the industry and economy. Committee work and priorities may adapt as a result. Directors look for ways to continuously improve their understanding in areas of importance, engage with external advisors and participate in education sessions to remain abreast of evolving risks and opportunities. In 2022, we added to the Board’s strength with the appointment of Mirko Bibic, President and Chief Executive Officer of BCE Inc. and Bell Canada. His deep strategic, operational, governance and risk experience across a wide range of commercial and consumer portfolios in the communications sector will strengthen the capabilities and broaden the perspectives of the Board. Eight years ago, when I wrote my first shareholder letter as RBC Chair, I spoke about the inextricable link between our stakeholders’ success and the bank’s. As the largest Canadian financial institution by market capitalization and indeed, one of the largest in the world by the same measure, I underscored the high standard RBC must set as a leading corporate citizen. When leadership centres on serving others, great things happen. During my time as Chair, RBC’s client base has grown by approximately one million and the total value of deposits has almost doubled(2), a testament to the bank’s client-first focus. Benefits have expanded and evolved to keep pace with changing employee needs and expectations. The bank embarked upon a 10-year, $500 million commitment to set youth up for success through RBC Future Launch®. This initiative has provided $331+ million since 2017, reaching over five million Canadian youth(3). Net income has increased at a compound annual growth rate (CAGR) of 7 per cent. Additionally, share price and dividends have grown at a CAGR of 6 per cent and 7 per cent respectively(4). Serving as RBC Chair has been both an honour and great privilege for me. I am grateful for the Directors past and present who have led us to this exciting point in the bank’s journey. I am equally grateful to each and every RBCer who has and continues to build this extraordinary global franchise with passion and purpose. Going forward, as a proud RBC shareholder, I will watch with keen interest in how Dave, his leadership team and our incredible colleagues find even more new ways to create value and make an impact. We will all be better for it. Kathleen Taylor Chair of the Board Royal Bank Plaza – South Tower, Toronto, Canada (1) Refer to page 13 of the 2022 Annual Report for additional information (2) Between October 31, 2014 and October 31, 2022, client base has increased from (3) Refer to page 15 of the 2022 Annual Report for additional information (4) Between October 31, 2014 and October 31, 2022, net income increased from $9.0 16 million to 17 million and deposits from $614.1 billion to $1,208.8 billion billion to $15.8 billion, share price increased from $80.01 to $126.05, and dividends declared per common share increased from $2.84 to $4.96 Royal Bank of Canada Annual Report 2022 | 9 2022 highlights across our balanced scorecard Clients At RBC, our clients are at the centre of everything we do. Enabled by our investments in technology and talent, we believe our differentiated advice, products and services deliver long-term value and create exceptional client experiences. Customer Service Award Winner among the big 5 retail banks – Recognized in all 11 categories of the 2022 Ipsos Financial Service Excellence Awards, for the 2nd consecutive year Best in Customer Satisfaction among Canada’s big 5 retail banks by J.D. Power, 6 out of the last 7 years, and, in 2022, ranked highest in Customer Satisfaction with Mobile Banking Apps Market-leading client franchises #1 or #2 market share in all key product categories across Canadian Banking Largest retail mutual fund company in Canada based on assets under management (AUM)(3) 9th largest global investment bank(1), #1 in Largest Canadian bank-owned insurance Canada and #1 Canadian investment bank in the U.S.(2) #1 in market share for High Net Worth/Ultra High Net Worth in Canada organization(4) 6th largest full-service wealth advisory firm in the U.S. as measured by assets under administration (AUA)(3) (1) Based on global investment banking fees (fiscal 2022), Dealogic (2) Based on market share (fiscal 2022), Dealogic (3) Refer to the Glossary for definition on page 126 (4) On a total revenue basis 10 | Royal Bank of Canada Annual Report 2022 RBC Dominion Securities ranked highest among Canadian bank-owned investment brokerage firms for the 16th consecutive year(9) Leveraged our industry-leading Canadian mobile app to deliver value-added client insights. 3.3 million clients have activated personalized plans through MyAdvisor® Partnered with ICICI Bank Canada to create a seamless banking experience for newcomers to Canada RBCx™ supports 4,000 tech and innovation clients and in-house ventures like Mydoh® (used by 100,000+ Canadians), Ownr® (trusted by 85,000+ Canadian businesses) and Dr. Bill® (serving 8,000 physicians) Best Global Retail Bank and Best Bank for small and medium-sized enterprises(10) Expanded the Avion Rewards™ loyalty program with METRO Inc., Lowe’s‡, RONA‡ and Réno-Dépôt‡ joining our retail partnerships with Petro-Canada‡(11), WestJet‡, Rexall‡, DoorDash‡ and more RBC Global Asset Management® named TopGun Investment Team of the Year(5) One of the top 3 Greenwich Quality Leaders in Canadian Institutional Investment Management Service for the 8th consecutive year(6) Recognized as the most valuable Canadian brand and 2nd among the Top 10 Global Banks(7) Outstanding Global Private Bank in North America for the 7th consecutive year(8) (5) Brendan Wood International (6) Coalition Greenwich (7) Kantar BrandZ Most Valuable Global Brands (8) Private Banker International Global Wealth Awards (9) Investment Executive Brokerage Report Card (10) RBI Global retail banking awards (11) Petro-Canada is a Suncor business Royal Bank of Canada Annual Report 2022 | 11 2022 highlights across our balanced scorecard Employees Our collective success depends on attracting, retaining and developing the right talent to deliver on our strategy. From wellness and flexibility, to skill building and leadership development, we are committed to supporting, enabling and empowering our employees as they help our clients thrive and communities prosper. Among Canada’s Top 100 Employers, Canada’s Best Diversity Employers and Best Workplaces in 2022(1)(2) Recognized as one of the Best Workplaces for Professional Development for our experiential learning, coaching, mentorship and formal training(2) Named one of the Best Workplaces for Hybrid Work for flexibility and resources available to support the new world of work(2) Announced a $200 million investment in our employees, including a mid-year 3% salary increase, enhanced defined pension contributions and family benefits in Canada, and more support for career development Enhanced our critical tech talent strategy with a new Tech Career Journey and storytelling initiatives to strengthen our reputation as a top employer, welcoming 2,300 experienced technologists, 39% of whom were women $16.5 billion in competitive compensation and benefits Recognized as one of Canada’s Top Employers for Young People(1) (1) MediaCorp Canada Inc. (2) Great Place to Work Institute 12 | Royal Bank of Canada Annual Report 2022 Accelerating our progress in Diversity & Inclusion: Black, Indigenous and People of Colour (BIPOC) represented: 43% of hires(3) 43% of promotions(4) 31% of new executive appointments, surpassing our goal of 30% for the year(5) 2022 Employee Engagement Survey found employees are highly engaged and feel proud to be part of RBC(8): 93% feel they contribute to RBC’s success 89% are proud to be part of RBC 88% are willing to go above and beyond Women represented: 51% of hires(3) 53% of promotions(4) 43% of new executive appointments(5) Global employee base comprised of 20% young people(6) Welcomed 1,500+ summer students across the globe, 52% were BIPOC(7) Introduced a new HR management system with self-serve processes and AI-enabled learning and job recommendations to support career growth and enhance our employees’ digital experience (3) Hires includes new external hires and rehires excluding City National Bank, BlueBay Asset Management and Brewin Dolphin; based on self-identification; excludes summer interns, students and co-ops. BIPOC hires includes Canada and U.S. only. Women hires is global (4) Promotions are defined as an upward change in position level, HR Class or Global Grade. Excludes summer interns, students, co-ops, City National Bank, Blue Bay Asset Management and Brewin Dolphin. Values for women represent data from our global operations. Values for BIPOC represent data from our businesses in Canada and the U.S., based on self-identification (5) Represents data for our businesses in Canada governed by the Employment Equity Act. A new executive appointment is the appointment of an internal employee or external hire as a first-time Vice President, Senior Vice President or Executive Vice President (6) Headcount under 30 globally, excluding City National, BlueBay Asset Management and Brewin Dolphin employees (7) Based on self-identification (8) Employee Engagement Survey conducted between April 27-May 11, 2022; participation rate was 73% Royal Bank of Canada Annual Report 2022 | 13 2022 highlights across our balanced scorecard Communities Supporting the communities where we live and work is central to our Purpose. Through our global partnerships, donations and employee initiatives, RBC is committed to building vibrant, socially inclusive and sustainable communities. With our key programs – RBC Future Launch®, Tech for Nature™ and Emerging Artists – our approach is aligned to our priority ESG pillars including youth, climate, diversity & inclusion and financial wellness. $154+ million given globally through donations and community investments, including nearly $1.9 million to support humanitarian relief efforts in Ukraine, Pakistan, natural disaster response efforts in Canada and the U.S., and in response to local tragedies(1) Employees stepped up to participate in the second RBC Global Earth Day Challenge, completing 51,000+ earth-friendly activities. RBC provided rewards for completing each activity, leading to $760,000+ in support of local charities Celebrated the return of live events with marquee enterprise sponsorships, including the RBC Canadian Open, RBC Heritage, RBCxMusic® Concert Series and the Toronto International Film Festival (1) Includes employee volunteer grants and gifts in kind, as well as contributions to non-profits and non-registered charities. Figure includes sponsorships 14 | Royal Bank of Canada Annual Report 2022 Since its start in 2009, the RBC Race for the Kids has raised $83+ million for youth-focused charities around the world. In 2022, 37,000+ participants raised $9+ million for 22 charities across 10 countries $331+ million provided through RBC Future Launch®, reaching 5.3 million Canadian youth through 840+ partner programs since 2017. Through our $1.6 million investment in RBC Future Launch® scholarships this year, 500+ young Canadians will have the opportunity to pursue their business and academic passions RBC Charity Day for the Kids donated US$5 million to 55+ youth-focused charities around the globe. Since launching in 2015, this initiative has raised US$25.2 million for 100+ organizations Through the RBC Emerging Artists program, our investments in arts organizations have exceeded $119 million, supporting 35,000+ artists since 2007 Launched the RBC Black Entrepreneur Business Loan, supporting Black entrepreneurs in Canada as they start, manage and grow their business with loans of up to $250,000 (2) Refer to page 101 of the 2022 Annual Report for additional information Expanded our Employee Giving Campaign globally, with 81% of RBC employees supporting 9,500+ charities across 28 countries. Together with retirees, RBC raised $21.8 million $6 billion in support of our communities as one of the largest taxpayers in Canada, and as a taxpayer in other countries where we operate(2) Royal Bank of Canada Annual Report 2022 | 15 2022 highlights across our balanced scorecard Sustainability Climate change presents a significant challenge that is impacting communities globally. Achieving net-zero greenhouse gas (GHG) emissions by 2050 requires one of the largest economic transformations in generations. RBC is committed to working alongside governments, businesses and individuals to facilitate meaningful progress towards net-zero. 16 | Royal Bank of Canada Annual Report 2022 Signed our second long-term renewable energy Power Purchase Agreement, advancing our goals to reduce emissions from our global operations by 70% and to source 100% of our electricity from renewable and non-emitting sources, both by 2025 Acted as a financial advisor to 23 Indigenous communities buying an ownership stake in 7 Enbridge pipelines in Northern Alberta – the largest Indigenous energy partnership transaction in North America, to-date(1) RBC GAM is a founding signatory to the Canadian Investor Statement on Climate Change, which demonstrates the collective ambition and action of Canadian investors in recognizing the need to accelerate the transition towards a net-zero economy Supported the development and deployment of cutting-edge clean energy technologies through our investment in funds like EVOK, focusing on opportunities in carbon capture use & storage (CCUS), low-carbon fuels, clean energy, grid innovations and mobility(2) RBC released its Sustainable Finance Framework, which outlines the approach the bank takes to measure progress against its commitment to provide $500 billion in sustainable financing by 2025 RBC delivered a key milestone in its commitment to achieving net-zero in its lending portfolio by 2050 with the release of its initial set of 2030 interim emissions reduction targets for key sectors: oil & gas, power generation and automotive RBC intends to help finance the transition to net-zero, strengthen a diverse and inclusive culture, and build stronger communities and enable economic inclusion Honoured as ESG Manager of the year through the 2022 UK Pensions Awards Ranked #4 globally in Institutional Investor’s ESG Research Team category RBC Tech for Nature™, a global initiative to support new ideas, technologies, and partnerships that address complex environmental challenges. Since 2019, 550+ organizations have benefitted from $39+ million in community investments towards a $100 million commitment by 2025 (1) Indigenous Communities and Enbridge Announce Landmark Equity Partnership (2) Evok Innovations Announces First Close of $300 Million USD Cleantech Fund Royal Bank of Canada Annual Report 2022 | 17 2022 highlights across our balanced scorecard Shareholders RBC is driven by its vision, values and commitment to delivering long-term results. Financial performance metrics Medium-Term Objectives(1) Diluted EPS growth of 7%+ ROE of 16%+ Strong capital ratio (CET1) Dividend payout ratio of 40%–50% Total shareholder return(2) RBC Global peer average 3-Year 8% 16.4% 12.9% 46% 3-Year 10% 6% Earnings net income (C$ billion) Revenue by segment(3) (C$ billion) $16.1 $15.8 Annualized Dividend Increase of: 7% Five year(4) 10% Ten year(4) $9.1 Capital Markets $2.2 I&TS $3.5 Insurance 5-Year 8% 16.7% 12.5% 46% 5-Year 9% 5% $20.1 P&CB 2021 2022 $14.8 Wealth Management (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 the macroeconomic backdrop (2) Annualized TSR is calculated based on the TSX common share price appreciation plus reinvested dividend income. Source: Bloomberg, as at October 31, 2022. Please refer to page 24 (3) Excludes Corporate Support (4) Compound Annual Growth Rate 18 | Royal Bank of Canada Annual Report 2022 Strong funding profile Long-term credit rating upgraded to Aa1 by Moody’s(8) Approximately 400,000 net new clients added in 2022 Leading 103% ratio of loans to deposits in Canadian Banking $11.06 diluted earnings per share (EPS), flat from 2021 $4.96 dividends declared per share, up 15% from 2021; dividend payout ratio of 45% $12.4 billion of profits returned to our shareholders through dividends and share repurchases; total payout ratio of 80%(6) (5) Refer to the Glossary for definition on page 127 (6) Total payout ratio is calculated as total common shareholder distributions (common dividends of $6.9 billion + common share repurchases of $5.4 billion) as a percentage of net income available to common shareholders ($15.5 billion) (7) Average percentile ranking and rating compiled from our priority ESG rating agencies and indices: Sustainalytics, MSCI ESG Rating, FTSE4Good and S&P Global’s Corporate Sustainability Assessment (informing the DJSI) – FTSE4Good and MSCI ratings reflect 2021 scores. The ESG rankings and ratings market is evolving and is not currently regulated in Canada or the U.S. ESG rating agencies and indices may use different data, metrics, models and/or methodologies. ESG ranking and ratings are not necessarily comparable, and those given to RBC are for information only. Investors and other stakeholders should carefully consider the foregoing factors and other uncertainties when reviewing these rankings and ratings (8) On January 27, 2022, Moody’s upgraded our long-term debt ratings and assessments, as well as affirmed our short-term debt ratings. 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 Royal Bank of Canada Annual Report 2022 | 19 80.25(7)average percentile ranking and rating on our priority ESG indices16.4% return on common equity(5),down from 18.6% in 202112.6% robust common equity tier 1 (CET1) ratioPrudent risk management with 10 basis points of provision for credit losses (PCL) on impaired loans 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, 2022, compared to the preceding fiscal year. This MD&A should be read in conjunction with our 2022 Annual Consolidated Financial Statements and related notes and is dated November 29, 2022. 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 2022 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 Key performance and non-GAAP Operational/regulatory compliance statements 20 measures Overview and outlook 21 Selected financial and other highlights 21 22 About Royal Bank of Canada Vision and strategic goals 22 Economic, market and regulatory review and outlook Key corporate events of 2022 Defining and measuring success 22 23 through total shareholder returns 24 Financial performance 24 Overview 24 Impact of foreign currency translation 25 25 Total revenue Provision for credit losses 26 Insurance policyholder benefits, claims and acquisition expense Non-interest expense Income and other taxes Client assets Business segment results Results by business segment How we measure and report our business segments 27 27 27 28 29 29 29 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 30 32 37 43 47 49 53 53 53 54 55 55 56 58 58 60 61 Transactional/positional risk drivers 66 66 76 81 94 Credit risk Market risk Liquidity and funding risk Insurance risk risk drivers Operational risk Regulatory compliance risk 94 94 96 Strategic risk drivers 97 97 Strategic risk Reputation risk 97 Legal and regulatory environment risk 98 99 Competitive risk Macroeconomic risk drivers Systemic risk Overview of other risks Capital management Accounting and control matters Critical accounting policies and estimates Controls and procedures Related party transactions Supplementary information Glossary Enhanced Disclosure Task Force recommendations index 99 99 100 105 114 114 117 117 118 126 128 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 2022 Annual Report, in other filings with Canadian regulators or the SEC, in other reports to shareholders, and in other communications. Forward-looking statements in this document include, but are not limited to, statements relating to our financial performance objectives, vision and strategic goals, the economic, market, and regulatory review and outlook for Canadian, U.S., U.K., European and global economies, the regulatory environment in which we operate, the impact from rising interest rates, the expected closing of the transaction involving HSBC Bank Canada, 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, the direction of the coronavirus (COVID-19) pandemic and its potential impact on our business operations, financial results, condition and objectives and on the global economy and financial market conditions, our climate- and sustainability-related beliefs, targets and goals (including our net-zero and sustainable finance commitments), 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”, “commit”, “target”, “objective”, “plan” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “might”, “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 that our financial performance, environmental & social or other objectives, vision and strategic goals will not be achieved, and that our actual results may differ materially from such predictions, forecasts, projections, expectations or conclusions. 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, model, legal and regulatory environment, systemic risks and other risks discussed in the risk sections of our 2022 Annual Report including business and economic conditions in the geographic regions in which we operate, Canadian housing and household indebtedness, information technology and cyber risks, geopolitical uncertainty, environmental and social risk (including climate change), digital disruption and innovation, privacy, data and third- party related risks, regulatory changes, culture and conduct risks, 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. Additional factors that could cause actual results to differ materially from the expectations in such forward-looking statements can be found in the risk section of our 2022 Annual Report. 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 2022 Annual Report are set out in the Economic, market and regulatory review and outlook section and for each business segment under the Strategic priorities and Outlook headings. Except as required by law, we do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by us or on our behalf. Additional information about these and other factors can be found in the risk sections of this 2022 Annual Report. 20 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Overview and outlook Selected financial and other highlights Table 1 (Millions of Canadian dollars, except per share, number of and percentage amounts) Total revenue Provision for credit losses (PCL) Insurance policyholder benefits, claims and acquisition expense (PBCAE) Non-interest expense Income before income taxes Net income Segments – net income Personal & Commercial Banking Wealth Management Insurance Investor & Treasury Services Capital Markets Corporate Support Net income Selected information Earnings per share (EPS) – basic – diluted Return on common equity (ROE) (1) Average common equity (1) Net interest margin (NIM) – on average earning assets, net (2) 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) (3) Net stable funding ratio (NSFR) (3) Capital, Leverage and Total loss absorbing capacity (TLAC) ratios (4) Common Equity Tier 1 (CET1) ratio Tier 1 capital ratio Total capital ratio Leverage ratio TLAC ratio (5) TLAC leverage ratio (5) Selected balance sheet and other information (6) 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) (2) Assets under administration (AUA) (2), (7) Common share information Shares outstanding (000s) – average basic – average diluted – end of period Dividends declared per common share Dividend yield (2) Dividend payout ratio (2) Common share price (RY on TSX) (8) Market capitalization (TSX) (8) Business information (number of) Employees (full-time equivalent) (FTE) Bank branches Automated teller machines (ATMs) Period average US$ equivalent of C$1.00 (9) Period-end US$ equivalent of C$1.00 $ $ $ $ $ $ 2022 48,985 $ 484 1,783 26,609 20,109 2021 49,693 $ (753) 3,891 25,924 20,631 2022 vs. 2021 Increase (decrease) (708) 1,237 (2,108) 685 (522) (1.4)% (164.3)% (54.2)% 2.6% (2.5)% 15,807 $ 16,050 $ (243) (1.5)% 8,370 $ 3,144 857 513 2,921 2 7,847 $ 2,626 889 440 4,187 61 523 518 (32) 73 (1,266) (59) 6.7% 19.7% (3.6)% 16.6% (30.2)% n.m. 15,807 $ 16,050 $ (243) (1.5)% 11.08 $ 11.06 16.4% 94,700 $ 1.48% 0.06% (0.04)% 0.10% 0.26% 125% 112% 12.6% 13.8% 15.4% 4.4% 26.4% 8.5% 11.08 $ 11.06 18.6% 84,850 $ 1.48% (0.10)% (0.20)% 0.10% 0.31% 123% 116% 0.00 0.00 n.m. 9,850 n.m. n.m. n.m. n.m. n.m. n.m. n.m. 0.0% 0.0% (220) bps 11.6% – bps 16 bps 16 bps – bps (5) bps 200 bps (400) bps 13.7% 14.9% 16.7% 4.9% n.a. n.a. n.m. n.m. n.m. n.m. n.a. n.a. (110) bps (110) bps (130) bps (50) bps n.a. n.a. $ 1,917,219 $ 1,706,323 $ 210,896 33,499 102,390 58,898 107,983 8,763 57,338 (9,000) (697,600) 318,223 819,965 154,439 1,208,814 100,746 609,879 999,700 5,649,700 284,724 717,575 95,541 1,100,831 91,983 552,541 1,008,700 6,347,300 1,403,654 1,406,034 1,382,911 1,424,343 1,426,735 1,424,525 $ $ 4.96 $ 3.7% 45% 126.05 $ 4.32 $ 3.8% 39% 128.82 $ 174,316 183,507 (20,689) (20,701) (41,614) 0.64 n.m. n.m. (2.77) (9,191) 91,427 1,271 4,368 85,301 1,295 4,378 6,126 (24) (10) $ $ 0.774 $ 0.734 $ 0.796 $ (0.022) 0.808 $ (0.074) 12.4% 11.8% 14.3% 61.6% 9.8% 9.5% 10.4% (0.9)% (11.0)% (1.5)% (1.5)% (2.9)% 14.8% (10) bps 600 bps (2.2)% (5.0)% 7.2% (1.9)% (0.2)% (2.8)% (9.1)% (1) (2) (3) 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. The LCR and NSFR are calculated in accordance with the Office of the Superintendent of Financial Institutions’ (OSFI) Liquidity Adequacy Requirements (LAR) guideline. LCR is the average for the three months ended for each respective period. For further details, refer to the Liquidity and funding risk section. (4) Capital ratios are calculated using OSFI’s Capital Adequacy Requirements (CAR) guideline and the Leverage ratio is calculated using OSFI’s Leverage Requirements (LR) (5) guideline. Effective Q1 2022, OSFI requires Canadian Domestic Systemically Important Banks (D-SIBs) to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements which are calculated using OSFI’s TLAC guideline. For further details, refer to the Capital management section. AUA includes $15 billion and $6 billion (2021 – $15 billion and $3 billion) of securitized residential mortgages and credit card loans, respectively. (6) Represents year-end spot balances. (7) (8) Based on TSX closing market price at period-end. (9) n.a. not applicable n.m. not meaningful Average amounts are calculated using month-end spot rates for the period. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 21 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 95,000+ 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 advice and solutions for individual and business clients including life, health, wealth, home, auto, travel, annuities and reinsurance. Investor & Treasury Services Provides asset, payment and treasury services to financial institutions and asset owners worldwide. We are a leader in Canadian cash management and transaction banking services. Trusted with nearly 4 trillion in AUA, our focus is on safeguarding client assets and supporting our clients’ growth. Capital Markets Provides expertise in advisory & origination, sales & trading, and lending & financing to corporations, institutional clients, asset managers, private equity firms and governments globally. We serve clients from 63 offices in 18 countries across North America, the U.K. & Europe, and Australia, Asia & other regions. Corporate Support Corporate Support consists of Technology & Operations, which provides the technological and operational foundation required to effectively deliver products and services to our clients, Functions, which includes our finance, human resources, risk management, internal audit and other functional groups, as well as our Corporate Treasury function. Vision and strategic goals Our business strategies and actions are guided by our vision, “To be among the world’s most trusted and successful financial institutions.” Our three strategic goals are: (cid:129) (cid:129) (cid:129) In Canada, to be the undisputed leader in financial services; In the U.S., to be the preferred partner to corporate, institutional and HNW 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 2022 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 29, 2022 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 Unemployment remains very low across many advanced economies, with labour shortages limiting further increases in production. However, we expect unemployment rates will rise as central banks continue to raise interest rates to contain high inflation, adding to growth headwinds. The U.S. and Canadian economies are expected to undergo moderate recessions in calendar 2023. Recessions in the Euro Area and the United Kingdom (U.K.) have likely already started with higher interest rates adding to surging inflation and disruptions from the war in Ukraine. While global inflation pressures have eased with the price of key commodities and shipping costs declining from peak levels earlier in calendar 2022, inflation pressures have also broadened across a wide array of goods and services. Consumer demand has continued to outpace available supply, and labour shortages have driven wages higher, adding to potentially longer-lasting price pressures. Central banks are responding by increasing interest rates more quickly than previously expected. Higher interest rates, elevated inflation and a decline in the value of equities are reducing household confidence and purchasing power. 22 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Canada Canadian GDP is expected to increase 3.2% in calendar 2022 following a 4.5% increase in calendar 2021. Output growth in this calendar year has been supported by recovery from the COVID-19 pandemic in the travel and hospitality sectors and increased activity in the oil and gas and mining sectors reflecting higher global commodity prices. Labour market conditions remain tight with elevated job openings and unemployment rates at multi-decade lows. Growth is expected to continue to moderate in the final calendar quarter of 2022 with a moderate recession expected in the first half of calendar 2023. While the unemployment rate is low at 5.2% as of October 2022, it has increased from 4.9% in June and July of 2022. While inflation growth rates have begun to moderate as global supply chain disruptions have eased, and house prices are declining in response to Bank of Canada (BoC) interest rate increases, the inflation rate in October was still high and pressures remain broad-based. The BoC has already increased the overnight rate by 350 basis points since March 2022 and we expect that rate to rise to 4.0% before the end of the calendar year. Rising household debt servicing costs, high consumer price growth, and declining house prices are expected to weaken household confidence and purchasing power over the next calendar year. U.S. U.S. GDP is expected to increase 1.8% in calendar 2022 following a 5.9% increase in calendar 2021. Labour markets have remained very strong. However the unemployment rate has begun to increase from lows over the summer and the number of job openings is decreasing. We expect further increases in the unemployment rate over the remainder of calendar 2022 and in calendar 2023. While inflation rates have begun to decrease as global supply chain disruptions ease, and the price of gasoline has declined from higher levels in the spring, price growth remains very high and broad-based. The Federal Reserve (Fed) is responding with continued interest rate hikes. The Fed has already increased the federal funds rate target by 375 basis points since March 2022 and we expect that target range will rise to 4.75% to 5.0% by the end of the first calendar quarter of 2023. Higher interest rates and inflation are reducing household purchasing power, and we expect consumer spending growth to slow with a moderate recession expected in the first half of calendar 2023. Europe Euro area GDP is expected to rise by 3.0% in calendar 2022 following a 5.3% increase in calendar 2021. The Euro area economy is expected to have entered a moderate recession in the second half of calendar 2022. The war in Ukraine is having a more direct impact on economies in the Euro area relative to other regions due to stronger direct trade linkages. In addition, inflation in the region is expected to continue to surge higher driven by increased energy costs. Despite a slowing growth outlook, surging inflation is pushing the European Central Bank (ECB) to raise interest rates from exceptionally low negative rates at the beginning of this calendar year. The ECB increased interest rates by 50 bps in July 2022 and another 75 bps in each of September and October 2022. We expect further increases to push the deposit rate to 2.5% by the end of the first calendar quarter of 2023. U.K. GDP is projected to rise by 4.2% in calendar 2022 after a 7.5% increase in calendar 2021. The U.K. is also expected to have entered a recession in the second half of calendar 2022. As inflation in the U.K. has continued to surge, we expect the Bank of England (BoE) to raise interest rates more quickly than previously anticipated to 3.75% by early calendar 2023. Financial markets Bond yields have increased substantially from the second calendar quarter of 2022 as central banks respond to high inflation. The spread between longer and shorter duration bond yields, which is a commonly used recession indicator, has narrowed sharply with the spread between 10-year and 2-year yields inverting to negative values in the U.S. and Canada. Equity markets have declined from the beginning of calendar 2022 on a worsening global growth outlook. Global inflation pressures have shown signs of easing and inflation rates may have peaked in some regions such as the U.S. and Canada. However, underlying inflation pressures are not expected to ease to central bank target rates until the economy weakens substantially. 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 2022 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 2022 Annual Report. For further details on our framework and activities to manage risks, refer to the risk and Capital management sections of this 2022 Annual Report. Key corporate events of 2022 HSBC Bank Canada On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC Canada) for an all-cash purchase price of $13.5 billion. In addition, we will purchase all of the existing preferred shares and subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value. HSBC Canada is a premier Canadian personal and commercial bank focused on globally connected clients. The transaction is expected to close by late 2023 and is subject to the satisfaction of customary closing conditions, including regulatory approvals. For further details, refer to Note 33 of our Consolidated Financial Statements. Brewin Dolphin Holdings PLC On September 27, 2022, we completed the acquisition of Brewin Dolphin Holdings PLC (Brewin Dolphin) for total consideration of £1,591 million ($2,341 million) as of the date of close. The results of the acquired business have been consolidated from the closing date and are included in International Wealth Management within our Wealth Management segment. For further details, refer to Note 6 of our Consolidated Financial Statements. RBC Investor Services On October 17, 2022, we announced the signing of a Memorandum of Understanding with CACEIS (the asset servicing banking group of Crédit Agricole S.A. and Banco Santander, S.A.) with a view for CACEIS to acquire the European asset servicing activities of RBC Investor Services and its associated Malaysian centre of excellence. The execution of the final agreements between CACEIS and RBC requires prior consultation with the relevant works councils of CACEIS. The completion of the contemplated transaction will be subject to customary closing conditions, including regulatory and antitrust approvals, and is expected to take place by the end of the third calendar quarter of 2023. This transaction will have a de minimus impact on RBC’s CET1 ratio and EPS. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 23 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 of our overall performance relative to our peers over a period of time. Financial performance objectives are used to measure our performance against our medium-term TSR objectives and are used as goals as we execute against our strategic priorities. We review and revise these financial performance objectives as economic, market and regulatory environments change. The following table provides a summary of our 3-year and 5-year performance against our medium-term financial performance objectives: Financial performance compared to our medium-term objectives Table 2 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) 5-year (2) 8% 16.4% 12.9% 46% 8% 16.7% 12.5% 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 the macroeconomic backdrop. (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 2023. 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: (cid:129) 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. (cid:129) (cid:129) 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) 10% Top half 6% 9% Top half 5% (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, 2019 to October 31, 2022 and October 31, 2017 to October 31, 2022. Common share and dividend information For the year ended October 31 2022 2021 2020 2019 Common share price (RY on TSX) – close, end of period Dividends paid per share Increase (decrease) in share price Total shareholder return $ 126.05 $ 128.82 $ 93.16 $ 106.24 $ 4.96 (2.2)% 1.6% 4.32 38.3% 43.8% 4.26 (12.3)% (8.4)% 4.00 10.8% 15.2% Table 4 2018 95.92 3.70 (4.9)% (1.0)% Financial performance Overview 2022 vs. 2021 Net income of $15,807 million was down $243 million or 2% from last year. Diluted EPS of $11.06 was flat and ROE of 16.4% was down 220 bps. Our CET1 ratio was 12.6%, down 110 bps from last year. Our earnings reflect lower results in Capital Markets and Insurance, partially offset by higher earnings in Personal & Commercial Banking, Wealth Management, and Investor & Treasury Services. The current year also reflects lower releases of provisions on performing loans. For further details on our business segment results and CET1 ratio, refer to the Business segment results and Capital management sections, respectively. 24 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 2022 vs. 2021 $ $ 165 3 72 8 82 0.06 0.06 The relevant average exchange rates that impact our business are shown in the following table: (Average foreign currency equivalent of C$1.00) (1) U.S. dollar British pound Euro (1) Average amounts are calculated using month-end spot rates for the period. Total revenue (Millions of Canadian dollars, 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 Table 6 2021 0.796 0.579 0.668 2022 0.774 0.618 0.727 $ $ $ Table 7 2022 40,771 $ 18,054 22,717 $ 1.48% 2021 28,145 8,143 20,002 1.48% 3,510 $ 926 7,610 4,289 1,481 1,976 2,058 1,038 1,203 1,512 43 110 512 5,600 1,183 7,132 4,251 1,538 1,858 2,692 1,066 1,078 1,530 145 130 1,488 $ $ 26,268 $ 29,691 48,985 $ 49,693 2022 vs. 2021 Total revenue decreased $708 million or 1% from last year, largely due to lower insurance premiums, investment and fee income (Insurance revenue) and other revenue. Lower underwriting and other advisory fees and trading revenue also contributed to the decrease. These factors were partially offset by higher net interest income and investment management and custodial fees. Net interest income increased $2,715 million or 14%, primarily due to average volume growth and higher spreads in Canadian Banking and Wealth Management. NIM remained flat, as the benefit to our Canadian Banking and Wealth Management segments from rising interest rates was offset by spread compression in repo products. Insurance revenue decreased $2,090 million or 37%, mainly due to the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in PBCAE. These factors were partially offset by business growth in Canadian Insurance across the majority of our products. Investment management and custodial fees increased $478 million or 7%, primarily driven by higher average fee-based client assets reflecting net sales. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 25 Trading revenue decreased $257 million or 22%, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions. Underwriting and other advisory fees decreased $634 million or 24%, mainly attributable to lower debt and equity origination across most regions. Other revenue decreased $976 million or 66%, primarily 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. 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 2022 2,024 $ 926 2021 (2) 2,230 1,183 2,950 $ 3,413 1,147 $ 951 852 2,950 $ 1,904 935 574 3,413 $ $ $ $ (1) (2) 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). Amounts have been revised from those previously presented. 2022 vs. 2021 Total trading revenue of $2,950 million, which is comprised of trading-related revenue recorded in Net interest income and Non-interest income, decreased $463 million or 14% from last year, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions. Provision for credit losses (1) (Millions of Canadian dollars, except percentage amounts) Personal & Commercial Banking Wealth Management Capital Markets Corporate Support and other (2) PCL on performing loans Personal & Commercial Banking Wealth Management Capital Markets Corporate Support and other (2) PCL on impaired loans PCL – Loans PCL – Other financial assets (3) Total PCL PCL on loans is comprised of: Retail Wholesale PCL on performing loans Retail Wholesale PCL on impaired loans PCL – Loans Table 9 For the year ended $ October 31 2022 (281) $ 21 (22) 1 October 31 2021 (899) (32) (414) (5) (281) (1,350) $ 755 $ 13 13 (3) 778 497 (13) 484 $ 731 (14) (39) – 678 (672) (81) (753) (31) $ (250) (281) (684) (666) (1,350) 648 130 778 604 74 678 $ 497 $ (672) $ $ PCL on loans as a % of average net loans and acceptances 0.06% (0.10)% PCL on impaired loans as a % of average net loans and acceptances 0.10% 0.10% (1) (2) (3) Information on loans represents loans, acceptance and commitments. Includes PCL recorded in Corporate Support, Insurance and Investor & Treasury Services. PCL on other financial assets mainly represents provisions on debt securities measured at FVOCI and amortized cost, accounts receivable and financial guarantees. 26 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 2022 vs. 2021 Total PCL was $484 million compared to $(753) million last year, primarily reflecting lower releases of provisions on performing loans in Personal & Commercial Banking and Capital Markets. The PCL on loans ratio increased 16 bps. PCL on performing loans was $(281) million, compared to $(1,350) million last year, primarily in Personal & Commercial Banking and Capital Markets, reflecting the recovery from the COVID-19 pandemic in both 2022 and 2021. The releases in the current year were partially offset by unfavourable changes in our macroeconomic outlook. PCL on impaired loans increased $100 million or 15%, mainly reflecting recoveries last year as compared to provisions taken in the current year in Capital Markets and Wealth Management, as well as higher provisions in Personal & Commercial Banking. Insurance policyholder benefits, claims and acquisition expense (PBCAE) 2022 vs. 2021 PBCAE of $1,783 million decreased $2,108 million or 54% from last year, mainly reflecting the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in revenue. Higher favourable investment-related experience and favourable annual actuarial assumption updates in the current year largely related to economic assumptions also contributed to the decrease. These factors were partially offset by the impact of lower new longevity reinsurance contracts, as well as business growth in Canadian Insurance. Non-interest expense (Millions of Canadian dollars, except percentage amounts) Salaries Variable compensation Benefits and retention compensation Share-based compensation Human resources Equipment Occupancy Communications Professional fees Amortization of other intangibles Other Non-interest expense Efficiency ratio (1) Efficiency ratio adjusted (2) Table 10 $ 2022 7,251 $ 7,127 2,015 135 16,528 2,099 1,554 1,082 1,511 1,369 2,466 $ 26,609 $ 54.3% 52.3% 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% (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. 2022 vs. 2021 Non-interest expense increased $685 million or 3% from last year, mainly due to higher staff and technology related costs as well as increased marketing costs and other discretionary spend. These factors were partially offset by the change in the fair value of our U.S share-based compensation plans, which was largely offset in Other revenue. Our efficiency ratio of 54.3% increased 210 bps from last year. Excluding the change in fair value of investments backing policyholder liabilities, our efficiency ratio of 52.3% increased 10 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. 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 11 2022 $ 4,302 $ 2021 4,581 508 871 90 129 31 72 443 810 73 140 31 39 1,701 6,003 $ $ $ 20,109 $ 21.4% 27.5% 1,536 6,117 20,631 22.2% 27.6% (1) Total income and other taxes as a percentage of income before income taxes and other taxes. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 27 2022 vs. 2021 Income tax expense decreased $279 million or 6% from last year, primarily due to lower income before income taxes, an increase in income from lower tax rate jurisdictions and higher tax-exempt income in the current year. The effective income tax rate of 21.4% decreased 80 bps, primarily due to higher tax-exempt income and an increase in income from lower tax rate jurisdictions in the current year. Other taxes increased $165 million or 11% from last year, mainly due to higher value added and sales taxes commensurate with increased purchase activity, higher payroll taxes driven by higher staff-related costs, as well as an increase in business taxes. Client assets 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 69% of total AUA, as at October 31, 2022, followed by our Wealth Management and Personal & Commercial Banking businesses with approximately 25% and 6% of total AUA, respectively. 2022 vs. 2021 AUA decreased $698 billion or 11% from last year, primarily due to unfavourable market conditions, partially offset by increased client activity in Investor & Treasury Services, the impact of foreign exchange translation and the inclusion of our acquisition of Brewin Dolphin in Wealth Management. The following table summarizes AUA by geography and asset class: AUA by geographic mix and asset class (Millions of Canadian dollars) Canada (1) Money market Fixed income Equity Multi-asset and other Total Canada U.S. (1) Money market Fixed income Equity Multi-asset and other Total U.S. Other International (1) Money market Fixed income Equity Multi-asset and other Total International Total AUA Table 12 2022 2021 $ 43,200 $ 735,800 734,000 1,006,300 42,700 772,400 781,400 1,150,400 2,519,300 2,746,900 40,700 116,000 246,300 304,300 707,300 49,800 90,400 256,000 324,600 720,800 38,200 252,700 636,600 1,495,600 32,800 308,200 865,000 1,673,600 2,423,100 2,879,600 $ 5,649,700 $ 6,347,300 (1) Geographic information is based on the location from where our clients are serviced. 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, 2022. 2022 vs. 2021 AUM decreased $9 billion or 1% from last year, primarily due to unfavourable market conditions, partially offset by the inclusion of our acquisition of Brewin Dolphin, the impact of foreign exchange translation and net sales. 28 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis The following table presents the change in AUM for the year ended October 31, 2022: 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 2022 Table 13 2021 Money market Fixed income Equity Multi-asset and other Total Total $ 43,500 $ 235,400 $ 137,600 $ 592,200 $ 1,008,700 $ 100,000 (107,300) (700) (8,000) 200 – 2,100 42,900 (48,900) (2,900) (8,900) (27,400) – (1,300) 16,100 (10,600) 2,000 7,500 (18,100) – 2,900 16,600 (13,200) 23,000 26,400 (72,100) 58,500 29,200 175,600 (180,000) 21,400 17,000 (117,400) 58,500 32,900 843,600 98,000 (73,700) 51,500 75,800 123,800 (4,500) (30,000) Total market, acquisition/dispositions and foreign exchange impact 2,300 (28,700) (15,200) 15,600 (26,000) 89,300 AUM, balance at end of year $ 37,800 $ 197,800 $ 129,900 $ 634,200 $ 999,700 $ 1,008,700 Business segment results Results by business segments (Millions of Canadian dollars, except percentage amounts) Personal & Commercial Banking Wealth Management Insurance 2022 Investor & Treasury Services Capital Markets (1) Corporate Support (1) Net interest income $ Non-interest income 14,019 $ 6,124 3,634 $ – $ 11,215 3,510 498 $ 1,725 4,698 $ 4,422 (132) $ (728) Total revenue PCL PBCAE Non-interest expense 20,143 463 – 8,437 14,849 34 – 10,701 3,510 – 1,783 588 2,223 (3) – 1,569 9,120 (11) – 5,561 (860) 1 – (247) Table 14 2021 Total 22,717 $ 26,268 48,985 484 1,783 26,609 Total 20,002 29,691 49,693 (753) 3,891 25,924 Income before income taxes Income taxes 11,243 2,873 4,114 970 1,139 282 657 144 3,570 649 (614) (616) 20,109 4,302 20,631 4,581 Net income $ 8,370 $ 3,144 $ 857 $ 513 $ 2,921 $ 2 $ 15,807 $ 16,050 ROE (2) 30.9% 16.5% 36.4% 16.4% 11.3% n.m. 16.4% 18.6% Average assets $ 575,900 $ 158,100 $ 22,500 $ 250,600 $ 824,800 $ 55,000 $ 1,886,900 $ 1,678,200 (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 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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 29 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 expected credit losses on 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. For details on our accounting policy on Allowance for credit losses (ACL), refer to Note 2 of our 2022 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. 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. 30 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Calculation of ROE (Millions of Canadian dollars, except percentage amounts) Net income available to 2022 Table 15 2021 Personal & Commercial Banking Wealth Management Insurance Investor & Treasury Services Capital Markets Corporate Support Total Total common shareholders $ 8,287 $ 3,096 $ 851 $ 505 $ 2,855 $ (47) $ 15,547 $ 15,781 Total average common equity (1), (2) ROE (3) 26,800 30.9% 18,800 2,350 3,100 25,350 18,300 94,700 84,850 16.5% 36.4% 16.4% 11.3% n.m. 16.4% 18.6% 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, 2022 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 (Millions of Canadian dollars, except percentage amounts) Total revenue Non-interest expense Efficiency ratio 2022 Item excluded As reported Change in fair value of investments backing policyholder liabilities Adjusted As reported 2021 Item excluded Change in fair value of investments backing policyholder liabilities Table 16 Adjusted $ 48,985 $ 26,609 54.3% 1,888 – $ 50,873 $ 49,693 $ 26,609 25,924 52.3% 52.2% 13 – $ 49,706 25,924 52.2% Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 31 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 the delivery of exceptional client experiences, the breadth of our product suite, our depth of expertise, and the features of our digital solutions. > 14 million Number of Canadian Banking clients #1 or #2 Ranking in market share for all key retail and business products 38,450 Employees Revenue by business lines $20.1 billion Total revenue 70% Personal Banking 26% 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. We have the largest branch network, the most ATMs, one of the largest mobile sales forces across Canada along with market-leading digital capabilities. 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, auto financing companies, as well as emerging entrants to the financial services industry. 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. 2022 Operating environment › In the early part of the fiscal year, the operating environment continued to be impacted by COVID-19 related restrictions; however, it was buffered in part by low unemployment levels, sustained GDP growth and government support. As restrictions eased during the year, client activity improved, driving solid revenue growth in fiscal 2022. › In response to rising inflation, the BoC raised the benchmark interest rate by 350 basis points from March 2022 to October 2022. As a result of the rising interest rate environment, we saw NIM expansion in fiscal 2022, reversing the decline in the prior year. The combination of strong volumes and higher NIM translated to significant growth in net interest income. › While the credit environment in fiscal 2022 reflected a recovery from the COVID-19 pandemic, it also reflected unfavourable changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well as rising inflation and interest rates. PCL on impaired loans remained well below pre-pandemic levels. › As a result of the rising rate environment, housing activity has slowed and household debt servicing costs increased. In the latter half of the year, we saw mortgage originations below prior year levels. › Personal and business deposits continued to see significant growth in the first half of the year as COVID-19 related disruptions persisted; however, as a result of the economy re-opening and robust client activity, as well as the impact from Bank of Canada’s monetary policy, deposit growth decelerated in the latter half of the fiscal year but remained well above pre- pandemic levels. › In fiscal 2022, we saw unfavourable market conditions driving mutual fund balances lower from both market depreciation and net redemptions. We also saw a decline in client activity in our Direct Investing business from elevated levels in the previous year. › Client preferences for digital offerings are evolving and we continue to invest in digital solutions to improve the client experience and deliver personalized advice. › Our Caribbean Banking business was favourably impacted by the recovery from the COVID-19 pandemic, reflecting higher client activity. We also saw releases of provisions on performing and impaired loans. › In the U.S., earnings were favourably impacted by the rising interest rate environment and the increase in cross-border travel, as most restrictions related to COVID-19 were lifted. 32 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Strategic priorities OUR STRATEGY PROGRESS IN 2022 PRIORITIES IN 2023 Provide flexibility by continuing to deliver anytime, anywhere solutions to our clients across all channels, seamlessly integrating mobile and digital services into our clients’ lives Continue to reimagine our branch network to meet the evolving needs of our clients Expand our expert advisor network to support clients with complex advice needs Continue to focus on opportunities to support businesses and retail clients in their transition to net zero, including building upon our existing portfolio of products, services and advice Continue to utilize and transform our joint venture Moneris to deliver a leading merchant platform Transform sales, advice and services Evolved our branch network by opening new format branches and investing in upgrading existing locations with the objective of enhancing the client experience, allowing clients to engage in deeper conversations with our advisors and enabling them to complete more transactions digitally Continued to create capacity and capability to focus on advice, complex servicing and sales, all underpinned by innovation across our distribution network Leveraged our industry-leading Canadian mobile app to revolutionize the mobile client experience through personalization and value-added client insights Continued to tailor advice and insights to the individual to help clients manage their finances through the NOMI suite of capabilities, including NOMI Insights®, NOMI Find & Save® that uses predictive technology to help clients save, and NOMI® Forecast that provides a seven-day forecast of clients’ future cash flow In May 2022, Retail Banker International awarded RBC with the Best Global Retail Bank and Best Bank for Small & Medium-Sized enterprises (SMEs) awards, recognizing the Bank’s success in respect of its retail banking profits, world-class cost-income ratio, continued market share gains and exceptional client base In October 2022, J.D. Power Canada ranked RBC the highest in Customer Satisfaction among Big 5 Banks for the third consecutive year from the J.D. Power 2022 Canada Retail Banking Satisfaction Study In November 2021, RBC was awarded the Best Payments Innovation Award from The Digital Banker as part of the Global Retail Banking Innovation Awards 2021 Leveraged our existing product portfolio to support our clients’ transition to net zero, including lending such as electric and hybrid vehicles and energy retrofit loans, and ESG investment products including market-linked ESG GIC, InvestEase® responsible investing portfolio and RBC Vision funds Continued to grow our national cleantech practice through RBCx and worked with a number of cleantech ecosystem partners to identify and overcome the hurdles to commercialization of cleantech solutions Accelerate our growth Ownr® has launched more than 32,800 new Canadian businesses, driving close to 21,600 small business RBC bank accounts this year Continue to build a suite of best-in-class value propositions, digital experiences and Beyond Banking ventures to accelerate client acquisition Engage Canadians earlier, more often and in more compelling ways Focus on engaging key high-growth client segments and enabling our advisors to build new and deeper relationships with the objective of achieving industry- leading volume growth Establish additional key partnerships to continue to add value for our clients Enable unparalleled value for both consumers and merchants through best-in-class loyalty program Focus on increasing employee engagement and continue to build a future-ready workforce Since the launch of the full product offering in August 2021, Mydoh has reached 100,000 Canadian parents and children and is experiencing very high engagement Continued to provide superior working capital solutions to our business clients through RBC PayEdgeTM platform Lead with RBC VantageTM, a program that allows clients to unlock rewards, savings, insights and more with any eligible bank account. Approximately 2 million clients signed up for RBC Vantage since launch and we’ve delivered millions in fee rebates and over 1 billion RBC Avion® points Launched Vantage SnapshotTM that provides clients with a personalized picture of the cumulative savings and benefits they’ve received with their RBC bank accounts and highlights opportunities for clients to earn and save more – all in one spot Launched our next-generation loyalty program, Avion RewardsTM, that provides Canadians with more ways to shop, earn, save and redeem with innovative shopping features, best-in-class cash back deals and offers, and more ways to pay with points 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 Entered into a collaboration agreement with ICICI Bank Canada to focus on building banking solutions that simplify the financial transition for newcomers from the time they choose Canada to their arrival and beyond Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 33 OUR STRATEGY PROGRESS IN 2022 PRIORITIES IN 2023 Digitize to unlock productivity Achieved 11% year over year growth in number of mobile users Recognized with the J.D. Power Canada award for “Best in Customer Satisfaction” for our mobile banking app. The recognition comes from the J.D. Power 2022 Canadian Banking Mobile App Satisfaction Study Continued to invest in solutions that simplify, digitize and automate experiences for clients and employees, and enable employees to deliver relevant and expert advice, such as our market-leading MyAdvisor® personalized planning capability Enhanced digital experience for our small business and commercial clients and made it easier for them to transact with us Entered into agreements with Plaid and Envestnet | Yodlee that allow RBC clients to better manage their finances and build wealth by securely connecting to and sharing their RBC financial information with thousands of third-party applications Accelerated actions focused on enhancing the client experience underpinned by programs across growth and transformation priorities, including product development and digitization Despite lingering impacts of the COVID-19 pandemic, continued to drive accelerated client and real estate financing growth leveraging a competitively differentiated value proposition and home-buying solution Made focused investments to digitize client and internal processes within real estate financing, improving process robustness and control automation, and expanding targeted discounts and offers of value to the cross-border lifestyle In the Caribbean In the U.S. Outlook Deliver more personalized insights to improve the client experience while continuing to simplify and digitize everyday banking Lead in mobile capabilities and enable fulfillment of servicing through digital channels with access to advisors to help clients on their chosen path Invest in new tools and capabilities and proactively seek ways to streamline internal processes and the client experience Accelerate adoption of business agility and deliver faster, smarter and higher quality products and solutions Continue focus on modernizing data and technology; enhancing the client experience by digitizing and simplifying day to day banking; and developing and accelerating key programs to enable employees for success and accelerate growth Continue driving accelerated growth momentum through deeper integration to increase market share of Canadian purchasers of U.S. real estate and new-to- RBC relationship acquisition Expand digitally enabled client experiences to extend competitive differentiation and drive industry leading client satisfaction, while accelerating automation of operational processes and controls to enhance scalability Interest rate hikes by central banks to contain surging inflation are adding to global growth risk in the year ahead. Housing markets in Canada have already pulled back significantly since spring in response to increases in interest rates. Labour market conditions are extremely tight with demand for workers well outpacing available supply, leading to shortages across regions and sectors. However, as the economic backdrop deteriorates we expect job openings will fall and unemployment rates will rise. We expect moderate recessions in the U.S. and Canada in the first half of calendar 2023 with consumer spending contracting as higher borrowing costs and prices reduce household purchasing power. We expect the economy will begin to grow again in the second half of calendar 2023 with slowing inflation allowing central banks to pause interest rate hikes in the coming months. We will continue to pursue industry-leading outcomes and operational efficiency initiatives during uncertain times, and channel transformation to achieve our vision of being a digitally-enabled relationship bank. The Caribbean’s economic recovery has continued to strengthen in calendar 2022, supported by strong tourism-related travel. However, a slowing of the growth momentum is expected in 2023 as major source markets (U.S., U.K., Canada, Europe) are projected to fall into recessions. 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. 34 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 $ $ $ $ $ $ 2022 14,019 $ 6,124 20,143 (283) 746 463 8,437 11,243 8,370 $ 19,282 $ 13,957 5,325 861 30.9% 2.55% 41.9% 4.0% Table 17 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% 575,900 $ 548,900 553,300 552,100 336,400 $ 355,600 5,600 38,450 527,100 502,000 505,600 504,300 367,700 340,800 5,400 36,675 0.14% 0.14% 8,024 $ 2.54% 40.5% 3.8% 7,620 2.50% 42.0% 2.9% See Glossary for composition of this measure. AUA includes securitized residential mortgages and credit card loans as at October 31, 2022 of $15 billion and $6 billion, respectively (October 31, 2021 – $15 billion and $3 billion). (1) (2) (3) Represents year-end spot balances. Financial performance 2022 vs. 2021 Net income increased $523 million or 7% from last year, primarily attributable to higher net interest income, driven by average volume growth of 9% in Canadian Banking and higher spreads. Higher non-interest income also contributed to the increase. These factors were partially offset by higher PCL, higher staff and technology related costs, including digital initiatives. Total revenue increased $1,797 million or 10%, primarily due to higher net interest income reflecting average volume growth in Canadian Banking of 9% in loans and 9% in deposits. Increased client activity contributed to higher foreign exchange revenue, card service revenue and service charges. NIM increased 4 bps, primarily due to the impact of the rising interest rate environment, partially offset by changes in product mix and lower prepayment revenue in our mortgage portfolios. PCL was $463 million compared to $(187) million last year. The increase in PCL was primarily attributable to lower releases of provisions on performing loans due to unfavourable changes in our macroeconomic outlook in the current year. Non-interest expense increased $459 million or 6%, mainly attributable to higher staff and technology related costs, including digital initiatives, as well as higher marketing costs. Average loans and acceptances increased $48 billion or 9%, mainly driven by growth in residential mortgages and business loans. Average deposits increased $48 billion or 9%, reflecting growth in business deposits and personal deposits including Guaranteed Investment Certificates (GICs). Business line review In Canada, we operate through two business lines: Personal Banking and Business Banking. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 35 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, GICs, credit cards, and payment products and solutions. We rank #1 or #2 in market share for all key Personal Banking products in Canada supported by the largest retail banking network in Canada, with 1,162 branches and 4,028 ATMs. Financial performance Total revenue increased $620 million or 5% compared to last year, primarily due to higher net interest income reflecting average volume growth of 9% and higher interest rates, partially offset by the impact of competitive pricing in our mortgage portfolios. Increased client activity also contributed to higher card service revenue, foreign exchange revenue and service charges. These factors were partially offset by lower securities brokerage commissions. Average residential mortgages increased 11% compared to last year, mainly due to solid, but moderating, housing activity and mortgage originations. Average deposits increased 9% from last year, largely reflecting acquisition of new clients and an increase in activity from existing clients. Selected highlights (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. Business Banking Table 18 Average residential mortgages, loans and deposits (Millions of Canadian dollars) 2022 2021 $ 13,957 $ 13,337 18,200 75,700 338,400 305,400 74,800 293,500 270,500 16,600 162,200 132,400 178,600 205,500 194,400 191,300 127,600 135,900 1,162 4,028 1,182 4,032 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2022 2021 Residential mortgages Other loans and acceptances, net Deposits Business Banking offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer financing, trade products, and services to small and medium-sized commercial businesses across Canada. With one of the largest teams of relationship managers and specialists in the industry, our commitment to client experience and trusted advice has earned us leading market share in business lending and deposits. Financial performance Total revenue increased $1,092 million or 26% compared to last year, primarily due to higher net interest income reflecting higher interest rates and average volume growth of 11%. Higher credit fees, service charges and foreign exchange revenue reflecting increased client activity also contributed to the increase. Average loans and acceptances increased 11% and average deposits increased 11%, mainly due to new account acquisitions as well as deepening of our existing client relationships. Selected highlights (Millions of Canadian dollars) Total revenue Other information (average) Loans and acceptances, net Deposits Caribbean & U.S. Banking Table 19 Average loans and acceptances and deposits (Millions of Canadian dollars) 2022 5,325 $ 2021 4,233 $ 110,800 237,900 99,800 215,200 250,000 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 2022 2021 Loans and acceptances, net Deposits Our Caribbean Banking business offers a comprehensive suite of banking products and services, as well as international financing and trade promotion services through extensive branch, ATM, online, and mobile banking networks. Our U.S. Banking business serves the needs of Canadian retail and small business clients providing personalized, digitally-enabled cross-border banking solutions enabling a cross-border lifestyle in all 50 states across the U.S. 36 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Financial performance Total revenue increased $85 million or 11% from last year, primarily due to higher net interest income reflecting average volume growth of 12% and higher spreads. Higher card service revenue reflecting increased client activity also contributed to the increase. Average loans and acceptances increased 12% and average deposits increased 11% primarily due to increased client activity and the impact of foreign exchange translation. Selected highlights Table 20 Average loans and deposits (Millions of Canadian dollars) (Millions of Canadian dollars, except number of and percentage amounts) Total revenue Other information NIM Average loans and acceptances, net Average deposits AUA (1) Average AUA AUM (1) Number as at October 31: Branches ATMs 2022 861 $ 2021 776 $ 2.90% 10,200 20,800 6,500 6,300 5,300 38 269 2.85% 9,100 18,700 5,700 5,700 5,100 38 271 22,500 20,000 17,500 15,000 12,500 10,000 7,500 5,000 2,500 0 (1) Represents year-end spot balances. Wealth Management 2022 2021 Loans and acceptances, net Deposits Wealth Management is a global business serving clients in key financial centres. We serve HNW and UHNW individual and institutional clients with a comprehensive suite of advice-based solutions and strategies to help them achieve their financial goals. $14.8 billion Total revenue > 6,100 Client-facing advisors > $55 billion AUA net flows Asset under Administration (AUA) Assets under Management (AUM) $1,388 billion Total AUA $992 billion Total AUM 94% Personal 5% Institutional 1% Mutual Funds 49% Personal 26% Mutual Funds 25% 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 6th largest full-service wealth advisory firm in the U.S., as measured by AUA, 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 mutual 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., Ireland, the Channel Islands and Asia 2022 Operating environment › Earnings in the current fiscal year were favourably impacted by the rising interest rate environment reflecting rate hikes by the Fed, BoC and other central banks, while challenging market conditions unfavourably impacted our fee-based client assets. › Our core businesses performed well with continued volume growth in City National and net positive flows of fee-based 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. The mutual fund sector has seen a slowdown in sales due to the rising interest rate environment and market volatility. › 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. › While the credit environment in fiscal 2022 reflected a recovery from the COVID-19 pandemic, it also reflected unfavourable changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well as rising inflation and interest rates. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 37 Strategic priorities OUR STRATEGY PROGRESS IN 2022 PRIORITIES IN 2023 In Canada, be the premier service provider for HNW and UHNW clients 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 Further extended our position as industry leader in our full-service private wealth business Continued to focus on holistic wealth planning, including advisor training on intergenerational and business wealth transfer Continued to expand RBC® Premier Banking to deepen banking relationships with Wealth Management clients Continued to enhance our digital and data capabilities to drive increased client satisfaction and advisor productivity Implemented unique capabilities that are becoming increasingly important to our client base such as private alternative investment products Continue to retain and attract top-performing advisors to strengthen our talent advantage Deliver a differentiated client experience through enriched advisor-client interactions and seamless digital experiences Deepen client relationships by leveraging the combined strengths across other business segments with a focus on the business owner client segment 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 Continued to invest 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 organically growing our core-banking business and enhancing our risk management and controls foundation As part of the Preferred Banking mortgage-led strategy, City National launched a pilot mortgage pod program designed to attract new clients with a mortgage-led strategy The National Corporate Banking division, which was launched in 2021 to pursue the mid-Corp segment (companies with annual revenue from $500 million to $2 billion), gained market share in 2022 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 to deepen client relationships In City National, we will continue to focus on enhancing our risk management and compliance capabilities across the three lines of defense Serve our clients more effectively through a technology-driven platform, for example, transforming our end-to-end commercial credit journey leveraging a new commercial lending platform, strengthening the mortgage platform by modernizing technology and enhancing our client-facing digital capabilities Drive programs to enhance profitability and scalability across the organization 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 Completed acquisition of Brewin Dolphin, increasing our distribution, AUM and client base to position ourselves as the third largest wealth manager in the U.K. In Asia, continued growth momentum achieved through the addition of experienced client-facing advisors and net new assets 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 and increase business effectiveness and talent capabilities Successful integration of RBC Brewin Dolphin to enhance client value proposition and consolidate position in the U.K. local market Focus on growing the business in Asia by attracting experienced advisors; enhancing digital and product capabilities; and deepening cross-business, global collaboration In asset management, be a leading, diversified asset manager focused on global institutional and North American retail clients Maintained #1 market share in Canadian mutual fund AUM RBC® iShares strategic alliance maintained #1 market share in Canadian ETFs RBC GAM investment teams continued to integrate material ESG factors into their investment processes for applicable investment strategies 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 Outlook The ongoing uncertainty in the macroeconomic environment, including the expectation of further interest rate increases and a slowdown in economic growth, will continue to impact markets. Despite this uncertainty, we believe our diversified businesses remain 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 the full breadth of our 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. 38 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Wealth Management (Millions of Canadian dollars, except number of, percentage amounts and as otherwise noted) Net interest income Non-interest income Total revenue PCL on performing assets PCL on impaired assets PCL Non-interest expense Income before income taxes Net income Revenue by business Canadian Wealth Management U.S. Wealth Management (including City National) U.S. Wealth Management (including City National) (US$ millions) Global Asset Management International Wealth Management Key ratios ROE NIM Pre-tax margin (1) Selected balance sheet information Average total assets Average total earning assets, net Average loans and acceptances, net Average deposits Other information AUA (2), (3) AUM (2) Average AUA Average AUM PCL on impaired loans as a % of average net loans and acceptances Number of employees (FTE) Number of advisors (4) $ $ $ $ $ 2022 3,634 $ 11,215 14,849 21 13 34 10,701 4,114 3,144 $ 4,308 $ 7,448 5,757 2,667 426 16.5% 2.57% 27.7% Table 21 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% 158,100 $ 141,200 99,800 158,800 136,000 119,500 84,000 143,000 1,387,900 $ 991,500 1,318,100 966,300 0.01% 22,782 6,158 1,322,300 1,000,600 1,242,400 937,200 (0.02)% 19,486 5,548 Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items (Millions of Canadian dollars, except percentage amounts) 2022 vs. 2021 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 $ 158 5 129 17 (3)% 7% 9% Pre-tax margin is defined as Income before income taxes divided by Total revenue. (1) (2) Represents year-end spot balances. (3) In addition to Canadian Wealth Management, U.S. Wealth Management (including City National), and International Wealth Management, AUA includes $6,400 million (2021 – $7,100 million) related to GAM. (4) Represents client-facing advisors across all our Wealth Management businesses. Client assets – AUA (Millions of Canadian dollars) AUA, beginning balance Asset inflows Asset outflows Total net flows Market impact Acquisitions/dispositions Foreign exchange Total market, acquisition/dispositions and foreign exchange impact AUA, balance at end of year Table 22 2022 2021 $ 1,322,300 $ 380,600 (325,100) 1,100,000 352,800 (299,200) 55,500 (153,000) 79,800 83,300 10,100 53,600 235,900 (12,100) (55,100) 168,700 $ 1,387,900 $ 1,322,300 Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 39 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 $ 2022 Money market 43,400 $ 233,300 $ 137,200 $ 586,700 $ 1,000,600 $ Multi-asset and other Fixed income Equity Total 100,000 (107,300) (700) (8,000) 200 – 2,200 42,900 (48,900) (2,900) (8,900) (27,200) – (1,600) 16,100 (10,600) 1,900 7,400 (18,100) – 2,900 16,600 (13,200) 22,700 26,100 (71,600) 58,500 29,000 175,600 (180,000) 21,000 16,600 (116,700) 58,500 32,500 Table 23 2021 Total 836,400 97,900 (73,600) 51,000 75,300 123,200 (4,500) (29,800) Total market, acquisition/dispositions and foreign exchange impact 2,400 (28,800) (15,200) 15,900 (25,700) 88,900 AUM, balance at end of year $ 37,800 $ 195,600 $ 129,400 $ 628,700 $ 991,500 $ 1,000,600 AUA by geographic mix and asset class (Millions of Canadian dollars) Canada (1) Money market Fixed income Equity Multi-asset and other Total Canada U.S. (1) Money market Fixed income Equity Multi-asset and other Total U.S. Other International (1) Money market Fixed income Equity Multi-asset and other Total International Total AUA Table 24 2022 2021 $ 26,200 $ 30,500 81,800 369,500 508,000 24,700 29,200 91,300 377,400 522,600 40,700 116,000 246,300 297,100 700,100 16,600 8,900 47,000 107,300 179,800 49,500 90,300 256,000 308,400 704,200 15,300 8,100 37,700 34,400 95,500 $ 1,387,900 $ 1,322,300 (1) Geographic information is based on the location from where our clients are served. Financial performance 2022 vs. 2021 Net income increased $518 million or 20% from last year, mainly due to higher net interest income reflecting higher average volume growth and interest rates as well as higher average fee-based client assets. The impact of a legal provision taken in U.S. Wealth Management (including City National) in the prior year that was partially released in the first quarter of 2022 also contributed to the increase. These factors were partially offset by higher staff-related costs and variable compensation. Total revenue increased $1,553 million or 12%, largely due to higher net interest income driven by average volume growth of 19% in loans and 11% in deposits and higher interest rates. Higher average fee-based client assets, primarily reflecting net sales, and the impact of foreign exchange translation also contributed to the increase. PCL was $34 million compared to $(47) million last year, primarily in U.S. Wealth Management (including City National), mainly attributable to releases of provisions on performing loans in the prior year reflecting the recovery from the COVID-19 pandemic, as compared to provisions taken in the current year, largely driven by unfavourable changes in our macroeconomic outlook. Provisions taken on impaired loans in the current year, as compared to recoveries in the prior year, also contributed to the increase, resulting in a 3 bps increase in the PCL on impaired loans ratio. Non-interest expense increased $772 million or 8%, mainly due to higher staff and technology related costs. Higher variable compensation commensurate with increased results, the impact of foreign exchange translation as well as the Brewin Dolphin acquisition and related costs also contributed to the increase. Partly offsetting these factors was the impact of a legal provision taken in U.S. Wealth Management (including City National) in the prior year that was partially released in the first quarter of 2022. AUA increased $66 billion or 5%, mainly due to the impact of foreign exchange translation, the inclusion of our acquisition of Brewin Dolphin, and net sales. These factors were partially offset by unfavourable market conditions. AUM decreased $9 billion or 1%, primarily due to unfavourable market conditions, partially offset by the inclusion of our acquisition of Brewin Dolphin, the impact of foreign exchange translation and net sales. 40 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Business line review Canadian Wealth Management Canadian Wealth Management includes our full-service Canadian wealth advisory business, which is the largest in Canada as measured by AUA, with over 1,950 investment advisors providing comprehensive financial solutions with a focus on HNW and UHNW clients. Additionally, we provide discretionary investment management and estate and trust services to our clients through over 100 investment counsellors and over 100 trust professionals across Canada. We compete with domestic banks and trust companies, investment counselling firms, bank-owned full-service brokerages and boutique brokerages, mutual fund companies, and global private banks. In Canada, bank-owned wealth managers continue to be the major players. Financial performance Revenue increased $400 million or 10% from last year, primarily due to higher average fee-based client assets, largely driven by net sales, as well as higher net interest income from higher interest rates. Table 25 Average AUA and AUM (Millions of Canadian dollars) Selected highlights (Millions of Canadian dollars) Total revenue Other information 2022 2021 $ 4,308 $ 3,908 Average loans and acceptances, net Average deposits AUA (1) AUM (1) Average AUA Average AUM 5,600 28,600 4,600 26,200 511,300 524,200 171,700 168,900 519,600 486,100 171,800 151,900 (1) Represents year-end spot balances. U.S. Wealth Management (including City National) 600,000 500,000 400,000 300,000 200,000 100,000 0 2022 2021 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 $1,128 million or 18% from last year. In U.S. dollars, revenue increased $722 million or 14%, primarily due to higher net interest income driven by average volume growth of 14% in loans and 9% in deposits as well as higher interest rates, which also drove higher revenue from sweep deposits. Higher average fee-based client assets, largely driven by net sales, also contributed to the increase. NIM was up 21 bps, reflecting the impact of the rising interest rate environment as well as changes in average earning assets mix. Selected highlights Table 26 Average AUA and AUM (Millions of U.S. dollars) (Millions of Canadian dollars, except as otherwise noted) Total revenue Other information (Millions of U.S. dollars) Total revenue NIM Average earning assets, net Average loans, guarantees and letters of credit, net Average deposits AUA (1) AUM (1) Average AUA Average AUM (1) Represents year-end spot balances. 600,000 500,000 400,000 300,000 200,000 100,000 0 2022 $ 7,448 $ 2021 6,320 5,757 2.38% 98,100 68,800 90,600 513,700 159,200 538,100 168,100 5,035 2.17% 86,300 60,200 83,000 568,800 182,100 525,300 165,600 2022 2021 AUA AUM Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 41 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 distributed under the brand RBC BlueBay Asset Management, we offer investment management solutions for institutions and, through private banks including RBC Wealth Management®, to HNW and UHNW investors. We face competition from asset managers that are owned by international banks, as well as national and regional asset managers in the geographies where we serve clients. Financial performance Revenue decreased $59 million or 2% from last year, largely due to changes in the fair value of seed capital investments, the impact of foreign exchange translation as well as lower performance fees. These factors were partially offset by higher fee-based revenue driven by the impact of net sales. Selected highlights (Millions of Canadian dollars) Total revenue Other information 2022 2,667 $ 2021 2,726 $ Canadian net long-term mutual fund sales (redemptions) (1) Canadian net money market mutual fund sales (redemptions) (1) AUM (2) Average AUM (5,246) 21,830 (127) 522,700 562,200 (2,757) 597,300 568,200 (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 Table 27 Average AUM (Millions of Canadian dollars) 600,000 500,000 400,000 300,000 200,000 100,000 0 2022 2021 International Wealth Management includes operations in the U.K., Ireland, the Channel Islands and Asia. We provide customized and integrated wealth management solutions to HNW, UHNW and corporate clients in key financial centres. Competitors to our International Wealth Management business include global wealth managers, traditional private banks and domestic wealth managers. Financial performance Revenue increased $84 million or 25% from last year, primarily due to higher net interest income reflecting higher interest rates. Table 28 Average AUA and AUM (Millions of Canadian dollars) Selected highlights (Millions of Canadian dollars) Total revenue Other information Average loans, guarantees and letters of credit, net Average deposits AUA (1), (2) AUM (1), (2) Average AUA Average AUM 2022 426 $ 2021 342 $ 5,000 12,300 170,100 80,100 97,200 15,400 4,600 12,500 86,800 8,900 90,500 9,300 150,000 100,000 50,000 0 (1) (2) Represents year-end spot balances. AUA and AUM reflect the inclusion of $79,800 million and $72,400 million, respectively, related to our acquisition of Brewin Dolphin, which closed on September 27, 2022. 42 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 2022 2021 AUA AUM Insurance RBC Insurance® offers a wide range of advice and solutions for individual and business clients, including life, health, wealth, home, auto, travel, annuities, and reinsurance. $3.5 billion Total revenue > 4.9 million Number of clients 2,731 Employees Premiums and Deposits $5.5 billion Total premiums and deposits 45% Life and Health 42% Annuity 12% Segregated Fund Deposits 1% Property and Casualty 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, wealth accumulation solutions, and annuities to individuals and businesses. We also offer home and auto insurance for individuals through a distribution agreement with Aviva Canada. Our products and services are distributed through a wide variety of channels, including advice centres, RBC Insurance® stores, mobile advisors, digital platforms, independent brokers and partners. Outside Canada, we operate globally in the reinsurance and retrocession markets offering life, disability and longevity reinsurance. 2022 Operating environment › In Canada, the COVID-19 pandemic continued to stimulate an increased interest in protection, positioning us well to deliver our market-leading products through our best-in-class network of advisors and partners. The industry continued to face a number of challenges and opportunities, including a rising interest rate environment, evolving regulatory requirements, a competitive landscape underscored by consolidation, continued digital disruption and changing client expectations. As a result, we evolved our robust risk frameworks, controls and risk culture to protect clients and meet the expectations of both federal and provincial regulators. We also accelerated investment in product innovation, digitization, and data to better meet client protection needs, enhance access and convenience, and deliver improved experiences. We prioritized investment in our people, positioning ourselves as an employer of choice. › In the U.K., there was a sustained appetite for longevity risk transfer as companies continued to actively manage longevity risk. As a result, the longevity reinsurance market remained competitive in fiscal 2022. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 43 Strategic priorities OUR STRATEGY PROGRESS IN 2022 PRIORITIES IN 2023 Be an innovative, client-focused provider of a full suite of insurance solutions Grow our Insurance business in Canada, and internationally Launched RBC Growth Insurance Plus™ product for affluent Canadians looking to supplement life insurance needs, or for corporations, to help meet their corporate life insurance needs Introduced a new critical illness insurance product as an option for Group Benefits Solutions clients, strengthening our offering in the marketplace Launched a Workplace Wellness Toolkit designed to support businesses in assessing the wellbeing needs of their employees and creating wellness strategies tailored to the unique goals of their organization Continued to grow our longevity reinsurance and group annuity businesses, driven by our relationships within the U.K. and Canadian markets, and our strong underwriting expertise Develop and sustain excellence in distribution Launched RBC Insurance® Sales Technology Support Centre (STSC) to support advisors and their clients, resulting in faster and more efficient support for key tools and technologies Sustain distribution excellence through channel growth and by supporting our agents and partners with best-in-class tools, and unique value propositions Accelerate investments in product innovation, digitization, and data Evolve our risk culture Launched Aviva Underwriting Chat, giving our home and auto advisors the ability to chat directly with Aviva’s Underwriters, improving the client experience by bringing efficiency, and reducing the time spent on hold while applications are considered Built the first interface between RBC Insurance® and our external distribution partners, allowing for more efficient new distribution channels and partnerships for term life products Launched electronic delivery of select life and health contracts, improving cycle times, and increasing contract delivery for clients Introduced a new disability electronic application enabling online submissions of certain disability products, simplifying the process, facilitating quicker decisions on applications, and reducing time to purchase Added digital signature capabilities to electronic applications for our simplified term life insurance product, improving the advisor and client experience Added two socially responsible investing options to our segregated fund offerings. The fund investments exclude companies whose primary business is alcohol, tobacco products, firearms, cannabis, adult entertainment or gambling As part of our continuous commitment to diversity & inclusion, we enhanced the language of our Group Life and Health booklets and contracts, recognizing all gender identities Invest in product innovation, risk selection, underwriting, digital capabilities and other solutions which streamline our processes in order to attract and retain clients Evolve our robust risk frameworks, controls and risk culture to protect clients and meet the expectations of both federal and provincial regulators Attract and retain top talent Remained an employer of choice enabling us to attract, retain and engage employees to serve our clients and deliver value to our shareholders Foster diversity, equity and inclusion, and focus on inspiring future readiness to attract, retain and engage top talent Outlook The insurance industry is expected to continue experiencing change in fiscal 2023 driven by evolving client expectations, accelerated digital disruption, and distribution innovation. Government and regulatory pressures are expected to continue into the coming fiscal year. As consumers focus more attention on overall protection, we will continue to provide advice and education, deliver our products and services, and create industry partnerships to assist our clients. We will maintain our strength by investing in technology, product and service innovation, efficient distribution channels, and a strong risk culture. This will enable our goal of being an innovative, client-focused provider of a full suite of insurance solutions, and will allow us to thrive in a rapidly changing environment. For further details on our general economic review and outlook, refer to the Economic, market and regulatory review and outlook section. 44 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Insurance (Millions of Canadian dollars, except percentage amounts and as otherwise noted) Non-interest income Net earned premiums Investment Income, gains/(losses) on assets supporting insurance policyholder liabilities (1) Fee income Total revenue 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 29 2022 2021 4,653 $ (1,363) 220 3,510 – 1,468 315 588 1,139 857 $ 653 $ 2,857 4,840 577 183 5,600 (1) 3,547 344 596 1,114 889 2,917 2,683 36.4% 37.4% 22,500 $ 21,600 5,498 $ 2,999 2,499 11,511 (1,888) 2,731 5,721 3,162 2,559 12,816 (13) 2,573 (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 individual and group insurance and annuity products as well as segregated fund deposits, consistent with insurance industry practices. Financial performance 2022 vs. 2021 Net income decreased $32 million or 4% from last year, largely due to the impact of lower new longevity reinsurance contracts, partially offset by higher favourable investment-related experience. Total revenue decreased $2,090 million or 37%, mainly due to the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in PBCAE as indicated below. These factors were partially offset by business growth in Canadian Insurance across the majority of our products. PBCAE decreased $2,108 million or 54%, mainly reflecting the change in fair value of investments backing policyholder liabilities and lower group annuity sales, both of which are largely offset in revenue. Higher favourable investment-related experience and favourable annual actuarial assumption updates in the current year largely related to economic assumptions also contributed to the decrease. These factors were partially offset by the impact of lower new longevity reinsurance contracts, as well as business growth in Canadian Insurance. Non-interest expense decreased $8 million or 1% mainly due to lower costs associated with ongoing efficiency initiatives and lower legal costs. These factors were partially offset by increased costs in support of sales and client service activities. Business line review Canadian Insurance We offer life, health, travel, wealth accumulation solutions, and annuities to individuals and businesses across Canada. We also offer home and auto insurance for individuals, through a distribution agreement with Aviva Canada. Our life and health portfolio includes participating whole life, universal life, term life, critical illness, disability, and group benefits, including long-term disability, and health and dental insurance. Wealth solutions include a family of segregated funds as well as individual 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 either life or health or in property and casualty products. As a multi-line carrier, we offer a broad suite of solutions, increasing convenience for our clients. Many of our solutions hold market leadership positions, including our disability insurance and wealth products. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 45 Financial performance Total revenue decreased $2,264 million or 78% from last year, primarily due to the change in fair value of investments backing policyholder liabilities and lower group annuity sales. These factors were partially offset by business growth across the majority of our products. Premiums and deposits decreased $163 million or 5%, mainly due to group annuity and individual life products. Selected highlights (Millions of Canadian dollars) Total revenue Other information Premiums and deposits Life and health Property and casualty Annuity Segregated fund deposits Fair value changes on investments backing policyholder liabilities International Insurance Table 30 Premiums and deposits (Millions of Canadian dollars) 2022 653 $ 2,917 2021 $ 1,416 81 834 668 1,434 77 989 662 (2,259) (119) 4,000 3,000 2,000 1,000 0 2022 2021 Life and health Annuity Property and casualty 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 solutions. The global reinsurance market is competitive with significant market opportunities in the U.S., U.K, and Europe. Market share is largely held by a small number of reinsurers, with RBC Insurance® continuing to have steady growth. Financial performance Total revenue increased $174 million or 6% from last year, mainly due to the change in fair value of investments backing policyholder liabilities. Premiums and deposits decreased $60 million or 2%. 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 Table 31 Premiums and deposits (Millions of Canadian dollars) 2022 2021 $ 2,857 $ 2,683 1,044 1,455 1,050 1,509 371 106 4,000 3,000 2,000 1,000 0 2022 2021 Life and health Annuity 46 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Investor & Treasury Services Investor & Treasury Services provides asset, payment and treasury services to financial institutions and asset owners worldwide. We are a leader in Canadian cash management and transaction banking services. Trusted with nearly 4 trillion in AUA, our focus is on safeguarding client assets and supporting our clients’ growth. $3.9 trillion AUA 16.4% Return on equity $61.8 billion Average client deposits Our product and service offering includes custody, fund administration, shareholder services, private capital services, middle office, transaction banking (including trade finance, insourced solutions and services to broker dealers), and treasury and market services (including cash/liquidity management, foreign exchange and securities finance). Our asset services business competes against the world’s largest custodians in selected countries in North America, Europe, and the U.K. Our transaction banking business competes against the largest banks in Canada. Revenue by Geography $2.2 billion Total revenue 39% North America 33% Europe (Ex. U.K.) 17% U.K. 11% Asia-Pacific 2022 Operating environment › Results for our asset services business were impacted by industry headwinds such as continued pricing pressure, partially offset by rising interest rates. › Our funding and liquidity business managed through a rising rate environment and results were driven by increased market opportunities. › We continued to execute on initiatives to improve our cost structure, focus on markets and segments where we have competitive advantages and upgrade our technology capabilities. Strategic priorities OUR STRATEGY Grow the Canadian franchise PROGRESS IN 2022 PRIORITIES IN 2023 Delivered significant revenue growth in our transaction banking business through acquisition of new clients, expansion of existing relationships, and delivery of new product offerings Grow relationships with Canadian asset managers, investment counsellors, pension funds, insurance companies, and transaction banking clients Deliver new products to meet growing client demand and enhance our core capabilities in Canada to improve the client experience Compete in select asset servicing segments and markets Signed a Memorandum of Understanding to divest our European asset servicing activities and associated Malaysian centre of excellence Complete the intended divestiture (subject to customary closing conditions, including regulatory and antitrust approvals) Continued cross-segment collaboration to grow fund finance sales Deliver seamless client experiences and employ technology to enable our clients’ success Continued to evolve our digital offering, improve interactive applications to increase clients’ digital self-service capacity and reduce operational risk Continue to invest to seamlessly onboard, integrate and support our clients through digital channels Outlook In fiscal 2023, we expect the global asset services industry will remain challenging. While we expect some benefit from rising interest rates in fiscal 2023, ongoing fee reductions, competition from global custody providers in key markets and the impact of reduced client activity as a result of lower asset values and net client movements, are expected to constrain revenue growth. Ongoing inflationary pressures coupled with recession concerns also have the potential to impact our results in fiscal 2023. Completing the divestiture of our European asset servicing activities and associated Malaysian centre of excellence will be a priority. We will focus on growing in markets and segments where we have competitive advantages, improving operational efficiency and leveraging our investment in technology to enable our clients’ success. We will continue to prioritize prudent risk and funding management amidst an evolving liquidity environment and uncertain market backdrop. 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 2022 47 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) $ $ $ Table 32 2021 460 1,704 2,164 (8) – (8) 1,589 583 440 2022 498 $ 1,725 2,223 1 (4) (3) 1,569 657 513 $ 16.4% 14.0% 250,600 $ 245,000 61,800 183,200 235,400 219,800 64,400 155,400 $ 3,906,900 $ 4,640,900 4,634,900 3,718 4,392,600 3,497 Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items (Millions of Canadian dollars, except percentage amounts) 2022 vs. 2021 Increase (decrease): Total revenue PCL Non-interest expense Net income Percentage change in average U.S. dollar equivalent of C$1.00 Percentage change in average British pound equivalent of C$1.00 Percentage change in average Euro equivalent of C$1.00 (1) Represents year-end spot balances. $ (70) – (68) (3) (3)% 7% 9% Financial performance 2022 vs. 2021 Net income increased $73 million or 17% from last year, mainly driven by higher revenue from client deposits, partially offset by higher technology-related costs. Total revenue increased $59 million or 3%, mainly due to higher revenue from client deposits reflecting improved margins, partially offset by the impact of foreign exchange translation. Non-interest expense decreased $20 million or 1%, mainly due to the impact of foreign exchange translation and lower staff-related costs. These factors were partially offset by higher technology-related costs, a favourable sales tax adjustment in the prior year and higher legal costs. 48 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Capital Markets RBC Capital Markets® is a premier global investment bank providing expertise in advisory & origination, sales & trading, and lending & financing to corporations, institutional clients, asset managers, private equity firms and governments globally. Our professionals ensure that clients receive the advice, products, and services their businesses need from 63 offices in 18 countries. Our presence extends across North America, the U.K. & Europe, and Australia, Asia & other regions. >19,500 Number of clients #9 Global league table rankings1 6,887 Employees Revenue by Geography We operate two main business lines, Corporate & Investment Banking and Global Markets. $9.1 billion Total revenue 49% U.S. 29% Canada 16% U.K. & Europe 6% 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. 2022 Operating environment › The fiscal 2022 operating environment was characterized by significant geopolitical and economic uncertainty alongside elevated inflation and rising interest rates, resulting in increased financial market volatility and asset revaluation. This created a challenging operating environment that led to a decline in activity across some of our global capital markets businesses, particularly in the second half of the fiscal year. Global investment banking fee pools were impacted by weakness in credit and equity markets beginning in the second fiscal quarter of 2022, resulting in an approximately 30% decline in global investment banking fee pools1 this fiscal year compared to record levels in fiscal 2021. › Trading activity remained elevated in some businesses, particularly in macro-focused businesses such as rates and foreign exchange. However, this was offset by a more challenging environment for credit trading as a result of widening spreads and slower new issuance activities. Despite the market disruption, our balance sheet strength enabled us to continue supporting our clients during the 2022 fiscal year. › While the credit environment in fiscal 2022 reflected the recovery from the COVID-19 pandemic, it also reflected unfavourable changes in our economic outlook towards the latter half of the year, including the impact of slowing economic growth as well as rising inflation and interest rates. PCL on impaired loans remained below pre-pandemic levels. 1 Source: Dealogic, based on global investment bank fees, Fiscal 2022 Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 49 Strategic priorities OUR STRATEGY PROGRESS IN 2022 PRIORITIES IN 2023 Grow and deepen client relationships Lead with advice and extend capabilities Deliver holistic coverage to clients and drive multi-product client relationships to gain market share Expand client coverage in underpenetrated sectors and products Grow all areas of origination, inclusive of structured solutions, through partnership across Corporate & Investment Banking and Global Markets Continue to drive cross-platform and geographic collaboration across businesses and asset classes Lead on Sustainable Finance1, Energy Transition, and Private Capital solutions Strengthened relationships with key clients, resulting in high quality mandates and notable wins in Corporate & Investment Banking and Global Markets, for example: • Financial Advisor to DigitalBridge and IFM Investors on US$11 billion landmark communications infrastructure take-private transaction Financial Advisor and Lead Arranger to The Vertex Company and American Industrial Partners on its merger with Vectrus, creating a US$2.1 billion entity (cid:129) Expanded advisory and thought leadership capabilities inclusive of Sustainable Finance1 and Private Capital Refreshed our Global Markets strategy to deliver holistic client service providing trusted solutions and execution, leveraging origination and financing, enabled by digital offerings Examples include: (cid:129) Joint Bookrunner and Global Coordinator on Definity Financial’s Initial Public Offering (IPO) and Private Placement Agent on its Cornerstone Private Placement raising proceeds of C$2.1 billion, making it the largest IPO in Canadian financial services since 1999 Advised SS&C Technologies on the £1.2 billion acquisition of BluePrism, demonstrating our strength in delivering support in complex cross-border, sector and product transactions involving publicly traded targets (cid:129) Leverage digital and data to deliver innovative solutions Prioritize and align for impact Drive agility and ease of doing business Engage, enable and empower our talent Launched Aiden® Arrival, the second algorithm on the AI-based electronic trading platform, aimed at enhancing flexibility and control over trade execution Scaled our digital research platform, Elements, into next generation applications utilizing alternative data Scale digital capabilities including electronic execution, analytics and platform capabilities across Capital Markets Generate differentiated insights and thought leadership leveraging data and analytics Embedded productivity and efficiency measures within the businesses, and formalized a benefits tracking process Enhanced collaboration with Treasury & Market Services to increase funding capacity Strategically deploy talent, technology and financial resources to areas of greatest opportunity Align business and functional strategies to build scale and maximize impact Leveraged the newly created cross-business and functional Investment Review Board to address the technology capital allocation process Improve processes, leveraging an end-to-end approach to enhance client outcomes Accelerate execution and simplify procedures to improve employee experience Invested in senior talent through external hiring and promotions and repositioned our talent strategy to be better aligned with business outcomes Advanced our Diversity & Inclusion (D&I) strategy and improved representation of diverse talent Invest in talent through scaled development programs, increased mobility, senior hiring and promotions Deliver on D&I strategy and build on our inclusive culture Outlook In fiscal 2023, the outlook remains uncertain and financial market volatility is expected to persist. Despite these market dynamics, a modest recovery of capital markets industry revenues is expected. We will continue to pursue market share growth in both our Corporate & Investment Banking and Global Markets businesses. In Investment Banking, we continue to focus on targeted sectors and investment in talent, with an emphasis on advisory products. In Global Markets, our focus remains on delivering robust results 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, following higher levels of balance sheet deployment in support of increased client financing demands in fiscal 2022, 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 our financial resources 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 50 Sustainable finance refers to financial activities that take into account environmental, social and governance factors Royal Bank of Canada: Annual Report 2022 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 & Investment Banking Global Markets Other Key ratios ROE Selected balance sheet information Average total assets Average trading securities Average loans and acceptances, net Average deposits Other information Number of employees (FTE) Credit information $ $ $ $ 2022 4,698 $ 4,422 9,120 (34) 23 (11) 5,561 3,570 2,921 $ 4,309 $ 5,245 (434) Table 33 2021 4,553 5,634 10,187 (476) (33) (509) 5,427 5,269 4,187 4,823 5,542 (178) 11.3% 18.3% 824,800 $ 133,000 121,700 79,000 710,200 122,900 100,000 73,500 6,887 6,414 PCL on impaired loans as a % of average net loans and acceptances 0.01% (0.04)% Estimated impact of U.S. dollar, British pound and Euro translation on key income statement items (Millions of Canadian dollars, except percentage amounts) 2022 vs. 2021 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 $ 42 – 8 34 (3)% 7% 9% (1) The teb adjustment for 2022 was $572 million (2021 – $518 million). For further discussion, refer to the How we measure and report our business segments section. Revenue by region (Millions of Canadian dollars) 10,500 9,000 7,500 6,000 4,500 3,000 1,500 0 2022 2021 Australia, Asia & other regions U.K. & Europe U.S. Canada Financial performance 2022 vs. 2021 Net income decreased $1,266 million or 30% from last year, primarily driven by lower revenue in Corporate & Investment Banking, larger releases of provisions on performing assets in the prior year, and lower revenue in Global Markets. Total revenue decreased $1,067 million or 10%, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions. Lower debt and equity origination across most regions also contributed to the decrease. This was partially offset by higher lending revenue across most regions. PCL was $(11) million compared to $(509) million last year, primarily attributable to releases of provisions on performing assets reflecting the recovery from the COVID-19 pandemic in both 2022 and 2021. The releases in the current year were partially offset by unfavourable changes in our macroeconomic outlook. Provisions taken on impaired loans in the current year as compared to recoveries in the prior year also contributed to the increase, resulting in an increase of 5 bps in the PCL on impaired loans ratio. Non-interest expense increased $134 million or 2%, mainly due to higher technology-related costs, higher marketing and business development costs, and higher trade execution costs. These factors were partially offset by changes in the fair value of our share-based compensation plans, which was largely offset in other revenue. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 51 Business line review Corporate & Investment Banking Corporate & 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 & Investment Banking and Global Markets based on the contribution of each group in accordance with an established agreement. Financial performance Corporate & Investment Banking revenue of $4,309 million decreased $514 million or 11% from last year. Investment Banking revenue decreased $773 million or 30%, mainly due to the impact from loan underwriting markdowns, primarily in the U.S., largely driven by challenging market conditions. Lower debt origination primarily in the U.S. also contributed to the decrease. Lending and other revenue increased $259 million or 11%, primarily due to average volume growth in the U.S. and Europe. Selected highlights Table 34 Breakdown of total revenue (Millions of Canadian dollars) (Millions of Canadian dollars) Total revenue (1) Breakdown of revenue (1) Investment banking Lending and other (2) 2022 2021 $ 4,309 $ 4,823 1,786 2,523 2,559 2,264 Other information Average assets Average loans and acceptances, net 100,100 92,400 81,400 73,300 (1) The teb adjustment for the year ended October 31, 2022 was $39 million (October 31, 2021 – $37 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 5,000 4,000 3,000 2,000 1,000 0 businesses. Global Markets 2022 2021 Investment banking Lending and other 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 $5,245 million decreased $297 million or 5% from last year. Revenue in our Fixed income, currencies and commodities business decreased $308 million or 11%, largely driven by lower fixed income trading revenue and lower debt origination both primarily in the U.S. These factors were partially offset by higher foreign exchange trading revenue across all regions. Revenue in our Equities business decreased $73 million or 5%, primarily due to lower equity origination across most regions. Revenue in our Repo and secured financing business increased $84 million or 7%, mainly due to increased client activity. Selected highlights Table 35 Breakdown of total revenue (Millions of Canadian dollars) (Millions of Canadian dollars) Total revenue (1) Breakdown of revenue (1) Fixed income, currencies and commodities Equities Repo and secured financing (2) Other information Average assets 2022 2021 $ 5,245 $ 5,542 2,570 1,458 1,217 2,878 1,531 1,133 707,500 626,500 6,000 5,000 4,000 3,000 2,000 1,000 0 (1) The teb adjustment for the year ended October 31, 2022 was $533 million (October 31, 2021 – $481 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 2022 2021 Repo and secured financing Global equities Fixed income, currencies and commodities Other includes our legacy portfolio, which mainly consists of our U.S. commercial mortgage-backed securities (MBS), bank- owned life insurance (BOLI) derivative contracts and structured rates in Asia. Financial performance Revenue decreased $256 million from last year, reflecting higher residual funding costs and changes in the fair value of hedges related to our share-based compensation plans, which was largely offset in non-interest expense. 52 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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) Income taxes (recoveries) (1) Net income (loss) Table 36 2022 (132) $ (728) (860) 1 (247) (614) (616) 2 $ $ $ 2021 (321) 421 100 (1) 405 (304) (365) 61 Teb adjusted. (1) (2) Revenue for the year ended October 31, 2022, included losses of $363 million (October 31, 2021 – gains of $394 million) on economic hedges of our U.S. Wealth Management (including City National) share-based compensation plans, and non-interest expense included $(289) million (October 31, 2021 – $382 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. Due to the nature of activities and consolidation adjustments reported in this segment, we believe that a comparative period analysis is not relevant. 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, 2022 was $572 million and was $518 million last year. The following identifies the material items, other than the teb impacts noted previously, affecting the reported results in each year. 2022 Net income was $2 million. Net favourable tax adjustments and asset/liability management activities were offset by residual unallocated items. 2021 Net income was $61 million, primarily due to asset/liability management activities and residual unallocated items, partially offset by net unfavourable tax adjustments. Quarterly financial information Fourth quarter performance Q4 2022 vs. Q4 2021 Fourth quarter net income of $3,882 million was down $10 million. Diluted EPS of $2.74 was up $0.06 and ROE of 15.6% was down 130 bps. Our CET1 ratio of 12.6% was down 110 bps from a year ago. Lower results in Capital Markets and Corporate Support were partially offset by strong earnings in Wealth Management and Personal & Commercial Banking. Total revenue increased $191 million or 2%, largely due to higher net interest income and trading revenue. These factors were partially offset by lower insurance revenue, other revenue, underwriting and other advisory fees and mutual fund revenue. Net interest income increased $1,221 million or 24%, mainly due to higher spreads and average volume growth in loans and deposits in Canadian Banking and Wealth Management. These factors were partially offset by lower net interest income in Investor & Treasury Services reflecting higher funding costs that were offset by related gains on non-trading derivatives in Other revenue. Insurance revenue decreased $857 million or 57%, primarily due to lower group annuity sales and the change in fair value of investments backing policyholder liabilities, both of which are largely offset in PBCAE. Trading revenue increased $348 million, largely due to higher fixed income trading revenue across most regions. Mutual fund revenue decreased $132 million or 12%, largely due to lower average mutual fund balances in Wealth Management and Canadian Banking. Underwriting and other advisory fees decreased $174 million or 27%, mainly due to lower debt origination across all regions. Other revenue decreased $219 million or 90%, largely due to the impact of economic hedges, including changes in the fair value of hedges related to our U.S. share-based compensation plans that were largely offset in Non-interest expense. These factors were partially offset by net gains on non-trading derivatives, which were offset within net interest income. Total PCL was $381 million compared to $(227) million last year, reflecting provisions taken on performing loans and higher provisions on impaired loans in the current quarter as compared to releases of provisions on performing loans in the prior year, primarily in Personal & Commercial Banking. The PCL on loans ratio of 18 bps compared to (12) bps last year increased 30 bps. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 53 PBCAE decreased $916 million, primarily due to lower group annuity sales and the change in fair value of investments backing policyholder liabilities, both of which are largely offset in revenue. Higher favourable annual actuarial assumption updates largely related to economic assumption updates in the current year also contributed to the decrease. Non-interest expense increased $626 million or 10%, mainly attributable to higher variable compensation, primarily due to the timing of true-ups related to our variable compensation plans in Capital Markets and higher staff-related costs. The impact of foreign exchange translation as well as the Brewin Dolphin acquisition and related costs also contributed to the increase. These factors were partially offset by the change in the fair value of our U.S. share-based compensation plans as well as the impact of a legal provision taken in U.S Wealth Management (including City National) in the prior year that was partially released in the first quarter of 2022. Income tax expense decreased $117 million or 11%, primarily due to an increase in income from lower tax rate jurisdictions in the current year and lower income before income taxes. The effective income tax rate of 20.1% decreased 190 bps from last year, mainly due to an increase in income from lower tax rate jurisdictions in the current year. Q4 2022 vs. Q3 2022 Net income of $3,882 million was up $305 million or 9% compared to last quarter, primarily due to higher fixed income trading revenue in Capital Markets as the prior quarter included the impact from loan underwriting markdowns, primarily in the U.S, and higher spreads in Canadian Banking and Wealth Management. These factors were partially offset by higher compensation, primarily due to the timing of true-ups related to our variable compensation plans. 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) 2022 2021 Table 37 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Personal & Commercial Banking $ 5,419 $ 5,182 $ 4,739 $ 4,803 $ 4,605 $ 4,651 $ 4,527 $ 4,563 3,219 Wealth Management 1,809 Insurance 565 Investor & Treasury Services 2,708 Capital Markets (2) 79 Corporate Support (2) 3,613 1,399 587 2,810 (146) 3,444 1,501 548 2,298 (20) 3,373 1,754 517 2,463 (2) 3,605 234 551 2,348 (257) 3,655 1,233 582 1,649 (169) 3,976 644 503 2,313 (288) 3,260 536 534 2,718 43 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 12,567 381 116 7,209 4,861 979 12,132 340 850 6,386 4,556 979 11,220 (342) (180) 6,434 5,308 1,055 13,066 105 997 6,580 5,384 1,289 12,376 (227) 1,032 6,583 4,988 1,096 12,756 (540) 1,304 6,420 5,572 1,276 11,618 (96) 149 6,379 5,186 1,171 12,943 110 1,406 6,542 4,885 1,038 $ 3,882 $ 3,577 $ 4,253 $ 4,095 $ 3,892 $ 4,296 $ 4,015 $ 3,847 $ 2.75 $ 2.74 2.52 $ 2.51 2.97 $ 2.96 2.84 $ 2.84 2.68 $ 2.68 2.97 $ 2.97 2.76 $ 2.76 2.66 2.66 20.1% 21.5% 19.9% 23.9% 22.0% 22.9% 22.6% 21.2% of C$1.00 $ 0.739 $ 0.783 $ 0.789 $ 0.787 $ 0.796 $ 0.812 $ 0.798 $ 0.779 (1) (2) Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period. Teb adjusted. For further discussion, refer to the How we measure and report our business segments section of this 2022 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 over the period have been impacted by the factors noted below. Personal & Commercial Banking revenue has benefitted from solid volume growth in loans and deposits over the period. NIM has been favourably impacted by the rising interest rate environment over the last three quarters, whereas a low interest rate environment persisted in the earlier part of the period. Wealth Management revenue has benefitted from growth in average fee-based client assets, which is impacted by market conditions, and volume growth in loans and deposits over the period. The rising interest rate environment also favourably impacted revenue over the last three quarters, whereas a low interest rate environment persisted in the earlier part of 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. Group annuity sales are generally higher in the first half of the fiscal year. Investor & Treasury Services revenue has been impacted by interest rate movements, market volatility and client activity over the period. 54 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Capital Markets revenue is influenced, to a large extent, by market conditions that impact client activity. Trading revenue across the first half of the period benefitted from increased client activity. Beginning in the second quarter of 2022, there was a decline in global fee pools. Trading results were further impacted notably in the third quarter of 2022 amidst challenging market conditions, driving lower fixed income trading revenue, including the impact from loan underwriting markdowns. PCL 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 changes in macroeconomic conditions, exposures and credit quality. Throughout 2021 and the first half of 2022, we saw improvements in our macroeconomic and credit quality outlook, as the economic impact from the COVID-19 pandemic eased in most regions, resulting in releases of provisions on performing assets. In the last half of 2022, unfavourable changes in our macroeconomic outlook resulted in an increase in provisions. PCL on impaired assets remained lower than pre-pandemic levels over the period. PBCAE has fluctuated over the period reflecting changes in the fair value of investments backing policyholder liabilities, which is impacted by changes in market conditions, as well as group annuity sales, both of which are largely offset in revenue. 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 been impacted by fluctuations in variable compensation over the period, commensurate with fluctuations in revenue and earnings. 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 also reflect investments in staff and technology and increases in discretionary spend, including marketing. The fourth quarter of 2021 included a legal provision in U.S. Wealth Management (including City National) that was partially released in the first quarter of 2022. 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 and fourth quarters of 2022 reflected the impact of net favourable tax adjustments and an increase in income from lower tax rate jurisdictions, respectively. 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 38 2022 2021 $ 72,397 $ 108,011 318,223 317,845 549,751 273,967 (3,753) 154,439 126,339 113,846 79,638 284,724 307,903 503,598 218,066 (4,089) 95,541 107,096 $ 1,917,219 $ 1,706,323 $ 1,208,814 $ 1,100,831 91,439 405,698 9,593 153,491 436,714 10,025 1,809,044 1,607,561 108,064 111 108,175 98,667 95 98,762 $ 1,917,219 $ 1,706,323 Securities are comprised of trading and investment securities. (1) (2) Other – Other assets and liabilities include Segregated fund net assets and liabilities, respectively. 2022 vs. 2021 Total assets increased $211 billion or 12% from last year. Foreign exchange translation increased total assets by $114 billion. Cash and due from banks was down $41 billion or 36%, primarily due to lower deposits with central banks, reflecting our liquidity and short-term cash management activities. Interest-bearing deposits with banks increased $28 billion or 36%, mainly due to higher deposits with central banks, reflecting our short-term cash and liquidity management activities. Securities, net of applicable allowance, were up $33 billion or 12%, mainly due to higher government securities, reflecting short-term market opportunities and liquidity management activities, and the impact of foreign exchange translation. These factors were partially offset by lower equity trading securities. Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $10 billion or 3%, primarily due to the impact of foreign exchange translation and liquidity management activities, partially offset by decreased client demand. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 55 Loans (net of Allowance for loan losses) were up $102 billion or 14%, primarily due to volume growth in wholesale loans and residential mortgages. The impact of foreign exchange translation also contributed to the increase. Derivative assets were up $59 billion or 62%, primarily attributable to the impact of foreign exchange translation. Other assets were up $19 billion or 18%, primarily reflecting higher cash collateral and margin deposits. The impact of foreign exchange translation also contributed to the increase. Total liabilities increased $201 billion or 13% from last year. Foreign exchange translation increased total liabilities by $114 billion. Deposits increased $108 billion or 10%, mainly due to issuances of long-term and short-term notes due to funding requirements and the impact of foreign exchange translation. Higher retail deposits also contributed to the increase. Derivative liabilities were up $62 billion or 68%, primarily attributable to the impact of foreign exchange translation and higher fair values on interest rate contracts, partially offset by lower fair values on foreign exchange contracts. Other liabilities increased $31 billion or 8%, primarily due to higher short-term borrowings of subsidiaries due to funding requirements, higher cash collateral and the impact of foreign exchange translation. Total equity increased $9 billion or 10%, mainly reflecting earnings, net of dividends, and other comprehensive income (OCI). These factors were partially offset by share repurchases. 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 2022 and 2021, we did not derecognize any mortgages securitized through the NHA MBS program. For further details, refer to Note 7 and Note 8 of our 2022 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, 2022, we securitized $450 million of commercial mortgages (October 31, 2021 – $nil). Our continuing involvement with the transferred assets is limited to servicing certain of the underlying commercial mortgages sold. As at October 31, 2022, there was $2 billion of commercial mortgages outstanding that we continue to service related to these securitization activities (October 31, 2021 – $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 8 of our 2022 Annual Consolidated Financial Statements. RBC-administered multi-seller conduits We administer multi-seller conduits which are used primarily for the securitization of our clients’ financial assets. Our clients primarily use our multi-seller conduits to diversify their financing sources and to reduce funding costs by leveraging the value of high-quality collateral. The conduits offer us a favourable revenue stream and risk-adjusted return. We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit enhancements to the multi-seller conduits. Revenue for all such services amounted to $296 million during the year (October 31, 2021 – $304 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. 56 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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) 2022 Allocable notional amounts Maximum exposure to loss (2) Notional of committed amounts (1) Table 39 2021 Allocable notional amounts Maximum exposure to loss (2) $ 48,235 $ 45,261 $ 45,261 $ 40,876 $ 38,330 $ 38,330 2,546 2,546 2,546 2,974 2,974 2,974 $ 51,209 $ 48,235 $ 48,235 $ 43,422 $ 40,876 $ 40,876 Based on total committed financing limit. (1) (2) Not presented in the table above are derivative assets with a fair value of $25 million (October 31, 2021 – $17 million) which are a component of our total maximum exposure to loss from our interests in the multi-seller conduits. Refer to Note 8 of our 2022 Annual Consolidated Financial Statements for more details. Includes $14 million (October 31, 2021 – $9 million) of Financial standby letters of credit. (3) As at October 31, 2022, the notional amount of backstop liquidity facilities we provide increased $7 billion or 18% from last year, primarily due to an increase in outstanding securitized assets of the multi-seller conduits as well as the impact of foreign exchange translation. The notional amount of partial credit enhancement facilities we provide increased $428 million or 17% from last year, primarily due to an increase in outstanding securitized assets of the multi-seller conduits. Maximum exposure to loss by client type Table 40 As at October 31 (Millions of dollars) Outstanding securitized assets Auto and truck loans and leases Consumer loans Credit cards Dealer floor plan receivables Equipment receivables Fleet finance receivables Insurance premiums Residential mortgages Student loans Trade receivables Transportation finance Total Canadian equivalent 2022 2021 US$ C$ Total C$ US$ C$ Total C$ $ 10,553 $ 3,198 4,932 1,012 2,291 785 143 – 2,013 2,306 2,119 3,967 $ 18,351 $ 11,546 $ 4,359 7,441 1,960 3,365 1,283 624 1,785 2,882 3,144 3,041 – 719 580 243 213 428 1,785 139 – 153 2,466 3,876 906 2,227 366 170 – 1,587 2,337 2,163 3,752 $ 18,048 3,054 5,309 1,892 2,757 667 638 873 1,965 2,893 2,780 – 510 770 – 213 428 873 – – 102 $ 29,352 $ 8,227 $ 48,235 $ 27,644 $ 6,648 $ 40,876 $ 40,007 $ 8,227 $ 48,235 $ 34,228 $ 6,648 $ 40,876 Our overall exposure increased 18% compared to last year, primarily due to an increase in the outstanding securitized assets of the multi-seller conduits as well as the impact of foreign exchange translation. Correspondingly, total assets of the multi-seller conduits increased $7 billion or 18% from last year, also primarily due to an increase in outstanding securitized assets in the multi-seller conduits as well as the impact of foreign exchange. All of the multi-seller conduits transactions 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 DBRS Morningstar (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, 2022, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $33 billion, an increase of $8 billion or 32% from last year, primarily due to higher client usage. The rating agencies that rate the ABCP rated 100% (October 31, 2021 – 100%) of the total amount issued within the top ratings category. Structured finance We provide liquidity facilities to certain municipal bond tender option bond trusts in which we have an interest but do not consolidate because the residual certificates issued by the tender option bond trusts are held by third parties. As at October 31, 2022, our maximum exposure to loss from these unconsolidated municipal bond tender option bond trusts was $3 billion (October 31, 2021 – $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). Subordinated financing is provided during the warehouse phase by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs losses prior to ourselves as the senior lender. 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, 2022, our maximum exposure to loss associated with the outstanding senior warehouse financing facilities was $640 million (October 31, 2021 – $951 million). The decrease in our maximum exposure to loss from last year was driven by repayments of existing financing facilities partially offset by the impact of foreign exchange translation. We provide senior financing to unaffiliated structured entities that are established by third parties to acquire loans. Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorb losses prior to ourselves as the senior lender. 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, 2022, our maximum exposure to loss associated with the outstanding senior financing facilities was $5 billion (October 31, 2021 – $4 billion). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities as well as the impact of foreign exchange translation. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 57 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, 2022, our maximum exposure to loss was $3 billion (October 31, 2021 – $3 billion). We also provide liquidity facilities to certain third-party investment funds. The funds issue unsecured variable-rate preferred shares and invest in portfolios of tax exempt bonds. As at October 31, 2022, our maximum exposure to loss on these funds was $667 million (October 31, 2021 – $606 million). The increase in our maximum exposure to loss from last year was driven by the addition of new financing facilities as well as the impact of foreign exchange translation. Third-party securitization vehicles We hold interests in certain unconsolidated third-party securitization vehicles, which are structured entities. We, as well as other financial institutions, are obligated to provide funding to these entities up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit enhancements. As at October 31, 2022, our maximum exposure to loss in these entities was $14 billion (October 31, 2021 – $12 billion). The increase in our maximum exposure to loss compared to last year reflects an increase in client activity with third-party securitization vehicles. Interest and non-interest income earned in respect of these investments was $186 million (October 31, 2021 – $89 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, 2022 amounted to $453 billion compared to $414 billion last year, primarily driven by the impact of foreign exchange translation and volume growth in other commitments to extend credit. Refer to Liquidity and funding risk and Note 24 of our 2022 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. 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 may materially impact us as the risks evolve. The following represents our top and emerging risks: Top & emerging risks Description Business and economic conditions Our financial results are affected to varying degrees by the general business and economic conditions in the geographic regions in which we operate. These conditions may include factors such as: consumer saving and spending habits; consumer borrowing and repayment patterns; unemployment rates; the differing economic trajectories among nations across the globe, global tensions and geopolitical uncertainty; the level of business investment and overall business sentiment; trade; the direction of the COVID-19 pandemic and the emergence of new pathogens; the level of government spending as well as fiscal and monetary policy; the level of activity and volatility of the financial markets; disruptions to energy and other commodity markets; competitiveness; supply chain challenges and labour shortages affecting certain sectors; the evolution of elevated inflationary pressures; and possible stagflation or deflation. Moreover, interest rate changes and actions taken by central banks to manage inflation or the broader economy 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, housing prices, 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. In addition to risks arising from monetary policy tightening, risks are also emerging around how governments will seek to recoup pandemic-related support, or any new support provided to deal with emerging economic challenges. 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 wealth and income inequality, as well as changing demographics and immigration, which could impact the labour market, inflation, demand and consumer trends, and potentially have broader societal and government policy implications. 58 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Top & emerging risks Description Canadian housing and household indebtedness Information technology and cyber risks Geopolitical uncertainty Notwithstanding currently low unemployment rates, Canadian housing and household indebtedness risks remain heightened in the current rising interest rate environment. Concerns related to elevated levels of mortgage-related Canadian household debt, which accelerated during the COVID-19 pandemic, could escalate if the BoC continues to increase interest rates, if the current period of elevated inflation is prolonged or if unemployment increases, potentially resulting in, among other things, higher credit losses. Moreover, continued interest rate increases or slowing economic growth could adversely impact housing market activity and housing prices, which could push loan-to-value (LTV) ratios higher and further increase credit losses. While real estate rental activity has rebounded in certain markets, changing consumer preferences and work arrangements, and the impact from elevated borrowing costs, may continue to have an adverse impact on future real estate investment and demand. Information technology (IT) and cyber risks remain top risks, not only for the financial services sector, but for other industries worldwide. Geopolitical tensions have increased the risk of nation state actors attacking critical infrastructure, including banks and critical third-party suppliers (e.g., utilities, telecom providers, etc.). We continue to be subject to the heightened inherent risk 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 reliance on third-party service providers. Ransomware threats are growing in sophistication and being used to launch major supply chain attacks. 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. Resulting implications could include business interruptions, client 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, Artificial Intelligence (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. In 2022, the Russia-Ukraine conflict upended the geopolitical landscape, with wide-ranging impacts to the global economy and markets. The duration and path of the conflict remains uncertain, and could continue to fuel, or exacerbate global tensions, energy and other commodity shortages, supply chain disruptions, inflationary pressures, weakening sentiment and growth prospects, market volatility, cyberattacks, and the proliferation of sanctions and trade measures. Europe, in particular, faces significant uncertainty given its dependence on Russia for energy imports and its weakening economic prospects. Furthermore, 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, Taiwan, Hong Kong, and Macau. Tensions between China and its neighbours over territorial claims, and the prospect of even closer relations between China and Russia, add further global and economic uncertainty. Other geopolitical tensions could also add to economic and market uncertainties. In addition, an uncertain geopolitical or economic environment could lead to increases in polarization, social unrest, or terrorism, each of which could have direct or indirect impacts to the bank. More broadly, the future of global trade remains uncertain, as countries look to decrease reliance on the global supply chain and nations with differing values. Increased protectionism and economic nationalism could reshape global alliances as the supply of critical goods of economic and national importance (e.g., energy, semiconductors) remains 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. Environmental and social risk (including climate change) We, like other organizations, are increasingly under scrutiny to address social and racial inequality and other human rights issues, and failure to do so may result in strategic, regulatory and reputation 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). Digital disruption and innovation Environmental and social risks, including climate change, are each unique and transverse risks impacting our principal risk types in different ways and to varying degrees. While E&S risk manifests itself through credit, reputation, and regulatory compliance risks, the impact of E&S risk also extends to our other principal risks, including systemic, competitive, strategic, legal and regulatory environment, operational, market, liquidity and insurance risks. For details on these risks and how we are managing these risks, refer to the Overview of other risks section. The COVID-19 pandemic changed the way consumers interact with financial services providers, including increasing demand for digital banking services. While this represents an opportunity for us to leverage our use of technology, the need to meet the rapidly evolving needs of clients and compete with non-traditional competitors has increased our strategic and reputation risks. Additional risks 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 are challenging or 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 is resulting or could result in new and complex strategic, operational, regulatory, compliance and reputation risks that would need to be managed effectively. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 59 Top & emerging risks Description Privacy, data and third-party related risks 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 adopt new business models and technologies (e.g., cloud computing, AI and machine learning). Threat actors gravitate towards vulnerabilities in an ecosystem, and the weakest link in the supply chain can be a supplier or third-party service provider that 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. Regulatory changes The ongoing introduction of new or revised regulations requires enhanced focus across the organization on meeting additional regulatory requirements across the multiple jurisdictions in which we operate. Financial and other reforms that have been implemented or are being implemented, across multiple jurisdictions, such as digital, data and technology reforms, cyber security and 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. Culture and conduct risks Our Purpose, values and risk principles are key dimensions of our culture. We demonstrate our culture through our conduct – the behaviours, 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 that 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. Regulators continue to focus on conduct matters and risks, and heightened expectations generally from regulators could lead to investigations, remediation requirements, higher compliance costs and enforcement actions and fines, and potential criminal prosecutions or imposition of sanctions, including restrictions on our activities. 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 risks section. 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 60 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis influence that we can exert against these risks. These categories are maintained by GRM and reviewed regularly to ensure all principal risks are reflected. This classification methodology provides a common language and discipline for the identification and assessment of risk in existing businesses, new businesses, products or initiatives, as well as acquisitions and alliances. LessLess e c n e u fl n i d n a l o r t n o C MoreMore Macroeconomic Strategic 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 rising inflationary pressures and interest rates, economic slowdowns or recessions, deterioration in the Canadian housing market, abrupt changes in the geopolitical environment, unfavourable global trade agreements, political uncertainties, 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. Operational / Regulatory Compliance 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 the effective management of operational risk and regulatory compliance risk, including how we manage our dependence on people, systems, and processes, as well as how we respond to external events. Transactional / Positional A more traditional risk perspective involves credit, market, liquidity and insurance risks arising from, among other things, lending transactions and balance sheet positions. These risks are an integral part of our day-to-day business activities. We understand these risks well and have the greatest level of control and influence over them. We earn revenue by taking these transactional / positional risks. 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 so 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) corporate governance principles, and the requirements and expectations of other regulators in the jurisdictions 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 so that risks are appropriately and adequately managed throughout the enterprise to achieve our strategic objectives. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 61 BOARD OF DIRECTORS RISK COMMITTEE AUDIT COMMITTEE GOVERNANCE COMMITTEE HUMAN RESOURCES COMMITTEE The Board annually approves our Code of Conduct and closely collaborates with management to set the tone from above and promotes a strong governance culture that influences RBC at every level and across all global businesses. The Board also approves our risk appetite, provides oversight and carries out its risk management mandate primarily through its committees: The Risk Committee assists the Board in overseeing our risk management program ensuring that management has policies, processes and procedures to manage our significant risks and monitor our risk posture and risk profile. The Risk Committee oversees the risk management function, having regard to its independence 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), and GRM’s organizational structure, 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, (iv) internal controls; and (v) 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 conduct and culture, including breaches of our Code of Conduct. Additional responsibilities include (i) developing and recommending governance frameworks, principles and policies to the Board; (ii) overseeing and coordinating ESG matters at the Board and its committees; (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 risk management and the compensation for the CEO and Group Executives (GE). It also oversees our pension plans, key talent management and human resources strategies and practices, including employee engagement, diversity & inclusion and health & wellness, as well as 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, seeking to ensure 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 program and key activities. Provides appropriate and timely information to the Board or its Committees with regard to the identification, measurement, and management of the significant risks to which we are exposed across all of our legal entities, businesses and operations globally. 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 62 Royal Bank of Canada: Annual Report 2022 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 Risk Limits & Management Delegated Authorities Risk Profile Risk Posture Quantitative statements Qualitative statements Risk appetite statements (cid:129) Manage earnings volatility and exposure to future (cid:129) (cid:129) (cid:129) 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) 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 2022 63 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 2022 stress testing exercises, we addressed several emerging risks inclusive of inflation risk, supply chain pressures 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 seek to take into account any new risk considerations that may emerge from the growing use of AI methods and applications in our models across our organization. Prior to being used, models are subject to 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 risk approval 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. 64 Royal Bank of Canada: Annual Report 2022 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 Dividends & Capital Note Coupons 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 risk approval authorities and risk limits Risk Appetite is designed to account for strategic and forward-looking considerations whereas delegated 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 authorities and limits are used to implement risk management strategies to diversify risks, reduce unexpected losses and/or promote stability of earnings, govern on-going operations and monitor utilization of risk limits. Excesses to Management Delegated Authorities and risk limits can act as early warning indicators for Risk Appetite constraints and Board Delegated Authorities thus allowing for timely management attention. Senior management can 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 the Enterprise Risk Appetite Framework and 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. 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 2022 Annual Consolidated Financial Statements. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 65 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 allocation of the Board approved credit risk appetite is supported by the establishment of risk approval authorities and risk limits, delegated by the Board to the President & CEO and CRO. Credit transactions in excess of these authorities must be approved by the Risk Committee of the Board. To facilitate day-to-day business activities, the CRO has been empowered to further delegate credit risk approval authorities to individuals within GRM, the business segments, and functional units as necessary. Ensuring credit quality is not compromised for growth; We balance our risk and return by setting the following objectives for the management of credit risk: (cid:129) (cid:129) Mitigating credit risk in transactions, relationships and portfolios; Avoiding excessive concentrations in correlated credit risks; (cid:129) Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies, (cid:129) 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 HNW 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. 66 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis EAD is estimated based on the current exposure to the obligor and the possible future changes in that exposure driven by factors such as the nature of the credit commitment. As with LGD, rates are estimated to reflect an economic downturn, with added conservatism to reflect data and statistical uncertainties identified in the modelling process. Estimates of PD, LGD and EAD are reviewed, and then validated and back-tested by an independent validation team within the bank, on an annual basis. In addition, quarterly monitoring and back-testing is performed by the estimation team. These ratings and risk measurements are used to determine our expected losses as well as economic and regulatory capital, setting of risk limits, portfolio management and product pricing. Financial and regulatory measurement distinctions Expected loss models are used for both regulatory capital and accounting purposes. Under both models, expected losses are calculated as the product of PD, LGD and EAD. However, there are certain key differences under current Basel and IFRS reporting frameworks which could lead to significantly different expected loss estimates, including: (cid:129) Basel PDs are based on long-run averages over an entire economic cycle. IFRS PDs are based on current conditions, adjusted for estimates of future conditions that will impact PD under probability-weighted macroeconomic scenarios. Basel PDs consider the probability of default over the next 12 months. IFRS PDs consider the probability of default over the next 12 months only for instruments in stage 1. Expected credit losses for instruments in stage 2 are calculated using lifetime PDs. Basel LGDs are based on severe but plausible downturn economic conditions. IFRS LGDs are based on current conditions, adjusted for estimates of future conditions that will impact LGD under probability-weighted macroeconomic scenarios. 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 9 of our 2022 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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 67 Internal ratings map* Table 41 Ratings Business and Bank Sovereign BRR S&P Moody’s Description PD Bands 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 0.0000% – 0.0300% 0.0000% – 0.0150% 0.0000% – 0.0300% 0.0151% – 0.0250% 0.0000% – 0.0350% 0.0251% – 0.0350% 1+ 1H 1M AAA AA+ AA 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% AA- A+ A A- 1L 2+H 2+M 2+L 2H BBB+ BBB 2M BBB- 2L BB+ BB BB- B+ B B- 2-H 2-M 2-L 3+H 3+M 3+L 3H CCC+ CCC 3M CCC- 3L CC 4 5 6 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 2022 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 9 of our 2022 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. 68 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 42 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 2022 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, 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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 69 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 high risk, delinquent or defaulted borrowers. We strive to identify borrowers in financial difficulty early and modify their loan terms to minimize losses and assist clients in need. A forbearance agreement may be entered into with the borrower where we will forbear from enforcing on security in exchange for concessions made by the borrower. 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 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 client’s willingness and capacity to meet the new arrangement. 70 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Credit risk exposure by portfolio, sector and geography The following table presents our credit risk exposures under the Basel regulatory defined classes and reflects EAD. The classification of our sectors aligns with our view of credit risk by industry. Credit risk exposure by portfolio, sector and geography Table 43 October 31 2022 October 31 2021 Credit risk (1), (2) Counterparty credit risk (5) Credit risk (1), (2) Counterparty credit risk (5) As at (Millions of Canadian dollars) On-balance sheet amount Retail Off-balance sheet amount (3) Repo-style Undrawn Other (4) transactions Derivatives Total exposure On-balance sheet amount Off-balance sheet amount (3) Repo-style Undrawn Other (4) transactions Derivatives Total exposure Residential secured (6) $ Qualifying revolving (7) Other retail 393,346 $ 107,604 $ 32,474 98,070 94,949 19,993 – $ – 136 Total retail $ 523,890 $ 222,546 $ 136 $ – $ – – – $ – $ – – 500,950 $ 127,423 118,199 362,793 $ 96,609 $ 30,080 85,362 90,932 19,422 – $ – 146 – $ 746,572 $ 478,235 $ 206,963 $ 146 $ – $ – – – $ – $ – – 459,402 121,012 104,930 – $ 685,344 Wholesale $ Agriculture Automotive Banking (8) Consumer discretionary Consumer staples Oil and gas Financial services Financing products (8) Forest products Governments (8) 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 10,417 $ 8,919 73,335 19,666 7,103 6,086 45,394 5,762 1,143 279,401 10,755 5,291 23,764 2,377 2,614 89,926 27,839 7,301 6,394 12,318 4,113 2,089 $ 9,184 5,487 9,297 6,750 11,272 25,017 2,352 1,033 5,678 9,319 7,144 3,946 4,259 2,417 18,295 13,425 8,298 6,386 20,651 1,700 36 $ 317 1,036 569 346 1,923 3,530 163 230 1,563 601 298 669 945 – $ – 111,559 – – – 69,790 237 – 18,745 – 55 157 – 161 $ 1,606 38,830 949 1,923 5,959 24,546 780 78 6,290 1,216 1,908 458 467 12,703 $ 20,026 230,247 30,481 16,122 25,240 168,277 9,294 2,484 311,677 21,891 14,696 28,994 8,048 497 1,872 2,848 79 930 5,275 71 – – 33 – – – 73 144 818 852 5,672 110,911 44,997 2,751 2,069 5,081 20,126 18,429 15,779 43,325 26,083 9,400 $ 6,288 45,906 14,792 6,254 5,678 32,977 7,868 969 287,806 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 16,769 200,100 25,443 14,441 24,973 135,707 11,994 2,178 323,361 17,646 15,039 26,037 5,912 4,020 93,108 40,457 17,616 15,728 34,806 11,197 Total wholesale $ 649,918 $ 173,999 $ 23,798 $ 200,649 $ 117,012 $ 1,165,376 $ 577,096 $ 155,582 $ 20,106 $ 206,628 $ 88,390 $ 1,047,802 Total exposure (1) $ 1,173,808 $ 396,545 $ 23,934 $ 200,649 $ 117,012 $ 1,911,948 $ 1,055,331 $ 362,545 $ 20,252 $ 206,628 $ 88,390 $ 1,733,146 By geography (9) Canada U.S. Europe Other International $ 697,015 $ 284,705 $ 9,444 $ 79,829 334,821 25,485 79,343 6,526 62,629 10,145 2,603 1,742 79,795 $ 41,923 $ 1,112,882 $ 508,822 59,866 182,782 39,244 107,462 21,744 24,161 36,107 14,821 693,700 $ 264,708 $ 9,141 $ 88,523 $ 27,978 $ 1,084,050 404,977 245,929 155,407 62,509 88,712 53,193 7,866 1,991 1,254 69,295 22,667 5,875 54,617 42,483 21,005 27,270 25,757 7,385 Total exposure (1) $ 1,173,808 $ 396,545 $ 23,934 $ 200,649 $ 117,012 $ 1,911,948 $ 1,055,331 $ 362,545 $ 20,252 $ 206,628 $ 88,390 $ 1,733,146 (1) (2) Excludes securitization, banking book equities and other assets not subject to the standardized or IRB approach as well as exposures acquired through the U.S. government Paycheck Protection Program. EAD for standardized exposures are reported net of allowance for impaired assets and EAD for IRB exposures are reported gross of all ACL and partial write-offs as per regulatory definitions. 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. (3) (4) (5) Counterparty credit risk EAD reflects exposure amounts after netting. Collateral is included in EAD for repo-style transactions to the extent allowed by regulatory guidelines. Exchange traded derivatives are included in Other sectors. Includes residential mortgages and home equity lines of credit. Includes credit cards, unsecured lines of credit and overdraft protection products. (6) (7) (8) Comparative amounts have been reclassified from those previously presented. (9) Geographic profile is based on country of residence of the borrower. 2022 vs. 2021 Total credit risk exposure increased $179 billion or 10% from last year, primarily due to the impact of foreign exchange translation, volume growth in loans and undrawn commitments in our retail and wholesale portfolios, higher derivative exposures and an increase in securities. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 71 Net International exposure by region and client type (1), (2) As at October 31 2022 Table 44 October 31 2021 (Millions of Canadian dollars) Outstanding Securities (3) transactions Derivatives Financials Sovereign Corporate Total Total Asset type Client type Loans Repo-style Europe (excluding U.K.) U.K. Caribbean (4) Asia-Pacific Other (4), (5) Net International exposure (6), (7) $ 14,832 $ 38,187 $ 1,408 $ 3,326 $ 18,746 $ 25,896 $ 13,111 $ 57,753 $ 49,893 34,075 4,094 17,374 14,198 20,945 3,913 7,605 27,871 1,549 11,017 19,392 2,547 1,833 39,949 19,688 35,338 3,043 26,926 10,594 26,031 1,990 8,377 8,170 4,929 636 8,332 8,524 6,817 596 597 455 941 390 115 67 574 $ 39,101 $ 103,728 $ 3,791 $ 9,151 $ 55,316 $ 65,232 $ 35,223 $ 155,771 $ 135,331 (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 the borrower. Exposures are calculated on a fair value basis and net of collateral, which includes $357 billion against repo-style transactions (October 31, 2021 – $349 billion) and $14 billion against derivatives (October 31, 2021 – $11 billion). Securities include $13 billion of trading securities (October 31, 2021 – $22 billion), $56 billion of deposits (October 31, 2021 – $34 billion), and $35 billion of investment securities (October 31, 2021 – $33 billion). Exposures to Latin America, previously reported with Caribbean exposures, are now presented in Other. Comparative period amounts have been reclassified to conform to this presentation. Includes exposures in the Middle East, Africa, and Latin America. Excludes $5,213 million (October 31, 2021 – $3,076 million) of exposures to supranational agencies. Reflects $2,233 million of mitigation through credit default swaps, which are largely used to hedge single name exposures and market risk (October 31, 2021 – $1,499 million). (2) (3) (4) (5) (6) (7) 72 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Residential mortgages and home equity lines of credit (insured vs. uninsured) (1) Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a breakdown by geographic region. Residential mortgages and home equity lines of credit Table 45 (Millions of Canadian dollars, except percentage amounts) Region (4) Canada Atlantic provinces Quebec Ontario Alberta Saskatchewan and Manitoba B.C. and territories Total Canada (5) U.S. Other International Total International As at October 31, 2022 Residential mortgages Home equity lines of credit (3) Insured (2) Uninsured Total Total $ 8,460 46% $ 10,052 54% $ 18,512 43,067 188,109 41,817 30,623 71 156,700 83 22,154 53 12,444 29 31,409 17 19,663 47 8,847 43 12,290 17 93,113 24 – – – – 11,808 57 59,347 83 290,684 76 31,956 100 3,043 100 20,655 71,637 383,797 31,956 3,043 – – 34,999 100 34,999 $ 1,659 3,300 17,009 4,923 1,940 7,386 36,217 1,776 1,621 3,397 Total $ 93,113 22% $ 325,683 78% $ 418,796 $ 39,614 (Millions of Canadian dollars, except percentage amounts) Region (4) Canada Atlantic provinces Quebec Ontario Alberta Saskatchewan and Manitoba B.C. and territories Total Canada (5) U.S. Other International Total International As at October 31, 2021 Residential mortgages Home equity lines of credit (3) Insured (2) Uninsured Total Total 8,944 27,567 135,767 20,821 52% $ 68 80 50 17,351 40,309 169,978 41,501 $ $ 8,407 48% $ 12,742 32 34,211 20 20,680 50 9,179 46 13,314 20 98,533 28 1 – – – 10,714 51,823 54 80 255,636 72 23,422 100 2,740 100 19,893 65,137 354,169 23,423 2,740 26,163 1 – 26,162 100 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 (1) (2) (3) Disclosure is provided in accordance with the requirements of OSFI’s Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures). 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. Includes $39,591 million and $23 million of uninsured and insured home equity lines of credit, respectively (October 31, 2021 – $38,228 million and $27 million, respectively), reported within the personal loan category. The amounts in the U.S. and Other International include term loans collateralized by residential mortgages. (4) Region is based upon the address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, (5) 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 $384 billion (October 31, 2021 – $354 billion) includes $12 billion (October 31, 2021 – $11 billion) of mortgages with commercial clients in Canadian Banking, of which $9 billion (October 31, 2021 – $8 billion) are insured mortgages, and $17 billion (October 31, 2021 – $19 billion) of residential mortgages in Capital Markets, of which $17 billion (October 31, 2021 – $18 billion) are held for securitization purposes. All of the residential mortgages held for securitization purposes are insured (October 31, 2021 – all insured). Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 73 Residential mortgages portfolio by amortization period (1) The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of payments. Residential mortgages portfolio by amortization period Table 46 As at October 31 2022 October 31 2021 Canada U.S. and other International Total Canada U.S. and other International Total 57% 16 2 25 100% 25% 75 – – 54% 21 2 23 75% 25 – – 27% 71 2 – 71% 28 1 – 100% 100% 100% 100% 100% Amortization period ≤ 25 years > 25 years ≤ 30 years > 30 years ≤ 35 years > 35 years Total (1) Disclosure is provided in accordance with the requirements of OSFI’s Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures). Average LTV ratios (1) 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 47 For the year ended October 31 2022 Uninsured October 31 2021 Uninsured Residential mortgages (2) RBC Homeline Plan® products (3) Residential mortgages (2) RBC Homeline Plan® products (3) Average of newly originated and acquired for the period, by region (4) 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 (5), (6) Total Canadian Banking residential mortgages portfolio (7) 72% 72 70 73 73 68 75 72 73% 72 66 73 75 66 n.m. n.m. 74% 72 71 73 74 69 74 73 75% 74 68 72 75 67 n.m. n.m. 71% 68% 72% 69% 52% 46% 52% 46% (1) Disclosure is provided in accordance with the requirements of OSFI’s Guideline B-20 (Residential Mortgage Underwriting Practices and Procedures). (2) Residential mortgages exclude residential mortgages within the RBC Homeline Plan® products. (3) RBC Homeline Plan® products are comprised of both residential mortgages and home equity lines of credit. (4) Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick, and B.C. and territories are comprised of British Columbia, Nunavut, Northwest Territories and Yukon. The average LTV ratio for newly originated and acquired uninsured residential mortgages and RBC Homeline Plan® products is calculated on a weighted basis by mortgage amounts at origination. For newly originated mortgages and RBC Homeline Plan® products, LTV is calculated based on the total facility amount for the residential mortgage and RBC Homeline Plan® product divided by the value of the related residential property. (6) (5) (7) Weighted by mortgage balances and adjusted for property values based on the Teranet – National Bank National Composite House Price Index. n.m. not meaningful 74 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Credit quality performance The following credit quality performance tables and analysis provide information on loans, which represents loans, acceptances and commitments, and other financial assets. Gross impaired loans (GIL) (Millions of Canadian dollars, except percentage amounts) Personal & Commercial Banking Wealth Management Capital Markets Total GIL Impaired loans, beginning balance Classified as impaired during the period (new impaired) (1) Net repayments (1) Amounts written off Other (2) 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 2022 $ 1,362 278 559 October 31 2021 $ 1,590 233 485 $ 2,199 $ 2,308 $ 2,308 1,711 (450) (1,149) (221) $ 3,195 1,726 (721) (1,169) (723) $ 2,199 $ 2,308 0.26% 0.23% 0.18% 3.93% 0.25% 0.42% 0.31% 0.30% 0.24% 4.65% 0.26% 0.45% (1) (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. 2022 vs. 2021 Total GIL of $2,199 million decreased $109 million or 5% from last year and the total GIL ratio of 26 bps decreased 5 bps, due to lower impaired loans in Personal & Commercial Banking, partially offset by higher impaired loans in Capital Markets and Wealth Management. GIL in Personal & Commercial Banking decreased $228 million or 14%, mainly due to lower impaired loans in our Canadian Banking commercial portfolios, largely in the real estate and related and other services sectors. Lower impaired loans in our Canadian Banking residential mortgages portfolios also contributed to the decrease. GIL in Wealth Management increased $45 million or 19%, largely due to higher impaired loans in U.S. Wealth Management (including City National), mainly in the consumer discretionary sector, partially offset by repayments in International Wealth Management in the investment sector. GIL in Capital Markets increased $74 million or 15%, largely due to higher impaired loans in the real estate and related and consumer staples sectors, partially offset by lower impaired loans in a few sectors, including the transportation sector. Allowance for credit losses (Millions of Canadian dollars) Personal & Commercial Banking Wealth Management Capital Markets Corporate Support and other (1) ACL on loans ACL on other financial assets (2) Total ACL ACL on loans is comprised of: Retail Wholesale ACL on performing loans ACL on impaired loans Table 49 As at October 31 2022 October 31 2021 $ 3,200 $ 3,478 320 620 1 382 597 2 4,181 33 4,419 52 $ 4,214 $ 4,471 $ 2,285 $ 2,287 1,435 1,227 $ 3,512 $ 3,722 697 669 (1) (2) Includes PCL recorded in Corporate Support, Insurance and Investor & Treasury Services. ACL on other financial assets mainly represents allowances on debt securities measured at FVOCI and amortized cost, accounts receivable and financial guarantees. 2022 vs. 2021 Total ACL of $4,214 million decreased $257 million or 6% from last year, primarily reflecting a decrease of $238 million in ACL on loans. ACL on performing loans of $3,512 million decreased $210 million or 6%, primarily due to lower ACL in Personal & Commercial Banking, reflecting the recovery from the COVID-19 pandemic, partially offset by unfavourable changes in our macroeconomic outlook in the current year. ACL on impaired loans of $669 million decreased $28 million or 4%, due to lower ACL in Capital Markets and Personal & Commercial Banking, partially offset by higher ACL in Wealth Management. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 75 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. 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 COVID-19 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. 76 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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, 2022 For the year ended October 31, 2021 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) Market risk VaR (4) Market risk Stressed VaR (4) $ $ $ 45 $ 3 6 47 5 (47) 34 $ 4 5 34 7 (31) 51 $ 7 6 62 10 n.m. 59 $ 53 $ 87 $ 192 $ 103 $ 226 $ 21 $ 1 3 17 4 n.m. 34 $ 47 $ 24 $ 4 3 61 9 (51) 20 $ 4 3 44 8 (35) 38 $ 6 4 64 11 n.m. 50 $ 44 $ 72 $ 59 $ 53 $ 101 $ Low 12 2 2 21 6 n.m. 23 29 This table represents an integral part of our 2022 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. (4) The average market risk VaR and average SVaR for the year ended October 31, 2022 includes $11 million and $36 million, respectively (October 31, 2021 – $13 million and $15 million), related to loan underwriting commitments. n.m. not meaningful 2022 vs. 2021 Average market risk VaR of $53 million increased $9 million from last year. This was driven by the impact of heightened market volatility this year on our equity derivatives portfolio, partially offset by the impact of the Q2 2020 period of significant market volatility no longer being reflected in our two-year historical VaR period. Average SVaR of $103 million increased $50 million, largely driven by unfavourable market conditions this year which impacted loan underwriting commitments, and increased exposures in our fixed income portfolios. 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 4 days of net trading losses in 2022. Trading revenue (teb), (1) (2) and VaR (Millions of Canadian dollars) 80 60 40 20 0 -20 -40 -60 -80 -100 2 1 0 v 1, 2 o N 2 2 0 n 3 1, 2 J a 2 2 0 0 , 2 r 3 p A 2 2 0 J u l 3 1, 2 2 2 0 c t 3 1, 2 O (1) (2) Trading revenue (teb) amounts in the chart above have been revised from those previously presented. Trading revenue (teb) amounts in the chart above exclude the impact of loan underwriting commitments. Trading Revenue (teb) (1) (2) VaR Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 77 The following chart displays the distribution of daily trading profit and loss in 2022 and 2021 with 4 days of net trading losses in 2022 as mentioned above and no net trading losses in 2021. The largest reported profit was $54 million with an average daily profit of $16 million. Trading revenue (teb), (1) (2) s y a D f o r e b m u N n i y c n e u q e r F 90 80 70 60 50 40 30 20 10 0 0 6 - 5 5 - 0 5 - 5 4 - 0 4 - 5 3 - 0 3 - 5 2 - 0 2 - 5 1 - 0 1 - 5 - 0 5 0 1 5 1 0 2 5 2 0 3 5 3 0 4 5 4 0 5 5 5 0 6 Daily net trading revenue (C$ millions), excluding structured entities 2022 2021 (1) (2) Amounts have been revised from those previously presented. Trading revenue (teb) amounts in the chart above exclude the impact of 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 PBCAE. As at October 31, 2022, we held assets in support of approximately $12 billion of liabilities with respect to insurance obligations (October 31, 2021 – $13 billion). 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 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 forecasted based on past experience to determine response expectations for 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 assume continuation of existing hedge strategies. 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 projected funding date of mortgage rate commitments, fixed-rate loan prepayment behaviour, term deposit redemption behaviour, and the term and rate profile 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 rate scenarios to prevent EVE valuation and NII simulation market 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. 1 78 IRRBB positions include the impact of derivatives in hedge accounting relationships and FVOCI securities used for interest rate risk management. Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Market risk – IRRBB measures* (Millions of Canadian dollars) Before-tax impact of: 100 bps increase in rates 100 bps decrease in rates October 31 2022 EVE risk NII risk (1) Table 51 October 31 2021 Canadian dollar impact U.S. dollar impact Canadian dollar impact U.S. dollar impact Total Total EVE risk NII risk (1) $ (1,332) $ (568) $ (1,900) $ 440 1,709 1,269 547 $ (598) 234 $ (241) 781 $ (2,009) $ (839) 1,537 929 (921) * (1) This table represents an integral part of our 2022 Annual Consolidated Financial Statements. Represents the 12-month NII exposure to an instantaneous and sustained shift in interest rates. As at October 31, 2022, an immediate and sustained -100 bps shock would have had a negative impact to our NII of $839 million, down from $921 million last year, and an immediate and sustained +100 bps shock would have had a negative impact to our EVE of $1,900 million, down from $2,009 million last year. Both the year-over-year change in NII and EVE sensitivity reflect additional hedging activity. The impact of hedging activity on the EVE sensitivity was more than offset by the impact of a higher rate environment. During 2022, NII and EVE risks remained within approved limits. Market risk measures for other material non-trading portfolios Investment securities carried at FVOCI We held $93 billion of investment securities carried at FVOCI as at October 31, 2022, compared to $78 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, 2022, our portfolio of investment securities carried at FVOCI is interest rate sensitive and would impact OCI by a pre-tax change in value of $6 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 $16 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, 2022 was $90 billion. Our investment securities carried at FVOCI also include equity exposures of $1 billion as at October 31, 2022, 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 9 of our 2022 Annual Consolidated Financial Statements. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 79 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, 2022 Market risk measure Balance sheet amount Traded risk (1) Non-traded risk (2) Non-traded risk primary risk sensitivity $ 72,397 $ 108,011 – $ 84,468 72,397 23,543 Interest rate Interest rate 148,205 170,018 137,293 – 10,912 170,018 Interest rate, credit spread Interest rate, credit spread, equity Interest rate Interest rate Interest rate Interest rate Interest rate 317,845 264,665 53,180 6,128 8,558 – – 543,623 265,409 (3,753) 2,638 549,751 273,967 (3,753) 2,638 154,439 109,629 14,072 151,244 8,826 3,195 100,803 Interest rate, foreign exchange Interest rate 1,917,219 $ 661,182 $ 1,241,965 1,208,814 $ 2,638 141,319 $ 1,067,495 2,638 – Interest rate Interest rate 35,511 35,511 – 273,947 153,491 102,881 10,025 21,737 248,712 139,406 10,594 – 25,235 14,085 92,287 10,025 Interest rate Interest rate, foreign exchange Interest rate Interest rate Total liabilities Total equity Total liabilities and equity $ 1,809,044 $ 575,542 $ 1,211,765 108,175 $ 1,917,219 (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) 80 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis As at October 31, 2021 Market risk measure (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 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 agreements and securities borrowed 307,903 265,011 42,892 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 $ $ $ $ 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 1,706,323 $ 569,526 $ 1,124,524 Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate, foreign exchange Interest rate 1,100,831 $ 136,927 $ 2,666 – 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 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) 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) Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 81 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. 82 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 Table 53 (Millions of Canadian dollars) Cash and 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 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) Royal Bank of Canada Foreign branches Subsidiaries As at October 31, 2022 Securities received as collateral from securities financing and derivative transactions Bank-owned liquid assets Total liquid assets Encumbered liquid assets Unencumbered liquid assets $ 180,408 $ – $ 180,408 $ 3,601 $ 176,807 246,916 110,057 42,090 326,089 119,129 – 573,005 229,186 42,090 373,893 135,349 40,318 199,112 93,837 1,772 $ 579,471 $ 445,218 $ 1,024,689 $ 553,161 $ 471,528 As at October 31, 2021 Securities received as collateral from securities financing and derivative transactions Bank-owned liquid assets Total liquid assets Encumbered liquid assets Unencumbered liquid assets $ 193,484 $ – $ 193,484 $ 3,405 $ 190,079 214,326 114,692 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 2022 October 31 2021 $ 186,855 $ 233,342 68,567 157,648 90,910 193,763 Total unencumbered liquid assets $ 471,528 $ 459,557 (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 reflect changes in deposit and loan balances, as well as by activities in Capital Markets and Investor & Treasury Services, where business strategies and client flows may also affect liquidity reserve balances. Corporate Treasury also affects liquidity reserves through the management of funding issuances where reserves absorb timing mismatches between debt issuances and deployment into business activities. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 83 2022 vs. 2021 Total unencumbered liquid assets increased $12 billion or 3% from last year, mainly due to an increase in on-balance sheet securities reflecting higher wholesale funding and client deposit levels. 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, 2022, our unencumbered assets available as collateral comprised 24% of total assets (October 31, 2021 – 26%). Asset encumbrance Table 54 October 31 2022 October 31 2021 As at (Millions of Canadian dollars) collateral Other (1) Pledged as Available as collateral (2) Other (3) Total collateral Other (1) Pledged as Available as collateral (2) Other (3) Total Encumbered Unencumbered Encumbered Unencumbered Cash and deposits with banks Securities Trading Investment, net of applicable allowance Assets purchased under reverse repurchase agreements and securities borrowed (4) Loans Retail Mortgage securities Mortgage loans Non-mortgage loans Wholesale Allowance for loan losses Segregated fund net assets Other Derivatives Others (5) Total assets $ – $ 3,601 $ 176,807 $ – $ 180,408 $ – $ 3,405 $ 190,079 $ – $ 193,484 62,941 – 91,738 3,303 157,982 56,602 7,996 – 162,022 – 170,018 12,055 – – 87,311 3,633 147,546 133,429 – 145,484 456,292 21,709 9,192 3,409 490,602 437,408 18,310 17,436 5,343 478,497 28,208 62,905 6,066 – – – – 40,318 – – – – – – – – 27,263 26,696 – 9,119 – – – 273,724 124,889 264,848 (3,753) 2,638 55,471 363,325 130,955 273,967 (3,753) 2,638 29,370 46,699 3,213 – – – – 1,772 154,439 81,611 154,439 123,701 – 25,981 – – – – – – – – 30,778 29,858 8,110 – – – – 243,627 111,943 218,066 (4,089) 2,666 60,148 320,184 123,266 218,066 (4,089) 2,666 – 1,619 95,541 76,830 95,541 104,430 $ 664,726 $ 25,310 $ 504,609 $ 905,108 $ 2,099,753 $ 611,328 $ 21,715 $ 498,620 $ 753,560 $1,885,223 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 $22 billion (October 31, 2021 – $18 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, 2022, relationship-based deposits, which are the primary source of funding for retail and commercial lending, were $819 billion or 54% of our total funding (October 31, 2021 – $771 billion or 55%). 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, 2022, the notional value of issued and outstanding long-term debt subject to conversion under the Bail-in regime was $85 billion (October 31, 2021 – $53 billion). For further details on our wholesale funding, refer to the Composition of wholesale funding tables below. 84 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Long-term debt issuance During 2022, we continued to experience favourable unsecured wholesale funding access and pricing. We issued, either directly or through our subsidiaries, unsecured long-term funding of $43 billion in various currencies and markets. 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 2021, our outstanding MBS sold decreased $190 million. Our covered bonds and securitized credit card receivables increased $10 billion and $3 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 2022 October 31 2021 $ 119,241 $ 89,447 56,688 9,620 68,953 10,639 $ 198,833 $ 155,755 * (1) This table represents an integral part of our 2022 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 – €75 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 46% Euro 18% Other 10% MBS/CMB (2) 8% Covered Bonds 23% Cards securitization 3% Subordinated debentures 5% Canadian dollar 26% Unsecured funding 61% (1) Includes unsecured and secured long-term funding and subordinated debentures with an original term to maturity greater than 1 year (1) Includes unsecured and secured long-term funding and subordinated debentures with an original term to maturity greater than 1 year (2) Mortgage-backed securities and Canada Mortgage Bonds Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 85 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, 2022 Less than 1 month 1 to 3 months 3 to 6 months 6 to 12 months Less than 1 year sub-total $ 5,758 $ 9,482 3,488 375 404 – – 60 7,241 34 $ 311 $ 1,766 $ 7,869 $ 16,575 2,373 5,968 721 1,238 1,016 – 2,934 23,676 6,646 2,846 2,136 421 1,960 – 8,673 39,674 722 13,189 4,091 2,614 2,838 110 4,387 89,407 13,229 22,378 7,352 4,273 5,814 170 23,235 1 year to 2 years 2 years and greater – $ – – 19,108 2,363 2,402 4,575 1,483 10,219 – $ – 323 48,556 9,898 9,697 42,194 8,986 409 Total 7,869 89,407 13,552 90,042 19,613 16,372 52,583 10,639 33,863 $ 26,808 $ 30,859 $ 46,669 $ 69,391 $ 173,727 $ 40,150 $ 120,063 $ 333,940 $ 9,030 $ 6,641 $ 15,367 $ 7,536 $ 38,574 $ 6,977 $ 52,605 $ 98,156 235,784 135,153 24,218 31,302 17,778 33,173 61,855 67,458 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 $ 13,013 20,718 30,020 31,404 28,395 $ 10,347 $ 37,695 $ 27,824 95,155 52,784 76,437 175,763 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 $6,038 million (October 31, 2021 – $7,020 million), bearer deposit notes (unsecured) of $5,805 million (October 31, 2021 – $3,798 million), other long-term structured deposits (unsecured) of $12,411 million (October 31, 2021 – $8,285 million), and FHLB advances (secured) of $9,609 million (October 31, 2021 – $nil). 86 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Credit ratings Our ability to access unsecured funding markets and to engage in certain collateralized business activities on a cost-effective basis are primarily dependent upon maintaining competitive credit ratings. Credit ratings and outlooks provided by rating agencies reflect their views and methodologies. Ratings are subject to change, based on a number of factors including, but not limited to, our financial strength, competitive position, liquidity and other factors not completely within our control. The following table presents our major credit ratings: 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) Aa1 AA- AA AA (high) A1 A AA- AA stable stable stable stable As at November 29, 2022 (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 January 27, 2022, Moody’s upgraded our long-term debt ratings and assessments, as well as affirmed our short-term debt ratings. Following this rating action, our outlook is stable. This rating action concludes the review for upgrade initiated by Moody’s on October 7, 2021. (5) On May 13, 2022, Standard & Poor’s affirmed our ratings with a stable outlook. (6) On July 11, 2022, Fitch Ratings affirmed our ratings with a stable outlook. (7) On May 13, 2022, 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) 236 $ 38 146 $ 21 304 $ 25 312 $ 157 112 $ 13 140 – (1) Includes GICs issued by our municipal markets business out of New York. As at October 31 2022 October 31 2021 Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 87 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. Liquidity coverage ratio common disclosure template (1) (Millions of Canadian dollars, except percentage amounts) High-quality liquid assets Total high-quality liquid assets (HQLA) Cash outflows Retail deposits and deposits from small business customers, of which: $ Stable deposits (3) Less stable deposits Unsecured wholesale funding, of which: Operational deposits (all counterparties) and deposits in networks of cooperative banks (4) Non-operational deposits Unsecured debt Secured wholesale funding Additional requirements, of which: Outflows related to derivative exposures and other collateral requirements Outflows related to loss of funding on debt products Credit and liquidity facilities Table 60 For the three months ended October 31 2022 Total unweighted value (average) (2) Total weighted value (average) $ 364,478 375,324 $ 127,692 247,632 431,484 180,787 220,941 29,756 334,060 75,312 10,214 248,534 22,080 710,472 34,797 3,831 30,966 201,688 43,066 128,866 29,756 31,881 78,395 21,750 10,214 46,431 22,080 11,498 $ 380,339 $ 286,914 $ 15,716 28,346 50,441 9,934 28,346 $ 88,721 $ July 31 2022 $ Total adjusted value 364,478 291,618 125% Total adjusted value 353,406 287,871 123% 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 (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, 2022 is calculated as an average of 62 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%). 88 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 89% of total HQLA. These assets consist of cash, placements with central banks and highly rated securities issued or guaranteed by governments, central banks and supranational entities. LCR captures cash flows from on- and off-balance sheet activities that are either expected or could potentially occur within 30 days in an acute stress scenario. Cash outflows result from the application of withdrawal and non-renewal factors to demand 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 2022 vs. Q3 2022 The average LCR for the quarter ended October 31, 2022 was 125%, which translates into a surplus of approximately $73 billion, compared to 123% and a surplus of approximately $66 billion in the prior quarter. LCR has increased compared to last quarter as loan growth was more than offset by an increase in volume and change in mix of client deposits, as well as by issuances of term funding. 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. 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 LAR guideline and are not necessarily aligned with the classification requirements prescribed under IFRS. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 89 Net Stable Funding Ratio common disclosure template (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, 2022 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 $ 108,053 $ 108,053 – 326,492 106,488 220,004 312,346 186,282 126,064 – 41,545 – $ – – 71,417 32,742 38,675 438,928 – 438,928 3,298 – $ – – 37,631 20,284 17,347 79,690 – 79,690 4,950 214,175 34,934 9,608 $ 117,661 117,661 9,608 – – 431,963 32,190 165,785 14,246 266,178 17,944 340,812 121,004 93,141 – 247,671 121,004 – 21,456 14,020 41,545 164,329 1,785 13,127 14,020 $ 904,456 $ 38,537 – 198,407 1,403 295,131 – 107,266 – 507,939 701 661,461 – 111,525 15,189 15 14,312 4,000 99,000 26,949 26,099 54,587 121,583 63,827 30,277 156,711 279,382 – 38,539 843 17,969 691 33,986 3,181 298,856 2,834 259,881 38,539 17,952 33,951 297,918 259,057 34,285 – 1,772 1,772 2,810 3,298 865 4,950 300,342 26,258 21,456 26,604 26,795 70,722 All other assets not included in the above categories – 123,852 8 52,361 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 (%) 711,922 As at July 31, 2022 53,299 – 81,558 1,506 22,613 – 3,536 53,903 26,997 $ 809,254 112% Weighted value $ 884,887 784,537 113% (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. 90 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 2022 vs. Q3 2022 The NSFR as at October 31, 2022 was 112%, which translates into a surplus of approximately $95 billion, compared to 113% and a surplus of approximately $100 billion in the prior quarter. NSFR remained relatively flat compared to last quarter as growth in loans and securities was offset by 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, 2022 $ 177,946 $ 2 $ – $ – $ – $ – $ – $ – $ 2,460 $ 180,408 86,491 592 71 8 – 104 170 8,710 52,059 148,205 3,250 7,490 7,390 3,537 4,873 12,303 50,979 79,387 809 170,018 122,836 31,203 76,590 21,795 58,750 29,253 19,246 39,919 17,212 34,658 1,131 150,826 – 348,411 – 75,091 22,080 88,809 317,845 819,965 11,632 13,100 48,485 6,235 19,753 1,964 5 10,184 1,666 – 7,004 199 – 6,009 457 – 20,709 246 – 36,081 231 – 41,571 2,364 (45) 28 3,025 17,827 154,439 58,637 494,943 6,744 134,421 107,319 196 1,609 69,913 (357) 63,209 2,647 185,319 1,691 435,872 2,510 207,123 5,192 169,225 29,643 1,867,344 49,875 Total assets $ 501,687 $ 136,030 $107,515 $ 69,556 $ 65,856 $ 187,010 $ 438,382 $ 212,315 $ 198,868 $ 1,917,219 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 $ 91,052 $ 56,920 $ 52,671 $ 64,685 $ 83,220 $ 39,327 $ 60,161 $ 4,343 – 6,271 1,016 7,365 1,960 2,007 1,993 4,626 – 6,059 3,839 15,400 28,692 18,500 $ 645,195 $ 1,111,731 53,895 43,188 7,824 5,688 – – 11,632 6,235 35,511 – 5 – – – – – – – – – – – – – 17,872 35,511 211,929 13,096 57,152 – 424,715 1,021 – 35,600 22,073 1,390 – 129,505 6,585 – 7,743 10,994 1,353 – 82,091 298 – 1,055 7,097 656 110 313 5,244 958 – 77,603 156 – 94,361 178 – 946 20,135 892 – 71,198 1,046 – – 34,226 2,378 1,881 142,738 1,073 – – 40,626 11,411 8,034 92,083 12,357 – 16,361 – 1,117 – 273,947 153,491 77,307 10,025 662,673 9,363 108,175 1,776,967 32,077 108,175 Total liabilities and equity $ 425,736 $ 136,090 $ 82,389 $ 77,759 $ 94,539 $ 72,244 $ 143,811 $ 104,440 $ 780,211 $ 1,917,219 Off-balance sheet items Financial guarantees Commitments to extend credit Other credit-related commitments Other commitments $ 545 $ 7,016 1,934 24 2,211 $ 3,745 $ 3,274 $ 3,446 $ 6,879 1,135 11 17,133 1,469 16 21,094 1,448 16 14,184 1,674 16 1,415 $ 4,550 $ 1,068 $ 37 $ 49,135 541 60 193,990 520 136 19,269 85 187 4,516 90,821 849 20,291 333,216 99,627 1,315 Total off-balance sheet items $ 9,519 $ 10,236 $ 19,619 $ 25,832 $ 22,064 $ 51,151 $ 199,196 $ 20,609 $ 96,223 $ 454,449 (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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 91 (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 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 Total financial assets Other non-financial assets 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 $ 82,183 $ 44,058 $ 56,519 $ 36,342 $ 35,792 $ 30,625 $ 45,745 $ 4,362 2,693 15,040 18,321 2,804 1,878 9,557 5,350 2,442 1 7,543 – 4,244 848 18,320 $ 661,924 $ 1,011,508 52,110 37,213 6,118 8,122 – – Acceptances Obligations related to securities 12,653 7,207 sold short 37,841 – 5 – 2 – – – 5 – – – – – 1 – 19,873 37,841 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 168,763 5,456 33,489 – 342,828 1,663 – 62,338 9,903 1,299 – 129,897 6,907 – 5,610 4,938 1,048 – 75,663 434 – 4,742 3,747 439 – 52,327 290 – 848 2,723 373 188 44,606 155 – 668 9,211 1,000 110 56,526 1,108 – – 18,727 2,115 1,912 101,860 1,172 – – 36,733 10,226 7,383 86,902 13,360 – 19,232 1 795 – 681,953 9,910 98,762 262,201 91,439 50,784 9,593 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. 92 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis The following tables provide remaining contractual maturity analysis of our financial liabilities and off-balance sheet items. The amounts disclosed in the following table are the contractual undiscounted cash flows of all financial liabilities (e.g., par value or amount payable upon maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table incorporates only cash flows relating to payments on maturity and do not recognize premiums, discounts or mark-to-market adjustments recognized in the instruments’ carrying values as at the balance sheet date. Financial liabilities are based upon the earliest period in which they are required to be paid. For off-balance sheet items, the undiscounted cash flows potentially payable under financial guarantees and commitments to extend credit are classified on the basis of the earliest date they can be called. Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis* Table 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, 2022 $ 562,288 $ 463,711 $ 50,169 $106,568 $ 37,260 $ 1,219,996 – – 17,872 35,395 16,367 508 – – 256,756 61,420 654 110 – – 948 220 630 – – – – 709 1,609 1,884 – – 17,872 35,395 – 9,191 2,217 8,042 274,071 72,048 5,110 10,036 579,163 835,918 51,967 110,770 56,710 1,634,528 $ 20,289 $ 2 $ – $ – $ – $ – 284,606 73 48,573 304,895 48,648 60 1 61 136 36 172 187 – 187 20,291 456 333,216 353,963 Total financial liabilities and off-balance sheet items $ 884,058 $ 884,566 $ 52,028 $110,942 $ 56,897 $ 1,988,491 (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 81 41,238 265,461 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 * (1) This table represents an integral part of our 2022 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) Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 93 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 is designed to provide credible estimation of potential risk exposure, including surfacing 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 seek to 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 occurred, insights into 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 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. We proactively identify and investigate corporate insurance opportunities to mitigate and reduce potential future impacts of operational risk. 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. 94 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Our operations expose us to many different operational risks, which may adversely affect our businesses and financial results. The following list is not exhaustive, as other factors could also adversely affect our results. Operational risk Management strategy Information technology and cybersecurity risk Information technology risk is the risk associated with the use, ownership, operation, and adoption of information systems that can result in business interruptions, client service disruptions and loss of confidential information causing financial loss, reputational damage and regulatory fines and penalties. We maintain a risk driven program to address the risks following our operational risk framework supported by a global team of technology risk management experts. Information 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. Information management risk is the risk of failing to manage information appropriately through its lifecycle due to inadequate processes, controls and technology resulting in legal and regulatory consequences, reputational damage and/or financial loss. We have made substantial investments in the Enterprise Chief Data Office (CDO) and functional and regional data management and data governance units to promote awareness of and effectively manage information management risk. Managing information management risk is fundamental to realizing our Data Vision, which is to become a data-driven organization that uses data effectively and efficiently to improve client experience and decision-making. 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 CDO and the Chief Privacy 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 or 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 Enterprise Financial Crimes program is dedicated to the continuous development and maintenance of robust policies, guidelines, training, risk-assessment tools and models to enable our employees to manage evolving money laundering and terrorist financing risks and regulatory expectations. The Enterprise Financial Crimes 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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 95 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) in Q2 2023 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, 2022, our operational risk losses remain within our risk appetite. For further details on our contingencies, including litigation, refer to Notes 24 and 25 of our 2022 Annual Consolidated Financial Statements. 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 employees. 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 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. Internal audits, including behavioural science reviews with recommendations are also conducted to better understand and enhance employee attitudes and behaviours as they relate to risk management. 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 Risk Awareness Tone from Above Accountability Speaking Up Incentives Apply lessons learned Drives Influences Individual & Collective Conduct exhibited through: Behaviours Judgment Decisions Actions 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. 96 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 our business, actions with respect to relevant personnel, admission of wrongdoing, and guilty pleas with respect to criminal charges, which may in turn prohibit us from conducting certain types of business absent regulatory relief. 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 seek 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 & Transformation group, the GE, and the Board. The Enterprise Strategy & Transformation 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 seeking to ensure that 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 of helping clients thrive and communities prosper. A strong and trustworthy reputation will generally strengthen our market position, reduce the cost of capital, increase shareholder value, strengthen our resiliency, and help attract and retain top talent. Conversely, damage to our reputation can result in reduced share price and market capitalization, increased cost of capital, loss of strategic flexibility, inability to enter or expand into markets, loss of client loyalty and business, regulatory fines and penalties, restrictive agreements with regulators or prosecutors, or criminal prosecutions. The sources of reputation risk are widespread. Reputation risk is a transverse risk which can manifest as an outcome of other risk types including but not limited to credit, regulatory, legal, operational, and environmental and social 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 Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 97 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. Global uncertainty Significant uncertainty about inflationary and trade pressures, geopolitical tensions and supply chain disruptions all pose risks to the global economic outlook. In October 2022, the International Monetary Fund (IMF) projected global growth of 3.2% in calendar 2022 which remains unchanged from its July forecast. The October 2022 forecast is down from 4.9% in October 2021 and reflects the ongoing economic effects of inflationary pressures and tightening monetary policy, a worse-than-anticipated slowdown in China resulting from COVID-19 containment measures, and the ongoing conflict between Russia and Ukraine. While the outcome of the conflict between Russia and Ukraine remains uncertain, our exposure to Russia and Ukraine is extremely limited, as we do not have operations in these countries, consistent with our strategy and risk appetite. Our diversified business model, as well as our product and geographic diversification, continue to help mitigate the risks posed by global uncertainty. Government of Canada Budget 2022 On April 7, 2022, the Government of Canada presented its 2022 budget, which included measures focused on ensuring banking and life insurers’ groups help pay a portion of the costs of the Canadian federal government’s COVID-19 pandemic response. On November 22, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022 (the Bill) received second reading in the House of Commons. The Bill includes a Canada Recovery Dividend (CRD) and a permanent increase in the corporate income tax rate. The CRD is a one-time 15% tax for 2022 determined based on the average taxable income above $1 billion for taxation years 2020 and 2021 and payable in equal installments over five years. The permanent increase in the corporate income tax rate is 1.5% on taxable income above $100 million and would apply to taxation years that end after April 7, 2022. The Bill is not yet substantively enacted and timing of enactment remains uncertain. Based on the draft legislation, which remains subject to amendments prior to enactment, the CRD is expected to reduce net income by approximately $1 billion and other comprehensive income by approximately $0.1 billion when substantively enacted. The CRD is also expected to reduce our CET1 ratio by approximately 20 bps. Climate-related regulatory activity Climate change regulations, frameworks, and guidance that apply to banks, insurers and asset managers are rapidly evolving. We continue to monitor the development of applicable laws in this area and the evolution of disclosure requirements for public issuers. In Canada this includes OSFI’s Draft Guideline B-15 Climate Risk Management, which encompasses both climate risk management guidance and disclosure requirements that, if approved, would apply to RBC for fiscal 2023 at the earliest, and the Canadian Securities Administrators’ proposed National Instrument 51-107 on disclosure of climate-related matters which would introduce climate-related disclosure requirements for Canadian reporting issuers. In the U.S., the SEC has proposed rule changes which would require many registrants to include certain climate-related disclosures in their regulatory filings, including the financial statements. Internationally, the European Parliament recently approved the Corporate Sustainability Reporting Directive which will require disclosure under the European Sustainability Reporting Standards, and the International Sustainability Standards Board has also proposed standards for climate-related disclosures and general sustainability related disclosures. Canadian Housing Market and Consumer Debt In June 2022, OSFI released a new Advisory - Clarification on the Treatment of Innovative Real Estate Secured Lending Products under Guideline B-20 (the Advisory). The Advisory complements existing expectations under Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures, which articulates OSFI’s expectations regarding underwriting practices and procedures for reverse residential mortgages, residential mortgages with shared equity features and combined loan plans (CLPs). We do not originate reverse residential mortgages or residential mortgages with shared equity features, but we do originate CLPs through our RBC Homeline Plan® products. The Advisory is not expected to have an effect on how most borrowers with CLPs use their products. The Advisory will come into effect for us on October 31, 2023. New CLPs originated after this date will need to meet the new requirements. CLPs originated before October 31, 2023 are not subject to the new requirements unless certain contractual changes are made that would trigger application of the requirements. We have assessed the requirements and initiated a project to meet the requirements by the effective date. Interest rate benchmark reform On May 16, 2022, Refinitiv Benchmark Services (UK) Limited (RBSL), the administrator of the Canadian Dollar Offered Rate (CDOR), announced that the calculation and publication of all remaining tenors of CDOR will permanently cease after June 28, 2024. Concurrently, OSFI published their expectation that federally regulated financial institutions (FRFIs) transition all new derivatives and securities to an alternative benchmark rate by June 30, 2023, with no new CDOR exposure after that date, with 98 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis limited exceptions for risk management requirements. Furthermore, OSFI also expects all loan agreements referencing CDOR to be transitioned by June 28, 2024. The cessation of CDOR will be managed within our enterprise-wide interest rate benchmark reform program. For further details, refer to Note 2 of our 2022 Annual Consolidated Financial Statements. U.S. regulatory initiatives On September 29, 2022, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing the beneficial ownership information reporting requirements of the Corporate Transparency Act, which was part of the Anti- Money Laundering Act of 2020 (AMLA). The AMLA made significant revisions to the U.S.’s anti-money laundering/ anti-terrorist financing compliance framework, including by requiring FinCEN to issue the final rule. The final rule implements sweeping beneficial ownership disclosure requirements applicable to U.S. companies (excluding trusts) and foreign companies doing business in the U.S., in each case subject to certain exceptions. The final rule goes into effect January 1, 2024. As part of these broad changes to the U.S. AML regulatory regime, FinCEN has stated that it plans to update its Customer Due Diligence rule, which requires covered financial institutions to identify and verify the beneficial owners of legal entity customers. We are currently assessing the impact of the final rule and do not anticipate any issues in complying with the requirements. Technology and cyber risk management In July 2022, OSFI released final Guideline B-13 – Technology and Cyber Risk Management, which sets out expectations for the sound management of technology and cyber risk for FRFIs. This guideline will be effective on January 1, 2024. We have assessed the requirements and do not anticipate any issues in complying with the requirements by the effective date. Privacy In June 2022, the Canadian government released Bill C-27, the Digital Charter Implementation Act, 2022, with principles focused on strengthening consumer privacy protection in Canada. The Bill introduced three new federal Acts: the Consumer Privacy Protection Act, the Personal Information and Data Protection Tribunal Act, and the Artificial Intelligence and Data Act. These new Acts aim to strengthen Canada’s data privacy framework and create new regulations for responsible development and use of AI. The Consumer Privacy Protection Act is a private sector law that will repeal and replace the current Personal Information Protection and Electronic Documents Act. The Personal Information and Data Protection Tribunal Act will establish an administrative tribunal to review decisions and impose penalties, and the Artificial Intelligence and Data Act will create a risk-based approach to regulating AI systems. While it remains uncertain when and if Bill C-27 will be enacted, this new legislation could result in significant reforms that may impact our processes and privacy risk management practices. Our Global Privacy Program is responsible for overseeing the implementation of these evolving privacy principles in our organization. For further details on regulatory capital and related requirements, refer to the risk and Capital management sections of this 2022 Annual Report. Competitive risk Competitive risk is the risk of an inability to build or maintain a sustainable competitive advantage in a given market or markets, and includes the potential for loss of market share due to competitors offering superior products and services. Competitive risk can arise within or outside the financial sector, from traditional or non-traditional competitors, domestically or globally. There is intense competition for clients among financial services companies in the markets in which we operate. Client loyalty and retention can be influenced by a number of factors, including new technology used or services offered by our competitors, relative service levels and prices, product and service attributes, our reputation, actions taken by our competitors, and adherence with competition and anti-trust laws. Other companies, such as insurance companies and non-financial companies, as well as new technological applications, are increasingly offering services traditionally provided by banks. This competition could also reduce our revenue which could adversely affect our results. We identify and assess competitive risks as part of our overall risk management process. Our products and services are regularly benchmarked against existing and potential competitors. In addition, we regularly conduct risk reviews of our products, services, mergers and acquisitions strategy, as well as we seek to ensure adherence to competition and anti-trust laws. Our annual strategy-setting process also plays an integral role in managing competitive risk. Macroeconomic risk drivers Systemic risk Systemic risk is the risk that the financial system as a whole, or a major part of it – either in an individual country, a region, or globally – is put in real and immediate danger of collapse or serious damage due to an unforeseen event causing a substantive shock to the financial system with the likelihood of material damage to the economy, and which would result in financial, reputation, legal or other risks for us. Systemic risk is considered to be the least controllable risk facing us, leading to increased vulnerabilities as experienced during the 2008 global financial crisis and the COVID-19 pandemic. Our ability to mitigate systemic risk when undertaking business activities is limited, other than through collaborative mechanisms between key industry participants, and, as appropriate, the public sector and regulators to reduce the frequency and impact of these risks. The two most significant measures in mitigating the impact of systemic risk are diversification and stress testing. Our diversified business model, portfolios, products, activities and funding sources help mitigate the potential impacts from systemic risk as well as having established risk limits to ensure our portfolio is diversified, and concentration risk is reduced and remains within our risk appetite. Stress testing involves consideration of the simultaneous movements in a number of risk factors. It is used to ensure our business strategies and capital planning are robust by measuring the potential impacts of credit, market, liquidity, and Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 99 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. To address growing inflation pressures, major central banks started to increase benchmark interest rates in early fiscal 2022 and further increases are expected. While our NIM can potentially benefit from rate increases, rising interest rates, coupled with elevated inflation, could increase market volatility and reduce asset values, and could adversely impact household and corporate balance sheets. This could lead to credit deterioration and impact our financial results, particularly in our Personal & Commercial Banking, Wealth Management, and Capital Markets 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 European Union (EU), the BoE in the U.K. and monetary authorities in other jurisdictions in which we operate, as well as the fiscal policies of the governments of Canada, the U.S., the U.K., 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 seek to 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 reputation 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. 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. 100 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Tax contribution In 2022, 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 $6 billion (2021 – $8 billion). In Canada, total income and other tax expense for the year ended October 31, 2022 to various levels of government totalled $5 billion (2021 – $7 billion). Income and other tax expense – by category (Millions of Canadian dollars) Income and other tax expense – by geography (Millions of Canadian dollars) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2022 2021 2022 2021 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 (including climate change) 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. It refers to the risk that we face as a result of the manner in which we, a supplier or a client manages E&S issues or relationships with stakeholders and communities. 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 social and racial inequality and Indigenous Peoples’ rights), and community engagement. E&S risks, including climate change, are each unique and transverse risks impacting our principal risk types in different ways and to varying degrees. While E&S risk manifests itself through credit, reputation, and regulatory compliance risks, the impact of E&S risk also extends to our other principal risks, including systemic, competitive, strategic, legal and regulatory environment, operational, market, liquidity and insurance risks. The following sets out our governance and risk management in respect of environmental and social risks more broadly; see the Climate risk section below for additional information specific to climate risk. E&S risk – governance The Board oversees how we manage our E&S risks, our enterprise approach to E&S risks, and how we conduct our business to meet high standards of E&S responsibility. The Committees of the Board have oversight of E&S risks that are specific to their respective responsibilities, with the Governance Committee playing a specific oversight and coordination role over ESG matters, including certain of our ESG disclosures. For further details on risk governance, refer to the Enterprise risk management – Risk governance section and the Climate risk – Governance section. Senior management is responsible for managing E&S risks and opportunities, which include climate change, and implementing our enterprise strategies for E&S matters. E&S risk – risk management Roles and responsibilities related to E&S risk management are governed by the three lines of defence governance model and the Enterprise Risk Management Framework. The E&S Risk team within GRM is responsible for identifying, assessing, measuring, managing, mitigating, monitoring and reporting E&S issues that may pose a risk to the bank, and for developing and maintaining policies on a regular basis to manage E&S risk. Business segments and functional areas are responsible for incorporating E&S risk management requirements within their operations. A bottom-up approach is taken to identifying E&S risk at the client, transaction, and supplier level, as well as when evaluating business strategies, acquisitions, projects/initiatives, products, or services. A top-down approach is also taken to identifying and monitoring evolving E&S risks by monitoring E&S risk in various businesses, portfolios and geographies. Our Enterprise Policy on Environmental (including Climate) and Social Risk (E&S Risk Policy) serves as the foundation for our approach to managing E&S risks arising from our activities. It outlines our principles for E&S risk management, as well as the minimum requirements on how E&S risks arising from our activities are identified, assessed, measured, managed, mitigated, monitored and reported. The E&S Risk Policy also requires that clients operating in industries of elevated environmental risk be subjected to an environmental and social review. The E&S Risk Policy is supported by additional policies and procedures on E&S risk management for business segments. We also have policy guidelines in place for sensitive sectors and activities, which address our financing activities to clients and projects operating in the coal-fired power and coal mining sectors, the Arctic ecosystem, the Arctic National Wildlife Refuge, and United Nations Educational, Scientific and Cultural Organization (UNESCO) World Heritage Sites. Our E&S Risk Policy also sets the minimum requirement for how we identify, assess, manage, and mitigate human rights issues, and is supported by additional polices and position statements that reflect our approach to managing our businesses in a responsible manner. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 101 Our Code of Conduct establishes standards of desired behaviours that apply to all directors, employees, and contract workers of the bank and its subsidiaries. In addition, our principles-based Supplier Code of Conduct articulates our expectations with respect to a supplier’s business integrity, responsible business practices and responsible treatment of individuals and the environment. Our published 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. In addition, our Modern Slavery Act Statement, which is published annually, sets out the policies and processes that are designed to prevent slavery and human trafficking from taking place in our operations and supply chains. We are a participant or signatory to various industry principles and initiatives that are designed to help mitigate E&S risk within our business activities or advance responsible business practices, including, but not limited to the following: (cid:129) (cid:129) The bank is a signatory to the Equator Principles (EP), which is a benchmark for determining, assessing and managing E&S risks for project finance. We report annually on projects assessed according to the EP framework. RBC GAM1, BlueBay Asset Management LLP and Brewin Dolphin Holdings Limited are signatories to the United Nations Principles for Responsible Investment (UN PRI) and report annually on their responsible investment activities to the UN PRI. Climate risk Climate risk is the risk related to the global transition to a net-zero economy (transition risk) and the physical impacts of climate change (physical risk), which includes both chronic (longer-term) and acute (event driven) risks. We may be exposed to transition risk including through emerging regulatory and legal requirements changing business and consumer sentiments towards and the products and services we provide to our clients. Both we and our clients may also be exposed to transition risk through technological and societal change and market forces. Additionally, we and our clients may also be vulnerable to physical risk including through disruptions to operations and services. The following section is informed by the pillars of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). Climate risk – governance The Board provides oversight of the bank’s strategic approach to climate change, which includes how we manage climate-related risks and opportunities. The Board approved our updated climate strategy, the RBC Climate Blueprint, which was published in February 2022, and engaged with management on a range of climate-related topics including the measurement of financed emissions, scenario analysis, and our initial interim emissions reduction targets. The Committees of the Board also engaged with management on climate-related issues, which included emerging perspectives in Board oversight of ESG including climate, the increased regulatory and stakeholder focus, and further incorporation of climate risks in risk appetite, risk management frameworks and enterprise-wide stress testing. GE is responsible for implementing the RBC Climate Blueprint. Responsibility for climate is incorporated into our management structure and business models throughout the enterprise, and key businesses have an executive with responsibility for climate change and are configured to address the sustainable financing, investment and client needs associated with the net- zero transition as applicable to their business. Since 2021, we have had a Climate Strategy Steering Committee which includes executive representation from Capital Markets, Wealth Management, GAM®, Personal & Commercial Banking, GRM and Corporate Communications, and a Climate Strategy and Governance team which provides enterprise-wide strategic direction on advancing our understanding and developing strategies to address climate-related risks and opportunities for us and our clients. 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. 102 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Climate risk – 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 climate strategy is underpinned by our belief that the transition to net-zero should be just, orderly and inclusive. The RBC Climate Blueprint outlines our strategic climate priorities, including helping our clients as they transition to a net-zero future and holding ourselves accountable to achieve net-zero in our lending by 2050. RBC GAM has an approach to climate change that supports the RBC Climate Blueprint and lays out its commitments and actions related to climate change. In 2021, we made a commitment to provide $500 billion in sustainable financing by 20252. In October 2022, we published our approach and methodology for classifying, tracking, and disclosing progress towards our sustainable finance commitment and to support the identification of new growth opportunities for our clients and our business. Financing activities that help to address environmental issues are included as one aspect of sustainable finance. Our commitment to sustainable finance therefore allows us to build on our support for the growth of the green bond market through our issuance of green bonds under our Sustainable Bond Framework. In addition, RBC Europe Limited (RBCEL), a wholly owned subsidiary of the bank, is a member of the Green Bond Principles, and RBC reports annually on its green bond underwriting activities, globally. We also provide products, services and client solutions across our business segments to help businesses and individuals accelerate their climate goals and overcome barriers for adoption. RBC is a member of the Net-Zero Banking Alliance (NZBA), which is a global industry-led initiative to accelerate and support efforts to address climate change by aligning member banks’ lending and investment portfolios with net-zero emissions by 20503. We are also a member of the Partnership for Carbon Accounting Financials (PCAF), which is an industry-led partnership to facilitate transparency and enable financial institutions to assess and disclose greenhouse gas emissions of loans and investments. As a member of the NZBA, we made a commitment to setting and disclosing interim emissions reduction targets for certain of our key high-emitting sectors. In March 2022, we published our initial measurement of financed emissions using the PCAF methodology, and in October 2022, in accordance with our NZBA commitment, we published our initial interim emissions reduction targets for the oil and gas, power generation and automotive sectors3. Our ability to achieve our climate and sustainable finance-related commitments, goals and targets, including those discussed above, will depend on the collective efforts and actions across a wide range of stakeholders outside of our control, and there can be no assurance that they will be achieved4. Climate risk – risk management We regard climate risk as a transverse risk, which impacts all of our principal risk types in different ways and to varying degrees, and requires us to consider how financial and non-financial factors may impact us and our clients. Global practices in the identification, assessment, measurement and management of climate risks and opportunities are rapidly evolving. We are continuing 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. In particular: (cid:129) We conduct portfolio, client and scenario analyses to assess our exposure to, and the impact of, climate-related risks. (cid:129) We continue to refine our climate risk appetite and, as noted above, we have published initial interim emissions reduction targets for certain key high-emitting sectors in connection with our goal to achieve net-zero emissions in our lending by 2050. As part of our annual stress testing and analysis, we continue to integrate components of climate risk through transition and physical risk stresses and assess its impact on our key portfolios. (cid:129) (cid:129) We seek to improve data quality to further 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. (cid:129) We are expanding our climate data inventory and enhancing our data governance processes to improve our climate risk analytical capabilities. 2 3 4 Sustainable finance refers to financial activities that take into account environmental, social and governance factors. Our NZBA commitment, our initial measurement of financed emissions and our initial interim emissions reduction targets exclude the practices of: (a) RBC GAM and RBC Wealth Management. RBC Wealth Management includes the following affiliates: RBC Dominion Securities Inc. (Member – Canadian Investor Protection Fund), RBC Direct Investing Inc. (Member–Canadian Investor Protection Fund), Royal Mutual Funds Inc., RBC Wealth Management Financial Services Inc., Royal Trust Corporation of Canada and The Royal Trust Company, which are separate but affiliated subsidiaries of RBC; and (b) Brewin Dolphin Holdings PLC and its subsidiaries. External factors that could cause our actual results to differ materially from our expectations expressed in such commitments, goals and targets include the need for more and better climate data and standardization of climate-related measurement methodologies, our ability to gather and verify data, our ability to successfully implement various initiatives throughout our enterprise under expected time frames, difficulty in identifying transactions, products and services that meet the sustainable finance classification criteria, the risk that eligible transactions or related initiatives will not be completed within any specified period or at all or with the results or outcome as originally expected or anticipated by us, our ability to track transactions and report on them as performance against our climate or sustainable finance commitment, the compliance of various third parties with our policies and procedures and their commitment to us, the need for active and continuing participation and action of various stakeholders, technological advancements, the evolution of consumer behaviour, varying decarbonization efforts across economies, the need for thoughtful climate policies around the world, the challenges of balancing emission reduction targets with an orderly, just and inclusive transition and geopolitical factors that impact global energy needs, the legal and regulatory environment, and regulatory compliance considerations. Our climate- or sustainable finance-related commitments, goals and targets are aspirational and may need to be changed or recalibrated as data improve and as climate science, transition pathways and market practices regarding standards, methodologies, metrics and measurements evolve. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 103 As with risk appetite, our continued development of our climate risk measurement capabilities 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. In addition, we regularly review the risks that we face and reflect on those that affect our clients. 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 their transition to a net-zero economy, and advance their sustainability strategies: Emerging regulatory and legal requirements (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 to introduce or have already introduced rules to address the financial and economic risks of climate change. As regulations and formal requirements evolve, we will continue to monitor such developments and update our risk management practices and disclosures as necessary. See the Legal and regulatory environment risk section for further details. Disruptions to operations and client services Products and services we provide (cid:129) We identify properties that we lease or own, which contain business processes and supporting applications that require enhanced facility infrastructure to mitigate site disruptions, such as those caused by extreme weather events. We classify critical environment sites based on our business risk tolerance for site-specific downtime and, among other things, site location, power supply, exposure to flooding, geological stability and other hazards. (cid:129) We take steps to mitigate and adapt to climate change through our building design and our purchasing decisions. (cid:129) As required, we assess the impact of climate-related events (e.g., floods, hurricanes) on our businesses and client operations. (cid:129) We maintain a diversified lending portfolio, which improves our resilience to geographic or sectoral downturns and limits concentrations of credit exposure to climate risk. (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 continue to 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. Our offerings also include ESG-integrated investment solutions, structured products, carbon trading services, and ESG research and thought leadership. While we finance sectors across the economy, we are working to accelerate sustainable finance and to provide ESG advisory services to clients, inclusive of energy transition opportunities. (cid:129) RBC GAM integrates material ESG factors in its investment processes for applicable investment strategies 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 and extreme weather events, which may indirectly impact our Insurance business results. We are continuing to advance our understanding 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. (cid:129) Our Personal & Commercial Banking businesses continue to provide products to support clients in the net-zero transition, including financing for hybrid and electric vehicles, home energy retrofit financing, ESG market-linked GICs and advisory and lending solutions for clean technology. Climate risk – metrics & targets We report annually on environmental performance metrics, including metrics for the value of sustainable financing, environmental philanthropy through RBC Tech for Nature, financed emissions, and emissions reduction in our own operations. We also published our initial interim emissions reduction targets for certain key high-emitting sectors in October 2022. 104 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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, management of RWA, leverage ratio exposures, TLAC capital and TLAC leverage ratios. We manage and monitor capital from several perspectives, including regulatory capital, solo capital and TLAC. Our capital planning process is dynamic and involves various teams including Finance, Corporate Treasury, GRM, Economics and our businesses, and covers internal capital ratio targets, potential capital transactions as well as projected dividend payouts and share repurchases. This process considers our business operating plans, enterprise-wide stress testing and ICAAP, regulatory capital changes and supervisory 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 situations like the recent COVID-19 pandemic, given our risk profile and appetite. In addition, we include a discretionary cushion on top of OSFI’s regulatory targets to reflect our risk appetite, our forecasts of potential negative downturns and to maintain our capital strength for forthcoming regulatory and accounting changes, peer comparatives, rating agencies sensitivities and solo capital level. The Board is responsible for the ultimate oversight of capital management, including the annual review and approval of the capital plan. ALCO and GE share responsibility for capital management and receive regular reports detailing our compliance with approved limits and guidelines. The Audit and Risk Committees jointly approve the ICAAP process. Basel III Our consolidated regulatory capital requirements are determined by guidelines issued by OSFI, which are based on the minimum Basel III capital ratio requirements 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 SA 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 SA. We determine our regulatory leverage ratio based on OSFI’s LR Guideline, which reflects the BCBS Basel III leverage ratio requirements. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 105 All federally regulated banks with a Basel III leverage ratio total exposure exceeding €200 billion at their financial year-end are required, at a minimum, to publicly disclose in the first quarter following their year-end, the twelve indicators used in the G-SIB assessment methodology, with the goal of enhancing the transparency of the relative scale of banks’ potential global systemic importance and data quality. The FSB publishes an updated list of G-SIBs annually. On November 21, 2022, 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. Effective November 1, 2021, OSFI’s TLAC guideline established two minimum standards: the risk-based TLAC ratio, which builds on the risk-based capital ratios described in the CAR guideline, and the TLAC leverage ratio, which builds on the leverage ratio described in OSFI’s LR guideline. The TLAC requirement is intended to address the sufficiency of a D-SIB’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 external 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 TLAC guideline. 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. On June 17, 2021, OSFI announced an increase in the DSB from 1.0% to 2.5% of total RWA effective October 31, 2021 and reaffirmed this DSB level on June 22, 2022. The 2.5% continues to reflect the highest DSB requirement under OSFI capital requirements. 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 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) Modifications for increases in expected credit loss provisions on CET1 capital by applying a 25% after-tax exclusion rate for growth in Stage 1 and Stage 2 allowances between Q1 2020 and the respective quarters of fiscal 2022. The exclusion rate was reduced to the current 25% in fiscal 2022 from 50% in fiscal 2021, and will cease to apply at the beginning of fiscal 2023. 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. On August 12, 2021, OSFI announced that the exclusion of sovereign-issued securities that qualify as HQLA from the 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. On September 13, 2022, OSFI announced that exclusion of these central bank reserves from the leverage ratio will cease effective April 1, 2023. 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 Q2 2023. Clarification of the applicable capital and leverage ratio treatment of certain government relief programs. (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. 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, leverage and TLAC requirements imposed by OSFI: Basel III – OSFI regulatory targets Table 64 OSFI regulatory target requirements for large banks under Basel III Basel III capital and leverage ratios Minimum Capital Buffers (1) D-SIB/G-SIB surcharge (2) Minimum including Capital Buffers Minimum including Capital Buffers and D-SIB/G-SIB surcharge (2) RBC capital and leverage ratios as at October 31, 2022 Domestic Stability Buffer (3) Minimum including Capital Buffers, D-SIB/G-SIB surcharge and Domestic Stability Buffer as at October 31, 2022 Common Equity Tier 1 Tier 1 capital Total capital Leverage ratio TLAC ratio (4) TLAC leverage ratio (4) 4.5% 6.0% 8.0% 3.0% 21.5% 6.75% 2.5% 2.5% 2.5% n.a. n.a. n.a. 7.0% 8.5% 10.5% 3.0% 21.5% 6.75% 1.0% 1.0% 1.0% n.a. n.a. n.a. 8.0% 9.5% 11.5% 3.0% 21.5% 6.75% 12.6% 13.8% 15.4% 4.4% 26.4% 8.5% 2.5% 2.5% 2.5% n.a. 2.5% n.a. 10.5% 12.0% 14.0% 3.0% 24.0% 6.75% 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 Domestic Stability Buffer can range from 0% to 2.5% of total RWA and is currently set at 2.5%, reaffirmed by OSFI on June 22, 2022. Effective November 1, 2021, OSFI requires D-SIBs to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements which are calculated using OSFI’s TLAC guideline. (1) (2) (3) (4) n.a. not applicable 106 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Regulatory capital, TLAC available, RWA, capital and TLAC ratios Under Basel III, capital consists of CET1, Additional Tier 1, Tier 2 capital, and external TLAC instruments. 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. TLAC available is defined as the sum of Total capital and external TLAC instruments. External TLAC instruments comprise predominantly senior bail-in debt, which includes eligible senior unsecured debt with an original term to maturity of greater than 400 days and remaining term to maturity of greater than 365 days. Capital ratios are calculated by dividing CET1, Tier 1, Total capital and TLAC available by total RWA. The following chart provides a summary of the major components of CET1, Additional Tier 1, Tier 2 capital and external TLAC instruments. TLAC Available Total Capital Tier 1 Capital Common Equity Tier 1 (CET1) (1) 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 d l o h s e r h T ) 2 ( s n o i t c u d e D + Additional Tier 1 Capital + Tier 2 Capital + Preferred shares Limited recourse capital notes Non-controlling interests in subsidiaries Tier 1 instruments Subordinated debentures less amortization 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 and TLAC instruments of Financial Institutions (3) Significant investments in other Financial Institutions and Insurance subsidiaries Tier 2 and TLAC instruments External TLAC Instruments Senior bail-in debt Amortized portion of subordinated debentures Investments in own TLAC instruments Lower quality capital (1) (2) In accordance with OSFI’s regulatory adjustments announced in Q2 2020, and as discussed above, this includes capital modifications associated with Stage 1 and 2 allowances which were subject to a 25% after-tax exclusion rate in fiscal 2022, and 50% in fiscal 2021. This guidance will cease to apply at the beginning of fiscal 2023. 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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 107 The following tables provide details on our regulatory capital, TLAC available, RWA, and on ratios for capital, leverage and TLAC. Our capital position remains strong and our capital, leverage and TLAC ratios remain well above OSFI regulatory targets: Regulatory capital, TLAC available, RWA and capital, leverage and TLAC 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) TLAC available and ratios (2), (3) TLAC available TLAC ratio TLAC leverage ratio As at October 31 2022 October 31 2021 $ 76,945 84,242 93,850 $ 75,583 82,246 92,026 $ 496,898 35,342 77,639 $ 609,879 $ 444,142 34,806 73,593 $ 552,541 12.6% 13.8% 15.4% 4.4% 1,898 $ $ 160,961 26.4% 8.5% $ 13.7% 14.9% 16.7% 4.9% 1,662 n.a. n.a. n.a. (1) (2) (3) 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. Effective November 1, 2021, OSFI requires D-SIBs to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements which are calculated using OSFI’s TLAC guideline. The TLAC standard is applied at the resolution entity level which for us is deemed to be Royal Bank of Canada and its subsidiaries. A resolution entity and its subsidiaries are collectively called a resolution group. Both the TLAC ratio and TLAC leverage ratio are calculated using the TLAC available as percentage of total RWA and leverage exposure, respectively. n.a. not applicable Regulatory capital and TLAC available (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 2022 October 31 2021 17,162 $ 17,887 71,563 77,859 2,533 5,725 – – 11 11 (16,411) (23,812) 76,945 $ 75,583 7,294 $ – 6,661 – 3 – 7,297 $ 6,663 84,242 $ 82,246 2 – 8,587 $ – 3 1,018 – 9,608 $ 8,443 448 26 863 – 9,780 93,850 $ 92,026 External TLAC: instruments and regulatory adjustments External TLAC instruments Amortised portion of T2 instruments where remaining maturity > 1 year Regulatory adjustments applied to TLAC under Basel III TLAC available (Total capital + External TLAC) $ 66,528 818 (235) $ 160,961 n.a. n.a. n.a. n.a. n.a. not applicable 108 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 2022 vs. 2021 Continuity of CET1 ratio (Basel III) 286 bps (130) bps (109) bps 13.7% (98) bps (41) bps (40) bps 27 bps 12.6% October 31, 2021 (1) Net income (2) Dividends (2) RWA growth (excluding FX) Share repurchases Brewin Dolphin acquisition Fair value OCI adjustments Other (3) October 31, 2022 (1) Represents rounded figures. (1) (2) Represents net internal capital generation of $9 billion or 156 bps consisting of Net income available to shareholders, less common and preferred share dividends and distributions on other equity instruments. Includes net credit migration of 14 bps, model updates of 13 bps and other movements. (3) Our CET1 ratio was 12.6%, down 110 bps from last year, mainly reflecting RWA growth (excluding FX), share repurchases, the impact of our Brewin Dolphin acquisition, and the unfavourable impact of fair value OCI adjustments. These factors were partially offset by net internal capital generation, favourable net credit migration and model updates. Our Tier 1 capital ratio of 13.8% was down 110 bps, reflecting the factors noted above under the CET1 ratio and a favourable impact from the net issuance of preferred shares. Our Total capital ratio of 15.4% was down 130 bps, reflecting the factors noted above under the Tier 1 capital ratio and a favourable impact from the net issuance of subordinated debentures. Our Leverage ratio of 4.4% was down 50 bps, mainly reflecting share repurchases, business-driven growth in leverage exposures, lower regulatory modifications, the unfavourable impact of fair value OCI adjustments, and the impact of our Brewin Dolphin acquisition. These factors were partially offset by net internal capital generation. Leverage exposures increased by $236 billion mainly driven by business growth in retail and wholesale loans, and undrawn commitments. The impact of foreign exchange translation and lower regulatory modifications, mainly due to the reversal of the sovereign-issued securities qualifying as HQLA, also contributed to the increase. Our TLAC ratio of 26.4% was up 70 bps from 25.7% as at October 31, 2021, reflecting a favourable impact from the net issuance of external TLAC instruments, partially offset by the factors noted above under the Total capital ratio. Our TLAC leverage ratio of 8.5% was down 10 bps from 8.6%, as at October 31, 2021, reflecting the factors noted above under the Leverage ratio, partially offset by a favourable impact from the net issuance of external TLAC instruments. External TLAC instruments include long-term senior debt subject to conversion into common shares under the Bail-in regime. For further details, refer to Deposit and funding profile in the Liquidity and funding risk section. 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’s CAR guidelines. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 109 Total risk-weighted assets As at October 31 (Millions of Canadian dollars, except percentage amounts) Credit risk Lending-related and other Residential mortgages (3) Other retail (3) Business Sovereign Bank 2022 Risk-weighted assets Table 67 2021 Standardized approach Advanced approach Other Total Total Average of risk- weights (2) Exposure (1) $ 500,986 245,633 476,896 340,529 30,348 8% $ 13,518 $ 28,144 $ 27% 50% 5% 18% 8,307 57,199 72,399 166,424 12,876 3,999 3,034 1,484 65,506 – $ 41,662 $ 34,958 63,422 – – 238,823 200,553 14,412 – 4,756 – 15,910 5,483 Total lending-related and other $ 1,594,392 23% $ 98,742 $ 268,642 $ – $ 367,384 $ 318,101 Trading-related Repo-style transactions Derivatives $ 987,066 137,865 1% $ 29% 18 $ 8,557 $ 93 $ 8,668 $ 2,284 21,566 16,288 40,138 9,537 42,377 Total trading-related $ 1,124,931 4% $ 2,302 $ 30,123 $ 16,381 $ 48,806 $ 51,914 Total lending-related and other and trading-related Bank book equities Securitization exposures Regulatory scaling factor Other assets Total credit risk Market risk Interest rate Equity Foreign exchange Commodities Specific risk Incremental risk charge Total market risk Operational risk $ 2,719,323 4,346 74,839 n.a. 31,620 15% $ 101,044 $ 298,765 $ 16,381 $ 416,190 $ 370,015 5,474 10,328 16,485 41,840 5,682 12,543 18,267 44,216 5,682 6,631 18,267 n.a. – – n.a. 44,216 – 5,912 n.a. n.a. 131% 17% n.a. 140% $ 2,830,128 18% $ 106,956 $ 329,345 $ 60,597 $ 496,898 $ 444,142 $ 2,321 2,538 3,394 1,630 7,370 – 10,935 1,463 341 120 1,041 4,189 – – – – – – 13,256 $ 14,380 4,178 3,083 762 7,601 4,802 4,001 3,735 1,750 8,411 4,189 $ 17,253 $ 18,089 $ – $ 35,342 $ 34,806 $ 77,639 – n.a. $ 77,639 $ 73,593 Total risk-weighted assets $ 2,830,128 $ 201,848 $ 347,434 $ 60,597 $ 609,879 $ 552,541 (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. (3) Home equity line of credit (HELOC) exposures under the IRB Approach reported as “Other Retail” in this table have now been grouped with Residential Mortgages to ensure consistent classification between the Standardized Approach and the IRB Approach. Prior period amounts have been reclassified to conform with this presentation. n.a. not applicable 2022 vs. 2021 During the year, RWA was up $57 billion, mainly reflecting business growth in commercial and corporate lending, and residential mortgages, as well as the impact of foreign exchange translation. These factors were partially offset by favourable net credit migration, primarily in our wholesale portfolios, and model updates. The model updates mainly reflect the impact of the Q2 2020 period of significant market volatility no longer being reflected in our two-year historical VaR period. In our CET1 ratio the impact of foreign exchange translation on RWA is largely mitigated with economic hedges. 110 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Selected capital management activity Selected capital management activity Table 68 (Millions of Canadian dollars, except number of shares) Tier 1 capital Common shares activity Issued in connection with share-based compensation plans (1) Purchased for cancellation (2) Issuance of preferred shares, Series BT (2), (3) Redemption of preferred shares, Series BJ (2), (3) Tier 2 capital Issuance of May 3, 2032 subordinated For the year ended October 31, 2022 Issuance or redemption date Number of shares (000s) Amount November 5, 2021 February 24, 2022 1,270 (40,866) 750 (6,000) $ 99 (509) 750 (150) debentures (3), (4) January 25, 2022 1,000 Amounts include cash received for stock options exercised during the period and fair value adjustments to stock options. For further details, refer to Note 20 of our 2022 Annual Consolidated Financial Statements. (1) (2) (3) NVCC instruments. (4) For further details, refer to Note 19 of our 2022 Annual Consolidated Financial Statements. On December 6, 2021, we announced a normal course issuer bid (NCIB) to purchase up to 45 million of our common shares, commencing on December 8, 2021 and continuing until December 7, 2022, or such earlier date as we complete the repurchase of all shares permitted under the bid. Since the inception of this NCIB, the total number of common shares repurchased and cancelled was approximately 41 million, at a cost of approximately $5,426 million. We determine the amount and timing of purchases under the NCIB, subject to prior consultation with OSFI. Purchases may be made through the TSX, the NYSE and other designated exchanges and alternative Canadian trading systems. The price paid for repurchased shares is the prevailing market price at the time of acquisition. On 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. On January 25, 2022, we issued $1,000 million of NVCC subordinated debentures. The notes bear interest at a fixed rate of 2.94% per annum until May 3, 2027, and at the three-month CDOR plus 0.76% thereafter until their maturity on May 3, 2032. On February 24, 2022, we redeemed all 6 million of our issued and outstanding Non-Cumulative First Preferred Shares Series BJ at a price of $25.75 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 2022, our dividend payout ratio was 45%. Common share dividends paid during the year were $7 billion. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 111 Selected share data (1) (Millions of Canadian dollars, except number of shares and as otherwise noted) 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 BO (3), (4) Non-cumulative Series BT (3), (4), (5) 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) 2022 2021 Number of shares (000s) Amount 1,385,591 $17,318 (334) (2,680) 1,382,911 $16,984 Dividends declared per share $ 4.96 Number of shares (000s) Amount 1,425,187 $ 17,728 (73) (662) 1,424,525 $ 17,655 Table 69 Dividends declared per share $ 4.32 7,535 3,502 4,696 20,000 $ 20,000 24,000 12,000 6,000 6,000 – 14,000 750 15 500 500 600 300 150 150 – 350 750 $ 0.93 0.91 0.80 0.75 1.23 1.23 0.33 1.20 4.20% 23 US$ 67.50 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 1.20 – 23 US$ 67.50 1,750 1,750 4.50% 1,750 1,750 4.50% 1,250 1,250 4.00% 1,250 1,250 4.00% 1,000 1,000 3.65% 1,000 1,000 3.65% 106,765 $ 7,323 112,015 $ 6,723 (12) (5) (164) (39) 106,753 $ 7,318 $ 6,946 111,851 $ 6,684 $ 6,158 247 257 For further details about our capital management activity, refer to Note 20 of our 2022 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) (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) The dividends declared per share represent per annum dividend rate applicable to the shares issued as at the reporting date. For Limited Recourse Capital Notes (LRCN) Series, 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 20 of our 2022 Annual Consolidated Financial Statements. Excludes distributions to non-controlling interests. (8) (9) 112 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis As at November 25, 2022, the number of outstanding common shares was 1,382,866,527, net of treasury shares held of 2,788,345, and the number of stock options and awards was 7,471,143. 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, 2022, which were the preferred shares Series AZ, BB, BD, BF, BH, BI, BO, BT, 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, November 3, 2031, and May 3, 2032 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 $5.00 and including an estimate for accrued dividends and interest, these NVCC capital instruments would convert into a maximum of 4,541 million common shares, in aggregate, which would represent a dilution impact of 76.66% based on the number of common shares outstanding as at October 31, 2022. Attributed capital Our methodology for allocating capital to our business segments is based on the Basel III regulatory capital requirements, with the exception of Insurance. For Insurance, the allocation of capital is based on fully diversified economic capital. Risk-based capital attribution provides a uniform base for performance measurement among business segments, which compares to our overall corporate return objective and facilitates management decisions in resource allocation in conjunction with other factors. The calculation and attribution of capital involves a number of assumptions and judgments by management which are monitored to ensure that the regulatory capital framework remains comprehensive and consistent. The models are benchmarked to leading industry practices via participation in surveys, reviews of methodologies and ongoing interaction with external risk management industry professionals. For additional information on the risks highlighted below, refer to the Risk management section. RWA (C$ millions) (1) $496,898 Credit Market 35,342 Operational 77,639 $609,879 63% 6 11 Attributed capital (1) Credit Market Operational Goodwill and other intangibles 16 Other (2) 4 Royal Bank of Canada Personal & Commercial Banking Wealth Management Insurance Investor & Treasury Services Capital Markets RWA (C$ millions) (1) $179,465 Credit Market 272 Operational 30,347 $210,084 RWA (C$ millions) (1) $100,949 Credit Market 693 Operational 22,637 $124,279 RWA (C$ millions) (1), (3) Credit Market Operational $15,507 – – $15,507 RWA (C$ millions) (1) Credit Market Operational $16,478 3,727 4,587 $24,792 RWA (C$ millions) (1) $174,661 Credit Market 28,820 Operational 19,774 $223,255 67% – 12 Attributed capital (1) Credit Market Operational Goodwill and other intangibles Other (2) 16 5 50% – 12 Attributed capital (1) Credit Market Operational Goodwill and other intangibles Other (2) 36 2 12% Attributed capital (1) Based on Economic Capital: Credit Market 14 Operational 8 Goodwill and other intangibles Other (2) 10 56 57% 10 16 Attributed capital (1) Credit Market Operational Goodwill and other intangibles Other (2) 15 2 69% 13 8 Attributed capital (1) Credit Market Operational Goodwill and other intangibles Other (2) 7 3 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 the OSFI CAR guideline. (3) Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 113 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. 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 November 11, 2021, BCBS finalized the disclosure requirements for the Minimum capital requirements for market risk standards published in January 2019. On January 31, 2022, OSFI announced revised capital, leverage, liquidity and disclosure rules that incorporate the final BCBS Basel III reforms. The revised rules include new CAR, LR, LAR guidelines and related Pillar 3 disclosure requirements. The revised CAR (other than credit valuation adjustment and market risk), LR and Pillar 3 guidelines come into effect for us in Q2 2023. The revised LAR guidelines are effective for us on April 1, 2023. The revised CVA and market risk chapters of the CAR guidelines are effective for us in Q1 2024. We continue to assess the impact of the revised frameworks and are taking appropriate steps to ensure we are ready for adoption in Q2 2023 and Q1 2024. We do not anticipate any issues in complying with the new framework requirements. 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. Assurance on Capital, Leverage and Liquidity Returns On November 7, 2022, OSFI released a new guideline – Assurance on Capital, Leverage and Liquidity Returns, which establishes expectations on OSFI’s assurance requirements over regulatory returns. This guideline provides principles-based and risk-based guidance to external auditors and institutions in an effort to enhance and align these expectations across all federally regulated financial institutions (FRFIs). This guidance will be effective for us beginning in fiscal 2023. We are assessing the finalised requirements and we do not anticipate any issues in meeting OSFI’s minimum assurance requirements for our regulatory filings related to our capital (including TLAC), leverage and liquidity returns. 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 2022 Annual Consolidated Financial Statements. Certain of these policies and related estimates are recognized as critical because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and significantly different amounts could be reported under different conditions or using different assumptions. Our critical accounting judgments, estimates and assumptions relate to the fair value of financial instruments, ACL, 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. 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. 114 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 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 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 2022 Annual Consolidated Financial Statements. Allowance for credit losses An ACL is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include certain loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable, and finance and operating lease receivables. Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments. We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model: (cid:129) Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses expected to result from defaults occurring over the 12 months following the reporting date. Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset. (cid:129) Performing financial assets (cid:129) (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 ACL, refer to Notes 2, 4 and 5 of our 2022 Annual Consolidated Financial Statements. Goodwill and other intangible assets We allocate goodwill to groups of cash-generating units (CGU). Goodwill is not amortized and is tested for impairment on an annual basis, or more frequently if there are objective indications of impairment. We test for impairment by comparing the recoverable amount of a CGU with its carrying amount. We estimate the value in use and fair value less costs of disposal of our CGUs primarily using a discounted cash flow method which incorporates each CGU’s internal forecasts of revenues and expenses. Significant management judgment is applied in the determination of expected future cash flows (uncertainty in timing and amount), discount rates (based on CGU-specific risks) and terminal growth rates. CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk and government regulation), currency risk and price risk (including product pricing risk and inflation). If the 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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 115 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 11 of our 2022 Annual Consolidated Financial Statements. Employee benefits We sponsor a number of benefit programs for eligible employees, including registered pension plans, supplemental pension plans, health, dental, disability and life insurance plans. The calculation of defined benefit expenses and obligations depends on various assumptions such as discount rates, healthcare cost trend rates, projected salary increases, retirement age, and mortality and termination rates. Discount rates are determined using a yield curve based on spot rates from high quality corporate bonds. All other assumptions are determined by us and are reviewed by the actuaries. Actual experience that differs from the actuarial assumptions will affect the amounts of benefit obligations and remeasurements that we recognize. The weighted average assumptions used and the sensitivity of key assumptions are presented in Note 17 of our 2022 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 8 of our 2022 Annual Consolidated Financial Statements. Derecognition of financial assets We periodically enter into transactions in which we transfer financial assets such as loans or MBS 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 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 7 of our 2022 Annual Consolidated Financial Statements. Application of the effective interest method Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income generally for all interest bearing financial instruments using the effective interest method. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future cash flows. Provisions Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are measured as the best estimate of the consideration required to settle the present obligation at the reporting date. Significant judgment is required in determining whether a present obligation exists and in estimating the probability, timing and amount of any outflows. We record provisions related to litigation, asset retirement obligations and other items. 116 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis The forward-looking nature of these estimates requires us to use a significant amount of judgment in projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the reporting period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our expectations, we may incur expenses in excess of the provisions recognized. Insurance claims and policy benefit liabilities Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits. Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method, which incorporates assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy maintenance expenses, and provisions for adverse deviation. Key assumptions are reviewed annually and updated in response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change. Refer to Note 15 of our 2022 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 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 in 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, 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. On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be realized, using both positive and negative evidence. Refer to Note 22 of our 2022 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 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 depending on the nature of the contract. 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. If full retrospective application to a group of contracts is impracticable, the modified retrospective or fair value approach may be used. To manage the transition to IFRS 17, we established a comprehensive program and governance structure led by Finance and the Insurance business that focuses on the evaluation of the impacts of the standard and implementation of policies, systems and processes required for the adoption. Significant progress has been made in preparing for the implementation of IFRS 17. We expect the adoption of IFRS 17 to affect the timing of earnings recognition for our insurance contracts and the carrying amount of our insurance contract liabilities. We continue to assess the impacts of adopting IFRS 17 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, 2022, 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, 2022. 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, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Related party transactions In the ordinary course of business, we provide normal banking services and operational services, and enter into other transactions with associated and other related corporations, including our joint venture entities, on terms similar to those offered to non-related parties. We grant loans to directors, officers and other employees at rates normally accorded to preferred clients. In addition, we offer deferred share and other plans to non-employee directors, executives and certain other key employees. For further information, refer to Notes 12 and 26 of our audited 2022 Annual Consolidated Financial Statements. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 117 Table 70 2022 48,985 $ $ 2021 2020 49,693 $ 47,181 15,794 13 16,038 12 11,432 5 $ 15,807 $ 16,050 $ 11,437 $ 11.08 $ 11.06 4.96 7.84 7.82 4.29 $1,917,219 $1,706,323 $1,624,548 1,011,885 1,100,831 11.08 $ 11.06 4.32 1,208,814 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 118 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Net interest income on average assets and liabilities Table 71 (Millions of Canadian dollars, except for percentage amounts) (1) 2022 2021 2022 2021 2022 2021 Average balances Interest Average rate Assets Deposits with other banks Canada U.S. Other International Securities Trading Investment, net of applicable allowance Asset purchased under reverse repurchase agreements and securities borrowed Loans (2) Canada Retail Wholesale U.S. Other International Total interest-earning assets Non-interest-bearing deposits with other banks Customers’ liability under acceptances Other assets Total assets Liabilities and shareholders’ equity Deposits (3) Canada U.S. Other International 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 Total liabilities and shareholders’ equity Net interest income and margin Net interest income and margin (average earning assets, net) (4) Canada U.S. Other International Total $ 13,119 $ 81,962 22,819 10,580 $ 56,973 22,244 582 $ 911 204 106 4.44% 1.00% 0.11 1.11 0.61 0.89 63 136 117,900 89,797 1,697 305 1.44 0.34 135,117 150,384 128,977 131,612 4,754 2,308 3,736 1,141 3.52 1.53 2.90 0.87 285,501 260,589 7,062 4,877 2.47 1.87 360,068 317,997 5,447 1,309 1.51 0.41 478,696 103,034 581,730 136,937 49,630 441,380 86,978 15,146 5,344 528,358 110,314 40,619 20,490 4,037 2,038 13,658 3,557 17,215 2,880 1,559 3.16 5.19 3.52 2.95 4.11 3.09 4.09 3.26 2.61 3.84 768,297 679,291 26,565 21,654 3.46 3.19 1,531,766 99,564 18,354 237,167 1,347,674 120,154 19,410 190,963 40,771 – – – 28,145 – – – 2.66 – – – 2.09 – – – $ 1,886,851 $ 1,678,200 $ 40,771 $ 28,145 2.16% 1.68% $ 684,452 $ 153,039 101,058 626,549 $ 8,660 $ 4,700 1.27% 0.75% 0.17 132,833 0.53 97,355 1,044 1,047 231 517 0.68 1.04 938,549 856,737 10,751 5,448 1.15 0.64 39,079 33,566 2,409 1,809 6.16 5.39 315,871 10,133 26,000 1,329,632 226,376 18,409 209,890 275,870 9,174 23,486 1,198,833 202,316 19,516 165,286 4,351 288 255 18,054 – – – 574 179 133 8,143 – – – 1.38 2.84 0.98 1.36 – – – 0.21 1.95 0.57 0.68 – – – $ 1,784,307 $ 1,585,951 $ 18,054 $ 8,143 1.01% 0.51% $ 102,544 $ 92,250 n.a. n.a. n.a. n.a. $ 1,886,851 $ 1,678,200 $ 18,054 $ 8,143 0.96% 0.49% $ 1,886,851 $ 1,678,200 $ 22,717 $ 20,002 1.20% 1.19% $ 870,147 $ 437,357 224,261 793,130 $ 15,761 $ 13,947 1.81% 1.76% 1.27 349,840 0.79 204,706 4,447 1,608 5,423 1,533 1.24 0.68 $ 1,531,765 $ 1,347,676 $ 22,717 $ 20,002 1.48% 1.48% Insurance segment assets and liabilities are included in Other assets and Other liabilities, respectively. Interest income includes loan fees of $1,033 million (2021 – $888 million; 2020 – $797 million). (1) (2) (3) Deposits include personal chequing and savings deposits with average balances of $279 billion (2021 – $258 billion; 2020 – $218 billion), interest expense of $712 million (2021 – $175 million; 2020 – $498 million) and average rates of 0.26% (2021 – 0.07%; 2020 – 0.2%). Deposits also include term deposits with average balances of $500 billion (2021 – $437 billion; 2020 – $443 billion), interest expense of $7,323 million (2021 – $4,487 million; 2020 – $6,774 million) and average rates of 1.46% (2021 – 1.03%; 2020 – 1.53%). (4) Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities. n.a. not applicable Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 119 Change in net interest income Table 72 (Millions of Canadian dollars) (1) Assets Deposits with other banks Canada (3) U.S. (3) Other international (3) Securities Trading Investment, net of applicable allowance Asset purchased under reverse repurchase agreements and securities borrowed Loans Canada (3) Retail (3) Wholesale (3) U.S. (3) Other international (3) Total interest income Liabilities Deposits Canada (3) U.S. (3) Other international (3) 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 2022 vs. 2021 2021 vs. 2020 Increase (decrease) due to changes in Increase (decrease) due to changes in Average volume (2) Average rate (2) Net change Average volume (2) Average rate (2) Net change $ 25 $ 28 4 451 $ 820 64 476 $ 848 68 (27) $ 93 – 178 163 840 1,004 1,018 1,167 (95) 51 18 $ (190) 104 (791) (776) (9) (97) 104 (886) (725) 173 3,965 4,138 (583) (2,776) (3,359) 1,155 657 695 346 333 1,130 462 133 1,488 1,787 1,157 479 1,343 (281) (44) 116 (2,219) (341) (110) (230) (876) (622) (154) (114) $ 3,424 $ 9,202 $ 12,626 $ 573 $ (7,311) $ (6,738) 434 35 20 297 83 19 14 3,526 778 510 303 3,694 90 108 3,960 813 530 600 3,777 109 122 167 167 30 (145) (279) (10) (10) (2,845) (594) (260) (246) (1,769) (91) (20) (2,678) (427) (230) (391) (2,048) (101) (30) $ $ 902 $ 9,009 $ 9,911 $ (80) $ (5,825) $ (5,905) 2,522 $ 193 $ 2,715 $ 653 $ (1,486) $ (833) 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 As at October 31 (Millions of Canadian dollars) Canada (1) Residential mortgages Personal Credit cards Small business Retail Wholesale U.S. (1) Retail Wholesale Other International (1) Retail Wholesale Total loans and acceptances Total allowance for credit losses Total loans and acceptances, net of allowance for credit losses (1) Geographic information is based on residence of borrower. 120 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Table 73 2022 2021 $ 383,797 $ 354,169 78,232 17,235 12,003 79,422 19,778 12,669 495,666 126,751 461,639 107,750 $ 622,417 $ 569,389 47,402 114,799 35,601 86,041 162,201 121,642 6,683 50,289 56,972 6,358 44,148 50,506 $ 841,590 $ 741,537 (3,798) (4,164) $ 837,792 $ 737,373 Loans and acceptances by portfolio and sector As at October 31 (Millions of Canadian dollars) 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 loans and acceptances Total allowance for credit losses Total loans and acceptances, net of allowance for credit losses Table 74 2022 2021 $ 418,796 $ 380,332 93,441 17,822 12,003 97,709 20,577 12,669 $ 549,751 $ 503,598 10,105 8,770 7,016 19,405 6,940 5,959 41,353 13,781 1,094 5,632 10,537 5,232 19,952 2,223 3,006 79,506 24,393 7,176 6,542 11,847 1,370 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 $ 291,839 $ 237,939 $ 841,590 $ 741,537 (3,798) (4,164) $ 837,792 $ 737,373 Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 121 Gross impaired loans by portfolio and geography 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) Canada (2) 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. (2) Retail Wholesale Total Other International (2) Retail Wholesale Total Total GIL Allowance on impaired loans Net impaired loans GIL as a % of loans and acceptances Residential mortgages Personal Small business Retail Wholesale Total Allowance on impaired loans as a % of GIL $ $ Table 75 2022 560 $ 200 138 898 18 $ 9 1 254 122 57 96 – 7 3 77 5 9 12 16 322 246 8 6 – 27 2021 645 197 109 951 11 8 – 274 32 131 77 – 4 25 35 5 31 3 6 314 220 6 137 – 32 1,295 6 1,351 6 $ 2,199 $ 2,308 $ 352 $ 174 138 664 17 6 1 69 40 10 4 – 7 3 28 3 2 4 7 88 56 5 6 – – 356 443 164 109 716 11 5 – 107 25 48 – – 4 25 31 3 – 3 5 157 110 5 16 – – 555 $ 1,020 $ 1,271 $ $ 34 $ 674 708 $ 23 412 435 $ 212 390 200 $ 271 471 $ $ $ 2,199 $ 2,308 (697) (669) 602 $ 1,530 $ 1,611 0.13% 0.20% 1.09% 0.16% 0.45% 0.26% 30.41% 0.17% 0.21% 0.91% 0.19% 0.57% 0.31% 30.21% (1) Past due loans greater than 90 days not included in impaired loans were $170 million in 2022 (2021 – $137 million). For further details, refer to Note 5 of our 2022 Annual Consolidated Financial Statements. (2) Geographic information is based on residence of borrower. 122 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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 Canada (1) 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. (1) Retail Wholesale Total Other International (1) Retail Wholesale Total Total PCL on impaired loans Total PCL on performing loans 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) (1) Geographic information is based on residence of borrower. 2022 $ 13 $ 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 1 259 333 43 648 1 $ 3 (3) 47 35 (2) 3 – 1 (1) (6) (8) 3 9 5 32 25 (1) (16) 1 3 131 (1) 778 $ 678 15 $ 271 326 43 655 1 3 1 36 9 (21) 1 – 1 (1) 9 1 2 2 – 23 9 1 1 – – 78 733 $ 2 $ 68 70 $ (9) $ (16) (25) $ 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) 778 $ 678 (281) (1,350) (13) (81) $ $ $ $ $ $ $ $ $ $ 484 $ (753) 0.06% (0.10)% 0.10% 0.10% Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 123 Allowance on loans by portfolio and geography (1) As at and for the year ended October 31 (Millions of Canadian dollars, except percentage amounts) Allowance against impaired loans Canada (2) 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. (2) Retail Wholesale Total Other International (2) Retail Wholesale Total Total allowance on impaired loans Allowance on performing loans Residential mortgages Personal Credit cards Small business Retail Wholesale Total allowance on performing loans Total allowance on loans Key ratios Allowance on loans as a % of loans and acceptances Net write-offs as a % of average net loans and acceptances Includes loans, acceptances, and commitments. (1) (2) Geographic information is based on residence of borrower. 124 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis Table 77 2022 2021 $ 44 $ 85 48 45 71 34 $ 177 $ 150 $ 2 $ 4 – 27 10 7 1 – 1 1 12 2 1 2 4 25 12 1 3 – – 3 1 – 9 5 29 – – 1 3 9 1 – 1 2 27 81 1 9 – – $ 115 $ $ 292 $ 182 332 $ 2 $ 175 $ 177 $ $ 98 $ 102 $ 200 $ $ 669 $ $ 300 $ 946 893 146 3 126 129 107 129 236 697 278 991 875 143 $ 2,285 $ 2,287 $ 1,227 $ 1,435 $ 3,512 $ 3,722 $ 4,181 $ 4,419 0.50% 0.10% 0.60% 0.11% Credit quality information by Canadian province (1) As at and for the year ended October 31 (Millions of Canadian dollars) Loans and acceptances Atlantic provinces (2) Quebec Ontario Alberta Other Prairie provinces (3) B.C. and territories (4) Total loans and acceptances in Canada Gross impaired loans Atlantic provinces (2) Quebec Ontario Alberta Other Prairie provinces (3) B.C. and territories (4) Total GIL in Canada PCL on impaired loans Atlantic provinces (2) Quebec Ontario Alberta Other Prairie provinces (3) B.C. and territories (4) Total PCL on impaired loans in Canada (1) Geographic information is based on residence of borrower. (2) Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick. (3) Comprises Manitoba and Saskatchewan. (4) Comprises British Columbia, Nunavut, Northwest Territories and Yukon. Table 78 2022 2021 $ 30,709 $ 29,078 68,595 268,317 71,506 33,956 97,937 73,743 300,477 73,638 35,699 108,151 $ 622,417 $ 569,389 $ 65 $ 172 323 233 121 106 97 198 379 321 173 103 $ $ $ 1,020 $ 1,271 20 $ 47 529 48 39 50 733 $ 22 22 483 83 39 34 683 Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 125 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, 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, unless otherwise noted. Services provided in respect of assets under management include the selection of investments and the provision of investment advice. We have assets under management that are also administered by us and included in assets under administration. Attributed capital Attributed capital is based on the Basel III regulatory capital requirements and economic capital. Auction rate securities (ARS) Debt securities whose interest rates are regularly reset through an auction process. Average earning assets, net Average earning assets include interest- bearing deposits with other banks, securities, net of applicable allowance, assets purchased under reverse repurchase agreements and securities borrowed, loans, net of allowance, cash collateral and margin deposits. Insurance assets, and all other assets not specified are excluded. The averages are based on the daily balances for the period. Basis point (bp) One one-hundredth of a percentage point (.01%). Collateral Assets pledged as security for a loan or other obligation. Collateral can take many forms, such as cash, highly rated securities, property, inventory, equipment and receivables. Collateralized debt obligation (CDO) Securities with multiple tranches that are issued by structured entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand. Commercial mortgage-backed securities (CMBS) Securities created through the securitization of commercial mortgages. Commitments to extend credit Unutilized amount of credit facilities available to clients either in the form of loans, bankers’ acceptances and other on-balance sheet financing, or through off-balance sheet products such as guarantees and letters of credit. Common Equity Tier 1 (CET1) capital A regulatory Basel III capital measure comprised mainly of common shareholders’ equity less regulatory deductions and adjustments for goodwill and intangibles, defined benefit pension fund assets, shortfall in allowances and other specified items. Common Equity Tier 1 capital ratio A risk-based capital measure calculated as CET1 capital divided by risk-weighted assets. Covered bonds Full recourse on-balance sheet obligations issued by banks and credit institutions that are fully collateralized by assets over which investors enjoy a priority claim in the event of an issuer’s insolvency. Credit default swaps (CDS) A derivative contract that provides the purchaser with a one-time payment should the referenced entity/entities default (or a similar triggering event occur). Derivative A contract between two parties, which requires little or no initial investment and where payments between the parties are dependent upon the movements in price of an underlying instrument, index or financial rate. Examples of derivatives include swaps, options, forward rate agreements and futures. The notional amount of the derivative is the contract amount used as a reference point to calculate the payments to be exchanged between the two parties, and the notional amount itself is generally not exchanged by the parties. Dividend payout ratio Common dividends as a percentage of net income available to common shareholders. 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. Efficiency Ratio Non-interest expense as a percentage of total revenue. Fair value Fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Funding Valuation Adjustment Funding valuation adjustments are calculated to incorporate cost and benefit of funding in the valuation of uncollateralized and under- collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a funding curve, implied volatilities and correlations as inputs. Guarantees and standby letters of credit These primarily represent irrevocable assurances that a bank will make payments in the event that its client cannot meet its financial obligations to third parties. Certain other guarantees, such as bid and performance bonds, represent non-financial undertakings. Hedge A risk management technique used to mitigate exposure from market, interest rate or foreign currency exchange risk arising from normal banking operations. The elimination or reduction of such exposure is accomplished by establishing offsetting positions. For example, assets denominated in foreign currencies can be offset with liabilities in the same currencies or through the use of foreign exchange hedging instruments such as futures, options or foreign exchange contracts. Hedge funds A type of investment fund, marketed to accredited high net worth investors, that is subject to limited regulation and restrictions on its investments compared to retail mutual funds, and that often utilize aggressive strategies such as selling short, leverage, program trading, swaps, arbitrage and derivatives. High-quality liquid assets (HQLA) Assets are considered to be HQLA if they can be easily and immediately converted into cash at little or no loss of value during a time of stress. Impaired loans Loans are classified as impaired when there has been a deterioration of credit quality to the extent that management no longer has reasonable assurance of timely collection of the full amount of principal and interest in accordance with the contractual terms of the loan agreement. Credit card balances are not classified as impaired as they are directly written off after payments are 180 days past due. International Financial Reporting Standards (IFRS) IFRS are principles-based standards, interpretations and the framework adopted by the International Accounting Standards Board. Leverage Ratio A Basel III regulatory measure, the ratio divides Tier 1 capital by the sum of total assets plus specified off-balance sheet items. Expected credit losses The difference between the contractual cash flows due to us in accordance with the relevant contractual terms and the cash flows that we expect to receive, discounted to the balance sheet date. Liquidity Coverage Ratio (LCR) The Liquidity Coverage Ratio is a Basel III metric that measures the sufficiency of HQLA available to meet net short-term financial obligations over a thirty day period in an acute stress scenario. 126 Royal Bank of Canada: Annual Report 2022 Management’s Discussion and Analysis 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. RBC Homeline Plan® products This is comprised of residential mortgages and secured personal loans whereby the borrower pledges real estate as collateral. 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, sponsor member guarantees, 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. PCL on loans ratio PCL on loans ratio is calculated using PCL on loans as a percentage of average net loans and acceptances. 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 OSFI’s Capital Adequacy Requirements guidelines. 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 RWA 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 Loss Absorbing Capacity (TLAC) The aggregate of Tier 1 capital, Tier 2 capital, and external TLAC instruments which allow conversion in whole or in part into common shares under the Canada Deposit Insurance Corporation Act and meet all of the eligibility criteria under the TLAC guideline. TLAC ratio The risk-based TLAC ratio is defined as TLAC divided by total risk-weighted assets. TLAC Leverage Ratio The TLAC leverage ratio is defined as TLAC divided by the Leverage ratio exposure. 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. Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2022 127 EDTF recommendations index We aim to present transparent, high-quality risk disclosures by providing disclosures in this 2022 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 2022 Annual Report. The following index summarizes our disclosure by EDTF recommendation: Type of Risk Recommendation Disclosure Location of disclosure Annual Report page 128 60-65, 126-127 58-60 105-110 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 Basel back-testing Quantitative and qualitative analysis of our 63, 66-67 83-84, 88-89 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 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 60-65 60-65 113 63-64, 76 105-110 – – 105-110 – 66-69 – – 84, 87 91-92 84-86 80-81 76-81 76 76-79 71 69-70 Other risk types Publicly known risk events 94-104 98-99, 219-220 * These disclosure requirements are satisfied or partially satisfied by disclosures provided in our Pillar 3 Report for the quarter ended October 31, 2022 and for the year ended October 31, 2021. 128 Royal Bank of Canada: Annual Report 2022 Index for Enhanced Disclosure Task Force recommendations 66-75, 175-182 120-125 22-32, * * 68-70, 115, 147-149 – – 24, 29 – – – – – * 20 – 21 * * 21 32 – – – – – – – – 33 * – – REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS Reports 130 Management’s Responsibility for Financial Reporting Notes to Consolidated Financial Statements 143 Note 1 General information 130 Management’s Report on Internal Control over 143 Note 2 Financial Reporting Summary of significant accounting policies, estimates and judgments 131 Independent Auditor’s Report 158 Note 3 Fair value of financial instruments 135 Report of Independent Registered Public Accounting Firm (PCAOB ID 271) 171 Note 4 Securities Consolidated Financial Statements 138 Consolidated Balance Sheets 139 Consolidated Statements of Income 140 Consolidated Statements of Comprehensive Income 141 Consolidated Statements of Changes in Equity 142 Consolidated Statements of Cash Flows 175 Note 5 Loans and allowance for credit losses 182 Note 6 Significant acquisition 182 Note 7 Derecognition of financial assets 183 Note 8 Structured entities 187 Note 9 Derivative financial instruments and hedging activities 197 Note 10 Premises and equipment 198 Note 11 Goodwill and other intangible assets 200 Note 12 Joint ventures and associated companies 200 Note 13 Other assets 201 Note 14 Deposits 201 Note 15 Insurance 204 Note 16 Segregated funds 204 Note 17 Employee benefits – Pension and other post-employment benefits 209 Note 18 Other liabilities 209 Note 19 Subordinated debentures 210 Note 20 Equity 212 Note 21 Share-based compensation 214 Note 22 Income taxes 216 Note 23 Earnings per share 217 Note 24 Guarantees, commitments, pledged assets and contingencies 219 Note 25 Legal and regulatory matters 220 Note 26 Related party transactions 222 Note 27 Results by business segment 223 Note 28 Nature and extent of risks arising from financial instruments 224 Note 29 Capital management 225 Note 30 Offsetting financial assets and financial liabilities 227 Note 31 Recovery and settlement of on-balance sheet assets and liabilities 228 Note 32 Parent company information 229 Note 33 Subsequent events Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 129 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 29, 2022 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, 2022, 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, 2022, 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, 2022, 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 29, 2022 130 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 and 2021, 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, 2022 and 2021; 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, 2022. 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 for Financial Assets Categorized as Stage 1 and Stage 2 (Stage 1 and Stage 2 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 allowance for credit losses for financial assets was $4,214 million as of October 31, 2022 and represents management’s estimate of expected credit losses on financial assets as of the balance sheet date, of which a significant portion relates to financial assets categorized as Stage 1 and Stage 2. 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 borrower risk ratings, forward-looking macroeconomic conditions, scenario design and the weights assigned to each scenario. The probability of default, loss given default and exposure at default inputs are modelled based on the macroeconomic variables that are most closely correlated with credit losses. Management’s estimation of expected credit losses in Stage 1 and Stage 2 considers five distinct future macroeconomic How our audit addressed the key audit matter Our approach to addressing the matter included the following procedures, among others: (cid:129) Testing the effectiveness of controls relating to the estimation of the Stage 1 and Stage 2 ACL, including controls over: O O O O The probability of default, loss given default and exposure at default models. The design of future macroeconomic scenarios, the forecasting of certain macroeconomic variables, and the probability-weighting of these scenarios. The assignment of borrower risk ratings. The completeness and accuracy of certain data inputs underlying the Stage 1 and Stage 2 ACL calculation. (cid:129) Testing management’s process for estimating the Stage 1 and Stage 2 ACL, which consisted of: O O Testing the completeness and accuracy of certain underlying data used in the estimation of the Stage 1 and Stage 2 ACL. Using professionals with specialized skill and knowledge to assist in evaluating: (cid:129) 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 131 How our audit addressed the key audit matter (cid:129) The reasonableness of significant inputs and assumptions used in the estimation of the Stage 1 and Stage 2 ACL related to: (cid:129) (cid:129) (cid:129) (cid:129) The design of future macroeconomic scenarios. Certain forecasted macroeconomic variables. The probability-weights assigned to the scenarios. The assignment of borrower risk ratings for samples of loans. Our approach to addressing the matter included the following procedures, among 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 O Evaluating the appropriateness of the discounted cash flow model. Testing the completeness and accuracy of certain underlying data used in the model. Evaluating the reasonableness of certain assumptions used by management, related to future cash flows, which involved evaluating the consistency with: (cid:129) (cid:129) Evaluating consistency of the recoverable amount with market comparable transactions. Professionals with specialized skill and knowledge assisted us in evaluating: (cid:129) Current and past performance of the CGU. External market and industry data. The appropriateness of management’s discounted cash flow model. The consistency of the recoverable amount of the CGU with market comparable transactions. (cid:129) Key audit matter scenarios, each of which includes a forecast of 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. Significant management judgment is required in making assumptions and estimations when calculating the Stage 1 and Stage 2 ACL. We considered this a key audit matter due to: (cid:129) The significant judgment required by management when estimating the Stage 1 and Stage 2 ACL. (cid:129) A high degree of auditor judgment and subjectivity in performing procedures related to management’s assumptions for: O O O O Designing future macroeconomic scenarios. Forecasting certain macroeconomic variables. Probability-weighting scenarios. Assigning borrower risk ratings. (cid:129) The significant audit effort necessary to evaluate audit evidence as the estimation of the Stage 1 and Stage 2 ACL is a complex calculation that involves a large volume of data, interrelated inputs and assumptions, some of which are model-based. (cid:129) The audit effort involved 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 11 - Goodwill and other intangible assets to the consolidated financial statements. The goodwill allocated to the Caribbean Banking CGU was $1,759 million. Management conducts a goodwill impairment test as of August 1 of each year by comparing the carrying amount of each CGU to its recoverable amount. The recoverable amount of a CGU is represented by its value in use (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 of August 1, 2022, management determined that the recoverable amount was 109% of its carrying amount. Management also considered reasonably possible alternative scenarios, including market comparable transactions, which yielded valuations ranging from an immaterial deficit to an immaterial surplus. 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. 132 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Key audit matter We considered this a key audit matter due to: How our audit addressed the key audit matter (cid:129) (cid:129) (cid:129) The significant judgment required by management when determining the recoverable amount of the CGU, including projecting future cash flows. A high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence related to management’s calculation of the recoverable amount of the CGU. The audit effort involved 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 22 - Income taxes to the consolidated financial statements. The Bank is subject to income tax laws in various jurisdictions where it operates and the complex tax laws are potentially subject to different interpretations by management and the relevant taxation authorities. As disclosed by management, significant judgment is required in the interpretation of the relevant tax laws, and in assessing the probability of acceptance of the Bank’s tax positions to determine tax provisions, which includes management’s best estimate of uncertain tax positions that are under audit or appeal by the relevant taxation authorities. Management performs a review on a quarterly basis to incorporate its best assessment based on information available, but additional liability and income tax expense could result based on the acceptance of the Bank’s tax positions by the relevant tax authorities. In some cases, the Bank has received reassessments denying the tax deductibility of dividends from transactions including those with Tax Indifferent Investors. O We considered this a key audit matter due to: (cid:129) The significant judgment required by management, including O O a high degree of estimation uncertainty, when: Interpreting the relevant tax laws. Assessing the probability of acceptance of the Bank’s tax positions, which includes management’s best estimate of uncertain tax positions that are under audit or appeal by relevant taxation authorities. Our approach to addressing the matter included the following procedures, among 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 for (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 uncertain tax positions that are under audit or appeal by relevant taxation authorities. This consisted of: O O O Evaluating the appropriateness of the methods used. Testing the completeness and accuracy of underlying data used in the estimate. Reviewing correspondence with relevant taxation authorities. O Making inquiries of the Bank’s internal and external legal counsel. Evaluating, with the assistance of professionals with specialized skill and knowledge: (cid:129) (cid:129) Application of relevant tax laws. The reasonableness of management’s assessment of whether it is probable that the relevant tax authorities will accept the Bank’s tax positions. Evidence used by management. (cid:129) (cid:129) A high degree of auditor judgment and subjectivity in performing procedures and evaluating the uncertain tax positions. (cid:129) The audit effort involved 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. 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 133 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 29, 2022 134 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, 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, 2022, 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 for Financial Assets Categorized as Stage 1 and Stage 2 (Stage 1 and Stage 2 ACL) As described in Notes 2, 4 and 5 to the consolidated financial statements, the Bank’s allowance for credit losses for financial assets was $4,214 million as of October 31, 2022 and represents management’s estimate of expected credit losses on financial assets as of the balance sheet date, of which a significant portion relates to financial assets categorized as Stage 1 and Stage 2. 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 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 135 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 borrower risk ratings, forward-looking macroeconomic conditions, scenario design and the weights assigned to each scenario. The probability of default, loss given default and exposure at default inputs are modelled based on the macroeconomic variables that are most closely correlated with credit losses. 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 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. Significant management judgment is required in making assumptions and estimations when calculating the Stage 1 and Stage 2 ACL. The principal considerations for our determination that performing procedures relating to the Stage 1 and Stage 2 ACL is a critical audit matter are (i) the significant judgment required by management when estimating the Stage 1 and Stage 2 ACL; (ii) a high degree of auditor judgment and subjectivity in performing procedures related to management’s assumptions for (a) designing future macroeconomic scenarios, (b) forecasting certain macroeconomic variables, (c) probability-weighting scenarios, and (d) assigning borrower risk ratings; (iii) the significant audit effort necessary to evaluate audit evidence as the estimation of the Stage 1 and Stage 2 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 involved 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 Stage 1 and Stage 2 ACL, including controls over (i) the probability of default, loss given default and exposure at default models; (ii) the design of future macroeconomic scenarios, the forecasting of certain macroeconomic variables, and the probability-weighting of these scenarios; (iii) the assignment of borrower risk ratings; and (iv) the completeness and accuracy of certain data inputs underlying the Stage 1 and Stage 2 ACL calculation. These procedures also included, among others, testing management’s process for estimating the Stage 1 and Stage 2 ACL. This consisted of (i) testing the completeness and accuracy of certain underlying data used in the estimation of the Stage 1 and Stage 2 ACL; 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, and (b) the reasonableness of significant inputs and assumptions used in the estimation of the Stage 1 and Stage 2 ACL related to (1) the design of future macroeconomic scenarios, (2) certain forecasted macroeconomic variables, (3) the probability-weights assigned to the scenarios, and (4) the assignment of borrower risk ratings for samples of loans. Goodwill Impairment Assessment of the Caribbean Banking Cash Generating Unit (CGU) As described in Notes 2 and 11 to the consolidated financial statements, the goodwill allocated to the Caribbean Banking CGU was $1,759 million. Management conducts a goodwill impairment test as of August 1 of each year by comparing the carrying amount of each CGU to its recoverable amount. The recoverable amount of a CGU is represented by its value in use (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 of August 1, 2022, management determined that the recoverable amount was 109% of its carrying amount. Management also considered reasonably possible alternative scenarios, including market comparable transactions, which yielded valuations ranging from an immaterial deficit to an immaterial surplus. 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) the significant judgment required by management when determining the recoverable amount of the CGU, including projecting future cash flows; (ii) a high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence related to management’s calculation of the recoverable amount of the CGU; and (iii) the audit effort involved 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 (i) evaluating the appropriateness of the discounted cash flow model; (ii) testing the completeness and accuracy of certain underlying data used in the model; (iii) evaluating the reasonableness of certain assumptions used by management related to future cash flows, which involved evaluating the consistency with (a) current and past performance of the CGU, and (b) external market and industry data; and (iv) evaluating consistency of the recoverable amount with market comparable transactions. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s discounted cash flow model and 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 136 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements management’s best estimate of uncertain tax positions that are under audit or appeal by the relevant taxation authorities. Management performs a review on a quarterly basis to incorporate its best assessment based on information available, but additional liability and income tax expense could result based on the acceptance of the Bank’s tax positions by the relevant tax authorities. In some cases, as described in Note 22 to the consolidated financial statements, 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 uncertain tax positions is a critical audit matter are (i) the significant judgment required by management, including a high degree of estimation uncertainty, when (a) interpreting the relevant tax laws, and (b) assessing the probability of acceptance of the Bank’s tax positions, which includes management’s best estimate of uncertain tax positions that are under audit or appeal by relevant taxation authorities; (ii) a high degree of auditor judgment and subjectivity in performing procedures and evaluating the uncertain tax positions; and (iii) the audit effort involved 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 for (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 uncertain tax positions that are under audit or appeal by relevant taxation authorities. This consisted of (i) evaluating the appropriateness of the methods used; (ii) testing the completeness and accuracy of underlying data used in the estimate; (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, the reasonableness of management’s assessment of whether it is probable that the relevant tax authorities will accept the Bank’s tax positions, and evidence used by management. /s/ PricewaterhouseCoopers LLP Chartered Professional Accountants, Licensed Public Accountants Toronto, Canada November 29, 2022 We have served as the Bank’s auditor since 2016. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 137 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 2022 October 31 2021 $ 72,397 $ 113,846 108,011 79,638 148,205 170,018 318,223 139,240 145,484 284,724 Assets purchased under reverse repurchase agreements and securities borrowed 317,845 307,903 Loans (Note 5) Retail Wholesale Allowance for loan losses (Note 5) Segregated fund net assets (Note 16) Other Customers’ liability under acceptances Derivatives (Note 9) Premises and equipment (Note 10) Goodwill (Note 11) Other intangibles (Note 11) Other assets (Note 13) Total assets Liabilities and equity Deposits (Note 14) Personal Business and government Bank Segregated fund net liabilities (Note 16) Other Acceptances Obligations related to securities sold short Obligations related to assets sold under repurchase agreements and securities loaned Derivatives (Note 9) Insurance claims and policy benefit liabilities (Note 15) Other liabilities (Note 18) Subordinated debentures (Note 19) Total liabilities Equity attributable to shareholders Preferred shares and other equity instruments (Note 20) Common shares (Note 20) Retained earnings Other components of equity Non-controlling interests Total equity Total liabilities and equity 549,751 273,967 823,718 (3,753) 819,965 503,598 218,066 721,664 (4,089) 717,575 2,638 2,666 17,827 154,439 7,214 12,277 6,083 80,300 278,140 19,798 95,541 7,424 10,854 4,471 61,883 199,971 $ 1,917,219 $ 1,706,323 $ 404,932 $ 759,870 44,012 362,488 696,353 41,990 1,208,814 1,100,831 2,638 2,666 17,872 35,511 273,947 153,491 11,511 95,235 587,567 19,873 37,841 262,201 91,439 12,816 70,301 494,471 10,025 9,593 1,809,044 1,607,561 7,318 16,984 78,037 5,725 108,064 111 108,175 6,684 17,655 71,795 2,533 98,667 95 98,762 $ 1,917,219 $ 1,706,323 The accompanying notes are an integral part of these Consolidated Financial Statements. David I. McKay President and Chief Executive Officer Frank Vettese Director 138 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Consolidated Statements of Income (Millions of Canadian dollars, except per share amounts) Interest and dividend income (Note 3) Loans Securities Assets purchased under reverse repurchase agreements and securities borrowed Deposits and other $ Interest expense (Note 3) Deposits and other Other liabilities Subordinated debentures Net interest income Non-interest income Insurance premiums, investment and fee income (Note 15) Trading revenue Investment management and custodial fees Mutual fund revenue Securities brokerage commissions Service charges Underwriting and other advisory fees Foreign exchange revenue, other than trading Card service revenue Credit fees Net gains on investment securities Share of profit in joint ventures and associates (Note 12) Other Total revenue Provision for credit losses (Notes 4 and 5) Insurance policyholder benefits, claims and acquisition expense (Note 15) Non-interest expense Human resources (Note 17 and 21) Equipment Occupancy Communications Professional fees Amortization of other intangibles (Note 11) Other Income before income taxes Income taxes (Note 22) Net income Net income attributable to: Shareholders Non-controlling interests Basic earnings per share (in dollars) (Note 23) Diluted earnings per share (in dollars) (Note 23) Dividends per common share (in dollars) The accompanying notes are an integral part of these Consolidated Financial Statements. $ $ $ $ For the year ended October 31 2022 October 31 2021 $ $ $ $ $ 26,565 7,062 5,447 1,697 40,771 10,751 7,015 288 18,054 22,717 3,510 926 7,610 4,289 1,481 1,976 2,058 1,038 1,203 1,512 43 110 512 26,268 48,985 484 1,783 16,528 2,099 1,554 1,082 1,511 1,369 2,466 26,609 20,109 4,302 15,807 15,794 13 15,807 11.08 11.06 4.96 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 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 139 Consolidated Statements of Comprehensive Income (Millions of Canadian dollars) Net income Other comprehensive income (loss), net of taxes (Note 22) Items that will be reclassified subsequently to income: Net change in unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income Net unrealized gains (losses) on debt securities and loans at fair value through other comprehensive income Provision for credit losses recognized in income Reclassification of net losses (gains) on debt securities and loans at fair value through other comprehensive income to income Foreign currency translation adjustments Unrealized foreign currency translation gains (losses) Net foreign currency translation gains (losses) from hedging activities Reclassification of losses (gains) on foreign currency translation to income Reclassification of losses (gains) on net investment hedging activities to income Net change in cash flow hedges Net gains (losses) on derivatives designated as cash flow hedges Reclassification of losses (gains) on derivatives designated as cash flow hedges to income For the year ended October 31 2022 October 31 2021 $ 15,807 $ 16,050 (2,241) (16) (12) (2,269) 5,091 (1,449) (18) 17 3,641 1,634 194 1,828 177 (9) (117) 51 (4,316) 1,740 (7) (1) (2,584) 1,373 272 1,645 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 821 2,251 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. 1,747 50 2,618 5,818 21,625 21,604 21 21,625 $ $ $ $ $ $ 55 38 2,344 1,456 17,506 17,501 5 17,506 140 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements y t i u q e f o s t n e n o p m o c r e h t O 2 2 0 2 , 1 3 r e b o t c O d e d n e r a e y e h t r o F y t i u q E r e h t o l a t o T n g i e r o F I C O V F – y r u s a e r T d n a s e r a h s d e r r e f e r p – y r u s a e r T d e r r e f e r P d n a s e r a h s l a t o T y t i u q e g n i l l o r t n o c - n o N o t e l b a t u b i r t t a s t n e n o p m o c w o l f h s a C y c n e r r u c s e i t i r u c e s d e n i a t e R n o m m o c y t i u q e r e h t o n o m m o C y t i u q e r e h t o s t s e r e t n i s r e d l o h e r a h s y t i u q e f o s e g d e h n o i t a l s n a r t s n a o l d n a s g n i n r a e s e r a h s s t n e m u r t s n i s e r a h s s t n e m u r t s n i ) s r a l l i o d n a d a n a C f o s n o i l l i M ( 8 4 8 ) 6 2 4 5 ( , ) 5 5 1 ( 4 7 4 5 , ) 1 0 7 5 ( , 2 ) 6 4 9 6 ( , ) 6 5 ( ) 2 5 2 ( 8 1 8 5 , 7 0 8 5 1 , – – – – – – – ) 5 ( – 3 1 8 8 4 8 ) 6 2 4 5 ( , ) 5 5 1 ( 4 7 4 5 , ) 1 0 7 5 ( , 2 ) 6 4 9 6 ( , ) 6 5 ( ) 7 4 2 ( 0 1 8 5 , 4 9 7 5 1 , – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2 9 1 3 , 8 2 8 1 , 3 3 6 3 , ) 9 6 2 2 ( , ) 5 ( ) 1 ( ) 7 1 9 4 ( , – – – – – – – – 2 ) 6 4 9 6 ( , ) 6 5 ( ) 7 4 2 ( 8 1 6 2 , 4 9 7 5 1 , – – – – – – – – – – – – 2 2 9 4 , ) 3 8 1 5 ( , 2 5 5 ) 8 1 5 ( – – – – – – – – – 9 9 ) 9 0 5 ( – 0 5 7 ) 0 5 1 ( – – – – – – – – 2 6 7 8 9 , $ 5 9 $ 7 6 6 8 9 , $ 3 3 5 2 , $ 6 6 5 $ 5 5 0 2 , $ ) 8 8 ( $ , 5 9 7 1 7 $ ) 3 7 ( $ ) 9 3 ( $ 8 2 7 7 1 , $ 3 2 7 6 , $ s t n e m u r t s n i y t i u q e r e h t o d n a s e r a h s d e r r e f e r p f o n o i t p m e d e R s t n e m u r t s n i y t i u q e r e h t o d n a s e r a h s y r u s a e r t f o s e s a h c r u P s t n e m u r t s n i y t i u q e r e h t o d n a s e r a h s y r u s a e r t f o s e l a S s t n e m u r t s n i y t i u q e r e h t o d n a l a t i p a c e r a h s f o s e u s s I n o i t a l l e c n a c r o f d e s a h c r u p s e r a h s n o m m o C r e h t o n o s n o i t u b i r t s i d d n a s e r a h s d e r r e f e r p n o s d n e d i v i D s d r a w a n o i t a s n e p m o c d e s a b - e r a h S s e r a h s n o m m o c n o s d n e d i v i D d o i r e p f o g n i n n i g e b t a e c n a l a B y t i u q e n i s e g n a h C s e x a t f o t e n , ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t o l a t o T s t n e m u r t s n i y t i u q e e m o c n i t e N r e h t O 5 7 1 8 0 1 , $ 1 1 1 $ 4 6 0 8 0 1 , $ 5 2 7 5 , $ 4 9 3 2 , $ 8 8 6 5 , $ ) 7 5 3 2 ( , $ , 7 3 0 8 7 $ ) 4 3 3 ( $ ) 5 ( $ 8 1 3 7 1 , $ 3 2 3 7 , $ d o i r e p f o d n e t a e c n a l a B y t i u q e f o s t n e n o p m o c r e h t O 1 2 0 2 , 1 3 r e b o t c O d e d n e r a e y e h t r o F y t i u q E r e h t o l a t o T n g i e r o F I C O V F – y r u s a e r T d n a s e r a h s d e r r e f e r p – y r u s a e r T d e r r e f e r P d n a s e r a h s g n i l l o r t n o c - n o N o t e l b a t u b i r t t a s t n e n o p m o c w o l f h s a C y c n e r r u c s e i t i r u c e s i d e n a t e R n o m m o c y t i u q e r e h t o n o m m o C y t i u q e r e h t o y t i u q e l a t o T s t s e r e t n i l s r e d o h e r a h s y t i u q e f o s e g d e h n o i t a l s n a r t s n a o l d n a i s g n n r a e s e r a h s s t n e m u r t s n i s e r a h s s t n e m u r t s n i ) s r a l l i o d n a d a n a C f o s n o i l l i M ( – 5 4 3 2 , ) 5 7 4 1 ( , 3 6 7 4 , ) 3 4 7 4 ( , ) 6 ( ) 8 5 1 6 ( , 3 2 ) 0 6 2 ( 6 5 4 1 , 0 5 0 6 1 , – – – – – – – ) 3 ( ) 0 1 ( ) 7 ( 2 1 – 5 4 3 2 , ) 5 7 4 1 ( , 3 6 7 4 , ) 3 4 7 4 ( , ) 6 ( ) 8 5 1 6 ( , 3 3 ) 7 5 2 ( 3 6 4 1 , 8 3 0 6 1 , – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ) 1 8 8 ( 5 4 6 1 , ) 7 7 5 2 ( , 1 5 ) 5 ( – – – – ) 6 ( ) 8 5 1 6 ( , 3 3 ) 7 5 2 ( 4 4 3 2 , 8 3 0 6 1 , – – – – – – 6 1 1 4 , ) 0 6 0 4 ( , 7 4 6 ) 3 8 6 ( – – – – – – – – – – – – – – – – – – – – – – 0 0 1 – – – – – – – – – 0 5 2 2 , ) 5 7 4 1 ( , 7 6 7 6 8 , $ 3 0 1 $ 4 6 6 6 8 , $ 4 1 4 3 , $ ) 9 7 0 1 ( , $ 2 3 6 4 , $ ) 9 3 1 ( $ 6 0 8 9 5 , $ ) 9 2 1 ( $ ) 3 ( $ 8 2 6 7 1 , $ 8 4 9 5 , $ s t n e m u r t s n i y t i u q e r e h t o d n a s e r a h s d e r r e f e r p f o n o i t p m e d e R s t n e m u r t s n i y t i u q e r e h t o d n a s e r a h s y r u s a e r t f o s e s a h c r u P s t n e m u r t s n i y t i u q e r e h t o d n a s e r a h s y r u s a e r t f o s e l a S s t n e m u r t s n i y t i u q e r e h t o d n a l a t i p a c e r a h s f o s e u s s I n o i t a l l e c n a c r o f d e s a h c r u p s e r a h s n o m m o C r e h t o n o s n o i t u b i r t s i d d n a s e r a h s d e r r e f e r p n o s d n e d i v i D s d r a w a n o i t a s n e p m o c d e s a b - e r a h S s e r a h s n o m m o c n o s d n e d i v i D d o i r e p f o g n i n n i g e b t a e c n a l a B y t i u q e n i s e g n a h C s e x a t f o t e n , ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t o l a t o T s t n e m u r t s n i y t i u q e e m o c n i t e N r e h t O 2 6 7 8 9 , $ 5 9 $ 7 6 6 8 9 , $ 3 3 5 2 , $ 6 6 5 $ 5 5 0 2 , $ ) 8 8 ( $ 5 9 7 1 7 , $ ) 3 7 ( $ ) 9 3 ( $ 8 2 7 7 1 , $ 3 2 7 6 , $ d o i r e p f o d n e t a e c n a l a B . s t n e m e t a t S l a i c n a n i F d e t a d i l o s n o C e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 141 y t i u q E n i s e g n a h C f o s t n e m e t a t S d e t a d i l o s n o C 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 Net proceeds from (cash transferred for) dispositions Cash used in acquisitions, net of cash acquired 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 2022 October 31 2021 $ 15,807 $ 16,050 484 1,265 569 1,387 (108) (43) (100) (1,305) 333 (3,336) (58,898) 62,052 (8,931) (102,653) (9,942) 11,746 (2,330) 108,533 4,612 2,800 21,942 (28,373) 99,143 (122,964) (2,500) (313) (2,047) (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 – (57,054) (57,348) 1,000 (192) 51 (5,426) 749 (155) 5,474 (5,701) (6,960) (5) 9,609 (629) (2,185) (4,152) 2,750 (2,500) 90 – 2,245 (1,475) 4,763 (4,743) (6,420) (3) (14) (621) (5,928) (2,810) $ $ (41,449) 113,846 72,397 13,677 35,817 3,144 7,326 $ $ (5,042) 118,888 113,846 7,555 26,412 2,575 4,198 (1) We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2 billion as at October 31, 2022 (October 31, 2021 – $2 billion; October 31, 2020 – $3 billion). The accompanying notes are an integral part of these Consolidated Financial Statements. 142 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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 27 for further details on our business segments. The parent bank, Royal Bank of Canada, is a Schedule I Bank under the Bank Act (Canada) incorporated and domiciled in Canada. Our corporate headquarters are located at Royal Bank Plaza, 200 Bay Street, Toronto, Ontario, Canada and our head office is located at 1 Place Ville-Marie, Montreal, Quebec, Canada. Our common shares are listed on the Toronto Stock Exchange and New York Stock Exchange with the ticker symbol RY. These Consolidated Financial Statements are prepared in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Unless otherwise stated, monetary amounts are stated in Canadian dollars. Tabular information is stated in millions of dollars, except as noted. These Consolidated Financial Statements also comply with Subsection 308 of the Bank Act (Canada), which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions Canada (OSFI), our Consolidated Financial Statements are to be prepared in accordance with IFRS. The accounting policies outlined in Note 2 have been consistently applied to all periods presented. On November 29, 2022, 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. 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, allowance for credit losses, insurance claims and policy benefit liabilities, pensions and other post-employment benefits, income taxes, goodwill and other intangible assets, and 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. Significant judgments have been made in the following areas and discussed as noted in the Consolidated Financial Statements: Consolidation of structured entities Fair value of financial instruments Allowance for credit losses Employee benefits Goodwill and other intangibles Note 2 Note 8 Note 2 Note 3 Note 2 Note 4 Note 5 Note 2 Note 17 Note 2 Note 11 Application of the effective interest method Note 2 Derecognition of financial assets Income taxes Provisions Note 2 Note 7 Note 2 Note 22 Note 2 Note 24 Note 25 Basis of consolidation Our Consolidated Financial Statements include the assets and liabilities and results of operations of the parent company, Royal Bank of Canada, and its subsidiaries including certain structured entities, after elimination of intercompany transactions, balances, revenues and expenses. Consolidation Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee. We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual arrangements. We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining whether we are acting as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following factors: (i) the scope of our decision-making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and (iv) our exposure to variability of returns. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 143 Note 2 Summary of significant accounting policies, estimates and judgments (continued) The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances, different factors and conditions may indicate that different parties control an entity depending on whether those factors and conditions are assessed in isolation or in totality. Significant judgment is applied in assessing the relevant factors and conditions in totality when determining whether we control an entity. Specifically, judgment is applied in assessing whether we have substantive decision-making rights over the relevant activities and whether we are exercising our power as a principal or an agent. We consolidate all subsidiaries from the date we obtain control and cease consolidation when an entity is no longer controlled by us. Our consolidation conclusions affect the classification and amount of assets, liabilities, revenues and expenses reported in our Consolidated Financial Statements. Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate component of equity which is distinct from equity attributable to our shareholders. The net income attributable to non-controlling interests is separately disclosed in our Consolidated Statements of Income. Investments in joint ventures and associates Our investments in associated corporations and limited partnerships over which we have significant influence are accounted for using the equity method. The equity method is also applied to our interests in joint ventures over which we have joint control. Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is increased or decreased to recognize our share of the investee’s net profit or loss, including our proportionate share of the investee’s Other comprehensive income (OCI), subsequent to the date of acquisition. Non-current assets held for sale and discontinued operations Non-current assets (and disposal groups) are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is satisfied when the asset is available for immediate sale in its present condition, management is committed to the sale, and it is highly probable to occur within one year. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell and if significant, are presented separately from other assets on our Consolidated Balance Sheets. A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can be distinguished operationally and financially from the rest of our operations and (ii) it represents either a separate major line of business or is part of a single 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. Financial Instruments Classification of financial assets Financial assets are measured at initial recognition at fair value, and are classified and subsequently measured at fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortized cost based on our business model for managing the financial instruments and the contractual cash flow characteristics of the instrument. Debt instruments are measured at amortized cost if both of the following conditions are met and the asset is not designated as FVTPL: (a) the asset is held within a business model that is Held-to-Collect (HTC) as described below, and (b) the contractual terms of the instrument give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI). Debt instruments are measured at FVOCI if both of the following conditions are met and the asset is not designated as FVTPL: (a) the asset is held within a business model that is Held-to-Collect-and-Sell (HTC&S) as described below, and (b) the contractual terms of the instrument give rise, on specified dates, to cash flows that are SPPI. All other debt instruments are measured at FVTPL. Equity instruments are measured at FVTPL, unless the asset is not held for trading purposes and we make an irrevocable election to designate the asset as FVOCI. This election is made on an instrument-by-instrument basis. Business model assessment We determine our business models at the level that best reflects how we manage portfolios of financial assets to achieve our business objectives. Judgment is used in determining our business models, which is supported by relevant, objective evidence including: (cid:129) How the economic activities of our businesses generate benefits, for example through trading revenue, enhancing yields or hedging funding or other costs and how such economic activities are evaluated and reported to key management personnel; The significant risks affecting the performance of our businesses, for example, market risk, credit risk, or other risks as described in the Risk Management section of Management’s Discussion and Analysis, and the activities undertaken to manage those risks; Historical and future expectations of sales of the loans or securities portfolios managed as part of a business model; and 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. 144 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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 Non-interest income – Trading revenue or Non-interest income – Other. Dividends and interest income accruing on Trading securities are recorded in Interest and dividend income. Interest and dividends accrued on 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 and dividend 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 and dividend income. We account for all of our securities using settlement date accounting and changes in fair value between the trade date and settlement date are reflected in income for securities measured at FVTPL, and changes in the fair value of securities measured at FVOCI between the trade and settlement dates are recorded in OCI except for changes in foreign exchange rates on debt securities, which are recorded in Non-interest income-Other. Fair value option A financial instrument with a reliably measurable fair value can be designated as FVTPL (the fair value option) on its initial recognition even if the financial instrument was not acquired or incurred principally for the purpose of selling or repurchasing. The fair value option can be used for financial assets if it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities, or recognizing related gains and losses on a different basis (an accounting mismatch). The fair value option can be elected for financial liabilities if: (i) the election eliminates an accounting mismatch; (ii) the financial liability is part of a portfolio that is managed on a fair value basis, in accordance with a documented risk management or investment strategy; or (iii) there is an embedded derivative in the financial or non-financial host contract and the derivative is not closely related to the host contract. These instruments cannot be reclassified out of the FVTPL category while they are held or issued. Financial assets designated as FVTPL are recorded at fair value and any unrealized gain or loss arising due to changes in fair value is included in Trading revenue or Non-interest income – Other, depending on our business purpose for holding the financial asset. Financial liabilities designated as FVTPL are recorded at fair value and fair value changes attributable to changes in our own credit risk are recorded in OCI. Own credit risk amounts recognized in OCI will not be reclassified subsequently to net income. The remaining fair value changes not attributable to changes in our own credit risk are recorded in Trading revenue or Non-interest income – Other, depending on our business purpose for holding the financial liability. Upon initial recognition, if we determine that presenting the effects of own credit risk changes in OCI would create or enlarge an accounting mismatch in net income, the full fair value change in our debt designated as FVTPL is recognized in net income. To make that determination, we assess whether we expect that the effects of changes in the liability’s credit risk will be offset in profit or loss by a change in the fair value of another financial instrument measured at FVTPL. Such an expectation is based on an economic relationship between the characteristics of the liability and the characteristics of the other financial instrument. The determination is made at initial recognition and is not reassessed. To determine the fair value adjustments on our debt instruments designated as FVTPL, we calculate the present value of the instruments based on the contractual cash flows over the term of the arrangement by using our effective funding rate at the beginning and end of the period. 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 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 145 Note 2 Summary of significant accounting policies, estimates and judgments (continued) decomposition is a process to explain the fair value changes of certain positions and is performed daily for trading portfolios. All fair value instruments are subject to IPV, a process whereby trading function valuations are verified against external market prices and other relevant market data. Market data sources include traded prices, brokers and price vendors. We give priority to those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is determined over time by comparing third-party price values to traders’ or system values, to other pricing service values and, when available, to actual trade data. Quoted prices for identical instruments from pricing services or brokers are generally not adjusted unless there are issues such as stale prices. If multiple quotes for identical instruments are received, fair value is based on an average of the prices received or the quote from the most reliable vendor, after the outlier prices that fall outside of the pricing range are removed. Other valuation techniques are used when a price or quote is not available. Some valuation processes use models to determine fair value. We have a systematic and consistent approach to control the use of models. Valuation models are approved for use within our model risk management framework. The framework addresses, among other things, model development standards, validation processes and procedures and approval authorities. Model validation ensures that a model is suitable for its intended use and sets parameters for its use. All models are revalidated regularly by qualified personnel who are independent of the model design and development. Annually our model risk profile is reported to the Board of Directors. IFRS 13 Fair Value Measurement permits an exception, through an accounting policy choice, to measure the fair value of a portfolio of financial instruments on a net open risk position basis when certain criteria are met. We have elected to use this policy choice to determine the fair value of certain portfolios of financial instruments, primarily derivatives, based on a net exposure to market or credit risk. We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences between the actual counterparty collateral discount curve and standard overnight index swap (OIS) discounting for collateralized derivatives, funding valuation adjustments (FVA) for uncollateralized and under-collateralized over-the-counter (OTC) derivatives, unrealized gains or losses at inception of the transaction, bid-offer spreads, unobservable parameters and model limitations. These adjustments may be subjective as they require significant judgment in the input selection, such as implied probability of default (PD) and recovery rate, and are intended to arrive at a fair value that is determined based on assumptions that market participants would use in pricing the financial instrument. The realized price for a transaction may be different from its recorded value, previously estimated using management judgment. Valuation adjustments may therefore impact unrealized gains and losses recognized in Non-interest income – Trading revenue or Other. Valuation adjustments are recorded for the credit risk of our derivative portfolios in order to arrive at their fair values. Credit valuation adjustments (CVA) take into account our counterparties’ creditworthiness, the current and potential future mark-to-market of transactions and the effects of credit mitigants such as master netting and collateral agreements. CVA amounts are derived from estimates of exposure at default (EAD), PD, recovery rates on a counterparty basis and market and credit factor correlations. EAD is the value of expected derivative related assets and liabilities at the time of default, estimated through modelling using underlying risk factors. PD is implied from the market prices for credit protection and the credit ratings of the counterparty. When market data is unavailable, it is estimated by incorporating assumptions and adjustments that market participants would use for determining fair value using these inputs. Correlation is the statistical measure of how credit and market factors may move in relation to one another. Correlation is estimated using historical data. CVA is calculated daily and changes are recorded in Non-interest income – Trading revenue. FVA are also calculated to incorporate the cost and benefit of funding in the valuation of uncollateralized and under- collateralized OTC derivatives. Future expected cash flows of these derivatives are discounted to reflect the cost and benefit of funding the derivatives by using a funding curve, implied volatilities and correlations as inputs. Where required, a valuation adjustment is made to reflect the unrealized gain or loss at inception of a financial instrument contract where the fair value of that financial instrument is not obtained from a quoted market price or cannot be evidenced by other observable market transactions based on a valuation technique incorporating observable market data. A bid-offer valuation adjustment is required when a financial instrument is valued at the mid-market price, instead of the bid or offer price for asset or liability positions, respectively. The valuation adjustment takes into account the spread from the mid-market price to either the bid or offer price. Some valuation models require parameter calibration from such factors as market observable option prices. The calibration of parameters may be sensitive to factors such as the choice of instruments or optimization methodology. A valuation adjustment is also estimated to mitigate the uncertainties of parameter calibration and model limitations. In determining fair value, a hierarchy is used which prioritizes the inputs to valuation techniques. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Determination of fair value based on this hierarchy requires the use of observable market data whenever available. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model inputs that are either observable, or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 inputs are one or more inputs that are unobservable and significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available at the measurement 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. 146 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Loans Loans are debt instruments recognized initially at fair value and are subsequently measured in accordance with the Classification of financial assets policy provided above. The majority of our loans are carried at amortized cost using the effective interest method, which represents the gross carrying amount less allowance for credit losses. Interest on loans is recognized in Interest income using the effective interest method. The estimated future cash flows used in this calculation include those determined by the contractual term of the asset and all fees that are considered to be integral to the effective interest rate. Also included in this amount are transaction costs and all other premiums or discounts. Fees that relate to activities such as originating, restructuring or renegotiating loans are deferred and recognized as Interest income over the expected term of such loans using the effective interest method. Where there is a reasonable expectation that a loan will be originated, commitment and standby fees are also recognized as interest income over the expected term of the resulting loans using the effective interest method. Otherwise, such fees are recorded as other liabilities and amortized into Non-interest income over the commitment or standby period. Future prepayment fees on mortgage loans are not included as part of the effective interest rate at origination. If prepayment fees are received on a renewal of a mortgage loan before maturity, the fee is included as part of the effective interest rate, and if not renewed, the prepayment fee is recognized in interest income at the prepayment date. For loans carried at amortized cost or FVOCI, impairment losses are recognized at each balance sheet date in accordance with the three-stage impairment model outlined below. Allowance for credit losses An allowance for credit losses (ACL) is established for all financial assets, except for financial assets classified or designated as FVTPL and equity securities designated as FVOCI, which are not subject to impairment assessment. Assets subject to impairment assessment include loans, debt securities, interest-bearing deposits with banks, customers’ liability under acceptances, accounts and accrued interest receivable, and finance and operating lease receivables. ACL on loans measured at amortized cost is presented in Allowance for loan losses. ACL on debt securities measured at FVOCI is presented in Other components of equity. Other financial assets carried at amortized cost are presented net of ACL on our Consolidated Balance Sheets. Off-balance sheet items subject to impairment assessment include financial guarantees and undrawn loan commitments. ACL on off-balance sheet items is separately calculated and included in Other Liabilities – Provisions. We measure the ACL on each balance sheet date according to a three-stage expected credit loss impairment model: (cid:129) Stage 1 – From initial recognition of a financial asset to the date on which the asset has experienced a significant increase in credit risk relative to its initial recognition, a loss allowance is recognized equal to the credit losses expected to result from defaults occurring over the 12 months following the reporting date. Stage 2 – Following a significant increase in credit risk relative to the initial recognition of the financial asset, a loss allowance is recognized equal to the credit losses expected over the remaining lifetime of the asset. (cid:129) Performing financial assets (cid:129) (cid:129) Impaired financial assets (cid:129) Stage 3 – When a financial asset is considered to be credit-impaired, a loss allowance is recognized equal to credit losses expected over the remaining lifetime of the asset. Interest income is calculated based on the carrying amount of the asset, net of the loss allowance, rather than on its gross carrying amount. The ACL is a discounted probability-weighted estimate of the cash shortfalls expected to result from defaults over the relevant time horizon. For loan commitments, credit loss estimates consider the portion of the commitment that is expected to be drawn over the relevant time period. For financial guarantees, credit loss estimates are based on the expected payments required under the guarantee contract. For finance lease receivables, credit loss estimates are based on cash flows consistent with the cash flows used in measuring the lease receivable. Increases or decreases in the required ACL attributable to 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 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 modelled 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 147 Note 2 Summary of significant accounting policies, estimates and judgments (continued) An exemption is provided for certain instruments with the following characteristics: (a) the instrument includes both a loan and undrawn commitment component; (b) we have the contractual ability to demand repayment and cancel the undrawn commitment; and (c) our exposure to credit losses is not limited to the contractual notice period. For products in scope of this exemption, the expected life may exceed the remaining contractual life and is the period over which our exposure to credit losses is not mitigated by our normal credit risk management actions. This period varies by product and risk category and is estimated based on our historical experience with similar exposures and consideration of credit risk management actions taken as part of our regular credit review cycle. Products in scope of this exemption include credit cards, overdraft balances and certain revolving lines of credit. Judgment is required in determining the instruments in scope for this exemption and estimating the appropriate remaining life based on our historical experience and credit risk mitigation practices. Assessment of significant increase in credit risk The assessment of significant increase in credit risk requires significant judgment. Movements between Stage 1 and Stage 2 are based on whether an instrument’s credit risk as at the reporting date has increased significantly relative to the date it was initially recognized. For the purposes of this assessment, credit risk is based on an instrument’s lifetime PD, not the losses we expect to incur. The assessment is generally performed at the instrument level. Our assessment of significant increases in credit risk is performed at least quarterly based on three factors. If any of the following factors indicates that a significant increase in credit risk has occurred, the instrument is moved from Stage 1 to Stage 2: (1) We have established thresholds for significant increases in credit risk based on both a percentage and absolute change in lifetime PD relative to initial recognition. For our wholesale portfolio, a decrease in the borrower’s risk rating is also required to determine that credit risk has increased significantly. (2) Additional qualitative reviews are performed to assess the staging results and make adjustments, as necessary, to better reflect the positions whose credit risk has increased significantly. (3) Instruments which are 30 days past due are generally considered to have experienced a significant increase in credit risk, even if our other metrics do not indicate that a significant increase in credit risk has occurred. The thresholds for movement between Stage 1 and Stage 2 are symmetrical. After a financial asset has transferred to Stage 2, if its credit risk is no longer considered to have significantly increased relative to its initial recognition, the financial asset will move back to Stage 1. For certain instruments with low credit risk as at the reporting date, it is presumed that credit risk has not increased significantly relative to initial recognition. Credit risk is considered to be low if the instrument has a low risk of default, and the borrower has the ability to fulfill their contractual obligations both in the near term and in the longer term, including periods of adverse changes in the economic or business environment. Certain interest-bearing deposits with banks, assets purchased under reverse repurchase agreements, insurance policy loans, and liquidity facilities extended to our multi-seller conduits have been identified as having low credit risk. Use of forward-looking information The measurement of expected credit losses for each stage and the assessment of significant increase in credit risk considers information about past events and current conditions as well as reasonable and supportable projections of future events and economic conditions. The estimation and application of forward-looking information requires significant judgment. The PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each macroeconomic scenario used in our expected credit loss calculation includes a projection of all relevant macroeconomic variables used in our models for a five year period, subsequently reverting to long-run averages. Macroeconomic variables used in our expected credit loss models include, but are not limited to, unemployment rates, gross domestic product growth rates, equity return indices, commodity prices, and Canadian housing prices. Depending on their usage in the models, macroeconomic variables may be projected at a country, province/state or more granular level. Our estimation of expected credit losses in Stage 1 and Stage 2 is a discounted probability-weighted estimate that considers a minimum of three future macroeconomic scenarios. Our base case scenario is based on macroeconomic forecasts published by our internal economics group. Upside and downside scenarios vary relative to our base case scenario based on reasonably possible alternative macroeconomic conditions. Additional and more severe downside scenarios are designed to capture a broader range of potential credit losses in certain sectors. Scenario design, including the identification of additional downside scenarios, occurs at least on an annual basis and more frequently if conditions warrant. Scenarios are designed to capture a wide range of possible outcomes and weighted according to our best estimate of the relative likelihood of the range of outcomes that each scenario represents. Scenario weights take into account historical frequency, current trends, and forward-looking conditions and are updated on a quarterly basis. All scenarios considered are applied to all portfolios subject to expected credit losses with the same probabilities. Our assessment of significant increases in credit risk is based on changes in probability-weighted forward-looking lifetime PDs as at the reporting date, using the same macroeconomic scenarios as the calculation of expected credit losses. 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. 148 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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. ACL for credit-impaired loans in Stage 3 are established at the borrower level, where losses related to impaired loans are identified on individually significant loans, or collectively assessed and determined through the use of portfolio-based rates, without reference to particular loans. Individually assessed loans (Stage 3) When individually significant loans are identified as impaired, we reduce the carrying value of the loans to their estimated realizable value by recording an individually assessed ACL to cover identified credit losses. The individually assessed ACL reflects the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be recovered, and the impact of time delays in collecting principal and/or interest (time value of money). The estimated realizable value for each individually significant loan is the present value of expected future cash flows discounted using the original effective interest rate for each loan. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated realizable amount may be determined using observable market prices for comparable loans, the fair value of collateral underlying the loans, and other reasonable and supported methods based on management judgment. Individually-assessed allowances are established in consideration of a range of possible outcomes, which may include macroeconomic or non-macroeconomic scenarios, to the extent relevant to the circumstances of the specific borrower being assessed. Assumptions used in estimating expected future cash flows reflect current and expected future economic conditions and are generally consistent with those used in Stage 1 and Stage 2 measurement. Significant judgment is required in assessing evidence of credit-impairment and estimation of the amount and timing of future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct impact on PCL and may result in a change in the ACL. Collectively assessed loans (Stage 3) Loans that are collectively assessed are grouped on the basis of similar risk characteristics, taking into account loan type, industry, geographic location, collateral type, past due status and other relevant factors. The collectively-assessed ACL reflects: (i) the expected amount of principal and interest calculated under the terms of the original loan agreement that will not be recovered, and (ii) the impact of time delays in collecting principal and/or interest (time value of money). The expected principal and interest collection is estimated on a portfolio basis and references historical loss experience of comparable portfolios with similar credit risk characteristics, adjusted for the current environment and expected future conditions. A portfolio specific coverage ratio is applied against the impaired loan balance in determining the collectively- assessed ACL. The time value of money component is calculated by using the discount factors applied to groups of loans sharing common characteristics. The discount factors represent the expected recovery pattern of the comparable group of loans, and reflect the historical experience of these groups adjusted for current and expected future economic conditions and/or industry factors. Significant judgment is required in assessing evidence of impairment and estimation of the amount and timing of future cash flows when determining expected credit losses. Changes in the amount expected to be recovered would have a direct impact on PCL and may result in a change in the ACL. Write-off of loans Loans and the related ACL are written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realization of collateral. In circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery, write off may be earlier. For credit cards, the balances and related 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 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 149 Note 2 Summary of significant accounting policies, estimates and judgments (continued) 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 Financial Instruments (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 judgment is applied in determining whether the contractual rights to the cash flows from the transferred assets have expired or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those cash flows. We derecognize transferred financial assets if we transfer substantially all the risks and rewards of the ownership in the assets. When assessing whether we have transferred substantially all of the risk and rewards of the transferred assets, management considers the Bank’s exposure before and after the transfer with the variability in the amount and timing of the net cash flows of the transferred assets. In transfers in which we retain the servicing rights, management has applied judgment in assessing the benefits of servicing against market expectations. When the benefits of servicing are greater than fair value, a servicing asset is recognized in Other assets in our Consolidated Balance Sheets. When the benefits of servicing are less than fair value, a servicing liability is recognized in Other liabilities in our Consolidated Balance Sheets. Derecognition of financial liabilities We derecognize a financial liability from our Consolidated Balance Sheets when our obligation specified in the contract expires, or is discharged or cancelled. We recognize the difference between the carrying amount of a financial liability transferred and the consideration paid in our Consolidated Statements of Income. Interest Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income for all interest-bearing financial instruments. The effective interest rate is the rate that discounts estimated future cash flows over the expected life of the financial asset or liability to the net carrying amount upon initial recognition. Significant judgment is applied in determining the effective interest rate due to uncertainty in the timing and amounts of future cash flows. Dividend income Dividend income is recognized when the right to receive payment is established. This is the ex-dividend date for listed equity securities, and usually the date when shareholders have approved the dividend for unlisted equity securities. Transaction costs Transaction costs are expensed as incurred for financial instruments classified or designated as FVTPL. For other financial instruments, transaction costs are capitalized on initial recognition. For financial assets and financial liabilities measured at 150 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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 Consolidated Balance Sheets 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 classified or 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 9 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 Interest rate benchmark reform (the Reform) fully transition to alternative benchmark rates (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 ABRs and hedged items referencing interbank offered rates (IBORs), which include USD London Interbank Offered Rate (USD LIBOR) and Canadian Dollar Offered Rate (CDOR), in accordance with 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). 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. 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 151 Note 2 Summary of significant accounting policies, estimates and judgments (continued) 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 IBORs 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, health and annuity insurance (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 insurance contracts and a portion of property and casualty contracts. These are designated as FVTPL with changes in fair value reported in Insurance premiums, investment and fee income. Insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy benefits. Liabilities for life insurance contracts are determined using the Canadian Asset Liability Method (CALM), which incorporates assumptions for mortality, morbidity, policy lapses and surrenders, investment yields, policy dividends, operating and policy maintenance expenses and provisions for adverse deviation. These assumptions are reviewed at least annually and updated in response to actual experience and market conditions. Liabilities for property and casualty insurance represent estimated provisions for reported and unreported claims. Liabilities for life and property and casualty insurance are included in Insurance claims and policy benefit liabilities. Changes in Insurance claims and policy benefit liabilities are included in the Insurance policyholder benefits, claims and acquisition expense in our Consolidated Statements of Income in the period in which the estimates change. Premiums ceded for reinsurance and reinsurance recoveries on policyholder benefits and claims incurred are reported in income and expense as appropriate. Reinsurance recoverables, which relate to paid benefits and unpaid claims, are included in Other assets. Acquisition costs for new insurance contracts consist of commissions, premium taxes, certain underwriting costs and other costs that vary with the acquisition of new contracts. Deferred acquisition costs for life insurance products are implicitly recognized in Insurance claims and policy benefit liabilities by CALM. For property and casualty insurance, these costs are classified as Other assets and amortized over the policy term. Segregated funds are lines of business in which we issue an insurance contract where the benefit amount is directly linked to the market value of the investments held in the underlying fund. The contractual arrangement is such that the underlying segregated fund assets are registered in our name but the segregated fund policyholders bear the risks and rewards of the funds’ investment performance. Liabilities for these contracts are calculated based on contractual obligations using actuarial assumptions and are at least equivalent to the surrender or transfer value calculated by reference to the value of the relevant underlying funds or indices. Segregated funds’ assets and liabilities are separately presented on our Consolidated Balance Sheets. As the segregated fund policyholders bear the risks and rewards of the funds’ performance, investment income earned by the segregated funds and expenses incurred by the segregated funds are offset and are not separately presented in our Consolidated Statements of Income. Fee income we earn from segregated funds includes management fees, mortality, policy administration and surrender charges, and these fees are recorded in Non-interest income – Insurance premiums, investment and fee income. We provide minimum death benefit and maturity value guarantees on segregated funds. The liability associated with these minimum guarantees is recorded in Insurance claims and policy benefit liabilities. Liability adequacy tests are performed for all insurance contract portfolios at each balance sheet date to ensure the adequacy of insurance contract liabilities. Current best estimates of future contractual cash flows, claims handling and administration costs, and investment returns from the assets backing the liabilities are taken into account in the tests. When the test results indicate that there is a deficiency in liabilities, the deficiency is charged immediately to our Consolidated Statements of Income by writing down the deferred acquisition costs in Other assets and/or increasing Insurance claims and policy benefit liabilities. 152 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Employee benefits – Pensions and other post-employment benefits Our defined benefit pension expense, which is included in Non-interest expense – Human resources, consists of the cost of employee pension benefits for the current year’s service, net interest on the net defined benefit liability (asset), past service cost and gains or losses on settlement. Remeasurements of the net defined benefit obligation, which comprise actuarial gains and losses and return on plan assets (excluding amounts included in net interest on the net defined benefit liability), are recognized immediately in OCI in the period in which they occur. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions. Amounts recognized in OCI will not be reclassified subsequently to net income. Past service cost is the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment and is charged immediately to income. For each defined benefit pension plan, we recognize the present value of our defined benefit obligations less the fair value of the plan assets as a defined benefit liability reported in Other liabilities – Employee benefit liabilities on our Consolidated Balance Sheets. For plans where there is a net defined benefit asset, the amount is reported as an asset in Other assets – Employee benefit assets on our Consolidated Balance sheets. The calculation of defined benefit expenses and obligations requires significant judgment as the recognition is dependent on discount rates and various actuarial assumptions such as healthcare cost trend rates, projected salary increases, retirement age and mortality and termination rates. Due to the long-term nature of these plans, such estimates and assumptions are subject to inherent risks and uncertainties. For our pension and other post-employment benefit plans, the discount rate is determined by reference to market yields on high quality corporate bonds. Since the discount rate is based on currently available yields, and involves management’s assessment of market liquidity, it is only a proxy for future yields. Actuarial assumptions, set in accordance with current practices in the respective countries of our plans, may differ from actual experience as country specific statistics are only estimates of future employee behaviour. These assumptions are determined by management and are reviewed by actuaries at least annually. Changes to any of the above assumptions may affect the amounts of benefits obligations, expenses and remeasurements that we recognize. Our contributions to defined contribution pension plans are expensed when employees have rendered services in exchange for such contributions. Defined contribution pension expense is included in Non-interest expense – Human resources. Share-based compensation We offer share-based compensation plans to certain key employees and to our non-employee directors. To account for stock options granted to employees, compensation expense is recognized over the applicable vesting period with a corresponding increase in equity. Fair value is determined by using option valuation models, which take into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the share price over the life of the option and other relevant factors. When the options are exercised, the exercise price proceeds together with the amount initially recorded in equity are credited to common shares. Our other share-based compensation plans include performance deferred share plans and deferred share unit plans for key employees (the Plans). The obligations for the Plans are accrued over their vesting periods. The Plans are settled in cash. For cash-settled awards, our accrued obligations are adjusted to their fair value at each balance sheet date. For share- settled awards, our expected obligations recognized in equity are based on the fair value of our common shares at the date of grant. Changes in our obligations, net of related hedges, are recorded as Non-interest expense – Human resources in our Consolidated Statements of Income with a corresponding increase in Other liabilities for cash-settled awards and in Retained earnings for share-settled awards. Compensation expense is recognized in the year the awards are earned by plan participants based on the vesting schedule of the relevant plans, net of estimated forfeitures. The compensation cost attributable to options and awards granted to employees who are eligible to retire or will become eligible to retire during the vesting period, is recognized immediately if the employee is eligible to retire on the grant date or over the period between the grant date and the date the employee becomes eligible to retire. Our contributions to the employee savings and share ownership plans are expensed as incurred. Income taxes Income tax comprises current tax and deferred tax and is recognized in our Consolidated Statements of Income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current income tax payable on profits is recognized as an expense based on the applicable tax laws in each jurisdiction in the period in which profits arise, calculated using tax rates enacted or substantively enacted by the balance sheet date. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities for accounting and tax purposes. A deferred income tax asset or liability is determined for each temporary difference, except for earnings related to our subsidiaries, branches, associates and interests in joint 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 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 153 Note 2 Summary of significant accounting policies, estimates and judgments (continued) 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, the Dividend Growth Model and peer analysis. 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 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 list and 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. 154 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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. 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. 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 155 Note 2 Summary of significant accounting policies, estimates and judgments (continued) 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 clients. 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 clients 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 generally 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 client, 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 client 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. For stock options whose exercise price is less than the average market price of our common shares, using the treasury stock method, they are assumed to be exercised and the proceeds are used to repurchase common shares at the average market price for the period. The incremental number of common shares issued under stock options and repurchased from proceeds is included in the calculation of diluted earnings per share. Share capital and other equity instruments We classify a financial instrument that we issue as a financial asset, financial liability or an equity instrument in accordance with the substance of the contractual arrangement. Our common shares held by us are classified as treasury shares in equity and accounted for at weighted average cost. Upon the sale of treasury shares, the difference between the sale proceeds and the cost of the shares is recognized in Retained earnings. Financial instruments issued by us are classified as equity instruments when there is no contractual obligation to transfer cash or other financial assets. Incremental costs directly attributable to the issue of equity instruments are included in equity as a deduction from the proceeds, net of tax. Financial instruments that will be settled by a variable number of our common shares upon their conversion by the holders as well as the related accrued distributions are classified as liabilities on our Consolidated Balance Sheets. Dividends and yield distributions on these instruments are classified as Interest expense in our Consolidated Statements of Income. For compound instruments comprised of both liability and equity components, the liability component is initially measured at fair value with any residual amount assigned to the equity component. Future changes in accounting policy and disclosure The following standard has been issued, but is not yet effective for us. IFRS 17 Insurance Contracts (IFRS 17) In May 2017, the IASB issued IFRS 17 to establish a comprehensive 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 depending on the nature of the contract. 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. If full retrospective 156 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements application to a group of contracts is impracticable, the modified retrospective or fair value approach may be used. To manage the transition to IFRS 17, we established a comprehensive program and governance structure led by Finance and the Insurance business that focuses on the evaluation of the impacts of the standard and implementation of policies, systems and processes required for the adoption. Significant progress has been made in preparing for the implementation of IFRS 17. We expect the adoption of IFRS 17 to affect the timing of earnings recognition for our insurance contracts and the carrying amount of our insurance contract liabilities. We continue to assess the impacts of adopting IFRS 17 on our Consolidated Financial Statements. Updates related to interest rate benchmark reform On May 16, 2022, Refinitiv Benchmark Services (UK) Limited (RBSL), the administrator of CDOR, announced that the calculation and publication of all tenors of CDOR will permanently cease immediately following a final publication on June 28, 2024. The cessation announcement triggered fallback provisions related to our CDOR-linked products, including certain loans, bonds, and derivatives, and defined the dates of their transition to ABRs. The fixed spreads to be used in the transition to the relevant ABR for each CDOR setting were also defined for certain of our CDOR-linked products as a result of the announcement. 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 USD LIBOR and CDOR 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 USD LIBOR and CDOR based products provided by our regulators and are on track with our transition activities to move to ABRs. 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. These include financial instruments referencing USD LIBOR maturing after June 30, 2023 and CDOR maturing after June 28, 2024. In the normal course of business, our derivative notional amounts may fluctuate with minimal impact to our IBOR conversion plans. October 31, 2022 October 31, 2021 As at (Millions of Canadian dollars) USD LIBOR CDOR (5) Cross currency swaps USD LIBOR – CDOR Non-derivative financial assets (1) $ 57,494 $ 18,493 75,987 $ n.a. n.a. $ $ Non-derivative financial liabilities (2) Derivative notional (3) Non-derivative financial assets (1) Non-derivative financial liabilities (2) 1,468 $ 5,550,175 $ 18,572 20,040 $ 7,554,619 $ 2,004,444 68,325 $ 9,226 77,551 $ Derivative notional (3), (4) 1,420 $ 4,901,854 1,307,071 14,797 16,217 $ 6,208,925 n.a. $ 222,256 n.a. $ 222,256 n.a. n.a. n.a. $ 206,953 n.a. $ 206,953 75,987 $ 20,040 $ 7,776,875 $ 77,551 $ 16,217 $ 6,415,878 Non-derivative assets represent the drawn outstanding balance of Loans and Customers’ liability under acceptances and the fair value of Securities. (1) (2) Non-derivative liabilities represent Subordinated debentures, Deposits and Acceptances. (3) (4) Amounts have been updated from those previously presented to reflect the regulatory developments related to the cessation of CDOR and transition of non-USD LIBOR The notional amount for cross currency swaps between USD LIBOR and CDOR are presented separately in the Cross currency swaps section of this table. financial instruments. Includes our exposure to financial instruments referencing interest rates substantially similar to CDOR. (5) 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 CDOR (1), (2) As at October 31, 2022 October 31, 2021 $ $ 59,271 $ 26,913 122,437 15,644 86,184 $ 138,081 Includes our exposure to financial instruments referencing interest rates substantially similar to CDOR. (1) (2) Undrawn commitments exclude amounts related to drawn outstanding balances, which in certain cases may exclude extension options. Consistent with our transition plan, our exposure to non-derivative financial assets, non-derivative financial liabilities, derivative notional and undrawn balances of loan commitments referencing non-USD LIBOR interest rates is no longer material to our financial statements (October 31, 2021 – $3.6 billion, $3.4 billion, $2,975.4 billion and $3.0 billion, respectively). We continue to manage significant exposures to benchmarks that have no announced plans for cessation or further reform, including the EURO Interbank Offered Rate (EURIBOR) and Australian Bank Bill Swap Rate (BBSW), which are excluded from the tables above. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 157 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, 2022 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 $ – $ 84,468 $ – $ – $ 23,543 $ 23,543 $ 108,011 $ 108,011 138,507 – 9,698 – – 92,063 138,507 9,698 92,063 – 828 828 – 77,127 – 70,073 148,205 170,018 148,205 162,964 77,127 70,073 318,223 311,169 264,665 – – – 53,180 53,180 317,845 317,845 73 6,914 6,987 154,439 3,377 375 3,222 3,597 – – 218 563 781 – – – – – – – 546,767 261,833 521,428 253,816 547,433 272,532 522,094 264,515 808,600 775,244 819,965 786,609 – 73,084 – 73,084 154,439 76,461 154,439 76,461 $ 298 $ 447 – 21,959 152,119 7,196 745 181,274 $ 382,675 $ 607,304 36,816 380,396 $ 404,932 $ 402,653 757,668 759,870 605,102 43,954 44,012 36,758 1,026,795 1,022,256 1,208,814 1,204,275 35,511 – – – 35,511 35,511 – 153,491 (360) – 248,835 – 69 – 25,112 – 90,348 10,025 25,112 – 90,160 9,668 273,947 153,491 90,057 10,025 273,947 153,491 89,869 9,668 158 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements (Millions of Canadian dollars) Financial assets Interest-bearing deposits with banks Securities Trading Investment, net of applicable allowance 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 – 13,439 – – 77,802 125,801 13,439 77,802 – 533 533 – 67,149 67,149 – 66,823 139,240 145,484 139,240 145,158 66,823 284,724 284,398 Assets purchased under reverse repurchase agreements and securities borrowed 265,011 – – 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 – 8,428 8,428 95,541 4,109 241 2,769 3,010 – – 327 813 1,140 – – – – – – – – 42,892 42,892 307,903 307,903 500,621 204,376 502,277 204,683 501,189 216,386 502,845 216,693 704,997 706,960 717,575 719,538 – 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 $ 565,106 24,743 362,488 $ 696,353 41,990 362,689 697,475 41,994 932,562 933,889 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 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, 2022, the change in fair value during the period attributable to changes in credit risk for positions still held was a loss of $662 million and the cumulative change in fair value attributable to changes in credit risk for positions still held was a loss of $490 million. 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. As at October 31, 2022, the extent to which credit derivatives or similar instruments mitigate the maximum exposure to credit risk was $589 million (October 31, 2021 – $484 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. (Millions of Canadian dollars) Term deposits Personal Business and government (3) Bank (4) Obligations related to assets sold under repurchase agreements and securities loaned Other liabilities As at or for the year ended October 31, 2022 (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) $ 22,328 $ 160,775 7,208 21,959 152,119 7,196 190,311 181,274 $ (369) (8,656) (12) (9,037) $ (238) (2,135) – (2,373) $ (166) (1,718) – (1,884) 248,963 69 248,835 69 (128) – 1 – 1 – $ 439,343 $ 430,178 $ (9,165) $ (2,372) $ (1,883) Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 159 Note 3 Fair value of financial instruments (continued) As at or for the year ended October 31, 2021 (1) (Millions of Canadian dollars) Term deposits Personal Business and government (3) Bank (4) Contractual maturity amount Carrying value $ 18,205 $ 131,830 17,253 18,328 131,630 17,251 167,288 167,209 Obligations related to assets sold under repurchase agreements and securities loaned Other liabilities 236,164 171 236,147 171 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) $ 123 (200) (2) (79) (17) – $ (17) (75) – (92) (8) – $ 72 416 – 488 – – $ 403,623 $ 403,527 $ (96) $ (100) $ 488 (1) (2) $97 million in changes in fair value attributable to changes in credit risk were recognized in income for the year ended October 31, 2022, and $97 million in cumulative changes in credit risk were included in income for positions still held life-to-date (October 31, 2021 – $nil and $nil respectively). The cumulative change is measured from the initial designation of the liabilities as FVTPL. For the year ended October 31, 2022, $3 million of fair value gains previously included in OCI relate to financial liabilities derecognized during the year (October 31, 2021 – $25 million of fair value losses). (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. 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 2022 October 31 2021 $ $ $ (7,382) $ 8,543 3,447 (1,407) 1,161 $ 2,040 1,251 $ (843) 753 1,033 57 950 $ 1,161 $ 2,040 (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 $2,805 million (October 31, 2021 – losses of $14 million). Excludes derivatives designated in a hedging relationship. Refer to Note 9 for net gains (losses) on these derivatives. For the year ended October 31, 2022, $8,536 million of net fair value gains on financial liabilities designated as FVTPL, other than those attributable to changes in our own credit risk, were included in Non-interest income (October 31, 2021 – losses of $1,408 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 2022 October 31 2021 $ 10,999 $ 1,177 28,595 40,771 $ 8,336 $ 9,718 18,054 $ 22,717 $ 4,551 375 23,219 28,145 2,865 5,278 8,143 20,002 (1) (2) (3) 160 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 $601 million (October 31, 2021 – $576 million), and Interest expense of $6 million (October 31, 2021 – $4 million). Includes dividend income for the year ended October 31, 2022 of $2,954 million (October 31, 2021 – $2,436 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, 2022 of $112 million (October 31, 2021 – $110 million). Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Fee income arising from financial instruments For the year ended October 31, 2022, we earned $6,118 million in fees from banking services (October 31, 2021 – $5,583 million). For the year ended October 31, 2022, we also earned $14,932 million in fees from investment management, trust, custodial, underwriting, brokerage and other similar fiduciary services to retail and institutional clients (October 31, 2021 – $15,167 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), (2) Other OECD government (3) Mortgage-backed securities (1) Asset-backed securities Non-CDO securities (4) 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), (2) 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 securities loaned Derivatives Interest rate contracts Foreign exchange contracts Credit derivatives Other contracts Valuation adjustments Total gross derivatives Netting adjustments Total derivatives Other liabilities October 31, 2022 Fair value measurements using Netting October 31, 2021 Fair value measurements using Netting Level 1 Level 2 Level 3 adjustments Fair value Level 1 Level 2 Level 3 adjustments Fair value As at $ – $ 84,468 $ – $ $ 84,468 $ – $ 56,896 $ – $ $ 56,896 15,024 – 1,254 1,325 – – – 46,592 3,779 13,257 35,570 3,452 2 1,308 21,162 3,593 – – 4 – – 2 7 1,874 18,803 13,257 36,828 4,777 2 8,977 – 215 2,729 – 1,310 21,169 52,059 – – 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 4 893 23,110 61,371 64,195 82,123 1,887 148,205 68,747 68,911 1,582 139,240 1,226 – 440 – – – – – 36 2,555 2,124 43,918 5,144 2,860 7,524 524 25,569 395 1,702 90,613 – – – – 28 – – 151 397 576 3,781 2,124 44,358 5,144 2,888 7,524 524 25,720 828 1,973 – 12 – – – – – 46 1,730 3,132 34,815 5,956 2,727 7,074 586 19,625 153 92,891 2,031 75,798 – – – – 20 – – 152 334 506 – – 264,665 9,673 – 1,692 264,665 11,365 – – 265,011 11,501 – 1,077 – – – 3,939 – 39,804 99,424 388 14,786 (2,100) 3,939 152,302 263 13 – 62 45 383 40,067 99,437 388 18,787 (2,055) – – – 3,175 – 33,857 41,224 34 17,955 (819) 156,624 3,175 92,251 320 74 – 26 9 429 1,221 2,141 15 154,439 3,377 1,474 2,635 – (2,185) (2,185) (314) 3,703 3,132 34,827 5,956 2,747 7,074 586 19,777 533 78,335 265,011 12,578 34,177 41,298 34 21,156 (810) 95,855 (314) 95,541 4,109 $71,057 $685,985 $ 4,553 $ (2,185) $ 759,410 $75,427 $573,003 $ 3,594 $ (314) $ 651,710 $ – $ 22,016 $ – – 152,566 7,196 241 $ – – $ $ 22,257 152,566 7,196 – $ 18,498 $ – – 132,369 17,251 151 $ – – – – – 248,835 – – – 3,847 – 39,592 94,310 125 16,663 (967) 1,122 145 – 847 (8) 35,511 18,345 19,496 248,835 – 236,147 40,714 94,455 125 21,357 (975) – – – 3,699 – 28,566 40,484 120 17,456 38 – – 955 27 – 419 (11) 3,847 149,723 2,106 155,676 3,699 86,664 1,390 341 (632) – (291) 258 560 7 (2,185) (2,185) 153,491 (314) $ 18,649 132,369 17,251 37,841 236,147 29,521 40,511 120 21,574 27 91,753 (314) 91,439 825 Obligations related to securities sold short Obligations related to assets sold under repurchase agreements and 16,383 19,128 (1) As at October 31, 2022, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of trading securities were $12,273 million and $nil (October 31, 2021 – $13,124 million and $nil), respectively, and in all fair value levels of Investment securities were $23,362 million and $2,755 million (October 31, 2021 – $13,542 million and $2,592 million), respectively. $20,571 $598,832 $ 2,347 $ (2,185) $ 619,565 $22,302 $510,985 $ 1,548 $ (314) $ 534,521 (2) United States (U.S.). (3) Organisation for Economic Co-operation and Development (OECD). (4) Collateralized debt obligations (CDO). Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 161 Note 3 Fair value of financial instruments (continued) Fair values of our significant assets and liabilities measured on a recurring basis are determined and classified in the fair value hierarchy table using the following valuation techniques and inputs. Interest-bearing deposits with banks The majority of our Interest-bearing deposits with banks are designated as FVTPL. These FVTPL deposits are composed of short- dated deposits placed with banks, and are included in Interest-bearing deposits with banks in the fair value hierarchy table. The fair values of these instruments are determined using the discounted cash flow method. The inputs to the valuation models include interest rate swap curves and credit spreads, where applicable. They are classified as Level 2 instruments in the hierarchy as the inputs are observable. Government bonds (Canadian, U.S. and other OECD governments) Government bonds are included in Canadian government debt, U.S. 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, Secured Overnight Financing Rate (SOFR) 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 162 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 (Millions of Canadian dollars, except for prices, percentages and ratios) Products Corporate debt and related derivatives Government debt and municipal bonds Private equities, hedge fund investments and related equity 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 $ 7 1,692 Price-based Discounted cash flows Prices $ 1.00 $ 111.90 $ Credit spread 1.67% 10.73% Credit enhancement 11.70% 15.60% 85.64 6.20% 13.00% $ 130 Corporate debt and other debt 151 Discounted cash flows Yields 7.85% 10.72% 8.92% Equities Derivative related liabilities 2,271 Market comparable Price-based 2 Discounted cash flows EV/EBITDA multiples P/E multiples EV/Rev multiples 14.31X 24.04X 5.77X Liquidity discounts (4) 10.00% 40.00% Discount rate 10.80% 10.80% n.a. 3.97X 8.47X 0.35X NAV / prices (5) n.a. Interest rate derivatives and interest-rate-linked structured notes (6), (7) Derivative related assets Derivative related liabilities 270 Discounted cash flows Option pricing model 1,216 1.88% 1.98% Interest rates CPI swap rates 4.49% 2.59% IR-IR correlations 19.00% 67.00% FX-IR correlations 29.00% 56.00% FX-FX correlations 68.00% 68.00% Equity derivatives and equity- linked structured notes (6), (7) Other (8) Discounted cash flows 8.28% Option pricing model Equity (EQ)-EQ correlations 33.00% 94.90% EQ-FX correlations (83.15)% 38.44% 7.00% 129.00% Dividend yields (0.63)% EQ volatilities 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 62 2 51 15 28 4 241 655 103 – 8.59X 12.46X 3.88X 17.35% 10.80% n.a. High Even Even Even Even Lower Middle Middle Upper Total $ 4,553 $ 2,347 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 163 26.00X 38.00X 20.80X 40.00% 10.65% n.a. 2.46% 2.42% 67.00% 56.00% 68.00% 9.16X 10.96X 5.40X 16.40% 10.65% n.a. High Even Even Even Even Lower Middle Middle Upper Note 3 Fair value of financial instruments (continued) As at October 31, 2021 (Millions of Canadian dollars, except for prices, percentages and ratios) Fair value Range of input values (1), (2) Products Corporate debt and related derivatives Government debt and municipal bonds Private equities, hedge fund investments and related equity derivatives Reporting line in the fair value hierarchy table Assets Liabilities Valuation techniques Corporate debt and other debt Loans Derivative related liabilities $ 27 1,077 Price-based Discounted cash flows $ 9 Significant unobservable inputs (3) Low High Weighted average / Inputs distribution Prices $ 29.18 $ 127.09 $ 1.15% Credit enhancement 11.92% 6.92% 15.90% Credit spread 96.36 4.04% 13.25% Corporate debt and other debt 150 Discounted cash flows Yields 3.91% 8.17% 5.91% Equities Derivative related liabilities 1,864 Market comparable Price-based 2 Discounted cash flows 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) 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% 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 0.00% Discounted cash flows Option pricing model Equity (EQ)-EQ correlations 32.00% EQ-FX correlations (60.60)% Dividend yields 6.37% 95.00% 27.30% 8.00% 128.00% EQ volatilities 151 381 25 2 37 – 20 25 24 7 $ 3,594 $ 1,548 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 $373 million (October 31, 2021 – $385 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. 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. 164 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Prepayment rates A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments change the future cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when the loan interest rate is lower than the current reinvestment rate, and a decrease in the prepayment rate in isolation will result in a decrease in fair value when the loan interest rate is lower than the current reinvestment rate. Prepayment rates are generally negatively correlated with interest rates. Recovery and loss severity rates A recovery rate is an estimation of the amount that can be collected in a loan default scenario. The recovery rate is the recovered amount divided by the loan balance due, expressed as a percentage. The inverse concept of recovery is loss severity. Loss severity rate is an estimation of the loan amount not collected when a loan defaults. The loss severity rate is the loss amount divided by the loan balance due, expressed as a percentage. Generally, an increase in the recovery rate or a decrease in the loss severity rate will increase the loan fair value, and vice versa. Volatility rates Volatility measures the potential variability of future prices and is often measured as the standard deviation of price movements. Volatility is an input to option pricing models used to value derivatives and issued structured notes. Volatility is used in valuing equity, interest rate, commodity and foreign exchange options. A higher volatility rate means that the underlying price or rate movements are more likely to occur. Higher volatility rates may increase or decrease an option’s fair value depending on the option’s terms. The determination of volatility rates is dependent on various factors, including but not limited to, the underlying’s market price, the strike price and maturity. Dividend yields A dividend yield is the underlying equity’s expected dividends expressed as an annual percentage of its price. Dividend yield is used as an input for forward equity price and option models. Higher dividend yields will decrease the forward price, and vice versa. A higher dividend yield will increase or decrease an option’s value, depending on the option’s terms. Correlation rates Correlation is the linear relationship between the movements in two different variables. Correlation is an input to the valuation of derivative contracts and issued structured notes when an instrument’s payout is determined by correlated variables. When variables are positively correlated, an increase in one variable will result in an increase in the other variable. When variables are negatively correlated, an increase in one variable will result in a decrease in the other variable. The referenced variables can be within a single asset class or market (equity, interest rate, commodities, credit and foreign exchange) or between variables in different asset classes (equity to foreign exchange, or interest rate to foreign exchange). Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of the instrument. Interest rates An interest rate is the percentage amount charged on a principal or notional amount. Increasing interest rates will decrease the discounted cash flow value of a financial instrument, and vice versa. Consumer Price Index swap rates A CPI swap rate is expressed as a percentage of an increase in the average price of a basket of consumer goods and services, such as transportation, food and medical care. An increase in the CPI swap rate will cause inflation swap payments to be larger, and vice versa. EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts Private equity valuation inputs include EV/EBITDA multiples, P/E multiples and EV/Rev multiples. These are used to calculate either enterprise value or share value of a company based on a multiple of earnings or revenue estimates. Higher multiples equate to higher fair values for all multiple types, and vice versa. A liquidity discount may be applied when few or no transactions exist to support the valuations. Credit Enhancement Credit enhancement is an input to the valuation of securitized transactions and is the amount of loan loss protection for a senior tranche. Credit enhancement is expressed as a percentage of the transaction sizes. An increase in credit enhancement will cause the credit spread to decrease and the tranche fair value to increase, and vice versa. Interrelationships between unobservable inputs Unobservable inputs, including the above discount margin, default rate, prepayment rate, and recovery and loss severity rates, may not be independent of each other. For example, the discount margin can be affected by a change in default rate, prepayment rate, or recovery and loss severity rates. Discount margins will generally decrease when default rates decline or when recovery rates increase. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 165 Note 3 Fair value of financial instruments (continued) Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3 For the year ended October 31, 2022 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 $ 25 $ – $ 2 $ – $ (23) $ – $ – $ 4 $ 2 25 1,530 1,582 20 152 334 506 – (3) 14 11 – – – – – – 100 102 8 2 51 61 – – 314 314 – – 11 11 – (6) (82) – 9 1 – (18) 2 7 (3) 1,874 (111) 10 (21) 1,887 – – (1) (1) – – 37 37 – (3) (35) (38) 28 151 397 576 1,077 (25) (37) 407 (466) 802 (66) 1,692 (635) 47 (393) 20 – (187) (103) 165 – – (5) (2) (34) – 1 17 (22) (245) 25 15 64 3 70 (11) (1) (13) 5 (406) 19 – (100) (60) 58 – – (859) (132) (785) 53 15 2,204 $ (139) $ 86 $ 522 $ (453) $ 454 $ (227) $ 2,447 (151) $ 2 $ (3) $ (120) $ 26 $ (143) $ 148 $ (241) $ $ (7) (1) – – 8 – – – (158) $ 1 $ (3) $ (120) $ 34 $ (143) $ 148 $ (241) $ $ $ $ – – – 43 43 n.a. n.a. n.a. n.a. (78) (16) (90) 271 – – 130 19 – 19 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 (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 $ 44 $ – $ (2) $ – $ (17) $ – $ – $ 25 $ 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 2 30 1,261 1,337 27 160 335 522 – (2) 96 94 – – – – – – (60) (62) (7) (12) 34 15 – 12 338 350 – – 5 5 1,070 (5) (19) 264 – (5) (125) (147) – 4 (2) 2 (8) – 14 26 40 – – – – – (24) (6) 2 25 1,530 (30) 1,582 – – (38) (38) 20 152 334 506 73 (298) 1,077 (588) 22 (301) 40 53 84 14 (20) – (39) (1) – 11 – (2) 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 (177) $ (44) $ 1 6 $ – 8 – – (7) (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 (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 $50 million for the year ended October 31, 2022 (October 31, 2021 – gains of $46 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, 2022 included derivative assets of $383 million (October 31, 2021 – $429 million) and derivative liabilities of $2,106 million (October 31, 2021 – $1,390 million). n.a. not applicable 166 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis Transfers between Level 1 and Level 2, and transfers into and out of Level 3 are assumed to occur at the end of the period. For an asset or a liability that transfers into Level 3 during the period, the entire change in fair value for the period is excluded from the Gains (losses) included in earnings for positions still held column of the above reconciliation, whereas for transfers out of Level 3 during the period, the entire change in fair value for the period is included in the same column of the above reconciliation. Transfers between Level 1 and 2 are dependent on whether fair value is obtained on the basis of quoted market prices in active markets (Level 1). During the year ended October 31, 2022, there were no significant transfers out of Level 1 to Level 2. 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, 2022, there were no significant transfers out of Level 2 to Level 1. 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. 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, 2022, significant transfers out of Level 2 to Level 3 included: (cid:129) (cid:129) $777 million of Loans, due to changes in the market observability of inputs. $227 million of OTC equity options in Other contracts comprised of $57 million of derivative related assets and $284 million of derivative related liabilities, due to changes in the market observability of inputs and changes in the significance of unobservable inputs. $127 million of loan underwriting commitments in derivative related liabilities of Other contracts, due to changes in the market observability of inputs. (cid:129) 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, 2022, there were no significant transfers out of Level 3 to Level 2. 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) Positive and negative fair value movements of Level 3 financial instruments from using reasonably possible alternative assumptions A financial instrument is classified as Level 3 in the fair value hierarchy if one or more of its unobservable inputs may significantly affect the measurement of its fair value. In preparing the financial statements, appropriate levels for these unobservable input parameters are chosen so that they are consistent with prevailing market evidence or management judgment. Due to the unobservable nature of the prices or rates, there may be uncertainty about the valuation of these Level 3 financial instruments. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 167 Note 3 Fair value of financial instruments (continued) The following table summarizes the impacts to fair values of Level 3 financial instruments using reasonably possible alternative assumptions. This sensitivity disclosure is intended to illustrate the potential impact of the relative uncertainty in the fair value of Level 3 financial instruments. In reporting the sensitivities below, we offset balances in instances where: (i) the move in valuation factors cause an offsetting positive and negative fair value movement, (ii) both offsetting instruments are in Level 3, and (iii) exposures are managed and reported on a net basis. With respect to overall sensitivity, it is unlikely in practice that all reasonably possible alternative assumptions would simultaneously be realized. October 31, 2022 October 31, 2021 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 4 $ 2 7 1,874 28 151 397 1,692 383 15 $ $ 4,553 $ (241) $ (2,106) – $ (2,347) $ – $ – – 27 4 12 38 60 5 – 146 $ 9 $ 55 – 64 $ – $ – – (23) 25 $ 2 25 1,530 (4) (10) (39) (62) (3) – 20 152 334 1,077 429 – (141) $ 3,594 $ (9) $ (57) (151) $ (1,390) – (7) (66) $ (1,548) $ – $ – 1 19 4 14 33 23 7 – 101 $ – $ 30 – 30 $ (1) – (1) (16) (4) (13) (34) (24) (5) – (98) – (77) – (77) Sensitivity results As at October 31, 2022, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions would be an increase of $146 million and a reduction of $141 million in fair value, of which $54 million and $53 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 $64 million and an increase of $66 million in fair value. Level 3 valuation inputs and approaches to developing reasonably possible alternative assumptions The following is a summary of the unobservable inputs used in the valuation of the Level 3 instruments and our approaches to developing reasonably possible alternative assumptions used to determine sensitivity. Financial assets or liabilities Asset-backed securities, corporate debt, government debt, municipal bonds and loans Private equities, hedge fund investments and related equity derivatives Interest rate derivatives Equity derivatives Bank funding and deposits Structured notes Sensitivity methodology Sensitivities are determined based on adjusting, plus or minus one standard deviation, the bid-offer spreads or input prices if a sufficient number of prices is received, adjusting input parameters such as credit spreads or using high and low vendor prices as reasonably possible alternative assumptions. Sensitivity of direct private equity investments is determined by (i) adjusting the discount rate by 2% when the discounted cash flow method is used to determine fair value, (ii) adjusting the price multiples based on the range of multiples of comparable companies when price-multiples- based models are used, or (iii) using an alternative valuation approach. The private equity fund, hedge fund and related equity derivative NAVs are provided by the fund managers, and as a result, there are no other reasonably possible alternative assumptions for these investments. Sensitivities of interest rate and cross currency swaps are derived using plus or minus one standard deviation of the inputs, and an amount representing model and parameter uncertainty, where applicable. Sensitivity of the Level 3 position is determined by shifting the unobservable model inputs by plus or minus one standard deviation of the pricing service market data including volatility, dividends or correlations, as applicable. Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain basis points. Sensitivities for interest-rate-linked and equity-linked structured notes are derived by adjusting inputs by plus or minus one standard deviation, and for other deposits, by estimating a reasonable move in the funding curve by plus or minus certain basis points. 168 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Fair value for financial instruments that are carried at amortized cost and classified using the fair value hierarchy (Millions of Canadian dollars) As at October 31, 2022 Fair value approximates carrying value (1) Fair value may not approximate carrying value Fair value measurements using Level 1 Level 2 Level 3 Total 23,543 $ – – $ – – $ 70,073 – $ – – $ 70,073 Interest-bearing deposits with banks $ Amortized cost securities (2) Assets purchased under reverse repurchase agreements and securities borrowed Loans Retail Wholesale Other assets Deposits Personal Business and government Bank Obligations related to assets sold under repurchase agreements and securities loaned Other liabilities Subordinated debentures (Millions of Canadian dollars) Interest-bearing deposits with banks $ Amortized cost securities (2) Assets purchased under reverse repurchase agreements and securities borrowed Loans Retail Wholesale Other assets Deposits Personal Business and government Bank Obligations related to assets sold under repurchase agreements and securities loaned Other liabilities Subordinated debentures Total fair value 23,543 70,073 521,428 253,816 775,244 73,084 995,124 380,396 605,102 36,758 42,224 70,162 17,943 88,105 72,198 226,070 271,414 406,045 22,638 700,097 25,112 77,801 – – – – – – – – – – – – – – 10,956 – 10,956 53,180 446,809 230,880 677,689 716 4,457 4,993 9,450 170 451,266 235,873 687,139 886 759,434 9,620 769,054 108,549 198,265 14,120 320,934 433 792 – 108,982 199,057 14,120 1,225 322,159 1,022,256 – 1,554 9,608 – 10,805 60 – 12,359 9,668 25,112 90,160 9,668 $ 803,010 $ – $ 332,096 $ 12,090 $ 344,186 $ 1,147,196 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 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 (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. $ 789,352 $ – $ 235,835 $ 9,106 $ 244,941 $ 1,034,293 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 169 Note 3 Fair value of financial instruments (continued) 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. 170 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Note 4 Securities Carrying value of securities (Millions of Canadian dollars) Trading (2) Debt issued or guaranteed by: Canadian government U.S. federal, state, municipal and agencies Other OECD government Mortgage-backed securities Asset-backed securities Corporate debt and other debt Bankers’ acceptances 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 Yield (4) U.S. federal, state, municipal and agencies Yield (4) Other OECD government Yield (4) Asset-backed securities Yield (4) Corporate debt and other debt Yield (4) Amortized cost, net of allowance Fair value Total carrying value of securities As at October 31, 2022 Term to maturity (1) Within 3 months 3 months to 1 year 1 year to 5 years 5 years to 10 years Over 10 years With no specific maturity Total $ 2,255 $ 14,181 $ 6,907 $ 2,706 $ 6,011 $ – $ 32,060 7,151 1,343 – 779 252 3,055 10,107 233 – 49 3 1,837 7,043 606 – 67 – 4,813 4,507 241 – 207 – 3,037 8,020 2,354 2 208 – 8,172 14,835 26,410 19,436 10,698 24,767 – – – – – – 52,059 52,059 36,828 4,777 2 1,310 255 20,914 52,059 148,205 780 778 2.3% 237 237 2.0% 802 802 4.9% 1,105 1,105 2.4% – – – – – – 1,010 1,009 2.3% 215 216 2.7% 2,613 2,615 0.4% 642 642 1.2% – – – – – – 1,024 1,012 2.8% 616 616 2.0% 13,586 13,554 1.9% 3,406 3,396 1.7% – – – 46 46 4.6% 5,922 5,919 3.2% 4,793 4,792 2.8% 12,420 12,307 2.6% 745 635 1.6% 56 56 3.8% 522 347 3.1% 1,561 999 4.1% 9,104 9,061 3.4% 19,929 18,326 3.0% 1 1 4.4% 41 37 4.5% 6,331 6,172 5.3% 2,666 2,656 3.1% – – – 2,944 2,851 4.7% 1,911 1,830 5.4% 51 46 5.1% 8,846 8,841 9,273 9,274 31,098 30,931 18,944 18,618 26,918 24,399 – – – – – – – – – – – – – – – – – – – – – 551 828 551 828 4,081 3,781 2.4% 2,685 2,124 3.0% 46,034 44,358 2.6% 5,154 5,144 1.8% 2,985 2,888 4.7% 8,288 8,048 5.3% 25,852 25,720 2.8% 551 828 95,630 92,891 929 2.4% 1,734 2.8% 16,655 2.0% 6,101 2.3% – – – – 25,419 2.1% 161 4.4% 235 1.3% – – 574 0.8% 1,899 1,899 34,132 2.3% 5,518 1.7% 711 3.1% 11,347 2.0% 77,127 70,073 $ 25,575 $ 42,210 $ 82,699 $ 40,141 $ 74,711 $ 52,887 $ 318,223 25,518 2.4% – – 3 1.5% 24 4.9% 25,545 21,707 3,784 2.3% 64 1.3% 135 3.5% 741 2.4% 10,825 9,433 3,885 1.7% 3,645 1.9% 573 3.0% 7,574 2.6% 32,332 30,579 784 3.0% 1,574 1.3% – – 2,434 1.7% 6,526 6,455 – – – – – – – – – – Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 171 Note 4 Securities (continued) (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 Other (3) Equities 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 Fair value through other comprehensive income (2) Debt issued or guaranteed by: Canadian government Provincial and municipal Federal Amortized cost Fair value Yield (4) Amortized cost Fair value Yield (4) agencies Amortized cost Fair value Yield (4) U.S. federal, state, municipal and Other OECD government Amortized cost Fair value Yield (4) Mortgage-backed securities Amortized cost Fair value Yield (4) Asset-backed securities Corporate debt and other debt Amortized cost Fair value Yield (4) Amortized cost Fair value Yield (4) Cost Fair value (5) Equities 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% – – – – – – – – – – – – – – – – – – – – – 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 Amortized cost Fair value 7,436 7,437 10,344 10,347 24,898 24,917 9,356 9,386 25,904 25,715 Amortized cost (2) Debt issued or guaranteed by: Canadian government Yield (4) U.S. federal, state, municipal and agencies Yield (4) Other OECD government Yield (4) Asset-backed securities Yield (4) Corporate debt and other debt Yield (4) Amortized cost, net of allowance Fair value Total carrying value of securities 453 1.1% 2,979 1.5% 17,589 1.5% 3,601 2.0% 194 1.7% – – 24,816 1.5% 1,093 – 1,914 – – – 1,133 1.0% 4,593 4,597 27,411 1.3% 5,974 – 663 1.1% 8,285 1.4% 67,149 66,823 $ 20,625 $ 27,513 $ 73,087 $ 28,338 $73,257 $ 61,904 $284,724 19,559 1.3% – – 7 1.4% 23 4.7% 19,783 19,647 3,718 1.0% 2,790 0.8% 320 0.5% 4,424 1.6% 28,841 28,701 274 1.0% 1,212 1.3% – – 2,072 1.2% 6,537 6,567 2,767 2.1% 58 1.1% 336 1.7% 633 2.0% 7,395 7,311 – – – – – – – – – – (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. 172 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Unrealized gains and losses on securities at FVOCI (1), (2) (Millions of Canadian dollars) Debt issued or guaranteed by: Canadian government Federal (3) Provincial and municipal U.S. 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, 2022 October 31, 2021 As at Cost/ Amortized cost Gross unrealized gains Gross unrealized losses Fair value Cost/ Amortized cost Gross unrealized gains Gross unrealized losses Fair value $ 4,081 $ 2,685 1 $ 6 (301) $ 3,781 $ (567) 2,124 3,841 $ 3,328 1 $ 3 (139) $ 3,703 3,132 (199) 46,034 5,154 2,985 7,741 547 25,852 551 343 7 1 3 – 51 284 (2,019) 44,358 5,144 2,888 (17) (98) (220) (23) 7,524 524 (183) 25,720 828 (7) 34,678 5,949 2,757 7,074 580 19,731 242 353 8 2 1 6 57 292 (204) 34,827 5,956 2,747 (1) (12) (1) – 7,074 586 (11) 19,777 533 (1) $ 95,630 $ 696 $ (3,435) $ 92,891 $ 78,180 $ 723 $ (568) $ 78,335 (1) Excludes $77,127 million of held-to-collect securities as at October 31, 2022 that are carried at amortized cost, net of allowance for credit losses (October 31, 2021 – $67,149 million). (2) Gross unrealized gains and losses includes $(19) million of allowance for credit losses on debt securities at FVOCI as at October 31, 2022 (October 31, 2021 – $(9) 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 $2,846 million, $1 million, $92 million and $2,755 million, respectively as at October 31, 2022 (October 31, 2021 – $2,603 million, $1 million, $12 million and $2,592 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 Balance at end of period October 31, 2022 October 31, 2021 Performing Impaired Performing Impaired For the year ended Stage 1 Stage 2 Stage 3 (2) Total Stage 1 Stage 2 Stage 3 (2) Total $ 2 $ 1 $ (12) $ (9) $ 12 $ – $ (4) $ 8 – 1 – – 3 (1) (2) – – (1) – – – – 1 – – – – – – – (10) (1) – – – – 3 (1) (11) (1) (4) 1 – – 8 (10) (4) (1) – (1) – – – (1) 3 – – – – – – – (9) 1 (4) – – – 8 (11) (10) – $ 3 $ 1 $ (23) $ (19) $ 2 $ 1 $ (12) $ (9) (1) Expected credit losses on debt securities at FVOCI are not separately recognized on the Consolidated Balance Sheets 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 173 Note 4 Securities (continued) Allowance for credit losses – securities at amortized cost (Millions of Canadian dollars) Balance at beginning of period Provision for credit losses 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, 2022 October 31, 2021 Performing Impaired Performing Impaired For the year ended Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total $ 5 $ 18 $ – $ 23 $ 10 $ 19 $ – $ 29 – – – – 11 (1) (7) – – – – – – – (6) 2 – – – – – – – – – – – – 11 (1) (13) 2 (4) – – – 9 (1) (9) – – – – – – – 1 (2) – – – – – – – – (4) – – – 9 (1) (8) (2) $ 8 $ 14 $ – $ 22 $ 5 $ 18 $ – $ 23 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, 2022 October 31, 2021 Performing Impaired Performing Impaired As at Stage 1 Stage 2 Stage 3 (1) Total Stage 1 Stage 2 Stage 3 (1) Total $ 91,177 $ 56 $ 680 – 91,857 – – 56 $ 76,035 $ – $ 898 – 76,933 8 216 – 216 14 – $ 91,233 $ 77,147 $ 82 $ – 150 680 150 423 – – – – $ 77,229 423 – 150 150 150 92,063 828 $ 92,891 77,570 82 150 77,802 533 – $ 76,035 $ 66,033 $ – – 1,114 – 928 – – – 77,149 22 66,961 5 $ 78,335 – $ 66,033 1,139 – – – – – 67,172 23 – $ 211 – 211 18 Amortized cost $ 76,925 $ 202 $ – $ 77,127 $ 66,956 $ 193 $ – $ 67,149 (1) (2) Reflects $150 million of purchased credit impaired securities (October 31, 2021 – $150 million). Investment securities at FVOCI not subject to impairment represent equity securities designated as FVOCI. 174 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Note 5 Loans and allowance for credit losses Loans by geography and portfolio net of allowance (Millions of Canadian dollars) Retail (2) Residential mortgages Personal Credit cards (3) Small business (4) Wholesale (2), (5) Total loans As at October 31, 2022 Canada United States Other International Allowance for loan losses (1) Total net of allowance Total $ 383,797 $ 31,956 $ 79,422 19,778 12,669 108,916 14,888 558 – 114,795 3,043 $418,796 $ 3,399 241 – 97,709 20,577 12,669 50,256 273,967 (432) $ (856) (849) (181) (1,435) 418,364 96,853 19,728 12,488 272,532 $ 604,582 $ 162,197 $ 56,939 $823,718 $ (3,753) $ 819,965 Undrawn loan commitments – Retail Undrawn loan commitments – Wholesale 258,115 118,928 4,630 225,113 2,212 264,957 81,194 425,235 (243) (135) (Millions of Canadian dollars) Retail (2) Residential mortgages Personal Credit cards (3) Small business (4) Wholesale (2), (5) Total loans Canada United States Other International Total Allowance for loan losses (1) Total net of allowance As at October 31, 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) Excludes allowance for loans measured at FVOCI of $5 million (October 31, 2021 – $14 million). (1) (2) Geographic information is based on residence of the borrower. (3) (4) (5) The credit cards business is managed as a single portfolio and includes both consumer and business cards. Includes small business exposure managed on a pooled basis. Includes small business exposure managed on an individual client basis. Loans maturity and rate sensitivity (Millions of Canadian dollars) Retail Wholesale Total loans Allowance for loan losses Maturity term (1) Rate sensitivity As at October 31, 2022 Under 1 year (2) 1 to 5 years Over 5 years Total Floating Fixed Rate Non-rate- sensitive Total $ 277,302 $ 226,793 $ 45,656 $ 549,751 $ 199,414 $ 342,087 $ 8,250 $ 549,751 2,184 273,967 46,660 225,123 35,802 11,352 273,967 226,813 $ 504,115 $ 262,595 $ 57,008 $ 823,718 $ 246,074 $ 567,210 $ 10,434 $ 823,718 (3,753) (3,753) Total loans net of allowance for loan losses $ 819,965 $ 819,965 (Millions of Canadian dollars) Retail Wholesale Total loans Allowance for loan losses Total loans net of allowance for loan losses (1) Generally, based on the earlier of contractual repricing or maturity date. (2) Includes variable rate loans that can be repriced at the clients’ discretion without penalty. 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 $ 174,345 33,882 9,839 218,066 36,143 179,588 $ 423,708 $ 256,290 $ 41,666 $ 721,664 $ 203,053 $ 508,773 $ 7,503 $ 503,598 218,066 2,335 9,838 $ 721,664 (4,089) $ 717,575 (4,089) $ 717,575 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 175 Note 5 Loans and allowance for credit losses (continued) Allowance for credit losses (Millions of Canadian dollars) Retail Residential mortgages Personal Credit cards Small business Wholesale Customers’ liability under acceptances October 31, 2022 October 31, 2021 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 $ 416 $ 27 $ 1,079 875 177 1,797 211 348 31 (90) (24) $ (248) (332) (23) (136) 13 $ 432 $ 1 1,043 893 2 194 9 3 1,574 518 $ 1,309 1,246 140 2,795 (43) $ 23 (72) 12 (27) $ (247) (297) (23) (32) $ 416 (6) 1,079 875 (2) 177 48 (560) (200) (238) 1,797 75 (30) – – 45 107 (32) – – 75 $ 4,419 $ 497 $ (763) $ 28 $4,181 $ 6,115 $ (672) $ (794) $ (230) $ 4,419 Presented as: Allowance for loan losses Other liabilities – Provisions Customers’ liability under acceptances Other components of equity $ 4,089 241 75 14 $3,753 $ 5,639 363 378 45 5 107 6 $ 4,089 241 75 14 (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, 2022 that are no longer subject to enforcement activity was $53 million (October 31, 2021 – $93 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. 176 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Allowance for credit losses – Retail and wholesale loans October 31, 2022 October 31, 2021 Performing Impaired Performing Impaired For the year ended (Millions of Canadian dollars) Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Residential mortgages Balance at beginning of period Provision for credit losses Model changes Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Originations Maturities Changes in risk, parameters and exposures Write-offs Recoveries Exchange rate and other Balance at end of period Personal Balance at beginning of period Provision for credit losses Model changes Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Originations Maturities Changes in risk, parameters and exposures Write-offs Recoveries Exchange rate and other Balance at end of period Credit cards Balance at beginning of period Provision for credit losses Model changes Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Originations Maturities Changes in risk, parameters and exposures Write-offs Recoveries Exchange rate and other Balance at end of period Small business Balance at beginning of period Provision for credit losses Model changes Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Originations Maturities Changes in risk, parameters and exposures Write-offs Recoveries Exchange rate and other Balance at end of period Wholesale Balance at beginning of period Provision for credit losses Model changes Transfers to stage 1 Transfers to stage 2 Transfers to stage 3 Originations Maturities Changes in risk, parameters and exposures Write-offs Recoveries Exchange rate and other $ 186 $ 92 $ 138 $ 416 $ 206 $ 160 $ 152 $ 518 $ $ $ $ $ $ $ $ (21) 113 (14) (2) 159 (23) (167) – – 4 10 (98) 23 (25) – (9) 68 – – 4 – (15) (9) 27 – – 10 (38) 14 5 (11) – – – 159 (32) (89) (38) 14 13 (6) 205 (14) (2) 113 (30) (284) – – (2) (5) (182) 18 (44) – (24) 178 – – (9) – (23) (4) 46 – – 15 (37) 10 (21) 235 $ 65 $ 132 $ 432 $ 186 $ 92 $ 138 $ (11) – – – 113 (54) (91) (37) 10 (32) 416 422 $ 569 $ 88 $ 1,079 $ 480 $ 733 $ 96 $ 1,309 (3) 609 (120) (2) 106 (70) (660) – – 3 – (607) 121 (47) – (99) 724 – – – – (2) (1) 49 – – 213 (374) 126 (2) (3) – – – 106 (169) 277 (374) 126 1 (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) 285 $ 661 $ 97 $ 1,043 $ 422 $ 569 $ 88 $ 1,079 233 $ 642 $ – $ 875 $ 364 $ 882 $ – $ 1,246 (2) 495 (95) (2) 10 (5) (458) – – 1 – (495) 95 (325) – (29) 826 – – 2 – – – 327 – – 6 (503) 171 (1) (2) – – – 10 (34) 374 (503) 171 2 – 723 (105) (4) 6 (7) (742) – – (2) – (723) 105 (309) – (31) 719 – – (1) – – – 313 – – (17) (460) 163 1 177 $ 716 $ – $ 893 $ 233 $ 642 $ – $ – – – – 6 (38) (40) (460) 163 (2) 875 88 $ 55 $ 34 $ 177 $ 78 $ 29 $ 33 $ 140 – 27 (17) (1) 32 (22) (43) – – 9 – (27) 17 (4) – (24) 50 – – 6 – – – 5 – – 38 (32) 9 (6) – – – – 32 (46) 45 (32) 9 9 3 57 (11) (1) 36 (21) (77) – – 24 1 (57) 11 (2) – (22) 64 – – 31 – – – 3 – – 28 (32) 9 (7) 73 $ 73 $ 48 $ 194 $ 88 $ 55 $ 34 $ 4 – – – 36 (43) 15 (32) 9 48 177 566 $ 794 $ 437 $ 1,797 $ 995 $ 1,132 $ 668 $ 2,795 (14) 415 (78) (3) 641 (439) (504) – – 13 (3) (411) 80 (62) – (345) 503 – – 29 – (4) (2) 65 – – 71 (202) 66 (39) (17) – – – 641 (784) 70 (202) 66 3 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) Balance at end of period $ 597 $ 585 $ 392 $ 1,574 $ 566 $ 794 $ 437 $ 1,797 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 177 Note 5 Loans and allowance for credit losses (continued) Key inputs and assumptions The measurement of expected credit losses is a complex calculation that involves a large number of interrelated inputs and assumptions and the allowance is not sensitive to any one single factor alone. The key drivers of changes in expected credit losses include the following: (cid:129) Changes in the credit quality of the borrower or instrument, primarily reflected in changes in internal risk ratings; (cid:129) Changes in forward-looking macroeconomic conditions, specifically the macroeconomic variables to which our models are calibrated, which are those most closely correlated with credit losses in the relevant portfolio; (cid:129) Changes in scenario design and the weights assigned to each scenario; and (cid:129) Transfers between stages, which can be triggered by changes to any of the above inputs. 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 as well as in the measurement of our weighted allowance for credit losses due to uncertainty related to the pace and level of deterioration in economic forecasts. 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. 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 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 relevant macroeconomic variable. 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. 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. We reassessed our scenario weights to increase weight to the downside scenarios relative to October 31, 2021 in order to reflect the uncertainty and downside risk of deeper recessions than contemplated in our base scenario. The impact of weighting these multiple scenarios increased our ACL on performing loans, relative to our base scenario, by $738 million at October 31, 2022 (October 31, 2021 – $726 million). 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, 2022. Subsequent changes to this forecast and related estimates will be reflected in our allowance for credit losses in future periods. Our base scenario reflects rising unemployment rates, high inflation, production capacity limits, supply chain pressures, and increased expectations for central banks to continue increasing interest rates which results in moderate recessions expected in Canada and the U.S. in calendar 2023. Our base scenario also reflects declining housing prices in Canada. Downside scenarios, including two additional and more severe downside scenarios designed for the energy and real estate sectors, reflect the possibility of a more severe macroeconomic shock beginning in calendar Q1 2023 relative to our base scenario. Conditions are expected to deteriorate from calendar Q4 2022 levels for up to 18 months, followed by a recovery for the remainder of the period. These scenarios assume monetary policy responses that return the economy to a long-run, sustainable growth rate within the forecast period. The possibility of a deeper recession and a more prolonged recovery as compared to our base scenario, including further monetary policy responses to elevated inflation rates which may increase credit risk, is reflected in our general downside scenario. The upside scenario reflects slightly stronger economic growth than the base scenario, without prompting a further offsetting monetary policy response as compared to our base scenario, followed by a return to a long-run sustainable growth rate within the forecast period. 178 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 2.5 2.4 2.3 2.2 2.1 2.0 1.9 The following provides additional detail about our calendar quarter forecasts for certain key macroeconomic variables used in the models to estimate ACL: (cid:129) Unemployment – In our base forecast, calendar Q4 2022 unemployment rates are expected to rise to 5.6% in Canada and 3.9% in the U.S., peaking by Q4 2023 at 6.8% in Canada and 5.1% in the U.S., and reverting to the long run equilibrium towards the latter end of the forecast horizon. Canada Unemployment Rate (1) U.S. Unemployment Rate (1) % 11 9 7 5 3 Q 1-2022 Q 4-2021 Q 2-2022 Q 3-2022 Q 4-2022 Q 1-2023 Q 2-2023 Q 3-2023 Q 1-2024 Q 4-2023 Q 2-2024 Q 3-2024 Q 1-2025 Q 4-2024 Q 2-2025 Q 3-2025 Q 1-2026 Q 4-2025 Q 2-2026 Q 3-2026 Q 4-2026 Q 1-2027 Q 2-2027 Q 3-2027 % 10 8 6 4 2 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 Q 4-2026 Q 1-2027 Q 2-2027 Q 3-2027 Range of alternative scenarios (October 31, 2022) Base scenario (October 31, 2022) Range of alternative scenarios (October 31, 2022) Base scenario (October 31, 2022) Base scenario (October 31, 2021) Base scenario (October 31, 2021) (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 and U.S GDP growth to slow and for both regions to experience moderate recessions during the first half of calendar 2023. GDP in calendar Q4 2023 is expected to be 0.2% below Q4 2022 levels in Canada, and 0.4% below such levels in the U.S. Canada Real GDP (1) Trillions of Canadian dollars 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 18.0 Q 4-2021 Q 1-2022 Q 2-2022 Q 3-2022 Q 4-2022 Q 2-2023 Q 1-2023 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 Q 4-2026 Q 1-2027 Q 2-2027 Q 3-2027 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 Q 4-2026 Q 1-2027 Q 2-2027 Q 3-2027 Range of alternative scenarios (October 31, 2022) Base scenario (October 31, 2022) Range of alternative scenarios (October 31, 2022) Base scenario (October 31, 2022) Base scenario (October 31, 2021) Base scenario (October 31, 2021) (1) Represents the seasonally adjusted annual rate indexed to 2012 Canadian dollars 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 $88 per barrel over the next 12 months from calendar Q4 2022 and $72 per barrel in the following 2 to 5 years. The range of average prices in our alternative downside and upside scenarios is $29 to $114 per barrel for the next 12 months and $42 to $77 per barrel for the following 2 to 5 years. As at October 31, 2021, our base forecast included an average price of $71 per barrel for the next 12 months and $56 per barrel for the following 2 to 5 years. (cid:129) Canadian housing price index – In our base forecast, we expect housing prices to decrease by (1.0)% over the next 12 months from calendar Q4 2022, with a compound annual growth rate of 5.2% 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 (30.0)% to 10.9% over the next 12 months and 4.2% to 9.5% for the following 2 to 5 years. As at October 31, 2021 our base forecast included housing price growth of 0.1% from calendar Q4 2021 for the next 12 months and 4.1% for the following 2 to 5 years. The primary variables driving credit losses in our retail portfolios are Canadian unemployment rates, Canadian housing price index and Canadian GDP. 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 credit spreads, Canadian and U.S. 10 year government bond yields, U.S. 10 year BBB corporate bond yield, Canadian consumer confidence index, Canadian and U.S. commercial real estate price indices, U.S. housing price index, and natural gas prices (Henry Hub). 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 credit spreads, Canadian and U.S. 10 year government bond yields, and U.S. 10 year BBB corporate bond yield. 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, and oil and natural gas prices. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 179 Note 5 Loans and allowance for credit losses (continued) Transfers between stages Transfers between Stage 1 and Stage 2 are based on the assessment of significant increases in credit risk relative to initial recognition, as described in Note 2. The impact of moving from 12 months expected credit losses to lifetime expected credit losses, or vice versa, varies by product and is dependent on the expected remaining life at the date of the transfer. Stage transfers may result in significant fluctuations in expected credit losses. The following table illustrates the impact of staging on our ACL by comparing our allowance if all performing loans were in Stage 1 to the actual ACL recorded on these assets. October 31, 2022 October 31, 2021 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) $ 2,373 $ 1,094 $ 3,467 $ 2,521 $ 1,125 $ 3,646 (1) Represents loans and commitments in Stage 1 and Stage 2. 180 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Credit risk exposure by internal risk rating The following table presents the gross carrying amount of loans measured at amortized cost, and the full contractual amount of undrawn loan commitments subject to the impairment requirements of IFRS 9. Risk ratings are based on internal ratings used in the measurement of expected credit losses as at the reporting date, as outlined in the internal ratings maps for Wholesale and Retail facilities in the Credit risk section of Management’s Discussion and Analysis. (Millions of Canadian dollars) Stage 1 Stage 2 Stage 3 (1) Total Stage 1 Stage 2 Stage 3 (1) Total October 31, 2022 October 31, 2021 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 $ 340,716 $ 2,573 $ 15,035 1,188 51,915 – 408,854 1,932 3,125 1,304 – 8,934 $ 73,339 $ 2,575 $ 5,482 836 9,733 – 3,780 1,660 104 – – $ 343,289 $ 310,334 $ 1,507 $ – – – 560 16,967 4,313 53,219 560 15,152 3,343 45,512 – 2,051 634 913 – – $ 311,841 17,203 – 3,977 – 46,425 – 645 645 560 418,348 374,341 5,105 645 380,091 448 $ 418,796 241 $ 380,332 – $ 75,914 $ 72,267 $ – – – 200 9,262 2,496 9,837 200 4,974 687 8,934 – 698 $ 4,551 1,045 88 – – $ 72,965 9,525 – 1,732 – 9,022 – 197 197 Total $ 89,390 $ 8,119 $ 200 $ 97,709 $ 86,862 $ 6,382 $ 197 $ 93,441 Loans outstanding – Credit cards Low risk Medium risk High risk Not rated (2) $ 15,088 $ 83 $ 1,418 39 751 1,911 1,255 32 – $ 15,171 $ 12,864 $ – – – 3,329 1,294 783 1,646 136 527 24 $ 1,645 937 43 – $ 12,888 3,291 – 1,073 – 570 – Total $ 17,296 $ 3,281 $ – $ 20,577 $ 15,173 $ 2,649 $ – $ 17,822 Loans outstanding – Small business Low risk Medium risk High risk Not rated (2) Impaired $ 8,571 $ 1,512 102 3 – 838 $ 1,130 375 – – – $ – – – 138 9,409 $ 2,642 477 3 138 8,609 $ 1,583 227 4 – 274 $ 979 218 – – – $ – – – 109 8,883 2,562 445 4 109 Total $ 10,188 $ 2,343 $ 138 $ 12,669 $ 10,423 $ 1,471 $ 109 $ 12,003 Undrawn loan commitments – Retail Low risk Medium risk High risk Not rated (2) $ 247,620 $ 1,041 $ 9,021 876 5,668 246 367 118 – $ 248,661 $ 229,516 $ – – – 9,267 1,243 5,786 9,475 1,205 4,854 574 $ 133 97 90 – $ 230,090 9,608 – 1,302 – 4,944 – Total $ 263,185 $ 1,772 $ – $ 264,957 $ 245,050 $ 894 $ – $ 245,944 Wholesale – Loans outstanding Investment grade Non-investment grade Not rated (2) Impaired $ 88,513 $ 145,908 11,789 – 202 $ 15,758 360 – – $ 88,715 $ 62,975 $ – – 1,301 161,666 12,149 1,301 117,396 9,339 – 226 $ 15,146 430 – – $ 63,201 132,542 – 9,769 – 1,357 1,357 246,210 16,320 1,301 263,831 189,710 15,802 1,357 206,869 Items not subject to impairment (3) Total Undrawn loan commitments – Wholesale Investment grade Non-investment grade Not rated (2) Total 10,136 $ 273,967 $ 284,481 $ 126,225 3,692 179 $ 10,657 1 – $ 284,660 $ 246,539 $ 1,122 $ – – 136,882 3,693 108,063 3,476 12,377 1 11,197 $ 218,066 – $ 247,661 120,440 – 3,477 – $ 414,398 $ 10,837 $ – $ 425,235 $ 358,078 $ 13,500 $ – $ 371,578 (1) (2) (3) As at October 31, 2022, 88% of credit-impaired loans were either fully or partially collateralized (October 31, 2021 – 86%). For details on the types of collateral held against credit-impaired assets and our policies on collateral, refer to the Credit risk mitigation section of Management’s Discussion and Analysis. In certain cases where an internal risk rating is not assigned, we use other approved credit risk assessments or rating methodologies, policies and tools to manage our credit risk. Items not subject to impairment are loans held at FVTPL. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 181 Note 5 Loans and allowance for credit losses (continued) Loans past due but not impaired (1), (2) (Millions of Canadian dollars) Retail Wholesale October 31, 2022 October 31, 2021 As at 30 to 89 days 90 days and greater Total 30 to 89 days 90 days and greater Total $ $ 1,328 $ 1,279 2,607 $ 168 $ 1,496 $ 2 1,281 170 $ 2,777 $ 1,105 $ 1,230 2,335 $ 137 $ 1,242 1,230 – 137 $ 2,472 (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. Amounts presented may include loans past due as a result of administrative processes, such as mortgage loans on which payments are restrained pending payout due to sale or refinancing. Past due loans arising from administrative processes are not representative of the borrowers’ ability to meet their payment obligations. Note 6 Significant acquisition Wealth Management On September 27, 2022, we completed the acquisition of 100% of the issued share capital of Brewin Dolphin Holdings PLC (Brewin Dolphin) via our subsidiary, RBC Wealth Management (Jersey) Holdings Limited. Brewin Dolphin provides discretionary wealth management services in the U.K., Ireland and the Channel Islands. Brewin Dolphin’s business gives us a platform to significantly transform our wealth management business in the U.K., Ireland and the Channel Islands, and provides us with the opportunity to position the combined businesses as a premier integrated wealth management provider to private and institutional clients. Total consideration of £1,591 million ($2,341 million) as of the date of close consisted of £1,564 million ($2,302 million) in cash, as well as amounts related to share based compensation. Based on the estimated fair values, our preliminary purchase price allocation assigns $3,279 million to assets and $938 million to liabilities, including customer relationship intangible assets of $1,292 million and goodwill of $913 million, which is allocated to our International Wealth Management and Global Asset Management CGUs and is not deductible for tax purposes. Goodwill reflects the expected synergies from the combined businesses and the expected growth of the Wealth Management segment. The estimates for the fair values of the assets acquired and liabilities assumed may be retroactively adjusted to reflect new information obtained about facts and circumstances that existed as at the acquisition date during the measurement period. The results of the acquisition have been consolidated from the date of close and included in our Wealth Management segment. Note 7 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 participated in government relief programs in Canada and in the U.S. Under the Canadian Emergency Business Account program, we 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 (CMHC) or a third-party insurer. We require the borrower to pay for mortgage insurance when the loan amount is greater than 80% of the original appraised value of the property (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 2022 and 2021. We sell the NHA MBS pools primarily to Canada Housing Trust, 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 182 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements counterparty in interest rate swap agreements where we pay the entity the interest due to CMB investors and receive the interest on the underlying MBS and reinvested assets. As part of the swaps, we are also required to maintain a principal reinvestment account for principal payments received on the underlying mortgage loans to meet the repayment obligation upon maturity of the CMB. We reinvest the collected principal payments in permitted investments as outlined in the swap agreements. We have determined that certain of the NHA MBS program loans transferred to the entity do not qualify for derecognition as we have not transferred substantially all of the risks and rewards of ownership. As a result, these transferred MBS continue to be classified as residential mortgage loans and recognized on our Consolidated Balance Sheets. The cash received for these transferred MBS is treated as a secured borrowing and a corresponding liability is recorded in Deposits – Business and government on our Consolidated Balance Sheets. Securities sold under repurchase agreements and securities loaned We also enter into transactions such as repurchase agreements and securities lending agreements where we transfer assets under agreements to repurchase them at a future date and retain substantially all of the risks and rewards associated with the assets. These transferred assets remain on our Consolidated Balance Sheets and are accounted for as collateralized borrowing transactions. The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for derecognition, and their associated liabilities. October 31, 2022 October 31, 2021 As at (Millions of Canadian dollars) Carrying amount of transferred assets that do not qualify for derecognition Carrying amount of associated Canadian residential mortgage loans (1), (2) Securities sold under repurchase agreements (3) Securities loaned (3) Canadian residential mortgage loans (1), (2) Securities sold under repurchase agreements (3) Total Securities loaned (3) Total $ 32,812 $ 258,615 $ 15,332 $ 306,759 $ 34,052 $ 252,920 $ 9,281 $ 296,253 liabilities 32,177 258,615 15,332 306,124 33,769 252,920 9,281 295,970 Fair value of transferred assets $ 31,174 $ Fair value of associated 258,615 $ 15,332 $ 305,121 $ 34,142 $ 252,920 $ 9,281 $ 296,343 liabilities 30,900 258,615 15,332 304,847 34,073 252,920 9,281 296,274 Fair value of net position $ 274 $ – $ – $ 274 $ 69 $ – $ – $ 69 (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 8 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 clients. 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 an expected 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, 2022, $1,826 million of financial assets held by the conduit was included in Loans (October 31, 2021 – $1,076 million) and $1,284 million of ABCP issued by the conduit was included in Deposits (October 31, 2021 – $665 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 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 183 Note 8 Structured entities (continued) 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 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, 2022, $6 billion of notes issued by our credit card securitization vehicle were included in Deposits on our Consolidated Balance Sheets (October 31, 2021 – $3 billion). Collateralized commercial paper vehicle We established a funding vehicle that provides loans to us and finances those loans by issuing commercial paper to third-party investors. The structured entity’s commercial paper carries an equivalent credit rating to RBC because we are obligated to advance funds to the entity in the event there are insufficient funds from other sources to settle maturing commercial paper. We pledge collateral to secure the loans and are exposed to the market and 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, 2022, $14 billion of commercial paper issued by the vehicle was included in Deposits on our Consolidated Balance Sheets (October 31, 2021 – $13 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, 2022, the total amount of mortgages transferred and outstanding was $121 billion (October 31, 2021 – $80 billion) and $43 billion of covered bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2021 – $37 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, 2022, $6 billion of municipal bonds were included in Investment securities related to consolidated TOB structures (October 31, 2021 – $7 billion) and a corresponding $7 billion of floating-rate certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2021 – $7 billion). RBC managed investment funds We are sponsors and investment managers of mutual and pooled funds, which give us the ability to direct the investment decisions of the funds. We consolidate those mutual and pooled funds in which our interests, which include direct investment in seed capital plus management or performance fees, indicate that we are acting as a principal. As at October 31, 2022, $524 million of Trading securities held in the consolidated funds (October 31, 2021 – $514 million) and $363 million of Other liabilities representing the fund units held by third parties (October 31, 2021 – $365 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. 184 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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 Multi-seller conduits (1) Structured finance As at October 31, 2022 Non-RBC managed investment funds Third-party securitization vehicles Other Total $ $ $ $ 255 $ – 25 – – $ 3,089 $ – $ 595 $ 5,334 – 6 – – – 8,494 – – 2,487 100 568 3,939 16,315 125 574 280 $ 5,340 $ 3,089 $ 8,494 $ 3,750 $ 20,953 171 $ 171 $ – $ – $ – $ – $ – $ – $ – $ – $ 171 171 Maximum exposure to loss (2) $ 48,260 $ 8,658 $ 3,758 $ 14,339 $ 5,523 $ 80,538 Total assets of unconsolidated structured entities $ 47,289 $ 26,543 $ 548,320 $ 64,361 $ 554,573 $ 1,241,086 (Millions of Canadian dollars) On-balance sheet assets Securities Loans Derivatives Other assets On-balance sheet liabilities Derivatives Maximum exposure to loss (2) 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 29 $ 4,596 $ 3,047 $ 6,855 $ 2,461 $ 93 $ 93 $ – $ – $ – $ – $ – $ – $ – $ – $ 3,596 12,877 125 390 16,988 93 93 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 (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 $32 billion as at October 31, 2022 (October 31, 2021 – $25 billion). The maximum exposure to loss resulting from our interests in these entities consists mostly of investments, loans, fair value of derivatives, liquidity and credit enhancement facilities. The maximum exposure to loss of the multi-seller conduits is higher than the on-balance sheet assets primarily because of the notional amounts of the backstop liquidity and credit enhancement facilities. Refer to Note 24. Below is a description of our involvement with each significant class of unconsolidated structured entity. Multi-seller conduits We administer multi-seller ABCP conduit programs. Multi-seller conduits primarily purchase financial assets from clients and finance those purchases by issuing ABCP. In certain multi-seller conduit arrangements, we do not maintain any ownership of the multi-seller conduits that we administer and have no rights to, or control of, its assets. As the administrative agent, we earn a residual fee for providing services such as coordinating funding activities, transaction structuring, documentation, execution and monitoring. The ABCP issued by each multi-seller conduit is in the conduit’s own name with recourse to the financial assets owned by the multi-seller conduit, and is non-recourse to us except through our participation in liquidity and/or credit enhancement facilities. We provide transaction-specific and program-wide liquidity facilities to the multi-seller conduits. In addition, we provide program-wide credit enhancement to the multi-seller conduits which obligate us to purchase assets or advance funds in the event the multi-seller conduit does not otherwise have funds from other sources, such as from the liquidity facilities, to settle maturing ABCP. In some cases, we or another third party may provide transaction-specific credit enhancement which can take various forms. We receive market-based fees for providing these liquidity and credit facilities. For certain transactions, we act as counterparty to various hedging contracts to facilitate our clients’ securitization of fixed rate and/or foreign currency denominated assets through the conduits. These may take the form of forward contracts, interest rate swaps or cross currency swaps. These derivatives expose us to foreign exchange and interest rate risks that are centrally managed by our foreign exchange trading and swap desks, respectively, and credit risk on the underlying assets that is mitigated by the credit enhancement described below. Each transaction is structured with transaction-specific first loss protection provided by the third-party seller. This enhancement can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally designed to cover a multiple of historical losses. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 185 Note 8 Structured entities (continued) 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 unaffiliated structured entities that are established by third parties to acquire loans for the purposes of issuing a term collateralized loan obligation (CLO) transaction. Subordinated financing is provided during the warehouse phase by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs losses prior to ourselves as the senior lender. 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. Subordinated financing is provided by either the collateral manager or third-party investors. Subordinated financing serves as the first loss tranche which absorbs losses prior to ourselves as the senior lender. 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 reference funds, and we economically hedge our exposure to these derivatives by investing in those reference funds. We also act as custodian 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. 186 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 and 2021, 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, 2022, we transferred commercial mortgages with a carrying amount of $450 million (October 31, 2021 – $nil) 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, 2022 and 2021, we have not provided any financial or non-financial support to any consolidated or unconsolidated structured entities when we were not contractually obligated to do so. Furthermore, we have no intention to provide such support in the future. Note 9 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 187 Note 9 Derivative financial instruments and hedging activities (continued) Total return swaps are contracts where one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a referenced asset or group of assets, including any returns such as interest earned on these assets, in exchange for amounts that are based on prevailing market funding rates. Other derivative products Other contracts are stable value and equity derivative contracts. Non-financial derivatives Other contracts also include non-financial derivative products such as precious metal and commodity derivative contracts in both the OTC and exchange markets. Derivatives issued for trading purposes Most of our derivative transactions relate to client-driven sales and trading activities, and associated market risk hedging. Sales activities include the structuring and marketing of derivative products to clients, enabling them to modify or reduce risks. Trading involves market-making, positioning and arbitrage activities. Market-making involves quoting bid and offer prices to other market participants with the intention of generating revenue based on spread and volume. Positioning involves the active management of derivative transactions with the expectation of profiting from favourable movements in prices, rates, or indices. Arbitrage activities involve identifying and profiting from price differentials between markets and product types. Any realized and unrealized gains or losses on derivatives used for trading purposes are recognized immediately in Non-interest income – Trading revenue. Derivatives issued for other-than-trading purposes We also use derivatives for purposes other than trading, primarily for hedging, in conjunction with the management of interest rate, credit, equity and foreign exchange risk related to our funding, lending, investment activities and asset/liability management. Interest rate swaps are used to manage our exposure to interest rate risk by modifying the repricing or maturity characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. Purchased options are used to hedge redeemable deposits and other options embedded in consumer products. We manage our exposure to foreign currency risk with cross currency swaps and foreign exchange forward contracts. We predominantly use credit derivatives to manage our credit exposures. We mitigate industry sector concentrations and single-name exposures related to our credit portfolio by purchasing credit derivatives to transfer credit risk to third parties. Certain derivatives and cash instruments are specifically designated and qualify for hedge accounting. From time to time, we also enter into derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge accounting, or where hedge accounting is not considered economically feasible to implement. In such circumstances, changes in fair value are reflected in Other income in Non-interest income. 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 As at October 31, 2022 Term to maturity Within 1 year 1 through 5 years Over 5 years Total Trading Other than Trading $ 763,398 $ 4,994,006 100,504 108,770 2,187,124 87,942 518,244 58,075 62,266 1,143 228,709 148,032 233,941 56,353 16,394 164 539,103 353 $ 44,188 $ 1,363 6,934,996 4,781,148 16,710,150 16,001,414 708,736 – – 829,368 848,263 829,368 848,263 151,084 182,841 577,780 556,652 807,939 $ 806,576 $ 86,136 67,345 1,572,490 18,061 16,623 35,621 93,431 2,648 82,659 879,541 3,199 3,274 6,751 19,392 2,275,908 237,946 2,970,275 79,335 82,163 43,515 341,532 2,230,901 233,617 2,918,063 79,335 82,163 42,785 327,860 45,007 4,329 52,212 – – 730 13,672 50,869 98,763 12,173 6,168 – 89,147 – 65 – – 198,901 332,769 68,526 22,562 197,251 332,320 68,526 22,562 – 2,094 164 630,344 164 630,344 1,650 449 – – – – $10,104,168 $10,260,443 $6,115,049 $26,479,660 $25,651,512 $ 828,148 188 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements (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 $ 158 $ 1,028,697 $ 1,015,263 $ 3,936,638 266,798 271,000 6,559,032 312,149 309,540 4,268,243 185,547 203,665 14,763,913 764,494 784,205 14,259,757 764,494 784,205 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 13,434 504,156 – – 36,463 8,359 32,675 – – 483 12,651 2,860 400 – – – – (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, 2021 – $1 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $26 billion (October 31, 2021 – $25 billion) and protection sold of $17 billion (October 31, 2021 – $17 billion). (3) Other contracts exclude loan underwriting commitments of $6 billion (October 31, 2021 – $9 billion), which are not classified as derivatives under CAR guidelines. $ 8,637,171 $ 9,163,667 $ 5,543,665 $ 23,344,503 $ 22,733,022 $ 611,481 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, 2022 October 31, 2021 Positive Negative Positive Negative $ 77 $ 25,690 12,056 – 37,823 37,734 8,680 49,758 2,623 – 98,795 388 18,474 155,480 25 $ 21,608 – 12,201 33,834 37,631 9,087 38,230 – 2,571 87,519 125 21,084 142,562 10 $ 28,400 4,580 – 32,990 11,404 4,469 23,208 1,021 – 40,102 34 20,827 93,953 11 23,136 – 5,258 28,405 11,515 4,929 22,382 – 978 39,804 115 21,253 89,577 2,244 2,244 6,880 6,880 1,187 1,187 1,116 1,116 268 – 374 642 – 313 3,199 158,679 (2,055) (2,185) 260 – 447 707 5 321 2,149 91,726 27 (314) $ 154,439 $ 153,491 $ 95,541 $ 91,439 237 22 6,677 6,936 – 273 14,089 156,651 (975) (2,185) 305 32 859 1,196 – 329 2,712 96,665 (810) (314) (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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 189 Note 9 Derivative financial instruments and hedging activities (continued) Fair value of derivative instruments by term to maturity (1) October 31, 2022 October 31, 2021 As at (Millions of Canadian dollars) Derivative assets Derivative liabilities Less than 1 year 1 through 5 years Over 5 years Total Total $ 56,050 56,792 41,597 $ 154,439 $ 27,771 28,029 39,741 $ 95,541 91,439 26,766 27,938 36,735 58,504 54,361 40,626 153,491 Less than 1 year 1 through 5 years Over 5 years (1) The fair value reflects the impact of the election to characterize the daily variation margin as settlement of the related derivative fair values as permitted by certain central counterparties. 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 CDOR Total Return Swaps CDOR Non-derivative instruments USD LIBOR As at October 31, 2022 October 31, 2021 Notional/Principal amounts Notional/Principal amounts $ 40,208 $ – 114,159 801 237 38,730 290 76,931 390 215 $ 155,405 $ 116,556 (1) Excludes interest rate contracts and non-derivative instruments which reference rates in multi-rate jurisdictions, including EURO Interbank Offered Rate and Australian Bank Bill Swap Rate (BBSW). Derivative-related credit risk Credit risk from derivative transactions is generated by the potential for the counterparty to default on its contractual obligations when one or more transactions have a positive market value to us. Therefore, derivative-related credit risk is represented by the positive fair value of the instrument and is normally a small fraction of the contract’s notional amount. We subject our derivative transactions to the same credit approval, limit and monitoring standards that we use for managing other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and managing the size, diversification and maturity structure of the portfolio. Credit utilization for all products is compared with established limits on a continual basis and is subject to a standard exception reporting process. We use a single internal rating system for all credit risk exposure, as outlined in the internal ratings maps in the Credit risk section of Management’s Discussion and Analysis. Offsetting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of master netting agreements and achieved when specific criteria are met in accordance with our accounting policy in Note 2. A master netting agreement provides for a single net settlement of all financial instruments covered by the agreement in the event of default. However, credit risk is reduced only to the extent that our financial obligations to the same counterparty can be set off against obligations of the counterparty to us. We maximize the use of master netting agreements to reduce derivative-related credit exposure. Our overall exposure to credit risk that is reduced through master netting agreements may change substantially following the reporting date as the exposure is affected by each transaction subject to the agreement as well as by changes in underlying market rates. Measurement of our credit exposure arising out of derivative transactions is reduced to reflect the effects of netting in cases where the enforceability of that netting is supported by appropriate legal analysis as documented in our trading credit risk policies. The use of collateral is another significant credit mitigation technique for managing derivative-related counterparty credit risk. Mark-to-market provisions in our agreements with some counterparties, typically in the form of a Credit Support Annex, provide us with the right to request that the counterparty pay down or collateralize the current market value of its derivatives positions when the value exceeds a specified threshold amount. Replacement cost and credit equivalent amounts are determined in accordance with OSFI’s non-modelled regulatory SA-CCR under the CAR guidelines. The replacement cost represents the total fair value of all outstanding contracts in a gain position after factoring in the master netting agreements and applicable margins, scaled by a regulatory factor. The credit equivalent amount is defined as the replacement cost plus an additional amount for potential future credit exposure also scaled by a regulatory factor. The risk-weighted equivalent is determined by applying appropriate risk-weights to the credit equivalent amount, including those risk weights reflective of model approval under the internal ratings based approach. 190 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Derivative-related credit risk (1) (Millions of Canadian dollars) Over-the-counter contracts Interest rate contracts Forward rate agreements Swaps Options purchased Options written Foreign exchange contracts Forward contracts Swaps Options purchased Options written Credit derivatives Other contracts Exchange-traded contracts October 31, 2022 Credit equivalent amount Replacement cost Risk-weighted equivalent (2) Replacement cost October 31, 2021 Credit equivalent amount Risk-weighted equivalent (2) As at $ 46 $ 76 $ 5 $ 9 $ 64 $ 9,699 108 15 8,772 6,072 536 28 299 5,196 11,098 21,698 426 543 29,565 22,188 1,111 313 766 20,457 19,870 5,187 119 164 5,940 4,556 340 86 114 7,520 397 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 20 4,569 187 141 4,232 4,092 145 43 213 10,480 124 $ 41,869 $117,013 $ 24,428 $ 20,944 $ 88,391 $ 24,246 (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 $16 billion (October 31, 2021 – $18 billion). Replacement cost of derivative instruments by risk rating and by counterparty type Risk rating (1) Counterparty type (2) As at October 31, 2022 (Millions of Canadian dollars) Gross positive fair values Impact of master netting agreements and applicable margins Replacement cost (after netting agreements) AAA, AA A BBB BB or lower $ 39,001 $ 72,983 $ 29,690 $ Total 17,005 $ 158,679 $ 73,616 $ Banks Total Other 22,727 $ 62,336 $ 158,679 OECD governments 21,552 62,614 21,818 10,826 116,810 71,582 22,597 22,631 116,810 $ 17,449 $ 10,369 $ 7,872 $ 6,179 $ 41,869 $ 2,034 $ 130 $ 39,705 $ 41,869 Risk rating (1) Counterparty type (2) As at October 31, 2021 (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 $ 22,801 $ 37,938 $ 16,333 $ 19,593 $ 96,665 $ 42,361 $ 15,964 $ 38,340 $ 96,665 applicable margins 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 (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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 191 Note 9 Derivative financial instruments and hedging activities (continued) Below is a description of our risk management strategy for each risk exposure that we decide to hedge: Interest rate risk We use interest rate contracts to manage our exposure to interest rate risk by modifying the repricing characteristics of existing and/or forecasted assets and liabilities, including funding and investment activities. The swaps are designated in either a fair value hedge or a cash flow hedge and predominantly reference IBORs across multiple jurisdictions. Certain swaps will be affected by the Reform as the market transitions to ABRs. 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, 2022 Designated as hedging instruments in hedging relationships (Millions of Canadian dollars) Fair value Cash flow Net investment Assets As at October 31, 2021 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 $ 247 $ 57 $ 36 $ 154,099 $ 66 $ 9 $ 98 $ 95,368 Liabilities Derivative instruments Non-derivative instruments 27 – – – 126 25,798 153,338 n.a. 131 – 20 18 – 27,157 91,270 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 192 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 Notional amounts Carrying amount (1) Within 1 year 1 through 5 years Over 5 years Total Assets Liabilities $ 9,083 $ 32,173 $ 15,516 $ 56,772 $ 247 $ 10,094 92,744 69,419 13,231 – 3 24 1.1% 1.9% 2.5% 1.8% 2.8% 2.0% 2.3% 1.9% 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% (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-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-EUR exchange rate As at October 31, 2022 Notional amounts Carrying amount (1) Within 1 year 1 through 5 years Over 5 years Total Assets Liabilities $ 50,436 $ 74,726 $ 1,023 $ 126,185 $ 6,221 42,830 24,024 73,075 – $ – – – 3.3% 2.0% 2.8% 1.5% 2.5% 2.0% 3.0% 1.7% $ – $ n.a. 314 $ 1.44 – $ n.a. 314 $ 1.44 32 $ – 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 $ 16,659 55,556 13,784 90,123 $ 85,999 – $ – – – 0.5% 0.8% 1.0% 1.2% 1.2% 1.5% 0.7% 1.2% $ – $ n.a. 183 $ 1.52 – $ n.a. 183 $ 1.52 9 $ – (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 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 193 Note 9 Derivative financial instruments and hedging activities (continued) Net investment hedges (Millions of Canadian dollars, except average rates) Foreign exchange risk Foreign currency liabilities Weighted average CAD-USD exchange rate Weighted average CAD-EUR exchange rate Weighted average CAD-GBP exchange rate Forward contracts Weighted average CAD-USD exchange rate Weighted average CAD-EUR exchange rate Weighted average CAD-GBP exchange rate (Millions of Canadian dollars, except average rates) Foreign exchange risk Foreign currency liabilities Weighted average CAD-USD exchange rate Weighted average CAD-EUR exchange rate Weighted average CAD-GBP exchange rate Forward contracts Weighted average CAD-USD exchange rate Weighted average CAD-EUR exchange rate Weighted average CAD-GBP exchange rate n.a. not applicable As at October 31, 2022 Notional/Principal Carrying amount Within 1 year 1 through 5 years Over 5 years Total Assets Liabilities $ 5,462 $ 20,851 $ 1,025 $ 27,338 1.29 1.51 1.71 1.28 1.51 1.71 1.31 – – 1.28 1.48 – – $ 6,089 $ 36 $ n.a. $ 25,798 126 $ 6,089 $ 1.34 1.36 1.55 – $ n.a. n.a. n.a. n.a. n.a. n.a. 1.34 1.36 1.55 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. 401 $ 27,128 1.29 1.30 1.51 1.48 1.72 – 4,951 $ – $ 1.26 1.45 1.73 n.a. n.a. n.a. n.a. $ 27,157 98 $ 18 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, 2022 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) Securities – Investment, net of applicable allowance; Loans – Retail; $52,216 $ – $ (3,285) $ – Loans – Wholesale $ (3,695) – 86,738 – (5,924) Deposits – Business and government; Subordinated debentures Deposits – Bank 5,742 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; (1) As at October 31, 2022, the accumulated amount of fair value hedge adjustments remaining in the Balance Sheet for hedged items that have ceased to be adjusted for hedging gains and losses is a loss of $486 million for fixed-rate assets and a loss of $25 million for fixed-rate liabilities (October 31, 2021 – gain of $125 million and loss of $62 million, respectively). 194 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Cash flow and net investment hedges – assets and liabilities designated as hedged items 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; $ Interest bearing deposits with banks; Asset purchased under reverse repurchase agreements and securities borrowed Deposits – Business and government; Deposits – Personal; Obligations related to assets sold under repurchase agreements and securities loaned 4,720 $ (1,777) $ (2,668) (6,895) 5,471 2,231 Securities – Investment, net of applicable allowance (17) 7 – n.a. 1,927 (5,936) (421) Changes in fair values used for calculating hedge ineffectiveness Cash flow hedge/foreign currency translation reserve Continuing hedges Discontinued hedges Balance sheet items: Securities – Investment, net of applicable allowance; Loans – Retail $ Deposits – Business and government; Deposits – Personal Securities – Investment, net of applicable allowance; Loans – Retail 614 $ (402) $ 206 (2,641) 1,310 (399) (98) 1 – n.a. (2,331) (4,032) (421) (Millions of Canadian dollars) Cash flow hedges Interest rate risk Variable rate assets Variable rate liabilities Foreign exchange risk Fixed rate assets 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 Net investment hedges Foreign exchange risk Foreign subsidiaries n.a. not applicable Effectiveness of designated hedging relationships (Millions of Canadian dollars) Fair value hedges Interest rate risk For the year ended October 31, 2022 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 $ 3,650 $ (5,713) (45) 29 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 Net investment hedges Foreign exchange risk Foreign currency liabilities Forward contracts (4,698) 6,713 17 (1,771) (159) (36) $ 37 – (3) – (4,432) $ 6,673 23 (1,768) (159) n.a. n.a. (185) (118) 17 – (23) Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 195 Note 9 Derivative financial instruments and hedging activities (continued) (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. 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 Net investment hedges Foreign exchange risk Foreign currency liabilities Forward contracts (631) 2,579 98 1,882 449 (17) $ 9 (497) $ 1,949 – – – 98 1,882 449 n.a. n.a. 279 (1,024) 103 – 1 (1) Hedge ineffectiveness recognized in income included losses of $19 million that are excluded from the assessment of hedge effectiveness and are offset by economic hedges (October 31, 2021 – $101 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, 2022 For the year ended October 31, 2021 Cash flow hedge reserve Foreign currency translation reserve Cash flow hedge reserve $ 566 $ 2,055 $ (1,079) $ Foreign currency translation reserve 4,632 (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 Hedges 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 $ 2,241 23 (1) (227) (17) (23) 530 1,452 100 306 505 (105) (271) 240 (1,768) (159) 5,085 (18) 23 (698) 2,394 $ 470 5,688 $ (582) 566 $ 1,882 449 (4,308) (7) (1) (592) 2,055 196 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Note 10 Premises and equipment (Millions of Canadian dollars) Land Buildings For the year ended October 31, 2022 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 $ 145 $ 1,308 $ Additions Acquisition through business – – 1,126 $ 24 773 $ 3 2,754 $ 28 170 $ 5,394 $ 397 270 308 $ 11,978 860 138 combination Transfers from work in process Disposals Foreign exchange translation Other – – (10) 7 (1) – 15 (83) 24 (3) 4 195 (195) 17 (2) 1 49 (5) 15 – 6 206 (205) 67 (11) 1 (465) (1) 6 12 55 – (153) 58 124 – – (146) (1) – 67 – (798) 193 119 Balance at end of period $ 141 $ 1,261 $ 1,169 $ 836 $ 2,845 $ 120 $ 5,748 $ 299 $ 12,419 Accumulated depreciation Balance at beginning of period $ Depreciation Disposals Foreign exchange translation Other Balance at end of period $ Net carrying amount at end of – $ – – – – – $ 664 $ 48 (80) 11 (16) 627 $ 584 $ 234 (192) 12 2 640 $ 427 $ 94 (4) 6 2 525 $ 1,589 $ 233 (204) 38 – – $ 1,133 $ – – – – 569 (106) 2 45 157 $ 4,554 1,265 (732) 68 50 87 (146) (1) 17 1,656 $ – $ 1,643 $ 114 $ 5,205 period $ 141 $ 634 $ 529 $ 311 $ 1,189 $ 120 $ 4,105 $ 185 $ 7,214 (Millions of Canadian dollars) Land Buildings For the year ended October 31, 2021 Owned by the Bank (1), (2) Right–of–use lease assets Furniture, fixtures and other equipment Computer equipment Leasehold improvements Work in process Buildings Equipment (2) Total Cost Balance at beginning of period $ 152 $ Additions Acquisition through business 1 combination Transfers from work in process Disposals Foreign exchange translation Other – – (2) (6) – 1,310 $ – – 13 (24) (20) 29 1,150 $ 28 886 $ 6 2,675 $ 94 203 $ 388 5,171 $ 379 254 $ 11,801 1,005 109 – – – – – – – 180 (286) (27) 81 47 (65) (16) (85) 170 (106) (62) (17) (410) (1) (5) (5) – (49) (167) 60 – (56) 1 – – (589) (302) 63 Balance at end of period $ 145 $ 1,308 $ 1,126 $ 773 $ 2,754 $ 170 $ 5,394 $ 308 $ 11,978 Accumulated depreciation Balance at beginning of period $ Depreciation Disposals Foreign exchange translation Other Balance at end of period $ Net carrying amount at end of – $ – – – – – $ 648 $ 49 (12) (9) (12) 664 $ 580 $ 245 (284) (16) 59 584 $ 467 $ 94 (64) (7) (63) 427 $ 1,480 $ 222 (92) (31) 10 – $ – – – – 584 $ 578 (5) (24) – 108 $ 3,867 1,276 (497) (86) (6) 88 (40) 1 – 1,589 $ – $ 1,133 $ 157 $ 4,554 period $ 145 $ 644 $ 542 $ 346 $ 1,165 $ 170 $ 4,261 $ 151 $ 7,424 As at October 31, 2022, we had total contractual commitments of $185 million to purchase premises and equipment (October 31, 2021 – $162 million). (1) (2) Certain amounts have been revised from those previously presented. Lease payments Total lease payments for the year ended October 31, 2022 were $1,213 million, of which $578 million or 48% relates to variable payments and $635 million or 52% relates to fixed 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 variable lease payments not included in the measurement of lease liabilities were $571 million for the year ended October 31, 2022 (October 31, 2021 – $603 million). Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 197 Note 11 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, 2022 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 $ 1,600 $ 17 – – – – 159 577 $ – – 12 589 $ 1,964 $ 33 – (69) 2,768 $ – (19) 278 115 $ 880 – 47 112 $ – – – 148 $ 1,013 $ 10,854 930 – (19) – 512 86 – – (1) 1,928 $ 3,027 $ 1,042 $ 112 $ 147 $ 1,099 $ 12,277 Balance at end of period $ 2,574 $ 1,759 $ 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) 1,964 $ 2,768 $ 121 $ – (4) (2) 115 $ 112 $ – – – 112 $ 149 $ 1,078 $ 11,302 – – (7) – (441) (65) – – (1) 148 $ 1,013 $ 10,854 Balance at end of period $ 2,557 $ 1,600 $ 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. The impact of subsequent acquisitions has also been considered in our impairment test. In our 2022 and 2021 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). 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, 2022, 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. 198 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 August 1, 2021 Discount rate (1) Terminal growth rate Discount rate (1) Terminal growth rate 11.0% 12.6 11.8 11.8 12.8 n.m. 11.6 11.8 12.4 3.0% 3.5 3.0 3.0 3.0 n.m. 3.0 3.0 3.0 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 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 As at August 1, 2022, the recoverable amount of our Caribbean Banking CGU, based on FVLCD, was 109% of its carrying amount (August 1, 2021 – 123%). We calculated FVLCD using a discounted cash flow method that projects future cash flows over a 5-year period. Cash flows are based on management forecasts, adjusted to approximate the considerations of a prospective third-party buyer. Cash flows beyond the initial 5-year period are assumed to increase at a constant rate using a nominal long-term growth rate. Future cash flows, terminal growth rates, and discount rates are based on the same factors noted above. The forecast future cash flows were discounted using a pre-tax rate of 12.6% (August 1, 2021 – 10.9%), reflecting a higher interest rate environment. 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 is most sensitive to changes in future cash flows, discount rates and terminal growth rates. We considered reasonably possible alternative scenarios, including market comparable transactions, which yielded valuations ranging from an immaterial deficit to an immaterial surplus. The sensitivity of the FVLCD to key inputs and assumptions was tested by recalculating the recoverable amount using reasonably possible change to those parameters. A 50 bps change in the terminal growth rate would increase and decrease the recoverable amount by $231 million and $203 million, respectively. A 50 bps increase in the discount rate would decrease the recoverable amount by $267 million. A reduction in the forecasted cash flows of 10% per annum would reduce the recoverable amount by $440 million. If future cash flows were reduced by 8%, the recoverable amount would approximate the carrying amount. 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. Other intangible assets (Millions of Canadian dollars) Gross carrying amount Balance at beginning of period Additions Acquisition through business combination Transfers Dispositions Impairment losses Currency translations Other changes For the year ended October 31, 2022 Internally generated software Other software Core deposit intangibles Customer list and relationships In process software $ 4,886 $ 25 – 1,121 (960) (16) 71 (51) 894 $ 16 14 76 (111) – 48 (29) 1,474 $ – – – – – 149 7 1,414 $ – 1,292 – (329) – 113 (18) 1,236 $ 1,256 148 (1,197) (5) (11) 30 78 Total 9,904 1,297 1,454 – (1,405) (27) 411 (13) Balance at end of period $ 5,076 $ 908 $ 1,630 $ 2,472 $ 1,535 $ 11,621 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 $ (2,979) $ (976) 959 9 (36) (8) (572) $ (137) 109 – (31) 19 (885) $ (153) – – (98) (10) $ (3,031) $ (612) $ (1,146) $ (997) $ (103) 315 – 13 23 (749) $ – $ (5,433) (1,369) – 1,383 – – 9 (152) – 24 – – $ (5,538) $ 2,045 $ 296 $ 484 $ 1,723 $ 1,535 $ 6,083 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 199 Note 11 Goodwill and other intangible assets (continued) (Millions of Canadian dollars) Gross carrying amount Balance at beginning of period Additions Acquisition through business combination Transfers Dispositions Impairment losses Currency translations Other changes Balance at end of period Accumulated amortization Balance at beginning of period Amortization charge for the year Dispositions Impairment losses Currency translations Other changes Balance at end of period Net balance at end of period For the year ended October 31, 2021 Internally generated software (1) Other software (1) Core deposit intangibles Customer list and relationships (1) In process software Total 9,672 1,192 – – (495) (166) (308) 9 $ $ $ $ $ 4,321 $ 48 – 1,022 (258) (157) (83) (7) 1,031 $ 15 – 69 (186) – (43) 8 1,586 $ – – – – – (112) – 1,493 $ – – – (43) – (41) 5 1,241 $ 1,129 – (1,091) (8) (9) (29) 3 4,886 $ 894 $ 1,474 $ 1,414 $ 1,236 $ 9,904 (2,529) $ (898) 257 137 45 9 (630) $ (138) 185 – 24 (13) (793) $ (150) – – 58 – (2,979) $ (572) $ (885) $ (968) $ (101) 43 – 29 – (997) $ – $ – – – – – (4,920) (1,287) 485 137 156 (4) – $ (5,433) 1,907 $ 322 $ 589 $ 417 $ 1,236 $ 4,471 (1) Certain amounts have been revised from those previously presented. Note 12 Joint ventures and associated companies The following table summarizes the carrying value of our interests in joint ventures and associated companies accounted for under the equity method as well as our share of the income of those entities. Joint ventures Associated companies As at and for the year ended (Millions of Canadian dollars) Carrying amount Share of: Net income October 31 2022 248 $ $ October 31 October 31 2022 2021 223 $ 463 $ October 31 2021 431 $ 103 $ 107 $ 7 $ 23 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, 2022, restricted net assets of these subsidiaries, joint ventures and associates were $44 billion (October 31, 2021 – $39 billion). Note 13 Other assets (Millions of Canadian dollars) Accounts receivable and prepaids Accrued interest receivable Cash collateral Commodity trading receivables Deferred income tax asset Employee benefit assets Insurance-related assets Collateral loans Policy loans Reinsurance assets Other Investments in joint ventures and associates Margin deposits Precious metals Receivable from brokers, dealers and clients Taxes receivable Other 200 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements As at October 31 2022 October 31 2021 $ 4,250 $ 5,056 2,195 14,541 6,996 2,011 2,640 4,703 25,634 7,054 1,472 3,331 524 85 1,084 12 711 14,684 1,772 3,299 6,933 4,752 615 87 1,032 62 654 11,441 1,619 3,395 4,891 4,648 $ 80,300 $ 61,883 Note 14 Deposits (Millions of Canadian dollars) Personal Business and government Bank Non-interest-bearing (4) Canada United States Europe (5) Other International Interest-bearing (4) Canada United States Europe (5) Other International October 31, 2022 October 31, 2021 As at Demand (1) Notice (2) $ 203,645 $ 64,743 $ 136,544 $ 17,855 490 348,004 10,458 394,011 33,064 Term (3) Total Demand (1) Notice (2) Term (3) 404,932 $ 207,493 $ 64,613 $ 90,382 $ 759,870 44,012 319,533 28,992 356,020 12,549 20,800 449 Total 362,488 696,353 41,990 $ 562,107 $ 83,088 $ 563,619 $ 1,208,814 $ 576,062 $ 85,862 $ 438,907 $ 1,100,831 $ 149,737 $ 7,797 $ 52,702 620 7,840 – – – 466 $ – – – 158,000 $ 151,475 $ 8,051 $ 52,702 620 7,840 54,021 632 8,002 – – – 713 $ – – – 305,779 11,410 28,276 5,743 17,982 57,055 254 – 409,586 85,111 52,144 16,312 733,347 153,576 80,674 22,055 315,464 6,978 34,278 5,212 19,857 57,260 693 1 312,987 77,597 36,788 10,822 160,239 54,021 632 8,002 648,308 141,835 71,759 16,035 $ 562,107 $ 83,088 $ 563,619 $ 1,208,814 $ 576,062 $ 85,862 $ 438,907 $ 1,100,831 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, 2022, deposits denominated in U.S. dollars, British pounds, Euro and other foreign currencies were $465 billion, $35 billion, $50 billion and $30 billion, respectively (October 31, 2021 – $399 billion, $35 billion, $43 billion and $27 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 Aggregate amount of term deposits in denominations of one hundred thousand dollars or more Average deposit balances and average rates of interest As at October 31 2022 October 31 2021 61,996 156,531 49,225 42,809 27,609 33,835 32,012 $ 159,602 $ 133,776 64,062 83,871 45,532 29,204 24,573 25,329 32,560 $ 563,619 $ 438,907 $ 521,000 $ 416,000 (Millions of Canadian dollars, except for percentage amounts) Canada United States Europe Other International Note 15 Insurance For the year ended October 31, 2022 October 31, 2021 $ Average balances 847,052 207,436 81,824 28,613 Average rates 1.02% 0.50 1.03 0.72 $ Average balances 772,875 180,230 77,217 28,731 Average rates 0.61% 0.13 0.55 0.33 $ 1,164,925 0.92% $ 1,059,053 0.51% 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 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 201 Note 15 Insurance (continued) Reinsurance ceded 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 2022 4,913 $ (260) 4,653 $ 1,741 $ (273) 1,468 $ $ $ $ $ October 31 2021 5,090 (250) 4,840 3,834 (287) 3,547 (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, 2022 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. 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 2022 October 31 2021 0.11% 1.81 3.75 0.50 0.12% 1.78 3.76 0.50 0.80 2.90 0.79 2.90 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). 202 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 October 31, 2021 Gross Ceded Net Gross Ceded Net As at $ 11,481 $ 41 $ 11,522 $ $ $ 7 $ 30 37 $ $ 11,559 $ 902 $ 10,579 $ 12,775 $ 41 902 $ 10,620 $ 12,817 $ 42 – 6 $ – $ 1 7 $ 29 36 $ 903 $ 10,656 $ 12,864 $ 47 $ 1 $ 41 861 $ 11,914 42 – 861 $ 11,956 – $ 3 3 $ 6 38 44 864 $ 12,000 (1) 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, 2022 October 31, 2021 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 $ 12,817 $ (1,288) (6) (1) $ 11,522 $ (1) Includes the change in fair value of investments backing our policyholder liabilities. Ceded Gross Net 861 $ 11,956 $ 12,123 $ (130) (1,158) (177) 171 (1) – 902 $ 10,620 $ 12,817 $ 775 (89) 8 Ceded Net 752 $ 11,371 667 108 (90) 1 8 – 861 $ 11,956 The net decrease in life insurance claims and policy benefit liabilities over the prior year was primarily attributable to market movements on assets backing life insurance policyholder liabilities and asset and liability matching activities, partially offset by business growth. During the year, we reviewed all key actuarial methods and assumptions which are used in determining the policy benefit liabilities resulting in a $177 million net decrease to insurance liabilities comprised of: (i) a decrease of $225 million for revised actuarial reserves on interest rate risk; (ii) an increase of $9 million due to reinsurance contract renegotiations; (iii) an increase of $37 million arising from insurance risk related assumption updates largely due to mortality, morbidity, and expense assumptions; and (iv) an increase of $2 million due to changes to valuation models and related data. Sensitivity analysis The following table presents the sensitivity of the level of insurance policyholder liabilities disclosed in this note to reasonably possible changes in the actuarial assumptions used to calculate them. The percentage change in each variable is applied to a range of existing actuarial modelling assumptions to derive the possible impact on net income. The analyses are performed where a single assumption is changed while holding other assumptions constant, which is unlikely to occur in practice. (Millions of Canadian dollars, except for percentage amounts) Increase in market interest rates (1) Decrease in market interest rates (1) Increase in equity market values (2) Decrease in equity market values (2) Increase in maintenance expenses (3) Life Insurance (3) Adverse change in annuitant mortality rates Adverse change in assurance mortality rates Adverse change in morbidity rates Adverse change in lapse rates Net income impact for the year ended Change in variable October 31 2022 1% $ 1 10 10 5 2 2 5 10 (10) $ 5 6 (10) (33) (166) (59) (181) (199) October 31 2021 (14) 17 8 (10) (37) (287) (67) (213) (253) (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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 203 Note 16 Segregated funds We offer certain individual variable insurance contracts that allow policyholders to invest in segregated funds. The investment returns on these funds are passed directly to the policyholders. Amounts invested are at the policyholders’ risk, except where the policyholders have selected options providing maturity and death benefit guarantees. A liability for the guarantees is recorded in Insurance claims and policy benefit liabilities. Segregated funds net assets are recorded at fair value. All of our segregated funds net assets are categorized as Level 1 in the fair value hierarchy. The fair value of the segregated funds liabilities is equal to the fair value of the segregated funds net assets. Segregated funds net assets and segregated funds liabilities are presented on separate lines on the Consolidated Balance Sheets. The following tables present the composition of net assets and the changes in net assets for the year. Segregated funds net assets (Millions of Canadian dollars) Cash Investment in mutual funds Other assets (liabilities), net Changes in net assets (Millions of Canadian dollars) Net assets at beginning of period Additions (deductions): Deposits from policyholders Net realized and unrealized gains (losses) Interest and dividends Payment to policyholders Management and administrative fees Net assets at end of period $ $ $ As at October 31 2022 October 31 2021 39 $ 2,598 1 2,638 $ 40 2,625 1 2,666 For the year ended October 31 2022 2,666 $ October 31 2021 1,922 859 (301) 56 (573) (69) 975 381 51 (604) (59) $ 2,638 $ 2,666 Note 17 Employee benefits – Pension and other post-employment benefits Plan characteristics We sponsor a number of programs that provide pension and post-employment benefits to eligible employees. The majority of beneficiaries of the pension plans are located in Canada and other beneficiaries of the pension plans are primarily located in the U.S., the U.K. and the Caribbean. The pension arrangements including investment, plan benefits and funding decisions are governed by local pension committees or trustees, who are legally segregated from the Bank, or management. Significant plan changes require the approval of the Board of Directors. Our defined benefit pension plans provide pension benefits based on years of service, contributions and average earnings at retirement. Our primary defined benefit pension plans are closed to new members. New employees are generally eligible to join defined contribution pension plans. The specific features of these plans vary by location. We also provide supplemental non-registered (non-qualified) pension plans for certain executives and senior management that are typically unfunded or partially funded. Our defined contribution pension plans provide pension benefits based on accumulated employee and Bank contributions. The Bank contributions are based on a percentage of an employee’s annual earnings and a portion of the Bank contribution may be dependent on the amount being contributed by the employee and their years of service. Our primary other post-employment benefit plans provide health, dental, disability and life insurance coverage and cover a number of current and retired employees who are mainly located in Canada. These plans are unfunded unless required by legislation. We measure our benefit obligations and pension assets as at October 31 each year. All plans are valued using the projected unit-credit method. We fund our registered defined benefit pension plans in accordance with actuarially determined amounts required to satisfy employee benefit obligations under current pension regulations. For our principal pension plan, the most recent funding actuarial valuation was completed on January 1, 2022, and the next valuation will be completed on January 1, 2023. For the year ended October 31, 2022, total contributions to our pension plans (defined benefit and defined contribution plans) and other post-employment benefit plans were $427 million and $79 million (October 31, 2021 – $456 million and $75 million), respectively. For 2023, total contributions to our pension plans and other post-employment benefit plans are expected to be $341 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. 204 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022 October 31, 2021 Defined benefit pension plans Other post- employment benefit plans Defined benefit pension plans Other post- employment benefit plans $ $ $ $ $ $ $ $ $ 14,310 $ 11,271 – $ 1,387 16,698 $ 14,403 – 1,703 3,039 $ (1,387) $ 2,295 $ (1,703) 716 $ 622 94 $ – $ 75 (75) $ 1,005 $ 912 93 $ – 77 (77) 15,026 $ 11,893 – $ 1,462 17,703 $ 15,315 – 1,780 3,133 $ (1,462) $ 2,388 $ (1,780) (8) – (6) – 3,125 $ (1,462) $ 2,382 $ (1,780) 3,331 $ (206) 3,125 $ – $ (1,462) (1,462) $ 2,640 $ (258) 2,382 $ – (1,780) (1,780) The following table presents an analysis of the movement in the financial position related to all of our material pension and other post-employment benefit plans worldwide, including executive retirement arrangements. As at or for the year ended October 31, 2022 October 31, 2021 Other post- employment benefit plans Defined benefit pension plans (1) Defined benefit pension plans (1) $ 17,703 $ 580 (Millions of Canadian dollars) Fair value of plan assets at beginning of period Interest income Remeasurements Return on plan assets (excluding interest income) Change in foreign currency exchange rate Contributions – Employer Contributions – Plan participant Payments Payments – amount paid in respect of settlements 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 $ $ $ $ $ – $ – – – 79 20 (99) – – – – $ 1,780 $ 42 2 – 63 (1) (341) (9) 6 20 (99) – (1) (2,931) (62) 177 45 (610) 3 135 (14) 15,026 $ 15,315 $ 308 (1) (3) 496 (2) (3,797) 83 (47) 45 (610) 3 103 11,893 $ 23 $ 11,870 1,462 $ 1,462 $ – 11,893 $ 1,462 $ Other post- employment benefit plans – – 16,024 $ 432 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 (1) For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2022 were $323 million and $117 million, respectively (October 31, 2021 – $413 million and $155 million, respectively). Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 205 Note 17 Employee benefits – Pension and other post-employment benefits (continued) 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 2022 308 (1) (3) (84) – 14 $ $ 234 250 484 $ $ $ October 31 2021 359 $ – 2 7 – 13 October 31 2022 42 2 – 63 (26) – $ October 31 2021 46 (1) – 57 (12) – 381 $ 235 616 $ 81 – 81 $ $ 90 – 90 Service costs for the year ended October 31, 2022 totalled $305 million (October 31, 2021 – $356 million) for pension plans in Canada and $2 million (October 31, 2021 – $3 million) for International plans. Net interest expense (income) for the year ended October 31, 2022 totalled $(83) million (October 31, 2021 – $7 million) for pension plans in Canada and $(1) million (October 31, 2021 – $nil) for International plans. Pension and other post-employment benefit remeasurements The following table presents the composition of our remeasurements recorded in OCI related to our material pension and other post-employment benefit plans worldwide. (Millions of Canadian dollars) Actuarial (gains) losses: Changes in demographic assumptions Changes in financial assumptions Experience adjustments Return on plan assets (excluding interest based on discount rate) Change in asset ceiling (excluding interest income) For the year ended Defined benefit pension plans Other post-employment benefit plans October 31 2022 October 31 2021 October 31 2022 October 31 2021 $ (2) $ – $ (1) $ (3,797) 83 2,931 2 (1,253) (5) (1,614) 5 (319) (5) – – (6) (177) 3 – – $ (783) $ (2,867) $ (325) $ (180) Remeasurements recorded in OCI for the year ended October 31, 2022 were gains of $798 million (October 31, 2021 – gains of $2,819 million) for pension plans in Canada and losses of $15 million (October 31, 2021 – gains of $48 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 206 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022, the management of defined benefit pension investments focused on 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 is being used to reduce asset/liability duration mismatch and hence variability of the plan’s funded status due to interest rate movement. Longer maturity debt securities, given their price sensitivity to movements in interest rates, are considered to be a good economic hedge to risk associated with the plan’s liabilities, which are discounted using predominantly long maturity bond interest rates as inputs. Asset allocation of defined benefit pension plans (1), (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 $ 1,469 2,799 3,489 114 3,171 3,984 As at October 31, 2022 Percentage of total plan assets Quoted in active market (3) Fair value October 31, 2021 Percentage of total plan assets Quoted in active market (3) 10% 19 100% $ 100 1,879 4,202 11% 24 100% 100 23 1 21 26 – – – 8 3,766 71 3,844 3,941 21 – 22 22 – – – 12 $ 15,026 100% 30% $ 17,703 100% 37% 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, 34% of our total plan assets would be classified as quoted in an active market (October 31, 2021 – 41%). (4) Amounts are net of securities sold under repurchase agreements. As at October 31, 2022, the plan assets include 0.7 million (October 31, 2021 – 1.0 million) of our common shares with a fair value of $89 million (October 31, 2021 – $128 million) and $48 million (October 31, 2021 – $29 million) of our debt securities. For the year ended October 31, 2022, dividends received on our common shares held in the plan assets were $4 million (October 31, 2021 – $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 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 Benefits expected to be paid 2028-2032 Weighted average duration of defined benefit payments As at October 31, 2022 Canada International Total $ 66,616 585 643 668 691 713 733 3,907 12.4 years $ 6,043 22 35 34 33 35 34 189 15.1 years $ 72,659 607 678 702 724 748 767 4,096 12.5 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 207 Note 17 Employee benefits – Pension and other post-employment benefits (continued) 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 2022 5.4% 3.0% n.a. n.a. October 31 2021 3.3% 3.0% n.a. n.a. October 31 2022 October 31 2021 5.5% n.a. 3.5% 3.1% 3.6% n.a. 3.4% 3.1% (1) For our other post-employment benefit plans, the assumed trend rates used to measure the expected benefit costs of the defined benefit obligations are also the ultimate trend rates. n.a. not applicable Mortality assumptions Mortality assumptions are significant in measuring our obligations under the defined benefit pension plans. These assumptions have been set based on country specific statistics. Future longevity improvements have been considered and included where appropriate. The following table summarizes the mortality assumptions used for material plans. October 31, 2022 October 31, 2021 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 23.9 23.4 24.2 25.4 24.8 24.7 25.1 26.8 23.8 23.6 24.2 25.4 24.8 25.3 25.1 27.2 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 2022. (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 208 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Increase (decrease) in obligation Defined benefit pension plans Other post- employment benefit plans $ (1,348) $ 1,649 (160) 198 29 (31) 287 n.a. n.a. – – 20 57 (48) Note 18 Other liabilities (Millions of Canadian dollars) Accounts payable and accrued expenses Accrued interest payable Cash collateral Commodity liabilities Deferred income Deferred income taxes Dividends payable Employee benefit liabilities Insurance related liabilities Lease liabilities Negotiable instruments Payable to brokers, dealers and clients Payroll and related compensation Precious metals certificates Provisions Short-term borrowings of subsidiaries Taxes payable Other Note 19 Subordinated debentures As at October 31 2022 1,292 $ 5,019 26,143 10,038 3,660 439 1,856 1,668 324 5,110 1,715 10,974 8,991 557 627 9,609 2,136 5,077 95,235 $ 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 $ $ 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 (1) June 8, 2023 January 27, 2026 (2) November 1, 2027 (3) July 25, 2029 (2) December 23, 2029 (2) June 30, 2030 (2) November 3, 2031 (2) May 3, 2032 (2) January 28, 2033 (2) October 1, 2083 June 29, 2085 Deferred financing costs Earliest par value redemption date November 1, 2022 July 25, 2024 December 23, 2024 June 30, 2025 November 3, 2026 May 3, 2027 January 28, 2028 Any interest payment date Any interest payment date Interest rate 5.38% 9.30% 4.65% 4.75% 2.74% (4) 2.88% (5) 2.09% (6) 2.14% (7) 2.94% (8) 1.67% (9) (10) (11) Denominated in foreign currency (millions) US$150 $ US$1,500 TT$300 US$174 $ $ As at October 31 2022 – $ 110 1,884 60 1,415 1,412 1,250 1,637 932 875 224 237 10,036 $ (11) 10,025 $ October 31 2021 188 110 1,916 55 1,499 1,489 1,250 1,717 – 943 224 215 9,606 (13) 9,593 (1) On July 15, 2022, all US$150 million of outstanding 5.38% subordinated debentures matured. (2) 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 November 1, 2022, we redeemed all TT$300 million of outstanding 4.75% subordinated debentures due on November 1, 2027 for 100% of their principal amount plus (4) (5) (6) (7) (8) (9) (10) (11) 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 0.76% 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. 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 As at October 31 2022 110 1,884 6,706 1,336 10,036 $ $ Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 209 Note 20 Equity Share capital Authorized share capital Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value, issuable in series; the aggregate consideration for which all the First Preferred Shares and all the Second Preferred Shares that may be issued may not exceed $20 billion and $5 billion, respectively. Common – An unlimited number of shares without nominal or par value may be issued. Outstanding share capital The following table details our common and preferred shares 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) October 31, 2022 October 31, 2021 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 1,425,187 $ 17,728 1,423,861 $ 17,628 1,270 (40,866) 99 (509) 1,326 – 100 – Balance at end of period 1,385,591 $ 17,318 $ 4.96 1,425,187 $ 17,728 $ 4.32 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 (5) Non-cumulative, 5-Year Rate Reset Series AZ Series BB Series BD Series BF Series BO Series BT (6) 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 (662) $ (48,437) 46,419 (73) (5,183) 4,922 (2,680) $ (334) (1,388) $ (37,603) 38,329 (129) (4,060) 4,116 (662) $ (73) 1,382,911 $ 16,984 1,424,525 $ 17,655 6,000 $ 6,000 – 150 $ 150 – 20,000 20,000 24,000 12,000 14,000 750 500 500 600 300 350 750 1.23 1.23 0.33 0.93 0.91 0.80 0.75 1.20 4.20% 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 1.20 – 15 23 US$ 67.50 15 23 US$ 67.50 1,750 1,250 1,000 1,750 1,250 1,000 106,765 $ 7,323 4.50% 4.00% 3.65% 1,750 1,250 1,000 1,750 1,250 1,000 112,015 $ 6,723 4.50% 4.00% 3.65% (164) $ (2,811) 2,963 (12) $ (39) (518) 552 (5) (2) $ (6,306) 6,144 (3) (683) 647 (164) $ (39) 106,753 $ 7,318 111,851 $ 6,684 Includes fair value adjustments to stock options of $6 million (October 31, 2021 – $11 million). (1) (2) During the year ended October 31, 2022, we purchased common shares for cancellation at an average cost of $132.80 per share with a book value of $12.47 per share. (3) (4) During the year ended October 31, 2021, we did not purchase for cancellation any common shares. 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 5-Year Rate Reset First Preferred Shares Series BT (Series BT) and Non-Cumulative Fixed Rate/Floating Rate First Preferred Shares Series C-2 (Series C-2) which were issued at $1,000 and US$1,000 per share (equivalent to US$25 per depositary share), respectively. (5) On February 24, 2022, we redeemed all 6 million of our issued and outstanding Non-Cumulative Fixed Rate First Preferred Shares Series BJ at a price of $25.75 per share. (6) On November 5, 2021, we issued 750 thousand Non-Cumulative 5-Year Rate Reset First Preferred Shares Series BT, totalling $750 million. (7) 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. (8) 210 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Significant terms and conditions of preferred shares and other equity instruments As at October 31, 2022 Preferred shares First preferred Non-cumulative, fixed rate Series BH (4) Series BI (4) Non-cumulative, 5-Year Rate Reset (5) Series AZ (4) Series BB (4) Series BD (4) Series BF (4) Series BO (4) Series BT (4) Non-cumulative, fixed rate/ floating rate Series C-2 (6) Other equity instruments Limited recourse capital notes (7) Series 1 (8) Series 2 (9) Series 3 (10) Current annual yield Premium Current dividend per share (1) Earliest redemption date (2) Issue date Redemption price (2), (3) 4.90% 4.90% 3.70% 3.65% 3.20% 3.60% 4.80% 4.20% $ .306250 November 24, 2020 .306250 November 24, 2020 June 5, 2015 July 22, 2015 $ 26.00 26.00 2.21% 2.26% 2.74% 2.62% 2.38% 2.71% May 24, 2019 .231250 August 24, 2019 .228125 .200000 May 24, 2020 .187500 November 24, 2020 .300000 21.000000 January 30, 2014 June 3, 2014 January 30, 2015 March 13, 2015 February 24, 2024 November 2, 2018 February 24, 2027 November 5, 2021 25.00 25.00 25.00 25.00 25.00 1,000.00 6.75% 4.052% US$16.875000 November 7, 2023 November 2, 2015 US$1,000.00 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) With the exception of Series BT, non-cumulative preferential dividends of each Series are payable quarterly, as and when declared by the Board of Directors, on or about (2) (3) (4) (5) (6) (7) (8) (9) the 24th day (7th day for Series C-2) of February, May, August and November. In the case of Series BT, non-cumulative preferential dividends are payable semi-annually, as and when declared by the Board of Directors. 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 and BI, 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 BT may be redeemed for cash at a price per share of $1,000 if redeemed on the earliest redemption date and on the same date every fifth year 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 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 2022 211 Note 20 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 U.S. The requirements of our DRIP are satisfied through either open market share purchases or shares issued from treasury. During 2022 and 2021, the requirements of our DRIP were satisfied through open market share purchases. Shares available for future issuances As at October 31, 2022, 42.7 million common shares are available for future issue relating to our DRIP and potential exercise of stock options and awards outstanding. In addition, we may issue up to 38.9 million common shares from treasury under the RBC Umbrella Savings and Securities Purchase Plan that was approved by shareholders on February 26, 2009. Note 21 Share-based compensation Stock option plans We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common shares. The exercise price for the majority of the grants is determined as the higher of the volume-weighted average of the trading prices per board lot (100 shares) of our common shares on the Toronto Stock Exchange (i) on the day preceding the day of grant; and (ii) the five consecutive trading days immediately preceding the day of grant. The exercise price for the remaining grants is the closing market share price of our common shares on the New York Stock Exchange on the date of grant. All options vest over a four-year period, and are exercisable for a period not exceeding 10 years from the grant date. The compensation expense recorded for the year ended October 31, 2022, in respect of the stock option plans was $8 million (October 31, 2021 – $6 million). The compensation expense related to non-vested options was $4 million at October 31, 2022 (October 31, 2021 – $3 million), to be recognized over the weighted average period of 2.0 years (October 31, 2021 – 2.0 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, 2022 October 31, 2021 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 Number of options (thousands) 7,055 $ 1,184 (684) (46) exercise price (1) 92.27 129.99 73.98 104.28 Weighted average exercise price (1) 86.02 106.00 65.56 93.23 6,973 $ 1,251 (1,150) (19) 7,509 $ 3,502 $ 100.07 87.15 7,055 $ 3,273 $ 92.27 80.38 (1) The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rates as of October 31, 2022 and October 31, 2021. 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 $51 million (October 31, 2021 – $75 million) and the weighted average share price at the date of exercise was $134.10 (October 31, 2021 – $115.11). (3) New shares were issued for all stock options exercised in 2022 and 2021. Options outstanding as at October 31, 2022 by range of exercise price Options outstanding Options exercisable (Canadian dollars per share except share amounts and years) $48.22 – $74.39 $78.28 – $90.23 $96.55 – $102.33 $104.70 – $106.00 $129.99 Number outstanding (thousands) Weighted average exercise price (1) 70.05 86.99 98.90 105.40 129.99 890 $ 1,409 1,743 2,299 1,168 Weighted average remaining contractual life (years) 2.31 3.54 5.19 7.66 9.12 Number exercisable (thousands) Weighted average exercise price (1) 70.05 86.99 99.96 – – 890 $ 1,409 1,203 – – (1) The weighted average exercise prices reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2022. 7,509 $ 100.07 5.91 3,502 $ 87.15 212 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements The weighted average fair value of options granted during the year ended October 31, 2022 was estimated at $7.80 (October 31, 2021 – $4.65). 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 2022 October 31 2021 $ 128.48 $ 104.86 0.48% 4.59% 14% 6 Years 1.25% 3.66% 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, 2022, we contributed $128 million (October 31, 2021 – $123 million), under the terms of these plans, towards the purchase of our common shares. As at October 31, 2022, an aggregate of 36 million common shares were held under these plans (October 31, 2021 – 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 U.S. 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 For the year ended October 31, 2022 October 31, 2021 (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 Units granted (thousands) Weighted average fair value per unit 469 $ 131.49 125.22 129.65 135.44 128.50 3,794 2,220 92 1,083 Units granted (thousands) Weighted average fair value per unit 462 $ 4,066 2,486 87 767 113.34 128.95 106.10 104.21 109.24 Our liabilities for the awards granted under the deferred share and other plans are measured at fair value, determined based on the quoted market price of our common shares and specified fund choices as applicable. Annually, our obligation is increased by additional units earned by plan participants, and is reduced by forfeitures, cancellations, and the settlement of vested units. In addition, our obligation is impacted by fluctuations in the market price of our common shares and specified fund units. For performance deferred share award plans, the estimated outcome of meeting the performance conditions also impacts our obligation. 7,658 $ 127.48 7,868 $ 118.62 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 213 Note 21 Share-based compensation (continued) The following tables present the units that have been earned by the participants, our obligations for these earned units under the deferred share and other plans, and the related compensation expenses (recoveries) recognized for the year. Obligations under deferred share and other plans October 31, 2022 October 31, 2021 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 684 1,182 757 319 218 3,160 5,429 $ 9,398 6,006 2,537 1,772 25,142 $ (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 22 Income taxes Components of tax expense Units (thousands) 5,001 9,925 6,216 2,574 1,724 25,440 Carrying amount 644 $ 1,280 801 331 216 $ 3,272 For the year ended October 31 2022 20 $ October 31 2021 205 518 506 627 142 333 $ 1,998 210 273 (261) 91 $ $ (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 214 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements For the year ended October 31 2022 October 31 2021 $ 4,151 (230) $ 4,893 (92) – 3,921 232 4 231 (86) 381 4,302 (633) (2) 2 2 (478) 6 628 70 287 (16) 4,785 (216) (4) 74 (58) (204) 4,581 (35) – (28) 1 591 – 485 97 796 622 (3) 10 (45) 466 $ 4,768 20 17 (17) (42) 1,885 $ 6,466 The effective income tax rate of 21.4% decreased 80 bps, primarily due to higher tax-exempt income and an increase in income from lower tax rate jurisdictions in the current 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, 2022 October 31, 2021 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 $ 5,269 26.2% $ 5,405 26.2% (428) (437) 4 (106) (2.1) (2.2) – (0.5) (361) (379) (4) (80) (1.8) (1.8) – (0.4) Income taxes in Consolidated Statements of Income / effective tax rate $ 4,302 21.4% $ 4,581 22.2% 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 As at and for the year ended October 31, 2022 Net asset beginning of period Change through equity Change through profit or loss Exchange rate differences Acquisitions/ disposals Other Net asset end of period $ 974 $ – $ 2 $ 11 $ – $ 1,614 11 242 110 (10) – – (1) (19) (2) (836) (211) 1 67 (126) – 4 101 – 2 23 5 10 – 8 – – (57) (345) – $ – – 3 – 987 1,504 12 322 6 – – (16) (1,234) (163) 4 (287) 22 1,937 $ (278) $ 19 (137) (381) $ 4 (6) 83 $ (8) 4 (331) $ (435) – – (113) 3 $ 1,033 2,011 (74) 1,937 $ 1,472 (439) $ 1,033 $ $ $ As at and for the year ended October 31, 2021 (Millions of Canadian dollars) Net asset beginning of period Change through equity Change through profit or loss Exchange rate differences Acquisitions/ disposals Other Net asset end of period 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 $ $ $ 1,362 $ 1,269 9 204 (104) (68) (784) – $ 17 – – 6 45 – 592 47 (796) (12) 2,527 $ (740) $ 2,579 (52) 2,527 (372) $ 396 2 40 205 (1) (82) 45 (29) 204 $ (16) $ (68) – (2) 3 5 30 (4) 3 (49) $ – $ – – – – – – $ – – – – – – 974 1,614 11 242 110 (19) (836) – – – $ – (5) (5) $ (163) 4 1,937 $ $ 2,011 (74) 1,937 Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 215 Note 22 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 $322 million were recognized at October 31, 2022 (October 31, 2021 – $242 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, 2022, unused tax losses and tax credits of $429 million and $130 million (October 31, 2021 – $384 million and $207 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, 2021 – $nil), or in two to four years (October 31, 2021 – $2 million) and there are $429 million of unused tax losses that will expire after four years (October 31, 2021 – $382 million). There are no tax credits that will expire in one year (October 31, 2021 – $nil), $93 million that will expire in two to four years (October 31, 2021 – $115 million) and $37 million that will expire after four years (October 31, 2021 – $92 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 $26 billion as at October 31, 2022 (October 31, 2021 – $20 billion). Tax examinations and assessments During the year, we received a reassessment from the Canada Revenue Agency (CRA) in respect of the 2017 taxation year, which suggests that Royal Bank of Canada owes additional taxes of approximately $237 million as they denied the deductibility of certain dividends. The reassessment received during the year is consistent with the reassessments received for taxation years 2012 to 2016 of approximately $1,391 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. Government of Canada Budget 2022 On April 7, 2022, the Government of Canada presented its 2022 budget, which included measures focused on ensuring banking and life insurers’ groups help pay a portion of the costs of the Canadian federal government’s COVID-19 pandemic response. On November 22, 2022, Bill C-32, Fall Economic Statement Implementation Act, 2022 (the Bill) received second reading in the House of Commons. The Bill includes a Canada Recovery Dividend (CRD) and a permanent increase in the corporate income tax rate. The CRD is a one-time 15% tax for 2022 determined based on the average taxable income above $1 billion for taxation years 2020 and 2021 and payable in equal installments over five years. The permanent increase in the corporate income tax rate is 1.5% on taxable income above $100 million and would apply to taxation years that end after April 7, 2022. The Bill is not yet substantively enacted and timing of enactment remains uncertain. Based on the draft legislation, which remains subject to amendments prior to enactment, the CRD is expected to reduce net income by approximately $1 billion and other comprehensive income by approximately $0.1 billion when substantively enacted. Note 23 Earnings per share (Millions of Canadian dollars, except share and per share amounts) Basic earnings per share Net income Dividends on preferred shares and distributions on other equity instruments Net income attributable to non-controlling interests Net income available to common shareholders Weighted average number of common shares (in thousands) Basic earnings per share (in dollars) Diluted earnings per share Net income available to common shareholders Weighted average number of common shares (in thousands) Stock options (1) Issuable under other share-based compensation plans Average number of diluted common shares (in thousands) Diluted earnings per share (in dollars) For the year ended October 31 2022 October 31 2021 $ $ $ $ 15,807 $ (247) (13) 16,050 (257) (12) 15,547 $ 15,781 1,403,654 11.08 $ 1,424,343 11.08 15,547 $ 15,781 1,403,654 1,918 462 1,406,034 $ 11.06 $ 1,424,343 1,737 655 1,426,735 11.06 (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, 2022 and the year ended October 31, 2021, no outstanding options were excluded from the calculation of diluted earnings per share. 216 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Note 24 Guarantees, commitments, pledged assets and contingencies Guarantees and commitments We use guarantees and other off-balance sheet credit instruments to meet the financing needs of our clients. The table below summarizes our maximum exposure to credit losses related to our guarantees and commitments provided to third parties. The maximum exposure to credit risk relating to a guarantee is the maximum risk of loss if there was a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions, insurance policies or from collateral held or pledged. The maximum exposure to credit risk relating to a commitment to extend credit is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognized as a liability in our Consolidated Balance Sheets. (Millions of Canadian dollars) Financial guarantees Financial standby letters of credit Commitments to extend credit Backstop liquidity facilities Credit enhancements Documentary and commercial letters of credit Other commitments to extend credit Other credit-related commitments Securities lending indemnifications Performance guarantees Sponsored member guarantees Other Maximum exposure to credit losses As at October 31 2022 October 31 2021 $ 20,291 $ 16,867 45,336 2,960 318 284,602 38,405 2,537 447 248,522 90,693 7,333 1,241 360 99,797 7,195 142 326 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. 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 217 Note 24 Guarantees, commitments, pledged assets and contingencies (continued) 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. 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, 2022, the total balance of uncommitted amounts was $363 billion (October 31, 2021 – $333 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, 2022, we have unfunded commitments of $1,421 million (October 31, 2021 – $1,396 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. 218 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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, 2022, we had on average $2 billion of assets pledged intraday to the Bank of Canada on a daily basis (October 31, 2021 – $2 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, 2022 and October 31, 2021. 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 2022 October 31 2021 $ 97,178 $ 79,282 66,277 25,981 70,334 40,318 207,830 171,540 465,484 (9,192) 454,844 (17,436) 456,292 437,408 $ 664,122 $ 608,948 $ 158,748 $ 154,699 46,151 263,005 39,687 46,699 31,941 7,314 3,809 15,643 45,288 274,392 40,438 62,905 49,556 9,503 8,263 15,029 $ 664,122 $ 608,948 (1) Primarily relates to Obligations related to securities lent or sold under repurchase agreements, Securities lent and Derivative transactions. Note 25 Legal and regulatory matters We are a large global institution that is subject to many different complex legal and regulatory requirements that continue to evolve. We are and have been subject to a variety of legal proceedings, including civil claims and lawsuits, regulatory examinations, investigations, audits and requests for information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions. Some of these matters may involve novel legal theories and interpretations and may be advanced under criminal as well as civil statutes, and some proceedings could result in the imposition of civil, regulatory enforcement or criminal penalties. We review the status of all proceedings on an ongoing basis and will exercise judgment in resolving them in such manner as we believe to be in our best interest. In many proceedings, it is inherently difficult to determine whether any loss is probable or to reliably estimate the amount of any loss. 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 provisions 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. On December 30, 2021, the U.S. Court of Appeals for the Second Circuit issued an opinion affirming in part and reversing in part certain district court rulings that had dismissed a substantial portion of the consolidated class action on jurisdictional grounds and lack of standing. The Second Circuit remanded the matter to the district court for further proceedings consistent with its decision. 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. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 219 Note 25 Legal and regulatory matters (continued) 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. The Court of Appeal has scheduled a new trial to begin on September 18, 2023. 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. In addition, the Department of Labor has proposed amendments to the QPAM exemption. If the amendments are finalized as proposed, it is unclear how they would affect Royal Bank of Canada’s ability to obtain relief beyond the one-year temporary exemption period. 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. Foreign exchange matters Beginning in 2015, putative class actions were brought against Royal Bank of Canada and/or RBC Capital Markets, LLC in the U.S., 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, LLC’s 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 the U.S. District Court (the “Opt Out Action”). In May 2020, the U.S. District Court dismissed Royal Bank of Canada from the Opt Out Action. The plaintiffs refiled their claim and in July 2021, the U.S. District Court granted a motion in favour of RBC Capital Markets, LLC to dismiss the action, however, denied the motion as to Royal Bank of Canada. Royal Bank of Canada has reached a settlement for an immaterial amount with respect to a U.S. action brought by a different class of plaintiffs. 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. U.S. communications recordkeeping inquiry In October 2022, our subsidiary RBC Capital Markets, LLC received a request for information and documents from the Securities and Exchange Commission (SEC) concerning compliance with records preservation requirements relating to business communications exchanged on electronic channels that have not been approved by RBC Capital Markets, LLC. RBC Capital Markets, LLC is cooperating with the SEC’s inquiry. As has been publicly reported, the SEC is conducting similar inquiries into recordkeeping practices at multiple other financial institutions. Based on the facts currently known, it is not possible at this time to predict the ultimate outcome of this inquiry or the timing of its resolution. U.K. Competition and Markets Authority investigation RBC Europe Limited is engaging with the U.K. Competition and Markets Authority in respect of an investigation of alleged anti- competitive arrangements in the financial services sector between 2009 and 2013. The outcome and resulting financial impact of this investigation is unknown and not reliably estimable. Other matters We are a defendant in a number of other actions alleging that certain of our practices and actions were improper. The lawsuits involve a variety of complex issues and the timing of their resolution is varied and uncertain. Management believes that we will ultimately be successful in resolving these lawsuits, to the extent that we are able to assess them, without material financial impact to the Bank. This is, however, an area of significant judgment and the potential liability resulting from these lawsuits could be material to our results of operations in any particular period. Various other legal proceedings are pending that challenge certain of our other practices or actions. While this is an area of significant judgment and some matters are currently inestimable, we consider that the aggregate liability, to the extent that we are able to assess it, resulting from these other proceedings will not be material to our consolidated financial position or results of operations. Note 26 Related party transactions Related parties Related parties include associated companies over which we have direct or indirect control or have significant influence and post-employment benefit plans for the benefit of our employees. Related parties also include 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 or jointly controlled by KMP, Directors or their close family members. 220 Royal Bank of Canada: Annual Report 2022 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 For the year ended (Millions of Canadian dollars) Salaries and other short-term employee benefits (2) Post-employment benefits (3) Share-based payments October 31 2022 (1) $ October 31 2021 19 3 35 27 $ 2 40 (1) (2) During the year ended October 31, 2022 certain executives, who were members of the Bank’s GE as at October 31, 2021, left the Bank and therefore were no longer part of KMP. Compensation for the year ended October 31, 2022 attributable to the former executives, including benefits and share-based payments relating to awards granted in prior years was $14 million. Includes the portion of the annual variable short-term incentive bonus that certain executives elected to receive in the form of DSUs. Refer to Note 21 for further details. Directors receive retainers but do not receive salaries and other short-term employee benefits. (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 $ 69 $ 57 October 31, 2022 (1) October 31, 2021 (2) As at (Millions of Canadian dollars, except number of units) Stock options (3) Other non-option stock based awards (3) RBC common and preferred shares No. of No. of units held units held Value Value 2,409,294 $ 59 2,369,659 $ 81 127 24 914,496 170,312 983,004 183,783 115 22 (1) During the year ended October 31, 2022 certain executives, who were members of the Bank’s GE as at October 31, 2021, left the Bank and therefore were no longer part of KMP. Total shareholdings and options held upon their departure was 569,470 units with a value of $34 million. (2) 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. (3) Directors do not receive stock options or any other non-option stock based awards. 3,494,102 $ 196 3,536,446 $ 232 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, 2022, total loans to KMP, Directors and their close family members were $14 million (October 31, 2021 – $14 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, 2022 and October 31, 2021. 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, 2022, loans to joint ventures and associates were $251 million (October 31, 2021 – $340 million) and deposits from joint ventures and associates were $20 million (October 31, 2021 – $13 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, 2022 and October 31, 2021. $1 million of guarantees have been given to joint ventures and associates for the year ended October 31, 2022 (October 31, 2021 – $1 million). Other transactions, arrangements or agreements involving joint ventures and associates As at or for the year ended (Millions of Canadian dollars) Commitments and other contingencies Other fees received for services rendered Other fees paid for services received October 31 October 31 2021 2022 829 $ 1,017 48 108 50 107 $ Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 221 Note 27 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 advice and solutions for individual and business clients including life, health, wealth, home, auto, travel, annuities and reinsurance. 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 platforms as well as through independent brokers and 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 administration, shareholder services, private capital services, middle office transaction banking (including trade finance, insourced solutions and services to broker dealers), and treasury and market services (including cash/liquidity management, foreign exchange and 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 & 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, 2022 was $572 million (October 31, 2021 – $518 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, the U.S. and Other International. Transactions are primarily recorded in the location that best reflects the risk due to negative changes in economic conditions and prospects for growth due to positive economic changes. 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 222 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements 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. For the year ended October 31, 2022 (Millions of Canadian dollars) Net interest income (2) Non-interest income Total revenue Provision for credit losses Insurance policyholder benefits, claims and acquisition expense Non-interest expense Net income (loss) before income taxes Income taxes (recoveries) Personal & Commercial Banking Wealth Management Insurance Investor & Treasury Services Capital Markets (1) Corporate Support (1) $ 14,019 $ 3,634 $ – $ 498 $ 6,124 11,215 3,510 1,725 20,143 463 14,849 34 3,510 – 2,223 (3) 4,698 $ 4,422 9,120 (11) (132) $ (728) (860) 1 Total Canada United States Other International 22,717 $ 15,761 $ 5,423 $ 26,268 13,508 6,364 48,985 484 29,269 600 11,787 60 – 8,437 – 10,701 1,783 588 – 1,569 – 5,561 – (247) 1,783 26,609 (466) 13,648 – 9,006 11,243 2,873 4,114 970 1,139 282 657 144 3,570 649 (614) (616) 20,109 4,302 15,487 3,615 2,721 452 1,533 6,396 7,929 (176) 2,249 3,955 1,901 235 Net income Non-interest expense includes: Depreciation and amortization Impairment of other intangibles $ $ 8,370 $ 3,144 $ 857 $ 513 $ 2,921 $ 2 $ 15,807 $ 11,872 $ 2,269 $ 1,666 942 $ 11 931 $ 2 57 $ 2 190 $ 1 502 $ 2 12 $ – 2,634 $ 1,617 $ 18 11 776 $ 5 241 2 Total assets $ 602,824 $ 174,964 $ 21,918 $263,362 $ 794,032 $ 60,119 $1,917,219 $992,485 $570,255 $ 354,479 Total assets include: Additions to premises and equipment and intangibles $ 394 $ 2,265 $ 49 $ 84 $ 256 $ 630 $ 3,678 $ 1,263 $ 666 $ 1,749 Total liabilities $ 602,741 $ 174,986 $ 22,588 $263,206 $ 793,826 $ (48,303) $1,809,044 $884,394 $570,266 $ 354,384 (Millions of Canadian dollars) Net interest income (2) Non-interest income Total revenue Provision for credit losses Insurance policyholder benefits, claims and acquisition expense Non-interest expense Net income (loss) before income taxes Income taxes (recoveries) Net income Non-interest expense includes: Depreciation and amortization Impairment of other intangibles 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 $ 5,725 18,346 (187) 2,689 $ 10,607 13,296 (47) – $ 5,600 5,600 (1) 460 $ 1,704 2,164 (8) 4,553 $ 5,634 10,187 (509) (321) $ 421 100 (1) 20,002 $ 13,947 $ 29,691 15,454 4,447 $ 8,083 49,693 (753) 29,401 (203) 12,530 (277) – 7,978 – 9,929 3,891 596 – 1,589 – 5,427 – 405 3,891 25,924 2,036 12,897 – 9,107 10,555 2,708 3,414 788 1,114 225 583 143 5,269 1,082 (304) (365) 20,631 4,581 14,671 3,599 3,700 649 7,847 $ 2,626 $ 889 $ 440 $ 4,187 $ 61 $ 16,050 $ 11,072 $ 3,051 $ 1,608 6,154 7,762 (273) 1,855 3,920 2,260 333 1,927 923 $ 5 883 $ 3 59 $ 1 197 $ 2 497 $ 18 4 $ – 2,563 $ 29 1,594 $ 16 728 $ 11 241 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 (1) (2) Taxable equivalent basis. Interest revenue is reported net of interest expense as we rely primarily on net interest income as a performance measure. Note 28 Nature and extent of risks arising from financial instruments We are exposed to credit, market and liquidity and funding risks as a result of holding financial instruments. Our risk measurement and objectives, policies and methodologies for managing these risks are disclosed in the shaded text along with those tables specifically marked with an asterisk (*) in the Credit risk section of Management’s Discussion and Analysis. These shaded text and tables are an integral part of these Consolidated Financial Statements. Concentrations of credit risk exist if a number of our counterparties are engaged in similar activities, are located in the same geographic region or have comparable economic characteristics such that their ability to meet contractual obligations would be similarly affected by changes in economic, political or other conditions. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 223 Note 28 Nature and extent of risks arising from financial instruments (continued) Concentrations of credit risk indicate the relative sensitivity of our performance to developments affecting a particular industry or geographic location. The amounts of credit exposure associated with certain of our on- and off-balance sheet financial instruments are summarized in the following tables. (Millions of Canadian dollars, except percentage amounts) On-balance sheet assets other than derivatives (1) Derivatives before master netting agreements (2), (3) Off-balance sheet credit instruments (4) Canada % United States % Europe % Other International % Total As at October 31, 2022 $ 759,037 65% $ 263,736 23% $ 87,671 8% $ 48,991 4% $ 1,159,435 32,434 20% 35,921 23% 72,885 46% 17,439 11% 158,679 $ 791,471 60% $ 299,657 23% $ 160,556 12% $ 66,430 5% $ 1,318,114 Committed and uncommitted (5) $ 398,719 57% $ 223,624 32% $ Other 13,847 12% 79,110 66% 52,669 8% $ 24,476 20% 20,857 3% $ 2,485 2% 695,869 119,918 $ 477,829 59% $ 237,471 29% $ 77,145 9% $ 23,342 3% $ 815,787 (Millions of Canadian dollars, except percentage amounts) On-balance sheet assets other Canada % United States % Europe % Other International % Total As at October 31, 2021 than derivatives (1) $ 701,779 67% $ 213,389 20% $ 85,271 8% $ 49,001 5% $ 1,049,440 Derivatives before master netting agreements (2), (3) Off-balance sheet credit instruments (4) 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) $ 370,479 59% $ 196,692 32% $ Other 14,014 11% 82,010 66% 46,187 8% $ 26,920 22% 9,335 1% $ 1,383 1% 622,693 124,327 $ 452,489 61% $ 210,706 28% $ 73,107 10% $ 10,718 1% $ 747,020 (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, 2021 – 56%), the Prairies at 15% (October 31, 2021 – 16%), British Columbia and the territories at 15% (October 31, 2021 – 14%) and Quebec at 10% (October 31, 2021 – 10%). No industry accounts for more than 20% (October 31, 2021 – 20%) of total on-balance sheet credit instruments with the exception of Banking, which accounted for 26% (October 31, 2021 – 24%), and Government, which accounted for 32% (October 31, 2021 – 37%). 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 9. 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, 2021 – 45% and 55%). The largest concentrations in the wholesale portfolio relate to Financial services at 15% (October 31, 2021 – 13%), Real estate and related at 12% (October 31, 2021 – 10%), Utilities at 11% (October 31, 2021 – 10%), Other services at 7% (October 31, 2021 – 8%), and Oil and gas at 6% (October 31, 2021 – 6%). The classification of our sectors aligns with our view of credit risk by industry. Note 29 Capital management Regulatory capital and capital ratios OSFI formally establishes risk-based capital and leverage minimums and Total Loss Absorbing Capacity (TLAC) ratios 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. External TLAC instruments comprise predominantly senior bail-in debt, which includes eligible senior unsecured debt with an original term to maturity of greater than 400 days and remaining term to maturity of greater than 365 days. TLAC available is defined as the sum of Total capital and other TLAC instruments. 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. 224 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements During 2022 and 2021, we complied with all applicable capital, leverage and TLAC 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) TLAC available and ratios (2), (3) TLAC available TLAC ratio TLAC leverage ratio As at October 31 2022 October 31 2021 $ 76,945 $ 75,583 82,246 84,242 92,026 93,850 $ 496,898 $ 444,142 34,806 73,593 35,342 77,639 $ 609,879 $ 552,541 12.6% 13.8% 15.4% 4.4% 1,898 $ 13.7% 14.9% 16.7% 4.9% 1,662 $ $ 160,961 26.4% 8.5% n.a. n.a. n.a. (1) (2) (3) 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. Effective November 1, 2021, OSFI requires Domestic Systemically Important Banks (D-SIBs) to meet minimum risk-based TLAC ratio and TLAC leverage ratio requirements which are calculated using OSFI’s TLAC guideline. The TLAC standard is applied at the resolution entity level which for us is deemed to be Royal Bank of Canada and its subsidiaries. A resolution entity and its subsidiaries are collectively called a resolution group. Both the TLAC ratio and TLAC leverage ratio are calculated using the TLAC available as percentage of total RWA and leverage exposure, respectively. n.a. not applicable Note 30 Offsetting financial assets and financial liabilities Offsetting within our Consolidated Balance Sheets may be achieved where financial assets and liabilities are subject to master netting arrangements that provide the currently enforceable right of offset and where there is an intention to settle on a net basis, or realize the assets and settle the liabilities simultaneously. For derivative contracts and repurchase and reverse repurchase arrangements, this is generally achieved when there is a market mechanism for settlement (e.g., central counterparty exchange or clearing house) which provides daily net settlement of cash flows arising from these contracts. Margin receivables and margin payables are generally offset as they settle simultaneously through a market settlement mechanism. Amounts that do not qualify for offsetting include master netting arrangements that only permit outstanding transactions with the same counterparty to be offset in an event of default or occurrence of other predetermined events. Such master netting arrangements include the International Swaps and Derivatives Association Master Agreement or certain derivative exchange or clearing counterparty agreements for derivative contracts, global master repurchase agreement and global master securities lending agreements for repurchase, reverse repurchase and other similar secured lending and borrowing arrangements. The amount of financial collateral received or pledged subject to master netting arrangements or similar agreements but do not qualify for offsetting refers to the collateral received or pledged to cover the net exposure between counterparties by enabling the collateral to be realized in an event of default or the occurrence of other predetermined events. Certain amounts of collateral are restricted from being sold or re-pledged unless there is an event of default or the occurrence of other predetermined events. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 225 Note 30 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 instruments subject to enforceable master netting arrangements or similar agreements Amounts subject to enforceable netting arrangements As at October 31, 2022 Related amounts not offset on the Consolidated Balance Sheets (1) Gross amounts of recognized financial instruments Gross amounts offset on the Consolidated Balance Sheets Net amounts presented in the Consolidated Balance Sheets Impact of master netting agreements Financial collateral (2) Net amounts Amounts not subject to enforceable netting arrangements Net amounts presented on the Consolidated Balance Sheets 411,937 $ 146,479 1,638 560,054 $ 94,203 $ 2,185 304 96,692 $ 317,734 $ 144,294 1,334 463,362 $ 360,722 $ 141,137 825 502,684 $ 94,203 $ 2,185 304 96,692 $ 266,519 $ 138,952 521 405,992 $ 293 $ 314,602 $ 98,610 11 21,412 83 98,914 $ 336,097 $ 293 $ 265,822 $ 98,610 11 19,758 – 98,914 $ 285,580 $ 2,839 $ 24,272 1,240 28,351 $ 111 $ 10,145 – 10,256 $ 317,845 154,439 1,334 473,618 404 $ 20,584 510 21,498 $ 7,428 $ 14,539 – 21,967 $ 273,947 153,491 521 427,959 Amounts subject to enforceable netting arrangements As at October 31, 2021 Related amounts not offset on the Consolidated Balance Sheets (1) Gross amounts of recognized financial instruments Gross amounts offset on the Consolidated Balance Sheets Net amounts presented in the Consolidated Balance Sheets Impact of master netting agreements Financial collateral (2) Net amounts Amounts not subject to enforceable netting arrangements Net amounts presented on the Consolidated Balance Sheets 384,439 $ 84,595 412 469,446 $ 77,028 $ 314 240 77,582 $ 307,411 $ 84,281 172 391,864 $ 338,737 $ 77,514 412 416,663 $ 77,028 $ 314 240 77,582 $ 261,709 $ 77,200 172 339,081 $ 101 $ 305,071 $ 57,101 1 12,978 61 57,203 $ 318,110 $ 101 $ 261,135 $ 57,101 1 10,503 – 57,203 $ 271,638 $ 2,239 $ 14,202 110 16,551 $ 492 $ 11,260 – 11,752 $ 307,903 95,541 172 403,616 473 $ 9,596 171 10,240 $ 492 $ 14,239 – 14,731 $ 262,201 91,439 172 353,812 (Millions of Canadian dollars) Financial assets Assets purchased under reverse repurchase agreements and securities borrowed Derivative assets (3) Other financial assets Financial liabilities Obligations related to assets sold under repurchase agreements and securities loaned Derivative liabilities (3) Other financial liabilities (Millions of Canadian dollars) Financial assets Assets purchased under reverse repurchase agreements and securities borrowed Derivative assets (3) Other financial assets Financial liabilities Obligations related to assets sold under repurchase agreements and securities loaned Derivative liabilities (3) Other financial liabilities $ $ $ $ $ $ $ $ (1) (2) (3) Financial collateral is reflected at fair value. The amount of financial instruments and financial collateral disclosed is limited to the net balance sheet exposure, and any over-collateralization is excluded from the table. Includes cash collateral of $20 billion (October 31, 2021 – $12 billion) and non-cash collateral of $316 billion (October 31, 2021 – $307 billion) received for financial assets and cash collateral of $19 billion (October 31, 2021 – $9 billion) and non-cash collateral of $267 billion (October 31, 2021 – $262 billion) pledged for financial liabilities. Includes cash margin of $3 billion (October 31, 2021 – $3 billion) that was offset against derivative assets and cash margin of $8 billion (October 31, 2021 – $3 billion) that was offset against derivative liabilities on the Consolidated Balance Sheets. 226 Royal Bank of Canada: Annual Report 2022 Consolidated Financial Statements Note 31 Recovery and settlement of on-balance sheet assets and liabilities The table below presents an analysis of assets and liabilities recorded on our Consolidated Balance Sheets by amounts to be recovered or settled within one year and after one year, as at the balance sheet date, based on contractual maturities and certain other assumptions outlined in the footnotes below. As warranted, we manage the liquidity risk of various products based on historical behavioural patterns that are often not aligned with contractual maturities. Amounts to be recovered or settled within one year, as presented below, may not be reflective of our long-term view of the liquidity profile of certain balance sheet categories. (Millions of Canadian dollars) Assets Cash and due from banks (1) Interest-bearing deposits with banks Securities Trading (2) Investment, net of applicable allowance Assets purchased under reverse repurchase agreements and securities borrowed Loans Retail Wholesale Allowance for loan losses Segregated fund net assets Other Customers’ liability under acceptances Derivatives (2) Premises and equipment Goodwill Other intangibles Other assets Liabilities Deposits (3) Segregated fund net liabilities Other 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, 2022 After one year October 31, 2021 Total Within one year After one year Total As at $ 71,081 $ 1,316 $ 72,397 $ 112,924 $ 922 $ 113,846 108,011 – 108,011 79,638 – 79,638 139,810 8,395 148,205 129,206 10,034 139,240 26,540 143,478 170,018 29,831 115,653 145,484 316,714 1,131 317,845 307,805 98 307,903 113,965 70,374 435,786 203,593 – 2,638 17,827 151,928 59 – – 66,071 2,511 7,155 12,277 6,083 14,229 549,751 273,967 (3,753) 2,638 17,827 154,439 7,214 12,277 6,083 80,300 98,946 60,099 404,652 157,967 – 2,666 503,598 218,066 (4,089) 2,666 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 $ 1,082,380 $ 838,592 $ 1,917,219 $ 979,313 $ 731,099 $ 1,706,323 $ 1,023,324 $ 185,490 $ 1,208,814 $ 943,633 $ – 2,638 2,638 – 157,198 $ 2,666 1,100,831 2,666 17,872 – 17,872 19,868 5 19,873 34,105 1,406 35,511 35,524 2,317 37,841 273,001 140,808 1,904 71,689 110 946 12,683 9,607 23,546 9,915 273,947 153,491 261,533 89,804 11,511 95,235 10,025 1,867 48,901 188 668 1,635 10,949 21,400 9,405 262,201 91,439 12,816 70,301 9,593 $ 1,562,813 $ 246,231 $ 1,809,044 $ 1,401,318 $ 206,243 $ 1,607,561 (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. Trading securities designated as FVTPL are generally presented based on contractual maturity. Non-trading derivatives are presented according to the recovery or settlement of the hedging transaction. (3) Demand deposits of $562 billion (October 31, 2021 – $576 billion) are presented as within one year due to their being repayable on demand or at short notice on a contractual basis. In practice, these deposits relate to a broad range of individuals and customer-types which form a stable base for our operations and liquidity needs. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 227 Note 32 Parent company information The following table presents information regarding the legal entity of Royal Bank of Canada with its subsidiaries presented on an equity accounted basis. Condensed Balance Sheets (Millions of Canadian dollars) Assets Cash and due from banks Interest-bearing deposits with banks Securities Investments in bank subsidiaries and associated corporations (1) Investments in other subsidiaries and associated corporations Assets purchased under reverse repurchase agreements and securities borrowed Loans, net of allowance for loan losses Net balances due from bank subsidiaries (1) Other assets Liabilities and shareholders’ equity Deposits Net balances due to 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 2022 October 31 2021 48,062 $ 84,680 174,615 49,841 88,260 132,829 679,580 7,172 227,767 97,617 56,896 153,780 43,546 80,216 125,590 601,742 – 155,421 $ 1,492,806 $ 1,314,808 $ 955,978 $ – 36,701 382,099 854,833 28,201 38,309 285,447 1,374,778 1,206,790 9,964 108,064 9,351 98,667 $ 1,492,806 $ 1,314,808 For the year ended October 31 2022 27,791 $ 12,846 14,945 5,425 20,370 579 10,175 9,616 2,276 7,340 8,454 15,794 $ 5,810 21,604 $ $ $ $ October 31 2021 19,793 5,615 14,178 5,393 19,571 (606) 9,466 10,711 2,088 8,623 7,415 16,038 1,463 17,501 (1) (2) Includes dividend income from investments in subsidiaries and associated corporations of $11 million (October 31, 2021 – $5 million). Includes a nominal share of profit (loss) from associated corporations (October 31, 2021 – nominal). 228 Royal Bank of Canada: Annual Report 2022 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 33 Subsequent events For the year ended October 31 2022 October 31 2021 $ 15,794 $ 16,038 (8,454) 101,145 (78,288) (10,348) 24,133 (7,239) 3,024 2,385 42,152 (27,784) 59,304 (71,509) (1,180) (2,514) (36,981) (80,664) 1,000 – 51 (5,426) 749 (155) (6,960) (302) (11,043) (49,555) 97,617 (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 $ $ 48,062 $ 97,617 7,801 $ 21,332 2,618 4,641 6,306 17,831 2,185 1,772 Acquisition On November 29, 2022, we entered into an agreement to acquire 100% of the common shares of HSBC Bank Canada (HSBC Canada) for an all-cash purchase price of $13.5 billion. In addition, we will purchase all of the existing preferred shares and subordinated debt of HSBC Canada held directly or indirectly by HSBC Holdings plc at par value ($2.1 billion as of September 30, 2022). HSBC Canada is a premier Canadian personal and commercial bank focused on globally connected clients. The transaction is expected to close by late 2023 and is subject to the satisfaction of customary closing conditions, including regulatory approvals. The results of the acquired business will be consolidated from the date of close. Consolidated Financial Statements Royal Bank of Canada: Annual Report 2022 229 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 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 $ 72,397 $ 113,846 $ 118,888 $ 108,011 318,223 79,638 284,724 39,013 275,814 26,310 $ 38,345 249,004 30,209 $ 36,471 222,866 28,407 $ 32,662 218,379 14,929 $ 27,851 236,093 12,452 $ 22,690 215,508 17,421 $ 8,399 199,148 15,550 9,039 182,710 317,845 819,965 280,778 307,903 717,575 202,637 313,015 660,992 216,826 306,961 618,856 189,459 294,602 576,818 173,768 220,977 542,617 169,811 186,302 521,604 193,479 174,723 472,223 176,612 135,580 435,229 144,773 117,517 408,850 126,079 $1,917,219 $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 $1,208,814 $1,100,831 $1,011,885 $ 886,005 $ 836,197 $ 789,036 $ 757,589 $ 697,227 $ 614,100 $ 563,079 239,763 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 9,593 590,205 10,025 $1,809,044 $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 Equity attributable to shareholders 108,064 98,667 86,664 83,523 79,861 73,829 71,017 62,146 52,690 47,665 Non-controlling interest Total equity 111 95 103 102 94 599 595 1,798 1,813 1,795 108,175 98,762 86,767 83,625 79,955 74,428 71,612 63,944 54,503 49,460 Total liabilities and equity $1,917,219 $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 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 Other Statistics – reported (Millions of Canadian dollars, except percentages and per share amounts) (1) PROFITABILITY MEASURES Earnings per shares – basic – diluted Return on common equity (6), (7) Return on risk-weighted assets Efficiency ratio (4) KEY RATIOS PCL on impaired loans as a % of average net loans and acceptances (8) Net interest margin (average earning assets, net) (3), (6) SHARE INFORMATION Common shares outstanding (000s) – end of period Dividends declared per common share Dividend yield (9) Dividend payout ratio Book value per share (10) Common share price (RY on TSX) (11) Market capitalization (TSX) (11) Market price to book value CAPITAL MEASURES – CONSOLIDATED Common Equity Tier 1 capital ratio Tier 1 capital ratio Total capital ratio Leverage ratio $ $ $ $ 2022 22,717 $ 26,268 48,985 484 2021 20,002 $ 29,691 49,693 (753) 2020 20,835 $ 26,346 47,181 4,351 2019 19,749 $ 26,253 46,002 1,864 2018 17,952 $ 24,624 42,576 1,307 2017 16,926 $ 23,743 40,669 1,150 2016 16,531 $ 22,264 38,795 1,546 2015 14,771 $ 20,932 35,703 1,097 2014 14,116 $ 19,992 34,108 1,164 1,783 26,609 15,807 $ 3,891 25,924 16,050 $ 3,683 24,758 11,437 $ 4,085 24,139 12,871 $ 2,676 22,833 12,431 $ 3,053 21,794 11,469 $ 3,424 20,526 10,458 $ 2,963 19,020 10,026 $ 3,573 17,661 9,004 $ 2013 13,249 17,433 30,682 1,237 2,784 16,214 8,342 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 11.08 $ 11.06 $ 16.4% 2.68% 54.3% 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 $ 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% 5.53 5.49 19.7% 2.67% 52.8% 0.10% 1.48% 0.10% 0.24% 0.27% 0.20% 0.21% 0.28% 0.24% 0.27% 0.31% 1.48% 1.55% 1.61% 1.64% 1.69% 1.70% 1.71% 1.86% 1.88% 1,382,911 1,424,525 1,422,473 1,430,096 1,438,794 1,452,535 1,484,235 1,443,955 1,443,125 $ $ $ 4.96 $ 3.7% 45% 72.85 $ 126.05 $ 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 $ 174,316 1.73 183,507 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 1,441,722 2.53 4.0% 46% 29.87 70.02 100,903 2.34 12.6% 13.8% 15.4% 4.4% 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. (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 2022 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 2022 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 2022 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). 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. This measure 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. (6) (7) (8) (9) Defined as dividends per common share divided by the average of the high and low share price in the relevant period. (10) Calculated as common equity divided by the number of common shares outstanding at the end of the period. (11) Based on TSX closing market price at period-end. n.a. not applicable 230 Royal Bank of Canada: Annual Report 2022 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, 2022 Carrying value of voting shares owned by the Bank (3) $ 77,914 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 27,655 13,535 5,604 2,669 1,215 486 (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 2022 231 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: 416-955-7808 email: invesrel@rbc.com 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 and BO are listed on the TSX. The related depository shares of the series C-2 preferred shares are listed on the NYSE. Direct deposit service Shareholders in Canada and the U.S. may have their common share dividends deposited directly to their bank account by electronic funds transfer. To arrange for this service, please contact our Transfer Agent and Registrar, Computershare Trust Company of Canada. Eligible dividend designation For purposes of the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends (and deemed dividends) paid by RBC to Canadian residents on both its common and preferred shares, are designated as “eligible dividends”, unless stated otherwise. Common share repurchases We are engaged in a normal course issuer bid (NCIB) which allows us to repurchase for cancellation up to 45 million common shares during the period spanning from December 8, 2021 to December 7, 2022, when the bid expires, or such earlier date as we may complete the purchases pursuant to our Notice of Intention to Make a NCIB filed with the Toronto Stock Exchange. We determine the amount and timing of purchases under the NCIB, subject to prior consultation with the Office of the Superintendent of Financial Institutions. For further details, refer to the Capital management section. A copy of our Notice of Intention to Make a NCIB may be obtained, without charge, by contacting our Corporate Secretary at our Toronto mailing address. 2023 Quarterly earnings release dates First quarter March 1 Second quarter May 25 Third quarter Fourth quarter November 30 August 24 2023 Annual Meeting The Annual Meeting of Common Shareholders will be held on Wednesday, April 5, 2023. Dividend dates for 2023 Subject to approval by the Board of Directors Common and preferred shares series AZ, BB, BD, BF, BH, BI and BO Preferred shares series C-2 (US$) Preferred shares series BT Record dates January 26 April 25 July 26 October 26 January 27 April 28 July 28 October 27 Payment dates February 24 May 24 August 24 November 24 February 7 May 8 August 8 November 7 February 15 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 CAPITAL MARKETS, RBC FUTURE LAUNCH, RBC GLOBAL ASSET MANAGEMENT, RBC INSURANCE, RBC HOMELINE PLAN, RBC PAYEDGE, RBC TECH FOR NATURE, RBC VANTAGE, RBC WEALTH MANAGEMENT, RBCx, MYADVISOR, InvestEase, AIDEN, OWNR, NOMI, NOMI INSIGHTS, NOMI FIND & SAVE Dr. Bill, MYDOH, Avion Rewards, RBCxMUSIC, AVION, and VANTAGE SNAPSHOT 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. 232 Royal Bank of Canada: Annual Report 2022 Shareholder information rbc.com/ar2022 81104 (12/2022)
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