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ROYAL BANK OF CANADA ANNUAL REPORT 2014

RBC IS A
GLOBAL LEADER
Royal Bank of Canada is the largest bank in Canada, and the
12th largest bank in the world, based on market capitalization.
Our approximately 78,000 employees serve over 16 million
personal, business and corporate clients across a diversified
mix of businesses in 40 countries.
Our values define who we are:
Service – Excellent service to clients and each other
Teamwork – Working together to succeed
Responsibility – Personal responsibility for high performance
Diversity – Diversity for growth and innovation
Integrity – Trust through integrity in everything we do
CONTENTS
We Have A Focused
Strategy

1

We Create Long-term Value

2

We Have Five Key Strengths
That Drive Our Success

Enhanced Disclosure Task Force
Recommendations Index
107

3

Reports and Consolidated
Financial Statements

108

Ten-Year Statistical Review

197

4

Glossary

199

We Make Communities
Stronger

5

Directors and
Executive Officers

202

Message from Dave McKay

6

Principal Subsidiaries

203

Message from Katie Taylor

9

Shareholder Information

204

We Deliver Stability &
Opportunity Through
Diversification

Management’s Discussion
and Analysis

For more information, please visit: rbc.com
To view our online annual report, please visit:
rbc.com/ar2014

10

WE HAVE A
FOCUSED STRATEGY
Our client focus, diversified business model and commitment to our
long-term strategic priorities have been fundamental to our growth and
success in the past, and will allow us to continue to create value in the future.
STRATEGIC GOALS
In Canada, to be the
undisputed leader in
financial services

Globally, to be a leading
provider of capital
markets, investor and
wealth management
solutions

In targeted markets, to
be a leading provider of
select financial services
complementary to our
core strengths

2014 KEY HIGHLIGHTS
䊳

Gained market share across key
businesses and client segments

䊳

Delivered solid volume growth
(loans and deposits)

䊳

Launched new products to meet
clients’ evolving needs

䊳

Continued to lead the Canadian
league tables

䊳

Recognized as Canada’s most
valuable brand

䊳

Expanded international distribution
of our U.S. and global asset
management business

䊳

Continued to optimize Caribbean
banking operations for efficiency
and profitability

䊳

Deepened offering and capabilities in
key markets to win new clients and
mandates and to grow market share

䊳

Strengthened our cross-border
banking business in the U.S.

䊳

Strategically added top talent
within capital markets and wealth
management in the U.S. and
internationally

2015 STRATEGIC PRIORITIES
1.

Extend lead in Canada through largest distribution network and increased efficiency

2.

Deepen presence in the U.S., U.K./Europe and key international hubs by expanding capabilities, offering and distribution

3.

Lead change with differentiated experiences to help clients achieve their goals

4.

Pursue balanced growth opportunities and disciplined use of capital to create value for the long term

5.

Maintain robust risk management staying within our risk appetite across our diversified business model

Royal Bank of Canada: Annual Report 2014

1

WE CREATE
LONG-TERM VALUE
We delivered record earnings and strong returns to shareholders. In 2014, we
grew earnings by 8%, increased our quarterly dividend by 12% compared to
last year, delivered strong return on equity (ROE) of 19% and maintained a
robust capital ratio of 9.9%.

MEDIUM-TERM OBJECTIVE

2014

(3 TO 5-YEAR)

RESULTS

ACHIEVED

7%+

9.3%

✓

Return on Equity

18%+

19.0%

✓

Capital Ratios (CET1)

Strong

9.9%

✓

40%–50%

47%

✓

Financial Performance Metric
Diluted EPS Growth

Dividend Payout Ratio

Strong
Earnings

Profitable
Growth

Financial
Strength

Delivered Returns
to Shareholders

NET INCOME
(C$ BILLION)

RETURN ON EQUITY
(ROE)

COMMON EQUITY TIER 1 (CET1)
CAPITAL RATIO

DIVIDENDS DECLARED
PER SHARE

19.6% 19.7%

$9.0

19.0%

$8.3

8.9%

9.6%

9.9%

$2.84

(pro forma)

$7.5

Annualized
dividend
increase of:
12% – 1 yr
11% – 10 yr CAGR

$1.01

12

13

14

12

13

12

14

13

14

04

14

Over the past decade, we’ve delivered a strong annualized total shareholder return (TSR) of 14%, second highest among our global peer
group. Our strong TSR has been underpinned by consistent financial performance and low earnings volatility.

Total Shareholder Return1

ONE-YEAR

THREE-YEAR

FIVE-YEAR

TEN-YEAR

RBC

19%

23%

12%

14%

Global Peer Average

11%

19%

8%

5%

1. Compounded annually, as at October 31, 2014. The peer group average excludes RBC; for more information on the list of 19 financial institutions in the peer group, refer to the Financial
performance section of our 2014 Management’s Discussion and Analysis.

2

Royal Bank of Canada: Annual Report 2014

WE HAVE FIVE
KEY STRENGTHS THAT
DRIVE OUR SUCCESS
Our key strengths underpin past performance and provide a strong foundation
for future growth. These strengths enable us to successfully deliver on our
strategy.

CLIENT
FOCUS
@ Named Bank of the Year
for Canada1
@ Best-in-class client
service, wealth planning
and trust offerings2
@ Received Best Banking
awards for financial
planning, advice and
channel excellence3
@ Recognized as a global
leader among investment
banks in expertise and skill4

SIZE & SCALE IN
CANADA WITH
GLOBAL REACH
@ Largest bank in Canada by
market capitalization5
• 5th in North America
• 12th globally
@ 40 countries

DIVERSIFIED
BUSINESS MODEL
@ Diversified by
business, geography
and client segment
@ 37% of revenue from
outside Canada

@ ~78,000 employees
@ ~16 million clients
@ 4.5+ million active online
& mobile clients
@ ~1,400 branches

FINANCIAL STRENGTH &
PRUDENT RISK MANAGEMENT

EMPLOYEES, BRAND
& REPUTATION

@ Consistent earnings and
dividend growth

@ Named one of the Best Workplaces in
Canada6 for the 6th consecutive year
while attracting talented employees
globally

@ Strong capital position
and credit ratings

@ Canada’s most valuable
brand and 16th most
valuable bank brand
globally7

@ Prudent risk management
built on a culture of doing
what’s right

@ One of the World’s
Most Admired
Companies8
1. The Banker.
2. Private Banker International.
3. Ipsos – Best Banking Awards.
4. The Economist.

5. Bloomberg as at Oct. 31, 2014.
6. The Great Place to Work® Institute.
7. Brand Finance.
8. Fortune.
Royal Bank of Canada: Annual Report 2014

3

WE DELIVER
STABILITY & OPPORTUNITY
THROUGH DIVERSIFICATION
We serve our clients through a number of business lines across many geographies.
We’re confident we have the right mix to deepen client relationships, benefit from growth
opportunities and support consistent performance over the long term. Our diversified
business model positions us well to deliver superior returns and earnings stability through
the business cycle.

9%

12%

INSURANCE

WEALTH MANAGEMENT
@ Top 5 global wealth manager and
top 50 global asset manager2
1

•

Among the fastest-growing asset
managers in the world2

•

#1 in Canada in mutual funds3

•

Top 10 full-service brokerage firm
in the U.S.4

@ Among the fastest-growing insurance
organizations in Canada5
@ One of the largest Canadian bankowned insurance organizations

5%
INVESTOR &
TREASURY SERVICES
@ Top 10 global custodian6

51%
PERSONAL &
COMMERCIAL BANKING
@ #1 or #2 market share in
all Canadian banking retail
product categories

@ Best overall global custodian7

CAPITAL MARKETS

@ Largest distribution network
in Canada

@ Top 10 global investment bank8

@ Recognized as the Global Retail
Bank of the Year11

@ Recognized as the Most Trusted
Investment Bank in the World9

@ First bank globally to provide a
cloud-based mobile payment
solution offering clients a choice
of paying with credit or debit, and
the first in North America to offer
the flexibility to pay a friend
through Facebook Messenger

@ Named Best Investment Bank in
Canada across Equity, Debt and
M&A for the 7th consecutive year10

* Amounts exclude Corporate Support

For more awards, please visit: rbc.com/aboutus/awards
4

23%

2014
EARNINGS
$9.0B

Royal Bank of Canada: Annual Report 2014

•

1.

#1 in Canada

By client assets – Scorpio Partnership’s 2014
Global Private Banking Benchmark.
2. Pensions & Investments and Towers Watson 2014
Global Asset Manager Ranking Report.
3. By assets – Investment Funds Institute of Canada
(IFIC) as at September, 2014.
4. By assets and advisors – Company data.
5. Company data.
6. By AUA.
7. Global Investor.
8. Thomson Reuters by fees.
9. The Economist.
10. Euromoney.
11. Retail Banker International.

WE MAKE
COMMUNITIES
STRONGER
We contributed more than $100 million this year to causes that will have a positive and
lasting social, economic and environmental impact for generations to come. We are actively
involved with charitable organizations around the world and we support our employees in
their volunteering efforts.

RBC KIDS PLEDGE:
$100 MILLION.
5 YEARS.

We believe kids are our future: for our economic prosperity,
the health of the planet and the hope for our communities.

The RBC Kids Pledge is a commitment to
improve the well-being of at least 1 million
kids and youth. We believe kids need and
deserve our complete commitment so they
can be healthy in mind, body and spirit.
This pledge consolidates our support for a
diverse range of arts, sports, wellness,
education and employment programs to
help kids reach their full potential.
When you believe in kids, they can do
anything.

RBC BLUE
WATER PROJECT®:
$50 MILLION.
10 YEARS.

Employees laced up their running shoes to take
part in RBC Run/Race for the Kids events globally to
help raise funds for local children’s charities.

We help provide access to drinkable, swimmable, fishable water
now and for future generations.
The RBC Blue Water Project is our global
charitable commitment that is dedicated
to protecting fresh water and promoting
responsible water use. This year, RBC
Blue Water Project Leadership and
Community Action Grants provided
funding for protection and preservation
programs.
On RBC Blue Water Day, more than 20,000 employees
rolled up their sleeves and participated in over 700
‘clean up,’ ‘plant some green’ and ‘cultivate awareness’
makeover events to help protect water.

WE ALSO INVEST IN A WIDE RANGE OF EDUCATION, HEALTH, ARTS & CULTURE,
ENVIRONMENT AND SPORTS PROGRAMS AND ORGANIZATIONS
For more information, please visit: RBC Corporate Responsibility Review at rbc.com/community-sustainability
Royal Bank of Canada: Annual Report 2014

5

MESSAGE FROM
DAVE MCKAY
Dave McKay
President and Chief Executive Officer

Dear fellow shareholders,
Let me begin this letter by saying that I’m
honoured to serve as your President and
Chief Executive Officer. I started my career
at RBC more than 25 years ago as a summer
student. As I worked in different
businesses, functions and locations over
the years, I was always impressed by the
calibre of people who work here. Today, I’m
privileged to lead this tremendous team
with a shared commitment to building on
RBC’s proud history of more than 150 years.
Six years after the financial crisis it feels
like the global economy has begun to turn a
corner. The Canadian and U.S. economies
continued to improve throughout the year.
While the central banks of both countries
maintained historically low interest rates,
we saw lower unemployment, higher
consumer spending and improved housing
market activity – all signals of healthy
economic activity. The U.S. Federal Reserve
ended its asset purchase program in
October, further proof that the U.S.
economy is back on track. While growth in
Europe was slow, the U.K. continued to be a
good news story in the region. Across the
banking industry, regulation continued to
be a key theme.

Delivering record financial results in
2014 for our shareholders
Against this backdrop, I’m pleased to report
that 2014 was a record year for RBC. We
continued to extend our leadership position
in Canada and build our businesses in
select global markets. We earned $9 billion,

6

Royal Bank of Canada: Annual Report 2014

up 8 per cent from last year, reflecting
record results in all of our business
segments.
With these results, we achieved all of our
financial objectives. We earned $6.00 per
share (diluted EPS) with a return on equity
of 19 per cent, and we ended the year with
a strong Common Equity Tier 1 capital
ratio of 9.9 per cent.
These financial objectives measure
progress toward our medium-term
objective of maximizing Total Shareholder
Returns (TSR). We delivered compound
annual TSR of 23 per cent and 12 per cent
over the three- and five-year periods.
During 2014, our one-year TSR was 19 per
cent. We raised our dividend twice during
2014 for a combined increase of 12 per
cent while repurchasing shares, and we
renewed our share buyback program for
2015.

Building on our strengths to grow our
businesses
Looking ahead, we understand the drivers
of growth will be different from those in
the past decade, and I feel confident RBC
can adapt to changes and capitalize on
new opportunities including the shift in
demographics, the emergence of new
technologies and the changing needs and
preferences of our clients.
We know the pace of consumer borrowing
in Canada will continue to moderate
following many years of strong credit
growth, and that the shift to savings and
investing will accelerate. In fact,
investments are forecast to grow three

I am enormously proud of
what we’ve achieved
together and incredibly
excited for the
opportunities that lie
ahead
times faster than credit over the next
decade. RBC is extremely well positioned to
serve our clients as we are the largest
mutual fund provider in our home market,
selling almost twice as many mutual funds
as our nearest bank competitor. We also
have the largest full-service wealth
management business with leading market
share for high-net-worth individuals in
Canada, and we have the most mobile and
branch-based investment and financial
planners to serve our clients. We are also
among the fastest-growing insurance
organizations in Canada.
As the market leader in business financial
services in Canada, we see opportunity
from the growing demand for credit from
businesses, especially as improvements in
the U.S. economy help foster greater
confidence to spur investing. Additionally,
with over 45 per cent of businesses
expected to change ownership in the next
five to 10 years, we are well placed to help
business owners plan for succession and
with the transition itself – by finding a
buyer, financing the transaction and
managing their new wealth.

ANNOUNCED 37% TOTAL
INCREASE TO QUARTERLY
DIVIDENDS OVER 3 YEARS

There is no question our home market is a
competitive banking environment and
pressure from continued low interest rates
will remain a headwind for our business
next year. Within this context, we are
committed to improving on our industry
leading efficiency ratio and deepening
client relationships through cross-sell, a
proven capability for RBC. Overall, I believe
we can continue to extend our lead in
Canada to deliver profitable growth.
Globally, we have the right strategies to
build leadership in select businesses and
markets where our strengths can help us
win.
We have a strong presence in the U.S., an
advantage given the expected growth in the
American economy. In our Capital Markets
business, the U.S. now accounts for more
than 50 per cent of revenue, reflecting
strong client acquisition over the past
number of years, and we are focused on
building deeper relationships with those
clients. Our U.S. Wealth Management
business is the seventh-largest full-service
brokerage by assets and we are broadening
our product offering. Over the last few years
we’ve also added global fixed income and
equity capabilities to our asset
management business in that market,
which continues to grow.
In the U.K. and Europe, we are building our
presence, adding expertise across wealth
management, asset management and
capital markets, and benefitting from RBC’s
brand and reputation. Given the challenging
economic environment, we are taking a
prudent approach to building our

capabilities as we know the recovery will
take some time. I am encouraged by our
progress in these markets and expect it to
continue. In Capital Markets, we are
increasingly winning corporate and
investment banking mandates. We are
among the fastest growing asset
managers with strong momentum outside
of Canada. With its reputation for service
excellence, our Investor & Treasury
Services business is also well positioned
for expansion in the global investment
industry.

Second, we remain committed to returning
capital to shareholders through dividend
increases and share buybacks. And lastly,
we will consider targeted acquisitions that
fit our strategy and risk appetite, and
deliver strong returns for our shareholders
over the long term.

Across all of our businesses advancements in technology are changing client
expectations, transforming business
models and redefining the competitive
landscape. Meanwhile, the regulatory
environment for banks will continue to
evolve. Our financial strength gives us the
flexibility to effectively manage regulatory
changes while investing in our
businesses. We have digitized and
simplified processes to lower costs and
deliver a faster, better client experience,
and are investing in our technology and
innovation to shape the future with new
products and services. For example, this
year we launched a new system that
automates many of the steps in
processing a new mortgage to deliver
faster service, and we are a leader in
emerging payment solutions.

Whether it’s helping them buy their first
home, start their own business, travel
worry-free, pay for their children’s
education or prepare for a comfortable
retirement, we enable more than 16 million
clients in achieving their goals. At the end
of 2014, we funded $231 billion in
mortgages and lines of credit for
homeowners in Canada and $5 billion in
small business loans for Canadian
entrepreneurs. We grew the assets
entrusted to us by investors around the
world by 13 per cent this year.

Looking ahead, we will maintain our
balanced and disciplined approach to
capital deployment. Our first priority will
remain investing in our existing
businesses to generate strong returns.

Bringing the best of RBC to our clients
United by our vision of always earning the
right to be our clients’ first choice, we put
customers at the centre of everything that
we do.

We loaned nearly $110 billion to medium
and large companies around the world to
help them build their businesses, and
ensured our institutional clients could make
informed decisions by providing top-ranked
research and investment solutions in key
international markets.

Royal Bank of Canada: Annual Report 2014

7

NAMED BANK OF
THE YEAR FOR CANADA1

Creating opportunities for our
employees
Our employees’ passion for helping
clients succeed is second to none. They
represent our brand with pride. I’m
particularly proud of how much our
employees care about doing what’s right.
Our people, culture and brand are a true
differentiator wherever we do business.
We enable success by fostering an
environment of respect and inclusion
where everyone can contribute and
achieve their potential. The diversity of
our workforce brings different
perspectives and abilities and plays a
central role in serving our clients and
driving productivity, innovation and
growth.

Making a positive difference in
communities
One of the things that defines RBC is the
positive social, economic and environmental impact we make in communities.
In 2014, we invested more than
$100 million in community efforts, shared
our expertise and provided nearly
2,500 RBC Employee Volunteer grants.
We’re on track to improve the well-being
of at least one million kids and youth
through our multi-year, $100-million RBC
Kids Pledge. A key element of that
commitment is the RBC Run/Race for the
Kids, which took place in seven cities
around the world, and this year more than
8,000 employees, their families and
friends ran with us in support of local

8

Royal Bank of Canada: Annual Report 2014

children’s charities. Our employees are
also tremendous supporters of the RBC
Blue Water Project, our commitment to
protecting fresh water for generations to
come.

We serve more than
25% of active
Canadian digital
banking clients2

Thank you
Thank you to our clients who choose to
place their trust in us, and to our
employees who work so hard to help them
succeed.
I’d like to acknowledge and thank Gordon
Nixon, who retired as CEO this year, for his
leadership of a truly world-class
organization, and for leaving the company
with the strength and depth to build for
the future. And finally, I’d like to express
my gratitude to the Board of Directors for
their continued insight and counsel.
And to you, our shareholders, we are
committed to delivering high-quality
growth, industry-leading returns and longterm value. I am enormously proud of
what RBC has achieved and incredibly
excited for the opportunities that lie
ahead.

David McKay
President and Chief Executive Officer

We have more than
30% share of all
mutual funds
sold by banks in
Canada – other banks
have less than 20%3
Awarded Best Fund
Group Overall4
Named Most Trusted
Investment Bank in
the World5

1. The Banker.
2. Finalta Digital and Multichannel
Banking Benchmark 2014 Study –
Big 5 Canadian banks.
3. Investment Funds Institute of Canada,
September 2014.
4. 2014 Lipper Canada Fund Awards.
5. The Economist.

MESSAGE FROM
KATIE TAYLOR
Katie Taylor, Chair of the Board

Dear fellow shareholders,
It is an honour to take on the role of Chair,
more than a decade after first joining RBC’s
Board of Directors in 2001.
Over the years the Board has overseen
RBC’s continued growth resulting from its
successful focus on cultivating broad and
deep client relationships, investing in
people and contributing to the economic
prosperity and betterment of communities
where it does business.
In 2014 the Board continued to engage with
the outstanding management team at RBC.
Our oversight is directed at guiding their
business decisions to deliver value to
shareholders over the long term.

RBC has the right strategy to drive
growth and create value
As strategic advisors to management, the
Board must prudently balance strategic
opportunities with risk discipline. Today’s
approach to shareholder value creation
must build agility to benefit from opportunities to allow RBC to thrive in tomorrow’s
changing environment. To that end, the
Board and management actively discuss
how RBC is positioned to grow as external
factors such as technology, regulation and
changing client demographics shape the
financial services industry.
The Board is focused on ensuring that RBC
has both the right strategy to drive
continued success and the competitive
strengths and capabilities to deliver on its
priorities. We assess the amount and type
of risk RBC will accept in pursuit of its
business objectives, and monitor the
organization’s systems and processes to
manage those risks. We work closely with
management on how best to enhance the
bank’s strong capital position and create
value by investing in organic growth,

funding dividend increases, repurchasing
shares or making strategic acquisitions.

RBC has the right team in place to
benefit from future opportunities
Succession planning, including the
selection and appointment of the senior
management team, is a fundamental
responsibility of the Board. We review the
depth and diversity of succession pools
for key leadership roles, and we monitor
the progress of succession candidates.
This year Dave McKay succeeded Gordon
Nixon as President and CEO, and there
were a number of other important
appointments at the Group Executive
level. The skills and experience of our
senior leaders are essential to achieving
sustainable growth over the long term.
The Board is confident that under Dave
McKay’s leadership, RBC will continue to
build on its past successes. His
distinguished 26-year career at RBC
includes international experience in
corporate banking and senior roles in
retail banking and risk management. His
outstanding dedication to clients, focus
on innovation, commitment to employees
and track record of performance will serve
RBC well as it continues to grow.
As the bank grows and its leadership team
transitions, we remain committed to
enhancing the diversity of experience,
perspectives and skill sets represented on
the Board. We are pleased to welcome
Dave McKay and Jacynthe Côté to the
Board, and to announce that Toos
Daruvala will join as a Director in January
2015. With a longstanding career at Rio
Tinto Alcan, most recently as President
and Chief Executive Officer, Ms. Côté
brings extensive experience in international business. Mr. Daruvala, currently a
Director and Senior Partner at McKinsey &

Company, brings more than 30 years of
experience in advising financial institutions
on matters ranging from banking and risk
management practices to corporate strategy
and organizational effectiveness.
As we welcome these three new Directors,
we say farewell to one. Over his 13-year
tenure as CEO, Gordon Nixon added
tremendous value in earnings, returns and
client focus. Under his guidance, RBC has
taken its place among the most-respected
financial institutions globally.

RBC is committed to driving growth,
which is essential to its continued
success
The Board of Directors recognizes that RBC
succeeds when its stakeholders –
shareholders, employees, clients and
communities – succeed. As one of the
largest financial institutions in the world,
RBC sets high standards as a top employer
and leading corporate citizen. United by
strong corporate values, the Board of
Directors, management and employees
worldwide share the vision of always
earning the right to be our clients’ first
choice.
In 2014, RBC delivered significant value to
stakeholders as it continued to grow and
deliver on its strategic goals. I want to thank
my fellow Board members for their valuable
advice. The Board would like to extend its
sincere thanks to the management team at
RBC and the company’s dedicated
employees who serve and focus on clients
– each and every day.

Kathleen Taylor
Chair of the Board

For more information on our governance policies, visit: rbc.com/governance
Royal Bank of Canada: Annual Report 2014

9

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, 2014, compared to the preceding two years. This MD&A should be read in conjunction with our 2014 Annual Consolidated Financial Statements and related
notes and is dated December 2, 2014. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements prepared in accordance with
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), unless otherwise noted.
Additional information about us, including our 2014 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.

Table of contents
Caution regarding forward-looking statements

10

Overview and outlook
Selected financial and other highlights
About Royal Bank of Canada
Vision and strategic goals
Economic and market review and outlook
Defining and measuring success through Total
Shareholder Returns

11
11
12
12
12

Key corporate events of 2014

14

Financial performance
Overview

14
14

Business segment results
Results by business segment
How we measure and report our business segments
Key performance and non-GAAP measures
Personal & Commercial Banking
Wealth Management
Insurance

18
18
19
19
23
28
31

13

Investor & Treasury Services
Capital Markets
Corporate Support

34
35
39

Quarterly financial information
Fourth quarter 2014 performance
Quarterly results and trend analysis

39
39
40

Results by geographic segment

42

Financial condition
Condensed balance sheets
Off-balance sheet arrangements

43
43
43

Risk management
Overview
Top and emerging risks
Enterprise risk management
Credit risk
Market risk
Liquidity and funding risk
Insurance risk

46
46
46
47
52
63
68
78

Regulatory compliance risk
Operational risk
Strategic risk
Reputation risk
Legal and regulatory environment risk
Competitive risk
Systemic risk

Overview of other risks

78
79
80
80
80
82
82

82

Capital management

85

Additional financial information
Exposures to selected financial instruments

94
94

Accounting and control matters
Critical accounting policies and estimates
Controls and procedures

95
95
99

Related party transactions

99

Supplementary information

100

See our Glossary for definitions of terms used throughout this document

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 2014 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 and market review and outlook for Canadian, U.S., European
and global economies, the regulatory environment in which we operate, the outlook and priorities for each of our business segments, and the risk environment including our
liquidity and funding risk. 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 and our financial performance objectives,
vision and strategic goals, and may not be appropriate for other purposes. Forward-looking statements are typically identified by words such as “believe”, “expect”, “foresee”,
“forecast”, “anticipate”, “intend”, “estimate”, “goal”, “plan” and “project” and similar expressions of future or conditional verbs such as “will”, “may”, “should”, “could” or
“would”.
By their very nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, which give rise to the possibility that
our predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that our assumptions may not be correct and that our financial performance
objectives, vision and strategic goals will not be achieved. We caution readers not to place undue reliance on these statements as a number of risk factors could cause our
actual results to differ materially from the expectations expressed in such forward-looking statements. These factors – many of which are beyond our control and the effects of
which can be difficult to predict – include: credit, market, liquidity and funding, insurance, regulatory compliance, operational, strategic, reputation, legal and regulatory
environment, competitive and systemic risks and other risks discussed in the Risk management and Overview of other risks sections; anti-money laundering, growth in
wholesale credit, the high levels of Canadian household debt; cybersecurity; the business and economic conditions in Canada, the U.S. and certain other countries in which we
operate; the effects of changes in government fiscal, monetary and other policies; tax risk and transparency; our ability to attract and retain employees; the accuracy and
completeness of information concerning our clients and counterparties; the development and integration of our distribution networks; model, information technology,
information management, social media, environmental and third party and outsourcing risk.
We caution that the foregoing list of risk factors is not exhaustive and other factors could also adversely affect our results. When relying on our forward-looking statements
to make decisions with respect to us, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Material economic
assumptions underlying the forward looking statements contained in this 2014 Annual Report are set out in the Overview and outlook section and for each business segment
under the heading Outlook and priorities. 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 management and Overview of other risks sections.
Information contained in or otherwise accessible through the websites mentioned does not form part of this report. All references in this report to websites are inactive textual references and
are for your information only.

10

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Overview and outlook
Selected financial and other highlights

Table 1
2014

(Millions of Canadian dollars, except per share, number of and percentage amounts)

Continuing operations
Total revenue
Provision for credit losses (PCL)
Insurance policyholder benefits, claims and
acquisition expense (PBCAE)
Non-interest expense
Net income before income taxes
Net income from continuing operations
Net loss from discontinued operations
Net income
Segments – net income from continuing operations
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support
Net income from continuing operations
Selected information
Earnings per share (EPS) – basic
– diluted
Return on common equity (ROE) (2), (3)
Selected information from continuing operations
EPS – basic
–diluted
ROE (2), (3)
PCL on impaired loans as a % of average net loans and
acceptances
Gross impaired loans (GIL) as a % of loans and acceptances
Capital ratios and multiples (4)
Common Equity Tier 1 (CET1) ratio (4)
Tier 1 capital ratio (4)
Total capital ratio (4)
Assets-to-capital multiple (4)
Selected balance sheet and other information
Total assets
Securities
Loans (net of allowance for loan losses)
Derivative related assets
Deposits
Common equity
Average common equity (2)
Total capital risk-weighted assets
Assets under management (AUM)
Assets under administration (AUA) (5)
Common share information
Shares outstanding (000s) – average basic
– average diluted
– end of period
Dividends declared per common share
Dividend yield (6)
Common share price (RY on TSX)
Market capitalization (TSX)
Business information from continuing operations (number of)
Employees (full-time equivalent) (FTE)
Bank branches
Automated teller machines (ATMs)
Period average US$ equivalent of C$1.00 (7)
Period-end US$ equivalent of C$1.00

$

$
$

$

34,108
1,164
3,573
17,661
11,710
9,004
–
9,004
4,475
1,083
781
441
2,055
169
9,004

2013 (1)
$

$
$

$

30,682
1,237
2,784
16,214
10,447
8,342
–
8,342
4,380
886
595
339
1,700
442
8,342

2014 vs. 2013
Increase (decrease)

2012 (1)
$

$
$

$

29,147
1,299
3,621
14,641
9,586
7,558
(51)
7,507
4,056
753
713
102
1,576
358
7,558

$

$
$

$

3,426
(73)

11.2%
(5.9)%

789
1,447
1,263
662
–
662

28.3%
8.9%
12.1%
7.9%
0.0%
7.9%

95
197
186
102
355
(273)
662

2.2%
22.2%
31.3%
30.1%
20.9%
(61.8)%
7.9%

$

6.03
6.00
19.0%

$

5.53
5.49
19.7%

$

4.96
4.91
19.6%

$

0.50
0.51
n.m.

9.0%
9.3%
(70) bps

$

6.03
6.00
19.0%

$

5.53
5.49
19.7%

$

4.99
4.94
19.7%

$

0.50
0.51
n.m.

9.0%
9.3%
(70) bps

$

0.27%
0.44%

0.31%
0.52%

0.35%
0.58%

n.m.
n.m.

(4) bps
(8) bps

9.9%
11.4%
13.4%
17.0X

9.6%
11.7%
14.0%
16.6X

n.a.
13.1%
15.1%
16.7X

n.m.
n.m.
n.m.
n.m.

30 bps
(30) bps
(60) bps
40 bps

80,805
16,438
26,379
12,580
51,021
5,551
5,100
53,069
65,900
596,100

9.4%
9.0%
6.5%
16.8%
9.1%
12.9%
12.6%
16.6%
16.8%
14.7%

940,550
199,148
435,229
87,402
614,100
48,615
45,700
372,050
457,000
4,647,000

$

859,745
182,710
408,850
74,822
563,079
43,064
40,600
318,981
391,100
4,050,900

$

823,954
161,602
378,241
91,293
512,244
38,346
36,500
280,609
343,000
3,653,300

$

1,442,553
1,452,003
1,442,233
$
2.84
3.8%
$
80.01
115,393

1,443,735
1,466,529
1,441,056
$
2.53
4.0%
$
70.02
100,903

1,442,167
1,468,287
1,445,303
$
2.28
4.5%
$
56.94
82,296

(1,182)
(14,526)
1,177
$
0.31
n.m.
$
9.99
14,490

(0.1)%
(1.0)%
0.1%
12.3%
(20) bps
14.3%
14.4%

73,498
1,366
4,929
0.914
0.887

74,247
1,372
4,973
0.977
0.959

74,377
1,361
5,065
0.997
1.001

(749)
(6)
(44)
(0.063)
(0.072)

(1.0)%
(0.4)%
(0.9)%
(6.4)%
(7.5)%

$
$

$
$

$
$

$
$

(1)

Comparative amounts prior to November 1, 2013 have been restated for the adoption of new accounting standards. For further details, refer to Note 2 of our 2014 Annual Consolidated
Financial Statements.
(2)
Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. This includes ROE and Average common equity. For further details,
refer to the Key performance and non-GAAP measures section.
(3)
These measures may not have a standardized meaning under generally accepted accounting principles (GAAP) and may not be comparable to similar measures disclosed by other financial
institutions. For further details, refer to the Key performance and non-GAAP measures section.
(4)
Effective the first quarter of 2013, we calculate capital ratios and Assets-to-capital multiple using the Basel III framework. Capital ratios presented above are on an “all-in” basis. Capital ratios
and Assets-to-capital multiple in 2012 were calculated using the Basel II framework. Basel III and Basel II are not directly comparable. The CET1 ratio is a regulatory measure under the Basel
III framework and is not applicable (n.a.) for 2012. For further details, refer to the Capital management section.
(5)
Includes $31.2 billion (2013 – $32.6 billion, 2012 – $38.4 billion) of securitized mortgages and credit card loans.
(6)
Defined as dividends per common share divided by the average of the high and low share price in the relevant period.
(7)
Average amounts are calculated using month-end spot rates for the period.
n.m. not meaningful
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

11

About Royal Bank of Canada
Royal Bank of Canada (RY on TSX and NYSE) is Canada’s largest bank, and one of the largest banks in the world, based on market capitalization.
We are one of North America’s leading diversified financial services companies, and provide personal and commercial banking, wealth
management services, insurance, investor services and capital markets products and services on a global basis. We employ approximately
78,000 full- and part-time employees who serve more than 16 million personal, business, public sector and institutional clients through offices
in Canada, the U.S. and 38 other countries. For more information, please visit rbc.com.
Our business segments are described below.
Personal & Commercial Banking operates in Canada, the Caribbean and the U.S., and comprises our personal and business banking
operations, as well as our auto financing and retail investment businesses.
Wealth Management serves affluent, high net worth and ultra-high net worth clients from our offices in key financial centres mainly in
Canada, the U.S., the U.K., Channel Islands, continental Europe, and Asia with a comprehensive suite of investment, trust, banking, credit and
other wealth management solutions. We also provide asset management products and services directly to institutional and also to individual
clients through our distribution channels and third-party distributors.
Insurance provides a wide range of life, health, home, auto, travel, wealth and reinsurance products and solutions. We offer insurance
products and services through our proprietary distribution channels, comprised of the field sales force which includes retail insurance branches,
our field sales representatives, call centres and online, as well as through independent insurance advisors and affinity relationships in Canada.
Outside Canada, we operate in reinsurance markets globally.
Investor & Treasury Services serves the needs of institutional investing clients by providing asset servicing, custodial, advisory, financing
and other services to safeguard assets, maximize liquidity and manage risk in multiple jurisdictions around the world. We also provide shortterm funding and liquidity management for RBC.
Capital Markets provides public and private companies, institutional investors, governments and central banks with a wide range of
products and services. In North America, we offer a full suite of products and services which include corporate and investment banking, equity
and debt origination and distribution, and structuring and trading. Outside North America, we offer a diversified set of capabilities in our key
sectors of expertise such as energy, mining and infrastructure and we are now expanding into industrial, consumer and health care in Europe.
Our business segments are supported by Corporate Support, which consists of Technology & Operations and Functions. Technology &
Operations provides the technological and operational foundation required to effectively deliver products and services to our clients, while
Functions includes our finance, human resources, risk management, internal audit and other functional groups.
The following chart presents our business segments and respective lines of business:
ROYAL BANK OF CANADA
Personal &
Commercial Banking
O
O

Wealth
Management

Canadian Banking
Caribbean &
U.S. Banking

O

O

O

Canadian Wealth
Management
U.S. & International
Wealth
Management
Global Asset
Management

Insurance
O

O

Investor & Treasury
Services

Canadian
Insurance
International
Insurance

Capital
Markets
O

O
O

Corporate and
Investment
Banking
Global Markets
Other

Corporate Support
O

Technology & Operations

O

Functions

Vision and strategic goals
Our business strategies and actions are guided by our vision of “Always earning the right to be our clients’ first choice.” Our three strategic
goals are:
•
In Canada, to be the undisputed leader in financial services;
•
Globally, to be a leading provider of capital markets, investor and wealth management solutions; and
•
In targeted markets, to be a leading provider of select financial services complementary to our core strengths.
For our progress in 2014 against our business strategies and strategic goals, refer to the Business segment results section.
Economic and market review and outlook – data as at December 2, 2014
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. For details on
risk factors from general business and economic conditions that may affect our business and financial results, refer to the Overview of other risks
section.
Canada
The Canadian economy is expected to grow at an estimated rate of 2.5% during calendar 2014, slightly below our estimate of 2.6% as at
December 4, 2013. Growth in the economy continues to be driven by solid consumer spending and strength in the labour market on employment
gains as the unemployment rate fell to its lowest level since November 2008 at 6.5% in October 2014. Housing market activity remained firm
through the year, despite the dampening impact of poor weather conditions early in 2014. Weakening commodity prices, lower expectations of
interest rate increases by the Bank of Canada (BoC) and a strengthening of the U.S. dollar compared to most world currencies due to an improving
U.S. economy and anticipated U.S. interest rate increases are key factors in the Canadian dollar depreciating against the U.S. dollar during 2014.
Interest rates remained low as the persistence of excess capacity in the economy led the BoC to maintain its overnight rate at 1% in October 2014.
12

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

In calendar 2015, we expect the Canadian economy to grow at an estimated rate of 2.7%, driven by an improvement in net exports, increase
in business investment, and steady, albeit slowing consumer spending growth. We expect growth in the housing market to ease to more
sustainable levels in 2015 as market interest rates move higher and household debt accumulation slows. As the economy strengthens and
inflation holds around the BoC’s target level of 2% on a sustained basis, we expect the BoC to begin to raise its overnight rate from the current
1% in the middle of calendar 2015.
U.S.
We expect the U.S. economy to grow at an estimated rate of 2.3% during calendar 2014, which is below our estimate of 2.7% as at December 4,
2013. Strengthening consumption and firming business investment continue to drive the economy, with weaker net exports and the impact of
poor weather early in the year limiting growth. Growth in consumer spending was driven by improvements in the labour market as the
unemployment rate fell to 5.8% in October 2014 which is the lowest level since July 2008. As a result of improving labour market conditions and
a general strengthening in the economy, the Federal Reserve (Fed) reduced its monthly asset purchases throughout 2014 and ended the program
in October 2014, although it has maintained interest rates at historically low levels.
In calendar 2015, we expect the U.S. economy to grow at a rate of 3.3%, as both household and business spending accelerate given
expected gains in household wealth and the recent momentum in the labour market. Housing market activity is expected to improve given the
easing in lending standards and the decline in long-term mortgage rates. As labour markets and core inflation levels approach target levels, we
expect the Fed to begin to raise its key interest rate from the current funds target range of 0.0% to 0.25% starting in the middle of calendar 2015.
Europe
The Euro area economy is expected to grow marginally at an estimated rate of 0.7% during calendar 2014, below our estimate of 1.0% as at
December 4, 2013. The harmonized inflation level continues to remain below the European Central Bank’s (ECB) desired range, and averaged
0.5% from January through October 2014. Labour markets remain weak and the unemployment rate has stayed elevated at 11.5% in October
2014. To support the recovery, the ECB is taking steps to provide stimulus to the Euro area economy through an asset purchase program which
will run a minimum of two years, and has reduced its key interest rate twice during the calendar year, by 10 basis points (bps) each time, to the
current 0.05%. The ECB is also encouraging liquidity and business investment in the Euro area by introducing negative deposit rates in order to
stimulate lending by European banks.
We expect the Euro area economy to grow at a rate of 1.0% during calendar 2015, as the ECB’s stimulus measures take hold, and expect the
ECB to hold its key interest rate at the current level for the foreseeable future.
Financial markets
Equity markets in Canada, the U.S. and major European economies generally exhibited capital appreciation through most of fiscal 2014
supported by highly accommodative monetary policy, before concerns related to recent geopolitical uncertainty, the Ebola outbreak in Africa,
and expectations for recessionary conditions in Europe led to some volatility towards the end of our fiscal year. Yields on long-term government
bonds in Canada, the U.S. and major European economies have continued to decline over the year and remain near historically low levels. Credit
spreads remained relatively stable through most of fiscal 2014, but widened significantly in the last two months of fiscal 2014. Commodity
prices declined in the second half of calendar 2014. Oil prices, in particular, decreased sharply towards the end of our fiscal year due to a
combination of increased global supply and weak demand prospects.
Regulatory environment
We continue to monitor and prepare for regulatory developments in a manner that seeks to ensure compliance with new requirements while
mitigating any adverse business or economic impacts, including those with the potential to negatively impact our products or services. Such
impacts could result from new or amended regulations and the expectations of those who enforce them. Significant developments include
regulations enacted under the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, such as restrictions on banking entities
engaging in proprietary trading and having certain relationships with hedge and private equity funds (the Volcker Rule); the Fed’s enhanced
prudential standards for Bank Holding Companies and Foreign Banking Organizations; changes to capital and liquidity rules under the Basel
Committee on Banking Supervision’s global standards (Basel III); over-the-counter (OTC) derivatives reforms; and the recently announced
voluntary commitments by MasterCard Canada and Visa Canada to reduce merchant credit card fees in Canada.
For a discussion on risk factors resulting from these and other regulatory developments which may affect our business and financial results,
refer to the Risk management – Top and emerging risks section. For further details on our framework and activities to manage risks, refer to the
Risk management and Capital management sections.
Defining and measuring success through Total Shareholder Returns
Our focus is to maximize total shareholder returns (TSR) through the achievement of top tier performance 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 the TSR will vary depending on market conditions, and the
relative 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 progress against our medium-term TSR objectives. We review and revise these
financial performance objectives as economic, market and regulatory environments change. By focusing on our medium-term objectives in our
decision-making, we believe we will be well positioned to provide sustainable earnings growth and solid returns to our common shareholders.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

13

We achieved all our performance objectives in 2014. The following table provides a summary of our performance against our financial
performance objectives in 2014:
Financial performance objectives

Table 2
2014 results

(1)

Achieved
✓
✓
✓
✓

9.3%
19.0%
9.9%
47%

Diluted EPS growth of 7% +
ROE of 18% +
Strong capital ratios (CET1) (1)
Dividend payout ratio 40% – 50%
For further details on the CET1 ratio, refer to the Capital management section.

For 2015, our financial performance objectives will remain unchanged.
We compare our TSR to that of a global peer group approved by our Board of Directors and consisting of the following 19 financial institutions:
•
Canadian financial institutions: Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation, National Bank of
Canada, Power Financial Corporation, The Bank of Nova Scotia, and the Toronto-Dominion Bank.
•
U.S. banks: Bank of America Corporation, JPMorgan Chase & Co., The Bank of New York Mellon Corporation, U.S. Bancorp, and Wells
Fargo & Company.
•
International banks: Banco Bilbao Vizcaya Argentaria Group, Barclays PLC, BNP Paribas, Credit Suisse Group AG, Deutsche Bank Group,
National Australia Bank, and Westpac Banking Corporation.
Medium-term objectives – three and five year TSR vs. peer group average

Table 3

Royal Bank of Canada

Three year TSR (1)

Five year TSR (1)

23%
2nd quartile

12%
2nd quartile

19%

8%

Peer group average (excluding RBC) (2)
(1)

The three and the five year average annual TSR are calculated based on our common share price appreciation plus reinvested dividends for the period October 31, 2011 to October 31, 2014
and October 31, 2009 to October 31, 2014 respectively, based on information as disclosed by Bloomberg L.P.

As a result of changes in the financial services industry over the past several years, and considering our performance and strategy, we recently
completed a re-evaluation of our peer group with the goal of ensuring that we include only those institutions in the global financial services
industry that are most relevant to us as competitors. Our Canadian peer group remains unchanged and we have revised our peer group of U.S.
and International banks. Our new peer group will be effective in 2015, and will include:
•
Canadian financial institutions: Bank of Montreal, Canadian Imperial Bank of Commerce, Manulife Financial Corporation, National Bank of
Canada, Power Financial Corporation, The Bank of Nova Scotia, and the Toronto-Dominion Bank.
•
U.S. banks: JPMorgan Chase & Co., and Wells Fargo & Company.
•
International banks: Westpac Banking Corporation.
Common share and dividend information

Table 4
2014

For the year ended October 31

Common share price (RY on TSX) – close, end of period
Dividends paid per share
Increase (decrease) in share price
Total shareholder return

$

80.01
2.76
14.3%
19.0%

2013
$

70.02
2.46
23.0%
28.0%

2012
$

56.94
2.22
17.1%
22.0%

2011
$

48.62
2.04
(10.6)%
(6.7)%

2010
$

54.39
2.00
(0.7)%
2.9%

Key corporate events of 2014
Jamaican banking operations
On June 27, 2014, we completed the sale of RBC Royal Bank (Jamaica) Limited and RBTT Securities Jamaica Limited (collectively, RBC Jamaica) to
Sagicor Group Jamaica Limited, as announced on January 29, 2014. As a result of the transaction, we recorded a total loss on disposal of $100
million (before- and after-tax), including a loss of $60 million in the first quarter of 2014 and a further loss of $40 million in the third quarter of
2014, which includes foreign currency translation related to the closing of the sale. For further details, refer to Note 11 of our 2014 Annual
Consolidated Financial Statements.
Financial performance
On November 1, 2013, we adopted amendments to IAS 19 Employee benefits, as well as adopted IFRS 10 Consolidated Financial Statements and
IFRS 11 Joint Arrangements. The financial information presented in this document reflects the effects of these standards on our comparative
financial information presented for the year ended or as at October 31, 2013 and October 31, 2012. For further details, refer to Note 2 of our
2014 Annual Consolidated Financial Statements.
Overview
2014 vs. 2013
Net income of $9,004 million was up $662 million or 8% from a year ago. Diluted earnings per share (EPS) of $6.00 was up $0.51 and return on
common equity (ROE) of 19.0% was down 70 bps from 19.7% last year. Our Common Equity Tier 1 (CET1) ratio was 9.9%.
Our results reflected solid volume growth across most of our Canadian Banking businesses, higher earnings from growth in average
fee-based client assets in Wealth Management, and higher earnings in Capital Markets primarily reflecting strong equity markets, our continued
focus on origination and lending, and increased activity from client-focused strategies. The impact of foreign exchange translation also
contributed to the increase. These factors were partially offset by higher costs in support of business growth, a loss of $100 million (before- and
after-tax) related to the sale of RBC Jamaica, and higher litigation provisions and related legal costs in Capital Markets. In addition, our results
14

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

last year included a charge of $160 million ($118 million after-tax) as a result of new tax legislation in Canada, which affects the policyholders’
tax treatment of certain individual life insurance policies, as well as net favourable income tax adjustments of $214 million in Corporate Support.
For further details on our results and CET1 ratio, refer to the Business segment results and Capital management sections, respectively.
2013 vs. 2012
In 2013, net income of $8,342 million was up $835 million or 11% from 2012. Diluted EPS of $5.49 was up $0.58 and ROE of 19.7% was up
10 bps.
Our results reflected strong earnings growth across most of our business segments. Favourable income tax adjustments in 2013 of
$214 million related to prior years, lower provision for credit losses (PCL) reflecting improved credit quality, and continuing benefits from our
efficiency management activities also contributed to the increase. These factors were partially offset by lower trading revenue in Capital Markets
and a charge of $160 million ($118 million after-tax) in Insurance as a result of new tax legislation in Canada. In addition, our 2012 results were
impacted by net favourable adjustments of $60 million after-tax including a release of $128 million of tax uncertainty provisions and interest
income of $72 million ($53 million after-tax) related to a refund of taxes paid due to the settlement of several tax matters with the Canada
Revenue Agency (CRA), an adjustment related to a change in estimate of mortgage prepayment interest of $125 million ($92 million after-tax),
and a loss of $224 million ($213 million after-tax) related to the acquisition of the remaining 50% stake of RBC Dexia Investor Services Limited
(RBC Dexia).
Estimated impact of foreign currency translation on our consolidated financial results
Our foreign currency-denominated results are impacted by exchange rate fluctuations. Revenue, PCL, insurance policyholder benefits, claims and
acquisition expense (PBCAE), non-interest expense and net income denominated in foreign currency are translated at the average rate of
exchange for the year.
The following table reflects the estimated impact of foreign exchange translation on key income statement items:
Table 5
(Millions of Canadian dollars, except per share amounts)

2014 vs. 2013

2013 vs. 2012

$

818
9
75
510
121

$

213
3
8
110
53

$

.08
.08

$

.04
.04

Increase (decrease):
Total revenue
PCL
PBCAE
Non-interest expense
Net income
Impact on EPS from continuing operations:
Basic
Diluted
The relevant average exchange rates that impact our business are shown in the following table:

Table 6
(Average foreign currency equivalent of C$1.00) (1)

U.S. dollar
British pound
Euro
(1)

2014

2013

2012

0.914
0.551
0.680

0.977
0.626
0.740

0.997
0.630
0.771

Average amounts are calculated using month-end spot rates for the period.

Total revenue
Table 7
2014

2013

2012

$

22,019
7,903

$ 21,148
7,899

$ 20,769
8,330

$

14,116

$ 13,249

$ 12,439

1.86%

1.88%

(Millions of Canadian dollars)

Interest income
Interest expense
Net interest income
Net interest margin (on average earning assets) (1)

1.97%

$

7,355
4,957
742
4,090
1,809
1,039

Non-interest income

$

19,992

$ 17,433

$ 16,708

Total revenue

$

34,108

$ 30,682

$ 29,147

Investments (2)
Insurance (3)
Trading
Banking (4)
Underwriting and other advisory
Other (5)

(1)
(2)
(3)
(4)
(5)

$

6,408
3,911
867
3,909
1,569
769

$

5,084
4,897
1,305
3,399
1,434
589

Net interest margin (on average earning assets) is calculated as net interest income divided by average earning assets.
Includes securities brokerage commissions, investment management and custodial fees, and mutual fund revenue.
Includes premiums and investment and fee income. Investment income includes the change in fair value of investments backing
policyholder liabilities and is largely offset in PBCAE.
Includes service charges, foreign exchange revenue other than trading, card service revenue and credit fees.
Includes other non-interest income, net gain (loss) on available-for-sale (AFS) securities and share of profit in associates.

2014 vs. 2013
Total revenue increased $3,426 million or 11% from last year. The impact of foreign exchange translation this year increased our total revenue by
$818 million.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

15

Net interest income increased $867 million or 7%, mainly due to solid volume growth of 5% across most of our businesses in Canadian
Banking and higher trading-related net interest income in Capital Markets. Higher lending activity in Capital Markets also contributed to the
increase. For further details on the change in net interest income, refer to the Supplementary information section.
Net interest margin was down 2 bps compared to last year largely due to the continuing low interest rate environment and competitive
pressures. For further details on net interest margin, refer to the Supplementary information section.
Investments revenue increased $947 million or 15%, mainly due to higher revenue from growth in average fee-based client assets in Wealth
Management resulting from capital appreciation and strong net sales. Higher mutual fund distribution fees also contributed to the increase.
Insurance revenue increased $1,046 million or 27%, mainly due to the change in fair value of investments backing our policyholder
liabilities resulting from a decrease in long-term interest rates, largely offset in PBCAE. Business growth in our European life and U.K. annuity
products also contributed to the increase.
Banking revenue increased $181 million or 5%, mainly due to the impact of foreign exchange translation, higher credit card balances and
transaction volumes, and higher service fee revenue. These factors were partially offset by lower loan syndication activity compared to the strong
levels last year.
Underwriting and other advisory revenue increased $240 million or 15%, mainly due to strong growth in equity origination reflecting
increased issuance activity, and higher mergers and acquisitions (M&A) activity reflecting increased mandates.
Other revenue increased $270 million or 35%, mainly due to favourable cumulative accounting adjustments in Personal & Commercial
Banking, and gains on credit default swaps used to economically hedge our corporate loan portfolio in Capital Markets compared to losses
last year.
2013 vs. 2012
Total revenue increased $1,535 million or 5% as compared to 2012, mainly due to solid volume growth across all businesses in Canadian
Banking, higher revenue from growth in average fee-based client assets across all businesses in Wealth Management, and incremental
revenue related to our additional 50% ownership of Investor Services. The inclusion of our acquisition of Ally Canada, strong growth in our
lending portfolio in Capital Markets, and in our loan syndication business primarily in the U.S., and higher debt origination reflecting solid
issuance activity also contributed to the increase. These factors were partially offset by a change in fair value of investments backing our
policyholder liabilities resulting from an increase in long-term interest rates, largely offset in PBCAE, lower fixed income trading revenue, and
spread compression. In addition, 2012 was favourably impacted by a mortgage prepayment interest adjustment of $125 million resulting from
a change in methodology with respect to the timing of recognition of mortgage prepayment interest.
Additional trading information
Table 8
2014

(Millions of Canadian dollars)

Total trading revenue
Net interest income
Non-interest income
Total trading revenue
Total trading revenue by product
Interest rate and credit
Equities
Foreign exchange and commodities
Total trading revenue
Trading revenue (teb) by product
Interest rate and credit
Equities
Foreign exchange and commodities
Total trading revenue (teb)
Trading revenue (teb) by product – Capital Markets
Interest rate and credit
Equities
Foreign exchange and commodities
Total Capital Markets trading revenue (teb)

2013

2012

$

2,029
742

$

1,661
867

$

1,532
1,305

$

2,771

$

2,528

$

2,837

$

1,560
814
397

$

1,611
594
323

$

1,932
516
389

$

2,771

$

2,528

$

2,837

$

1,560
1,305
397

$

1,611
972
323

$

1,932
945
389

$

3,262

$

2,906

$

3,266

$

1,293
1,244
333

$

1,350
942
286

$

1,584
925
323

$

2,870

$

2,578

$

2,832

2014 vs. 2013
Total trading revenue of $2,771 million, which comprises trading-related revenue recorded in Net interest income and Non-interest income, was
up $243 million, or 10%, mainly due to higher equity trading revenue reflecting strong market conditions and higher commodities trading
revenue. These factors were partially offset by lower fixed income trading revenue largely driven by the unfavourable impact of the
implementation of valuation adjustments related to funding costs on uncollateralized OTC derivatives (FVA), and the exiting of certain proprietary
trading strategies to comply with the Volcker Rule.
2013 vs. 2012
Total trading revenue of $2,528 million, which comprises trading-related revenue recorded in Net interest income and Non-interest income, was
down $309 million, or 11%, mainly due to lower fixed income trading revenue, largely in Europe, as a result of challenging market conditions.

16

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Provision for credit losses
2014 vs. 2013
Total PCL decreased $73 million or 6% from a year ago, mainly due to lower provisions in Capital Markets and Wealth Management, partially
offset by higher provisions in Personal & Commercial Banking, primarily in Caribbean Banking.
2013 vs. 2012
Total PCL decreased $62 million or 5% as compared to 2012, mainly reflecting improved credit quality in our Personal & Commercial banking,
partially offset by higher provisions in Capital Markets and Wealth Management.
For further details on PCL, refer to the Credit quality performance section.
Insurance policyholder benefits, claims and acquisition expense
2014 vs. 2013
PBCAE increased $789 million or 28% from a year ago, mainly due to the change in fair value of investments backing our policyholder liabilities,
which was largely offset in revenue, and the impact of foreign exchange translation. These factors were partially offset by lower net claims costs.
In addition, our PBCAE last year included the unfavourable impact of the charge of $160 million related to new tax legislation in Canada, which
affects the policyholders’ tax treatment of certain individual life insurance policies, and a favourable impact from interest and asset related
activities on the Canadian life business.
2013 vs. 2012
PBCAE decreased $837 million or 23% as compared to 2012, mainly due to the change in fair value of investments backing our policyholder
liabilities, which was largely offset in insurance revenue. Favourable actuarial adjustments reflecting management actions and assumption
changes also contributed to the decrease. These factors were partially offset by the charge related to new tax legislation in Canada.
Non-interest expense
Table 9
2014

(Millions of Canadian dollars)

2012

4,604
3,924
1,464
256

$ 4,089
3,638
1,216
139

Salaries
Variable compensation
Benefits and retention compensation
Share-based compensation

$

4,834
4,388
1,561
248

Human resources
Equipment
Occupancy
Communications
Professional fees
Outsourced item processing
Amortization of other intangibles
Impairment of other intangibles
Impairment of investments in joint ventures and associates
Other

$

11,031
1,147
1,330
779
763
246
666
8
–
1,691

$ 10,248
1,081
1,235
728
753
250
566
10
20
1,323

$ 9,082
913
1,130
748
666
254
494
–
168
1,186

$

17,661
51.8%

$ 16,214
52.8%

$ 14,641
50.2%

Non-interest expense
Efficiency ratio (1)
(1)

2013
$

Efficiency ratio is calculated as non-interest expense divided by total revenue.

2014 vs. 2013
Non-interest expense increased $1,447 million or 9%, primarily due to the impact of foreign exchange translation of $510 million, higher costs in
support of business growth, and higher variable compensation driven by higher revenue in Wealth Management and higher results in Capital
Markets. Increased litigation provisions and related legal costs in Capital Markets, and the loss of $100 million related to the sale of RBC Jamaica
also contributed to the increase. These factors were partly offset by continuing benefits from our efficiency management activities.
Efficiency ratio of 51.8% decreased 100 bps from 52.8% last year, mainly due to continuing benefits from our efficiency management
activities.
2013 vs. 2012
Non-interest expense increased $1,573 million or 11% as compared to 2012, primarily reflecting incremental costs related to our additional 50%
ownership of Investor Services and higher variable compensation mainly driven by higher revenue in Wealth Management. The inclusion of our
acquisition of Ally Canada, higher costs in support of business growth, and higher litigation provisions and related legal costs in Capital Markets
also contributed to the increase. These factors were partially offset by continued benefits from our ongoing focus on efficiency management
activities, and lower variable compensation in Capital Markets reflecting a lower compensation to revenue ratio. In addition, non-interest
expense was unfavourably impacted in 2012 by an impairment loss and other costs of $188 million related to the acquisition of the remaining
50% stake of RBC Dexia.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

17

Income and other taxes
Table 10
(Millions of Canadian dollars, except percentage amounts)

Income taxes
Other taxes
Goods and services sales taxes
Payroll taxes
Capital taxes
Property taxes
Insurance premium taxes
Business taxes

$
$

Total income and other taxes
Net income before income taxes
Canadian statutory income tax rate (1)
Lower average tax rate applicable to subsidiaries
Goodwill impairment
Tax-exempt income from securities
Tax rate change
Effect of previously unrecognized tax loss, tax credit or
temporary differences
Other
Effective income tax rate
Effective total tax rate (2)
(1)
(2)

$
$
$

2014
2,706

$

2013
2,105

$

395
529
86
106
51
8
1,175
3,881
11,710
26.3%
(2.3)
0.0
(3.3)
0.0

370
497
85
119
50
25
$ 1,146
$ 3,251
$ 10,447
26.2%
(1.8)
0.0
(2.8)
0.0

(0.1)
2.5
23.1%
30.1%

(0.5)
(1.0)
20.1%
28.0%

$

$

$
$
$

2012
2,028
343
430
79
120
50
16
1,038
3,066
9,586
26.4%
(3.1)
0.4
(3.4)
0.0
(0.1)
1.0
21.2%
28.9%

Blended Federal and Provincial statutory income tax rate.
Total income and other taxes as a percentage of net income before income taxes and other taxes.

2014 vs. 2013
Income tax expense increased $601 million or 29% from last year, mainly due to higher earnings before income tax. The effective income tax rate
of 23.1% increased 300 bps as last year included net favourable tax adjustments, including $214 million of income tax adjustments related to
prior years.
Other taxes increased $29 million or 3%, mainly due to higher payroll taxes and sales taxes which were partially offset by lower business
taxes and property taxes. In addition to the income and other taxes reported in our Consolidated Statements of Income, we recorded income tax
recoveries of $643 million (2013 – $231 million) in shareholders’ equity, primarily reflecting foreign currency translation losses from hedging
activities.
2013 vs. 2012
Income tax expense increased $77 million or 4% from 2012, mainly due to higher earnings before income taxes. The effective income tax rate of
20.1% decreased 110 bps from 21.2% in 2012, mainly due to favourable income tax adjustments in 2013 related to prior years.
Other taxes increased $108 million or 10% from 2012, mainly due to higher payroll taxes and sales taxes.
Business segment results
Results by business segment

Table 11
2014

(Millions of Canadian dollars,
except percentage amounts)

Net interest income
Non-interest income
Total revenue
PCL
PBCAE
Non-interest expense
Net income before
income taxes
Income tax
Net income from continuing
operations
Loss from discontinued
operations
Net income
ROE (2) from continuing
operations
ROE (2)
Average assets

Personal &
Commercial
Banking

Wealth
Management

Insurance

Investor &
Treasury
Services

2013
Capital
Markets (1)

Corporate
Support (1)

Total

2012

Total

Total

9,743 $
3,987
$ 13,730 $
1,103
–
6,563

469 $
5,844
6,313 $
19
–
4,800

– $
4,964
4,964 $
–
3,573
579

732 $
1,152
1,884 $
–
–
1,286

3,485 $
3,881
7,366 $
44
–
4,344

(313) $
164
(149) $
(2)
–
89

14,116 $ 13,249
19,992
17,433
34,108 $ 30,682
1,164
1,237
3,573
2,784
17,661
16,214

$ 12,439
16,708
$ 29,147
1,299
3,621
14,641

$

6,064 $
1,589

1,494 $
411

812 $
31

598 $
157

2,978 $
923

(236) $
(405)

11,710 $ 10,447
2,706
2,105

$

9,586
2,028

$

4,475 $

1,083 $

781 $

441 $

2,055 $

169 $

9,004 $

8,342

$

7,558

$

–
4,475 $

–
1,083 $

–
781 $

–
441 $

–
2,055 $

–
169 $

–
9,004 $

–
8,342

$

(51)
7,507

29.0%

19.2%

14.1%

n.m.

$

49.7%

19.8%

19.0%
19.7%
19.0%
19.7%
$ 368,800 $ 25,800 $ 12,000 $ 94,200 $ 392,300 $ 13,400 $ 906,500 $ 852,000

(1)

19.7%
19.6%
$ 803,000

Net interest income, total revenue and net income before income taxes are presented in Capital Markets on a taxable equivalent basis (teb). The teb adjustment is eliminated in the Corporate
Support segment. For a further discussion, refer to the How we measure and report our business segments section.
This measure may not have a standardized meaning under GAAP and may not be comparable to similar measures disclosed by other financial institutions. For further details, refer to the Key
performance and non-GAAP measures section.
n.m. not meaningful
(2)

18

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

How we measure and report our business segments
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand-alone business
and reflects the way that the business segment is managed. This approach is intended to ensure that our business segments’ results include all
applicable revenue and expenses associated with the conduct of their business and depicts how management views those results. The following
highlights the key aspects of how our business segments are managed and reported:
•
Personal & Commercial Banking reported results include securitized Canadian residential mortgage and credit card loans and related
amounts for income and provisions for credit losses on impaired loans.
•
Wealth Management reported results also include disclosure in U.S. dollars as we review and manage the results of certain businesses
largely in this currency.
•
Capital Markets results are reported on a taxable equivalent basis (teb), which grosses up net interest income from certain tax-advantaged
sources (Canadian taxable corporate dividends) 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 source 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, including residual asset/liability management results, impact from income tax adjustments, net charges
associated with unattributed capital and PCL on loans not yet identified as impaired.
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 allocation
To ensure that our business segments’ results include expenses associated with the conduct of their business, we allocate costs incurred or
services provided by Technology & Operations and Functions, which are directly undertaken or provided on the business segments’ behalf. For
other costs not directly attributable to our business segments, including overhead costs and other indirect expenses, we use our management
reporting framework for allocating these costs to each business segment in a manner that is intended to reflect the underlying benefits.
Capital attribution
Our framework also determines the attribution of capital to our business segments in a manner that is intended to consistently measure and
align economic costs with the underlying benefits and risks associated with the activities of each business segment. The amount of capital
assigned to each business segment is referred to as attributed capital. Unattributed capital and associated net charges are reported in Corporate
Support. For further information, refer to the Capital management section.
Funds transfer pricing
A funds transfer pricing methodology is used to allocate interest income and expense by product to each business segment. This allocation
considers the interest rate risk, liquidity and funding risk and regulatory requirements of each of our business segments. We base transfer pricing
on external market costs and each business segment fully absorbs the costs of running its business. Our business segments may retain certain
interest rate exposures subject to management approval that would be expected in the normal course of operations.
Provisions for credit losses (PCL)
PCL are recorded to recognize estimated losses on impaired loans, as well as losses that have been incurred but are not yet identified in our
loans portfolio. This portfolio includes on-balance sheet exposures, such as loans and acceptances, and off-balance sheet items such as letters
of credit, guarantees and unfunded commitments. PCL on impaired loans are included in the results of each business segment to fully reflect the
appropriate expenses related to the conduct of each business segment. PCL on loans not yet identified as impaired are included in Corporate
Support, as Group Risk Management effectively controls this through its monitoring and oversight of various lending portfolios throughout the
enterprise. For details on our accounting policy on Allowance for credit losses, refer to Note 2 of our 2014 Annual Consolidated Financial
Statements.
Key performance and non-GAAP measures
Performance measures
The following discussion describes the key performance measures we use in evaluating our operating results.
Return on common equity (ROE)
We measure and evaluate the performance of our consolidated operations and each business segment using a number of financial metrics such
as net income and ROE. We use ROE, at both the consolidated and business segment levels, as a measure of return on total capital invested in
our business. Management views the business segment ROE measure as a useful measure for supporting investment and resource allocation
decisions because it adjusts for certain items that may affect comparability between business segments and certain competitors.
Our consolidated ROE calculation is based on net income available to common shareholders divided by total average common equity for the
period. Business segment ROE calculations are based on net income available to common shareholders divided by average attributed capital for
the period. For each segment, average attributed capital includes the capital required to underpin various risks as described in the Capital
Management section and amounts invested in goodwill and intangibles.
The attribution of capital and risk capital involves the use of assumptions, judgments and methodologies that are regularly reviewed and
revised by management as necessary. Changes to such assumptions, judgments and methodologies can have a material effect on the 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.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

19

The following table provides a summary of our ROE calculations:
Calculation of ROE

Table 12
2014

(Millions of Canadian dollars, except
percentage amounts)

Net income available to common
shareholders from continuing
operations
Loss to common shareholders from
discontinued operations
Net income available to common
shareholders
Average common equity from
continuing operations (1), (2)
Average common equity from
discontinued operations (1)
Total average common equity (1), (2)
ROE (3)
(1)
(2)
(3)
n.m.

Personal &
Commercial
Banking

$

4,405

Wealth
Management

$

1,057

Insurance

$

773

Investor &
Treasury
Services

$

429

Capital
Markets

$

1,990

Corporate
Support

$

43 $

Total

8,697 $
–

$

4,405

$

1,057

$

773

$

429

$

1,990

$

$

15,200

$

5,500

$

1,550

$

2,150

$

14,100

$

15,200
29.0%

$

5,500
19.2%

$

1,550
49.7%

$

2,150
19.8%

$

14,100
14.1%

43 $

8,697 $

2013

2012

Total

Total

7,991 $
–

7,203
(51)

7,991 $

7,152

$

7,200 $ 45,700 $ 40,600 $

36,100

$

–
–
7,200 $ 45,700 $ 40,600 $
n.m.
19.0%
19.7%

400
36,500
19.6%

Average common equity represent rounded figures.
The amounts for the segments are referred to as attributed capital.
ROE is based on actual balances of average common equity before rounding.
not meaningful

Embedded value for Insurance operations
Embedded value is a measure of shareholder value embedded in the balance sheet of our Insurance segment, excluding any value from future
new sales. We use the change in embedded value between reporting periods as a measure of the value created by the insurance operations
during the period.
We define embedded value as the value of equity held in our Insurance segment and the value of in-force business (existing policies). The
value of in-force business is calculated as the present value of future expected earnings on in-force business less the present value of capital
required to support in-force business. We use discount rates that are consistent with those used by other insurance companies. Required capital
uses the capital frameworks in the jurisdictions in which we operate.
Key drivers affecting the change in embedded value from period to period are new sales, investment performance, claims and policyholder
experience, change in actuarial assumptions, changes in foreign exchange rates and changes in shareholder equity arising from transfers in
capital.
Embedded value does not have a standardized meaning under GAAP and may not be directly comparable to similar measures disclosed by
other companies. Given that this measure is specifically used for our Insurance segment and involves the use of discount rates to present value
the future expected earnings and capital required for the in-force business, reconciliation to financial statements information is not applicable.
Non-GAAP measures
We believe that certain non-GAAP measures described below are more reflective of our ongoing operating results, and provide readers with a
better understanding of management’s perspective on our performance. These measures enhance the comparability of our financial performance
for the year ended October 31, 2014 with results from last year as well as, in the case of economic profit, measure relative contribution to
shareholder value. Non-GAAP measures do not have a standardized meaning under GAAP and may not be comparable to similar measures
disclosed by other financial institutions.
The following discussion describes the non-GAAP measures we use in evaluating our operating results.
Economic profit
Economic profit is net income excluding the after-tax effect of amortization of other intangibles less a capital charge for use of attributed capital.
It measures the return generated by our businesses in excess of our cost of capital, thus enabling users to identify relative contributions to
shareholder value.
The capital charge includes a charge for common equity and preferred shares. In 2014, we revised our cost of equity to 9.0% from 8.5% in
2013, largely as a result of higher long-term interest rates.

20

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

The following table provides a summary of our Economic profit on a continuing basis:
Economic profit from continuing operations

Table 13
2014
Personal &
Commercial
Banking

Wealth
Management

Insurance

Investor &
Treasury
Services

Net income from continuing operations
add: Non-controlling interests
After-tax effect of amortization
of other intangibles
Intangibles writedown

$

$

$

$

Adjusted net income
less: Capital charge

$

4,503
1,439

$

1,161
521

$

781
147

$

3,064

$

640

$

634

(Millions of Canadian dollars)

4,475
1

1,083
(1)

27
–

Economic profit (loss) from
continuing operations

781
–

73
6

Capital
Markets

Corporate
Support

441
(1)

$ 2,055
–

21
–

1
2

$

461
205

$ 2,058
1,333

$

$

256

$

$

–
–

725

$

Total

169 $
(93)

9,004
(94)

1
–

123
8

77
696

$

9,041
4,341

(619) $

4,700

2013

(Millions of Canadian dollars)

Personal &
Commercial
Banking

Wealth
Management

886
–

26
–

67
–

Insurance

$

$

Net income from continuing operations
add: Non-controlling interests
After-tax effect of amortization
of other intangibles
Goodwill and intangibles writedown

$

Adjusted net income
less: Capital charge

$

4,402
1,285

$

953
492

$

595
129

$

3,117

$

461

$

466

Economic profit (loss) from
continuing operations

4,380 $
(4)

2012

Investor &
Treasury
Services

595
–
–
–

Capital
Markets

339 $ 1,700
(1)
–

Corporate
Support

$

21
–

1
–

$

359
180

$ 1,701
1,053

$

$

179

$

$

648

Total

442 $ 8,342
(93)
(98)

Total

$

7,558
(97)

2
–

117
–

112
168

351
563

$ 8,361
3,702

$

7,741
3,681

(212) $ 4,659

$

4,060

Results excluding specified items
Our results were impacted by the following specified items:
•
For the year ended October 31, 2014, in our Personal & Commercial Banking segment:
– A total loss of $100 million (before- and after-tax) related to the sale of RBC Jamaica, comprised of a loss of $60 million (before- and
after-tax) in the first quarter of 2014, and a further loss of $40 million (before- and after-tax) in the third quarter of 2014 which includes
foreign currency translation related to the closing of the sale of RBC Jamaica; and
– A provision of $40 million ($32 million after-tax) related to post-employment benefits and restructuring charges in the Caribbean.
•
For the year ended October 31, 2013:
– A charge of $160 million ($118 million after-tax) as a result of new tax legislation in Canada, which affects the policyholders’ tax
treatment of certain individual life insurance policies in our Insurance segment; and
– A restructuring charge of $44 million ($31 million after-tax) related to the integration of Investor Services, primarily in Europe, in our
Investor & Treasury Services segment.
•
For the year ended October 31, 2012:
– A loss of $224 million ($213 million after-tax) related to our acquisition of the remaining 50% stake in RBC Dexia in our Investor &
Treasury Services segment.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

21

The following tables provide calculations of our segment results and measures excluding these specified items:
Personal & Commercial Banking

Table 14
2014
Items excluded

Total loss on sale
of RBC
Jamaica (1)

Provision for
post-employment
benefits and
restructuring
charges

13,730
1,103
6,563
6,064
4,475

$

$

$

–
–
(100)
100
100

6,563
13,730
47.8%

$

(100)

As reported

(Millions of Canadian dollars, except percentage amounts)

Total revenue
PCL
Non-interest expense
Net income before taxes
Net income

$

$

Adjusted
$

$

–
–
(40)
40
32

$

(40)

$

13,730
1,103
6,423
6,204
4,607

$

Selected balances and other information
$

Non-interest expense
Total revenue
Efficiency ratio

5.5%
6.4%
(0.9%)

Revenue growth rate
Non-interest expense growth rate
Operating leverage
(1)

6,423
13,730
46.8%
5.5%
4.2%
1.3%

Total loss is comprised of a loss of $60 million (before- and after-tax) recorded in Q1 2014, and a further loss of $40 million (before- and after-tax) which includes foreign currency translation
recorded in Q3 2014.

Insurance

Table 15
2013

As reported

(Millions of Canadian dollars, except percentage amounts)

Total revenue
PBCAE
Non-interest expense
Net income before income taxes
Net income

$

$

Selected balance and other information
Net income available to common shareholders
Average common equity
ROE (1)
(1)

$

3,928
2,784
551
593
595
586
1,400
41.4%

Charge related to
certain individual life
insurance policies
$

Adjusted

$

–
(160)
–
160
118

$

$

$

118

$

3,928
2,624
551
753
713
704
1,400
49.8%

Based on actual balances before rounding.

Investor & Treasury Services

Table 16
2013

2012

(Millions of Canadian dollars, except percentage amounts)

As reported

Restructuring
charge (1)

Total revenue
Non-interest expense
Net income before income taxes
Net income

$

1,804
1,348
456
339

$

$

–
(44)
44
31

326
2,000
16.5%

$

31

Selected balances and other information
Net income available to common
shareholders
Average common equity
ROE (3)
(1)
(2)

(3)

22

$

$

Adjusted

As reported

Loss related to the
acquisition of the
remaining 50%
stake of RBC Dexia (2)

$ 1,804
1,304
500
$
370

$

905
701
204
102

$

$

$

90
1,700
5.3%

357
2,000
18.1%

$

Adjusted
$

$

36
(188)
224
213

$

213

$

$

941
513
428
315

303
1,700
17.9%

Related to the integration of Investor Services.
Consisted of an impairment loss of $168 million (before- and after-tax), comprised of a write-down of investments in joint ventures, other costs relating to the acquisition of $20 million
($19 million after-tax), and a loss of $36 million ($26 million after-tax), which was our proportionate share of the loss recorded by RBC Dexia from the securities exchange with Dexia Group
and trading losses on the sale of a majority of the securities received in the exchange.
Based on actual balances before rounding.

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Personal & Commercial Banking
Personal & Commercial Banking is comprised of our personal and business banking operations, and our auto financing and retail investment
businesses, including our online discount brokerage channel, and operates through two businesses: Canadian Banking, and Caribbean & U.S.
Banking. We provide services to more than 13 million individual, business and institutional clients across Canada, the Caribbean and the U.S. In
Canada, we provide a broad suite of financial products and services through our extensive branch, automated teller machine (ATM), online,
mobile and telephone banking networks, as well as through a large number of proprietary sales professionals. In the Caribbean, we offer a broad
range of financial products and services to individuals and business clients, and public institutions in various markets. In the U.S., we serve the
cross-border banking needs of Canadian clients within the U.S. through online channels, as well as the banking product needs of our U.S. wealth
management clients.
Our banking-related operations compete in the Canadian financial services industry, which consists of other Schedule I banks, independent
trust companies, foreign banks, credit unions, caisses populaires, and auto financing companies. We maintain top (#1 or #2) rankings in market
share in this competitive environment for all retail and business financial product categories, and have the largest branch network, the most
ATMs and the largest mobile sales network across Canada. In the Caribbean, our competition includes banks, trust companies and investment
management companies serving retail and corporate customers and public institutions. We continue to be the second largest bank as measured
by assets in the English Caribbean, with 93 branches in 18 countries and territories. In the U.S., we compete primarily with other Canadian
banking institutions with operations in the U.S.
Economic and market review
We continued to see solid volume growth across most of our Canadian banking businesses, reflecting solid economic performance in Canada
and the continuing low interest rate environment which has driven solid, although slowing, credit industry growth compared to last year. Stable
credit loss rates in our business and consumer products reflect improving unemployment rates in Canada. Our businesses continued to be
impacted by competitive pressures and certain regulatory measures aimed at slowing the pace of borrowing. In the Caribbean, unfavourable
economic conditions continued to negatively impact our results through higher PCL, lower loan volumes, and spread compression.
Highlights
•
We were the first financial institution in Canada to deliver a mobile app for businesses on all major platforms including Android, BlackBerry,
iOS, and Windows Phone 8.
•
We partnered with BestBuy and Future Shop to offer online rewards points redemption access to over 90,000 items.
•
Our mutual funds distribution through our branch network exceeded $110 billion in assets under administration, an increase of 17%.
•
In the Caribbean, we continued to focus on quality asset and revenue growth while reducing our structural costs despite continued
challenging market conditions.
•
We completed the sale of RBC Jamaica to Sagicor Group Jamaica Limited in June 2014.
•
As a result of our successes in most of our businesses, we received external recognition as an industry leader and were named:
–
“Best Global Retail Bank” by Retail Banker International.
–
“Best Trade Finance Bank 2014 in Canada” by Global Finance Magazine for the second consecutive year.
–
“Best Private Banking Services in Canada, the Caribbean, Cayman Islands and Jersey 2014” by Euromoney Magazine.
Outlook and priorities
Financial conditions in Canada are expected to remain favourable, driven by continued improvement in the Canadian economy, supportive credit
conditions, and continuing low interest rates. We expect continued solid volume growth across most of our products, but anticipate increased
pricing pressures and industry competition resulting from the slowing credit industry. We are adapting to these market trends by focusing on
higher growth segments.
On November 4, 2014, MasterCard Canada and Visa Canada announced voluntary commitments to reduce merchant credit card fees to an
average effective rate of 1.5% for the next five years, effective April 30, 2015. As a result of these commitments, the Minister of Finance signaled
the government’s intention to not regulate credit card interchange rates at this time. While we continue to assess the potential impact of this
announcement on our operations, we do not expect it to have a significant impact on our Canadian Banking results.
In the Caribbean, challenging market conditions and slow economic growth continue to constrain our outlook. We expect net interest
margins to remain challenged by spread compression. However, we expect to drive more efficiency through expense reduction as we continue to
leverage our common operating model across our Caribbean platforms.
For further details on the legal and regulatory environment, refer to the Risk management – Legal and regulatory environment risk section.
For further details on our general economic review and outlook, refer to the Economic and market review and outlook section.
Key strategic priorities for 2015
In Canada, our priorities are to continue to:
•
Leverage our sales capabilities, strategic partnerships and innovative distribution channels to help broaden our client base.
•
Provide a superior client experience through relevant and tailored advice in order to achieve industry-leading volume growth.
•
Extend and strengthen our capabilities to differentiate us in the emerging payments markets.
•
Enhance our channel capabilities particularly in the digital and mobile platforms.
•
Automate and digitize our business processes to improve the customer experience and maintain our industry-leading efficiency.
In the Caribbean and the U.S., we are focused on:
•
Strengthening our operations by focusing on quality asset growth in key markets, optimizing our cost structure, improving our credit and
operational risk practices and enhancing our leadership and talent capabilities.
•
Strengthening the cross-border business in the U.S. and continuing to assess the market and our strategic business development options.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

23

Personal & Commercial Banking

Table 17

(Millions of Canadian dollars, except number of and percentage amounts and as otherwise noted)

Net interest income
Non-interest income
Total revenue
PCL
Non-interest expense
Net income before income taxes
Net income
Revenue by business
Canadian Banking
Caribbean & U.S. Banking
Key ratios
ROE
NIM (1)
Efficiency ratio (2)
Efficiency ratio adjusted (2), (3)
Operating leverage
Operating leverage adjusted (3)
Selected average balance sheet information
Total assets
Total earning assets (4)
Loans and acceptances (4)
Deposits
Attributed capital
Other information
AUA (5)
AUM
Number of employees (FTE)
Effective income tax rate
Credit information
Gross impaired loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances

$

$
$

2014
9,743
3,987
13,730
1,103
6,563
6,064
4,475
12,869
861

$

$
$

29.0%
2.77%
47.8%
46.8%
(0.9)%
1.3%

2013
9,434
3,585
13,019
995
6,168
5,856
4,380
12,220
799

$

$
$

30.5%
2.78%
47.4%
n.a.
(1.3)%
n.a.

2012
9,059
3,379
12,438
1,165
5,822
5,451
4,056
11,614
824
31.2%
2.86%
46.8%
n.a.
n.a.
n.a.

$

368,800
351,300
351,600
278,800
15,200

$

355,300
338,700
337,800
262,200
14,050

$

330,700
316,200
315,400
243,900
12,700

$

214,200
4,000
36,174
26.2%

$

192,200
3,400
38,011
25.2%

$

179,200
3,100
38,244
25.6%

0.54%
0.31%

0.55%
0.30%

0.58%
0.37%

Estimated impact of U.S. dollar and Trinidad & Tobago dollar (TTD) translation on key income
statement items
2014 vs 2013

(Millions of Canadian dollars, except percentage amounts)

Increase (decrease):
Total revenue
Non-interest expense
Net income
Percentage change in average US$ equivalent of C$1.00
Percentage change in average TTD equivalent of C$1.00
(1)
(2)
(3)
(4)
(5)
n.a.

$

46
39
(1)
(6)%
(7)%

NIM is calculated as Net interest income divided by Average total earning assets.
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
Measures have been adjusted by excluding the loss related to the sale of RBC Jamaica and the provision related to post-employment benefits and restructuring charges in the Caribbean, and
are non-GAAP measures. For further details, refer to the Key performance and non-GAAP measures section.
Average total earning assets and average loans and acceptances include average securitized residential mortgages and credit card loans for the year of $54.5 billion and $8.0 billion,
respectively (2013 – $53.9 billion and $7.2 billion; 2012 – $44.9 billion and $7.3 billion).
AUA includes securitized residential mortgages and credit card loans as at October 31, 2014 of $23.2 billion and $8.0 billion respectively (October 31, 2013 – $25.4 billion and $7.2 billion;
October 31, 2011 – $31.0 billion and $7.4 billion).
not applicable

Financial performance
2014 vs. 2013
Net income increased $95 million or 2% compared to last year. Excluding the loss of $100 million (before- and after-tax) related to the sale of
RBC Jamaica, and a provision of $40 million ($32 million after-tax) related to post-employment benefits and restructuring charges in the
Caribbean, net income of $4,607 million was up $227 million or 5%, largely reflecting solid volume growth and strong fee-based revenue growth
across most of our businesses in Canada, and the full integration of Ally Canada. These factors were partially offset by higher PCL largely in the
Caribbean.
Total revenue increased $711 million or 5% from last year, mainly due to solid volume growth of 5% across most of our Canadian
businesses, and strong fee-based revenue growth primarily attributable to higher mutual fund distribution fees and card services revenue.
Net interest margin was relatively stable compared to last year.
PCL increased $108 million, with the PCL ratio increasing 1 bp, largely reflecting an additional provision of $50 million related to our
impaired residential mortgages portfolio in the Caribbean, as well as higher provisions in our Canadian small business portfolio. For further
details, refer to the Credit quality performance section.
Non-interest expense increased $395 million or 6%. Excluding the specified items noted above, non-interest expense was up $255 million
or 4%, mostly due to higher staff and marketing costs in support of business growth, the impact of foreign exchange translation, and higher
litigation provisions. These factors were partially offset by continuing benefits from our efficiency management activities and benefits from the
full integration of Ally Canada.
Average loans and acceptances increased $14 billion or 4%, mainly due to growth in Canada, primarily in residential mortgages, business
loans, and personal loans. Average deposits increased $17 billion or 6%, reflecting solid growth in both personal and business deposits.
24

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

2013 vs. 2012
Net income was up $324 million or 8% from 2012, reflecting solid volume growth across all our businesses in Canada, improved credit quality in
our Canadian and Caribbean portfolios, and the inclusion of our acquisition of Ally Canada. These factors were partially offset by spread
compression, and a provision related to post-employment benefits and restructuring charges in the Caribbean of $40 million ($31 million aftertax). In addition, our results in 2012 were favourably impacted by a mortgage prepayment interest adjustment of $125 million ($92 million aftertax) resulting from a change in methodology with respect to the timing of recognition of mortgage prepayment interest.
Average loans and acceptances increased $22 billion or 7% from 2012, mainly due to growth in Canadian home equity products, personal
loans, and business loans. Average deposits increased $18 billion or 8% from 2012, reflecting solid growth in both business and personal
deposits.
Results excluding the specified items noted above are non-GAAP measures. For further details, including a reconciliation, refer to the Key
performance and non-GAAP measures section.
In Canada, we operate through three business lines: Personal Financial Services, Business Financial Services and Cards and Payments
Solutions. The following provides a discussion of our consolidated Canadian Banking results.
Canadian Banking financial highlights

Table 18

(Millions of Canadian dollars, except number of and percentage
amounts and as otherwise noted)

2014
$

Net interest income
Non-interest income
Total revenue
PCL
Non-interest expense
Net income before income taxes
Net income

$

Revenue by business
Personal Financial Services
Business Financial Services
Cards and Payment Solutions

$

Key ratios
ROE
NIM (1)
Efficiency ratio (2)
Operating leverage
Selected average balance sheet information
Total assets
Total earning assets (3)
Loans and acceptances (3)
Deposits
Attributed capital
Other information
AUA (4)
Number of employees (FTE)
Effective income tax rate
Credit information
Gross impaired loans as a % of average net loans and
acceptances
PCL on impaired loans as a % of average net loans and
acceptances
(1)
(2)
(3)

(4)
n.a.

$

2013

9,168 $
3,701
12,869
928
5,687
6,254
4,642 $

8,875
3,345
12,220
908
5,464
5,848
4,352

7,285 $
3,135
2,449

6,948
2,990
2,282

37.0%
2.71%
44.2%
1.2%

37.5%
2.72%
44.7%
(0.6%)

350,400 $ 338,000
337,900
326,400
343,900
330,400
263,600
248,100
12,400
11,400

2012
$

$
$

8,484
3,130
11,614
1,015
5,163
5,436
4,045
6,591
2,894
2,129
38.9%
2.78%
44.5%
n.a.

$ 314,600
305,100
307,900
230,300
10,200

205,200
31,442
25.8%

183,600
31,970
25.6%

171,100
31,800
25.6%

0.33%

0.36%

0.37%

0.27%

0.27%

0.33%

NIM is calculated as Net interest income divided by Average total earning assets.
Efficiency ratio is calculated as Non-interest expense divided by Total revenue.
Average total earning assets and average loans and acceptances include average securitized residential mortgages and credit card
loans for the year of $54.5 billion and $8.0 billion, respectively (2013 – $53.9 billion and $7.2 billion; 2012 – $44.9 billion and
$7.3 billion).
AUA includes securitized residential mortgages and credit card loans as at October 31, 2014 of $23.2 billion and $8.0 billion
respectively (October 31, 2013 – $25.4 billion and $7.2 billion; October 31, 2012 – $31.0 billion and $7.4 billion).
not applicable

Financial performance
2014 vs. 2013
Net income increased $290 million or 7%, compared to last year, reflecting solid volume growth across most businesses, strong fee-based
revenue growth, and the full integration of Ally Canada.
Total revenue increased $649 million or 5% from last year, largely due to solid volume growth of 5% across most businesses, and strong
fee-based revenue growth primarily attributable to higher mutual fund distribution fees and card services revenue.
Net interest margin was relatively stable compared to last year.
PCL increased $20 million, with the PCL ratio flat, mainly due to higher provisions in our small business portfolio.
Non-interest expense increased $223 million or 4%, due to higher staff and marketing costs in support of business growth, and higher
litigation provisions. These factors were partially offset by continuing benefits from our efficiency management activities and benefits from the
full integration of Ally Canada.
Average loans and acceptances increased $14 billion or 4%, mainly due to growth in residential mortgages, business loans and personal
loans. Average deposits increased $16 billion or 6%, primarily reflecting growth in both personal and business deposits.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

25

2013 vs. 2012
Net income increased $307 million or 8% from 2012, reflecting solid volume growth across all businesses, improved credit quality, and the
inclusion of our acquisition of Ally Canada. These factors were partially offset by higher costs in support of business growth and spread
compression.
Business line review
Personal Financial Services
Personal Financial Services focuses 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, including home equity financing, personal lending, deposit accounts, Canadian private
banking, indirect lending (including auto financing), mutual funds and self-directed brokerage accounts, and Guaranteed Investment Certificates
(GICs). We rank #1 or #2 in market share for most personal banking products in Canada and our retail banking network is the largest in Canada
with 1,272 branches and 4,620 ATMs.
Financial performance
Total revenue increased $337 million or 5% compared to last year, reflecting solid volume growth across most businesses, and higher mutual
fund distribution fees.
Average residential mortgages increased 4% compared to 2013, resulting from solid housing market activity supported by the continuing
low interest rate environment. Average personal loans grew 2% from last year largely due to growth in indirect lending. Average personal
deposits grew 7% from last year, reflecting the acquisition of new clients as well as the continued use of savings and other deposits products by
existing clients.
Selected highlights
(Millions of Canadian dollars,
except number of)

Table 19
2014

2013

(Millions of Canadian dollars)

2012

Total revenue
$ 7,285 $ 6,948 $
6,591
Other information (average)
Residential mortgages
186,700 178,700
170,400
Personal loans
85,200
83,600
76,300
Personal deposits
100,000
93,700
87,300
Personal GICs
65,100
63,100
59,100
Branch mutual fund
111,600
95,300
82,300
balances (1)
AUA – Self-directed
60,500
53,300
48,900
brokerage (1)
Number of:
New deposit accounts opened
(thousands)
1,514
1,285
1,204
Branches
1,272
1,255
1,239
ATM
4,620
4,622
4,724
(1)

Average residential mortgages, personal loans and deposits

216,000

120,000

180,000

100,000

144,000

80,000

108,000

60,000

72,000

40,000

36,000

20,000

0

Residential
mortgages
Personal
loans
Personal
deposits

0
2014 2013 2012

2014 2013 2012

2014 2013 2012

Represents year-end spot balances.

Business Financial Services
Business Financial Services offers a wide range of lending, leasing, deposit, investment, foreign exchange, cash management, auto dealer
financing (floorplan), and trade products and services to small, medium-sized and commercial businesses and agriculture and agribusiness
clients across Canada. Our business banking network has the largest team of relationship managers and specialists in the industry. Our strong
commitment to our clients has resulted in our leading market share in business loans and deposits.
Financial performance
Total revenue increased $145 million or 5% compared to last year, primarily due to strong volume growth in business deposits and business
loans, and a favourable cumulative accounting adjustment related to deferred loan fees in our business lending portfolio. These factors were
partially offset by spread compression from competitive pressures.
Average loans and acceptances increased 6% and average business deposits were up 8%, in a very competitive environment, due to
increased activity from existing and new clients.
Selected highlights
(Millions of Canadian dollars)

Total revenue
Other information (average)
Business loans and acceptances
Business deposits (1)
(1)

26

Table 20
2014

2013

2012

$ 3,135 $ 2,990

$ 2,894

57,900
98,500

54,500
91,300

48,300
83,900

Includes GIC balances.

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Average business loans and acceptances and business deposits
(Millions of Canadian dollars)

64,000
56,000
48,000
40,000
32,000
24,000
16,000
8,000
0

2014 2013 2012

2014 2013 2012

112,000
98,000
84,000
70,000
56,000
42,000
28,000
14,000
0

Business loans and
acceptances
Business deposits

Card and Payment Solutions
Cards and Payment Solutions provides a wide array of convenient credit cards with loyalty and reward benefits, and payment products and
solutions within Canada. We have over 6.7 million credit card accounts and have approximately 23% market share of Canada’s credit card
purchase volume.
In addition, this business line includes our 50% interest in Moneris Solutions, Inc., our merchant card processing joint venture with the
Bank of Montreal. Moneris processes approximately $195 billion in annual credit and debit card transaction volumes.
Financial performance
Total revenue increased $167 million or 7%, compared to last year, driven by improved spreads, higher balances and higher credit card transaction volumes.
Average credit card balances increased 4% and net purchase volumes increased 10% due to higher active accounts driven by strength in
new account acquisitions.
Selected highlights

Table 21
2014

(Millions of Canadian dollars)

Total revenue
Other information
Average credit card balances
Net purchase volumes

$

2013

(Millions of Canadian dollars)

2012

2,449 $ 2,282 $ 2,129
14,100
84,200

Average credit card balances and net purchase volumes

13,600
76,200

12,900
70,500

16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0

2014 2013 2012

2014 2013 2012

96,000
84,000
72,000
60,000
48,000
36,000
24,000
12,000
0

Average credit
card balances
Net purchase
volumes

Caribbean & U.S. Banking
Our Caribbean banking business offers a comprehensive suite of banking products and services, as well as international financing and trade
promotion services through extensive branch, ATM, online and mobile banking networks.
Our U.S. cross-border banking business serves the needs of our Canadian clients within the U.S. through online and mobile channels, and
offers a broad range of financial products and services to individual and business clients across all 50 states. As well, we serve the banking
product needs of our U.S. wealth management clients.
Financial performance
Total revenue increased $62 million or 8% from last year, primarily due to the impact of foreign exchange translation, and the implementation of
full-service pricing in the Caribbean.
Average loans and acceptances increased $300 million or 4%, primarily due to the impact of foreign exchange translation and strong loan
growth in the U.S. client base. Average deposits increased $1 billion or 8%, mostly due to increased liquidity in the Caribbean leading to higher
savings and current account balances, and the impact of foreign exchange translation.
Selected highlights

Table 22

(Millions of Canadian dollars, except number of
and percentage amounts)

Total revenue
Other information
Net interest margin
Average loans and acceptances
Average deposits
AUA
AUM
Number of:
Branches
ATM

2014
$

861 $

2013
799

2012
$

824

4.30%
7,700
15,200
9,000
4,000

4.56%
7,400
14,100
8,600
3,400

5.19%
7,500
13,600
8,100
3,100

93
309

116
351

121
341

Average loans and deposits (Millions of Canadian dollars)

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0

2014 2013 2012

2014 2013 2012

Management’s Discussion and Analysis

16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0

Loans and
acceptances
Deposits

Royal Bank of Canada: Annual Report 2014

27

Wealth Management
Wealth Management comprises Canadian Wealth Management, U.S. & International Wealth Management and Global Asset Management (GAM).
Wealth Management serves individual and institutional clients in target markets around the world. From our offices in key financial centres
mainly in Canada, the U.S., the U.K., Channel Islands, continental Europe, and Asia, Wealth Management offers a comprehensive suite of
investment, trust, banking, credit and other wealth management solutions to affluent, high net worth (HNW), and ultra-high net worth (UHNW)
clients. Our asset management group, Global Asset Management, which includes BlueBay Asset Management (BlueBay), is an established
global leader in investment management services, providing investment strategies and fund solutions directly to institutional investors and also
to individual clients through our distribution channels and third-party distributors.
Economic and market review
Solid economic performance in Canada and the U.S., as well as strong growth in capital markets throughout most of fiscal 2014, drove higher
growth in our average fee-based client assets through capital appreciation and net sales. The Euro area economy grew marginally, leading the
ECB to implement policy measures aimed at restoring investor confidence and stimulating lending in the region. In addition, the continuing
global low interest rate environment resulted in continued spread compression and money market fee waivers.
Highlights
•
Capital appreciation and strong net sales continued to drive client assets higher surpassing $1.1 trillion this year.
•
In Canada, our full service private wealth business is the industry leader. We continued to extend our leadership amongst HNW clients by
focusing on delivering comprehensive value to our clients, leveraging our expertise around business owners, succession and wealth
planning.
•
In the U.S., we are among the top 10 full service brokerage firms in terms of assets and number of advisors, and we continued to focus on
improving advisor productivity.
•
Outside Canada and the U.S., we have focused on select markets with growth potential where we are well positioned to succeed, while at
the same time enhancing our product offering and operating environment.
•
We continued to grow and invest in our high-performing asset management business and maintained a leading market share of 14.5% of
the Canadian mutual fund asset management industry. We have increased BlueBay’s distribution footprint with institutional clients and
expanded our international distribution capabilities to U.S. and international institutional clients and professional buyers. We also
enhanced our capabilities by acquiring differentiated global equities investment capabilities.
•
The strength of our global capabilities and commitment to deliver integrated global wealth management advice, solutions and services to
HNW and UHNW clients helped us earn significant industry awards. We were ranked or named:
–
5th largest global wealth manager by client assets (Scorpio Partnership’s 2014 Global Private Banking KPI Benchmark)
–
Outstanding Wealth Manager – Customer Relationship Service and Engagement (Private Banker International)
–
Best Fund Group Overall and Best Bond Funds Group (Lipper Awards)
–
A top 50 Global Asset Manager (Pensions & Investments / Towers Watson)
–
Best Bank-owned Brokerage Firm in Canada (International Executive Brokerage Report Card)
–
Trust Company of the Year (Society of Trust and Estate Practitioners)
Outlook and priorities
Economic and market conditions are expected to continue improving, particularly in Canada and the U.S., and we anticipate further growth in
average fee-based client assets. We have also recently realigned our International Wealth Management business to allow us to continue focusing
our strategic priorities around evolving markets and competition, and the changing needs of our clients. For further details on our general
economic review and outlook, refer to the Economic and market review and outlook section.
Key strategic priorities for 2015
•
Bring the best of RBC to our clients by leveraging the RBC enterprise brand, capabilities and competitive strengths.
•
Leverage and grow our high performing asset management business globally.
•
Focus growth on the HNW and UHNW client segments in our priority markets.
•
Focus on serving our international cross-border clients well from our targeted markets by realigning certain international businesses for
sustainable growth and profitable scale.

28

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Wealth Management

Table 23
2014

(Millions of Canadian dollars, except number of and percentage amounts and as otherwise noted)

Net interest income
Non-interest income
Fee-based revenue
Transactional and other revenue
Total revenue
PCL
Non-interest expense
Net income before income taxes
Net income
Revenue by business
Canadian Wealth Management
U.S. & International Wealth Management
U.S. & International Wealth Management (US$ millions)
Global Asset Management (1)

2012

469 $

396 $

$

4,185
1,659
6,313
19
4,800
1,494
1,083 $

3,463
1,628
5,487
51
4,219
1,217
886 $

2,964
1,478
4,835
(1)
3,809
1,027
753

2,186 $
2,430
2,221
1,697

1,889 $
2,225
2,174
1,373

1,741
1,977
1,973
1,117

19.2%
23.7%

15.8%
22.2%

13.9%
21.2%

$

25,800 $
15,700
36,200
5,500

21,600 $
12,100
31,900
5,400

20,900
9,900
29,200
5,150

$

983 $
717,500
452,300
690,500
427,800
12,919
4,402

862 $
639,200
387,200
609,500
367,600
12,462
4,366

793
577,800
339,600
554,800
322,500
12,139
4,388

$

Key ratios
ROE
Pre-tax margin (2)
Selected average balance sheet information
Total assets
Loans and acceptances
Deposits
Attributed capital
Other information
Revenue per advisor (000s) (3)
AUA (4)
AUM (4)
Average AUA
Average AUM
Number of employees (FTE)
Number of advisors (5)

2013

$

393

Estimated impact of U.S. dollar, British pound and Euro translation on key income
statement items
(Millions of Canadian dollars, except percentage amounts)

Increase (decrease):
Total revenue
Non-interest expense
Net income

2014 vs. 2013
$

(6)%
(12)%
(8)%

Percentage change in average US$ 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)
(2)
(3)
(4)
(5)

212
180
21

Effective the first quarter of 2014, BlueBay results are no longer reported on a one-month lag. As a result, 2014 included thirteen months of results from BlueBay.
Pre-tax margin is defined as net income before income taxes divided by Total revenue.
Represents investment advisors and financial consultants of our Canadian and U.S. full-service wealth businesses.
Represents year-end spot balances.
Represents client-facing advisors across all our wealth management businesses.

2014 vs. 2013
Net income increased $197 million or 22% from a year ago, mainly due to higher earnings from growth in average fee-based client assets,
primarily in our Global Asset Management and Canadian Wealth Management businesses.
Total revenue increased $826 million or 15%, mainly due to higher revenue from growth in average fee-based client assets resulting from
capital appreciation and strong net sales, and the impact of foreign exchange translation.
PCL decreased $32 million mainly due to lower provisions on a few accounts. For further details, refer to the Credit quality performance
section.
Non-interest expense increased $581 million or 14%, mainly due to higher variable compensation driven by higher revenue, the impact of
foreign exchange translation, and higher staff levels and infrastructure investments in support of business growth.
2013 vs. 2012
Net income increased $133 million or 18% from 2012, mainly due to higher earnings from growth in average fee-based client assets resulting
from net sales and capital appreciation and higher transaction volumes reflecting improved market conditions. These factors were partially offset
by higher PCL.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

29

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 1,600 investment advisors providing comprehensive advice-based financial solutions to affluent, HNW and UHNW clients. Additionally,
we provide discretionary investment management and estate and trust services to our clients through approximately 60 investment counsellors
and 95 trust professionals in locations 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 $297 million or 16% from a year ago, mainly due to higher revenue from a 14% increase in AUA reflecting capital appreciation
and net sales.
Selected highlights
2014

2013

2012

Total revenue
$ 2,186
Other information
3,000
Total loans and acceptances (1)
15,300
Total deposits (1)
AUA
285,100
AUM
55,400
Average AUA
272,900
Average AUM
50,400
Total assets under fee-based
programs
166,700

$ 1,889

$ 1,741

(Millions of Canadian dollars)

(1)

Average AUA and AUM (1) (Millions of Canadian dollars)

Table 24

2,500
13,400
251,400
43,600
239,100
40,000

2,300
11,900
230,400
36,100
222,100
34,400

139,400

120,700

350,000

56,000

300,000

48,000

250,000

40,000

200,000

32,000

150,000

24,000

100,000

16,000

50,000

8,000

0

(1)

Represents an average amount, which is calculated using methods intended to
approximate the average of the daily balances for the period.

2014 2013 2012

2014 2013 2012

AUA
AUM

0

Represents average balances, which are more representative of the impact client
balances have upon our revenue.

U.S. & International Wealth Management
U.S. Wealth Management includes our private client group, which is the 8th largest full-service wealth advisory firm in the U.S., as measured by
number of advisors, with over 1,800 financial advisors. Additionally, our correspondent and advisor services businesses deliver clearing and
execution services for small to mid-sized independent broker-dealers and registered investment advisor firms. In the U.S., we operate in a
fragmented and extremely competitive industry. There are approximately 4,300 registered broker-dealers in the U.S., comprising independent,
regional and global players.
We have recently realigned our International Wealth Management business to focus on serving our international cross-border clients well
from our targeted markets for sustainable growth and profitable scale. International Wealth Management includes Wealth Management –
International (formerly Wealth Management – British Isles & Caribbean and also includes the international businesses in Canada and the U.S.),
and Wealth Management – Emerging markets. We provide customized and integrated trust, banking, credit, and investment solutions to HNW
and UHNW clients and corporate clients with over 1,500 employees located in 17 countries around the world. Competitors to our International
Wealth Management business comprise global wealth managers, traditional offshore private banks, domestic wealth managers and U.S.
investment-led private client operations.
Financial performance
Revenue increased $205 million or 9% from a year ago. In U.S. dollars, revenue increased $47 million or 2%, mainly due to higher revenue from
a 6% increase in AUA reflecting capital appreciation and net sales, partially offset by the change in fair value of our U.S. share-based
compensation plan, largely offset in non-interest expense.
Selected highlights
(Millions of Canadian dollars, except otherwise
noted)

Total revenue
$
Other information (Millions of U.S.
dollars)
Total revenue
Total loans, guarantees and
letters of credit (1)
Total deposits (1)
AUA
AUM
Average AUA
Average AUM
Total assets under fee-based
programs (2)
(1)
(2)
30

Average AUA and AUM (1) (Millions of U.S. dollars)

Table 25
2014

2013

2012

2,430 $

2,225 $

1,977

2,221

2,174

1,973

14,500
19,100
383,700
41,100
382,000
38,400

12,100
18,000
371,900
35,600
361,800
34,700

10,200
17,200
347,800
31,300
331,700
29,000

94,500

83,200

71,700

Represents an average amount, which is calculated using methods intended to
approximate the average of the daily balances for the period.
Represents amounts related to our U.S. wealth management businesses.
Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

455,000

45,500

390,000

39,000

325,000

32,500

260,000

26,000

195,000

19,500

130,000

13,000

65,000

6,500

0

(1)

2014 2013 2012

2014 2013 2012

AUA
AUM

0

Represents average balances, which are more representative of the impact client
balances have upon our revenue.

Global Asset Management
Global Asset Management provides global investment management services and solutions for individual and institutional investors in Canada,
the U.S., the U.K., Europe and emerging markets. We provide a broad range of investment management services through mutual, pooled and
hedge 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 bank, and directly to
individual clients. We also provide investment solutions directly to institutional clients, including pension plans, endowments and foundations.
We are the largest retail fund company in Canada as well as a leading institutional asset manager. We face competition in Canada from
major banks, insurance companies, asset management organizations and boutique firms. The Canadian fund management industry is large and
mature, but still 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, insurance companies
and boutique asset managers.
Internationally, through our leading global capabilities of BlueBay and RBC Global Asset Management, we offer investment management
solutions for institutions and, through private banks including RBC Wealth Management, to HNW and UHNW investors. We face competition from
asset managers that are part of international banks as well as national, regional and boutique asset managers in the geographies where we
serve clients.
Financial performance
Revenue increased $324 million or 24% from a year ago, mainly due to higher revenue from a 14% increase in AUM reflecting capital
appreciation and strong net sales, the impact of foreign exchange translation, and an additional month of revenue from BlueBay.
Selected highlights
(Millions of Canadian dollars)

2014

2013

2012

Total revenue (1)
$ 1,697 $ 1,373 $ 1,117
Other information
Canadian net long-term mutual
fund sales
10,982
8,064
7,906
Canadian net money
market mutual fund
(redemptions) sales
(1,229)
(1,348)
(1,981)
AUM
350,600 306,500 272,200
Average AUM
335,300 292,100 259,100
(1)

Average AUM (1) (Millions of Canadian dollars)

Table 26

Effective the first quarter of 2014, BlueBay results are no longer reported on a onemonth lag. As a result, 2014 included thirteen months of results from BlueBay.

350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
2014
(1)

2013

2012

Represents average balances, which are more
representative of the impact client balances have
upon our revenue.

Insurance
Insurance comprises our operations in Canada and globally and operates under two business lines: Canadian Insurance and International
Insurance, providing a wide range of life, health, home, auto, travel, wealth and reinsurance products and solutions. In Canada, we offer our
products and services through our proprietary distribution channels, comprised of the field sales force which includes retail insurance branches,
our field sales representatives, call centres and online, as well as through independent insurance advisors and affinity relationships. Outside
Canada, we operate in reinsurance markets globally offering life, accident and annuity reinsurance products. Our competitive environment is
discussed below in each business.
Economic and market review
While the global insurance industry has shown signs of stabilization, we continued to experience pressure from systemic factors such as
persistently low interest rates, uncertain global market conditions, a slowdown in consumer lending, and changes in the regulatory environment
including the Ontario government’s mandated auto rate reduction strategy which continue to impact the insurance marketplace. Although these
factors have negatively impacted our businesses, product and pricing actions taken in recent years, a migration to lower cost proprietary
distribution channels, conservative investment practices and diversified product lines have continued to mitigate this challenging environment.
Highlights
•
We introduced tools, training and technology including simplified processes and improved applications to create a best-in-class sales force
to capture increased market share in the Canadian insurance marketplace.
•
For the 3rd consecutive quarter, RBC Insurance continues to be the fastest growing group insurance provider in Canada.
•
Annual travel insurance plan solutions were launched in the branch network and to our credit card clients, including optional Trip
Cancellation insurance.
•
We made pricing and product enhancements in individual disability insurance including a new unique program for established
professionals.
•
The U.K. longevity risk transfer market continued to be robust as pension plan sponsors and annuity writers continued to pursue de-risking
solutions. The market has seen growth in new entrants as well as various risk transfer options. We have been active in the U.K. market since
2008 and continue to selectively add annuity reinsurance contracts at a measured pace.
Outlook and priorities
We expect continued business growth as a result of the product and pricing actions taken during the last few years, including increasing volumes
through our growing proprietary channels and the execution of efficiency management initiatives, which we anticipate will assist in mitigating
economic and regulatory challenges. For further details, refer to the Economic and market review and outlook section.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

31

Key strategic priorities for 2015
•
Deepen client relationships by continuing to provide our customers with a comprehensive suite of insurance products and services based
on their unique family needs.
•
Continue to improve our proprietary channels distribution efficiency through implementation of performance management processes, a
proactive sales culture and enhanced cross-selling initiatives.
•
Continue to simplify the way we do business by streamlining all business processes to ensure that clients find it easy to do business with
us, while diligently managing our expenses.
•
Pursue select international opportunities, within our risk appetite, with the aim of continuing to grow our core reinsurance business.
Insurance

Table 27
2014

2013

2012

3,742 $
938
284
4,964
3,194
379
579
812
781 $

3,674 $
(17)
271
3,928
2,326
458
551
593
595 $

3,705
929
263
4,897
3,055
566
518
758
713

2,911 $
2,053

1,962 $
1,966

2,992
1,905

49.7%

41.4%

46.7%

$

12,000 $
1,550

11,900 $
1,400

11,500
1,500

$

5,164 $
2,419
2,745
8,564
439
6,239
700
3,126

4,924 $
2,344
2,580
8,034 $
(491)
6,302
500
2,965

4,849
2,362
2,487
7,921
410
5,861
300
2,744

(Millions of Canadian dollars, except percentage amounts and as otherwise noted)

Non-interest income
Net earned premiums
Investment income (1)
Fee income
Total revenue
Insurance policyholder benefits and claims (1)
Insurance policyholder acquisition expense
Non-interest expense
Net income before income taxes
Net income
Revenue by business
Canadian Insurance
International Insurance

$

$
$

Key ratios
ROE
Selected average balance sheet information
Total assets
Attributed capital
Other information
Premiums and deposits (2)
Canadian Insurance
International Insurance
Insurance claims and policy benefit liabilities
Fair value changes on investments backing policyholder liabilities (1)
Embedded value (3)
AUM
Number of employees (FTE)
Estimated impact of U.S. dollar and British pound translation on key income statement items
(Millions of Canadian dollars, except percentage amounts)

2014 vs. 2013

Increase (decrease):
Total revenue
PBCAE
Non-interest expense
Net income

$

Percentage change in average US$ equivalent of C$1.00
Percentage change in average British pound equivalent of C$1.00
(1)

(2)
(3)

74
75
–
(2)
(6)%
(12)%

Investment income can experience volatility arising from fluctuation of fair value through profit or loss (FVTPL) assets. The investments which support actuarial liabilities are predominantly
fixed income assets designated as at FVTPL. Consequently changes in the fair values of these assets are recorded in investment income in the consolidated statement of income and are
largely offset by changes in the fair value of the actuarial liabilities, the impact of which is reflected in insurance policyholder benefits and claims.
Premiums and deposits include premiums on risk-based insurance and annuity products, and individual and group segregated fund deposits, consistent with insurance industry practices.
Embedded value is defined as the sum of value of equity held in our Insurance segment and the value of in-force business (existing policies). For further details, refer to the Key performance
and non-GAAP measures section.

Financial performance
2014 vs. 2013
Net income increased $186 million or 31%. Excluding the charge last year of $160 million ($118 million after-tax) as a result of new tax legislation in Canada, which affects the policyholders’ tax treatment of certain individual life insurance policies, net income increased $68 million, or
10%, mainly due to lower net claims costs, business growth in our European life and U.K. annuity products, and favourable actuarial adjustments
reflecting management actions and assumption changes. Our results last year also included a favourable impact from interest and asset related
activities on the Canadian life business.
Total revenue increased $1,036 million or 26%, mainly due to the change in fair value of investments backing our policyholder liabilities
resulting from a decrease in long-term interest rates, largely offset in PBCAE. Business growth in our European life and U.K. annuity products, and
the impact of foreign exchange translation also contributed to the increase.
PBCAE increased $789 million or 28%, mainly due to the change in fair value of investments backing our policyholder liabilities, which was
largely offset in revenue, and the impact of foreign exchange translation. These factors were partially offset by lower net claims costs. In addition,
our PBCAE last year included the unfavourable impact of the charge related to new tax legislation in Canada as noted above and a favourable
impact from interest and asset related activities on the Canadian life business.
Non-interest expense increased $28 million or 5%, mainly due to higher costs in support of business growth, partially offset by continuing
benefits from our efficiency management activities.
32

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Premiums and deposits were up $240 million or 5%, reflecting growth in both International and Canadian Insurance.
Embedded value decreased $63 million, as the impact of the transfer of capital from our insurance businesses through dividend payments
was mostly offset by growth from operations and the favourable change in discount rates. For further details, refer to the Key performance and
non-GAAP measures section.
2013 vs. 2012
Net income decreased $118 million or 17% from 2012, mainly due to a charge of $160 million ($118 million after-tax) as a result of new tax
legislation in Canada. Excluding this charge, net income of $713 million was relatively flat compared to 2012 as favourable actuarial adjustments reflecting management actions and assumption changes and the continuing benefit from our efficiency management activities were
mostly offset by higher net claims costs.
Results excluding the specified item noted above are non-GAAP measures. For further details, including a reconciliation, refer to the Key
performance and non-GAAP measures section.
Business line review
Canadian Insurance
We offer life, health, property and casualty insurance products as well as wealth accumulation solutions, to individual and group clients across
Canada. Our life and health portfolio includes universal life, term life, critical illness, disability, long-term care insurance and group benefits. We
offer a wide range of property and casualty products including home, auto and travel insurance. Our travel products include out of province/
country medical coverage, trip cancellation insurance and interruption insurance.
In Canada, we compete against over 200 insurance companies, with the majority of the organizations specializing in either life and health,
or property and casualty products. We hold a leading market position in disability insurance products, have a significant presence in life and
travel products, and have a growing presence in the home, auto and wealth markets.
Financial performance
Total revenue increased $949 million or 48% from last year, mainly due to the change in fair value of investments backing our policyholder
liabilities resulting from the decrease in long-term interest rate, largely offset in PBCAE.
Premiums and deposits increased $75 million or 3% reflecting growth in our life, health, wealth accumulation, home and auto product lines,
partially offset by the impact of the sale of the travel agency insurance business in the previous year.
Selected highlights
(Millions of Canadian dollars)

Total revenue
$
Other information
Premiums and deposits
Life and health
Property and casualty
Annuity and segregated fund
deposits
Fair value changes on
investments backing
policyholder liabilities

Table 28
2014

2013

2012

2,911 $

1,962 $

2,992

Premiums and deposits (Millions of Canadian dollars)

3,000
2,500

1,266
951

1,245
942

1,280
965

202

157

117

2,000
1,500
1,000
500
0
2014

490

(510)

2013

2012

408

International Insurance
International Insurance is primarily comprised of our reinsurance businesses which insure risks of other insurance and reinsurance companies.
We offer life and health, accident and annuity reinsurance products.
The global reinsurance market is dominated by a few large players, with significant presence in the U.S., U.K. and Euro area. The reinsurance
industry is competitive but barriers to entry remain high.
Financial performance
Total revenue increased $87 million or 4%, mainly due to business growth in our European life and U.K. annuity products and the impact of
foreign currency translation. These factors were partially offset by the change in fair value of investments backing our policyholder liabilities,
largely offset in PBCAE.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

33

Premiums and deposits increased $165 million, or 6% driven by volume growth in both U.K. annuity and European life products.
Selected highlights

Table 29

(Millions of Canadian dollars)

Total revenue
Other information
Premiums and deposits
Life and health
Property and casualty
Annuity

$

2014

2013

2012

2,053 $

1,966 $

1,905

Premiums and deposits (Millions of Canadian dollars)

3,000
2,500
2,000

2,128
6
611

2,069
50
461

1,980
56
451

1,500
1,000
500
0
2014

2013

2012

Investor & Treasury Services
Investor & Treasury Services is a specialist provider of asset servicing, custody, payments, treasury services, and transaction banking for
financial institutions and other institutional investors worldwide. We deliver custodial, advisory, financing and other services to safeguard client
assets, maximize liquidity, and manage risk across multiple jurisdictions. We also provide short-term funding and liquidity management for RBC.
We are a top 10 global custodian by assets under administration with a network of 18 offices across North America, Europe, the Middle East and
Asia-Pacific. While we compete against the world’s largest global custodians, we remain a specialist provider and our transaction banking
business competes primarily with major Canadian banks.
Economic and market review
The highly competitive environment in the global custody industry continued to exert downward pressure on margins in 2014. Continued
uncertainty relating to the timing of a recovery in the Euro area economy and the corresponding low to negative interest rate environment
reduced deposit rates, leading to spread compression. In Canada and the U.S., investor confidence improved, driving higher transaction volumes
and growth in custodial fees. Increased regulation across the industry continued to impact our custody business, resulting in higher compliance
and technology costs.
Highlights
•
We maintained our leading market position in Canada by focusing on new client wins and deepening relationships with existing clients.
•
We continued to evolve our service offering by investing in technology to provide enhanced solutions and we restructured our coverage
teams to better serve our key client segments.
•
We achieved improved earnings and extracted further expense savings with the continuation of our efficiency management program.
•
We delivered strong growth in client deposits in support of RBC growth objectives.
•
As a result of our successes, we received external recognition and were named:
– Best Custodian Overall (Global Investor) and Fund Administrator of the Year (GlobalCustody.net Survey);
– Real Estate Fund Administrator of the Year (Custody Risk European Awards).
Outlook and priorities
In 2015 we will mark the transition to ‘business-as-usual operations’ following extensive integration efforts since the formation of the Investor &
Treasury Services segment two years ago. Having achieved significant cost savings as well as revenue growth, our focus in 2015 will be to
leverage our leading market position in Canada and our offshore capabilities in Luxembourg and Ireland to increase sales revenue. While we
expect the asset servicing environment to remain challenging in the near-term largely due to competitive margin pressures and the continuing
low interest rate environment, we believe we are well-positioned to compete in the continuously changing operating environment. For further
details on our general economic review and outlook, refer to the Economic and market review and outlook section.
Key strategic priorities for 2015
•
Maintain our leadership position in Canada by continuing to invest in technology solutions that enhance the overall client experience.
•
Evolve our global operating and client servicing model to improve efficiencies by leveraging the strength of our leading offshore service
offering in Luxembourg and Ireland for our global client base.
•
Continue to support RBC growth strategies through the expertise of our liquidity management team.
•
Leverage our enterprise-wide relationships to access new business and broaden client opportunities.

34

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Investor & Treasury Services

Table 30
2014

(Millions of Canadian dollars, except percentage amounts and as otherwise noted)

$

Net interest income
Non-interest income
Total revenue
Non-interest expense
Net income before income taxes
Net income

732
1,152
1,884
1,286
598
441

$

Key Ratios
ROE
ROE adjusted (1)
Selected average balance sheet information
Total assets
Deposits
Client deposits
Wholesale funding deposits
Attributed capital
Other Information
AUA
Average AUA
Number of employees (FTE)

2013
$

$

19.8%
n.a.
$

94,200
112,100
42,700
69,400
2,150
3,702,800
3,463,000
4,963

671
1,133
1,804
1,348
456
339

2012
$

612
293
905
701
204
102

$

16.5%
18.1%
$

83,100
104,300
36,100
68,200
2,000
3,208,800
3,052,600
5,208

5.3%
17.9%
$

66,900
92,900
14,100
78,800
1,700
2,886,900
2,781,800
6,084

Estimated impact of U.S. dollar, British pound and Euro translation on key income statement
items
2014 vs. 2013

(Millions of Canadian dollars, except percentage amounts)

Increase (decrease):
Total revenue
Non-interest expense
Net income

$

(6)%
(12)%
(8)%

Percentage change in average US$ 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)
n.a.

69
57
7

Measures have been adjusted by excluding a restructuring charge related to the integration of Investor Services and the acquisition of the remaining 50% stake of RBC Dexia, and are nonGAAP measures. For further details, refer to the Key performance and non-GAAP measures section.
not applicable

Financial performance
2014 vs. 2013
Net income increased $102 million or 30% from last year. Excluding a restructuring charge last year of $44 million ($31 million after-tax) related
to the integration of Investor Services, net income increased $71 million or 19%, largely due to continuing benefits from our efficiency
management activities and higher earnings from growth in client deposits.
Total revenue increased $80 million or 4% from last year, mainly reflecting the impact of foreign exchange translation, higher net interest
income resulting from growth in client deposits, and higher funding and liquidity revenue as a result of tightening credit spreads. These factors
were partially offset by a decrease in custodial fees and lower foreign exchange transaction volumes in Investor Services.
Non-interest expense decreased $62 million or 5% from last year. Excluding the restructuring charge last year noted above, non-interest
expense decreased $18 million or 1%, primarily reflecting continuing benefits from our efficiency management activities, largely offset by the
impact of foreign exchange translation.
2013 vs. 2012
Net income was up $237 million from 2012. Excluding the restructuring charge in 2013 noted above and a loss of $224 million ($213 million
after-tax) in 2012 related to the acquisition of the remaining 50% stake of RBC Dexia, net income increased $55 million or 17%, largely due to
continuing benefits from our efficiency management activities and incremental earnings related to our additional 50% ownership of Investor
Services. Higher custodial fees and increased foreign exchange in Investor Services also contributed to the increase. These factors were partially
offset by lower funding and liquidity results and higher infrastructure costs.
Results excluding the specified items noted above are non-GAAP measures. For further details, including a reconciliation, refer to the Key
performance and non-GAAP measures section.
Capital Markets
Capital Markets provides public and private companies, institutional investors, governments and central banks globally with a wide range of
capital markets products and services across our two main business lines, Corporate and Investment Banking and Global Markets. Our legacy
portfolio is grouped under Other.
In North America, we offer a full suite of products and services which include corporate and investment banking, equity and debt origination
and distribution, and structuring and trading. Outside North America, we have a select presence in the U.K. and Europe, and Asia-Pacific, where
we offer a diversified set of capabilities in our key sectors of expertise such as energy, mining and infrastructure and we are now expanding into
industrial, consumer and healthcare in Europe.
In Canada, we compete mainly with Canadian banks where we are the premier global investment bank and market leader with a strategic
presence in all lines of capital markets businesses. In the U.S., we have full industry sector coverage and investment banking product range and
compete with large U.S. and global investment banks as well as smaller regional firms. In the U.K. and Europe, we compete in our key sectors of
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

35

expertise with global and regional investment banks. In Asia-Pacific, we compete with global and regional investment banks in select products,
consisting of our fixed income distribution and currencies trading in Asia and our corporate and investment banking in Australia.
Economic and market review
The capital market environments in the U.S. and Canada were strong during 2014 partly reflecting solid economic growth in both countries and
ongoing favourable monetary policies, while growth in European economies and markets improved marginally during 2014. However recent
geopolitical uncertainties and expectations for recessionary conditions in Europe led to some volatility towards the end of our fiscal year.
Strong client activity reflecting economic growth particularly in the U.S. and Canada, and the low interest rate environment led to strong
issuance activity throughout most of the year, with our corporate and investment banking businesses continuing to perform well, as we
continued to focus our efforts on origination and increased activity from client-focused strategies. Equity trading businesses were strong during
the year, driven by economic growth in the U.S., Canada and U.K. Fixed income trading businesses strengthened in Europe and the U.S. reflecting
improved market conditions driven by stable credit spreads when compared to volatile credit spreads experienced in 2013.
Highlights
•
We continued to focus on growing our corporate and investment banking businesses, particularly in the U.S. and Europe, while rebalancing
our global markets businesses by leveraging our investments that were made in prior years, allocating capital from trading to corporate and
investment banking businesses and managing risks by narrowing the focus of our trading products.
•
In Canada, we maintained our market leadership by deepening our existing client relationships, gaining new clients by leveraging our strong
cross border capabilities and improving collaboration with Wealth Management to drive operational efficiencies, and offering a full suite of
global capabilities. We continued to win significant mandates including acting as global coordinators and joint bookrunner on a
US$3 billion bought deal financing for Barrick Gold Corporation, and acting as joint bookrunner on Encana Corporation’s $2.6 billion bought
secondary offering of PrairieSky Royalty Ltd.
•
In the U.S., we continued to leverage our key strategic investments made in recent years to expand our corporate and investment banking
businesses. We successfully positioned our lending relationships as we continued to focus on origination and increased activity from clientfocused strategies, and our trading businesses took advantage of improved market conditions, particularly in the fixed income credit, equity
and municipal markets. We continued growing our businesses and won several significant mandates including acting as joint bookrunner
and sole swap arranger in a US$1 billion debt offering for AT&T.
•
In the U.K. and Europe, we continued to expand our corporate and investment banking businesses. We won new mandates including acting
as sole financial advisor to the Irish government-owned utility Bord Gáis Eireann on its sale of Bord Gáis Energy for €1.1 billion.
•
In Asia, we continued to focus on our fixed income trading distribution and foreign exchange trading capabilities, while in Australia, we
continued to selectively grow our corporate and investment banking business in mining, energy and infrastructure. We won new mandates
including acting as joint bookrunner in a US$3.25 billion debt offering for Westpac Banking Corporation.
•
As a result of our successes in each of our regions, we received external recognition as an industry leader and were named or ranked:
–
Best Investment Bank in Canada by Euromoney Magazine for the seventh consecutive year.
–
The 10th largest investment bank globally and in the U.S. by fees for the first nine months of 2014 (Dealogic).
–
The most trusted investment bank in the world and ranked second globally in terms of expertise and skills by the Economist.
–
The 14th largest financial advisor to M&A deals globally by value for the first nine months of 2014 (Dealogic), up from 18th for the same
period last year.
Outlook and priorities
We expect continuing improvement in economic and market environments in 2015. We have positioned our business through strategic
investments in our U.S. and U.K. corporate and investment banking businesses in recent years to take advantage of these improved economic
conditions. As a result, we anticipate growth in our corporate and investment banking businesses reflecting our continued focus on lending and
client focused activities. However, we expect that growth in our net lending revenue will be impacted by increased competition and narrower
spreads. Overall we anticipate slight growth in our fixed income, currencies and commodities businesses reflecting improving market conditions.
We continue to work towards compliance with Volcker Rule restrictions in the U.S. on banking entities engaging in proprietary trading and
having certain relationships with hedge and private equity funds by July 2015. As a result, we have exited certain proprietary trading strategies
and believe that our remaining strategies are permitted under the Volcker Rule as we expect to conduct these in accordance with certain
exemptions from the regulation (e.g. activities found to be conducted solely outside the U.S.) We do not expect these changes to have a material
effect on our results in our global markets businesses. Further growth in our businesses will be dependent on continued growth in the global
economy, impacts associated with other regulatory reforms, and implications associated with heightened concerns from regulators related to
leveraged finance activities.
For further details, refer to our Risk management – Top and emerging risks section. For further details on our general economic outlook, refer
to the Economic and market review and outlook section.
Key strategic priorities for 2015
•
Maintain our leadership position in Canada by focusing on long-term client relationships, leveraging our global capabilities, and continuing
to improve collaboration with Wealth Management.
•
Expand and strengthen client relationships in the U.S. by building on our momentum through expanded origination, advisory and
distribution activity, and driving cross-selling through our diversified loan book.
•
Build on our core strengths in Europe and Asia in both Corporate and Investment Banking and Global Markets by continuing to grow and
deepen client relationships.
•
Optimize capital use to earn high risk-adjusted returns by maintaining both a balanced approach between investment banking and trading
revenues and a disciplined approach to managing the risk and costs of our business.
•
Manage through the significant changes in the regulatory environment.

36

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Capital Markets financial highlights

Table 31
2014

(Millions of Canadian dollars, except percentage amounts and as otherwise noted)

$

Net interest income (1)
Non-interest income
Total revenue (1)
PCL
Non-interest expense
Net income before income taxes
Net income

$

Revenue by business
Corporate and Investment Banking
Global Markets
Other

$

Key ratios
ROE
Selected average balance sheet information
Total assets
Trading securities
Loans and acceptances
Deposits
Attributed capital
Other information
Number of employees (FTE)
Credit information
Gross impaired loans as a % of average net loans and acceptances
PCL on impaired loans as a % of average net loans and acceptances

$

2013

3,485
3,881
7,366
44
4,344
2,978
2,055

$

3,437
3,930
(1)

$

$

2012

2,872
3,708
6,580
188
3,856
2,536
1,700

$

3,014
3,492
74

$

2,559
3,629
6,188
135
3,752
2,301
1,576

$

2,533
3,635
20

14.1%

14.1%

392,300
103,800
64,800
47,600
14,100

$ 368,300
100,800
54,700
38,400
11,500

3,927

3,729

3,658

0.08%
0.07%

0.42%
0.34%

0.83%
0.29%

13.4%
$

349,200
90,400
47,000
33,700
11,150

Estimated impact of U.S. dollar, British pound and Euro translation on key income statement
items
2014 vs. 2013

(Millions of Canadian dollars, except percentage amounts)

Increase (decrease):
Total revenue
Non-interest expense
Net income

$

(6)%
(12)%
(8)%

Percentage change in average US$ 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)

421
227
121

The teb adjustment for 2014 was $492 million (2013 – $380 million, 2012 – $431 million). For further discussion, refer to the How we measure and report our business segments section.

Revenue by region (Millions of Canadian dollars)
7,500

Asia and other
Europe

5,000

U.S.
Canada

2,500

0
2014

2013

2012

Financial performance
2014 vs. 2013
Net income increased $355 million or 21%, reflecting growth across most businesses, largely driven by strong equity markets, our continued
focus on origination and lending, and increased activity from client-focused strategies. Lower PCL also contributed to the increase. These factors
were partially offset by higher litigation provisions and related legal costs.
Total revenue increased $786 million or 12%, largely due to higher equity trading revenue reflecting strong market conditions, the impact of
foreign exchange translation, strong growth in most of our investment banking businesses and higher lending revenue. These factors were
partially offset by lower fixed income trading revenue largely driven by the unfavourable impact of the implementation of valuation adjustments
related to funding costs on uncollateralized OTC derivatives, and the exiting of certain proprietary trading strategies to comply with the Volcker
Rule. In addition, our revenue last year was favourably impacted by the disposition of our London Metal Exchange shares.
PCL decreased $144 million or 77%, as last year included higher provisions on a few accounts. For further details, refer to the Credit quality
performance section.
Non-interest expense increased $488 million or 13%, mainly due to the impact of foreign exchange translation, higher litigation provisions
and related legal costs, and higher variable compensation on improved results.
2013 vs. 2012
Net income increased $124 million or 8% from 2012, primarily due to strong growth in our corporate and investment banking businesses mainly
driven by higher lending, loan syndication and debt origination mainly in the U.S., and lower variable compensation. These factors were partially
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

37

offset by lower revenue in our fixed income trading businesses largely in Europe, as a result of challenging market conditions in 2013, higher
litigation provisions and related legal costs, and higher PCL.
Business line review
Corporate and Investment Banking
Corporate and Investment Banking comprises our corporate lending, loan syndications, debt and equity origination, M&A advisory services,
private equity, research, client securitization and the global credit businesses. For debt and equity origination, revenue is allocated between
Corporate and Investment Banking and Global Markets based on the contribution of each group in accordance with an established agreement.
Financial performance
Corporate and Investment Banking revenue of $3,437 million increased $423 million or 14%, as compared to last year.
Investment banking revenue increased $162 million or 10%, mainly driven by strong growth in equity origination reflecting increased
issuance activity mainly in Canada and the U.S. Higher distributions on private equity investments and higher M&A activity reflecting increased
mandates primarily in the U.S. also contributed to the increase. These factors were partially offset by lower loan syndication activity mainly in the
U.S. compared to the strong levels last year.
Lending and other revenue increased $261 million or 18%, mainly due to strong growth in our lending portfolio.
Selected highlights
(Millions of Canadian dollars)

Table 32
2014

Total revenue (1)
$ 3,437
Breakdown of revenue (1)
Investment banking
1,736
1,701
Lending and other (2)
Other information
Average assets
49,500
Average loans and acceptances
42,530
(1)

(2)

$

Breakdown of total revenue (Millions of Canadian dollars)

2013

2012

3,014 $

2,533

1,574
1,440

1,338
1,195

2,400

40,000
34,350

33,800
27,875

800

4,000

Investment banking

3,200

Lending and other

1,600

0
2014

The teb adjustment for 2014 was $13 million (2013 – $2 million, 2012 – $10 million).
For further discussion, refer to the How we measure and report our business segments
section.
Comprises our corporate lending, client securitization, and global credit businesses.

2013

2012

Global Markets
Global Markets comprises our fixed income, foreign exchange, equity sales and trading, repos and secured financing and commodities
businesses.
Financial performance
Total revenue of $3,930 million increased $438 million or 13% as compared to last year.
Revenue in our Fixed income, currencies and commodities business decreased $33 million or 2%. The unfavourable impact of the
implementation of the FVA noted above, and the exiting of certain proprietary trading strategies to comply with the Volcker Rule, were largely
offset by higher fixed income trading revenue reflecting strong market conditions as compared to the challenging market conditions last year,
and higher commodities trading revenue.
Revenue in our Equities business increased $254 million or 26%, primarily due to strong equity markets and our continued focus on equity
origination and increased activity from client-focused strategies.
Revenue in our Repo and secured financing business increased $217 million or 32%, mainly due to higher trading revenue reflecting
increased client activity.
Selected highlights
(Millions of Canadian dollars)

Table 33
2014

Total revenue (1)
$ 3,930
Breakdown of revenue (1)
Fixed income, currencies and
commodities
1,801
Equities
1,243
886
Repo and secured financing (2)
Other information
Average assets
369,200
(1)

(2)

38

$

2013

2012

3,492 $

3,635

1,834
989
669

2,052
927
656

351,100

311,700

4,000

Repo and secured financing

3,000

Global equities

2,000

Fixed income, currencies
and commodities

1,000
0

The teb adjustment for 2014 was $470 million (2013 – $378 million, 2012 – $421
million). For further discussion, refer to the How we measure and report our business
segments section.
Comprises our secured funding businesses for internal businesses and external clients.

Royal Bank of Canada: Annual Report 2014

Breakdown of total revenue (Millions of Canadian dollars)

Management’s Discussion and Analysis

2014

2013

2012

Other
Other comprises our legacy portfolio which consists of our bank-owned life insurance (BOLI) stable value products, U.S. commercial mortgagebacked securities, U.S. auction rate securities (ARS), and structured rates in Asia. In recent years, in order to optimize our capital employed to
improve our risk-adjusted returns and reduce our liquidity risk on various products, we have significantly reduced several of our legacy portfolios.
Our legacy portfolios decreased by 20% as compared to last year.
Financial performance
Revenue decreased $75 million as compared to last year, mainly due to gains taken on certain legacy portfolios in 2013.
Corporate Support
Corporate Support comprises Technology & Operations which provide the technological and operational foundation required to effectively
deliver products and services to our clients, and Functions which includes our finance, human resources, risk management, internal audit and
other functional groups. Reported results for Corporate Support mainly reflect certain activities related to monitoring and oversight of enterprise
activities which are not allocated to business segments. Corporate Support also includes our Corporate Treasury function. For further details,
refer to the How we measure and report our business segments section.
Corporate Support

Table 34

(Millions of Canadian dollars, except number of)

$

Net interest income (loss) (1)
Non-interest income (loss)
Total revenue (1)
PCL
Non-interest expense
Net income (loss) before income taxes (1)
Income taxes (recoveries) (1)
Net income (2)

$

Other information
Number of employees (FTE)
(1)
(2)

2014

2013

2012

(313) $
164
(149)
(2)
89
(236)
(405)
169 $

(124) $
(12)
(136)
3
72
(211)
(653)
442 $

(184)
68
(116)
–
39
(155)
(513)
358

12,388

11,871

11,508

Teb adjusted.
Net income reflects income attributable to both shareholders and Non-Controlling Interests (NCI). Net income attributable to NCI for the year ended October 31, 2014 was $93 million
(October 31, 2013 – $93 million; October 31, 2012 – $92 million).

Due to the nature of activities and consolidated adjustments reported in this segment, we believe that a comparative period analysis is not
relevant. The following identifies material items affecting the reported results in each period.
Net interest income (loss) 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 recorded in Capital Markets. The amount deducted from net
interest income (loss) was offset by an equivalent increase in income taxes (recoveries). The teb amount for the year ended October 31, 2014
was $492 million as compared to $380 million last year and $431 million for the year ended October 31, 2012. For further discussion, refer to
the How we measure and report our business segments section.
In addition to the teb impacts noted above, the following identifies the other material items affecting the reported results in each period.
2014
Net income was $169 million largely reflecting asset/liability management activities and gains on private equity investments mainly related to
the sale of a legacy portfolio, partially offset by net unfavourable tax adjustments.
2013
Net income was $442 million largely reflecting net favourable tax adjustments, including $214 million of income tax adjustments related to
previous years, and asset/liability management activities.
2012
Net income was $358 million largely reflecting the settlement of several tax matters with the CRA which resulted in the release of $128 million of
tax uncertainty provisions and interest income of $72 million ($53 million after-tax) related to a refund of taxes paid and asset/liability
management activities.
Quarterly financial information
Fourth quarter 2014 performance
Q4 2014 vs. Q4 2013
Fourth quarter net income of $2,333 million, was up $232 million or 11% from last year. Diluted EPS of $1.57 was up $0.18 and ROE of 19.0%
was up 20 bps. Our fourth quarter earnings reflected higher earnings from growth in average fee-based client assets in Wealth Management, and
higher earnings in Canadian Banking reflecting strong fee-based revenue growth and solid volume growth of 5%. Lower net claims costs and
business growth in European Life and U.K. annuity products in Insurance also contributed to the increase. These factors were partially offset by
lower trading results in Capital Markets. Our fourth quarter results last year were impacted by a charge of $160 million ($118 million after-tax) as
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

39

a result of new tax legislation in Canada, which affects the policyholders’ tax treatment of certain individual life insurance policies, which was
largely offset by net favourable income tax adjustments including a $124 million income tax adjustment related to prior years.
Total revenue increased $463 million or 6%, mainly due to higher revenue from growth in average fee-based client assets in Wealth
Management, strong fee-based revenue growth primarily attributable to higher mutual fund distribution fees and card services revenue, solid
volume growth of 5% across most of our Canadian Banking businesses, and favourable net cumulative accounting adjustments in the current
quarter of $55 million ($40 million after-tax) in Canadian Banking. Higher corporate and investment banking revenue mainly reflecting increased
investment banking activity and strong growth in lending in Capital Markets, as well as a change in the fair value of investments backing our
policyholder liabilities in Insurance, largely offset in PBCAE, also contributed to the increase. These factors were partly offset by lower trading
revenue which included the unfavourable impact of the implementation of FVA on uncollateralized OTC derivatives and the exiting of certain
proprietary trading strategies during the quarter to comply with the Volcker Rule.
Total PCL increased $11 million from last year, mainly reflecting an additional provision of $50 million related to our impaired residential
mortgages portfolio in the Caribbean, and a provision on a single account in Capital Markets. These factors were partly offset by lower provisions
in our Canadian personal lending portfolio. In addition, our PCL last year included provisions on a few accounts in Wealth Management. The PCL
ratio of 31 bps decreased 1 bp from last year.
PBCAE decreased $126 million or 14%, as last year was impacted by the charge related to new tax legislation in Canada noted above. A
favourable claims adjustment in our life retrocession business also contributed to the decrease. These factors were partially offset by the change
in fair value of investments backing our policyholder liabilities, which was largely offset in revenue.
Non-interest expense increased $189 million or 5%, primarily reflecting higher costs in support of business growth, higher variable
compensation in Wealth Management driven by higher revenue, and increased marketing costs. These factors were partially offset by continuing
benefits from our efficiency management activities.
Q4 2014 vs. Q3 2014
Net income of $2,333 million decreased $45 million, or 2% compared to the prior quarter, as solid revenue growth in our retail businesses
including higher earnings from average fee-based client assets in Wealth Management, and the favourable net cumulative accounting adjustments noted above and fee-based revenue growth in Canadian Banking were more than offset by lower trading results reflecting challenging
market conditions compared to strong levels last quarter, the implementation of FVA, and the exiting of certain proprietary trading strategies
noted above. Lower results in most investment banking businesses compared to strong levels last quarter, and restructuring costs related to our
U.S. and International Wealth Management businesses also contributed to the decrease. Our prior quarter results were impacted by a loss of
$40 million (before- and after-tax) related to the closing of the sale of RBC Jamaica.
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 foreign currencies. The following table summarizes our
results for the last eight quarters (the period):
Quarterly results (1), (2)

Table 35
2014
Q4

(Millions of Canadian dollars, except per share and percentage amounts)

Q3

2013
Q2

Q1

Q4

Q3

Q2

Q1

Net interest income
Non-interest income

$ 3,560 $ 3,647 $ 3,449 $ 3,460 $ 3,351 $ 3,392 $ 3,222 $ 3,284
4,822
5,343
4,827
5,000
4,568
3,784
4,501
4,580

Total revenue
PCL
PBCAE
Non-interest expense

$ 8,382 $ 8,990 $ 8,276 $ 8,460 $ 7,919 $ 7,176 $ 7,723 $ 7,864
345
283
244
292
334
267
287
349
752
1,009
830
982
878
263
938
705
4,340
4,602
4,332
4,387
4,151
3,999
4,015
4,049

Net income before income taxes
Income taxes

$ 2,945 $ 3,096 $ 2,870 $ 2,799 $ 2,556 $ 2,647 $ 2,483 $ 2,761
612
718
669
707
455
362
574
714

Net income

$ 2,333 $ 2,378 $ 2,201 $ 2,092 $ 2,101 $ 2,285 $ 1,909 $ 2,047

EPS – basic
– diluted

$

1.57 $
1.57

1.59 $
1.59

1.47 $
1.47

1.39 $
1.38

1.40 $
1.39

1.52 $
1.51

1.26 $
1.25

1.35
1.34

Segments – net income (loss)
Personal & Commercial Banking
Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
Corporate Support

$ 1,151 $ 1,138 $ 1,115 $ 1,071 $ 1,070 $ 1,167 $ 1,039 $ 1,104
285
285
278
235
202
233
222
229
256
214
154
157
107
160
164
164
113
110
112
106
91
104
65
79
402
641
507
505
469
386
383
462
126
(10)
35
18
162
235
36
9

Net income – total

$ 2,333 $ 2,378 $ 2,201 $ 2,092 $ 2,101 $ 2,285 $ 1,909 $ 2,047

Effective income tax rate
Period average US$ equivalent of C$1.00

20.8%
23.2%
23.3%
25.3%
17.8%
13.7%
23.1%
25.9%
$ 0.900 $ 0.925 $ 0.907 $ 0.926 $ 0.960 $ 0.963 $ 0.982 $ 1.005

(1)
(2)

Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.
Comparative amounts have been revised from those previously presented.

Seasonality
Seasonal factors impact our results in most quarters. The first quarter is seasonally 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
quarter results for Investor Services are generally favourably impacted by higher securities lending as a result of the European dividend season.
The third and fourth quarters include the summer months during which market activity generally tends to slow, negatively impacting the results
of our capital markets, brokerage and investment management businesses.
40

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Notable items affecting our consolidated results
•
In the third quarter of 2014, our results included a loss of $40 million (before- and after-tax) which includes foreign currency translation
related to the closing of the sale of RBC Jamaica.
•
In the first quarter of 2014, our results included a loss of $60 million (before- and after-tax) related to the announced sale of RBC Jamaica,
as well as a provision of $40 million ($32 million after-tax) related to post-employment benefits and restructuring charges in the Caribbean.
•
In the fourth quarter of 2013, our results included a charge of $160 million ($118 million after-tax) as a result of new tax legislation in
Canada, which affects the policyholders’ tax treatment of certain individual life insurance policies, as well as net favourable income tax
adjustments including a $124 million income tax adjustment related to prior years.
•
In the third quarter of 2013, our results included net favourable income tax adjustments including a $90 million income tax adjustment
related to 2012.
•
In the second quarter of 2013, our results included a restructuring charge of $44 million ($31 million after-tax) related to the integration of
Investor Services, primarily in Europe.
Trend analysis
Economic conditions in Canada and the U.S. have continued to improve over the period, driven mostly by solid consumer spending supported by
strengthening labour markets, along with firm housing market activity. Capital markets in both countries have generally strengthened since
2013, despite the recent conclusion of the Fed’s monthly asset purchase program. Global equity indices experienced volatility throughout the
period resulting from geopolitical uncertainty and the possibility of Euro area recession. For further details, refer to the Economic and market
review and outlook section.
Earnings have generally trended upwards over the period, driven by solid volume growth in our Canadian Banking businesses and higher
earnings from growth in average-fee based client assets reflecting capital appreciation and strong net sales in Wealth Management. Capital
Markets results have generally trended upwards since the third quarter of 2013, and were negatively impacted in the fourth quarter of 2014 by
the implementation of FVA on uncollateralized OTC derivatives, and the exiting of certain proprietary trading strategies to comply with the
Volcker Rule. Results in our Insurance segment have continued to fluctuate over the period, largely due to the timing of new U.K. annuity
contracts, claims costs, and actuarial adjustments, and have generally trended upwards since the fourth quarter of 2013. Insurance results in the
fourth quarter of 2013 were impacted by an unfavourable charge resulting from new tax legislation in Canada as noted above. Investor &
Treasury Services results have generally trended upwards due to benefits from our efficiency management activities and improved business
performance, and have generally been stable over the past four quarters.
Revenue generally trended upwards over the period, mostly due to solid volume growth in our Canadian Banking businesses, and higher
revenue from growth in average fee-based client assets in Wealth Management. Trading revenue has generally trended upwards since the third
quarter of 2013, and was unfavourably impacted in the fourth quarter of 2014 by the implementation of FVA and the exiting of certain proprietary
trading strategies as noted above. Net interest income has trended upwards over the period, largely due to solid volume growth across our
Canadian Banking businesses.
Despite increased lending, strong asset quality has resulted in PCL remaining relatively stable over the period. The fourth quarter of 2014
included an additional provision in Personal & Commercial Banking related to our impaired residential mortgages portfolio in the Caribbean,
while Wealth Management had provisions in the last two quarters of 2013 and the first quarter of 2014 related to a few accounts. PCL in Capital
Markets has fluctuated over the period, with provisions in the first two quarters of 2013 and the last quarter of 2014 mainly related to a few
accounts.
PBCAE has fluctuated quarterly as it includes the changes to the fair value of investments backing our policyholder liabilities, which is
largely offset in revenue. PBCAE has also been impacted by volume growth in our Insurance businesses as well as actuarial liability adjustments
and generally lower claims costs. PBCAE in the fourth quarter of 2013 included a charge as a result of new tax legislation in Canada as noted
above.
While we continue to focus on efficiency management activities, non-interest expense has generally trended upwards over the period largely
in support of business growth. The first quarter of 2014 was impacted by the loss related to the sale of RBC Jamaica and a provision in the
Caribbean as noted above, while the third quarter of 2014 was impacted by foreign currency translation related to the closing of the sale of RBC
Jamaica, also noted above.
Our effective income tax rate has fluctuated over the period, mostly due to varying levels of income being reported in jurisdictions with
different tax rates, as well as fluctuating levels of income from tax-advantaged sources such as Canadian taxable corporate dividends. Our
effective income tax rate has also been impacted by various favourable tax adjustments as noted above.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

41

Results by geographic segment (1)
For geographic reporting, our segments are grouped into Canada, 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. The
following table summarizes our financial results by geographic region.
Table 36
2014
Canada

(Millions of Canadian dollars)

U.S.

2013 (2)

Other
International

Total

Canada

U.S.

2012 (2)

Other
International

Total

Canada

U.S.

Other
International

Total

Continuing operations
Net interest income
Non-interest income

$ 11,121 $ 1,896 $
10,495
4,256

1,099 $ 14,116
5,241
19,992

$ 10,956 $ 1,603 $
8,606
3,835

690 $ 13,249
4,992
17,433

$ 10,391 $ 1,308 $
9,059
3,569

740 $ 12,439
4,080
16,708

Total revenue
PCL
PBCAE
Non-interest expense
Income taxes

$ 21,616 $ 6,152 $
922
52
2,188
1
9,650
4,222
1,983
672

6,340 $ 34,108
190
1,164
1,384
3,573
3,789
17,661
51
2,706

$ 19,562 $ 5,438 $
892
78
1,425
10
9,210
3,681
1,709
396

5,682 $ 30,682
267
1,237
1,349
2,784
3,323
16,214
2,105

$ 19,450 $ 4,877 $
1,018
90
2,315
21
8,586
3,406
1,527
521

4,820 $ 29,147
191
1,299
1,285
3,621
2,649
14,641
(20)
2,028

$ 6,326 $ 1,273 $

743 $ 8,342

Net income from continuing
operations
Net loss from discontinued
operations
Net income
(1)
(2)

$

6,873 $ 1,205 $

$

6,873 $ 1,205 $

–

–

926 $
–
926 $

9,004
–
9,004

–

–

$ 6,326 $ 1,273 $

–
743 $ 8,342

$ 6,004 $
–
$ 6,004 $

839 $
(51)
788 $

715 $
–
715 $

7,558
(51)
7,507

For further details, refer to Note 30 of our 2014 Annual Consolidated Financial Statements.
Amounts have been revised from those previously presented.

2014 vs. 2013
Net income in Canada was up $547 million or 9% from last year, mainly due to solid volume growth across most of our businesses in Canadian
Banking, and higher earnings from growth in average fee-based client assets resulting from capital appreciation and strong net sales in Wealth
Management. Strong fee-based revenue growth primarily attributable to higher mutual fund distribution fees and card services revenue in
Canadian Banking also contributed to the increase. These factors were partially offset by higher costs in support of business growth including
higher staff and marketing costs, and the unfavourable impact of the implementation of the FVA. In addition, results last year benefited from net
favourable tax adjustments. Our results last year were also unfavourably impacted by a charge of $160 million ($118 million after-tax) as a result
of new tax legislation in Canada, which affects the policyholders’ tax treatment of certain individual life insurance policies.
U.S. net income decreased $68 million or 5% from last year, as last year benefited from favourable income tax adjustments, including $214
million related to prior years. Strong growth in our lending portfolio, strong equity markets and our continued focus on equity origination and
increased activity from client-focused strategies were partly offset by higher litigation provisions and related legal costs in Capital Markets.
Other International net income was up $183 million or 25% from the previous year, largely due to lower PCL in Capital Markets, higher
trading revenue in Europe, and higher lending in Capital Markets. These factors were partially offset by a loss of $100 million (before- and aftertax) related to the sale of RBC Jamaica, and a provision of $40 million ($32 million after-tax) related to post-employment benefits and
restructuring charges in the Caribbean. In addition, last year was unfavourably impacted by a restructuring charge of $44 million related to the
integration of Investor Services, primarily in Europe.
2013 vs. 2012
Net income in Canada was up $322 million or 5% compared to 2012, mainly due to solid volume growth across all businesses in Canadian
Banking. Higher earnings from growth in average fee-based client assets in Wealth Management, strong growth in our corporate and investment
banking businesses driven by higher lending, M&A and loan syndication activity, improved credit quality in our Canadian Banking portfolio, and
the contribution of our acquisition of Ally Canada also contributed to the increase. These factors were partially offset by spread compression and
a charge of $160 million ($118 million after-tax) in Insurance as a result of new tax legislation in Canada. In addition, the 2012 results were
favourably impacted by a settlement of several tax matters with the CRA which resulted in the release of $128 million of tax uncertainty provisions and interest income of $72 million ($53 million after-tax) and a favourable adjustment related to a change in estimate of mortgage
prepayment interest of $125 million ($92 million after-tax). Our results in 2012 were also unfavourably impacted by an impairment loss related
to the acquisition of the remaining 50% stake of RBC Dexia of which $105 million (before- and after-tax) was recorded in our Canadian
operations.
U.S. net income increased $485 million or 62% compared to 2012, largely due to favourable income tax adjustments of $214 million
related to prior years. Strong growth in our corporate and investment banking businesses mainly driven by higher loan syndication and higher
lending, and higher earnings from growth in average fee-based client assets and higher transaction volumes in Wealth Management also
contributed to the increase. These factors were partially offset by higher variable compensation in Wealth Management and Capital Markets.
Other International net income was up $28 million or 4% compared to 2012, largely due to strong growth in our corporate and investment
banking businesses. Improved business performance in Investor Services including higher revenue and continuing benefits from our efficiency
management activities, lower variable compensation in Capital Markets, and higher earnings from growth in average fee-based client assets and
higher transaction volumes in Wealth Management also contributed to the increase. In addition, the 2012 results were unfavourably impacted by
the impairment loss related to our acquisition of RBC Dexia as noted above of which $63 million (before- and after-tax) was recorded in our Other
International operations, and our proportionate share of the loss on the securities exchange and trading losses recorded by RBC Dexia. These
factors were partially offset by lower trading revenue largely in Europe, higher PCL in Wealth Management and Capital Markets, and a provision
related to post-employment benefits and restructuring charges in the Caribbean of $40 million ($31 million after-tax).

42

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Financial condition
Condensed balance sheets (1)

Table 37
2014

As at October 31 (Millions of Canadian dollars)

Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Loans
Retail
Wholesale
Allowance for loan losses
Segregated fund net assets
Other – Derivatives
– Other

$

17,421
8,399
199,148
135,580
334,987
102,236
(1,994)
675
87,402
56,696

2013
$

15,550
9,039
182,710
117,517
320,627
90,182
(1,959)
513
74,822
50,744

2012
$

12,428
10,246
161,602
112,257
300,288
79,949
(1,996)
383
91,293
57,504

Total assets

$ 940,550

$ 859,745

$ 823,954

Liabilities
Deposits
Segregated fund liabilities
Other – Derivatives
– Other
Subordinated debentures

$ 614,100
675
88,982
174,431
7,859

$ 563,079
513
76,745
162,505
7,443

$ 512,244
383
96,761
162,030
7,615

886,047

810,285

779,033

52,690
1,813

47,665
1,795

43,160
1,761

Total liabilities
Equity attributable to shareholders
Non-controlling interests
Total equity
Total liabilities and equity
(1)

54,503

49,460

44,921

$ 940,550

$ 859,745

$ 823,954

Foreign currency-denominated assets and liabilities are translated to Canadian dollars.

Our consolidated balance sheet was impacted by foreign exchange translation which increased our total assets and our total liabilities and
equity by approximately $21 billion compared to last year due to the weaker Canadian dollar.
2014 vs. 2013
Total assets were up $81 billion or 9% from last year.
Interest-bearing deposits with banks decreased by $1 billion or 7%, largely reflecting lower deposits with central banks.
Securities were up $16 billion or 9% compared to last year, primarily due to the impact of foreign exchange translation, increased equity
trading positions in support of business activity, and an increase in corporate debt securities largely reflecting our management of liquidity and
funding risk.
Assets purchased under reverse repurchase agreements (reverse repos) and securities borrowed increased $18 billion or 15%, mainly
attributable to increased client activity, and the impact of foreign exchange translation.
Loans were up $26 billion or 6%, predominantly due to volume growth in residential mortgages and growth in wholesale loans. The impact
of foreign exchange translation also contributed to the increase.
Derivative assets were up $13 billion or 17%, mainly attributable to increased fair values on interest rate swaps, cross currency interest rate
swaps, foreign exchange forward contracts, and equity contracts, partially offset by increased financial netting.
Other assets were up $6 billion or 12%, partially reflecting an increase in customers’ liability under acceptances and the impact of foreign
exchange translation.
Total liabilities were up $76 billion or 9% from last year.
Deposits increased $51 billion or 9%, mainly reflecting higher business deposits, largely due to increased client activity and our issuances
of fixed term notes and covered bonds to satisfy funding requirements. The impact of foreign exchange translation and demand for our high-yield
savings accounts and other product offerings in our retail business also contributed to the increase.
Derivative liabilities were up $12 billion or 16%, primarily attributable to increased fair values on interest rate swaps, cross currency interest
rate swaps, foreign exchange forward contracts, and equity contracts, partially offset by increased financial netting.
Other liabilities increased $12 billion or 7%, mainly resulting from the impact of foreign exchange translation, an increase in bankers’
acceptances due to increased client activity, higher cash collateral requirements, and higher obligations related to securities sold short.
Total equity increased $5 billion or 10%, largely reflecting earnings, net of dividends.
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of financial transactions that, for accounting purposes, are not recorded on our
Consolidated Balance Sheets. Off-balance sheet transactions are generally undertaken for risk, capital and funding management purposes which
benefit us and our clients. These include transactions with structured entities and may also include the issuance of guarantees. These transactions give rise to, among other risks, varying degrees of market, credit, liquidity and funding risk, which are discussed in the Risk management
section.
We use structured entities to securitize our financial assets as well as assist our clients in securitizing their financial assets. These entities
are not operating entities, typically have no employees, and may or may not be recorded on our Consolidated Balance Sheets.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

43

Securitizations of our financial assets
We periodically securitize our credit card receivables, residential and commercial mortgage loans and bond participation certificates primarily to
diversify our funding sources, enhance our liquidity position and for capital purposes. We also securitize residential and commercial mortgage
loans for sales and trading activities. Securitization can be used as a cost-effective fund raising technique compared to the relative cost of
issuing unsecured wholesale debt.
The majority of our securitization activities are recorded on our Consolidated Balance Sheets. 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, which are not derecognized from our Consolidated Balance Sheets. For details of
these activities, refer to Note 6 and Note 7 of our 2014 Annual Consolidated Financial Statements.
We periodically securitize residential mortgage loans for the Canadian social housing program through the NHA MBS program which are
derecognized from our Consolidated Balance Sheets when sold to third party investors. During 2014, we securitized $158 million of residential
mortgage loans for the Canadian social housing program (2013 – $nil).
We also periodically securitize commercial mortgages 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 risk and rewards of ownership of the securitized assets. Our
continuing involvement with the transferred assets is limited to servicing the underlying commercial mortgages sold to our sponsored structured
entity. As at October 31, 2014, there were $1.3 billion of commercial mortgages outstanding related to these securitization activities (October
31, 2013 – $1.3 billion). During 2014, we securitized $173 million of commercial mortgages which were sold to our sponsored entity (2013 –
$nil).
In prior years, we participated in bond securitization activities where we purchased government, government related and corporate bonds
and repackaged those bonds in participation certificates, which were sold to third party investors. Securitized bond participation certificates are
derecognized from our Consolidated Balance Sheets as we have transferred substantially all of the risk and rewards of ownership of the securitized assets. Our continuing involvement with the transferred assets is limited to servicing the underlying bonds. As at October 31, 2014, there
were $482 million of bond participation certificates outstanding related to these prior period securitization activities (October 31, 2013 – $624
million). We did not securitize bond participation certifications during 2014 or 2013.
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 client 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 resecuritization 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 involvement in certain significant unconsolidated structured entities. For a complete discussion of our interests
in consolidated and unconsolidated structured entities, refer to Note 7 to our 2014 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. We are involved in these
conduit markets because our clients value these transactions. Our clients primarily use 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, risk-adjusted
return and cross-selling opportunities.
We provide services such as transaction structuring, administration, backstop liquidity facilities and partial credit enhancements to the
multi-seller conduits. Fee revenue for all such services amounted to $168 million during the year (2013 – $153 million). We do not maintain any
ownership or retained interests in these multi-seller conduits and have no rights to, or control of, their assets.
Our total commitment to the conduits in the form of backstop liquidity and credit enhancement facilities is shown below. The total
committed amount of these facilities exceeds the total amount of the maximum assets that may have to be purchased by the conduits under the
purchase agreements. As a result, the maximum exposure to loss attributable to our backstop liquidity and credit enhancement facilities is less
than the total committed amounts of these facilities.
Liquidity and credit enhancement facilities

Table 38
2014

As at October 31 (Millions of Canadian dollars)

Notional of
committed
amounts (1)

Allocable
notional
amounts

Backstop liquidity facilities
Credit enhancement facilities
Total

$ 31,019
2,928
$ 33,947

$ 27,340
2,815
$ 30,155

(1)
(2)
(3)

2013
Maximum
Outstanding exposure
loans to loss (3)

Notional of
committed
amounts (1)

$

$ 31,675
2,889
$ 34,564

$

864 $ 28,204
–
2,815
864 $ 31,019

Allocable
notional Outstanding
amounts
loans (2)

$ 27,875 $
2,785
$ 30,660 $

896
–
896

Maximum
exposure
to loss (3)

$
$

28,771
2,785
31,556

Based on total committed financing limit.
Net of allowance for loan losses and write-offs.
Not presented in the table above are derivative assets with a fair value of $nil (2013 – $44 million) which are a component of our total maximum exposure to loss from our interests in the
multi-seller conduits. Refer to Note 7 of our 2014 Annual Consolidated Financial Statements for more details.

As at October 31, 2014, the notional amount of backstop liquidity facilities we provide decreased by $656 million or 2.1% from last year. Total
loans extended to the multi-seller conduits under the backstop liquidity facilities decreased by $32 million from last year primarily due to
principal repayments. The partial credit enhancement facilities we provide increased by $39 million from last year. The decrease in the amount of
backstop liquidity facilities provided to the multi-seller conduits compared to last year primarily reflects a decrease in the outstanding securitized assets of the multi-seller conduits. The increase in the amount of credit enhancement facilities provided to the multi-seller conduits
compared to last year primarily reflects a fluctuation in exchange rates.

44

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Maximum exposure to loss by client type

Table 39
2014
(US$)

As at October 31 (Millions)

Outstanding securitized assets
Credit cards
Auto loans and leases
Student loans
Trade receivables
Asset-backed securities
Equipment receivables
Electricity market receivables
Dealer floor plan receivables
Fleet finance receivables
Insurance premiums
Corporate loan receivables
Residential mortgages
Transportation finance
Total
Canadian equivalent

(C$)

2013
Total (C$)

(US$)

(C$)

Total (C$)

$

5,768
8,154
2,536
2,094
767
1,301
–
1,053
436
127
–
–
857
$ 23,093

$

510
1,793
–
112
–
–
–
771
377
–
–
1,275
153
$ 4,991

$

7,011
10,983
2,858
2,472
864
1,466
–
1,958
869
144
–
1,275
1,119
$ 31,019

$

6,096
8,643
3,374
2,688
859
1,649
–
765
313
87
75
–
415
$ 24,964

$

510
2,252
–
56
–
–
173
740
265
–
–
1,530
–
$ 5,526

$ 6,866
11,264
3,518
2,859
896
1,720
173
1,538
592
90
78
1,530
432
$ 31,556

$ 26,028

$ 4,991

$ 31,019

$ 26,030

$ 5,526

$ 31,556

Our overall exposure decreased 1.7% compared to last year reflecting a decrease in the outstanding securitized assets of the multi-seller conduits.
Correspondingly, total assets of the multi-seller conduits decreased by $647 million or 2.1% over last year, primarily due to decrease in the
Student loans, Trade receivables, Auto loans and leases, Residential mortgages, Equipment and Electricity market receivables asset classes, which
was partially offset by increases in the Transportation finance, Dealer floor plan and Fleet finance receivables and Credit cards asset classes. 100%
of multi-seller conduits assets were internally rated A or above, compared to 99.5% last year. All transactions funded by the unconsolidated multiseller conduits are internally rated using a rating system which is largely consistent with that of the external rating agencies.
Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed in the U.S. multiseller conduits are reviewed by Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch). Transactions in the
Canadian multi-seller conduits are also reviewed by Dominion Bond Rating Services (DBRS). 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, 2014, the total asset-backed commercial paper (ABCP) issued by the conduits amounted to $19.8 billion, an increase of
$1.0 billion or 5.6% from last year. The increase in the amount of ABCP issued by the multi-seller conduits compared to last year is primarily due
to exchange rate fluctuations. The rating agencies that rate the ABCP rated 73% (October 31, 2013 – 75%) of the total amount issued within the
top ratings category and the remaining amount in the second highest ratings category.
We sometimes purchase ABCP issued by the multi-seller conduits in our capacity as a placement agent in order to facilitate overall program
liquidity. As at October 31, 2014, the fair value of our inventory was $42 million, an increase of $28 million from last year. The fluctuations in
inventory held reflect normal trading activity. This inventory is classified as Securities – Trading on our Consolidated Balance Sheets.
Structured finance
We invest in ARS of trusts which fund their long-term investments in student loans by issuing short-term senior and subordinated notes. Our
maximum exposure to loss in these ARS trusts as at October 31, 2014 was $913 million (2013 – $870 million). The increase in our maximum
exposure to loss is primarily related to exchange rate differences. As at October 31, 2014, approximately 89.8% of these investments were AAA
rated. Interest income from the ARS investments, which is reported in Net-interest income was $7.2 million during the year
(2013 – $12.6 million).
We also provide liquidity facilities to certain municipal bond Tender Option Bond (TOB) trusts in which we have an interest but do not
consolidate because the residual certificates issued by the TOB trusts are held by third parties. As at October 31, 2014, our maximum exposure
to loss from these unconsolidated municipal bond TOB trusts was $749 million (2013 – $572 million). The increase in our maximum exposure to
loss relative to last year is primarily related to new TOB trusts and an increase in our TOB funding limits. Fee revenue from provision of liquidity
facilities to these entities reported in Non-interest income was $2.8 million during the year (2013 – $3.6 million).
During this fiscal year, we entered the collateralized loan obligation market as a senior warehouse lender and structuring and placement
agent. We now provide senior warehouse financing to discrete unaffiliated structured entities that are established by third parties to acquire
loans and issue a term collateralized loan obligation transaction. A portion of the proceeds from the sale of the term collateralized loan obligations certificates is used to fully repay the senior warehouse financing that we provide. As at October 31, 2014 all such loans made during the
year have been repaid.
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 the reference funds, and we economically hedge our exposure
from these derivatives by investing in those third party managed reference funds. Our maximum exposure as at October 31, 2014, which is
primarily related to our investments in such reference funds, was $3.4 billion (October 31, 2013 – $2.7 billion). The increase in our maximum
exposure compared to last year is primarily due to exchange rate differences and positive performance of the reference funds.
Beginning in the first quarter of 2013, 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, 2014, our maximum exposure to these funds was
$641 million (October 31, 2013 – $594 million). The increase in our maximum exposure compared to last year is primarily due to exchange rate
differences.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

45

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, 2014, our maximum exposure to loss in these entities was $2.4 billion
(October 31, 2013 – $2.2 billion). The increase in our maximum exposure compared to last year reflects additional securitized assets and
exchange rate fluctuations. Interest and non-interest income earned in respect of these investments was $20 million (2013 – $26 million).
Guarantees, retail and commercial commitments
We provide guarantees and commitments to our clients 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, 2014 amounted to $258 billion compared to $232 billion
last year. The increase compared to last year relates primarily to business growth and the impact of foreign currency translation in other
commitments. Refer to Liquidity and funding risk and Note 26 to our 2014 Annual Consolidated Financial Statements for details regarding our
guarantees and commitments.
Risk management
Overview
The ability to manage risk well is a core competency at RBC, and is supported by strong risk conduct and an effective risk management approach.
RBC defines risk as the potential for loss or an undesirable outcome with respect to volatility of actual earnings in relation to expected earnings,
capital adequacy or liquidity. The organization design and governance processes of Group Risk Management (GRM) assures independence from
the businesses it supports. Our ability to manage these risks is supported by both strong risk conduct and an effective risk management
approach.
We manage our risks by seeking to ensure that business activities and transactions provide an appropriate balance of return for the risks
assumed and remain within our Risk Appetite, which is collectively managed throughout RBC, through adherence to our Enterprise Risk Appetite
Framework. Our major risk categories include credit, market, liquidity and funding, insurance, regulatory compliance, operational, strategic,
reputation, legal and regulatory environment, competitive, and systemic risk. In order to avoid excessive concentration of risks, we strive to
diversify our business lines, products and industries.
Mission statement
Build shareholder value through leadership in the strategic management of risk.
Objectives
The key objectives of GRM are to:
•
Provide independent and objective oversight of the management of significant risks arising from the bank’s businesses and operations;
•
Maintain an effective enterprise-wide risk management process through working in partnership with all areas of RBC;
•
Ensure the continuous improvement in risk management processes, tools and practices; and
•
Promote strong risk conduct.
Risk priorities:
•
Risk Appetite – Articulates what risks we are prepared to undertake
•
Risk Conduct – Defines how we should operate;
•
Risk Governance and Controls – Focus on the maintenance of effective enterprise-wide risk management processes
•
Support enterprise, segment and business strategies by maintaining strong partnerships, balancing risk and reward, and striving to achieve
a shared responsibility for risk compliance within our businesses
•
Risk Infrastructure (People, operating plan and systems) – Deliver efficient and scalable risk and compliance infrastructure comprised of
highly competent professionals supported by appropriate training/development, tools and technology; and
•
Managing regulatory environment and relationships – Comply with regulatory requirements and expectations, and maintaining strong
regulatory standards.
Accomplishments:
•
Our risk profile remained within the Risk Appetite throughout the year.
•
Maintained strong credit quality ratios.
•
Stress testing capabilities significantly enhanced.
•
Operational risk events impacting earnings remained low.
•
Ensured sound management of regulatory compliance risk.
Top and emerging risks
Our view of risks is not static. An important component of our enterprise risk management approach is to ensure that top risks which are evolving
or emerging risks are appropriately identified, managed, and incorporated into existing enterprise risk management assessment, measurement,
monitoring and escalation processes.
These practices ensure management is forward-looking in its assessment of risks to the organization. Identification of top and emerging
risks occurs in the course of businesses developing and pursuing approved strategies and as part of the execution of risk oversight
responsibilities by GRM, Finance, Corporate Treasury, Global Compliance and other control functions.
Risk oversight activities which can lead to identification of new, evolving or emerging risks include control mechanisms (e.g. approval of
new products, transactions, projects or initiatives), business strategy development, stress testing, portfolio level measurement, monitoring and
reporting activities, and the ongoing assessment of industry and regulatory developments.
Details of the top and emerging risks we are facing are discussed below.

46

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Anti-Money Laundering (AML)
We are subject to a highly complex and dynamic set of anti-money laundering, anti-terrorist financing, and anti-bribery and anti-corruption
(collectively, AML) laws, regulations and expectations across the multiple jurisdictions in which we operate. These requirements are of critical
importance to members of the international financial community, law enforcement agencies and regulatory bodies. The regulatory landscape for
AML practices remains in a state of rapid change in response to globalization, proliferation of technologies to conduct financial transactions, and
new and changing money laundering and terrorist financing strategies. The scope of AML activities continues to expand with evolving criminal
activities, such as tax evasion, human trafficking, bribery, and corruption. Money laundering, terrorist financing, and, increasingly, bribery and
corruption pose significant potential risks for RBC. Our reputation is at risk with regulators, clients and other stakeholders in the event of AML
related incidence, particularly in light of the current regulatory environment. The regulatory tolerance for major AML Program failures is low as
demonstrated by recent penalties and enforcement actions.
We continuously enhance our transaction monitoring, client identification and client risk assessment processes and practices to prevent or
detect activities that might pose risk to our systems and networks. Internally, annual AML training is mandatory for all applicable employees
including senior management and the Board of Directors.
Growth in wholesale credit
Our wholesale loan growth has been strong in recent years, largely driven by Capital Markets. Loan growth in the U.S. has been strong given our
strategy of expanding and strengthening client relationships in that market along with strong demand. Growth has been across various sectors
with strong growth in commercial real estate and leveraged financing. To manage risks associated with this increase we focus on diversification,
driven by limits on single name, country and industry exposures across all businesses, portfolios and transactions. We continue to adhere to
strict lending standards as we grow our wholesale credit portfolio. We also stress test our portfolio to assist in evaluating the potential impact of
severe economic conditions.
High levels of Canadian household debt
Canadian household debt remains elevated as persistently low interest rates continue to fuel strong home sales, supporting home prices and
limiting moderation in mortgage credit growth. The risks surrounding elevated credit balances largely stem from households’ continued ability to
manage existing debt repayments when interest rates rise and a greater share of disposable income is needed to make payments. Additional risk
stems from the potential for high household debt to amplify the impact of an external shock to the Canadian economy. The combination of
increasing unemployment, rising interest rates, and a downturn in real estate markets would pose a risk to the credit quality of our retail lending
portfolio. We actively manage our lending portfolios and stress test them against various scenarios. Our stress testing shows that the vast
majority of our mortgage clients have sufficient capacity to absorb interest rate increases in the ranges currently forecasted. For further
discussion relating to our retail portfolio, refer to the Credit risk section.
Cybersecurity
The bank leverages advancements in technology to support our business model and enhance the experience of our clients on a global basis. As
a result, we are exposed to risks related to cybersecurity and the increasing sophistication of cyber-attacks in the marketplace. Attacks in the
industry are often focused on compromising sensitive data for inappropriate use or disrupting business operations. Such an attack could
compromise our confidential information as well as that of our clients and third parties with whom we interact and may result in negative
consequences, including remediation costs, loss of revenue, additional regulatory scrutiny, litigation and reputational damage. We are
committed to protecting our bank through ongoing and growing investments in our cyber defense technologies, rigorous processes and controls,
and investments in our team of cyber defense professionals. Our investments are positioned to manage the risks we face today and position the
bank for the evolving threat landscape.
Enterprise risk management
Our Enterprise Risk Management Framework provides an overview of our enterprise-wide programs for identifying, assessing, measuring,
controlling, monitoring and reporting on the significant risks that face the organization.
Risk conduct
Our risk conduct is a shared set of behavioural norms that sustain our core values, protect our clients, safeguard our shareholders’ value, and
support market integrity and stability from undue risk. Risk conduct defines how we should operate, in order to instill the mindset of undertaking
risk and “doing what’s right” in a manner that is consistent with our values and Code of Conduct.
There are four key components that we rely on to ensure strong and effective risk conduct at RBC:
•
Tone at the top and middle management;
•
Accountability, which is shared across all businesses and employees;
•
Incentives, which are closely linked to our Risk Profile relative to our Risk Appetite, and to our financial, strategic, risk and operational
goals; and
•
Effective challenge, which promotes constructive discussion of different points of view on the level of risk undertaken.
We also have a strong ethical culture of integrity and compliance grounded in our Code of Conduct. The Code of Conduct broadly addresses a
variety of ethical and legal concerns that our employees face on a daily basis. Our Code of Conduct is supported by a number of global and
regional compliance frameworks, policies, training programs, online tools, job aids, new employee orientation materials, and the direction of
senior management.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

47

Risk Appetite
Our Risk Appetite is the amount and type of risk we are able and willing to accept in the pursuit of our business objectives. Our approach to
articulating Risk Appetite is focused around three key concepts:
•
The amount of “Earnings at Risk” that is determined to be acceptable over an economic cycle, using an expected loss lens;
•
The amount of “Capital at Risk” that is determined to be acceptable under stress, using an unexpected loss lens; and
•
Ensuring adequate liquidity throughout times of stress.
Our Risk Appetite Framework has four major components as follows:
1.

Define our Risk Capacity by identifying regulatory constraints that restrict our ability to accept risk.

2.

Establish and regularly confirm our Risk Appetite, comprised of Drivers that are the business objectives which include risks we must accept
to generate desired financial returns, and Self-Imposed Constraints that limit or otherwise influence the amount of risk undertaken. Our
Self-Imposed Constraints include:
•
Maintaining stability of earnings;
•
Avoiding excessive concentrations of risk;
•
Maintaining low exposure to stress events;
•
Ensuring sound management of regulatory compliance risk and operational risk;
•
Ensuring sound management of liquidity and funding risk;
•
Ensuring capital adequacy by maintaining capital ratios in excess of rating agency and regulatory expectations;
•
Maintaining strong credit ratings; and
•
Maintaining a Risk Profile that is in the top half of our peer group.

3.

Set Risk Limits and Tolerances to ensure that risk-taking activities are within Risk Appetite.

4.

Regularly measure and evaluate our Risk Profile, representing the risks we are exposed to, relative to our Risk Appetite, and ensure
appropriate action is taken prior to Risk Profile surpassing Risk Appetite.

The Enterprise Risk Appetite Framework is structured in such a way that it can be applied at the enterprise, business segment, business unit,
and legal entity levels. Risk Appetite is integrated into our business strategies and capital plan. We also ensure that the business strategy aligns
with the enterprise and business segment level Risk Appetite.
One aspect of our Enterprise Risk Appetite Framework is the concept of Risk Posture which is used within the enterprise and business
segment strategic planning processes to identify potential pressure points on our Risk Profile or Risk Appetite that can result from a proposed
strategy. Risk Posture is an expression of the impact of strategic priorities on our Risk Profile over a one year timeframe, using a scale of
conservative, neutral or expansionary.
Risk management principles
The following principles guide our enterprise-wide management of risk:
1.

Effective balancing of risk and reward by aligning business strategy with Risk Appetite, avoiding excessive concentration of risk through
diversification, pricing appropriately for risk, mitigating risk through preventive and detective controls and transferring risk to third parties.

2.

Shared responsibility for risk management as business segments are responsible for active management of their risks, with direction and
oversight provided by GRM and other corporate functions groups.

3.

Business decisions are based on an understanding of risk as we perform rigorous assessment of risks in relationships, products, transactions and other business activities.

4.

Avoid activities that are not consistent with our values, Code of Conduct or policies, which contributes to the protection of our reputation.

5.

Proper focus on clients reduces our risks by knowing our clients and ensuring that all products and transactions are suitable for, and
understood by our clients.

6.

Use of judgment and common sense in order to manage risk throughout the organization.

48

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Risk governance
The Board of Directors and senior management utilize the Three Lines of Defence Governance Model to ensure that risks in achieving our
strategic objectives are appropriately and adequately managed.

BOARD OF DIRECTORS
Risk Committee

Audit Committee

Human Resources
Committee

Corporate Governance &
Public Policy Committee

Group Executive & Group Risk Committee
and Senior Management Risk Committees

First Line of Defence

Second Line of Defence

Risk Owners

Risk Oversight

Business and support
functions embedded in
the business
Accountable for:
Identification
Assessment
Mitigation
Monitoring and
Reporting of risk
relative to approved
policies and appetite

Establish risk
management practices
and provide risk
guidance
Provide oversight of the
effectiveness of First
Line risk management
practices
Monitor and independently
reports on the level of risk
against established
appetite

Third Line of Defence
Independent Assurance
Primarily provided by
internal audit
Independent
assurance to
management and the
Board of Directors on
the effectiveness of
risk management
practices

The Board of Directors establishes the tone at the top, approves our Risk Appetite, provides oversight and carries out its risk management
mandate primarily through its committees which include the Risk Committee, the Audit Committee, the Corporate Governance & Public Policy
Committee and the Human Resources Committee.
The purpose of the Risk Committee is to oversee our risk management program. The Risk Committee’s oversight role is designed to ensure
that the risk management function is adequately independent from the businesses whose activities it reviews, and that the policies, procedures
and controls used by management are sufficient to keep risks within our Risk Appetite.
The Audit Committee also has a risk oversight role through its responsibilities to review our internal controls and the control environment,
and to ensure that policies related to capital management and adequacy are in place and effective. The Audit Committee regularly reviews
reporting on legal and regulatory compliance risks including significant litigation issues and regulatory compliance matters.
In addition, the following board committees have specific reputation risk oversight responsibilities:
•
Corporate Governance & Public Policy Committee – Monitors the effectiveness of our corporate governance, reviews policies and programs,
reviews our efforts to understand and meet changing public values and expectations, and identifies, assesses and advises management on
public affairs issues related to our image and reputation.
•
Human Resources Committee – This committee, along with the Risk Committee, is jointly responsible for our Code of Conduct, and actively
oversees the design and operation of our compensation system.
The Group Executive (GE) is comprised of our senior management team and is led by the President & Chief Executive Officer (CEO) and includes
the Chief Risk Officer (CRO) and Chief Administrative Officer & Chief Financial Officer (CAO & CFO). The GE is responsible for our strategy and its
execution and establishing the “tone at the top”. The GE actively shapes and recommends our Risk Appetite for approval by the Board of
Directors. The GE’s risk oversight role is executed primarily through the mandate of the Group Risk Committee (GRC). The GRC with the assistance
of its supporting senior management risk committees is responsible for ensuring that our overall Risk Profile is consistent with our strategic
objectives and remains within our Risk Appetite and there are ongoing, appropriate and effective risk management processes.
Employees at all levels of the organization are responsible for managing the day-to-day risks that arise in the context of their mandate.
The First Line of Defence is provided by the employees across the businesses as well as support functions embedded in the businesses that are
responsible for providing products and services, and for the execution of activities. The First Line of Defence has ownership and accountability
for:
•
Risk identification, assessment, mitigation, monitoring and reporting in accordance with established enterprise risk policies and Risk
Appetite;
•
Ensuring appropriate and adequate capabilities to manage risks relevant to the businesses; and
•
Alignment of business and operational strategies with our strong Risk Conduct and Risk Appetite.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

49

The Second Line of Defence is provided by areas with independent oversight accountabilities residing in functions such as GRM, Global
Compliance, and other areas within our Control and Group Functions (such as Corporate Treasury, Law, Human Resources, Finance, Technology
and Operations, Corporate Taxation and Enterprise Strategy Group). The Second Line of Defence:
•
Establishes the enterprise level risk management frameworks and policies, and provides risk guidance;
•
Provides oversight of the effectiveness of first line risk management practices; and
•
Monitors and independently reports on the level of risk relative to established appetite.
GRM, under the direction of the CRO, is responsible for the oversight of a number of significant risks we face. GRM also provides oversight of
Strategic Risk through the CRO and the Group Executive, who have responsibility for ensuring business Risk Appetite and strategies align with
Enterprise Risk Appetite. Global Compliance is responsible for our policies and processes designed to mitigate and manage regulatory
compliance risk. In addition to GRM and Global Compliance, other Control and Group Functions have designated roles supporting our enterprisewide risk management program.
The Third Line of Defence is primarily provided by internal audit, and provides independent assurance to senior management and the Board of
Directors on the effectiveness of risk management policies, processes and practices in all areas of our organization.
Risk measurement
Our ability to measure risks is a key component of our enterprise-wide risk and capital management processes. Certain measurement
methodologies are common to a number of risk types, while others only apply to a single risk type. While quantitative risk measurement is
important, we also place reliance on qualitative factors. Our measurement models and techniques are continually subject to independent
assessment for appropriateness and reliability. For those risk types that are difficult to quantify, we place greater emphasis on qualitative risk
factors and assessment of activities to gauge the overall level of risk to ensure that they are within our Risk Appetite.
Quantifying expected loss
Expected loss is used to assess earnings at risk and is a representation of losses that are statistically expected to occur in the normal course of
business in a given period of time. For credit risk, the key parameters used to measure our exposure to expected loss are probability of default,
loss given default, and exposure at default. For market risk, a statistical technique known as Value-at-Risk (VaR) is used to measure losses under
normal market conditions.
Quantifying unexpected loss
Unexpected loss is used to assess capital at risk and is a statistical estimate of the amount by which actual losses can exceed expected loss over
a specified time horizon, measured at a specified level of confidence. We hold capital to withstand these unexpected losses, should they occur.
For further details, refer to the Capital management section.
Stress testing
Stress testing examines potential impacts arising from exceptional but plausible adverse events, and is an important component of our risk
management framework. Stress testing results are used in:
•
Monitoring our Risk Profile relative to Risk Appetite in terms of earnings and capital at risk;
•
Setting limits;
•
Identifying key risks to and potential shifts in our capital levels and financial position;
•
Enhancing our understanding of available mitigating actions in response to adverse events; and
•
Assessing the adequacy of our target capital levels.
Our enterprise-wide stress tests evaluate key balance sheet, income statement, leverage, and capital impacts arising from risk exposures and
changes in earnings. The results are used by our senior management risk committees, the GRC, and the Board of Directors to understand our
performance drivers under stress, and review stressed capital and leverage ratios against regulatory thresholds and internal targets. The results
are also incorporated into our Internal Capital Adequacy Assessment Process (ICAAP) and Capital Plan analyses.
We annually evaluate a number of enterprise-wide stress scenarios over a multi-year horizon, featuring a range of severities. Our Board of
Directors reviews the recommended scenarios, and GRM leads the scenario assessment process. Results from across the organization are
integrated to develop an enterprise-wide view of the impacts, with input from subject matter experts in GRM, Corporate Treasury, Finance, and
Economics. Recent scenarios evaluated include global recessions, local Canadian recessions, energy price shocks, and natural catastrophe
events. Our 2014 enterprise-wide stress test results are within our Board approved Risk Appetite.
Ongoing stress testing and scenario analyses within specific risk types such as market risk, liquidity risk, structural interest rate risk, retail
and wholesale credit risk, operational risk, and insurance risk supplement and support our enterprise-wide analyses. Results from these riskspecific programs are used in a variety of decision-making processes including risk limit setting, portfolio composition evaluation, and business
strategy implementation. For further details on some of these programs, refer to the Market risk and Liquidity and funding risk sections.
In addition to ongoing enterprise-wide and risk specific stress testing programs, we also utilize ad-hoc and reverse stress testing to deepen
our knowledge of the risks we face. Ad-hoc stress tests are one-off analyses used to investigate developing conditions or stress a particular
portfolio in more depth. Reverse stress tests, starting with a severe outcome and aiming to identify scenarios that might lead to that outcome,
are used in risk identification and understanding of risk/return boundaries.
We also participate in a number of regulator-required stress test exercises at both the consolidated and subsidiary levels.
Back-testing
We back-test credit risk parameters (i.e. Probability of default, Loss given default, and Usage given default) on a quarterly basis to ensure the
parameters remain appropriate for use in regulatory and economic capital calculations. Back-testing is performed by comparing the realized
values to the parameter estimates that were in use at the beginning of the period.

50

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Validation of measurement models
We widely use models for many purposes, including valuation of financial products and the measurement and management of different types of
risk. Models are subject to validation by qualified employees that are sufficiently independent of the model design and development, or by
approved external parties. Model validation is a comprehensive independent review of a model that evaluates the applicability of the model’s
logic, its assumptions and theoretical underpinnings, the appropriateness of input data sources, the interpretation of the model results, and the
strategic use of the model outputs. By reviewing and evaluating a model’s assumptions and limitations, initial and ongoing model validation
helps ensure the model incorporates current market developments and industry trends. Our model validation process is designed to ensure that
all material underlying model risk factors are identified and successfully mitigated.
Risk control
Our enterprise-wide risk management approach is supported by a comprehensive set of risk controls. The controls are anchored by our Enterprise Risk Management and Risk-Specific Frameworks. These frameworks lay the foundation for the development and communication of policies,
establishment of formal risk review and approval processes, and the establishment of delegated authorities and limits. The implementation of
robust risk controls enables the optimization of risk and return on both a portfolio and a transactional basis.
Our risk management frameworks and policies are organized into the following five levels:
Level 1: Enterprise Risk Management Framework provides an overview of our enterprise-wide program for identifying, assessing, measuring,
controlling, monitoring and reporting on the significant risks we face. This framework is underpinned by our Risk Appetite Framework and Risk
Conduct Framework.
Level 2: Risk-Specific Frameworks elaborate on each specific risk type and the mechanisms for identifying, measuring, monitoring and reporting
of our principal risks; key policies; and roles and responsibilities.
Level 3: Enterprise Risk Policies articulate minimum requirements, within which businesses and employees must operate.
Level 4: “Multi-risk” Enterprise Risk Policies govern activities such as product risk review and approval, stress testing, risk limits, risk approval
authorities and model risk management.
Level 5: Business Segments and Corporate Support – Specific Policies and Procedures are established to manage the risks that are unique to
their operations.
Risk review and approval processes
Risk review and approval processes are established by GRM based on the nature, size, and complexity of the risk involved. In general, the risk
review and approval process involves a formal review and approval by an individual, group or committee that is independent from the originator.
The approval responsibilities are governed by delegated authorities based on the following categories: transactions, structured credit, projects
and initiatives, and new products and services.
Authorities and limits
The Risk Committee of the Board of Directors delegates credit, market, and insurance risk authorities to the President & CEO and the CRO. The
delegated authorities allow these officers to approve single name, geographic (country and region) and industry sector exposures within defined
parameters to manage concentration risk, establish underwriting and inventory limits for trading and investment banking activities and set
market risk tolerances.
The Board of Directors also delegates liquidity risk authorities to the President & CEO, CAO & CFO, and CRO. These limits act as a key risk
control designed to ensure that reliable and cost-effective sources of cash or its equivalent are available to satisfy our current and prospective
commitments.
Reporting
Enterprise and business segment level risk monitoring and reporting are critical components of our enterprise risk management program and
support the ability of senior management and the Board of Directors to effectively perform their risk management and oversight responsibilities.
On a quarterly basis, we provide to senior management and the Board of Directors the Enterprise Risk Report which includes a comprehensive
review of our Risk Profile relative to our Risk Appetite and focuses on the range of risks we face along with an analysis of the related issues and
trends. In addition to our regular risk monitoring, other risk specific presentations are provided to and discussed with senior management and
the Board of Directors on top and emerging risk issues or significant changes in our level of risk.
Risk Pyramid
We use a pyramid to identify and categorize our principal risks. The Risk Pyramid drives internal consistency of risk terminology and language,
and is used to identify and assess risk in new and existing businesses, products or initiatives, acquisitions and alliances. Principal risk types are
organized vertically from the top of the pyramid to its base according to the relative degree of control and influence we consider to have over
each risk type. The Risk Pyramid is reviewed regularly to ensure that all key risks are reflected and ranked appropriately.
The base of the pyramid – The risk categories along the base of the Risk Pyramid are those over which we have the greatest level of control and
influence. These are credit, market, liquidity and funding, insurance and regulatory compliance risks. Operational risk, while still viewed as one
of the risks over which we have the greatest level of control and influence, is ranked higher on the pyramid than the other highly controllable
risks. This ranking acknowledges the level of controllability associated with people, systems and external events.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

51

LE
SS

The top of the pyramid – Systemic risk is placed at the top of the Risk Pyramid, and is generally considered the least controllable type of risk
arising from the business environment impacting us. However, we have in place measures for mitigating the impacts of systemic risk such as
stress testing programs and diversification. We are diversified across various business models, funding sources, products and geographies.
Legal and regulatory environment and competitive risks, which can be viewed as somewhat controllable, can be influenced through our role as a
corporate entity, and as an active participant in the Canadian and global financial services industry.

LEGAL &
REGULATORY
ENVIRONMENT

COMPETITIVE

Co

nt
ro

l&

Inf

lue
nc
e

SYSTEMIC

REPUTATION

STRATEGIC

M

OR

E

OPERATIONAL

CREDIT

MARKET

LIQUIDITY
& FUNDING

INSURANCE

REGULATORY
COMPLIANCE

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 tables
represent an integral part of our 2014 Annual Consolidated Financial Statements.

Credit risk
Credit risk is the risk of loss associated with an obligor’s potential inability or unwillingness to fulfill its contractual obligations. Credit risk
may arise directly from the risk of default of a primary obligor (e.g. issuer, debtor, counterparty, borrower or policyholder), or indirectly from a
secondary obligor (e.g. guarantor or reinsurer). Credit risk includes counterparty credit risk from both trading and non-trading activities.
The failure to effectively manage credit risk across all our products, services and activities can have a direct, immediate and material impact
on our earnings and reputation.
We balance our risk and return by:
•
Ensuring credit quality is not compromised for growth;
•
Diversifying credit risks in transactions, relationships and portfolios;
•
Using our credit risk rating and scoring systems or other approved credit risk assessment or rating methodologies, policies and tools;
•
Pricing appropriately for the credit risk taken;
•
Applying consistent credit risk exposure measurements;
•
Mitigating credit risk through preventive and detective controls;
•
Transferring credit risk to third parties, where appropriate, through approved credit risk mitigation techniques, including hedging
activities and insurance coverage; and
•
Ongoing credit risk monitoring and administration.
Risk measurement – Credit risk
We quantify credit risk, at both the individual obligor and portfolio levels, to manage expected credit losses and minimize unexpected losses
in order to limit earnings volatility.
We employ different risk measurement processes for our wholesale and retail credit portfolios. The wholesale portfolio comprises
businesses, sovereigns, public sector entities, banks and other financial institutions, and certain individuals and small businesses that are
managed on an individual client basis. The retail portfolio is comprised of residential mortgages, personal, credit card, and small business
loans, which are managed on a pooled basis. Credit risk rating systems are designed to assess and quantify the risk inherent in credit
activities in an accurate and consistent manner.
In measuring credit risk and setting regulatory capital, two principal approaches are available: Internal Ratings Based Approach (IRB)
and Standardized Approach. Most of our credit risk exposure is measured under the IRB.
Economic capital, which is our internal quantification of risks, is used extensively for performance measurement, limit setting and
internal capital adequacy.

52

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

The key parameters that form the basis of our credit risk measures for both regulatory and economic capital are:
•
Probability of default (PD): An estimated percentage that represents the likelihood of default within a given time period of an obligor for
a specific rating grade or for a particular pool of exposure.
•
Exposure at default (EAD): An amount expected to be owed by an obligor at the time of default.
•
Loss given default (LGD): An estimated percentage of EAD that is not expected to be recovered during the collections and recovery
process.
These parameters are determined based on historical experience from internal credit risk rating systems in accordance with supervisory
standards, and are independently validated and updated on a regular basis.
Under the Standardized Approach, used primarily for Investor Services and our Caribbean and U.S. banking operations, risk-weights
prescribed by the Office of the Superintendent of Financial Institutions (OSFI) are used to calculate risk-weighted assets (RWA) for credit risk
exposure.
Wholesale credit risk
The wholesale credit risk rating system is designed to measure the credit risk inherent in our wholesale lending 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
assigned to it. The BRR differentiates the riskiness of obligors and represents our evaluation of the obligor’s ability and willingness to meet its
contractual obligations on time over a three year time horizon. The assignment of BRRs is based on the evaluation of the obligor’s business
risk and financial risk and is based on fundamental credit analysis. The determination of the PD associated with each BRR relies primarily on
internal default history since the late 1990s augmented where necessary with reference to external data. PD estimates are designed to be a
conservative reflection of our experience across the economic cycle including periods of stress or economic downturn.
Our rating system is largely consistent with that of external rating agencies. The following table aligns the relative rankings of our
22-grade internal risk ratings with the ratings used by external rating agencies.

Internal ratings map*

*

Table 40

Ratings

BRR

Standard & Poor’s
(S&P)

Moody’s Investors
Service (Moody’s)

1
2
3
4
5
6
7
8
9
10

1+
1H
1M
1L
2+H
2+M
2+L
2H
2M
2L

AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-

Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3

Investment Grade

11
12
13
14
15
16
17
18
19
20

2-H
2-M
2-L
3+H
3+M
3+L
3H
3M
3L
4

BB+
BB
BBB+
B
BCCC+
CCC
CCCCC

Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca

Non-investment Grade

21
22

5
6

D
Bankruptcy

C
Bankruptcy

Impaired

Description

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.

Each credit facility is assigned an LGD rate. LGD rates are largely driven by factors that will impact the extent of any losses in the event the
obligor defaults including seniority of debt, collateral security, and the industry sector in which the obligor operates. Estimated LGD rates
draw primarily on internal loss experience since the late 1990s. Where we have limited internal loss data we also look to external data to
inform the estimation. 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 judgments made in the estimation process.
EAD is estimated based on the current exposure to the obligor and the possible future changes in that exposure driven by factors such
as the nature of the credit commitment and the type of obligor. As with LGD, rates are estimated to reflect downturn conditions, with added
conservatism to reflect data and modeling uncertainty. Estimates are based on internal data dating back to the late 1990s.
Estimates of PD, LGD, and EAD are updated, and then validated and back-tested by an independent 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
in the determination of our expected losses as well as economic and regulatory capital, setting of risk limits, portfolio management and
product pricing.
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 the obligation. It is measured not only by its current value, but also by how this value can move as market
conditions change. Counterparty credit risk usually occurs in trading-related derivative and repo-style transactions.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

53

Derivative transactions include financial (e.g. forwards, futures, swaps, and options) and non-financial derivatives (e.g. precious metal and
commodities). For further details on our derivative instruments and credit risk mitigation, refer to Note 8 of our 2014 Annual Consolidated
Financial Statements.
Retail credit risk
Credit scoring is the primary risk rating system for assessing obligor and transaction risk for retail exposures. Credit scores along with
decision strategies are employed in the acquisition of new clients (acquisition) and management of existing clients (behavioural).
Criteria used to pool exposures for risk quantification include behavioural score, product type (mortgages, credit cards, lines of credit
and instalment loans), collateral type (chattel, liquid assets and real estate), loan-to-value, and the delinquency status (performing,
delinquent and default) of the exposure. Regular monitoring and periodic adjustments and alignments are conducted to ensure that this
process provides for a meaningful differentiation of risk. Migration between the pools is considered when assessing credit quality.
The pools are also assessed based on credit risk parameters (PD and EAD) which consider borrower and transaction characteristics,
including behavioural credit score, product type and delinquency status. LGD is reviewed and re-estimated on an annual basis under the
Basel III IRB. The estimation is based on transaction specific factors, including product, loan-to-value and collateral types. LGD is determined
based on over 10 years of historical economic losses with the highest degree of granularity and sufficient margin of conservatism. Parameters
are validated and back-tested by an independent team within the bank.
The following table maps PD bands to various risk levels:

Internal ratings map*

Table 41

PD bands

*

Description

0.000% – 1.718%

Low risk

1.719% – 6.430%

Medium risk

6.431% – 99.99%

High risk

100%

Impaired/Default

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.

Risk control – Credit risk
The Board of Directors and its committees, the GE, the GRC and other senior management risk committees work together to ensure a Credit
Risk Management Framework and supporting policies, processes and procedures exist to manage credit risk and approve related credit risk
limits. Reports are distributed to the Board of Directors, the GRC, and senior executives to keep them informed of our Risk Profile, including
trending information and significant credit risk issues and shifts in exposures to ensure appropriate actions can be taken where necessary.
Our enterprise-wide credit risk policies set out the minimum requirements for the management of credit risk in a variety of borrower, transactional and portfolio management contexts.
Credit policies are an integral component of our Credit Risk Management Framework and set out the minimum requirements for the
management of credit risk as follows:
Credit risk assessment
•
Mandatory use of credit risk rating and scoring systems.
•
Consistent credit risk assessment criteria.
•
Standard content requirements in credit application documents.
Credit risk concentration
We define credit concentration risk as the risk arising from an over-concentration on single names, industry sectors, countries or credit
products within the portfolio. Concentration risk results from large exposure to similar risks that are positively correlated such that their
ability to meet contractual obligations could be similarly affected by changes in economic, political or other conditions. We manage credit
exposures to promote alignment to the Bank’s risk appetite, to maintain our target business mix and to ensure that there is no undue risk
concentration. Credit concentration limits are reviewed and approved by the Risk Committee.
Credit risk mitigation
Structuring of transactions
•
Specific credit policies and procedures set out the requirements for structuring transactions. Risk mitigants include the use of
guarantees, seniority, loan-to-value requirements and covenants. Product-specific guidelines set out appropriate product structuring as
well as client and guarantor criteria.
Collateral
•
We often require obligors to pledge collateral as security when we advance credit. The extent of risk mitigation provided by collateral
depends on the amount, type and quality of the collateral taken. Specific requirements relating to collateral valuation and management
are documented in our credit risk management policies.
Credit derivatives
•
Used as a tool to mitigate industry sector concentration and single-name exposure. For a more detailed description of the types of credit
derivatives we enter into and how we manage related credit risk, refer to Note 8 of our 2014 Annual Consolidated Financial Statements.

54

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

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 strive to identify borrowers in financial difficulty early and modify their loan terms in order
to maximize collection and to avoid foreclosure, repossession, or other legal remedies. In these circumstances, a borrower may be granted
concessions that would not otherwise be considered. We have specialized groups and formalized policies that direct the management of
delinquent or defaulted borrowers. Examples of such concessions to retail borrowers may include rate reduction, principal forgiveness, and
term extensions. Concessions to wholesale borrowers may include restructuring the agreements, modifying the original terms of the
agreement and/or relaxation of covenants. For both retail and wholesale loans, the appropriate remediation techniques are based on the
individual borrower’s situation, the Bank’s policy and the customer’s willingness and capacity to meet the new arrangement. When a loan is
restructured, the recorded investment in the loan is reduced as of the date of restructuring to the amount of the net cash flows receivable
under the modified terms, discounted at the effective interest rate inherent in the loan (prior to restructuring). During 2014, the amount of
loans restructured was not material.
Product approval
•
Proposals for credit products and services are comprehensively reviewed and approved under a risk assessment framework.
Credit portfolio management
•
Limits are used to manage concentration risk and to ensure our portfolio is well-diversified and remains within our Risk Appetite. Limits
are reviewed on a regular basis taking into account the business, economic, financial and regulatory environments.
•
Our credit limits are established at the following levels: single name limits (notional and economic capital), underwriting risk limits,
geographic (country and region) limits (notional and economic capital), industry sector limits (notional and economic capital), and
product and portfolio limits, where deemed necessary.
Gross credit risk exposure
Gross credit risk exposure is calculated based on the definitions provided under the Basel III framework. Under this method, risk exposure is
calculated before taking into account any collateral and is inclusive of an estimate of potential future changes to that credit exposure. Gross
credit risk is categorized into lending-related and other, and trading-related.
Lending-related and other includes:
•
Loans and acceptances outstanding, undrawn commitments, and other exposures including contingent liabilities such as letters of
credit and guarantees, Available-for-sale (AFS) debt securities and deposits with financial institutions. Undrawn commitments represent
an estimate of the contractual amount that may be drawn upon at the time of default of an obligor.
Trading-related credit includes:
•
Repo-style transactions which include repurchase and reverse repurchase agreements and securities lending and borrowing transactions. For repo-style transactions, gross exposure represents the amount at which securities were initially financed, before taking into
account collateral.
•
Derivative amount which represents the credit equivalent amount, which is defined by OSFI as the replacement cost plus an amount for
potential future credit exposure.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

55

Gross credit risk exposure by portfolio and sector*

Table 42
As at

October 31
2014
Lending-related and other

October 31
2013
Trading-related

Lending-related and other

Loans and acceptances

Trading-related

Loans and acceptances
Undrawn
Repo-style
Total
Other (1) transactions Derivatives (2) exposure (3) Outstanding commitments

(Millions of
Canadian dollars)

Undrawn
Outstanding commitments

Residential mortgages
Personal
Credit cards
Small business (4)

$

219,257 $
96,021
14,924
4,785

– $
83,965
21,689
4,631

197 $
154
–
9

– $
–
–
–

– $
–
–
–

219,454 $
180,140
36,613
9,425

209,238 $
92,859
14,142
4,388

– $
77,463
20,347
4,043

– $
32
–
41

– $
–
–
–

– $
–
–
–

209,238
170,354
34,489
8,472

Retail

$

334,987 $

110,285 $

360 $

– $

– $

445,632 $

320,627 $

101,853 $

73 $

– $

– $

422,553

5,694 $
6,209
7,172
9,615
5,688
979
4,665
1,320
30,387
4,822

1,079 $
55 $
4,880
299
6,189
547
22,161
3,353
9,775
13,414
452
108
4,753
441
2,870
876
7,791
1,699
8,705
511

– $
–
–
–
160,514
–
–
–
22
2

51 $
697
281
1,578
23,290
18
462
174
286
955

6,879 $
12,085
14,189
36,707
212,681
1,557
10,321
5,240
40,185
14,995

5,441 $
6,167
6,230
8,906
4,903
893
4,038
1,074
24,413
4,006

630 $
51 $
3,602
255
5,786
509
19,843
3,140
8,529
13,374
434
104
3,656
384
2,648
807
5,461
1,487
6,883
500

– $
–
–
–
134,290
–
–
–
7
3

30 $
451
142
2,047
18,368
15
266
158
295
620

6,152
10,475
12,667
33,936
179,464
1,446
8,344
4,687
31,663
12,012

5,432
25,886
4,628
1,201

3,624
13,345
5,303
710

810
13,800
8,170
22,724

11,568
64,900
91,762
192,824

5,593
22,755
4,396
1,320

564
14,537
8,319
21,243

10,763
58,543
80,224
177,793
628,169

Business (4)
Agriculture
$
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation &
environment
Other
Sovereign (4)
Bank (4)

1,702
8,379
47,798
73,365

–
3,490
25,863
94,824

Repo-style
Total
Other (1) transactions Derivatives (2) exposure (3)

3,032
9,989
5,527
270

1,574
9,060
34,789
67,007

–
2,202
27,193
87,953

Wholesale

$

113,698 $

91,637 $ 152,547 $

284,715 $

73,296 $

715,893 $

100,135 $

76,290 $ 133,041 $

251,648 $

67,055 $

Total exposure

$

448,685 $

201,922 $ 152,907 $

284,715 $

73,296 $ 1,161,525 $

420,762 $

178,143 $ 133,114 $

251,648 $

67,055 $ 1,050,722

*
(1)
(2)
(3)
(4)

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.
Includes credit equivalent amounts for contingent liabilities such as letters of credit and guarantees, outstanding amounts for AFS debt securities, deposits with financial institutions and
other assets.
Credit equivalent amount after factoring in master netting agreements.
Gross credit risk exposure is before allowance for loan losses. Exposure under Basel III asset classes of qualifying revolving retail and other retail are largely included within Personal and
Credit cards, while home equity lines of credit are included in Personal.
Refer to Note 5 of our 2014 Annual Consolidated Financial Statements for the definition of these terms.

2014 vs. 2013
Total gross credit risk exposure increased $111 billion or 11% from last year, largely reflecting an increase in repo-style transactions and growth
in loans and acceptances.
Retail exposure increased $23 billion or 5%, primarily due to volume growth in Canadian residential mortgages and personal loans
reflecting the ongoing low interest rate environment.
Wholesale exposure increased $88 billion or 14%, largely driven by an increase in repo-style transactions due to higher client activity,
higher loans and acceptances reflecting growth across various industry sectors, particularly in Real estate & related, and an increase in Other
exposure related to letters of credit and guarantees, and AFS securities. The impact of foreign exchange translation also contributed to the
increase. Wholesale loan utilization was 37%, unchanged from last year.
Gross credit risk exposure by geography* (1)

Table 43
As at

October 31
2014
Lending-related and other

October 31
2013
Trading-related

Lending-related and other

Loans and acceptances
(Millions of
Canadian dollars)

Undrawn
Outstanding commitments

Repo-style
Other transactions Derivatives

Total
Undrawn
exposure Outstanding commitments

Canada
$ 390,221 $
U.S.
28,325
Europe
15,348
Other International
14,791

142,841 $ 63,060 $ 56,308 $ 21,649 $
43,270
23,487
150,549
12,536
13,091
47,904
52,501
34,222
2,720
18,456
25,357
4,889

Total Exposure

201,922 $ 152,907 $ 284,715 $ 73,296 $ 1,161,525 $ 420,762 $

*
(1)

$ 448,685 $

Trading-related

Loans and acceptances

674,079 $ 373,714 $
258,167
23,177
163,066
11,471
66,213
12,400

Repo-style
Other transactions Derivatives

129,632 $ 58,048 $ 55,394 $ 23,619 $
35,633
20,811
120,482
11,829
10,200
39,111
55,928
27,215
2,678
15,144
19,844
4,392

Total
exposure

640,407
211,932
143,925
54,458

178,143 $ 133,114 $ 251,648 $ 67,055 $ 1,050,722

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.
Geographic profile is primarily based on country of residence of the borrower.

2014 vs. 2013
The geographic mix of our gross credit risk exposure to Canada, U.S., Europe, and Other International ended the year at 58%, 22%, 14%, and
6%, respectively (2013 – 61%, 20%, 14%, and 5%, respectively). Shifts in our geographic mix were largely related to repo-style transactions.

56

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Loans and acceptances outstanding and undrawn commitments* (1), (2)

Table 44
As at

October 31
2014
Low risk

(Millions of Canadian dollars)

Retail (3)
Residential mortgages
Personal
Credit cards
Small business

October 31
2013(4)

Medium
risk High risk Impaired

$ 206,699 $ 9,452 $
158,530
17,309
29,900
5,403
6,542
1,519
$ 401,671 $ 33,683 $

Total

Medium
risk High risk Impaired

Low risk

2,428 $
678 $ 219,257 $ 195,578 $ 10,561 $
3,847
300
179,986
150,701
15,240
1,310
–
36,613
28,359
4,981
1,308
47
9,416
5,908
1,439
8,893 $ 1,025 $ 445,272 $ 380,546 $ 32,221 $

Total

2,408 $
691 $ 209,238
4,018
363
170,322
1,149
–
34,489
1,047
37
8,431
8,622 $ 1,091 $ 422,480

As at
October 31
2014
(Millions of Canadian dollars)

Wholesale (5)
Business
Sovereign
Bank
Total
*
(1)
(2)
(3)
(4)
(5)

October 31
2013

Investment
grade

Non-investment
grade

Impaired

$

$

$

$

82,714
9,476
1,440
93,630

109,829
455
469
110,753

$

950
–
2
952

$

Total
$ 193,493
9,931
1,911
$ 205,335

Investment
grade

Non-investment
grade

$

$

73,865
9,582
1,387
84,834

$

89,940
341
200
90,481

$

Impaired

Total

$ 1,107
–
3
$ 1,110

$164,912
9,923
1,590
$176,425

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.
This table represents our retail and wholesale loans and acceptances outstanding and undrawn commitments by portfolio and risk category. For a qualitative description of the credit risk
assessment process, refer to the Risk measurement – Credit risk section.
This amount is before allowance for impaired loans.
Includes undrawn commitments of $nil, $84.0 billion, $21.7 billion, and $4.6 billion for Residential mortgages, Personal, Credit cards and Small business, respectively.
Comparative amounts have been restated to align with changes in our parameter estimation methodology and risk band classification during 2014.
Includes undrawn commitments of $85.6 billion, $5.3 billion, and $0.7 billion for Business, Sovereign and Bank, respectively.

2014 vs. 2013
There were no significant shifts in the overall distribution of our exposure across the various credit quality categories compared to last year.
European exposure

Table 45
As at
October 31
2014
Loans and acceptances

(Millions of Canadian dollars)

Gross exposure to Europe
Less: Collateral held
against repo-style
transactions
Potential future
credit exposure
add-on amount
Undrawn
commitments
Gross drawn exposure to
Europe
Less: Collateral applied
against derivatives
Add: Trading securities
Net exposure to Europe (3)
(1)

(2)
(3)

October 31
2013

Other

Undrawn
Outstanding commitments (1)
$
15,348 $
13,091

Letters of
Total
Total
credit and Repo-style
European
European
Securities (2) guarantees transactions Derivatives exposure
exposure
$
22,916 $ 24,988 $
52,501 $ 34,222 $ 163,066 $ 143,925

–

–

–

–

51,386

–

51,386

54,416

–

–

–

–

–

22,403

22,403

18,827

–

13,091

–

24,988

–

–

38,079

27,719

$

15,348 $

–

$

–
–
15,348 $

–
–
–

$

22,916 $

– $

1,115 $

11,819 $

51,198 $

42,963

$

–
15,471
38,387 $

–
–
– $

–
–
1,115 $

8,249
–
3,570 $

8,249
15,471
58,420 $

6,306
13,816
50,473

Comprised of undrawn commitments of $10.6 billion to corporate entities, $2.1 billion to financial entities and $0.4 billion to sovereign entities. On a country basis, exposure is comprised of
$5.2 billion to the U.K., $2.3 billion to Germany, $2.1 billion to France, $509 million to Ireland, $343 million to Spain, $1 million to Italy, with the remaining $2.6 billion related to Other
Europe. Of the undrawn commitments, over 77% are to investment grade entities.
Securities include $15.5 billion of trading securities (2013 – $13.8 billion), $11.9 billion of deposits (2013 – $13.8 billion) and $11 billion of AFS securities (2013 – $7.8 billion).
Excludes $2.8 billion (2013 – $1 billion) of exposures to supranational agencies and $0.7 billion (2013 – $2.4 billion) of exposures to trade credit reinsurance.

Our gross credit risk exposure is calculated based on the definitions provided under the Basel III framework whereby risk exposure is calculated
before taking into account any collateral and inclusive of an estimate of potential future changes to that credit exposure. On that basis, our total
European exposure as at October 31, 2014 was $163 billion. Our gross drawn exposure to Europe was $51 billion, after taking into account

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

57

collateral held against repo-style transactions of $51 billion, letters of credit and guarantees, and undrawn commitments for loans of $38 billion
and potential future credit exposure to derivatives of $23 billion. Our net exposure to Europe was $58 billion, after taking into account $8 billion
of collateral, primarily in cash, we hold against derivatives and the addition of trading securities of $15 billion held in our trading book. Our net
exposure to Europe also reflected $0.4 billion of mitigation through credit default swaps, which are largely used to hedge single name exposures
and market risk.
Net European exposure by country (1)

Table 46
As at
October 31
2014
Loans
outstanding

(Millions of Canadian dollars)

Securities

October 31
2013

Repo-style
transactions

Derivatives

Total

U.K.
Germany
France

$

9,428
914
569

$

12,486
8,602
3,176

$

874
36
50

$

1,245
620
489

$ 24,033
10,172
4,284

Total U.K., Germany, France

$

10,911

$

24,264

$

960

$

2,354

Greece
Ireland
Italy
Portugal
Spain

$

–
619
26
9
350

$

–
104
67
–
105

$

–
8
–
–
–

$

–
152
57
–
21

Total Peripheral (2)

$

1,004

$

276

$

8

$

Luxembourg
Netherlands
Norway
Sweden
Switzerland
Other

$

524
882
369
13
502
1,143

$

1,136
2,893
2,613
2,658
2,890
1,657

$

2
20
–
60
54
11

Total Other Europe

$

3,433

$

13,847

$

Total exposure to Europe

$

15,348

$

38,387

$

(1)
(2)

Total
$

17,515
8,270
3,856

$ 38,489

$

29,641

$

–
883
150
9
476

$

–
174
325
6
491

230

$

1,518

$

996

$

247
465
29
–
111
134

$

1,909
4,260
3,011
2,731
3,557
2,945

$

5,666
2,861
2,925
2,831
3,094
2,459

147

$

986

$ 18,413

$

19,836

1,115

$

3,570

$ 58,420

$

50,473

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.
Gross credit risk exposure to peripheral Europe is comprised of Greece $nil (2013 – $nil), Ireland $2.5 billion (2013 – $1.5 billion), Italy $0.2 billion (2013 – $0.3 billion), Portugal $nil (2013
– $0.1 billion), and Spain $0.9 billion (2013 – $0.9 billion).

2014 vs. 2013
Net credit risk exposure to Europe increased $8 billion from last year, largely driven by increased exposure in the U.K., Germany and Netherlands,
partially offset by a decrease in Luxembourg. Our net exposure to peripheral Europe, which includes Greece, Ireland, Italy, Portugal and Spain,
remained minimal with total outstanding exposure increasing $0.5 billion during the year to $1.5 billion as at October 31, 2014, largely due to an
increase in Ireland.
Our exposure was predominantly investment grade. Our net exposure to larger European countries, including the U.K., Germany and France,
was primarily related to our capital markets, wealth management and investor services businesses, particularly in fixed income, treasury
services, derivatives, and corporate and individual lending. These are predominantly client-driven businesses where we transact with a range of
European financial institutions, corporations and individuals. In addition, we engage in primary dealer activities in the U.K., where we participate
in auctions of government debt and act as a market maker and provide liquidity to clients. Exposures to other European countries are largely
related to securities which include trading securities, deposits, and AFS securities.
Our trading securities are related to both client market making activities and our funding and liquidity management needs. All of our trading
securities are marked-to-market on a daily basis. Deposits are primarily related to deposits with central banks or financial institutions and also
included deposits related to our wealth management business in the Channel Islands. AFS securities are largely comprised of Organization of
Economic Co-operation and Development government and corporate debt. Our European corporate loan book is run on a global basis and the
underwriting standards for this loan book reflect the same approach to the use of our balance sheet as we have applied in both Canada and the
U.S. We had a PCL recovery on this portfolio of $1 million this year. The gross impaired loans ratio of this loan book was 0.12%, down from
0.69% last year.
Net European exposure by client type

Table 47
As at
October 31
2014

(Millions of Canadian dollars)

U.K.

Germany

Total
U.K.,
Germany,
France
France Greece Ireland

October 31
2013

Total
Italy Portugal Spain Peripheral

Other
Europe

Total
Europe

Total
Europe

Financials
Sovereign
Corporate

$ 4,928 $
10,028
9,077

6,948 $ 1,385 $ 13,261 $
1,776 2,137 13,941
1,448
762 11,287

– $ 92 $ 59 $
–
14
6
–
777
85

– $ 97 $
–
10
9 369

248 $ 11,132 $ 24,641
30
3,556 17,527
1,240
3,725 16,252

$ 21,593
16,205
12,675

Total

$ 24,033 $ 10,172 $ 4,284 $ 38,489 $

– $ 883 $ 150 $

9 $ 476 $

1,518 $ 18,413 $ 58,420

$ 50,473

58

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

2014 vs. 2013
Our net exposure to Corporate increased by $4 billion due to increases in the U.K. and Germany. The increase in Financials of $3 billion was
largely in Germany and the U.K.
Residential mortgages and home equity lines of credit (insured vs. uninsured)
Residential mortgages and home equity lines of credit are secured by residential properties. The following table presents a breakdown by
geographic region:
Residential mortgages and home equity lines of credit

Table 48
As at October 31, 2014
Home equity
lines of credit

Residential mortgages (1)
(Millions of Canadian dollars, except percentage
amounts)

Region (3)
Canada
Atlantic provinces
Quebec
Ontario
Prairie provinces
B.C. and territories

Insured (2)

$

Uninsured

6,411
13,006
35,354

55%
50
40

25,813
15,585

53
38

Total Canada (4)
U.S.
Other International

$ 96,169
4
13

Total International

$

17

45%
1
–
–%

$

Total

5,169
13,248
51,974

45%
50
60

22,826
25,887

47
62

$

11,580
26,254
87,328

Total

$

2,068
4,163
17,104
10,310
9,768

48,639
41,472

$ 119,104
535
3,081

55%
99
100

$ 215,273
539
3,094

$

43,413
332
2,691

$

100%

$

$

3,023

3,616

3,633

Total

$ 96,186

44%

$ 122,720

56%

$ 218,906

$

46,436

Total – October 31, 2013

$ 96,624

46%

$ 111,822

54%

$ 208,446

$

45,494

(1)
(2)
(3)

(4)

The residential mortgages amounts exclude our third party mortgage-backed securities (MBS) of $351 million (2013 – $792 million).
Insured residential mortgages are mortgages whereby our exposure to default is mitigated by insurance through the Canada Mortgage and Housing
Corporation (CMHC) or other private mortgage default insurers.
Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island,
Nova Scotia and New Brunswick, the Prairie provinces are comprised of Manitoba, Saskatchewan and Alberta, and B.C. and territories are comprised of
British Columbia, Nunavut, Northwest Territories and Yukon.
Total Canada residential mortgages balance of $215 billion consolidated is comprised of $192 billion of residential mortgages and $5 billion of
mortgages with commercial clients of which $3.4 billion are insured mortgages, both in Canadian Banking, and $18 billion of securitized residential
mortgages in Capital Markets.

Home equity lines of credit are uninsured and reported within the personal loan category. As at October 31, 2014, home equity lines of credit in
Canadian Banking were $43 billion (2013 – $43 billion). Approximately 97% of these home equity lines of credit (2013 – 97%) are secured by a
first lien on real estate, and less than 8% (2013 – 8%) of these clients pay the scheduled interest payment only.
Residential mortgages portfolio by amortization period
The following table provides a summary of the percentage of residential mortgages that fall within the remaining amortization periods based
upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of
payments:
Residential mortgages portfolio by amortization period

Table 49
As at
October 31
2014

Canada
Amortization period
≤ 25 years
>25 years ≤ 30 years
> 30 years ≤ 35 years
> 35 years
Total

U.S. and Other
International

October 31
2013
Total

Total

71%
23
5
1

91%
9
–
–

72%
22
5
1

68%
22
8
2

100%

100%

100%

100%

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

59

Average loan-to-value (LTV) ratio for newly originated and acquired uninsured residential mortgages and homeline products
The following table provides a summary of our average LTV ratio for newly originated and acquired uninsured residential mortgages and homeline
products by geographic region:
Average LTV ratio

Table 50
2014
Uninsured
Residential
mortgages (1)

2013
Uninsured

Homeline
products (2)

Residential
mortgages (1)

Homeline
products (2)

Region (3)
Atlantic provinces
Quebec
Ontario
Prairie provinces
B.C. and territories
U.S.
Other International

74%
71
71
74
69
71
85

Average of newly originated and acquired for the
year (4), (5)

72%

71%

71%

71%

Total Canadian Banking residential mortgages portfolio

55%

55%

56%

56%

74%
73
71
73
67
n.m.
n.m.

73%
71
71
73
69
69
83

74%
73
71
73
67
n.m.
n.m.

(1)
(2)
(3)

Residential mortgages excludes residential mortgages within the homeline products.
Homeline products are comprised of both residential mortgages and home equity lines of credit.
Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island,
Nova Scotia and New Brunswick, the Prairie provinces are comprised of Manitoba, Saskatchewan and Alberta, and B.C. and territories are comprised of
British Columbia, Nunavut, Northwest Territories and Yukon.
(4)
The average LTV ratio for newly originated and acquired uninsured residential mortgages and homeline products is calculated on a weighted basis by
mortgage amounts at origination.
(5)
For newly originated mortgages and homeline products, LTV is calculated based on the total facility amount for the residential mortgage and homeline
product divided by the value of the related residential property.
n.m. not meaningful

While the above table provides the LTV ratios for the current year originations, the LTV ratio on our outstanding balances of the entire Canadian
Banking uninsured residential mortgages, including homeline products is 55% as at October 31, 2014 (2013 – 56%). This calculation is
weighted by mortgage balances and adjusted for property values base on the Teranet – National Bank National Composite House Price Index.
We employ a risk-based approach to property valuation. Property valuation methods include automated valuation models (AVM) and
appraisals. An AVM is a tool that estimates the value of a property by reference to market data including sales of comparable properties and
price trends specific to the Metropolitan Statistical Area in which the property being valued is located. Using a risk-based approach, we also
employ appraisals which can include drive-by or full on-site appraisals.
We continue to actively manage our entire mortgage portfolio and perform stress testing, based on a combination of increasing
unemployment, rising interest rates, and a downturn in real estate markets. Our stress test results indicate the vast majority of our residential
mortgage and homeline clients have sufficient capacity to continue making payments in the event of a shock to one of the above noted
parameters.

60

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Credit quality performance

Provision for (recovery of) credit losses

Table 51
2014

(Millions of Canadian dollars, except percentage amounts)

2013

Personal & Commercial Banking
Wealth Management
Capital Markets
Corporate Support and Other (1)

$

1,103
19
44
(2)

$

995
51
188
3

Total PCL

$

1,164

$

1,237

$

27
393
345
44

$

27
391
346
32

Canada (2)
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale

809
123

796
149

PCL on impaired loans

932

945

U.S. (2)
Retail
Wholesale

$

2
40
42

PCL on impaired loans
Other International (2)
Retail
Wholesale

$

121
69

PCL ratio (3)
Total PCL ratio
Personal & Commercial Banking
Canadian Banking
Caribbean Banking
Wealth Management
Capital Markets
(1)
(2)
(3)

$

1,164
0.27%
0.31
0.27
2.44
0.12
0.07

3
32
35

$

190

PCL on impaired loans
Total PCL

$

86
171
257

$

1,237
0.31%
0.30
0.27
1.24
0.42
0.34

PCL in Corporate Support and Other primarily comprised of PCL for loans not yet identified as impaired. For further information, refer
to the How we measure and report our business segments section.
Geographic information is based on residence of borrower.
PCL on impaired loans as a % of average net loans and acceptances.

2014 vs. 2013
Total PCL decreased $73 million, or 6%, from a year ago. The PCL ratio of 27 bps, decreased 4 bps.
PCL in Personal & Commercial Banking increased $108 million or 11%, and the PCL ratio of 31 bps, increased 1 bp, mainly reflecting higher
provisions in our Caribbean portfolio including an additional provision of $50 million in our impaired residential mortgages portfolio, and higher
provisions in our small business portfolio in Canada.
PCL in Wealth Management decreased $32 million, mainly due to lower provisions on a few accounts.
PCL in Capital Markets decreased $144 million, as the PCL last year included higher provisions on a few accounts in the technology & media
sector in Other International.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

61

Gross impaired loans (GIL)

Table 52

(Millions of Canadian dollars, except percentage amounts)

Personal & Commercial Banking
Wealth Management
Capital Markets
Investor & Treasury Services
Corporate Support and Other
Total GIL
Canada (1)
Retail
Wholesale
GIL
U.S. (1)
Retail
Wholesale
GIL
Other International (1)
Retail
Wholesale
GIL
Total GIL
Impaired loans, beginning balance
Classified as impaired during the year (new impaired) (2)
Net repayments (2)
Amounts written off
Other (2), (3)
Impaired loans, balance at end of year
GIL ratio (4)
Total GIL ratio
Personal & Commercial Banking
Canadian Banking
Caribbean Banking
Wealth Management
Capital Markets
(1)
(2)

(3)
(4)

$

$

2014
1,913
11
50
2
1
1,977

$

$

2013
1,872
96
229
3
1
2,201

$

659
487
1,146

$

729
526
1,255

$

13
18
31

$

14
98
112

$

$
$

$

353
447
800
1,977
2,201
1,317
(228)
(1,329)
16
1,977

$

$
$

$

0.44%
0.54
0.33
11.05
0.07
0.08

348
486
834
2,201
2,250
1,769
(265)
(1,471)
(82)
2,201
0.52%
0.55
0.36
9.91
0.79
0.42

Geographic information is based on residence of borrower.
Certain GIL movements for Canadian Banking retail and wholesale portfolios are generally allocated to New Impaired, as Return to
performing status, Repayments, Sold, and Exchange and other movements amounts are not reasonably determinable. Certain GIL
movements for Caribbean Banking retail and wholesale portfolios are generally allocated to Exchange and other movements, as
Return to performing status, Repayments, and Sold amounts are not reasonably determinable.
Includes Return to performing status during the year, Recoveries of loans and advances previously written off, Sold, and Exchange
and other movements.
GIL as a % of loans and acceptances.

2014 vs. 2013
Total GIL decreased $224 million or 10% from a year ago. The GIL ratio of 44 bps, decreased 8 bps.
GIL in Personal & Commercial Banking increased $41 million or 2%, mainly due to higher impaired loans in our Caribbean portfolios,
partially offset by lower impaired loans in our Canadian residential mortgages portfolio. The GIL ratio of 54 bps, decreased 1 bp from last year.
GIL in Wealth Management decreased $85 million, mainly due to write-offs and repayments related to a few accounts.
GIL in Capital Markets decreased $179 million, primarily due to lower impaired loans in our technology & media, transportation &
environment, and financing products sectors, largely reflecting repayments, write-offs and sales.
Allowance for credit losses (ACL)

Table 53
2014

(Millions of Canadian dollars)

Allowance for impaired loans
Personal & Commercial Banking
Wealth Management
Capital Markets
Investor & Treasury Services
Total allowance for impaired loans
Canada (1)
Retail
Wholesale
Allowance for impaired loans
U.S. (1)
Retail
Wholesale
Allowance for impaired loans
Other International (1)
Retail
Wholesale
Allowance for impaired loans
Total allowance for impaired loans
Allowance for loans not yet identified as impaired
Total ACL
(1)
62

Geographic information is based on residence of borrower.

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

2013

$

602
10
18
2
632

$

486
53
58
2
599

$

143
160
303

$

149
170
319

$

1
16
17

$

2
19
21

$

172
140
312
632
1,453
2,085

$

146
113
259
599
1,451
2,050

$

$

2014 vs. 2013
Total ACL increased $35 million or 2% from a year ago, mainly related to higher ACL in our Caribbean portfolio, partially offset by lower ACL in
Wealth Management and Capital Markets.
Market risk
Market risk is defined to be the impact of market prices upon the financial condition of the firm. 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, and ways in which market risk manifests itself, 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 at fair value through profit and loss (FVTPL),
b) Impairment on available-for-sale (AFS) securities, and
c) Hedge ineffectiveness.

2.

CET1 capital, which includes:
a) All of the above, plus
b) Changes in the fair value of AFS securities where revaluation gains and losses are reported as other comprehensive income,
c) Changes in the Canadian dollar value of investments in foreign subsidiaries, net of hedges, due to foreign exchange translation,
and
d) Remeasurements of employee benefit plans.

3.

CET1 Ratio, which includes:
a) All of the above, plus
b) Changes in risk-weighted assets (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 value of other non-trading positions whose value is a function of market risk factors.

Market risk controls – FVTPL positions
As an element of the Enterprise Risk Appetite Framework, the Board of Directors approves the overall market risk constraints for RBC. GRM
creates and manages the control structure for FVTPL positions that ensures that business is conducted consistent with Board requirements.
The Market and Trading Credit Risk function within GRM is responsible for creating and managing the controls and governance procedures
that ensure that risk taken is consistent with risk appetite constraints set by the Board. These controls include limits on:
(1)
Market risk positions;
(2)
Probabilistic measures of potential loss such as Value-at-Risk and Stressed Value-at-Risk defined below, and;
(3)
Scenario based stress tests which utilize both actual historical market scenarios such as the global financial crisis of 2008 and
hypothetical scenarios designed to be more forward looking. These stress tests apply severe and long duration stresses to market
variables.
Market Risk Positions – are measures of potential loss due to changes in market variables.
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 1 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 CVA and certain other positions which are updated weekly.
Stressed Value-at-Risk (SVaR) – is calculated in an identical manner as VaR with the exception that it is computed using a fixed historical
one year period of extreme volatility and its inverse rather than the most recent two year history. The stress period used is the interval from
September 2008 through August 2009. Stressed VaR is calculated weekly for all portfolios.
VaR and SVaR are statistical estimates based on historical market data and should be interpreted with knowledge of their limitations –
which include the following:
•
VaR and SVaR will not be predictive of future losses if the realized market movements differ significantly from the periods used to
compute them.
•
VaR and SVaR project potential losses over a one day holding period and do not project potential losses for risk positions held over
longer time periods.
•
VaR and SVaR are measured using positions at close of business and do not include the impact of trading activity over the course of a
day.
We validate our VaR and SVaR measures through a variety of means – including subjecting the models to vetting and validation by a group
independent of the model developers and by back-testing the VaR against daily marked-to-market revenue to identify and examine events
in which actual outcomes in trading revenue exceed the VaR projections.
Stress Tests – Our market risk stress testing program is used to identify and control risk due to large changes in market prices and rates.
We conduct stress testing daily on positions that are marked-to-market. The stress tests simulate both historical and hypothetical events
which are severe and long term in duration. Historical scenarios are taken from actual market events over the last 30 years and range in
duration up to 90 days. Examples include the equity market crash of 1987 and the global financial crisis of 2008. Hypothetical scenarios
are designed to be forward looking at potential future market stresses, and are designed to be severe but plausible. We are constantly
evaluating and refining these scenarios as market conditions change. Stress results are calculated assuming an instantaneous revaluation
of our positions with no management action.
These measures are computed on all positions that are FVTPL for financial reporting purposes, with the exception of those in a designated
hedging relationship and those in our insurance businesses.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

63

Market risk measures – FVTPL positions
VaR and SVaR
The following table presents our Market risk VaR and Market risk SVaR figures for 2014 and 2013.
Market Risk VaR*

Table 54
2014
For the year ended October 31

As at
Oct. 31

(Millions of Canadian dollars)

2013

Average

High

For the year ended October 31

As at
Oct. 31

Low

Average

High

Low

$

9
3
2
24
8
(18)

$

10
2
3
27
9
(21)

$

17
5
7
36
11
(30)

$

4
1
2
18
6
(15)

$

8
5
3
38
10
(23)

$

9
4
3
41
10
(23)

$

19
7
5
51
12
(31)

$

5
1
2
36
7
(16)

Market risk VaR

$

28

$

30

$

39

$

19

$

41

$

44

$

51

$

38

Market risk SVaR

$

83

$

92

$

121

$

69

$

117

$

95

$

123

$

73

Equity
Foreign exchange
Commodities
Interest rate
Credit specific (1)
Diversification (2)

*
(1)
(2)

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.
General credit spread risk is measured under interest rate VaR while credit specific risk captures issuer-specific credit spread volatility.
Market risk VaR is less than the sum of the individual risk factor VaR results due to portfolio diversification.

2014 vs. 2013
Average market risk VaR of $30 million was down $14 million compared to last year, mainly driven by lower risk positions in MBS portfolios and
the roll forward of the historical time period used to calculate VaR.
Average SVaR of $92 million decreased $3 million compared to last year, largely due to lower risk positions in certain MBS portfolios. The
decrease was also a result of the adoption of the provisions of IFRS 9 Financial Instruments (IFRS 9) in which changes in the fair value of nonderivative liabilities attributable to changes in our credit risk are no longer reported in revenue and were therefore excluded from our VaR model
as of May 1, 2014. The decrease was partially offset by higher risk in fixed income positions whose price behaviour was particularly volatile in
the historical period used to calculate SVaR when compared to more recent history, and the impact of foreign exchange translation on foreigndenominated portfolios.
The following chart graphically displays a bar chart of our daily trading profit and loss and a line chart of our daily Market risk VaR for the current
year. We incurred net trading losses on eleven days in the year totalling $46 million, as compared to seven days of losses totalling $14 million in
2013, with none of the losses exceeding VaR.
Trading Revenue and VaR (Millions of Canadian dollars)
60
50
40
30
20
10
0
-10
-20
-30
-40
-50

,
v1

13

20

No

Jan

,
31

14

20

r

Ap

,
30

Daily Trading Revenue

64

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

14

20

Jul

,
31

Market Risk VaR

14

20

t

Oc

,
31

14

20

The following chart displays the distribution of daily trading profit and loss in 2014. The largest daily reported loss of $11 million on October 13,
2014 was primarily driven by certain proprietary trading strategies. The largest reported profit was $50 million with an average daily profit of
$12 million.

> 100

90

80

70

60

50

40

30

20

10

0

-10

-20

-30

-40

-50

-60

-70

-80

-90

90
80
70
60
50
40
30
20
10
0

< -100

Frequency in Number of Days

Trading Revenue for the year ended October 31, 2014 (teb)

Daily net trading revenue (Millions of Canadian dollars), excluding VIEs

2014

2013

Market risk measures for other FVTPL positions – Assets and liabilities of RBC Insurance
We offer a range of insurance products to clients and hold investments to meet the future obligations to policyholders. The investments which
support actuarial liabilities are predominantly fixed income assets designated as at FVTPL. Consequently changes in the fair values of these
assets are recorded in investment 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 insurance policyholder benefits and claims. As at October 31, 2014, we had liabilities in
respect to insurance obligations of $8.6 billion and trading securities of $6.8 billion in support of the liabilities.
Market risk controls – Structural Interest Rate Risk (SIRR) Positions (1)
The asset/liability mismatch of positions not marked-to-market is referred to as SIRR and is subject to a separate set of limits and controls.
The Board of Directors approves the overall risk appetite for SIRR, and Asset Liability Committee (ALCO) along with GRM provide oversight for
this risk through risk policies, limits, and operating standards. In addition, interest rate risk reports are reviewed regularly by GRM, ALCO, the
Group Risk Committee, the Risk Committee of the Board and the Board of Directors.
(1)

SIRR positions include impact of derivatives in hedge accounting relationships and AFS securities used for interest rate risk management.

Structural Interest Rate Risk measurement
SIRR measures include the impact of interest rate changes to both one year’s net interest income and the instantaneous impact to economic
value of equity. These measures are reported on a weekly basis and are subject to limits and controls set by ALCO and GRM.
We further supplement our assessment by measuring interest rate risk for a range of dynamic and static market scenarios. Dynamic
scenarios simulate our interest income in response to various combinations of business and market factors. Business factors include
assumptions about future pricing strategies and volume and mix of new business, whereas market factors include assumed changes in
interest rate levels and changes in the shape of the yield curve. Static scenarios supplement dynamic scenarios and are employed for
assessing the risks to the value of equity and net interest income.
As part of our monitoring process, the effectiveness of our interest rate risk mitigation activity is assessed on value and earnings bases,
and model assumptions are validated against actual client behavior.
Market risk measures – Structural Interest Rate Positions
The following table provides the potential before-tax impact of an immediate and sustained 100 bps and 200 bps increase or decrease in interest
rates on net interest income and economic value of equity of our non-trading portfolio, assuming that no further hedging is undertaken. These
measures are based upon assumptions made by senior management and validated by empirical research. All interest rate risk measures are based
upon interest rate exposures at a specific time and continuously change as a result of business activities and our risk management actions.
Over the course of 2014, our interest rate risk exposure was within our target level.
Market risk measures – Non-trading banking activities*

Table 55
2014

Economic value of equity risk
(Millions of Canadian dollars)

Before-tax impact of:
100bps increase in rates
100bps decrease in rates
Before-tax impact of:
200bps increase in rates
200bps decrease in rates
*
(1)
(2)

Canadian
dollar impact

$

U.S. dollar
impact (1)

(910) $
755
(1,893)
1,264

Total

Canadian
dollar impact

(6) $ (916) $
(1)
754
(17) (1,910)
(5) 1,259

2013

2012

Net interest income risk (2)
U.S. dollar
impact (1)

Economic
value of
Net interest
Total equity risk income risk (2)

402 $
(346)

12 $ 414 $
(2) (348)

736
(431)

27
(3)

763
(434)

(540) $
446
(1,160)
799

391
(303)
758
(398)

Economic
value of
Net interest
equity risk income risk (2)

$

(497) $
405
(1,005)
651

397
(322)
842
(370)

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.
Represents the impact on the non-trading portfolios held in our U.S. banking operations.
Represents the 12-month Net interest income exposure to an instantaneous and sustained shift in interest rates.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

65

Market risk measures for other material non-trading portfolios
Available for Sale (AFS) Securities
We held $46 billion of securities classified as AFS as at October 31, 2014, compared to $38 billion as at October 31, 2013. We hold debt
securities designated as AFS primarily as investments and to manage interest rate risk in our non-trading banking activity. Certain legacy debt
portfolios are also classified as AFS. As at October 31, 2014, our portfolio of AFS securities exposes us to interest rate risk of a pre-tax loss of
$6.9 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 loss of $11.2 million, as measured by the change in value for a one basis point widening of credit spreads.
Changes in the value of these securities are reported in other comprehensive income. Our available-for-sale securities also include equity
exposures of $1.7 billion as at October 31, 2014, which is unchanged compared to last year.
Derivatives in hedge accounting relationships
Derivative assets in a designated hedge accounting relationship of $2.0 billion as at October 31, 2014 were unchanged from last year, and
derivative liabilities of $837 million as at October 31, 2014 were down from $931 million last year. We use interest rate swaps to manage our
structural interest rate risk, as described above. To the extent these swaps are considered effective hedges, changes in their fair value are
recognized in other comprehensive income. The interest rate risk for the designated cash flow hedges, measured as the change in the value of
the derivatives for a one basis point parallel increase in yields, was $3.6 million as of October 31, 2014.
We also use interest rate swaps to hedge changes in the fair value of certain fixed-rate instruments. Changes in fair value of the interest rate
swaps and the hedged instruments that are related to interest rate movements are reflected in income.
We also use foreign exchange derivatives to manage our exposure to equity investments in subsidiaries that are denominated in foreign
currencies, particularly the U.S. dollar and British pound. Changes in the fair value of these hedges and the cumulative translation adjustment
related to our structural foreign exchange risk are reported in other comprehensive income.
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 level of 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 un-hedged 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 operations. 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.
Our overall trading and non-trading market risk objectives, policies and methodologies have not changed significantly from 2013.

66

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Linkage of market risk to selected balance sheet items
The following table provides the linkages between selected balance sheet items with positions included in our trading market risk and nontrading 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 56
As at October 31, 2014
Market risk measure

(Millions of Canadian dollars)

Assets subject to market risk
Cash and due from banks (3)
Interest-bearing deposits with banks (4)
Securities
Trading (5)
Available-for-sale (6)
Assets purchased under reverse repurchase
agreements and securities borrowed (7)
Loans
Retail (8)
Wholesale (9)
Allowance for loan losses
Segregated fund net assets (10)
Derivatives
Other assets (11)
Assets not subject to market risk (12)
Total assets
Liabilities subject to market risk
Deposits (13)
Segregated fund liabilities (14)
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned (15)
Derivatives
Other liabilities (16)
Subordinated debentures
Liabilities not subject to market risk (17)

Balance sheet
amount

Traded risk (1)

Non-traded
risk (2)

$

$

$

17,421
8,399

10,840
5,642

Non-traded risk
primary risk sensitivity

6,581
2,757

Interest rate
Interest rate

151,380
47,768

144,607
–

6,773
47,768

Interest rate, credit spread
Interest rate, credit spread, equity

135,580

135,444

136

Interest rate

334,987
102,236
(1,994)
675
87,402
49,878
6,818

16,614
427
–
–
83,981
14,098

318,373
101,809
(1,994)
675
3,421
35,780

$

940,550

$

411,653

$ 522,079

$

614,100
675

$

116,348
–

$ 497,752
675

50,345

50,345

–

64,331
88,982
51,190
7,859
8,565

64,210
87,145
14,756
–

121
1,837
36,434
7,859

332,804

$ 544,678

Total liabilities

$

886,047

Total equity

$

54,503

Total liabilities and equity

$

940,550

$

Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate

Interest rate
Interest rate

Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate

(1)

Traded risk includes FVTPL positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR and Stress testing are used as risk controls for traded
risk.
(2)
Non-traded risk includes positions used in the management of the SIRR and other non-trading portfolios. Other material non-trading portfolios include positions from our Insurance business
and AFS securities not included in SIRR.
The following footnotes provide additional information on the Non-traded risk amounts:
(3)
Cash and due from banks includes $5,494 million included in SIRR. An additional $1,087 million is included in other risk controls.
(4)
Interest-bearing deposits with banks of $2,757 million are included in SIRR.
(5)
Trading securities include $6,761 million in securities used in the management of the SIRR of RBC Insurance, which is not included in our disclosed SIRR measure.
(6)
Available-for-sale securities of $44,403 million are included in SIRR. An additional $3,365 million are held by our insurance businesses that do not contribute to our disclosed SIRR measures
and certain legacy assets.
(7)
Assets purchased under reverse repurchase agreements include $136 million reflected in SIRR.
(8)
Retail loans include $318,376 million reflected in SIRR.
(9)
Wholesale loans include $100,646 million reflected in SIRR. An additional $1,163 million is used in the management of the SIRR of RBC Insurance.
(10) Investments for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
(11) Other assets include $33,309 million reflected in SIRR. An additional $2,471 million is used in the management of the SIRR of RBC Insurance.
(12) Other assets include $6,818 million of physical and other assets that are not subject to market risk.
(13) Deposits include $497,747 million reflected in SIRR. An additional $5 million is used in the management of the SIRR of RBC Insurance.
(14) Insurance and investment contracts for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
(15) Obligations related to assets sold under repurchase agreements include $121 million reflected in SIRR.
(16) Other liabilities include $9,324 million used in the management of the SIRR of RBC Insurance, and $27,110 million contribute to our SIRR measure.
(17) Other liabilities include $8,565 million of payroll related and other liabilities that are not subject to market risk.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

67

As at October 31, 2013
Market risk measure
(Millions of Canadian dollars)

Assets subject to market risk
Cash and due from banks (3)
Interest-bearing deposits with banks (4)
Securities
Trading (5)
Available-for-sale (6)
Assets purchased under reverse repurchase agreements
and securities borrowed (7)
Loans
Retail (8)
Wholesale (9)
Allowance for loan losses
Segregated fund net assets (10)
Derivatives
Other assets (11)
Assets not subject to market risk (12)
Total assets
Liabilities subject to market risk
Deposits (13)
Segregated fund liabilities (14)
Other
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned (15)
Derivatives
Other liabilities (16)
Subordinated debentures
Liabilities not subject to market risk (17)
Total liabilities
Total equity
Total liabilities and equity

Balance sheet
amount

Traded risk (1)

Non-traded
risk (2)

$

$

$

$
$

$
$
$

15,550
9,039

8,202
2,833

Non-traded risk
primary risk sensitivity

7,348
6,206

Interest rate
Interest rate

144,023
38,687

137,718
–

6,305
38,687

Interest rate, credit spread
Interest rate, credit spread, equity

117,517

116,703

814

Interest rate

320,627
90,182
(1,959)
513
74,822
43,999
6,745
859,745

16,168
387
–
–
71,678
12,631

304,459
89,795
(1,959)
513
3,144
31,368

$

366,320

$ 486,680

$

105,313
–

$ 457,766
513

47,128

47,128

–

60,416
76,745
46,265
7,443
8,696
810,285
49,460
859,745

60,147
75,368
12,962
–

269
1,377
33,303
7,443

300,918

$ 500,671

563,079
513

$

Interest rate
Interest rate
Interest rate
Interest rate
Interest rate, foreign exchange
Interest rate

Interest rate
Interest rate

Interest rate
Interest rate, foreign exchange
Interest rate
Interest rate

(1)

Traded risk includes FVTPL positions whose revaluation gains and losses are reported in revenue. Market risk measures of VaR, SVaR and Stress testing are used as risk controls for traded
risk.
(2)
Non-traded risk includes positions used in the management of the SIRR and other non-trading portfolios. Other material non-trading portfolios include positions from our Insurance business
and AFS securities not included in SIRR.
The following footnotes provide additional information on the Non-traded risk amounts:
(3)
Cash and due from banks includes $6,396 million included in SIRR. An additional $952 million is included in other risk controls.
(4)
Interest-bearing deposits with banks of $6,206 million are included in SIRR.
(5)
Trading securities include $5,863 million in securities used in the management of the SIRR of RBC Insurance, which is not included in our disclosed SIRR measure.
(6)
Available-for-sale securities of $34,307 million are included in SIRR. An additional $4,380 million are held by our insurance businesses that do not contribute to our SIRR measures and
certain legacy assets.
(7)
Assets purchased under reverse repurchase agreements include $814 million reflected in SIRR.
(8)
Retail loans include $304,459 million reflected in SIRR.
(9)
Wholesale loans include $88,765 million reflected in SIRR. An additional $1,030 million is used in the management of the SIRR of RBC Insurance.
(10) Investments for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
(11) Other assets include $28,756 million reflected in SIRR. An additional $2,612 million is used in the management of the SIRR of RBC Insurance.
(12) Other assets include $6,745 million of physical and other assets that are not subject to market risk.
(13) Deposits include $457,766 million reflected in SIRR.
(14) Insurance and investment contracts for the account of segregated fund holders are included in the management of the SIRR of RBC Insurance.
(15) Obligations related to assets sold under repurchase agreements include $269 million reflected in SIRR.
(16) Other liabilities include $8,735 million used in the management of the SIRR of RBC Insurance, and $24,568 million contribute to our SIRR measure.
(17) Other liabilities include $8,696 million of payroll related and other liabilities that are not subject to market risk.

Liquidity and funding risk
Liquidity and funding risk (liquidity risk) is the risk that we may be unable to generate or obtain sufficient cash or its equivalent in a timely
and cost-effective manner to meet our commitments as they come due. The nature of banking services inherently exposes us to various types
of liquidity risk. The most common sources of liquidity risk arise from mismatches in the timing and value of cash inflows and outflows, both
from on- and off-balance sheet exposures.
Our liquidity position is structured to satisfy our current and prospective commitments in normal business conditions, and in
conjunction with our capital position, to maintain safety and soundness in times of stress. To achieve these goals, we operate under a
comprehensive Liquidity Management Framework and employ key liquidity risk mitigation strategies that include the maintenance of:
•
An appropriate balance between the level of exposure allowed under our risk appetite given the potential impact of extreme but
plausible events and the cost of its mitigation;
•
Broad funding access, including preserving and promoting a reliable base of core client deposits, ongoing access to diversified sources
of wholesale funding and demonstrated capacities to monetize specific asset classes;
•
A comprehensive enterprise-wide liquidity contingency plan that is supported by unencumbered marketable securities; and
•
Appropriate and transparent liquidity transfer pricing and cost allocation.

68

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Our liquidity management policies, practices and processes reinforce these risk mitigation strategies. In managing liquidity risk, we favour a
centralized management approach to the extent possible given the various considerations outlined in this section.
Our liquidity risk objectives, policies and methodologies have not changed materially from 2013. However, certain limits and risk practices
have been modified as a result of market conditions and to align with local regulatory developments and to position ourselves for the
prospective Basel III regulatory liquidity standards. We continue to maintain liquidity and funding that is appropriate for the execution of our
strategy. Liquidity risk remains well within our risk appetite.
Regulatory environment
We continue to monitor and, as appropriate, modify our risk policies, practices and processes to align with regulatory developments and to
position ourselves for prospective regulatory reforms, such as the Basel III regulatory liquidity standards established by the BCBS and supported
by OSFI and other jurisdictions. The BCBS liquidity standards include minimum requirements for two regulatory measures, the Liquidity Coverage
Ratio (LCR) and Net Stable Funding Ratio (NSFR). In January 2013, the BCBS released its final rules for LCR, with phased timelines for compliance,
starting with a minimum of 60% coverage in 2015 and increasing by 10% annually to 100% in 2019. In January 2014, the BCBS released its final
paper on “Liquidity coverage ratio disclosure standards”. Banks are expected to comply with the BCBS LCR disclosure standards beginning in the
first full fiscal quarter of calendar 2015 (Q2 for Canadian banks). In October 2014, the BCBS issued the final standard for NSFR and banks are
required to meet the minimum standard by January 1, 2018. Disclosure standards for the NSFR are currently being developed by the BCBS and a
consultative document is expected to be released by the end of the year.
In May 2014, OSFI issued the final version of the “Liquidity Adequacy Requirements (LAR) Guideline”. The objective of this guideline is to
describe the methodologies supporting a series of liquidity metrics that will be used by OSFI to assess the liquidity adequacy of an institution.
The LAR guideline converts the BCBS liquidity requirements (including the LCR and NSFR liquidity metrics together with monitoring tools) into
OSFI guidance as well as formalizing use of the OSFI-designed Net Cumulative Cash Flow (NCCF) as a supervisory tool. The LAR guideline contains
modified assumptions and parameters for NCCF which OSFI originally introduced in 2010. Of note in the LAR guideline is that, while the LCR
implementation date of January 2015 is consistent with the BCBS requirement, there will be no phase-in period as the minimum LCR requirement
for Canadian institutions at that date will be 100% compared to the minimum 60% coverage as prescribed by the BCBS. Implementation of the
formal version of NCCF and other liquidity monitoring tools will also be January 2015. Intraday monitoring tools will be implemented by 2017. In
July 2014, OSFI issued its guideline setting out the public disclosure requirements regarding the LCR for D-SIBs which is consistent with the
international standards established by the BCBS final rules published earlier this year. We prepare a NCCF report for OSFI on a monthly basis and
are submitting monthly LCR and quarterly NSFR results to OSFI as well as Quantitative Impact Study reports on LCR and NSFR for OSFI and BCBS
twice a year.
In August 2014, the Government of Canada’s Department of Finance released its bail-in consultation paper “Taxpayer Protection and Bank
Recapitalization Regime”. Bail-in regimes are being implemented in a number of jurisdictions following the 2008 financial crisis in an effort to
limit taxpayer exposure to potential losses of a failing institution and ensure the institution’s shareholders and creditors remain responsible for
bearing such losses. The proposed regime applies only to D-SIBs and focuses on a specific range of liabilities and excludes deposits. For further
details, refer to the Legal and regulatory environment risk section.
Risk measurement
To monitor and control risk within appropriate tolerances, limits are set on various metrics reflecting a range of time horizons and severity of
stress conditions. Risk methodologies and underlying assumptions are periodically reviewed and validated to ensure alignment with our
operating environment, expected economic and market conditions, rating agency preferences, regulatory requirements and accepted
practices. Liquidity risk is measured using contractual maturity dates for some assets and liabilities (e.g., wholesale lending and funding) and
effective maturity for others. In the effective maturity approach, the liquidity value of assets and liabilities is determined based on observed
behavioural or market-based patterns unrelated to contractual maturity. For example, effective maturity may be shorter than contractual
maturity if the demonstrated behaviour of the asset suggests that it can be monetized before maturity. Effective maturity for a liability may be
longer than contractual maturity if the demonstrated behaviour of the liability suggests that it will be extended or rolled over at maturity.
Specific examples include government bonds for assets as they can be quickly and reliably monetized and relationship-based deposits for
liabilities where a significant portion is typically assigned core value although contractual maturity dates may be quite short or even legally
characterized as available on demand (conversely, demand loans display attributes of longer term assets and are treated accordingly from an
effective maturity perspective). Internally derived assumptions consider all relevant material and available data, information and methods of
quantifying liquidity risk. We measure and manage our liquidity position from three risk perspectives as follows:
Structural (longer-term) liquidity risk
We use cash capital and other structural metrics, which focus on mismatches in effective maturity between all assets and liabilities, to
measure and control balance sheet risk and to assist in the determination of our term funding strategy. Stressed conditions are considered,
including a protracted loss of access to longer term unsecured wholesale deposits that fund illiquid assets.
Tactical (shorter-term) liquidity risk
We apply net cash flow limits in Canadian dollar and foreign currencies for key short-term time horizons (overnight to nine weeks) under
various stages of stress and assign a risk-adjusted limit to our aggregate pledging exposure and individual limits by types of pledging activities to measure our shorter-term liquidity exposures. Net cash flow positions are derived from application of internally generated risk
assumptions and parameters to known and anticipated cash flows for all material unencumbered assets, liabilities and off-balance sheet
activities. Pledged assets are not considered a source of available liquidity. We also control this risk by adhering to group-wide and unitspecific prescribed regulatory standards.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

69

Contingency liquidity risk
Contingency liquidity risk management assesses the impact of and our intended responses to sudden stressful events. Our liquidity
contingency plan, maintained and administered by Corporate Treasury, guides our actions and responses to liquidity crises. The Liquidity
Crisis Team, consisting of senior representatives with relevant subject matter expertise from key business segments and Corporate Support,
contributes to the development of stress tests and funding plans and meets regularly to assess our liquidity status, conduct stress tests and
review liquidity contingency preparedness.
Our stress tests, which include elements of scenario and sensitivity analyses, are based on models that measure our potential exposure
to global, country-specific and RBC-specific events (or combinations thereof) and consider both historical and hypothetical events over a
nine-week period consistent with our internal tactical liquidity risk measure and our view of the most critical time span for such events.
Different levels of severity are considered for each type of crisis with some scenarios reflecting multiple notch downgrades to our credit
ratings. Key tests are run monthly, while others are run quarterly. The frequency of review is determined by considering a combination of
likelihood and impact.
In a particularly acute short-term crisis or if a crisis was to extend over a number of months, actions would be taken to supplement liquidity
available from our earmarked contingency asset pool by limiting cash and collateral outflows and by accessing new sources of liquidity and
funding; for example, through sales of liquid assets and securitization and, in extraordinary circumstances, sales of core assets. As well, in light
of our current credit ratings and well-developed market relationships and access, it is expected that even under extreme but plausible scenarios,
we would continue to be able to access wholesale funding markets, albeit possibly at reduced overall capacity, higher costs and for shorter
average maturities.
While we also have potential access to various normal course and emergency central bank lending facilities in Canada, the U.S. and Europe,
such facilities are not considered a source of funding in our contingency planning for scenarios identified as extreme but plausible.
After reviewing test results, the liquidity contingency plan and other liquidity risk management practices and limits may be modified
accordingly. The risk of more prolonged crises is addressed through measures of structural liquidity risk that assume stress conditions.
Our liquid assets consist primarily of a diversified pool of highly rated and liquid marketable securities and include segregated portfolios (in
both Canadian and U.S. dollars) of contingency liquidity assets to address potential on- and off-balance sheet liquidity exposures (such as
deposit erosion, loan drawdowns and higher collateral demands), that have been sized through models we have developed or by the scenario
analyses and stress tests we conduct periodically. These portfolios are subject to minimum asset quality levels and, as appropriate, other strict
eligibility guidelines (e.g., maturity, diversification and eligibility for central bank advances) to maximize ready access to cash in emergencies.
Examples of assets held in these portfolios include U.S. and Canadian federal government treasury bills and bonds, U.S. Agency bonds, U.S. and
Canadian government guaranteed and sponsored entity bonds, other highly rated foreign sovereign bonds and their guaranteed debt, supranational bonds and Canadian provincial bonds. Our total pool of unencumbered liquid assets, whether held specifically for contingency liquidity
purposes or for investment or trading activities, would be available during times of crisis as sources of liquidity, either via outright sale or to
obtain secured funding.
Risk Profile
As at October 31, 2014, relationship-based deposits, which are the primary source of funding for retail loans and mortgages, were $394 billion or
54% of our total funding (October 31, 2013 – $359 billion or 54%). Funding for highly liquid assets during the year consisted primarily of a range
of shorter-term wholesale funding that reflects the purpose and expected monetization period of these assets. This wholesale funding comprised
unsecured short-term liabilities of $74 billion and secured (repos and short sales) liabilities of $126 billion, and represented 10% and 17% of
total funding as at October 31, 2014, respectively (October 31, 2013 – $67 billion and $111 billion or 10% and 17% of total funding,
respectively). Long-term wholesale funding is mostly used to fund less liquid wholesale assets. Additional quantitative information is provided in
the following Funding section.
As at October 31, 2014, we held earmarked contingency liquidity assets of $12 billion, of which $7 billion was in U.S. currency and
$5 billion was in Canadian currency (October 31, 2013 – $12 billion of which $7 billion was in U.S. currency and $5 billion was in Canadian
currency). During the year ended October 31, 2014, we held on average $12 billion, of which $7 billion was in U.S. currency and $5 billion was in
Canadian currency (October 31, 2013 – $10 billion of which $5 billion was in U.S. currency and $5 billion was in Canadian currency). We also
held a derivatives pledging liquid asset buffer of US$4 billion as at October 31, 2014 to mitigate the volatility of our net pledging requirements
for derivatives trading (October 31, 2013 – US$4 billion). This buffer averaged US$4 billion during the year ended October 31, 2014 (October 31,
2013 – US$2 billion).
As recommended by the EDTF, the following tables provide summaries of our liquidity reserve and asset encumbrance. Unencumbered assets
represent, for the most part, a ready source of funding that can be accessed quickly, when required. In the Liquidity reserve table, available
liquid assets consist of on-balance sheet cash and securities holdings as well as securities received as collateral from securities financing
(reverse repos and off-balance sheet collateral swaps) and derivative transactions and constitute the preferred source for quickly accessing
liquidity. The other component of our liquidity reserve consists primarily of uncommitted and undrawn central bank credit facilities that could be
accessed under exceptional circumstances provided certain pre-conditions could be met and where advances could be supported by eligible
assets (e.g. certain unencumbered loans) not included in the liquid assets category. The Asset encumbrance table provides a comprehensive
view of the assets available to the Bank, not just the liquidity reserve, and identifies assets already pledged as well as those available for use as
collateral (including unencumbered assets from the Liquidity reserve table) for secured funding purposes. Less liquid assets such as mortgages
and credit card receivables can in part be monetised although requiring more lead times relative to liquid assets. As at October 31, 2014, our
assets available as collateral comprised 66% of our total liquid assets. For the purpose of constructing the following tables, encumbered assets
include: (i) bank-owned liquid assets that are either pledged as collateral (e.g., repo financing and derivative pledging) or not freely available
due to regulatory or internal policy requirements (e.g., earmarked to satisfy mandatory reserve or local capital adequacy requirements and to
maintain continuous access to payment and settlement systems); (ii) securities received as collateral from securities financing and derivative
transactions which have either been re-hypothecated where permissible (e.g., to obtain financing through repos or to cover securities sold short)
or have no liquidity value since re-hypothecation is prohibited; and (iii) illiquid assets that have been securitized and sold into the market or that
have been pledged as collateral in support of structured term funding vehicles. We do not include encumbered assets as a source of available
liquidity in measuring liquidity risk. Unencumbered assets are the difference between total and encumbered assets from both on- and offbalance sheet sources.

70

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Liquidity reserve (1)

Table 57
As at October 31, 2014

(Millions of Canadian dollars)

Cash and holding at central banks
Deposits in other banks available overnight
Securities issued or guaranteed by sovereigns, central
banks or multilateral development banks (2), (3)
Other (2)
Liquidity assets eligible at central banks
(not included above) (4)
Undrawn credit lines granted by central banks (5)
Other assets eligible as collateral for discount (6)
Other liquid assets (7)
Total liquid assets

Bank-owned
liquid assets
$
18,656
3,855

Securities
received as
collateral from
securities
financing and
derivative
transactions
$
–
–

Total liquid
assets
$
18,656
3,855

Encumbered
liquid assets
$
1,054
333

Unencumbered
liquid assets
$
17,602
3,522

204,409
112,878

16,626
21,346

221,035
134,224

104,335
59,345

116,700
74,879

62
8,372
125,627
11,887
485,746

–
–
–
–
37,972

62
8,372
125,627
11,887
523,718

–
–
–
11,887
176,954

62
8,372
125,627
–
346,764

$

$

$

$

$

As at October 31, 2013 (8)

(Millions of Canadian dollars)

Cash and holding at central banks
Deposits in other banks available overnight
Securities issued or guaranteed by sovereigns, central
banks or multilateral development banks (2), (3)
Other (2)
Liquidity assets eligible at central banks
(not included above) (4)
Undrawn credit lines granted by central banks (5)
Other assets eligible as collateral for discount (6)
Other liquid assets (7)
Total liquid assets

Bank-owned
liquid assets
$
12,711
3,767

Securities
received as
collateral from
securities
financing and
derivative
transactions
$
–
–

Total liquid
assets
$
12,711
3,767

Encumbered
liquid assets
$
980
287

Unencumbered
liquid assets
$
11,731
3,480

202,007
83,008

15,470
20,509

217,477
103,517

103,446
51,921

114,031
51,596

60
6,345
123,778
11,678
443,354

–
–
–
–
35,979

60
6,345
123,778
11,678
479,333

–
–
–
11,678
168,312

60
6,345
123,778
–
311,021

$

$

$

$

$

As at
(Millions of Canadian dollars)

Royal Bank of Canada
Foreign branches
Subsidiaries
Total unencumbered liquid assets
(1)
(2)
(3)
(4)
(5)

(6)

(7)
(8)

October 31
2014
$
221,007
47,570
78,187
$
346,764

October 31
2013 (8)
$
198,989
37,619
74,413
$
311,021

Information is provided from an enterprise-wide perspective and amounts shown are based on face value. In managing liquidity risk, we consider legal, regulatory, tax and other constraints
that may impede transferability of liquidity among RBC units.
The Bank-owned liquid assets amount includes securities owned outright by the bank or acquired via on-balance sheet securities finance transactions.
Includes liquid securities issued by provincial governments and U.S. government sponsored entities working under U.S. Federal government’s conservatorship (e.g. Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation).
Includes Auction Rate Securities.
Includes loans that qualify as eligible collateral for the discount window facility available to us at the Federal Reserve Bank of New York. Amounts are face value and would be subject to
collateral margin requirements applied by the Federal Reserve Bank to determine collateral value/borrowing capacity. Access to the discount window borrowing program is conditional on
meeting requirements set by the Federal Reserve Bank and borrowings are typically expected to be infrequent and due to uncommon occurrences requiring temporary accommodation.
Represents our unencumbered Canadian dollar non-mortgage loan book (at face value) that could, subject to satisfying conditions precedent to borrowing and application of prescribed
collateral margin requirements, be pledged to the Bank of Canada for advances under its Emergency Lending Assistance (ELA) program. ELA and other central bank facilities are not
considered sources of available liquidity in our normal liquidity risk profile but could in extraordinary circumstances, where normal market liquidity is seriously impaired, allow us and other
banks to monetize assets eligible as central bank collateral to meet requirements and mitigate further market liquidity disruption.
Represents pledges related to OTC and exchange traded derivative transactions.
Amounts have been revised from those previously presented.

2014 vs. 2013
Total liquid assets increased $44 billion or 9%, largely attributable to client financing through reverse repo and changes to client reverse repo
collateral mix, while trading inventories grew from a combination of asset growth and valuations, and liquid asset buffers expanded.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

71

Asset encumbrance (1)

Table 58
As at
October 31
2014
Encumbered

(Millions of Canadian dollars)

Pledged as
collateral

Cash and due from banks
Interest-bearing deposits with banks
Securities
Trading
Available-for-sale
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans
Retail
Mortgage securities
Mortgage loans
Non-mortgage loans
Wholesale
Allowance for loan losses
Segregated fund net assets
Other – Derivatives
– Others (7)

$

Total assets
(1)
(2)
(3)

(4)
(5)
(6)
(7)

October 31
2013 (6)

Unencumbered

Other (2)

243
90

$ 1,054
–

64,467
7,781

–
57

111,056

Available as
collateral (3)
$

Other (4)

Pledged as
collateral

Available as
collateral (3)

$

$

Other (4)

Total (5)

284
–

$ 15,550
9,039

88,012
31,016

1,088
127

144,023
38,687

–

53,779

3,925

162,582

44,229
22,750
8,174
–
–
–
–
11,678

–
–
–
–
–
–
–
–

19,190
–
94,365
35,758
–
–
–
–

$ 254,415

$ 1,028

85,698
37,802

1,215
2,128

151,380
47,768

54,923
7,496

–
48

–

68,044

8,432

187,532

104,878

37,441
26,589
8,915
–
–
–
–
11,887

–
–
–
–
–
–
–
–

29,042
–
97,223
36,777
–
–
–
–

66,483
152,774
115,730
102,236
(1,994)
675
87,402
56,696

$ 268,469

$ 1,111

–
126,185
9,592
65,459
(1,994)
675
87,402
44,809
$344,188

$992,502

Unencumbered

Other (2)

$ 17,421
8,399

378,734

$

Total (5)

285
–

$

15,839
8,309

Encumbered

$

204
83

980
–

$

14,082
8,956

345,158

$

–
123,069
8,850
54,424
(1,959)
513
74,822
39,066
$304,209

63,419
145,819
111,389
90,182
(1,959)
513
74,822
50,744
$ 904,810

Information is provided from an enterprise-wide perspective and amounts shown are based on face value. In managing liquidity risk, we consider legal, regulatory, tax and other constraints
that may impede transferability of liquidity among RBC units.
Includes assets restricted from use to generate secured funding due to legal or other constraints.
Includes loans that could be used to collateralize central bank advances. Our unencumbered Canadian dollar non-mortgage loan book (at face value) could, subject to satisfying conditions
precedent to borrowing and application of prescribed collateral margin requirements, be pledged to the Bank of Canada for advances under its ELA program. We also lodge loans that qualify
as eligible collateral for the discount window facility available to us at the Federal Reserve Bank of New York. ELA and other central bank facilities are not considered sources of available
liquidity in our normal liquidity risk profile but could in extraordinary circumstances, where normal market liquidity is seriously disrupted, allow us and other banks to monetize assets eligible
as central bank collateral to meet requirements and mitigate market liquidity dislocations.
Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral but would not be considered readily available since they may not be acceptable
at central banks or other for other lending programs.
Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing and derivative transactions.
Amounts have been revised from those previously presented.
The Pledged as collateral amounts relate to OTC and exchange traded derivative transactions.

Other sources of liquidity that could be available to mitigate stressed conditions include: (i) our unused wholesale funding capacity, which is
regularly assessed using an established methodology that is periodically reviewed and, as necessary, revised, and (ii) central bank borrowing
facilities if, in extraordinary circumstances, market sources were not sufficient to allow us to monetize our assets available as collateral to meet
our requirements (e.g., Bank of Canada, Federal Reserve Bank, Bank of England, and Bank of France).
Risk control
The Board of Directors annually approves delegation of liquidity risk authorities to senior management. The Risk Committee of the Board
annually approves the Liquidity Management Framework and the Pledging Policy and is responsible for its oversight. The Board of Directors,
the Risk Committee, GRC and ALCO review, on a regular basis, reporting on our enterprise-wide liquidity position and status. The GRC, the
Policy Review Committee (PRC) and/or ALCO also review liquidity documents prepared for the Board of Directors or its committees. The PRC
and ALCO annually approve the Liquidity Management Framework’s key supporting documents and provide strategic direction and primary
management oversight to Corporate Treasury, GRM, other functions and business platforms in the area of liquidity risk management. To
maximize funding and operational efficiencies, we monitor and manage our liquidity position on a consolidated basis and for key units taking
into account market, legal, regulatory, tax, operational and any other applicable restrictions that may impede transferability of liquidity
between RBC units. This includes analyzing our ability to lend or borrow funds between branches and subsidiaries, and converting funds
between currencies. The outcome of this analysis is considered in liquidity metrics and our Recovery Plan.
Policies
Our principal liquidity policies define risk tolerance parameters. They authorize senior management committees, Corporate Treasury or GRM
to approve more detailed policies and limits that govern management, measurement and reporting requirements for specific businesses and
products.
Authorities and limits
Limits for our structural liquidity risk positions are approved at least annually and monitored regularly. Net cash flow limits are approved at
least annually. Depending on the significance of each reporting entity, net cash flow limits are monitored daily or weekly by major currency,
branches, subsidiaries and geographic locations. Any potential exceptions to established limits are reported immediately to Corporate
Treasury and GRM, who provide or arrange for approval where appropriate after reviewing remedial action plans.
The liquidity factors for cash flow assets and liabilities under varying conditions are reviewed periodically by Corporate Treasury, GRM
and the business segments to determine if they remain valid or changes to assumptions and limits are required. Through this process, we
ensure that a close link is maintained between the management of liquidity risk, market liquidity risk and credit risk, including GRM approval
of credit lines between entities. In response to our experience during periods of market volatility over the past six years, we have modified the
liquidity treatment of certain asset classes to reflect changes in market liquidity. Where required, limits are reduced in consideration of the
results of stress tests.
72

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

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 profile
During 2014, we continued to focus on building our core deposit base. Our relationship-based deposits, including our personal deposit franchise
and our commercial and institutional client groups, maintain balances with relatively low volatility profiles and constitute our principal source of
reliable funding. Reflecting deposit insurance and at times, exclusive relationships with us, these balances represent a highly stable source of
core deposits in most circumstances as they are typically less reactive to market developments than those from transactional lenders and
investors. Core deposits consist of our own statistically derived liquidity adjusted estimates of the highly stable portions of our relationshipbased balances (demand, notice and fixed-term) together with wholesale funds maturing beyond one year and as at October 31, 2014
represented 69% of our total deposits (2013 – 70%). Over the past year, core deposit balances have increased by 10%, generally keeping pace
with the growth in our total deposits. Core deposit growth was driven predominantly by growth in relationship-based deposits and to a lesser
extent by issuance of longer-term wholesale funding. For further details on the gross dollar amounts of our relationship-based deposits and our
wholesale funding maturity schedule, refer to the Risk profile section and the following Composition of wholesale funding table, respectively.
Long-term debt issuance
During 2014, we continued to experience more favourable unsecured wholesale funding access and pricing compared to many of our global
peers. As demonstrated in the following table, we also continued to expand our unsecured long-term funding base by selectively issuing, either
directly or through our subsidiaries, $24 billion of term funding in various currencies and markets. Total unsecured long-term funding
outstanding increased by $12 billion.
We use residential mortgage and credit card and auto receivable-backed 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 credit card and auto receivables.
Compared to 2013, our outstanding MBS sold decreased $7 billion while our covered bonds and credit card and auto receivables
increased $5 billion and $1 billion, respectively.
For further details, refer to the Off-balance sheet arrangements section.
Long-term funding sources*

Table 59
As at
October 31
2014

(Millions of Canadian dollars)

Unsecured long-term funding
Secured long-term funding
Commercial mortgage-backed securities sold
Subordinated debentures
*

October 31
2013

$

82,033
57,996
1,330
7,832

$

69,903
59,285
1,304
7,408

$

149,191

$

137,900

This table represents an integral part of our 2014 Annual Consolidated Financial Statements.

Our wholesale funding activities are well-diversified by geography, investor segment, instrument, currency, structure and maturity. We maintain
an ongoing presence in different funding markets, which allows us to continuously monitor market developments and trends, identify opportunities and risks, and take appropriate and timely actions. We operate longer-term debt issuance registered programs. The following table
summarizes these programs with their authorized limits by geography.
Programs by geography

Table 60

Canada

U.S.

Europe/Asia

• Canadian Shelf – $15 billion

• SEC Registered – US$25 billion

• European Debt Issuance Program –
US$40 billion

• SEC Registered Covered Bonds –
US$12 billion

• Covered Bond Program –
Euro 23 billion
• Japanese Issuance Programs –
JPY 1 trillion

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

73

We also raise long-term funding using Canadian Deposit Notes, Canadian NHA 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 expansion into new markets and untapped investor segments against relative
issuance costs since diversification expands our wholesale funding flexibility and 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 currency as well
as by type of long-term funding products. Maintaining competitive credit ratings is also critical to cost-effective funding.
Long-term debt – funding mix by currency of issuance

Long-term debt – funding mix by product

($128.3 billion as at October 31, 2014)

($128.3 billion as at October 31, 2014)
Other
5%

Euro
7%

Cards and auto
securitization
7%
Covered
bonds
20%

U.S. dollar
45%

Canadian dollar
43%

Unsecured
funding
55%

MBS/CMB (1)
18%

(1)

Mortgage-backed securities and Canada Mortgage Bonds

The following table provides our composition of wholesale funding and represents our enhanced disclosure in response to EDTF
recommendations.
Composition of wholesale funding (1)

Table 61
As at October 31, 2014
Less than 1
month

(Millions of Canadian dollars)

1 to 3
months
277
4,411
1,320
4,573
578
699
22
–
51

3 to 6
months
$

11
10,880
1,835
3,341
458
950
2,391
–
596

6 to 12
months
$

19
12,873
4,114
3,970
1,058
1,435
2,635
1,500
1,111

Less than
1 year
sub-total
$

3,341
29,023
7,787
12,476
2,430
3,142
5,809
1,700
4,961

1 year
to 2
years
$

–
2,746
–
16,809
597
3,751
6,934
1,500
42

2 years
and
greater
$

Total

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)

$

3,034
859
518
592
336
58
761
200
3,203

$

– $ 3,341
–
31,769
–
7,787
38,254
67,539
4,729
7,756
16,395
23,288
20,246
32,989
4,632
7,832
3,963
8,966

Total

$

9,561

$ 11,931

$ 20,462

$ 28,715

$ 70,669

$ 32,379

$ 88,219 $ 191,267

Of which:
– Secured
– Unsecured

$

4,455
5,106

$ 2,041
9,890

$ 5,176
15,286

$ 8,184
20,531

$ 19,856
50,813

$ 10,685
21,694

$ 36,641 $ 67,182
51,578
124,085

As at October 31, 2013
Less than 1
month

(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
(1)
(2)
(3)
(4)
(5)
(6)
(7)

74

1 to 3
months
164
3,350
626
2,333
283
2,477
94
–
55

3 to 6
months
$

10
17,122
1,586
3,162
565
4,078
132
–
163

6 to 12
months

1,820
549
–
–
274
758
54
1,000
4,401

$

$

354
9,969
1,717
4,608
808
2,040
213
600
1,148

$

8,856

$ 9,382

$ 26,818

$ 21,457

$

5,040
3,816

$ 3,197
6,185

$ 5,796
21,022

$ 3,970
17,487

Less than
1 year
sub-total
$

2,348
30,990
3,929
10,103
1,930
9,353
493
1,600
5,767

1 year
to 2
years
$

2 years
and
greater
$

Total

2,088
–
9,771
828
2,845
6,007
1,700
–

– $
2,348
624
33,702
–
3,929
35,670
55,544
3,131
5,889
18,251
30,449
21,761
28,261
4,121
7,421
3,390
9,157

$ 66,513

$ 23,239

$ 86,948 $ 176,700

$ 18,003
48,510

$ 8,852
14,387

$ 40,011 $ 66,866
46,937
109,834

Excludes bankers’ acceptances.
Only includes deposits raised by treasury. Excludes deposits associated with services we provide to these banks (e.g., custody, cash management).
Only includes consolidated liabilities, including our collateralized commercial paper program.
Includes deposit notes.
Includes notes where the payout is tied to movements in foreign exchange, commodities and equities.
Includes credit card, auto and mortgages.
Includes tender option bonds (secured) of $3,118 million (October 31, 2013 – $4,227 million), bearer deposit notes (unsecured) of $2,215 million (October 31, 2013 – $1,540 million) and
other long-term structured deposits (unsecured) of $3,633 million (October 31, 2013 – $3,390 million).
Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

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 (i.e. amortized cost or fair value) at the balance sheet date and have been enhanced in response to EDTF recommendations. 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 modeling 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

As at October 31, 2014
Less than
1 month

(Millions of Canadian dollars)

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

Assets
Cash and deposits with
banks
$ 22,871 $
218 $
– $
– $
– $
– $
– $
Securities
Trading (1)
94,025
13
65
55
48
229
558
Available-for-sale
4,450
3,739
2,528
433
1,113
3,417
18,307
Assets purchased under
reverse repurchase
agreements and securities
borrowed
54,860
24,728
28,241
8,261
10,361
2,142
–
Loans (net of allowance for
loan losses)
19,260
10,776
7,490
14,961
16,081
73,788
176,063
Other
Customers’ liability under
acceptances
6,218
2,013
399
433
2,393
–
6
Derivatives
4,145
7,275
3,483
2,673
1,909
8,507
21,331
Other financial assets
18,729
672
585
169
106
245
281

– $

With no
specific
maturity

2,731 $

Total

25,820

5,236
11,959

51,151
1,822

151,380
47,768

–

6,987

135,580

29,787

87,023

435,229

–
38,071
828

–
8
828

11,462
87,402
22,443

Total financial assets
Other non-financial assets

$ 224,558 $ 49,434 $ 42,791 $ 26,985 $ 32,011 $ 88,328 $ 216,546 $
1,847
779
679
409
52
589
1,637

85,881 $ 150,550 $ 917,084
2,302
15,172
23,466

Total assets

$ 226,405 $ 50,213 $ 43,470 $ 27,394 $ 32,063 $ 88,917 $ 218,183 $

88,183 $ 165,722 $ 940,550

Liabilities and equity
Deposits (2)
Unsecured borrowing
$ 31,190 $ 22,626 $ 27,372 $ 18,602 $ 21,581 $ 39,693 $
Secured borrowing
561
2,715
2,950
5,331
4,786
9,753
Covered bonds
748
–
2,558
–
–
4,908
Other
Acceptances
6,218
2,013
399
433
2,393
–
Obligations related to
securities sold short
50,345
–
–
–
–
–
Obligations related to
assets sold under
repurchase agreements
and securities loaned
58,208
1,252
1,306
1,051
574
–
Derivatives
3,745
6,997
3,845
3,351
2,042
10,345
Other financial liabilities
18,094
1,121
492
170
298
309
Subordinated debentures
200
–
–
–
–
–

49,523 $
21,099
14,556
6

–

–

11,462

–

–

–

50,345

–
22,295
530
–

–
36,359
4,033
7,659

1,940
3
357
–

64,331
88,982
25,404
7,859

Total financial liabilities
Other non-financial
liabilities
Equity

$ 169,309 $ 36,724 $ 38,922 $ 28,938 $ 31,674 $ 65,008 $ 108,009 $

Total liabilities and equity

$ 170,763 $ 39,694 $ 39,596 $ 28,995 $ 31,752 $ 65,925 $ 110,465 $

Off-balance sheet items
Financial guarantees
Lease commitments
Commitments to extend
credit
Other commitments
Total off-balance sheet
items
(1)
(2)

1,454
–

$

$

646 $
58

2,970
–

674
–

57
–

78
–

2,391 $
114

2,289 $
167

1,982 $
165

2,970 $
161

1,660
127

6,352
420

7,329
575

6,806
879

8,513
2,578

2,491 $

9,277 $ 10,360 $

917
–

1,325 $
634
19,768
289

9,727 $ 310,045 $ 530,359
10,135
–
57,330
3,641
–
26,411

2,456
–

71,554 $ 312,345 $ 862,483
7,956
–

5,292 $
1,220
108,250
984

9,832 $ 14,222 $ 22,016 $ 115,746 $

7,002
54,503

23,564
54,503

79,510 $ 373,850 $ 940,550
254 $
1,291

59 $
–

17,208
3,810

11,539
263

2,299
62,319

172,516
68,434

13,347 $

64,677 $ 261,968

Trading debt securities classified as fair value through profit or loss have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual
maturity.
A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base, as explained
in the preceding Deposit profile section, for our operations and liquidity needs.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

75

As at October 31, 2013
Less than
1 month

(Millions of Canadian dollars)

Assets
Cash and deposits with banks $
Securities
Trading (1)
Available-for-sale
Assets purchased under
reverse repurchase
agreements and securities
borrowed (2)
Loans (net of allowance for
loan losses) (2)
Other
Customers’ liability under
acceptances
Derivatives
Other financial assets

12,989

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

$

–

With no
specific
maturity

Total

–

$ 11,600

$ 24,589

5 years
and greater

$

93,407
3,420

40
4,641

19
1,268

40
796

38
1,116

249
2,452

534
10,021

4,507
13,140

45,189
1,833

144,023
38,687

59,226

10,653

18,506

6,268

10,207

1,543

–

–

11,114

117,517

14,489

9,689

6,136

10,459

19,614

45,686

181,766

30,918

90,093

408,850

5,224
2,349
16,082

1,621
5,028
847

470
2,338
754

254
2,353
114

2,384
1,627
122

–
6,284
270

–
21,056
447

–
33,786
639

–
1
575

9,953
74,822
19,850

Total financial assets
Other non-financial assets

$ 207,186
1,273

$ 32,519
453

$ 29,491
311

$ 20,284
147

$ 35,108
741

$ 56,484
406

$ 213,824
1,341

$ 82,990
2,227

$ 160,405
14,555

$ 838,291
21,454

Total assets

$ 208,459

$ 32,972

$ 29,802

$ 20,431

$ 35,849

$ 56,890

$ 215,165

$ 85,217

$ 174,960

$ 859,745

$ 16,258
3,800
–

$ 27,847
6,685
–

$ 11,422
3,656
–

$ 14,107
4,265
–

$ 52,027
7,190
3,226

$ 46,194
21,667
14,612

$ 10,830
11,218
3,470

$ 281,237
–
–

$ 482,478
59,293
21,308

1,621

470

254

2,384

–

–

–

–

9,953

–

–

–

–

–

–

–

–

47,128

1,991
5,233
875
–

1,308
2,569
692
–

877
2,536
268
–

290
2,312
344
–

1,500
11,365
383
217

–
17,739
662
–

–
31,970
3,969
7,226

1,061
–
123
–

60,416
76,745
24,439
7,443

Liabilities and equity
Deposits (3)
Unsecured borrowing (2)
$ 22,556
Secured borrowing (2)
812
Covered bonds
–
Other
Acceptances
5,224
Obligations related to
securities sold short
47,128
Obligations related to
assets sold under
repurchase agreements
and securities loaned
53,389
Derivatives
3,021
Other financial liabilities (2)
17,123
Subordinated debentures
–
Total financial liabilities
Other non-financial
liabilities (2)
Equity

$ 149,253

$ 29,778

$ 39,571

$ 19,013

$ 23,702

$ 75,908

$ 100,874

$ 68,683

$ 282,421

$ 789,203

1,606
–

2,834
–

686
–

114
–

135
–

1,085
–

1,692
–

7,349
–

5,581
49,460

21,082
49,460

Total liabilities and equity

$ 150,859

$ 32,612

$ 40,257

$ 19,127

$ 23,837

$ 76,993

$ 102,566

$ 76,032

$ 337,462

$ 859,745

$

$

51
–
1,044
57,749

$ 15,592
4,114
153,166
62,970

$ 58,844

$ 235,842

Off-balance sheet items
Financial guarantees
$
Lease commitments
Commitments to extend credit
Other commitments

392
62
3,757
156

$ 1,341
122
6,843
405

$ 2,336
181
4,780
444

$ 1,938
179
6,488
799

$ 2,985
173
7,320
2,292

$ 2,295
662
18,031
371

$

Total off-balance sheet items $

4,367

$ 8,711

$ 7,741

$ 9,404

$ 12,770

$ 21,359

$ 97,375

(1)
(2)
(3)

4,113
1,389
91,288
585

141
1,346
13,615
169

$ 15,271

Trading debt securities classified as fair value through profit or loss have been included in the less than 1 month category as there is no expectation to hold these assets to their contractual
maturity.
Amounts have been revised from those previously presented.
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, as explained
in the preceding Deposit profile section, for our operations and liquidity needs.

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 (i.e. par value or amount payable upon
maturity). The amounts do not reconcile directly with those in our consolidated balance sheets as the table only incorporates cash flows
relating to payments on maturity of the instrument and do not recognize premiums, discounts or mark-to-market adjustments recognized in
the instruments’ carrying value 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.

76

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Contractual maturities of financial liabilities and off-balance sheet items – undiscounted basis *

Table 63

As at October 31, 2014

(Millions of Canadian dollars)

Financial liabilities
Deposits (1)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
Subordinated debentures
Off-balance sheet items
Financial guarantees (2)
Operating leases
Commitments to extend credit (2)
Total financial liabilities and off-balance sheet items

5 years
and
greater

Total

22,967

$ 613,118

6
–

–
–

11,462
50,345

–
309
–
54,694

–
530
–
85,145

–
4,013
7,632
34,612

64,332
25,384
7,832
772,473

111
634
1
746
55,440

7
1,220
–
1,227
86,372

1
1,291
–
1,292
35,904

17,208
3,810
172,516
193,534
$ 966,007

5 years
and
greater

Total

25,534

$ 562,032

On
demand

Within
1 year

1 year
to 2 years

$ 289,204

$ 161,953

–
–

11,456
50,345

–
–

1,941
358
–
291,503

62,391
20,174
200
306,519

5,883
–
137,696
143,579
$ 435,082

11,206
665
34,819
46,690
$ 353,209

$

$

54,385

2 years
to 5 years
$

$

84,609

$

$

As at October 31, 2013

(Millions of Canadian dollars)

Financial liabilities
Deposits (1), (3)
Other
Acceptances (3)
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities (3)
Subordinated debentures
Off-balance sheet items
Financial guarantees (2)
Operating leases
Commitments to extend credit (2)
Total financial liabilities and off-balance sheet items
*
(1)
(2)
(3)

On
demand

Within
1 year

$ 264,287

$ 128,206

–
–

9,953
47,128

–
–

–
–

–
–

9,953
47,128

1,061
123
–

57,855
19,277
–

1,500
350
200

–
678
–

–
4,095
7,208

60,416
24,523
7,408

265,471

262,419

64,317

82,416

36,837

711,460

5,850
–
117,753

9,550
717
35,413

178
662
–

14
1,389
–

–
1,346
–

15,592
4,114
153,166

123,603

45,680

$ 389,074

$ 308,099

1 year
to 2 years
$

62,267

2 years
to 5 years
$

840
$

65,157

81,738

$

1,403
$

83,819

$

1,346

172,872

38,183

$ 884,332

This table represents an integral part of our 2014 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, as explained
in the preceding Deposit profile section, for our operations and liquidity needs.
We believe that it is highly unlikely that all or substantially all of these guarantees and commitments will be drawn or settled within one year, and contracts may expire without being drawn or
settled. The management of the liquidity risk associated with potential extensions of funds is outlined in the preceding Risk measurement section.
Amounts have been revised from those previously presented.

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 are based
on their methodologies. Ratings are subject to change from time to time, based on a number of factors including, but not limited to, our financial
strength, competitive position and liquidity and other factors not completely within our control.
On January 24, 2014, Fitch Ratings affirmed our ratings with a stable outlook along with the other six largest Canadian banks.
On June 11, 2014, Moody’s affirmed our long-term ratings and revised our outlook to negative from stable along with the other six largest
Canadian banks. The outlook revisions are linked to Moody’s view that risks for the Canadian banks’ senior debt holders and uninsured
depositors have shifted to the downside as a result of previously announced plans by the Canadian government to implement a bail-in regime for
domestic systemically important banks and the accelerating global trends towards reducing the public cost of future bank resolutions through
such burden-sharing.
On July 7, 2014, DBRS affirmed our ratings with a stable outlook along with the other five largest Canadian banks.
On December 2, 2014, Standard & Poor’s (S&P) affirmed our ratings with a negative outlook. On August 8, 2014, S&P revised our outlook
to negative from stable along with the other five largest Canadian banks to reflect the possible impact of a bail-in policy proposal from the
Canadian federal government, which was released on August 1, 2014.
For further details on the proposed bail-in regime, refer to the Legal and regulatory environment risk section.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

77

The following table presents our major credit ratings(1) and outlooks as at December 2, 2014:
Credit ratings

Table 64
As at December 2, 2014 (2)
Short-term debt

Senior long-term debt

P-1
A-1+
F1+
R-1(high)

Aa3
AAAA
AA

Moody’s
Standard & Poor’s
Fitch Ratings
Dominion Bond Rating Services
(1)

(2)

(3)
(4)

Outlook
negative (3)
negative (4)
stable
stable

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.
On August 19, 2014, Kroll Bond Rating Agency affirmed our senior long-term and short-term debt and deposit ratings
of AA and K1+, respectively, with a stable outlook. These ratings were unsolicited and we did not participate in the
rating process.
On June 11, 2014, Moody’s revised our outlook to negative from stable for our supported senior debt and uninsured
deposit ratings.
On August 8, 2014, Standard & Poor’s revised our outlook to negative from stable, reflecting the possible impact of a
bail-in policy proposal from the Canadian federal government.

Additional contractual obligations for rating downgrades
A lowering of our credit rating may have potentially adverse consequences for our funding capacity or access to the capital markets, may also
affect our ability, and the cost, to enter into normal course derivative or hedging transactions and may require us to post additional collateral
under certain contracts. However, we estimate, based on periodic reviews of ratings triggers embedded in our existing businesses and of our
funding capacity sensitivity, that a minor downgrade would not significantly influence our liability composition, funding access, collateral usage
and associated costs. The following table presents the additional collateral obligations required at the reporting date in the event of a one-, twoor three-notch downgrade to our credit ratings. These additional collateral obligations are incremental requirements for each successive
downgrade and do not represent the cumulative impact of multiple downgrades. The amounts reported change periodically as a result of several
factors, including the transfer of trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of transactions
with downgrade triggers, the imposition of internal limitations on new agreements to exclude downgrade triggers, as well as normal course mark
to market of positions with collateralized counterparties moving from a negative to a positive position. There is no outstanding senior debt
issued in the market that contains rating triggers which would lead to early prepayment of principal.
Additional contractual obligations for rating downgrades

Table 65
As at
October 31
2014

(Millions of Canadian dollars)

One-notch
downgrade

Contractual derivatives funding or margin requirements $
Other contractual funding or margin requirements (1)
(1)

518
396

October 31
2013

Two-notch
downgrade

Three-notch
downgrade

One-notch
downgrade

Two-notch
downgrade

Three-notch
downgrade

$

$

$

$

$

143
62

790
–

616
490

171
187

762
95

Includes GICs issued by our municipal markets business out of New York and London.

Insurance risk
Insurance risk refers to the potential financial loss that may arise where the amount, timing and/or frequency of benefit payments under
insurance and reinsurance contracts are different than expected. Insurance risk does not include other 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.
We have implemented an Insurance Risk Framework that provides an overview of our program for identifying, assessing, managing, and
reporting on the insurance risks that face the organization. Key processes and tools have been developed to support and enhance risk
management, including: Own Risk and Solvency Assessment (ORSA), insurance risk appetite, Comprehensive Identification and Assessment of
Risk (CIAR), insurance risk delegated authorities and risk limits, model risk management, stress testing, experience studies, actuarial liabilities,
and reinsurance. Insurance risk policies and procedures have also been established to define the requirements for managing product, pricing,
underwriting, and claims management risk.
Regulatory compliance risk
Regulatory compliance risk is the risk of potential non-conformance with laws, rules, regulations, prescribed practices, contracts or ethical
standards in any jurisdiction in which we operate. Issues regarding compliance with laws and regulations can arise in a number of areas in a
large complex financial institution such as RBC, and are often the result of inadequate or failed internal processes, people or systems.
Laws and regulations are in place to protect the financial and other interests of our clients, investors and the public. As a large scale global
financial institution, we are subject to numerous laws and to extensive and evolving regulation by governmental agencies, supervisory authorities and self-regulatory organizations in Canada, the U.S., Europe and other jurisdictions in which we operate. In recent years such regulation
has become increasingly extensive and complex. In addition, the enforcement of regulatory matters has intensified. Recent resolution of such
matters involving other global financial institutions have involved the payment of substantial penalties, agreements with respect to future
operation of their business, actions with respect to relevant personnel and guilty pleas with respect to criminal charges.

78

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

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, regulatory examinations, investigations, audits and requests for
information by various governmental regulatory agencies and law enforcement authorities in various jurisdictions, and we anticipate that our
ongoing business activities will give rise to such matters in the future. Changes to laws, including tax laws, regulations or regulatory policies, as
well as the changes in how they are interpreted, implemented or enforced, could adversely affect us, for example by lowering barriers to entry in
the businesses in which we operate, increasing our costs of compliance or limiting our activities and ability to execute our strategic plans.
Further, there is no assurance that we always will be or will be deemed to be in compliance with laws, regulations or regulatory policies.
Accordingly, it is possible that we could receive a judicial or regulatory judgment or decision that results in fines, damages, penalties, and other
costs or injunctions, convictions or loss of licenses or registrations that would damage our reputation and negatively impact our earnings. In
addition, we are subject to litigation arising in the ordinary course of our business and the adverse resolution of any litigation could have a
significant adverse effect on our results or could give rise to significant reputational damage, which in turn could impact our future business
prospects. Global compliance has developed a Regulatory Compliance Management Framework consistent with regulatory expectations from
OSFI and other regulators. The framework is designed to 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 has been
further defined as risks associated with money laundering, bribery, privacy, market conduct, consumer protection, and business conduct.
Specific compliance policies, procedures, and supporting frameworks have been developed to support the minimum requirements for the
prudent management of regulatory compliance risk. Within the framework there are five elements that form a cycle by which all regulatory
compliance risk management programs are developed, implemented and maintained. The first element is intended to ensure our regulatory
compliance programs evolve alongside our business activities and operations. The second element is intended to ensure regulatory compliance
risks are identified and assessed appropriately so regulatory compliance programs are designed in a manner to most effectively meet regulatory
requirements. The third element relates to the design and implementation of specific controls. The fourth element is intended to ensure
appropriate monitoring and oversight of the effectiveness of the controls. Lastly, the fifth element is intended to ensure the timely escalation and
resolution of issues, and clear and transparent reporting. This is a critical step in enabling senior management and the Board of Directors to
effectively perform their management and oversight responsibilities.
Operational risk
Operational risk is the risk of loss or harm resulting from inadequate or failed internal processes, people and systems or from external events.
Operational risk is embedded in all our activities, including the practices and controls used to manage other risks. Failure to manage
operational risk can result in direct or indirect financial loss, reputational impact, regulatory censure, or failure in the management of other risks
such as credit or market risk.
Three Lines of Defence
Operational risk follows our established Three Lines of Defence governance model. This model encompasses the organizational roles and
responsibilities for a coordinated enterprise-wide approach for the management of operational risk. For further details, refer to the Risk
management – Enterprise risk management section.
Operational Risk Framework
We have put in place an Operational Risk Framework which is founded on the principles of our Enterprise Risk Management Framework and sets
out the processes to identify, assess and monitor operational risk. The processes are established through the following core programs:
•
Internal events – Internal events are specific instances where operational risk leads to or could have led to an unintended, identifiable
impact. The internal events program provides a structured and consistent approach for collecting and analyzing internal event data to
facilitate the analysis of the operational risk events affecting RBC. This program enables learnings based on “what has happened to us” and
supports the articulation of the operational risk appetite.
•
External events – External events are operational risk events that affect institutions other than RBC. External event monitoring and analysis
is critical to gain awareness of operational risk experience within the industry and to identify emerging industry trends.
•
Business Environment and Internal Control Factors (BEICF) Assessments – BEICF Assessments are conducted to improve business decisionmaking by gaining awareness of the key risks and the strengths and vulnerabilities of internal controls. Key BEICF Assessment processes
include: Risk and Control Assessments conducted at both enterprise and business levels; and Change Initiatives and New/Amended
Product Assessments conducted to ensure understanding of the risk and reward trade-off for business initiatives (e.g., new products,
acquisitions, changes in business processes, implementation of new technology, etc.).
•
Scenario analysis – Scenario analysis is a structured and disciplined process for making reasonable assessments of infrequent, yet
plausible, severe operational risk events. Understanding how vulnerable RBC is to such “tail risks” identifies mitigating actions and informs
the determination of related operational risk thresholds as part of the articulation of operational risk appetite.
•
BEICF monitoring – BEICF monitoring is conducted on an ongoing basis through Key Risk Indicators (KRIs) and other assurance/monitoring
programs (e.g., Business Unit monitoring, Centres of Governance monitoring, audit results, etc.).
Conclusions from the operational risk programs are used to inform the overall level of exposure to operational risk, which defines our operational
risk profile. The profile includes significant operational risk exposures, potential new and emerging exposures and trends, and overall
conclusions on the control environment and risk outlook. We proactively identify and investigate corporate insurance opportunities to mitigate
and reduce potential future impacts of operational risk.
We consider risk/reward decisions in striking the balance between accepting potential losses versus incurring costs of mitigation, the
expression of which is in the form of our operational risk appetite. Our operational risk appetite is established at the board level and cascaded
throughout each of our business segments.
Management reports have been implemented at various levels of RBC in order to support proactive management of operational risk and
transparency of risk exposures. Reports are provided on a regular basis and provide detail on the main drivers of the risk status and trend for
each of our business segments and RBC 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.
Operational risk capital
We currently use the Standardized Approach to calculate operational risk capital requirements and the allocation of capital amongst our
business units. We are in the process of attaining accreditation towards the Basel II Advanced Measurement Approach (AMA) as the approved
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

79

regulatory capital methodology. Output from capital modeling will provide further transparency around the materiality of key risks by quantifying
the expected losses and unexpected losses.
Operational risk loss events
During 2014, we did not experience any material operational risk loss event. For further details on our contingencies, including litigation, refer to
Notes 26 and 27 of our 2014 Annual Consolidated Financial Statements.

Strategic risk
Strategic risk is the risk that the enterprise or particular business areas will make inappropriate strategic choices, or will be unable to successfully implement selected strategies or related plans and decisions. Business strategy is the major driver of our risk profile 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 the businesses.
Oversight of strategic risk is the responsibility of the heads of the business segments, the Enterprise Strategy Office, GE, and the Board of
Directors. Management of strategic risk is supported by the Enterprise Strategy Group as per the Enterprise Strategic Planning Policy.
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 that an activity undertaken by an organization or its representatives will impair its image in the community or lower
public confidence in it, resulting in the loss of business, legal action or increased regulatory oversight.
Reputation risk can arise from a number of events and primarily occurs in connection with credit risk, regulatory, legal and operational risks
and failure to maintain strong risk conduct. Operational failures and non-compliance with laws and regulations can have a significant reputational impact on us.
We have put in place a Reputation Risk Framework which provides an overview of our approach to the management of this risk. It focuses on
our organizational responsibilities, and controls in place to mitigate reputation risks.
The following principles guide our management of reputation risk:
•
We must operate with integrity at all times in order to sustain a strong and positive reputation.
•
Protecting our reputation is the responsibility of all our employees, including senior management, and extends to all members of the
Board of Directors.

Legal and regulatory environment risk
Certain regulatory reforms will impact the way in which we operate, both in Canada and abroad, and the full impact of some of these reforms 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 regulatory reforms
have potential to increase our operational, compliance, and technology costs and adversely affect our profitability.
Basel Committee on Banking Supervision global standards for capital and liquidity reform (Basel III)
The Basel Committee’s standards for capital and liquidity (commonly referred to as “Basel III”) establish minimum requirements for common
equity, increased capital requirements for counterparty credit exposures, a new global leverage ratio and measures to promote the build up of
capital that can be drawn down in periods of stress. Banks around the world continue to adopt these new standards in accordance with domestic
implementation.
In January 2013, the BCBS released final rules for the short-term liquidity standard, the LCR, with implementation commencing in 2015.
Subsequently in October 2014, the BCBS released final rules for the long-term liquidity standard, the NSFR, with implementation commencing in
2018. For further details on how our business may be impacted, refer to the Liquidity and funding risk section.
In January 2014, the BCBS released final rules for the global leverage requirement, which takes effect as a 3% minimum supplemental
capital requirement on January 1, 2018. For further details on how our business may be impacted, refer to the Capital management section.
During the year, U.S. regulators approved final rules to apply a U.S. based supplemental leverage requirement and LCR requirement to large
banking organizations operating in the U.S. We anticipate subsequent rules will be introduced to apply U.S.-specific LCR and leverage requirements to our U.S. Intermediate Holding Company and U.S. branch network (see below for further details).
Basel III requirements are being implemented in the European Union through a revised Capital Requirements Directive (CRD IV) and
accompanying Capital Requirements Regulation (CRR), both of which became effective January 1, 2014 and are to be phased-in gradually
through 2019. CRD IV/CRR also introduces improvements to the transparency of activities of banks and investment funds in different countries,
adds a host of governance standards (including standards for executive compensation and bonuses, board oversight of risk and board diversity),
and implements a common reporting framework for regulatory reporting. These changes may also result in higher capital requirements for our
European subsidiaries.
Dodd-Frank – Volcker Rule
On December 10, 2013 U.S. authorities finalized section 619 of the Dodd-Frank Act relating to broad prohibitions and restrictions on proprietary
trading and certain banking entity relationships with hedge funds and private equity funds (the “Volcker Rule”). The final Volcker Rule extended
the general compliance deadline to July 21, 2015 and provided some flexibility for foreign institutions as it relates to activities conducted outside
the U.S. The Rule impacts our global activities as its reach extends to the Bank and each of its subsidiaries and affiliates (subject to certain
exceptions). The majority of our trading businesses will continue to be permissible under the Rule and we are in the process of building the
requisite monitoring program and reporting metrics to demonstrate compliance. We have exited or are in the process of exiting certain activities
that cannot be restructured to comply with the Rule. For a limited number of business activities, we are continuing discussions with regulators
and others in the industry in order to assess the best means of restructuring those activities to comply with the Rule. The combined impact of
these changes is not expected to materially affect our overall results.
80

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Dodd-Frank – Enhanced Supervision of Foreign Banking Organizations
On February 18, 2014, the U.S. Federal Reserve finalized their new oversight regime for non-U.S. banks with subsidiaries, affiliates and branches
operating in the U.S. (the “Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations”), pursuant to
section 165 of the Dodd-Frank Act. The rule is intended to address the perceived systemic risk that large foreign banks could pose to the U.S.
financial markets. As a foreign banking organization with more than US$50 billion in U.S. non- branch assets, RBC is required to establish a
separately capitalized U.S. Intermediate Holding Company (the IHC), into which all of our U.S. legal entities must be placed and for which certain
U.S.-based requirements will apply. The IHC will be subject to Federal Reserve oversight comparable to U.S. bank holding companies. As a result,
changes to our existing practices will be required to provide the governance and infrastructure needed to support these U.S.-specific requirements in areas of financial reporting, capital and liquidity, risk management, and stress testing. In addition, there will be limitations on capital
distributions from the IHC to RBC, and such distributions will be subject to supervisory approval. The requirements will be phased in between
2015 and 2018, with RBC needing to form its IHC by July 1, 2016. An implementation plan outlining our approach for meeting these requirements
including forming the IHC must be filed with the Federal Reserve by January 1, 2015. The Federal Reserve has stated that it plans to issue, at a
later date, separate rules to apply early remediation requirements and limits on exposures to single counterparties. The final rule also deferred
application of U.S.-based leverage requirements, which differ from the Basel III leverage ratio, to January 1, 2018. RBC will incur costs to comply
with these additional U.S. based financial reporting, risk management and governance requirements (both initially and on an ongoing basis) and
we may have less flexibility in our capital and liquidity structures which historically have been managed on a global (vs. regional) basis. These
impacts are not expected to materially affect our financial performance or overall results.
Canadian bail-in regime
On August 1, 2014, the Government of Canada proposed a “bail-in” regime for the six D-SIBs. Bail-in regimes are being implemented in a number
of jurisdictions following the 2008 financial crisis in an effort to limit taxpayer exposure to potential losses of a failing institution and ensure the
institution’s shareholders and creditors remain responsible for bearing such losses. The proposed regime would grant the Government of Canada
the power to permanently cancel an institution’s existing common shares and/or convert an institution’s long-term senior debt into common
shares. Either power would only be exercisable once the institution was no longer viable and full conversion of the institution’s non-viable
contingent capital (NVCC) instruments into common shares had already occurred. Deposits (including those insured by the Canada Deposit
Insurance Corporation), shorter-term unsecured wholesale debt, and derivatives would not be subject to conversion or cancellation. Higher Loss
Absorbency requirements would also apply to ensure affected banks maintain sufficient capital to absorb the proposed conversions. The
proposed changes could adversely impact our cost of funding.
Total loss-absorbing capacity (TLAC)
On November 10, 2014, the Financial Stability Board (FSB) proposed minimum common international standards related to the TLAC of global
systemic banks. The standards are intended to address the sufficiency of global systemically important banks’ (G-SIBs) capital to absorb losses
in a resolution, in a manner that minimizes impact on financial stability and ensures continuity of critical economic functions. To date, RBC and
the other Canadian banks have not been designated as G-SIBs. It is uncertain how these proposed standards will be integrated into Canada’s
bail-in regime as discussed above, which also remains to be finalized.
Over-the-counter (OTC) derivatives reform
Reforms in the OTC derivatives markets continue on a global basis, with the governments of the G20 nations proceeding with plans to transform
the capital regimes, national regulatory frameworks and infrastructures in which we and other market participants operate. We, along with other
Canadian banks, will experience changes in our wholesale banking business, some of which will impact our client- and trading-related
derivatives revenues in Capital Markets. As part of this, we have implemented a compliance framework to adhere to new requirements in Canada
(including new trade reporting rules effective October 31, 2014), the U.S., Europe, Asia-Pacific, and Australia.
In September 2013, the BCBS and the International Organization of Securities Commissions (IOSCO) released joint guidelines that include a
requirement for non-exempt financial entities to exchange initial and variation margin (i.e. margin held as collateral to protect against potential
counterparty default). Throughout 2014, European, Japanese, and U.S. regulators proposed domestic rules based on these guidelines. Effective
December 1, 2015, RBC expects it will be required to comply with these guidelines and will work with national authorities to prepare for
compliance as Canadian rules are developed.
On December 31, 2012, RBC registered as a swaps dealer in the U.S. pursuant to U.S. Commodity Futures Trading Commission (CFTC)
requirements. To avoid the imposition of duplicative prudential requirements (and mitigate some of the expected compliance and operating
costs), we are continuing to work with Canadian and U.S. authorities to encourage reliance on the Canadian framework.
In Europe, OTC regulation is being phased in since the European Market Infrastructure Rules (EMIR) came into force in March 2013. EMIR
requires firms to clear certain OTC standardized derivative contracts through central counterparties, establish risk mitigation controls for OTC
derivatives transactions that cannot be cleared, and report both cleared and non-cleared contracts to trade repositories. The review of Markets in
Financial Instruments Directive (MiFID II) (in effect January 2017) is another key initiative seeking to achieve greater trade transparency,
enhanced investor protection and more oversight of OTC derivatives and fixed income products, primarily through the introduction of new types
of regulated trading platforms and increased governance over certain trading activities.
The payments system in Canada
The Federal government is continuing to review a number of aspects of the Canadian payments system, in areas such as governance, mobile
payments, debit and credit cards, and the overall regulatory framework.
On November 4, 2014, MasterCard Canada and Visa Canada announced voluntary commitments to reduce merchant credit card fees to an
average effective rate of 1.5% for the next five years, effective April 30, 2015. As a result of these commitments, the Minister of Finance signalled
the government’s intention to not regulate credit card interchange rates at this time. However, the government also indicated it may implement
amendments to the voluntary Code of Conduct for the Credit and Debit Card Industry in Canada in the near future. We will continue to assess the
impact as further details are made available. We believe that we are well positioned to make any adjustments required in response to these
commitments and will continue to support our personal and business clients with competitive credit card products.
These and other potential changes could have implications for RBC from a technological, systems, operational and regulatory perspective.
While the government’s review is still at an early stage, risks associated with the implementation of these reforms could include implications to
our revenue and business strategy through potential measures such as enhanced disclosure requirements, and the introduction of some form of
dispute resolution mechanism for merchants. We continue to provide input into the government’s consultations in this area, arguing for fair and
consistent regulation of all participants in the payments system to protect safety and soundness while promoting innovation.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

81

Consumer protection
On September 19, 2014, the Supreme Court of Canada rendered its judgment in the 2003 Quebec class action lawsuit, Marcotte v. Bank of
Montreal. The Court specifically found that certain provisions of Quebec’s Consumer Protection Act apply to credit cards issued by federallychartered banks. The Supreme Court agreed with the banks that foreign currency conversion fees cardholders pay when they transact in other
currencies are not “credit charges”, and therefore not subject to certain restrictions imposed by the Consumer Protection Act, but ruled that the
disclosure requirements of the legislation do apply. Accordingly, five banks and one credit union must reimburse and pay punitive damages to
credit cardholders for failing to properly disclose these fees. Neither Royal Bank of Canada nor any of the three other banks named in the lawsuit
are required to pay any damages or reimbursement given that, at all relevant times, the conversion fee was disclosed in accordance with the
applicable legislative provisions. The Supreme Court decision is important in that it narrows the circumstances in which exclusive federal
jurisdiction over banking renders provincial/territorial legislation inoperative, opening the door further for the activities of RBC and other
federally-regulated institutions to be subject to both federal and provincial/territorial legislation.
The Supreme Court decision may also influence the work being undertaken by the Federal government in the area of consumer protection
more generally. In December 2013 the government began consulting on the development of a principles-based federal consumer protection
framework focused on setting standards for the protection of consumers and we participated in that Department of Finance consultation.
Foreign Account Tax Compliance Act (FATCA)
The U.S. Foreign Account Tax Compliance Act (FATCA) came into effect on July 1, 2014 and generally requires non-U.S. financial institutions to
provide information to the U.S. Internal Revenue Service (IRS) about U.S. persons and financial accounts in which they have an interest in order
to identify persons who may be evading U.S. taxes through the use of foreign accounts. On February 5, 2014, the Canadian government
concluded an intergovernmental agreement (IGA) with the U.S. government providing some relief to Canadian financial institutions and their
clients. Under the terms of the IGA, Canadian financial institutions will report information directly to CRA rather than directly to the IRS. The CRA
will then exchange the information with the IRS through provisions in the existing Canada-U.S. Tax Convention. The IGA also generally eliminates
the requirement for Canadian financial institutions to withhold and remit to the IRS a 30% tax on U.S.-source payments paid or credited to
individual account holders who fail to provide information requested to determine their U.S. status. Instead, the accounts for those individuals
will be treated as U.S. reportable accounts and included in the reporting to the tax authorities.
Regulatory reform in the U.K. and elsewhere in Europe
The regulatory framework in the U.K. and elsewhere in Europe continues to undergo significant reform and reorganization. The U.K. Financial
Services (Banking Reform) Act was finalized in December 2013 and regulators continue to adopt regulations to implement the new legislation.
Key changes focus on heightened requirements for governance, consumer protection, and bank executive remuneration. The approved persons
regime applies more stringent oversight, certification, and disclosure requirements to those performing senior management functions at a
subject bank. U.K. authorities are also consulting on a new remuneration code for the U.K. that sets out new rules on remuneration to strengthen
the alignment between long-term risk and reward in the banking sector. European authorities have also published guidelines aimed at ensuring
a consistent approach for complaints handling across the European Union.
In July 2014, U.K. legislation confirmed that our U.K. entities will be exempt from the requirement to separate our retail banking and
investment banking activities by virtue of meeting the prescribed de minimis threshold for applicability.
Competitive risk
The competition for clients among financial services companies in the markets in which we operate is intense. Client loyalty and retention can be
influenced by a number of factors, including new technology used or services offered by our competitors, relative service levels, relative prices,
product and service attributes, our reputation, actions taken by our competitors, and adherence with competition and anti-trust laws. Other
companies, such as insurance companies and non-financial companies, are increasingly offering services traditionally provided by banks. For
example, our payments business is facing intense competition from emerging non-traditional competitors. This competition could also reduce
net interest income, fee revenue and adversely affect our results.
Systemic risk
Systemic risk is the risk that the financial system as a whole, or a major part of it – either in an individual country, a region, or globally – is put in
real and immediate danger of collapse or serious damage with the likelihood of material damage to the real economy, and that this will result in
financial, reputation or other risks for RBC.
Systemic risk is considered to be the least controllable risk facing RBC. Our ability to mitigate this risk when undertaking business activities is
limited, other than through collaborative mechanisms between key industry participants, and, as appropriate, the public sector, to reduce the
frequency and impact of these risks. The two most significant measures in mitigating the impact of systemic risk are diversification and stress testing.
Our diversified business portfolios, products, activities and funding sources help mitigate the potential impacts from systemic risk. We also
mitigate systemic risk by establishing risk limits to ensure our portfolio is well diversified, 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 funding and operational risks on us,
under adverse economic conditions. Our enterprise-wide stress testing program utilizes stress scenarios featuring a range of severities based on
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 the Risk management – Enterprise risk management section.
Overview of other risks
In addition to the risks described in the Risk management section, there are other risk factors, described below, which may adversely affect our
businesses and financial results. The following discussion is not exhaustive as other factors could also adversely affect our results.
Business and economic conditions
Our earnings are significantly affected by the general business and economic conditions in the geographic regions in which we operate. These
conditions include consumer saving and spending habits as well as consumer borrowing and repayment patterns, business investment,
government spending, exchange rates, sovereign debt risks, the level of activity and volatility of the capital markets, strength of the economy
and inflation. For example, an economic downturn may result in high unemployment and lower family income, corporate earnings, business
82

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

investment and consumer spending, and could adversely affect the demand for our loan and other products and result in higher provisions for
credit losses. Given the importance of our Canadian operations, an economic downturn in Canada or in the U.S. impacting Canada would largely
affect our personal and business lending activities in our Canadian banking businesses, including cards, and could significantly impact our
results of operations.
Our earnings are also sensitive to changes in interest rates. A continuing low interest rate environment in Canada, the U.S. and globally
would result in net interest income being unfavourably impacted by spread compression largely in Personal & Commercial Banking and Wealth
Management. While an increase in interest rates would benefit our businesses that are currently impacted by spread compression, a significant
increase in interest rates could also adversely impact household balance sheets. This could result in credit deterioration which might negatively
impact our financial results, particularly in some of our personal and commercial banking and Wealth Management businesses.
Capital Markets and Investor & Treasury Services would be negatively impacted if global capital markets deteriorate resulting in lower
average fee-based client assets and transaction volumes and trading volatility. In Wealth Management, weaker market conditions would lead to
lower average fee-based client assets and transaction volumes. Worsening of 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. For further details on economic and market factors which may impact
our financial performance, refer to the Wealth Management, Investor & Treasury Services and Capital Markets sections.
Government fiscal, monetary and other policies
Our businesses and earnings are affected by the fiscal, monetary or other policies that are adopted by the Bank of Canada and various other
Canadian regulatory authorities, the Board of Governors of the Federal Reserve System in the U.S. and other U.S. government authorities, as well
as those adopted by international regulatory authorities and agencies in jurisdictions in which we operate. 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 RBC are complex and wide
ranging. As a result, we ensure that any decisions or actions related to tax always reflect our assessment of the long-term costs and risks
involved, including their impact on our relationship with clients, shareholders, and regulators, and our reputation.
Our approach to tax is governed by our Taxation Policy and Risk Management Framework, and reflects the fundamentals of our Risk
Pyramid. Oversight of our tax policy and the management of tax risk is the responsibility of the CAO & CFO and the Senior Vice President,
Taxation. We report our tax position to the Audit Committee on a regular basis and discuss our tax strategy with the Audit and Risk Committees
as well as with GE.
Our tax strategy is designed to ensure transparency and support our business strategy, and is aligned with our corporate vision and values.
We seek to maximize shareholder value by ensuring that our businesses are structured in a tax efficient manner while considering reputational
risk by being in compliance with all laws and regulations. Our framework seeks to ensure that we:
•
Act with integrity and in a straightforward, open and honest manner in all tax matters;
•
Ensure tax strategy is aligned with our business strategy supporting only bona fide transactions with a business purpose and economic
substance;
•
Ensure our full compliance and full disclosure to tax authorities of our statutory obligations; and
•
Endeavor to work with the tax authorities to build positive long-term relationships and where disputes occur, address them
constructively.
With respect to assessing the needs of our clients, we consider a number of factors including the purposes of the transaction. We 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 transaction.
Given that we have offices in 40 countries worldwide, complex tax legislation and accounting principles can often result in differing legal
interpretations between the respective tax authorities we deal with and ourselves. Should this occur, we are committed to an open and transparent dialogue with the tax authorities to ensure a quick assessment and prompt resolution of the issue. Failure to adequately manage tax risk
and resolve issues with tax authorities could adversely impact our results and/or significantly impact our reputation.
Tax Contribution
In 2014, total income and other tax expense to various levels of governments totalled $3.2 billion (2013 – $3 billion; 2012 – $2.9 billion). In
Canada, total income and other tax expense for the year ended October 31, 2014 to various levels of government totalled $2.2 billion (2013 –
$2.6 billion; 2012 – $2 billion).
Income and other tax expense – by category

Income and other tax expense – by geography

(Millions of Canadian dollars)

(Millions of Canadian dollars)

Business taxes
3,500

Insurance premium taxes
Property taxes

2,625

3,500

Other International

2,625

U.S.
Canada

Capital taxes
1,750

Payroll taxes
Goods and services
sales taxes

875
0
2014

2013

2012

Income taxes

1,750
875
0
2014

2013

2012

For further details on income and other tax expense, refer to the Financial performance section.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

83

Ability to attract and to retain employees
Competition for qualified employees is intense within the financial services industry and from non-financial industries looking to recruit.
Although our goal is to attract and retain qualified employees, there is no assurance that we will be able to do so.
Accuracy and completeness of information on clients and counterparties
When deciding to extend credit or enter into other transactions with clients and counterparties, we may rely on information provided by or on
behalf of clients and counterparties, including audited financial statements and other financial information. We may also rely on representations
of clients and counterparties as to the completeness and accuracy of that information. Our financial results could be adversely impacted if the
financial statements and other financial information relating to clients and counterparties on whom we rely do not comply with GAAP or are
materially misleading.
Development and integration of our distribution networks
We regularly explore opportunities to expand our distribution networks, either through acquisitions or organically by adding, for example, new
bank branches, insurance offices, online savings accounts and ATMs in high-growth, receptive markets. However, if we are not able to develop or
integrate these distribution networks effectively, our results of operations and financial condition may be negatively affected.
Model risk
The use of models plays an important role in many of our business activities. We use a variety of models for many purposes, including the
valuation of financial products, risk measurement and management of different types of risk. Model risk is the risk of error in the design,
development, implementation or subsequent use of models. We have established an enterprise-wide Model Risk Management Framework,
including principles, policies and procedures, roles and responsibilities to manage model risk. One of the key factors in the framework to
mitigate model risk is independent validation.
Information technology risk
We use information technology for business operations and the enablement of strategic business goals and objectives. Information technology
risk is the risk to our business associated with the use, ownership, operation, involvement, influence and adoption of information technology
within the enterprise. It consists of information technology related events that could potentially have an adverse impact on our business. Such
events could result in business interruption, service disruptions, theft of intellectual property and confidential information, additional regulatory
scrutiny, litigation and reputational damage. To manage our information technology risk, we have established an enterprise-wide Information
Technology Risk Management Framework.
Information management risk
Information management risk is the risk of loss or harm resulting from the failure to manage information appropriately throughout its lifecycle.
Exposure to this risk exists when information is acquired or created, processed, used, shared, accessed, retained or disposed. With respect to
personal information, the failure to manage information appropriately can result in the misuse of personal information or privacy breaches. With
respect to client information, the inability to process information accurately and on a timely basis can result in service disruptions. With respect
to corporate and proprietary information, the mismanagement of information can result in the disclosure of confidential information, the
unavailability of information when it is required and the reliance on inaccurate information for decision-making purposes. Such events could
lead to legal and regulatory consequences, reputational damage and financial loss.
Social media risk
The scale and profile of social media has grown to present a number of risks. These risks include brand and reputational damage, information
leaks, non-compliance with regulatory requirements and governance risk. To manage the risks associated with social media, we have
implemented an enterprise-wide policy as well as business unit policies on the usage of external social media, which sets out the requirements
for the business and corporate use of social media and is part of our larger Social Media Governance Framework.
Environmental risk
Environmental risk is the risk of loss to financial, operational or reputational value resulting from the impact of environmental issues. It arises
from the business activities and operations of both us and our clients. For example, the environmental issues associated with our clients’
purchase and sale of contaminated property or development of large-scale projects may give rise to credit, regulatory and reputation risk.
Operational and legal risks may arise from environmental issues at our branches, offices or data processing centres.
Corporate Sustainability (CS) sets enterprise-wide policy requirements for the identification, assessment, control, monitoring and reporting
of environmental risk. Oversight is provided by GE and the Corporate Governance and Public Policy Committee (CG&PPC) of the Board of
Directors. Business segments and corporate functions are responsible for incorporating environmental risk management requirements and
controls within their operations. The CS Group also provides advisory services and support to business segments on the management of specific
environmental risks in business transactions.
Periodically, we verify that our environmental risk management policies and processes are operating as intended. On an annual basis, and
more frequently as required, environmental risk management activities, issues, and trends are reported to GE and to the CG&PPC of the Board of
Directors. Failure to adequately manage environmental risk could adversely impact our results and/or significantly impact our reputation.
We report on the full extent of environmental management annually in the Corporate Responsibility Report and Public Accountability
Statements.
Third party and outsourcing risk
Failing to effectively manage our service providers may expose RBC to service disruptions, regulatory action, financial loss, litigation or reputational damage. Third party and outsourcing risk has received increased oversight from regulators and attention from the media. We formalized
and standardized our expectations of our suppliers with a principles-based Supplier Code of Conduct to ensure their behaviour aligns with our
standards in the following key areas: business integrity, responsible business practices, responsible treatment of individuals, and the
environment.
Other factors
Other factors that may affect actual results include changes in government trade policy, changes in accounting standards, including their effect
on our accounting policies, estimates and judgements, currency and interest rate movements in Canada, the U.S., and other jurisdictions in
which we operate, changes to our credit ratings, the timely and successful development of new products and services, our ability to cross-sell
more products to customers, technological changes, effective design, implementation and execution of processes and their associated controls,
84

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

fraud by internal and external parties, the possible impact on our business from disease or illness that affects local, national or global
economies, disruptions to public infrastructure, including transportation, communication, power and water, international conflicts and other
political developments including those relating to the war on terrorism, and our success in anticipating and managing the associated risks.
We caution that the foregoing discussion of risk factors, many of which are beyond our control, is not exhaustive and other factors could
also affect our results.
Capital management
We actively manage our capital to maintain strong capital ratios and high ratings while providing strong returns to our shareholders. In addition
to the regulatory requirements, we consider the expectations of credit rating agencies, depositors and shareholders, as well as our business
plans, stress tests, peer comparisons and our internal capital ratio targets. Our goal is to optimize our capital usage and structure, and provide
support for our business segments and clients and better returns for our shareholders, while protecting depositors and senior creditors.
Capital management framework
Our capital management framework provides the policies and processes for defining, measuring, raising and investing all types of capital in a
coordinated and consistent manner. It includes the overall approach of capital management, including guiding principles as well as roles and
responsibilities relating to capital adequacy and transactions, dividends, solo capital and management of risk-weighted assets and grossadjusted assets or total exposures. We manage and monitor capital from several perspectives, including regulatory capital, economic capital and
subsidiary capital.
Our capital planning is a dynamic process which 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.
The integral parts of our capital planning comprise our business operating plans, Enterprise-wide stress testing and Internal Capital Adequacy
Assessment Process (ICAAP), along with the considerations of regulatory capital requirements and accounting changes, internal capital
requirements, rating agency metrics and solo capital.
Our capital plan is established on an annual basis and is aligned with the management actions included in the annual business operating
plan, which includes forecast growth in assets and earnings taking into account our business strategies, 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 severe but plausible scenarios

Enterprise-wide
Stress Testing

Capital impacts of
severe but plausible
scenarios

Total capital requirements

Capital Plan and
Business
Operating Plan

ICAAP
Capital available and target
capital ratios

Our Enterprise-wide stress testing and ICAAP provide key inputs for capital planning, including setting the appropriate 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 exceptional adverse events. ICAAP is an
OSFI mandated annual process to assess capital adequacy and requirements to cover all material risks, with a cushion to cover severe but
plausible contingencies. In accordance with the OSFI guideline, the major components of our ICAAP process include comprehensive risk
assessment, stress testing, capital assessment and planning (both economic and regulatory capital), board and senior management oversight,
monitoring and reporting and internal control review.
Our internal capital targets are established to maintain robust capital positions in excess of OSFI’s Basel III “all-in” regulatory targets, which
include minimum capital requirements plus a capital conservation buffer that can absorb losses during periods of stress. The “all-in” methodology includes all regulatory adjustments that will be required by 2019, while retaining the phase-out rules for non-qualifying capital
instruments, as per OSFI’s Basel III Capital Adequacy Requirements (CAR) guideline. The stress test results of our Enterprise-wide stress testing
and ICAAP are incorporated into the OSFI capital conservation buffer, with a view to ensuring the bank has adequate capital to underpin risks
and absorb losses under all plausible stress scenarios given our risk profile and appetite. In addition, we include a discretionary cushion on top
of the OSFI regulatory targets to maintain capital strength for forthcoming regulatory and accounting changes, peer comparatives, rating agencies
sensitivities and solo capital level.
The Board of Directors is responsible for 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 established limits and
guidelines. The Risk Committee annually approves the Capital Management Framework. The Audit and Risk Committees jointly approve the ICAAP
process. The Audit Committee is also responsible for the ongoing review of internal controls over capital management.
Basel III
Our regulatory capital requirements are determined on a Basel III “all-in” basis as per OSFI guidelines. The top corporate entity to which Basel III
applies at the consolidated level is Royal Bank of Canada.
Under Basel III, banks select from among alternative approaches to calculate their minimum regulatory capital required to underpin 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 considered non-material
from a consolidated perspective continue to use the Basel III Standardized approach for credit risk (for example, our Caribbean banking
operations). For consolidated regulatory reporting of operational risk capital, we continue to use the Standardized approach. For consolidated
regulatory reporting of market risk capital, we use both Internal Models-based and Standardized approaches.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

85

In December 2010, the BCBS issued “Basel III: A global regulatory framework for more resilient banks and banking systems”, which outlines
the capital and liquidity requirements for global banks, with the objective of promoting financial stability and is intended to ensure sustainable
economic growth. The BCBS sets out the Basel III transitional requirements for Common Equity Tier 1 (CET1), Tier 1 and Total capital ratios at 4%,
5.5% and 8%, respectively for 2014, which will be fully phased-in to 7%, 8.5% and 10.5%, respectively (including minimums plus capital
conservation buffer of 2.5%) by January 1, 2019. The BCBS also released the NVCC requirements in January 2011 with an effort to ensure the loss
absorbency of regulatory capital instruments at the point of non-viability. In August 2011, OSFI issued an advisory outlining the NVCC principles
and requirements, including a full and permanent conversion of non-common capital instruments into common shares upon a trigger event,
effective the first quarter of 2013.
OSFI expects Canadian banks to currently meet the “all-in” targets (minimum ratios plus the capital conservation buffer – January 1, 2019
BCBS requirements) for CET1 ratio, and Tier 1 and Total capital. Effective January 1, 2014, the CVA capital charge is phased in over a five-year
period beginning 2014 and ending December 31st, 2018 to ensure an implementation similar to that in other countries. In accordance with the
guidance, there are two possible options to phase in the CVA capital charge. Under the option selected by RBC, option 1, CVA increased RWA for
purposes of calculating CET1, Tier 1 and Total Capital ratios, and was phased-in using 57%, 65% and 77% phase-in multiples respectively for
2014. The multiples will vary by year, reaching 100% by the end of 2018. The 2015 CET1, Tier 1 and Total Capital ratios phase-in multiples will be
64%, 71% and 77%, respectively.
In January 2014, the BCBS released its final paper on “Basel III leverage ratio framework and disclosure requirement”, which requires banks
to disclose the leverage ratio and its components, effective the first fiscal quarter of 2015. The leverage ratio is defined as the capital measure
divided by the exposure measure. The capital measure is currently defined as Tier 1 capital and the exposure measure is the sum of (a) onbalance sheet exposures; (b) derivative exposures; (c) securities financing transaction (SFT) exposures and (d) off-balance sheet items. The
minimum leverage ratio is 3%. On October 30, 2014, OSFI issued its final “Leverage Requirements (LR) Guideline”, which replaces the existing
OSFI assets-to-capital multiple (ACM) with the Basel leverage ratio beginning in Q1 2015.
OSFI released the list of six Canadian banks, including RBC, which are designated as D-SIBs in March 2013, for which an additional 1% risk
weighted capital surcharge will be required commencing January 1, 2016. In July 2013, BCBS published a revised document on “Global
systemically important banks (G-SIB): updated assessment methodology and the higher loss absorbency requirement”. BCBS requires all banks
with a Basel III leverage ratio total exposure exceeding EUR 200 billion as well as those designated as G-SIBs in the previous year to publish the
twelve indicators used in the assessment methodology, with the goal of enhancing the transparency of the relative scale of banks’ potential
global systemic importance and data quality. Per OSFI advisory “Global systemically important banks – Public disclosure requirements” issued
in March 2014, Canadian banks, including RBC, that meet the BCBS size threshold and are not designated as G-SIBs in the previous year will be
required to disclose in the report to shareholders the twelve indicators only (not the full template) for financial year ends 2013 and 2014, no later
than the first quarter of 2015. For subsequent year ends, disclosure should be made as part of a bank’s annual report to shareholders.
The following table provides a summary of OSFI regulatory target ratios under Basel III.
Basel III – OSFI regulatory target

Basel III
Capital Ratios

Common Equity Tier 1 (%)
Tier 1 capital (%)
Total capital (%)
(1)

Table 66
Meet or
OSFI regulatory target requirements for large banks under Basel III
RBC capital exceed
Minimum
Minimum
ratios as at
OSFI
including Capital
Capital
including
D-SIBs
October 31, regulatory
Conservation
Minimum Conservation
Capital
(1)
2014
target
Buffer and D-SIBs
Buffer
Conservation Surcharge
surcharge (1)
Buffer
ratios
> 4.5%
> 6.0%
> 8.0%

2.5%
2.5%
2.5%

> 7.0%
> 8.5%
> 10.5%

1.0%
1.0%
1.0%

> 8.0%
> 9.5%
> 11.5%

9.9%
11.4%
13.4%

✓
✓
✓

The D-SIBs surcharge will be applicable to risk weighted capital commencing January 1, 2016.

The following table provides details on our regulatory capital, RWA and capital ratios. Our capital position remained strong during the year and
our capital ratios remain well above OSFI regulatory targets.

86

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Regulatory capital, RWA and capital ratios
Regulatory capital, risk-weighted assets (RWA) and capital ratios

Table 67
As at
October 31
2014

(Millions of Canadian dollars, except percentage and multiple amounts)

Capital (1)
CET1 capital
Tier 1 capital
Total capital
RWA used in calculation of capital ratios (1), (2)
CET1 capital RWA
Tier 1 capital RWA
Total capital RWA
Total capital RWA consisting of: (1)
Credit risk
Market risk
Operational risk
Total capital risk-weighted assets
Capital ratios and multiples (1), (3)
CET1 ratio
Tier 1 capital ratio
Total capital ratio
Assets-to-capital multiple (4)
Gross-adjusted assets (GAA) (billions) (4)
(1)
(2)

(3)

(4)

October 31
2013

$

36,406
42,202
50,020

$

368,594
369,976
372,050

$ 318,981
318,981
318,981

$

286,327
38,460
47,263

$ 232,641
42,184
44,156

$

372,050

$ 318,981

$

9.9%
11.4%
13.4%
17.0X
885.0

9.6%
11.7%
14.0%
16.6X
807.0

$

$

30,541
37,196
44,716

Capital, RWA and capital ratios and multiples are calculated using OSFI CAR based on the Basel III framework.
Effective Q3, 2014 different scalars were applied to the CVA included in the risk weighted asset calculation applicable to each of the
three tiers of capital. In Q3 and Q4, 2014, the CVA scalars 57%, 65% and 77% were applied to CET 1, Tier 1 and Total Capital
respectively. The CVA scalars will change to 64%, 71% and 77% in fiscal 2015.
To enhance comparability among other global financial institutions, the following are our transitional capital ratios. The transitional
CET1, Tier 1 and Total capital ratios as at October 31, 2014 were 11.8%, 11.8% and 13.8% respectively. Transitional is defined as
capital calculated according to the current year’s phase-in of regulatory adjustments and phase-out of non-qualifying capital
instruments.
Assets-to-capital multiple and GAA are also calculated on a transitional basis.

Basel III regulatory capital and capital ratios
Under Basel III, regulatory capital consists of CET1, Additional Tier 1 and Tier 2 capital.
CET1 capital comprises the highest quality of capital. Regulatory adjustments under Basel III include full deductions of certain items and
additional capital components that are subject to threshold deductions.
Tier 1 capital comprises predominantly CET1 and Additional Tier 1 items including non-cumulative preferred shares. Tier 2 capital includes
subordinated debentures that meet certain criteria, certain loan loss allowances and non-controlling interests in subsidiaries’ Tier 2 instruments.
Total capital is defined as the sum of Tier 1 and Tier 2 capital. Preferred shares and subordinated debentures issued after January 1, 2013 require
NVCC features to be included into regulatory capital. For further details on NVCC, refer to the Legal and regulatory environment risk section.
Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by their respective RWA. OSFI requires Canadian banks to
maintain an ACM (which is calculated by dividing Gross-Adjusted Assets (GAA) by Total capital calculated on a Basel III transitional basis) at or
below a maximum level prescribed by OSFI. All items that are deducted from capital are excluded from total assets. As required by OSFI, we will
transition to the Basel III leverage ratio which replaces the existing ACM commencing in the first quarter of 2015.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

87

The following chart provides a summary of the major components of CET1, Additional Tier 1 and Tier 2 capital.
Total Capital
Tier 1 Capital

Threshold
Deductions(1)

Deductions

Common Equity Tier 1 (CET1)

+

Additional Tier 1 Capital

+

Tier 2 Capital

Common shares
Retained earnings
Other components of equity

Preferred shares
Non-controlling interests in subsidiaries
Tier 1 instruments

Subordinated debentures
Certain loan loss allowances
Non-controlling interests in subsidiaries
Tier 2 instruments

Goodwill and other intangibles
Deferred tax assets on loss
carryforwards
Defined benefit pension funds assets
Non-significant investments in CET1
instruments of Financial Institutions(2)

Non-significant investments in Tier 1
instruments of Financial Institutions(2)
Significant investments in other Financial
Institutions and insurance subsidiaries
Tier 1 instruments

Non-significant investments in Tier 2
instruments of Financial Institutions(2)
Significant investments in other Financial
Institutions and insurance subsidiaries
Tier 2 instruments

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

(1)

(2)

Lower quality
capital

First level: The amount by which each of the items exceeds a 10% threshold of CET1 capital (after all deductions but before threshold deductions) will be deducted from CET1
capital. Second level: The aggregate amount of the three items not deducted from the first level above and in excess of 15% of CET1 capital after regulatory adjustments will be
deducted from capital, and the remaining balance not deducted will be risk-weighted at 250%.
Non-significant investments are subject to certain CAR criteria that drive the amount eligible for deduction.

Regulatory Capital

Table 68
All-in basis
2014

(Millions of Canadian dollars)

CET1 capital: instruments and reserves and regulatory adjustments
Directly issued qualifying common share capital (and equivalent for nonjoint 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)

$

$

36,406

11
(13,408)
$

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
Other
Regulatory adjustments applied to Tier 2 under Basel III

30,541

1,000
4,794

–
6,652

2
–

3
–

5,796
$

14,607
28,124
1,207
–

12
(12,150)

Additional Tier 1 capital (AT1)

88

$

–

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
Tier 1 capital (T1 = CET1 + AT1)

14,684
31,442
2,418

2013

42,202

6,655
$

37,196

2,010
5,595

–
7,234

31
182
–
–

24
262
–
–

Tier 2 capital (T2)

$

7,818

$

7,520

Total capital (TC = T1 + T2)

$

50,020

$

44,716

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

2014 vs. 2013
Continuity of CET1 ratio (Basel III)
144 bps

15 bps

(53) bps
(38) bps
(30) bps
(9) bps

2 bps

9.9%

9.6%

October 31, 2013 (1) Internal
Threshold
capital
deductions
generation (2)

(1)
(2)

RWA
increase

Risk
parameters
update

CVA
phase-in

Amendments
to IAS 19R
Employee
Benefits

Other October 31, 2014 (1)

Represents round figures.
Internal capital generation of $4.6 billion represents Net income available to shareholders less common and preferred shares
dividends.

Our CET 1 ratio was 9.9% as at October 31, 2014, up 30 bps from October 31, 2013, mainly due to internal capital generation and lower
threshold deductions. These factors were partially offset by higher RWA reflecting business growth, an update to our risk parameters and CVA
capital charge implementation. The impact from the adoption of the amendments to IAS 19 Employee Benefits and net impact of foreign
exchange translation also decreased our CET1 ratio.
Our Tier 1 capital ratio of 11.4% was down 30 bps, mainly due to the net redemption of Additional Tier 1 instruments, higher RWA reflecting
business growth, an update to our risk parameters and CVA capital charge implementation, along with the impact from the adoption of the
amendments to IAS 19 Employee Benefits and net impact of foreign exchange translation. These factors were partially offset by internal capital
generation, lower threshold deductions, and a decrease in the phase-out of non-qualifying capital.
Our Total capital ratio of 13.4% was down 60 bps, driven by the factors noted above in respect of our Tier 1 ratio, partially offset by net
issuance of subordinated debentures.
As at October 31, 2014, our ACM (on a transitional basis) was 17.0X as compared to ACM as at October 31, 2013 of 16.6X. The increase was
mainly due to higher GAA due to business growth, net redemption of Additional Tier 1 instruments, phase-in of capital deductions, the impact
from the adoption of the amendments to IAS 19 Employee Benefits and the impact of foreign exchange translation. These factors were partially
offset by internal capital generation, a decrease in the phase-out of non-qualifying capital, and net issuance of subordinated debentures.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

89

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,
OSFI requires the minimum risk-based capital to be no less than 90% of the capital requirements as calculated under the Basel I standards. If the
capital requirement is less than 90%, a transitional adjustment to RWA must be applied as prescribed by OSFI CAR guidelines.
Total capital risk-weighted assets

Table 69
2014

As at October 31 (Millions of Canadian dollars, except
percentage amounts)

Credit risk
Lending-related and other
Residential mortgages
Other retail
Business
Sovereign
Bank

Exposure (1)

Average
of risk
weights (2)

2013
Risk-weighted assets

Standardized
approach

Advanced
approach

Other

Total

Total

$

191,905
229,594
231,982
58,453
81,477

6%
21%
55%
13%
9%

$

1,048 $
9,525 $
4,775
44,201
17,594
109,354
2,538
5,145
2,543
4,536

– $ 10,573
–
48,976
–
126,948
–
7,683
–
7,079

$

$

793,411

25%

$

28,498 $ 172,761 $

– $ 201,259

$ 168,007

$

284,715

2%

$

24 $

73,296

37%

1,447

15,116

Total trading-related

$

358,011

9%

$

1,471 $

19,980 $ 10,336 $

Total lending-related and other and
trading-related
Bank book equities
Securitization exposures
Regulatory scaling factor
Other assets

$ 1,151,422
2,035
39,936
n.a.
43,764

20%
100%
15%
n.a.
69%

$

29,969 $ 192,741 $ 10,336 $ 233,046
–
2,025
–
2,025
342
5,488
–
5,830
n.a.
11,938
–
11,938
n.a.
n.a.
30,032
30,032

$ 187,158
1,712
6,789
9,813
27,169

$ 1,237,157

23%

$

30,311 $ 212,192 $ 40,368 $ 282,871

$ 232,641

$

2,211 $
178
1,224
2,025
11,640
–

4,115 $
1,443
50
5
3,340
12,229

Total market risk

$

17,278 $

21,182 $

Operational risk

$

47,263

n.a.

CET1 capital risk-weighted assets (3)

$

94,852

233,374

–

–

$

94,852

233,374

–

–

2,074

–

$

94,852 $ 233,374 $ 43,824 $ 372,050

$ 318,981

Total lending-related and other
Trading-related
Repo-style transactions
Derivatives – including CVA – CET1
phase-in adjustment

Total credit risk
Market risk
Interest rate
Equity
Foreign exchange
Commodities
Specific risk
Incremental risk charge

Additional CVA adjustment, prescribed by
OSFI, for Tier 1 capital
Tier 1 capital risk-weighted assets (3)
Additional CVA adjustment, prescribed by
OSFI, for Total capital
Total capital risk-weighted assets (3)
(1)
(2)
(3)

$ 1,237,157

4,864 $

24 $
10,312

4,912

$

26,875
31,787

8,490
48,418
101,780
3,910
5,409

2,662
16,489

$

19,151

– $
–
–
–
–
–

6,326
1,621
1,274
2,030
14,980
12,229

$

3,361
3,330
1,661
990
21,948
10,894

– $

38,460

$

42,184

n.a. $

47,263

$

44,156

40,368 $ 368,594
1,382

$ 318,981

1,382

–

41,750 $ 369,976

$ 318,981

2,074

Total exposure represents exposure at default which is the expected gross exposure upon the default of an obligor. This amount is before any allowance against impaired loans or partial
write-offs and does not reflect the impact of credit risk mitigation and collateral held.
Represents the average of counterparty risk weights within a particular category.
Effective Q3, 2014 different scalars were applied to the CVA included in the risk weighted asset calculation applicable to each of the three tiers of capital. In Q3 and Q4, 2014, the CVA scalars
57%, 65% and 77% were applied to CET 1, Tier 1 and Total Capital respectively. The CVA scalars will change to 64%, 71% and 77% in fiscal 2015.

2014 vs. 2013
During the year, CET1 RWA was up $50 billion, mainly reflecting business growth, an update to our retail and corporate and business lending risk
parameters, the CVA capital charge implementation, and the impact of foreign exchange translation.

90

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Selected capital management activity
The following table provides our selected capital management activity for the year ended October 31, 2014.
Selected capital management activity

Table 70
2014
Issuance or
Number of
redemption date shares (000s)

(Millions of Canadian dollars, except number of shares)

Tier 1 capital
Common shares issued
Stock options exercised (1)
Purchased for cancellation
February 24, 2014
Issuance of preferred shares Series AK (2)
Issuance of preferred shares Series AZ (2), (3), (4)
January 30, 2014
Issuance of preferred shares Series BB (2), (3), (4)
June 3, 2014
Redemption of preferred shares Series AN
February 24, 2014
Redemption of preferred shares Series AP
February 24, 2014
Redemption of preferred shares Series AR
February 24, 2014
Redemption of preferred shares Series AT
August 24, 2014
Redemption of preferred shares Series AV
August 24, 2014
Redemption of TruCS 2013 (2)
December 31, 2013
Tier 2 capital
Issuance of July 17, 2024 subordinated debentures (2), (4)
July 17, 2014
Issuance of September 29, 2026 subordinated
debentures (2), (4)
September 29, 2014
Redemption of June 18, 2103 subordinated debentures (2)
June 18, 2014
Redemption of November 4, 2018 subordinated
debentures (2)
November 4, 2013
(1)
(2)
(3)
(4)

Amount

2,723 $
(1,546)
2,421
20,000
20,000
(9,000)
(11,000)
(14,000)
(11,000)
(16,000)

150
(16)
61
500
500
(225)
(275)
(350)
(275)
(400)
(900)
1,000
1,000
(600)
(1,000)

Amounts include cash received for stock options exercised during the period and the fair value adjustments to stock options.
For further details, refer to Notes 19, 20 and 21 of our 2014 Annual Consolidated Financial Statements.
Based on gross amount.
NVCC capital instruments.

Dividends
Our common share dividend policy reflects our earnings outlook, payout ratio objective and the need to maintain adequate levels of capital to
fund business opportunities. In 2014, our dividend payout ratio was 47%, which met our dividend payout ratio target of 40% to 50%. Common
share dividends paid during the year were $4.1 billion.
Selected share data (1)

Table 71
2014

(Millions of Canadian dollars, except
number of shares)

Number of
shares
(000s)

Common shares outstanding
1,442,233 $14,511 $
First preferred shares outstanding
Non-cumulative Series W (2)
12,000
300
Non-cumulative Series AA
12,000
300
Non-cumulative Series AB
12,000
300
Non-cumulative Series AC
8,000
200
Non-cumulative Series AD
10,000
250
Non-cumulative Series AE
10,000
250
Non-cumulative Series AF
8,000
200
Non-cumulative Series AG
10,000
250
Non-cumulative Series AH
–
–
Non-cumulative Series AJ (3)
13,579
339
Non-cumulative Series AK (3)
2,421
61
Non-cumulative Series AL (3)
12,000
300
–
–
Non-cumulative Series AN (3)
Non-cumulative Series AP (3)
–
–
Non-cumulative Series AR (3)
–
–
–
–
Non-cumulative Series AT (3)
Non-cumulative Series AV (3)
–
–
Non-cumulative Series AX (3)
13,000
325
20,000
500
Non-cumulative Series AZ (3), (4)
Non-cumulative Series BB (3), (4)
20,000
500
Treasury shares – preferred
1
–
Treasury shares – common
892
71
Stock options
Outstanding
8,579
Exercisable
4,987
Dividends
Common
4,097
Preferred
213
(1)
(2)
(3)
(4)

2013

Dividends
declared
Amount per share

2.84
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
–
0.97
0.53
1.15
0.39
0.39
0.39
1.17
1.17
1.53
0.50
0.46

Number of
shares
(000s)

1,441,056 $ 14,377 $
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
–
16,000
–
12,000
9,000
11,000
14,000
11,000
16,000
13,000
–
–
47
666

2012

Dividends
declared
Amount per share

300
300
300
200
250
250
200
250
–
400
–
300
225
275
350
275
400
325
–
–
1
41

2.53
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
0.86
1.25
–
1.40
1.56
1.56
1.56
1.56
1.56
1.53
–
–

10,604
5,711

Number of
shares
(000s)

Dividends
declared
Amount per share

1,445,303 $ 14,323 $
12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
8,500
16,000
–
12,000
9,000
11,000
14,000
11,000
16,000
13,000
–
–
42
543

300
300
300
200
250
250
200
250
213
400
–
300
225
275
350
275
400
325
–
–
1
30

2.28
1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
1.41
1.25
–
1.40
1.56
1.56
1.56
1.56
1.56
1.53
–
–

12,304
6,544
3,651
253

3,291
258

For further details about our capital management activity, refer to Note 21 of our Annual Consolidated Financial Statements.
Effective February 24, 2010, we have the right to convert into common shares at our option, subject to certain restrictions.
Dividend rate will reset every five years.
NVCC capital instruments.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

91

On October 27, 2014, we announced that the TSX approved our normal course issuer bid (NCIB) to purchase up to 12 million of our common
shares, commencing on November 1, 2014 and which may continue until October 31, 2015. Purchases may be made through the TSX, the NYSE
and other designated exchanges and published markets in both Canada and the U.S. The price paid for any repurchased shares will be the
prevailing market price at the time of acquisition. We determine the amount and timing of the purchase under the NCIB, subject to prior
consultation with OSFI. As at December 2, 2014, we have not purchased any shares under the 2015 NCIB.
Our previous NCIB commenced on November 1, 2013 and expired on October 31, 2014. Over the term of the previous bid, we purchased
1.5 million of our common shares. The total cost of the shares repurchased was $113 million, comprised of a book value of $16 million, with an
additional $97 million premium paid on repurchase.
On November 14, 2014, all $200 million outstanding 10% subordinated debentures matured. The maturity proceeds plus accrued interest
were paid to the noteholders on the maturity date.
On November 24, 2014, we redeemed all outstanding Non-cumulative 5-Year Rate Reset First Preferred Shares Series AX. The redemption
was financed out of general corporate funds.
As at November 28, 2014, the number of outstanding common shares and stock options was 1,442,238,852 and 8,573,404, respectively.
As at November 28, 2014, the number of Treasury shares – preferred and Treasury shares – common was (67,007) and (442,349), respectively.
NVCC provisions require the conversion of our capital instruments into a variable number of common shares in the event that OSFI deems
the Bank to be non-viable or a federal or provincial government in Canada publicly announces that the Bank has accepted or agreed to accept a
capital injection. If a NVCC trigger event were to occur, our NVCC capital instruments preferred shares Series AZ, preferred shares Series BB,
subordinated debentures due on July 17, 2024 and subordinated debentures due on September 29, 2026 would be converted into RBC common
shares pursuant to an automatic conversion formula with a conversion price based on the greater of: (i) a 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 812 million RBC common shares,
on aggregate, which would represent a dilution impact of 36.01% based on the number of RBC common shares outstanding as at October 31,
2014.
Attributed capital
Our methodology for allocating capital to our business segments is based on the higher of fully diversified economic capital and the Basel III
regulatory capital requirements. Risk-based capital attribution provides a uniform base for performance measurement among business
segments, which compares to our overall corporate return objective and facilitates management decisions in resource allocation in conjunction
with other factors.
Attributed capital is calculated and attributed on a wider array of risks compared to Basel III regulatory capital requirements, which are
calibrated predominantly to target credit, market (trading) and operational risk measures. Economic capital is our internal quantification of risks
associated with business activities which is the capital required to remain solvent under extreme market conditions, reflecting our objective to
maintain strong credit ratings. Economic capital is calculated based on credit, market (trading and non-trading), operational, business and fixed
asset, and insurance risks, along with capital attribution for goodwill and other intangibles. The common risks between the two frameworks are
aligned to reflect increased regulatory requirements.
•
Business risk is the risk of loss or harm due to variances in volumes, prices and costs caused by competitive forces, regulatory changes,
reputation and strategic risks.
•
Fixed asset risk is defined as the risk that the value of fixed assets will be less than their book value at a future date.
For further discussion on Credit, Market, Operational and Insurance risks, refer to the Risk management section.
Attributed capital is also used to assess the adequacy of our capital base. Our policy is to maintain a level of available capital, defined as
common equity and other capital instruments with equity-like loss absorption features such as preferred shares that exceed Economic capital
with a comfortable cushion.
The calculation and attribution of capital involves a number of assumptions and judgments by management which are monitored to ensure
that the economic capital framework remains comprehensive and consistent. The models are benchmarked to leading industry practices via
participation in surveys, reviews of methodologies and ongoing interaction with external risk management industry professionals.
The following outlines our attributed capital.
Attributed capital

Table 72
2014

(Millions of Canadian dollars)

13,800
3,900
4,300
2,750
500
11,350
4,150

$

11,800
3,300
4,050
2,650
500
10,750
3,400

Attributed capital
Under attribution of capital (1)

$

40,750
4,950

$

36,450
4,150

Average common equity

$

45,700

$

40,600

(1)

92

2013

$

Credit risk
Market risk (trading and non-trading)
Operational risk
Business and fixed asset risk
Insurance risk
Goodwill and other intangibles
Regulatory capital allocation

Comparative amount has been restated to reflect the adoption of the amendments to IAS 19 Employee benefits.

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

2014 vs. 2013
Attributed capital increased $4.3 billion largely due to an increase in Credit risk reflecting business growth, an update to our risk parameters, and
the impact of foreign exchange translation. Market risk increased mainly due to an increase in non-trading interest rate risk and the introduction
of structural foreign exchange risks in the first quarter of 2014. Operational and business risks increased due to higher gross revenue. Goodwill
and other intangibles risk increased mainly as a result of the impact of foreign exchange translation.
We remain well capitalized with current levels of available capital exceeding the attributed capital required to underpin all of our material
risks. For further details on the additional capital, refer to table 66 which provides a summary of OSFI regulatory target ratios.
Attributed capital in the context of our business activities
In carrying out our business activities, we are exposed to a range of risks. The following chart provides a high level view of risks within our
business segments, which includes credit, market and operational risks. We have used attributed capital to illustrate the relative size of the risks
in each of our businesses. The attributed capital distribution reflects the diversified nature of our business activities. RWA represents our
exposure to credit, market and operational risk for regulatory capital requirement.
Within Personal & Commercial Banking, credit risk is the most significant risk, largely related to our personal financial services, business
financial services and cards businesses. The primary risks within Wealth Management, which provides services to institutional and individual
clients, are operational risk and credit risk. Risks within our Insurance operations are primarily related to insurance risk in our life, health, home
and auto businesses followed by market risk and operational risk. The largest risk within Investor & Treasury Services is credit risk, followed by
market risk and operational risk. The most significant risk within Capital Markets is credit risk, followed by market risk. For additional information
on the risks highlighted below, refer to the Risk management section.

Royal Bank of
Canada

(1)
(2)
(3)

(4)
(5)
(6)

Attributed capital (1)
Credit
30%
9
Market (2)
Operational
9
Goodwill and other
intangibles
25
27
Other (3)

RWA (C$ millions) (4)
Credit
$282,871
Market
38,460
Operational
47,263

Personal &
Commercial
Banking

Wealth
Management

Insurance

Investor &
Treasury Services

Capital Markets

Attributed capital (1)
Credit
44%
3
Market (2)
Operational
11
Goodwill and other
intangibles
31
Other (5)
11

Attributed capital (1)
Credit
6%
2
Market (2)
Operational
14
Goodwill and other
intangibles
71
Other (5)
7

Attributed capital (1)
Credit
13%
21
Market (2)
Operational
13
Goodwill and other
intangibles
9
Other (5)
44

Attributed capital (1)
Credit
27%
Market (2)
21
Operational
13
Goodwill and other
intangibles
25
Other (5)
14

Attributed capital (1)
Credit
41%
18
Market (2)
Operational
8
Goodwill and other
intangibles
7
Other (5)
26

RWA (C$ millions) (4)
Credit
$118,901
Market
119
Operational
20,719

RWA (C$ millions) (4)
Credit
$13,512
Market
869
Operational
8,658

RWA (C$ millions) (6)
Credit
$7,286
Market
14
Operational
1

RWA (C$ millions) (4)
Credit
$12,083
Market
7,667
Operational
3,507

RWA (C$ millions) (4)
Credit
$124,850
Market
29,522
Operational
13,542

Attributed capital: An estimate of the amount of equity capital required to underpin risks. It is calculated by estimating the level of capital that is necessary to support our various business,
given their risks, consistent with our desired solvency standard and credit ratings.
Market risk attributed capital: An estimate of the amount of equity capital required to underpin trading market risk and interest rate risk.
Other – RBC: Includes (a) an estimate of the amount of equity capital required to underpin risks associated with business, fixed assets and insurance risks; (b) a regulatory capital adjustment
since attributed capital is determined at the higher of regulatory or economic capital; and (c) unattributed capital reported representing common equity in excess of common equity attributed
to our business segments which is reported in the Corporate Support segment only.
RWA amount above represents RWA for CET1.
Other – Business segments: Includes (a) An estimate of the amount of equity capital required to underpin risks associated with business, fixed assets and insurance risks; and (b) a
regulatory capital adjustment since attributed capital is determined at the business segment level as the greater of regulatory or economic capital.
Insurance RWA amount above represents our investments in the insurance subsidiaries capitalized at the regulatory prescribed rate as required under Basel CAR filing.

Subsidiary capital
Our capital management framework includes the management of our subsidiaries capital. We invest capital across the enterprise to meet local
regulators’ capital adequacy requirements and maximize returns to our shareholders. We invest in our subsidiaries as appropriate during the
year. We set guidelines for defining capital investments in our subsidiaries and manage the relationship between capital invested in subsidiaries
and our consolidated capital base to ensure that we can access capital recognized in our consolidated regulatory capital measurements.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

93

Each of our subsidiaries has responsibility for maintaining its compliance with local regulatory capital adequacy requirements, which may
include restrictions on the transfer of assets in the form of cash, dividends, loans or advances. Concurrently, Corporate Treasury provides
centralized oversight and consolidated capital management across all subsidiary entities.
Other considerations affecting capital
Capital treatment for equity investments in other entities is determined by a combination of accounting and regulatory guidelines based on the
size or nature of the investment. Three broad approaches apply as follows:
•
Consolidation: entities which we control are consolidated on our Consolidated Balance Sheets.
•
Deduction: certain holdings are deducted in full from our regulatory capital. These include all unconsolidated “substantial investments,” as
defined by the Bank Act (Canada) in the capital of financial institutions, as well as all investments in insurance subsidiaries.
•
Risk weighting: unconsolidated equity investments that are not deducted from capital are risk weighted at a prescribed rate for determination of capital charges.
Regulatory capital approach for securitization exposures
For our securitization exposures, we use an internal assessment approach (IAA) for exposures related to our ABCP business, and for other
securitization exposures we use a combination of approaches including a ratings-based approach and the standardized approach.
While our IAA rating methodologies are based in large part on criteria that are published by External Credit Assessment Institutions (ECAIs)
such as S&P and therefore are similar to the methodologies used by these institutions, they are not identical. Our ratings process includes a
comparison of the available credit enhancement in a securitization structure to a stressed level of projected losses. The stress level used is
determined by the desired risk profile of the transaction. As a result, we stress the cash flows of a given transaction at a higher level in order to
achieve a higher rating. Conversely, transactions that only pass lower stress levels achieve lower ratings.
Most of the other securitization exposures (non-ABCP) carry external ratings and we use the lower of our own rating or the lowest external
rating for determining the proper capital allocation for these positions. We periodically compare our own ratings to ECAIs ratings to ensure that
the ratings provided by ECAIs are reasonable.
GRM has responsibility 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.
Additional financial information
Exposures to selected financial instruments
Exposure to U.S. subprime and Alt-A through RMBS, CDOs and mortgages

Table 73
2014

2013

As at October 31 (Millions of Canadian dollars)

CDOs
that may
contain
Subprime Alt-A subprime
RMBS RMBS
or Alt-A

Fair value of securities

$

157 $ 188 $

$

1 $
– $
19
4
66
3
25
–
46
181

$

157 $ 188 $

Fair value of securities by rating
AAA
AA
A
BBB
Below BBBTotal
Fair value of securities by vintage
2003 (or before)
2004
2005
2006
2007 and later

$

Total

$

Amortized cost of subprime/Alt-A mortgages (whole loans)

$

Total subprime and Alt-A exposures

$

– $
4
58
73
22

23 $
19
67
68
11

157 $ 188 $
10 $

41 $

167 $ 229 $

Total

Subprime
RMBS

– $ 345 $
–
–
–
–
–

CDOs
that may
contain
Alt-A subprime
RMBS
or Alt-A

205 $ 221 $

$

8 $
8 $
36
19
16
25
51
11
94
158

– $ 345 $

205 $ 221 $

–
–
–
–
–

$

– $ 345 $
– $

51 $

– $ 396 $

1 $
4
94
38
68

25 $
43
63
64
26

205 $ 221 $
7 $

26 $

212 $ 247 $

Total

15 $ 441
–
–
–
–
15
15 $ 441
–
–
15
–
–
15 $ 441
– $

33

15 $ 474

Sensitivities of fair value of securities to changes in assumptions:
100bps increase in credit spread
100bps increase in interest rates
20% increase in default rates
25% decrease in prepayment rates

$

(4) $ (8)
(1)
(18)
(2)
(2)
(2)
6

Certain activities and transactions we enter into expose us to the risk of default of U.S. subprime and Alt-A residential mortgages. Our exposures
to U.S. subprime and Alt-A residential mortgages of $396 million represented less than 0.1% of our total assets as at October 31, 2014,
compared to $474 million or 0.1% last year. The decrease of $78 million was primarily due to the sale of securities.
94

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

2014 vs. 2013
Our total holdings of RMBS noted in the table above may be exposed to U.S. subprime risk. As at October 31, 2014, our U.S. subprime RMBS
exposure of $157 million decreased $48 million or 23% from last year, primarily due to the sale of certain securities. Of this exposure, $86
million or 55% of our related holdings were rated A and above, an increase of $26 million from last year due to the purchase of certain securities.
As at October 31, 2014, U.S. subprime RMBS holdings rated AAA comprised 1% of our total U.S. subprime RMBS holdings compared with
4% last year, primarily due to the sale of certain securities. As at October 31, 2014, our exposure to U.S. subprime loans of $10 million increased
$3 million, largely reflecting the purchase of certain securities.
Of our total portfolio of RMBS, holdings with a fair value of $188 million may be exposed to U.S. Alt-A risk. U.S. Alt-A exposures, decreased
$33 million from last year, with approximately 42% issued during 2006 and onwards, which compares to 41% last year. As at October 31, 2014,
our exposure to U.S. Alt-A loans of $41 million increased $15 million from last year due to the purchase of certain securities.
Of our total portfolio of CDOs, we have no holdings that are exposed to U.S. subprime or Alt-A risk. As at October 31, 2014, the fair value of
our corporate CDOs, which were predominantly comprised of $812 million of corporate collateralized loan obligations, decreased $600 million
from last year mainly due to the redemption of certain securities.
Off-balance sheet arrangements
For details on our off-balance sheet arrangements including multi-seller conduits, structured investment vehicles and other variable interest
entities as at October 31, 2014, refer to the Off-balance sheet arrangements section.
Leveraged finance
Leveraged lending involves the provision of debt financing to borrowers where proceeds are generally used to finance equity buyouts, mergers
and acquisitions, business recapitalizations, and include bridge facilities that meet certain leverage criteria. We revised our definition during the
year as we previously defined leveraged finance as primarily being related with a financial sponsor-related entity. This definition is subject to
refinement moving forward. As at October 31, 2014, our total commitments, including funded and unfunded amounts, were $16.4 billion.
Commercial mortgage-backed securities
The fair value of our total direct holdings of commercial mortgage-backed securities was $115 million as at October 31, 2014.
Assets and liabilities measured at fair value
Our financial instruments carried at fair value are classified as Level 1, 2, or 3, in accordance with the fair value hierarchy set out in IFRS 13 Fair
Value Measurement. For further details on the fair value of our financial instruments and transfers between levels of the fair value hierarchy, refer
to Note 3 of our 2014 Annual Consolidated Financial Statements.
The following table presents the total fair value of each major class of financial assets and financial liabilities measured at fair value and the
percentage of the fair value of each class categorized as Level 1, 2, or 3 as at October 31, 2014.
Assets and liabilities measured at fair value

Table 74
As at October 31, 2014

(Millions of Canadian dollars, except percentage amounts)

Financial assets
Securities at FVTPL
Available-for-sale
Assets purchased under reverse
repurchase agreements and securities
borrowed
Loans – Wholesale
Derivatives
Financial liabilities
Deposits
Obligations related to securities
sold short
Obligations related to assets sold under
repurchase agreements and securities
loaned
Derivatives
(1)

Fair value (1)
$ 151,380
45,995

85,292
3,615
144,470
$

79,439

Level 1 (1)

Level 2 (1)

43%
17

0
0
2

56%
74

100
87
97

0%

Level 3 (1)

Total

1% 100%
9
100

0
13
1

100
100
100

99%

1% 100%

50,345

65

35

0

100

58,411
145,964

0
2

100
97

0
1

100
100

The derivative assets and liabilities presented in the table above do not reflect the impact of netting.

Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies and estimates
Our significant accounting policies are described in Note 2 to our 2014 Annual Consolidated Financial Statements. Certain of these policies, as
well as estimates made by management in applying such policies, are recognized as critical because they require us to make particularly
subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that significantly different amounts
could be reported under different conditions or using different assumptions. Our critical accounting policies and estimates relate to the fair value
of financial instruments, allowance for credit losses, goodwill and other intangible assets, employee benefits, consolidation, derecognition of
financial assets, 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, estimates and judgments.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

95

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 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 adequacy of governance structures and control processes for these instruments.
We have established policies, procedures and controls for valuation methodologies and techniques to ensure fair value is reasonably
estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition, independent price verification
(IPV) and model validation standards. These control processes are managed by either Finance or Group Risk Management and are independent
of the relevant businesses and their trading functions. Profit and loss decomposition is a process to explain the fair value changes of certain
positions and is performed daily for trading portfolios. All fair value instruments are subject to IPV, a process whereby trading function valuations
are verified against external market prices and other relevant market data. Market data sources include traded prices, brokers and price vendors.
Other valuation techniques are used when a price or quote is not available. Some valuation processes use valuation models to determine fair
value. We have a systematic and consistent approach to control model use. 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. One significant model control is the validation process. The purpose of model validation is to ensure that a model is
suitable for its intended use and to set limitations for its use. All models are re-validated regularly.
Other controls include the use of a documented third-party pricing source list. The third-party pricing source list gives priority to those
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.
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 instruments not traded in an active market, fair value is determined using a valuation technique that maximizes the use of
observable market inputs to the extent available. 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 an arm’s
length 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.
We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences between the
overnight index swap (OIS) curve and London Interbank Offered Rates (LIBOR) 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, bidoffer spreads and unobservable parameters. These adjustments may be subjective as they require significant judgment in the input selection,
such as probability of default and recovery rate, and are intended to arrive at 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 is
previously estimated using management judgment, and 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 the transactions,
and the effects of credit mitigants such as master netting and collateral agreements. CVA amounts are derived from estimates of exposure at
default, probability of default, recovery rates on a counterparty basis, and market and credit factor correlations. Exposure at default is the
amounts of expected derivative related assets and liabilities at the time of default, estimated through modeling using underlying risk factors.
Probability of default and recovery rate are generally implied from the market prices for credit protection and credit ratings of the counterparty.
Correlation is the statistical measure of how credit and market factors may move in relation to one another. Correlation is estimated using
historical data and market data where available. CVA is calculated daily and changes are recorded in Non-interest income – Trading revenue.
In the determination of fair value of collateralized OTC derivatives using the OIS curve, our valuation approach accounts for the difference
between certain OIS rates and LIBOR for derivatives valuation as valuation adjustments.
FVA are also 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.
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 to either the bid or offer
price.
Some valuation models require parameter calibration from such factors as market observed 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.

96

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

We classify our financial instruments measured at fair value on a recurring basis into three levels based on the transparency of the inputs
used to measure the fair values of the instruments. As at October 31, 2014, Level 2 instruments, whose fair values are based on observable
inputs, include $355 billion of financial assets (2013 – $296 billion) and $296 billion of financial liabilities (2013 – $234 billion). These
amounts represent 81% of our total financial assets at fair value (2013 – 79%) and 89% of our total financial liabilities at fair value (2013 – 85%
respectively. Level 3 instruments, whose valuations include significant unobservable inputs, include $6 billion of financial assets (2013 –
$8 billion) and $2 billion of financial liabilities (2013 - $8 billion), representing 1% of our total financial assets at fair value (2013 – 2% and 1%
of our total financial liabilities at fair value (2013 – 3%), respectively.
At each reporting date or more frequently when conditions warrant, we evaluate our AFS securities to determine whether there is any
objective evidence of impairment, such as a significant or prolonged decline in the fair value of the security below its cost or when an adverse
effect on future cash flows from the security can be reliably estimated. When assessing impairment for debt instruments we primarily considered
counterparty ratings and security-specific factors, including collateral, external ratings, subordination and other market factors. For complex debt
instruments including U.S. non-agency MBS, ABS and other structured products, we also use cash flow projection models which incorporate
actual and projected cash flows for each security using a number of assumptions and inputs that are based on security specific factors. The
inputs and assumptions used such as default, prepayment and recovery rates are based on updated market data. For U.S. non-agency MBS,
recovery rates are largely dependent upon forecasted property prices which were assessed at the municipal level, provided by a third-party
vendor. In addition, we also consider the transaction structure and credit enhancement for the structured securities. If the result indicates that
we will not be able to recover the entire principal and interest amount, we do a further review of the security in order to assess whether a loss
would ultimately be realized. As equity securities do not have contractual cash flows, they are assessed differently than debt securities. In
assessing whether there is any objective evidence that suggests that the security is impaired we consider factors which include the length of
time and extent the fair value has been below the cost and the financial condition and near term prospects of the issuer. We also consider the
estimated recoverable value and the period of recovery. We conduct further analysis for securities where the fair value had been below cost for
greater than twelve months. If an AFS security is impaired, the cumulative unrealized losses previously recognized in Other components of equity
are recognized directly in income under Non-interest income. As at October 31, 2014, our gross unrealized losses on AFS securities were
$181 million (2013 – $293 million). Refer to Note 3 to our 2014 Annual Consolidated Financial Statements for more information.
Allowance for credit losses
We maintain allowance for credit losses relating to on-balance sheet exposures, such as loans and acceptances, and off-balance sheet items
such as letters of credit, guarantees and unfunded commitments, at levels that management considers appropriate to cover credit related losses
incurred as at the balance sheet date.
Allowances are determined individually for loans that are individually significant, and collectively for loans that are not individually
significant and loans which are significant but for which there is no objective evidence of impairment, using current and historical credit
information in both quantitative and qualitative assessments. For further information on allowance for credit losses, refer to Note 5 to our 2014
Annual Consolidated Financial Statements.
Individually assessed loans
Loans which are individually significant are assessed individually for objective indicators of impairment. A loan is considered impaired when
management determines that it will not be able to collect all amounts due according to the original contractual terms or the equivalent value.
Credit exposures of individually significant loans are evaluated based on factors including the borrower’s overall financial condition,
resources and payment record, and where applicable, the realizable value of any collateral. If there is evidence of impairment leading to an
impairment loss, then the amount of the loss is recognized in income and is determined as the difference between the carrying amount of the
loan, including accrued interest, and the estimated recoverable amount. The estimated recoverable amount is measured as the present value of
expected future cash flows discounted at the loan’s original effective interest rate, including cash flows that may result from the realization of
collateral less costs of disposal.
Collectively assessed loans
Loans which are not individually significant, or which are individually assessed and not determined to be impaired, are collectively assessed for
impairment. For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar risk characteristics, taking into
account loan type, industry, geographic location, collateral type, past due status and other relevant factors.
The collective impairment allowance is determined by reviewing factors including: (i) historical loss experience, which takes into
consideration historical probabilities of default, loss given default and exposure at default, in portfolios of similar credit risk characteristics, and
(ii) management’s judgment on the level of impairment losses based on historical experience relative to the actual level as reported at the
balance sheet date, taking into consideration the current portfolio credit quality trends, business and economic and credit conditions, the impact
of policy and process changes, and other supporting factors. Future cash flows for a group of loans are collectively evaluated for impairment on
the basis of the contractual cash flows of the loans in the group and historical loss experience for loans with credit risk characteristics similar to
those in the group. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not
affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not
currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience.
Write-off of loans
Loans and the related impairment allowance for credit losses are written off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realization of the collateral. In
circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery,
write off may be earlier. For credit cards, the balances and related allowance for credit losses are written off when payment is 180 days in arrears.
Personal loans are generally written off at 150 days past due.
Total allowance for credit losses
Based on the procedures discussed above, management believes that the total allowance for credit losses of $2,085 million is adequate to
absorb estimated credit losses incurred in the lending portfolio as at October 31, 2014 (2013 – $2,050 million). This amount includes
$91 million (2013 – $91 million) classified in Provisions under Other Liabilities on our Consolidated Balance Sheets, which relates to off-balance
sheet and other items.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

97

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. A CGU’s recoverable amount is the higher of its fair value less cost of disposal and its value in use. The carrying amount of a
CGU comprises the carrying amount of assets, liabilities, and goodwill allocated to the CGU. When the carrying value of a CGU exceeds its
recoverable amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the
other assets of the CGU proportionally based on the carrying amount of each asset. Any impairment charge is recognized in income in the period
it is identified. Subsequent reversals of goodwill impairment are prohibited.
We estimate the value in use and fair value less costs of disposal of our CGUs primarily using a discounted cash flow method which
incorporates each CGU’s internal forecasts of revenues and expenses. Significant management judgment is applied in the determination of
expected future cash flows (uncertainty in timing and amount), discount rates (based on CGU-specific risks) and terminal growth rates.
CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk, devaluation risk and government
regulation), currency risk and price risk (including product pricing risk and inflation). If the forecast earnings and other assumptions in future
periods deviate significantly from the current amounts used in our impairment testing, the value of our goodwill could become impaired.
Other intangible assets with a finite life are amortized on a straight-line basis over their estimated useful lives as follows: computer software
– 3 to 10 years and customer relationships – 10 to 20 years. They are tested for impairment when 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.
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 recognized. 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.
As at October 31, 2014, we had $8.6 billion of goodwill (2013 – $8.3 billion) and $2.8 billion of other intangible assets (2013 –
$2.8 billion). For further details, refer to Notes 2 and 10 to our 2014 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. The discount rate assumption is determined using spot
rates from a derived Aa corporate bond yield curve for our Canadian pension and other post-employment plans, and spot rates from an Aa
corporate bond yield curve for our International pension and other post-employment plans. All other assumptions are determined by
management, applying significant judgment, 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 to our 2014 Annual Consolidated Financial Statements.
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have
rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee.
We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the
entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual
arrangements.
We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining whether we are acting
as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following
factors: (i) the scope of our decision making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and
(iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances,
different factors and conditions may indicate that various 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 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.
Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate component of
equity which is distinct from our shareholders’ equity. The net income attributable to non-controlling interests is separately disclosed in our
Consolidated Statements of Income.
For further details, refer to Off-balance sheet arrangements and Note 7 to our Annual Consolidated Financial Statements.
Derecognition of financial assets
We periodically enter into transactions in which we transfer financial assets such as loans or packaged mortgage-backed securities (MBS) to
structured entities or trusts that issue securities to investors. We derecognized the assets when our contractual rights to the cash flows from the
assets have expired, when we retain the rights to receive the cash flows but assume an obligation to pay those cash flows to a third party subject
to certain pass-through requirements, or when we transfer our contractual rights to receive the cash flows and substantially all of the risks and
rewards of the assets have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the transferred
assets are not derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When we neither
retain nor transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets is
relinquished. If we retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing
involvement. Management’s judgment is applied in determining whether we have transferred or retained substantially all risk and rewards of
ownership of the transferred financial asset.

98

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

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 these 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. As at October 31, 2014, the
carrying and fair values of the transferred assets that do not qualify for derecognition were $101 billion and $101 billion, respectively (2013 –
$104 billion and $103 billion), and the carrying and fair values of the associated liabilities totalled $101 billion and $102 billion, respectively
(2013 – $103 billion and $104 billion). For further information on derecognition of financial assets, refer to Note 6 to our 2014 Annual
Consolidated Financial Statements.
Income Taxes
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different
interpretations by us and the relevant taxation authority. Management’s judgment is applied in the interpretation of the relevant tax laws and in
the estimation of the provision for current and deferred income taxes, including the expected timing and amount of the realization. A deferred tax
asset or liability is determined for each temporary difference based on the tax rates that are expected to be in effect in the period that the asset is
realized or the liability is settled. Where the temporary differences will not reverse in the foreseeable future, no deferred tax amount is recognized.
On a quarterly basis, we review whether it is probable that the benefits associated with our deferred tax assets will be realized, using both
positive and negative evidence. Refer to Note 24 to our 2014 Annual Consolidated Financial Statements for further information.
Changes in accounting policies and disclosure
We have adopted several new and amended IFRS standards effective November 1, 2013. These new and amended standards include IFRS 10
Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 Separate Financial
Statements, IAS 28 Investments in Associates and Joint Ventures, IFRS 13 Fair Value Measurement, IAS 19 Employee Benefits, IFRS 7
Disclosure – Offsetting Financial Assets and Financial Liabilities, and the own credit provisions of IFRS 9 Financial Instruments. Refer to Note 2 to
our 2014 Annual Consolidated Financial Statements for details of these changes.
Future changes in accounting policies and disclosure
Effective November 1, 2014, we will adopt amendments to IAS 32 Financial Instruments: Presentation and IFRS Interpretations Committee
Interpretation 21 Levies. Refer to Note 2 to our 2014 Annual Consolidated Financial Statements for details of the new standards. The adoption of
these new or amended standards is not expected to have a material impact 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 Administrative Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
As of October 31, 2014, management evaluated, under the supervision of and with the participation of the President and Chief Executive
Officer and the Chief Administrative Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as defined
under rules adopted by the United States Securities and Exchange Commission. Based on that evaluation, the President and Chief Executive
Officer and the Chief Administrative Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
October 31, 2014.
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 GAAP. However, because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements on a timely basis. See Management’s Report on Internal Control over Financial Reporting and the Report of
Independent Registered Public Accounting Firm.
No changes were made in our internal control over financial reporting during the year ended October 31, 2014, 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, 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 28 of our 2014 Annual
Consolidated Financial Statements.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

99

Supplementary information
Net interest income on average assets and liabilities

Table 75

Average balances
(Millions of Canadian dollars, except for percentage
amounts)

Assets
Deposits with other banks (2)
Canada
U.S.
Other International
Securities
Trading
Available-for-sale
Asset purchased under reverse
repurchase agreements and
securities borrowed
Loans (2), (3)
Canada
Retail
Wholesale
U.S.
Other International

$

2014

2013

1,692 $
540
5,227
7,459

1,355 $
426
7,370
9,151

2012 (1)

1,104 $
899
3,496
5,499

2014

61 $
1
14
76

2013

57 $
4
13
74

Average rate
2012 (1)

2014

2013

2012 (1)

30
8
16
54

3.61%
0.19
0.27
1.02%

4.21%
0.94
0.18
0.81%

2.72%
0.89
0.46
0.98%

149,920
43,047
192,967

137,064
37,809
174,873

122,573
36,838
159,411

3,322
671
3,993

3,113
666
3,779

3,027
811
3,838

2.22
1.56
2.07

2.27
1.76
2.16

2.47
2.20
2.41

136,857

123,766

103,042

971

941

937

0.71

0.76

0.91

314,159
54,681
368,840
28,402
25,067
422,309
759,592

301,887
50,248
352,135
22,691
21,129
395,955
703,745

292,899
37,204
330,103
18,802
14,251
363,156
631,108

12,245
2,721
14,966
888
1,125
16,979
22,019

12,077
2,486
14,563
776
1,015
16,354
21,148

11,961
2,180
14,141
702
1,097
15,940
20,769

3.90
4.98
4.06
3.13
4.49
4.02
2.90

4.00
4.95
4.14
3.42
4.80
4.13
3.01

4.08
5.86
4.28
3.73
7.70
4.39
3.29

9,322
—
—
—
8,617
—
—
—
153,953
—
—
—
803,000 $ 22,019 $ 21,148 $ 20,769

—
—
—
2.43%

—
—
—
2.48%

—
—
—
2.59%

Total interest-earning assets
Non-interest-bearing deposits with
other banks
13,495
11,511
Customers’ liability under acceptances
10,725
9,663
Other assets (2)
122,688
127,081
Total assets
$ 906,500 $ 852,000 $
Liabilities and shareholders’ equity
Deposits (2), (4)
Canada
415,509
375,864
U.S.
50,459
43,076
Other International
54,267
48,953
520,235
467,893
Obligations related to securities sold
short
50,548
48,979
Obligations related to assets sold
under repurchase agreements and
securities loaned
68,594
70,881
Subordinated debentures
6,632
8,216
Other interest-bearing liabilities
251
484
Total interest-bearing liabilities
646,260
596,453
Non-interest-bearing deposits
72,867
69,823
Acceptances
10,725
9,663
Other liabilities (2)
124,643
129,118
Total liabilities
$ 854,495 $ 805,057 $
Equity

Interest

5,416
158
299
5,873

5,242
169
283
5,694

5,368
209
471
6,048

1.30%
0.31
0.55
1.13

1.39%
0.39
0.58
1.22

1.54%
0.53
1.24
1.42

43,080

1,494

1,579

1,584

2.96

3.22

3.68

55,369
278
279
327
8,156
246
336
360
429
12
11
11
533,455
7,903
7,899
8,330
64,179
—
—
—
8,617
—
—
—
154,108
—
—
—
760,359 $ 7,903 $ 7,899 $ 8,330

0.41
3.71
4.78
1.22
—
—
—
0.92%

0.39
4.09
2.27
1.32
—
—
—
0.98%

0.59
4.41
2.56
1.56
—
—
—
1.10%

n.a.

n.a.

n.a.

n.a.

Total liabilities and shareholders’
equity

$ 906,500 $ 852,000 $ 803,000 $ 7,903 $ 7,899 $ 8,330

0.87%

0.93%

1.04%

Net interest income and margin

$ 906,500 $ 852,000 $ 803,000 $ 14,116 $ 13,249 $ 12,439

1.56%

1.56%

1.55%

Net interest income and margin
(average earning assets)
Canada
U.S.
Other International
Total

$ 497,436 $ 471,448 $
135,876
116,016
126,280
116,281
$ 759,592 $ 703,745 $

2.24%
1.40
0.87
1.86%

2.32%
1.38
0.59
1.88%

2.35%
1.49
0.76
1.97%

(1)
(2)
(3)
(4)

100

52,005

349,053
39,255
38,113
426,421

46,943

42,641

—

n.a.

441,562 $ 11,121 $ 10,956 $ 10,357
87,845
1,896
1,603
1,308
101,701
1,099
690
774
631,108 $ 14,116 $ 13,249 $ 12,439

On a continuing operations basis.
In 2012, we reclassified cash collateral for 2012 and 2011 paid from Interest bearing deposits with banks and Loans-wholesale to Other assets and cash collateral received from Deposits to
Other liabilities.
Interest income includes loan fees of $516 million (2013 – $509 million; 2012 – $467 million).
Deposits include savings deposits with average balances of $133 billion (2013 – $124 billion; 2012 – $109 billion), interest expense of $.7 billion (2013 – $.7 billion; 2012 – $.6 billion) and
average rates of .5% (2013 – .6%; 2012 – .6%). Deposits also include term deposits with average balances of $302 billion (2013 – $273 billion; 2012 – $264 billion), interest expense of
$4.4 billion (2013 – $4.3 billion; 2012 – $4.6 billion) and average rates of 1.47% (2013 – 1.57%; 2012 – 1.74%).

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

Change in net interest income

Table 76

(Millions of Canadian dollars)

Assets
Deposits with other banks (3)
Canada (4)
U.S. (4)
Other international (4)
Securities
Trading
Available-for-sale
Asset purchased under reverse repurchase agreements
and securities borrowed
Loans (3)
Canada
Retail
Wholesale
U.S.
Other international
Total interest income
Liabilities
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 expense
Net interest income
(1)
(2)
(3)

2014 vs. 2013

2013 vs. 2012 (1)

Increase (decrease)
due to changes in

Increase (decrease)
due to changes in

Average
volume (2)

Average
rate (2)

14
1
(4)

(10)
(4)
5

4
(3)
1

292
92

(83)
(87)

209
5

100

(70)

$

$

491
219
195
189
1,589

$

553
29
31
51

$
$

(9)
(65)
(5)
585 $
1,004 $

Average
volume (2)

Net change

Average
rate (2)

7
(4)
18

Net change

20
–
(21)

27
(4)
(3)

358
21

(272)
(166)

86
(145)

30

188

(184)

(323)
16
(83)
(79)
(718) $

168
235
112
110
871

367
764
145
529
2,393

(379)
(40)
(15)
(136)

174
(11)
16
(85)

412
20
134
217

8
(25)
6
(581) $
(137) $

(1)
(90)
1
4
867

92
3
1
879
1,514

$

$
$

$

$
$

4

(251)
(458)
(71)
(611)
(2,014) $

116
306
74
(82)
379

(538)
(60)
(322)
(222)

(126)
(40)
(188)
(5)

(140)
(27)
(1)
(1,310) $
(704) $

(48)
(24)
(431)
810

On a continuing operations basis.
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.
In 2012, we reclassified cash collateral for 2012 and 2011 paid from Interest bearing deposits with banks and Loans-wholesale to Other assets and cash collateral received from Deposits to
Other liabilities.
Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.

(4)

Loans and acceptances by geography

Table 77
Canadian
GAAP

IFRS
2014

2013

2012 (1)

2011 (1)

2010 (1)

$

215,624
86,984
14,650
4,785
322,043
63,925
3,840
413

$ 206,134
85,701
13,902
4,388
310,125
58,959
3,807
823

$ 195,552
80,000
13,422
2,503
291,477
51,212
3,751
390

$ 185,620
75,668
12,723
2,481
276,492
45,186
3,304
747

$ 124,064
69,291
9,704
2,712
205,771
45,217
2,785
808

$

68,178

$

$

$

$

$

390,221

$ 373,714

$ 346,830

$ 325,729

$ 254,581

4,686
23,639
28,325

3,734
19,443
23,177

3,138
17,081
20,219

3,101
11,094
14,195

4,230
7,584
11,814

8,258
21,881
30,139

6,768
17,103
23,871

5,673
16,900
22,573

5,152
12,110
17,262

4,936
11,084
16,020

As at October 31 (Millions of Canadian dollars)

Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Sovereign
Bank
Wholesale

63,589

55,353

49,237

48,810

U.S.
Retail
Wholesale
Other International
Retail
Wholesale
Total loans and acceptances

$

448,685 $ 420,762 $ 389,622 $ 357,186
(1,994)
(1,959)
(1,996)
(1,967)

$ 282,415
(2,038)

$

446,691

$ 280,377

Total allowance for loan losses
Total loans and acceptances, net of allowance for loan losses
(1)

$ 418,803

$ 387,626

$ 355,219

On a continuing operations basis.
Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

101

Loans and acceptances by portfolio and sector

Table 78
Canadian
GAAP

IFRS
2014

2013

2012 (1)

2011 (1)

2010 (1)

$

219,257
96,021
14,924
4,785

$ 209,238
92,859
14,142
4,388

$ 198,324
85,800
13,661
2,503

$ 188,406
80,921
12,937
2,481

$ 126,790
75,519
9,916
2,712

$

334,987

$ 320,627

$ 300,288

$ 284,745

$ 214,937

5,694
6,209
7,172
9,615
5,688
979
4,665
1,320
30,387
4,822
5,432
25,886
4,628
1,201

5,441
6,167
6,230
8,906
4,903
893
4,038
1,074
24,413
4,006
5,593
22,755
4,396
1,320

5,202
3,585
5,432
8,802
3,895
811
3,938
965
20,650
4,203
5,221
21,447
4,193
990

4,880
3,025
5,341
6,394
2,007
698
3,381
1,122
15,569
2,712
4,927
17,011
4,050
1,324

4,705
3,228
5,202
5,869
4,593
726
3,143
587
12,651
2,257
3,546
15,290
3,765
1,916

As at October 31 (Millions of Canadian dollars)

Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation & environment
Other (2)
Sovereign
Bank
Wholesale

$

113,698

$ 100,135

$

Total loans and acceptances

$

448,685

$ 420,762

$ 389,622

Total allowance for loan losses

(1,994)

Total loans and acceptances, net of allowance for loan losses
(1)
(2)

102

$

446,691

(1,959)
$ 418,803

89,334
(1,996)

$ 387,626

$

72,441

$ 357,186
(1,967)
$ 355,219

On a continuing operations basis.
Other in 2014 related to financing products, $3.7 billion; health, $4.0 billion; holding and investments, $6.9 billion; other services, $8.3 billion; and other, $3.0 billion.

Royal Bank of Canada: Annual Report 2014

Management’s Discussion and Analysis

$

67,478

$ 282,415
(2,038)
$ 280,377

Impaired loans by portfolio and geography

Table 79
Canadian
GAAP

IFRS
As at October 31 (Millions of Canadian dollars, except for percentage amounts)

Residential mortgages
Personal
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation & environment
Other (2)
Sovereign
Bank
Wholesale
Total impaired loans (3)
Canada
Residential mortgages
Personal
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale
Total
U.S.
Retail
Wholesale
Total
Other International
Retail
Wholesale
Total
Total impaired loans
Allowance against impaired loans
Net impaired loans
Gross impaired loans as a % of loans and acceptances
Residential mortgages
Personal
Small business
Retail
Wholesale
Total
Allowance against impaired loans as a % of gross impaired loans
(1)
(2)
(3)

$

$

$
$

$
$
$
$
$
$
$

2014
678
300
47
1,025

$

40
12
108
6
3
25
48
9
314
38
32
315
–
2
952
1,977

$

388
224
47
659

$

36
11
70
4
1
6
41
9
171
37
11
90
–
–
487
1,146
13
18
31
353
447
800
1,977
(632)
1,345
0.31%
0.31%
0.98%
0.31%
0.84%
0.44%
31.98%

$

$
$
$
$
$
$
$

2013
691
363
37
1,091

$

43
12
101
14
1
26
54
2
367
117
98
272
–
3
1,110
2,201

$

464
229
36
729

$

38
9
58
14
1
8
40
2
169
86
21
80
–
–
526
1,255
14
98
112
348
486
834
2,201
(599)
1,602
0.33%
0.39%
0.83%
0.34%
1.11%
0.52%
27.22%

$

$
$
$
$
$
$
$

2012 (1)
674
273
33
980

$

52
17
83
2
5
30
88
2
353
251
73
312
–
2
1,270
2,250

$

475
206
34
715

$

44
11
34
–
3
12
34
2
153
238
22
88
–
–
641
1,356
7
162
169
258
467
725
2,250
(636)
1,614
0.34%
0.32%
1.32%
0.33%
1.42%
0.58%
28.33%

$

$
$
$
$
$
$
$

2011 (1)
719
289
40
1,048

$

75
38
91
33
13
27
38
4
464
47
105
311
–
33
1,279
2,327

$

567
188
40
795

$

62
30
48
25
1
7
26
2
164
43
12
93
–
–
513
1,308
6
116
122
247
650
897
2,327
(605)
1,722
0.38%
0.36%
1.61%
0.37%
1.77%
0.65%
26.00%

2010 (1)
691
278
49
1,018
74
97
91
104
28
49
102
8
560
68
52
385
9
34
1,661
2,679

$

544
174
49
767
71
87
53
65
1
11
99
4
177
55
42
106
–
–
771
1,538

$
$

–
364
364

$
$

251
526
777
2,679
(721)
1,958

$
$
$

0.54%
0.37%
1.81%
0.47%
2.46%
0.95%
26.91%

On a continuing operations basis.
Other in 2014 is related to health, $18 million; holding and investments, $132 million; other services, $99 million; and other, $66 million.
Past due loans greater than 90 days not included in impaired loans were $316 million in 2014 (2013 – $346 million; 2012 – $393 million; 2011 – $525 million; 2010 – $180 million).

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

103

Provision for credit losses by portfolio and geography

Table 80
Canadian
GAAP

IFRS
2014

(Millions of Canadian dollars, except for percentage amounts)

Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation & environment
Other (2)
Sovereign
Bank

2013

2012 (1)

2011 (1)

2010 (1)

$

94
441
353
44

$

41
458
354
32

$

67
445
394
43

$

42
438
448
35

$

25
457
399
45

$

932

$

885

$

949

$

963

$

926

$

3
2
27
27
–
7
14
2
58
14
2
76
–
–

$

4
3
17
(6)
10
4
21
1
62
157
35
44
–
–

$

8
(2)
27
(11)
1
5
32
–
82
102
47
61
–
–

$

7
(4)
14
(20)
(11)
5
3
–
66
(3)
29
82
–
–

$

18
15
29
(6)
(34)
3
(6)
(1)
184
5
10
76
–
15

Wholesale

$

232

$

352

$

352

$

168

$

308

Total provision for credit losses on impaired loans

$

1,164

$

1,237

$

1,301

$

1,131

$

1,234

$

27
393
345
44

$

27
391
346
32

$

34
413
391
43

$

25
408
448
35

$

7
444
399
45

$

809

$

796

$

881

$

916

$

895

Canada
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank

4
3
25
(5)
–
1
14
2
34
14
3
28
–
–

4
3
16
(6)
–
3
14
1
37
50
2
25
–
–

8
(2)
13
(11)
1
5
12
–
43
98
10
30
–
–

7
(3)
13
(9)
–
4
3
1
31
6
5
44
–
–

18
15
17
3
(1)
3
(4)
2
35
(6)
10
30
–
–

Wholesale

$

123

$

149

$

207

$

102

$

122

Total

$

932

$

945

$

1,088

$

1,018

$

1,017

U.S.
Retail
Wholesale

2
40
$

Other International
Retail
Wholesale

Total provision for credit losses

35

4
29
$

86
171

33

$

64
116

(15)

–
62
$

43
85

62
31
124

$

190

$

257

$

180

$

128

$

155

1,164

$

1,237

$

1,301

$

1,131

$

1,234

–
$

Provision for credit losses as a % of average net loans and
acceptances

1,164
0.27%

–
$

1,237
0.31%

(2)
$

1,299
0.35%

On a continuing operations basis.
Other in 2014 is related to financing products, $3 million; holding and investments, $29 million; other services, $18 million; and other, $26 million.

Royal Bank of Canada: Annual Report 2014

4
(19)

$

Total provision for credit losses on non-impaired loans

104

$

121
69

Total provision for credit losses on impaired loans

(1)
(2)

42

3
32

Management’s Discussion and Analysis

2
$

1,133
0.33%

6
$

1,240
0.40%

Allowance for credit losses by portfolio and geography

Table 81
Canadian
GAAP

IFRS

Allowance at beginning of year
Allowance at beginning of year – discontinued operations
Provision for credit losses
Write-offs by portfolio
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Sovereign
Bank
Wholesale
Total write-offs by portfolio
Recoveries by portfolio
Residential mortgages
Personal
Credit cards
Small business
Retail
Business
Sovereign
Bank
Wholesale
Total recoveries by portfolio
Net write-offs
Adjustments (3)

$

2014
2,050
–
1,164

$
$

(30)
(565)
(466)
(47)
(1,108)
(221)
–
–
(221)
(1,329)

Total allowance for credit losses at end of year
Allowance against impaired loans
Canada
Residential mortgages
Personal
Small business
Retail
Business
Agriculture
Automotive
Consumer goods
Energy
Non-bank financial services
Forest products
Industrial products
Mining & metals
Real estate & related
Technology & media
Transportation & environment
Other
Sovereign
Bank
Wholesale

$

(Millions of Canadian dollars, except percentage amounts)

U.S.
Retail
Wholesale

$
$
$

$
$

$
$
$

$

Total allowance against impaired loans
Allowance against non-impaired loans
Residential mortgages
Personal
Credit cards
Small business
Retail
Wholesale
Off-balance sheet and other items
Total allowance against non-impaired loans
Total allowance for credit losses
Key ratios
Allowance for credit losses as a % of loans and acceptances
Net write-offs as a % of average net loans and acceptances
(1)
(2)
(3)

2013
2,087
–
1,237

$
$

(24)
(498)
(466)
(35)
(1,023)
(448)
–
–
(448)
(1,471)

$
$
$

$
$

$
$
$
$

31
93
19
143

$

6
4
22
–
–
3
18
1
48
17
5
36
–
–
160
303

$

1
16
17

$

172
140
312
632

$

$

78
400
385
45
908

$
$
$
$

454
91
1,453
2,085

$
$

$
$
$
$

Other International
Retail
Wholesale

2
106
114
9
231
32
–
–
32
263
(1,066)
(63)
2,085

$

$
$
$
$

0.46%
0.25%

2
96
112
9
219
51
–
–
51
270
(1,201)
(73)
2,050

$

$
$

$
$
$

$
$

$
$
$
$

36
97
16
149

$

6
4
15
1
–
4
15
1
42
46
6
30
–
–
170
319

$

2
19
21

$

146
113
259
599

$

$

48
405
385
45

$
$
$
$
$

883
477
91
1,451
2,050

$

$
$

$

$
$

0.49%
0.27%

2012 (1),(2)
2,056
–
1,299

(32)
(499)
(496)
(50)
(1,077)
(288)
–
(32)
(320)
(1,397)
1
83
102
8
194
39
–
–
39
233
(1,164)
(104)
2,087

$

2011 (1)
2,966
(854)
1,133

$
$

(16)
(515)
(545)
(45)
(1,121)
(226)
(9)
–
(235)
(1,356)

$
$
$

$
$

$
$
$
$

41
89
12
142

$

9
7
14
1
–
6
10
1
45
107
8
31
–
–
239
381

$

1
38
39

$

96
120
216
636

$

$

48
392
403
60

$
$
$
$
$

903
457
91
1,451
2,087

$

$
$

$

$
$

0.54%
0.31%

1
79
97
7
184
60
–
–
60
244
(1,112)
(75)
2,058

$

$
$

$
$
$

$
$

$
$
$
$

2010 (1)
2,264
–
1,240

(11)
(538)
(463)
(56)
(1,068)
(478)
–
–
(478)
(1,546)
1
79
63
7
150
51
–
–
51
201
(1,345)
(33)
2,126

47
88
15
150

$

13
15
17
3
–
3
12
1
47
20
5
43
–
–
179
329

$

1
25
26

$

80
170
250
605

$

$

41
412
415
60

$

26
480
365
60

$
$
$
$
$

928
434
91
1,453
2,058

$
$
$
$
$

931
386
88
1,405
2,126

$

$
$

$

$
$

47
88
18
153

$

14
27
20
10
1
4
36
1
36
12
6
40
–
–
207
360

$
$

–
85
85

$

83
193
276
721

$
$

0.57%
0.33%

0.75%
0.49%

On a continuing operations basis.
Opening allowance for credit losses as at November 1, 2011 has been restated due to the implementation of amendments to IFRS 11.
Under IFRS, other adjustments include $87 million of unwind of discount and $(24) million of changes in exchange rate (2013 – $86 million and $(13) million; 2012 – $110 million and
$(6) million). For further details, refer to Note 5 of our 2014 Annual Consolidated Financial Statements.

Management’s Discussion and Analysis

Royal Bank of Canada: Annual Report 2014

105

Credit quality information by Canadian province

Table 82
Canadian
GAAP

IFRS
2014

(Millions of Canadian dollars)

Loans and acceptances
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)

$

Total loans and acceptances in Canada
Gross impaired loans
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
Total gross impaired loans in Canada
Provision for credit losses on impaired loans
Atlantic provinces (2)
Quebec
Ontario
Prairie provinces (3)
B.C. and territories (4)
Total provision for credit losses on impaired loans in Canada
(1)
(2)
(3)
(4)

106

Management’s Discussion and Analysis

$

21,263
48,060
152,258
84,015
68,118

2012 (1)
$

19,953
42,920
141,566
77,187
65,204

2011 (1)
$

18,481
38,776
141,230
68,468
58,774

2010 (1)
$

14,558
33,093
103,179
54,843
48,908

$ 390,221

$ 373,714

$ 346,830

$ 325,729

$ 254,581

$

81
205
391
258
211

$

83
177
424
330
241

$

67
180
502
338
269

$

66
135
398
404
305

$

72
162
598
429
277

$

1,146

$

1,255

$

1,356

$

1,308

$

1,538

$

51
92
588
111
90

$

50
78
605
113
99

$

62
96
704
120
106

$

54
63
686
107
108

$

50
85
659
146
77

$

932

$

945

$

1,088

$

1,018

$

1,017

On a continuing operations basis.
Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
Comprises Manitoba, Saskatchewan and Alberta.
Comprises British Columbia, Nunavut, Northwest Territories and Yukon.

Royal Bank of Canada: Annual Report 2014

22,130
50,748
159,817
88,538
68,988

2013

EDTF recommendations index
On October 29, 2012, the Enhanced Disclosure Task Force (EDTF), established by the Financial Stability Board, issued its report Enhancing the
Risk Disclosures of Banks, which included 32 recommendations aimed at achieving transparent, high-quality risk disclosures. As a result, our
enhanced disclosures have been provided in our 2014 Annual Report and Supplementary Financial Information package (SFI).
The following index summarizes our disclosure by EDTF recommendation:

Location of
disclosure

Type of Risk

General

Risk governance, risk
management and
business model

Recommendation

Liquidity

Funding

Table of contents for EDTF risk disclosure
Define risk terminology and measures

3
4

Top and emerging risks
New regulatory ratios

5
6
7
8

Risk management organization
Risk culture
Risk in the context of our business activities
Stress testing

9

15
16
17

Minimum Basel III capital ratios and Domestic systemically
important bank surcharge
Composition of capital and reconciliation of the accounting
balance sheet to the regulatory balance sheet
Flow statement of the movements in regulatory capital
Capital strategic planning
RWA by business segments
Analysis of capital requirement, and related measurement
model information
RWA credit risk and related risk measurements
Movement of risk-weighted assets by risk type
Basel back-testing

18
19

11
12
13
14

20

21
22

Market risk

23
24
25
26

27

Credit risk

28
29
30

Other

Disclosure

1
2

10

Capital adequacy and
risk-weighted assets
(RWA)

Annual
Report
page

31
32

SFI
page

107
47-52
199-201
46-47
69,85-86

–
–

47-52
49-50
93
50,63

–
–
–
–

86

–

–

21-24

–
85-86
–
52-55

25
–
28
26-27

–
–
50,53

40-42
28
40

Quantitative and qualitative analysis of our liquidity reserve

70-71

–

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

72
78
75-76

–
–

73-74

–

67-68

–

63-65
63
63-64

–
–
–

52-63
146-148
100-106
55,97
125
62

29-42

53-54

44

54

39

78-85
80
185

–
–

Relationship between the market risk measures for trading
and non-trading portfolios and the balance sheet
Decomposition of market risk factors
Market risk validation and back-testing
Primary risk management techniques beyond reported risk
measures and parameters
Bank’s credit risk profile
Quantitative summary of aggregate credit risk exposures that
reconciles to the balance sheet
Policies for identifying impaired loans
Reconciliation of the opening and closing balances of
impaired loans and impairment allowances during the year
Quantification of gross notional exposure for OTC derivatives
or exchange-traded derivatives
Credit risk mitigation, including collateral held for all sources
of credit risk
Other risk types
Publicly known risk events

Management’s Discussion and Analysis

1
–

38
–
31,35

Royal Bank of Canada: Annual Report 2014

107

REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
109 Reports

117 Notes to Consolidated Financial Statements

109

Management’s responsibility for financial reporting

117

Note 1

General information

109

Report of Independent Registered Public Accounting
Firm

117

Note 2

Summary of significant accounting policies,
estimates and judgments

110

Management’s Report on Internal Control over
Financial Reporting

131

Note 3

Fair value of financial instruments

143

Note 4

Securities

111

Report of Independent Registered Public Accounting
Firm

146

Note 5

Loans

149

Note 6

Derecognition of financial assets

112 Consolidated Financial Statements

108

112

Consolidated Balance Sheets

149

Note 7

Structured entities

113

Consolidated Statements of Income

153

Note 8

Derivative financial instruments and
hedging activities

114

Consolidated Statements of Comprehensive Income

159

Note 9

Premises and equipment

115

Consolidated Statements of Changes in Equity

160

Note 10

Goodwill and other intangible assets

116

Consolidated Statements of Cash Flows

162

Note 11

Significant dispositions

163

Note 12

Joint ventures and associated companies

163

Note 13

Other assets

164

Note 14

Deposits

165

Note 15

Insurance

167

Note 16

Segregated funds

168

Note 17

Employee benefits – Pension and other
post-employment benefits

172

Note 18

Other liabilities

173

Note 19

Subordinated debentures

173

Note 20

Trust capital securities

175

Note 21

Equity

177

Note 22

Share-based compensation

179

Note 23

Income and expenses from selected
financial instruments

180

Note 24

Income taxes

182

Note 25

Earnings per share

182

Note 26

Guarantees, commitments, pledged assets
and contingencies

185

Note 27

Litigation

186

Note 28

Contractual repricing and maturity
schedule

186

Note 29

Related party transactions

187

Note 30

Results by business segment

190

Note 31

Nature and extent of risks arising from
financial instruments

191

Note 32

Capital management

192

Note 33

Offsetting of financial assets and financial
liabilities

194

Note 34

Recovery and settlement of on-balance
sheet assets and liabilities

195

Note 35

Parent company information

196

Note 36

Subsequent events

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Management’s responsibility for financial reporting
The accompanying consolidated financial statements of Royal Bank of Canada were prepared by management, which is responsible for the
integrity and fairness of the information presented, including the many amounts that must of necessity be based on estimates and judgments.
These consolidated financial statements were prepared in accordance with the Bank Act (Canada) and International Financial Reporting
Standards as issued by the International Accounting Standards Board. Financial information appearing throughout our Management’s
Discussion and Analysis is consistent with these consolidated financial statements.
Our internal controls are designed to provide reasonable assurance that transactions are authorized, assets are safeguarded and proper
records are maintained. These controls include quality standards in hiring and training of employees, policies and procedures manuals, a
corporate code of conduct and accountability for performance within appropriate and well-defined areas of responsibility.
The system of internal controls is further supported by a compliance function, which is designed to ensure that we and our employees
comply with securities legislation and conflict of interest rules, and by an internal audit staff, which conducts periodic audits of all aspects of
our operations.
The Board of Directors oversees management’s responsibilities for financial reporting through an Audit Committee, which is composed
entirely of independent directors. This Committee reviews our consolidated financial statements and recommends them to the Board for
approval. Other key responsibilities of the Audit Committee include reviewing our existing internal control procedures and planned revisions to
those procedures, and advising the directors on auditing matters and financial reporting issues. Our Chief Compliance Officer and Chief Internal
Auditor have full and unrestricted access to the Audit Committee.
The Office of the Superintendent of Financial Institutions Canada (OSFI) examines and inquires into our business and affairs as deemed
necessary to determine whether the provisions of the Bank Act are being complied with, and that we are in sound financial condition. In carrying
out its mandate, OSFI strives to protect the rights and interests of our depositors and creditors.
Deloitte LLP, Independent Registered Public Accounting Firm appointed by our shareholders upon the recommendation of the Audit
Committee and Board, have performed an independent audit of the consolidated financial statements and their report follows. The auditors have
full and unrestricted access to the Audit Committee to discuss their audit and related findings.
David I. McKay
President and Chief Executive Officer
Janice R. Fukakusa
Chief Administrative Officer and Chief Financial Officer
Toronto, December 2, 2014
Report of Independent Registered Public Accounting Firm
To the Shareholders of Royal Bank of Canada
We have audited the accompanying consolidated financial statements of Royal Bank of Canada and subsidiaries (the “Bank”), which comprise
the consolidated balance sheets as at October 31, 2014 and October 31, 2013, and the consolidated statements of income, statements of
comprehensive income, statements of changes in equity, and statements of cash flows for each of the years in the three-year period ended
October 31, 2014, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting Standards Board, 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.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

109

Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the balance sheets of Royal Bank of Canada and
subsidiaries as at October 31, 2014 and October 31, 2013, and their financial performance and cash flows for each of the years in the three-year
period ended October 31, 2014 in accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board.
Other Matter
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bank’s internal
control over financial reporting as of October 31, 2014 based on the criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 2, 2014 expressed an unqualified
opinion on the Bank’s internal control over financial reporting.

Deloitte LLP
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants
Toronto, Canada
December 2, 2014
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 the Chief
Administrative 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
generally accepted accounting principles. It includes those policies and procedures that:
•
•

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions related to and dispositions of
our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and our receipts and expenditures are made only in accordance with authorizations of our
management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on our financial statements.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated, under the supervision of and with the participation of the President and Chief Executive Officer and the Chief
Administrative Officer and Chief Financial Officer, the effectiveness of our internal control over financial reporting as of October 31, 2014, 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, 2014, internal control over financial reporting was
effective based on the criteria established in the Internal Control – Integrated Framework (2013). Also, based on the results of our evaluation,
management concluded that there were no material weaknesses that have been identified in internal control over financial reporting as of
October 31, 2014.
Our internal control over financial reporting as of October 31, 2014 has been audited by Deloitte LLP, Independent Registered Public
Accounting Firm, who also audited our Consolidated Financial Statements for the year ended October 31, 2014, as stated in the Report of
Independent Registered Public Accounting Firm, which report expressed an unqualified opinion on the effectiveness of our internal control
over financial reporting.
David I. McKay
President and Chief Executive Officer
Janice R. Fukakusa
Chief Administrative Officer and Chief Financial Officer
Toronto, December 2, 2014

110

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm
To the Shareholders of Royal Bank of Canada
We have audited the internal control over financial reporting of Royal Bank of Canada and subsidiaries (the “Bank”) as of October 31, 2014,
based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Bank’s management is responsible 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 an opinion on the Bank’s internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the 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.
In our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of October 31, 2014,
based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended October 31, 2014 of the Bank
and our report dated December 2, 2014 expressed an unqualified opinion on those consolidated financial statements.

Deloitte LLP
Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants Toronto, Canada
December 2, 2014

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

111

Consolidated Balance Sheets
As at
October 31
2014

(Millions of Canadian dollars)

Assets
Cash and due from banks

$

Interest-bearing deposits with banks

17,421 $

October 31
2013
15,550

8,399

9,039

Securities (Note 4)
Trading
Available-for-sale

151,380
47,768

144,023
38,687

199,148

182,710

Assets purchased under reverse repurchase agreements and securities borrowed

135,580

117,517

Loans (Note 5)
Retail
Wholesale

334,987
102,236

320,627
90,182

437,223
(1,994)

410,809
(1,959)

435,229

408,850

675

513

11,462
87,402
2,684
8,647
2,775
295
138
30,695

9,953
74,822
2,636
8,332
2,777
247
161
26,638

Allowance for loan losses (Note 5)
Segregated fund net assets (Note 16)
Other
Customers’ liability under acceptances
Derivatives (Note 8)
Premises and equipment, net (Note 9)
Goodwill (Note 10)
Other intangibles (Note 10)
Investments in joint ventures and associates (Note 12)
Employee benefit assets (Note 17)
Other assets (Note 13)

144,098

125,566

Total assets

$

940,550 $

859,745

Liabilities and equity
Deposits (Note 14)
Personal
Business and government
Bank

$

209,217 $
386,660
18,223

194,943
354,593
13,543

614,100

563,079

675

513

11,462
50,345
64,331
88,982
8,564
2,420
37,309

9,953
47,128
60,416
76,745
8,034
2,027
34,947

263,413

239,250

Segregated fund net liabilities (Note 16)
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase agreements and securities loaned
Derivatives (Note 8)
Insurance claims and policy benefit liabilities (Note 15)
Employee benefit liabilities (Note 17)
Other liabilities (Note 18)
Subordinated debentures (Note 19)
Total liabilities
Equity attributable to shareholders (Note 21)
Preferred shares
Common shares (shares issued – 1,442,232,886 and 1,441,055,616)
Treasury shares – preferred (shares held – (1,207) and (46,641))
– common (shares held – (891,733) and (666,366))
Retained earnings
Other components of equity
Non-controlling interests (Note 21)
Total equity
Total liabilities and equity

$

7,859

7,443

886,047

810,285

4,075
14,511
–
71
31,615
2,418

4,600
14,377
1
41
27,438
1,208

52,690

47,665

1,813

1,795

54,503

49,460

940,550 $

859,745

The accompanying notes are an integral part of these Consolidated Financial Statements. Comparative amounts have been restated. Refer to
Note 2.
David I. McKay
President and Chief Executive Officer
112

Royal Bank of Canada: Annual Report 2014

Victor L. Young
Director
Consolidated Financial Statements

Consolidated Statements of Income
For the year ended
October 31
2014

(Millions of Canadian dollars, except per share amounts)

Interest income
Loans
Securities
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits and other

$

Interest expense
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 gain on available-for-sale securities (Note 4)
Share of profit in joint ventures and associates (Note 12)
Other

October 31
2013

October 31
2012

16,979 $
3,993
971
76

16,354 $
3,779
941
74

15,940
3,838
937
54

22,019

21,148

20,769

5,873
1,784
246

5,694
1,869
336

6,048
1,922
360

7,903

7,899

8,330

14,116

13,249

12,439

4,957
742
3,355
2,621
1,379
1,494
1,809
827
689
1,080
192
162
685

3,911
867
2,870
2,201
1,337
1,437
1,569
748
632
1,092
188
159
422

4,897
1,305
2,006
1,896
1,182
1,376
1,434
586
588
849
148
163
278

19,992

17,433

16,708

34,108

30,682

29,147

Provision for credit losses (Note 5)

1,164

1,237

1,299

Insurance policyholder benefits, claims and acquisition expense (Note 15)

3,573

2,784

3,621

Non-interest expense
Human resources (Note 17 and 22)
Equipment
Occupancy
Communications
Professional fees
Outsourced item processing
Amortization of other intangibles (Note 10)
Impairment of other intangibles (Note 10 and 11)
Impairment of investments in joint ventures and associates (Note 12)
Other

11,031
1,147
1,330
779
763
246
666
8
–
1,691

10,248
1,081
1,235
728
753
250
566
10
20
1,323

9,082
913
1,130
748
666
254
494
–
168
1,186

17,661

16,214

14,641

Income before income taxes from continuing operations
Income taxes (Note 24)

11,710
2,706

10,447
2,105

9,586
2,028

9,004
–

8,342
–

7,558
(51)

Total revenue

Net income from continuing operations
Net loss from discontinued operations (Note 11)
Net income

$

9,004 $

8,342 $

7,507

Net income attributable to:
Shareholders
Non-controlling interests

$

8,910 $
94

8,244 $
98

7,410
97

$

9,004 $

8,342 $

7,507

$

6.03 $
6.03
–
6.00
6.00
–
2.84

5.53 $
5.53
–
5.49
5.49
–
2.53

4.96
4.99
(0.03)
4.91
4.94
(0.03)
2.28

Basic earnings per share (in dollars) (Note 25)
Basic earnings per share from continuing operations (in dollars)
Basic loss per share from discontinued operations (in dollars)
Diluted earnings per share (in dollars) (Note 25)
Diluted earnings per share from continuing operations (in dollars)
Diluted loss per share from discontinued operations (in dollars)
Dividends per common share (in dollars)

The accompanying notes are an integral part of these Consolidated Financial Statements. Comparative amounts have been restated. Refer to
Note 2.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

113

Consolidated Statements of Comprehensive Income
For the year ended
(Millions of Canadian dollars)

October 31
2014

October 31
2013

October 31
2012

Net income

$

$

$

Other comprehensive income (loss), net of taxes (Note 24)
Items that will be reclassified subsequently to income:
Net change in unrealized gains (losses) on available-for-sale securities
Net unrealized gains on available-for-sale securities
Reclassification of net gains on available-for-sale securities to income
Foreign currency translation adjustments
Unrealized foreign currency translation gains
Net foreign currency translation losses from hedging activities
Reclassification of losses on foreign currency translation to income
Reclassification of losses (gains) on net investment hedging activities to income
Net change in cash flow hedges
Net (losses) gains on derivatives designated as cash flow hedges
Reclassification of losses (gains) on derivatives designated as cash flow hedges to income
Items that will not be reclassified subsequently to income:
Remeasurements of employee benefit plans
Net fair value change due to credit risk on financial liabilities designated as at fair value through
profit or loss
Total other comprehensive income (loss), net of taxes

9,004

8,342

7,507

143
(58)

15
(87)

193
(33)

85

(72)

160

2,743
(1,585)
44
3

1,402
(912)
1
(1)

114
–
170
(159)

1,205

490

125

(108)
28

(11)
(30)

32
25

(80)

(41)

57

(236)

319

(779)

(59)

–

(295)

319

(779)

915

696

(437)

–

Total comprehensive income

$

9,919

$

9,038

$

7,070

Total comprehensive income attributable to:
Shareholders
Non-controlling interests

$

9,825
94

$

8,940
98

$

6,972
98

$

9,919

$

9,038

$

7,070

The accompanying notes are an integral part of these Consolidated Financial Statements. Comparative amounts have been restated. Refer to
Note 2.

114

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

115

313
–
–
–
–
–
–
–
–

121
(67)
–
–
–
–
–
–
–
–
–

150
(16)
–
–
–
–
–
–
–
–
–
$ 4,075 $14,511 $

1,000
–
(1,525)
–
–
–
–
–
–
–
–

$ 4,600 $14,377 $

–
–
(213)
–
–
–
–
–
–
–
–

$ 4,813 $14,323 $

–
–
–
–
–
–
–
–
–

$ 4,813 $14,010 $

Preferred
shares

Other components of equity

– $

–
–
–
124
(125)
–
–
–
–
–
–

1 $

–
–
–
127
(127)
–
–
–
–
–
–

1 $

–
98
(97)
–
–
–
–
–
–

– $
–
–
–
(9)
(3,291)
(258)
5
7,410
(779)

–
(341)
(9)
–
–
(7)
(3,651)
(253)
(26)
8,244
319

(14)
(97)
–
–
–
(9)
(4,097)
(213)
(8)
8,910
(295)
71 $31,615 $

–
–
–
5,333
(5,303)
–
–
–
–
–
–

41 $27,438 $

–
–
–
4,453
(4,442)
–
–
–
–
–
–

30 $23,162 $

–
5,186
(5,164)
–
–
–
–
–
–

8 $20,084 $

432 $

–
–
–
–
–
–
–
–
–
–
85

347 $

–
–
–
–
–
–
–
–
–
–
(72)

419 $

–
–
–
–
–
–
–
–
160

259 $
–
–
–
–
–
–
–
–
56

–
–
–
–
–
–
–
–
–
–
(41)

1,891 $

–
–
–
–
–
–
–
–
–
–
1,205

95 $

–
–
–
–
–
–
–
–
–
–
(80)

686 $ 175 $

–
–
–
–
–
–
–
–
–
–
490

196 $ 216 $

–
–
–
–
–
–
–
–
125

71 $ 160 $

2,418 $

–
–
–
–
–
–
–
–
–
–
1,210

1,208 $

–
–
–
–
–
–
–
–
–
–
377

831 $

–
–
–
–
–
–
–
–
341

490 $

52,690 $

1,136
(113)
(1,525)
5,457
(5,428)
(9)
(4,097)
(213)
(8)
8,910
915

47,665 $

121
(408)
(222)
4,580
(4,569)
(7)
(3,651)
(253)
(26)
8,244
696

43,160 $

313
5,284
(5,261)
(9)
(3,291)
(258)
5
7,410
(438)

39,405 $

Total
equity

313
5,284
(5,261)
(9)
(3,291)
(350)
2
7,507
(437)

121
(408)
(222)
4,580
(4,569)
(7)
(3,651)
(347)
4
8,342
696

1,136
(113)
(1,525)
5,457
(5,428)
(9)
(4,097)
(307)
10
9,004
915
1,813 $54,503

–
–
–
–
–
–
–
(94)
18
94
–

1,795 $49,460

–
–
–
–
–
–
–
(94)
30
98
–

1,761 $44,921

–
–
–
–
–
(92)
(3)
97
1

1,758 $41,163

Treasury Treasury
AvailableForeign
Cash
Total other
Equity
Common shares – shares – Retained
for-sale
currency
flow components attributable to Non-controlling
shares preferred common earnings securities translation hedges
of equity shareholders
interests

The accompanying notes are an integral part of these Consolidated Financial Statements. Comparative amounts have been restated. Refer to Note 2.

Balance at October 31, 2014

Balance at October 31, 2013
Changes in equity
Issues of share capital
Common shares purchased for cancellation
Preferred shares redeemed
Sales of treasury shares
Purchases of treasury shares
Share-based compensation awards
Dividends on common shares
Dividends on preferred shares and other
Other
Net income
Total other comprehensive income (loss), net of taxes

Balance at October 31, 2012
Changes in equity
Issues of share capital
Common shares purchased for cancellation
Preferred shares redeemed
Sales of treasury shares
Purchases of treasury shares
Share-based compensation awards
Dividends on common shares
Dividends on preferred shares and other
Other
Net income
Total other comprehensive income (loss), net of taxes

Balance at November 1, 2011
Changes in equity
Issues of share capital
Sales of treasury shares
Purchases of treasury shares
Share-based compensation awards
Dividends on common shares
Dividends on preferred shares and other
Other
Net income
Total other comprehensive income (loss), net of taxes

(Millions of Canadian dollars)

Consolidated Statements of Changes in Equity

Consolidated Statements of Cash Flows
For the year ended
(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
Impairment of investments in joint ventures and associates
Loss (Gain) on sale of premises and equipment
Gain on available-for-sale securities
Loss (Gain) on disposition of business
Impairment of available-for-sale securities
Share of profit in joint ventures and associates
Net gain on sales of joint ventures and associates
Adjustments for net changes in operating assets and liabilities
Insurance claims and policy benefit liabilities
Net change in accrued interest receivable and payable
Current income taxes
Derivative assets
Derivative liabilities
Trading securities
Loans, net of securitizations
Assets purchased under reverse repurchase agreements and securities borrowed
Deposits
Obligations related to assets sold under repurchase agreements and securities loaned
Obligations related to securities sold short
Brokers and dealers receivable and payable
Other
Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
Proceeds from sale of available-for-sale securities
Proceeds from maturity of available-for-sale securities
Purchases of available-for-sale securities
Proceeds from maturity of held-to-maturity securities
Purchases of held-to-maturity securities
Net acquisitions of premises and equipment and other intangibles
Proceeds from dispositions
Cash used in acquisitions
Net cash (used in) from investing activities
Cash flows from financing activities
Redemption of trust capital securities
Issue of subordinated debentures
Repayment of subordinated debentures
Issue of common shares
Common shares purchased for cancellation
Issue of preferred shares
Redemption of preferred shares
Sales of treasury shares
Purchase of treasury shares
Dividends paid
Issuance costs
Dividends/distributions paid to non-controlling interests
Change in short-term borrowings of subsidiaries
Net cash used in financing activities
Effect of exchange rate changes on cash and due from banks
Net change in cash and due from banks
Cash resources at beginning of period (1), (2)
Cash and due from banks at end of period (1)
Cash flows from operating activities include:
Amount of interest paid
Amount of interest received
Amount of dividend received
Amount of income taxes paid
(1)
(2)

October 31
2014

October 31
2013

October 31
2012

$

$

$

$
$

9,004

8,342

7,507

1,164
499
(207)
674
–
14
(228)
95
25
(162)
(62)

1,237
445
(72)
576
20
(24)
(217)
(17)
26
(159)
–

1,416
412
(204)
514
168
25
(222)
–
55
(162)
–

530
187
(206)
(12,580)
12,237
(7,253)
(27,096)
(18,063)
52,339
3,915
3,233
(638)
(2,247)
15,174

113
(467)
354
16,475
(20,017)
(23,038)
(20,175)
(5,260)
41,857
(3,616)
6,372
536
3,794
7,085

802
(177)
(815)
8,180
(3,679)
6,850
(29,320)
(25,179)
18,103
16,162
(3,484)
537
864
(1,647)

640
8,795
38,950
(54,208)
285
(1,625)
(1,227)
173
–
(8,217)

1,207
6,476
37,099
(41,057)
401
(284)
(932)
17
(2,537)
390

1,585
9,779
45,991
(54,782)
190
(242)
(1,320)
2,677
(628)
3,250

(900)
2,000
(1,600)
150
(113)
1,000
(1,525)
5,457
(5,428)
(4,211)
(14)
(94)
(6)
(5,284)
198
1,871
15,550
17,421

–
2,046
(2,000)
121
(408)
–
(222)
4,580
(4,569)
(3,810)
–
(94)
(93)
(4,449)
96
3,122
12,428
15,550

–
–
(1,006)
126
–
–
–
5,284
(5,261)
(3,272)
–
(92)
21
(4,200)
1
(2,596)
15,024
12,428

7,186
20,552
1,702
2,315

$
$

7,223
19,348
1,478
1,479

$
$

7,839
19,691
1,316
2,884

We are required to maintain balances with central banks and other regulatory authorities. The total balances were $2.0 billion as at October 31, 2014 (October 31, 2013 – $2.6 billion;
October 31, 2012 – $2.1 billion; November 1, 2011 – $2.0 billion).
For the year ended October 31, 2012, cash resources at the beginning of the period include cash and due from banks of $12,308 million and cash and due from banks included in assets of
discontinued operations of $2,716 million.

The accompanying notes are an integral part of these Consolidated Financial Statements. Comparative amounts have been restated. Refer to
Note 2.
116

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Note 1 General information
Royal Bank of Canada and its subsidiaries (the Bank) provide diversified financial services including personal and commercial banking, wealth
management, insurance, investor services and capital markets products and services on a global basis. Refer to Note 30 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 VilleMarie, 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 per share amounts and percentages. 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 (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 December 2, 2014, 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.
General
Use of estimates and assumptions
In preparing our Consolidated Financial Statements, management is required to make subjective estimates and assumptions that affect the
reported amount of assets, liabilities, net income and related disclosures. Estimates made by management are based on historical experience
and other assumptions that are believed to be reasonable. Key sources of estimation uncertainty include: securities impairment, determination
of fair value of financial instruments, the allowance for credit losses, derecognition of financial assets, insurance claims and policy benefit
liabilities, pensions and other post-employment benefits, income taxes, carrying value of goodwill and other intangible assets, litigation
provisions, and deferred revenue under the credit card customer loyalty reward program. Accordingly, actual results may differ from these and
other estimates thereby impacting our future Consolidated Financial Statements. Refer to the relevant accounting policies in this Note for details
on our use of estimates and assumptions.
Significant judgments
In preparation of these Consolidated Financial Statements, management is required to make significant judgments that affect the carrying
amounts of certain assets and liabilities, and the reported amounts of revenues and expenses recorded during the period. Significant judgments
have been made in the following areas and discussed as noted in the Consolidated Financial Statements:
Consolidation of structured
entities

Note 2 – page 117
Note 7 – page 149

Securities impairment

Note 2 – page 121
Note 4 – page 143

Fair value of financial
instruments

Note 2 – page 122
Note 3 – page 131

Application of the effective interest
method

Note 2 – page 123

Allowance for credit losses

Note 2 – page 125
Note 5 – page 146

Derecognition of financial assets

Note 2 – page 125
Note 6 – page 149

Employee benefits

Note 2 – page 127
Note 17 – page 168

Income taxes

Note 2 – page 127
Note 24 – page 180

Goodwill and other intangibles

Note 2 – page 128
Note 10 – page 160
Note 11 – page 162

Provisions

Note 2 – page 129
Note 26 – page 182
Note 27 – page 185

Basis of consolidation
Our Consolidated Financial Statements include the assets and liabilities and results of operations of the parent company, Royal Bank of Canada,
and its subsidiaries including certain structured entities, after elimination of intercompany transactions, balances, revenues and expenses.
Consolidation
Subsidiaries are those entities, including structured entities, over which we have control. We control an entity when we are exposed, or have
rights, to variable returns from our involvement with the entity and have the ability to affect those returns through our power over the investee.
We have power over an entity when we have existing rights that give us the current ability to direct the activities that most significantly affect the
entity’s returns (relevant activities). Power may be determined on the basis of voting rights or, in the case of structured entities, other contractual
arrangements.
We are not deemed to control an entity when we exercise power over an entity in an agency capacity. In determining whether we are acting
as an agent, we consider the overall relationship between us, the investee and other parties to the arrangement with respect to the following
factors: (i) the scope of our decision making power; (ii) the rights held by other parties; (iii) the remuneration to which we are entitled; and
(iv) our exposure to variability of returns.
The determination of control is based on the current facts and circumstances and is continuously assessed. In some circumstances,
different factors and conditions may indicate that various 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.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

117

Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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.
Non-controlling interests in subsidiaries that we consolidate are shown on our Consolidated Balance Sheets as a separate component of
equity which is distinct from our shareholders’ equity. The net income attributable to non-controlling interests is separately disclosed in our
Consolidated Statements of Income.
Investments in associates and joint ventures
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 net profit or loss recognized in 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 are presented separately from other
assets on our Consolidated Balance Sheets.
A disposal group is classified as a discontinued operation if it meets the following conditions: (i) it is a component that can be
distinguished operationally and financially from the rest of our operations, and (ii) it represents either a separate major line of business or is part
of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations. Disposal groups classified as
discontinued operations are presented separately from our continuing operations in our Consolidated Statements of Income.
During the third quarter in 2011, we announced the sale of substantially all of our U.S. regional retail banking operations and completed
this sale in the second quarter of 2012. Our U.S. regional retail banking operations are reflected as discontinued operations on our Consolidated
Financial Statements for all periods presented.
Changes in accounting policies
During the first quarter, we adopted the following new accounting standards (in order of significance).
IAS 19 Employee Benefits (IAS 19)
The amendments to IAS 19 change the accounting for pension and other post-employment benefits, specifically with respect to actuarial gains
and losses, past service costs, interest expense and return on plan assets. The amended standard eliminates the deferral and amortization of
actuarial gains and losses in net income, instead requiring the immediate recognition of actuarial gains and losses in OCI. Past service costs are
immediately recognized in the period in which a plan amendment occurs. Net interest, calculated by applying the discount rate to the Net
defined benefit liability or asset, replaces the Interest cost and Expected return on plan assets components of Defined benefit pension expense.
The amendments also introduce a number of interim and annual disclosure requirements for defined benefit plans.
We retrospectively adopted the amendments on November 1, 2013. Under the amended standard, we recognize the present value of our
defined benefit obligation under each of our defined benefit plans, less the fair value of the plan’s assets, as a liability reported in 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
Employee benefit assets. New annual disclosures have been provided in Note 17.
IFRS 10 Consolidated Financial Statements (IFRS 10)
IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and Separate Financial Statements (IAS 27) and SIC-12 Consolidation –
Special Purpose Entities (SIC-12) and provides a single consolidation model applicable to all types of entities. IFRS 10 is based on the existing
principle that an entity should consolidate all other entities that it controls.
Under IAS 27 and SIC-12, control was based on having a majority of the voting interests or, for special purpose entities, an overall
assessment of the purpose and design of the entity, our decision making rights, and our exposure to the majority of the risks and rewards of
ownership. Under IFRS 10, control is based on three conditions, which must all be satisfied: (i) decision making power over the relevant
activities, (ii) exposure to variable returns, and (iii) a link between decision making power and returns. IFRS 10 introduces a substantial amount
of application guidance that expands on new and existing principles related to the determination of control. It places a greater emphasis on
decision making power by making it a required condition for control, removes the bright lines for assessing exposure to risks and rewards, and
introduces new considerations related to our role as a principal or an agent in entities over which we have decision making power. The
determination of control is based on the current facts and circumstances and is to be continuously assessed.
We retrospectively adopted IFRS 10 on November 1, 2013. On adoption, RBC Capital Trust II was deconsolidated as our involvement does
not expose us to variable returns. See Note 20 for further details on our innovative capital instruments.
IFRS 11 Joint Arrangements (IFRS 11)
IFRS 11 requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and
obligations arising from the arrangement. IFRS 11 requires a joint operator to recognize and measure the assets and liabilities in relation to its
interest in the arrangement, and a joint venturer to apply the equity method of accounting. We retrospectively adopted IFRS 11 on November 1,
2013. The adoption resulted in a change to our method of accounting for joint ventures from proportionate consolidation to the equity method.
IFRS 12 Disclosure of Interest in Other Entities (IFRS 12)
IFRS 12 provides enhanced guidance on the annual disclosure requirements of a reporting entity’s interests in other entities. The standard
requires an entity to disclose information that helps users to evaluate (i) the nature of, and risks associated with, a reporting entity’s interests in
subsidiaries, joint arrangements, associates and unconsolidated structured entities (off-balance sheet structures); and (ii) the effect of those
interests on the entity’s financial position, financial performance and cash flows. We adopted IFRS 12 on November 1, 2013. Our annual
disclosures in Notes 7 and 12 have been updated to reflect the requirements of IFRS 12.
118

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

IAS 27 Separate Financial Statements (IAS 27) and IAS 28 Investments in Associates and Joint Ventures (IAS 28)
As a consequence of the new IFRS standards IFRS 10, IFRS 11 and IFRS 12, the IASB issued amended and retitled IAS 27 and IAS 28. We
retrospectively adopted these new requirements on November 1, 2013. The adoption did not impact the Consolidated Financial Statements.
IFRS 13 Fair Value Measurement (IFRS 13)
IFRS 13 provides a revised definition of fair value and sets out a framework for measuring fair value in a single standard. IFRS 13 also requires
more comprehensive disclosure requirements on fair value measurement. The measurement and disclosure requirements of IFRS 13 apply when
another standard requires or permits the item to be measured at fair value with limited exceptions. We prospectively adopted IFRS 13 on
November 1, 2013. The adoption did not have a material impact on the Consolidated Financial Statements. New annual disclosures have been
provided in Notes 3, 10 and 17.
IFRS 7 Financial Instruments – Disclosure (IFRS 7)
The amendments to IFRS 7 require expanded disclosures to enable users to assess the effect of offsetting arrangements on an entity’s financial
position. The amendments require entities to disclose both gross and net amounts associated with master netting agreements and similar
arrangements, including the effects of financial collateral, whether or not they are presented net on the balance sheet. We adopted the
amendments to IFRS 7 on November 1, 2013. New annual disclosures have been provided in Note 33.
The tables below present the impact of the above standards adopted during the first quarter on our Consolidated Balance Sheets as at
October 31, 2013, October 31, 2012 and November 1, 2011 and Consolidated Statements of Income for the years ended October 31, 2013
and 2012.
As at and for the year ended October 31, 2013
Adjustments
(Millions of Canadian dollars, except per share amounts)

Consolidated Balance Sheet
Cash and due from banks
Interest-bearing deposits with banks
Securities – Trading and Available-for-sale
Loans – Wholesale (1)
Other – Investment in joint ventures and associates
Other – Employee benefit assets
Other – Other lines impacted by accounting changes (2)
Lines not impacted by accounting changes

Published

IAS 19

IFRS 10

IFRS 11

$ 15,870
9,061
182,718
89,998
112
1,084
40,503
521,473

$

$

–
–
1
3
–
–
–
–

$ (320)
(22)
(9)
181
135
–
(412)
–

4

–
–
–
–
–
(923)
292
–

Total
impact
$

Restated

(320)
(22)
(8)
184
135
(923)
(120)
–

$ 15,550
9,039
182,710
90,182
247
161
40,383
521,473

(447)

(1,074)

859,745

(33)
–
(414)
–
–
–
–

870
268
(437)
(900)
(876)
1
–

354,593
2,027
34,947
–
27,438
1,208
439,532

Total assets

860,819

(631)

Deposits – Business and government (1)
Other – Employee benefit liabilities
Other – Other liabilities (1)
Trust capital securities
Retained earnings
Other components of equity
Lines not impacted by accounting changes

353,723
1,759
35,384
900
28,314
1,207
439,532

–
268
(24)
–
(876)
1
–

$ 860,819

$ (631)

$

4

$ (447)

$ (1,074)

$ 859,745

$

$ (87)
(0.07)
(0.05)

$

–
–
–

$

$

$

Total liabilities and equity
Consolidated Statement of Income
Net income
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)

8,429
5.60
5.54

903
–
1
(900)
–
–
–

Consolidated Financial Statements

–
–
–

(87)
(0.07)
(0.05)

Royal Bank of Canada: Annual Report 2014

8,342
5.53
5.49

119

Note 2 Summary of significant accounting policies, estimates and judgments (continued)
As at and for the year ended October 31, 2012
Adjustments
Published

(Millions of Canadian dollars, except per share amounts)

Consolidated Balance Sheet
Cash and due from banks
Interest-bearing deposits with banks
Securities – Trading and Available-for-sale
Loans – Wholesale (1)
Other – Investment in joint ventures and associates
Other – Employee benefit assets
Other – Other lines impacted by accounting changes (2)
Lines not impacted by accounting changes

IAS 19

$ 12,617
10,255
161,611
79,953
125
1,049
47,881
511,609

$

–
–
–
–
–
(920)
367
–

IFRS 10

IFRS 11

$

–
–
1
3
–
–
–
–

$ (189)
(9)
(10)
(7)
452
–
(834)
–

4

Total
impact
$

Restated

(189)
(9)
(9)
(4)
452
(920)
(467)
–

$ 12,428
10,246
161,602
79,949
577
129
47,414
511,609

(597)

(1,146)

823,954

(21)
–
(576)
–
–
–
–

882
589
(610)
(900)
(1,108)
1
–

316,339
2,318
37,618
–
23,162
831
443,686

Total assets

825,100

(553)

Deposits – Business and government (1)
Other – Employee benefit liabilities
Other – Other liabilities (1)
Trust capital securities
Retained earnings
Other components of equity
Lines not impacted by accounting changes

315,457
1,729
38,228
900
24,270
830
443,686

–
589
(35)
–
(1,108)
1
–

$ 825,100

$ (553)

$

4

$ (597)

$ (1,146)

$ 823,954

$

$

$

–
–
–

$

$

$

Total liabilities and equity
Consolidated Statement of Income
Net income
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)

7,539
4.98
4.93

(32)
(0.02)
(0.02)

903
–
1
(900)
–
–
–

–
–
–

(32)
(0.02)
(0.02)

7,507
4.96
4.91

As at November 1, 2011
Adjustments
(Millions of Canadian dollars, except per share amounts)

Consolidated Balance Sheet
Cash and due from banks
Interest-bearing deposits with banks
Securities – Trading and Available-for-sale
Loans – Wholesale (1)
Other – Investment in joint ventures and associates
Other – Employee benefit assets
Other – Other lines impacted by accounting changes (2)
Lines not impacted by accounting changes

Published

IAS 19

IFRS 10

$ 12,428
6,460
167,022
64,752
142
311
40,182
502,536

$

$

–
–
–
–
–
(144)
97
–

–
–
7
3
–
–
–
–

Total
impact

IFRS 11
$

(120)
(3,133)
(4,577)
(849)
1,652
(12)
(3,872)
–

$

Restated

(120)
(3,133)
(4,570)
(846)
1,652
(156)
(3,775)
–

$ 12,308
3,327
162,452
63,906
1,794
155
36,407
502,536

Total assets

793,833

(47)

10

(10,911)

(10,948)

782,885

Deposits – Business and government (1)
Other – Employee benefit liabilities
Other – Other liabilities (1)
Trust capital securities
Retained earnings
Other components of equity
Lines not impacted by accounting changes

299,956
1,639
36,796
894
20,381
490
433,677

–
263
(13)
–
(297)
–
–

903
–
1
(894)
–
–
–

(15,424)
(8)
4,521
–
–
–
–

(14,521)
255
4,509
(894)
(297)
–
–

285,435
1,894
41,305
–
20,084
490
433,677

$ 793,833

$ (47)

$ (10,911)

$ (10,948)

$ 782,885

Total liabilities and equity
(1)
(2)

$

10

Amounts have been restated from those originally published to reflect classification changes made in the current period.
Includes Premises and equipment, Goodwill, Other intangibles and Other assets.

During the second quarter, we adopted the following new accounting standard.
Own credit provisions of IFRS 9 Financial Instruments (IFRS 9)
The own credit provisions of IFRS 9 change the accounting for financial liabilities designated as at fair value through profit or loss (FVTPL).
Previously under International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement (IAS 39), all fair value changes
in financial liabilities designated as at FVTPL were recognized in net income. Under IFRS 9, the changes in the fair value of these liabilities
attributable to our own credit are recognized in OCI rather than income. Amounts recognized in OCI will not be reclassified subsequently to net
income.
We prospectively adopted the own credit provisions of IFRS 9 with an initial application date of November 1, 2013. Fair value changes in our
financial liabilities designated as at FVTPL attributable to changes in our own credit risk are now recorded in OCI. The remaining fair value
changes continue to be recorded in Trading revenue or Non-interest income - Other. We did not restate our quarterly or annual results for periods
prior to February 1, 2014 as the amounts were not significant. Amounts recognized in the Statement of Income in the first quarter were recorded
in OCI in the second quarter.
120

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

The table below presents the impact of adopting the above standard on our Consolidated Statement of Income and Consolidated Statement
of Comprehensive Income for the year ended October 31, 2014. Results as reported under the own credit provisions of IFRS 9 are compared to
the pro-forma results had we continued to apply IAS 39. The adoption did not impact our Consolidated Balance Sheet.
For the year ended October 31, 2014
Pro-forma
(IAS 39)

(Millions of Canadian dollars, except per share amounts)

Consolidated Statement of Income
Non-interest income – Trading revenue
Non-interest income – Other
Non-interest expense – Human resources (1)
Net income
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)
Consolidated Statement of Comprehensive Income
Total other comprehensive income, net of taxes
(1)

As
reported
(IFRS 9)

Impact

$

672
674
11,008
8,962
6.00
5.97

$

$

974

$

70
11
23
42
0.03
0.03
(59)

$

742
685
11,031
9,004
6.03
6.00

$

915

Adjustments related to variable compensation arrangements.

Financial instruments – Recognition and measurement
Securities
Securities are classified at inception, based on management’s intention, as at FVTPL, available-for-sale (AFS) or held-to-maturity. Certain debt
securities with fixed or determinable payments and which are not quoted in an active market may be classified as loans and receivables.
Trading securities include securities purchased for sale in the near term which are classified as at FVTPL by nature and securities designated
as at FVTPL under the fair value option. Obligations to deliver trading securities sold but not yet purchased are recorded as liabilities and carried
at fair value. Realized and unrealized gains and losses on these securities are recorded as Trading revenue in Non-interest income. Dividends
and interest income accruing on Trading securities are recorded in Interest income. Interest and dividends accrued on interest-bearing and equity
securities sold short are recorded in Interest expense.
AFS securities include: (i) securities which may be sold to meet liquidity needs, in response to or in anticipation of changes in interest rates
and resulting prepayment risk, changes in foreign currency risk, changes in funding sources or terms, and (ii) loan substitute securities which are
client financings that have been structured as after-tax investments rather than conventional loans in order to provide the clients with a
borrowing rate advantage. AFS securities are measured at fair value. Unrealized gains and losses arising from changes in fair value are included
in Other components of equity. Changes in foreign exchange rates for AFS equity securities are recognized in Other components of equity, while
changes in foreign exchange rates for AFS debt securities are recognized in Foreign exchange revenue, other than trading in Non-interest income.
When the security is sold, the cumulative gain or loss recorded in Other components of equity is included as Net gain (loss) on AFS securities in
Non-interest income. Purchase premiums or discounts on AFS debt securities are amortized over the life of the security using the effective
interest method and are recognized in Net interest income.
At each reporting date, and more frequently when conditions warrant, we evaluate our AFS securities to determine whether there is any
objective evidence of impairment. Such evidence includes: for debt instruments, when an adverse effect on future cash flows from the asset or
group of assets can be reliably estimated; for equity securities, when there is a significant or prolonged decline in the fair value of the investment
below its cost.
When assessing impairment for debt instruments we primarily consider counterparty ratings and security-specific factors, including
subordination, external ratings, and the value of any collateral held, for which there may not be a readily accessible market. Significant judgment
is required in assessing impairment as management is required to consider all available evidence in determining whether objective evidence of
impairment exists and whether the principal and interest on the AFS debt security can be fully recovered. For complex debt instruments we use
cash flow projection models which incorporate actual and projected cash flows for each security based on security specific factors using a
number of assumptions and inputs that involve management judgment, such as default, prepayment and recovery rates. Due to the subjective
nature of choosing these inputs and assumptions, the actual amount of the future cash flows and their timing may differ from the estimates used
by management and consequently may cause a different conclusion as to the recognition of impairment or measurement of impairment loss.
In assessing whether there is any objective evidence that suggests that equity securities are impaired, we consider factors which include
the length of time and extent the fair value has been below cost, along with management’s assessment of the financial condition, business and
other risks of the issuer. Management weighs all these factors to determine the impairment but to the extent that management judgment may
differ from the actual experience of the timing and amount of the recovery of the fair value, the estimate for impairment could change from period
to period based upon future events that may or may not occur, the conclusion for the impairment of the equity securities may differ.
If an AFS security is impaired, the cumulative unrealized loss previously recognized in Other components of equity is removed from equity
and recognized in Net gain (loss) on AFS securities under Non-interest income. This amount is determined as the difference between the cost/
amortized cost and current fair value of the security less any impairment loss previously recognized. Subsequent to impairment, further declines
in fair value are recorded in Non-interest income, while increases in fair value are recognized in Other components of equity until sold. For AFS
debt securities, reversal of previously recognized impairment losses is recognized in our Consolidated Statements of Income if the recovery is
objectively related to a specific event occurring after recognition of the impairment loss.
Held-to-maturity securities are debt securities where we have the intention and the ability to hold the investment until its maturity date.
These securities are initially recorded at fair value and are subsequently measured at amortized cost using the effective interest method, less any
impairment losses which we assess using the same impairment model as for loans. Interest income and amortization of premiums and discounts
on debt securities are recorded in Net interest income. For held-to-maturity securities, reversal of previously recognized impairment losses is
recognized in our Consolidated Statements of Income if the recovery is objectively related to a specific event occurring after the recognition of
the impairment loss. Reversals of impairment losses on held-to-maturity securities are recorded to a maximum of what the amortized cost of the
investment would have been before the original impairment charge. We hold an insignificant amount of held-to-maturity securities. All held-tomaturity securities have been included with AFS securities on our Consolidated Balance Sheets.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

121

Note 2 Summary of significant accounting policies, estimates and judgments (continued)
We account for all of our securities using settlement date accounting and changes in fair value between the trade date and settlement date
are reflected in income for securities classified or designated as at FVTPL, and changes in the fair value of AFS securities between the trade and
settlement dates are recorded in OCI except for changes in foreign exchange rates on debt securities, which are recorded in Non-interest income.
Fair value option
A financial instrument can be designated as at 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 it in the near term. An instrument that is designated as at FVTPL by way
of this fair value option must have a reliably measurable fair value and satisfy one of the following criteria: (i) it eliminates or significantly
reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities, or recognizing gains and
losses on them on a different basis (an accounting mismatch); (ii) it belongs to a group of financial assets or financial liabilities or both that are
managed, evaluated, and reported to key management personnel on a fair value basis in accordance with our risk management strategy, and we
can demonstrate that significant financial risks are eliminated or significantly reduced; or (iii) there is an embedded derivative in the financial or
non-financial host contract and the derivative is not closely related to the host contract. These instruments cannot be reclassified out of the
FVTPL category while they are held or issued.
Financial assets designated as at FVTPL are recorded at fair value and any unrealized gain or loss arising due to changes in fair value is
included in Trading revenue or Non-interest income – Other. Financial liabilities designated as at FVTPL are recorded at fair value and fair value
changes attributable to changes in our own credit risk are recorded in OCI. The remaining fair value changes are recorded in Trading revenue or
Non-interest income – Other. Upon initial recognition, if we determine that presenting the effects of own credit risk changes in OCI would create
or enlarge an accounting mismatch in net income, the full fair value change in our debt designated as at FVTPL is recognized in net income.
To determine the fair value adjustments on our debt designated as at FVTPL, we calculate the present value of the instruments based on the
contractual cash flows over the term of the arrangement by using our effective funding rate at the beginning and end of the period with the
change in present value recorded in OCI, Trading revenue or Non-interest income – Other as appropriate.
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 adequacy of governance structures and control processes for valuation of these instruments.
We have established policies, procedures and controls for valuation methodologies and techniques to ensure fair value is reasonably
estimated. Major valuation processes and controls include, but are not limited to, profit and loss decomposition, independent price verification
(IPV) and model validation standards. These control processes are managed by either Finance or Group Risk Management and are independent
of the relevant businesses and their trading functions. Profit and loss decomposition is a process to explain the fair value changes of certain
positions and is performed daily for trading portfolios. All fair value instruments are subject to IPV, a process whereby trading function valuations
are verified against external market prices and other relevant market data. Market data sources include traded prices, brokers and price vendors.
We give priority to those third-party pricing services and prices having the highest and most consistent accuracy. The level of accuracy is
determined over time by comparing third-party price values to traders’ or system values, to other pricing service values and, when available, to
actual trade data. 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 model use. 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.
We record valuation adjustments to appropriately reflect counterparty credit quality of our derivative portfolio, differences between the
overnight index swap (OIS) curve and London Interbank Offered Rates (LIBOR) 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, bidoffer spreads and unobservable parameters. These adjustments may be subjective as they require significant judgment in the input selection,
such as probability of default and recovery rate, and are intended to arrive at 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 is
previously estimated using management judgment, and 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 the transactions,
and the effects of credit mitigants such as master netting and collateral agreements. CVA amounts are derived from estimates of exposure at
default, probability of default, recovery rates on a counterparty basis, and market and credit factor correlations. Exposure at default is the
amounts of expected derivative related assets and liabilities at the time of default, estimated through modeling using underlying risk factors.
Probability of default and recovery rate are generally implied from the market prices for credit protection and credit ratings of the counterparty.
Correlation is the statistical measure of how credit and market factors may move in relation to one another. Correlation is estimated using
historical data and market data where available. CVA is calculated daily and changes are recorded in Non-interest income – Trading revenue.
In the determination of fair value of collateralized OTC derivatives using the OIS curve, our valuation approach accounts for the difference
between certain OIS rates and LIBOR for derivatives valuation as valuation adjustments.
FVA are also 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.
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 to either the bid or offer price.
122

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Some valuation models require parameter calibration from such factors as market observed 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.
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.
Interest
Interest is recognized in Interest income and Interest expense in the Consolidated Statements of Income 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.
Transaction costs
Transaction costs are expensed as incurred for financial instruments classified or designated as at FVTPL. For other financial instruments,
transaction costs are capitalized on initial recognition. For financial assets and financial liabilities measured at amortized cost, capitalized
transaction costs are amortized through Net income over the estimated life of the instrument using the effective interest method. For AFS
financial assets measured at fair value that do not have fixed or determinable payments and no fixed maturity, capitalized transaction costs are
recognized in Net income when the asset is derecognized or becomes impaired.
Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset on the balance sheet when there exists both a legally enforceable right to offset the recognized
amounts and an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
Assets purchased under reverse repurchase agreements and sold under repurchase agreements
We purchase securities under agreements to resell (reverse repurchase agreement) and take possession of these securities. Reverse repurchase
agreements are treated as collateralized lending transactions whereby 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. 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 designated as at FVTPL and are recorded at fair value. Interest earned on reverse
repurchase agreements is included in Interest income, and interest incurred on repurchase agreements is included in Interest expense in our
Consolidated Statements of Income. Changes in fair value for reverse repurchase agreements and repurchase agreements designated as at FVTPL
are included in Trading revenue or Other in Non–interest income.
Derivatives
Derivatives are primarily used in sales and 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 swaps, interest rate futures, forward rate agreements, interest
rate options, foreign exchange forward contracts, cross currency swaps, foreign currency futures, foreign currency options, equity swaps and
credit derivatives. All derivative instruments are recorded on our Consolidated Balance Sheets at fair value, including those derivatives that are
embedded in financial or non-financial contracts and are not closely related to the host contracts.
When derivatives are embedded in other financial instruments or host contracts, such combinations are known as hybrid instruments with
the effect that some of the cash flows of a hybrid instrument vary in a way similar to a stand-alone derivative. If the host contract is not carried at
fair value with changes in fair value reported in our Consolidated Statements of Income, the embedded derivative is generally required to be
separated from the host contract and accounted for separately as at FVTPL if the economic characteristics and risks of the embedded derivative
are not closely related to those of the host contract. All embedded derivatives are presented on a combined basis with the host contracts
although they are separated for measurement purposes when conditions requiring separation are met.
When derivatives are used in sales and 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.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

123

Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Hedge accounting
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 have been ‘highly effective’ in offsetting
changes in the fair value or cash flows of the hedged items. A hedge is regarded as highly effective only if the following criteria are met: (i) at
inception of the hedge and throughout its life, the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash
flows attributable to the hedged risk, and (ii) actual results of the hedge are within a pre-determined range. In the case of hedging a forecast
transaction, the transaction must have a high probability of occurring and must present an exposure to variations in cash flows that could
ultimately affect the reported net profit or loss. Hedge accounting is discontinued when it is determined that the hedging instrument is no longer
effective as a hedge, the hedging instrument is terminated or sold, upon the sale or early termination of the hedged item, or when the forecast
transaction is no longer deemed highly probable. Refer to Note 8 for the fair value of derivatives and non-derivative instruments categorized by
their hedging relationships, as well as derivatives that are not designated in hedging relationships.
Fair value hedges
In a fair value hedging relationship, the carrying value of the hedged item is adjusted for changes in fair value attributable to the hedged risk and
recognized in Non-interest income. Changes in fair value of the hedged item, to the extent that the hedging relationship is effective, are offset by
changes in the fair value of the hedging derivative, which are also recognized in Non-interest income. When hedge accounting is discontinued,
the carrying value of the hedged item is no longer adjusted and the cumulative fair value adjustments to the carrying value of the hedged items
are amortized to Net income over the remaining life of the hedged items.
We predominantly use interest rate swaps to hedge our exposure to changes in a fixed interest rate instrument’s fair value caused by
changes in interest rates.
Cash flow hedges
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes, is recognized in
OCI while the ineffective portion is recognized in Non-interest income. When hedge accounting is discontinued, the cumulative amounts
previously recognized in Other components of equity are reclassified to Net interest income during the periods when the variability in the cash
flows of the hedged item affects Net interest income. Unrealized gains and losses on derivatives are reclassified immediately to Net income
when the hedged item is sold or terminated early, or when the forecast transaction is no longer expected to occur.
We predominantly use interest rate swaps to hedge the variability in cash flows related to a variable-rate asset or liability.
Net investment hedges
In hedging a foreign currency exposure of 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.
Loans
Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which are not
classified as AFS. Loans are initially recognized at fair value. When loans are issued at a market rate, fair value is represented by the cash
advanced to the borrowers. Loans are subsequently measured at amortized cost using the effective interest method less impairment, unless we
intend to sell them in the near future upon origination or they have been designated as at FVTPL, in which case they are carried at fair value.
We assess at each balance sheet date whether there is objective evidence that the loans are impaired. Evidence of impairment may include
indications that the borrower is experiencing significant financial difficulty, probability of bankruptcy or other financial reorganization, as well as
a measurable decrease in the estimated future cash flows evidenced by the adverse changes in the payments status of the borrower or economic
conditions that correlate with defaults. Whenever a payment is 90 days past due, loans other than credit card balances and loans guaranteed or
insured by a Canadian government (Federal or Provincial) or a Canadian government agency (collectively, Canadian government) are classified as
impaired unless they are fully secured and collection efforts are reasonably expected to result in repayment of debt within 180 days of the loans
becoming past due. Loans guaranteed by a Canadian government are classified as impaired when the loan is contractually 365 days in arrears.
Credit card balances are written off when a payment is 180 days in arrears.
Assets acquired to satisfy loan commitments are recorded at their fair value less costs to sell. Fair value is determined based on either
current market value where available or discounted cash flows. Any excess of the carrying value of the loan over the fair value of the assets
acquired is recognized by a charge to Provision for credit losses.
Interest on loans is recognized in Interest income – Loans using the effective interest method. The estimated future cash flows used in this
calculation include those determined by the contractual term of the asset, all fees that are considered to be integral to the effective interest rate,
transaction costs and all other premium 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 result, commitment and standby fees are also recognized as interest income over the expected term of
the resulting loans using the effective interest method. Otherwise, such fees are recorded as other liabilities and amortized into Non-interest
income over the commitment or standby period. Prepayment fees on mortgage loans are not included as part of the effective interest rate at
origination as the amounts are not reliably measurable. If prepayment fees are received on a renewal of a mortgage loan, the fee is included as
part of the effective interest rate, and if not renewed, the prepayment fee is recognized in interest income at the prepayment date.

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Allowance for credit losses
An allowance for credit losses is established if there is objective evidence that we will be unable to collect all amounts due on our loans portfolio
according to the original contractual terms or the equivalent value. This portfolio includes on-balance sheet exposures, such as loans and
acceptances, and off-balance sheet items such as letters of credit, guarantees and unfunded commitments.
The allowance for credit losses is increased by the impairment losses recognized and decreased by the amount of write-offs, net of
recoveries. The allowance for credit losses for on-balance sheet items is included as a reduction to assets, and the allowance for credit losses
relating to off-balance sheet items is included in Provisions under Other Liabilities.
We assess whether objective evidence of impairment exists individually for loans that are individually significant and collectively for loans
that are not individually significant. If we determine that no objective evidence of impairment exists for an individually assessed loan, whether
significant or not, the loan is included in a group of loans with similar credit risk characteristics and collectively assessed for impairment. Loans
that are individually assessed for impairment and for which an impairment loss is recognized are not included in a collective assessment of
impairment.
Allowance for credit losses represent management’s best estimates of losses incurred in our loan portfolio at the balance sheet date.
Management’s judgment is required in making assumptions and estimations when calculating allowances on both individually and collectively
assessed loans. The underlying assumptions and estimates used for both individually and collectively assessed loans can change from period to
period and may significantly affect our results of operations.
Individually assessed loans
Loans which are individually significant are assessed individually for objective indicators of impairment. A loan is considered impaired when
management determines that it will not be able to collect all amounts due according to the original contractual terms or the equivalent value.
Credit exposures of individually significant loans are evaluated based on factors including the borrower’s overall financial condition,
resources and payment record, and where applicable, the realizable value of any collateral. If there is evidence of impairment leading to an
impairment loss, then the amount of the loss is determined as the difference between the carrying amount of the loan, including accrued
interest, and the estimated recoverable amount. The estimated recoverable amount is measured as the present value of expected future cash
flows discounted at the loan’s original effective interest rate, including cash flows that may result from the realization of collateral less costs to
sell. Individually-assessed impairment losses reduce the carrying amount of the loan through the use of an allowance account and the amount of
the loss is recognized in Provision for credit losses in our Consolidated Statements of Income. Following impairment, interest income is
recognized on the unwinding of the discount from the initial recognition of impairment.
Significant judgment is required in assessing evidence of impairment and estimation of the amount and timing of future cash flows when
determining the impairment loss. When assessing objective evidence of impairment we primarily consider specific factors such as the financial
condition of the borrower, borrower’s default or delinquency in interest or principal payments, local economic conditions and other observable
data. In determining the estimated recoverable amount we consider discounted expected future cash flows at the effective interest rate using a
number of assumptions and inputs. Management judgment is involved when choosing these inputs and assumptions used such as the expected
amount of the loan that will not be recovered and the cost of time delays in collecting principal and/or interest, and when estimating the value of
any collateral held for which there may not be a readily accessible market. Changes in the amount expected to be recovered would have a direct
impact on the Provision for credit losses and may result in a change in the Allowance for credit losses
Collectively assessed loans
Loans which are not individually significant, or which are individually assessed and not determined to be impaired, are collectively assessed for
impairment. For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar risk characteristics, taking into
account loan type, industry, geographic location, collateral type, past due status and other relevant factors.
The collective impairment allowance is determined by reviewing factors including: (i) historical loss experience, which takes into
consideration historical probabilities of default, loss given default and exposure at default, in portfolios of similar credit risk characteristics, and
(ii) management’s judgment on the level of impairment losses based on historical experience relative to the actual level as reported at the
balance sheet date, taking into consideration the current portfolio credit quality trends, business and economic and credit conditions, the impact
of policy and process changes, and other supporting factors. Future cash flows for a group of loans are collectively evaluated for impairment on
the basis of the contractual cash flows of the loans in the group and historical loss experience for loans with credit risk characteristics similar to
those in the group. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions that did not
affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not
currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience. Collectively-assessed impairment losses reduce the carrying amount of the aggregated loan
position through an allowance account and the amount of the loss is recognized in Provision for credit losses. Following impairment, interest
income is recognized on the unwinding of the discount from the initial recognition of impairment.
The methodology and assumptions used to calculate collective impairment allowances are subject to uncertainty, in part because it is not
practicable to identify losses on an individual loan basis due to the large number of individually insignificant loans in the portfolio. Significant
judgment is required in assessing historical loss experience, the loss identification period and its relationship to current portfolios including
delinquency, and loan balances; and current business, economic and credit conditions including industry specific performance, unemployment
and country risks. Changes in these assumptions would have a direct impact on the Provision for credit losses and may result in changes in the
related Allowance for credit losses.
Write-off of loans
Loans and the related impairment allowance for credit losses are written off, either partially or in full, when there is no realistic prospect of
recovery. Where loans are secured, they are generally written off after receipt of any proceeds from the realization of the collateral. In
circumstances where the net realizable value of any collateral has been determined and there is no reasonable expectation of further recovery,
write off may be earlier. For credit cards, the balances and related allowance for credit losses are written off when payment is 180 days in arrears.
Personal loans are generally written off at 150 days past due.
Derecognition of financial assets
Our various securitization activities generally consist of the transfer of financial assets such as loans or packaged mortgage-backed securities
(MBS) to independent structured entities or trusts that issue securities to investors.
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Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Financial assets are derecognized from our Consolidated Balance Sheets when our contractual rights to the cash flows from the assets have
expired, when we retain the rights to receive the cash flows of the assets but assume an obligation to pay those cash flows to a third party
subject to certain pass-through requirements or when we transfer our contractual rights to receive the cash flows and substantially all of the risk
and rewards of the assets have been transferred. When we retain substantially all of the risks and rewards of the transferred assets, the transferred assets are not derecognized from our Consolidated Balance Sheets and are accounted for as secured financing transactions. When we
neither retain nor transfer substantially all risks and rewards of ownership of the assets, we derecognize the assets if control over the assets is
relinquished. If we retain control over the transferred assets, we continue to recognize the transferred assets to the extent of our continuing
involvement.
Management’s judgment is applied in determining whether the contractual rights to the cash flows from the transferred assets have expired
or whether we retain the rights to receive cash flows on the assets but assume an obligation to pay for those cash flows. We derecognize
transferred financial assets if we transfer substantially all the risk 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 entity 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 that 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 market value, a servicing asset is recognized in Other assets in our Consolidated Balance Sheets. When the benefits of servicing
are less than fair market 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.
Guarantees
Financial guarantee contracts are contracts that contingently require us to make specified payments (in cash, other assets, our own shares or
provision of services) to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with
the original or modified terms of a debt instrument. Liabilities are recognized on our Consolidated Balance Sheets at the inception of a guarantee
for the fair value of the obligation undertaken in issuing the guarantee. Financial guarantees are subsequently remeasured at the higher of (i) the
amount initially recognized and (ii) our best estimate of the present value of the expenditure required to settle the present obligation at the end
of the reporting period.
If the financial guarantee contract meets the definition of a derivative, it is measured at fair value at each balance sheet date and reported
under Derivatives on our Consolidated Balance Sheets.
Insurance and segregated funds
Premiums from long-duration contracts, primarily life insurance, are recognized when due in Non-interest income – Insurance premiums,
investment and fee income. Premiums from short-duration contracts, primarily property and casualty, and fees for administrative services are
recognized in Insurance premiums, investment and fee income over the related contract period. Unearned premiums of the short-duration
contracts, representing the unexpired portion of premiums, are reported in Other liabilities. Investments made by our insurance operations are
classified as AFS or loans and receivables, except for investments supporting the policy benefit liabilities on life and health insurance contracts
and a portion of property and casualty contracts. These are designated as at 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 business consist of commissions, premium taxes, certain underwriting costs and other costs that vary
with the acquisition of new business. 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.
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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 liability, 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. 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 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 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 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 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 is only an estimate for 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 plans are expensed when employees have rendered services in exchange for such contributions.
Defined contribution plan 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 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
accrued obligations 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.
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 purposes compared with 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 nontaxable 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 carryfowards are included in Other assets and Other
liabilities. On a quarterly basis, we review our deferred income tax assets to determine whether it is probable that the benefits associated with
these assets will be realized; this review involves evaluating both positive and negative evidence.
We are subject to income tax laws in various jurisdictions where we operate, and the complex tax laws are potentially subject to different
interpretations by us and the relevant taxation authorities. Significant judgment is required in the interpretation of the relevant tax laws, and the
determination of our tax provision which includes our best estimate of tax positions that are under audit or appeal by relevant taxation
authorities. We perform a review on a quarterly basis to incorporate our best assessment based on information available, but additional liability
and income tax expense could result based on decisions made by the relevant tax authorities.
The determination of our deferred tax asset or liability also requires significant management judgment as the recognition is dependant on
our projection of future taxable profits and tax rates that are expected to be in effect in the period the asset is realized or the liability is settled.
Any changes in our projection will result in changes in deferred tax assets or liabilities on our Consolidated Balance Sheets, and also deferred tax
expense in our Consolidated Statements of Income.

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Note 2 Summary of significant accounting policies, estimates and judgments (continued)
Business combinations, goodwill and other intangibles
All business combinations are accounted for using the acquisition method. Non-controlling interests, if any, are recognized at their proportionate
share of the fair value of identifiable assets and liabilities, unless otherwise indicated. Identifiable intangible assets are recognized separately
from goodwill and included in Other intangibles. Goodwill represents the excess of the price paid for the business acquired over the fair value of
the net identifiable assets acquired on the date of acquisition.
Goodwill
Goodwill is allocated to cash-generating units or groups of cash-generating units (CGU) 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 CGU with its carrying
amount. The recoverable amount of a CGU is the higher of its value in use and its fair value less costs of disposal. Value in use is the present
value of the expected future cash flows from a CGU. Fair value less costs of disposal is the amount obtainable from the sale of a CGU in an
orderly transaction between market participants, less disposal costs. The fair value of a CGU is estimated using valuation techniques such as a
discounted cash flow method, adjusted to reflect the considerations of a prospective third-party buyer. External evidence such as binding sale
agreements or recent transactions for similar businesses within the same industry is considered to the extent that it is available.
Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGU, in particular future
cash flows, discount rates and terminal growth rates, due to the uncertainty in the timing and amount of cash flows and the forward-looking
nature of these inputs. Future cash flows are based on financial plans agreed by management which are estimated based on forecast results,
business initiatives, planned capital investments and returns to shareholders. Discount rates are based on the bank-wide cost of capital,
adjusted for CGU-specific risks and currency exposure as reflected by differences in expected inflation. Bank-wide cost of capital is based on the
Capital Asset Pricing Model. CGU-specific risks include country risk, business/operational risk, geographic risk (including political risk,
devaluation risk, and government regulation), currency risk, and price risk (including product pricing risk and inflation). Terminal growth rates
reflect the expected long-term gross domestic product growth and inflation for the countries within which the CGU operates. Changes in these
assumptions may impact the amount of impairment loss recognized in Non-interest expense.
The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the recoverable
amount is less than the carrying value, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU
and then to the other non-financial assets of the CGU proportionately based on the carrying amount of each asset. Any impairment loss is
charged to income in the period in which the impairment is identified. Goodwill is stated at cost less accumulated impairment losses.
Subsequent reversals of goodwill impairment are prohibited.
Upon disposal of a portion of a CGU, the carrying amount of goodwill relating to the portion of the CGU sold is included in the determination
of gains or losses on disposal. The carrying amount is determined based on the relative fair value of the disposed portion to the total CGU.
Other intangibles
Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business combination, or generated
internally. Intangible assets acquired through a business combination are recognized separately from goodwill when they are separable or arise
from contractual or other legal rights, and their fair value can be measured reliably. The cost of a separately acquired intangible asset includes its
purchase price and directly attributable costs of preparing the asset for its intended use. In respect of internally generated intangible assets, cost
includes all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by
management. Research and development costs that are not eligible for capitalization are expensed. After initial recognition, an intangible asset
is carried at its cost less any accumulated amortization and accumulated impairment losses, if any. Intangible assets with a finite-life are
amortized on a straight-line basis over their estimated useful lives as follows: computer software – 3 to 10 years; and customer relationships –
10 to 20 years. We do not have any intangible assets with indefinite lives.
Intangible assets are assessed for indicators of impairment at each reporting period. If there is an indication that an intangible asset may be
impaired, an impairment test is performed by comparing the carrying amount of the intangible asset to its recoverable amount. Where it is not
possible to estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs.
If the recoverable amount of the asset (or CGU) is less than its carrying amount, the carrying amount of the intangible asset is written down to its
recoverable amount as an impairment loss.
An impairment loss recognized previously is reversed if there is a change in the estimates used to determine the recoverable amount of the
asset (or CGU) since the last impairment loss was recognized. If an impairment loss is subsequently reversed, the carrying amount of the asset
(or CGU) is revised to the lower of its recoverable amount and the carrying amount that would have been determined (net of amortization) had
there been no prior impairment.
Due to the subjective nature of these estimates, significant judgment is required in determining the useful lives and recoverable amounts of
our intangible assets, and assessing whether certain events or circumstances constitute objective evidence of impairment. Estimates of the
recoverable amounts of our intangible assets rely on certain key inputs, including future cash flows and discount rates. Future cash flows are
based on sales projections and allocated costs which are estimated based on forecast results and business initiatives. Discount rates are based
on the bank-wide cost of capital, adjusted for asset-specific risks. Changes in these assumptions may impact the amount of impairment loss
recognized in Non-interest expense.
Other
Translation of foreign currencies
Monetary assets and liabilities denominated in foreign currencies, are translated into Canadian dollars at rates prevailing at the balance sheet
date. Foreign exchange gains and losses resulting from the translation and settlement of these items are recognized in Non-interest income in
the Consolidated Statements of Income.
Non-monetary assets and liabilities that are measured at historical cost are translated into Canadian dollars at historical rates. Nonmonetary financial assets classified as AFS securities, such as equity instruments, that are measured at fair value are translated into Canadian
dollars at rates prevailing at the balance sheet date, and the resulting foreign exchange gains and losses are recorded in Other components of
equity until the asset is sold or becomes impaired.
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.
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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 and accumulated impairment losses. Cost comprises the purchase price, any costs directly
attributable to bringing the asset to the location and condition necessary for its intended use, and the initial estimate of any disposal costs.
Depreciation is recorded principally on a straight–line basis over the estimated useful lives of the assets, which are 25 to 50 years for buildings,
3 to 10 years for computer equipment, and 7 to 10 years for furniture, fixtures and other equipment. The amortization period for leasehold
improvements is the lesser of the useful life of the leasehold improvements or the lease term plus the first renewal period, if reasonably assured
of renewal, up to a maximum of 10 years. Land is not depreciated. Gains and losses on disposal are recorded in Non–interest income.
Premises and equipment are assessed for indicators of impairment at each reporting period. If there is an indication that an asset may be
impaired, an impairment test is performed by comparing the asset’s carrying amount to its recoverable amount. Where it is not possible to
estimate the recoverable amount of an individual asset, we estimate the recoverable amount of the CGU to which the asset belongs and test for
impairment at the CGU level. An impairment charge is recorded to the extent the recoverable amount of an asset (or CGU), which is the higher of
value in use and fair value less costs of disposal, is less than its carrying amount. Value in use is the present value of the future cash flows
expected to be derived from the asset (or CGU). Fair value less costs of disposal is the amount obtainable from the sale of the asset (or CGU) in
an orderly transaction between market participants, less costs of disposal.
After the recognition of impairment, the depreciation charge is adjusted in future periods to reflect the asset’s revised carrying amount. If an
impairment is later reversed, the carrying amount of the asset is revised to the lower of the asset’s recoverable amount and the carrying amount
that would have been determined (net of depreciation) had there been no prior impairment loss. The depreciation charge in future periods is
adjusted to reflect the revised carrying amount.
Provisions
Provisions are liabilities of uncertain timing or amount and are recognized when we have a present legal or constructive obligation as a result of a
past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount
of the obligation. Provisions are measured as the best estimate of the consideration required to settle the present obligation at the reporting
date. Significant judgment is required in determining whether a present obligation exists and in estimating the probability, timing and amount of
any outflows. We record provisions related to litigation, asset retirement obligations, and the allowance for off-balance sheet and other items.
Provisions are recorded under Other liabilities on our Consolidated Balance Sheets.
We are required to estimate the results of ongoing legal proceedings, expenses to be incurred to dispose of capital assets, and credit losses
on undrawn commitments and guarantees. The forward-looking nature of these estimates requires us to use a significant amount of judgment in
projecting the timing and amount of future cash flows. We record our provisions on the basis of all available information at the end of the
reporting period and make adjustments on a quarterly basis to reflect current expectations. Should actual results differ from our expectations, we
may incur expenses in excess of the provisions recognized.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, such as an insurer,
a separate asset is recognized if it is virtually certain that reimbursement will be received.
Commissions and fees
Portfolio management and other management advisory and service fees are recognized based on the applicable service contracts. Fees related
to provision of services including asset management, wealth management, financial planning and custody services that cover a specified service
period, are recognized over the period in which the service is provided. Fees such as underwriting fees and brokerage fees that are related to the
provision of specific transaction type services are recognized when the service has been completed.
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.
Leasing
A lease is an agreement whereby the lessor conveys to the lessee the right to use an asset for an agreed upon period of time in return for a
payment or series of payments. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of the
leased asset to the lessee, where title may or may not eventually be transferred. An operating lease is a lease other than a finance lease.
Operating leases
When we are the lessee in an operating lease, we record rental payments on a straight-line basis over the lease term in Non-interest expense.
Finance leases
When we are the lessee in a finance lease, we initially record both the leased asset and the related lease obligation in Premises and equipment,
Other intangibles and Other liabilities on our Consolidated Balance Sheets at an amount equal to the fair value of the leased asset or, if lower,
the present value of the minimum lease payments, each determined at the date of inception of the lease. Initial direct costs directly attributed to
the lease are recognized as an asset under the finance lease.
Earnings per share
Earnings per share is computed by dividing Net income available to common shareholders by the weighted average number of common shares
outstanding for the period. Net income available to common shareholders is determined after deducting dividend entitlements of preferred
shareholders, any gain (loss) on redemption of preferred shares net of related income taxes and the net income attributable to non-controlling
interests.
Diluted earnings per share reflects the potential dilution that could occur if additional common shares are assumed to be issued under
securities or contracts that entitle their holders to obtain common shares in the future, to the extent such entitlement is not subject to
unresolved contingencies. For contracts that may be settled in cash or in common shares at our option, diluted earnings per share is calculated
based on the assumption that such contracts will be settled in shares. Income and expenses associated with these types of contracts are
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

129

Note 2 Summary of significant accounting policies, estimates and judgments (continued)
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. These contracts include our convertible Preferred Shares and Trust Capital Securities. For stock options
whose exercise price is less than the average market price of our common shares, they are assumed to be exercised and the proceeds are used
to repurchase common shares at the average market price for the period. The incremental number of common shares issued under stock options
and repurchased from proceeds is included in the calculation of diluted earnings per share.
Share capital
We classify a financial instrument that we issue as a financial asset, financial liability or an equity instrument in accordance with the substance
of the contractual arrangement.
Our common shares held by us are classified as treasury shares in equity and accounted for at weighted average cost. Upon the sale of
treasury shares, the difference between the sale proceeds and the cost of the shares is recognized in Retained earnings. Financial instruments
issued by us are classified as equity instruments when there is no contractual obligation to transfer cash or other financial assets. Incremental
costs directly attributable to the issue of equity instruments are included in equity as a deduction from the proceeds, net of tax. Financial
instruments that will be settled by a variable number of our common shares upon their conversion by the holders as well as the related accrued
distributions are classified as liabilities on our Consolidated Balance Sheets. Dividends and yield distributions on these instruments are
classified as Interest expense in our Consolidated Statements of Income.
Future changes in accounting policy and disclosure
We are currently assessing the impact of adopting the following standards on our consolidated financial statements:
IAS 32 Financial Instruments: Presentation (IAS 32)
In December 2011, the IASB issued amendments to IAS 32 which clarify the existing requirements for offsetting financial assets and financial
liabilities. The amendments will be effective for us on November 1, 2014. The adoption of these amendments is not expected to have a material
impact on our consolidated financial statements.
IFRS Interpretations Committee Interpretation 21 Levies (IFRIC 21)
In May 2013, the IASB issued IFRIC 21 which provides guidance on when to recognize a liability to pay a levy that is accounted for in accordance
with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. It also addresses the accounting for a liability to pay a levy whose timing
and amount is certain. The Interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the
relevant legislation that triggers the payment of the levy. IFRIC 21 will be effective for us on November 1, 2014. The adoption of this interpretation
is not expected to have a material impact on our consolidated financial statements.
IFRS 15 Revenue from Contracts with Customers (IFRS 15)
In May 2014, the IASB issued IFRS 15 which establishes principles for reporting about the nature, amount, timing and uncertainty of revenue and
cash flows arising from an entity’s contracts with customers. The standard provides a single, principles based five-step model for revenue
recognition to be applied to all contracts with customers. IFRS 15 will be effective for us on November 1, 2017.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the complete version of IFRS 9, first issued in November 2009, which brings together the classification and
measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39.
IFRS 9 introduces a principles-based approach to the classification of financial assets based on an entity’s business model and the nature
of the cash flows of the asset. All financial assets, including hybrid contracts, are measured as at FVTPL, fair value through OCI or amortized cost.
For financial liabilities, IFRS 9 includes the requirements for classification and measurement previously included in IAS 39.
IFRS 9 also introduces an expected loss impairment model for all financial assets not as at FVTPL. The model has three stages: (1) on initial
recognition, 12-month expected credit losses are recognized in profit or loss and a loss allowance is established; (2) if credit risk increases
significantly and the resulting credit risk is not considered to be low, full lifetime expected credit losses are recognized; and (3) when a financial
asset is considered credit-impaired, interest revenue is calculated based on the carrying amount of the asset, net of the loss allowance, rather
than its gross carrying amount.
Finally, IFRS 9 introduces a new hedge accounting model that aligns the accounting for hedge relationships more closely with an entity’s
risk management activities.
We adopted the own credit provisions of IFRS 9 in the second quarter of this year. The remaining sections of IFRS 9 will be effective for us no
later than November 1, 2018.

130

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Note 3 Fair value of financial instruments
Carrying value and fair value of selected financial instruments
The following tables provide a comparison of the carrying and fair values for each classification of financial instruments.
As at October 31, 2014
Carrying value

Carrying value and fair value

(Millions of Canadian dollars)
Financial assets
Securities
Trading
Available-for-sale (1)
Total Securities
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans
Retail
Wholesale

Financial
instruments
classified
as at FVTPL

Financial
instruments
designated
as at FVTPL

Availablefor-sale
instruments
measured at
fair value

$ 141,217
–
141,217

$

$

Other
Derivatives
Other assets
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
Subordinated debentures

10,163
–
10,163

–
46,009
46,009

Fair value

Financial
instruments
measured at
amortized cost

$

–
1,759
1,759

Financial
instruments
measured at
amortized cost

$

–
1,762
1,762

Total carrying
amount

$

Total
fair value

151,380
47,768
199,148

$ 151,380
47,771
199,151

–

85,292

—

50,288

50,288

135,580

135,580

–
1,337
1,337

–
2,278
2,278

–
–
–

333,763
97,851
431,614

335,178
97,758
432,936

333,763
101,466
435,229

335,178
101,373
436,551

87,402
–

–
930

–
–

–
32,975

–
32,975

87,402
33,905

87,402
33,905

209,217
386,660
18,223
614,100

$ 209,365
387,774
18,228
615,367

112
–
–
112

$

13,289
59,446
6,592
79,327

$

195,816
327,214
11,631
534,661

$

195,964
328,328
11,636
535,928

$

50,345

–

–

–

50,345

50,345

–
88,982
20
–

58,411
–
30
106

5,920
–
36,816
7,753

5,921
–
36,762
7,712

64,331
88,982
36,866
7,859

64,332
88,982
36,812
7,818

Total carrying
amount

Total
fair value

As at October 31, 2013
Carrying value and fair value
Financial
instruments
classified
as at FVTPL

(Millions of Canadian dollars)
Financial assets
Securities
Trading
$
Available-for-sale (1)
Total Securities
Assets purchased under reverse repurchase agreements
and securities borrowed
Loans
Retail
Wholesale
Other
Derivatives
Other assets
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
Subordinated debentures
(1)
(2)
(3)

$

135,346
–
135,346

Financial
instruments
designated
as at FVTPL

Availablefor-sale
instruments
measured at
fair value

$

$

8,677
–
8,677

–
38,286
38,286

Carrying value

Fair value

Financial
instruments
measured at
amortized cost

Financial
instruments
measured at
amortized cost

$

–
401
401

$

–
401
401

$

144,023
38,687
182,710

$ 144,023
38,687
182,710

–

82,023

–

35,494

35,494

117,517

117,517

–
614
614

–
964
964

–
–
–

319,447
87,825
407,272

317,635
87,848
405,483

319,447
89,403
408,850

317,635
89,426
407,061

74,822
–

–
983

–
–

–
28,820

–
28,820

74,822
29,803

74,822
29,803

194,943
354,593
13,543
563,079

$ 195,127
355,479
13,543
564,149

69
–
–
69
47,128
–
76,745
(2)
–

$

9,069
56,037
1,932
67,038

$

185,805
298,556
11,611
495,972

$

185,989
299,442
11,611
497,042

$

–

–

–

47,128

47,128

53,948
–
42
109

6,468
–
34,352
7,334

6,468
–
34,352
7,285

60,416
76,745
34,392
7,443

60,416
76,745
34,392
7,394

Available-for-sale securities include held-to-maturity securities that are recorded at amortized cost.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

131

Note 3 Fair value of financial instruments (continued)
The following tables present information on loans and receivables designated as at FVTPL, the maximum exposure to credit risk, the extent to
which the risk is mitigated by credit derivatives and similar instruments, and changes in the fair value of these assets. For our loans and
receivables designated as at 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.
Loans and receivables designated as at fair value through profit or loss
As at October 31, 2014

Carrying
amount of
loans and
receivables
designated
as at FVTPL

(Millions of Canadian dollars)

Interest-bearing deposits with banks $
5,603
Assets purchased under reverse
repurchase agreements and
securities borrowed
85,292
Loans – Wholesale
2,278
Other Assets
326
$ 93,499

Maximum
exposure to
credit risk

Extent to
which credit
derivatives
or similar
instruments
mitigate
credit risk

Changes in
fair value for
the year
attributable
to changes in
credit risk for
positions
still held

Cumulative
change in
fair value
attributable
to changes in
credit risk for
positions
still held (1)

Changes in
fair value
of credit
derivatives
or similar
instruments
for the year

Cumulative
change
in fair value
of credit
derivatives
or similar
instruments (1)

$

5,603

$

–

$

–

$

–

$

–

$

–

$

85,292
2,278
326
93,499

$

–
242
–
242

$

–
4
–
4

$

–
5
–
5

$

–
–
–
–

$

–
–
–
–

As at October 31, 2013

Carrying
amount of
loans and
receivables
designated
as at FVTPL

(Millions of Canadian dollars)

Maximum
exposure to
credit risk

Interest-bearing deposits with banks $ 2,424
Assets purchased under reverse
repurchase agreements and
securities borrowed
82,023
Loans – Wholesale
964
Other assets
463
$ 85,874
(1)

$

2,424

82,023
964
463
$ 85,874

Extent to
which credit
derivatives
or similar
instruments
mitigate
credit risk

$

–

$

–
224
–
224

Changes in
fair value for
the year
attributable
to changes in
credit risk for
positions
still held

Cumulative
change in
fair value
attributable
to changes in
credit risk for
positions
still held (1)

Changes in
fair value
of credit
derivatives
or similar
instruments
for the year

Cumulative
change
in fair value
of credit
derivatives or
similar
instruments (1)

$

–

$

–

$

–

$

–

$

–
3
–
3

$

–
1
–
1

$

–
–
–
–

$

–
–
–
–

The cumulative change is measured from the initial recognition of the credit derivative or similar instruments.

The following tables present the changes in the fair value of our financial liabilities designated as at FVTPL as well as their contractual maturity
and carrying amounts. For our financial liabilities designated as at 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 the fair value attributable
to changes in market conditions such as changes in benchmark interest rate or foreign exchange rate.
Liabilities designated as at fair value through profit or loss
As at October 31, 2014

(Millions of Canadian dollars)

Term deposits
Personal
Business and government (2)
Bank (3)
Obligations related to assets sold
under repurchase agreements
and securities loaned
Other liabilities
Subordinated debentures

132

Contractual
maturity
amount

$

12,964
59,139
6,592
78,695

58,413
30
101
$ 137,239

Royal Bank of Canada: Annual Report 2014

Carrying
Value

$

13,289
59,446
6,592
79,327

58,411
30
106
$ 137,874

Difference
between
carrying value
and contractual
maturity amount

Changes in fair
value for the year
ended attributable
to changes in
credit risk included
in net income for
positions still held

Changes in fair value
for the year ended
attributable to
changes in credit
risk included in other
comprehensive income
for positions still held

Cumulative change
in fair value
attributable to
changes in credit
risk for positions
still held (1)

$

$

–
–
–
–

$

$

(2)
–
5
635 $

–
–
–
–

$

Consolidated Financial Statements

325
307
–
632

$

13
61
–
74

–
–
3
77

$

19
58
–
77

–
–
(3)
74

As at October 31, 2013

(Millions of Canadian dollars)

Term deposits
Personal
Business and government (2)
Bank (3)
Obligations related to assets sold
under repurchase agreements
and securities loaned
Other liabilities
Subordinated debentures
(1)
(2)
(3)
n.a.

Contractual
maturity
amount

$

8,963
56,216
1,932
67,111

53,952
42
106
$ 121,211

Carrying
value

$

9,069
56,037
1,932
67,038

53,948
42
109
$ 121,137

Difference
between
carrying value
and contractual
maturity amount

$

$

Changes in fair
value for the year
ended attributable
to changes in
credit risk included
in net income for
positions still held

Changes in fair value
for the year ended
attributable to
changes in credit risk
included in other
comprehensive income
for positions still held

106 $
(179)
–
(73)

(20)
36
–
16

n.a.
n.a.
n.a.
n.a.

(4)
–
3
(74) $

–
–
6
22

n.a.
n.a.
n.a.
n.a.

Cumulative change
in fair value
attributable to
changes in credit
risk for positions
still held (1)

$

$

6
(3)
–
3

–
–
(6)
(3)

The cumulative change is measured from the initial recognition of the liabilities designated as at FVTPL. For the year ended October 31, 2014, $4 million of fair value losses previously
included in OCI were realized for financial liabilities derecognized during the year.
Business and government includes deposits from regulated deposit-taking institutions other than regulated banks.
Bank refers to regulated banks.
not applicable.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

133

Note 3 Fair value of financial instruments (continued)
Fair value of assets and liabilities measured on a recurring basis and classified using the fair value hierarchy
The following tables present the financial instruments that are measured at fair value on a recurring basis and classified by the fair value
hierarchy.
As at
October 31, 2014

(Millions of Canadian dollars)

Fair value
measurements using
Level 1
Level 2
Level 3

Financial assets
Interest bearing deposits with banks $
Securities
Trading
Canadian government debt (1)
Federal
Provincial and municipal
U.S. state, municipal and
agencies debt (1)
Other OECD government debt (2)
Mortgage-backed securities (1)
Asset-backed securities
CDOs (3)
Non-CDO securities
Corporate debt and other debt
Equities
Available-for-sale (4)
Canadian government debt (1)
Federal
Provincial and municipal
U.S. state, municipal and
agencies debt (1)
Other OECD government debt
Mortgage-backed securities (1)
Asset-backed securities
CDOs
Non-CDO securities
Corporate debt and other debt
Equities
Loan substitute securities
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans
Other
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments (5)
Total gross derivatives
Netting adjustments
Total derivatives
Other assets

–

Total gross derivatives
Netting adjustments
Total derivatives
Other liabilities
Subordinated debentures

(1)
(2)
(3)
(4)
(5)
n.a.
134

5,603

$

–

Total
gross fair
value

Netting
adjustments

$

$

$

5,603

5,603

Fair value
measurements using
Level 1
Level 2
Level 3
$

–

$

2,424

$

–

Total
gross fair
value
$

2,424

Netting
adjustments
$

Assets/
liabilities
at fair
value
$

2,424

8,288
–

5,855
11,371

–
–

14,143
11,371

14,143
11,371

11,978
–

6,976
12,146

–
–

18,954
12,146

18,954
12,146

1,838
7,334
–

27,628
7,991
964

6
–
4

29,472
15,325
968

29,472
15,325
968

5,480
2,815
–

23,980
8,101
802

22
370
28

29,482
11,286
830

29,482
11,286
830

–
–
15
47,396

37
889
27,422
3,589

74
364
149
166

111
1,253
27,586
51,151

111
1,253
27,586
51,151

–
–
–
41,874

–
1,084
24,346
3,132

31
260
415
183

31
1,344
24,761
45,189

31
1,344
24,761
45,189

64,871

85,746

763

151,380

151,380

62,147

80,567

1,309

144,023

144,023

429
–

11,540
799

–
–

11,969
799

11,969
799

153
–

9,690
667

–
–

9,843
667

9,843
667

29
6,979
–

4,839
7,303
138

1,389
11
–

6,257
14,293
138

6,257
14,293
138

26
5,463
–

4,238
5,434
139

2,014
–
–

6,278
10,897
139

6,278
10,897
139

–
–
–
140
102

857
381
7,714
514
24

24
182
1,573
1,028
–

881
563
9,287
1,682
126

881
563
9,287
1,682
126

–
–
–
137
103

1,294
283
5,096
585
24

103
180
1,673
969
–

1,397
463
6,769
1,691
127

1,397
463
6,769
1,691
127

7,679

34,109

4,207

45,995

45,995

5,882

27,450

4,939

38,271

38,271

–
–

85,292
3,154

–
461

85,292
3,615

85,292
3,615

–
–

82,023
1,164

–
414

82,023
1,578

82,023
1,578

13
–
–
3,238
–

102,176
33,761
244
4,839
(702)

339
48
10
560
(56)

102,528
33,809
254
8,637
(758)

102,528
33,809
254
8,637
(758)

22
–
–
2,558
(2)

78,517
20,709
193
3,219
(398)

333
76
32
858
(105)

78,872
20,785
225
6,635
(505)

78,872
20,785
225
6,635
(505)

3,251

140,318

901

144,470

144,470
(57,068)

2,578

(57,068)

983

$ 380,217

$ 71,127

$ 296,320

$ 7,867

$ 375,314

$ (31,190)

$ 344,124

$ 13,401
59,446
6,592

$

$

8,095
52,104
1,932

$ 1,043
3,933
–

$

$

$

31,832

15,280

16

47,128

47,128

–

53,948

–

53,948

53,948

97,470
35,703
342
12,485
(36)

9
–
–
2,379
n.a.

74,113
22,715
295
5,979
n.a.

791
193
37
1,727
n.a.

74,913
22,908
332
10,085
n.a.

74,913
22,908
332
10,085
n.a.

145,964
(56,982)

2,388

103,102

2,748

108,238

$ 76,405

$ 354,548

$ 6,332

$ 437,285

$

$ 12,904
59,376
6,592

$

497
70
–

$ 13,401
59,446
6,592

$

17,484

4

50,345

50,345

58,411

–

58,411

58,411

97,470
35,703
342
12,485
(36)

2,895

141,215

709
39
15
1,062
29
1,854

145,964
(56,982)

–
–

30
106

20
–

50
106

$ 35,752

$ 296,118

$ 2,445

$ 334,315

$

(56,982)

106,012
(31,190)

(31,190)
11

930

96,752
35,664
327
8,537
(65)

106,012

452

–

9
–
–
2,886
–

1,194

520

326

(57,068)

102,240

87,402
930

604

Financial Liabilities
Deposits
Personal
$
–
Business and government
–
Bank
–
Other
Obligations related to securities
sold short
32,857
Obligations related to assets sold
under repurchase agreements
and securities loaned
–
Derivatives
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments (5)

$

October 31, 2013

Assets/
liabilities
at fair
value

–
–
–

9,138
56,037
1,932

74,822
983

(31,493)

88,982
50
106

–
–

37
–

3
109

40
109

$ 277,333

$ 34,220

$ 234,498

$ 7,852

$ 276,570

9,138
56,037
1,932

108,238
(31,493)
76,745
40
109

$ (31,493)

$ 245,077

As at October 31, 2014, residential and commercial mortgage-backed securities (MBS) included in all fair value levels of Trading securities were $6,564 million and $81 million (October 31,
2013 – $4,934 million and $93 million), respectively, and in all fair value levels of AFS securities, $6,956 million and $34 million (October 31, 2013 – $3,105 and $35 million), respectively.
OECD stands for Organisation for Economic Co-operation and Development.
CDOs stand for Collateralized Debt Obligations.
Excludes $14 million and $1,759 million of AFS and held-to-maturity securities (October 31, 2013 – $15 million and $401 million), respectively, that are carried at cost.
IFRS 13 requirements are applied on a prospective basis and the standard 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 fair value of certain portfolios of financial instruments,
primarily derivatives, on a net exposure to market or credit risk. The valuation adjustment amounts in this table include those determined on a portfolio basis.
not applicable.
Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

The following describes how fair values are determined, what inputs are used and where they are classified in the fair value hierarchy table
above, for our significant assets and liabilities that are measured at fair value on a recurring basis:
Government bonds (Canadian, U.S. and other OECD governments)
Government bonds are included in Canadian government debt, U.S. state, municipal and agencies debt, Other OECD government debt and
Obligations related to securities sold short in the fair value hierarchy table. The fair values of government issued or guaranteed debt securities in
active markets are determined by reference to recent transaction prices, broker quotes, or third-party vendor prices and are classified as Level 1
in the fair value hierarchy. The fair values of securities that are not traded in active markets are based on either security prices, or valuation
techniques using implied yields and risk spreads derived from prices of actively traded and similar government securities. Securities with
observable prices or rate inputs as compared to transaction prices, dealer quotes or vendor prices are classified as Level 2 in the hierarchy.
Securities where inputs are unobservable are classified as Level 3 in the hierarchy.
Corporate and U.S. municipal bonds
The fair values of corporate and U.S. municipal bonds, which are included in Corporate debt and other debt, U.S. state, municipal and agencies
debt and Obligations related to securities sold short in the fair value hierarchy table, are determined using either recently executed transaction
prices, broker quotes, pricing services, or in certain instances discounted cash flow method using rate inputs such as benchmark yields
(Canadian Dealer Offered Rate, LIBOR and other similar reference rates) and risk spreads of comparable securities. Securities with observable
prices or rate inputs 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.
Asset-backed securities and Mortgage-backed securities
Asset-backed securities (ABS) and MBS are included in Asset-backed securities, Mortgage-backed securities, Canadian government debt, U.S.
state, municipal and agencies debt, and Obligations related to securities sold short in the fair value hierarchy table. ABS are primarily
collateralized debt obligations (CDO). Inputs for valuation of MBS and CDO are, when available, traded prices, dealer or lead manager quotes,
broker quotes and vendor prices of the identical securities. When prices of the identical securities are not readily available, we use industry
standard models with inputs such as discount margins, yields, default, prepayment and loss severity rates that are implied from transaction
prices, dealer quotes or vendor prices of comparable instruments. Where security prices and inputs are observable, ABS and MBS are classified
as Level 2 in the hierarchy. Otherwise, they are classified as Level 3 in the hierarchy.
Auction rate securities
Auction rate securities (ARS) are included in U.S. state, municipal and agencies debt, and Asset-backed securities in the fair value hierarchy
table. The valuation of ARS involves discounting forecasted cash flows from the underlying student loan collateral and incorporating multiple
inputs such as default, prepayment, deferment and redemption rates, and credit spreads. These inputs are unobservable, and therefore, ARS are
classified as Level 3 in the hierarchy. All relevant data must be assessed and significant judgment is required to determine the appropriate
valuation inputs.
Equities
Equities and Obligations related to securities sold short in the fair value hierarchy table consist of listed and unlisted common shares, private
equities and hedge funds with certain redemption restrictions. 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, including multiples of earnings and discounted
cash flow method with forecasted cash flows and discount rate as inputs. Private equities are classified as Level 3 in the hierarchy as their inputs
are not observable. Hedge funds are valued using Net Asset Values (NAV). If we can redeem a hedge fund at NAV prior to the next quarter end,
the fund is classified as Level 2 in the hierarchy. Otherwise, it is classified as Level 3 in the hierarchy.
Derivatives
The fair values of exchange-traded derivatives, such as interest rate and equity options and futures, are based on quoted market prices and are
classified as Level 1 in the fair value hierarchy. OTC derivatives primarily consist of interest rate and cross currency swaps, interest rate options,
foreign exchange forward contracts and options, and commodity options and swaps. 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. As previously discussed, 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 lent 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. Fair value for these contracts is calculated
using valuation techniques such as 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 we designated certain deposits as at FVTPL. These FVTPL deposits are composed of
deposits taken, the issuance of certificate of deposits and promissory notes, interest rate and equity linked notes, and are included in Deposits
in the fair value hierarchy table. The fair values for these instruments are determined using discounted cash flow method and derivative option
valuation models. The inputs to the valuation models include benchmark yield curves, credit spreads, interest rates, interest rate and equity
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.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

135

Note 3 Fair value of financial instruments (continued)
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, 2014 (Millions of Canadian dollars, except for prices, percentages and ratios)
Range of input values (2), (3), (4)

Fair value

Reporting line in the fair value
hierarchy table

Products

Assets

Liabilities

Non-derivative financial instruments
Asset-backed securities
Asset-backed securities

$

478

Auction rate securities
U.S. state, municipal and
agencies debt
Asset-backed securities

100
461

Equity derivatives and equity-linked
structured notes (8)

75.92
5.09%
3.52%
2.00%
20.00%
50.00%

1.32%
9.00%
4.00%
40.00%

2.26%
9.80%
4.76%
93.51%

Discounted cash flows

Discount margins
Default rates
Prepayment rates
Recovery rates

Price-based
Discounted cash flows

Prices
Yields
Capitalization rates
Liquidity discounts (6)

$

2.50 $ 119.52 $
2.75%
7.50%
6.43%
9.47%
10.00%
10.00%

97.86
3.84%
7.95%
10.00%

Price-based
Discounted cash flows

Prices
Yields

$

67.38 $ 100.00 $
0.17%
30.15%

96.24
3.06%

Discounted cash flows

Interest rate (IR)–IR correlations
Foreign exchange (FX)–FX
correlations
FX–IR correlations

19.00%

67.00%

Even

68.00%
29.00%

68.00%
56.00%

Even
Even

Market comparable
Price-based
Discounted cash flows

EV/EBITDA multiples
P/E multiples
EV/Rev multiples
Liquidity discounts (6)
Discount rate
Net Asset Values /Prices (7)

4.00 X
8.79 X
0.45 X
–%
12.00%
n.a.

10.80 X
15.70 X
7.50 X
50.00%
17.00%
n.a.

8.73 X
11.79 X
4.97 X
26.92%
14.78%
n.a.

Discounted cash flows
Option pricing model

Interest rates
CPI swap rates
IR–IR correlations
FX–IR correlations
FX-FX correlations
IR volatilities

2.96%
1.73%
19.00%
29.00%
68.00%
26.28%

2.98%
2.30%
67.00%
56.00%
68.00%
28.28%

Even
Even
Even
Even
Even
Even

Discounted cash flows
Option pricing model

Dividend yields
Equity (EQ)-EQ correlations
EQ-FX correlations
EQ volatilities

0.04%
0.50%
(72.80)%
1.00%

18.11%
97.20%
53.20%
172.00%

Lower
Middle
Middle
Lower

70

Deposits

Derivative financial instruments
Interest rate derivatives and interestrate-linked structured notes (8)

53.70 $ 90.50 $
0.70%
9.48%
2.84%
5.36%
1.00%
5.00%
15.00%
30.00%
30.00%
70.00%

Prices
Discount margins
Yields
Default rates
Prepayment rates
Loss severity rates

4.63%
10.00%
8.00%
97.50%

416
11
1,616

Bank funding and deposits

Private equities, hedge fund
investments and related equity
derivatives

$

High

4

Government debt and municipal bonds
U.S. state, municipal and
agencies debt
Other OECD government debt
Corporate debt and other debt

Low

Weighted
average / Inputs
distribution (5)

Price-based
Discounted cash flows

979
166

Corporate debt
Corporate debt and other debt
Loans
Obligations related to
securities sold short

Valuation
techniques

Significant
unobservable
inputs (1)

Equities
Derivative-related assets
Derivative-related liabilities

1,194
11

Derivative-related assets
Derivative-related liabilities

348

Derivative-related assets
Deposits
Derivative-related liabilities

442

Mortgage-backed securities
Corporate debt and other debt
Derivative-related assets
Derivative-related liabilities
Other Liabilities

4
6
100

434

732

497
529

Other (9)

$ 6,332 $

Total

(1)
(2)
(3)

(4)
(5)
(6)
(7)

(8)
(9)
n.a.

136

159
20
2,445

The acronyms stand for the following: (i) Enterprise Value (EV); (ii) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA); (iii) Price / Earnings (P/E); (iv) Revenue (Rev); and
(v) Consumer Price Index (CPI).
Comparative information relating to periods before November 1, 2013 is not required by IFRS 13.
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 level of aggregation and diversity within each derivative instrument category may result in certain ranges of inputs being wide and 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.
Fair value of securities with liquidity discount inputs totalled $211 million.
NAV of a hedge fund is total fair value of assets less liabilities divided by the number of fund units. The NAVs of the funds and the corresponding equity derivatives referenced to NAVs are not
considered observable as we cannot redeem certain of these hedge funds at NAV prior to the next quarter end. Private equities are valued based on NAV or valuation techniques. The range
for NAV per unit or price per share has not been disclosed for the hedge funds or private equities due to the dispersion of prices given the diverse nature of the investments.
The structured notes contain embedded equity or interest rate derivatives with unobservable inputs that are similar to those of the equity or interest rate derivatives.
Other primarily includes certain insignificant instruments such as commodity derivatives, foreign exchange derivatives, credit derivatives and bank-owned life insurance.
not applicable

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

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 present value 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. Generally, an increase in the credit spread or discount margin will result in a decrease in fair
value, and vice versa.
Funding spread
Funding spreads are credit spreads specific to our funding or deposit rates. A decrease in funding spreads, on its own, will increase fair value of
our liabilities, and vice versa.
Default rates
A default rate is the rate at which borrowers fail to make scheduled loan payments. A decreasing default rate will typically increase the fair value
of the loan, and vice versa. This effect will be significantly more pronounced for a non-government guaranteed loan than a government
guaranteed loan.
Prepayment rates
A prepayment rate is the rate at which a loan will be repaid in advance of its expected amortization schedule. Prepayments change the future
cash flows of a loan. An increase in the prepayment rate in isolation will result in an increase in fair value when the loan interest rate is lower
than the then 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 then 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 percentage of the
recovered amount divided by the loan balance due. The inverse concept of recovery is loss severity. Loss severity is an estimation of the loan
amount not collected when a loan defaults. The loss severity rate is the percentage of the loss amount divided by the loan balance due.
Generally, an increase in the recovery rate or a decrease in the loss severity rate will increase the loan fair value, and vice versa.
Capitalization rates
A capitalization rate is a rate of return on a real estate property investment calculated by dividing a property’s income by the property’s value. A
lower capitalization rate increases the property 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 its contractual
payout.
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 Consumer Price Index (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.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

137

Note 3 Fair value of financial instruments (continued)
EV/EBITDA multiples, P/E multiples, EV/Rev multiples, and liquidity discounts
Private equity valuation inputs include Enterprise Value / Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA) multiples,
Price / Earnings (P/E) multiples and Enterprise Value / Revenue (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.
Interrelationships between unobservable inputs
Unobservable inputs of ARS, including the above discount margin, default rate, prepayment rate, recovery and loss severity rates, may not be
independent of each other. The discount margin of ARS 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. Prepayments may cause fair
value to either increase or decrease.
Changes in fair value measurement for instruments measured on a recurring basis and categorized in Level 3
The following tables present the changes in fair value measurements on a recurring basis for instruments included in Level 3 of the fair value
hierarchy.
For the year ended October 31, 2014

(Millions of Canadian dollars)

Assets
Securities
Trading
U.S. state, municipal and
agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
CDOs
Non-CDO securities
Corporate debt and other debt
Equities

Fair value
November 1,
2013

Total
realized/
unrealized
gains (losses)
included in
earnings

$

$

Loans – Wholesale
Other
Net derivative balances (3)
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments
Other assets

$

138

Royal Bank of Canada: Annual Report 2014

$

(61) $
–
(83)

5
–
1

Transfers
out of
Level 3

$

Fair value
October 31,
2014

15
(2)
(2)
1

(9)
20
27
14

130
2,083
263
84

(85)
(1,984)
(487)
(77)

7
16
20
22

(15)
(29)
(87)
(61)

74
364
149
166

2
(5)
–
–

1,309

9

52

2,697

(2,777)

71

(598)

763

(2)

2,014
–

–
–

240
–

–
1

(856)
10

–
–

(9)
–

1,389
11

n.a.
n.a.

(9) $
(366)
(31)

6
–
4

$

1
–
–

103
180
1,673
969

–
(4)
–
120

9
23
130
120

–
–
1,760
47

(36)
(17)
(1,921)
(228)

24
–
–
–

(76)
–
(69)
–

24
182
1,573
1,028

n.a.
n.a.
n.a.
n.a.

4,939

116

522

1,808

(3,048)

24

(154)

4,207

n.a.

414

3

32

31

(19)

–

(2)
3
(2)
(54)
(1)
–

31
3
–
(103)
–
–

(13)
–
33
93
(73)
–

94
2
–
(169)
–
–

(5,804) $

22

5,119

(100)
(28)
(31)
43
15
–
$

(1,043) $
(3,933)

(16)
(3)
(109)
$

47
–
90

Transfers
into
Level 3

2 $
(4)
2

(458)
(117)
(5)
(869)
(105)
11
$

Purchases
of assets/
issuances of
liabilities

Sales of
assets/
settlements
of liabilities
and
other (2)

– $
–
(3)

31
260
415
183

Available-for-sale
U.S. state, municipal and
agencies debt
Other OECD government debt
Asset-backed securities
CDOs
Non-CDO securities
Corporate debt and other debt
Equities

Liabilities
Deposits
Personal
Business and government
Other
Obligations related to securities
sold short
Other liabilities
Subordinated debentures

22
370
28

Total
unrealized
gains (losses)
included in
other
comprehensive
income (1)

Changes in
unrealized gains
(losses) included
in earnings for
assets and
liabilities for the
year ended
October 31, 2014
for positions
still held

(5,104) $

27

$

11 $
(184)

550

4,467

$

(54) $
(180)

(560) $
(1,551)

184
265

(1)
–
(3)

(198)
–
–

202
(50)
–

(238) $

(2,309) $

601

1
29
–
(143) $

$

Consolidated Financial Statements

$

78
146
–
557
79
(11)
97

$

(299) $ 1,264
–
5,513

$

–
–
–
$

–

$

8
4
112

(299) $ 6,901

461

(22)

(370)
9
(5)
(502)
(85)
–

(108)
(18)
(5)
20
4
–

4,478

$

(131)

(497) $
(70)

20
(7)

(4)
(20)
–
$

(591) $

–
(22)
–
(9)

For the year ended October 31, 2013

(Millions of Canadian dollars)

Assets
Securities
Trading
U.S. state, municipal and
agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
CDOs
Non-CDO securities
Corporate debt and other debt
Equities

Fair value
November 1,
2012

Total
realized/
unrealized
gains (losses)
included in
earnings

$

$

Loans – Wholesale
Other
Net derivative balances (3)
Interest rate contracts
Foreign exchange contracts
Credit derivatives
Other contracts
Valuation adjustments
Other assets

$

n.a.

$

$

414
633
50

Transfers
into
Level 3

(525) $
(237)
(64)

34
–
21

Transfers
out of
Level 3

$

Fair value
October 31,
2013

(4) $
(406)
(43)

22
370
28

$

–
–
1

1
7
10
8

16
4,608
634
107

(48)
(4,376)
(655)
(224)

–
70
96
7

(7)
(70)
(86)
(1)

31
260
415
183

8
(2)
1
(29)

1,310

19

36

6,462

(6,129)

228

(617)

1,309

(21)

1,906
–

–
–

88
–

417
–

(406)
–

9
–

2,014
–

n.a.
n.a.

1,996
645
1,446
948

–
4
(12)
65

67
36
80
51

–
–
1,281
27

(542)
(505)
(1,172)
(122)

12
–
50
–

(1,430)
–
–
–

103
180
1,673
969

n.a.
n.a.
n.a.
n.a.

6,941

57

322

1,725

(2,747)

71

(1,430)

4,939

n.a.

403

8

22

288

(307)

–

414

–

(3)
21
–
(33)
–
–

32
19
–
153
(6)
–

(70)
(9)
38
101
26
–

(4)
13
–
(79)
(2)
–

(9,097) $

227

6,627

70
46
(21)
(193)
160
(3)
$

143

$

365

$

8,673

$

(6,840) $
(2,519)

(737) $
(11)

(102) $
(95)

(6,133) $
(1,738)

(8)
(101)
(122)

10
98
(6)

–
(3)
19

(96)
–
–

$ (9,590) $

(2)
(3)

2
6
2

Purchases
of assets/
issuances of
liabilities

Sales of
assets/
settlements
of liabilities
and
other (2)

10
(2)
19
(16)

(487)
(198)
(22)
(1,052)
(282)
14
$

(1)

2 $
(1)
7

59
23
397
302

Available-for-sale
U.S. state, municipal and
agencies debt
Other OECD government debt
Asset-backed securities
CDOs
Non-CDO securities
Corporate debt and other debt
Equities

Liabilities
Deposits
Personal
Business and government
Other
Obligations related to securities
sold short
Other liabilities
Subordinated debentures

99
375
55

Total
unrealized
gains (losses)
included in
other
comprehensive
income (1)

Changes in
unrealized gains
(losses) included
in earnings for
assets and
liabilities for the
year ended
October 31, 2013
for positions
still held

(646) $

7,213
165

$

79
3
–

–

4
(9)
–
234
(1)
–

(458)
(117)
(5)
(869)
(105)
11

$ (1,819) $

(69) $ 5,625
–
265

(8)
–
–

(181) $ (7,967) $ 7,460 $

–
–

$

7
–
–

5,119

95
56
(8)
13
124
1
$

(1,043) $
(3,933)

(16)
(3)
(109)

(77) $ 5,897 $ (5,104) $

260

(34)
(120)

–
98
(6)

(62)

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 included in OCI on AFS securities were $152 million for the year ended October 31, 2014 (October 31, 2013 – gains of $79 million), excluding the translation gains or losses arising on
consolidation.
Other includes amortization of premiums or discounts recognized in net income.
Net derivatives as at October 31, 2014 included derivative assets of $901 million (October 31, 2013 – $1,194 million) and derivative liabilities of $1,854 million (October 31, 2013 – $2,748
million).
not applicable

Total gains or losses of Level 3 instruments recognized in earnings (1)
For the year ended October 31, 2014

Total realized/unrealized gains
(losses) included in earnings
Assets Liabilities
Total

(Millions of Canadian dollars)

Non-interest income
Insurance premiums, investment and fee income
Trading revenue
Net gain on available-for-sale securities
Credit fees and Other

$

$
(1)

1 $
686
115
(3)
799 $

– $
(882)
–
(33)
(915) $

1 $
(196)
115
(36)
(116) $

Changes in unrealized
gains (losses) included in earnings for
assets and liabilities for the year
ended October 31, 2014 for positions
still held
Assets
Liabilities
Total
– $
136
–
11
147 $

– $
(208)
–
(79)
(287) $

–
(72)
–
(68)
(140)

Comparative information relating to periods before November 1, 2013 is not required by IFRS 13.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

139

Note 3 Fair value of financial instruments (continued)
Transfers between fair value hierarchy levels for instruments carried at fair value on a recurring basis
Transfers between Level 1 and Level 2, and transfers in and out of Level 3 are assumed to occur at the end of the period. For an asset or a liability
that transfers into Level 3 during the period, the entire change in fair value for the period is excluded from the Total realized/unrealized gains
(losses) included in earnings column of the above reconciliation, whereas for transfers out of Level 3 during the period, the entire change in fair
value for the period is included in the same column of the above reconciliation.
Transfers between Level 1 and Level 2 are dependent on whether fair value is obtained on the basis of quoted market prices in active
markets (Level 1) as opposed to fair value estimated using observable inputs in a discounted cash flow method (Level 2). For the year ended
October 31, 2014, $1,905 million of certain government bonds reported in Trading and Available-for-sale U.S. state, municipal and agencies
debt, and $1,027 million included in Obligations related to securities sold short were transferred from Level 1 to the corresponding Level 2
balances. During the year ended October 31, 2013, $1,105 million of certain government bonds reported in Trading U.S. state, municipal and
agencies debt, and $1,308 million included in Obligations related to securities sold short were transferred from Level 1 to the corresponding
Level 2 balances, and certain government bonds of $122 million reported in Trading Canadian government debt – Federal were transferred from
Level 2 to the corresponding Level 1 balances.
During the year ended October 31, 2014, significant transfers out of Level 3 included: (i) Other OECD government debt of $366 million, due
to improved price transparency; (ii) net Interest rate contracts of $112 million, due to the increase in observability of swap rates; (iii) net Foreign
exchange contracts of $149 million, due to shorter maturities; (iv) net Other contracts of $515 million, mainly due to the increase in observability
of pricing in the underlying investments; (v) Personal deposits of $1,071 million and $185 million, as the unobservable inputs did not
significantly affect their fair values, and the equity volatility became observable, respectively; (vii) Business and government deposits of
$5,032 million, as the funding spread became observable; and (viii) Business and government deposits of $462 million, as yields became
observable. Significant transfer in to Level 3 includes Personal deposits of $139 million, as the equity volatility became unobservable.
During the year ended October 31, 2013, significant transfers out of Level 3 included: (i) Other OECD government debt of $406 million, due
to increased market activity; (ii) CDOs of $1,437 million, as a result of increased price transparency evidenced by trade data, dealer data or
multiple vendor quotes; (iii) certain net derivative balances, with a majority of the transfers related to derivatives for which pricing became
observable as maturity dates became shorter due to the passage of time; (iv) Personal deposits of $5,535 million, transferred out of Level 3, as
unobservable inputs did not significantly affect fair value measurement of these instruments.
Positive and negative fair value movement 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 valuation of these Level 3 financial instruments.
The following table summarizes the impact 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 have considered offsetting balances in instances when: (i) the move in valuation factor
caused an offsetting positive and negative fair value movement, (ii) both offsetting instruments are in Level 3, and (iii) when 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 be simultaneously realized.

140

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

As at
October 31, 2014

Level 3 fair value

(Millions of Canadian dollars)

Securities
Trading
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
Corporate debt and other debt
Equities
Available-for-sale
U.S. state, municipal and agencies debt
Other OECD government debt
Asset-backed securities
Corporate debt and other debt
Equities
Loans
Derivatives
Other assets

$

$
Deposits
Derivatives
Other, securities sold short, other liabilities
and subordinated debentures
$

Positive fair value
movement from
using reasonably
possible
alternatives

October 31, 2013
Negative fair value
movement from
using reasonably
possible
alternatives

Level 3 fair value

Positive fair value
movement from
using reasonably
possible
alternatives

Negative fair value
movement from
using reasonably
possible
alternatives

$

6 $
–
4
438
149
166

– $
–
1
10
2
–

– $
–
(1)
(14)
(2)
–

22
370
28
291
415
183

$

–
–
1
3
42
–

1,389
11
206
1,573
1,028
461
901
–
6,332 $
(567)
(1,854)

23
–
12
12
92
12
23
–
187 $
14
38

(57)
–
(18)
(10)
(23)
(11)
(21)
–
(157) $
(14)
(59)

2,014
–
283
1,673
969
414
1,194
11
7,867 $
(4,976)
(2,748)

20
–
9
9
24
3
84
–
195
60
77

(24)
(2,445) $

–
52 $

–
(73) $

(128)
(7,852) $

1
138

$

$

(1)
–
(2)
(3)
(32)
–
(64)
–
(16)
(10)
(20)
(3)
(85)
–
(236)
(39)
(100)
–
(139)

Sensitivity results
As at October 31, 2014, the effects of applying other reasonably possible alternative assumptions to the Level 3 asset positions would be an
increase of $187 million and a reduction of $157 million in fair value, of which $139 million and $98 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
$52 million and an increase of $73 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 of the Level 3 instruments and our approaches to develop reasonably possible alternative
assumptions used to determine sensitivity.
Financial assets or liabilities
Asset-backed securities,
corporate debt, government
debt and municipal bonds

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, or using high and low vendor prices as reasonably
possible alternative assumptions.

Auction Rate Securities

Sensitivity of ARS is determined by decreasing the discount margin between 12% and 15% and increasing the
discount margin between 19% and 38%, depending on the specific reasonable range of fair value uncertainty
for each particular financial instrument’s market. Changes to the discount margin reflect historic monthly
movements in the student loan asset-backed securities market.

Private equities, hedge fund
investments and related
equity derivatives

Sensitivity of direct private equity investments is determined by (i) adjusting the discount rate by 2% when
discounted cash flow method is used to determine fair value, (ii) adjusting the price multiples based on the
range of multiples of comparable companies when price-based models are used, or (iii) using an alternative
valuation approach. NAVs of the private equity funds, hedge funds and related equity derivatives are provided
by the fund managers, and as a result, there are no other reasonably possible alternative assumptions for
these investments.

Interest rate derivatives

Sensitivities of interest rate and cross currency swaps are derived using plus or minus one standard deviation
of these inputs, and an amount based on model and parameter uncertainty, where applicable.

Equity derivatives

Sensitivity of the Level 3 position will be determined by shifting the unobservable model inputs by plus or
minus one standard deviation of the pricing service market data including volatility, dividends or correlations,
as applicable.

Bank funding and deposits

Sensitivities of deposits are calculated by shifting the funding curve by plus or minus certain basis points.

Structured notes

Sensitivities for interest-rate-linked and equity-linked structured notes are derived by adjusting inputs by plus
or minus one standard deviation, and for other deposits, by estimating a reasonable move in the funding curve
by plus or minus certain basis points.

Municipal guaranteed
investment certificates

Sensitivity is calculated using plus or minus one standard deviation of the funding curve bid-offer spread.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

141

Note 3 Fair value of financial instruments (continued)
Fair value for financial instruments that are carried at amortized cost and classified using the fair value hierarchy
The following table presents fair values of financial instruments that are carried at amortized cost and classified by the fair value hierarchy.
As at October 31, 2014 (1)

(Millions of Canadian dollars)

Held-to-maturity securities (3)
Assets purchased under reverse repurchase agreements and
securities borrowed
Loans
Retail
Wholesale

Level 1
$
5

Level 2
$ 1,522

Level 3
$ 235

29,198

–

21,090

65,766
5,603
71,369
28,224
128,791

–
–
–
–
5

139,209
176,555
9,659
325,423
5,419
27,280
–
358,122

Other assets
Deposits
Personal
Business and government
Bank
Obligations related to assets sold under repurchase
agreements and securities loaned
Other liabilities
Subordinated debentures
$
(1)
(2)
(3)

Fair value may not approximate carrying value

Fair value always
approximates
carrying value (2)
$
–

Fair value measurements using

$

Total
1,762

Total
Fair value
$ 1,762

–

21,090

50,288

265,038
88,940
353,978
4,546
381,136

4,374
3,215
7,589
205
8,029

269,412
92,155
361,567
4,751
389,170

335,178
97,758
432,936
32,975
517,961

–
–
–
–

55,924
150,827
1,915
208,666

831
946
62
1,839

56,755
151,773
1,977
210,505

195,964
328,328
11,636
535,928

–
–
–
–

502
5,699
7,657
$ 222,524

–
3,783
55
$ 5,677

502
9,482
7,712
$ 228,201

5,921
36,762
7,712
$ 586,323

$

Comparative information relating to periods before November 1, 2013 is not required by IFRS 13.
Certain financial instruments have not been assigned to a level as the carrying amount always approximates their fair values due to the short-term nature (instruments that are receivable or
payable on demand, or with original maturity of three months or less) and insignificant credit risk.
Included in Securities – Available-for-sale on our Consolidated Balance Sheets

Fair values of financial assets and liabilities carried at amortized cost and disclosed in the table above are determined using the following
valuation techniques and inputs.
Held-to-maturity securities
Fair values of Canadian Federal and OECD government bonds, and corporate bonds 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.
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 ratio. Fair
values of credit card receivables are also calculated based on a discounted cash flow method with portfolio yields, charge off and monthly
payment rates as inputs. The carrying values of short-term and variable rate loans generally approximate their fair values.
Loans – Wholesale
Wholesale loans include Business, Bank and Sovereign loans. Where market prices are available, loans are valued based on market prices.
Otherwise, fair value is determined by the discounted cash flow method using the following inputs: market interest rates and market based
spreads of assets with similar credit ratings and terms to maturity, 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 composed 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 short-term term
deposits, and demand and notice deposits generally approximate their fair values.
Other assets and Other liabilities
Other assets and Other liabilities include receivables and payables relating to certain commodities and option premiums. 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. The option premium receivables and payables
are valued by the discounted cash flow models using market interest rates as inputs.
142

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Subordinated debentures
Fair values of Subordinated debentures are based on recent transaction prices.
Note 4 Securities
Carrying value of securities
The following table presents the financial instruments that we held at the end of the period, measured at carrying value:
As at October 31, 2014
Term to maturity (1)

(Millions of Canadian dollars)

Trading (2)
Canadian government debt
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities (3)
Asset-backed securities (3)
Corporate debt and other debt (3)
Bankers’ acceptances
Certificates of deposit
Other (4)
Equities
Available-for-sale (2)
Canadian government debt
Federal
Amortized cost
Fair value
Yield (5)
Provincial and municipal
Amortized cost
Fair value
Yield (5)
U.S. state, municipal and agencies debt
Amortized cost
Fair value
Yield (5)
Other OECD government debt
Amortized cost
Fair value
Yield (5)
Mortgage-backed securities
Amortized cost
Fair value
Yield (5)
Asset-backed securities
Amortized cost
Fair value
Yield (5)
Corporate debt and other debt
Amortized cost
Fair value
Yield (5)
Equities
Cost
Fair value
Loan substitute securities
Cost
Fair value
Yield (5)
Amortized cost
Fair value
Held-to-maturity (2)
Amortized cost
Fair value
Total carrying value of securities (2)

Within
3 months

3 months
to 1 year

1 year to
5 years

$ 3,050
3,272
1,637
–
56

$ 6,651
6,811
3,205
1
66

754
17
470
–

8
342
5,501
–

–
574
13,086
–

–
30
2,998
–

9,256

22,585

34,979

626
627
1.8%

615
619
2.8%

–
–
–

$

7,594
7,109
6,223
86
307

5 years to
10 years
$

2,232
5,678
1,594
246
321

Over
10 years
5,987
6,602
2,666
635
614

$

Total

–
–
–
–
–

$ 25,514
29,472
15,325
968
1,364

–
17
3,789
–

–
–
–
51,151

762
980
25,844
51,151

13,099

20,310

51,151

151,380

8,195
8,356
2.2%

2,197
2,367
3.3%

–
–
–

–
–
–

11,633
11,969
2.4%

–
–
–

644
648
2.4%

130
131
2.9%

18
20
4.9%

–
–
–

792
799
2.5%

108
108
0.0%

385
383
8.5%

80
81
0.7%

213
213
0.4%

5,544
5,472
0.7%

–
–
–

6,330
6,257
1.1%

5,663
5,663
0.1%

2,138
2,139
0.2%

6,357
6,374
0.9%

117
117
0.4%

–
–
–

–
–
–

14,275
14,293
0.5%

–
–
–

–
–
–

–
–
–

17
17
3.0%

116
121
1.8%

–
–
–

133
138
2.0%

–
–
–

–
–
–

381
387
0.6%

833
849
0.5%

277
208
1.0%

–
–
–

1,491
1,444
0.6%

1,625
1,628
1.1%

822
823
2.0%

5,820
5,840
1.6%

727
739
2.0%

255
257
4.2%

–
–
–

9,249
9,287
1.7%

–
–

–
–

–
–

–
–

–
–

1,333
1,696

1,333
1,696

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

124
126
3.9%

124
126
3.9%

8,022
8,026

3,960
3,964

21,477
21,686

4,234
4,433

6,210
6,078

1,457
1,822

45,360
46,009

163
163

110
110

38
40

1,448
1,449

–
–

–
–

1,759
1,762

$ 17,445

$ 26,659

$ 56,703

$ 18,980

$ 26,388

$ 52,973

$ 199,148

Consolidated Financial Statements

$

With no
specific
maturity

Royal Bank of Canada: Annual Report 2014

143

Note 4 Securities (continued)
As at October 31, 2013
Term to maturity (1)

(Millions of Canadian dollars)

Trading (2)
Canadian government debt
U.S. state, municipal and agencies debt
Other OECD government debt
Mortgage-backed securities (3)
Asset-backed securities (3)
Corporate debt and other debt (3)
Bankers’ acceptances
Certificates of deposit
Other (4)
Equities
Available-for-sale (2)
Canadian government debt
Federal
Amortized cost
Fair value
Yield (5)
Provincial and municipal
Amortized cost
Fair value
Yield (5)
U.S. state, municipal and agencies debt
Amortized cost
Fair value
Yield (5)
Other OECD government debt
Amortized cost
Fair value
Yield (5)
Mortgage-backed securities
Amortized cost
Fair value
Yield (5)
Asset-backed securities
Amortized cost
Fair value
Yield (5)
Corporate debt and other debt
Amortized cost
Fair value
Yield (5)
Equities
Cost
Fair value
Loan substitute securities
Cost
Fair value
Yield (5)
Amortized cost
Fair value
Held-to-maturity (2)
Amortized cost
Fair value
Total carrying value of securities (2)
(1)
(2)
(3)
(4)
(5)

144

Within
3 months

3 months
to 1 year

$ 3,341
2,415
1,181
2
90

$ 8,872
9,852
2,041
6
38

678
22
1,319
–

–
493
2,114
–

9,048

1 year to
5 years

5 years to
10 years

Over
10 years

$

4,204
3,376
709
136
206

$ 6,438
5,184
1,074
640
690

–
1,042
12,289
–

–
19
3,115
–

23,416

36,909

852
853
2.6%

533
540
2.7%

250
250
1.4%

$

8,245
8,655
6,281
46
351

With no
specific
maturity
$

Total

–
–
–
–
–

$ 31,100
29,482
11,286
830
1,375

–
12
3,658
–

–
–
–
45,189

678
1,588
22,495
45,189

11,765

17,696

45,189

144,023

4,927
5,007
2.1%

3,189
3,439
3.6%

4
4
4.8%

–
–
–

9,505
9,843
2.7%

175
175
1.4%

181
182
2.5%

40
40
4.3%

19
20
4.9%

–
–
–

665
667
2.0%

158
157
0.4%

68
68
0.1%

521
522
2.5%

534
533
0.4%

5,141
4,998
0.7%

–
–
–

6,422
6,278
0.8%

5,263
5,262
0.1%

1,306
1,311
0.7%

2,913
2,917
0.7%

1,405
1,407
0.4%

–
–
–

–
–
–

10,887
10,897
0.4%

–
–
–

–
–
–

–
–
–

25
26
3.5%

105
113
2.5%

–
–
–

130
139
2.7%

8
5
2.6%

–
–
–

279
291
1.0%

1,193
1,237
0.5%

408
327
1.1%

–
–
–

1,888
1,860
0.7%

1,387
1,394
1.3%

939
945
1.8%

3,475
3,478
1.7%

615
619
2.8%

333
333
4.5%

–
–
–

6,749
6,769
1.9%

–
–

–
–

–
–

–
–

–
–

1,407
1,706

1,407
1,706

–
–
–

–
–
–

–
–
–

–
–
–

–
–
–

125
127
4.0%

125
127
4.0%

7,918
7,921

3,021
3,039

12,296
12,397

7,001
7,301

6,010
5,795

1,532
1,833

37,778
38,286

140
140

141
141

76
76

44
44

–
–

–
–

401
401

$ 17,109

$ 26,596

$ 49,382

$ 19,110

$ 23,491

$ 47,022

$182,710

Actual maturities may differ from contractual maturities shown above since borrowers may have the right to prepay obligations with or without prepayment penalties.
Trading securities and AFS securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost.
Includes CDOs which are presented as Asset-backed securities – CDOs in the table entitled Fair value of assets and liabilities measured on a recurring basis and classified using the fair value
hierarchy in Note 3.
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.

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Unrealized gains and losses on available-for-sale securities (1), (2)
As at
October 31, 2014

(Millions of Canadian dollars)

Canadian government debt
Federal
Provincial and municipal
U.S. state, municipal and agencies
debt (3)
Other OECD government debt
Mortgage-backed securities
Asset-backed securities
CDOs
Non-CDO securities
Corporate debt and other debt
Equities
Loan substitute securities

Cost/
Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

$ 11,633
792

$

$

(3)

338
8

Fair
value

(2) $ 11,969
(1)
799

Cost/
Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

$

$

$

9,505
665

340
3

Fair
value

(2) $ 9,843
(1)
667

6,330
14,275
133

9
19
5

(82)
(1)
–

6,257
14,293
138

6,422
10,887
130

9
14
10

(153)
(4)
(1)

6,278
10,897
139

857
634
9,249
1,333
124

26
5
49
369
2

(2)
(76)
(11)
(6)
–

881
563
9,287
1,696
126

1,343
545
6,749
1,407
125

58
3
49
312
3

(4)
(85)
(29)
(13)
(1)

1,397
463
6,769
1,706
127

(181) $ 46,009

$ 37,778

$ 45,360
(1)
(2)

October 31, 2013

$

830

$

$

801

$

(293) $ 38,286

Excludes $1,759 million held-to-maturity securities as at October 31, 2014 (October 31, 2013 – $401 million) that are carried at cost.
The majority of the MBS are residential. Cost/Amortized cost, gross unrealized gains, gross unrealized losses and fair value related to commercial MBS are $33 million, $1 million, $nil, and
$34 million, respectively as at October 31, 2014 (October 31, 2013 – $34 million, $1 million, $nil, and $35 million).
Includes securities issued by U.S. non-agencies backed by government insured assets, and MBS and ABS issued by U.S. government agencies.

AFS securities are assessed for objective evidence of impairment at each reporting date and more frequently when conditions warrant. Our
impairment review is primarily based on the factors described in Note 2. Depending on the nature of the securities under review, we apply
specific methodologies to assess whether the cost/amortized cost of the security would be recovered. As at October 31, 2014, our gross
unrealized losses on AFS securities were $181 million (October 31, 2013 – $293 million). Management believes that there is no objective
evidence of impairment on our AFS securities that are in an unrealized loss position as at October 31, 2014.
Held-to-maturity securities
Held-to-maturity securities stated at amortized cost are subject to periodic impairment review and are classified as impaired when, in
management’s opinion, there is no longer reasonable assurance of the timely collection of the full amount of principal and interest. The
impairment review of held-to-maturity securities is primarily based on the impairment model for loans. Management believes that there is no
objective evidence of impairment on our held-to-maturity securities as at October 31, 2014.
Net gain and loss on available-for-sale securities (1)
For the year ended
(Millions of Canadian dollars)

Realized gains
Realized losses
Impairment losses
(1)

October 31
2014

October 31
2013

October 31
2012

$

232
(15)
(25)

$

231
(17)
(26)

$

242
(46)
(48)

$

192

$

188

$

148

The following related to our insurance operations are excluded from Net gain (loss) on AFS securities and included in Insurance premiums, investment and fee income on the Consolidated
Statements of Income: Realized gains for the year ended October 31, 2014 were $12 million (October 31, 2013 – $3 million; October 31, 2012 – $9 million). Realized losses for the year
ended October 31, 2014 were $1 million (October 31, 2013 – $nil, October 31, 2012 – $nil). There were no impairment losses related to our insurance operations for the years ended
October 31, 2014, October 31, 2013 and October 31, 2012.

During the year ended October 31, 2014, $192 million of net gains were recognized in Non-interest income as compared to $188 million in the
prior year. The current year reflects net realized gains of $217 million mainly comprised of distributions from and gains on sale of certain
Equities, redemption and restructurings of certain Asset-backed securities and the sale of Canadian government debt. Partially offsetting the net
realized gains are $25 million of impairment losses primarily on certain Equities. This compares to net realized gains for the year ended
October 31, 2013 of $214 million which was partially offset by $26 million of impairment losses.
Reclassification of financial Instruments
The following table provides information regarding certain securities that we reclassified in prior reporting periods:
Financial instruments reclassified in prior periods
As at

(Millions of Canadian dollars)

Financial assets – FVTPL reclassified to available-for-sale (1)
CDOs
Mortgage-backed securities
(1)

October 31
2014

October 31
2013

Total carrying value
and fair value

Total carrying value
and fair value

$

751
44

$

1,154
59

$

795

$

1,213

On October 1, 2011 and November 1, 2011, we reclassified $1,872 million and $255 million, respectively, of certain CDOs and U.S. non-agency MBS from classified as at FVTPL to AFS.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

145

Note 4 Securities (continued)
For the year ended

(Millions of Canadian dollars)

FVTPL reclassified to available-for-sale
CDOs
Mortgage-backed securities

(1)

October 31, 2014

October 31, 2013

October 31, 2012

Interest income/ gains
(losses) recognized
Change in fair value
in net income
during the period (1)
during the period

Interest income/gains
(losses) recognized
Change in fair value
in net income
during the period (1)
during the period

Interest income/ gains
(losses) recognized
Change in fair value
in net income
during the period (1)
during the period

$

(29) $
(2)

58
4

$

(5) $
–

59
8

$

60 $
2

76
8

$

(31) $

62

$

(5) $

67

$

62 $

84

This change represents the fair value gains or losses that would have been recognized in profit or loss had the assets not been reclassified.

Note 5 Loans

As at
October 31, 2014

Retail (1)
Residential mortgages
Personal
Credit cards
Small business (2)

United
Other
States International

Canada

Total

539 $
4,082
65
–

3,094 $ 219,257
4,955
96,021
209
14,924
–
4,785

$ 206,134 $
85,701
13,902
4,388

378 $
3,306
50
–

2,726 $ 209,238
3,852
92,859
190
14,142
–
4,388

$ 322,043 $

4,686 $

8,258 $ 334,987

$ 310,125 $

3,734 $

6,768 $ 320,627

54,656
413
1,797
$

23,544
30
–

20,250
758
788

56,866 $ 23,574 $

$ 378,909 $ 28,260 $
(1,466)
(100)

Total loans net of allowance for loan losses $ 377,443 $ 28,160 $
(1)
(2)
(3)
(4)
(5)

Total

$ 215,624 $
86,984
14,650
4,785

Wholesale (1)
Business (3)
Bank (4)
Sovereign (5)
Total loans
Allowance for loan losses

United
Other
States International

Canada

(Millions of Canadian dollars)

October 31, 2013

98,450
1,201
2,585

21,796 $ 102,236

51,122
823
1,747

19,395
28
–

$ 53,692 $ 19,423 $

16,009
469
589

86,526
1,320
2,336

17,067 $

90,182

30,054 $ 437,223 $ 363,817 $ 23,157 $
(428)
(1,994)
(1,482)
(105)

23,835 $ 410,809
(372)
(1,959)

29,626 $ 435,229

23,463 $ 408,850

$ 362,335 $ 23,052 $

Geographic information is based on residence of borrower.
Includes small business exposure managed on a pooled basis.
Includes small business exposure managed on an individual client basis.
Bank refers primarily to regulated deposit-taking institutions and securities firms.
Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.

Loans maturity and rate sensitivity
As at October 31, 2014
Maturity term (1)
(Millions of Canadian dollars)

Under
1 year (2)

1 to 5
years

Rate sensitivity
Over
5 years

Total

Fixed
Rate

Floating

Non-ratesensitive

Total

Retail
Wholesale

$ 184,647 $ 140,785 $
83,263
15,526

9,555 $ 334,987 $ 121,451 $ 208,956 $
3,447
102,236
43,808
57,284

4,580 $ 334,987
1,144
102,236

Total loans
Allowance for loan losses

$ 267,910 $ 156,311 $ 13,002 $ 437,223 $ 165,259 $ 266,240 $
(1,994)

5,724 $ 437,223
(1,994)

Total loans net of allowance for loan losses

$ 435,229

$ 435,229

As at October 31, 2013
Maturity term (1)
(Millions of Canadian dollars)

Under
1 year (2)

1 to 5
years

Rate sensitivity
Over
5 years

Total

Floating

Fixed Non-rateRate sensitive

Total

Retail
Wholesale

$ 175,673 $ 133,501 $ 11,453 $ 320,627 $ 125,836 $ 189,628 $ 5,163 $ 320,627
73,050
12,010
5,122
90,182
47,061
41,611
1,510
90,182

Total loans
Allowance for loan losses

$ 248,723 $ 145,511 $ 16,575 $ 410,809 $ 172,897 $ 231,239 $ 6,673 $ 410,809
(1,959)
(1,959)

Total loans net of allowance for loan losses
(1)
(2)
146

$ 408,850

Generally, based on the earlier of contractual repricing or maturity date.
Includes variable rate loans that can be repriced at the clients’ discretion without penalty.
Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

$ 408,850

Allowance for credit losses
For the year ended October 31, 2014

(Millions of Canadian dollars)

Retail
Residential mortgages
Personal
Credit cards
Small business

Balance at
beginning
of period

Provision
for credit
losses

Write-offs

$

$

$

Wholesale
Business
Bank (1)
Total allowance for loan losses
Allowance for off-balance sheet and other
items (2)
Total allowance for credit losses

$

Individually assessed
Collectively assessed
Total allowance for credit losses

$

151
583
385
61

95
444
353
44

(30)
(565)
(466)
(47)

Recoveries

Unwind of
discount

Exchange
rate
changes/
other

Balance
at end
of period

$

$

$

$

2
106
114
9

(26)
(23)
–
(2)

48
(10)
(1)
(1)

240
535
385
64

1,180

936

(1,108)

231

(51)

36

777
2

228
–

(221)
–

32
–

(36)
–

(12)
–

768
2

779

228

(221)

32

(36)

(12)

770

1,959

1,164

(1,329)

263

(87)

24

1,994

91

–

–

–

91

2,050

$ 1,164

$ (1,329)

24

$ 2,085

240
1,810

160
1,004

(188)
(1,141)

10
14

214
1,871

2,050

$ 1,164

$ (1,329)

24

$ 2,085

Exchange
rate
changes/
other

Balance
at end
of period

$

$

–

–
$

263

$

16
247
$

263

(87)

$

(24)
(63)
$

(87)

$

1,224

For the year ended October 31, 2013

(Millions of Canadian dollars)

Retail
Residential mortgages
Personal
Credit cards
Small business

Balance at
beginning
of period

Provision
for credit
losses

Write-offs

Recoveries

Unwind of
discount

$

$

$

$

$

Wholesale
Business
Bank (1)
Total allowance for loan losses
Allowance for off-balance sheet and other
items (2)
Total allowance for credit losses

$

Individually assessed
Collectively assessed
Total allowance for credit losses

$

124
543
403
72

41
455
354
32

(24)
(498)
(466)
(35)

2
96
112
9

(24)
(17)
–
(2)

32
4
(18)
(15)

151
583
385
61

1,142

882

(1,023)

219

(43)

3

1,180

852
2

355
–

(448)
–

51
–

(43)
–

10
–

777
2

854

355

(448)

51

(43)

10

779

1,996

1,237

(1,471)

270

(86)

13

1,959

91

–

–

–

91

2,087

$ 1,237

$ (1,471)

13

$ 2,050

298
1,789

287
950

(346)
(1,125)

2,087

$ 1,237

$ (1,471)

–

–
$

270

$

31
239
$

270

Consolidated Financial Statements

(86)

$

(28)
(58)
$

(86)

(2)
15
$

13

240
1,810
$ 2,050

Royal Bank of Canada: Annual Report 2014

147

Note 5 Loans (continued)
For the year ended October 31, 2012

(Millions of Canadian dollars)

Retail
Residential mortgages
Personal
Credit cards
Small business

Balance at
beginning
of period

Provision
for credit
losses

Write-offs

$

$

$

Wholesale
Business
Bank (1)
Total allowance for loan losses
Allowance for off-balance sheet and other
items (2)
Total allowance for credit losses

$

Individually assessed
Collectively assessed
Total allowance for credit losses
(1)
(2)

$

112
557
415
75

64
437
403
43

(32)
(499)
(496)
(50)

Recoveries

Unwind of
discount

Exchange
rate
changes/
other

Balance
at end
of period

$

$

$

$

1
83
102
8

(34)
(23)
–
(2)

13
(12)
(21)
(2)

1,159

947

(1,077)

194

(59)

(22)

773
33

352
–

(288)
(32)

39
–

(51)
–

27
1

124
543
403
72
1,142
852
2

806

352

(320)

39

(51)

28

854

1,965

1,299

(1,397)

233

(110)

6

1,996

91

–

2,056

$ 1,299

$ (1,397)

–

–

252
1,804

244
1,055

(202)
(1,195)

2,056

$ 1,299

$ (1,397)

$

–

233

$

19
214
$

(110)

$

(26)
(84)

233

$

–

91

6

$ 2,087

11
(5)

(110)

$

298
1,789

6

$ 2,087

Bank refers primarily to regulated deposit-taking institutions and securities firms.
The allowance for off-balance sheet and other items is reported separately in Other liabilities – Provisions.

Net interest income after provision for credit losses
For the year ended
October 31
2014

October 31
2013

October 31
2012

Net interest income
Provision for credit losses

$

14,116
1,164

$

13,249
1,237

$

12,439
1,299

Net interest income after provision for credit losses

$

12,952

$

12,012

$

11,140

90 days
1 to 29 days 30 to 89 days and greater

Total

(Millions of Canadian dollars)

Loans past due but not impaired
As at
October 31,2014
(Millions of Canadian dollars)

Retail
Wholesale

October 31,2013

90 days
1 to 29 days 30 to 89 days and greater

Total

$

3,055 $
431

1,284 $
322

316 $ 4,655
–
753

$

2,953 $
624

1,358 $
303

329 $ 4,640
17
944

$

3,486 $

1,606 $

316 $ 5,408

$

3,577 $

1,661 $

346 $ 5,584

Gross carrying value of loans individually determined to be impaired (1)
As at
October 31
2014

(Millions of Canadian dollars)

$

Retail
Wholesale
Business
Bank (2)

$
(1)
(2)

148

Average balance of gross individually assessed impaired loans for the year ended October 31, 2014 was $690 million (October 31, 2013 – $887 million).
Bank refers primarily to regulated deposit-taking institutions and securities firms.

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

October 31
2013

–

71

631
2

815
3

633

$

889

Note 6 Derecognition of financial assets
We enter into transactions in which we transfer financial assets such as loans or securities to structured entities or other third parties. The
transferred financial assets are derecognized from our Consolidated Balance Sheets when we transfer substantially all of the risks and rewards of
ownership of the financial assets. When we are exposed to substantially all of the risks and rewards of the assets, or when we have neither
transferred nor retained substantially all of the risks and rewards but retain control of the financial assets, we continue to recognize the financial
assets on our Consolidated Balance Sheets and a liability is recognized for the cash proceeds received.
The majority of assets transferred under repurchase agreements, securities lending agreements, and in our Canadian residential mortgage
securitization transactions do not qualify for derecognition.
Transferred financial assets not derecognized
Securitization of Canadian residential mortgage loans
We 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 Housing Corporation (CMHC) or
a third-party insurer. We require the borrower to pay the insurance for mortgages in which the loan amount is greater than 80% of the original
appraised value of the property (loan-to-value (LTV) ratio). For residential mortgage loans securitized under this program with an LTV ratio 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 the borrower
defaults on the mortgage payment, 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 a mortgage default during 2014 and 2013.
We sell the NHA MBS pools primarily to a government-sponsored structured entity under the Canada Mortgage Bond (CMB) program. The
entity periodically issues CMBs, which are guaranteed by the government, and sells them to third-party investors. Proceeds of the CMB issuances
are used by the entity to purchase the NHA MBS pools from eligible NHA MBS issuers who participate in the issuance of a particular CMB series.
Our continuing involvement includes servicing the underlying residential mortgage loans we have securitized, either ourselves or through a thirdparty servicer. We also act as counterparty in interest rate swap agreements where we pay the entity the interest due to CMB investors and
receive the interest on the underlying MBS and reinvested assets. As part of the swap, 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 agreement.
We have determined that all 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 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 on a future day and retain substantially all of the credit, price, interest rate and foreign exchange risks and rewards
associated with the assets. These transferred assets remain on our Consolidated Balance Sheets and are accounted for as collateralized
borrowing transactions.
The following table provides information on the carrying amount and fair value of the transferred assets that did not qualify for derecognition,
and their associated liabilities.
As at
October 31, 2014

(Millions of Canadian dollars)

Carrying amount of transferred
assets that do not qualify
derecognition
Carrying amount of associated
liabilities

Canadian
residential
mortgage
loans (1), (2)

Securities
loaned (3)

60,279 $

4,052 $101,303

36,941

60,279

4,052

Fair value of transferred assets
$
Fair value of associated liabilities

37,010 $
37,769

60,279 $
60,279

4,052 $101,341
4,052 102,100

$

(759) $

– $

(1)
(2)
(3)

Canadian
residential
mortgage
loans (1) (2)

Total

36,972 $

Fair value of net position

$

Securities
sold under
repurchase
agreements (3)

October 31, 2013

$

Securities
loaned (3)

Total

43,092 $

55,715 $

4,701 $103,508

43,019

55,715

4,701 103,435

$

42,921 $
43,418

55,715 $
55,715

4,701 $103,337
4,701 103,834

(759) $

(497) $

– $

101,272

– $

Securities
sold under
repurchase
agreements (3)

– $

(497)

Includes Canadian residential mortgages loans transferred primarily to Canada Housing Trust at the initial securitization and other permitted investments used for funding requirements after
the initial securitization.
CMB investors have legal recourse only to the transferred assets, and do not have recourse to our general assets.
Does not include over-collateralization of assets pledged.

Note 7 Structured entities
In the normal course of business, we engage in a variety of financial transactions with structured entities to support our financing and investing
needs as well as those of our customers. A structured entity is an entity in which voting or similar rights are not the dominant factor in deciding
control. Structured entities are generally created to achieve a narrow and well defined objective with restrictions around their ongoing activities.
We consolidate a structured entity when we control the entity in accordance with our accounting policy described in Note 2. In other cases, we
may sponsor or have an interest in such an entity but not consolidate it.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

149

Note 7 Structured entities (continued)
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.
Credit card securitization vehicle
We securitize a portion of our credit card receivables through a structured entity on a revolving basis. The entity is financed through the issuance
of senior and subordinated notes collateralized by the underlying credit card receivables. The senior notes are issued to third-party investors and
the subordinated notes are retained by us. The third-party investors have recourse only to the transferred assets.
We continue to service the credit card receivables sold and perform an administrative role for the entity. We also provide first-loss
protection through our ownership of all the subordinated notes issued by the entity and our interest in the excess spread (residual net interest
income after all trust expenses) which is subordinated to the obligations to the senior noteholders. Additionally, we may own some senior notes
as investments or for market-making activities; we retain a cash reserve account of the entity from time to time; we provide subordinated loans to
the entity to pay upfront expenses; and we act as counterparty to interest rate and cross currency swap agreements which hedge the entity’s
interest rate and currency risk exposure.
We consolidate the structured entity because we have decision making power over the timing and size of future issuances and other
relevant activities which were predetermined by us at inception. We also obtain significant funding benefits and are exposed to the majority of
the residual ownership risks through the credit support provided. As at October 31, 2014, $8.5 billion of notes issued by our credit card securitization vehicle were included in Deposits on our Consolidated Balance Sheets (October 31, 2013 – $7.0 billion).
Auto loan securitization vehicles
We obtained control of certain auto loan securitization vehicles as a result of the acquisition of the Canadian auto finance and deposit business
of Ally Financial Inc. completed in 2013. These vehicles issued senior and subordinated notes collateralized by auto loan receivables originated
and transferred to the entities by Ally Financial Inc. We continue to provide credit enhancement to the outstanding notes through
overcollateralization, cash reserve accounts and our interest in the excess spread, which is subordinated to the noteholders. We also act as
swap counterparty for one entity’s interest rate swap agreements which hedge its interest rate risk exposure. The third-party investors have
recourse only to the transferred assets.
We consolidate these vehicles because we have the decision making power over the relevant activities and are exposed to the majority of
the residual ownership risks. As at October 31, 2014, there were $407 million of deposits outstanding related to these structures (October 31,
2013 – $944 million).
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 credits risks of the pledged securities. We administer the entity and earn an administration fee for providing these
services.
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, 2014, $7.8 billion
of commercial paper was included in Deposits on our Consolidated Balance Sheets (October 31, 2013 – $3.9 billion).
Innovative capital vehicles
RBC Capital Trust was created to issue innovative capital instruments, the proceeds from which were used to purchase mortgages from RBC. We
consolidate the trust as, through our roles as trustee, administrative agent and equity investor, we have the decision making power over the
relevant activities of the trust and are exposed to variability from the performance of the underlying mortgages. Refer to Note 20 for further
details on our innovative capital instruments.
Covered bonds
RBC Covered Bond Guarantor Limited Partnership (Guarantor LP) was created to issue guarantees of covered bonds that we issue. We periodically transfer mortgages to Guarantor LP to support funding activities and asset coverage requirements under our covered bond program. The
covered bonds guaranteed by 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 Guarantor LP are insufficient to satisfy the
obligations owing on the covered bonds.
We consolidate Guarantor LP as, through our roles as trustee, administrative agent and equity investor, we have the decision making power
over the relevant activities of Guarantor LP and are exposed to variability from the performance of the underlying mortgages. As at October 31,
2014, the total amount of mortgages transferred and outstanding was $38.3 billion (October 31, 2013 – $37.1 billion) and $26.4 billion of
covered bonds were recorded as Deposits on our Consolidated Balance Sheets (October 31, 2013 – $21.3 billion).
ARS TOB programs
We sold ARS into Tender Option Bond (TOB) trusts, where each program consists of a credit enhancement (CE) trust and a TOB trust. Each ARS
sold to the TOB program is supported by a letter of credit and liquidity facility issued by us, which requires us to extend funding if there are any
losses on the ARS. The CE trust certificate is deposited into a TOB trust which provides the financing of the purchase of the underlying security
through the issuance of floating-rate certificates to short-term investors and a residual certificate to a single third-party investor. Both the CE and
the TOB trusts are structured entities. We are the remarketing agent for the floating-rate certificates and we provide liquidity facilities to each of
the ARS TOB programs to purchase any floating-rate certificates that have been tendered but not successfully remarketed. We receive marketbased fees for acting as the remarketing agent and providing the letters of credit and liquidity facilities.

150

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

We consolidate these ARS TOB programs as we have decision making power over the relevant activities of the CE trust and are exposed to
the variability from the performance of the underlying ARS through our provision of the credit enhancement and the liquidity facility. As at
October 31, 2014, $67 million of ARS were included in AFS securities related to consolidated TOB structures (October 31, 2013 – $683 million)
and a corresponding $69 million of floating rate certificates were included in Deposits on our Consolidated Balance Sheets (October 31, 2013 $744 million).
Municipal bond TOB programs
We utilize the TOB funding vehicle to finance taxable and tax-exempt municipal bonds within our Capital Markets segment. The structure of
municipal bond TOB programs that we are involved with is similar to the structure of the ARS TOB programs described above. However, in certain
municipal bond TOB programs, we also purchase residual certificates issued by these TOB vehicles which expose us to credit risk of the
underlying bonds as well as interest rate risk of the structure.
We consolidate programs in which 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, 2014, $3.3 billion of municipal bonds were included in AFS Securities related
to consolidated TOB structures (October 31, 2013 – $3.7 billion) and a corresponding $3.3 billion of floating rate certificates were included in
Deposits on our Consolidated Balance Sheets (October 31, 2013 - $3.7 billion).
Non-RBC managed Investment funds
We enter into certain fee-based equity derivative transactions where our investments in the reference funds are held by an intermediate limited
partnership entity (intermediate entity) in which we hold a substantial majority of the equity interests. We consolidate the intermediate entity
because we have the decision making power to direct all the activities of the entity and are exposed to a majority of the risks and rewards
through our equity investments. As at October 31, 2014, $277 million of Trading securities representing our investments in the reference funds
were recorded on our Consolidated Balance Sheets (October 31, 2013 – $300 million).
RBC managed investment 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 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, 2014, $499 million of Trading securities held in the consolidated
funds (October 31, 2013 – $295 million) and $189 million of Other liabilities representing the fund units held by third parties (October 31,
2013 – $26 million) were recorded on our Consolidated Balance Sheets.
Unconsolidated structured entities
We have interests in certain structured entities that we do not consolidate but have recorded assets and liabilities on our Consolidated Balance
Sheets related to our transactions and involvement with these entities.
The following table presents the assets and liabilities recorded on our Consolidated Balance Sheets and our maximum exposure to loss
related to our interests in unconsolidated structured entities. It also presents the size of each class of unconsolidated structured entity, as
measured by the total assets of the entities in which RBC has an interest.
As at October 31, 2014

Multi-seller
conduits (1)

(Millions of Canadian dollars)

On-balance sheet assets
Securities
Loans
Derivatives
Other assets
On-balance sheet liabilities
Derivatives
Other liabilities

Structured
finance

Non-RBC
managed
investment
funds

RBC
managed
investment
funds

Third-party
securitization
vehicles

Trading
portfolio
investments

Other

Total

$

42 $
864
–
–

– $
–
3
913

3,343 $
–
–
1

151 $
–
–
220

1 $
1,463
–
–

3,345 $
–
–
–

718 $
–
8
286

7,600
2,327
11
1,420

$

906 $

916 $

3,344

371 $

1,464 $

3,345 $

1,012 $

11,358

$

85 $
–

– $
–

– $
–

2 $
–

– $
–

– $
260

87
265

– $
5

$

85 $

– $

5 $

– $

2 $

– $

260 $

352

Maximum exposure to loss (2)

$

31,019 $

2,158 $

4,005 $

203 $

2,397 $

3,345 $

873 $

44,000

Total assets of unconsolidated
structured entities

$

30,428 $

13,118 $ 621,938 $ 272,852 $

27,095 $ 875,438 $

Consolidated Financial Statements

64,963 $1,905,832

Royal Bank of Canada: Annual Report 2014

151

Note 7 Structured entities (continued)
As at October 31, 2013

Multi-seller
conduits (1)

(Millions of Canadian dollars)

On-balance sheet assets
Securities
Loans
Derivatives
Other assets
On-balance sheet liabilities
Deposits
Derivatives
Other liabilities

Structured
finance

Non-RBC
managed
investment
funds

RBC
managed
investment
funds

Third-party
securitization
vehicles

Trading
portfolio
investments

Other

Total

$

14 $
896
44
–

– $
–
20
870

2,629 $
–
–
1

143 $
–
–
200

– $
1,454
–
–

3,494 $
–
–
–

761 $
3
9
350

7,041
2,353
73
1,421

$

954 $

890 $

2,630 $

343 $

1,454 $

3,494 $

1,123 $

10,888

$

– $
11
–

– $
–
–

– $
–
1

– $
–
–

– $
2
–

– $
–
–

903 $
–
333

903
13
334

$

11 $

– $

1 $

– $

2 $

– $

1,236 $

1,250

Maximum exposure to loss (2)

$

31,600 $

1,969 $

3,294 $

182 $

2,187 $

3,494 $

1,059 $

43,785

Total assets of unconsolidated
structured entities

$

31,075 $

(1)
(2)

22,733 $ 810,866 $ 238,348 $

40,183 $ 736,756 $

58,102 $1,938,063

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 $19.8 billion as at October 31, 2014 (October 31, 2013 - $18.8 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 by the notional amounts of the backstop liquidity and credit enhancement
facilities. Refer to Note 26.

Below is a description of our involvement with each significant class of unconsolidated structured entity.
Multi-seller conduits
We administer five multi-seller asset-backed commercial paper (ABCP) conduit programs (multi-seller conduits) – two in Canada and three in the
U.S. These conduits primarily purchase financial assets from clients and finance those purchases by issuing ABCP.
We do not maintain any ownership or retained interests in the multi-seller conduits that we administer and have no rights to, or control of,
their assets. As the administrative agent, we earn a residual fee for providing services such as coordinating funding activities, transaction
structuring, documentation, execution and monitoring of transactions. The ABCP issued by each multi-seller conduit is in the conduit’s own
name with recourse to the financial assets owned by each multi-seller conduit, and is non-recourse to us except through our participation in
liquidity and/or credit enhancement facilities. We may purchase ABCP issued by our multi-seller conduits from time to time in our capacity as
placement agent in order to facilitate the overall program liquidity.
We provide transaction-specific and program-wide liquidity facilities to the multi-seller conduits. In addition, we provide program-wide
credit enhancement to the multi-seller conduits which obligate us to purchase assets or advance funds in the event the multi-seller conduit does
not otherwise have funds from other sources, such as from the liquidity facilities, to settle maturing ABCP. In some cases, we or another third
party may provide transaction-specific credit enhancement which can take various forms. We receive market-based fees for providing these
liquidity and credit facilities.
For certain transactions, we act as counterparty to foreign exchange rate forward contracts and interest rate swaps to facilitate our clients’
securitization of fixed rate and/or foreign currency denominated assets through the conduits. These derivatives expose us to foreign exchange
and interest rate risks that are centrally managed by our foreign exchange trading and swap desks, respectively, and credit risk on the underlying
assets that is mitigated by the credit enhancement described below.
Each transaction is structured with transaction-specific first loss protection provided by the third-party seller. This enhancement can take
various forms, including but not limited to overcollateralization, excess spread, subordinated classes of financial assets, guarantees or letters
of credit. The amount of this enhancement varies but is generally sized to cover a multiple of loss experience.
An unrelated third party (expected loss investor) absorbs credit 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 credit losses, and management of
the ABCP liabilities.
We do not consolidate these multi-seller conduits as we do not have the decision-making power to direct the relevant activities noted
above.
Structured finance
We purchased U.S. ARS from certain trusts (U.S. ARS Trusts) which fund their long-term investments in student loans by issuing short-term senior
and subordinated notes. We are subject to losses on these U.S. ARS Trusts if defaults are experienced on the underlying student loans; however,
in the majority of these structures, the principal and accrued interest on the student loans is guaranteed by U.S. government agencies. We act as
auction agent for some of these entities but have no legal obligation to purchase the notes issued by these entities in the auction process. We do
not consolidate these U.S. ARS Trusts as we do not have decision making power over the investing and financing activities of the Trusts, which
are the activities that most significantly affect the performance of the Trusts.
Additionally, we invest in certain municipal bond TOB programs that we do not consolidate. These programs are similar to those
consolidated municipal bond TOB programs described above; however, the residual certificates are held by third-parties and we do not provide
credit enhancement of the underlying assets. We only provide liquidity facilities on the floating-rate certificates which may be drawn if
certificates are tendered but not able to be remarketed. We do not have decision making power over the relevant activities of the programs;
therefore, we do not consolidate these programs. The assets transferred into these programs are derecognized from our Consolidated Balance
Sheets.
152

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Non-RBC managed investment funds
We enter into fee-based equity derivative transactions with third parties including mutual funds, unit investment trusts and other investment
funds. These transactions provide their investors with the desired exposure to a reference fund, and we economically hedge our exposure to
these derivatives by investing in those reference funds. We also act as custodian or administrator for several funds. We do not consolidate those
reference funds that are managed by third parties as we do not have power to direct their investing activities.
We provide liquidity facilities to certain third-party investment funds. The funds issued unsecured variable-rate preferred shares and invest
in portfolios of tax-exempt municipal bonds. Undrawn liquidity commitments expose us to 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.
RBC managed investment 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 in which our interests indicate that we are exercising our decision making power as an
agent of the other unit holders.
Third-party securitization vehicles
We hold interests in securitization vehicles that provide funding to certain third-parties on whose behalf the entities were created. The activities
of these entities are limited to the purchase and sale of specified assets from the sponsor and the issuance of asset-backed notes collateralized
by those assets. The underlying assets are typically receivables, including auto loans and leases. We, as well as other financial institutions, are
obligated to provide funding up to our maximum commitment level and are exposed to credit losses on the underlying assets after various credit
enhancements. Enhancement can take various forms, including but not limited to overcollateralization, excess spread, subordinated classes of
financial assets, guarantees or letters of credit. The amount of this enhancement varies but is generally sized to cover a multiple of loss
experience. We do not consolidate these entities as we do not have decision making power over the relevant activities, including the investing
and financing activities.
Trading portfolio investments
We also invest in the securities issued by structured entities, including government-sponsored entities, as part of our trading activities. We did
not create and are not the sponsor of these entities and our involvement is limited to that of a passive investor. These investments do not carry
a funding commitment; therefore our maximum exposure to loss is limited to our investment. We do not consolidate these entities as we do not
have any decision making power over their activities.
Other
Other structured entities include credit investment products and tax credit funds.
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 or historic rehabilitation real estate
projects 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 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.
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 end October 31,
2014, we transferred commercial mortgages with a carrying amount of $173 million (October 31, 2013 – $nil) to a sponsored securitization
vehicle in which we did not have an interest as at the end of the reporting period.
Financial support provided to structured entities
During the years ended October 31, 2014, 2013 and 2012, we have not provided any financial or non-financial support to any consolidated or
unconsolidated structured entities when we were not contractually obligated to do so. Furthermore, we have no intention to provide such support
in the future.
Note 8 Derivative financial instruments and hedging activities
Derivative instruments are categorized as either financial or non-financial derivatives. Financial derivatives are financial contracts whose value
is derived from an underlying interest rate, foreign exchange rate, credit risk, and equity or equity index. Non-financial derivatives are contracts
whose value is derived from a precious metal, commodity instrument or index. Notional amount of derivatives represents the contract amount
used as a reference point to calculate payments. Notional amounts are generally not exchanged by counterparties, and do not reflect our
exposure at default.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

153

Note 8 Derivative financial instruments and hedging activities (continued)
Financial derivatives
Forwards and futures
Forward contracts are effectively non-standardized agreements that are transacted between counterparties in the over-the-counter 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 over-the-counter contracts in which two counterparties exchange a series of cash flows based on agreed upon rates 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. 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 predetermined price, at or by
a specified 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 over-the-counter contracts that transfer credit risk related to an underlying financial instrument (referenced asset) from one
counterparty to another. Examples of credit derivatives are described below.
Credit default swaps provide protection against the decline in value of the referenced asset as a result of specified credit events such as
default or bankruptcy. They are similar in structure to an option, whereby the purchaser pays a premium to the seller of the credit default swap in
return for payment contingent on a credit event affecting the referenced asset.
Credit default baskets are similar to credit default swaps except that the underlying referenced financial instrument is a group of assets
instead of a single asset.
Total return swaps are contracts where one counterparty agrees to pay or receive from the other cash flows based on changes in the value
of the referenced asset.
Other derivative products
Certain warrants and loan commitments that meet the definition of derivative are also included as derivative instruments.
Non-financial derivatives
We also transact in non-financial derivative products including precious metal and commodity derivative contracts in both the over-the-counter
and exchange markets.
Derivatives issued for trading purposes
Most of our derivative transactions relate to sales and trading activities. Sales activities include the structuring and marketing of derivative
products to clients to enable them to transfer, modify or reduce current or expected 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 managing market risk positions 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 products.
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. 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. We largely assess and measure the effectiveness of a hedging relationship based on the change in fair value of the derivative
hedging instrument relative to the change in fair value of the hedged item. When cash instruments are designated as hedges of currency risks,
only changes in their value due to currency risk are included in the assessment and measurement of hedge effectiveness.
154

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

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 Non-interest income.
After-tax unrealized gains relating to de-designated hedges of $44 million (before-tax unrealized gains of $60 million) included in Other
components of equity as at October 31, 2014, are expected to be reclassified to Net interest income within the next 12 months.
The following table presents the fair values of the derivative and non-derivative instruments categorized by their hedging relationships, as
well as derivatives that are not designated in hedging relationships.
Derivatives and non-derivative instruments
As at
October 31, 2014
Designated as hedging
instruments in
hedging relationships
Cash
flow
hedges

(Millions of Canadian dollars)

Assets
Derivative instruments
Liabilities
Derivative instruments
Non-derivative instruments

Fair
value
hedges

October 31, 2013
Designated as hedging
instruments in
hedging relationships

Net Not designated
investment
in a hedging
hedges
relationship

$ 504 $

1,392 $

511
–

121
–

87 $
205
20,949

Cash
flow
hedges

Net Not designated
Fair value investment
in a hedging
hedges
hedges
relationship

85,419 $ 555 $ 1,461 $
88,145
–

460
–

376
–

32 $
95
17,499

72,774
75,814
–

Results of hedge activities recorded in Net income and Other comprehensive income
For the year ended
October 31, 2013

October 31, 2012

Net gains
Net gains
After-tax
(losses) included (losses) included
unrealized
in Non-interest
in Net interest
gains (losses)
income
income included in OCI

Net gains
Net gains
After-tax
(losses) included (losses) included
unrealized
in Non-interest
in Net interest
gains (losses)
income
income included in OCI

$

$

October 31, 2014

(Millions of Canadian dollars)

Net gains
(losses) included
in Non-interest
income

Fair value hedges
Gains (losses) on hedging
instruments
$
(Losses) gains on hedged
items attributable to
the hedged risk
Ineffective portion (1)
Cash flow hedges
Ineffective portion
Effective portion
Reclassified to income
during the period (2)
Net investment hedges
Ineffective portion
Foreign currency gains
(losses)
(Losses) gains from
hedges
$
(1)
(2)
n.a.

Net gains
(losses) included
in Net interest
income

216 $

After-tax
unrealized
gains (losses)
included in OCI

n.a. $

n.a.

(329)
(113)

n.a.
n.a.

n.a.
n.a.

(13)
n.a.

n.a.
n.a.

n.a.

n.a. $

n.a.

459
(92)

n.a.
n.a.

n.a.
(108)

(13)
n.a.

(38)

n.a.

1

n.a.

n.a.
n.a.
(125) $

(66) $

n.a. $

n.a.

n.a.
n.a.

(15)
(81)

n.a.
n.a.

n.a.
n.a.

n.a.
n.a.

n.a.
(11)

(4)
n.a.

n.a.
n.a.

n.a.
32

n.a.

40

n.a.

n.a.

(35)

n.a.

n.a.

1

n.a.

n.a.

1

n.a.

n.a.

n.a.

2,743

n.a.

n.a.

1,402

n.a.

n.a.

114

n.a.

(1,585)

n.a.

n.a.

n.a.

n.a.

(84) $

(35) $

(38) $

1,050

$

(551) $

(104) $

40 $

(912)
479

$

–
146

Includes losses of $109 million (2013 – $82 million; 2012 – $76 million) that are excluded from the assessment of hedge effectiveness. These amounts are recorded in Non-interest income
and are offset by other economic hedges.
After-tax losses of $28 million were reclassified from Other components of equity to income during the year ended October 31, 2014 (October 31, 2013 – gains of $30 million; October 31,
2012 – losses of $25 million).
not applicable

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

155

Note 8 Derivative financial instruments and hedging activities (continued)
Notional amount of derivatives by term to maturity (absolute amounts)
As at October 31, 2014
Term to maturity
(Millions of Canadian dollars)

Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (2)
Other contracts (3)
Exchange-traded contracts
Interest rate contracts
Futures – long positions
Futures – short positions
Options purchased
Options written
Foreign exchange contracts
Futures – long positions
Futures – short positions
Other contracts (3)

Within 1 year

$

324,707
1,626,852
98,085
97,259

1 to 5 years

$

47,227
3,301,834
101,493
104,445

Over 5 years (1)

$

–
1,852,349
23,930
32,258

Total

$

371,934
6,781,035
223,508
233,962

Trading

$

371,934
6,579,940
223,508
233,962

Other than
Trading

$

–
201,095
–
–

1,019,102
7,371
148,340
27,159
28,287
1,702
62,652

30,832
15,102
424,982
12,665
12,220
16,188
58,982

1,094
20,415
218,011
4,058
4,475
8,124
20,685

1,051,028
42,888
791,333
43,882
44,982
26,014
142,319

1,018,520
42,156
763,764
43,882
44,982
24,707
140,168

32,508
732
27,569
–
–
1,307
2,151

14,429
52,345
21,303
4,322

16,614
19,373
5,229
–

47
1
–
–

31,090
71,719
26,532
4,322

31,090
71,719
26,532
4,322

–
–
–
–

960
1,167
132,399

–
–
33,755

–
–
420

960
1,167
166,574

960
1,167
166,571

–
–
3

$ 3,668,441

$ 4,200,941

2,185,867

$10,055,249

$ 9,789,884

$ 265,365

Trading

Other than
Trading

$

As at October 31, 2013
Term to maturity
(Millions of Canadian dollars)

Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (2)
Other contracts (3)
Exchange-traded contracts
Interest rate contracts
Futures – long positions
Futures – short positions
Options purchased
Options written
Foreign exchange contracts
Futures – long positions
Futures – short positions
Other contracts (3)
(1)
(2)

(3)

156

Within 1 year

$

364,918
1,218,382
59,272
59,921

1 to 5 years

$

93,570
2,718,313
83,085
81,222

Over 5 years (1)

$

–
1,369,003
27,178
33,000

Total

$

458,488
5,305,698
169,535
174,143

$

458,488
5,095,519
169,337
174,112

$

–
210,179
198
31

887,156
6,054
131,805
19,217
19,737
1,650
57,593

30,991
14,420
308,927
10,917
11,729
11,498
42,101

1,079
13,796
144,779
4,732
4,682
8,961
20,647

919,226
34,270
585,511
34,866
36,148
22,109
120,341

858,547
34,270
555,841
34,866
36,148
20,704
120,336

60,679
–
29,670
–
–
1,405
5

10,332
20,727
13,831
11,371

6,809
13,952
3,557
1,277

–
–
–
–

17,141
34,679
17,388
12,648

17,103
34,604
17,388
12,648

38
75
–
–

6,092
11,381
140,471

9,646
12,617
29,786

102
–
387

15,840
23,998
170,644

15,840
23,998
170,641

–
–
3

$ 3,039,910

$ 3,484,417

1,628,346

$ 8,152,673

$ 7,850,390

$ 302,283

$

Includes contracts maturing in over 10 years with a notional value of $668 billion (October 31, 2013 – $501 billion). The related gross positive replacement cost is $39 billion (October 31,
2013 – $25 billion).
Credit derivatives include credit default swaps, total return swaps and credit default baskets, including credit derivatives given guarantee treatment for OSFI regulatory reporting purposes.
Credit derivatives with a notional value of $1.3 billion (October 31, 2013 – $1.4 billion) are economic hedges. Trading credit derivatives comprise protection purchased of $13.3 billion
(October 31, 2013 – $11.0 billion) and protection sold of $11.4 billion (October 31, 2013 – $9.7 billion).
Other contracts include precious metal, commodity, stable value and equity derivative contracts.

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

The following tables indicate the periods when the cash flows are expected to occur and when they are expected to affect profit or loss for cash
flow hedges:

Cash inflows from assets
Cash outflows from liabilities

Within 1 year
$
268
(540)

1 to 2 years
$
287
(446)

As at October 31, 2014
2 to 3 years
3 to 5 years
$
243
$
325
(384)
(269)

Over 5 years
$
85
(87)

Total
$ 1,208
(1,726)

Net cash flows

$

$

$

$

$

(Millions of Canadian dollars)

Cash inflows from assets
Cash outflows from liabilities

Within 1 year
$
267
(533)

1 to 2 years
$
232
(531)

2 to 3 years
$
218
(495)

3 to 5 years
$
314
(602)

Over 5 years
$
321
(122)

Total
$ 1,352
(2,283)

Net cash flows

$

$

$

$

$

$

(Millions of Canadian dollars)

(272)

(159)

(141)

$

56

(2)

(518)

As at October 31, 2013

(266)

(299)

(277)

(288)

199

(931)

Fair value of derivative instruments
As at
October 31, 2014
Average fair value
Year end fair value
for year ended (1)
Positive

(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 (2)
Other contracts (3)
Held or issued for other than trading purposes
Interest rate contracts
Swaps
Options purchased
Options written
Foreign exchange contracts
Forward contracts
Cross currency swaps
Cross currency interest rate swaps
Options purchased
Options written
Credit derivatives (2)
Other contracts (3)
Total gross fair values before netting
Valuation adjustments determined on a pooled
basis (4)
Impact of netting agreements that qualify for
balance sheet offset
Impact of netting agreements that do not qualify for
balance sheet offset (5)
(1)
(2)
(3)
(4)

(5)
n.a.

$

Negative

Positive

Negative

258 $
206 $
347 $
357
78,884
75,195
95,960
91,386
3,671
–
4,123
–
–
4,509
–
5,101
82,813
79,910
100,430
96,844

October 31, 2013
Average fair value
for year ended (1)
Year end fair value
Positive

$

505
80,490
2,792
–
83,787

Negative

$

347
78,156
–
3,619
82,122

Positive

$

348
73,164
3,253
–
76,765

Negative

$

262
69,897
–
3,966
74,125

8,416
1,732
10,433
1,645
–
22,226

8,741
1,155
14,261
–
1,349
25,506

12,155
1,788
16,034
2,621
–
32,598

11,752
1,506
19,165
–
2,222
34,645

9,229
1,505
9,692
1,900
–
22,326

9,381
1,053
16,333
–
1,704
28,471

6,774
1,432
9,308
2,234
–
19,748

7,629
944
12,058
–
1,744
22,375

225
7,052
112,316

281
10,662
116,359

254
8,525
141,807

301
12,373
144,163

229
5,203
111,545

254
8,275
119,122

225
6,635
103,373

276
10,085
106,861

2,098
–
–
2,098

626
–
–
626

2,106
1
–
2,107

787
–
1
788

326
–
885
–
–
1,211

259
45
754
–
–
1,058

194
–
843
–
–
1,037

194
–
339
–
–
533

–
112
3,421

41
112
1,837

–
–
3,144

56
–
1,377

145,228

146,000

106,517

108,238

(758)

(36)

(505)

(57,068)
87,402

(56,982)
88,982

(31,190)
74,822

(60,546)
(60,546)
$ 26,856 $ 28,436

n.a.
(31,493)
76,745

(51,653)
(51,653)
$ 23,169 $ 25,092

Average fair value amounts are calculated based on monthly balances.
Credit derivatives include credit default swaps, total return swaps and credit default baskets, including credit derivatives given guarantee treatment for OSFI regulatory reporting purposes.
Other contracts include precious metal, commodity, stable value and equity derivative contracts.
IFRS 13 requirements are applied on a prospective basis and the standard 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, on a net exposure to market or credit risk. The valuation adjustment amounts in this table include those determined on a portfolio basis.
Additional impact of offsetting credit exposures on contracts that do not qualify for balance sheet offset.
not applicable
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

157

Note 8 Derivative financial instruments and hedging activities (continued)

Fair value of derivative instruments by term to maturity
As at
October 31, 2014
(Millions of Canadian dollars)

Derivative assets
Derivative liabilities

Less than
1 year

1 to
5 years

October 31, 2013

Over
5 years

Total

$ 19,485 $ 29,838 $ 38,079 $ 87,402
19,980
32,640
36,362
88,982

Less than
1 year

1 to
5 years

Over
5 years

Total

$ 13,695 $ 27,340 $ 33,787 $ 74,822
15,672
29,104
31,969
76,745

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-related credit risk 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 utilize a single internal rating system for all credit risk exposure. In most cases, these internal ratings
approximate the external risk ratings of public rating agencies.
Netting is a technique that can reduce credit exposure from derivatives and is generally facilitated through the use of master netting
agreements. 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-tomarket provisions in our agreements with some counterparties, typically in the form of a Credit Support Annex, provide us with the right to
request that the counterparty pay down or collateralize the current market value of its derivatives positions when the value passes a specified
threshold amount.
Replacement cost represents the total fair value of all outstanding contracts in a gain position after factoring in the master netting
agreements. The credit equivalent amount is defined as the sum of the replacement cost plus an add-on amount for potential future credit
exposure as defined by OSFI. The risk-weighted amount is determined by applying the standard OSFI defined measures of counterparty risk to
the credit equivalent amount.
Derivative-related credit risk
As at
October 31, 2014 (1)

(Millions of Canadian dollars)

Over-the-counter contracts
Interest rate contracts
Forward rate agreements
Swaps
Options purchased
Foreign exchange contracts
Forward contracts
Swaps
Options purchased
Credit derivatives (4)
Other contracts (5)
Exchange traded contracts

Replacement
cost

$

(5)

158

183
12,455
355

$

5,731
3,190
225
178
1,780
3,530
$

(1)
(2)
(3)
(4)

Credit
equivalent
amount (2)

27,627

276
22,308
665

October 31, 2013 (1)
Risk-weighted
equivalent (3)

$

11,049
6,576
443
2,053
6,670
10,358
$

60,398

$

70
4,660
386

Replacement
cost

$

94
13,133
399

Credit
equivalent Risk-weighted
amount (2) equivalent (3)

$

278
20,914
634

$

3,201
2,516
201
1,136
3,996
207

2,463
2,500
259
106
1,864
2,867

6,891
6,262
444
1,480
6,838
11,186

2,232
1,946
221
719
3,519
224

16,373

$ 23,685

$ 54,927

$ 14,737

The amounts presented are net of master netting agreements in accordance with Basel III.
The total credit equivalent amount includes collateral applied of $11.4 billion (October 31, 2013 – $9.6 billion).
The risk-weighted balances are calculated in accordance with Basel III.
Credit derivatives include credit default swaps, total return swaps and credit default baskets, and exclude credit derivatives issued for other-than-trading purposes related to bought
protection.
Other contracts include precious metal, commodity, stable value, and equity derivatives contracts.

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

48
5,465
363

Replacement cost of derivative instruments by risk rating and by counterparty type
As at October 31, 2014
Counterparty type (2)

Risk rating (1)
AAA, AA

(Millions of Canadian dollars)

A

BB or
lower

BBB

Total

Gross positive replacement cost $ 25,765 $ 98,566 $ 13,995 $ 6,915 $ 145,241 $
Impact of master netting
agreements
19,279
88,911
8,154
1,270
117,614
Replacement cost (after netting
agreements)

OECD
governments

Banks

52,986
44,372

$ 6,486 $ 9,655 $ 5,841 $ 5,645 $ 27,627 $

Other

Total

12,427 $ 79,828 $ 145,241
7,743

8,614 $

65,499

117,614

4,684 $ 14,329 $

27,627

As at October 31, 2013
Counterparty type (2)

Risk rating (1)
(Millions of Canadian dollars)

AAA, AA

A

BB or
lower

BBB

Total

Gross positive replacement cost $ 20,610 $ 68,471 $ 11,604 $ 5,844 $ 106,529 $
Impact of master netting
agreements
14,345
60,780
6,829
890
82,844
Replacement cost (after netting
agreements)
(1)
(2)

OECD
governments

Banks

$ 6,265 $ 7,691 $ 4,775 $ 4,954 $ 23,685 $

48,730 $

Other

Total

10,634 $ 47,165 $ 106,529

37,070

6,734

39,040

11,660 $

3,900 $

82,844

8,125 $

23,685

Our internal risk ratings for major counterparty types approximate those of public ratings agencies. Ratings of AAA, AA, A and BBB represent investment grade ratings and ratings of BB or
lower represent non-investment grade ratings.
Counterparty type is defined in accordance with the capital adequacy requirements of OSFI.

Note 9 Premises and equipment

Land

(Millions of Canadian dollars)

Cost
Balance at October 31, 2013
Additions (1)
Acquisitions through business combinations
Transfers from work in process
Disposals
Foreign exchange translation
Other
Balance at October 31, 2014
Accumulated depreciation
Balance at October 31, 2013
Depreciation
Disposals
Foreign exchange translation
Other

Buildings

Computer
equipment

Furniture,
fixtures
and other
Leasehold
equipment improvements

Work in
process

$

134 $
–
–
1
(2)
2
2

1,358 $
14
–
17
(1)
8
(49)

1,516 $
108
–
43
(412)
27
(4)

1,434 $
74
–
34
(303)
14
(5)

2,040 $
54
–
90
(67)
34
41

$

137

$

1,347

1,278

1,248

2,192

$

–
–
–
–
–

$

499 $
50
(1)
3
(52)

$

$

1,155 $
181
(412)
21
(20)

$

1,015 $
101
(282)
9
(4)

Total

113 $ 6,595
279
529
–
–
(185)
–
(1)
(786)
2
87
–
(15)

$

208

$ 6,410

1,290 $
167
(61)
20
47

–
–
–
–
–

$ 3,959
499
(756)
53
(29)

Balance at October 31, 2014

$

–

$

499

$

925

$

839

$

1,463

$

–

$ 3,726

Net carrying amount at October 31, 2014

$

137

$

848

$

353

$

409

$

729

$

208

$ 2,684

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

159

Note 9 Premises and equipment (continued)

Land

(Millions of Canadian dollars)

Cost
Balance at October 31, 2012
Additions (1)
Acquisitions through business combinations
Transfers from work in process
Disposals
Foreign exchange translation
Other

Buildings

Computer
equipment

Furniture,
fixtures
and other
Leasehold
equipment improvements

Work in
process

$

128 $
3
–
2
(1)
2
–

1,274 $
12
–
44
(3)
6
25

1,430 $
107
1
31
(59)
13
(7)

1,369 $
40
21
52
(56)
7
1

1,864 $
40
–
155
(6)
16
(29)

$

134

$

1,358

1,516

1,434

2,040

$

–
–
–
–
–

$

455 $
42
(2)
2
2

1,048 $
171
(56)
9
(17)

Balance at October 31, 2013

$

–

$

499

$

1,155

$

1,015

Net carrying amount at October 31, 2013

$

134

$

859

$

361

$

419

Balance at October 31, 2013
Accumulated depreciation
Balance at October 31, 2012
Depreciation
Disposals
Foreign exchange translation
Other

(1)

$

$

$

Total

199 $ 6,264
234
436
–
22
(284)
–
(3)
(128)
2
46
(35)
(45)

$

113

1,147 $
140
(5)
8
–

–
–
–
–
–

$ 3,600
445
(111)
23
2

$

1,290

$

–

$ 3,959

$

750

$

113

$ 2,636

950 $
92
(48)
4
17

$ 6,595

At October 31, 2014, we had total contractual commitments of $216 million to acquire premises and equipment (October 31, 2013 – $122 million; October 31, 2012 – $222 million).

Note 10 Goodwill and other intangible assets
Goodwill
The following table presents changes in the carrying amount of goodwill by CGU for the years ended October 31, 2014 and 2013.

$ 1,929 $ 1,446 $
598
–
–
58

543 $
–
5

1,889 $
–
48

517 $
–
22

127 $
–
5

118 $
–
–

52
96
1

$ 837
11
30

$ 7,458
705
169

At October 31, 2013
Dispositions
Currency translations

$ 2,527 $ 1,504 $

548 $

1,937 $

539 $

132 $

118 $ 149

$ 878

$ 8,332

–
59

(51)
366

At October 31, 2014

$ 2,527 $ 1,593 $

–
10
558 $

U.S. Wealth
Management

Investor &
Treasury
Services

At October 31, 2012
Acquisitions
Currency translations

(51)
140

Global Asset
Management

International
Wealth
Management

(Millions of Canadian dollars)

–
–

Caribbean
Banking

Canadian
Wealth
Management

Canadian
Banking

–
105
2,042 $

–
43
582 $

Insurance

–
9
141 $

–
–

Capital
Markets

–
–

118 $ 149

$

937

Total

$ 8,647

We perform our annual impairment test by comparing the carrying amount of each CGU to its recoverable amount. The recoverable amount of a
CGU is represented by its value in use, except in circumstances where the carrying amount of a CGU exceeds its value in use. In such cases, we
determine the CGU’s fair value less costs of disposal and its recoverable amount is the greater of its value in use and fair value less costs of
disposal. Our annual impairment test is performed as at August 1.
In our 2014 annual impairment test, the recoverable amounts of our Caribbean Banking and International Wealth Management CGUs were
based on fair value less costs of disposal (2013 annual impairment test – Caribbean Banking CGU). In 2014 and 2013, the recoverable amounts
of all other CGUs tested were based on value in use.
Value in use
We calculate value in use using a five-year discounted cash flow method. Future cash flows are based on financial plans agreed by management
for a five-year period, 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 five-year period, cash flows are assumed to increase at a constant rate
using a nominal long-term growth rate (terminal growth rate). Terminal growth rates are based on the current market assessment of gross
domestic product and inflation for the countries within which the CGU operates. The discount rates used to determine the present value of each
CGU’s projected future cash flows are based on the bank-wide cost of capital, adjusted for the risks to which each CGU is exposed. CGU-specific
risks include: country risk, business/operational risk, geographic risk (including political risk, devaluation risk, and government regulation),
currency risk, and price risk (including product pricing risk and inflation).
The estimation of value in use involves significant judgment in the determination of inputs to the discounted cash flow model and is most
sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the forecast period. These

160

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

key inputs and assumptions used to determine the recoverable amount of each CGU using value in use were tested for sensitivity by applying a
reasonably possible change to those assumptions. The post-tax discount rates were increased by 1%, terminal growth rates were decreased by
1%, and future cash flows were reduced by 10%. As at August 1, 2014, no change in an individual key input or assumption, as described, would
result in a CGU’s carrying amount exceeding its recoverable amount based on value in use.
The terminal growth rates and pre-tax discount rates used in our discounted cash flow models are summarized below.
As at
August 1, 2014

Group of cash generating units
Canadian Banking
Caribbean Banking
Canadian Wealth Management
Global Asset Management
U.S. Wealth Management
International Wealth Management
Insurance
Investor & Treasury Services
Capital Markets
(1)

August 1, 2013

Discount
rate (1)

Terminal
growth
rate

Discount
rate (1)

Terminal
growth
rate

10.6%
13.0
11.9
11.6
15.7
10.3
10.1
12.8
15.9

3.0%
4.2
3.0
3.0
3.0
3.0
3.0
3.0
3.0

10.6%
12.9
11.9
11.8
15.9
11.8
10.2
12.5
15.6

3.0%
4.2
3.0
3.0
3.0
3.0
3.0
3.0
3.0

Pre-tax discount rates are determined implicitly based on post-tax discount rates.

Fair value less costs of disposal – Caribbean Banking
For our Caribbean Banking CGU, we calculated fair value less costs of disposal using a discounted cash flow method that projects future cash
flows over a 5-year period. Cash flows are based on management forecasts, adjusted to approximate the considerations of a prospective thirdparty buyer. Cash flows beyond the initial 5-year period are assumed to increase at a constant rate using a nominal long-term growth rate. Future
cash flows, terminal growth rates, and discount rates are based on the same factors noted above. This fair value measurement is categorized as
level 3 in the fair value hierarchy as certain significant inputs are not observable.
The estimation of fair value less costs of disposal 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. These key inputs and assumptions were tested for sensitivity by applying a reasonably possible change to those assumptions. The posttax discount rates were increased by 1%, terminal growth rates were decreased by 1%, and future cash flows were reduced by 10%. As at
August 1, 2014, the recoverable amount, based on fair value less costs of disposal, was 120% of its carrying amount. 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 fair value less costs of disposal.
Fair value less costs of disposal – International Wealth Management
For our International Wealth Management CGU, we calculated fair value less costs of disposal using a multiples-based approach. Each business
within the CGU was valued using either a Price-to-assets-under-administration (P/AUA) or Price-to-revenue (P/Rev) multiple, as appropriate, to
reflect the considerations of a prospective third-party buyer. For the applicable businesses, we applied a P/AUA multiple of 2.5% to AUA as at
August 1, 2014 and a P/Rev multiple of 2.5x to revenue for the 12 months preceding the testing date. These multiples represent our best
estimate from a range of reasonably possible inputs based on precedent transactions for comparable businesses. This fair value measurement
is categorized as level 3 in the fair value hierarchy as certain significant inputs are not observable.
The estimation of fair value less costs of disposal involves significant judgment in the determination of the appropriate valuation approach
and inputs and is most sensitive to changes in the P/AUA and P/Rev multiples. If the multiples used were each reduced to the low end of the
range of reasonably possible inputs considered, the recoverable amount of the CGU based on fair value less costs of disposal would still exceed
its carrying amount.
Other intangible assets
The following table presents the carrying amount of our other intangible assets:
As at October 31, 2014

(Millions of Canadian dollars)
Gross carrying amount
Balance at October 31, 2013
Additions
Transfers
Dispositions
Impairment losses
Currency translations
Other changes
Balance at October 31, 2014
Accumulated amortization
Balance at October 31, 2013
Amortization charge for the year
Dispositions
Impairment losses
Currency translations
Other changes
Balance at October 31, 2014
Net balance, at October 31, 2014

Internally
generated
software
$

Other
software
$ 1,128
57
22
(2)
–
15
(34)
$ 1,186

$

$ (1,815)
(460)
4
–
(22)
–
$ (2,293)

$

$

$

(811)
(60)
1
–
(13)
(5)
(888)

$

$

298

$

2,554
48
750
(4)
–
32
22
3,402

Core
deposit
intangibles

1,109

$

157
–
–
(3)
–
14
–
168

Customer
list and
relationships
$

$

1,509
–
–
–
(8)
48
(38)
1,511

$

$

$

–
–
–
–
–
–
–

$

487

$

$

(117)
(22)
–
–
(12)
–
(151)

$

(539)
(124)
–
–
(22)
38
(647)

$

17

$

864

Consolidated Financial Statements

In process
software

$

711
545
(772)
–
–
8
(5)
487

Total
$

$

6,059
650
–
(9)
(8)
117
(55)
6,754

$ (3,282)
(666)
5
–
(69)
33
$ (3,979)
$

Royal Bank of Canada: Annual Report 2014

2,775
161

Note 10 Goodwill and other intangible assets (continued)

As at October 31, 2013
Internally
generated
software

(Millions of Canadian dollars)

Gross carrying amount
Balance at October 31, 2012
Additions
Transfers
Dispositions
Impairment losses
Currency translations
Other changes

Other
software

Core
deposit
intangibles

$

2,206 $
30
400
(2)
(7)
15
(88)

Balance at October 31, 2013

$

2,554

Accumulated amortization
Balance at October 31, 2012
Amortization charge for the year
Dispositions
Impairment losses
Currency translations
Other changes

$ (1,442) $
(361)
1
3
(9)
(7)

(730) $
(66)
1
–
(7)
(9)

(90) $
(22)
–
–
(5)
–

Balance at October 31, 2013

$ (1,815) $

(811) $

(117) $

Net balance, at October 31, 2013

$

739

976 $
63
122
(2)
(4)
9
(36)

Customer
list and
relationships

$ 1,128

$

317

$

$

In process
software

Total

150
–
–
–
–
7
–

$

1,365
120
–
–
–
25
(1)

$

650
581
(522)
–
(2)
2
2

$ 5,347
794
–
(4)
(13)
58
(123)

157

$

1,509

$

711

$ 6,059

(413)
(117)
–
–
(11)
2

$

–
–
–
–
–
–

$ (2,675)
(566)
2
3
(32)
(14)

(539)

$

–

$ (3,282)

970

$

711

40

$

$ 2,777

Note 11 Significant dispositions
Personal & Commercial Banking
Caribbean Banking
On June 27, 2014, we completed the sale of RBC Royal Bank (Jamaica) Limited and RBTT Securities Jamaica Limited (collectively, RBC Jamaica) to
Sagicor Group Jamaica Limited, as announced on January 29, 2014. As a result of the transaction, we recorded a total loss on disposal of $100
million (before and after-tax), including a loss of $60 million in the first quarter and $40 million primarily relating to foreign currency translation
losses reclassified from Other components of equity in the third quarter of 2014. The loss on disposal has been included in Non-Interest expense
– Other.
U.S. Banking
On March 2, 2012, we completed the sale of our U.S. regional retail banking operations to the PNC Financial Services Group, Inc. (PNC)
announced on June 20, 2011. As a result of the transaction, we recorded a total loss on sale of $294 million after-tax, including an estimated
loss of $304 million in 2011 and a reduction to loss on sale of $10 million in 2012. The loss on disposal was recorded in Net loss from
discontinued operations.
The results of the operations sold to PNC and certain of our U.S. regional banking assets have been presented in our Consolidated Financial
Statements as discontinued operations for all periods presented. Select financial information is set out in the tables below.
Total discontinued operations – Statements of Income
For the year ended
(Millions of Canadian dollars)

Net interest income
Non-interest income

October 31
2014
$
–
–

October 31
2013
$
–
–

October 31
2012
$
200
68

Total Revenue

–

–

268

Provision for credit losses
Non-interest expense

–
–

–
–

117
258

Net loss before income taxes

–

–

(107)

Net loss
Gain on sale

–
–

–
–

(61)
10

Net loss from discontinued operations
U.S. regional retail banking operations sold to PNC
Other U.S. regional banking assets

–
–

–
–

(36)
(15)

Total

162

$

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

–

$

–

$

(51)

Total discontinued operations – Statements of Cash Flows
For the year ended
(Millions of Canadian dollars)

Net cash used in operating activities
Net cash from investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and due from banks

October 31
2014
$
–
–
–
–

October 31
2013
$
–
–
–
–

October 31
2012
$ (6,727)
4,054
(24)
(19)

–
–

–
–

(2,716)
2,716

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

–

$

–

$

–

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

(Millions of Canadian dollars)

Carrying amount

October 31
2014
$
180

October 31
2013
$
135

October 31
2012
$
452

October 31
2014
$
115

October 31
2013
$
112

October 31
2012
$
125

131
5

133
5

139
25

31
–

26
–

24
–

Share of:
Net income (1)
Other comprehensive income
$
(1)

Associated companies
As at and for the year ended

136

$

138

$

164

$

31

$

26

$

24

Net income for the year ended October 31, 2012 reflects our share of the income of RBC Dexia up to July 27, 2012, the date we completed our acquisition of the remaining 50% interest that
we did not already own.

We do not have any joint ventures or associated companies that are individually material to our financial results. Previously, our principal joint
ventures included a 50% interest in RBC Dexia. In the third quarter of 2012, we completed the acquisition of RBC Dexia and as a result, it is no
longer a joint venture.
During the year ended October 31, 2014, we recognized no impairment losses in respect of our interests in associated companies
(October 31, 2013 – $20 million; October 31, 2012 – none) and $62 million of gains on sales of associated companies (October 31, 2013 –
none; October 31, 2012 – none). During the year ended October 31, 2012, we recognized an impairment loss of $168 million related to our
interest in our previous joint venture, RBC Dexia.
Note 13 Other assets
As at

(Millions of Canadian dollars)

Cash collateral and margin deposits
Accounts receivable and prepaids
Receivable from brokers, dealers and clients
Insurance-related assets
Collateral loans
Policy loans
Reinsurance assets
Other
Deferred income tax asset
Accrued interest receivable
Taxes receivable
Precious metals
Other

October 31
2014
$ 12,481
3,773
2,354

October 31
2013
$ 11,689
3,563
1,474

1,121
113
512
400
2,382
1,554
1,620
223
4,162

1,273
132
422
355
2,141
1,789
1,252
173
2,375

$

Consolidated Financial Statements

30,695

$

26,638

Royal Bank of Canada: Annual Report 2014

163

Note 14 Deposits
The following table details our deposit liabilities:
As at

October 31, 2014
(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
(1)
(2)
(3)
(4)
(5)

October 31, 2013

Demand (1)
$ 120,444
162,988
5,771
$ 289,203

Notice (2)
$ 17,793
3,038
11
$ 20,842

Term (3)
$ 70,980
220,634
12,441
$ 304,055

Total
$ 209,217
386,660
18,223
$ 614,100

Demand (1)
$ 111,566
146,985
5,734
$ 264,285

Notice (2)
$ 15,732
1,209
11
$ 16,952

Term (3)
$ 67,645
206,399
7,798
$ 281,842

Total
$ 194,943
354,593
13,543
$ 563,079

$ 65,774
1,777
3,314
5,057

$ 3,478
15
1
279

$

-

$ 69,252
1,792
3,315
5,336

$

60,201
1,444
3,810
4,684

$ 3,282
7
1
315

$

-

$ 63,483
1,451
3,811
4,999

175,172
3,497
31,118
3,494
$ 289,203

10,895
2,144
418
3,612
$ 20,842

241,902
45,359
9,282
7,512
$ 304,055

427,969
51,000
40,818
14,618
$ 614,100

158,743
3,488
28,985
2,930
$ 264,285

9,604
202
45
3,496
$ 16,952

223,409
42,863
7,992
7,578
$ 281,842

391,756
46,553
37,022
14,004
$ 563,079

Deposits payable on demand include all deposits for which we do not have the right to notice of withdrawal. These deposits include both savings and chequing accounts.
Deposits payable after notice include all deposits for which we can legally require notice of withdrawal. These deposits are primarily savings accounts.
Term deposits include deposits payable on a fixed date. These deposits include term deposits, guaranteed investment certificates and similar instruments. As at October 31, 2014, the
balance of term deposits also include senior deposit notes we have issued to provide long-term funding of $150 billion (October 31, 2013 – $134 billion).
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, 2014, deposits denominated in U.S. dollars,
Sterling, Euro and other foreign currencies were $183 billion, $11 billion, $23 billion and $22 billion, respectively (October 31, 2013 – $152 billion, $8 billion, $20 billion and $21 billion).
Europe includes the United Kingdom, Switzerland and the Channel Islands.

The following table presents the contractual maturities of our term deposit liabilities.
As at
(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 $100,000 or more

October 31
2014

October 31
2013

$

$

57,840
32,880
50,300
54,354
31,559
28,946
24,673
23,503

43,426
34,532
33,450
62,443
34,519
22,358
25,596
25,518

$ 304,055

$ 281,842

$ 270,000

$ 247,000

The following table presents the average deposit balances and average rates of interest.

October 31, 2014
(Millions of Canadian dollars, except for percentage amounts)

Canada
United States
Europe (1)
Other International
(1)

164

October 31, 2012

Average
balances
$ 477,316
52,058
43,429
20,299

Average
rates
1.13%
0.30
0.21
1.03

Average
balances
$ 435,842
44,512
38,791
18,571

Average
rates
1.20%
0.38
0.27
0.95

Average
balances
$ 403,610
41,617
33,394
11,979

Average
rates
1.33%
0.50
0.62
2.20

$ 593,102

0.99%

$ 537,716

1.06%

$ 490,600

1.23%

Europe includes the United Kingdom, Switzerland and the Channel Islands.

Royal Bank of Canada: Annual Report 2014

For the year ended
October 31, 2013

Consolidated Financial Statements

Note 15 Insurance
Risk management
Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to our expectations at the time of
underwriting. We do not have a high degree of concentration risk due to our geographic diversity and business mix. Concentration risk is not a
major concern for the life and health insurance business as it does not have a material level of regional specific characteristics like those
exhibited in the property and casualty insurance business. Exposure to concentrations of insurance risks for the property and casualty business
is primarily mitigated through a robust Insurance Risk Framework including prudent underwriting practices and diversification by product
offerings and geographical areas. Reinsurance is also used for all insurance businesses to lower our risk profile and limit the liability on a single
claim. We manage underwriting and pricing risk through the use of underwriting guidelines which detail the class, nature and type of business
that may be accepted, pricing policies by product line and centralized control of policy wordings. The risk that claims are handled or paid
inappropriately is mitigated using a range of IT system controls and manual processes conducted by experienced staff. These, together with a
range of detailed policies and procedures, ensure that all claims are handled in a timely, appropriate and accurate manner.
Reinsurance
In the ordinary course of business, our insurance operations reinsure risks to other insurance and reinsurance companies in order to lower our
risk profile, limit loss exposure to large risks, and provide additional capacity for future growth. These ceding reinsurance arrangements do not
relieve our insurance subsidiaries from their direct obligations to the insureds. 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
For the year ended
October 31
2014
$
4,962
(1,220)

(Millions of Canadian dollars)

Gross premiums
Premiums ceded to reinsurers

October 31
2013
$
4,785
(1,111)

October 31
2012
$
4,739
(1,034)

Net premiums

$

3,742

$

3,674

$

3,705

Gross claims and benefits
Reinsurers’ share of claims and benefits

$

3,692
(498)

$

2,768
(442)

$

3,472
(417)

Net claims

$

3,194

$

2,326

$

3,055

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, 2014 are as follows:
Life insurance
Mortality and morbidity – Mortality estimates are based on standard industry and national 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.
Non-life insurance
Assumptions related to unpaid claims concern the patterns of development of claims from inception to ultimate settlement. The reserving
assumptions, based on historical paid/incurred development patterns adjusted for changes in products, claims processes and legislative trends,
result in a collective loss ratio when compared with earned premium.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

165

Note 15 Insurance (continued)
The portfolio assumptions that have the greatest effect on the net liabilities included in our Consolidated Balance Sheets are listed below:
Significant insurance assumptions
As at

October 31
2014

October 31
2013

0.12%
1.82
3.15
0.50

0.12%
1.99
3.15
0.50

0.43
2.19

0.46
2.29

60.16

62.14

Life Insurance
Canadian Insurance
Mortality rates (1)
Morbidity rates (2)
Reinvestment yield (3)
Lapse rates (4)
International Insurance
Mortality rates (1)
Reinvestment yield (3)
Non-life Insurance
Expected loss ratio (5), (6)
(1)
(2)
(3)
(4)
(5)
(6)

Average annual death rate for the largest portfolio of insured policies.
Average net settlement rate for the individual and group disability insurance portfolio.
Ultimate reinvestment rate of the insurance operations.
Ultimate policy termination rate (lapse rate) for the largest permanent life insurance portfolio that relies on higher termination rate to maintain its profitability (lapse-supported policies).
Ratio of incurred claim losses and claim expenses to Net premiums of the property and casualty business, measuring the profitability or loss experience on our total book of business.
Amounts have been revised from those previously reported.

The following table summarizes our gross and reinsurers’ share of insurance liabilities at the end of the year.
Insurance claims and policy benefit liabilities
As at
October 31, 2014
Gross

(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

(1)

October 31, 2013

Ceded

Net

Gross

Ceded

Net

$

7,555
5

$

390
–

$ 7,165
5

$ 7,029
1

$

300
–

$ 6,729
1

$

7,560

$

390

$ 7,170

$ 7,030

$

300

$ 6,730

$

419
1,010

$

–
29

$

$

410
1,005

$

–
21

$

1,429

$

29

$ 1,400

$ 1,415

$

21

$ 1,394

$

8,989

$

419

$ 8,570

$ 8,445

$

321

$ 8,124

419
981

$

410
984

Insurance claims and policy benefit liabilities include Investment contracts and Unearned premium provision, both of which are reported in Other liabilities on the Consolidated Balance
Sheets.

Reconciliation of life insurance policyholder liabilities
October 31, 2014
(Millions of Canadian dollars)

Balances, beginning of the year
New and in-force policies
Changes in assumption and methodology
Net change in investment contracts

$

Balances, end of the year

$

October 31, 2013

Gross
7,030
621
(95)
4

Ceded
$
300
90
–
–

Net
$ 6,730
531
(95)
4

Gross
$ 6,989
(67)
108
–

7,560

$

$ 7,170

$ 7,030

390

$

$

Ceded
206
94
–
–
300

Net
$ 6,783
(161)
108
–
$ 6,730

Reconciliation of non-life insurance policyholder liabilities
October 31, 2014
(Millions of Canadian dollars)

Balances, beginning of the year
Changes in unearned premiums provision
Written premiums
Less: Net premiums earned
Changes in unpaid claims provision and adjustment expenses
Incurred claims
Less: Claims paid

$

Balances, end of the year

$

166

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Gross
1,415

$

Ceded
21

October 31, 2013
Net
$ 1,394

Gross
$ 1,354

$

Ceded
27

Net
$ 1,327

942
(933)

91
(91)

851
(842)

980
(990)

32
(32)

948
(958)

595
(590)

38
(30)

557
(560)

652
(581)

33
(39)

619
(542)

1,429

$

29

$ 1,400

$ 1,415

$

21

$ 1,394

The net increase in Insurance claims and policy benefit liabilities over the prior year was comprised of the net increase in life and health,
reinsurance and property and casualty liabilities attributable to business growth and market movements on assets backing life and health
liabilities. During the year, we reviewed all key actuarial methods and assumptions which are used in determining the policy benefit liabilities
resulting in a $102 million net decrease to insurance liabilities comprised of: (i) a decrease of $37 million for assumption updates due to net
favourable interest rate and equity market changes; (ii) a decrease of $36 million due to liability impacts of significant business projects; (iii) a
decrease of $21 million due to valuation system and data changes; and (iv) a decrease of $8 million arising from insurance risk related
assumption updates largely due to mortality, morbidity, maintenance, property and casualty margin for adverse deviation and expense
assumptions. Changes in Insurance claims and policy benefit liabilities are included in Insurance policyholder benefits, claims and acquisition
expenses in our Consolidated Statements of Income in the period in which the estimates changed.
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 variable is applied to a range of existing actuarial modelling
assumptions to derive the possible impact on net income. The disclosure is not intended to explain the impact of a percentage change in the
insurance assets and liabilities disclosed above. The analyses are performed where a single assumption is changed while holding other
assumptions constant, which is unlikely to occur in practice.
Sensitivity
Net income impact for year ended
(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
Decrease in equity market values
Increase in maintenance expenses
Life Insurance
Adverse change in annuitant mortality rates
Adverse change in assurance mortality rates
Adverse change in morbidity rates
Adverse change in lapse
Non-life Insurance
Increase in expected loss ratio
(1)

Change in
variable
1%
1
10
10
5

$

October 31
2014
1
(3)
6
(3)
(25)

October 31
2013
27
(35)
8
(2)
(30)

$

2
2
5
10

(72)
(47)
(156)
(192)

(53)
(46)
(191)
(170)

5

(10)

(11)

Sensitivities for market interest rates have been calculated by increasing or decreasing 100 basis points at all points on the yield curve, with changes persisting for one year. In the prior year
we also included a corresponding impact of 15 basis points on the ultimate reinvestment rate that is no longer required due to actuarial changes in the determination of the ultimate
reinvestment rate implemented in the current period.

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
As at

(Millions of Canadian dollars)

Cash
Investment in mutual funds
Other liabilities, net

October 31
2014
$
1
675
(1)

October 31
2013
$
6
509
(2)

$

$

675

513

Changes in net assets
For the year ended

October 31
2014
$
513

(Millions of Canadian dollars)

Net assets, beginning of year
Additions (deductions):
Deposits from policyholders
Net realized and unrealized gains
Interest and dividend
Payment to policyholders
Management and administrative fees

October 31
2013
$
383

239
52
19
(132)
(16)
$

Net assets, end of year
Consolidated Financial Statements

675

188
45
13
(105)
(11)
$

Royal Bank of Canada: Annual Report 2014

513
167

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 pension plans are
administered by separate trustees that are legally segregated from the Bank. The majority of beneficiaries of the pension plans are located in
Canada and other beneficiaries of the pension plans are primarily located in the United States, the United Kingdom and the Caribbean. The
pension arrangements including investment, plan benefits and funding decisions are governed by local pension committees, trustees (U.K.), 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 principal 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 company contributions. The
company contributions are based on a percentage of an employee’s annual earnings and a portion of the company contribution is 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 primary pension plan, the most recent funding actuarial valuation was completed
on January 1, 2014, and the next valuation will be completed on January 1, 2015.
For the year ended October 31, 2014, total company contributions to our pension plans (defined benefit and defined contribution plans)
and other post-employment benefit plans were $537 million and $63 million (October 31, 2013 – $389 million and $55 million), respectively.
For 2015, total contributions to our pension plans and other post-employment benefit plans are expected to be $363 million and $70 million,
respectively.
Risks
By their design, the defined benefit pension plans expose the Bank to 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. By closing our principal defined benefit pension plans and migrating to defined contribution pension plans, the volatility
associated with future service costs will reduce over time.
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.
As at
October 31, 2014

October 31, 2013

Defined benefit
pension plans

Other postemployment
benefit
plans

Defined benefit
pension plans

Other postemployment
benefit
plans

Canada
Fair value of plan assets
Present value of defined benefit obligation

$

10,419
10,767

$

4
1,754

$

$

3
1,636

Net deficit

$

(348)

$

(1,750)

$

(65)

$

(1,633)

International
Fair value of plan assets
Present value of defined benefit obligation

$

(Millions of Canadian dollars)

932
1,038

$

–
78

$

812
894

$

–
86

(82)

$

(86)

Net deficit

$

(106)

$

(78)

$

Total
Fair value of plan assets
Present value of defined benefit obligation

$

11,351
11,805

$

4
1,832

$

Total net deficit

$

(454)

$

(1,828)

$

Amounts recognized in our Consolidated Balance Sheets
Employee benefit assets
Employee benefit liabilities

$

138
(592)

$

–
(1,828)

Total net deficit

$

(454)

$

(1,828)

168

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

9,454
9,519

10,266
10,413

$

3
1,722

(147)

$

(1,719)

$

161
(308)

$

–
(1,719)

$

(147)

$

(1,719)

The following table presents an analysis of the movement in the financial position related to all of our material pension and other postemployment benefit plans worldwide, including executive retirement arrangements.
As at or for the year ended
October 31, 2014

(Millions of Canadian dollars)

Change in fair value of plan assets
Opening fair value of plan assets
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 of any settlements
Other

October 31, 2013

Defined benefit
pension plans (1)

Other postemployment
benefit
plans

Defined benefit
pension plans (1)

Other postemployment
benefit
plans

$

$

$

$

10,266
472

3
–

647
60
400
52
(456)
(78)
(12)

Closing fair value of plan assets
Change in present value of benefit obligation
Opening benefit obligation
Current service costs
Past service costs
Interest expense
Remeasurements
Actuarial (gains) losses from demographic assumptions
Actuarial (gains) losses from financial assumptions
Actuarial losses from experience adjustments
Change in foreign currency exchange rate
Contributions – Plan participant
Payments
Payments – amount paid of any settlements
Business combinations/Disposals
Other

9,348
408

–
–
63
13
(75)
–
–

601
32
272
52
(430)
(4)
(13)

$

11,351

$

4

$

$

10,413
315
97
486

$

1,722
31
–
80

$

76
830
6
67
52
(456)
(78)
–
(3)

1
–

10,266
9,857
298
(2)
438

(58)
119
7
6
13
(75)
–
(11)
(2)

–
–
55
12
(65)
–
–
$

3

$

1,682
28
(2)
73

382
(265)
49
38
52
(430)
(4)
–
–

51
(65)
4
4
12
(65)
–
–
–

Closing benefit obligation

$

11,805

$

1,832

$

10,413

$

1,722

Unfunded obligation
Wholly or partly funded obligation

$

28
11,777

$

1,670
162

$

27
10,386

$

1,557
165

Total benefit obligation

$

11,805

$

1,832

$

10,413

$

1,722

(1)

For pension plans with funding deficits, the benefit obligations and fair value of plan assets as at October 31, 2014 were $10,180 million and $9,587 million, respectively (October 31,
2013 – $8,996 million and $8,688 million, respectively).

Pension and other post-employment benefit expense
The following table presents the composition of our pension and other post-employment benefit expense.
For the year ended
Other post-employment benefit plans

Pension plans
October 31
2014
$
315
97
14
–
13

October 31
2013
$
298
(2)
30
–
11

October 31
October 31
2012
2014
$
221 $
31
1
–
(4)
80
–
9
11
–

Defined benefit pension expense
Defined contribution pension expense

$

439
137

$

337
117

$

229
91

$

Total benefit expense

$

576

$

454

$

320

$

(Millions of Canadian dollars)

Current service costs
Past service costs
Net interest expense (income)
Remeasurements of other long term benefits
Administrative expense

October 31
2013
$
28
(2)
73
(5)
–

October 31
2012
$
25
(4)
79
2
–

120
–

$

94
–

$

102
–

120

$

94

$

102

Total service costs for the year ended October 31, 2014 totalled $307 million (October 31, 2013 – $284 million; October 31, 2012
– $212 million) for pension plans in Canada and $105 million (October 31, 2013 – $12 million; October 31, 2012 – $10 million) for International
plans. Net interest expense for the year ended October 31, 2014 totalled $10 million (October 31, 2013 – $26 million; October 31, 2012 – net
interest income of $8 million) for pension plans in Canada and $4 million (October 31, 2013 – $4 million; October 31, 2012 – $4 million) for
International plans.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

169

Note 17 Employee benefits - Pension and other post-employment benefits (continued)
Remeasurements of employee benefit plans
The following table presents the composition of our remeasurements recorded in OCI.
For the year ended
Other post-employment benefit plans
Defined benefit pension plans
(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)

October 31
2014

October 31
2013

October 31
2012

October 31
2014

October 31
2013

October 31
2012

$

$

$

$

(54)
113
–

$

53
(62)
4

$

(65)
190
(2)

$

59

$

(5)

$

123

76
830
6
(647)

$

265

382
(265)
49
(601)

$

(435)

(1)
1,159
8

–

(231)
$

935

–

–

Total remeasurements recorded in OCI for the year ended October 31, 2014 were loss of $238 million (October 31, 2013 – gain of $424 million;
October 31, 2012 – loss of $871 million) for pension plans in Canada and loss of $27 million (October 31, 2013 – gain of $11 million;
October 31, 2012 – loss of $64 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 plan’s 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 is conducted with careful
consideration of the pension obligation’s exposure to interest rates, credit spreads and inflation which are key risk factors impacting the
obligation. The asset mix policy is therefore consistent with an asset/liability framework. Factors taken into consideration in developing our
asset mix include but are not limited to the following:
(i) the nature of the underlying benefit obligations, including the duration and term profile of the liabilities;
(ii) the member demographics, including expectations for normal retirements, terminations, and deaths;
(iii) the financial position of the pension plans;
(iv) the diversification benefits obtained by the inclusion of multiple asset classes; and
(v) expected asset returns, including asset and liability volatility and correlations.
To implement our asset mix policy, we may invest in equity securities, debt securities, alternative investments and derivative instruments. Our
holdings in certain investments, including common shares, emerging market equity and debt, 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 associated with the underlying portfolio. To manage our credit risk exposure, counterparties of our derivative
instruments are required to meet minimum credit ratings and enter into collateral agreements.
Our defined benefit pension plan assets are primarily comprised of equity and debt securities. Our equity securities generally have unadjusted
quoted market prices in an active market (Level 1) and our debt securities generally have quoted market prices for similar assets in an active
market (Level 2). Alternative investments and other includes cash, hedge funds, and private fund investments including infrastructure, real
estate leases, private equity and derivative financial instruments. In the case of private fund investments, no quoted market prices are usually
available (Level 2 or Level 3). These fund assets are either valued by an independent valuator or priced using observable market inputs.
During the year, investment changes and risk factor diversification continued in support of our efforts to reduce variability in the funded status.
As a result, equity risk was reduced through redeployment of equity investments into a diverse mix of quality alternative investments with low
correlation to equity markets, including investments in hedge funds, infrastructure, private equity and real estate. In addition, an increasing
allocation to debt securities is used to reduce asset liability duration mismatch and hence variability of the plan’s funded status due to interest
rate changes. 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 predominately long maturity bond interest rates as inputs. We
expect to continue to move towards a higher weighting of debt securities as market conditions permit, to further reduce risk of variability in the
funded status.
Asset allocation of defined benefit pension plans (1)
As at
October 31, 2014

(Millions of Canadian dollars, except percentages)

Equity securities
Domestic
Foreign
Debt securities
Domestic government bonds
Foreign government bonds
Corporate and other bonds
Alternative investments and other

Fair value

Quoted
in active
market (2)

$ 1,623
2,530

14%
22

100%
100

2,199
530
2,097
2,372
$ 11,351

(1)
(2)

170

October 31, 2013

Percentage
of total
plan assets

19
5
19
21
100%

–
–
–
11
39%

Fair value

Percentage
of total
plan assets

Quoted
in active
market (2)

$ 1,354
2,625

13%
25

100%
100

2,377
495
1,601
1,814
$ 10,266

23
5
16
18
100%

The asset allocation is based on the underlying investments held directly and indirectly through the funds as this is how we manage our investment policy and strategies.
If our assessment of quoted in an active market was based on the direct investments, 45% of our total plan assets would be classified as quoted in an active market (October 31,
2013 –48%).
Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

–
–
–
15
41%

The allocation to equity securities of our pension plan in Canada is 38% (October 31, 2013 – 40%) and that of our International plan is 18%
(October 31, 2013 – 24%). The allocation to debt securities of our pension plan in Canada is 41% (October 31, 2013 – 42%) and that of our
International plan is 58% (October 31, 2013 – 62%). The allocation to alternative investments and other in our pension plan in Canada is 21%
(October 31, 2013 –18%) and that of our International plan is 24% (October 31, 2013 – 14%).
As at October 31, 2014, the plan assets include 1 million (October 31, 2013 – 1 million) of our common shares with a fair value of
$107 million (October 31, 2013 – $84 million) and $39 million (October 31, 2013 – $13 million) of our debt securities. For the year ended
October 31, 2014, dividends received on our common shares held in the plan assets were $4 million (October 31, 2013 – $3 million).
Maturity profile
The following table presents the maturity profile of our defined benefit pension plan obligation.
As at
October 31, 2014

(Millions of Canadian dollars, except participants and years)

Number of plan participants
Actual benefit payments 2014
Benefits expected to be paid 2015
Benefits expected to be paid 2016
Benefits expected to be paid 2017
Benefits expected to be paid 2018
Benefits expected to be paid 2019
Benefits expected to be paid 2020-2024
Weighted average duration of defined benefit payments

Canada

International

75,250
$
405
488
512
537
560
581
3,192
15.2 years

10,084
$
51
40
41
39
40
43
263
19.8 years

Total
85,334
456
528
553
576
600
624
3,455
15.5 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 Aa corporate bond yield curve. The derived curve is based on observed rates for Aa corporate bonds with
maturities less than six years and a projected Aa corporate curve based on spreads between observed Aa corporate bonds and Aa provincial
bonds for periods greater than six years. 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 an Aa corporate bond yield curve. Spot rates beyond 30 years are set to
equal the 30-year spot rate. The discount rate is the equivalent single rate that produces the same discounted value as that determined using
the entire discount curve. This valuation methodology does not rely on assumptions regarding reinvestment returns.
Rate of increase in future compensation
The assumptions for increases in future compensation are developed separately for each plan, where relevant. Each assumption is set based on
the price inflation assumption and compensation policies in each market, as well as relevant local statutory and plan-specific requirements.
Healthcare cost trend rates
Healthcare cost calculations are based on both short and long term trend assumptions established based on the plan’s recent trend experience
as well as on market expectations.
As at
Defined benefit pension plans

Weighted average assumptions to determine benefit
obligation
Discount rate
Rate of increase in future compensation
Healthcare cost trend rates
– Medical (1)
– Dental
(1)
n.a.

Other post-employment benefit plans

October 31
2014

October 31
2013

October 31
2012

October 31
2014

October 31
2013

October 31
2012

4.10%
3.30%

4.60%
3.30%

4.40%
3.30%

4.20%
n.a.

4.70%
n.a.

4.50%
n.a.

n.a.
n.a.

n.a.
n.a.

n.a.
n.a.

3.50%
4.00%

3.80%
4.00%

3.90%
4.00%

For our other post-employment benefit plans, the assumed medical healthcare cost trend rates used to measure the expected cost of benefits were 3.50% for the next year decreasing to an
ultimate rate of 2.50% in 2030.
not applicable

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

171

Note 17 Employee benefits - Pension and other post-employment benefits (continued)
Mortality assumptions
Mortality assumptions are significant in measuring our obligations under the defined benefit pension plans. These assumptions have been set
based on country specific statistics. Future longevity improvements have been considered and included where appropriate. The following table
summarizes the mortality assumptions used for major plans.
As at
October 31, 2014

October 31, 2013

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

(In years)

Male

Female

Male

Female

Male

Female

Male

Female

Country
Canada
United States
United Kingdom

23.0
20.6
23.9

23.5
22.9
25.2

24.0
21.1
26.1

24.5
23.4
27.6

22.4
20.5
23.8

23.2
22.8
25.1

23.5
21.0
26.0

24.1
23.3
27.5

Sensitivity analysis
Assumptions adopted can have a significant effect on the obligations for defined benefit pension and other post-employment benefit plans. The
increase (decrease) in obligation in the following table has been determined assuming all other assumptions are held constant. In practice, this
is unlikely to occur, as changes in some of the assumptions may be correlated. The following table presents the sensitivity analysis of key
assumptions for 2014:

(Millions of Canadian dollars)

Discount rate
Impact of 50bps increase in discount rate
Impact of 50bps decrease in discount rate
Rate of increase in future compensation
Impact of 50bps increase in rate of increase in future compensation
Impact of 50bps decrease in rate of increase in future compensation
Mortality rate
Impact of an increase in longevity by one additional year
Healthcare cost trend rate
Impact of 100bps increase in healthcare cost trend rate
Impact of 100bps decrease in healthcare cost trend rate
n.a.

Defined benefit
pension plans –
Increase
(decrease) in
obligation

Other postemployment
benefit
plans – Increase
(decrease) in
obligation

$

$

(864)
960

(125)
140

65
(66)

n.a.
n.a.

265

46

n.a.
n.a.

131
(112)

not applicable

Note 18 Other liabilities
As at
October 31
2014

(Millions of Canadian dollars)

Cash collateral
Accounts payable and accrued expenses
Payroll and related compensation
Payable to brokers, dealers and clients
Negotiable instruments
Accrued interest payable
Deferred income
Taxes payable
Precious metals certificates
Dividends payable
Insurance related liabilities
Deferred income taxes
Provisions
Other

172

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

October 31
2013

$

10,500
2,386
6,582
2,063
2,416
1,748
1,937
1,691
572
1,127
617
204
500
4,966

$

8,855
2,917
5,911
1,821
2,172
1,796
1,783
1,480
677
1,027
566
170
271
5,501

$

37,309

$

34,947

Note 19 Subordinated debentures
The debentures are unsecured obligations and are subordinated in right of payment to the claims of depositors and certain other creditors. All
redemptions, cancellations and exchanges of subordinated debentures are subject to the consent and approval of OSFI. All subordinated
debentures are redeemable at our option. The amounts presented below include the impact of fair value hedging for interest rate risk and are net
of our holdings in these securities which have not been cancelled and are still outstanding.
(Millions of Canadian dollars, except percentage and foreign currency)

Maturity
November 14, 2014 (1)
November 4, 2018
June 15, 2020
November 2, 2020
June 8, 2023
July 17, 2024 (6)
December 6, 2024
September 29, 2026 (6)
November 1, 2027
June 26, 2037
October 1, 2083
June 29, 2085
June 18, 2103

Earliest par value
redemption date
November 4, 2013 (2)
June 15, 2015
November 2, 2015
July 17, 2019
December 6, 2019
September 29, 2021
November 1, 2022
June 26, 2017
Any interest payment date
Any interest payment date
June 18, 2009 (12)

Denominated in
foreign currency
(millions)

Interest
rate
10.00%
5.45% (3)
4.35% (4)
3.18% (5)
9.30%
3.04% (7)
2.99% (8)
3.45% (9)
4.75%
2.86%

TT$300
JPY 10,000

(10)
(11)

5.95% (13)

US$174

As at
October 31
2014
$
200
–
1,491
1,483
110
1,002
1,992
1,009
53
106
224
196
–

October 31
2013
$
217
1,000
1,508
1,488
110
–
1,947
–
49
109
224
181
615

$

7,866
(7)

$

7,448
(5)

$

7,859

$

7,443

Deferred financing costs

The terms and conditions of the debentures are as follows:
(1)
All $200 million outstanding 10.00% subordinated debentures matured on November 14, 2014.
(2)
All $1 billion outstanding subordinated debentures were redeemed on November 4, 2013 for 100% of their principal amount plus accrued interest to the redemption date.
(3)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.00% above the 90-day Bankers’ Acceptance rate.
(4)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.41% above the 90-day Bankers’ Acceptance rate.
(5)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.21% above the 90-day Bankers’ Acceptance rate.
(6)
The notes include non-viability contingency capital (NVCC) provisions, necessary for the notes to qualify as Tier 2 regulatory capital under Basel III. NVCC provisions require the conversion of
the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces that the Bank
has accepted or agreed to accept a capital injection. In such an event, each note is convertible into common shares pursuant to an automatic conversion formula with a multiplier of 1.5 and a
conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common
shares on the Toronto Stock Exchange. The number of shares issued is determined by dividing the par value of the note (including accrued and unpaid interest on such note) by the
conversion price and then times the multiplier.
(7)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.08% above the 90-day Bankers’ Acceptance rate.
(8)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.10% above the 90-day Bankers’ Acceptance rate.
(9)
Interest at stated interest rate until earliest par value redemption date, and thereafter at a rate of 1.12% above the 90-day Bankers’ Acceptance rate.
(10) Interest at a rate of 40 basis points above the 30-day Bankers’ Acceptance rate.
(11) Interest at a rate of 25 basis points above the U.S. dollar 3-month 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.
(12) All $600 million outstanding subordinated debentures were redeemed on June 18, 2014 for 100% of their principal amount plus accrued interest to the redemption date.
(13) Interest at stated rate until earliest par value redemption date and every 5 years thereafter at a rate of 1.72% above the 5-year Government of Canada yield.

Maturity schedule
The aggregate maturities of subordinated debentures, based on the maturity dates under the terms of issue, are as follows:
October 31
2014
$
200
4,086
3,580

(Millions of Canadian dollars)

Within 1 year
5 to 10 years
Thereafter

$

7,866

Note 20 Trust capital securities
We issued innovative capital instruments, RBC Trust Capital Securities (RBC TruCS), through two structured entities: RBC Capital Trust (Trust) and
RBC Capital Trust II (Trust II). Trust II was wound up in 2014 after the redemption of the RBC TruCS Series 2013 (RBC TruCS 2013) on
December 31, 2013.
The Trust has issued non-voting RBC TruCS Series 2010, 2011, 2015 and 2008-1 (RBC TruCS 2010, 2011, 2015 and 2008-1). RBC TruCS
2010 and 2011 were redeemed in 2010 and 2011, respectively.
The holders of RBC TruCS 2015 and 2008-1 do not have any conversion rights or any other redemption rights. As a result, upon
consolidation of the Trust, RBC TruCS 2015 and 2008-1 are classified as Non-controlling interests. Holders of RBC TruCS 2015 and 2008-1 are
eligible to receive semi-annual non-cumulative fixed cash distributions until December 31, 2015 and June 30, 2018, respectively, and a floatingrate cash distribution thereafter.
No cash distributions will be payable by the Trust on RBC TruCS if we fail to declare regular dividends (i) on our preferred shares, or (ii) on
our common shares if no preferred shares are then outstanding. In this case, the net distributable funds of the Trust will be distributed to us as
holders of residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions in full, we will not declare dividends of any kind
on any of our preferred or common shares for a specified period of time.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

173

Note 20 Trust capital securities (continued)
The table below presents the significant terms and conditions of RBC TruCS.
Significant terms and conditions of RBC Trust Capital Securities
As at

Annual
yield

Earliest
redemption date

Conversion date

At the option of the
issuer

At the option
of the holder

(Millions of Canadian dollars, except for
percentage amounts)
Issuance date
RBC Capital Trust (1),(2),(3),(4),(5),(6),(7)
Included in Non-controlling interests
1,200,000 Trust Capital Securities
– Series 2015
October 28, 2005
500,000 Trust Capital Securities
– Series 2008-1
April 28, 2008

June 30, December 31

4.87% (8) December 31, 2010

n.a.

June 30, December 31

6.82% (8)

June 30, 2013

n.a.

RBC Capital Trust II (2),(3),(4),(5),(6),(7),(9)
Included in Deposits
900,000 Trust Capital Securities
– Series 2013 (10)

June 30, December 31

December 31, 2008

Any time

July 23, 2003

Distribution dates

5.812%

October 31
2014
Principal
amount

October 31

$

$

1,200

2013
Principal
amount

500

$

—

1,200
500

$

900

The significant terms and conditions of the RBC TruCS are as follows:
(1)
Subject to the approval of OSFI, the Trust may, on the earliest redemption date specified above, and on any distribution date thereafter, redeem in whole (but not in part) the RBC TruCS
2008-1 and 2015, without the consent of the holders.
(2)
Subject to the approval of OSFI, upon occurrence of a special event as defined, prior to the earliest redemption date specified above, the trusts may redeem in whole (but not in part) the RBC
TruCS 2008-1, 2013 or 2015 without the consent of the holders.
(3)
Issuer Redemption Price: The RBC TruCS 2008-1 may be redeemed for cash equivalent to (i) the Early Redemption Price if the redemption occurs prior to June 30, 2018 or (ii) the Redemption
Price if the redemption occurs on or after June 30, 2018. The RBC TruCS 2013 and 2015 may be redeemed for cash equivalent to (i) the Early Redemption Price if the redemption occurs prior
to December 31, 2013 and 2015, respectively, or (ii) the Redemption Price if the redemption occurs on or after December 31, 2013 and 2015, respectively. Redemption Price refers to an
amount equal to $1,000 plus the unpaid distributions to the redemption date. Early Redemption Price refers to an amount equal to the greater of (i) the Redemption Price and (ii) the price
calculated to provide an annual yield, equal to the yield on a Government of Canada bond issued on the redemption date with a maturity date of June 30, 2018, plus 77 basis points, for RBC
TruCS 2008-1, and a maturity date of December 31, 2013 and 2015, plus 23 basis points and 19.5 basis points, for RBC TruCS 2013 and 2015, respectively.
(4)
Automatic Exchange Event: Without the consent of the holders, each RBC TruCS 2008-1, 2013 and 2015 will be exchanged automatically for 40 of our non-cumulative redeemable First
Preferred Shares Series Al, T and Z, respectively, upon occurrence of any one of the following events: (i) proceedings are commenced for our winding-up; (ii) OSFI takes control of us; (iii) we
have Tier 1 capital ratio of less than 5% or Total capital ratio of less than 8%; or (iv) OSFI has directed us to increase our capital or provide additional liquidity and we elect such automatic
exchange or we fail to comply with such direction. The First Preferred Shares Series AI, T and Z pay semi-annual non-cumulative cash dividends and Series T is convertible at the option of the
holder into a variable number of common shares.
(5)
From time to time, we purchase some of the innovative capital instruments and hold them temporarily. As at October 31, 2014, we held $9 million of RBC TruCS 2015 (October 31, 2013 –
$nil) and $3 million of the RBC TruCS 2008-1 (October 31, 2013 – $nil) as treasury holdings which were deducted from regulatory capital.
(6)
Regulatory capital: In accordance with OSFI Capital Adequacy Requirements, effective January 2013, RBC TruCS no longer qualify as additional Tier 1 capital due to their lack of non-viability
contingent capital terms and conditions. As such, outstanding RBC TruCS are being phased out of regulatory capital in accordance with OSFI guidelines.
(7)
Holder Exchange Right: Holders of RBC TruCS 2013 may, at any time, exchange all or part of their holdings for 40 non-cumulative redeemable First Preferred Shares Series U, for each RBC
TruCS 2013 held. The First Preferred Shares Series U pay semi-annual non-cumulative cash dividends as and when declared by our Board of Directors and are convertible at the option of the
holder into a variable number of common shares. Holders of RBC TruCS 2008-1 and RBC TruCS 2015 do not have similar exchange rights.
(8)
The non-cumulative cash distribution on the RBC TruCS 2015 will be 4.87% paid semi-annually until December 31, 2015, and at one half of the sum of 180-day Bankers’ Acceptance rate plus
1.5%, thereafter. The non-cumulative cash distribution on the RBC TruCS 2008-1 will be 6.82% paid semi-annually until June 30, 2018, and at one half of the sum of 180-day Bankers’
Acceptance rate plus 3.5% thereafter.
(9)
Subject to the approval of OSFI, Trust II may, in whole or in part, on the redemption date specified above, and on any distribution date thereafter, redeem any outstanding RBC TruCS 2013
without the consent of the holders.
(10) On December 31, 2013, Trust II redeemed all $900 million principal amount of RBC TruCS 2013 for cash at a redemption price of $1,000 per unit.
n.a. not applicable

174

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Note 21 Equity
Share capital
Authorized share capital
Preferred – An unlimited number of First Preferred Shares and Second Preferred Shares without nominal or par value, issuable in series; the
aggregate consideration for which all the First Preferred Shares and all the Second Preferred Shares that may be issued may not exceed
$20 billion and $5 billion, respectively.
Common – An unlimited number of shares without nominal or par value may be issued.
Outstanding share capital
The following table details our common and preferred shares outstanding.
As at
October 31, 2014
(Millions of Canadian dollars, except the
number of shares and dividends per share)

Preferred shares
First preferred (1)
Non-cumulative, fixed rate
Series W
Series AA
Series AB
Series AC
Series AD
Series AE
Series AF
Series AG
Series AH (2)
Non-cumulative, 5-Year Rate Reset
Series AJ (3)
Series AL
Series AN (4)
Series AP (4)
Series AR (4)
Series AT (5)
Series AV (5)
Series AX (6)
Series AZ
Series BB
Non-cumulative, floating rate
Series AK (3)

Number of
shares
(thousands)

12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
–

Amount

$

13,579
12,000
–
–
–
–
–
13,000
20,000
20,000
2,421

300
300
300
200
250
250
200
250
–

October 31, 2013
Dividends
declared
per share

$

Number of
shares
(thousands)

1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
–

12,000
12,000
12,000
8,000
10,000
10,000
8,000
10,000
–

339
300
–
–
–
–
–
325
500
500

0.97
1.15
0.39
0.39
0.39
1.17
1.17
1.53
0.50
0.46

16,000
12,000
9,000
11,000
14,000
11,000
16,000
13,000
–
–

61

0.53

–

$ 4,075
Common shares
Balance at beginning of year
Issued under the stock option plan (7)
Purchased for cancellation (8)

1,441,056
2,723
(1,546)

$ 14,377
150
(16)

Balance at end of year

1,442,233

$ 14,511

Treasury shares – Preferred shares
Balance at beginning of year
Sales
Purchases
Balance at end of year
Treasury shares – Common shares
Balance at beginning of year
Sales
Purchases
Balance at end of year
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)

47
4,919
(4,965)
1
666
70,684
(70,458)
892

$

$
$

$

Amount

$

300
300
300
200
250
250
200
250
–

Dividends
declared
per share

$

1.23
1.11
1.18
1.15
1.13
1.13
1.11
1.13
0.86

400
300
225
275
350
275
400
325
–
–

1.25
1.40
1.56
1.56
1.56
1.56
1.56
1.53
–
–

–

–

$ 4,600

$

2.84

1
124
(125)
–
41
5,333
(5,303)
71

1,445,303
2,528
(6,775)

$ 14,323
121
(67)

1,441,056

$ 14,377

42
4,892
(4,887)
47
543
71,361
(71,238)
666

$

$
$

$

$

2.53

1
127
(127)
1
30
4,453
(4,442)
41

First Preferred Shares Series were issued at $25 per share.
On July 2, 2013, we redeemed all 8.5 million of issued and outstanding Non-Cumulative First Preferred Shares Series AH for cash at a redemption price of $26 per share plus declared
dividends. This amount is comprised of the $25 per share original issue price plus a $1 per share redemption premium.
On February 24, 2014, we issued 2.4 million Non-Cumulative Floating Rate First Preferred Shares, Series AK, totalling $61 million through a holder option, one-for-one conversion of some of
our Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series AJ.
On February 24, 2014, we redeemed all issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series AN (9 million shares), Series AP (11 million shares), and
Series AR (14 million shares) for cash at a redemption price of $25 per share.
On August 24, 2014, we redeemed all issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares, Series AT (11 million shares) and Series AV (16 million shares) for
cash at a redemption price of $25 per share.
On November 24, 2014, we redeemed all 13 million of issued and outstanding Non-Cumulative 5-year Rate Reset First Preferred Shares Series AX for cash at a redemption price of $25 per
share.
Includes fair value adjustments to stock options of $16 million (2013 – $14 million).
During the year ended October 31, 2014, we purchased for cancellation common shares at an average cost of $72.64 per share (October 31, 2013 – $60.34 per share) with a book value of
$10.03 per share (October 31, 2013 – $9.94 per share).
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

175

Note 21 Equity (continued)

As at October 31, 2014

Preferred shares
First preferred
Non-cumulative, fixed rate
Series W (4)
Series AA
Series AB
Series AC
Series AD
Series AE
Series AF
Series AG
Non-cumulative, 5-Year Rate Reset (5)
Series AJ
Series AL
Series AX
Series AZ (6)
Series BB (6)
Non-cumulative, floating rate
Series AK (7)
(1)
(2)

(3)
(4)

(5)

(6)

(7)

Initial
Period
Annual Yield

Premium

4.90%
4.45%
4.70%
4.60%
4.50%
4.50%
4.45%
4.50%
5.00%
5.60%
6.10%
4.00%
3.90%

Current
Dividend
per share (1)

$

Earliest
redemption
date (2)

Issue Date

Redemption
price (2), (3)

.306250
.278125
.293750
.287500
.281250
.281250
.278125
.281250

February 24, 2010
May 24, 2011
August 24, 2011
November 24, 2011
February 24, 2012
February 24, 2012
May 24, 2012
May 24, 2012

January 31, 2005 $
April 4, 2006
July 20, 2006
November 1, 2006
December 13, 2006
January 19, 2007
March 14, 2007
April 26, 2007

25.00
25.25
25.25
25.50
25.50
25.50
25.50
25.50

1.93%
2.67%
4.13%
2.21%
2.26%

.220000
.266250
.381250
.250000
.243750

February 24, 2014
February 24, 2014
November 24, 2014
May 24, 2019
August 24, 2019

September 16, 2008
November 3, 2008
April 29, 2009
January 30, 2014
June 3, 2014

25.00
25.00
25.00
25.00
25.00

1.93%

.180786

February 24, 2019

February 24, 2014

25.00

Non-cumulative preferential dividends of each Series are payable quarterly, as and when declared by the Board of Directors, on or about the 24th day of February, May, August and November.
The redemption price represents the price as at October 31, 2014 or the contractual redemption price, whichever is applicable. 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. Unless otherwise noted, shares may be redeemed for cash at a price per share of $25 if
redeemed on the earliest redemption date and on the same date every fifth year thereafter. In the case of Series W, AA, AB, AC, AD, AE, AF and AG, 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.
Subject to the consent of OSFI and the requirements of the Bank Act (Canada), we may purchase the First Preferred Shares of each Series for cancellation at the lowest price or prices at which,
in the opinion of the Board of Directors, such shares are obtainable.
Subject to the approval of the Toronto Stock Exchange, we may, on or after February 24, 2010, convert First Preferred Shares Series W into our common shares. First Preferred Shares Series W
may be converted into that number of common shares determined by dividing the current redemption price by the greater of $2.50 and 95% of the weighted average trading price of common
shares at such time.
The 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 preferred shares include non-viability contingency capital (NVCC) provisions, necessary for the shares to qualify as Tier 1 regulatory capital under Basel III. NVCC provisions require the
conversion of the instrument into a variable number of common shares in the event that OSFI deems the Bank non-viable or a federal or provincial government in Canada publicly announces
that the Bank has accepted or agreed to accept a capital injection. In such an event, each preferred share is convertible into common shares pursuant to an automatic conversion formula
with a 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 preferred share value ($25.00 plus declared and unpaid dividends) by the
conversion price.
The dividend rate is equal to the three-month Government of Canada Treasury Bill rate plus the premium indicated. The holders have the option to convert their shares into non-cumulative
First Preferred Shares, Series AJ subject to certain conditions on February 24, 2019 and every fifth year thereafter.

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. We have agreed that if the Trust fails to pay any required distribution on the trust capital securities in
full, we will not declare dividends of any kind on any of our preferred or common shares. Refer to Note 20.
Currently, these limitations do not restrict the payment of dividends on our preferred or common shares.
Dividend reinvestment plan
Our dividend reinvestment plan (DRIP) provides common and preferred shareholders with a means to receive additional common shares rather
than cash dividends. The plan is only open to shareholders residing in Canada or the United States. The requirements of our DRIP are satisfied
through either open market share purchases or shares issued from treasury. During 2014 and 2013, the requirements of our DRIP were satisfied
through open market share purchases.
Shares available for future issuances
As at October 31, 2014, 43.7 million common shares are available for future issue relating to our DRIP and potential exercise of stock options
outstanding. In addition, we may issue up to 38.9 million common shares from treasury under the RBC Umbrella Savings and Securities Purchase
Plan that was approved by shareholders on February 26, 2009.

176

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Non-controlling interests
As at
(Millions of Canadian dollars)

RBC Trust Capital Securities (1)
Series 2015
Series 2008-1
Other
(1)

October 31
2014

October 31
2013

$

1,211
508
94

$

1,220
511
64

$

1,813

$

1,795

As at October 31, 2014, RBC TruCS Series 2015 includes $20 million of accrued interest (October 31, 2013 – $20 million), net of $9 million of treasury holdings (October 31, 2013 – $nil).
Series 2008-1 includes $11 million of accrued interest (October 31, 2013 – $11 million), net of $3 million of treasury holdings (October 31, 2013 – $nil).

Note 22 Share-based compensation
Stock option plans
We have stock option plans for certain key employees. Under the plans, options are periodically granted to purchase common shares. The
exercise price for each grant 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 options vest over a four-year period for employees, and are exercisable for a period not exceeding 10 years from
the grant date.
The compensation expense recorded for the year ended October 31, 2014, in respect of the stock option plans was $7 million (October 31,
2013 – $7 million; October 31, 2012 – $7 million). The compensation expense related to non-vested options was $4 million at October 31, 2014
(October 31, 2013 – $5 million; October 31, 2012 – $7 million), to be recognized over the weighted average period of 1.4 years (October 31,
2013 – 1.1 years; October 31, 2012 – 1.5 years).
Analysis of the movement in the number and weighted average exercise price of options is set out below:
A summary of our stock option activity and related information
October 31, 2014

(Canadian dollars per share except share amounts)

Outstanding at beginning of year
Granted
Exercised (1), (2)
Forfeited in the year

Number
of options
(thousands)
10,604
705
(2,723)
(7)

October 31, 2013

Weighted
average
exercise price
$
50.39
69.17
49.03
52.92

Number
of options
(thousands)
12,304
906
(2,528)
(78)

October 31, 2012

Weighted
average
exercise price
$
48.12
58.65
42.22
53.27

Number
of options
(thousands)
14,413
1,161
(3,174)
(96)

Weighted
average
exercise price
$
45.06
48.93
34.36
52.37

Outstanding at end of year

8,579

$

52.36

10,604

$

50.39

12,304

$

48.12

Exercisable at end of year
Available for grant

4,987
11,443

$

49.60

5,711
12,140

$

47.80

6,544
12,968

$

45.43

(1)
(2)

Cash received for options exercised during the year was $133 million (October 31, 2013 – $107 million; October 31, 2012 – $109 million) and the weighted average share price at the date of
exercise was $74.27 (October 31, 2013 – $63.17; October 31, 2012 – $54.48).
New shares were issued for all stock options exercised in 2014, 2013 and 2012. See Note 21.

Options outstanding as at October 31, 2014 by range of exercise price:
Options outstanding

(Canadian dollars per share except share amounts)

$31.70 - $35.37
$44.13 - $48.93
$50.55 - $52.94
$54.99 - $57.90
$58.65 - $69.17

Number
outstanding
(thousands)
1,031
1,448
2,323
2,182
1,595
8,579

(1)

Weighted
average
exercise price (1)
$
35.35
47.86
52.66
55.08
63.30
$

Options exercisable
Weighted
average
remaining
contractual life
4.09
5.75
5.02
4.33
8.55

Number
exercisable
(thousands)
1,031
322
1,452
2,182
–

5.51

4,987

52.36

Weighted
average
exercise price (1)
$
35.35
44.13
52.70
55.08
–
$

49.60

The weighted average exercise prices have been revised to reflect the conversion of foreign currency-denominated options at the exchange rate as of October 31, 2014.

The weighted average fair value of options granted during the year ended October 31, 2014 was estimated at $7.19 (October 31, 2013 – $5.33;
October 31, 2012 – $4.42). This was determined by applying the Black-Scholes model on the date of grant, taking into account the specific
terms and conditions under which the options are granted, such as the vesting period and expected share price volatility estimated by
considering both historic average share price volatility and implied volatility derived from traded options over our common shares of similar
maturity to those of the employee options. The following assumptions were used to determine the fair value of options granted:

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

177

Note 22 Share-based compensation (continued)
Weighted average assumptions
For the year ended
October 31
2014
$
68.75
1.95%
3.94%
18%
6 years

(Canadian dollars per share except percentages)

Share price at grant date
Risk-free interest rate
Expected dividend yield
Expected share price volatility
Expected life of option

October 31
2013
$
58.65
1.38%
4.19%
18%
6 years

October 31
2012
$
48.19
1.38%
3.93%
18%
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 commissioned 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, 2014, we contributed $85 million (October 31, 2013 – $77 million;
October 31, 2012 – $75 million), under the terms of these plans, towards the purchase of our common shares. As at October 31, 2014, an
aggregate of 38 million common shares were held under these plans (October 31, 2013 – 38 million common shares; October 31, 2012 –
37 million common shares).
Deferred share and other plans
We offer deferred share unit plans to executives, non-employee directors and to certain key employees. Under these plans, the executives or
directors may choose to receive all or a percentage of their annual variable short-term incentive bonus or directors’ fee in the form of deferred
share units (DSUs). The executives or directors 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, permanent disability or termination of employment/directorship. The cash value of the DSUs is equivalent to the market value of
common shares when conversion takes place.
We have a deferred bonus plan for certain key employees within Capital Markets. The deferred bonus is invested as RBC share units and a
specified percentage vests on each of the three anniversary dates following the grant date. Each vested amount is paid in cash and is based on
the original number of RBC share units plus accumulated dividends valued using the average closing price of RBC common shares during the five
trading days immediately preceding the vesting date.
We offer performance deferred share award plans to certain key employees, all of which vest at the end of three years. Upon vesting, the
award is paid in cash and is based on the original number of RBC share units granted plus accumulated dividends valued using the average
closing price of RBC common shares during the five trading days immediately preceding the vesting date. A portion of the award under certain
plans can be increased or decreased up to 25%, depending on our total shareholder return compared to a defined peer group of global financial
institutions. We previously offered deferred compensation to certain employees in the form of common shares that were held in trust and
accumulated dividends during the three year vesting period.
We maintain a non-qualified deferred compensation plan for key employees in the United States under an arrangement called the RBC U.S.
Wealth Accumulation Plan. This plan allows eligible employees to defer a portion of their annual income and allocate the deferrals among
various fund choices, which include a share unit fund that tracks the value of our common shares. Certain deferrals may also be eligible for
matching contributions, all of which are allocated to the RBC share unit fund.
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. The following tables present our obligations under the deferred share and other plans, and the related
compensation expenses (recoveries) recognized for the year.
Obligation under deferred share and other plans
October 31, 2014

Units granted
during the year
(Millions of Canadian dollars
except units and per unit
amounts)

Deferred share unit plans
Deferred bonus plan
Performance deferred
share award plans
RBC U.S. Wealth
Accumulation Plan
Other share-based plans

Number Weighted
granted
average
(thousands) fair value

315 $ 71.57
5,339
78.97

$

Units granted
during the year

Carrying
amount

Number Weighted
granted
average
(thousands) fair value

333
1,585

265 $ 60.83
5,215
69.45

October 31, 2012

Units
Outstanding
at the end
of the year

$

Units granted
during the year

Carrying
amount

Number Weighted
granted
average
(thousands) fair value

307
1,517

302 $ 59.60
8,917
56.72

Units
outstanding
at the end
of the year
Carrying
amount

$

229
1,494

2,181

68.09

503

2,337

58.62

440

2,570

49.03

307

69
845

74.68
70.32

343
118

374
809

61.23
60.47

301
76

458
437

51.91
51.34

253
45

8,749 $ 75.12

178

October 31, 2013

Units
outstanding
at the end
of the year

Royal Bank of Canada: Annual Report 2014

$

2,882

Consolidated Financial Statements

9,000 $ 65.23

$

2,641

12,684 $ 54.87

$

2,328

Compensation expenses recognized under deferred share and other plans
For the year ended
(Millions of Canadian dollars)

Deferred share unit plans
Deferred bonus plan
Performance deferred share award plans
RBC U.S. Wealth Accumulation Plan
Other share-based plans

October 31
2014
$
61
121
243
147
65

October 31
2013
$
53
284
249
211
46

October 31
2012
$
29
185
151
136
29

$

$

$

637

843

530

Note 23 Income and expenses from selected financial instruments
Gains and losses arising from financial instruments held at FVTPL, except for those supporting our insurance operations, are reported in Noninterest income. Related interest and dividend income are reported in Net interest income.
Net gains (losses) from financial instruments held at fair value through profit or loss (1)
For the year ended
(Millions of Canadian dollars)

Net gains (losses)
Classified as at fair value through profit or loss (2)
Designated as at fair value through profit or loss (3)
By product line
Interest rate and credit
Equities
Foreign exchange and commodities
(1)
(2)
(3)

October 31
2014

October 31
2013

October 31
2012

$

922
(132)

$

875
(30)

$

1,217
(54)

$

790

$

845

$

1,163

$

603
(190)
377

$

593
(55)
307

$

$

790

$

845

$

805
(8)
366
1,163

The following related to our insurance operations are excluded from Non-interest income and included in Insurance premiums, investment and fee income in the Consolidated Statements of
Income: Net gains (losses) from financial instruments designated as at FVTPL were $515 million (October 31, 2013 – $(496) million; October 31, 2012 – $439 million).
Excludes derivatives designated in a hedging relationship. Refer to Note 8 for net gains (losses) on these derivatives.
For the year ended October 31, 2014, $414 million of net fair value losses on financial liabilities designated as at FVTPL, other than those attributable to changes in our own credit risk, were
included in Non-interest income.

Net interest income from financial instruments (1)
For the year ended
(Millions of Canadian dollars)

Interest income
Financial instruments held as at fair value through profit or loss
Other categories of financial instruments (2)

October 31
2014

October 31
2013

October 31
2012

$

$

$

4,246
17,773
22,019

Interest expense
Financial instruments held as at fair value through profit or loss
Other categories of financial instruments

$

2,198
5,705

21,148
$

7,903
$

Net interest income
(1)

(2)

14,116

3,959
17,189

2,260
5,639

4,955
15,814
20,769

$

3,029
5,301

7,899
$

13,249

8,330
$

12,439

The following related to our insurance operations are excluded from Net-interest income and included in Insurance premiums, investment and fee income in the Consolidated Statements of
Income: Interest income of $435 million (October 31, 2013 – $470 million; October 31, 2012 – $466 million), Interest expense of $nil million (October 31, 2013 – $nil million; October 31,
2012 – $nil million).
Refer to Note 5 for interest income accrued on impaired financial assets.

Income from other categories of financial instruments (1), (2)
For the year ended
(Millions of Canadian dollars)

Net gains (losses) arising from financial instruments measured at amortized cost (3)
Net fee income which does not form an integral part of the effective interest rate of financial assets
and liabilities
Net fee income arising from trust and other fiduciary activities
(1)
(2)
(3)

October 31
2014
$
(7)

October 31
2013
$
–

4,190
9,138

3,869
7,990

October 31
2012
$
(4)
3,378
6,595

Refer to Note 4 for net gains (losses) on AFS securities.
Refer to Note 4 for impairment losses on AFS and held-to-maturity securities, and Note 5 for impairment losses on loans.
Financial instruments measured at amortized cost include held-to-maturity securities, loans and financial liabilities measured at amortized cost.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

179

Note 24 Income taxes
The components of tax expense are as follows:
For the year ended
(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

October 31
2014

October 31
2013

October 31
2012

$

$

$

2,858
(64)
(4)

(2)

2,790
Deferred tax
Origination and reversal of temporary difference
Effects of changes in tax rates
Adjustments for prior years
Recoveries arising from previously unrecognized tax loss, tax credit or temporary difference of a
prior period
Write-down

(100)
(1)
(5)

(107)
2
167

(3)
4

(46)
32

(16)
–

(120)

2,028

3
(20)
2
(322)
–
(4)
(11)
121

(22)
(7)

72
(2)
1
39
(59)
11
10
(279)

–
–

(643)
2,063

46

2,105

70
(12)
5
(561)
1
(39)
10
(88)

$

1,982

(156)
(3)
74

(84)

Total income taxes

2,166
(184)
–

2,225

2,706
Income taxes in Consolidated Statements of Comprehensive Income and Changes in Equity
Other comprehensive income
Net unrealized gains on available-for-sale securities
Reclassification of gains on available-for-sale securities to income
Unrealized foreign currency translation gains
Foreign currency translation (losses) gains from hedging activities
Reclassification of (gains) losses on net investment hedging activities
Net unrealized (losses) gains on derivatives designated as cash flow hedges
Reclassification of (gains) losses on derivatives designated as cash flow hedges to income
Remeasurement of employee benefit plans
Net fair value change due to credit risk on financial liabilities designed as at fair value through
profit and loss
Issuance costs

2,516
(289)

–
–

(231)
$

1,874

(207)
$

1,821

Our effective tax rate changed from 20.1% for 2013 to 23.1% for 2014, principally due to a net favourable tax adjustment of $214 million related
to prior years recorded in 2013, which is presented in Other in the table below.
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
For the year ended
(Millions of Canadian dollars, except for percentage amounts)

Income taxes at Canadian statutory tax rate
(Decrease) increase in income taxes resulting from
Lower average tax rate applicable to subsidiaries
Goodwill Impairment
Tax-exempt income from securities
Tax rate change
Effect of previously unrecognized tax loss, tax credit or temporary differences
Other
Income taxes reported in Consolidated Statements of Income / effective tax rate

October 31, 2014
$ 3,080
26.3%
(272)
–
(386)
(3)
(7)
294
$ 2,706

(2.3)
–
(3.3)
–
(0.1)
2.5
23.1%

October 31, 2013
$ 2,737
26.2%
(190)
–
(294)
(1)
(48)
(99)
$ 2,105

(1.8)
–
(2.8)
–
(0.5)
(1.0)
20.1%

October 31, 2012
$ 2,531
26.4%
(299)
37
(330)
2
(16)
103
$ 2,028

(3.1)
0.4
(3.4)
–
(0.1)
1.0
21.2%

Deferred tax assets and liabilities result from tax loss carryforwards and temporary differences between the tax basis of assets and liabilities and
their carrying amounts on our Consolidated Balance Sheets.

180

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Significant components of deferred tax assets and liabilities
As at October 31, 2014

(Millions of Canadian dollars)

Net Asset
November 1,
2013

Change
through
equity

Change
through profit
or loss

Exchange rate
differences

413
1,290
6
62
42
102
(227)
(80)
492
(279)
150

$

–
–
–
–
–
(49)
–
7
88
–
–

$

(37)
151
3
(19)
78
(19)
(99)
(25)
(16)
5
62

$

–
72
–
1
–
(4)
4
–
2
(8)
10

$

$

1,971

$

46

$

84

$

77

$

$
$

Net deferred tax asset/(liability)
Allowance for credit losses
$
Deferred compensation
Business realignment charges
Tax loss carryforwards
Deferred income
Available-for-sale securities
Premises and equipment
Deferred expense
Pension and post-employment related
Intangibles
Other
Comprising
Deferred tax assets
Deferred tax liabilities

Other

Net Asset
October 31,
2014

–
–
–
–
–
–
–
–
–
–
–

$

–
–
–
–
–
–
–
–
–
–
–

$

376
1,513
9
44
120
30
(322)
(98)
566
(282)
222

–

$

–

$

2,178

2,141
(170)

$

2,382
(204)

1,971

$

2,178

Acquisitions/
disposals

As at October 31, 2013

(Millions of Canadian dollars)

Net deferred tax asset/(liability)
Allowance for credit losses
Deferred compensation
Business realignment charges
Tax loss carryforwards
Deferred income
Available-for-sale securities
Premises and equipment
Deferred expense
Pension and post-employment related
Intangibles
Other
Comprising
Deferred tax assets
Deferred tax liabilities

Net Asset
November 1,
2012
$

418
988
39
72
97
140
(150)
(81)
555
(230)
80

Change
through
equity

Change
through profit
or loss

Exchange rate
differences

$

–
–
–
1
–
(1)
–
–
(121)
–
1

$

(55)
270
(33)
(13)
2
(39)
(83)
1
53
(15)
32

$

(1)
33
–
–
–
2
1
–
5
(7)
1

$

58
–
–
–
(57)
–
–
–
–
(31)
31

$ (120)

$

120

$

34

$

1

Acquisitions/
disposals

Other

Net Asset
October 31,
2013

$ (7)
(1)
–
2
–
–
5
–
–
4
5

$

413
1,290
6
62
42
102
(227)
(80)
492
(279)
150

$

$

1,971

$

1,928

8

$

2,071
(143)

$

2,141
(170)

$

1,928

$

1,971

The tax loss carryforwards amount of deferred tax assets was related to losses in our Luxembourg, U.K., U.S., Caribbean and Japanese
operations. Deferred tax assets of $44 million (October 31, 2013 – $62 million) were recognized at October 31, 2014 in respect of tax losses
incurred in current or preceding years 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, 2014, unused tax losses, tax credits and deductible temporary differences of $532 million, $267 million and $7 million
(October 31, 2013 – $514 million, $183 million and $nil) available to be offset against potential tax adjustments or future taxable income were
not recognized as deferred tax assets. This amount includes unused tax losses of $167 million (October 31, 2013 – $168 million) which expire in
two to four years, and $365 million (October 31, 2013 – $346 million) which expire after four years. There are $6 million of tax credits (October
31, 2013 – $nil) that will expire in two to four years, and $261 million (October 31, 2013 – $183 million) that will expire after four years. In
addition, there are deductible temporary differences of $7 million (October 31, 2013 – $nil) that will expire after four years.
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 $9.0 billion as at October 31, 2014 (October 31, 2013 –
$7.7 billion).

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

181

Note 25 Earnings per share
For the year ended
(Millions of Canadian dollars, except share and per share amounts)

Basic earnings per share
Net Income
Net loss from discontinued operations

October 31
2014

October 31
2013

October 31
2012

$

$

$

9,004
(213)
(94)

Net income from continuing operations
Preferred share dividends
Net income attributable to non-controlling interest

Diluted earnings per share
Net income available to common shareholders from continuing operations
Dilutive impact of exchangeable shares

8,342
–
8,342
(253)
(98)

7,507
(51)
7,558
(258)
(97)

8,697

7,991

7,203

1,442,553

1,443,735

1,442,167

$

6.03
–

$

5.53
–

$

4.99
(0.03)

$

6.03

$

5.53

$

4.96

$

8,697
21

$

7,991
53

$

7,203
53

Net income available to common shareholders from continuing operations
Weighted average number of common shares (in thousands)
Basic earnings (loss) per share
Continuing operations (in dollars)
Discontinued operations (in dollars)

9,004
–

Net income from continuing operations available to common shareholders including dilutive
impact of exchangeable shares

8,718

8,044

–

–

Weighted average number of common shares (in thousands)
Stock options (1)
Issuable under other share-based compensation plans
Exchangeable shares (2)

1,442,553
2,938
–
6,512

1,443,735
2,320
74
20,400

1,442,167
1,626
433
24,061

Average number of diluted common shares (in thousands)
Diluted earnings (loss) per share
Continuing operations (in dollars)
Discontinued operations (in dollars)

1,452,003

1,466,529

1,468,287

$

6.00
–

$

5.49
–

$

4.94
(0.03)

$

6.00

$

5.49

$

4.91

Net loss from discontinued operations available to common shareholders

(1)

7,256
(51)

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. The following amounts were excluded from the calculation of diluted earnings per share: for the years
ended October 31, 2014 and 2013 – no outstanding options were excluded from the calculation of diluted earnings per share; for the year ended October 31, 2012 – an average of 3,992,229
outstanding options with an average exercise price of $55.05.
Includes exchangeable preferred shares and trust capital securities.

(2)

Note 26 Guarantees, commitments, pledged assets and contingencies
Guarantees and commitments
We utilize 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 loan commitment 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.
Maximum exposure to credit losses
As at
October 31
2014

(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 commitments
Securities lending indemnifications
Performance guarantees

182

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

$

17,208

October 31
2013
$

15,592

31,467
3,246
180
137,623

32,142
3,181
139
117,704

62,319
6,115

57,749
5,221

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
obligations to the third party. For certain guarantees, the guaranteed party can request payment from us even though the client has not defaulted
on its obligations. The term of these guarantees can range up to eight 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 asset-backed commercial paper conduit programs administered by us and third parties, as an
alternative source of financing in the event that such programs are unable to access commercial paper markets, or in limited circumstances,
when predetermined performance measures of the financial assets owned by these programs are not met. The average remaining term of these
liquidity facilities is approximately three years.
Backstop liquidity facilities are also provided to non-asset backed programs such as variable rate demand notes issued by third parties.
These standby facilities provide liquidity support to the issuer to buy the notes if the issuer is unable to remarket the notes, as long as the
instrument and/or the issuer maintain the investment grade rating.
The terms of the backstop liquidity facilities do not require us to advance money to these programs in the event of bankruptcy or insolvency
events and generally do not require us to purchase non-performing or defaulted assets.
Credit enhancements
We provide partial credit enhancement to multi-seller programs administered by us to protect commercial paper investors in the event that the
collection on the underlying assets, the transaction-specific credit enhancement or the liquidity proves to be insufficient to pay for maturing
commercial paper. Each of the asset pools is structured to achieve a high investment-grade credit profile through credit enhancements from us
and other third parties related to each transaction. The average remaining term of these credit facilities is approximately three years.
Documentary and commercial letters of credit
Documentary and commercial letters of credit, which are written undertakings by us on behalf of a client authorizing a third party to draw drafts
on us up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipment of goods to which they relate.
Other commitments to extend credit
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, bankers’ acceptances or letters
of credit.
Other 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 or securities that are issued or guaranteed by the
Canadian government, U.S. government or other OECD countries.
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 eight years.
Our policy for requiring collateral security with respect to these instruments and the types of collateral security held is generally the same as
for loans. When collateral security is taken, it is determined on an account-by-account basis according to the risk of the borrower and the
specifics of the transaction. Collateral security may include cash, securities and other assets pledged.
Indemnifications
In the normal course of our operations, we provide indemnifications which are often standard contractual terms to counterparties in transactions
such as purchase and sale contracts, fiduciary, agency, licensing, custodial and service agreements, 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 will 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. These include both retail and commercial commitments. As at October 31, 2014, the total balance of uncommitted amounts was
$195 billion (October 31, 2013 – $183 billion).
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

183

Note 26 Guarantees, commitments, pledged assets and contingencies (continued)
Pledged assets and collateral
In the ordinary course of business, we pledge assets and enter in collateral agreements with terms and conditions that are usual and customary
to our regular lending, borrowing and trading activities recorded on our Consolidated Balance Sheets. The following are examples of our general
terms and conditions on pledged assets and collateral:
•
The risks and rewards of the pledged assets reside with the pledgor.
•
The pledged asset is returned to the pledgor when the necessary conditions have been satisfied.
•
The right of the pledgee to sell or re-pledge the asset is dependent on the specific agreement under which the collateral is pledged.
•
If there is no default, the pledgee must return the comparable asset to the pledgor upon satisfaction of the obligation.
We are also required to provide intraday pledges to the Bank of Canada when we use the Large Value Transfer System (LVTS), which is a real-time
electronic wire transfer system that continuously processes all Canadian dollar large-value or time-critical payments throughout the day. The
pledged assets earmarked for LVTS activities are normally released back to us at the end of the settlement cycle each day. Therefore, the pledged
assets amount is not included in the table below. For the year ended October 31, 2014, we had on average $3.1 billion of assets pledged
intraday to the Bank of Canada on a daily basis (October 31, 2013 – $3.0 billion). There are infrequent occasions where we are required to take
an overnight advance from the Bank of Canada to cover a settlement requirement, in which case an equivalent value of the pledged assets would
be used to secure the advance. There were no overnight advances taken on October 31, 2014 and October 31, 2013.
Details of assets pledged against liabilities and collateral assets held or re-pledged are shown in the following tables:
As at
(Millions of Canadian dollars)

Sources of pledged assets and collateral
Bank assets
Cash and due from banks
Interest-bearing deposits with banks
Loans
Securities
Other assets

October 31
2014

October 31
2013 (1)

$

$

243
90
72,191
59,476
11,887
$ 143,887

Client assets
Collateral received and available for sale or re-pledging
Less: not sold or re-pledged

189,229
(67,747)
121,482
265,369

Uses of pledged assets and collateral
Securities lent
Securities borrowed
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
(1)

204
83
74,138
50,527
11,678
$ 136,630
164,397
(49,612)
114,785
251,415

$

21,550
25,150
50,345
61,184
45,089
26,589
17,068
2,167
4,947
11,280
$ 265,369

$

19,535
27,951
47,128
56,580
49,899
22,750
14,363
1,928
3,672
7,609
$ 251,415

Certain amounts have been revised from those previously reported.

Lease commitments
Finance lease commitments
We lease computer equipment from third parties under finance lease arrangements. The leases have various terms, escalation and renewal
rights. The future minimum lease payments under the finance leases are as follows:
As at
October 31, 2014

(Millions of Canadian dollars)

Future minimum lease payments
No later than one year
Later than one year and no later than five years

Total
future
minimum
lease
payments

Future
interest
charges

$

$

$

59
51
110

$

(6)
(6)
(12)

October 31, 2013

Present
value of
finance lease
commitments

Total
future
minimum
lease
payments

Future
interest
charges

Present
value of
finance lease
commitments

$

$

$

$

$

53
45
98

$

69
86
155

$

(8)
(10)
(18)

$

61
76
137

The net carrying amount of computer equipment held under finance lease as at October 31, 2014 was $113 million (October 31, 2013 – $153
million).
184

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Operating lease commitments
We are obligated under a number of non-cancellable operating leases for premises and equipment. These leases have various terms, escalation
and renewal rights. The minimum future lease payments under non-cancellable operating leases are as follows.
As at
October 31, 2014
(Millions of Canadian dollars)

Future minimum lease payments
No later than one year
Later than one year and no later than five years
Later than five years
Less: Future minimum sublease payments to be received
Net future minimum lease payments

Land and
buildings
$

536
1,663
1,294
3,493
(17)
$ 3,476

October 31, 2013

Equipment

Land and
buildings

Equipment

$

$

$

$

134
200
–
334
–
334

586
1,752
1,349
3,687
(25)
$ 3,662

$

138
314
–
452
–
452

Note 27 Litigation
We are a large global institution that is subject to many different complex legal and regulatory requirements that continue to evolve. As a result,
Royal Bank of Canada and its subsidiaries 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.
Management reviews the status of all proceedings on an ongoing basis and will exercise its judgment in resolving them in such manner as
management believes to be in the Bank’s best interest. This is an area of significant judgment and uncertainty and the extent of our financial and
other exposure to these proceedings could be material to our results of operations in any particular period. The following is a description of our
significant legal proceedings.
LIBOR inquiries and litigation
Various regulators and competition and enforcement authorities around the world, including in Canada, the United Kingdom, and the U.S., are
conducting investigations related to certain past submissions made by panel banks in connection with the setting of the U.S. dollar London
interbank offered rate (LIBOR). As Royal Bank of Canada is a member of certain LIBOR panels, including the U.S. dollar LIBOR panel, we have
been the subject of regulatory demands for information and are cooperating with those investigations. In addition, Royal Bank of Canada and
other U.S. dollar panel banks have been named as defendants in private lawsuits filed in the U.S. with respect to the setting of LIBOR, including a
number of class action lawsuits which have been consolidated before the U.S. District Court for the Southern District of New York (the Court). The
complaints in those actions assert claims against us and other panel banks under various U.S. laws including U.S. antitrust laws, the U.S.
Commodity Exchange Act (CEA), and state law. The Court has issued three detailed rulings on various motions in the consolidated cases, on
March 29, 2013, August 23, 2013 and June 23, 2014, which have collectively narrowed the scope of claims against us and the other panel bank
defendants. A procedural aspect of these rulings is currently on appeal to the U.S. Supreme Court which may cause the scope of the claims
against us to change. Based on the facts currently known, it is not possible at this time for us to predict the resolution of these regulatory
investigations or private lawsuits, including the timing and potential impact on Royal Bank of Canada.
CFTC litigation
Royal Bank of Canada is a defendant in a civil lawsuit brought by the Commodity Futures Trading Commission (CFTC) in the U.S. The lawsuit
alleges that certain inter-affiliate transactions were improper wash trades and effected in a non competitive manner. At this time, management
does not believe that the ultimate resolution of this matter will have a material adverse effect on our consolidated financial position or results of
operations.
Wisconsin school districts litigation
Royal Bank of Canada is a defendant in a lawsuit relating to our role in transactions involving investments made by a number of Wisconsin
school districts in certain collateralized debt obligations. These transactions were also the subject of a regulatory investigation. Despite reaching
a settlement with the Securities and Exchange Commission in September 2011, which was paid to the school districts through a Fair Fund, the
lawsuit is continuing. Based on the facts currently known, it is not possible at this time to predict the ultimate outcome of this proceeding or the
timing of its resolution; however, management believes the ultimate resolution of this proceeding will not have a material adverse effect on our
consolidated financial position or results of operations.
Rural/Metro litigation
On October 10, 2014, the Delaware Court of Chancery in a class action brought by former shareholders of Rural/Metro Corporation held Royal
Bank of Canada liable in the amount of US$75.8 million, plus interest, for aiding and abetting a breach of fiduciary duty by three Rural/Metro
directors. Plaintiffs’ attorneys’ fee application is pending and must be resolved before a final judgment will be entered. Management believes
that the ultimate resolution of this proceeding, including any possible appeal, will not have a material adverse effect on our consolidated
financial position or results of operations.
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. 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.
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

185

Note 28 Contractual repricing and maturity schedule
The following table details our exposure to interest rate risk. The carrying amounts of financial assets and financial liabilities are reported below
based on the earlier of their contractual repricing date or maturity date.
The following table does not incorporate management’s expectation of future events where expected repricing or maturity dates differ
significantly from the contractual dates. We incorporate these assumptions in the management of interest rate risk exposure. These assumptions
include expected repricing of trading instruments and certain loans and deposits. Taking into account these assumptions on the consolidated
contractual repricing and maturity schedule at October 31, 2014, would result in a change in the under-one-year gap from $11.4 billion to
$75.6 billion.
As at October 31, 2014

(Millions of Canadian dollars)

Assets
Cash and deposits with banks
Trading securities
Available-for-sale securities
Assets purchased under reverse
repurchase agreements and
securities borrowed
Loans (net of allowance for loan
losses)
Derivatives
Segregated fund net assets
Other assets
Liabilities
Deposits
Obligations related to assets sold
under repurchase agreements
and securities loaned
Obligations related to securities
sold short
Derivatives
Segregated fund net liabilities
Other liabilities
Subordinated debentures
Non-controlling interests
Shareholders’ equity

Immediately
interest
rate-sensitive
$

10,912 $
105
–

Under 3
months
8,638 $
27,518
23,387

3 to 6
months
1 $
9,181
2,414

6 to 12
months 1 to 5 years
– $
8,408
1,465

Over
5 years

– $
– $
23,001
32,464
14,264
4,416

Non-ratesensitive

Total

6,269 $
25,820
50,703
151,380
1,822
47,768

1,004

115,025

15,933

3,618

–

–

–

135,580

165,259
87,402
–
33

65,121
–
–
12,428

12,339
–
–
1

25,191
–
–
–

156,311
–
–
–

7,278
–
–
113

3,730
–
675
44,121

435,229
87,402
675
56,696

$

264,715 $ 252,117 $ 39,869 $ 38,682 $ 193,576 $ 44,271 $ 107,320 $ 940,550

$

236,376 $ 119,539 $ 18,251 $ 37,724

101,572 $ 20,943 $

79,695 $ 614,100

592

61,308

806

1,625

–

–

–

64,331

450
88,982
–
71
–
–
–

938
–
–
10,605
620
–
825

1,790
–
–
31
–
–
–

824
–
–
61
1,491
–
1,050

10,392
–
–
1,720
2,591
1,719
2,200

14,633
–
–
6,710
3,157
–
–

21,318
–
675
40,557
–
94
48,615

50,345
88,982
675
59,755
7,859
1,813
52,690

$

326,471 $ 193,835 $ 20,878 $ 42,775 $ 120,194 $ 45,443 $ 190,954 $ 940,550

Total gap

$

(61,756) $

58,282 $ 18,991 $

(4,093) $

73,382 $

(1,172) $

(83,634) $

Canadian dollar
Foreign currency

$

(39,220) $
(22,536)

11,370 $ 4,683 $
46,912
14,308

(1,898) $
(2,195)

97,840 $
(24,458)

(6,936) $
5,764

(65,948) $
(17,686)

Total gap

$

(61,756) $

58,282 $ 18,991 $

(4,093) $

73,382 $

(1,172) $

(83,634) $

–
(109)
109
–

Note 29 Related party transactions
Related parties
Related parties include associated companies, post-employment benefit plans for the benefit of our employees, key management personnel, the
Board of Directors (Directors), close family members of key management personnel and Directors, and entities which are, directly or indirectly,
controlled by, jointly controlled by or significantly influenced by key management personnel, Directors or their close family members.
Key management personnel and Directors
Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling our
activities, directly or indirectly. They include the senior members of our organization called the Group Executive. The Group Executive is
comprised of the President and Chief Executive Officer and individuals that report directly to him, including the Chief Administrative Officer and
Chief Financial Officer, Chief Human Resources Officer, Chief Risk Officer, and heads of our business units. The Directors do not plan, direct, or
control the activities of the entity; they oversee the management of the business and provide stewardship.

186

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Compensation of key management personnel and Directors
The following tables present the compensation paid, shareholdings and options held by key management personnel and Directors.
For the year ended
(Millions of Canadian dollars)

Salaries and other short-term employee benefits (2)
Post-employment benefits
Share-based payments
(1)

(2)

October 31
2014 (1)
$
22
7
26

October 31
2013
$
23
3
30

October 31
2012
$
21
2
25

$

$

$

55

56

48

During the year, certain executives who were members of the Bank’s Group Executive as at October 31, 2013 have left the Bank and therefore, are no longer part of key management
personnel. Compensation for the year ended October 31, 2014, attributable to the former executives, including current year benefits and share based payments relating to awards granted in
prior years was $60 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 22 for further details.

Stock options, stock awards and shares held by key management personnel, Directors and their close family members
As at
October 31, 2013
October 31, 2014 (1)
(Millions of Canadian dollars, except number of shares)

Stock options
Other non-option stock based awards
RBC common shares
(1)

No. of units
held
2,472,134
1,447,763
686,674

Value
$ 66
116
55

No. of units
held
4,566,316
2,467,532
1,485,843

4,606,571

$ 237

8,519,691

$

Value
84
173
104

$ 361

During the year, certain executives who were members of the Bank’s Group Executive as at October 31, 2013 have left the Bank and therefore, are no longer part of key management
personnel. Total stock options, stock awards and shares held by these executives upon their departure were 3,459,347 units with a value of $194 million.

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 key management personnel, 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, 2014, total loans to key management personnel, Directors and their close family members were $7 million (October 31,
2013 – $6 million). No guarantees, pledges or commitments have been given to key management personnel, 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-party counterparties.
As at October 31, 2014, loans to joint ventures and associates were $57 million (October 31, 2013 – $48 million) and deposits from
joint ventures and associates were $14 million (October 31, 2013 – $12 million).
Other transactions, arrangements or agreements involving joint ventures or associates
As at or for the year ended
October 31
2014
$
315
45
185

(Millions of Canadian dollars)

Commitments and other contingencies
Other fees received for services rendered
Other fees paid for services received

October 31
2013
$
240
47
191

October 31
2012
$
349
84
245

Restricted net assets
Certain of our subsidiaries and joint ventures are subject to regulatory requirements of the jurisdictions in which they operate. When these
subsidiaries and joint ventures 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. At October 31, 2014, restricted net assets of these subsidiaries and joint ventures were $16.0 billion
(October 31, 2013 – $16.2 billion).
Note 30 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 is comprised of our personal and business banking operations, auto financing and retail investment
businesses and operates through four business lines: Personal Financial Services, Business Financial Services and Cards and Payment Solutions
(Canadian Banking), and Caribbean & U.S. Banking. In Canada we provide a broad suite of financial products and services to our individual and
business clients through our extensive branch, automated teller machines, online and telephone banking networks, as well as through a large
number of proprietary sales professionals. In the Caribbean we offer a broad range of financial products and services to individuals, business
clients and public institutions in their respective markets. In the United States, we serve the cross-border banking needs of Canadian clients
within the United States, as well as the banking needs of our U.S. wealth management clients.
Wealth Management is comprised of Canadian Wealth Management, U.S. & International Wealth Management and Global Asset
Management. We serve affluent, high net worth and ultra high net worth clients in Canada, the United States, the United Kingdom, Europe, Asia,
Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

187

Note 30 Results by business segment (continued)
and emerging markets with a comprehensive suite of investment, trust, banking, credit and other wealth management solutions. We also provide
asset management products and services directly to institutional and individual clients as well as through RBC distribution channels and thirdparty distributors.
Insurance is comprised of our insurance operations in Canada and globally and operates under two business lines: Canadian Insurance and
International Insurance, providing a wide range of life, health, property and casualty, and reinsurance products and solutions. In Canada, we
offer our products and services through our proprietary distribution channels, comprised of the field sales force which includes retail insurance
branches, our field sales representatives, call centers and online network, as well as through independent insurance advisors and affinity
relationships. Outside North America, we operate in reinsurance markets globally.
Investor & Treasury Services offers global custody, fund and pension administration, as well as an integrated suite of products to
institutional investors worldwide. We also provide cash management, correspondent banking and trade finance services to financial institutions
globally and funding and liquidity management for RBC as well as other select institutions.
Capital Markets is comprised of a majority of our global wholesale banking businesses providing public and private companies,
institutional investors, governments and central banks with a wide range of products and services across our two main business lines, Global
Markets and Corporate and Investment Banking. In North America, we offer a full suite of products and services which include corporate and
investment banking, equity and debt origination and distribution, and structuring and trading. Outside North America, we have a select presence
in the U.K., Europe, and Asia Pacific, where we offer a diversified set of capabilities in our key sectors of expertise such as energy, mining and
infrastructure.
All other enterprise level activities that are not allocated to these five business segments, such as enterprise funding, securitizations, net
charges associated with unattributed capital, and consolidation adjustments, including the elimination of the Taxable equivalent basis (Teb)
gross-up amounts, are included in Corporate Support. Teb adjustments gross up Net interest income from certain tax-advantaged sources
(Canadian taxable corporate dividends) to their effective tax equivalent value with the corresponding offset recorded in the provision for income
taxes. Management believes that these adjustments are necessary for Capital Markets to reflect how it is managed. The use of the Teb
adjustments 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, 2014 was
$492 million (October 31, 2013 – $380 million, October 31, 2012 – $431 million).
Geographic segments
For geographic reporting, our segments are grouped into Canada, United States and Other International. Transactions are primarily recorded in
the location that best reflects the risk due to negative changes in economic conditions and prospects for growth due to positive economic
changes. This location frequently corresponds with the location of the legal entity through which the business is conducted and the location of
our clients. Transactions are recorded in the local currency and are subject to foreign exchange rate fluctuations with respect to the movement in
the Canadian dollar.
Management reporting framework
Our management reporting framework is intended to measure the performance of each business segment as if it were a stand–alone business
and reflects the way our business segments are managed. This approach is intended to ensure that our business segments’ results reflect all
relevant revenue and expenses associated with the conduct of their businesses. Management regularly monitors these segments’ 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,
estimates and methodologies for allocating overhead costs and indirect expenses to our business segments and that assists in the attribution
of capital and the transfer pricing of funds to our business segments in a manner that fairly and 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 management to ensure that
they remain valid. The capital attribution methodologies involve a number of assumptions and estimates that are revised periodically.

188

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

For the year ended October 31, 2014
Personal &
Commercial
Wealth
(Millions of Canadian dollars)
Banking Management

Net interest income (2), (3) $ 9,743
Non-interest income
3,987
Total revenue
13,730
Provision for credit losses
1,103
Insurance policyholder
benefits, claims and
acquisition expense
–
Non-interest expense
6,563
Net income (loss) before
income taxes
6,064
Income taxes (recoveries)
1,589
Net income from
continuing operations
4,475
Net income from
discontinued
operations
–
Net income
$ 4,475
Non-interest expense
includes:
Depreciation and
amortization
Impairment of other
intangibles
Restructuring
provisions
Total assets
Total assets include:
Additions to property,
plant, equipment
and intangibles
Total liabilities

$

339

$

469
5,844
6,313
19

Investor &
Treasury
Services

Insurance

$

–
4,964
4,964
–

$

732
1,152
1,884
–

Capital
Markets (1)

$

3,485
3,881
7,366
44

Corporate
Support (1)

$

Total

Canada

(313) $ 14,116
164
19,992
(149)
34,108
(2)
1,164

$ 11,121
10,495
21,616
922

$

United
States

Other
International

1,896
4,256
6,152
52

$

1,099
5,241
6,340
190

–
4,800

3,573
579

–
1,286

–
4,344

–
89

3,573
17,661

2,188
9,650

1
4,222

1,384
3,789

1,494
411

812
31

598
157

2,978
923

(236)
(405)

11,710
2,706

8,856
1,983

1,877
672

977
51

1,083

781

441

2,055

169

9,004

6,873

1,205

926

–
$ 1,083 $

–
781

$

–
441

$

–
2,055

$

–
169

$

–
9,004

$

–
6,873

$

–
1,205

$

–
926

16

$

58

$

28

$

577

$

1,165

$

971

$

39

$

155

$

147

$

–

6

–

–

2

–

8

2

6

–

20
$377,051

16
$ 27,084

–
$12,930

–
$ 103,822

–
$ 400,314

–
$ 19,349

36
$ 940,550

–
$ 496,055

16
$ 215,985

20
$ 228,510

$
318
$376,154

$
105
$ 27,022

$
16
$12,988

$
30
$ 103,798

$
147
$ 400,114

$
563 $ 1,179
$(34,029) $ 886,047

$
924
$ 441,535

$
154
$ 216,052

$
101
$ 228,460

Insurance

Investor &
Treasury
Services

Total

Canada

United
States

Other
International

(124) $ 13,249
(12)
17,433
(136)
30,682
3
1,237

$ 10,956
8,606
19,562
892

1,603
3,835
5,438
78

$

For the year ended October 31, 2013
Personal &
Commercial
Wealth
(Millions of Canadian dollars)
Banking Management

Net interest income (2), (3) $ 9,434
Non-interest income
3,585
Total revenue
13,019
Provision for credit losses
995
Insurance policyholder
benefits, claims and
acquisition expense
–
Non-interest expense
6,168
Net income (loss) before
income taxes
5,856
Income taxes (recoveries)
1,476
Net income from
continuing operations
4,380
Net income from
discontinued
operations
–
Net income
$ 4,380

$

396
5,091
5,487
51

$

–
4,219

–
3,928
3,928
–

$

2,784
551

1,217
331
886

671
1,133
1,804
–

Capital
Markets (1)

$

2,872
3,708
6,580
188

Corporate
Support (1)

$

$

690
4,992
5,682
267

–
1,348

–
3,856

–
72

2,784
16,214

1,425
9,210

10
3,681

1,349
3,323

593
(2)

456
117

2,536
836

(211)
(653)

10,447
2,105

8,035
1,709

1,669
396

743
–

595

339

1,700

442

8,342

6,326

1,273

743

$

–
886

$

–
595

$

–
339

$

–
1,700

$

–
442

$

–
8,342

$

–
6,326

$

–
1,273

$

–
743

$

135

$

13

$

56

$

25

$

501

$

1,011

$

838

$

36

$

137

Non-interest expense
includes:
Depreciation and
amortization
Impairment of other
intangibles
Restructuring
provisions
Total assets

1

–

–

5

–

4

10

10

–

–

21
$363,894

–
$ 23,361

–
$12,275

44
$ 90,621

–
$ 358,036

–
$ 11,558

65
$ 859,745

9
$ 494,306

–
$ 181,703

56
$ 183,736

Total assets include:
Additions to property,
plant, equipment
and intangibles
Total liabilities

$
468
$362,892

$
90
$ 23,306

$
13
$12,325

$
35
$ 90,793

$
107
$ 357,872

$
517 $ 1,230
$(36,903) $ 810,285

$
966
$ 444,781

$
132
$ 181,815

$
132
$ 183,689

$

281

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

189

Note 30 Results by business segment (continued)
For the year ended October 31, 2012

(Millions of Canadian dollars)

Personal &
Commercial
Wealth
Banking Management

Net interest income (2), (3)
$ 9,059 $
Non-interest income
3,379
Total revenue
12,438
Provision for credit losses
1,165
Insurance policyholder benefits,
claims and acquisition expense
–
Non-interest expense
5,822
Net income (loss) before income
taxes
5,451
Income taxes (recoveries)
1,395
Net income from continuing
operations
4,056
Net income from discontinued
operations
–
Net income
$ 4,056 $

Insurance

Investor &
Treasury
Services

Capital Corporate
Markets (1) Support (1)

Total

393 $
– $
4,442
4,897
4,835
4,897
(1)
–

612 $
293
905
–

2,559 $
3,629
6,188
135

–
3,809

3,621
518

–
701

–
3,752

–
39

3,621
14,641

1,027
274

758
45

204
102

2,301
725

(155)
(513)

753

713

102

1,576

–
753 $

–
713 $

–
102 $

–
1,576 $

United
Other
States International

Canada

(184) $ 12,439 $ 10,391 $
68
16,708
9,059
(116)
29,147
19,450
–
1,299
1,018

1,308 $
3,569
4,877
90

740
4,080
4,820
191

2,315
8,586

21
3,406

1,285
2,649

9,586
2,028

7,531
1,527

1,360
521

358

7,558

6,004

839

715

–
358 $

(51)
7,507 $

–
6,004 $

(51)
788 $

–
715

695
(20)

Non-interest expense includes:
Depreciation and amortization $
253 $
Impairment of other intangibles
–
Restructuring provisions
–
Total assets
$342,514 $

136 $
14 $
15 $
27 $
452 $
897 $
723 $
38 $
136
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21,993 $ 12,322 $ 77,255 $ 355,153 $ 14,717 $ 823,954 $ 457,386 $ 173,179 $ 193,389

Total assets include:
Additions to property, plant,
equipment and intangibles
Total liabilities

133 $
11 $
304 $
128 $
877 $ 1,693 $ 1,069 $
145 $
479
21,979 $ 12,372 $ 77,276 $ 355,030 $(28,992) $ 779,033 $ 412,406 $ 173,308 $ 193,319

(1)
(2)
(3)

$
240 $
$341,368 $

Taxable equivalent basis (Teb).
Inter-segment revenue and share of profits in associates are not material.
Interest revenue is reported net of interest expense as management relies primarily on net interest income as a performance measure.

Revenue by business line
For the year ended
(Millions of Canadian dollars)

Personal Financial Services
Business Financial Services
Cards and Payment Solutions
Caribbean & U.S. Banking
Canadian Wealth Management
U.S. & International Wealth Management
Global Asset Management
Insurance
Investor & Treasury services
Corporate and Investment Banking
Global Markets
Other Capital Markets
Corporate Support

October 31
2014
$
7,285
3,135
2,449
861
2,186
2,430
1,697
4,964
1,884
3,437
3,930
(1)
(149)

October 31
2013
$
6,948
2,990
2,282
799
1,889
2,225
1,373
3,928
1,804
3,014
3,492
74
(136)

October 31
2012
$
6,591
2,894
2,129
824
1,741
1,977
1,117
4,897
905
2,533
3,635
20
(116)

$

$

$

34,108

30,682

29,147

Note 31 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 (*) on pages 52 to 77 of the 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 clients 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.

190

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Concentrations of credit risk indicate the relative sensitivity of our performance to developments affecting a particular industry or
geographic location. The amounts of credit exposure associated with certain of our on- and off-balance sheet financial instruments are
summarized in the following table.
As at October 31, 2014
(Millions of Canadian dollars, except percentage amounts)

On-balance sheet assets other than
derivatives (1)
Derivatives before master netting
agreement (2), (3)
Off-balance sheet credit instruments (4)
Committed and uncommitted (5)
Other

Canada

%

$ 422,498 72%
12,825

9

United
States

%

Europe

%

$ 79,140 14%

$ 46,596

8%

Other
International

%

Total

$

36,031 6%

$ 584,265

23,039 16

102,368 70

$ 435,323 60%

$ 102,179 14%

$ 148,964 20%

$

43,040 6%

7,009 5

$ 729,506

$ 224,849 62%
44,808 52

$ 102,253 28%
24,569 29

$ 28,312 8%
11,189 13

$

7,876 2%
5,076 6

$ 363,290
85,642

$ 269,657 60%

$ 126,822 28%

$ 39,501

$

12,952 3%

$ 448,932

9%

145,241

As at October 31, 2013 (6)
(Millions of Canadian dollars, except percentage amounts)

On-balance sheet assets other than
derivatives (1)
Derivatives before master netting
agreement (2), (3)
Off-balance sheet credit instruments (4)
Committed and uncommitted (5)
Other
(1)

(2)
(3)
(4)
(5)

(6)

Canada

%

$ 401,206 74%

United
States

%

Europe

%

$ 62,739 12%

$ 42,935

8%

Other
International

%

Total

$

31,399 6%

$ 538,279

10,842 10

18,249 17

71,085 67

$ 412,048 64%

$ 80,988 12%

$ 114,020 18%

$

37,752 6%

6,353 6

$ 644,808

$ 213,602 64%
43,173 55

$ 86,834 26%
20,840 27

$ 24,020 7%
11,361 14

$

8,242 3%
3,188 4

$ 332,698
78,562

$ 256,775 62%

$ 107,674 26%

$ 35,381

$

11,430 3%

$ 411,260

9%

106,529

Includes assets purchased under reverse repurchase agreements and securities borrowed, loans and customers’ liability under acceptances. The largest concentrations in Canada are
Ontario at 46% (October 31, 2013 – 45%), the Prairies at 21% (October 31, 2013 – 21%), British Columbia and the territories at 16% (October 31, 2013 – 17%) and Quebec at 12%
(October 31, 2013 – 12%). No industry accounts for more than 33% (October 31, 2013 – 31%) of total on-balance sheet credit instruments.
The largest concentration of credit exposure by counterparty type is banks at 36% (October 31, 2013 – 46%).
Excludes credit derivatives classified as other than trading.
Represents financial instruments with contractual amounts representing credit risk.
Retail and wholesale commitments comprise 38% (October 31, 2013 – 39%) and 62% (October 31, 2013 – 61%), respectively, of our total commitments. The largest sector concentrations
in the wholesale portfolio relate to Energy at 18% (October 31, 2013 – 18%), Financing products at 14% (October 31, 2013 – 16%), Non-bank financial services at 9% (October 31, 2013 –
10%), Real estate and related at 9% (October 31, 2013 – 9%), and Technology and media at 7% (October 31, 2013 – 6%).
Certain amounts have been revised from results previously reported.

Note 32 Capital management
Regulatory capital and capital ratios
OSFI formally establishes risk-based capital targets for deposit-taking institutions in Canada. We are required to calculate our capital ratios and
Assets-to-capital multiple 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 full deductions of intangibles (excluding mortgage servicing rights), certain deferred tax assets, defined benefit pension fund assets
and liabilities, and non-significant investments in banking, financial and insurance entities. Tier 1 capital comprises predominantly CET1, with
additional items that consist of capital instruments such as certain preferred shares, and certain non-controlling interests in subsidiaries. Tier 2
capital includes subordinated debentures that meet certain criteria and certain loan loss allowances. Total Capital is the sum of CET1, additional
Tier 1 capital and Tier 2 capital. Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by risk-weighted assets. The
Assets-to-capital multiple is calculated by dividing gross adjusted assets by Total capital. During 2014 and 2013, we have complied with all
capital requirements imposed by OSFI.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

191

Note 32 Capital management (continued)
As at
October 31
2014

(Millions of Canadian dollars, except percentage and multiple amounts)

Capital
Common Equity Tier 1 capital
Tier 1 capital
Total capital

$

Risk-weighted assets used in calculation of capital ratios (1), (2)
Common Equity Tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
Total capital risk-weighted assets (1)
Credit risk
Market risk
Operational risk

36,406
42,202
50,020

$ 30,541
37,196
44,716

368,594
369,976
372,050

318,981
318,981
318,981

$ 286,327
38,460
47,263

$ 232,641
42,184
44,156

$ 372,050

$ 318,981

9.9%
11.4%
13.4%
17.0X

9.6%
11.7%
14.0%
16.6X

Capital ratios and multiples (1)
Common Equity Tier 1 capital ratio
Tier 1 capital ratio
Total capital ratio
Assets-to-capital multiple (3)
(1)
(2)

October 31
2013

Capital, risk-weighted assets and capital ratios and multiples are calculated using OSFI Capital Adequacy Requirements based on the Basel III framework.
Effective third quarter, the credit valuation adjustment to our risk-weighted asset calculation implemented in the first quarter, must reflect different percentages for each tier of capital. This
change reflects a phase-in of credit valuation adjustments ending in the fourth quarter of 2018. During this phase-in period, risk-weighted assets for CET1, Tier 1 capital and Total capital
ratios will be subject to different annual credit valuation adjustment percentages.
Gross adjusted assets as at October 31, 2014 were $885 billion (October 31, 2013 – $807 billion).

(3)

Note 33

Offsetting financial assets and financial liabilities

Offsetting within our balance sheet 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 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. These are generally classified as Other assets or Other liabilities.
Amounts that do not qualify for offsetting include master netting arrangements that only permit outstanding transactions with the same
counterparty to be offset in an event of default or occurrence of other predetermined events. Such master netting arrangements include the ISDA
Master Agreement or 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 the financial collateral received or pledged subject to master netting arrangement or similar agreements but not qualified for
offsetting refers to the collateral received or pledged to cover the net exposure between counterparties by enabling the collateral to be realized in
an event of default or the occurrence of other predetermined events. Certain amounts of collateral are restricted from being sold or re-pledged
unless there is an event of default or the occurrence of other predetermined events.
The table below provides the amount of financial instruments that have been offset on the Consolidated Balance Sheet and the amounts
that do not qualify for offsetting but are subject to enforceable master netting arrangements or similar agreements. The amounts presented are
not intended to represent our actual exposure to credit risk.
Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements
As at October 31, 2014
Amounts subject to offsetting and enforceable netting arrangements
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify on offsetting on
the balance sheet (1)

Assets purchased under reverse
repurchase agreements and securities
borrowed
Derivative assets (3)
Other financial assets

Gross amounts
of financial
assets before
balance sheet
offsetting

Amounts of
financial
liabilities
offset on the
balance sheet

Net amount of
financial assets
presented on
the balance
sheet

Impact of
master
netting
agreements

$

$

$

$

$

192

Royal Bank of Canada: Annual Report 2014

149,348
136,230
1,264
286,842

$

14,038
57,068
1,240
72,346

$

Consolidated Financial Statements

135,310
79,162
24
214,496

$

56
60,546
–
60,602

Financial
collateral
received (2)

$ 134,985
8,993
–
$ 143,978

Net
amount

Amounts not
subject to
enforceable
netting
arrangements

Total amount
recognized
on the
balance sheet

$

$

$

269
9,623
24
$ 9,916

$

270
8,240
–
8,510

$

135,580
87,402
24
223,006

As at October 31, 2013
Amounts subject to offsetting and enforceable netting arrangements
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify on offsetting on
the balance sheet (1)

Assets purchased under reverse
repurchase agreements and securities
borrowed
Derivative assets (3)
Other financial assets

Gross
amounts of
financial
assets before
balance sheet
offsetting

Amounts of
financial
liabilities
offset on the
balance sheet

Net amount of
financial assets
presented on
the balance
sheet

Impact of
master
netting
agreements

$

$

$

$

$
(1)
(2)
(3)

127,549
98,878
1,302
227,729

$

11,156
31,190
1,290
43,636

$

116,393
67,688
12
184,093

$

41
51,653
–
51,694

Financial
collateral
received (2)

$ 116,013
8,459
–
$ 124,472

Net
amount

Amounts not
subject to
enforceable
netting
arrangements

Total amount
recognized
on the
balance sheet

$

$

$

339
7,576
12
$ 7,927

$

1,124
7,134
–
8,258

$

117,517
74,822
12
192,351

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 $8,687 million (October 31, 2013 – $6,027 million) and non-cash collaterals of $135 billion (October 31, 2013 – $118 billion).
Includes cash margin of $1,326 million (October 31, 2013 – $988 million) which offset against the derivative balance on the balance sheet.

Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements
As at October 31, 2014
Amounts subject to offsetting and enforceable netting arrangements
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify on offsetting on
the balance sheet (1)

Obligations related to assets sold
under repurchase agreements and
securities loaned
Derivative liabilities (3)
Other financial liabilities

Gross amounts
of financial
liabilities
before balance
sheet offsetting

Amounts of
financial
assets offset
on the
balance sheet

Net amount of
financial
liabilities
presented on the
balance sheet

Impact of
master
netting
agreements

Financial
collateral
pledged (2)

$

$

$

$

$

$

78,029
135,662
1,381
215,072

$

14,038
56,982
1,326
72,346

$

63,991
78,680
55
142,726

$

56
60,546
–
60,602

$

63,790
9,184
–
72,974

Net
amount

Amounts not
subject to
enforceable
netting
arrangements

Total amount
recognized
on the
balance sheet

$

$

$

145
8,950
55
$ 9,150

340
10,302
–
10,642

$

Total amount
recognized
on the
balance sheet

$

$

64,331
88,982
55
153,368

As at October 31, 2013
Amounts subject to offsetting and enforceable netting arrangements
Amounts subject to master
netting arrangements or
similar agreements but do
not qualify on offsetting on
the balance sheet (1)
Gross amounts
of financial
liabilities
before balance
sheet offsetting
Obligations related to assets sold under
repurchase agreements and securities
loaned
$
Derivative liabilities (3)
Other financial liabilities
$
(1)
(2)
(3)

70,306
99,122
989
170,417

Amounts of
financial
assets offset
on the
balance sheet

Net amount of
financial liabilities
presented on the
balance sheet

Impact of
master
netting
agreements

Financial
collateral
pledged (2)

Net
amount

Amounts not
subject to
enforceable
netting
arrangements

$

$

$

$

$

$

$

11,155
31,493
988
43,636

$

59,151
67,629
1
126,781

$

41
51,653
–
51,694

$

59,024
8,040
–
67,064

86
7,936
1
$ 8,023

$

1,265
9,116
–
10,381

$

60,416
76,745
1
137,162

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 $6,709 million (October 31, 2013 – $6,281 million) and non-cash collateral of $66 billion (October 31, 2013 – $61 billion).
Includes cash margin of $1,240 million (October 31, 2013 – $1,290 million) which offset against the derivative balance on the balance sheet.

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

193

Note 34

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
management’s long-term view of the liquidity profile of certain balance sheet categories.
As at
October 31, 2014
Within one
After one
year
year

(Millions of Canadian dollars)

Assets
Cash and due from banks (2)
Interest-bearing deposits with banks
Securities
Trading securities (3)
Available-for-sale securities
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 (3)
Premises and equipment, net
Goodwill
Other intangibles
Investments in joint ventures and associates
Employee benefit assets
Other assets
Liabilities
Deposits (4)
Segregated fund net liabilities
Other
Acceptances
Obligations related to securities sold short
Obligations related to assets sold under repurchase
agreements and securities loaned
Derivatives (3)
Insurance claims and policy benefit liabilities
Employee benefit liabilities
Other liabilities
Subordinated debentures

$

16,649
7,494

(4)

194

772 $
905

17,421
8,399

$

13,665
5,732

$

Total

1,885
3,307

$ 15,550
9,039

141,399
12,318

9,981
35,450

151,380
47,768

135,484
11,388

8,539
27,299

144,023
38,687

126,451

9,129

135,580

104,860

12,657

117,517

52,196
38,290

282,791
63,946

43,338
36,710

277,289
53,472

–

675

334,987
102,236
(1,994)
675

–

513

320,627
90,182
(1,959)
513

11,456
19,485
–
–
–
–
–
24,414

6
67,917
2,684
8,647
2,775
295
138
6,281

11,462
87,402
2,684
8,647
2,775
295
138
30,695

9,953
13,695
3
–
–
–
–
21,039

–
61,127
2,633
8,332
2,777
247
161
5,599

9,953
74,822
2,636
8,332
2,777
247
161
26,638

$ 450,152

$ 492,392 $ 940,550

$ 395,867

$ 465,837

$ 859,745

$ 451,065
–

$ 163,035 $ 614,100
675
675

$ 392,645
–

$ 170,434
513

$ 563,079
513

11,456
46,125

6
4,220

11,462
50,345

9,953
44,231

–
2,897

9,953
47,128

62,391
19,980
135
–
25,228
200

1,940
69,002
8,429
2,420
12,081
7,659

64,331
88,982
8,564
2,420
37,309
7,859

57,855
15,671
338
–
24,204
–

2,561
61,074
7,696
2,027
10,743
7,443

60,416
76,745
8,034
2,027
34,947
7,443

$ 269,467 $ 886,047

$ 544,897

$ 265,388

$ 810,285

$ 616,580
(1)
(2)
(3)

$

Total

October 31, 2013 (1)
Within one
After one
year
year

Certain amounts have been revised from those previously reported.
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 at FVTPL and trading derivatives not designated in hedging relationships are presented as within one year as this best represents in most instances the shortterm nature of our trading activities. Non-trading derivatives designated in hedging relationships are presented according to the recovery or settlement of the related hedged item.
Demand deposits of $289 billion (October 31, 2013 – $264 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.

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Note 35 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
As at
October 31
2014

(Millions of Canadian dollars)

Assets
Cash and due from banks
Interest-bearing deposits with banks
Securities
Investments in bank subsidiaries and associated corporations
Investments in other subsidiaries and associated corporations
Assets purchased under reverse repurchase agreements
Loans, net of allowances for loan losses
Net balances due from bank subsidiaries
Other assets

$

Liabilities and shareholders’ equity
Deposits
Net balances due to bank subsidiaries
Net balances due to other subsidiaries
Other liabilities

7,333
5,788
111,159
20,240
53,131
17,075
407,440
10,466
120,052

October 31
2013
$

3,561
2,707
100,574
24,302
42,298
14,578
384,906
–
105,219

$ 752,684

$ 678,145

$ 497,053
–
56,146
138,989

$ 455,625
4,892
35,899
126,670

692,188

623,086

7,806
52,690

7,394
47,665

$ 752,684

$ 678,145

Subordinated debentures
Shareholders’ equity

Condensed Statements of Income
For the year ended
October 31
2014
$
18,415
5,882

October 31
2013
$ 18,573
5,795

October 31
2012
$ 18,842
6,914

Net interest income
Non-interest income (2)

12,533
6,007

12,778
4,626

11,928
1,737

Total revenue

18,540

17,404

13,665

Provision for credit losses
Non-interest expense

1,010
7,801

1,147
7,304

1,139
6,974

Income before income taxes
Income taxes

9,729
2,283

8,953
1,537

5,552
1,423

Net income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries

7,446
1,558

7,416
926

4,129
3,378

(Millions of Canadian dollars)

Interest income (1)
Interest expense

Net income
(1)
(2)

$

9,004

$

8,342

$

7,507

Includes dividend income from investments in subsidiaries and associated corporations of $10 million (2013 – $1,313 million; 2012 – $1,292 million).
Includes gain from associated corporations of $7 million (2013 – loss of $9 million; 2012 – gain of $2 million).

Consolidated Financial Statements

Royal Bank of Canada: Annual Report 2014

195

Note 35 Parent company information (continued)
Condensed Statements of Cash Flows
For the year ended
October 31
2014

(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
Change in loans, net of loan 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

9,004

October 31
2013

October 31
2012

$

$

8,342

7,507

(1,558)
41,428
(22,865)
(4,193)
(2,712)
(2,497)
(1,305)
182

(926)
31,183
(18,927)
(19,048)
1,730
(3,668)
388
(8,210)

(3,378)
9,772
(29,324)
9,440
(229)
(2,164)
(2,713)
(2,571)

15,484

(9,136)

(13,660)

(3,081)
1,225
28,875
(36,165)
(803)
(2,409)
4,889
70

(1,548)
1,641
28,056
(26,392)
(754)
(7,323)
20,164
–

400
3,991
28,994
(29,307)
(867)
163
10,158
–

Net cash (used in) from investing activities

(7,399)

13,844

13,532

Cash flows from financing activities
Issue of subordinated debentures
Repayment of subordinated debentures
Issue of preferred shares
Issuance costs
Redemption of preferred shares for cancellation
Issue of common shares
Redemption of common shares for cancellation
Dividends paid

2,000
(1,600)
1,000
(14)
(1,525)
150
(113)
(4,211)

2,046
(2,000)
–
–
(222)
121
(408)
(3,810)

–
(1,006)
–
–
–
126
–
(3,272)

Net cash used in financing activities

(4,313)

(4,273)

(4,152)

3,772
3,561

435
3,126

(4,280)
7,406

Net cash from (used in) operating activities
Cash flows from investing activities
Change in interest-bearing deposits with banks
Proceeds from sale of available-for-sale securities
Proceeds from maturity of available-for-sale securities
Purchases of available-for-sale securities
Net acquisitions of premises and equipment and other intangibles
Change in cash invested in subsidiaries
Change in net funding provided to subsidiaries
Proceeds from sale of an associate

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 in year
Amount of interest received in year
Amount of dividends received in year
Amount of income taxes paid in year

$

7,333

$

3,561

$

3,126

$

5,814
18,582
10
1,286

$

5,943
17,281
1,313
265

$

7,372
17,502
1,302
1,951

Note 36 Subsequent events
On November 14, 2014, all $200 million outstanding 10% subordinated debentures matured. The maturity proceeds plus accrued interest were
paid to the noteholders on the maturity date.
On November 24, 2014, we redeemed all 13 million of issued and outstanding Non-Cumulative 5-Year Rate Reset First Preferred Shares,
Series AX for cash at a redemption price of $25 per share.

196

Royal Bank of Canada: Annual Report 2014

Consolidated Financial Statements

Ten-year statistical review
Condensed Balance Sheet
IFRS
(Millions of Canadian dollars)

2014 (1)

2013 (1)

CGAAP
2012 (1)

2011

Assets
Cash and due from banks $ 17,421 $ 15,550 $ 12,428 $ 12,428
Interest-bearing deposits
with banks
8,399
9,039
10,246
6,460
Securities
199,148
182,710
161,602
167,022
Assets purchased under
reverse repurchase
agreements and
securities borrowed
135,580
117,517
112,257
84,947
Loans net of allowance
435,229
408,850
378,241
347,530
Other
144,773
126,079
149,180
175,446
Total Assets
$ 940,550 $ 859,745 $ 823,954 $ 793,833
Liabilities
Deposits
$ 614,100 $ 563,079 $ 512,244 $ 479,102
Other
264,088
239,763
259,174
263,625
Subordinated debentures
7,859
7,443
7,615
8,749
Trust capital securities
–
–
–
894
Preferred shares liabilities
–
–
–
–
Non-controlling interest in
subsidiaries
–
n.a.
n.a.
n.a.
Total Liabilities
Equity attributable to
shareholders
Non-controlling interest
Total equity

2011
$ 13,247 $
12,181
179,558

2010

2009

8,440 $

7,584 $ 11,086 $

13,254
183,519

8,919
177,298

2008

20,041
171,134

2007

2006

2005

4,226 $

4,401 $

5,001

11,881
178,255

10,502
184,869

5,237
160,495

84,947
72,698
41,580
44,818
64,313
59,378
42,973
296,284
273,006
258,395
289,540
237,936
208,530
190,416
165,485
175,289
161,213
187,240
103,735
69,100
65,399
$ 751,702 $ 726,206 $ 654,989 $ 723,859 $ 600,346 $ 536,780 $ 469,521
$ 444,181 $ 414,561 $ 378,457 $ 438,575 $ 365,205 $ 343,523 $ 306,860
256,124
263,030
229,699
242,744
201,404
160,575
131,003
7,749
6,681
6,461
8,131
6,235
7,103
8,167
–
727
1,395
1,400
1,400
1,383
1,400
–
–
–
–
300
298
300
1,941

2,256

2,071

2,371

1,483

1,775

1,944

886,047

810,285

779,033

752,370

709,995

687,255

618,083

693,221

576,027

514,657

449,674

52,690

47,665

43,160

39,702

41,707

38,951

36,906

30,638

24,319

22,123

19,847

1,813

1,795

1,761

1,761

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

54,503

49,460

44,921

41,463

41,707

38,951

36,906

30,638

24,319

22,123

19,847

Total liabilities and equity $ 940,550 $ 859,745 $ 823,954 $ 793,833

$ 751,702 $ 726,206 $ 654,989 $ 723,859 $ 600,346 $ 536,780 $ 469,521

Condensed Income Statement
IFRS
(Millions of Canadian dollars)

Net interest income
$
Non-interest income
Total revenue
Provision for credit losses
(PCL)
Insurance policyholder
benefits, claims and
acquisition expense
Non-interest expense (NIE)
Non-controlling interest
Net income from
continuing operations
Net loss from discontinued
operations
Net income
(1)

2014

2013

CGAAP
2012

2011

14,116 $ 13,249 $ 12,439 $ 11,357
19,992
17,433
16,708
16,281
34,108
30,682
29,147
27,638

2011

2010

2009

2008

2007

2006

2005

$ 10,600 $ 10,338 $ 10,705 $ 9,054 $ 7,700 $ 6,796 $ 6,793
16,830
15,744
15,736
12,528
14,762
13,481
12,391
27,430
26,082
26,441
21,582
22,462
20,637
19,184

1,164

1,237

1,299

1,133

975

1,240

2,167

1,595

791

429

3,573
17,661
n.a.

2,784
16,214
n.a.

3,621
14,641
n.a.

3,358
14,167
n.a.

3,360
14,453
104

3,546
13,469
99

3,042
13,436
100

1,631
12,351
81

2,173
12,473
141

2,509
11,495
44

2,625
11,402
(13)

9,004

8,342

7,558

6,970

6,650

5,732

5,681

4,555

5,492

4,757

3,437

–
9,004

–
8,342

(51)
7,507

(526)
6,444

(1,798)
4,852

(509)
5,223

(1,823)
3,858

–
4,555

–
5,492

(29)
4,728

(50)
3,387

455

Current and two preceding periods reflect changes in accounting standards and presentation changes as disclosed in Note 2 of our Annual Consolidated Financial Statements.

Ten-year statistical review

Royal Bank of Canada: Annual Report 2014

197

Other Statistics – reported
(Millions of Canadian dollars,
except percentages and per
share amounts)

IFRS
2014 (1)

PROFITABILITY MEASURES (2)
Earnings per shares (EPS)
– basic
$
6.03
– diluted
$
6.00
Return on common equity
(ROE)
19.0%
Return on risk-weighted
assets (RWA)
2.52%
Efficiency ratio (3)
51.8%
KEY RATIOS
PCL on impaired loans as
a % of Average net
loans and acceptances
0.27%
Net interest margin (total
average assets)
1.56%
Non-interest income as a
% of total revenue
58.6%
SHARE INFORMATION (2)
Common shares
outstanding (000s) –
end of period
1,442,233
Dividends declared per
common share
$
2.84
Dividend yield
3.8%
Dividend payout ratio (3)
47%
Book value per share
$
33.69
Common share price (RY
on TSX) – close, end of
period
$
80.01
Market capitalization
(TSX)
115,393
Market price to book value
2.38
CAPITAL MEASURES CONSOLIDATED (4)
Common Equity Tier 1
capital ratio
9.9%
Tier 1 capital ratio
11.4%
Total capital ratio
13.4%
Assets-to-capital multiple
17.0X
(1)
(2)
(3)
(4)

198

2013 (1)

$
$

5.53 $
5.49 $

CGAAP
2012 (1)

2011

4.96 $
4.91 $

4.25
4.19

2011

$
$

3.21 $
3.19 $

2010

3.49 $
3.46 $

2009

2.59 $
2.57 $

2008

3.41 $
3.38 $

2007

4.24 $
4.19 $

2006

3.65 $
3.59 $

2005

2.61
2.57

19.7%

19.6%

18.7%

12.9%

14.9%

11.9%

18.1%

24.7%

23.5%

18.0%

2.67%
52.8%

2.70%
50.2%

2.44%
51.3%

1.87%
52.7%

2.03%
51.6%

1.50%
50.8%

1.78%
57.2%

2.23%
55.5%

2.21%
55.7%

1.77%
59.2%

0.31%

0.35%

0.33%

0.34%

0.45%

0.72%

0.53%

0.33%

0.23%

0.21%

1.56%

1.55%

1.52%

1.49%

1.59%

1.64%

1.39%

1.33%

1.35%

1.53%

56.8%

57.3%

58.9%

61.4%

60.4%

59.5%

58.0%

65.7%

67.1%

64.6%

1,441,056

1,445,303

1,438,376

1,438,376

1,424,922

1,417,610

1,341,260

1,276,260

1,280,890

1,293,502

$

$

2.53 $
4.0%
46%
29.87 $

2.28 $
4.5%
46%
26.52 $

2.08
3.9%
45%
24.25

$

70.02 $

56.94 $

48.62

$

$

2.08 $
3.9%
47%
25.65 $

2.00 $
3.6%
52%
23.99 $

2.00 $
4.8%
52%
22.67 $

2.00 $
4.2%
59%
20.90 $

1.82 $
3.3%
43%
17.49 $

1.44 $
3.1%
40%
16.52 $

1.18
3.2%
45%
14.89

$

48.62 $

54.39 $

54.80 $

46.84 $

56.04 $

49.80 $

41.67

100,903
2.34

82,296
2.15

69,934
2.00

69,934
1.90

77,502
2.27

77,685
2.42

62,825
2.24

71,522
3.20

63,788
3.01

53,894
2.80

9.6%
11.7%
14.0%
16.6X

n.a.
13.1%
15.1%
16.7X

n.a.
n.a.
n.a.
n.a.

n.a.
13.3%
15.3%
16.1X

n.a.
13.0%
14.4%
16.5X

n.a.
13.0%
14.2%
16.3X

n.a.
9.0%
11.0%
20.1X

n.a.
9.4%
11.5%
20.0X

n.a.
9.6%
11.9%
19.7X

n.a.
9.6%
13.1%
17.6X

Current and two preceding periods reflect changes in accounting standards and presentation changes as disclosed in Note 2 of our Annual Consolidated Financial Statements.
On April 6, 2006, we paid a stock dividend of one common share on each of our issued and outstanding common shares. The effect was the same as two-for-one split of our common shares.
All common share and per share information have been adjusted retroactively for the stock dividend.
Ratios for 2009-2012 represent continuing operations.
Effective 2013 we calculate the capital ratios and multiples using the Basel III (all-in basis) framework unless otherwise stated. 2008-2012 capital ratios and multiples were calculated using
the Basel II framework. 2004-2007 capital ratios and 2005-2007 asset-to-capital multiples were calculated using the Basel I framework. Capital ratios and multiples prior to 2011 were
determined under Canadian GAAP.

Royal Bank of Canada: Annual Report 2014

Ten-year statistical review

Glossary
Acceptances
A bill of exchange or negotiable instrument
drawn by the borrower for payment at maturity
and accepted by a bank. The acceptance
constitutes a guarantee of payment by the bank
and can be traded in the money market. The
bank earns a “stamping fee” for providing this
guarantee.
Allowance for credit losses
The amount deemed adequate by management
to absorb identified credit losses as well as
losses that have been incurred but are not yet
identifiable as at the balance sheet date. This
allowance is established to cover the lending
portfolio including loans, acceptances,
guarantees, letters of credit, and unfunded
commitments. The allowance is increased by
the provision for credit losses, which is charged
to income and decreased by the amount of
write-offs, net of recoveries in the period.
Alt-A assets
A term used in the U.S. to describe assets
(mainly mortgages) with a borrower risk profile
between the prime and subprime categorizations. Categorization of assets as Alt-A (as
opposed to prime) varies, such as limited
verification or documentation of borrowers’
income or a limited credit history.
Asset-backed securities (ABS)
Securities created through the securitization of
a pool of assets, for example auto loans or
credit card loans.
Assets-to-capital multiple (ACM)
Total assets plus specified off-balance sheet
items, as defined by OSFI, divided by total
regulatory capital on a transitional basis. ACM
will be replaced in 2015 by the Basel III
Leverage Ratio.
Assets under administration (AUA)
Assets administered by us, which are beneficially owned by clients, as at October 31,
unless otherwise noted. Services provided in
respect of assets under administration are of
an administrative nature, including
safekeeping, collecting investment income,
settling purchase and sale transactions, and
record keeping.
Assets under management (AUM)
Assets managed by us, which are beneficially
owned by clients, as at October 31, unless
otherwise noted. Services provided in respect

of assets under management include the
selection of investments and the provision of
investment advice. We have assets under
management that are also administered by us
and included in assets under administration.
Auction rate securities (ARS)
Securities issued through structured entities
that hold long-term assets funded with longterm debt. In the U.S., these securities are
issued by sponsors such as municipalities,
student loan authorities or other sponsors
through bank-managed auctions.
Average earning assets
Average earning assets include interest-bearing
deposits with other banks including certain
components of cash and due from banks,
securities, assets purchased under reverse
repurchase agreements and securities
borrowed, loans, and excludes segregated fund
net assets and other assets. The averages are
based on the daily balances for the period.
Bank-owned life insurance contracts (BOLI)
Our legacy portfolio includes BOLI where we
provided banks with BOLI stable value
agreements (“wraps”), which insure the life
insurance policy’s cash surrender value from
market fluctuations on the underlying
investments, thereby allowing us to guarantee
a minimum tax-exempt return to the counterparty. These wraps allow us to account for the
underlying assets on an accrual basis instead
of a mark-to-market basis.
Basis point (bp)
One one-hundredth of a percentage point
(.01%).
Collateral
Assets pledged as security for a loan or other
obligation. Collateral can take many forms,
such as cash, highly rated securities, property,
inventory, equipment and receivables.
Collateralized debt obligation (CDO)
Securities with multiple tranches that are
issued by structured entities and collateralized
by debt obligations including bonds and loans.
Each tranche offers a varying degree of risk and
return so as to meet investor demand.
Commercial mortgage-backed securities
(CMBS)
Securities created through the securitization of
commercial mortgages.

Commitments to extend credit
Unutilized amount of credit facilities available
to clients either in the form of loans, bankers’
acceptances and other on-balance sheet
financing, or through off-balance sheet
products such as guarantees and letters of
credit.
Common Equity Tier 1 (CET1) capital
A regulatory Basel III capital measure
comprised mainly of common shareholders’
equity less regulatory deductions and
adjustments for goodwill and intangibles,
defined benefit pension fund assets, shortfall
in allowances and other specified items.
Common Equity Tier 1 capital ratio
A risk-based capital measure calculated as
CET1 capital divided by risk-weighted assets.
Covered bonds
Full recourse on-balance sheet obligations
issued by banks and credit institutions that are
also fully collateralized by assets over which
investors enjoy a priority claim in the event of
an issuer’s insolvency.
Credit default swaps (CDS)
A derivative contract that provides the
purchaser with a one-time payment should the
referenced entity/entities default (or a similar
triggering event occur).
Derivative
A contract between two parties, which requires
little or no initial investment and where
payments between the parties are dependent
upon the movements in price of an underlying
instrument, index or financial rate. Examples of
derivatives include swaps, options, forward
rate agreements and futures. The notional
amount of the derivative is the contract amount
used as a reference point to calculate the
payments to be exchanged between the two
parties, and the notional amount itself is
generally not exchanged by the parties.
Dividend payout ratio
Common dividends as a percentage of net
income available to common shareholders.
Earnings per share (EPS), basic
Calculated as net income available to common
shareholders divided by the average number of
shares outstanding.

Glossary

Royal Bank of Canada: Annual Report 2014

199

Earnings per share (EPS), diluted
Calculated as net income available to common
shareholders divided by the average number of
shares outstanding adjusted for the dilutive
effects of stock options and other convertible
securities.
Economic capital
An estimate of the amount of equity capital
required to underpin risks. It is calculated by
estimating the level of capital that is necessary
to support our various businesses, given their
risks, consistent with our desired solvency
standard and credit ratings. The identified risks
for which we calculate Economic Capital are
credit, market (trading and non-trading),
operational, business, fixed asset, and
insurance. Additionally, Economic Capital
includes goodwill and intangibles, and allows
for diversification benefits across risks and
business segments.
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 undercollateralized 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.
Gross-adjusted assets (GAA)
GAA are used in the calculation of the Assetsto-capital multiple. They represent our total
assets including specified off-balance sheet
items and net of prescribed deductions. Off
balance sheet items for this calculation are
direct credit substitutes, including letters of
credit and guarantees, transaction-related
contingencies, trade-related contingencies and
sale and repurchase agreements.
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.

200

Royal Bank of Canada: Annual Report 2014

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.

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.

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.

Net interest margin (average assets)
Net interest income as a percentage of total
average assets.

Home equity products
This is comprised of residential mortgages and
secured personal loans whereby the borrower
pledges real estate as collateral.

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.

International Financial Reporting Standards
(IFRS)
IFRS are principles-based standards, interpretations and the framework adopted by the
International Accounting Standards Board.

Notional amount
The contract amount used as a reference point
to calculate payments for derivatives.

Impaired loans
Loans are classified as impaired when there
has been a deterioration of credit quality to the
extent that management no longer has
reasonable assurance of timely collection of the
full amount of principal and interest in
accordance with the contractual terms of the
loan agreement. Credit card balances are not
classified as impaired as they are directly
written off after payments are 180 days past
due.
Leverage Ratio
A Basel III regulatory measure, the ratio divides
Tier 1 capital by the sum of total assets plus
specified off-balance sheet items.
Loan-to-value (LTV) ratio
Calculated based on the total facility amount
for the residential mortgage and homeline
product divided by the value of the related
residential property.

Glossary

Net interest income
The difference between what is earned on
assets such as loans and securities and what is
paid on liabilities such as deposits and
subordinated debentures.

Net interest margin (on average earning
assets)
Calculated as net interest income divided by
average earning assets.

Off-balance sheet financial instruments
A variety of arrangements offered to clients,
which include credit derivatives, written put
options, backstop liquidity facilities, stable
value products, financial standby letters of
credit, performance guarantees, credit
enhancements, mortgage loans sold with
recourse, commitments to extend credit,
securities lending, documentary and
commercial letters of credit, note issuances
and revolving underwriting facilities, securities
lending indemnifications and indemnifications.
Office of the Superintendent of Financial
Institutions Canada (OSFI)
The primary regulator of federally chartered
financial institutions and federally
administered pension plans in Canada. OSFI’s
mission is to safeguard policyholders,
depositors and pension plan members from
undue loss.

Operating leverage
The difference between our revenue growth rate
and non-interest expense growth rate.
Options
A contract or a provision of a contract that gives
one party (the option holder) the right, but not
the obligation, to perform a specified transaction with another party (the option issuer or
option writer) according to specified terms.
Primary dealer
A formal designation provided to a bank or
securities broker-dealer permitted to trade
directly with a country’s central bank. Primary
dealers participate in open market operations,
act as market-makers of government debt and
provide market information and analysis to
assist with monetary policy.
Provision for credit losses (PCL)
The amount charged to income necessary to
bring the allowance for credit losses to a level
determined appropriate by management. This
includes both specific and general provisions.
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.
Residential mortgage-backed securities
(RMBS)
Securities created through the securitization of
residential mortgage loans.
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 offbalance sheet exposures. Certain assets are
not risk-weighted, but deducted from capital.
The calculation is defined by guidelines issued
by OSFI. For more details, refer to the Capital
management section.

Securities lending
Transactions in which the owner of a security
agrees to lend it under the terms of a
prearranged contract to a borrower for a fee.
The borrower must collateralize the security
loan at all times. An intermediary such as a
bank often acts as agent for the owner of the
security. There are two types of securities
lending arrangements: lending with and
without credit or market risk indemnification. In
securities lending without indemnification, the
bank bears no risk of loss. For transactions in
which the bank provides an indemnification, it
bears the risk of loss if the borrower defaults
and the value of the collateral declines
concurrently.
Securities sold short
A transaction in which the seller sells securities
and then borrows the securities in order to
deliver them to the purchaser upon settlement.
At a later date, the seller buys identical
securities in the market to replace the
borrowed securities.
Securitization
The process by which various financial assets
are packaged into newly issued securities
backed by these assets.
Structured entities
A structured entity is an entity in which voting
or similar rights are not the dominant factor in
deciding who controls the entity, such as when
the activities that significantly affect the
entity’s returns are directed by means of
contractual arrangements. Structured entities
often have restricted activities, narrow and well
defined objectives, insufficient equity to
finance their activities, and financing in the
form of multiple contractually-linked instruments.
Standardized Approach
Risk weights prescribed by OSFI are used to
calculate risk-weighted assets for the credit risk
exposures. Credit assessments by OSFIrecognized external credit rating agencies of
S&P, Moody’s, Fitch and DBRS are used to riskweight our Sovereign and Bank exposures
based on the standards and guidelines issued
by OSFI. For our Business and Retail exposures,
we use the standard risk weights prescribed by
OSFI.
Structured investment vehicle
Managed investment vehicle that holds mainly
highly rated asset-backed securities and funds
itself using the short-term commercial paper
market as well as the medium-term note (MTN)
market.

Subprime loans
Subprime lending is the practice of making
loans to borrowers who do not qualify for the
best market interest rates because of their
deficient credit history. Subprime lending
carries more risk for lenders due to the
combination of higher interest rates for the
borrowers, poorer credit histories, and adverse
financial situations usually associated with
subprime applicants.
Taxable equivalent basis (teb)
Income from certain specified tax advantaged
sources 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 aftertax net income.
Tier 1 capital
Tier 1 capital comprises predominantly of CET1
capital, with additional Tier 1 items such as
preferred shares, innovative instruments and
non-controlling interests in subsidiaries Tier 1
instruments.
Tier 2 capital
Tier 2 capital consists mainly of subordinated
debentures that meet certain criteria, certain
loan loss allowances and non-controlling
interests in subsidiaries’ Tier 2 instruments.
Total capital and total capital ratio
Total capital is defined as the total of Tier 1 and
Tier 2 capital. The total capital ratio is calculated by dividing total capital by risk-weighted
assets.
Tranche
A security class created whereby the risks and
returns associated with a pool of assets are
packaged into several classes of securities
offering different risk and return profiles from
those of the underlying asset pool. Tranches
are typically rated by ratings agencies, and
reflect both the credit quality of underlying
collateral as well as the level of protection
based on the tranches’ relative subordination.
Trust Capital Securities (RBC TruCS)
Transferable trust units issued by structured
entities RBC Capital Trust or RBC Capital Trust II
for the purpose of raising innovative Tier 1
capital.
Value-at-Risk (VaR)
A generally accepted risk-measurement
concept that uses statistical models based on
historical information to estimate within a given
level of confidence the maximum loss in market
value we would experience in our trading
portfolio from an adverse one-day movement in
market rates and prices.

Glossary

Royal Bank of Canada: Annual Report 2014

201

Directors and executive officers
Directors (1)
W. Geoffrey Beattie (2001)
Toronto, Ontario
Chief Executive Officer
Generation Capital

Timothy J. Hearn (2006)
Calgary, Alberta
Chairman
Hearn & Associates

Jacynthe Côté (2014)
Montreal, Quebec
Corporate Director

Alice D. Laberge (2005)
Vancouver, British Columbia
Corporate Director

David F. Denison, O.C., FCPA,
FCA (2012)
Toronto, Ontario
Corporate Director

Michael H. McCain (2005)
Toronto, Ontario
President and Chief
Executive Officer
Maple Leaf Foods Inc.

Richard L. George, O.C. (2012)
Calgary, Alberta
Partner, Novo Investment Group

David I. McKay (2014)
Toronto, Ontario
President and Chief
Executive Officer
Royal Bank of Canada

Heather Munroe-Blum,
O.C., O.Q., Ph.D., FRSC (2011)
Montreal, Quebec
Professor of Medicine and
Principal Emerita
McGill University
J. Pedro Reinhard (2000)
Key Biscayne, Florida
President
Reinhard & Associates
Thomas A. Renyi (2013)
New Harbor, Maine
Corporate Director

Kathleen P. Taylor (2001)
Toronto, Ontario
Chair of the Board
Royal Bank of Canada
Bridget A. van Kralingen (2011)
New York, New York
Senior Vice President
IBM Global Business Services
IBM Corporation
Victor L. Young, O.C. (1991)
St. John’s, Newfoundland
and Labrador
Corporate Director

Edward Sonshine, O.Ont., Q.C.
(2008)
Toronto, Ontario
Chief Executive Officer
RioCan Real Estate
Investment Trust

The date appearing after the name of each director indicates the year in which the individual became a director.
(1)

On December 2, 2014, the Board of Directors appointed Toos N. Daruvala as a director, to take effect on January 1, 2015. Mr. Daruvala is a Director and Senior Partner of McKinsey & Company
based in New York City, U.S.A.

Group Executive
Janice R. Fukakusa, FCPA, FCA
Chief Administrative Officer and
Chief Financial Officer
Zabeen Hirji
Chief Human Resources Officer

202

Mark Hughes
Chief Risk Officer
M. George Lewis, FCPA, FCA,
CFA
Group Head, Wealth
Management and Insurance

Royal Bank of Canada: Annual Report 2014

Directors and executive officers

A. Douglas McGregor
Group Head, Capital Markets
and Investor & Treasury Services

Bruce Ross
Group Head, Technology &
Operations

David I. McKay
President and
Chief Executive Officer

Jennifer Tory
Group Head, Personal &
Commercial Banking

Principal subsidiaries

Carrying value of
voting shares owned
by the Bank (3)

Principal subsidiaries (1)

Principal office address (2)

Royal Bank Holding Inc.
Royal Mutual Funds Inc.
RBC Insurance Holdings Inc.
RBC General Insurance Company
RBC Insurance Company of Canada
RBC Life Insurance Company
RBC Direct Investing Inc.
RBC Phillips, Hager & North Investment Counsel Inc.
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.
RBC Capital Markets Arbitrage S.A.
Capital Funding Alberta Limited
RBC Global Asset Management Inc.
RBC Investor Services Trust
RBC Investor Services Bank S.A.
RBC (Barbados) Trading Bank Corporation

Toronto, Ontario, Canada
Toronto, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Mississauga, Ontario, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Nassau, New Providence, Bahamas
George Town, Grand Cayman, Cayman Islands
St. Michael, Barbados
George Town, Grand Cayman, Cayman Islands
St. Michael, Barbados
Luxembourg, Luxembourg
Calgary, Alberta, Canada
Toronto, Ontario, Canada
Toronto, Ontario, Canada
Esch-sur-Alzette, Luxembourg
St. James, Barbados

RBC USA Holdco Corporation (2)
RBC Capital Markets, LLC (2)
RBC Global Asset Management (U.S.) Inc.

New York, New York, U.S.
New York, New York, U.S.
Minneapolis, Minnesota, U.S.

RBC Dominion Securities Limited
RBC Dominion Securities Inc.

Toronto, Ontario, Canada
Toronto, Ontario, Canada

6,499

RBC Holdings (Barbados) Ltd.
RBC Financial (Caribbean) Limited

St. Michael, Barbados
Port of Spain, Trinidad and Tobago

2,910

RBC Finance S.à r.l./B.V. (2)
RBC Holdings (Luxembourg) S.A R.L.
RBC Holdings (Channel Islands) Limited
Royal Bank of Canada (Channel Islands) Limited

Amsterdam, Netherlands
Luxembourg, Luxembourg
Jersey, Channel Islands
Guernsey, Channel Islands

2,816

BlueBay Asset Management (Services) Ltd

London, England

1,962

RBC Europe Limited

London, England

1,648

RBC Capital Trust

Toronto, Ontario, Canada

1,783

Royal Bank Mortgage Corporation

Toronto, Ontario, Canada

1,085

The Royal Trust Company

Montreal, Quebec, Canada

RBC Bank (Georgia), National Association (2)

Atlanta, Georgia, U.S.

272

RBC Covered Bond Guarantor Limited Partnership

Toronto, Ontario, Canada

269

RBC Luxembourg (Suisse) Holdings S.A R.L.
Royal Bank of Canada (Suisse) SA

Luxembourg, Luxembourg
Geneva, Switzerland

167

Royal Trust Corporation of Canada

Toronto, Ontario, Canada

150

(1)
(2)

(3)

$

40,630

11,305

531

The Bank directly or indirectly controls each subsidiary.
Each subsidiary is incorporated or organized under the law of the state or country in which the principal office is situated, except for RBC USA Holdco Corporation which is incorporated under
the laws of the State of Delaware, U.S., RBC Capital Markets, LLC, which is organized under the laws of the State of Minnesota, U.S. RBC Finance S.à r.l. / B.V. is a company incorporated in the
Netherlands with its official seat in Amsterdam, the Netherlands, and place of effective management, central administration, and principal establishment in Luxembourg, Grand Duchy of
Luxembourg. RBC Bank (Georgia), National Association is a national banking association organized under the laws of the U.S. with its main office in Atlanta, Georgia and management offices
in Raleigh, North Carolina.
The carrying value (in millions of dollars) of voting shares is stated as the Bank’s equity in such investments.

Principal subsidiaries

Royal Bank of Canada: Annual Report 2014

203

Shareholder Information
Corporate headquarters
Street address:
Royal Bank of Canada
200 Bay Street
Toronto, Ontario M5J 2J5
Canada
Tel: 1-888-212-5533
Fax: 416-955-7800
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 University Street
Suite 700
Montreal, Quebec H3A 3S8
Canada
Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
(International)
Fax: 514-982-7580
website: computershare.com\rbc
Co-Transfer Agent (U.S.):
Computershare Trust
Company, N.A.
250 Royall Street
Canton, Massachusetts 02021
U.S.A.
Co-Transfer Agent (U.K.):
Computershare Investor
Services PLC
Securities Services – Registrars
P.O. Box 82, The Pavilions,
Bridgwater Road,
Bristol BS99 6ZZ
U.K.

Stock exchange listings
(Symbol: RY)
Common shares are listed on:
Canada – Toronto Stock
Exchange (TSX)
U.S. – New York Stock Exchange
(NYSE)
Switzerland – Swiss Exchange
(SIX)
All preferred shares are listed on
the TSX.
Valuation day price
For capital gains purposes, the
Valuation Day (December 22,
1971) cost base for our common
shares is $7.38 per share. This
amount has been adjusted to
reflect the two-for-one share split
of March 1981 and the two-forone share split of February 1990.
The one-for-one share dividends
paid in October 2000 and April
2006 did not affect the Valuation
Day value 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

Financial analysts, portfolio
managers, institutional
investors
For financial information inquiries,
please contact:
Investor Relations
Royal Bank of Canada
200 Bay Street
4th Floor, North Tower
Toronto, Ontario M5J 2W7
Canada
Tel: 416-955-7802
Fax: 416-955-7800
or visit our website at
rbc.com/investorrelations

Unless stated
otherwise, all dividends (and
deemed dividends) paid by us
hereafter are designated as
“eligible dividends” for the
purposes of such rules.

Common share repurchases
We are engaged in a Normal
Course Issuer Bid (NCIB). During
the one-year period commencing
November 1, 2014, we may
repurchase for cancellation, up to
12 million common shares in the
open market at market prices. We
determine the amount and timing
Direct deposit service
of the purchases under the NCIB,
Shareholders in Canada and the
subject to prior consultation with
U.S. may have their RBC common
the Office of the Superintendent
share dividends deposited directly of Financial Institutions Canada
to their bank account by electronic (OSFI).
funds transfer. To arrange for this
service, please contact our
A copy of our Notice of Intention
Transfer Agent and Registrar,
to file a NCIB may be obtained,
Computershare Trust Company of without charge, by contacting our
Canada.
Corporate Secretary at our
Toronto mailing address.
Eligible dividend designation
For purposes of the enhanced
2015 Quarterly earnings release
dividend tax credit rules
dates
contained in the Income Tax Act
First quarter
February 25
(Canada) and any corresponding
Second quarter
May 28
provincial and territorial tax
Third quarter
August 26
legislation, all dividends (and
Fourth quarter
December 2
deemed dividends) paid by us to
Canadian residents on our
2015 Annual Meeting
common and preferred shares
The Annual Meeting of Common
after December 31, 2005, are
Shareholders will be held on
designated as “eligible
Friday, April 10, 2015 in Toronto,
dividends.”
Ontario, Canada.

Tel: 1-866-586-7635 (Canada and
the U.S.) or 514-982-7555
Dividend dates for 2015
(International)
Subject to approval by the Board of Directors
Fax: 1-888-453-0330 (Canada and
Ex-dividend
Record
Payment
the U.S.) or 416-263-9394
dates
dates
dates
(International)
February 24
January
26
January
22
Common
and
preferred
email: service@computershare.com
May 22
April 23
shares series W, AA, AB, April 21
August 24
July 27
July 23
AC, AD, AE, AF, AG, AJ,
For other shareholder inquiries,
November 24
October 26
October 22
AK, AL, AZ and BB
please contact:
Governance
Shareholder Relations
A summary of the significant ways in which corporate governance
Royal Bank of Canada
practices followed by RBC differ from corporate governance practices
200 Bay Street
required to be followed by U.S. domestic companies under the New
9th Floor, South Tower
York Stock Exchange listing standards is available on our website at
Toronto, Ontario M5J 2J5
rbc.com/governance.
Canada
Tel: 416-955-7806
Fax: 416-974-3535

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 BLUE WATER PROJECT, RBC CAPITAL TRUST, RBC GLOBAL ASSET MANAGEMENT,
RBC INSURANCE, RBC TSNs, RBC TruCS and RBC WEALTH MANAGEMENT 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.

204

Royal Bank of Canada: Annual Report 2014

Shareholder information

Thanks to our employees who chose the cover for this annual report. More than 7,000 employees from
around the world voted, and many took the time to share their comments and pride in RBC.

ALWAYS EARNING
THE RIGHT TO
BE OUR CLIENTS’
FIRST CHOICE

rbc.com/ar2014

81104 (12/2014)
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