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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 3

We Deliver Stability &

Opportunity Through

Diversification 4

We Make Communities

Stronger 5

Message from Dave McKay 6

Message from Katie Taylor 9

Management’s Discussion

and Analysis 10

Enhanced Disclosure Task Force

Recommendations Index 107

Reports and Consolidated

Financial Statements 108

Ten-Year Statistical Review 197

Glossary 199

Directors and

Executive Officers 202

Principal Subsidiaries 203

Shareholder Information 204

For more information, please visit: rbc.com

To view our online annual report, please visit:

rbc.com/ar2014

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Deepened offering and capabilities in

key markets to win new clients and

mandates and to grow market share

䊳Strategically added top talent

within capital markets and wealth

management in the U.S. and

internationally

䊳Continued to optimize Caribbean

banking operations for efficiency

and profitability

䊳Strengthened our cross-border

banking business in the U.S.

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%.

Financial Performance Metric

MEDIUM-TERM OBJECTIVE

(3 TO 5-YEAR)

2014

RESULTS ACHIEVED

Diluted EPS Growth 7%+ 9.3% ✓

Return on Equity 18%+ 19.0% ✓

Capital Ratios (CET1) Strong 9.9% ✓

Dividend Payout Ratio 40%–50% 47% ✓

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

$9.0

$7.5

$8.3

1412 13

12 13 14

19.0%

19.6% 19.7%

9.9%

8.9% 9.6%

1412 13

(pro forma)

$1.01

$2.84

Annualized

dividend

increase of:

12% – 1 yr

11% – 10 yr CAGR

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 Return1ONE-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.

DIVERSIFIED

BUSINESS MODEL

SIZE & SCALE IN

CANADA WITH

GLOBAL REACH

CLIENT

FOCUS

EMPLOYEES, BRAND

& REPUTATION

FINANCIAL STRENGTH &

PRUDENT RISK MANAGEMENT

@ 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

@ Diversiﬁed by

business, geography

and client segment

@ 37% of revenue from

outside Canada

@ Largest bank in Canada by

market capitalization5

• 5th in North America

• 12th globally

@ 40 countries

@ ~78,000 employees

@ ~16 million clients

@ 4.5+ million active online

& mobile clients

@ ~1,400 branches

@ Consistent earnings and

dividend growth

@ Strong capital position

and credit ratings

@ Prudent risk management

built on a culture of doing

what’s right

@ Named one of the Best Workplaces in

Canada6 for the 6th consecutive year

while attracting talented employees

globally

@ Canada’s most valuable

brand and 16th most

valuable bank brand

globally7

@ One of the World’s

Most Admired

Companies8

1. The Banker. 5. Bloomberg as at Oct. 31, 2014.

2. Private Banker International. 6. The Great Place to Work®Institute.

3. Ipsos – Best Banking Awards. 7. Brand Finance.

4. The Economist. 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.

23%

CAPITAL MARKETS

12%

WEALTH MANAGEMENT

INVESTOR &

TREASURY SERVICES

1. 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.

2014

EARNINGS

$9.0B

INSURANCE

@ Among the fastest-growing insurance

organizations in Canada5

@ One of the largest Canadian bank-

owned insurance organizations

@ Top 10 global custodian6

@ Best overall global custodian7

@ Top 5 global wealth manager1 and

top 50 global asset manager2

•

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

@ Top 10 global investment bank8

•

#1 in Canada

@ Recognized as the Most Trusted

Investment Bank in the World9

@ Named Best Investment Bank in

Canada across Equity, Debt and

M&A for the 7th consecutive year10

51%

PERSONAL &

COMMERCIAL BANKING

@ #1 or #2 market share in

all Canadian banking retail

product categories

@ Largest distribution network

in Canada

@ Recognized as the Global Retail

Bank of the Year11

@ 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

* Amounts exclude Corporate Support

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

4 Royal Bank of Canada: Annual Report 2014

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.

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.

$50 MILLION.

10 YEARS.

RBC BLUE

WATER PROJECT®:

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,

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.

6 Royal Bank of Canada: Annual Report 2014

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.

Across all of our businesses advance-

ments 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.

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.

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.

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.

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.

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 environ-

mental 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

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.

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 long-

term 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 serve more than

25% of active

Canadian digital

banking clients2

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.

8 Royal Bank of Canada: Annual Report 2014

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 oppor-

tunities 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 interna-

tional 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 11

Selected financial and other highlights 11

About Royal Bank of Canada 12

Vision and strategic goals 12

Economic and market review and outlook 12

Defining and measuring success through Total

Shareholder Returns 13

Key corporate events of 2014 14

Financial performance 14

Overview 14

Business segment results 18

Results by business segment 18

How we measure and report our business segments 19

Key performance and non-GAAP measures 19

Personal & Commercial Banking 23

Wealth Management 28

Insurance 31

Investor & Treasury Services 34

Capital Markets 35

Corporate Support 39

Quarterly financial information 39

Fourth quarter 2014 performance 39

Quarterly results and trend analysis 40

Results by geographic segment 42

Financial condition 43

Condensed balance sheets 43

Off-balance sheet arrangements 43

Risk management 46

Overview 46

Top and emerging risks 46

Enterprise risk management 47

Credit risk 52

Market risk 63

Liquidity and funding risk 68

Insurance risk 78

Regulatory compliance risk 78

Operational risk 79

Strategic risk 80

Reputation risk 80

Legal and regulatory environment risk 80

Competitive risk 82

Systemic risk 82

Overview of other risks 82

Capital management 85

Additional financial information 94

Exposures to selected financial instruments 94

Accounting and control matters 95

Critical accounting policies and estimates 95

Controls and procedures 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

(Millions of Canadian dollars, except per share, number of and percentage amounts) 2014 2013 (1) 2012 (1)

2014 vs. 2013

Increase (decrease)

Continuing operations

Total revenue $ 34,108 $ 30,682 $ 29,147 $ 3,426 11.2%

Provision for credit losses (PCL) 1,164 1,237 1,299 (73) (5.9)%

Insurance policyholder benefits, claims and

acquisition expense (PBCAE) 3,573 2,784 3,621 789 28.3%

Non-interest expense 17,661 16,214 14,641 1,447 8.9%

Net income before income taxes 11,710 10,447 9,586 1,263 12.1%

Net income from continuing operations 9,004 8,342 7,558 662 7.9%

Net loss from discontinued operations – – (51) – 0.0%

Net income $ 9,004 $ 8,342 $ 7,507 $ 662 7.9%

Segments – net income from continuing operations

Personal & Commercial Banking $ 4,475 $ 4,380 $ 4,056 $ 95 2.2%

Wealth Management 1,083 886 753 197 22.2%

Insurance 781 595 713 186 31.3%

Investor & Treasury Services 441 339 102 102 30.1%

Capital Markets 2,055 1,700 1,576 355 20.9%

Corporate Support 169 442 358 (273) (61.8)%

Net income from continuing operations $ 9,004 $ 8,342 $ 7,558 $ 662 7.9%

Selected information

Earnings per share (EPS) – basic $ 6.03 $ 5.53 $ 4.96 $ 0.50 9.0%

– diluted 6.00 5.49 4.91 0.51 9.3%

Return on common equity (ROE) (2), (3) 19.0% 19.7% 19.6% n.m. (70) bps

Selected information from continuing operations

EPS – basic $ 6.03 $ 5.53 $ 4.99 $ 0.50 9.0%

–diluted 6.00 5.49 4.94 0.51 9.3%

ROE (2), (3) 19.0%19.7% 19.7% n.m. (70) bps

PCL on impaired loans as a % of average net loans and

acceptances 0.27%0.31% 0.35% n.m. (4) bps

Gross impaired loans (GIL) as a % of loans and acceptances 0.44%0.52% 0.58% n.m. (8) bps

Capital ratios and multiples (4)

Common Equity Tier 1 (CET1) ratio (4) 9.9%9.6% n.a. n.m. 30 bps

Tier 1 capital ratio (4) 11.4%11.7% 13.1% n.m. (30) bps

Total capital ratio (4) 13.4%14.0% 15.1% n.m. (60) bps

Assets-to-capital multiple (4) 17.0X 16.6X 16.7X n.m. 40 bps

Selected balance sheet and other information

Total assets $ 940,550 $ 859,745 $ 823,954 $ 80,805 9.4%

Securities 199,148 182,710 161,602 16,438 9.0%

Loans (net of allowance for loan losses) 435,229 408,850 378,241 26,379 6.5%

Derivative related assets 87,402 74,822 91,293 12,580 16.8%

Deposits 614,100 563,079 512,244 51,021 9.1%

Common equity 48,615 43,064 38,346 5,551 12.9%

Average common equity (2) 45,700 40,600 36,500 5,100 12.6%

Total capital risk-weighted assets 372,050 318,981 280,609 53,069 16.6%

Assets under management (AUM) 457,000 391,100 343,000 65,900 16.8%

Assets under administration (AUA) (5) 4,647,000 4,050,900 3,653,300 596,100 14.7%

Common share information

Shares outstanding (000s) – average basic 1,442,553 1,443,735 1,442,167 (1,182) (0.1)%

– average diluted 1,452,003 1,466,529 1,468,287 (14,526) (1.0)%

– end of period 1,442,233 1,441,056 1,445,303 1,177 0.1%

Dividends declared per common share $ 2.84 $ 2.53 $ 2.28 $ 0.31 12.3%

Dividend yield (6) 3.8%4.0% 4.5% n.m. (20) bps

Common share price (RY on TSX) $ 80.01 $ 70.02 $ 56.94 $ 9.99 14.3%

Market capitalization (TSX) 115,393 100,903 82,296 14,490 14.4%

Business information from continuing operations (number of)

Employees (full-time equivalent) (FTE) 73,498 74,247 74,377 (749) (1.0)%

Bank branches 1,366 1,372 1,361 (6) (0.4)%

Automated teller machines (ATMs) 4,929 4,973 5,065 (44) (0.9)%

Period average US$ equivalent of C$1.00 (7) $ 0.914 $ 0.977 $ 0.997 $ (0.063) (6.4)%

Period-end US$ equivalent of C$1.00 $ 0.887 $ 0.959 $ 1.001 $ (0.072) (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 short-

term 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

Wealth

Management Insurance Investor & Treasury

Services

Capital

Markets

OCanadian Banking

OCaribbean &

U.S. Banking

OCanadian Wealth

Management

OU.S. & International

Wealth

Management

OGlobal Asset

Management

OCanadian

Insurance

OInternational

Insurance

OCorporate and

Investment

Banking

OGlobal Markets

OOther

Corporate Support

OTechnology & Operations OFunctions

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 Achieved

Diluted EPS growth of 7% + 9.3% ✓

ROE of 18% + 19.0% ✓

Strong capital ratios (CET1) (1) 9.9% ✓

Dividend payout ratio 40% – 50% 47% ✓

(1) 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

Three year TSR (1) Five year TSR (1)

Royal Bank of Canada 23% 12%

2nd quartile 2nd quartile

Peer group average (excluding RBC) (2) 19% 8%

(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

For the year ended October 31 2014 2013 2012 2011 2010

Common share price (RY on TSX) – close, end of period $ 80.01 $ 70.02 $ 56.94 $ 48.62 $ 54.39

Dividends paid per share 2.76 2.46 2.22 2.04 2.00

Increase (decrease) in share price 14.3% 23.0% 17.1% (10.6)% (0.7)%

Total shareholder return 19.0% 28.0% 22.0% (6.7)% 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

Increase (decrease):

Total revenue $ 818 $ 213

PCL 93

PBCAE 75 8

Non-interest expense 510 110

Net income 121 53

Impact on EPS from continuing operations:

Basic $ .08 $ .04

Diluted .08 .04

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) 2014 2013 2012

U.S. dollar 0.914 0.977 0.997

British pound 0.551 0.626 0.630

Euro 0.680 0.740 0.771

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

Total revenue

Table 7

(Millions of Canadian dollars) 2014 2013 2012

Interest income $ 22,019 $ 21,148 $ 20,769

Interest expense 7,903 7,899 8,330

Net interest income $ 14,116 $ 13,249 $ 12,439

Net interest margin (on average earning assets) (1) 1.86% 1.88% 1.97%

Investments (2) $ 7,355 $ 6,408 $ 5,084

Insurance (3) 4,957 3,911 4,897

Trading 742 867 1,305

Banking (4) 4,090 3,909 3,399

Underwriting and other advisory 1,809 1,569 1,434

Other (5) 1,039 769 589

Non-interest income $ 19,992 $ 17,433 $ 16,708

Total revenue $ 34,108 $ 30,682 $ 29,147

(1) Net interest margin (on average earning assets) is calculated as net interest income divided by average earning assets.

(2) Includes securities brokerage commissions, investment management and custodial fees, and mutual fund revenue.

(3) 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.

(4) Includes service charges, foreign exchange revenue other than trading, card service revenue and credit fees.

(5) 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

(Millions of Canadian dollars) 2014 2013 2012

Total trading revenue

Net interest income $ 2,029 $ 1,661 $ 1,532

Non-interest income 742 867 1,305

Total trading revenue $ 2,771 $ 2,528 $ 2,837

Total trading revenue by product

Interest rate and credit $ 1,560 $ 1,611 $ 1,932

Equities 814 594 516

Foreign exchange and commodities 397 323 389

Total trading revenue $ 2,771 $ 2,528 $ 2,837

Trading revenue (teb) by product

Interest rate and credit $ 1,560 $ 1,611 $ 1,932

Equities 1,305 972 945

Foreign exchange and commodities 397 323 389

Total trading revenue (teb) $ 3,262 $ 2,906 $ 3,266

Trading revenue (teb) by product – Capital Markets

Interest rate and credit $ 1,293 $ 1,350 $ 1,584

Equities 1,244 942 925

Foreign exchange and commodities 333 286 323

Total Capital Markets trading revenue (teb) $ 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

(Millions of Canadian dollars) 2014 2013 2012

Salaries $ 4,834 $ 4,604 $ 4,089

Variable compensation 4,388 3,924 3,638

Benefits and retention compensation 1,561 1,464 1,216

Share-based compensation 248 256 139

Human resources $ 11,031 $ 10,248 $ 9,082

Equipment 1,147 1,081 913

Occupancy 1,330 1,235 1,130

Communications 779 728 748

Professional fees 763 753 666

Outsourced item processing 246 250 254

Amortization of other intangibles 666 566 494

Impairment of other intangibles 810 –

Impairment of investments in joint ventures and associates –20 168

Other 1,691 1,323 1,186

Non-interest expense $ 17,661 $ 16,214 $ 14,641

Efficiency ratio (1) 51.8% 52.8% 50.2%

(1) 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) 2014 2013 2012

Income taxes $ 2,706 $ 2,105 $ 2,028

Other taxes

Goods and services sales taxes $ 395 $ 370 $ 343

Payroll taxes 529 497 430

Capital taxes 86 85 79

Property taxes 106 119 120

Insurance premium taxes 51 50 50

Business taxes 825 16

$ 1,175 $ 1,146 $ 1,038

Total income and other taxes $ 3,881 $ 3,251 $ 3,066

Net income before income taxes $ 11,710 $ 10,447 $ 9,586

Canadian statutory income tax rate (1) 26.3% 26.2% 26.4%

Lower average tax rate applicable to subsidiaries (2.3) (1.8) (3.1)

Goodwill impairment 0.0 0.0 0.4

Tax-exempt income from securities (3.3) (2.8) (3.4)

Tax rate change 0.0 0.0 0.0

Effect of previously unrecognized tax loss, tax credit or

temporary differences (0.1) (0.5) (0.1)

Other 2.5 (1.0) 1.0

Effective income tax rate 23.1% 20.1% 21.2%

Effective total tax rate (2) 30.1% 28.0% 28.9%

(1) Blended Federal and Provincial statutory income tax rate.

(2) 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 2013 2012

(Millions of Canadian dollars,

except percentage amounts)

Personal &

Commercial

Banking

Wealth

Management Insurance

Investor &

Treasury

Services

Capital

Markets (1)

Corporate

Support (1) Total Total Total

Net interest income $ 9,743 $ 469 $ – $ 732 $ 3,485 $ (313) $ 14,116 $ 13,249 $ 12,439

Non-interest income 3,987 5,844 4,964 1,152 3,881 164 19,992 17,433 16,708

Total revenue $ 13,730 $ 6,313 $ 4,964 $ 1,884 $ 7,366 $ (149) $ 34,108 $ 30,682 $ 29,147

PCL 1,103 19 – – 44 (2) 1,164 1,237 1,299

PBCAE – – 3,573 – – – 3,573 2,784 3,621

Non-interest expense 6,563 4,800 579 1,286 4,344 89 17,661 16,214 14,641

Net income before

income taxes $ 6,064 $ 1,494 $ 812 $ 598 $ 2,978 $ (236) $ 11,710 $ 10,447 $ 9,586

Income tax 1,589 411 31 157 923 (405) 2,706 2,105 2,028

Net income from continuing

operations $ 4,475 $ 1,083 $ 781 $ 441 $ 2,055 $ 169 $ 9,004 $ 8,342 $ 7,558

Loss from discontinued

operations –––––– –– (51)

Net income $ 4,475 $ 1,083 $ 781 $ 441 $ 2,055 $ 169 $ 9,004 $ 8,342 $ 7,507

ROE (2) from continuing

operations 29.0% 19.2% 49.7% 19.8% 14.1% n.m. 19.0% 19.7% 19.7%

ROE (2) 19.0% 19.7% 19.6%

Average assets $ 368,800 $ 25,800 $ 12,000 $ 94,200 $ 392,300 $ 13,400 $ 906,500 $ 852,000 $ 803,000

(1) 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.

(2) 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

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 2013 2012

(Millions of Canadian dollars, except

percentage amounts)

Personal &

Commercial

Banking

Wealth

Management Insurance

Investor &

Treasury

Services

Capital

Markets

Corporate

Support Total Total Total

Net income available to common

shareholders from continuing

operations $ 4,405 $ 1,057 $ 773 $ 429 $ 1,990 $ 43 $ 8,697 $ 7,991 $ 7,203

Loss to common shareholders from

discontinued operations –– (51)

Net income available to common

shareholders $ 4,405 $ 1,057 $ 773 $ 429 $ 1,990 $ 43 $ 8,697 $ 7,991 $ 7,152

Average common equity from

continuing operations (1),(2) $ 15,200 $ 5,500 $ 1,550 $ 2,150 $ 14,100 $ 7,200 $ 45,700 $ 40,600 $ 36,100

Average common equity from

discontinued operations (1) –– 400

Total average common equity (1),(2) $ 15,200 $ 5,500 $ 1,550 $ 2,150 $ 14,100 $ 7,200 $ 45,700 $ 40,600 $ 36,500

ROE (3) 29.0% 19.2% 49.7% 19.8% 14.1% n.m. 19.0% 19.7% 19.6%

(1) Average common equity represent rounded figures.

(2) The amounts for the segments are referred to as attributed capital.

(3) ROE is based on actual balances of average common equity before rounding.

n.m. 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

(Millions of Canadian dollars)

Personal &

Commercial

Banking

Wealth

Management Insurance

Investor &

Treasury

Services

Capital

Markets

Corporate

Support Total

Net income from continuing operations $ 4,475 $ 1,083 $ 781 $ 441 $ 2,055 $ 169 $ 9,004

add: Non-controlling interests 1 (1) – (1) – (93) (94)

After-tax effect of amortization

of other intangibles 27 73 – 21 1 1 123

Intangibles writedown –6––2–8

Adjusted net income $ 4,503 $ 1,161 $ 781 $ 461 $ 2,058 $ 77 $ 9,041

less: Capital charge 1,439 521 147 205 1,333 696 4,341

Economic profit (loss) from

continuing operations $ 3,064 $ 640 $ 634 $ 256 $ 725 $ (619) $ 4,700

2013 2012

(Millions of Canadian dollars)

Personal &

Commercial

Banking

Wealth

Management Insurance

Investor &

Treasury

Services

Capital

Markets

Corporate

Support Total Total

Net income from continuing operations $ 4,380 $ 886 $ 595 $ 339 $ 1,700 $ 442 $ 8,342 $ 7,558

add: Non-controlling interests (4) – – (1) – (93) (98) (97)

After-tax effect of amortization

of other intangibles 26 67 – 21 1 2 117 112

Goodwill and intangibles writedown – – – ––––168

Adjusted net income $ 4,402 $ 953 $ 595 $ 359 $ 1,701 $ 351 $ 8,361 $ 7,741

less: Capital charge 1,285 492 129 180 1,053 563 3,702 3,681

Economic profit (loss) from

continuing operations $ 3,117 $ 461 $ 466 $ 179 $ 648 $ (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

(Millions of Canadian dollars, except percentage amounts) As reported

Total loss on sale

of RBC

Jamaica (1)

Provision for

post-employment

benefits and

restructuring

charges Adjusted

Total revenue $ 13,730 $ – $ – $ 13,730

PCL 1,103 – – 1,103

Non-interest expense 6,563 (100) (40) 6,423

Net income before taxes 6,064 100 40 6,204

Net income $ 4,475 $ 100 $ 32 $ 4,607

Selected balances and other information

Non-interest expense $ 6,563 $ (100) $ (40) $ 6,423

Total revenue 13,730 13,730

Efficiency ratio 47.8% 46.8%

Revenue growth rate 5.5% 5.5%

Non-interest expense growth rate 6.4% 4.2%

Operating leverage (0.9%) 1.3%

(1) 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

(Millions of Canadian dollars, except percentage amounts) As reported

Charge related to

certain individual life

insurance policies Adjusted

Total revenue $ 3,928 $ – $ 3,928

PBCAE 2,784 (160) 2,624

Non-interest expense 551 – 551

Net income before income taxes 593 160 753

Net income $ 595 $ 118 $ 713

Selected balance and other information

Net income available to common shareholders $ 586 $ 118 $ 704

Average common equity 1,400 1,400

ROE (1) 41.4% 49.8%

(1) 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) Adjusted As reported

Loss related to the

acquisition of the

remaining 50%

stake of RBC Dexia (2) Adjusted

Total revenue $ 1,804 $ – $ 1,804 $ 905 $ 36 $ 941

Non-interest expense 1,348 (44) 1,304 701 (188) 513

Net income before income taxes 456 44 500 204 224 428

Net income $ 339 $ 31 $ 370 $ 102 $ 213 $ 315

Selected balances and other information

Net income available to common

shareholders $ 326 $ 31 $ 357 $ 90 $ 213 $ 303

Average common equity 2,000 2,000 1,700 1,700

ROE (3) 16.5% 18.1% 5.3% 17.9%

(1) Related to the integration of Investor Services.

(2) 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.

(3) Based on actual balances before rounding.

22 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) 2014 2013 2012

Net interest income $ 9,743 $ 9,434 $ 9,059

Non-interest income 3,987 3,585 3,379

Total revenue 13,730 13,019 12,438

PCL 1,103 995 1,165

Non-interest expense 6,563 6,168 5,822

Net income before income taxes 6,064 5,856 5,451

Net income $ 4,475 $ 4,380 $ 4,056

Revenue by business

Canadian Banking $ 12,869 $ 12,220 $ 11,614

Caribbean & U.S. Banking 861 799 824

Key ratios

ROE 29.0% 30.5% 31.2%

NIM (1) 2.77% 2.78% 2.86%

Efficiency ratio (2) 47.8% 47.4% 46.8%

Efficiency ratio adjusted (2), (3) 46.8% n.a. n.a.

Operating leverage (0.9)% (1.3)% n.a.

Operating leverage adjusted (3) 1.3% n.a. n.a.

Selected average balance sheet information

Total assets $ 368,800 $ 355,300 $ 330,700

Total earning assets (4) 351,300 338,700 316,200

Loans and acceptances (4) 351,600 337,800 315,400

Deposits 278,800 262,200 243,900

Attributed capital 15,200 14,050 12,700

Other information

AUA (5) $ 214,200 $ 192,200 $ 179,200

AUM 4,000 3,400 3,100

Number of employees (FTE) 36,174 38,011 38,244

Effective income tax rate 26.2% 25.2% 25.6%

Credit information

Gross impaired loans as a % of average net loans and acceptances 0.54% 0.55% 0.58%

PCL on impaired loans as a % of average net loans and acceptances 0.31% 0.30% 0.37%

Estimated impact of U.S. dollar and Trinidad & Tobago dollar (TTD) translation on key income

statement items

(Millions of Canadian dollars, except percentage amounts) 2014 vs 2013

Increase (decrease):

Total revenue $46

Non-interest expense 39

Net income (1)

Percentage change in average US$ equivalent of C$1.00 (6)%

Percentage change in average TTD equivalent of C$1.00 (7)%

(1) NIM is calculated as Net interest income divided by Average total earning assets.

(2) Efficiency ratio is calculated as Non-interest expense divided by Total revenue.

(3) 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.

(4) 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).

(5) 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).

n.a. 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 after-

tax). In addition, our results in 2012 were favourably impacted by a mortgage prepayment interest adjustment of $125 million ($92 million after-

tax) 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 2013 2012

Net interest income $ 9,168 $ 8,875 $ 8,484

Non-interest income 3,701 3,345 3,130

Total revenue 12,869 12,220 11,614

PCL 928 908 1,015

Non-interest expense 5,687 5,464 5,163

Net income before income taxes 6,254 5,848 5,436

Net income $ 4,642 $ 4,352 $ 4,045

Revenue by business

Personal Financial Services $ 7,285 $ 6,948 $ 6,591

Business Financial Services 3,135 2,990 2,894

Cards and Payment Solutions 2,449 2,282 2,129

Key ratios

ROE 37.0% 37.5% 38.9%

NIM (1) 2.71% 2.72% 2.78%

Efficiency ratio (2) 44.2% 44.7% 44.5%

Operating leverage 1.2% (0.6%) n.a.

Selected average balance sheet information

Total assets $ 350,400 $ 338,000 $ 314,600

Total earning assets (3) 337,900 326,400 305,100

Loans and acceptances (3) 343,900 330,400 307,900

Deposits 263,600 248,100 230,300

Attributed capital 12,400 11,400 10,200

Other information

AUA (4) 205,200 183,600 171,100

Number of employees (FTE) 31,442 31,970 31,800

Effective income tax rate 25.8% 25.6% 25.6%

Credit information

Gross impaired loans as a % of average net loans and

acceptances 0.33% 0.36% 0.37%

PCL on impaired loans as a % of average net loans and

acceptances 0.27% 0.27% 0.33%

(1) NIM is calculated as Net interest income divided by Average total earning assets.

(2) Efficiency ratio is calculated as Non-interest expense divided by Total revenue.

(3) 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).

(4) 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).

n.a. 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 Table 19

(Millions of Canadian dollars,

except number of) 2014 2013 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

balances (1) 111,600 95,300 82,300

AUA – Self-directed

brokerage (1) 60,500 53,300 48,900

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) Represents year-end spot balances.

Personal

loans

Residential

mortgages

Personal

deposits

36,000

72,000

108,000

216,000

180,000

144,000

20,000

40,000

60,000

120,000

100,000

80,000

Average residential mortgages, personal loans and deposits

(Millions of Canadian dollars)

2014 2013 2012 2014 2013 2012 2014 2013 2012

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 Table 20

(Millions of Canadian dollars) 2014 2013 2012

Total revenue $ 3,135 $ 2,990 $ 2,894

Other information (average)

Business loans and acceptances 57,900 54,500 48,300

Business deposits (1) 98,500 91,300 83,900

(1) Includes GIC balances.

Business deposits

Business loans and

acceptances

8,000

16,000

24,000

32,000

40,000

64,000

56,000

14,000

28,000

42,000

70,000

56,000

112,000

98,000

84,000

2014 20122013 2014 20122013

Average business loans and acceptances and business deposits

(Millions of Canadian dollars)

48,000

26 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

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 trans-

action 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

(Millions of Canadian dollars) 2014 2013 2012

Total revenue $ 2,449 $ 2,282 $ 2,129

Other information

Average credit card balances 14,100 13,600 12,900

Net purchase volumes 84,200 76,200 70,500 Net purchase

volumes

Average credit

card balances

4,000

2,000

8,000

16,000

10,000

12,000

14,000

6,000

24,000

12,000

48,000

36,000

96,000

84,000

72,000

60,000

2014 20122013 2014 20122013

Average credit card balances and net purchase volumes

(Millions of Canadian dollars)

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) 2014 2013 2012

Total revenue $ 861 $ 799 $ 824

Other information

Net interest margin 4.30% 4.56% 5.19%

Average loans and acceptances 7,700 7,400 7,500

Average deposits 15,200 14,100 13,600

AUA 9,000 8,600 8,100

AUM 4,000 3,400 3,100

Number of:

Branches 93 116 121

ATM 309 351 341

Deposits

Loans and

acceptances

1,000

2,000

4,000

5,000

6,000

7,000

3,000

8,000

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2014 20122013 2014 20122013

Average loans and deposits (Millions of Canadian dollars)

Management’s Discussion and Analysis 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:

–5

th 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

(Millions of Canadian dollars, except number of and percentage amounts and as otherwise noted) 2014 2013 2012

Net interest income $ 469 $ 396 $ 393

Non-interest income

Fee-based revenue 4,185 3,463 2,964

Transactional and other revenue 1,659 1,628 1,478

Total revenue 6,313 5,487 4,835

PCL 19 51 (1)

Non-interest expense 4,800 4,219 3,809

Net income before income taxes 1,494 1,217 1,027

Net income $ 1,083 $ 886 $ 753

Revenue by business

Canadian Wealth Management $ 2,186 $ 1,889 $ 1,741

U.S. & International Wealth Management 2,430 2,225 1,977

U.S. & International Wealth Management (US$ millions) 2,221 2,174 1,973

Global Asset Management (1) 1,697 1,373 1,117

Key ratios

ROE 19.2% 15.8% 13.9%

Pre-tax margin (2) 23.7% 22.2% 21.2%

Selected average balance sheet information

Total assets $ 25,800 $ 21,600 $ 20,900

Loans and acceptances 15,700 12,100 9,900

Deposits 36,200 31,900 29,200

Attributed capital 5,500 5,400 5,150

Other information

Revenue per advisor (000s) (3) $ 983 $ 862 $ 793

AUA (4) 717,500 639,200 577,800

AUM (4) 452,300 387,200 339,600

Average AUA 690,500 609,500 554,800

Average AUM 427,800 367,600 322,500

Number of employees (FTE) 12,919 12,462 12,139

Number of advisors (5) 4,402 4,366 4,388

Estimated impact of U.S. dollar, British pound and Euro translation on key income

statement items

(Millions of Canadian dollars, except percentage amounts) 2014 vs. 2013

Increase (decrease):

Total revenue $ 212

Non-interest expense 180

Net income 21

Percentage change in average US$ equivalent of C$1.00 (6)%

Percentage change in average British pound equivalent of C$1.00 (12)%

Percentage change in average Euro equivalent of C$1.00 (8)%

(1) 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.

(2) Pre-tax margin is defined as net income before income taxes divided by Total revenue.

(3) Represents investment advisors and financial consultants of our Canadian and U.S. full-service wealth businesses.

(4) Represents year-end spot balances.

(5) 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 Table 24

(Millions of Canadian dollars) 2014 2013 2012

Total revenue $ 2,186 $ 1,889 $ 1,741

Other information

Total loans and acceptances (1) 3,000 2,500 2,300

Total deposits (1) 15,300 13,400 11,900

AUA 285,100 251,400 230,400

AUM 55,400 43,600 36,100

Average AUA 272,900 239,100 222,100

Average AUM 50,400 40,000 34,400

Total assets under fee-based

programs 166,700 139,400 120,700

(1) Represents an average amount, which is calculated using methods intended to

approximate the average of the daily balances for the period.

AUM

AUA

2014 2013 2012 2014 2012

50,000

100,000

150,000

200,000

250,000

8,000

16,000

24,000

32,000

56,000

48,000

300,000

40,000

350,000

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

2013

(1) 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 Table 25

(Millions of Canadian dollars, except otherwise

noted) 2014 2013 2012

Total revenue $ 2,430 $ 2,225 $ 1,977

Other information (Millions of U.S.

dollars)

Total revenue 2,221 2,174 1,973

Total loans, guarantees and

letters of credit (1) 14,500 12,100 10,200

Total deposits (1) 19,100 18,000 17,200

AUA 383,700 371,900 347,800

AUM 41,100 35,600 31,300

Average AUA 382,000 361,800 331,700

Average AUM 38,400 34,700 29,000

Total assets under fee-based

programs (2) 94,500 83,200 71,700

(1) Represents an average amount, which is calculated using methods intended to

approximate the average of the daily balances for the period.

(2) Represents amounts related to our U.S. wealth management businesses.

AUM

AUA

2014 2013 2012 2014 2013 2012

65,000

130,000

195,000

260,000

455,000

6,500

13,000

19,500

26,000

45,500

39,000

32,500

325,000

390,000

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

(1) Represents average balances, which are more representative of the impact client

balances have upon our revenue.

30 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

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 Table 26

2014 2013 2012

50,000

100,000

150,000

200,000

350,000

250,000

300,000

Average AUM (1) (Millions of Canadian dollars)

(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) 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. (1) 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

(Millions of Canadian dollars, except percentage amounts and as otherwise noted) 2014 2013 2012

Non-interest income

Net earned premiums $ 3,742 $ 3,674 $ 3,705

Investment income (1) 938 (17) 929

Fee income 284 271 263

Total revenue 4,964 3,928 4,897

Insurance policyholder benefits and claims (1) 3,194 2,326 3,055

Insurance policyholder acquisition expense 379 458 566

Non-interest expense 579 551 518

Net income before income taxes 812 593 758

Net income $ 781 $ 595 $ 713

Revenue by business

Canadian Insurance $ 2,911 $ 1,962 $ 2,992

International Insurance 2,053 1,966 1,905

Key ratios

ROE 49.7% 41.4% 46.7%

Selected average balance sheet information

Total assets $ 12,000 $ 11,900 $ 11,500

Attributed capital 1,550 1,400 1,500

Other information

Premiums and deposits (2) $ 5,164 $ 4,924 $ 4,849

Canadian Insurance 2,419 2,344 2,362

International Insurance 2,745 2,580 2,487

Insurance claims and policy benefit liabilities 8,564 8,034 $ 7,921

Fair value changes on investments backing policyholder liabilities (1) 439 (491) 410

Embedded value (3) 6,239 6,302 5,861

AUM 700 500 300

Number of employees (FTE) 3,126 2,965 2,744

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 $74

PBCAE 75

Non-interest expense –

Net income (2)

Percentage change in average US$ equivalent of C$1.00 (6)%

Percentage change in average British pound equivalent of C$1.00 (12)%

(1) 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.

(2) Premiums and deposits include premiums on risk-based insurance and annuity products, and individual and group segregated fund deposits, consistent with insurance industry practices.

(3) 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 legis-

lation 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 adjust-

ments 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 Table 28

2014 2013 2012

500

1,500

1,000

2,000

3,000

2,500

Premiums and deposits (Millions of Canadian dollars)

(Millions of Canadian dollars) 2014 2013 2012

Total revenue $ 2,911 $ 1,962 $ 2,992

Other information

Premiums and deposits

Life and health 1,266 1,245 1,280

Property and casualty 951 942 965

Annuity and segregated fund

deposits 202 157 117

Fair value changes on

investments backing

policyholder liabilities 490 (510) 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

2014 2013 2012

500

1,500

1,000

2,000

3,000

2,500

Premiums and deposits (Millions of Canadian dollars)

(Millions of Canadian dollars) 2014 2013 2012

Total revenue $ 2,053 $ 1,966 $ 1,905

Other information

Premiums and deposits

Life and health 2,128 2,069 1,980

Property and casualty 650 56

Annuity 611 461 451

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

(Millions of Canadian dollars, except percentage amounts and as otherwise noted) 2014 2013 2012

Net interest income $ 732 $ 671 $ 612

Non-interest income 1,152 1,133 293

Total revenue 1,884 1,804 905

Non-interest expense 1,286 1,348 701

Net income before income taxes 598 456 204

Net income $ 441 $ 339 $ 102

Key Ratios

ROE 19.8% 16.5% 5.3%

ROE adjusted (1) n.a. 18.1% 17.9%

Selected average balance sheet information

Total assets $ 94,200 $ 83,100 $ 66,900

Deposits 112,100 104,300 92,900

Client deposits 42,700 36,100 14,100

Wholesale funding deposits 69,400 68,200 78,800

Attributed capital 2,150 2,000 1,700

Other Information

AUA 3,702,800 3,208,800 2,886,900

Average AUA 3,463,000 3,052,600 2,781,800

Number of employees (FTE) 4,963 5,208 6,084

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

items

(Millions of Canadian dollars, except percentage amounts) 2014 vs. 2013

Increase (decrease):

Total revenue $69

Non-interest expense 57

Net income 7

Percentage change in average US$ equivalent of C$1.00 (6)%

Percentage change in average British pound equivalent of C$1.00 (12)%

Percentage change in average Euro equivalent of C$1.00 (8)%

(1) 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 non-

GAAP measures. For further details, refer to the Key performance and non-GAAP measures section.

n.a. 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 client-

focused 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

(Millions of Canadian dollars, except percentage amounts and as otherwise noted) 2014 2013 2012

Net interest income (1) $ 3,485 $ 2,872 $ 2,559

Non-interest income 3,881 3,708 3,629

Total revenue (1) 7,366 6,580 6,188

PCL 44 188 135

Non-interest expense 4,344 3,856 3,752

Net income before income taxes 2,978 2,536 2,301

Net income $ 2,055 $ 1,700 $ 1,576

Revenue by business

Corporate and Investment Banking $ 3,437 $ 3,014 $ 2,533

Global Markets 3,930 3,492 3,635

Other (1) 74 20

Key ratios

ROE 14.1% 14.1% 13.4%

Selected average balance sheet information

Total assets $ 392,300 $ 368,300 $ 349,200

Trading securities 103,800 100,800 90,400

Loans and acceptances 64,800 54,700 47,000

Deposits 47,600 38,400 33,700

Attributed capital 14,100 11,500 11,150

Other information

Number of employees (FTE) 3,927 3,729 3,658

Credit information

Gross impaired loans as a % of average net loans and acceptances 0.08% 0.42% 0.83%

PCL on impaired loans as a % of average net loans and acceptances 0.07% 0.34% 0.29%

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

items

(Millions of Canadian dollars, except percentage amounts) 2014 vs. 2013

Increase (decrease):

Total revenue $ 421

Non-interest expense 227

Net income 121

Percentage change in average US$ equivalent of C$1.00 (6)%

Percentage change in average British pound equivalent of C$1.00 (12)%

Percentage change in average Euro equivalent of C$1.00 (8)%

(1) 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.

2014 2013 2012

Europe

U.S.

Canada

Asia and other

Revenue by region

(Millions of Canadian dollars)

2,500

5,000

7,500

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 Table 32

(Millions of Canadian dollars) 2014 2013 2012

Total revenue (1) $ 3,437 $ 3,014 $ 2,533

Breakdown of revenue (1)

Investment banking 1,736 1,574 1,338

Lending and other (2) 1,701 1,440 1,195

Other information

Average assets 49,500 40,000 33,800

Average loans and acceptances 42,530 34,350 27,875

(1) 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.

(2) Comprises our corporate lending, client securitization, and global credit businesses.

2014 2013 2012

800

1,600

4,000

2,400

Investment banking

Lending and other

3,200

Breakdown of total revenue (Millions of Canadian dollars)

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 Table 33

(Millions of Canadian dollars) 2014 2013 2012

Total revenue (1) $ 3,930 $ 3,492 $ 3,635

Breakdown of revenue (1)

Fixed income, currencies and

commodities 1,801 1,834 2,052

Equities 1,243 989 927

Repo and secured financing (2) 886 669 656

Other information

Average assets 369,200 351,100 311,700

(1) 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.

(2) Comprises our secured funding businesses for internal businesses and external clients.

2014 2013 2012

4,000

Global equities

Fixed income, currencies

and commodities

Repo and secured financing

Breakdown of total revenue (Millions of Canadian dollars)

1,000

3,000

2,000

38 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

Other

Other comprises our legacy portfolio which consists of our bank-owned life insurance (BOLI) stable value products, U.S. commercial mortgage-

backed 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) 2014 2013 2012

Net interest income (loss) (1) $ (313) $ (124) $ (184)

Non-interest income (loss) 164 (12) 68

Total revenue (1) (149) (136) (116)

PCL (2) 3–

Non-interest expense 89 72 39

Net income (loss) before income taxes (1) (236) (211) (155)

Income taxes (recoveries) (1) (405) (653) (513)

Net income (2) $ 169 $ 442 $ 358

Other information

Number of employees (FTE) 12,388 11,871 11,508

(1) Teb adjusted.

(2) 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 adjust-

ments 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 2013

(Millions of Canadian dollars, except per share and percentage amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Net interest income $ 3,560 $ 3,647 $ 3,449 $ 3,460 $ 3,351 $ 3,392 $ 3,222 $ 3,284

Non-interest income 4,822 5,343 4,827 5,000 4,568 3,784 4,501 4,580

Total revenue $ 8,382 $ 8,990 $ 8,276 $ 8,460 $ 7,919 $ 7,176 $ 7,723 $ 7,864

PCL 345 283 244 292 334 267 287 349

PBCAE 752 1,009 830 982 878 263 938 705

Non-interest expense 4,340 4,602 4,332 4,387 4,151 3,999 4,015 4,049

Net income before income taxes $ 2,945 $ 3,096 $ 2,870 $ 2,799 $ 2,556 $ 2,647 $ 2,483 $ 2,761

Income taxes 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 $ 1.57 $ 1.59 $ 1.47 $ 1.39 $ 1.40 $ 1.52 $ 1.26 $ 1.35

– diluted 1.57 1.59 1.47 1.38 1.39 1.51 1.25 1.34

Segments – net income (loss)

Personal & Commercial Banking $ 1,151 $ 1,138 $ 1,115 $ 1,071 $ 1,070 $ 1,167 $ 1,039 $ 1,104

Wealth Management 285 285 278 235 202 233 222 229

Insurance 256 214 154 157 107 160 164 164

Investor & Treasury Services 113 110 112 106 91 104 65 79

Capital Markets 402 641 507 505 469 386 383 462

Corporate Support 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 20.8% 23.2% 23.3% 25.3% 17.8% 13.7% 23.1% 25.9%

Period average US$ equivalent of C$1.00 $ 0.900 $ 0.925 $ 0.907 $ 0.926 $ 0.960 $ 0.963 $ 0.982 $ 1.005

(1) Fluctuations in the Canadian dollar relative to other foreign currencies have affected our consolidated results over the period.

(2) 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 2013 (2) 2012 (2)

(Millions of Canadian dollars) Canada U.S.

Other

International Total Canada U.S.

Other

International Total Canada U.S.

Other

International Total

Continuing operations

Net interest income $ 11,121 $ 1,896 $ 1,099 $ 14,116 $ 10,956 $ 1,603 $ 690 $ 13,249 $ 10,391 $ 1,308 $ 740 $ 12,439

Non-interest income 10,495 4,256 5,241 19,992 8,606 3,835 4,992 17,433 9,059 3,569 4,080 16,708

Total revenue $ 21,616 $ 6,152 $ 6,340 $ 34,108 $ 19,562 $ 5,438 $ 5,682 $ 30,682 $ 19,450 $ 4,877 $ 4,820 $ 29,147

PCL 922 52 190 1,164 892 78 267 1,237 1,018 90 191 1,299

PBCAE 2,188 1 1,384 3,573 1,425 10 1,349 2,784 2,315 21 1,285 3,621

Non-interest expense 9,650 4,222 3,789 17,661 9,210 3,681 3,323 16,214 8,586 3,406 2,649 14,641

Income taxes 1,983 672 51 2,706 1,709 396 - 2,105 1,527 521 (20) 2,028

Net income from continuing

operations $ 6,873 $ 1,205 $ 926 $ 9,004 $ 6,326 $ 1,273 $ 743 $ 8,342 $ 6,004 $ 839 $ 715 $ 7,558

Net loss from discontinued

operations –– – – – – – – (51) – (51)

Net income $ 6,873 $ 1,205 $ 926 $ 9,004 $ 6,326 $ 1,273 $ 743 $ 8,342 $ 6,004 $ 788 $ 715 $ 7,507

(1) For further details, refer to Note 30 of our 2014 Annual Consolidated Financial Statements.

(2) 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 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. 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 provi-

sions 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

As at October 31 (Millions of Canadian dollars) 2014 2013 2012

Assets

Cash and due from banks $ 17,421 $ 15,550 $ 12,428

Interest-bearing deposits with banks 8,399 9,039 10,246

Securities 199,148 182,710 161,602

Assets purchased under reverse repurchase agreements and securities borrowed 135,580 117,517 112,257

Loans

Retail 334,987 320,627 300,288

Wholesale 102,236 90,182 79,949

Allowance for loan losses (1,994) (1,959) (1,996)

Segregated fund net assets 675 513 383

Other – Derivatives 87,402 74,822 91,293

– Other 56,696 50,744 57,504

Total assets $ 940,550 $ 859,745 $ 823,954

Liabilities

Deposits $ 614,100 $ 563,079 $ 512,244

Segregated fund liabilities 675 513 383

Other – Derivatives 88,982 76,745 96,761

– Other 174,431 162,505 162,030

Subordinated debentures 7,859 7,443 7,615

Total liabilities 886,047 810,285 779,033

Equity attributable to shareholders 52,690 47,665 43,160

Non-controlling interests 1,813 1,795 1,761

Total equity 54,503 49,460 44,921

Total liabilities and equity $ 940,550 $ 859,745 $ 823,954

(1) 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 trans-

actions 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 securi-

tized 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 re-

securitization exposures involves, among other things, reviewing the performance data of the underlying assets. We affirm our ratings each

quarter and formally confirm or assign a new rating at least annually. For further details on our activities to manage risks, refer to the Risk

management section.

Below is a description of our 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 2013

As at October 31 (Millions of Canadian dollars)

Notional of

committed

amounts (1)

Allocable

notional

amounts

Outstanding

loans

Maximum

exposure

to loss (3)

Notional of

committed

amounts (1)

Allocable

notional

amounts

Outstanding

loans (2)

Maximum

exposure

to loss (3)

Backstop liquidity facilities $ 31,019 $ 27,340 $ 864 $ 28,204 $ 31,675 $ 27,875 $ 896 $ 28,771

Credit enhancement facilities 2,928 2,815 – 2,815 2,889 2,785 – 2,785

Total $ 33,947 $ 30,155 $ 864 $ 31,019 $ 34,564 $ 30,660 $ 896 $ 31,556

(1) Based on total committed financing limit.

(2) Net of allowance for loan losses and write-offs.

(3) 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 securi-

tized 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 2013

As at October 31 (Millions) (US$) (C$) Total (C$) (US$) (C$) Total (C$)

Outstanding securitized assets

Credit cards $ 5,768 $ 510 $ 7,011 $ 6,096 $ 510 $ 6,866

Auto loans and leases 8,154 1,793 10,983 8,643 2,252 11,264

Student loans 2,536 – 2,858 3,374 – 3,518

Trade receivables 2,094 112 2,472 2,688 56 2,859

Asset-backed securities 767 – 864 859 – 896

Equipment receivables 1,301 – 1,466 1,649 – 1,720

Electricity market receivables –– – – 173 173

Dealer floor plan receivables 1,053 771 1,958 765 740 1,538

Fleet finance receivables 436 377 869 313 265 592

Insurance premiums 127 – 144 87 – 90

Corporate loan receivables –– –75 – 78

Residential mortgages – 1,275 1,275 – 1,530 1,530

Transportation finance 857 153 1,119 415 – 432

Total $ 23,093 $ 4,991 $ 31,019 $ 24,964 $ 5,526 $ 31,556

Canadian equivalent $ 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 multi-

seller conduits are internally rated using a rating system which is largely consistent with that of the external rating agencies.

Multiple independent debt rating agencies review all of the transactions in the multi-seller conduits. Transactions financed in the U.S. multi-

seller conduits are reviewed by Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch). Transactions in the

Canadian multi-seller conduits are 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 obliga-

tions 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, trans-

actions 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.

Risk Owners Independent Assurance

BOARD OF DIRECTORS

Business and support

functions embedded in

the business

Accountable for:

Identification

Assessment

Mitigation

Risk Oversight

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

Primarily provided by

internal audit

Independent

assurance to

management and the

Board of Directors on

the effectiveness of

risk management

practices

First Line of Defence Second Line of Defence Third Line of Defence

Group Executive & Group Risk Committee

and Senior Management Risk Committees

Risk Committee

Corporate Governance &

Public Policy Committee

Human Resources

Committee

Audit Committee

Monitoring and

Reporting of risk

relative to approved

policies and appetite

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 enterprise-

wide 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 risk-

specific 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 Enter-

prise 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

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.

SYSTEMIC

COMPETITIVE

REPUTATION

LEGAL &

REGULATORY

ENVIRONMENT

STRATEGIC

OPERATIONAL

CREDIT MARKET LIQUIDITY

& FUNDING INSURANCE REGULATORY

COMPLIANCE

LESS

Control & Influence

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) Description

1 1+ AAA Aaa

Investment Grade

2 1H AA+ Aa1

3 1M AA Aa2

4 1L AA- Aa3

5 2+H A+ A1

6 2+M A A2

7 2+L A- A3

8 2H BBB+ Baa1

9 2M BBB Baa2

10 2L BBB- Baa3

11 2-H BB+ Ba1

Non-investment Grade

12 2-M BB Ba2

13 2-L BB- Ba3

14 3+H B+ B1

15 3+M B B2

16 3+L B- B3

17 3H CCC+ Caa1

18 3M CCC Caa2

19 3L CCC- Caa3

20 4 CC Ca

21 5 D C Impaired

22 6 Bankruptcy Bankruptcy

* 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, transac-

tional 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 trans-

actions. 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

October 31

2013

Lending-related and other Trading-related Lending-related and other Trading-related

Loans and acceptances Loans and acceptances

(Millions of

Canadian dollars) Outstanding

Undrawn

commitments Other (1)

Repo-style

transactions Derivatives (2)

Total

exposure (3) Outstanding

Undrawn

commitments Other (1)

Repo-style

transactions Derivatives (2)

Total

exposure (3)

Residential mortgages $ 219,257 $ – $ 197 $ – $ – $ 219,454 $ 209,238 $ – $ – $ – $ – $ 209,238

Personal 96,021 83,965 154 – – 180,140 92,859 77,463 32 – – 170,354

Credit cards 14,924 21,689 – – – 36,613 14,142 20,347 – – – 34,489

Small business (4) 4,785 4,631 9 – – 9,425 4,388 4,043 41 – – 8,472

Retail $ 334,987 $ 110,285 $ 360 $ – $ – $ 445,632 $ 320,627 $ 101,853 $ 73 $ – $ – $ 422,553

Business (4)

Agriculture $ 5,694 $ 1,079 $ 55 $ – $ 51 $ 6,879 $ 5,441 $ 630 $ 51 $ – $ 30 $ 6,152

Automotive 6,209 4,880 299 – 697 12,085 6,167 3,602 255 – 451 10,475

Consumer goods 7,172 6,189 547 – 281 14,189 6,230 5,786 509 – 142 12,667

Energy 9,615 22,161 3,353 – 1,578 36,707 8,906 19,843 3,140 – 2,047 33,936

Non-bank financial services 5,688 9,775 13,414 160,514 23,290 212,681 4,903 8,529 13,374 134,290 18,368 179,464

Forest products 979 452 108 – 18 1,557 893 434 104 – 15 1,446

Industrial products 4,665 4,753 441 – 462 10,321 4,038 3,656 384 – 266 8,344

Mining & metals 1,320 2,870 876 – 174 5,240 1,074 2,648 807 – 158 4,687

Real estate & related 30,387 7,791 1,699 22 286 40,185 24,413 5,461 1,487 7 295 31,663

Technology & media 4,822 8,705 511 2 955 14,995 4,006 6,883 500 3 620 12,012

Transportation &

environment 5,432 3,624 1,702 – 810 11,568 5,593 3,032 1,574 – 564 10,763

Other 25,886 13,345 8,379 3,490 13,800 64,900 22,755 9,989 9,060 2,202 14,537 58,543

Sovereign (4) 4,628 5,303 47,798 25,863 8,170 91,762 4,396 5,527 34,789 27,193 8,319 80,224

Bank (4) 1,201 710 73,365 94,824 22,724 192,824 1,320 270 67,007 87,953 21,243 177,793

Wholesale $ 113,698 $ 91,637 $ 152,547 $ 284,715 $ 73,296 $ 715,893 $ 100,135 $ 76,290 $ 133,041 $ 251,648 $ 67,055 $ 628,169

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

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

(1) 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.

(2) Credit equivalent amount after factoring in master netting agreements.

(3) 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.

(4) 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

October 31

2013

Lending-related and other Trading-related Lending-related and other Trading-related

Loans and acceptances Loans and acceptances

(Millions of

Canadian dollars) Outstanding

Undrawn

commitments Other

Repo-style

transactions Derivatives

Total

exposure Outstanding

Undrawn

commitments Other

Repo-style

transactions Derivatives

Total

exposure

Canada $ 390,221 $ 142,841 $ 63,060 $ 56,308 $ 21,649 $ 674,079 $ 373,714 $ 129,632 $ 58,048 $ 55,394 $ 23,619 $ 640,407

U.S. 28,325 43,270 23,487 150,549 12,536 258,167 23,177 35,633 20,811 120,482 11,829 211,932

Europe 15,348 13,091 47,904 52,501 34,222 163,066 11,471 10,200 39,111 55,928 27,215 143,925

Other International 14,791 2,720 18,456 25,357 4,889 66,213 12,400 2,678 15,144 19,844 4,392 54,458

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

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

(1) 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

October 31

2013(4)

(Millions of Canadian dollars) Low risk

Medium

risk High risk Impaired Total Low risk

Medium

risk High risk Impaired Total

Retail (3)

Residential mortgages $ 206,699 $ 9,452 $ 2,428 $ 678 $ 219,257 $ 195,578 $ 10,561 $ 2,408 $ 691 $ 209,238

Personal 158,530 17,309 3,847 300 179,986 150,701 15,240 4,018 363 170,322

Credit cards 29,900 5,403 1,310 – 36,613 28,359 4,981 1,149 – 34,489

Small business 6,542 1,519 1,308 47 9,416 5,908 1,439 1,047 37 8,431

$ 401,671 $ 33,683 $ 8,893 $ 1,025 $ 445,272 $ 380,546 $ 32,221 $ 8,622 $ 1,091 $ 422,480

As at

October 31

2014

October 31

2013

(Millions of Canadian dollars)

Investment

grade

Non-investment

grade Impaired Total

Investment

grade

Non-investment

grade Impaired Total

Wholesale (5)

Business $ 82,714 $ 109,829 $ 950 $ 193,493 $ 73,865 $ 89,940 $ 1,107 $164,912

Sovereign 9,476 455 – 9,931 9,582 341 – 9,923

Bank 1,440 469 2 1,911 1,387 200 3 1,590

Total $ 93,630 $ 110,753 $ 952 $ 205,335 $ 84,834 $ 90,481 $ 1,110 $176,425

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

(1) 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.

(2) This amount is before allowance for impaired loans.

(3) 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.

(4) Comparative amounts have been restated to align with changes in our parameter estimation methodology and risk band classification during 2014.

(5) 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

October 31

2013

Loans and acceptances Other

(Millions of Canadian dollars) Outstanding

Undrawn

commitments (1) Securities (2)

Letters of

credit and

guarantees

Repo-style

transactions Derivatives

Total

European

exposure

Total

European

exposure

Gross exposure to Europe $ 15,348 $ 13,091 $ 22,916 $ 24,988 $ 52,501 $ 34,222 $ 163,066 $ 143,925

Less: Collateral held

against repo-style

transactions – – – – 51,386 – 51,386 54,416

Potential future

credit exposure

add-on amount – – – – – 22,403 22,403 18,827

Undrawn

commitments – 13,091 – 24,988 – – 38,079 27,719

Gross drawn exposure to

Europe $ 15,348 $ – $ 22,916 $ – $ 1,115 $ 11,819 $ 51,198 $ 42,963

Less: Collateral applied

against derivatives – – – – – 8,249 8,249 6,306

Add: Trading securities – – 15,471 – – – 15,471 13,816

Net exposure to Europe (3) $ 15,348 $ – $ 38,387 $ – $ 1,115 $ 3,570 $ 58,420 $ 50,473

(1) 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.

(2) 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).

(3) 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

October 31

2013

(Millions of Canadian dollars)

Loans

outstanding Securities

Repo-style

transactions Derivatives Total Total

U.K. $ 9,428 $ 12,486 $ 874 $ 1,245 $ 24,033 $ 17,515

Germany 914 8,602 36 620 10,172 8,270

France 569 3,176 50 489 4,284 3,856

Total U.K., Germany, France $ 10,911 $ 24,264 $ 960 $ 2,354 $ 38,489 $ 29,641

Greece $–$ –$ –$–$–$–

Ireland 619 104 8 152 883 174

Italy 26 67 – 57 150 325

Portugal 9–––96

Spain 350 105 – 21 476 491

Total Peripheral (2) $ 1,004 $ 276 $ 8 $ 230 $ 1,518 $ 996

Luxembourg $ 524 $ 1,136 $ 2 $ 247 $ 1,909 $ 5,666

Netherlands 882 2,893 20 465 4,260 2,861

Norway 369 2,613 – 29 3,011 2,925

Sweden 13 2,658 60 – 2,731 2,831

Switzerland 502 2,890 54 111 3,557 3,094

Other 1,143 1,657 11 134 2,945 2,459

Total Other Europe $ 3,433 $ 13,847 $ 147 $ 986 $ 18,413 $ 19,836

Total exposure to Europe $ 15,348 $ 38,387 $ 1,115 $ 3,570 $ 58,420 $ 50,473

(1) Geographic profile is based on country of risk, which reflects our assessment of the geographic risk associated with a given exposure. Typically, this is the residence of the borrower.

(2) 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

October 31

2013

(Millions of Canadian dollars) U.K. Germany France

Total

U.K.,

Germany,

France Greece Ireland Italy Portugal Spain

Total

Peripheral

Other

Europe

Total

Europe

Total

Europe

Financials $ 4,928 $ 6,948 $ 1,385 $ 13,261 $ – $ 92 $ 59 $ – $ 97 $ 248 $ 11,132 $ 24,641 $ 21,593

Sovereign 10,028 1,776 2,137 13,941 – 14 6 – 10 30 3,556 17,527 16,205

Corporate 9,077 1,448 762 11,287 – 777 85 9 369 1,240 3,725 16,252 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

Residential mortgages (1)

Home equity

lines of credit

(Millions of Canadian dollars, except percentage

amounts) Insured (2) Uninsured Total Total

Region (3)

Canada

Atlantic provinces $ 6,411 55% $ 5,169 45% $ 11,580 $ 2,068

Quebec 13,006 50 13,248 50 26,254 4,163

Ontario 35,354 40 51,974 60 87,328 17,104

Prairie provinces 25,813 53 22,826 47 48,639 10,310

B.C. and territories 15,585 38 25,887 62 41,472 9,768

Total Canada (4) $ 96,169 45% $ 119,104 55% $ 215,273 $ 43,413

U.S. 4 1 535 99 539 332

Other International 13 – 3,081 100 3,094 2,691

Total International $ 17 –% $ 3,616 100% $ 3,633 $ 3,023

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) The residential mortgages amounts exclude our third party mortgage-backed securities (MBS) of $351 million (2013 – $792 million).

(2) 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.

(3) Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island,

Nova Scotia and New Brunswick, 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) 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

October 31

2013

Canada

U.S. and Other

International Total Total

Amortization period

≤25 years 71% 91% 72% 68%

>25 years ≤30 years 23 9 22 22

>30 years ≤35 years 5–5 8

>35 years 1–1 2

Total 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 2013

Uninsured Uninsured

Residential

mortgages (1)

Homeline

products (2)

Residential

mortgages (1)

Homeline

products (2)

Region (3)

Atlantic provinces 74% 74% 73% 74%

Quebec 71 73 71 73

Ontario 71 71 71 71

Prairie provinces 74 73 73 73

B.C. and territories 69 67 69 67

U.S. 71 n.m. 69 n.m.

Other International 85 n.m. 83 n.m.

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%

(1) Residential mortgages excludes residential mortgages within the homeline products.

(2) Homeline products are comprised of both residential mortgages and home equity lines of credit.

(3) Region is based upon address of the property mortgaged. The Atlantic provinces are comprised of Newfoundland and Labrador, Prince Edward Island,

Nova Scotia and New Brunswick, 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

(Millions of Canadian dollars, except percentage amounts) 2014 2013

Personal & Commercial Banking $ 1,103 $ 995

Wealth Management 19 51

Capital Markets 44 188

Corporate Support and Other (1) (2) 3

Total PCL $ 1,164 $ 1,237

Canada (2)

Residential mortgages $27$27

Personal 393 391

Credit cards 345 346

Small business 44 32

Retail 809 796

Wholesale 123 149

PCL on impaired loans 932 945

U.S. (2)

Retail $2$3

Wholesale 40 32

PCL on impaired loans 42 35

Other International (2)

Retail $ 121 $86

Wholesale 69 171

PCL on impaired loans 190 257

Total PCL $ 1,164 $ 1,237

PCL ratio (3)

Total PCL ratio 0.27% 0.31%

Personal & Commercial Banking 0.31 0.30

Canadian Banking 0.27 0.27

Caribbean Banking 2.44 1.24

Wealth Management 0.12 0.42

Capital Markets 0.07 0.34

(1) 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.

(2) Geographic information is based on residence of borrower.

(3) 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) 2014 2013

Personal & Commercial Banking $ 1,913 $ 1,872

Wealth Management 11 96

Capital Markets 50 229

Investor & Treasury Services 23

Corporate Support and Other 11

Total GIL $ 1,977 $ 2,201

Canada (1)

Retail $ 659 $ 729

Wholesale 487 526

GIL 1,146 1,255

U.S. (1)

Retail $13$14

Wholesale 18 98

GIL 31 112

Other International (1)

Retail $ 353 $ 348

Wholesale 447 486

GIL 800 834

Total GIL $ 1,977 $ 2,201

Impaired loans, beginning balance $ 2,201 $ 2,250

Classified as impaired during the year (new impaired) (2) 1,317 1,769

Net repayments (2) (228) (265)

Amounts written off (1,329) (1,471)

Other (2), (3) 16 (82)

Impaired loans, balance at end of year $ 1,977 $ 2,201

GIL ratio (4)

Total GIL ratio 0.44% 0.52%

Personal & Commercial Banking 0.54 0.55

Canadian Banking 0.33 0.36

Caribbean Banking 11.05 9.91

Wealth Management 0.07 0.79

Capital Markets 0.08 0.42

(1) Geographic information is based on residence of borrower.

(2) 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.

(3) Includes Return to performing status during the year, Recoveries of loans and advances previously written off, Sold, and Exchange

and other movements.

(4) 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

(Millions of Canadian dollars) 2014 2013

Allowance for impaired loans

Personal & Commercial Banking $ 602 $ 486

Wealth Management 10 53

Capital Markets 18 58

Investor & Treasury Services 22

Total allowance for impaired loans 632 599

Canada (1)

Retail $ 143 $ 149

Wholesale 160 170

Allowance for impaired loans 303 319

U.S. (1)

Retail $1$2

Wholesale 16 19

Allowance for impaired loans 17 21

Other International (1)

Retail $ 172 $ 146

Wholesale 140 113

Allowance for impaired loans 312 259

Total allowance for impaired loans 632 599

Allowance for loans not yet identified as impaired 1,453 1,451

Total ACL $ 2,085 $ 2,050

(1) Geographic information is based on residence of borrower.

62 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

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 2013

As at

Oct. 31

For the year ended October 31 As at

Oct. 31

For the year ended October 31

(Millions of Canadian dollars) Average High Low Average High Low

Equity $9$10$17$4$8$9$19$5

Foreign exchange 32515 471

Commodities 23723 352

Interest rate 24 27 36 18 38 41 51 36

Credit specific (1) 8 9 11 6 10 10 12 7

Diversification (2) (18) (21) (30) (15) (23) (23) (31) (16)

Market risk VaR $ 28 $ 30 $ 39 $ 19 $41$44$51$38

Market risk SVaR $ 83 $ 92 $ 121 $ 69 $ 117 $ 95 $ 123 $ 73

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

(1) General credit spread risk is measured under interest rate VaR while credit specific risk captures issuer-specific credit spread volatility.

(2) 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 non-

derivative 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 foreign-

denominated 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.

Daily Trading Revenue Market Risk VaR

Nov 1, 2013

Jan 31, 2014

Apr 30, 2014

Jul 31, 2014

Oct 31, 2014

-50

-40

-30

-20

-10

Trading Revenue and VaR (Millions of Canadian dollars)

64 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

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

> 100

Frequency in Number of Days

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

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

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 2013 2012

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

value of

equity risk

Net interest

income risk (2)

Economic

value of

equity risk

Net interest

income risk (2)(Millions of Canadian dollars)

Canadian

dollar impact

U.S. dollar

impact (1) Total

Canadian

dollar impact

U.S. dollar

impact (1) Total

Before-tax impact of:

100bps increase in rates $ (910) $ (6) $ (916) $ 402 $ 12 $ 414 $ (540) $ 391 $ (497) $ 397

100bps decrease in rates 755 (1) 754 (346) (2) (348) 446 (303) 405 (322)

Before-tax impact of:

200bps increase in rates (1,893) (17) (1,910) 736 27 763 (1,160) 758 (1,005) 842

200bps decrease in rates 1,264 (5) 1,259 (431) (3) (434) 799 (398) 651 (370)

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

(1) Represents the impact on the non-trading portfolios held in our U.S. banking operations.

(2) 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 non-

trading market risk disclosures, which illustrates how we manage market risk for our assets and liabilities through different risk measures.

Linkage of market risk to selected balance sheet items Table 56

As at October 31, 2014

Market risk measure

(Millions of Canadian dollars)

Balance sheet

amount Traded risk (1)

Non-traded

risk (2)

Non-traded risk

primary risk sensitivity

Assets subject to market risk

Cash and due from banks (3) $ 17,421 $ 10,840 $ 6,581 Interest rate

Interest-bearing deposits with banks (4) 8,399 5,642 2,757 Interest rate

Securities

Trading (5) 151,380 144,607 6,773 Interest rate, credit spread

Available-for-sale (6) 47,768 – 47,768 Interest rate, credit spread, equity

Assets purchased under reverse repurchase

agreements and securities borrowed (7) 135,580 135,444 136 Interest rate

Loans

Retail (8) 334,987 16,614 318,373 Interest rate

Wholesale (9) 102,236 427 101,809 Interest rate

Allowance for loan losses (1,994) – (1,994) Interest rate

Segregated fund net assets (10) 675 – 675 Interest rate

Derivatives 87,402 83,981 3,421 Interest rate, foreign exchange

Other assets (11) 49,878 14,098 35,780 Interest rate

Assets not subject to market risk (12) 6,818

Total assets $ 940,550 $ 411,653 $ 522,079

Liabilities subject to market risk

Deposits (13) $ 614,100 $ 116,348 $ 497,752 Interest rate

Segregated fund liabilities (14) 675 – 675 Interest rate

Other

Obligations related to securities sold short 50,345 50,345 –

Obligations related to assets sold under repurchase

agreements and securities loaned (15) 64,331 64,210 121 Interest rate

Derivatives 88,982 87,145 1,837 Interest rate, foreign exchange

Other liabilities (16) 51,190 14,756 36,434 Interest rate

Subordinated debentures 7,859 – 7,859 Interest rate

Liabilities not subject to market risk (17) 8,565

Total liabilities $ 886,047 $ 332,804 $ 544,678

Total equity $ 54,503

Total liabilities and equity $ 940,550

(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)

Balance sheet

amount Traded risk (1)

Non-traded

risk (2)

Non-traded risk

primary risk sensitivity

Assets subject to market risk

Cash and due from banks (3) $ 15,550 $ 8,202 $ 7,348 Interest rate

Interest-bearing deposits with banks (4) 9,039 2,833 6,206 Interest rate

Securities

Trading (5) 144,023 137,718 6,305 Interest rate, credit spread

Available-for-sale (6) 38,687 – 38,687 Interest rate, credit spread, equity

Assets purchased under reverse repurchase agreements

and securities borrowed (7) 117,517 116,703 814 Interest rate

Loans

Retail (8) 320,627 16,168 304,459 Interest rate

Wholesale (9) 90,182 387 89,795 Interest rate

Allowance for loan losses (1,959) – (1,959) Interest rate

Segregated fund net assets (10) 513 – 513 Interest rate

Derivatives 74,822 71,678 3,144 Interest rate, foreign exchange

Other assets (11) 43,999 12,631 31,368 Interest rate

Assets not subject to market risk (12) 6,745

Total assets $ 859,745 $ 366,320 $ 486,680

Liabilities subject to market risk

Deposits (13) $ 563,079 $ 105,313 $ 457,766 Interest rate

Segregated fund liabilities (14) 513 – 513 Interest rate

Other

Obligations related to securities sold short 47,128 47,128 –

Obligations related to assets sold under repurchase

agreements and securities loaned (15) 60,416 60,147 269 Interest rate

Derivatives 76,745 75,368 1,377 Interest rate, foreign exchange

Other liabilities (16) 46,265 12,962 33,303 Interest rate

Subordinated debentures 7,443 – 7,443 Interest rate

Liabilities not subject to market risk (17) 8,696

Total liabilities $ 810,285 $ 300,918 $ 500,671

Total equity $ 49,460

Total liabilities and equity $ 859,745

(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 activ-

ities 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 unit-

specific 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, suprana-

tional 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 off-

balance 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)

Bank-owned

liquid assets

Securities

received as

collateral from

securities

financing and

derivative

transactions

Total liquid

assets

Encumbered

liquid assets

Unencumbered

liquid assets

Cash and holding at central banks $ 18,656 $ – $ 18,656 $ 1,054 $ 17,602

Deposits in other banks available overnight 3,855 – 3,855 333 3,522

Securities issued or guaranteed by sovereigns, central

banks or multilateral development banks (2), (3) 204,409 16,626 221,035 104,335 116,700

Other (2) 112,878 21,346 134,224 59,345 74,879

Liquidity assets eligible at central banks

(not included above) (4) 62 – 62 – 62

Undrawn credit lines granted by central banks (5) 8,372 – 8,372 – 8,372

Other assets eligible as collateral for discount (6) 125,627 – 125,627 – 125,627

Other liquid assets (7) 11,887 – 11,887 11,887 –

Total liquid assets $ 485,746 $ 37,972 $ 523,718 $ 176,954 $ 346,764

As at October 31, 2013 (8)

(Millions of Canadian dollars)

Bank-owned

liquid assets

Securities

received as

collateral from

securities

financing and

derivative

transactions

Total liquid

assets

Encumbered

liquid assets

Unencumbered

liquid assets

Cash and holding at central banks $ 12,711 $ – $ 12,711 $ 980 $ 11,731

Deposits in other banks available overnight 3,767 – 3,767 287 3,480

Securities issued or guaranteed by sovereigns, central

banks or multilateral development banks (2), (3) 202,007 15,470 217,477 103,446 114,031

Other (2) 83,008 20,509 103,517 51,921 51,596

Liquidity assets eligible at central banks

(not included above) (4) 60 – 60 – 60

Undrawn credit lines granted by central banks (5) 6,345 – 6,345 – 6,345

Other assets eligible as collateral for discount (6) 123,778 – 123,778 – 123,778

Other liquid assets (7) 11,678 – 11,678 11,678 –

Total liquid assets $ 443,354 $ 35,979 $ 479,333 $ 168,312 $ 311,021

As at

(Millions of Canadian dollars)

October 31

2014

October 31

2013 (8)

Royal Bank of Canada $ 221,007 $ 198,989

Foreign branches 47,570 37,619

Subsidiaries 78,187 74,413

Total unencumbered liquid assets $ 346,764 $ 311,021

(1) 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.

(2) The Bank-owned liquid assets amount includes securities owned outright by the bank or acquired via on-balance sheet securities finance transactions.

(3) Includes liquid securities issued by provincial governments and U.S. government sponsored entities working under U.S. Federal government’s conservatorship (e.g. Federal National Mortgage

Association and Federal Home Loan Mortgage Corporation).

(4) Includes Auction Rate Securities.

(5) 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.

(6) 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.

(7) Represents pledges related to OTC and exchange traded derivative transactions.

(8) 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

October 31

2013 (6)

Encumbered Unencumbered Encumbered Unencumbered

(Millions of Canadian dollars)

Pledged as

collateral Other (2)

Available as

collateral (3) Other (4) Total (5)

Pledged as

collateral Other (2)

Available as

collateral (3) Other (4) Total (5)

Cash and due from banks $ 243 $ 1,054 $ 15,839 $ 285 $ 17,421 $ 204 $ 980 $ 14,082 $ 284 $ 15,550

Interest-bearing deposits with banks 90 – 8,309 – 8,399 83 – 8,956 – 9,039

Securities

Trading 64,467 – 85,698 1,215 151,380 54,923 – 88,012 1,088 144,023

Available-for-sale 7,781 57 37,802 2,128 47,768 7,496 48 31,016 127 38,687

Assets purchased under reverse

repurchase agreements and

securities borrowed 111,056 – 68,044 8,432 187,532 104,878 – 53,779 3,925 162,582

Loans

Retail

Mortgage securities 37,441 – 29,042 – 66,483 44,229 – 19,190 – 63,419

Mortgage loans 26,589 – – 126,185 152,774 22,750 – – 123,069 145,819

Non-mortgage loans 8,915 – 97,223 9,592 115,730 8,174 – 94,365 8,850 111,389

Wholesale – – 36,777 65,459 102,236 – – 35,758 54,424 90,182

Allowance for loan losses – – – (1,994) (1,994) – – – (1,959) (1,959)

Segregated fund net assets – – – 675 675 – – – 513 513

Other – Derivatives – – – 87,402 87,402 – – – 74,822 74,822

– Others (7) 11,887 – – 44,809 56,696 11,678 – – 39,066 50,744

Total assets $ 268,469 $ 1,111 $ 378,734 $344,188 $992,502 $ 254,415 $ 1,028 $ 345,158 $304,209 $904,810

(1) 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.

(2) Includes assets restricted from use to generate secured funding due to legal or other constraints.

(3) 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.

(4) 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.

(5) Includes bank-owned liquid assets and securities received as collateral from off-balance sheet securities financing and derivative transactions.

(6) Amounts have been revised from those previously presented.

(7) 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 relationship-

based 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

(Millions of Canadian dollars)

October 31

2014

October 31

2013

Unsecured long-term funding $ 82,033 $ 69,903

Secured long-term funding 57,996 59,285

Commercial mortgage-backed securities sold 1,330 1,304

Subordinated debentures 7,832 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 oppor-

tunities 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

• SEC Registered Covered Bonds –

US$12 billion

• European Debt Issuance Program –

US$40 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

($128.3 billion as at October 31, 2014)

Other

Euro

Canadian dollar

43%

U.S. dollar

45%

Long-term debt – funding mix by product

($128.3 billion as at October 31, 2014)

Unsecured

funding

55%

MBS/CMB

(1)

18%

Covered

bonds

20%

Cards and auto

securitization

(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

(Millions of Canadian dollars)

Less than 1

month

1to3

months

3to6

months

6to12

months

Less than

1 year

sub-total

1 year

to 2

years

2 years

and

greater Total

Deposits from banks (2) $ 3,034 $ 277 $ 11 $ 19 $ 3,341 $ – $ – $ 3,341

Certificates of deposit and commercial paper 859 4,411 10,880 12,873 29,023 2,746 – 31,769

Asset-backed commercial paper (3) 518 1,320 1,835 4,114 7,787 – – 7,787

Senior unsecured medium-term notes (4) 592 4,573 3,341 3,970 12,476 16,809 38,254 67,539

Senior unsecured structured notes (5) 336 578 458 1,058 2,430 597 4,729 7,756

Mortgage securitization 58 699 950 1,435 3,142 3,751 16,395 23,288

Covered bonds/asset-backed securities (6) 761 22 2,391 2,635 5,809 6,934 20,246 32,989

Subordinated liabilities 200 – – 1,500 1,700 1,500 4,632 7,832

Other (7) 3,203 51 596 1,111 4,961 42 3,963 8,966

Total $ 9,561 $ 11,931 $ 20,462 $ 28,715 $ 70,669 $ 32,379 $ 88,219 $ 191,267

Of which:

– Secured $ 4,455 $ 2,041 $ 5,176 $ 8,184 $ 19,856 $ 10,685 $ 36,641 $ 67,182

– Unsecured 5,106 9,890 15,286 20,531 50,813 21,694 51,578 124,085

As at October 31, 2013

(Millions of Canadian dollars)

Less than 1

month

1to3

months

3to6

months

6to12

months

Less than

1 year

sub-total

1 year

to 2

years

2 years

and

greater Total

Deposits from banks (2) $ 1,820 $ 164 $ 10 $ 354 $ 2,348 $ $ – $ 2,348

Certificates of deposit and commercial paper 549 3,350 17,122 9,969 30,990 2,088 624 33,702

Asset-backed commercial paper (3) – 626 1,586 1,717 3,929 – – 3,929

Senior unsecured medium-term notes (4) – 2,333 3,162 4,608 10,103 9,771 35,670 55,544

Senior unsecured structured notes (5) 274 283 565 808 1,930 828 3,131 5,889

Mortgage securitization 758 2,477 4,078 2,040 9,353 2,845 18,251 30,449

Covered bonds/asset-backed securities (6) 54 94 132 213 493 6,007 21,761 28,261

Subordinated liabilities 1,000 – – 600 1,600 1,700 4,121 7,421

Other (7) 4,401 55 163 1,148 5,767 – 3,390 9,157

Total $ 8,856 $ 9,382 $ 26,818 $ 21,457 $ 66,513 $ 23,239 $ 86,948 $ 176,700

Of which:

– Secured $ 5,040 $ 3,197 $ 5,796 $ 3,970 $ 18,003 $ 8,852 $ 40,011 $ 66,866

– Unsecured 3,816 6,185 21,022 17,487 48,510 14,387 46,937 109,834

(1) Excludes bankers’ acceptances.

(2) Only includes deposits raised by treasury. Excludes deposits associated with services we provide to these banks (e.g., custody, cash management).

(3) Only includes consolidated liabilities, including our collateralized commercial paper program.

(4) Includes deposit notes.

(5) Includes notes where the payout is tied to movements in foreign exchange, commodities and equities.

(6) Includes credit card, auto and mortgages.

(7) 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).

74 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

(Millions of Canadian dollars)

Less than

1 month

1to3

months

3to6

months

6to9

months

9to12

months

1 year

to 2 years

2 years

to 5 years

5 years

and greater

With no

specific

maturity Total

Assets

Cash and deposits with

banks $ 22,871 $ 218 $ – $ – $ – $ – $ – $ – $ 2,731 $ 25,820

Securities

Trading (1) 94,025 13 65 55 48 229 558 5,236 51,151 151,380

Available-for-sale 4,450 3,739 2,528 433 1,113 3,417 18,307 11,959 1,822 47,768

Assets purchased under

reverse repurchase

agreements and securities

borrowed 54,860 24,728 28,241 8,261 10,361 2,142 – – 6,987 135,580

Loans (net of allowance for

loan losses) 19,260 10,776 7,490 14,961 16,081 73,788 176,063 29,787 87,023 435,229

Other

Customers’ liability under

acceptances 6,218 2,013 399 433 2,393 – 6 – – 11,462

Derivatives 4,145 7,275 3,483 2,673 1,909 8,507 21,331 38,071 8 87,402

Other financial assets 18,729 672 585 169 106 245 281 828 828 22,443

Total financial assets $ 224,558 $ 49,434 $ 42,791 $ 26,985 $ 32,011 $ 88,328 $ 216,546 $ 85,881 $ 150,550 $ 917,084

Other non-financial assets 1,847 779 679 409 52 589 1,637 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 $ 49,523 $ 9,727 $ 310,045 $ 530,359

Secured borrowing 561 2,715 2,950 5,331 4,786 9,753 21,099 10,135 – 57,330

Covered bonds 748 – 2,558 – – 4,908 14,556 3,641 – 26,411

Other

Acceptances 6,218 2,013 399 433 2,393 – 6 – – 11,462

Obligations related to

securities sold short 50,345 ––––– – – –50,345

Obligations related to

assets sold under

repurchase agreements

and securities loaned 58,208 1,252 1,306 1,051 574 – – – 1,940 64,331

Derivatives 3,745 6,997 3,845 3,351 2,042 10,345 22,295 36,359 3 88,982

Other financial liabilities 18,094 1,121 492 170 298 309 530 4,033 357 25,404

Subordinated debentures 200––––– –7,659 – 7,859

Total financial liabilities $ 169,309 $ 36,724 $ 38,922 $ 28,938 $ 31,674 $ 65,008 $ 108,009 $ 71,554 $ 312,345 $ 862,483

Other non-financial

liabilities 1,454 2,970 674 57 78 917 2,456 7,956 7,002 23,564

Equity –––––– – –54,503 54,503

Total liabilities and equity $ 170,763 $ 39,694 $ 39,596 $ 28,995 $ 31,752 $ 65,925 $ 110,465 $ 79,510 $ 373,850 $ 940,550

Off-balance sheet items

Financial guarantees $ 646 $ 2,391 $ 2,289 $ 1,982 $ 2,970 $ 1,325 $ 5,292 $ 254 $ 59 $ 17,208

Lease commitments 58 114 167 165 161 634 1,220 1,291 – 3,810

Commitments to extend

credit 1,660 6,352 7,329 6,806 8,513 19,768 108,250 11,539 2,299 172,516

Other commitments 127 420 575 879 2,578 289 984 263 62,319 68,434

Total off-balance sheet

items $ 2,491 $ 9,277 $ 10,360 $ 9,832 $ 14,222 $ 22,016 $ 115,746 $ 13,347 $ 64,677 $ 261,968

(1) 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.

(2) 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

(Millions of Canadian dollars)

Less than

1 month

1to3

months

3to6

months

6to9

months

9to12

months

1 year

to 2 years

2 years

to 5 years

5 years

and greater

With no

specific

maturity Total

Assets

Cash and deposits with banks $ 12,989 $ – $ – $ – $ – $ – $ – $ – $ 11,600 $ 24,589

Securities

Trading (1) 93,407 40 19 40 38 249 534 4,507 45,189 144,023

Available-for-sale 3,420 4,641 1,268 796 1,116 2,452 10,021 13,140 1,833 38,687

Assets purchased under

reverse repurchase

agreements and securities

borrowed (2) 59,226 10,653 18,506 6,268 10,207 1,543 – – 11,114 117,517

Loans (net of allowance for

loan losses) (2) 14,489 9,689 6,136 10,459 19,614 45,686 181,766 30,918 90,093 408,850

Other

Customers’ liability under

acceptances 5,224 1,621 470 254 2,384 – – – – 9,953

Derivatives 2,349 5,028 2,338 2,353 1,627 6,284 21,056 33,786 1 74,822

Other financial assets 16,082 847 754 114 122 270 447 639 575 19,850

Total financial assets $ 207,186 $ 32,519 $ 29,491 $ 20,284 $ 35,108 $ 56,484 $ 213,824 $ 82,990 $ 160,405 $ 838,291

Other non-financial assets 1,273 453 311 147 741 406 1,341 2,227 14,555 21,454

Total assets $ 208,459 $ 32,972 $ 29,802 $ 20,431 $ 35,849 $ 56,890 $ 215,165 $ 85,217 $ 174,960 $ 859,745

Liabilities and equity

Deposits (3)

Unsecured borrowing (2) $ 22,556 $ 16,258 $ 27,847 $ 11,422 $ 14,107 $ 52,027 $ 46,194 $ 10,830 $ 281,237 $ 482,478

Secured borrowing (2) 812 3,800 6,685 3,656 4,265 7,190 21,667 11,218 – 59,293

Covered bonds – – – – – 3,226 14,612 3,470 – 21,308

Other

Acceptances 5,224 1,621 470 254 2,384 – – – – 9,953

Obligations related to

securities sold short 47,128 – – – – – – – – 47,128

Obligations related to

assets sold under

repurchase agreements

and securities loaned 53,389 1,991 1,308 877 290 1,500 – – 1,061 60,416

Derivatives 3,021 5,233 2,569 2,536 2,312 11,365 17,739 31,970 – 76,745

Other financial liabilities (2) 17,123 875 692 268 344 383 662 3,969 123 24,439

Subordinated debentures – – – – – 217 – 7,226 – 7,443

Total financial liabilities $ 149,253 $ 29,778 $ 39,571 $ 19,013 $ 23,702 $ 75,908 $ 100,874 $ 68,683 $ 282,421 $ 789,203

Other non-financial

liabilities (2) 1,606 2,834 686 114 135 1,085 1,692 7,349 5,581 21,082

Equity – – – – – – – – 49,460 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

Off-balance sheet items

Financial guarantees $ 392 $ 1,341 $ 2,336 $ 1,938 $ 2,985 $ 2,295 $ 4,113 $ 141 $ 51 $ 15,592

Lease commitments 62 122 181 179 173 662 1,389 1,346 – 4,114

Commitments to extend credit 3,757 6,843 4,780 6,488 7,320 18,031 91,288 13,615 1,044 153,166

Other commitments 156 405 444 799 2,292 371 585 169 57,749 62,970

Total off-balance sheet items $ 4,367 $ 8,711 $ 7,741 $ 9,404 $ 12,770 $ 21,359 $ 97,375 $ 15,271 $ 58,844 $ 235,842

(1) 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.

(2) Amounts have been revised from those previously presented.

(3) A major portion of relationship-based deposits are repayable on demand or at short notice on a contractual basis while, in practice, these customer balances form a core base, 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)

demand

Within

1 year

to 2 years

2 years

to 5 years

5 years

and

greater Total

Financial liabilities

Deposits (1) $ 289,204 $ 161,953 $ 54,385 $ 84,609 $ 22,967 $ 613,118

Other

Acceptances – 11,456 – 6 – 11,462

Obligations related to securities sold short – 50,345 – – – 50,345

Obligations related to assets sold under repurchase

agreements and securities loaned 1,941 62,391 – – – 64,332

Other liabilities 358 20,174 309 530 4,013 25,384

Subordinated debentures – 200 – – 7,632 7,832

291,503 306,519 54,694 85,145 34,612 772,473

Off-balance sheet items

Financial guarantees (2) 5,883 11,206 111 7 1 17,208

Operating leases – 665 634 1,220 1,291 3,810

Commitments to extend credit (2) 137,696 34,819 1 – – 172,516

143,579 46,690 746 1,227 1,292 193,534

Total financial liabilities and off-balance sheet items $ 435,082 $ 353,209 $ 55,440 $ 86,372 $ 35,904 $ 966,007

As at October 31, 2013

(Millions of Canadian dollars)

demand

Within

1 year

to 2 years

2 years

to 5 years

5 years

and

greater Total

Financial liabilities

Deposits (1),(3) $ 264,287 $ 128,206 $ 62,267 $ 81,738 $ 25,534 $ 562,032

Other

Acceptances (3) – 9,953 – – – 9,953

Obligations related to securities sold short – 47,128 – – – 47,128

Obligations related to assets sold under repurchase

agreements and securities loaned 1,061 57,855 1,500 – – 60,416

Other liabilities (3) 123 19,277 350 678 4,095 24,523

Subordinated debentures – – 200 – 7,208 7,408

265,471 262,419 64,317 82,416 36,837 711,460

Off-balance sheet items

Financial guarantees (2) 5,850 9,550 178 14 – 15,592

Operating leases – 717 662 1,389 1,346 4,114

Commitments to extend credit (2) 117,753 35,413 – – – 153,166

123,603 45,680 840 1,403 1,346 172,872

Total financial liabilities and off-balance sheet items $ 389,074 $ 308,099 $ 65,157 $ 83,819 $ 38,183 $ 884,332

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

(1) 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.

(2) We believe that it is highly unlikely that all or substantially all of these guarantees and commitments will be drawn or settled within one year, and contracts may expire without being drawn or

settled. The management of the liquidity risk associated with potential extensions of funds is outlined in the preceding Risk measurement section.

(3) 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 Outlook

Moody’s P-1 Aa3 negative (3)

Standard & Poor’s A-1+ AA- negative (4)

Fitch Ratings F1+ AA stable

Dominion Bond Rating Services R-1(high) AA stable

(1) 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.

(2) 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.

(3) On June 11, 2014, Moody’s revised our outlook to negative from stable for our supported senior debt and uninsured

deposit ratings.

(4) 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-, two-

or three-notch downgrade to our credit ratings. These additional collateral obligations are incremental requirements for each successive

downgrade and do not represent the cumulative impact of multiple downgrades. The amounts reported change periodically as a result of several

factors, including the transfer of trading activity to centrally cleared financial market infrastructures and exchanges, the expiration of transactions

with downgrade triggers, the imposition of internal limitations on new agreements to exclude downgrade triggers, as well as normal course mark

to market of positions with collateralized counterparties moving from a negative to a positive position. There is no outstanding senior debt

issued in the market that contains rating triggers which would lead to early prepayment of principal.

Additional contractual obligations for rating downgrades Table 65

As at

October 31

2014

October 31

2013

(Millions of Canadian dollars)

One-notch

downgrade

Two-notch

downgrade

Three-notch

downgrade

One-notch

downgrade

Two-notch

downgrade

Three-notch

downgrade

Contractual derivatives funding or margin requirements $ 518 $ 143 $ 790 $ 616 $ 171 $ 762

Other contractual funding or margin requirements (1) 396 62 – 490 187 95

(1) 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 author-

ities 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 decision-

making 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 success-

fully 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 reputa-

tional 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 require-

ments 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 require-

ments 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 federally-

chartered 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 strat-

egies 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 counter-

parties.

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 trans-

parent 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).

2014 2013 2012

Payroll taxes

Goods and services

sales taxes

Income taxes

Capital taxes

Property taxes

Insurance premium taxes

Business taxes

1,750

875

2,625

3,500

Income and other tax expense – by category

(Millions of Canadian dollars)

2014 2013 2012

Other International

U.S.

Canada

Income and other tax expense – by geography

(Millions of Canadian dollars)

1,750

875

2,625

3,500

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 reputa-

tional 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 gross-

adjusted 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 require-

ments. All of the components in the capital plan are monitored throughout the year and are revised as deemed appropriate.

Total capital requirements

Capital available and target

capital ratios

Capital impacts of

severe but plausible

scenarios

Enterprise-wide

Stress Testing ICAAP

Capital Plan and

Business

Operating Plan

Capital impacts of severe but plausible scenarios

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” method-

ology 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) on-

balance 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 Table 66

Basel III

Capital Ratios

OSFI regulatory target requirements for large banks under Basel III RBC capital

ratios as at

October 31,

2014

Meet or

exceed

OSFI

regulatory

target

ratios

Minimum Capital

Conservation

Buffer

Minimum

including

Capital

Conservation

Buffer

D-SIBs

Surcharge (1)

Minimum

including Capital

Conservation

Buffer and D-SIBs

surcharge (1)

Common Equity Tier 1 (%) > 4.5% 2.5% > 7.0% 1.0% > 8.0% 9.9% ✓

Tier 1 capital (%) > 6.0% 2.5% > 8.5% 1.0% > 9.5% 11.4% ✓

Total capital (%) > 8.0% 2.5% > 10.5% 1.0% > 11.5% 13.4% ✓

(1) 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

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

October 31

2014

October 31

2013

Capital (1)

CET1 capital $ 36,406 $ 30,541

Tier 1 capital 42,202 37,196

Total capital 50,020 44,716

RWA used in calculation of capital ratios (1), (2)

CET1 capital RWA $ 368,594 $ 318,981

Tier 1 capital RWA 369,976 318,981

Total capital RWA 372,050 318,981

Total capital RWA consisting of: (1)

Credit risk $ 286,327 $ 232,641

Market risk 38,460 42,184

Operational risk 47,263 44,156

Total capital risk-weighted assets $ 372,050 $ 318,981

Capital ratios and multiples (1), (3)

CET1 ratio 9.9% 9.6%

Tier 1 capital ratio 11.4% 11.7%

Total capital ratio 13.4% 14.0%

Assets-to-capital multiple (4) 17.0X 16.6X

Gross-adjusted assets (GAA) (billions) (4) $ 885.0 $ 807.0

(1) Capital, RWA and capital ratios and multiples are calculated using OSFI CAR based on the Basel III framework.

(2) 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.

(3) 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.

(4) 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.

Tier 1 Capital

Common Equity Tier 1 (CET1) Additional Tier 1 Capital

Common shares

Retained earnings

Other components of equity

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)

Preferred shares

Non-controlling interests in subsidiaries

Tier 1 instruments

Significant investments in insurance

subsidiaries and CET1 instruments in

other Financial Institutions

Mortgage servicing rights

Deferred tax assets relating to

temporary differences

Total Capital

Tier 2 Capital

Subordinated debentures

Certain loan loss allowances

Non-controlling interests in subsidiaries

Tier 2 instruments

Deductions

Threshold

Deductions(1)

Higher quality

capital

Lower quality

capital

Non-significant investments in Tier 2

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 2 instruments

Significant investments in other Financial

Institutions and insurance subsidiaries

Tier 1 instruments

(1) 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%.

(2) Non-significant investments are subject to certain CAR criteria that drive the amount eligible for deduction.

Regulatory Capital Table 68

All-in basis

(Millions of Canadian dollars) 2014 2013

CET1 capital: instruments and reserves and regulatory adjustments

Directly issued qualifying common share capital (and equivalent for non-

joint stock companies) plus related stock surplus $ 14,684 $ 14,607

Retained earnings 31,442 28,124

Accumulated other comprehensive income (and other reserves) 2,418 1,207

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) 12 11

Regulatory adjustments applied to CET1 under Basel III (12,150) (13,408)

Common Equity Tier 1 capital (CET1) $ 36,406 $ 30,541

Additional Tier 1 capital: instruments and regulatory adjustments

Directly issued qualifying Additional Tier 1 instruments plus related stock

surplus 1,000 –

Directly issued capital instruments to phase out from Additional Tier 1 4,794 6,652

Additional Tier 1 instruments issued by subsidiaries and held by third

parties (amount allowed in group AT1) 23

Regulatory adjustments applied to Additional Tier 1 under Basel III ––

Additional Tier 1 capital (AT1) 5,796 6,655

Tier 1 capital (T1 = CET1 + AT1) $ 42,202 $ 37,196

Tier 2 capital: instruments and provisions and regulatory adjustments

Directly issued qualifying Tier 2 instruments plus related stock surplus 2,010 –

Directly issued capital instruments subject to phase out from Tier 2 5,595 7,234

Tier 2 instruments issued by subsidiaries and held by third parties (amount

allowed in group Tier 2) 31 24

Collective allowance 182 262

Other ––

Regulatory adjustments applied to Tier 2 under Basel III ––

Tier 2 capital (T2) $ 7,818 $ 7,520

Total capital (TC = T1 + T2) $ 50,020 $ 44,716

88 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

2014 vs. 2013

Continuity of CET1 ratio (Basel III)

October 31, 2013 (1) Internal

capital

generation (2)

CVA

phase-in

OtherAmendments

to IAS 19R

Employee

Benefits

RWA

increase

Threshold

deductions

Risk

parameters

update

October 31, 2014 (1)

9.6%

144 bps 15 bps (53) bps

(38) bps

(30) bps

(9) bps 2 bps 9.9%

(1) Represents round figures.

(2) 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 2013

As at October 31 (Millions of Canadian dollars, except

percentage amounts) Exposure (1)

Average

of risk

weights (2)

Risk-weighted assets

Standardized

approach

Advanced

approach Other Total Total

Credit risk

Lending-related and other

Residential mortgages $ 191,905 6% $ 1,048 $ 9,525 $ – $ 10,573 $ 8,490

Other retail 229,594 21% 4,775 44,201 – 48,976 48,418

Business 231,982 55% 17,594 109,354 – 126,948 101,780

Sovereign 58,453 13% 2,538 5,145 – 7,683 3,910

Bank 81,477 9% 2,543 4,536 – 7,079 5,409

Total lending-related and other $ 793,411 25% $ 28,498 $ 172,761 $ – $ 201,259 $ 168,007

Trading-related

Repo-style transactions $ 284,715 2% $ 24 $ 4,864 $ 24 $ 4,912 $ 2,662

Derivatives – including CVA – CET1

phase-in adjustment 73,296 37% 1,447 15,116 10,312 26,875 16,489

Total trading-related $ 358,011 9% $ 1,471 $ 19,980 $ 10,336 $ 31,787 $ 19,151

Total lending-related and other and

trading-related $ 1,151,422 20% $ 29,969 $ 192,741 $ 10,336 $ 233,046 $ 187,158

Bank book equities 2,035 100% – 2,025 – 2,025 1,712

Securitization exposures 39,936 15% 342 5,488 – 5,830 6,789

Regulatory scaling factor n.a. n.a. n.a. 11,938 – 11,938 9,813

Other assets 43,764 69% n.a. n.a. 30,032 30,032 27,169

Total credit risk $ 1,237,157 23% $ 30,311 $ 212,192 $ 40,368 $ 282,871 $ 232,641

Market risk

Interest rate $ 2,211 $ 4,115 $ – $ 6,326 $ 3,361

Equity 178 1,443 – 1,621 3,330

Foreign exchange 1,224 50 – 1,274 1,661

Commodities 2,025 5 – 2,030 990

Specific risk 11,640 3,340 – 14,980 21,948

Incremental risk charge – 12,229 – 12,229 10,894

Total market risk $ 17,278 $ 21,182 $ – $ 38,460 $ 42,184

Operational risk $ 47,263 n.a. n.a. $ 47,263 $ 44,156

CET1 capital risk-weighted assets (3) $ 94,852 233,374 40,368 $ 368,594 $ 318,981

Additional CVA adjustment, prescribed by

OSFI, for Tier 1 capital – – 1,382 1,382 –

Tier 1 capital risk-weighted assets (3) $ 94,852 233,374 41,750 $ 369,976 $ 318,981

Additional CVA adjustment, prescribed by

OSFI, for Total capital – – 2,074 2,074 –

Total capital risk-weighted assets (3) $ 1,237,157 $ 94,852 $ 233,374 $ 43,824 $ 372,050 $ 318,981

(1) 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.

(2) Represents the average of counterparty risk weights within a particular category.

(3) 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

(Millions of Canadian dollars, except number of shares)

Issuance or

redemption date Number of

shares (000s) Amount

Tier 1 capital

Common shares issued

Stock options exercised (1) 2,723 $ 150

Purchased for cancellation (1,546) (16)

Issuance of preferred shares Series AK (2) February 24, 2014 2,421 61

Issuance of preferred shares Series AZ (2), (3), (4) January 30, 2014 20,000 500

Issuance of preferred shares Series BB (2), (3), (4) June 3, 2014 20,000 500

Redemption of preferred shares Series AN February 24, 2014 (9,000) (225)

Redemption of preferred shares Series AP February 24, 2014 (11,000) (275)

Redemption of preferred shares Series AR February 24, 2014 (14,000) (350)

Redemption of preferred shares Series AT August 24, 2014 (11,000) (275)

Redemption of preferred shares Series AV August 24, 2014 (16,000) (400)

Redemption of TruCS 2013 (2) December 31, 2013 (900)

Tier 2 capital

Issuance of July 17, 2024 subordinated debentures (2), (4) July 17, 2014 1,000

Issuance of September 29, 2026 subordinated

debentures (2), (4) September 29, 2014 1,000

Redemption of June 18, 2103 subordinated debentures (2) June 18, 2014 (600)

Redemption of November 4, 2018 subordinated

debentures (2) November 4, 2013 (1,000)

(1) Amounts include cash received for stock options exercised during the period and the fair value adjustments to stock options.

(2) For further details, refer to Notes 19, 20 and 21 of our 2014 Annual Consolidated Financial Statements.

(3) Based on gross amount.

(4) 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 2013 2012

(Millions of Canadian dollars, except

number of shares)

Number of

(000s) Amount

Dividends

declared

per share

Number of

(000s) Amount

Dividends

declared

per share

Number of

(000s) Amount

Dividends

declared

per share

Common shares outstanding 1,442,233 $14,511 $ 2.84 1,441,056 $ 14,377 $ 2.53 1,445,303 $ 14,323 $ 2.28

First preferred shares outstanding

Non-cumulative Series W (2) 12,000 300 1.23 12,000 300 1.23 12,000 300 1.23

Non-cumulative Series AA 12,000 300 1.11 12,000 300 1.11 12,000 300 1.11

Non-cumulative Series AB 12,000 300 1.18 12,000 300 1.18 12,000 300 1.18

Non-cumulative Series AC 8,000 200 1.15 8,000 200 1.15 8,000 200 1.15

Non-cumulative Series AD 10,000 250 1.13 10,000 250 1.13 10,000 250 1.13

Non-cumulative Series AE 10,000 250 1.13 10,000 250 1.13 10,000 250 1.13

Non-cumulative Series AF 8,000 200 1.11 8,000 200 1.11 8,000 200 1.11

Non-cumulative Series AG 10,000 250 1.13 10,000 250 1.13 10,000 250 1.13

Non-cumulative Series AH –– – – – 0.86 8,500 213 1.41

Non-cumulative Series AJ (3) 13,579 339 0.97 16,000 400 1.25 16,000 400 1.25

Non-cumulative Series AK (3) 2,421 61 0.53 –– – –– –

Non-cumulative Series AL (3) 12,000 300 1.15 12,000 300 1.40 12,000 300 1.40

Non-cumulative Series AN (3) – – 0.39 9,000 225 1.56 9,000 225 1.56

Non-cumulative Series AP (3) – – 0.39 11,000 275 1.56 11,000 275 1.56

Non-cumulative Series AR (3) – – 0.39 14,000 350 1.56 14,000 350 1.56

Non-cumulative Series AT (3) – – 1.17 11,000 275 1.56 11,000 275 1.56

Non-cumulative Series AV (3) – – 1.17 16,000 400 1.56 16,000 400 1.56

Non-cumulative Series AX (3) 13,000 325 1.53 13,000 325 1.53 13,000 325 1.53

Non-cumulative Series AZ (3), (4) 20,000 500 0.50 –– – –– –

Non-cumulative Series BB (3), (4) 20,000 500 0.46 –– – –– –

Treasury shares – preferred 1– 47 1 42 1

Treasury shares – common 892 71 666 41 543 30

Stock options

Outstanding 8,579 10,604 12,304

Exercisable 4,987 5,711 6,544

Dividends

Common 4,097 3,651 3,291

Preferred 213 253 258

(1) For further details about our capital management activity, refer to Note 21 of our Annual Consolidated Financial Statements.

(2) Effective February 24, 2010, we have the right to convert into common shares at our option, subject to certain restrictions.

(3) Dividend rate will reset every five years.

(4) 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

(Millions of Canadian dollars) 2014 2013

Credit risk $ 13,800 $ 11,800

Market risk (trading and non-trading) 3,900 3,300

Operational risk 4,300 4,050

Business and fixed asset risk 2,750 2,650

Insurance risk 500 500

Goodwill and other intangibles 11,350 10,750

Regulatory capital allocation 4,150 3,400

Attributed capital $ 40,750 $ 36,450

Under attribution of capital (1) 4,950 4,150

Average common equity $ 45,700 $ 40,600

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

92 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

Personal &

Commercial

Banking

Wealth

Management Insurance Investor &

Treasury Services Capital Markets

Attributed capital

(1)

Credit 44%

Market

(2)

Operational 11

Goodwill and other

intangibles 31

Other

(5)

Attributed capital

(1)

Credit 6%

Market

(2)

Operational 14

Goodwill and other

intangibles 71

Other

(5)

Attributed capital

(1)

Credit 13%

Market

(2)

Operational 13

Goodwill and other

intangibles 9

Other

(5)

Attributed capital

(1)

Credit 30%

Market

(2)

Operational 9

Goodwill and other

intangibles 25

Other

(3)

Attributed capital

(1)

Credit 27%

Market

(2)

Operational 13

Goodwill and other

intangibles 25

Other

(5)

Attributed capital

(1)

Credit 41%

Market

(2)

Operational 8

Goodwill and other

intangibles 7

Other

(5)

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

RWA

(C$ millions) (4)

Credit $282,871

Market 38,460

Operational 47,263

(1) 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.

(2) Market risk attributed capital: An estimate of the amount of equity capital required to underpin trading market risk and interest rate risk.

(3) 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.

(4) RWA amount above represents RWA for CET1.

(5) 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.

(6) 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 determi-

nation 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)

Subprime

RMBS

Alt-A

RMBS

CDOs

that may

contain

subprime

or Alt-A Total

Subprime

RMBS

Alt-A

RMBS

CDOs

that may

contain

subprime

or Alt-A Total

Fair value of securities $ 157 $ 188 $ – $ 345 $ 205 $ 221 $ 15 $ 441

Fair value of securities by rating

AAA $1$–$– $8$8$–

AA 19 4 – 36 19 –

A66 3 – 16 25 –

BBB 25 – – 51 11 –

Below BBB- 46 181 – 94 158 15

Total $ 157 $ 188 $ – $ 345 $ 205 $ 221 $ 15 $ 441

Fair value of securities by vintage

2003 (or before) $–$23$– $1$25$–

2004 419 – 443 –

2005 58 67 – 94 63 15

2006 73 68 – 38 64 –

2007 and later 22 11 – 68 26 –

Total $ 157 $ 188 $ – $ 345 $ 205 $ 221 $ 15 $ 441

Amortized cost of subprime/Alt-A mortgages (whole loans) $ 10 $ 41 $ – $ 51 $7$26$–$33

Total subprime and Alt-A exposures $ 167 $ 229 $ – $ 396 $ 212 $ 247 $ 15 $ 474

Sensitivities of fair value of securities to changes in assumptions:

100bps increase in credit spread $ (4) $ (8)

100bps increase in interest rates (1) (18)

20% increase in default rates (2) (2)

25% decrease in prepayment rates (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) Fair value (1) Level 1 (1) Level 2 (1) Level 3 (1) Total

Financial assets

Securities at FVTPL $ 151,380 43% 56% 1% 100%

Available-for-sale 45,995 17 74 9 100

Assets purchased under reverse

repurchase agreements and securities

borrowed 85,292 0 100 0 100

Loans – Wholesale 3,615 0 87 13 100

Derivatives 144,470 2 97 1 100

Financial liabilities

Deposits $ 79,439 0% 99% 1% 100%

Obligations related to securities

sold short 50,345 65 35 0 100

Obligations related to assets sold under

repurchase agreements and securities

loaned 58,411 0 100 0 100

Derivatives 145,964 2 97 1 100

(1) 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, bid-

offer 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 recog-

nized.

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 Interest Average rate

(Millions of Canadian dollars, except for percentage

amounts)

2014 2013 2012 (1) 2014 2013 2012 (1) 2014 2013 2012 (1)

Assets

Deposits with other banks (2)

Canada $ 1,692 $ 1,355 $ 1,104 $61$57$303.61% 4.21% 2.72%

U.S. 540 426 899 1480.19 0.94 0.89

Other International 5,227 7,370 3,496 14 13 16 0.27 0.18 0.46

7,459 9,151 5,499 76 74 54 1.02% 0.81% 0.98%

Securities

Trading 149,920 137,064 122,573 3,322 3,113 3,027 2.22 2.27 2.47

Available-for-sale 43,047 37,809 36,838 671 666 811 1.56 1.76 2.20

192,967 174,873 159,411 3,993 3,779 3,838 2.07 2.16 2.41

Asset purchased under reverse

repurchase agreements and

securities borrowed 136,857 123,766 103,042 971 941 937 0.71 0.76 0.91

Loans (2), (3)

Canada

Retail 314,159 301,887 292,899 12,245 12,077 11,961 3.90 4.00 4.08

Wholesale 54,681 50,248 37,204 2,721 2,486 2,180 4.98 4.95 5.86

368,840 352,135 330,103 14,966 14,563 14,141 4.06 4.14 4.28

U.S. 28,402 22,691 18,802 888 776 702 3.13 3.42 3.73

Other International 25,067 21,129 14,251 1,125 1,015 1,097 4.49 4.80 7.70

422,309 395,955 363,156 16,979 16,354 15,940 4.02 4.13 4.39

Total interest-earning assets 759,592 703,745 631,108 22,019 21,148 20,769 2.90 3.01 3.29

Non-interest-bearing deposits with

other banks 13,495 11,511 9,322 ——— ———

Customers’ liability under acceptances 10,725 9,663 8,617 ——— ———

Other assets (2) 122,688 127,081 153,953 ——— ———

Total assets $ 906,500 $ 852,000 $ 803,000 $ 22,019 $ 21,148 $ 20,769 2.43% 2.48% 2.59%

Liabilities and shareholders’ equity

Deposits (2), (4)

Canada 415,509 375,864 349,053 5,416 5,242 5,368 1.30% 1.39% 1.54%

U.S. 50,459 43,076 39,255 158 169 209 0.31 0.39 0.53

Other International 54,267 48,953 38,113 299 283 471 0.55 0.58 1.24

520,235 467,893 426,421 5,873 5,694 6,048 1.13 1.22 1.42

Obligations related to securities sold

short 50,548 48,979 43,080 1,494 1,579 1,584 2.96 3.22 3.68

Obligations related to assets sold

under repurchase agreements and

securities loaned 68,594 70,881 55,369 278 279 327 0.41 0.39 0.59

Subordinated debentures 6,632 8,216 8,156 246 336 360 3.71 4.09 4.41

Other interest-bearing liabilities 251 484 429 12 11 11 4.78 2.27 2.56

Total interest-bearing liabilities 646,260 596,453 533,455 7,903 7,899 8,330 1.22 1.32 1.56

Non-interest-bearing deposits 72,867 69,823 64,179 ——— ———

Acceptances 10,725 9,663 8,617 ——— ———

Other liabilities (2) 124,643 129,118 154,108 ——— ———

Total liabilities $ 854,495 $ 805,057 $ 760,359 $ 7,903 $ 7,899 $ 8,330 0.92% 0.98% 1.10%

Equity 52,005 46,943 42,641 —n.a. 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 $ 497,436 $ 471,448 $ 441,562 $ 11,121 $ 10,956 $ 10,357 2.24% 2.32% 2.35%

U.S. 135,876 116,016 87,845 1,896 1,603 1,308 1.40 1.38 1.49

Other International 126,280 116,281 101,701 1,099 690 774 0.87 0.59 0.76

Total $ 759,592 $ 703,745 $ 631,108 $ 14,116 $ 13,249 $ 12,439 1.86% 1.88% 1.97%

(1) On a continuing operations basis.

(2) 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.

(3) Interest income includes loan fees of $516 million (2013 – $509 million; 2012 – $467 million).

(4) 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%).

100 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

Change in net interest income Table 76

2014 vs. 2013 2013 vs. 2012 (1)

Increase (decrease)

due to changes in

Increase (decrease)

due to changes in

(Millions of Canadian dollars)

Average

volume (2)

Average

rate (2) Net change

Average

volume (2)

Average

rate (2) Net change

Assets

Deposits with other banks (3)

Canada (4) $ 14 (10) 4 72027

U.S. (4) 1 (4) (3) (4) – (4)

Other international (4) (4) 5 1 18 (21) (3)

Securities

Trading 292 (83) 209 358 (272) 86

Available-for-sale 92 (87) 5 21 (166) (145)

Asset purchased under reverse repurchase agreements

and securities borrowed 100 (70) 30 188 (184) 4

Loans (3)

Canada

Retail 491 (323) 168 367 (251) 116

Wholesale 219 16 235 764 (458) 306

U.S. 195 (83) 112 145 (71) 74

Other international 189 (79) 110 529 (611) (82)

Total interest income $ 1,589 $ (718) $ 871 $ 2,393 $ (2,014) $ 379

Liabilities

Deposits (3)

Canada 553 (379) 174 412 (538) (126)

U.S. 29 (40) (11) 20 (60) (40)

Other international 31 (15) 16 134 (322) (188)

Obligations related to securities sold short 51 (136) (85) 217 (222) (5)

Obligations related to assets sold under repurchase

agreements and securities loaned (9) 8 (1) 92 (140) (48)

Subordinated debentures (65) (25) (90) 3 (27) (24)

Other interest-bearing liabilities (5) 6 1 1 (1) -

Total interest expense $ 585 $ (581) $ 4 $ 879 $ (1,310) $ (431)

Net interest income $ 1,004 $ (137) $ 867 $ 1,514 $ (704) $ 810

(1) On a continuing operations basis.

(2) 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.

(3) 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.

(4) Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.

Loans and acceptances by geography Table 77

IFRS

Canadian

GAAP

As at October 31 (Millions of Canadian dollars) 2014 2013 2012 (1) 2011 (1) 2010 (1)

Canada

Residential mortgages $ 215,624 $ 206,134 $ 195,552 $ 185,620 $ 124,064

Personal 86,984 85,701 80,000 75,668 69,291

Credit cards 14,650 13,902 13,422 12,723 9,704

Small business 4,785 4,388 2,503 2,481 2,712

Retail 322,043 310,125 291,477 276,492 205,771

Business 63,925 58,959 51,212 45,186 45,217

Sovereign 3,840 3,807 3,751 3,304 2,785

Bank 413 823 390 747 808

Wholesale $ 68,178 $ 63,589 $ 55,353 $ 49,237 $ 48,810

$ 390,221 $ 373,714 $ 346,830 $ 325,729 $ 254,581

U.S.

Retail 4,686 3,734 3,138 3,101 4,230

Wholesale 23,639 19,443 17,081 11,094 7,584

28,325 23,177 20,219 14,195 11,814

Other International

Retail 8,258 6,768 5,673 5,152 4,936

Wholesale 21,881 17,103 16,900 12,110 11,084

30,139 23,871 22,573 17,262 16,020

Total loans and acceptances $ 448,685 $ 420,762 $ 389,622 $ 357,186 $ 282,415

Total allowance for loan losses (1,994) (1,959) (1,996) (1,967) (2,038)

Total loans and acceptances, net of allowance for loan losses $ 446,691 $ 418,803 $ 387,626 $ 355,219 $ 280,377

(1) 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

IFRS

Canadian

GAAP

As at October 31 (Millions of Canadian dollars) 2014 2013 2012 (1) 2011 (1) 2010 (1)

Residential mortgages $ 219,257 $ 209,238 $ 198,324 $ 188,406 $ 126,790

Personal 96,021 92,859 85,800 80,921 75,519

Credit cards 14,924 14,142 13,661 12,937 9,916

Small business 4,785 4,388 2,503 2,481 2,712

Retail $ 334,987 $ 320,627 $ 300,288 $ 284,745 $ 214,937

Business

Agriculture 5,694 5,441 5,202 4,880 4,705

Automotive 6,209 6,167 3,585 3,025 3,228

Consumer goods 7,172 6,230 5,432 5,341 5,202

Energy 9,615 8,906 8,802 6,394 5,869

Non-bank financial services 5,688 4,903 3,895 2,007 4,593

Forest products 979 893 811 698 726

Industrial products 4,665 4,038 3,938 3,381 3,143

Mining & metals 1,320 1,074 965 1,122 587

Real estate & related 30,387 24,413 20,650 15,569 12,651

Technology & media 4,822 4,006 4,203 2,712 2,257

Transportation & environment 5,432 5,593 5,221 4,927 3,546

Other (2) 25,886 22,755 21,447 17,011 15,290

Sovereign 4,628 4,396 4,193 4,050 3,765

Bank 1,201 1,320 990 1,324 1,916

Wholesale $ 113,698 $ 100,135 $ 89,334 $ 72,441 $ 67,478

Total loans and acceptances $ 448,685 $ 420,762 $ 389,622 $ 357,186 $ 282,415

Total allowance for loan losses (1,994) (1,959) (1,996) (1,967) (2,038)

Total loans and acceptances, net of allowance for loan losses $ 446,691 $ 418,803 $ 387,626 $ 355,219 $ 280,377

(1) On a continuing operations basis.

(2) 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.

102 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

Impaired loans by portfolio and geography Table 79

IFRS

Canadian

GAAP

As at October 31 (Millions of Canadian dollars, except for percentage amounts) 2014 2013 2012 (1) 2011 (1) 2010 (1)

Residential mortgages $ 678 $ 691 $ 674 $ 719 $ 691

Personal 300 363 273 289 278

Small business 47 37 33 40 49

Retail 1,025 1,091 980 1,048 1,018

Business

Agriculture $40$ 43 $ 52 $ 75 $ 74

Automotive 12 12 17 38 97

Consumer goods 108 101 83 91 91

Energy 614 2 33 104

Non-bank financial services 31 5 13 28

Forest products 25 26 30 27 49

Industrial products 48 54 88 38 102

Mining & metals 9224 8

Real estate & related 314 367 353 464 560

Technology & media 38 117 251 47 68

Transportation & environment 32 98 73 105 52

Other (2) 315 272 312 311 385

Sovereign –––– 9

Bank 23 2 33 34

Wholesale 952 1,110 1,270 1,279 1,661

Total impaired loans (3) $ 1,977 $ 2,201 $ 2,250 $ 2,327 $ 2,679

Canada

Residential mortgages $ 388 $ 464 $ 475 $ 567 $ 544

Personal 224 229 206 188 174

Small business 47 36 34 40 49

Retail 659 729 715 795 767

Business

Agriculture 36 38 44 62 71

Automotive 11 91130 87

Consumer goods 70 58 34 48 53

Energy 414 – 25 65

Non-bank financial services 1131 1

Forest products 6812 7 11

Industrial products 41 40 34 26 99

Mining & metals 9222 4

Real estate & related 171 169 153 164 177

Technology & media 37 86 238 43 55

Transportation & environment 11 21 22 12 42

Other 90 80 88 93 106

Sovereign –––– –

Bank –––– –

Wholesale 487 526 641 513 771

Total $ 1,146 $ 1,255 $ 1,356 $ 1,308 $ 1,538

U.S.

Retail $13$14$ 7$ 6$ –

Wholesale 18 98 162 116 364

Total $31$ 112 $ 169 $ 122 $ 364

Other International

Retail $ 353 $ 348 $ 258 $ 247 $ 251

Wholesale 447 486 467 650 526

Total $ 800 $ 834 $ 725 $ 897 $ 777

Total impaired loans $ 1,977 $ 2,201 $ 2,250 $ 2,327 $ 2,679

Allowance against impaired loans (632) (599) (636) (605) (721)

Net impaired loans $ 1,345 $ 1,602 $ 1,614 $ 1,722 $ 1,958

Gross impaired loans as a % of loans and acceptances

Residential mortgages 0.31% 0.33% 0.34% 0.38% 0.54%

Personal 0.31% 0.39% 0.32% 0.36% 0.37%

Small business 0.98% 0.83% 1.32% 1.61% 1.81%

Retail 0.31% 0.34% 0.33% 0.37% 0.47%

Wholesale 0.84% 1.11% 1.42% 1.77% 2.46%

Total 0.44% 0.52% 0.58% 0.65% 0.95%

Allowance against impaired loans as a % of gross impaired loans 31.98% 27.22% 28.33% 26.00% 26.91%

(1) On a continuing operations basis.

(2) Other in 2014 is related to health, $18 million; holding and investments, $132 million; other services, $99 million; and other, $66 million.

(3) 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

IFRS

Canadian

GAAP

(Millions of Canadian dollars, except for percentage amounts) 2014 2013 2012 (1) 2011 (1) 2010 (1)

Residential mortgages $94$41$ 67$42$25

Personal 441 458 445 438 457

Credit cards 353 354 394 448 399

Small business 44 32 43 35 45

Retail $ 932 $ 885 $ 949 $ 963 $ 926

Business

Agriculture $3$4$ 8$7$18

Automotive 23 (2) (4) 15

Consumer goods 27 17 27 14 29

Energy 27 (6) (11) (20) (6)

Non-bank financial services –10 1 (11) (34)

Forest products 74553

Industrial products 14 21 32 3 (6)

Mining & metals 21 – – (1)

Real estate & related 58 62 82 66 184

Technology & media 14 157 102 (3) 5

Transportation & environment 235 47 29 10

Other (2) 76 44 61 82 76

Sovereign –––––

Bank ––––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

Canada

Residential mortgages $27$27$ 34$25$ 7

Personal 393 391 413 408 444

Credit cards 345 346 391 448 399

Small business 44 32 43 35 45

Retail $ 809 $ 796 $ 881 $ 916 $ 895

Business

Agriculture 448718

Automotive 33 (2) (3) 15

Consumer goods 25 16 13 13 17

Energy (5) (6) (11) (9) 3

Non-bank financial services –– 1 – (1)

Forest products 13543

Industrial products 14 14 12 3 (4)

Mining & metals 21–12

Real estate & related 34 37 43 31 35

Technology & media 14 50 98 6 (6)

Transportation & environment 3210510

Other 28 25 30 44 30

Sovereign –––––

Bank –––––

Wholesale $ 123 $ 149 $ 207 $ 102 $ 122

Total $ 932 $ 945 $ 1,088 $ 1,018 $ 1,017

U.S.

Retail 2344–

Wholesale 40 32 29 (19) 62

$42$ 35 $ 33 $ (15) $ 62

Other International

Retail 121 86 64 43 31

Wholesale 69 171 116 85 124

$ 190 $ 257 $ 180 $ 128 $ 155

Total provision for credit losses on impaired loans $ 1,164 $ 1,237 $ 1,301 $ 1,131 $ 1,234

Total provision for credit losses on non-impaired loans – – (2) 2 6

Total provision for credit losses $ 1,164 $ 1,237 $ 1,299 $ 1,133 $ 1,240

Provision for credit losses as a % of average net loans and

acceptances 0.27% 0.31% 0.35% 0.33% 0.40%

(1) On a continuing operations basis.

(2) Other in 2014 is related to financing products, $3 million; holding and investments, $29 million; other services, $18 million; and other, $26 million.

104 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

Allowance for credit losses by portfolio and geography Table 81

IFRS

Canadian

GAAP

(Millions of Canadian dollars, except percentage amounts) 2014 2013 2012 (1),(2) 2011 (1) 2010 (1)

Allowance at beginning of year $ 2,050 $ 2,087 $ 2,056 $ 2,966 $ 2,264

Allowance at beginning of year – discontinued operations – – – (854) –

Provision for credit losses 1,164 1,237 1,299 1,133 1,240

Write-offs by portfolio

Residential mortgages (30) (24) (32) (16) (11)

Personal (565) (498) (499) (515) (538)

Credit cards (466) (466) (496) (545) (463)

Small business (47) (35) (50) (45) (56)

Retail $ (1,108) $ (1,023) $ (1,077) $ (1,121) $ (1,068)

Business $ (221) $ (448) $ (288) $ (226) $ (478)

Sovereign –– – (9) –

Bank –– (32) – –

Wholesale $ (221) $ (448) $ (320) $ (235) $ (478)

Total write-offs by portfolio $ (1,329) $ (1,471) $ (1,397) $ (1,356) $ (1,546)

Recoveries by portfolio

Residential mortgages $2$2$1$1$1

Personal 106 96 83 79 79

Credit cards 114 112 102 97 63

Small business 998 77

Retail $ 231 $ 219 $ 194 $ 184 $ 150

Business $32$51$39$60$51

Sovereign ––– ––

Bank ––– ––

Wholesale $32$51$39$60$51

Total recoveries by portfolio $ 263 $ 270 $ 233 $ 244 $ 201

Net write-offs $ (1,066) $ (1,201) $ (1,164) $ (1,112) $ (1,345)

Adjustments (3) (63) (73) (104) (75) (33)

Total allowance for credit losses at end of year $ 2,085 $ 2,050 $ 2,087 $ 2,058 $ 2,126

Allowance against impaired loans

Canada

Residential mortgages $31$36$41$47$47

Personal 93 97 89 88 88

Small business 19 16 12 15 18

Retail $ 143 $ 149 $ 142 $ 150 $ 153

Business

Agriculture $6$6$9$13$14

Automotive 44 7 15 27

Consumer goods 22 15 14 17 20

Energy –11 310

Non-bank financial services ––– –1

Forest products 346 34

Industrial products 18 15 10 12 36

Mining & metals 111 11

Real estate & related 48 42 45 47 36

Technology & media 17 46 107 20 12

Transportation & environment 568 56

Other 36 30 31 43 40

Sovereign ––– ––

Bank ––– ––

Wholesale $ 160 $ 170 $ 239 $ 179 $ 207

$ 303 $ 319 $ 381 $ 329 $ 360

U.S.

Retail $1$2$1$1$–

Wholesale 16 19 38 25 85

$17$21$39$26$85

Other International

Retail $ 172 $ 146 $ 96 $ 80 $ 83

Wholesale 140 113 120 170 193

$ 312 $ 259 $ 216 $ 250 $ 276

Total allowance against impaired loans $ 632 $ 599 $ 636 $ 605 $ 721

Allowance against non-impaired loans

Residential mortgages $78$48$48$41$26

Personal 400 405 392 412 480

Credit cards 385 385 403 415 365

Small business 45 45 60 60 60

Retail $ 908 $ 883 $ 903 $ 928 $ 931

Wholesale $ 454 $ 477 $ 457 $ 434 $ 386

Off-balance sheet and other items $ 91 $91$91$91$88

Total allowance against non-impaired loans $ 1,453 $ 1,451 $ 1,451 $ 1,453 $ 1,405

Total allowance for credit losses $ 2,085 $ 2,050 $ 2,087 $ 2,058 $ 2,126

Key ratios

Allowance for credit losses as a % of loans and acceptances 0.46% 0.49% 0.54% 0.57% 0.75%

Net write-offs as a % of average net loans and acceptances 0.25% 0.27% 0.31% 0.33% 0.49%

(1) On a continuing operations basis.

(2) Opening allowance for credit losses as at November 1, 2011 has been restated due to the implementation of amendments to IFRS 11.

(3) 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

IFRS

Canadian

GAAP

(Millions of Canadian dollars) 2014 2013 2012 (1) 2011 (1) 2010 (1)

Loans and acceptances

Atlantic provinces (2) $ 22,130 $ 21,263 $ 19,953 $ 18,481 $ 14,558

Quebec 50,748 48,060 42,920 38,776 33,093

Ontario 159,817 152,258 141,566 141,230 103,179

Prairie provinces (3) 88,538 84,015 77,187 68,468 54,843

B.C. and territories (4) 68,988 68,118 65,204 58,774 48,908

Total loans and acceptances in Canada $ 390,221 $ 373,714 $ 346,830 $ 325,729 $ 254,581

Gross impaired loans

Atlantic provinces (2) $81$83$67$66$72

Quebec 205 177 180 135 162

Ontario 391 424 502 398 598

Prairie provinces (3) 258 330 338 404 429

B.C. and territories (4) 211 241 269 305 277

Total gross impaired loans in Canada $ 1,146 $ 1,255 $ 1,356 $ 1,308 $ 1,538

Provision for credit losses on impaired loans

Atlantic provinces (2) $51$50$62$54$50

Quebec 92 78 96 63 85

Ontario 588 605 704 686 659

Prairie provinces (3) 111 113 120 107 146

B.C. and territories (4) 90 99 106 108 77

Total provision for credit losses on impaired loans in Canada $ 932 $ 945 $ 1,088 $ 1,018 $ 1,017

(1) On a continuing operations basis.

(2) Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.

(3) Comprises Manitoba, Saskatchewan and Alberta.

(4) Comprises British Columbia, Nunavut, Northwest Territories and Yukon.

106 Royal Bank of Canada: Annual Report 2014 Management’s Discussion and Analysis

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 Recommendation Disclosure

Annual

Report

page

SFI

page

General

1 Table of contents for EDTF risk disclosure 107 1

2 Define risk terminology and measures 47-52

199-201

–

3 Top and emerging risks 46-47 –

4 New regulatory ratios 69,85-86 –

Risk governance, risk

management and

business model

5 Risk management organization 47-52 –

6 Risk culture 49-50 –

7 Risk in the context of our business activities 93 –

8 Stress testing 50,63 –

Capital adequacy and

risk-weighted assets

(RWA)

9 Minimum Basel III capital ratios and Domestic systemically

important bank surcharge

86 –

10 Composition of capital and reconciliation of the accounting

balance sheet to the regulatory balance sheet

– 21-24

11 Flow statement of the movements in regulatory capital – 25

12 Capital strategic planning 85-86 –

13 RWA by business segments – 28

14 Analysis of capital requirement, and related measurement

model information

52-55 26-27

15 RWA credit risk and related risk measurements – 40-42

16 Movement of risk-weighted assets by risk type – 28

17 Basel back-testing 50,53 40

Liquidity 18 Quantitative and qualitative analysis of our liquidity reserve 70-71 –

Funding

19 Encumbered and unencumbered assets by balance sheet

category, and contractual obligations for rating downgrades

–

20 Maturity analysis of consolidated total assets, liabilities and

off-balance sheet commitments analyzed by remaining

contractual maturity at the balance sheet date

75-76 –

21 Sources of funding and funding strategy 73-74 –

Market risk

22 Relationship between the market risk measures for trading

and non-trading portfolios and the balance sheet

67-68 –

23 Decomposition of market risk factors 63-65 –

24 Market risk validation and back-testing 63 –

25 Primary risk management techniques beyond reported risk

measures and parameters

63-64 –

Credit risk

26 Bank’s credit risk profile

Quantitative summary of aggregate credit risk exposures that

reconciles to the balance sheet

52-63

146-148

100-106

29-42

27 Policies for identifying impaired loans 55,97

125

–

28 Reconciliation of the opening and closing balances of

impaired loans and impairment allowances during the year

62 31,35

29 Quantification of gross notional exposure for OTC derivatives

or exchange-traded derivatives

53-54 44

30 Credit risk mitigation, including collateral held for all sources

of credit risk

54 39

Other

31 Other risk types 78-85 –

32 Publicly known risk events 80

185

–

Management’s Discussion and Analysis Royal Bank of Canada: Annual Report 2014 107

REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS

109 Reports

109 Management’s responsibility for financial reporting

109 Report of Independent Registered Public Accounting

Firm

110 Management’s Report on Internal Control over

Financial Reporting

111 Report of Independent Registered Public Accounting

Firm

112 Consolidated Financial Statements

112 Consolidated Balance Sheets

113 Consolidated Statements of Income

114 Consolidated Statements of Comprehensive Income

115 Consolidated Statements of Changes in Equity

116 Consolidated Statements of Cash Flows

117 Notes to Consolidated Financial Statements

117 Note 1 General information

117 Note 2 Summary of significant accounting policies,

estimates and judgments

131 Note 3 Fair value of financial instruments

143 Note 4 Securities

146 Note 5 Loans

149 Note 6 Derecognition of financial assets

149 Note 7 Structured entities

153 Note 8 Derivative financial instruments and

hedging activities

159 Note 9 Premises and equipment

160 Note 10 Goodwill and other intangible assets

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

108 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, projec-

tions 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

(Millions of Canadian dollars)

October 31

2014

October 31

2013

Assets

Cash and due from banks $ 17,421 $ 15,550

Interest-bearing deposits with banks 8,399 9,039

Securities (Note 4)

Trading 151,380 144,023

Available-for-sale 47,768 38,687

199,148 182,710

Assets purchased under reverse repurchase agreements and securities borrowed 135,580 117,517

Loans (Note 5)

Retail 334,987 320,627

Wholesale 102,236 90,182

437,223 410,809

Allowance for loan losses (Note 5) (1,994) (1,959)

435,229 408,850

Segregated fund net assets (Note 16) 675 513

Other

Customers’ liability under acceptances 11,462 9,953

Derivatives (Note 8) 87,402 74,822

Premises and equipment, net (Note 9) 2,684 2,636

Goodwill (Note 10) 8,647 8,332

Other intangibles (Note 10) 2,775 2,777

Investments in joint ventures and associates (Note 12) 295 247

Employee benefit assets (Note 17) 138 161

Other assets (Note 13) 30,695 26,638

144,098 125,566

Total assets $ 940,550 $ 859,745

Liabilities and equity

Deposits (Note 14)

Personal $ 209,217 $ 194,943

Business and government 386,660 354,593

Bank 18,223 13,543

614,100 563,079

Segregated fund net liabilities (Note 16) 675 513

Other

Acceptances 11,462 9,953

Obligations related to securities sold short 50,345 47,128

Obligations related to assets sold under repurchase agreements and securities loaned 64,331 60,416

Derivatives (Note 8) 88,982 76,745

Insurance claims and policy benefit liabilities (Note 15) 8,564 8,034

Employee benefit liabilities (Note 17) 2,420 2,027

Other liabilities (Note 18) 37,309 34,947

263,413 239,250

Subordinated debentures (Note 19) 7,859 7,443

Total liabilities 886,047 810,285

Equity attributable to shareholders (Note 21)

Preferred shares 4,075 4,600

Common shares (shares issued – 1,442,232,886 and 1,441,055,616) 14,511 14,377

Treasury shares – preferred (shares held – (1,207) and (46,641)) –1

– common (shares held – (891,733) and (666,366)) 71 41

Retained earnings 31,615 27,438

Other components of equity 2,418 1,208

52,690 47,665

Non-controlling interests (Note 21) 1,813 1,795

Total equity 54,503 49,460

Total liabilities and equity $ 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 Victor L. Young

President and Chief Executive Officer Director

112 Royal Bank of Canada: Annual Report 2014 Consolidated Financial Statements

Consolidated Statements of Income

For the year ended

(Millions of Canadian dollars, except per share amounts)

October 31

2014

October 31

2013

October 31

2012

Interest income

Loans $ 16,979 $ 16,354 $ 15,940

Securities 3,993 3,779 3,838

Assets purchased under reverse repurchase agreements and securities borrowed 971 941 937

Deposits and other 76 74 54

22,019 21,148 20,769

Interest expense

Deposits and other 5,873 5,694 6,048

Other liabilities 1,784 1,869 1,922

Subordinated debentures 246 336 360

7,903 7,899 8,330

Net interest income 14,116 13,249 12,439

Non-interest income

Insurance premiums, investment and fee income (Note 15) 4,957 3,911 4,897

Trading revenue 742 867 1,305

Investment management and custodial fees 3,355 2,870 2,006

Mutual fund revenue 2,621 2,201 1,896

Securities brokerage commissions 1,379 1,337 1,182

Service charges 1,494 1,437 1,376

Underwriting and other advisory fees 1,809 1,569 1,434

Foreign exchange revenue, other than trading 827 748 586

Card service revenue 689 632 588

Credit fees 1,080 1,092 849

Net gain on available-for-sale securities (Note 4) 192 188 148

Share of profit in joint ventures and associates (Note 12) 162 159 163

Other 685 422 278

19,992 17,433 16,708

Total revenue 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) 11,031 10,248 9,082

Equipment 1,147 1,081 913

Occupancy 1,330 1,235 1,130

Communications 779 728 748

Professional fees 763 753 666

Outsourced item processing 246 250 254

Amortization of other intangibles (Note 10) 666 566 494

Impairment of other intangibles (Note 10 and 11) 810 –

Impairment of investments in joint ventures and associates (Note 12) –20 168

Other 1,691 1,323 1,186

17,661 16,214 14,641

Income before income taxes from continuing operations 11,710 10,447 9,586

Income taxes (Note 24) 2,706 2,105 2,028

Net income from continuing operations 9,004 8,342 7,558

Net loss from discontinued operations (Note 11) –– (51)

Net income $ 9,004 $ 8,342 $ 7,507

Net income attributable to:

Shareholders $ 8,910 $ 8,244 $ 7,410

Non-controlling interests 94 98 97

$ 9,004 $ 8,342 $ 7,507

Basic earnings per share (in dollars) (Note 25) $ 6.03 $ 5.53 $ 4.96

Basic earnings per share from continuing operations (in dollars) 6.03 5.53 4.99

Basic loss per share from discontinued operations (in dollars) –– (0.03)

Diluted earnings per share (in dollars) (Note 25) 6.00 5.49 4.91

Diluted earnings per share from continuing operations (in dollars) 6.00 5.49 4.94

Diluted loss per share from discontinued operations (in dollars) –– (0.03)

Dividends per common share (in dollars) 2.84 2.53 2.28

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 $ 9,004 $ 8,342 $ 7,507

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 143 15 193

Reclassification of net gains on available-for-sale securities to income (58) (87) (33)

85 (72) 160

Foreign currency translation adjustments

Unrealized foreign currency translation gains 2,743 1,402 114

Net foreign currency translation losses from hedging activities (1,585) (912) –

Reclassification of losses on foreign currency translation to income 44 1 170

Reclassification of losses (gains) on net investment hedging activities to income 3(1) (159)

1,205 490 125

Net change in cash flow hedges

Net (losses) gains on derivatives designated as cash flow hedges (108) (11) 32

Reclassification of losses (gains) on derivatives designated as cash flow hedges to income 28 (30) 25

(80) (41) 57

Items that will not be reclassified subsequently to income:

Remeasurements of employee benefit plans (236) 319 (779)

Net fair value change due to credit risk on financial liabilities designated as at fair value through

profit or loss (59) ––

(295) 319 (779)

Total other comprehensive income (loss), net of taxes 915 696 (437)

Total comprehensive income $ 9,919 $ 9,038 $ 7,070

Total comprehensive income attributable to:

Shareholders $ 9,825 $ 8,940 $ 6,972

Non-controlling interests 94 98 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 Statements of Changes in Equity

Other components of equity

(Millions of Canadian dollars)

Preferred

Common

Treasury

shares –

preferred

Treasury

shares –

common

Retained

earnings

Available-

for-sale

securities

Foreign

currency

translation

Cash

flow

hedges

Total other

components

of equity

Equity

attributable to

shareholders

Non-controlling

interests

Total

equity

Balance at November 1, 2011 $ 4,813 $14,010 $ – $ 8 $20,084 $ 259 $ 71 $ 160 $ 490 $ 39,405 $ 1,758 $41,163

Changes in equity

Issues of share capital – 313 – – – – – – – 313 – 313

Sales of treasury shares – – 98 5,186 – – – – – 5,284 – 5,284

Purchases of treasury shares – – (97) (5,164) – – – – – (5,261) – (5,261)

Share-based compensation awards – – – – (9) – – – – (9) – (9)

Dividends on common shares – – – – (3,291) – – – – (3,291) – (3,291)

Dividends on preferred shares and other – – – – (258) – – – – (258) (92) (350)

Other – – – – 5 – – – – 5 (3) 2

Net income – – – – 7,410 – – – – 7,410 97 7,507

Total other comprehensive income (loss), net of taxes – – – – (779) 160 125 56 341 (438) 1 (437)

Balance at October 31, 2012 $ 4,813 $14,323 $ 1 $ 30 $23,162 $ 419 $ 196 $ 216 $ 831 $ 43,160 $ 1,761 $44,921

Changes in equity

Issues of share capital – 121 – – – – – – – 121 – 121

Common shares purchased for cancellation – (67) – – (341) – – – – (408) – (408)

Preferred shares redeemed (213) – – – (9) – – – – (222) – (222)

Sales of treasury shares – – 127 4,453 – – – – – 4,580 – 4,580

Purchases of treasury shares – – (127) (4,442) – – – – – (4,569) – (4,569)

Share-based compensation awards – – – – (7) – – – – (7) – (7)

Dividends on common shares – – – – (3,651) – – – – (3,651) – (3,651)

Dividends on preferred shares and other – – – – (253) – – – – (253) (94) (347)

Other – – – – (26) – – – – (26) 30 4

Net income – – – – 8,244 – – – – 8,244 98 8,342

Total other comprehensive income (loss), net of taxes – – – – 319 (72) 490 (41) 377 696 – 696

Balance at October 31, 2013 $ 4,600 $14,377 $ 1 $ 41 $27,438 $ 347 $ 686 $ 175 $ 1,208 $ 47,665 $ 1,795 $49,460

Changes in equity

Issues of share capital 1,000 150 – – (14) – – – – 1,136 – 1,136

Common shares purchased for cancellation – (16) – – (97) – – – – (113) – (113)

Preferred shares redeemed (1,525) – – – – – – – – (1,525) – (1,525)

Sales of treasury shares – – 124 5,333 – – – – – 5,457 – 5,457

Purchases of treasury shares – – (125) (5,303) – – – – – (5,428) – (5,428)

Share-based compensation awards – – – – (9) – – – – (9) – (9)

Dividends on common shares – – – – (4,097) – – – – (4,097) – (4,097)

Dividends on preferred shares and other – – – – (213) – – – – (213) (94) (307)

Other – – – – (8) – – – – (8) 18 10

Net income – – – – 8,910 – – – – 8,910 94 9,004

Total other comprehensive income (loss), net of taxes – – – – (295) 85 1,205 (80) 1,210 915 – 915

Balance at October 31, 2014 $ 4,075 $14,511 $ – $ 71 $31,615 $ 432 $ 1,891 $ 95 $ 2,418 $ 52,690 $ 1,813 $54,503

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 115

Consolidated Statements of Cash Flows

For the year ended

(Millions of Canadian dollars)

October 31

2014

October 31

2013

October 31

2012

Cash flows from operating activities

Net income $ 9,004 $ 8,342 $ 7,507

Adjustments for non-cash items and others

Provision for credit losses 1,164 1,237 1,416

Depreciation 499 445 412

Deferred income taxes (207) (72) (204)

Amortization and Impairment of other intangibles 674 576 514

Impairment of investments in joint ventures and associates –20 168

Loss (Gain) on sale of premises and equipment 14 (24) 25

Gain on available-for-sale securities (228) (217) (222)

Loss (Gain) on disposition of business 95 (17) –

Impairment of available-for-sale securities 25 26 55

Share of profit in joint ventures and associates (162) (159) (162)

Net gain on sales of joint ventures and associates (62) ––

Adjustments for net changes in operating assets and liabilities

Insurance claims and policy benefit liabilities 530 113 802

Net change in accrued interest receivable and payable 187 (467) (177)

Current income taxes (206) 354 (815)

Derivative assets (12,580) 16,475 8,180

Derivative liabilities 12,237 (20,017) (3,679)

Trading securities (7,253) (23,038) 6,850

Loans, net of securitizations (27,096) (20,175) (29,320)

Assets purchased under reverse repurchase agreements and securities borrowed (18,063) (5,260) (25,179)

Deposits 52,339 41,857 18,103

Obligations related to assets sold under repurchase agreements and securities loaned 3,915 (3,616) 16,162

Obligations related to securities sold short 3,233 6,372 (3,484)

Brokers and dealers receivable and payable (638) 536 537

Other (2,247) 3,794 864

Net cash from (used in) operating activities 15,174 7,085 (1,647)

Cash flows from investing activities

Change in interest-bearing deposits with banks 640 1,207 1,585

Proceeds from sale of available-for-sale securities 8,795 6,476 9,779

Proceeds from maturity of available-for-sale securities 38,950 37,099 45,991

Purchases of available-for-sale securities (54,208) (41,057) (54,782)

Proceeds from maturity of held-to-maturity securities 285 401 190

Purchases of held-to-maturity securities (1,625) (284) (242)

Net acquisitions of premises and equipment and other intangibles (1,227) (932) (1,320)

Proceeds from dispositions 173 17 2,677

Cash used in acquisitions –(2,537) (628)

Net cash (used in) from investing activities (8,217) 390 3,250

Cash flows from financing activities

Redemption of trust capital securities (900) ––

Issue of subordinated debentures 2,000 2,046 –

Repayment of subordinated debentures (1,600) (2,000) (1,006)

Issue of common shares 150 121 126

Common shares purchased for cancellation (113) (408) –

Issue of preferred shares 1,000 ––

Redemption of preferred shares (1,525) (222) –

Sales of treasury shares 5,457 4,580 5,284

Purchase of treasury shares (5,428) (4,569) (5,261)

Dividends paid (4,211) (3,810) (3,272)

Issuance costs (14) ––

Dividends/distributions paid to non-controlling interests (94) (94) (92)

Change in short-term borrowings of subsidiaries (6) (93) 21

Net cash used in financing activities (5,284) (4,449) (4,200)

Effect of exchange rate changes on cash and due from banks 198 96 1

Net change in cash and due from banks 1,871 3,122 (2,596)

Cash resources at beginning of period (1), (2) 15,550 12,428 15,024

Cash and due from banks at end of period (1) $ 17,421 $ 15,550 $ 12,428

Cash flows from operating activities include:

Amount of interest paid $ 7,186 $ 7,223 $ 7,839

Amount of interest received 20,552 19,348 19,691

Amount of dividend received 1,702 1,478 1,316

Amount of income taxes paid 2,315 1,479 2,884

(1) 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).

(2) 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 Ville-

Marie, Montreal, Quebec, Canada. Our common shares are listed on the Toronto Stock Exchange and New York Stock Exchange with the ticker

symbol RY.

These Consolidated Financial Statements are prepared in compliance with International Financial Reporting Standards (IFRS) as issued by

the International Accounting Standards Board (IASB). Unless otherwise stated, monetary amounts are stated in Canadian dollars. Tabular

information is stated in millions of dollars, except 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

Fair value of financial

instruments

Note 2 – page 122

Note 3 – page 131

Allowance for credit losses Note 2 – page 125

Note 5 – page 146

Employee benefits Note 2 – page 127

Note 17 – page 168

Goodwill and other intangibles Note 2 – page 128

Note 10 – page 160

Note 11 – page 162

Securities impairment Note 2 – page 121

Note 4 – page 143

Application of the effective interest

method

Note 2 – page 123

Derecognition of financial assets Note 2 – page 125

Note 6 – page 149

Income taxes Note 2 – page 127

Note 24 – page 180

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) Published IAS 19 IFRS 10 IFRS 11

Total

impact Restated

Consolidated Balance Sheet

Cash and due from banks $ 15,870 $ – $ – $ (320) $ (320) $ 15,550

Interest-bearing deposits with banks 9,061 – – (22) (22) 9,039

Securities – Trading and Available-for-sale 182,718 – 1 (9) (8) 182,710

Loans – Wholesale (1) 89,998 – 3 181 184 90,182

Other – Investment in joint ventures and associates 112 – – 135 135 247

Other – Employee benefit assets 1,084 (923) – – (923) 161

Other – Other lines impacted by accounting changes (2) 40,503 292 – (412) (120) 40,383

Lines not impacted by accounting changes 521,473 – – – – 521,473

Total assets 860,819 (631) 4 (447) (1,074) 859,745

Deposits – Business and government (1) 353,723 – 903 (33) 870 354,593

Other – Employee benefit liabilities 1,759 268 – – 268 2,027

Other – Other liabilities (1) 35,384 (24) 1 (414) (437) 34,947

Trust capital securities 900 – (900) – (900) –

Retained earnings 28,314 (876) – – (876) 27,438

Other components of equity 1,207 1 – – 1 1,208

Lines not impacted by accounting changes 439,532 – – – – 439,532

Total liabilities and equity $ 860,819 $ (631) $ 4 $ (447) $ (1,074) $ 859,745

Consolidated Statement of Income

Net income $ 8,429 $ (87) $ – $ – $ (87) $ 8,342

Basic earnings per share (in dollars) 5.60 (0.07) – – (0.07) 5.53

Diluted earnings per share (in dollars) 5.54 (0.05) – – (0.05) 5.49

Consolidated Financial Statements Royal Bank of Canada: Annual Report 2014 119

Note 2 Summary of significant accounting policies, estimates and judgments (continued)

As at and for the year ended October 31, 2012

Adjustments

(Millions of Canadian dollars, except per share amounts) Published IAS 19 IFRS 10 IFRS 11

Total

impact Restated

Consolidated Balance Sheet

Cash and due from banks $ 12,617 $ – $ – $ (189) $ (189) $ 12,428

Interest-bearing deposits with banks 10,255 – – (9) (9) 10,246

Securities – Trading and Available-for-sale 161,611 – 1 (10) (9) 161,602

Loans – Wholesale (1) 79,953 – 3 (7) (4) 79,949

Other – Investment in joint ventures and associates 125 – – 452 452 577

Other – Employee benefit assets 1,049 (920) – – (920) 129

Other – Other lines impacted by accounting changes (2) 47,881 367 – (834) (467) 47,414

Lines not impacted by accounting changes 511,609 – – – – 511,609

Total assets 825,100 (553) 4 (597) (1,146) 823,954

Deposits – Business and government (1) 315,457 – 903 (21) 882 316,339

Other – Employee benefit liabilities 1,729 589 – – 589 2,318

Other – Other liabilities (1) 38,228 (35) 1 (576) (610) 37,618

Trust capital securities 900 – (900) – (900) –

Retained earnings 24,270 (1,108) – – (1,108) 23,162

Other components of equity 830 1 – – 1 831

Lines not impacted by accounting changes 443,686 – – – – 443,686

Total liabilities and equity $ 825,100 $ (553) $ 4 $ (597) $ (1,146) $ 823,954

Consolidated Statement of Income

Net income $ 7,539 $ (32) $ – $ – $ (32) $ 7,507

Basic earnings per share (in dollars) 4.98 (0.02) – – (0.02) 4.96

Diluted earnings per share (in dollars) 4.93 (0.02) – – (0.02) 4.91

As at November 1, 2011

Adjustments

(Millions of Canadian dollars, except per share amounts) Published IAS 19 IFRS 10 IFRS 11

Total

impact Restated

Consolidated Balance Sheet

Cash and due from banks $ 12,428 $ – $ – $ (120) $ (120) $ 12,308

Interest-bearing deposits with banks 6,460 – – (3,133) (3,133) 3,327

Securities – Trading and Available-for-sale 167,022 – 7 (4,577) (4,570) 162,452

Loans – Wholesale (1) 64,752 – 3 (849) (846) 63,906

Other – Investment in joint ventures and associates 142 – – 1,652 1,652 1,794

Other – Employee benefit assets 311 (144) – (12) (156) 155

Other – Other lines impacted by accounting changes (2) 40,182 97 – (3,872) (3,775) 36,407

Lines not impacted by accounting changes 502,536 – – – – 502,536

Total assets 793,833 (47) 10 (10,911) (10,948) 782,885

Deposits – Business and government (1) 299,956 – 903 (15,424) (14,521) 285,435

Other – Employee benefit liabilities 1,639 263 – (8) 255 1,894

Other – Other liabilities (1) 36,796 (13) 1 4,521 4,509 41,305

Trust capital securities 894 – (894) – (894) –

Retained earnings 20,381 (297) – – (297) 20,084

Other components of equity 490 – – – – 490

Lines not impacted by accounting changes 433,677 – – – – 433,677

Total liabilities and equity $ 793,833 $ (47) $ 10 $ (10,911) $ (10,948) $ 782,885

(1) Amounts have been restated from those originally published to reflect classification changes made in the current period.

(2) 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

(Millions of Canadian dollars, except per share amounts)

Pro-forma

(IAS 39) Impact

reported

(IFRS 9)

Consolidated Statement of Income

Non-interest income – Trading revenue $ 672 $ 70 $ 742

Non-interest income – Other 674 11 685

Non-interest expense – Human resources (1) 11,008 23 11,031

Net income 8,962 42 9,004

Basic earnings per share (in dollars) 6.00 0.03 6.03

Diluted earnings per share (in dollars) 5.97 0.03 6.00

Consolidated Statement of Comprehensive Income

Total other comprehensive income, net of taxes $ 974 $ (59) $ 915

(1) 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-to-

maturity 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.